[Senate Hearing 113-630]
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                                                        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
         
         
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   Available via the World Wide Web: http://www.gpo.gov/fdsys/browse/
        committee.action?chamber=senate&committee=appropriations

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87-215 PDF               WASHINGTON : 2015                      
                              
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E-mail, [email protected].  
                         
                      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: [email protected]. 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 [email protected] or [email protected]. 
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).
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    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).
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    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\
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    \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).
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    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).
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    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\
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    \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\
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    \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\
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    \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\
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    \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\
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    \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).
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  --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\
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    \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\
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    \29\ Id.
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    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\
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    \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.
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    \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\
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    \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.
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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\
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    \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.
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    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\
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    \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).
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    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.
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    \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'').
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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.
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    \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.
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    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).
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    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\
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    \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.
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    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.
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    \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.
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    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.
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    \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.
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    \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.
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    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).
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    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.
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    \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.
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    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.
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    \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).
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    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\
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    \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.
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  --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\
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    \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.
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    \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).
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    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.
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    \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).
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  --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\
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    \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.
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  --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.
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    \1\ The Federal Government's fiscal year begins on October 1 and 
ends on September 30.
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    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.
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    \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.
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    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.
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    \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).
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    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.
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    \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]
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                                                           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.
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    \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.
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    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\
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    \12\ TIGTA, Audit No. 201310030, Implementation of fiscal year 2013 
Sequestration Budget Reductions, report planned for May 2014.
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    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.
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    \13\ Public Law No. 111-148, 124 Stat. 119 (2010) (codified as 
amended in scattered titles of the U.S.C.).
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                     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.
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    \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.
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    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\
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    \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).
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    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).
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    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\
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    \22\ TIGTA, Ref. No. 2014-40-029, Interim Results of the 2014 
Filing Season (Mar. 2014).
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    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.
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    \23\ Public Law No. 107-300, 116 Stat. 2350.
    \24\ Public Law No. 111-204, 124 Stat. 2224.
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    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.
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    \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).
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    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.
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    \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.
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                  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.
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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.
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    \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.
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    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\
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    \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).
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    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\
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    \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).
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    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).
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    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.
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    \38\ Statistical information provided by the IRS Wage and 
Investment Division Return Integrity and Correspondence Services.
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    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.
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    \39\ Formerly the Department of the Treasury Financial Management 
Service.
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    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.
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    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.
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    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.
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    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\
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    \47\ S.D. Cal. Indict. filed Apr. 13, 2013.
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    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.
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    \48\ TIGTA, Ref. No. 2013-40-083, Income and Withholding 
Verification Processes are Resulting in the Issuance of Potentially 
Fraudulent Tax Refunds (Aug. 2013).
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            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.
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    \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.
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    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:
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    \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.
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               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.
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    \52\ Public Law No. 111-152, 124 Stat. 1029 (codified in scattered 
titles of the U.S.C.).
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            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.
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    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.
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    \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).
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    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.
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    \56\ TIGTA, Audit No. 201320029, Review of the Internal Revenue 
Service's Office of Safeguards, report planned for July 2014.
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            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.
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    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.
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    \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.
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    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.
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    \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).
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            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.
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    \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).
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    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\
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    \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.
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    \66\ The voluntary compliance rate is an estimate of the amount of 
tax for a given year that is paid voluntarily and timely.
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    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.
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    \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.
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    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\
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    \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).
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    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\
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    \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).
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    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\
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    \71\ TIGTA, Ref. No. 2013-30-113, The International Campus 
Compliance Unit Is Improving Individual Tax Compliance (Sept. 2013).
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    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\
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    \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\
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    \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).
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    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\
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    \77\ TIGTA, Audit No. 201410009, Status of Actions to Improve 
Identification and Processing of Applications for Tax-Exempt Status--
Follow-Up.
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               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.
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    \1\ http://www.gpo.gov/fdsys/pkg/FR-2014-04-23/pdf/2014-09129.pdf.
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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).
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    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\
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    \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).
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                               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).
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     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.
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    \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.
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    \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).
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    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.
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    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.
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    \21\ GAO-13-378; GAO-12-742; and GAO-11-565.
    \22\ GAO-12-742 and GAO-11-565.
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    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]