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

                                                            S. Hrg. 113-630

                                                            Senate Hearings

                                     Before the Committee on Appropriations

    _______________________________________________________________________

                   Financial Services and General Government Appropriations

                                                                Fiscal Year
                                                                       2015

    113th CONGRESS, SECOND SESSION

                                                                  H.R. 5016

    COMMODITY FUTURES TRADING COMMISSION

    DEPARTMENT OF THE TREASURY

    FEDERAL COMMUNICATIONS COMMISSION

    INTERNAL REVENUE SERVICE

    PRESIDENT'S FISCAL YEAR 2015 FUNDING REQUEST FOR AND OVERSIGHT OF FEDERAL
    INFORMATION TECHNOLOGY INVESTMENTS

    SECURITIES AND EXCHANGE COMMISSION

    SMALL BUSINESS ADMINISTRATION

    TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

     Financial Services and General Government Appropriations, 2015 (H.R.
                                     5016)

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    87-215 PDF

    2015

                                                            S. Hrg. 113-630

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2015

    =======================================================================

                                    HEARINGS

                                    BEFORE AN

                              SUBCOMMITTEE OF THE

                COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                        ONE HUNDRED THIRTEENTH CONGRESS

                                 SECOND SESSION

                                      ON

                                   H.R. 5016

        AN ACT MAKING APPROPRIATIONS FOR FINANCIAL SERVICES AND GENERAL
    GOVERNMENT FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2015, AND FOR OTHER
                                    PURPOSES

                                   __________

                      Commodity Futures Trading Commission
                           Department of the Treasury
                       Federal Communications Commission
                            Internal Revenue Service
       President's Fiscal Year 2015 Funding Request for and Oversight of
                   Federal Information Technology Investments
                       Securities and Exchange Commission
                         Small Business Administration
               Treasury Inspector General for Tax Administration

                                   __________

             Printed for the use of the Committee on Appropriations

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

       Available via the World Wide Web: http://www.gpo.gov/fdsys/browse/
            committee.action?chamber=senate&committee=appropriations

                                   __________

                          U.S. GOVERNMENT PUBLISHING OFFICE
    87-215 PDF               WASHINGTON : 2015

     _____________________________________________________________________________________
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                          COMMITTEE ON APPROPRIATIONS

                   BARBARA A. MIKULSKI, Maryland, Chairwoman

    PATRICK J. LEAHY, Vermont            RICHARD C. SHELBY, Alabama, Vice
    TOM HARKIN, Iowa                         Chairman
    PATTY MURRAY, Washington             THAD COCHRAN, Mississippi
    DIANNE FEINSTEIN, California         MITCH McCONNELL, Kentucky
    RICHARD J. DURBIN, Illinois          LAMAR ALEXANDER, Tennessee
    TIM JOHNSON, South Dakota            SUSAN M. COLLINS, Maine
    MARY L. LANDRIEU, Louisiana          LISA MURKOWSKI, Alaska
    JACK REED, Rhode Island              LINDSEY GRAHAM, South Carolina
    MARK L. PRYOR, Arkansas              MARK KIRK, Illinois
    JON TESTER, Montana                  DANIEL COATS, Indiana
    TOM UDALL, New Mexico                ROY BLUNT, Missouri
    JEANNE SHAHEEN, New Hampshire        JERRY MORAN, Kansas
    JEFF MERKLEY, Oregon                 JOHN HOEVEN, North Dakota
    MARK BEGICH, Alaska                  MIKE JOHANNS, Nebraska
    CHRISTOPHER A. COONS, Delaware       JOHN BOOZMAN, Arkansas

                       Charles E. Kieffer, Staff Director
                 William D. Duhnke III, Minority Staff Director
                                     ------

           Subcommittee on Financial Services and General Government

                        TOM UDALL, New Mexico, Chairman

    RICHARD J. DURBIN, Illinois          MIKE JOHANNS, Nebraska
    CHRISTOPHER A. COONS, Delaware       JERRY MORAN, Kansas
    BARBARA A. MIKULSKI, Maryland (ex    RICHARD C. SHELBY, Alabama
        officio)                           (ex officio)

                               Professional Staff

                            Marianne Clifford Upton
                             Diana Gourlay Hamilton
                                  Emily Sharp
                            Dale Cabaniss (Minority)
                            Andrew Newton (Minority)

                             Administrative Support

                                Colin MacDermott
                           LaShawnda Smith (Minority)

                                C O N T E N T S

                                  ----------

                            Thursday, March 27, 2014

                                                                       Page

    Federal Communications Commission................................     1

                            Wednesday, April 2, 2014

    Department of the Treasury.......................................    59

                           Wednesday, April 30, 2014

    Department of the Treasury.......................................   101
    Internal Revenue Service.........................................   187
    Treasury Inspector General for Tax Administration................   211

                             Wednesday, May 7, 2014

    President's Fiscal Year 2015 Funding Request for and Oversight of
      Federal Information Technology Investments.....................   275
        General Services Administration..............................   285
        Government Accountability Office.............................   293
        Office of Management and Budget..............................   280
        Office of Personnel Management...............................   290

                            Wednesday, May 14, 2014

    Securities and Exchange Commission...............................   361
    Commodity Futures Trading Commission.............................   373

                            Wednesday, May 21, 2014

    Small Business Administration....................................   415
    Department of the Treasury, Office of Financial Institutions.....   422

                                  Back Matter

    List of Witnesses, Communications, and Prepared Statements.......   439

    Subject Index....................................................   441
        Commodity Futures Trading Commission.........................   441
        Department of the Treasury...................................   441
            Office of Terrorism and Financial Intelligence...........   441
            Office of the Secretary..................................   442
        Federal Communications Commission............................   442
        Internal Revenue Service.....................................   444
            Government Accountability Office.........................   445
            Internal Revenue Service Oversight Board.................   447
            National Taxpayer Advocate--Nina E. Olson................   448
            National Treasury Employees Union........................   448
        President's Fiscal Year 2015 Funding Request for and
          Oversight of Federal Information Technology Investments....   449
        Securities and Exchange Commission...........................   451
        Small Business Administration................................   452
        Treasury Inspector General for Tax Administration............   453

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2015

                                  ----------

                            THURSDAY, MARCH 27, 2014

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 10:02 a.m. in room SD-138, Dirksen
    Senate Office Building, Hon. Tom Udall (chairman) presiding.
        Present: Senators Udall, Johanns, and Moran.

                       FEDERAL COMMUNICATIONS COMMISSION

    STATEMENT OF HON. TOM WHEELER, CHAIRMAN
    ACCOMPANIED BY: HON. AJIT PAI, COMMISSIONER

                     opening statement of senator tom udall

        Senator Udall. Good morning. I am pleased to convene this
    hearing of the Appropriations Subcommittee on Financial
    Services and General Government.
        First, I want to welcome my ranking member, Senator Mike
    Johanns. We don't have anybody else here, but we expect a few
    to show up. But great to be here with you and share this
    opportunity to learn from our Federal Communications Commission
    (FCC) members that are here. I also want to----
        Senator Johanns. Mr. Chairman, sometimes it is about
    quality, not quantity.
        Senator Udall. Yes, that is right. That is very, very well
    put. Yes. We have got real quality here. There is no doubt
    about it.
        And I also want to welcome our witnesses. Chairman Tom
    Wheeler, who recently was confirmed as the new chairman of the
    FCC. I want to thank you for your service and look forward to
    your testimony today. And also with us is Commissioner Ajit
    Pai. Really good to have you with us again and look forward to
    your testimony as well.
        The FCC has been very busy on a number of initiatives,
    initiatives that are critical to many Americans. And these are
    initiatives that I strongly support.
        The FCC is modernizing the almost $9 billion Universal
    Service Fund to expand access to vital communications systems
    for everyone in America.
        The United States invented the Internet, but now we lag
    behind many countries in broadband access. This is especially
    so in rural parts of New Mexico. So I am pleased to see new
    broadband and wireless investments in my home State and on
    tribal lands. And that is all thanks to universal service
    reforms.
        The FCC is also updating and streamlining the E-Rate
    program to support Internet access at schools. In New Mexico,
    E-Rate already makes a big difference, benefiting over 350
    schools and libraries and more than 370,000 school children.
        There is no doubt, as you both know, that we live in an
    Internet age. And as Chairman Wheeler has noted, every student
    in America should have access to state-of-the-art tools for
    education. E-Rate helps make that possible.
        In 2012, Congress authorized the FCC to conduct spectrum
    auctions to make more spectrum available for mobile broadband
    use. This fuels innovation in wireless technologies. It helps
    build FirstNet, our Nation's public safety broadcast network
    for first responders. And it will generate significant revenue
    for the U.S. Treasury.
        The FCC also has a crucial safety and security role. Our
    Nation's communications networks do more than just keep us in
    touch with friends and family. In emergency situations, these
    networks save lives. This committee explored these issues at a
    hearing I chaired last fall in how we can improve emergency
    communications. So I look forward to an update from you about
    the progress that is being made there.
        The FCC request for this fiscal year is--in 2015 funding is
    $375 million. This is a modest increase from the fiscal year
    2014 enacted level. FCC spending is fully offset, as we all
    know, by regulatory fees and from spectrum auctions.
        This committee has an important oversight responsibility,
    ensuring that the FCC uses that money wisely for the American
    people. There are two basic questions. What are the resource
    needs of the FCC, and what are the consequences of the
    shortfalls?
        I have the honor of chairing this subcommittee and serving
    with Senator Johanns, and I look forward to working with him to
    advance these critical FCC initiatives. So now I would turn to
    my ranking member for any opening statement that he would make.

                       statement of senator mike johanns

        Senator Johanns. Mr. Chairman, thank you very much for
    holding the hearing today on the fiscal year 2015 budget
    request for the FCC.
        Let me also say welcome, Chairman Wheeler and Commissioner
    Pai. We are glad to have you both here.
        This is an important hearing as the policies and actions of
    the FCC reverberate across our economy and impact our Nation's
    international competitiveness. The hearing is also significant
    as it is our first this year and serves as the kickoff for the
    fiscal year 2015 appropriations cycle.
        I very much appreciate the work of the chair of the
    Appropriations Committee, Senator Mikulski, and Ranking Member
    Shelby and other committee members to try to restore regular
    order to the congressional appropriations process. However, it
    is no secret that I opposed the decision last fall to amend the
    Budget Control Act to escalate Federal discretionary spending
    back over a $1 trillion.
        The changes Congress made to the Budget Control Act simply
    raise more money to spend more money. I did not object to
    replacing the sequester cuts, but we should have included
    targeted cuts that addressed waste or fraud or achieved long-
    term savings through structural changes. Unfortunately, in my
    judgment, the agreement reached last year just didn't meet the
    standard.
        Given my concern, I did not support the omnibus
    appropriations bill for fiscal year 2014 enacted earlier this
    year. There were numerous provisions in that bill that I
    supported and would vote for without reservation, but the
    package was all or nothing, and the good was unfortunately
    outweighed by the trillion dollar price tag.
        Because last year's budget agreement increased the spending
    caps for fiscal year 2015 as well, I am concerned we are on the
    same path for this fiscal year.
        I was disappointed that the President's budget for fiscal
    year 2015 proposed $56 billion in new spending this year and
    $791 billion in spending increases over the next decade, paid
    for with tax hikes on American families.
        With soaring annual deficits and nearly $18 trillion in
    debt hovering over our economy, our country is in need of
    serious budgeting that spends responsibly.
        As we begin the process of reviewing agency budget requests
    for fiscal year 2015, I intend to work with my colleagues on
    the committee to ensure we make the difficult decisions
    necessary to get our spending under control.
        We must also be mindful of the need to clear the way for
    economic opportunity and for international competitiveness. The
    FCC plays an important role in ensuring that the United States
    continues to lead the world in digital innovation and
    communications infrastructure. Its policies and actions can
    have an enormous impact on our country's economic growth.
        I am eager to hear more today about the Commission's
    efforts to promote economic growth, reduce regulatory burdens,
    and promote greater transparency, predictability, and
    accountability in its regulatory process.
        So, again, I thank the two of you for being here. I look
    forward to your testimony today and to working with you to
    address the challenges before us and to clear the way for
    continued U.S. leadership in communications, and I look forward
    to working with you in the future.
        Mr. Chairman, thank you.
        Senator Udall. Thank you very much, Senator Johanns. Really
    appreciate your opening comments.
        And Chairman Wheeler, at this point, I invite you now to
    present your remarks on behalf of the FCC, followed by
    Commissioner Pai.

                     summary statement of hon. tom wheeler

        Mr. Wheeler. Thank you very much, Mr. Chairman, and Ranking
    Member Johanns. We appreciate the opportunity to be here.
        This is my first time presenting before you. But it is not
    the first time in my life that I have presented a budget. So
    let me revert to some of my business experience and try and go
    to the core of what the issues are.
        As you pointed out, Mr. Chairman, we have a reasonable $35
    million increase that we are requesting, but it deserves
    explanation and discussion. You can really think of it in three
    parts.
        About a third of that goes for technology upgrades that
    produce cost savings and efficiency increases. About a third
    goes to universal service reform in the form of both expanded
    enforcement and new rules. And about a third is essentially for
    two things. One, those mandated costs of inflation--salaries,
    benefits, et cetera--that happen, as I say, by mandate. And
    second, the movement of the National Broadband Map from the
    National Telecommunications and Information Administration
    (NTIA) to the FCC and our need to pick up that expense.
        Let me see if I can unpack each of those. First, let us
    look at information technology (IT), which is about $13.5
    million. Our IT systems are old, inefficient, and insecure. Let
    me give you a couple of examples.
        Forty percent of our IT systems are more than 10 years old.
    This means that most of them aren't even supported by their
    vendors anymore, and they are costly to maintain. Worse, we
    have 207 different systems that are a hodgepodge of
    incompatible and inefficient. For instance, we cannot build a
    consumer database that works across the entire agency because
    we have so many different incompatible systems.
        But worst of all, these are insecure systems. I would be
    happy to explain in a less public setting some of my concerns
    about that, but let me give you one example. We are still using
    Windows XP in many of our computers, and it is well known that
    it is the access point of hackers worldwide. But we don't have
    the money to get out of it.

                             universal service fund

        The second leg of this three-legged stool is Universal
    Service Fund reform, which is $10.8 million. We have an $8.4
    billion program going through big changes with big challenges.
    The lifeline program has been abused. We will save $160 million
    this year by stopping some of the duplicate payments and the
    inappropriate participation that was there. But we are also
    dealing with companies, not just consumers, and we have had
    inefficient enforcement.
        I said from day one, when I came in, I want heads on pikes.
    I want to find out who the miscreants are and deal with them.
    We have insufficient resources to do that.
        Our High-Cost Rural Fund, we are shifting from voice to
    broadband, and we are putting out new trial programs. But our
    resources in the Wireline Competition Bureau are constrained in
    many other directions.
        And the E-Rate program, as you pointed out, Mr. Chairman,
    is an 18-year-old program, built around 18-year-old ideas and
    priorities. We have to change that to reorient it to high-speed
    broadband. We are in the process of a rulemaking to modernize
    that right now.
        But let me talk a little bit about management. We need more
    muscular enforcement. I am standing up a strike force on waste,
    fraud, and abuse in the Universal Service Program. But it
    doesn't make sense that on an $8.4 billion program, we have 25
    full-time equivalents (FTEs) for enforcement. It is
    insufficient.
        And so, what we ask for here are new employees, and let me
    be clear--we need investigators. We need auditors. We need
    financial enforcement folks. We need to expand by 15 the folks
    that we have in our Enforcement Bureau. That is almost doubling
    the current FTEs. We need to expand by 10 the folks that we
    have doing audits in our Office of Managing Director. That is
    doubling the numbers. We need to expand the Office of Inspector
    General by 6, and we need to put 14 more in the Wireline
    Competition Bureau for rules and enforcement appeals and things
    like this.
        And I would just say the last third are things that we are
    mandated for, for $5.7 million in Consumer Price Index (CPI)
    and other increases and $4 million for the broadband map.

                                    auctions

        One quick observation. We also, as you know and you pointed
    out, Mr. Chairman, are responsible for auctions. And while that
    is paid for out of the auctions themselves, we are asking for
    an additional $7 million there. We have generated $53 billion
    from auctions and have spent less than 2 percent of that to run
    them, a 98 percent return. I think that is a pretty good return
    on investment for America.
        We have had many auctions recently, in the last 5 years or
    so, that haven't had a very high profile. But in the last 5
    years, we have had 10 auctions that have auctioned off more
    than 16,000 new licenses. And we are now dealing with a mandate
    that we have from you given in 2012 to conduct the world's
    first incentive auction, which is literally inventing things as
    we go.
        As you pointed out, Mr. Chairman, the FCC pays its own way.
    It has no impact on deficit or taxes, and we take our
    responsibility at the heart of 21st century economies
    seriously. And that responsibility is multifold.
        One, we need to make sure that we are going away from the
    ``regulator knows best'' approach. We can't be as smart as the
    Internet. We need to make sure that we are providing stability
    for those who invest and create jobs.
        And two, we need to make sure that we are fulfilling our
    responsibility for consumer protection.
        And three, we need to make sure that we are fulfilling our
    responsibility to deliver about two-thirds of our program,
    about $8.4 billion to assist the development of 21st century
    communications in rural America.

                               prepared statement

        I appreciate the opportunity to be here and look forward to
    discussing these issues with you.
        [The statement follows:]
                     Prepared Statement of Hon. Tom Wheeler
        Chairman Udall, Ranking Member Johanns, and members of the
    subcommittee, I am pleased to appear before you today, alongside my
    colleague Commissioner Pai, to present the Federal Communications
    Commission's (FCC's) fiscal year 2015 budget request.
        Although I have testified before a number of other congressional
    committees during my career, this is my first appearance before a
    Senate Appropriations subcommittee. I see this as an important
    opportunity to update you on the FCC's activities while providing you
    with information essential to developing the Commission's funding
    levels.
        When I assumed the Chairmanship of the FCC last November, I was
    impressed by the Commission's moderate budget levels and the
    extraordinary work that this agency has accomplished during the past
    few decades. The Commission has raised more than $53 billion for the
    Treasury in auctions revenues since 1994--$1.56 billion of that just
    last month. We are on course to raise billions more in the next few
    years to fund, among other things, the deployment of an interoperable
    broadband network for our Nation's first responders, as well as to
    reduce the deficit. The Commission supports an industry that is
    essential to our Nation's economy and stimulates ever-higher levels of
    financial growth. We have repurposed and re-engineered significant
    amounts of spectrum to fuel these industries--including spectrum that
    would have been considered almost useless barely a decade ago. During
    the past 3 years, the Commission has reformed the Universal Service
    Fund (USF)--a massive undertaking designed to take this 20th century
    program into the next decades of the 21st century--and now we are
    building on that reform with a sharpened enforcement focus.
        The Commission's activities are entirely funded by those it
    regulates. In other words, there is a zero relationship between
    Commission expenditures and the Federal deficit. We have no direct
    appropriation, and we work hard to raise funds to put money back into
    the Treasury. In fact, the industries that we regulate contributed $17
    million to sequestration since that money was derived from their
    licensing fees. Auctions revenues cover auctions costs, and the USF
    funds cover USF program costs.
        The FCC's fiscal year 2015 budget request is $375,380,313,
    including $11,090,000 specifically allocated to the Office of Inspector
    General. Our auctions cap request is $106,200,000. Adopting this
    request will allow us to follow through on important priorities
    identified by your committee and our authorizers: the continued reform
    of USF programs to combat waste, fraud, and abuse and enhanced
    enforcement to put teeth into those reforms; as well as internal agency
    reform designed to make our processes responsive to consumers and the
    industry in a cost-effective fashion. Importantly, the auctions funds
    will support spectrum auctions identified in the 2012 Spectrum Act,
    which will make additional spectrum worth tens of billions of dollars
    available for commercial licensed services as well as providing
    nationwide spectrum for unlicensed use, and will support FirstNet.
        Although it is important to keep costs down in the current budget
    environment, let me give you a snapshot of the Commission's recent
    budget restraints. The FCC's spending levels decreased after fiscal
    year 2009 from $341 million to $335 million, and hovered just at that
    mark for 2 years, finally hitting $339 million during the next 3
    years--with $17 million of that number going toward sequestration in
    fiscal year 2013. During fiscal year 2013, the FCC cut its programming
    to the bone and worked hard to find cost savings, often delaying
    lifecycle replacements and improvements for facilities and equipment.
    In fiscal year 2011, the FCC had 1,776 employees. Today, we are down to
    1,725, which is a 30-year low in full-time equivalents (FTEs). The
    number of FCC contracting personnel also has steadily decreased from a
    high of 959 in fiscal year 2009 to a current level of 470.
        These cost reductions had real consequences. We have been unable to
    replace our Office of Engineering's Equipment Authorization System, and
    at this year's Consumer Electronics Show, I heard complaints about how
    sequestration's impact had slowed the approval of new products before
    last year's holiday shopping season. Cuts in employees left us
    chronically understaffed in enforcement, for example, so that our work
    to police pirate radio activities suffered--a big concern among some
    broadcasters--as we focused all available resources on public safety
    and homeland security activities. Likewise, we never replaced or
    upgraded our enforcement equipment. In fact, we have more than 200
    relic information technology (IT) systems that are costing the agency
    more to service than they would to replace over the long term.
        An effective and well-resourced FCC is critical, because we oversee
    the networks that power our information economy. The Commission's
    policies to unleash spectrum, promote competition, and provide
    regulatory certainty can help spur innovation and investment in a vital
    sector that drives economic growth and job creation. And the
    information and communications technology sector continues to be one of
    the leading lights of our economy and a key to our global
    competitiveness. For example:
      --American firms account for 84 percent of global profits in the
            computer hardware and software industries.
      --In 2010, the Information and Communication Technology (ICT) sector
            accounted for 24 percent of real gross domestic product (GDP)
            growth.
      --Each year, the ICT sector generates more than $300 billion in free
            goods and services that are not captured by GDP statistics.
      --The mobile apps economy, which didn't exist at the start of 2008,
            has created more than 750,000 U.S. jobs.
      --Since 2009, more than $250 billion has been invested by private
            companies to expand, extend and upgrade broadband networks,
            which exceeds investment by the major oil and gas or auto
            companies.
      --Annual investment in U.S. wireless networks grew more than 40
            percent between 2009 and 2012.
      --Venture capital financing of ``Internet-specific'' businesses has
            doubled in the past 4 years, from $3.5 billion in 2009 to $7.1
            billion in 2013.
        During the next year, the FCC will be hard at work on activities
    that will deliver significant benefits to consumers, businesses and our
    economy. We will be developing and licensing spectrum resources to spur
    innovation in new communications devices; upgrading, enhancing and
    securing our internal systems to better serve consumers and the
    industries that rely on us; and modernizing and enforcing our USF
    programs. That is really what the Commission's fiscal year 2015 budget
    is designed to support--another boom year of communications services
    for the American consumer and another year of growth for the industries
    that we support.
        During that same year, the FCC, like the technology and
    telecommunications industries, needs to adapt to keep pace with the
    exploding marketplace. The FCC needs the basic tools to sustain and
    encourage industry growth; to protect licensees; and ensure the
    reliability and safety of the systems that we use. We need to do so in
    a way that fosters solid management practices that support, sustain and
    enhance the industries that we regulate.
        One of the primary reasons that I initiated a process reform review
    upon assuming the FCC Chairmanship was because of my commitment to
    create an agency that is highly efficient, as well as responsive to the
    needs of all Americans. Instituting reform at this level will require
    the expenditure of resources that support essential programmatic
    changes. To support these efforts, the Commission is requesting a total
    of 1,790 FTEs for fiscal year 2015, which includes an additional 10
    FTEs for Information Technology (IT) programming and 45 FTEs for USF
    modernization and oversight. These numbers are projections over the
    current low number of FTEs, and they represent an increase of only 14
    FTEs over fiscal year 2011 levels.
        The FCC carefully considered the need to hire additional employees
    prior to submitting its fiscal year 2015 budget request. We have far
    fewer personnel in IT than comparable agencies, and, as I mentioned
    earlier, we have more than 200 incompatible, aging computer systems
    that, because they cannot talk to one another, act to increase the cost
    of doing business. We must overhaul, upgrade, secure and replace IT
    systems that are antiquated relics--costly to maintain and harmful to
    agency productivity. The Process Reform report that I commissioned
    draws a direct line between inefficient and unreliable IT systems and
    sluggish administrative and regulatory activities. Certainly, the FCC,
    of all agencies, must be able to communicate effectively inside and
    outside the Commission. The failure to invest in IT now will keep us
    from achieving many of the reform goals that Congress has set--from
    transparency to timeliness.
        Our other major spending target is USF modernization and oversight.
    The need here is urgent and resource-intensive. I intend to place a
    heavy--but not heavy-handed--emphasis on modernization and enforcement
    to ensure that USF adheres to Congress' vision and provides essential
    access to telecommunications services to all Americans--whether they
    live in a remote area of Alaska, in one of our American territories, or
    on an Indian reservation in North Dakota. On that note, I would
    emphasize that closing the infrastructure gaps in Indian country is an
    agency-wide priority, and I am committed to greater consultation with
    tribal leaders to promote broadband deployment and adoption in their
    communities.
        We envision hiring a broad range of USF specialists with the
    regulatory, enforcement, economic, legal, accounting and auditing
    skills necessary to provide oversight of the USF programs in multiple
    offices and bureaus. Although our budget estimates for fiscal year 2015
    indicate that most hires for USF would be targeted in the Wireline
    Competition Bureau (WCB), our new Managing Director currently is
    reviewing and revising the individual bureau staffing levels in
    accordance with the Commission's mission objectives. While the final
    recommendation has not yet been made, the USF employees will likely be
    distributed among WCB, the Enforcement Bureau (EB), Office of Inspector
    General (OIG), and the Office of the Managing Director (OMD). Every
    time I read or hear a news story about someone who tries to game the
    USF system, I recommit myself to the goal of dedicating qualified staff
    to reducing fraud.
        Our requested auctions spending bump will support current auctions
    activities as well as the complex process of developing the Incentive
    Auction Program. Since 1994, the auctions expenses have been
    approximately 2 percent of our total auctions revenues. The Commission
    operated the auctions program for 10 years under a cap without
    inflationary adjustments, only receiving an increase in fiscal year
    2013 to fund the start-up for the Incentive Auctions program.
        The Commission welcomed the statutory authority to initiate and
    operate Incentive Auctions because of its benefits to consumers and
    stakeholders, as well as the Treasury. We are grateful that you
    recognized the need to ensure that this program is properly funded and
    that you provided us with the necessary resources to move ahead with
    our work, even as other programs were facing sequestration. The
    importance of this auction to the public safety community and the boost
    it will provide for nationwide interoperable communications will
    benefit all Americans. We also see this auction as a significant
    financial opportunity for many broadcasters--it will enhance the
    ability of broadcasters retaining their spectrum to continue providing
    the public with diverse, local, free over-the-air television service.
        At the same time, the reclaimed spectrum will promote economic
    growth and enhance America's global competitiveness. More spectrum
    means more speed, capacity and ubiquity of mobile broadband services
    such as 4G LTE and Wi-Fi networks. These benefits will be magnified by
    another auction scheduled for the next year, AWS-3, which will provide
    access to reclaimed Federal spectrum.
        I appreciate this subcommittee's attention to the Commission's
    funding needs during the next fiscal year, and I look forward to
    working with you to fulfill our statutory mission efficiently and
    effectively. Thank you.

        Senator Udall. Thank you very much for your testimony.
        And Commissioner Pai, good to see you here, and please
    proceed with your testimony.

                       SUMMARY STATEMENT OF HON. AJIT PAI

        Mr. Pai. Thank you, Mr. Chairman.
        Chairman Udall, Ranking Member Johanns, Senator Moran,
    thank you for inviting me to testify this morning on the work
    of the Federal Communications Commission.
        This morning, I would like to focus my opening remarks on
    two critical issues: Reforming the Universal Service Fund (USF)
    and modernizing the agency's processes.
        First, USF. The Communications Act makes an important
    promise in the very first sentence: Congress created the FCC
    ``to make available, so far as possible, to all the people of
    the United States'' communication services.
        We at the FCC take this promise seriously. And that is one
    reason why the Commission reoriented USF support away from
    telephone service and toward next-generation broadband networks
    in 2011.
        And, of course, not every reform of the Universal Service
    Transformation Order has worked out as intended. Chairman
    Wheeler and I were not yet at the Commission when that order
    was adopted. So we can take a fresh look and reexamine whether
    any aspects of that order have actually deterred rural
    investment and harmed rural consumers.
        Fortunately, it appears the Commission will soon cross one
    such aspect off the books--the Quantile Regression Analysis, or
    QRA, benchmarks. For over a year, I and many others have warned
    that the QRA benchmarks have increased regulatory uncertainty,
    chilled the investment climate, and impeded the deployment of
    broadband to rural Americans.
        That said, the benchmarks were unanimously adopted. So it
    was no small matter when Chairman Wheeler announced a change of
    course in December. I applaud him for that decision. Ending
    regulatory uncertainty was the right thing to do, especially
    given that the QRA benchmarks did not save the Fund a single
    dollar.
        There is another aspect of the Universal Service
    Transformation Order I hope the Commission will reexamine soon,
    and that is the so-called rate floor. The rate floor was
    designed to reduce ``excessive subsidies for basic phone
    service.'' But it doesn't do that. Instead, it increases the
    rates rural consumers pay without reducing the subsidies that
    carriers receive.
        Specifically, the rate floor offers certain rural telephone
    companies Federal universal service dollars to increase
    consumers' phone bills. And these rate hikes are not minimal.
    Today, the rate floor is $14 per month, but it is set to go up
    soon to $20.46 on July 1, increasing rates for over 1 million
    rural consumers. That is a 46 percent jump for some consumers,
    many of whom are still waiting for the economic recovery to
    arrive.
        And for small carriers in these areas, it may mean more
    serious financial problems. Rate shock could send customers off
    their networks entirely, which means further uncertainty about
    the economics of rural investment.
        My view is that we should not add to the challenges our
    fellow citizens face in rural America. Instead, we should
    freeze the rate floor indefinitely and reexamine this policy.
    We followed that path with respect to the QRA benchmarks under
    the Chairman's leadership, and I hope we do so here, too.
        Second, process reform. This is important because it
    affects every area of the Commission's work. On the legislative
    front, a bipartisan supermajority of the U.S. House of
    Representatives passed recently the FCC Process Reform Act of
    2013. The House also passed the FCC Consolidated Reporting Act
    of 2013 back in September by a vote of 415 to 0. Together,
    these bills would eliminate outdated mandates on the agency,
    streamline our operations, and make it more accountable to the
    public. I hope these bills become laws soon.
        However, the FCC cannot and should not wait for Congress to
    act. There is much that we can do on our own. All too often,
    proceedings at the FCC drag on needlessly for many years. I am
    encouraged that Chairman Wheeler from the get-go has said that
    process reform is a priority, and many of the reforms proposed
    in last month's staff report on this topic are a good starting
    point.
        For instance, we should establish more deadlines and set an
    internal schedule for meeting those deadlines. We should also
    become more transparent to the public and to Congress about the
    work we do, and we can do that by creating an FCC dashboard on
    our Web site that collects in one place key performance
    metrics, such as how long it takes us to process consumer
    complaints.
        And Chairman Udall, I support your call to make our
    consumer complaint database searchable and user friendly. You
    are absolutely right that this idea, which is included in the
    FCC Process Reform Act I just mentioned, would benefit
    consumers. I believe it should be a part of our dashboard. For
    if we make it easier for others to hold us accountable for our
    performance, I am confident that all of us would act with more
    dispatch.

                               PREPARED STATEMENT

        Finally, I should note that while all commissioners are
    asked to vote on a budget proposed by the Chairman and
    submitted to the Office of Management and Budget, I have not
    been asked to participate in the development of the agency's
    budget request. But with that context in mind, I will do my
    best to respond to any questions you might have on that score
    or on any of the policy priorities that the FCC is tackling.
        Thank you once again, Mr. Chairman, Ranking Member Johanns,
    and I look forward to our exchange.
        [The statement follows:]
                      Prepared Statement of Hon. Ajit Pai
        Chairman Udall, Ranking Member Johanns, and members of the
    subcommittee, it is a privilege to appear before you today. Thank you
    for inviting me to testify on the work of the Federal Communications
    Commission (FCC).
        We have been busy, and today I'd like to share with you my views on
    several important issues that we are confronting, namely: freeing up
    spectrum for commercial use, reforming the Universal Service Fund's
    high-cost and E-Rate programs, removing regulatory barriers to
    infrastructure investment, adjusting our rules to the changing media
    marketplace, ensuring Americans can always reach help when they dial
    911, and reforming the agency's processes.
        Spectrum.--Given this subcommittee's focus on appropriations, it is
    worth noting that the FCC is one of few agencies that can generate a
    profit for the Federal Government. By auctioning off spectrum, the
    Commission has raised tens of billions of dollars for the Treasury over
    the last two decades. Between 2005 and 2008, for example, the
    Commission's spectrum auctions raised over $33 billion that was used
    for deficit reduction, and the FCC's auctions program was a net
    contributor to the Treasury each and every year.
        But the Commission's auction program has not always turned a
    profit. From January 2009 through December 2013, the Commission raised
    a paltry $72 million in auction revenue, or about two-tenths of 1
    percent of the amount raised in the prior 4 years. Indeed, when you
    account for the Commission's spending on auctions, our auctions program
    has actually lost money during the last 5 years. This is bad news not
    just for the Treasury but also for American consumers, whose demands
    for additional bandwidth have increased as their use of tablets and
    smartphones has spiked over this same period of time.
        That is why, since joining the Commission, I have concentrated on
    trying to accelerate the allocation of spectrum for mobile broadband
    and to rejuvenate the Commission's auction program. And I am pleased to
    report that we recently have made real progress on both of these
    fronts. Just last month, the Commission completed its first major
    spectrum auction in 6 years by auctioning off the H Block, 10 MHz of
    long-fallow spectrum once thought to be virtually worthless, to the
    tune of $1.564 billion. Former Chairwoman Clyburn deserves credit for
    pushing that auction through, as does Chairman Wheeler for finishing
    the job.
        But our work isn't finished. In the Middle Class Tax Relief and Job
    Creation Act of 2012, often called the Spectrum Act, Congress entrusted
    the Commission with holding a number of spectrum auctions, all with the
    twin goals of getting new spectrum into the commercial marketplace and
    raising at least $27.95 billion for national priorities.
        What are those national priorities? In short, they are deficit
    reduction and public safety--two things I'm sure every member of this
    subcommittee holds as priorities. Regarding the former, our incentive
    auctions hold the promise of raising more than $20 billion for deficit
    reduction. Indeed, Congress counted on us raising this money when it
    passed the Spectrum Act, so if the Commission fails to follow through,
    we will be responsible for increasing the budget deficit.
        As for public safety, successful spectrum auctions will provide
    money for key public safety priorities, such as the First Responder
    Network Authority's (FirstNet's) build-out of a nationwide,
    interoperable public safety broadband network. That $7 billion build-
    out makes good on the recommendation of the 9/11 Commission that first
    responders need interoperable communications systems in times of
    disaster. The Spectrum Act also set aside up to $135 million for State
    and local public safety officials, up to $300 million to advance the
    research and development of wireless public safety communications, and
    up to $115 million for the deployment of next-generation 911 (NG911).
    Under the law, all of this funding will be realized only if the net
    revenues of our wireless auctions are at least $27.95 billion.
        Given these important national priorities, we need to aim high. The
    H Block auction was a first step toward those goals, but a chunk of the
    money raised there will pay for running our auctions program. We still
    have about $27 billion to go.
        The next step towards raising these needed funds will be the
    auctioning of Federal spectrum as required by the Spectrum Act. Most
    important to that effort are two bands of spectrum, 1755-1780 MHz
    paired with 2155-2180 MHz, that will hopefully become part of a new
    Advanced Wireless Service-3 (AWS-3) service. These bands are already
    internationally harmonized for commercial use, which means deployment
    will be swifter and cheaper than other options. That also means
    carriers are likely to bid more for this spectrum, which can lead to
    greater net revenues for the national priorities I described above.
        Note that I said ``hopefully.'' Under the Commercial Spectrum
    Enhancement Act, the Commission can only assign commercial licenses for
    this spectrum if the revenues from the auction exceed 110 percent of
    the costs of relocating Federal users out of that spectrum and
    coordinating with those that remain. And the best way to make sure that
    we hit that mark and push that spectrum out into the marketplace is to
    invite all carriers to participate in the auction and offer a band plan
    that incentivizes the carriers to bid up the spectrum without
    restraint.
        One further note on this band: I regret that we will not be
    bringing all of this spectrum to the marketplace free and clear from
    interference by incumbent Federal users. Clearing 1755-1780 MHz of
    Federal users would be the best way to maximize the value of spectrum,
    both at auction and for consumers. That's what we did 10 years ago when
    we created the AWS-1 band that is so important to mobile broadband
    today, and that's why the Spectrum Act puts a thumb on the scale for
    clearing and allows sharing only if clearing is ``not feasible because
    of technical or cost constraints.'' But it appears that the decision
    has been made that clearing is not feasible at this point. I therefore
    hope that the Government will do its part for the public, publishing
    specific and detailed transition plans as early as possible and
    coordinating with carriers quickly so that this spectrum can be put to
    use soon.
        After this auction of Federal spectrum in the fall, the broadcast
    incentive auction will be the Commission's best opportunity to push a
    large amount of spectrum well-suited for mobile broadband into the
    commercial marketplace and raise the billions we need. With this
    auction, television broadcasters will have the opportunity to
    relinquish their spectrum that wireless carriers will then have the
    opportunity to purchase, with the bid-ask spread (i.e., the net
    revenues) going to the Treasury once the Commission has paid for the
    relocation expenses of broadcasters remaining in business.
        As the Commission moves forward on incentive auctions, I believe
    that five principles should guide our work. First, we must be faithful
    to the statute. It is our job to implement the Spectrum Act, not to
    rewrite it to conform to our policy preferences. Second, we must
    respect the laws of physics. Our band plan and approach to repacking
    must work from an engineering perspective. Third, we must be fair to
    all stakeholders. This is especially important because the incentive
    auction will fail unless both broadcasters and wireless carriers choose
    to participate. Fourth, we must keep our rules as simple as possible.
    The broadcast incentive auction is inherently complicated; unnecessary
    complexities are likely to deter participation. And fifth, we need to
    complete this proceeding in a reasonable timeframe. Prolonged
    uncertainty is not good for anyone.
        My greatest worry regarding the incentive auction, at this point,
    is about participation. In order for the incentive auction to be
    successful, we will need robust participation by broadcasters and
    wireless carriers alike. But right now, I am concerned that the
    Commission will make unwise policy choices that will deter
    participation in both the reverse and forward auctions. My position on
    the reverse auction is simple. Prices paid to broadcasters should be
    determined by the market. The Commission should not set them by
    administrative fiat. The Commission should not deter broadcaster
    participation through a complicated ``scoring'' scheme that tries to
    prejudge the compensation television station owners should receive. Any
    attempt to restrict payments to broadcasters will prove to be penny-
    wise and pound-foolish. Indeed, without sufficient broadcaster
    participation, the entire incentive auction will fail.
        And on the forward auction, the Commission should not limit
    carriers' ability to participate, such as by setting a spectrum cap or
    narrowing the spectrum screen despite the significant competition that
    exists in the wireless market. The inevitable effect of such a policy
    would be less spectrum for mobile broadband, less funding for national
    priorities, a higher budget deficit, and an increased chance of a
    failed auction. With a $27.95 billion target, we cannot let this
    auction fail.
        Finally, there's one last piece of spectrum I'm excited to discuss:
    the 5 GHz band. Although we are not planning to auction this spectrum,
    it can--and I believe will--be of substantial value to the American
    economy. The 5 GHz band is tailor-made for the next generation of Wi-
    Fi. Its propagation characteristics minimize interference in the band
    and the wide, contiguous blocks of 5 GHz spectrum allow for extremely
    fast connections, with throughput reaching 1 gigabit per second. The
    technical standard to accomplish this, 802.11ac, already exists, and
    devices implementing it are already being built. All of this means we
    can rapidly realize these benefits: more robust and ubiquitous wireless
    coverage for consumers; more manageable networks for providers; a new
    test bed for innovative application developers; and other benefits we
    can't even conceive today.
        Following the instructions set forth by Congress in the Spectrum
    Act, the Commission launched a rulemaking last year to make up to 195
    MHz of additional spectrum in the 5 GHz band available for unlicensed
    use. We also proposed to allow greater utilization of those segments of
    the 5 GHz band already available for unlicensed use. Last summer, I
    urged the FCC to move forward with its 5 GHz proceeding in stages,
    addressing the easier questions (such as how to modify the service
    rules for the UNII-1 band) before moving on to the hard ones.
        And at the end of this month the Commission will be taking action.
    Although I cannot comment on specifics, I can say that I am pleased
    that we will be making the band attractive for commercial Wi-Fi while
    safeguarding incumbent users. That means better, faster devices for
    consumers, which is all the more important given the growing congestion
    in the 2.4 GHz band (which consumers right now commonly rely upon for
    Wi-Fi access).
        Universal Service Fund.--Another big ticket item in the
    Commission's budget is the Universal Service Fund, which disbursed over
    $8.36 billion last year. The Fund contains four separate programs,
    three of which are capped. The high-cost program has a yearly budget of
    $4.5 billion, which is used to keep rural telephone rates
    ``affordable'' and deploy broadband to areas where the competitive
    market would not otherwise go. The E-Rate program, which supports
    schools and libraries, had a $2.38 billion cap last year, which is
    adjusted each year for inflation. And the rural healthcare program is
    capped at $400 million, but spending totaled only $157 million last
    year. The only uncapped program is the Lifeline program, which
    disbursed $1.79 billion last year, more than double the $817 million
    disbursed in 2008. In addition to these disbursements, the Fund spent
    $109 million in 2013 on administrative costs (not including the costs
    of Commission staff overseeing the program), with the majority ($65.6
    million) dedicated to administering the E-Rate program. My testimony
    will focus on the high-cost program and the E-Rate program.
        High-Cost.--The Communications Act of 1934 makes an important
    promise in its very first sentence: Congress created the Federal
    Communications Commission to ``make available, so far as possible, to
    all the people of the United States . . . a rapid, efficient, Nation-
    wide, and world-wide wire and radio communication service with adequate
    facilities at reasonable charges.'' We at the FCC take this promise
    seriously. That is one reason why the Commission adopted the 2011
    Universal Service Transformation Order, which reoriented the Fund away
    from supporting telephone service and toward supporting next-
    generation, broadband-capable networks.
        Fortunately, it looks like the Commission will soon be crossing one
    obstacle to rural investment off its books: the quantile regression
    analysis (QRA) benchmarks. For over a year, I and many others have
    warned that the QRA benchmarks have increased regulatory uncertainty,
    chilled the investment climate, and impeded the deployment of broadband
    to rural Americans. That said, the benchmarks have been the law for
    over 2 years so it was no small matter when Chairman Wheeler announced
    a change of course in December. Ending regulatory uncertainty is the
    right thing to do, especially given that the QRA benchmarks did not
    save the Fund one dollar. I am hopeful that ending the QRA benchmarks
    means that bringing next-generation technologies to our Nation's rural
    citizens will be a priority during Chairman Wheeler's tenure, and I
    look forward to continue working with him to make that happen.
        But sometimes it seems that every step forward for rural America is
    accompanied by a step back. I am concerned about another aspect of the
    Universal Service Transformation Order that is likely to have serious
    and unfortunate consequences for rural consumers: the so-called ``rate
    floor,'' which was adopted before Chairman Wheeler or I arrived at the
    Commission. The rate floor was designed to reduce ``excessive subsidies
    for basic phone service,'' but in fact it increases the State-set rates
    rural consumers pay without reducing the subsidies that carriers
    receive. Specifically, the rate floor offers certain rural telephone
    companies Federal universal service dollars to increase customers'
    phone bills. So if a company increases its rates by a dollar, it'll
    receive an extra dollar for per line from the Fund.
        And these rate hikes are not de minimis. Today, the rate floor is
    $14 per month, but it is set to go up to $20.46 on July 1 under the
    terms of the Universal Service Transformation Order. That's a 46
    percent jump for rural consumers, many of whom are still waiting for
    the economic recovery to arrive. And for small carriers, it may mean
    more serious financial problems. Such a rate shock could send customers
    off the network entirely, which means further uncertainty about the
    economics of investing in rural America. We should not be adding to the
    challenges our fellow citizens face in rural America. Instead, I hope
    the Commission will soon freeze the rate floor indefinitely and
    reexamine this policy.
        There are other steps that we must take to follow up on the promise
    of universal service. For example, we have yet to implement phase II of
    the Connect America Fund, which is the FCC's primary vehicle for
    delivering broadband to the millions of rural Americans without it. The
    second phase was supposed to commence at the beginning of 2013 but it
    looks like it won't start until 2015 at the earliest. Given that the
    Wireline Competition Bureau has been doing yeoman's work to complete
    the model necessary for that effort--and given the urgent need for
    broadband in the country--we should aim to make sure that effort does
    not fall further behind. That means setting out the competitive bidding
    process that will occur in areas where price-cap carriers decline
    Connect America Fund support sooner rather than later because no part
    of rural America should miss the broadband revolution while waiting for
    the regulatory dust to settle.
        Similarly, it is time for the Commission to start moving forward
    with a Connect America Fund for rate-of-return carriers. In
    constructing that fund, we must recognize that broadband operators in
    rural America today face unique challenges. Rural carriers must
    carefully plan their infrastructure over a 10- or 20-year time scale if
    they are to recover their costs. Indeed, Congress embedded this
    principle into section 254 of the act, including a statutory command
    that universal service support be ``predictable.'' What is more, line
    loss in rural America is real. As such, we must recognize that direct
    support for broadband-capable facilities, within the existing budget,
    is critical.
        E-Rate.--I am hopeful that, in the next few months, we will bring
    about real reform of that program. Established at the direction of
    Congress 18 years ago, the E-Rate program is intended to bring advanced
    communications services to schools and libraries across America.
        In many ways, the E-Rate program has been a success. Internet
    access in public schools has almost tripled, and speeds have grown
    alongside availability. For example, a 2010 FCC survey showed that 22
    percent of respondents were ``completely'' satisfied and another 58
    percent were ``mostly'' satisfied with the bandwidth they're getting.
    And just last year, 87 percent of educators responding to an
    independent survey reported that ``access to adequate bandwidth is
    available for robust communication, administrative and instructional
    needs'' in ``all'' or ``most'' classrooms on a school campus.
        But like all Federal programs, E-Rate has had its share of
    difficulties. For applicants, the funding process from start to finish
    can stretch for years. To navigate arcane steps like Form 470
    competitive bidding, Form 471 Program Integrity Assurance review, and
    the Form 500 commitment adjustment process, schools must enlist
    specialized E-Rate consultants, draining scarce dollars away from
    students and technology.
        For parents, the process is so opaque that they cannot know ahead
    of time how much funding their child's school might receive and cannot
    track whether it is actually spent on enriching the education of their
    kids.
        For school boards, E-Rate's ``priority'' system (under which things
    like paging and Blackberry services for administrators get prioritized
    over connecting a classroom to the Internet) distorts their spending
    decisions since some services are discounted by up to 90 percent while
    others may or may not receive any discount in a given funding year.
        For Government watchdogs, there's plenty of waste and abuse to
    worry about. For example, one Brooklyn school has gotten millions of E-
    Rate dollars over the years including money for Internet access
    services--even though the students are not allowed to use the Internet.
        And for everyone with a phone line, and who hence contributes to
    the program, it's hard to tell what bang we're getting for our
    universal service buck--there is no meaningful transparency with
    respect to E-Rate spending and no real information on the impact of
    that spending.
        There is a better way--one which would focus the E-Rate program on
    children. To create a student-centered E-Rate program, we need to
    fundamentally rethink how we structure the program. That means starting
    each school and library with an upfront allocation of funding so they
    know how much they can spend and can plan accordingly (a concept a
    subcommittee like this one should appreciate). That means establishing
    a meaningful matching requirement so that schools and libraries have a
    strong incentive not to waste money. That means cutting the red tape so
    that the initial application is just one page and there's only one
    other form needed before funds are disbursed. That means targeting
    funding at next-generation technologies like broadband and Wi-Fi while
    still letting local schools set their own priorities. And that means
    publishing all funding and spending decisions on an easily accessible,
    central Web site so that every parent, every journalist, every
    Government watchdog, every American can see just how E-Rate funds are
    being spent.
        The student-centered E-Rate program I have outlined (a summary is
    appended to this testimony) would fulfill E-Rate's statutory mission of
    bringing advanced services to schools and libraries across the country.
    It would reduce waste, fraud, and abuse in the program and increase
    transparency and accountability. By streamlining the rules, we would
    also reduce the need for administrative overhead, saving the Government
    millions more. And it would free an extra $1 billion for next-
    generation services in its first year ($600 million of which is
    currently spent each year on basic telephone service and other outdated
    technologies), all without collecting an extra dime from the American
    people.
        Given the potential savings at hand, I do not support increasing
    the program's budget at this time, and I am pleased that Chairman
    Wheeler appears to be on the same page. For example, last week he said
    that ``[s]imply sending more money to the E-Rate program to keep doing
    business as it has been for the last 18 years is not a sustainable
    strategy.'' I concur. Indeed, under no circumstances should we increase
    the size of the E-Rate program without finding corresponding new
    savings elsewhere in the Universal Service Fund. We cannot ask
    Americans to pay even more in their monthly phone bills, especially
    when median household income in this country is lower than it was in
    2007.
        If we are willing to make the ``hard decisions,'' as Chairman
    Wheeler has put it, I believe that real reform of the E-Rate program
    can become a reality. A student-centered E-Rate program--that's what
    teachers and librarians need, and that's what America's students and
    parents are counting on us to deliver.
        Infrastructure Investment.--Removing regulatory barriers to the
    deployment of infrastructure is another Commission priority. To give
    entrepreneurs, investors, and innovators the regulatory certainty they
    need to invest in next-generation infrastructure, we need to make sure
    that we are not saddling them with last-generation rules. That means
    hastening the Internet protocol (IP) Transition and facilitating
    wireless infrastructure deployment.
        IP Transition.--Almost every segment of the communications industry
    is competing to offer newer, faster, and better broadband services.
    Telecommunications carriers are upgrading DSL with IP-based technology
    and fiber. Cable operators have deployed DOCSIS 3.0 to increase
    bandwidth 10-fold. Satellite providers are offering 12 megabit packages
    in parts of the country that never dreamed of such speeds. And millions
    of Americans--many of whom don't subscribe to fixed broadband service
    at home--now have access to the Internet on the go using the mobile
    spectrum the Commission auctioned back in 2006 and 2008. Indeed,
    according to the State Broadband Initiative of the National
    Telecommunications and Information Administration, 98.8 percent of
    Americans had access to high-speed broadband as of December 2012. The
    common thread knitting all of these changes together is the Internet
    protocol (IP), a near-universal way to route and transmit data.
        What are the results of all this competition? More choices for
    consumers, and major challenges to old business models. Thirty years
    ago, most American consumers had access to one network largely run by
    one carrier, Ma Bell. Today, Americans are fleeing the copper network.
    33.6 million Americans dropped their copper landlines over the past 4
    years. About one in seven households with plain old telephone service
    over the public-switched telephone network (PSTN) dropped their service
    last year alone. And competition is rampant: 99.6 percent of Americans
    can choose from at least three wireline competitors, and 92 percent can
    choose from 10 or more. The evidence also shows that consumers are in
    fact exercising that choice: Interconnected voice over Internet
    protocol (VoIP) providers added 14.6 million subscriptions over the
    last 4 years. Essentially, voice is becoming just another application
    riding over the Internet.
        Over a year ago, I called on the Commission to move forward with an
    All-IP Pilot Program, one that would give forward-looking companies a
    path to turn off their old time division multiplexing (TDM) electronics
    in a discrete set of wire centers and migrate customers to an all-IP
    platform. Why? Because we cannot continue requiring service providers
    to invest in both old networks and new networks forever. Every dollar
    that is spent maintaining the networks of yesterday is a dollar that
    can't be invested in building and upgrading the networks of tomorrow.
    Our goal should be to maximize investment in IP infrastructure so that
    high-speed broadband extends to every corner of our country.
        I am pleased that, under Chairman Wheeler's leadership, the
    Commission adopted an order establishing an Al-IP Pilot Program
    consistent with the four guidelines I set forth last year. First,
    carrier participation should be voluntary--and the order announced that
    ``no provider will be forced to participate in an experiment.'' Second,
    trials should reflect the geographic and demographic diversity of our
    Nation-- and the order sought ``experiments that cover areas with
    different population densities and demographics, different topologies,
    and/or different seasonal and meteorological conditions.'' Third, no
    one can be left behind--and the order declared that ``no consumer [may]
    lose[ ] access to service or critical functionalities'' and that
    residential and business customers must receive ``clear, timely, and
    sufficient notice of any service-based experiment.'' And fourth, we
    must be able to evaluate an all-IP trial with empirical data--and the
    order sought ``experiments that collect and provide to the Commission
    data on key attributes of IP-based services.'' With these core
    principles in place, I am optimistic that the trials will be a success.
        I am especially happy that the All-IP Pilot Program is moving
    forward on a unanimous, bipartisan basis. As I said last year, this
    isn't an issue that divides the left from the right or Republicans from
    Democrats. Accordingly, the order reflects our consensus that companies
    should have the opportunity to go all-IP. What is more, the order
    demonstrates that reaching an agreement does not mean compromising your
    values. I look forward to continuing our collaborations as we assess
    the proposed trials that are already coming in.
        Of course, preparing for the IP Transition does not end with
    conducting an All-IP Pilot Program. We also need to take a hard look
    our regulations in light of the coming transition, if for no other
    reason than that the private sector needs flexibility to make
    investment decisions based on consumer demand, not outdated regulatory
    mandates. Accordingly, I believe four principles should shape our
    approach to the overall transition.
        First, we must ensure that vital consumer protections remain in
    place. For example, when consumers dial 911, they need to reach
    emergency personnel; it shouldn't matter whether they are using the
    (public switched telephone network (PSTN), a VoIP application, or a
    wireless phone. The same goes for consumer privacy protections and
    antifraud measures like our slamming rules. Second, we must not import
    the broken, burdensome economic regulations of the PSTN into an all-IP
    world. No tariffs. No arcane cost studies. And no hidden subsidies that
    distort competition to benefit companies, not consumers. We must also
    repeal the old-world regulations such as retail tariffing that no
    longer make sense in a competitive all-IP world. While they remain on
    the books, wholesale expansion to IP may just be too tempting. Third,
    we must retain the ability to combat discrete market failures and
    protect consumers from anticompetitive harm. Fourth, we must respect
    the limits of the Communications Act and not overstep our authority. If
    the law does not give us the authority to act, we must turn back to
    Congress for guidance rather than venturing forth on our own.
        Wireless Infrastructure.--Along with ending the economic
    regulations that deter wireline infrastructure investment and delay the
    deployment of next-generation networks, we need to address the business
    and technical challenges of deploying wireless broadband. Building a
    wireless network is expensive enough, but numerous Federal, State, and
    municipal regulations can make further deployment difficult or even
    prohibitive. To be sure, some oversight is necessary to ensure sound
    engineering and safety and to respect environmental, historical, and
    cultural concerns. But many procedures simply frustrate, rather than
    facilitate, deployment. That ultimately harms consumers who are denied
    better and cheaper wireless services.
        I am therefore pleased that the Commission moved forward last
    September with a Notice of Proposed Rulemaking seeking comment on a
    variety of ideas for reducing regulatory barriers to the construction
    of wireless infrastructure. In particular, I'd like to highlight three
    of them in my testimony this morning.
        First, we should make clear that local moratoria on the approval of
    new wireless infrastructure violate Federal law. The FCC has already
    put in place a shot clock for localities to address tower siting
    permits and other building applications. Prohibiting moratoria would
    address the tactic some localities have used to evade those deadlines
    by adopting an indefinite ``time out'' on the approval of wireless
    infrastructure.
        Second, we should modernize our rules to exempt distributed antenna
    systems (DAS) and small cells from our environmental processing
    requirements, except for rules involving radio frequency emissions.
    Given their small size and appearance--some small cell equipment can
    fit in the palm of your hand, for instance--there is no reason to
    subject DAS and small cells to the same environmental review process as
    a 200-foot tower. We should similarly update our historic preservation
    rules, which add yet more regulatory requirements, in order to
    facilitate the deployment of DAS and small cells. It bears noting that
    the greater the deployment of wireless infrastructure like this, the
    less reliance carriers (and hence consumers) must place on larger,
    ``macro'' cell sites and the less power networks and devices will
    consume.
        Third, we should address what happens when a local government
    doesn't comply with our shot clock. Currently, if a city does not
    process an application within 150 days, the only remedy is to file a
    lawsuit. This increases delay and diverts investments away from
    networks. To fix this problem, we should supplement our shot clocks
    with a backstop: If a locality doesn't act on a wireless facilities
    application by the end of the time limit, the application should be
    deemed granted. (As a legal matter, I believe the FCC has this
    authority following the Supreme Court's decision last May in City of
    Arlington, Texas v. FCC.)
        There are also other steps that the Commission can take to hasten
    the deployment of wireless infrastructure. For example, we have sought
    comment on clarifying the scope and meaning of section 6409(a) of the
    Spectrum Act, which prohibits State and local governments from denying
    certain collocation requests. I hope that we make appropriate
    clarifications in the near term. And we are looking for ways to
    expedite the deployment of infrastructure to implement positive train
    control, as required by the Rail Safety Improvement Act of 2008. I
    support moving forward on all these fronts swiftly; the American public
    deserves no less.
        Net Neutrality.--Given the amount of work the Commission must do to
    remove regulatory barriers to infrastructure investment, I hope that we
    do not divert our attention to promulgating rules that may in fact
    erect new barriers. I am of course talking about ``net neutrality,''
    which has apparently returned to the FCC's agenda after the courts
    ruled--for the second time in 4 years--that the FCC exceeded its
    authority in attempting to regulate the network management practices of
    Internet service providers.
        Without delving too far into the subject, let me say this. For over
    a decade, the Nation's broadband infrastructure has been governed by
    four Internet Freedoms, set forth by then-FCC Chairman Michael Powell.
    First, consumers should have their choice of legal content. Second,
    consumers should be able to run applications of their choice. Third,
    consumers should be permitted to attach any devices they choose to the
    connection in their homes. And fourth, consumers should receive
    meaningful information regarding their service plans. Although our
    Nation's broadband marketplace is dynamic and rapidly evolving, these
    four freedoms have remained vibrant throughout--they are in a sense the
    pillars, the foundation of the market--and they have long received
    bipartisan support.
        With those principles already entrenched, the FCC should stay its
    hand and refrain from any further attempt to micromanage how broadband
    providers run their networks. Such restraint is the best way to ensure
    that the market--and hence consumers--dictate the future of the
    Internet. This, in turn, will encourage innovation throughout the
    entire Internet ecosystem and incentivize the continued deployment of
    high-speed, quality broadband service. Our goal should be to connect
    all Americans with smart networks, not to enact rules that require
    networks to be dumb pipes. So let's recognize net neutrality for what
    it is: an unnecessary distraction from the pressing need to end
    regulatory barriers that stand in the way of ubiquitous broadband.
        Media Marketplace.--The media landscape has undergone revolutionary
    change in the last few decades. But the FCC's rules have not kept pace
    with the realities of the marketplace. Accordingly, since joining the
    Commission, I have advocated updating our regulations on a variety of
    fronts while at the same time preserving the Commission's commitment to
    the core values of competition, diversity, and localism. Today I will
    focus on two aspects of our work: reviewing our media ownership rules
    and revitalizing the AM radio band.
        Media Ownership.--The Commission is required by law to review its
    media ownership regulations every 4 years. This cycle's review began in
    September 2009 as we announced a series of workshops to begin gathering
    information from various stakeholders. Now, more than 4 years later,
    our review is still not complete. The time has come for us to launch
    our next review, but we have not yet finished the last one. This is
    unacceptable and shows a troubling disregard for our legal obligations.
    We should bring the current quadrennial review to a close at the
    Commission's March 31 meeting.
        We should make sensible reforms to our rules so that they reflect
    the marketplace realities of 2014 rather than those of 1975. For
    example, I supported then-Chairman Julius Genachowski's proposal to
    eliminate the newspaper-radio and radio-television cross-ownership
    rules. I also believe that the time has come to eliminate the
    newspaper-television cross-ownership rule. In this day and age, if you
    want to operate a newspaper, we should be thanking you, not placing
    regulatory barriers in your path. I am a realist and understand that
    whatever reforms we end up implementing will not go as far as I might
    prefer. But I do believe that we should be able to find common ground
    and move forward with some sensible reforms.
        Unfortunately, it appears that the Commission is set on tightening
    our media ownership rules in a piecemeal fashion rather than engage in
    the holistic review that Congress envisioned. Most disturbing is a
    proposal to make Joint Sales Agreements (JSAs) attributable under our
    local television ownership rule. As broadcasters' share of the
    advertising market has shrunk in the digital age, television stations
    must be able to enter into innovative, pro-competitive arrangements in
    order to operate efficiently.
        JSAs allow stations to save costs and to provide the services that
    we should want television broadcasters to offer, particularly in our
    Nation's mid-sized and small media markets. In my home State, for
    example, a JSA between two Wichita stations enabled the Entravision
    station, a Univision affiliate, to introduce the only Spanish-language
    local news in Kansas. Across the border in Joplin, Missouri, a JSA
    between Nexstar and Mission Broadcasting not only led to expanded news
    programming in that market but also nearly $3.5 million in capital
    investment. Some of that money was spent upgrading the stations'
    Doppler Radio system, which probably saved lives when a devastating
    tornado destroyed much of Joplin in 2011.
        JSAs are also an important tool for enabling minority ownership of
    television broadcasters. Although the Commission has not studied the
    link between joint sales agreements and ownership diversity, my
    office's own review estimated that 43 percent of female-owned and 75
    percent of African-American-owned full-power commercial television
    stations currently are parties to JSAs. For example, WLOO serves the
    Jackson, Mississippi market and is owned by Tougaloo College, a
    historically African-American college. WLOO is also party to a JSA with
    another Mississippi station, WDBD, which, in the words of WLOO's
    general manager, ``has permitted WLOO to become a real success story,
    enabling a new, minority station owner to reinvigorate this station and
    expand its local services.'' Without the JSA, WLOO reports that it
    would have to stop creating locally-produced programming so that it
    could redirect that money to hiring a small sales staff, and its
    general manager is worried that it may not have the funding to survive
    an equipment failure.
        For stations in smaller markets like Wichita, Joplin, and Jackson,
    the choice isn't between JSAs or having both television stations
    operating vibrantly on an independent basis. Rather, the real choice is
    between JSAs and having at most one television station continue to
    provide news programming while the other does not. Indeed, the
    economics suggest that there likely will be fewer television stations,
    period.
        Another piecemeal change to our media ownership rules was teed up
    in September with a notice of proposed rulemaking (NPRM) proposing to
    eliminate the ultra high frequency (UHF) discount portion of our
    national television ownership rule. Given the transition from analog to
    digital television, there is a strong case for ending the UHF discount;
    UHF signals are not inferior to very high frequency (VHF) signals in
    the digital world. Unfortunately, the Commission's NPRM went about it
    the wrong way.
        We should not modify the UHF discount without simultaneously
    reviewing the national audience cap, which currently stands at 39
    percent. The NPRM recognized the interdependent relationship between
    the national audience cap and the UHF discount, acknowledging that
    ``elimination of the UHF discount would impact the calculation of
    nationwide audience reach for broadcast station groups with UHF
    stations.'' Or, to put the matter succinctly, eliminating the UHF
    discount would substantially tighten the national ownership limit. For
    example, one company that is now more than 19 percentage points under
    the cap would be only 3 points below the cap if the UHF discount were
    eliminated.
        I was therefore disappointed that we proposed to end the UHF
    discount without asking whether it is time to raise the 39 percent cap.
    Indeed, this step is long overdue, notwithstanding any change to the
    UHF discount. The Commission has not formally addressed the appropriate
    level of the national audience cap since its 2002 Biennial Review
    Order, and it has been about a decade since the 39 percent cap was
    established. The media landscape is dramatically different today than
    it was then, and I wish that the NPRM had addressed the national
    television rule in a comprehensive manner.
        AM Radio.--This past October, the Commission launched an AM Radio
    Revitalization Initiative, something I had championed for more than a
    year. It's been over two decades since we last comprehensively reviewed
    our AM radio rules. Over that time, the AM band has struggled.
    Interference problems, declining listenership, financial challenges for
    minority-owned broadcasters, and other factors have brought the band
    low. But millions of Americans--myself included--still rely on and
    believe in AM radio. So this initiative is close to my heart.
        The Commission's NPRM embraced a sensible two-stage strategy for
    improving AM radio service. First, we proposed several ways to give AM
    broadcasters relief in the short term. For instance, we suggested a
    number of changes to our technical regulations, such as eliminating the
    ``ratchet rule,'' which effectively prevents AM broadcasters from
    improving their facilities. And perhaps most importantly, we sought
    public input on letting AM stations apply for new FM translators so
    that it is easier for them to reach listeners with a quality signal.
    I'm the first to acknowledge that these and other proposals will not be
    an immediate panacea for the difficulties confronting the AM band. But
    based on the conversations I have had with AM broadcasters across the
    country during the past year, I am convinced that they can make a
    substantial, positive difference to numerous AM stations.
        Second, we also invited the American public and stakeholders to
    share their proposals for the long-term future of the AM band. What
    steps can the Commission take so that there will be a vibrant AM radio
    service 10 or 15 years from now?
        The comment cycle closed last week, and we received many insightful
    and creative submissions from broadcasters, engineers, and others with
    an interest in AM radio. While we continue to review those comments, I
    am optimistic that the Commission will act quickly to implement an
    initial set of reforms to help the AM band. Indeed, my office's quick
    review of the comments that were filed suggests overwhelming support
    for many of the Commission's proposals.
        Connecting Americans to 911.--Federal law designates 911 as ``the
    universal emergency telephone number within the United States for
    reporting an emergency to appropriate authorities and requesting
    assistance.'' So when Americans dial 911, they expect and deserve to
    reach emergency personnel who can assist them in their time of need.
    Unfortunately, a recent tragedy shows that this is not always the case.
        On December 1, Kari Rene Hunt Dunn met her estranged husband in a
    Marshall, Texas hotel room so that he could visit their three children,
    ages 9, 4, and 3. During that encounter, Kari's husband forced her into
    the bathroom and began stabbing her. Kari's 9-year-old daughter did
    exactly what every child is taught to do during an emergency. She
    picked up the phone and dialed 911. The call didn't go through, so she
    tried again. And again. And again. All in all, she dialed 911 four
    times--but she never reached emergency personnel. Why? Because the
    hotel's phone system required her to dial 9 to get an outside line.
    Tragically, Kari died as a result of this vicious attack. Kari's
    daughter behaved heroically under horrific circumstances. But the
    hotel's phone system failed her, her mother, and her entire family.
        At first, I was shocked to hear that such a situation could exist.
    But when you think about it, it's probably the case in many places--
    hotels, office buildings, college campuses, and schools--that use
    ``multiline telephone systems'' or MLTS. But the truth of the matter is
    that we don't know the extent of the problem. That's why I launched an
    inquiry in January to gather the facts. As a first step, I sent a
    letter to the chief executive officers (CEOs) of the 10 largest hotel
    chains in America. As we continue to examine the information provided
    by those companies, I am encouraged by their willingness to respond and
    work with us to ensure everyone can reach a 911 operator when they need
    to. I am also encouraged that the American Hotel and Lodging
    Association, which represents 9 of the top 10 chains and many, many
    more hotels and motels, has convened an internal task force to address
    the issue.
        So what is the issue, precisely? In the case of Kari Hunt Dunn, it
    was what we call the ``Direct Dial'' issue--whether somebody picks up
    on the other end if you dial 911. But there are a couple of
    accompanying issues that come along with it. First is the question of
    who should pick up the other end of the line. Should it always be
    someone at the Public Safety Answering Point (PSAP)? Or in some
    buildings, should it be an on-site security office or front-desk clerk?
    And if the call does to go the PSAP, how does someone in the building
    find out that a call has been placed so that he or she can provide more
    immediate assistance or guide first responders to the correct room?
        The second question is location. Do the first responders know where
    the call is coming from? In large office buildings or complexes, on
    college campuses, and in hotels, it's not enough for first responders
    to show up at the front door, if one even exists. Conveying accurate
    location information to these emergency personnel is critical. If
    someone calls 911 in this building, for instance, think about how long
    it could take emergency medical technicians (EMTs) to find a person in
    distress if they don't know exactly where to go.
        We can't erase the tragedy that occurred in a Marshall, Texas hotel
    room last December. But we can work to prevent such tragedies from
    happening again, and that's what I am determined to do. I am confident
    that everyone here shares my belief that when an emergency strikes,
    people, whether in a hotel or office building, should be able to reach
    someone who can help.
        Process Reform.--Before concluding, I would like to touch on a
    subject that affects all areas of the Commission's work: process
    reform. The U.S. House of Representatives recently passed the Federal
    Communications Commission Process Reform Act of 2013, H.R. 3675. I hope
    that this commonsense bill, as well as the Federal Communications
    Commission Consolidated Reporting Act of 2013, H.R. 2844, which the
    House of Representatives passed 415 to 0 back in September, will soon
    be enacted into law. Together, these bills squarely address the need to
    modernize the FCC to reflect our dynamic, converged communications
    marketplace. And they would eliminate outdated mandates on the agency,
    streamline its operations, and make it more accountable to the public.
    These are two pieces of straightforward, good-government legislation,
    and I hope that the President will soon have the opportunity to sign
    them.
        The FCC, however, should not and need not sit still waiting for
    Congress to act. We should do what we can on our own to improve our
    internal processes. Our goal should be clear: The FCC should be as
    nimble as the industry that we oversee. All too often, proceedings at
    the Commission needlessly drag on for many years. I am encouraged that
    Chairman Wheeler has said that process reform is a priority, and many
    of the reforms proposed in last month's staff process reform report are
    a good starting point.
        Indeed, a variety of reforms would improve the Commission's
    performance. We should streamline our internal processes where
    possible. For example, let's adopt a procedure akin to the U.S. Supreme
    Court's certiorari process for handling applications for review--but
    one that maintains accountability by giving each of the five
    Commissioners the opportunity to bring a Bureau-level decision up for a
    Commission vote. Let's speed up our processing of smaller transactions.
    Let's establish more deadlines, such as a 9-month deadline for ruling
    on applications for review and petitions for reconsideration along with
    a 6-month deadline for handling waiver requests--and let's ensure our
    internal calendar sets a schedule for getting those items prepared and
    circulated in time so that we can meet those deadlines. When we adopt
    industry-wide rules, let's more frequently use sunset clauses that
    require us to eventually revisit the wisdom of (and, if necessary,
    revise or repeal) those rules.
        We should also become more transparent to the public and to
    Congress about how long it takes the Commission to do its work. One way
    to do this would be by creating an FCC Dashboard on our Web site that
    collects in one place key performance metrics. Let's keep track of how
    many petitions for reconsideration, applications for review, waiver
    requests, license renewal applications, and consumer complaints are
    pending at the Commission at any given time. And let's compare the
    current statistics in all these categories against those from a year
    ago, from 5 years ago, so everyone can see if we are headed in the
    right direction. If we make it easier for others to hold us accountable
    for our performance, I'm confident that we would act with more
    dispatch.
        My emphasis on acting promptly is not just about good government.
    It is also about the impact that the FCC's decisions (or lack thereof)
    have on our economy. As the pace of technological change accelerates,
    so too must the pace at the Commission. We can't let regulatory inertia
    frustrate technological progress or deter innovation.
        Finally, I should note that while all Commissioners are asked to
    vote on a budget proposed by the Chairman that is delivered to the
    Office of Management and Budget, I have never been asked to participate
    in the development of the agency's budget request. With that context in
    mind, I will do my best to respond to any questions you may have.
                  appendix--a student-centered e-rate program
        A student-centered E-Rate program focuses on five key goals:
    (1) Simplify the Program
       -- Schools need to fill out only two forms: an initial application
            and a report back on how the money was spent
       -- Initial application can be no more than one page
       -- Universal Service Fund (USF) administrator does all the
            calculations, reducing the burden on schools
       -- Less red tape means fewer delays, more predictability, and no
            need to hire consultants
    (2) Fairer Distribution of Funding
       -- Allocates E-Rate budget across every school in America; every
            school board and parent knows how much funding is available on
            day one
       -- Schools receive money on a per-student basis; funds follow
            students when they change schools
       -- Additional funds allocated for schools in rural and/or low-income
            areas as well as small schools to account for higher costs and
            different needs
    (3) Focus on Next-Generation Technologies for Kids
       -- Eliminates disincentive to spend money on connecting classrooms
       -- No more funding for stand-alone telephone service
       -- Students come first; funding directed only to instructional
            facilities, rather than non-educational buildings like bus
            garages
       -- Equal funding for all eligible services; local schools (not
            Washington) set priorities
    (4) More Transparency and Accountability
       -- Creates Web site where anyone can find out exactly how any school
            is spending E-Rate funds; enables parents, schools boards,
            press, and public to conduct effective oversight
       -- School district superintendent or school principal must certify
            that E-Rate funds were used to help students
    (5) Fiscal Responsibility
       -- Ends the ``more you spend, more you get'' phenomenon: Schools
            given fixed amount of money and must contribute at least one
            dollar for every three E-Rate dollars they receive
       -- Better incentives, reduced waste, and less red tape allows
            program to accomplish a lot more with the same amount of money;
            over $1 billion more in first year provided for next-generation
            technology
       -- Caps overall USF budget before any increase in E-Rate budget; any
            expansion in E-Rate must be accompanied by corresponding cuts
            elsewhere in USF

    ------------------------------------------------------------------------
                                          Legacy E-Rate     Student-Centered
                                             Program         E-Rate Program
    ------------------------------------------------------------------------
    Spending Priorities..............  --Prioritizes       --Focuses on next-
                                        voice telephone     generation
                                        service, long-      services; no
                                        distance calling,   funding for
                                        cell phone          stand-alone
                                        service, and        telephony
                                        paging ahead of     service
                                        connecting         --All eligible
                                        classrooms with     services treated
                                        broadband           equally
                                        Internet access     (including
                                       --Funding            connecting
                                        available for non-  classrooms);
                                        instructional       local schools,
                                        facilities such     not Washington,
                                        as bus garages      should set
                                        and sports          priorities
                                        stadiums           --Students come
                                                            first; funding
                                                            directed only to
                                                            instructional
                                                            facilities
    ------------------------------------------------------------------------
    Process..........................  --Complicated       --Simple
                                       --Schools face up   --Only 2 forms
                                        to 6 separate       required;
                                        forms plus          initial
                                        outside review by   application is
                                        an approved         only one page
                                        planner            --Streamlined
                                       --Schools must       rules eliminate
                                        spend money on      need for
                                        consultants to      consultants
                                        navigate web of    --USF
                                        rules such as the   Administrator
                                        28-day rule, the    does all the
                                        2-in-5 rule, and    calculations
                                        discount
                                        calculations
                                       --Backlog of
                                        appeals stretches
                                        back a full
                                        decade
    ------------------------------------------------------------------------
    Funding Allocation...............  --Funding tied to   --Funding follows
                                        discounts; higher-  the student
                                        discount schools   --Funding
                                        get more funding    allocated to all
                                        overall and         schools based on
                                        funding for more    student
                                        services            population,
                                       --Complex rules      adjusted for
                                        encourage           challenges that
                                        arbitrage and       schools in rural
                                        gaming              and low-income
                                       --Differences in     areas face
                                        spending among     --Additional
                                        States and within   allocation for
                                        States are          very small
                                        largely arbitrary   schools and
                                       --More than $400     schools in
                                        million lost each   remote areas
                                        year due to red     like Alaska
                                        tape               --Much less money
                                                            lost as a result
                                                            of red tape
                                                            means more money
                                                            for students
    ------------------------------------------------------------------------
    Financial Planning...............  --Funding           --Funding
                                        available to a      available
                                        school may change   immediately to
                                        dramatically from   all schools,
                                        1 year to the       independent of
                                        next                decisions made
                                       --Funding tied to    by other schools
                                        decisions of       --Minimal
                                        every other         fluctuations
                                        school in the       from 1 year to
                                        country             the next allow
                                       --Schools must bid   for long-term
                                        out services        financial
                                        before they know    planning
                                        if funding is
                                        available
                                       --Funding not
                                        secured until
                                        months or even
                                        years after
                                        funding year
                                        starts
    ------------------------------------------------------------------------
    Fiscal Responsibility............  --The more you      --Fixed pot of
                                        spend, the more     money for each
                                        you get             school and
                                       --Some schools       matching
                                        have little skin    requirement of
                                        in the game by      one dollar for
                                        receiving up to a   every three from
                                        90 percent          E-Rate promotes
                                        discount            prudent spending
                                       --Priority and      --Reducing
                                        group-discount      wasteful
                                        rules discourage    spending allows
                                        long-term,          the program to
                                        efficient-scale     accomplish a lot
                                        purchasing          more with the
                                       --Cap on E-Rate      same amount of
                                        but not overall     money; over $1
                                        Universal Service   billion more
                                        Fund                provided in
                                                            first year for
                                                            next-generation
                                                            technology
                                                           --Cap overall
                                                            Universal
                                                            Service Fund
                                                            before any
                                                            increase in E-
                                                            Rate budget
    ------------------------------------------------------------------------
    Transparency and Accountability..  --Funding           --Funding
                                        available to        available to
                                        schools not         schools publicly
                                        disclosed until     disclosed
                                        after the fact      immediately to
                                       --Parents can't go   enable parents,
                                        online to see       school boards,
                                        precisely how a     press, and
                                        school's E-Rate     public to
                                        funds are being     conduct local
                                        spent; online       oversight
                                        catalog just       --Schools to
                                        shows funding for   report online
                                        each recipient      exactly what
                                        divided into four   they're getting
                                        broad categories    for E-Rate
                                       --Relies on          dollars; school
                                        complicated rules   administrators
                                        and Federal         must certify
                                        audits and          it's spent on
                                        investigations      students
                                        for                --Transparency
                                        accountability      and local
                                                            control are key;
                                                            Federal
                                                            oversight a
                                                            backstop
    ------------------------------------------------------------------------
    Relation to Libraries............  --Libraries         --Libraries
                                        receive about 10    receive about 10
                                        percent of E-Rate   percent of E-
                                        funding             Rate funding
    ------------------------------------------------------------------------

        Senator Udall. Thank you very much, Commissioner Pai. Thank
    you both for your testimony.
        We are going to proceed with 7-minute rounds for each
    member, and then we will go through multiple rounds if the
    members desire, however long.
        Chairman Wheeler, I wanted to focus--you have mentioned
    this, both of us have mentioned the $36 million increase, which
    is a 10 percent increase, and you have discussed a little of
    that. I am wondering if you can talk a little bit--with these
    additional funds, will they improve the FCC's ability to carry
    out its mission? And what would be the impact if you didn't
    have those funds?
        I am trying to look at the other side of it. You put, I
    think, very solidly forward the positive side. What would be
    the impact of not doing that?

                                  FCC FUNDING

        Mr. Wheeler. Thank you, Mr. Chairman.
        You know, I am 5 months on the job now. And having come
    from the private sector, I am still learning the realities of
    Government. But one of the things that we have been trying to
    focus on is a basic concept of efficiency and how do you make
    things work and work well?
        As I indicated previously, the IT situation at the FCC is
    intolerable. It is a situation that no American business would
    allow to exist. We have begun to put in place solutions. We
    have brought in a crackerjack chief information officer (CIO)
    who understands what needs to be done. Absent the resources to
    do it, however, we are going to sit there with incompatible
    devices, with the inability to have common databases.
        We have--just to give you an example--98,000 different data
    points inside our agency that make it totally impossible to
    build the database, to relate back and forth. We have got to
    consolidate all of those. So, clearly, one thing is how do we
    become more efficient?
        And one of the frightening things, when you look at it from
    a budgeting point of view, we are asking for $13 million to fix
    IT. It is going to cost us more than that the next 2 years for
    baling wire and glue if we don't. So, clearly, there is cause
    and effect here, and there are results that come from it.
        Like Commissioner Pai, I strongly support what you have
    proposed insofar as an online consumer database. We just
    couldn't do it--we didn't have the tools to do it. Yes, it
    ought to be online. Yes, it ought to systematized. It is
    ridiculous.
        And as Commissioner Pai indicated, we are looking at other
    process reform kinds of activities. If we don't deal with the
    challenges presented by an $8.4 billion program that is being
    overhauled in all of its components and enforce our rules and
    our expectations, as is our fiduciary responsibility, then we
    won't be carrying out our fiduciary responsibility.
        Twenty-five people enforcing an $8.4 billion program
    doesn't make sense. So what I have tried to do, sir, is to--is
    to bring to the job a businessman's approach and say, okay,
    what are the challenges? How do we fix them? And then let us
    demand the results on that.

                                RURAL BROADBAND

        Senator Udall. Thank you very much for that.
        In my second question, I wanted to focus on rural
    broadband. And as you are well aware, this is a really, really
    critical challenge.
        And I am wondering, how will you continue to advance
    universal service reform to ensure that unserved areas are
    targeted for broadband support? How will you balance the need
    to connect areas with no broadband service while upgrading
    areas with slow service? And how will the additional staff
    requested in the budget help achieve these goals?
        Mr. Wheeler. So you said the key word, ``balance.'' And one
    of the joys that I have learned and that you all experience
    daily is making choices and how do you balance between various
    things.
        Yes, we have to get service into unserved areas. Yes, we
    have to make sure that in areas where there is service, that
    that service is expanding in its quality and speed. Yet we have
    a finite pot. And so, that balance is crucial.
        My concern and why we have asked for additional FTEs for
    the Wireline Competition Bureau is that these are huge issues
    to have these balancing of interests and to have fairness
    across an incredibly diverse country.
        And what we have--we are constrained in the Wireline Bureau
    because of all of the issues that we are dealing with. And when
    we pull people away to do enforcement, we are pulling them off
    of things like this. And we need to make sure that we have the
    right kind of enforcement activities so that we are then are
    not robbing Peter to pay Paul in the rural broadband kinds of
    decisions that have to be made.
        Senator Udall. The thing that is striking to me from your
    2012 Broadband Progress Report is 19 million Americans lack
    access to broadband. That is 6 percent of the population. Rural
    Americans are 13 times more likely to lack access to broadband
    than Americans in urban areas.
        My State of New Mexico ranks 44th among 50 States when it
    comes to broadband access, and over 14 percent of New Mexicans
    do not have access to broadband. So we appreciate your
    initiatives, and we appreciate you working to really push us
    forward in that area.
        And with that, Senator Johanns, I call on you for your
    first round of questions.

                                 FTE DEPLOYMENT

        Senator Johanns. Thank you, Mr. Chairman.
        Chairman Wheeler, as you have pointed out, one of the most
    significant increases in your budget is the 45 FTEs anticipated
    in the Universal Service Fund program, if you will. You have
    also acknowledged that the FCC budget request essentially parks
    most of the new USF hires in the Wireline Competition Bureau,
    but I think you are anticipating that they could be spread
    elsewhere.
        For example, I could see they could go to the Wireline
    Bureau, the Enforcement Bureau, the Office of Inspector
    General, the Office of Managing Director. The difficulty that
    creates for us who are supposed to be providing some oversight
    here is how are these people going to be deployed? So I have a
    couple of questions for you.
        Can you give me--give the subcommittee here more
    specificity as to where you think you are heading here maybe
    today, but also as this rolls out?
        And then the second thing I want to ask because your
    testimony prompts this question, with the sorry state of your
    IT as you have described it, does it make sense to try to get
    that up to speed and allocate resources there more aggressively
    and think about FTEs in a future budget request? So those are
    my questions.
        Mr. Wheeler. Thank you.
        Senator Johanns. And Commissioner, I will ask you to offer
    some thoughts on that, too.
        Mr. Wheeler. Thank you, Senator.
        Let me be specific on where the people go. Fifteen people
    into the Enforcement Bureau, which is almost doubling the
    number of enforcement people for universal service. Ten people
    into the Office of Managing Director.
        And the reason that is important is that the Universal
    Service Administrative Corporation, which is the structure, the
    quasi-independent structure that disburses the funds, reports
    in through the Office of the Managing Director, and that is
    where you need to have auditing capability and oversight
    capability there. So there are 10 people for that.
        Six people for the Office of Inspector General, and as you
    know, they run their own shop.
        Senator Johanns. Right.
        Mr. Wheeler. We don't dictate how they do that.
        And then the remaining 14 are for the Wireline Competition
    Bureau, which is for multiple reasons. One, what happens in
    enforcement is you get a series of appeals and things like
    this, and that gets handled by the Wireline Bureau. And also,
    as I was saying to Senator Udall, we have been robbing Peter to
    pay Paul to do enforcement. So that is the specific breakout of
    it.
        Now insofar as your question about IT versus enforcement, I
    wish that I could make that decision, sir. But I don't see
    how--I mean, I think that we have got two fiduciary
    responsibilities here.
        One is to make sure that $8.4 billion is appropriately
    spent. And with all respect, I think that we have some catching
    up to do on our oversight and enforcement of those programs.
    And we are in the process of modernizing.
        And second, as you suggested, the IT system, I mean, we
    just simply cannot go on this way. Here is a little interesting
    fact. As a result of my being here today and being in the news,
    we will see a precipitous increase in the amount of attacks on
    the FCC Web site, just because people say, ``Oh, FCC, let's
    go.'' We cannot tolerate that.
        If we have responsibility for the economic engine of the
    21st century, we can't be sitting here, one, without
    capabilities and, two, exposed as we are. So the choosing
    between these is incredibly difficult.
        Senator Johanns. You know, Mr. Chairman, your observation
    is correct. You know, back in my U.S. Department of Agriculture
    days, one of the most surprising things I learned in the first
    days of being there is how aggressively the system was
    attacked. Every minute, every day, it was just constantly being
    pinged by somebody who was trying to find a weak point.
        So that is what prompted my question. If you had to make
    tough choices, and I know you would like to do it all, where
    would you go? Would it be IT, or would you go to employees, the
    new ones that you have requested?
        Mr. Wheeler. And I appreciate what you are saying. I think
    we have a fiduciary responsibility on both counts. I can't sit
    here and say to you, sir, and members of the committee, that we
    can allow enforcement to continue as it has on the Universal
    Service Fund and all its components.
        I have stood up a special strike force to be able to deal
    with waste, fraud, and abuse. There are two things. Both of
    these issues undermine the basic foundation of both activities.
    If you don't have a good IT system, it undermines your ability
    to get things done at the agency. And if you don't have a good
    enforcement system, it undermines the credibility of the
    program itself. I wish I could cut the baby in half, sir.
        Senator Johanns. Commissioner Pai, do you have any
    thoughts?

                                  USF FUNDING

        Mr. Pai. Senator, just briefly, I think the exchange you
    have just heard is reflective of the difficult balance that has
    to be struck. On one hand, the FCC has to vindicate the public
    interest. On the other hand, the American people deserve and
    expect a measure of fiscal responsibility, and that is a
    difficult balance to strike in any situation.
        I think it also comes in the context of the overall cap in
    domestic discretionary spending, which is slated to increase,
    as you know, only by 0.1 percent. And so, I think it is
    incumbent on us, both to justify the proposed increase and to
    devote those resources that are approved to worthy causes.
        With respect to USF enforcement, I, of course, support
    robust enforcement of the agency's rules and the law. I,
    myself, have not been presented with a very specific plan about
    how those resources would be deployed in terms of the
    particular tasks the particular employees would be devoted to.
    Would it be time limited or permanent, et cetera? But I
    certainly look forward to working with the Chairman and this
    committee on that regard.
        With respect to IT spending, I do agree that we need to
    devote more attention to our IT systems. For example, our
    internal tracking system, among other things, is rather slow,
    shall we say. A charitable way of putting it. And so, I think
    it would help us operate more efficiently, deliver better
    results for the American public if that were speedier.
        On the other hand, I also think it is important for us to
    use the IT spending resources we get more effectively. And so,
    for example, we spent a great deal of money on the FCC Web
    site. It is a Web site that many people find incredibly
    difficult to use. More often than not, people actually click
    through to the old Web site, which looks like it was, you know,
    cutting edge back in 1998. I myself do that.
        And so, I think it is important for us to focus on the IT
    priorities that really matter and to make sure that that
    balance between the public interest and fiscal responsibility
    always is maintained.
        Senator Johanns. Mr. Chairman, I have some more questions,
    but I will wait until the next round.
        Senator Udall. Senator Moran.
        Senator Moran. Mr. Chairman, thank you very much.
        Mr. Chairman and Commissioner, thank you very much for
    being here.
        Senator Udall, thank you for having this hearing.
        We had a hearing on the FCC in which we had the Chairman
    and a number of the commissioners here 2 years ago before you
    were the chairman and when I sat in the chair of Senator
    Johanns. That was the first hearing this subcommittee had had
    in 9 years on the FCC.
        And I think this is--your agency is one of the most
    important. You happen to have three Senators here who represent
    pretty rural States, and I appreciate the focus that we can
    bring to this attention. And I thank you for your leadership.
        On IT acquisition, Senator Udall and I are interested in
    trying to determine how to have a system of IT acquisition that
    is well founded across the Federal Government. And I am going
    to submit for the record a number of questions in writing about
    IT acquisition at the FCC.
        In response to certainly Senator Johanns' question, what I
    see, Mr. Chairman, is that you have found two areas in which
    you think there is a need for additional funding, two that are
    priorities. Hard to differentiate which one has the highest
    priority.
        In your short time that you have been Chair of the FCC,
    have you found places that the FCC is spending money that it
    should not or does not need to or is a low priority?
        Mr. Wheeler. Yes. I think the issue that we have is, again,
    when I came on, what I discovered was about 70 percent of the
    budget is people, without much flexibility in the people other
    than moving desks around from one assignment to the other. And
    so, as our priorities change, what we end up doing is
    reassigning people rather than seeking new budgets or things
    like this.
        So, yes, we have had some dramatic changes from--in the
    Wireline Bureau, from narrowband activities being repurposed
    into broadband activities, being repurposed into rural
    broadband activities in particular.
        In the Wireline Bureau things are being repurposed into the
    new Internet protocol transition that is taking place in
    networks. I mean, something as current as this morning, sir.
        The matter of what are the rights of traditional telephone
    companies operating on twisted copper pairs to end their
    service and say we are going to go over to an IP service that
    can affect the ability to power the phone in the middle of a
    tornado in Kansas, can affect the ability of a burglar alarm to
    communicate and other kinds of things. We are having to switch
    resources.
        So what I am trying to say, in an answer to your question,
    is we are constantly reprioritizing. It doesn't show up like a
    business account normally does in a line-by-line kind of
    operation because what we are doing is moving existing bodies
    back and forth among tasks.

                                RURAL BROADBAND

        Senator Moran. When you and I first met, Mr. Chairman, the
    initial conversation, you were going through the nomination
    process.
        Mr. Wheeler. Yes, sir.
        Senator Moran. The first conversation, we had several
    topics, but rural broadband is often front and center with me.
    You indicated in a House hearing--and I appreciate that
    conversation. You said things that I like to hear, and you
    followed through with changes in the order of 2011.
        You indicated in a House hearing that the QRA would be
    altered. And my question is, can you give us an update on your
    plans? What will replace the QRA? How long of a term strategy--
    what is the long-term strategy in regard to Universal Service
    Fund?
        Mr. Wheeler. The long-term strategy for the Universal
    Service Fund, we could be here past lunch. But first of all, I
    thank you for the kind words and the credit for the change
    decision on the QRA and particularly, as you pointed out, that
    it was a unanimous decision out of the Commission.
        But I know you raised this, and believe me, you weren't the
    only member of this body or the other body that raised it with
    me. So I had to dive in and learn about it. And you know, the
    QRA was a really well-intentioned, well-meaning pursuit of
    perfection. And like everything else in life, you know, the
    perfect is the enemy of the good. And the complexities just
    went out of control. And so, my comment was, ``Timeout, let us
    stop this.''
        Now the question is, what are we going to replace it with?
    There are multiple proposals that have been submitted by rate-
    of-return carriers and their various representatives. We are
    trying to sort through those right now.
        I can't tell you what the answer to that is going to be
    right now. We have just reverted to the previous process before
    the QRA and continue working on the old allocation
    methodologies.
        But we will--I believe the record is just in the process of
    closing, if it hasn't just closed. And we will take all of
    those and try and piece them together.
        The interesting thing to me, though, is that there are
    different approaches being proposed by the same kinds of
    carriers, which again puts us back in this position of, okay,
    how do you make decisions or how do you say, okay, here is
    another alternative that we ought to be looking at?
        Senator Moran. Timeframe?
        Mr. Wheeler. I hope that we get done with that in the next
    6 months.
        Senator Moran. Mr. Chairman, I used most of my time
    complimenting you, but I assume that the time still has
    expired. I am glad we are having another round.
        Thank you.

                                 TRIBAL ISSUES

        Senator Udall. Okay. We will go for another round here.
        You mentioned QRA, and I also, I think, communicated with
    you that we welcomed your plan to scrap that. In the case of
    New Mexico, I think that hurt many small rural telephone
    cooperatives, and so we appreciate that effort there.
        Wanted to talk a little bit about tribal broadband and the
    FCC Office of Native Affairs and Policy, Chairman Wheeler. I
    want to express my appreciation to the Commission's efforts to
    address the digital divide facing Native American communities.
    Telephone access on tribal lands still lags far behind the rest
    of the country.
        By the FCC's own report, the number of people without
    broadband access on rural tribal lands is eight times worse
    than the national average. This digital divide creates real
    hardships for people. We know that. We see it on a firsthand
    basis in visits out in New Mexico in these rural areas. And it
    is also a barrier to economic development, which is obviously
    crucial.
        So I support the recent positive developments, such as the
    work of the FCC's Office of Native Affairs and Policy. I am
    concerned, however, that the FCC's budget request does not
    include specific funding to support this office's critical
    mission for Indian Country, which encompasses, as you know, 565
    federally recognized tribes, approximately 231 federally
    recognized Native Alaskan entities, and about 38,000
    beneficiaries of Hawaiian homelands.
        Can you explain to me how the FCC budget request will
    address the telecommunication challenges facing Native American
    communities and how high a priority are tribal issues to you?
        Mr. Wheeler. Yes, sir. Thank you.
        The only reason it isn't spelled out in the budget is that
    you don't spell out offices. But I can assure you that the
    $300,000 that this subcommittee has in the past suggested and
    that was affected by sequestration is definitely in there and
    will be appropriately spent.
        Insofar as our policy with regard to tribal lands, I met
    probably 3 weeks ago with leaders of the Native American
    community, and I told them several things. First of all, I
    learned something. I learned about the concept of trusteeship
    and how I am a trustee and I didn't know I was. And I learned
    about how the concept of consultation is not the concept--is
    not the use of the word that I have always grown up using.
    There are specific responsibilities associated with that.
        And I committed to these leaders and I committed in front
    of their large meeting several things. One, that we would
    improve the consultations. Two, that I took the trusteeship
    seriously. And three, that I wanted their help on three
    specific goals. One is improving broadband in Indian country.
    Two is dealing with the question of access to the spectrum that
    passes over Indian country. And three is assuring the diversity
    of voices, which is the question of priority licensing for
    radio stations that operate in Indian country.
        I also told them that we would refresh and strengthen the
    Native Nations Broadband Task Force and that I would physically
    be in Indian country addressing these issues with the people.
        I also noted to them in passing that because of my son, I
    am probably the only FCC Chairman that has ever attended
    powwows on Indian reservations from the Dakotas down to
    Arizona. Unfortunately, never in West Virginia--never in New
    Mexico, Senator.
        Senator Udall. Thank you.
        And I think, I know my two Senators who are up here on the
    dais with me understand a lot of these tribal and Native
    American issues. But you are absolutely right. The trust
    responsibility is one that is there, Federal Government with
    the tribal communities, and needs to be one that is respected
    and worked with and understood.
        And also consultation. I mean, it is a different kind of
    consultation, and that is why the office we have is so
    important. Because the folks in there know and understand that.
    They reach out in a very significant way and involve all of
    these many communities across the United States to participate
    and be a part of the dialogue, among many other things. So
    thank you very much for that.
        I am going to try to get one more question in here on E-
    Rate, and I mentioned the importance of E-Rate in my opening
    remarks, and I am excited about the potential innovations to
    help improve student achievement. Could you expand on your
    testimony about how E-Rate could be modernized to better meet
    the needs of schools in the current broadband era?
        Mr. Wheeler. Yes, sir.
        We need to focus on a 21st century goal, which is high-
    speed broadband to schools. When the E-Rate was put in place in
    1996, the world was a little different. We were talking about
    dial-up modems then. And the idea of connecting schools was
    quite different.
        We are in a situation today where we are spending $2.4
    billion on the E-Rate, and over half of that is not going to
    high-speed broadband. Now over the years, paying for pagers,
    paying for dial-up voice service, paying for cell phone
    service, things like this were logical. But the world has
    changed, and I am again back to--we have got to make decisions
    on how we spend a finite pot of money.
        So we are in a process right now of developing a new
    rulemaking, which we will bring to the Commission this summer,
    that modernizes the E-Rate program to focus on the delivery of
    broadband as a priority. To make sure that rural America
    doesn't end up dealing with the leftovers as it often has in
    the P2, the Part 2 of the program--making sure that it is less
    burdensome on the schools.
        I mean, it is--first of all, back to the IT issue, it is
    done on paper. It is really ridiculous in the way it is done.
    And it is done annually. Continuing on, we need to make sure
    that there is efficiency in the way in which the program is
    both administered at our level and at the local level. And that
    the buying is done right, that we emphasize buying consortia
    who can get better prices and that we create a structure that
    does that. And that is what we are doing in this new
    modernization order.
        Senator Udall. Thank you very much.
        Senator Johanns.
        Senator Johanns. Thank you, Mr. Chairman. Just a couple
    more questions.
        Let me, if I might, Chairman Wheeler, shift gears a little
    bit here to positive train control.
        Mr. Wheeler. Yes, sir.
        Senator Johanns. My understanding is that the FCC has put
    together a proposal known as program comment that is intended
    to function as an amendment to the FCC's 2004 programmatic
    agreement. I understand that FCC's licensing authority over
    spectrum necessary for positive train control triggers an FCC
    role in the infrastructure.
        Why would the FCC not be able to recommend to the Advisory
    Council on Historic Preservation (ACHP) that the utility poles
    that are necessary here in the railroad rights-of-way be
    excluded from the historic preservation review? Wouldn't the
    ACHP exempt activity where the potential effects on historic
    properties are foreseeable and likely to be, de minimis,
    minimal and not adverse? And could you--do you feel you could
    make that recommendation to them?
        And I guess what I am looking for here, we know we have got
    a big problem out here. You must carry this around in the back
    of your mind as the must-do checklist for the next few months.
    Isn't there a way to put some streamline behind this, and
    because at the end of the day, it needs to get done, right? We
    all face that.
        Mr. Wheeler. Yes, sir, Senator.
        And it is not in the back of my mind. Yes.
        Senator Johanns. Front and center, yes.
        Mr. Wheeler. The points you make are all spot-on. There are
    two roles the Commission has in positive train control (PTC).
    One is spectrum, and the other is antenna siting. I think on
    the spectrum side, we get pretty good marks because we
    facilitated the transfer of spectrum. We facilitated the
    sharing of spectrum. That is working.
        As you point out, the National Environmental Protection Act
    and the National Historic Preservation Act have specific
    provisions that say that there needs to be tribal sign-off on
    any antennas.
        Now I came out of the wireless business. When you are going
    one-off, that can be done. When you come in with tens of
    thousands like we have to do here, it chokes the system. So
    there are two options that I faced.
        Option one is, yes, we could do what you suggested, and we
    could go amend the whole process. The joy of that is that the
    processes you have to go through to get there--and then the
    court review, and then everything that comes with it--probably
    puts us on the other side of the deadline date here.
        So my decision was how do you make things move faster?
    Because the reality is the railroads have a date, a deadline
    that you established. The tribes had no deadline. So we started
    back to the consultation concept.
        We brought together a couple of meetings and have developed
    a process for batch processing, if you will, to handle these in
    groups rather than one-off that we hope is going to break
    through the logjam. I must say that the issue has been
    exacerbated by the fact that there were many, as in thousands,
    of antennas put in place by railroads before any recognition of
    this. And the need to go back and catch up on those while
    moving forward on the others is a nontrivial undertaking.
        But again, I think that we have developed a process that
    speeds it up by doing batch. But I can assure you, sir, that we
    are keenly aware of what you are talking about. And this is a
    statutory responsibility, two statutory responsibilities, and
    our job is to facilitate and obey both.
        Senator Johanns. Yes, and here is what I would offer, Mr.
    Chairman and Commissioner Pai. This is the kind of issue where
    us getting in the middle of it and doing this, that, or the
    next thing may only interfere with the process. On the other
    hand, I think both the chairman, myself as ranking member,
    Senator Moran, others who work with the tribes every day, every
    week in our office would be more than willing to be as helpful
    as we can because this deadline is real. And unless we change
    the deadline, we have all got a big problem on our hands. So I
    just put that out there.

                                 ISSUE DIALOGUE

        The last thing I wanted to say--and I will have some
    questions that I will just submit to the record. But this is
    more of an offer, Mr. Chairman, than a question. I think, in
    your job, if you could satisfy two issues, they would be naming
    the building after you.
        Spectrum and net neutrality. And you know, you have this
    huge history. You have kind of worked with everybody here. I
    find these issues enormously interesting and engaging. I have
    got no ax to grind. I am not running for reelection. I am going
    to move on in life.
        Here is an offer that I would make. I would love to start a
    dialogue with you in just a general way about these issues. I
    would welcome it. Obviously, at the end of the day, it might be
    more dialogue than anything, but I think these are--I love to
    tell the story about my first car phone where my wife took my
    car for a day, got this huge surprise for me. Got a phone
    installed. You know, one of these big clunky things on a cord.
        I loved this thing. I used it every day for that first
    month. I got the first bill, darn near had to mortgage the
    house to pay the first bill.
        Look at the difference that has occurred in a rather brief
    period of time. The key to the way forward, though, and the
    impact on our economic growth in this country really deals with
    many issues, but these two issues are so at the core of it. And
    I would love to pick your brain about it.
        Mr. Wheeler. This afternoon, our offices will be in
    contact, and I would look forward to that a lot.
        Senator Johanns. Thank you. I welcome that dialogue, and
    let us hope it continues. So thank you.
        Mr. Wheeler. Thank you, sir.
        Senator Udall. Thank you both.
        Senator Moran.

                                  RURAL RATES

        Senator Moran. Chairman, thank you again.
        Commissioner Pai indicated in his opening statement about
    the impact of the announced rate floor increase. I wanted to
    highlight for you, Mr. Chairman, in Kansas our companies
    currently charge rural customers anywhere from $11.77 to $18.25
    per month for phone service. By State law, they are prohibited
    from increasing that rate more than $1.50 in any 1 month for a
    12-month period.
        So by State law, it just seems to me there is no capability
    of complying with this decision. The new rate of $20.46, they
    just can't meet that July 14 deadline. And so, I am interested
    in what the FCC's response is into that particular problem.
        But further, many rural customers in Kansas receive both
    phone service and broadband service from the same company. And
    therefore, when the phone service costs are increased, I think
    a natural reaction, and it is particularly true in today's
    world, is to eliminate the land line. And the costs then fall
    for broadband even more directly. I mean, my guess is that
    broadband services become even more expensive as a result of
    the increasing phone rate.
        I wondered if you had--if you have any thought that that is
    a rational occurrence, if I am making something up or that is
    the propensity to do that exists? Have you given any thought to
    what the consequence is to broadband customers because of the
    increasing cost of phone service? And then are you willing to
    address this issues?
        Mr. Wheeler. Well, that is--on the second point, I would
    like to get some research on that and not just shoot from the
    hip. But I mean that is a legitimate issue.
        On the first point, again, this is the joy of this job. I,
    Senator Johanns, thank you for your thought that they might
    name the building after me. This is not a goal, okay?
        But if there is anything that I hope that folks will say at
    the end of my term is that at least we made decisions. Because
    the thing that American business can't afford and American
    consumers can't afford is limbo.
        Senator Moran. Certainly.
        Mr. Wheeler. So as Commissioner Pai said in his statement,
    and he and I are in agreement on this, it was a unanimous
    decision out of the FCC before we arrived to set up the
    structure that led to exactly what you talk about. So I inherit
    the results of the algorithm that everybody agreed to that
    produces this result.
        We have two responsibilities--to adhere to the statute and
    not to be stupid. And it seems to me that if we create a
    situation where we run headlong into the kind of Public Utility
    Commission (PUC) problems you were talking about, where we
    create a situation where suddenly there is a 46 percent rate
    hike that gets slapped on everybody in July, that is tending
    towards the other thing that we don't want to have.
        So what I am going to be proposing is that, one, we delay
    the implementation beyond July because you have got to provide
    the window for the PUCs to be able to deal with--the companies
    to be able to deal with the PUCs to be able to deal with
    things. And secondly, that we develop a phase-in so that this
    isn't hitting everybody's bills bang on, but comes in over
    time.
        Because there still is a statutory responsibility that the
    rates be reasonably comparable. And it is not just urban
    subscribers who are doing some of this subsidization of rates.
    It is other rural subscribers who are doing this subsidization
    of rates as well.
        So it is not a question of whether. It is a question of
    how, and how do you do it reasonably.

                     INTERNAL REVENUE SERVICE USF POLICIES

        Senator Moran. Thank you.
        I don't want Commissioner Pai to have been here and not had
    an opportunity. But before I turn to him and before my time
    expires, let me raise another topic and then hear from either
    or both you.
        I have never thought of this before. This question was
    brought to my attention, that the Internal Revenue Service
    (IRS) treats all universal service high-cost funding, including
    the Connect America Fund Phase 1 dollars, as general revenue
    instead of a contribution to capital. You are smiling. So you
    know this topic.
        The general revenue has tax liability consequences that
    will diminish the effectiveness of the fund. And I am curious
    as to whether or not the FCC has had ongoing conversations with
    the IRS. I am told that there is a comparable analogous
    situation that occurred previously, and I am curious as to
    whether you are addressing this issue between the FCC and the
    IRS.
        Mr. Wheeler. So I am smiling because I recently became
    aware of this as well. There was literally a company, in seeing
    this yesterday, that said that they had just been told by the
    IRS to follow the same rules as had been used in the Broadband
    Technology Opportunities Program (BTOP) that you are
    referencing.
        And so, what I am doing is asking our general counsel to
    get into this and to find out what is going on. I was smiling
    when you mentioned the IRS because it is that time of year.
        Senator Moran. I don't know that the IRS brings many
    smiles.
        Here or at home. Commissioner Pai, either one of those
    topics?

                                   RATE FLOOR

        Mr. Pai. Sure. To start, Senator, you should know that the
    Chairman is already making his mark. The very first floor at
    the FCC is labeled ``TW,'' and I think it is a sign of things
    to come. Even in 5 months, he is getting the floors renamed for
    him.
        But more seriously----
        Mr. Wheeler. It stands for ``12th Street.''
        Mr. Pai. Well, so they say. I am not buying it yet.
        But to the first topic, with respect to the rate floor, the
    FCC has twin responsibilities here under the law. We have to
    make sure that the rates are reasonably comparable. We have to
    make sure that communication services are affordable.
        The way I think about it is from the perspective of a
    consumer in Washington, DC, versus my hometown of Parsons,
    Kansas. The rates are different. I mean, in DC, it is $20.46.
    In Parsons, it is $14. But if you look at the median income,
    the median income in Washington, DC, is $64,000. The median
    income in Parsons is $38,000.
        So if you try to pair those statutory responsibilities, it
    seems to me that reasonably comparable doesn't just mean that
    the exact rate has to be equal. It has to mean that these
    services are affordable for people, regardless of where they
    live, taking into account all of the circumstances.
        Second, in terms of State law, I think it is critical for
    us from an institutional perspective to have a good
    relationship with our State and local colleagues who, to the
    extent that the rate floor would end up overriding State law or
    putting these carriers in a catch 22--either they comply with
    State law or Federal law--I think that is something to be
    avoided.
        The second thing, though, that you mentioned is something
    that is really close to my heart, and I think the chairman
    captured it exactly right in his opening statement. We live in
    an Internet age. And so, it follows from that that the
    consequence of not having broadband Internet access or access
    to other advanced communication services is that almost quite
    literally you live in another era. And that is becoming all too
    real for people in rural America.
        And the reason that I say that in answer to your question
    is that line loss in rural America is real. I have heard it
    from carriers in Kansas, Nebraska, New Mexico, States across
    this country. And so, as a result, if they lose universal
    service support because people just feel compelled to drop that
    land line, either the carrier has to try to make a go of it on
    broadband alone, for which there is no support, or they simply
    go out of business. And I think that is an untenable state of
    affairs.
        And so, stepping back from the trees of the QRA and the
    rate floor, et cetera, and looking at the forest of universal
    service, my own vision is that we would move to a Connect
    America Fund for rate-of-return carriers. We would move to a
    system that would allow standalone support for broadband
    facilities, recognizing that, for an increasing number of
    Americans today, voice isn't a distinct service as it used to
    be for the last 100 years. It is simply another application
    riding over the Internet.
        And if we embrace that kind of a vision depending, of
    course, on what the particulars of the record show, I think we
    are going to be in a situation where rural Americans and urban
    Americans will have a more level playing field in terms of, you
    know, the Internet access and other communications
    opportunities that truly do fall at the heart of the
    Communications Act.
        So that is something to flag for the future. And I think,
    Senator Johanns, you would be perfectly positioned to take a
    role on this issue going forward. That is the real level
    playing field, I think, for our people going forward.
        Senator Moran. Commissioner, thank you.
        If the voting schedule allows, I will be in your hometown
    of Parsons tomorrow, visiting the community college and the
    community hospital.
        Mr. Pai. I hope you say ``hi'' to my parents.
        Senator Moran. I hope to see them. Thank you.
        Mr. Wheeler. Are they going to name those after you?
        Mr. Pai. I am by far not the most august person from
    Parsons. Even now there is a quarterback in the NFL who
    deserves that title.
        Senator Udall. Thank you for those comments.
        Chairman Wheeler and Commissioner Pai, I just want to add
    to the earlier comments about the impact on small rural
    telephone cooperatives of a potential new increase in terms of
    the local service rate floor.
        New Mexico telephone providers in rural areas of Chaves and
    Lincoln Counties, for example, are very worried that this will
    cause a spike in their customers' phone bills. So I do
    appreciate your willingness to look carefully at the concerns
    that are raised here and thank you for doing that.

                               RURAL TRANSLATORS

        I just have one additional question here. And to both of
    you, this is about TV translators. Nearly 54 million Americans,
    including most--almost 600,000 New Mexicans rely exclusively on
    over-the-air TV. In New Mexico, many of those TV viewers rely
    on more than 200 translators located throughout the State to
    receive broadcast television. This is especially the case in
    rural areas and on tribal lands. As the Commission proceeds
    with the incentive auction rulemaking, will you consider the
    importance of protecting TV viewers in rural areas who are
    served by TV translators?
        Mr. Wheeler. I have been hogging. Do you want to go first?
        Mr. Pai. Sure. So, Senator, I take that concern very
    seriously. I have heard from folks across the country, but
    especially in the Mountain West and Midwest that this is an
    area of concern for a lot of people.
        And that is specifically why I mentioned when the FCC
    adopted the Notice of Proposed Rulemaking on September 28,
    2012, that the FCC should flag this issue and make sure that we
    do whatever we can, within the constraints of the law, to make
    sure that the people who rely on these translator services
    don't suddenly find that they are left in the dark, so to
    speak.
        Mr. Wheeler. Ajit just put it right. Do everything we can
    within the constraints of the law. I mean, the difficulty in
    the law is that it specifically excluded translators and low-
    power TV stations in the repacking kinds of activities.
        I believe that there are--I believe that there are
    solutions to this that range from, one, fortunately these are
    in rural areas, and the spectrum crunch does not exist in rural
    areas. So the betting odds that a translator gets caught up in
    this are slim. There may be some. But in those instances where
    there are, I think that there are other alternatives, and what
    we are going to be doing is trying to work through developing
    those other pathways so that we can maintain exactly what Ajit
    said, which was how do you maintain, keep the service from
    going black, at the same point in time adhering to the law? And
    again, that is what you pay us for.
        Senator Udall. Right. Thank you very much for that.
        I know that I may have additional comments for the record.
    I know my distinguished ranking member may also.
        I think Senator Moran has one final question, he tells me.

                           INCENTIVE AUCTIONS PROCESS

        Senator Moran. Thank you, Mr. Chairman and Ranking Member,
    for your indulgence.
        I want to talk about license--about spectrum auction,
    excuse me. There is a lot of focus on the nature of the
    auction, how that is--how it is going to occur.
        What I think may be missing is whether there is going to be
    any spectrum to auction. And I think broadcasters are looking
    for, you talked earlier about certainty, the business community
    needs some certainty. When can a broadcaster begin to
    understand what their company spectrum may be worth?
        They have got to enter into contracts for towers and
    employees. You have got to plan your business, and I don't know
    that any broadcaster knows what return, what they may receive
    if they put their spectrum up for auction. Is there--I think
    you are going to be in front of the broadcasters here in Las
    Vegas before very long. I assume this would be a question. Any
    thoughts?
        Mr. Wheeler. Yes, sir.
        There is a timeline that basically works this way. Starting
    next week, we start working inside the Commission with
    commissioners, such as Commissioner Pai, and working through
    the options that we see that are on the table and narrowing it
    down. Same point in time, working with you all up here to share
    with you what our thoughts are in terms of how to structure the
    auction.
        As you mentioned, then I go out to talk to the National
    Association of Broadcasters (NAB). I am not going to give a
    speech that says here are all the answers. But what will follow
    from that is a series of meetings with broadcasters that roll
    out here are the various concepts.
        But I think that it is beyond that. That I spent the last
    almost decade investing in companies and selling companies. I
    am used to seeing a book, that the investment banker comes
    forward and says, okay, here are all the numbers you need to
    know. Here are the assumptions. Here are the spreadsheets. Plug
    in whatever assumptions you want and kick out conclusions at
    the end.
        I think it is incumbent upon us to meet with broadcasters
    and say here is a book. Here is what it means in your
    particular circumstance. You make the decision. This is a
    voluntary auction. You've got to decide whether you want to
    come, then you decide whether you want to stay in it.
        But we are going to approach this in a business-like manner
    that provides to the broadcasters the information they need to
    make an informed decision. And you can't do it on a blanket
    kind of a basis. You have got to sit down and say, okay, now in
    this community, with these kinds of realities, these are the
    expectation.
        Senator Moran. I hope you are successful in accomplishing
    that.
        Mr. Chairman, thank you.
        Senator Udall. Thank you, and thank you both, Senator
    Johanns and Senator Moran, for participating today. Really
    appreciate that.
        I want to thank everybody who participated in the hearing.
    And especially our staff members, who I think worked very
    closely with your staff to make this a successful hearing. And
    appreciate hearing from the top officials of the FCC about the
    resource needs and the opportunity to explore a number of
    important and timely issues.
        Today's discussion has provided helpful insights, I think,
    into the FCC's operations and, really, the challenges that you
    all face. This information will be instructive as Congress
    moves forward with our work on the fiscal year 2015 funding.

                         ADDITIONAL COMMITTEE QUESTIONS

        And with that, I believe our hearing is concluded. And
    well, let me also say the hearing record will remain open until
    next Thursday, April 3 at 12 noon for subcommittee members to
    submit statements and/or questions to be submitted to witnesses
    for the record.
        [The following questions were not asked at the hearing, but
    were submitted to the Commission for response subsequent to the
    hearing.]
                    Questions Submitted to Hon. Tom Wheeler
                    Questions Submitted by Senator Tom Udall
                          consumer complaints database
        Question. Chairman Wheeler, thank you for your comments about the
    importance of improving how the Federal Communications Commission (FCC)
    handles consumer complaints. As you know, Senator Nelson and I wrote to
    you before the hearing to ask that the Commission implement an online
    consumer complaints database.
        What steps can the Commission take now to begin to implement a
    consumer complaints database?
        More generally, how should the Commission use new technologies to
    help guide its enforcement and policymaking activities?
        Answer. Despite limited funds for mission-critical information
    technology (IT) projects, the Commission is making significant progress
    toward modernizing the FCC's consumer complaints process and supporting
    IT. To speed this process, we are exploring the use of cloud-based,
    commercially available, ``off-the-shelf'' technology to address
    consumer needs. With careful use of fiscal year 2014 funds and the
    infusion of fiscal year 2015 funds, we hope to meet our goal of having
    a new consumer complaint system in place by the end of the calendar
    year. In the interim, the Commission will make modifications to
    existing systems that support progress toward a new system, and engage
    in related outreach efforts.
        As part of our modernization process, the Commission will solicit
    input from stakeholders, including both service providers and consumer
    groups. These comments will assist the Commission in developing design
    features for the new consumer complaint Web site that support core
    mission objectives--accessibility, transparency and functionality. The
    planned system will be designed to accommodate a more user-friendly
    complaint portal for consumers and allow consumers to check their
    complaint status online. This redesign also will make available
    summarized data about the volume and type of complaints to provide more
    information to the public and our partners as part of a ``dashboard.''
        A streamlined consumer complaints process and the implementation of
    modern technologies will provide essential support to Commission staff
    as they review consumer complaints and initiate enforcement activities.
    In addition, the Enforcement Bureau is reviewing new methods for
    streaming information from agents in the field. These combined system
    improvements and modernization will enable better tracking of
    complaints, cases, and related information. Overall, the ability to
    review complaints in a more efficient fashion will provide a foundation
    for policy decisions that rely upon statistical data analysis while
    supporting less workforce-intensive information gathering efforts.
                                   data caps
        Question. Mr. Wheeler, I previously authored legislation to help
    wireless consumers avoid ``bill shock'' after inadvertently exceeding
    monthly usage limits. Today, most consumers are accustomed to online
    access at home with a broadband subscription that allows unlimited
    access to data from the Internet. Yet many wireline and wireless
    Internet service providers are now experimenting with or implementing
    usage-based pricing and ``data caps.'' My understanding is that
    consumer groups have asked the Commission to collect information on how
    companies implement and administer such data caps.
        What steps has the Commission taken to do so?
        Will you commit to studying the impacts of data caps for consumers
    and publicly reporting the Commission's findings?
        Answer. In August 2013, the Commission's Open Internet Advisory
    Committee investigated the use of data caps for wireline broadband
    services and identified policy issues that data caps raise. That report
    can be found at http://transition.fcc.gov/cgb/oiac/Economic-
    Impacts.pdf.
        Building on the report and consumer concerns, the May 15, 2014 Open
    Internet Notice of Proposed Rulemaking asked a number of questions
    about data caps, including whether the Commission should require both
    wireline and wireless providers to disclose network practices that
    relate to data caps. We also have asked whether the Commission should
    require disclosures enabling end users to identify application-specific
    usage, to distinguish which user or device contributes to total data
    usage, to identify traffic potentially exempt from caps, and to
    identify current consumption levels. We will fully examine the record
    garnered by the Notice of Proposed Rulemaking (NPRM) and from other
    sources on data caps, and address consumer concerns in any future
    order.
          digital television channel 6 radio interference protections
        Question. Public radio stations operating at FM frequencies near
    the digital television (DTV) channel 6 petitioned the FCC in 2009 to
    updates its interference rules. In general, such rules are important to
    preventing harmful interference between various broadcasters. Yet my
    understanding is that the Commission's current rules for DTV channel 6
    interference are based on analogue TV technology.
        Given the DTV transition, will the FCC consider reviewing proposals
    to update its DTV channel 6 interference rules?
        Answer. National Public Radio filed a Petition for Rulemaking in
    October 2009 seeking the elimination of the current rule that protects
    TV Channel 6 from non-commercial FM station interference. At the end of
    2009, the Commission placed the Petition out for public comment. While
    I recognize that the Petition was filed several years ago, Commission
    action remains pending given our work to implement the Incentive
    Auction provisions contained in the Middle Class Tax Relief and Job
    Creation Act of 2012 (Spectrum Act). One of the options for TV
    broadcasters under the Spectrum Act is to volunteer to move from a UHF
    channel to a VHF channel (which includes Channel 6 allotments). It may
    well be prudent to wait to see what the final channel plan will look
    like before modifying any interference rules between the different
    services.
             emergency 9-1-1 call centers ``do-not-call'' registry
        Question. The Middle Class Tax Relief and Job Creation Act of 2012
    requires the Commission to create a ``Do-Not-Call'' Registry for
    telephone numbers used by emergency 911 call centers, or Public Safety
    Answering Points (PSAPs), and to prohibit the use of automatic dialing
    ``robocall'' equipment to contact those numbers. Your budget request
    includes a resubmitted fiscal year 2014 base item increase of $500,000
    to implement PSAPs' Do-Not-Call Registry.
        Could you explain in more detail how this funding will be used to
    improve emergency 9-1-1 operations?
        Answer. The Commission's budget request supports the October 17,
    2012 FCC Order establishing the Do-Not-Call Registry for telephone
    numbers used by Public Safety Answering Points (PSAPs). This registry
    is essential to protecting the integrity of PSAP communications. Under
    the Middle Class Job Relief Act of 2012 and the 2012 FCC Order,
    verified PSAP administrators or managers must be able to place into the
    registry telephone numbers that are used for the provision of emergency
    services or for communications between public safety agencies. The
    current Federal Trade Commission (FTC) Do-Not-Call List does not
    support these numbers and creates a gap where robocallers can interfere
    with essential first responder actions and communications. The
    Commission currently is exploring the least expensive alternatives for
    implementing this list, including potentially utilizing the sofiware
    and contractors involved in the development of the FTC's Do-Not-Call
    List.
                              fcc regulatory fees
        Question. Last year, the Commission adopted an order to update its
    regulatory fee structure. This followed a Government Accountability
    Office (GAO) report that found the Commission's regulatory fee
    structure is out of date given changes in the telecommunications
    market, in regulation, and in the Commission's work over the last
    decade. The FCC order describes the changes as initial steps to more
    comprehensively revising the Commission's regulatory fee program. The
    order also notes that the Commission will issue ``shortly'' a Second
    Further Notice of Proposed Rulemaking once more public input is
    considered.
        When does the Commission plan to take the next steps to modernizing
    its regulatory fee structure?
        Answer. The Commission is currently involved in a multi-year effort
    designed to ensure fairness and transparency within the section 9
    regulatory fee structure. Congress annually requires the Commission to
    collect regulatory fees ``to recover the costs of . . . enforcement
    activities, policy and rulemaking activities, user information
    services, and international activities.'' To calculate regulatory fees,
    the Commission allocates the total amount to be collected among the
    various regulatory fee categories. This allocation is based on the
    number of full time employees (FTEs) assigned to work in each
    regulatory fee category. Below is a summary of the Commission's
    rulemaking efforts:
    Reform Effort Summary
        2008 Further Notice of Proposed Rulemaking.--FCC sought comment on
    revising its regulatory fee schedule to address significant changes in
    the communications industry and the Commission since FTEs were
    allocated to regulatory fee categories in 1998.
        2012 NPRM.--FCC inquired into updating the FTE allocations for the
    first time since 1998.
        2012 GAO Report.--General Accountability Office (GAO) recommended
    fundamental reevaluation of how to align regulatory fees more closely
    with regulatory costs.
        2013 NPRM; 2013 Report and Order.--FCC applied current FTE data to
    determine the number of FTEs working on regulation and oversight of
    Interstate Telecommunications Service Providers and other fee
    categories and revised the calculation of FTEs in the International
    Bureau to categorize most of those FTEs as indirect.
        FCC also adopted permitted amendments (reclassification of services
    in the regulatory fee schedule as defined in section 9(b)(3) of the
    Communications Act of 1934, as amended (the act)) which requires
    notification to Congress prior to implementation. Notifications are
    planned to be provided for fiscal year 2014 regulatory fees.
      --Consolidation of UHF and VHF television stations into one
            regulatory fee category.
      --Assessment of regulatory fees on Internet Protocol TV (IPTV)
            licensees by including them in the cable television category.
        The Commission also committed to a further notice to consider
    additional regulatory fee reform and conclusively readjust regulatory
    fees within 3 years.
        2014 Ex Partes.--FCC staff engaged a wide and numerous array of
    Commission regulatees to obtain further input concerning regulatory fee
    reform.
        2014 Draft Second Further Notice of Proposed Rulemaking.--FCC staff
    have drafted and circulated a Further Notice seeking comment on
    additional reform measures to improve the regulatory fee process,
    including the adoption of methodologies tailored to ensure more
    equitable distribution of the regulatory fee burden among categories of
    Commission licensees under the statutory framework in section 9 of the
    act. Some of the issues for which the draft Further Notice seeks
    comment were raised by commenters in fiscal year 2013 (or earlier),
    along with subsequent ex parte meetings, and the Further Notice now
    tailors its inquiry, in response to the more developed record, to
    further examine these proposals.
                        fcc resources for merger reviews
        Question. Chairman Wheeler, given recent announcements of
    telecommunications mergers, does the Commission's budget proposal
    include sufficient funding to support the timely review of major
    telecommunications transactions? What impact does the review of large
    transactions have on the Commission's resources?
        Answer. The Commission maintains a special Transaction Team within
    the Office of General Counsel (OGC), which confers with other bureaus
    and uses administrative efficiencies to ensure transparent and timely
    review of large-scale mergers. The volume of these transactions varies
    year-to-year, but we have found that the creative use of intra-agency
    teams of this nature provides the required level of support for our
    mission-critical activities.
        The Commission overall has the lowest level of FTEs in 30 years as
    well as half as many contractors as 4 years ago. This situation,
    coupled with unwieldy, relic IT systems, hobbles our efforts in all
    agency operations. If this Committee supports our overall budget
    request, the Commission should have sufficient resources to handle
    transactions as well as other OGC projects.
                                    lifeline
        Question. Chairman Wheeler, your testimony highlights plans to
    increase universal service oversight. I am pleased that the FCC has
    already increased oversight of the Lifeline program, which helps low
    income persons get telephone service. As you know, Lifeline dates to
    the Reagan administration and was expanded to include wireless phone
    service during the presidency of George W. Bush. This initiative can be
    a ``Lifeline'' for low income persons in a time of emergency, or when
    applying for a job. That is why the Commission must continue reforms to
    guard against waste, fraud, and abuse. One of those reforms is a new
    National Lifeline Accountability Database. This will help weed out
    ``double dipping'' if there are duplicate participants receiving
    Lifeline assistance.
        How soon will this database be implemented?
        Answer. Last month, the National Lifeline Accountability Database
    (NLAD) became fully operational in all States and has had a significant
    impact in reducing waste, fraud, and abuse. Thus far, NLAD already has
    identified $169 million in annual savings by flagging existing
    duplicates for elimination while preventing enrollment.
                                 net neutrality
        Question. Chairman Wheeler, as you know, I am a supporter of a free
    and open Internet. The principle of such ``network neutrality'' is that
    Internet users should be able to access lawful online content and
    applications regardless of the source, without blocking or interference
    from their Internet service provider. This helps innovators and
    startups compete on a level playing field with established companies.
    Following the Verizon v. FCC decision by the U.S. Court of Appeals for
    the District of Columbia Circuit, you stated that you intend to propose
    new open Internet rules. You further noted the Commission's
    responsibility to preserve the Internet ``as an open platform for
    innovation and expression while providing certainty and predictability
    in the marketplace.''
        Do you believe that the authority granted under section 706 of the
    Communications Act gives the Commission adequate authority to ensure a
    free and open Internet?
        Under what circumstances would the Commission use its authority
    under title II of the Communications Act to ensure a free and open
    Internet?
        Answer. For over a decade, the Commission has struggled with the
    idea of net neutrality. There has been a bipartisan consensus, starting
    under the Bush administration with Chairman Powell, on the importance
    of an open Internet to economic growth, investment, and innovation.
        In January of this year, the U.S. Court of Appeals for the D.C.
    Circuit agreed that the Commission has the legal authority under
    section 706 of the Telecommunications Act of 1996 to craft enforceable
    rules to preserve a free and open Internet, even while it found that
    two of the rules we adopted in the 2010 Open Internet Order went beyond
    the FCC's authority.
        On May 15, 2014, the Commission adopted a Notice of Proposed
    Rulemaking initiating the process of crafting rules to protect and
    promote the open Internet. The proposals we put forward and the
    questions we ask in this Notice focus on maintaining an open, fast, and
    robust Internet that continues to serve as a platform for economic
    growth, investment, innovation, free expression, and competition.
        I believe that the section 706 framework set forth by the Court of
    Appeals in Verizon is sufficient to give us the authority to adopt and
    implement robust rules that will accomplish this goal. At the same
    time, the Notice asks whether the best path forward may be under title
    II. The entire purpose of an NPRM is to give Americans the ability to
    express themselves and provide analysis and guidance. I look forward to
    a broad and thoughtful debate on the record.
        We have specifically created a means by which Americans who may not
    otherwise participate in an FCC proceeding can make their voice heard
    through our new Open Internet e-mail address: openinternet@fcc.gov. And
    to ensure sufficient opportunity for broad public comment, we have
    provided for a comment and reply period that will give everyone an
    opportunity to participate.
                               number portability
        Question. Under the Commission's local number portability (LNP)
    rules, consumers can generally keep their existing phone number when
    switching to a new telephone service provider. Today, this is something
    many consumers take for granted. A private, third-party entity
    administers the number portability system on behalf of the Commission.
    My understanding is that the Commission is in the process of
    considering proposals for administering this system.
        Without commenting on any specific proposal before the Commission,
    will you assure me that the Commission will preserve consumer
    protections such as number portability in the transition to Internet
    protocol- or IP-based telephone networks?
        Answer. The Commission will work to preserve consumer protections
    such as number portability in the transition to Internet Protocol- or
    IP-based telephone networks.
                             positive train control
        Question. After the crash between a commuter train and a freight
    train in 2008, Congress moved quickly to require the installation of a
    safety system, known as ``positive train control.'' It was not clear at
    that time how many antennas and stations would be required along the
    tracks. We now know that over 20,000 antennas need to be installed and
    approved by the FCC. In some areas, the approval process includes
    consultation with tribal governrnents.
        How will the FCC balance the need to move expeditiously to permit
    this new safety system while ensuring that the proper environmental and
    historical reviews are taking place?
        Does the budget request include enough resources to complete this
    task in time to meet, the statutory deadline for installing the
    positive train control system?
        How is the FCC coordinating with other Federal, State, local and
    tribal officials on this issue? Have you encountered any problems in
    those collaborations?
        Answer. On May 16, 2014, the Advisory Council on Historic
    Preservation (ACHP) voted to approve a Program Comment that modifies
    the FCC's usual procedures for historic preservation review. The
    process outlined in the Program Comment is tailored to the unique
    circumstances surrounding the deployment of Positive Train Control
    (PTC) facilities, and provides a mechanism for timely review by all
    parties. PTC is a transformative technology that has the power to save
    lives, prevent injuries, and avoid extensive property damage. It is a
    top priority of the Commission to facilitate an efficient and timely
    review process that complies with the National Environmental Protection
    Act (NEPA) and the National Historic Preservation Act (NHPA) while
    expediting this important safety measure. I believe the timelines set
    forth in the Program Comment will help the Commission reach this
    balance.
        Additionally, I am pleased that we have reached an agreement with
    the freight rail industry that will resolve the siting issues for one-
    third of the PTC poles while providing substantial resources to tribal
    nations and States to support and advance historic preservation. As a
    result of this agreement, the freight railroads are immediately able to
    start using nearly 11,000 previously constructed poles for important
    testing and other preparatory activities and for the ultimate provision
    of PTC.
        As part of the agreement, the seven class I freight railroads have
    agreed to create a Cultural Resource Fund totaling $10,000,000 to
    provide funding directly to tribal nations and State Historic
    Preservation Offices to support cultural and historic preservation
    projects. A neutral third-party administrator will administer the fund.
    Each freight railroad has also committed to training its employees on
    environmental and historic preservation compliance and to building
    working relationships with tribal nations.
        The Memoranda of Understanding between the freight railroads and
    the FCC is available on the FCC Web site at http://www.fcc.gov/
    encyclopedia/positive-train-
    control-ptc.
        The Program Comment Public Notice is also available on the FCC Web
    site at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-14-
    680A1.pdf.
        The FCC moved resources from other projects to the PTC project over
    a year ago and continues to dedicate additional personnel and resources
    to resolving this issue. The pending budget request for fiscal year
    2015 does not contain a specific request for PTC funding but the
    Commission has been able to fully fund the necessary resources for this
    project from its internal S&E account, utilizing FTEs and resources
    within the Wireless Telecommunications Bureau and the Consumer and
    Governmental Affairs Bureau.
        During this time we have worked closely with tribal nations, State
    Historic Preservation Officers, the Advisory Council for Historic
    Preservation, the Federal Railway Administration, the National
    Transportation Safety Board, and land-holding Federal agencies. We have
    a constructive working relationship with all of these parties which led
    to the adoption of the procedures in the Program Comment and the
    landmark agreement with the freight rail industry.
                                   telehealth
        Question. Telehealth tecimologies can greatly enhance rural medical
    services. New Mexico is a large State with many residents living far
    from urban areas. Telehealth sometimes offers the best avenue to help
    meet healthcare needs. That is why I am working in a bipartisan manner
    with Senator Thune and others to help reduce some of the barriers to
    telemedicine. In December 2012, the Commission updated its existing
    rural healthcare universal service mechanism, making $400 million
    available to rural healthcare providers for broadband services through
    the ``Healthcare Connect Fund.''
        What other actions can the FCC take to encourage greater use of
    telehealth technologies?
        Answer. We must leverage all available technologies to ensure that
    advanced healthcare solutions are readily accessible to all Americans,
    from rural and remote areas to underserved inner cities. By identifying
    regulatory barriers and incentives and building stronger partnerships
    with stakeholders in the areas of telehealth, mobile applications, and
    tele-medicine, we can expedite this vital shift.
        That's why I recently announced the formation of a new Commission
    Task Force--CONNECT2HEALTHFCC--that will bring together the expertise
    of the FCC on the critical intersection of broadband, advanced
    technology, and health. I appointed a senior, experienced staffer--
    Michele Ellison as Chair of the Task Force and Deputy General Counsel.
        Specifically, the CONNECT2HEALTHFCC Task Force will consider ways
    to accelerate the adoption of healthcare technologies by leveraging
    broadband and other next-gen communications services. To advance this
    broad initiative, our Task Force will work hand in hand with the
    leadership of the Commission, in particular with the FCC's Director of
    Health Care Initiatives and the Chiefs of the Wireline and Wireless
    Bureaus and Office of Engineering and Technology. The Task Force will
    also collaborate with public and private stakeholders in the healthcare
    and technology space.
                        tribal mobility fund eligibility
        Question. The Eastern Navajo Agency in New Mexico, along with the
    Ramah Navajo and Zuni Pueblo, are some of the most underserved areas in
    the continental United States. It is my understanding that first phase
    of the Tribal Mobility Fund auction treated the vast majority of the
    Eastern Navajo Agency as having 3G service. This meant that those areas
    were not eligible for funding. Yet my understanding is that mobile
    broadband service is not actually available throughout this area.
        Will the Commission take steps to confirm the level of service
    available in these areas before excluding them from consideration in
    future Tribal Mobility Fund auctions?
        Answer. I recognize the importance of finding solutions and
    ensuring robust service on tribal lands and I will continue to take
    actions that support this goal.
                  tv blackouts during retransmission disputes
        Question. Last year during a dispute over retransmission fees,
    nearly three million Time Warner Cable customers lost access to CBS
    programming. In response, then Acting Chairwoman Clyburn stated that
    media companies should ``accept shared responsibility'' for putting
    consumers' interests above other interests during such disputes.
        Given the Commission's authority under section 325 of the
    Communications Act, what more can the Commission do to better protect
    consumers during such retransmission disputes?
        Answer. There is no question that the video marketplace has changed
    since Congress established the retransmission consent regime in 1992.
    Additionally, retransmission agreements have become more complicated
    with the advent of digital distribution options. The Commission's rules
    require parties to negotiate in good faith for retransmission consent.
    Although not directly related to blackouts, we recently modified our
    rules to prohibit joint retransmission consent negotiations between two
    non-commonly owned, top-four ranked TV stations in the same market in
    order to help level the playing field and get negotiations back to a
    one-on-one discussion, as Congress intended. With respect to blackouts,
    the Commission continues to monitor situations when disputes occur, and
    we will continue to help facilitate fair and effective completion of
    negotiations for the benefit of consumers.
                       telecommunications relay services
        Question. The Americans with Disabilities Act (ADA) recognizes the
    importance of telecommunications for persons with disabilities,
    including those who have difficulty hearing or speaking on the
    telephone. With Video Relay Service (VRS), individuals using sign
    language can make relay calls through communications assistants. These
    assistants then voice what is signed to the called party. For Americans
    who communicate best with sign language, VRS provides an important
    service.
        Will you give your assurance that the Commission will fully meet
    its obligations under the Americans with Disabilities Act with respect
    to telecommunications relay services?
        Answer. I agree that the Commission must fully meet its obligations
    under the Americans with Disabilities Act with respect to
    telecommunication relay services and I will continue to take all
    actions necessary to facilitate this program.
            21st century communications and video accessibility act
        Question. Passed by Congress in 2010, the Twenty-First Century
    Communications and Video Accessibility Act contains protections that
    enable people with disabilities to access broadband, digital and mobile
    innovations. According to a 2009 FCC study, persons with disabilities
    are less likely to use Internet-based communications technologies. For
    examples, 65 percent of Americans have broadband at home, yet only 42
    percent of Americans with disabilities have these services. This gap is
    due in part to physical barriers that people with disabilities confront
    in using the Internet.
        What is the level of compliance with the communications provisions
    of the Twenty-First Century Communications and Video Accessibility Act?
        What other actions can the FCC to ensure that Americans with
    disabilities have access to new broadband technologies?
        Answer. The Commission has completed all rulemakings associated
    with statutory deadlines established by the provisions of the Twenty-
    First Century Communications and Video Accessibility Act (CVAA). You
    will find below a list of implementation deadlines requiring compliance
    with the Act's provisions. Generally, the Commission has been very
    pleased with the efforts of covered entities to meet these deadlines in
    a timely fashion.
        The Commission's Disability Rights Office (DRO), housed in the
    Consumer and Govenmiental Affairs Bureau, is active on various
    proceedings designed to ensure access to new broadband technologies.
    These include proceedings requiring access to Internet-based
    telecommunications relay services, updating the hearing aid
    compatibility requirements, and ensuring disability access to wireline
    communications as we make the transition from the public switched
    telephone network to IP-based forms of communication. In addition,
    through its complaint process, DRO keeps abreast of and addresses
    accessibility barriers as these arise. Finally, DRO maintains an email
    list, Accesslnfo, of over 2000 individuals through which DRO regularly
    informs consumers, state and local governments, and industry
    stakeholders nationally and internationally of Commission rulemakings,
    events, and other actions pertaining to expansion of the rights of
    people with disabilities.

                       Summary of Compliance With the Act

                   implementation of the twenty-first century
           communications and video accessibility act of 2010 (cvaa)
    Section 102. Hearing Aid Compatibility
        Extends hearing aid compatibility requirements to handsets used for
    advanced communications services.
              No implementation deadlines.
    Section 103. Relay Services
        Revises the definition of telecommunications relay services (TRS).
              No implementation deadlines.
        Requires VoIP service providers to contribute to the TRS Fund by
    October 8, 2011.
              On October 7, 2011, the FCC adopted rules requiring covered
            entities to register with FCC by December 31, 2011; report
            revenues for fourth quarter 2011 by April 1, 2012, to determine
            contributions for the 2012-2013 TRS Fund year; and to report
            revenues and contribute to the TRS Fund annually thereafter.
    Section 104. Access to Advanced Communications Services and Equipment
        Adds sections 716 (accessibility requirements for advanced
    communications services and equipment), 717 (recordkeeping and
    enforcement provisions), and 718 (accessibility requirements for
    Internet browsers built into mobile phones) to the Communications Act.
        1. Requires implementing rules for Sections 716 and 717 by October
    8, 2011.
              On October 7, 2011, the FCC released a report and order
            adopting rules. Covered entities must comply with accessibility
            requirements by October 8, 2013. FCC established new request
            for dispute assistance and informal complaint procedures,
            effective October 8, 2013, for alleged violations of Sections
            255, 716, and 718 of the Communications Act.
        2. Requires recordkeeping obligations to commence 1 year after
    rules become effective.
              Rules became effective January 30, 2012; recordkeeping
            obligations began January 30, 2013. FCC established Web-based
            system for submission of recordkeeping compliance
            certifications and contact information (RCCCI Registry) by
            April 1, 2013, and annually thereafter.
        3. Requires Section 718 to be effective October 8, 2013.
              On April 26, 2013, the FCC adopted rules to implement Section
            718. Covered entities must comply with the accessibility
            requirements by October 8, 2013.
        4. Requires the FCC to establish an accessibility clearinghouse by
    October 8, 2011.
              The FCC launched its Accessibility Clearinghouse in October
            2011.
        5. Requires FCC biennial reports to Congress; first report by
    October 8, 2012.
              The FCC submitted its first biennial report to Congress on
            October 5, 2012; next report due October 2014.
        6. Requires the Comptroller General to conduct a study and report
    to Congress by October 8, 2015.
    Section 105. National Deaf-Blind Equipment Distribution Program
            (NDBEDP)
        Adds Section 719 to the Communications Act, which authorizes up to
    $10 million from the TRS Fund annually to support programs that
    distribute accessible telecommunications, advanced communications, and
    Internet services equipment to low-income individuals who are deaf-
    blind. Requires implementing rules by April 8, 2011.
              On April 4, 2011, the FCC adopted rules to establish the
            NDBEDP as a pilot program. The FCC certified state-based
            entities and launched the pilot program on July 1, 2012. The
            FCC will adopt rules for a permanent NDBEDP by June 2015.
    Section 106. Emergency Access Advisory Committee (EAAC)
        1. Requires the FCC to establish the EAAC within 60 days after
    October 8, 2010.
              On December 7, 2010, the FCC announced the appointment of
            EAAC members.
        2. Requires the EAAC, within 1 year after member appointment [or by
    December 7, 2011], to conduct a national survey and submit a report
    with recommendations to the FCC.
              The EAAC conducted a national survey and submitted a report
            and recommendations to the FCC on December 6, 2011.
        3. Authorizes the FCC to promulgate regulations.
              No implementation deadlines. On May 8, 2013, the FCC adopted
            rules to require bounce-back messages by September 30, 2013,
            when text-to-911 messages are not supported. Major carriers
            volunteered to support text-to-911 by May 15, 2014.
    Section 201. Video Programming Accessibility Advisory Committee (VPAAC)
        1. Requires the FCC to establish the VPAAC within 60 days after
    October 8, 2010.
              On December 7, 2010, the FCC announced the appointment of
            VPAAC members.
        2. Requires the VPAAC to submit, within 6 months after the VPAAC's
    first meeting on January 13, 2011 [or by July 13, 2011], a report with
    recommendations about closed captioning of IP-delivered video
    programming (``first report'').
              The VPAAC submitted its first report to the FCC on closed
            captioning on July 13, 2011.
        3. Requires the VPAAC to submit, within 18 months after October 8,
    2010 [or by April 9, 2012], a report with recommendations about video
    description, emergency information, user interfaces, program guides,
    and menus (``second report'').
              The VPAAC submitted its second report to the FCC on April 9,
            2012.
    Section 202. Video Description, Emergency Information, and Closed
            Captioning
        Amends Section 713 of the Communications Act with respect to the
    provision of video description, accessible emergency information,
    closed captioning on video programming delivered using Internet
    protocol, and petitions for exemption from the closed captioning
    requirements.
    Video Description
        1. Requires, 1 year after the enactment of the CVAA, or by October
    8, 2011, the reinstatement of FCC regulations that mandated the
    provision of video description on video programming, with certain
    modifications.
              On August 25, 2011, the FCC released a report and order
            reinstating the video description rules, effective October 8,
            2011, and requiring compliance by July 1, 2012.
        2. Requires, not later than 1 year after the completion of the
    phase-in of the reinstated regulations, or by July 1, 2013, the FCC to
    initiate an inquiry on video description and report to Congress 1 year
    after initiating that inquiry, i.e., by July 1, 2014.
              The FCC initiated an inquiry on video description on June 25,
            2013.
        3. After filing its report to Congress by July 1, 2014, but no
    later than October 8, 2016, 6 years after the enactment date of the
    CVAA, the FCC must extend the video description requirements to
    broadcast stations in the top 60 television markets.
              The FCC's video description rules extend requirements to
            broadcast stations in the top 60 television markets beginning
            on July 1, 2015.
        4. Not before July 1, 2016, 2 years after completing its report to
    Congress, the FCC may increase the video description requirement by up
    to 75 percent (from 50 to 87.5 hours per quarter) for televised video
    programming.
        5. Nine years after the date of enactment of the CVAA, or by
    October 8, 2019, the FCC must submit to Congress a report assessing the
    provision of video description, particularly with respect to television
    markets outside the top 60.
        6. Ten years after the date of enactment of the CVAA, or on October
    8, 2020, the FCC is authorized to phase in the video description
    regulations for up to 10 additional television market areas each year.
    Emergency Information
        Requires the FCC to adopt rules, not later than 1 year after the
    second VPAAC report, or by April 9, 2013, that require video
    programming owners, providers, and distributors to convey emergency
    information in a manner that is accessible to individuals who are blind
    or visually impaired.
              The FCC adopted rules on April 8, 2013, to require, by May
            26, 2015, the use of a secondary audio stream to convey
            televised emergency information aurally, when such information
            is conveyed visually during programming other than newscasts,
            for example, in an on-screen crawl.
    Closed Captioning on Video Programming Delivered Using Internet
            Protocol (IP)
        Requires the FCC to adopt rules, not later than 6 months after the
    first VPAAC report, or by January 13, 2012, to require closed
    captioning on IP-delivered video programming that was published or
    exhibited on television with captions after the effective date of such
    regulations.
              On January 12, 2012, the FCC adopted rules governing the
            closed captioning requirements for IP-delivered video
            programming. Implementation was phased in for two different
            types of IP-delivered programming: (1) programming newly added
            to an IP distributor's inventory; and (2) programming already
            in an IP distributor's inventory.
              Programming that is newly added to an IP distributor's
            inventory must be captioned if the program was shown on
            television with captions on or after the following dates:
              -- September 30, 2012--for pre-recorded video programming
            that is not substantially edited for the Internet.
              -- March 30, 2013--for live and near-live video programming.
              -- September 30, 2013--for pre-recorded video programming
            that is substantially edited for the Internet.
              Programming already in an IP distributor's inventory must be
            captioned according to the following implementation schedule:
              -- Within 45 days after the program is shown on television
            with captions on or after March 30, 2014 and before March 30,
            2015;
              -- Within 30 days after the program is shown on television
            with captions on or after March 30, 2015 and before March 30,
            2016; and
              -- Within 15 days after the program is shown on television
            with captions on or after March 30, 2016.
    Exemptions Based on Economic Burden
        Replaces the term ``undue burden'' with the term ``economically
    burdensome'' as the standard by which the FCC is to assess requests for
    exemptions from the closed captioning requirements.
              No implementation deadlines. On July 19, 2012, the FCC
            amended its rules to replace the term ``undue burden'' with
            ``economically burdensome'' and determined that the four
            factors in Section 7 13(e) of the Communications Act will be
            used to evaluate requests for exemption.
    Section 203. Closed Captioning, Emergency Information, and Video
            Description Capability
        Amends Section 303(u) and adds Section 303(z) to the Communications
    Act to update requirements for apparatus that receive, play back, or
    record video programming to be compatible with closed captioning, video
    description, and accessible emergency information so that these
    features and services reach viewers.
    Apparatus Closed Captioning Capability
        Requires the FCC to adopt rules to update apparatus closed
    captioning capability requirements within 6 months after the first
    VPAAC report, or by January 13, 2012.
              On January 12, 2012, the FCC adopted rules that require
            apparatus manufactured on or after January 1, 2014 to comply
            with the updated closed captioning capability requirements.
    Apparatus Video Description and Emergency Information Capability
        Requires the FCC to adopt rules for apparatus video description and
    emergency information capability within 18 months after the second
    VPAAC report, or by October 9, 2013.
              The FCC adopted rules on April 8, 2013, to require apparatus
            manufactured on or after May 26, 2015, to provide a secondary
            audio stream to convey required video description and televised
            emergency information aurally, when such information is
            conveyed visually during programming other than newscasts, for
            example, in an on-screen crawl.
    Section 204. User Interfaces on Digital Apparatus
        Adds Section 303 (aa) to the Communications Act. Requires user
    interfaces on apparatus designed to receive or play back video
    programming, including IP-delivered video programming, to be accessible
    to and usable by individuals who are blind or visually impaired, and
    mandates a mechanism that is reasonably comparable to a button, key, or
    icon for activating closed captioning and video description features.
    Requires the FCC to adopt rules for these provisions within 18 months
    after the second VPAAC report, or by October 9, 2013.
              On October 29, 2013, following the shutdown of the Federal
            govermnent due to a lapse in appropriations, the FCC adopted
            rules requiring video programming apparatus user interfaces to
            be accessible to and usable by individuals who are blind or
            visually impaired, and a mechanism for activating closed
            captioning and video description by December 20, 2016.
    Section 205. Access to Video Programming Guides And Menus Provided on
            Navigation Devices
        Adds Section 303(bb) to the Communications Act. Requires on-screen
    text menus and guides provided by navigation devices (set-top boxes) to
    be audibly accessible in real-time upon request by individuals who are
    blind or visually impaired, and mandates access to any built-in closed
    captioning capability through the use of a mechanism that is reasonably
    comparable to a button, key, or icon designated for activating the
    closed captioning or accessibility features. Requires the FCC to adopt
    rules for these provisions within 18 months afier the second VPAAC
    report, or by October 9, 2013.
              On October 29, 2013, following the shutdown of the Federal
            government due to a lapse in appropriations, the FCC adopted
            rules requiring on-screen text menus and guides provided by
            navigation devices to be accessible to individuals who are
            blind or visually impaired, and a mechanism for activating
            closed captioning by December 20, 2016. Small multichannel
            video programming distributors (MVPDs) must comply by December
            20, 2018.
                              unlicensed spectrum
        Question. Spectrum is a scarce and valuable resource. This is the
    case for both licensed and unlicensed spectrum. Unlicensed spectrum
    fuels innovation and, according to one recent study, helped generate
    over $220 billion in value to the US economy last year. Given the
    growth of WiFi and the explosion of connected devices sometimes
    referred to as the ``Internet of things,'' the value of unlicensed
    spectrum will likely continue to grow.
        As the Commission proceeds with upcoming spectrum auctions, will
    you work to preserve adequate access to unlicensed spectrum?
        Answer. As contemplated by the Middle Class Tax Relief and Job
    Creation Act, the May 15th Incentive Auction Report and Order adopted
    rules to permit unlicensed use of technically reasonable guard bands
    required to protect licensed services in the new 600 MHz band, in
    addition to Channel 37 and remaining TV White Spaces. This action will
    make available a significant amount of low-band spectrum for unlicensed
    use, much of it on a consistent, nationwide basis.
        We also are actively participating in ongoing efforts with the
    Department of Transportation and industry to resolve technical issues
    in a portion of the 5 GHz ITS band currently used for vehicle-to-
    vehicle communications and with the Defense Department to resolve
    issues in a portion of the 5 GHz band used for military radar.
    Resolving these issues could make an additional 195 MHz of spectrum
    available for wireless broadband. We hope and expect parties to engage
    productively, and we will be watching closely.
             budget request for universal service fund (usf) reform
        Question. The fiscal year 2015 President's budget requests an
    additional 45 FTE for Universal Service Reform. Please provide a table
    that lists each new FTE by office and bureau, with a description of the
    proposed responsibilities for each new FTE.
        Answer. The FCC's $10,877,000 request would provide 45 additional
    FTEs for enforcement-based oversight and supplement the 25 FCC
    employees tasked with oversight of the $8.4 billion USF programs.
    Specifically, the requested funds will provide for a Joint USF Anti-
    Fraud Task Force to combine resources agency-wide and develop a
    strategic, targeted approach to identifying, preventing, eliminating
    and prosecuting activities that undermine the integrity of the USF
    program. The 45 FTEs will be spread throughout the agency as follows:
      --6 FTES for Office of Inspector General (investigations and
            enforcement)
      --20 FTEs for Enforcement Bureau (increasing EB 's capacity to handle
            complex cases)
      --10 FTEs for Office of Managing Director (financial systems and
            operational oversight)
      --9 FTEs for Wireline Competition Bureau (oversight and compliance
            activities such as identifying potential rule violations,
            reviewing data and reports from beneficiaries)
        Below are detailed descriptions of the bureau activities and the
    bulk of these employees, but note that there may be adjustments based
    on budgetary constraints and a final programmatic review:
    FCC USF Anti-Fraud Joint Task Force Plan: Wireline Competition Bureau
      --The Wireline Competition Bureau (WCB) oversees the Federal
            Universal Service Fund. WCB manages the four USF programs--
            Lifeline, E-Rate, Connect America Fund and Rural Health Care--
            as well as contributions. Because WCB manages the Fund in close
            coordination with USAC, WCB often becomes aware of potential
            abuse of the Fund, mainly through USAC audits, appeals, annual
            filings, press reports and! or through discussions with
            stakeholders.
      --WCB's role will fall into three main categories: initial inquiry
            into potential rule violations; internal support and
            consultation; and coordination and outreach.
        --Initial Inquiry into Potential Rule Violations.--WCB is well-
                positioned to serve as the eyes and ears of the agency to
                identify potential rule violations. WCB meets with funding
                recipients and others involved with USF on a daily basis
                and in the course of those meetings frequently identifies
                situations that deserve further scrutiny. WCB also
                coordinates with USAC on a daily basis and often becomes
                aware through that process of potential violations.
            WCB staff will enhance and augment these existing functions by
                dedicating expert staff to these tasks as well as to
                analyzing data (e.g., National Lifeline Accountability
                Database data, FCC Forms and Annual Reports), to identify
                potential targets for investigation, conduct initial
                assessments, and make prompt referrals to the EB Strike
                Force.
        --Internal Support and Consultation.--WCB will serve as a resource
                on factual (including historical) and legal issues
                regarding waste, fraud and abuse in each of the USF
                programs. The team will identify patterns of fraud/fraud
                risk in and among the USF programs. Based on lessons
                learned in this process, the team will advise policymakers
                on how to mitigate the risk of waste, fraud and abuse going
                forward. The team would also provide USAC with guidance and
                training on fraud related issues and will have a role in
                the development and review of compliance plans. Finally,
                the team will recommend areas for intensive review or
                auditing to USAC, the EB Strike Force, and the OIG.
        --Coordination and Outreach.--WCB will work with other
                representatives of the USF Anti-Fraud Task Force to
                coordinate efforts with OGC and OIG on fraud issues and
                will work with OMR on crisis communications.

    ------------------------------------------------------------------------
                    Role                         Description          # FTEs
    ------------------------------------------------------------------------
    WCB Anti-Fraud Director............  Direct overall Anti-Fraud        1
                                          activities for WCB;
                                          report to Chief of TAPD.
    Anti-Fraud Dedicated Staff Experts.  For each program, at least       8
                                          one legal expert and at
                                          least one finance/
                                          auditing expert initially
                                          allocated as follows with
                                          but with flexibility to
                                          shift experts among
                                          programs as needed:
                                           --2 E-Rate legal experts
                                          (also support Rural
                                          Health Care)
                                           --2 E-Rate compliance/
                                          auditing experts (also
                                          support Rural Health
                                          Care)
                                           --1 Lifeline legal
                                          expert
                                           --1 Lifeline compliance/
                                          auditing expert
                                           --1 Connect America Fund
                                          legal expert
                                           --1 Connect America Fund
                                          compliance/auditing
                                          expert
    ------------------------------------------------------------------------

    Enforcement Bureau USF Strike Force
      --The EB USF Strike Force will target fraud, waste, and abuse in all
            four components of the USF: Lifeline, E-Rate, High Cost
            programlConnect America Fund, and Rural Health Care.
      --Strike Force--working in teams composed of attorneys,
            investigators, and forensic analysts--will pursue violations of
            the Communications Act, the Commission's rules, the False
            Claims Act, the Debt Collection Improvement Act, and other laws
            bearing on USF programs.
      --The Strike Force will investigate allegations of wrongdoing by
            specific targets, analyze data (e.g., NLAD data, USAC E-Rate
            funding request data, etc.) to identify patterns of misconduct,
            conduct undercover work, and target recidivists who resurface
            under different corporate guises.
      --The Strike Force will coordinate internally with other components
            of the Joint USF Anti-Fraud Task Force (e.g., on investigations
            where appropriate, on rulemakings, on policy issues) and
            externally with DOJ and State authorities (e.g., Public
            Utilities Commissions (PUCs), State attorney generals (AGs) and
            other law enforcement) to investigate and pursue wrongdoers.

                                    POSITIONS
    ------------------------------------------------------------------------
                Role                         Description              # FTEs
    ------------------------------------------------------------------------
    Strike Force Director.......  Direct overall activities of            1
                                   Strike Force; report to EB
                                   Bureau Chief
    Deputy Directors............  Three deputies with                     3
                                   responsibilities divided as
                                   follows:
                                    --1. E-Rate
                                    --2. Lifeline, Contributions
                                    --3. High Cost, Rural Health
    Strike Force Teams..........  Three 4-person teams responsible       14
                                   for specific cases. Teams
                                   consist of:
                                    --1 attorney (team leader)
                                    --1-2 investigator (interviews,
                                   undercover, doc production,
                                   etc.)
                                    --2-3 forensic examiners
                                   (document and financial
                                   analysis)
    Policy Counsel..............  One attorney tasked with working        1
                                   collaboratively with other FCC
                                   stakeholders on policy matters,
                                   rulemakings, etc.
    DOJ Trial Attorney Detailee.  Funding for a DOJ criminal trial        1
                                   attorney detailee dedicated to
                                   handling USF fraud, waste, and
                                   abuse cases
    ------------------------------------------------------------------------

    Office of the Managing Director: FTEs to Eliminate Improper Payments;
            and Improve Operational and Financial Oversight
        The Office of the Managing Director (OMD) manages and oversees the
    functions of the Universal Service Administrative Company related to
    auditing, improper payments assessments and reporting, finance,
    accounting, procurement, information technology, administration, and
    personnel issues.
                Identifying, Recovering and Reducing Improper Payments
      --As required by the Improper Payments Elimination and Recovery
            Improvement Act of 2012, OMD has worked to develop assessments
            for each of the universal service programs that disburse
            funding: Lifeline, E-Rate, High Cost programlConnect America
            Fund, and Rural Health Care. Improper payments are any payments
            that were not made or any payments that should have been made.
            The law requires the Commission to have an error rate of lower
            than 1.5 percent of total disbursements for each program.
      --For the High Cost/CAF, E-Rate and Lifeline programs, the Commission
            must analyze and constantly review and improve procedures to
            accurately capture improper payments based on OMB guidance.
            Specifically, additional OMD staff will focus on working with
            other Commission offices and USAC to bolster the assessments
            for those programs so we can demonstrate that we are testing
            all of the key components of those programs. In addition, as
            the programs are reformed, assessments procedures must be
            updated and revised accordingly.
      --Based on the findings in the completed assessments--as well as
            findings from other audits and investigations--the Commission
            must develop corrective action plans to reduce improper
            payments under the statute. OMD staff will work other
            Commission offices and with USAC to address areas of concern,
            including by proposing rule changes, referring actions to the
            Enforcement Bureau, performing further targeted audits,
            conducting additional outreach, improving predisbursements
            reviews, and taking other actions as necessary to remediate the
            issues identified.
      --OMD staff will work to increase recovery of funds from payment
            recapture audits (USF Beneficiary and Contributor Audits, or
            BCAP). Nearly $300 million in potential recoveries is
            outstanding based on audit findings. Staff will determine
            whether audit findings were correct and if funding can be
            collected before recovery can proceed. Staff will review
            outstanding issues and provide guidance to USAC and
            stakeholders.
                Operational and Financial Oversight
      --Financial.--OMD staff will analyze USF program cash management
            practices to determine whether to revise the current commitment
            and disbursement policies and procedures. Work with agency's
            CFO to ensure compliance with Federal financial requirements.
            Oversee USAC efforts to reduce outstanding commitments and
            disbursements.
      --Information Technology.--OMD staff will work with USAC and
            coordinate with other offices to modernize and improve USF
            financial and programmatic systems. Improvements in the
            financial systems will (1) ensure the proper funding is being
            disbursed for each program; (2) provide stakeholders with
            updated and user-friendly access to Commission and USAC
            systems, information and data; and (3) improve data collection
            and analysis to support policymaking and to determine whether
            the Commission's programmatic and administrative goals are
            being met for each program.
      --Risk Assessments.--To comply with GAO recommendations, OMD staff
            will manage and oversee program risk assessments for E-Rate and
            Lifeline. OMD staff will also analyze, review and implement
            recommendations that result from the risk assessments.

                                    POSITIONS
    ------------------------------------------------------------------------
                Role                         Description              # FTEs
    ------------------------------------------------------------------------
    Director of USF Oversight...  Direct, plan and coordinate             1
                                   overall activities
                                   administrative oversight team;
                                   report to Managing Director
    Improper Payments Reduction   As described above                      3
     and Reporting Team.
    Information Technology        As described above                      2
     Modernization Team.
    Financial Management Team...  As described above                      2
    Risk Assessment Team........  As described above                      2
    ------------------------------------------------------------------------

                                     ______

                  Questions Submitted by Senator Mike Johanns
        Question. In our hearing, you indicated that a change to the
    regulation governing the FCC's implementation of their responsibilities
    would take too long and therefore be of little value in helping the
    rail industry meet the deadlines specified in the Positive Train
    Control statute.
        If the FCC is able to utilize the Program Comment and any modified
    procedures in the 2004 Programmatic Agreement specified by the Program
    Comment, what do you expect the pace of Positive Train Control (PTC)
    pole approval to be, assuming the parties subject to compliance
    obligations submit timely and complete data packages to the FCC?
        Answer. On May 16, 2014, the Advisory Council on Historic
    Preservation (ACHP) voted to approve a Program Comment that modifies
    the FCC's usual procedures for historic preservation review. The
    Program Comment permits several changes to our existing procedures that
    should significantly reduce the time required for necessary review.
    First, the Program Comment contains new, significant provisions that,
    subject to certain exceptions, exclude from review deployments of PTC
    poles installed in railroad rights of way within 500 feet of existing
    equipment that is at least 25 feet tall, including signaling equipment
    that includes a vertical post, catenary bridges or masts, or above
    ground utility transmission or distribution lines and associated
    structures.
        For those poles not excluded from review, the Program Comment
    provides for streamlined processing times. Once a railroad submits a
    deployment notification, State and Tribal Historic Preservation
    Officers have 30 days to express their interests or concerns. If there
    is no response within 30 days, the railroad can refer the matter to the
    FCC, which in turn has 10 business days to decide whether a Tribe or
    SHPO can participate in the review. In addition, the Commission must
    resolve disputes between the railroads and Tribes and SHPOs within 10
    days. These are meaningful improvements to current processing times.
        Question. The FCC's budget proposes to retain $106 million
    collected from auction revenues to develop, implement and maintain its
    auction program. This is $7.5 million above the fiscal year 2014 level.
    In fiscal year 2013 the FCC sought a $13.7 million dollar anomaly,
    increasing the cap from $85 million to $98.7 million, specifically for
    costs associated with the first-ever incentive auction. The auction cap
    was again set at the higher level in fiscal year 2014 at $98.7 million,
    citing the need for additional resources for the incentive auction. The
    fiscal year 2015 FCC budget again seeks an increase, now to $106
    million, for essentially the same purpose.
        Given concerns about transparency, the fiscal year 2014 Omnibus
    adopted House report language which required the FCC to submit to the
    Committees a report with specific detail on the Commission's fiscal
    year 2015 projected auction expenditures.
        The Committee just received the first required Auction Expenditure
    report and it is difficult to understand what costs are attributable to
    various auctions and what progress is being made towards the rollout of
    the incentive auction with the use of these funds.
        Would you please provide the Committee with more specific detail on
    how those funds will be spent and any update you have on the progress
    of the incentive auction process?
        Answer. The Commission must maintain its systems and staff to carry
    out traditional auctions while creating and maintaining new systems and
    structures to handle the Incentive Auction process. Prior to 2013, the
    Commission maintained its systems for a 10-year period at $85 million
    without any inflationary adjustments. During that period, the
    Commission administered its spectrum auction program, raising billions
    of dollars for the Treasury and providing tens of thousands of
    licenses. The Commission recently completed the $1.65B H Block auction,
    while the AWS-3 auction is scheduled for the current year. Accordingly,
    the next fiscal year will place additional strain on the traditional
    auction process.
        The increases during the past two fiscal years are specifically
    geared toward the incentive auctions process. The first increase funded
    start-up and initiation costs of a complex, unique system, and the next
    fiscal year will see an intensification of the auctions activities
    process. Below is a description of the work and continuing activities
    generating the added costs for the auctions program.
    Public Releases
      --The Incentive Auction rulemaking process continues, with the
            adoption of the Incentive Auction Report and Order, Wireless
            Microphones Report and Order, and Mobile Spectrum Holdings
            Report and Order on May 15, 2014.
      --To assist the Commission in making policy decisions, and to support
            auction research conducted by our outside auction design
            experts, the staff runs studies daily, using complex software
            developed to support these tasks. Preliminary results from
            these studies have been released to the public in the Repacking
            Data Public Notice,\1\ and the accompanying workshop/webinar
            discussing these results,\2\ and in the Aggregate Interference
            Public Notice,\3\ which is scheduled to be released concurrent
            with the Incentive Auction Report and Order.
    ---------------------------------------------------------------------------
        \1\ Incentive Auction Task Force Releases Information Related to
    Repacking; Announces Workshop/Webinar to Provide Additional Detail, GN
    Docket No. 12-268, ET Docket No. 13-26, Public Notice, 29 FCC Rcd 47
    (2014).
        \2\ LEARN Workshop on Feasibility Checking During Repacking
    Process, FCC (Feb. 21, 2014), available at http://www.fcc.gov/events/
    learn-workshop-feasibility-checking-during-repacking-
    process.
        \3\ Incentive Auction Task Force Releases Updated Constraint File
    Data Using Actual Channels and Staff Analysis Regarding Pairwise
    Approach to Preserving Population Served, GN Docket No. 12-268, ET
    Docket No. 13-26, Public Notice, DA 14-677 (2014).
    ---------------------------------------------------------------------------
    Software Development
      --IT Upgrades.--Conducting the first-ever Incentive Auction is
            complicated, and requires advanced computer system development
            and upgrades to the Commission's current auction system to
            support integrating the reverse and forward auctions with the
            ``repacking'' of television stations in the UHF band.
      --Feasibility Checking.--The voluntary reverse auction, where
            descending prices are offered to broadcast television licensees
            in return for relinquishing usage rights, can continue only
            insofar as the Commission is able to guarantee that any bidder
            that exits the auction can receive a channel in its ``home''
            (UHF, upper VHF, or lower VHF) band. To determine how prices
            decrease and how winners are selected, our outside auction
            system designers have developed software called a ``feasibility
            checker'' to perform thousands of these checks in real-time.
      --Optimization.--To determine an initial spectrum clearing target, as
            well as a final channel assignment, the Commission will need to
            run integer optimization software. In conjunction with our
            outside auction designers, we are also continuing to explore
            the use of integer optimization solvers at other points of the
            reverse and forward auctions, or in the repacking process. The
            staff has been working to develop elaborate optimization models
            to achieve a balance between cost and computational time.
      --Auction Bidding Systems.--The Commission has an online auction
            system (``ISAS'') that has served well since the debut of
            spectrum auctions. However, the system as it is currently built
            cannot support the unique nature of the Incentive Auction, and
            staff has been working with our outside auction service
            provider to design a replacement bidding system engine that
            will support our current and future needs. The three components
            of the Incentive Auction are all integrally connected, and
            major features, including to the user-experience, require a
            redesign to allow for a successful bidding process.
      --Systems Integration.--Similarly, if any one component of the
            Incentive Auction system fails, it could cause the entire
            auction system to fail. Recognizing that systems integration is
            a crucial component to achieving the goals of the Spectrum Act,
            the staff has focused much attention on ensuring that connected
            pieces communicate successfully (from the clearing target
            optimizer to the reverse auction bidding engine and feasibility
            checker, for example). We have also begun the process of hiring
            a team to help with systems user acceptance testing, and an
            independent verification and validation team.
    Studies
      --As in the previously mentioned public releases, the Incentive
            Auction team runs studies and study scenarios to inform staff
            and Commission decisions regarding policy decisions, and the
            cost-benefit analysis of certain design considerations. The
            staff works closely with our outside contractors to develop and
            refine study software to test auction designs.
      --The auction studies feed into cross-bureau and office teams, and
            have been integral in negotiations with Mexico and Canada on
            the possibility of performing a joint repacking of the UHF
            band.
                                     ______

                   Questions Submitted by Senator Jerry Moran
        Question. Thank you for your assurance at the hearing that the FCC
    has a timeline and process to provide broadcast TV stations a ``book''
    of financial data to help stations understand the kind of prices they
    can expect to earn if they choose to participate in the upcoming
    incentive auction. Strong participation by broadcasters will be
    critical to the success of the auction. Could you please provide the
    Committee with the timeline of the FCC process you referenced in your
    testimony, including an approximate estimation about when TV stations
    can expect to receive the financial information they need to determine
    whether or not to participate in the auction?
        Answer. I agree that strong participation by broadcasters will be
    critical to the success of the Incentive Auction, and I am committed to
    providing information to facilitate broadcasters' ability to make
    informed, fact-based decisions about whether and how to participate. On
    May 15, 2014, the Commission adopted its rules for the Incentive
    Auction. We will be providing additional data and information to
    broadcasters in the coming weeks and months, including a timeline for
    our future actions, and a ``book'' of financial data to provide
    broadcasters with an estimate of potential prices in the reverse
    auction.
        Question. As was noted in Commissioner Pai's testimony, the FCC has
    traditionally generated large revenue for the Treasury from its
    spectrum auction program, but between fiscal year 2009 and fiscal year
    2013, Congress appropriated to the FCC $452 million for auction-related
    expenses and the Commission only generated $73.25 million in auction
    revenue. The FCC budget proposal asks for $106 million for costs
    associated with auctions, which is just shy of a 25 percent increase
    from the $85 million Congress allocated for most of the last decade. As
    you know, the administration has suggested that they do not envision
    clearing additional spectrum for auction after next year's auctions and
    they will instead focus on spectrum sharing. If spectrum sharing
    becomes the preferred strategy, should we expect the Commission's
    auctions-related costs and corresponding personnel levels to drop in
    fiscal year 2016 and beyond since there are no additional major
    spectrum auctions planned?
        Answer. Certainly spectrum sharing is a goal of the Commission, and
    spectrum clearing is also possible in other instances. In some
    instances, shared spectrum may be auctioned, as will be the case with
    our AWS-3 auction scheduled for this Fall. We have spectrum auctions
    authority during the next decade, and sometimes those auctions will be
    small but with significant economic impact. For instance, during the
    period where you noted that the Commission only generated $73.25
    million in revenue, we auctioned more than 16,000 licenses, resulting
    in important growth benefits for numerous businesses nationwide. Also,
    it is essential to recognize the overall numbers--that auctions
    spending has cost less than 2 percent of the revenue received from the
    program, which is a terrific record for any government or private
    program.
        Question. The 's Wireline Competition Bureau recently announced a
    rate floor increase, which will have a major impact on Kansas telephone
    customers across the country. Rural Kansas telephone companies
    currently charge rural customers anywhere from $11.77 to $18.25 per
    month for phone service, and under Kansas law, they are only allowed to
    increase rates by $1.50 per month in any 12-month period. The new rate
    of $20.46 will be impossible for companies in my state to comply with
    by the July 1, 2014 deadline. Are you willing to commit to delaying the
    rate floor increase, and will you work with companies to address their
    challenges so they can comply with the law?
        Furthermore, if a carrier increases its rates to match the rate
    floor, I understand that it does not lose any universal service
    support. This appears to counter the argument that the rate floor
    reduces ``excessive'' universal service subsidies, yet increases rates
    despite the statute's requirement that telephone rates be
    ``affordable.'' What purpose does the rate floor serve other than
    making rural rates less affordable?
        Answer. For 2014, the Commission has delayed any further reductions
    in universal service support until we have more information on the
    number of lines affected. The Commission adopted an Order on April 23,
    2014, that maintains the requirement that carriers file with the
    Universal Service Administrative Company the number of lines with rates
    below the rate floor, but delays any potential universal service
    support reductions until January 2015. In addition, the universal
    service support reductions that go into effect in January will only be
    for those lines with rates below $16, with no further increases until
    July 2016. The Order also excludes Lifeline recipients in order to
    ensure that people with the least means are not affected. Future
    reductions will be limited to an increase of no more than $2 per year.
        Although I understand the concern regarding increased landline
    rates because of the increased rate floor, what we have seen since the
    Commission implemented this rule in 2012 is a minimal impact. The rate
    floor increased from $10 in 2012 to $14 in 2013, a 40 percent increase.
    Our rules do not require carriers to raise their rates. The fact that
    many carriers continue to report some lines with rates well below the
    $14 rate floor suggests that they may have made a business decision to
    grandfather the lower rates for those customers and accept the
    associated support reductions. In 2013, carriers in 34 study areas in
    16 states were still reporting a number of lines with residential local
    service charges of $5 or less, further reinforcing that individual
    carriers may choose not to raise rates in response to the current rate
    floor.
        Question. On March 31, the FCC approved a plan to restrict
    television broadcasters' use of joint sales agreements (JSAs). What
    data and facts were considered by the FCC to make a determination that
    the use of JSAs was inconsistent with the spirit of media ownership
    rules? Does the FCC currently collect information on JSA usage among
    television broadcasters? If so, how many are there in the United
    States? How many television stations owned by women and minorities
    participate in JSAs? How many JSAs were approved by the FCC since 2002?
        Answer. The Commission's attribution rules ``seek to identify those
    interests in licensees that confer on their holders a degree of
    `influence or control that the holders have a realistic potential to
    affect the programming decisions of licensees or other core operating
    functions.' '' The attribution rules are taken into account when
    calculating ownership interests under the local TV and local radio
    ownership rules. The Commission first proposed to attribute JSAs that
    involve the sale of 15 percent or more of the weekly advertising time
    between same market television stations in 2004, and sought additional
    comment in 2010.
        Based on the records developed, and our ongoing review of TV JSAs
    as part of license transfer applications, there was growing concern
    that the increasing prevalence of such agreements warranted attribution
    similar to the radio attribution rules adopted in 2003, because they
    ``provide incentives for joint operation that are similar to those
    created by common ownership.''
        It is important to note that the Commission does not review or
    approve JSAs, but does take such agreements into consideration when
    reviewing applications to transfer licenses between entities. With the
    adoption of the new rules, TV stations will now be required to file any
    attributable JSA with the Commission, and will have 2 years to unwind
    any attributable JSAs where the local TV ownership rule would not allow
    joint ownership. Additionally, under existing rules, all radio and TV
    stations are required to place a copy of JSAs in their public files.
    Based on these self-reporting requirements, approximately 130 stations
    currently report being involved in a JSA. Within the Order, the
    Commission recognized that there could be some exceptions to the new
    rule, where a JSA could be found to be in the public interest, and
    provided an expedited waiver process to address those instances.
        Question. Almost all small and medium-sized cable operators license
    most of their programming through a single buying group, the National
    Cable Television Cooperative (NCTC). In October 2012, the FCC issued an
    FNPRM that tentatively concluding its definition of a ``buying group''
    needs to be modernized and sought comment on this and other related
    matters to ensure that buying groups utilized by smaller cable
    operators can avail themselves of certain program access rules as
    Congress intended. What is the status of this proceeding?
        Answer. The Media Bureau is currently evaluating the record in this
    proceeding, which raises complex legal and policy issues impacting not
    just small cable operators but also programmers. The Bureau is
    analyzing the costs and benefits of such a rule change as well as the
    effect of this proposed rule change on the video marketplace generally.
    While I understand the concerns raised by the NCTC, nothing is
    prohibiting the NCTC from qualifying as a buying group under the
    existing rules, as they previously have done.
      questions related to information technology strategy and investments
        Question. Describe the role of your agency's Chief Information
    Officer in the oversight of IT purchases. How is this person involved
    in the decision to make an IT purchase, determine its scope, oversee
    its contract, and oversee the product's continued operation and
    maintenance?
        Answer. The Commission's Chief Information Officer (``CIO'') or a
    member of the CIO's team is involved in every major IT acquisition by
    the FCC. The FCC IT Team has recently launched an updated enterprise
    planning approach that will improve transparency, accountability, and
    responsibility throughout the entirety of the IT investment lifecycle.
    The IT team is involved from the submission of an investment request to
    seeing the projects to completion as well as simultaneously tracking
    the on-going benefits of the investment made as a result of the
    project.
        Question. Describe the existing authorities, organizational
    structure, and reporting relationship of your agency Chief Information
    Officer. Note and explain any variance from that prescribed in the
    Information Technology Management Reform Act of 1996 (aka, The Clinger-
    Cohen Act) for the above.
        Answer. The FCC's CIO is located within the Office of the Managing
    Director (``OMD''). The Managing Director directs operations in OMD and
    reports directly to the Chairman. The CIO in turn reports to the
    Managing Director on the FCC's organizational chart and for practical
    purposes coordinates with the Managing Director on the day-today
    activities of the IT team at the FCC. For longer tenn, high priority,
    and high visibility IT projects, the CIO along with the Managing
    Director brief the Chairman on a regular basis.
        The Clinger-Cohen Act specifically designated the CIO as reporting
    to the agency head for certain matters related to strategic planning in
    larger agencies listed in 31 USC Sec. 901(b) that are considered Chief
    Financial Officer Act (``CFO Act'') agencies.\4\ While the FCC is a
    smaller agency and is not a CFO Act agency; the CIO does regularly
    advise the Chairman on IT issues as mentioned above.
    ---------------------------------------------------------------------------
        \4\ See 40 USC Sec. 11315(c).
    ---------------------------------------------------------------------------
        Question. What formal or informal mechanisms exist in your agency
    to ensure coordination and alignment within the CXO community (i.e.,
    the Chief Information Officer, the Chief Acquisition Officer, the Chief
    Finance Officer, the Chief Human Capital Officer, and so on)? How does
    that alignment flow down to agency subcomponents?
        Answer. The FCC's smaller size and management structure lends
    itself to a high level of coordination among the FCC's CXOs. The CIO,
    CFO, CHCO, and CAO are all a part of OMD. The team meets at least
    weekly as a group to discuss ongoing issues and to coordinate on
    agency-wide matters.
        Question. How much of the agency's budget goes to demonstration,
    modernization, and enhancement of IT systems as opposed to supporting
    existing and ongoing programs and infrastructure? How has this changed
    in the last 5 years?
        Answer. The FCC has spent the vast majority of its fiscal year 2014
    IT budget, as it has in previous years, towards ongoing Operations and
    Maintenance (O&M) of existing systems versus delivering new
    functionality to the bureaus and offices it supports. To date, the FCC
    has only spent 23 percent of its budget outlay on development,
    modernization, and enhancement efforts. The remaining 77 percent has
    been spent on O&M, mainly directed towards systems far beyond the
    normal upgrade cycles. These numbers will change as a new system is
    built out to accommodate the incentive auction scheduled for 2015.
        Question. Where and how are you taking advantage of this
    Administration's ``shared services'' initiative? How do you identify
    and utilize existing capabilities elsewhere in government or industry
    as opposed to recreating them internally?
        Answer. Since the arrival of our new CIO, Dr. David Bray, the FCC
    has conducted a number of information gathering sessions with industry
    and with agencies and departments in government to ascertain the best
    practices and best solutions available for various IT functions. The
    FCC is pursuing avenues to have infrastructure services channeled
    through larger, and better resourced, agencies in order to minimize its
    exposure, both physical and monetary, to risks associated with the use
    of the Internet.
        The FCC recognizes that it cannot maintain a security posture
    nearly as well as larger and better equipped agencies in government. As
    an example, the FCC has been pursuing a course of action with Defense
    Information Systems Agency (DISA) as a provider. Unfortunately, DISA is
    looking for at least 50,000 users in an organization when it provides
    these services. The FCC's size at less than 1,800 employees does not
    readily lend itself to the DISA solution without additional incentives
    for them to take on the work.
        On the application side, the FCC has been working at outsourcing
    its Office of Inspector General (OIG) system to an agency with mature
    and well-funded solutions, such as NASA. In this case, both government
    agencies that do provide the service for other agencies are out of
    capacity. The CIO is continuing to reach out to other agencies as well
    as to industry providers to move capacity to a more flexible and modern
    environment in a modular fashion. The above examples demonstrate some
    of the FCC's ongoing efforts to find shared solutions. Since 40 percent
    of the systems at the FCC are 10 years old, or more, the need for a
    change is absolute, but re-creating the same applications on a new
    platform inside the FCC' s four walls is not the preferred approach.
        Question. Provide short, two-page, summaries of three recent IT
    program successes, projects that were delivered on time, within budget,
    and delivered the promised functionality and benefits to the end user.
    How does your agency define ``success'' in IT program management?
        Answer. Please find three summaries of recent FCC IT program
    successes below. The FCC can provide additional details as necessary.
      --ELS Enhancement.--The Experimental Licensing System (ELS) Web
            portal was upgraded to allow for the licensing of four new
            types of devices, medical in nature. This upgrade accelerates
            the delivery of these medical devices for use in the
            population.
      --OGC Tracking System.--The Office of General Counsel expanded its
            capabilities for the tracking of court cases. This was an
            internal upgrade to help OGC's specific business needs. This
            upgrade deferred the need to build a new system and was
            accommodated within the existing infrastructure by building
            upon a system that already existed at the FCC.
      --EAS Redesign.--An agile development exercise with nine sprints
            (discrete roll outs of functionality) which addressed some
            security issues and developed the first phase of a new login
            system. The new login system improves the ability of users from
            outside the agency to login without having to go through a
            separate unrelated system at the FCC to receive a separate
            numeric login. This improvement assists users and saves time.
        Question. What ``best practices'' have emerged and been adopted
    from these recent IT program successes? What have proven to be the most
    significant barriers encountered to more common or frequent IT program
    successes?
        Answer. The introduction and infusion of agile development and
    behaviors throughout the organization has resulted in more timely and
    better suited outcomes from development and projects in general. The
    organization conducted numerous Agile training sessions ensuring that
    all of the staff is aware of the methodology and practice of Agile.
        The process of collecting and communicating requirements has long
    been a sore point in the development and deployment of successful
    systems. The FCC, through Agile development and better performance
    tracking, has been able to overcome the initial challenges of producing
    requirements that actually meet business goals. Through proper
    discipline, and breaking down and measuring work in digestible slices,
    the FCC can better understand and control the deliverables.
        The FCC IT department has also adopted a strategy which includes
    using ``intrapreneurs'' as the vehicle for strengthening partnerships
    with the 18 bureaus and offices of the FCC. Using this system, each
    bureau and office has a liaison working closely with them in defining
    requirements and establishing a business case which is then fed through
    a capital planning and investment control (CPIC) process for
    evaluation. This approach promotes budget transparency and provides the
    opportunity to drive data driven dashboards across all of the projects
    in IT.
        Question. Describe the progress being made in your agency on the
    transition to new, cutting-edge technologies and applications such as
    cloud, mobility, social networking, and so on. What progress has been
    made in the CloudFirst and ShareFirst initiatives?
        Answer. FCC IT has also instituted a layered approach driven by
    modular development which allows for agility, and cost-savings, through
    re-use of code, templates, and business functions. Resiliency in FCC
    operations is also a major driver in the modernization of the FCC.
    Protecting data, systems, and privacy by design through the use of
    multiple tools and approaches has delivered a more secure environment
    for FCC employees and clients. Examples of FCC commitment to
    modernization and security can be evidenced in the roll-out of Virtual
    Desktop Infrastructure (VDI) and delivering secure connections to
    mobile devices, whether FCC or personally owned.
        In committing to finding CloudFirst and ShareFirst approaches, the
    FCC is modernizing in a modular fashion which will allow for faster
    deployment to new environments as they become available. In moving data
    to the cloud environment and creating a datamart, the FCC is attempting
    to consolidate its sources of information to eliminate redundancies in
    processes and data gathering.
        The deployment of VDI, allowing for the use of devices anywhere at
    any time in a secure fashion, has gone a long way towards making FCC
    staff more mobile. The FCC has also facilitated the use of staffs
    personally owned devices by deploying secure technologies allowing for
    mobile device use in a secure fashion.
        Furthermore, the FCC is moving to a new and more interactive
    platform on its Web site which will allow for more timely and
    interactive exchanges with the public as well as its employees.
        To facilitate these many ongoing efforts and bring strategic vision
    to the future of IT at the FCC, the CIO's team has identified the 7
    tracks below as the primary paths forward for the IT organization's
    support of the mission of the FCC:
      --Improving Security to enhance telework and mobility.
      --Securing internal and external collaborations.
      --Strengthening FCC's IT security posture.
      --Transforming access to FCC enterprise data.
      --Modernizing legacy systems and tracking.
      --Improving FCC.gov and complaint reform.
      --Increasing transparency and system usability.
        Question. How does your agency implement acquisition strategies
    that involve each of the following: early collaboration with industry;
    RFP's with performance measures that tie to strategic performance
    objectives; and risk mitigation throughout the life of the contract?
        Answer. The newly installed CIO of the FCC has instituted a process
    by which providers who offer distinct solutions in areas where the FCC
    is interested have an opportunity to present to relevant staff in our
    Technology Center. This process is ongoing and allows the staff to
    understand what is possible rather than focusing on the status quo.
    Through this process, the FCC has chosen some technology paths which
    allow for participation with technology providers who can solve present
    problems with modernization and technology dependent solutions.
        There are numerous examples of where the FCC has experienced
    success in using performance measures for major IT investments. One
    clear example was the replacement of its Core Financial System. As part
    of the procurement process, the FCC asked bidders to prepare a quality
    assurance surveillance plan (QASP) founded on an initial set of
    performance metrics established by the FCC. The QASPs submitted by the
    bidders were evaluated as part of the procurement process, and the FCC
    has used the QASP throughout the lifecycle of the contract to evaluate
    the quality, accuracy, and timeliness of products and services provided
    by the vendor that was selected. Using the QASP process, a monetary
    incentive or disincentive is assigned at regular intervals throughout
    the lifecycle of the contract. The incentives correspond to the
    project's performance standards.
        Furthermore, the FCC has risk management processes built into its
    major IT services contracts that were established as part of the
    acquisition process. Through these processes, the FCC's vendors seek
    first to plan appropriately to avoid risk. If risks do arise, the
    vendors track the risks, seek to mitigate them, and generate regular
    risk management reports by which IT staff can monitor the contracts
    throughout their lifecycles.
        Question. According to the Office of Personnel Management, 46
    percent of the more than 80,000 Federal IT workers are 50 years of age
    or older, and more than 10 percent are 60 or older. Just 4 percent of
    the Federal IT workforce is under 30 years of age. Does your agency
    have such demographic imbalances? How is it addressing them? Does this
    create specific challenges for attracting and maintaining a workforce
    with skills in cutting edge technologies? What initiatives are underway
    to build your technology workforce's capabilities?
        Answer. The FCC does not base hiring decisions on age or consider
    age as a factor in determining workforce composition. Being mindful of
    increasing levels of the staff becoming eligible for retirement,
    however, the FCC has sought to use a combination of new hires and
    detailed employees from other agencies to fortify its information
    technology group.
        By building a workforce based on skilled veteran employees as well
    as new hires and detailed employees from other agencies, the FCC would
    be able to increase its knowledge base. Outside expertise will help
    inform the current staff about solutions used in other organizations
    and agencies.
        Question. What information does your agency collect on its IT and
    program management workforce? Please include, for example, details
    about current staffing versus future needs, development of the talent
    pipeline, special hiring authorities, and known knowledge gaps.
        Answer. Having recently brought in a new CIO to the FCC, the CIO's
    transition team is evaluating the current workforce to identify
    knowledge gaps and the agency's long-term staffing needs for the IT
    workforce. Through this process, the CIO has identified staffing needs
    that it is filling through both outside hires and detailed employees
    from within the agency. Also, as mentioned above, the CIO is using
    detailed employees from other agencies to provide a bridge across
    knowledge gaps while the team seeks to fill open positions.
                                     ______

                      Questions Submitted to Hon. Ajit Pai
                    Questions Submitted by Senator Tom Udall
                         emergency 9-1-1 in hotel rooms
        Question. Commissioner Pai, I understand from your testimony that
    you are examining how to improve emergency 9-1-1 service in hotel
    rooms. Could you explain briefly what the challenges are?
        Answer. Yes. As you know from my written testimony, the problem is
    that some of the ``multiline telephone systems'' (or MLTS) that are in
    use in hotels, office buildings, college campuses, schools, and other
    large facilities require users to dial an access code (like ``9'') to
    complete a 911 call. In the case of Kari Rene Hunt Dunn, which is
    discussed in my testimony, this meant that her daughter was required to
    dial ``9-911'' to complete a call to 911. In emergencies, consumers
    will not necessarily know that they are dialing from a phone that
    requires an access code or what that access code might be.
        So far, my inquiry has revealed that the challenges are not
    technical, at least not for modern MLTS systems. Both the MLTS vendors
    and the hotels I have heard from say that their MLTS systems can be
    programmed or reprogrammed to allow consumers to reach emergency
    personnel when they dial ``911.''
        The problem is that a substantial number of these devices just
    aren't set up that way, and many hotels do not realize that this is an
    issue. When facilities that use MLTS are made aware of this issue, I
    have found that they are willing and able to take steps to fix it. Take
    La Quinta, for example. After surveying its franchisees earlier this
    year, the company discovered that in about 60 percent of its franchised
    hotels a guest would not reach emergency services by dialing ``911''
    alone. La Quinta understood that this situation was unacceptable and
    instructed its franchisees to solve the problem. It stated that, by
    April 1, 2014, it expected that all La Quinta-branded hotels would have
    systems in place that would connect guests with emergency personnel
    when they dial ``911.'' This means that one company showed that it was
    possible to fix this problem in hundreds of hotels in just 2\1/2\
    months. Similarly, the InterContinental Hotel Group informed me that
    the telephone provider for two of their hotel brands has already agreed
    to push out a no-cost software update to allow for direct 911 dialing.
        Based on these responses, I am not aware of any challenges that
    would prevent hotels that use modern MLTS devices from ensuring that
    their guests can reach emergency personnel when they dial 911. However,
    from talking with various industry representatives about this issue, I
    have heard that some older MLTS devices might not be capable of being
    reprogrammed to allow direct access to 911. I have not heard a
    definitive age or date range that would define that category of devices
    (though some have suggested anecdotally that it might be in the 10-15
    plus year range); nor do I have data about the percentage of any such
    devices that may still be in the marketplace. I am going to continue to
    explore this issue.
        Question. How can the Federal Communications Commission (FCC) help
    address these challenges?
        Answer. One of the most important ways the FCC can help address
    this issue is to bring public awareness and attention to the problem.
    As suggested above, hotels in my experience are willing and able to fix
    the problem when they are made aware of it.
        I am committed to continuing to work on this issue and raise
    awareness. As my testimony indicated, I launched an inquiry earlier
    this year and started out by sending letters to the chief executive
    officers of the 10 largest hotel chains in the United States. I have
    also been working with the American Hotel and Lodging Association
    (AH&LA) to find solutions to this problem. I expanded my inquiry at the
    end of March by sending letters to some of the leading vendors of MLTS
    devices and services, because this issue may occur not just in hotels
    but also in the office buildings where Americans work and in the
    schools where our children learn, among other places. In order to
    address the problem on this broader scale, the entire MLTS vendor
    community must be involved. I am looking forward to reviewing their
    responses to my inquiry.

                              SUBCOMMITTEE RECESS

        Senator Udall. And with the subcommittee being concluded,
    the subcommittee is hereby recessed.
        Thank you.
        [Whereupon, at 11:18 a.m., Thursday, March 27, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2015

                                  ----------

                            WEDNESDAY, APRIL 2, 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, Moran, Mikulski,
    Johnson, Graham, Kirk, and Coats.

                           DEPARTMENT OF THE TREASURY

                 Office of Terrorism and Financial Intelligence

    STATEMENT OF HON. DAVID S. COHEN, UNDER SECRETARY

                     OPENING STATEMENT OF SENATOR TOM UDALL

        Senator Udall. Good afternoon. The subcommittee will come
    to order.
        I'm pleased to convene this hearing of the Financial
    Services and General Government Subcommittee to consider the
    fiscal year 2015 funding needs of Treasury's Office of
    Terrorism and Financial Intelligence and its enforcement of
    sanctions.
        I welcome my distinguished ranking member, Senator Mike
    Johanns. I believe our Chairwoman, Barbara Mikulski, will be
    here at some point, and other colleagues, I think, will also
    join me on the dais today, and they may arrive through the
    course of this proceeding.
        This hearing will be unclassified, but if any Senator has a
    question that requires a classified response, we will reconvene
    in a secure setting, when schedules permit.
        So, with that, I'm going to start with my opening
    statement, and then I'll turn to Senator Johanns to jump in,
    and then we'll go to our honorable witness, here, David Cohen.
        Good afternoon. I'm pleased to convene this hearing of the
    Appropriations Subcommittee on Financial Services and General
    Government. I would very much like to welcome--well, I was
    welcoming Chairwoman Mikulski, but she's not here yet, so I'll
    welcome her when she gets here--and certainly welcome Senator
    Johanns, and we'll have other folks here today.
        I also want to welcome our witness, Under Secretary of
    Terrorism and Financial Intelligence, Mr. David Cohen. Thank
    you for your service, and I really look forward to your
    testimony today.
        The Office of Terrorism and Financial Intelligence--what
    some call, I think, TFI--is a small, specialized unit of the
    Treasury Department, but it is a critical component of our
    foreign policy. TFI safeguards our financial system and
    implements sanctions against rogue nations, drugpins,
    terrorists, and proliferators of weapons of mass destruction.
        The employment and use of sanctions has changed greatly. In
    2008, the U.S. sanctions against Iran were largely ineffective
    because of Iran's ongoing oil exports and trade with other
    nations. Since 2008, it's a different story. Congress has
    passed new sanctions against Iran. The administration has led
    an international effort to leverage those sanctions. The
    Iranian economy is crumbling, and this--look at what these
    sanctions have done--the Iranian economy is crumbling,
    inflation is rampant, oil exports have been slashed, and the
    currency is in freefall. These sanctions brought Iran to the
    table. Not only are the United States and Iran talking, but
    with four other permanent members of the U.N. Security Council
    and Germany, which, as we all know, is known as the P5+1, we
    have--that group, working together, has negotiated a Joint Plan
    of Action and are working to negotiate a final agreement to
    prevent Iran from acquiring a nuclear weapon.
        This is an important example. Sanctions can help achieve
    foreign policy goals, but they are a means to an end, not an
    end in itself. The progress in Iran is also a reminder,
    sanctions can be implemented in many different ways. It makes a
    large difference in the outcome, depending on how we use this
    powerful tool.
        A great deal depends on who is pursuing the sanctions.
    Analysis shows that sanctions are the most effective when more
    nations are enforcing them. Unilateral sanctions are less
    likely to be effective. And also, effectiveness depends on when
    we use them. If sanctions are applied at the wrong time, such
    as while our negotiators are working to iron out a deal, the
    administration has strongly urged Congress to hold off further
    sanctions on Iran at this sensitive time, because it could
    derail negotiations and limit our options.
        During this time, most sanctions are in full effect on
    Iran, and there are concerns that some companies are taking
    things a bit too far. So, I am interested to hear commitments
    that the sanctions regime is still strong. Properly applied,
    sanctions can work. We have seen this in Iran, and we have seen
    a renewed interest in sanctions as a foreign policy tool. For
    example, last week, in response to Russia's annexation of
    Crimea and continued defiance of the international community,
    the United States Senate gave the President new tools to punish
    the Russian Government for destabilizing Ukraine and seizing
    Crimea. I hope to hear more about these new sanctions, how they
    will be implemented by the Treasury Department to carry out our
    foreign policy goals with regard to Russia, and also how
    existing sanctions have worked with the Iranian Government,
    using the right leverage at the right time.
        Elsewhere, there have been failures, such as the sanctions
    against Saddam Hussein's Iraq and the ongoing failure of Cuban
    isolation that has continued for more than 50 years. They are a
    reminder, too. Sanctions should be used in concert with
    diplomacy and other efforts. This committee has an important
    oversight responsibility ensuring that Federal funds are spent
    wisely for the American people.
        We have two basic questions: What are the funding
    requirements of TFI to fulfill its critical mission? And what
    is the consequence of a shortfall?
        I have the honor of chairing this subcommittee and serving
    with Senator Johanns, and I really look forward to working with
    him on this topic. And I now turn to our ranking member,
    Senator Johanns, for any remarks he would like to make.
        And I also welcome our two colleagues here, Senator Coons
    and Senator Johnson, who have joined us.
        Thank you.

                       STATEMENT OF SENATOR MIKE JOHANNS

        Senator Johanns. Mr. Chairman, thank you so much for
    calling the hearing today. We're going to discuss a very
    important topic. We're going to talk about sanctions, their
    enforcement, their administration.
        TFI plays an important national security role. Its
    components and bureaus work together to safeguard our country's
    financial system and to combat terrorism, proliferation of
    weapons of mass destruction, money laundering, drug
    trafficking, and a whole host of national security interests. I
    think we all agree that sanctions can be a powerful tool and a
    useful tool in carrying out U.S. foreign policy and national
    security goals.
        An important example is in our dealings with Iran. Iran is
    a destabilizing force in the Middle East that continues to
    support terrorism and threatens our allies, such as Israel. For
    decades, Iran has provided funding, weapons, training, and
    sanctuary to numerous terrorist groups. I believe the only
    acceptable solution for a nation with this kind of track record
    is the full abandonment of its nuclear program.
        I think we all agree that the implementation of sanctions
    on Iran is what helped bring them to the negotiating table.
    However, I continue to have concerns about the effects of
    easing sanctions as the administration has done under the Joint
    Plan of Action. I also have concerns about how the
    administration is prepared to respond if a final agreement with
    Iran is not reached and negotiations collapse.
        I've joined a number of my colleagues in supporting a very
    bipartisan effort to impose stricter sanctions on Iran if
    ongoing negotiations between Iran and other nations fail to
    produce results. This bipartisan sanctions legislation,
    brokered by Senator Menendez and Senator Kirk, would simply
    keep the pressure on the Iranian regime while talks continue.
    If the negotiations do not reach the goal of a nuclear-free
    Iran, the sanctions in this bill are necessary. It also gives
    the administration continued flexibility in up to a year to
    reach a final agreement, provided Iran meets its obligations.
        I also believe this sanctions legislation should not be
    prevented from coming to a vote on the Senate floor.
    Remarkably, this legislation has 58 cosponsors, but,
    unfortunately, the Senate Majority Leader has blocked attempts
    to vote on this legislation because of objections from the
    administration.
        We must continue to send a firm message to Iran that its
    nuclear program must end. Recent actions by Russia also
    highlight the need for a robust and effective program for the
    administration and enforcement of sanctions.
        I think it's important for the United States and our
    European allies to impose economic sanctions in response to
    what Russia has done in the Ukraine. A strong response holding
    Russia accountable now might help deter it from similar
    pursuits in the future. I don't think President Putin cares one
    whit about what we say about him, but he'll be watching, very
    carefully, the actions we take. Strong sanctions could have an
    economic impact that would create problems for him with his
    citizens. I welcome the President's efforts to impose targeted
    sanctions against Russia.

                               PREPARED STATEMENT

        I think there are real opportunities for the President to
    step forward and unite European countries to push back using
    economic force. The Russian incursion into the Crimean region
    of Ukraine requires an unequivocal response that sends a clear
    message that Russia cannot interfere with the sovereignty of
    other countries.
        Mr. Chairman, I know that Iran and Russia are just a few of
    the countries for whom TFI administers and enforces sanctions.
    So, as we review the Treasury Department's budget request for
    fiscal 2015, I look forward to working with you, as we have
    always done in the past, to ensure that TFI has the resources
    necessary to carry out its critical mission.
        Thank you, Mr. Chairman.
        [The statement follows:]
                   Prepared Statement of Senator Mike Johanns
        Mr. Chairman, thank you for calling this hearing today to discuss
    the Department of the Treasury's Office of Terrorism and Financial
    Intelligence (TFI) and its administration and enforcement of sanctions.
        TFI plays an important national security role. Its components and
    bureaus work together to safeguard our country's financial system and
    to combat terrorism, proliferation of weapons of mass destruction,
    money laundering, drug trafficking and other national security threats.
        The emphasis of today's hearing is on sanctions. The Office of
    Foreign Assets Control (OFAC) is responsible for administering and
    enforcing economic and trade sanctions against targeted foreign
    countries, terrorists, international narcotics traffickers, and those
    engaged in activities related to the proliferation of weapons of mass
    destruction.
        Sanctions can be a powerful and useful tool in carrying out U.S.
    foreign policy and national security goals.
        An important example is in our dealings with Iran. Iran is a
    destabilizing force in the Middle East that continues to support
    terrorism and threaten our allies, such as Israel.
        For decades, Iran has provided funding, weapons, training and
    sanctuary to numerous terrorist groups.
        I believe the only acceptable solution for a nation with Iran's
    track-record is the full abandonment of their nuclear program.
        I think we all agree that the implementation of sanctions on Iran
    is what helped bring them to the negotiating table.
        However, I continue to have concerns about the effects of easing
    sanctions, as the administration has under the Joint Plan of Action.
        I also have concerns about how the administration is prepared to
    respond if a final agreement with Iran is not reached.
        I have joined a number of my colleagues in supporting a bipartisan
    effort to impose stricter sanctions on Iran if ongoing negotiations
    between Iran and other nations fail to produce results.
        This bipartisan sanctions legislation brokered by Senator Menendez
    and Senator Kirk would simply keep pressure on the Iranian regime while
    talks continue.
        If the negotiations do not reach the goal of a nuclear free Iran,
    the sanctions in this bill are necessary.
        It also gives the administration continued flexibility and up to 1
    year to reach a final agreement, provided Iran meets its obligations.
        I also believe this sanctions legislation should not be prevented
    from coming up for a vote.
        This legislation has 58 cosponsors, but unfortunately, the Senate
    Majority Leader has blocked attempts to vote on any Iran sanctions
    package because of objections from the Obama administration.
        We must continue to send a firm message to Iran that its nuclear
    program must end.
        Recent actions by Russia also highlight the need for a robust and
    effective program for the administration and enforcement of sanctions.
        I think it is important for the United States and its European
    allies to impose economic sanctions in response to Russia's armed
    incursion into Ukraine.
        A strong response holding Russia accountable now might help deter
    it from similar pursuits in the future.
        I don't think President Putin cares one whit about what we say
    about him but he will be watching carefully to see what actions we
    take.
        Strong sanctions could have an economic impact that would create
    problems for him.
        I welcome the President's efforts to impose targeted sanctions
    against Russia.
        I think there are real opportunities for the President to step
    forward and unite European countries to push back using economic force.
        The Russian incursion into the Crimean region of Ukraine requires
    an unequivocal response that sends a clear message that Russia cannot
    interfere in the sovereignty of other countries.
        Mr. Chairman, I know that Iran and Russia are just a few of the
    countries for whom TFI administers and enforces sanctions.
        As we review the Treasury Department's budget request for fiscal
    year 2015, I look forward to working with you to ensure that TFI has
    the resources necessary to carry out its important mission.

        Senator Udall. Thank you very much, Senator Johanns.
        And I would now recognize Chairwoman Mikulski for her
    opening remarks.

                  STATEMENT OF CHAIRWOMAN BARBARA A. MIKULSKI

        Chairwoman Mikulski. First of all, Mr. Chairman, I want to
    thank you and Senator Johanns for holding this hearing. It is
    the first hearing ever in the Financial Services Subcommittee
    on the--on making sure that we have adequate resources to
    implement sanctions. And I think that this really shows the
    vitality and vibrancy. And I'm glad it's going to be a
    bipartisan one, because, when it comes to national security,
    that's where it should be.
        So--we have a lot of Maryland constituents today--so, we
    thank you for this first-ever hearing.
        Mr. Cohen, I'm really proud of you, and I'm really proud of
    the 413 people--only 413 people--who work for the Department of
    Treasury implementing this, because, when we look at sanctions,
    it is the most important tool of diplomacy that we have to
    bring people to the table to begin serious negotiations or to
    comply with the negotiations agreed to. So, we look forward to
    hearing your testimony. I want you to be able to speak and us
    to get into very meaty, robust questions, but I will hope that
    we can focus on, What is it that we need to make sure you're
    provided with so that you can do the job the Commander in Chief
    and the Congress, through its authorizing legislation, ask you
    to do in these really hot spots around the world, particularly
    Iran, North Korea, Syria, and now with the new challenges of
    sanctions with Ukraine?
        So, thank you very much for your service, to all 413
    people, and we look forward to your testimony and working with
    you in this very important foreign policy area.
        Senator Udall. Thank you, Chairwoman Mikulski.
        And now I would invite Under Secretary Cohen to present
    your remarks.

                    SUMMARY STATEMENT OF HON. DAVID S. COHEN

        Mr. Cohen. Thank you, Chairman Udall, Ranking Member
    Johanns, Chairwoman Mikulski, distinguished members of the
    Committee on Appropriations. And thank you for the opportunity
    to appear before you today to discuss the Department of
    Treasury's Office of Terrorism and Financial Intelligence.
        I'm especially proud to be here to discuss the work of TFI.
    For just over 3 years now, I have had the privilege of serving
    as the Under Secretary for Terrorism and Financial
    Intelligence. The women and men of TFI are an outstanding
    group--skilled, creative, patriotic, and enormously dedicated
    to their increasingly demanding jobs. I am impressed, every
    day, by the truly remarkable work of my colleagues. And, in the
    course of this hearing, I hope to convey to this subcommittee
    how much we all benefit from their magnificent work.
        TFI will soon celebrate its 10-year anniversary. And over
    this past decade, TFI's financial measures have become an
    increasingly crucial tool for protecting and advancing our core
    national security and foreign policy interests.
        The reason behind TFI's broadening mandate is simple.
    Nearly every national security threat has an important
    financial component. Effectively mitigating these threats
    requires creative thinking about how to leverage, pressure, and
    often exploit our adversaries' financial vulnerabilities. As a
    result, TFI has been increasingly called upon to deploy our
    tools to address national security threats in nearly every
    corner of the globe. The variety of the threats we face means
    that TFI's output must be the sum of TFI's many parts, from
    marshaling financial intelligence and analytical capabilities,
    to engaging businesses and governments around the world, to
    deploying regulatory actions and sanctions authorities, to
    enforcement actions.
        We are able to do this because of the unique structure of
    TFI and because of the support that we have received from this
    committee and from the Congress over the years.
        Treasury is the only finance ministry in the world with its
    own in-house intelligence unit. TFI's Office of Intelligence
    and Analysis, OIA, is comprised of subject-matter and trade-
    craft experts who provide all source intelligence analysis used
    by Treasury officials and other intelligence customers
    throughout the U.S. Government, including the President. These
    analysts, who rely on financial intelligence as well as other
    sources, follow the money to help map the networks of our
    adversaries. Harnessing OIA's intelligence capabilities is
    crucial to the mission of other TFI components, including the
    Office of Foreign Assets Control (OFAC), our sanctions
    implementation arm.
        As you all know, OFAC's workload has grown dramatically
    since the creation of TFI, from managing 17 sanctions programs
    in 2004 to 37 today, addressing issues ranging from Iran to
    North Korea to Syria to, most recently, Ukraine, while still
    also pursuing our counterterrorist financing and narcotics
    trafficking programs, as well as others.
        Our sanctions programs are most effective when they stand
    on a foundation of strong systemic safeguards and financial
    transparency. To promote financial transparency, TFI's Office
    of Terrorist Financing and Financial Crimes, TFFC, develops
    policies and implements strategies to strengthen the integrity
    of the financial system and safeguard it from terrorist
    financing, money laundering, drug trafficking, organized crime,
    and proliferation finance.
        Meanwhile, the Financial Crimes Enforcement Network,
    FinCEN, implements the Bank Secrecy Act by designing and
    enforcing a regulatory framework to defend the U.S. financial
    system from money laundering and other serious financial crime.
        And finally, Treasury's Executive Office of Asset
    Forfeiture guides the strategic use of forfeited assets across
    the U.S. Government to disrupt and dismantle criminal
    enterprises.
        In sum, over the past decade, TFI has become a central part
    of the national security community, advancing important
    national security and foreign policy interests of the United
    States. And, as our country continues to turn to financial
    measures to address our thorniest foreign policy challenges,
    TFI will continue to craft these tools, implement them, and
    vigorously enforce them.

                               PREPARED STATEMENT

        Before I conclude, let me say a word about our resource
    levels. Notwithstanding the recent growth in our workload, the
    $102 million provided in the fiscal year 2014 Departmental
    Offices appropriation is sufficient to allow us to accomplish
    our mission, as is the President's budget request for fiscal
    year 2015. We have been able to increase our sanctions programs
    and other output by generating program efficiencies through
    effective management and by transferring funds, when needed,
    among organizations and programs within TFI.
        Thank you, and I look forward to addressing your questions.
        [The statement follows:]
                   Prepared Statement of Hon. David S. Cohen
        Chairman Udall, Ranking Member Johanns, and distinguished members
    of the Subcommittee on Financial Services and General Government: Thank
    you for the opportunity to appear before you today to discuss the
    Department of the Treasury's Office of Terrorism and Financial
    Intelligence (TFI). My remarks will focus on the history of TFI, TFI's
    components, TFI's role in implementing sanctions programs, and the
    President's fiscal year 2015 funding request for TFI.
        I am especially proud to be appearing before this subcommittee to
    discuss the work of TFI. The women and men of TFI are an outstanding
    group--skilled, creative, patriotic, and enormously dedicated to their
    increasingly demanding jobs. For just over 3 years now, I have had the
    privilege of serving as the Under Secretary of TFI, and I am impressed
    every day by the truly remarkable work of my TFI colleagues. In the
    course of this hearing, I hope to convey to this subcommittee how much
    we all benefit from their magnificent work.
                           tfi background and history
        September 11, 2001, served as the catalyst for an important shift
    in the U.S. Government's approach to national security. Following that
    fateful day, there was a newfound recognition across the Government
    that disrupting the financial infrastructure of terrorist groups needed
    to be a part of our counterterrorism strategy.
        And in the 12 years since those tragic attacks, we have made great
    strides in developing a comprehensive, whole-of-government approach to
    combating terrorist financing. By all accounts, the United States has
    been at the forefront of this effort globally. The Treasury
    Department--and our powerful financial toolkit--have been key to this
    effort.
        And as the national security landscape has evolved over the past
    decades, so have Treasury's efforts. Far from just being focused on
    issues related to terrorist financing, Treasury's use of financial
    measures has become a crucial tool for protecting and advancing a much
    broader range of national security and foreign policy interests of the
    United States.
        The reason behind TFI's broadening mandate is simple: Nearly every
    national security threat has an important financial component.
    Effectively mitigating these threats requires creative thinking about
    how to leverage, pressure, and often exploit our adversaries' financial
    vulnerabilities.
        That is where TFI comes in. TFI has been recognized as a leader
    within the Government for its intelligence, enforcement, diplomatic,
    and regulatory capabilities. We have also been recognized for our
    substantive expertise on topics as varied as virtual currency,
    transnational organized crime, counterterrorism, and nuclear non-
    proliferation.
        As a result, we have been increasingly called upon to deploy our
    various tools to address national security threats in nearly every
    corner of the globe. These tools include financial and economic
    sanctions, regulatory actions including section 311 of the USA PATRIOT
    Act, civil enforcement actions, advisories to the private sector, and
    conversations to alert foreign government officials as well as the
    private sector to particular threats.
                                 tfi components
        The diversity of the threats that we face and the tools that we
    have to mitigate those threats means that TFI's output must be the sum
    of many crucial parts. Each of these parts meaningfully contributes to
    TFI's mission, from marshaling financial intelligence and analytical
    capabilities to engaging businesses and governments around the world to
    deploying regulatory tools and sanctions authorities.
        To better understand how all of these parts come together under the
    TFI umbrella, let me provide some detail on the structure of our
    office.
        TFI is comprised of five components: the Office of Intelligence and
    Analysis (OIA), the Office of Foreign Assets Control (OFAC), the Office
    of Terrorist Financing and Financial Crimes (TFFC), the Financial
    Crimes Enforcement Network (FinCEN), and the Treasury Executive Office
    of Asset Forfeiture (TEOAF).
        Treasury is the only finance ministry in the world with its own in-
    house intelligence unit. OIA subject-matter and tradecraft experts
    contribute to every aspect of the intelligence cycle, providing all-
    source intelligence analysis to Treasury officials and other
    intelligence customers throughout the U.S. Government, including the
    President.
        Harnessing OIA's intelligence capabilities is crucial to the
    mission of other TFI components, including OFAC. OFAC designs,
    implements, and enforces sanctions programs to disrupt and dismantle
    the support networks of terrorist groups, weapons of mass destruction
    (WMD) proliferators, drug traffickers, and organized criminal groups.
    OFAC's workload has grown tremendously since the creation of TFI. When
    TFI was formed in 2004, OFAC managed 17 sanctions programs. Today, it
    manages 37.
        Sanctions programs are most effective when they stand on a
    foundation of strong systemic safeguards in the financial sector.
    Indeed, one of the TFI's core missions is to ensure that these
    safeguards are part of our own domestic financial system and to
    encourage the adoption of similar safeguards around the world.
        The aim of these safeguards can be captured in one word:
    transparency.
        Transparency is critical to enabling financial institutions and law
    enforcement, regulatory, and other authorities to ``follow the
    money''--that is, to identify traces of illicit finance so that they
    can protect the integrity of the international financial system. Their
    efforts, in turn, deny terrorists, proliferators, and other criminals
    access to the financial system, forcing them to turn to costlier and
    riskier alternative ways of moving money.
        To promote international financial transparency, TFFC develops
    policies and implements strategies to strengthen the integrity of the
    financial system and safeguard it from terrorist financing, money
    laundering, drug trafficking, organized crime, and proliferation
    finance. TFFC also establishes strategic relationships across the globe
    to foster adoption of best practices while identifying priority threats
    to, and vulnerabilities in, the U.S. and international financial
    systems.
        Domestically, FinCEN implements the Bank Secrecy Act, designing and
    enforcing a regulatory framework to defend the U.S. financial system
    from money laundering and other serious financial crimes. To do so,
    FinCEN requires financial institutions to create and maintain records
    that are highly useful to law enforcement and collects, analyzes, and
    disseminates financial intelligence. FinCEN also works with counterpart
    financial intelligence units around the world to share information in
    an effort to prevent criminals from exploiting international borders to
    hide from justice.
        Meanwhile, TEOAF guides the strategic use of forfeited assets by
    Treasury, the Department of Justice, U.S. Immigration and Customs
    Enforcement, U.S. Customs and Border Protection, U.S. Secret Service,
    and other law enforcement agencies to disrupt and dismantle criminal
    enterprises.
        I will turn now to TFI's role in designing and implementing some of
    our sanctions programs. While these sanctions efforts vary in size and
    scope, all have achieved meaningful results in furthering important
    national security goals.
                       ukraine-related sanctions actions
        The Treasury Department has played a major role in the U.S. and
    international community's response to Russia's recent actions in
    Ukraine, including its support for an illegal referendum in Crimea, the
    purported annexation of Crimea, the dangerous risk of escalation caused
    by Russian troops in Crimea, and the potential for violence related to
    the buildup of Russian forces on Ukraine's eastern border.
        In response to Russian aggression, President Obama has issued three
    Executive orders (E.O.), which together provide the Secretary of the
    Treasury, in consultation with the Secretary of State, the authority to
    impose broad sanctions on Russia and others individuals and entities
    responsible for the situation in Ukraine.
        Armed with these new authorities, we have followed through on
    President Obama's warning that there will be real costs for Russia's
    incursion into Ukraine and its violation of Ukrainian sovereignty. So
    far, we have designated 31 individuals--including Crimean separatist
    leaders, Russian Government officials, and members of the inner circle
    of the Russian leadership--as well as Bank Rossiya, a mid-sized Russian
    bank.
        Those designated have had their assets in the U.S. frozen and are
    barred entirely from conducting business with, in, or through the
    United States. I suspect that they will also find it very difficult to
    conduct business outside the U.S., because our experience with other
    sanctions programs has demonstrated that major financial centers around
    the world often adhere to U.S. guidelines when it comes to the
    implementation of sanctions. In short, these individuals will find
    their ability to transact in the world economy severely constrained.
        Of particular note, the President has given the Secretary of the
    Treasury the authority to target Russian Government officials as well
    as those who materially support or act on behalf of senior Russian
    officials. Using this authority we designated individuals such as
    Gennady Timchenko, whose activities in the energy sector have been
    directly linked to President Putin, and Yuri Kovalchuk, the largest
    shareholder of Bank Rossiya and personal banker for senior officials of
    the Russian Federation.
        As I noted, we have also designated Bank Rossiya, which has served
    as the bank for President Putin and other senior Russian Government
    officials. Prior to its designation, Bank Rossiya was the 17th largest
    bank in Russia, with about $10 billion in assets and numerous U.S.
    dollar-denominated correspondent accounts here in the U.S., as well as
    correspondent accounts in Europe and elsewhere denominated in other
    currencies.
        Following our action last week, the bank's assets under U.S.
    jurisdiction are blocked, it has been frozen out of using the dollar,
    and it no longer has access to its correspondent accounts within U.S.
    financial institutions. And we are working with our partners in foreign
    governments and in the international private sector to further isolate
    the bank and stymie its operations.
        On March 20, the President signed the latest E.O., which authorizes
    the Secretary of the Treasury, in consultation with the Secretary of
    State, to sanction any individual or entity determined to operate in
    sectors of the Russian economy specified in the future by the Secretary
    of the Treasury, including the energy, metals, and mining sectors. This
    authority is a very powerful yet flexible tool that will allow us to
    respond quickly and meaningfully as events develop in Ukraine.
        We recognize that these measures will have the greatest impact when
    harmonized with the actions of our international partners, in
    particular in Europe and Asia, because of their extensive economic ties
    to Russia. We are in daily communication with our counterparts in the
    G-7, the European Union (EU), and other countries with significant
    financial and economic links to Russia to discuss how we can best adopt
    collective measures.
        These are serious measures with implications across the global
    economy. But while a diplomatic resolution remains the preferred
    outcome to the situation involving Ukraine, Russia must know that any
    escalation will only isolate it further from the international
    community and the international economy.
        Beyond our sanctions effort, Treasury has also used our tools to
    halt the misappropriation of assets from Ukraine. FinCEN has issued two
    advisories to U.S. financial institutions related to the unrest in
    country. These advisories remind institutions of their obligation to
    apply enhanced scrutiny to accounts and transactions conducted on or
    behalf of senior Ukrainian political officials, including those of the
    former Yanukovych administration, and to report any suspicious
    financial transactions.
                             iran sanctions program
        Our unprecedented sanctions on Iran have led the way in
    demonstrating the power and efficacy of our financial measures.
        From the outset of the Obama administration, we have pursued a
    dual-track strategy that paired an offer to Iran to rejoin the
    community of nations if it addresses the international community's
    concerns over its nuclear program with increasingly powerful and
    sophisticated sanctions if it continued to ignore those concerns.
        When Iran initially chose another path, we responded by crafting
    and implementing the most comprehensive, powerful, and effective set of
    sanctions in history.
        Today, Iran stands isolated from the global financial system with
    slashed oil revenues, an eroded currency, and a severely weakened
    economy.
        Our oil, financial, and trade-based sanctions helped drive Iran
    into deep recession. Since 2011, oil sanctions imposed by the EU and
    the U.S. have cost Iran over $100 billion in lost sales. Last year,
    Iran's economy contracted by 6 percent and is expected to perform badly
    this year as well. Its currency, the rial, has lost about 60 percent of
    its value against the dollar since 2011. And its inflation rate is
    about 30 percent, one of the highest in the world.
        This enormous pressure on the Iranian economy did not come about
    overnight. We have worked side-by-side with Congress to craft sanctions
    that target Iran's key sources of economic strength. We maximized the
    impact of these sanctions through TFFC's robust and persistent
    engagement with foreign governments and the private sector. Working
    alongside our interagency partners, we leveraged our in-house
    intelligence component, OIA, to identify Iranian pressure points. And
    then OFAC took action against illicit actors and their financial
    networks by targeting them with powerful sanctions.
        This has not been a simple task. In all, TFI enforces a
    sophisticated and complex regime of sanctions on Iran that encompasses
    10 statutes, 26 E.O.s, and 4 United Nations Security Council
    Resolutions. We supplement these tools by issuing public guidance,
    licenses that advance U.S. objectives, and advisories warning of
    concerning trends and practices.
        Although our sanctions have proved to be incredibly potent, we have
    not imposed sanctions for sanctions' sake. All along, the goal of our
    sanctions has been to induce a shift in the decisionmaking calculus of
    the Iranian Government and to build the necessary leverage for serious
    negotiations about its nuclear program.
        We are now in the midst of those negotiations. In the Joint Plan of
    Action (JPOA) that went into effect in late January, Iran agreed to
    take important steps to halt the advance of its nuclear program in
    exchange for limited, targeted, and temporary relief for 6 months. And
    as Iran has implemented its commitments to date, we have worked to
    fulfill our own.
        Even as we now seek to negotiate a comprehensive solution over
    Iran's nuclear program, the core architecture of U.S. sanctions--
    especially our potent oil, financial and banking sanctions--remains
    firmly in place. And over the remaining 4 months of the JPOA period, we
    will continue to vigorously enforce these sanctions as well as the
    broad array of sanctions targeting Iran's human rights abuses and its
    support for terrorism.
                            syria sanctions program
        In Syria, the U.S. Government's policy is to isolate and degrade
    violent extremist networks and facilitate an orderly end to the
    conflict, with a clear transition to a new competent and representative
    authority. U.S. and international sanctions are a key component of this
    effort, and are designed to deprive the Assad regime of the financial
    means needed to support its relentless campaign of violence against the
    Syrian people.
        In the absence of UN sanctions regime, the United States has worked
    with the EU, the Arab League, and a host of other countries to build a
    robust international sanctions regime designed to pressure the Syrian
    Government and bring about an end to the conflict. In close
    coordination with our colleagues at the State Department, Treasury has
    played a key role in international engagement on Syria through the
    Friends of the Syrian People International Working Group on Sanctions,
    contributing to the U.S. Government's effort to coordinate broader and
    more effective sanctions implementation among like-minded countries.
        Since the Syrian uprising began in March 2011, President Obama has
    issued five E.O.s, each delegating authority to the Treasury Department
    to impose sanctions in response to the violence in Syria. These E.O.s
    significantly expanded the tools available to the U.S. Government to
    respond to the crisis in Syria, namely by isolating the Assad regime
    and key regime supporters and denying it the resources needed to fund
    its continued repression of the Syrian people.
        From the start of the uprising to date, Treasury has designated
    more than 200 Syrian individuals and entities pursuant to all of its
    relevant authorities. We have also used our authorities to expose the
    involvement of foreign actors in Syria. Treasury designations have
    drawn attention to Iranian support for the Syrian regime, whether
    directly or through its proxy, the Lebanese terrorist group Hizballah.
    Since the uprising began, we have designated the Islamic Revolutionary
    Guard Corps-Qods Force, Iran's Law Enforcement Forces, Hizballah, and
    Hizballah's Secretary General Hassan Nasrallah for providing material
    support to the Syrian regime's violent response to peaceful protests.
        Apart from sanctions against the Assad regime and its supporters,
    Treasury has also used its global terrorism authorities to target the
    activities of extremists groups operating in Syria such as al-Nusrah
    Front and the Islamic State of Iraq and the Levant (ISIL), the group
    formerly known as al-Qa'ida in Iraq (AQI). We have also been closely
    tracking the funding streams of these groups and have sanctioned
    numerous terrorist financiers sending funds to extremists in Syria.
                         north korea sanctions program
        Following the DPRK's April 2012 Taepo Dong-2 launch, the December
    2012 Taepo Dong-2 launch, and the February 2013 nuclear test, Treasury
    measures--including designations targeting the DPRK's nuclear,
    ballistic missile, and proliferation activities as well as the regime's
    access to luxury goods, and the financial networks that support its
    illicit activities--have impeded the development and slowed the pace of
    the DPRK's illicit programs.
        Over the past year, Treasury has designated two key North Korean
    banks: Foreign Trade Bank and Daedong Credit Bank, both of which
    provided crucial financial support to other U.S. and UN-designated DPRK
    entities, including North Korea's premier arms dealer. Since August
    2010, there have been seven Treasury designations under E.O. 13551,
    which targets individuals and entities facilitating North Korean arms
    sales, the procurement of luxury goods, and illicit economic
    activities; and 31 designations under E.O. 13382, which targets
    individuals and entities engaged in WMD proliferation-related
    activities.
        The DPRK's recent missile launches using ballistic missile
    technology on February 27, March 3, and March 26, 2014 are a clear
    indication that the DPRK is committed to aggressively pursuing its
    ballistic missile and nuclear programs, which have been prohibited by
    multiple UN Security Council (UNSC) resolutions. The United States will
    continue to fully implement both UNSC and U.S. sanctions authorities
    until it is clear to the DPRK that denuclearization is the only path
    forward and Pyongyang undertakes complete, verifiable, and irreversible
    denuclearization.
                          narcotics sanctions program
        Treasury has made significant progress in our efforts to target
    drug lords worldwide through authorities granted to us in the Foreign
    Narcotics Kingpin Designation Act (``Kingpin Act''). The Kingpin Act
    aims to hit drug traffickers in their wallets, depriving them and their
    key lieutenants and money launderers of access to the U.S. financial
    system. Since the law was passed, more than 1,400 individuals and
    entities have had their access to the U.S. financial system cut off.
        In 2013, Treasury designated 83 individuals and 67 entities
    pursuant to the Kingpin Act, and the President identified six
    significant international narcotics traffickers. Treasury focused on
    cartels operating out of Mexico and Central America by repeatedly
    targeting the family members and close associates of the Sinaloa
    Cartel, the associates and businesses of Los Zetas, and an ever-
    expanding network of narcotics trafficking organizations in Central
    America. Treasury also continued to track the activities of major
    narcotics trafficking organizations in Colombia, which have ties to
    these Mexican and Central American organizations.
        One of the most influential designations last year was the
    September action targeting the Los Cachiros, a Honduran drug
    trafficking organization which plays a critical role in the
    transportation of narcotics from Colombia to Mexico. On the same day
    that Treasury designated this organization, the Government of Honduras
    embarked on a week-long seizure action against Los Cachiros' financial
    and commercial assets, including those businesses designated by OFAC,
    pursuant to the Honduran Asset Forfeiture Law. This success is similar
    to other forfeiture actions that have followed OFAC designations in
    Colombia and elsewhere.
                        global counter-terrorism program
        Over the past 12 years, OFAC has designated more than 800
    individuals and entities under our counterterrorism sanctions program.
    In 2013, we designated 87 individuals and entities with the aim of
    disrupting and degrading some of the most dangerous terrorist threats
    to our country, including al-Qa`ida in the Arabian Peninsula (AQAP),
    Lashkar-e Tayyiba, the Haqqani Network, and the Iranian Revolutionary
    Guards Corps Qods Force.
        Beyond the blocking of assets, a Treasury designation exposes
    terrorists' activities publicly, drawing them out of the shadows and
    alerting financial institutions and foreign governments to their
    nefarious activity. It also encourages corresponding actions from
    counterterrorism partners and the United Nations. But most importantly,
    the designations disrupt and degrade the finances of terrorist groups
    as those designated will never again be able to openly access the
    international financial system.
                              tfi resource levels
        Now that I have outlined some of our sanctions programs, I will
    discuss TFI's resource levels. Despite the recent growth in our
    sanctions programs, the $102 million provided in the fiscal year 2014
    Departmental Offices appropriation is sufficient to allow us to
    accomplish our mission. We have been able to increase our sanctions
    programs and other output by generating program efficiencies, effective
    management, and transferring funds when needed among organizations and
    programs within TFI.
        In short, Treasury's Departmental Offices appropriations in years
    past have been sufficient to support our operations and I believe that
    the fiscal year 2015 budget request is no different.
                                   conclusion
        Over the past decade, TFI has become a central part of the national
    security community. Comprised of an extraordinarily talented and
    skilled group of intelligence analysts, policy advisors, sanctions
    investigators, and regulators, TFI, working with our interagency
    partners, has been crucial to our Government's efforts to disrupt
    illicit networks, protect the integrity of the U.S. and international
    financial systems, and, in doing so, advance the core national security
    and foreign policy interests of the United States.
        And as our country continues to turn to financial instruments to
    resolve our thorniest foreign policy challenges, TFI will continue to
    craft these tools, implement them, and vigorously enforce them.
        Thank you.

        Senator Udall. Thank you very much. And thank you for
    staying on time, there.
        I'm going to recognize each Senator for 7 minutes in each
    round and in the order of arrival here. And I'm going to start.

                            IMPACT OF SEQUESTRATION

        Under Secretary Cohen, you mentioned in your testimony that
    fiscal year--the fiscal year 2014 level of $102 million for TFI
    is sufficient to accomplish the mission of the office. However,
    in 2013, funding for TFI was $96 million, significantly less
    than both the current level and the fiscal year 2015 request of
    $106 million, because of sequestration. Can you explain how
    decreased funding affected TFI's ability to administer and
    implement sanctions, what activities were stopped or delayed,
    or what is the consequence of those reductions on our foreign
    policy goals? And how would fiscal year--the fiscal year 2015
    request level allow Treasury to implement a more robust
    sanctions program?
        Mr. Cohen. Thank you, Mr. Chairman.
        There's no question that the sequestration in fiscal year
    2013 had an impact on our ability to pursue our mission and to
    function at the highest level of effectiveness.
        Our budget is largely comprised of two components: salary
    and travel expenses. There are obviously some other aspects to
    it, but those are the two principal components, which, I think,
    reflects what we do. We have people who work on our sanctions
    programs, who are intelligence analysts, who are sanctions
    investigators, who put together the packages, who enforce our
    sanctions; and I have people who travel the world, meeting with
    foreign governments, meeting with the private sector around the
    world to talk about what we're doing, to seek support, to
    explain our sanctions programs, and to elicit as much
    complementary action from others as possible.
        I think you made the point, Mr. Chairman, that our
    sanctions programs are more effective when they are
    multilateral. There's no question that that's true. And one of
    the very important things that we do, beyond imposing
    sanctions, is travel the world to try and, as I said, elicit
    support from others to pursue the same objectives that we're
    pursuing.
        So, the sequestration cuts that were mandated impaired both
    our ability to fill jobs that became vacant through normal
    attrition. One way we addressed the cuts was by delaying
    hiring; as people would leave, we wouldn't fill those jobs as
    quickly as we would have liked. And we cut back on our travel.
    And so, our ability to meet with foreign counterparts to pursue
    our mission through those sorts of engagements was impaired.
        There's, you know, some long-lasting impact, particularly
    from the inability to hire as quickly as we would have liked to
    have hired. Happily, the sequestration has ended, and I think
    that the budget that we have for this year, and the budget
    request for next year, should allow us to pursue our mission
    completely.
        Senator Udall. Thank you very much.

                               BUDGET FLEXIBILITY

        You know, the President's budget for fiscal year 2015 was
    submitted to Congress on March 4 of this year. Since then, the
    Russian military marched into Crimea; last weekend, North Korea
    exchanged fire with South Korea; global events continue to
    unfold. Does this budget request include flexibility to respond
    to emerging global events? And how would you adjust resources
    if new global events occurred that were not anticipated?
        Mr. Cohen. Mr. Chairman, it does allow us to react to
    events as they unfold. To some extent--you mentioned the North
    Koreans; we obviously already have sanctions programs in place.
    I have people in my office who are dedicated to the--North
    Korea's sanctions effort and to all of the associated work
    involving North Korea. The situation with Russia and Ukraine is
    new. I did not have a cadre of people, certainly not on the
    order that I have working today, focused on those issues, you
    know, 6 months ago.
        That being said, the people who work for me in TFI are
    enormously skilled and capable of working on more than one
    program at a time and shifting their focus from one set of
    issues to another. And what we have done is drawn people and
    surged so that we are in a position to fulfill the demands
    coming from the President and across the administration, to
    ensure that we have very strong sanctions in place that are
    being implemented, and that we are prepared as the situation
    continues to unfold involving Russia and Ukraine.
        Senator Udall. Great. Thank you for both of those.
        I'm going to end a little early, because we have so much
    participation here, and try to set an example, in terms of
    time. We're going to try to stick to the 7 minutes so we can
    get everybody in.
        So, Senator Johanns, I'm going to turn to you for your
    questioning, and then to Senator Mikulski.
        Senator Johanns. Thank you, Mr. Chairman.
        And, Secretary Cohen, it's good to have you here today. We
    appreciate it immensely.

                                 IRAN SANCTIONS

        The administration, as we have worked with them on
    sanctions relative to Iran, has remained firm in their position
    that additional sanctions would be difficult, or even harmful,
    to the current negotiations. Despite the fact that I--as I
    pointed out in my opening statement, I think that's the reason
    why we got Iran to the table, if you will.
        So, what I would like to ask you initially here is, What
    would the plan be to ensure that, in the event that there isn't
    a final agreement--let's say discussions collapse--what is the
    United States prepared to do, and what are you prepared to
    administer, in terms of a swift, firm response to those
    circumstances?
        Mr. Cohen. Well, Senator, I'd quite agree that it has been
    the sanctions, and the pressure that has been brought to bear
    through the sanctions programs that we've developed, and we've
    developed along with the Congress, that was a hugely
    significant factor in bringing Iran to the table in a much
    different fashion than we had seen over the preceding years.
    They came to the table last fall with a recognition that they
    needed sanctions relief to try to repair their economy, and
    that the only way that President Rouhani would be able to
    fulfill the pledge that he made to the Iranian people during
    the elections, of bringing the economy back from the dire
    situation that it was in, was through sanctions relief. And
    they understood that the only way that they could get that
    sanctions relief was through addressing the concerns--the very
    serious concerns with their nuclear program.
        We are continuing to implement the vast majority of the
    sanctions architecture that brought Iran to the table in the
    first place. There have been some that have been suspended, but
    the really powerful sanctions--the oil sanctions, the banking
    sanctions, the financial sanctions--those all remain in place
    even as we are fulfilling our commitments under the Joint Plan
    of Action to provide the limited, targeted relief that we've
    agreed to.
        In terms of what we would be prepared to do if a
    comprehensive solution is not achieved through these
    negotiations, I don't want to speculate on particularly what
    form or fashion those sanctions might take. I think we have
    said, from the President on down, that if the Iranians are not
    prepared to reach a comprehensive solution here, a negotiated
    solution, that we will not only ensure that the sanctions that
    have been suspended will come back into force, but that we will
    work with Congress to put in place more stringent sanctions,
    going forward.
        I think it's best to leave to another day exactly what that
    would look like, but I think there's no question that we
    recognize that--if we are unable to reach a comprehensive
    solution here, that we will be working with Congress on
    enhanced sanctions.
        Senator Johanns. One of the things I worried about--and I'm
    guessing it was a concern of yours--that some relief is given
    through the Joint Plan of Action--and I think that's been
    estimated to be about $7 billion----
        Mr. Cohen. Right.
        Senator Johanns [continuing]. Some argue it's actually more
    than that, some experts out there have written about that--one
    of my concerns is that, once the door opens, the temptation for
    other countries, other parts of the world, to squeeze that door
    further open and further open is just too great to pass up.
    Have you seen any evidence, at this point, relative to Iran,
    that that, in fact, is happening, that there's leakage
    occurring, that companies or countries are taking advantage of
    this Joint Plan of Action?
        Mr. Cohen. Sir, that is something that we have, as you
    might imagine, been watching very carefully, and have been
    taking very aggressive steps to try to forestall. And I can
    say, with some confidence, that we have not seen companies
    anywhere--Europe, the Gulf, Asia--trying to take advantage of
    this--as you described, the narrow opening, the--really the
    quite limited suspensions of the sanctions, to sort of get into
    the Iranian market, enter into business deals that would
    otherwise be sanctionable. We have not seen it. The estimate
    that we came up with at the time the Joint Plan of Action was
    agreed to, as you noted, was that it would be worth
    approximately a maximum value of about $6 to $7 billion.
        Senator Johanns. Right. Right.
        Mr. Cohen. The Joint Plan of Action has now been in effect
    for a little over 2 months. Nothing that we have seen leads us
    to question that estimate. If anything, that estimate is
    probably on the high side. We are not seeing companies trying
    to go into the Iranian market, strike deals that would be
    sanctionable, or frankly even, to any great extent, taking
    advantage of the narrow suspended sanctions that are
    permissible under the Joint Plan of Action.
        One of the reasons, I think, that that is the case is that
    we, in early February, announced a whole set of sanctions
    against people and entities, really, across the world. There
    was a financial institution in Germany that we applied
    sanctions to. There were three individuals in Georgia who were
    part of a sanctions evasion network that we applied sanctions
    to. There was an individual and his company in Spain, an
    individual and his company in Turkey. They were all subject to
    sanctions--we put sanctions on them in early February--which
    really, I think, gave a concrete example to what I've been
    saying, what Secretary Lew has been saying, what Secretary
    Kerry's been saying, and what the President said, which is that
    if anybody tries to violate the sanctions during this period of
    the Joint Plan of Actions we'll come down on them, as the
    President said, like a ton of bricks. We did that, and I think
    that sent a very strong message.
        Senator Johanns. Thank you, Mr. Chairman.
        Senator Udall. Thank you, Senator Johanns.
        Senator Mikulski.
        Chairwoman Mikulski. Thank you, Mr. Chairman.

                                    STAFFING

        So, Mr. Cohen, according to the President's budget, you
    would get $4 million more this year. But, you have a lot more
    work to do. So, you think you can do this on 4 million more? Or
    are--or, let me go to, really, the workforce. You have, I
    think, 413 people working for you?
        Mr. Cohen. I have a slightly different calculation of the
    number of people working for me. What I--and it's a little
    complicated, because my----
        Chairwoman Mikulski. Well, let me tell you where I'm
    heading.
        Mr. Cohen. Okay.
        Chairwoman Mikulski. It's not the number.
        Mr. Cohen. Yes.
        Chairwoman Mikulski. You have a great background. You
    worked for two Presidents. But, I know you also clerked for a
    beloved figure in Maryland----
        Mr. Cohen. Yes.
        Chairwoman Mikulski [continuing]. Judge Norman Ramsey.
        Mr. Cohen. Right.
        Chairwoman Mikulski. Someone I admired so much, and both
    his first wife and----
        Mr. Cohen. Yes.
        Chairwoman Mikulski [continuing]. When she passed away, his
    second wife.
        Mr. Cohen. Yes.
        Chairwoman Mikulski. And truly an inspirational,
    transformational leader. I get--tell me the categories of
    people who work for you. Are they accountants, are they
    lawyers, are they skill sets? Or can you just dial them up
    anytime we pass a new sanction and go to a temp agency?
        Mr. Cohen. It's wonderful to be reminded of Norman Ramsey,
    who was a great man.
        The people who work for me are a collection of lawyers, of
    economists, of people who hold advanced degrees in national
    security studies and international affairs, intelligence
    analysts who have backgrounds as varied as art history,
    hardcore economics, former bankers, and many former lawyers,
    like myself, who have made the shift over to working in
    Government. It's a very diverse collection of people, who, as I
    mentioned, are able to sort of reorient themselves to surge and
    to move into new areas as the need demands----
        Chairwoman Mikulski. But, here goes to my question. I'm
    interested in recruitment, real retention, because, as--even if
    you can come with a great background, like in forensic
    accounting, a highly specialized field, and tremendous
    lucrative fields, where, if you know how to do this, there are
    a lot of other jobs that you could have, other than this. So,
    is recruitment and retention a problem, or is it that, if
    there's certainty in funding, in pay, and so on, with this 1-
    percent pay-raise deal that we get, what----
        Mr. Cohen. There's no question that we're----
        Chairwoman Mikulski. In other words, we want to make sure
    you get to be you, and that you get to implement the laws that
    the Congress authorizes----
        Mr. Cohen. Right.
        Chairwoman Mikulski [continuing]. In partnership with the
    President of the United States.
        Mr. Cohen. I appreciate it. I think there's no question
    that retention is a challenge; in part, for the reasons that
    you identified, that I have people working for me who, on any
    given day, could walk out the door and increase their salary
    substantially. They have a skill set that is in demand, both
    domestically and, frankly, overseas, as well.
        I'll be candid, it was not made any easier by the shutdown
    that we went through last fall. I think that created a question
    in people's mind about why they are coming to work every day,
    or wanting to come to work every day for the Federal
    Government, when they're not being paid, and being told to stay
    home. That did not make things any easier.
        On the other side of the ledger, I will say, though, that
    we do benefit from, I think, a good reputation of being an
    organization where the work is incredibly interesting, where we
    are well supported, both within the Department, within the
    administration, and here in Congress, and you can come and work
    on----
        Chairwoman Mikulski. So, certainty.
        Mr. Cohen. Yes.

                              GOVERNMENT SHUTDOWN

        Chairwoman Mikulski. So, one, if you come for the mission,
    and there's certainty of the funding, that at least you'll get
    paid for the work you do and not sent home as nonessential--I
    mean, of the 413, or whatever, people work for you, how many
    were sent home during the shutdown?
        Mr. Cohen. The--a very large majority of the people who----
        Chairwoman Mikulski. The implementors of the sanctions were
    sent home?
        Mr. Cohen. We, in fulfilling our legal obligations under
    the Antideficiency Act, figured out how many people we could
    keep on board, and--in the expectation and the hope, frankly,
    that the shutdown would not last----
        Chairwoman Mikulski. Was it 10----
        Mr. Cohen [continuing]. For very long.
        Chairwoman Mikulski [continuing]. Percent? Was it 80
    percent?
        Mr. Cohen. I think, initially, it was a little bit--it was
    about 10 percent that remained at work. And----
        Chairwoman Mikulski. So, 90 percent of your workforce was
    sent home----
        Mr. Cohen. Right.
        Chairwoman Mikulski [continuing]. When shut down.
        Mr. Cohen. Initially.

                                ORGANIZED CRIME

        Chairwoman Mikulski. Well, let me, then, go to something
    else, because this hearing, I would hope, for other members, as
    for me, has been a wonderful tutorial on this. I know people
    like Senator Johnson's been involved in banking, is very
    familiar with this. But, you're really one of the big fighters
    against nuclear proliferators, weapons of mass destruction
    proliferators, and organized crime. Could you share with me--I
    think we're least familiar with the organized-crime sanctions.
    Could you tell us, quickly, in the few minutes that I have--and
    I do mean quickly----
        Mr. Cohen. I will.
        Chairwoman Mikulski [continuing]. In the spirit of
    cooperation--What is it that you do?
        Mr. Cohen. Yes.
        Chairwoman Mikulski. And what does it take to do that?
        Mr. Cohen. Yes. About 3 years ago, now, the President
    issued a new executive order going after transnational
    organized crime, which allows us to identify transnational
    organized criminal groups and then apply sanctions to the
    people in the businesses that are supporting those criminal
    organizations. We've identified, I think, about five different
    transnational organized criminal groups, from the Yakuza in
    Japan to the Brothers' Circle in Eurasia to the Camorra in
    Italy, and then have built out, as--this is sort of the pattern
    that we follow in many of our sanctions programs--built out the
    individuals and the businesses that are working underneath the
    umbrella of these criminal organizations, imposing sanctions on
    them, freezing their assets, preventing them from using the
    U.S. financial system, and then going around the world and
    asking our counterparts to take complementary action.
        Chairwoman Mikulski. I know my time's up.
        Senator Udall. Thank you, Chairwoman Mikulski.
        Senator Moran.
        Senator Moran. Mr. Chairman, thank you much.
        Mr. Secretary, thank you for joining us.
        Let me--I have two questions, and one is just a--I come
    across the wire this afternoon.

                           POTENTIAL RUSSIAN OIL SALE

        Reuters is reporting that Iran and Russia are close to a
    deal, swapping oil, bartering for other goods from Russia,
    indicating that--the deal is expected to be valued at about $20
    billion, indicates would perhaps further undermine our efforts
    with the most recent negotiations in Iran. And I wondered what
    you--what your thoughts were, your concerns were.
        `` `The indications are that Iran and Russia have made
    progress toward an oil-for-goods deal,' sources said, `that
    would be worth up to $20 billion, which would enable Tehran to
    boost vital energy exports, in defiance of Western sanctions,'
    people familiar with the negotiations told Reuters.'' Thoughts?
        Mr. Cohen. I haven't seen that most recent report, but I'm
    obviously familiar with this topic. There have been other
    reports about this.
        You know, what I can say is this. Since this issue first
    became something that we were aware of, we have been crystal
    clear to the Russians that any such deal is not only contrary
    to the spirit of the P5+1 negotiations that we're involved in,
    but would also be plainly sanctionable under a number of
    different authorities that we have. Obviously, the purchase of
    oil from Iran by Russia would be sanctionable. If they sold
    that oil to anybody else, that transaction would be
    sanctionable. Whatever financial institution in Russia would be
    involved in the payment for that oil would be subject to
    sanctions. We have been very clear with the Russians that----
        Senator Moran. But, the sanctions would go both ways, to
    both countries? Additional----
        Mr. Cohen. Sure.
        Senator Moran [continuing]. They would violate sanctions
    with Iran, violate--in violating that violation, it would cause
    us to be able to impose sanctions against Russia?
        Mr. Cohen. Correct. And, frankly, I think it was clear at
    the outset that we were prepared, if necessary, to take action,
    given our long history of applying sanctions against those who
    violate our sanctions all around the world. Frankly, I think
    what has transpired in the last several weeks has only
    reinforced the point, I would think, for the Russians, that
    we're not unwilling to apply sanctions against Russian entities
    and Russian individuals if the facts dictate. So----
        Senator Moran. So, it would be surprising if Russia and
    Iran entered into this agreement?
        Mr. Cohen. Look, I'm not going to predict what the Russians
    and the Iranians may do. We've been seeing reports about this
    sort of deal for many months now. It hasn't been consummated,
    to the best of my knowledge. I don't know that the report today
    really adds, necessarily, to the situation. I've seen reports
    like this, saying that they're close to this deal for many
    months now.
        But, as I said, we've been very clear with the Russians,
    and, I should also say, very clear with the Iranians, that, in
    the course of these P5+1 negotiations, that any sort of deal
    like this would not be conducive to----
        Senator Moran. In your--I mean, I think what you're telling
    me is that such a deal would be significantly contrary to the
    agreements we've reached with Iran, and would be a significant
    setback to the desired outcome of those negotiations?
        Mr. Cohen. Well, it certainly would not be a welcome
    development. And, as I said, it's one that we've told the
    Russians, from the highest levels of its Government on down,
    that we would look at with great disfavor.

                         TRADES BETWEEN TURKEY AND IRAN

        Senator Moran. Let me turn to Turkey. It--at least reported
    to me that there may be significant trades, in the billions of
    dollars, gold, other trade activity, originating between Turkey
    and Iran. And that would be true, despite the sanctions regime
    that is imposed against Iran. How is this occurring? What are
    we doing about it? I guess the initial question would be, Is
    there truth to it?
        Mr. Cohen. I will answer this question, to the extent that
    I can in this session, although I would make the same offer to
    you that I made to Senator Corker in another setting, which is,
    I'm happy to come in and talk about this in a classified
    setting, where I think we could----
        Senator Moran. Okay.
        Mr. Cohen [continuing]. Talk about this in greater detail.
        I think the short answer, and the answer that I can give
    you here, is that we have been aware of these allegations, have
    been watching very carefully the trade in gold between----
        Senator Moran. Yes.
        Mr. Cohen [continuing]. Really any country and Iran,
    preceding the Joint Plan of Action, where we've--where that
    trade has been--is--the sanctions on trade in gold is suspended
    under the Joint Plan of Action. But, since the summer of 2012,
    when the President issued an executive order that forbade the
    sale of gold to the Government of Iran, we have been watching
    the gold trade, and--let me put it this way. I don't think we
    have demonstrated any reluctance to apply sanctions, where
    we've seen violations. And this is an issue that has been one
    that we've been looking at, there's obviously been others
    outside the Government who have been focusing on this issue and
    writing about this issue. And I think I would probably best
    stop there.

                                     RUSSIA

        Senator Moran. Secretary Cohen, let me go back to Russia,
    before my 53, 52 seconds expire. How long ago did these
    negotiations begin between Russia and Iran? How long have we
    been monitoring this? When did we start expressing concern to
    Russia? Is this a matter of months, weeks? Did they predate the
    Ukraine and Crimea circumstance? When did this begin?
        Mr. Cohen. I think I would rather address that question in
    a different setting.
        Senator Moran. Okay. Thank you very much.
        Thanks, Mr. Chairman.
        Senator Udall. Thank you, Senator Moran.
        Senator Coons.
        Senator Coons. Thank you, Chairman Udall.
        And I'd like to thank full-committee Chairwoman Mikulski
    and Chairman Udall for convening this hearing.
        Mr. Under Secretary, thank you for your service. I want to
    thank you and the dedicated staff at the Office of Foreign
    Assets Control, and, in fact, all of TFI, for your tireless
    work.

                         ADDITIONAL BUDGETING RESOURCES

        This is all about a credible threat, in my view. I am
    convinced, the only reason Iran is at the negotiating table
    with us today, and the only reason we have any chance at ending
    their illicit nuclear program through peaceful means, is
    because of the vigorous and thorough enforcement of very tough
    sanctions enacted by Congress, enforced by the administration.
        And so, I'm concerned if, in the decade from 2004 to 2014,
    as you mentioned, the number of sanctions programs has gone
    from 17 to 37. Further, as Senator Udall mentioned, if, in just
    recent weeks since the President's budget was submitted, you've
    been handed an even broader range of tasks to take on, and the
    implications of some of the previous questions, whether it's
    with Turkey or with the Russian oil deal with Iran or with, as
    I may ask about, other issues in Africa or Syria, you have a
    very full plate.
        I admire that you say that the President's budget
    submission is sufficient, and that, through program
    efficiencies, effective management, and moving folks around,
    you can surge and meet whatever requirements there may be. But,
    I just want to suggest to you that it's at least this Senator's
    desire to give you an abundance of the resources to support the
    skills, the talent, and the ability in your workforce, not to
    move folks around in response to emerging challenges and
    threats, but to anticipate them.
        One of my concerns is that, as the Joint Plan of Action has
    moved forward, there have been some trade delegations, both
    announced and real, to Iran. I'm concerned that there are some
    folks, our allies and our adversaries, who view Iran as
    potentially open for business. And I think it's only with a
    credible threat of, as you mentioned, as the President
    mentioned, coming down on folks who violate sanctions like a
    ton of bricks, that we can keep moving forward.
        So, if we were to give you more resources, could you put
    them to effective use? Would they help deter those who think
    that they can evade sanctions, whether Russia or Assad in Syria
    or countries in Africa with whom Rouhani is conducting a charm
    offensive, or do you think they would be wasted? Could you
    effectively put to use additional resources in enforcing the
    sanctions regimes we have charged you with?
        Mr. Cohen. Well, Senator, thank you for the question, and
    thank you for the letter that you sent a few weeks ago. It is
    very encouraging to my folks to know that their work is
    appreciated.
        We do have sufficient resources, even as new issues come
    up, to continue to ensure that the Iran sanctions, for
    instance, are being fully implemented, full enforced. The
    designations we did in February, I think, reflect that. And,
    you know, we have not taken our eye off the ball at all with
    respect to Iran, even as we have surged in Ukraine.
        We draw on resources outside of TFI, we draw on resources
    from others in Treasury, we draw on resources in the
    intelligence community and in other agencies in the executive
    branch, through all of our work, and including when we have a
    need to really surge. I think we do a good job of managing our
    resources. And so, I would not say that we would waste whatever
    resources are given to us.
        And I think anyone would say that more is better than less.
    But, I do think that we are able to fulfill our mission, even
    as it expands and changes, some things rise to the top, others
    become less urgent, with the resources that have been
    appropriated and the resources that have been requested.
        Senator Coons. Well, Mr. Under Secretary, if I might, the
    point of the letter was to compliment you and the folks at OFAC
    and more broadly in your entity for their terrific work, and to
    express my appreciation for the value of their work. But, as
    Senator Mikulski mentioned, there is no temp agency to which
    you can turn. You may be able to draw from other places in the
    Federal Government--from the intelligence community or from
    other departments--but I have to presume they're conducting
    vital and important work in their agencies, as well.
        My concern is that I see no diminution in the scope and the
    importance of the issues for which you will need very
    technically skilled folks. I see no reduction in the number of
    our allies who need to be visited in person and whose business
    entities need to be convinced to not engage in sanctionable
    activities. In fact, as I mentioned, President Rouhani has been
    engaged in a charm offensive across Africa. There's, I think, a
    dozen African countries that, without some active engagement
    from the United States, may potentially engage in sanctionable
    behavior. The deal that's been contemplated, widely reported,
    both a deal to construct new nuclear facilities in Iran and to
    trade oil for other things with Russia, may also expand the
    scope of your work.
        I think you need more resources. I think we need to make it
    credible to the Islamic Republic of Iran, and to any country
    and any company that thinks they will skirt our sanctions
    regime or somehow get through this, to know that we have moved
    sanctions from a sideshow in the American diplomatic and
    military arsenal to center stage. And I think we need to make
    certain that you are robustly and fully staffed and funded. I
    thank you for your leadership and making sure that that work
    gets done, done well, and done in a timely fashion.
        Thank you.
        Mr. Cohen. Thank you.
        Senator Udall. Senator Coons, thank you very much.
        Senator Kirk.
        Senator Kirk. Thank you, Mr. Chairman.

                          VISA FOR IRANIAN AMBASSADOR

        I wanted to ask you about the recent decision of the
    administration to grant a visa to Hamid Aboutalebi, the
    proposed Iranian Ambassador to the U.N., to have the hostage-
    taker in chief safe in New York City, sipping his latte on
    Fifth Avenue, thinking--he's probably laughing directly at you,
    at how weak and feckless that you are, that he can put
    Americans in incarceration for 444 days, and he actually
    managed to get a position inside the United States. Have you
    seen the comments of the Americans that were all held hostage
    by this idiot?
        Mr. Cohen. I have seen those comments, Senator, and share
    your concern with this individual taking up a position at the
    U.N.
        Senator Kirk. The fascinating thing is, this guy admits
    that he was a hostage-taker, and the Iranians stick us with
    this guy, just to laugh at you.
        Mr. Cohen. Well, Senator, as I'm sure you know, the
    question of whether or not to grant an individual a visa is not
    mine. I think, regardless of this particular individual----
        Senator Kirk. You do understand the kind of shock that we
    all have that the administration would do this?
        Mr. Cohen. Senator, I understand your position on this.
        Chairwoman Mikulski. Visas are issued by the--which
    Department?
        Mr. Cohen. The State Department, Madam Chairwoman.
        One thing I can say is, the work that we will do--the work
    that we have been doing and the work that we're going to
    continue to do, is utterly unaffected by who sits in the chair
    for Iran at the United Nations. Frankly, a position that does
    not affect, I think, in any way, what----
        Senator Kirk. I do remember the last guy who was in this
    position. He's now the Foreign Minister of Iran. Congressman
    Steve Israel and I went to see him for lunch one day in New
    York. He spent, like, an hour telling us how the Holocaust
    hadn't happened. And I said to him, ``Don't cause diplomatic
    incident. I'm stunned that you're raising this topic about
    events which happened two generations ago, not in your
    country.'' And he said, ``I was ordered to tell you the
    Holocaust didn't happen.'' That's the quality of the people
    that we are talking about, here.
        Mr. Cohen. Right.
        I--the--far be it from me to defend the quality of the
    people that Iran sends to the U.N.
        Senator Kirk. Even if they are involved in incarcerating
    Americans illegally?
        Mr. Cohen. You know, Senator, what I can tell you is that
    whoever Iran chooses for their Permanent Representative to the
    United Nations, the question of whether or not to grant that
    person a visa----
        Senator Kirk. David, you're about to get a letter signed by
    20 Senators, ``Don't grant this visa.''
        Mr. Cohen. Yes.
        Senator Kirk. Now that we have----
        Senator Udall. Senator Kirk, the--he doesn't grant the
    visa. It's over in the State Department. We're trying to----
        Senator Kirk. I realize----
        Senator Udall. We're trying to----
        Senator Kirk. I used to serve----
        Senator Udall [continuing]. Focus on----
        Senator Kirk [continuing]. In the State Department.
        Senator Udall [continuing]. His duties. So----
        Senator Kirk. Yes.
        Senator Udall [continuing]. His duties as the----
        Senator Kirk. I do realize that.
        Senator Udall [continuing]. TFI head.
        Senator Kirk. This is probably the only administration
    witness we have before the Congress after this announcement of
    Hamid Aboutalebi coming into the United States.
        Senator Udall. Well, the--Under Secretary Cohen, as you
    know, briefed the entire Senate, Democrats and Republicans----
        Senator Kirk. Right.
        Senator Udall [continuing]. In a confidential----
        Senator Kirk. David----
        Senator Udall [continuing]. Session, and every----
        Senator Kirk [continuing]. And I have worked quite a bit--
    --
        Senator Udall. Yes, and everything was able to be done
    there. So, I think we should try to focus on his duties and
    responsibilities. Because I don't think he has anything to do
    with the visa. I think that's the State Department's----
        Mr. Cohen. That's correct.
        Senator Udall. You don't issue visas. Is that right?
        Mr. Cohen. That's correct.
        Senator Udall. But, I don't want to interfere with your
    questioning of him if----
        Senator Kirk. I would say----
        Senator Udall [continuing]. There is legitimate reason----

                           TEMPORARY SANCTIONS RELIEF

        Senator Kirk [continuing]. David, you didn't highlight
    something in your testimony, that--you also said the sanctions
    that Congress unanimously supported were key to bringing the
    Iranians to the table, but what you didn't say was that you
    vigorously opposed the passage of the Menendez-Kirk sanctions.
    So, the irony of your position----
        Mr. Cohen. Actually--Senator, if I might, the----
        Senator Kirk. I actually have a copy of the letter you sent
    me on that.
        Mr. Cohen. Right. And what that letter said was that the
    amendment, as it currently existed at that time, was one that
    we had concerns with in how it would be implemented. And what
    transpired after that hearing that day was that we worked with
    you, Senator, with Senator Menendez and others, to modify the
    provision that was ultimately enacted. As that provision was
    ultimately enacted, it addressed many of the concerns that
    animated that letter, and was ultimately crafted in a way that
    has proven to be extraordinarily successful in driving down
    Iran's ability to sell oil.
        I think the concerns that were expressed in that letter on
    December 1 of 2011, I think it was, when that letter was sent,
    were concerns that were with respect to the version of the
    amendment, as it existed that day, and----
        Senator Kirk. I would say, you know----
        Mr. Cohen [continuing]. It changed, subsequently----
        Senator Kirk [continuing]. If you remember----
        Mr. Cohen [continuing]. In a way that was much more----
        Senator Kirk [continuing]. If you remember, you and I were
    on the phone almost hourly at the time that we did that
    amendment, and we did make a number of changes to suit the
    administration.
        Mr. Cohen. That's right.
        Senator Kirk. At your request.
        Mr. Cohen. I think that's right.
        Senator Kirk. Yes. And when the Senate voted, it was
    unanimous. Not a single Senator stood with your position on
    this issue.
        Mr. Cohen. Well, as I said, what ultimately was enacted and
    what ultimately has proven to be so effective--and I take
    nothing away from your efforts and the efforts of Senator
    Menendez and the others who voted for that provision--what
    ultimately proved to be tremendously effective was a modified
    version of that amendment that allowed us to work in a way to
    drive down Iran's ability to sell its oil without roiling the
    international markets. And we've managed to, essentially, keep
    the price of oil at the same level that it was in December
    2011, while taking off----
        Senator Kirk. You briefly touched on a----
        Mr. Cohen. Yes.
        Senator Kirk [continuing]. On a point, here before the
    committee, saying up to $6 billion was released to the
    Iranians. That's about 50 years' support to Hezbollah.
        Mr. Cohen. I'm sorry, Senator, I didn't----
        Senator Kirk. If you look at the cost of Hezbollah to the
    Iranians, because they--on that organization--that killed the
    243 marines in Lebanon and killed our station chief in Lebanon,
    if you look at the yearly cost of that operation, you have
    provided almost 50 years worth of money to the Iranians through
    this negotiation process.
        Mr. Cohen. Well, Senator, what we agreed to in the Joint
    Plan of Action was to allow the Iranians access to $4.2 billion
    of their oil revenue that has been denied to them in overseas
    accounts over the course of the 6 months. The manner in which
    that money is being released by the banks that hold it to the
    Iranians--not American banks, banks overseas--is such that we
    have good visibility into where the money is going.
        If the Iranians continue to fund Hezbollah, which the
    Iranians have done for many years now and which has been the
    focus of many of my actions and actions of others in the
    Government, that is conduct that is not facilitated by the
    Joint Plan of Action, but is conduct that we, if we see it,
    will continue to take action against. I have no hesitation
    whatsoever in continuing to pursue and to try and disrupt
    Iran's support for Hezbollah, and we'll continue to do that.
        Senator Udall. Thank you very much.
        Now, Senator Kirk, your time's expired. I'm going to now
    move to Senator Johnson.
        Senator Johnson. Thank you, Mr. Chairman.
        And thank you, Under Secretary Cohen.

                    RESOURCES FOR EXPANDING RESPONSIBILITIES

        I've been amazed at OFAC's capacity to absorb additional
    sanctions implementation responsibilities over the years. OFAC
    Director Adam Szubin and his team have done an extraordinary
    job. Given that TFI and OFAC, in particular, have had to take
    on expanding sanctions responsibilities, which you describe in
    your testimony, how long do you think you can maintain this
    current level of excellence without additional staff and other
    resources being made available to meet expanding duties?
        Mr. Cohen. Well, thank you, Mr. Chairman, and thank you for
    your support over the years for our work.
        My folks in OFAC, and, frankly, across TFI as a whole, are
    working very hard. I think I said, in a prior hearing, they're
    working flat out, and I think that's a fair description. I've
    got an extraordinarily dedicated and extraordinarily
    hardworking group of people who work in TFI.
        I am comfortable that the current resources that we have
    appropriated this year and that the President has requested for
    next year are sufficient for us to continue to do that work.
    But, you know, I do not have people who come to work in the
    morning without anything to do. I've got everybody quite
    gainfully employed.

                             ADDITIONAL FLEXIBILITY

        Senator Johnson. The situations in Syria, Iran, Ukraine,
    and elsewhere, are all extremely complex and fluid, which makes
    flexibility a crucial element of Treasury's ability to respond.
    Are there things Congress should be doing now to provide you
    with additional flexibility to react nimbly to ongoing
    diplomatic challenges across the world?
        Mr. Cohen. Well, Senator, I think one thing that Congress
    could do to allow us to continue to have the flexibility to
    react nimbly to challenges as they develop is--when Congress
    legislates new sanctions authority, to ensure that we have
    discretion in how to implement those authorities. I think we
    have demonstrated, over the years, that we will employ the
    authorities that are given to us in an aggressive fashion and,
    in a relatively smart fashion, as well. But, the greater
    flexibility that we have in determining how and when to apply
    these sanctions authorities, the better able we would be, and
    we will be, to respond to issues as they arise. The more that
    it is predetermined exactly what sorts of sanctions must be
    applied, the more that the legislation is prescriptive in that
    respect, the more difficult it is for us to react in a flexible
    fashion.
        Senator Johnson. Under Secretary Cohen and Chairman, I will
    have to excuse myself. I have to chair another committee
    hearing. But, thank you.
        Senator Udall. Senator Johnson, thank you very much, and we
    very much appreciate your participation and the fact that we
    know you have another hearing going on. But, thank you for
    coming over.
        Senator Graham, we're--you weren't here at the beginning,
    but we're trying to----
        Senator Johnson. Thank you.
        Senator Udall [continuing]. Stick with 7 minutes----
        Senator Graham. Yes, sir.
        Senator Udall [continuing]: And get through everybody.
    We've had good, robust participation today, and really
    appreciate seeing you here. Thank you.
        Senator Graham. Well, thank you. Thank you for letting me
    come. I'm not on the subcommittee, but I really appreciate the
    invite. This is a well-run place around here.
        Chairwoman Mikulski. You got it.
        Senator Graham. Yes.
        Mr. Cohen, I want to compliment you and your team. I think
    you all have been very diligent in trying to enforce the
    sanctions, and--credit where credit's due. I think the
    sanctions have been implemented in a way to get the Iranians to
    the table.

                       BUSINESS DURING INTERIM AGREEMENT

        After the interim deal, how many delegations have gone to
    Tehran--foreign delegations--to discuss potential business
    opportunities with the Iranians? Do we know?
        Mr. Cohen. I think we know. I don't have that number right
    at hand. But, I'd--we obviously are----
        Senator Graham. Is it above or below 50, or do----
        Mr. Cohen. Fifty, did you----
        Senator Graham. Yes.
        Mr. Cohen. I--honestly, Senator, I don't----
        Senator Graham. Just provide it to us, if you could.
        Mr. Cohen. I will.
        Senator Graham. Yes----
        Mr. Cohen. Yes.
        Senator Graham [continuing]. That's fair. I think it's
    quite a lot.
        Mr. Cohen. Yes.
        Senator Graham. Before the interim deal, were there
    delegations going to Iran, talking about potential business?
        Mr. Cohen. Certainly not to the extent that we saw----
        Senator Graham. If you could----
        Mr. Cohen [continuing]. After the interim deal.
        Senator Graham [continuing]. Give us before the interim
    deal and after the interim deal, in terms of international
    engagement, I think it would be helpful, because I think
    there's a perception out there, true or not, that now's the
    time to think about doing business with Iran. And we want to
    make sure that doesn't go too far.
        Mr. Cohen. Okay.
        [The information follows:]
                           trade delegations to iran
        In support of the President's dual-track strategy towards Iran of
    pressure and diplomacy, the Department of the Treasury has engaged in
    extensive outreach to companies, financial institutions, and
    governments around the world to make clear the broad scope of our
    sanctions and our intention--which we have consistently demonstrated--
    to actively enforce them.
        We continued these active efforts following the November 2013
    announcement of the Joint Plan of Action. Since that time, Treasury
    officials have spoken to hundreds of companies and traveled extensively
    to make clear that Iran is not open for business. As part of this
    campaign we have kept a close eye on countries from which we have seen
    trade delegations visit Iran to explore possible post-sanctions
    opportunities. Where we saw any risk to the pressure we built, we met
    with the governments of these countries and had frank conversations to
    express our concerns. We have not hesitated to take action against
    entities that have violated our sanctions. Indeed, since November 2013
    we have designated nearly 100 entities and levied almost half a billion
    dollars in civil penalties for Iranian sanctions evasion. At least
    partially as a result, we have not seen these delegations lead to
    significant new business for Iran. Indeed, as we expected, the economic
    benefits to Iran under the JPOA have been contained, and entirely
    insufficient to overcome the deep economic difficulties Iran continues
    to face.
        In response to the committee's request, please see the below list
    of countries we have observed sending trade delegations visiting Iran
    in the 2 years preceding or during the JPOA period (including to the
    present). Please note that this list is not intended to be exhaustive,
    and is based on open-source reporting.

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

    -------------------------------------------------
                             Afghanistan              Lebanon
                             Austria                  Netherlands
                             Azerbaijan               Oman
                             China                    Romania
                             Czech Republic           Singapore
                             France                   South Korea
                             Georgia                  Sweden
                             Germany                  Thailand
                             India                    Tunisia
                             Iraq                     Turkey
                             Ireland                  UAE
                             Italy                    Uzbekistan
                             Kazakhstan
    ------------------------------------------------------------------------

                             NORTH KOREAN SANCTIONS

        Senator Graham. North Korea is still being sanctioned by
    the United States. Is that true?
        Mr. Cohen. Yes, sir.
        Senator Graham. Have our sanction efforts deterred their
    nuclear program?
        Mr. Cohen. I think our sanctions, which are largely----
        Senator Graham. Can I help you?
        Mr. Cohen [continuing]. Focused----
        Senator Graham. No.
        Mr. Cohen. Yes.
        Senator Graham. No, it hasn't.
        Mr. Cohen. Yes. Well----
        Senator Graham. Well, since not--you're not a CIA-type
    person, but--I don't mean to interrupt--the truth of the matter
    is, the North Koreans are building--they have nuclear
    capability. So, I'll shut up and let you answer. Do you think
    the sanctions are deterring their nuclear program?
        Mr. Cohen. I don't think they're deterring their nuclear
    program. I think our sanctions have disrupted, to some extent,
    North Korea's progress in acquiring the material and acquiring
    the hard currency that they need to buy the material for their
    nuclear program.
        But, I quite agree with you that the North Koreans have
    been pursuing a nuclear program, and have done so
    notwithstanding our sanctions and sanctions that have been in
    place against North Korea for many years.
        Senator Graham. I would just invite subcommittee members to
    maybe get briefed up. It's pretty astonishing what they're
    doing, in spite of our best efforts. They're going down the
    plutonium track now.
        There was a reactor that was basically somewhat dismantled.
    Plutonium-producing reactors, part of--the last round of
    negotiations, is supposedly coming back online. So, I just want
    us to remember the North Korean model, that we tried sanctions
    that didn't work there.

                         GOAL OF NEGOTIATIONS WITH IRAN

        Now, the goal in Iran is to get the Iranians to dismantle
    their nuclear program. Is that the stated goal of the
    administration?
        Mr. Cohen. The goal with respect to our sanctions in Iran,
    I think, is twofold. One is to disrupt their ability to
    continue to develop a nuclear program, as well as to put
    pressure on the Iranian Government so that, as part of the
    dual-track strategy, where we have been offering the Iranians
    the opportunity to negotiate in a credible fashion with the
    international community with regard to their nuclear program,
    to create the incentives so the Iranians will actually come to
    the----
        Senator Graham. Right. But, what's the----
        Mr. Cohen [continuing]. Negotiating table----
        Senator Graham [continuing]. End game? What are we trying
    to accomplish in Iran?
        Mr. Cohen. We are trying to ensure that Iran does not, and
    cannot, develop a nuclear weapon.
        Senator Graham. Okay. So, one of the goals would be to
    dismantle the plutonium-producing reactor at Arak. Is that
    correct?
        Mr. Cohen. Senator, as you know, I am not the negotiator.
        Senator Graham. No.
        Mr. Cohen. My colleagues at the State Department are
    responsible for negotiating the deal. And I think just last
    week we had a classified session, where----
        Senator Graham. Wouldn't it help----
        Mr. Cohen [continuing]. We went into some of these issues.
        Senator Graham. Wouldn't it help you to know the goal?
    Because you're the guy driving the sanctions regime. I mean,
    you know, what are you trying to accomplish----
        Mr. Cohen. Right.
        Senator Graham [continuing]. With these sanctions? Which is
    to keep them from developing a nuclear weapon.
        Mr. Cohen. Right. The ultimate goal is what I said, which
    is to prevent Iran from developing a nuclear weapon.
        Senator Graham. Fair enough.
        Mr. Cohen. I am not----
        Senator Graham. Fair enough. Fair enough. I----
        Mr. Cohen. I'd leave it there.
        Senator Graham. Yes, fair enough.
        The Congress is debating among itself the idea of imposing
    sanctions under the following conditions: that, at the end of
    the 6 months, the Iranians haven't met the benchmarks that we
    all hope, which is a dismantling of their program, that
    sanctions would continue. Because the goal of the sanctions is
    to reach a result. And the new round of sanctions are tailored
    to meeting the goal. The sanctions would continue if the
    nuclear program is not substantially dismantled, I think is the
    way the new language reads.

                        IMPACT OF ADDITIONAL LEGISLATION

        Do you believe, if they violate the interim deal, a new
    round of sanctions will apply? Those are the two things. Do you
    think it would hurt your effort if the Congress got on record
    reinforcing the sanctions, in terms of the goal we're trying to
    achieve, and to deter them from cheating? Do you think that
    hurts or helps your effort?
        Mr. Cohen. Senator, the judgment of those who were involved
    in the negotiations--my colleagues at the State Department,
    and, frankly, the judgment of the President, who said he would
    veto any such legislation--is that it would not be----
        Senator Graham. Yes, I don't want to----
        Mr. Cohen [continuing]. Helpful to the----
        Senator Graham [continuing]. Get you on the wrong side of
    the President, but you're the guy dealing with the sanctions.
        Mr. Cohen. And I don't need this piece of legislation.
        Senator Graham. Okay, that's fair enough. You don't think
    you need any reinforcement, is what you're saying.
        Mr. Cohen. What I need is what we have, which is a very,
    very robust sanctions architecture that is in place, that we're
    enforcing, as well as the absolutely unquestioned credible
    threat that if the Iranians don't come to an agreement in----
        Senator Graham. I'm not going to get your comment on
    military policy, if that's where----
        Mr. Cohen. No, no. No, no. I'm not talking military policy.
    That if the Iranians are unable to, or unwilling to, reach a
    comprehensive solution, that this Congress and this
    administration will work together to impose additional
    sanctions.
        Senator Graham. The----
        Mr. Cohen. There is no one in Iran who, for a second,
    thinks that we would be unable to implement more stringent
    sanctions if the----

              COMPARISON OF SANCTIONS AGAINST IRAN AND NORTH KOREA

        Senator Graham. In 7 seconds, are the sanctions against
    Iran as robust as the sanctions against North Korea?
        Mr. Cohen. Well, the sanctions against Iran are broader and
    deeper than the sanctions against North Korea.
        Senator Udall. Thank you, Senator Graham. Thank you very
    much.
        Is--I assume there's an interest in a second round. I--
    Senator Mikulski, you--I would--yes, I----
        Chairwoman Mikulski. Senator Graham--if I could comment to
    Senator Graham before you----
        Senator Udall. Oh, please. Chairwoman Mikulski, please.
        Chairwoman Mikulski. First of all, I'm so glad you came.
        Senator Udall. Yes, thank you for coming.
        Senator Graham. No one's ever invited me to anything,
    almost. I really----
        Chairwoman Mikulski. Well, it's a different----
        Senator Graham [continuing]. Appreciate it.
        Chairwoman Mikulski. But, just--this is----
        Senator Graham. Even my own caucus won't invite me to
    lunch.
        Chairwoman Mikulski. So, this is exact--well, that's a
    different thing. We're not going to go that far.
        Senator Graham. Okay, yes.
        Chairwoman Mikulski. Seriously----
        Senator Graham. Yes.
        Chairwoman Mikulski [continuing]. This is kind of the
    different kind of tone that Senator Shelby and I are trying to
    set.
        Senator Graham. And great.
        Chairwoman Mikulski. One is that many of these issues cut
    across a variety of subcommittees; and, within the various
    subcommittees, there's different expertise. So, you, sir, are
    the ranking member on State Department Foreign Ops. That's the
    authorizing committee. And your work on the Department of
    Defense, of course, is well known and almost legendary. So, you
    come----
        Senator Graham. At least in my own mind, yes.
        Chairwoman Mikulski. No, but, you see, you bring it to the
    table. And----
        Senator Graham. Thank you.
        Chairwoman Mikulski [continuing]. This is just great. And I
    could say this for us here, the fact that this was robust
    bipartisan participation, a couple of different committees. We
    had the banking authorizer here. This is great, because I think
    we had a tutorial, really, on what this office is--413 people,
    they enforce 37 different sanctions. This testimony is a
    teaching----
        Senator Graham. Mr. Cohen is doing a good job. I just----
        Chairwoman Mikulski. And what I wanted----
        Senator Graham [continuing]. Want to recognize that I know
    you're trying very----
        Chairwoman Mikulski. And what I just wanted to say is that,
    if the Joint Plan of Action falls apart, and the Congress then
    moves to take needed action, I will--because this is in July--
    make sure that we, as appropriators, would accommodate whatever
    it takes to up the game for them to be able to implement
    whatever we do.
        So, I think if we all--that I want us to think that we're
    all in this together to protect the United States, to protect
    treasured allies. And I think this has just been the kind of
    hearing where we look at the resources and look at the cause.
    And I'm glad that you came.
        Senator Graham. Thank you very much.
        Chairwoman Mikulski. And I really want to----
        Senator Graham. Thank you both.
        Chairwoman Mikulski [continuing]. Thank both you and
    Senator Johanns for this very content-rich conversation here.
        Senator Udall. Thank you very much, Senator Mikulski.
        And we will invite you again when we need your expertise.
    We appreciate it. We appreciate it very much.
        But, what--yes, what----
        Chairwoman Mikulski. And I like being ex officio. I just
    invite myself.
        Senator Udall. But, we--and I very much appreciate your
    work, and I think everybody does, here. I couldn't emphasize
    enough--and you've seen it, from both the Republican side and
    Democrat side, echoed here. We know--need to know the resources
    you need in order to do your very important job, and it's
    just--you need to let us know and be in touch with us as we
    move down the road and we get into these crisis situations,
    where we're trying to move from Russia to Ukraine to a variety
    of sanctions.

                           TEMPORARY SANCTIONS RELIEF

        And I wanted to come back to--because I think one of the
    members raised this issue of the narrow window and the idea--
    Senator Graham raised this in his question, in terms of visits
    to Tehran and all of that. You said that the number, in terms
    of--the prediction was $6 billion to $7 billion, and you said
    the number's actually lower. And I was wondering, Why is that?
    What--the prediction was going to be up in that range, and it's
    actually been much lower. What has caused that?
        Mr. Cohen. The estimate--the $6 billion to $7 billion
    estimate included a number of different components that,
    together, added up to $6 billion or $7 billion, including the
    essential value of transactions involving auto parts, which was
    one of the suspended sanctions, and potential transactions
    involving petrochemical sales. And, thus far, we have seen very
    little pickup in either of those two areas.
        I think that is, in part, due to the fact that the Joint
    Plan of Action is in effect for 6 months, which means these
    sanctions are suspended for 6 months, and the international
    business community and the international financial community
    knows that, for the transaction to be nonsanctionable, it needs
    to be completed, from, order to manufacture to shipment to
    payment, within that 6-month period. That's not a very long
    period of time. I think it has dissuaded, frankly, some from
    taking advantage of that.
        Now, I should say, the lion's share of the $6 billion to $7
    billion is this $4.2 billion in Iran's own assets, its own
    funds overseas that are going to be released over the course of
    the 6 months. We have fulfilled, in good faith and completely,
    our obligations, thus far, to release--or to allow the release
    of, I think, three of the tranches. And we'll continue to do
    that over the course of the 6 months.
        Senator Udall. Thank you for that answer.

              COMPARISON OF SANCTIONS AGAINST IRAN AND NORTH KOREA

        The issue here was raised of North Korea and sanctions
    working, in terms of North Korea. And the thing that seems to
    me--I mean, looking at sanctions on North Korea and sanctions
    in Iran--is, we--the difference is the large number of
    countries--the P5+1--that are participating, and the actual
    robust ability for them to engage in this sanctionable
    activity.
        The problem we have in North Korea is China, which--that's
    my sense. They seem to, when it gets to the point that North
    Korea needs to be rescued, you have economic rescue packages
    that occur, and those numbers have been going up. And that's a
    much more difficult one, I guess, for us to deal with.
        But, I--those are my thoughts on that. I'm wondering what--
    and things that I've read and heard about--what are your
    thoughts there, in terms of the--comparing--if you had a
    comparison of North Korea and the Iranian situation?
        Mr. Cohen. Yes. Well, there's no question that Iran, before
    we embarked on the sanctions effort, was much more integrated
    into the global economy than North Korea is today or ever has
    been. I mean, North Korea is quite isolated, for reasons
    unrelated to sanctions, related to the government that they
    have there. So, the same techniques and the same sanctions that
    we've applied to Iran are not, sort of, easily just translated
    into the North Korea context.
        That being said, there's no question that North Korea is
    also susceptible to sanctions, and we have applied sanctions
    against North Korea. And I would--and would cite one sanction,
    in particular, which is, about 9 months ago now, we imposed
    sanctions on something called the Foreign Trade Bank in North
    Korea, which was their major foreign exchange financial
    institution. It was the principal way in which all the banks in
    North Korea would be able to transact with banks outside of
    North Korea. We saw Chinese banks cut off the Foreign Trade
    Bank. Some of the major Chinese banks that had held accounts
    with the Foreign Trade Bank severed those accounts.
        So, I think that was, in part, a response to what we did;
    it was, in part, a response to some of the outreach that we
    made to the Chinese; and it was, I think, in large part, a
    dividend from years of effort to spread the word about
    financial integrity and financial transparency and the major
    Chinese banks recognizing that their reputation for financial
    integrity is something that is important to them as they
    interact with the rest of the world.
        And so, it is absolutely true that the majority of North
    Korea's relationship is with China, but we've also had some
    success with China in applying pressure to North Korea.

                    IMPROVING SANCTIONS AGAINST NORTH KOREA

        Senator Udall. Yes. Are--what could Treasury do to make
    sanctions more impactful against North Korea under the current
    sanctions regimens that----
        Mr. Cohen. Yes. Well, we're going to continue----
        Senator Udall. What tools are----
        Mr. Cohen. Yes.
        Senator Udall. You know, what tools are missing to make
    them more effective?
        Mr. Cohen. Mr. Chairman, I'm not sure that we have any
    tools that are missing. What we are going to continue to do is
    to implement the sanctions programs that we have in place,
    which are focused on North Korea's efforts to develop its
    nuclear program as well as North Korea's other illicit
    activity. You know, this is an issue that gets a great deal of
    attention in the Treasury Department as well as, across the
    national security community, and we're going to continue to
    pressure North Korea.
        Senator Udall. Yes. Thank you very much.
        Senator Coats, you haven't had a chance to question, here.
    And so--we all have, and so you're still in your first round.
    So, then we'll come to you and then I'll come back to my
    Ranking Member, the distinguished Senator Johanns, here.
        Senator Coats. Okay, thank you, Mr. Chairman.
        I just want to follow up on a parochial question, if you
    don't mind, and that is--the Indiana delegation sent to
    Pentagon, Under Secretary Hale, a letter, dated March 24,
    asking some questions about the AMFO initiative. That's the
    Army Financial Management Optimization Program. Number one, I
    want to commend you, because, you know, unprecedented in my
    career, we received a letter back on March 26 of the same year.
    So, I'm very impressed with that. So, I want to--a word of
    thanks, there, in terms of response.
        But--and I was just looking through that letter. It
    actually went to Congressman Carson. There are a number of us,
    both Senators and members of our congressional delegation.
        And the question is, on this--your--the review of this new
    system. It potentially involves your--and I quote from the
    letter, ``possibly including reductions in numbers of DFAS
    personnel at certain locations. We will make every effort to
    accommodate any changes through attrition.'' I'm not here to
    get a specific answer from you, but to better understand what
    is happening and how--and I think there's probably a trial plan
    that's going to be put in place, if that rings a bell. What is
    it you're trying to accomplish? And what are some of the
    consequences of that going to be to the current DFAS system--
    locations personnel, et cetera?
        Senator Udall. Mr. Secretary--Under Secretary Cohen, I just
    wanted to----
        Senator Coats. I just got a note saying I'm at the wrong
    hearing.
        Senator Udall. Oh, okay.
        Senator Coats. This is--I've got the right room number, but
    the wrong hearing.
        Mr. Cohen. Well, that would explain why I didn't----
        Senator Coats. I appreciate----
        Mr. Cohen [continuing]. Know anything about this letter.
        Senator Coats. Well, this is the first time this has ever
    happened to me, but I hope it's not a precursor of what may----
        Senator Udall. You're always welcome in our committee, and
    you----
        Senator Coats. Well, thank you. I saw some familiar faces,
    and I thought this is where I should be.
        Well, I'm going to let you off the hook on this one.
        Mr. Cohen. Thank you, Senator.
        Senator Coats. All right. I hope you're able to respond as
    quickly as the Under Secretary of the Army has been able to
    respond. I'll go to try to find out where I'm supposed to be.
        Mr. Cohen. Okay.
        Senator Coats. Thank you.
        Senator Udall. Thank you.
        Senator Johanns.

                                  OIL EXPORTS

        Senator Johanns. Mr. Secretary, I think you can tell from
    the--maybe, the line of questioning on both sides of the aisle,
    that what we're searching for here is--we want to make sure
    that whatever we're doing here, from a policy and a funding
    standpoint, doesn't interfere with work that you're doing. I
    don't detect any dissatisfaction whatsoever, again, on either
    side of the aisle, with the work of you and your folks. And I
    just want to emphasize that.
        But, the success of sanctions with Iran, I believe, has
    been built over a period of time. It was, ``Try this.'' That
    wasn't working so well. ``Try that.'' While, at the same time,
    your group was discovering, learning, trying various things
    that we were authorizing you to try, until finally we got
    Iran's attention, and all of a sudden there's discussions that
    they want to sit down and negotiate.
        My worry--and, I think, the worry of many of us--is that,
    if we pull one string out of the sweater of sanctions, the
    sleeve comes off, and then all of a sudden you folks are
    sitting out there, saying, ``My goodness, we had them where we
    needed to be, and this is falling apart.'' We don't want that
    to happen.
        So, let me follow up, if I might, on a question that
    Senator Moran asked you about, the agreement with--or potential
    agreement with Russia, or discussions, whatever else is going
    on there. Isn't it true that, since the sanction agreement was
    reached with Iran, that their oil exports have, in fact,
    climbed and they are over the level that was permitted by that
    interim agreement?
        Mr. Cohen. Senator, the interim agreement looks at oil
    sales over the course of the 6-month period. It's not a month-
    by-month----
        Senator Johanns. Right.
        Mr. Cohen [continuing]. Analysis. Our assessment--and I'd
    say ``our,'' in the sense of the administration, because it's
    actually the State Department that tracks the oil sales----
        Senator Johanns. Right.
        Mr. Cohen [continuing]. Not the Treasury Department----
        Senator Johanns. Right.
        Mr. Cohen. But, I think the sense is that, over the course
    of this 6-month period of the Joint Plan of Action, we are
    comfortable that Iran will stay--or actually, more
    specifically, the purchasers will stay within the level that
    was agreed to in the Joint Plan of Action. There are
    fluctuations, month to month. I would encourage you to have the
    State Department's oil experts come and talk to you about this.
    But, I think the sense is that we're not alarmed by some of the
    reports that have been in the public press.
        Senator Johanns. Yes. And I'm certainly not saying that the
    Joint Plan calls for a day-by-day assessment, and if you sold
    more one day, then you've got to sell less the next day and----
        Mr. Cohen. Right.
        Senator Johanns [continuing]. Square up the books or true
    up the books. But, what I am saying is, if you look at the
    period of time between now and when the Joint Plan started, it
    appears to me that they're on the wrong course.
        Mr. Cohen. Yes. And, I don't mean not to answer your
    question directly, but I don't track the oil figures with that
    specificity. I know that my colleagues at the State Department
    are comfortable that, even if there has been some slight
    uptick, that it's nothing that is going to call into question
    the fundamental nature of the Joint Plan of Action.

                        IMPROVING NORTH KOREA SANCTIONS

        Senator Johanns. Well, let me, if I might, just ask a
    question or two about North Korea. North Korea, I think, is a--
    just a source of concern for everybody, and a source of
    frustration, because--I'll just be honest with you, I think
    North Korea, from time to time, shakes the world down. They
    need resources, they need money, and all of a sudden we're off
    to the races. It's almost as predictable as Christmas arriving.
        Are we missing something with North Korea? Is it time to do
    a more thorough assessment of the sanctions that are in place,
    and ask ourselves, Are these the right sanctions at this time?
    Are there additional approaches that we should be employing?
        I guess what I'm asking is, Are we at a stage where
    Congress should be looking at a more comprehensive approach to
    what's transpiring, relative to sanctions, in North Korea?
        Mr. Cohen. Well, what I can tell you is that we are
    constantly reevaluating what we have been doing with respect to
    North Korea. I was going to say ``in every one of our
    programs,'' but I think it is especially true with respect to
    North Korea, because in answer to a prior question, I think it
    is--it is unavoidable, the conclusion that we have not deterred
    North Korea from the path that it's been on. And it's a very,
    very worrisome path.
        So, I can tell you that this is a topic that is actively
    under consideration within the administration, how--not just
    through sanctions, but all of the ways that we have to project
    power and to address this issue, thinking about how to,
    frankly, change the course that North Korea is on, because, a
    denuclearized Korean Peninsula, particularly a denuclearized
    North Korea, is something that we are completely committed to
    achieving.
        Senator Johanns. Final comment. I only have 30 seconds,
    here.

                       HUMAN RIGHTS ISSUES IN NORTH KOREA

        The nuclear capability of North Korea in such an unstable
    regime is of concern to everybody. But, if one-tenth of the
    claims about human rights violations in North Korea turn out to
    be verifiable someday--and someday they will be verifiable--
    this is outrageous, it's shocking. I mean, it's appalling what
    this regime is doing to its people. And I just think, unless we
    figure out a better way forward with North Korea, this will
    visit upon humanity a tragedy that is nearly unspeakable, if
    one-tenth of it's true. It's just unbelievable.
        Mr. Cohen. I agree. I have nothing other to say than that I
    agree with that.
        Senator Udall. Thank you, Senator Johanns.
        I know that you have the--an appointment; you were trying
    to leave at 3:30.
        Mr. Cohen. Yes.
        Senator Udall. We just have one more questioner here for 7
    minutes. Would that be--is that going to be okay, or are we
    going to really----
        Mr. Cohen. Absolutely.
        Senator Udall. Okay.
        Now, Senator Moran.
        Senator Moran. Thank you, Mr. Secretary. And I only have
    one question.
        Senator Udall. Good.
        Senator Moran. Although my preface may be longer than the
    question.

                             APPROPRIATIONS FOR TFI

        It's--something that's transpired here in our hearing, I
    think, is unique. It seems to be that many members of this
    committee, and some who joined us, have been interested in
    providing more money to you. I think the message has been, we
    want to make certain that you have the necessary resources to
    accomplish your mission. That is--and then you had the
    chairperson of our full committee describe the tutorial that we
    were receiving today, and then your testimony--there's a
    sentence in there that I wanted to highlight. When you talk
    about resources, ``We've been able to increase our sanction
    programs and other output by generating program
    efficiencies''--no one would say that anything but good comes
    from efficiency--``effective management''--we're all for that--
    ``and''--this is the part that I wanted to highlight--``and
    transferring funds, when needed, among organizations and
    programs within TFI.'' And what the tutorial that I received
    today included was a reminder that, when we appropriate money,
    we're appropriating money broader--more broadly than just your
    office.
        Mr. Cohen. Right.
        Senator Moran. That money goes to departmental offices. And
    while the President's request for Terrorism and Financial
    Intelligence is $105.9 million, that's really of a--that's a
    portion of a larger amount of money that would be appropriated
    that's about $309 million to departmental offices.
        Mr. Cohen. Right.
        Senator Moran. The transfer--so, first of all, I would
    suggest to my colleagues who are interested in providing more
    money, to make certain that you accomplish your mission, we
    ought to be very interested in making certain that that money
    goes to you, to your office, to accomplish those goals.
        And then, second, the--your testimony about transferring
    funds. I was interested in knowing, or being assured, that the
    transfer works to you, not that you're transferring money out
    of your office to any of the other departmental offices. Is
    that true?
        Mr. Cohen. Senator, the transfer is within my deputate, as
    it were. So, in----
        Senator Moran. Within TFI.
        Mr. Cohen. Within the Office of Terrorism and Financial
    Intelligence (TFI), from Terrorist Financing and Financial
    Crimes (TFFC) to the Office of Foreign Assets Control (OFAC) or
    to the Office of Intelligence and Analysis (OIA), that's where
    we're able to shift----
        Senator Moran. So, not transfers from--the departmental
    offices that make up this broad allocation of money are
    Executive Direction, your office, Tax Policy, Domestic Finance,
    Economic Policy, International Affairs, Treasurywide
    Management.
        Mr. Cohen. Right.
        Senator Moran. And so, my question is, Do you ever transfer
    money from TFI to any of those other offices within the
    departmental offices?
        Mr. Cohen. So, my understanding is that the--although the
    funds are appropriated to departmental offices, which includes
    TFI, there is a presumptive amount that is for TFI, and those
    are my funds. Those are my funds to use, and they do not get
    transferred away. The other----
        Senator Moran. So, the Treasury Secretary doesn't come to
    you and say, ``Secretary Cohen, we need more money in Tax
    Policy. Can you--we need to transfer money from TFI to Tax
    Policy.'' That doesn't happen.
        Mr. Cohen. Right.
        Senator Moran. Okay.
        Mr. Cohen. Right.
        Senator Moran. Am I missing--is there----
        Mr. Cohen. No. No, I was just going to say, I think all
    those other offices at Treasury do important work, as well.
    But, the funds that are earmarked for TFI are TFI's funds.
        Senator Moran. Well, I--you--while they may do important
    work, it is pretty unusual for a number of my colleagues here
    to be trying to offer more money than you're requesting. And I
    think, in this tutorial that we're having today, it's useful,
    at least for me and perhaps others, to understand that this
    money is not--I don't--sacrosanct within those departmental
    offices.
        Mr. Cohen. Right.
        Senator Moran. It's a broader allocation than just you--
    your office.
        Mr. Cohen. It's a broader allocation, but the funds that
    are--I mean, ``earmarked'' is probably not the correct term,
    but the funds that are----
        Senator Moran. It's a word I would not use.
        Mr. Cohen. Yes, I'm sorry. I should--I want to revise and
    extend my remarks on that.
        The funds that are identified as going to TFI are funds
    that are for TFI's use.
        Senator Moran. Okay. Thank you, Mr. Secretary.
        Mr. Cohen. Thank you.
        Senator Moran. Thank you, Mr. Chairman.
        Senator Udall. Thank you. And thank you for closing a
    little early, here, and we'll get him on the road.
        Let me thank everybody who participated in this hearing.
    Appreciate hearing from you, Under Secretary Cohen, as the top
    official of TFI, about resource needs and the sanctions
    program.

                         ADDITIONAL COMMITTEE QUESTIONS

        Today's discussion, I think, has provided helpful insights
    into TFI's operations and challenges. This information will be
    instructive as Congress moves forward with our work on fiscal
    year 2015 funding.
        The hearing record will remain open until next Wednesday,
    April 9th, at 5 p.m., for subcommittee members to submit
    statements and/or questions to be submitted to the witnesses
    for the record.
        [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. David S. Cohen
                    Questions Submitted by Senator Tom Udall
                                  north korea
        Question. Sanctions against North Korea have not been successful at
    preventing proliferation and other activities that threaten our
    national security. What could Treasury do to make sanctions more
    impactful under the current sanctions regime? What tools or elements
    are missing to make sanctions more effective?
        Answer. Sanctions are an important part of our overall North Korea
    policy and the broad and ongoing international effort to achieve the
    denuclearization of the Korean Peninsula. U.S. and international
    sanctions are intended to raise the cost to North Korea of continuing
    to pursue its nuclear, ballistic missile, and other prohibited
    programs, and to restrict its financing of these programs and it
    proliferation activities, and we have seen some successes.
        To more effectively address the threat posed by North Korea, it is
    essential to secure the commitment of other countries to take action to
    prevent funds being redirected to North Korea's illicit programs and
    proliferation activities. This is particularly true of China, North
    Korea's largest trading partner. The United States has urged China to
    escalate pressure on North Korea, including through the effective
    enforcement of United Nations (U.N.) sanctions against North Korean
    proliferation activities, and Treasury will continue to engage China
    and other countries in the region to restrict North Korea's ability to
    finance its illicit nuclear, ballistic missile, and proliferation
    programs.
                                      iran
        Question. The Government Accountability Office (GAO) and other
    entities have opined that the use of economic sanctions against Iran
    since 2010 have successfully disrupted the Iranian economy. Why have
    sanctions against this nation been more successful than other sanctions
    regimes? What in particular has made these sanctions so impactful? What
    lessons has the Treasury Department learned from the success of
    sanctions against Iran that could be applied more generally to other
    sanctions programs?
        Answer. The Treasury Department coordinates and implements
    approximately two dozen distinct financial sanctions programs,
    including jurisdiction-specific and conduct-based programs. In each
    instance where sanctions have been applied, they have been one tool
    among many deployed. Current sanctions programs are diverse and
    tailored to meet particular national security and foreign policy
    circumstances and the goals and mechanics of how sanctions affect
    specific targets may differ in each instance.
        The United States, working with its international partners, has
    imposed the world's most comprehensive and far reaching set of
    sanctions on Iran. This robust and coordinated multilateral effort has
    been critical to creating leverage for diplomacy. Sanctions have
    slashed and curtailed Iran's access to its oil revenues, isolated it
    from the international financial system, and led to economic
    contraction. U.S. sanctions on Iranian financial institutions, coupled
    with our broad outreach campaign to warn the international financial
    community of the risks associated with doing business with Iran,
    contributed to a sustained downturn in Iranian economic activity.
        Treasury has learned many lessons from our Iran sanctions,
    including the power of coordinated action and the importance of
    tailoring sanctions to best pressure and exploit a target's financial
    vulnerabilities. These lessons are readily applied across the sanctions
    programs we implement.
                                   diplomacy
        Question. The Treasury Department and State Department have
    complementary roles in sanctions policy. Please explain how the
    departments work together and with other Federal entities to develop
    and implement sanctions. What are the roles and responsibilities of
    each entity? How do the departments coordinate with each other? How can
    these intergovernmental relationships be improved? How is the
    effectiveness of economic sanctions improved by diplomatic efforts?
        Answer. The Treasury and State Departments are close partners in
    the administration's development and implementation of sanctions. At
    the most senior levels and throughout our agencies, Treasury and State
    regularly confer on sanctions strategy, policy, and enforcement, and
    frequently undertake joint actions employing our respective
    authorities.
        Treasury and State also work closely with other relevant agencies.
    On April 29, 2014, for example, the Departments of Treasury, State,
    Commerce, and Justice undertook joint action against the network of
    serial proliferator Karl Lee. Since 2005, Lee and firms with which he
    has been associated have been subject to nonproliferation sanctions
    pursuant to a variety of U.S. authorities. In this recent set of
    actions, Treasury designated eight of Lee's companies; Commerce added
    nine entities (eight companies and one Chinese national) to its Entity
    List, a compilation of foreign persons determined to have acted
    contrary to the U.S.'s national security or foreign policy interests
    and who are subject to special export licensing requirements; Justice
    unsealed an indictment of Lee; and State offered a $5 million reward
    for information leading to his arrest or conviction.
        As you observe, State and Treasury authorities are complementary,
    and vary across our complex array of sanctions regimes. While there
    naturally exists some overlap because of the broad and flexible nature
    of our sanctions, Treasury focuses extensively, though by no means
    exclusively, on the financial sector, while also targeting agents,
    material supporters, and facilitators of terrorism, proliferation,
    human rights abuses, and other illicit conduct. State identifies and
    targets individuals and entities for primary designation as Specially
    Designated Global Terrorists and as Foreign Terrorist Organizations;
    identifies and sanctions individuals and entities engaged in
    proliferation; works extensively on U.N. sanctions; and focuses more on
    underlying commercial activity and human rights violations and abuses
    of foreign persons and entities.
        Both Treasury and State actively engage in diplomatic outreach as
    an integral part of our sanctions efforts. Officials from both
    departments regularly meet with foreign counterparts and businesses to
    explain our sanctions programs, to demarche them on activities of
    concern, and to coordinate joint action. Such activity is quieter than
    undertaking public designations, but can be equally if not sometimes
    more effective in deterring and disrupting sanctionable conduct.
        State and Treasury--along with the rest of the administration--will
    continue our joint efforts and close cooperation to advance U.S.
    national security and foreign policy objectives.
                                     russia
        Question. As events in Ukraine continue to unfold, please explain
    Treasury's ongoing workload requirements. What resources are being
    utilized to implement sanctions against Russia? What additional
    resources, if any, are needed?
        Answer. To craft sanctions against Russia, we have relied upon
    experts from throughout the Office of Terrorism and Financial
    Intelligence (TFI) and Treasury's departmental offices. Despite the
    recent growth in our sanctions programs, the $102 million provided for
    TFI in the fiscal year 2014 departmental offices appropriation is
    sufficient to allow us to accomplish our mission, as is the President's
    budget request of fiscal year 2015. We have been able to increase our
    sanctions programs and other output by generating program efficiencies,
    effective management, and the reallocation of internal TFI resources to
    address new and emerging trends and issues.
                                   venezuela
        Question. There have been calls to sanction Venezuelan officials as
    a result of violence linked to the protests and reactions by the Maduro
    government. Does the Treasury Department believe that sanctions would
    be helpful or harmful with regards to finding a political solution? Is
    it possible that sanctions in this case could be counterproductive?
        Answer. As we have seen in certain contexts, targeted financial
    measures, including sanctions, can be an effective tool when used in
    concert with diplomatic efforts to advance specific U.S. foreign policy
    goals. The administration is currently studying a range of options to
    respond to the violence linked to the protests in Venezuela. We defer
    to our colleagues at the State Department on the U.S. Government's
    overall approach to the current political situation in Venezuela.
                                     ______

                    Questions Submitted by Senator Mark Kirk
                              central bank of iran
        Question. On November 21, 2011, the Treasury Department identified
    the Islamic Republic of Iran as a jurisdiction of primary money
    laundering concern under section 311 of the USA PATRIOT Act. In that
    finding, you wrote that the Central Bank of Iran (CBI) played a central
    role in facilitating Iran's illicit conduct, including its support for
    terrorism. Based in part on that finding, on December 1, 2011, the
    Senate voted 100-0 in favor of a bipartisan amendment to the fiscal
    year 2012 National Defense Authorization Act (NDAA) to impose sanctions
    on the Central Bank of Iran. There is no doubt that sanctions against
    the CBI remain the most powerful point of pressure on the regime--and
    it's something Iran wants suspended more than anything.
        Putting aside the nuclear program--given Iran's continued support
    for terrorism and its involvement in a range of illicit activities--by
    definition, does the Central Bank of Iran continue to be a primary
    money laundering concern?
        So regardless of what happens on the nuclear front, if the Central
    Bank continues to play a role in terrorism and illicit activities, can
    we have your assurance that the administration will continue to fully
    enforce the CBI sanctions until Iran has ceased all such activities?
        Answer. The section 311 finding under the USA PATRIOT Act of Iran
    as a jurisdiction of primary money laundering concern was, and
    continues to be, based on a range of illicit conduct that Iranian
    financial institutions, including the CBI, were found to have engaged
    in. This activity included Iranian financial institutions' support for
    terrorism and facilitation of Iran's pursuit of nuclear and ballistic
    missile capabilities.
        Treasury is aggressive in our enforcement of TFI authorities and
    continuously evaluates and assesses the role of any Iranian financial
    institution, including the CBI, in illicit conduct and will not
    hesitate to enforce existing sanctions or take action in appropriate
    circumstances now and in the future.
                               iran human rights
        Question. Despite President Hassan Rouhani's rhetoric after his
    election in June 2013, there has been no concrete improvement regarding
    rights and freedoms in Iran. In fact, in his latest report to the
    United Nations Human Rights Council on the situation of human rights in
    the Islamic Republic of Iran, released in March 2014, UN Secretary-
    General Ban Ki-Moon stated that ``[t]he new administration has not made
    any significant improvement in the promotion and protection of freedom
    of expression and opinion, despite pledges made by the President during
    his campaign and after his swearing-in,'' and that ``[t]here have been
    no improvements in the situation of religious and ethnic minorities,
    who continue to suffer severe restrictions in the enjoyment of their
    civil, political, economic, social and cultural rights.'' Yet since May
    2013, the administration has not designated any Iranian officials or
    entities as human rights abusers.
        In a July 2012 letter to me, the Department of State pledged that
    ``[t]he Departments of State and Treasury will continue to work
    together to implement both the Comprehensive Iran Sanctions and
    Divestment Act of 2010 and Executive Order 13553.'' Since June 2013,
    what has the Department of Treasury done to implement section 105 of
    the Comprehensive Iran Sanctions and Divestment Act (CISADA), Executive
    Order 13553 and Executive Order 13606?
        Answer. The U.S. Government is armed with a variety of authorities
    that authorize Treasury to target the Iranian Government's human rights
    abuses and censorship activities. Taken together, these authorities
    provide Treasury with the flexibility to pursue human rights abuses
    vigorously. Most recently, on May 23, 2014, the Department designated
    Morteza Tamaddon, an Iranian Government official, under Executive Order
    13628 for his censorship-related activities. To date, Treasury has
    designated 19 Iranian individuals and 17 Iranian entities for human
    rights abuses and censorship under various authorities, including
    CISADA, and Executive Orders 13553, 13628, and 13606. Treasury
    continuously evaluates potential targets for designation for human
    rights abuses and will not hesitate to take action in appropriate
    circumstances.
                                     turkey
        Question. On December 17, 2013, businessman Reza Zarrab was
    arrested as part of a wide ranging corruption investigation in Turkey.
    Four Turkish ministers resigned, allegedly as a result of the
    revelations relating to their connections to Zarrab. Despite the
    evidence against him, Zarrab was released in February 2014.
        As you know, according to reports, Zarrab played an integral role
    as part of Turkey's ``gas-for-gold'' scheme, where he transported gold
    as payment by Turkey for Iranian gas, valued at upwards of $28 billion.
    Moreover, reports in Turkey have linked Zarrab to Yasin Al Qadi, the
    Saudi Arabian businessman with ties to Al Qaeda, the Turkish
    Humanitarian Relief Foundation (IHH) which organized Mavi Marmara, and
    Mansour Arbabsiar, who was sentenced in May 2013 for participating in a
    plot to murder the Saudi Arabian Ambassador to the United States, and
    possibly of being a member of the Iranian al-Quds Force.
        Has Zarrab been considered for designation as part of the
    Treasury's Special Designated Nationals List (SDN)?
        Has the Turkish Government shared with you or any other U.S.
    Government agency the evidence that allegedly ties Reza Zarrab to
    terrorism finance?
        Has the U.S. Government asked--and if so, has the Turkish
    Government agreed--to provide access to Mr. Zarrab?
        Is the Treasury Department coordinating with European allies or
    other authorities to investigate any corruption tied to Turkey and
    concerns relating to Turkey serving as a conduit for terrorist funding?
        Answer. We are aware of the media reports you cite. The Treasury
    Department does not comment on potential designations and ongoing
    investigations. However, we regularly coordinate with our international
    partners, including Turkey and our other European allies, with respect
    to Iran sanctions and terrorism finance. We will not hesitate to take
    action in appropriate circumstances and continue to actively target
    sanctions evasion.
                                  cyber crime
        Question. Recent high profile data breaches in the United States
    have demonstrated that cyber crimes have a massive impact on individual
    American consumers and the broader economy, and even threaten national
    security. These cyber crimes are transnational crimes, and the world's
    leading nations must work together to protect their citizens through
    international coordination. We have a joint responsibility to ensure
    that specific foreign countries do not become safe havens for cyber
    criminals.
        What is your office currently doing to identify these transnational
    threats, and what coordination is occurring with your international
    counterparts, particularly in geographical areas where these cyber
    criminals are known to exist, such as Ukraine?
        Answer. TFI targets cyber threats that could impact the U.S.
    financial sector or pose a threat to national security. These threats
    may include financial fraud, money laundering, terrorist financing, and
    attacks on critical infrastructure. TFI has specific tools it has used
    to combat cyber threats, including section 311 of the USA PATRIOT Act
    and civil enforcement actions. TFI will continue to use its authorities
    as appropriate.
        TFI directs financial institutions to report suspicious activity
    related to cyber crime to support law enforcement identification of
    cyber threats and our efforts to identify significant cyber criminals
    and suspect financial institutions. In addition, TFI works with
    intelligence and law enforcement partners to identify cyber threats and
    provide analysis of the threat environment. TFI also engages with
    international partners to gather information and support operational
    and strategic analyses of cyber threats.

                              SUBCOMMITTEE RECESS

        Senator Udall. The subcommittee hearing is hereby
    adjourned.
        [Whereupon, at 3:35 p.m., Wednesday, April 2, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      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 IRS's 2014 filing season to date; (2) describe IRS's
    fiscal year 2015 budget request and workload; and (3) describe IRS's
    actions to absorb budget cuts and cite opportunities that could help
    IRS more strategically manage operations.
        To conduct this work, we analyzed funding, staffing, and
    performance trends, including the 2014 filing season to date, and
    summarized the President's budget requests for IRS from fiscal years
    2009 through 2014. We analyzed the fiscal year 2015 justification and
    other IRS data, including performance data for key IRS operations and
    full-time equivalents (FTE) for priority programs. We reviewed our
    prior work and interviewed IRS officials in the Office of the Chief
    Financial Officer and the Information Technology organization, the
    National Taxpayer Advocate, and representatives from tax preparation
    firms.
        We conducted this performance audit from January to April 2014 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. We interviewed IRS officials
    and determined that the data presented in this report were sufficiently
    reliable for our purposes.

        In summary, we found:

      --IRS's appropriations have declined to below fiscal year 2009 levels
            and FTEs have been reduced by about 8,000 since fiscal year
            2009. Planned performance in enforcement and taxpayer service
            has decreased or fluctuated; for example, in the fiscal year
            2014 congressional justification the audit coverage target for
            individual examinations was 1.0 percent for fiscal year 2014,
            however, the target was lowered to 0.8 percent in the fiscal
            year 2015 congressional justification. Amidst lower demand,
            IRS's telephone level of service performance (the percentage of
            callers seeking live assistance and receiving it) was 73
            percent from January 1 through March 15, 2014 compared to 69
            percent during the same period last year. However, between
            fiscal years 2009 and 2013, IRS's telephone level of service
            fluctuated between 61 percent and 74 percent. Average wait
            times have almost doubled since fiscal year 2009--from 8.8
            minutes to 16.8 minutes as of mid-March 2014.
      --Not including other budgetary resources such as user fees, the
            fiscal year 2015 budget request for IRS is $12.5 billion, which
            is an increase of 10.5 percent ($1.2 billion) in funding and
            8.3 percent in staffing (6,998 FTEs) over fiscal year 2014.
            According to the President's budget, of the requested $1.2
            billion, $480 million is predicated on a cap adjustment--
            funding above the discretionary spending limit--and largely
            covers enforcement and infrastructure initiatives. IRS's
            workload has increased as a result of legislative mandates and
            priority programs, such as work related to the Patient
            Protection and Affordable Care Act and identity theft.
      --IRS has absorbed approximately $900 million in budget cuts since
            fiscal year 2010 through savings and efficiencies and by
            reducing, delaying, or eliminating services. For example, IRS
            delayed two information technology projects (Information
            Reporting and Document Matching and Return Review Program) and
            substantially reduced employee training. To help improve
            operations, the President requested a large budget increase for
            IRS in fiscal year 2015. However, additional funding is not the
            only solution. We have open recommendations on IRS's operations
            that may help it achieve efficiencies over time, such as
            developing a long-term plan to improve Web services.
                                agency comments
        On April 16, 2014, IRS provided technical comments on our findings,
    which we have incorporated where appropriate.
        We plan to send copies of this report to the Chairman and ranking
    members of other Senate and House committees and subcommittees that
    have appropriation, authorization, and oversight responsibilities for
    IRS. We are also sending copies to the Commissioner of Internal
    Revenue, the Secretary of the Treasury, and the Chairman of the IRS
    Oversight Board. The report is available at no charge on the GAO Web
    site at http://www.gao.gov.
        If you or your staffs have any questions about this report, please
    contact us at (202) 512-9110 or mctiguej@gao.gov or whitej@gao.gov.
    Contact points for our offices of Congressional Relations and Public
    Affairs are on the last page of this report. GAO staff members who made
    major contributions to this report were Libby Mixon, Assistant
    Director, and Joanna Stamatiades, Assistant Director, and Jehan Chase,
    Pawnee A. Davis, Mary Evans, Charles Fox, Suzanne Heimbach, LaKeshia
    Allen Horner, Natalie Maddox, Paul Middleton, Ed Nannenhorn, Sabine
    Paul, Amy Radovich, Mark Ryan, Erinn L. Sauer, Cynthia Saunders, and
    Tamara Stenzel.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    James R. McTigue, Jr.,
    Director, Tax Issues
    Strategic Issues.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    James R. White,
    Director, Tax Issues
    Strategic Issues.

    Enclosure--1

                           ENCLOSURE: BRIEFING SLIDES

        Internal Revenue Service: Absorbing Budget Cuts Has Resulted in
              Significant Staffing Declines and Uneven Performance

                     Prepared for Congressional Committees

                                 April 10, 2014

                            (Updated April 18, 2014)

                                   objectives
        Our objectives are to provide interim information on the Internal
    Review Service's (IRS) fiscal year 2015 budget request and its 2014
    filing season performance. This briefing:

      --analyzes IRS funding, staffing, and performance trends for fiscal
            years 2009 through 2014, including an assessment of IRS's 2014
            filing season to date;
      --describes IRS's fiscal year 2015 budget request and workload; and
      --describes IRS's actions to absorb budget cuts and cites
            opportunities that could help IRS more strategically manage
            operations.
                             scope and methodology
      --To analyze funding, staffing, and performance trends, including the
            2014 filing season, we summarized the President's budgets and
            IRS's congressional justifications (CJ) from fiscal years 2009
            through 2014, and interviewed IRS officials in the Office of
            the Chief Financial Officer (CFO); analyzed IRS data including
            full-time equivalents (FTE) and performance data for key IRS
            operations; and interviewed IRS officials and other
            stakeholders such as representatives from tax preparation firms
            on filing season performance and challenges.
      --To describe IRS's fiscal year 2015 budget request and workloads, we
            reviewed the fiscal year 2015 CJ and other budget documents;
            analyzed FTE data on IRS identified priority programs; and
            interviewed officials from IRS's Offices of Corporate Budget
            and the National Taxpayer Advocate.
      --To describe IRS's actions to absorb budget cuts and cite
            opportunities for IRS to more strategically manage operations,
            we reviewed Office of Management and Budget (OMB) and
            Department of Treasury guidance on sequestration; interviewed
            officials from IRS's Office of the CFO and Information
            Technology organization; and reviewed our prior work.
        We conducted this performance audit from January to April 2014 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 interviewed
    IRS officials and determined that the data presented in this briefing
    were sufficiently reliable for our purposes.
                                results in brief
      --IRS's appropriations have declined to below fiscal year 2009
            levels. IRS FTEs have been reduced by about 8,000 FTEs since
            fiscal year 2009. Performance in enforcement and taxpayer
            service has decreased or fluctuated. IRS is providing a better
            level of telephone service in 2014 amidst lower demand.
      --Not including other budgetary resources such as user fees, the
            fiscal year 2015 budget request for IRS is $12.5 billion, which
            is an increase of 10.5 percent ($1.2 billion) in funding and
            8.3 percent in staffing (6.998 FTEs) over fiscal year 2014.
            IRS's workload is dedicated to legislative mandates and
            priority programs.
      --IRS has absorbed budget cuts through savings and efficiencies and
            by reducing, delaying, and eliminating some services. To
            improve operations, IRS has requested a large budget increase
            for 2015. However, additional funding is not the only solution
            for IRS. We have open recommendations that may help IRS to more
            effectively manage its operations and achieve some savings over
            time.
    funding trends: irs's appropriations have declined to below fiscal year
                                  2009 levels

         Figure 1: IRS's Appropriations, Fiscal Years 2009 Through 2014

                             (Dollars in Millions)
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Legend: FY = fiscal year.
        Source: Fiscal years 2009 through 2014 congressional justification
    for IRS.
        Notes: The fiscal year 2013 levels represent an across the board
    rescission and reductions required by sequestration. In fiscal year
    2014, IRS received $92 million for the improvement of services to
    taxpayers, refund fraud and identity theft, and international and
    offshore compliance issues. The operating plan, which has not been
    approved as of April 11, 2014, proposes allocating $34 million to
    Taxpayer Services and $58 million to Operations Support. In addition,
    IRS has proposed to transfer $69.2 million from Enforcement to
    Operations Support for information technology infrastructure ($40
    million) and a program reclassification ($29.2 million). Amounts shown
    do not include other budgetary resources, such as user fees.
        See appendix I for more information on IRS budget trends, including
    other budgetary resources.
    staffing trends: irs has reduced ftes by about 8,000 (9 percent) since
                                fiscal year 2009

           Figure 2: IRS Full-Time Equivalents (FTE) Funded Through
     Appropriations, Fiscal Years 2009 Through 2013 Actual and Fiscal Year
                                  2014 Enacted
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Legend: FY = fiscal year.
        Source: Fiscal years 2009 through 2014 congressional justification
    for IRS.
        Notes: The fiscal year 2013 level represents an across-the-board
    rescission and reductions required by sequestration. In fiscal year
    2014, IRS received $92 million for the improvement of services to
    taxpayers, refund fraud and identity theft, and international and
    offshore compliance issues. The operating plan, which has not been
    approved as of April 11, 2014, proposes allocating $34 million to
    Taxpayer Services and $58 million to Operations Support. In addition,
    IRS has proposed to transfer $69.2 million from Enforcement to
    Operations Support for information technology infrastructure ($40
    million) and a program reclassification ($29.2 million). Amounts shown
    do not include FTEs funded with other budgetary resources, such as user
    fees.
        See appendix II for more information on IRS budget trends,
    including other budgetary resources.
    performance trends: return examination and collection coverage measures
                                  show decline

      Figure 3: IRS Return Examination and Collection Coverage Measures,
      Fiscal Years 2009 Through 2013 Actual and Fiscal Year 2014 and 2015
                                    Targets
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of fiscal years 2009 through 2014
    congressional justification for IRS.
        For more information on coverage measures, see appendix III.
      performance trends: electronic filing continues to increase in 2014

                     Table 1: Tax Returns Processed, 2009 Through 2014 Filing Seasons (in Thousands)
    ----------------------------------------------------------------------------------------------------------------
                                                                                                          Percentage
                                                                                                            change
                                           2009       2010       2011       2012       2013       2014     from 2013
                                                                                                            to 2014
    ----------------------------------------------------------------------------------------------------------------
    Number of individual tax returns     89,215     85,210     87,595     96,556     93,103     98,170           5.4
     processed........................
        Electronic....................   70,705     71,153     76,664     85,904     84,443     90,333           7
        Paper.........................   18,510     14,057     10,932     10,653      8,660      7,837          -9.5
    Percentage electronically filed          79.3       83.5       87.5       89.0       90.7       92.0       n/a
     \a\..............................
    Free File \b\.....................    2,416      2,498      2,344      2,431      2,337      2,573          10.1

    Number of refunds issued                 77.7       74.1       75.2       80.4       77.8       78.8         1.2
     (millions).......................
    Amount of refunds (billions)......     $210.2     $219.4     $219.8     $224.7     $214.5     $219.9         2.5
    ----------------------------------------------------------------------------------------------------------------
    Legend: n/a = not applicable.
    Source: GAO analysis of IRS data.
    Notes: Unless otherwise noted, data are from January 1 of each year through April 3, 2009; April 2, 2010; April
      1, 2011; April 6, 2012; April 5, 2013; and April 4, 2014. Numbers may not add due to rounding.
    \a\ The percentage of returns filed electronically early in the filing season is likely to decline before the
      filing season is over. Taxpayers filed about 84 percent of all individual returns electronically in 2013. The
      numbers for electronic filing that we are reporting are for returns processed versus returns received.
    \b\ IRS offers Free File software for eligible taxpayers to prepare and e-file their federal tax returns online
      for free at IRS.gov. Free File 2013 and 2014 data are from January 1 through April 8, 2013 and April 7, 2014.

     performance trends: irs is providing better telephone service in 2014
       amidst lower demand which irs attributes in part to fewer tax law
                                    changes

      Table 2: Interim IRS Call Volume, Level of Service, and Average Wait Times, 2009 Through 2014 Filing Seasons
    ----------------------------------------------------------------------------------------------------------------
                                                Interim Filing Season \a\                Truncated Interim Filing
                                   --------------------------------------------------             Season
                                                                                     -------------------------------
                                                                                                             Percent
                                                                                                             change
                                                                                         2013       2014      from
                                      2009      2010      2011      2012      2013      (March     (March     March
                                                                                         16)        15)      2013 to
                                                                                                              March
                                                                                                            2014 \b\
    ----------------------------------------------------------------------------------------------------------------
      CALL VOLUME (IN MILLIONS)

    Total calls to IRS \c\........      52.4      48.7      53.3      65.1      59.0       51.1       39.6      -23
        Automated calls answered..      19.6      23.1      26.8      36.4      32.4       28.7       21.5      -25
        Assistor answered calls...      14.9      12.6      12.8      10.6      11.2        9.3        6.7      -28
        Abandoned, busies, and          17.9      13.0      13.7      18.1      15.4       13.1       11.5      -13
         disconnects..............

        ACCESS MEASURES

    Level of Service (LOS)--            64        75        75        68        69         69         73          7
     Percentage of callers seeking
     live assistance who receive
     it...........................
    Average wait time (in minutes)       8.8       9.9       9.7      15.9      13.8       13.7       12.4       -9
    ----------------------------------------------------------------------------------------------------------------
    Source: GAO analysis of IRS data.
    \a\ Unless otherewise noted, data for filing season to date are cumulative for IRS from January 1 of each year
      to April 4, 2009; April 3, 2010; April 2, 2011; March 31, 2012; and March 30, 2013. Because of time lags in
      data reporting, to compare this year to last, we used data from January 1 of each year to March 16, 2013, and
      March 15, 2014, for the truncated interim filing season column.
    \b\ The numbers in the table are rounded, but the percent change was calculated using exact values.
    \c\ The numbers in the table include the total automated, assistor answered, abandoned, busy and disconnected
      account calls, taxpayer account-related and tax law calls, but do not reflect the total number of attempted
      calls to IRS, nor do they represent total call volume to all IRS functions such as enforcement.

     performance trends: irs is providing better telephone service in 2014
       amidst lower demand which irs attributes in part to fewer tax law
                              changes (continued)

           Table 3: IRS Key Telephone Actual Performance Compared to its Goals, Fiscal Years 2009 Through 2014
    ----------------------------------------------------------------------------------------------------------------
                                                               Fiscal Year (October 1 through September 30) \a\
                                                         -----------------------------------------------------------
                                                            2009      2010      2011      2012      2013      2014
    ----------------------------------------------------------------------------------------------------------------
    Level of Service (LOS)--Percentage of         Goal    \b\ 77        71        71        61        70        61
     callers seeking live assistance who
     receive it............................
                                                Actual        70        74        70        68        61    \c\ 67

    Average wait time (in minutes).........       Goal        10.4      11.6      11.6      19        14.6      22.0
                                                Actual         8.8      10.8      13.0      16.7      17.6  \c\ 16.8
    ----------------------------------------------------------------------------------------------------------------
    Source: GAO analysis of IRS data.
    \a\ Unless otherwise noted, the goals listed are for the entire fiscal year.
    \b\ IRS revised its original fiscal year goal of 77 percent down to 70 percent because of high call volume from
      taxpayers requesting electronic filing authentication information and asking stimulus-related questions.
    \c\ Unlike the level of service and wait time information reported in Table 2 for 2014, which is from January 1
      through March 15, 2014, the corresponding data shown for 2014 in this table are fiscal year to date--October
      1, 2013, through March 15, 2014.

        performance trends: irs continues to answer more automated than
                        assistor answered calls in 2014

            (Note: Data for Figure 4 is in chart and table format.)

       Figure 4: IRS Call Volume (in millions), 2009 Through 2014 Filing
                                    Seasons
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.
        Notes: Unless otherwise noted, data are cumulative for IRS from
    January 1 of each year to April 4, 2009; April 3, 2010: April 2, 2011;
    March 31, 2012; and March 30, 2013. For 2014, data are from January 1
    through March 15, 2014. The numbers in the graphic include the total
    automated, assistor answered, abandoned, busy and disconnected taxpayer
    account-related and tax law calls, but do not reflect the total number
    of attempted calls to IRS, nor do they represent total call volume to
    all IRS functions such as enforcement.

    ----------------------------------------------------------------------------------------------------------------
                                                                                                       Abandoned,
                      Year                     Total calls to    Automated calls      Assistor         busies, and
                                                     IRS            answered       answered calls      disconnects
    ----------------------------------------------------------------------------------------------------------------
    IRS has reported that answering calls using automation is substantially less expensive than using live
     assistors, which IRS estimated costs $33 per call in 2013......................................................
    ----------------------------------------------------------------------------------------------------------------
    2009....................................              52.4              19.6              14.9              17.9
    2010....................................              48.7              23.1              12.6              13
    2011....................................              53.3              26.8              12.8              13.7
    2012....................................              65.1              36.4              10.6              18.1
    2013....................................              59.0              32.4              11.2              15.4
    2014 (March 15).........................              39.6              21.5               6.7              11.5
    ----------------------------------------------------------------------------------------------------------------

     performance trends: average wait times have generally increased since
                                      2009

            (Note: Data for Figure 5 is in chart and table format.)

      Figure 5: Average Wait Time (in minutes), Fiscal Years 2009 Through
                                      2014
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Legend: FY = fiscal year.
        Source: GAO analysis of IRS data.
        Notes: Unless otherwise noted, data are cumulative for IRS from
    January 1 of each year to April 4, 2009; April 3, 2010; April 2, 2011;
    March 31, 2012; and March 30, 2013. For 2014, data are from January 1
    through March 15, 2014.

    ----------------------------------------------------------------------------------------------------------------
                                                                                     Fiscal year      Filing season
                            Fiscal year                         Fiscal year goal       actual            actual
    ----------------------------------------------------------------------------------------------------------------
    2009......................................................              10.4               8.8               8.8
    2010......................................................              11.6              10.8               9.9
    2011......................................................              11.6              13.0               9.7
    2012......................................................              19                16.7              15.9
    2013......................................................              14.6              17.6              13.8
    2014 (March 15)...........................................              22                16.8              12.4
    ----------------------------------------------------------------------------------------------------------------

    performance trends: overage correspondence has increased significantly
                                   since 2009

            (Note: Data for Figure 6 is in chart and table format.)

     Figure 6: IRS Taxpayer Correspondence Performance, Fiscal Years 2009
                                  Through 2013
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.
        Notes: Aggregate data are from two IRS units that jointly handle
    taxpayer correspondence. The same employees that provide telephone
    service are also responsible for responding to correspondence from
    taxpayers. Data cover equivalent periods for each fiscal year with
    slight variation in the exact dates depending on the year and data
    source.

    ------------------------------------------------------------------------
                                                               Percentage of
                                              Correspondence     taxpayer
                                                 received     correspondence
                   Fiscal year                  during the    overage at the
                                                fiscal year     end of the
                                               (in millions)    fiscal year
    ------------------------------------------------------------------------
    Overage correspondence is paper correspondence that IRS has not
     responded to within 45 days of receipt. This figure shows data for two
     IRS units that handle correspondence...................................
    ------------------------------------------------------------------------
    2009....................................              19              25
    2010....................................              20              27
    2011....................................              20              35
    2012....................................              21              40
    2013....................................              21              47
    ------------------------------------------------------------------------

         fiscal year 2015 request: irs is requesting $12.5 billion in
    appropriations, an increase of 10.5 percent ($1.2 billion) over fiscal
                                   year 2014

     Figure 7: IRS Enacted Appropriations, Fiscal Year 2009 through 2014,
                          and Fiscal Year 2015 Request

                             (Dollars in millions)
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Legend: FY = fiscal year.
        Source: Fiscal years 2009 through 2015 congressional justifications
    for IRS.
        Notes: Fiscal year 2013 levels represent an across-the-board
    rescission and reductions required by sequestration. In fiscal year
    2014, IRS received $92 million for the improvement of services to
    taxpayers, refund fraud and identity theft, and international and
    offshore compliance issues. The operating plan, which has not been
    approved as of April 11, 2014, proposes allocating $34 million to
    Taxpayer Services and $58 million to Operations Support. In addition,
    IRS has proposed to transfer $69.2 million from Enforcement to
    Operations Support for information technology infrastructure ($40
    million) and a program reclassification ($29.2 million). Amounts shown
    do not include other budgetary resources, such as user fees.
        See appendix I for more information on the fiscal year 2015 budget
    request for IRS, including other budgetary resources.
      fiscal year 2015 request: irs's largest requested increase is $658
                       million for operations support \1\

            (Note: Data for Figure 8 is in chart and table format.)

    Figure 8: Fiscal Year 2015 Budget Request by Appropriation Compared to
                 Fiscal Year 2014 Enacted Appropriation for IRS
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Legend: FY = fiscal year.
        Source: Fiscal years 2014 through 2015 congressional justifications
    for IRS.
        Notes: Request includes 22 program initiatives totaling more than
    $1.1 billion (see appendixes IV through VIII). Amounts shown do not
    include other budgetary resources, such as user fees.
        \1\ Operations Support includes IRS's information systems and
    overall planning, direction, and support for the IRS.
        See appendix I for more information on IRS budget trends, including
    other budgetary resources.

                              (Dollars in millions)
    ------------------------------------------------------------------------
                                          Fiscal year 2015  Fiscal year 2014
                                              requested          enacted
    ------------------------------------------------------------------------
    Taxpayer Services...................           2,318             2,157
    Enforcement.........................           5,372             5,022
    Operations Support..................           4,457             3,799
    Business Systems Modernization......             330               313
                                         -----------------------------------
          Totals........................          12,477            11,291
    ------------------------------------------------------------------------

      fiscal year 2015 request: irs proposed increasing staffing to about
                            fiscal year 2012 levels

      Figure 9: IRS Full-Time Equivalents Funded Through Appropriations,
     Fiscal Years 2009 Through 2013 Actual, 2014 Enacted, and 2015 Request
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Legend: FY = fiscal year. FTE = full-time equivalent.
        Source: Fiscal years 2009 through 2015 congressional justification
    for IRS.
        Notes: Fiscal year 2013 levels represent the across-the-board
    rescission and reductions required by sequestration. In fiscal year
    2014, IRS received $92 million for the improvement of services to
    taxpayers, refund fraud and identity theft, and international and
    offshore compliance issues. The operating plan, which has not been
    approved as of April 11, 2014, proposes allocating $34 million to
    Taxpayer Services and $58 million to Operations Support. In addition,
    IRS has proposed to transfer $69.2 million from Enforcement to
    Operations Support for information technology infrastructure ($40
    million) and a program reclassification ($29.2 million). Amounts shown
    do not include FTEs funded with other budgetary resources, such as user
    fees. The FY 2015 initiatives were developed with most FTE costed
    assuming a January 1 hire date.
        See sppendix II for more information for FTEs in the Fiscal Year
    2015 budget request for IRS, including other budgetary resources.
    fiscal year 2015 request: the largest staffing increase is about 3,000
                              ftes for enforcement

            (Note: Data for Figure 10 is in chart and table format.)

     Figure 10: Fiscal Year 2015 Full-Time Equivalents, Budget Request by
     Appropriation Compared to Fiscal Year 2014 Enacted Appropriation for
                                      IRS
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Legend: FY = fiscal year.
        Source: Fiscal years 2015 congressional justification for IRS.
        Notes: The FY 2015 initiatives were developed with most FTE costed
    assuming a January 1 hire data.
        See appendix II for more information on FTEs in the fiscal year
    2015 budget request for IRS, including other budgetary resources.

    ------------------------------------------------------------------------
                                          Fiscal year 2015  Fiscal year 2014
                                              requested          enacted
    ------------------------------------------------------------------------
    Taxpayer Services...................          31,481            28,996
    Enforcement.........................          45,757            42,805
    Operations Support..................          13,380            11,860
    Business Systems Modernization......             569               528
                                         -----------------------------------
          Totals........................          91,187            84,189
    ------------------------------------------------------------------------

    workload: staff dedicated to legislative mandates and priority programs

       Table 4: Full-Time Equivalents to Implement New Laws and Priority Programs, Fiscal Years 2013 Actual, 2014
                                               Planned, and 2015 Requested
    ----------------------------------------------------------------------------------------------------------------
                                                                                                        Fiscal year
                  Legislative Mandate/Priority Program                  Fiscal year     Fiscal year   2015 requested
                                                                        2013 actual    2014 enacted         \a\
    ----------------------------------------------------------------------------------------------------------------
    Refund fraud including identity theft...........................           4,146           4,146           4,603
    International and offshore tax administration...................           2,135           1,819           2,151
    Patient Protection and Affordable Care Act \b\..................             701       \c\ 1,954           2,046
    Merchant card/cost basis reporting \d,e\........................              90             128             450
    Foreign Account Tax Compliance Act \f\..........................              40              50             394
    Return Review Program/Electronic Fraud Detection System.........             104             137             137
    Return preparer oversight.......................................             167              80             186
                                                                     -----------------------------------------------
          Total FTEs................................................           7,383           8,314           9,967
    ----------------------------------------------------------------------------------------------------------------
    Legend: FY = fiscal year. FTE = full-time equivalent.
    Source: IRS Office of Corporate Budget.
    Notes: \a\ The FY 2015 initiatives were developed with most FTE costed assuming a January 1 hire date. \b\
      PPACA, Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by the Health Care and Education
      Reconciliation Act (HCERA), Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30, 2010). All references to PPACA
      include amendments by HCERA.
    \c\ According to IRS officials, this reflects the number of FTEs requested in the Fiscal Year 2014 President's
      Budget.
    \d\ Housing Assistance Tax Act of 2008, Pub. L. No. 110-289, div. C, Sec.  3091, 122 Stat. 2654, 2908-2911 (July
      30, 2008).
    \e\ Energy Improvement and Extension Act of 2008, Pub. L. No. 110-343, div. B, Sec.  403, 122 Stat. 3765, 3854-
      3860 (Oct. 3, 2008).
    \f\ Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, Title V, 124 Stat. 71, 97-117 (Mar. 18,
      2010).
    See eppendices IX and X for more information on PPACA spending.

       absorbing cuts: reductions to irs's budget greater than projected
                                    savings

            (Note: Data for Figure 11 is in chart and table format.)

      --IRS has absorbed approximately $900 million in budget cuts since
            fiscal year 2010.

     Figure 11: IRS Projected and Actual Savings and Efficiencies, Fiscal
                           Year 2009 Through 2015 \a\
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Legend: FY = fiscal year.
        Source: GAO analysis of fiscal year 2009 through fiscal year 2015
    IRS congressional justifications for the IRS.
        Note: \a\ IRS began calculating actual savings and efficiencies in
    fiscal year 2012, based on our recommendation.

                                                 (Dollars in thousands)
    ----------------------------------------------------------------------------------------------------------------
                                                                         Actual Budget
                              Fiscal Year                           Reductions, Savings and   Projected Savings and
                                                                          Efficiencies             Efficiencies
    ----------------------------------------------------------------------------------------------------------------
    2015..........................................................                       --                   95,200
    2014..........................................................                       --                  254,864
    2013..........................................................                  586,382                   70,850
    2012..........................................................                  426,013                  189,957
    2011..........................................................                  277,178                  190,638
    2010..........................................................                  176,425                  118,125
    2009..........................................................                       --                   94,249
    ----------------------------------------------------------------------------------------------------------------

        absorbing cuts: irs reduced or eliminated some services in 2014
        In 2014, IRS reduced or eliminated services, consistent with our
    finding in December 2012 that IRS needed to dramatically revise its
    strategy for providing telephone and correspondence services, and that
    incremental efficiency gains would not be enough to reverse service
    declines. IRS:

      --limited inquiries to answer only basic tax law questions during the
            filing season and reassigned assistors to work account-related
            inquires;
      --launched the ``Get Transcript'' tool, which allows taxpayers to
            obtain a viewable and printable transcript on www.irs.gov, and
            redirected taxpayers to automated tools for additional
            guidance;
      --redirected refund-related inquiries to automated services and did
            not answer refund inquires until 21 days after the tax return
            was filed electronically or 6 weeks after the return was filed
            by paper (unless the automated service directed the taxpayer to
            contact IRS);
      --limited access to the Practitioner Priority Services line to only
            those practitioners working tax account issues;
      --limited live assistance and redirected requests for domestic
            employer identification numbers to IRS's online tool; and
      --eliminated free return preparation and reduced other services at
            IRS's walk-in sites.
     absorbing cuts: irs has delayed two it projects in part due to budget
                                   reductions
        IRS put two major IT projects, Information Reporting and Document
    Matching (IRDM) and the Return Review Program (RRP), on hold due to a
    lack of funding and technical issues (See appendix XI).\1\

      --During the hold, IRS will determine the best case management tool
            to use to meet IRDM's program requirements. It plans to
            leverage an off-the-shelf solution because IRS believes it will
            be more cost effective than building one.
      --IRS initially planned to release all of RRP by March 2015. The
            first phase, Transition State 1.0 (TS1), was split into two
            releases: R1.0 and R1.1. Testing of TS1 R1.0 has been ongoing,
            and will continue for the remainder of the calendar year. IRS
            put the next two phases, TS1.5 and TS2.0 on hold until it has
            analyzed and resolved how to design RRP's architecture more
            efficiently.
        --IRS is working to develop a plan to move beyond the hold on RRP,
                and expects to complete the plan in the summer of 2014, and
                will initiate the plan after that time. Moving forward,
                this plan will help inform IRS's funding needs for RRP.
    ----------
        \1\ Information Reporting and Document Matching (IRDM): IRDM is
    intended to be used to improve business taxpayer compliance by matching
    business information (e.g., 1099-K) tax returns with individual tax
    returns to identify potential income under reporting. Return Review
    Program (RRP): When RRP is fully deployed it is expected to make use of
    leading-edge technology to detect, resolve, and prevent fraud.
          absorbing cuts: irs substantially reduced employee training
      --According to IRS Commissioner Koskinen, since 2010 IRS has reduced
            training costs by 83 percent and training-related travel costs
            by 87 percent by limiting employee travel and training to
            mission-critical projects.
      --For fiscal year 2013, IRS reported a savings of $56.2 million by
            reducing agency-wide, non-technical training and non-case
            related travel.
      --In its fiscal year 2013 Report to Congress, the National Taxpayer
            Advocate lists training cuts as one of IRS's most serious
            problems. From fiscal years 2009 through 2013, per-employee
            spending dropped from $1,450 per full-time equivalent to less
            than $250.

      Table 5: Percentage of Training Reduction for Selected IRS Divisions,
                         Fiscal Years 2009 Through 2013
    ------------------------------------------------------------------------
                        Division                        Percent reduction
    ------------------------------------------------------------------------
    Appeals........................................                       96
    Tax Exempt and Government Entities.............                       96
    Small Business/Self-Employed...................                       93
    Large Business and International...............                       92
    Taxpayer Advocate Service......................                       78
    Wage and Investment............................                       74
    ------------------------------------------------------------------------
    Source: National Taxpayer Advocate: 2013 Annual Report to Congress,
      Volume I, (Dec. 31, 2013).

          opportunities exist to more strategically manage operations
        Funding is one component of improving operations. Legislative
    proposals and our prior work provide options to improve IRS operations
    (see appendixes XII and XIII). For example, the administration proposes
    legislative changes such as providing IRS with greater flexibility to
    address correctable errors (broaden math error authority).

        In addition, we recommended that IRS:

      --outline a strategy that defines appropriate levels of telephone and
            correspondence service and wait times and lists specific steps
            to manage service based on an assessment of time frames,
            demand, capabilities, and resources (GAO-13-156).\1\ IRS did
            not agree or disagree with this recommendation, stating that it
            already had an objective of providing taxpayers with access to
            accurate services while managing demand by improving
            efficiency. However, in recent years, because IRS has not kept
            up with the demand for its services we maintain our
            recommendation is valid; a strategy to reverse the trends may
            require difficult tradeoffs.
      --review disparities in the ratios of direct revenue yield to costs
            across different enforcement programs and across different
            groups of cases within programs and determine whether this
            evidence provides a basis for adjusting IRS's allocation of
            enforcement resources each year. We noted that the better
            empirical basis IRS planners have for making such judgments,
            the more confident they can be that they are allocating their
            limited resources to the best effect (GAO-13-151).\2\ IRS
            agreed with our recommendation. Given the time to develop
            additional key data, IRS is considering how to apply interim
            methods, findings, or approximations. They are unsure when this
            work will be completed; we believe our recommendation remains
            valid.
      --develop a long-term strategic plan for its web services. We noted
            that a long-term strategy could help managers have a common
            understanding of IRS's plans, and better assist Congress in
            understanding what it is being asked to fund and holding IRS
            accountable for progress (GAO-13-435).\3\ In April 2014, IRS
            reported that a long-term online strategy for improving web
            services will be completed in February 2015.
    ----------
    ---------------------------------------------------------------------------
        \1\ GAO, 2012 Tax Filing: IRS Faces Challenges Providing Service to
    Taxpayers and Could Collect Balances Due More Effectively, GAO-13-156
    (Washington, D.C.: Dec. 18, 2012).
        \2\ GAO, Tax Gap: IRS Could Significantly Increase Revenues by
    Better Targeting Enforcement Resources, GAO-13-151 (Washington, D.C.:
    Dec. 5, 2012).
        \3\ GAO, IRS Website: Long-Term Strategy Needed to Improve
    Interactive Services, GAO-13-435 (Washington, D.C.: Apr. 16, 2013).
    ---------------------------------------------------------------------------
                            concluding observations
        IRS has absorbed budget cuts since fiscal year 2010, and the
    resulting imbalance between service and demand has adversely affected
    operations. To address this imbalance, IRS has requested a large budget
    increase for 2015. However, additional funding is not the only solution
    for IRS. We have open recommendations that may help IRS to more
    effectively manage its operations and achieve some savings over time.
    appendix i: dollars by appropriation account, fiscal years 2009 through
                                      2015

                      Table 6: Fiscal Years 2009 Through 2014 Enacted and Fiscal Year 2015 Budget Request for IRS by Appropriation Account
                                                                      (Dollars in Millions)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                     Dollar
                                                                                                                                     change       Percent
                                                                                                                                  fiscal year  change fiscal
                                                          Fiscal   Fiscal   Fiscal   Fiscal  Fiscal year  Fiscal year    Fiscal       2014       year 2014
                   Appropriation account                   year     year     year     year       2013         2014     year 2015    enacted       enacted
                                                           2009     2010     2011     2012   enacted \a\  enacted \b\  requested  compared to   compared to
                                                         enacted  enacted  enacted  enacted                                       fiscal year   fiscal year
                                                                                                                                      2015          2015
                                                                                                                                   requested     requested
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Enforcement........................................    5,117    5,504    5,493    5,299       4,949        5,022       5,372          350            7.0
    Operations support.................................    3,867    4,084    4,057    3,947       3,801        3,799       4,457          658           17.3
    Taxpayer services..................................    2,293    2,279    2,293    2,240       2,136        2,157       2,318          161            7.5
    Business Systems Modernizaton......................      230      264      263      330         313          313         330           17            5.5
    Health Insurance Tax Credit Administration (HITCA)        15       16       15        0           0            0           0            0            0
     \c\...............................................
                                                        ----------------------------------------------------------------------------------------------------
        Subtotal.......................................   11,523   12,146   12,122   11,817      11,199       11,291      12,477        1,186           10.5
    Other resources, such as user fees.................      390      539      655      695         855          815         785          -30           -3.7
                                                        ----------------------------------------------------------------------------------------------------
        Total funding available for obligations........   11,913   12,686   12,777   12,512      12,053       12,106      13,261        1,156            9.6
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Legend: FY = fiscal year.
    Source: Fiscal years 2011 through 2015 congressional justifications for IRS.
    Notes: Dollars are nominal and not adjusted for inflation, and numbers may not add due to rounding.
    \a\ Fiscal year 2013 enacted represents the operating level after applying across-the-board rescisson and reductions required by sequestration and an
      interappropriation transfer of $73 million transferred from the Enforcement appropriation to the Taxpayer Services ($13 million) and Operations
      Support ($60 million) appropriations.
    \b\ In fiscal year 2014, IRS received $92 million for the improvement of services to taxpayers, refund fraud and identity theft, and international and
      offshore compliance issues. The operating plan, which has not been approved as of April 11, 2014, proposes allocating $34 million to Taxpayer Services
      and $58 million to Operations Support. In addition, IRS has proposed to transfer $69.2 million from Enforcement to Operations Support for information
      technology infrastructure ($40 million) and a program reclassification ($29.2 million).
    \c\ In fiscal year 2012, administrative resources for HITCA were moved to the Taxpayer Services appropriation under the Consolidated Appropriations Act,
      2012, Pub. L. No. 112-74, 125 Stat. 786 (Dec. 23, 2011).

       appendix ii: staffing by appropriation account, fiscal years 2009
                                  through 2015

                 Table 7: Fiscal Years 2009 Through 2013 Actual, 2014 Enacted, and 2015 Requested Full-time Equivalents by Appropriation Account
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                   FTE change     Percent
                                                                                                                                  fiscal year  change fiscal
                                                       Fiscal   Fiscal   Fiscal   Fiscal                                              2014       year 2014
                                                        year     year     year     year     Fiscal    Fiscal year   Fiscal year     enacted       enacted
                  Appropriation account                 2009     2010     2011     2012    year 2013      2014          2015      compared to   compared to
                                                       actual   actual   actual   actual  actual \a\  enacted \b\  requested \c\  fiscal year   fiscal year
                                                                                                                                      2015          2015
                                                                                                                                   requested     requested
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Enforcement.....................................   47,361   50,400   49,920   47,189     44,174       42,805        45,757          2,952            6.9
    Operations support..............................   12,101   12,262   12,103   11,499     11,610       11,860        13,380          1,520           12.8
    Taxpayer services...............................   32,422   31,607   31,574   30,236     29,646       28,996        31,481          2,485            8.6
    Business Systems Modernizaton...................      322      337      309      562        451          528           569             41            7.8
    Health Insurance Tax Credit Administration             10       12        0        0          0            0             0              0            0
     (HITCA) \d\....................................
                                                     -------------------------------------------------------------------------------------------------------
        Subtotal....................................   92,216   94,618   93,906   89,486     85,881       84,189        91,187          6,998            8.3
    Other resources, such as user fees..............    1,153      752    1,003    2,185      1,884        1,503         1,503              0            0
                                                     -------------------------------------------------------------------------------------------------------
        Total.......................................   93,369   95,370   94,909   91,671     87,765       85,692        92,690          6,998            8.2
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Legend: FY = fiscal year.
    Source: Fiscal years 2011 through 2014 congressional justifications for IRS.
    Notes: \a\ Fiscal year 2013 actual represents the operating level after applying across-the-board rescission and reductions required by sequestration
      and an interappropriation transfer of $73 million transferred from the Enforcement appropriation to the Taxpayer Services ($13 million) and Operations
      Support ($60 million) appropriations.
    \b\ In fiscal year 2014, IRS received $92 million for the improvement of services to taxpayers, refund fraud and identity theft, and international and
      offshore compliance issues. The operating plan, which has not been approved as of April 11, 2014, proposes allocating $34 million to Taxpayer Services
      and $58 million to Operations Support. In addition, IRS has proposed to transfer $69.2 million from Enforcement to Operations Support for information
      technology infrastructure ($40 million) and a program reclassification ($29.2 million).
    \c\ The fiscal year 2015 initiatives were developed with most FTE costed assuming a January 1 hire date.
    \d\ The administrative resources for HITCA were moved to the Taxpayer Services appropriation under the Consolidated Appropriations Act, 2012, Pub. L.
      No. 112-74, 125 Stat. 786 (Dec. 23, 2011).

    appendix iii: irs adjusted enforcement coverage and efficiency targets
                                    downward

       Table 8: IRS Enforcement Coverage Measures Fiscal Years 2009 Through 2013 Actual and 2014 and 2015 Targets
    ----------------------------------------------------------------------------------------------------------------
                                                                                                 Fiscal
                                   Fiscal    Fiscal    Fiscal    Fiscal    Fiscal     Fiscal      year
                                    year      year      year      year      year     year 2014    2014      Fiscal
                                    2009      2010      2011      2012      2013    target \a\   target    year 2015
                                   actual    actual    actual    actual    actual   (Original)   (March   target \b\
                                                                                                  2014)
    ----------------------------------------------------------------------------------------------------------------
    Selected Examination Measures...................................................................................
    ----------------------------------------------------------------------------------------------------------------
    Examination Coverage--            1.0%      1.1%      1.1%      1.0%      1.0%       1.0%       0.8%       0.8%
     Individual.................
    Examination Efficiency--           138       140       139       142       142        145        133        124
     Individual.................
    Examination Coverage              5.6%      5.7%      6.2%      6.2%      5.6%       4.9%       4.2%       4.1%
     Business (Assets > 10 mil).
    Automated Underreporter           2.6%      3.0%      3.3%      3.2%      2.8%       3.1%       2.5%       2.7%
     Coverage...................
    Automated Underreporter          1,905     1,924     2,007     2,041     2,025      2,001      1,931      1,950
     Efficiency.................
    ----------------------------------------------------------------------------------------------------------------
    Selected Collections Measures...................................................................................
    ----------------------------------------------------------------------------------------------------------------
    Collection Coverage.........     54.2%     50.1%     50.0%     48.1%     47.0%      47.1%      42,7%      45.0%
    Collection Efficiency.......     1,845     1,822     1,952     1,997     2,057      2,039      2,007      1,900
    Automated Collection System      94.3%     95.9%     94.9%     94.7%     94.4%      94.5%      94.0%      94.0%
     Accuracy...................
    ----------------------------------------------------------------------------------------------------------------
    Source: GAO analysis of fiscal years 2014 and 2015 congressional justifications for IRS.
    Notes: Coverage measures generally are the number of closed examinations by the number of filings for the prior
      year. Efficiency measures are generally the total number of cases closed divided by total full-time
      equivalents used. Automated Collection System Accuracy refers to the percent of taxpayers who received the
      correct answer to their question.
    \a\ The fiscal year 2014 target was based on the fiscal year 2014 budget request.
    \b\ The fiscal year 2015 target was based on the fiscal year 2015 budget request.

       appendix iv: of requested $1.2 billion for fiscal year 2015, $480
                   million predicated on a cap adjustment \1\
        The fiscal year 2015 request includes 22 new program initiatives--
    17 of which are predicated on a cap adjustment--with total requested
    funding of more than $1.1 billion.\2\ This includes:
      --13 for enforcement ($535 million),
      --6 for Infrastructure ($376 million),
      --1 for taxpayer service ($221 million), and
      --1 for BSM ($17 million).

     Figure 12: Funding Requested for New Initiatives Predicated on a Cap
                       Adjustment (Dollars in Thousands)
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of fiscal year 2015 congressional
    justification for IRS.
    ----------
        \1\ Congress passes cap adjustments to allow for additional funding
    above discretionary spending lists for certain activities.
        \2\ One of the new program initiatives predicated on a cap
    adjustment is a funding transfer to the Alcohol Tobacco Trade Bureau.
    appendix v: irs proposed 17 initiatives predicated on a cap adjustment
                             totaling $480 million

                                          Table 9: Funding Requested for New Initiatives Predicated on a Cap Adjustment
                                                                     (Dollars in Thousands)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Fiscal year 2015 funding requested, by
                                                                                     appropriation account                            Projected    Projected
                                                                      ---------------------------------------------------            Enforcement   Protected
                    Description of budget adjustments                                                                       Total      ROI for      Revenue
                                                                        Taxpayer               Operations     Business               fiscal year    ROI for
                                                                        services  Enforcement    support      Systems                    2017       fiscal
                                                                        account     account      account   Modernization                           year 2017
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Enforcement Initiatives.................................................................................................................................
    --------------------------------------------------------------------------------------------------------------------------------------------------------
        Address International and Offshore Compliance Issues.........         --      49.037        7,773           --       56,810         4.8           --
        Expand Coverage of High Wealth Individuals and Enterprises...         --      17,684        3,273           --       20,957        11.3           --
        Expand Audit Coverage........................................         --      53,581       44,198           --       97,779         7.1         20.5
        Enhance Collection Coverage..................................         --      41,692       25,070           --       66,762         8.5           --
        Improve Coverage of Partnerships and Flow-Through Entities...         --      28,690        7,849           --       36,539         6.8           --
        Expand Compliance Coverage in the Tax-Exempt Sector..........         --      13,364        2,731           --       16,095          --           --
        Pursue Fraud Referrals, Employment Tax, and Abusive Tax               --       9,275        8,537           --       17,812          --           --
         Schemes.....................................................
        Build Out Tax Return Preparer Compliance and Professional             --      14,765        2,772           --       17,537          --           --
         Responsibility Activities...................................
        Implement Information Technology (IT) Changes to Deliver the          --          --       32,223           --       32,223          --           --
         Foreign Account Tax Compliance Act (FATCA)..................
        Leverage Digital Evidence for Criminal Investigation.........         --         698        3,674           --        4,372          --           --
        Leverage Data to Improve Case Selection......................         --       4,052       32,741           --       36,793     \a\ 2.0           --
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Infrastructure Initiatives..............................................................................................................................
    --------------------------------------------------------------------------------------------------------------------------------------------------------
        Implement Information Technology (IT) Services...............         --          --       10,000           --       10,000          --           --
        Implement Campus Consolidation and Revitalization Strategy...         --          --       10,000           --       10,000          --           --
        Implement e-Government and Other Administration Priorities...         --          --       31,011           --       31,011          --           --
        Maintain Integrity of Revenue Financial Systems..............         --          --       12,136           --       12,136          --           --
        Expand Virtual Service Delivery (VSD)........................         --          --        7,701           --        7,701          --           --
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Alcohol and Tobacco Tax and Trade Bureau Program Integrity Transfer.....................................................................................
    --------------------------------------------------------------------------------------------------------------------------------------------------------
        Transfer to TTB for High-Return on Investment (ROI) Tax               --       5,000   ..........  .............      5,000          --           --
         Enforcement Activities......................................
                                                                      --------------------------------------------------------------------------------------
          Total Fiscal Year 2015 Cap Adjustment......................  .........    $237,838     $241,689  .............   $479,527         n/a           --
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Legend: n/a = not applicable. Note: Numbers may not add due to rounding.
    Source: Fiscal year 2015 congressional justification for IRS.
    Note: \a\ IRS considers leveraging data to improve case selection a revenue-enhancing initiative.

        appendix vi: five proposed initiatives for $654 million are not
                         predicated on a cap adjustment

                              Table 10: Funding Requested for New Initiatives Not Predicated on a Program Integrity Cap Adjustment
                                                                     (Dollars in Thousands)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Appropriation Account                                           Projected
                                                                   ----------------------------------------------------               Projected    protected
                                                                                                                                     enforcement    revenue
                   Description of budget adjustments                  Taxpayer               Operations     Business       Total     revenue ROI    ROI for
                                                                     services   Enforcement    support      Systems                   for fiscal    fiscal
                                                                      account     account      account   Modernization                year 2017    year 2017
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    New Initiatives...............................................    $167,382      $53,545    $417,780      $15,679       $654,386         n/a   ..........
      Improve Taxpayer Services and Return Processing.............     153,482           --      57,776           --        211,258          --           --
      Prevent Identity Theft and Refund Fraud.....................      13,900       16,971      34,005           --         64,876          --         22.4
      Continue Migration from Aging Tax Administration Systems--            --           --         829       15,679         16,508  ...........  ..........
       Enhance Online Services....................................
      Address Impact of Patient Protection and Affordable Care Act          --       36,574      19,525           --         56,099         2.3         14.0
       (PPACA) Statutory Requirements.............................
      Implement Information Technology (IT) Changes to Deliver Tax          --           --     305,645           --        305,645  ...........          --
       Credits and Other Requirements.............................
    Non-Recur Fiscal Year 2014 Additional Appropriation...........     -34,000           --     -58,000  .............      -92,000         n/a           --
      Maintaining Current Levels..................................      46,483      105,719      69,382        1,593        223,177         n/a           --
      Base Adjustment.............................................  ..........      -29,221      29,221  .............  ...........  ...........          --
      Savings and efficiencies, net reinvestment..................     -18,786      -18,233     -42,156  .............      -95,200         n/a           --
                                                                   -----------------------------------------------------------------------------------------
        Total Request Before Cap Adjustment.......................  $2,317,633   $5,133,988  $4,215,169     $330,210    $11,997,000         n/a           --
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Legend: n/a = not applicable. ROI = return on investment. FY = Fiscal Year.
    Source: Fiscal year 2015 congressional justification for IRS.
    Note: Numbers may not add due to rounding.

    appendix vii: irs continues to report actual return on investment (roi)
                      data for three enforcement programs

                                         Table 11: Actual Return on Investment (ROI) for Major IRS Enforcement Programs
                                                                      (Dollars in Millions)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Fiscal year 2010          Fiscal year 2011          Fiscal year 2012          Fiscal year 2013
                   Enforcement program               -------------------------------------------------------------------------------------------------------
                                                        Cost    Revenue   ROI     Cost    Revenue   ROI     Cost    Revenue   ROI     Cost    Revenue   ROI
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Examination.....................................   $4,371   $23,563    5.4   $4,333   $18,924    4.4   $4,232   $14,476    3.4   $3,965   $16,662    4.2
    Collection......................................    1,948    29,105   14.9    1,939    31,060   16.0    1,742    30,442   17.5    1,660    31,396   18.9
    Automated Underreporter.........................      262     4,924   18.8      270     5,245   19.4      267     5,269   19.7      258     5,287   20.5
                                                     -------------------------------------------------------------------------------------------------------
        IRS total...................................   $6,581   $57,592    8.8   $6,543   $55,229    8.4   $6,242   $50,187    8.0   $5,883   $53,345    9.1
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Source: Fiscal year 2015 congressional justification for IRS.
    Note: Numbers may not add due to rounding.

      --For the fiscal year 2015 congressional justification, IRS continued
            to calculate direct actual ROI for the Examination, Collection,
            and Automated Underreporter programs, but has not completed
            this calculation fro other programs or at lower levels.
      --IRS is not yet able to calculate average or marginal direct actual
            ROI of new enforcement program initiatives, but is in the
            process of completing a feasibility study to identify steps
            necessary to measure actual revenue and ROI for new enforcement
            initiatives.
      --IRS will continue to use revenue protection and revenue enhancement
            ROI projections.
    appendix viii: irs estimated future roi for new enforcement initiatives

            (Note: Data for Figure 13 is in chart and table format.)

     Figure 13: Prevent Identity Theft and Refund Fraud (Protected Revenue)
     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.

                                                  (Dollars in Millions)
    ----------------------------------------------------------------------------------------------------------------
                            Fiscal year                               Cost             Revenue             ROI
    ----------------------------------------------------------------------------------------------------------------
    2015......................................................              64.9             548.0               8.4
    2016......................................................              65.4           1,097.0              16.8
    2017......................................................              65.3           1,462.0              22.4
    ----------------------------------------------------------------------------------------------------------------

            (Note: Data for Figure 14 is in chart and table format.)

    Figure 14: Address Impact of Affordable Care Act Statutory Requirements
                              (Protected Revenue)
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.

                                                  (Dollars in Millions)
    ----------------------------------------------------------------------------------------------------------------
                            Fiscal year                               Cost             Revenue             ROI
    ----------------------------------------------------------------------------------------------------------------
    2015......................................................               4.4              22.2               5.0
    2016......................................................               5.1              57.2              11.2
    2017......................................................               5.1              71.5              14.0
    ----------------------------------------------------------------------------------------------------------------

            (Note: Data for Figure 15 is in chart and table format.)

              Figure 15: Expand Audit Coverage (Protected Revenue)
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.

                                                  (Dollars in Millions)
    ----------------------------------------------------------------------------------------------------------------
                            Fiscal year                               Cost             Revenue             ROI
    ----------------------------------------------------------------------------------------------------------------
    2015......................................................               4.5              33.8               7.5
    2016......................................................               5.2              85.3              16.4
    2017......................................................               5.2             106.6              20.5
    ----------------------------------------------------------------------------------------------------------------

            (Note: Data for Figure 16 is in chart and table format.)

    Figure 16: Address Impact of Affordable Care Act Statutory Requirements
                             (Enforcement Revenue)
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.

                                                  (Dollars in Millions)
    ----------------------------------------------------------------------------------------------------------------
                            Fiscal year                               Cost             Revenue             ROI
    ----------------------------------------------------------------------------------------------------------------
    2015......................................................              51.7              50.2               1.0
    2016......................................................              56.3              94.9               1.7
    2017......................................................              55.9             129.2               2.3
    ----------------------------------------------------------------------------------------------------------------

            (Note: Data for Figure 17 is in chart and table format.)

            Figure 17: Expand Audit Coverage (Enforcement Revenue)
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.

                                                  (Dollars in Millions)
    ----------------------------------------------------------------------------------------------------------------
                            Fiscal year                               Cost             Revenue             ROI
    ----------------------------------------------------------------------------------------------------------------
    2015......................................................              93.3             210.0               2.3
    2016......................................................             100.7             511.2               5.1
    2017......................................................              94.8             674.3               7.1
    ----------------------------------------------------------------------------------------------------------------

            (Note: Data for Figure 18 is in chart and table format.)

        Figure 18: Address International and Offshore Compliance Issues
                             (Enforcement Revenue)
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.

                                                  (Dollars in Millions)
    ----------------------------------------------------------------------------------------------------------------
                            Fiscal year                               Cost             Revenue             ROI
    ----------------------------------------------------------------------------------------------------------------
    2015......................................................              56.8              87.5               1.5
    2016......................................................              63.2             194.0               3.1
    2017......................................................              60.9             292.8               4.8
    ----------------------------------------------------------------------------------------------------------------

            (Note: Data for Figure 19 is in chart and table format.)

     Figure 19: Expand Coverage of High Wealth Individuals and Enterprises
                             (Enforcement Revenue)
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.

                                                  (Dollars in Millions)
    ----------------------------------------------------------------------------------------------------------------
                            Fiscal year                               Cost             Revenue             ROI
    ----------------------------------------------------------------------------------------------------------------
    2015......................................................              21.0              78.5               3.7
    2016......................................................              23.0             159.9               7.0
    2017......................................................              21.6             243.9              11.3
    ----------------------------------------------------------------------------------------------------------------

            (Note: Data for Figure 20 is in chart and table format.)

          Figure 20: Enhance Collection Coverage (Enforcement Revenue)
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.

                                                  (Dollars in Millions)
    ----------------------------------------------------------------------------------------------------------------
                            Fiscal year                               Cost             Revenue             ROI
    ----------------------------------------------------------------------------------------------------------------
    2015......................................................              66.8             174.6               2.6
    2016......................................................              73.4             489.0               6.7
    2017......................................................              72.6             616.8               8.5
    ----------------------------------------------------------------------------------------------------------------

            (Note: Data for Figure 21 is in chart and table format.)

     Figure 21: Improve Coverage of Partnerships and Flow-Through Entities
                             (Enforcement Revenue)
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.

                                                  (Dollars in Millions)
    ----------------------------------------------------------------------------------------------------------------
                            Fiscal year                               Cost             Revenue             ROI
    ----------------------------------------------------------------------------------------------------------------
    2015......................................................              36.5              84.4               2.3
    2016......................................................              41.3             174.8               4.2
    2017......................................................              39.6             267.8               6.8
    ----------------------------------------------------------------------------------------------------------------

            (Note: Data for Figure 22 is in chart and table format.)

        Figure 22: Leverage Data to Improve Case Selection (Enforcement
                                    Revenue)
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.

                                                  (Dollars in Millions)
    ----------------------------------------------------------------------------------------------------------------
                            Fiscal year                               Cost             Revenue             ROI
    ----------------------------------------------------------------------------------------------------------------
    2015......................................................              36.8               0.0               0.0
    2016......................................................              38.6              63.0               1.6
    2017......................................................              38.6              75.4               2.0
    ----------------------------------------------------------------------------------------------------------------

      appendix ix: patient protection and affordable care act (ppaca)\1\
                    spending, fiscal years 2010 through 2012

        Table 12: Patient Protection and Affordable Care Act (PPACA) Spending, Fiscal Years 2010 Through 2012 (in
                                                        Millions)
    ----------------------------------------------------------------------------------------------------------------
                                                           Fiscal year    Fiscal year    Fiscal year
                      PPACA Initiatives                    2010 actual    2011 actual    2012 actual       Total
    ----------------------------------------------------------------------------------------------------------------
    Administer new fees on drug manufacturers and health           $0.3           $0.7           $1.1           $2.1
     insurers...........................................
    Strengthen oversight of exempt hospitals............            0.4            4.5            4.0            9.0
    Promoting compliance with other new provisions......            0.8           11.6            8.3           20.8
    Program management..................................            0.1            8.4           17.9           26.4
    Support of implementation of taxpayer issues (e.g.              2.4            5.0            5.2           12.5
     Counsel, Appeals)..................................
    Customer service support (outreach, phones, and                 1.3            6.0            4.7           12.0
     other support).....................................
    Information technology, operations, and support and            15.3          131.9          258.0          405.2
     infrastructure, deliver new tax credits and
     individual coverage requirement....................
                                                         -----------------------------------------------------------
          Total.........................................          $20.7         $168.2         $299.2         $488.1
    ----------------------------------------------------------------------------------------------------------------
    Legend: FY = fiscal year.
    Source: Fiscal year 2014 congressional justification for IRS.
    Notes: PPACA was enacted on March 23, 2010. IRS received funding for PPACA implementation activities from the
      Department of Health and Human Services' Health Insurance Reform Implementation Fund in fiscal years 2010 to
      2012. Numbers may not add due to rounding.
    \1\ PPACA, Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by the Health Care and Education
      Reconciliation Act (HCERA), Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30, 2010). All references to PPACA
      include amendments by HCERA.

      appendix x: ppaca spending and request by account and initiatives,
                         fiscal years 2013 through 2015

                                          Table 13: PPACA Spending and Request by Account and Initiative (in Millions)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                          Taxpayer Services                Enforcement                Operations Support                   Total
                                   -------------------------------------------------------------------------------------------------------------------------
                                    Fiscal                        Fiscal                         Fiscal                         Fiscal
           PPACA Initiatives         year     Fiscal     Fiscal    year     Fiscal     Fiscal     year     Fiscal     Fiscal     year     Fiscal     Fiscal
                                     2013   year 2014  year 2015   2013   year 2014  year 2015    2013   year 2014  year 2015    2013   year 2014  year 2015
                                    actual  requested  requested  actual  requested  requested   actual  requested  requested   actual  requested  requested
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Improve taxpayer service and      $3.8      $70.3      $58.2      $0       $3.2         $0       $0      $16.0      $15.7     $3.8      $89.5      $73.9
     meet increased demand (PPACA
     portion of initiative).......
    Address impact of PPACA            0.5        1.1          0    19.3       26.1       36.6     11.8       17.2       19.5     31.6       44.4       56.1
     statutory requirements.......
    Implement IT changes to              0          0          0       0          0          0    248.6      305.6      305.6    248.6      305.6      305.6
     deliver tax credits and other
     requirements.................
    Expand telecom infrastructure        0          0          0       0          0          0        0          0       16.0        0          0       16.0
     to handle increased demand...
                                   -------------------------------------------------------------------------------------------------------------------------
        Total PPACA budget request    $4.3      $71.4      $58.2   $19.3      $29.3      $36.6   $260.4     $338.8     $356.9     $284  \a\ $439.     $451.7
                                                                                                                                                6
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Source: IRS data on PPACA spending for fiscal year 2013 and fiscal years 2014 and 2015 congressional justifications for IRS.
    Notes: IRS did not receive funding for PPACA implementation activities in fiscal years 2013 or 2014. IRS received funding from the Department of Health
      and Human Services in fiscal years 2010 to 2012. Numbers may not add due to rounding.
    \a\ Actual total fiscal year 2014 PPACA spending through February 28, 2014 is $59.2 million.

                  appendix xi: summary of major it investments
        Total funding for all investments from fiscal years 2009 to 2015 is
    about $11 billion.

                              Table 14: Summary of IRS's Major IT Investments (in Millions)
    ----------------------------------------------------------------------------------------------------------------
                                                                                            Fiscal year
                                                                                  Actual        2015      Projected
                        Investment name                      Fiscal year 2014  obligations   projected   useful life
                                                            appropriation \a\  to date \b\   life-cycle     (year)
                                                                                                cost
    ----------------------------------------------------------------------------------------------------------------
    Account Management Services (AMS)
      Enhances customer support by providing applications              $17             $11         $204         2017
       that enable IRS employees to access, validate, and
       update individual taxpayer accounts on demand......
    Patient Protection and Affordable Care Act (PPACA) \c\
      Encompasses the planning, development and                        345             651        1,987         2018
       implementation of IT systems needed to support
       IRS's tax administration responsibilities
       associated with the act \d\........................
    Customer Account Data Engine 2 (CADE 2)
      Provides timely access to authoritative individual               165             687        1,022         2020
       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 time that tax                   16             111          162         2021
       returns are filed in order to eliminate the
       issuance of fraudulent tax refunds.................
    e-Service (e-SVS)
      Comprises several web-based self-assisted services                11             173          207         2019
       that are intended to allow authorized individuals
       to do business with the IRS electronically.........
    Foreign Account Tax Compliance Act (FATCA)
      Intended to implement provisions of the Foreign                   47              17          162         2020
       Account Tax Compliance Act regarding financial
       institutions reporting to IRS information about
       financial accounts held by U.S. taxpayers, or
       foreign entitites in which U.S. taxpayers hold a
       substantial ownership interest.....................
    Implement Return Review Program (RRP) (Replaces EFDS)
      Currently under development, is intended to maximize              68             103          253         2020
       fraud detection at the time that tax returns are
       filed to eliminate issuance of questionable refunds
    Individual Master File (IMF)
      Represents the authoritative data source for                      14              82          166         2019
       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 business information                  23              70          186         2019
       matching program in order to increase voluntary
       compliance and accurate income reporting...........
    Integrated Customer Communication Environment (ICCE)
      Includes several projects that are intended to                    15             482          524         2019
       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 review, improve                      18             202          336         2020
       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, accounts payable/                15             414          494         2019
       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 updates tax forms                10             143          188         2019
       to comply with tax law changes.....................
    IRS End User Systems and Services (EUSS)
      Supports products and services necessary for daily               182             705        1,933         2019
       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, development, and                 406           4,094        7,317         2019
       deployment of server storage infrastructures,
       software, databases, and operating systems.........
    IRS Telecommunications Systems and Support (TSS)
      Supports IRS's broad and local network                           302           1,007        2,388         2019
       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 as tax filing and                16             487          651         2017
       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 platform for electronic               40             376          639         2020
       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, management, and image                      9             157          203         2019
       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's analysis of fiscal year 2015 congressional justification for IRS.
    \a\ Fiscal year 2014 appropriation is the amount IRS plans to fund out of its own accounts (e.g., user fees and
      other budget accounts).
    \b\ Actual obligations to date through fiscal year 2013.
    \c\ IRS uses the acronym ``ACA'' to refer to the Patient Protection and Affordable Care Act in its reports.
    \d\ In this report, we are not evaluating the healthcare.gov initiative headed by the Centers for Medicare and
      Medicaid Services.

     appendix xii: gao conducted analyses related to 12 of 38 legislative
                proposals in the fiscal year 2015 budget request

                         Table 15: Legislative Proposals Related to Prior GAO Work (in Millions)
    ----------------------------------------------------------------------------------------------------------------
                                                                             Projected
      IRS legislative proposals related to     Projected revenues over 10   costs over 3      Related GAO reports
                 prior GAO work                          years                 years
    ----------------------------------------------------------------------------------------------------------------
    Modify reporting of tuition expenses and  $606.......................           $0.2  GAO-10-225
     scholarships of Form 1098-T, Tuition
     Statement.
    Authorize the Department of Treasury to   No revenue effect..........           11.2  GAO-05-491
     require additional information to be
     included in electronically filed Form
     5500 annual reports and electronic
     filing of certain other employee
     benefit plan reports.
    Increase certainty with respect to        9,610......................            1.9  GAO-09-717
     worker classification.
    Require taxpayers who prepare their       No revenue effect..........           14.6  GAO-12-33
     returns electronically, but file their
     returns on paper, to print their
     returns with a scannable code.
    Allow IRS to absorb credit card           19.........................            9.6  GAO-10-11
     processing fees for certain tax
     payments.
    Provide IRS with greater flexibility to   173........................            1.4  GAO-11-481
     address correctable errors.
    Provide whistleblowers with protection    Negligible revenue effect..            0    GAO-11-683
     from retaliation.
    Provide stronger protection from          No revenue effect..........            0    GAO-11-683
     improper disclosure of taxpayer
     information in whistleblower actions.
    Add tax crimes to the Aggravated          Negligible revenue effect..            0    GAO-13-132T
     Identity Theft statute.
    Impose a civil penalty on tax identity    Negligible revenue effect..            2.7  GAO-13-132T
     theft crimes.
    Explicitly provide that the Department    Negligible revenue effect..  Not available  GAO-14-467T, GAO-08-781
     of Treasury and IRS have authority to
     regulate all paid return preparers.
    Rationalize tax return filing due dates   2,581......................  Not available  GAO-13-515
     so they are staggered.
    ----------------------------------------------------------------------------------------------------------------
    Source: GAO analysis based on IRS fiscal year 2015 congressional justification and Department of the Treasury,
      General Explanations of the Administration's Fiscal Year 2015 Revenue Proposals (Washington, D.C.: March
      2014).

           appendix xiii: 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 reports on duplication,
            overlap, and fragmentation.\1\
      --As of March 2014, 37 GAO products contain 10 matters for Congress
            and 72 recommendations to IRS with a potential financial
            benefit. In addition, we have made multiple recommendations
            that could improve IRS operations if implemented.
      --Since March 2013, 34 recommendations were implemented.
    ----------
        \1\ See GAO, GAO, 2014 Annual Report: Additional Opportunities to
    Reduce Fragmentation, Overlap, and Duplication and Achieve Other
    Financial Benefits, GAO-14-343SP (Washington, D.C.: Apr. 8, 2014).

            (Note: Data for Figure 23 is in chart and table format.)

    Figure 23: Recommendations to IRS and Open Matters for Congress With a
                               Financial Benefit

        Source: GAO analysis of GAO open recommendations.

    ----------------------------------------------------------------------------------------------------------------
                                                                   Number of matters and recommendations
                                                     ---------------------------------------------------------------
                                                         Indirect        Increase
                                                         financial      savings and      Increase        Increase
                                                          benefit         revenue         savings         revenue
    ----------------------------------------------------------------------------------------------------------------
    IRS.............................................              37               6              14              15
    Congress........................................  ..............               4               1               5
    ----------------------------------------------------------------------------------------------------------------

                                     ______

        Prepared Statement of Nina E. Olson, National Taxpayer Advocate
        Chairman Udall, 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
    2015.\1\
    ---------------------------------------------------------------------------
        \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.
    ---------------------------------------------------------------------------
        As you know, the IRS's budget has been cut substantially since
    fiscal year 2010, and because of sequestration, the cuts last year were
    the most substantial to date. As a result of these resource reductions,
    the IRS's ability to meet the service needs of the taxpaying public has
    been severely impaired, and the agency has made unprecedented and
    disturbing changes to its delivery of taxpayer service.
        The 16-day Government shutdown compounded the impact of these
    budget cuts and affected the IRS's ability to prepare for the 2014 tax
    filing season. As a result, the agency delayed the start of the filing
    season by 10 days, requiring early filers to wait additional time to
    receive their tax refunds. During the shutdown, moreover, thousands of
    taxpayers were exposed to IRS enforcement actions but had no ability to
    contact IRS employees, including the Taxpayer Advocate Service, all of
    whose employees were furloughed and unable to assist taxpayers who
    experienced emergencies caused by ongoing enforcement.\2\
    ---------------------------------------------------------------------------
        \2\ During the shutdown from October 1 through October 16, 2013,
    taxpayers were subject to the following compliance and enforcement
    actions: 3,902 levies on Social Security benefits; 5,455 levies on
    financial or other accounts; 7,025 wage levies; 4,099 Notices of
    Federal Tax Lien issued; 180,095 Automated Underreporter Statutory
    Notices of Deficiency; and 102,231 Collection Due Process Levy Hearing
    Notices issued by the Automated Collection System. Preliminary
    information from IRS Office of Taxpayer Correspondence, Individual
    Master File (IMF), and Automated Lien System.
    ---------------------------------------------------------------------------
        On top of all this, the revelations by the Treasury Inspector
    General for Tax Administration (TIGTA) that the IRS's Exempt
    Organizations unit had used a ``Be on the Lookout'' (or ``BOLO'') list
    to select applicants with the words ``tea party'' and other political-
    sounding names for further review undermined public trust in the
    fairness and impartiality of the IRS, and led to multiple
    investigations that are still underway. Getting the IRS back on track
    requires not merely strong leadership within the agency, but helpful
    oversight and support from Congress and other key stakeholders. For
    that reason, I appreciate your holding today's hearing.
        In my view, the IRS is often so focused on resolving immediate
    crises that it is not able to devote sufficient time to setting long-
    term goals and developing approaches to achieve those goals. In the
    preface to my most recent annual report to Congress, I attempted to
    provide my vision of what a 21st century tax administration system
    should look like.\3\
    ---------------------------------------------------------------------------
        \3\ National Taxpayer Advocate 2013 Annual Report to Congress
    [hereinafter ``NTA 2013 Annual Report''], at x.
    ---------------------------------------------------------------------------
        As a foundational matter, tax administration in the 21st century
    should be premised on a thematic, principle-based Taxpayer Bill of
    Rights.\4\ If taxpayers believe they are treated, or can be treated, in
    an arbitrary and capricious manner, they will mistrust the system and
    be less likely to comply voluntarily. If taxpayers have confidence in
    the fairness and integrity of the tax system, they will be more likely
    to comply.
    ---------------------------------------------------------------------------
        \4\ See NTA 2013 Annual Report 5-19 (Most Serious Problem: Taxpayer
    Rights: The IRS Should Adopt a Taxpayer Bill of Rights as a Framework
    for Effective Tax Administration); NTA 2011 Annual Report 493-518
    (Legislative Recommendation: Enact the Recommendations of the National
    Taxpayer Advocate to Protect Taxpayer Rights); NTA 2007 Annual Report
    478-489 (Legislative Recommendation: Taxpayer Bill of Rights and De
    Minimis ``Apology'' Payments).
    ---------------------------------------------------------------------------
        The good news on this front is that the Internal Revenue Code
    provides dozens of taxpayer rights. The bad news is that most taxpayers
    have no idea what their rights are and therefore often cannot take
    advantage of them. That is because taxpayer rights are scattered
    throughout the code and are not presented in a coherent way. Not
    surprisingly, in response to a taxpayer survey conducted for our office
    in 2012, less than half of all U.S. taxpayers said they believed they
    have rights before the IRS, and only 11 percent said they knew what
    those rights are.\5\
    ---------------------------------------------------------------------------
        \5\ Forrester Research Inc., The TAS Omnibus Analysis, from North
    American Technographics Omnibus Mail Survey, Q2/Q3 2012 19-20 (Sept.
    2012).
    ---------------------------------------------------------------------------
        We can and must do a better job of making taxpayers aware of their
    rights and enabling them to assert them. Since 2007, I have repeatedly
    recommended adoption of a Taxpayer Bill of Rights that takes the
    multiple existing rights embedded in the code and groups them into ten
    broad categories, modeled on the U.S. Constitution's Bill of Rights.\6\
    Just as the Constitution's Bill of Rights sets out the relationship
    between the Federal Government and U.S. citizens and imposes limits on
    the Federal Government's power, I believe a thematic, principle-based
    list of core taxpayer rights would provide a foundational framework for
    taxpayers and IRS employees alike that would promote effective tax
    administration.
    ---------------------------------------------------------------------------
        \6\ Congress has passed several pieces of legislation with
    ``Taxpayer Bill of Rights'' in the title. See Technical and
    Miscellaneous Revenue Act, Public Law No. 100-647, Sec. 6226, 102 Stat.
    3342, 3730 (1988) (containing the ``Omnibus Taxpayer Bill of Rights,''
    also known as TBOR 1); Taxpayer Bill of Rights 2, Public Law No. 104-
    168, 110 Stat. 1452 (1996) (also known as TBOR 2); Internal Revenue
    Service Restructuring and Reform Act, Public Law No. 105-206, 112 Stat.
    685 (1998) (Title III is known as ``Taxpayer Bill of Rights III'' or
    TBOR 3). These laws create specific rights in certain instances, but
    they do not create a thematic, principle-based list of overarching
    taxpayer rights.
    ---------------------------------------------------------------------------
        I am very pleased the House of Representatives passed my proposal
    verbatim last year, with bipartisan support, on a voice vote.\7\ While
    I believe a Taxpayer Bill of Rights should have the force of law, and
    therefore hope the Senate passes this legislation, the IRS has the
    authority to adopt a Taxpayer Bill of Rights on its own. I have been
    working with the IRS leadership to try to get agreement to do so.
    Particularly when resources are dear, it is important to have a set of
    foundational principles that guide operations and serve as a framework
    for effective tax administration.
    ---------------------------------------------------------------------------
        \7\ Taxpayer Bill of Rights Act, H.R. 2768, 113th Cong. (2013). In
    my 2013 report, I suggested some wording modifications, and as
    discussed below, the Office of the Taxpayer Advocate recently tested
    our proposed modifications with focus groups of taxpayers and preparers
    to assess whether the language accurately conveys the gist of the
    rights we have identified. Based on input from the focus groups, we are
    currently tweaking the language of a few provisions.

        In my testimony today, I will elaborate on the following key
    ---------------------------------------------------------------------------
    issues:

        1.  Taxpayer Services and IRS Funding.--The IRS is failing badly at
    meeting taxpayer needs because it lacks resources.\8\ Last year, the
    IRS received some 109 million telephone calls on its customer service
    lines. The IRS could answer only 60.5 percent of calls seeking to reach
    a customer service representative (CSR)--and those taxpayers who got
    through had to wait an average of 17.6 minutes on hold. Initial
    statistics for fiscal year 2014 through April 15 indicate service has
    remained at low levels, with taxpayers waiting an average of slightly
    more than 17 minutes and tax practitioners kept on hold for nearly 27
    minutes.\9\ The tax collector is rarely the Government's most popular
    agency, but at the end of the day, IRS funding reductions do not
    ``punish'' the IRS nearly as much as they punish the nearly 150 million
    individual taxpayers and more than 10 million business entity taxpayers
    who are trying to comply with the tax laws and not receiving the help
    they need. When the IRS receives 109 million telephone calls, there is
    no substitute for the funding to hire enough CSRs to answer them. If
    the IRS does not receive more funding, it will be unable to assist
    millions of taxpayers seeking assistance from their Government to
    comply with the tax laws.
    ---------------------------------------------------------------------------
        \8\ See NTA 2013 Annual Report 20-38 (Most Serious Problem: IRS
    Budget: The IRS Desperately Needs More Funding to Serve Taxpayers and
    Increase Voluntary Compliance).
        \9\ IRS, Joint Operations Center, Executive Level Summary report
    (Oct. 1, 2013 through April 15, 2014).
    ---------------------------------------------------------------------------
        2.  Erosion of IRS Employee Training and Skills.--To deal with a
    complex, constantly changing tax law and provide taxpayers with
    accurate and complete service, IRS employees must receive prompt and
    appropriate training and education. Since fiscal year 2009, budget cuts
    and sequestration have led the IRS to cut its training budget by over
    85 percent. The IRS has reduced its training and education programs to
    a bare minimum without considering the types of training employees need
    to perform basic job functions, protect taxpayer rights, and prevent
    harm to and undue burden for taxpayers.\10\
    ---------------------------------------------------------------------------
        \10\ See NTA 2013 Annual Report 40-50 (Most Serious Problem:
    Employee Training: The Drastic Reduction in IRS Employee Training
    Impacts the Ability of the IRS to Assist Taxpayers and Fulfill Its
    Mission).
    ---------------------------------------------------------------------------
        3.  Identity Theft and Refund Fraud.--The IRS should establish a
    meaningful single point of contact for taxpayers who become victims of
    identity theft. Today, 21 separate units handle different aspects of
    identity theft, and although the IRS says it has adopted a single point
    of contact, no employee has the authority to coordinate the entirety of
    the taxpayer/victim's case if, as is common, more than one of the 21
    units is involved. Thus, taxpayers traumatized by the crime of identity
    theft are forced to navigate the IRS by themselves, increasing their
    frustration and despair.\11\ The IRS also takes much too long to
    resolve ID theft cases and issue refunds to legitimate taxpayers. The
    Taxpayer Advocate Service's experience with identity theft cases
    demonstrates the soundness of our recommendation that the IRS assign
    one employee to work with the victim from the beginning, and help
    coordinate resolution of the case (not merely monitor it) when it
    requires work by multiple units.
    ---------------------------------------------------------------------------
        \11\ See NTA 2013 Annual Report 75-83 (Most Serious Problem:
    Identity Theft: The IRS Should Adopt a New Approach to Identity Theft
    Victim Assistance that Minimizes Burden and Anxiety for Such
    Taxpayers).
    ---------------------------------------------------------------------------
        4.  Affordable Care Act.--As part of the Affordable Care Act (ACA),
    the IRS is implementing complicated healthcare tax provisions. I
    believe the IRS has acquitted itself well in meeting its initial
    responsibilities under the ACA. At the same time, I have concerns about
    the IRS's approach to addressing taxpayer questions and adequately
    training employees on the new provisions. In particular, the IRS is not
    doing enough to educate taxpayers about the importance of updating
    their information throughout the year with the Exchange if they are
    receiving a credit. Our office will continue to work with the IRS to
    ensure that taxpayers are treated properly and fairly in the
    implementation of the new law. Within the Taxpayer Advocate Service
    (TAS), we are also training our employees about taxpayer concerns they
    are likely to see next year, such as the impact of premium tax credit
    reconciliation and under- and overpayments, so they will be properly
    prepared to assist taxpayers.\12\
    ---------------------------------------------------------------------------
        \12\ See generally National Taxpayer Advocate fiscal year 2014
    Objectives Report to Congress 29 (TAS Prepares for Implementation of
    Health Care Provisions); IRS: Enforcing Obamacare's New Rules and
    Taxes: Hearing Before the House Comm. on Oversight & Gov't Reform,
    112th Cong. (2012) (statement of Nina E. Olson, National Taxpayer
    Advocate).
    ---------------------------------------------------------------------------
        5.  Accelerated Receipt and Use of Third-Party Information
    Reports.--Congress should direct the IRS to develop a plan to enable it
    to match information return data against tax return data before paying
    out refunds.\13\ If the IRS could match Forms 1040 against Forms W-2 in
    a pre-refund environment, it could dramatically reduce improper
    payments to identity thieves and other perpetrators of refund fraud,
    including some improper Earned Income Tax Credit claimants. At the same
    time, it could make the data available to taxpayers and thereby help
    them prepare their returns more accurately and easily.
    ---------------------------------------------------------------------------
        \13\ See NTA 2013 Annual Report, vol. 2, 67-96 (Analysis:
    Fundamental Changes to Return Filing and Processing Will Assist
    Taxpayers in Return Preparation and Decrease Improper Payments). The
    National Taxpayer Advocate has been recommending this approach since
    2009. See National Taxpayer Advocate 2009 Annual Report to Congress
    338-345 (Legislative Recommendation: Direct the Treasury Department to
    Develop a Plan to Reverse the ``Pay Refunds First, Verify Eligibility
    Later'' Approach to Tax Return Processing).
    ---------------------------------------------------------------------------
        6.  IRS Information Technology Challenges.--The IRS's Information
    Technology (IT) function must be adequately funded, not only to deliver
    on major initiatives like the ACA and Foreign Account Tax Compliance
    Act (FATCA), but also to deliver on the many small but important
    improvements and projects that will make a positive difference for
    taxpayers, employees, and the public fisc. At present, the IRS is
    focusing its IT resources almost exclusively on the ACA, FATCA, and the
    2015 filing season. All other IT requests are subordinate to these
    three programs. Thus, important taxpayer service and compliance
    initiatives are at risk because needed improvements cannot be developed
    or implemented, compounding harm to taxpayers. Furthermore, without
    dedicated funding to invest in projects that bring us into the 21st
    century and the digital age, the IRS will increasingly lag behind other
    tax administrators and the financial services sector.
                      i. taxpayer services and irs funding
        The requirement to pay taxes is generally the most significant
    burden a government imposes on its citizens. For that reason, I believe
    the Government has a practical and moral obligation to make compliance
    as simple and painless as possible. Yet the IRS is increasingly unable
    to meet the service needs of our taxpayers by phone, in person, and by
    mail. Consider the following:

      --Despite the greater availability of information on IRS.gov, the
            number of telephone calls the IRS receives from taxpayers on
            its customer service lines has been rising steadily over the
            past decade--from 71 million calls in fiscal year 2004 to 109
            million calls in fiscal year 2013, an increase of 53
            percent.\14\
    ---------------------------------------------------------------------------
        \14\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
    Snapshot (final week of fiscal year 2013 and fiscal year 2004).
    ---------------------------------------------------------------------------
      --The IRS lacks the staffing to answer these calls. In fiscal year
            2004, the IRS answered 87 percent of calls from taxpayers
            seeking to speak with a CSR (which, in IRS parlance, is
            referred to as the ``Level of Service'' or ``LOS''). In fiscal
            year 2013, the IRS answered only 61 percent of such calls, a
            reduction of 26 percentage points, or 30 percent, in the LOS.
            Among those taxpayers lucky enough to get through, hold time
            increased from 2.6 minutes to 17.6 minutes, a nearly six-fold
            rise.\15\
    ---------------------------------------------------------------------------
        \15\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
    Snapshot (final week of each fiscal year for fiscal year 2004 through
    fiscal year 2013).

         Figure 1: IRS Telephone Service Levels, Fiscal Year 2004-2013

      --The IRS historically has prepared tax returns for low income,
            elderly, and disabled taxpayers seeking assistance at its walk-
            in sites (known as ``Taxpayer Assistance Centers,'' or
            ``TACs''). In fiscal year 2004, the IRS prepared 476,000
            returns.\16\ Since that time, the IRS has imposed increasing
            limits on return preparation, and by fiscal year 2013, the
            number of returns it prepared during the filing season had
            declined by 59 percent as compared with fiscal year 2004.\17\
    ---------------------------------------------------------------------------
        \16\ This data was provided to TAS by the IRS Wage & Investment
    Division in connection with the National Taxpayer Advocate's 2007
    Annual Report to Congress 162-182 (Most Serious Problem: Service at
    Taxpayer Assistance Centers).
        \17\ Government Accountability Office, GAO-14-133, 2013 Tax Filing
    Season: IRS Needs to Do More to Address the Growing Imbalance between
    the Demand for Services and Resources 26 (Dec. 2013); GAO, GAO-11-111,
    2010 Tax Filing Season: IRS's Performance Improved in Some Key Areas,
    but Efficiency Gains Are Possible in Others 45 (Dec. 2010); GAO, GAO-
    07-27, Tax Administration: Most Filing Season Services Continue to
    Improve, but Opportunities Exist for Additional Savings 29 (Nov. 2006)
    (supplemented with IRS data provided to TAS for 2004 through 2006).
    ---------------------------------------------------------------------------
      --The IRS's ability to timely process taxpayer correspondence has
            also taken a hit. When the IRS sends a taxpayer a notice
            proposing to increase his or her tax liability, it gives the
            taxpayer an opportunity to present an explanation or
            documentation supporting the position taken on the return. Each
            year, the IRS typically receives around ten million taxpayer
            responses, known collectively as the ``adjustments inventory.''
            \18\ The IRS has established timeframes for processing taxpayer
            correspondence, generally 45 days. During the final week of
            fiscal year 2004, the IRS failed to process 12 percent of its
            adjustments correspondence within its timeframes. By contrast,
            during the final week of fiscal year 2013, the IRS was unable
            to process 53 percent of adjustments correspondence within
            these timeframes.\19\
    ---------------------------------------------------------------------------
        \18\ In fiscal year 2013, receipts in the Adjustments Inventory
    were about 8.4 million, as compared with 10.4 million in fiscal year
    2012. We are not certain why the number declined. The Adjustments
    Inventory is one component of the Accounts Management function's
    overall Paper Inventory. In fiscal year 2013, receipts in the Paper
    Inventory were about 20.8 million, and the percentage classified as
    overage at year-end was 47 percent. IRS, Joint Operations Center,
    Account Management Information Report (AMIR)--National Summary (week
    ending Sept. 28, 2013).
        \19\ IRS, Joint Operations Center, Adjustments Inventory Reports:
    July-September Fiscal Year Comparison (fiscal year 2004 through fiscal
    year 2013).

        As compared with fiscal year 2013, the IRS's ability to assist
    ---------------------------------------------------------------------------
    taxpayers has suffered further declines in fiscal year 2014:

      --For fiscal year 2014 through April 15, the LOS on the phones was 66
            percent, down from 71 percent during the same period in fiscal
            year 2013. Among taxpayers who got through, hold time rose from
            13.3 minutes to slightly over 17 minutes. For practitioners
            calling the Practitioner Priority Service line, the decline was
            even steeper. The LOS dropped from 82 percent to 72 percent,
            while hold time rose from 12 minutes to 26.7 minutes.\20\
    ---------------------------------------------------------------------------
        \20\ IRS, Joint Operations Center, Executive Level Summary reports
    (comparing the periods of Oct. 1, 2013 through April 15, 2014 with Oct.
    1, 2012 through April 15, 2013).
    ---------------------------------------------------------------------------
      --In an effort to answer more calls, the IRS posted an announcement
            on IRS.gov in December that said it will answer only ``basic''
            tax-law questions on its phone lines and in its walk-in sites
            during the filing season (January through mid-April).\21\ It
            will not answer any questions that are ``more detailed'' than
            ``basic'' during the filing season. Moreover, it will not
            answer any tax-law questions after mid-April, including
            ``basic'' questions from the millions of taxpayers who obtain
            filing extensions and prepare their returns later in the year.
    ---------------------------------------------------------------------------
        \21\ IRS, e-News for Tax Professionals--Issue Number 2013-49, Item
    4, Some IRS Assistance and Taxpayer Services Shift to Automated
    Resources (Dec. 20, 2013), at http://www.irs.gov/uac/Some-IRS-
    Assistance-and-Taxpayer-Services-Shift-to-Automated-Resources.

        Here are some examples of ``complex'' tax law questions that the
    ---------------------------------------------------------------------------
    IRS no longer will answer from its taxpayers:

              I deliver pizzas for my employer using my car. How can I
            deduct my car expenses?

              I received a 1099-MISC instead of a Form W-2 for my new job,
            how do I report this on my tax return?

              Do I have to report the inheritance I received?

              I have started selling some craft items I make as a hobby. Do
            I have to report that?

        These questions are really directional questions--how should I
    approach this issue? When the IRS is unable and unwilling to answer
    questions such as these, it increases the compliance burden on its
    taxpayers and the risk that taxpayers will get incorrect advice from
    other quarters. Thus, the decision to answer only basic tax law
    questions through the filing season, and not answer any ``complex''
    question at all, will have a negative effect on tax compliance.

      --Also to conserve resources, the IRS announced that it will no
            longer prepare any tax returns at its walk-in sites, even for
            low income, elderly, or disabled taxpayers.\22\
    ---------------------------------------------------------------------------
        \22\ IRS, e-News for Tax Professionals--Issue Number 2013-49, Item
    4, Some IRS Assistance and Taxpayer Services Shift to Automated
    Resources (Dec. 20, 2013), at http://www.irs.gov/uac/Some-IRS-
    Assistance-and-Taxpayer-Services-Shift-to-Automated-Resources.

        At the risk of vast understatement, it is a sad state of affairs
    when the Government writes tax laws as complex as ours--and then can
    answer nothing beyond ``basic'' questions from baffled citizens who are
    doing their best to comply.
        I realize that some may find it difficult to justify increased
    funding for the IRS. I personally have concerns about IRS performance,
    and in fact, I am required by statute to be an ``IRS critic'' by
    identifying at least 20 of the most serious problems facing taxpayers
    in my annual reports to Congress.\23\ But I must tell you that I do not
    see any way the agency can begin to meet the service needs of the
    taxpaying public without substantially more funding. Most notably,
    almost twenty million phone calls from taxpayers seeking to speak with
    a customer service representative went unanswered last year. With phone
    calls up about 17 percent and IRS funding down 8 percent since fiscal
    year 2010, there is no way the IRS can answer all these calls without
    more employees.
    ---------------------------------------------------------------------------
        \23\ See IRC Sec. 7803(c)(2)(B)(ii)(III).
    ---------------------------------------------------------------------------
        In part because of mistakes made in the past, the agency has
    undergone significant leadership changes in recent months. Many policy
    changes have been made in response to congressional concerns, and the
    fiscal year 2014 appropriations act contains new directives. If members
    have continuing concerns, I encourage you to use the oversight process
    to try to address them. But I personally believe it is a mistake to cut
    the IRS's budget and thereby preclude the agency from providing basic
    service to millions of taxpayers who seek help each year. When we ask
    our taxpayers to turn over a significant portion of their incomes to
    the Government, we owe it to them--the constituents you represent, and
    the taxpayers for whom I advocate--to ensure we have the infrastructure
    in place to help them comply with the requirements Congress has imposed
    by law.
                ii. erosion of irs employee training and skills
        The IRS mission is to ``provide America's taxpayers top-quality
    service by helping them understand and meet their tax responsibilities
    and enforce the law with integrity and fairness to all.'' \24\ With a
    complex and constantly changing tax law, it is essential that IRS
    employees receive prompt and appropriate training and education in
    order to provide taxpayers with complete and accurate assistance.
    However, budget cuts and sequestration have led the IRS to reduce its
    training budget by over 85 percent since fiscal year 2009.\25\ Per-
    employee spending dropped from nearly $1,450 per full-time equivalent
    employee in 2009 to less than $250 in 2013.\26\
    ---------------------------------------------------------------------------
        \24\ Internal Revenue Manual (IRM) 1.1.1.1, The IRS Mission (Mar.
    1, 2006).
        \25\ IRS response to TAS research request (Nov. 22, 2013). In
    fiscal year 2009, the IRS spent $153,155,686 on training versus
    $22,574,539 in fiscal year 2013, a reduction of 85.26 percent. The IRS
    training budget includes both training and conferences.
        \26\ IRS, Human Resources Reporting Center, available at https://
    persinfo.web.irs.gov/(last visited Oct. 22, 2013).

              Figure 2: IRS Training Budget, Fiscal Year 2009-2013

        Most of the operating divisions that interact directly with
    taxpayers fared worse than the agency as a whole. The IRS Appeals
    division reduced its training budget from nearly $6 million in fiscal
    year 2009 to about $250,000 in fiscal year 2013, or almost 96
    percent.\27\ During the same period:
    ---------------------------------------------------------------------------
        \27\ IRS response to TAS research request (Nov. 22, 2013).

      --The Tax Exempt and Government Entities (TE/GE) division slashed its
            training budget by almost 96 percent, or approximately $7
            million;
      --The Small Business/Self-Employed (SB/SE) division training budget
            declined by 93 percent;
      --The Large Business and International (LB&I) division training
            budget fell by about 92 percent;
      --The Taxpayer Advocate Service (TAS) decreased its training budget
            by almost 78 percent; and
      --The Wage and Investment (W&I) division fared the best, with a
            decrease of ``only'' approximately 74 percent.\28\
    ---------------------------------------------------------------------------
        \28\ Id.

        Not only has the IRS reduced the funding and number of hours of
    training for employees, it has also cut the number of courses offered
    and eliminated entire subject areas. In fiscal year 2009, SB/SE offered
    over 2,000 different in-person and virtual learning courses to its
    Revenue Officers (ROs, who conduct all field collection), compared to
    just over 900 in fiscal year 2013, a nearly 60 percent decrease. Other
    job series saw even more drastic cuts. TE/GE Tax Examiners were offered
    166 in-person training courses in fiscal year 2009 but only three in
    fiscal year 2013, a 98 percent decrease.\29\
    ---------------------------------------------------------------------------
        \29\ Id.
    ---------------------------------------------------------------------------
        We want the IRS to treat taxpayers fairly and to assess the correct
    amount of tax and to protect taxpayer rights in its interactions with
    taxpayers. After several years of continuing and drastic cuts to
    training, U.S. taxpayers cannot have confidence that IRS employees will
    be able to fulfill these expectations. IRS funding for training (and
    travel related to in-person training) must be restored to 2009 levels.
                      iii. identity theft and refund fraud
        As I have written in nearly every Annual Report I have delivered to
    Congress since 2004, tax-related identity theft is a serious problem--
    for its victims, for the IRS and, when Treasury funds are improperly
    paid to the perpetrators, for all taxpayers.\30\ In general, tax-
    related identity theft occurs when an individual intentionally uses the
    Social Security number of another person to file a false tax return to
    obtain an unauthorized refund.\31\
    ---------------------------------------------------------------------------
        \30\ See National Taxpayer Advocate 2013 Annual Report to Congress
    75-83 (Most Serious Problem: The IRS Should Adopt a New Approach to
    Identity Theft Victim Assistance that Minimizes Burden and Anxiety for
    Such Taxpayers); 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); National
    Taxpayer Advocate 2011 Annual Report to Congress 48-73 (Most Serious
    Problem: Tax-Related Identity Theft Continues to Impose Significant
    Burdens on Taxpayers and the IRS); National Taxpayer Advocate 2009
    Annual Report to Congress 307-317 (Status Update: IRS's Identity Theft
    Procedures Require Fine-Tuning); National Taxpayer Advocate 2008 Annual
    Report to Congress 79-94 (Most Serious Problem: IRS Process
    Improvements to Assist Victims of Identity Theft); National Taxpayer
    Advocate 2007 Annual Report to Congress 96-115 (Most Serious Problem:
    Identity Theft Procedures); National Taxpayer Advocate 2005 Annual
    Report to Congress 180-191 (Most Serious Problem: Identity Theft);
    National Taxpayer Advocate 2004 Annual Report to Congress 133-136 (Most
    Serious Problem: Inconsistence Campus Procedures).
        \31\ The IRS refers to this type of tax-related identity theft as
    ``refund-related'' identity theft. In ``employment-related'' identity
    theft, an individual files a tax return using his or her own taxpayer
    identifying number (usually an Individual Taxpayer Identification
    Number or ITIN), but uses someone else's SSN to obtain employment.
    Consequently, the wages are reported to the IRS under the SSN of the
    victim, potentially prompting the IRS to pursue the victim for
    additional tax on the apparent income. See IRM 10.5.3.2(4), Identity
    Protection Program Servicewide Identity Theft Guidance (Feb. 27, 2013).
    Unlike in 1993, when I first represented a client in an identity theft
    case, the IRS now has procedures in place to minimize the tax
    administration impact to the victim in these employment-related
    identity theft situations. Accordingly, I will focus on refund-related
    identity theft in this testimony.
    ---------------------------------------------------------------------------
        Within my organization, the Taxpayer Advocate Service, identity
    theft receipts increased sharply over the past decade, accounting for
    approximately one out of four cases in our inventory in recent years.

            Figure 3: Taxpayer Advocate Service ID Theft Cases \32\

        When we first started writing about tax-related identity theft in
    2004, the IRS had no procedures for its employees to follow when a
    taxpayer claimed to be a victim of ID theft. Since then, the IRS has
    established a program office to develop victim assistance procedures
    and has adopted many of the recommendations we have made over the
    years. The IRS also has done a better job of developing automated
    filters that flag suspicious returns and delay the payout of refunds
    while the refund claims are scrutinized, and it has improved some of
    its victim assistance procedures.
    ---------------------------------------------------------------------------
        \32\ Case receipt data obtained from the Taxpayer Advocate
    Management Information System (TAMIS) on February 13, 2014.
    ---------------------------------------------------------------------------
        Yet, the IRS still has much room for improvement in how it
    addresses identity theft. First, it must recognize that the
    consequences for victims can be significant. Being victimized by an
    identity thief is a traumatic life event; when someone steals and uses
    your identity, it is an invasion of your person. On top of that, the
    victim must spend time and energy having to prove his or her identity
    to the IRS and must endure months of aggravation and frustration before
    receiving his or her tax refund, a delay that can create financial
    hardships for taxpayers--particularly low income taxpayers--who are
    expecting and depending on their tax refunds to pay basic living
    expenses. The IRS's current approach in many ways treats the victim as
    someone experiencing a minor inconvenience, instead of a frightening
    personal trauma.
        In acknowledging that identity theft is a traumatic life event, the
    IRS should set up a centralized identity theft unit similar to the
    innocent spouse unit that assists taxpayers who are seeking relief from
    joint and several liability. It is important to have a centralized unit
    with specially trained employees who can remain on the case as a single
    point of contact with the victim from the beginning to full case
    resolution. Otherwise, the IRS would be guilty of contributing to the
    problem and perpetuating the trauma to the victim. When I visited the
    IRS Identity Protection Specialized Unit (IPSU) unit last summer, I met
    with front-line employees, many of whom expressed frustration about not
    truly ``owning'' a case and having to wait for other functions to take
    actions on these cases that the IPSU could have easily completed.
        In my latest report to Congress, I recommended that the IRS
    designate the IPSU as the centralized function that assigns a single
    employee to work with ID theft victims until all related issues are
    resolved. In my meetings with the new IRS leadership, they have
    expressed willingness to revisit whether the current decentralized
    approach is the right one. I have offered to collaborate with the Wage
    and Investment division to test the effectiveness of creating a
    meaningful single point of contact for victims of identity theft with
    cases that require the involvement of multiple IRS functions (for
    example, where the taxpayer is not only trying to get a current year's
    return refund but also seeking abatement of an assessment attributable
    to a prior year's identity theft return).
        The IRS takes much too long to resolve ID theft cases and issue
    refunds to the legitimate taxpayers, particularly where the case moves
    back and forth among IRS functions. A 2013 TIGTA report found the IRS
    took an average of 312 days to work the 100 ID theft cases in the
    report sample.\33\ This included 277 days of inactivity. In other
    words, though the cases lingered in various IRS units for approximately
    10 months, the average case in TIGTA's sample was resolved with just 35
    days of direct contact.
    ---------------------------------------------------------------------------
        \33\ See TIGTA, Ref. No. 2013-40-129, Case Processing Delays and
    Tax Account Errors Increased Hardship for Victims of Identity Theft
    (Sept. 26, 2013).
    ---------------------------------------------------------------------------
        The IRS's current approach of using more than 20 specialized units
    to handle discrete aspects of an identity theft victim's case is simply
    not working. As far as the victims are concerned, there should be one
    IRS employee who interacts with the taxpayer. That one employee should
    maintain control of the taxpayer's case, including all peripheral
    issues stemming from the identity theft. Because identity theft cases
    are often very complex, and can involve multiple issues spanning
    multiple years, too many victims fall between the cracks of the IRS
    bureaucracy.

     Figure 4: Percentage of TAS ID Theft Cases with Multiple Issue Codes,
                           Fiscal Year 2011-2013 \34\

        The Taxpayer Advocate Service's experience with working identity
    theft cases demonstrates the soundness of our recommendation that the
    IRS should assign one employee to work with the victim from the
    beginning, and oversee the case when it requires coordination among
    different units. Instead of taking 312 days to work an identity theft
    case, TAS case advocates resolve them in 87 days.\35\ And even though
    identity theft cases are complex (with over 94 percent of our identity
    theft cases closed in fiscal year 2013 involving more than one issue
    code), TAS case advocates have achieved a relief rate of 87
    percent.\36\ Furthermore, an overwhelming 94 percent of identity theft
    victims who came to TAS in fiscal year 2013 have expressed satisfaction
    with our assistance.\37\
    ---------------------------------------------------------------------------
        \34\ The IRS does not track the number of issues in a given
    identity theft case because, unlike TAS, it treats each module (year/
    tax/issue) as a different case. Accordingly, we can provide TAS data
    only. This chart is meant to illustrate that the vast majority of TAS
    identity theft cases involve multiple issue codes. The increase in the
    percentage of cases with multiple issue codes from fiscal year 2011 to
    fiscal year 2013 may be due to better coding by TAS case advocates to
    record secondary issue codes; it does not necessarily mean that TAS
    identity theft cases have become more complex in recent years.
        \35\ Analysis conducted by TAS Technical Analysis and Guidance of
    data obtained from TAMIS (Oct. 1, 2013).
        \36\ Id.
        \37\ Analysis conducted by TAS Business Assessment of customer
    satisfaction scores reported for fiscal year 2013 (through June 2013);
    data obtained from TAMIS (Oct. 1, 2013).
    ---------------------------------------------------------------------------
        The IRS also needs to do a better job of tracking identity theft
    case data. The IRS cannot even provide a reliable figure for the number
    of identity theft victims it has assisted, partly because the various
    specialized units use different systems to track cases. Moreover, while
    some IRS functions track the length of time a case is in their
    inventory, the IRS still cannot provide an overall cycle time from the
    taxpayer's perspective. For example, specialized units generally
    measure cycle time from the date that particular unit received the
    case; their cycle time measures do not reflect the time elapsed since
    the taxpayer attempted to file the initial return, or all of the prior
    interactions the victim may have had with the IRS. In my 2013 Annual
    Report to Congress, I recommended that the IRS develop a method of
    tracking cycle time from the perspective of the victim.
                            iv. affordable care act
        As part of the Affordable Care Act (ACA), the IRS is implementing
    complicated healthcare tax provisions that require new technology and
    significant rule-making.\38\ These provisions would present a serious
    administrative challenge to any agency, but for one such as the IRS,
    with its annual and continuing tax administration duties, the added
    work is daunting. To date, I believe the IRS has acquitted itself well
    in meeting its initial responsibilities under the ACA. Specifically,
    the IRS has done a good job of updating information technology (IT)
    systems, issuing guidance, and collaborating with other Federal
    agencies. The IRS's actions with regard to ACA implementation
    demonstrate what the IRS can do when it has sufficient lead time to
    plan and implement a complex social benefit delivered through the tax
    system.
    ---------------------------------------------------------------------------
        \38\ See Patient Protection & Affordable Care Act of 2009, Public
    Law No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by the
    Health Care & Education Reconciliation Act of 2010, Public Law No. 111-
    152, 124 Stat. 1029 (Mar. 30, 2010).
    ---------------------------------------------------------------------------
        While the opening of the Health Insurance Marketplaces \39\ on
    October 1, 2013, was riddled with problems, the one aspect that went
    better than anticipated was the role of the IRS in providing
    information to the Marketplace on household income and family size.
    Originally, the IRS agreed that queries from the Marketplace would have
    an average response time of less than 5 seconds. However the IRS has
    been providing an average response time of less than one second.\40\
    The IRS is to be commended on its ability to surpass expectations thus
    far.
    ---------------------------------------------------------------------------
        \39\ https://www.healthcare.gov/marketplace/individual.
        \40\ This is due, in part, to a lower than anticipated volume of
    inquiries. Data provided verbally at ACA Executive Steering Committee
    on Nov. 13, 2013.
    ---------------------------------------------------------------------------
        In order to ensure that ACA design and implementation treat
    taxpayers--both individuals and businesses--appropriately and fairly,
    the Taxpayer Advocate Service has been actively involved with the IRS
    roll-out of the Affordable Care Act tax provisions. I personally sit on
    the ACA Executive Steering Committee and have staff throughout TAS on
    the ACA Joint Implementation Teams to ensure the provisions are
    implemented in a fair and equitable manner and that taxpayer rights are
    protected.\41\
    ---------------------------------------------------------------------------
        \41\ The Joint Implementation Teams TAS is represented on are:
    Customer Service Operations, Tax Return Processing, Information Return
    Receipt and Processing, ACA Notices and Correspondence, Compliance--
    Individuals, Compliance--Business, and Collection.
    ---------------------------------------------------------------------------
    ACA Taxpayer Service and Training Raise Concerns
        The true test for the IRS will be in 2015, when taxpayers begin
    filing their 2014 tax returns. This will be the first year when
    individual taxpayers will have to report they have minimal essential
    health insurance coverage when they file their income tax returns, or
    that they are exempt from the responsibility to have the required
    health insurance coverage. If the taxpayer does not have health
    insurance coverage and is not exempt, then he or she will need to make
    an individual shared responsibility payment (ISRP) when filing a
    return.\42\ Additionally, many taxpayers will have to reconcile the
    Premium Tax Credit amounts they are currently receiving with the
    amounts to which they are entitled based on their actual (as opposed to
    projected) 2014 income.\43\
    ---------------------------------------------------------------------------
        \42\ IRC Sec. 5000A. The following individuals in the following
    categories are exempt from the ISRP: a member of a religious sect that
    is recognized as conscientiously opposed to accepting insurance
    benefits; a member of a healthcare sharing ministry; a person not
    lawfully present in the U.S.; a person incarcerated for at least one
    day of the applicable month in a jail, prison, or similar penal
    institution or correctional facility after the disposition of charges;
    a person who has income below the tax filing threshold; a person who
    lacks coverage for fewer than 3 months; a person who cannot afford
    coverage where the required contribution exceeds 8 percent of household
    income for 2014; members of federally recognized Indian tribes; or
    persons who have suffered hardship as certified by an Exchange with
    respect to the capability to obtain minimum essential coverage
    (including, among others, patients of the Federal Indian Health Service
    not enrolled in a recognized tribe). See IRC Sec. 5000A(d) and (e).
        \43\ The Premium Tax Credit is a refundable, advanceable tax credit
    available to help taxpayers with moderate income purchase health
    insurance through a Marketplace. IRC Sec. 36B.
    ---------------------------------------------------------------------------
        While other agencies have telephone or Web chat options, the IRS
    has adopted a Web-first strategy that acts more as a ``Web-only''
    strategy, limiting taxpayers' access to in-person assistance with tax-
    related healthcare questions.\44\ The IRS has specifically advised its
    assistors ``the best service to the customer is to provide the Web
    URLs. This is known as the `Web First' strategy.'' \45\ In comparison,
    Healthcare.gov has telephone assistors trained to answer questions, as
    well as a live Web chat option.\46\
    ---------------------------------------------------------------------------
        \44\ See Health Insurance Market Place, Help-Center, https://
    www.healthcare.gov/help-center/(last visited Aug. 12, 2013).
        \45\ IRS, Affordable Care Act Web First Strategy: Addressing Health
    Care Law Inquiries, http://win.web.irs.gov/field/fadocs/
    ACA_Web_First_Strat.pdf (last visited Apr. 30, 2013).
        \46\ See Health Insurance Market Place, Help-Center, https://
    www.healthcare.gov/help-center/(last visited Aug. 12, 2013).
    ---------------------------------------------------------------------------
        Web sites alone may not meet the needs of taxpayers dealing with
    complicated new provisions for the first time.\47\ Moreover, those who
    are eligible for the Premium Tax Credit may not have the necessary
    language or computer literacy skills to obtain information in this
    way,\48\ and those who lack Internet access still need IRS assistance
    through other channels. Obtaining healthcare is an inherently
    complicated and personal decision that can have a major impact on a
    taxpayer's life and finances. If the IRS cannot answer tax-related
    questions, taxpayers may unknowingly make healthcare choices that carry
    significant tax implications.
    ---------------------------------------------------------------------------
        \47\ Existing IRS functions, such as Stakeholder Partnership,
    Education & Communication (SPEC), Stakeholder Liaison, and Taxpayer
    Assistance Centers may receive questions and even visits from taxpayers
    who want to know about the ACA. See SPEC Outreach Summary (Filing
    Season Jan.-Apr. 2013) (containing 3-pg. ACA Overview); IRS Pub. 5093,
    Healthcare Law Online Resources (1 pg. listing a half-dozen URLs for
    individuals & employers).
        \48\ Adults ``living in households earning at least $50,000 per
    year are more likely to have home broadband than those at lower income
    levels.'' Pew Res. Ctr., Home Broadband 2013, available at http://
    pewInternet.org/Reports/2013/Broadband.aspx (last visited Sept. 17,
    2013). As of 2011, only ``75.6 percent of households reported having a
    computer,'' which means almost a quarter of the Nation's households may
    be unable to get the information they need from the IRS's Web strategy.
    U.S. Census Bureau, Computer and Internet Use in the United States,
    P20-569 (May 2013) 1. See also National Taxpayer Advocate 2011 Annual
    Report to Congress 273, 279 (Introduction to Diversity Issues: The IRS
    Should Do More to Accommodate Changing Taxpayer Demographics) (``low
    income, less educated, minority, elderly, disabled, or rural
    populations are less likely than others to use the Internet'').
    ---------------------------------------------------------------------------
    The IRS Is Not Adequately Training Assistors to Respond to Taxpayer
            Questions on Health Care Issues
        As discussed above, due to resource constraints the IRS already
    cannot answer millions of telephone calls or respond timely to volumes
    correspondence from taxpayers.\49\ The new work caused by the ACA will
    compound this backlog. The IRS estimates it needs almost 2,000 new
    employees to handle the numerous additional calls and letters that may
    arrive once applicable provisions take effect.\50\ Absent additional
    employees dedicated to the ACA, the IRS must ensure that the employees
    it does have --particularly in taxpayer-facing roles--are properly
    trained to respond to taxpayer inquiries.
    ---------------------------------------------------------------------------
        \49\ See NTA 2013 Annual Report 20 (Most Serious Problem: IRS
    Budget Cuts Diminish Taxpayer Service); National Taxpayer Advocate 2012
    Annual Report to Congress 34 (Most Serious Problem: The IRS Is
    Significantly Underfunded to Serve Taxpayers and Collect Tax); IRS
    Joint Operation Center (JOC) Snapshot Report for fiscal year 2013
    (Sept. 30, 2013) and JOC Accounts Management Inventory Reports for
    fiscal year 2013 (Oct. 6, 2012-Sept, 28, 2013).
        \50\ See IRS fiscal year 2014 Congressional Budget Submission,
    Table 4.9 at 177.
    ---------------------------------------------------------------------------
        The IRS has provided some general ACA information to employees but
    has not yet engaged in substantive training. The IRS says it is
    developing training for 2014, but TAS has yet to see or review its
    training plan. In contrast, TAS has been providing training to its
    employees on the Affordable Care Act since 2010, to give them time to
    digest and develop a basic understanding of the new provisions. TAS
    plans to continue this training through 2014, adding more in-depth
    sessions and specific case studies. It is my understanding that one of
    the ACA Implementation Teams is reviewing the ACA training TAS offered
    this year to see if it meets the needs of the ACA overview all IRS
    employees should receive. I encourage the IRS to use TAS's training and
    ensure that all IRS employees receive basic training on the new
    healthcare provisions.
    IRS Outreach Does Not Alert Taxpayers to the Issues Surrounding a
            Change in Circumstances
        The IRS has made strides in its ACA outreach efforts. It has issued
    several user-friendly publications for taxpayers regarding the Premium
    Tax Credit, and we understand it plans similar publications for the
    employer provisions and Individual Shared Responsibility Payment.\51\
    Additionally, the IRS has made efforts to improve the ACA pages on
    IRS.gov, including by posting new pages on the Premium Tax Credit and
    the ISRP \52\ as well as updated Q&As and legal guidance.\53\ The IRS
    also plans to create a page on the 5000A Individual Shared
    Responsibility Payment. TAS will continue to work with the IRS on its
    outreach efforts.
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        \51\ Thus far, the IRS has issued several electronic publications,
    including Pub. 5093, Health Care Law Online Resources (July 2013), Pub.
    5120, Facts About the Premium Tax Credit (flyer) (Sept. 2013), and Pub.
    5121, Facts About the Premium Tax Credit (brochure) (Dec. 2013). We
    understand that Spanish versions of the publications are in progress.
        \52\ The ACA homepage is located at http://www.irs.gov/aca. The
    Premium Tax Credit page is located at http://www.irs.gov/uac/The-
    Premium-Tax-Credit. The ISRP page is located at http://www.irs.gov/uac/
    Individual-Shared-Responsibility-Provision.
        \53\ http://www.irs.gov/uac/Newsroom/Affordable-Care-Act-Tax-
    Provisions-Questions-and-Answers.
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        However, we remain concerned that the IRS is not being proactive
    and educating taxpayers as early as possible on a critical issue: the
    importance of updating their information throughout the year with the
    Exchange if they are receiving a credit.\54\ To avoid receiving an
    excess credit, taxpayers must update their information with the
    marketplace if their incomes or other relevant circumstances
    change.\55\ This is also important for taxpayers who may be eligible
    for a larger credit due to a reduction in pay or an increase in family
    size (such as having or adopting a child). Educating taxpayers early
    and repeatedly about this requirement will help prevent them from owing
    money to the IRS (or reducing their refunds) or receiving an additional
    credit amount at the end of the year that they could have received
    earlier.
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        \54\ To apply for a premium assistance credit, an individual goes
    to an Exchange, which will attempt to verify household income with the
    IRS. In general, applicable taxpayers seeking health insurance and a
    premium tax credit through an Exchange will supply names, Social
    Security numbers, and income data for themselves and their dependents
    to the Exchange. See ACA Sec. 1411(b), 124 Stat. 119, 224 (2010). The
    Exchange can verify data with HHS, which has authority under the ACA to
    obtain IRS data, and then disclose any inconsistency to the Exchange.
    See IRC Sec. 6103(l)(21). If IRS information is inaccurate or outdated,
    the individual may need to present updated documentation or other
    evidence to HHS to establish eligibility for a premium tax credit. If a
    taxpayer's household status at year's end is other than anticipated--
    due either to a change in income or family size--the premium tax credit
    may be more or less than the amount advanced. Consequently, the IRS may
    recover the excess as a tax (above a threshold for low income
    taxpayers), or owe the taxpayer a refund. Section ``36B(f)(2)(B) places
    a graduated set of caps on the additional tax liability for taxpayers
    with household income under 400 percent of the F[ederal] P[overty]
    Level]. The repayment limitation amounts range from $600 to $2,500
    (one-half that amount for single taxpayers) depending on FPL, and are
    adjusted to reflect changes in the cost of living beginning in 2015.''
    76 Fed. Reg. 50931, 50933-934 (Aug. 17, 2011).
        \55\ Income may change after submission of an application, which
    reflects the amount on the last tax return, i.e., the one filed in the
    current year relating to the year that just ended. Thus, a couple of
    years' worth of life changes may transpire by the time of
    reconciliation between the advance and ultimate credit amounts. By the
    same token, certain changed circumstances, such as the birth of a child
    or a reduction in pay, may increase the credit.
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        Healthcare.gov now has a ``Report Life Change'' button that allows
    individuals to modify their health insurance plans (once they are
    enrolled) if they have experienced a change such as family size,
    moving, etc.\56\ Assuming this option will also allow for a
    recalculation of the Premium Tax Credit based on these changes, the IRS
    can easily tie its messages about changing circumstances into this new
    option.
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        \56\ Amy Goldstein, Administration will allow people to switch
    health-care plan to a limited degree, Washington Post (Feb. 7, 2014)
    available at http://www.washingtonpost.com/national/health-science/
    administration-will-allow-people-to-switch-obamacare-plans-to-a-
    limited-degree/2014/02/07/56c8bfd2-9015-11e3-b227-
    12a45d109e03_story.html (last visited Feb. 18, 2014).
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        TAS worked with the IRS to prominently place language in the 2013
    Form 1040, U.S. Individual Income Tax Return, instructions to alert
    taxpayers to the importance of updating their information with the
    marketplaces. However, the IRS still needs to be more proactive. While
    almost 80 percent of individual returns are refund returns and thus may
    offset some or all of the reconciliation amount, the IRS should be
    doing all it can to ensure that as few taxpayers as possible have
    excessive advanced premium tax credit payments and instead receive the
    correct amount throughout the year.\57\ In addition to preventing
    taxpayers from owing money, this approach will reduce future costs to
    the IRS for collection activities.\58\
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        \57\ IRS Compliance Data Warehouse, Individual Returns Transaction
    File Tax Year 2012 (Feb. 2014).
        \58\ TAS looks forward to working with the IRS Office of Research,
    Analysis and Statistics (RAS) to try to identify the areas and
    populations of taxpayers most likely to have experienced a change in
    circumstances. This information can be used by the IRS's SPEC
    organization, TAS Local Taxpayer Advocates (LTAs), Low Income Taxpayer
    Clinics (LITCs), and other stakeholders to conduct outreach to these
    specific populations.
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        I have additional concerns that other taxpayers will have their
    returns delayed because they claim a larger Premium Tax Credit than
    what they received during the year due to a change in circumstances. If
    the IRS flags these returns as potentially fraudulent, it may hold up
    legitimate refunds. TAS has seen these issues previously, especially
    when large dollar amounts are at stake.\59\
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        \59\ National Taxpayer Advocate 2012 Annual Report to Congress 111-
    133 (Most Serious Problem: The IRS's Compliance Strategy for the
    Expanded Adoption Credit Has Significantly and Unnecessarily Harmed
    Vulnerable Taxpayers, Has Increased Costs for the IRS, and Does Not
    Bode Well for Future Credit Administration); National Taxpayer Advocate
    fiscal year 2012 Objectives Report to Congress 28-32; National Taxpayer
    Advocate 2011 Annual Report to Congress 687-689 (Case Advocacy:
    Policymakers Can Learn from the Implementation of the FTHBC); National
    Taxpayer Advocate fiscal year 2011 Objectives Report to Congress 3, 37-
    43; National Taxpayer Advocate 2010 Annual Report to Congress 15 (Most
    Serious Problem: The IRS Mission Statement Does Not Reflect the
    Agency's Increasing Responsibilities for Administering Social Benefits
    Programs) (Case Advocacy: TAS Assists the IRS with the Administration
    of the First-Time Homebuyer Credit); National Taxpayer Advocate 2009
    Annual Report to Congress 506-509; Hearing on Complexity and the Tax
    Gap: Making Tax Compliance Easier and Collecting What's Due, Hearing
    Before the S. Comm. on Finance, 112th Cong. (statement of Nina E.
    Olson, National Taxpayer Advocate) (June 28, 2011); Filing Season
    Update: Current IRS Issues: Hearing Before the S. Comm. on Finance,
    111th Cong. (2010) (statement of Nina E. Olson, National Taxpayer
    Advocate) (Apr. 15, 2010); The National Taxpayer Advocate's 2009 Report
    on the Most Serious Problems Encountered by Taxpayers: Hearing Before
    the Subcomm. on Oversight of the H. Comm. on Ways and Means, 111th
    Cong. (2010) (statement of Nina E. Olson, National Taxpayer Advocate)
    (Mar. 16, 2010).
    ---------------------------------------------------------------------------
        While there will always be persons trying to game the tax system, I
    believe the risk of fraud with respect to the Premium Tax Credit (PTC)
    is much less than with many other refundable credits. With respect to
    the Advanced Premium Tax Credit, the credit will be paid to established
    insurance companies when a policy is actually in place. When a taxpayer
    claims the PTC on his or her income tax return, it is a reimbursement
    of amounts already paid; the taxpayer will have to provide proof of a
    qualified health insurance plan, which the IRS will be able to verify
    through third-party information reporting. This design minimizes the
    opportunities for fraud.
        TAS is in the final stages of developing an estimator for the
    Premium Tax Credit that will help taxpayers and practitioners
    understand how changes in circumstances will impact their credit
    amounts. TAS hopes to have this tool online and available to the public
    in the next few months. We have had success with a similar estimator
    for the Small Business Health Care Tax Credit (SBHCTC), which we
    launched on the TAS Tax Toolkit in November 2012.\60\ The homepage for
    the estimator received 5,000 page views for October 2013 and over
    13,000 page views for October--December 2013.\61\
    ---------------------------------------------------------------------------
        \60\ http://www.taxpayeradvocate.irs.gov/Businesses/Small-Business-
    Health-Care-Tax-Credit-Estimator (last visited Feb. 19, 2014).
    According to Weber Shandwick, which tracks statistics for the
    estimator, the SBHCTC estimator has received over 23,500 page views
    since its launch in 2012.
        \61\ Taxpayer Advocate Service, fiscal year 2014 1st Quarter
    Business Performance Review.
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    IRS ACA Audit and Collection Activity May Unduly Burden Low Income
            Taxpayers
        My concerns about the IRS's implementation of the Affordable Care
    Act (ACA) are similar to concerns I have raised on numerous occasions
    about the IRS's handling of identity theft claims. Just as the IRS does
    not resolve identity theft cases through a single point of contact and
    thereby forces taxpayers to negotiate a maze of various IRS functions
    to unwind the harm caused by the identity theft, the IRS may not
    resolve, during routine audits, issues related to the ACA. This case
    segmentation may prolong the length of time taxpayers must wait to
    fully and finally resolve their tax liabilities for a given year and
    burden them with additional IRS contacts. These inefficiencies, some of
    which appear to be attributable to programming conditions, may
    disproportionately affect low income taxpayers.\62\
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        \62\ Programming deficiencies are evident in other, related areas
    of IRS operations. See letter from Sen. Grassley to Comm'r Koskinen
    (Apr. 21, 2014) available at http://www.grassley.senate.gov/issues/
    upload/Grassley-to-IRS-Return-Review-Program-4-21-14.pdf, noting that
    the IRS is not implementing the needed Return Review Program, a fraud
    detection system especially critical as the refundable Premium Tax
    Credit becomes available, due to budgetary constraints.
    ---------------------------------------------------------------------------
        For example, the IRS may audit the return of a taxpayer claiming
    the Earned Income Tax Credit (EITC).\63\ The taxpayer may have also
    claimed the Premium Tax Credit.\64\ If the IRS determines the
    taxpayer's income exceeded the allowable threshold for claiming EITC,
    the taxpayer may also not be eligible for the PTC. However, under
    current programming conditions, the IRS would not be able to resolve
    both issues in the course of the audit because it plans to assess
    liability under the ACA using different software than it uses to
    process returns. Return-processing software would not recognize and
    manage tax liabilities arising under the ACA.\65\ Consequently, the IRS
    would ``conclude'' the audit and assess additional tax because of
    disallowed EITC only to contact the taxpayer months later and assess
    additional tax due to disallowed PTC.
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        \63\ Taxpayers who claim the Earned Income Tax Credit are more
    likely to be audited than taxpayers in the general population. EITC
    audits have historically comprised about a third of all individual
    taxpayer audits. See National Taxpayer Advocate 2012 Annual Report to
    Congress vol. 2, Study of Tax Court Cases In Which the IRS Conceded the
    Taxpayer was Entitled to Earned Income Tax Credit (EITC).
        \64\ In general, a taxpayer may be eligible for the PTC if the
    taxpayer's household income for the taxable year is at least 100
    percent but not more than 400 percent of the Federal poverty level for
    the taxpayer's family size. IRC Sec. 36B(c)(1). The 2014 Federal
    poverty level for a four-person household is $23,850. See Federal
    Poverty Guidelines, available at http://aspe.hhs.gov/POVERTY/
    14poverty.cfm. 400 percent of $23,850 is $95,400. For 2014, joint
    filers with two qualifying children must have adjusted gross income of
    less than $49,186 in order to qualify for EITC. Preview of 2014 EITC
    Income Limits, Maximum Credit Amounts and Tax Law Updates, available at
    http://www.irs.gov/Individuals/2012-EITC-Income-Limits,-Maximum-Credit-
    -Amounts-and-Tax-Law-Updates.
        \65\ The traditional software used by IRS Exam to conduct audits,
    Report Generating Software, cannot accommodate the need to assess these
    tax liabilities resulting from the same audit record.
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        Conversely, if a taxpayer inflated his or her income in order to
    receive a larger EITC refund and the IRS later adjusts the taxpayer's
    income downward and reduces the claimed EITC amount, the taxpayer might
    be entitled to additional PTC because of the decreased income. As a
    result of the audit, the IRS would assess additional tax due to
    disallowed EITC, but the taxpayer's final liability, determined months
    later after the PTC issue is addressed, may be lower. The taxpayer
    might receive demands for payment related to the disallowed EITC in the
    meantime.
        Similar issues arise with respect to the ISRP. A taxpayer may claim
    EITC and also report liability for ISRP with respect to the same
    child.\66\ If the IRS determines the child was not a qualifying child,
    it would disallow the claimed EITC and assess additional tax. If the
    child was also not the taxpayer's dependent, the taxpayer would not be
    liable for ISRP with respect to that child, but only later would the
    IRS contact the taxpayer with respect to the assessed ISRP and
    ultimately reduce the liability. In the meantime, the taxpayer might be
    burdened with demands for payment and enforced collection action with
    respect to the disallowed EITC at a time when the true amount of the
    taxpayer's liability had not yet been established.
    ---------------------------------------------------------------------------
        \66\ Under section 5000A(b)(3) of the ACA, the adult or married
    couple who can claim a child or another individual as a dependent for
    Federal income tax purposes is responsible for making the payment if
    the dependent does not have coverage or an exemption.
    ---------------------------------------------------------------------------
        The ACA prohibits the IRS from collecting ISRP liabilities through
    enforced collection action.\67\ However, when the IRS takes enforced
    collection action, such as a levy, to collect non-ISRP liabilities, it
    may collect more than the taxpayer actually owes.\68\ Once the non-ISRP
    liabilities have been satisfied, the IRS should refund the overpayment
    to the taxpayer.\69\ However, IRS programming conditions may cause the
    IRS to automatically apply excess levy proceeds to ISRP liabilities.
    The IRS tested programming intended to prevent this refund offset, but
    the proposed solution was successful only if the refund offset occurred
    in the same cycle the levy payment was received, which occurred only 18
    percent of the time.\70\ Ensuring that levy proceeds are not applied to
    ISRP liabilities would require manual processing of these accounts.
    ---------------------------------------------------------------------------
        \67\ IRC Sec. 5000A(g)(2)(B).
        \68\ This may occur, for example, when the IRS imposes a continuous
    levy on the taxpayer's wages or levies on Social Security benefits and
    either inadvertently does not release the levy when the tax liability
    has been satisfied, or releases the levy, but not before the employer
    or the Social Security Administration has already remitted the payment
    to the IRS. See IRM 5.11.2.6 (Apr. 15, 2014), noting that ``Every
    reasonable effort will be made to release a notice of levy timely.
    However, sometimes surplus levy proceeds are received. Surplus proceeds
    are payments greater than the amount still owed for the liabilities
    listed on the notice of levy. Example: A refund posts after the levy
    source has already sent payment for the levy.''
        \69\ See IRC Sec. 6342(b).
        \70\ Wage and Investment Research & Analysis (WIRA) Group 2,
    Project #2-14-09-A-206 Refund Offset Adjustment Due to Lien/Levy
    Overpayment (April 2014) and attached spreadsheet, showing that out of
    11,064 transactions in tax year 2012 in which a levy resulted in an
    overpayment, in only 2,039 transactions was the overpayment offset to
    another module in the same cycle and was therefore preventable. 2,039
    out of 11,064 is 18 percent. TAS Research has not yet verified the
    accuracy of these findings.
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    Delays in Information Matching Show Need for Real-Time Tax System
        Last year, the Treasury Department delayed the requirement for
    certain employers with 100 or more employees to provide coverage to
    their employees.\71\ Due to the delay in implementation, employers will
    not have to provide information reporting to the IRS regarding the
    employees they cover.\72\ This information reporting will help identify
    which taxpayers have coverage and which do not (and therefore have to
    pay a penalty). We do not yet know how the IRS plans to address this
    lack of information during the 2015 filing season. TAS members on the
    relevant Joint Implementation Team have been told it will be discussed
    later.
    ---------------------------------------------------------------------------
        \71\ Treasury Department Fact Sheet, Final Regulations Implementing
    Employer Shared Responsibility Under the Affordable Care Act (ACA) for
    2015, available at http://www.treasury.gov/press-center/press-releases/
    Documents/Fact%20Sheet%20021014.pdf (last visited April 28, 2014). The
    requirement was further delayed until 2016 for employers with 50 to 99
    employees. Shared Responsibility for Employers Regarding Health
    Coverage, 79 Fed. Reg. 8544 (Feb. 12, 2014).
        \72\ Transition Relief for 2014 Under Sec. Sec. 6055 (Sec. 6055
    Information Reporting), 6056 (Sec. 6056 Information Reporting) and
    4980H (Employer Shared Responsibility Provisions), Notice 2013-45,
    2013-31 I.R.B. 116.
    ---------------------------------------------------------------------------
        Without this information, the IRS's job is increasingly difficult.
    This concern underscores the need for the IRS to develop an accelerated
    document-matching program, as discussed immediately below.
       v. accelerated receipt and use of third-party information reports
        Accelerated third-party information report processing and upfront
    document matching would protect revenue, reduce fraud, and improve
    taxpayer service.
        Whether in the context of Premium Tax Credit reconciliation,
    eligibility for the Earned Income Tax Credit, or returns filed by
    identity thieves, the IRS faces pressure to satisfy two competing
    demands: protect the public fisc from erroneous refund claims and meet
    taxpayer expectations by issuing refunds quickly. Although the IRS has
    instituted many business rules and filters to identify questionable
    refunds, it generally matches third-party information reports with tax
    return data long after it has released any associated income tax
    refunds.\73\
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        \73\ For a more detailed discussion of the IRS's processes to
    review refund returns, see Nina E. Olson, More Than a `Mere' Preparer:
    Loving and Return Preparation, 2013 TNT 92-131, Tax Notes Tax Analysts
    Tax Notes Today (May 13, 2013).
    ---------------------------------------------------------------------------
        In 2009, I recommended that Congress establish a timeframe for the
    IRS to develop a strategy and timeline for accelerating third-party
    information report processing and providing taxpayers with electronic
    access to such data.\74\ Most recently, a study in my 2013 Annual
    Report proposed a strategic framework and preliminary recommendations
    to better structure the filing season to reduce fraud and protect the
    interests of both the Government and taxpayers.\75\ This is a key
    component of 21st century tax administration.
    ---------------------------------------------------------------------------
        \74\ National Taxpayer Advocate 2009 Annual Report to Congress 338-
    345; National Taxpayer Advocate 2011 Annual Report to Congress 284-295;
    National Taxpayer Advocate 2012 Annual Report to Congress 180-191.
        \75\ NTA 2013 Annual Report vol. 2, 67-96.
    ---------------------------------------------------------------------------
        The Government benefits from the revenue protection aspect of
    accelerated third-party information report processing and upfront
    document matching. Third-party information reporting is a crucial
    element in maximizing tax compliance.\76\ By enabling the IRS to match
    third-party data to tax return information before issuing refunds, the
    IRS could identify and resolve inaccurate income tax reporting soon
    after the return is filed and prevent the release of erroneous refunds.
    This system would deter tax fraud and identity theft by stopping the
    refund associated with a mismatch.
    ---------------------------------------------------------------------------
        \76\ Tax gap data show the importance of information reporting
    compliance, and how third-party reporting is essential to encourage
    voluntary compliance; specifically, when taxpayers have a choice about
    reporting their income, tax compliance rates are remarkably low. For
    example, workers who are classified as employees have little
    opportunity to underreport their earned income because it is subject to
    both information reporting on Forms W-2 and tax withholding. In fact,
    IRS data show that taxpayers report about 99 percent of their wages and
    salaries. IRS, Tax Gap for Tax Year 2006 Overview, Chart 1 (Jan. 6,
    2012).
    ---------------------------------------------------------------------------
        In addition, accelerated information report processing and upfront
    matching would substantially improve taxpayer service and reduce
    taxpayer burden by:

      --Providing taxpayers with direct electronic access to the third-
            party information report data to assist in tax preparation and
            reduce inadvertent errors; \77\
    ---------------------------------------------------------------------------
        \77\ Taxpayers will not realize the full benefits of accelerated
    third-party information reporting unless the IRS provides taxpayers and
    their preparers with the ability to access and download their third
    party data from an online account. To address inadvertent omissions,
    the IRS should provide access to real-time transcripts of third-party
    data to aid in return preparation. Taxpayers and preparers could refer
    to the transcripts to ensure they do not accidentally omit income. One
    step above the transcript would be to provide a platform from which
    taxpayers and preparers could download third-party data submitted to
    the IRS or the Social Security Administration directly into a
    commercial tax software package or even an improved version of the
    IRS's Free File Fillable Forms (FFFF). This second option would
    eliminate transcription errors and provide a one-stop-service to
    taxpayers who would not need to download the data separately from each
    third party. In addition, the Government would enjoy the benefits
    experienced by other tax administrations through pre-filled returns,
    but would still encourage competition in the tax software industry. For
    more information on the benefits of electronic access to third-party
    data and the experience of international tax administrations, see
    National Taxpayer Advocate 2013 Annual Report to Congress vol. 2, 67-
    96.
    ---------------------------------------------------------------------------
      --Improving taxpayers' ability to answer questions about an
            underlying economic transaction if the IRS identifies the
            mismatch within months rather than a year or more after the
            fact;
      --Avoiding IRS collection actions long after taxpayers have spent the
            refunds;
      --Avoiding the long-term accrual of penalties and interest on
            unintentionally omitted or under-reported items; and
      --Reducing vulnerability to identity-theft related refund fraud.\78\
    ---------------------------------------------------------------------------
        \78\ William Hoffman, IRS Oversight Board Brainstorms Real-Time Tax
    System, ID Theft Initiatives, Tax Notes Today (May 2, 2013); IRS,
    PowerPoint, Real Time Tax System Initiative, Public Meeting 1 (Dec. 8,
    2011), available at http://www.irs.gov/file_source/pub/irs-utl/
    rtts_deck.pdf. For more information on identity-theft refund fraud, see
    National Taxpayer Advocate 2013 Annual Report to Congress 75-83 (Most
    Serious Problem: The IRS Should Adopt a New Approach to Identity Theft
    Victim Assistance that Minimizes Burden to Such Taxpayers); 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).

        While the IRS has acknowledged the benefits of accelerated third-
    party information report processing and upfront matching, it has not
    made any recent progress in developing a long-term plan for such a
    system.\79\ The IRS's lack of progress only delays the significant
    benefits we outlined throughout the study. Thus, we reiterated our 2009
    Legislative Recommendation that Congress require the IRS and Treasury,
    in consultation with the Taxpayer Advocate Service, to prepare a plan
    and timeline to achieve an accelerated third-party report processing
    system.
    ---------------------------------------------------------------------------
        \79\ For written and oral statements of panelists at the two IRS
    Real Time Tax System Initiative public meetings, see http://
    www.irs.gov/Tax-Professionals/Real-Time-Tax-Initiative (last visited
    Feb. 13, 2013).
    ---------------------------------------------------------------------------
        In addition, to stimulate serious consideration and discussion of
    the issue, we offered the following administrative and legislative
    recommendations to achieve a system that allows the IRS to perform
    upfront matching to protect Government revenue and improve taxpayer
    service:

      --Provide taxpayers with electronic access to real-time transcripts
            of third-party information reporting data to aid in return
            preparation.
      --Provide a platform from which taxpayers and preparers could
            download third-party data directly into commercial tax return
            preparation software.
      --To accelerate the processing of Form W-2 data, develop and
            implement a 1 year pilot to determine whether the IRS can
            screen Form W-2 data as effectively as the Social Security
            Administration.
      --Because almost 98 percent of information reports are already e-
            filed, eliminate the March 31 deadline for e-filed information
            reports.\80\ Thus, all information reports, whether e-filed or
            filed on paper, would be due at the end of February.
    ---------------------------------------------------------------------------
        \80\ IRS Pub. 6961, 2013 Update: Calendar Year Projections of
    Information and Withholding Documents for the United States and
    Campuses, Tables 2-4 (Of the 2,288,516,144 information reports received
    in calendar year 2012, 2,240,335,726 were received electronically).
    ---------------------------------------------------------------------------
      --Create a $50 de minimis threshold for corrections, which would
            eliminate the need to file an amended or corrected third-party
            information report for any adjustments to income below $50.
      --Further increase electronic filing by reducing the 250 report
            threshold in IRC Sec. 6011(e) to 50 reports and offer 2D bar
            code technology for those who cannot e-file.
      --Issue direct deposit and other electronic refunds by April 30 and
            paper checks by May 31 for taxpayers who file their returns by
            April 15.

        The proposals included in the 2013 study are meant to serve as a
    ``conversation starter'' and are based on research conducted by the
    Taxpayer Advocate Service, including discussions with impacted
    stakeholder groups and a review of international tax systems. We
    attempted to address all identified concerns and risks, but we
    acknowledge that there will be unexpected challenges and risks before a
    proposal along these lines is implemented. We recognize that the
    changes necessary to accomplish an accelerated third-party reporting
    system require a great deal of forethought, analysis, and stakeholder
    engagement.
                   vi. irs information technology challenges
        An adequately funded, staffed, and skilled IRS Information
    Technology (IT) function underpins all of the activities described
    above. IT resources are the common denominator for performing core IRS
    functions, including taxpayer service, prompt issuance of refunds,
    selection and assignment of compliance work, and protecting taxpayers
    and the public from refund fraud and identity theft. If the IT
    workforce is not appropriately skilled and staffed, the IRS will not be
    able to bring itself into the 21st century, much less meet its everyday
    work demands. Cost overruns will occur if the IRS does not have the
    skilled staff to undertake the necessary strategic planning or provide
    adequate project and contract oversight.
        For fiscal year 2014 and fiscal year 2015, the IRS is focusing its
    IT resources on three main areas: implementation of the ACA;
    implementation of FATCA; and implementation of the 2015 filing season,
    including delivery of various legislative provisions and extenders. All
    other requests for IT resources are subordinate to these three ``heavy
    lifts.'' While I understand the importance of each of these areas to
    tax administration, at current funding and staffing levels the IRS will
    not be able to deliver on these programs and also improve or correct
    core processes and systems. The negative impact to taxpayers of not
    funding everyday improvements to IRS taxpayer service, revenue
    protection, and compliance activities is significant.
        Moreover, because the IT workforce is stretched so thin, the
    already glacial pace of the IRS's move into a 21st century technology
    environment is being slowed further. The IRS's inability to digitally
    communicate with taxpayers places the IRS far behind other
    international tax administrations and the financial services sector.
    The slowdown or shutdown of IT support also compounds the impact of
    taxpayer service funding reductions by driving taxpayers to make
    numerous telephonic or correspondence contacts with the IRS just to get
    information about their accounts. It also forces the IRS to continue
    using archaic compliance methods like correspondence examinations, when
    a ``virtual'' face-to-face audit would bring about better and more
    accurate results in terms of taxpayer response, issue resolution, and
    taxpayer education.
        The Taxpayer Advocate Service has keenly felt the impact of this IT
    shortfall, when work on a once-in-a generation revision of its case
    management system (called TASIS) stopped short on March 31, 2014, due
    to lack of available funds. The work stoppage was based on the IRS's
    need to prioritize its IT projects and direct all available resources
    to the three key priorities--ACA, FATCA, and the 2015 filing season.
    While work will resume on this system shortly because TAS itself has
    transferred $1.8 million of its operating budget to cover the
    shortfall, this stop-and-start approach undermines not only TAS's
    ability to deliver quality service to taxpayers experiencing
    significant hardship, but also the IRS's efforts in developing an
    enterprise case management system.
        The IRS currently has about 167 case management systems used by
    different units. This diversity of systems is one reason it is so
    difficult for IRS employees and taxpayers to find out precisely what
    the IRS is doing when an issue crosses different IRS functional units.
    There is no IRS ``integrated'' or ``enterprise-wide'' case management
    system.
        The Taxpayer Advocate Service Information System, or TASIS, was
    designed with this problem in mind. Over a decade ago, TAS began a
    major redesign effort of its case management and case assignment
    system, which soon expanded to include all of its activities, including
    systemic advocacy and research. The result is TASIS--an integrated
    case, project, and work assignment system that allows for seamless
    movement and access to cases, projects, research, and archives. TASIS
    will have the following capabilities:

      --TAS Intake Advocates will be able to conduct a real-time initial
            interview and perform related case-building, including
            automatically retrieving relevant information from other IRS
            systems.\81\
    ---------------------------------------------------------------------------
        \81\ As part of our business process review, TAS created an Intake
    Advocate position to ensure that TAS cases would be as fully developed
    as possible at the first contact with the taxpayer for assignment to
    the appropriate case advocate and to eliminate the delays associated
    with reassigning cases. TAS has also developed procedures for
    identifying instances where, with a little guidance from the Intake
    Advocate, the taxpayer could actually resolve the problem him or
    herself.
    ---------------------------------------------------------------------------
      --TAS Case Advocates will have the ability to communicate digitally
            with taxpayers--both receiving and sending information and
            documents, and sending automated reminders to taxpayers or IRS
            employees as needed to keep cases on track toward resolution.
      --Taxpayers will be able to submit electronic requests for TAS
            assistance--whether for help with an individual problem or with
            solving a systemic problem--and they will be able to check on
            the status of their cases or systemic issue online without
            having to call a TAS employee for an update.
      --All significant materials--case files, projects, research studies,
            communications--will be converted to digital files, promoting
            ease of access and sharing, and eliminating costs of document
            storage, shipping, archiving, and retrieval.\82\
    ---------------------------------------------------------------------------
        \82\ Reliance on paper files and documents requires storage and
    handling of 50 to 60 pages for each TAS case, or approximately 12.5
    million pages each year. This includes hard copies as well as records
    kept on employees' local hard drives. TAS incurs repeated copying and
    shipping costs for transfers, work reviews, and collaboration. The use
    of virtual documents will almost eliminate costs associated with paper
    document-handling and storage, allow immediate access for
    collaboration, and improve TAS's ability to reference the products or
    conduct research.
    ---------------------------------------------------------------------------
      --Case Advocacy employees will have an easy-to-use method to identify
            and elevate systemic issues they encounter in the cases.
      --TAS will have a sophisticated ability to search our rich repository
            of information so that projects and data can be easily
            identified and retrieved via a library of key terms (metadata)
            that are applied to both cases and projects.

        All of these features were designed to minimize the time spent on
    duplicative keystrokes and data entry, and manual retrieval or requests
    for information from other functions, so that TAS employees' limited
    time can be spent on direct communication with and advocating for
    taxpayers rather than on mere clerical tasks.
        In summary, TASIS is a sophisticated case, project, and work
    assignment management system that has already been identified by the
    IRS's Chief Technology Officer as a potential foundation for an IRS
    Enterprise Case Management System, and it is of sufficient significance
    that the Senate Appropriations Committee has included it on its list of
    ``major information technology project activities'' about which the IRS
    must report quarterly to the Senate and House Appropriations Committees
    and the Government Accountability Office.\83\
    ---------------------------------------------------------------------------
        \83\ S. Rep. No. 113-80, at 34 (2013).
    ---------------------------------------------------------------------------
        I write about TASIS in detail partly because of its independent
    significance but also to illustrate the impact of the funding
    shortfalls in IT more generally. Although TAS is just one small unit
    within the IRS, it assists taxpayers who are experiencing significant
    hardship as a result of IRS actions or inaction.\84\ The later
    deployment of TASIS because of the work stoppage will harm those
    taxpayers, impeding my employees' ability to effectively communicate
    and advocate on their behalf. The work stoppage also will cost the IRS
    more in terms of shoring up an obsolete system, unproductive use of
    employees' direct time, and higher costs once the program is started up
    again. This pattern is being reproduced several times over in every
    business unit of the IRS.
    ---------------------------------------------------------------------------
        \84\ See IRC Sec. 7811.
    ---------------------------------------------------------------------------
        As the National Taxpayer Advocate, I believe it is a key taxpayer
    need that the IRS's IT function be adequately funded, not only to
    deliver on major initiatives like ACA and FATCA, but also to deliver on
    the many small but important improvements and projects that will make a
    positive difference for taxpayers, employees, and the public fisc.
    Furthermore, the IRS needs dedicated funding to develop projects that
    bring us into the 21st century and the digital age. The IRS should be
    in the vanguard of technology, not bringing up the rear.
                                vii. conclusion
        In my 2013 Annual Report, I stated that the short-term crises of
    the past year masked the major problem facing the IRS today--unstable
    and chronic underfunding that puts at risk the IRS's ability to meet
    its current responsibilities, much less articulate and achieve the
    necessary transformation to an effective, modern tax agency. The issues
    I have discussed today clearly illustrate this situation. In this and
    every filing season, the IRS must carry out its core mission of
    collecting revenue and helping taxpayers comply with their obligations.
    At the same time, it must deal with threats such as identity theft,
    prepare for the new challenges presented by the ACA, and bring its
    technology into the 21st century.
        I am hopeful that the new leadership of the IRS, with continued
    oversight and support from Congress and the involvement of the Office
    of the Taxpayer Advocate, can meet these goals. In particular, I
    believe that the IRS can improve tax administration and the fundamental
    fairness of the system by embracing the Taxpayer Bill of Rights I have
    outlined here today and using those principles to help guide the
    establishment of agency goals and policies. Thank you for the
    opportunity to submit this testimony.
                                     ______

          Prepared Statement of the National Treasury Employees Union
        Chairman Udall, Ranking Member Johanns and distinguished members of
    the subcommittee, I would like to thank you for allowing me to provide
    comments on the Internal Revenue Service (IRS) budget request for
    fiscal year 2015. As president of the National Treasury Employees Union
    (NTEU), I have the honor of representing over 150,000 Federal workers
    in 31 agencies, including the men and women at the IRS.
        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 funding reductions in recent years.
        Since fiscal year 2011, funding for the IRS has been cut by nearly
    $1 billion, a reduction of almost 8 percent. The funding cuts have
    forced the IRS to operate under an exception-only hiring freeze since
    December 2010, and forced the Service to reduce the total number of
    full-time, permanent employees by about 10,000, many of whom are
    responsible for providing critical services that taxpayers require in
    order to meet their tax obligations.
                      irs fiscal year 2015 budget request
        NTEU was pleased to see that the administration's budget request
    for the IRS would provide the agency with a total of $12.4 billion in
    fiscal year 2015, an increase of more than $1.1 billion over the
    current fiscal year 2014 level which would help restore funding for
    important taxpayer service and enforcement activities that have been
    slashed in recent years. These funding reductions have adversely
    impacted IRS' ability to meet its mission, and without action by
    Congress, IRS' ability to serve taxpayers and enforce our Nation's tax
    laws will continue to erode.
                               taxpayer services
        Providing quality taxpayer service is a critical component of the
    IRS' efforts to help the taxpaying public understand their tax
    obligations while making it easier to participate in the tax system.
    Through a variety of in-person, telephone and Web-based methods, the
    IRS seeks to help taxpayers navigate an increasingly complex tax code
    and prevent inadvertent noncompliance. Unfortunately, the IRS' ability
    to provide excellent taxpayer service has been severely challenged due
    to reduced funding in recent years and the cuts mandated by
    sequestration. Without additional resources, further degradation in
    taxpayer services will occur, jeopardizing our voluntary compliance
    system.
               impact of inadequate funding on taxpayer services
        In the past few years, many experts in the tax community, including
    the National Taxpayer Advocate, the IRS Oversight Board and the IRS
    Advisory Council have all warned of the dangers of underfunding the IRS
    and the adverse impact it has had on taxpayer service.
        In her Annual Report to Congress released earlier this year,
    National Taxpayer Advocate Nina Olson identified insufficient funding
    of the IRS as one of the most serious problems facing taxpayers.
    According to Olson, the lack of adequate funding, coupled with a rising
    workload has had a devastating impact on IRS taxpayer service. Among
    the report's findings are:
      --Last year, only 61 percent of calls from taxpayers seeking
            assistance reached a customer service representative, leaving
            20 million taxpayers unable to get through--that is a decline
            from 87 percent a decade earlier, with half the decline
            occurring since 2010.
      --Taxpayers who did get through had to wait on hold approximately
            17.6 minutes before speaking with a CSR. That's up from 2.6
            minutes 10 years earlier, a nearly six-fold increase, with
            nearly half the increase occurring since fiscal year 2010.
      --An 86 percent drop in tax law questions answered from 795,000 10
            years ago to only 110,000 in the 2013 tax-filing season.
      --A cut of 87 percent, from $172 million in 2010 to just $22 million
            last year in employee training.
      --The IRS historically has prepared tax returns for taxpayers seeking
            its help, particularly for low income, elderly, and disabled
            taxpayers. Ten years ago, it prepared some 476,000 returns.
            That number declined significantly over the decade, and the IRS
            recently announced it will no longer prepare returns at all.
      --Last year, the IRS received about 8.4 million letters from
            taxpayers responding to proposed adjustments to their tax
            liabilities. As of the end of the fiscal year, 53 percent of
            taxpayer letters in the IRS's ``adjustments'' inventory were
            considered ``over age'' (generally, more than 45 days old).
            That compares with ``over age'' percentages of 12 percent 10
            years earlier and 28 percent in fiscal year 2010.
      --At the same time, the number of individual tax returns grew from
            131.4 million in fiscal 2004 to about 146 million in fiscal
            2013, an increase of about 11 percent, with about one-third of
            it having occurred just since fiscal year 2010.
                         delayed start to filing season
        In late December, the IRS announced it would have to delay the
    start of the 2014 tax filing season by 10 days to allow the IRS
    sufficient time to program and test its tax processing system which
    must be updated annually to reflect tax law updates, business process
    changes and programming updates in time for the start of the filing
    season. The annual process for updating IRS systems was significantly
    delayed by the 16-day Federal Government shutdown which came at the
    height of IRS' preparations to update its systems. According to the
    IRS, programming, testing and deployment of more than 50 IRS systems is
    needed to handle processing of nearly 150 million tax returns. Updating
    these core systems is a complex, year-round process with the majority
    of the work beginning in the fall of each year.
        However, with roughly 90 percent of IRS operations closed due to
    the Government shutdown, IRS preparations were delayed nearly three
    weeks, causing the need to postpone the start of the filing season.
        The delayed start to the filing season will have a direct impact on
    taxpayers who will be forced to wait longer to start the filing process
    and who are already facing longer wait times to speak to an IRS
    representative due to the lack of sufficient staffing. According to the
    IRS, they expect more than 18 million calls to go unanswered this
    filing season and wait times to rise to around 25 minutes per call,
    compared with 10 minutes in 2010. Once taxpayers do get through, they
    may not be able to get the answers they need to resolve their tax
    issues. The IRS recently announced that due to its budget situation, it
    would only be able to answer ``basic'' tax law questions on its
    telephone lines and in its walk-in sites during the upcoming filing
    season.
        Taxpayers' inability to get the answers they need to understand
    complex tax issues will almost certainly impact the accuracy of their
    returns, which could delay refunds to the many taxpayers that depend on
    their refunds to pay their bills and meet other financial obligations.
    While returns without any issues may be processed in a timely manner,
    those returns that are kicked out of the automated process will have to
    be worked by an understaffed IRS workforce which is down more than 8
    percent. A lack of adequate staff to handle these returns will almost
    inevitably lead to substantial delays in processing refunds for those
    taxpayers, delaying the financial relief they may require.
        With taxpayers unable to receive the assistance they need to
    resolve their tax questions and accurately prepare their returns, many
    may be forced to turn to paid preparers for help, resulting in
    additional expenses for them to simply comply with their tax
    obligations.
          adverse impact of new filing season initiative on taxpayers
        Last September, the IRS announced a new fiscal year 2014 filing
    season initiative that included various procedural changes that the
    agency plans to implement in fiscal year 2014 at call sites, Taxpayer
    Assistance Centers (TACs) and campus locations across the country. The
    changes limit the live assistance that taxpayers receive and direct
    them to utilize more online services. The changes will primarily impact
    taxpayers seeking assistance in the following areas: tax law inquiries,
    tax return preparation, requests for employer identification numbers,
    requests for transcripts, and updates on the status of their refunds.
    Below is a summary of changes and the adverse impact they will have on
    taxpayers this filing season.
      --Tax Law Assistance--will provide live assistance with basic tax law
            only, and only through April 15, 2014. All advanced tax law
            questions, including common complex issues such as estate and
            trust distributions, the alternative minimum tax (AMT),
            casualty and theft losses and the qualified State tuition
            program will be referred to other IRS resources. In addition,
            all topics related to corporations and partnerships will also
            be considered ``out of scope,'' thus live assistance will not
            be available to taxpayers with questions about these difficult
            topics.
      --Tax Return Preparation--will direct taxpayers who request return
            preparation at IRS TACs to other options instead of preparing
            tax returns for them on site.
      --Employer Identification Number (EIN)--will refer all new taxpayer
            EIN requests to the EIN Online Assistant for EIN issuance.
      --Requests for Transcripts--will redirect all individual taxpayers
            needing a transcript to the Get Transcript application.
      --Tax Refund Inquiries--will redirect all taxpayer requests for
            refund information to Where's My Refund? and automated phone
            channels for the first 21 days after they file.
      --Practitioner Priority Service (PPS)--will deflect transcript
            requests made for non-tax account issues to other IRS options.
        NTEU believes that limiting the amount of live assistance to
    taxpayers that are actively seeking help with their tax related issues
    will be detrimental to efforts to increase compliance with our Nations'
    tax laws, and only serve to harm those taxpayers that rely on the
    assistance of qualified and experienced IRS employees to understand and
    meet their tax obligations.
        Mr. Chairman, it is clear funding reductions in recent years have
    seriously impaired the IRS' ability to provide taxpayers with the
    services they need. And 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 $2.3
    billion in funding for taxpayer services in fiscal year 2015, a $195
    million increase over the current level. We believe this increase will
    allow the IRS to further improve customer service to meet rising
    taxpayer demand and help taxpayers understand their obligations,
    correctly file their returns, and pay taxes due in a timely manner.
        We were also pleased to see the President's request would provide
    an additional $165 million for IRS taxpayer service as part of the new
    Opportunity, Growth, and Security Initiative. This funding will support
    additional IRS customer service improvements, including increasing
    toll-free telephone level of service by 11 percentage points to over 80
    percent, driving responsiveness to taxpayers through correspondence
    inventory reduction, and bolstering resources to help tackle more labor
    intensive identity theft and refund fraud cases.
        NTEU believes providing quality services to taxpayers is a critical
    component to our system of tax administration, and that the President's
    request for additional funding for taxpayer services will help prevent
    further degradation of services and enable the IRS to provide taxpayers
    with the services they need to meet their tax obligations.
                                  enforcement
        Mr. Chairman, the funding reductions to the IRS budget in recent
    years have also negatively impacted its ability to maximize taxpayer
    compliance, reduce the tax gap and generate critical revenue for the
    Federal Government.
                   impact on voluntary compliance and tax gap
        NTEU believes our system of voluntary tax compliance is most
    effective when the IRS is able to assist those trying to meet their
    obligations under the law. In particular, by assisting taxpayers with
    their tax questions before they file their returns, the IRS can help
    prevent inadvertent noncompliance and reduce burdensome post-filing
    actions, such as audits and penalties.
        However, funding reductions and the cuts to operating expenses
    mandated by sequestration have resulted in the inability of millions of
    taxpayers to get answers from IRS call centers and taxpayer assistance
    centers (TACs), which lessens their ability to meet their tax
    obligations.
        The National Taxpayer Advocate has previously warned that limited
    resources were impeding IRS' ability to conduct education and outreach
    to taxpayers, particularly small business, which is critical to
    ensuring they are able to understand and comply with their tax
    obligations. For example, she has repeatedly warned staffing levels at
    TACs across the country are woefully inadequate, with taxpayers lining
    up to enter IRS offices well before those offices were even open and
    with some people being turned away.
        Inadequate staffing and the lack of availability of services at
    TACs has long been a problem at the IRS and disproportionately impacts
    the most vulnerable populations who use TACs most often, including non-
    English speaking taxpayers, the elderly and low income individuals and
    families, who often need additional assistance in understanding and
    meeting their tax responsibilities. If these taxpayers are not provided
    the assistance they need to understand their tax obligations, they may
    inadvertently file an incorrect return which could necessitate the need
    for IRS to undertake post-filing actions that are costly and burdensome
    to both the taxpayer and the IRS.
        Incorrect filings could also result in taxpayers paying less than
    they owe, further hampering efforts to close the tax gap, which is the
    amount of tax owed by taxpayers that is not paid on time. According to
    the IRS, the amount of tax not timely paid is $450 billion, translating
    to a noncompliance rate of almost 17 percent.
        The adverse impact of insufficient staffing on IRS' capacity to
    collect revenue critical to reducing the Federal deficit is clear.
    According to the IRS, every dollar invested in IRS enforcement programs
    generates between $4-$7 in return, but reduced funding for enforcement
    programs in recent years has led to a steady decline in enforcement
    revenue since fiscal year 2007. In fiscal year 2012, IRS enforcement
    activities brought in roughly $50.2 billion, down $9 billion from the
    $59.2 billion high in fiscal year 2007. The IRS has noted that the
    decline in enforcement revenue has come amid a continuing decline in
    key enforcement personnel staffing. There were 7,400 fewer permanent
    enforcement personnel in fiscal year 2013 than in fiscal year 2010,
    including roughly 3,000 fewer revenue agents and revenue officers who
    are central to Service enforcement efforts.
        The IRS has warned that enforcement staffing will continue to be a
    significant concern under the fiscal year 2014 funding level and has
    warned that under this insufficient level of funding, audits will
    decline by an estimated 100,000 and the number of collection activities
    will decline by an estimated 190,000.
        While we know 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. At a time when Congress
    is debating painful choices of program cuts and tax increases to
    address the Federal budget deficit, NTEU believes it makes sense to
    invest in one of the most effective deficit reduction tools: collecting
    revenue that is owed, but hasn't yet been paid.
        That is why NTEU was happy to see the administration's budget
    request would provide a $349 million increase in funding for IRS tax
    enforcement above the current level. The increased funding is designed
    to protect revenue by identifying fraud and preventing issuance of
    questionable refunds, including tax-related identity theft, addressing
    offshore noncompliance, and improving examination audit and collection
    coverage rates.
        We also support the administration's program integrity cap
    adjustment of $474 million to help the IRS continue to target
    international tax compliance and restore previously reduced enforcement
    levels. A large portion of this increase will be invested in
    strengthening current Service compliance programs designed to close the
    tax gap by combating offshore tax evasion, expanding enforcement
    efforts on noncompliance among corporate and high-income taxpayers.
    These investments are expected to generate $2.1 billion in additional
    annual enforcement revenue, resulting in a return on investment (ROI)
    of nearly 6 to 1, once new hires reach full potential in fiscal year
    2017. This estimate does not account for the deterrent effect of IRS
    enforcement programs, estimated to be at least three times larger than
    the direct revenue impact.
                                   conclusion
        Mr. Chairman, thank you for the opportunity to provide NTEU's views
    on the administration's fiscal year 2015 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 Udall. Now, turning to the Treasury request,
    Secretary Lew, most of the $13.8 billion of gross funding
    requests for the Treasury Department is for the IRS. The
    President's budget requests $1.3 billion to fund the other
    bureaus and offices of the Department, a decrease of $22
    million, or about 2 percent, less than the fiscal year 2014.
    These bureaus and offices cover a wide variety of activities
    for the Department, from implementing financial sanctions
    against our enemies, forecasting economic indicators, and
    managing the Federal Government's books. And, by the way, we
    had a very good hearing with the Financial Sanctions Section
    with David Cohen, which Senator Johanns and I were involved in,
    and many other members, and we were very impressed with their
    work.
        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 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.
        Now turning to the IRS request, the Internal Revenue
    Service administers the tax laws and collects the revenues for
    funding over 95 percent of the Federal Government operations
    and public services. The IRS has nearly 90,000 employees. Each
    year, they make hundreds of millions of contacts with the
    American taxpayer and with businesses. The IRS is the face of
    the Government for more U.S. citizens than any other agency.
        For fiscal year 2015, the President's budget requests
    $11.997 billion in base appropriated funding for the IRS. This
    is an increase of $706 million, or a 6 percent boost above the
    fiscal year 2014 enacted level of $11.291 billion. Another $480
    million is sought through a program integrity budget cap
    adjustment, raising the appropriations request to $12.477
    billion.
        Now, the fiscal year 2015 funding forecast is not
    encouraging. Budgetary constraints remain in place. This
    subcommittee faces challenging funding decisions. This
    subcommittee is going to have to balance many competing demands
    for the ensuing fiscal year. It will be helpful to hear
    Secretary Lew and the Commissioner'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 faces, the consequences
    of funding shortfalls, and how this subcommittee can be helpful
    in supporting the Department's vital mission.
        With that, I turn to my very distinguished Ranking Member,
    Senator Johanns, for his opening statement.

                       STATEMENT OF SENATOR MIKE JOHANNS

        Senator Johanns. Thank you, Mr. Chairman. Thank you for
    holding this very important hearing today to review the budget
    requests of the Department of Treasury and the Internal Revenue
    Service.
        As members of this committee, we have a significant
    responsibility to ensure the hard-earned tax dollars for
    millions of Americans are spent wisely and, equally as
    important, appropriately. That is even more critical as
    decisions are made to again increase Federal spending, despite
    persistent annual deficits and nearly $18 trillion in debt
    hovering over our children and grandchildren.
        Our country is in need of serious budgeting. All too often,
    Washington loses sight of the fact that every dollar the
    Government spends is a dollar taken from a taxpayer. All too
    often, Federal agencies lose sight of the fact that their
    funding belongs to the American people.
        Nowhere is the need for oversight more apparent than in the
    agencies before us today. The IRS should be working on
    improving services and making tax compliance easier for
    taxpayers. However, when the IRS takes actions that represent a
    serious abrogation of the trust of the American people, it
    alone is responsible for the damage it has done to its
    credibility. The IRS has undermined taxpayers' faith in the
    impartiality of the Agency. This imperils the willingness of
    taxpayers to comply with a system that relies on them to report
    their income honestly, freely, and voluntarily.
        A year ago, these agencies appeared before this
    subcommittee. Despite being questioned at the hearing, no one
    alerted this subcommittee to the inappropriate treatment that
    was taking place by the IRS relative to certain taxpayers. The
    only response was an agreement, in principle, that there should
    be no politics in the execution of our tax laws. Once the
    information about the inappropriate scrutiny of taxpayers
    became public 3 short days later, I asked that the hearing be
    reconvened, and that request was not granted. Detailed
    questions for the record that I subsequently submitted received
    very generic and, quite honestly, unresponsive answers.
        We have all heard comments that, in essence, say
    investigations in these--into these issues are distracting and
    that everyone should let the past go and just move on.
    Unfortunately to taxpayers, these responses appear to reflect a
    continued lack of accountability and a lack of leadership. My
    constituents ask, where is the acceptance of responsibility for
    your Agency's roles in this matter? This is not an instance
    where you can simply say, well, one bad actor is gone and
    another has been reprimanded. All too often, that is the
    Washington way. There are negative press reports and then some
    employee is singled out for punishment.
        That kind of response to this situation demonstrates a lack
    of awareness or a deliberate disregard for the seriousness of
    the problems at the IRS. These actions may have been--
    irreparably damaged the credibility of the IRS, credibility
    that is essential if it is to function in a system of voluntary
    compliance. For there to be hope for any effort to repair that
    damage, there has to be a fundamental change in the culture of
    the Agency that has given rise to these issues.
        Unfortunately, just last week, in the report on the IRS
    award system, there was again evidence of an Agency culture
    that, quite frankly, is out of touch. Many no longer trust the
    IRS to enforce tax laws impartially without regard to an
    individual's exercise of their constitutional rights.
        On top of that, try to explain to my constituents in
    Nebraska that his hard-earned tax dollars are going to pay
    bonuses to IRS employees who did not pay their own taxes or
    committed serious misconduct. There is not an American that
    would understand that. And then try to explain that the IRS
    will need to do a study just to determine whether conduct can
    be a factor in whether employees receive awards in the future.
    It just defies common sense.
        But awards seem to be an important priority at the IRS. In
    the fiscal year 2014 bill, which was recently enacted, the IRS
    received a $92 million increase for the entire Agency. Ninety-
    two million. So what happened then? One of the IRS' first
    actions after the enactment of the appropriations bill was to
    announce they would pay out $63 million in awards to employees,
    almost 70 percent of the $92 million increase all to awards and
    bonuses. Once again, IRS management seems to have forgotten
    that their most important customers are not their employees. It
    is the American people.
        It is disappointing to see that the IRS budget request this
    year is also equally unrealistic. The President's request for
    IRS for fiscal year 2015 is about $12.5 billion. This is about
    $1.1 billion over the 2014 enacted level. Under the changes
    enacted to the Budget Control Act last fall, overall
    discretionary spending for the entire Federal Government is due
    to rise by less than $1.4 billion. So with $1.4 billion
    available for both defense, domestic spending increases, the
    IRS tells us that they want 80 percent of it. It just boggles
    the mind.
        Also troubling is the inclusion of a request for a program
    integrity cap adjustment of $479 million. Treasury and the IRS
    are fully aware that such cap adjustments were not included in
    the Budget Control Act of 2011. And no cap adjustment for the
    IRS was authorized in the budget agreement last fall. Such a
    completely unrealistic request sets unreasonable expectations,
    and they are not credible.
        Mr. Chairman, again I thank you for calling this hearing. I
    look forward to working with you as we always have on fiscal
    requests as we move forward to solving the riddle of the 2015
    budget. But I have to tell you, there is so much about what we
    are going to be hearing about today that I have concerns about,
    and I appreciate the hearing to ask the appropriate questions.
    Thank you.
        Senator Udall. Senator Johanns, thank you so much. And now,
    Secretary Lew, I invite you to present your remarks on behalf
    of the Department of the Treasury.

                      SUMMARY STATEMENT OF HON. JACOB LEW

        Secretary Lew. Thank you very much, Chairman Udall, Ranking
    Member Johanns, members of the subcommittee. Thank you for the
    opportunity to speak about the Treasury budget. I appreciate
    your cooperation in rescheduling this hearing, and I am going
    to keep my opening remarks short.
        Let me start by saying what an honor it is to work with the
    dedicated men and women at the Department of the Treasury. They
    are talented public servants who are focused on strengthening
    our country. They have performed with excellence under
    difficult circumstances in recent years, and I want to thank
    them for their service and commitment.
        Our economy has been strengthening over the past 4\1/2\
    years, but we still have work to do to help increase growth,
    create jobs, and restore opportunity. And today's advance
    report on Gross Domestic Product (GDP) just underscores how
    much we must keep at this.
        The President's budget offers proven strategies that invest
    in the economy to propel growth now and promote longer-run
    prosperity. To help make sure that prosperity is widely shared,
    the President will emphasize the importance of raising the
    minimum wage today. Congress has an opportunity to help make
    sure no American who works full time has to raise a family in
    poverty, and we hope Congress will pass legislation to increase
    the Federal minimum wage to $10.10 an hour as soon as possible.
        The request for Treasury is part of the administration's
    comprehensive blueprint to move our Nation forward. This
    request will allow the Department to help maintain a strong
    economy, sensibly manage the Government's finances, foster
    greater investment in American communities and small
    businesses, protect our national security, monitor risks to the
    financial system, and promote conditions that support economic
    growth and stability at home and abroad.
        Over the past 5 years, Treasury has met its
    responsibilities efficiently and at lower cost. Today's budget
    request builds on that progress and includes even more ways to
    reduce costs and achieve savings while offering carefully
    designed proposals to increase the Department's effectiveness.
    For instance, we are seeking a second round of funding for the
    State's Small Business Credit Initiative, which has been
    enormously successful in strengthening small businesses across
    the country. We are working to reduce the risks from
    cybersecurity attacks by helping to improve the financial
    sector's resilience to such attacks and investing in Treasury's
    own defenses and infrastructure. And we are requesting
    sufficient funding for the Internal Revenue Service so it can
    provide the kind of quality service that American taxpayers
    deserve.
        As we consider what is in the best interests of taxpayers,
    it is important to note that it has been 5\1/2\ years since
    Fannie Mae and Freddie Mac went into conservatorship. And
    today's stress tests show taxpayers could still be on the hook
    in the event of a severe economic downturn. Now is the time to
    reform our housing finance system, and I want to encourage the
    Senate Banking Committee to continue making progress on this
    very complex issue.
        Since the financial crisis, Treasury has played a central
    role in designing and implementing the most comprehensive
    reforms to the financial system since the Great Depression. A
    major piece of unfinished business is housing finance reform,
    and we need legislation that protects taxpayers, ensures
    continued widespread availability of consumer-friendly mortgage
    products, like the 30-year fixed-rate loan, provides liquidity
    during times of economic stress, and facilitates the
    availability of affordable housing in an explicit and
    transparent manner.
        Before I take questions, I would like to talk briefly about
    Ukraine. The United States and the international community have
    made it clear that we will continue to stand with the Ukrainian
    people during this critical time. That is why we are united in
    our effort to impose costs on Russia for its unlawful and
    provocative acts.

                               PREPARED STATEMENT

        On Monday, the United States responded to Russia's latest
    actions with additional sanctions, which will increase the
    impact we have already begun to see on Russia's economy from
    U.S. and international sanctions. We urge Russia to pursue a
    diplomatic solution to the situation, especially as Ukraine
    moves forward with the presidential elections next month.
        With that, let me thank you for the opportunity to appear
    before you today, and I look forward to answering your
    questions.
        [The statement follows:]
                      Prepared Statement of Hon. Jacob Lew
        Chairman Udall, Ranking Member Johanns, members of the
    subcommittee, thank you for giving me the opportunity to speak about
    the Treasury budget. The President's fiscal year 2015 budget requests
    $13.8 billion to fund the Department's operating bureaus. This includes
    an important increase for the Internal Revenue Service and a decrease
    for the rest of the Department, which I will cover in more detail
    below.
        Let me start by saying what an honor it is to work with the
    dedicated men and women at the Department of Treasury. They are
    talented public servants who are focused on strengthening our country.
    They have endured much over recent years including a Federal pay
    freeze, sequestration, and the Government shutdown, and I want to thank
    them for their service and commitment.
        I would now like to turn to an overview of the economy and the
    substantial progress we have made toward recovering from the worst
    recession since the Great Depression. We have now experienced nearly 5
    years of growth. A stronger private sector is helping grow the economy
    and drive deficits lower. Our businesses have added 8.9 million jobs
    over the last 49 months. The housing market has improved. Home prices
    are rising, and millions of homeowners are no longer under water on
    their mortgages. Household balance sheets continue to heal, exports are
    growing, and manufacturing is making solid gains. And healthcare costs
    are growing at the slowest rate in 50 years.
        I want to take a moment and quickly applaud the Senate Banking
    Committee for beginning their markup of important legislation to reform
    our housing finance system yesterday. Now is the time to reform our
    housing finance sector. Housing starts, new home sales, and existing
    home sales all reached multi-year highs last year, rates of mortgage
    delinquency and foreclosure have declined to near pre-recession levels,
    and the appreciation we have seen in home prices has substantially
    reduced the share of mortgages that are underwater. But we need to
    build on that progress, and the pent up demand from years of low
    household formation combined with generally housing affordability can
    spur a step up in new construction to reverse the downward trend we
    have seen in home sales since mid-2013. A resurgent housing sector
    would boost the economy and generate new jobs, and a successful reform
    to housing finance would reinforce that cycle.
        Five and a half years after the Government Sponsored Enterprises
    (GSEs) were put in conservatorship, we still face a housing finance
    system that does not adequately meet the needs of the American people.
    Far too many potential homeowners do not have access to credit, and
    will not until there is a clear path to a new system that provides
    certainty to all participants. The system today continues a flawed
    dynamic where taxpayers must support future losses at Fannie Mae and
    Freddie Mac should there be another downturn in home prices. We need to
    start reform now--and we need legislation to achieve the fundamental
    reforms that protect both consumers and taxpayers. The longer we put it
    off, the easier it is to forget the damage to the economy, loss of
    housing wealth, and instability a system with misaligned incentives and
    inadequate taxpayer and consumer protections.
        As the President said in his State of the Union address, we are now
    better positioned to meet the demands of the 21st century than any
    other nation.
        There is considerably more that needs to be done. While corporate
    profits have been hitting all-time highs and the stock market has been
    vibrant, too many in the middle class and those striving to get into
    the middle class, are struggling to make ends meet.
        The President's budget addresses these challenges. It puts forward
    proven, pro-growth initiatives to expand opportunity for all Americans.
    And it fulfills the President's pledge to make this a year of action,
    while offering a framework for long-term prosperity and
    competitiveness.
        As part of this proposal, the President's request for the Treasury
    will allow the department to carry out its mission to maintain a strong
    economy and responsibly manage the Government's finances. It will also
    allow Treasury to foster greater investment in American communities and
    small businesses, protect our national security, monitor risks to the
    financial system, and promote conditions that support economic growth
    and stability at home and abroad.
     strengthening the economy and job creation, protecting the financial
                                     system
        For nearly 20 years, Treasury's Community Development Financial
    Institutions (CDFI) Fund has been attracting economic development and
    job creation to America's underserved communities. This year's request
    includes $225 million for the CDFI Fund, just over $1 million below
    last year's request, including a proposed 1 year extension of the CDFI
    Bond Guarantee program, which provides a source of long-term capital to
    financial institutions that support lending in underserved communities.
    Of the total request, $35 million for the Healthy Food Financing
    Initiative will support the growth of businesses that improve the
    availability of affordable, healthy food options in low-income
    communities.
        We are also supporting small business growth by requesting a second
    round of funding for the State Small Business Credit Initiative
    (SSBCI), which was enacted in 2010 to empower States to help small
    companies grow. Just last week, I saw the positive difference SSBCI can
    make in our communities when I visited New Center Stamping in Detroit.
    New Center Stamping utilized SSBCI funding to grow and hire new
    employees, and demonstrates how targeted policies and programs can
    drive growth, strengthen the middle class, and bolster local economies.
        The program's original funding of $1.5 billion is expected to
    result in up to $15 billion in new investments in small businesses by
    leveraging $10 in private capital for every $1 of Federal support, and
    during 2013 States more than doubled their use of these funds. To
    continue our support for State economic development agencies' work with
    small businesses, the budget proposes a new investment of $1.5 billion
    for the SSBCI. This additional funding would be awarded in two
    allocations: $1 billion awarded on a competitive basis to States best
    able to target underserved groups, leverage Federal funding, and
    evaluate results; and $500 million awarded according to a need-based
    formula based on economic factors such as job losses and the pace of
    economic recovery.
        In the coming year, Treasury will continue to rebuild and reform
    our financial system. Reforms like the Volcker Rule are transforming
    the way Wall Street operates, while strengthening our financial system
    and making our economy an engine of economic growth once again. Going
    forward, we must remain vigilant to potential new threats to the
    stability of the financial system, constantly monitoring how risks
    change and evolve. Treasury will continue to wind down the remaining
    investments in the Troubled Asset Relief Program (TARP), often
    recovering more than the original support extended, and continue the
    operation of TARP's housing programs to help struggling homeowners
    avoid foreclosure.
        The budget also proposes to extend the Terrorism Risk Insurance
    Program and to implement programmatic reforms to limit taxpayer
    exposure and achieve cost neutrality. The extension will preserve the
    long-term availability and affordability of property and casualty
    insurance for terrorism risk.
        Finally, we seek to improve the protection and resilience of the
    critical infrastructure in the financial sectors with a special focus
    on reducing the risks associated with cybersecurity incidents. Working
    with industry and government partners, we promote best practices,
    develop incident management plans, and identify, analyze, and share
    timely and actionable information. Further, this budget includes $11
    million for investments in enhancing Treasury's own cyber-preparedness
    and the security of Treasury's vast array of unclassified sensitive,
    classified, and very sensitive intelligence information. We must also
    ensure that our vital systems and services remain operational even
    under severe circumstances. As stewards of this information and IT
    services, it is our responsibility to ensure it is properly secure both
    from continuously evolving external and insider threats. These
    improvements to our own systems, and Treasury's continued work with our
    private sector partners to advance cybersecurity in the financial
    industry are vital to ensuring continued economic growth.
      boosting resources for taxpayer services and enforcement measures,
               finding new efficiencies across treasury programs
        The President's budget makes substantial investments in improved
    taxpayer service and enforcement at the Internal Revenue Service (IRS),
    as well as in technology that will drive IRS efficiencies in the
    future. The Budget also builds on Treasury's ongoing efforts to improve
    efficiency, reduce costs, and streamline operations. The IRS continues
    its commitment to carrying out its responsibilities, providing quality
    service to taxpayers and preserving the public's faith in our tax
    system, but the lack of sufficient funding in recent years has made it
    difficult to provide the kind of services American taxpayers deserve.
    While the IRS is working hard to provide the highest possible level of
    taxpayer service within its limited resources, its funding situation is
    causing taxpayers to face longer wait times on the phone, and it is
    taking longer to respond to taxpayer correspondence. A sustained
    deterioration in taxpayer service combined with reduced enforcement
    activity could create serious long-term risk for the U.S. tax system,
    which is based on voluntary compliance.
        To counter these effects, Treasury's budget request includes
    substantial investments to help strengthen taxpayer service,
    enforcement, and technology at the IRS. The fiscal year 2015 Treasury
    budget includes $2.3 billion for taxpayer service, supporting
    initiatives designed to improve the IRS' ability to provide timely and
    accurate responses to taxpayer inquiries, as well as make more
    information accessible in a secure digital environment.
        The request for the IRS includes a $1.2 billion increase, of which
    $480 million is financed by a proposed program integrity cap adjustment
    for enforcement initiatives that provide a high return on investment.
    This proposed cap adjustment funds strategic investments that will help
    close the tax gap and will return 6 dollars for every 1 dollar
    invested, once fully implemented. The proposed cap adjustment will
    yield $2.1 billion in additional enforcement revenue in 2017 and is
    projected to reduce the deficit by $35 billion over the next 10 years.
        Treasury's request also includes $452 million for initiatives that
    are critical to full and effective IRS implementation of the Affordable
    Care Act, which the Congressional Budget Office has projected will
    lower the deficit substantially over the next two decades. Thanks to
    the Affordable Care Act (ACA), 8 million people have signed up for
    private insurance through the Health Insurance Marketplace, 3 million
    young adults have gained coverage by being able to stay on their
    parents' plan, and millions more have secured coverage through Medicaid
    and the Children's Health Insurance Program. The law is also providing
    greater security to Americans who already have coverage, making
    discrimination based on pre-existing conditions and lifetime limits on
    coverage a thing of the past.
        The fiscal year 2015 Treasury budget builds on our commitment over
    the past 5 years to deliver core services more efficiently and at a
    lower cost to the taxpayer. In fact, the department has been able to
    propose more than $1.1 billion in savings in its budget submissions
    over the past 4 years. Excluding the IRS, the fiscal year 2015 Treasury
    budget reflects a decrease of 1.7 percent below the fiscal year 2014
    enacted level and identifies $154.2 million in efficiency savings and
    program reductions.
        One area where we have made progress has been our multi-pronged
    effort to expand the use of electronic transactions in conducting the
    business of Government, including electronic payroll savings bonds,
    electronic benefit payments, and electronic tax collection. These
    efforts have reduced costs, improved customer service, and decreased
    susceptibility to fraud. The ``Paperless Treasury'' initiative has
    saved the Government hundreds of millions of dollars through electronic
    payment of benefits and increases in the electronic filing rate for tax
    returns.
        It is important to note that the President's budget also includes a
    separate Opportunity, Growth, and Security Initiative. This Initiative
    includes pro-growth investments that are fully paid for by cutting
    spending and closing tax loopholes. Treasury investments under the
    Initiative will support progress in the areas of taxpayer service,
    fiscal transparency, and global food security. This includes $165
    million to support additional IRS customer service improvements,
    including increasing annual toll-free telephone service levels to over
    80 percent, driving responsiveness to taxpayers through correspondence
    inventory reduction, and bolstering resources to help tackle more
    highly burdensome identity theft and refund fraud cases.
     protecting national security interests and preventing illicit use of
                              the financial system
        I want to end by highlighting the Treasury budget's proposals to
    protect our national security interests and continue the department's
    financial intelligence and enforcement activities.
        The Treasury budget proposes $105.9 million for the Office of
    Terrorism and Financial Intelligence (TFI), within the Departmental
    Offices, to oversee and marshal Treasury's intelligence, enforcement,
    and economic sanctions functions in support of U.S. national security
    policies and interests. Our funding request reflects Treasury's
    continued efforts to safeguard financial systems against illicit use
    and combat rogue nations, terrorist facilitators, money laundering, and
    other threats to our national security.
        In particular, TFI conducted a sustained sanctions campaign against
    Iran, its agents, and its front companies in response to Iran's
    continued defiance of United Nations Security Council resolutions
    related to its nuclear program. As a result, banks around the world
    have continued cutting off Iran from the international financial
    sector; this isolation has played an essential role in bringing Iran to
    the negotiating table.
        Last year, we completed more than 500 actions under our sanctions
    authorities in an effort to disrupt and dismantle the financial
    networks that support terrorists, narcotics traffickers, transnational
    organized crime, and the proliferators of weapons of mass destruction.
    Our sanctions programs are effective because they stand on a foundation
    of reliable intelligence analysis, strong systemic safeguards in the
    financial sector, and robust engagement with our financial sector,
    foreign governments, and foreign financial institutions.
        The Ukrainian people have demonstrated tremendous courage as they
    have charted an independent course for their country and demanded a
    government that reflects the will of the people. The United States has
    been at the forefront of building international support for Ukraine,
    and of holding Russia accountable for its attempts to destabilize
    Ukraine. And Treasury has played a key role in these efforts, not just
    through our carefully designed sanctions program but also in monitoring
    the impacts to U.S. economic interests, pushing forward the U.S. loan
    guarantee for Ukraine, offering technical assistance to the Government
    of Ukraine, and encouraging support from partners and international
    institutions such as the International Monetary Fund.
        The United States very much wants to see Ukraine prosper. It is in
    our economic interest and it is in our strategic interests to stand
    with the people of Ukraine in their time of need.
                                   conclusion
        The fiscal year 2015 Treasury budget reflects a careful balance of
    savings proposals and targeted investments in key priorities.
        The proposed savings will be achieved through a combination of
    efficiency improvements and increased streamlining of operational
    processes, making Treasury even leaner and more effective as it
    continues to deliver essential services to the American people.
        The Treasury budget is balanced, responsible and carefully
    designed. It adheres to the President's strategy to make our economy
    stronger while keeping our fiscal house in order. And I am eager to
    work with you to put it into action.
        Thank you and I look forward to answering your questions.

        Senator Udall. Secretary Lew, thank you very much. And I
    would just remind all of us, we have three panels, and I
    believe we still have votes at 4:00, so we are going to try to
    move along. We are going to have 7-minute rounds and try to
    move through these three panels, and hopefully finish up before
    4:00.

              STRENGTHENING ECONOMY TO HELP MIDDLE-CLASS AMERICANS

        Secretary Lew, in your statement, you highlight the recent
    growth in the economy. The nonpartisan Congressional Budget
    Office reported that the annual budget deficit as a percentage
    of GDP has dropped for the fifth year in a row, the housing
    market is beginning to rebound, the unemployment rate is
    dropping but still higher than before the recession. Our
    economy is recovering, but it still has a long way to go,
    particularly for middle-class Americans. I hear that all the
    time from New Mexicans, where I was just home the last couple
    of weeks, and people talking to me about that. Can you explain
    how Treasury's fiscal year 2015 budget request will continue to
    strengthen our economy and particularly help middle-class
    Americans?
        Secretary Lew. Well, Senator, I think that I can answer
    that both in terms of the Treasury budget, but also in the
    larger frame of the President's budget. You know, we are very
    pleased that the economy is doing much better. You compare the
    economy today to a few years ago, and it is a world of
    improvement. But we still have a lot of progress to make. Until
    every American who wants a job can find a job, and a job that
    pays a decent wage, we still have more work to do.
        In the Treasury budget, we have a number of programs that
    are, I think, working quite effectively. I mentioned a couple.
    The State Small Business Credit Initiative (SSBCI) is actually
    making a real difference in either guaranteeing loans or
    providing support for collateral for loans for small businesses
    to create jobs.
        Just last week, I visited one borrower, a firm in Detroit,
    that stamps machine parts. Because of an SSBCI loan, we are
    making replacement--manufacturer replacement parts for American
    autos in the United States and not overseas. That is the kind
    of work SSBCI does and can do if it gets the support to have
    another round of loans. Our CDFI program, similarly, is
    supporting communities that are working to develop economic
    foundations for small business in job creation.
        And in the larger picture, I would say that the President's
    budget has a very clear direction this year, which is that we
    need to build a foundation for growth, and we all know what it
    is. We know that it is about building infrastructure because we
    need to have roads and ports and airports that are ready for
    the 21st century. That will create short-term jobs in the
    construction industry, but it will create longer-term
    foundations for growth. So working together on a bipartisan
    basis to fund infrastructure will make a difference.
        I think that there are other things in the budget, like
    skills training, that are critically important. We have a lot
    of jobs open in this country, and we have a lot of people
    looking for work. There is a gap there that can be closed with
    skills training, marrying people and jobs.
        You know, the third thing I would mention, while it is not
    in this subcommittee's jurisdiction, immigration reform. We
    know that immigration reform is a driver of economic growth in
    this country. It has always been a driver in our history, and
    we have seen a study from the Congressional Budget Office that
    shows it will affirmatively help grow our economy and reduce
    our deficits.
        So those are a number of things in this budget. Obviously
    there is a lot of work to do, but I hope on a bipartisan basis
    we can do it.
        Senator Udall. Thank you very much, and I could not agree
    with you more. And it would seem to me an area where we could
    cooperate a lot would be in infrastructure. I think everybody
    realizes that it--you get short-term jobs, but you also do lay
    the foundation for growth. So I am hoping that we will be able
    to work and find some ways there.

                  TAX-EXEMPT STATUS FOR SOCIAL WELFARE GROUPS

        I wanted to turn my attention here to these tax-exempt
    organizations. I have long supported the need to make
    meaningful changes to ensure that the rules to qualify for tax-
    exempt status are abundantly clear. We need a bright line test
    to replace the guidance that has led to over a half-century of
    confusion and inconsistent application. It is 100 percent
    unacceptable for the IRS to ever unevenly enforce rules based
    on ideology, politics, or other bases. The same rules should
    apply equally and equitably to all applicants. But it is also
    unacceptable for political operatives, regardless of political
    affiliation, to use 501(c)(4) organizations as de facto
    political action committees in order to hide their donors'
    identities and circumvent campaign finance law disclosure
    requirements.
        I understand the IRS is currently evaluating an enormous
    volume of comments generated in response to proposed rules
    published last November designed to bring long-needed clarity
    to the determination of eligibility for tax-exempt status of
    social welfare groups. What are your current plans for going
    forward with finalizing the proposed rules? What timetable is
    the IRS following for further action? And until the rules are
    changed, what tests or criteria is the IRS using to evaluate
    applicants for tax-exempt status as social welfare groups?
        Secretary Lew. Mr. Chairman, as I said at the time and as I
    have said since, the actions that were reported on in terms of
    the 501(c)(4) program were unacceptable. It is unacceptable for
    there to be any targeting in our tax enforcement based on
    belief or partisan views. And we went about following the
    recommendations of our Inspector General, who will be
    testifying here later. And I am pleased to say we implemented
    all of the recommendations, and that includes replacing all of
    the senior officials who were responsible, and issuing guidance
    to try and create some clarity in an area where ambiguity was
    at the root of the problem.
        The proposed rule that was put out was in many regards an
    incomplete rule because it was asking for comment to inform
    what a final rule would look like. There is a lot of work to be
    done between now and issuing a final rule. There is the need to
    review 150,000 comments. There is going to be the need
    ultimately to publish a new final rule. And there are going to
    be a number of things between now and then where the IRS will
    be reaching out for comment.
        I think that the partisan debate over this has, frankly,
    obscured what the rule really does. And what the rule does is
    it restricts discretion in an area where too much discretion
    caused the problem. Now, that is a hard thing to do, and we do
    not pretend that it is final. But we look forward to working
    together and responding to comments to get to the point where
    we can together say that the problem that underlay the events,
    that came out, that we all are agreeing were unacceptable, can
    never happen again.
        Senator Udall. Thank you very much for that answer. Senator
    Johanns.
        Senator Johanns. Thank you, Mr. Chairman. Mr. Secretary,
    welcome. Good to see you again.

                    IRS HANDLING OF TAX-EXEMPT APPLICATIONS

        As you know, the IRS did single out certain groups, Tea
    Party groups. They got special scrutiny when they applied for
    tax exempt status, something they had a lawful right to do.
    Now, I think to everybody that is extremely troubling that this
    Agency that has such a huge impact on the lives of millions and
    millions of Americans would be executing the laws in a manner
    that targets anybody because of their political views.
        But equally troubling is the fact that the IRS acknowledged
    that this activity, just days after you and Acting Commissioner
    Miller appeared before this subcommittee to testify about the
    fiscal year 2014 budget request, there was absolutely no
    indication of the disclosure that was to come. In fact, Mr.
    Secretary, as you know, you were asked a question about reports
    of politically motivated activity, and your statement was, ``No
    politics in the execution of our tax laws,'' should be there.
    Would you please explain to us on this subcommittee why you did
    not make the subcommittee aware of what was to come just 72
    hours later?
        Secretary Lew. Senator, first, I stand by the statement
    that it is unacceptable for there to be any political
    interference in the enforcement of our tax code. And to this
    day, I have seen no evidence that there were any politically
    appointed officials who had any say in anything. It was
    terrible behavior and very bad judgment, but it was not on the
    part of political--or politically affiliated, you know,
    political appointees.
        Senator Johanns. But let me stop you there if I might, Mr.
    Secretary, because you are drawing an inside-the-beltway
    distinction that only people like you and I would understand.
    You are saying political appointees, we have no evidence that
    they were involved. That does not mean that there is not
    somebody within the IRS who has a certain political bent, or
    somebodies----
        Secretary Lew. Senator, there was very bad judgment, and I
    would note that it was applied to groups on the right and
    groups on the left, in terms of identifying organizations in
    unacceptable ways. So I am agreeing----
        Senator Johanns. No, I am not going to let you get away
    with that because, quite honestly, people on the left, that was
    so rare as to be almost nonexistent. To Tea Party groups, it
    was consistent. It was group after group after group. They were
    held up in trying to get their tax exempt status.
        Secretary Lew. Senator, there were an awful lot of
    applications pending at the time that was not an even
    distribution of applications, but there was evidence that it
    was bad judgment applied to both right and left. And that is--
    it is unacceptable, so I am agreeing that it is unacceptable.
    In terms of the testimony that I gave last year, I want to
    point out that I was not aware of the circumstances until our
    Inspector General briefed me on it.
        Senator Johanns. Were you briefed before the hearing?
        Secretary Lew. And I did not feel at liberty to speak on a
    subject that was going to be the subject of an Inspector
    General report until it was issued. And I have spoken to many
    committees of Congress about it since.
        Senator Johanns. No, you have not spoken to me. I have sat
    in your place at one point in my career as a Cabinet member. I
    have faced this kind of scrutiny. I cannot imagine sitting
    there having knowledge of something this important, this
    explosive, and not at least stopping by the ranking member's
    office or the chairman's office, or both, and saying, look,
    here is what is going on. I do not want to mislead anybody.
    This is what is coming. We would have held that in confidence.
    Why would you not do that?
        Secretary Lew. Well, Senator, the fairly well-accepted
    practice is not to interfere in any way with Inspector General
    reports, and that, I think, is appropriate as a policy. And I
    have tried to be very open in discussing this matter with
    Members of Congress, and following after that.
        Senator Johanns. I followed that same rule when I was in
    your position. Inspector General had an investigation, we
    stayed as clear away from that as we possibly could. But if I
    was asked a direct question at a hearing, I felt I had the
    liberty to sit down with them, unless otherwise instructed by
    the Inspector General, to say, look, I can at least inform you
    that there is an investigation going on. I would appreciate
    your confidence. We would have kept that confidence. I can
    assure you of that. I do not understand why we had to learn
    from the media that this was going on.
        Secretary Lew. Senator, the report obviously was a matter
    that was taken very seriously by both the administration, by
    the Department, and by the Congress. We have respected the
    independence of the Inspector General throughout the process. I
    think that is the appropriate thing, and I look forward to
    working with you to make sure that we have the kinds of
    conversations that give you visibility into what is appropriate
    as we can.
        Senator Johanns. Let me ask you another question. The
    Internal Revenue Service, beyond a shadow of a doubt, has
    damaged its credibility. I do not think anybody could disagree
    with that. And it just seems to be one bad story after another.
    But having said that, they are circling back around now trying
    to do something with tax exempt organizations. They put this
    proposed rule out, and I understand it is proposed. And they
    get an avalanche of comments. I think by anybody's definition,
    150,000 comments is a huge number of comments.
        Were you--will you assure me, Mr. Secretary, that all
    comments will be taken seriously, will be reviewed, will be
    thoughtfully analyzed before any further action is taken on
    this rule?
        Secretary Lew. Senator, that was the intent all along, was
    to elicit comment, broad comment. I think the number of
    comments probably exceeds expectation, but I will note that a
    lot of them are form responses, so the actual number of
    individual comments is lower. But there are a lot of comments,
    and I think the IRS and our Office of Tax Policy will be very
    careful in reviewing comments.
        We want to get this right. This--and I would just say, in
    terms of confidence in the IRS, this was a very small number of
    people at the IRS who exercised bad judgment. And it--that
    judgment has been--they have been held accountable, and that
    judgment is, I think, universally being criticized by this
    committee, by the administration.
        The question of the performance of the IRS, more generally,
    in fairness to most of the 90,000 people who work at the IRS,
    is not colored by that experience. We just had a filing season,
    where under terrible circumstances, late enactment of
    legislation, Government shutdown, we had a smooth filing system
    where the American people were able to file electronically, and
    get quick refunds, under very adverse budget circumstances. We
    are implementing a new law, Foreign Account Tax Compliance Act
    (FATCA). People are putting enormous energy into doing it
    effectively. And around the world, I heard that FATCA should
    become a global standard now.
        So the men and women at the IRS are dedicated public
    servants, and I just think it would be wrong to look at the
    501(c)(4) experience and extend that to all of the men and
    women of the IRS.
        Senator Johanns. Not doing that. Not even suggesting that.
    But I can assure you the American people are dismayed by the
    activity at the IRS.
        Secretary Lew. And I do not disagree, Senator, that there
    is a lot of work to regain confidence.
        Senator Udall. Thank you, Senator Johanns. Senator Coons.

                         ACCOUNTABILITY WITHIN THE IRS

        Senator Coons. Thank you, Mr. Chairman. And thank you, Mr.
    Secretary, for your service and for being with us today.
        If I might just follow on that general theme, I think we
    all share a deep concern about the use of inappropriate
    criteria in determining whether certain political organizations
    are qualified for 501(c)(4) status. Could you just clarify for
    us who has been held accountable? What sort of consequences
    have there been that allow you or that allow me to have any
    confidence that the IRS and the folks who exercised very poor
    judgment have seen some real consequences for this----
        Secretary Lew. Well, Senator, at--when this report came
    out, the immediate action was replacing the Acting IRS
    Commissioner with a new Acting IRS Commissioner, Danny Werfel,
    who has served with great distinction until Commissioner
    Koskinen was confirmed. All of the SES--the senior executives
    in between the Commissioner and the program were relieved of
    their responsibilities and, in many cases, separated from the
    Federal service.
        I think that we are now in the process of having a
    conversation about how to make sure this never happens again,
    and the rule writing is a joint process between the IRS and
    Treasury's Office of Tax Policy. It is being approached with
    the greatest seriousness of purpose where we want to fully take
    into account views, right and left and center, wherever they
    come from, and get this right because restoring confidence in
    the IRS is critical. You cannot have, you know, the kind of
    strong confidence in Government that we need if people do not
    trust the IRS, which is the point of connection that so many
    people have with the U.S. Government. So I share the very
    strong belief that making it clear that this has been fixed is
    critical.
        In the interim, and the Chairman asked me this question,
    there is a process of self-certification where individuals who
    apply get to certify their eligibility. So there is not the
    case-by-case review going on the way it was. We have got to get
    to a place with a clear standard that is transparent and simple
    and that takes away some discretion, because right now I think
    this is an area where too much discretion is not a good thing.
        Senator Coons. Well, thank you, Mr. Secretary, and thank
    you for your persistent engagement in ensuring some
    accountability on these actions.

                          ECONOMIC SANCTIONS AND OFAC

        Let me move, if I could, to sanctions. You mentioned in
    your statement the important role the United States is playing
    in helping the citizens of Ukraine to stand up to Russian
    aggression. We previously on this subcommittee held a hearing
    in which David Cohen, the Under Secretary for Terrorism and
    Financial Intelligence, testified about the terrific work that
    the folks under him, and in particular, OFAC, the Office of
    Foreign Asset Control, perform.
        I was struck by the range in scope of actions, more than
    500 sanctions enforcement actions they have undertaken, the
    very difficult and important work that those folks do to ensure
    that sanctions against Iran, as well as against now Russia, and
    Syria, and North Korea, and many other countries, are
    investigated and enforced.
        The whole situation in the Ukraine and the sanctions
    against Russia have emerged since the budget submission. I sent
    a letter to the full committee chair back on April 10 urging a
    reconsideration of the budget request. I do think, as we will
    discuss with the IRS Commissioner, there are customer service
    reasons to really focus on an increased investment in IRS
    responsiveness and customer service.
        I think there is an equally, if not a greater, compelling
    reason for us to increase the enforcement funding so that this
    particularly important grouping within the Department is able
    to enforce aggressively sanctions against Russia, against Iran,
    against Syria, against North Korea. The Under Secretary bravely
    offered answers to my questions, suggesting that there was
    surge capacity and that folks could be borrowed from other
    agencies.
        My assertion to you is simply this. If there is any time
    for us to demonstrate that we have pre-funded, that we have
    ramped up to be able to vigorously enforce sanctions against
    Iran, it would be this moment.

                     STATE SMALL BUSINESS CREDIT INITIATIVE

        If I could turn our attention to the SSBCI last. In
    general, I want to commend you for the focus on resilience in
    cyber preparations, the importance of GSE reform, the
    importance of extension of the Terrorism Risk Insurance
    Program. But I wanted to encourage you to speak for a moment to
    the State Small Business Credit Initiative. You said you had
    recently visited a small business, I think, in Detroit that had
    benefitted from it.
        I was at the ribbon-cutting for the Frankford Bakery in
    Delaware that also benefitted from it. My State has taken
    advantage of it. I think it offers great opportunity to
    leverage private funds. So please speak a little bit more, if
    you would, about what an extension of the SSBCI program might
    do for job creation.
        Secretary Lew. Well, Senator, you know, I can just use an
    example like the place that I visited or the firm that you
    visited. There would be a vacant building with broken windows
    in Detroit if they had not gotten an SSBCI guaranteed loan to
    essentially buy existing, but unused, equipment to put people
    in Detroit back to work. And those jobs would have been
    somewhere else, probably outside of the United States. You
    know, they did not have collateral that they could go to a bank
    with, so they needed collateral to be backed by an entity. And
    the State used the SSBCI money to do that. They are now
    expanding, putting in conveyor belts to be able to cut from
    eight hours to one hour how long it takes to switch dyes. Well,
    that is going to mean more output, more efficiency, and more
    jobs.
        I am using that example because I happened to be there last
    week. I am sure you could use the example of the bakery that
    you visited. All over the country, we are seeing businesses
    that would not be there, but for this support. And I think,
    redoubling the effort is important.

                         COMBATTING TERRORIST FINANCING

        Can I go back, Senator, to just--and respond very briefly
    on the Terrorism and Financial Intelligence (TFI) question or
    comments that you made? We have an extraordinary group of
    people who work in Terrorist Finance at Treasury. You know,
    David Cohen, his predecessor, Stuart Levy, has built an
    institution that did not exist 10 years ago into a powerful
    tool for the United States to use to carry forward its policies
    and project its influence in meaningful and important ways.
        The team works very hard--OFAC works very hard. I do not
    think it escaped anyone's attention that in the middle of all
    the work they are doing on Russia, we cited two more firms
    yesterday in Iran. They are multitasking. They are working on
    all fronts. They have the resources they need. I am not saying
    they have more than the resources they need. But they are doing
    an extraordinary job, and the American people really should
    understand what a great asset we have there.
        And I did not mean to take you off of your intended
    question, but I could not let it go by.
        Senator Coons. Well, thank you, Mr. Secretary. I do think
    the SSBCI program is worthy of some extension and support
    because it leverages private sector dollars 10 to 1 with public
    dollars.
        Secretary Lew. Yes.
        Senator Coons. It is locally administered. I have seen its
    effectiveness in my State. As for your comment on sanctions
    enforcement, I just would urge you to searchingly reconsider
    whether we have all the resources we need for this critically
    important fight at this time. Thank you.
        Senator Udall. Okay, Senator Coons. Thank you so much. And
    in order to move through all the witnesses, I think we are
    finished with our questioning here. We are going to excuse you,
    Secretary Lew, and call the Commissioner forward. Thank you
    very much for your testimony.
        Secretary Lew. Thank you, Mr. Chairman.
        Senator Udall. Really appreciate your service. Mr.
    Koskinen, I invite you now to present your remarks on behalf of
    the Internal Revenue Service.

                            INTERNAL REVENUE SERVICE

    STATEMENT OF HON. JOHN KOSKINEN, COMMISSIONER, INTERNAL
                REVENUE SERVICE
        Mr. Koskinen. Chairman Udall, Ranking Member Johanns,
    Senator Coons, thank you for the opportunity to provide you
    with an overview of our proposed fiscal 2015 budget and what we
    hope to accomplish with those resources.
        In discussing the IRS budget, we remain concerned about the
    constraints under which the IRS has been operating since 2010.
    Our funding for fiscal year 2014 was set at $11.29 billion,
    which is more than $850 million below fiscal year 2010 and $500
    million below our pre-sequester level. I think it is important
    to note the IRS is the only major Federal agency operating at
    close to our post-sequester level, rather than returning to the
    higher pre-sequester level, as other agencies were allowed to
    do.
        A solution to the funding problem faced by the IRS begins
    with the administration's fiscal year 2015 budget request,
    which totals $12.64 billion, approximately $1.35 billion above
    the fiscal year 2014 enacted level. In the absence of these
    additional resources, our ongoing funding shortfall has major
    negative implications for taxpayers and the tax system.

                                 FILING SEASON

        We are particularly concerned about next year's filing
    season. This year, when all is said and done, we will have
    processed approximately 148 million individual tax returns.
    This is a tremendous accomplishment, and does not happen
    automatically or by accident, but is a result of the work done
    by our highly experienced, dedicated, and capable workforce.
        The 2013 filing season, which just ended, went extremely
    smoothly. We were able to improve our phone service somewhat,
    despite our funding limitations. In part, this was a result of
    our improved ability to provide information on our web site and
    the lack of major tax legislation in 2013. Because of the
    modest drop in call volume, we maintained a level of phone
    service during the filing season of about 71 percent, better
    than last year's overall average of 60.5 percent, but still an
    unacceptable level of service since that means that almost 30
    percent of calls did not go through.
        Furthermore, now that filing season is over and we no
    longer have extra seasonal employees, we will have fewer people
    on the phones, and we expect wait times to increase
    significantly between now and the end of September. For all of
    fiscal year 2014, we expect our level of phone service to drop
    below 70 percent and end up closer to last year's 60.5 percent.
        We are already beginning to prepare for next year's filing
    season, and we are concerned that delivering a smooth filing
    season in 2015 may be significantly more difficult. In a normal
    year, preparing for filing season takes several months. The
    advanced work to get our systems ready for 2015 will be more
    challenging than last year because of the need to accommodate
    major system changes for important statutory provisions going
    into effect under the Affordable Care Act and FATCA. We would
    use a portion of the administration's 2015 budget request,
    about $394 million, for implementing the Affordable Care Act
    and FATCA.

                                  IT UPGRADES

        A large portion of this is for Information Technology (IT)
    upgrades. For example, we need to build new technology systems
    to process and analyze the reports coming to us from financial
    institutions under FATCA. Investments in IT are also needed to
    continue implementing Affordable Care Act (ACA) provisions. I
    want to stress that we are mandated to implement the Affordable
    Care Act and FATCA, so if we do not receive this funding, we
    must take it from taxpayer service and enforcement. We have no
    other choice.
        On top of the planning needed for ACA and FATCA, we also
    need to adjust our systems for numerous additional tax law
    changes if Congress passes a package of tax extender
    provisions. Therefore, if there is going to be a tax extender
    package this year, it would be very helpful if Congress could
    pass it as soon as possible, to give the IRS maximum lead time
    to get our systems ready for these changes.
        About $400 million of the administration's request for
    additional funding would go to taxpayer service programs. We
    estimate this would allow us to answer an additional 12 million
    taxpayer calls with an approximately 2,400 additional full-time
    equivalents hired, and cause our level of phone service to
    exceed 80 percent. The additional calls answered would include
    calls from those seeking help with the tax-related provisions
    of the Affordable Care Act. In the absence of additional
    funding, we estimate that our level of service will plunge to
    about 53 percent.
        About another $334 million of the additional request would
    go to enforcement programs. With this funding, we estimate
    closing more than 500,000 additional cases, including
    individual audits, employment tax exams, and collection
    activities. Through these activities, we estimate we would
    collect an additional $2.1 billion a year in enforcement
    revenues, to a large extent as a result of hiring about 1,200
    additional revenue officers and agents. These increased
    collections would more than pay for the entire additional
    funding being sought for 2015.
        An important subject of enforcement is the fight against
    refund fraud caused by identity theft. About $65 million of the
    additional request would go to this area. We estimate that,
    through improved identity theft fraud detection, we would
    protect an additional $360 million a year in revenue from going
    out the door. We would also close an additional 13,000 cases
    where taxpayers have been victimized by identity thieves.
        I want to emphasize that we take very seriously the need to
    be careful stewards of the funding received. As Senator Johanns
    said, we are well aware of the fact that these are taxpayer
    dollars we are spending, and they deserve to be confident that
    we are spending them wisely. It is my responsibility to ensure
    that that funding is used wisely.

                               PREPARED STATEMENT

        I would be delighted to report back to the subcommittee, as
    fiscal year 2015 unfolds to discuss with you what the American
    taxpayer, in fact, received from additional investments in our
    Agency.
        This concludes my statement. I would be happy to take your
    questions.
        [The statement follows:]
                    Prepared Statement of Hon. John Koskinen
        Chairman Udall, Ranking Member Johanns and members of the
    subcommittee, thank you for the opportunity to appear before you today
    to update you on the Internal Revenue Service's (IRS') performance
    under our current funding levels for fiscal year 2014 and to provide
    you with an overview of our fiscal year 2015 budget and what we hope to
    accomplish with those resources.
        The IRS is vital to the functioning of Government and to keeping
    our Nation and economy strong. We support the Nation's tax system by
    providing taxpayer service to help people understand and meet their tax
    responsibilities while ensuring enforcement of the tax laws. The agency
    plays a unique role in Government, and resources invested in the agency
    lead to significant revenue increases for the Nation.
        In fiscal year 2013, the IRS collected $2.9 trillion in gross
    revenue to fund the Federal Government, approximately 91 percent of all
    Federal receipts. Moreover, for fiscal year 2013, we processed more
    than 147.6 million individual income tax returns and issued more than
    118 million refunds to individual taxpayers totaling nearly $314
    billion. This is a tremendous accomplishment, especially given that
    processing such a high volume of returns is an annual occurrence for
    this agency. It is important to remember that this does not happen
    automatically or by accident, but occurs as a result of the efforts of
    our highly experienced and capable workforce.
        The IRS has made major progress since fiscal year 2010 in finding
    hundreds of millions of dollars in cost savings and efficiencies.
    However, even with these savings, the fiscal year 2014 IRS budget
    approved by Congress continued a funding shortfall for the agency that
    has major implications for taxpayers and the tax system, both for this
    year's tax season and beyond. It is important to note that the IRS
    continues to operate at near sequestration levels, with the agency's
    fiscal year 2014 funding less than 1 percentage point above fiscal year
    2013 levels. Our current level of funding is clearly less than what the
    agency needs, especially to provide the level of taxpayer services the
    public has a right to expect.
        This year, millions of taxpayers continue to see longer wait times
    on the phone to get basic questions answered and resolve tax issues,
    though IRS employees are working diligently to reduce those wait times
    as much as possible. Further, as a result of fewer staff and reduced
    enforcement activities, the IRS estimates it will not be able to
    collect billions of dollars in enforcement revenues. The IRS is
    committed to carrying out its core responsibilities and working to
    preserve the public's faith in the essential fairness and integrity of
    our tax system, yet continued funding reductions will pose serious
    challenges to these efforts.
        The IRS remains committed to being as efficient as possible and
    spending taxpayer dollars wisely, and we will continue to find savings
    wherever we can. At the same time, the fiscal year 2015 President's
    budget will allow us to invest in strategic priorities so that we can
    continue to fulfill our dual mission of strong enforcement of the tax
    laws and excellent customer service.
        To summarize, the budget funds the following activities and
    programs: improving service to taxpayers; increasing our efforts
    against refund fraud, especially fraud caused by identity theft; making
    our compliance efforts more strategic, using new tools, data and
    capabilities to conduct a balanced enforcement program; and investing
    in advanced technology to enhance both service and enforcement
    activities. The IRS will also continue to implement and administer tax-
    related provisions of major legislation, including the Foreign Account
    Tax Compliance Act (FATCA) and the Affordable Care Act (ACA).
        In discussing our budget situation, we recognize that there has
    been a loss of confidence among taxpayers and particularly within
    Congress in regard to the way we manage operations, particularly the
    management problems that came to light last year in the section
    501(c)(4) area. One of my responsibilities is to ensure that we are
    minimizing risks and quickly solving management and operational
    problems that may arise, so that Congress can be confident that when we
    request additional funding the money will be used wisely. Taxpayers
    provide the funds we receive and they deserve to be confident that we
    are careful stewards of those resources.
        Despite the limits on our resources, I remain impressed with the
    professionalism and commitment of our workforce. Our employees have
    continued, throughout these challenging times, to perform critical work
    for the IRS and the Nation--helping people understand and meet their
    tax responsibilities while ensuring enforcement of the tax laws. They
    are making every effort to ensure a smooth experience for taxpayers
    despite the funding shortfall.
          irs performance: fiscal year 2013 and current filing season
        Through both taxpayer service and enforcement programs, the IRS
    remains committed to making the tax laws easier to access and
    understand and to improving voluntary compliance and reducing the tax
    gap--the difference between taxes owed and taxes paid on time. Taxpayer
    service supports and protects the trillions of dollars in revenue that
    come into the Treasury each year voluntarily from taxpayers by helping
    them understand their obligations under the tax law. Enforcement
    pursues those who evade or misrepresent their tax responsibility.
    Filing Season
        One of the most important activities the IRS undertakes each year
    is delivering a smooth and successful filing season. The IRS delivered
    another successful tax filing season in 2013, rising to the challenges
    posed by tax legislation enacted on January 2 of that year. The filing
    season began on January 30, 2013, less than 1 month after the passage
    of legislation that affected more than 600 tax products needed for the
    filing season. The IRS took the necessary steps to minimize disruptions
    for taxpayers, including working around the clock to update our forms
    and computer systems.
        As noted, during 2013 the IRS processed more than 147.6 million
    individual income tax returns and issued 118.7 million refunds totaling
    almost $314 billion. In addition, IRS employees responded accurately to
    95.7 percent of tax law questions and 96 percent of taxpayer account
    questions. Largely as a result of the ongoing decline in agency funding
    and the late tax law changes, for fiscal year 2013, the telephone level
    of service for taxpayers trying to reach the IRS' toll-free lines
    dropped to 60.5 percent, the lowest level since fiscal year 2008. That
    means that approximately 40 percent of taxpayers who called were unable
    to reach an IRS employee.
        The 2014 filing season, which began on January 31, started strongly
    and ran very smoothly. Through April 11, 2014, the IRS received more
    than 112 million individual income tax returns and issued more than 85
    million refunds for approximately $234.5 billion.
        Our level of phone service has appeared to improve this filing
    season as compared to the average for fiscal year 2013. We have been
    able to maintain a level of phone service of around 70 percent so far,
    meaning that about 70 percent of taxpayers who called this filing
    season got through to the IRS. One reason may be that the volume of
    calls to our toll-free lines is actually down somewhat. We believe that
    is largely because there were no significant tax law changes enacted in
    2013 and because tax return processing has gone relatively smoothly. In
    addition, we continue to provide more resources to taxpayers on our Web
    site, which we believe offers an alternative to the phone. However,
    increases in volume will negatively impact these results, and we expect
    that for the year we will drop below 70 percent and end up closer to
    last year's 60.5 percent. We will continue to monitor telephone service
    levels and work to maintain as high a level of phone service as
    possible within our resource limitations.
        An area of concern this year is the amount of time people have had
    to wait to get in-person help at our Taxpayer Assistance Centers
    (TACs). We have had reports from field staff of taxpayers lining up
    outside TACs well before the centers open in the morning to make sure
    they receive service the same day. We also have had reports of people
    waiting 90 minutes or more to be helped once they arrived inside the
    TAC and taken a number for service. Unfortunately, given our resource
    limitations we have few options to drive down these wait times.
    Taxpayer Service
        Providing taxpayers with top quality service and helping them
    understand and meet their tax obligations remained top priorities for
    the IRS in fiscal year 2013. During fiscal year 2013, the IRS updated
    forms to help taxpayers comply with filing requirements, converted
    forms for visually impaired taxpayers, and translated more tax products
    into multiple languages. In addition, the IRS continued its effort to
    redesign taxpayer correspondence in plain language and in a consistent
    format to make it easier for taxpayers to understand their obligations.
        The IRS continued to provide alternative service options in fiscal
    year 2013 by increasing the amount of tax information and services
    available on IRS.gov. In fiscal year 2013, taxpayers viewed IRS.gov Web
    pages more than 1.87 billion times as they used the Web site and mobile
    applications to obtain forms and publications, get answers to tax law
    questions, and check the status of their refunds.
        Taxpayers used the ``Where's My Refund?'' online tool in 2013
    nearly 201 million times to check refund status, an increase of 51.6
    percent from 2012. Last year, the IRS enhanced the ``Where's My
    Refund?'' tool to allow taxpayers to find out when their tax return was
    received, when the refund was approved, and when the refund was sent.
        The IRS also deployed a new telephone and Web tool called ``Where's
    My Amended Return?'' in both English and Spanish that allows taxpayers
    to check the status of their Form 1040X amended tax returns for the
    current year and up to 3 prior years. The tool also provides taxpayers
    with other information, such as when their amended return was received,
    adjusted, and completed, as well as specific information regarding
    offset conditions, such as a previous IRS tax liability or a past due
    obligation.
        The IRS continues to improve and expand on its outreach and
    educational services through partnerships with State taxing
    authorities, volunteer groups, and other organizations. Volunteer
    Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE)
    sites provide free tax assistance for low-income individuals, the
    elderly and disabled, and individuals with limited proficiency in
    English. In fiscal year 2013, more than 91,800 volunteers prepared 3.4
    million Federal returns, 95.3 percent of which were filed
    electronically, and more than 2.5 million State returns. The IRS also
    teamed up with its national partners to offer a remote filing method--
    Facilitated Self-Assistance (FSA)--at VITA sites. More than 82,000 FSA
    returns were filed at the 330 VITA sites offering the FSA remote filing
    model.
        I am pleased to report that the IRS' technology efforts in relation
    to improving taxpayer service recently received public recognition. In
    March, the Excellence.gov Awards Program sponsored by the American
    Council for Technology and the Industry Advisory Council recognized the
    IRS' Virtual Service Delivery (VSD) program for Excellence in Customer
    Experience. VSD technology units allow face-to-face contact between IRS
    employees and taxpayers at remote sites through two-way video
    conferencing. These units help the IRS resolve taxpayer issues remotely
    at understaffed and unstaffed Taxpayer Assistance Centers, Taxpayer
    Advocate Service sites, and Low Income Taxpayer Clinic locations.
        With the IRS budget now in its fourth year of relative decline,
    significant effects on taxpayer services will become more apparent in
    fiscal year 2014. The IRS has had 11,000 fewer people working during
    the 2014 filing season than it had in 2010 while processing the largest
    number of tax returns in the agency's history.
        In addition to our concerns about the overall level of phone
    service noted above, we estimate that taxpayers may see average wait
    times of 25 minutes per call, compared with 10 minutes in 2010. Given
    current resources, we also expect that it will take longer for us to
    respond to taxpayer correspondence. Historically, 70 percent of letters
    we receive have been answered within 30 days, but we expect that more
    than half of all correspondence this year will take more than 45 days
    to answer.
        As Forbes magazine recently noted, a reduction in IRS funding that
    erodes service levels ``punishes'' taxpayers.
    Tax Compliance
        In fiscal year 2013, as a result of the impacts of sequestration
    and furloughs, the IRS delivered key enforcement programs well below
    historical levels. Total individual audits fell 5 percent from 1.48
    million in 2012 to 1.40 million, while audits of high-income
    individuals declined from 179,000 to 172,000. This translated to an
    individual coverage rate below 0.9 percent, a historical low. Likewise,
    business return audits dropped 13 percent from 70,000 to 61,000.
        Collections related to all enforcement activities totaled $53.3
    billion in fiscal year 2013, an increase of $3.1 billion over fiscal
    year 2012. This was the fourth consecutive year the IRS exceeded $50
    billion, for a total IRS-wide return on investment (ROI) of $4.8 to $1.
    Most of the increase came from a $2.6 billion rise in revenue from our
    appeals function which, due to the timing of the appeals process,
    generally relates to examinations occurring in previous years. Revenue
    from the collection function, the levels of which also frequently rise
    and fall in tandem with the overall health of the economy, increased by
    nearly $1 billion in fiscal year 2013.
        While the overall receipts from enforcement increased in 2013
    compared to the prior year, the total is still down by more than $4.3
    billion from 4 years ago. The reason for this decline is primarily due
    to a decline in revenue from audits, which dropped nearly $400 million
    in fiscal year 2013 to $9.83 billion, the lowest level in a decade.
    This decline in audit revenue is attributable to a decline in the
    number of returns audited.
        We are concerned the decline in core enforcement activities during
    fiscal year 2013 that was noted above is expected to continue in fiscal
    year 2014, given the ongoing challenging budget environment. For
    example, we expect audits to decline by an estimated 100,000 from
    fiscal year 2013 and the number of collection activities to decline by
    an estimated 190,000.
        Despite the circumstances, the IRS has made significant progress in
    a number of major enforcement areas. One of these is international
    compliance. Strategic enforcement efforts and the parallel Offshore
    Voluntary Disclosure Program (OVDP) give U.S. taxpayers with
    undisclosed offshore assets or income an opportunity to become
    compliant with the U.S. tax system and avoid potential criminal
    charges. The OVDP has resulted in more than 43,000 disclosures and the
    collection of about $6.5 billion in back taxes, interest, and penalties
    since the program was first established in 2009.
        The IRS also continued to focus on service and compliance
    activities in regard to tax return preparers. Return preparers play a
    key role in increasing taxpayer compliance and strengthening the
    integrity of the U.S. tax system. The IRS requires anyone who prepares
    or assists in preparing Federal tax returns for compensation to have a
    valid Preparer Tax Identification Number (PTIN). PTINs allow the IRS to
    collect more accurate data on who is preparing returns, the volume and
    types of returns being prepared and the qualifications of those doing
    return preparation. Additionally, PTIN data is essential in determining
    where to direct compliance and educational outreach efforts for
    erroneously prepared tax returns. The IRS recently held a successful
    PTIN renewal season, offering enhanced PTIN system usability,
    troubleshooting tips, and other tools. As of March 2014, the number of
    valid PTINs totaled approximately 677,000.
        In fiscal year 2013, the IRS continued to educate and inform return
    preparers on tax law compliance in a number of ways, including: making
    visits to more than 3,000 return preparers around the country,
    including 300 compliance visits to preparers who handled large numbers
    of returns claiming the Earned Income Tax Credit (EITC); and addressing
    preparers who were found to have made egregious errors through
    education and outreach and through a variety of methods to ensure
    appropriate penalties and/or sanctions were imposed.
        A critical area of focus involves stopping erroneous claims for
    refundable tax credits, particularly the EITC. We are concerned that
    the improper payment rate has remained unacceptably high throughout the
    program's history. Therefore, we initiated a major review of our
    activities in this area earlier this year. If Congress enacts the
    proposal in the administration's fiscal year 2015 budget to provide the
    IRS with greater flexibility to address ``correctable errors,'' we will
    have additional tools to stop erroneous claims and, as a result, we
    believe we will be able to make a real reduction in the improper
    payment rate.
        The IRS criminal investigation program examines potential criminal
    violations of the Internal Revenue Code and related financial crimes
    such as money laundering and tax-related identity theft fraud. In
    fiscal year 2013, the IRS completed 5,557 investigations; achieved a
    conviction rate of 93.1 percent; maintained a Department of Justice
    case acceptance rate of 95.5 percent, which compares favorably with
    other Federal law enforcement agencies; and obtained 3,311 convictions.
        Refund fraud related to identity theft continues to be a major
    focus for us and touches nearly every part of the IRS. In fiscal year
    2013, the IRS continued to focus on a comprehensive and aggressive
    strategy to identify and combat tax-related identity theft. Last year,
    the IRS conducted a number of activities in this area. These included:
    issuing Identity Protection Personal Identification Numbers (IP PINs)
    to more than 770,000 taxpayers for the 2013 filing season; conducting
    191 identity theft outreach events with tax and accounting
    practitioners, the general public, and the media; and working with
    victims to resolve and close more than 963,000 identity theft cases.
    Business Systems Modernization
        IRS modernization efforts during fiscal year 2013 continued to
    focus on building and deploying advanced information technology (IT)
    systems, processes, and tools to improve efficiency and productivity.
    Fiscal year 2013 modernization successes included the following:
      --The IRS' Customer Account Data Engine 2 (CADE 2) posted more than
            139 million returns and issued more than 111 million refunds
            totaling $281 billion during the filing season. Daily
            processing and posting of individual taxpayer accounts--which
            improved on the prior system of weekly processing and posting--
            enabled faster refunds for millions of taxpayers.
      --Modernized e-File (MeF) Release 8 deployed for the filing season
            and was the sole e-file platform used as the IRS processed
            224.7 million individual returns, and 16.8 million Business
            Master File returns.
      --The IRS launched the Information Return Document Matching program
            and began selecting casework in January 2013. This program
            matches new information returns, such as Form 1099-K, Payment
            Card and Third Party Network Transactions, with both individual
            and business tax returns to identify potential income
            underreporting or non-reporting.
      --The IRS launched a new Web portal that improved taxpayer access to
            IRS.gov. The Integrated Enterprise Portal accommodated a 22
            percent increase in visits and a 6 percent increase in page
            views in fiscal year 2013 compared to fiscal year 2012.
        Looking ahead, we believe that IRS IT operations in fiscal year
    2014 will suffer a significant negative impact from the continuing
    tight budget environment. We anticipate that fiscal year 2014 funding
    will not be sufficient to address critical technology infrastructure
    needs such as: additional improvements to IRS.gov; new identity theft
    prevention tools; and upgrades to the basic computer software used by
    our employees that are needed to reduce system vulnerabilities.
    Implementing Enacted Legislation
        Within its budget constraints, the IRS nonetheless has an
    obligation to carry out the legislative responsibilities Congress has
    approved over the last several years, particularly ACA and FATCA.
    Implementation activities involving both statutes carried out in fiscal
    year 2013 will evolve and continue through fiscal year 2014 and into
    fiscal year 2015.
        With regard to ACA implementation, I am pleased to be able to tell
    you that the systems and processes that the IRS developed to support
    enrollment in the new Health Insurance Marketplace were launched on
    schedule and are working as planned. We continue to focus on two
    significant provisions that go into effect in 2014: the premium tax
    credit and the individual shared responsibility provision. These two
    provisions will have a profound impact on IRS forms and procedures
    beginning with the 2015 filing season, and will require additional
    taxpayer services and education activities.
        Preparation is already well underway to modify forms and
    instructions, enhance education and outreach to taxpayers and their
    advisors, and update our systems and processes in time for the 2015
    filing season. The IRS is also focusing on ensuring that returns that
    erroneously or fraudulently claim refundable premium tax credits (or
    fail to reconcile advance payments of the credit) are efficiently
    identified and addressed using Marketplace information available during
    the filing season as well as the ever-improving IRS tools used for all
    returns to address errors and fraud.
        Another major initiative is implementation of FATCA, which is an
    important new tool in our offshore compliance efforts. FATCA requires
    foreign financial institutions (FFIs) to report information to the IRS
    about financial accounts held by U.S. taxpayers, or by foreign entities
    in which U.S. taxpayers hold a substantial ownership interest.
    Withholding requirements under FATCA go into effect on July 1, 2014. It
    is important to note that legal restrictions in some countries prevent
    FFIs from fulfilling the reporting, withholding and account disclosure
    requirements. For that reason, the Department of the Treasury
    (Treasury), with assistance from the IRS, is advancing an
    intergovernmental approach to FATCA implementation that is focused on
    bilateral agreements that address these legal impediments, simplify
    practical implementation and reduce the costs to FFIs. As of last week,
    there were 28 signed intergovernmental agreements. In addition another
    27 jurisdictions had been publicly identified as having reached
    agreements in substance, bringing the total number of countries
    considered to have agreements in effect to 55.
        The IRS FATCA registration Web site opened in August 2013 to allow
    financial institutions to begin to enter data. In January 2014,
    financial institutions were able to begin submitting their
    electronically signed FATCA agreements. Going forward, one of the IRS'
    biggest challenges involves having the resources to build and maintain
    systems that can effectively process all the incoming data. Beyond
    building these systems, we also will need additional staff to analyze
    the information and develop compliance programs around the new data.
    Exempt Organizations
        The IRS is continuing the efforts it began in fiscal year 2013 to
    implement broad managerial and operational improvements in the
    determination process for tax-exempt status. In this work we are
    focusing on applications for recognition of tax-exempt status under
    both sections 501(c)(3) and 501(c)(4).
        We continue to address the issues and concerns surrounding the
    determinations process for section 501(c)(4) applications. In fiscal
    year 2013 and continuing into this fiscal year, the IRS has made
    important progress in responding to the recommendations made by the
    Treasury Inspector General for Tax Administration (TIGTA) in a May 2013
    report describing problems with the processing of these applications.
    As of the end of January 2014, the IRS completed action on all nine
    TIGTA recommendations contained in that report.
        Our responses to the TIGTA recommendations include the actions we
    have taken to reduce the inventory of section 501(c)(4) applications,
    including the group of 145 cases in the ``priority backlog''--those
    that were pending for 120 days or more as of May 2013. As of March 13,
    2014, 126 of those cases, or 87 percent, have been closed. Of the
    closed cases, 98 of them were approved, including 43 organizations that
    took advantage of a temporary self-certification procedure we offered
    in summer 2013. Of the remaining 28 closed cases, most were closed
    either because the organization withdrew the application or it failed
    to respond to our questions. To date, three applications have been
    formally denied. The 19 cases still open generally fall into one of two
    categories: either the taxpayer has asked for and received additional
    time to respond to our questions, or the case is being litigated. None
    of these 19 organizations opted to accept the self-certification
    procedure used by 43 organizations to obtain prompt approval of their
    applications.
        Also consistent with the response to the TIGTA recommendations,
    draft proposed regulations were released in November 2013 that are
    intended to provide clarity in determining the extent to which an
    organization's political activity is consistent with tax-exempt status
    as a social welfare organization. I believe it is extremely important
    to make this area of regulation as clear as possible, not only because
    it will help guide the IRS in proper enforcement, but because it will
    also give a better roadmap to applicants and help those that already
    have section 501(c)(4) status understand the applicable standards and
    properly administer their organizations.
        As Treasury has noted in the past, the central purpose of any
    Notice of Proposed Rulemaking is to solicit public comments on proposed
    regulations, and we intend to consider all public comments we have
    received on these proposed regulations before moving forward in the
    regulatory process. Indeed, we received more than 150,000 comments on
    these proposed regulations, which is a record for an IRS rulemaking
    comment period. In addition, while I do not control the regulatory
    process, I am committed that any final regulation should be fair to
    everyone, understandable and easy to administer. It is also important
    that every taxpayer be confident that, whenever they interact with the
    IRS, they will be treated the same as any other taxpayer, no matter
    what their beliefs, what organizations they belong to or whom they
    voted for in the last election. Taxpayer trust in the integrity of the
    IRS is our most important asset, and my primary goal is to do whatever
    is necessary to restore whatever trust has been lost as a result of the
    inappropriate criteria used to scrutinize some 501(c)(4) applications.
        Improving the section 501(c)(3) application process has been
    another significant area of focus for our agency, and we have been
    working diligently to make the process less burdensome for applicants
    in a number of ways. We presently have a backlog of 60,000 section
    501(c)(3) applications, many of them well over a year old.
        Our Exempt Organization (EO) group consistently receives more than
    60,000 applications per year, consisting primarily of applications for
    section 501(c)(3) status. The agency has experienced a substantial rise
    in applications since 2010, due in large part to automatic revocations
    of tax-exempt status that occurred under the 2006 Pension Protection
    Act beginning in 2011, and the subsequent requests for reinstatement,
    which have added more than 50,000 cases to EO's workload since fiscal
    year 2010.
        We have taken a number of actions to deal with the backlog in
    501(c)(3) applications. On January 2, 2014, the IRS issued Revenue
    Procedure 2014-11, which makes the reinstatement process more efficient
    for organizations whose status was automatically revoked and allows a
    majority of revoked organizations to use a streamlined process to apply
    for retroactive reinstatement of their exempt status.
        Looking beyond the issue of automatic revocations, the IRS has
    recently developed another way of making the determination process more
    efficient for section 501(c)(3) organizations. The Interactive Form
    1023, Application for Recognition of Exemption under section 501(c)(3),
    which was made available online in September 2013, should result in
    more complete applications. This will thus reduce processing time by
    minimizing the IRS' need to request additional information to make a
    determination.
        We have also taken all applications that were more than a year old
    as of last fall and devoted the necessary resources to resolving
    virtually all of them in the next months. We also are working to have
    no applications still pending at the end of this year that have been
    filed more than 9 months earlier. Ultimately, we want to process all
    applications within a 6-month timeframe, with a backlog of less than
    30,000 cases at any time.
        To make this possible we are also examining the feasibility of
    creating a streamlined application process for certain organizations
    seeking tax-exempt status, in particular small organizations that pose
    a low risk of noncompliance. The goal is to come up with a new
    procedure this summer that is more efficient without introducing major
    risks into the system for approving applications. These streamlined
    applications could be processed in a matter of weeks rather than
    months.
              the administration's fiscal year 2015 budget request
        The budgetary constraints under which the IRS has been operating
    since 2010 continue to pose very serious challenges to our efforts to
    enforce the tax laws and provide excellent customer service. Our fiscal
    year 2014 enacted appropriation was $11.29 billion, which is more than
    $850 million below the fiscal year 2010 funding level in nominal
    dollars, or over $1 billion in real dollars. This represents a 7
    percent cut in our annual budget since 2010 while the total population
    of individual and business filers grew by more than 4 percent over the
    same time period.
        Essentially, the Federal Government is losing billions of dollars
    in revenue collection to achieve budget savings of a few hundred
    million dollars. In general, the IRS estimates that for every $1
    invested in the IRS budget, it produces $4 in enforcement revenue,
    which is a $4-to-$1 return on investment to the American taxpayer. This
    year, for example, the IRS estimates it would have returned to the
    Federal Government over $2 billion more in collections had we received
    the remaining $500 million that our budget was cut as a result of the
    sequester.
        The solution to the funding problems faced by the IRS begins with
    the President's fiscal year 2015 budget request, which, with the
    inclusion of the program integrity cap adjustment and the Opportunity,
    Growth and Security Initiative, totals $12.64 billion. This is
    approximately $1.35 billion above the fiscal year 2014 enacted level of
    $11.29 billion. This amount includes a $480 million program integrity
    cap adjustment to vitalize tax compliance and a $165 million additional
    investment through the Opportunity, Growth and Security Initiative to
    deliver performance enhancements that taxpayers deserve.
        The aim of the President's proposal is twofold. First, it is
    designed to reverse the erosion in the IRS budget over the last several
    years. In so doing, it will help taxpayers get the service they expect.
    It will also strengthen compliance in key areas, such as international
    tax compliance, high-wealth individuals and flowthrough entities, in
    large part by halting the recent declines in the number of key
    enforcement personnel. Longer term, the proposal also positions the IRS
    well for the future by allowing the agency to invest in necessary basic
    infrastructure, as well as advanced technology.
        The budget request also provides funding to: implement enacted
    legislation; enforce return preparer compliance; expand criminal
    investigation capabilities; address compliance issues in the tax-exempt
    sector, including employee retirement plans, exempt organizations, and
    direct-pay bonds; and provide appropriate and balanced coverage by
    improving examination audit and collection coverage rates.
        In regard to compliance, increased resources for IRS enforcement
    programs yield direct, measurable results through activities that
    provide a high return on investment. It is important to point out that
    this request includes a $480 million program integrity cap adjustment
    that will reduce the deficit through above-base funding for high-return
    tax enforcement and compliance programs, of which $5 million will be
    transferred to the Alcohol and Tobacco Tax and Trade Bureau. The $475
    million requested for the IRS fiscal year 2015 enforcement initiatives
    funded through this program integrity cap adjustment is expected to
    generate nearly $2.1 billion in additional annual enforcement revenue
    once the new personnel hired reach full potential in fiscal year 2017.
    At full performance, these resources requested for enforcement
    initiatives are expected to generate a return on investment of nearly
    $6 to $1, not including indirect deterrence effects estimated to be at
    least three times the direct revenue impact. Over the 10-year budget
    window, the proposal is expected to generate $52 billion in additional
    revenue while costing $17 billion, thereby reducing the deficit by $35
    billion.
        It is fair to ask what value the American taxpayer would receive
    for the increase in funding requested by the President of approximately
    $1.2 billion over the fiscal year 2014 enacted level. Let me detail for
    you how the IRS intends to spend these additional funds in various
    categories:
        Improve taxpayer service: $211 million--This additional funding
    will allow the IRS to meet the expected increase in demand for taxpayer
    services in fiscal year 2015. Combined with Opportunity, Growth and
    Security Initiative resources, the additional funding will allow us to
    answer about 12 million additional calls from taxpayers seeking our
    help, including taxpayers seeking assistance in regard to the ACA, and
    will cause our level of phone service to exceed 80 percent. It also
    includes $19 million that will be invested in advanced technology to
    further expand and improve the services taxpayers receive when they
    call the IRS. For example, this additional funding will allow the IRS
    to enhance its automated phone system to let taxpayers elect to be
    called back instead of waiting on hold, and will allow customer service
    representatives to call up immediate displays of taxpayer information
    on their computers, improving response time.
        Prevent refund fraud and identity theft: $65 million.--This
    additional funding will allow the IRS to help more taxpayers who have
    been victims of identity theft resolve their cases. We will also invest
    in advanced technology to further our efforts in identifying
    potentially fraudulent returns, allowing us to reduce improper
    payments. We project that investments in these activities will protect
    nearly $1.5 billion in revenue by fiscal year 2017, an ROI of more than
    $22 to $1.
        Address offshore tax evasion: $57 million.--This additional funding
    will allow us to expand our efforts to identify and pursue U.S.
    taxpayers with undisclosed offshore accounts. It will also help the IRS
    expand criminal investigations of international tax and financial
    crimes, and expand information gathering to identify those who promote
    or facilitate abusive offshore schemes. We estimate that this
    investment will enable the IRS to close an additional 6,600 cases and
    produce additional, direct annual enforcement revenue of approximately
    $293 million once the new hires carrying out these activities reach
    full potential in fiscal year 2017. That is an ROI of $4.8 to $1.
        Expand audit coverage of individuals: $98 million.--This additional
    funding will allow the IRS to hire additional personnel to improve our
    examination efforts in regard to individuals. With these new resources,
    the IRS will be able to do more exams, match more documents to detect
    misreported or unreported income, and invest in advanced technology to
    make our work more efficient by, for example, using barcoding so that
    some paper documents we receive can be electronically processed. As a
    result, we estimate that we will be able to close an additional 243,000
    individual examination cases. Through these activities, we expect to
    collect $674 million more in direct enforcement revenue once the new
    hires reach full potential in fiscal year 2017, an ROI of $7.1 to $1.
        Expand audit coverage of high-wealth taxpayers: $21 million.--This
    additional funding will allow the IRS to hire more enforcement
    personnel to continue our focus on high-wealth taxpayers. This is a
    challenging area, as these taxpayers frequently operate complex
    enterprises containing many interrelated businesses that often have
    international components. We estimate that, with this investment, we
    will be able to close an additional 325 cases and produce additional
    annual enforcement revenue of $243.9 million once the new hires reach
    full potential in fiscal year 2017--an ROI of $11.3 to $1.
        Improve audit coverage of partnerships and flow-through entities:
    $36 million.--This additional funding will allow the IRS to hire
    additional staff to keep pace with this segment of taxpayers, the most
    rapidly growing portion of all tax returns filed. In particular, this
    will allow us to increase the number of tax examiners with specialized
    knowledge about partnerships. We estimate that we will be able to close
    an additional 2,800 cases involving partnerships and produce $268
    million more enforcement revenue annually once the new hires reach full
    potential in fiscal year 2017, an ROI of $6.8 to $1.
        Enhance collection coverage: $67 million.--This additional funding
    will allow the IRS to hire new staff to improve our efforts to work
    with taxpayers to collect back taxes owed. With the additional funding,
    we will be able to take a more proactive role in reaching out to
    taxpayers earlier in the collection process. We estimate that this will
    allow us to close an additional 244,000 collection cases. The funding
    also will provide additional staff to handle an increasing number of
    cases involving unpaid employment taxes, which we estimate will allow
    us to close an additional 45,000 employment tax cases. As a result, we
    project additional annual, direct enforcement revenue of $617 million
    once new hires reach full potential in fiscal year 2017, an ROI of $8.5
    to $1.
        Improve efforts in the tax-exempt sector: $16 million.--With this
    additional funding, the IRS will be able to continue its focused
    oversight of the tax-exempt sector and improve service to make
    voluntary compliance easier. We estimate these additional resources
    will allow us to reach our goal of cutting our backlog of 501(c)(3)
    applications in half and reducing the processing time for all
    applications to a period of 2 weeks or less for smaller organizations
    and no more than 6 months for all applications.
        Pursue fraud referrals and tax schemes: $18 million.--This
    additional funding will be dedicated to improving our efforts in the
    core enforcement areas of corporate fraud, employment tax, and abusive
    tax schemes by increasing the number of convictions and assessments of
    unpaid tax. A portion of the funding will be for the use of computer
    software that will allow the IRS to apply so-called network analysis to
    detect corporate fraud and abuse. With this software tool, the IRS will
    be able to identify schemes by linking together multiple potentially
    fraudulent returns or information items. These efforts are expected to
    help us achieve a conviction rate in this area for fiscal year 2015 of
    92 percent.
        Enhance return preparer compliance: $17 million.--This additional
    funding will allow the IRS to increase service and compliance
    activities in regard to tax return preparers. The IRS will be able to
    increase audits of preparers and increase monitoring and pursuit of
    preparers engaged in fraudulent activities, including those who prepare
    large numbers of returns involving EITC claims. We estimate we will be
    able to conduct 200 additional preparer visits and more than two dozen
    additional investigations into fraudulent activity.
        Use technology to enhance criminal investigation: $4 million.--This
    additional funding will allow the IRS to automate the processing of
    evidence gathered by our criminal investigators by implementing a
    virtual digital evidence processing environment. This new system will
    allow for more secure and efficient evidence processing nationwide, and
    reduce travel by IRS agents and investigative specialists.
        Use technology to improve audit case selection: $37 million--This
    additional funding will enable the IRS to improve the way we gather and
    use electronic data, which will in turn allow us to do a better job of
    selecting cases for audit and focusing on issues that need to be
    examined. This is important because the IRS needs to continually adapt
    to changing taxpayer behavior to prevent tax fraud and abuse. Under the
    initiative we envision, we will significantly increase the digital
    availability of tax return information and then employ technology to
    analyze this information in order to better detect noncompliant
    taxpayer behavior.
        Expand Virtual Service Delivery (VSD): $8 million.--This additional
    funding will create a secure, Web-based digital communications channel
    through the Internet using online messaging that ultimately will allow
    the IRS to communicate directly with taxpayers while they are at work
    or at home, or using their mobile device. This will improve the
    taxpayer experience in resolving difficult issues with their accounts.
        Enhance online services: $16 million.--With this additional
    funding, the IRS will develop additional digital applications that will
    further improve taxpayers' online interactions with the IRS. This
    technology investment will help provide secure digital communications,
    and add more interactive capabilities to existing Web self-service and
    mobile products.
        Implement ACA: $452 million.--This additional funding, the majority
    of which is for required information technology upgrades, will allow
    the IRS to increase efforts to ensure compliance with a number of tax-
    related provisions of the ACA, and also perform outreach and
    educational activities so that taxpayers will understand what these
    provisions require, as well as covering additional phone calls made by
    taxpayers inquiring about the ACA. The funding will also assist the IRS
    in continuing to implement a major ACA provision going into effect in
    2014--the premium tax credit, which will help millions of Americans
    purchase affordable coverage.
        Implement FATCA: $32 million.--With this additional funding, the
    IRS will invest in advanced technology to allow the agency to continue
    implementing FATCA, which in turn will provide more information to us
    on offshore accounts of U.S. citizens. As mentioned above, FATCA
    includes new reporting and withholding requirements for foreign
    financial institutions. To properly process and analyze the data we
    receive as a result of these new requirements, the IRS will need to
    build new technology systems and modify existing systems.
        Enhance information technology services: $10 million.--This
    additional funding will enable the IRS to continue upgrading its
    computer systems, and in particular convert the agency's operating
    system to a less complex standard, which will decrease our need for
    computer hardware. These investments will result in a more stable
    computing environment and reduce delays in providing service to
    taxpayers.
        Consolidate and revitalize IRS office space: $10 million.--With
    this additional funding, the IRS will be able to consolidate office
    space in Atlanta, Georgia, and design a new, modernized facility for
    processing tax returns at the IRS campus in Covington, Kentucky. These
    activities, in turn, will allow the agency to improve efficiencies and
    achieve long-term savings.
        Enhance IRS procurement and security systems: $31 million.--This
    additional funding will allow the IRS to improve the efficiency of our
    procurement processes and also improve security for our employees and
    our resources.
        Improve IRS financial accounting systems: $12 million.--This
    additional funding will help the IRS ensure more timely and accurate
    reporting of data on the revenue we collect. The funding will also
    allow the IRS to make necessary system and programming changes to
    comply with various Federal mandates, and to stay current with internal
    changes made to IRS' tax processing systems for tax administration that
    also affect financial reporting.
                                   conclusion
        Chairman Udall, Ranking Member Johanns and members of the
    subcommittee, thank you again for the opportunity to update you on IRS
    operations and discuss the fiscal year 2015 President's budget request
    for the IRS. It is vital that we find a solution to our budget problem,
    so that the IRS can be on a path to a more stable and predictable level
    of funding. I look forward to working with Congress and this
    subcommittee to do just that. In order to ensure that the IRS can
    continue to deliver on its dual mission of providing quality taxpayer
    service and ensuring compliance with the Nation's tax laws, I hope that
    one of the legacies of my term as IRS commissioner will be that we put
    the agency's funding on a more solid footing. This concludes my
    statement, and I would be happy to take your questions.

                                 IDENTITY THEFT

        Senator Udall. Commissioner, thank you very much for your
    testimony. You know, one of the things that--and for your
    service today--the big issues that you face are refund fraud
    and identity theft. And these are serious, pervasive problems
    in the United States, and I think they are probably daunting
    task 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. The rapid growth of tax related identity theft
    has resulted in a backlog. My understanding, it is about
    140,000 cases.
        What is the IRS' strategy for dealing with identity theft
    and refund fraud? Is it comprehensive and aggressive enough to
    keep pace with fraudsters? And what is your plan for tackling
    the backlog? What measures make it easier for the IRS to better
    detect fraud and halt refund fraud schemes in their tracks? And
    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?
        Mr. Koskinen. It is a critical problem that exploded,
    really, in 2010 to 2012, and overwhelmed both the IRS and law
    enforcement. We have made great progress since then,
    particularly in protecting and working with taxpayers whose
    identities have been stolen. It used to take, when this first
    started, over 360 days to resolve a case. We now have those
    cases being resolved in less than 120 days. The backlog at this
    time last year was 260,000 cases. The end of this filing
    season, the backlog was under 100,000 cases, reduced by over 60
    percent.
        Our problem is that these are not individuals filing false
    returns. This is organized crime around the world that is
    filing hundreds, if not thousands, of returns at the same time,
    stealing Social Security numbers in various ways. We have
    developed fraud detectors that have allowed us to detect
    trends. Last year in the filing system overall, we stopped $17
    billion of fraudulent refunds from going out the door. We
    continue to adjust those filters.
        One of the technology changes which we hope to fund would
    allow us to change those filters on the run, rather than only
    once a year. Our system is somewhat archaic, and it is like
    running a Model-T. And so, we can only adjust the filters once
    a year. With more technology expenditures, which we hope to
    devote to this activity, we will be able to adjust those
    filters on the run and try to keep ahead of them.
        Even though we have made great progress, I have asked our
    senior executive team--we have had two meetings on this--to
    step back and ask what else can we do? One of the things we can
    do, and we have asked for legislative support, is move the
    receipt for W-2s to the IRS from mid-March to the end of
    January. All employees get their W-2s by the end of the
    January. We would like to have the IRS have access to those W-
    2s at that time because what has happened is we are a victim of
    our own success. In the old days, which I remember, you used to
    get your refund in a check from the IRS sometime in August
    through October.
        And by that time, all the third-party information was into
    the IRS. You now have improved the technology enough that we
    tell you if you file in January or February, within 21 days we
    will give you a refund, and we have met that standard. Ninety
    million people got refunds by April 15. So we leapfrogged the
    third party information. We need to have the W-2 information
    earlier so we can have some of the third-party information
    earlier. 1099s are too complicated to try to get that
    information much earlier.
        We need to reconsider how we handle refund requests. We
    need to actually adjust those so we can get them in a
    reasonable time. We are working very well. We have partnerships
    with law enforcement at the State and local level. We have
    partnerships with financial institutions, with the prisons
    where a lot of this originally started, which is one of the
    reasons we are getting our arms around the problem.
        We also have significant enforcement activity going on. In
    fiscal year 2011, we had 300 criminal investigations. Last
    year, we had almost 1,500. We have over 500 already in this
    filing season. We have moved to--we had 1,000 indictments last
    year with 438 sentences. Those are for multi-year sentences.
    This year already, just in the filing season, we have had 412
    indictments and 342 convictions. And as I say, people are going
    to jail for 5, 10, 15 years.
        So to some extent, one of the reasons we think we are
    getting our arms around this is we have sent a lot of criminals
    to jail. And these are not, as I say, people filing one return
    at a time. These are people filing 50, 100, 5,000 of them at a
    time. But we need to be continually vigilant. We need to
    continually devote resources to it.

                         PROPOSED 501(C)(4) REGULATIONS

        Senator Udall. Thank you. Obviously, a very serious issue.
    The--we had a lively exchange up here on the tax exempt. And I
    do not want to rehash a lot of that, but the one thing that I
    am wondering about with the proposed rule out there, until the
    rules change, what tests or criteria is the IRS using to
    evaluate applicants or tax exempt status as a social welfare
    group?
        Mr. Koskinen. Last summer, to try to resolve the backlog of
    applications that had been pending far too long--some of them,
    2 years--an interim measure was adopted that said if you will
    simply state and affirm that you are not going to spend more
    than 40 percent of your resources and revenues on political
    activities, you could, in fact, pass through. That has
    continued. So people applying today, if they simply say they
    are not going to spend more than 40 percent of their funding on
    political activities, can be reviewed and processed
    immediately.
        We have, as the Secretary noted, implemented and adopted
    all of the recommendations of the Inspector General. There is
    training and re-training for people around every election
    cycle, which will not happen until later this year. But at this
    point, there are provisions making sure that any applicant that
    does not want to sign the 40 percent attestation and wants to
    be reviewed on the facts and circumstances, goes through review
    process, to make sure that no individual has the ability to
    stop one of those applications.
        Senator Udall. Thank you. Senator Johanns.

                   POLITICAL ACTIVITY BY TAX-EXEMPT ENTITIES

        Senator Johanns. Mr. Commissioner, welcome. Who defines
    political activity?
        Mr. Koskinen. Part of the problem is the facts and
    circumstances of political activity have been vague. There are,
    if you look in the regulations and the advice from the IRS over
    the years, there are 12 or 14 examples of what is in and what
    is out.
        One of my concerns--and I share everybody's interest in
    this regulation which was drafted before I was confirmed--is
    that we need to have a clear standard, and not just for people
    applying. We need to have a clear standard for people running
    these organizations. They ought not to have to look over their
    shoulder, worrying that somebody is going to say the facts and
    circumstances have changed, you are now doing something that
    puts your tax exemption in----
        Senator Johanns. Mr. Commissioner, I do not have much
    quarrel with what you just said. But you just informed us that
    if I file under 501(c)(4) and I attest to you that no more than
    40 percent of our resources will go to political activity, then
    I go right on through.
        Mr. Koskinen. Right.
        Senator Johanns. But if I am 42 percent, I will not go
    right on through. Now, political activity, who defines it? Do
    you define it? Who in your office is responsible for saying,
    Mike----
        Mr. Koskinen. As I said, there is public information about
    a range of examples of what is political activity. Advocacy,
    for instance, historically has not been viewed as political
    activity. One of the goals of the new regulation, and my
    commitment to it is, as the chairman noted earlier, that any
    final regulation ought to be fair to everybody. It ought to be
    clear on just this question and any other question, and it
    ought to be easy to administer. We ought not to be in the
    business of making subjective determinations of when you are
    over the line of political activity.
        Senator Johanns. But I think today you are. It sounds
    extremely arbitrary and capricious to me that you have set a 40
    percent limit, and you have told everybody out there that if
    they are at 41 percent or 40.5 percent, then they are going to
    get some kind of special scrutiny from the IRS. On the other
    hand, if you are at 40 percent or 39 percent, zip right on
    through. But I cannot figure out what is political activity.
    You are not expressing that, and that to me sounds arbitrary.
        Mr. Koskinen. No. As I said, there is public information
    giving a wide range of examples of what is and is not political
    activity. As I said, advocacy has been held not to be political
    activity. The standard is are you primarily a social welfare
    organization, and ``primarily'' has never been defined in terms
    of what percentage it is. The 40 percent was just taken as an
    idea that that was a lot of resources to put into political
    activity, and in this interim period it would be a way of
    streamlining the process.
        But you are exactly right. The problem is what the
    definition of political activity is, and how much of it should
    you be allowed to engage in before you are no longer a social
    welfare organization. And that is exactly what the regulation
    process is meant to decide and provide.
        Senator Johanns. Well, if I was at 41 percent and I were a
    private citizen out there, I would be hollering like crazy
    because I think you are treating that person different for
    their activity versus the person who is at 39 percent. And we
    should not be doing that.
        Mr. Koskinen. The issue is, unless you want to say that
    everybody can spend as much as they like on political activity
    and still be a social welfare organization, the statute says
    you should primarily be a social welfare organization. So
    whatever the line is, historically, that has been drawn, if you
    are over the line, you are not viewed as a social welfare
    organization. You are discriminated against because of your
    political activity, and you are not qualified. That is the way
    it has been for 50 years.
        The problem is it has been extremely unclear for 50 years,
    and what, hopefully, we will get out of the regulatory process
    when we reissue, and I think we will reissue a new draft for
    public comment, is a regulation that is, in fact, more
    understandable, more transparent, easier for people applying
    and easier for people who are running organizations to know
    what is allowed and what is not allowed.
        There is a definition right now in the present regulation
    of what political activity is, and we have got over 150,000
    comments, a lot of them addressing whether that is the right
    definition. But it is a pretty clear definition. It is not a
    definition that people--a lot of people have felt it is broad,
    and that is a position that has been held on both ends of the
    political spectrum.
        But it is clear. I think what we have in a redraft of this
    should be equally clear, but it should take into consideration
    the 150,000 comments, and we will do that.

                        FISCAL YEAR 2015 BUDGET REQUEST

        Senator Johanns. Let me--quite honestly, you are talking in
    circles, but let me go on to the budget. According to the
    changes in the Budget Control Act that resulted from the Ryan-
    Murray agreement last fall, total discretionary spending will
    rise from $1 trillion and $12 billion to $1 trillion and $14
    billion. The actual increase is smaller than a $2 billion
    difference. It is closer to about $1.4 billion.
        In your budget alone, you are asking for an almost $1.2
    billion increase. Even without the requested cap adjustment of
    $480 million, you are still asking for a $700 million increase,
    which would be more than half of the total increase in
    discretionary spending for everything, from fiscal year 2014 to
    fiscal year 2015.
        It just strikes me that that is not consistent with
    reality. I cannot imagine as the Secretary of Agriculture
    walking into OMB and saying to them, I want half of every
    increase in discretionary dollars in agriculture. I think I
    would have been thrown out of the office.
        Mr. Koskinen. The difference is, and it is an important
    difference for this subcommittee and an important difference
    for the country, is the Secretary of Agriculture with his $700
    million, is not going to give you money back. The IRS returns
    four to six times back to the Government for every dollar it
    gets.
        As I have said, if we had our pre-sequester $500 million, I
    have testified we would have provided $2 billion to $3 billion
    more into the Treasury than we are now able to provide. Our
    enforcement revenues are going to go down. We have 4,500 fewer
    revenue agents and revenue officers, whose only job is to
    collect revenue. If we do not have those people, they will not
    collect the revenue.
        So it is not as if we are spending this money on a social
    welfare program. This money in the IRS budget is designed to
    assist taxpayers to make it as easy as possible to pay and to
    assist the Government in collecting the money that is owed to
    it. We collect on average over the years $50 billion to $60
    billion just in our collection efforts, which is four to five
    times the budget of the IRS. As our budget is constrained, the
    amount of revenue to the Government is going down by a multiple
    of four to five.
        Senator Johanns. Your argument seems to be going along the
    lines of you should just give us an unlimited amount of money,
    and we will just keep collecting and collecting and collecting.
    But Congress decides that, and we have decided with the Ryan-
    Murray agreement, and you are not even showing even a close
    attempt to live within that agreement, in my judgment.
        Mr. Koskinen. The President's budget decisions are made by
    the administration and by OMB. Our position is simply that we
    have told you what you will get when you give us the resources.
    We have told you what you will not get if you do not give us
    the resources. It is a judgment you will have to make. All we
    want to do is make sure you understand the negative impacts on
    taxpayer services, the negative impacts on collection that are
    going to result if we end up with the--anything like the same
    budget we have now.
        Senator Johanns. Thank you, Mr. Chairman.
        Senator Udall. Senator Moran, if you are prepared to
    proceed, we are actually right at--I do not want to put you on
    the spot. We can start----
        Senator Moran. I think you have already done that.
        Senator Udall. No, no, no. We can do another round. I am
    just saying if you----
        Senator Moran. That is fine. If you would go ahead, Mr.
    Chairman, I would wait.
        Senator Udall. Okay. Okay. Great. I just--I did not know
    whether your staff scheduled you so well that you just walk in
    and start your questioning. So but anyway, thank you.
        Senator Moran. Did you do that? Apparently not.
        Senator Udall. Okay. Okay.
        Mr. Koskinen. If they do that, I would like to borrow your
    staff once in a while.

                        OVERSEAS TAX EVASION INITIATIVES

        Senator Udall. You know, they end up, Commissioner, they
    can watch the TV and see everything that is moving along, and
    then move you right in, and set it down in front of you. But it
    takes a lot of juggling, and our staffs are always good at
    that. Our staff is very good at that.
        Let me--I think--this is--this whole issue of these
    organizations troubles me, and I want to kind of tell you what
    I see from the practical side happening. Congress passed a
    law--we are talking this tax exempt social welfare
    organization--passes a law. And it says that these
    organizations are established, and this is the quote from the
    law, ``exclusively for the promotion of social welfare.'' So
    that is what the law said.
        Mr. Koskinen. Right.
        Senator Udall. Well, the way you guys got yourselves, and
    it was not you, but the way the IRS got themselves in a mess is
    they interpreted the word ``exclusively'' to means
    ``primarily.'' So to me, that is a big jump from
    ``exclusively'' to ``primarily.'' And so, then you have had to
    come up with this political test and all those kinds of things
    and the 40 percent.
        What is happening out there, and I think people should
    understand this, is that these 501(c)(4)s, money is
    contributed, and the donors are not publicly available. And so,
    what can happen, and this is, in a sense, in my opinion, money
    laundering, is that a 501(c)(4) can start with this intention
    of doing political activity. And the money flows in, and nobody
    knows how that money is connected to the political system in
    any way.
        The 501(c)(4) can close its doors and then put that money
    into a super Pac, and you will end up having no evidence of who
    were the donors, and that is what the big problem is. And it is
    growing to a huge proportion. I think in the last elections it
    was $400 million, which is really what people are calling out
    there, and I agree with this--secret money, dirty money, that
    kind of thing.
        So anyway, that is--I just want to tell you that is the
    issue that you are tackling is that we have always had a
    political system where we knew who was supporting whom. And we
    are getting a long ways from that when we have these
    organizations. And I think when you look at all these comments
    and get your congressional input, you really need to look at
    how this is impacting the core of our democracy really.
        So with that, let me shift, and I am not asking for a
    comment on that. I want to talk a little bit about offshore tax
    invasion. 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, and you know that very well, and it is 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 has recouped $6 billion in back taxes, penalties, and
    interests, and provided an opportunity for 43,000 tax dodgers
    to come clean. These programs have also provided the IRS with a
    wealth of information on various banks and advisors assisting
    people with offshore tax evasion.
        The IRS' 2015 funding request of $56.8 million to support
    overseas tax evasion initiatives is conditioned on securing
    funds that would exceed the available budget cap. Without 2015
    funding, the IRS will lack critical resources to meet overseas
    tax collection priorities.
        So my questions are these. What have been the benefits for
    the IRS in conducting the various overseas voluntary disclosure
    programs? What is the IRS doing now in 2014 to implement
    strategies to address international tax compliance issues? Can
    you confirm that as presented in your 2015 budget justification
    the $56.8 million in requested funds for overseas compliance
    initiatives depend on securing resources above the statutory
    budget cap, and how will the IRS devote resources to the
    overseas initiatives in 2015 if the requested funds are not
    appropriated?
        Mr. Koskinen. Well, I would begin by agreeing with you that
    the benefits of the Foreign Account Tax Compliance Act are
    broader than just the amount of money we have collected. It is
    important for the average taxpayer to know when they are
    writing their check that everybody is paying their fair share,
    and they do not have to think, well, if I had a really fancy
    lawyer or a good accountant, I could hide my money somewhere
    and not pay taxes on it. They need to know that we take tax
    evasion seriously; that if you, in fact, willfully are not
    paying your taxes, we will track you down, and we are going to
    find you. And that includes in overseas tax havens.
        We are working with the Department of Justice very closely,
    our Criminal Investigation Division, on the criminal side of
    this issue. We have been working on the civil side. We need
    funding to implement FATCA. We are about to start to get reams,
    volumes of data on individual taxpayer accounts from banks
    around the world.
        But I would say, and money is in this request, and as I
    said earlier, the implementation of the Foreign Account Tax
    Compliance Act and the implementation of the Affordable Care
    Act are statutory mandates. So if we do not get the funding
    that we need in the budget, we will have to take the funding
    from our discretionary areas, which are taxpayer services and
    enforcement, because we are mandated to implement FATCA and the
    Affordable Care Act.
        But what we need to have everybody understand is, this
    year, in 2014, we got zero dollars to implement the Affordable
    Care Act. So we have had to find $400 million in the budget to
    continue with that implementation, which is met primarily from
    IT resources. Three hundred million dollars of important IT
    projects, including some related to identity theft and fraud,
    are not being done. If we go forward into 2015 without
    sufficient resources, we will implement FATCA. We will
    implement the Affordable Care Act. And it will come at the cost
    of taxpayer service and other enforcement.
        Senator Udall. Thank you. Senator Johanns.

                               PERFORMANCE AWARDS

        Senator Johanns. Mr. Commissioner, in February you made the
    decision to spend $62.5 million in fiscal year 2014 funds to
    pay out performance awards to employees for fiscal year 2013.
    $43.4 million went to bargaining unit employees, and about
    $19.1 million went to other employees, including managers at
    the IRS.
        Now, your--the previous commissioner had made the decision
    to suspend those awards because of funding pressures and the
    need to fund other crucial priorities. Could you explain to us
    why you reached a different decision, and why you decided to
    spend this money in that direction versus some of the
    priorities that you have testified to at this hearing?
        Mr. Koskinen. I would be delighted to. The previous
    decision had been made when the IRS was challenged to meet the
    sequester levels. It had to find almost $600 million to take
    out of the budget. It ended up with furlough days. It ended up
    with almost no training to employees anywhere during the year.
    And it ended up making a decision under the contract which
    provided for 1.75 percent as a performance award pool to change
    it to zero.
        The union, under the contract, then filed an unfair labor
    practice and grievance and a lawsuit. When I came, all of that
    was pending. We were spending money on that. We were able to
    settle the claim that under the contract we needed to provide
    1.75 percent as the award. The performance award pool was
    changed to make it 1 percent to be consistent with what the
    Government-wide number is, so that, in fact, the $40 million,
    give or take a little, that we paid to the bargaining unit
    employees, was probably $25 million to $30 million less than we
    would have paid if we had lost that lawsuit.
        So it was a settlement of a disagreement that was in the
    courts that saved us money in litigation and the risk that we
    would end up paying more. It also seemed to me an important
    investment in our workforce. These are people who had not
    gotten a pay raise in 4 years. They had just had the shutdown,
    furlough days, were doing critical work for us across the
    board. But it was a settlement of litigation that it seemed to
    me at the time was appropriate, and if I had to do it again, I
    would do it again.
        Senator Johanns. We have received information, which I
    would like you to verify or not verify, that in paying out the
    awards, awards were given to employees within the Tax Exempt
    and Government Entities Business Unit. These awards were paid
    out despite an ongoing investigation relative to the disparate
    treatment of taxpayers that we have talked about.
        Why did you decide it was important to pay out the awards
    to a group under investigation, even though that had not been
    concluded at the moment? It is hard to tell when it will be
    concluded. And I would just offer a comment. I think to the
    average person in America, that just seems extremely tone deaf.
        Mr. Koskinen. Well, I think it is important to understand
    there are over 800 people in that unit. Seventy to 80 percent
    of that unit's work is on 501(c)(3)s, not on (c)(4)s. So to say
    that we would not provide any of them a performance award--
    these are not bonuses, they are performance awards. Only two-
    thirds to 70 percent of the employees get those awards, and the
    average award for bargaining units employees is about $950. So
    nobody is making a fortune off of this. And to deny everybody
    in the organization, whether they were near the (c)(4)s or not,
    their performance award possibility, it would not have made any
    sense.
        Also the significant people involved in this are no longer
    in the IRS. They did not get awards. The fact that people have
    been involved in the process under investigation, but have not
    been found that they themselves engaged in erroneous work, it
    seems to me it would be unfair to them to then say, while it is
    all pending, and we do not know whether there is anything
    further coming out, nobody gets an award.
        If it turns out people performed badly--and that is why I
    am hoping that we will get reports out of the six
    investigations going on--we will look at those facts, and we
    will respond appropriately. If there are people who are found
    to have performed badly, they will not be eligible for
    performance awards. But we need to know what the findings are.
    We cannot simply say everybody involved in any investigation by
    anybody for anything is, therefore, not going to get an award.
        Senator Johanns. Mr. Commissioner, it gets worse, though.
    Recently, there was a review of IRS performance awards, which I
    am guessing you are familiar with, between 2010 and 2012.
    During that time, more than 2,800 employees with recent
    substantiated conduct issues resulting in disciplinary action
    received more than $2.8 million in monetary awards, more than
    27,000 hours in time off awards, and 175 quality step
    increases.

                            EMPLOYEE TAX COMPLIANCE

        Among these, more than 1,100 IRS employees with
    substantiated Federal tax compliance problems--in other words,
    they are not paying their taxes--received more than a million
    dollars in cash awards, more than 10,000 hours in time off
    awards, and 69 quality step increases within a year after the
    IRS substantiated their tax compliance problems.
        Now again, to the average American, the thought that you
    would--not you, but the IRS--would award an employee who is not
    paying their taxes is just incomprehensible.
        Mr. Koskinen. We take tax compliance very seriously,
    obviously. The compliance rate of IRS employees is over 99
    percent. That is significantly better than anybody else in the
    Federal Government, significantly better than people on the
    Hill, and it is, clearly, substantially better than the public.
        Notwithstanding that, when an employee comes to work for
    the IRS, they commit that they will pay their taxes. We monitor
    all 90,000 employees regularly. As the IG reported, there is no
    policy across the Government that says you should or should not
    take conduct into consideration, or tax payment into
    consideration. We have a separate disciplinary process, and
    anybody who willfully does not file their taxes is subject to
    dismissal, and we have dismissed people for that.
        But I agree--we agreed with the IG's recommendation,
    notwithstanding the absence of a general policy. We should have
    a policy in the IRS, and we will develop that and we are about
    to start. We are in the middle of a negotiation with the union
    about our next 5-year contract because a big bulk of this deals
    with union employees. And we have advised the union, and they
    said they are prepared to discuss with us the proposal we are
    developing, which we will discuss with them in the next few
    weeks because I do think it is exactly right. The reason we
    take it so seriously is if we are chasing you for your taxes,
    we should be paying our taxes.
        And as I would stress again, over 99 percent of the IRS
    employees are compliant with their taxes. Those that are not
    compliant oftentimes have the same issues everybody has. They
    have got an issue about whether they declared head of household
    correctly. They may not have put a 1099-R in about a pension
    payment or outside income that they got. There may be issues
    about deductibility of dependents. So a lot of those, and a
    number of those thousand, were in the group of those who had
    differences of views as to what were appropriate taxes. They
    had not paid, and they were appealing it. They were then
    singled out as they had not paid.
        Ultimately, I think that it is appropriate for people to
    say if you are in the IRS, you should pay your taxes. Some
    people might say if you are in the Government you should pay
    your taxes.
        Senator Johanns. Thank you, Mr. Chairman.
        Senator Udall. Thank you, Senator Johanns. And,
    Commissioner, I really appreciate you taking this matter
    seriously. Based on the recent TIGTA filing, certain past bonus
    decisions were troubling and questionable, and I am glad you
    are making it a priority to revise the policies and practices.
    Senator Moran.
        Senator Moran. Chairman, thank you very much. Thank you for
    giving me the moment to collect my thoughts and listen to what
    the Commissioner had to say.
        Commissioner, thank you very much for joining us. Let me
    follow up just a moment on the line of questioning that Senator
    Johanns had with you. My understanding is that you believe that
    the policy was absent and needed to be put in place to prevent
    the bonuses from being paid to employees at the IRS who have
    not or did not pay their taxes. That is what your testimony is?
        Mr. Koskinen. Yes, sir. We have had a policy for senior
    level employees and executives that if they are not compliant,
    they are not eligible for awards. But we are developing a
    broader policy, and I think we should develop, although we have
    to negotiate it with the union. We have advised them that we
    should have a policy that basically says if you willfully are
    not compliant with your taxes, you should not be eligible for a
    performance award.
        Senator Moran. When were these performance awards granted
    in relationship to your arrival as Commissioner at the IRS?
        Mr. Koskinen. The performance was for the fiscal year 2013,
    which was before I arrived. The decision, as Senator Johanns
    and I were talking about, to actually make the awards or create
    the pool that would allow somewhere between 65 and 70 percent
    of people to receive these awards was made in February by me.
        Senator Moran. So the determination about who would receive
    the award was made before you arrived. The ultimate decision to
    have the pool that was necessary to make the awards actually
    occur occurred after your arrival.
        Mr. Koskinen. That is right. These were for determinations
    already made. The way the process for bargaining unit employees
    works is it begins as a recommendation, and it has two levels
    of review to make sure that, in fact, there was performance
    that merited an award. A third to sometimes 40 percent of
    employees get no award.
        Senator Moran. In your review of this circumstance, did you
    determine that there was a realization on the part of the
    individuals--the management at the IRS that made the decision
    to include these employees in receiving a bonus, that there was
    an awareness that these employees had not paid their taxes?
        Mr. Koskinen. No, I do not----
        Senator Moran. They did not know that?
        Mr. Koskinen. My understanding is that, historically, as in
    the rest of the Government, that performance issues are
    separate from any disciplinary issues, on the theory, I guess,
    that if you get disciplined you get disciplined, but in the
    meantime your performance is whatever it was. So in determining
    those performance awards, as a general matter, there was not a
    process that said, okay, what are the disciplinary issues.
        Some managers may have been aware of whether the employees
    were tax compliant or not, although again, as a general matter,
    we protect taxpayer information very carefully. So if you are
    an IRS employee and you have a problem with your taxes, that
    information, as a general matter, will not be available to
    anybody else, even in the IRS.
        Senator Moran. I do not know that I will phrase this
    correctly, but the people involved in disciplinary actions at
    the IRS would have known this----
        Mr. Koskinen. Yes.
        Senator Moran [continuing]. But not the management of these
    individuals--not the managers of these individual employees.
        Mr. Koskinen. As I said, some of them, obviously, would be,
    depending on the nature of the disciplinary action. If you were
    a manager and your employee had been disciplined, you might
    have been the disciplining agent. You may have known about it
    otherwise as you went forward. But the process at the time did
    not require them, and, in fact, did not allow them to say,
    well, as a result I am changing my view of your performance
    because of this other issue.
        Senator Moran. Is this change in policy that you have
    determined as necessary, is it subject to negotiations with the
    union?
        Mr. Koskinen. Yes, it is. The bargaining unit agreement has
    a provision right now that says the only time you can take any
    of these things into consideration is when it affects the
    integrity of the Agency. And historically that has not been
    interpreted to be a standard disagreement about taxes. So we
    are developing a proposal. We have told the union that we want
    to include that in the negotiations, and the union has said
    that they are prepared to consider it.
        Senator Moran. So when you indicated to the committee that
    you support a change in policy, that does not at this point
    necessarily mean it will occur. Negotiations still have to
    occur between the bargaining units.
        Mr. Koskinen. No. The policies apply to the executives and
    senior level employees already. We are developing them to make
    sure it goes down through managers. Bargaining unit employees
    are subject to the contract, and I think that, you know, our--
    --
        Senator Moran. So that is to be determined.
        Mr. Koskinen. That is to be determined. But you know, my
    view is employees understand they work for the IRS. They are
    held to a higher standard than if they worked anywhere else in
    the Government or in the private sector. And I think it is
    appropriate--I agree with the Senator and others--that people
    ought to be comfortable if I work for the IRS and I am chasing
    you for your taxes, I should have paid mine.

                              AFFORDABLE CARE ACT

        Senator Moran. Let me change topics. A letter was written
    to you, Commissioner, on February 10. I do not expect you to
    know this off the top of your head, but you have not responded,
    and I would encourage you to do that. It is a letter from six
    United States senators generally led by Senator Coburn of
    Oklahoma.
        But we are in what I think is a very straightforward,
    pretty apolitical kind of way asking questions of you as to the
    enforcement of the individual mandate based upon the
    circumstances that you now find yourself in with the delays and
    extensions that have been announced and provided for the
    enforcement of the Affordable Care Act.
        And there are seven specific questions that are outlined in
    this letter that I think would helpful for us as Members of
    Congress to know how you intend to enforce the individual
    mandate. And so, I wanted to use this opportunity to bring to
    your attention this letter.
        Mr. Koskinen. I am sorry we have not responded. My view is
    that we ought to respond to every letter promptly. I know of
    that letter. There is a clearance process for complicated
    issues. Tax policy is an issue controlled by the Treasury
    Department, not by us.
        I will make sure that we get you that answer promptly
    because I do believe, and my commitment in my confirmation
    hearing was, if you write me a letter, I am going to read it. I
    have looked at that letter. And secondly, if you write to me,
    not only will I read it, I will try to get back with you as
    quickly as we can, and this is too long in delay.
        Senator Moran. Commissioner, thank you very much. I
    appreciate that attitude and very much would like to see that
    policy implemented. I became a member of the Appropriations
    Committee when I became a United States Senator, shortly
    thereafter. And one of the reasons was that the committee that
    makes spending decisions, maybe we are spending too much money,
    we can spend less. We certainly have the opportunity to
    prioritize.
        But also an important feature of the role that I think my
    colleagues and I have is the ability to question the agencies
    that we are responsible for funding. And it seems to me that,
    and I have not been an appropriator prior to this
    Administration. This is not--I do not have anything to compare
    it to. But it is troublesome to me the number of instances in
    which agency heads and Department secretaries are asked for
    language--asked to respond in language to questions that we
    have asked that go unanswered. And I very much appreciate the
    suggestion that that is not your practice, and that you will
    respond to this letter. I would encourage your colleagues to do
    the same.
        Mr. Koskinen. I cannot control anybody else, but I will
    tell you as well, if you get a letter from me and you do not
    think it is responsive, you should let me know. My goal is to
    not only respond promptly, but to be responsive.
        Senator Moran. Well, I am really interested in making
    certain that we do our jobs appropriately. Information is key
    to the ability to do that. And in my view, this is a letter
    that is not intended to create any political climate, score any
    political points. It is just how are you going to do this so
    that we know how to respond. And this committee has a
    responsibility to make certain we do it right. I thank you,
    Commissioner.
        Mr. Koskinen. Thank you.
        Senator Udall. Thank you, Commissioner. Senator Moran, we
    are trying to get in one more panel before the 4:00 vote, so if
    you have any additional questions----
        Senator Moran. Mr. Chairman, I have questioned the
    Commissioner sufficiently.
        Senator Udall. Great. Thank you very much. Commissioner,
    thank you for your testimony.
        Mr. Koskinen. You are welcome.
        Senator Udall. I understand that you are going to stay here
    during the testimony of the Inspector General. We very much
    appreciate that. And I would call forward Inspector General
    George, and as soon as you get up here and get situated, I
    would invite you to present your remarks. Please proceed.

               TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

                           DEPARTMENT OF THE TREASURY

    STATEMENT OF HON. J. RUSSELL GEORGE, INSPECTOR GENERAL
        Mr. George. Thank you, Mr. Chairman. Chairman Udall,
    Ranking Member Johanns, and Senator Moran, thank you for the
    opportunity to appear today. During my testimony I will address
    three key issues: first, the Internal Revenue Service's fiscal
    year 2015 budget request; second, TIGTA's recent work related
    to the most significant challenges currently confronting the
    IRS; and third, the fiscal year 2015 budget request for TIGTA.
        The proposed IRS budget requests approximately appropriated
    resources of $12.5 billion. This is an increase of over $1.2
    billion from the fiscal year 2014 enacted level. The IRS is
    faced with several challenges as it administers our Nation's
    tax laws and a reduced budgetary environment.
        Let me start with the topic of providing quality customer
    service, which is the first step to achieving taxpayer
    compliance. We have seen a decline in the IRS' ability to
    provide a sufficient level of customer service in each of the
    ways that taxpayers interact with the IRS, namely by telephone,
    walk in, and correspondence. Many taxpayers use the telephone
    to contact the IRS. Addressing their questions with reduced
    staffing continues to be a struggle, resulting in long wait
    times, abandoned calls, and taxpayers' redialing the IRS' toll
    free telephone lines multiple times.
        At its walk-in offices, known as taxpayer assistance
    centers, the IRS has decided to eliminate certain services,
    such as tax return preparation, that can be obtained through
    other channels. The IRS assisted over six and a half million
    taxpayers at these centers in fiscal year 2013, but plans to
    assist 14 percent fewer--that is 840,000--taxpayers this year.
        The IRS' ability to process taxpayer correspondence in a
    timely manner has also declined while the backlog of paper
    correspondence inventory has substantially increased. The over-
    age inventory rose from 181,000 at the end of 2010 to almost
    1.2 million at the end of 2013.
        Tax fraud related identity theft continues to be a growing
    problem that results in billions of dollars of improper
    payments. For tax year 2011, we identified 1.1 million
    undetected returns that have potentially refunds totaling $3.6
    billion. Now, while this is a decrease of $1.6 billion from the
    prior year, indicating that the IRS is making some progress,
    significant improvements are still needed.
        Implementation of tax law changes associated with the
    Affordable Care Act will also present many challenges to the
    IRS in the coming years. For example, the ACA provides for a
    refundable credit, known as a premium tax credit, to offset an
    individual's health insurance expenses. In September 2013, we
    reported that a fraud mitigation strategy is not in place to
    guide Affordable Care Act's systems development.
        The IRS informed us that two new systems are under
    development that will address fraud risk. However, until these
    new systems are successfully developed and tested, we remain
    concerned that the IRS' existing fraud detection system may not
    be capable of identifying and preventing refund fraud.
        We are also concerned about the protection of confidential
    taxpayer data that will be provided to the exchanges. The IRS'
    role in providing customer service in this area will become
    more significant in 2015. We continue to monitor IRS
    implementation of the ACA and help identify and correct any
    problems early in the process.
        The tax gap is also a continuing challenge. The most recent
    IRS assessment is that the gross tax gap is about $450 billion
    annually. Most of this amount--$376 billion--is attributable to
    taxpayers under reporting their tax liabilities.
        Finally TIGTA's fiscal year 2015 proposed budget request
    requests approximately--resources in the amount of $157
    million, an increase of less than 1 percent compared to the
    fiscal year 2014 enacted budget. TIGTA's budget priorities
    include mitigating risks associated with tax refund fraud and
    identity theft, monitoring the IRS' implementation of the ACA
    and other tax law changes, and assessing the IRS's ability to
    provide quality taxpayer service and address the tax gap.

                               PREPARED STATEMENT

        In addition, we will continue to give priority to
    investigating allegations of serious misconduct and criminal
    activity by IRS employees, ensuring IRS employees are safe and
    IRS facilities, data, and infrastructure are secure and not
    impeded by threats of violence and protecting the IRS against
    attempts to interfere with tax administration.
        Chairman Udall, Ranking Member Johanns, Senator Moran,
    thank you for the opportunity to share my views.
        [The statement follows:]
                  Prepared Statement of Hon. J. Russell George
      review of the president's fiscal year 2015 funding request for the
          department of the treasury and the internal revenue service
        Chairman Udall, 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\ 2015 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 2015 budget request.
    ---------------------------------------------------------------------------
        \1\ The Federal Government's fiscal year begins on October 1 and
    ends on September 30.
    ---------------------------------------------------------------------------
        The Treasury Inspector General for Tax Administration, also known
    as ``TIGTA,'' is a nationwide organization. We are statutorily mandated
    to provide independent audit and investigative services necessary to
    improve the economy, efficiency, and effectiveness of IRS operations,
    including the oversight of the IRS Chief Counsel and the IRS Oversight
    Board. TIGTA's oversight activities are designed to identify high-risk
    systemic inefficiencies in IRS operations and to investigate exploited
    weaknesses in tax administration. TIGTA's role is critical in that we
    provide the American taxpayer with assurance that the approximately
    95,000 \2\ IRS employees who collected over $2.9 trillion in tax
    revenue, processed over 241 million tax returns, and issued $364
    billion in tax refunds during fiscal year 2013,\3\ do so in an
    effective and efficient manner while minimizing the risks of waste,
    fraud, or abuse.
    ---------------------------------------------------------------------------
        \2\ Total IRS staffing as of April 5, 2014. Included in the total
    are approximately 19,000 seasonal employees.
        \3\ IRS, Management's Discussion & Analysis, Fiscal Year 2013.
    ---------------------------------------------------------------------------
        TIGTA's Office of Audit (OA) reviews all aspects of the Federal 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. The Office
    of Audit places emphasis on statutory coverage required by the IRS
    Restructuring and Reform Act of 1998 (RRA 98),\4\ the American Recovery
    and Reinvestment Act of 2009,\5\ and other laws, as well as areas of
    concern raised by Congress, the Secretary of the Treasury, the
    Commissioner of Internal Revenue, and other key stakeholders. The OA
    has examined specific high-risk issues such as identity theft, refund
    fraud, improper payments, information technology, security
    vulnerabilities, complex modernized computer systems, tax collections
    and revenue, and waste and abuse in IRS operations.
    ---------------------------------------------------------------------------
        \4\ 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.).
        \5\ Public Law No. 111-5, 123 Stat. 115 (2009).
    ---------------------------------------------------------------------------
        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. The OI places a high priority on its statutory responsibility to
    protect all IRS employees located in over 670 facilities nationwide. In
    the last 4 years, threats directed at the IRS have become the second
    largest component of OI's work. Physical violence, harassment, and
    intimidation of IRS employees continue to pose significant challenges
    to the implementation of a fair and effective system of tax
    administration. The OI is committed to ensuring the safety of IRS
    employees and the security of IRS facilities.
        TIGTA's Office of Inspections and Evaluations (I&E) provides
    responsive, timely, and cost-effective inspections and evaluations of
    challenging areas within the IRS, providing TIGTA with additional
    flexibility and capability to produce value-added products and services
    to improve tax administration. Inspections and Evaluations' work is not
    a substitute for audits and investigations. In fact, its findings may
    result in subsequent audits and/or investigations. Inspections are
    intended to monitor compliance, assess the effectiveness and efficiency
    of programs and operations, and inquire into allegations of waste,
    fraud, abuse, and mismanagement; evaluations are intended to provide
    in-depth reviews of specific management issues, policies, or programs.
    In the last year, I&E has reviewed the IRS's implementation of the
    Telework Enhancement Act of 2010, assessed the costs and frequency of
    IRS executives' temporary duty travel and the associated travel
    taxability, and determined that the IRS needs to improve the
    comprehensiveness, accuracy, reliability, and timeliness of the Tax Gap
    estimate.
             overview of the irs's fiscal year 2015 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 Strategic Plan and agency priority goal of focusing on
    expanding the availability and improving the quality of customer
    service options. The IRS's Strategic Plan goals are to: (1) Deliver
    high quality and timely service to reduce taxpayer burden and encourage
    voluntary compliance and (2) Effectively enforce the law to ensure
    compliance with tax responsibilities and combat fraud. 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 2015 IRS budget
    requests appropriated resources of approximately $12.5 billion.\6\ The
    total appropriations amount is an increase of $1.2 billion, or
    approximately 11 percent more than the fiscal year 2014 enacted level
    of approximately $11.3 billion. This increase is illustrated in Table
    1. The budget request includes a net staffing increase of 6,998 full-
    time equivalents (FTE) \7\ for a total of approximately 91,187
    appropriated FTEs.
    ---------------------------------------------------------------------------
        \6\ The fiscal year 2015 budget request also includes approximately
    $101 million from reimbursable programs, $27 million from non-
    reimbursable programs, $396 million from user fees, $265 million in
    available unobligated funds from prior years, and a transfer of $5
    million to the Alcohol and Tobacco Tax and Trade Bureau for a total
    amount of $13.3 billion in available resources.
        \7\ A measure of labor hours in which one FTE is equal to 8 hours
    multiplied by the number of compensable days in a particular fiscal
    year.
        \8\ Fiscal Year 2014 enacted includes $92 million in funding ($34
    million in Taxpayer Services and $58 million in Operations Support).
    The $92 million was a nonrecurring appropriation increase in the
    Consolidated Appropriations Act 2014. The additional funds were granted
    to improve the delivery of services to taxpayers, improve the
    identification and prevention of refund fraud and identity theft, and
    address international and offshore compliance issues.

               TABLE 1--IRS FISCAL YEAR 2015 BUDGET REQUEST INCREASE OVER FISCAL YEAR 2014 ENACTED BUDGET
                                                     [In thousands]
    ----------------------------------------------------------------------------------------------------------------
                                                               Fiscal year
                     Appropriations account                   2014 enacted   Fiscal year    $ change       Percent
                                                                   \8\      2015 request                   change
    ----------------------------------------------------------------------------------------------------------------
    Taxpayer Services.......................................    $2,156,554    $2,317,633      $161,079           7.5
    Enforcement.............................................     5,022,178     5,371,826       349,648           7.0
    Operations Support......................................     3,798,942     4,456,858       657,916          17.3
    Business Systems Modernization..........................       312,938       330,210        17,272           5.5
                                                             -------------------------------------------------------
          Total Appropriated Resources......................    11,290,612    12,476,527     1,185,915          10.5
    ----------------------------------------------------------------------------------------------------------------
    Source: TIGTA analysis of the IRS's fiscal year 2015 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.
        As a result of the Balanced Budget and Emergency Deficit Control
    Act, as amended,\9\ the IRS was required to reduce planned spending
    from its appropriations by $594 million for fiscal year 2013 as a
    result of sequestration.\10\ The IRS was also required in fiscal year
    2013 to reduce planned spending from its appropriations by $24 million
    as the result of an across-the-board rescission.\11\ These funding
    reductions represented a total decrease of $618 million to the IRS's
    budget of $11.8 billion, resulting in a revised annual budget for
    fiscal year 2013 of $11.2 billion.
    ---------------------------------------------------------------------------
        \9\ Public Law No. 112-25, 125 Stat. 240 (2011).
        \10\ Sequestration involves automatic spending cuts of
    approximately $1 trillion across the Federal Government that took
    effect on March 1, 2013.
        \11\ A rescission cancels part of an agency's discretionary budget
    authority and is usually established as a percentage reduction to the
    budget authority.
    ---------------------------------------------------------------------------
        The IRS achieved these budgetary savings by cuts in key spending
    areas such as personnel compensation ($276 million), including not
    issuing bargaining unit employee awards during fiscal year 2013 and
    furloughing employees for three days, travel ($92 million), and
    equipment ($50 million). We are currently assessing the IRS's steps to
    plan for and implement the reductions in its fiscal year 2013 budget
    due to sequestration.\12\
    ---------------------------------------------------------------------------
        \12\ TIGTA, Audit No. 201310030, Implementation of fiscal year 2013
    Sequestration Budget Reductions, report planned for May 2014.
    ---------------------------------------------------------------------------
        Implementation of the sequestration mandated cuts, coupled with a
    trend of lower budgets, reduced staffing, and the loss of supplementary
    funding for the implementation of the Patient Protection and Affordable
    Care Act of 2010 (hereinafter referred to as the ACA or Affordable Care
    Act),\13\ impacted the IRS's ability to effectively deliver its
    priority program areas, including enforcement activities. For example,
    examinations of individual tax returns declined from 1,481,966 in
    fiscal year 2012 to 1,404,931 in fiscal year 2013, an approximate 5
    percent decrease. Further, collection activities initiated by the IRS,
    such as taxpayer liens, levies, and property seizures declined from
    3,669,663 in fiscal year 2012 to 2,457,647 in fiscal year 2013, an
    approximately 33 percent decrease.
    ---------------------------------------------------------------------------
        \13\ Public Law No. 111-148, 124 Stat. 119 (2010) (codified as
    amended in scattered titles of the U.S.C.).
    ---------------------------------------------------------------------------
                         key challenges facing the irs
        In this section of my testimony, I will discuss several of the most
    significant challenges now facing the IRS as it administers our
    Nation's tax laws.
                                taxpayer service
        Providing quality customer service is the IRS's first step to
    achieving taxpayer compliance. One of Congress' principal objectives in
    enacting RRA 98 was to mandate that the IRS do a better job of meeting
    the needs of the taxpayers. In the past, TIGTA has evaluated the IRS's
    efforts in providing quality customer service and made recommendations
    for areas of improvement. Although the IRS has implemented certain
    procedures to better assist the American taxpayer, funding reductions
    pose a significant challenge.
        Overall, the IRS's fiscal year 2013 enacted budget was over $1
    billion less than its fiscal year 2010 enacted budget as a result of
    the fiscal year 2013 sequestration and rescission and declines in its
    fiscal year 2011 and fiscal year 2012 budgets. These budget constraints
    continue to result in the IRS cutting service to taxpayers which make
    it difficult for the IRS to effectively assist taxpayers. As demand for
    taxpayer services continues to increase, resources devoted to customer
    service have decreased, thereby affecting the quality of customer
    service that the IRS is able to provide. I would like to provide you
    with some specific examples.
        First, the IRS continues to struggle in providing high-quality
    customer service over the phone. These struggles result in long
    customer wait times, customers abandoning calls, and customers
    redialing the IRS toll-free telephone lines \14\ for service. Despite
    other available options, most taxpayers continue to use the telephone
    as the primary method to make contact with the IRS. For the 2014 Filing
    Season as of March 8, 2014, approximately 46.3 million taxpayers
    contacted the IRS by calling the various customer service toll-free
    telephone assistance lines seeking help to understand the tax laws and
    meet their tax obligations. IRS assistors have answered 6 million calls
    and have achieved a 74.7 percent Level of Service \15\ with an 11.7
    minute Average Speed of Answer.\16\ The Level of Service for the 2013
    Filing Season was 67.9 percent. The IRS forecasted a 70.2 percent Level
    of Service for the 2014 Filing Season.
    ---------------------------------------------------------------------------
        \14\ The IRS refers to the suite of 29 telephone lines to which
    taxpayers can make calls as ``Customer Account Services Toll-Free.''
        \15\ The primary measure of service to taxpayers. It is the
    relative success rate of taxpayers who call for live assistance on the
    IRS's toll-free telephone lines.
        \16\ The average amount of time for an assistor to answer the call
    after the call is routed to a call center staff.
    ---------------------------------------------------------------------------
        Although the IRS is reporting an increase in the Level of Service,
    IRS numbers continue to show a decline in the total number of taxpayers
    who contact the IRS who are actually assisted. As of March 8, 2014, the
    number of taxpayers actually assisted has dropped from 56.1 percent to
    51.6 percent as of the same time last year.\17\ We previously reported
    that the Level of Service measure does not accurately reflect total
    call demand (i.e., total number of taxpayers attempting to call the
    IRS).\18\ The Level of Service only measures the percentage of calls in
    the queue waiting to be answered by an assistor that are actually
    answered. The Level of Service does not measure the success of
    taxpayers attempting to call the IRS to use the IRS's automated
    services. The IRS can manage the Level of Service by increasing or
    decreasing the number of calls it allows into the assistor queue.\19\
    ---------------------------------------------------------------------------
        \17\ Using automation or live assistance, the IRS answered 31.6
    million of the 56.3 million calls received as of March 8, 2013 (56.1
    percent) and 23.9 million of the 46.3 million calls received as of
    March 8, 2014 (51.6 percent).
        \18\ TIGTA, Ref. No. 2009-40-127, Higher Than Planned Call Demand
    Reduced Toll-Free Telephone Access for the 2009 Filing Season (Sept.
    2009).
        \19\ TIGTA, Ref. No. 2014-40-029, Interim Results of the 2014
    Filing Season (Mar. 2014).
    ---------------------------------------------------------------------------
        Second, the IRS's ability to process taxpayer correspondence in a
    timely manner has also declined. The over-age correspondence inventory
    rose from approximately 181,000 at the end of Processing Year 2010 to
    almost 1.2 million at the end of Processing Year 2013, representing an
    increase of 556 percent.\20\ IRS management indicated that the
    continued increase in the over-age correspondence inventory is the
    result of reduced resources. The allocation of limited resources
    requires difficult decisions with the focus on maximizing taxpayer
    assistance on the toll-free telephone lines during filing season while
    concentrating any remaining resources toward various priority programs
    such as identity theft and aged work.\21\
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        \20\ Numbers have been rounded. The percentage of change is based
    on the actual inventory volumes as of the end of Processing Years 2010
    and 2013.
        \21\ TIGTA, Ref. No. 2014-40-029, Interim Results of the 2014
    Filing Season (Mar. 2014).
    ---------------------------------------------------------------------------
        Third, the number of taxpayers assisted by Taxpayer Assistance
    Centers (TACs) will decrease this fiscal year. The IRS assisted more
    than 6.5 million taxpayers in fiscal year 2013 and plans to assist 5.6
    million taxpayers in fiscal year 2014, which is 14 percent fewer than
    in fiscal year 2013. The IRS indicated that budget cuts and its
    strategy of not offering services at TACs that can be obtained through
    other service channels, such as the IRS's Web site, result in the
    reduction of the number of taxpayers the IRS plans to assist at the
    TACs.
        In fiscal year 2014, the IRS eliminated or reduced services at
    TACs. Currently, TACs are not preparing tax returns. Instead, taxpayers
    seeking this assistance will be referred to Volunteer Income Tax
    Assistance sites or other free preparation options. TAC assistors will
    only answer basic tax law questions during the filing season and will
    not answer any tax law questions after April 15, 2014. After April 15,
    2014, the IRS will direct all tax law inquiries to alternative services
    such as IRS.gov, TeleTax, commercial software packages, or a tax
    professional. In addition, TACs will no longer answer taxpayers' tax
    refund inquiries unless the taxpayer has waited more than 21 days for
    the refund. Taxpayers with refund inquiries will be referred to the
    ``Where's My Refund?'' application on IRS.gov. Finally, the TACs are
    transitioning to no longer provide transcripts upon request without
    extenuating circumstances. For the 2014 Filing Season, TACs will still
    provide transcripts but are encouraging taxpayers to obtain them
    through other sources.\22\
    ---------------------------------------------------------------------------
        \22\ TIGTA, Ref. No. 2014-40-029, Interim Results of the 2014
    Filing Season (Mar. 2014).
    ---------------------------------------------------------------------------
        The reduction in services was implemented without completing the
    required taxpayer burden risk evaluation for the taxpayers most likely
    to visit a Taxpayer Assistance Center, such as low-income, elderly, and
    limited-English-proficient taxpayers. The purpose of such an evaluation
    is to assess the burden that service changes can have on taxpayers.
                               improper payments
        The Improper Payments Information Act of 2002 \23\ requires Federal
    agencies, including the IRS, to estimate the amount of improper
    payments made each year and to describe the steps taken to ensure that
    managers are held accountable for reducing these payments. Agencies
    must also report to Congress on the causes of and the steps taken to
    reduce improper payments and address whether they have the information
    systems and other infrastructure needed to reduce improper payments.
    The Improper Payments Elimination and Recovery Act of 2010 \24\ (IPERA)
    amended the Improper Payments Information Act of 2002 by redefining the
    definition of improper payments and strengthening agency reporting
    requirements. TIGTA is required to review annually the IRS's compliance
    with the Act's reporting requirements.
    ---------------------------------------------------------------------------
        \23\ Public Law No. 107-300, 116 Stat. 2350.
        \24\ Public Law No. 111-204, 124 Stat. 2224.
    ---------------------------------------------------------------------------
        The Office of Management and Budget has declared the Earned Income
    Tax Credit (EITC) Program a high-risk program that is subject to
    reporting in the Department of the Treasury's Agency Financial Report.
    The IRS estimates that 22 to 26 percent of EITC payments were issued
    improperly in fiscal year 2013. The dollar value of these improper
    payments was estimated to be between $13.3 billion and $15.6 billion.
        In March 2014,\25\ we reported that the IRS continued to not
    provide all required IPERA information to the Department of the
    Treasury for inclusion in the Department of the Treasury's Agency
    Financial Report for fiscal year 2013. For the third consecutive year,
    the IRS did not publish annual reduction targets or report an improper
    payment rate of less than 10 percent for the EITC. IRS management
    indicated that on March 20, 2014, the Office of Management and Budget
    approved the establishment of supplemental measures for use in
    evaluating the incremental reduction in EITC improper payments. The IRS
    is in the process of developing these supplemental measures.
    ---------------------------------------------------------------------------
        \25\ TIGTA, Ref, No. 2014-40-027, The Internal Revenue Service
    fiscal year 2013 Improper Payment Reporting Continues to Not Comply
    With the Improper Payments Elimination and Recovery Act (Mar. 2014).
    ---------------------------------------------------------------------------
        Finally, although risk assessments were performed for each of the
    programs that the Department of the Treasury required the IRS to
    assess, the risk assessment process still may not provide a valid
    assessment of improper payments in tax administration. As such, the
    EITC remains the only area considered at high risk for improper
    payments. There continues to be no effective process to address the
    continued risks associated with improper tax refund payments resulting
    from other refundable tax credits \26\ and tax refund fraud. Improper
    payments due to identity theft are the most significant example of a
    category that is not estimated by the IRS. As such, we believe the
    IRS's identification of EITC as the only program of high risk of
    improper payments may significantly underestimate the risk of improper
    payments to tax administration. IRS management indicated that on March
    20, 2014, the Office of Management and Budget provided guidance
    exempting improper refunds made without relation to any refundable tax
    credit program from improper payment requirements. We plan to evaluate
    the impact of the Office of Management and Budget guidance in an
    upcoming review.
    ---------------------------------------------------------------------------
        \26\ A refundable credit is not limited to the amount of an
    individual's tax liability and can result in a Federal tax refund that
    is larger than the amount of a person's Federal income tax withholding
    for that year.
    ---------------------------------------------------------------------------
                      identity theft and tax refund fraud
        While refundable tax credits increase the risk of potentially
    fraudulent tax refunds, other issues concerning tax administration can
    also pose a significant risk for improper payments. The IRS continues
    to be challenged with the rapidly growing problem of identity-theft tax
    refund fraud, including tax fraud related to the use of stolen Employer
    Identification Numbers (EIN).\27\ Efforts to identify and detect tax
    returns with these characteristics are hampered by the IRS's lack of
    third-party information to effectively verify income and withholding
    when tax returns are processed.
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        \27\ An EIN is a Federal Tax Identification Number used to identify
    a taxpayer's business account. The EIN is used by employers, sole
    proprietors, corporations, partnerships, nonprofit associations, trusts
    and estates, government agencies, certain individuals, and other types
    of businesses.
    ---------------------------------------------------------------------------
    Identity Theft
        The IRS has described identity theft as the number one tax scam for
    2014.\28\ The IRS has made this issue one of its top priorities and has
    made some progress; however, significant improvements are still needed.
    ---------------------------------------------------------------------------
        \28\ IRS Press Release, IR-2014-16 (Feb, 19, 2014), available at
    http://www.irs.gov/uac/Newsroom/IRS-Releases-the-``Dirty-Dozen''-Tax-
    Scams-for-2014;-Identity-Theft,-Phone-Scams-Lead-List.
    ---------------------------------------------------------------------------
        As of December 28, 2013, the IRS had identified more than 2.9
    million incidents of identity theft in calendar year 2013. As of
    December 31, 2013, the IRS reported that during the 2013 Filing Season
    it stopped the issuance of more than $10.7 billion in potentially
    fraudulent tax refunds associated with over 1.8 million tax returns
    classified as involving identity theft.
        In September 2013, TIGTA reported that the impact of identity theft
    on tax administration continues to be significantly greater than the
    amount the IRS detects and prevents.\29\ Using the characteristics of
    tax returns that the IRS has confirmed as involving identity theft and
    income and withholding information the IRS received in 2012 late in the
    filing season and in early 2013, we analyzed tax year 2011 tax returns
    processed during the 2012 Filing Season and identified approximately
    1.1 million undetected tax returns where the primary Taxpayer
    Identification Number on the tax return was a Social Security Number.
    The undetected tax returns have potentially fraudulent tax refunds
    totaling approximately $3.6 billion, which is a decrease of $1.6
    billion compared to the $5.2 billion we reported for tax year 2010.\30\
    ---------------------------------------------------------------------------
        \29\ TIGTA, Ref. No. 2013-40-122, Detection Has Improved; However,
    Identity Theft Continues to Result in Billions of Dollars in
    Potentially Fraudulent Tax Refunds (Sept. 2013).
        \30\ TIGTA, Ref. No. 2012-42-080, There Are Billions of Dollars in
    Undetected Tax Refund Fraud Resulting From Identity Theft (July 2012).
    ---------------------------------------------------------------------------
        In addition, we expanded our tax year 2011 analysis to include tax
    returns where the primary Taxpayer Identification Number on the tax
    return is an Individual Taxpayer Identification Number (ITIN).\31\ We
    identified more than 141,000 tax year 2011 tax returns filed with an
    ITIN that have the same characteristics as IRS-confirmed identity-theft
    tax returns. Potentially fraudulent tax refunds issued for these
    undetected tax returns totaled approximately $385 million, which is in
    addition to the approximately $3.6 billion referred to earlier. In
    total, the IRS could issue potentially fraudulent refunds of
    approximately $4 billion annually as a result of identity-theft tax
    refund fraud.
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        \31\ An ITIN is available to individuals who are required to have a
    taxpayer identification number for tax purposes, but do not have and
    are not eligible to obtain a Social Security Number because they are
    not authorized to work in the United States.
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        A common characteristic of tax returns filed by identity thieves is
    the reporting of false income and withholding to generate a fraudulent
    tax refund. Another aspect to this problem is that many individuals who
    are victims of identity theft may be unaware that their identity has
    been stolen and used to file fraudulent tax returns. These individuals
    are typically those who are not required to file a tax return.\32\
    ---------------------------------------------------------------------------
        \32\ Individuals who generally are not required to file a tax
    return include children, deceased individuals, the elderly, and
    individuals who earn less than their standard deduction or earn non-
    taxable income such as some Social Security benefits.
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        The IRS continues to expand the number of identity-theft filters it
    uses to identify potentially fraudulent tax returns and prevent the
    issuance of fraudulent tax refunds from 80 filters during Processing
    Year 2013 to 114 filters during Processing Year 2014. The identity-
    theft filters incorporate criteria based on characteristics of
    confirmed identity-theft tax returns. These characteristics include
    amounts claimed for income and withholding, filing requirements,
    prisoner status, taxpayer age, and filing history.
        Tax returns identified by these filters are held during processing
    until the IRS can verify the taxpayer's identity. The IRS attempts to
    contact the individual who filed the tax return and, if this
    individual's identity cannot be confirmed, the IRS removes the tax
    return from processing. This prevents the issuance of many fraudulent
    tax refunds. For Processing Year 2014 as of February 28, 2014, the IRS
    reported that it identified and confirmed 28,076 fraudulent tax returns
    and prevented the issuance of nearly $143 million in fraudulent tax
    refunds as a result of the identity-theft filters.\33\
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        \33\ TIGTA, Ref. No. 2014-40-029, Interim Results of the 2014
    Filing Season (Mar. 2014).
    ---------------------------------------------------------------------------
        In January 2012, IRS Criminal Investigation created the Identity
    Theft Clearinghouse (the Clearinghouse). The Clearinghouse was created
    to accept tax fraud-related identity-theft leads from the IRS's
    Criminal Investigation field offices. The Clearinghouse performs
    research, develops each lead for the field offices, and provides
    support for ongoing criminal investigations involving identity theft.
    Since its inception, the Clearinghouse has received 5,287 identity-
    theft leads that have resulted in the development of 568
    investigations.
        Finally, the IRS has significantly expanded the number of tax
    accounts that it locks by placing an indicator on the individual's tax
    account.\34\ In Processing Year 2011, the IRS began locking taxpayers'
    accounts where the IRS Master File \35\ and Social Security
    Administration data showed a date of death. The IRS places a unique
    identity-theft indicator to lock the individual's tax account if he or
    she is deceased. Electronically filed tax returns using the Social
    Security Number of a locked account will be rejected (the IRS will not
    accept the tax return for processing). Paper tax returns will be
    processed; however, the tax returns will not post to the taxpayer's
    account due to the account lock, and a refund will not be issued.
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        \34\ When an account is locked, tax refunds are not processed.
        \35\ The IRS database that stores various types of taxpayer account
    information. This database includes individual, business, and employee
    plans and exempt organizations data.
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        Between January 2011 and September 2013, the IRS had locked
    approximately 11 million deceased taxpayer accounts, which will assist
    the IRS in preventing future identity-theft fraudulent tax refunds from
    being issued. For Processing Year 2014 as of February 28, 2014, the IRS
    had rejected 67,079 e-filed tax returns. As of September 30, 2013, the
    IRS had prevented the issuance of approximately $10 million in
    fraudulent tax refunds since the inception of the lock on paper tax
    returns. In November 2013, the Chairman of the Senate Finance Committee
    proposed restricting access to the Social Security Administration's
    public death data--the Death Master File, which would help the IRS's
    efforts to reduce tax fraud via the use of a deceased individual's
    Social Security Number.
        Despite these improvements, the IRS could continue to expand the
    use of characteristics of confirmed identity-theft cases to improve its
    ability to detect and prevent the issuance of fraudulent tax refunds.
    As we reported in July 2008,\36\ July 2012, and again in September
    2013, the IRS is not in compliance with direct-deposit regulations that
    require tax refunds to be deposited into an account only in the name of
    the individual listed on the tax return. Direct deposit, which now
    includes debit cards, provides the ability to receive fraudulent tax
    refunds quickly, without the difficulty of having to negotiate a tax
    refund paper check. The majority of the tax year 2011 tax returns we
    identified with indicators of identity theft (84 percent) involved the
    use of direct deposit to obtain tax refunds totaling approximately $3.5
    billion. There are indications that abusive practices are ongoing. For
    example, one bank account received 446 direct deposits totaling over
    $591,000.\37\
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        \36\ TIGTA, Ref. No. 2008-40-182, Processes Are Not Sufficient to
    Minimize Fraud and Ensure the Accuracy of Tax Refund Direct Deposits
    (Sep. 2008).
        \37\ TIGTA, Ref. No. 2013-40-122, Detection Has Improved; However,
    Identity Theft Continues to Result in Billions of Dollars in
    Potentially Fraudulent Tax Refunds (Sep. 2013).
    ---------------------------------------------------------------------------
        To improve the IRS's conformance with direct-deposit regulations
    and to help minimize fraud, TIGTA recommended that the IRS limit the
    number of tax refunds being sent to the same direct-deposit account. As
    of December 2013, the IRS is still considering this recommendation, but
    the IRS did develop new filters for the 2013 Filing Season to identify
    and stop tax returns with similar direct-deposit and address
    characteristics. As of March 3, 2014, the IRS indicated that it had
    identified 395,468 tax returns using these filters and prevented
    approximately $1.3 billion in tax refunds from being issued.\38\
    Recently, the IRS indicated it is developing a systemic restriction to
    limit to three the number of deposits to a single bank account. After
    three deposits to a single account, including situations where refunds
    are split, the entire refund amount will be sent by paper check to the
    taxpayer at the address of record.
    ---------------------------------------------------------------------------
        \38\ Statistical information provided by the IRS Wage and
    Investment Division Return Integrity and Correspondence Services.
    ---------------------------------------------------------------------------
        In addition, the IRS implemented a pilot program in January 2013
    with the Department of the Treasury's Bureau of Fiscal Service \39\
    designed to allow financial institutions to reject direct-deposit tax
    refunds based on mismatches between the account name and the name on
    the tax return. Once the refund is identified by the institution, it is
    sent back to the Bureau of Fiscal Service to be routed back to the IRS.
    As of the end of calendar year 2013, there have been 20,898 refunds
    returned from financial institutions totaling more than $67 million.
    This is a promising first step in recovering fraudulent tax refunds
    issued via direct deposit.
    ---------------------------------------------------------------------------
        \39\ Formerly the Department of the Treasury Financial Management
    Service.
    ---------------------------------------------------------------------------
        Identifying potential identity-theft tax fraud is the first step.
    Once the IRS identifies a potential identity-theft tax return, it must
    verify the identity of the individual filing the return. However,
    verifying whether the returns are fraudulent will require additional
    resources. Using IRS estimates, it would cost approximately $22 million
    to screen and verify the more than 1.2 million tax returns that we
    identified as not having third-party information on income and
    withholding. Without the necessary resources, it is unlikely that the
    IRS will be able to work the entire inventory of potentially fraudulent
    tax returns it identifies. The net cost of failing to provide the
    necessary resources is substantial, given that the potential revenue
    loss to the Federal Government of these tax fraud-related identity
    theft cases is in the billions of dollars annually.
    TIGTA Criminal Investigations of Identity Theft and Impersonation Scams
        Identity theft has a negative impact on the economy, and the damage
    it causes to its victims can be personally, professionally, and
    financially devastating. When individuals steal identities and file
    fraudulent tax returns to obtain fraudulent refunds before the
    legitimate taxpayers file, the crime is tax fraud, which falls within
    the programmatic responsibility of IRS Criminal Investigation. TIGTA's
    Office of Investigations focuses its limited resources on investigating
    identity theft characterized by any type of IRS employee involvement,
    the misuse of client information by tax preparers, or the impersonation
    of the IRS through phishing \40\ schemes and other means. Where there
    is overlapping jurisdiction, TIGTA OI and IRS Criminal Investigation
    will work together to bring identity thieves to justice.
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        \40\ 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.
    ---------------------------------------------------------------------------
        Currently, TIGTA is investigating several cases that involve
    identity theft. A recent example of this activity involved two hospital
    employees who conspired with each other to defraud the United States by
    filing false Federal income tax returns using the personal identifiers
    of patients at the hospital where they were employed and directing more
    than $400,000 in tax refunds to be deposited into bank accounts they
    controlled, or accounts linked to prepaid debit or gift cards.\41\ One
    individual was sentenced to a total of 81 months of imprisonment for
    his role in the conspiracy and aggravated identity theft.\42\ The other
    individual was sentenced to 57 months of imprisonment for his role in
    the conspiracy.\43\ Both were ordered to pay restitution to the IRS in
    the amount of $116,404.\44\
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        \41\ E.D. Va. Indictment dated Aug. 7, 2013.
        \42\ E.D. Va. Judgment dated Jan. 13, 2014.
        \43\ E.D. Va. Judgment dated Jan. 24, 2014.
        \44\ E.D. Va. Restitution Orders dated Jan. 10, 2014, and Jan.24,
    2014.
    ---------------------------------------------------------------------------
        IRS employees are entrusted with the sensitive personal and
    financial information of taxpayers. Using this information to
    perpetrate a criminal scheme for personal gain negatively impacts our
    Nation's voluntary tax system and it can generate widespread distrust
    of the IRS. TIGTA aggressively investigates IRS employees involved in
    identity-theft-related tax refund fraud and refers these investigations
    to the Department of Justice for prosecution. Many of these employees
    face significant prison sentences as well as the loss of their jobs if
    convicted.
        For example, in November 2013, TIGTA special agents arrested an IRS
    Tax Examining Technician for aggravated identity theft and
    conspiracy.\45\ The IRS employee conspired with another individual to
    divert a tax refund belonging to another taxpayer by changing the
    taxpayer's mailing address without the taxpayer's permission, causing a
    refund of $595,901 to be mailed to her co-conspirator.\46\ Further
    criminal action is pending.
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        \45\ N.D. Ga. Executed Arrest Warrant dated Nov. 26, 2013.
        \46\ N.D. Ga. Crim. Compl. dated Nov. 25, 2013.
    ---------------------------------------------------------------------------
        TIGTA also investigates tax preparers who misuse their clients'
    information to commit identity theft-related refund fraud. For example,
    TIGTA investigated a tax preparer who stole the personal identifiers of
    her clients and filed numerous fraudulent tax returns without their
    permission or knowledge. The tax preparer, who was indicted in April
    2013 on charges of aggravated identity theft, wire fraud, mail fraud
    and false claims, prepared and filed more than 200 fraudulent tax
    returns and defrauded the U.S. Government of more than $1 million in
    tax refunds. She used the proceeds from the fraudulently obtained tax
    returns to purchase 20 real properties in Arizona.\47\
    ---------------------------------------------------------------------------
        \47\ S.D. Cal. Indict. filed Apr. 13, 2013.
    ---------------------------------------------------------------------------
        In addition to these TIGTA investigations, the IRS announced in
    February 2013 the results of a nationwide effort with the Department of
    Justice and local U.S. Attorneys' offices focusing on identity theft
    suspects in 32 States and Puerto Rico, which involved 215 cities and
    surrounding areas. This joint effort involved 734 enforcement actions
    related to identity theft and refund fraud, including indictments,
    informations, complaints, and arrests.
        Criminals have been impersonating the IRS for years. While the
    fraud schemes may change, the motive remains the same: to bilk honest
    taxpayers out of their hard-earned money. Scammers and thieves often
    prey on immigrants and the elderly and sometimes even resort to
    threats. For example, in the late summer of 2013, TIGTA began noticing
    numerous complaints from around the country about suspicious callers
    claiming to be IRS employees collecting taxes from recent IRS audits.
    The callers demanded that the tax payments be made to pre-paid debit
    cards and threatened arrest, suspension of business or driver's
    licenses, and even deportation if the callers' demands were not met. In
    many cases, the callers became hostile and insulting. As of April 2014,
    the TIGTA Hotline has received tens of thousands of reports related to
    this scam, and it is estimated that the scheme has resulted in over $2
    million in payments made by the victims. TIGTA special agents are
    actively reviewing these complaints.
    Tax Refund Fraud
                Verification of Income and Withholding
        Access to third-party income and withholding information at the
    time tax returns are processed is the most important tool the IRS could
    use to detect and prevent tax fraud resulting from the reporting of
    false income and withholding. While the IRS has increased its detection
    of fraudulent tax returns at the time tax returns are processed and has
    prevented the issuance of billions of dollars in fraudulent tax
    refunds, it still does not have timely access to third-party income and
    withholding information needed to make any substantial improvements in
    its detection efforts.
        Expanded access to the National Directory of New Hires could
    immediately provide the IRS with this type of information that could
    help prevent 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
    EITC. The IRS has included a legislative proposal for expanded access
    to this information in its annual budget submissions for fiscal years
    2010 through 2014 and has once again included this proposal in its
    fiscal year 2015 budget submission. In an effort to combat identity
    theft, the Chairman of the Senate Finance Committee proposed in
    November 2013 granting the IRS authority to use the Department of
    Health and Human Services (HHS) National Directory of New Hires to
    verify employment data.
        Improvements can also be made to the income and verification
    processes when tax returns are identified by the IRS as potentially
    fraudulent. In August 2013, we reported \48\ that ineffective income
    and withholding verification processes are resulting in the issuance of
    potentially fraudulent tax refunds. Our review of a random sample of
    272 tax returns sent for verification found that ineffective
    verification processes resulted in the issuance of the potentially
    fraudulent tax refunds associated with these tax returns.
    ---------------------------------------------------------------------------
        \48\ TIGTA, Ref. No. 2013-40-083, Income and Withholding
    Verification Processes are Resulting in the Issuance of Potentially
    Fraudulent Tax Refunds (Aug. 2013).
    ---------------------------------------------------------------------------
                Stolen or Falsely Obtained Employer Identification Numbers
        Individuals attempting to commit tax refund fraud commonly steal or
    falsely obtain an EIN to file tax returns reporting false income and
    withholding. A valid EIN for the employer must be provided in support
    of wages and withholding reported on individual tax returns.
    Individuals who report wages and withholding on a tax return must
    attach a Form W-2, Wage and Tax Statement,\49\ to a paper-filed tax
    return to support the income and withholding reported. For an e-filed
    tax return, the filer must input the information from the Form W-2 into
    the e-filed tax return.
    ---------------------------------------------------------------------------
        \49\ The IRS requires employers to report wage and salary
    information for employees on a Form W-2. The Form W-2 also reports the
    amount of Federal, State, and other taxes withheld from an employee's
    paycheck.
    ---------------------------------------------------------------------------
        TIGTA identified 767,071 tax year 2011 e-filed individual tax
    returns with refunds based on falsely reported income and withholding
    using a stolen or falsely obtained EIN.\50\ TIGTA estimates that the
    IRS could issue almost $2.3 billion annually in potentially fraudulent
    tax refunds based on these EINs. There were 285,670 EINs used on these
    tax returns. Of these:
    ---------------------------------------------------------------------------
        \50\ TIGTA, Ref. No. 2013-40-120, Stolen and Falsely Obtained
    Employer Identification Numbers Are Used to Report False Income and
    Withholding (Sep. 2013).

      --277,624 were stolen EINs used to report false income and
            withholding on 752,656 tax returns with potentially fraudulent
            refunds issued totaling more than $2.2 billion.
      --8,046 were falsely obtained EINs used to report false income and
            withholding on 14,415 tax returns with potentially fraudulent
            refunds issued totaling more than $50 million.

        These 767,071 returns with potentially fraudulent refunds issued
    are in addition to the approximately 1.2 million undetected tax year
    2011 tax returns we identified as having characteristics of an
    identity-theft tax return discussed earlier in our testimony.
        The IRS has developed a number of processes to prevent fraudulent
    refunds claimed using stolen and falsely obtained EINs. As previously
    noted, third-party information is not available to effectively detect
    the reporting of false income and withholding at the time tax returns
    are processed. Nonetheless, the IRS has both tax information and other
    data that can be used to proactively identify tax returns with income
    reported using a stolen or falsely obtained EIN. Using these data, the
    IRS could have identified 53,169 tax returns with refunds issued
    totaling almost $154 million that had income reported with a stolen or
    falsely obtained EIN. IRS management agreed with our recommendation to
    update fraud filters using the tax information and other data we
    identified such as the Suspicious EIN Listing.\51\
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        \51\ The Suspicious EIN Listing is a cumulative listing of EINs
    that the IRS has confirmed as suspicious. The IRS has confirmed 6,333
    EINs as suspicious since January 2003.
    ---------------------------------------------------------------------------
                   implementation of the affordable care act
        The Patient Protection and Affordable Care Act and the Health Care
    and Education Reconciliation Act of 2010 \52\ contain 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 healthcare
    expenses. They also impose penalties, administered through the tax
    code, for individuals and businesses that do not obtain healthcare
    coverage for themselves or their employees. The ACA represents the
    largest set of tax law changes in more than 20 years and represents a
    significant challenge to the IRS.
    ---------------------------------------------------------------------------
        \52\ Public Law No. 111-152, 124 Stat. 1029 (codified in scattered
    titles of the U.S.C.).
    ---------------------------------------------------------------------------
                ACA-related Customer Service
        In December 2013, we issued a report on the IRS's ACA customer
    service strategy,\53\ which is a collaborative and coordinated effort
    between the IRS and multiple Federal and State agencies. The Department
    of Health and Human Services (HHS) will serve as the ``public face''
    for customer service at the Exchanges \54\ until calendar year 2015.
    Individuals who contact the IRS for ACA assistance will be referred to
    the HHS's public website (Healthcare.gov) and toll-free telephone
    assistance lines. The IRS will also refer individuals to its own
    recorded telephone messages and self-assistance tools. In calendar year
    2015, the IRS will take the lead in providing customer service when
    individuals begin filing their tax year 2014 tax returns. The IRS's
    customer service strategy includes sufficient plans to: (1) perform
    outreach and education; (2) update or develop tax forms, instructions,
    and publications; and (3) provide employee training to assist
    individuals in understanding the requirement to maintain minimum
    essential coverage and the tax implications of obtaining the Premium
    Tax Credit.
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        \53\ TIGTA, Ref. No. 2014-43-006, Affordable Care Act: The Customer
    Service Strategy Sufficiently Addresses Tax Provisions; However,
    Changes in Implementation Will Create Challenges (Dec. 2013).
        \54\ Exchanges are intended to allow eligible individuals to obtain
    health insurance, and all Exchanges, whether State-based or established
    and operated by the Federal Government, will be required to perform
    certain functions.
    ---------------------------------------------------------------------------
        However, changes in the implementation of ACA tax provisions may
    result in increased demand for customer service assistance resulting in
    more contacts with the IRS. Depending on the nature of any changes made
    to ACA tax provisions, the IRS's strategy and plans to provide adequate
    customer service could be affected. Attempting to mitigate the effect
    that implementation changes may have on its ability to provide adequate
    customer service, the IRS has developed oversight and monitoring
    processes and procedures to alert management at the earliest possible
    time of actions that may affect its operations.
                Security of Federal Tax Data
        The information technology and security challenges for the ACA are
    considerable and include implementation of interdependent projects in a
    short span of time, evolving requirements, coordination with internal
    and external stakeholders, cross-agency system integration, and
    testing. ACA implementation will have a significant impact on existing
    systems, so there must be bandwidth to support all provisions. Finally,
    projects must be staffed with personnel who have the required knowledge
    and skills to efficiently deploy new technologies. To manage these
    challenges, the IRS created a Project Management Office for the ACA
    within the Information Technology program area.
        The Exchanges are forwarding requests for income and family size
    information for each applicant and their family members who are
    qualified to apply for health insurance to the IRS. The Department of
    Health and Human Services' Data Services Hub provides the connections
    for the Exchanges and all other Federal agencies, including the IRS.
        The IRS, using Federal tax data, will determine the applicant's
    historical household income, family size, filing status, adjusted gross
    income, taxable Social Security benefits, and other requested
    information. The IRS will then transmit the Federal tax data to the HHS
    Data Services Hub for delivery to the appropriate Exchange. The
    Exchanges use the IRS information along with other available data to
    verify the information provided by the applicant.
        TIGTA issued a report on the IRS Income and Family Size
    Verification Project and found that the project was on schedule and the
    IRS was managing known information technology risks at the time the
    audit was conducted.\55\ TIGTA recommended that the IRS: (1) improve
    the management of ACA changes to requirements; and (2) use an
    integrated suite of automated tools to manage ACA requirements and
    application test cases.
    ---------------------------------------------------------------------------
        \55\ TIGTA, Ref. No. 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 (Mar. 2013).
    ---------------------------------------------------------------------------
        TIGTA remains concerned about the protection of confidential
    taxpayer data that will be provided to the Exchanges. The Federal tax
    data provided to HHS and the Exchanges will be protected through the
    IRS's Safeguard Review Program. TIGTA is currently conducting an audit
    of the IRS's Safeguard Review Program and will issue a report on its
    operations in fiscal year 2014.\56\ TIGTA has concerns that the
    Safeguard Review Program may lack sufficient staffing or funding to
    adequately expand its operations to include the addition of the Federal
    and State Exchanges.
    ---------------------------------------------------------------------------
        \56\ TIGTA, Audit No. 201320029, Review of the Internal Revenue
    Service's Office of Safeguards, report planned for July 2014.
    ---------------------------------------------------------------------------
                Protection Against Fraudulent ACA Claims on Tax Returns
        The Affordable Care Act provides for a refundable tax credit to
    offset an individual's health insurance expenses. Beginning in tax year
    2014, some low to moderate income individuals eligible to obtain health
    insurance through one of the State Exchanges or the Federal Exchange
    may be eligible for a refundable credit to assist them in paying
    monthly insurance premiums. The amount of the credit is determined by
    an individual's income in relation to the Federal poverty level, among
    other factors. In October 2013, the IRS began working with the
    Exchanges to provide a computation of individuals' estimated maximum
    monthly Premium Tax Credit.\57\ Individuals can elect the amount of
    credit they want advanced up to the maximum credit for which the
    Exchange has approved them to receive. Qualified individuals can elect
    to either: (1) have the monthly credit sent directly to their insurance
    provider as an advance payment (Advance Premium Tax Credit) \58\ to
    lower the amount of monthly premiums they would pay out-of-pocket; or
    (2) wait to receive the credit when they file their tax year 2014 tax
    return. As of March 31, 2014, the Department of Health and Human
    Services reported that more than $1.4 billion in Advance Premium Tax
    Credits have been paid to insurers.
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        \57\ A Premium Tax Credit is a refundable tax credit to assist
    individuals and families in purchasing health insurance coverage
    through an Exchange.
        \58\ An Advance Premium Tax Credit is paid in advance to a
    taxpayer's insurance company to help cover the cost of premiums.
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        Like other refundable credits, there is a risk for improper
    payments with the Premium Tax Credit. For example, Advance Premium Tax
    Credits are computed using a number of factors, including an
    individual's projected 2014 income, family size, etc. The Exchanges
    will use income and family size information received from the IRS, as
    well as information provided by the applicant and other data sources,
    to project the income and family size amounts used to determine
    eligibility for the credit. The Exchanges also rely on the IRS's
    computation of the maximum available credit based on the projected
    income and family size when assisting applicants in choosing a health
    insurance plan. TIGTA is currently evaluating the accuracy of the data
    that the IRS provides to the HHS for use in enrolling individuals and
    calculating the Advance Premium Tax Credit, and plans to issue a report
    this year.\59\ We plan to assess the protection of Federal tax data
    provided by the IRS in the future.\60\
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        \59\ TIGTA, Audit No. 201340335, Affordable Care Act: Accuracy of
    the Income and Family Size Verification and Advanced Premium Tax Credit
    Calculation, report planned for May 2014.
        \60\ TIGTA, Audit No. 201420302, Security Over Federal Tax Data at
    Health Insurance Exchanges, report planned for September 2014.
    ---------------------------------------------------------------------------
        It is not until the individual files his or her tax year 2014 tax
    return during calendar year 2015 that the IRS will know the
    individual's actual income for 2014 and the amount of the tax credit
    the individual is entitled to receive. Individuals who receive an
    Advance Premium Tax Credit will reconcile the amount received to the
    amount of Premium Tax Credit they are eligible to receive based on
    their actual 2014 income and family size when they file their tax year
    2014 tax return.
        Individuals who are eligible to receive the Premium Tax Credit but
    did not receive a credit in advance can claim the credit on their tax
    year 2014 tax return. Individuals who received more than they were
    entitled in the form of an Advance Premium Tax Credit will be
    responsible for repaying all or part of the advanced credit received.
    The IRS will assess the additional credit on the taxpayer's account and
    attempt to collect it.
        TIGTA is concerned that the potential for refund fraud and related
    schemes could increase as a result of processing ACA Premium Tax
    Credits unless the IRS builds, implements, updates, and embeds ACA
    predictive analytical fraud models into its tax filing process. The IRS
    has developed a plan to prevent, detect, and resolve fraud and abuse
    during ACA tax return processing. The plan, when fully developed and
    implemented, is designed to leverage third-party reporting from the
    Exchanges and new computer analytical capability built into the Return
    Review Program.\61\ The plan calls for the development of the ACA
    Validation Service, which will be used to identify improper ACA-related
    refunds. The ACA Validation Service will be designed to perform
    screening for improper refunds and will also identify fraudulent
    schemes that include multiple returns. The IRS plans to rely on the
    Electronic Fraud Detection System and/or the new Return Review Program
    to provide the systems to identify and prevent ACA-related refund
    fraud.
    ---------------------------------------------------------------------------
        \61\ The Return Review Program is the key automated component of
    the IRS's pre-refund initiative and will implement the IRS's new
    business model for a coordinated criminal and civil tax noncompliance
    approach to prevent, detect, and resolve tax refund fraud, including
    refundable ACA premium tax credits.
    ---------------------------------------------------------------------------
        The applications for processing electronic and paper tax returns
    will need to be modified before January 2015 in order for the IRS to be
    able to use the new ACA Validation Service to determine if a taxpayer
    claiming the Premium Tax Credit also purchased insurance through the
    Exchanges or received an Advance Premium Tax Credit in 2014, and if any
    math errors exist.
        We have developed a multi-audit strategy to evaluate the IRS's
    implementation of the Premium Tax Credit. To date, we have completed
    evaluations of the IRS's development of needed information systems and
    the adequacy of the IRS's plans to provide customer service to
    individuals seeking assistance with the Premium Tax Credit. In
    September 2013, we reported that a fraud mitigation strategy is not in
    place to guide ACA systems development, testing, initial deployment,
    and long-term operations.\62\ The IRS informed us that two new systems
    are under development that will address Affordable Care Act tax refund
    fraud risk. However, until these new systems are successfully developed
    and tested, TIGTA remains concerned that the IRS's existing fraud
    detection system may not be capable of identifying Affordable Care Act
    refund fraud or schemes prior to the issuance of tax refunds.
    ---------------------------------------------------------------------------
        \62\ TIGTA, Ref. No. 2013-23-119, Affordable Care Act: Improvements
    Are Needed to Strengthen Systems Development Controls for the Premium
    Tax Credit Project (Sep. 2013).
    ---------------------------------------------------------------------------
                ACA Provisions Impacting the Current 2014 Filing Season
        Several ACA tax-related provisions became effective for calendar
    year 2013 that affect individuals with high incomes including the
    creation of a new net investment income tax,\63\ and an increase in the
    employee-share of the Medicare tax (i.e., Hospital tax).\64\ The ACA
    also increased the income limit for qualifying medical and dental
    expenses taken as an itemized deduction. In prior years, individuals
    could take an itemized deduction for qualified medical and dental
    expenses that exceeded 7.5 percent of their Adjusted Gross Income.
    Beginning in calendar year 2013, the qualifying expenses must exceed 10
    percent of Adjusted Gross Income.
    ---------------------------------------------------------------------------
        \63\ The ACA created a new tax that is equal to 3.8 percent of an
    individual's net investment income for the tax year or the excess of
    the individual's Modified Adjusted Gross Income over $200,000 ($250,000
    for married individuals filing jointly).
        \64\ The ACA increased the employee-share of the Medicare tax to
    0.9 percent of an individual's covered wages in excess of $200,000
    ($250,000 for married individuals filing jointly). The ACA also
    increased the Medicare tax on self-employment income to 0.9 percent of
    an individual's self-employment income over $200,000 ($250,000 for
    married individuals filing jointly).
    ---------------------------------------------------------------------------
        Taxpayers began filing tax returns with these tax changes on
    January 31, 2014. In addition to reprogramming its computer systems to
    properly reflect these changes, the IRS had to issue guidance to
    taxpayers and tax return preparers explaining each of these provisions
    and revise or develop new tax forms, instructions and publications to
    reflect the tax law changes. In an ongoing review, we will determine
    whether the IRS has correctly implemented these provisions, which
    includes analyzing tax returns to ensure that they are accurately
    processed.\65\
    ---------------------------------------------------------------------------
        \65\ TIGTA, Audit No. 201440014, 2014 Filing Season Implementation,
    report planned for September 2014.
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                                  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
    tax year 2006, which is an increase from the prior estimate of $345
    billion for tax year 2001. The voluntary compliance rate \66\ decreased
    slightly from 83.7 percent in 2001 to 83.1 percent in 2006.
    ---------------------------------------------------------------------------
        \66\ The voluntary compliance rate is an estimate of the amount of
    tax for a given year that is paid voluntarily and timely.
    ---------------------------------------------------------------------------
        The largest component ($376 billion or approximately 84 percent) of
    the Tax Gap is based on taxpayers' underreporting their taxes due. The
    IRS addresses this gap by attempting to identify questionable tax
    returns when they are received and processed and by conducting
    examinations of tax returns filed to determine if there are any
    adjustments needed to the information reported on the tax returns.
    Additional taxes are assessed and collected.
        The next component ($46 billion or 10 percent) of the Tax Gap is
    based on taxpayers underpayment of taxes due. The IRS addresses this
    gap by issuing notices and contacting taxpayers to collect the
    delinquent taxes. The IRS is authorized to take enforcement action,
    such as filing liens and seizing assets, to collect the taxes.
        The smallest component ($28 billion or 6 percent) of the Tax Gap is
    based on taxpayers who do not file tax returns when they are due. These
    taxpayers also may not have taxes withheld or make estimated taxes. The
    IRS analyzes data from third parties (such as Forms W-2 or Forms 1099)
    to identify taxpayers who should have filed a tax return, and either
    prepares a substitute tax return or contacts the taxpayer to obtain the
    delinquent tax return.
        The scope, complexity, and magnitude of the international financial
    system also present significant enforcement challenges for the IRS. At
    the end of calendar year 2012, foreign business holdings and
    investments in the United States were $25.5 trillion, an increase of
    nearly $135 billion over calendar year 2011, while U.S. business and
    investments abroad grew to over $21.6 trillion, an increase of nearly
    $1.5 billion during the same period. The numbers of taxpayers
    conducting international business transactions continues to grow as
    technological advances provide opportunities for offshore investments
    that were once only possible for large corporations and wealthy
    individuals.
        The IRS is increasingly challenged by a lack of information
    reporting on many cross-border transactions that have been rendered
    possible by advancing technology. In addition, the varying legal
    requirements imposed by different jurisdictions lead to the creation of
    complex business structures that are not easy to understand, making the
    determination of the full scope and effect of cross-border transactions
    extremely difficult.
        As this global economic activity increases, so do concerns
    regarding the International Tax Gap.\67\ While the IRS has not
    developed an accurate and reliable estimate of the International Tax
    Gap, non-IRS sources estimate it to be between $40 billion and $133
    billion annually. To address the International Tax Gap, the IRS
    developed an international tax strategy plan with two major goals: (1)
    to enforce the law to ensure that all taxpayers meet their obligations
    and (2) to improve service to make voluntary compliance less
    burdensome.
    ---------------------------------------------------------------------------
        \67\ The International Tax Gap is the 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.
    ---------------------------------------------------------------------------
        The IRS also currently faces the challenge of implementing the
    Foreign Account Tax Compliance Act (FATCA).\68\ FATCA was enacted to
    combat tax evasion by U.S. persons holding investments in offshore
    accounts. Under FATCA, a United States taxpayer with financial assets
    outside the United States will be required to report those assets to
    the IRS. In addition, foreign financial institutions will be required
    to report to the IRS certain information about financial accounts held
    by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a
    substantial ownership interest. The IRS is developing a new
    international system, the Foreign Financial Institution Registration
    System, to support the requirements of FATCA. This system is intended
    to register foreign financial institutions to assist in achieving the
    primary objective of FATCA which is the disclosure of U.S. taxpayer
    foreign accounts. TIGTA reviewed the development of this system and
    reported that the program management control processes did not timely
    identify or communicate system design changes to ensure its successful
    deployment.\69\
    ---------------------------------------------------------------------------
        \68\ Public Law No. 111-147, Sec. Sec. 501-541, 124 Stat 71 *96-116
    (2010) (codified in scattered sections of 26 U.S.C.).
        \69\ TIGTA Ref. No. 2013-20-118, Foreign Account Tax Compliance
    Act: Improvements Are Needed to Strengthen Systems Development for the
    Foreign Financial Institution Registration System (Sept. 2013).
    ---------------------------------------------------------------------------
        Concerns about the International Tax Gap have also led to increased
    enforcement efforts on international information reporting requirements
    and increased assessments of related penalties. For example, the IRS
    has automated the penalty-setting process for the Form 5471,
    Information Return of U.S. Persons With Respect to Certain Foreign
    Corporations, which has resulted in a total of $215.4 million in late-
    filed Form 5471 penalty assessments during fiscal years 2009 through
    2012.\70\
    ---------------------------------------------------------------------------
        \70\ TIGTA, Ref. No. 2013-30-111, Systemic Penalties on Late-Filed
    Forms Related to Certain Foreign Corporations Were Properly Assessed,
    but the Abatement Process Needs Improvement (Sept. 2013).
    ---------------------------------------------------------------------------
        In addition, the IRS established the International Campus
    Compliance Unit to expand its audit coverage of tax returns with
    international aspects and to increase compliance among international
    individual taxpayers. For fiscal year 2011 through March 13, 2013, the
    International Campus Compliance Unit conducted almost 18,000 audits and
    assessed approximately $36 million in additional tax. Despite its
    accomplishments, TIGTA found that the International Campus Compliance
    Unit has no specific performance measures for its operations.\71\
    ---------------------------------------------------------------------------
        \71\ TIGTA, Ref. No. 2013-30-113, The International Campus
    Compliance Unit Is Improving Individual Tax Compliance (Sept. 2013).
    ---------------------------------------------------------------------------
        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 during the next 2 years
    before increasing again in fiscal year 2010. The, dollars collected
    decreased to just over than $50 billion in fiscal year 2012. While the
    IRS did not track the reason for the increase in fiscal year 2010, it
    did receive additional funds to hire more than 1,500 revenue officers
    between June 2009 and February 2010.
        One enforcement program whose resources have been significantly
    reduced is the Automated Collection System (ACS). The ACS function
    attempts to collect taxes through telephone contact with taxpayers
    before cases are assigned to revenue officers who make in-person visits
    to collect delinquent taxes. The ACS has 16 call sites in the Small
    Business and Self Employed and the Wage and Investment Divisions.
    However, ACS staff was reduced by 24 percent, from 2,824 contact
    representatives in fiscal year 2010 to 2,140 contact representatives in
    fiscal year 2013. In addition, three call sites were taken off-line in
    February 2013 to work Accounts Management inventory (other than
    identity theft cases) because Accounts Management began devoting more
    of its resources to work the growing inventory of identity theft cases.
    This shift in resources to Accounts Management was originally scheduled
    to continue for 3 months but was subsequently extended through the end
    of fiscal year 2013 and was still ongoing as of February 2014. As a
    result of these combined reductions, the number of ACS contact
    representatives in fiscal year 2013 was 41 percent fewer than in fiscal
    year 2010.
        Another impact on the ACS program is how resources are applied to
    its growing workload. In fiscal year 2013, the ACS prioritized
    answering telephone phone calls from taxpayers over working delinquent
    accounts, which resulted in the ACS spending only 24 percent of its
    resources on working inventory and 76 percent on answering taxpayers'
    questions. The shift from working inventory has had consequences on the
    ACS's core mission of collecting delinquent taxes. In an ongoing audit,
    we reviewed ACS business results from fiscal year 2010 through fiscal
    year 2013 and determined:

      --New inventory is outpacing closures, so the inventory is growing.
      --Inventory is taking longer to close, and the cases are older.
      --When cases are closed, more are closed as currently not
            collectible.
      --Fewer enforcement actions are taken.
      --More, and older, cases are being transferred to the growing
            inventory of cases available to be assigned to Collection Field
            personnel.\72\
    ---------------------------------------------------------------------------
        \72\ TIGTA, Audit No. 201330017, Review of the Automated Collection
    System Inventory Management, report planned for August 2014.

        Leveraging external resources, such as whistleblowers, can help
    improve tax compliance. 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 with respect to
    processing whistleblower claims. For example, information captured from
    multiple systems and entered into a single inventory control system was
    potentially erroneous, 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.\73\
    ---------------------------------------------------------------------------
        \73\ TIGTA, Ref. No. 2012-30-045, Improved Oversight Is Needed to
    Effectively Process Whistleblower Claims (Apr. 2012).
    ---------------------------------------------------------------------------
        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 to be critical to its 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.\74\ 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 taxpayers once it is implemented. The IRS's
    modernization efforts also include developing computer programs to
    conduct predictive analytics to reduce refund fraud.\75\ The successful
    implementation of the IRS's modernization program should significantly
    improve service to taxpayers and enhance Federal tax administration.
    ---------------------------------------------------------------------------
        \74\ TIGTA, Ref. No. 2012-20-122, Customer Account Data Engine 2
    System Requirements and Testing Processes Need Improvements (Sep.
    2012).
        \75\ These are computer models that analyze extremely large
    quantities of data to seek out data patterns and relationships that
    could indicate potential tax fraud schemes.
    ---------------------------------------------------------------------------
        Simplifying the tax code could also help taxpayers understand and
    voluntarily comply with their tax obligations and limit opportunities
    for tax evasion. Finally, penalties are an important tool because they
    discourage taxpayer behavior that contributes to the Tax Gap. 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 during fiscal year
    2011 it assessed over 500,000 accuracy-related penalties, involving
    over $1 billion against individuals.
            management actions in response to prior reported issues
        TIGTA follows up regularly on management actions in response to
    recommendations in our reports. One notable example that we are
    currently following up on is the report on Exempt Organizations. TIGTA
    previously reported \76\ that the IRS used inappropriate criteria for
    selecting and reviewing applications for tax-exempt status. This
    resulted in substantial delays in processing certain applications and
    the issuance of unnecessary information requests being issued to
    certain organizations.
    ---------------------------------------------------------------------------
        \76\ TIGTA, Ref. No. 2013-10-053, Inappropriate Criteria Were Used
    to Identify Tax-Exempt Applications for Review (May 2013).
    ---------------------------------------------------------------------------
        The IRS Commissioner reported in January 2014 that the IRS
    completed action on all nine recommendations contained in our May 2013
    report. TIGTA is currently assessing the actions the IRS has taken in
    response to our recommendations.\77\
    ---------------------------------------------------------------------------
        \77\ TIGTA, Audit No. 201410009, Status of Actions to Improve
    Identification and Processing of Applications for Tax-Exempt Status--
    Follow-Up.
    ---------------------------------------------------------------------------
                   tigta budget request for fiscal year 2015
        As requested by the subcommittee, I will now provide information on
    our budget request for fiscal year 2015.
        TIGTA's fiscal year 2015 proposed budget requests appropriated
    resources of $157,419,000, an increase of 0.67 percent from the fiscal
    year 2014 enacted budget. 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 2015 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 fiscal year 2013, TIGTA's combined audit and investigative
    efforts have recovered, protected, and identified monetary benefits
    totaling $16.6 billion,\78\ including cost savings, increased revenue,
    revenue protection \79\, and court-ordered settlements in criminal
    investigations, and affected approximately 3.9 million taxpayer
    accounts. Based on TIGTA's fiscal year 2013 budget of $143.8 million,
    this represents a Return on Investment of $116-to-$1.
    ---------------------------------------------------------------------------
        \78\ This figure includes 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.
        \79\ Recommendations made by TIGTA to ensure the accuracy of the
    total tax, penalties, and interest paid to the Federal Government.
    ---------------------------------------------------------------------------
        In fiscal year 2014, TIGTA received approximately $7 million above
    its requested amount of $149.4 million. This additional funding will
    enable TIGTA to (1) restore staffing to pre-sequestration levels; (2)
    increase training expenditures for auditors and special agents to meet
    required standards; and (3) upgrade and improve our technology
    infrastructure. The additional funding will allow TIGTA to continue to
    support critical audit, investigative, and inspection and evaluation
    priorities. The additional funds have also enabled the Office of Audit
    to immediately initiate audits that require travel to various IRS
    locations--travel that had previously been placed on hold due to budget
    constraints. In addition, the Office of Audit has been able to
    immediately initiate audits in critical areas such as international tax
    compliance and identity theft. As additional law enforcement staff is
    hired, the Office of Investigations will be able to conduct more
    proactive initiatives to uncover fraud in IRS operations and identify
    threats to IRS employees and infrastructure. In addition, the Office of
    Investigations will be able to investigate more complaints of IRS
    employee misconduct, fraud, waste, and abuse.
    IRS Implementation of the ACA
        Several key ACA provisions will become effective in fiscal year
    2014, and the IRS must ensure that the taxpayer system is able to fully
    implement these provisions. 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, TIGTA is conducting or planning to initiate 10 ACA-
    related audits during fiscal year 2014 and fiscal year 2015. 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 that could result in threats of violence, or the actual
    assault of IRS employees and attacks on IRS facilities. 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. As
    ACA provisions start to take effect, additional resources will be
    dedicated to investigating related 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
    tax refund fraud and identity theft, monitoring the IRS's
    implementation of the Affordable Care Act and other tax law changes,
    and assessing the IRS's ability to provide quality taxpayer service and
    address the Tax Gap.
        Recent audit work has shown 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. In
    addition, TIGTA has concerns over the security of tax data provided to
    the Exchanges and is also concerned that the potential for refund fraud
    and related schemes could increase as a result of processing ACA
    Premium Tax Credits.
    TIGTA's Investigative Priorities
        TIGTA's investigative priorities include investigating allegations
    of serious misconduct and criminal activity by IRS employees; ensuring
    IRS employees are safe and IRS facilities, data and infrastructure are
    secure and not impeded by threats of violence; and protecting the IRS
    against external attempts to corrupt or otherwise interfere with tax
    administration.
        IRS employees are entrusted with the sensitive personal and
    financial information of taxpayers. It is particularly troubling when
    IRS employees misuse their positions in furtherance of identity theft
    and other fraud schemes. TIGTA will continue to proactively review the
    activities of IRS employees who access taxpayer accounts for any
    indication of unauthorized accesses that may be part of a larger fraud
    scheme and conduct investigations into suspected wrongdoing.
        Between fiscal years 2010 and 2013, TIGTA processed over 11,391
    threat-related complaints and conducted over 5,500 investigations of
    threats made against IRS employees. TIGTA will continue to aggressively
    investigate individuals who threaten the safety and security of the IRS
    and its employees.
        As mentioned earlier, the TIGTA Hotline has received over 30,000
    reports from taxpayers victimized by individuals impersonating IRS
    employees in an effort to defraud them. To date, thousands of victims
    have paid over $2 million to the scammers. TIGTA will continue to
    investigate these crimes against taxpayers and alert the public to this
    scam to ensure that innocent taxpayers are not harmed by these
    criminals.
        We at TIGTA take seriously our mandate to provide independent
    oversight of the IRS in its administration of our Nation's tax system.
    As such, we plan to provide continuing audit coverage of the IRS's
    efforts to operate efficiently and effectively and investigate any
    instances of IRS employee misconduct.
        Chairman Udall, Ranking Member Johanns, and members of the
    subcommittee, thank you for the opportunity to share my views.

     STATUS OF IRS CORRECTIVE ACTION ON TIGTA TAX-EXEMPT ORGANIZATIONS WORK

        Senator Udall. Thank you for your testimony today. And,
    Inspector General George, I want to focus on this issue again
    of these tax exempt applications. Last May, your office
    published an audit and made findings delineating the use of
    inappropriate case screening criteria in 501--in processing IRS
    processing of applications for tax exempt under Section
    501(c)(4) of the Tax Code. TIGTA's report outlined delays in
    case disposition, weak internal controls, communications
    breakdowns, and management deficiency.
        Your report recommended nine specific corrective actions,
    including the issuance of procedures and guidance and
    development of training to address the problems identified. I
    note particularly recommendation number eight directing that
    guidance on how to measure the ``primary activity of IRC
    Section 501(c)(4), social welfare organizations, be included
    for consideration in the Department of the Treasury priority
    guidance plan.''
        A couple of questions. It has been nearly a year since the
    report was issued. What is the status of the IRS' efforts to
    address the problems? How has the IRS satisfactorily
    implemented all of the corrective actions TIGTA recommended?
    And if no, what remains uncompleted, and what other actions
    would you recommend the IRS undertake to correct any
    deficiencies in this area?
        Mr. George. Very important questions, Senator. I have to
    make it clear that the Department of the Treasury has a
    directive that limits that tax policy is within the ambit of
    the Assistant Secretary for Tax Policy--final tax policy, and I
    would have to defer to him to give you a definitive response to
    some of the questions that you raised. Other parts I can
    address.
        We are in the process now of conducting an assessment of
    the IRS' implementation of our recommendations. As you know,
    one, and you pointed this out at the outset, was that
    clarification be given as to the amount of activity that can
    take place. That is most definitely a tax policy question, but
    there is no question that their proposal, which has gone much
    further than the nine recommendations that we made did include
    that recommendation amongst one or two others.
        The Commissioner, and to his credit, the Acting
    Commissioner, Danny Werfel, and this current Commissioner, Mr.
    Koskinen, have made repeated public comments that they were
    going to fully address our recommendations. And I anticipate
    conducting that review on an expedited basis, and will not wait
    another year to get back to you on it, and I will let you know
    as soon as we get the information from that review.
        Senator Udall. Great. Thank you very much. Senator Johanns.
        Senator Johanns. Mr. Inspector General, good to see you
    here today.
        Mr. George. Thank you, sir.
        Senator Johanns. Soon after your report came out in that
    early timeframe, the--kind of the response of certain people
    with the IRS and I think others was this is a limited group,
    they are in the Cincinnati office, very, very closely confined
    problem. Did you agree with that assessment based upon your
    investigation?
        Mr. George. Sir, this is--I have to be very diplomatic here
    because, one, I cannot acknowledge that there is an ongoing
    investigation by my office. I can acknowledge obviously that
    the FBI is undertaking an investigation. We are helping in
    their review on this matter.
        This was such a fluid situation, and then there was some
    very inaccurate statements, and you were right about that. But
    I to this day hold the position that it is too premature to
    come to any conclusive finding as to what happened here. We
    did--because we conducted an audit and not a review/
    investigation at the outset of this, and our audit did find,
    you know, inappropriate criteria used. We did conclude that
    there was gross mismanagement on the part of senior IRS
    executives. As the Commissioner has pointed out, actions were
    taken against those individuals who were a part of that. But
    this is still an ongoing matter, sir.
        Senator Johanns. The actions taken did extend beyond the
    Cincinnati office, though. Is that fair to say?
        Mr. George. Oh, yes. Yes.
        Senator Johanns. As you know, this matter has also been the
    subject of numerous hearings, and I have seen you on TV. You
    have participated in some of those hearings, a lot of those on
    the House with the House Oversight. Have you cooperated with
    that committee in terms of their request for information,
    documents? Are you assisting that process in any way?
        Mr. George. To the extent that we are allowed to. Title 26
    of the United States Code, section 6103 places severe
    restrictions on the type of information that my organization
    and the IRS can hand over to various committees in Congress.
    Namely, it says that we can only provide taxpayer information
    to the chairman of the Senate Finance Committee and the
    chairman of the House Ways and Means Committee. They in turn
    can determine what type of information they would like to
    share.
        If I were to share 6103 information with either the
    chairman of the House Oversight Committee or every other
    committee except for the one that I noted, I am subject to
    criminal penalties. And so, if there is a document that has
    non-6103 information on it and they are simply asking for
    clarification, while I personally have not had, especially
    during the course of the audit, had no contact with them
    directly, members of my staff have. And so, and then to the
    extent of those communications, I would defer to them, some of
    whom are in the room, sir, but----

              IRS PROCEDURES FOR PROCESSING 501(C)(4) APPLICATIONS

        Senator Johanns. During the Commissioner's testimony, he
    talked about his attempt to clarify the 501(c)(4) application
    process, I guess. He stated now--surprised me; I was not aware
    of this--that the IRS now has a rule that if, I think to
    paraphrase his testimony, if you are using less than 40 percent
    of your resources for ``political activity,'' then, man, your
    application zips on through.
        Do you find any support that you are aware of in the tax
    laws, regulations that would allow that kind of division? I
    mean, I tried to ask, so 41 percent is a problem, but 39
    percent is not a problem. Do you know of anything that would
    support the IRS handling applications really for any tax exempt
    status with--and create a rule of that nature? It struck me as
    arbitrary and capricious.
        Mr. George. To directly answer your question, I am not
    aware of any rule that either permits nor prohibits it, so I
    would not be clear about that. And as you may know, this was an
    attempt by Danny Werfel, the Acting Commissioner, to address
    the backlog, and it was a severe backlog some years in the
    making for applicants of the 501(c)(4) status.
        So this was, I believe, an attempt on his part to be even-
    handed. I am sure he worked with the Office of Chief Counsel at
    the IRS. But it is something that I have no additional
    information about, sir.

                            EARNED INCOME TAX CREDIT

        Senator Johanns. Mr. Inspector General, let me, if I might,
    go to another topic here, not that I might not return to this.
    But the earned income tax credit has been subject to a lot of
    analysis and criticism by your office. And if I remember the
    numbers correctly, about 20 percent of what is paid out
    annually is fraudulently sought and paid out, totaling $15
    billion or some huge amount of money.
        Give us your best advice as to how we can address that
    issue. There was a piece of legislation recently that was going
    to be used as an offset on something. And my goodness, the
    debate was you are taking food out of the mouths of children.
    Well, nobody wants to do that, but I think we should not be
    paying out taxpayer money that is fraudulent, if you know what
    I am saying, that is fraudulently sought. Give us your best
    advice on that.
        Mr. George. Once again, sir, I have to preface that is a
    tax policy question. So I am going to answer your question, but
    I would have to defer to the Assistant Secretary for Tax
    Policy. You are right, it is in the tens of billions. It is
    under $20 billion, so the teens.
        Senator Johanns. Fifteen to $18 billion.
        Mr. George. Yes, something like that. It has, believe it or
    not, gone down in recent years. But with any credit, especially
    a refundable credit, it is extraordinarily hard for the IRS to
    administer this because that means, again, you may not owe
    taxes, but the money, you can claim it, and the money goes out.
    And as the Commissioner noted, when they sometimes do not have
    third party information from people until months after these
    checks have gone out the door, it is almost impossible to
    reclaim the money, to claw it back. And that is part of the
    problem here.
        Senator Johanns. Would it help to just require that the
    name of the person, the individual involved that qualifies for
    that credit be listed together with a social security number?
        Mr. George. Not only would that be helpful, but a truly
    troubling aspect, because we made recommendations on this for
    quite some time. A lot of the individuals who use this credit,
    and I do not know if you have seen the instructions. I think
    they are about 30 pages long on how to apply for the earned
    income tax credit, which means that a lot of the individuals
    who receive this have the benefit of outside or third party
    people assisting them with their taxes.
        And we have found examples of those individuals whether on
    purpose or not, you know, in cahoots with the individuals or
    not, siphoning money off to the side. This is not just one
    individual, one family engaged in, you know, inappropriate tax
    behavior, sir. It is more than that. And so, this is something
    that demands to be looked at. It is not the only one. There are
    other refundable credits out there that have similar problems.
        The Congress did change the law so that it made it clear
    who was eligible for that whereas in the past it was not clear
    whether somebody who was not entitled to certain public benefit
    could not receive them. That has been clarified. There are
    other refundable credits where that is still not clarified. So
    this is a big issue.
        Senator Johanns. You know, my--and I am going over my time,
    I hope you do not mind. It is just the two of us here.
        Senator Udall. That is all right.
        Senator Johanns. But I think this is an enormously,
    enormously important discussion. I do not want one single
    American who is entitled to a tax credit not to get it. The law
    provides to it. They are entitled to get it. They apply for it.
    We should send it to them. I have got no issue with that
    whatsoever.
        I get crazy over this notion, and I think people figure
    this out. And they make application fraudulently, and the money
    goes out the door, and chances of recovery are very, very slim,
    as you know. I do not know if this subcommittee is the
    appropriate subcommittee, but this warrants a hearing process
    where we ask you and others at the IRS how do we fix this,
    because I think the fixes would be pretty straightforward.
        And here we are fighting with each other over revenue
    necessary to run the Agency, while billions of dollars are
    slipping out the door. It makes no sense to me. Like I said, it
    drives me crazy. It is such a waste of money.
        Mr. George. Sir, there are two--and, again, I do not want
    to belabor the chairman's--step on his time either. But giving
    the IRS quicker access to information and actually giving them
    access to a database that is run by the Department of Health
    and Human Services, which would assist them in gathering third
    party information. The earlier the third party information is
    available to the IRS, the quicker they can help address and
    stem some of these problems.
        Senator Johanns. Yes, great. Thank you, Mr. Chairman.
        Senator Udall. Thank you very much, Senator Johanns. Just a
    quick comment on the earned income tax credit. The earned
    income tax credit is one of the Federal Government's largest
    benefit programs for low income working families and
    individuals. You know that very well. Workers, self-employed
    people, and farmers who earn $51,567 or less last year could
    receive larger refunds if they qualify for the EITC.
        The EITC has been making the lives of workers a lot easier
    for more than 38 years. Yet there have been challenges in the
    implementation of this credit, and that is what we have been
    talking about here. We have recently heard of examples of fraud
    and misuse that are troubling, and I know that you are working
    to address that.
        On the flip side, the IRS also estimates that nationwide,
    one in five eligible workers still miss out on the EITC either
    because they do not claim it when filing or do not file a tax
    return. I think it is critical we ensure that this credit is
    reaching those in the most need and protected for the
    hardworking families struggling to make ends meet. And very
    much appreciate, Senator Johanns, your comments on that.

                        IDENTITY THEFT AND REFUND FRAUD

        Inspector General George, the question, you heard me have a
    discussion with the Commissioner on refund fraud and identity
    theft. Do you consider IRS' current strategy for dealing with
    identity theft and refund fraud to be satisfactory? What
    measures should the IRS pursue with greater vigor to improve
    its response to the growing problem of refund fraud and
    identity theft?
        Mr. George. As I have indicated in various public settings,
    this is one of the fastest-growing threats to our systems--our
    Nation's system of tax administration. As I pointed out in my
    written testimony, the IRS has made progress in identifying tax
    returns that should not go out that some of which have
    characteristics of identity theft and others, for example,
    people in jail who may not be claiming to be someone else, may
    be claiming to be themselves, but claiming refunds for money
    they are not entitled to. So this is an amazingly growing
    problem.
        I, my mother, my father, we have all gotten these phone
    calls demanding that we pay the IRS money, or they are going
    to--all three of us were going to be arrested. So I mean, I
    know we are not the only ones. We have reported over 1 million
    or 2 million calls requesting millions of dollars, tens of
    thousands of dollars in these types of fraud. And this thing is
    just growing exponentially.
        So it is almost like a moving--excuse me--almost like a
    moving target for the IRS. They can skim it down. They can put
    clamps down here, and then the balloon expands or it goes to
    this other area. This is not solely a domestic problem. It is
    an international problem. But this is something that if we do
    not want to completely undermine people's trust in their
    Nation's system of tax administration, you know, the IRS with
    declining resources and additional responsibilities is truly
    going to have to make some tough choices, sir.
        Senator Udall. Do you share the concern expressed by the
    National Taxpayer Advocate that victims still face the same,
    and they use this language, a labyrinth of procedures and
    drawn-out timeframes for resolution that they faced 5 years
    ago?
        Mr. George. We actually issued an audit more recently which
    reconfirmed her findings. So the answer is an unqualified yes.

                        SECURITY OF TAXPAYER INFORMATION

        Senator Udall. Now, computer security has been problematic
    for the IRS since 1997. The Treasury Inspector General for Tax
    Administration has identified security of taxpayer data
    employees is one of the top three management challenges facing
    the IRS. The Government Accountability Office (GAO) has
    highlighted the need for improvements as well. Significant
    deficiencies make the IRS systems vulnerable to unauthorized
    access. This can adversely affect the confidentiality,
    integrity, and availability of financial and sensitive taxpayer
    information.
        What are your key concerns about the adequacy of
    information security measures IRS has put in place to protect
    its systems from the threat of cyber attack?
        Mr. George. Well, once again, and this ties into the issue
    of identity theft and the massive increase in the number of
    those cases. As a matter of fact, we are required every year
    under the Reports Consolidation Act to list the top 10
    management challenges confronting the IRS, every IG of major
    agencies. For years, the IRS' tax systems modernization was the
    number one concern that we had, but in the recent years, they
    have made improvements. I am not in the position at this very
    moment to outline exactly what those improvements are, sir, but
    they have made improvements.
        But again, with technology growing in a nano second, they
    are going to have to stay on top of this, and in an environment
    of declining resources they have some tough choices to make.
    But it is still a problem. I mean, but it is not the same--to
    the same extent. You may recall the tax system modernization
    effort, billions of dollars were expended on a system that did
    not work. And so, they had to recreate the entire thing from
    the get-go, and they were able to do so.
        Senator Udall. Great. Thank you very much for that answer.
    Senator Johanns.
        Senator Johanns. If I could just offer kind of a concluding
    comment. First of all, I just want you to know I respect what
    you folks do. I have worked with the Inspector General myself,
    and, you know, and sometimes that oversights gets a little
    irritating, if you know what I am saying, if you are the person
    in charge. But having said that, it is the right thing because
    it forces people to be paying attention.
        The second thing I wanted to say on this earned income tax
    credit, again I want to make this very clear. I want every
    person in America who is entitled to receive it under the law
    to get it. And if there are people not getting it, we should do
    whatever we can to do outreach or whatever to properly inform
    them that it is available and they have a right to claim it.
        But 20 percent of the earned income tax credit under your
    own analysis, 20 percent of the payments each year are
    improperly paid out. That is appalling, and it is not a small
    amount of money. It is $13 billion to $15 billion according to
    my notes. We cannot justify that. We cannot justify that, and
    if that can be fixed, and I believe it can quite easily be
    fixed, we in Congress should be fixing it. It is as simple as
    that.
        So that, again, drives me crazy that deserving people are
    not getting it. Undeserving people are fraudulently claiming it
    and receiving it. We pay it out to them, and I just think that
    is flat wrong. Just flat wrong. Thank you.
        Senator Udall. Senator Johanns, thank you so much today for
    your participation and involvement here. We have almost gone
    two full hours, and I just want to tell you how much I
    appreciate it.
        I want to echo his comments on the inspectors general. I
    mean, I think they play a tremendously important function in
    our government and a real watchdog out there and help us. And I
    very much appreciate the Commissioner staying and listening to
    your testimony. It shows his commitment, I think, to try to get
    things right there at the IRS.
        I want to thank all who participated in preparing for this
    hearing. I appreciate the hearing from the top officials, so
    the Treasury Department, about resource needs and the
    opportunity to explore a number of important and, I think, very
    timely issues. Today's discussion has provided helpful insights
    into the Treasury and IRS' critical operations and challenges.
    This information will be instructive as Congress moves forward
    with our work on the fiscal year 2015 funding.
        The other thing I want to say is I think the staff has done
    on both sides excellent work in preparing us for this hearing.

                         ADDITIONAL COMMITTEE QUESTIONS

        The hearing record will remain open until next Wednesday,
    May 7, at noon for subcommittee members to submit statements
    and questions to be submitted to the witnesses for the record.
    And we would very much appreciate you giving timely responses
    to those.
        [The following questions were not asked at the hearing, but
    were submitted to the Departments for response subsequent to
    the hearing:]
                     Questions Submitted to Hon. Jacob Lew
                    Questions Submitted by Senator Tom Udall
                     financial stability oversight council
        Question. Secretary Lew, when the Financial Stability Oversight
    Council (FSOC) released its final rule for the designation of nonbank
    financial firms, it acknowledged that the asset management industry was
    different and instructed the Office of Financial Research (OFR) to do a
    report on the industry. Specifically, the FSOC asked the OFR to
    determine whether any threats to financial stability could arise from
    asset management; whether they are significant enough to warrant a
    regulatory response; and what form that response should take.

      --What risks have the FSOC or OFR identified?
      --Why does the FSOC believe designation of one or two asset
            management firms is a more effective solution to address these
            risks than an activity-based approach by the primary regulator?

        Answer. The Council is still evaluating the extent to which there
    are potential threats to U.S. financial stability arising from asset
    management companies or their activities and what, if any, measures are
    appropriate to address those threats. I would not want to prejudge the
    outcome of that analysis while it is still ongoing.
        The September 2013 Office of Financial Research (OFR) study on
    asset management is only one of many inputs that the Council will
    consider as it continues its review of the asset management industry
    and its various activities. Further, it is important to note that the
    Council did not ask the OFR to make recommendations regarding any
    regulatory response that the Council or other regulators should take in
    response to any risks in the asset management industry. The Council
    hosted a public conference on May 19 to discuss the asset management
    industry and its activities. At the conference, we heard directly from
    the industry and other stakeholders, including academics and public
    interest groups, on this issue, and we welcome continued engagement
    from across the spectrum as the Council continues its careful
    assessment of potential risks to U.S. financial stability.
        To the extent that the Council identifies risks posed by asset
    managers or their activities that could pose a threat to financial
    stability, the Council has a number of potential responses, including
    highlighting potential emerging threats in its annual reports to
    Congress, making recommendations to existing primary regulators to
    apply heightened standards and safeguards, and designating individual
    firms on a company-specific basis. If the Council identifies risks that
    require action, it will seek to deploy the most appropriate remedy.
                                 cybersecurity
        Question. The Treasury Department and financial sector have access
    to a significant amount of personal and sensitive data that must be
    protected from both external and internal threats. However, over the
    past few years, the Treasury Inspector General has audited the
    Department's cyber security and repeatedly found vulnerabilities,
    particularly within the Office of the Comptroller of the Currency. The
    President's budget requests a significant increase of $11 million
    dollars to combat these cyber security threats.

      --Please explain how the funds would be used to address cyber
            security threats, and in particular, the vulnerabilities
            identified by the Inspector General.

        Answer. There are many cyber threats confronting Treasury. The
    $10.9 million requested is directed at four key areas within
    Departmental Offices (DO) and the Department-wide Systems and Capital
    Investments Program:

        1.  Insider Threat Monitoring, $3.3 million;
        2.  DO Local Area Network Cybersecurity Improvements, $2.6M;
        3.  Government Security Operations Center, $3.5 million; and
        4.  Data Leakage Protection System, $1.5 million.

        The Department's Insider Threat Program is being implemented in
    accordance with Executive Order 13587, the National Insider Threat
    Policy and Minimum Standards, and Treasury Order 105-20, and in
    coordination with the National Insider Threat Task Force (NITTF). To
    comply with these authorities, Treasury intends to institutionalize its
    insider threat audit and monitoring system on its top secret/secret
    compartmented information network and build an insider threat analysis
    cell to review data from all parts of the Department. This will assist
    the Office of the Comptroller of the Currency (OCC) as well as all
    other Bureaus.
        The DO local area network (LAN) cybersecurity improvements will
    provide comprehensive network access control to mitigate cybersecurity
    risks against the DO Local Area Network. The DO LAN is the primary
    computing network used by DO. Its current cybersecurity features are
    robust, but they require improvement to address the ever-increasing
    worldwide cyber threat. Funds will support hardware, system audit and
    monitoring software, password management software, and FTEs.
        The Government Security Operations Center currently serves as the
    Department-wide cyber incident response organization, responsible for
    monitoring, detecting, and addressing incidents, which includes
    monitoring the Department's Trusted Internet Connections and Managed
    Trusted Internet Protocol Service gateways. It works in coordination
    with Bureau security organizations to defend against traditional and
    advanced cyber attacks directed at the Department's systems and users,
    most notably advanced phishing-type attacks. Funds will be used, in
    part, to recruit technical analysts focused on data mining, who will
    analyze the technical aspects of cyber attacks in order to formulate
    detection, actionable defense, and mitigation strategies, which are
    generally outside the scope of the analytical work performed elsewhere
    in the Department. Funds will also support security intelligence
    analysis and advance cyber threat detection.
        Data Leakage Protection System funds in the amount of $1,500,000
    are requested in fiscal year 2015 budget for specialized technical
    services to implement a Data Leakage Protection (DLP) tool at non-IRS
    Internet perimeter points. The DLP will examine data, including e-mail
    being sent from the Department, to identify whether any sensitive data,
    such as personally identifiable or classified information, is being
    inadvertently transmitted.
        Separately, OCC-specific investments include an increased focus by
    the Comptroller and OCC's senior IT staff on the effectiveness of OCC's
    cybersecurity program. OCC recently hired a new Chief Information
    Security Officer (CISO) with extensive cybersecurity experience in the
    banking, financial, and payment services sectors. Through the new
    CISO's leadership, OCC is pursuing several new cybersecurity technology
    initiatives in fiscal year 2015 and fiscal year 2016 to improve its
    capabilities to monitor and protect its sensitive information and data.
    OCC has also begun recruiting additional cybersecurity professionals
    with new skill sets needed to update and manage its security-related
    processes related to improving OCC's risk-based information security
    continuous monitoring capabilities.
                    alcohol and tobacco tax and trade bureau
        Question. Treasury's Alcohol and Tobacco Tax and Trade Bureau (TTB)
    regulates alcohol and tobacco products by approving product labels and
    formulas to protect consumers from unsafe products, and collect
    significant revenue for the Treasury. In fiscal year 2013, TTB
    collected nearly $23 billion in excise taxes, which is a return of $243
    dollars for every dollar spent to operate the bureau. However, the
    fiscal year 2015 budget proposes to cut funding for the TTB by $3
    million, and then provide an additional $5 million under the program
    integrity cap adjustment.

      --Why does the budget cut funding for this bureau-- while the alcohol
            market continues to grow rapidly, and this bureau continues to
            collect significant revenue for the Treasury?
      --Why is the budget cutting funding in the base budget, while
            proposing an increase under a cap adjustment that is not
            currently authorized?

        Answer. The fiscal year 2015 President's budget includes a proposal
    to amend section 251 of the Balanced Budget and Emergency Deficit
    Control Act of 1985, as amended, to provide a program integrity cap
    adjustment of $5 million (of which $2 million will be used for agent
    support) for the Alcohol and Tobacco Tax and Trade Bureau (TTB)'s tax
    enforcement and compliance program to narrow the tax gap in the tobacco
    and alcohol industries and reduce the deficit through revenue
    collections. The budget proposes an increase in its alcohol and tobacco
    enforcement program, while working to increase operational efficiencies
    to support businesses getting their products to market. We recommend
    that Congress pass the proposed program integrity cap adjustment for
    both TTB and the Internal Revenue Service. The proposed cap adjustment
    for TTB tax enforcement and compliance activities includes $5 million
    in new revenue-producing tax compliance initiatives in fiscal year 2015
    and $5 million in new initiatives each year from fiscal year 2016 to
    fiscal year 2019 and continued through fiscal year 2024. TTB will
    target known points in the supply chain that are susceptible to
    diversion activity and prioritize forensic audits and investigations of
    high-risk entities in the alcohol and tobacco industries. Because these
    new initiatives, as well as current enforcement activities, must be
    sustained over time in order to maximize their potential taxpayer
    returns, the total above-base adjustment funding is $193 million over
    the 10-year period. These additional investments will generate $285
    million in additional tax revenue over the 10-year period. The net
    savings from these investments is $92 million.
                                 housing market
        Question. The Troubled Assets Relief Program of 2008, known as
    TARP, created several programs at Treasury to stabilize the housing
    market. The Making Homes Affordable program and Hardest Hit Fund help
    homeowners avoid foreclosure through refinancing and other mortgage
    relief. Though the housing market is showing signs of recovery, many
    homeowners are still struggling. The Government Accountability Office
    (GAO) recently reported that participation rates in these programs are
    declining.

      --Do you believe these TARP programs continue to effectively help
            struggling homeowners?
      --As the remaining TARP funds are expended and these programs begin
            to wind down, what will be the ongoing role of the Treasury
            Department in the housing market?

        Answer. Under Making Home Affordable (MHA), there have been over 2
    million homeowner assistance actions, including more than 1.3 million
    permanent mortgage modifications, to date. In addition, MHA has
    indirectly assisted millions more by setting new standards and
    prompting changes in industry practices that have led to more
    affordable and sustainable private modifications. In total, through
    government programs and additional private sector efforts, more than
    6.9 million families have received help.
        Although the housing market is recovering, many homeowners and
    communities are still dealing with the aftermath of the housing crisis.
    On average, 15,000 homeowners entered the program each month in 2013.
    The extension of MHA to December 31, 2015 will benefit many additional
    families, while maintaining clear standards, consumer protections, and
    accountability for the mortgage servicing industry.
        Treasury remains focused on helping as many people as possible
    through the housing programs under TARP. We will continue to evaluate
    our programs in an effort to assist homeowners and communities who
    still need help. We will also ensure that as the programs wind down,
    they are done so in an efficient and well organized manner.
                        ``my ra'' and retirement savings
        Question. This year's State of the Union address, the President
    announced a new initiative to encourage Americans to save for
    retirement. The ``My RA'' program would allow employees to set up
    automatic contributions from their paychecks to an IRA account, backed
    by the Government with the same interest rate offered to Federal
    employees.

      --When will this program be available to employees and employers that
            want to use it?
      --How much will it cost the Treasury Department to implement this new
            initiative?

        Answer. Treasury is working to launch myRA in late 2014 with
    broader and scaled rollouts occurring in intervals over 2015 and 2016.
        Treasury is currently in the process of evaluating proposals from
    potential financial agents to manage the program, and we are unable to
    provide an estimate of such costs until that process is complete.
    Treasury expects that there will be a minimal cost to operating the
    program, but we cannot provide an accurate estimate until we have
    actual data, including take up by myRA savers and the average duration
    of time these securities are held by participants.
                                     ______

                Questions Submitted by Senator Richard J. Durbin
        Question. A proposal requiring the Secretary of Treasury to enter
    into contracts with private collection agencies (PCAs) to collect
    Federal taxes is included in Sec. 6304 of the draft ``Tax Reform Act of
    2014'' introduced by Chairman Camp, as well as in Sec. 305 of S. 2260,
    the ``Expiring Provisions Improvement Reform and Efficiency (EXPIRE)
    Act'' now pending in the Senate.
        What was the result of a similar initiative that was in effect from
    2006 to 2009?
        Answer. The IRS has determined that the previous PCA initiative in
    effect actually lost money because the initiative imposed significant
    administrative costs on the IRS and resulted in the IRS' resources
    being diverted from higher priority collection cases to lower priority
    collection cases. To prepare for the 2006 to 2009 initiative, the IRS
    expended significant start-up costs. Although the Internal Revenue Code
    permits the IRS to retain 25 percent of the amount collected by PCAs,
    this amount proved insufficient to cover the costs of the 2006 to 2009
    initiative and the IRS needed to use appropriated funds to maintain the
    initiative, decreasing the amount of funds the IRS could use to collect
    taxes from higher priority cases. During the 2006 to 2009 initiative,
    the IRS had a policy of attempting to resolve any cases that came back
    unresolved from the PCAs. IRS collection employees were therefore
    assigned to work lower-priority collection cases where the PCAs were
    unsuccessful. Ultimately, after taking all costs into account, the IRS
    concluded that the program lost revenue.
        Question. Is it true that the IRS currently has the authority to
    use PCAs, but has chosen not to use that authority? Why?
        Answer. Section 6306 of the Internal Revenue Code, which was added
    to the Code in 2004, permits, but does not require, the Secretary to
    enter into a ``qualified tax collection contract.'' The 2006 to 2009
    initiative was undertaken pursuant to this authority. As noted in the
    previous response, the 2006 to 2009 initiative lost revenue, taking all
    activities into account. In addition, taxpayers are not entitled to the
    same protections when PCAs attempt to collect tax debts as they are
    when the IRS does so. For example, the IRS is required to make its
    processes and procedures public, which it does by issuing the Internal
    Revenue Manual (IRM). IRS employees are required to follow the IRM,
    which prohibits aggressive collection practices. PCAs are not required
    to make their processes public, nor are they required to follow the
    IRM. During the 2006 to 2009 initiative, at least some PCAs were
    accused of using aggressive collection practices, such as exerting
    psychological pressure on taxpayers. In addition, IRS employees can be
    fired, fined, and/or imprisoned for the improper use or disclosure of
    tax return information; PCAs are not subject to these consequences for
    the improper use or disclosure of tax return information. So for
    reasons of revenue outcomes and taxpayer service, IRS has not chosen to
    use PCAs in the last few years.
        Question. What are your agencies' positions on the proposal to
    require Treasury to use PCAs to collect Federal taxes?
        Answer. Treasury has both administrative and policy concerns with
    the proposal requiring Treasury to use PCAs to collect Federal taxes,
    and does not support the proposal. From an administrative standpoint,
    requiring Treasury to use PCAs would impose significant start-up costs
    on the IRS to evaluate PCAs and enter into qualified tax collection
    contracts, and ongoing costs to monitor PCAs' collection activities.
    Because the proposal does not provide additional funding for the IRS,
    these costs would decrease the funds available to the IRS for other
    priorities, including its ongoing enforcement activities. Moreover,
    previous experience with PCAs has taught us that the IRS has a much
    higher return on investment than PCAs, making this proposal a less
    effective use of taxpayer dollars. We are especially concerned that
    making the use of PCAs mandatory requires the Treasury to continue
    using the program, even if the evidence demonstrates that using PCAs
    loses revenue. From a policy perspective, we have several concerns with
    the proposal. Most significantly, the types of tax receivables excluded
    from qualified tax collection contracts are too limited (for example,
    the proposal does not exclude cases where collection could result in
    economic hardship). In addition, the proposal does not contain adequate
    safeguards to protect taxpayer rights. PCAs are not subject to the same
    requirements as the IRS for safeguarding tax return information and are
    not subject to the same consequences as IRS employees if they
    improperly use or disclose tax return information.
        Question. What impact could this requirement to use PCAs to collect
    Federal taxes have on taxpayers, specifically low-income taxpayers?
        Answer. We have several concerns about the impact of this
    requirement, including that (1) it could result in economic hardship
    for taxpayers who have an outstanding tax liability that they cannot
    currently afford to pay in full, and (2) the lack of due process and
    other taxpayer protections similar to those that apply when the IRS
    collects a tax liability could lead to potential abuse by PCAs and
    reduce future voluntary compliance by affected taxpayers.
        To determine the extent to which the proposal would affect low-
    income taxpayers, IRS used parameters similar to those in the proposal
    and prepared a preliminary estimate of individual taxpayers who could
    be affected by the proposal. This analysis determined that the
    overwhelming majority of individual income taxpayers potentially
    affected by the proposal would have incomes below 250 percent of the
    Federal poverty level. We are concerned that low-income taxpayers could
    be pressured into committing to payment schedules that they cannot
    afford to keep, which could damage their credit rating and their
    ability to remain current with respect to their tax liabilities.
    Moreover, unlike the IRS, PCAs have no incentive to engage in taxpayer
    outreach and education, which is particularly beneficial to low-income
    taxpayers and other underserved populations and which may help promote
    future tax compliance.
                                     ______

                   Questions Submitted by Senator Jerry Moran
        Question. Describe the role of your agency's Chief Information
    Officer (CIO) in the oversight of IT purchases. How is the CIO involved
    in the decision to make an IT purchase, determine its scope, oversee
    its contract, and oversee the product's continued operation and
    maintenance?
        Answer. The Deputy Assistant Secretary (Information Systems)/CIO is
    responsible for implementing Federal policy contained in the Clinger-
    Cohen Act, Federal Information Security Management Act, Paperwork
    Reduction Act, E-Government Act, Government Paperwork Elimination Act,
    and other IT-related statutes and Executive Orders. The CIO's functions
    and responsibilities include:

         1.  providing advice and other assistance to the Secretary of the
    Treasury and other senior management personnel of the Department to
    ensure that information technology is acquired and information
    resources are managed consistent with the policies and procedures of
    Clinger-Cohen;
         2.  developing, maintaining, and facilitating implementation of a
    sound and integrated information technology architecture for the
    Department;
         3.  promoting effective and efficient design and operation of all
    major information resources management processes for the Department;
         4.  chairing the Treasury CIO Council and Treasury Technical
    Investment Review Board to ensure sound decisionmaking;
         5.  developing, maintaining, and facilitating implementation of
    Departmental IT guidance, including policies, procedures, manuals, and/
    or guidelines relative to the Department of the Treasury classified and
    sensitive but unclassified telecommunications security and unclassified
    computer security programs of all Departmental elements;
         6.  promoting effective use of information technology for public
    access to public information and facilitating Treasury-wide electronic
    information dissemination programs in accordance to statutes and
    regulations;
         7.  establishing and implementing sound information management
    activities as they relate to the Department's records management and
    information collection programs;
         8.  monitoring the performance of information technology programs
    of the agency, evaluating the performance of those programs on the
    basis of the applicable performance measurements, and advising the
    Secretary regarding whether to continue, modify, or terminate a program
    or project;
         9.  assessing and determining the strategy for ensuring adequate
    IT workforce capabilities; and
        10.  partnering with the Department's Chief Financial Officer (CFO)
    to ensure that the capital planning and investment are integrated into
    the budget process.

        Question. Describe the existing authorities, organizational
    structure, and reporting relationship of the IRS Chief Information
    Officer. Note and explain any variance from that prescribed in the
    Information Technology Management Reform Act of 1996 (aka, The Clinger-
    Cohen Act) for the above.
        Answer. The IRS Chief Technology Officer reports directly to the
    IRS Deputy Commissioner and has a dotted line relationship with the
    Treasury Deputy Assistant Secretary for Information Services and Chief
    Information Officer. Coordination, oversight, and compliance are
    conducted in part through the Treasury Technology Investment Review
    Board (TTIRB), which is a monthly review by a committee composed of
    officials from across the Department. Further coordination and
    consolidated Department-wide reporting is managed through the TTIRB and
    Treasury CIO Council, which includes all bureau-level CIOs and is
    chaired by the Treasury CIO. In addition to reporting in accordance
    with the Clinger-Cohen Act, Federal Information Security Management
    Act, Paperwork Reduction Act, E-Government Act, Government Paperwork
    Elimination Act, and other IT-related statutes and Executive Orders,
    the Treasury CIO has embedded annual performance metrics into the
    bureau CIOs/Chief Technology Officers (CTOs) performance plans,
    including the IRS CTO's plan. The IRS's separate appropriation provides
    the IRS with significant independence in managing their IT portfolio in
    the context of supporting their unique mission.
        Question. What formal or informal mechanisms exist in your agency
    to ensure coordination and alignment within the CXO community \1\
    (i.e., the Chief Information Officer, the Chief Acquisition Officer,
    the Chief Finance Officer, the Chief Human Capital Officer, and so on)?
    How does that alignment flow down to agency subcomponents?
    ---------------------------------------------------------------------------
        \1\ The CXO Community is a peer-to-peer community exclusively for
    C-Level executives (CEO, COO, CPO, CFO, CIO, CTO, CKO, CMO, CAO, CVO,
    CRO, CLO, CSO, CDO, President, Chairman and MD).
    ---------------------------------------------------------------------------
        Answer. Treasury's new 2014-2017 strategic plan represents the
    goals and strategies for the diverse financial and economic activities
    of the Department, including achieving organizational excellence in
    support of Treasury's operational mission. The plan enables members of
    the CXO community to align themselves to a clear set of Departmental
    management goals and corresponding strategies, including increasing
    workforce engagement, performance, and diversity; supporting effective
    data-driven decisionmaking; promoting efficient use of resources; and
    creating a culture of customer service.
        To improve alignment of these Departmental goals and priorities, it
    is Treasury policy that the functional program heads at Departmental
    Offices establish additional Department-wide strategic goals and
    objectives, as well as individual performance expectations and uniform
    language, which is incorporated into the performance plans of Bureau
    functional program heads (CXOs).
        Finally, there are numerous forums, councils, and policies that
    enable coordination and alignment across the CXO community and within
    each functional area, including alignment from headquarters to bureaus.
    For example, since 2010, Treasury has been conducting quarterly
    performance reviews in support of Government Performance and Results
    Act (GPRA)-Modernization Act to drive accountability and produce
    results in the management space. Departmental program heads also
    regularly convene their bureau counterparts through forums such as ``HR
    Stat'' and the ``CFO council'' to discuss policy and ongoing events in
    each CXO area of expertise.
        Question. How much of the agency's budget goes to Demonstration,
    Modernization, and Enhancement of IT systems as opposed to supporting
    existing and ongoing programs and infrastructure? How has this changed
    in the last 5 years?
        Answer. In fiscal year 2015, 23 percent of Treasury's IT budget
    will go to Development, Modernization, and Enhancement (DME). Generally
    Treasury has seen an increase in DME spending from fiscal year 2011
    where 19 percent of Treasury's IT Budget was applied to DME.
        Question. Where and how is the IRS taking advantage of this
    administration's ``shared services'' initiative? How do you identify
    and utilize existing capabilities elsewhere in government or industry
    as opposed to recreating them internally?
        Answer. IRS has actively participated in the Federal Government
    Shared Services initiative over the past several years. Currently IRS
    primarily utilizes Federal Government shared services through the
    Treasury Franchise Fund (TFF) that is supervised and managed by the
    Department of the Treasury. The fiscal year 2014 estimate for the IRS
    shared services provided by the TFF is $95 million. Some of the
    services IRS receives through the TFF include:

      --HR Connect, which delivers human capital services and interfaces
            with the Department of Agriculture's National Finance Center,
            which provides payroll processing and support;
      --Web Solutions, which provides collaboration sites and support for
            IRS Webmasters and content managers;
      --Treasury Enterprise Identity Credential & Access Management
            provides Personal Identification Verification, Physical Access
            Controls, Logical Access Controls for local, remote & mobile
            devices;
      --Government Secure Operations Center serves as the focal point for
            management of cyber incidents and is responsible for security
            detection, analysis & incident management lifecycle practices;
            and
      --A number of other smaller programs that provide non-IT services,
            including the Office of Small and Disadvantaged Business
            Utilization, which advises and aids the bureaus on small
            business policies and initiatives; Treasury Operations
            Excellence, which provides Lean Six Sigma training and other
            services to help Treasury and other Federal agencies use
            entrusted resources more effectively and efficiently; and the
            Privacy, Transparency, and Records program, which provides
            assistance to Treasury customers to collect, protect, retain,
            preserve, disclose, and provide access to Treasury's
            information resources pursuant to U.S. laws.

        IRS also offers shared services to other agencies through
    Reimbursable Agreements. These include procurement services and use of
    Call Centers by FEMA for disasters.
        Question. Provide short, two-page, summaries of three recent IT
    program successes--projects that were delivered on time, within budget,
    and delivered the promised functionality and benefits to the end user.
    How does the IRS define ``success'' in IT program management?

        Answer.--
    Project #1: IRS.gov/Enterprise Portal
        In August of 2011, the IRS Information Technology organization set
    out to deploy enhanced Web services including a straightforward,
    manageable Web environment, established end-to-end operational
    accountability and visibility, and a cost-effective program structure.

        Additionally, the IRS sought to address the following challenges:
      --Exponential growth of online electronic filings and taxpayer access
            to information;
      --Difficulty balancing system capability to meet demand (scaling
            horizontally);
      --Inconsistent user experiences for the taxpayer and tax preparer;
      --Limited ability to share data and content between the IRS user
            communities;
      --Difficulty focusing on serving end users (taxpayers and preparers)
            in an end-to-end fashion, and
      --Multiple portals with numerous services to maintain.

        The solution was the Integrated Enterprise Portal (IEP), an
    innovative, cost-effective system that provides a scalable, managed
    private cloud capability to the IRS, enabling one-stop, Web-based
    services to internal and external users. The IEP has transformed the
    way the agency creates, launches and administers its taxpayer- and
    employee-facing applications. At its most basic operational level, it
    allows the IRS to get business-critical applications to the live
    environment more quickly, while enhancing cost predictability and
    security.

        Recent IEP Program Successes:

      --Registered User Portal (RUP) Deployment.--RUP, deployed on-time and
            within budget in September 2013, implemented a secure, FISMA-
            moderate (Federal Information Security Management Act framework
            risk classification), scalable, managed private cloud which
            provides a shared portal infrastructure that consolidates the
            IRS platforms under a single, flexible, and scalable platform.
            The RUP is the IRS external portal that allows registered
            individuals and third party users, where registration and login
            authentication are required for access, to interact with
            selected tax processing and other sensitive systems,
            applications, and data.
      --Filing Season 2014.--The 2014 tax filing season marked the IRS's
            first season fully ``in the cloud.'' Going into tax season
            there was uncertainty driven by the fact that deployment
            occurred just a few short months earlier--a period of time made
            even shorter by a 3-week Government shutdown. Additionally, the
            IEP was predicted to face an unprecedented amount of traffic
            and filings. Despite these circumstances, the IEP not only
            delivered, but exceeded expectations handling the highest
            number of electronic returns and traffic ever--all with 100
            percent availability and zero Priority 1 or Priority 2
            incidents. This was a season of unprecedented peaks for the IRS
            that set a new standard for tax seasons to come. For example,
            on 2/6/14 the IEP successfully handled the ``Where is My
            refund'' application peak of 5.8 million unique daily visitors
            at a peak volume of 15,000 transactions/minute. Detailed
            statistics are as follows:

            Portal key performance metrics January 11 to April 17, 2014:

        --224.1 million total returns submitted (Federal + State);
        --1.025 billion IRS.gov page views/263 million IRS.gov site visits;
                and
        --132.7 million page views during seasonal peak week.

            ``Where's My Refund'' accessed via IRS.gov Web site:

        --136 million page views;
        --112 million site views; and
        --15,000 peak transactions/minute.

      --New Technical Capabilities to support the Affordable Care Act (ACA)
            effort.--A new Transactional Portal Environment (TPE), which is
            a series of capabilities that reside within the IEP, was needed
            to support the new Affordable Care Act (ACA) program. The ACA
            TPE supports secure Application-to-Application (A2A) interfaces
            between Health and Human Services (HHS) Centers for Medicare &
            Medicaid Services (CMS) and the IRS. The new portal solution
            was implemented on-time and on-budget to support the beginning
            of open enrollment in the Marketplaces in October 2013. The IRS
            achieved the business objective to deploy a TPE solution
            providing CMS access to ACA services and providing 24/7
            monitoring and support, daily reporting, and confirmation that
            initial traffic was within anticipated thresholds.

            Key metrics for October 1, 2013 to April 15, 2014:

        --TPE successfully processed 45 million requests for Income and
                Family Size Verification (IFSV) and Premium Tax Credit
                (PTC) computation services in real time from CMS.

      --Employee User Portal (EUP).--In late December 2013, a production
            IRS Employee User Portal (EUP) environment was successfully
            transitioned to the IEP. The IRS completed this transition
            ahead of schedule in response to a request by the IEP
            Governance Board to pull in the transition schedule in order to
            begin transitioned production operations prior to the beginning
            of Tax Filing Season 2014. Production operations of the newly
            transitioned environment were supported without a Priority 1 or
            2 incident throughout the 2014 Tax Filing Season (January 2014
            to April 2014). In addition to supporting transition and filing
            season operations of the existing EUP infrastructure, the IRS
            conducted initial analysis and concept of operations
            discussions about the future state of the EUP that would align
            with the goals of data center optimization and consolidation.

        Definition of ``Success''

        Success was clearly defined on this program with deliverables
    completed on time, within budget, and with the promised functionality
    to achieve the Authority to Operate (ATO) recommendation from Cyber
    Security and planned business results.
    Project #2: CADE 2
        The Customer Account Data Engine 2, known as the CADE 2 program, is
    implementing a single, data-centric solution that provides daily
    processing of taxpayer accounts.
        A critical component of the CADE 2 program is an authoritative
    database for individual taxpayers that provides more efficient and
    effective tax administration. The new database is the heart of the
    solution. It will transform the way the IRS approaches tax
    administration into the future. It improves taxpayer services by
    providing the capability to view taxpayer account data stored in the
    CADE 2 database with on-line viewing by IRS customer service
    representatives, as well as analytical reporting for more meaningful
    business intelligence and expanded opportunities to increase
    compliance.
        As the IRS continues to invest in its data-centric vision in fiscal
    year 2015, CADE 2 will enable an enterprise-wide data environment that
    extends business capabilities, promotes efficiency, and increases
    productivity by ensuring the fidelity, security, and understanding of
    IRS data. This is essential to effectively enable the IRS to leverage
    21st century technologies such as cloud computing, Web services,
    electronic submissions, e-Authentication, big data and data analysis,
    and computing as a commodity, to name a few.
        With deployment of CADE 2 Transition State 1 (TS1), the IRS took a
    leap forward from a technology standpoint, moving the management of
    IRS's individual taxpayer account data from 1960's sequential flat-
    files stored on magnetic tapes, to state-of-the-art relational database
    technology. The IRS is now conducting transactional processing of
    account data for over 270 million individual taxpayers and over a
    billion tax modules on a modernized DB2 relational database. The IRS
    data is now stored in relational formats dictated by a state-of-the-art
    data model that maintains historical values never before retained on
    taxpayer account transactions and facilitates daily viewing of taxpayer
    account data by IRS customer service representatives. CADE 2 TS1 is
    offering faster refunds, faster notices, faster payment postings, and
    improved service for millions of taxpayers as well as a solid
    foundation for our data-centric vision. As of the end of April 2014,
    CADE 2 had posted 116.97 million returns and issued 101.67 million
    refunds totaling $269.30 billion for filing season 2014.
        The IRS is now well positioned to take the essential next step in
    its data-centric vision--rewriting its core taxpayer account processing
    applications so they can leverage the benefits of the new, high-powered
    CADE 2 relational database environment. Prototypes are being conducted
    to validate our assumptions about our approach to this effort. Once our
    applications are re-written into a modern programming language and are
    able to effectively populate the new CADE 2 relational database based
    on its modernized data model, it will become the authoritative source
    for individual taxpayer account data for the IRS. This CADE 2 effort,
    called Transition State 2 (TS2), will enable the IRS to address its
    longstanding unpaid assessments financial material weakness which has
    added substantial risk to IRS custodial accounting and clean audit
    opinion for nearly 20 years.
        TS2 will ensure the long-term viability of the IRS tax processing
    systems by addressing the limitations and risks associated with the
    aging architecture and the design of our legacy core tax processing
    systems, as well as the outdated programming languages that are
    difficult to maintain.
        Investments in CADE 2 TS2 are already delivering benefits to
    taxpayers with the rollout of the Penalty & Interest (P&I) common code
    base on January 2, 2014. After years and years of discrepancies among
    various systems in calculating penalty and interest, a new application
    is now calculating penalty and interest consistently on individual and
    business accounts for taxes that are not received by the due date
    across our master files (Business Master Files and Individual Master
    Files). It is also providing service improvements for taxpayers such as
    more accurate notices, consistent penalty and interest calculations,
    and enhanced service, as Customer Service Representatives have more
    accurate information and are better able to assist taxpayers in meeting
    their tax filing and payment obligations. The solution uses the
    existing master file common code modules as baselines and incorporates
    additional requirements for the Integrated Data Retrieval System
    (IDRS).
        CADE 2 is a game changer for the IRS, and once complete it will
    enable many opportunities for the IRS to transform the way we approach
    tax processing today and into the future.
    Project #3: Filing Season
        At the core of the IRS's operations is an IT infrastructure that
    has been foundational to administering the U.S. Federal tax code since
    the early 1960's. Deployment of IT infrastructure in support of Filing
    Season 2014 resulted in many successes, in spite of a tough budget
    environment that resulted in three agency furlough days, hiring freezes
    and a 16-day Government shut down that delayed the opening of filing
    season. Through collaborative efforts of hundreds of IT and Business
    staff and consistent assessment of risks and mitigation of impacts, the
    IRS was able to continue its record of timely deployment of IT systems
    for filing season 2014, enabling improved taxpayer services, increased
    compliance, and enhanced security against threats to the Nation's tax
    system, with marked improvements in production statistics over previous
    years.
        The IT infrastructure for Filing Season 2014 is extraordinarily
    large and complex, putting it in a class of its own in comparison to
    other tax systems around the world. The IRS deployed 67 critical filing
    season systems comprised of thousands of programs written in many
    programming languages and technology platforms that have been developed
    over decades to support the growing tax code. These complex systems
    provided the intelligence and capacity to process about 250 million tax
    returns submitted electronically and on paper between January 2 and
    April 15, filtering out fraud and generating over a million refunds
    totaling roughly $250 billion. These systems capture and move massive
    amounts of data from program to program under strict limitations set by
    service level agreements that govern the complex tax return process.
    They support filing season core tax processing, collection, and exam
    activities for every taxpayer in the country, and then send the
    appropriate financial data to IRS's general ledger to execute fiduciary
    responsibilities and ensure integrity in management of U.S. Government
    funds. Underlying the critical systems is a complex communications
    infrastructure of local and wide area networks, with computer hardware
    and other IT devices and supporting systems that successfully routed
    over 58 million taxpayer telephone calls with 100 percent system
    uptime, providing 24x7 taxpayer access to the IRS for Filing Season
    2014. The IRS also maintains various technology components and
    processes that mitigated hundreds of cyber incidents and ensured the
    continued security posture of our systems, networks, computers and
    printers, including thwarting three serious cyber threats (e.g.,
    ``Heart-bleed'', Microsoft Word and Microsoft Internet Explorer) during
    peak tax processing season.
        Readiness activities to prepare the IRS's labyrinth of IT systems
    and processes for Filing Season 2014 included identifying and training
    IT specialists to implement world class system end-to-end monitoring,
    control room 24x7 coverage, and enhanced incident management to support
    filing season execution. Modernized systems using new technologies were
    developed and successfully deployed in Filing Season 2014, and hundreds
    of programming changes were made to our core systems, updating them to
    incorporate changing tax law. Updates to infrastructure configurations
    and upgrades to hundreds of computer hardware components, software
    applications, databases, operating systems, networks, communication
    devices, and procedures were necessary for smooth execution and
    protection from hackers and intruders. Systems Acceptability Testing
    (SAT) and Final Integration Testing (FIT) was completed for 133
    projects, including execution of 62,000 test cases to provide assurance
    of a successful launch.
        A Processing Year Delivery Assurance Executive and program
    management office provided leadership over the Filing Season 2014
    activities within the IT organization, and over the many suppliers who
    assumed responsibilities in development and execution. An integrated
    Filing Season 2014 governance framework provided enterprise risk and
    readiness assessments to address and mitigate every issue. Filing
    Season readiness standard operating procedures were followed, with
    weekly and then daily operational meetings across the breadth and depth
    of the enterprise using red/yellow/green reporting for each critical
    system. Readiness certifications were required at all levels of the
    organization to signify readiness and ensure stakeholder accountability
    in execution.
        Operational results in Filing Season 2014 show many successes and
    significant improvements over Filing Season 2013:

      --Priority One incidents were down 42 percent from previous Filing
            Season.
      --Modernized e-File (MeF) system had one of the best filing seasons
            on record, enabling taxpayers to electronically submit over 221
            million individual returns along with over 12.5 million
            Business Master File returns (as of 5/27/2014)--an increase of
            3.08 percent for submitted returns compared to the same period
            in 2013.
      --CADE 2 had a smooth filing season launch of its core processing
            systems in Filing Season 2014 and continues to demonstrate full
            integration into Filing Season Operations.

        --CADE 2 database is feeding 16 downstream systems, and allowing
                over 50,000 Customer Service Representatives and other IRS
                users to view CADE 2 data.

      --IRS.gov enabled more taxpayers to avoid wait times on phones. With
            no interruption in service, usage on the Web site from 3/1-5/
            31/2014 includes 595 million IRS.gov page views and 143.2
            million Web site visits.
      --``Where's My Refund'' inquiries using IRS.gov equated to 6.7
            million page views and 5.8 million site visits from 3/1-5/31/
            2014.
      --The ``Get Transcript'' application delivered over 11 million
            transcripts to taxpayers and IRS customers from 1/13-5/28/2014,
            allowing them to view/print a PDF file of their transcript.
      --E-Services enhancements enabled State users to get copies of
            transcripts for individuals who are victims of ID Theft.
            Previously, only IRS employees could request these transcripts.
      --Enhancements to Enterprise eFax service (EEFax) increased the
            number of faxes that can be delivered to taxpayers at one time
            and reduce annual expenses for hardware, software and
            telecommunication lines.
      --New End to End (E2E) application and infrastructure monitoring and
            auto-ticketing enhanced operation of many Filing Season
            Critical Systems.
      --Enhancements to the Online Payment Agreement (OPA) program were
            successfully implemented in Filing Season 2014 making it easier
            for the online user to navigate the OPA Web page and establish
            installment agreements.

        Question. What ``best practices'' have emerged and been adopted
    from these recent IT program successes? What have proven to be the most
    significant barriers encountered to more common or frequent IT program
    successes?
        Answer. Many IT best practices have emerged from our successes at
    the IRS, particularly in the last few years when IRS executives,
    architects, engineers, and subject-matter experts have taken more of a
    lead role in program leadership, systems design, applications
    development, and systems integration. While many of the best practices
    are shared across various program management offices--enabled by
    sharing of toolkits, post-implementation reviews, and collaboration
    (cross-membership) among governance bodies, etc.--the following are
    best practices reported by the three specific program offices that
    reported their successes in the previous question above:
    Project #1: IRS.gov/Enterprise Portal

        The portal team used best practices such as:

      --Elastic Scalability.--A recent best practice that resulted in an IT
            program success was our use of elastic scalability on demand.
            This ``on-demand'' capability was successfully utilized to
            scale the ``Where's My Refund?'' application on a peak day by
            300 percent in a matter of hours. This approach is being
            successfully applied to business critical applications inside
            the IRS firewall for Filing Season 2015.
      --Overcoming Barriers.--One of the key barriers to adopting rapid
            cloud provisioning was overcome by striking a good balance
            between maintaining the stability of the applications and
            limiting the changes during filing season.
    Project #2: CADE 2
        With regard to best practices, CADE 2 was sponsored at the highest
    level . In 2009, the IRS Commissioner himself formally launched the
    CADE 2 program and each Commissioner since then has strongly endorsed
    it since its inception.
        CADE 2 has been managed under a delivery partner operating model,
    jointly led and governed by IRS executives across Information
    Technology and the technology industry. With the flexibility, to use
    critical pay and other authorities to recruit industry leaders and
    experts with a mix of knowledge in legacy and modernized systems,
    augmented by a small cadre of in-house subject matter experts, the
    program was staffed with the right mix of people.

      --CADE 2 established a governance model that includes an Executive
            Steering Committee with representation at the highest levels of
            the organizations; a Governance Board that has the expertise to
            enable them to make critical decisions and assume
            accountability for the outcome of the program; an Executive
            Oversight Team that meets regularly with accountability for
            day-to-day identification of risks and progress in addressing
            those risks across the program; and advisory councils that
            provide technical advice and subject matter expertise as
            needed.
      --The CADE 2 Program Management Office (PMO) serves with clear
            authority and lines of accountability assigned to the Business
            and IT delivery partners. This collaborative program management
            model was supplemented by high performing workshops early on in
            the program to develop techniques such as granted trust,
            generous listening, and rules of effective engagement, which
            has resulted in growing an in-house capability to manage
            complex systems using industry best practices that keeps
            decisionmaking on the side of the government.
      --The CADE 2 PMO produced four foundational documents that drive the
            program:

        --Program Charter describes who we are--mission, goals, operating
                principles;
        --SolutionsArchitecture documents where we are now and where we are
                going--aligned with agency architecture;
        --Program Roadmap outlines how we are going to transition to target
                state; and
        --Program Management plan defines management principles, practices,
                and processes that will be used.

      --The program institutionalized a solid process around messaging to
            ensure open, accurate and consistent communication with regular
            report-outs to ensure full transparency and ongoing
            understanding of progress and risks on the program by all
            oversight bodies, audit agencies, agency top executive team,
            delivery and business partner executives, and stakeholders.
      --The CADE 2 PMO engaged people IRS-wide in an organizational
            readiness plan to support the new solution in order to gain
            maximum benefits and results. Many organizational readiness
            activities were conducted, such as training sessions on the new
            production process and how to address and resolve issues within
            a short timeframe, a control room staffed 24x7 with subject
            matter experts to provide production support, and formulation
            of special teams charged with driving testing to complete prior
            to deploying.

        Overcoming Barriers:

      --Previous barriers such as getting the business to the table to
            build requirements and own decisions along the way were
            mitigated through the comprehensive governance model.
      --Burden from audits and other oversight reporting requirements was
            mitigated by inviting the Treasury Inspector General for Tax
            Administration (TIGTA) and the Government Accountability Office
            (GAO) to partner with us throughout the full life-cycle of the
            program to address risks and building solutions to mitigate
            them in real-time.
      --Issues around funding were managed at the highest levels of the
            IRS, to get the resources that were needed in a timely manner
            to meet the program objectives.
      --Cultural issues around ``change'' and ``ownership'' were addressed
            by the CADE 2 program manager and other IRS executives
            encouraging shared commitment for the success of the program.
      --Individuals and work teams that previously worked with siloed
            knowledge of IRS systems were brought together to understand
            the ``big picture'' to effectively implement the CADE 2
            integrated solution.
      --The CADE 2 program manager and other IRS executives personally
            conducted workshops and coaching sessions using high
            performance communications techniques and contextual leadership
            to provide the vision and ``line of sight'' to break down silos
            and barriers within the IRS.
    Project #3: Filing Season 2014
        Many of the best practices used in other large IT programs have
    been adopted by the Filing Season Readiness program, including:

      --Right-sized governance bodies that included stakeholders from IT
            and business organizations that are at the appropriate level of
            their organizations where they can readily represent their
            organization's interest and make decisions.
      --Dedicated Filing Season program management office (called the
            Processing Year Delivery Assurance function) with lead
            executive that assumed point of accountability for success:

        --Enabled strengthened supplier management and engagement resulting
                in more tightly integrated incident and problem management.
        --Used various disciplines to promote data-based decisionmaking,
                such as Filing Season Readiness dashboards, and simulation/
                predictive modeling to project volumes and impacts.
        --Conducted regular preparatory meetings with all stakeholders,
                with accelerated frequency as filing season approached,
                where action items with tracked to completion.

      --Enhanced organizational readiness with tabletop exercises to help
            anticipate Filing Season operational organization and process
            issues.
      --Lessons Learned captured that resulted in over 250 recommendations
            for improvement/action in 31 areas:

        --Implemented IT Filing Season Readiness Framework--a repeatable
                process for cross-organizational management of readiness--
                including defining Filing Season Readiness SOP.
        --Created and validated a Control Room SOP based on experience and
                best practices that is now available to guide establishment
                of Control Rooms for other business systems.

      --Obstacles were overcome using aggressive risk mitigation framework:

        --Integrated risk and readiness assessments into the Filing Season
                delivery cadence, strengthening evidence-based
                decisionmaking capabilities.

        Question. Describe the progress being made in your agency on the
    transition to new, cutting-edge technologies and applications such as
    cloud, mobility, social networking, and so on. What progress has been
    made in the CloudFirst and ShareFirst initiatives?
        Answer. In 2010, Treasury was the first civilian agency to move key
    Web assets to a commercial cloud provider with the launch of
    Treasury.gov, as well as other Web sites. It has become the go-to
    solution for offices and Bureaus within Treasury needing to establish
    Web sites or Web applications, and it is poised to grow further.
    Treasury is also currently working to establish a private (Treasury)
    cloud infrastructure so that any application or data hosted by a
    Treasury bureau can quickly be migrated to the private cloud and be
    securely provisioned for use by Treasury's many constituencies.
        Treasury has a long history of being a shared services provider
    offering essential services (both business and technical) to
    constituencies both within and external to our Department. HR Connect
    is one of the six approved Federal Office of Personnel Management (OPM)
    Human Resource Lines of Business (HR LoB) Shared Service Centers
    providing HR-related services in the Federal Government. HR Connect
    currently services 22 entities, 6 of which have been fully integrated
    in the last 5 years. BPD's Administrative Resource Center (ARC) is
    recognized across government as a leader in multiple service lines. Of
    particular note, ARC is approved by OMB as a Center of Excellence for
    Financial Management and a public key infrastructure shared service
    provider. Additionally, ARC is designated as a Human Resource Line of
    Business Shared Service Center, through its partnership with Treasury's
    HR Connect, and recognized by the General Services Administration (GSA)
    as an Information Systems Security Line of Business Shared Service
    Center for Security Assessment services.
        Question. How does your agency implement acquisition strategies
    that involve each of the following: early collaboration with industry;
    Request for Proposals (RFP) with performance measures that tie to
    strategic performance objectives; and risk mitigation throughout the
    life of the contract?
        Answer. The Department of the Treasury strongly encourages early
    collaboration with industry to facilitate best meeting customer
    requirements through effective planning and contracting. As appropriate
    for the complexity and dollar value of a specific procurement,
    Contracting Officers may utilize one or more tools to facilitate early
    communications with industry, to include (but not be limited to)
    meetings with vendors, issue of a Request for Information (RFI), and/or
    hosting of a pre-solicitation conference or Industry Day. Collaborative
    actions most suitable to a requirement should be identified early in
    the acquisition process and addressed in the acquisition plan.
        In coordination with the internal customer (requiring activity),
    the Contracting Officer develops specific deliverables and metrics
    appropriate for the type, complexity, strategic objectives, and desired
    outcomes of each contract to ensure the best outcome for the
    Government.
        By focusing pre-award and post-award, we can help mitigate risk.
    Prior to issue of a solicitation and subsequent contract, the
    Contracting Officer works with the internal customer to ensure use of
    the most appropriate contract type, inclusion of appropriate internal
    controls and risk-mitigating strategy in the performance work statement
    and/or solicitation, and development of a comprehensive and effective
    plan for Government monitoring of contractor performance. These
    decisions and actions should be addressed in the acquisition plan for
    the specific procurement. After award of a contract, risk mitigation is
    achieved primarily through performance monitoring conducted by the
    Contracting Officer Representative (COR); immediate Government action
    on any unsatisfactory performance issues; and, a thorough review by the
    Contracting Officer prior to the exercise of any option on a multiple
    year contract to ensure that the Government's requirement remains
    unchanged and the vendor is performing in accordance with the contract.
        Question. According to the Office of Personnel Management, 46
    percent of the more than 80,000 Federal IT workers are 50 years of age
    or older, and more than 10 percent are 60 or older. Just 4 percent of
    the Federal IT workforce is under 30 years of age. Does your agency
    have such demographic imbalances? How is it addressing them? Does this
    create specific challenges for attracting and maintaining a workforce
    with skills in cutting-edge technologies? What initiatives are underway
    to build your technology workforce's capabilities?
        Answer. Treasury has similar demographic imbalances. In September
    2013, 3 percent of Treasury's IT workforce was under the age of 30
    versus 54 percent being over the age of 50 and 13 percent being over
    the age of 60. Over the last several years, Treasury has utilized
    buyouts as a method for addressing this imbalance in the workforce.
    Treasury uses the Pathways program, including internships, recent
    graduates, and the Presidential Management Fellows program as a method
    to build the technology workforce.
        It is Treasury's human capital vision to be widely recognized as an
    employer of choice and to employ an engaged workforce that sets the
    standard for excellence in the Federal Government. Treasury will
    develop and manage innovative human capital business practices that
    help supervisors/managers and employees deliver results--focused
    outcomes that support the strategic goals and objectives of the
    Department by improving workforce productivity, diversity, leadership
    effectiveness, and individual development.
        Question. What information does your agency collect on its IT and
    program management workforce? Please include, for example, details
    about current staffing versus future needs, development of the talent
    pipeline, special hiring authorities, and known knowledge gaps.
        Answer. Treasury's Office of the Chief Human Capital Officer (CHCO)
    is piloting a workforce-planning model that uses a guided inquiry
    approach to assist managers in evaluating their current workforce and
    to make projections regarding future workforce requirements. The
    approach relies on identification of staffing levels and competencies
    needed in the future; analysis of the present workforce; comparison of
    the present workforce to future workforce needs in order to identify
    gaps and surpluses; development of strategies for building the
    workforce needed in the future; and an evaluation process to assure
    that the workforce plan remains valid and that objectives are being met
    to ensure the long-term sustainability of the organization.
        Once the data is consolidated, it will be aggregated to create a
    strategic action plan that will be provided to the CIO and the CHCO for
    review and analysis of crosscutting issues. Such issues could result,
    for example, in the identification of opportunities to realign
    employees across bureaus or identify efficiencies that might be gained
    through restructuring, e.g., consolidating multiple bureau contracts
    into a single Department-wide contract.
        Treasury utilizes the Federal Acquisition Certification for Program
    and Project Managers (FAC-P/PM) program for its acquisition and project
    management workforce. FAC-P/PM tracks program and project managers'
    certifications and skills through training, experience, and other
    developmental activities related to acquisition and project management.
    Tracking of FAC-P/PM training and certification is done in the Federal
    Acquisition Institute Training Application System (FAITAS).
                                     ______

                   Questions Submitted to Hon. John Koskinen
                    Questions Submitted by Senator Tom Udall
                restoring irs streamlined critical pay authority
        Question. As part of the 1998 restructuring of the IRS, Congress
    authorized some special personnel flexibilities to help the IRS recruit
    and retain highly skilled employees with specialized expertise.
        ``Streamlined critical pay authority'' permits the IRS Commissioner
    to bring in up to 40 uniquely qualified experts for 4 year appointments
    to revitalize and enhance the IRS workforce.
        Use of the authority is permitted only under certain conditions:
    (1) the positions must require expertise of an extremely high level in
    an administrative, technical, or professional field and critical to the
    IRS's successful accomplishment of an important mission; and (2)
    exercise of the authority must be necessary to recruit or retain an
    individual exceptionally well-qualified for the position.
        The original authority had a 10 year sunset and was renewed in 2008
    for 5 additional years, but has now lapsed as of September 30, 2013.
    The President's fiscal year 2015 budget seeks language to reinstate the
    authority.
        How has the IRS used streamlined critical pay authority?
        Answer. The IRS has found streamlined critical pay (SCP) authority
    to be an enormously useful tool in recruiting top-tier talent,
    especially in helping us to recruit information technology experts from
    the private sector. The IRS used SCP authority to attract executives
    for high-demand Information Technology (IT) programs, as well as other
    specialized functions requiring state-of-the art skills and specialized
    expertise. SCP authority allowed the IRS to streamline the hiring
    process and offer additional incentives to high-level executives and
    technical experts needed for key positions. It was included in the
    Internal Revenue Service Restructuring and Reform Act of 1998 as a
    means of assisting the IRS in attracting private-sector experts to
    bring their knowledge and skills to the IRS for a period of time.
        Question. What types of positions has this authority enabled the
    IRS to fill?
        Answer. Currently, over 82 percent of SCP positions are related to
    IT areas, such as: systems architecture development, migration of new
    integrated processing systems, design and delivery of innovative Web
    capabilities and mobile applications, cybersecurity, risk management,
    infrastructure support, and Enterprise Portfolio Management.
        The IRS also used SCP authority to recruit for key positions
    outside the IT field which include: Director of the Office of
    Professional Responsibility/Standards of Tax Practice, Senior Advisor
    to the IRS Commissioner (Compliance Analytics Initiatives), Director of
    Compliance Analytics, Strategy and Implementation Program, and the
    Senior Technical Advisor to the Deputy Commissioner for Services and
    Enforcement.
        Question. What have been the benefits to the IRS and the public it
    serves?
        Answer. SCP authority enabled the IRS to meet the challenge of
    recruiting executives with certain high-demand skills. It has clearly
    helped to improve, modernize and secure the information technology
    capabilities of the IRS. Executives the IRS brought in under the SCP
    authority have significantly updated the core tax processing system,
    developed and implemented Modernized e-file systems, and implemented
    the Treasury Network (TNET). One of the best examples of the benefits
    achieved through use of SCP talent was the implementation of the
    Customer Account Data Engine, Transition State 1 (CADE TS1). CADE2 TS1
    changed a 50-year-old weekly batch cycle processing design into a daily
    processing system and moved the data of over 140 million taxpayers to
    an updated computer system. This achievement transformed the way the
    IRS serves our Nation's taxpayers by providing faster access to data
    and the ability to issue tax refunds more quickly.
        SCP Executives bring a talent that is highly complementary to the
    talent already on board within the IRS. This melding of career Federal
    Executives and expertise from the private sector has been instrumental
    in moving the IT organization to be world-class in the people process
    and technology areas. Another example of the success of this approach
    was demonstrated in January 2013 when the Government Accountability
    Office (GAO) removed the IRS Modernization from their Federal High-Risk
    Programs list. GAO acknowledged that the IRS took necessary steps to
    fix weaknesses by creating cross-functional working groups to fix at-
    risk control areas, improved the encryption of information transferred
    between accounting systems and upgraded the Cybersecurity of internal
    systems. Additionally, the IRS addressed its outdated operating system
    and application software, improved its auditing and monitoring
    capabilities of its general support system and tested its general
    ledger system for tax transactions in its current operating
    environment. These accomplishments were a direct result of the
    collaboration and leadership provided by a combination of Senior
    Executive Service (SES) and SCP Executives. Without this authority, the
    IRS's ability to successfully deliver critical functions is at risk.
        Question. What are your concerns if this now-expired authority is
    not renewed?
        Answer. Absent the SCP authority, the IRS's ability to attract and
    recruit individuals, especially in the IT field, who have current,
    relevant private-sector experience in successfully developing and
    delivering cutting edge projects and programs has been hampered
    significantly.
        The IRS utilized the SCP authority to not only meet its short and
    long range goals, but also to keep pace with the technological advances
    needed to provide world class services to America's taxpayers. Without
    SCP authority, the IRS's ability to perform certain vital functions
    will be hampered, including:
      --Ensuring the IRS has top talent required by components of the IRS
            mission that need cutting edge talent in technology;
      --Providing executive leadership for all highly complex, mission
            critical information systems that underpin our Nation's tax
            administration system;
      --Administering internal IRS systems, as well as driving changes for
            the interface of the IRS information systems with those of
            multiple external partners;
      --Applying state-of-the-art tools and industry best practices to
            implement robust programs to meet increased challenges of
            cybersecurity as the agency continues to make progress toward
            the goal of increasing use of the Internet as a primary means
            of taxpayer contact; and
      --Performing compliance analytics and implementing related strategy
            solutions, as well as administering and enforcing the
            regulations established for the legal and tax professional
            community.
              telephone level of service--enhanced online services
        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 IRS's capacity to
    respond 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 2013, IRS answered just 61 percent of its calls, and those
    who got through spent an average of nearly 17 minutes waiting on hold.
        What does the IRS consider to be an ``acceptable'' level of service
    for taxpayers calling for assistance on the toll-free phones?
        How will the funding increase of $137.3 million dollars in the
    IRS's fiscal year 2015 request help attain an acceptable level of
    service?
        What factors could impede the IRS from attaining its level of
    service goal of 71 percent for 2015?
        What setbacks might the IRS experience if resources in 2015 fall
    short of the request? What are the practical consequences of those
    setbacks for taxpayers?
        Answer. The IRS strives to provide high-quality service to as many
    taxpayers as possible, given limited resources. The agency develops
    telephone plans after consideration of many factors, including:
    historical demand adjusted for known anomalies; the types and
    anticipated lengths of calls we expect to receive; assumptions
    concerning upcoming events, such as known or pending legislation or
    trends in customer behavior; and the availability of existing or new
    automation and other alternative services. These plans are then matched
    with available or anticipated resources to determine the level of
    service (LOS) the IRS can provide. For instance, this year the lower
    than anticipated filing season demand was likely due to relatively few
    tax law changes and more people using IRS.gov to get answers to many
    basic tax law questions. As a result, the IRS expects to exceed its
    projected fiscal year 2014 LOS of 61 percent.
        The fiscal year 2015 budget request of $12.6 billion, including
    $165 million in additional investments through the Opportunity, Growth
    and Security Initiative, would allow the IRS to increase the projected
    LOS in fiscal year 2015 from 53 percent to 80 percent. The IRS expects
    to receive additional assistor telephone contacts related to the
    Affordable Care Act (ACA) in fiscal year 2015. Other factors, such as
    known or pending legislative changes, could also adversely affect the
    IRS's ability to deliver the planned LOS.
        Without the funding requested in the President's budget, we
    estimate the increase in demand will result in a 53 percent LOS. This
    means approximately five out of every 10 taxpayers who call the IRS for
    service would not get through to an assistor. Those who do get through
    will then be subjected to long wait times. Because of this
    extraordinarily low projected LOS, the IRS expects that a higher than
    normal number of taxpayers will call back when they are unable to reach
    an assistor. These additional callbacks or re-tries will further
    compound the strain on the IRS telephone systems and may drive the LOS
    even lower than the projected levels. Also, taxpayers abandoning the
    telephone lines will likely turn to walk-in services or send
    correspondence, straining other IRS service channels.
        Each year, taxpayers call the IRS for assistance expecting a prompt
    and accurate response to their questions. The IRS continually explores
    improvement opportunities to provide customers with easy access to
    accurate, user-friendly account services. Our objective is to
    proactively manage customer demand by improving contact center
    efficiency, referring customer demand to the most efficient service
    resource, and equipping the workforce with the tools to be productive.
    To continue to efficiently serve the maximum number of taxpayers
    possible, the IRS implemented the 2014 Service Approach to align
    taxpayer demand with the most cost-effective resource to provide the
    needed service. The 2014 Service Approach accomplished this by
    referring taxpayers to self-service resources, such as Where's My
    Refund and Get Transcripts via www.irs.gov while preserving telephone
    and in-person service for taxpayers that needed to speak to an
    assistor.
        In a recent report, the GAO identified some opportunities for the
    IRS to potentially realize hundreds of millions of dollars in cost
    savings and increased revenues. One such idea is by enhancing online
    and interactive Web services to improve service to taxpayers and
    encourage greater tax law compliance.
        Question. Commissioner Koskinen, is it your view that advancements
    to IRS online services would improve service to taxpayers and encourage
    greater tax law compliance?
        Answer. Yes, the easier it is for taxpayers to get the information
    they need, the more likely it is that taxpayers will be compliant and
    online services make it easier for taxpayers to get the information
    they need. Over the past few years, there has been a significant
    expansion in the use of IRS online services, such as Where's My Refund,
    to provide account information to taxpayers. For example, the Where's
    My Refund service had 136 million page views and 112 million site views
    via our IRS.gov Web site from January 11-April 17, 2014 and enabled
    millions of taxpayers to avoid the long wait times when calling the
    IRS. The IRS also offers several online options for tax law assistance
    on IRS.gov, such as the Interactive Tax Assistant, IRS tax
    publications, the IRS Tax Map, Tax Topics, and Frequently Asked
    Questions. Taxpayers can also download the IRS2Go application on an
    iPhone or Android device to interact with the IRS using their mobile
    device. The widespread usage of these various online options
    demonstrates that taxpayers have an appetite for expanded online
    capabilities.
        Question. What initiatives is the IRS currently undertaking or
    contemplating to make progress in enhancing online services?
        Answer. The IRS has recently launched several new applications,
    such as Direct Pay and Get Transcript, and we are working toward the
    creation of an interactive online account. This online account will
    serve as a platform for taxpayers to securely interact with the IRS to
    obtain historical tax return data, submit payments, and receive status
    updates. In addition to these new online tools, the IRS is working
    closely with external tax service providers (tax professionals, online
    service providers, transmitters, and third parties) to improve online
    service delivery to taxpayers.
        Question. What impediments prevent the IRS from doing more to
    improve online services for taxpayers?
        Answer. While the IRS has made great strides in improving online
    services, there are several impediments that slow the speed of
    development and deployment of new and improved services:
      --Budgetary/resource constraints;
      --Integrating online tools with legacy systems;
      --Policy/regulatory restrictions;
      --The need to protect privacy and prevent identity theft and fraud;
            and
      --Competing mandates, such as the filing season and the
            implementation of new legislation.

        Question. What resources would be required for the IRS to do more
    in this area?
        Answer. The President's fiscal year 2015 budget requested $23
    million within the Business Systems Modernization appropriation ($16.8
    million capital and $6.2 million labor) for the continued development
    of Online Services applications, which would improve service to
    taxpayers and encourage greater tax law compliance. Due to budget cuts
    in recent years, the IRS has had to do significant re-planning, across
    the board, to address the stark realities around our capability to
    deliver our strategic priorities, along with the significant
    legislative requirements to which we were committed.
        In addition, development of new online applications creates
    additional demand on our current IT infrastructure, which is already at
    risk due to inadequate funding needed to maintain, replace and upgrade
    the infrastructure. This additional demand threatens deployment of new
    capability and capacity upgrades needed to support the IRS's current
    business needs.
       volunteer income tax assistance (vita) services for small business
        Question. Almost all businesses (over 90 percent) start out as a
    sole proprietorship or as self-employed businesses. Unless incorporated
    or part of a partnership, self-employed business income is subject to
    taxation through calculations performed on ``Schedule C'' (or C-EZ).
    Each year, some 20 million self-employed businesses file a Schedule C
    or C-EZ. Schedule C is basically a one-page profit and loss statement
    that every business needs to understand.
        In August 2010, the IRS, in partnership with the National Community
    Tax Coalition and Self-Employed Tax Initiative, launched the Schedule C
    VITA Pilot for the 2011 tax season. This pilot, conducted at 12 sites,
    was designed to determine the feasibility of restructuring IRS policies
    governing low-income self-employment tax preparation at VITA sites.
        What were the findings of the Schedule C VITA pilots?
        Answer. In 2010, the IRS collaborated with the National Community
    Tax Coalition and Corporation for Enterprise Development to develop a
    Schedule C Pilot. The purpose of the pilot was to test the
    effectiveness of possibly expanding the parameters of Schedule C tax
    return preparation by Volunteer Income Tax Assistance (VITA)/Tax
    Counseling for the Elderly (TCE) programs.
        Currently, all VITA/TCE sites can provide basic income tax return
    preparation services to low to moderate income taxpayers who generally
    make $52,000 or less. These services include preparing Schedule C
    returns meeting the Schedule C-EZ $5,000 expense limitation (later
    increased to $10,000 for tax year 2013 returns). However, VITA/TCE
    sites cannot prepare a Schedule C-EZ or Schedule C return if:
      --operating results of the business was a loss for the tax year;
      --section 179 expense is claimed;
      --the business has inventory;
      --the business has employees;
      --the business operations on the accrual method of accounting; or
      --the taxpayer claims depreciation or vehicle expenses other than the
            standard mileage rate.

        The Schedule C pilot was limited to participating VITA sites. TCE
    sites did not participate in the pilot. The pilot allowed participating
    VITA sites to prepare returns with the following characteristics, as
    long as total business expenses did not exceed $25,000:
      --business losses confined to the current tax year;
      --business use of home by day care providers; and
      --section 179 expenses.

        The following table provides the results from the pilot for Tax
    Years 2010-2012.

                                          SCHEDULE C PILOT TAX YEARS 2010-2012
    ----------------------------------------------------------------------------------------------------------------
                                                                       Tax Year 2012   Tax Year 2011   Tax Year 2010
    ----------------------------------------------------------------------------------------------------------------
    Total Schedule C Returns prepared by all VITA/TCE sites                  196,349         195,020         184,853
     (including pilot returns)......................................
    Number of participating Schedule C pilot partners...............              16              16              12
    Number of participating Schedule C pilot sites..................              32              32              24
    Number of Schedule C pilot returns..............................           4,656           4,033           4,160
    Accuracy of Schedule C pilot returns \1\........................   Not available             90%           94.7%
    ----------------------------------------------------------------------------------------------------------------
    \1\ IRS employees conducted return reviews of 20 Schedule C pilot returns reviewing the accuracy of the returns'
      expenses and income. These reviews determined the accuracy of results.

        Question. What steps or initiatives can be taken to reach more of
    America's underserved business start-ups, many of whom have no place to
    turn for affordable and competent business tax preparation assistance?
        Answer. The IRS offers a wide range of products, tools and
    initiatives designed to assist business start-ups in understanding and
    meeting their Federal tax responsibilities. On IRS.gov, small
    businesses have access to valuable information and resources 24 hours a
    day, 7 days a week. For example, Small Business Taxes: The Virtual
    Workshop explains how to meet Federal tax obligations in nine easy-to-
    understand lessons. The IRS.gov Small Business Tax Center provides free
    educational products and services via numerous online resources
    including videos, Webinars, and multiple social media outlets. Small
    businesses can also subscribe to E-News for Small Businesses, an
    electronic newsletter with helpful information, including reminders and
    tips to assist small businesses with tax compliance. For example, for
    Small Business Week, May 12-16, 2014, the IRS provided the following:
      --Two informational Webinars for small business owners (which are
            archived on IRS.gov and available through the IRS Video
            Portal):
        --Payments to Independent Contractors.
        --Avoiding the Biggest Tax Mistakes.

      --Video that provides tour of the online Small Business Tax Center.

        The IRS provides E-News to almost 306,000 subscribers. E-News is
    also used to increase awareness of the tools and products available to
    small businesses. The IRS also provides on IRS.gov the Online Small
    Business Tax Calendar, with links to due dates and events to help small
    business owners meet tax deadlines.
        The IRS continues to develop and implement compliance assistance
    programs to assist business start-ups and improve their knowledge of
    the tax code. For example, when users apply for a new employer
    identification number (EIN) via IRS.gov, we provide a link to a one-
    stop resource, the Small Business Tax Center which is the small
    business/self-employed landing page on IRS.gov. We provide small
    business tax workshop training materials in English, Spanish and new
    for 2014, Chinese for our partners, such as SCORE (a nonprofit
    dedicated to helping small businesses succeed), Small Business
    Development Centers (SBDC), Latino Tax Professional Association, and
    many others (to use in presenting these workshops). We also identify
    small business issues for review by Federal advisory groups and
    implement approved recommendations. In 2013, Federal advisory groups
    (Internal Revenue Service Advisory Group, Information Reporting Program
    Advisory Committee, Taxpayer Advocacy Panel, and Electronic Tax
    Administration Advisory Committee) worked the following issues: Online
    Payment Agreements, Business Identity Theft, Decreasing Non-Filers, and
    Bankruptcy Compliance. Implemented recommendations include improvements
    to the Voluntary Classification Settlement Program (VCSP). The VCSP
    assisted thousands of small business owners in correctly making
    employee determinations. The above Federal advisory groups assisted
    with the IRS's implementation of the Fresh Start Initiative, which, for
    the first time, allows businesses to apply for streamlined installment
    agreements.
        The IRS routinely partners with agencies that interact with start-
    up businesses (e.g., State and local government agencies, local SCORE
    and SBDC) to place the IRS tax center links on their Web sites.
        The IRS has also developed outreach initiatives for new
    entrepreneurial businesses, including young entrepreneurs under the age
    of 30 who are starting new businesses in increasing numbers. These
    initiatives include establishing partnerships with entrepreneurial
    organizations that will include IRS information in their curriculum and
    publications, and will leverage our partnerships with schools/
    educational ventures that promote an entrepreneurial skill set to
    include how to develop a business plan, recordkeeping and other
    necessary skills to establish a successful and compliant business.
    During this fiscal year so far, we developed customized materials, such
    as Small Business Taxes--the Virtual Workshop, and coordinated small
    business key message delivery for over 162 small business forums
    reaching over 3,100 participants, including many new business owners.
    Through our leveraged partnerships with industry leaders, we have
    distributed materials to over 100 national, State, and local
    organizations via email distribution lists. Future plans include
    identifying and partnering with additional industry and business
    organizations and delivering more customized outreach materials.
        Question. Does the IRS plan to extend and expand the original pilot
    project more broadly to other VITA sites to reach more small
    businesses?
        Answer. The IRS is conducting an assessment of the Tax Year 2013
    Self-Employment Tax Initiative (SETI). The assessment includes
    evaluation of date and demographic/filing profiles of all VITA/TCE
    Schedule C filers, the accuracy of the Schedule C returns prepared
    under the program, and the quality of the training and certification
    test for VITA/TCE preparers participating in the program. We anticipate
    completing the assessment in August 2014.
                helping our middleclass entrepreneurs (home) act
        Question. Last year I introduced a bipartisan bill to help business
    owners who operate primarily out of their homes deal with the often-
    complicated process of filing income taxes. Under the current system,
    home-office business owners often struggle to calculate expenses,
    depreciation, and carryovers on their homes.
        The IRS has recently made claiming the home office deduction easier
    but that was not a permanent fix. I believe our Nation's entrepreneurs
    deserve the certainty of knowing that they can continue claiming the
    home office deduction without complicated bureaucratic red-tape. My
    proposal would allow business owners to take an optional standard
    deduction of $1,500 dollars.
        How have the recent changes affected the number of filers claiming
    the home office deduction?
        Answer. The Tax Year 2013 filing season, the first year that the
    Office in the Home (OIH) optional safe harbor method (as allowed by
    Revenue Procedure 2013-13, 2013-6 I.R.B. 478) was available, has not
    yet concluded (generally October 15 is the last day individuals can
    file with an extension). Given taxpayers taking an OIH deduction may
    have a more complex return, it is likely many OIH filers may still be
    on extension. Therefore, we do not have the complete information upon
    which to perform an analysis.
        Question. Is the IRS planning to make further improvements to
    claiming the home office deduction?
        Answer. As stated in response to question above, we do not have
    complete information upon which to make a determination on what
    improvements, if any, need to be made at this time. However, the
    regulations under Internal Revenue Code section 280A (relating to
    expenses in connection with business use of a home or rental of
    vacation homes) regarding deductions for expenses attributable to the
    business use of homes and rental of vacation homes is an item on the
    Treasury/IRS's Priority Guidance Plan. This guidance will be in
    addition to, but will not replace, the guidance provided under Revenue
    Procedure 2013-13.
                           general welfare exemption
        Question. I recently met with tribal leaders from across Indian
    Country to discuss economic development challenges and successes.
    During these discussions, tribal leaders raised concerns with the IRS
    audits of services to tribal members. In particular, several leaders
    expressed their frustration in working with the IRS as it develops
    clear and appropriate guidelines for tribal application of the General
    Welfare Exemption.
        For several years now, the IRS has been engaged in a consultation
    process with tribal leaders. Where in this consultation and guidance
    process is the IRS?
        Answer. In response to concerns raised by Indian tribal members in
    consultation with Treasury and the IRS, Notice 2012-75 and Revenue
    Procedure 2014-35 were issued to provide guidance and safe harbors for
    the general welfare exclusion to income. The Department of Treasury and
    the IRS issued the Notice in 2012 as interim guidance on which tribes
    could rely. The Notice addressed comments and concerns expressed by
    tribal leaders and others during previous consultation sessions and set
    forth a list of programs that would qualify under the general welfare
    exclusion to income. It also asked for comments prior to the guidance
    being issued in its final form. In all, over 120 comments were received
    and consultations were held, which were taken into account in preparing
    final guidance, Revenue Procedure 2014-35, which was issued on June 3,
    2014. Based on the submitted comments, we think the recently issued
    final guidance addresses the key questions raised by Indian tribes and
    organizations. Treasury and the IRS will continue communicating with
    Indian tribal representatives and organizations to ensure clarity in
    this and other areas of tax policy.
        Question. What does it expect the timeline going forward to be?
        Answer. The final guidance, Revenue Procedure 2014-35, was released
    June 3, 2014 and will be printed in the June 23, 2014 edition of the
    Internal Revenue Bulletin.
        Question. Additionally, does the IRS have a summary of the outreach
    efforts, including a list of the tribal entities consulted, that it has
    undertaken as part of this process that it can share with the
    committee?
        Answer. The IRS, through its Indian Tribal Governments Office, in
    conjunction with the Treasury point-of-contact for tribal matters, has
    made itself available, formally and informally, throughout the process.
    Representatives of the IRS and the Treasury Department consulted with
    tribal leaders and members of Indian tribes concerning application of
    the general welfare exclusion to programs of Indian tribal governments.
    In Notice 2011-94, 2011-49 I.R.B. 834, the IRS invited comments
    concerning the application of the general welfare exclusion to Indian
    tribal government programs that provide benefits to tribal members.
        The IRS received over 85 comments from Indian tribal governments
    and other individuals and groups describing various Indian tribal
    government programs for tribal members and how the general welfare
    exclusion should apply to those programs. In response to those
    comments, the IRS issued Notice 2012-75, 2012-51 I.R.B. 715, which
    proposed a revenue procedure that would provide safe harbors under
    which the IRS would conclusively presume that (i) the individual need
    requirement of the general welfare exclusion would be met for specific
    benefits provided under described Indian tribal governmental programs,
    and (ii) certain benefits an Indian tribal government provides under
    other described programs are not compensation for services. In response
    to Notice 2012-75, the IRS received over 40 comments from Indian tribal
    governments and other individuals and groups. The more than 120
    comments and consultations were very helpful in preparing Revenue
    Procedure 2014-35.
        Throughout the process, the IRS and Treasury engaged in face-to-
    face consultations that were open to the public. We also conducted
    call-in consultations in order to be available to individuals, tribes
    and organizations that were unable to travel. In addition to those
    formal consultation efforts, we met on an informal basis with Indian
    tribal leaders and organizations at various gatherings such as those
    conducted by the National Congress of American Indians (NCAI), the
    Native American Finance Officers Association (NAFOA), and the United
    South and Eastern Tribes (USET). Since December 2012, we have consulted
    with over 700 individuals, Indian tribes, and Indian tribal
    organizations.
        assisting victims of tax-related identity theft and refund fraud
        Question. The National Taxpayer Advocate has recommended that the
    Internal Revenue Service establish a meaningful single point of contact
    for taxpayers who become victims of identity theft. According to the
    Taxpayer Advocate, 21 separate units handle different aspects of
    identity theft and no employee has the authority to coordinate the
    entirety of the taxpayer/victim's case if, as is common, more than one
    of the 21 units is involved.
        What is the current process and timetable that a victim of tax-
    related identity theft or refund fraud experiences in resolving their
    case with the IRS and securing the refund to which they are entitled?
        Does the IRS agree with the Taxpayer Advocate's recommendation that
    the IRS should designate a single point of contact with an IRS staff
    representative to a victim of tax-related identity theft and/or refund
    fraud?
        What are the IRS's plans for adopting the single-point-of-contact
    recommendation?
        What are the impediments for instituting a process whereby a victim
    of identity theft and refund fraud is assigned a single point of
    contact within the IRS to guide the casework through the process to
    resolution?
        Answer. Refund fraud caused by identity theft is one of the biggest
    challenges facing the IRS today, and the harm it inflicts on innocent
    taxpayers is a problem we take very seriously. The IRS has a
    comprehensive and aggressive identity theft strategy focusing on
    preventing refund fraud, investigating these crimes, and assisting
    taxpayers victimized by identity theft. The IRS's Identity Protection
    Specialized Unit (IPSU) is critical to our efforts to assist identity
    theft victims. The IPSU provides taxpayers with a consolidated office
    to contact at the IRS via a distinct toll-free telephone line that
    specializes in identity theft victim assistance. Budgetary constraints
    do not allow for a single individual to be assigned to each victim of
    identity theft. In addition, specialized teams throughout the
    enterprise acknowledge identity theft claims and provide contact
    information. The point of contact may be an individual or group of
    individuals trained and able to provide the information on the victim's
    case.
        The IRS continues to explore opportunities to improve the services
    available to victims of identity theft and the time it takes to resolve
    their cases. In calendar year 2013, the IRS worked with victims to
    resolve and close approximately 963,000 cases, and the time for
    resolving these cases is decreasing. During the past fiscal year,
    taxpayers who became identity theft victims had their situation
    resolved in roughly 120 days, far more quickly than in previous years,
    when cases could take over 300 days to resolve.
        The IRS recently proposed further centralization of identity theft
    victim casework in the Wages and Investment (W&I) Division in May 2014.
    If adopted, the proposal would position W&I as wholly responsible for
    all identify theft victim assistance work. By further centralizing this
    function, we anticipated that service to victims of identity theft will
    continue to improve. While budgetary and resource constraints do not
    allow a single individual point of contact from receipt of the claim
    through determination and/or account resolution, the centralized W&I
    process will serve victims more timely and completely by ensuring
    consistency of the processes.
     processing of applications for tax exempt status under i.r.c. section
                                   501(c)(4)
        Question. In May 2013, the Treasury Inspector General for Tax
    Administration published audit findings delineating the use of
    inappropriate case screening criteria in IRS's processing of
    applications for tax-exempt status under section 501(c)(4) of the Tax
    Code. I have long supported the need to make meaningful changes to
    ensure that the rules to qualify for tax-exempt status are abundantly
    clear. It is 100 percent unacceptable for the IRS to ever unevenly
    enforce rules based on ideology, politics, or other bases.
        In June 2013, the IRS initiated a new process whereby certain
    taxpayers whose applications for section 501(c)(4) tax-exempt status as
    a social welfare organization have the option of obtaining an approval
    if they self-certify that they will meet certain guidelines. An
    organization is permitted to self-certify if they represent that the
    organization devotes 60 percent or more of both spending and time to
    activities that promote social welfare as defined by section 501(c)(4),
    that the organization devotes less than 40 percent of both spending and
    time to political campaign intervention, and that the organization
    ensures the above thresholds apply for past, current and future
    activities.
        Initially, optional expedited processing was offered to 501(c)(4)
    applicants whose applications had been pending for more than 120 days
    as of May 28, 2013. This applied to organizations whose showed
    potential involvement in political campaign involvement or issue
    advocacy, and did not present any private inurement issues. In guidance
    issued in December 2013, the IRS extended the optional expedited
    processing to all 501(c)(4) applicants whose applications indicate that
    the organization may be involved in political campaign intervention or
    in providing private benefit to a political party and that otherwise do
    not present any issue with regard to exempt status.
        What benefits are available to an organization by securing tax-
    exempt status approval from the IRS through either the traditional
    application process or the self-certification process?
        Answer. Organizations that have received a determination letter
    from the Internal Revenue Service stating that they are described in
    section 501(c)(4) of the Code, as well as those that hold themselves
    out as described in section 501(c)(4), can claim exemption from Federal
    income tax (other than tax on unrelated business income).
        An organization that has received a determination letter is
    entitled to rely upon that determination, provided there is no relevant
    change in the applicable law and the organization did not omit or
    misstate material information or operate in a manner materially
    different from that originally represented in its exemption application
    (and, in the case of participants in the optional expedite process,
    from the signed representations). If the organization is later examined
    by the IRS, this reliance limits the retroactive application of a
    revocation.
        Organizations that have not received a determination letter do not
    have the protection against retroactive revocation of their exempt
    status that such a letter can afford.
        Question. May an organization operate as 501(c)(4), including
    publicly describing itself as a 501(c)(4) organization, without having
    to apply for or receive formal approval from the IRS?
        Answer. Yes. An organization that meets the requirements of
    exemption under section 501(c)(4) may operate as such without applying
    for recognition of that status by the Internal Revenue Service. Such an
    organization must comply with the requirements of tax-exempt status
    each taxable year in order to be tax-exempt during that year. In
    addition, if a section 501(c)(4) organization does not file the annual
    return or notice it is required to file (Form 990, Form 990-EZ or the
    Form 990-N e-Postcard) for three consecutive years, its tax-exempt
    status is automatically revoked as of the due date for the third annual
    return or notice.
        Question. In each of the past 3 tax years, of the total number of
    organizations filing an annual Form 990 and claiming section 501(c)(4)
    status, what proportion have been formally granted such status through
    a favorable determination letter or other written approval issued by
    the IRS?
        Answer. In fiscal year 2010, 72,693 organizations claiming
    501(c)(4) status filed annual Forms 990, of which 7,065, or 10 percent
    were from organizations whose status as 501(c)(4) organizations
    formally had been approved by the IRS. In fiscal year 2011, 69,255
    organizations claiming 501(c)(4) status filed annual Forms 990, of
    which 7,815, or 11 percent were from organizations whose status as
    501(c)(4) organizations formally had been approved by the IRS. In
    fiscal year 2012, 71,643 organizations claiming 501(c)(4) status filed
    annual Forms 990, of which 9,185, or 13 percent were from organizations
    whose status as 501(c)(4) organizations formally had been approved by
    the IRS.
                                     ______

                Questions Submitted by Senator Richard J. Durbin
        Question. A proposal requiring the Secretary of Treasury to enter
    into contracts with private collection agencies (PCAs) to collect
    Federal taxes is included in sec. 6304 of the draft ``Tax Reform Act of
    2014'' introduced by Chairman Camp, as well as in sec. 305 of S. 2260,
    the ``Expiring Provisions Improvement Reform and Efficiency (EXPIRE)
    Act'' now pending in the Senate.
        What was the result of a similar initiative that was in effect from
    2006 to 2009?
        Answer. The Government lost money as a result of the PCA initiative
    in effect from September 2006 to February 2009. During the previous
    initiative, the IRS assigned balance due accounts with the lowest
    priority to PCAs for collection. Assigning these cases to PCAs resulted
    in collections of $98.2 million in revenue, $63.4 million of which was
    remitted to the Treasury, with the PCAs receiving $16.5 million and the
    IRS retaining $18.3 million. However, the IRS incurred direct costs of
    $30.7 million to administer the program. We therefore absorbed the
    difference of $12.4 million out of appropriated funds. The $30.7
    million also does not include start-up costs of approximately $55.4
    million for business and information technology development. Thus, the
    IRS spent $67.8 million of appropriated funds on this initiative, which
    exceeded the $63.4 million that was remitted to the Treasury, resulting
    in a $4.4 million loss to the Government.
        In addition, during the previous initiative, taxpayers were not
    entitled to the same protections when PCAs attempted to collect tax
    debts as they are when the IRS is collecting the debt. For example, the
    IRS is required to make our processes and procedures public, which we
    do by issuing the Internal Revenue Manual (IRM). PCAs are not required
    to make their processes public, nor are they required to follow the
    IRM. During the 2006 to 2009 initiative, some PCAs were accused of
    using aggressive collection practices, such as exerting psychological
    pressure, on taxpayers. These practices are prohibited by the IRM and
    IRS employees can be fired for using them.
        Question. Is it true that the IRS currently has the authority to
    use PCAs, but has chosen not to use that authority? Why?
        Answer. Yes, section 6306 of the Internal Revenue Code, which was
    added to the Code in 2004, permits, but does not require, the Secretary
    to enter into a ``qualified tax collection contract.'' The 2006 to 2009
    initiative was undertaken pursuant to this authority. The IRS has not
    undertaken to exercise this authority since 2009 because of revenue
    outcomes, taxpayer service and cost effectiveness.
        The 2006-2009 initiative lost revenue, taking all activities into
    account. Additionally, the PCAs do not provide the same protections to
    taxpayers from aggressive collection practices and anecdotal evidence
    suggested some taxpayers were being subjected to aggressive collection
    practices by at least some PCAs. Further, the results of an internal
    cost-effectiveness study of the 2006-2009 Private Debt Collection
    program, which was published in March 2009, showed that when working
    similar inventory, collection efforts are more cost-effective using IRS
    employees rather than outside contractors. IRS employees also have a
    much wider range of options available to them to resolve difficult
    collection cases. This internal study was supported by an independent
    review.
        Question. What are your agencies' positions on the proposal to
    require Treasury to use PCAs to collect Federal taxes?
        Answer. The IRS has administrative and policy concerns with the
    proposal and does not support it. Requiring the IRS to use PCAs would
    impose significant start-up costs on the IRS to evaluate PCAs and enter
    into qualified tax collection contracts, and additional costs to
    monitor the PCAs' collection activities. Because the proposal does not
    provide additional funding for the IRS, these costs would decrease the
    funds available to the IRS for other priorities, including its ongoing
    enforcement activities. Moreover, previous experience with PCAs has
    taught us that the IRS has a much higher return on investment than
    PCAs, making this proposal a less effective use of taxpayer dollars.
    The proposal also does not provide the IRS with sufficient discretion
    on the types of cases that should be referred to PCAs. For example, the
    proposal does not exclude cases where collection could result in
    economic hardship to the taxpayer.
        Additionally, the proposal does not protect taxpayers from certain
    aggressive collection practices employed by at least some PCAs, but
    prohibited by IRS processes and procedures. Further, a comprehensive
    review shows that IRS collection practices are more cost effective than
    PCAs. Thus, more revenue would be generated and taxpayers would receive
    better service if Congress would provide additional funding for IRS
    collection activities, not by diminishing our already limited resources
    to implement another PCA initiative.
        Question. What impact could this requirement to use PCAs to collect
    Federal taxes have on taxpayers, specifically low-income taxpayers?
        Answer. The IRS did not study the impact PCA use had on taxpayers
    generally or low-income taxpayers specifically in connection with the
    PCA legislation in the American Jobs Creation Act; however, when we
    decided not to continue with the PCA initiative in 2009, we were aware
    of taxpayer complaints that at least some PCAs had used overly
    aggressive collection practices (for example, intimidation, harassment,
    or violation of taxpayers' rights, the Fair Debt Collection Practices
    Act, or the Privacy Act). Additionally, our most recent analysis of the
    potential impact of assigning all inactive cases to PCAs, based on data
    we extracted on April 28, 2014, estimates that 79 percent of
    individuals in 2013 and 77 percent of individuals in 2014 who had
    inactive delinquent accounts had an adjusted gross income less than 250
    percent of poverty level.
        We also are concerned that the use of PCAs could result (1) in
    economic hardship for taxpayers who have an outstanding tax liability
    that they cannot currently afford to pay in full, and (2) in a
    reduction in future voluntary compliance by taxpayers who are subjected
    to overly aggressive collection activities by PCAs. And, unlike the
    IRS, PCAs have no incentive to engage in taxpayer outreach and
    education, which is particularly beneficial to low-income taxpayers and
    other underserved populations and which may help promote future tax
    compliance.
                                     ______

                  Questions Submitted by Senator Mike Johanns
        Question. To what extent and how could the IRS use social security
    numbers as an enforcement tool to reduce improper payments to filers
    receiving payments because of a claim made pursuant to a refundable tax
    credit?
        Answer. There are numerous refundable credits currently
    administered by the IRS, including the Earned Income Tax Credit (EITC),
    the Additional Child Tax Credit (ACTC) and the American Opportunity Tax
    Credit (AOTC). The IRS has a dual mission when it is administering
    refundable credits. We must balance ensuring that those who qualify
    claim and receive the credit with ensuring that the money goes only to
    those eligible to receive it.
        When the law requires a valid Social Security Number (SSN) for a
    refundable credit, the IRS uses its current math error authority to
    prevent improper payments during return processing. However, a valid
    SSN is not a requirement for all refundable credits. Current law does
    not require the taxpayer or a qualifying child to have an SSN to be
    eligible to receive the Child Tax Credit (CTC), ACTC or AOTC. For those
    credits, the taxpayer and each qualifying child are only required to
    have a taxpayer identification number (TIN). For this purpose, a TIN
    can be an individual taxpayer identification number (ITIN).
        An individual is eligible to obtain an ITIN only if the individual
    is ineligible to obtain an SSN and requires a number for Federal tax
    purposes. This means that current law does not prohibit a resident
    alien, who does not have an SSN, from being eligible to claim the CTC/
    ACTC or AOTC.
        In addition to the SSN issue, the rules for children for EITC and
    CTC/ACTC are also not consistent. There is no uniform definition of a
    qualifying child that would make it easier for taxpayers to understand
    and claim the credits (if they are eligible) and avoid errors, and for
    the IRS to administer the credits. The age, residency, and support
    requirements for children, as well as rules for divorced or separated
    parents, under these provisions vary.
        Another challenge faced by the IRS is the inability to correct
    clear errors related to refundable credits. Providing the IRS with
    correctable error authority, a proposal included in the General
    Explanations of the Administration's fiscal year 2015 Revenue Proposals
    (the ``Greenbook''), would allow us to correct clear errors without
    lengthy and expensive audits if:
      --the information provided by the taxpayer does not match the
            information contained in a Government database;
      --the taxpayer has exceeded the lifetime limit for claiming a
            deduction or credit; or
      --the taxpayer has failed to include with his/her return
            documentation required by statute.

        Through existing math error authority, the IRS protects almost $300
    million in EITC refund claims annually; however, we believe that
    correctable error authority would greatly improve our efforts in this
    area.
        Question. At the hearing on April 30, 2014, you mentioned that
    applicants for 501(c)(4) status that certify that no more than 40
    percent of their resources would be devoted to political activity would
    be granted the status sought.
        In response to a question from Senator Udall, you noted that

            ``. . . if you will simply state and affirm that you are not
            going to spend more than 40 percent of your resources and
            revenues on 8 political activities, you could, in fact, pass
            through.''

        Are you concerned that applicants that may not so certify will be
    subject to additional scrutiny despite being well within their legal
    rights to claim the status?
        Answer. We have taken steps to ensure that we provide uniform and
    fair treatment to organizations that choose not to use the optional
    expedited process. We have done this by issuing written procedures that
    now guide the processing of all such applications. In brief, our
    procedures provide that any issues presented by these applications will
    be analyzed as quickly as possible under current law. The specific
    procedures are set forth in Interim Guidance Memo TEGE-07-0613-08 (June
    25, 2013), as amended by Interim Guidance Memo TEGE-07-0713-12 (July
    18, 2013), and in Interim Guidance Memo TEGE-07-1213-24 (December 23,
    2013), all of which are available in the electronic reading room at
    IRS.gov.
        Further, on May 19, 2014, we issued Interim Guidance Memo TEGE-07-
    0514-0012 (also available in the electronic reading room at IRS.gov).
    This memo provides that an organization--including organizations
    eligible for the optional expedited process--that receives a proposed
    adverse determination letter will have the right to request the Office
    of Appeals to review its application for recognition of tax-exempt
    status.
        Additionally, we have closed 130 cases in the original backlog
    (nearly 90 percent of the total), as of April 18, 2014. Ninety-nine of
    these cases received favorable determination letters, including 56
    applicants that chose not to participate in the optional expedited
    process.
        Question. What rationale, if any, did the IRS use in its selection
    of the 40 percent threshold?
        Answer. The IRS selected the 40 percent threshold to balance
    reasonable standards for a safe harbor with appropriate use of
    resources for tax administration.
        Question. Please provide an update regarding the IRS' multi-year
    agreement with the free-file alliance, including the IRS' intent to
    conclude a new agreement or otherwise continue the program.
        Answer. In February 2014, IRS leadership met with the leaders of
    Free File, Incorporated (FFI), formerly known as the Free File
    Alliance, to discuss a 1-year extension of the expiring Memorandum of
    Understanding (MOU) to allow time for negotiations on a new multi-year
    Agreement/MOU. The extension was signed on May 2, 2014 and is valid
    from October 30, 2014, to October 30, 2015.
        The 1-year extension agreement includes specific language that a
    full renegotiation of the 5 year Agreement/MOU will begin in June 2014
    with a goal to conclude those negotiations by December 2014 and enter
    into a new multi-year Agreement/MOU before the expiration of the 1-year
    extension on October 30, 2015. FFI has played a key role in the IRS's
    strategy for growing e-file. The 1-year extension provides the IRS and
    FFI time to shape a longer term agreement to include innovations to the
    12-year-old Free File program.
        Question. In your testimony, you mentioned the need to ``. . . move
    the receipt for W-2s to the IRS from mid-March to the end of January.''
    Have you made this request in pursuit of the capacity within the IRS to
    prepare returns or portions of returns for filers?
        Answer. No, the IRS is not pursuing and has no plans to implement a
    system to create pre-filled forms or software/products for simple tax
    return preparation.
        During my testimony, I referenced the administration's fiscal year
    2015 Revenue Proposal ``Rationalize Tax Return Filing Due Dates So They
    Are Staggered.'' This proposal would require information returns to be
    filed with the IRS (or Social Security Administration, in the case of
    Form W-2) by January 31. Accelerating the IRS's receipt of third-party
    information will facilitate detection of non-compliance earlier in the
    filing season and allow the IRS to address identity theft and refund
    fraud more effectively before refunds are paid.
                                     ______

                   Questions Submitted by Senator Jerry Moran
        Question. Describe the role of your agency's Chief Information
    Officer (CIO) in the oversight of IT purchases. How is the CIO involved
    in the decision to make an IT purchase, determine its scope, oversee
    its contract, and oversee the product's continued operation and
    maintenance?
        Answer. The IRS Chief Technology Officer (CTO) has the authority to
    govern all areas related to information resources and technology
    management, including acquisition of information technology (IT) and
    the management of information resources. The CTO has management and
    oversight responsibility for both the IT organizational functions and
    the evaluation, selection and management of vendors, ensuring that the
    goods and services received not only align with, but can help drive
    forward, the critical operational and information technology (IT)
    priorities of the business strategy.
        This responsibility combines a thorough knowledge of the Federal
    acquisition system and a deep understanding of the dynamic commercial
    IT marketplace. The Vendor Management Organization (VMO), which is
    under the authority of the CTO, is solely focused on this activity and
    has a straightforward mission--to maximize IT investments. This is
    accomplished by developing a set of repeatable, sustainable processes
    with goals that focus on:
      --Achieving greater transparency around organizational structures,
            roles, and responsibilities to ensure accountability and limit
            ``surprises'';
      --Committing more time and energy to limit supplier advantage, e.g.,
            through competitive bidding processes, market research on
            rates, and internal staff training;
      --Cultivating existing vendor relationships that drive value by
            effectively managing the vendor throughout the contract
            lifecycle, from sourcing and selecting the vendor, to
            establishing contracts, purchasing and managing payments;
      --Maintaining focus on value delivery by making sure that the
            benefits promised are the beginning of a project or investment
            are delivered; and
      --Managing spending to create visibility that enables repeatable
            savings opportunities.

        The CTO also has a well-established IT Governance structure to
    align IT with business strategy and to ensure that investments stay on
    track to achieve our strategies and goals, with measures to monitor
    performance.
        The Infrastructure Executive Steering Committee (IESC) within the
    CTO organization ensures that project objectives are met, risks are
    managed appropriately, and the expenditure of IRS resources is fiscally
    sound. The CTO has also established an Enterprise Software Governance
    Board (ESGB) to develop a standardized approach to software acquisition
    management practices. An ESGB working group is also in place to gather
    and document existing software acquisition processes, document a
    proposed software lifecycle, gather software usage metrics, and
    evaluate and recommend a software asset/license management tool, all of
    which will identify installed software products, match products to
    licenses and confirm compliance status of those products. This
    governance ensures that all stakeholders' interests are taken into
    account and that processes provide measurable results.
        Question. Describe the existing authorities, organizational
    structure, and reporting relationship of the IRS Chief Information
    Officer. Note and explain any variance from that prescribed in the
    Information Technology Management Reform Act of 1996 (aka, The Clinger-
    Cohen Act) for the above.
        Answer. Pursuant to Delegation Order 2-1 (formerly DO-261, Rev. 1),
    Internal Revenue Manual Section 1.2.41.2 (08-17-2000), the IRS
    Commissioner gives the IRS CTO authority to govern all areas related to
    information resources and technology management, and authority to
    perform those functions that the Commissioner is authorized to perform
    having Servicewide impact and relating to, or concerning, the
    acquisition of information technology (IT) and the management of
    information resources, other than the duties delegated to the Assistant
    Commissioner (Procurement).
        With regard to organizational structure and reporting relationship,
    under Internal Revenue Manual Section 1.1.12.1 (05-19-2012), the IRS
    CTO is accountable to the Commissioner of the IRS to lead the IT
    organization. While the CTO performs and is accountable to the
    Commissioner as outlined in the IRM and in accordance with the
    Information Technology Reform Act of 1996 (Clinger Cohen Act), the CTO
    also has line reporting to the Deputy Commissioner for Operations
    Support, along with the Chief Officers, i.e., Chief Financial Officer;
    Human Capital Officer; Chief, Agency-wide Shared Services; and
    Director, Privacy, Governmental Liaison and Disclosure. This enables
    collaboration and alignment among the Chief Officers in building a
    strategic foundation for organizational excellence. This strategic
    foundation is critical in delivering the IRS's objectives and goals
    outlined in the IRS strategic plan.
        There are no variances from the requirements of the Information
    Technology Management Reform Act of 1996 (aka, the Clinger-Cohen Act).
    Following are charts that show organizational structure:

        Question. What formal or informal mechanisms exist in your agency
    to ensure coordination and alignment within the CXO \1\ community
    (i.e., the Chief Information Officer, the Chief Acquisition Officer,
    the Chief Finance Officer, the Chief Human Capital Officer, and so on)?
    How does that alignment flow down to agency subcomponents?
    ---------------------------------------------------------------------------
        \1\ The CXO Community is a peer-to-peer community exclusively for
    C-Level executives (CEO, COO, CPO, CFO, CIO, CTO, CKO, CMO, CAO, CVO,
    CRO, CLO, CSO, CDO, President, Chairman and MD).
    ---------------------------------------------------------------------------
        Answer. The Commissioner chairs an agency Senior Executive Team
    (SET) meeting monthly. It includes the Deputy Commissioner for Services
    and Enforcement (DCSE), Deputy Commissioner for Operations Support
    (DCOS), and Functional Operating Division Chiefs and their deputies,
    including the entire CXO community. The SET meetings are designed to
    ensure top-level strategies and policies are driven down into the
    organization with consistency, and to enable coordination and alignment
    on enterprise and cross-organizational initiatives, risks, and current
    events facing the agency.
        The DCOS also meets each week with her direct team, which includes
    CXO community chiefs. These meetings are conducted to build a
    collaborative community of leaders under the DCOS to ensure
    coordination and alignment as a strategic foundation for organizational
    excellence and in delivering on the objectives and goals outlined in
    the IRS strategic plan. Cross-organizational strategies and priority
    initiatives are discussed, organizational risks, impacts, and
    mitigation strategies are brought to the table for discussion,
    administrative requirements and recent items of significance are
    shared, and general updates on current events are covered during these
    meetings.
        DCOS also holds working sessions with the CXO community several
    times a year. These sessions are designed to build and gain alignment
    on various themes/strategies that require concerted time, deeper
    thinking and cross-coordination among the team members. Subject matter
    discussed in these meetings is usually specialized and high priority
    with potentially large impacts on the CXO community and the entire IRS.
        DCOS conducts quarterly Business Process Reviews (BPRs) with each
    of the individual organizations within the CXO community. These reviews
    enable the DCOS to get a comprehensive update on high-priority programs
    and initiatives, to review program results and performance measures,
    and to drive down guidance and preferences in managing various aspects
    of the programs. Action items are noted in BPRs and implemented with
    follow-up reporting at subsequent meetings.
        Actions, initiatives, and messaging from the above framework of
    meetings are driven down within the CXO community through weekly senior
    staff meetings and numerous working groups. The senior staff, in turn,
    drives any formal guidance and direction down through their
    organizations as part of their direct reports meetings, functional area
    reviews, and communications strategies. Ongoing functional
    responsibilities that need cross-organizational coordination and
    alignment among CXO community organizations and beyond are handled with
    an additional level of structure via governance boards and working
    groups.
        Question. How much of the agency's budget goes to Demonstration,
    Modernization, and Enhancement of IT systems as opposed to supporting
    existing and ongoing programs and infrastructure? How has this changed
    in the last 5 years?
        Answer. The Chart below depicts the IRS spending for Development,
    Modernization, and Enhancement (DME) and Operations and Maintenance
    (O&M) for the past 5 years. The trend shows higher spending in DME and
    less O&M. Due to the IRS's budget cuts for the past several years,
    decreased spending in O&M has created a critical need to invest in the
    aging IT infrastructure. Inadequate spending to replace and maintain
    the IT infrastructure will not only increase maintenance costs, system
    downtime, and availability, but threatens deployment of new capability
    and capacity upgrades needed to support operational resiliency and
    security. This creates risk for disaster recovery, information security
    and encryption.
        The fiscal year 2015 Budget Request reflects the IRS's plan to
    increase investment in infrastructure, causing a deviation from the
    downward spending trend. If sufficient funding is provided in fiscal
    year 2015, we expect to get back on track with a higher allocation of
    our budget in DME in the out years.

                                               [Dollars are in thousands]
    ----------------------------------------------------------------------------------------------------------------
                                                                  O&M        DME       Total      DME %      O&M %
    ----------------------------------------------------------------------------------------------------------------
    2011 Actual..............................................  1,960,391    428,262  2,388,653      17.93      82.07
    2012 Actual..............................................  1,807,405    679,898  2,487,303      27.33      72.67
    2013 Actual..............................................  1,652,447    632,382  2,284,829      27.68      72.32
    2014 Enacted.............................................  1,684,867    668,733  2,353,600      28.41      71.59
    2015 Request.............................................  2,104,831    650,225  2,755,056      23.60      76.40
    ----------------------------------------------------------------------------------------------------------------

        In 2011, IRS spent 18 percent of its total budget on DME. Since
    2011, DME spending has increased to approximately 28 percent of IRS IT
    spending due to legislated programs and decreasing budgets. In 2015,
    assuming above the budget cap funding is provided, this percentage will
    decrease to 24 percent to accommodate the need to invest in IT
    Infrastructure.

                                               [Dollars are in thousands]
    ----------------------------------------------------------------------------------------------------------------
                                                                  O&M        DME       Total      DME %      O&M %
    ----------------------------------------------------------------------------------------------------------------
    2015 Request.............................................  2,104,831    650,225  2,755,056      23.60      76.40
    2014 Enacted.............................................  1,684,867    668,733  2,353,600      28.41      71.59
    2013 Actual..............................................  1,652,447    632,382  2,284,829      27.68      72.32
    2012 Actual..............................................  1,807,405    679,898  2,487,303      27.33      72.67
    2011 Actual..............................................  1,960,391    428,262  2,388,653      17.93      82.07
    ----------------------------------------------------------------------------------------------------------------

        In 2011, IRS spent 18 percent of its total budget on DME. Since
    2011, DME spending has increased to approximately 27 percent of IRS IT
    spending due to legislated programs and decreasing budgets. In 2015,
    assuming above the budget cap funding is provided, this percentage will
    decrease to 24 percent to accommodate the need to invest in IT
    Infrastructure.

        Note: Above includes all IT funds, including ACA activity.

        Question. Where and how is the IRS taking advantage of this
    administration's ``shared services'' initiative? How do you identify
    and utilize existing capabilities elsewhere in government or industry
    as opposed to recreating them internally?
        Answer. The IRS has actively participated in the Federal Government
    Shared Services initiative over the past several years. Currently the
    IRS primarily utilizes Federal Government shared services through the
    Treasury Franchise Fund (TFF) that is supervised and managed by the
    Department of the Treasury. The fiscal year 2014 estimate for the IRS
    shared services provided by the TFF is $95 million. Some of the
    services IRS receives through the TFF include:
      --HR Connect, which delivers human capital services and interfaces
            with the Department of Agriculture's National Finance Center
            providing payroll processing and support;
      --Web Solutions, which provides collaboration sites and support for
            IRS Webmasters and content managers;
      --Treasury Enterprise Identity Credential & Access Management
            provides Personal Identification Verification, Physical Access
            Controls, Logical Access Controls for local, remote & mobile
            devices;
      --Government Secure Operations Center serves as the focal point for
            management of cyber incidents and is responsible for security
            detection, analysis and incident management lifecycle
            practices; and
      --A number of other smaller programs that provide non-IT services,
            including the Office of Small and Disadvantaged Business
            Utilization, which advises and aids the bureaus on small
            business policies and initiatives; Treasury Operations
            Excellence, which provides Lean Six Sigma training and other
            services to help Treasury and other Federal agencies use
            entrusted resources more effectively and efficiently; and the
            Privacy, Transparency, and Records program, which provides
            assistance to Treasury customers to collect, protect, retain,
            preserve, disclose, and provide access to Treasury's
            information resources pursuant to U.S. laws.

        The IRS also offers shared services to other agencies through
    Reimbursable Agreements. These include procurement services and use of
    Call Centers by FEMA for disasters.
        Question. Provide short, two-page, summaries of three recent IT
    program successes--projects that were delivered on time, within budget,
    and delivered the promised functionality and benefits to the end user.
    How does the IRS define ``success'' in IT program management?

        Answer.--
    Project #1: IRS.gov/Enterprise Portal
        In August of 2011, the IRS Information Technology organization set
    out to deploy enhanced Web services including a straightforward,
    manageable Web environment, established end-to-end operational
    accountability and visibility, and a cost-effective program structure.

        Additionally, the IRS sought to address the following challenges:

      --Exponential growth of online electronic filings and taxpayer access
            to information;
      --Difficulty balancing system capability to meet demand (scaling
            horizontally);
      --Inconsistent user experiences for the taxpayer and tax preparer;
      --Limited ability to share data and content between the IRS user
            communities;
      --Difficulty focusing on serving end users (taxpayers and preparers)
            in an end-to-end fashion; and
      --Multiple portals with numerous services to maintain.

        The solution was the Integrated Enterprise Portal (IEP), an
    innovative, cost-effective system that provides a scalable, managed
    private cloud capability to the IRS, enabling one-stop, Web-based
    services to internal and external users. The IEP has transformed the
    way the agency creates, launches and administers its taxpayer- and
    employee-facing applications. At its most basic operational level, it
    allows the IRS to get business-critical applications to the live
    environment more quickly, while enhancing cost predictability and
    security.

        Recent IEP Program Successes:

      --Registered User Portal (RUP) Deployment.--RUP, deployed on-time and
            within budget in September 2013, implemented a secure, FISMA-
            moderate (Federal Information Security Management Act framework
            risk classification), scalable, managed private cloud which
            provides a shared portal infrastructure that consolidates the
            IRS platforms under a single, flexible, and scalable platform.
            The RUP is the IRS external portal that allows registered
            individuals and third party users, where registration and login
            authentication are required for access, to interact with
            selected tax processing and other sensitive systems,
            applications, and data.
      --Filing Season 2014.--The 2014 tax filing season marked the IRS's
            first season fully ``in the cloud.'' Going into tax season
            there was uncertainty driven by the fact that deployment
            occurred just a few short months earlier--a period of time made
            even shorter by a 3-week Government shutdown. Additionally, the
            IEP was predicted to face an unprecedented amount of traffic
            and filings. Despite these circumstances, the IEP not only
            delivered, but exceeded expectations handling the highest
            number of electronic returns and traffic ever--all with 100
            percent availability and zero Priority 1 or Priority 2
            incidents. This was a season of unprecedented peaks for the IRS
            that set a new standard for tax seasons to come. For example,
            on 2/6/14 the IEP successfully handled the ``Where is My
            refund'' application peak of 5.8 million unique daily visitors
            at a peak volume of 15,000 transactions/minute. Detailed
            statistics are as follows:

            Portal key performance metrics January 11 to April 17, 2014:

        --224.1 million total returns submitted (Federal + State);
        --1.025 billion IRS.gov page views/263 million IRS.gov site visits;
                and
        --132.7 million page views during seasonal peak week.

            ``Where's My Refund'' accessed via IRS.gov Web site:

        --136 million page views;
        --112 million site views; and
        --15,000 peak transactions/minute.

      --New Technical Capabilities to support the Affordable Care Act (ACA)
            effort.--A new Transactional Portal Environment (TPE), which is
            a series of capabilities that reside within the IEP, was needed
            to support the new Affordable Care Act (ACA) program. The ACA
            TPE supports secure Application-to-Application (A2A) interfaces
            between Health and Human Services (HHS) Centers for Medicare &
            Medicaid Services (CMS) and the IRS. The new portal solution
            was implemented on-time and on-budget to support the beginning
            of open enrollment in the Marketplaces in October 2013. The IRS
            achieved the business objective to deploy a TPE solution
            providing CMS access to ACA services and providing 24/7
            monitoring and support, daily reporting, and confirmation that
            initial traffic was within anticipated thresholds.

            Key metrics for October 1, 2013 to April 15, 2014:

        --TPE successfully processed 45 million requests for Income and
                Family Size Verification (IFSV) and Premium Tax Credit
                (PTC) computation services in real time from CMS.

      --Employee User Portal (EUP).--In late December 2013, a production
            IRS Employee User Portal (EUP) environment was successfully
            transitioned to the IEP. The IRS completed this transition
            ahead of schedule in response to a request by the IEP
            Governance Board to pull in the transition schedule in order to
            begin transitioned production operations prior to the beginning
            of Tax Filing Season 2014. Production operations of the newly
            transitioned environment were supported without a Priority 1 or
            2 incident throughout the 2014 Tax Filing Season (January 2014
            to April 2014). In addition to supporting transition and filing
            season operations of the existing EUP infrastructure, the IRS
            conducted initial analysis and concept of operations
            discussions about the future state of the EUP that would align
            with the goals of data center optimization and consolidation.

        Definition of ``Success''

        Success was clearly defined on this program with deliverables
    completed on time, within budget, and with the promised functionality
    to achieve the Authority to Operate (ATO) recommendation from Cyber
    Security and planned business results.
    Project #2: CADE 2
        The Customer Account Data Engine 2, known as the CADE 2 program, is
    implementing a single, data-centric solution that provides daily
    processing of taxpayer accounts.
        A critical component of the CADE 2 program is an authoritative
    database for individual taxpayers that provides more efficient and
    effective tax administration. The new database is the heart of the
    solution. It will transform the way the IRS approaches tax
    administration into the future. It improves taxpayer services by
    providing the capability to view taxpayer account data stored in the
    CADE 2 database with on-line viewing by IRS customer service
    representatives, as well as analytical reporting for more meaningful
    business intelligence and expanded opportunities to increase
    compliance.
        As the IRS continues to invest in its data-centric vision in fiscal
    year 2015, CADE 2 will enable an enterprise-wide data environment that
    extends business capabilities, promotes efficiency, and increases
    productivity by ensuring the fidelity, security, and understanding of
    IRS data. This is essential to effectively enable the IRS to leverage
    21st century technologies such as cloud computing, Web services,
    electronic submissions, e-Authentication, big data and data analysis,
    and computing as a commodity, to name a few.
        With deployment of CADE 2 Transition State 1 (TS1), the IRS took a
    leap forward from a technology standpoint, moving the management of
    IRS's individual taxpayer account data from 1960's sequential flat-
    files stored on magnetic tapes, to state-of-the-art relational database
    technology. The IRS is now conducting transactional processing of
    account data for over 270 million individual taxpayers and over a
    billion tax modules on a modernized DB2 relational database. The IRS
    data is now stored in relational formats dictated by a state-of-the-art
    data model that maintains historical values never before retained on
    taxpayer account transactions and facilitates daily viewing of taxpayer
    account data by IRS customer service representatives. CADE 2 TS1 is
    offering faster refunds, faster notices, faster payment postings, and
    improved service for millions of taxpayers as well as a solid
    foundation for our data-centric vision. As of the end of April 2014,
    CADE 2 had posted 116.97 million returns and issued 101.67 million
    refunds totaling $269.30 billion for filing season 2014.
        The IRS is now well positioned to take the essential next step in
    its data-centric vision--rewriting its core taxpayer account processing
    applications so they can leverage the benefits of the new, high-powered
    CADE 2 relational database environment. Prototypes are being conducted
    to validate our assumptions about our approach to this effort. Once our
    applications are re-written into a modern programming language and are
    able to effectively populate the new CADE 2 relational database based
    on its modernized data model, it will become the authoritative source
    for individual taxpayer account data for the IRS. This CADE 2 effort,
    called Transition State 2 (TS2), will enable the IRS to address its
    longstanding unpaid assessments financial material weakness which has
    added substantial risk to IRS custodial accounting and clean audit
    opinion for nearly 20 years.
        TS2 will ensure the long-term viability of the IRS tax processing
    systems by addressing the limitations and risks associated with the
    aging architecture and the design of our legacy core tax processing
    systems, as well as the outdated programming languages that are
    difficult to maintain.
        Investments in CADE 2 TS2 are already delivering benefits to
    taxpayers with the rollout of the Penalty & Interest (P&I) common code
    base on January 2, 2014. After years and years of discrepancies among
    various systems in calculating penalty and interest, a new application
    is now calculating penalty and interest consistently on individual and
    business accounts for taxes that are not received by the due date
    across our master files (Business Master Files and Individual Master
    Files). It is also providing service improvements for taxpayers such as
    more accurate notices, consistent penalty and interest calculations,
    and enhanced service, as Customer Service Representatives have more
    accurate information and are better able to assist taxpayers in meeting
    their tax filing and payment obligations. The solution uses the
    existing master file common code modules as baselines and incorporates
    additional requirements for IDRS.
        CADE 2 is a game changer for the IRS, and once complete it will
    enable many opportunities for the IRS to transform the way we approach
    tax processing today and into the future.
    Project #3: Filing Season
        At the core of the IRS's operations is an IT infrastructure that
    has been foundational to administering the U.S. Federal tax code since
    the early 1960's. Deployment of IT infrastructure in support of Filing
    Season 2014 resulted in many successes, in spite of a tough budget
    environment that resulted in three agency furlough days, hiring freezes
    and a 16-day Government shut down that delayed the opening of filing
    season. Through collaborative efforts of hundreds of IT and Business
    staff and consistent assessment of risks and mitigation of impacts, the
    IRS was able to continue its record of timely deployment of IT systems
    for filing season 2014, enabling improved taxpayer services, increased
    compliance, and enhanced security against threats to the Nation's tax
    system, with marked improvements in production statistics over previous
    years.
        The IT infrastructure for Filing Season 2014 is extraordinarily
    large and complex, putting it in a class of its own in comparison to
    other tax systems around the world. The IRS deployed 67 critical filing
    season systems comprised of thousands of programs written in many
    programming languages and technology platforms that have been developed
    over decades to support the growing tax code. These complex systems
    provided the intelligence and capacity to process about 250 million tax
    returns submitted electronically and on paper between January 2 and
    April 15, filtering out fraud and generating over a million refunds
    totaling roughly $250 billion. These systems capture and move massive
    amounts of data from program to program under strict limitations set by
    service level agreements that govern the complex tax return process.
    They support filing season core tax processing, collection, and exam
    activities for every taxpayer in the country, and then send the
    appropriate financial data to IRS's general ledger to execute fiduciary
    responsibilities and ensure integrity in management of U.S. Government
    funds. Underlying the critical systems is a complex communications
    infrastructure of local and wide area networks, with computer hardware
    and other IT devices and supporting systems that successfully routed
    over 58 million taxpayer telephone calls with 100 percent system
    uptime, providing 24x7 taxpayer access to the IRS for Filing Season
    2014. The IRS also maintains various technology components and
    processes that mitigated hundreds of cyber incidents and ensured the
    continued security posture of our systems, networks, computers and
    printers, including thwarting three serious cyber threats (e.g.,
    ``Heart-bleed'', Microsoft Word and Microsoft Internet Explorer) during
    peak tax processing season.
        Readiness activities to prepare the IRS's labyrinth of IT systems
    and processes for Filing Season 2014 included identifying and training
    IT specialists to implement world class system end-to-end monitoring,
    control room 24x7 coverage, and enhanced incident management to support
    filing season execution. Modernized systems using new technologies were
    developed and successfully deployed in Filing Season 2014, and hundreds
    of programming changes were made to our core systems, updating them to
    incorporate changing tax law. Updates to infrastructure configurations
    and upgrades to hundreds of computer hardware components, software
    applications, databases, operating systems, networks, communication
    devices, and procedures were necessary for smooth execution and
    protection from hackers and intruders. Systems Acceptability Testing
    (SAT) and Final Integration Testing (FIT) was completed for 133
    projects, including execution of 62,000 test cases to provide assurance
    of a successful launch.
        A Processing Year Delivery Assurance Executive and program
    management office provided leadership over the Filing Season 2014
    activities within the IT organization, and over the many suppliers who
    assumed responsibilities in development and execution. An integrated
    Filing Season 2014 governance framework provided enterprise risk and
    readiness assessments to address and mitigate every issue. Filing
    Season readiness standard operating procedures were followed, with
    weekly and then daily operational meetings across the breadth and depth
    of the enterprise using red/yellow/green reporting for each critical
    system. Readiness certifications were required at all levels of the
    organization to signify readiness and ensure stakeholder accountability
    in execution.
        Operational results in Filing Season 2014 show many successes and
    significant improvements over Filing Season 2013:
      --Priority One incidents were down 42 percent from previous Filing
            Season.
      --Modernized e-File (MeF) system had one of the best filing seasons
            on record, enabling taxpayers to electronically submit over 221
            million individual returns along with over 12.5 million
            Business Master File returns (as of 5/27/2014)--an increase of
            3.08 percent for submitted returns compared to the same period
            in 2013.
      --CADE 2 had a smooth filing season launch of its core processing
            systems in Filing Season 2014 and continues to demonstrate full
            integration into Filing Season Operations.
        --CADE 2 database is feeding 16 downstream systems, and allowing
                over 50,000 Customer Service Representatives and other IRS
                users to view CADE 2 data.

      --IRS.gov enabled more taxpayers to avoid wait times on phones. With
            no interruption in service, usage on the Web site from 3/1-5/
            31/2014 includes 595 million IRS.gov page views and 143.2
            million Web site visits.
      --``Where's My Refund'' inquiries using IRS.gov equated to 6.7
            million page views and 5.8 million site visits from 3/1-5/31/
            2014.
      --The ``Get Transcript'' application delivered over 11 million
            transcripts to taxpayers and IRS customers from 1/13-5/28/2014,
            allowing them to view/print a PDF file of their transcript.
      --E-Services enhancements enabled State users to get copies of
            transcripts for individuals who are victims of ID Theft.
            Previously, only IRS employees could request these transcripts.
      --Enhancements to Enterprise eFax service (EEFax) increased the
            number of faxes that can be delivered to taxpayers at one time
            and reduce annual expenses for hardware, software and
            telecommunication lines.
      --New End to End (E2E) application and infrastructure monitoring and
            auto-ticketing enhanced operation of many Filing Season
            Critical Systems.
      --Enhancements to the Online Payment Agreement (OPA) program were
            successfully implemented in Filing Season 2014 making it easier
            for the online user to navigate the OPA Web page and establish
            installment agreements.
        Question. What ``best practices'' have emerged and been adopted
    from these recent IT program successes? What have proven to be the most
    significant barriers encountered to more common or frequent IT program
    successes?
        Answer. Many IT best practices have emerged from our successes at
    the IRS, particularly in the last few years when IRS executives,
    architects, engineers, and subject-matter experts have taken more of a
    lead role in program leadership, systems design, applications
    development, and systems integration. While many of the best practices
    are shared across various program management offices--enabled by
    sharing of toolkits, post-implementation reviews, and collaboration
    (cross-membership) among governance bodies, etc.--the following are
    best practices reported by the three specific program offices that
    reported their successes in the previous question above:
    Project #1: IRS.gov/Enterprise Portal
        The portal team used best practices such as:
      --Elastic Scalability.--A recent best practice that resulted in an IT
            program success was our use of elastic scalability on demand.
            This ``on-demand'' capability was successfully utilized to
            scale the ``Where's My Refund?'' application on a peak day by
            300 percent in a matter of hours. This approach is being
            successfully applied to business critical applications inside
            the IRS firewall for Filing Season 2015.
      --Overcoming Barriers.--One of the key barriers to adopting rapid
            cloud provisioning was overcome by striking a good balance
            between maintaining the stability of the applications and
            limiting the changes during filing season.
    Project #2: CADE 2
        With regard to best practices, CADE 2 was sponsored at the highest
    level . In 2009, the IRS Commissioner himself formally launched the
    CADE 2 program and each Commissioner since then has strongly endorsed
    it since its inception.
        CADE 2 has been managed under a delivery partner operating model,
    jointly led and governed by IRS executives across Information
    Technology and the technology industry. With the flexibility, to use
    critical pay and other authorities to recruit industry leaders and
    experts with a mix of knowledge in legacy and modernized systems,
    augmented by a small cadre of in-house subject matter experts, the
    program was staffed with the right mix of people.

      --CADE 2 established a governance model that includes an Executive
            Steering Committee with representation at the highest levels of
            the organizations; a Governance Board that has the expertise to
            enable them to make critical decisions and assume
            accountability for the outcome of the program; an Executive
            Oversight Team that meets regularly with accountability for
            day-to-day identification of risks and progress in addressing
            those risks across the program; and advisory councils that
            provide technical advice and subject matter expertise as
            needed.
      --The CADE 2 Program Management Office (PMO) serves with clear
            authority and lines of accountability assigned to the Business
            and IT delivery partners. This collaborative program management
            model was supplemented by high performing workshops early on in
            the program to develop techniques such as granted trust,
            generous listening, and rules of effective engagement, which
            has resulted in growing an in-house capability to manage
            complex systems using industry best practices that keeps
            decisionmaking on the side of the Government.
      --The CADE 2 PMO produced four foundational documents that drive the
            program:
        --Program Charter describes who we are--mission, goals, operating
                principles;
        --SolutionsArchitecture documents where we are now and where we are
                going--aligned with agency architecture;
        --Program Roadmap outlines how we are going to transition to target
                state; and
        --Program Management plan defines management principles, practices,
                and processes that will be used.

      --The program institutionalized a solid process around messaging to
            ensure open, accurate and consistent communication with regular
            report-outs to ensure full transparency and ongoing
            understanding of progress and risks on the program by all
            oversight bodies, audit agencies, agency top executive team,
            delivery and business partner executives, and stakeholders.
      --The CADE 2 PMO engaged people IRS-wide in an organizational
            readiness plan to support the new solution in order to gain
            maximum benefits and results. Many organizational readiness
            activities were conducted, such as training sessions on the new
            production process and how to address and resolve issues within
            a short timeframe, a control room staffed 24x7 with subject
            matter experts to provide production support, and formulation
            of special teams charged with driving testing to complete prior
            to deploying.

        Overcoming Barriers:

      --Previous barriers such as getting the business to the table to
            build requirements and own decisions along the way were
            mitigated through the comprehensive governance model.
      --Burden from audits and other oversight reporting requirements was
            mitigated by inviting TIGTA and GAO to partner with us
            throughout the full life-cycle of the program to address risks
            and building solutions to mitigate them in real-time.
      --Issues around funding were managed at the highest levels of the
            IRS, to get the resources that were needed in a timely manner
            to meet the program objectives.
      --Cultural issues around ``change'' and ``ownership'' were addressed
            by the CADE 2 program manager and other IRS executives
            encouraging shared commitment for the success of the program.
      --Individuals and work teams that previously worked with siloed
            knowledge of IRS systems were brought together to understand
            the ``big picture'' to effectively implement the CADE 2
            integrated solution.
      --The CADE 2 program manager and other IRS executives personally
            conducted workshops and coaching sessions using high
            performance communications techniques and contextual leadership
            to provide the vision and ``line of sight'' to break down silos
            and barriers within the IRS.
    Project #3: Filing Season 2014
        Many of the best practices used in other large IT programs have
    been adopted by the Filing Season Readiness program, including:
      --Right-sized governance bodies that included stakeholders from IT
            and business organizations that are at the appropriate level of
            their organizations where they can readily represent their
            organization's interest and make decisions.
      --Dedicated Filing Season program management office (called the
            Processing Year Delivery Assurance function) with lead
            executive that assumed point of accountability for success:
        --Enabled strengthened supplier management and engagement resulting
                in more tightly integrated incident and problem management.
        --Used various disciplines to promote data-based decisionmaking,
                such as Filing Season Readiness dashboards, and simulation/
                predictive modeling to project volumes and impacts.
        --Conducted regular preparatory meetings with all stakeholders,
                with accelerated frequency as filing season approached,
                where action items with tracked to completion.

      --Enhanced organizational readiness with tabletop exercises to help
            anticipate Filing Season operational organization and process
            issues.
      --Lessons Learned captured that resulted in over 250 recommendations
            for improvement/action in 31 areas:
        --Implemented IT Filing Season Readiness Framework--a repeatable
                process for cross-organizational management of readiness--
                including defining Filing Season Readiness SOP.
        --Created and validated a Control Room SOP based on experience and
                best practices that is now available to guide establishment
                of Control Rooms for other business systems.

      --Obstacles were overcome using aggressive risk mitigation framework:
        --Integrated risk and readiness assessments into the Filing Season
                delivery cadence, strengthening evidence-based
                decisionmaking capabilities.

        Question. Describe the progress being made in your agency on the
    transition to new, cutting-edge technologies and applications such as
    cloud, mobility, social networking, and so on. What progress has been
    made in the CloudFirst and ShareFirst initiatives?
        Answer. With regard to new technologies, the IRS embraces every
    opportunity to be a leader in Government. The pace in which we can
    embrace new practices, technologies, and tools must be balanced against
    the existing funding and resource capacities. Even with these
    constraints, the IRS has made significant investments in end-to-end
    lifecycle traceability, data architecture, security tools, and internal
    collaboration tools.
        In the spirit of CloudFirst, the IRS already embraces an internal
    cloud concept with infrastructure-as-a-service virtualization. The same
    principle of elasticity is gained by being able to increase hardware
    for critical filing season needs and reallocating hardware to other
    purposes outside of filing season. IRS.gov is already using a private
    cloud for all non-personally identifiable information (PII). We have
    used the FedRAMP approved public cloud offerings for several tests,
    including performance testing of end-to-end filing season systems and
    scaling of new applications. We continue to leverage the cloud
    offerings where it makes the best sense according to a project's
    lifecycle, type of data and privacy considerations, and integration
    with existing IRS applications.
        Regarding ShareFirst, we have regular meetings with the Treasury
    Department to discuss opportunities to leverage work between the IRS
    and the other bureaus. Beyond Department-wide sharing, we have an
    extensive program and governance mechanism for intra-agency sharing.
    The IRS has a standards-based enterprise architecture that ensures
    adoption of common platforms and tools to minimize product sprawl. The
    IRS also has a software lifecycle with the appropriate checks in place
    to ensure new initiatives leverage existing products, licenses and
    services.
        Beyond intra-agency sharing, the IRS participates in inter-agency
    sharing by using Data.gov. Data.gov is the central repository for the
    Federal Government to post free datasets for the public to research and
    develop Web and mobile applications. The IRS posts aggregate data
    cleansed of any personally identifiable information (PII). Examples
    include summary tax data by zip code, and tax exempt statistics of the
    changes in the numbers of tax and exemptions across States/counties.
    This type of information can be used to create new visualizations and
    can be combined with other data from across the Federal Government.
        The IRS has over 30 datasets posted on data.gov, which are shared
    with the public, as well as other government agencies.
        Question. How does your agency implement acquisition strategies
    that involve each of the following: early collaboration with industry;
    RFP's with performance measures that tie to strategic performance
    objectives; and risk mitigation throughout the life of the contract?
        Answer. To bring these increased capabilities online at the IRS, we
    created standardized training and development opportunities and
    established the Vendor Management Organization (VMO), a small cadre of
    acquisition professionals with the specialized knowledge and experience
    to expedite complex IT acquisitions across the enterprise. The VMO has
    an over-arching organizational concept of strategically managing
    procurements and suppliers to maximize IT investments in key
    commodities, while at the same time minimizing business risk. The VMO
    manages all vendor relationships and all IT contracts, using a single
    system for documentation, tracking vendor contract renewal dates and
    option years, and developing metrics and measuring vendor performance.
        The VMO also use a Performance-Based Acquisition strategy for most
    acquisitions. This technique structures all aspects of an acquisition
    around the purpose and outcome desired, as opposed to the process by
    which the work is to be performed. Under this technique, the VMO
    develops a Statement of Objectives (SOO), which describes the
    requirements in terms of measurable outcomes rather than by
    prescriptive methods. The VMO then develops Measurable Performance
    Standards defining what is considered acceptable performance to
    determine whether performance outcomes have been met.
        A more strategic relationship with our vendors using this technique
    enables us to use remedies or procedures to manage performance that
    does not meet standards. To this end, the VMO has developed a Supplier
    Assessment Management tool, which is a scorecard that tracks
    performance based on set criteria which was developed and is overseen
    by the Supplier Management Advisory Board. This governance is essential
    to ensure that the IRS is maximizing the value of its vendor
    relationships, reducing risks, and measuring performance to achieve
    desired results.
        Question. According to the Office of Personnel Management, 46
    percent of the more than 80,000 Federal IT workers are 50 years of age
    or older, and more than 10 percent are 60 or older. Just 4 percent of
    the Federal IT workforce is under 30 years of age. Does your agency
    have such demographic imbalances? How is it addressing them? Does this
    create specific challenges for attracting and maintaining a workforce
    with skills in cutting-edge technologies? What initiatives are underway
    to build your technology workforce's capabilities?
        Answer. The IRS Information Technology organization performs
    extensive ongoing workforce analyses. Below is a summary of the IRS's
    IT organization's demographics, which reflects a somewhat higher
    percentage of older IT workers at IRS than OPM's analysis of the
    overall Federal IT workforce:
      --The number of IT workers who are over 50 years of age is 4222 (out
            of 7294 total employees), or 58 percent of the current
            workforce.
      --The number of IT workers who are over 60 years of age is 979 (out
            of 7,294 total employees), or 13 percent of the current
            workforce.
      --Two percent of the IRS IT workforce is under 30 years of age (132
            employees out of 7294 total).

        The IRS pursues the following to ensure the proper technology
    capabilities for its workforce:

      --IT performs extensive contractor-provided and on-the-job training
            and coaching where needed to ensure skills of the existing
            workforce are commensurate with work demands;
      --IT has active frontline and senior leadership readiness programs to
            ensure there are leadership candidates in the pipeline;
      --IT has an active leadership-mentoring program in place;
      --IT has an active ``ambassador'' program for new hires to link new
            employees with seasoned employees for mentoring and coaching;
      --IT's recent Direct Hire Authority provides IT with increased
            abilities to hire employees with specific skills for critical
            projects such as in support of the Affordable Care Act;
      --Where possible and when funding allows, IT seeks new external
            talent while adhering to Federal recruitment practices such as
            ``veteran's preference'';
      --Having recently completed negotiations with our union, special
            appointing authorities (such as ``Pathways'') will provide more
            flexibility to IT to attract students into entry-level
            positions;
      --IT has launched a competency/skill/proficiency assessment process
            for all technical employees. The data will help IT make
            decisions about needed training and development; and
      --IT is in the process of implementing a workforce planning tool
            concept, which would allow for an enterprise-wide view of
            talent, skills, capacity, and availability for better
            utilization of current staff across organizational boundaries.

        Question. What information does your agency collect on its IT and
    program management workforce? Please include, for example, details
    about current staffing versus future needs, development of the talent
    pipeline, special hiring authorities, and known knowledge gaps.
        Answer. The IRS currently performs IT workforce analyses about:
      --IRS population trends, retirements, and other attrition losses,
            including those that affect the IT organization.
      --Competency, skill, and proficiency information on the existing
            workforce. We are currently linking such information to
            position and business process to help analyze where development
            might be needed or where shifts in IT priorities are required.
      --Hiring demand. The date is collected and mapped to business
            processes, competency and skill. Unfunded hiring needs tell us
            where gaps in IT positions and skills exist.
      --Legacy systems requiring skills that are not readily available
            outside of the IRS (e.g., older programming languages such as
            COBOL and ALC).
      --The IRS's need for JAVA-programmers, which continues to be a much
            needed skill. Our Direct Hire Authority has assisted us in
            improving on this skill-base.
                                     ______

              Questions Submitted by Senator Christopher A. Coons
        Question. In fiscal year 2013, the telephone level of service for
    taxpayers trying to reach the IRS' toll-free lines dropped to 60.5
    percent. Roughly 40 percent of taxpayers who called were unable to
    reach an IRS employee. Can you discuss what steps you are taking to
    solve this? We must ensure that taxpayers are able to communicate with
    the IRS in a timely and efficient way.
        Answer. The IRS strives to serve as many taxpayers as possible,
    given limited resources. Telephone plans are developed after
    consideration of many factors, including: historical demand adjusted
    for known anomalies; the types and anticipated lengths of calls we
    expect to receive; assumptions concerning upcoming events, such as
    known or pending legislation or trends in customer behavior; and the
    availability of existing or new automation and other alternative
    services. These plans are then matched with available or anticipated
    resources to determine a measure for the IRS's telephone level of
    service (LOS). For instance, this year there was a lower than
    anticipated filing season demand for telephone assistance, which was
    likely due to relatively few tax law changes and more people using
    IRS.gov to get answers to many basic tax law questions. As a result,
    the IRS expects to exceed its projected fiscal year 2014 LOS of 61
    percent.
        The fiscal year 2015 Budget request of $12.6 billion, including the
    Opportunity, Growth and Security Initiative, would allow the IRS to
    increase the projected LOS in fiscal year 2015 from 53 percent to 80
    percent. The IRS projects demand related to the Affordable Care Act
    (ACA) to result in appropimately 10.5 million new calls to the IRS in
    fiscal year 2015. Without the funding requested in the President's
    budget, we estimate that nearly five out of every 10 taxpayers who call
    the IRS for service will not get through to an assistor. Those who do
    get through will then be subjected to long wait times. Because of this
    extraordinarily low projected LOS, the IRS expects that a higher than
    normal number of taxpayers will call back when they are unable to reach
    an assistor. These additional callbacks or re-tries will further
    compound the strain on the IRS telephone systems and may drive the LOS
    even lower than the projected levels. Also, taxpayers abandoning the
    telephone lines will likely turn to walk-in services or send
    correspondence, straining other IRS service channels. Other factors,
    such as legislative changes, could also adversely affect the IRS's LOS
    for fiscal year 2015.
        Each year, taxpayers call the IRS for assistance expecting a prompt
    and accurate response to their questions. The IRS continually explores
    improvement opportunities to provide customers with easy access to
    accurate, user-friendly account services. Our objective is to
    proactively manage customer demand by improving contact center
    efficiency, referring customer demand to the most efficient service
    resource, and equipping the workforce with the tools to be productive.
    To continue to efficiently serve the maximum number of taxpayers
    possible, the IRS implemented the 2014 Service Approach to align
    taxpayer demand with the most cost-effective resource to provide the
    needed service. The 2014 Service Approach accomplished this by
    referring taxpayers to self-service resources while preserving
    telephone and in-person service for taxpayers that needed to speak to
    an assistor.
        Question. I am concerned about some of the treatment that groups
    seeking 501(c)(4) status have received. I believe that we must ensure
    that staff that acted inappropriately are held accountable and correct
    any failures that allowed this behavior to happen. We have to be
    guaranteed that the IRS provides unbiased service to all taxpayers. Can
    you comment on the steps you have taken to ensure that this situation
    is fixed?
        Answer. Last year, the Treasury Inspector General for Tax
    Administration (TIGTA) issued a report related to the determination
    process and the processing of applications for tax exempt status,
    Inappropriate Criteria Were Used to Identify Tax-Exempt Applications
    for Review.
        Since then, we have taken substantive corrective actions to address
    the problems TIGTA had identified. We have:
      --Created an expedited approval process for 501(c)(4) organizations
            that has significantly reduced our backlog.
      --Established an Accountability Review Board to assess individual
            employees' conduct and recommend discipline where appropriate.
      --Installed a new management team in the Exempt Organizations (EO)
            division.
      --Developed new training and conducted workshops on a number of
            critical issues, including the difference between issue
            advocacy and political campaign intervention, and the proper
            way to identify applications that require review of political
            campaign intervention activities.
      --Established a new process to document the reasons why applications
            are chosen for further review.
      --Issued guidelines for EO specialists on how to process requests for
            tax-exempt status involving potentially significant political
            campaign intervention.
      --Created a formal, documented process for EO determinations
            personnel to request assistance from technical experts.

        Additional detail on our efforts is available at: http://
    www.irs.gov/uac/Newsroom/IRS-Charts-a-Path-Forward-with-Immediate-
    Actions.
        Subsequent to the TIGTA report, more than 250 IRS employees have
    spent more than 120,000 hours working directly on compliance with the
    six related investigations of the issues described in the TIGTA
    report--at a direct cost of nearly $10 million. I hope these
    investigations can be concluded in the very near future. Once we have
    the resulting reports, we can then take further corrective action,
    where necessary. Completion of the reports is important for us to learn
    from, address, and move beyond the problems and concerns identified.
                                     ______

                 Questions Submitted to Hon. J. Russell George
                  Questions Submitted by Senator Mike Johanns
        Question. According to your audits the IRS continues to report that
    more than 20 percent of Earned Income Tax Credit (EITC) payments are
    issued improperly each year. In fiscal year 2013, the IRS estimates it
    issued between $13 and $15 billion in improper EITC payments.
        Do you believe there is the potential for similar problems with
    implementation of the ACA's premium tax credits?
        Answer. As is the case with other refundable credits, there is a
    risk for improper payments with the Premium Tax Credit. TIGTA is
    concerned that the potential for refund fraud and related schemes could
    increase as a result of processing Premium Tax Credits provided by the
    Affordable Care Act unless the IRS builds, implements, updates, and
    embeds Affordable Care Act predictive analytical fraud models into its
    tax filing process. In September 2013, we reported that a fraud
    mitigation strategy is not in place to guide Affordable Care Act
    systems development, testing, initial deployment, and long-term
    operations. The IRS informed us that two new systems are under
    development that will address Affordable Care Act tax refund fraud
    risk. However, until these new systems are successfully developed and
    tested, TIGTA remains concerned that the IRS's existing fraud detection
    system may not be capable of identifying Affordable Care Act refund
    fraud or schemes prior to the issuance of tax refunds.
        Question. Are you aware of any effort on the part of the IRS to
    synthesize or otherwise generate the technical capacity or resources to
    perform full or partial return preparation for filers?
        Answer. No. We are not aware of any such effort.

                              SUBCOMMITTEE RECESS

        Senator Udall. So with that, the subcommittee hearing is
    hereby adjourned.
        [Whereupon, at 3:55 p.m., Wednesday, April 30, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2015

                                  ----------

                             WEDNESDAY, MAY 7, 2014

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 1:57 p.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Tom Udall (chairman) presiding.
        Present: Senators Udall, Johanns, Moran, and Mikulski.

     The President's Fiscal Year 2015 Funding Request for and Oversight of
                   Federal Information Technology Investments

                     OPENING STATEMENT OF SENATOR TOM UDALL

        Senator Udall. Good afternoon. I am pleased to convene this
    hearing of the Appropriations Subcommittee on Financial
    Services and General Government on the request for and
    oversight of Federal information technology investments.
        First I want to welcome my ranking member, Senator Mike
    Johanns, and I think we will have other colleagues joining us
    as we move through these proceedings.
        And with us today are four distinguished witnesses, the
    Federal Chief Information Officer, Steve VanRoekel; the
    Administrator of the General Services Administration, Dan
    Tangherlini; the Director of the Office of Personnel
    Management, Katherine Archuleta; and the Director of
    Information Technology Management Issues at the GAO, the
    Government Accountability Office, David Powner.
        Thank you for your service, and I look forward today to
    hearing all of your testimony.
        With the agencies here today that all play a Governmentwide
    role, I want to mention that this week is Public Service
    Recognition Week. I would like to take this opportunity to
    salute our public servants and the valuable work they do. And I
    think many of you have many of those valuable public servants
    within your agencies and organizations.
        Today's hearing is important because updating our
    information technology systems is crucial. Our Government
    should be using cutting-edge, 21st century technology. Too
    often, it isn't. And that affects all of us.
        Across the Federal Government, agencies rely on information
    technology, including financial management systems to track
    payments and manage funds, handheld devices and e-mail systems
    to communicate with each other, Internet Web sites to
    communicate with the public and share information on what the
    Government is doing.
        The technology is moving forward, but the Federal
    Government is falling behind.
        Agencies operate on old systems, often with multiple
    programs that cannot speak to each other, and with outdated,
    obsolete technologies.
        We also need to make sure that money is well spent. The
    Federal Government spends $80 billion a year on information
    technology (IT) investments--every year--to operate outmoded
    systems agencies currently rely on and develop new ones. But
    $80 billion a year, and we know there is waste and duplication.
        We need to get the most out of every dollar. And too often,
    we don't.
        The Federal Government's IT Dashboard identifies 201 major
    IT investments totaling more than $12 billion, with significant
    concerns that need management attention.
        Let me repeat that: 201 Federal IT investments. $12 billion
    in question marks. That is not acceptable to any of us.
        There are numerous examples of expensive multiyear projects
    over budget and delayed, of investments that ultimately failed,
    wasting taxpayer money and crippling the Government's ability
    to do its job.
        At a time of tight budgets, we cannot afford to waste
    funds. We should not be paying more and getting less. Agencies
    need IT investments that are efficient and effective, that help
    them complete their missions.
        Agencies have identified savings from duplication and waste
    within IT portfolios totaling over $2.5 billion in the next 3
    years. The Government Accountability Office (GAO) has
    identified additional savings by consolidating data centers.
    There are many opportunities to improve the way the Federal
    Government spends money on IT. We need to make the most of
    them.
        At the same time, we need well-trained experts to do the
    work. For these investments to succeed, there are some existing
    and new tools being used by Federal agencies, but there may be
    more that can be done to train, recruit, and retain qualified
    IT specialists.
        I want to make sure that citizens can depend on the Web to
    interact with their Government. IT is not a luxury. It is
    essential for individuals and for businesses. Small companies
    from places like Albuquerque and Las Cruces should be able to
    go online and find what Federal Government opportunities exist,
    and to be able to submit bids to compete for those
    opportunities.
        American taxpayers should be confident that their money is
    being spent wisely and efficiently.
        I look forward to hearing testimony today on how the fiscal
    year 2015 budget will advance oversight of IT investments and
    what more could be done. I am hoping that this hearing will
    help to guide this subcommittee's efforts as we evaluate the
    President's budget request and craft our appropriations bill.
        I am also pleased to be working with my subcommittee
    colleagues, Ranking Member Johanns and Senator Moran, on
    bipartisan legislation to empower Federal agency chief
    information officers to drive more effective IT investments
    with more flexibility, transparency, and accountability.
        And so with that, I turn to my ranking member, Senator
    Johanns, for any remarks he would like to make.

                       STATEMENT OF SENATOR MIKE JOHANNS

        Senator Johanns. Thank you, Mr. Chairman. I want to say how
    much I appreciate you holding this important hearing today. As
    members of this committee, we, of course, have a responsibility
    to conduct oversight to ensure that hard-earned tax dollars of
    millions of Americans are spent appropriately, thoughtfully,
    wisely.
        One area in need of this oversight is the $82 billion the
    Federal Government will spend on IT in the fiscal year 2014.
    Given the resources at stake and the importance of the
    projects, it is imperative that the Office of Management and
    Budget (OMB) and other Federal agencies appropriately manage
    these acquisitions and improve transparency and efficiency.
        We can all name the project that ended with failure or with
    serious problems. I can name healthcare.gov.
        While a crisis makes news, also troubling are the accounts
    that simply don't grab headlines. They don't have the high
    profile, like projects with ongoing costs that grow year after
    year.
        Long-term investments must represent good value. We must be
    able to assure our citizens that it is good value. So we have
    to have safeguards in place to ensure that oversight of these
    projects is consistent; that problems are anticipated, ideally
    before they occur; and, most importantly, that someone is
    accountable, someone is responsible.
        Often, large, complex information technology projects drag
    on. Sometimes they outlast the administration that initiated
    them, and the employees responsible for managing them.
        In our Financial Services and General Government bill
    alone, billions have been spent over the years on trying to
    modernize tax systems at the Internal Revenue Service (IRS).
    That work has just gone on and on and on. While these projects
    appear to be back on track now, past problems generated
    millions in costs and years of delay.
        As recent press reports have reminded us, the Office of
    Personnel Management (OPM) has a long history of unsuccessful
    retirement modernization initiatives.
        Recognizing the need to modernize its retirement processing
    in the late 1980s, OPM began initiatives aimed at automating
    its antiquated paper-based processes. However, following
    attempts over more than 2 decades, the agency has not yet been
    successful in achieving the modernized retirement system
    envisioned.
        These results, or lack thereof, are the type that anger our
    constituents who see hard-earned tax dollars being squandered
    on seemingly endless failed initiatives, and they have a right
    to be concerned.
        According to the Government Accountability Office (GAO),
    across the Government, IT projects too often go over budget,
    fall behind schedule, and don't deliver sufficient value.
    Responsibility for oversight of information technology projects
    is oftentimes fragmented throughout the specific agency owning
    the project, and the projects and spending receive insufficient
    oversight, maybe from Congress, but also from the Office of
    Management and Budget.
        Unfortunately, when it comes to IT spending, it appears
    there is not a lot of management or effective budgeting going
    on at OMB.
        Whether issues relate to program requirements, performance,
    spending, security, there are lots of people involved, but
    oftentimes no clear lines of accountability.
        So, Mr. Chairman, I think this hearing is enormously
    important. I look forward to the testimony of the witnesses.
        We welcome you here. We hope you can enlighten us today
    with your testimony. I look forward to the opportunity to ask
    questions.
        Thank you, Mr. Chairman.
        Senator Udall. Thank you very much, Senator Johanns.
        And we are delighted today to be joined by our chairwoman
    of the Appropriations Committee, Senator Mikulski.
        Senator Mikulski, if you would like to do an opening
    statement, we would be ready for that at this point.

                    STATEMENT OF SENATOR BARBARA A. MIKULSKI

        Senator Mikulski. Mr. Chairman, I know we want to get on
    with our hearing, so I am going to welcome the witnesses, but I
    am going to thank you and Senator Johanns for convening this
    hearing.
        For some time, both in my role as chair of the subcommittee
    on Commerce, Justice, Science, to now my chair of the full
    committee, I have become increasingly concerned about what I
    call techno-boondoggles.
        Part of the job of the Appropriations Committee is to be a
    quiet guardian of the purse. Well, I intend to be a not-so-
    quiet guardian of the purse. And what I worry about is that we
    spend billions and zillions on technology projects that are
    often ineffective or lacking in utility to, often, dysfunction.
        Just two examples, as the chair of the Commerce, Justice,
    we had a tremendous fiasco over the funding of the census, so
    much so that Secretary Gutierrez, who I have great admiration
    for as CEO of a major corporation, called me aghast, and we
    went back, taking the census by hand after billions.
        We had a Federal Bureau of Investigation (FBI) project in
    which all the computers were supposed to talk, connect the
    dots. Again, a boondoggle. Had to go back and do it again.
        And yet, I fear one of the greatest boondoggles could be
    now with our Veterans Administration, in which so many agencies
    have to talk to each other in order to get to where our
    veterans do not stand in line, disability claims, something I
    know you are both interested in.
        So we have to get a handle on what is happening on these,
    and in these financial services with the particular people here
    to testify. The Federal Government has spent more than $600
    billion on IT investments over the last decade. And often, we
    end up doing it again and then again and then again. And I
    think it is time we get our arms around this.

                               PREPARED STATEMENT

        The Appropriations Committee has to do it because we see
    everything and we fund everything. So let's get on with it. But
    I want you to know, working with Senator Shelby, we want to
    have a smart Government and a frugal Government, and IT could
    be one of our biggest challenges here. So thank you.
        [The statement follows:]
               Prepared Statement of Senator Barbara A. Mikulski
        Thank you to Senators Udall and Johanns for convening this hearing.
    The American people are shocked--and so am I--every time it is
    discovered that billions of dollars have been wasted on what I call
    techno boondoggles.
        These techno boondoggles are technology projects that should in
    theory make the Government more effective and efficient in providing
    services, but instead turn out to be complete flops.
        The result of these flops is a lot of wasted time and taxpayer
    money. When things go wrong, we always see the 3 Bs--Big money, Big
    projects and Big failures.
        This Committee has a responsibility to provide oversight of the
    funding for these projects to ensure that we get the most bang for our
    buck.
        According to the General Accounting Office, the Federal Government
    has spent more than $600 billion on technology or information
    technology (IT) investments over the last decade. Unfortunately, I
    don't think we have gotten a good return on this investment.
        We have spent billions of dollars on projects that have languished
    for years, only to be canceled or replaced with something else. This is
    inexcusable!
        One of the best examples of this type of techno boondoggle comes
    from the Air Force, which tried to replace 240 outdated computer
    networks with one system. In theory, that sounds like a great idea. But
    in reality, the agency spent $1 billion and wasted 5 years before
    eventually terminating the project altogether in 2012.
        Senator McCain described it as ``one of the most egregious examples
    of mismanagement'' he had ever seen.
        Another example comes from the Department of Homeland Security
    attempt to create a new passenger screening system for people traveling
    by plane.
        After spending $42 million and 8 years, they scrapped the whole
    project and replaced it with a different new screening system.
        Those are just two examples--sadly, I could cite dozens of others.
        Today I would like to hear how we can stop this kind of unnecessary
    spending. As Chairwoman of the Appropriations Committee, I'm committed
    to providing significant oversight of these projects and I believe this
    hearing is a good first step.
        Last week, I convened a hearing on the importance of innovation and
    research. Those investments save lives, improve national security and
    create jobs. Innovation can also improve the performance of Federal
    agencies and help the Government better serve our constituents.
        When a techno boondoggle occurs, we not only waste tax dollars, but
    we hamper the delivery of services to the American public that depends
    on them.
        For example, the Department of Veterans Affairs processes and
    distributes disability payments to millions of veterans across the
    country. The Social Security Administration provides disability
    payments to millions of Americans, while the Office of Personnel
    Management manages Federal employee retirement benefits for millions of
    people, including many of my constituents.
        My staffers who handle casework for these three agencies are some
    of the busiest people I know because of the ongoing backlogs. These
    backlogs weren't created by failed IT systems, but they were certainly
    made worse.
        At a time of smaller budgets and difficult spending decisions, we
    have to make sure every dollar is spent wisely. When the Federal
    Government signs an IT contract, we are not only signing a contract
    with a company to build a program or implement a system. We are signing
    a contract with the American people that promises their tax dollars
    will be spent wisely and in a way that advances the mission of the
    agency.
        I take this responsibility very seriously and look forward to
    hearing from our witnesses.

        Senator Udall. Thank you, Madam Chairwoman. We really
    appreciate your involvement in this. I know that this is
    something you have cared about passionately for a long time.
        Mr. VanRoekel, I would like you to present your remarks on
    behalf of the Office of Management and Budget.
    STATEMENT OF HON. STEVEN VanROEKEL, CHIEF INFORMATION
                OFFICER, OFFICE OF MANAGEMENT AND BUDGET
        Mr. VanRoekel. Thank you, sir. Chairman Udall, Ranking
    Member Johanns, and Chairwoman Mikulski, thank you for the
    opportunity to testify on the President's fiscal year 2015
    budget request for the improvement of Federal information
    technology investments and oversight.
        It is important to consider this request in the context of
    the President's overall fiscal year 2015 budget request for the
    Office of Management and Budget, which is $93.5 million and 480
    full-time equivalent employees.
        This request would enable OMB to address the growing
    workload while more effectively overseeing program management
    and funding across more than 100 Federal agencies and
    departments. This is a critical investment with returns in the
    form of improved program management, budgetary savings, and
    smarter regulations, some of the many critical outcomes that
    the administration, Congress, and the American people look to
    OMB to help ensure.
        The Office of E-Government and Information Technology's
    work is core to achieving each of those aims. I would like to
    take a minute to discuss what our work has achieved to date and
    what our focus will be moving forward.
        Every day during my nearly 20 years in the private sector,
    I focused on improving and expanding core services and customer
    value while also cutting costs. When I joined the
    administration in 2009, I found willing partners in this
    mission and have spent the past 3 years in OMB focused on
    maximizing the return on investments in Federal information
    technology, driving innovation to meet customer needs, and
    establishing a foundation for securing and protecting our
    information systems.
        In the decade prior to this administration, the Federal IT
    budget increased at the compound annual growth rate of 7.1
    percent a year. If spending had increased at the same rate
    during this administration, our current budget IT request would
    total $117 billion, not the roughly $80 billion that is being
    requested for information technology across the Federal
    Government in fiscal year 2015.
        Throughout the President's first term and into today, we
    have focused on establishing mechanisms to stop this growth in
    IT spending. We have flatlined IT spending, and since 2012, our
    PortfolioStat data-driven accountability sessions have resulted
    in over $2.5 billion in identified cost savings and $1.9
    billion in realized savings, showcasing the results of the
    administration's Governmentwide policies to drive this
    efficiency.
        With these efficiency efforts firmly underway in fiscal
    year 2014 and fiscal year 2015, the administration is
    increasing its efforts to deliver smarter, more effective
    applications of technology. This work, which the President's
    fiscal year 2015 budget supports as part of the President's
    management agenda, focuses on ensuring the Federal Government
    has three things: one, the best talent working inside
    Government; two, the best companies working with Government;
    and three, the best processes in place to make sure everyone
    involved can do their best work and, more importantly, be held
    accountable for delivering excellent results to the American
    people.
        To support this work, the fiscal year 2015 budget requests
    $20 million for the Information Technology Oversight and Reform
    Fund. This fund will use data, analytics, and digital services
    to improve the efficiency, effectiveness, and security of
    Government operations and programs. This funding will also
    allow OMB to continue the work of PortfolioStat, enhance
    cybersecurity capabilities, and create the Digital Service, a
    centralized, world-class team made up of our country's
    brightest digital talent. These people will be charged with
    removing barriers to exceptional Government service delivery
    and remaking the digital experiences that citizens and
    businesses have with their Government.
        The Digital Service, in close partnership with the General
    Services Administration's (GSA's) 18F delivery team, will
    establish standards to bring the Government's digital services
    in line with the best private sector service experiences, to
    identify gaps in their service capability, and to provide
    oversight and accountability to ensure we see results.
        It will work side-by-side with agencies to ensure they have
    the resources and talent needed to deliver great services on
    time, on spec, on budget, and with optimal user functionality.
        This capability, which will drive effectiveness across key
    citizen-facing services, is being incubated now under my office
    in OMB in fiscal year 2014 and, if funded, will expand in
    fiscal year 2015.
        The fiscal year 2015 Information Technology Oversight and
    Reform (ITOR) request, this fund, represents a modest
    investment in comparison to the total Federal IT spending of
    approximately $80 billion annually. And through the ITOR fund,
    and the help of this subcommittee in both the Senate and the
    House, we have delivered tangible results in Government
    technology efficiency. And we look forward to accelerating this
    return on investment as we apply these efforts to effectiveness
    of technology in 2015.
        In conclusion, it is apparent, in today's world, we can no
    longer separate the outcomes of our Federal programs from the
    smart use of technology. By increasing emphasis on customer
    needs and making it faster and easier for individuals and
    businesses to complete transactions with their Government,
    online or off-line, we can deliver the world-class services
    that they expect.

                               PREPARED STATEMENT

        I am excited to continue working with this subcommittee on
    our shared goals and look forward to our conversation and
    questions. Thank you.
        [The statement follows:]
                  Prepared Statement of Hon. Steven VanRoekel
        Chairman Udall, Ranking Member Johanns, and members of the
    subcommittee, thank you for the opportunity to testify on the
    President's fiscal year 2015 request for the improvement of Federal
    information technology (IT) investments.
        During my 20 years in the private sector, I woke up every day
    focused on improving and expanding core services and customer value
    while also cutting costs. I brought this focus with me to the Federal
    Government. When I joined the administration in 2009, and the Office of
    Management and Budget (OMB) in 2011, I found willing partners in this
    mission and have spent the past 3 years at OMB focused on driving
    innovation to meet customer needs, maximizing our return on investments
    in Federal information technology, and establishing a trusted
    foundation for securing and protecting our information systems.
        Before discussing the administration's fiscal year 2015 request for
    the Information Technology Oversight and Reform (ITOR) fund and Office
    of E-Government, I want to raise OMB's overall fiscal year 2015 budget
    request. The President's fiscal year 2015 budget for OMB requests $93.5
    million and 480 full-time equivalents (FTEs) to address growing
    workloads while making targeted investments to enable OMB to more
    effectively oversee program management and funding across more than 100
    agencies and departments throughout the Federal Government. The budget
    request would bring OMB back up to a staffing level comparable to 2009,
    though well below 2010, and support our expanded role in a number of
    key priority areas for this subcommittee. This is a critical investment
    with large returns in the form of improved program management,
    budgetary savings, and smarter regulations--some of the many critical
    outcomes that the administration, Congress, and the American people
    look to OMB to help ensure. While OMB has taken on a number of new
    functions and responsibilities in recent years, our funding and
    staffing levels have been significantly constrained and have not kept
    pace with our counterparts at the Congressional Budget Office. Today,
    OMB is 11 percent smaller than as recent as fiscal year 2010, with a
    fiscal year 2014 estimated FTE level of 470. As a result of
    sequestration, OMB employees were required to take 8 furlough days last
    year--the most of any agency in the Federal Government. While the
    funding restored in fiscal year 2014 appropriations was a step in the
    right direction, and we thank the subcommittee for its support, there
    is still work to be done. The requested funding will allow OMB to
    continue to play a central role in supporting the development and
    execution of a wide range of crucial programs and policies and managing
    critical Government functions. Today more than ever, OMB has a central
    role to play in our efforts to move our economy forward by creating
    jobs, growing the economy, and promoting opportunity for all.
                              focus on efficiency
        Constantly improving the state of Federal technology is a priority
    for this administration and is a mission that OMB takes seriously. In
    these times of fiscal constraint, this means we must drive innovation
    while controlling spending--by maximizing effectiveness and efficiency
    in everything we do. The administration's first term efforts largely
    focused on establishing mechanisms to stop out of control IT spending,
    promoting new technologies such as cloud computing and mobile, opening
    up Federal Government data for private sector use, enhancing cyber
    capabilities, and deploying Federal technology as a tool to increase
    efficiency to allow Government to do more with less.
        In the decade prior to this administration, the Federal IT budget
    increased at the compound annual growth rate of 7.1 percent. If
    spending increased at the same rate during this administration, our
    current IT budget request would total $117 billion. However, through
    PortfolioStat data-driven accountability sessions, and with the help of
    this subcommittee, Federal agencies enhanced analytical approaches to
    more effectively manage Federal IT portfolios and improve IT cost
    oversight. The Office of E-Government established a rigorous,
    continuous process for agencies to drive and measure information
    technology savings through the consolidation of duplicative services
    and other tactics to fund investment in innovation.
        The result is over $2.5 billion of identified cost savings and $1.9
    billion of realized savings through the PortfolioStat process and a
    consolidation of commodity IT. During this administration, we flatlined
    Federal IT spending, driving efficiencies and fueling innovation across
    the Federal technology portfolio, through initiatives like data center
    consolidation, cloud computing and the administration's Digital
    Government strategy, all the while working to keep Federal data safe
    and secure. Through these efforts and others, Federal agencies began to
    seize upon productivity gains seen in the private sector and apply
    technology to improve efficiency of our Government.
                             focus on effectiveness
        With our actions to drive efficiency across IT portfolios firmly
    underway, the administration is also increasing its efforts to deliver
    smarter, more effective applications of technology to improve the
    delivery of Federal services, information, and benefits. In doing so,
    we are applying the same rigor and data-driven analytical capabilities
    we used to drive efficiency across Federal IT to ensure agencies use IT
    effectively to deliver on their core missions.
        To deliver citizens the services they expect from their Government,
    we must shift the focus of Federal Government IT projects from
    compliance and process to meeting user needs. We must be intensely
    user-centered and agile, involve top talent from the private sector in
    Government IT projects, and ensure agency leadership is actively
    engaged and accountable to the public for the success of the digital
    services of their agency. To support this effort, the administration's
    Smarter IT Delivery Agenda seeks to improve the value we deliver to
    citizens through Federal IT, and the speed and cost-effectiveness with
    which it is delivered.
        The work of the Smarter IT Delivery Agenda builds upon the progress
    of reshaping the delivery of information technology already underway,
    as well as introduces new approaches and tools to transform the
    Government IT landscape. To do this, we are focused on a three-part
    agenda focused on ensuring the Federal Government has: (1) the best
    talent working inside Government; (2) the best companies working with
    Government; and, (3) the best processes in place to make sure everyone
    involved can do their best work and be held accountable for delivering
    excellent results for our customers, the American people.
        The Smarter IT Delivery Agenda aims to increase customer
    satisfaction with top Government digital services; decrease the
    percentage of Government IT projects that are delayed or over budget;
    and increase the speed with which we hire and deploy qualified talent
    to work on Government IT projects.
        There are several key projects already underway, and we will
    undertake additional projects in the coming months as the agenda
    continues to evolve.
          focus area 1: get the right talent working inside government
        IT excellence starts with having the best people executing IT in
    Government. While there are many talented IT professionals across
    Government, it is clear that we need to broaden and deepen this talent
    pool to meet present and future needs.
        We must also work to solve the current challenges facing Government
    when it comes to quickly hiring qualified technical talent. IT is
    already one of the most competitive job markets in our economy, but
    Government hiring processes make competing for that talent even more
    challenging. Today, the average hiring cycle for IT specialists in the
    Federal Government is over 100 days. The norm for leading private
    sector companies is 7-14 days. Given the competitive markets for
    technical talent, Government is often unable to acquire top candidates
    given the current hiring process.
    The Digital Service
        To accelerate the pace of change, we are standing up a Digital
    Service--a centralized, world-class capability that is part of the
    Federal Chief Information Officer (CIO) Team made up of our country's
    brightest digital talent, which we will pilot with existing funds in
    2014, and scale in 2015 according to the President's fiscal year 2015
    budget. The team will be charged with removing barriers to exceptional
    Government service delivery and remaking the digital experiences that
    citizens and businesses have with their Government.
        Through a modest team of people housed within the E-Government
    office at OMB, the Digital Service will establish standards to bring
    the Government's digital services in line with the best private sector
    service experiences, define common platforms for re-use that will
    provide a consistent user experience, collaborate with agencies to
    identify gaps in their delivery capacity to design, develop, and deploy
    excellent citizen-facing services, and provide oversight and
    accountability to ensure we see results. The Digital Service is a close
    partnership with the 18F delivery team at the U.S. General Services
    Administration (GSA), and will work side-by-side with agencies to
    ensure they have the resources and talent needed to deliver great
    services on time, on spec, on budget, and with optimal user
    functionality.
    Flexible Hiring Authority Options for IT Talent
        Building on the success of the Presidential Innovation Fellows
    program--a program that is delivering low cost, innovative solutions
    like RFP-EZ, advancing open data initiatives at agencies and more--the
    administration is pursuing flexible hiring authority options for IT
    talent, reducing barriers to the hiring of key digital experts in
    Government. The program is being developed in partnership with the
    Office of Personnel Management, and would be phased in with agencies
    such as GSA.
          focus area 2: get the best companies working with government
        The administration is also taking steps to reduce barriers and
    burdens in Federal procurement and increase the ability for innovative
    and non-traditional companies to work with the Federal Government with
    FBOpen--a new platform that allows easier access to Federal
    opportunities. In addition, OMB recently worked with GSA and
    procurement experts across Government on an open dialogue \1\ to reduce
    barriers and burdens in Federal procurement.
    ---------------------------------------------------------------------------
        \1\ http://www.gpo.gov/fdsys/pkg/FR-2014-04-23/pdf/2014-09129.pdf.
    ---------------------------------------------------------------------------
    Open Dialogue
        The open dialogue was a joint effort between the Chief Acquisition
    Officers Council, OMB, GSA, and the Chief Information Officers Council
    to engage all stakeholders in the acquisition community to better
    understand the opportunities and challenges they face when doing
    business with the Federal Government. The focus of the dialogue was to
    generate solutions in three areas: streamlining reporting and
    compliance requirements, identifying industry best practices, and
    increasing participation by qualified non-traditional Government
    contractors. We anticipate that we will have recommendations for
    actions emerging from this work, and are eager to work with Congress on
    developing a whole-of-Government approach to improving Federal
    acquisitions.
     focus area 3: put the right processes and practices in place to drive
                          outcomes and accountability
        Complicated Federal IT projects often face similar challenges: (1)
    they lack visibility and real-time communication among the technical or
    IT staff, the mission or business owner, and the executive team; (2)
    they use the outdated waterfall approach to technology development,
    which includes long lead requirements setting rather than the agile
    approaches--where products are developed in rapid, iterative cycles--
    that have made the consumer Internet so successful; and (3) there is
    responsibility and accountability regarding compliance issues, but not
    enough end-to-end responsibility for the project actually working for
    its intended users at targeted investment levels. Taken together, these
    qualities can result in sub-optimal outcomes and high costs.
        To address these issues, the administration will focus its efforts
    on driving accountability for customer service, mission results and
    cost; sharing best practices; and guiding agencies and contractors in
    delivering great digital services.
    Tech FAR Guide
        The administration will develop a compilation of the 21st century,
    agile aspects of the Federal Acquisition Regulation (FAR) that will
    guide agencies in soliciting services in new ways--ways that more
    closely match techniques used by the private sector--such as using
    challenges and crowdsourcing approaches to involve citizens, writing
    requirements that allow for more flexible execution, or a pay-for-
    service model. In particular, the guide will include FAR-allowed
    processes used by agencies that have successfully implemented IT
    projects, many of which are currently underutilized.
    Digital Service Playbook
        The administration will develop a Digital Service Playbook to share
    best practices for effective IT service delivery in Government. This
    playbook will build on successes both within and outside Government and
    will guide both technical and business owners within agencies. It will
    include best practices for building modern solutions across the
    implementation of the technology, how to measure customer input and
    manage customer expectations, and how to share solutions across
    Government.
    PortfolioStat 2014
        This spring, the administration is implementing PortfolioStat 2014,
    the third year of this successful program. PortfolioStat 2014 will not
    only continue the rigorous data-driven focus on finding efficiencies in
    agencies that has resulted in $1.9 billion in savings since 2012, but
    also adds a new focus on accountability around service delivery to
    ensure agencies are accountable for delivering on their highest impact
    IT investments. As I have testified previously, the PortfolioStat
    process brings together technology experts with the agency's senior
    accountable officials and Deputy Secretary to evaluate agency
    performance against measured outcomes and increase accountability and
    responsibility within agencies.
       the information technology oversight and reform fund and enhanced
                                 cybersecurity
        To support this work, the fiscal year 2015 budget requests $20
    million for the Information Technology Oversight and Reform (ITOR)
    fund. This fund, previously known as the Integrated, Efficient, and
    Effective Uses of Information Technology (IEEUIT), will use data,
    analytics and digital services to improve the efficiency, effectiveness
    and security of Government operations and programs.
        With the funding requested for fiscal year 2015, OMB would continue
    the work of PortfolioStat and enhance cybersecurity capabilities that
    will ensure we can protect our country's national digital assets. The
    additional funding represented in ITOR will enable OMB to better
    leverage analytics and industry expertise to conduct targeted, risk-
    based oversight reviews of agencies' cybersecurity activities. The
    result of these efforts will inform future Federal information security
    policies, metrics, and Cross Agency Priority (CAP) goals, and will
    ensure successful implementation of important policy work underway with
    continuous diagnostics, anti-phishing, and identity management
    initiatives. The fiscal year 2015 ITOR request represents a modest
    investment in comparison to the total Federal IT spending of
    approximately $80 billion annually. Through the ITOR fund and the help
    of the subcommittee, we have delivered tangible results in Government
    technology efficiency. We look forward to delivering the same return on
    investment from these funds as we apply them to effectiveness of
    technology in fiscal year 2015.
                                   conclusion
        In conclusion, it is apparent that in today's world we can no
    longer separate the effectiveness of our Federal programs from the
    smart use of IT. By increasing emphasis on customer needs and making it
    faster and easier for individuals and businesses to complete
    transactions with the Government--online or offline--we can deliver the
    world-class services that citizens expect. To do this it is imperative
    that we get the best talent working inside Government, the best
    companies working with Government, and the best processes in place to
    deliver results for our customers, the American people.
        Mr. Chairman and members of the subcommittee, thank you for holding
    this hearing and inviting me to speak today. I appreciate this
    subcommittee's interest and ongoing support and I am excited to
    continue working with the subcommittee on our shared goal of improving
    the efficiency and effectiveness of our Government. I would be pleased
    to answer any questions you may have at this time.

        Senator Udall. Thank you very much, Mr. VanRoekel.
        Administrator Tangherlini, I invite you now to present your
    remarks on behalf of the General Services Administration.
    STATEMENT OF HON. DAN TANGHERLINI, ADMINISTRATOR,
                GENERAL SERVICES ADMINISTRATION
        Mr. Tangherlini. Thank you very much and good afternoon,
    Chairman Udall, Ranking Member Johanns, full committee Chair
    Mikulski, members and staff of the committee. My name is Dan
    Tangherlini, and I am the administrator of the U.S. General
    Services Administration, or GSA.
        Before focusing on the topic of today's hearing, I would
    like to do two things, first, introduce our new deputy
    administrator, Denise Roth, who as chief operating officer will
    focus, among other duties, on internal GSA information
    technology. And next, I would like to thank the chairman, the
    ranking member, committee members, and staff for your hard work
    on the fiscal year 2014 Consolidated Appropriations Act,
    especially in the current funding environment.
        This legislation represented a positive step forward for
    our Nation and for our economy. Among its many provisions, the
    act made available more than $9.3 billion in funding for GSA to
    invest in our Nation's public building infrastructure, pay rent
    for our leased buildings, consolidate offices to save money,
    and upgrade land ports of entry to secure our borders.
        GSA's fiscal year 2015 budget request looks to continue
    these efforts. And I want to sustain our partnership to make
    sure this is not an isolated investment, but a foundation for a
    long-term, sound management of our Government's real property
    infrastructure.
        The challenges of technology procurement and delivery
    facing the Government have been a focus for better management
    and oversight throughout this administration. Given GSA's
    mission to deliver the best value in real estate acquisition
    and technology services to the Government and the American
    people, we believe we are uniquely positioned to help make a
    difference in these efforts.
        Through better management of our own IT investments, as
    well as offerings GSA provides Governmentwide, GSA can support
    the administration's efforts to better manage IT.
        Since my arrival at GSA, we have been focused on
    consolidating and streamlining major functions within the
    agency to eliminate redundancy, improve oversight, and increase
    accountability. As part of GSA's top-to-bottom review, GSA
    brought together all IT functions, budgets, and authorities
    from across the agency under an accountable, empowered GSA
    Chief Information Officer (CIO) in line with the best practices
    followed by most modern organizations today.
        GSA now has one enterprise-wide process for making IT
    investments, which ensures that investments are geared toward
    the highest priorities in support of agencies' strategic goals.
        We set internal goals to reduce ongoing operating costs to
    allow the organization to make better long-term investments
    using our enterprise-wide, data-driven IT budget process.
        Consolidation also provides an opportunity to adopt the
    best forward-leaning practices in supporting investments. In
    recognition of the need to modernize not just applications, but
    how we support IT, and consistent with broader Federal efforts,
    GSA instituted a cloud-first policy that prompts all
    application development initiatives to look first to the GSA
    cloud platforms before considering legacy platforms with higher
    operational costs.
        The focus of our transition has not been limited to what we
    build, but also how we build. Our move to an agile development
    shop has resulted in a significant increase in our ability to
    rapidly deploy and scale.
        Consolidated IT governance is also helping GSA realize a
    high-performing IT environment as effectively and efficiently
    as possible while also providing a level of transparency and
    accountability that will lead to continuous, ongoing
    improvement.
        GSA also looks for opportunities to help agencies adopt new
    technologies and take advantage of digital services that
    improve mission delivery and enhance their interactions with
    the public.
        For example, we recently announced the creation of 18F, the
    digital delivery team within GSA that aims to make the
    Government's digital and Web services simple, effective, and
    easier to use for the American people.
        By using lessons from our Nation's top technology startups,
    these public service innovators are looking to provide support
    for our Federal partners in delivering better digital services
    at reduced time and cost, and making us a better consumer of
    IT.
        GSA's internal IT reforms, acquisition solutions, and
    digital services are in keeping with our mission to deliver the
    best value in information technology solutions to Government
    and the American people.

                               PREPARED STATEMENT

        GSA still has a lot of work ahead of us, and I am grateful
    for the subcommittee's support for our reform efforts. I
    appreciate the opportunity to appear before you today, and I am
    happy to answer any questions that you have. Thank you.
        [The statement follows:]
                   Prepared Statement of Hon. Dan Tangherlini
        Good afternoon, Chairman Udall, Ranking Member Johanns, and members
    of the subcommittee. My name is Dan Tangherlini, and I am the
    Administrator of the U.S. General Services Administration (GSA).
        The challenges of technology procurement and delivery facing the
    Government have been a focus for better management and oversight
    throughout this administration. They present an opportunity to deliver
    better outcomes for the American people in a more efficient manner.
    Given the U.S. General Services Administration's mission to deliver the
    best value in real estate, acquisition, and technology services to the
    Government and the American people, we believe we are uniquely
    positioned to help make a difference in these efforts. Through better
    management of our own information technology (IT) investments, as well
    as offerings GSA provides Governmentwide, GSA can support the
    administration's efforts to better manage IT and help to continue
    improving some of these longstanding challenges.
                           gsa information technology
    Empowering the Chief Information Officer
        Since my arrival at GSA, we have been focused on consolidating and
    streamlining major functions within the agency to eliminate redundancy,
    improve oversight, and increase accountability. Consistent with the
    administration's push to strengthen Chief Information Officer (CIO)
    authorities, GSA brought together all IT functions, budgets, and
    authorities from across the agency under an accountable, empowered GSA
    CIO, in line with the best practices followed by most modern
    organizations today. GSA has moved from 17 different regional and
    bureau CIOs to one enterprise CIO office. To improve management and
    accountability, GSA established the Investment Review Board co-chaired
    by the GSA CIO and Chief Financial Officer (CFO) with oversight and
    authority over all GSA IT spending. Prior to this consolidation, GSA's
    business lines and often the regions had separate IT systems and
    budgets, providing limited visibility and oversight into proposed
    investments and creating significant redundancy and inefficiency.
    Enterprise Planning
        GSA now has one enterprisewide process for making IT investments,
    which ensures that investments are geared toward the highest priorities
    in support of the agency's strategic goals. We are now able to more
    comprehensively look at the portion of spending that is focused on
    operating and maintaining existing systems. We have set internal goals
    to reduce ongoing operating costs to allow the organization to make
    better long-term investments using our enterprisewide, data driven
    zero-based IT budgeting process.
    Zero-based IT Budgeting
        GSA is beginning to leverage an internal zero-based IT budgeting
    (ZBB) process to develop the IT budget. ZBB is a budgeting method that
    requires justification for all expenses in each new fiscal period. This
    method will ensure budgeting processes align to the organization's
    strategy by tying budget line items to specific strategic goals and
    initiatives. For instance, GSA used to maintain multiple systems to
    track engagements with partner Federal agencies. Through these changes,
    GSA's major business lines will share these tools, facilitating a two-
    fold win. From an IT perspective, we eliminated the cost of maintaining
    redundant systems, resulting in lower operations and maintenance costs.
    From the mission execution side, we improved engagement with partner
    Federal agencies by putting a more complete picture of who we work with
    in the hands of our staff.
    Enhanced Use of Cloud Computing and Consolidation of Data Centers
        Consolidation also provides an opportunity to adopt the best
    forward-leaning practices not just in where and what IT investments are
    made, but also how we support these investments. In recognition of the
    need to modernize not just applications but how we support IT, and
    consistent with broader Federal efforts, GSA instituted a ``cloud
    first'' policy that prompts all application development initiatives to
    look first to the GSA cloud platforms available as technology solutions
    before evaluating legacy platforms with higher operational costs. In
    doing this, GSA has saved money not only in the areas of reduced
    infrastructure costs, but also through the reuse of previously
    developed functionality. This initiative in part has also allowed us to
    consolidate 1,700 legacy applications into fewer than 100 cloud-based
    applications between 2011 and 2013. GSA's use of cloud services has
    saved $15 million\1\ over the past 5 years. GSA has also been
    aggressive in shutting down unneeded data centers as part of the
    Federal Data Center Consolidation Initiative. In fiscal year 2013, GSA
    shut down 37 data centers, meeting our goal, and we intend to shut down
    an additional 24 this fiscal year.
    ---------------------------------------------------------------------------
        \1\ Savings resulting from use of cloud services, such as
    Salesforce Platform as a Service, and E-mail as a Service.
    ---------------------------------------------------------------------------
    Agile Development
        The focus of our transition has not been limited to what we build,
    but also how we build. GSA IT has moved away from the world of
    waterfall application development methodologies that have historically
    led to higher costs and poor product quality, to an agile methodology
    which allows us to work better, faster, and leaner than we ever have
    before. Our move to an agile development shop has resulted in a
    significant increase in our ability to rapidly deploy and scale. As a
    result, beginning in 2013, GSA's development cycle time has been
    reduced to 6 to 8 weeks from 8 to 12 months.
        These IT reform initiatives have resulted in more efficient
    allocation of IT resources. In fiscal year 2013, GSA spent $698 million
    in IT spending. In fiscal year 2015, GSA requested $572 million, a
    reduction of nearly 18 percent. We have cut 45 full time equivalent
    positions in the IT area and identified several duplicative systems in
    the regions and between various offices that are now being
    consolidated. In addition, GSA's strategic hiring plan is focused on
    obtaining IT skills through Government hires to allow us to decrease
    the reliance on contractors in some areas.
        Consolidated IT governance helps GSA realize a high performing IT
    environment as effectively and efficiently as possible. Enterprise IT
    governance will ensure GSA is investing in the right initiatives at the
    right time, allow greater oversight of key IT investments, and promote
    interoperability and transparency through the GSA enterprise. It also
    allows a level of transparency and accountability that will lead to
    continuous ongoing improvement.
                            it acquisition solutions
        In addition to our efforts to better manage internal GSA IT
    investments and policies, we also offer acquisition solutions to
    agencies that deliver savings and enable them to focus more on core
    mission activities.
        GSA aggregates and leverages the Federal Government's buying power
    to obtain a wide range of information technology and telecommunications
    products and services in support of agency missions across Government
    through contract vehicles like Schedule 70 and Networx. Schedule 70 is
    an indefinite delivery/indefinite quantity (IDIQ) multiple award
    schedule that provides direct access to products, services, and
    solutions from more than 5,000 certified industry partners. Networx
    provides cost-effective solutions for partner agencies' communications
    infrastructure and service needs. Through better pricing of these and
    other similar acquisitions, GSA helped agencies save more than $1
    billion in fiscal year 2013, and will help them save an additional $1
    billion in fiscal year 2014 on these acquisitions.\2\
    ---------------------------------------------------------------------------
        \2\ Compared to commercial pricing for comparable services and
    terms and conditions.
    ---------------------------------------------------------------------------
        Additionally, GSA is currently developing the Prices Paid Portal.
    This proof of concept tool is intended to provide greater visibility
    into the prices paid by Government agencies for commonly purchased
    goods and services. Currently, the system is being populated with
    initial data on simple commodities such as office supplies, with data
    on more complex items to follow. Allowing the Federal acquisition
    community to see and analyze the cost of these goods and services is
    intended to drive better pricing for all future Federal procurements.
    Our hope is to replicate our purchasing experience as individuals where
    comparative market pricing information is widely available, such as
    many e-commerce, travel and secondary market portals.
                  innovative technologies and digital services
        GSA also looks for opportunities to help agencies adopt new
    technologies and take advantage of digital services that improve
    mission delivery, and enhance their interactions with the public. For
    example, the Federal Risk and Authorization Management Program
    (FedRAMP) is a Governmentwide program that accelerates adoption of
    cloud computing across Government by providing a standardized approach
    to security assessment, authorization, and continuous monitoring for
    cloud products and services. This mandatory approach, which uses a ``do
    once, use many times'' framework, is saving cost, time, and staff
    required to conduct redundant agency security assessments.
        GSA helps to ensure that we have tools that allow the Government to
    access the ingenuity of the American people to help solve Government's
    challenges. GSA manages Challenge.gov, an award winning platform to
    promote and conduct challenge and prize competitions Governmentwide.
    Challenge.gov seeks to involve more Americans in the work of
    Government. Eighty contests were hosted in fiscal year 2013, covering a
    wide range of technical and creative challenges. For instance, the
    Federal Trade Commission (FTC) hosted a robocall challenge, which asked
    innovators to create solutions to block illegal robocalls on landline
    or mobile phones. The FTC received nearly 800 entries and selected two
    winners in a tie for the best overall solution. One winning solution,
    Nomorobo, went to market on September 30, 2013, and has blocked nearly
    1.3 million calls for consumers.
        GSA also is leading efforts to open Government data to
    entrepreneurs and other innovators to fuel development of products and
    services that drive economic growth. GSA operates Data.gov, the
    flagship open Government portal, which enables easy access to and use
    of more than 90,000 data collections from over 180 Government agencies.
    By facilitating information transparency and access, GSA allows anyone,
    whether an individual or a business, to take public information and
    apply it in new and useful ways. A snapshot of the power of open data
    can be seen on Data.gov/Impact, which provides a list of companies
    leveraging open Government data to power the economy.
        GSA is also committed to helping agencies through smarter delivery
    of IT projects. In collaboration with White House Office of Science and
    Technology Policy, GSA manages the Presidential Innovation Fellows
    (PIF) program. The PIF program recruits and sources some of our
    Nation's brightest individuals to specific agencies and challenges them
    to implement solutions that save money and make the Federal Government
    work better for the American people. The program is set up to deliver
    results in months, not years, and has already demonstrated its value
    through solutions like the United States Agency for International
    Development's (USAID's) Better Than Cash and the Department of Veterans
    Affairs' (VA's) Blue Button.
        Building on this approach, and in coordination with the Digital
    Service at the Office of Management and Budget (OMB), GSA recently
    announced the creation of 18F-- a digital delivery team within GSA that
    aims to make the Government's digital and Web services simple,
    effective, and easier to use for the American people. By using lessons
    from our Nation's top technology startups, these public service
    innovators are looking to provide support for our Federal partners in
    delivering better digital services at reduced time and cost. 18F is
    structured to develop in an agile manner, building prototypes rapidly
    and putting them in the hands of users for feedback; measure success
    not in terms of completion of a system, but through customer use; build
    core capacity so that the Government can build and deliver technology
    solutions; and scale what works iteratively.
        18F is already engaged in various initiatives to improve services
    GSA provides to our constituents. As an example, the 18F team helped
    develop a new, innovative tool called FBOpen (fbopen.gsa.gov) that
    allows small and innovative businesses to quickly access Federal
    contracting and grant opportunities by using simple search queries.
    This open source search tool makes it easier for small businesses and
    less traditional Federal contractors to better find and bid on
    Government opportunities, while increasing competition and delivering a
    simpler way to find all of the opportunities the Federal Government
    makes available. By pairing innovative technologists with agency
    procurement experts and reaching out to small businesses to understand
    their needs, GSA was able to successfully test (and deploy) a viable
    product in less than 6 months. FBOpen is just one example of how use of
    smarter IT practices can shorten the time to value, whether work is
    performed by Federal employees, contractors, or both.
                                   conclusion
        GSA's internal IT reforms, acquisition solutions, and digital
    services are in keeping with our mission to deliver the best value in
    information technology solutions to Government and the American people.
    GSA still has a lot of work ahead of us, and I appreciate the
    subcommittee's support of our reform efforts.
        I appreciate the opportunity to appear before you today and I am
    happy to answer any questions you have. Thank you.

        Senator Udall. Thank you for your testimony.
        And now, Director Archuleta, I would like you to present
    your remarks on the half of the Office of Personnel Management.
    STATEMENT OF HON. KATHERINE ARCHULETA, DIRECTOR, OFFICE
                OF PERSONNEL MANAGEMENT
        Ms. Archuleta. Thank you, Chairman Udall, Ranking Member
    Johanns, and Chairwoman Mikulski for inviting me to participate
    in today's hearing on the oversight of the information
    technology investments and to testify on the issues facing the
    Federal IT workforce.
        As director of the Office of Personnel Management, one of
    my goals is to build an engaged, inclusive, diverse, and well-
    trained workforce, not only for today's needs, but also for the
    future.
        In order to meet their missions, Federal agencies must have
    the tools to attract, develop, and keep top talent from all
    segments of society. To accomplish this, the Office of
    Personnel Management (OPM) is partnering with agencies to help
    address Governmentwide and agency-specific recruitment,
    training, and retention needs in areas where skills are in high
    demand.
        The development and proper deployment of IT will require
    fast thinking and intelligent minds at the helm in order to tap
    into the vast potential for the skillful harnessing of cyber's
    possibilities.
        The demand for cyber skills is real. The Bureau of Labor
    Statistics has projected that computer occupations will grow by
    18 percent from 2012 to 2022, while all other occupations will
    grow by 11 percent.
        This is why OPM supports the Governmentwide development of
    qualified Federal cyber personnel through workforce planning,
    recruitment, training and development, and other initiatives.
        OPM is the lead agency to meet to the OMB cross-agency
    priority goal to close critical skills gaps in the Federal
    workforce. We have partnered with relevant interagency councils
    and working groups and to design the most effective strategies
    to address cyber workforce needs.
        OPM realizes that agencies may need to take advantage of
    existing flexibilities to meet their hiring needs. We have
    collaborated with the CIO Council to ensure a broad
    understanding of the various hiring and pay authorities
    available to attract and bring on board needed talent.
        OPM has also helped agencies cut down the time it takes to
    hire, from the posting of a vacancy announcement to bringing
    employees on board.
        OPM is committed to ensuring that agencies are aware of the
    services we can offer in the crafting of job opportunity
    announcements in a way that gets them to the best possible
    candidates. With well-written job opportunity announcements,
    agencies can find superior candidates for a position and fill
    that post as quickly as possible.
        Agencies have a number of existing pay and leave
    flexibilities at their disposal that can be used to recruit and
    retain cyber personnel. This includes recruitment and retention
    incentives, enhanced annual leave accrual rates, student loan
    repayments, as well as general workplace flexibilities.
        In addition, OPM is ready to work with agencies to consider
    providing special rates or critical position pay.
        Further, three initiatives have been identified as possible
    positive courses of forward action. The first is the
    establishment of a cross-Government talent exchange program
    called GovConnect. GovConnect will help all agencies test and
    scale talent exchange programs. It would enable employees to
    find project-based rotational assignments and enable managers
    to reach into the broader Federal workforce to fill critical
    needs.
        Second, OPM is working on a learning and development
    resource exchange called GovU. GovU would be a collaborative
    model for the sharing of training and development resources
    across the Federal Government.
        Finally, training and development resources are critical
    tools in employee growth. OPM will continue to work with
    agencies and other stakeholders to utilize existing recruitment
    and retention tools, and explore whether additional
    flexibilities are warranted. These efforts will help ensure
    that we build and develop a Federal IT workforce that is
    engaged, inclusive, and high-performing in order to meet the
    changing challenges of today and tomorrow.

                               PREPARED STATEMENT

        Thank you for inviting me here today, and I am happy to
    answer any questions you may have.
        [The statement follows:]
                 Prepared Statement of Hon. Katherine Archuleta
        Thank you for inviting me to participate in today's hearing
    regarding oversight of information technology (IT) investments, and to
    testify on issues facing the Federal IT workforce. I am happy to be
    here with you today.
        As Director of the Office of Personnel Management (OPM), one of my
    goals is to build an engaged, inclusive, diverse, and well-trained
    workforce, not only for today's needs but also for the future. In order
    to meet their missions, Federal agencies must have the tools to
    attract, develop, and keep top talent, from all segments of society. To
    this end, OPM is partnering with agencies to help address
    Governmentwide and agency-specific recruitment, training, and retention
    needs in areas where skills are in high demand.
        Anticipating cyber workforce needs and ensuring that the Federal
    Government is prepared to meet those needs is an important goal for
    OPM. The development and proper deployment of cyber will require fast-
    thinking, intelligent minds at the helm in order to tap into the vast
    potential for the skillful harnessing of cyber's possibilities. The
    demand for cyber skills is real--the Bureau of Labor Statistics
    projects that computer occupations will grow by 18 percent between
    2012-2022, while all other occupations will grow by 11 percent. This is
    why OPM supports the Governmentwide development of qualified Federal
    cyber personnel through workforce planning, recruitment, training and
    development and other initiatives. This development is informed by
    routine data analysis that OPM conducts to assess the needs arising out
    of the Federal cyber workforce, as well as agency progress toward
    meeting cyber workforce targets. In addition, OPM has launched the
    first-ever complete inventory of all cyber positions in the Federal
    Government, to be housed in our Enterprise Human Resources Information
    (EHRI) system. Agencies are currently working to populate this database
    with a designation code for all positions that conduct work related to
    cybersecurity. Through the EHRI data set, OPM and agencies will have
    clearer visibility on current and projected cyber workforce needs.
        OPM is the lead agency to meet the Office of Management and
    Budget's (OMB's) Cross Agency Priority Goal to close critical skills
    gaps in the Federal workforce, and has partnered with relevant
    interagency councils and working groups to design the most effective
    strategies to address cyber workforce needs. Further, OPM, in our
    continued support of the White House's 25 Point Implementation Plan To
    Reform Federal IT Management, has developed the IT Program Management
    Career Path Guide and recommended training curriculum for the newly
    established IT Program Management job title. OPM worked closely with
    the Chief Information Officers (CIO) Council and OMB on this project.
    The final product provides guidance to Federal agencies on the creation
    and improvement of the IT Program Management career path at each
    agency.
        OPM continues to support the National Science Foundation's
    administration of the CyberCorps Scholarship for Service (SFS) program.
    The SFS program awards scholarships to students pursuing a degree in
    cybersecurity. In exchange for the scholarship, students agree to work
    for the Government in a cybersecurity position. OPM provides program
    guidance, monitors student progress, hosts virtual career fairs,
    participates in the planning and execution of live job fairs, and
    markets the SFS program to students and Federal agencies. In January
    2014, the annual job fair attracted more than 400 students, who had the
    opportunity to network with recruitment representatives from over 40
    Federal agencies. Since 2002, more than 1,500 students have graduated
    and gone to work for over 130 different agencies and sub-agencies in a
    variety of occupations such as IT management, computer scientist, and
    computer engineer.
        OPM realizes that agencies may need to take advantage of existing
    flexibilities to meet their hiring needs. To this end, OPM has
    partnered with the CIO Council to ensure there is a broad understanding
    of the various hiring and pay authorities available to attract and hire
    the talent needed. Over the years, OPM has provided agencies with a
    number of expedited hiring authorities where suitable justification has
    been given. This includes Governmentwide Direct-Hire Authority for
    cybersecurity professionals, at grade 9 and above, in the Information
    Technology Management series (Information Security). OPM has also
    helped agencies cut down on the timeline of an average hire from the
    posting of a vacancy announcement to bringing employees on board. OPM
    is also committed to ensuring that agencies are aware of the services
    OPM can offer in crafting job opportunity announcements in a manner
    that nets them the best possible candidates. OPM, through both our
    public policy function and our reimbursable services offered via USA
    Staffing, can help agencies develop and post clear and attractive job
    opportunity announcements. With well written job opportunity
    announcements, agencies can both find superior candidates for the job
    and achieve quick, timely hiring. We recommend that agencies take
    advantage of OPM's expertise as a resource when beginning their
    candidate search.
        Agencies have a number of existing pay and leave flexibilities at
    their disposal that can be used to recruit and retain cyber personnel.
    This includes the ability to set pay above the minimum rate for newly
    hired cyber employees with superior qualifications or who are filling a
    special agency need; recruitment and retention incentives; enhanced
    annual leave accrual rate; student loan repayments; as well as general
    workplace flexibilities including telework and alternative work
    schedules. In addition, OPM is ready to work with agencies to consider
    providing special rates or critical position pay. Special rates are
    intended to address significant or likely significant agency handicaps
    in recruiting or retaining qualified employees. Similarly, the critical
    position pay authority requires individuals to possess an extremely
    high level of expertise in scientific or technical fields. Agencies
    must show that a position being considered for higher compensation
    under critical position pay is critical to the agency's successful
    accomplishment of an important mission. Further, the critical position
    pay authority may only be used to the extent necessary to recruit or
    retain an individual exceptionally well qualified for the position.
        Overall, OPM is supporting the development of Governmentwide
    enterprise training and resource exchanges across agencies as called
    for in the President's fiscal year 2015 budget. For example, OPM will
    develop university partnerships that increase access for Federal
    employees to affordable education and training that is targeted to the
    Federal Government's priority skills needs, such as science,
    technology, engineering, and mathematics. These partnerships will
    enable Federal occupational and human resources leaders to work with
    post-secondary institutions to target curriculum to emerging skills
    needs in the Federal Government.
        Working with agencies to address their cyber workforce needs
    requires anticipating workforce challenges and creating a culture of
    excellence and engagement to enable higher performance. To this end,
    three initiatives have been identified as possible positive courses of
    action. While each of these initiatives can apply outside of the cyber
    workforce, each can appropriately be used to address agencies' cyber
    workforce needs. We are still in the vetting stage, but we think these
    ideas have promise.
        The first idea is the establishment of a cross-Government talent
    exchange program called GovConnect. GovConnect would be designed to
    help all agencies test and scale talent exchange programs and enable
    employees to find project-based rotational assignments and enable
    managers to reach into the broader Federal workforce to fill critical
    skills needs. GovConnect would seek to create a more mobile and agile
    workforce through communities of practice that can share ideas and
    solutions with each other through online networking.
        Secondly, OPM is working on a reimbursable learning and development
    resource exchange called GovU. GovU would be modeled off OPM's Human
    Resources University (HRU). HRU has, at its core, a collaborative model
    for the sharing of training and development resources across the
    Federal Government. OPM hopes to continue in this model with GovU by
    enabling agencies to share training and development resources to meet
    common needs. To facilitate this, OPM is collaborating with the Chief
    Human Capital Officers' Council and the Chief Learning Officers'
    Council to create an operational project plan.
        Finally, training and development resources are critical tools in
    employee growth, and OPM is reviewing these resources to ensure they
    are consistently excellent and easily accessible Governmentwide.
    Further, through increased training and development comes greater
    accountability from and higher performance expectations for Federal
    employees. As capabilities and credibility are enhanced, efforts are
    needed to incorporate continuous improvement in the education
    opportunities and tools available to Federal employees.
        OPM will continue to work with agencies, and with our labor
    partners, and other stakeholders to utilize existing recruitment and
    retention tools and to explore whether additional flexibilities are
    warranted to address IT workforce needs. OPM will continue to help
    agencies enhance the management and performance of their workforce by
    sharing best practices and leadership development resources. These
    efforts will help ensure that we build and develop a Federal IT
    workforce that is engaged, inclusive, and high performing in order to
    meet the challenges of both today and tomorrow.
        Thank you for inviting me here today, and I am happy to address any
    questions you may have.

        Senator Udall. Thank you very much for your testimony.
        Mr. Powner, I now invite you to present your remarks on
    behalf of the GAO.
    STATEMENT OF HON. DAVID POWNER, DIRECTOR, INFORMATION
                TECHNOLOGY ISSUES, GOVERNMENT
                ACCOUNTABILITY OFFICE
        Mr. Powner. Chairman Udall, Ranking Member Johanns,
    Chairwoman Mikulski, we appreciate the opportunity to testify
    on how the Federal Government can better manage its annual $80
    billion investment in information technology. Of this $80
    billion, three-quarters is spent on operational or legacy
    systems while the remaining goes toward new development.
    Therefore, it is vitally important that new systems
    acquisitions are managed and governed effectively, and that the
    Federal Government finds more efficient ways to deliver
    existing services.
        Over the past 5 years, OMB has initiated excellent efforts
    to do just that. This morning, I would like to highlight four
    significant initiatives, the IT Dashboard, TechStat sessions,
    data center consolidation, and PortfolioStat. For each, I will
    highlight accomplishments to date, but also what needs to be
    done to get even more out of these initiatives.

                        INFORMATION TECHNOLOGY DASHBOARD

        Starting with the Dashboard, the IT Dashboard was put in
    place to highlight the status and CIO assessments of
    approximately 750 major IT investments across 27 departments.
    This public dissemination of each project's status is intended
    to allow OMB and the Congress to hold agencies accountable for
    results and performance.
        The accuracy of the information on the Dashboard has
    improved over time with certain agencies reporting more
    accurately than others.
        Here is what the Dashboard tells us: As this chart
    indicates, of the 750 major investments, 560 are in green
    status, 116 are in yellow, and 40 are in red.
        So we have about 200 projects, Mr. Chairman, that you
    mentioned that total about $12 billion that are at risk and
    need attention.
        Only eight agencies report red or high-risk projects.
    Nineteen agencies do not have high-risk projects, according to
    the Dashboard, including the Department of Defense (DOD), the
    Department of the Treasury, OPM, and GSA.
        Senator Mikulski. Did you say they don't?
        Mr. Powner. They do not. So if you go to the Dashboard
    right now, DOD does not have any reds listed.
        Mr. Chairman, there are three things that need to happen to
    make the Dashboard a better accountability mechanism.
        One, all major investments need to be listed on the
    Dashboard. Our work has shown that several investments, like
    the Department of Energy's (DOE's) supercomputers, are not
    listed on the Dashboard.
        Two, ratings need to be even more accurately reported.
    There are clearly more than 200 projects that are high- or
    medium-risk.
        And then three, OMB and agencies need to aggressively
    govern the at-risk investments using TechStat sessions.

                             OMB TECHSTAT MEETINGS

        TechStat sessions are OMB meetings initiated in 2010 to
    turn around troubled IT investments that were failing or not
    producing results. OMB held about 80 of these meetings and had
    great results. That included scaling back projects and even
    terminating failing projects.
        OMB subsequently empowered CIOs to hold their own TechStat
    sessions within their respective agencies, a move we agree
    with, but we also strongly think that OMB should hold TechStat
    sessions on a selective basis for high-risk or troubled
    projects and for projects that are top national priorities.
        OMB recently told us that they held two TechStat sessions
    in 2013. Clearly, this is not enough.

                           DATA CENTER CONSOLIDATION

        Now turning to how we better manage operational systems,
    OMB started a data center consolidation effort in 2010 to
    address the Government's low server utilization rates,
    estimated between 10 and 15 percent, far from the industry
    standard of 60 percent.
        This effort was also to result in $3 billion in savings
    across all the departments. Our ongoing work shows that there
    are currently 7,500 data centers, about 750 of those have been
    consolidated or closed to date. There are over $1.3 billion in
    savings that have resulted from this, and agencies estimate
    another $3 billion in savings in fiscal years 2014 and 2015.
    Therefore, expected savings through fiscal year 2015 should be
    around $4.5 billion. Better transparency on the savings is
    needed, in our opinion.

                            PORTFOLIOSTAT INITIATIVE

        I would like to commend the subcommittee for requiring this
    quarterly report from OMB on IT reform savings. OMB recently
    expanded the data center consolidation effort into a larger
    initiative called PortfolioStat to eliminate additional
    duplicative spending of administrative and business systems. In
    its quarterly report to this committee, OMB reports they have
    achieved $1.9 billion in savings through this initiative
    through 2013, and that the target is $2.5 billion. The target
    should be much higher.
        Based on our work, there are over 200 PortfolioStat
    initiatives that agencies are working on to eliminate at least
    $5.5 billion in duplicative spending. It is critical that these
    200 initiatives are driven to closure so that the $5 billion in
    savings can be achieved.
        In summary, Mr. Chairman, the tremendous transparency that
    the Dashboard provides needs to be even more effectively used
    to lessen risk and failures on large IT acquisitions, and both
    the data center consolidation and PortfolioStat processes need
    to build off their initial successes to achieve savings that
    collectively tally about $10 billion.

                               PREPARED STATEMENT

        Thank you for your oversight of these important issues, and
    we look forward to working with you further.
        [The statement follows:]
                    Prepared Statement of Hon. David Powner
        Chairman Udall, Ranking Member Johanns, and members of the
    subcommittee, I am pleased to be here today to discuss how best
    practices and major information technology (IT) reform initiatives can
    help the Federal Government better acquire and manage IT investments.
    As reported to the Office of Management and Budget (OMB), Federal
    agencies plan to spend at least $82 billion on IT in fiscal year 2014.
    Given the scale of such planned outlays and the criticality of many of
    these systems to the health, economy, and security of the Nation, it is
    important that OMB and Federal agencies provide appropriate oversight
    and transparency into these programs and avoid duplicative investments,
    whenever possible, to ensure the most efficient use of resources.
        However, as we have previously reported and testified, Federal IT
    projects too frequently fail and incur cost overruns and schedule
    slippages while contributing little to mission-related outcomes.\1\
    During the past several years, we have issued multiple reports and
    testimonies on best practices for major acquisitions and Federal
    initiatives to acquire and improve the management of IT investments.\2\
    In those reports, we made numerous recommendations to Federal agencies
    and OMB to further enhance the management and oversight of IT programs.
    ---------------------------------------------------------------------------
        \1\ See, for example, Government Accountability Office (GAO),
    Information Technology: OMB and Agencies Need To More Effectively
    Implement Major Initiatives To Save Billions of Dollars, GAO-13-796T
    (Washington, DC: July 25, 2013); Secure Border Initiative: DHS Needs To
    Reconsider Its Proposed Investment in Key Technology Program, GAO-10-
    340 (Washington, DC: May 5, 2010); and Polar-Orbiting Environmental
    Satellites: With Costs Increasing and Data Continuity at Risk,
    Improvements Needed in Tri-agency Decision Making, GAO-09-564
    (Washington, DC: June 17, 2009).
        \2\ See, for example, GAO, Information Technology: Leveraging Best
    Practices To Help Ensure Successful Major Acquisitions, GAO-14-183T
    (Washington, DC: Nov. 13, 2013); Information Technology: Additional
    Executive Review Sessions Needed To Address Troubled Projects, GAO-13-
    524 (Washington, DC: June 13, 2013); Data Center Consolidation:
    Strengthened Oversight Needed To Achieve Billions of Dollars in
    Savings, GAO-13-627T (Washington, DC: May 14, 2013); Data Center
    Consolidation: Strengthened Oversight Needed To Achieve Cost Savings
    Goal, GAO-13-378 (Washington, DC: Apr. 23, 2013); Information
    Technology Dashboard: Opportunities Exist To Improve Transparency and
    Oversight of Investment Risk at Select Agencies, GAO-13-98 (Washington,
    DC: Oct. 16, 2012); Data Center Consolidation: Agencies Making Progress
    on Efforts, but Inventories and Plans Need To Be Completed, GAO-12-742
    (Washington, DC: July 19, 2012); Information Technology: Critical
    Factors Underlying Successful Major Acquisitions, GAO-12-7 (Washington,
    DC: Oct. 21, 2011); Information Technology: Continued Attention Needed
    To Accurately Report Federal Spending and Improve Management, GAO-11-
    831T (Washington, DC: July 14, 2011); and Information Technology:
    Investment Oversight and Management Have Improved but Continued
    Attention Is Needed, GAO-11-454T (Washington, DC: Mar. 17, 2011).
    ---------------------------------------------------------------------------
        As discussed with subcommittee staff, I am testifying today on the
    results and recommendations from our selected reports on how best
    practices and IT reform initiatives can help Federal agencies better
    manage major acquisitions and legacy investments. All work on which
    this testimony is based was performed in accordance with generally
    accepted Government auditing standards or all sections of the
    Government Accountability Office's (GAO's) Quality Assurance Framework
    that were relevant to our objectives. Those standards and the framework
    require that we plan and perform our audits and engagements to obtain
    sufficient, appropriate evidence to provide a reasonable basis for our
    findings and conclusions based on our audit objectives; the framework
    also requires that we discuss any limitations in our work. We believe
    that the information, data, and evidence obtained and the analysis
    conducted provide a reasonable basis for our findings and conclusions
    based on our objectives. A more detailed discussion of the objectives,
    scope, and methodology of this work is included in each of the reports
    on which this testimony is based.\3\
    ---------------------------------------------------------------------------
        \3\ GAO, Information Technology: Additional OMB and Agency Actions
    are Needed To Achieve Portfolio Savings, GAO-14-65 (Washington, DC:
    Nov. 6, 2013); IT Dashboard: Agencies Are Managing Investment Risk, but
    Related Ratings Need To Be More Accurate and Available, GAO-14-64
    (Washington, DC: Dec. 12, 2014); GAO-13-524; GAO-13-378; GAO-13-98;
    GAO-12-742; Information Technology Reform: Progress Made; More Needs To
    Be Done To Complete Actions and Measure Results, GAO-12-461
    (Washington, DC: Apr. 26, 2012); IT Dashboard: Accuracy Has Improved,
    and Additional Efforts Are Under Way To Better Inform Decision Making,
    GAO-12-210 (Washington, DC: Nov. 7, 2011); GAO-12-7; Data Center
    Consolidation: Agencies Need To Complete Inventories and Plans To
    Achieve Expected Savings, GAO-11-565 (Washington, DC: July 19, 2011);
    Information Technology: OMB Has Made Improvements to Its Dashboard, but
    Further Work Is Needed by Agencies and OMB To Ensure Data Accuracy,
    GAO-11-262 (Washington, DC: Mar. 15, 2011); and Information Technology:
    OMB's Dashboard Has Increased Transparency and Oversight, but
    Improvements Needed, GAO-10-701 (Washington, DC: July 16, 2010).
    ---------------------------------------------------------------------------
                                   background
        Information technology should enable Government to better serve the
    American people. However, despite spending hundreds of billions on IT
    since 2000, the Federal Government has experienced failed IT projects
    and has achieved little of the productivity improvements that private
    industry has realized from IT. Too often, Federal IT projects run over
    budget, behind schedule, or fail to deliver results. In combating this
    problem, proper oversight is critical.
        Both OMB and Federal agencies have key roles and responsibilities
    for overseeing IT investment management and OMB is responsible for
    working with agencies to ensure investments are appropriately planned
    and justified. However, as we have described in numerous reports,\4\
    although a variety of best practices exist to guide their successful
    acquisition, Federal IT projects too frequently incur cost overruns and
    schedule slippages while contributing little to mission-related
    outcomes.
    ---------------------------------------------------------------------------
        \4\ See, for example, GAO, FEMA: Action Needed To Improve
    Administration of the National Flood Insurance Program, GAO-11-297
    (Washington, DC: June 9, 2011); GAO-10-340; Secure Border Initiative:
    DHS Needs To Address Testing and Performance Limitations That Place Key
    Technology Program at Risk, GAO-10-158 (Washington, DC: Jan. 29, 2010);
    and GAO-09-564.
    ---------------------------------------------------------------------------
        Agencies have reported that poor-performing projects have often
    used a ``big bang'' approach--that is, projects that are broadly scoped
    and aim to deliver capability several years after initiation. For
    example, in 2009 the Defense Science Board reported that the Department
    of Defense's (Defense's) acquisition process for IT systems was too
    long, ineffective, and did not accommodate the rapid evolution of
    IT.\5\ The board reported that the average time to deliver an initial
    program capability for a major IT system acquisition at Defense was
    over 7 years.
    ---------------------------------------------------------------------------
        \5\ Defense Science Board, Report of the Defense Science Board Task
    Force on Department of Defense Policies and Procedures for the
    Acquisition of Information Technology (Washington, DC: March 2009).
    ---------------------------------------------------------------------------
        Each year, OMB and Federal agencies work together to determine how
    much the Government plans to spend on IT projects and how these funds
    are to be allocated. As reported to OMB, Federal agencies plan to spend
    more than $82 billion on IT investments in fiscal year 2014, which is
    the total expended for not only acquiring such investments, but also
    the funding to operate and maintain them. Of the reported amount, 26
    Federal agencies \6\ plan to spend about $75 billion, $17 billion on
    development and acquisition and $58 billion on operations and
    maintenance (O&M).\7\ Figure 1 shows the percentages of total planned
    spending for 2014 for the $75 million spent on development and O&M.
    ---------------------------------------------------------------------------
        \6\ The 26 agencies are the Departments of Agriculture, Commerce,
    Defense, Education, Energy, Health and Human Services, Homeland
    Security, Housing and Urban Development, Interior, Justice, Labor,
    State, Transportation, the Treasury, and Veterans Affairs;
    Environmental Protection Agency, General Services Administration,
    National Aeronautics and Space Administration, National Archives and
    Records Administration, National Science Foundation, Nuclear Regulatory
    Commission, Office of Personnel Management, Small Business
    Administration, Smithsonian Institution, Social Security
    Administration, and U.S. Agency for International Development.
        \7\ According to the analytical perspectives associated with the
    President's fiscal year 2014 budget, the remainder is comprised of
    classified Department of Defense (DOD) IT investments.

        However, this $75 billion does not reflect the spending of the
    entire Federal Government. We have previously reported that OMB's
    figure understates the total amount spent in IT investments.\8\
    Specifically, it does not include IT investments by 58 independent
    executive branch agencies, including the Central Intelligence Agency,
    or by the legislative or judicial branches. Further, agencies differed
    on what they considered an IT investment; for example, some have
    considered research and development systems as IT investments, while
    others have not. As a result, not all IT investments are included in
    the Federal Government's estimate of annual IT spending. OMB provided
    guidance to agencies on how to report on their IT investments, but this
    guidance did not ensure complete reporting or facilitate the
    identification of duplicative investments. Consequently, we
    recommended, among other things, that OMB improve its guidance to
    agencies on identifying and categorizing IT investments.
    ---------------------------------------------------------------------------
        \8\ GAO, Information Technology: OMB Needs To Improve Its Guidance
    on IT Investments, GAO-11-826 (Washington, DC: Sept. 29, 2011).
    ---------------------------------------------------------------------------
        Further, over the past several years, we have reported that overlap
    and fragmentation among Government programs or activities could be
    harbingers of unnecessary duplication.\9\ Thus, the reduction or
    elimination of duplication, overlap, or fragmentation could potentially
    save billions of tax dollars annually and help agencies provide more
    efficient and effective services.
    ---------------------------------------------------------------------------
        \9\ 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).
    ---------------------------------------------------------------------------
         omb has launched major initiatives for overseeing investments
        OMB has implemented a series of initiatives to improve the
    oversight of underperforming investments, more effectively manage IT,
    and address duplicative investments. These efforts include the
    following:
      --IT Dashboard.--Given the importance of transparency, oversight, and
            management of the Government's IT investments, in June 2009,
            OMB established a public Web site, referred to as the IT
            Dashboard, that provides detailed information on 760 major IT
            investments at 27 Federal agencies, including ratings of their
            performance against cost and schedule targets. The public
            dissemination of this information is intended to allow OMB;
            other oversight bodies, including Congress; and the general
            public to hold agencies accountable for results and
            performance. Among other things, agencies are to submit Chief
            Information Officer (CIO) ratings, which, according to OMB's
            instructions, should reflect the level of risk facing an
            investment on a scale from 1 (high risk) to 5 (low risk)
            relative to that investment's ability to accomplish its goals.
            Ultimately, CIO ratings are assigned colors for presentation on
            the Dashboard, according to the five-point rating scale, as
            illustrated in table 1.

    TABLE 1--IT DASHBOARD CIO RATING COLORS, BASED ON A FIVE-POINT SCALE FOR
                                   CIO RATINGS
    ------------------------------------------------------------------------
              Rating (by agency CIO)                        Color
    ------------------------------------------------------------------------
    1--High risk..............................  Red
    2--Moderately high risk...................  Red
    3--Medium risk............................  Yellow
    4--Moderately low risk....................  Green
    5--Low risk...............................  Green
    ------------------------------------------------------------------------
    Source: OMB's IT Dashboard.

        As of April 2014, according to the IT Dashboard, 201 of the Federal
    Government's 760 major IT investments--totaling $12.4 billion--were in
    need of management attention (rated ``yellow'' to indicate the need for
    attention or ``red'' to indicate significant concerns). (See figure 2.)

      --TechStat Reviews.--In January 2010, the Federal CIO began leading
            TechStat sessions--face-to-face meetings to terminate or
            turnaround IT investments that are failing or are not producing
            results. These meetings involve OMB and agency leadership and
            are intended to increase accountability and transparency and
            improve performance. Subsequently, OMB empowered agency CIOs to
            hold their own TechStat sessions within their respective
            agencies. According to the former Federal CIO, the efforts of
            OMB and Federal agencies to improve management and oversight of
            IT investments have resulted in almost $4 billion in savings.
      --Federal Data Center Consolidation Initiative.--Concerned about the
            growing number of Federal data centers, in February 2010 the
            Federal CIO established the Federal Data Center Consolidation
            Initiative. This initiative's four high-level goals are to
            promote the use of ``green IT'' \10\ by reducing the overall
            energy and real estate footprint of Government data centers;
            reduce the cost of data center hardware, software, and
            operations; increase the overall IT security posture of the
            Government; and shift IT investments to more efficient
            computing platforms and technologies. OMB believes that this
            initiative has the potential to provide about $3 billion in
            savings by the end of 2015.
    ---------------------------------------------------------------------------
        \10\ ``Green IT'' refers to environmentally sound computing
    practices that can include a variety of efforts, such as using energy
    efficient data centers, purchasing computers that meet certain
    environmental standards, and recycling obsolete electronics.
    ---------------------------------------------------------------------------
      --PortfolioStat.--In order to eliminate duplication, move to shared
            services, and improve portfolio management processes, in March
            2012, OMB launched the PortfolioStat initiative. Specifically,
            PortfolioStat requires agencies to conduct an annual agency-
            wide IT portfolio review to, among other things, reduce
            commodity IT \11\ spending and demonstrate how their IT
            investments align with the agency's mission and business
            functions.\12\ PortfolioStat is designed to assist agencies in
            assessing the current maturity of their IT investment
            management process, making decisions on eliminating duplicative
            investments, and moving to shared solutions in order to
            maximize the return on IT investments across the portfolio. OMB
            believes that the PortfolioStat effort has the potential to
            save the Government $2.5 billion over the next 3 years by, for
            example, consolidating duplicative systems.
    ---------------------------------------------------------------------------
        \11\ According to OMB, commodity IT includes services such as
    enterprise IT systems (e-mail; identity and access management; IT
    security; Web hosting, infrastructure, and content; and collaboration
    tools); IT infrastructure (desktop systems, mainframes and servers,
    mobile devices, and telecommunications); and business systems
    (financial management, grants-related Federal financial assistance,
    grants-related transfer to State and local governments, and human
    resources management systems).
        \12\ OMB, Implementing PortfolioStat, Memorandum, M-12-10
    (Washington DC: Mar. 30, 2012).
    ---------------------------------------------------------------------------
        opportunities exist to improve acquisition and management of it
                                  investments
        Given the magnitude of the Federal Government's annual IT budget,
    which is expected to be more than $82 billion in fiscal year 2014, it
    is important that agencies leverage all available opportunities to
    ensure that their IT investments are acquired in the most effective
    manner possible. To do so, agencies can rely on IT acquisition best
    practices and initiatives such as OMB's IT Dashboard, and OMB-mandated
    TechStat sessions. Additionally, agencies can save billions of dollars
    by continuing to consolidate Federal data centers and by eliminating
    duplicative investments through OMB's PortfolioStat initiative.
    Best Practices Are Intended To Help Ensure Successful Major
            Acquisitions
        In 2011, we identified seven successful acquisitions and nine
    common factors critical to their success, and noted that the factors
    support OMB's objective of improving the management of (1) large-scale
    IT acquisitions across the Federal Government, and (2) wide
    dissemination of these factors could complement OMB's efforts.\13\
    Specifically, we reported that Federal agency officials identified
    seven successful acquisitions, in that they best achieved their
    respective cost, schedule, scope, and performance goals.\14\ Notably,
    all of these were smaller increments, phases, or releases of larger
    projects. The common factors critical to the success of three or more
    of the seven acquisitions are generally consistent with those developed
    by private industry and are identified in the following list of common
    critical success factors:
    ---------------------------------------------------------------------------
        \13\ GAO-12-7.
        \14\ The seven investments were (1) the Department of Commerce's
    Decennial Response Integration System, (2) Defense's Defense Global
    Combat Support System-Joint (Increment 7), (3) the Department of
    Energy's Manufacturing Operations Management Project, (4) the
    Department of Homeland Security's Western Hemisphere Travel Initiative,
    (5) the Department of Transportation's Integrated Terminal Weather
    System, (6) the Internal Revenue Service's Customer Account Data Engine
    2, and (7) the Veterans Affairs Occupational Health Recordkeeping
    System.
    ---------------------------------------------------------------------------
      --Program officials were actively engaged with stakeholders.
      --Program staff had the necessary knowledge and skills.
      --Senior department and agency executives supported the programs.
      --End users and stakeholders were involved in the development of
            requirements.
      --End users participated in testing of system functionality prior to
            formal end user acceptance testing.
      --Government and contractor staff were consistent and stable.
      --Program staff prioritized requirements.
      --Program officials maintained regular communication with the prime
            contractor.
      --Programs received sufficient funding.
        (Source: GAO analysis of agency data.)

        These critical factors support OMB's objective of improving the
    management of large-scale IT acquisitions across the Federal
    Government; wide dissemination of these factors could complement OMB's
    efforts.
    IT Dashboard Can Improve the Transparency into and Oversight of Major
            IT Investments
        The IT Dashboard serves an important role in allowing OMB and other
    oversight bodies to hold agencies accountable for results and
    performance. However, we have issued a series of reports highlighting
    deficiencies with the accuracy and reliability of the data reported on
    the Dashboard.\15\ For example, we reported in October 2012 that
    Defense had not rated any of its investments as either high or
    moderately high risk and that in selected cases, these ratings did not
    appropriately reflect significant cost, schedule, and performance
    issues reported by GAO and others. We recommended that Defense ensure
    that its CIO ratings reflect available investment performance
    assessments and its risk management guidance. Defense concurred and has
    revised its process to address these concerns.
    ---------------------------------------------------------------------------
        \15\GAO-14-64; GAO-13-98; GAO-12-210; GAO-11-262; and GAO-10-701.
    ---------------------------------------------------------------------------
        Further, while we reported in 2011 that the accuracy of Dashboard
    cost and schedule data had improved over time,\16\ more recently, in
    December 2013 we found that agencies had removed investments from the
    Dashboard by reclassifying their investments--representing a troubling
    trend toward decreased transparency and accountability.\17\
    Specifically, the Department of Energy reclassified several of its
    supercomputer investments from IT to facilities and the Department of
    Commerce decided to reclassify its satellite ground system investments.
    Additionally, as of December 2013, the public version of the Dashboard
    was not updated for 15 of the previous 24 months because OMB does not
    revise it as the President's budget request is being created.
    ---------------------------------------------------------------------------
        \16\ GAO-12-210.
        \17\ GAO-14-64.
    ---------------------------------------------------------------------------
        We also found that, while agencies experienced several issues with
    reporting the risk of their investments, such as technical problems and
    delayed updates to the Dashboard, the CIO ratings were mostly or
    completely consistent with investment risk at seven of the eight
    selected agencies.\18\ Additionally, the agencies had already addressed
    several of the discrepancies that we identified. The final agency, the
    Department of Veterans Affairs, did not update 7 of its 10 selected
    investments because it elected to build, rather than buy, the ability
    to automatically update the Dashboard, and has now resumed updating all
    investments. To their credit, agencies' continued attention to
    reporting the risk of their major IT investments supports the
    Dashboard's goal of providing transparency and oversight of Federal IT
    investments.
    ---------------------------------------------------------------------------
        \18\ The Departments of Agriculture, Commerce, Energy, Justice,
    Transportation, the Treasury, and Veterans Affairs; and the Social
    Security Administration.
    ---------------------------------------------------------------------------
        Nevertheless, the rating issues that we identified with performance
    reporting and annual baselining,\19\ some of which are now corrected,
    serve to highlight the need for agencies' continued attention to the
    timeliness and accuracy of submitted information, in order to allow the
    Dashboard to continue to fulfill its stated purpose. We recommended
    that agencies appropriately categorize IT investments and that OMB make
    Dashboard information available independent of the budget process. OMB
    neither agreed nor disagreed with these recommendations. Six agencies
    generally agreed with the report or had no comments and two others did
    not agree, believing their categorizations were appropriate. We
    continue to believe that our recommendations are valid.
    ---------------------------------------------------------------------------
        \19\ At times, a project's cost, schedule, and performance goals--
    known as its baseline--are modified to reflect changed development
    circumstances. These changes--called a rebaseline--can be done for
    valid reasons, but can also be used to mask cost overruns and schedule
    delays.
    ---------------------------------------------------------------------------
    TechStat Reviews Can Help Highlight and Evaluate Poorly Performing
            Investments
        TechStat reviews were initiated by OMB to enable the Federal
    Government to turnaround, halt, or terminate IT projects that are
    failing or are not producing results. In 2013, we reported that OMB and
    selected agencies had held multiple TechStats, but that additional OMB
    oversight was needed to ensure that these meetings were having the
    appropriate impact on underperforming projects and that resulting cost
    savings were valid.\20\ Specifically, we determined that as of April
    2013, OMB reported conducting 79 TechStats, which focused on 55
    investments at 23 Federal agencies. Further, four selected agencies--
    the Departments of Agriculture, Commerce, Health and Human Services
    (HHS), and Homeland Security (DHS)--conducted 37 TechStats covering 28
    investments. About 70 percent of the OMB-led and 76 percent of agency-
    led TechStats on major investments were considered medium to high risk
    at the time of the TechStat.
    ---------------------------------------------------------------------------
        \20\ GAO-13-524.
    ---------------------------------------------------------------------------
        However, the number of at-risk TechStats held was relatively small
    compared to the current number of medium- and high-risk major IT
    investments. Specifically, the OMB-led TechStats represented roughly
    18.5 percent of the investments across the Government that had a
    medium- or high-risk CIO rating. For the four selected agencies, the
    number of TechStats represented about 33 percent of the investments
    that have a medium- or high-risk CIO rating. We concluded that until
    OMB and agencies develop plans to address these weaknesses, the
    investments would likely remain at risk.
        In addition, we reported that OMB and selected agencies had tracked
    and reported positive results from TechStats, with most resulting in
    improved governance. Agencies also reported projects with accelerated
    delivery, reduced scope, or termination. We also found that OMB
    reported in 2011 that Federal agencies achieved almost $4 billion in
    lifecycle cost savings as a result of TechStat sessions. However, we
    were unable to validate OMB's reported results because OMB did not
    provide artifacts showing that it ensured the results were valid. Among
    other things, we recommended that OMB require agencies to report on how
    they validated the outcomes. OMB generally agreed with this
    recommendation.
    Continued Oversight Needed To Consolidate Federal Data Centers and
            Achieve Cost Savings
        In an effort to consolidate the growing number of Federal data
    centers, in 2010, OMB launched a consolidation initiative intended to
    close 40 percent of Government data centers by 2015, and, in doing so,
    save $3 billion. Since 2011, we have issued a series of reports on the
    efforts of agencies to consolidate their data centers.\21\ For example,
    in July 2011 and July 2012, we found that agencies had developed plans
    to consolidate data centers; however, these plans were incomplete and
    did not include best practices.\22\ In addition, although we reported
    that agencies had made progress on their data center closures, OMB had
    not determined initiative-wide cost savings, and oversight of the
    initiative was not being performed in all key areas. Among other
    things, we recommended that OMB track and report on key performance
    measures, such as cost savings to date, and improve the execution of
    important oversight responsibilities, and that agencies complete
    inventories and plans. OMB agreed with these two recommendations, and
    most agencies agreed with our recommendations to them.
    ---------------------------------------------------------------------------
        \21\ GAO-13-378; GAO-12-742; and GAO-11-565.
        \22\ GAO-12-742 and GAO-11-565.
    ---------------------------------------------------------------------------
        Additionally, as part of ongoing follow-up work, we have determined
    that while agencies had closed data centers, the number of Federal data
    centers was significantly higher than previously estimated by OMB.
    Specifically, as of May 2013, agencies had reported closing 484 data
    centers by the end of April 2013, and were planning to close an
    additional 571 data centers--for a total of 1,055--by September 2014.
    However, as of July 2013, 22 of the 24 agencies participating in the
    initiative had collectively reported 6,836 data centers in their
    inventories--approximately 3,700 data centers more than OMB's previous
    estimate from December 2011. This dramatic increase in the count of
    data centers highlights the need for continued oversight of agencies'
    consolidation efforts.
    Agencies' PortfolioStat Efforts Have the Potential To Save Billions of
            Dollars
        OMB launched the PortfolioStat initiative in March 2012, which
    required 26 executive agencies to, among other things, reduce commodity
    IT spending and demonstrate how their IT investments align with the
    agency's mission and business functions.\23\ In November 2013, we
    reported on agencies' efforts to complete key required PortfolioStat
    actions and make portfolio improvements.\24\ We noted that all 26
    agencies that were required to implement the PortfolioStat initiative
    took actions to address OMB's requirements. However, there were
    shortcomings in their implementation of selected requirements, such as
    addressing all required elements of an action plan to consolidate
    commodity IT, and migrating two commodity areas to a shared service by
    the end of 2012. In addition, several agencies had weaknesses in
    selected areas such as the CIO's authority to review and approve the
    entire portfolio, and ensuring a complete baseline of information
    relative to commodity IT. Further, we observed that OMB's estimate of
    about 100 consolidation opportunities and a potential $2.5 billion in
    savings from the PortfolioStat initiative was understated because,
    among other things, it did not include estimates from Defense and the
    Department of Justice. Our analysis, which included these estimates,
    showed that, collectively, the 26 agencies reported about 200
    opportunities and at least $5.8 billion in potential savings through
    fiscal year 2015, at least $3.3 billion more than the number initially
    reported by OMB.
    ---------------------------------------------------------------------------
        \23\ OMB, Implementing PortfolioStat, Memorandum M-12-10
    (Washington, DC: Mar. 30, 2012).
        \24\ GAO-14-65.
    ---------------------------------------------------------------------------
        In March 2013, OMB issued a memorandum commencing the second
    iteration of its PortfolioStat initiative.\25\ This memorandum
    identified a number of improvements that should help strengthen IT
    portfolio management and address key issues we have identified.
    However, we concluded that selected OMB efforts could be strengthened
    to improve the PortfolioStat initiative and ensure agencies achieve
    identified cost savings, including addressing issues related to
    existing CIO authority at Federal agencies, and publicly reporting on
    agency-provided data. We recommended, among other things, that OMB
    require agencies to fully disclose limitations with respect to CIO
    authority. In addition, we made several recommendations to improve
    agencies' implementation of PortfolioStat requirements. OMB partially
    agreed with these recommendations, and responses from 20 of the
    agencies commenting on the report varied.\26\
    ---------------------------------------------------------------------------
        \25\ OMB, Memorandum for the Heads of Executive Departments and
    Agencies: Fiscal Year 2013 PortfolioStat Guidance: Strengthening
    Federal IT Portfolio Management, M-13-09 (Washington, DC: Mar. 27,
    2013).
        \26\ Of the 20 agencies commenting on the report, 12 agreed with
    our recommendations directed to them, 4 disagreed or partially
    disagreed with our recommendations directed to them, and 4 provided
    additional clarifying information.
    ---------------------------------------------------------------------------
        In summary, OMB's and agencies' recent efforts have resulted in
    greater transparency and oversight of Federal spending, but continued
    leadership and attention are necessary to build on the progress that
    has been made. The expanded use of the common factors critical to the
    successful management of large-scale IT acquisitions should result in
    more effective delivery of mission-critical systems. Additionally,
    Federal agencies need to continue to improve the accuracy and
    availability of information on the Dashboard to provide greater
    transparency and even more attention to the billions of dollars
    invested in troubled projects. Further, agencies should conduct
    additional TechStat reviews to focus management attention on troubled
    projects and establish clear action items to turn the projects around
    or terminate them.
        The Federal Government can also build on the progress of agencies'
    data center closures and reduction in commodity IT. With the
    possibility of over $5.8 billion in savings from the data center
    consolidation and PortfolioStat initiatives, agencies should continue
    to identify consolidation opportunities in both data centers and
    commodity IT. In addition, better support for the estimates of cost
    savings associated with the opportunities identified would increase the
    likelihood that these savings will be achieved.
        Chairman Udall, Ranking Member Johanns, and members of the
    subcommittee, this completes my prepared statement. I would be pleased
    to respond to any questions that you may have at this time.
                     Attachment, Highlights of GAO-14-568T
      leveraging best practices and reform initiatives can help agencies
                           better manage investments
    Why GAO Did This Study
        The Federal Government reportedly plans to spend at least $82
    billion on IT in fiscal year 2014. Given the scale of such planned
    outlays and the criticality of many of these systems to the health,
    economy, and security of the Nation, it is important that OMB and
    Federal agencies provide appropriate oversight and transparency into
    these programs and avoid duplicative investments, whenever possible, to
    ensure the most efficient use of resources.
        GAO has previously reported and testified that Federal IT projects
    too frequently fail and incur cost overruns and schedule slippages
    while contributing little to mission-related outcomes. Numerous best
    practices and administration initiatives are available for agencies
    that can help them improve the oversight and management of IT
    acquisitions.
        GAO is testifying today on the results and recommendations from
    selected reports that focused on how best practices and IT reform
    initiatives can help Federal agencies better manage major acquisitions
    and legacy investments.
    What GAO Recommends
        GAO has previously made numerous recommendations to OMB and Federal
    agencies on key aspects of IT acquisition management, as well as the
    oversight and management of these investments. In particular, GAO has
    made recommendations regarding the IT Dashboard, efforts to consolidate
    Federal data centers, and PortfolioStat.
    What GAO Found
        Information technology (IT) acquisition best practices have been
    developed by both industry and the Federal Government to help guide the
    successful acquisition of investments. For example, GAO recently
    reported on nine critical factors underlying successful major IT
    acquisitions. Factors cited included (1) program officials were
    actively engaged with stakeholders and (2) prioritized requirements.
        One key IT reform initiative undertaken by the Office of Management
    and Budget (OMB) to improve transparency is a public Web site, referred
    to as the IT Dashboard, which provides information on 760 major
    investments at 27 Federal agencies, totaling almost $41 billion. The
    Dashboard also includes ratings of investments risk on a scale from 1
    (high risk) to 5 (low risk). As of April 2014, according to the
    Dashboard, 559 investments were low or moderately low risk (green), 159
    were medium risk (yellow), and 42 were moderately high or high risk
    (red).
        GAO has issued a series of reports on Dashboard accuracy and, in
    2011, found that while there were continued issues with the accuracy
    and reliability of cost and schedule data, the accuracy of these data
    had improved over time. Further, a recent GAO report found that
    selected agencies' ratings were mostly or completely consistent with
    investment risk. However, this report also noted that agencies had
    removed major investments from the IT Dashboard, representing a
    troubling trend toward decreased transparency and accountability.
    Additionally, GAO reported that as of December 2013, the public version
    of the Dashboard was not updated for 15 of the previous 24 months
    because OMB did not revise it as the President's budget request was
    being created. Consequently, GAO made recommendations to improve the
    Dashboard's accuracy, ensure that it includes all major IT investments,
    and increase its availability. Agencies generally agreed with the
    report or had no comments.
        In an effort to consolidate the growing number of Federal data
    centers, OMB launched a consolidation initiative intended to close 40
    percent of Government data centers by 2015, and in doing so, save $3
    billion. GAO reported that agencies planned to close 1,055 data centers
    by the end of fiscal year 2014, but also highlighted the need for
    continued oversight of these efforts. Among other things, GAO
    recommended that OMB improve the execution of important oversight
    responsibilities, with which OMB agreed.
        To better manage the Government's existing IT systems, OMB launched
    the PortfolioStat initiative, which, among other things, requires
    agencies to conduct annual reviews of their IT investments and make
    decisions on eliminating duplication. GAO reported that agencies
    continued to identify duplicative spending as part of PortfolioStat and
    that this initiative has the potential to save at least $5.8 billion by
    fiscal year 2015, but that weaknesses existed in agencies'
    implementation of the initiative's requirements. Among other things,
    GAO made several recommendations to improve agencies' implementation of
    PortfolioStat requirements. OMB partially agreed with these
    recommendations, and most of the other 20 agencies commenting on the
    report also agreed.

                              IT MANAGEMENT MODEL

        Senator Udall. Thank you very much, Mr. Powner, for your
    testimony.
        Let me begin with the questioning here. GSA and OPM have
    either, and this is indicated in the testimony, moved or are
    moving to an IT management model that includes a more robust
    role for their agency CIOs. And the GAO has previously reported
    on ways the chief Federal information officers are impeded in
    their ability to manage or even monitor IT spending within
    their agencies.
        And so I am very interested, since you are all moving down
    this road, how far have you gotten? What percentage of this
    have you done on consolidation? Are your CIOs empowered to
    drive down costs, which seems to be something the GAO has
    talked about over and over again? And are they enabled and
    empowered to create savings within the agencies? And where are
    they right now on this?
        Mr. Tangherlini. I appreciate the question. And GSA, I
    would say that we are 90 percent down the road of
    consolidation, 100 percent down the road on the policy of
    consolidation around the CIO.
        But I think that that is an approach that works
    particularly well for GSA, given our size and the nature of our
    mission.
        As a result of integrating around a single CIO, we have
    been able to focus very intensely on finding the enterprise
    opportunities in each of our investments, and the numbers speak
    for themselves. In the fiscal year 2015 President's budget
    request, we are requesting an 18 percent lower budget than just
    2 years before.
        Again, though, I would say that that has been particularly
    appropriate and effective for GSA because of how we are sized.
    It may or may not be a model useful for other agencies,
    depending on how interrelated their functions are, are there
    similarities between what they do, and how do they deliver
    services.
        Senator Udall. And you have seen significant savings as a
    result of this, that you can identify?
        Mr. Tangherlini. We think the savings comes from a number
    of areas. One, our cloud first policy, which is really focused
    around building off of a policy set by OMB, and Steve's
    leadership has been incredibly important and helpful, has
    reduced the long-term cost of operating of other systems. Our
    data center consolidation efforts, again, led by OMB, supported
    by the great work of David Powner and the GAO, has also reduced
    our long-term operating costs.
        For us, though, the next step in that evolution was really
    getting an enterprise sense of what our IT strategy and
    architecture is. And within GSA, we needed to have a single,
    accountable leader to deliver that.
        Senator Udall. Thank you.

                                  IT STRATEGY

        Director Archuleta, the same questions to you. Where are
    you at? What successes have you had? Have you seen concrete
    savings?
        Ms. Archuleta. One of the first things I did, Senator, when
    I came into the position of director of OPM in November was in
    December to hire Donna Seymour as my CIO and to appoint a chief
    technology officer (CTO) for OPM.
        Like Dan's description of what he has been able to
    accomplish at GSA, we may not be as far along, but I think we
    are on the right path.
        We have completed in the first 100 days of my tenure an IT
    strategic plan that lays out six very important pillars that
    match very much what the CIO Council and the leadership, like
    Steve VanRoekel, have given to us.
        First and foremost I put in place IT leadership and IT
    governance to determine how and where the decisions will be
    made for the IT infrastructure investments we will make.
        All projects must meet the standards that both the
    leadership and the governance team have set forth, and they are
    all reviewed by the entire team.
        Like Dan and other agencies throughout Government, we are
    looking at enterprise architecture, and realizing that the
    investments that we make throughout the enterprise have to take
    into consideration not only what the needs are, but the limited
    resources we have available.
        For that reason, Donna and her team are not only focused on
    our immediate needs, but looking into the future, how we can
    make the right investments with the money that is available to
    us.
        I am proud to say that she has taken important steps in
    leading this agency that did not have the leadership that it
    needed in IT. It was an issue during my confirmation, and I am
    pleased to report that we are making headway.
        Senator Udall. Great.

                              CIO BUDGET AUTHORITY

        Mr. Powner, do you believe this concept of giving CIOs
    additional authority over their agency IT spending would
    improve oversight and achieve savings? And do you have any
    response to what the two witnesses have said?
        Mr. Powner. I think, clearly, the CIO authority is a big
    issue in the Federal Government. We saw, Steve and I have
    talked about this, even with the commodity IT. Many CIOs don't
    have authority over all the commodity IT or the business and
    administrative systems.
        Giving them certain budget authority sure would be a game
    changer, no doubt. That would clearly help. It probably would
    help attract a completely different type of CIO to the Federal
    Government, too. So clearly, budget authorities would help.
        But we also, too, see certain agencies that have been very
    successful without budget authorities by establishing the right
    governance processes, in the organization that Dan was
    referring to, where we do see some appropriate governance in
    pockets in the Government.
        I think IRS was mentioned earlier. They were the poster
    child for years, but this committee did a lot with spend plan
    reviews. You got the right people in there. They got the right
    governance. They turned it around. They are one of the better
    IT shops in the Government today.
        Senator Udall. Senator Johanns, would you like to proceed
    at this point?
        Senator Johanns. Thank you, Mr. Chairman.
        Thank you all for being here and your efforts.

                                  IT DASHBOARD

        Let me start out with the Dashboard, if I could. If I were
    to just look at that, I would say there are 70 percent of the
    projects that are just proceeding along normally. There are 25
    percent of the projects that need some degree of attention.
    Certainly, not major or it would be in the 5 percent category.
    And only 5 percent of the projects out there are concerning.
        Now you also said, Mr. Powner, that there are certain
    projects that are not included in that, so that is kind of a
    deficiency in what we are trying to accomplish here.
        But how do you explain a situation like healthcare.gov,
    which I think everybody would acknowledge was a bust. Now, I
    appreciate they brought in a bunch of people and fine-tuned it
    or whatever, and saved the day or did their best to save the
    day. In 1 month, it was listed on the Dashboard under red
    during its entire development.
        So I am sitting here with that knowledge saying to myself,
    not only is that Dashboard deficient, because you have a whole
    bunch of stuff going on in the Federal Government that doesn't
    make its way to the Dashboard, but I am also going to tell you,
    and I hope you challenge me on this, I am also going to tell
    you that what finds its way onto Dashboard is jaded. It is not
    accurate. It is being finessed, because either somebody totally
    blew it, and they thought this was normal development, or in
    the alternative, they didn't want anybody to know this thing
    was in crisis through its development.
        Now, I don't care what side of the political spectrum you
    are on, Democrat or Republican, this is embarrassing.

                             IT DASHBOARD ACCURACY

        So, Mr. Powner, explain that to us. How could
    healthcare.gov go through this development, tens of billions of
    dollars spent on it, and 1 month it has a red listing on the
    Dashboard?
        Mr. Powner. I would say this with the Dashboard, so there
    are clearly 200 projects that deserve attention. We can't argue
    that. Our comment is that the work we have done, we looked at
    the accuracy of the Dashboard, some agencies do a much better
    job than others. And it is contingent on strong CIOs having
    review sessions to make sure that what is up here is right. And
    there are pockets of success.
        So what happened with healthcare.gov--and I will say this,
    sometimes bad data is actually good data, from an oversight
    perspective, because it was green, green, green, green. It went
    down March 2013 to red and then right back up to green.
        Well, I can tell you, something goes from green to red
    often, okay, but doesn't go back to green in a month from red.
    That typically hardly ever happens.
        So questions should have been asked there, from a Dashboard
    perspective. I don't think it was green. But again, even the
    bad data there told a story, okay? It is really up to the
    internal processes of those agencies to get this right.
        And what we see are some agencies taking it very seriously,
    and other agencies that aren't.
        And I know, Steve, I probably sound like a broken record,
    but DOD was reporting no red for the last 18 months. That is
    not true. They have many red projects at DOD.
        So there was a recent hearing in front of the Senate Armed
    Services Committee, where DOD not only are they committed now
    to coming up with a Dashboard assessment every 6 months, they
    actually went from 93 investments to 118. They found 25 more
    major investments at DOD to report on the Dashboard.
        So I actually think that is progress. Now, we need to get
    that right. But we are all over the board on this, but we are
    encouraged. Before the Dashboard, we didn't have any of this.
    We didn't have any of this.

                      EXPEDITIONARY COMBAT SUPPORT SYSTEM

        And I will say, the Expeditionary Combat Support System
    (ECSS) project that failed in the Air Force, Chairwoman
    Mikulski, and you mentioned some of the big failures, Steve
    VanRoekel and OMB, they TechStat'ed ECSS three times, so they
    knew something was wrong with ECSS. And it eventually led to
    failure.
        We can't prove that it was TechStat that did it, but the
    Dashboard and the TechStat process that was going on at OMB
    probably saved--$1 billion was wasted on that. But it probably
    saved a lot more money that could have been wasted on ECSS in
    the Air Force.

                    DEPARTMENT OF HEALTH AND HUMAN SERVICES

        Senator Johanns. I appreciate that explanation, but I am
    still going to get back to what happened at the Department of
    Health and Human Services (HHS), because I think this is a
    worrisome problem for what you are trying to do here.
        To me, it seems like somebody was pressuring somebody to
    report all was fine. If you are going to make an honest
    assessment of this, you would have thought that you would have
    had red all over the place and people saying, ``Whoa, time out.
    When this thing lights up, it may go down.''
        I mean, think of how poorly this thing worked on the day it
    was supposed to light up, and people couldn't get on it. I will
    never forget that very embarrassing scene for the Secretary of
    Health and Human Services. She is at some event. She has this
    thing lit up, and this notice comes on that it has crashed. It
    just was crazy.
        In 1 month, it has a red rating. That tells me I can't
    trust what you were doing here.
        And so, where is the pressure coming from? Is it the CIO in
    Health and Human Services that is collapsing to the pressure?
    Is the administration saying, ``Look, we can't report that.
    This thing has to roll.''
        And how do you know that when you get to a point that it is
    release date, this thing is ready to go, that it just doesn't
    implode on you, and, therefore, you should not be trying to
    release something that is not ready for prime time?
        Mr. Powner. Well, Senator Johanns, I don't know what
    exactly happened there and who did what when with that. But I
    will say you are absolutely right, when you look at the
    complexity involved, the compressed schedules, the compressed
    testing, it should have been red. You are absolutely right. It
    should have been red.
        Senator Johanns. I appreciate your candor, because I think
    everybody knows that is the obvious answer.
        So I have kind of run out of time here. There will probably
    be another round.
        So thank you, Mr. Chairman.
        Senator Udall. There will be another round.
        Chairwoman Mikulski.
        Senator Mikulski. Mr. Chairman and ranking member, thank
    you very much for holding this hearing.
        This is an excellent panel because, first of all, we have
    GAO, who has continually sounded the alarm on these projects,
    and we are very grateful for the reports.
        Many of us actually read these reports. I know the
    Washington Post says we don't always read them. But I think the
    appropriators really love GAO and inspector general reports, so
    thank you.
        And at this table here, I think we have the right people
    who have the spirit of reform and transformation. So my
    questions will go not so much to fingerpoint, but to pinpoint
    how we can move ahead to clean up any mess that we have and to
    prevent any future messes from happening.
        So let me join some of my colleagues on our skepticism
    because when I hear that DOD, Treasury, and OPM have nothing on
    the Dashboard, when my own constituent service says,
    particularly with DOD and OPM, my dashboard lights up. I know
    these issues here come from two sources. One is we look at
    budgetary constraints, and project after project, big idea, big
    project, big failure, big bucks. And canceled, terminated,
    delayed.

                                    BACKLOGS

        But I also have a whole other source of information, people
    who call Senator Barb dot-gov and say I need help. Where are my
    backlogs?
        My caseload in Maryland is exploding on three backlogs: the
    Veterans Affairs (VA) disability backlog, the Social Security
    disability backlog, and the OPM retirement backlog. And then
    when we go to look at these, we find that their roots and
    origin lie in technology.
        So you see where I am coming from. I want to save money,
    and I also want to respond to the mission. So this then takes
    me to--let's go to the veterans backlog.
        You, the VA Committee that is trying to meet this, and they
    work on a bipartisan basis, Senator Johnson, Senator Kirk. Then
    I held a hearing and had General Shinseki, Mr. Hagel, Ms.
    Colvin, and so on. Well, first we found that they weren't
    reporting. And then we find now that DOD and VA have computers
    that don't talk to each other.
        VA and DOD have electronic health records that can't talk.
    In 2008, Congress ordered them to create an interoperable
    system. In 2013, Hagel and Shinseki say they are abandoning the
    effort. The agencies spent $1 billion in 5 years and have
    nothing to show for it.
        And now we hear that the agencies are developing two
    separate systems that aren't sure that they are going to merge
    and talk with each other. And in the meantime, the number of
    Iraq and Afghan vets who are applying for benefits is
    increasing.
        They shouldn't have to stand in line because we can't go
    digital at the VA and have these interoperable systems.
        This is to me a cameo of what is wrong. And I could go to
    OPM. I know you are trying and you have, actually, an excellent
    reform framework here, and I compliment you on it. But your
    records are in a cave in Pennsylvania. Your records are in a
    cave nine stories down in Pennsylvania with a dated,
    dysfunctional system. That is not an accusation. It is not a
    fault. It is a fact.
        And when they try to pull these records up, you know what
    happens. They don't work. They get inaccurate assessments.
        I can tell my colleagues, we have a substantial number of
    Federal retirees in Maryland, because we have the great Federal
    labs, et cetera. So the miscalculations, et cetera. So I can
    come back to you but you are not even on the Dashboard, but you
    are on my dashboard.
        So let's go to the VA.
        Mr. VanRoekel, you are Mr. OMB. You say that OMB needs more
    help because the workload is expanding. I acknowledge that. I
    have talked extensively with Ms. Burwell.
        But tell me, what is the role of OMB, number one, in being
    aware of the problem; number two, correcting the problem? How
    much muscle do you have? How much clout do you have? And how
    could we correct that problem and use that as an example,
    because many of these cut across agency lines?
        Mr. VanRoekel. Thank you, ma'am.

                      PREVENTING MAJOR IT SYSTEM FAILURES

        I think when you mentioned techno-boondoggles earlier, I
    think they have some defining characteristics that we have seen
    time and time again. The private sector has gone through a big
    transition in the last 15 years on its view of technology,
    really going from a very discretionary thing--it was the
    ability to send an e-mail or print a document or call the help
    desk--to this very strategic thing. It is the way you market
    your products. It is the way you control supply and demand and
    inventory and quality, and connect with your customers in
    special ways.
        I contend that the Government is going through that
    transition now, that we are in the midst of that inflection
    point. And the hangover of not being to the other end of that
    inflection is really kind of defined by the boondogglish
    characteristics, which are when faced with a problem, we see a
    single big procurement go out to a typically single, big
    monolithic vendor with a multiyear specification that runs out
    to an end. That tends to lead to a very large failure at the
    end of that, where in year 1, you may have a great idea. In
    year 2, you have no results to show that justifies getting
    funding in out-years.
        And the pace of change of technology, the turnover of
    people in the Government, all these things contribute to not
    leading you to the end result that you want to see.
        And so our first order of business is really thinking about
    how we change that big, monolithic approach into what modern
    Internet companies do today, which is delivering results very,
    very quickly. If you use Facebook, and you go up on Facebook,
    there is probably a new version of Facebook that comes out
    every month or so. They turn over all the time. You just don't
    know it, because you just get to take advantage of that.
        And so bringing that into Government and setting
    Governmentwide policy are core to my direction.
        The second part of this is deeper engagement with agencies.
    The Federal enterprise, a lot of people misconceive that my
    organization is the IT shop on the sixth floor of the building
    and we roll up our sleeves and we sort of dive in. The Federal
    enterprise is practically a sector of the economy. It is so
    large. And the ability for a very modest group at OMB, in small
    double digits on my team, doesn't have the ability to dive in
    and write code and develop solutions.
        What I propose in the 2015 budget is really about how do we
    create a mechanism, instead of reactively when things are going
    wrong, proactively go in and engage with agencies to help them
    right the ship.
        Senator Mikulski. Do you have the authority, the clout, and
    resources to go across the agencies or to pick out something
    that you know that is heading toward a disaster?
        Mr. VanRoekel. I believe I do, yes. I have the authority to
    work with the OMB director and the agencies on formulating the
    President's budget. I have Governmentwide policy authority
    through my role in OMB, and that authority gives me the ability
    to go in and stop projects.
        And as Mr. Powner mentioned, we have done that in agencies
    through the TechStat process.
        But going in reactively is often too late. I think we need
    to go in on these projects like VA----
        Senator Mikulski. Do you have the authority, clout, and
    resources to go in early?
        Mr. VanRoekel.Yes, ma'am.

                          VA DISABILITY CLAIMS BACKLOG

        Senator Mikulski. So what can we do to clean up the VA? Not
    the VA. It goes beyond the VA.
        With the indulgence of my colleagues, because I know how
    passionately you feel about this problem, this veterans'
    disability long line and also the inability of VA to seem to go
    digital.
        I have walked into the Baltimore office, the third worst
    field office in the Nation, trying to correct it. If you look
    at the records of a single event, I am 4'11'' on a good day.
    Some of those records are almost as high as I am. And you have
    dedicated staff foraging through records trying to pluck a
    piece of paper to really be able to process the claim.
        So what can you do about it? And what will you do about it?
    And can I have your word that when you leave here, it will be
    your top priority?
        Mr. VanRoekel. I have a personal interest in the VA. My
    father is probably watching the Webcast right now. He had his
    knee replaced at a Veterans hospital in Sioux Falls, South
    Dakota, a Vietnam vet.
        And I have actually been working with the Department of
    Veterans Affairs on helping shape the direction to take.
        I think it speaks to the chairman's earlier comment around
    CIO authorities. And I think the key thing to consider there is
    that a lot of these programs that are happening in Government
    are not just an IT problem. It is not the CIO. And just giving
    the CIO authority, you are not going to get to where you need
    to go.
        It really takes a collective effort across how we are
    thinking about----
        Senator Mikulski. I need to have three to five concrete
    steps that, Memorial Day, when I go out and talk to my
    veterans, I want to be able to tell them, in addition to the
    bipartisan commitment on spending financial resources to do it,
    that it is going to happen. And you cannot leave this to
    Shinseki and Hagel. And I am not knocking those men,
    whatsoever.
        We have to solve the problem. And if there is one thing the
    Congress of the United States agrees on, on both sides of the
    aisle, on both sides of the dome, no veteran should stand in
    line to have their disability benefit processed.
        So how can we do this? And what would you tell me to tell
    those veterans that we are going to do to do that?
        Mr. VanRoekel. I would say, that, one, I am the Federal CIO
    and committed to working on this, and I welcome working with
    you and your staff and the committee and the larger Congress on
    driving this forward, as well as working with my counterparts
    across Government who play an important role in this, and with
    the Department of Veterans Affairs, the Deputy Secretary of the
    VA. I have had many conversations around the work to be done
    here and thinking about, really, the smart application of
    technology.
        And I think they are making good strides on the veterans
    benefit management system. I think it is a good application of
    process. We need to really deeply look at process. We have been
    working with the department on really rethinking some core
    processes in light of technology.
        And third, it is working with the veteran service
    organization. They are really the frontline, really, of a lot
    of this.
        Senator Mikulski. Right.
        Mr. VanRoekel. And we need a closer working relationship
    with them to encourage all of them to really submit fully
    developed veterans claims electronically, which we have the
    capability to receive from them, but we predominantly still get
    paper through that pipeline. So we inherently create a problem
    by the veteran service organizations, sort of the lack of
    electronic----

                                CIO AUTHORITIES

        Senator Mikulski. Well, I appreciate everything you said.
    My time is up. And in fact, the Chair has been most indulgent
    with my time. And this goes to everybody.
        So all of you and the recommendations of GAO, first of all,
    that is not an accurate number. It doesn't include independent
    agencies. It doesn't include the legislative branch and the
    judicial branch, which in and of itself is something.
        So that is one thing. The underestimation of the problem, I
    think, exists.
        Number two, what I would like to suggest, Mr. Chairman, is
    that we survey the subcommittee chairs and get from the
    subcommittee chairs what they consider the top three issues in
    technology from healthcare.gov, which was brought up, what we
    have in CJS, Veterans, and then do it, and then OPM and your
    situation.
        We have to do this, and I am going to ask you to not put us
    in a priority, but show you the way as we fund this year's
    appropriation, we cannot have waste. And if this were fraud, we
    would say one corrupt contractor. But this is dysfunction. This
    isn't corruption.
        So we need a sense of urgency, which I believe you have.
    And you have people in place now, I believe, that are present,
    so that we can move on this.
        But we cannot tolerate this in this committee. We have to
    get value for the dollar, be accountable to the taxpayers, and
    fulfill the missions of our agencies.
        So let's go forward together.
        Senator Udall. Chairwoman Mikulski, thank you very much. I
    think that is an excellent suggestion, working with our
    subcommittee chairs to try to get that information.
        I couldn't echo more what she said in terms of the vets. I
    mean, this is something that is completely bipartisan up here.
    We had an excellent meeting. We brought them into
    appropriations. She was chairing the hearing. We said what do
    you need to do it? I think we gave them some dollars, but I
    don't think it is proceeding in the way that is getting the job
    done.
        So that is something you could really help us with, Mr.
    VanRoekel.
        Senator Johanns--or, Senator Moran, your turn to----
        Senator Moran. People often get Kansas and Nebraska
    confused, but rarely Senators Johanns and Moran.
        Mr. Chairman, thank you very much. You and Senator Johanns
    have been, in my view, greatly interested in a topic that
    matters significantly to us as taxpayers and people who care
    about the efficiency and effectiveness of Government. I look
    forward to us pursuing policies and encouraging agencies to
    develop plans that alter the landscape significantly in
    efficiency and effectiveness and timeliness of the way we
    deliver services to Americans.
        And in my view, this is exactly the kind of hearing that
    the Appropriations Committee ought to be having. We ought to do
    this more often. It is the reason I was interested and willing
    to be a member of the Senate Appropriations Committee, because
    of the opportunity we have for oversight. And I am grateful to
    my two colleagues here for pursuing this line of questioning.
        Let me start with the GAO, and I think part of this was
    covered, as I understand, before I arrived in regard to
    healthcare.gov. So I want to focus not on healthcare.gov, but
    on the IT Dashboard.

                               REPORTING ACCURACY

        And my question is, GAO has issued a report on improving
    the Dashboard as a transparency tool. Which agencies are
    reporting accurately? Which agencies are not? And what can we
    do to make this tool more helpful for oversight purposes?
        Mr. Powner. We do a lot of work checking certain agencies,
    but there are a handful of agencies that we believe are
    reporting quite accurately, the Department of Agriculture (Ag),
    Commerce, Education, Homeland Security (DHS), the Department of
    the Interior (DOI), and VA are reporting accurately.
        If you go to the Dashboard now, you will see reds, yellows,
    greens for all those agencies. It looks appropriate, given the
    complexity of some of these IT projects.
        If you look at DOD, the Department of Justice, the State
    Department, Department of Transportation, and Treasury, there
    is probably more risk than what they are reporting at those
    five agencies.
        Senator Moran. Thank you. What is the difference between
    the agencies that are reporting accurately and those that are
    not? What would you call the characteristic difference between
    what is happening in one, as compared to the other? What is
    missing?
        Mr. Powner. I would say, these are CIO ratings, so it is
    clearly driven by the CIO. I think CIO involvement, and we hear
    certain CIOs, when they get ratings that funnel up to them to
    post on the Dashboard, and certain CIOs push back and say,
    ``No, I think there is more risk than what we are reporting.''
    We like to hear that. I mean, that is how you effectively
    manage these programs, by acknowledging the risk and then
    tackling the risk going forward. So I think it is up to those
    strong CIOs to really question to make sure we have accurate
    status.
        We only have 760 of these. Most agencies have no more than
    50. It is not asking that much of any agency to get an accurate
    assessment when many are spending between $2 billion and $6
    billion within their agencies on these major investments.
        Senator Moran. Are you telling me that it is the attitude,
    approach, the effectiveness, the leadership skills of the CIO
    that determines whether or not you get the accurate outcome?
        Mr. Powner. It is all that, and we talked a little bit,
    too, prior about CIO authorities. Some agencies have
    authorities where they are deeply involved with certain of
    these projects, and some aren't, to be realistic. And the
    authorities are kind of all over the board.
        Senator Moran. Does that corollary apply to those who are
    doing it the best and those who are doing it less well so? Is
    there an authority issue, in, again, those two categories? Can
    we tie them together?
        Mr. Powner. You would tie them together, but I also have
    seen some CIOs who are very effective at using this mechanism
    without having the authorities still getting accurate ratings.
        And those are just good leaders within certain agencies.
        Senator Moran. Thank you very much.

                          SYSTEM FOR AWARD MANAGEMENT

        Let me turn to the GSA, SAM.gov. Since the Government
    switched from the Central Contractor Registration (CCR) to
    SAM.gov, as I understand it, there has been a drop in the
    number of new businesses competing for Government contracts.
    The number of new registrations per month has dropped over 35
    percent, and I have heard from some small businesses interested
    in contracting with the Government, the Federal Government,
    about the difficulty of navigating the process.
        Here are my questions: Can you explain the drop in
    registration in switching from CCR to SAM.gov? Should we expect
    the same drop with regard to other systems as they are
    integrated into SAM.gov? Is there a backlog to certify those
    news registrants? And if so, how do we reduce it? And what is
    GSA doing to improve the system that burdens new entrants into
    this process?
        Mr. Tangherlini. I think in many ways SAM.gov, as part of
    the integrated acquisition environment, actually represents
    some of the less than best practices of how Government goes and
    buys technology.
        And when I came to GSA, I inherited this program, which was
    heading toward failure. We worked very closely with OMB. We
    were able to turn it around so that we could deliver this vital
    mission.
        But if I could go back in time, I would have worked closely
    with our CIO, who was not integrated in the project initially,
    which right there suggests that there is going to be an
    opportunity for failure, and we would have built it in a very
    different way than the way we are building it now.
        Now what we found with SAM.gov is that actually we pushed
    up, dramatically pushed up, people's compliance with certain
    types of reporting. And that was the goal, to get people more
    compliant with required reporting in order to be an approved
    and certified Federal vendor.
        But that means that more people are having trouble getting
    through the compliance hurdle. So while we have seen a drop in
    the number of people applying, we have dramatically seen an
    increase in the overall compliance of the people who are, in
    fact, certified.
        So now we are going back and asking, are there ways that we
    can actually make it easier for people to get on to SAM. Can we
    make SAM much more user-friendly? Can we make it much more
    effective, because as a primary buyer of services for the
    Federal Government, we want as many competitors as possible
    bidding on Federal contracts. We don't want to reduce the
    number of people competing.
        We don't have a backlog right now, but we do have a system
    that, because of its very high compliance hurdles, actually
    makes it harder for people to get all the way through. When
    they are through, they are compliant. We feel that is a better
    certified vendor that we are offering the Federal community.
    But we have to figure out ways to make it easier.
        Senator Moran. Those two things, in my view, should not be
    mutually exclusive.
        Mr. Tangherlini. I agree. I completely agree.
        Senator Moran. Thank you, Mr. Chairman.
        Senator Udall. Thank you, Senator Moran.

                             CIO SPENDING AUTHORITY

        Mr. VanRoekel, in 2011, OMB issued a memo outlining that
    CIOs, and this is a quote from that memo, ``should drive down
    costs and improve service for commodity IT.''
        Yet, few Federal CIOs seem to have authority over community
    IT purchases, including their agencies. And you heard the
    testimony earlier, I was kind of laying the groundwork for the
    question I am asking you here.
        Doesn't it make sense to you that this might be an area
    that is ripe for a legislative solution or legislative
    enactment? The three of us are on a piece of legislation that
    gives specifically that authority to the CIOs that was in your
    memo. And so will you work with members of this subcommittee to
    ensure CIOs have the ability to oversee IT spending within
    their agencies?
        Mr. VanRoekel. Thank you. I consider this a very important
    issue. That memo is actually the first memo issued by my office
    in my tenure as Federal CIO, so I weigh it very heavily as very
    important.
        The role of the CIO has continued to evolve over time. If
    you looked at CIOs, even in the private sector, even what we
    now consider cutting edge private sector companies, 10 or 15
    years ago, you would have seen a much different set of
    characteristics than you see today.
        Today, the CIO is a cyber warrior. They stay on top of
    cyber-type aspects. They are a business owner, and they manage,
    in the private sector, profit and loss (P&L) statements. In the
    public sector, they manage these very large budgets. They are
    an executive from a team, a multilayered team aspect.
        What we have inspired to do in my tenure is not only, one,
    lay the groundwork to say that our first stage of getting costs
    under control was really to make sure that we had a view into
    this commodity spend. It is unthinkable in the private sector
    for an agency of Government to run more than one e-mail system.
        When we came to Government in 2009, the Department of
    Agriculture was running 21 e-mail systems. And so our first
    foray here was let's get our arms around this commodity stuff.
    This is the lowest of the low-hanging fruit to drive cost
    savings.
        The Department of Agriculture, I am happy to report now, as
    Mr. Powner said, they are one of the great reporting agencies.
    They are running one e-mail system. It is cloud-based. They
    have one way of buying mobile devices. They have one way of
    buying computers across that very large enterprise, and they
    have done a great job driving this stuff forward.
        So as we evolve, as we take this journey through really
    moving from discretionary to strategic, I think the role of the
    CIO will continue to evolve. And I think there is room for
    policy and discussions around what that role entails.
        What I would caution is that that role, I believe, truly
    believe, is going to continue to evolve and will be set up in a
    way that we should have fruitful discussions to talk about what
    that is going to look like for now and into the future for
    success.
        Senator Udall. Mr. Powner, could you comment on that,
    specifically on the authority of the CIO? Do you believe it
    would be helpful to identify specifically that they have the
    authority to make commodity IT purchases, and those kind of
    things, throughout the agencies?
        Mr. Powner. Yes, I think if you start with the authority
    issue on commodity IT, there is no reason why CIOs in the
    Federal Government should not have authority over commodity IT.
        And I think the PortfolioStat initiative, we have 200
    initiatives that total $5.8 billion. If we do it right, we
    could save money. That includes some data center consolidation.
    It includes going to the cloud. It includes eliminating a lot
    of duplication.
        And there is always this big debate, are CIOs responsible
    for mission-critical applications and systems? Frankly, they
    should be. But let's start with commodity IT. Start with
    commodity IT, get the authorities right there, and then we can
    grow the CIO authorities, as Mr. VanRoekel referred to. I think
    that is the appropriate way to go.
        Senator Udall. Thank you.
        Senators Johanns.
        Senator Johanns. Thank you, Mr. Chairman.

                             RETIREMENT PROCESSING

        If I could go to Director Archuleta with a question or two
    about the retirement system, it seems to me that when you are
    dealing with the body of people from the Federal system who are
    qualified for retirement or are on a retirement program, that
    you are dealing with a pretty defined universe, compared to
    rolling out an IT system for the entire United States and
    everybody who might access it.
        This would seem, by comparison, relatively straightforward.
    But we have all read that article about the cave. I can't
    imagine working under those conditions, to be honest with you.
    But people go back to the stacks and stacks of paper files. And
    literally, they are figuring out retirement with a pencil and
    piece of paper and a calculator.
        I mean, I was amazed. Is that truly what is happening? When
    somebody reaches retirement age, they decide to retire, how do
    you make sure--walk us through the steps where they go from the
    decision to retire and retirement day to actually being on the
    system?
        Ms. Archuleta. I would be glad to, Senator.
        First, let me say, especially as we honor employees this
    week, that employees at Boyers are a terrific group of
    individuals who are very dedicated to making sure that our
    annuitants are served in the best way possible.
        If they are not able to meet some of our expectations, it
    is not because they are not trying. It is because we have not
    given them the tools they need to implement the work that is so
    important.
        When you think about the number of people that Retirement
    Services deals with on a daily basis at any given time, the
    general group of people are over 2 million retirees and their
    families who are customers of Retirement Services. And, as you
    know, we have about 1.9 million people in the Federal
    Government right now. On any particular month, anywhere from
    9,000 to 10,000 of those individuals retire.
        In 2010, there was a decision to shut down an IT system
    that had been piloted. It didn't work. And the result of which
    is that we had to go back to the drawing board. What the
    employees did was to use very effectively what has been
    characterized as paper and pencil, but, I will tell you, a lot
    of dedication as well.
        They have managed to reduce the backlog. Today, just a few
    days ago, we reported to you that there were approximately
    15,000 backlogged cases. That still is too many.
        So as a result of my commitment to reduce the backlog that
    I made during my confirmation hearing, and with the help of our
    new CIO and the dedicated staff at Retirement Services (RS), we
    are focused on three priorities for reducing the backlog and
    moving forward into the future on how we deal with Retirement
    Services.
        The first one, and you will recognize all of these, sir,
    because your constituents talk about them, is that we are going
    to look at customer service first, and what is the response
    time that it takes for any annuitant to hear about whether he
    or she is eligible for the retirement contributions that they
    have put away in their retirement fund.
        Usually, if I were to retire tomorrow, I would work with my
    Human Resources (HR) manager in the Department of Labor, and I
    would let her know that I was retiring. The HR manager would
    then gather my papers and inform our Retirement Services that
    Katherine Archuleta is about ready to retire.
        The gathering of those papers on the day that I do retire,
    if there are no outstanding issues around my retirement, what
    will happen is that first, I retire on May 1. About May 15 or
    so, I will get my first check, which is the accumulation of my
    leave pay. On about June 1, I will get my first retirement
    check, and that will be 80 percent of what I am entitled to.
    The last 20 percent will come in the final adjudication of my
    file, and usually that happens within another 30 to 45 days.
    That is a normal case.
        But sometimes not everybody is as easy as Katherine
    Archuleta. There are other times when there are other issues
    that employees encounter, such as court cases or other
    liabilities that they encounter, which we must investigate.
        If all of that information is in our hands, that same
    timeline will apply. However, if there are things that are not
    available, if we don't have the paperwork, if the court is
    involved, it takes a lot more investigation by these
    individuals.
        So that customer service is really important to us, that we
    are communicating. So we are focusing on that.
        The second thing, sir, that I would tell you we are doing
    is focusing on case management, how do we get those files as
    quickly as we can? The investment, the appropriation that you
    provided to us at $2.6 million will enable us to develop the
    case management system. We have asked for another $2.4 million
    in 2015. That will allow us to complete that. And by the end of
    fiscal year 2015, we should have a case management system
    online.
        Finally, we are going to work on the post-adjudicative
    workload. Those are individuals who in fact have already
    retired and changes in their lives have made further work with
    them necessary. That might be a death of the annuitant. It
    might be a divorce of the annuitant. There might be new child
    custody issues. All of those things come into play as their
    annuities are calculated.
        It is a complicated process. It is in paper and pencil
    right now. But I will tell you that there is a dedicated staff,
    including the people in Boyers, many of whom have worked there
    for over 20 years, who are working very hard to solve these
    problems.
        Senator Johanns. You know, nobody here is picking on the
    employees.
        Ms. Archuleta. No, I know that, sir. Yes.
        Senator Johanns. We are happy that there is somebody who
    wants to do the work and is dedicated and forcefully trying to
    get it done.
        But I do think this is an example of where we have spent
    money, really, to no avail. You have the employees out there
    holding things together, but when you say we haven't given them
    the resources, I think we have given them the resources. We
    just haven't deployed the resources appropriately, and it has
    not been effectively utilized.
        Ms. Archuleta. And I could add to that the resources have
    worked. So it is my commitment to you, sir, to keep you up-to-
    date on where we are at in this process. As I said, I have
    employed a new CIO. It is at the top of her list of things that
    we are going to accomplish.
        And I will be sure to keep you and this committee up to
    date on our progress.
        Senator Johanns. Thank you, Mr. Chairman.
        Senator Udall. Senator Moran.
        Senator Moran. Thank you again.

        FEDERAL RISK AND AUTHORIZATION MANAGEMENT PROGRAM CERTIFICATION

        Let me go back to OMB. I want to talk about the Federal
    Risk and Authorization Management Program (FedRAMP). Your
    memorandum requires that all cloud service providers (CSPs)
    must be FedRAMP-certified by June 4, 2014, and that if they
    are, that makes them eligible to partake in future Federal
    cloud service procurement opportunities.
        June 4 is not very far away, and FedRAMP certification
    seems to me to be pretty important. And I think there is some
    concern that we may not be prepared by June 4. And so my
    questions are, what measures will be taken to ensure that
    agencies enforce the FedRAMP deadline on CSPs seeking
    Government acquisition June 4 and beyond?
        Mr. VanRoekel. The FedRAMP, just to catch people up,
    FedRAMP is called the Federal Risk Authorization and Management
    Program. Agencies of Government were going under our cloud-
    first policy to cloud vendors and basically asking for very
    specific and unique requirements for each agency. What was
    happening was, two things are really happening. One was that
    they were driving all the cost savings out of it by asking for
    unique solutions to be produced by the private sector, to send
    them back these solutions. And two, it was creating all this
    variability in the marketplace, where cloud vendors didn't know
    how to sell to Government. They didn't know how to provide.
        So I launched FedRAMP to basically build a consistent way
    of doing cybersecurity around these cloud providers,
    effectively shaping cloud computing as we know it in the United
    States.
        Now if you go to Amazon or Microsoft or any of these large
    cloud vendors and you talk to them, even about their corporate
    strategy, they are using FedRAMP as the way of defining
    consistent cybersecurity capabilities to sell into the private
    sector. We are even seeing other foreign governments pick up
    FedRAMP as now their model of operating, because the United
    States owns about 80 percent of cloud computing capabilities
    for the world. And so we are making good progress.
        On FedRAMP adoption inside the Government, we have over, I
    believe, a dozen or so vendors that have now reached the
    FedRAMP certification that can now sell into Government. And
    agencies also are then required, because I didn't want people
    to get out and fail, and, ``If I don't go to the cloud, then I
    can just use my own stuff inside my own data center.'' Part of
    what you are seeing in the June deadline is getting Federal
    agencies to say, if they are going to provide their own
    capabilities, we are going to require that they meet those same
    guidelines for cybersecurity. And I believe we are making great
    progress.
        Senator Moran. If you have to meet the same requirements,
    what would be the incentive to stay in-house?
        Mr. VanRoekel. That is a great question. It was actually
    part of the incentive structure we put in place to try to get
    people to go to the private sector, because we think that is a
    better, long-term motion.
        Senator Moran. Is it better because of cost savings? Better
    because you think the security would ultimately be better?
        Mr. VanRoekel. I think it is better for a couple reasons.
    One is, it goes from a very capital-intensive model to an OpEx
    model where instead of upgrading your data center and coming to
    committees like this and asking for money every 3 years to buy
    new servers and things, you just pay one price over the course
    of time. And two is the capability. You get the benefit of
    upgrades and things that the vendor is doing at scale with
    other customers.
        When you go to Amazon.com, you don't think to yourself, do
    I have the latest version of Amazon.com installed? You just use
    it, and it is just available to you. That is kind of the beauty
    of cloud and where this goes, is that we can reap the benefits
    of large-scale, and get the benefits of the upgrades and the
    technology shifting over time without us having to drive it
    ourselves.
        Senator Moran. You mentioned the number 12. Is that a good
    number? Is that a sufficient number?
        Mr. VanRoekel. I was looking. These move all the time, so I
    was trying to pull to the page. I believe that is very close,
    but I would be happy to get back to you.
        [The information follows:]

        As of June 2014:
        22 cloud services have received FedRAMP authorizations:
      --12 companies and 13 cloud services have received Joint
            Authorization Board (JAB) issued Provisional Authorizations To
            Operate (P-ATO).
      --2 companies and 3 cloud services have received agency issued
            Authorizations To Operate (A-ATO).
      --5 private cloud services have been authorized by the Department of
            Homeland Security (DHS).
      --1 Government agency (U.S. Department of Agriculture) has one cloud
            service that meets FedRAMP requirements.
      --There are 13 cloud service providers (CSPs) with 13 cloud services
            in-process for Joint Authorization Board authorization.
        The authorized cloud services range across Infrastructure as a
    Service (IaaS), Platform as a Service (PaaS), and Software as Service
    (SaaS) offerings. At any given time, there are also upwards of a dozen
    systems being actively reviewed by the JAB for FedRAMP authorization,
    and many more in the pipeline.

        Senator Moran. Just in general, is that the number of
    vendors that you would want to be certified? Or is the audience
    much larger, the opportunity much larger?
        Mr. VanRoekel. The key to that is, many of the very large
    vendors out there are represented in that 12. The bulk of the
    large vendors, like the Microsofts and Amazons of the world,
    are represented in that number.
        We have a very rich pipeline, and I think the vibrancy in
    this cloud marketplace continues to evolve and expand. And it
    is a place that really speaks to kind of American
    exceptionalism in technology.
        Senator Moran. Very good.

                                BROADBAND ACCESS

        Another question, Mr. Chairman, talk about broadband access
    with the GSA. The Middle Class Tax Relief and Job Creation Act
    of 2012 directed GSA to develop a master contract to govern the
    placement of wireless service antennas on buildings and other
    property owned by the Federal Government. This makes some sense
    to me, but I also understand that not much has happened, and
    that GSA is significantly behind the deadline. I think
    President Obama has directed this to happen. It hasn't happened
    following his Executive order. It is a congressionally mandated
    program.
        Would you bring me up-to-date on where we are and maybe my
    understanding of the timeframe? As I understand, you are a
    couple years behind?
        Mr. Tangherlini. I will actually have to follow up with you
    and the subcommittee to give you a better update on where we
    stand with that particular initiative related to the Recovery
    Act.

        [Note: See in the ``Additional Committee Questions'' at the end of
    the hearing the General Services Administration's response to Senator
    Moran's question above.]

        Senator Moran. I think there is merit to achieving this
    goal. I think it enhances the wireless industry's ability to
    deliver. I pay attention to these issues, in part because of
    the rural nature of where I come from. And it also is trying to
    create revenue for the Treasury. So I would be glad to have
    your follow up.
        Mr. Tangherlini. We support all of those things. We would
    like to help out.
        Senator Moran. Okay, thank you very much.
        Senator Udall. Thank you, Senator Moran.

                                DIGITAL SERVICES

        OMB's fiscal year 2015 budget request includes a new
    Digital Service team of 25 staff to identify major IT problems
    across agencies. GSA's new 18F team will include talented,
    private, and nonprofit sector technology experts to help
    resolve IT issues at the agencies.
        I want to ask Mr. VanRoekel and Mr. Tangherlini, can you
    explain how these teams will work together to prevent major IT
    system failures and improve citizen services? What types of
    problems do you expect these groups to solve? How is this
    effort different from the Presidential Innovation Fellows? And
    are you concerned that the agencies may be reluctant to request
    help from GSA's 18F team?
        Mr. VanRoekel. Great, so I think I will go first. The key
    thing to think about as far as I think a lot of what you have
    heard today is a lot of our engagement on Federal IT on
    programs that aren't going so well is very reactive. We go in
    when indicators are showing us things aren't going well, or
    other notable examples where we go when in, in a reactive way.
        The intention of this budget request is to really shift
    from reactive to more proactive, where we are starting to
    identify what are the key investments that agencies are doing,
    and then how do we get a team of people in that you would
    really, as American taxpayers, would want in looking at these
    investments in a nonbiased way to understand what are the gaps
    that need to be filled.
        Current staff within OMB, our time is primarily comprised
    of our statutory duties that do the budget formulation,
    reporting to Congress, and other things. Our GAO engagement
    work, which is, amazingly, up to about 40 percent of our time,
    is spent working on GAO inquiries.

                                HIRING EXPERTISE

        And then through the great work of this committee, we stood
    up a couple years ago the IT Oversight and Reform Group, which
    is a small group that has been really focused on Government
    efficiency. It is what has driven those billions of dollars in
    savings we talked about. It is what drives the report that you
    get on a quarterly basis that has line item savings identified
    inside agencies. And it has driven the PortfolioStat process.
        This additional capacity that we are talking about in the
    2015 budget is really about bringing people in. Think of the
    Facebook engineer out there, the usability person at Google, or
    the person who can take a rotation in Government, work within
    Government, where we go in and having identified important
    projects within Government, come into those Government agencies
    and provide expert consulting, look at and spend time with
    agency.
        And I am saying, by ``spend time,'' not a 3-hour PowerPoint
    session, but spend 1 or 2 or 3 weeks or more with the agency
    really getting behind the scenes on what is going on inside
    this agency, what are commonsense, 21st century ways that we
    need to address the issues at hand, and then work with agency
    on coming up with a plan on how to address those.
        So really think of our group as the group that does the
    consultancy upfront, identifies gaps, comes up with a plan to
    address those gaps. And then the way that the agencies would
    address those gaps I anticipate would be one of three ways.
        One is they would find or hire someone into their own
    organization to address those. We actually have been working
    with Director Archuleta on looking at flexibility in technical
    hiring and other things to help fill that sort of gap.
        Two is looking at the vendor community and understanding
    can these vendors who are working on these projects subprime in
    small innovative companies? Can they work in a different way?
    Can they bring talent in? We have seen that work effectively in
    Government.
        Or third is potentially working with GSA's 18F team, where
    they are building delivery capacity, people who would actually
    sit with agency and write code or work on these projects in a
    small way.
        And what we have seen time and time again, from me going
    into an agency and helping them on a project to other efforts,
    a very small number of people who have a notion of how to
    deliver things, in modern technology terms, can really change
    the game, and change the dynamic in a way.
        It doesn't take an army of new people coming in. You can
    actually just inject a few well-meaning people in to really
    change the outcomes today.

                                      18F

        Senator Udall. Dan, on the 18F.
        Mr. Tangherlini. I would just add to that. What we are
    trying to do is build an additional level of capacity beyond
    our existing capacity, which is to provide agencies with
    contract solutions. So that rather than agencies trying to
    figure out every component of how you would solve a problem, we
    can help agencies through having internal capacity, programming
    capacity, better understanding of how you build IT systems,
    help them experiment with solutions, so that when we go back
    into the marketplace for the bigger buy, we are actually a more
    knowledgeable consumer of IT services.
        We think that working more closely with the capacity that
    Steve is developing means that we are going to have an
    opportunity to have a feedback mechanism, figure out what is
    working, frankly, what isn't working, and make sure that we
    carry that message from agency to agency, so that these
    mistakes don't get repeated over and over again.
        The other exciting aspect of this is that 18F is going to
    be the resident home for the Presidential Innovation Fellows.
    So those are folks who the agencies have personally selected to
    come work on problems that they have identified. And from that,
    we are going to have a better way of understanding the
    challenges within those agencies. We are going to use some of
    the experiences that the Presidential Innovation Fellows bring
    back, share with the other fellows, to understand how we should
    be targeting our efforts to serve agencies.
        We also think that the Presidential Innovation Fellows will
    be a fantastic recruiting tool both for our internal capacity
    that we are developing at GSA, external capacity that is being
    developed in the other agencies, and maybe even Steve's office,
    too.
        Senator Udall. Thank you.

                                 IT INITIATIVES

        You have commented on this area, previously, so I am
    wondering, do you believe these new proposals would address
    some of your concerns in terms of providing more guidance and
    oversight to IT initiatives, which I think you have mentioned
    in the past?
        Mr. Tangherlini. I think these are good ideas to be
    proactive and to be innovative and to get in on the front end.
    That is definitely needed. So these initiatives are great.
        But we have 760 investments up here that are in flight;
    275, roughly, of the 760 are acquisitions that need some basic
    blocking and tackling to get them done. And then we also have
    most of this as legacy spend, data center consolidation and
    PortfolioStat.
        So I think these are great ideas, but we can't lose sight
    of this, because we are spending a lot of money and we need
    help with some of this.
        Senator Udall. Thank you very much.
        Senator Johanns.
        Senator Johanns. I am very mindful of the fact that we are
    going to get called to a couple votes, I think in about 10 or
    15 minutes, so if I could just ask a couple quick questions,
    just a follow-up on healthcare.gov.

                                 HEALTHCARE.GOV

        Mr. VanRoekel, were you a part of the oversight team? Or
    was there an oversight team, as healthcare.gov was being built
    and working its way toward implementation?
        Mr. VanRoekel. My role was very in line with the mission
    and role that OMB plays, in that I assembled team across the
    Federal agencies that related to the Affordable Care Act. It
    was something that we call the IT steering committee.
        And the primary output of this team was the data services
    hub capability of the Affordable Care Act implementation. It is
    somewhat of a natural act for agencies to work within their own
    agencies. It is not as natural in the model that is Government
    for these agencies to work across their borders. So we brought
    together the teams of technical people to work with each other
    to solve the opportunity for these transactions to be routed
    between the agencies.
        Senator Johanns. Okay. Did you have any concerns when
    healthcare.gov was not reporting red? I mean, they did 1 month
    and then popped right back to green. Did that raise any red
    flags for you and your office? Or did anyone come to you and
    say, ``You know, I just wonder if we can rely upon the
    information that we have been given by HHS.''

                                  IT DASHBOARD

        Mr. VanRoekel. The IT Dashboard, it is probably important
    to note as a kind of pretense to this, primarily tracks cost
    and schedule variance. Cost and schedule variance wasn't
    something that the Government was tracking, writ large, before
    my office created the IT Dashboard. And the IT Dashboard was
    sort of an important first step in getting agencies not only to
    report this, but, more importantly, letting agency CIOs have
    visibility into the corners of their agencies on what all the
    investments were and what were the cost and schedule variance
    of those investments. We now have that as a cost and schedule
    variance to track. And that is what IT Dashboard does.
        I agree with Mr. Powner. We hold a lot of potential to
    enrich the way we are looking into these investments and our
    fiscal year 2015 budget request really starts to get at the
    capacity to be able to that.
        Senator Johanns. So at that time and at this time today, if
    I am a Secretary, and we report that we are on budget, number
    one, and number two, that we are meeting the schedule for
    whatever rollout day is, then I get a green on the performance
    Dashboard is what you are saying?
        Mr. VanRoekel. I have added another feature to the
    Dashboard that is something I call rebaselining. So if an
    agency goes in and has set an initial cost schedule and time
    schedule to their investment, we could not tell, in the first
    versions of IT Dashboard, if an agency is going in and changing
    their targets, they were moving the schedule, moving the costs.
        In late 2011, early 2012, we added the functionality, so we
    could see if someone was rebaselining their investment, meaning
    they were moving the goal line on cost or schedule. That gives
    us a key indicator to look at as well.
        Senator Johanns. You can kind of see the point I am getting
    to. I think that is good information to have. But I could be a
    Cabinet member and my team could be coming to me and saying,
    ``We are on budget. We are on schedule. We are not moving the
    goalposts,'' and I would report green. And then the fourth
    thing they could be reporting to me, ``We don't think this has
    a prayer of working.''
        And yet, I would be in compliance with the Dashboard,
    right?
        Mr. VanRoekel. I think, to Senator Mikulski's point earlier
    on kind of these large monolithic projects, one of the primary
    problems we have is we don't know the health of the project
    until the end, until we get to the delivery. We have seen this
    in many examples across the Federal Government.

                               AGILE DEVELOPMENT

        The key is, as I mentioned earlier, to think in a more
    modular way. How am I delivering something I can actually see
    and touch and feel in 60 days or 90 days, and limit those
    deliveries to that time?
        Part of our broader policy work, and the capacity that we
    are putting into the 2015 budget, is working more side-by-side
    with agencies to drive this as the new normal.
        You wouldn't walk into a private sector company today and
    see them spec'ing a 3-year project that is $100 million and
    things like that. Just as a society, you don't deliver
    solutions that way.
        Our aspiration with this work is to get Government to
    really think about how am I doing things in a more agile way
    that delivers customer value very soon.
        In the cases where I work with agencies, or we get people
    who were bringing this to agencies, we see great results.

                              IT DASHBOARD RATINGS

        Senator Johanns. What you are telling me, you answered that
    in a finessed sort of way, what you are telling me is the
    answer to my question is yes, you could report you were on
    time, you are on budget, you are not rebaselining, but my team
    could be telling me that it looks like this thing will fail,
    and I would still be in compliance with the Dashboard.
        Mr. VanRoekel. The green, yellow, and red are self-
    assessments. They are independent of the metrics we see under
    the Dashboard. We do track those metrics, independent of green,
    yellow, red. We actually don't use green, yellow, red as the
    key indicator.
        Senator Johanns. David, I saw you nodding.
        Mr. Powner. Well, I will give you a good example. I think
    DOD has turned a corner. They now have 118 investments
    reported, up from 93. They have agreed to provide an assessment
    every 6 months, not monthly, like other agencies.
        But in their new guidance, what they said, and they have
    had so many failures with enterprise resource planning (ERP)
    systems, and the Air Force ECSS is the recent example. They are
    going to list every ERP system they are doing as red, because
    of their past history. I actually think that is appropriate, so
    it gets the right attention.
        So they could be perfect on cost and schedule, but they may
    call it, if it is ERP, and the complexities they have had and
    all the past failures, it is going to be red.
        We like that. So I like where there is flexibility, because
    it is okay if we have more reds. We want this managed more
    effectively, so we are not wasting taxpayer money.
        Senator Johanns. And, again, not to get into a partisan
    debate about whether we like the healthcare bill or not--we
    could have that debate, and we have had--I think the managers,
    right up to the gentleman in the Oval Office, deserve to know
    if this thing isn't coming together.
        As a former Cabinet member myself, I would want to know
    that. And if I did know that, I would be telling somebody, my
    committee of jurisdiction, the President himself, ``There is a
    very serious problem here.''
        And that is what I am trying to get to. I just want to make
    sure that whatever processes we have in place are catching what
    we think they are catching. And I just worry that today we are
    not there yet.
        Now I compliment you. I do think knowing about price or
    whether you are on budget, et cetera, is good information to
    have. But at the end of the day, we also want to know that when
    we spend that money, we are going to get something that
    actually works.
        And that is where the Federal Government, I think, gets so
    much criticism. We spend all this money, and at the end of the
    day, it doesn't work, and we are all kind of going, ``Wow, that
    was a surprise,'' when, quite honestly, somebody had to know
    that as this was being put together, it wasn't coming together.
    That is what I am trying to achieve here, how do we get to
    that?
        And that is a question for another day, but a question we
    are going to continue to press on. And I thank you for your
    indulgence, Mr. Chairman.
        Senator Udall. Senator Moran.
        Senator Moran. Mr. Chairman, no questions.
        Senator Udall. Okay, let me see here, first of all, let me
    thank all of you for participating and being here today. You
    can see there is a real passion up here for the work that you
    do, and saving real dollars, and focusing on this. We really
    appreciate the top officials and experts in IT here, and your
    ideas for improvement. I think you gave us some very good
    suggestions.
        Today's discussion, I think, has been very helpful, and it
    will be instructive as we move forward.
        The hearing record will remain open until next Wednesday,
    May 14, at noon, for subcommittee members to submit statements
    and questions to be submitted to the witnesses for the record.
        [The following questions were not asked at the hearing, but
    were submitted to the agencies for response subsequent to the
    hearing:]
                  Questions Submitted to Hon. Steven VanRoekel
                    Questions Submitted by Senator Tom Udall
                        techstat and failing it projects
        Question. The Government Accountability Office (GAO) has noted that
    the Office of Management and Budget (OMB) has transferred
    responsibility of TechStat reviews to agencies, and conducts many fewer
    TechStat sessions itself. Much of the success of previous TechStat
    sessions has been attributed to the fact that they were attended by
    high-level managers from the agency and OMB.
      --Do you believe that TechStat reviews are as effective when
            conducted by agencies as when conducted by OMB?
      --What tools do agencies have to terminate information technology
            (IT) investments that are critically over budget, over
            schedule, or failing to meet performance goals?
      --Similarly, what tools do agencies have to replace these terminated
            investments with new commercial IT solutions?
      --What authority does OMB have to intervene into agency IT projects
            that are at risk or failing and cancel them?
      --What will OMB do to provide more guidance and oversight of the
            Federal Government's most at-risk IT projects?
        Answer. OMB works on a continual basis with agencies to conduct
    TechStats, be they led by the agency or by OMB itself. As part of the
    25 Point Plan to Reform Federal IT Management, OMB worked with agencies
    to develop a TechStat toolkit, which was based on the rigorous
    processes OMB used to develop the TechStat model. The Toolkit provides
    templates, guides and other tools for an agency to successfully execute
    a TechStat. OMB believes that TechStats can be more effective as a
    tool, when managed and applied by agencies. This is because agencies
    are closer to the programs and are able to recognize the triggers and
    risk factors that an investment may be heading off course more quickly
    than OMB can. As a result, the agency can assemble a multidisciplinary
    team to review the investment and implement corrections.
        Agencies have broad latitude to cancel failing investments. In
    fact, in many instances they are able to marshal administrative
    remedies faster than OMB. Agencies can terminate contracts and assign
    personnel to meet revised agency priorities. These types of changes are
    implemented very quickly. In addition, on at least an annual basis
    agencies convene investment review boards (IRBs) to review the IT
    investments of their respective institutions to ensure that they are
    delivering on the vision and consistent with the agreed upon strategy.
        Additionally, as part of the Smarter IT Delivery Initiative, OMB is
    reshaping the delivery of information technology already underway and
    introducing new approaches/tools to transform the Government IT
    landscape. To do this, OMB is focused on a three-part agenda that will
    provide the Federal Government with: (1) the best talent (2) the best
    companies; and, (3) the best processes to drive outcomes and
    accountability.
        As part of this effort, in August 2014, the Administration began
    piloting the U.S. Digital Service. This small team of America's best
    digital experts will work in collaboration with other Government
    agencies to identify and fix problems, to help upgrade the Government's
    technology infrastructure, and to make Web sites more consumer
    friendly. The team has one core mission: to improve and simplify the
    digital experience that people and businesses have with the U.S.
    Government by:
      --Establishing standards to bring the Government's digital services
            in line with the best private sector services;
      --Identifying common technology patterns that will help us scale
            services effectively;
      --Collaborating with agencies to identify and address gaps in their
            capacity to design, develop, deploy and operate excellent
            citizen-facing services; and
      --Providing accountability to ensure agencies see results.
        The Administration also released for public comment two crucial
    components in its growing IT toolkit that will enable agencies to do
    their best work--the Digital Services Playbook and the TechFAR
    Handbook.
        The Digital Services Playbook lays out best practices for effective
    digital service delivery and will serve as a guide for agencies across
    Government. To increase the success of Government digital service
    projects, this playbook outlines 13 key ``plays'' drawn from private
    and public-sector best practices that, if followed together, will help
    Federal agencies deliver services that work well for users and require
    less time and money to develop and operate.
        To ensure Government has the right tech tools to do its job, and
    can be more agile and flexible to meet rapidly changing needs, the
    dministration also launched the TechFAR Handbook. The TechFAR Handbook
    is a guide that explains how agencies can execute key plays in the
    Playbook in ways consistent with the Federal Acquisition Regulation
    (FAR). This document will help agencies take advantage of existing
    authorities to procure development services in new ways that more
    closely match the modern software development techniques used in the
    private sector.
        With regard to OMB, it has authority as described in the E-
    Government Act of 2002 (Public Law 107-347) to oversee implementation
    of:
      --Capital planning and investment control for information technology;
      --The development of enterprise architectures;
      --Information security;
      --Privacy;
      --Access to, dissemination of, and preservation of Government
            information;
      --Accessibility of information technology for persons with
            disabilities; and
      --Other areas of electronic Government.
        OMB's Office of E-Government and Information Technology will
    continue to publish new and/or updated guidance to support agencies in
    their development and management of IT investments. This includes
    revising the capital planning guidance that is used to help agencies
    manage IT investments. The revisions are intended to provide the right
    level of visibility into the investments so that agencies, OMB,
    Congress and the public can see that the Government is making smart
    investments in IT.
                        special hire and pay authorities
        Question. Both GSA's 18F and OMB's Digital Service are using
    Schedule A hiring authority. Direct Hire Authority is available for
    Information Technology Management (Information Security) (GSA-2210, GS-
    9 and above, Governmentwide and nationwide), but not all IT positions.
      --Given the high demand and competition for IT-related positions, and
            because the private sector can often pay higher salaries for
            such positions, what increased hire and pay authorities are
            under consideration for IT positions that don't currently have
            any, and what types of positions would these be?
      --What other types of hiring and pay incentives beyond those now
            available to Government employees and agencies should be
            contemplated for recruitment and retention of IT specialists?
      --Do you believe that OMB needs additional authority to expand the
            use of Schedule A hiring authority for the Digital Service?
        Answer. OMB, the U.S. Department of Veterans Affairs (VA) and the
    General Services Administration (GSA) recently received authority from
    the Office of Personnel Management (OPM) to hire a small number of
    Schedule A, Digital Services Experts to support the Smarter IT Delivery
    Initiative. We believe that hiring flexibilities like this will better
    allow agencies to compete with private sector hiring standards for
    elite IT talent. Currently, we are planning research and evaluation
    methods which would help the Government determine if this Schedule A
    authority should be scaled Governmentwide. In the meantime, the
    Administration continues to explore other flexible hiring options that
    agencies can utilize such as term appointments. The Administration also
    encourages agencies to utilize the direct hire authority for
    cybersecurity professionals where applicable.
                        data center consolidation update
        Question. Since agencies began executing their data center
    consolidation plans in 2011, more than 700 Federal data centers have
    been closed. This has led to $3 billion in reported savings through
    PortfolioStat, but more progress can be made. GAO's testimony notes
    that as of last July, Federal agencies reported having nearly 7,000
    data centers. Measuring average server utilization is one way to
    evaluate how effectively the Federal Government is using its remaining
    data centers. While the industry standard for average server
    utilization is 60 percent, the Federal Government's standard is roughly
    10 percent.
      --How many Federal data centers existed at the start of this
            initiative and how many are there now?
      --What is the current average server utilization rate at Federal data
            centers?
      --What is your target utilization rate for Federal servers?
      --How is OMB providing oversight of this initiative and coordinating
            agency efforts to consolidate data centers?
        Answer. In October 2010, based on agency submissions after the
    launch of the Federal Data Center Consolidation Initiative (FDCCI), OMB
    reported 2,094 data centers. As of July 2014, agencies have identified
    9,540 data centers, of all types and sizes. This increase, explained in
    further detail below, is a result of a change in definition of a data
    center, and is not a result of construction of new data centers. The
    9,540 is categorized into two populations, core (275 data centers) and
    non-core (9,265), further defined below.
        It is important to note that since the FDCCI was launched there
    have been several important policy shifts within the data center space
    which provide some context for the increased 9,540 figure. First, in
    March 2012, based on a recommendation from the FDCCI Task Force (a CIO
    Council body), OMB changed the definition of a data center and removed
    all square footage and tiering requirements (the original definition
    required 500 square feet and meeting strict criteria from the Uptime
    Institute). Subsequently, this caused a dramatic increase in the number
    of data centers that agencies reported. As mentioned above, the jump
    was not due to construction of new data centers, as the Government
    maintains a net zero growth policy dating back to the summer of 2010.
    Further, the definitional change has provided additional transparency
    and insight into the Federal Government's actual data center footprint.
    The majority of the Government's data centers are smaller rooms and
    closets (less than 1,000 square feet), rather than large, stand-alone
    facilities, that one envisions when he/she considers what a Google,
    Facebook or Microsoft may employ.
        Second, in March 2013, the FDCCI was integrated into PortfolioStat,
    the Government's IT portfolio management initiative. As these efforts
    converged, OMB instructed agencies to focus on optimizing those data
    centers that are pivotal to delivering taxpayer services, while closing
    duplicative and inefficient data centers. As a result, agency progress
    under the FDCCI is no longer solely measured by closures. Instead the
    FDDCI Task Force categorized agency data center populations into two
    categories: core and non-core. While the Government will continue to
    target the initial goal of closing 40 percent of agency-identified,
    non-core data centers, agencies will also be measured by the extent to
    which their core data centers are optimized for total cost of
    ownership. To enable this, the Task Force developed energy, facility,
    labor, storage, virtualization and cost per operating system metrics.
        Instead of focusing on one metric, for example, server utilization,
    OMB worked with the FDCCI Task Force to develop total cost of ownership
    metrics, which measure performance against all the cost areas of data
    centers, rather than just one dimension (utilization) of one piece of
    data center equipment (servers). These metrics, which were published as
    part of the fiscal year 2014 PortfolioStat guidance, cover hardware,
    software, energy, human capital and facilities density. OMB and the 24
    participating Federal agencies believe that working to meet the targets
    for these metrics puts the Government in a better position to address
    emerging taxpayer needs than just focusing on server utilization.
        To date, agencies have closed 976 data centers with 3,665 planned
    for closure by the end of fiscal year 2015. This information is updated
    on a quarterly basis on Data.gov. OMB provides oversight through its
    PortfolioStat process, monthly FDCCI Task Force meetings, continuous
    budget development and execution discussions, and if necessary, other
    avenues.
                     improving the it dashboard--timeliness
        Question. The IT Dashboard has been an important tool for improving
    transparency and accountability in Federal IT spending. However, GAO
    has made several recommendations to OMB for improving the IT Dashboard
    which have not yet been implemented. For example, the public version of
    the IT Dashboard is not updated during preparation of the President's
    budget request, which takes roughly 6 months. GAO also noted that the
    IT Dashboard was not updated for 15 months out of a recent 24-month
    period. This transparency tool should be kept accurate and up to date.
      --Will you make sure that the IT Dashboard is updated throughout the
            year, including during budget deliberations, as GAO recommends?
        Answer. Agencies have the ability to update and view the IT
    Dashboard on a continuous basis throughout the year. The IT Dashboard
    is also available for public viewing year round. However, agency data
    submissions to OMB during the budget-development period include both
    factual information as well as pre-decisional deliberative materials.
    It is important that OMB preserve the confidentiality of the
    deliberations that are at the core of the budget development process,
    which involves the identification, evaluation, and consideration of
    budgetary alternatives, as well as sensitive procurement data. The
    manner in which agencies submit this data makes it difficult, as a
    practical matter, to separate the factual information from the pre-
    decisional deliberative materials during this period. Given the
    existing data model and application design, OMB is currently not in a
    position to release, for example, CIO ratings and other ``regularly-
    updated portions'' during the budget development period without, at the
    same time, releasing pre-decisional deliberative materials.
                      improving the it dashboard--accuracy
        Question. Currently, the Dashboard posts data on whether major IT
    projects are on schedule and on budget. This information is useful to
    understanding the status of IT projects, but it does not fully
    represent the risk of major projects.
      --How could OMB improve the IT Dashboard to provide more accurate and
            meaningful data on the status and risk of failure for major IT
            projects?
        Answer. Agencies are required, at least monthly, to submit cost and
    schedule data on IT investments to the IT Dashboard. This information
    is useful to understanding the status of IT projects. Over the last few
    years, these submissions, along with related calculations, have been
    updated to provide more transparency. For example, cost and schedule
    performance was previously tracked via individual milestones within a
    major investment, which did not have the ability to link related
    activities together. With the introduction of projects and activities
    in fiscal year 2013, the IT Dashboard now reports cost and schedule
    performance at a more granular level, using parent-child activity
    groupings to reflect the work breakdown structure (WBS) used by
    agencies to manage the projects within their investments. Further, each
    year OMB provides feedback to agencies regarding their preliminary IT
    budget materials along with data quality related feedback. Since 2011,
    the IT Dashboard has included a data quality report for each investment
    and OMB reminds and encourages agencies to review this report
    regularly.
        While OMB works with agencies directly to correct and resolve data
    issues when it finds missing data submissions or erroneous data, it
    also continuously looks for ways to further improve the data quality.
    For example, in the fiscal year 2016 capital planning guidance, OMB has
    initiated a new requirement that agencies identify at least three open
    risks for all active projects and submit the same to the IT Dashboard
    along with risk assessment and risk mitigation plan.
        Further, risk management is the identification, assessment, and
    prioritization of risks (followed by coordinated and execution of
    resources to minimize, monitor, and control the probability and/or
    impact of these risks or to maximize the realization of opportunities).
    Merely identifying the investments risks, as OMB has stressed in
    PortfolioStats, TechStats and other means, is not a guarantee that the
    risks won't be realized. Managing risk is a continual, dedicated,
    iterative process that is never complete.
                  it dashboard--major investments reclassified
        Question. GAO's testimony notes that major IT investments were
    removed from the IT Dashboard. The Department of Energy, for example,
    apparently reclassified several of its supercomputer investments from
    ``information technology'' to facilities. A December 2013 GAO report
    describes such reclassifications as ``representing a troubling trend
    toward decreased transparency and accountability.''
      --Why were the investments removed from the dashboard?
      --What is OMB doing to provide better guidance to agencies for more
            accurate and consistent reporting?
        Answer. Agencies have the responsibility to define the composition
    of their IT portfolio. As specified in the Clinger Cohen Act, agencies
    ``provide for the selection of information technology investments to be
    made by the executive agency, the management of such investments, and
    the evaluation of the results of such investments.''
        To assist agencies in managing their IT portfolio, OMB provides
    guidance on information technology definitions. OMB uses the definition
    of ``Information Technology'' and ``major information system'' as
    defined in 40 U.S.C. 11101 and OMB Circulars A-11 and A-130. While all
    IT Investments are reported to the Federal IT Dashboard, major
    information systems have an increased reporting requirement. Each year
    during the development of the President's budget, OMB and agencies
    determine which IT systems and investments should be reported as major.
    Systems and investments that are deemed to no longer meet the
    definition of a major investment are downgraded to non-major and as
    such no longer subject to the increased OMB level oversight and
    reporting. In the example of the U.S. Department of Energy's (DOE)
    decision to not report supercomputers as a part of their IT Portfolio,
    OMB responded by explicitly included supercomputing as a policy
    requirement in the PortfolioStat Integrated Data Collection Common
    Definitions, which is available to all agencies on max.gov. Please see
    the policy statement below:

              ``This term refers to any equipment or interconnected system
            or subsystem of equipment that is used in the automatic
            acquisition, storage, manipulation, management, movement,
            control, display, switching, interchange, transmission, or
            reception of data or information by an executive agency. IT is
            related to the terms capital asset, IT investment, program,
            project, sub-project, service, and system. It also includes
            computers, ancillary equipment (including imaging peripherals,
            input, output, and storage devices necessary for security and
            surveillance), peripheral equipment designed to be controlled
            by the central processing unit of a computer, software,
            firmware and similar procedures, services (including support
            services), and related resources; but does not include any
            equipment acquired by a Federal contractor incidental to a
            Federal contract (40 USC 11101); however OMB policy includes in
            this supercomputers, software for mission systems,
            telecommunications, and satellite signal processing.''
                it dashboard--making it a model for transparency
        Question. The IT Dashboard Web site notes that this tool enables
    ``Federal agencies, industry, the general public and other stakeholders
    to view details of Federal information technology investments.'' Yet
    the IT Dashboard itself is not subject to such transparency.
      --How much is spent annually on operation of the dashboard?
      --Will you commit to making details of the funding and delivery of
            the IT Dashboard completely transparent?
        Answer. The IT Dashboard is an investment listed on the IT
    Dashboard, just like any other IT investment. The URL is: https://
    www.itdashboard.gov/investment?buscid=622. At $450,000, it would not
    qualify as a ``major'' investment at most agencies. However, due to its
    high profile role in transparency, OMB keeps visibility into the
    performance of this investment at that level. Each year, OMB considers
    and evaluates whether additional investments to provide more timely
    information and capabilities to agencies, Congress and the public would
    yield the proper return on investment. OMB looks forward to working
    with Congress to understand what capabilities would improve
    transparency.
                            incremental development
        Question. GAO and IT project management experts stress the
    importance of using incremental, modular development strategies when
    building major IT systems. Delivering small increments over time leads
    to greater success. Far too often, big complicated procurements lead to
    a failure that comes after years of cost overruns and delays. Current
    OMB policy calls for 6 month deliveries.
      --What percentage of major Federal IT acquisitions are currently
            developed incrementally?
      --What barriers exist that prevent all IT investments from being
            immediately restructured to an incremental development model?
      --How can OMB further reduce risk of IT project failures by
            encouraging more incremental and modular procurement
            strategies?
        Answer. As of July 2014, the Governmentwide average planned
    duration for delivering key IT functionality was 156 days. However, 12
    agencies report average planned durations above this average and DOD
    reports an average of 456 days,\1\ demonstrating that OMB and agencies
    need to continue to address this critical policy area.
    ---------------------------------------------------------------------------
        \1\ Planned duration is taken from the Federal IT Dashboard
    Activities Data Feed, available to the public.
    ---------------------------------------------------------------------------
        To help all agencies meet this goal and move toward iterative IT
    development, OMB released Contracting Guidance to Support Modular
    Development in 2012. This guide assists agencies in implementing
    contracts that support modular development approaches.
        To further this work, the Administration also released a Digital
    Services Playbook (please see response to question #1), which will help
    agencies deliver effective digital services in a flexible and iterative
    fashion. One of the ``plays'' in the playbook is around agile and
    incremental development. Play #4 states, ``[w]e should use an
    incremental, fast-paced style of software development to reduce the
    risk of failure by getting working software into users' hands quickly,
    and by providing frequent opportunities for the delivery team members
    to adjust requirements and development plans based on watching people
    use prototypes and real software. A critical capability is being able
    to automatically test and deploy the service so that new features can
    be added often and easily put into production. Following agile
    methodologies is a proven best practice for building digital services,
    and will increase our ability to build services that effectively meet
    user needs.''
        However, there continue to be obstacles impeding agency adoption of
    proven methodologies, such as agile. These include determining the
    proper acquisition vehicle to use to perform agile, optimal ways to
    consider delivery metrics within agile contracting, and how agencies
    determine success or what a minimal viable product should be. That is
    why the Administration also released the TechFAR (please see response
    to question #1), which provides agencies tools and examples of how to
    use agile development methodologies with the current language of the
    FAR.
        As needed, OMB will continue to work with agencies to develop and
    promulgate tools and guidance to aid in the use of these commercially-
    proven best practices.
                         cio authority over it spending
        Question.
      --How much of the Administration's total fiscal year 2015 budget
            request for IT is directly controlled or overseen by the CIO at
            each agency?
      --What is OMB doing to increase CIO authority over IT spending?
      --How is OMB working with agencies to ensure that Federal CIOs are
            truly empowered to drive the types IT efficiencies and savings
            discussed during this hearing?
        Answer. While OMB believes that current statutes provide agency
    CIOs with the proper authorities to ensure that IT is used as a
    strategic asset to improve service delivery, it's clear these
    authorities have not been implemented in a consistent and effective
    manner across agencies. Direct CIO control over IT budget ranges from
    less than 1 percent to as high as 97 percent, with an overall average
    of around 25 percent.
        To strengthen CIO authorities, OMB issued memorandum M-11-29,
    emphasizing the role that CIOs are required to have in the areas of
    governance, commodity IT, program management and information security.
    Additionally, OMB has made CIO authorities an integral part of
    PortfolioStat. As part of PortfolioStat sessions, OMB discusses with
    agencies their progress implementing CIO authorities. Additionally, OMB
    has and is committing to continuing a robust dialogue with Congress on
    whether legislation is required to fully implement CIO Authorities.
     25 point implementation plan to reform federal information technology
                                   management
        Question. In 2010, OMB issued the 25 Point Implementation Plan to
    Reform Federal Information Technology Management, which detailed action
    items for OMB and other agencies in order to deliver more value to the
    American taxpayer. Please provide an update on the current status of 19
    action items assigned to OMB, the Federal CIO, and Federal CIO Council.
        Answer. The status of each of the 19 action items assigned to OMB,
    the Federal CIO and the CIO Council are detailed below:
    1. Complete detailed implementation plans to consolidate data centers
            by 2015.
        In accordance with the IT Reform Plan, all agencies published their
    updated Data Center consolidation plans in 2011 and links to the plans
    were posted on CIO.gov. As part of PortfolioStat in 2013 and outlined
    in M-13-09 the Federal Data Center Consolidation Initiative (FDCCI) was
    integrated into PortfolioStat and agencies are no longer required to do
    separate implementation plans.
        As outlined in M-13-09, dated March 27, 2013, to improve the
    outcomes of PortfolioStat and to advance agency IT portfolio
    management, OMB consolidated previously collected IT plans, reports and
    data calls into three primary collection channels:
      --IRM Strategic Plans. According to Circular A-130, ``Information
            Resources Management (IRM) Strategic Plans should support the
            agency Strategic Plan required in OMB Circular A-11, and
            provide a description of how information resources management
            activities help accomplish agency missions, and ensure that
            information resource management decisions are integrated with
            organizational planning, budget, procurement, financial
            management, human resources management, and program
            decisions.'' In addition to requirements established in OMB
            Circular A-130, IRM Strategic Plans must now be signed by the
            Agency COO and agencies will be required to address the
            specific requirements that are defined in Appendix A of this
            memorandum;
      --Enterprise Roadmap. In alignment with the IRM Strategic Plan, the
            Enterprise Roadmap documents an agency's current and future
            views of its business and technology environment from an
            architecture perspective. It does so by reflecting the
            implementation of new or updated business capabilities and
            enabling technologies that support the agency's strategic goals
            and initiatives. It also contains a transition plan to show the
            sequence of actions needed to implement the IRM Strategic plan.
            Moreover, it focuses on increasing shared approaches to IT
            service delivery across mission, support, and commodity areas;
            and
      --Integrated Data Collection (IDC). OMB has established an Integrated
            Data Collection channel for agencies to report structured
            information. Agencies will use this channel to report agency
            progress in meeting IT strategic goals, objectives and metrics
            as well as cost savings and avoidances resulting from IT
            management actions.
        The IDC will draw on information previously reported under
    PortfolioStat, the FDCCI, the Federal Digital Government Strategy,
    quarterly Federal Information Security Management Act (FISMA) metrics,
    the Federal IT Dashboard, and selected human resource, financial
    management, and procurement information requested by OMB.
        For additional context, please see response to Question #3.
    2. Create a Governmentwide marketplace for data center availability.
        The Governmentwide marketplace was established in June 2012, as
    referenced in the GAO Report from July 2012 on Data Center
    Consolidation, found at http://gao.gov/assets/600/592696.pdf.
    3. Shift to a ``Cloud First'' policy.
        In December 2010, the Administration instituted a ``cloud first''
    policy, which states that if a secure, reliable, and cost effective
    cloud solution exists, agencies are required to implement that
    solution. To drive this effort, the Administration published the
    Federal Cloud Computing Strategy in February 2011. This strategy
    articulates the benefits, considerations, and trade-offs of cloud
    computing, provides a decision framework and case examples to support
    agencies in migrating towards cloud computing, highlights cloud
    computing implementation resources, and identifies Federal Government
    activities, roles, and responsibilities for catalyzing cloud adoption.
        Under this initiative, cloud computing has now become an accepted
    and integral part of the Federal IT environment. Agencies no longer
    question the utility and feasibility of cloud computing; but instead
    are seeking out opportunities to use cloud computing to reshape their
    IT portfolios to drive innovation, maximize return on investment, and
    improve cybersecurity. To track implementation of the policy, OMB
    requires agencies to report their cloud computing spending as part of
    the development of the budget. These figures can be found on the
    Federal IT Dashboard.
    4. Develop a strategy for shared services.
        The Administration released the Federal IT Shared Services Strategy
    on May 2, 2012. It provides organizations in the Executive Branch of
    the United States Federal Government (Federal Agencies) with policy
    guidance on the full range and lifecycle of intra- and inter-agency
    information technology (IT) shared services, which enable mission,
    administrative, and infrastructure-related IT functions.
    5. Design a formal IT program management career path.
        OPM and OMB launched the IT Program Manager Career Path in May
    2011. This effort included the creation of a new basic title and
    definition for Information Technology Program Manager under the
    Technology Management Series, GS-2210 and the release of the IT Program
    Management Career Path Guide, which provides guidance to Federal
    agencies on the creation and improvement of the IT Program Management
    career path at each agency.
    6. Require Integrated Program Teams.
        Since fiscal year 2013 agencies have been required to provide the
    names and contact information for Integrated Program Teams members for
    all major IT investments as part of OMB's annual capital planning
    guidance Circular A-11 Exhibit 300.
    7. Launch a best practices collaboration platform.
        In March 2011, the CIO Council developed a Web-based best practices
    collaboration platform, originally located at cio.gov/bestpractices.
    Since then, the CIO Council has updated the platform and moved it to
    MAX.gov, an executive branch collaboration platform. This portal allows
    program managers to share and aggregate best practices, case studies,
    lessons learned, and other tools and resources that increase
    information sharing and enhance collaborative problem-solving and
    innovation.
    8. Launch technology fellows program.
        In 2011, OMB and OPM launched the Presidential Management Fellows
    Technology Fellows Program--a 2-year, rotational, paid fellowship. This
    fellowship program helped lay the groundwork for the Presidential
    Innovation Fellows (PIF) program, launched in 2012.
    9. Enable IT program manager mobility across Government and industry.
        The CIO Council, OMB and OPM launched the pilot IT Program Manager
    Mobility Program in April 2012 to encourage the movement of program
    managers across Government and industry. Although six agencies (the
    Department of the Navy, Department of Defense, Department of Homeland
    Security, Defense Information Security Agency, General Services
    Administration and the Department of Veterans Affairs) participated,
    interagency rotations were never completed. OMB will continue to look
    for ways to leverage the knowledge and expertise of Federal IT program
    managers.
    10. Design and develop cadre of specialized IT acquisition
            professionals.
        In 2011, the Office of Federal Procurement Policy (OFPP) issued
    guidance to Chief Acquisition Officers (CAOs), senior procurement
    executives (SPEs) and Chief Information Officers (CIOs) that provides
    guidance on designing and developing specialized IT acquisition cadres
    and developing IT best acquisition practices. The guidance describes
    how agencies can design and organize a cadre of contracting
    professionals, Program Managers (PMs), and Contracting Officer's
    Representatives (CORs) to ensure these functions work closely
    throughout the process to achieve program goals and strengthen the
    skills and capabilities of this specialized acquisition cadre to
    improve outcomes.
    11. Identify IT acquisition best practices and adopt Governmentwide.
        This requirement was accommodated under the memo, Guidance for
    Specialized Information Technology Acquisition Cadres, detailed above.
    12. Issue contracting guidance and templates to support modular
            development.
        On June 14, 2012, OMB issued Contracting Guidance to Support
    Modular Development to assist agencies in implementing modular
    development approaches.
    13. Reduce barriers to entry for small innovative technology companies.
        Under the Presidential Innovation Fellows program, the Small
    Business Administration (SBA) launched RFP-EZ as a pilot program on
    December 28, 2012. RFP-EZ is a Web-based application that is comprised
    of five different systems, all meant to make it easier for small
    businesses to sell their services to Government buyers, and enables
    agencies' contracting officers to quickly source low-cost, high-impact
    information technology solutions
    14. Work with Congress to create IT budget models that align with
            modular development.
        OMB Guidance on Exhibits 53 and 300 Information Technology and E-
    Government require that projects for major Government IT investments
    should aim to deliver functionality within 6 months. In addition, the
    guidance requires agencies to indicate whether the completion of an
    activity provides a key deliverable or usable functionality and OMB
    asks agencies to report on whether modular development principles are
    applied in their acquisition planning. Efforts under this area have
    been subsumed by larger efforts underway to strengthen CIO authorities
    through proposed legislation, for example, the Federal Information
    Technology Acquisition Reform Act (FITARA) and the Federal Information
    Technology (FITSATA). OMB will continue working through its Information
    Technology Oversight & Reform appropriation to further examine how
    budgeting models could be updated, given the fluidity of technological
    change.
    15. Develop supporting materials and guidance for flexible IT budget
            models.
        On June 9, 2012, the CIO Council Best Practices Committee developed
    Summary Report on IT Budget and Funding Flexibilities. This report is
    available to agency CIOs across the Federal Government through the CIOC
    knowledge portal on Max.gov. Additional guidance on flexible budging
    has been incorporated into yearly budget guidance (see Fiscal Year 2013
    Guidance on Exhibit 300--Planning, Budgeting, Acquisition, and
    Management of Information Technology Capital Assets pages 8 and 18,
    Fiscal Year 2014 Guidance on Exhibit 53 and 300--Information Technology
    and E-Government pages 28, 38, and 41 and Fiscal Year 2015 Guidance on
    Exhibit 53 and 300--Information Technology and E-Government pages 27,
    39 and 42).
    16. Work with Congress to scale flexible IT budget models more broadly.
        To shift agencies toward IT budget models that align with modular
    development, OMB has integrated modular development in Guidance on
    Exhibits 53 and 300 Information Technology and E-Government. This
    includes requiring targets for projects to aim to deliver functionality
    within 6 months, having acquisition planning with modular development
    principles, and having innovative investments consistent with policy
    initiatives such as modular development. For example, the President's
    fiscal year 2014 budget requested that a new IT Modernization account
    be created at the Department of Labor to drive improved IT efficiency
    and effectiveness. This was subsequently enacted by Congress. .
    17. Work with Congress to consolidate Commodity IT spending under
            Agency CIO.
        OMB M-11-29, Chief Information Officer Authorities clarified the
    primary responsibilities and authorities of Agency CIOs across several
    key areas, including Commodity IT. The memo states that, ``Agency CIOs
    must focus on eliminating duplication and rationalize their agency's IT
    investments . . . the CIO shall pool their agency's purchasing power
    across their organization to drive down costs and improve service for
    commodity IT.'' OMB has held numerous discussions with Members of
    Congress on implementing M-11-29 and how those authorities should be
    codified in statute. Larger efforts to strengthen CIO authorities have
    been subsumed under several proposed bills, for example, The Federal
    Information Technology Acquisition Reform Act (FITARA) and the Federal
    Information Technology Savings, Accountability, and Transparency Act
    (FITSATA).
    18. Reform and strengthen Investment Review Boards.
        OMB has worked to reform and strengthen Investment Review Boards by
    revamping IT budget submissions and assisting agencies in standing up
    the TechStat model at the Department level.
        Beginning with fiscal year 2013 budget submissions OMB developed a
    new framework for reporting IT investments. This new framework and
    guidance was designed to increase the relevance of IT investment data,
    better align budget with management processes, improve data accuracy,
    and reduce the reporting burden on agencies by establishing a separate
    Exhibit 300B (see Guidance on Exhibit 300--Planning, Budgeting,
    Acquisition, and Management of Information Technology Capital Assets).
        To assist agencies with oversight, OMB developed the TechStat
    Toolkit. The Toolkit provides a comprehensive guide for agencies to
    quickly implement TechStat, from templates for briefing staff and
    executives on the TechStat model to templates for documenting a
    detailed action plan for correcting problems. To date, thousands of
    agency employees have been trained through this toolkit on how to plan,
    structure and conduct TechStat sessions.
    19. Redefine role of Agency CIOs and Federal CIO Council.
        While current statutes provide Agency CIOs with the proper
    authorities to ensure that IT is used as a strategic asset to improve
    service delivery, these authorities have not been implemented in a
    consistent and effective manner across agencies. To address this, OMB
    issued memorandum M-11-29 emphasizing the role that CIOs are required
    to have governance, commodity IT, program management and information
    security. Additionally, OMB has made CIO Authorities an integral part
    of PortfolioStat. As part of PortfolioStat sessions, OMB discusses with
    agencies progress implementing CIO authorities.
        In addition, M-11-29 required Agency CIOs to play a cross-agency
    portfolio management role through the Federal CIO Council. The CIO
    Council is the body for CIOs from across the Government to come
    together to share best practices and recommend changes to existing, or
    put forward idea for, new policy. Larger efforts are underway within
    Congress to strengthen CIO authorities and create more flexible funding
    models under FITARA and FITSATA.
           portfoliostat and cost estimates for major it investments
        Question. In OMB's PortfolioStat discussions with CIOs, how does
    OMB verify estimates for savings? What data on costs or source of cost
    estimates do you use to assess the validity of a budget request for a
    major program? Is there a formal or independent cost analysis, such as
    the Defense Department uses?
        Answer. Savings reported during the PortfolioStat process are
    submitted by agencies to OMB's Integrated Data Collection (IDC) with a
    description of the activity that led to the savings, the amount saved,
    and the fiscal year associated with the saving. OMB then performs a
    qualitative review of the data submitted by agencies. During this
    process, OMB may follow up with agencies to request additional
    information regarding savings descriptions. The descriptions are then
    included in the Information Technology Oversight and Reform (ITOR)
    Quarterly Report to Congress. The report undergoes a multi-step review
    process where agency officials must confirm the accuracy of the data
    reported to OMB and Congress.
        Furthermore, to validate costs regarding major programs, OMB may
    request and review a number of documents before approving such
    requests. For example, OMB may request to review an agency's formal
    business case for an investment, to include the project plan, program
    management plan, program performance metrics, and/or analysis of
    alternatives, to name a few. Additionally, OMB uses the annual budget
    process to assess the quality and performance of major programs each
    year.
                               omb tech far guide
        Question. Mr. VanRoekel, your testimony describes OMB's ``Tech
    FAR'' guide to highlight often underutilized ways that agencies can
    solicit IT tools and services.
      --How will this new approach alter the acquisition process for IT
            projects?
      --What metrics, such as quicker competitions of faster delivery
            times, could help evaluate if Tech FAR is working?
      --Why is a separate FAR needed for IT projects? Should the FAR be
            updated and streamlined for all Federal acquisitions to avoid a
            proliferation of FAR guides for each type of acquisition?
        Answer. To ensure Government has the right tech tools to do its
    job, and can be more agile and flexible to meet rapidly changing needs,
    the Administration launched the TechFAR Handbook, a guide that explains
    how agencies can execute key plays in the Playbook in ways consistent
    with the Federal Acquisition Regulation (FAR). This document will help
    agencies take advantage of existing authorities to procure development
    services in new ways that more closely match the modern software
    development techniques used in the private sector.
        It is important to note that the TechFAR is not a separate FAR, but
    rather a guide that highlights the flexibilities in the FAR that can
    help agencies implement the best practices included in the Digital
    Services Playbook that would be accomplished with acquisition support.
    The TechFAR handbook is also not intended to usurp existing laws,
    regulations, or Agency policy.
        The TechFAR Handbook states that it is ``aligned with the Digital
    Services Playbook's guidance to use contractors to support an iterative
    development process focuses on how to use contractors to support an
    iterative, customer-driven software development process.'' In addition,
    the TechFAR ``is not designed to be used for commodity IT purchases,
    especially where commercially available off-the-shelf items can be used
    as-is at a lower cost and lower risk to the Government.''
          cloud computing and utility-based purchasing of it services
        Question. The President's budget notes that it includes investments
    to transform the Government IT portfolio through cloud computing,
    giving agencies the ability to purchase IT services in a utility-based
    model, paying for only the services consumed.
      --How are Federal agencies using this utility-based model to both
            save costs and also provide more agility for Federal agencies?
      --How is OMB coordinating this transition to cloud computing across
            the Federal Government?
        Answer. Since OMB released its ``Cloud First'' policy in 2010,
    Federal agencies have shown progress in their movement to cloud
    platforms and in taking advantage of the cost savings, innovation,
    scalability and agility that cloud computing offers. Total cloud
    spending is projected to increase by 10 percent from fiscal year 2013
    to the fiscal year 2015 budget, to nearly $3 billion, with more cloud
    expected in the years to come as the cloud industry matures.
        OMB has coordinated the migration to cloud solutions by
    encompassing an all of Government approach. In connection with our
    Federal Cloud Computing Strategy, the Administration launched FedRAMP--
    a Governmentwide program that provides a standardized approach to
    security assessment, authorization, and continuous monitoring for cloud
    products and services. Our FedRAMP program now has 18 CSP (cloud
    service providers) systems that have received FedRAMP Provisional ATO
    (authorization to operate), providing agencies a valuable tool to get
    them to the cloud quicker. OMB also works with NIST to continuously
    develop cloud security, interoperability and portability standards, the
    Department of State to engage international partners on cloud lessons
    learned, and GSA to stand up cloud computing acquisition vehicles. In
    addition, OMB's ongoing PortfolioStat efforts with agencies continue to
    look for opportunities to shift to the cloud, utilize FedRAMP and take
    advantage of cloud computing to drive data center optimization.
                                shared services
        Question. Shared services among agencies, particularly for
    ``commodity'' IT items, can be key to driving efficiencies and savings
    in IT. Shared Services is included in the President's second term
    management agenda and is now a Cross-Agency Priority Goal.
      --What are the barriers to providing such shared services in the
            Federal Government and what steps can OMB take to increase
            their use, especially for IT services?
        Answer. Examples of barriers are (1) changing the culture in most
    agencies from program-silo'ed services to cross-cutting services within
    the entire agency and with other agencies; (2) agency-only funding
    models which hamper and handcuff agency flexibility to transfer money
    to another agency; and (3) procurement strategies that do not allow for
    other programs/bureaus/agencies to buy services off contracts
    negotiated by other agencies. The latter would enable the Government to
    leverage its buying power to negotiate lower costs as the number of
    agency adopters increases. Other barriers include technical challenges
    in scaling and/or integrating systems and applications, having
    authoritative architectures that provide process and technology
    standards, as well as cybersecurity and data privacy considerations as
    shared service delivery models are implemented.
        Additionally, as part of the Smarter IT Delivery Initiative, OMB is
    reshaping the delivery of information technology already underway, as
    well as introducing new approaches and tools to transform the
    Government IT landscape. For details on work underway as part of this
    initiative, see answer to Question #1.
                      portfoliostat and software licenses
        Question. The PortfolioStat initiative includes efforts to
    consolidate so-called ``commodity'' IT or more basic, commercially
    available software, hardware, and cloud services.
      --What savings have Federal agencies realized to date through
            consolidating software licenses?
      --How many Federal agencies have a current inventory of their
            software licenses?
      --How many Federal agencies do not have a current inventory of their
            software licenses?
      --What should be the target number of Federal agencies that should
            have a current inventory of their software licenses?
        Answer. To date, a little over $500 million of reported
    PortfolioStat savings have been tied to enterprise software license
    consolidation efforts. For example, the Department of the Interior has
    saved $5.8 million through their Enterprise eArchive System (EES), part
    of their eERDMS system. However, in discussions with agencies, they
    have indicated that software management savings are also captured in
    broader savings and consolidation efforts reported by agencies through
    PortfolioStat, hence the actual figure is higher, although the exact
    amount is unknown.
        A recent GAO report, Federal Software Licenses: Better Management
    Needed to Achieve Significant Savings Government-Wide reviewed all 24
    Chief Financial Officers Act agencies and analyzed their policies for
    managing software licenses as well as their software inventories. The
    report found that 20 of the major Federal agencies have developed
    policies for managing software licenses and have partially implemented
    inventories. Those policies will include, but certainly not be limited
    to, modes and mechanisms to ascertain the proper amount of licenses for
    any given agency.
            data act and improving cost estimates for it investments
        Question. How will OMB use data on actual expenditures for like
    systems collected under the DATA Act to improve cost estimates and
    assess budget requests on IT programs?
        Answer. The DATA Act does not focus on tracking actual expenditures
    in IT system-by-system. Nor does the DATA Act change the processes by
    which agencies produce cost estimates and OMB reviews business cases
    for IT investments. Implementation of the DATA legislation will
    contribute to improved availability and quality of Federal spending
    information and increased transparency for IT and other spending.
                       risk assessments of it investments
        Question. What risk assessment criteria are agencies using to
    evaluate the risk associated with procurements of IT products and
    services? Do Federal agencies then communicate the assessment criteria
    or findings to the private companies impacted?
        Answer. Risk assessments should include risk information from all
    stakeholders and should be performed at the initial concept stage and
    then monitored and controlled throughout the life cycle of the
    investment. OMB Guidance on Exhibits 53 and 300 Information Technology
    and E-Government, which is updated annually, for major investments
    requires agencies to list all significant project-related risks and
    operational-related risks that are currently open and provide risk
    assessment information.
        For all active projects and components of IT investments that are
    in Operations a minimum of three open risks must be identified. When
    reporting these risks, agencies are required to describe the risk, the
    cause for the risk, identify a mitigation plan for the risk, list the
    impact (high, medium, low) and provide a mitigation plan.
        In addition, agencies must categorize the risk in one of the
    following categories: (1) Schedule, (2) Initial costs, (3) Life cycle
    costs, (4) Technical obsolescence, (5) Feasibility, (6) Reliability of
    systems, (7) Dependencies and interoperability between this investment
    and others, (8) Surety (asset protection) considerations, (9) Risk of
    creating a monopoly for future procurements, (10) Capability of agency
    to manage the investment, (11) Overall risk of investment failure, (12)
    Organizational and change management, (13) Business (14) Data/info,
    (15) Technology, (16) Strategic, (17) Security, (18) Privacy, and (19)
    Project resources.
        It is typical that agencies work internally with Federal staff or
    with contract resources supporting an investment to ensure there is a
    comprehensive understanding of all risks and the proper actions to
    remediate, mitigate, and manage that risk in a proactive manner.
                            procurement issues in it
        Question. This committee heard testimony that agile, more
    incremental procurement strategies are especially appropriate for IT
    investments given the pace of technological change and innovation.
      --What steps can OMB take, besides issuing the Tech FAR and ``myth
            buster'' guides, to help address complaints that IT procurement
            takes too long? How can Congress help?
        Answer. This past spring, the Federal Chief Acquisition Officers
    Council and the CIO Council sponsored an open online dialogue to
    solicit input on how to reduce burdens and improve the efficiency and
    effectiveness of the Federal procurement process. A number of themes
    emerged, such as simplifying procedures for the acquisition of
    commercial items and taking better advantage of technologies to make it
    easier for small and innovative businesses and buying agencies to find
    one another, as we are doing with ``FBOpen.'' OMB is carefully
    reviewing the recommendations made in the dialogue, both for actions
    that can be taken administratively as well as areas where legislative
    support may be beneficial.
                          omb's ``myth busting'' memo
        Question. OMB issued a ``myth busting'' memo to help improve
    communication between industry partners and Federal agencies in the
    acquisition process. Yet my understanding is that Federal agencies are
    hesitant to talk to contractors.
      --How can OMB reinforce the ``myth busting'' memo to improve
            appropriate engagement between contractors and Federal
            agencies?
        Answer. The TechFAR encourages vendor engagement early on in the
    process and urges agencies to utilize tools such as industry days,
    Requests for Information (RFI), and draft Requests for Proposals (RFPs)
    or draft Requests for Quotation (RFQ). This type of engagement helps
    provide an avenue for the vendors to ask questions to ensure that they
    understand the process and what the Government is trying to procure.
    Releasing the TechFAR should help agencies move toward more vendor
    engagement, but we realize continual work is needed to combat cultural
    reluctance to engage with contractors. As a result, OMB will explore
    additional ways to improve communication between industry and Federal
    agencies such as releasing additional guidance and training
    opportunities.
                                 it schedule 70
        Question. GSA's IT Schedule 70 is the largest, most widely used
    acquisition vehicle in the Federal Government.
      --How is the IT Schedule 70 helping or hindering the Government's
            ability to acquire innovative technologies and IT services?
        The General Services Administration is best equipped to answer this
    question.
                                     ______

                   Questions Submitted by Senator Jerry Moran
                            accuracy of it dashboard
        Question. One of the important oversight tools to monitor how the
    Government buys, builds, and manages its major IT projects is the IT
    Dashboard. Unfortunately, I this tool is not updated accurately and on
    an ongoing basis. GAO reported that, as of December 2013, the public
    version of the Dashboard was not updated for 15 of the previous 24
    months.
      --Will OMB make the Dashboard publicly available year round, even
            during budget deliberations, as GAO has recommended?
      --What is OMB doing to make sure that all major investments, like
            DOE's supercomputers, are listed as major investments on the
            Dashboard?
        Answer. Agencies have the ability to update and view the IT
    Dashboard on a continuous basis throughout the year. The IT Dashboard
    is also available for public viewing year round. However, agency data
    submissions to OMB during the budget-development period include both
    factual information as well as pre-decisional deliberative materials,
    much of which is at the core of the budget development process. This
    can include the identification, evaluation, and consideration of
    budgetary alternatives, as well as sensitive procurement data. The
    manner in which agencies submit this data makes it difficult, as a
    practical matter, to separate the factual information from the pre-
    decisional deliberative materials during this period. Given the
    existing data model and application design, OMB is currently not in a
    position to release, for example, CIO ratings and other ``regularly-
    updated portions'' during the budget development period without, at the
    same time, releasing pre-decisional deliberative materials.
        In the OMB fiscal year 2016 Guidance on Exhibits 53 and 300, OMB
    also revised the definition of Information Technology to ensure that
    things like supercomputers were included. This definition is available
    to all agencies through max.gov and reads as follows:
              ``This term refers to any equipment or interconnected system
            or subsystem of equipment that is used in the automatic
            acquisition, storage, manipulation, management, movement,
            control, display, switching, interchange, transmission, or
            reception of data or information by an executive agency. IT is
            related to the terms capital asset, IT investment, program,
            project, sub-project, service, and system. It also includes
            computers, ancillary equipment (including imaging peripherals,
            input, output, and storage devices necessary for security and
            surveillance), peripheral equipment designed to be controlled
            by the central processing unit of a computer, software,
            firmware and similar procedures, services (including support
            services), and related resources; but does not include any
            equipment acquired by a Federal contractor incidental to a
            Federal contract (40 U.S.C. 11101); however OMB policy includes
            in this `supercomputers, software for mission systems,
            telecommunications, and satellite signal processing.' ''
                     exploring emerging contracting models
        Question. As this committee seeks to identify ways to decrease
    agencies' reliance on appropriated funds for IT acquisitions, I am
    interested to learn about emerging, non-traditional contracting models,
    such as no-cost models, that agencies should be considering as one way
    to increase efficiencies and reduce costs. This committee's fiscal year
    2014 appropriations explanatory report directed OMB to produce a report
    on the use of alternative contracting models, including quantifying
    costs savings achieved through their use.
      --Please provide an update on the status of this report.
      --Can you offer examples of emerging models that could help?
        Answer. OMB is working with agencies to gather information about
    their consideration of and experience with ``no-cost'' contracting for
    IT related-requirements, such as where an agency developing a public
    database authorizes the contractor to charge user fees to cover the
    cost and maintenance of the system, and expect to complete our initial
    analysis shortly. In addition, we are looking at how to promote greater
    use of performance-based contracting practices where agency
    solicitations focus on outcomes, rather than ``how to'' prescriptions,
    that in turn allow contractors to provide simpler, less costly
    proposals and more innovative solutions.
        We are also encouraged by the Committee's recent support for an
    ``innovation set-aside'' pilot that would allow agencies to conduct
    competitions or make directed awards, where appropriate, to new
    entrants. Such an authority could make it easier for agencies to reach
    high-tech companies that may not be expert in the rules for selling to
    the Government, but can provide cutting-edge lower cost solutions to
    meet the needs of the taxpayer. We look forward to working with this
    Committee and other Members of Congress as we consider new and better
    ways to provide best value to the taxpayer.
                                techstat reviews
        Question. TechStat Reviews were initiated by OMB to enable the
    Federal Government to either turnaround or terminate IT projects that
    are failing or are not producing intended results. According to GAO, 70
    percent of OMB-led and 76 percent of agency-led TechStat reviews on
    major investments were considered medium to high risk at the time of
    the TechStat. OMB reported in 2011 that Federal agencies achieved
    almost $4 billion in life-cycle cost savings as a result of TechStat
    sessions, although GAO has noted they were unable to validate OMB's
    reported results.
      --GAO has indicated OMB held only two TechStat sessions in 2013. Why
            weren't more held?
      --With 42 moderately high or high risk projects, what is the plan
            moving forward with OMB-led TechStat sessions, which have
            proven effective?
      --What types of resources and personnel are necessary to conduct a
            TechStat review on high risk projects?
        Answer. OMB works on a continual basis with agencies to conduct
    TechStats, be they led by the agency or by OMB itself. As part of the
    25 Point Plan to Reform Federal IT Management, OMB worked with agencies
    to develop a TechStat toolkit, which was based on the rigorous
    processes OMB used to develop the TechStat model. The Toolkit provides
    templates, guides and other tools for an agency to successfully execute
    a TechStat. OMB believes that TechStats can be more effective as a
    tool, when managed and applied by agencies. This is because agencies
    are closer to the programs and are able to recognize the triggers and
    risk factors that an investment may be heading off course more quickly
    than OMB can. As a result, the agency can assemble a multidisciplinary
    team to review the investment and implement corrections.
        Agencies have broad latitude to cancel failing investments. In
    fact, in many instances they are able to marshal administrative
    remedies faster than OMB. Agencies can terminate contracts and assign
    personnel to meet revised agency priorities. These types of changes are
    implemented very quickly. In addition, on at least an annual basis
    agencies convene investment review boards (IRBs) to review the IT
    investments of their respective institutions to ensure that they are
    delivering on the vision and consistent with the agreed upon strategy.
        To conduct a TechStat, agencies and OMB need to dedicate time and
    resources across every discipline involved, including the program/
    mission offices, IT, acquisition, general counsel, human capital,
    performance, risk, and financial management. These can vary depending
    on the size of the investment, the maturity of the program and the
    problem(s) which needs to be addressed.
        Additionally, as part of the Smarter IT Delivery Initiative, OMB is
    reshaping the delivery of information technology already underway and
    introducing new approaches/tools to transform the Government IT
    landscape. To do this, OMB is focused on a three-part agenda that will
    provide the Federal Government with: (1) the best talent (2) the best
    companies; and, (3) the best processes to drive outcomes and
    accountability.
        As part of this effort, in August 2014, the Administration began
    piloting the U.S. Digital Service. This small team of America's best
    digital experts will work in collaboration with other Government
    agencies to identify and fix problems, to help upgrade the Government's
    technology infrastructure, and to make Web sites more consumer
    friendly. The team has one core mission: to improve and simplify the
    digital experience that people and businesses have with the U.S.
    Government by:
      --Establishing standards to bring the Government's digital services
            in line with the best private sector services;
      --Identifying common technology patterns that will help us scale
            services effectively;
      --Collaborating with agencies to identify and address gaps in their
            capacity to design, develop, deploy and operate excellent
            citizen-facing services; and
      --Providing accountability to ensure agencies see results.
        The Administration also released for public comment two crucial
    components in its growing IT toolkit that will enable agencies to do
    their best work--the Digital Services Playbook and the TechFAR
    Handbook.
        The Digital Services Playbook lays out best practices for effective
    digital service delivery and will serve as a guide for agencies across
    Government. To increase the success of Government digital service
    projects, this playbook outlines 13 key ``plays'' drawn from private
    and public-sector best practices that, if followed together, will help
    Federal agencies deliver services that work well for users and require
    less time and money to develop and operate.
        To ensure Government has the right tech tools to do its job, and
    can be more agile and flexible to meet rapidly changing needs, the
    Administration also launched the TechFAR Handbook. The TechFAR Handbook
    is a guide that explains how agencies can execute key plays in the
    Playbook in ways consistent with the Federal Acquisition Regulation
    (FAR). This document will help agencies take advantage of existing
    authorities to procure development services in new ways that more
    closely match the modern software development techniques used in the
    private sector.
                                    fedramp
        Question. On December 8, 2011, the Office of Management and Budget
    (OMB) issued a memorandum establishing the requirements for executive
    agencies to implement and use a standardized test and evaluation
    process to qualify cloud service providers for participation in the $80
    billion a year Federal IT marketplace called the Federal Risk and
    Authorization Management Program or FedRAMP. Industry estimates
    demonstrate that FedRAMP has saved the Government $52.5 million since
    the program began operating in 2012. Considering that the Federal
    Government spent more than $450 million on security authorizations and
    incurs annual costs in excess of $9 billion to support more than 60,000
    full-time employees to handle related security operations, full
    implementation of FedRAMP could potentially save both the Government
    and the industry significant dollars and time. The OMB memorandum
    requires that all Cloud Service Providers must be FedRAMP certified by
    June 4, 2014 in order to be eligible to partake in future Federal cloud
    service procurement opportunities or continue providing services in
    cases of existing providers. However, as the deadline quickly
    approaches, many have expressed concerns that OMB and GSA may not be
    prepared to effectively enforce the June 4, 2014 FedRAMP deadline.
    Failure to implement measures to ensure Federal agencies comply with
    this deadline would result in the continued acquisition of non-FedRAMP-
    certified cloud service offerings, which would not only elevate the
    security risk to Federal IT systems, but also jeopardize the future of
    the FedRAMP program.
      --What measures will be taken to ensure that agencies enforce the
            FedRAMP deadline on CSPs seeking Government acquisition
            opportunities after June 4, 2014?
      --How will OMB and GSA support the FedRAMP program going forward to
            ensure this promising cybersecurity initiative is effectively
            implemented and the broader goals of the President's
            International Strategy for Cyberspace and Cloud First policy
            are ultimately achieved?
        Answer. To clarify, the June 2014 deadline referenced in the
    question was not for cloud service providers, but rather for Federal
    agencies to update, evolve and refine their cloud authorizations,
    completed on a continuous basis as they implement and comply with the
    Federal Information Security Management Act (FISMA). To accomplish this
    goal, agencies would need to work CSPs, but the deadline was specific
    to Federal agencies, not industry. Moreover, the value proposition
    behind FedRAMP is the standardization of the assessing and authorizing
    cloud solutions, saving both the Government and industry time and
    resources.
        OMB continues to work with the FedRAMP Project Management Office at
    GSA, the FedRAMP Joint Authorization Board (JAB), CSPs, and agencies on
    improvements that can be made to the FedRAMP process. For example, OMB
    is working with this community to improve inter and intra-agency trust
    of FedRAMP authorizations so that agencies do not unnecessarily
    duplicate the security authorization process. Additionally, OMB is
    working with this community to determine if there are ways to
    accelerate the approval process while still meeting the same quality
    standards that exist today. As further improvements are made to this
    program, OMB will brief the relevant committees on this progress.
        OMB conducts oversight through normal channels, which include
    PortfolioStat and processes to support the annual FISMA Report, to
    gauge agency efforts to meet the June 2014 deadline. As necessary, OMB
    will work with agencies on corrective actions, for example, if the
    deadline isn't met. FedRAMP itself is one part of a comprehensive
    approach to accelerate the adoption of cloud computing across the
    Government to drive innovation, increase collaboration, and create
    service efficiencies.
                       federal data center consolidation
        Question. In 2010, the Federal CIO established the Federal Data
    Center Consolidation Initiative to achieve a number of goals including
    reducing energy consumption; shrink the real estate footprint of
    Government data centers; reduce the cost of data center hardware,
    software, and operations; and increase IT security. OMB believes this
    effort will provide about $3 billion in savings by the end of 2015.
      --Please provide a status update of this effort.
      --How many data centers have been closed to date and how much savings
            have there been?
      --Which agencies are doing a good job with data center consolidation?
            Which agencies are not?
      --What is OMB doing to make data center cost savings more
            transparent, as GAO has recommended?
        Answer. In October 2010, based on agency submissions after the
    launch of the Federal Data Center Consolidation Initiative (FDCCI), OMB
    reported 2,094 data centers. As of July 2014, agencies have identified
    9,540 data centers, of all types and sizes. This increase, explained in
    further detail below, is a result of a change in definition of a data
    center, and is not a result of construction of new data centers. The
    9,540 is categorized into two populations, core (275 data centers) and
    non-core (9,265), further defined below.
        It is important to note that since the FDCCI was launched there
    have been several important policy shifts within the data center space
    which provide some context for the increased 9,540 figure. First, in
    March 2012, based on a recommendation from the FDCCI Task Force (a CIO
    Council body,) OMB changed the definition of a data center and removed
    all square footage and tiering requirements (the original definition
    required 500 square feet and meeting strict criteria from the Uptime
    Institute). Subsequently, this caused a dramatic increase in the number
    of data centers that agencies reported. As mentioned above, the jump
    was not due to construction of new data centers, as the Government
    maintains a net zero growth policy dating back to the summer of 2010.
    Further, the definitional change has provided additional transparency
    and insight into the Federal Government's actual data center footprint.
    The majority of the Government's data centers are smaller rooms and
    closets (less than 1,000 square feet), rather than large, stand-alone
    facilities, that one envisions when he/she considers what a Google,
    Facebook or Microsoft may employ.
        Second, in March 2013, the FDCCI was integrated into PortfolioStat,
    the Government's IT portfolio management initiative. As these efforts
    converged, OMB instructed agencies to focus on optimizing those data
    centers that are pivotal to delivering taxpayer services, while closing
    duplicative and inefficient data centers. As a result, agency progress
    under the FDCCI is no longer solely measured by closures. Instead the
    FDDCI Task Force categorized agency data center populations into two
    categories: core and non-core. While the Government will continue to
    target the initial goal of closing 40 percent of agency-identified,
    non-core data centers, agencies will also be measured by the extent to
    which their core data centers are optimized for total cost of
    ownership. To enable this, the Task Force developed energy, facility,
    labor, storage, virtualization and cost per operating system metrics.
        Instead of focusing on one metric, for example, server utilization,
    OMB worked with the FDCCI Task Force to develop total cost of ownership
    metrics, which measure performance against all the cost areas of data
    centers, rather than just one dimension (utilization) of one piece of
    data center equipment (servers). These metrics, which were published as
    part of the fiscal year 2014 PortfolioStat guidance, cover hardware,
    software, energy, human capital and facilities density. OMB and the 24
    participating Federal agencies believe that working to meet the targets
    for these metrics puts the Government in a better position to address
    emerging taxpayer needs than just focusing on server utilization.
        To date, agencies have closed 976 data centers with 3,665 planned
    for closure by the end of fiscal year 2015. This information is updated
    on a quarterly basis on Data.gov. OMB provides oversight through its
    PortfolioStat process, monthly FDCCI Task Force meetings, continuous
    budget development and execution discussions, and if necessary, other
    avenues.
        With regards to agency efforts and transparency, OMB is currently
    working with agencies through the Federal CIO Council on publicly
    releasing the FDCCI core data center optimization metrics and
    PortfolioStat cost savings (currently reported through the Information
    Technology Oversight and Reform Quarterly Report to the House and
    Senate Committees on Appropriations).\2\
    ---------------------------------------------------------------------------
        \2\ Information Technology Oversight and Reform (ITOR) Quarterly
    Report to Congress, previously known as the IEEUIT Report.
    ---------------------------------------------------------------------------
        When you examine how agencies are doing with the FDCCI, you see
    examples of successes and failures across the Government. For example,
    the Census Bureau saved $18 million from fiscal years 2011-2013 by
    utilizing cloud computing as a means to do data center optimization,
    DHS saved $136 million in fiscal years 2012-2013 by decommissioning DHS
    component serves and migrating these services to DHS enterprise data
    centers, and EPA saved $10 million in fiscal year 2012 by making better
    use of shared services through infrastructure optimization and
    consolidation. At the same time, more work remains to be done,
    including accurately calculating savings from where the costs of
    operating the facility are owned by multiple entities, and determining
    the true impact of energy efficiency efforts when there is a lack of
    metering. OMB will continue to work across the Government, the FDCCI
    Task Force and external bodies, including advocacy and industry groups
    to mitigate these challenges as the FDCCI continues.
                             federal cio authority
        Question. How much of the total fiscal year 2015 budget request for
    IT is directly controlled or overseen by the Federal CIO at each
    agency?
        Answer. While OMB believes that current statutes provide agency
    CIOs with the proper authorities to ensure that IT is used as a
    strategic asset to improve service delivery, it's clear these
    authorities have not been implemented in a consistent and effective
    manner across agencies. Direct CIO control over IT budget ranges from
    less than 1 percent to as high as 97 percent, with an overall average
    of around 25 percent.
        To strengthen CIO authorities, OMB issued memorandum M-11-29,
    emphasizing the role that CIOs are required to have in the areas of
    governance, commodity IT, program management and information security.
    Additionally, OMB has made CIO authorities an integral part of
    PortfolioStat. As part of PortfolioStat sessions, OMB discusses with
    agencies their progress implementing CIO authorities. Additionally, OMB
    has and is committing to continuing a robust dialogue with Congress on
    whether legislation is required to fully implement CIO Authorities.
                       hhs cio control of healthcare.gov
        Question. How much influence did the HHS CIO, Frank Baitman, have
    over the Healthcare.gov project?
        Answer. The Department of Health and Human Services would be best
    equipped to answer this question.
                                     ______

                  Questions Submitted to Hon. Dan Tangherlini
                    Questions Submitted by Senator Tom Udall
                                      18f
        Question. How will you ensure that agencies will not be reluctant
    to request help from the General Services Administration's (GSA's) 18F
    team?
        Answer. The 18F team will create demand through the delivery of
    successful outcomes. Agencies have a need for this type of work and if
    the 18F team is successful, it will be seen as an obvious place to go
    to partner with a talented team using methods that drive down costs and
    successfully deliver products and services on time.
        GSA is actively promoting the work 18F is undertaking to build
    awareness and interest. The team is discussing its approach and
    potential projects with any agency or Federal entity that is
    interested, and is eager to address any questions. Ultimately, it is up
    to agency and program leadership to make the decision whether to use
    any service, product, or tool to better manage and build technology
    solutions.
                        special hire and pay authorities
        Question. I am aware that 18F and the Digital Service are using
    schedule A hiring authority and that direct hire authority is available
    for Information Technology (IT) Management (Information Security) (GSA-
    2210, GS-9 and above, Governmentwide and nationwide), but not all IT
    positions.
        Given the high demand and competition for IT-related positions, and
    because the private sector can often pay higher salaries for such
    positions, do you believe that increased hire and pay authorities
    should be considered for IT positions that don't currently have any and
    if so, what types of positions would these be?
        Answer. To date, the 18F program has used standard pay schedules
    and existing hiring authorities to build the team. GSA feels that an
    attractive mission and work that is highly valued across the
    organization can be an excellent recruiting tool for talent.
        GSA has worked to improve the time to hire for the 18F organization
    as long hiring times dissuade many highly qualified candidates from
    taking positions in both the private and public sector. Technical
    talent does not stay on the market long.
        Question. What other types of hiring and pay incentives beyond
    those now available to Government employees and agencies do you believe
    should be contemplated for recruitment and retention of IT specialists?
        Answer. When hiring in a competitive area, like technology
    development, different tools may be needed to help hire and retain the
    most qualified and talented workforce possible. Working with the Office
    of Personnel Management, Federal agencies can better understand the
    authorities currently available to them for hiring and pay.
          fixing sam.gov web site for federal procurement opportunities
        Question. My office frequently receives requests from small New
    Mexico companies seeking to find and compete for Federal procurement
    opportunities. I like to point them to online tools such as GSA's
    System for Award Management or SAM Web site. But I have heard numerous
    complaints from small business owners about how complicated the SAM
    registration process is. And worse, one has to register before one can
    browse what Federal opportunities are even available. One former
    Presidential Innovation Fellow documented his frustrations with this by
    showing each step he encountered when trying to register on SAM. He has
    77 slides showing the various steps and complications he faced. At one
    point near the end, his online application was blocked since he did not
    have a fax number.
        I would like to ask three questions I hope you will answer ``yes''
    to. Will you commit to fixing some of the problems with SAM by:
      --Simplifying the SAM registration process?
      --Allowing anyone to view and bid on Federal opportunities through
            SAM?
      --Requiring companies to register fully once they are closer in the
            process to receiving a final award rather than at the start?
        Answer. Yes, the GSA Integrated Award Environment (IAE) is
    committed to greater ease of use and has plans for a user-centric
    design to further modernize the System for Awards Management (SAM) and
    other IAE systems. It currently takes an average of 3 calendar days to
    complete registration in SAM, including external Internal Revenue
    Service and Department of Defense validations. Some companies that
    experience problems with these tax and Commercial and Government Entity
    (CAGE) code validations take longer to register.
        Currently, everyone already has the ability to view Federal
    opportunities without registering in SAM. Federal opportunities are
    posted at www.fbo.gov, and no SAM registration is required to view
    them. While SAM currently does not show Federal opportunities, GSA
    plans to incorporate fbo.gov into SAM in future development.
        Similarly, it is already the case that companies are not required
    to register fully in SAM until they are close to award. Under Federal
    Acquisition Regulation (FAR) 4.1102(a), prospective contractors are
    only required to be registered in SAM prior to award, but not prior to
    submitting an offer. If a contractor has not registered in SAM prior to
    award, FAR 4.1103(a)(1) instructs contracting officers to contact
    potential awardees and instruct them to register in SAM prior to award.
                                    fedramp
        Question. Mr. Tangherlini, can you discuss the current status of
    the FedRAMP effort and how many cloud service providers have received
    at least agency-level authority to operate under FedRAMP?
        Answer. FedRAMP is fully operational. The status is summarized
    below.
        As of June 9, 2014, 22 cloud services have received FedRAMP
    authorizations:
      --12 companies and 13 cloud services have received Joint
            Authorization Board (JAB) issued Provisional Authorizations to
            Operate (P-ATO).
      --2 companies and 3 cloud services have received agency issued
            Authorizations To Operate (A-ATO).
      --5 private cloud services have been authorized by the Department of
            Homeland Security (DHS).
      --1 Government agency (U.S. Department of Agriculture) has one cloud
            service that meets FedRAMP requirements.
      --There are 13 Cloud Service Providers (CSPs) with 13 cloud services
            in-process for Joint Authorization Board authorization.
        The authorized cloud services include both large and small
    businesses, and range across Infrastructure as a Service (IaaS),
    Platform as a Service (PaaS), and Software as Service (SaaS) offerings.
    At any given time, there are also upwards of a dozen systems being
    actively reviewed by the JAB for FedRAMP authorization, and many more
    in the pipeline. Agencies are also working on their own authorizations
    with numerous cloud service providers.
                      effect of not investing in it budgets
        Question. For the past several years, IT budgets at agencies have
    been cut. This has affected projects that are designed to save money
    once implemented.
        Can you discuss some of the effects at your agencies of the
    inability to implement planned projects?
        Answer. GSA IT's budget has been decreasing since 2013, and is
    projected to continue this trend through fiscal year 2016. GSA's
    agency-wide consolidation of support functions has provided the Chief
    Information Officer (CIO) with opportunities to streamline the IT
    environment and reduce duplication, and, as a result, have been able to
    reduce associated costs. Efficiencies gained from consolidation have
    enabled the CIO to shift some resources from running legacy
    applications and infrastructure and invest in efforts to grow and
    transform GSA's business IT systems. That said, the realities of a
    constrained budgetary environment mean that the full benefits of
    initiatives such as cloud storage, virtual desktop integration, and
    data center consolidation are taking longer to realize.
        Full funding of GSA's fiscal year 2015 request will enable us to
    further develop and operate transformative solutions that will result
    in long term savings to the agency. A key component in this
    transformation is the need to divest GSA of costly legacy solutions and
    environments, through careful and judicious investments in modern
    technologies, using common tools and platforms to replace duplicative
    systems, and to continue to invest in collaborative and cloud based
    technologies to allow GSA's vision of mobility.
        Specifically, full funding will allow us to invest in solutions in
    the following areas:
      --Open Data/Open Government initiatives.
      --Data analytics platform to support Governmentwide data analytics.
      --Ability to transform GSA IT to adopt agile development processes,
            resulting in more efficient delivery of IT services.
      --Increased compliance and adoption of records and electronic
            document management practices.
      --Increase mobility and automation of paper based business processes.
        Our experience has shown that investing in such technologies and
    initiatives can not only greatly reduce overall agency costs, but also
    improve how GSA delivers on its mission. Our organization will continue
    to optimize our operations, reduce duplication of effort and resources,
    and enable increasingly efficient delivery of IT services.
     25 point implementation plan to reform federal information technology
                                   management
        Question. In 2010, the Office of Management and Budget (OMB) issued
    the 25 Point Implementation Plan To Reform Federal Information
    Technology Management, which detailed action items for GSA and other
    agencies in order to deliver more value to the American taxpayer.
    Please provide an update on the current status of those action items
    assigned to GSA. For those action items not completed, please explain
    why.
        Answer. (1) Stand-up contract vehicles for secure Infrastructure-
    as-a-Service (IaaS) solutions.
      --The GSA Federal Acquisition Service (FAS) has established Blanket
            Purchase Agreements (BPAs) for Cloud Infrastructure as a
            Service (IaaS) with 11 industry partners.
      --The providers on this Cloud IaaS BPA allow agencies to buy cloud
            storage, virtual machines, and Web hosting with an Authority to
            Operate (ATO) at the Federal Information Security Management
            Act (FISMA) moderate impact level.
      --IaaS helps agencies realize cost savings and efficiencies while
            modernizing and expanding their IT capabilities without
            spending capital resources on infrastructure. Cloud-based
            infrastructure is rapidly scalable, secure, and accessible over
            the Internet--you only pay for what you use.
        (2) Stand-up contract vehicles for ``commodity'' services.
      --GSA has established Federal Strategic Sourcing Initiatives,
            including a Blanket Purchase Agreement for Wireless Service
            (http://www.gsa.gov/portal/category/
            100931?utm_source=FAS&utm_medium=print-
            radio&utm_term=wirelessfssi&utm_campaign=shortcuts).
        (3) Reduce barriers to entry for small innovative technology
    companies.
      --GSA established Business Breakthrough, workshops that offered
            companies up-to-date information on how to successfully
            navigate Government contracting (http://www.gsa.gov/portal/
            content/239329?utm_source=OCM&utm_medium=print-
            radio&utm_term=businessbreakthrough&utm_campaign=shortcuts).
      --GSA created FBOpen, which streamlines the process of looking for
            opportunities with the Federal Government (https://github.com/
            18F/fbopen).
      --GSA established BusinessUSA, a one-stop platform to make it easier
            for businesses to access services that help them to hire and
            grow (http://
            business.usa.gov/).
      --GSA created Challenge.gov, allowing agencies to establish
            technical, scientific, ideation, and creative competitions
            where the U.S. Government seeks innovative solutions from the
            public (https://challenge.gov/).
        (4) Launch an interactive platform for pre-request for proposal
    (RFP) agency-industry collaboration--GSA established the Better Buy
    Projects Pilots Wiki, an online dialogue with the acquisitions
    community to make Government buying more open and collaborative (http:/
    /www.gsa.gov/portal/content/131483).
                         gsa and federal it procurement
        Question. What is GSA doing to help Federal agencies procure IT
    systems and services and how can this be improved?
        Answer. FAS' Integrated Technology Service (ITS) is helping Federal
    agencies procure IT systems and services to meet the Government's
    missions while saving taxpayer dollars.
        In the first 7 months of fiscal year 2014, Federal, State, and
    local entities spent $13.9 billion through GSA's IT contracts.
    Documented savings for agencies using certain GSA programs are $607
    million between October 2013 and March 2014. We expect by the end of
    fiscal year 2014, agencies will save a total of $1.3 billion using
    several of GSA's IT contracts and resources. In addition, agencies
    using GSA contracts are avoiding the cost, time, and resources spent on
    setting up redundant contracts throughout Government.
        For example, in our Network Services Networx program, ITS helped
    save Government 30 to 60 percent compared to benchmarked commercial
    pricing and Government saved, on average, 7.27 percent using GSA's
    Reverse Auctions, with 87 percent of the awardees being small
    businesses. In addition, ITS' software acquisition Blanket Purchase
    Agreements (BPAs)--SmartBUY--saved the Government $776.7 million in
    fiscal year 2013 by negotiating reductions in software prices.
        In addition to providing agencies increased savings, ITS is focused
    on improved relationships and collaboration with our Government
    partners, increasing our customer service, and utilizing partnerships
    with both agencies and industry to find solutions to complex Government
    problems. For example, ITS has partnered with OMB and other Federal
    agencies to provide solutions for IT hardware (servers, laptops,
    desktops), cloud, mobility, and wireless devices. ITS has also been
    held up as a model of Government partnerships and reduced contract
    duplication through our partnership with the Defense Information
    Systems Agency for satellite communication services.
        We plan to provide additional capabilities and expert resources to
    agencies through a shift in our delivery model (aka, category
    management). Simply, this means a shift from focusing on contracts to
    helping agencies buy IT better in terms of what they are trying to buy
    (telecom, outsourcing, cloud, hardware, etc). This strengthened market
    approach will help us better structure IT acquisitions to match
    business markets to Government needs, further minimize redundancies in
    Government purchasing, and reduce total cost of ownership to the
    Government and taxpayers.
        In each of our programs, ITS has strong partnerships with agencies
    and industry who work with us to develop requirements, identify market
    offerings, challenges, and best practices that ultimately result in
    Governmentwide offerings meeting the majority of Government's needs in
    IT.
                                 it schedule 70
        Question. GSA's IT Schedule 70 is the largest, most widely used
    acquisition vehicle in the Federal Government. How is the IT Schedule
    70 helping or hindering the Government's ability to acquire innovative
    technologies and IT services?
        Answer. The IT Schedule 70 program continues to help the Government
    acquire innovative technologies. As a part of the Multiple Award
    Schedules, Schedule 70 supports agencies acquiring innovative
    technologies and IT services by providing pre-competed, on-demand
    contracts with over 4,700 industry partners. The majority of these
    Schedule 70 partners are small businesses. The pre-competed Schedule 70
    contracts help to reduce acquisition times and redundancy in agency
    acquisitions. These Schedule 70 benefits are available to help Federal,
    State, and local agencies.
        IT Schedule 70 is designed to allow quick, unassisted agency
    acquisitions of technology. In addition, IT Schedule 70 offers greater
    flexibility so agencies can tailor their own requirements at the order
    level and leverage other acquisition approaches such as BPAs to
    eliminate the need for agency-specific and redundant indefinite
    delivery/indefinite quantity contracts. The schedules' flexibility
    gives agency contracting offices the choice to retain control of their
    procurements, including requirements development, evaluation, award and
    administration.
        GSA is also working to help the Government's ability to acquire
    innovative technologies and services that have yet to be introduced to
    the Federal Government, through its Special Item Number (SIN) 132-99,
    Introduction of New Information Technology Services and/or Products.
    This would allow offerors and vendors to add new and innovative
    information technology products and services to IT Schedule 70 that
    would be otherwise unclassified and out of scope to the other SINs
    under the program. Moreover, it provides a new service, function, task,
    or attribute that may provide a more economical or efficient means for
    Federal agencies to accomplish their mission.
        Finally, for agencies that require additional assistance, GSA also
    offers full-service IT acquisition options through our Assisted
    Acquisition Services.
                                     ______

                   Questions Submitted by Senator Jerry Moran
                                    sam.gov
        Question. In 2008, the General Services Administration (GSA) began
    consolidating 10 Governmentwide acquisition data systems into one
    integrated system called the System for Award Management (SAM.gov). The
    intent of this approach was to enhance competition and innovation. The
    current SAM application includes four of those legacy systems. One of
    those systems is the Central Contractor Registration or CCR. Since the
    Government switched from CCR to SAM.gov, there has been a precipitous
    drop in the number of new businesses competing for Government
    contracts. The number of new registrations per month has dropped over
    35 percent. I have heard from small businesses interested in
    contracting with the Federal Government about the difficulty of
    navigating this process.
        Can you explain the drop in registrations in switching from CCR to
    SAM.gov? Should we expect the same drop with regards to the other
    systems as they are integrated into the SAM.gov?
        Is there a backlog to certify new registrants? If so, how can we
    reduce it?
        What is GSA doing to improve that system so the burden for new
    entrants is not as high?
        Answer. The System for Award Management (SAM), and the Central
    Contract Registration (CCR) before it, is the Governmentwide system
    where entities register to do business with the Federal Government, as
    required by the Federal Acquisition Regulation (FAR). The trend for
    registrants new to the process starting in 2007, does show an overall
    decline. There was a significant spike up in 2009, correlated with
    opportunities due to the American Recovery and Reinvestment Act of
    2009. Specifically the new registrant numbers by fiscal year are:
        CCR 2007: 113,277
        CCR 2008: 124,163
        CCR 2009: 191,159
        CCR 2010: 150,640
        CCR 2011: 143,482
        CCR 7 months 2012: 62,487 SAM: 21,393 total: 83,880
        SAM 2013: 78,571
        SAM 2014: 32,562 5 Months
        Importantly, with the launch of SAM, the Federal governance for the
    GSA Integrated Award Environment (IAE) affected the decision to change
    the requirements for registrants interested in procurement
    opportunities with the Federal Government. In CCR, registrants provided
    general information about the entity, contacts and the necessary
    financial information to receive payment. However, the Representations
    and Certifications were not required, and were input through the
    separate Online Representations and Certifications Application (ORCA).
        At the time that the Government migrated from CCR to SAM, only 29
    percent of all entities registered to receive procurement dollars had
    complete and current Representations and Certifications in ORCA. Today
    all procurement registrants in SAM have current and completed
    Representations and Certifications.
        In July 2012, at migration there were approximately 221,000 active
    procurement registrants in CCR; only about 64,000 were compliant with
    Representations and Certifications. As of May 27, 2014, there were in
    excess of 355,000 registered entities for contracts and 100 percent of
    these were compliant for Representations and Certifications.
        As is evidenced by the number of active registrants, excluding
    those only seeking grants and financial assistance, the number of
    eligible registrants has increased over time, as many historical
    registrants continue to renew their registrations.
        The IAE continues to work with the Federal community and
    registrants to improve access and functionality including updating SAM
    with Helper Text in plain English, implementing an open data
    Application Programming Interface (API) for users to be able to track
    status in real time, and implementing live chat at the help desk. As
    the Environment transitions into the planned three-core with API future
    state, the common services platform will standardize user identity and
    access management, further enhancing ease of use.
                  federal government property broadband access
        Question. In 2012, Congress enacted the Middle Class Tax Relief and
    Job Creation Act (Public Law 112-96), which directed GSA to develop a
    master contract to govern the placement of wireless service antenna
    structures on buildings and other property owned by the Federal
    Government. This plan would both enhance the wireless industry's
    ability to deliver high speed wireless broadband service and create
    revenue for the Treasury. The law required this plan to be completed
    within 60 days of enactment. After little progress was made, President
    Obama issued an Executive Order directing agencies to tackle this
    assignment. Yet, it is my understanding that more than 2 years after
    the deadline, this work is still not complete.
        What is the status of this project?
        Answer. GSA drafted the master contract within the 60-day period
    mandated by section 6409 of Public Law 112-96. Given that the contract
    is to be used by executive landholding agencies to facilitate
    streamlined contracting with private sector telecommunications carriers
    for the installation of the carrier's antennas on Federal facilities,
    the master contract is based on the contract GSA uses to outlease space
    for private sector antenna installations at GSA controlled facilities.
        Question. When do you expect that a master siting contract will be
    finished and available for use?
        Answer. The master contract is finished and available for use by
    executive landholding agencies to document an agreement between the
    United States and the private sector telecommunications company
    concerning the installation of the carrier's antenna on Federal
    property. The contract is publicly available at http://www.gsa.gov/
    portal/content/191703.
                            federal fleet management
        Question. According to a July 2013 Government Accountability Office
    (GAO) report, Federal agencies spend about $3 billion annually to
    acquire, operate, and maintain 450,000 Federal vehicles. President
    Obama has directed agencies to determine their optimal fleet
    inventories and set targets for achieving these inventories by 2015
    with the goal of a more cost-effective fleet. GAO offered a series of
    recommendations to achieve this goal, and notes that GSA agreed with
    the recommendations.
        Has the GSA completed its development and published guidance for
    agencies on estimating indirect fleet costs? If so, could you please
    provide a status update?
        Answer. GSA has completed its development and published guidance
    for agencies on estimating indirect fleet costs. We issued GSA Bulletin
    FMR B-38, Indirect Costs of Motor Vehicle Fleet Operations, on February
    20, 2014. This bulletin provides guidance to Executive agencies
    regarding the estimation, identification, categorization, and reporting
    of indirect costs of operating a fleet of motor vehicles.
        Question. What is the amount of cost savings Congress and taxpayers
    can expect from a smaller, more modern fleet?
        Answer. GSA is tasked with coordinating a Governmentwide process
    whereby agencies implement vehicle allocation methodologies for right-
    sizing their fleets. Right-sizing is not solely about reducing costs,
    it is about configuring the fleets to optimally support the agencies'
    missions. This may entail eliminating unnecessary vehicles, which would
    reduce their associated costs, but it also may encompass acquiring more
    appropriate vehicles and shifting between vehicle types. For example,
    an agency may find that a minivan is more efficient use of resources
    than a large sport utility vehicle (SUV); or a particular mission may
    be more effectively achieved by using a low greenhouse gas emitting
    compact sedan rather than a larger passenger vehicle. In 2013 a
    significant shift to subcompact sedans from large, medium, and compact
    sedans occurred with subcompacts increasing by 6,501 vehicles while the
    large, medium, and compact sedan categories were reduced by 10,915
    vehicles.
        Additionally, the agencies are under statutory and other mandates
    to meet targets for acquiring alternative fuel vehicles, consuming more
    alternative fuel and less petroleum, meeting environmental goals, and
    enhancing safety. While some of these efforts may reduce costs in the
    long run, in some situations they may actually increase up-front costs.
    While cost-consciousness and reducing waste and inefficiency is always
    a major goal, it is balanced by the need to invest in a more modern,
    safe, and efficient fleet.
        Question. How many Federal employees currently support the
    acquisition, operation, and maintenance of the Federal vehicle fleet?
        Answer. The acquisition, operation and maintenance of the Federal
    vehicle fleet are the responsibility of the individual agencies.
    Although agencies report overhead costs to GSA, the number of Federal
    employees supporting these areas are determined by the individual
    agencies and not reported to GSA. In some agencies fleet management is
    often an ancillary function performed by employees with other duties.
        Question. Of the $3 billion overall cost of fleet management, how
    much can be attributed to acquisition of new vehicles? What percentage
    can be attributed to operation of the vehicles? How much does the
    Government spend to maintain the fleet?
        Answer. Agencies' spending specifically to purchase vehicles
    (excluding the United States Postal Service (USPS)) in 2013 was $1.06
    billion, a 10-year low, down from over $1.9 billion in 2009. Overall
    fleet costs (also excluding USPS) were $2.825 billion in 2013,
    consisting of $875 million (31 percent of the total) in depreciation,
    $339 million (12 percent) in maintenance, $117 million (4 percent) in
    indirect costs, $32 million (1 percent) for commercial leases, $1.009
    billion (36 percent) to lease vehicles from GSA, and $452 million (16
    percent) for fuel.
        Question. Has GSA explored using private sector technologies that
    would allow Federal employees to check out vehicles, much like leading
    short-term vehicle rental companies?
        Answer. Following the lead of popular commercial car sharing
    ventures, GSA is actively pursuing similar initiatives to help Federal
    agencies reduce costs, improve efficiencies, optimize vehicle use and
    support sustainability. GSA's goal is to drive agency cost savings
    while allowing agencies to focus resources on their mission instead of
    ancillary services.
        GSA is interested in being able to provide its Federal customers a
    variety of transportation solutions designed to fit a customer's
    vehicle needs. For example, for customers that only need transportation
    intermittently, it may be more beneficial to use a car sharing service
    in lieu of renting, leasing and/or purchasing a vehicle.
        GSA has launched several car sharing initiatives and pilots to
    identify which is in the best interest of the Government. In December
    2013, GSA launched a pilot for a car sharing service through the newly
    developed GSA Fleet Vehicle Dispatch Reservation Module. The module
    allows customers to combine GSA fleet leased vehicles and agency owned
    vehicles in GSA's Federal Fleet Management System within a given agency
    into motor pools, schedule vehicle reservations, dispatch vehicles to
    drivers, and generate reservation and utilization reports. Agencies can
    track vehicle utilization and determine where one could potentially
    reduce the number of vehicles to increase their fleet efficiency and
    productivity through this car sharing solution. After a successful
    pilot period, GSA launched the tool for Governmentwide use on March 31,
    2014.
        Another pilot is planned to supplement the Federal fleet by
    utilizing commercially available hourly rentals that offer pilot
    customers the ability to reserve a car by the hour or by day, to meet
    official business needs requiring local travel. A third pilot will
    focus on utilizing car sharing technology on existing GSA fleet
    vehicles located in the downtown Chicago area. The goal is to research,
    procure, test, and evaluate various car sharing technologies and tools.
    The results from these car sharing solutions will be evaluated to
    identify best practices for vehicle sharing, examine business models
    and technologies that facilitate car sharing, and identify any
    obstacles that may inhibit agencies from effectively sharing vehicles.
        Question. Has GSA considered installing technologies to monitor
    driving patterns and improve the operation and usage of vehicles?
        Answer. GSA is dedicated to bringing Federal customers innovative
    products and services to more efficiently and effectively manage their
    motor vehicle fleets. GSA continually researches new technologies aimed
    to improve the overall efficiency of the Federal fleet. Recently GSA
    entered into a partnership with the National Highway Traffic Safety
    Administration (NHTSA) to ensure the Federal fleet is a leader in
    safety technology. Together, a pilot will be conducted to focus on the
    effectiveness of three main technologies: forward collision alert, lane
    departure warning and back up camera systems. Piloting these advanced
    vehicle technologies affords GSA and NHTSA the opportunity to implement
    measures, receive immediate feedback, and conduct analysis that have
    the potential to mitigate poor driving behavior.
        Additionally, GSA is beginning to offer vehicle monitoring
    solutions to Federal agencies that will have the capability to collect
    information regarding vehicle locations, driver behavior, utilization,
    and unsafe driving practices.
                               gsa it schedule 70
        Question. GSA developed IT Schedule 70 as an acquisition vehicle
    for agencies to have direct access to products and services from more
    than 5,000 certified industry partners. How is GSA's Schedule 70
    helping or hindering the Government's ability to acquire innovative
    technologies and IT services?
        Answer. The IT Schedule 70 program continues to help the Government
    acquire innovative technologies. As a part of the Multiple Award
    Schedules, Schedule 70 supports agencies acquiring innovative
    technologies and IT services by providing pre-competed, on-demand
    contracts with over 4,700 industry partners. The majority of these
    Schedule 70 partners are small businesses. The pre-competed Schedule 70
    contracts help to reduce acquisition times and redundancy in agency
    acquisitions. These Schedule 70 benefits are available to help Federal,
    State, and local agencies.
        IT Schedule 70 is designed to allow quick, unassisted agency
    acquisitions of technology. In addition, IT Schedule 70 offers greater
    flexibility so agencies can tailor their own requirements at the order
    level and leverage other acquisition approaches such as Blanket
    Purchase Agreements (BPAs) to eliminate the need for agency-specific
    and redundant indefinite delivery/indefinite quantity contracts. The
    Schedules' flexibility gives agency contracting offices the choice to
    retain control of their procurements, including requirements
    development, evaluation, award and administration.
        GSA is also working to help the Government's ability to acquire
    innovative technologies and services that have yet to be introduced to
    the Federal Government, through its Special Item Number (SIN) 132-99,
    Introduction of New Information Technology Services and/or Products.
    This allows offerors and vendors to add new and innovative information
    technology products and services to IT Schedule 70 that would be
    otherwise unclassified and out of scope to the other SINs under the
    program. Moreover, it provides a new service, function, task, or
    attribute that may provide a more economical or efficient means for
    Federal agencies to accomplish their mission.
        Finally, for agencies that require additional assistance, GSA also
    offers full-service IT acquisition options through our Assisted
    Acquisition Services.
        Question. What is GSA doing today to ensure that the IT schedules
    are efficient, competitive, and delivering value to the agency
    customers and taxpayers?
        Answer. GSA is currently undertaking a large scale effort to
    reshape and improve the Multiple Award Schedule (MAS) program to ensure
    the IT Schedule 70 contracts are efficient, competitive, and deliver
    value to agency customers and taxpayers. These changes are a direct
    result of customer feedback, the evolving acquisition environment, and
    changing market conditions.
        The IT Schedules Program is also focused on increasing
    competitiveness through better pricing and price visibility, increased
    compliance, and meaningful and timely program data. All GSA Schedules
    are migrating to a Dynamic Pricing Model to reduce prices and pricing
    variability across Schedules contracts and demonstrate savings to
    customer agencies. The goal of Dynamic Market Pricing is to provide
    relevant transactional level data at both the MAS and order level so
    agencies can negotiate better pricing. This is achieved through
    capturing transactional data collected on various Federal Strategic
    Sourcing Initiative (FSSI) Solutions at the Blanket Purchase Agreement
    (BPA) level to reduce price variability and increase data quality and
    spend analysis. In addition, ``Raising the Bar'' language was added to
    MAS solicitations (April 2014) that mandated broad offering
    availability for products and services, part number standardization,
    and Most Favored Customer (MFC) pricing, which alone does not
    constitute fair and reasonable pricing. GSA is also implementing
    services labor category standards and pricing and addressing
    manufacturer part number standardization via a Mass Modification for
    all SINs with products to existing contractors.
        While the above actions also deliver greater value to agencies, GSA
    is taking additional steps to implement solutions to enhance customer
    service and make MAS easier to use. GSA has added a new live chat
    feature on the Web site and a centralized toll-free number and e-mail
    address to make it easier and more efficient for agencies to contact
    GSA to get answers and needed support. GSA has launched the IT
    Solutions Navigator tool and other self-service options to help
    agencies find the best IT contract for the specific requirements. GSA
    is exploring leveraging e-commerce platforms to ensure customers have
    the information they need to make informed buying decisions.
                            gsa tech initiative 18f
        Question. GSA has launched a new pilot program called 18F. My
    understanding is this program is designed to help identify and address
    targeted IT challenges in Government and help provide solutions.
        Can you please share the long-term strategy behind 18F?
        Answer. 18F will be successful in the short term if we (1) properly
    scale the team to meet customer demand; (2) partner with several
    additional agencies and ship great products for those agencies early
    and often; and (3) provide a measurable increase in our agency
    partners' ability to deliver on their missions. In the long term, we
    hope our efforts will serve as a successful model for procuring,
    building and delivering digital services that are the norm in
    Government IT.
        Question. How many employees does GSA plan to hire?
        Answer. Currently, 18F has budgeted for 54 full time staff in
    fiscal year 2014. The success of the program will dictate how many
    staff GSA will eventually hire in the long term. 18F operates as a
    reimbursable service, and, if there is sufficient demand, the
    organization will scale appropriately.
        Question. How does this program help create stronger competition in
    the acquisition market?
        Answer. 18F will create stronger competition in the acquisition
    marketplace in three ways. First, 18F hopes to demonstrate that agile
    software development and lean practices are a more successful method of
    building and delivering technology. Success will lead more agencies to
    adopt these methods bringing companies into the marketplace who
    specialize in this type of work. Second, by demonstrating a less risky
    way of delivering technology, agencies will be less reluctant to
    modernize and develop information technology systems and services,
    opening up Federal expenditures that have been dedicated to operations
    and maintenance. Last, 18F will create demand for well functioning
    digital services from the public. To meet this growing demand, agencies
    will need to acquire appropriate services, platforms, and even
    infrastructure, which will increase competition and grow the
    acquisition marketplace.
        Question. Can you please identify agencies who have reached out to
    18F with specific IT challenges or projects? How many projects were
    there? What is the capacity of 18F to assist agencies in this process?
        Answer. Currently, there are 16 agencies that have made serious
    inquiries with 18F on projects that would benefit from the partnership.
    Eight of those agencies have either signed or are in the process of
    signing an interagency agreement. 18F is in various stages of business
    development on 24 projects across those agencies. 18F will only take on
    projects that it is confident in being able to meet the needs of the
    agency partner. If demand increases for 18F's services, GSA will work
    to staff the program accordingly.
                                     ______

                Questions Submitted to Hon. Katherine Archuleta
                    Questions Submitted by Senator Tom Udall
                       increased pay and hire authorities
        Question. I am aware that 18F and the Digital Service are using
    schedule A hiring authority and that direct hire authority is available
    for Information Technology (IT) Management (Information Security) (GSA-
    2210, GS-9 and above, Governmentwide and nationwide), but not all IT
    positions.
        Given the high demand and competition for IT-related positions, and
    because the private sector can often pay higher salaries for such
    positions, what increased hire and pay authorities are under
    consideration for IT positions that don't currently have any and what
    types of positions would these be?
        What other types of hiring and pay incentives beyond those now
    available to Government employees and agencies should be contemplated
    for recruitment and retention of IT specialists?
        Answer. The Office of Personnel Management (OPM) is reviewing
    current authorities to determine what additional flexibilities may help
    agencies, as well as ensuring that agencies are aware of the tools
    already available to meet staffing needs through existing
    flexibilities, authorities, and incentives. Agencies have considerable
    authority to provide additional direct compensation in certain
    circumstances to support their recruitment and retention efforts, or to
    request further flexibilities from OPM. Such compensation tools include
    special rates, critical pay, student loan repayments, and recruitment,
    relocation, and retention incentives.
        For example, OPM has established higher special rates of pay for IT
    specialists, computer engineers, and computer scientists to address
    staffing problems in certain entry/developmental grades within the
    General Schedule pay system. While the fiscal year 2013 the annual quit
    rate for IT specialists was 1.6 percent (below the Governmentwide
    average), special rates and other existing flexibilities can be used to
    target subpopulations of IT specialists, such as cyber security
    experts, where there may be staffing challenges.
                     effect of not investing in it budgets
        Question. For the past several years, IT budgets at agencies have
    been cut. This has affected projects that are designed to save money
    once implemented. Can you discuss some of the effects at your agency of
    the inability to implement planned projects?
        Answer. OPM released a Strategic IT Plan in March, fulfilling a
    commitment to strive to modernize IT that I made during my confirmation
    process. OPM developed the Strategic IT Plan to ensure our IT supports
    and aligns to our agency's strategic plan and that OPM's mission is
    fulfilled. It provides a framework for the use of data throughout the
    human resources lifecycle and establishes enabling successful practices
    and initiatives that define OPM's IT modernization efforts. Some parts
    of the plan will require us to shift resources, while others may
    require additional funding. OPM will develop project-specific work
    plans within the leadership and governance structure established by
    this strategic plan. In developing these work plans, OPM will determine
    funding needs and opportunities for cost avoidance and savings.
     25 point implementation plan to reform federal information technology
                                   management
        Question. In 2010, the Office of Management and Budget (OMB) issued
    the 25 Point Implementation Plan To Reform Federal Information
    Technology Management, which detailed action items for OPM and other
    agencies in order to deliver more value to the American taxpayer.
    Please provide an update on the current status of those action items
    assigned to OPM. For those action items not completed, please explain
    why.
        Answer. OPM launched a Project Manager Community of Practice (PM
    CoP) that fosters the development of IT program and project managers.
    OPM has collaborated with the Project Management Institute (PMI) so
    that participants can earn continuing education units through training,
    presentations, and mentoring to earn or maintain Project Management
    Professional (PMP) certification. Likewise, using the IT Program
    Management Career Path Guide, OPM focuses on developing new project
    managers through training, mentoring and providing hands on experience
    with projects. The PM CoP also partnered with the General Services
    Administration (GSA) for implementation of the Federal Acquisition
    Institute Training Application System (FAITAS) tool so OPM can track PM
    development and certifications.
        Working with the Chief Information Officers (CIO) Council and OMB,
    OPM has developed the IT Program Management Career Path Guide and
    recommended training curriculum for the newly established IT Program
    Management job title. It builds upon the IT Program Management
    Competency Model and provides guidance to Federal agencies on the
    creation and improvement of the IT Program Management career path.
        OPM also updated the Job Family Standard for the GS-2210 series to
    include the IT Program Manager definition which covers work that
    involves managing one or more major multi-year IT initiatives of such
    magnitude they must be carried out through multiple related IT
    projects.
        OPM worked with the Office of Management and Budget (OMB) to add
    the title IT Program Manager to the Job Family Standard for Information
    Technology, and to develop IT Program Manager competencies and the IT
    Program Management Career Path Guide. The Federal Acquisition
    Certification for program and project managers (FAC-P/PMs) builds upon
    this work and adds core-plus specialized certifications, the first one
    being in the area of IT. This development supports the administration's
    Smarter IT Delivery Agenda. The Smarter IT Delivery Agenda aims to
    increase customer satisfaction with top Government digital services;
    decrease the percentage of Federal Government IT projects that are
    delayed or over budget; and increase the speed with which qualified
    talent is hired and deployed to work on Government IT projects.
        Finally, agencies can use the Intergovernmental Personnel Act to
    allow for the temporary assignment of personnel, including IT program
    managers, between the Federal Government and State and local
    governments, colleges and universities, Indian tribal governments,
    federally funded research and development centers, and other eligible
    organizations.
                                     ______

                   Questions Submitted by Senator Jerry Moran
        demographic challenges of aging information technology workforce
        Question. The Federal information technology (IT) workforce is
    aging. According to the Office of Personnel Management (OPM), 46
    percent of the more than 80,000 Federal IT workers are 50 years of age
    or older, and more than 10 percent are 60 or older. Just 4 percent of
    the Federal IT workforce is under 30 years of age.
        What are we doing to address the demographic challenges with
    regards to the IT workforce?
        Answer. The current Initiative to Close Cybersecurity Skill Gaps is
    led by the OPM Director along with the subject matter expertise
    provided by the initiative's sub-goal leaders from the Office of
    Science and Technology in the Executive Office of the President and the
    National Initiative for Cybersecurity Education. In addition, OPM is an
    active collaborative partner within the Federal cyber and human
    resources communities; the Chief Human Capital Officers Council; the
    Chief Information Officers Council; the National Initiative for
    Cybersecurity Education (NICE) project; and among Federal agencies to
    raise awareness about the vital need for strategic workforce planning
    across Government and within agencies to ensure that agencies have the
    capability to obtain the IT and cybersecurity workforce they need now
    and in the future.
        Strategic workforce planning includes insightful decisionmaking
    that relies on evidence-based analyses such as the demographic
    challenges cited above; the knowledge that the national labor market
    itself is shrinking; and that our talent pipeline in IT and cyber
    skills need strengthening. IT and cyber hiring and development
    opportunities, given the current economic environment, are key
    decisions each agency is addressing, as the competition nationally and
    globally for these skills will be fierce over the next decade.
        OPM is also working with technology departments at colleges and
    universities to ensure that the talent pipeline is growing and will
    have the IT and cyber skills needed by the agencies. In addition to
    promoting IT and cyber disciplines, OPM reaches out to the education
    and academia sector to increase its awareness of Federal employment
    opportunities and the Federal job application process. Student
    internships can start as early as the high school level and graduates
    of community colleges and universities are also encouraged to apply for
    employment. Just this past year, OPM launched a new outreach effort to
    recruit and onboard science, technology, engineering, and mathematics
    (STEM) graduates; the Presidential Management Fellowship (PMF)
    program's new PMF-STEM portfolio attracts applicants with IT and cyber
    skills in disciplines such as computer science, computer engineering
    and computational analytics.
        In working with Federal hiring officials, our outreach guidance
    provides agencies with up-to-date information on how to message their
    opportunities, encourages them to work within their communities to
    strengthen the local talent pipeline, the availability of hiring and
    pay flexibilities, and provides workforce planning tools that enable
    them to plan for and get the workforce they need. Our objective, given
    the current fiscal environment, is to raise and leverage the
    capabilities of the Federal agencies to get the IT and cyber workforce
    they need, now and in the future, when the national and global labor
    markets are progressively smaller and more competitive. This outreach
    also allows the Federal Government to reach communities like the
    veterans community. In fiscal year 2012, military veterans comprised
    28.9 percent of total hires, marking the highest percentage of military
    veterans newly hired into the Federal Government in over 20 years. As
    part of our efforts on recruitment for cyber positions, OPM has worked
    with many partners, including State programs that service veterans.
        Since mid-February, OPM has made presentations (face-to-face or
    virtually) at 36 schools, 14 of which are participants in Scholarship
    for Service (CyberCorps), and 13 of which are Centers of Academic
    Excellence Institutions. OPM has also developed a detailed outreach
    plan and set a goal of partnering with a total of 22 universities and
    colleges prior to the end of fiscal year 2014 in order to expand our
    recruitment and outreach presence.
        OPM is also promoting academic alliances with universities and
    colleges so that our existing workforce can retain, enhance or develop
    their skills. An example is OPM's recent 2014 alliance with the
    University of Maryland University College that offers discount tuition
    opportunities to Federal employees and their dependents. Similar
    efforts like this are under consideration with universities and
    colleges that offer degrees and coursework in IT and cyber skills as
    well. In addition, the National Initiative for Cybersecurity Education,
    with OPM and the Chief Information Officer Council as collaborative
    partners, offers a clearinghouse resource for our employees to use in
    planning for and getting the training they need.
                          interdisciplinary workforce
        Question. Increasingly, private sector companies have a workforce
    that is interdisciplinary in that they understand both business and
    technology. In comparison, many companies and former Government
    employees have complained to my staff about the lack of
    interdisciplinary skills in the Federal workforce--the program managers
    have only program management skills. The IT professionals are only
    familiar with IT. Acquisition workforce is trained in acquisition but
    not the other areas.
        To what extent are training funds in your budget designed to help
    develop a workforce that increasingly requires interdisciplinary
    skills?
        Answer. Cross-fertilization of technical professional skills such
    as IT, cyber and acquisition is part of the career development models
    and programs for Federal agencies. OPM along with the Federal agencies
    and the various interagency councils encourage IT, cyber and
    acquisition employees to consider and pursue career development
    opportunities that strengthen their skills in program and project
    management and that develop their familiarity in other disciplines akin
    to their work environment. For example, since 2010 when the Office of
    Management and Budget (OMB) issued the 25 Point Implementation Plan To
    Reform Federal Information Technology Management, OPM and the Federal
    agencies have taken the following actions that recognize this need for
    cross-fertilization of business acumen with the technology IT and cyber
    skills.
      --OPM designed and issued a formal IT program management career path.
            Working with the Chief Information Officers (CIO) Council and
            OMB, OPM's IT Program Management Career Path Guide recommends
            training curriculum for the newly established IT Program
            Management job title. It builds upon the IT Program Management
            Competency Model and provides guidance to Federal agencies on
            the creation and improvement of the IT Program Management
            career path.
      --OPM updated the Job Family Standard for the Information Technology
            2210 occupational series to include the IT Program Manager
            definition which covers work that involves managing one or more
            major multi-year IT initiatives of such magnitude they must be
            carried out through multiple related IT projects.
      --OPM provides guidance to and encourages Federal agencies to use the
            Intergovernmental Personnel Act to allow for the temporary
            assignment of personnel, including IT and cyber program
            managers, between the Federal Government and State and local
            governments, colleges and universities, Indian tribal
            governments, federally funded research and development centers,
            and other eligible organizations.
        This cross-fertilization of business and program management
    disciplines for the IT, cyber and acquisition disciplines is also
    encouraged by the Federal leadership and agencies in other key mission
    critical occupations such those in the science, technology, engineering
    and mathematics disciplines.
        OPM revised its Hiring Managers Applicant Satisfaction Survey for
    fiscal year 2014 so that cyber hiring managers can report how satisfied
    they are with the quality of cyber candidates for their vacancies and
    identify what type of cyber work is being addressed in their vacancies.
    This will give us insight into the demand and flow of cyber work in our
    hiring actions and development activities and will enable us to be
    strategically focused on getting and retaining the high caliber IT and
    cyber workforce agencies need. For this fiscal year, as of June 12,
    2014, the survey has received 24,186 total responses with 681 of those
    responses indicating that the applicant performed cyber work.
        Question. Where are IT and personnel investments going? How well
    are you tracking how IT investments are aligned to the strategic plans
    of agencies?
        Answer. Cyber skills are particularly sensitive to the changing
    external forces of technology and the national security and economic
    prosperity. Additionally, it is important that whenever an employee is
    brought into the Federal Government and performs well that the Federal
    Government do everything possible to retain that individual. Part of
    this responsibility lies in making sure that person feels fulfilled by
    the training opportunities that are available to him or her.
        OPM's Employee Viewpoint Surveys reflect that overall, the current
    Federal workforce is very interested in receiving training that will
    foster their development. OPM also knows that having the agility and
    funding levels and staff capacity to provide the right developmental
    training at the right time is a key factor in employee retention.
        OPM partnered recently with the Chief Information Officers
    Council's workforce survey that provided employees with a self-
    assessment tool of their cyber skills. Over 23,000 responses were
    received; the March 2013 reported results give Federal agencies insight
    about the skills their employees have and those that are needed.
    Through the Closing Skill Gaps Initiative, OPM encourages the cyber and
    human resources communities to use these results to design development
    opportunities to refresh and update talent.
        OPM is also reaching out, as part of the President's Second Term
    Management Agenda and the Closing Skill Gaps Initiative, to partner
    with the National Initiative for Cybersecurity Education-Department of
    Homeland Security (NICE-DHS) clearinghouse resource effort on the
    National Institute of Standards and Technology (NIST) Web portal so
    that training and development activities can become a part of a
    Governmentwide university environment for Federal employees and
    agencies.
                    efficiencies in hiring qualified talent
        Question. One common complaint amount Federal agencies is the time
    consuming and burdensome nature of the hiring process. One flexibility
    that agencies do not currently have is the ability to share lists of
    best qualified candidates for similar jobs. For example, it my
    understanding that if one agency conducts a search that results in a
    limited number of candidates with the specific skill set, and the
    agency is only able to hire one, another agency looking to fill the
    same position is not allowed to access the names of the other
    candidates. Instead, each agency is required to conduct its own lengthy
    search, delaying hiring and slowing down the ability of agencies to
    make progress on important projects.
        Do you believe modifying the underlying statute to allow agencies
    to share their list of best qualified candidates would help agencies
    hire quicker and more effectively?
        Answer. As you may know, in 2010, OPM submitted to the House of
    Representatives and the Senate draft legislation that would permit
    agencies to share resumes and select from among top candidates who have
    competed for similar positions at another agency, were assessed, and
    were determined by the other agency to be among the best qualified
    candidates for the job. Should Congress develop similar such
    legislation, OPM would be happy to examine it.
                       pathways program for cyber talent
        Question. Director Archuleta, in your testimony you discuss OPM's
    work to enhance the recruitment and retention of cyber security and IT
    professionals, particularly students. One tool you did not mention was
    the Pathways internship programs, which allow agencies to non-
    competitively convert students and recent graduates. Many agencies have
    reported difficulties in utilizing the program due to the large number
    of applications they receive resulting from public notice, inadequate
    ways to assess candidates without experience and inability to target
    specific talent sources.
        What is OPM doing to make sure that the Pathways programs are an
    effective pipeline for bringing mission-critical entry level IT talent
    into Federal agencies?
        What is OPM doing to educate agencies on the use of this
    recruitment tool? Finally, what can Congress do to help increase the
    use and effectiveness of the program?
        Answer. Pathways is designed to be an inclusive program, that
    permits agencies to recruit from all segments of the population. One of
    its goals is to expose recent graduates and students to Government
    service, in order to encourage them to consider becoming further
    involved in Government service as an immediate or long-term career
    goal. By definition, therefore, a strong response from applicants is a
    good thing, not a problem. Nevertheless, as with any recruitment
    process, it is important for agencies to develop valid approaches to
    assessment that permit them to identify the best candidates efficiently
    and effectively.
        OPM is working through the STEM community and with technology
    departments at colleges and universities and examining hiring
    flexibilities to recruit and onboard STEM graduates. The Presidential
    Management Fellowship (PMF) program and the pilot STEM track helped to
    attract applicants with cyber skills in disciplines such as
    cybersecurity and information security.
        OPM has held a number of Webinars, briefings, and training and
    specific agency sessions to educate human resources professionals and
    hiring managers on how to use the program. OPM has implemented monthly
    meetings with agency Pathways Program Officers to address global and
    specific issues related to the program. In addition, OPM is also
    finalizing additional guidance and frequently asked questions that will
    aid in making sure that agencies have information that they can use for
    the effective implementation of this program.
                                     ______

                    Questions Submitted to Hon. David Powner
                    Questions Submitted by Senator Tom Udall
                     general information technology reform
        Question. What are the top five reforms needed to improve Federal
    information technology (IT) spending so that it is more efficient and
    effective?
        Answer. Given the magnitude of the Federal Government's annual IT
    budget, which is expected to be more than $82 billion in fiscal year
    2014, it is important that agencies leverage all available
    opportunities to ensure that their IT investments are acquired in the
    most effective manner possible. To do so, agencies can rely on the
    Office of Management and Budget's (OMB's) initiatives such as:
      --the IT Dashboard, a public Web site that provides information on
            760 major investments at 27 Federal agencies, totaling almost
            $41 billion;
      --the mandated use of incremental IT development, the deployment of
            IT capabilities or functionality in release cycles no longer
            than 6 months;
      --TechStat sessions, which are face-to-face meetings to terminate or
            turn around IT investments that are failing or are not
            producing results;
      --the Federal Data Center Consolidation Initiative, which seeks to
            save $3 billion by fiscal year 2015 by reducing the cost of
            data center hardware, software, and operations; and
      --PortfolioStat sessions, which we estimate could save more than $5.8
            billion, are annual reviews of agencies' IT investments to
            eliminate duplication, move to shared services, and improve
            portfolio management processes.
        We have examined each of these initiatives and made numerous
    recommendations to further increase their efficiency and
    effectiveness.\1\ For example, we recommended that OMB make Dashboard
    information available independent of the budget process, and that
    selected agencies appropriately categorize IT investments and address
    identified weaknesses.\2\ In addition, we recommended that OMB develop
    and issue realistic and clear guidance on incremental development and
    that selected agencies update and implement their incremental
    development policies to reflect OMB's guidance. We have also made
    recommendations to individual agencies participating in PortfolioStat
    to improve their implementation of PortfolioStat requirements. We have
    ongoing work reviewing the status of the implementation of these
    recommendations.
    ---------------------------------------------------------------------------
        \1\ GAO, Data Center Consolidation: Strengthened Oversight Needed
    To Achieve Cost Savings Goal, GAO-13-378 (Washington, DC: Apr. 23,
    2013); Information Technology: Additional Executive Review Sessions
    Needed To Address Troubled Projects, GAO-13-524 (Washington, DC: June
    13, 2013); Information Technology: Additional OMB and Agency Actions
    Are Needed To Achieve Portfolio Savings, GAO-14-65 (Washington, DC:
    Nov. 6, 2013); IT Dashboard: Agencies Are Managing Investment Risk, but
    Related Ratings Need To Be More Accurate and Available, GAO-14-64
    (Washington, DC: Dec. 12, 2013); and Information Technology: Agencies
    Need To Establish and Implement Incremental Development Policies, GAO-
    14-361 (Washington, DC: May 1, 2014).
        \2\ GAO-14-64.
    ---------------------------------------------------------------------------
                       identifying failing it investments
        Question. How well do the PortfolioStat and TechStat processes
    identify high risk or failing IT investments that may need to be
    canceled? How many such investments were canceled or put back on track
    through such processes? Should such tools be used more widely by
    Federal agencies?
        Answer. While PortfolioStat was initially intended to focus on
    commodity IT,\3\ OMB only recently updated its PortfolioStat guidance
    in May 2014 to also ensure that critical IT investments deliver
    intended impacts and meet customer needs. However, OMB's TechStat
    sessions--face-to-face meetings to terminate or turn around IT
    investments that are failing or are not producing results--are more
    suited to identify high risk or failing IT investments that may need to
    be canceled.
    ---------------------------------------------------------------------------
        \3\ According to OMB, commodity IT includes services, such as
    enterprise IT systems (e-mail; identity and access management; IT
    security; Web hosting, infrastructure, and content; and collaboration
    tools); IT infrastructure (desktop systems, mainframes and servers,
    mobile devices, and telecommunications); and business systems
    (financial management, grants-related Federal financial assistance,
    grants-related transfer to State and local governments, and human
    resources management systems).
    ---------------------------------------------------------------------------
        In June 2013, we reported that OMB and selected agencies had held
    multiple TechStats and determined that, as of April 2013, OMB reported
    conducting 79 TechStats, which focused on 55 investments at 23 Federal
    agencies.\4\ Further, four selected agencies--the Departments of
    Agriculture, Commerce, Health and Human Services (HHS), and Homeland
    Security (DHS)--conducted 37 TechStats covering 28 investments. About
    70 percent of the OMB-led and 76 percent of agency-led TechStats on
    major investments were considered medium to high risk at the time of
    the TechStat. We further reported that OMB and selected agencies
    tracked and reported positive results from TechStats, with most
    resulting in improved governance. We also found that OMB reported in
    2011 that Federal agencies achieved almost $4 billion in lifecycle cost
    savings as a result of TechStat sessions. However, we were unable to
    validate the reported outcomes and associated savings because OMB did
    not provide supporting artifacts or demonstrate the steps that OMB
    analysts took to verify the agencies' data. We subsequently recommended
    that OMB require agencies to report on how they validated the outcomes.
    OMB generally agreed with this recommendation.
    ---------------------------------------------------------------------------
        \4\ GAO, Information Technology: Additional Executive Review
    Sessions Needed To Address Troubled Projects, GAO-13-524 (Washington,
    DC: June 13, 2013).
    ---------------------------------------------------------------------------
        Agencies could use TechStats more frequently. In our 2013 report,
    we found that the number of at-risk TechStats held was relatively small
    compared to the current number of medium- and high-risk major IT
    investments. Specifically, the OMB-led TechStats represented roughly
    18.5 percent of the investments across the Government that had a
    medium- or high-risk chief information officer (CIO) rating. For the
    four selected agencies, the number of TechStats represented about 33
    percent of the investments that had a medium- or high-risk CIO rating.
    We concluded that, until OMB and agencies develop plans to address
    these weaknesses, the investments would likely remain at risk. We
    further recommended that OMB require agencies to conduct TechStats for
    each IT investment rated with a moderately high- or high-risk CIO
    rating on the IT Dashboard. OMB generally agreed with this
    recommendation.
                         canceling failing it projects
        Question. What tools do agencies have to terminate IT investments
    that are critically over budget, over schedule, or failing to meet
    performance goals? Similarly, what tools do agencies have to replace
    these terminated investments with new commercial IT solutions?
        Answer. As previously mentioned, agencies can utilize TechStat
    sessions to terminate or turn around IT investments that are failing or
    are not producing results. These meetings involve OMB and agency
    leadership and are intended to increase accountability and transparency
    and improve performance. OMB has told us that these sessions have
    resulted in investments that were either terminated or reduced in
    scope. Further, according to the former Federal chief information
    officer, the efforts of OMB and Federal agencies to improve management
    and oversight of IT investments have resulted in almost $4 billion in
    savings.
        In addition to TechStat sessions, our Information Technology
    Investment Management (ITIM) framework can be used by agencies to
    improve their organizational processes and measure progress in
    attaining them, including ensuring that investments are delivering
    expected benefits.\5\ As depicted in the following figure, the
    organization ensures that mission needs are met during the control
    phase. If the project is not meeting expectations or if problems have
    arisen, steps are quickly taken to address the deficiencies. If mission
    needs have changed, the organization is able to adjust its objectives
    for the project and appropriately modify expected project outcomes. The
    following figure illustrates the central components of the IT
    investment approach.
    ---------------------------------------------------------------------------
        \5\ GAO, Information Technology Investment Management: A Framework
    for Assessing and Improving Process Maturity (Supersedes AIMD-10.1.23),
    GAO-04-394G (Washington, DC: Mar. 1, 2004).

        If an agency elects to terminate an IT investment, OMB guidance on
    the acquisition of IT requires that agencies maximize the use of
    commercial services and off-the-shelf technology.\6\
    ---------------------------------------------------------------------------
        \6\ OMB, Guidance On Exhibits 53 And 300--Information Technology
    and E-Government (2012).
    ---------------------------------------------------------------------------
                         transition to cloud computing
        Question. How well are Federal agencies implementing ``cloud
    first'' policies to drive efficiencies and savings through greater use
    of cloud computing services?
        Answer. In July 2012, we found that each of the seven selected
    agencies \7\ that we reviewed incorporated cloud computing requirements
    into their policies and processes, and implemented at least one service
    by December 2011.\8\ However, two agencies did not plan to meet OMB's
    deadline to implement two additional services by June 2012, but did
    plan to do so by the end of the year. As a result, we recommended that
    the seven agencies develop key planning information, such as estimated
    costs and legacy IT systems' retirement plans, for existing and planned
    services. The agencies generally agreed with these recommendations.
    ---------------------------------------------------------------------------
        \7\ The selected agencies were the Departments of Agriculture,
    Health and Human Services, Homeland Security, State, and Treasury; the
    General Services Administration and the Small Business Administration.
        \8\ GAO, Information Technology Reform: Progress Made but Future
    Cloud Computing Efforts Should Be Better Planned, GAO-12-756
    (Washington, DC: July 11, 2012).
    ---------------------------------------------------------------------------
        We have ongoing work looking at OMB's Cloud First initiative, where
    we are assessing agency progress in utilizing cloud-based solutions,
    determining the extent to which agencies experienced cost savings when
    such solutions have been deployed, and identifying any challenges
    agencies are facing as they use cloud computing.
                       federal data center consolidation
        Question. I would like to ask about discrepancies between Federal
    departments and agencies when it comes to data center consolidation and
    optimization. Which agencies or departments seem to be taking the most
    advantage of such opportunities to create savings and efficiencies?
    Which agencies or departments seem to lag behind?
        Answer. Of the 24 agencies participating in OMB's data center
    consolidation initiative, we believe the Departments of Defense
    (Defense) and Homeland Security (DHS) are two of the agencies that show
    the most potential for achieving planned savings and efficiencies.
    Specifically, as we testified in February 2014,\9\ Defense reported
    1,922 facilities although its original goal was to consolidate from 936
    data centers to 392 and save an estimated $2.2 billion. This increase
    in inventory opens the possibility of consolidating even more centers
    and realizing billions in cost savings. Further, DHS plans to reduce
    the number of its large data centers from 40 to 3 and recently reported
    consolidation savings of $108 million through fiscal year 2013.
    ---------------------------------------------------------------------------
        \9\ GAO, Information Technology: Leveraging Best Practices and
    Reform Initiatives Can Help Defense Manage Major Investments, GAO-14-
    400T (Washington, DC: Feb. 26, 2014).
    ---------------------------------------------------------------------------
        Regarding agencies that have been challenged to achieve their
    consolidation goals, we have ongoing work looking at OMB's data center
    consolidation initiative, including evaluating the extent to which
    agencies have achieved planned cost savings through their consolidation
    efforts and identifying agencies' notable consolidation successes and
    challenges in achieving cost savings. We plan to report later this year
    on each of the agencies' savings to date and where there is opportunity
    for greater savings.
                          top priority it investments
        Question. How can OMB help ensure the success of the
    administration's top priority IT investments?
        Answer. While OMB's and agencies' recent efforts have resulted in
    greater transparency and oversight of Federal spending, continued
    leadership and attention are necessary to build on the progress that
    has been made. OMB is periodically reviewing the status of investments
    through its oversight of the IT Dashboard and its TechStat process.
    However, as we recommended in 2013, OMB needs to continue to hold
    TechStat sessions for major investments, hold agencies accountable for
    the performance of their investments, and make Dashboard information
    available independent of the budget process. Without this continued
    oversight, top priority investments may remain at risk. Additionally,
    with the possibility of over $5.8 billion in savings from the data
    center consolidation and PortfolioStat initiatives, OMB and agencies
    should continue to identify and pursue consolidation opportunities, by
    implementing a range of our recommendations intended to increase to
    efficiency and effectiveness of Federal IT.

                              SUBCOMMITTEE RECESS

        Senator Udall. The subcommittee is hereby adjourned. Thank
    you.
        [Whereupon, at 3:40 p.m., Wednesday, May 7, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2015

                                  ----------

                            WEDNESDAY, MAY 14, 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.

                       SECURITIES AND EXCHANGE COMMISSION

    STATEMENT OF HON. MARY JO WHITE, CHAIR

                     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 requests of two key Federal regulatory
    agencies, the Securities and Exchange Commission (SEC) and the
    Commodity Futures Trading Commission (CFTC).
        I welcome my distinguished ranking member, Senator Mike
    Johanns, and some of our other colleagues I think will join us
    here throughout the day.
        Joining us today are also the Honorable Mary Jo White,
    Chair of the Securities and Exchange Commission, and the
    Honorable Mark Wetjen, Acting Chairman of the Commodity Futures
    Trading Commission. They will discuss the critical work of
    their agencies, their use of resources provided over the past
    couple of years, and their budget needs for fiscal year 2015.
        The workload for these agencies has grown dramatically in
    recent years. The SEC and the CFTC all play critical roles in
    stimulating and sustaining economic growth and prosperity in
    our country, in protecting the marketplace from fraud and
    manipulation, and in carrying out Dodd-Frank reforms. My
    constituents have made clear they support these reforms to
    prevent the reckless and abusive practices that led to the
    financial crisis.
        Fortunately, some sectors of our country are recovering.
    But sadly, many families have not recovered, and they continue
    to struggle. I believe it is my responsibility to the hard-
    working and honest people of New Mexico and to all Americans
    who suffered as a result of this crisis to ensure that we work
    to fully implement Dodd-Frank.
        We need a financial system that is safe and sound because
    what happens on Wall Street touches every American family.
    Whether they are saving to buy their first home, helping to put
    their children through college, or planning for retirement,
    they put their faith in the financial markets being sound. We
    cannot let them down.
        And they are not alone. Market users, financial investors,
    and the U.S. economy all depend on vigilant oversight by these
    two agencies, especially in today's rapid-paced, evolving, and
    often volatile global marketplace.
        In the past few years, both Chair White and Acting Chairman
    Wetjen and their fellow commissioners and their respective
    staffs I think have worked very hard to create a more reliable
    regulatory structure to ensure the stability and integrity of
    the futures and securities markets. But there is still, I think
    everyone will admit, a lot of work to be done.
        We depend on your leadership to implement the reforms
    designed to strengthen our regulatory framework, to do so
    promptly, prudently, and transparently, and help guard against
    another financial meltdown.
        As the investors' advocate, the SEC has an important role
    in maintaining fair, orderly, and efficient stock in securities
    markets. The SEC conducts day-to-day oversight of the major
    market participants, monitors corporate disclosure of
    information to the investing public, and investigates and
    pursues enforcement action against securities laws violations.
        Dodd-Frank dramatically expanded the SEC's
    responsibilities. The SEC was thrust into the driver's seat for
    issuing nearly 100 new rules, creating five new offices,
    issuing more than 20 studies and reports, overseeing the over-
    the-counter derivatives market and hedge fund advisers,
    registering municipal advisers and security-based swap market
    participants, and setting up a new whistleblower program.
        The Jumpstart Our Business Startups Act of 2012 (JOBS Act)
    added more to SEC's plate for further rules and studies on
    capital formation, disclosure, and registration requirements.
        Turning to the CFTC now, the CFTC carries out market
    surveillance, compliance, and enforcement programs in the
    futures and swaps arena. It detects, deters, and punishes
    abusive trading activity and manipulation of commodity prices,
    helping to prevent negative impacts both on consumers and on
    the economy.
        Four years ago, the CFTC's mission was substantially
    expanded to include new oversight of the swaps marketplace, the
    vast once-in-the-shadows world of over-the-counter derivatives.
    It is a significantly transformed and highly diversified
    marketplace, one that is globalized, electronic, and around the
    clock.
        The enactment of Wall Street reform in 2010 also added to
    the job of the CFTC. CFTC now has oversight of the once
    unregulated $400 trillion over-the-counter U.S. derivatives
    market to protect and benefit end-users and the broader
    American public. This complex swaps market has a notional value
    of nearly eight times the size of that of the futures market.
        Now, the forecast for 2015, looking ahead for fiscal year
    2015 for the SEC, the President seeks funding of $1.7 billion,
    an increase of $350 million, 26 percent above the fiscal year
    2014 base enacted level of $1.35 billion. It is $236 million
    above the SEC's $1.464 billion current operating level. The
    $1.7 billion requested for fiscal year 2015 will support 5,143
    permanent positions, an increase of 639 positions over the
    current 4,504 permanent positions, for a 14 percent growth in
    staff.
        And for the CFTC, the President's budget requests $280
    million, an increase of $65 million above the fiscal year 2014
    enacted level of $215 million. This is a 30 percent increase in
    funding above the current level. The proposed fiscal year 2015
    level will support 920 staff or 253 more when compared to the
    current staffing level of 667, a 37 percent increase.
        Congress probably exercises its most effective oversight of
    agencies and programs through the appropriations process,
    permitting an annual checkup and review of operations, of
    activities, and spending. Today's hearing provides a valuable
    opportunity to ask some important questions.
        Are the SEC and the CFTC keeping pace with the developments
    in the markets, particularly with more complex financial
    products which are emerging?
        Do these agencies have the right mix of talent and
    specialized expertise to be vigilant watchdogs?
        Do they have the state-of-the-art information technology to
    augment and support their human capital?
        What are the top priorities for use of the resources
    proposed for 2015?
        And what are the likely consequences of continued budget
    shortfalls and reduced resources?
        I know Senator Johanns and I welcome the opportunity to
    conduct critical oversight of these two agencies. And I now
    turn to my distinguished ranking member, Senator Mike Johanns,
    for his opening remarks.

                       STATEMENT OF SENATOR MIKE JOHANNS

        Senator Johanns. Mr. Chairman, let me just start out and
    say thank you to the witnesses for being here with us today. I
    thank you, Mr. Chairman, for holding yet another important
    hearing as we work our way through the various budget requests
    under our subcommittee's jurisdiction.
        I do look forward to hearing from the witnesses today
    regarding the details of your requests as well as your plans to
    carry out core missions and implement Dodd-Frank in a
    responsible manner. There are three areas that I would like to
    highlight, looking forward to your testimony and my questions.
        First, the SEC's implementation of the JOBS Act. Where is
    that on schedule? I am concerned that it is not on schedule,
    and I want to learn more about that. I do encourage the SEC and
    your team to move with all appropriate speed in finalizing
    Regulation A and the crowdfunding rules.
        Second, I would like to get both of your thoughts on
    technological advancement in the marketplace, and what your
    agencies are doing on the technology front to adapt.
        And finally, I ask you to be persistent in trying to work
    together and coordinate with your fellow regulators. Any
    conflicts between SEC and CFTC on cross-border swaps and lack
    of coordination between the SEC and Department of Labor over
    fiduciary standards continues to cause uncertainty and
    confusion.
        Derivatives markets and effective oversight of those
    markets matter a lot to farmers, to homeowners, and to small
    businesses. We all benefit from a system that promotes fair and
    orderly markets. So I am concerned when certain agency rules
    seem to fragment the market and push businesses overseas.
        In some instances, the CFTC has moved too quickly. Others,
    the Commission has simply chosen to issue guidance in what
    looks like an effort to avoid cost-benefit analysis. In many
    cases, the Commission has opted to act alone instead of
    properly coordinating with the SEC as well as other domestic
    and international regulators.
        In order to be an effective regulator, transparency is
    critical. This need for transparency and coordination is
    evident in the CFTC's approach to cross-border implementation
    swaps regulation. CFTC's guidance, the delays, the lack of
    coordination with other regulators have led to confusion and
    concern for market participants, foreign government finance
    ministers, and investors here and abroad.
        No doubt that both the CFTC and SEC have an important job
    of protecting investors who look to the markets to help secure
    their retirements, pay for their homes, send kids to college.
    Your agencies have an obligation to protect consumers,
    hopefully, from the next Madoff, MF Global, or Stanford.
        As we look at both of your budget requests, two things come
    to mind. First, technological solutions are important to keep
    up with next-generation trading platforms that operate at
    lightning speeds. Two, staffing levels have to be carefully
    considered. We also have to make sure that they are
    sustainable.
        All agencies have to make strategic decisions on how best
    to allocate resources. As we all know, simple increasing
    funding doesn't necessarily ensure that the agency will
    successfully achieve its mission.
        So, to the chairs, you both have difficult tasks before
    you. We ask a lot. We ask that you improve transparency in our
    securities markets, uncover fraud and deception, without over-
    regulating our markets and hindering economic growth.
        Chairman Udall, again, I look forward to working with you
    as we consider the fiscal year 2015 budget requests of the CFTC
    and the SEC, and I look forward to the testimony and the
    opportunity to ask questions.
        Thank you, Mr. Chairman.
        Senator Udall. Thank you very much, Senator Johanns.
        And at this time, I would invite Chair White to present
    testimony on behalf of the SEC, followed by Acting Chairman
    Wetjen on behalf of the CFTC. You each will have 5 minutes. I
    know you have very thorough statements, which will be put in
    the record, and you can use your 5 minutes as you choose.
        Please proceed, Chair White.

                    SUMMARY STATEMENT OF HON. MARY JO WHITE

        Ms. White. Thank you, Chairman Udall, Ranking Member
    Johanns. Thank you for inviting me to testify in support of the
    President's fiscal year 2015 budget for the Securities and
    Exchange Commission.
        Now more than ever, investors and our markets need a
    strong, vigilant, and adequately resourced SEC. To put the
    SEC's extensive responsibilities and its 2015 budget request
    into context--from fiscal year 2001 to fiscal year 2014,
    trading volume in the equity markets more than doubled to a
    projected $71 trillion. The complexities of financial products
    and the speed with which they are traded increased
    exponentially.
        Assets under management of mutual funds grew by 131 percent
    to $14.8 trillion, and assets under management of investment
    advisers jumped almost 200 percent to $55 trillion. There are
    today over 25,000 SEC registrants, including broker-dealers,
    clearing agents, transfer agents, credit rating agencies,
    exchanges, and others.
        During this time of unprecedented growth and change in our
    markets, the SEC also has been given significant new
    responsibilities for over-the-counter derivatives, private fund
    advisers, municipal advisors, crowdfunding portals, and more.
        The President's $1.7 billion budget request would enable
    the SEC to address critical core priorities including enhancing
    examination coverage for investment advisers and other key
    entities who deal with retail and institutional investors;
    protecting investors by expanding our enforcement program's
    investigative capabilities, and strengthening our ability to
    litigate against wrongdoers; deploying and leveraging cutting-
    edge technology to better keep pace with those we regulate,
    make our operations more efficient, and improve our ability to
    identify a variety of market risks, including emerging frauds.
        The SEC's funding, as you know, is deficit neutral, which
    means that the amount Congress appropriates is offset by
    transaction fees and thus does not impact the deficit, the
    funding available for other agencies, or count against the caps
    in the congressional budget framework.
        Nonetheless, I fully recognize my duty to be an effective
    and prudent steward of the funds we are appropriated. I believe
    our accomplishments in the past year should give Congress and
    the public confidence that we will fulfill this responsibility.

                           RECENT SEC ACCOMPLISHMENTS

        While certainly much more remains to be done, since my
    arrival in April 2013, the Commission has adopted or proposed
    more than 20 significant rulemakings, including many mandated
    by the Dodd-Frank and JOBS Acts, across the regulatory spectrum
    of our jurisdiction. My written testimony details these.
        We are also now more aggressively enforcing the securities
    laws, requiring for the first time admissions to hold certain
    wrongdoers more publicly accountable. And in fiscal year 2013,
    we obtained orders for penalties and disgorgements of $3.4
    billion, the highest in the agency's history.
        We have intensified our data-driven disciplined approach to
    analyzing and appropriately addressing complex market structure
    issues, such as high-frequency trading and dark pools,
    implementing a powerful new analytical tool called MIDAS. We
    have begun a comprehensive review of the SEC's public company
    disclosure rules to make disclosures more meaningful to
    investors while at the same time making them more cost
    effective for companies.
        And I want to make clear that this significant progress I
    am talking about was due to the incredible commitment, talent,
    and expertise of the SEC staff. The fiscal year 2015 budget
    request would permit the SEC to increase its examination
    coverage of investment advisers who everyday investors are
    increasingly turning to for investment assistance for
    retirement and family needs.

                               SEC FUNDING NEEDS

        While the SEC has made the most of its limited resources,
    we nevertheless were only able to examine 9 percent of
    registered investment advisers in fiscal year 2013. In 2004, 10
    years ago, the SEC had 19 examiners per trillion dollars in
    investment adviser assets under management. Today, in 2014, we
    have only eight. More coverage is plainly needed, and the
    industry itself has acknowledged that.
        Very importantly, this budget request would also allow us
    to better leverage technology across the agency to support a
    number of key initiatives.
        This budget request also allows us to continue augmenting
    our Division of Economic and Risk Analysis by adding financial
    economists and other experts to assist with economic analysis
    in rulemaking, risk-based selection for investigations and
    examinations, and structured data initiatives.

                               PREPARED STATEMENT

        I firmly believe that the funding we seek is fully
    justified by our important and growing responsibilities to
    investors, companies, and the markets. Your continued support
    will allow us to better fulfill our mission and to build on the
    significant progress the agency has achieved, which I am
    committed to continuing and enhancing.
        I would be pleased to answer any of your questions.
        [The statement follows:]
                    Prepared Statement of Hon. Mary Jo White
        Chairman Udall, Ranking Member Johanns, and members of the
    subcommittee:
        Thank you for inviting me to testify today in support of the
    President's fiscal year 2015 budget request for the Securities and
    Exchange Commission.\1\ I appreciate the opportunity to describe why
    and how the SEC needs the $1.7 billion requested for the coming fiscal
    year in order to fulfill the obligations given to the agency by
    Congress to protect investors, maintain fair, orderly, and efficient
    markets, and facilitate capital formation.\2\
    ---------------------------------------------------------------------------
        \1\ A copy of the SEC's fiscal year 2015 Budget Congressional
    Justification can be found on our website at http://www.sec.gov/about/
    reports/secfy15congbudgjust.shtml.
        \2\ The views expressed in this testimony are those of the Chair of
    the Securities and Exchange Commission and do not necessarily represent
    the views of the President, the full Commission, or any Commissioner.
    In accordance with past practice, the budget justification of the
    agency was submitted by the Chair and was not voted on by the full
    Commission.
    ---------------------------------------------------------------------------
        I am pleased by the SEC's accomplishments this past year. We
    adopted or proposed a substantial volume of mandated and other key
    rules. We aggressively enforced the securities laws, changing a key
    policy that can hold wrongdoers more publicly accountable and obtaining
    orders for penalties and disgorgement of $3.4 billion in fiscal year
    2013, the highest in the agency's history. We launched MIDAS and
    intensified our review of market structure issues, including high-
    frequency and off-exchange trading practices. And we have continued to
    improve our efficiency by enhancing our technology, bringing in more
    experts, and deploying more risk-based analytics to allow us to do more
    with our limited resources, and to do so more quickly.
        And with last week being Public Service Recognition Week, I want to
    take this occasion to make clear that none of this would have been
    possible without the incredible commitment, talent, and expertise of
    the staff of the SEC.
        As described in more detail below, the requested budget level would
    allow the SEC to build upon its strong efforts and accomplish several
    key and pressing priorities, including:
      --Bolstering examination coverage for investment advisers and other
            key areas within the agency's jurisdiction;
      --Strengthening our enforcement program's efforts to detect,
            investigate, and prosecute wrongdoing;
      --Continuing the agency's investments in the technologies needed to
            keep pace with today's high-tech, high-speed markets; and
      --Enhancing the agency's oversight of the rapidly changing markets
            and ability to carry out its increased regulatory
            responsibilities.
                      significant gains, but work remains
        The SEC's funding mechanism is deficit-neutral, which means that
    the amount Congress appropriates to the agency will not have an impact
    on the nation's budget deficit, nor will it impact the amount of
    funding available for other agencies.\3\ Our appropriation also does
    not count against the caps set in the bi-partisan Congressional budget
    framework for 2014 and 2015.
    ---------------------------------------------------------------------------
        \3\ Section 991 of the Dodd-Frank Act requires the SEC to collect
    transaction fees from self-regulatory organizations in an amount
    designed to directly offset our appropriation. The current fee rate is
    about $0.02 per every $1,000 transacted.
    ---------------------------------------------------------------------------
        Nonetheless, I deeply appreciate that I have a serious
    responsibility to be an effective and prudent steward of the funds we
    are appropriated. Since my arrival just over a year ago, we have made
    every effort to effectively deploy our funds to accomplish our mission
    and the goals that Congress has set for us. And, within the last year,
    we have advanced a significant number of rules and other initiatives
    across the wide range of our responsibilities with respect to the
    regulatory objectives mandated for the SEC by the Dodd-Frank Wall
    Street Reform and Consumer Protection Act (``Dodd-Frank Act'') and the
    Jumpstart Our Business Startups Act (``JOBS Act''), proposing or
    adopting rules concerning, among other things:
      --The registration and regulation of nearly a thousand municipal
            advisors;
      --The cross-border application of our security-based swap rules in
            the global swaps market;
      --Lifting the ban on general solicitation in certain private
            offerings and proposing rules to provide important data and
            investor protections for this new market;
      --Proprietary trading and investments in private funds by banks and
            their affiliates, under what is commonly called the ``Volcker
            Rule'';
      --Increasing access to capital for smaller companies by permitting
            securities-based crowdfunding;
      --Programs required of broker-dealers, investment companies, and
            other regulated entities to address risks of identity theft;
      --Further safeguarding the custody of customer funds and securities
            by broker-dealers;
      --Updating and expanding the Regulation A exemption for raising
            capital;
      --The retention of a certain amount of credit risk by securitizers of
            asset-backed securities;
      --The removal of references to nationally recognized statistical
            rating organization ratings in our broker-dealer and investment
            company regulations; and
      --Enhancing risk management and other standards for the clearing
            agencies responsible for the safe and efficient transfer of
            trillions of dollars of securities each year.
        In addition, we put forward rule proposals to strengthen and reform
    the structure of money market funds and require that certain key market
    infrastructure participants have comprehensive policies and procedures
    to better insulate market infrastructure technological systems from
    vulnerabilities.
        We also have taken steps to enhance the SEC's already strong
    enforcement program, including by modifying the longstanding ``no
    admit/no deny'' settlement protocol to require admissions in certain
    cases. While no admit/no deny settlements still make a great deal of
    sense in many situations, because admissions achieve a greater measure
    of public accountability, they can bolster the public's confidence in
    the strength and credibility of law enforcement and in the integrity of
    our markets. Already the Commission has resolved a number of cases with
    admissions, and my expectation is that there will be more such cases in
    2014 as the new protocol continues to evolve and be applied. The
    Commission also has brought a number of significant enforcement cases
    across our regulatory spectrum, including actions against exchanges to
    ensure they operate fairly and in compliance with applicable rules,
    actions against auditors and others who serve as gatekeepers in our
    financial system, landmark insider trading cases, and additional cases
    against individuals and entities whose actions contributed to the
    financial crisis.
        In the past year, the Commission also has made great strides to
    improve its technology, including through the development of tools that
    permit us to better understand and protect the integrity of our markets
    and inform our exam program. In October 2013, the agency brought on-
    line a transformative tool called MIDAS that enables us to analyze
    enormous amounts of trading data across markets almost instantaneously.
    The SEC's Quantitative Analytics Unit in our National Exam Program has
    developed groundbreaking new technology that allows our examiners to
    access and systematically analyze massive amounts of trading data from
    firms in a fraction of the time it has taken in years past. We are
    laying the technological foundation for unified access to SEC
    information, applications, and data across the agency, and are making a
    variety of other technological investments to enable us to meet our
    mission more efficiently and effectively.
        Despite this significant progress, there is much that the SEC still
    needs to accomplish. Completing the rulemakings and studies mandated by
    Congress in the Dodd-Frank and JOBS Acts remains among my top
    priorities. We must continue to seek to address structural concerns
    about our complex, dispersed marketplace in a responsible and
    empirically-based manner, and also continue our current review of the
    SEC's public issuer disclosure rules. We also need to continue to
    increase our capacity to examine and oversee the entities under the
    SEC's jurisdiction, as well as hold accountable those that harm
    investors through securities law violations. We are at a critical point
    in the deployment of more sophisticated technology tools and platforms,
    and it is vital that we have the resources necessary to continue
    modernizing our IT systems and infrastructure.
        The SEC needs significant additional resources to keep pace with
    the growing size and complexity of the securities markets and the
    agency's broad responsibilities. The agency currently oversees more
    than 25,000 market participants, including over 11,000 investment
    advisers, approximately 10,000 mutual funds and exchange-traded funds,
    4,450 broker-dealers, 450 transfer agents, 18 securities exchanges, as
    well as the Public Company Accounting Oversight Board (PCAOB),
    Financial Industry Regulatory Authority (FINRA), Municipal Securities
    Rulemaking Board (MSRB), Securities Investor Protection Corporation
    (SIPC), and Financial Accounting Standards Board (FASB). The SEC also
    has responsibility for reviewing the disclosures and financial
    statements of approximately 9,000 reporting companies, and has new and
    expanded responsibilities over the derivatives markets, an additional
    2,500 reporting advisers to hedge fund and other private funds, close
    to 1,000 municipal advisors, ten registered credit rating agencies, and
    seven registered clearing agencies. And, as you know, between the Dodd-
    Frank and the JOBS Acts, the SEC was given nearly 100 new rulemaking
    responsibilities.
        The SEC's responsibilities are extensive and complex and its
    mission is critically important. The funding we are seeking is fully
    justified by our growing responsibilities to investors, companies, and
    the markets. With what I believe is a thoughtful and targeted approach
    to our resource challenges, the fiscal year 2015 budget request of $1.7
    billion would allow the SEC to hire an additional 639 staff in
    critical, core areas and enhance our information technology.
        Outlined below is a brief overview of some of the key components of
    our request.
    expanding oversight of investment advisers and strengthening compliance
        There is an immediate and pressing need for significant additional
    resources to permit the SEC to increase its examination coverage of
    registered investment advisers so as to better protect investors and
    our markets. During fiscal year 2013, due to significant resource
    constraints, the SEC examined only about 9 percent of these advisers,
    comprising approximately 25 percent of the assets under management.
        The number of SEC-registered advisers has increased by more than 40
    percent over the last decade, while the assets under management by
    these advisers have increased more than two-fold, to almost $55
    trillion. At the same time, the industry has been increasing its use of
    new and complex products, including derivatives and certain structured
    products, employing technologies that facilitate high-frequency and
    algorithmic trading, and developing complex ``families'' of financial
    services companies with integrated operations that include both broker-
    dealer and investment adviser affiliates. While the SEC has efficiently
    used its limited resources by improving its risk assessment IT
    capabilities and focusing its examination staff and resources on those
    areas posing the greatest risk to investors, in 2004, the SEC had 19
    examiners per trillion dollars in investment adviser assets under
    management. Today, we have only 8. More coverage is clearly needed as
    the status quo does not begin to provide sufficient protection for
    investors who increasingly turn to investment advisers for assistance
    navigating the securities markets and investing for retirement and
    family needs.
        A top SEC priority under the fiscal year 2015 request is to add 316
    additional staff to the examination program in its Office of Compliance
    Inspections and Examinations (OCIE). This would allow the agency to
    examine more registered firms, particularly in the investment
    management industry; build out the examination program to implement
    newly expanded responsibilities with respect to municipal advisors,
    swap market participants, private fund advisers, crowdfunding portals
    and other new registrants; and more effectively risk-target and monitor
    other market participants. Additionally, OCIE would also be able to
    continue ongoing efforts to enhance its risk assessment and
    surveillance through the development of new technologies in areas such
    as text analytics, visualization, search and predictive analytics.
                             bolstering enforcement
        Strong and effective enforcement of our Federal securities laws is
    central to the SEC's mission. In addition to modifying our settlement
    policy to require public admissions in certain cases, the Commission in
    the last year brought groundbreaking cases across the full range of the
    securities laws, including, among many others, a $615 million
    settlement of an insider trading case; a failure to supervise case
    against a prominent hedge fund adviser; actions against exchanges and
    municipal issuers; Foreign Corrupt Practices Act cases against large
    multinational corporations; and additional matters against individuals
    and entities whose actions contributed to the financial crisis.
        Notwithstanding these results, the SEC's Division of Enforcement
    faces a number of key challenges to preserve and enhance its ability to
    vigorously pursue the entire spectrum of wrongdoing within our
    jurisdiction. Our Enforcement work includes the detection,
    investigation, and litigation of violations of the Federal securities
    laws. In each of these areas, we face significant challenges:
      --Detection. We receive over 15,000 tips, complaints, and referrals
            annually, including the more than 3,000 tips that flow into the
            Division's Whistleblower Office, which generate a fresh stream
            of case leads in need of investigation. The review and analysis
            of these tips require significant human and technological
            resources. We also have focused intensively on potential
            misconduct in the equity markets and in connection with new
            rules, including those implemented under the Dodd-Frank and
            JOBS Acts. But detecting misconduct in constantly evolving
            securities markets, including as a result of the growth of
            algorithmic, automated trading and ``dark pools,'' requires
            substantial resources.
      --Investigations. Technological advances across the industry allow
            for more sophisticated schemes, which require improved
            technology and significant resources to unravel. We also are
            expanding our focus on financial reporting and auditing
            misconduct cases, which are highly technical and labor
            intensive.
      --Litigation. We have seen an increase in litigation and trials as we
            focus more extensively on individual wrongdoing. And, the
            recent change to our long-standing settlement policy that now
            requires admissions in certain cases may lead to more
            litigation. Success at trial is critical to our ability to
            carry out our mission, and litigation, often against well-
            funded opposition.
        In order to meet the challenges of our rapidly changing and
    expanding markets, with increasingly complex products and more
    sophisticated wrongdoers, Enforcement seeks to hire 126 new staff,
    including additional legal, accounting, and industry specialized
    experts, primarily for investigations and litigation. These critical
    resources will enable us to improve our information processing and
    analysis, expand our investigative capabilities, strengthen our
    litigation capacity, and better use technology. In addition, the
    Division will continue to: (1) invest in technology that enables the
    staff to work more efficiently and effectively, and (2) collaborate
    with external stakeholders who assist in the Division's identification,
    investigation, and litigation of securities law violations, including
    wrongdoing that crosses borders.
                             leveraging technology
        The SEC is strongly committed to leveraging technology to
    streamline operations and increase the effectiveness of its programs.
    We are developing new analytic tools designed to process data more
    efficiently and make timelier and better-informed decisions. For
    example, we apply cutting-edge analytics, such as visual data analysis,
    to increase the speed with which the exam and enforcement program
    evaluate data and develop evidence. To support these tools, we are
    investing in our information technology infrastructure to store and
    process increased volumes of data. We generated over $18 million in
    cost avoidance in fiscal year 2013 through a more efficient data center
    structure, renegotiated contracts, server virtualization, and other
    process improvements. Our recently initiated Quantitative Research and
    Analytic Data Support program is structuring vast quantities of
    financial market data and making it more accessible across the agency.
    This program will enhance the quality and speed of data-driven analyses
    and, importantly, link disparate sources of data to allow staff to
    establish connections not previously possible.
        While the agency has made significant progress over the past few
    years in modernizing its technological systems, progress was set back
    by our level of funding in fiscal year 2014. Increased funding for
    these efforts and new technology investments are essential. The SEC's
    fiscal year 2015 budget request, which includes full use of the SEC
    Reserve Fund, would support a number of key information technology
    initiatives, including:
      --EDGAR modernization, a multi-year effort to simplify the financial
            reporting process to promote automation and reduce filer
            burden. EDGAR provides the most critical window into the
            capital markets for investors and businesses. With a more
            modern EDGAR, both the investing public and SEC staff will
            benefit from having access to better data.
      --Enterprise Data Warehouse, a centralized repository for the
            Commission to organize different sources of data, which can
            help the public gain easier access to more usable market data,
            which will facilitate easier and more effective analysis.
      --Data analytics tools, to assist in the integration and analysis of
            large amounts of data, allowing for computations, algorithms
            and quantitative models that can lead to earlier detection of
            fraud or suspicious behavior. We have begun deploying these
            tools on a limited basis within our enforcement and exam
            programs, but due to current budget constraints have not yet
            rolled them out more broadly. Under this request, more front-
            line staff, including those performing examinations and
            investigations, would be able to leverage these tools to
            efficiently identify links, anomalies, or indicators of
            possible securities violations.
      --Examination improvements, to improve risk assessment and
            surveillance tools and datasets that will help the staff
            monitor for trends and emerging fraud risks, as well as
            improving the workflow system supporting SEC examinations.
      --Enforcement investigation and litigation tracking, to support
            Enforcement teams with the receipt and loading of the high
            volume of materials produced during investigations and
            litigation, to build the capability to permit the electronic
            transmittal of data, and to implement a document management
            system for Enforcement's internal case files.
      --SEC.gov modernization, to make one of the most widely used Federal
            government websites more flexible, informative, easier to
            navigate and secure for investors, registrants, public
            companies, and the general public. SEC.gov receives more than
            35 million hits per day, and there is high public demand for
            quick and ready access to the tremendous amount of data
            available there, including 21 million filings in the EDGAR
            system and 170,000 documents on SEC.gov. When fully
            implemented, the website will offer dramatically improved
            search and filtering capabilities that will enhance the
            transparency and availability of this data.
      --Tips, Complaints, and Referral (TCR) system enhancements, to
            bolster flexibility, configurability, and adaptability. The TCR
            system is the SEC's central repository of tips, complaints, and
            referrals that maximizes our ability to search, track, and
            route workflow for the high volume that the agency receives
            each year (e.g., over 15,000 in fiscal year 2013). System
            enhancements will provide automated triage of the items the
            agency receives, as well as improved intake, resolution
            tracking, searching, and reporting functionalities.
      --Information security, to upgrade security tools and processes, and
            to develop and train staff to monitor, respond to, and
            remediate ever-increasing risks and security threats and to
            permit continuous risk monitoring.
      --Business process automation and improvement, to improve the
            efficiency and effectiveness of the agency's processes, thereby
            enabling us to better serve the public.
      strengthening oversight of the securities markets and infrastructure
        To effectively assess constantly evolving market activity across a
    wide range of complex trading venues, the SEC's Division of Trading and
    Markets must:
      --Enhance its effort to address market structure and technology
            developments, including through MIDAS and other tools that
            facilitate the analysis of trade and order data that reflects,
            for example, high-frequency trading and trading on off-exchange
            venues where pre-trade prices are not typically available to
            the public;
      --Continue its work with self-regulatory organizations (SROs) to
            enhance critical market infrastructures that are essential for
            the operation of the securities markets; and
      --Expand its oversight of clearing agencies, large broker-dealers,
            exchanges, and other major securities market participants.
        Further, in fiscal year 2015 we expect a significant number of new
    registrants under the Dodd-Frank and JOBS Acts as registration
    requirements under those laws go into effect, including dealers and
    other participants in the security-based swap market and crowdfunding
    portals. Additional resources are needed to undertake these new market-
    related responsibilities, including staff focused on market
    supervision, analytics and research, and derivatives policy and trading
    practices. Accordingly, for these core and new responsibilities, in the
    fiscal year 2015 budget request the SEC proposes to add 25 positions in
    its Division of Trading and Markets.
    enhancing corporate disclosure reviews and supporting implementation of
                                  the jobs act
        For fiscal year 2015, the SEC requests 25 new positions for its
    Division of Corporation Finance. These resources are needed for
    Corporation Finance to continue its multi-year effort to enhance its
    disclosure review program for large or financially significant
    companies, meet the increased workload resulting from expected improved
    market conditions and additional emerging growth companies
    confidentially submitting registration statements for non-public
    review, provide increased interpretive guidance, and evaluate trends in
    the increasingly complex offerings of asset-backed securities and other
    structured financial products. During fiscal year 2015, Corporation
    Finance also will continue to implement the rulemakings required by the
    Dodd-Frank and JOBS Acts and move forward on a comprehensive initiative
    to update the disclosure requirements for reporting companies.
       focusing on economic and risk analysis to support rulemaking and
                   structured data and risk-based initiatives
        The SEC's Division of Economic and Risk Analysis (DERA) works to
    integrate analysis of economic, financial, and legal disciplines with
    data analytics and quantitative methodologies in support of the SEC's
    mission. DERA is our most rapidly growing division, having more than
    doubled since its creation in late 2009. In fiscal year 2014, we are
    planning to hire 45 additional staff for DERA, primarily for additional
    financial economists and other experts to perform and support economic
    analyses and research and further enhance our risk assessment
    activities. In fiscal year 2015, we seek to add 14 positions in DERA,
    primarily financial economists and other experts who significantly
    assist with:
      --The rulemaking process by providing the Commission and staff with
            economic analysis and technical advice;
      --Data analysis for risk-based selection of firms and issues for
            inquiries, investigations and examinations; and
      --Improving structured data initiatives in order to enable the
            Commission, investors, and other market participants to more
            systematically and efficiently analyze and draw conclusions
            from large quantities of financial information.
        DERA also seeks to hire additional technologists with mathematical
    and statistical programming experience to support the activities of the
    Division, including by assisting with the development of risk
    assessment models and risk metrics, data analytics, and economic
    analysis in the agency's rulemakings.
           enhancing monitoring of the investment management industry
        In the past 10 years, the number of portfolios of mutual funds,
    exchange-traded funds, and closed-end funds has increased by 17
    percent, and assets under management held by those funds has increased
    by 123 percent to $16 trillion. And significantly, during that period,
    complexity in the investment management industry has increased
    dramatically, reflecting growing sophistication in product design and
    portfolio strategies.
        For fiscal year 2015, the SEC requests 25 new positions for its
    Division of Investment Management. With additional resources,
    Investment Management plans to:
      --Improve the reporting of information about fund operations and
            portfolio holdings by mutual funds, closed-end funds, and
            exchange traded funds;
      --Continue to build capacity to manage and analyze data filed by
            hedge funds and other private funds;
      --Bolster the technical expertise of Investment Management's
            disclosure review program to, among other things, identify
            trends and monitor the risks related to the growth and
            increased product sophistication in the asset management
            industry; and
      --Enhance the ability of Investment Management's Risk and
            Examinations Office to manage, monitor, and analyze industry
            data, and provide ongoing financial analysis of the asset
            management industry.
                enhancing training and development of sec staff
        Nothing is more critical to the agency's success than the expertise
    of the SEC's staff. And providing in-depth and up-to-date training is
    essential for the staff to maintain and enhance its expertise over our
    constantly changing markets. Historically, the SEC's training budget
    has not matched that of its Federal financial regulatory agency peers.
    The agency is requesting to increase its staff training budget in
    fiscal year 2015 principally to support training and development for
    employees directly involved in examinations, investigations, fraud
    detection, litigation, and other core mission responsibilities of the
    SEC. This will consist of specialized training about new trends in the
    securities industry and changing market conditions, as well as
    analytics and forensics. The investment in training also will allow the
    SEC to provide continuing education courses that staff are required to
    take to maintain necessary legal and financial credentials.
                                   conclusion
        Thank you for your support of the agency's vital mission and the
    opportunity to present the President's fiscal year 2015 budget request.
    I would be happy to answer your questions.

        Senator Udall. Thank you very much.
        And Acting Chairman Wetjen, please proceed.

                      COMMODITY FUTURES TRADING COMMISSION

    STATEMENT OF HON. MARK P. WETJEN, ACTING CHAIRMAN
        Mr. Wetjen. Good afternoon, Chairman Udall, Ranking Member
    Johanns, and members of the subcommittee.
        Thank you for inviting me today to the hearing on the
    President's fiscal year 2015 funding request for the
    Commission.
        In my written remarks, I respond to the subcommittee's
    request to detail on how the Commission has used its resources
    in the previous 2 fiscal years. My goal this afternoon is to
    provide this subcommittee with context to the important role
    the Commission plays in the financial system and the economy as
    a whole, as well as the important role this committee plays in
    helping our agency achieve its mission.
        As you know, the Commission was directed by Congress to
    police the derivatives markets, which includes futures,
    options, and swaps. The CFTC also has continued its effort to
    implement the new regulatory framework for the swaps market
    required under Dodd-Frank.
        The operation and integrity of the derivatives markets are
    critical to the efficient functioning of the global financial
    system and the economies it supports. Without them, a farmer
    cannot lock in a price for his crop; a small business cannot
    lock in an interest rate that would otherwise fluctuate,
    perhaps raising its costs; a global manufacturer cannot lock in
    a currency value, making it harder to plan and grow its global
    business; and a lender cannot manage its assets and balance
    sheet to ensure it can continue lending. The derivatives
    markets better enable these enterprises to do what they do
    best--create jobs and grow the economy.
        When not overseen properly, failures of firms or other
    irregularities in the markets can severely and negatively
    impact the economy and cause dramatic losses for individual
    participants. This is why appropriately funding the Commission
    is so important.

                             CFTC RESPONSIBILITIES

        Measured in percentage terms, the Commission's funding
    level today is substantially larger than it was through much of
    the last decade. Previous funding increases were necessary and
    appreciated. Nonetheless, the growth of the Commission's
    responsibilities, including under Dodd-Frank, have
    significantly outpaced the growth in the agency's budget.
    Consequently, today the Commission is underfunded.
        The markets the Commission oversees and the agency's
    related responsibilities have grown by a variety of different
    measures. For instance, the notional value of derivatives
    centrally cleared by clearinghouses was estimated to be $124
    trillion in 2010 and is now approximately $223 trillion. That
    is nearly a 100 percent increase.
        Now more than ever, a clearinghouse's failure to follow the
    Commission's regulations--designed to ensure proper risk
    management--could have significant consequences to the economy.
    The amount of customer funds managed by clearinghouses and
    futures commission merchants was $177 billion in 2010 and is
    now over $218 billion, a nearly 40 percent increase.
        The Commission's rules are designed to ensure customer
    funds are safely kept by these firms, and a failure to provide
    appropriate oversight increases the chance of risky practices,
    placing customer funds at risk.
        By one measure, the total number of registrants and
    registered entities overseen directly by the Commission has
    increased by at least 40 percent in the last 4 years. This
    includes 102 swap dealers, two major swap participants, and
    more than three dozen registered entities, which include
    clearinghouses and trading venues.
        The CFTC also oversees more than 4,000 advisers and
    operators of managed funds, some of which have significant
    outward exposures across financial markets. Additionally, the
    Commission directly or indirectly supervises approximately
    another 64,000 registrants, yet the agency's current onboard
    staff is just 648 employees.
        The registered entities the Commission oversees are, by and
    large, well-run firms that perform important services for their
    customers. Nevertheless, those relying upon them, as well as
    the American public, deserve assurance that the risks the firms
    pose are being mitigated by an agency capable of meaningful
    oversight.

                      FISCAL YEAR 2015 REQUEST PRIORITIES

        This year's budget request is a significant step towards a
    longer-term funding level that is necessary to fully and
    responsibly fulfill the agency's mission. It recognizes the
    immediate need for an appropriation of $280 million and
    approximately 920 full-time equivalents, which is heavily
    weighted toward examinations, surveillance, and technology
    functions. The request balances the need for more technological
    tools to monitor the markets, detect fraud and abuse, and
    identify risk and compliance issues with the need for expert
    staff to analyze and make use of the data.

                               PREPARED STATEMENT

        Without additional funding, the consequences are plain: the
    Commission will be forced to perform fewer and less thorough
    examinations of registered entities, including those deemed
    systemically important or that steward customer funds; it will
    be less able to develop analytical systems to effectively
    perform surveillance of markets becoming increasingly
    automated; it will be deterred in its mandate to collect and
    analyze swaps data in an effort to enhance market transparency;
    and it will be less able to timely investigate and prosecute
    enforcement cases to address customer harm or threats to market
    integrity.
        Thank you for inviting me today, and I will be happy to
    answer any questions.
        [The statement follows:]
                   Prepared Statement of Hon. Mark P. Wetjen
        Good afternoon, Chairman Udall, Ranking Member Johanns and members
    of the subcommittee. Thank you for inviting me to today's hearing on
    the President's fiscal year 2015 funding request and budget
    justification for the Commodity Futures Trading Commission
    (``Commission'' or ``CFTC'').
        During the last 2 years, despite significant budgetary constraints,
    the CFTC has made important progress in fulfilling its mission. As you
    know, under the Commodity Exchange Act, the Commission has oversight
    responsibilities for the derivatives markets, which include futures,
    options, cash, and swaps. Each of these markets is significant.
    Collectively, they have taken on particular importance to the U.S.
    economy in recent decades and, as a consequence, have grown
    substantially in size, measuring hundreds of trillions of dollars in
    notional value. Their operation and integrity are critical to the
    effective functioning of the U.S. and global economies.
        At their core, the derivatives markets exist to help farmers,
    producers, small businesses, manufacturers and lenders focus on what
    they do best: providing goods and services and allocating capital to
    reduce risk and meet Main Street demand. Well-regulated derivatives
    markets facilitate job creation and the growth of the economy by
    providing a means for managing and assuming prices risks and broadly
    disseminating, and discovering, pricing information.
        Stated more simply, through the derivatives marketplace, a farmer
    can lock in a price for his crop; a small business can lock in an
    interest rate that would otherwise fluctuate, perhaps raising its
    costs; a global manufacturer can lock in a currency value, allowing it
    to better plan and grow its global business; and a lender can manage
    its assets and balance sheet to ensure it can continue lending, fueling
    the economy in the process.
        Essentially, these complex markets facilitate the assumption and
    distribution of risk throughout the financial system. Well-working
    derivatives markets are key to supporting a strong, growing economy by
    enabling the efficient transfer of risk, and therefore the efficient
    production of goods and services. Accordingly, it is critical that
    these markets are subject to appropriate governmental oversight.
        Mr. Chairman, Ranking Member, and subommittee members, I do not
    intend the testimony that follows to sound alarmist, or to overstate
    the case for additional resources, but I do want to be sure that
    Congress, and this subcommittee in particular, have a clear picture of
    the potential risks posed by the continued state of funding for the
    agency. When not overseen properly, the derivatives markets may
    experience irregularities or failures of firms intermediating in them--
    events that can severely and negatively impact the economy as a whole
    and cause dramatic losses for individual participants. The stakes,
    therefore, are high.
      the cftc's responsibilities have grown substantially in recent years
        The unfortunate reality is that, at current funding levels, the
    Commission is unable to adequately fulfill the mission given to it by
    Congress: to prevent disruptions to market integrity, protect customer
    assets, monitor and reduce the build-up of systemic risk, and ensure to
    the greatest extent possible that the derivatives markets are free of
    fraud and manipulation.
        Recent increases in the agency's funding have been essential and
    appreciated. They have not, however, kept pace with the growth of the
    Commission's responsibilities, including those given to it under Dodd-
    Frank.
        Various statistics have been used to measure this increase in
    responsibilities. One often-cited measure is the increase in the gross
    notional size of the marketplace now under the Commission's oversight.
    Other measures, though, are equally and perhaps more illustrative.
                          trading volume has increased
        For instance, the trading volume of CFTC-regulated futures and
    options contracts was 3,060 million contracts in 2010 and rose to 3,477
    million in 2013. Similarly, the volume of interest rate swap trading
    activity by the 15 largest dealers averaged 249,564 swap events each in
    2010, and by 2012, averaged 332,484 each (according to the
    International Swaps and Derivatives Association (``ISDA'') data). Those
    transactions, moreover, can be executed in significantly more trading
    venues, and types of trading venues, both here and abroad. In addition,
    the complexity of the markets--its products and sophistication of the
    market tools, such as automated-trading techniques--has increased
    greatly over the years.
                        clearing houses manage more risk
        The notional value of derivatives centrally cleared by clearing
    houses was $124 trillion in 2010 (according to ISDA data), and is now
    approximately $223 trillion (according to CFTC data from swap data
    repositories (``SDRs'')). That is nearly a 100 percent increase. The
    expanded use of clearinghouses is significant in this context because,
    among other things, it means that the Commission must ensure through
    appropriate oversight that these entities continue to properly manage
    the various types of risks that are incident to a market structure
    dependent on central clearing. A clearinghouse's failure to adhere to
    rigorous risk management practices established by the Commission's
    regulations, now more than ever, could have significant economic
    consequences. The Commission directly oversees 15 registered
    clearinghouses and two of them, Chicago Mercantile Exchange, Inc., and
    ICE Clear Credit LLC, have been designated as systemically important by
    the Financial Stability Oversight Council.
         clearing houses and intermediaries manage more customer funds
        The amount of customer funds held by clearinghouses and futures
    commission merchants (``FCMs'') was $177 billion in 2010 and is now
    over $218 billion, another substantial increase. These are customer
    funds in the form of cash and securities deposited at firms to be used
    for margin payments made by the end-users of the markets, like farmers,
    to support their trading activities. Again, Commission rules are
    designed to ensure customer funds are safely kept by these market
    intermediaries, and a failure to provide the proper level of oversight
    increases the risk of certain practices by firms, including operational
    risks or fraud. In fact, recent events in the FCM community led to the
    temporary or permanent loss of more than a billion dollars of customer
    funds.
       substantially larger number of firms now registered with the cftc
        The total number of registrants and registered entities overseen
    directly or indirectly by the Commission, depending on the measure, has
    increased by at least 40 percent in the last 4 years. This includes 102
    swap dealers and two major swap participants (``MSPs'').
        In addition, the CFTC oversees more than 4,000 advisers and
    operators of managed funds, some of which have significant outward
    exposures in and across multiple markets. It is conceivable that the
    failure of some of these funds could have spill-over effects on the
    financial system. In all cases, investors in these funds are entitled
    to know their money is being appropriately held and invested.
        Additionally, the Commission directly or indirectly supervises
    another approximately 64,000 registrants, mostly associated persons
    that solicit or accept customer orders or participate in certain
    managed funds, or that invest customer funds through discretionary
    accounts. Although it leverages the resources of the self-regulatory
    organizations (``SROs''), the Commission itself must oversee these
    registrants in certain areas and provide guidance and interpretations
    to the SROs. The Commission does so with a total staff of only 648
    employees currently onboard--about 1 percent of the number of
    registrants under its purview. Separately, the Commission must oversee
    more than three dozen registered entities, including clearinghouses and
    trading venues, each of which is subject to a complex set of regulatory
    requirements newly established or modified by the Dodd-Frank Act and
    designed to mitigate systemic risk.
        By almost any measure, in fact, the portfolio of entities that the
    Commission is charged with overseeing has expanded dramatically in size
    and risk over the last half decade. The intermediaries in the
    derivatives markets are by and large well-run firms that perform
    important services in the markets and for their customers.
    Nevertheless, collectively, these firms can potentially pose risks--in
    some cases significant risks--to the financial system and the broader
    economy. Accordingly, those relying upon these firms and the public
    deserve assurance that such firms are supervised by an agency capable
    of meaningful oversight.
        the cftc has made important progress but has been significantly
                                  constrained
        For much of fiscal year 2013, the CFTC operated under continuing
    resolutions, which extended the fiscal year 2012 appropriation of $205
    million. These appropriations, however, were subject to sequestration.
    Effectively, our operating budget for fiscal year 2013 was $195
    million. Thus, the fiscal year 2014 appropriation of $215 million was a
    modest budgetary increase for the Commission, lifting the agency's
    appropriations above the sequestration level of $195 million that has
    posed significant challenges for the agency's orderly operation. As
    directed by Congress, the agency has submitted a fiscal year 2014 Spend
    Plan outlining its allocation of current resources, which reflects an
    increased emphasis on examinations and technology-related staff.
        Even with these significant budget constraints, the dedicated staff
    of the Commission were able to complete the majority of new rulemakings
    required by the Dodd-Frank Act--about 50 rulemakings in all. This was
    in addition to the Commission's ongoing work overseeing the futures
    exchange and options markets. These regulatory efforts resulted in
    greater transparency, which is critical to reducing systemic risk and
    lowering costs to end-users, while improving efficiency and supporting
    competition.
        With regard to technology, we made progress in a variety of areas.
    We improved the quality of data reported to swap data repositories and
    have laid groundwork to receive, analyze and promulgate new datasets
    from SROs related to new authorities. We upgraded data analytics
    platforms to keep up with market growth. Financial risk surveillance
    tools were enhanced to support monitoring and stress testing related to
    new authorities. The Commission has prototyped a high-performance
    computing platform that dramatically reduces data analytics computation
    times and an on-line portal for regulatory business transactions to
    improve staff and industry productivity. The Commission has implemented
    enhanced position limit monitoring and is ready to implement pre-trade
    and heightened account ownership and control surveillance. Finally, the
    Commission has ensured that foundational server, storage, networking,
    and workstation technology are refreshed on a cost-effective cycle and
    that technology investments have cybersecurity and business continuity
    built-in.
        In its role as a law enforcement agency, the Commission's
    enforcement arm protects market participants and other members of the
    public from fraud, manipulation and other abusive practices in the
    futures, options, cash, and swaps markets, and prosecutes those who
    engage in such conduct. As of May 1, 2014, the Commission filed 31
    enforcement actions in fiscal year 2014 and also obtained orders
    imposing more than $2.2 billion in sanctions. By way of comparison, in
    fiscal year 2013, the Commission filed 82 enforcement actions, and
    obtained orders imposing more than $1.7 billion in sanctions.
        With the bulk of rulemaking behind us, the necessary focus must be
    examinations, market supervision and enforcement. Simply stated, this
    requires appropriate staffing and technological resources sufficiently
    robust to oversee what are highly advanced, complex global markets, and
    be able to take effective and timely enforcement action.
      the fiscal year 2015 request prioritizes examinations, technology,
                       market integrity, and enforcement
        The President's fiscal year 2015 budget request reflects these
    priorities and highlights both the importance of the Commission's
    mission and the potential effects of continuing to operate under
    difficult budgetary constraints.
        The request is a significant step towards the longer-term funding
    level that is necessary to fully and responsibly fulfill the agency's
    core mission: protecting the safety and integrity of the derivatives
    markets. It recognizes the immediate need for an appropriation of $280
    million and approximately 920 staff years full-time equivalents
    (``FTEs'') for the agency, an increase of $65 million and 253 FTEs over
    the fiscal year 2014 levels, heavily weighted towards examinations,
    surveillance, and technology functions.
        In this regard, the request balances the need for more
    technological tools to monitor the markets, detect fraud and
    manipulation, and identify risk and compliance issues, with the need
    for staff with the requisite expertise to analyze the data collected
    through technology and determine how to use the results of that
    analysis to fulfill the Commission's mission as the regulator of the
    derivatives markets. Both are essential to carrying out the agency's
    mandate. Technology, after all, is an important means for the agency to
    effectively carry out critical oversight work; it is not an end in
    itself.
        In light of technological developments in the markets today, the
    agency has committed to an increased focus on technology. The fiscal
    year 2015 budget request includes a $15 million increase in technology
    funding above the fiscal year 2014 appropriation, or about a 42 percent
    increase, solely for IT investments.
        In my remaining testimony, I will review three of the primary
    mission priorities for fiscal year 2015.
                                  examinations
        The President's request would provide $38 million and 158 FTEs for
    examinations, which also covers the compliance activities of the
    Commission. As compared to fiscal year 2014, this request is an
    increase of $15 million and 63 FTEs.
        I noted earlier that the Commission has seen substantial growth in,
    among other things, trading volumes, customer funds held by
    intermediaries in the derivatives markets, and margin and risk held by
    clearinghouses. Examinations and regulatory compliance oversight are
    perhaps the best deterrents to fraud and improper or insufficient risk
    management and, as such, remain essential to compliance with the
    Commission's customer protection and risk management rules.
        The Commission has a direct examinations program for clearinghouses
    and designated contract markets, and it will soon directly examine swap
    execution facilities and SDRs. However, the agency does not at this
    time have the resources to place full-time staff on site at these
    registered entities, even systemically-important clearing
    organizations, unlike a number of other financial regulators that have
    on-the-ground staff at the significant firms they oversee. The
    Divisions of Market Oversight and Clearing and Risk collectively have a
    total of 47 examinations positions in fiscal year 2014 to monitor,
    review, and report on some of the most complex financial market
    operations in the world.
        The Commission today performs only high-level, limited-scope
    reviews of the nearly 100 FCMs holding over $218 billion in customer
    funds and 102 swap dealers. In fact, the Commission currently has a
    staff of only 38 to examine these firms, and to review and analyze,
    among other things, over 1,200 financial filings and over 2,400
    regulatory notices each year. This staff level is less than the number
    the Commission had in 2010, yet the number of firms requiring its
    attention has almost doubled, and there has been a noted increase in
    the complexity and risk profile of the firms. Additionally, although it
    has begun legal compliance oversight of swap dealers and MSPs, the
    Commission has been able to allocate only 13 FTEs for this purpose.
    This number is insufficient to perform the necessary level of oversight
    of the newly registered swap dealer entities.
        In fiscal year 2014, the Commission overall will have a mere 95
    staff positions dedicated to examinations of the thousands of different
    registrants that should be subject to thorough oversight and
    examinations. The reality is that the agency has fallen far short of
    performance goals for its examinations activities, and it will continue
    to do so in the absence of additional funding from Congress. For
    example, as detailed in the Annual Performance Review for fiscal year
    2013, the Commission failed to meet performance targets for system
    safeguard examinations and for conducting direct examinations of FCM
    and non-FCM intermediaries. The President's budget request
    appropriately calls on Congress to bolster the examinations function at
    the agency, and it would protect the public, and money deposited by
    customers, by enhancing the examinations program staff by more than 66
    percent in fiscal year 2015.
        Moreover, if Congress fully funds the President's request, the
    Commission can move toward annual reviews of all significant
    clearinghouses and trading platforms and perform more effective
    monitoring of market participants and intermediaries. Partially funding
    the request will mean accepting potentially avoidable risk in the
    derivatives markets as the Commission is forced to forego more in-depth
    financial, operational and risk reviews of the firms within its
    jurisdiction. Thus, the Commission would be reactive, rather than
    proactive in regard to firm or industry risk issues.
                        technology and market integrity
        The fiscal year 2015 request also supports a substantial increase
    in technology investments relative to fiscal year 2014, roughly a 42
    percent increase. The $50 million investment in technology will provide
    millions of dollars for new and sophisticated analytical systems that
    will, in part, assist the Commission in its efforts to ensure market
    integrity. As global markets have moved almost entirely to electronic
    systems, the Commission must invest in technology required to collect
    and analyze market data, and to handle the unprecedented volumes of
    transaction-level data provided by financial markets.
        The President's fiscal year 2015 budget request supports, in
    addition, 103 data-analytics and surveillance-related positions in the
    Division of Market Oversight alone, an increase of more than 98 percent
    over the fiscal year 2014 staffing levels. Market surveillance is a
    core Commission mission, and it is an area that depends heavily on
    technology. As trading across the world has moved almost entirely to
    electronic systems, the Commission must make the technology investments
    required to collect and make sense of market data and handle the
    unprecedented volumes of transaction-level data provided by financial
    markets.
        Effective market surveillance, though, equally depends on the
    Commission's ability to hire and retain experienced market
    professionals who can analyze extremely complex and voluminous data
    from multiple trading markets and develop sophisticated analytics and
    models to respond to and identify trading activity that warrants
    investigation. The fiscal year 2015 investment in high-performance
    hardware and software therefore must be paired with investments in
    personnel that can employ technology investments effectively.
        Accordingly, to make use of existing and new IT investments, the
    fiscal year 2015 request would provide funding for 193 FTEs, an
    increase of 74 FTEs over fiscal year 2014. These new staff positions
    are necessary for the Commission to receive, analyze, and effectively
    surveil the markets it oversees. These new positions, together with the
    technology investments included in the fiscal year 2015 request, will
    enable the Commission to make market surveillance a core component of
    our mission.
        The CFTC has invested appropriated funds in fiscal year 2013 and
    fiscal year 2014 in technology to make important progress. We have the
    groundwork in place to receive and effectively analyze swaps
    transaction data submitted to repositories and SROs related to new
    authorities. The fiscal year 2015 request would provide funding to
    continue and increase the pace of progress in the areas noted above and
    also support the additional examination, enforcement, and economic and
    legal staff. Effective use of technology is essential to our mission to
    ensure market integrity, promote transparency, and effectively surveil
    market participants.
                                  enforcement
        The President's fiscal year 2015 request would provide $62 million
    and 200 FTEs for enforcement, an increase of $16 million and 51 FTEs
    over fiscal year 2014. The simple fact is that, without a robust,
    effective enforcement program, the Commission cannot fulfill its
    mandate to ensure a fair playing field. From fiscal year 2011 to date,
    the Commission has filed 314 enforcement actions and also obtained
    orders imposing more than $5.4 billion in sanctions.
        The cases the agency pursues range from sophisticated manipulative
    and disruptive trading schemes in markets the Commission regulates,
    including financial instruments, oil, gas, precious metals and
    agricultural products, to quick strike actions against Ponzi schemes
    that victimize investors. The agency also is engaged in complex
    litigations related to issues of financial market integrity and
    customer protection. By way of example, in fiscal year 2013, the CFTC
    filed and settled charges against three financial institutions for
    engaging in manipulation, attempted manipulation and false reporting of
    London Interbank Offered Rate (LIBOR) and other benchmark interest
    rates.
        Such investigations continue to be a significant and important part
    of the Division of Enforcement's docket. Preventing manipulation is
    critical to the Commission's mission to help protect taxpayers and the
    markets, but manipulation investigations, in particular, strain
    resources and time. And once a case is filed, the priority must shift
    to the litigation. In addition to requiring significant time and
    resources at the Commission, litigation requires additional resources,
    such as the retention of costly expert witnesses.
        In 2002, when the Commission was responsible for the futures and
    options markets alone, the Division of Enforcement had approximately
    154 people. Today, the agency's responsibilities have substantially
    increased. The CFTC now also has anti-fraud and anti-manipulation
    authority over the vast swaps market and the host of new market
    participants the agency now oversees. In addition, the agency is now
    responsible for pursuing cases under our enhanced Dodd-Frank authority
    that prohibits the reckless use of manipulative or deceptive schemes.
    Notwithstanding these additional responsibilities, however, total
    enforcement staff has shrunk--there are currently only 147 members of
    the enforcement staff. The President's budget request would bring this
    number to 200. More cops on the beat means the public is better assured
    that the rules of the road are being followed.
        In addition to the need for additional enforcement staff and
    resources, the CFTC also believes technology investments will make our
    enforcement staff more efficient. For instance, the fiscal year 2015
    request would support developing and enhancing forensic analysis and
    case management capabilities to assist in the development of analytical
    evidence for enforcement cases. In fiscal year 2013 and fiscal year
    2014, appropriated funds invested in information technology have
    enabled the Commission to continue enhancing enforcement and litigation
    automation services, including a major upgrade to the document and
    digital evidence review platform that will enable staff to keep pace
    with the exploding volume of data required to successfully conduct
    enforcement actions.
        A full increase for enforcement means that the agency can pursue
    more investigations and better protect the public and the markets. A
    less than full increase means that the CFTC will continue to face
    difficult choices about how to use its limited enforcement resources.
    At this point, it is not clear that the agency could maintain the
    current volume and types of cases, as well as ensure timely responses
    to market events.
    other fiscal year 2015 priorities: international policy coordination &
                          economic and legal analysis
        The global nature of the derivatives markets makes it imperative
    that the United States consult and coordinate with international
    authorities. For example, the Commission recently announced significant
    progress towards harmonizing a regulatory framework for CFTC-regulated
    Swap Execution Facilitys (SEFs) and EU-regulated multilateral trading
    facilities (``MTFs''). The Commission is working internationally to
    promote robust and consistent standards, to avoid or minimize
    potentially conflicting or duplicative requirements, and to engage in
    cooperative supervision, wherever possible.
        Over the past 2 years, the CFTC, SEC, European Commission, European
    Securities and Markets Authority, and other market regulators from
    around the globe have been meeting regularly to discuss and resolve
    issues with the goal of harmonizing financial reform. The Commission
    also participates in numerous international working groups regarding
    derivatives. The Commission's international efforts directly support
    global consistency in the oversight of the derivatives markets. In
    addition, the Commission anticipates a significant need for ongoing
    international policy coordination related to both market participants
    and infrastructure in the swaps markets. The Commission also
    anticipates a need for ongoing international work and coordination in
    the development of data and reporting standards under Dodd-Frank rules.
    Dodd-Frank further provided a framework for foreign trading platforms
    to seek registration as foreign boards of trade, and 24 applications
    have been submitted so far.
        Full funding for international policy means the Commission will be
    able to maintain our coordination efforts with financial regulators and
    market participants from around the globe. If available funding is
    decreased, we will be less able to engage in cooperative work with our
    international counterparts, respond to requests, and provide staffing
    for various standard-setting projects. The President's fiscal year 2015
    request would enable the Commission to sustain its efforts, providing
    $4.2 million and 15 FTEs that would be dedicated to international
    policy.
        In addition, for fiscal year 2015, the President's budget would
    support $24 million and 92 FTEs to invest in robust economic analysis
    teams and Commission-wide legal analysis. Compared to the fiscal year
    2014 Spending Plan, this request is an increase of $4 million and 18
    FTEs. Both of these teams support all of the Commission's divisions.
        The CFTC's economists analyze innovations in trading technology,
    developments in trading instruments and market structure, and
    interactions among various market participants in the futures and swaps
    markets. Economics staff with particular expertise and experience
    provides leverage to dedicated staff in other divisions to anticipate
    and address significant regulatory, surveillance, clearing, and
    enforcement challenges. Economic analysis plays an integral role in the
    development, implementation, and review of financial regulations to
    ensure that the regulations are economically sound and subjected to a
    careful consideration of potential costs and benefits. Economic
    analysis also is critical to the public transparency initiatives of the
    Commission, such as the Weekly Swaps Report. Moving into fiscal year
    2015, the CFTC's economists will be working to integrate large
    quantities of swaps market data with data from designated contract
    markets and swap execution facilities, and large swaps and futures
    position data to provide a more comprehensive view of the derivatives
    markets.
        The legal analysis team provides interpretations of Commission
    statutory and regulatory authority and, where appropriate, provides
    exemptive, interpretive, and no-action letters to CFTC registrants and
    market participants. In fiscal year 2013, the Commission experienced a
    significant increase in the number and complexity of requests from
    market participants for written interpretations and no-action letters,
    and this trend is expected to increase into fiscal year 2015.
        A full increase for the economics and legal analysis mission means
    the Commission will be able to support each of the CFTC's divisions
    with economic and legal analysis. Funding short of this full increase
    or flat funding means an increasingly strained ability to integrate and
    analyze vast amounts of data the Commission is receiving on the
    derivatives markets, thus impacting our ability to study and detect
    problems that could be detrimental to the economy. Flat funding also
    means the Commission's legal analysis team will continue to be
    constrained in supporting front-line examinations, adding to the delays
    in responding to market participants and processing applications, and
    hampering the team's ability to support enforcement efforts.
                                   conclusion
        Effective oversight of the futures and swaps markets requires
    additional resources for the Commission. This means investing in both
    personnel and information technology. We need staff to analyze the vast
    amounts of data we are receiving on the swaps and futures markets. We
    need staff to regularly examine firms, clearinghouses, trade
    repositories, and trading platforms. We need staff to bring enforcement
    actions against perpetrators of fraud and manipulation. The agency's
    ability to appropriately oversee the marketplace hinges on securing
    additional resources.
        Thank you again for inviting me today, and I look forward to your
    questions.

        Senator Udall. Thank you both for your testimony.
        And we will now proceed on 7-minute rounds of questions.

                            CFTC MISSION ACTIVITIES

        Chairman Wetjen, the CFTC's budget justification submitted
    to the committee suggests that the fiscal year 2015 request,
    and I quote from that budget justification, ``A significant
    step towards the longer-term funding level that is necessary to
    fully and responsibly fulfill the agency's core mission.''
        What do you consider to be the optimum funding level
    necessary for the CFTC to fully and responsibly perform its
    work? What functions would the CFTC not be able to adequately
    address if the funding level enacted for 2015 is less than the
    full $280 million requested?
        Mr. Wetjen. Thank you, Chairman, for the question.
        This request is especially focused on three key areas for
    the agency and with regard to the agency's mission. The key
    mission activities are enforcement, surveillance, and
    examinations. And as I just said in my opening statement, we
    are not going to be able to do as much as we should, I believe,
    in each of those three key areas.
        So we are not going to be able to do as many examinations
    of some of these critical entities and intermediaries in our
    marketplace. I mentioned clearinghouses. There is a tremendous
    and enormous amount of risk that is now being housed at
    clearinghouses. That has increased quite substantially in
    recent years. We have 15 clearinghouses under our jurisdiction,
    and we are able to annually examine 2 of them which have been
    deemed systemically important.
        We have, with current staffing, been able to get around to
    some of the other clearinghouses as well, but we are not in a
    position with the current staffing to examine all 15 of those
    on a regular basis. So the staff has been forced to make
    judgments about which clearinghouse might be a little more
    risky than others and focus attention in that way. And I think
    ideally--again, just focusing on the category of
    clearinghouses--you would have examinations of all of them on
    an annual basis.
        Senator Udall. How about the optimum level? Do you have a
    thought on that?
        Mr. Wetjen. Well, the $280 million request I think gets us
    very, very close to optimal, based on my judgment. The request
    this year is slightly below what was asked for last year.
        Primarily that was because we wanted to be respectful of
    the direction the Congress gave us in passing the budget
    resolution, which called for a very modest increase in overall
    discretionary spending. So in light of that, it seemed
    appropriate to adjust the request this year accordingly.
        Senator Udall. Thank you.
        Chair White, the SEC is seeking $1.7 billion for fiscal
    year 2015. This would be a 26 percent increase in resources
    compared to the level enacted for the current year.

                           KEY PRIORITIES FOR THE SEC

        What are the top priorities to which these additional
    resources will be devoted? What consequences can be expected if
    the funding level approved for the SEC is less than the amount
    requested by the President?
        Ms. White. The priorities are to fund our exam program, our
    enforcement program, our--really, our core areas, including our
    Division of Economic and Risk Analysis.

                      IMPORTANCE OF SUFFICIENT SEC FUNDING

        I don't think we can overstate the importance of sufficient
    funding, what we request in this budget request, for
    technology. We are at a critical juncture at the SEC with a
    number of our systems enhancements, a number of our risk-based
    tools that allow us to be smarter and more efficient in
    detecting problems in the marketplace, including emerging
    frauds.
        Just as an illustration, I alluded to this in my oral
    testimony as well--there are 11,000 registered investment
    advisers now under the SEC's jurisdiction. And under current
    levels, we were only able to cover 9 percent of those last
    year. And that is using very smart, targeted, risk-based tools
    to go to the areas where we think the highest risk is.
        But there are 40 percent of those investment advisers who
    have not been examined. So that is a very, very high priority
    for us, as it was in the 2014 request, but we did not actually
    receive funding for that.
        Strong enforcement of our Federal securities laws is always
    at the top of our highest priority list, along with others. And
    this budget request does seek 126 additional enforcement staff,
    including market experts, which I think is enormously important
    to do our job better and more efficiently.
        So if we were not to receive funding at that level, clearly
    all of our functions really across the board would suffer. I
    have tried to illustrate the areas of greatest need, and
    certainly our request is intended to be quite targeted and
    surgical to those core needs.
        We obviously have the new responsibilities that you alluded
    to in your opening remarks to implement the reforms in the
    over-the-counter securities-based swap markets. We have new
    advisers we are responsible for. All of that needs to be
    implemented as well as, obviously, the rules put in place.

                              WALL STREET REFORMS

        Senator Udall. Thank you.
        In a couple of months, we will mark the fourth anniversary
    of the enactment of comprehensive Wall Street reforms aimed at
    strengthening the oversight in the wake of the financial crisis
    of 2008. And recent analysis by outside monitoring entities
    reflect that of the 398 total rulemakings required under Dodd-
    Frank, 95--24 percent--are under the jurisdiction of the SEC,
    and 60--15 percent--are under the jurisdiction of the CFTC.
        A report by Davis Polk analysts issued last month indicates
    that of the 95 rules under the SEC, 42--that is 44 percent--had
    been finalized, and 10--11 percent--have not yet been proposed.
    Of the 60 CFTC rules, 50--83 percent--have been finalized, and
    3--5 percent--have not yet been proposed.
        Both of you, I am interested in hearing how the independent
    progress reports square with your agency's own internal
    tracking of your implementation timetable. I think the best
    thing for me to do is come back to that question, let Senator
    Johanns question, because I have a couple of additional
    questions on that. And if you can keep that in mind, I may end
    up repeating some of that.
        Senator Johanns, I am going to go to you for questioning at
    this point.

                            BUDGET INCREASE REQUEST

        Senator Johanns. Thank you, Mr. Chairman.
        Chairman Wetjen, let me get started with you. If you look
    at the Budget Control Act and then the Ryan-Murray agreement
    that was reached last fall after, as you know, some very, very
    difficult negotiations, total discretionary spending is due to
    increase this year by about $1.4 billion--or in the next budget
    year, I should say. That is less than 1 percent increase over
    last year.
        So I think the bipartisan message sent to everybody is that
    this is going to be very tight, very challenging, very
    difficult. However, in the budget request we get from CFTC, you
    are asking for a 30 percent increase.
        Now, I think by anybody's definition that is significant.
    But it is especially high when you recognize what everybody
    else is faced with across the Federal Government.
        So I would ask you a couple questions. One is how do you
    justify it, recognizing that colleagues across the Federal
    Government with very important missions like yours are also
    going to be held to this agreement?
        And then, second, what if it doesn't happen? Do you have
    contingency plans as to how you will deal with that and how you
    will get your budget in line with what the Ryan-Murray
    agreement calls for?
        Mr. Wetjen. Thank you, Senator, for the question.
        The request was based on a number of different factors. But
    first and foremost, what are we responsible for doing under the
    law? And again, I will go back to the three key areas of our
    agency's mission--enforcement, surveillance, and examinations.
        Those are the key mission activities. But meanwhile, the
    number of entities we oversee has increased by a variety of
    different measures that I just recently went through in
    percentage terms that are even higher than the percentage
    increase we sought with our budget request this year.
        And so, I think our first responsibility--or my first
    responsibility in my capacity at the moment is trying to make
    my best judgment and best case for the kind of funding we need
    to make sure we are complying with the law. And so, that formed
    the basis of this.
        And as I said before, we recognize the passage of the
    budget agreement last year, and so we tried to be more modest
    this year in the request. But we have to make sure that we are
    executing on these key mission activities. Otherwise, I worry
    that we are not fulfilling our responsibilities to the American
    public.
        There is quite a bit at stake. As I tried to lay out in my
    testimony, there are enormous amounts of risk being managed by
    the firms that we oversee. That is why we have fulsome rule
    sets that they are required to comply with. It is primarily for
    that purpose, to make sure they are managing risk in an
    appropriate way.
        And unfortunately, we have seen over the past number of
    years the sorts of outcomes that can happen when they fail to
    do that or when they fail to follow our rules. So that is the
    basis for the request.
        Your second--remind me again, Senator, the second part of
    your question.
        Senator Johanns. The second part of the question is what if
    you don't get there? How are you going to----
        Mr. Wetjen. Right.
        Senator Johanns [continuing]. Describe for us how you are
    going to deal with that if your argument isn't adopted and your
    request isn't granted?
        Mr. Wetjen. Well, I think we will have to continue doing--
    we would be forced to continue doing what we have been doing.
    And that is using our best judgment about which entities to
    examine, which ones we are going to have to take a pass on in a
    particular year, make judgments about which matters to pursue
    by way of investigations once some incident comes to light,
    whether by referral from another division within the agency or
    through some other way outside of the agency. Judgments will be
    have to made there--be made there.
        And as far as those cases that are already under
    development, enforcement cases under development, again,
    judgments will have to be made about how to allocate resources.
    Do we devote more to some cases based on, you know, certain
    risks of success or risk of not succeeding, and so it might
    involve an assessment of litigation risk in that way.
        So these are the sort of judgments you prefer not to have
    to make, given the responsibilities we have been given under
    the law.

                              TECHNOLOGY SPENDING

        Senator Johanns. In this general vein, let me ask a
    question about the technology piece of your budget.
        CFTC technology spending has grown less than 7 percent
    since fiscal year 2011. The overall budget is up by 12 percent
    during that same period of time. My concern is that the CFTC is
    operating with Selectric typewriters while the industry is
    operating with the latest technology, and I just worry that you
    are getting behind.
        It seems to me that what we are trying to achieve with your
    agency is a faster, more technological advanced agency than we
    have today that can keep up with what is going on in the
    marketplace. Not necessarily a bigger agency. Bigger doesn't
    necessarily solve the problems that you are dealing with out
    there.
        So tell us why the Commission has, it seems to me,
    downplayed technology investment while spending in other areas
    of the budget. It would seem to me technology would be critical
    for you to keep up.
        Mr. Wetjen. Sir, you are absolutely right. It is critical.
    And by no means should this year's request be viewed as
    downplaying the importance of technology. It is critically
    important.
        But what we have had to do, again, is given the fact that
    there are finite resources and trying to be responsible in our
    request and in light of other responsibilities of the agency,
    we just had to make a judgment about how much is appropriate to
    allocate to technology spending right now and how much is
    appropriate to spend on these other important mission
    activities.
        And as important as technology is, we still need human
    capital to use it and deploy it. And as important as technology
    is, we need to be doing our level best on these key functions
    such as examinations.
        And I hate to beat this drum continually, but these
    entities that we oversee are critically important, and the
    amount of risk that they house is very, very significant. And
    some of these intermediaries also manage billions and billions
    of dollars of customer money, and we have seen instances of
    FCMs, they are called, fail in the last number of years.
        And in the case of MF Global, we had more than $1.5 billion
    tied up in a bankruptcy proceeding. Now there is a variety of
    different reasons why MF Global failed, but the point is
    oversight is important, and the rules we have are designed to
    prevent that sort of incident from taking place.
        So $50 million is a slight increase, as you said, above
    where we have been spending currently. I would like to spend
    much more than that. But in the context of an overall budget
    request that has limitations, that was my best judgment about
    where we should be in the short term.
        Senator Johanns. Mr. Chairman, I will yield back to you.
    And I anticipate another round?
        Senator Udall. Yes, yes. Of course. Thank you, Senator
    Johanns.

                         STATUS OF MANDATORY RULEMAKING

        I outlined a little bit on that Davis Polk analysis and the
    numbers there. And going back to that question, how the
    independent progress report squares with your agency's own
    internal tracking of your implementation timetable. Yes? For
    both of you.
        Ms. White. Essentially, yes, whether the particulars match
    up precisely, essentially, they do. I mean, the SEC, as you
    mentioned in your opening remarks, was given nearly 100
    rulemakings by Dodd-Frank, and then some additional ones under
    mandated rulemakings and then additional ones under the JOBS
    Act.
        And I did from the beginning of my tenure and continue to
    prioritize the completion of those rulemakings under both Dodd-
    Frank and the JOBS Act. And I am pleased with the progress. We
    have proposed or adopted about over 80 percent, but we clearly
    have a ways to go.
        Among those that we have adopted and proposed since I have
    been at the agency for about a year now, I think there are 20-
    quite significant ones. Among those adopted, the Volcker rule
    is obviously one of them. The bad actor rule, which is very
    important to investors, specifies that certain offerings should
    not be exempt if they are associated with bad actors.
        We have proposed all of the title VII rulemakings under our
    jurisdiction and adopted some. It is a very high priority for
    2014 for us to complete those. We have adopted the municipal
    advisors rule. A number of others have been adopted. And again,
    we have completed nearly all the mandated studies that were
    assigned to us under Dodd-Frank.
        It is very important that these rulemakings are done,
    obviously, promptly--and that is certainly one of my
    commitments and one of the commitments I made at my
    confirmation--but also to be done well and to be done after
    careful and appropriate economic analysis. And so, you know, we
    are all very closely focused as one of our highest priorities
    on completing those mandated rulemakings under the Dodd-Frank
    Act and under the JOBS Act.

                               STAFFING EXPERTISE

        Senator Udall. Do you feel you have the necessary expertise
    on staff to adequately issue and enforce the rules required by
    Dodd-Frank?
        Ms. White. I think we have the necessary expertise on
    staff. Obviously, some of our rulemakings are also done jointly
    or in consultation with our fellow regulators, both
    domestically and internationally.
        But you make an excellent point, which is what we are
    talking about is not just adopting those robust, strong rules,
    but also then implementing them following their adoption. And
    that is one of my significant resource concerns, that we
    actually do have the resources to adequately and robustly
    implement and enforce those rules once they are adopted.
        Senator Udall. And do you have staffing plans adapted to
    bring on more expertise in areas that contributed to the
    financial crisis?
        Ms. White. Again, a very high priority of mine since I
    began was to bring on more experts, including economists. So
    you will see that prioritized in our budget again this year as
    it was last year with expertise certainly in areas that were
    involved in the financial crisis and also in modern-day issues
    with respect to our equity market structure.
        And we have done that in the enforcement space as well. So
    there is full understanding of the rules we are enforcing with
    the requisite expertise. And that is one of the very important
    things that we are seeking the funding for in this budget
    request.

                                   RULEMAKING

        Senator Udall. Chair Wetjen, how are you coming on the
    rules that you are promulgating, the ones that are in the
    pipeline? Does it square pretty much with the independent
    analysts, or do you take issue with their numbers?
        Mr. Wetjen. No, I believe it does. The primary rulemakings
    that come to mind when I think about those that we were
    required to do under Dodd-Frank but have not yet finalized, it
    is the rulemaking for margin requirements for uncleared swaps,
    capital requirements for those firms entering into uncleared
    swaps, and then the third one would be a final rule on position
    limits, another rulemaking required under Dodd-Frank.
        So I believe that Davis Polk study had the same count--they
    might have mentioned one more, I believe you said. But those
    are the three that I think of in terms of unfinished business.
        On position limits, we proposed a rule there last fall. So
    staff is working on the common file, creating a response to
    that proposal.
        On the other two, staff is working on a re-proposal. Those
    were rulemakings that were actually proposed a couple of years
    ago. But in light of significant international work done
    through the auspices of a number of different key international
    organizations, the decision was made to actually re-propose the
    rule, those two rules. And so, we hope to have something in
    circulation for the Commission very, very soon on those two.
        Senator Udall. Now how would you characterize the efforts
    to harmonize rules among multiple regulators? Why don't you
    take a stab at that.
        Mr. Wetjen. Thank you sir.
        It is difficult. It is--everyone has their own
    responsibilities and obligations to their own country and to
    their own legislative bodies. But there has been considerable
    effort through some of these same international organizations I
    mentioned. The International Organization of Securities
    Commissions (IOSCO) is a key one that comes to mind.
        There is another group that was formed specifically related
    to derivatives reforms, the OTC Derivatives Regulators Group
    (ODRG) it is called. And so, those groups meet on a regular
    basis all in an effort to try and get countries to adopt
    reforms that are sufficiently comparable and comprehensive in
    nature.
        Senator Udall. Chair White.

                           COORDINATION IN RULEMAKING

        Ms. White. Yes. I think, again, a high priority we have
    both domestically and internationally is to try to--even on
    rulemakings that are not required to be joint, ensure that
    there is very close consultation and coordination to try to
    make them as robust, but as consistent or at least compatible
    as possible really around the globe.
        When you talk about the title VII rulemakings and the over-
    the-counter derivatives market, that is obviously a uniquely
    global market. And so, we need to get that right. And I think
    we are all working very hard to try to do that.
        I think the fact that the agencies charged with
    implementing the Volcker rule actually worked together and came
    out with a joint rule, including the CFTC and the SEC, was
    enormously important, both to the strength of the rule and the
    consistency and certainty for the marketplace.
        Senator Udall. Thank you.
        Senator Moran, would you like to----
        Senator Moran. Mr. Chairman, thank you very much.
        Senator Johanns was--this may be based upon the
    relationship I have had with other CFTC chairmen--telling me
    that the presumption exists that if you are a Creighton grad,
    you can do no wrong.
        Chairman Wetjen, thank you very much for joining us today.
    I appreciated the conversation that we had in my office
    yesterday. You have indicated to me, and I have seen evidence
    of it, the desire to work hard to develop good, solid
    relationships with Congress, and I am very grateful for that. I
    look forward to accomplishing that as well with you. Let me
    just ask a question that in part we discussed yesterday.
        Implications of rulemakings mandated by Dodd-Frank. What
    are you able to do to mitigate what is always described as
    unintended consequences? You and I have been in touch in regard
    to a real-time reporting rule, which may unintentionally
    identify swap participants in transactions, and you indicated
    this is something you are looking into.
        Would you bring me up to date? And maybe can put on the
    record the conversation--the nature of the conversation we had
    yesterday and where you are headed.

                                REPORTING TRADES

        Mr. Wetjen. Thank you, sir.
        We did pass a rulemaking that puts in place a real-time
    reporting obligation of swaps activity. And depending on the
    entity or the counterparty in the trade, there is a timeline by
    which the party has to report their trade to the public.
        And the matter you and I discussed, as you know, relates to
    certain instruments that are not terribly liquid, meaning there
    is not a lot of trading activity in some of these products. And
    because of that fact, it becomes easier to identify the
    identity of one of the counterparties.
        And so this is a problem and a challenge for the agency
    because the statute does say one of the considerations that has
    to be made is that in this reporting obligation, the identity
    of the party not be revealed. On the other hand, there is
    tremendous public benefit in having information about a trade
    available as quickly as possible. That is very useful in terms
    of price discovery, which is one of the key functions of our
    marketplace.
        So that is where the tension is. And so, I have directed
    the staff at the CFTC to examine this problem, to look into it,
    and to see whether or not we can confirm that this is, in fact,
    a problem.
        The other analysis here is, again, I think we need to
    review what the statute says and look carefully at that and
    determine what was meant when we were cautioned not to have a
    reporting obligation that could reveal someone's identity. It
    is not like anyone said, ``Hey, it is so and so.'' But just
    that, again, so few people are trading in a particular
    instrument that the marketplace tends to figure out relatively
    easily who those parties are.
        So staff is looking at this. I actually had a conversation
    after you and I spoke yesterday, a follow-up conversation with
    the staff. They are doing a new type of analysis that I wasn't
    aware of when you and I spoke. So they are looking at another
    way to see if they can confirm some of what has been reported
    by the parties in these particularly illiquid swaps. So we will
    keep looking at it and keep you up to date.

               FINANCIAL STABILITY OVERSIGHT COUNCIL DESIGNATIONS

        Senator Moran. Thank you very much.
        Let me turn to the SEC. Chair White, thank you very much
    for your presence today. I am pleased to see you here, as I
    sometimes do in the Banking Committee as well.
        Two asset managers were recently graduated to Stage 2 of
    the Financial Stability Oversight Council (FSOC's) review
    process for systemically important financial institutions. And
    I am concerned that asset managers who simply administer
    customer accounts may be proceeding down a path of additional
    regulation that, in my view, may be inappropriate for that
    industry.
        Can you give me a better sense of how this designation
    process for asset managers is progressing at the FSOC, and
    given the understanding that the assets in question are not
    owned by the companies in question? And then I have a couple of
    follow-ups, I think, based upon what you say.
        Ms. White. I think although there have been media reports
    to the effect of your question, I don't think there has been a
    public announcement of the precise status, if any, with respect
    to specific asset managers, which is the protocol of the FSOC
    with respect to any company that might be considered.
        Senator Moran. That is encouraging. Because what I would
    ask you is--because I understand there is a roundtable
    discussion to occur in the next couple of weeks. And so, part
    of my concern is why are we making designations now when there
    is more work yet to be done?
        Ms. White. Well, again, I think that FSOC officials--the
    Secretary of Treasury, obviously, the chair of the FSOC--are
    engaged in a process of learning about and gathering data on
    the asset manager industry. Again, I can't go beyond what I can
    say publicly about the process otherwise.
        I think it is a good development that there is the asset
    manager conference on Monday, and it is a public forum, so that
    the representatives of the FSOC, staff of the member agencies
    will hear from the industry and other interested parties and
    knowledgeable parties.
        I do think it is important--and again, the FSOC is given
    the responsibility to decide whether there are systemically
    important institutions that aren't banks, are insurance
    companies, et cetera. And if so, if they pose systemic risk to
    the financial system, one of the powers Congress gave to FSOC
    was to designate.
        Now that doesn't say what that process should be, what the
    data should be before one does that. I think those are very
    important questions. And I think it is also very important--and
    actually, the OFR study, which came out in September about the
    asset management industry, not specific parties, pointed out
    the very fact that you mentioned, which is the asset manager
    business is an agency business.
        And so, when you are considering what, if any, systemic
    risk it may or may not pose, you are not talking about a
    balance sheet of positions. You are talking about an agency
    model. And I think it is very important that that be understood
    by all who are considering this and that the right expertise be
    brought to bear on that analysis.

            SIGNIFICANCE OF AGENCY RELATIONSHIP IN FSOC DESIGNATIONS

        Senator Moran. In your analysis, what is the significance
    of that agency relationship? How do you personally, or how do
    you at the SEC as chair, see this issue within your role at
    FSOC?
        Ms. White. Well, again, as the Chair, I am a member of
    FSOC, as you know. I think it is an extremely important factor.
        Essentially, if you are looking to what kinds of entities
    and why they may create systemic risks, if these assets are not
    yours and not on your balance sheet, that is a very different
    situation before you to assess in terms of whether such an
    entity, if it were to fail, fails in any sense similarly to a
    bank, which does carry positions on the balance sheet,
    obviously.
        So I think it is a critical fact. Not the only fact to look
    at, but a critical distinction between asset managers and some
    of the other entities that have been considered.
        Senator Moran. Thank you both. My time has expired.
        Senator Udall. Senator Johanns.

                            CHANGES MADE AT THE SEC

        Senator Johanns. Chair White, if I could turn to you. If
    you look at the history of the SEC budget, even predating the
    Obama administration going back to the year 2000, the budget
    has grown from $377 million to $1.35 billion in 2014, very,
    very significant growth by any definition.
        But despite this tremendous growth in resources, the SEC--
    and I acknowledge this was prior to your time. But it failed to
    detect Ponzi schemes like Madoff, Stanford; didn't sound the
    warning on the collapse of the U.S. financial system--or near
    collapse. That describes for me a very serious problem within
    the SEC. You may disagree with that. You may agree with that.
        But I would like you to spend some time, since this is a
    great opportunity for oversight, to talk to us on the committee
    about your view of what needs to be done to avoid a future
    Madoff, a future Ponzi scheme.
        What are you doing at the SEC that changes the culture of
    that dynamic of how people look at their role and
    responsibility in terms of dealing with characters like that
    and in terms of dealing with the financial system of the United
    States?

                       SEC ENHANCEMENTS AND IMPROVEMENTS

        Ms. White. I think several points there. One is--and the
    agency has obviously acknowledged this--that there were
    weaknesses and issues where before my arrival the agency had
    made significant progress on addressing, and very important
    that that did happen, I think.
        For example, in terms of a Ponzi scheme, today one of the
    items in our budget request that we are seeking to enhance even
    further is the tips, complaints, and referral system whereby we
    get about 15,000 complaints at the SEC every year. Three
    thousand plus of those come into our whistleblower office, but
    15,000 in toto, so to speak. And so, those are now all
    centralized, automated, assessed electronically, quickly, and
    sent out to where they need to be sent out.
        One of the enhancements that we actually weren't able to do
    last year because of the funding was to automate the triaging
    of those complaints. But there is no question that that
    feature, which did figure in those incidents you are
    mentioning, is now quite, quite different at the SEC.
        A number of other changes were made, both in the exam
    program--enhancement, improvements--and in the enforcement
    division as well. I mean, one of the things that I think is
    enormously strengthening the enforcement program, for example,
    is the specialty units, where you now have expertise residing
    in different market strata that the SEC is responsible for. And
    again, I think nothing is more important at the SEC than to
    have a very strong compliance function, very strong enforcement
    function.
        On the examination side, also enhancements, improvements
    have been made, really very significant ones. We have been
    helped by our technology there. We have been helped by our
    economists as part of that effort, which is basically that we
    now have technological tools that allow us to analyze, assess,
    and access massive amounts of data much more quickly.
        For example, one of our newer tools in the examination
    program is called NEAT, which is National Exam Analytics Tool.
    Basically, it allows our examiners when they go in to an
    investor adviser to examine, to look at all of their trading.
        And so, we have one instance recently where I think 17
    million transactions were accessed and analyzed in 36 hours.
    The SEC of yesterday couldn't have come close to that.
        And what do we do when we get that data analyzed? We look
    for patterns of insider trading. We look for Ponzi schemes. We
    look for front running. We look for other kinds of patterns
    that may suggest wrongdoing.
        So it is a much stronger SEC in those respects, I think. No
    one could responsibly sit here and say that any law enforcement
    agency will never miss a scheme going forward. But it is an
    extraordinarily strong enforcement and exam function today.

                          PREVENTION OF ANOTHER MADOFF

        Senator Johanns. Would you be confident in testifying to
    the subcommittee today that under the current atmosphere, the
    current approaches, that Madoff could not repeat what he did
    some years ago?
        Ms. White. From what I know of what occurred--and again, I
    wasn't here, but I have studied what occurred. I think the
    systems we were just talking about, among others, certainly at
    the SEC, I believe that activity would have been detected and
    proceeded upon.
        Again, you can never guarantee that you will catch every
    Ponzi scheme, every fraudster, every criminal in any agency.
    But I do think it has been built to prevent that from happening
    again.

            SEC'S ABILITY TO USE FUNDS IN AN ABBREVIATED TIME PERIOD

        Senator Johanns. The budget request you are making this
    year admittedly is sizeable. I appreciate you are a little bit
    different circumstance. But having said that, it is our job to
    provide oversight wherever the dollar comes from.
        Given recent past experience, history would probably tell
    us that we might be facing a continuing resolution and that you
    would not receive your full request for some period of time
    into the budget year. We haven't done a lot of budgets around
    here, unfortunately. Consequently, what would then happen is
    your budget request may be met in January, February, March of
    next year.
        Under those circumstances, would you in that limited period
    of time, between when you received that and the end of the
    fiscal year--the end of September 2015, would you be able to
    responsibly deal with that? Hire up the people you want to hire
    up, do the things you want to do, within an abbreviated period
    of time?

                                PRUDENT SPENDING

        Ms. White. I think there is no question, and we have done
    this in prior years as well. We take into account the
    likelihood of a continuing resolution, and how long it may
    last. And that clearly leads to prudent deferred spending. We
    do have no year funds, however, so that we are able to more
    flexibly deal with getting our money somewhat later in the
    year.
        But there is no question. One place where it is a
    particular challenge is in our long-term mission-critical
    information technology (IT) projects. I mean, for those of
    necessity, you need to know you have the money. And then there
    is a relatively lengthy procurement process. So they do present
    challenges.
        But I think our financial management folks, and I have
    talked at length to them about these issues as well, are geared
    up to be able to use if we would get the funding, as much of it
    as is possible. And then they can carry over and be able to use
    the funding in the following year, but having projected the
    uses for it in this year.
        Senator Johanns. I yield, Mr. Chairman.
        Senator Udall. Thank you very much, Senator Johanns.
        And thank you for those answers.

                                  VOLCKER RULE

        I wanted to shift over to the Volcker rule, which you all
    know is a very, very important one. Chair White and Chairman
    Wetjen, on September 10, 2013, five Federal financial
    regulatory agencies issued uniform final regulations
    implementing the Volcker rule.
        The first question. How is the Volcker rule being enforced,
    and what is the relevant role of each of your agencies in
    overseeing compliance?
        Ms. White. I think the rule itself actually became
    effective April 1 of this year. But the compliance period is
    still out into 2015 and beyond that. It is a scaled compliance
    approach, both in terms of extent and also in terms of timing.
        And again, I think I alluded to this a few minutes ago, it
    is critical that the agencies did enact a joint rule. I think
    it is a better rule, a stronger rule, and it plainly for the
    marketplace was necessary to do that.
        And one of the commitments, and I actually said this in my
    opening statement when the SEC adopted the rule, is that we
    need to be focused from this day forward on continuing that
    coordination as we get into the compliance and enforcement
    period.
        And so, there is an interagency working group that all five
    agencies have very active senior members on who are focused on
    questions of interpretation, questions of compliance, questions
    of enforcement. And we will try to stay as consistent and in
    sync as we can. We are obviously independent agencies at the
    end of the day.
        With respect to entities who are covered by the rule--for
    example, broker-dealers--the SEC is the primary regulator
    there. And so, we will have the voice as to whether there is
    compliance or not and proceed with enforcement, but we will
    still coordinate with each other on questions of interpretation
    that affect compliance and enforcement.

                              AGENCY COORDINATION

        Senator Udall. Chair Wetjen, do you have thoughts on that?
        Mr. Wetjen. I would like to echo what Chair White said. I
    think there is a continued commitment to coordinating among the
    agencies.
        Another good example, in addition to what Chair White
    shared, is we actually issued an interim final rule, I believe
    that was late January, and it related to a special investment
    vehicle issue that materialized and had come to the attention
    of the agencies and to the Congress. And so, all five agencies
    adopted this interim final rule very, very rapidly.
        And again, I just think that is another example that there
    is a continued commitment to solve these problems jointly,
    again, in an effort to avoid any kind of uncertainty that not
    doing so could create for the marketplace. So I expect that to
    continue.

                           MONEY MARKET MUTUAL FUNDS

        Senator Udall. Shifting now to money market mutual funds.
    Chair White, as you know, Senator Johanns and I and several
    other Senators wrote to you at the SEC in 2012, highlighting
    the concerns raised by our local governments on changes to
    money market mutual funds. And I keep hearing from folks back
    home about this issue.
        In fact, a little over 2 weeks ago, I had a conference call
    with constituents representing local governments and businesses
    in New Mexico, and they continue to express concern about
    possible changes. As you know, local governments rely on these
    money market mutual funds as a cash management tool and as an
    important source of low-cost, short-term financing.
        Can you give us an update on where the SEC is on the rule?
    And how do you plan to address these concerns of local
    governments and others?
        Ms. White. Yes. The SEC commissioners and staff are
    actively involved, quite actively involved in finalizing those
    rules and those reforms of money market funds. They are a
    priority for 2014. I expect in the relative near term to
    proceed to finalizing those rules.
        As you know, when we proposed the rules, we proposed two
    alternatives. One is a floating net asset value (NAV) for prime
    institutional funds and the other a fees and gates approach.
    Government funds were actually exempted from the floating NAV,
    but municipalities weren't. I think that is the issue that is
    being raised.
        We have gotten a lot of comments on precisely that point.
    The staff has met with a number of representatives of
    municipalities expressing that concern. Should we go in that
    direction of a floating NAV, there is an exemption for retail
    funds, which would cover some of the municipal funds, but I
    think not all. We are very carefully focusing on all of the
    comments, but quite focused on the concern that has been
    expressed by the municipalities.
        Senator Udall. Right. Thank you very much.
        Senator Coons. Welcome. Good to have you here.

                                   IT FUNDING

        Thank you. I appreciate the opportunity to join you and
    thank you both for your service and for the opportunity to
    discuss with you your proposals.
        If I might first ask CFTC Chair Wetjen, the core to your
    funding request is about investments in technology and staff.
    And your fiscal year 2015 request calls for a $15 million
    increase in IT funding.
        Could you just comment on the risks posed to your
    organization, on the markets if your IT infrastructure isn't
    upgraded or modernized, and what role it plays in your taking
    on an expanded role?
        Mr. Wetjen. Thank you, Senator Coons.
        We have a plan developed by our Office of Data and
    Technology on how to use the $50 million. It would include some
    enhancements to current systems we have in place which are
    necessary for surveillance purposes.
        And the one system I would point out is one that tries--
    well, tracks positions taken on by market participants. And so,
    it is a critical tool that we have now, but it still needs to
    be enhanced if it is going to be as effective as possible.
        Going forward, I think what the agency should consider
    doing is investing in new initiatives, technological
    initiatives so that we can get a better understanding of not
    only consummated trading activity, but order messaging, which
    is something that happens a lot in automated markets.
        You have firms or entities sending in orders that don't
    always match with another counterparty. So it is important
    because some firms inappropriately might use a number of
    different order messages sent into a marketplace as a way to
    engage in some kind of a manipulative scheme. And so, going
    forward, you know, if we are able to get additional funding for
    IT, I think that is the next key initiative we might want to
    invest in.

                            CFTC ENFORCEMENT ACTIONS

        Senator Coons. You had a budget of roughly $200 million
    last year and collected north of $1.7 billion in fines. That is
    about an eightfold return on taxpayer investment. So I just
    wondered if you wanted to take a moment and explain, as an
    entity that literally pays for itself, what enforcement actions
    you pursued last year and how a more fully funded CFTC would
    benefit taxpayers, as well as benefit the marketplace.
        Mr. Wetjen. Yes, thank you, Senator, for that question.
        I think we initiated and completed around 150, 160
    enforcement actions last year, in fiscal year 2013, which, as
    you mentioned, resulted in over $1.5 billion in fine
    collections. So it was in that sense a good return on the
    investment, when you consider the level of funding for the
    agency.
        Right now, we are on pace to probably have fewer
    enforcement actions consummated and completed based on numbers
    midway through the year--midway through the fiscal year. There
    is a variety of reasons for that, but one of which is that we
    have lost some staff in the Division of Enforcement. So that
    does give you some indication about what the impact of reduced
    staffing can have.
        Again, there could be other reasons for that as well. It
    could just be the nature of incidents that have been brought to
    the attention of the agency this year are different than in
    years past, but it is one thing you might want to take a look
    at.
        So I have some concerns about that. That is one of the
    reasons why we have asked for additional attorneys for the
    Division of Enforcement at the agency. Our request would bring
    us roughly 50 additional FTEs. And again, I think we would
    continue to demonstrate with that enhanced team an ability to
    bring a good return for the taxpayer.
        Senator Coons. Thank you.
        Thank you for what you do, Chair White, at the SEC. I have
    a sense that you are charged with overseeing more than 25,000
    market participants roughly who engage in trillions of dollars
    worth of economic activity, and I think what the SEC does is,
    like the CFTC, critically important to a well-functioning
    capital market that is secure and transparent.

                            SEC ENFORCEMENT EFFORTS

        And as we continue to heal from the financial crisis, I
    think it is critical we take steps to ensure that doesn't
    happen again. Given the very broad range and significant
    expansion in your responsibilities and given that, as is the
    case I just referred to, you don't cost anything to the
    taxpayers, net-net, I support funding the President's request
    at $1.7 billion. But I would be interested in your comments on
    the trends of security frauds that you are seeing in current
    enforcement efforts and what sort of risks retail investors are
    exposed to. I would also be interested in how you see progress
    in rulemaking to implement the JOBS Act.
        Ms. White. In terms of the enforcement efforts, I think
    there is nothing more important than a strong, a very strong
    enforcement presence by the SEC to protect investors--retail,
    as well as institutional--to protect the integrity of our
    markets, to protect the markets so that capital formation will
    be facilitated.
        The SEC had, and much of this before I arrived, but in
    terms of the financial crisis cases, I think an extraordinarily
    strong record. The agency charged over 165, I think it was 169,
    entities and individuals. Seventy-plus of those were actually
    senior executives--chief executive officers (CEOs) and chief
    financial officers (CFOs). Enforcement actually got orders to
    return over $3 billion in fines and disgorgement. So there is
    obviously value--not only value added there, but it is actually
    returning under our Fair Funds provision money to investors.
        So we are just about through. We have some additional
    financial crisis cases that obviously we are focused on
    completing. One of the things that we have done--really, two of
    the things that we have done since I have been there to
    strengthen the enforcement function is to form two new task
    forces. One is a financial reporting and auditing task force,
    which I think is the core of investor protection. And that is
    something that is already yielding results for the benefit of
    investors and the markets.
        We have also formed a microcap fraud task force, which
    particularly targets that brand of securities fraud on retail
    investors.
        Another very disturbing pattern--and I have seen this when
    I was a prosecutor, too. And it is some of the most egregious
    frauds you see are what I call the affinity frauds, when
    somebody commits a Ponzi scheme or other kind of investment
    scam really against their own communities. And we are certainly
    seeing really a growth in those, and so we are very focused on
    dealing with those. We have brought a number of different
    cases.
        We have also intensified our enforcement efforts vis-a-vis
    the obligations of exchanges to make sure they are following
    the various what I call the market structure rules of our
    equity markets, which I think is important to everyone.

                        INVESTMENT ADVISOR EXAMINATIONS

        And then one final point I would make is just talking
    earlier about our need for resources to increase the number of
    examinations we do of investment advisers. And of course, they
    are the ones that are really day-to-day dealing with your
    everyday investor, and we are only able to cover a very small
    percentage of those under current funding.
        And when we go to those places--and frankly, when we go to
    the broker-dealers we examine as well--we find a lot of issues.
    So it is these issues that make us at least understand the
    critical importance of sufficient funding to be able to carry
    out those responsibilities for investors.
        And actually, by just showing up on an exam--I think since
    fiscal year 2012, just showing up and pointing out, ``By the
    way, those fees should not have been charged to those investors
    or those funds. They should have been for your account.'' We
    have returned, I think, $28.8 million just by showing up. So it
    shows you across the span I think the benefits to investors.

                      SEC TRAINING FOR NON-U.S. REGULATORS

        Senator Coons. One last question, if I might, Mr. Chairman.
        One other area that I was surprised to see in your report
    is that I didn't realize you were engaged in training non-U.S.
    regulators.
        Ms. White. Yes.
        Senator Coons. It was roughly 1,700 in fiscal year 2013, I
    think it is 1,400 this fiscal year and next. What are the
    benefits of that program? How does it benefit us to provide
    training to non-U.S. regulators whose markets may not be as
    robust or scalable or secure?
        Ms. White. I think there has been significant benefit and
    has for decades, frankly, but even more so now. The securities
    markets, and certainly the securities frauds markets, are quite
    global. I mean, they don't respect borders.
        And so, I think the training that we provide is invaluable
    to the American investor who may well be defrauded from any
    country you could name abroad. If they have a strong
    enforcement function, we are protecting the American investors
    there.
        And we have seen an awful lot of progress. There is much
    more to go, but I think it is an invaluable service to the
    American investors. It is also I think an invaluable service
    really to the global markets and the integrity of them.
        Senator Coons. Thank you.
        Thank you, Mr. Chairman.
        Senator Udall. Senator Coons, thank you very much.
        Senator Johanns, please proceed.
        Senator Johanns. Mr. Chairman Wetjen, let me ask you a
    question. But let me also, if I might, lay some groundwork for
    this question so you know where I am coming from.

                              EFFECTS ON END-USERS

        I think all of us agree that the CFTC must have smart,
    forward-leaning regulation. The market changes so dramatically.
    And yet, we still have to be sensitive to the potential to
    over-regulate. We don't want to regulate everything that moves.
    So trying to be--to strike that balance I think is key.
        One example of regulatory overreach that I have been
    working on since Dodd-Frank passed is margin requirements on
    end-users when trading derivatives. I can state unequivocally
    Congress never intended for nonfinancial end-users to be
    subject to costly margin requirements, and yet here we are,
    almost 5 years later, still battling with this.
        So I have introduced legislation that exempts end-users
    from margin requirement. This is not a Republican versus
    Democrat issue. The measure has gained strong bipartisan
    support. A companion bill has already passed the House with
    over 400 votes.
        This is one of those things that should be done. I don't
    know of a Senator that opposes it. Maybe there is one out there
    that I haven't come across yet. But again, I think Congress is
    nearly unanimous on this.
        I asked Gary Gensler about it one time, and I always felt
    that he had a pretty aggressive view of regulating things. I
    think that is what he saw his job as, and he was going to
    regulate stuff. But he even agreed that nonfinancial end-users
    don't pose a risk to the system and, therefore, should not be
    burdened with what I would call a job-killing margin
    requirement.
        I would like you--I know this is an issue now in the Fed's
    hands, but I would like your thoughts personally, as the acting
    chair of the CFTC, on what I am trying to get done here.
        Mr. Wetjen. Senator, I agree with you that Dodd-Frank tried
    to, if I can use these words, hold harmless as much as possible
    the end-user community as it related to title VII in
    particular.
        Senator Johanns. Right.
        Mr. Wetjen. And we have a number of rules that provided
    exemptions from clearing requirements for end-users, and we
    have taken a number of different other actions as well to build
    out that general principle. And one specific area has to do
    with interaffiliate trades between companies that are not swap
    dealers. And so, we have done a considerable amount of work
    there.
        So I agree with you in principle that that was a message
    and intent behind Dodd-Frank. At least as it relates to title
    VII, end-users are supposed to largely be left out of the grip,
    so to speak, of the new rulemakings implementing title VII.
        I am not familiar with the details of the Fed's proposal,
    and I don't recall exactly where they are in the process. But I
    agree in principle with what you are saying as it relates to
    end-users in title VII.
        Senator Johanns. Mm-hmm. See, Mr. Chairman, the Creighton
    education kicks in, and good, practical, common sense stuff
    come out.
        Thank you. I will yield.
        Senator Udall. Senator Coons, did you have additional
    questions? Okay.
        Chair White, one of the key components of Dodd-Frank was a
    mandate that the SEC adopt a number of new rules relating to
    credit rating agencies. And all of us remember what a key role
    credit rating agencies played in the kind of meltdown that we
    were in back in that time period.
        And of these new rules, we included annual reports on
    internal controls, conflict of interest with respect to sales
    and marketing practices, various disclosure requirements, and
    consistent application of rating symbols and definitions.
        What is the status of the SEC's efforts to comply with the
    mandates under Dodd-Frank relating to credit rating agencies,
    and what further developments can we expect from the SEC on
    this?

                             CREDIT RATING AGENCIES

        Ms. White. A very important area, a very high priority for
    the agency.
        The agency did in January 2011 adopt, actually, a new rule
    requiring Nationally Recognized Statistical Rating
    Organizations (NRSROs) to disclose representations and
    warranties and how investors might enforce breaches of those.
    In May 2011, the agency proposed the rules you are alluding to.
    I think they proposed that 11 be amended to accomplish the
    objectives that you listed and 5 new ones. We are moving those
    forward quite actively, and they are a priority to complete
    this year.
        Senator Udall. Do you believe there are additional
    reporting requirements or controls necessary to prevent another
    crisis?
        Ms. White. There is no question in my mind that the credit
    rating agency issues played a significant role in the financial
    crisis. And I think the issues you have identified are ones
    that do need further reforms, and that is the objective of
    these rulemakings.
        Senator Udall. Okay. And I know that some of the critics
    have kind of come at this and said we should start over again.
    I assume that isn't the position of the SEC at this point.
        Ms. White. Well, we are certainly listening to all
    comments. Obviously, the formal comment period is closed, but
    we are listening very carefully to those who think that certain
    aspects perhaps should be re-proposed or done differently and
    perhaps not require a re-proposal.
        So we are trying to come out with very robust rules, and we
    are continuing to listen to all critics and all supporters and
    really all ideas on it.
        Senator Udall. Right. Thank you very much.
        Senator Johanns, do you have--and it looks like Senator
    Coons has completed his questioning here.
        Let me thank both of you. We really appreciate having you
    here today. We appreciate this frank discussion and exchange of
    ideas.
        We want to thank everyone who participated in preparing for
    this hearing. You have excellent staff. We do also, and we very
    much appreciate their help.
        Today's discussion I think has provided helpful insights
    into these--your operations and I think shows us what the
    challenges are that are ahead of us. This information will be
    instructive as we further consider the budget proposals and
    develop our fiscal year 2015 bill during the coming weeks.

                         ADDITIONAL COMMITTEE QUESTIONS

        The hearing record will remain open until next Wednesday,
    May 21 at 12 noon for subcommittee members to submit statements
    and/or questions to be submitted to the witnesses for the
    record.
        [The following questions were not asked at the hearing, but
    were submitted to the agencies for response subsequent to the
    hearing:]
                   Questions Submitted to Hon. Mary Jo White
                    Questions Submitted by Senator Tom Udall
            strengthening exams and oversight--frequency of reviews
        Question. The SEC's Office of Compliance, Inspections and
    Examinations (OCIE) is responsible for conducting examinations of the
    Nation's registered entities. These include broker-dealers, transfer
    agents, investment advisers, the securities exchanges, clearing
    agencies, as well as self-regulatory organizations.
        Chair White, your budget materials state that during fiscal 2013,
    the SEC was able to examine only about 9 percent of registered
    investment advisers. That means only 1 of every 12 of investment
    advisers is inspected. What do you believe would be a more suitable
    frequency?
        Answer. As you point out, during fiscal year 2013, the SEC examined
    about 9 percent of registered investment advisers, comprising
    approximately 25 percent of the assets under management. As I stated in
    my testimony, clearly more coverage is needed, as the status quo does
    not provide sufficient protection for investors who increasingly turn
    to investment advisers for assistance navigating the securities markets
    and investing for retirement and family needs.
        Examination staff uses a risk-based approach designed to focus its
    limited resources on those firms and practices that pose the greatest
    potential risk of securities law violations that can harm investors and
    the markets. These high-risk firms frequently are large and complex
    entities, and examinations of them often take significant time to
    complete.
        While we believe our risk-based approach has helped us to more
    efficiently use our resources to better protect investors, an increase
    of exam frequency to between 30 and 50 percent of investment adviser
    firms annually would further enhance our effectiveness and bring us
    closer to the current broker-dealer coverage level that, combined with
    examinations conducted by the Financial Industry Regulatory Authority,
    is approximately 50 percent.
        Going forward, we will continue to use technology and risk-based
    data analytics to be as efficient as possible with our limited
    resources.
        Question. What are the drawbacks of sporadic inspections?
        Answer. OCIE staff's direct engagement with registrants allows the
    staff to provide first-hand information to the Commission and other SEC
    staff regarding the activities of our regulated entities, helping us
    prevent fraud, identify compliance deficiencies, promote compliance,
    inform policy, and monitor risk. Less frequent examinations therefore
    limits the information available to the Commission in discharging its
    mission to protect investors, including by reducing the instances in
    which we may identify potential fraud and other wrongdoing and also
    reducing incentives for registrants to put in place rigorous internal
    controls and compliance programs.
        Sporadic or less frequent examinations also factor into business
    decisions that may not always be in the best interests of clients or
    customers. For example, OCIE staff has identified an increase in firms
    choosing to de-register as broker-dealers, or to conduct a greater
    percentage of their business as investment advisers. The staff believes
    that in some cases this shift could be due in part to the perception of
    less rigorous oversight of investment advisers.
        Question. Your request for fiscal 2015 seeks $373 million, a $72
    million increase for the exams function above current spending. This
    will support 316 additional staff positions above the 967 current
    level. What impact will those enhanced funds have on accelerating the
    frequency of exams?
        Answer. The number and percentage of investment advisers examined
    each year depends on a number of factors, including the type and scope
    of the examinations conducted, the program priorities, the complexity
    of the advisory business, and staffing levels. Of the 316 positions for
    OCIE, we anticipate using 240 for investment adviser exams.
        Our best estimate, as reflected in the budget request, is an
    investment adviser coverage level of 9 percent in fiscal year 2014 and
    12 percent in fiscal year 2015. The time it would take in fiscal year
    2015 to hire and train new employees likely means we would not realize
    the full effect from this staffing increase until future years. OCIE
    estimates that with the requested fiscal year 2015 staffing increase,
    the exam program would be able to cover at least 14-15 percent of the
    population in fiscal year 2016. This outcome could vary depending on a
    number of factors, including new program priorities or higher than
    expected staff attrition/turnover rates. To achieve an annual
    examination level of 30 percent to 50 percent would require incremental
    increases in subsequent budgets to permit the agency to hire and
    sufficiently train the necessary complement of examiners.
                market transformation and high-frequency trading
        Question. Chair White, as the leader of one of our key financial
    regulators, you are acutely aware of the growing challenges facing your
    agency in monitoring the markets. We now have significantly
    transformed, globalized, round-the-clock, and highly diversified
    marketplace. Stock exchanges can now execute trades in less than a half
    a millionth of a second.
        What is the current status of the SEC's oversight of high-frequency
    trading and automated trading environments?
        Does the SEC presently have the necessary talent and technology in
    place to monitor and analyze high-frequency trading, to inform your
    regulatory and enforcement work, and guard the integrity and safety of
    the markets? What are the deficiencies?
        Answer. Generally, the SEC's ability--in enforcement, examination,
    and regulation--to monitor and analyze high-frequency trading (HFT)
    activity in the U.S. markets has increased as more tools have become
    available to SEC staff, including software that can handle larger data
    sets and more advanced and powerful computers.
    Data and Analysis of HFT Activity
        The SEC has developed improved data sources and capabilities that
    can be used to analyze HFT activity.
        Most prominently, we have launched an equity market structure
    website \1\ that builds on an analytical tool called MIDAS (Market
    Information Data Analytics System), which enables us to quickly analyze
    enormous amounts of trading data across markets.\2\ Though MIDAS does
    not identify individual firms, MIDAS data is now used in conjunction
    with existing investigations of specific firms. In particular, OCIE
    examiners and Enforcement staff use MIDAS to compare the individual
    trades and quotes of a particular firm (acquired from the firm itself)
    in the context of all other contemporaneous market trades and quotes.
    These types of analyses can help inform investigations on a variety of
    issues, such as those relating to insider trading and market
    manipulation.
    ---------------------------------------------------------------------------
        \1\ The web site is located at http://www.sec.gov/marketstructure/
    and is broadly intended to promote a market-wide dialogue and fuller
    empirical understanding of the equity markets. It serves as a central
    location for SEC staff to publicly share evolving data, research, and
    analysis about HFT and other market structure issues.
        \2\ MIDAS is an SEC system that collects equity quote and trade
    data from the consolidated public tapes as well as the individual data
    feeds that are commercially available from each equity exchange. That
    system supports a variety of powerful applications across the SEC's
    enforcement, examination, and regulatory functions, including research
    to better understand a market structure with a significant amount of
    HFT trading. This research in turn helps better inform policy decisions
    related to market structure issues, including HFT.
    ---------------------------------------------------------------------------
        SEC staff also is now analyzing information that recently has
    become available to it though the Large Trader Reporting Rule \3\--
    which provides SEC staff access to information about the trading
    activity of the largest market participants, including many HFT firms,
    upon request--into its policy-making, examination, and enforcement
    efforts.
    ---------------------------------------------------------------------------
        \3\ See Exchange Act Release No. 64976 (July 27, 2011), 76 FR 46959
    (August 3, 2011).
    ---------------------------------------------------------------------------
        Barriers to the development of comprehensive and reliable analyses
    of HFT remain, however, and include: (1) the limitations of available
    data; \4\ (2) the absence of a clear, commonly agreed definition of
    HFT; and (3) inherent complexities in the econometric techniques
    available for assessing the effect of HFT on market quality. To help
    surmount these barriers, the SEC is in the midst of an initiative to
    expand the data available to regulators. Specifically, in July 2012,
    the SEC adopted Rule 613, which requires the self-regulatory
    organizations to submit a national market system (NMS) plan to
    establish a consolidated audit trail (CAT) for NMS securities, across
    all U.S. markets, from the time of order inception through routing,
    cancellation, modification, or execution.\5\ When the consolidated
    audit trail is fully implemented, regulators will be able to readily
    tie all order and trade activity in NMS securities throughout the U.S.
    markets back to particular accounts and to properly sequence that
    activity in time. Fully implementing CAT is a high priority for the
    Commission.
    ---------------------------------------------------------------------------
        \4\ There currently is no comprehensive data source that enables
    regulators to tie all order and trade activity in the U.S. equity
    markets back to particular accounts. Accordingly, an exhaustive
    analysis of HFT activity is not possible at this time.
        \5\ See Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722
    (August 1, 2012).
    ---------------------------------------------------------------------------
        A significant impediment to the SEC's ability to monitor and
    analyze HFT trading is the absence of comprehensive data that links
    orders and trades to individual market participants. Although current
    data resources allow the SEC to monitor and analyze overall market
    quality, questions regarding outcomes for end-users and intermediaries
    are often difficult to answer without account-level data. Data from CAT
    will facilitate many types of studies that are difficult to conduct
    with current data.\6\ CAT will also significantly improve regulators'
    ability to monitor the trading activity of individual firms, the
    overall level of HFT activity in the market, and the outcomes realized
    by end-users of the market.
    ---------------------------------------------------------------------------
        \6\ Examples of such studies include: how different types of market
    participants provide liquidity, and how liquidity provision from
    different market participants impact market quality at times of market
    stress; whether aggressive HFT strategies increase investor trading
    costs or serve to provide short-term liquidity at a premium; whether
    certain HFT strategies crowd out passive liquidity suppliers, and if
    so, how the costs of end-users are affected; and whether improvements
    in price efficiency allow liquidity providers to provide more liquidity
    to institutional orders.
    ---------------------------------------------------------------------------
    Oversight of Operational Risks in Automated Trading
        To address the risk of instability and disruption that can arise in
    an automated trading environment, the SEC and the securities industry
    have undertaken a series of responsive initiatives. ``Limit up-limit
    down,'' for example, is now fully implemented and moderating price
    volatility in individual securities.\7\ Market-wide circuit breakers
    are in place to address volatility across the equities, options, and
    futures markets.\8\
    ---------------------------------------------------------------------------
        \7\ SEC Press Release No. 2012-107, ``SEC Approves Proposals to
    Address Extraordinary Volatility in Individual Stocks and Broader Stock
    Market'' (June 1, 2012).
        \8\ Id.
    ---------------------------------------------------------------------------
        The SEC has taken additional steps to require market participants
    to address their technology risks. We adopted--and are vigorously
    enforcing--the Market Access Rule, which requires brokers to have risk
    controls in place before providing their customers with access to the
    market.\9\ Last March, the Commission proposed Regulation Systems
    Compliance and Integrity (SCI) to put in place stricter requirements
    relating to the technology used by exchanges, large alternative trading
    systems, certain exempt clearing agencies, and securities information
    processors--the SIPs.\10\ The staff is now completing a recommendation
    for final rules.
    ---------------------------------------------------------------------------
        \9\ SEC Press Release No. 2010-210, ``SEC Adopts New Rule
    Preventing Unfiltered Market Access'' (November 3, 2010). One market
    access risk is the potential for erroneously submitting a single large
    order or a flood of small orders that disrupt trading. See SEC Press
    Release 2013-222, ``SEC Charges Knight Capital With Violations of
    Market Access Rule'' (October 16, 2013).
        \10\ SEC Press Release No. 2013-35, ``SEC Proposes Rules to Improve
    Systems Compliance and Integrity'' (March 7, 2013).
    ---------------------------------------------------------------------------
        The SEC has closely focused on certain market infrastructure
    systems that are ``single points of failure'' that can halt or severely
    disrupt trading when a problem occurs. The exchanges have responded
    with technology audits of the SIPs and a series of specific
    enhancements to improve SIP robustness and resilience. In addition, the
    exchanges have developed more robust SIP backup capabilities, and at
    the end of June 2014 implemented a new ``hot-warm'' backup, with a 10-
    minute recovery standard.
    Further Enhancements to HFT Oversight
        In addition, I recently publicly outlined a series of initiatives
    that will, among other things, enhance the SEC's oversight of HFT firms
    and automated trading tools.
      --The SEC staff is now developing a recommendation to the Commission
            for an anti-disruptive trading rule that would address the use
            of aggressive, destabilizing trading strategies in vulnerable
            market conditions. Such a rule will need to be carefully
            tailored to apply to active proprietary traders in short time
            periods when liquidity is most vulnerable and the risk of price
            disruption caused by aggressive short-term trading strategies
            is highest.
      --The SEC staff is also preparing two recommendations for the
            Commission that are focused on using our core regulatory tools
            of registration and firm oversight: (1) a rule to clarify the
            status of unregistered active proprietary traders to subject
            them to our rules as dealers; and (2) a rule eliminating an
            exception from Financial Industry Regulatory Authority (FINRA)
            membership requirements for dealers that trade in off-exchange
            venues. Dealer registration and FINRA membership should
            significantly strengthen regulatory oversight over active
            proprietary trading firms and the strategies they use.
      --Finally, the SEC staff is preparing recommendations for the
            Commission to improve firms' risk management of trading
            algorithms and to enhance regulatory oversight over their use.
        I also have asked the exchanges and FINRA to consider including a
    time stamp in the consolidated data feeds that indicates when a trading
    venue, for example, processed the display of an order or execution of a
    trade. With this information, users of the consolidated feeds would be
    able to better monitor the latency of those feeds and assess whether
    such feeds meet their trading and other requirements.
      enhancing corporate disclosure of material risk: climate change and
                             environmental impacts
        Question. Generally, publicly traded companies disclose business
    risks to investors through regular financial reports (called ``10-K
    filings'') submitted to the SEC.
        Recently, there have efforts to ensure that environmental costs and
    risks are also reported to investors because they impact a company's
    bottom line. In July 2010, the SEC issued guidance requiring companies
    to address how climate change (and climate change regulation) could
    potentially impact their businesses. Like all SEC disclosures, this is
    aimed at informing market price and protecting investors. Yet, concerns
    have been raised that despite existing disclosure guidance, reporting
    by companies is not as robust as it should be. In response to this
    subcommittee's fiscal 2014 report, the SEC submitted an updated staff
    report focused on the quality, specificity, and thoroughness of
    disclosure related to climate change.
        I would be interested in hearing more about how the SEC is
    reviewing climate disclosures and the extent to which public companies
    are conforming to the guidance and making full disclosures.
        Answer. The Commission's 2010 Guidance Regarding Disclosure Related
    to Climate Change provides interpretive guidance about how companies
    should evaluate climate change related issues when considering what
    information to disclose to investors under existing disclosure
    requirements, such as risk factors or management's discussion and
    analysis. Companies that are subject to SEC disclosure rules must
    provide climate change related disclosure if the information is
    material. The U.S. Supreme Court has held that information is material
    if there is a substantial likelihood that a reasonable investor would
    consider it important in deciding how to vote or make an investment
    decision. Companies must consider their own particular facts and
    circumstances in evaluating whether information would be considered to
    be material.
        As you noted, the SEC submitted a report on public company
    disclosures about climate change related matters to the Subcommittee
    earlier this year. The staff of the Division of Corporation Finance
    prepared the report based on its survey of climate change related
    disclosures by a number of companies in selected industries. Of those
    companies surveyed, most included risk factor disclosure about climate
    change related matters. The companies surveyed also disclosed climate
    change related matters in the business, management's discussion and
    analysis, executive compensation discussion, and legal proceedings
    sections of their filings.
        The Division of Corporation Finance staff routinely reviews new
    issuer filings and periodic reports of public companies for compliance
    with applicable disclosure requirements and inclusion of material
    information. The goal of the staff's reviews is to monitor and enhance
    compliance with applicable disclosure requirements. In conducting its
    filing reviews, the staff will continue to consider whether a company
    has complied with applicable disclosure requirements, including with
    respect to climate change, in their filings. Where the staff has
    concerns about the adequacy of the disclosure in a filing, the staff
    will issue a comment letter asking the company for further explanation
    or additional disclosure.
                 ecological disclosure--pollution externalities
        Question. There is also growing concern that while the SEC requires
    public companies to disclose certain financial information, its
    disclosures do not take into account the possible costs imposed on
    public by corporate activities that have an adverse impact or pose
    material risk to public health and the environmental such as pollution
    damages.
        What actions are underway at the SEC to evaluate public company
    disclosure of environmental and ecological risks?
        Answer. A number of Commission rules and regulations may trigger
    disclosure of the possible costs and environmental and ecological risks
    stemming from corporate activities, depending on a company's particular
    facts and circumstances. The following provisions of Regulation S-K may
    require disclosure of environmental and ecological risks and associated
    costs, based on a company's particular facts and circumstances.
      --Item 101 requires companies to disclose the material effects that
            compliance with environmental laws may have upon the company,
            as well as any material estimated capital expenditures for
            environmental control facilities.
      --Item 103 requires disclosure of certain proceedings arising under
            environmental laws, including proceedings that involve a claim
            for damages, potential monetary sanctions, capital
            expenditures, deferred charges or charges to income if the
            amount involved exceeds 10 percent of the company's
            consolidated assets.
      --Item 503(c) requires a discussion of significant risk factors,
            which could include environmental and ecological risks.
      --Item 303 requires companies to identify and disclose known trends,
            events, demands, commitments and uncertainties that are
            reasonably likely to have a material effect on financial
            condition or operating performance.
        The Division of Corporation Finance staff routinely reviews public
    company disclosures to monitor and enhance compliance with applicable
    disclosure requirements. Where the staff has concerns about the
    adequacy of the disclosure in a filing, including with respect to
    environmental and ecological risks and associated costs, the staff will
    issue a comment letter asking the company for further explanation or
    additional disclosure.
                            ustr special 301 report
        Question. The United States Trade Representative (USTR) ``Special
    301'' Report is an annual review of the state of intellectual property
    rights (IPR) protection and enforcement among our trading partners
    around world.
        Does the SEC or the major U.S. exchanges take into account a
    foreign company's inclusion in the USTR Special 301 Report when
    considering whether to permit the company to be publicly listed?
        Should the SEC or major U.S. exchanges take into account a foreign
    company's inclusion in USTR's Special 301 Report or its Special 301
    Out-of-Cycle Review of Notorious Markets before allowing the company to
    be publicly listed?
        What role do the SEC and major U.S. exchanges have in ensuring that
    US capital markets do not enrich companies that profit from
    intellectual property rights (IPR) infringement?
        Answer. The U.S. Federal securities regulatory system as applied to
    listed companies is based on the principle of full and fair disclosure
    of information to investors, and the Commission does not consider the
    merits of the transaction or company during the registration process. A
    company is, however, required to provide disclosure of material risks
    and litigation to which the company is subject, including any material
    risks associated with a company's intellectual property or the
    enforcement of rights related to intellectual property.
        As to the U.S. exchanges, section 6(b)(5) of the Exchange Act
    requires that, among other things, the rules of a registered securities
    exchange be designed to ``prevent fraudulent and manipulative acts and
    practices,'' ``promote just and equitable principles of trade,''
    ``remove impediments to and perfect the mechanism of a free and open
    market and a national market system,'' and ``protect investors and the
    public interest.'' The exchanges have adopted rules relating to the
    qualification, listing and delisting of foreign issuers on their
    markets, which have been determined by the Commission to be consistent
    with the Exchange Act. These rules, among other things, set forth
    financial, corporate governance, and disclosure requirements that
    issuers must comply with in order to be eligible for listing.
    Furthermore, the exchanges generally retain broad discretion in their
    rules to deny the listing of a company (or suspend dealings in, or
    delist, a company's securities once listed) even if the company meets
    the listing or continued listing standards, if the exchange determines
    there are circumstances that make the initial or continued listing of
    the company inadvisable or unwarranted. Thus, pursuant to this broad
    authority, an exchange could take into account a company's country's
    inclusion in the USTR Special 301 Report or the Special 301 Out-of-
    Cycle Review of Notorious Markets when considering whether to permit
    the company to be publicly listed.
        We understand that the exchanges are considering adopting
    procedures to ensure companies on the Special 301 Out-of-Cycle Review
    of Notorious Markets list are identified in the listing application
    process and would generally not warrant listing. The USTR Special 301
    Report does not actually list foreign companies, but rather lists
    countries that have a particular problem with respect to intellectual
    property rights protection, enforcement, or market access for persons
    relying on such rights. To the extent a company from one of these
    foreign countries has applied to list on an exchange and has disclosed
    that there is a material risk or litigation about an issue related to
    intellectual property rights, the listing exchange would inquire about
    the issue and take it into consideration when considering the listing
    application of the company.
                             executive compensation
        Question. The Dodd-Frank Wall Street Reform and Consumer Protect
    Act required a number of regulations on executive compensations to
    allow for greater transparency and to discourage the excessive risk
    taking that contributed to the economic crisis, including those
    outlined in section 956. There was also significant outcry after it was
    reported that banks who relieved taxpayer bailouts awarded their top
    executives nearly $1.6 billion in salaries, bonuses and other benefits
    the following year.
        On March 2, 2011, the SEC issued a proposed rule made jointly with
    other regulators that would require certain financial institutions to
    disclose the structure of their incentive-based compensation and
    prohibit compensation that encourages inappropriate risks.
        What is the expected timeline for the rule to be finalized?
        How does the SEC plan to address the criticisms of the proposed
    rule?
        Does the SEC believe that the proposed rule would have discouraged
    the troubling practices that contributed to the economic crisis? Will
    it help prevent future excessive risk-taking?
        Is the SEC considering additional measures or actions on this
    issue?
        Answer. In the spring of 2011, the SEC, acting jointly with the
    Federal Reserve Board, the Office of the Comptroller of the Currency,
    the Federal Deposit Insurance Corporation, the Federal Housing Finance
    Agency, the National Credit Union Administration, and the Office of
    Thrift Supervision proposed a rule pursuant to section 956. As required
    by the statute, the proposed rule would apply to bank holding
    companies, banks, the Federal National Mortgage Association, the
    Federal Home Loan Mortgage Corporation, broker-dealers, credit unions,
    and investment advisers.
        In general, the jointly proposed rules drew upon the Guidance on
    Sound Incentive Compensation Policies finalized by the Federal banking
    agencies in the summer of 2010. The banking agency guidance is designed
    to address compensation structures that could cause imprudent risk
    taking.
        The proposed joint rule is comprised of three parts:
      --Disclosures: A covered firm would be required to file an annual
            report describing the firm's incentive-based compensation
            arrangements.
      --Prohibition on Encouraging Inappropriate Risk: All covered firms
            would be prohibited from establishing or maintaining an
            incentive-based compensation arrangement that encourages
            inappropriate risks. This portion of the rule draws upon the
            banking agency guidance.
      --Deferral for Large Firms: For covered firms with $50 billion or
            more in total consolidated assets, executive officers would
            have at least 50 percent of their incentive-based compensation
            deferred for at least 3 years. The deferred compensation could
            not be paid faster than on a pro-rata basis, and would have to
            be adjusted to reflect actual losses. The firm's board also
            would approve incentive compensation for individuals determined
            to have the ability to expose the firm to substantial losses.
        The comment period for the proposed rule closed on May 31, 2011.
    The SEC and its fellow regulators received approximately 10,000 comment
    letters. Common themes in the comment letters included:
      --Concern in applying a single mandatory deferral requirement to a
            broad array of firms with dramatically different businesses;
      --How the proposed rule would apply to affiliates regulated by
            multiple agencies;
      --How the proposed rule would apply to certain types of investment
            advisers; and
      --Tax and accounting consequences.
        The SEC staff is working closely with the staff of the banking
    regulators to consider these comments and how the jointly proposed
    rules could be revised to address commenters' concerns with those
    rules.
        The SEC is also moving forward with enhanced disclosures related to
    executive compensation required by the Dodd-Frank Act. In the fall of
    2013, the Commission proposed a new rule that would require public
    companies to disclose the ratio of the compensation of its chief
    executive officer to the median compensation of its employees.
    Advancing the other executive compensation rules required under the
    Dodd-Frank Act is also a near-term priority.
                                     ______

                Questions Submitted by Senator Richard C. Shelby
        Question. In recent years, the SEC has responded to events like the
    2010 flash crash or the concerns raised by Michael Lewis with narrowly
    focused studies of the problem at hand. While examining the latest
    problems and reassuring market participants is important, ad hoc
    reviews and immediate responses to crises often crowd out the
    opportunity to engage in deeper assessments of complex reform issues
    such as market infrastructure, off-exchange trading, and Regulation
    National Market System (NMS).
        Given the growing complexity and fragmentation of our equity
    markets, are you supportive of calls for the SEC to undertake a
    comprehensive review of market structure?
        Answer. Yes. As reflected in a recent public speech, I set forth
    three core principles that are grounding the SEC's review of equity
    market structure and guiding further actions: (1) all issues must be
    evaluated through the prism of the best interest of investors and the
    facilitation of capital formation for public companies; (2) we must
    account for the varying nature of companies and products, with a
    particular sensitivity to the needs of smaller companies; and (3) our
    review of market structure must be comprehensive, including testing
    assumptions about long-standing rules and market practices.\11\
    ---------------------------------------------------------------------------
        \11\ Enhancing Our Equity Market Structure, Speech by SEC Chair
    Mary Jo White, at Sandler O'Neill & Partners, L.P. Global Exchange and
    Brokerage Conference New York, N.Y. (June 5, 2014), available at http:/
    /www.sec.gov/News/Speech/Detail/Speech/1370542004312.
    ---------------------------------------------------------------------------
        Addressing the issues of our current market structure demands a
    continuous and comprehensive review that integrates targeted
    enhancements with an expansive consideration of broader changes.\12\
    Accordingly, as we evaluate the merits of broader changes, we will also
    continue to assess and address specific elements of today's market
    structure that work against the interests of investors and public
    companies. In these remarks, I outlined the initiatives we are
    advancing across five broad sets of issues: market instability, high
    frequency trading, fragmentation, broker conflicts, and the quality of
    markets for smaller companies.\13\ These initiatives are designed to
    address discrete issues that will, among other things, enhance
    transparency and the Commission's ability to oversee HFT firms.
    ---------------------------------------------------------------------------
        \12\ Id.
        \13\ Id.
    ---------------------------------------------------------------------------
        While our review in each of these five areas has already resulted
    in discrete actions targeting specific issues, the more fundamental
    policy questions demand--and are receiving--close attention at the SEC.
    To facilitate engagement with market participants and the public, SEC
    staff will populate our market structure website with summaries of key
    issues that provide a framework for further analysis, identifying areas
    that the staff is focused on and where public perspectives are
    essential. To help in our review of equity market structure, I have
    also recommended to the Commission the creation of a new Market
    Structure Advisory Committee comprised of experts with a diversity of
    backgrounds and viewpoints. The new committee will serve as an
    additional forum and resource for reviewing specific, clearly
    articulated initiatives or rule proposals.
        Question. In early July, the Commission's rules providing for the
    regulation and registration of municipal advisors will become
    effective. The Commission routinely publishes updated and final
    ``Frequently Asked Questions'' (FAQs) which provide practical
    information to firms seeking to comply with the rule. The Office of
    Municipal Securities provided general interpretive guidance on certain
    aspects of the final rules on May 19, 2014. However, FAQ's detailing
    the manner in which the rule treats wholly owned bank subsidiaries
    making tax exempt loans have not been finalized and published. It is my
    hope that these would be published well before the effective date so
    that covered entities have the time and opportunity to understand and
    comply with the rule.
        When will you publish Commission FAQs relating to wholly owned bank
    subsidiaries?
        Answer. The Commission's final rules for municipal advisor
    registration became effective on July 1, 2014. To address specific
    questions arising from market participants and to facilitate a smooth
    implementation of these major new rules, the staff in the Office of
    Municipal Securities provided interpretive guidance, in the form of
    frequently asked questions (FAQs), in January and May of this year.
        In the May FAQs, the staff specifically addressed several questions
    raised by banks regarding implementation of the final rules, including:
    (1) the treatment of so-called ``dual employees'' of banks (i.e.,
    individuals who are employed by a bank and also are associated with the
    bank's broker-dealer affiliate); (2) the applicability of the bank
    exemption to banks that provide advice to a municipal entity regarding
    the structure, timing, and terms under which the bank would purchase
    municipal securities for its own account; (3) the treatment of proceeds
    of pension obligation bonds; and (4) transitional guidance for
    identifying existing proceeds of municipal securities held in existing
    accounts or existing investments.
        Although the staff did not provide specific guidance regarding the
    treatment of transactions in which wholly-owned bank operating
    subsidiaries make tax-exempt loans under the final rules, the staff
    issued an FAQ regarding the purchase of municipal securities by an
    institutional buyer in a principal capacity that may be relevant for
    these transactions. Specifically, in this FAQ, the staff stated that an
    institutional buyer would not be engaged in municipal advisory activity
    under the final rules if the institutional buyer only provides
    information regarding the terms under which the institutional buyer
    would purchase municipal securities for its own account and does not
    provide advice to the municipal entity regarding an issuance of
    municipal securities that would be offered to other investors. The
    staff believes that this guidance could be relevant to and useful for
    advice on transactions involving those wholly-owned bank operating
    subsidiaries that meet the general parameters specified in the FAQ.
                                     ______

                Question Submitted by Senator Richard J. Durbin
        Question. Chair White, you have received several letters, one
    signed by the Illinois Secretary of State (and 7 others) and the other
    by the Illinois Securities Commissioner (and 17 other Commissioners),
    expressing concerns about the SEC's proposal to preempt the States from
    reviewing Regulation A offerings. Under the JOBS Act, issuers are
    exempt from State review for shares traded on a national exchange or
    sold to a ``qualified purchaser.'' The SEC's proposed rules define a
    qualified purchaser as ``all offerees of securities in a Regulation A
    offering and all purchasers in a Tier 2 offering,'' applying to anyone
    and eliminating State review.
        Many have suggested that with smaller offerings and newer issuers
    also comes greater risk and likelihood of fraudulent activity. Although
    your points on investor protection and costs associated with complying
    with State law are well-taken, states currently offer review on these
    smaller offerings that can further protect investors. States also have
    taken steps to harmonize review processes, streamlining requirements
    among states in response to concerns about the time and costs
    associated with complying with State review.
        How will the SEC work with State regulators' to address concerns
    that preempting State authority beyond what Congress intended under the
    JOBS Act would limit the additional investor protections states can
    offer, especially in light of commitments to streamline State review
    processes to address issuer concerns?
        Answer. As part of our ongoing dialogue with State securities
    regulators, Commission staff and I periodically meet with
    representatives of the states and the North American Securities
    Administrators Association (NASAA) to discuss developments in the
    securities markets and, where applicable, to address areas of specific
    concern.
        With respect to the Commission's proposed rules for implementing
    Title IV of the JOBS Act, the Commission has received more than 100
    comment letters on its rule proposal, many of which addressed the
    proposed approach to State securities law compliance. The staff is
    carefully reviewing the comments as it works to develop recommendations
    for final rules for the Commission's consideration. In addition, the
    staff is closely monitoring the development and implementation of
    NASAA's multi-State coordinated review program for Regulation A
    offerings. It should also be noted that the proposed rules would not
    limit in any way the states' authorities to pursue fraudulent offerings
    and would permit that all offers under proposed Regulation A be filed
    with a State with such a requirement.
        I look forward to continuing our ongoing dialogue with State
    securities regulators and NASAA, including with respect to the
    Commission's proposal to adopt rules to implement title IV of the JOBS
    Act. Our objective for this rulemaking is to ensure that the framework
    and requirements for Regulation A offering are both workable and
    protective of investors.
                                     ______

              Questions Submitted by Senator Christopher A. Coons
        Question. Since becoming Chairman, have you found the SEC to have
    the right resources necessary to go after those that commit fraud,
    regardless of where the security is bought?
        Answer. Since my arrival, we have made every effort to
    effectively--and efficiently--deploy our funds in order to identify,
    investigate and prosecute those within our jurisdiction that commit
    fraud. These efforts have resulted in a number of significant
    enforcement cases across our regulatory spectrum, including actions
    against exchanges to ensure they operate fairly and in compliance with
    applicable rules, actions against investment advisers and broker-
    dealers for taking undisclosed fees and for disrupting the markets
    through failures in their automated trading systems, important
    financial reporting cases against issuers, actions against auditors and
    others who serve as gatekeepers to our financial system, Foreign
    Corrupt Practices Act (FCPA) cases against large multinational
    corporations, actions against municipal issuers, landmark insider
    trading cases, and additional cases against individuals and entities
    whose actions contributed to the financial crisis.
        That said, the SEC needs significant additional resources to keep
    pace with the growing size and complexity of the securities markets and
    the agency's broad responsibilities. Specific to our Enforcement
    program, we face a number of key challenges to preserve and enhance our
    ability to vigorously pursue the entire spectrum of wrongdoing within
    our jurisdiction. Our Enforcement work includes the detection,
    investigation, and litigation of violations of the Federal securities
    laws. In each of these areas, we face significant challenges:
      --Detection. We receive over 15,000 tips, complaints, and referrals
            annually, including the more than 3,000 tips that flow into the
            Division's Whistleblower Office, which generate a fresh stream
            of case leads in need of investigation. The review and analysis
            of these tips require significant human and technological
            resources. We also have focused intensively on potential
            misconduct in the equity markets and in connection with new
            rules, including those implemented under the Dodd-Frank and
            JOBS Acts. But detecting misconduct in constantly evolving
            securities markets, including as a result of the growth of
            algorithmic, automated trading and ``dark pools,'' requires
            substantial resources.
      --Investigations. Technological advances across the industry allow
            for more sophisticated schemes, which require improved
            technology and significant resources to unravel. We also are
            expanding our focus on financial reporting and auditing
            misconduct cases, which are highly technical and labor
            intensive.
      --Litigation. We have seen an increase in litigation and trials as we
            focus more extensively on individual wrongdoing. And, the
            recent change to our long-standing settlement policy that now
            requires admissions in certain cases may lead to more
            litigation. Success at trial is critical to our ability to
            carry out our mission, and litigation, often against well-
            funded opposition.
        In order to meet the challenges of our rapidly changing and
    expanding markets, with increasingly complex products and more
    sophisticated wrongdoers, Enforcement seeks to hire 126 new staff,
    including additional legal, accounting, and industry specialized
    experts, primarily for investigations and litigation. These critical
    resources will enable us to improve our information processing and
    analysis, expand our investigative capabilities, strengthen our
    litigation capacity, and better use technology. In addition, the
    Enforcement Division will continue to: (1) invest in technology that
    enables the staff to work more efficiently and effectively, and (2)
    collaborate with external stakeholders who assist in the Division's
    identification, investigation, and litigation of securities law
    violations, including wrongdoing that crosses borders.
        Question. I believe private enforcement and investors' right to
    recover losses is very important, and serves as a deterrent to
    securities fraud. Would you agree and can you discuss how the SEC can
    work with victims of securities fraud to recover losses?
        Answer. The SEC is fully committed to its mission of protecting
    investors and continuously strives to maximize the return of funds to
    victims of securities fraud whenever possible. This may consist of ill-
    gotten gains required to be disgorged and/or penalties imposed by a
    court in the Commission's enforcement actions. The Sarbanes-Oxley Act
    of 2002 enhanced the Commission's ability to more fully compensate
    harmed investors by giving us authority, in appropriate cases, to
    create Fair Funds through which we can distribute civil penalties
    (along with disgorgement) to victims. Prior to the Act, the Commission
    was required to transmit all penalties obtained to the U.S. Treasury.
    This Fair Fund authority is an important part of our effort to help
    harmed investors recover losses. Additionally, meritorious private
    actions can help supplement regulatory enforcement of the securities
    laws.
        The SEC's Office of Distributions (OD) within the Division of
    Enforcement is responsible for overseeing the Commission's
    distributions program. The OD handles all distributions to victims in
    enforcement actions where a disgorgement fund exists or where the
    Commission or a court has created a Fair Fund that includes monetary
    penalties. The office was reorganized in 2011 to centralize the
    handling of distributions, develop expertise, and improve speed and
    efficiency in the distribution process. Its mission is to return money
    to harmed investors whenever practicable in a fair, reasonable, cost-
    effective, and efficient manner. It also seeks to promote awareness
    among injured investors about the distributions process through
    proactive outreach and targeted mailings.
        The OD handles an average of 200 distribution funds at any given
    time. Since the passage of the Sarbanes Oxley Act, the SEC has returned
    more than $9.9 billion to harmed investors through its distributions.
    In fiscal year 2013, the SEC returned over $250 million to harmed
    investors through 22 different distribution funds. We are committed to
    continuing to work to maximize the return of funds to harmed investors
    whenever possible.
        Question. There are reports that the SEC is considering allowing
    U.S. companies to utilize accounting standards from the International
    Standards Board to report their financial results in the United States.
    Could you comment on the validity of these reports, as well as the
    strengths and weaknesses of such an approach?
        Answer. The Commission has long promoted the objective of a single
    set of high-quality globally accepted accounting standards. The
    Financial Accounting Standards Board (FASB) and the International
    Accounting Standards Board (IASB) have been working together to more
    closely converge U.S. Generally Accepted Accounting Principles (U.S.
    GAAP) and International Financial Reporting Standards (IFRS) since
    2002. The FASB's ongoing work with the IASB on convergence projects has
    resulted in the elimination of many significant differences between
    U.S. GAAP and IFRS. The Commission continues to monitor the progress of
    the remaining convergence projects.
        Under the Commission's rules, foreign private issuers are permitted
    to file financial statements in accordance with IFRS as issued by the
    IASB without reconciliation to U.S. GAAP. Today, over 500 companies,
    representing trillions of dollars of market capitalization, avail
    themselves of this method of reporting by submitting reports to the
    Commission as foreign private issuers using IFRS. Therefore, high-
    quality IFRS standards are critically important to the U.S. markets.
        The Commission has not yet made any determinations as to whether
    there would be any further incorporation of IFRS into the U.S.
    financial reporting system. I believe it is important for the
    Commission to continue to consider the potential benefits and
    challenges of further incorporating IFRS into the U.S. financial
    reporting system. As we do, it is imperative to fully consider the
    interests of U.S. investors, the FASB's role as the standard setter of
    accounting standards for U.S. companies, and the role the United States
    plays in the development of global accounting standards.
                                     ______

                   Questions Submitted by Senator Jerry Moran
                 sec registration threshold under section 12(g)
        Question. In implementing Section 401 of the JOBS ACT, the SEC
    proposed Regulation A+, which is intended relieve the reporting burden
    for small businesses by exempting securities offerings of less than $50
    million annually from the registration requirements of the Securities
    Act. Additionally, the JOBS Act increased one of the registration
    thresholds under section 12(g) of the Exchange Act, by allowing up to
    2000 accredited investors for companies with over $10 million in
    assets. Recently, Kansas businesses have expressed concerns about
    increasing asset threshold under 12(g) in order to match the exemption
    provided for public offerings in Regulation A+.
        Has the SEC examined the effects of increasing the 12(g) asset
    threshold?
        What is the policy rationale for such an increase? Do you believe
    that rationale is consistent with Congressional intent?
        What is the SEC doing to make certain the reporting requirements
    for companies with assets of $10 million and 2000+ accredited investors
    are not more burdensome than requirements for companies with potential
    assets of up to $50 million?
        Answer. As described in the Commission's rule proposal to implement
    new section 3(b)(2), often referred to as Regulation A+ exemption, a
    company raising capital under that exemption would have to comply with
    the requirements of Exchange Act Section 12(g) just as any other
    company would. That is, no matter how much a company raised in a
    Regulation A+ offering, if, at the end of the year it had more than $10
    million of assets and 2,000 holders of record, it would be required to
    register under the Exchange Act.
        Under the rule proposal, certain Regulation A+ issuers would be
    required to file annual and semiannual ongoing reports and current
    event updates that are similar to the requirements for public company
    reporting, but scaled for these issuers. In the proposing release, the
    Commission noted that such disclosures would benefit investors by
    providing a regular flow of information and would further the
    development of a market for the securities. The reporting obligations
    would be required even if the issuer has fewer than 2,000 holders of
    record and therefore does not meet the thresholds under section 12(g).
    The staff is carefully reviewing the public comment received on this
    rule proposal as it works to develop recommendations for final rules
    for the Commission's consideration.
        With regard to Exchange Act Section 12(g), Congress established a
    $1 million total assets threshold in 1964. The Commission subsequently
    used its authority under Exchange Act Section 12(h) to raise the asset
    threshold several times, and raised it to $10 million in 1996. The
    changes made by the JOBS Act, which were effective immediately upon
    enactment, codified the $10 million threshold in the Exchange Act, but
    did not raise it.
        The Commission staff is preparing rule recommendations to revise
    its rules to implement the changes made by the JOBS Act to section
    12(g). When undertaking these rulemakings, as is the case with all
    rulemakings, the Commission and its staff are mindful of the economic
    effects associated with the requirements proposed or adopted, including
    the costs and benefits of regulation and potential effects on
    efficiency, competition and capital formation.
                              accredited investors
        Question. Section 413 of the Wall Street Reforms and Consumer
    Protection Act of 2010 requires the SEC to examine its definition of an
    accredited investor to determine whether it should be modified ``for
    the protection of investors, in the public interest, and in light of
    the economy.'' To qualify as an accredited investor, SEC requires an
    investor to earn an annual income over $200,000 or a net worth over $1
    million, excluding a primary residence. There is concern among the
    angel investing community and new businesses across the country that a
    dramatic increase in the threshold for qualification as an accredited
    investor could limit the number of individuals who are able to provide
    capital to early stage businesses at their most critical juncture. GAO
    analysis of Federal data on household net worth showed that adjusting
    the $1 million minimum threshold to approximately $2.3 million, to
    account for inflation, would decrease the number of households
    qualifying as accredited from approximately 8.5 million to 3.7 million,
    or approximately a 56 percent drop in eligible accredited investors.
        What criteria will the SEC use to determine whether or not to
    increase the threshold for qualification as an accredited investor?
        Is there strong evidence that the current thresholds pose any risk
    for investors? What data suggests current accredited investors do not
    understand risk when making investments?
        Answer. The Commission staff, including staff from the Division of
    Corporation Finance and the Division of Economic and Risk Analysis,
    currently is engaged in a comprehensive review of the accredited
    investor definition. The review and the feedback received through that
    process will inform the Commission's consideration of whether to change
    the definition of accredited investor, including whether net worth and
    annual income should be used as tests for determining whether a natural
    person is an accredited investor. As part of this review, Commission
    staff is also independently evaluating alternative criteria for the
    accredited investor definition suggested by the public and other
    interested parties. Careful consideration is being given to both the
    need to facilitate capital formation and the need to protect investors.
    Any possible changes to the definition would subsequently occur through
    the rulemaking process, which includes opportunities for public comment
    on any such changes and a thorough economic analysis of their potential
    effects.
                        accounting rules under jobs act
        Question. The section 4(a)(6) exemption of the JOBS Act was
    intended to provide investors with protection in the form of disclosure
    while allowing companies an easy pay to accessing investment capital.
    Balancing these goals is why Congress included mandatory financial
    disclosures for companies seeking investment. However, Congress did not
    stipulate the basis of accounting required and deferred to the SEC to
    make that determination. In response, the Commission has proposed U.S.
    generally accepted accounting principles (U.S. GAAP), a standard basis
    of accounting designed for use by larger and public corporations. Many
    companies and crowdfunding platforms believe this requirement is
    unnecessary, unduly burdensome, and inconsistent with Congress's intent
    to create an exemption that was compatible with the reality of small
    business. As the National Federation of Independent Business (NFIB) has
    shown, most small businesses do not use U.S. GAAP accounting. In fact,
    only a small minority uses any sort of pure accrual-based accounting
    (of which U.S. GAAP is a subset) with the vast majority using either
    cash-based accounting or a hybrid method. Small businesses choose the
    method of accounting that makes the most sense for their needs, both in
    terms of how it reflects the reality of their business and the costs of
    preparation and compliance.
        Why did the SEC decide to require U.S. GAAP as the preferred
    accounting practice?
        Answer. As you know, the Commission has proposed rules to implement
    the crowdfunding provisions of the JOBS Act.\14\ Under the proposal,
    companies would be required to provide financial statements prepared in
    accordance with U.S. generally accepted accounting principles (``U.S.
    GAAP''). The Commission considered a variety of factors when issuing
    the proposal, including that (i) financial statements prepared in
    accordance with U.S. GAAP are currently required for offerings under
    Regulation A, which is another exemption available to smaller issuers
    to raise capital; (ii) financial statements prepared in accordance with
    U.S. GAAP are generally self-scaling to the size of the issuer, which
    should reduce the burden of preparing financial statements for many
    early stage issuers; and (iii) some commenters suggested that the
    Commission require financial statements prepared in accordance with
    U.S. GAAP.
        The Commission requested comment on the proposal and alternatives,
    such as whether financial statements should be prepared differently
    than under U.S. GAAP and, if so, which changes from U.S. GAAP would be
    appropriate The Commission also requested comment on whether the
    Commission should allow issuers to prepare financial statements using a
    comprehensive basis of accounting other than U.S. GAAP.
        The Commission has received approximately 320 comment letters,
    including 30 form letters, on the crowdfunding proposal. Comments
    received on this aspect of the proposal were mixed, and contained a
    variety of suggested approaches. The Commission staff is reviewing
    these letters and will consider them carefully as they develop
    recommendations for final rules for the Commission's consideration.
                                audit threshold
        Question. In the JOBS act Congress established a tiered system of
    required financial disclosures that companies would have to meet in
    order to participate in an offering under Regulation Crowdfunding.
    Under the law, issuers offering more than $500,000 within a 12-month
    period, or such other amount as the Commission may establish, by rule,
    are required to provide audited financial statements. The Commission
    has proposed keeping the threshold for requiring an audit at $500,000.
    The $500,000 audit threshold as proposed has received criticism in both
    the media and comments to the Commission because of the prohibitive
    cost of audits for small companies, especially since the audit will
    need to be undertaken prior to the company being certain that it will
    secure funding. The Commission proposes to keep the threshold at
    $500,000 because ``Congress specifically selected'' it. However this is
    not true; Congress specifically gave the SEC authority to select a
    different threshold amount to avoid the very scenario that appears to
    be developing--that the audit requirement is too onerous for companies
    to comply with, excluding them from being able to take advantage of
    crowdfunding.
        Is the SEC aware of concerns raised by small businesses interested
    in using crowdfunding?
        Will the SEC monitor and potential modify these thresholds over
    time?
        Answer. Title III of the JOBS Act, which establishes a new
    crowdfunding exemption, contains a number of requirements mandated by
    Congress, including those to ensure investor protection. As you note,
    the Commission proposed rules designed to implement the crowdfunding
    exemption and received approximately 320 comment letters, including 30
    form letters, on the proposal. While some commenters were supportive of
    the Commission's proposal, other commenters expressed concerns about
    costs that may arise under the proposal, including costs associated
    with preparing audited financial statements. Commission staff is
    reviewing these comment letters and has been meeting with individuals
    and groups interested in sharing their views about the rule proposal.
    The staff is considering all of the feedback provided as it works to
    develop recommendations for final rules for the Commission's
    consideration. The Commission and staff appreciate the need to develop
    rules to implement the crowdfunding exemption in a way that both
    promotes capital formation while at the same time providing key
    protections for investors.
        In issuing the proposal, the Commission noted its understanding
    that the proposed rules, if adopted, could significantly affect the
    viability of crowdfunding as a capital-raising method for startups and
    small businesses. Rules that are unduly burdensome could discourage
    participation in crowdfunding. Rules that are too permissive, however,
    may increase the risks for individual investors, thereby undermining
    the facilitation of capital raising for startups and small businesses.
        The Commission also directed the staff to develop a comprehensive
    work plan to review and monitor the use of the crowdfunding exemption
    under section 4(a)(6) and the rules the Commission adopts to implement
    crowdfunding. Upon adoption of the final rules, the Commission staff
    will monitor the market for crowdfunding offerings, focusing in
    particular on the types of issuers using the exemption, the level of
    compliance by issuers and intermediaries, and whether the exemption is
    achieving its objectives. This monitoring program will assist the
    Commission's efforts in evaluating the development of market practices
    in offerings made in reliance on the crowdfunding exemption and related
    rules. These efforts also will facilitate future Commission
    consideration of any potential amendments to the rules implementing
    crowdfunding.
                           ongoing audit requirement
        Question. The Commission has proposed a requirement that companies
    subject to an initial audit must undergo audits on a yearly basis until
    the securities are retired, the company becomes a reporting company, or
    the company liquidates or dissolves. This proposal is in no way
    mandated by the JOBS Act. The Commission justifies this requirement on
    the grounds of providing investors and potential secondary purchasers
    with up-to-date information. While this is an important objective, and
    was the reason for Congress requiring certain limited ongoing
    disclosures in the JOBS act, requiring ongoing audits is excessively
    expensive, burdensome, and ultimately contrary to the needs of small
    businesses and potential investors. The ongoing audit requirement will
    also render the cost-of-capital of crowdfunding higher than other
    sources of funding, possibly creating an adverse selection problem
    where the best companies avoid crowdfunding in favor of other types of
    offerings with less onerous requirements such as offerings made in
    reliance on Rule 506(c), leaving only companies for whom crowdfunding
    is the last resort in the marketplace.
        Is the Commission aware of the concern about this requirement?
        Why would the Commission treat crowdfunding investments differently
    than securities sold under Regulation A, which do not require a yearly
    audit?
        Answer. While some commenters were supportive of the Commission's
    proposal, other commenters expressed concerns about costs that may
    arise under the proposal, including costs associated with preparing
    ongoing annual reports with audited financial statements. As indicated
    above in response to Question 3, Commission staff is reviewing these
    comment letters and has been meeting with individuals and groups
    interested in sharing their views about the rule proposal.
        The crowdfunding provisions of the JOBS Act require ongoing
    disclosure, which differs from current Regulation A. Under the proposal
    to implement the crowdfunding provisions, a company's ongoing
    disclosure about its financial condition would have to meet the
    financial statement requirements that were applicable to its initial
    offering of securities. As a result, only companies whose offering
    statement included audited financial statements would be required to
    provide audited financial statements on a yearly basis until one of
    three terminating events occurs. The Commission requested comment on
    the proposed ongoing annual reporting requirement and will consider
    carefully the comments submitted on this requirement when adopting
    final rules.
                                     ______

                   Questions Submitted to Hon. Mark P. Wetjen
                    Questions Submitted by Senator Tom Udall
                     importance of conducting annual exams
        Question. Chairman Wetjen, the Commodity Futures Trading Commission
    (CFTC) regulates the activities of over 68,000 registrants who handle
    customer funds, solicit or accept orders, or give trained advice. These
    include commodity pool operators, futures commission merchants, floor
    brokers, floor traders, and salespersons. I understand that due to
    resource constraints, the CFTC is unable to conduct reviews more
    frequently than once every 3 years. Because of the triennial cycle, the
    ability to check compliance is diluted. Your fiscal 2015 budget request
    seeks $38.1 million dollars which will support 158 staff. That is 63
    more staff than the 95 supported by the current spending level of $23.6
    million dollars.
        Would the requested funding permit more frequent reviews?
        Answer. Yes. Currently, the Commission's review cycles of
    registered entities varies depending on many factors, including the
    Commission's available resources and whether an entity is considered
    systemically important. By fully funding the President's budget
    request, the Commission can move toward annual reviews of all
    significant clearinghouses and trading platforms and perform more
    proactive monitoring of higher risk market participants and
    intermediaries. Partially funding the request will mean accepting
    potentially avoidable risk in the derivatives markets as the Commission
    is forced to reduce the frequency of reviews and forego more in-depth
    financial, operational and risk reviews of the firms within its
    jurisdiction.
        Question. What are some of the benefits CFTC could realize from the
    proposed increase in resources for the Exams functions?
        Answer. The CFTC would be in a better position to monitor risk in
    the markets and entities we oversee, verify that registered entities
    are complying with our rules, and proactively monitor the activities of
    our registrants. This would also help the CFTC to ensure that the
    financial, risk, compliance and operational reports that we receive are
    materially correct. Likewise, the CFTC would be better able identify
    industry trends and assess new and emerging risks in the industry.
    Lastly, the CFTC would be in an improved position to proactively
    monitor and detect problems at firms sooner. The benefit to customers
    would be just as important as closer monitoring would help ensure the
    firms are following our customer protection rules.
        Question. Would more frequent reviews require adding staff with
    enhanced expertise?
        Answer. While our staff has, on average, 23.6 years of experience,
    the industry is constantly changing and becoming more complex. In
    enhancing its examinations program, the CFTC would expect to hire
    individuals with more specialized skills, and possibly train current
    employees to provide those specialized skills. The skills necessary for
    an effective examinations program include risk management, technology
    (including data security and data management), swaps expertise,
    liquidity analysis, market risk analysis, and operational risk
    analysis.
        Question. Is the CFTC encountering any problems in acquiring the
    skills and experience needed to support the growth you project to need?
        Answer. The key challenges the CFTC faces in this regard are having
    adequate resources to train existing staff and hire qualified new
    staff. An additional challenge the Commission faces when hiring new
    staff is that it competes for qualified staff directly with private
    sector employers who have significant financial resources at their
    disposal and are often able to provide greater compensation than public
    sector employers. Regarding our existing staff, the Commission faces
    challenges in retaining some of its most experienced and knowledgeable
    staff. In recent years, the Commission has had to reduce investments in
    training opportunities for existing staff. Such training is vital to
    retaining employees and updating their skills and knowledge about the
    markets we regulate and our agency's increased regulatory
    responsibilities under the Dodd-Frank Wall Street Reform and Consumer
    Protection Act (Dodd-Frank).
                market transformation and high-frequency trading
        Question. Chairman Wetjen, as the leader of one of our key
    financial regulators, you are acutely aware of the growing challenges
    facing your agency in monitoring the markets. We now have significantly
    transformed, globalized, round-the-clock, and highly diversified
    marketplace. Rapid, electronic, algorithmic trading platforms are
    replacing the traditional open-outcry trading floors.
        What is the current status of the CFTC's oversight of high-
    frequency trading and automated trading environments?
        Answer. The Commodity Exchange Act (Act) and Commission regulations
    are designed to protect market participants and the public from fraud,
    manipulation, abusive practices, and systemic risk related to futures
    and swaps. The Commission oversees designated contract markets (DCMs),
    swap execution facilities (SEFs), clearinghouses, futures commission
    merchants (FCMs), swap dealers (SDs) and other entities and
    intermediaries to monitor their compliance, and in the case of DCMs and
    SEFs, reviews their self-regulatory programs. DCMs are subject to 23
    core principles under the Act and SEFs are subject to 15. As the front-
    line self-regulatory organizations, DCMs and SEFs have primary
    responsibility for identifying misconduct by all market participants,
    including those engaged in automated trading and high-frequency trading
    (HFT). The CFTC's Division of Market Oversight conducts rule
    enforcement reviews of DCMs' self-regulatory programs and evaluates
    their compliance with the Act and Commission regulations.
        The Act and Commission regulations do not distinguish between HFT
    and non-HFT. ``High-frequency trader'' is not a distinct category of
    market participant within the Commission's regulations, nor is it a
    defined term or separate registration status. Applicable regulations
    and resources developed by the Commission to detect trading abuses are
    equally relevant regardless of the trading strategy used to effectuate
    the abuse. Many Commission rulemakings implementing Dodd-Frank apply to
    automated trading and HFT because the rules address trading on DCMs and
    SEFs, or apply to registrants who may engage in automated trading of
    HFT activity.
        In April 2012, the Commission adopted Regulations 1.73 and 23.609
    requiring FCMs, SDs and major swap participants (``MSPs'') that are
    clearing members to establish risk-based limits based on ``position
    size, order size, margin requirements, or similar factors'' for all
    proprietary accounts and customer accounts. The rules also require
    FCMs, SDs and MSPs to ``use automated means to screen orders for
    compliance with the [risk] limits'' when such orders are subject to
    automated execution. The Commission also adopted rules in April 2012
    requiring SDs and MSPs to ensure that their ``use of trading programs
    is subject to policies and procedures governing the use, supervision,
    maintenance, testing, and inspection of the program.''
        In June 2012, the Commission adopted rules to implement the 23 core
    principles for DCMs. Regulation 38.255 requires DCMs to ``establish and
    maintain risk control mechanisms to prevent and reduce the potential
    risk of price distortions and market disruptions, including, but not
    limited to, market restrictions that pause or halt trading in market
    conditions prescribed by the designated contract market.'' Regulation
    37.405 imposes similar requirements on SEFs.
        The DCM rules also set forth risk control requirements for
    exchanges that provide direct market access (``DMA'') to clients.
    Regulation 38.607 requires DCMs that permit DMA to have effective
    systems and controls reasonably designed to facilitate an FCM's
    management of financial risk. These systems and controls include
    automated pre-trade controls through which member FCMs can implement
    financial risk limits. Regulation 38.607 also requires DCMs to
    implement and enforce rules requiring member FCMs to use these systems
    and controls. The DCM rules also implement new requirements in the Act
    related to exchanges' cyber security and system safeguard programs. The
    Act and Commission regulations also address cyber security and system
    safeguards within SEFs.
        Finally, the Division also conducts direct surveillance of its
    regulated markets, and continues to improve the regulatory data
    available for this purpose. For example, in November 2013 the
    Commission published final rules to improve its identification of
    participants in futures and swaps markets (OCR Final Rules). While
    enhancing the Commission's already robust position-based reporting
    regime, the OCR Final Rules also create new volume-based reporting
    requirements that significantly expand the Commission's view into its
    regulated markets, including with respect to HFT.
        In addition to its current rules, on September 12, 2013, the
    Commission published a Concept Release on Risk Controls and System
    Safeguards for Automated Trading Environments. The Concept Release
    proposes consideration of a series of 23 additional pre-trade risk
    controls; post-trade reports; design, testing, and supervision
    standards for automated trading systems (ATS) that generate orders for
    entry into automated markets; market structure initiatives; and other
    measures designed to reduce risk or improve the functioning of
    automated markets. The Concept Release is intended to foster a public
    dialogue and inform the Commission as it considers what additional
    measures, if any, might be necessary to address automated and high-
    frequency trading.
        The initial 90-day comment period closed on December 11, 2013, but
    was reopened from January 21 through February 14, 2014, in conjunction
    with a meeting of the CFTC's Technology Advisory Committee (TAC). The
    Commission received over 40 public comments on the Concept Release,
    including comments from DCMs; an array of trading firms; trade
    associations; public interest groups; members of academia; a U.S.
    Federal reserve bank; and consulting, technology and information
    service providers in the financial industry. CFTC Staff is currently
    studying all publicly submitted comments received and upon completing
    the review will make initial recommendations if necessary.
        Question. Does the CFTC presently have the necessary talent and
    technology in place to monitor and analyze high-frequency trading, to
    inform your regulatory and enforcement work, and guard the integrity
    and safety of the markets? What are the deficiencies?
        Answer. As noted above, the Commission's rules do not distinguish
    between HFT and non-HFT trading. The Commission does face challenges in
    making sure its technology and personnel are adequate to oversee
    trading in the markets, including HFT trading. The most significant
    impediment to enhanced Commission surveillance of HFT is insufficient
    staff and resources. In particular, the Commission does not have the
    resources in place to receive and analyze complete messaging (e.g.,
    order book) data from DCMs or SEFs. Access to messaging data is
    critical to overseeing electronic trading because it permits analysts
    to reconstruct what actually happened during a particular trading
    period. With appropriate staff and technology, staff can use this data
    to detect disruptive trading practices such spoofing. Achieving
    comprehensive surveillance of electronic trading will require
    additional financial, staff and other resources not currently available
    to the Commission.

                              SUBCOMMITTEE RECESS

        Senator Udall. The subcommittee hearing is hereby
    adjourned.
        [Whereupon, at 3:25 p.m., Wednesday, May 14, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2015

                                  ----------

                            WEDNESDAY, MAY 21, 2014

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 1:45 p.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Tom Udall (chairman) presiding.
        Present: Senators Udall and Johanns.

                         SMALL BUSINESS ADMINISTRATION

                          Office of the Administrator

    STATEMENT OF HON. MARIA CONTRERAS-SWEET, ADMINISTRATOR

                     OPENING STATEMENT OF SENATOR TOM UDALL

        Senator Udall. The subcommittee will now come to order.
    Good afternoon.
        I am pleased to convene this hearing of the Appropriations
    Subcommittee on Financial Services and General Government on
    the fiscal year 2015 budget request for the Small Business
    Administration and the Community Development Financial
    Institutions Fund.
        First, I want to welcome Ranking Member Senator Mike
    Johanns. Others may be joining us today. We are not sure on
    that. But they may participate with us as we progress.
        With us today are two distinguished witnesses, the new
    Administrator of the Small Business Administration, Maria
    Contreras-Sweet, and the Acting Assistant Secretary of
    Financial Institutions of the Treasury Department, Amias
    Gerety.
        Thank you for your service, and I look forward to hearing
    your testimony.
        Last week was National Small Business Week, recognizing
    small-business owners and entrepreneurs. Small businesses, as
    we all know, are the backbone of our American economy, creating
    two out of every three jobs in the United States. In my home
    State of New Mexico, small businesses make up 96 percent of all
    employers.
        I welcome the opportunity today to conduct oversight of
    these two Federal entities. They play an important role in
    supporting small businesses, creating jobs, revitalizing
    distressed communities, and strengthening our economy.
        The Small Business Administration does four important
    things. It offers training and mentorship services with partner
    organizations across the country. It helps small businesses
    compete for $80 billion in Federal contracts. It provides $36
    billion in guaranteed loans to help small businesses start up
    and grow, and another $1 billion in direct loans to help small
    businesses rebuild after natural disasters.
        The Community Development Financial Institutions (CDFI)
    Fund at the Treasury Department also provides valuable support
    to financial institutions that serve distressed communities and
    to help develop these underserved areas. It supports over 800
    CDFI institutions across the country with financial assistance,
    tax credits, and a new bond program. The CDFI Fund was awarded
    $1.7 billion in financial assistance for community development
    organizations and $33 billion in tax credits.
        The Small Business Administration (SBA) and CDFI Fund are
    crucial for new entrepreneurs needing help with creating a
    business plan. For well-established businesses, it is crucial
    because they are still struggling to recover from the economic
    crisis and need help with credit.
        These programs help entrepreneurs open grocery stores in
    neighborhoods without healthy food options. They help new
    homeowners afford their first homes. And together, the SBA and
    the CDFI Fund provide access to capital, and they leverage
    funds to help grow our economy and create new jobs.
        The fiscal year 2015 budget request for the SBA is $865
    million, a decrease of $64 million from the fiscal year 2014
    level. In large part, this reduction is the result of a
    stronger economy with small-business owners less likely to
    default on their federally guaranteed loans, saving taxpayer
    dollars.
        However, there are the reductions that are troubling. The
    request eliminates the State Trade and Export Promotion
    program, a program that helps small businesses increase their
    exports.
        As a Senator from a border State, I know firsthand how such
    programs can help an economy grow.
        Similarly, the total request for the CDFI account is $225
    million. That is slightly less than the fiscal year 2014 level.
    With this total, the request eliminates the Bank Enterprise
    Award program, a program that provides financial incentives to
    FDIC-insured banks to increase their investments in distressed
    communities.
        I look forward to hearing from both witnesses on why these
    reductions were requested.
        Both agencies have also requested to extend programs that
    help provide access to capital that is not available on the
    private market.
        SBA's 504 loans provide credit for small businesses to
    purchase real estate and equipment. The budget proposals to
    allow 504 loans to be used to refinance commercial mortgages so
    small-business owners can lock in low interest rates and free
    up resources to reinvest in their businesses, helping them get
    back on their feet.
        The CDFI bond program currently provides $750 million in
    30-year bonds to CDFIs, which are then leveraged to community
    investors to support development. The budget proposes to
    continue and increase this bond program for another year.
        Both proposals would provide credit to reinvest in our
    communities at no cost to the taxpayer. I look forward to
    hearing from these witnesses about the resources they need to
    do their jobs and how the subcommittee can help to support
    their vital missions and help this recovery reach Main Street,
    which I think should be an important focus of this hearing.
        I now turn to my distinguished ranking member, Senator Mike
    Johanns, for his opening comments.

                       STATEMENT OF SENATOR MIKE JOHANNS

        Senator Johanns. Mr. Chairman, thank you for calling this
    hearing today.
        To our witnesses, welcome. We are glad to have you here. I
    look forward to your testimony. I look forward to testimony
    about the Small Business Administration and other efforts to
    promote economic growth in our Nation.
        The American economy is still facing rocky times.
    Unfortunately, I believe many current policies are hindering
    rather than helping growth. We especially need to do more for
    our country's small businesses. In States like mine, and across
    the country, they are the backbone of the economy and represent
    the majority of all new jobs created over the last decade.
        When I meet with small businesses in business roundtables
    and that sort of environment, it doesn't take very long before
    they are talking to me about regulatory reform and the need for
    that. An uncertain regulatory environment affects lenders and
    small-business owners.
        I constantly hear from financial institutions all over
    Nebraska about how correct regulatory burdens and ever-changing
    rules are negatively affecting availability and access to
    credit. Businesses have to have capital to grow. They have to
    have capital to expand, to create jobs, so we need to ensure
    that the Government is not throwing up roadblocks in terms of
    capital development.
        The SBA has a critical mission in our Nation, providing a
    helping hand to small businesses through guaranteed and direct
    loans. SBA also does important work to help businesses,
    homeowners, and communities affected by disasters.
        We have, unfortunately, seen the unbridled hand of Mother
    Nature affect communities in Nebraska. Just 10 days ago,
    tornadoes devastated the areas of Beaver Crossing, Sutton,
    Nebraska, Cordova, and elsewhere. In just one example, 1,200
    Nebraskans volunteered, though, to help with cleanup in a
    community of 400 people. What a remarkable response.
        It signifies the true character of a great State. But that
    does not mean these folks who lost everything won't need some
    help in terms of loans from the SBA. They need that to get back
    on their feet.
        I have been in close contact with the Governor and others
    in the State. I have every indication that a request will be
    forthcoming, probably this week. And I know that the SBA will
    very carefully, attentively, and responsibly look at the
    request. These good people need your help.
        These folks had a rough Mother's Day, and I am hopeful that
    we can get them appropriate assistance quickly.
        On the CDFI program, the President's budget request
    proposed a slight reduction for the program. While I appreciate
    the efforts to hold down spending, I do question some of the
    rearranged priorities in this CDFI account.
        For instance, the President's budget zeroed out the bank
    enterprise award program in order to finance increases to the
    healthy foods financing program. So there are instances where I
    will have some questions that I would like to have answered
    today.
        I would say that both of these agencies have very worthy
    goals. The job of both agencies is to generate economic growth.
    Given our Government's fiscal restraint, we must carefully
    review every agency budget to ensure that taxpayers are
    receiving the best value for the dollar.
        I look forward to hearing from our witnesses about the
    efforts they are making to work with small businesses and
    community lending institutions to ensure that these programs
    are having an impact in both urban and rural America.
        Mr. Chairman, again, thank you for calling this hearing. I
    look forward to the testimony.
        Senator Udall. Senator Johanns, thank you for very much for
    that opening statement.
        Administrator Contreras-Sweet, I invite you to present your
    remarks on behalf of the Small Business Administration.

                SUMMARY STATEMENT OF HON. MARIA CONTRERAS-SWEET

        Ms. Contreras-Sweet. Thank you, Mr. Chairman. And thank
    you, Ranking Member Johanns, and the distinguished members of
    the subcommittee. Thank you for this opportunity to testify
    before you today.
        We appreciate your ongoing leadership and your support for
    the SBA as we work to assist the entrepreneurs who are so
    critical to economic growth and local job creation. We all know
    that they create right now two out of three new jobs, and they
    employ half of the private sector workforce. So it is
    important, the work that we are doing.
        I have been on the job, I am pleased to say, for about 6
    weeks now, 38 days to be precise. And I have traveled across
    the country to meet with our core constituencies, meaning the
    small-business owners, veteran entrepreneurs, SBA lenders,
    procurement officials, exporters, and victims of the
    devastating mudslide in Washington.
        I can tell you that at every stop, I have heard powerful
    testimony about how SBA has been a critical force in helping
    our small businesses succeed.
        Again, I want to thank this committee, in particular, for
    enabling SBA to increase access to capital, to counseling, and
    to contracts, and, of course, to disaster assistance for small
    businesses throughout our country.
        This budget request gives me the tools I need to pursue
    three core goals: number one, to expand access to capital to
    create more quality jobs; two, to embrace an inclusive vision
    for SBA; and three, to ensure our programs are giving taxpayers
    a strong return on their investment, a real bang for their
    buck.
        With respect to the first goal, to create jobs through our
    loan programs, last year was the third straight year that SBA
    supported over $29 billion in lending to more than 47,000 small
    businesses. We also assisted 46,000 businesses and individuals
    through $2.8 billion in disaster loans.
        For fiscal year 2015, SBA is requesting an appropriation of
    $710 million plus an additional $155 million for our disaster
    assistance program. This request would enable us to guarantee
    loans totaling $36.5 billion over the next year, and it would
    help us facilitate access to $80 billion in Federal contracts
    for our small businesses.
        We are also requesting full funding for disaster loan
    assistance, as we continue to make process reforms to ensure
    that homeowners, renters, and businesses have access to rapid
    SBA assistance when they need us the most.
        We have dramatically reduced our subsidy for the 504 loan
    program down to $45 million. And for the second year in a row,
    SBA is requesting no credit subsidy for the 7(a) loan program.
        Overall, our fiscal year 2015 request represents a $64
    million reduction because of the subsidy decrease, as you aptly
    pointed out.
        These two lending programs, both 7(a) and 504 together,
    will support an estimated 650,000 jobs for fiscal year 2015.
        This budget also seeks authority to extend 504 refinance
    lending. The 504 refi helps entrepreneurs unlock equity that
    they already own in their businesses. A restructured loan under
    504 refi means a better rate on long-term debt, allowing owners
    to use their equity to create jobs and to grow.
        Before expiring at the end of fiscal year 2012, the 504
    refi supported $5.5 billion in lending over 2 years. And the
    good news is, again, this request is at zero subsidy cost to
    the taxpayer.
        In terms of the next core value, in terms of an inclusive
    vision for entrepreneurship, this budget would help SBA get
    more loans into the hands of entrepreneurs from diverse
    backgrounds. And toward that end, we encourage our lending
    partners to approve more small-dollar loans.
        SBA is once again setting fees to zero under our 7(a) loans
    under $150,000.
        This budget would allow us to continue working with our
    resource partners to counsel and train more than 1 million
    small-business owners annually.
        To that end, we are seeking funding for our nationwide
    network of Small Business Development Centers (SBDCs), our
    Women's Business Centers (WBCs), our Veteran's Business
    Outreach Centers (VBOCs), and our volunteer SCORE counselors.
    Each year more than 250,000 servicemembers transition out of
    the Armed Forces. Our Boots to Business program allows them to
    continue to serve their country and become job creators.
        We are requesting $7 million to meet the Department of
    Defense's request to train transitioning servicemembers at more
    than 200 installations worldwide. We are making it easier for
    veterans to access capital by reducing or eliminating their
    fees on certain SBA loans.
        We are also investing more in our Native American programs,
    working in 84 communities across America to facilitate new
    business opportunities for this underserved population. Through
    our 8(a) program, we have helped native entrepreneurs and
    tribal businesses secure more than $10 billion in Government
    contracts in fiscal year 2012.
        Finally, a return on investment for the taxpayer, in terms
    of ensuring that they are getting the maximum Return on
    Investment (ROI), the SBA continues to focus on rooting out
    waste, fraud, and abuse in contracting and lending programs.
    Since 2008, SBA has suspended and debarred more companies and
    individuals for abusing SBA programs than in the previous 10
    years combined.
        I am committed to ensuring that Federal dollars go to
    deserving small businesses that play by the rules.
        At the same time, we have tightened our belts within our
    own operations, saving $600,000 in rent by moving our DC
    district office, reducing our fleet expenses by more than 9
    percent, and reducing SBA travel by 25 percent over fiscal year
    2012 levels.
        Our fiscal year budget ensures that America's small
    businesses have the resources and the tools and the training to
    realize their potential, strengthen our economy, grow
    communities, grow jobs, and grow America.

                               PREPARED STATEMENT

        With that, I thank you. I thank the subcommittee for its
    leadership, for its support for small businesses. And I would
    be delighted to take your questions at the appropriate time.
        [The statement follows:]
                Prepared Statement of Hon. Maria Contreras-Sweet
        Chairman Udall, Ranking Member Johanns, and distinguished members
    of this subcommittee, thank you for this opportunity to testify today.
        We appreciate your ongoing support for the Small Business
    Administration (SBA) as we work to assist the entrepreneurs who are so
    critical to economic growth and local job creation.
        I've been on the job for 6 weeks now. I've traveled across the
    country to meet with our core constituencies: small business owners,
    veteran entrepreneurs, SBA lenders, Certified Development Companies
    (CDCs), procurement officials, exporters, and victims of the
    devastating mudslide in Washington State.
        At every stop, I've heard powerful testimonials about how SBA has
    been a critical force in helping our small businesses succeed. We're a
    small agency with a big mission. We call it ``3 Cs and a D''--providing
    access to capital, counseling, contracts and disaster assistance. Our
    fiscal year 2015 budget will help us fulfill that mission and support
    the entrepreneurs who are creating most of the new jobs in America.
        Last year was the third straight year that the SBA supported over
    $29 billion in lending to more than 47,000 small businesses. We also
    assisted more than 46,000 businesses and individuals through $2.8
    billion in disaster loans.
        For fiscal year 2015, the SBA is requesting an appropriation of
    $710 million, plus an additional $155 million for our disaster
    assistance program.
        This request would enable us to guarantee loans totaling $36.5
    billion over the next year and help us facilitate access to $80 billion
    in Federal contracts for small businesses.
        This budget request gives me the tools I need as Administrator to
    pursue three core goals: expand access to capital to create more
    quality jobs; embrace an inclusive vision for the SBA in which our
    borrowers better reflect the geographic and socioeconomic diversity of
    America; and ensure our programs are giving taxpayers a strong return
    on their investment--real bang for their buck.
        It would allow us to work with our resource partners to counsel and
    train more than 1 million small business owners. To that end, we're
    seeking full funding for our Small Business Development Centers,
    Women's Business Centers, Veteran's Business Outreach Centers and our
    national network of SCORE chapters and volunteer mentors.
        We're also requesting full funding for disaster loan assistance as
    we continue to make process reforms to ensure that homeowners, renters,
    and businesses have access to rapid SBA assistance when they need us
    the most.
        We've dramatically reduced our subsidy for the 504 loan program
    down to $45 million, and for the second year in a row, the SBA is
    requesting no credit subsidy for the 7(a) loan program. Overall, our
    fiscal year 2015 request represents a $64 million reduction because of
    the subsidy decrease.
        Our borrowers report that these two lending programs--7(a) and
    504--together have supported more than 650,000 jobs.
        This budget seeks authority to extend 504 Refinance lending. 504
    Refi helps entrepreneurs unlock equity they already own in their
    businesses. Restructuring a loan under 504 Refi means better rates on
    long-term debt, allowing owners to use their equity to create jobs and
    grow.
        504 Refi supported $5.5 billion in lending over 2 years when it was
    originally authorized, but it expired at the end of fiscal year 2012.
    This is a zero subsidy request. The tremendous benefits of reinstating
    this program would come at zero subsidy cost to the taxpayers.
        Each year, more than 250,000 servicemembers transition out of the
    armed forces. Our Boots to Business program allows them to continue to
    serve their country as job creators. In fact, on my very first day at
    the SBA this week, I met with a group of these heroes who've started
    their own businesses.
        We're requesting $7 million to meet the Department of Defense's
    request to train transitioning servicemembers at more than 200
    installations worldwide. We're also making it easier for veterans to
    access capital by reducing or eliminating their fees on certain SBA
    loans.
        This budget will help SBA get more loans into the hands of
    entrepreneurs from diverse backgrounds.
        Toward that end, the SBA is once again setting fees to zero to
    encourage our lending partners to approve more 7(a) loans under
    $150,000.
        We're also investing more in our Native American programs, working
    in 84 communities across America to facilitate new business
    opportunities for this underserved population. Through our 8(a)
    program, we helped Native entrepreneurs and tribal businesses secure
    more than $10 billion in government contracts in fiscal year 2012.
        Finally, the SBA continues to focus on rooting out waste, fraud,
    and abuse in our contracting and lending programs.
        Since 2008, SBA has suspended and debarred more companies and
    individuals for abusing SBA programs than in the previous 10 years
    combined. I have a zero-tolerance policy for these and I am committed
    to ensuring that Federal dollars go to deserving small businesses that
    play by the rules.
        At the same time, we've tightened our belts within our own
    operations. The SBA is saving $600,000 in rent by moving our DC office
    into our SBA national headquarters. We've reduced our fleet management
    expenses by more than 9 percent through reductions in our fleet. We've
    invested in new equipment that will save us a half-million dollars in
    copying expenses over the next 5 years. And we've reduced SBA travel by
    25 percent over fiscal year 2012 levels.
        In closing, I would like to share something Federal Reserve Chair
    Janet Yellen said last Thursday when she addressed small business
    leaders from all 50 States during National Small Business Week:
    ``America has come a long way since the dark days of the financial
    crisis, and small businesses deserve a considerable share of the credit
    for the investment and hiring that have brought that progress. Although
    we have come far, it is also true that we have further to go to achieve
    a healthy economy, and I am certain that small businesses will continue
    to play a critical role in reaching that objective.''
        Our fiscal year 2015 budget ensures that America's small businesses
    have the resources, tools and training to realize their potential and
    strengthen our economy. With that, I want to thank this subcommittee
    for its leadership and support of small businesses, and I am happy to
    take your questions.

        Senator Udall. Thank you very much for your testimony.
        Mr. Gerety, please present your testimony on behalf of the
    Treasury Department.

                           DEPARTMENT OF THE TREASURY

                        Office of Financial Institutions

    STATEMENT OF AMIAS GERETY, ACTING ASSISTANT SECRETARY
                FOR FINANCIAL INSTITUTIONS
        Mr. Gerety. Thank you, and good afternoon, Chairman Udall,
    Ranking Member Johanns, and other members of the subcommittee.
    Thank you for inviting me to speak in support of the
    President's fiscal year 2015 budget request for the Treasury
    Department's Community Development Financial Institutions Fund,
    or CDFI Fund.
        I would like to start by expressing my appreciation to the
    subcommittee and to Congress for its long history of support
    for the CDFI Fund, and by requesting your continued strong
    support for its critically important mission.
        The 2015 budget requests $225 million for the CDFI fund's
    flagship program, the CDFI program, which spurs economic growth
    and increases access to capital in low-income communities; for
    the Healthy Food Financing Initiative, which supports the
    growth of businesses that increase access to affordable,
    healthy food in low-income communities; the Native American
    CDFI Assistance Program, which increases access to credit,
    capital, and financial services in Native American communities;
    and resources for the administration of the CDFI Fund.
        The budget also proposes a 1-year extension of the CDFI
    bond guarantee program, which provides a source of long-term
    capital to financial institutions that support lending in
    underserved communities.
        The CDFI Fund programs create economic growth in
    communities often considered too risky for mainstream financial
    institutions. Let me offer you an example from a business I
    visited in New Orleans earlier this month.
        Circle Foods is a grocery store that opened in 1939, and
    was New Orleans' first African-American owned and operated
    grocery store. In 2005, it was heavily damaged by Hurricane
    Katrina, and for 7 years, the owner tried to secure financing
    to renovate and reopen his business, but he was unable to find
    any willing investors and lenders.
        In 2012, Hope Credit Union, a leading CDFI serving the
    Midsouth, provided Circle Foods with financing through a
    partnership that included the city of New Orleans' fresh food
    retail initiative. And this year, a new 22,000-square-foot
    Circle Foods reopened and is now providing access to fresh
    produce and affordable food.
        In addition, the grocery store has created 62 new jobs, the
    majority of them filled by people who live in that community.
        The President's 2015 budget reflects a careful balance of
    savings proposals and targeted investments in key priorities.
    Continued strong funding is needed if the CDFI Fund is to be
    able to continue its critical work, generating new economic
    opportunity where it is needed most.

                               PREPARED STATEMENT

        Mr. Chairman, this concludes my formal statement, and I
    will be happy to answer any of your questions. Thank you very
    much.
        [The statement follows:]
                       Prepared Statement of Amias Gerety
                                  introduction
        Good afternoon Chairman Udall, Ranking Member Johanns, and
    distinguished members of the subcommittee. Thank you for inviting me to
    speak today on behalf of the Department of the Treasury's Community
    Development Financial Institutions Fund (CDFI Fund) and in support of
    the President's fiscal year 2015 budget request. I would like to start
    by expressing my appreciation to this subcommittee and to Congress for
    its long history of support for the CDFI Fund.
        During my tenure at Treasury it has always been an honor to work
    with the dedicated men and women at the CDFI Fund. They're talented
    public servants who are focused on strengthening our country and they
    performed with excellence under quite difficult conditions over recent
    years. So I want to thank them for their service and commitment.
        The President's fiscal year 2015 budget requests your continued
    strong support for the CDFI Fund and its critically important mission:
    To increase economic opportunity and promote community development
    investments for underserved populations and in distressed communities
    in the United States. As a vital component of the Treasury, the CDFI
    Fund is closely aligned with Treasury's core priority of promoting
    domestic economic growth.
        In fiscal year 2015 the CDFI Fund requests $224.9 million. This is
    slightly below the fiscal year 2014 enacted level. The budget includes:
      --$151.3 million for the CDFI Fund's flagship program, the CDFI
            Program, which spurs economic growth and increases access to
            capital in low-income communities;
      --$35 million for the Healthy Food Financing Initiative (HFFI), which
            supports the growth of businesses that increase access to
            affordable, healthy food in low-income communities;
      --$15 million for the Native American CDFI Assistance Program, which
            increases access to credit, capital, and financial services in
            Native communities; and
      --$23.6 million for administration of the CDFI Fund.
        The budget also proposes a 1-year extension of the CDFI Bond
    Guarantee Program, which provides a source of long-term capital to
    financial institutions that support lending in underserved communities.
        The CDFI Fund's programs create economic growth in communities
    often considered too risky for mainstream financial institutions. The
    CDFI Fund accomplishes much of its work through a nationwide network of
    over 850 certified Community Development Financial Institutions, or
    CDFIs. CDFIs are mission-driven financial institutions that are
    dedicated to community development and provide financial products and
    services for businesses, consumers, affordable housing developers, and
    community service providers. CDFIs fill a critical gap in the financial
    industry by serving markets that are historically underserved and by
    providing the economic development expertise and specialized financial
    products and services that these communities urgently need. CDFIs
    provide loans for small businesses and job creation; finance the
    development of affordable housing for low-income Americans; support
    community-based social service organizations and create high-quality
    community facilities; and provide retail banking services to the
    unbanked and others often targeted by predatory lenders.
        When I was in New Orleans earlier this month, I had the opportunity
    to see firsthand how CDFIs are providing critically needed financing
    for communities most in need. One of the sites I visited was Circle
    Foods, a grocery store that opened in 1939 and was New Orleans' first
    African American-owned and -operated grocery at a time when African-
    Americans were not allowed to shop in other parts of the city. In 2005,
    Circle Foods was heavily damaged by flooding in the 7th Ward caused by
    Hurricane Katrina. For years, the owner tried to secure financing to
    renovate and reopen the store, but was unable to find any willing
    lenders and investors.
        That changed in 2012, when Hope Credit Union, a leading CDFI
    serving the Midsouth, provided Circle Foods with financing through a
    partnership that included the City of New Orleans' Fresh Food Retail
    Initiative. Thanks to Hope Credit Union, a new 22,000-square-foot
    Circle Foods reopened earlier this year and is now providing access to
    fresh produce and affordable food in the 7th Ward. In addition, the
    grocery store has created 62 new jobs, the majority of them are filled
    by people who live in the local community. And Hope Credit Union soon
    will open a branch within the new Circle Foods that will provide
    convenient access to financial services and give people in the
    community a reliable, affordable alternative to the payday lenders that
    moved into the Ward following Hurricane Katrina.
        This story is just one of many examples of the way that CDFIs are
    helping to meet critical needs in underserved communities. CDFIs all
    across the Nation are truly making a difference.
                       the critical role of the cdfi fund
        One of the main factors that makes the critical work of CDFIs
    possible is this subcommittee's support of the CDFI Fund.
        CDFIs take a variety of forms. There are CDFI loan funds, credit
    unions, community banks, and venture capital funds. There are small
    local and regional CDFIs that focus on serving particular communities,
    as well as large national CDFIs with offices in several States and
    cities. But all CDFIs share a commitment to stimulating economic and
    community development in distressed communities. These organizations
    have decades of experience providing financial products and services
    that offer the people they serve a way to enter the financial
    mainstream and build successful, productive lives.
        The CDFI Fund is dedicated to expanding the capacity of these
    invaluable organizations, and it accomplishes that in two main ways: by
    certifying CDFIs and by providing a variety of financing and capacity
    building programs for CDFIs.
                               cdfi certification
        To be eligible for most of the CDFI Fund's programs, any financial
    institution must be certified as a CDFI in order to participate in our
    programs. In addition, formal certification of a CDFI is important to
    many prospective financing partners, including banks and foundations.
    To be certified, a CDFI must meet a strict set of criteria, including
    having a primary mission of community development and serving a target
    market that meets at least one of the CDFI Fund's definitions of a
    distressed or low-income community. One common type of target market is
    a census tract that has a poverty rate of at least 20 percent, or a
    median family income at or below 80 percent of the statewide or
    metropolitan average.
        In 2013 the CDFI Fund undertook a formal process to recertify all
    existing CDFIs whose most recent certification was more than 3 years
    old. This process was both an investment in the integrity of the
    certification status for organizations and a way to position the CDFI
    Fund for the future. During fiscal year 2013, the CDFI Fund recertified
    425 CDFIs and certified 76 new CDFIs. Today, there are over 850
    certified CDFIs headquartered in all 50 States and the District of
    Columbia, as well as in Guam, Puerto Rico, and the U.S. Virgin Islands.
                            programs and initiatives
        In addition to certifying CDFIs, the CDFI Fund provides programs to
    support them. The oldest of these is the Community Development
    Financial Institutions Program (CDFI Program), through which the CDFI
    Fund provides financial assistance awards and technical assistance
    awards to enable CDFIs to expand their services and to build their
    technical capacity. Over the years, the demand for CDFI Program awards
    has continued to grow. For the fiscal year 2014 award round, the CDFI
    Fund received 336 applications requesting $393 million in funding,
    which was nearly three times the $146.4 million available through the
    program.
        Within the CDFI Program, the CDFI Fund administers the Healthy Food
    Financing Initiative (HFFI), an innovative interagency program created
    to address the problem of food deserts in underserved communities. An
    estimated 23.5 million Americans lack convenient access to healthy
    food. Through the HFFI, the CDFI Fund provides flexible financial and
    technical assistance awards to CDFIs that invest in businesses that
    increase access to healthy food in low-income communities. In fiscal
    year 2014, the CDFI Fund received applications from 33 eligible
    organizations requesting $85 million through the HFFI, almost four
    times the $22 million available.
        Another program is the Native American CDFI Assistance Program
    (NACA Program). As a part of the CDFI Fund's Native Initiatives, the
    NACA Program promotes economic opportunity in Native communities that
    lack adequate access to affordable financial products and services by
    providing financial and technical assistance awards to CDFIs that focus
    on serving Native American, Alaska Native, and Native Hawaiian
    communities. The Native Initiatives also include specialized training
    programs to help CDFIs expand their capacity to serve Native
    communities. Since the NACA Program's inception in 2001, the number of
    certified CDFIs that serve Native communities has increased from 7 to
    68. For the fiscal year 2014 funding round of the NACA Program, the
    CDFI Fund received 46 applications requesting more than $22 million in
    funding, almost double the $12.3 million available.
        The CDFI Fund's Capacity Building Initiative complements the CDFI
    Program, HFFI, and the NACA Program, by providing direct technical
    assistance and training to CDFIs. The Capacity Building Initiative
    helps CDFIs improve their ability to deliver financial products and
    services and to achieve long-term sustainability. By offering training
    workshops, webinars, market research, customized technical assistance,
    and informational resources, the Capacity Building Initiative helps
    CDFIs develop, diversify, and grow.
        The Capacity Building Initiative training series focuses on
    specialized issues of critical importance to CDFIs and the communities
    they serve. Among the training series presented thus far are: CDFI
    Capitalization; Financing Healthy Food Options; Foreclosure Solutions;
    Innovations in Small Business Lending; Portfolio Management; Leadership
    Journey for Native CDFI Growth and Excellence; Scaling up Microfinance;
    Preserving and Expanding CDFI Minority Depository Institutions;
    Financing Community Health Centers; and Strengthening Small and
    Emerging CDFIs.
        In addition to offering these training programs, the CDFI Fund
    compiles training materials, webinars, and research reports that
    supplement the training topics and provides them in a Resource Bank on
    the CDFI Fund's Web site. The Resource Bank is a one-stop source for
    current information on topics of critical importance to CDFIs, and it
    is available to anyone--members of the CDFI industry and the general
    public alike--at no charge.
        The CDFI Fund's newest program is the CDFI Bond Guarantee Program,
    a groundbreaking effort to accelerate community economic growth and
    development. The CDFI Bond Guarantee Program offers CDFIs unprecedented
    access to significant, long-term capital. Because Treasury fully
    guarantees the bonds, CDFIs can borrow for up to 30 years at an
    attractive fixed interest rate and use the funds to finance community
    development projects. Because participating CDFIs must have excellent
    performance histories and management and be financially capable of
    carrying the programs strong loan requirements, the guarantees are
    projected to have no cost to taxpayers. For the fiscal year 2013 round
    of the CDFI Bond Guarantee Program, $500 million in guarantee authority
    was available. The CDFI Fund received eight guarantee applications
    requesting a total of $825 million in bond guarantees. Treasury entered
    into agreements to guarantee and approved term sheets for bonds
    totaling $325 million.
                     the cdfi fund's impact and performance
        CDFIs are dedicated to serving distressed and low-income
    communities, and the data indicate that they are doing just that. On
    average, 70 percent of the customers of certified CDFIs are low-income
    and 60 percent are members of a minority community. Moreover, the CDFI
    Fund strives to proportionately serve both urban and rural areas. In
    fiscal year 2013, 53 percent of the CDFI Program's financial assistance
    awardees served major urban areas, 27 percent served minor urban areas
    and 20 percent served rural areas. The CDFI Fund also recently released
    an analysis on 10 years of data provided by CDFIs on their total
    portfolios. The data demonstrated that 25.4 percent of loans and
    investments (19.2 percent of total dollars) were made in non-
    metropolitan rural areas by CDFIs from 2002-2012. Approximately 17
    percent of Americans reside in non-metropolitan areas, so it is clear
    that CDFIs are giving these traditionally underserved target markets
    the opportunity to benefit from services that they could not receive
    from mainstream financial institutions.
        It is also clear that these services have a tangible impact. CDFI
    Program awardees reported on the most recent activities in 2012 and
    indicated that they had:
      --Created or maintained more than 35,000 full-time jobs (up from
            25,600 in fiscal year 2011);
      --Originated almost 6,500 small business and microenterprise loans
            (up from 6,345 in fiscal year 2011);
      --Financed more than 17,700 units of affordable housing (down from
            24,466 in fiscal year 2011);
      --Provided more than 293,000 individuals with financial literacy
            training and other financial education (up from 233,100 in
            fiscal year 2011); and
      --Made more than 24,000 loans and investments totaling almost $2
            billion (up from 17,500 loans and investments totaling almost
            $1.3 billion in fiscal year 2011).
        In addition, all 12 of the first-round HFFI awardees reported on
    their first year of investments, which included 43 projects totaling
    $29 million in eligible HFFI activities. Of these 43 projects, 30 were
    retail projects--ranging from small green grocers to large supermarkets
    serving low-income communities--that created 339,226 square feet of new
    retail space. The other 13 HFFI projects involved other activities such
    as production and distribution facilities needed to increase access to
    healthy food.
        The CDFI Fund is committed to rigorous evaluations that measure the
    impact of its programs. In 2012, the CDFI Fund commissioned a study to
    examine the financial performance and social impact of its flagship
    CDFI Program. That study is now underway and will be completed by the
    end of fiscal year 2014. In addition, the CDFI Fund has begun the
    ``Access to Capital and Credit in Native Communities'' study, a follow-
    up to a 2001 study that looked at access to financial services in
    Native American, Alaska Native, and Native Hawaiian communities, and
    that established some of the key guidelines of the NACA Program. The
    study will use a combination of existing research, consultations with
    tribes, and focus groups to identify important economic issues in
    Native communities. The results of both of these studies will allow the
    CDFI Fund to assess its programs more effectively and to determine ways
    to serve low-income communities even better in the years ahead.
        The performance of CDFIs speaks volumes about their strength,
    commitment, and ability. And that's what the work of CDFIs and the CDFI
    Fund is all about. It's about more than creating programs and providing
    services; these are just the means to a greater end. The work is
    ultimately about expanding opportunities for families and communities
    to reach their full potential and contribute to the Nation's economic
    growth.
                                   conclusion
        CDFIs have established a strong track record of leveraging the CDFI
    Fund's awards with private investment. Indeed, on average, CDFI Fund
    awardees leverage their awards with private investment by a factor of
    more than 6:1, which means that the total of $201 million in program
    funding requested in this budget may ultimately generate more than $1.2
    billion dollars of investment. Clearly, the funding requested offers
    strong potential for significant local impact at a relatively small
    Federal cost.
        The President's fiscal year 2015 budget reflects a careful balance
    of savings proposals and targeted investments in key priorities. As the
    numbers reflect, the CDFI Fund has been and remains one of those key
    priorities. Continued strong funding is needed if the CDFI Fund is to
    be able to continue its critical work generating new economic
    opportunity in communities where economic opportunity is needed most.
        On behalf of everyone at Treasury and the CDFI Fund, I would like
    to again express our gratitude for the support of this subcommittee,
    and I look forward to continuing to work with you in the future.
        Mr. Chairman, this concludes my formal statement, and I will be
    happy to answer any of your questions.

        Senator Udall. Thank you very much. And both of your full
    statements will be put into the record.
        We are at this point now going to start 7-minute rounds of
    questioning. I will start out.

                              ECONOMIC DEVELOPMENT

        To both of you, a few weeks ago, this subcommittee held a
    hearing on the Treasury Department, and Secretary Lew testified
    about the growing economy. The economy is slowly recovering
    from the recession. The unemployment rate is slowly improving.
        But for many States, towns, and neighborhoods, including
    many in New Mexico, they are not yet feeling the effect of this
    growth, and many Americans are still looking for jobs.
        For both witnesses, can you please explain how the fiscal
    year 2015 budget request for the SBA and the CDFI will help
    grow the economy and create jobs? And then how will you target
    underserved populations, including Native American communities,
    which have become some of the hardest hit communities in our
    country?
        Ms. Contreras-Sweet, please, you can start.
        Ms. Contreras-Sweet. Thank you.
        SBA intrinsically does just that. In terms of our entire
    portfolio, what we are focused on is spurring economic
    activity. And to that extent, I think that as we think about
    small businesses, and we think about their journey through
    entrepreneurship, as they first start to think about
    entrepreneurship, we want them to think about it more
    aggressively. So whether you are a veteran, to your point, Mr.
    Chairman, we want to have the Boots to Business program.
        First, it starts with sort of just a general conversation
    about it. Then we put them through a 2-day program. We put them
    through an 8-week program to get them to think about
    entrepreneurship. So that is one way in which we do it.
        But throughout our partnerships, whether it is the
    volunteers at SCORE or the women at the Women's Business
    Center, or it is in disadvantaged communities, this is what SBA
    is. It is our strength. We go out and we talk to people who are
    thinking about entrepreneurship, and we take them through a
    training program. We give them the tools, the tips, and the
    relationships that they need to help develop the right business
    plan.
        And then after that, if it makes sense, then we introduce
    them to possible work. The contracting opportunities, whether
    it is in the Government sector though our contracting
    opportunities or through our American supplier initiative,
    where we introduce entrepreneurs to private sector
    opportunities, we help create jobs.
        And then after that, they tell us that sometimes they need
    a performance bond or bid bond, so we have for the surety
    program.
        And finally, when they are ready and they have work, we
    provide them the debenture, the Government guarantee to provide
    them the access to capital.
        And so that is, if you will, the journey. The key
    milestones that exist in entrepreneurship, the SBA is there.
        So at the end of the day, we are delighted that essentially
    what we are, are job creators.
        Thank you very much for the question, Senator.
        Senator Udall. Thank you.
        Mr. Gerety.
        Mr. Gerety. Thank you. I think the issue of the growth in
    our economy and the disparate effects in different communities
    is particularly important to the CDFI Fund, which has as its
    mission over the last 20 years, focusing particularly on those
    communities, whether urban, rural, or Native American
    communities, that are underserved by traditional financial
    institutions.
        Within the President's budget, we have both the core
    program, which includes grants, and other opportunities to
    support the financial capacity of CDFIs. We have two programs
    within that, one focused on small and emerging CDFIs and other
    focused on more established CDFIs.
        The budget also includes specific $15 million funding for
    the Native American CDFI assistance program, recognizing that
    Native American communities are particularly underserved. And
    this is part of a more than 10-year effort to develop and
    support both the financial and the technical capacity of Native
    American CDFIs, CDFIs that serve Native American communities.
        I think it is also important to recognize that underserved
    communities are not just found in urban areas, but they are
    found all across this country. And as we have looked at the
    past 10 years of CDFI funding, we found that over 25 percent of
    the loans and investments that are made by CDFIs are in rural
    communities, which only have 17 percent of the population.
        So across each of these types of communities, we are very
    focused on building the capacity of lenders and supporting
    those lenders in providing capital and job support to those
    institutions that are really focused on developing those
    communities and providing the flow of capital to small
    businesses, entrepreneurs, and affordable housing.
        Senator Udall. Thank you.
        Senator Johanns.
        Senator Johanns. Thank you, Mr. Chairman.

                                 LOAN SUBSIDIES

        Let me start out, if I could, Administrator, and ask you a
    question about the loan guarantee program. For fiscal year 2014
    and 2015, the 7(a) loan program, as you know, doesn't require a
    subsidy. That is a good thing. We celebrate that.
        However, it is my understanding that the 504 program, which
    guarantees loans for major assets like real estate and heavy
    equipment, will again require an appropriation to subsidize the
    cost of the loan guarantees.
        What is your thought about where we go from here? Is this
    an area where we can reasonably expect that someday you will
    come in and say we don't need the subsidies for this program? I
    would like your thoughts on that.
        Ms. Contreras-Sweet. Thank you. I am delighted to have an
    opportunity to address that point.
        As I understand, and my research has indicated, because it
    was an important question as I came on board, and as I have
    seen historically, it did not require--you remember the
    downturn began in 2008. And as I saw in the prior years and
    leading up to, I believe it was 2012, we did not require a
    subsidy. So there was a lag, if you will.
        And then you saw that, 2011, 2012, 2013, is where we
    required the subsidy. So I am delighted that it flattened out
    first. It came on and then it flattened. Now we are seeing a
    dramatic decrease.
        It is based on commercial real estate values. So I think
    that as we continue to see this coming back up, it allows for
    the entrepreneur to use their debt more appropriately, and make
    sure that they are fulfilling the terms of the SBA guaranteed
    loan.
        So just based on the trajectory, the flattening out and now
    the decrease, I am hopeful that that will continue to decrease,
    so that you get the trajectory that you want. Then we will be
    able to come back to you and say we are back to a zero subsidy.
        Senator Johanns. Great.

                              AFFORDABLE CARE ACT

        In testimony before the House Appropriations Committee last
    month, then-Acting Administrator Marianne Markowitz stated that
    she conducted about 30 outreach seminars on Obamacare. I will
    be very honest, that caught my attention. I didn't know that is
    what this agency should be doing.
        Do you currently have Obamacare outreach programs
    scheduled? Are you planning on doing more of the same? Do you
    have staff assigned to this? Is there a budget for it?
        Ms. Contreras-Sweet. Thank you, Senator.
        The way the counseling centers work throughout the country
    is that they are there to respond and to counsel small
    businesses about the laws, about the way programs work, and
    about how to grow the business. And so we are there to
    implement the law.
        And when they come in, or we are out doing the work that we
    do, and they ask us about the Affordable Care Act (ACA), that
    is what we respond to. We respond to a panoply of questions,
    including the laws that they have to face and deal with.
        So yes, we are out in the field, sometimes answering those
    questions. And we are delighted to say that when we are out in
    the field responding to any question that they might have,
    including the ACA, and we respond, we are learning that they
    get to know us better, they get to understand and make
    important decisions.
        And what we have learned from that process is that
    entrepreneurs see their small business as family, and they are
    wanting to know how to provide for their families.
        The ACA, fortunately, has provided them an opportunity to,
    in some instances, draw from a pool so they can get more
    competitive rates on health care. That has helped them.
        And it has also helped them learn more about SBA. So in
    that regard, we are able to pivot and direct them to other
    resources that we provide to continue to help them grow and
    prosper.
        Senator Johanns. That is interesting, because I have had
    the opposite experience. Small businesses really are frustrated
    with Obamacare, very frustrated. And I have had small
    businesses in Nebraska tell me they won't grow past 50 because
    they don't want to go over the limit.
        Have you ever had anybody tell you that?
        Ms. Contreras-Sweet. I have traveled now across the country
    with seven stops, and I have not had anybody share that with
    me.
        On the contrary, they said that, in one instance, they were
    able, if they were below 50, that they were able to partake in
    the tax credit that provided them a break in order to provide
    for their employees.
        Senator Johanns. I would welcome you to Nebraska sometime,
    and we will get a business roundtable together, and you can
    hear what I have heard.
        Ms. Contreras-Sweet. Thank you, Senator.
        Senator Johanns. Yes.
        Let me turn to, if I might, Mr. Gerety.

                       ALLOCATION OF FUNDS TO RURAL AREAS

        Since its creation in 1994, the CDFI Fund has awarded more
    than $1.9 billion to community development organizations,
    financial institutions. However, I would note that entities
    located in Nebraska have received grant awards totaling $5.8
    million over 20 years, 2 decades. That is three-tenths of 1
    percent of the total dollar amounts of awards.
        By comparison, entities in New York have received awards
    totaling $250 million. California has received $225 million.
    Illinois has received $140 million.
        It seems to me that the way the program is being
    implemented, it favors large population centers or States, and
    States like mine, Nebraska, kind of get what is left behind.
        Tell me what is going on. Is this what you wanted to
    happen? Or is this an anomaly that you hope to fix?
        Mr. Gerety. Senator, I think you raise a really important
    issue, which is the goal of the CDFI Fund is to provide access
    to capital, and to promote the capacity of lenders in
    underserved communities, wherever they are across the country.
        One of the things that we have been the beneficiaries of
    from this subcommittee is a $1 million line item that is
    explicitly focused on improving the CDFI Fund's ability to
    target, identify, and build capacity for underserved
    communities, both urban and rural.
        And that is beyond just the natural mission of the CDFI
    Fund, which is to serve underserved communities who are
    underserved by mainstream financial lenders, but this is
    explicitly to target communities that are underserved by CDFIs.
        I think one of the things that we have seen is that, and
    particularly in rural communities, there are real opportunities
    to do outreach, to build capacity, to strengthen those
    programs.
        For example, I know working with Senator Moran, we were
    able to do two explicit outreach programs in Kansas to try to
    build up the CDFI community in that State. And I know that
    there are six CDFIs located in Nebraska. And we, certainly, are
    always looking for opportunities to build the capacity of CDFIs
    across the country and, in particular, to do targeted outreach
    where there are areas that are underserved by the CDFI
    community.
        This is an important part of our program and something that
    we continue to try to prioritize.
        Senator Johanns. I would offer this, if you could take out
    the Nebraska file, and I hate to sound so parochial, but my
    office would be more than willing to work with you to see how
    we can make this program more relevant for our State.
    Obviously, it is not connecting much.
        I don't know if that is something happening on our end of
    the equation or your end of the equation. That doesn't really
    matter to me so much as how do we fix it? How do we boost this
    effort? Because our natural tendency is to look at a program
    like this and say, gosh, it is hard to get capital in rural
    States. On your best day, you are competing with States that
    are much more populated and have greater advantages et cetera.
        So we want to support these, but then 20 years into it, we
    look back and we say, gosh, it is doing some things for urban
    areas. It is not doing much for our State. We have to rethink
    what we are doing here. We want to be helpful in trying to do
    that.
        If you could do that and have somebody reach back to my
    office, that would be appreciated.
        Mr. Gerety. Certainly, Senator, we will be glad to reach
    out and to continue to work with you to strengthen the CDFI
    programs in areas that are underserved.
        Senator Johanns. Mr. Chairman, I took a little liberty with
    my time there, but what I was thinking is maybe I would ask
    each witness questions and then I know we are called to a vote,
    maybe we submit questions in writing. It is up to you, but I
    would be willing to do that.
        Senator Udall. I think we should probably do that. I think
    we can leave here in the next 10 minutes, if we wanted to do
    just a short 5-minute round. That is my understanding.
        Let me do one quick question, and then if you would like
    to.

                        STATE TRADE AND EXPORT PROMOTION

        I just want an explanation on the State Trade and Export
    Promotion Program. You know the President's goal of doubling
    exports and all of that. This has created some real opportunity
    out there.
        We have seen $29 million in STEP funds, responsible for
    $300 million in export. And I am just really wondering,
    Administrator Contreras-Sweet, what is in the budget for them
    to look in other places, and why has the decision been made to
    eliminate the program?
        Ms. Contreras-Sweet. Thank you so much for the excellent
    question, and I am delighted to speak to it.
        As a former banker and now the head of the SBA, I think
    that one of the most important things that we should be
    considering is how we help our small businesses compete in an
    international economy. We know that 95 percent of our customers
    are outside of our country. And with the technological
    advancements, we have lowered the threshold of being able to
    enter international markets.
        So we want to make sure that small businesses have a level
    playing field to get outside and to compete in those markets.
        To that extent, we are now ready almost imminently, to
    release the Request for Proposal (RFP) for the State Trade and
    Export Promotion (STEP) program for this year. And so I feel a
    duty to assess a program than be knee-jerk and just respond and
    say we are going to do it again. So since it is a new program,
    I felt it was important to assess its efficaciousness, to
    examine what worked, what didn't work, and to refine it, and
    then come back with something that was really supportive and
    successful and effective for small businesses in the next
    budget ground.
        Senator Udall. Thank you very much for that.
        Senator Johanns. I will submit my questions.
        Senator Udall. Okay, we will both submit additional
    questions for the record.
        Let me just thank you for participating today. Today's
    discussion has provided, I think, very helpful insights on both
    of your budgets for the CDFI and the SBA.

                         ADDITIONAL COMMITTEE QUESTIONS

        The hearing record will remain open until next Wednesday,
    May 28, at noon, for subcommittee members to submit statements
    and questions to be submitted to the witnesses for the record.
        [The following questions were not asked at the hearing, but
    were submitted to the Department and the Agency for response
    subsequent to the hearing:]
                  Questions Submitted to Maria Contreras-Sweet
                    Questions Submitted by Senator Tom Udall
                                   microloans
        Question. While SBA is well-known for guaranteeing the 7a and 504
    loans that support numerous small businesses across the country, the
    SBA also provides $25 million in microloans and $20 million for
    technical assistance to microloan recipients. These loans, which
    average $13,000, help support the needs of very small businesses,
    including working capital, inventory or supplies, and equipment. The
    budget proposes to maintain the same lending level as fiscal year 2014,
    at a reduced cost, because the rate of default for these loans is
    decreasing. The SBA is currently developing a proposed rule to
    modernize the program.
        How will the microloan program be updated to improve access to
    credit for America's smallest businesses?
        Answer. The SBA is exploring a number of avenues for improvement of
    the Microloan Program and increased access to credit for our smallest
    businesses. We are currently working with, industry representatives,
    congressional representatives, and practitioners to gather appropriate
    ideas and build them into a strategic approach for program improvement
    and increased access to capital. In addition, we are moving forward
    with finalizing a rule that was proposed last March; with updating the
    Standard Operating Procedures (SOP) manual; and with exploring avenues
    to increase private sector involvement.
                          funding for new initiatives
        Question. The SBA provides funding for many entrepreneurial
    development programs, such as the Small Business Development Centers
    and SCORE, which provide training and mentorship opportunities for
    small business owners across the country. These programs have proven
    results--they help businesses start up, prosper and grow. Yet the
    fiscal year 2015 budget request keeps funding for these critical
    programs flat, while including significant increases two new
    initiatives that have not yet had any results.
        Why does the budget request significant increases for the new
    growth accelerators and entrepreneurial education programs, while
    keeping funding for successful programs flat?
        How do these new initiatives differ from existing programs provided
    through entrepreneurial development? Could these activities not be
    provided by existing programs?
        Answer. In today's economy, it is critical that we continue to
    support job creation wherever there's an opportunity among our Nation's
    28 million small businesses. The President's fiscal year 2015 budget
    proposal for SBA ensures that small businesses have the tools and
    resources they need to start and expand their operations and create
    good jobs that support a growing economy and a strong middle class. The
    Small Business Development Centers, Women's Business Centers, SCORE
    chapters, and Veteran's Business Outreach Centers--also known
    collectively as our resource partner network--are essential to the
    agency's ability to achieve these goals. As a result, we are pleased to
    be able to request full funding for these programs for fiscal year
    2015.
        As an agency, we strive to be as innovative and entrepreneurial as
    the small businesses we serve. Moreover, we strive to maximize our
    value to small businesses and ensure that we make efficient use of
    taxpayer dollars. Currently, millions of existing small business owners
    plan to grow their businesses, but they lack sufficient training in
    areas like accounting, market analysis, and finance. They have the will
    to succeed but require access to quality, targeted education and
    mentorship to help them create and implement strong growth plans,
    access capital, increase revenue, and ultimately create new jobs. Many
    of these businesses are located in underserved communities, where there
    is much need and opportunity.
        The fiscal year 2015 budget request seeks to address existing gaps
    in assisting small businesses. For example, the initiatives supported
    under Entrepreneurship Education differ from the services commonly
    offered by our resource partners, by their intensity and the time
    devoted to individual businesses coupled with training and complexity
    and level of expertise of the management support provided. There is an
    expressed need to offer intensive support that focuses on the unique
    challenges that growing firms face, which look very different from the
    needs of startups. A large number of SBA's existing resource partners
    have built up and concentrated their expertise in training and
    counseling for start-up businesses, and are limited in the amount of
    time they are able to devote to each business. The funding for
    Entrepreneurship Education programs allows us to address that gap.
        For example, the Entrepreneurship Education request will allow SBA
    to expand Emerging Leaders, which provides an intensive curriculum to
    existing small businesses and has a proven track record of helping
    these businesses grow and create jobs. Our Emerging Leaders initiative,
    now in its seventh consecutive year since starting in late 2007, was
    launched by SBA to assist existing small businesses possessing a high
    growth potential who are located in historically underserved
    communities across the United States.
        Participants receive over 100 hours of in-person and out of
    classroom training. Through our Emerging Leaders Program we try to make
    use of all our assets. Our District Offices facilitate hosting the
    classes, and our resource partners still play a key role, which may
    include hosting classes, teaching sessions, identifying participants,
    and providing ongoing technical assistance at the conclusion of the
    course.
                                504 refinancing
        Question. From 2010 to 2012, the 504 program allowed small
    businesses to use loans to refinance their commercial mortgages. This
    helped many small businesses in the same way that refinancing a home
    mortgage helped homeowners--it helped keep the doors open for many
    small businesses across the country. The budget requests the extension
    of this program which ended when the authorization lapsed in 2012. The
    budget proposes to reauthorize the program at $7.5 billion per year.
        What was the impact of the program while it was authorized? What
    are some of the success stories?
        Answer. The President's budget request supports reauthorizing the
    504 Refinance program, which was part of the Small Business Jobs Act of
    2010 and expired at the end of September 2012. Through this successful
    program, 200 SBA lending partners made over 2,700 loans valuing more
    than $2.5 billion. On the last day of the program in 2012, SBA had over
    400 projects pending work and almost $500 million that did not get
    funded. Demand still exists in the marketplace, as commercial real
    estate values are still depressed. By refinancing their debt to take
    advantage of historically low interest rates, businesses improve their
    cash flow, and access equity in their properties to inject into their
    businesses. This allows companies to retain jobs and expand by offering
    a favorable long-term fixed rate. The budget requests a 1 year
    reauthorization of the program. Since SBA is allowed under the 504 Refi
    program to charge an adjusted fee to cover the projected costs, this
    request does not require an appropriation from Congress for subsidy.
        Proceeds from the 504 Refinance program assisted businesses in all
    ten SBA regions:
      --Region I: A grocery store was able to restructure debt and provide
            business expenses of $670,000.
      --Region II: A water bottling company experienced $1.2 million in
            growth due to available working capital.
      --Region III: An assisted living facility restructured debt and
            refinanced business expenses for three facilities.
      --Region IV: A concrete foundation company was able to purchase a new
            pump to improve operations.
      --Region V: A gas station finance eligible business expenses saving
            $43,000 annually.
      --Region VI: A steel company financed their A/P and inventory worth
            almost $1.25 million.
      --Region VII: A telecommunications firm secured a $1.6 million 504
            Refi loan for equipment modernization.
      --Region VIII: A restaurant had a balloon payment upcoming but was
            able to refinance to continue operations.
      --Region IX: A medical equipment supplier refinanced balloon payments
            due in less than 1 year.
      --Region X: A hotel was able to secure a $2 million loan for working
            capital under eligible business expenses.
        Question. How would this loan compare to credit options that are
    available on the private market?
        Answer. The 504 Refinance program provides excellent terms compared
    to what is available on the private market. For example, 504 Refi is
    unique in that it provides a fixed rate for 20 years (10 years for
    equipment). The private market generally won't do fixed rates for a 20
    year term, but will either have variable rates or terms for a shorter
    period. The long-term fixed rate allows small businesses to better
    manage their debt, creating more stability and opportunity for job
    retention and creation.
                                lender oversight
        Question. Through the SBA's flagship 7a loan program and the 504
    program, SBA will guarantee approximately $36 billion in fiscal year
    15. In fiscal year 2011, approximately two-thirds of the SBA guaranteed
    loans were made using delegated authority with limited oversight. Both
    the SBA Inspector General and the GAO have identified weaknesses in
    SBA's oversight of these lending programs and provided recommendations
    to create an effective oversight program.
        What steps has SBA taken to improve oversight of these lending
    programs and implement the recommendations?
        Answer. SBA understands the importance of lender oversight in
    administering an effective 7(a) program. SBA has made significant
    progress in instituting a comprehensive credit risk management program
    for its business loan programs. All lenders participating in the 7(a)
    program are continually assessed and risk rated to ensure that those
    considered to represent highest risk receive greatest Agency attention.
    In fiscal year 2013, SBA undertook approximately 24 lender supervision
    and enforcement actions. SBA has also suspended or debarred
    approximately 27 parties, including but not limited to, actions against
    loan agents and borrowers. SBA has developed and implemented a
    regulatory framework to support credit risk management, including the
    promulgation of lender oversight/enforcement regulations that establish
    the grounds and procedures for lender supervision and enforcement,
    lender oversight Delegations of Authority, Lender Risk Rating
    Standards, and Standard Operating Procedures for lender supervision/
    enforcement and reviews/examinations. SBA conducts lender supervision
    and enforcement through a separate Office of Credit Risk Management and
    a Lender Oversight Committee (LOC) comprised of senior Agency officials
    representing fiscal, credit risk, operations and legal areas.
                             7(a) total loan limit
        Question. SBA's flagship 7(a) loan program is one of the Federal
    Government's primary business loan program. Through these guaranteed
    loans, SBA provides up to $5 million for up to 25 years to small
    businesses. Funds can be used for a variety of purposes to develop and
    expand small businesses. In 2013, the program supported over 483,000
    jobs and 40,000 small businesses. The total loan level is currently
    capped at $17.5 billion in loan authority per year. But in 2013, the
    SBA reached this limit.
        What are your projections for the total 7(a) lending level in
    fiscal year 2015? Do you believe the cap on the 7(a) loan should be
    increased?
        Answer. SBA is supportive of both the Senate Committee on
    Appropriations and the House Committee on Appropriations plans through
    their fiscal year 2015 bills to increase the 7(a) loan authorization
    level. Based on prior year lending trends, when SBA formulated the
    fiscal year 2015 budget, we estimated that a $17.5 billion 7(a)
    authorization level would be sufficient to meet market demand for
    fiscal year 2015. However, in light of trends on fiscal year 2014
    volume, SBA does believe it is prudent to increase the authorization
    level for fiscal year 2015. As stated at the hearing, we would like to
    emphasize that an increase in the authorization level would not have
    any subsidy cost for the taxpayer.
                           disaster assistance (sba)
        Question. SBA provides direct loans to small businesses that are
    affected by natural disasters. These long-term, low-interest loans
    allow small businesses to repair or replace damaged property to limit
    the economic impact of natural disasters. The budget request for the
    administrative costs of these loans is decreasing by $5 million.
        How do you determine what will be needed to administer disaster
    assistance?
        Answer. The SBA reviews historical spending trends, expected
    carryover balances and staffing forecasts to determine what level of
    funding to request for disaster assistance. The SBA continually reviews
    processes and implements improvements in order to enhance program
    delivery and achieve greater efficiency. The $5 million reduction in
    the disaster administration request reflects cost reductions SBA
    expects to achieve through more efficient operations.
        Question. Do you believe the fiscal year 2015 request is
    sufficient?
        Answer. Absent a catastrophic disaster event or multiple major
    events in 2015, the fiscal year 2015 request should be sufficient.
        Question. What are your balances for disaster assistance, and how
    long will they last?
        Answer. As of May 31, the disaster administrative funding balance
    was $238 million and the disaster subsidy balance was $736 million. It
    is nearly impossible to predict the timing and severity of disasters,
    and therefore difficult to estimate how long these balances will last.
        Question. How do you determine the portion of disaster funding that
    will be for Stafford Act disasters?
        Answer. Previously, the SBA derived the Stafford Act allocation
    from a three-year average of loan applications processed by the Office
    of Disaster Assistance according to presidential and non-presidential
    disaster declarations. In 2014, the SBA conducted a cost study to
    determine the portion of overall disaster administration spending on
    Stafford Act disasters. The result of the study is a cost allocation
    model the SBA can update annually with actual spending to estimate the
    administrative funding needs of Stafford and non-Stafford disaster
    loans.
                                     ______

                      Questions Submitted to Amias Gerety
                    Questions Submitted by Senator Tom Udall
                               cdfi bond program
        Question. The CDFI bond program provides 30 year bonds to CDFI
    organizations to support additional lending for a variety of economic
    development efforts including--job creation, community revitalization
    and affordable housing. In fiscal year 2013, Congress provided $500
    million for the bond program, and then in fiscal year 2014 we provided
    another $750 million. The fiscal year 2015 budget proposes to increase
    it again, to the authorized level of $1 billion.
        Please explain how this program is using the funds provided in 2013
    and 2014, and why the budget proposes to continue and expand the
    program.
        Answer. The Administration continues to support and expand the CDFI
    Bond Guarantee Program (CDFI BG Program) because it addresses a
    fundamental challenge in revitalizing communities, creating jobs, and
    expanding economic opportunity: many low-income and underserved
    communities require long-term, fixed-rate financing that the private
    market does not generally offer. According to the Carsey Institute,
    CDFI loan funds do not have access to long-term debt to meet market
    needs for longer-term financing.\1\ The CDFI BG Program provides a
    long-term, fixed-rate source of capital so CDFIs can provide the
    financing communities need.
    ---------------------------------------------------------------------------
        \1\ Carsey Institute, ``CDFI Industry Analysis Summary Report'',
    Spring 2012, pg 12. Accessed at: http://www.cdfifund.gov/docs/CBI/2012/
    Carsey%20Report%20PR%20042512.pdf.
    ---------------------------------------------------------------------------
        CDFIs may use bond proceeds to finance: charter schools; commercial
    real estate; daycare centers; healthcare facilities; rental housing;
    rural infrastructure; owner-occupied homes; licensed senior living and
    long-term care facilities; small businesses; not-for-profit
    organizations; and other CDFIs and similar financing entities.
        In the first two rounds of the CDFI BG Program in fiscal year 2013
    and fiscal year 2014, Treasury approved term sheets and executed
    agreements to guarantee a combined total of $525 million. Bond proceeds
    are expected to finance affordable housing, charter schools, healthcare
    facilities, commercial real estate, and lending to not-for-profit
    organizations. Financing of community development projects has recently
    begun.
        Question. Do you believe there is sufficient demand from CDFIs to
    support the $1 billion level?
        Answer. We believe that $1 billion is an appropriate cap for fiscal
    year 2015. Congress set the $1 billion level when it authorized the
    program. This level indicates to CDFIs that significant resources will
    be available if they make a commitment to participate in the program.
        The $525 million committed in the first 2 years of the program
    marks an encouraging start to a new and complex program. There is a
    promising initial level of interest and capacity, as evidenced by the
    four CDFIs that submitted high quality plans within a very short
    application period in fiscal year 2013 and the four additional CDFIs
    that received bond loans in fiscal year 2014.
        After completing two funding rounds for the Bond Guarantee Program,
    we have begun to explore ways to improve administration of the program,
    including opportunities to address any perceived impediments for
    program applicants.
                                 healthy foods
        Question. Obesity and malnutrition are widespread in this country
    and have been linked to major health problems, such as diabetes and
    heart disease. In many low-income neighborhoods across the country,
    there are no healthy food options nearby, making it much more difficult
    to adopt a healthy lifestyle. CDFI's Healthy Foods Financing program
    provides assistance to CDFIs to finance grocery stores, farmers markets
    and other healthy food options in these low-income neighborhoods. The
    budget proposes to increase this program to $35 million, $13 million
    more than last year.
        Why does the budget propose such a significant increase for this
    program?
        Answer. The Healthy Foods Financing Initiative (HFFI) expanded
    healthy food options necessary to address obesity and malnutrition. It
    achieved this through improved access to affordable food outlets in
    areas where there has been a chronic absence of such alternatives.
    Continued support from Congress will enable CDFIs to expand access to
    healthy food options in low-income communities. To date, all 12 of the
    first-round HFFI awardees reported on the impacts of their first year
    of investments. The 12 HFFI awardees initiated 43 projects totaling
    $29,035,079 in HFFI eligible activities. Of these projects, 30 were
    retail HFFI projects with 339,226 square feet of new retail space
    developed from small green grocers to large supermarkets serving low
    income, low-access census tracts. Another 13 non-retail projects, such
    as production and distribution, resulted in the development of 5,073
    square feet of space for eligible healthy food activities.
        Question. How would the requested funds help address this national
    epidemic?
        Answer. The Healthy Foods Financing Initiative (HFFI) is dedicated
    to increasing access to healthy food options in low-income urban and
    rural communities. Through HFFI, the CDFI Fund provides competitive
    awards to CDFIs that finance healthy food retail outlets in underserved
    communities.
        CDFIs have a wealth of experience in financing grocery stores,
    local food processors and distributors, farmers' markets, and food co-
    ops. As with other CDFI Fund programs, the HFFI-Financial Assistance
    award is designed to help CDFIs respond to local economic market
    conditions in the low-income communities they serve. CDFIs may use up
    to 25 percent of the award to finance non-retail HFFI activities, an
    option especially responsive to rural areas in need of financing for
    food production.
                      bank enterprise award program (bea)
        Question. The fiscal year 2015 budget eliminates an important CDFI
    Fund program, the Bank Enterprise Award program. Created in 1994, the
    program helps leverage CDFI dollars by supporting banks that provide
    lending, investment and service activities in economically distressed
    communities. Without the BEA program, many of these banks cannot
    compete for CDFI funds, and would be unable to finance development
    projects in low-income and distressed neighborhoods.
        Why did the budget eliminate this critical program?
        Answer. Treasury recognizes that the Bank Enterprise Award Program
    (BEA Program) provides important resources for FDIC-insured banks and
    thrifts to invest in underserved communities. However, in the current
    fiscal environment, difficult budget decisions have to be made.
        The BEA Program isn't the only CDFI Fund grant program that
    supports FDIC-insured banks; depository institutions certified as
    CDFI's are also eligible to apply for the CDFI Fund's flagship CDFI
    Program, which will continue to provide financial and technical
    assistance to invest in and build the capacity of CDFI banks. This
    program empowers them to grow, achieve organizational sustainability,
    and contribute to the revitalization of their communities. In the
    fiscal year 2014 round of the CDFI Program, 9 percent of total
    applicants were CDFI-certified banks. Out of these 23 bank applicants 9
    received financial assistance awards totaling $12.2 million.
        The CDFI Fund's Capacity Building Initiative also recently launched
    a ``Preserving and Expanding CDFI Minority Depository Institutions''
    series to address the unique challenges facing CDFI MDIs. This program
    provides advanced training and technical assistance for CDFI MDIs to
    build their capacity to provide community development services to their
    underserved communities.
        Question. How would this elimination impact overall lending?
        Answer. The elimination of the BEA Program is not expected to have
    a material impact on overall lending to markets served by CDFIs. CDFI
    target markets are highly correlated with eligible areas under the
    Community Reinvestment Act (CRA), communities historically underserved
    by mainstream institutions. Banks eligible to apply to the BEA Program
    will continue to be incentivized by CRA to invest in these communities.
        In addition, due to the higher poverty level eligibility criteria,
    areas eligible under the BEA Program are a subset of CDFI investments
    areas and target markets. The CDFI Program will continue to provide
    financial and technical assistance to invest in and build the capacity
    of CDFIs which will help to mitigate the impact of eliminating this
    program.
                                     ______

                Questions Submitted by Senator Richard J. Durbin
        Question. Section 1206 of the Dodd-Frank Wall Street Reform and
    Consumer Protection Act established a grant program within the CDFI
    Fund to encourage financial institutions to offer affordable small
    dollar loans through technical assistance and loan loss reserve funds.
    Affordable small dollar loans would help borrowers who may otherwise
    turn to predatory payday loans, and this grant program can help
    financial institutions overcome some of the challenges that come with
    offering these products.
        To what extent have technical assistance and loan loss reserve
    funds under section 1206 been clearly included in the core program
    Notice of Funding Availability (NOFA) since authorization in 2009? If
    not, how can these be included in the core program NOFA in fiscal year
    2015?
        Answer. Since 2007, the CDFI Program NOFA has specified that
    eligible uses of Financial Assistance awards include loan loss
    reserves.to cover losses on loans made in their investment areas or
    target populations, which may include small dollar loans.\2\ Since
    2011, applicants are required to specify how much of their award
    request will be used for loan loss reserves. In fiscal year 2014, 126
    applicants requested approximately $59 million (or 17.4 percent of the
    total amount requested) for loan loss reserves. It is important to
    note, this data is prospective, based-on an institution's intentions at
    the time of application. The CDFI Fund is unable to track at this time
    the amount of Financial Assistance awards received that were then used
    to fund loan loss reserves specifically for small dollar loans.
        The Fund will explore including language in its NOFA concerning
    small dollar consumer lending and is open to establishing a new grant
    program as proposed in Section 1206 if, and when, funds are
    appropriated.
    ---------------------------------------------------------------------------
        \2\ To carry out the purposes specified in the Technical Assistance
    application, funds may be expended for: compensation; professional
    services; travel; training and education; equipment; and supplies.
    Developing a small dollar loan program is an eligible purpose. However,
    data is not available on the number of applicants that request
    technical assistance awards to develop small dollar loan programs.
    ---------------------------------------------------------------------------

                             CONCLUSION OF HEARINGS

        Senator Udall. The subcommittee is hereby adjourned.
        [Whereupon, at 2:23 p.m., Wednesday, May 21, the hearings
    were concluded, and the subcommittee was recessed, to reconvene
    subject to the call of the Chair.]

           LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

                                  ----------
                                                                       Page

    Archuleta, Hon. Katherine, Director, Office of Personnel
      Management:
        Prepared Statement of........................................   291
        Questions Submitted to.......................................   351
        Statement of.................................................   290

    Cohen, Hon. David S., Under Secretary, Office of Terrorism and
      Financial Intelligence, Department of the Treasury:
        Prepared Statement of........................................    65
        Questions Submitted to.......................................    96
        Statement of.................................................    59
        Summary Statement of.........................................    64
    Contreras-Sweet, Hon. Maria, Administrator, Office of the
      Administrator, Small Business Administration:
        Prepared Statement of........................................   420
        Questions Submitted to.......................................   432
        Statement of.................................................   415
        Summary Statement of.........................................   418
    Coons, Senator Christopher A., U.S. Senator From Delaware,
      Questions Submitted by

    Durbin, Senator Richard J., U.S. Senator From Illinois, Questions
      Submitted by

    George, Hon. J. Russell, Treasury Inspector General for Tax
      Administration, Department of the Treasury:
        Prepared Statement of........................................   212
        Questions Submitted to.......................................   274
        Statement of.................................................   211
    Gerety, Amias, Acting Assistant Secretary for Financial
      Institutions, Office of Financial Institutions, Department of
      the Treasury:
        Prepared Statement of........................................   423
        Questions Submitted to.......................................   435
        Statement of.................................................   422
    Government Accountability Office, Prepared Statement of the......   109

    Internal Revenue Service Oversight Board, Prepared Statement of
      the............................................................   103

    Johanns, Senator Mike, U.S. Senator From Nebraska:
        Prepared Statement of........................................    62
        Questions Submitted by

        Statements of

    Kirk, Senator Mark, U.S. Senator From Illinois, Questions
      Submitted by...................................................    98
    Koskinen, Hon. John, Commissioner, Internal Revenue Service:
        Prepared Statement of........................................   189
        Questions Submitted to.......................................   248
        Statement of.................................................   187

    Lew, Hon. Jacob, Secretary, Office of the Secretary, Department
      of the Treasury:
        Prepared Statement of........................................   175
        Questions Submitted to.......................................   235
        Statement of.................................................   101
        Summary Statement of.........................................   173

    Mikulski, Senator Barbara A., U.S. Senator From Maryland:
        Prepared Statement of........................................   279
        Statements of

    Moran, Senator Jerry, U.S. Senator From Kansas, Questions
      Submitted by

    National Treasury Employees Union, Prepared Statement of the.....   167

    Olson, Nina E., National Taxpayer Advocate, Office of the
      Taxpayer
      Advocate, Prepared Statement of................................   149

    Pai, Hon. Ajit, Commissioner, Federal Communications Commission..     1
        Prepared Statement of........................................    10
        Questions Submitted to.......................................    56
        Summary Statement of.........................................     8
    Powner, Hon. David, Director, Information Technology Issues,
      Government Accountability Office:
        Prepared Statement of........................................   295
        Questions Submitted to.......................................   355
        Statement of.................................................   293

    Shelby, Senator Richard C., U.S. Senator From Alabama, Questions
      Submitted by...................................................   405

    Tangherlini, Hon. Dan, Administrator, General Services
      Administration:
        Prepared Statement of........................................   287
        Questions Submitted to.......................................   343
        Statement of.................................................   285

    Udall, Senator Tom, U.S. Senator From New Mexico:
        Prepared Statement of........................................   102
        Opening Statements of

        Questions Submitted by

    VanRoekel, Hon. Steven, Chief Information Officer, Office of
      Management and Budget:
        Prepared Statement of........................................   282
        Questions Submitted to.......................................   326
        Statement of.................................................   280

    Wetjen, Hon. Mark P., Acting Chairman, Commodity Futures Trading
      Commission:
        Prepared Statement of........................................   375
        Questions Submitted to.......................................   412
        Statement of.................................................   373
        Summary Statement of.........................................   365
    Wheeler, Hon. Tom, Chairman, Federal Communications Commission:
        Prepared Statement of........................................     5
        Questions Submitted to.......................................    36
        Statement of.................................................     1
        Summary Statement of.........................................     3
    White, Hon. Mary Jo, Chair, Securities and Exchange Commission:
        Prepared Statement of........................................   366
        Questions Submitted to.......................................   399
        Statement of.................................................   361
        Summary Statement of.........................................   365

                                 SUBJECT INDEX

                                  ----------

                      COMMODITY FUTURES TRADING COMMISSION

                                                                       Page

    CFTC:
        Has Made Important Progress But Has Been Significantly
          Constrained................................................   376
        Responsibilities.............................................   373
            Have Grown Substantially in Recent Years.................   375
    Clearing Houses:
        And Intermediaries Manage More Customer Funds................   376
        Manage More Risk.............................................   376
    Enforcement......................................................   379
    Examinations.....................................................   378
    Fiscal Year 2015 Request:
        Priorities...................................................   374
        Prioritizes Examinations, Technology, Market Integrity, and
          Enforcement................................................   377
    Other Fiscal Year 2015 Priorities: International Policy
      Coordination & Economic and Legal Analysis.....................   380
    Substantially Larger Number of Firms Now Registered with the CFTC   376
    Technology and Market Integrity..................................   378
    Trading Volume Has Increased.....................................   375
                                   __________

     DEPARTMENT OF THE TREASURY============================== deg.

                 Office of Terrorism and Financial Intelligence

    Additional:
        Budgeting Resources..........................................    78
        Flexibility..................................................    84
    Appropriations for TFI...........................................    94
    Budget Flexibility...............................................    71
    Business During Interim Agreement................................    84
    Central Bank of Iran.............................................    98
    Comparison of Sanctions Against Iran and North Korea

    Cyber Crime......................................................    99
    Diplomacy........................................................    97
    Global Counter-Terrorism Program.................................    70
    Goal of Negotiations With Iran...................................    86
    Government Shutdown..............................................    75
    Human Rights Issues in North Korea...............................    94
    Impact of:
        Additional Legislation.......................................    87
        Sequestration................................................    70
    Improving:
        North Korea Sanctions........................................    93
        Sanctions Against North Korea................................    91
    Iran.............................................................    96
        Central Bank of..............................................    98
        Diplomacy....................................................    97
        Goal of Negotiations With....................................    86
        Human Rights.................................................    98
        Sanctions....................................................    72
            Program..................................................    68
        Temporary Sanctions Relief

        Trade Delegations to.........................................    85
    Narcotics Sanctions Program......................................    69
    North Korea......................................................    96
        Sanctions....................................................    86
            Program..................................................    69
    Office of Terrorism and Financial Intelligence...................    59
    Oil Exports......................................................    92
    Organized Crime..................................................    76
    Potential Russian Oil Sale.......................................    76
    Resources for Expanding Responsibilities.........................    83
    Russia

        Potential Russian Oil Sale...................................    76
    Staffing.........................................................    74
    Syria Sanctions Program..........................................    68
    Temporary Sanctions Relief

    TFI:
        Appropriations for...........................................    94
        Background and History.......................................    66
        Components...................................................    66
        Resource Levels..............................................    70
    Trade Delegations to Iran........................................    85
    Trades Between Turkey and Iran...................................    77
    Turkey...........................................................    99
    Ukraine-related Sanctions Actions................................    67
    Venezuela........................................................    98
    Visa for Iranian Ambassad80============================== deg.

                            Office of the Secretary

    Accountability Within the IRS....................................   183
    Boosting Resources for Taxpayer Services and Enforcement
      Measures, Finding New Efficiencies Across Treasury Programs....   177
    Combatting Terrorist Financing...................................   185
    Economic Sanctions and OFAC......................................   184
    IRS:
        Handling of Tax-Exempt Applications..........................   181
        Request......................................................   103
    Protecting National Security Interests and Preventing Illicit Use
      of the Financial System........................................   177
    State Small Business Credit Initiative...........................   184
    Strengthening:
        Economy to Help Middle-Class Americans.......................   178
        The Economy and Job Creation, Protecting the Financial System   176
    Tax-Exempt Status for Social Welfare Groups......................   180
    Treasury Request.................................................   102
                                   __________

                       FEDERAL COMMUNICATIONS COMMISSION

    21st Century Communications and Video Accessibility Act..........    42
        Summary of Compliance With the Act...........................    43
            Implementation of the 21st Century Communications and
              Video Accessibility Act of 2010 (CVAA).................    43
                Access to:
                    Advanced Communications Services and Equipment--
                      Section 104....................................    43
                    Video Programming Guides and Menus Provided on
                      Navigation Devices--Section 205................    46
                Closed Captioning, Emergency Information, and Video
                  Description Capability--Section 203................    45
                Emergency Access Advisory Committee (EAAC)--Section
                  106................................................    43
                Hearing Aid Compatibility--Section 102...............    43
                National Deaf-Blind Equipment Distribution Program
                  (NDBEDP)--Section 105..............................    43
                Relay Services--Section 103..........................    43
                User Interfaces on Digital Apparatus--Section 204....    45
                Video:
                    Description, Emergency Information, and Closed
                      Captioning--Section 202........................    44
                    Programming Accessibility Advisory Committee
                      (VPAAC)--Section 201...........................    44
    Auctions.........................................................     5
        Description of the Work and Continuing Activities Generating
          the Added Costs for the Auctions Program:..................
            Public Releases..........................................    50
            Software Development.....................................    50
            Studies..................................................    51
    Budget Request for Universal Service Fund (USF) Reform...........    46
        Enforcement Bureau USF Strike Force..........................    47
            Positions (Role, Description, # FTEs)....................    48
        FCC USF Anti-Fraud Joint Task Force Plan: Wireline
          Competition Bureau.........................................    46
            Positions (Role, Description, # FTEs)....................    47
        Office of the Managing Director: FTEs to Eliminate Improper
          Payments; and Improve Operational and Financial Oversight..    48
            Positions (Role, Description, #FTEs).....................    49
    Consumer Complaints Database.....................................    36
    Data Caps........................................................    37
    Digital Television Channel 6 Radio Interference Protections......    37
    Emergency 9-1-1:
        Call Centers ``Do-Not-Call'' Registry........................    37
        In Hotel Rooms...............................................    56
    FCC..............................................................
        Funding......................................................    21
        IT Program:
            Primary Paths Forward for the IT Organization's Support
              of the Mission of the FCC..............................    55
            Successes:
                EAS Redesign.........................................    54
                ELS Enhancement......................................    54
                OGC Tracking System..................................    54
        Regulatory Fees..............................................    38
        Resources for Merger Reviews.................................    39
    FTE Deployment...................................................    23
    Implementation of the Twenty-First Century Communications and
      Video Accessibility Act of 2010 (CVAA).........................    43
    Incentive Auctions Process.......................................    35
    Internal Revenue Service USF Policies............................    32
    Issue Dialogue...................................................    30
    Legacy E-Rate Program............................................    20
        Financial Planning...........................................    20
        Fiscal Responsibility........................................    21
        Funding Allocation...........................................    20
        Process......................................................    20
        Relation to Libraries........................................    21
        Spending Priorities..........................................    20
        Transparency and Accountability..............................    21
    Lifeline.........................................................    39
    Net Neutrality...................................................    39
    Number Portability...............................................    40
    Positive Train Control...........................................    40
    Questions Related to Information Technology Strategy and
      Investments....................................................    53
    Rate Floor.......................................................    32
    Rural:
        Broadband

        Rates........................................................    31
        Translators..................................................    34
    Student-Centered E-Rate Program..................................    19
        Financial Planning...........................................    20
        Fiscal Responsibility........................................    21
        Focuses on Five Key Goals:
            (1) Simplify the Program.................................    19
            (2) Fairer Distribution of Funding.......................    19
            (3) Focus on Next-Generation Technologies for Kids.......    20
            (4) More Transparency and Accountability.................    20
            (5) Fiscal Responsibility................................    20
        Funding Allocation...........................................    20
        Process......................................................    20
        Relation to Libraries........................................    21
        Spending Priorities..........................................    20
        Transparency and Accountability..............................    21
    Telecommunications Relay Services................................    42
    Telehealth.......................................................    41
    Tribal:
        Issues.......................................................    27
        Mobility Fund Eligibility....................................    41
    TV Blackouts During Retransmission Disputes......................    41
    Universal Service Fund...........................................     4
    Unlicensed Spectrum..............................................    46
    USF Funding......................................................    24
                                   __________

                            INTERNAL REVENUE SERVICE

    Administration's Fiscal Year 2015 Budget Request.................   195
        Increase in Funding Requested by the President and How the
          IRS Intends to Spend These Additional Funds in Various
          Categories:
            Address Offshore Tax Evasion--$57 Million................   196
            Consolidate and Revitalize IRS Office Space--$10 Million.   197
            Enhance:
                Collection Coverage--$67 Million.....................   196
                Information Technology Services--$10 Million.........   197
                IRS Procurement and Security Systems--$31 Million....   198
                Online Services--$16 Million.........................   197
                Return Preparer Compliance--$17 Million..............   197
                Virtual Service Delivery (VSD)--$8 Million...........   197
            Expand Audit Coverage of:
                High-Wealth Taxpayers--$21 Million...................   196
                Individuals--$98 Million.............................   196
            Implement:
                ACA--$452 Million....................................   197
                FATCA--$32 Million...................................   197
            Improve:
                Audit Coverage of Partnerships and Flow-Through
                  Entities--$36 Million..............................   196
                Efforts in the Tax-Exempt Sector--$16 Million........   196
                IRS Financial Accounting Systems--$12 Million........   198
                Taxpayer Service--$211 Million.......................   196
            Prevent Refund Fraud and Identity Theft--$65 Million.....   196
            Pursue Fraud Referrals and Tax Schemes--$18 Million......   197
            Use Technology to:
                Enhance Criminal Investigation--$4 Million...........   197
                Improve Audit Case Selection--$37 Million............   197
    Affordable Care Act..............................................   209
    Alcohol and Tobacco Tax and Trade Bureau.........................   236
    Assisting Victims of Tax-Related Identity Theft and Refund Fraud.   254
    Cybersecurity....................................................   235
    Earned Income Tax Credit.........................................   231
    Employee Tax Compliance..........................................   206
    Filing Season....................................................   187
    Financial Stability Oversight Council............................   235
    Fiscal Year 2015 Budget Request..................................   201
    General Welfare Exemption........................................   253
    Helping Our Middleclass Entrepreneurs (HOME) Act.................   253
    Housing Market...................................................   237
    Identity Theft...................................................   198
        And Refund Fraud.............................................   233
    IRS:
        Performance: Fiscal Year 2013 and Current Filing Season......   190
            Business Systems Modernization...........................   192
            Exempt Organizations.....................................   193
            Filing Season............................................   190
            Implementing Enacted Legislation.........................   193
            Tax Compliance...........................................   191
            Taxpayer Service.........................................   190
        Spending for Development, Modernization, and Enhancement
          (DME) and Operations and Maintenance (O&M) for the Past 5
          Years

        Procedures for Processing 501(c)(4) Applications.............   230
    IT Upgrades......................................................   188
    ``My RA'' and Retirement Savings.................................   237
    Organizational Structure:
        Chief Technology Officer (Chart).............................   262
        Organization and Top Officials (Chart).......................   261
    Overseas Tax Evasion Initiatives.................................   203
    Performance Awards...............................................   205
    Political Activity by Tax-Exempt Entities........................   200
    Processing of Applications For Tax Exempt Status Under I.R.C.
      Section 501(c)(4)..............................................   255
    Proposed 501(c)(4) Regulations...................................   199
    Restoring IRS Streamlined Critical Pay Authority.................   248
    Schedule C Pilot Tax Years 2010-2012.............................   252
    Security of Taxpayer Information.................................   233
    Status of IRS Corrective Action on TIGTA Tax-Exempt Organizations
      Work...........................................................   228
    Telephone Level of Service--Enhanced Online Services.............   249
    Volunteer Income Tax Assistance (VITA) Services for Small
      Business.......251===================================== deg.

                        Government Accountability Office

     (Prepared Statement and Information on Reviews of the 2014 Tax Filing
    Season and the Fiscal Year 2015 Budget Request for the Internal Revenue
                                    Service)

    Absorbing Cuts:
        IRS:
            Has Delayed Two IT Projects In Part Due to Budget
              Reductions.............................................   126
            Reduced or Eliminated Some Services in 2014..............   126
            Substantially Reduced Employee Training..................   127
                Percentage of Training Reduction for Selected IRS
                  Divisions, Fiscal Years 2009 Through 2013--Table 5.   127
        Reductions to IRS's Budget Greater Than Projected Savings....   125
            IRS Projected and Actual Savings and Efficiencies, Fiscal
              Year 2009 Through 2015--Figure 11......................   125
    Agency Comments..................................................   110
    Briefing Slides..................................................   112
    Concluding Observations..........................................   128
    Dollars by Appropriation Account, Fiscal Years 2009 Through
      2015--Appendix I...............................................   128
        Fiscal Years 2009 Through 2014 Enacted and Fiscal Year 2015
          Budget Request for IRS by Appropriation Account--Table 6...   128
    Fiscal Year 2015 Request:
        IRS:
            Is Requesting $12.5 Billion in Appropriations, an
              Increase of 10.5 Percent ($1.2 Billion) Over Fiscal
              Year 2014..............................................   120
                IRS Enacted Appropriations, Fiscal Year 2009 through
                  2014, and Fiscal Year 2015 Request--Figure 7.......   120
            Largest Requested Increase Is $658 Million for Operations
              Support................................................   121
                Fiscal Year 2015 Budget Request by Appropriation
                  Compared to Fiscal Year 2014 Enacted Appropriation
                  for IRS--Figure 8..................................   121
            Proposed Increasing Staffing to About Fiscal Year 2012
              Levels.................................................   122
                IRS Full-Time Equivalents Funded Through
                  Appropriations, Fiscal Years 2009 Through 2013
                  Actual, 2014 Enacted, and 2015 Request--Figure 9...   122
        The Largest Staffing Increase Is About 3,000 FTEs for
          Enforcement................................................   123
            Fiscal Year 2015 Full-Time Equivalents, Budget Request by
              Appropriation Compared to Fiscal Year 2014 Enacted
              Appropriation for IRS--Figure 10.......................   123
    Five Proposed Initiatives for $654 Million Are Not Predicated on
      a Cap Adjustment--Appendix VI..................................   132
        Funding Requested for New Initiatives Not Predicated on a
          Program Integrity Cap Adjustment--Table 10.................   132
    Funding Trends: IRS's Appropriations Have Declined to Below
      Fiscal Year 2009 Levels........................................   113
        IRS's Appropriations, Fiscal Years 2009 Through 2014--Figure
          1..........................................................   113
    GAO Conducted Analyses Related to 12 of 38 Legislative Proposals
      in the Fiscal Year 2015 Budget Request--Appendix XII...........   147
        Legislative Proposals Related to Prior GAO Work--Table 15....   147
    Implementing Open Matters for Congress and Recommendations to IRS
      Could Result in Financial Benefits--Appendix XIII..............   148
        Recommendations to IRS and Open Matters for Congress With a
          Financial Benefit--Figure 23...............................   148
    Internal Revenue Service: Absorbing Budget Cuts Has Resulted in
      Significant Staffing Declines and Uneven Performance

    IRS:
        Adjusted Enforcement Coverage and Efficiency Targets
          Downward--Appendix III.....................................   129
            IRS Enforcement Coverage Measures Fiscal Years 2009
              Through 2013 Actual and 2014 and 2015 Targets--Table 8.   129
        Continues to Report Actual Return on Investment (ROI) Data
          for Three Enforcement Programs--Appendix VII...............   133
            Actual Return on Investment (ROI) for Major IRS
              Enforcement Programs--Table 11.........................   133
        Estimated Future ROI for New Enforcement Initiatives--
          Appendix VIII..............................................   134
            Address:
                Impact of Affordable Care Act Statutory Requirements:
                    Enforcement Revenue--Figure 16...................   137
                    Protected Revenue--Figure 14.....................   135
                International and Offshore Compliance Issues
                  (Enforcement Revenue)--Figure 18...................   139
            Enhance Collection Coverage (Enforcement Revenue)--Figure
              20.....................................................   141
            Expand:
                Audit Coverage:
                    Enforcement Revenue--Figure 17...................   138
                    Protected Revenue--Figure 15.....................   136
                Coverage of High Wealth Individuals and Enterprises
                  (Enforcement Revenue)--Figure 19...................   140
            Improve Coverage of Partnerships and Flow-Through
              Entities (Enforcement Revenue)--Figure 21..............   142
            Leverage Data to Improve Case Selection (Enforcement
              Revenue)--Figure 22....................................   143
            Prevent Identity Theft and Refund Fraud (Protected
              Revenue)--Figure 13....................................   134
        Proposed 17 Initiatives Predicated on a Cap Adjustment
          Totaling $480 Million--Appendix V..........................   131
            Funding Requested for New Initiatives Predicated on a Cap
              Adjustment--Table 9....................................   131
    Objectives.......................................................   112
    Of Requested $1.2 Billion for Fiscal Year 2015, $480 Million
      Predicated on a Cap Adjustment--Appendix IV....................   130
        Funding Requested for New Initiatives Predicated on a Cap
          Adjustment--Figure 12:.....................................   130
    Opportunities Exist to More Strategically Manage Operations......   127
    Patient Protection and Affordable Care Act (PPACA) Spending,
      Fiscal Years 2010 Through 2012--Appendix IX....................   144
        Patient Protection and Affordable Care Act (PPACA) Spending,
          Fiscal Years 2010 Through 2012--Table 12...................   144
    Performance Trends:
        Average Wait Times Have Generally Increased Since 2009.......   118
            Average Wait Time (in minutes), Fiscal Years 2009 Through
              2014--Figure 5.........................................   118
        Electronic Filing Continues to Increase in 2014..............   115
            Tax Returns Processed, 2009 Through 2014 Filing Seasons--
              Table 1................................................   115
        IRS:
            Continues to Answer More Automated Than Assistor Answered
              Calls in 2014..........................................   117
                IRS Call Volume (in millions), 2009 Through 2014
                  Filing Seasons--Figure 4...........................   117
            Is Providing Better Telephone Service in 2014 Amidst
              Lower Demand Which IRS Attributes in Part to Fewer Tax
              Law Changes............................................   116
                Interim IRS Call Volume, Level of Service, and
                  Average Wait Times, 2009 Through 2014 Filing
                  Seasons--Table 2...................................   116
                IRS Key Telephone Actual Performance Compared to its
                  Goals, Fiscal Years 2009 Through 2014--Table 3.....   116
        Overage Correspondence Has Increased Significantly Since 2009   119
            IRS Taxpayer Correspondence Performance, Fiscal Years
              2009 Through 2013--Figure 6............................   119
        Return Examination and Collection Coverage Measures Show
          Decline....................................................   115
            IRS Return Examination and Collection Coverage Measures,
              Fiscal Years 2009 Through 2013 Actual and Fiscal Year
              2014 and 2015 Targets--Figure 3........................   115
    PPACA Spending and Request by Account and Initiatives, Fiscal
      Years 2013 Through 2015--Appendix X............................   144
        PPACA Spending and Request by Account and Initiative--Table
          13.........................................................   144
    Results in Brief.................................................   112
    Scope and Methodology............................................   112
    Staffing by Appropriation Account, Fiscal Years 2009 Through
      2015--Appendix II..............................................   129
        Fiscal Years 2009 Through 2013 Actual, 2014 Enacted, and 2015
          Requested Full-time Equivalents by Appropriation Account--
          Table 7....................................................   129
    Staffing Trends: IRS Has Reduced FTEs by About 8,000 (9 percent)
      Since Fiscal Year 2009.........................................   114
        IRS Full-Time Equivalents (FTE) Funded Through
          Appropriations, Fiscal Years 2009 Through 2013 Actual and
          Fiscal Year 2014 Enacted--Figure 2.........................   114
    Summary of:
        IRS Audit....................................................   110
        Major IT Investments--Appendix XI............................   145
            Summary of IRS's Major IT Investments--Table 14..........   145
    Workload: Staff Dedicated to Legislative Mandates and Priority
      Programs.......................................................   124
        Full-Time Equivalents to Implement New Laws and Priority
          Programs, Fiscal Years 2013 Actual, 2014 Planned, and 2015
          Requested--T124==================================== deg.

                    Internal Revenue Service Oversight Board

        (Prepared Statement To Present Views and Recommendations on the
     President's Fiscal Year 2015 Budget Request for the Internal Revenue
                                    Service)

    Customer Service.................................................   105
    Enforcement......................................................   106
    Human Capital and Business Systems Modernization (BSM)/IT........   108
        Business Systems Modernization Program (BSM/IT)..............   108
    Introduction and Executive Summary...............................   103
    The President's Budget Request...................................   105
        Enforcement Initiatives:
            Address International and Offshore Compliance............   107
            Enhance:
                Collection Coverage..................................   107
                Return Preparer Compliance...........................   107
            Expand Audit Coverage of:
                High-Wealth Taxpayers and Enterprises................   107
                Individuals..........................................   107
            Improve Audit Coverage of Partnerships and Flow-Through
              Entities...............................................   107
            Prevent T107===================================== deg.

                   National Taxpayer Advocate--Nina E. Olson

       (Prepared Statement Regarding the Proposed Budget of the Internal
                                Revenue Service)

    Accelerated Receipt and Use of Third-Party Information Reports...   163
        Administrative and Legislative Recommendations to Achieve a
          System That Allows the IRS To Perform Upfront Matching To
          Protect Government Revenue and Improve Taxpayer Service....   164
        Improve Taxpayer Service and Reduce Taxpayer Burden..........   163
    Affordable Care Act..............................................   158
        ACA Taxpayer Service and Training Raise Concerns.............   158
        IRS:
            ACA Audit and Collection Activity May Unduly Burden Low
              Income Taxpayers.......................................   161
            Is Not Adequately Training Assistors to Respond to
              Taxpayer Questions on Health Care Issues...............   159
            Outreach Does Not Alert Taxpayers to the Issues
              Surrounding a Change in Circumstances..................   159
        Delays in Information Matching Show Need for Real-Time Tax
          System.....................................................   163
    Conclusion.......................................................   166
    Erosion of IRS Employee Training and Skills......................   154
        IRS Training Budget, Fiscal Year 2009-2013--Figure 2.........   154
    Identity Theft and Refund Fraud..................................   155
        Percentage of TAS ID Theft Cases with Multiple Issue Codes,
          Fiscal Year 2011-2013--Figure 4............................   157
        Taxpayer Advocate Service ID Theft Cases--Figure 3...........   156
    IRS Information Technology Challenges............................   165
        Taxpayer Advocate Service Information System (TASIS).........   165
    Key Issues.......................................................   150
        Accelerated Receipt and Use of Third-Party Information
          Reports....................................................   151
        Affordable Care Act..........................................   151
        Erosion of IRS Employee Training and Skills..................   150
        Identity Theft and Refund Fraud..............................   150
        IRS Information Technology Challenges........................   151
        Taxpayer Services and IRS Funding............................   150
    Taxpayer Services and IRS Funding................................   151
        IRS Telephon152====================================== deg.

                       National Treasury Employees Union

    (Prepared Statement on the Internal Revenue Service Budget Request for
                               Fiscal Year 2015)

    Adverse Impact of New Filing Season Initiative on Taxpayers......   168
        Employer Identification Number (EIN).........................   169
        Practitioner Priority Service (PPS)..........................   169
        Requests for Transcripts.....................................   169
        Tax:
            Law Assistance...........................................   168
            Refund Inquiries.........................................   169
            Return Preparation.......................................   169
    Conclusion.......................................................   170
    Delayed Start to Filing Season...................................   168
    Enforcement......................................................   169
    Impact:
        Of Inadequate Funding on Taxpayer Services...................   167
        Report's Findings............................................   167
        On Voluntary Compliance and Tax Gap..........................   169
    IRS Fiscal Year 2015 Budget Request..............................   167
    Taxpayer Service167====================================== deg.

       PRESIDENT'S FISCAL YEAR 2015 FUNDING REQUEST FOR AND OVERSIGHT OF
                   FEDERAL INFORMATION TECHNOLOGY INVESTMENTS

    25 Point Implementation Plan to Reform Federal Information
      Technology Management

        Action Items Assigned to OMB, the Federal CIO and the CIO
          Council:
             1. GComplete Detailed Implementation Plans To
              Consolidate Data Centers By 2015.......................   332
             2. GCreate a Governmentwide Marketplace for Data Center
              Availability...........................................   332
             3. GShift to a ``Cloud First'' Policy...................   332
             4. GDevelop a Strategy for Shared Services..............   333
             5. GDesign a Formal IT Program Management Career Path...   333
             6. GRequire Integrated Program Teams....................   333
             7. GLaunch a Best Practices Collaboration Platform......   333
             8. GLaunch Technology Fellows Program...................   333
             9. GEnable IT Program Manager Mobility Across Government
              and Industry...........................................   333
            10. GDesign and Develop Cadre of Specialized IT
              Acquisition Professionals..............................   333
            11. GIdentify IT Acquisition Best Practices and Adopt
              Governmentwide.........................................   333
            12. GIssue Contracting Guidance and Templates To Support
              Modular Development....................................   333
            13. GReduce Barriers to Entry for Small Innovative
              Technology Companies...................................   334
            14. GWork With Congress To Create IT Budget Models That
              Align With Modular Development.........................   334
            15. GDevelop Supporting Materials and Guidance for
              Flexible IT Budget Models..............................   334
            16. GWork With Congress To Scale Flexible IT Budget
              Models More Broadly....................................   334
            17. GWork With Congress To Consolidate Commodity IT
              Spending Under Agency CIO..............................   334
            18. GReform and Strengthen Investment Review Boards......   334
            19. GRedefine Role of Agency CIOs And Federal CIO Council   335
    Accuracy of IT Dashboard.........................................   338
    Agile Development................................................   324
    Attachment, Highlights of GAO-14-568T............................   303
    Background (Major Information Technology (IT) Reform Initiatives)   296
    Backlogs.........................................................   308
    Broadband Access.................................................   320
    Canceling Failing IT Projects....................................   357
    CIO:
        Authorities..................................................   312
        Authority Over IT Spending...................................   331
        Budget Authority.............................................   305
        Spending Authority...........................................   315
    Cloud Computing and Utility-Based Purchasing of IT Services......   336
    Data:
        Act and Improving Cost Estimates for IT Investments..........   337
        Center:
            Consolidation............................................   294
                Update...............................................   328
    Demographic Challenges of Aging Information Technology Workforce.   352
    Department of Health and Human Services..........................   307
    Digital Services.................................................   321
    Effect of Not Investing in IT Budgets

    Efficiencies in Hiring Qualified Talent..........................   354
    Expeditionary Combat Support System..............................   307
    Exploring Emerging Contracting Models............................   339
    Federal:
        CIO Authority................................................   342
        Data Center Consolidation

        Fleet Management.............................................   348
        Government Property Broadband Access.........................   347
        Risk and Authorization Management Program Certification......   318
    FedRAMP

        Authorizations (Cloud Services)..............................   320
    Fixing SAM.gov Web Site for Federal Procurement Opportunities....   343
    Focus (Key Projects):
        Area:
            1: Get the Right Talent Working Inside Government........   283
                Flexible Hiring Authority Options for IT Talent......   283
                The Digital Service..................................   283
            2: Get the Best Companies Working With Government........   284
                Open Dialogue........................................   284
            3: Put the Right Processes and Practices in Place To
              Drive Outcomes and Accountability......................   284
                Digital Service Playbook.............................   284
                PortfolioStat 2014...................................   284
                Tech FAR Guide.......................................   284
        On:
            Effectiveness............................................   283
            Efficiency...............................................   282
    Fundamental Phases of the IT Investment Approach--Figure.........   357
    General Information Technology Reform............................   355
    GSA:
        18F Program

        And Federal IT Procurement...................................   345
        Information Technology.......................................   287
            Agile Development........................................   288
            Empowering the Chief Information Officer.................   287
            Enhanced Use of Cloud Computing and Consolidation of Data
              Centers................................................   288
            Enterprise Planning......................................   287
            Zero-based IT Budgeting..................................   287
        IT Schedule 70...............................................   349
        Tech Initiative 18F..........................................   350
    Healthcare.gov...................................................   323
    HHS CIO Control of Healthcare.gov................................   342
    Hiring Expertise.................................................   321
    Identifying Failing IT Investments...............................   356
    Improving the IT Dashboard:
        Accuracy.....................................................   329
        Timeliness...................................................   329
    Increased Pay and Hire Authorities...............................   351
    Incremental Development..........................................   331
    Information Technology:
        Dashboard....................................................   294
        Oversight and Reform Fund and Enhanced Cybersecurity.........   285
    Innovative Technologies and Digital Services.....................   289
    Interdisciplinary Workforce......................................   353
    IT:
        Acquisition Solutions........................................   288
        Dashboard

            Accuracy.................................................   306
            CIO Rating Colors, Based on a Five-Point Scale for CIO
              Ratings................................................   298
            Making It a Model For Transparency.......................   330
            Management Model.........................................   304
            Major Investments Reclassified...........................   330
            Overall Performance Ratings of Major Investments as of
              April 2014.............................................   299
            Ratings..................................................   325
            Schedule 70

            Strategy.................................................   305
        Initiatives..................................................   323
    Leveraging Best Practices and Reform Initiatives Can Help
      Agencies Better Manage Investments.............................   303
    OMB:
        Has Launched Major Initiatives for Overseeing Investments....   298
        ``Myth Busting'' Memo........................................   338
        Tech FAR Guide...............................................   335
        TechStat Meetings............................................   294
    Opportunities Exist To Improve Acquisition and Management of IT
      Investments....................................................   300
    Pathways Program for Cyber Talent................................   355
    Percentages of Planned IT Spending for Fiscal Year 2014--Figure 1   297
    PortfolioStat:
        And:
            Cost Estimates For Major IT Investments..................   335
            Software Licenses........................................   336
        Initiative...................................................   295
    Preventing Major IT System Failures..............................   309
    President's Fiscal Year 2015 Funding Request for and Oversight of
      Federal Information Technology Investments.....................   275
    Procurement Issues in IT.........................................   337
    Reporting Accuracy...............................................   313
    Retirement Processing............................................   316
    Risk Assessments of IT Investments...............................   337
    SAM.gov..........................................................   346
    Shared Services..................................................   336
    Special Hire and Pay Authorities

    System for Award Management......................................   314
    TechStat:
        And Failing IT projects......................................   326
        Reviews......................................................   339
    Top Priority IT Investments......................................   358
    Transition to Cloud Computing....................................   357
    VA Disability Claims Backlog.....................................   311
                                   __________

                       SECURITIES AND EXCHANGE COMMISSION

    Accounting Rules Under JOBS Act..................................   410
    Accredited Investors.............................................   410
    Agency Coordination..............................................   393
    Audit Threshold..................................................   411
    Bolstering Enforcement...........................................   369
        Detection....................................................   369
        Investigations...............................................   369
        Litigation...................................................   369
    Budget Increase Request..........................................   383
    CFTC:
        Enforcement Actions..........................................   395
        Mission Activities...........................................   381
    Changes Made at the SEC..........................................   390
    Coordination in Rulemaking.......................................   387
    Credit Rating Agencies...........................................   398
    Ecological Disclosure--Pollution Externalities...................   403
    Effects on End-Users.............................................   397
    Enforcement of the Federal Securities Laws:
        Detection....................................................   407
        Investigations...............................................   408
        Litigation...................................................   408
    Enhancing:
        Corporate Disclosure:
            Of Material Risk: Climate Change and Environmental
              Impacts................................................   402
            Reviews and Supporting Implementation of the JOBS Act....   371
        Monitoring of the Investment Management Industry.............   372
        Training and Development of SEC Staff........................   372
    Executive Compensation...........................................   404
        Deferral for Large Firms.....................................   405
        Disclosures..................................................   405
        Prohibition on Encouraging Inappropriate Risk................   405
    Expanding Oversight of Investment Advisers and Strengthening
      Compliance.....................................................   368
    Financial Stability Oversight Council Designations...............   389
    Focusing on Economic and Risk Analysis to Support Rulemaking and
      Structured Data and Risk-Based Initiatives.....................   371
    Importance of:
        Conducting Annual Exams......................................   412
        Sufficient SEC Funding.......................................   382
    Investment Advisor Examinations..................................   396
    IT Funding.......................................................   394
    Key Priorities for the SEC.......................................   382
    Leveraging Technology............................................   370
        Business Process Automation and Improvement..................   371
        Data Analytics Tools.........................................   370
        EDGAR Modernization..........................................   370
        Enforcement Investigation and Litigation Tracking............   370
        Enterprise Data Warehouse....................................   370
        Examination Improvements.....................................   370
        Information, Security........................................   371
        SEC.gov Modernization........................................   370
        Tips, Complaints, and Referral (TCR) System Enhancements.....   370
    Market Transformation and High-Frequency Trading

        Data and Analysis of HFT Activity............................   400
        Further Enhancements to HFT Oversight........................   402
        Oversight of Operational Risks in Automated Trading..........   401
    Money Market Mutual Funds........................................   393
    Ongoing Audit Requirement........................................   411
    Prevention of Another Madoff.....................................   391
    Prudent Spending.................................................   392
    Recent SEC Accomplishments.......................................   365
    Reporting Trades.................................................   388
    Rulemaking.......................................................   387
    SEC:
        Ability To Use Funds in an Abbreviated Time Period...........   392
        Enforcement Efforts..........................................   395
        Enhancements and Improvements................................   391
        Funding Needs................................................   366
        Registration Threshold Under Section 12(g)...................   409
        Training for Non-U.S. Regulators.............................   397
    Significance of Agency Relationship in FSOC Designations.........   390
    Significant Gains, But Work Remains..............................   367
    Staffing Expertise...............................................   386
    Status of Mandatory Rulemaking...................................   385
    Strengthening:
        Exams and Oversight--Frequency of Reviews....................   399
        Oversight of the Securities Markets and Infrastructure.......   371
    Technology Spending..............................................   384
    USTR Special 301 Report..........................................   404
    Volcker Rule.....................................................   392
    Wall Street Reforms..............................................   383
                                   ==
                                   ===========
                                   ===========
                                   ========= deg.
                                   __________

                         SMALL BUSINESS ADMINISTRATION

                          Office of the Administrator

    504 Refinancing..................................................   433
    7(a) Total Loan Limit............................................   434
    Affordable Care Act..............................................   429
    Allocation of Funds to Rural Areas...............................   430
    Bank Enterprise Award Program (BEA)..............................   436
    CDFI:
        Bond Program.................................................   435
        Certification................................................   424
        Critical Role of the CDFI Fund...............................   424
        Fund's Impact and Performance................................   425
    Disaster Assistance (SBA)........................................   434
    Economic Development.............................................   426
    Funding for New Initiatives......................................   432
    Healthy Foods....................................................   436
    Lender Oversight.................................................   434
    Loan Subsidies...................................................   428
    Microloans.......................................................   432
    Programs and Initiatives.........................................   424
    State Trade and Export P431============================== deg.

               TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

    Identity Theft and Tax Refund Fraud..............................   217
        Tax Refund Fraud.............................................   220
            Stolen or Falsely Obtained Employer Identification
              Numbers................................................   221
            Verification of Income and Withholding...................
        TIGTA Criminal Investigations of Identity Theft and
          Impersonation Scams........................................   219
    Implementation of the Affordable Care Act........................   221
        ACA:
            Provisions Impacting the Current 2014 Filing Season......   224
            Related Customer Service.................................   221
        Protection Against Fraudulent ACA Claims on Tax Returns......   222
        Security of Federal Tax Data.................................   222
    Improper Payments................................................   216
    IRS:
        Fiscal Year 2015 Budget Request Increase Over Fiscal Year
          2014 Enacted Budget--Table 1...............................   214
        Tax Gap......................................................   224
    Key Challenges Facing the IRS....................................   215
    Management Actions in Response to Prior Reported Issues..........   227
    Overview of the IRS's Fiscal Year 2015 Budget Request............   213
    Review of the President's Fiscal Year 2015 Funding Request for
      the Department of the Treasury and the Internal Revenue Service   212
    Taxpayer Service.................................................   215
    TIGTA Budget Request for Fiscal Year 2015........................   227
        IRS Implementation of the ACA................................   227
        TIGTA's:
            Audit Priorities.........................................   228
            Investigative Priorities.................................   228

                                       [all]