[Senate Hearing 113-234]
[From the U.S. Government Publishing Office]
S. Hrg. 113-234
TAX FRAUD AND TAX ID THEFT:
MOVING FORWARD WITH SOLUTIONS
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HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
APRIL 16, 2013
__________
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COMMITTEE ON FINANCE
MAX BAUCUS, Montana, Chairman
JOHN D. ROCKEFELLER IV, West ORRIN G. HATCH, Utah
Virginia CHUCK GRASSLEY, Iowa
RON WYDEN, Oregon MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York PAT ROBERTS, Kansas
DEBBIE STABENOW, Michigan MICHAEL B. ENZI, Wyoming
MARIA CANTWELL, Washington JOHN CORNYN, Texas
BILL NELSON, Florida JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware JOHNNY ISAKSON, Georgia
BENJAMIN L. CARDIN, Maryland ROB PORTMAN, Ohio
SHERROD BROWN, Ohio PATRICK J. TOOMEY, Pennsylvania
MICHAEL F. BENNET, Colorado
ROBERT P. CASEY, Jr., Pennsylvania
Amber Cottle, Staff Director
Chris Campbell, Republican Staff Director
(ii)
C O N T E N T S
__________
OPENING STATEMENTS
Page
Baucus, Hon. Max, a U.S. Senator from Montana, chairman,
Committee on Finance........................................... 1
Hatch, Hon. Orrin G., a U.S. Senator from Utah................... 4
WITNESSES
Miller, Steven T., Acting Commissioner, Internal Revenue Service,
Washington, DC................................................. 6
Porter, Jeffrey A., chair of the Tax Executive Committee,
American Institute of Certified Public Accountants, and
founder, Porter and Associates, Huntington, WV................. 7
Olson, Nina E., National Taxpayer Advocate, Internal Revenue
Service, Washington, DC........................................ 9
LaCanfora, Marianna, Acting Deputy Commissioner, Retirement and
Disability Policy, Social Security Administration, Washington,
DC............................................................. 11
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Baucus, Hon. Max:
Opening statement............................................ 1
Prepared statement........................................... 29
Hatch, Hon. Orrin G.:
Opening statement............................................ 4
Prepared statement........................................... 32
LaCanfora, Marianna:
Testimony.................................................... 11
Prepared statement........................................... 34
Miller, Steven T.:
Testimony.................................................... 6
Prepared statement........................................... 41
Responses to questions from committee members................ 51
Olson, Nina E.:
Testimony.................................................... 9
Prepared statement........................................... 62
Porter, Jeffrey A.:
Testimony.................................................... 7
Prepared statement........................................... 91
Responses to questions from committee members................ 104
Wyden, Hon. Ron:
Internal Revenue Service Office of Chief Counsel memorandum,
dated July 8, 2011......................................... 109
Communications
Consumers for Paper Options...................................... 117
International Association of Jewish Genealogical Societies
(IAJGS)........................................................ 122
LifeLock Inc..................................................... 129
National Conference of Insurance Legislators (NCOIL)............. 132
Records Preservation and Access Committee (RPAC)................. 138
Ryesky, Kenneth H................................................ 146
Visa Inc......................................................... 150
(iii)
TAX FRAUD AND TAX ID THEFT:
MOVING FORWARD WITH SOLUTIONS
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TUESDAY, APRIL 16, 2013
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:06
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max
Baucus (chairman of the committee) presiding.
Present: Senators Wyden, Nelson, Cardin, Hatch, Grassley,
Thune, and Isakson.
Also present: Democratic Staff: Amber Cottle, Staff
Director; Mac Campbell, General Counsel; Lily Batchelder, Chief
Tax Counsel; Ann Cammack, Tax Counsel; Tiffany Smith, Tax
Counsel; and Tom Klouda, Professional Staff Member, Social
Security. Republican Staff: Chris Campbell, Staff Director;
Shawn Novak, Senior Accountant and Tax Counsel; and Jim Lyons,
Tax Counsel.
OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM
MONTANA, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The committee will come to order.
Before we begin, I think I can speak for every member of
this committee in saying our thoughts and prayers are with the
victims of the Boston Marathon bombing and with the families of
all those impacted by that horrible tragedy.
We are also grateful for the brave first responders on the
scene who undoubtedly saved countless lives. Acts of violence
such as this clearly are not tolerated in our country, and all
of us will work together to make sure the perpetrators are
brought to justice, while we offer our condolences and sympathy
to those who are more directly affected.
The Czech writer and politician Vaclav Havel once said, ``I
have preserved my identity, put its credibility to the test,
and defended my dignity. What good this will bring to the
world, I do not know. But for me it is good.''
Our identity represents who we are. It represents our
morals, our culture, our sense of worth. It represents, as
Havel said, our credibility and our dignity. When stolen from
us, it can have devastating consequences. Identity theft is a
serious problem. It is growing at epidemic proportions,
especially tax-related identity theft.
According to the IRS Taxpayer Advocate, tax-related
identity theft jumped more than 650 percent between 2008 and
2012. Last year alone there were 1.8 million incidents of
identity theft and fraudulent refunds. One of the latest
victims is Kipp Saile, a 48-year-old horseback outfitter in
Pray, MT, a tiny town just outside Yellowstone National Park.
Like many Montana communities, everyone in Pray knows their
neighbor. Doors are left unlocked, and the only threat of crime
involves the possibility of a bear stealing your catch from the
Yellowstone River. It is the last place you would expect to
find a case of identity theft.
Yet earlier this year, Kipp was in the process of
refinancing his home when he got a call from his tax preparer.
There was a serious problem, he said. When the preparer tried
to submit Kipp's tax return to complete his refinancing, it was
rejected by the IRS.
According to IRS records, Kipp had moved more than 2,000
miles to Maryland, taken up a new wife, and no longer cared for
his kids. In reality, of course, Kipp lived on his 10 acres in
Pray with his wife of 11 years, Heidi, and their three
children. Someone had stolen Kipp's identity and filed a false
tax return using his Social Security number.
That is where the nightmare began. Kipp has since been
forced to spend every day trying to repair the damage to his
name and credit. Needless to say, it has been a stressful
experience. It has cost Kipp many a sleepless night and quite a
bit of money. The refinance has been put on hold, costing him
an additional $500 a month he would have saved with the lower
mortgage.
Instead of helping Kipp clear up this mess, the IRS has
made a bad situation even worse. Kipp has been told twice by
IRS employees that he was not defrauded, the U.S. Government
was. At least one IRS employee hung up on Kipp, cut him off,
and was rude. He hung up on Kipp while he was trying to make
his case.
I find that outrageous, and I will not stand for a
Montanan, or any American taxpayer, to be treated with that
kind of disrespect by an IRS employee or any agency employee,
employees who are supposed to be serving the public.
I am going to say this very clearly, Mr. Miller: never
forget that you and everyone else at the IRS work for Kipp
Saile and all American taxpayers. Your job is to serve them.
They are the employers; you are the employees. I certainly hope
this was an isolated incident and does not reflect the type of
service provided by the IRS. But there is no excuse for even
one rude employee like this, and I intend to find out what you
are doing to make sure this type of behavior is not repeated.
It is critical that the IRS be ready and equipped to handle
cases like Kipp's because they are increasingly common. We have
all seen the stories in the newspapers and on TV about ID
theft. Just last week, USA Today highlighted some of the most
egregious examples of tax ID fraud, like a case where one
address in Michigan was used to file 2,137 tax returns. There
was another case where a single bank account was used to
receive 590 direct deposit refunds from the IRS, totaling more
than $900,000.
In recent congressional testimony, the IRS reported that
they had identified more than 900,000 fraudulent returns and
stopped more than $6.5 billion in fraudulent refunds in 2011,
but that was only the tip of the iceberg.
The Treasury Inspector General for Tax Administration
recently reported that another 1.5 million fraudulent returns
went undetected in 2011, potentially allowing $5.2 billion in
refunds to be paid. The IG estimated that if tax identity theft
were not addressed, it could cost the IRS $21 billion in
fraudulent refunds over the next 5 years.
Enough is enough. It is time to act. Three weeks ago,
members of this committee were briefed on tax reform options
that included proposals to help combat tax fraud and tax ID
theft. Senator Nelson, joined by Senators Cardin, Schumer, and
Feinstein, introduced comprehensive tax fraud legislation last
week. I commend them for that. I am pleased that the
administration has included several significant tax fraud
prevention proposals in its fiscal year 2014
budget.
This includes limiting access to death records and omitting
Social Security numbers on wage statements, but there is still
much more that can be done. We know tax fraudsters have easy
access to taxpayers' Social Security numbers through online
databases, hospitals, and other businesses that store personal
information. We need tougher controls on access to private
information, but it needs to be done efficiently without adding
more paperwork to the process.
We know that fraud is easier to detect when the IRS can
match a W-2 filed by an employer to a tax return before issuing
a refund. Right now that is not happening. We need to cut
through the red tape and ensure this information gets to the
IRS quickly.
We also know that too often it can be the tax return
preparers themselves who are the identity thieves. Proper
oversight by the IRS can help prevent this, but we face
obstacles. The IRS was handed a major setback recently when the
Federal court ruled against their authority to regulate some
tax return preparers. The case Loving v. IRS is ongoing, and I
am hopeful that the IRS will succeed on appeal, otherwise
taxpayers will not be able to know if they are using a reliable
return preparer.
I will be asking for an update on the status of this. We
need to consider whether legislation is necessary to protect
taxpayers from fraudulent preparers. This committee outlined
several ideas recently to reimpose tax preparer regulations,
and I encourage you to look at those ideas as part of our tax
reform option papers.
I also want to hear today how the IRS is utilizing the
tools they already have. USA Today recently stated that the IRS
is ``losing the identity theft fight'' and criticized the IRS
for taking too long to resolve fraud cases. According to the
National Taxpayer Advocate, it takes an average of more than
180 days to close cases. That is unacceptable. The IRS needs to
step it up and improve the way it handles tax ID theft once
cases are identified.
Victims of ID theft, people like Kipp Saile, are forced to
put their lives on hold while their cases languish in red tape.
IRS needs to speed up prosecution through better communication
with Federal, State, and local law enforcement, and this
committee is committed to protecting the American taxpayer. I
am hopeful that we will be able to work together to move
forward with legislation to stop tax ID theft.
We owe that to Kipp Saile and all the victims of identity
theft, and to all American taxpayers who pay their bills
properly and on time and are obviously quite put out when too
many others do not.*
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* For more information, see also, ``Present Law and Background
Information Related to Selected Tax Procedure and Administration
Issues,'' Joint Committee on Taxation staff report, April 15, 2013
(JCX-9-13), https://www.jct.gov/
publications.html?func=startdown&id=4515.
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[The prepared statement of Chairman Baucus appears in the
appendix.]
The Chairman. Senator Hatch?
OPENING STATEMENT OF HON. ORRIN G. HATCH,
A U.S. SENATOR FROM UTAH
Senator Hatch. Well, thank you, Mr. Chairman. I agree with
your statement. Before I begin, I just want to say that my
prayers go out to the city of Boston, especially for the
families of those who lost their lives and have been very
seriously hurt and injured. I wish everyone who was impacted by
this tragedy a very swift and peaceful recovery, to the extent
that that can happen.
I also want to thank you, Mr. Chairman, for holding this
important hearing. Each year the Finance Committee holds a
hearing around the end of the tax filing season. In the past,
these hearings have provided unique insight into the issues
faced by the American taxpayers, as well as some of the overall
problems we have with our Nation's tax system. The chairman has
announced some of them.
The subject of this year's hearing is the rapidly growing
crime of tax fraud by identity theft. This is a serious matter
and deserves our careful attention. Two of my colleagues,
Senator Nelson and Senator Crapo, should be commended for their
efforts in this area. Their subcommittee, the Subcommittee on
Fiscal Responsibility and Economic Growth, has held two
hearings on this topic over the last 2 years.
In addition, this was an important topic of conversation at
last year's tax filing season before the full committee. I
share the concerns of many throughout our country regarding tax
fraud by identity theft. From 2010 to 2011, the number of these
crimes nearly tripled, going from about 440,000 to 1.1 million.
Two senior members of my Finance Committee staff know this
issue very well, as they have been victims of tax fraud by
identity theft. In both cases, criminals obtained their Social
Security numbers, filed fraudulent returns, and collected
refunds.
For both staffers, this began a nightmarish scenario in
which they had to spend days on the phone and filling out
paperwork just to be able to file their own tax return. In the
end, they have to live with the fact that their Social Security
numbers are out there, and they can only hope that they are not
used to commit another fraud.
So I want to thank our four witnesses for coming to talk to
us today about this troubling issue, and I assure you we are
listening very carefully.
When it comes to dealing with tax fraud and identity theft,
I understand that the IRS has adopted a 3-pronged approach. The
first prong is prevention, which means stopping this type of
tax fraud from being successful in the first place. Clearly,
given the prevalence of this crime, much more work needs to be
done in this area.
The second prong is providing taxpayer services for those
who have been the victims of identity theft. This is a
significant focus of the IRS, but it appears that the agency is
falling woefully short in some instances. For example, an audit
by the Treasury Inspector General for Tax Administration
sampled 17 different identity theft cases and found that the
average time it took for these cases to be resolved was 414
days. Now, that is simply too long a wait for taxpayers who
have been the victims of identity theft, and I am hoping that
we can discuss ways to cut that wait time down during today's
hearing.
The third prong of the IRS's approach is catching and
convicting the criminals who have committed these crimes. This
is a critically important step. If we can step up enforcement,
many would-be criminals would likely decide that it is not
worth the risk to commit these crimes. I think we ought to have
very stiff penalties in these cases, and, frankly, they ought
to be enforced.
I am interested in hearing more about the IRS's efforts to
follow this 3-pronged approach, what successes they have had,
and what challenges they are still facing. I particularly
enjoyed meeting with you, Mr. Miller, yesterday. It was a good
meeting. That is why I am glad that we have you top IRS people
with us here today. Acting Commissioner Steve Miller, we are
grateful that you are here today. I know that you are taking
this seriously.
In addition, I want to know what other steps could be taken
to prevent these crimes, assist the victims, and improve
enforcement. I believe all of our witnesses here today will be
able to address some of these questions. While tax fraud
identity theft is the major focus of this hearing, we will also
discuss general issues associated with the tax filing season.
This year, as with every year, taxpayers face a number of
issues and obstacles as they try to file their returns. We
clearly need to do better in providing assistance during what
can be a very difficult time for many of our citizens.
For example, at last year's hearing I noted that the IRS's
goal of answering 61 percent of taxpayers' service calls was
unacceptable. I am glad to see this year that the IRS set a
significantly higher goal. That said, I still think more can be
done to improve taxpayer service.
I hope we can have a full and informative discussion of
these issues during today's hearing. Once again, I want to
thank the distinguished Senator from Florida and others for the
work that they have been doing in this area, and I want to
welcome our witnesses.
Mr. Chairman, I look forward to this very important
hearing, and we appreciate you folks being here with us today.
The Chairman. Thank you, Senator.
[The prepared statement of Senator Hatch appears in the
appendix.]
The Chairman. I would like to introduce our four witnesses.
First is Mr. Steven Miller. Mr. Miller is Acting Commissioner
of the IRS. Next to Mr. Miller is Ms. Nina Olson, the National
Taxpayer Advocate. The third witness is Mr. Jeffrey Porter, who
is sitting next to Mr. Miller. He is chair of the Tax Executive
Committee for the American Institute of Certified Public
Accountants. Finally, we have Ms. Marianna LaCanfora, Acting
Deputy Commissioner of Retirement and Disability Policy for the
Social Security Administration. Did I pronounce your name
correctly?
Ms. LaCanfora. Yes. Thank you.
The Chairman. Thank you.
Mr. Miller, you are first. You know the drill. Speak for
about 5 minutes. Your statements will be in the record.
STATEMENT OF STEVEN T. MILLER, ACTING COMMISSIONER, INTERNAL
REVENUE SERVICE, WASHINGTON, DC
Mr. Miller. Thank you, Chairman Baucus, Ranking Member
Hatch, members of the committee. Thanks for the opportunity to
update you today. Obviously, Chairman Baucus, the treatment
that Mr. Saile got was not acceptable and not up to what we
hope are our standards, and we will look into that.
The Chairman. I appreciate that. Thank you.
Mr. Miller. While I will spend most of my time today
discussing the future, I first want to touch on where we are.
The agency has more than 3,000 employees working on identity
theft. Last year, we stopped $20 billion in fraud. You had
talked about 2011. In 2012, $20 billion in fraud before it went
out, up from that $6 billion the year before. Our ability to
stop bad refunds has improved this year as well.
In addition, the number of criminal investigations
continues to rise, with more than 800 so far this year.
Finally, we are making progress on getting victims their
refunds. It is still slow, Mr. Chairman, but we are making
progress. We have closed more than 200,000 of these cases since
the beginning of this calendar year, and for the first time,
over the last couple of months, we are closing more than we are
getting in. So, our inventory is getting under control.
All this is not without cost. We spent almost $330 million
out of our declining budget on these matters in 2012, so in my
mind we are better, but our work is not done. We need to get
better still.
What I would like to do now is walk through where we need
to be to take the next major step in fighting identity theft.
The barriers to get there include the proliferation in the
theft and availability of SSNs, the sheer volume and complexity
of the cases before us, available IRS resources--and in
particular resources for technology updates--as well as third-
party information reporting, and our own business processes. We
have started work in several of these areas, but much more
remains to be done.
Here is where we need to be in the future. To illustrate,
let us follow how my return would move through our system.
First, at the time of filing before the return enters our
system, I should have to authenticate who I am in a robust
manner, even before it gets in to the IRS. This should happen
regardless of how I file. The issue is how to do this. Do we,
for example, use out-of-wallet questions, personal information
that is known to me but is tough for an identity thief to steal
or track down?
After authentication and as my return enters the system,
the IRS has to employ a set of flexible filters and tools that
allow a more informed decision on whether to issue a refund.
That decision must be based on a wider array of information
than is available to us today.
Here, let us talk about intelligent matching. First, the
IRS needs to validate that I am who I say I am. We need to do
this by using all the data in our systems, as well as other
data that is not currently available to us, on a timely basis,
at least.
So, for example, we need to look at my return and ask, do I
look like the same Steve Miller who has filed in the past? Do I
live in the same place, work at the same place, have the same
family, et cetera? Is the information on my return consistent
with other data we are receiving? So some of the data needed is
historical, and some is current third-party data.
Historical data we may have already, though it may not
always be available to us on a timely basis. But in this future
state, we also need to at least have some third-party data to
validate both my identity and other items on my return.
In this world, the IRS may have my W-2, certain 1099s, et
cetera, at the time the IRS makes the determination of whether
a refund is due to me and whether the amount claimed is
correct. Issues to discuss here include the need for improved
technology, the timing of data receipt, burden on reporting
entities, and the need for some taxpayers to have a fast
refund.
Next in the future vision is how we deal with victims.
Here, we need better coordination internally, and, more
importantly, we need a better solution for those like Mr.
Saile, who is the second one to file with us. Right now, second
filers are forced to submit a paper return, and they face a
long wait.
We need to get to a point where we take that second filer
in electronically and we prove the identity more efficiently,
and we need to have an improved system to issue an Identity
Protection PIN, which we could talk about. The key issue again
here is technology. Existing technology does not get us there.
There are other areas to discuss and many important, far-
reaching questions that merit discussion about the future and
shape of tax administration. These questions should be
considered not just inside the IRS, but with the tax community,
law enforcement, as well as you in Congress and taxpayers.
As I describe for you a preferred future for fighting
identity theft, please recognize that improvements are neither
immediate nor are they possible without resources. I will ask
for your support for the 2014 budget which includes additional
funding on this issue, as well as several important proposals
on identity theft.
Thanks again for the opportunity to be present.
The Chairman. You bet. Thanks, Mr. Miller.
[The prepared statement of Mr. Miller appears in the
appendix.]
The Chairman. Mr. Porter, you are next.
STATEMENT OF JEFFREY A. PORTER, CHAIR OF THE TAX EXECUTIVE
COMMITTEE, AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS,
AND FOUNDER, PORTER AND ASSOCIATES, HUNTINGTON, WV
Mr. Porter. Good morning, Chairman Baucus, Ranking Member
Hatch, and members of the committee. My name is Jeffrey Porter,
and I am the chair of the American Institute of CPAs Tax
Executive Committee and a sole practitioner at Porter and
Associates in Huntington, WV. On behalf of the AICPA, I am
pleased to have the opportunity to testify today.
An important issue of concern for our members is identity
theft. In mitigation of this issue, the AICPA appreciates the
IRS's recent issuance of proposed regulations which authorize
filers of certain information returns to truncate a taxpayer's
identifying number.
However, unfortunately there are some statutory limits
placed upon the Service's ability to expand their truncation
initiative. For example, employers are required to provide
employees a W-2 with their full Social Security number. We urge
Congress to permit truncation of Social Security numbers on all
copies of W-2s other than those filed with the Social Security
Administration. We also urge Congress to consider expansive
legislation to allow truncation of Social Security numbers on
all types of tax forms and returns provided to a taxpayer,
employee, or other recipient.
Now I would like to share our feedback on this year's tax
filing season. Overall, it was an extremely challenging and
compressed filing season due to the late enactment of
legislation and the resulting delay in the release of 31 tax
forms.
Since the IRS could not accept tax returns that included
certain forms until February or early March, our members
essentially lost the first half of their filing season.
Nevertheless, we believe the IRS did an outstanding job under
difficult circumstances. They maintained an open dialogue with
stakeholders and were responsive to our concerns.
Earlier this year, we submitted a letter to Acting
Commissioner Miller on the delayed release of forms. Within
days, the IRS issued a notice which provided critical relief
requested from late payment penalties.
Unfortunately, the filing season was also a challenge due
to the late issuance of corrected 1099s. Generally, a 1099 must
be furnished to taxpayers by February 15th; however, brokerage
firms can amend a 1099 at any time. Over the last few years, we
have noticed more brokerage firms issuing corrected 1099s,
sometimes issuing multiple corrected forms on the same account.
These forms create anxiety, confusion, and, for some taxpayers,
an increase in tax preparation fees.
As a result, many taxpayers now have a tendency to wait
until they have received their anticipated corrected 1099s
before providing records to the CPA. In order to streamline the
tax return reporting process for both the government and
taxpayers and to minimize the need for amended tax returns, we
suggest you consider legislation that would permit taxpayers to
report de minimus changes in their income from a corrected 1099
in the year of receipt.
Another area of interest for our profession is the IRS's
tax return preparer program. The AICPA has always been a
steadfast supporter of the Service's goals of enhancing
compliance and elevating ethical conduct. We generally support
their program, including the registration of paid tax return
preparers and the issuance of preparer tax identification
numbers; the expansion of Circular 230 over all paid preparers;
the creation of a basic continuing education and competence
program geared towards the unenrolled preparer community; and
the IRS's mitigation of any taxpayer confusion regarding the
qualifications of different paid preparers.
Another important issue is the reform of penalties. Because
the success of our system depends upon voluntary compliance,
penalty provisions should be carefully crafted by Congress and
sensibly administered by the Service to ensure that penalties
deter bad conduct without deterring good conduct or punishing
the innocent.
Targeted, proportionate penalties that clearly articulate
standards of behavior and are administered in an even-handed
and reasonable manner encourage voluntarily compliance with the
tax laws.
On the other hand, over-broad, vaguely defined, and
disproportionate penalties, particularly those administered as
part of a system that automatically imposes penalties or that
otherwise fails to provide basic due process safeguards,
creates a perception of unfairness that is likely to discourage
voluntary compliance.
Finally, we appreciate the committee's important
consideration of tax reform and potential solutions. We have
consistently supported tax reform simplification efforts,
because we are convinced that such actions will reduce
taxpayers' compliance costs, encourage voluntary compliance,
and facilitate enforcement actions.
To name a few, we support the repeal of the Alternative
Minimum Tax, the harmonization of education incentives, the
enactment of consistent definitions in the code, the repeal of
unused provisions, and the simplification of the kiddie tax
rules. We also believe in the simplification and harmonization
of retirement planning vehicles. We have more extensive
thoughts on tax reform, tax reform due dates, and information
reporting in the written comments submitted to this committee.
Thank you again for the opportunity to testify. I will be
pleased to answer any questions you may have.
The Chairman. Thank you, Mr. Porter. I presume you
submitted all those recommendations for simplification and
changes to this committee as we work on tax reform.
Mr. Porter. Yes, sir.
The Chairman. We need lots of help, frankly, to make sure
we do it right. All right. Thank you.
[The prepared statement of Mr. Porter appears in the
appendix.]
The Chairman. Ms. Olson?
STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE,
INTERNAL REVENUE SERVICE, WASHINGTON, DC
Ms. Olson. Chairman Baucus, Ranking Member Hatch, and
members of the committee, thank you for inviting me to testify
today about tax-related identity theft. Before I begin, I want
to commend you for the excellent tax reform options paper the
committee staff compiled last month and urge you to move
forward with comprehensive tax reform and a taxpayer bill of
rights.
I also want to make you aware of my concern that cuts to
the IRS budget since 2010, including but not limited to
sequestration, are impairing the IRS's ability to serve
taxpayers and are self-
defeating as a deficit-reduction measure. Almost surely the
reduction in revenue collection will ultimately exceed the
short-term budget savings.
On the subject of identity theft, let me start by
emphasizing the most important impact for most victims: delayed
refunds. Apart from the time and obvious frustration involved
in having to prove one's own identity, a taxpayer generally
will not receive his or her refund until the case is fully
resolved.
So far this filing season, 84 percent of all individual
returns processed have resulted in refunds, and the average
refund amount has been nearly $2,800, so longer case resolution
times often translate into financial inconvenience, or even
hardship. Some identity theft victims also experience
consequences when other Federal agencies or private businesses
rely on IRS data.
For example, the IRS generally will not release account
transcripts while an identity theft case is pending, so
students applying for financial aid and homeowners applying for
a mortgage or refinancing may face additional obstacles. That
is why prompt case resolution is so important.
Yet, cases are not being resolved promptly, nor do
taxpayers have a single point of contact to work with, nor does
the IRS even have a reliable way of measuring service-wide
cycle time on identity theft cases.
The IRS recently created 21 separate specialized units to
handle different types of identity theft problems, which may be
helpful, but, when a case involves multiple issues, one IRS
entity should oversee the case to make sure the problems are
handled in a coordinated manner. The IRS seems to believe that
relatively few cases require involvement by multiple functions.
I disagree. Within the Taxpayer Advocate Service, 94 percent of
our identity theft cases have multiple issues.
Similarly, TIGTA reviewed a judgmental sample of 17
identity theft cases for an audit conducted last year and found
that the IRS had opened 58 cases separately to resolve these
victims' accounts, an average of nearly three and a half cases
per victim. The average cycle time for those cases was well
over a year.
IRS data suggests its workload continues to grow at a rapid
clip. The IRS had more than 1.25 million identity theft cases
in inventory at the end of February, more than 5 times as much
as a year ago when the volume was less than 235,000 cases.
After years of so-called IRS reengineering efforts, victims are
still experiencing unacceptable delays.
From an administrative standpoint, there are several steps
the IRS can take to improve victim assistance. The IRS should
create a strong centralized unit so ID theft victims with
multiple issues do not have to deal with multiple functions to
get complex problems resolved. The IRS should analyze its
procedures to identify ways to reduce cycle time.
The Taxpayer Advocate Service generally is able to resolve
identity theft cases in about 3 months, and there is no reason
why the IRS should need from 6 months to over a year to do so.
The IRS should do a better job of keeping victims informed of
the status of their cases while they are in progress, and
promptly issue refunds when it has identified the correct
taxpayer, instead of waiting until case closing.
From a congressional standpoint, I believe several steps
could make a difference. First, I recommend that Congress
consider what needs to be done to enable the IRS to receive and
process information returns, like forms W-2, before it
processes income tax returns and issues refunds. If the wage
and withholding on a tax return had to match the numbers filed
by employers on forms W-2, identity thieves would have a much
harder time.
Second, I recommend that Congress restrict access to the
Death Master File which provides a means of access to taxpayer-
identifying information that can further tax fraud. Third, I
recommend that you enact restrictions on the use and disclosure
of taxpayer return information shared by the IRS with State and
local law enforcement authorities.
Finally, I have long advocated for the regulation of
Federal tax preparers for many reasons, one of which is that it
will reduce the incidents of fraud. If the Court of Appeals for
the D.C. Circuit ultimately invalidates the Treasury's preparer
regulations, I encourage this committee to do what it has done
on two previous occasions and approve legislation explicitly
authorizing the IRS to regulate in this area.
I appreciate the opportunity to testify today and would be
happy to answer your questions.
The Chairman. Thank you, Ms. Olson.
[The prepared statement of Ms. Olson appears in the
appendix.]
The Chairman. Ms. LaCanfora?
STATEMENT OF MARIANNA LaCANFORA, ACTING DEPUTY COMMISSIONER,
RETIREMENT AND DISABILITY POLICY, SOCIAL SECURITY
ADMINISTRATION, WASHINGTON, DC
Ms. LaCanfora. Chairman Baucus, Ranking Member Hatch, and
members of the committee, thank you for inviting me to this
important hearing on tax fraud, tax ID theft, and tax reform. I
will discuss the death information that we maintain to
administer Social Security programs and our role in the wage
reporting process.
I am Marianna LaCanfora, the Social Security
Administration's Acting Deputy Commissioner for Retirement and
Disability Policy. At Social Security, we are responsible for
administering some of the Nation's most important and most
successful programs. We take great pride in helping the
American people obtain the benefits to which they are entitled.
We are also committed to protecting the sensitive data that we
collect and maintain.
The President's fiscal year 2014 budget includes four SSA-
related legislative proposals that would enhance our ability to
combat fraud, curb improper payments, and improve our wage
reporting process.
I would like to briefly explain the history behind one of
these legislative proposals, which would restrict access to the
Death Master File, or the DMF. Since Social Security began in
the 1930s, we have collected death information from funeral
homes, States, and other sources to timely stop paying
beneficiaries who have died. Each year, we receive about 2.5
million reports of death. When we receive this information, we
update our records, stop benefits as appropriate, and, in some
cases, start paying benefits to surviving spouses and young
children.
People eventually became aware of our collection of death
records. In 1978, Ronald Perholtz filed a lawsuit under the
Freedom of Information Act, or FOIA, to gain access to the
death records in our files. The Department of Justice advised
us that we could not withhold the data requested under FOIA.
As a result, we entered into a court-approved consent
decree requiring us to disclose death records regularly. In
time, because we began to receive more and more requests for
death information, we contracted with the Department of
Commerce's National Technical Information Service to distribute
the Death Master File.
Recent media reports have stated that criminals use the DMF
information to perpetrate tax fraud. While death data can be a
very valuable tool to prevent fraud, we must strike a balance
that allows legitimate uses of the data while also preventing
misuse. That is why we believe the law should be changed to
stop wrongdoers from obtaining our death information.
The legislative proposal would delay the release of a
deceased individual's information on the DMF for 3 years after
he or she dies. Only private entities that the Commissioner
certifies as having a legitimate need for the information would
receive the DMF immediately.
At the same time, the proposal would expand Federal
agencies' access to death information for additional purposes,
such as law enforcement and reducing improper government
payments. We look forward to working with Congress on this
legislation. This budget includes another proposal that would
permit us to share our prisoner information to help other
agencies reduce improper payments.
I would like to briefly touch upon the wage reporting
process. We collect wage reports to ensure that workers receive
Social Security credit for their work. We also use this
information to calculate benefit amounts. On a daily basis, we
provide it to the IRS for tax administration.
The President's fiscal year 2014 budget includes two
proposals that would enhance the wage reporting process while
also helping to prevent fraud and error. One proposal would
require more employers to file electronic wage reports, which
are far more accurate than paper. The second proposal would
restructure the Federal wage reporting process by requiring
employers to report wages quarterly rather than annually.
Increasing the frequency and timeliness of wage reporting would
enhance the ability to detect fraud and curb improper payments.
Again, thank you for the opportunity to describe our
efforts in this area. I would be happy to answer any questions
you may have.
The Chairman. Thank you, Ms. LaCanfora.
[The prepared statement of Ms. LaCanfora appears in the
appendix.]
The Chairman. I have two questions, really. First is, with
a 3-year delay in releasing the deceased Social Security
numbers, can't the IRS have access to that information and
match any refund requests or returns filed with the IRS against
those to find out whether that person is actually alive? Maybe
you, Mr. Miller, can answer that question.
Mr. Miller. So, we do receive the Death Master File
currently. We do mark accounts in two ways. Those who have
recently passed, their estate has to file a tax return with us,
so they have a filing requirement. We cannot simply lock that
account.
We do tag it so that we can judge whether it is a proper
estate tax return or not, and we capture quite a few of those
in our filters. With respect to those who have passed more than
a couple of years ago, we do lock down their account so that
people cannot use those. We have locked down more than 11
million of those accounts.
The Chairman. So how confident are you that people are not
ripping taxpayers off by fraudulently using these Social
Security numbers, that is, numbers of people who are deceased?
How confident are you that there is not much leakage there
anymore?
Mr. Miller. I am quite sure there is some leakage, Senator.
The Chairman. Where would it be? What is the flaw? Where
are the cracks in the system?
Mr. Miller. So--and I would open it to my colleague from
SSA as well--the system is only as good as the reporting to SSA
is, and only as timely as the reporting to SSA is. These are
not necessarily all coming from the DMF. People are stealing
from funeral homes, from hospitals, so they may be utilizing
those numbers in advance of our ability to load them in our
system.
The Chairman. What about those other sources; what are you
doing about that: funeral homes, hospitals, et cetera?
Mr. Miller. So, we do not have the authority or the
capabilities to police the use of Socials. All we can do is try
to educate.
The Chairman. If you had the authority, how important would
that be to your enforcement?
Mr. Miller. I do not know whether that would be the IRS
that should have that authority or whether others should have
that authority. It is clearly a gap in the system. Someone
needs to educate and make clear that these Socials need to be
protected. We are trying to do that, and we are also trying, as
you heard, in terms of the administration's proposal, to try to
get fewer of those SSNs floating around in the system.
The Chairman. I would be interested in your reaction, and
maybe others on the panel in my limited amount of time, to
doing electronic filing. California is setting up a pilot
program, as I understand it, where the State just sends you
your return, and it is all filled out for you. I am trying to
find some ways to use electronic systems to create more
efficiency. So, if you could just comment a little bit on what
we could do there.
Mr. Miller. I think, if I am understanding the question,
Mr. Chairman, we are talking about California's--what is called
the Ready Return, or something of that nature.
The Chairman. Yes. Right.
Mr. Miller. You would have to talk to California about how
well it is doing. My understanding is it works, but for a
limited number of individuals. We have actually worked with the
software community, and they are partners in doing this. I am
not sure that that is an answer to identity theft. Whether we
want to go that way or not is a different question in terms of
burden on the taxpayer, but I am not sure at all that that is
going to be----
The Chairman. Just off the top of your heard reaction, is
that something worth pursuing, the Ready Return approach?
Mr. Miller. Depending on where it would be in line of my
priorities, Mr. Chairman, but it is not at the top of my
priorities, no.
The Chairman. And why not?
Mr. Miller. Because we have quite a few other things on our
plate right now.
The Chairman. Yes. Others? Is there potential? Let me ask
Mr. Porter, Ms. Olson.
Ms. Olson. Well, in my annual report, what we recommended
for enforcement reasons is that the IRS needs to get W-2 and
1099 data very early so it can do some of the protections for
identity theft and fraud, and then, once we have that data, we
should make that available to taxpayers so that they can
download it into the software programs that they are purchasing
or that they can give it to their preparers so we do not miss a
1099 or a W-2 somewhere. Or we recommend that the IRS create a
return itself whereby taxpayers could download that
information. For a small category of taxpayers, that return
would be it, because they only have W-2 information.
The Chairman. Right. Right. My time is expiring.
Ms. Olson. But for many others----
The Chairman. My time is expiring. But, Mr. Miller, very
briefly, what are your number-one and your number-two
priorities?
Mr. Miller. My number-one priority just finished up last
night.
The Chairman. Well, that is history then. What is it now?
[Laughter.]
Mr. Miller. Making sure those returns finish their winding
through and people get their refunds, Mr. Chairman. That is
number one.
Number two is the other legislative things we have in front
of us, including the foreign account work we have, the health
care act work that we have, and identity theft. Those are all
in the same category.
The Chairman. All right. Thank you. Thank you.
Senator Hatch?
Senator Hatch. Thank you, Mr. Chairman.
Ms. Olson, if a criminal has the taxpayer's name and Social
Security number, it may be enough to file a fraudulent return
seeking a refund. Now, identity theft victims now receive an
additional layer of security to prevent the fraud from
happening to them again. Would adding a similar, additional
layer of security for all taxpayers be an effective way to
prevent tax fraud related to identity theft?
Ms. Olson. I think that that is something worth looking
into. People who e-file already have to answer certain
questions, information off the last year's return. What Acting
Commissioner Miller was talking about, some of these out-of-
wallet questions, things that we are familiar with--what was
the name of your elementary school, your first pet, et cetera--
are getting more accepted in doing business and may be easier
for taxpayers to answer.
I would also make a comment about something Mr. Miller
referred to earlier about funeral homes and hospitals. I often
wonder why they need Social Security numbers in the first
place, why those numbers are available to these entities. Why
are they asking for them? I think that that is something worth
looking at, the proliferation of people asking for Social
Security numbers where there is no overriding tax need, for
example, for giving that information.
Senator Hatch. All right. Thank you.
Mr. Miller, are refundable tax credits an element of the
income tax system that make it easier for criminals to obtain
fraudulent refunds, and are they more susceptible to fraud than
non-
refundable credits?
Mr. Miller. I do not think we can crowd all refundable
credits into one pile, Senator. I think that it is clear that
where a refundable credit represents a large hunk of money,
that that becomes a target, a natural target for thieves.
That would be true of any credit, but especially of a
refundable credit where there is no natural break on its
utility. It really depends on the nature of what information we
have to validate that credit at the time. I think that is more
important than whether it is refundable or not.
Senator Hatch. Well, as you know, some have advocated a
return to more paper filing as a way to combat tax fraud
through identity theft. However, would going to more paper tax
return filings really reduce this crime?
Mr. Miller. We do not think so, Senator. First, we still
see a goodly amount of fraudulent returns coming in on paper.
Second, whether they come in on paper or whether they come in
electronically, those returns and that information are going
through the same system.
So what we would have is a delta between something that
costs us about 17 cents to process, that is an electronic
return, and $3-plus for a paper return for, in our mind, not
necessarily much benefit in terms of cutting down on fraud.
Senator Hatch. I see.
Mr. Porter, as a longtime professional tax practitioner,
you have undoubtedly dealt with many cases where the IRS has
assessed penalties. Penalties can be waived in some cases where
the taxpayer can demonstrate ``reasonable cause.'' Do existing
reasonable cause exceptions adequately protect both taxpayers
and the government, and where is there room for improvement in
this area?
Mr. Porter. Well, we have concerns about areas where there
is not reasonable cause, where the reasonable cause exception
is not allowed. So that is one area we are concerned about. Our
concerns in the area where there are reasonable cause
exceptions deals with really the subjectivity with which the
rules are applied. As we all know, the tax code is extremely
complex, and taxpayers many times will make foot faults that
are unintentional, so we just believe that the subjectivity
issue of how we decide whether they are or are not abated is
the issue.
Senator Hatch. All right.
This is for all three of you. The IRS's planned regulation
of paid tax return preparers is currently on hold. The IRS lost
on its appeal in a recent District Court case that ruled that
the IRS does not have the authority to regulate tax return
preparers.
How important is the IRS's ability to regulate tax return
preparers in the battle to combat tax fraud, tax refund fraud
for instance?
Mr. Miller. If I could start out, Senator. We think it is
remarkably important. First, we have worked with the Department
of Justice, and we are appealing the District Court case. We
hope to get an answer this calendar year. Yes, we think it is
vital. We think it is vital to our ability to allow the public
some confidence that the return preparer whom they are
selecting meets certain basic competencies. So, we find it very
important.
Senator Hatch. Mr. Porter?
Mr. Porter. We have consistently supported the IRS and
their program to register tax return preparers and provide ID
numbers, and the expansion of Circular 230. We agree that we
think it provides the taxpayer a level of confidence to know
their preparer has at least a basic level of competence, and it
allows the IRS the ability to track preparers and to see the
type of returns that they are preparing and potentially be able
to spot fraud issues early on.
Senator Hatch. All right. Ms. Olson?
Ms. Olson. I personally have over 50 taxpayer assistance
orders sitting on my desk that are in the process of being
issued to Mr. Miller over there on my right, where the
taxpayers have been the victims of preparer fraud.
The preparers have taken their identity or filed
unauthorized returns and had the refunds of significant amounts
of money--as much as $5,000--deposited into their personal
accounts. We are dealing right now with the fall-out of the
legitimate taxpayer trying to file a second return, a real
return, and getting their refund back from us.
When I see return preparers in massage parlors and return
preparers in dog grooming locations, I am not saying that they
should be shut down, but I am saying that they should be
required to demonstrate their competency to prepare returns.
That is the environment that we have today, absent this
regulation, that folks are just hanging up their shingle
without any qualifications whatsoever.
Senator Hatch [presiding]. All right. Thank you all.
Senator Grassley?
Senator Grassley. Yes. Mr. Miller, recent reports indicate
that the IRS has taken a position that it can access taxpayer
e-mails without warrant under the Electronic Communications
Privacy Act. While that law does allow Federal agencies to
obtain electronic communications from a remote computing
service without a search warrant, provided that they are older
than 180 days, this position is contrary to the 6th Circuit
decision in Warshak.
In that case, the court held that the search warrant is
necessary to obtain any content of an e-mail, regardless of
age. It is my understanding that the Department of Justice has
extended this policy to all circuits. So my question is, why is
the IRS taking a more aggressive posture under that law than
the Justice Department has applied for all agencies, or applied
to all circuits?
Mr. Miller. Well, Senator Grassley, the short answer is, we
are not taking that position. We follow Warshak. In the
criminal context, we seek a search warrant in advance of going
to an ISP, Internet Service Provider, for e-mail content. On
the civil side, we do not have a policy that has us going to
them anyway. We are going to clarify that in our procedures. We
think that is currently the case in any event, but, in short,
we are following Warshak.
Senator Grassley. Well then, I think I can go on to my next
subject. Well, maybe one other follow-up. Is the same standard
going to be applied to civil and criminal investigations?
Mr. Miller. My understanding--and you are not talking to a
criminal lawyer here--is, we cannot get a search warrant in a
civil matter, only in a criminal matter, so we would not be
going to the ISP for content of e-mails on the civil side. So
it is in conformity with the statute, and it is in conformity
with the 6th Circuit opinion in Warshak.
Senator Grassley. All right.
Would this apply also to Facebook and Twitter?
Mr. Miller. You are probably moving out of my range of
ability to answer. I will come back to you on that.
Senator Grassley. All right. Well then, why don't you
respond to that in writing?
Let me go on to my next and last issue, again to you. You
probably know that, a few months ago, I sent a letter to you
expressing my concern about the proposed whistle-blower
regulations. Chief among these were that they will hamstring
the program by limiting awards and discouraging knowledgeable
insiders from coming forward.
Last week, the IRS held a hearing on proposed regulations.
A number of whistle-blowers and attorneys made their concerns
with the proposed regulations loud and clear. If the whistle-
blower program is going to be as effective and successful as it
can be, the final regulations ought to address those concerns.
Unfortunately, it appears that the concerns expressed by me
and others may be falling on deaf ears, because, at last week's
IRS hearing, a whistle-blower attorney asked those attending to
raise their hands if they thought the proposed regulations
would encourage future IRS whistle-blowers to come forward.
It is my understanding that the only persons to raise their
hands were the IRS panel members. It is difficult for me to
understand how anyone, particularly anyone with knowledge of
the concerns expressed by me and others, would not raise their
hand.
So do you agree that the IRS panel members are correct,
that the proposed regulations will actually encourage whistle-
blowers to come forward? I would like to have an explanation of
why or why not.
Mr. Miller. Let me do a few things here, Senator. First--
and I hope you know this--I am supportive, and the Service is
trying to be more supportive, of the whistle-blower community,
with continued contact and discussion with them, of getting
information in from them, because there are blind spots for us
in reporting. So, in the offshore area and other areas like
that, they are vital. We are trying to do what we can. I would
say the proposed regulations are just that: they are proposed.
We are talking to people about what changes are necessary,
what changes can be made. I think we would also welcome a
chance to discuss with you what we can do, what we cannot do,
and what might require legislation. So that is sort of where we
are.
To the extent we can make whistle-blowers more comfortable
and communicate with them more along the way, I think that is a
positive. There are a couple of provisions in the
administration's 2014 bill that you may know about that are
going to help here. One of them will allow us to release more
information, I think, to the whistle-blower towards the end of
the process. That also has the detail of requiring them to
treat it as 6103 information.
The other piece that you may be aware of and that you have
pushed for, Senator, is to have the False Claims Act reprisal
rules put into title 26 as well. So I would welcome a
conversation, a continued conversation on this, and we are
still working on it.
Senator Grassley. I welcome that conversation, because I
think it is a situation that is similar to the False Claims Act
that you just talked about, which has brought in $33 billion to
the Federal Treasury since 1986. I did not anticipate that
would ever happen.
I think we have more of a gold mine here if we start
listening to these whistle-blowers. I think we have already
seen benefits potentially of at least $600 or $700 million, and
probably billions of dollars out there that have already been
identified. So I will submit some other questions along this
line, but I do welcome your talking to me.
I yield the floor.
Senator Hatch. Thank you.
Senator Wyden?
Senator Wyden. Thank you, Mr. Chairman.
Mr. Miller, on this privacy issue, I want to be clear on
it, because this has triggered enormous concern. Are you saying
that the agency has not obtained electronic communications
without a warrant? That is a ``yes'' or ``no'' answer.
Mr. Miller. I am sorry, you are going to have to repeat
that one.
Senator Wyden. Has the agency obtained electronic
communications without a warrant, yes or no?
Mr. Miller. Not to my knowledge.
Senator Wyden. All right.
Now, your lawyers say that you can. Mr. Chairman, I would
ask unanimous consent to put into the record a memo outlining
why the IRS lawyers have taken the view that Americans' e-mail,
Facebook messages, and Twitter communications which are older
than 180 days can be obtained by the IRS without a warrant.
Senator Hatch. Without objection.
[The information appears in the appendix on p. 109.]
Senator Wyden. Thank you, Mr. Chairman.
You indicated, Mr. Miller, to Senator Grassley that you
would go back and look at this. When will we actually get a
public statement that the agency will not seek to obtain
electronic communications without a warrant? When would we get
that actual public statement?
Mr. Miller. I think the point I had was that the raising of
the issue of Facebook and Twitter--you have that statement from
me today, earlier today, Senator Wyden. We are not doing it.
What I have said is, in the criminal context, we use search
warrants, and we are not going to the ISPs in the civil context
for content e-mail, with or without warrant, because we cannot
get a warrant in that context in any event.
I will say that there is certain public information out
there on Facebook, on Twitter. This is why I sort of want to be
more nuanced in the discussion. There is certain public
information that we might look at in terms of a collection
action, in terms of an examination. That is a different sort of
situation, and I would be glad to come back and sort of work
through that for you. But that is public information, not
private information.
Senator Wyden. The public has recently learned, Mr. Miller,
that the IRS legal counsel believes that Americans enjoy no
general privacy to their online communications that are older
than 180 days. That is why people are so troubled. So you have
said, and it is certainly helpful to hear that today, that this
has not been done in the past. I think it is very important
that the agency clarify its policy with respect to the privacy
rights of Americans and do it promptly.
Mr. Miller. And we intend to do that.
Senator Wyden. When will you do that?
Mr. Miller. I would hope to have that done--I do not have a
date, but it is----
Senator Wyden. Can you commit today to have this done
within 30 days, that the agency will clarify----
Mr. Miller. I will use my best effort, Senator. I think we
can do that, yes.
Senator Wyden. All right.
Ms. Olson, what is your reaction to this question about the
IRS's position with respect to the privacy of tax information?
I mean, we are always trying to find ways to boost tax
compliance. Here we have--and I put it in the record--the
general counsel of the IRS saying that Americans enjoy no
general privacy to their online communications that are older
than 180 days. That is not something that was made up by some
whistle-blower, that was from the IRS general counsel.
My sense is, the two issues are going to be related:
taxpayer compliance and the privacy of Americans' tax
information. Section 6103 of the Internal Revenue Code was
written by the Congress to ensure that taxpayers' tax
information is private. What is your sense about memos like
this, the one that I just quoted from, undermining the
expectation that Americans have in section 6103?
Ms. Olson. Well, regrettably that memo was not shared with
me prior to it being made public, nor was it circulated for my
comments. My experience with memos such as that is, when they
are actually circulated and people within the IRS, such as my
office and myself, have an opportunity to raise concerns about
them, that you get a much better quality work product, and it
might have looked different had the voice of the taxpayer had
an opportunity to comment on that.
I think that it is vitally important to people's
willingness to comply with the laws that they feel like they
are being treated fairly by the tax administration, just as the
tax administration is asking them to behave properly with their
tax filing obligations.
Not having a full and robust discussion internally is one
sure way of coming out with guidance such as that, so that then
it needs to be said, ``We are not going to follow that.'' I
just have to say that the Chief Counsel often issues memos in
answer to very narrow questions, and, when you have a greater
discussion, you are able to place that in context and get a
better product.
Senator Wyden. My time is up, Mr. Chairman. I would just
note that, as a general rule, having worked with Ms. Olson over
the years, the public is better protected when Ms. Olson is
consulted. I think that we have learned that again, and I hope,
Mr. Miller, that that lesson is one of the take-aways of this
discussion. Thank you.
Senator Hatch. Thank you, Senator.
Before we turn to Senator Nelson, let me just ask you, Mr.
Miller, what are the criminal penalties for a person who
commits identity fraud with regard to the IRS; do you know?
Mr. Miller. I am probably the wrong one to address that
question to.
Senator Hatch. Does anybody know there on the panel?
Mr. Miller. I will say there are two things that are being
proposed as part of the 2014 budget that you all should be
thinking about. One is, a specific penalty on the civil side of
$5,000 for each filing of a false return by reason of identity
theft. That would be new. There is also an additional 2-year
sentencing guideline that would be brought to bear, or possibly
brought to bear. In a tax case where there is an aggregated
identity theft rule on the books that does not apply to tax
cases, this would put that in.
Senator Hatch. Sure. If you would, I would like to have you
folks make recommendations of what type of a criminal penalty
there should be for people who engage in these type of
practices. I think it ought to be pretty stiff, myself.
Ms. Olson. Sir, there is, for preparers in particular, a
criminal penalty if they use or disclose taxpayer information
without the taxpayer's consent. So, when you have a preparer
who is using that information to file a return that the
taxpayer did not authorize, I think we do have some tools. We
have not used that authority, to my knowledge.
Senator Hatch. I am more interested in the actual tax fraud
that is being perpetrated.
Senator Nelson, you are next. I apologize for interrupting.
Senator Nelson. First of all, I have been heartened by the
commentary that we have heard from the witnesses with regard to
either the overall impact of the legislation that we have filed
or the parts of it they have testified to.
I would like to pursue just a couple of comments here that
will further, I think, give credence to the need for this
legislation. I would appreciate, to the chairman and the
ranking member, if you all would seriously consider moving this
legislation. I think the testimony today has brought out parts
of it.
I want to thank Mr. Miller. For example, for some reason we
have seen a concentration of this fraud in Tampa and Miami.
Senator Isakson came in. There has been a concentration in
Georgia as well as Florida, of taking identities and filing
false returns and getting a refund. This has such an impact,
and we have had a hearing before in this committee a couple of
years ago. I just recently had another hearing in my capacity
as chairman of the Aging Committee.
What happened in Tampa is that street crime has suddenly
dropped because the criminals are using a laptop instead of a
crowbar. The drug traffic on the corners has diminished because
they found a new way that is a lot easier and a lot less risky
to get somebody's money. In this case, it is the United States
taxpayers' money.
Mr. Miller, you said you had spent something like $330
million going after ID theft, but you said you had prevented
$20 billion of theft. That is a pretty good return on your
investment. At the same time, there is still, according to your
figures, $5.2 billion that is lost to the taxpayer. So I would
be curious, Mr. Miller. Why do you think it is happening in
concentrated places like Tampa and Miami?
Mr. Miller. I do not know that, but where it seems to work,
people begin to use it. We really have not gotten behind that.
We really do not understand why. It did, in fact--Florida was
the beginning of this. You are absolutely right: you still are
suffering the greatest amount of this in those two areas.
Senator Nelson. Well, I want to thank you. Working real-
time with the local police--here is a good example of
government working. They cannot share information. That is
prohibited. But we worked it out where, with the victim, the
taxpayer giving their consent, that they, the IRS, could share
the tax information with the local law enforcement so that it
would help them bolster their ability to go after the bad guy.
Now, another way, Mr. Chairman, that they get around this
is that they have the tax return money come to a pre-paid debit
card, and then there is no identifying information so that the
police can go after the bad guy. What do you think about that,
Mr. Miller?
Mr. Miller. I do very much appreciate your comments on our
improved work with local law enforcement. We did not start out
doing as good a job as we needed to there, and, with your help
and the help of Florida authorities, I think we are doing much
better.
On debit cards, they were proliferating. I am not sure
where they are today. There have been some changes in the rules
about, know your customer and the application of those rules to
debit cards. We may see a different result now than we did
earlier, but it is something we should be talking about.
Senator Nelson. Well, each one of the people, including Ms.
LaCanfora from Social Security, has pointed out the problems.
Now, they are constrained because they can only do so much with
Social Security numbers. But we know it is a problem on the
Death Master File. We need to delay the publication.
As she said, the Commissioner of Social Security can go in
and make available to legitimate interests, like life insurance
companies, the Social Security numbers, but stop publishing
them on the Internet. Otherwise, it is like shooting fish in a
barrel. If you have the number, somebody is going to go and
file a false return. So, Mr. Chairman, with the utmost of
urgency on the day after tax day, I would urge you and Senator
Hatch to get this legislation moving.
Thank you.
Senator Hatch. Would the Senator yield?
Senator Nelson. Of course.
Senator Hatch. I would like to be on his bill with him. We
understand there is an Ancestry.com problem that we need to
resolve. If we can resolve that, I think I would go on the bill
with you.
Senator Nelson. Of course.
Senator Hatch. And I would like to support it and push it.
Senator Nelson. And it is legitimate users.
Senator Hatch. But you only add 2 years' criminal penalty
on to the current penalty. Do you know what the current penalty
is?
Senator Nelson. Oh yes, sir. The current penalty is only 3
years. The bill takes it up to 5 years. The current fine is
only $100,000. The bill takes it up to $250,000.
Senator Hatch. Well, I think the criminal penalties ought
to be higher than that so that people realize there is a
substantial penalty for doing this type of stuff to their
fellow citizens. I just want to commend the Senator for working
on this. I would like to be on it. Let us work out that
Ancestry.com thing so that it works, and I will be happy to
work with you.
Senator Nelson. Of course.
The Chairman. Thank you, Senator.
Senator Nelson. Thank you.
The Chairman. Senator Cardin?
Senator Cardin. Thank you, Mr. Chairman. I thank our
witnesses.
On a regular basis, I talk to my staff people who handle
case work to see what they are spending most of their time on.
Identity theft is a major issue in my Senate office, and I
would say probably in every Senate office. It is a growing
problem. The number of people affected by identity theft,
including the IRS issues that we are talking about today, is
increasing, and the cases are becoming more complicated.
People are waiting to get refunds who thought their refunds
would come in, and it is taking a longer time. The number of
people who have been compromised is increasing. So, Senator
Nelson, I want to thank you for your leadership on this. I am
proud to be a co-sponsor of your bill. You deal with some of
the core issues to prevent identity theft, and the careless use
of Social Security numbers as an identifier clearly has to
change.
I am reminded that, today, I believe the instruction from
the IRS is to put your Social Security number on your check, on
your returns. I do not know why you need that. That check,
after it is--who knows where it is going to be seen or used? It
just adds another area of abuse. So I would just urge us to
follow Senator Nelson's leadership to minimize the use of the
Social Security number much more than we use it today.
I also applaud Senator Nelson for recognizing that we have
to work together, the local law enforcement with IRS and
Federal authorities, in a much more efficient way to deal with
this issue. Our number-one objective is to prevent identity
theft. Obviously, once it has occurred, our responsibility is
to make sure that those who have been victimized are treated
fairly, including getting access to their refunds in a timely
way.
As Senator Hatch has pointed out, those who have committed
the crime need to be held accountable for their actions so they
understand that we will not tolerate this type of crime, which
I believe is the fastest-growing crime in America today.
So let me ask, particularly Mr. Miller and Ms. Olson, a
question. Any one of you can respond. Basically, what resources
do we need in order to accomplish this objective? We talk about
tight budgets. What do we need?
A second issue I hope you would address is that we all are
very proud that refunds are sent very promptly by the IRS to
those who have refunds due. But if it is sent to the wrong
person, you are not helping that individual at all. Should we
be considering greater audit or greater scrutiny of a tax
return as to where the checks are being mailed, or I guess
where they are being transmitted, to make sure that we--is
there something we can do that maybe will delay the refunds by
a day or two, or three or four, but cut down the number of
checks that are being sent to wrong accounts on a fraudulent
basis?
Mr. Miller. So let me start in the response. In particular,
I will start with the budget. Thank you for asking the
question, sir. The IRS, in the last 2 years, is down about $1
billion, 8 to 10 percent, including the $600-million cut we
took in sequestration. As I mentioned, we are spending about
$330 million in identity theft at this point. It is clear we do
need more resources. We need technology dollars, and we need
additional employee dollars as well.
The 2014 budget that has come up here has both. It has $100
million for identity theft and 800 FTE, full time
equivalencies, as well as some other dollars in the IT area.
That is a start. It is not by any means, as you can tell, a
full reimbursement of what we are doing, but that is a start.
We do need resources, there is no question about it.
Again, I have said this before. I would say if you had a
dollar to give me and there was a choice between giving that
dollar for an employee or giving it to me for IT improvements,
I would take it for IT improvements because, ultimately, that
is what we need here, to be better at processing these returns,
at matching the information.
Moving to your second area on refund speed, I think it is a
discussion we should have. We should have that, whether it is
the ability to get W-2s earlier, 1099s earlier, which we are
trying to do, but let us face facts. The answer here is that
the IRS has as much information as we possibly can at the time
we make the decision about issuing a refund. So, I think there
are discussion points we ought to have around that.
We also should have discussion points around the other
issue you raise, which is, whether it is a debit card or
whether it is a direct deposit, there are currently rules
elsewhere as to what level of diligence needs to be had between
those making the payment into that account and those
maintaining the account as to the identity, and do those
identities match. That is a discussion that I would welcome,
but it is not an IRS discussion. It is not what we regulate.
But that is an area fertile for discussion.
Ms. Olson. If I may. I am aware of the time, but if I may
make some comments here. I do believe I named the funding of
the IRS a most serious problem for taxpayers, and I think, on
the taxpayer service side, which is where identity theft falls,
that we are very much suffering. I do believe that there is a
lot that can be done with the internal procedures right now
that would improve service to the taxpayers.
I think that the larger discussion is this whole refund
culture. We have started sort of raising that as an issue. Many
other tax administrations in the world actually do not issue
refunds until the filing season is over and they have an
opportunity to compare the data that they get in with the
returns that they are getting.
That does not just go to identity theft, but all sorts of
just mere errors on the returns that they have an opportunity
to correct, and then they issue the refunds a month after the
filing season is over. I think that is part of the serious
discussion we need to have.
With respect to validating the accounts, it used to be 15
years ago that the IRS would get bank information, and the
banks would actually verify whether the name on the account
matched the name of the check that it was going into. I think
direct deposit sort of made that more difficult.
We have gotten various answers about what banking law
permits and what it does not, so I think that is something that
would be a good subject of study for this committee and other
committees as to whether there is a conflict in the law that
would prohibit us from being able to do that kind of
verification process.
Senator Cardin. Thank you, Mr. Chairman.
The Chairman. Mr. Miller, what are you doing about employee
sensitivity training? You know, that example. Clearly it is
unacceptable that IRS employees hang up on the Kipp Sailes of
the world.
Mr. Miller. It is. It is. It is no way for us to behave. We
have trained people. We do train people. We train our CSRs. In
fact, we have trained probably 37,000 folks on how to deal with
an identity theft situation and to recognize that it is
happening, to be sensitive to the folks on the phone who have
been victimized. We are trying. We are trying. I think we do
well. There are obviously instances where we fail, and we need
to work at getting better at that.
The Chairman. I mean, it really is not difficult at all.
Just, anybody who answers the phone has to keep his or her head
screwed on straight and remember that they are there to serve
the person calling.
Mr. Miller. Agreed.
The Chairman. It is not hard. It is pretty simple. I have
staff just in my office who take a lot of telephone calls from
a lot of people. I marvel at how well they handle all these
telephone calls. Do you take calls yourself?
Mr. Miller. I do take some calls, yes.
The Chairman. Why don't you go over and sit in one of those
offices for a day so they can watch what a good job you do?
Mr. Miller. I have sat with CSRs, the people who take the
phone calls. It is not an easy job, Senator. It is something
that they do very well. But there are going to be instances,
unfortunately, with 12,000 to 15,000 people, where you have
slip-ups and you have failures, and we have to get after those,
there is no question.
The Chairman. When you hire people, they go through
training?
Mr. Miller. They absolutely do.
The Chairman. Before they get hired?
Mr. Miller. Well, not before they get hired.
The Chairman. I am asking, before they get hired.
Mr. Miller. Do they get training before they get hired?
The Chairman. No, no, no, no, no. I am just saying, when
people apply, do you look at these qualities in an applicant
before you decide whether or not to hire them?
Mr. Miller. We do try to assess whether they are the type
of person who could be on the phone and will keep their cool.
The Chairman. It is better to hire uppers than downers.
Mr. Miller. Yes. That is why I will never be on the phone.
The Chairman. You hire uppers, people who are positive,
upbeat, they are going to be good employees and they are more
likely to treat taxpayers appropriately than if you hire a
downer, who is more likely to treat them inappropriately.
Mr. Miller. Right.
The Chairman. So what do you think, Ms. Olson? What can be
done to increase more appropriate IRS employee response to
taxpayers who are calling in, appropriately upset that someone
has stolen their ID, and appropriately upset if the Service is
not helping them, if the Service thinks, oh, that is not your
problem, it is the Service's problem?
Ms. Olson. I think that it is very difficult when you
receive lots of calls in a day to remember that the taxpayer is
a human being and not a widget or a case. I think in my own
organization what we try to remind my employees of on a regular
basis is just that. And the kind of training that we have been
trying to do, both in the domestic violence area, where you are
working with victims of domestic violence, and moving into the
area of identity theft or even just people in economic
extremes, is to make employees understand, even if people are
angry with you, that it is not personal and that there are ways
of ramping down and dialing down the conversation and the
emotions. Saying ``you are not a victim'' is not one of those
ways.
So I really think it goes to the nature of training, and it
is not a one-time thing; you have to reinforce that message to
your employees. You also have to give them a chance to de-brief
and to deal with their own stress, because I cannot emphasize
enough how difficult it is to be on the phones and listen to
people's cases, and it is very easy to try to steel yourself
against that pressure.
So, as a manager, I think constantly of how to keep my own
employees' morale up even as I am trying to encourage them to
listen to the taxpayer, not take it personally, and be
empathetic. I cannot emphasize enough that last word.
The Chairman. I am sure it helps for employees to rotate so
they are not sitting in that same place all the time. I mean,
for short periods, go off and do something else and then come
back again, get refreshed.
Mr. Miller. I could not agree more. Our difficulty is the
number of people we have on the phone and the level of service
we try to apply and get to. It is very difficult.
In a better world, I would be taking people off and letting
them work paper to decompress. That is not the world of our
filing season right now, sir. We do not have the bodies to be
able to do that and provide the level of service that is
necessary for the American people during tax filing season. So,
in particular, this time period is difficult.
The Chairman. Do you have any goals, benchmarks, that are
quantified as to a certain date you would like to see refund
waiting lists shortened, or a certain number of days, and the
same with ID theft, get it cut down to a certain number of
taxpayers whose identities are stolen? Are you working down to
approaching zero on the last category?
Mr. Miller. We track virtually everything we do, Senator.
We certainly do track the efficiency we have. Our difficulty
with identity theft is what we need to do is, I agree, get our
cycle time down to what is much more reasonable than it is
right now. We are getting there. We are closing, again, more
cases than we are getting, and that is pretty key.
The Chairman. But do you have a number? What is it now?
What is the cycle time now?
Mr. Miller. The cycle time is around 180 days.
The Chairman. Are you trying to get it down to 120?
Mr. Miller. I would like to get it down to 90.
The Chairman. I know you would. But you have to get to 120
before you can get to 90. Do you have a date by which you are
going to get to 120, another date when you get to 90, another
date when you get to 60, another date when you get down to 30?
Mr. Miller. I do not think I am going to get to 30. One
will always have these cases, unfortunately, I believe.
The Chairman. I am just asking, do you have standards? I
mean, do you have numbers that you are aspiring to?
Mr. Miller. I am aspiring to 90 days by the end of this
calendar year.
The Chairman. Ninety days at the end of this calendar year?
Mr. Miller. Yes. But that is aspirational, and it depends
on the number of cases we get in.
The Chairman. All right. Let us do it this way. It is 180
today?
Mr. Miller. Roughly.
The Chairman. So you want to cut it in half by the end of
the year?
Mr. Miller. Yes.
The Chairman. And this is April. So let us do a little
midway test the 1st of September to see where you are, and let
us know.
Mr. Miller. All right.
The Chairman. All right. Thanks.
Senator Thune?
Senator Thune. Mr. Chairman, thank you. I want to thank
Commissioner Miller for the penalty relief that you are
providing to filers who have been impacted by storms in the
south and the Midwest over the past few days.
I can speak from personal experience. In South Dakota, we
have had a lot of people without power in our largest community
in our State and a few other places, and a lot of damage from
recent storms. So, we appreciate your willingness to work with
us. I do not know what that extension is going to be, and we
look forward to working with you to try to address as best we
can the need that people will have to perhaps have a little bit
of additional time to get their returns filed.
Let me, if I might, come back to the issue of fraud and ask
this question, because I think there are a lot of Americans who
would be surprised to know that the IRS does not currently
match W-2 information against information reported on tax
returns so as to prevent the identity theft-related fraud.
So I am wondering maybe if you can explain why this is the
case and what, if anything, the IRS is doing to fix the
problem. My understanding is that using W-2 information before
a tax refund is issued is one of the recommendations that has
been made by the National Taxpayer Advocate, so why is a match-
up not done?
Mr. Miller. The W-2 comes to Social Security, they do a bit
of transcription--and my colleague from Social Security can
speak to this--then it comes to us rather quickly. We actually
have moved it up, and we are doing some matching, but we are
not doing matching as of the 1st of February, which would be
when we would first begin to make those decisions on refunds.
We are doing it a little later in the year. So we are getting
better at it.
There is a discussion in the President's budget about going
quarterly for wage information or, in our case, we also have a
test going on of some State wage data, and we can use that
because that is earlier also. So there are other ways to do
this. The fact of not having the W-2s is a function of when
they come in to the government, and that is a question of
burden on both large and small employers.
Second, when we have to start the filing season, that is a
question of how fast people want their refunds. Those are
pretty big discussion points that we ought to have as we decide
where to go here.
Senator Thune. Ms. Olson, that was a recommendation from
the Taxpayer Advocate. Do you want to add anything to that?
Ms. Olson. Well, we really think that there needs to be a
review of the requirements, the due dates, given 21st-century
technology of e-filing and availability of data, and can that
be moved up so Social Security and the IRS get the information.
We have always wondered why it is that the IRS does not get the
information first, and we have proposed a pilot for the IRS,
which does its own scrubbing of numbers, to determine if it is
as good as Social Security in identifying any errors in the
data so we do not need to wait that time.
But I think the real thing is, you have to look at the
dates, the due dates, of the start of the filing season and the
due dates of the 1099 and W-2 information. How soon can you get
a reasonable amount, the bulk of these W-2s in, so that you
would have them available to match with the returns?
I think you have to pull in the 1099s on the interest and
dividends, because people make little mistakes on that, and it
would be great to get them up front rather than dealing with
them after the fact for filing. That is more a taxpayer service
benefit, but, if you are doing one, you might as well do the
other.
Senator Thune. All right. Thanks.
Ms. LaCanfora, this is a little bit off of this particular
subject, but I wanted to just ask this question because I posed
this question to your predecessor, or I should say I raised the
question, I think, before with the Commissioner. But it has to
do with last year's annual report on the financial status of
Social Security by the trustees of that program.
We obviously know the challenge that the program faces in
the long term, but it indicated that you are going to have the
Social Security trust fund exhausted by 2033, and the
Disability Insurance trust fund facing bankruptcy by year 2016.
So you have the issue of significant benefit cuts perhaps
happening automatically for beneficiaries.
That is why this issue, I think, bears on that other one,
and that is why I think it is so concerning, the reports of
fraud in the SSDI program. The Wall Street Journal had reported
on some potentially fraudulent practices on the part of law
firms such as Binder and Binder, representing claimants for
disability benefits before the Social Security Administration,
particularly in the appeals process where administrative law
judges adjudicate claims.
I guess I am curious as to what actions the Social Security
Administration has taken to address allegations about this law
firm and their material representations to the Social Security
Administration, and how are you prioritizing the Social
Security Administration's program integrity functions within
your existing budget to ensure that there is a proper response
to fraud claims in the SSDI program.
Ms. LaCanfora. A lot of questions there. First, let me just
make one comment about the prior discussion with Ms. Olson
about the time it takes us to process wage reports. I just
wanted to say that, if an employer files a wage report
electronically with the Social Security Administration, we turn
that around to the IRS within 24 hours, generally speaking, so
there really is no delay. That has improved significantly over
the past 10 years. I just wanted to put that out there for the
record.
With regard to the Social Security Disability Insurance
program, there are a lot of things we could talk about there,
probably the subject of a whole series of other hearings. But I
will say, with respect to any suspicious or fraudulent
activity, we have many mechanisms in place to try to combat
fraud. I will mention just a couple.
One is our Cooperative Disability Investigation Units,
which are units around the country in which we partner with
both the Inspector General and local law enforcement to
investigate any allegations of fraud and abuse. We do thorough
investigations in collaboration with local law enforcement.
In addition to that, we have the mechanism, of course, of
our own Inspector General. Our employees around the country,
who deal with benefit applications every day, have the ability
to refer any suspicious activity to the Inspector General. We
believe that with all of the mechanisms we have in place, the
fraud in the program is still extremely low. We put it at less
than one-half of 1 percent of all claimants who file benefit
claims with us.
Senator Thune. How about specifically the allegations about
this law firm and their material representations to the Social
Security Administration?
Ms. LaCanfora. From our perspective, we have not
substantiated any harm, abuse, or misuse with respect to that
law firm.
Senator Thune. All right. Well, there has been a
significant amount of reporting to the contrary, but I
appreciate your looking into it and hope you will continue to
stay on top of it. Thank you.
Thank you, Mr. Chairman. Mr. Chairman? There is nobody
here. [Laughter.]
All right. Well, I guess this hearing is adjourned. Thanks.
[Whereupon, at 11:35 a.m., the hearing was concluded.]
A P P E N D I X
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