[Senate Hearing 113-390]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-390
 
                   NOMINATION OF JOHN ANDREW KOSKINEN 

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                 on the

                             NOMINATION OF

               JOHN ANDREW KOSKINEN, TO BE COMMISSIONER, 
                        INTERNAL REVENUE SERVICE

                               __________

                        DECEMBER 10 AND 11, 2013

                               __________
                                    

            Printed for the use of the Committee on Finance

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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...................     3

                         ADMINISTRATION NOMINEE

Koskinen, Hon. John Andrew, nominated to be Commissioner, 
  Internal Revenue Service, Washington, DC.......................     5

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Opening statement............................................     1
    Prepared statement...........................................    39
Grassley, Hon. Chuck:
    Letter from Senator Grassley to John Koskinen, dated 
      September 26, 2013.........................................    41
Hatch, Hon. Orrin G.:
    Opening statement............................................     3
    Prepared statement...........................................    46
Koskinen, Hon. John Andrew:
    Testimony....................................................     5
    Prepared statement...........................................    48
    Biographical information.....................................    52
    Responses to questions from committee members................    64

                                 (iii)


                  NOMINATION OF JOHN ANDREW KOSKINEN,
                          TO BE COMMISSIONER,
                        INTERNAL REVENUE SERVICE

                              ----------                              


                     TUESDAY, DECEMBER 10, 2013 AND

                      WEDNESDAY, DECEMBER 11, 2013

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:04 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max 
Baucus (chairman of the committee) presiding.
    Present: Senators Wyden, Menendez, Carper, Cardin, Bennet, 
Casey, Hatch, Grassley, Crapo, Roberts, Enzi, Thune, and 
Portman.
    Also present: Democratic Staff: Amber Cottle, Staff 
Director; Mac Campbell, General Counsel; Rory Murphy, 
International Trade Analyst; Tiffany Smith, Tax Counsel; and 
Lily Batchelder, Chief Tax Counsel. Republican Staff: Chris 
Campbell, Staff Director; Mark Prater, Deputy Chief of Staff 
and Chief Tax Counsel; and Nicholas Wyatt, Tax and Nominations 
Professional Staff Member.

   OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM 
            MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The hearing will come to order.
    The famed journalist, Grantland Rice, once wrote, and I 
quote him, ``You can develop good judgment as you do the 
muscles of your body--by judicious daily exercise.''
    That is a valuable lesson for anyone, especially one who 
serves in government. And, in the wake of the charges of 
political targeting that erupted last spring, it is vital for 
those who serve at the IRS.
    With us today is John Koskinen, the President's nominee to 
be the Commissioner of Internal Revenue. If confirmed, Mr. 
Koskinen will face many challenges. The IRS plays an important 
role in tax reform. It is key to the Affordable Care Act's 
implementation, for example. And perhaps most importantly, it 
must win back the American people's trust. That means undoing 
the damage done by the Inspector General's report on the IRS's 
handling of 501(c)(4) applications.
    The American people are willing to pay their taxes. They 
understand that it is their civic duty. But when there are 
charges of political bias at the IRS, it makes everyone feel 
like the deck is stacked.
    This committee is in the midst of a bipartisan 
investigation of those charges. In the meantime, IRS needs to 
do its job in a fair and evenhanded manner. The acting 
Commissioner, Danny Werfel, deserves credit for his steady 
management since arriving at the IRS in May.
    Last month, the administration proposed clear new standards 
for the treatment of tax-exempt social welfare organizations. 
That was a positive step, but there is more work to be done. We 
need to install new safeguards to ensure that the mistakes 
identified in the Inspector General's report do not happen 
again.
    Winning back the public's trust will not happen overnight. 
It will take time and, in Grantland Rice's words, judicious 
daily exercise of good judgment. I believe Mr. Koskinen will 
exercise that judgment. He is the right person for the job. But 
the task will not be easy.
    The IRS must be an active partner in tax reform. This 
committee is hard at work fixing the Nation's broken tax code, 
and, as we develop ideas, we need the IRS's input. No reform 
proposal is worth the paper it is printed on unless the IRS can 
implement and manage it as intended. And that is why productive 
communication between the IRS and this committee is so 
critical.
    Last month, my office released three staff discussion 
drafts on tax reform proposals. The first focused on 
modernizing our international tax system; the second focused on 
improving tax administration, fighting fraud, and making filing 
safer, easier, and more simple; and the third focused on making 
the tax code more neutral for American businesses.
    Now we are gathering feedback on those proposals from 
stakeholders, from the public, and from businesses, and the 
work will continue. More drafts are coming, and we will need 
the IRS's input on those as well.
    The IRS must also continue to play its part in implementing 
the Affordable Care Act. Helping individuals, families, and 
businesses pay for health insurance is a cornerstone of the 
health reform law. According to the independent Kaiser Family 
Foundation, 17 million people will qualify for assistance. The 
IRS must be ready to handle that task, and, by all accounts, 
preparations are on track. It needs to keep up the good work.
    Mr. Koskinen has a history of succeeding in demanding 
roles: at Freddie Mac, in the heat of the financial crisis; at 
the helm of the District of Columbia's financial turnaround in 
the early 2000s; as a turnaround artist in the private sector; 
and even as leader of the team that addressed Y2K concerns.
    He is the right person to take on this challenge, and, with 
filing season approaching, the IRS needs a leader in place. The 
IRS has been without a confirmed Commissioner for more than a 
year. Before this year, the longest any nominee for IRS 
Commissioner had waited before confirmation was 100 days. Mr. 
Koskinen was nominated 132 days ago.
    Mr. Koskinen, with your knowledge, experience, and 
expertise, I expect you would be highly sought after by many 
players in the private sector. Instead, you have chosen to 
continue your career in public service, and for that, we thank 
you.
    Thank you for accepting the nomination to this position. 
The IRS Commissioner may not be the most glamorous job in the 
administration, but it is certainly one of great importance.
    Again, the acting Commissioner, Danny Werfel, deserves 
credit for taking on a very tough job in the wake of the 
Inspector General's report, and I believe he has performed very 
well. But Mr. Werfel will be leaving the IRS at the end of this 
year.
    So now is the time for us to act. The IRS needs its 
Commissioner. John Koskinen is the right man for the job. He 
has broad support from Democrats and Republicans, and I hope we 
can approve this nomination quickly and take it to the full 
Senate for a vote. It is time we get this done.
    [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. Thank you, Mr. Chairman. Today we are here 
to discuss the future of the Internal Revenue Service and hear 
testimony from President Obama's nominee to head the agency, 
John Koskinen.
    Mr. Koskinen, I do not think that I have to tell that if 
you are confirmed, and I expect you to be, you will have a 
difficult job ahead of you. The IRS is one of the most powerful 
agencies in our government, and, consequently, it is both 
feared and loathed by millions of Americans.
    That being the case, it is vital that the IRS maintain its 
credibility. The American people should be able to trust that 
the IRS will enforce our Nation's tax laws without bias or 
prejudice. Any hint of impropriety on the part of the IRS or 
its leadership damages its credibility and that of our entire 
government.
    Unfortunately, over the last few years, the credibility of 
the IRS has been eroded through actions taken by the IRS 
itself, and the agency has, in large part, lost the trust of 
the American people. As proof, one needs to look no further 
than the IRS political targeting scandal currently under 
investigation by this committee.
    When this scandal was revealed, President Obama said, ``I 
have got no patience with it. I will not tolerate it, and we 
will make sure that we find out exactly what happened on 
this.'' Senate Majority Leader Harry Reid expressed similar 
views on the Senate floor, stating, ``I have full confidence in 
the ability of Senator Baucus and the Finance Committee to get 
to the bottom of this matter and recommend appropriate 
action.''
    Now, I share both President Obama's desire to find out 
exactly what happened and Leader Reid's view of the Finance 
Committee's investigative abilities. Indeed, if there is one 
thing we should all be able to agree on, it is that the IRS 
should enforce the tax laws as they are written by Congress, 
without consideration of political views.
    That being the case, I had hoped to hold off on proceeding 
with this nomination until the Finance Committee's bipartisan 
investigation had concluded. The confirmation of an IRS 
Commissioner should not and must not be a partisan issue. And, 
like I said, with an agency this powerful, the leadership 
should have the confidence of members of both parties.
    I had hoped that the next Commissioner would begin his time 
with the benefit of the findings of our investigation so that 
he would be in a better position to fix the problems we have 
uncovered and to move the agency forward with strong bipartisan 
support. Chairman Baucus has chosen to go a different 
direction, which is, of course, his right. My hope is that this 
will not impede our efforts.
    Also, I would like to personally pay tribute to Danny 
Werfel as well. I think he took over a very tough situation, 
and he has handled himself with great skill and dignity and 
integrity, in my opinion, and he has worked pretty closely with 
us in trying to get to the bottom of some of these problems.
    Mr. Koskinen, I hope that today you will commit to 
continuing the cooperation the committee has enjoyed thus far 
in its investigation and that you will encourage others to do 
the same at the agency. As far as I am concerned, the top 
priority for the next IRS Commissioner should be to restore the 
agency's damaged credibility with the American people and their 
trust that the actions taken by the IRS are fair and impartial.
    Toward that end, it is essential that we continue to 
receive full and open cooperation in our investigation. There 
are many other issues the next leader of the IRS will have to 
address. For example, there is the IRS's significant role in 
the implementation of Obamacare. If what we have seen thus far 
is any indication, this is going to be a difficult proposition, 
both in terms of operation and enforcement.
    Just last week, the Treasury Inspector General for Tax 
Administration issued a report that found that the IRS has an 
inadequate system in place for preventing fraudulent Affordable 
Care Act premium subsidy payments from occurring and that 
people's personal information would be at risk.
    Insurers and others have raised questions about the income 
verification for the premium subsidies. I have also raised this 
concern on a number of occasions. Similar tax subsidy programs, 
including, for example, the earned income tax credit, have 
improper payment rates as high as 25 percent. Can we expect the 
same for the Obamacare premium subsidies?
    These are just a few of the many potential issues IRS will 
be facing as implementation continues. On top of that, there 
are proposed regulations addressing the political activities of 
tax-exempt organizations. These proposals have been 
controversial for a number of reasons, not the least of which 
is the widespread doubt as to whether the IRS is able to 
perform its duties in an independent, nonpartisan fashion.
    Now, Mr. Koskinen, I hope to get a sense of your views on 
these and other issues during the course of today's hearing. 
Like I said, the IRS is an agency rife with problems, most of 
which are, at least in my opinion--I think in the opinion of 
many people--self-
inflicted.
    If you are confirmed, I hope that you will begin working 
jointly with Congress--and with members of both parties--to fix 
these problems.
    I want to personally pay tribute to you for being willing 
to take this very difficult job at this very difficult time and 
for the excellent work that you have done in the past in so 
many ways. I believe you will make a great IRS Commissioner, 
and I intend to support you.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    The Chairman. Thank you, Senator. I also join in your 
complements of Danny Werfel. I am very impressed with how 
frequently he has called you, called me, giving us updates on 
what he is doing before items break in the press, and I think 
he has been a terrific Acting Commissioner. Thank you very much 
for praising Danny Werfel.
    Joining us today is John Koskinen, nominated to be the 
Commissioner of the Internal Revenue Service. Thank you for 
coming, Mr. Koskinen. And I would ask you, at this time, to 
introduce your family.
    Mr. Koskinen. Thank you, Mr. Chairman.
    I am delighted that my wife Pat is here immediately behind 
me. My daughter Cheryl, who lives in Bethesda, was planning on 
coming before they closed school. And so she is at home with 
her two young children.
    My son and his wife live in Los Angeles. His in-laws, who 
are now part of our extended family, are in Annapolis. And so 
they called this morning, again, and regretted that they could 
not join us, but their son, Scott Cantor, and his fiancee, 
Kathleen Scher, are with us, along with a long-time friend of 
mine, Roger Waldman, who started out--when I started my career 
in government service--working on the Kerner Commission staff a 
long time ago, joining us with his friend Barbara Coe.
    So that is my support staff. I have told them they cannot 
use their noisemakers until later in the hearing.
    The Chairman. Wonderful. Why don't you all stand so we can 
recognize you? All of you. Thank you very, very much for 
joining us. [Applause.]
     Mr. Koskinen, go ahead. This is a time for you to tell us 
why you want this job.

    STATEMENT OF HON. JOHN ANDREW KOSKINEN, NOMINATED TO BE 
     COMMISSIONER, INTERNAL REVENUE SERVICE, WASHINGTON, DC

    Mr. Koskinen. Thank you. Chairman Baucus, Ranking Member 
Hatch, and members of the committee, I am honored to appear 
before you this morning as the nominee to be the next 
Commissioner of the Internal Revenue Service. With your 
permission, Mr. Chairman, I will summarize my prepared 
statement here this morning and submit the full statement for 
the record.
    This past May, when I was asked whether I would be willing 
to serve as the next Commissioner, I agreed, because I believe 
that the successful operation of the Internal Revenue Service 
is vital for this country. The activities of the IRS touch 
virtually every American.
    The agency collects over $2.5 trillion a year, over 90 
percent of the revenues collected by the government. And this 
is a challenging time for the agency as it confronts new 
responsibilities, while dealing with a budget that has declined 
substantially since 2010. And, of course, as already mentioned, 
on top of that all are the management problems that have shaken 
public trust in the agency.
    I have had a longstanding commitment to public service, and 
most of my career has been spent helping large organizations in 
both the public and private sectors respond to significant 
financial and management challenges. If confirmed, I look 
forward to leading the IRS as Commissioner and to working with 
this committee to deal with the range of challenges that it 
confronts.
    In our meetings as part of this confirmation process, many 
of you have asked what my plans for the agency are, if I am 
confirmed as Commissioner. While I still have a lot to learn 
and thousands of employees yet to meet and listen to, it is 
clear that the responsibility of the Commissioner is to make 
sure that the agency fairly, efficiently, and effectively 
collects the taxes owed by every business and individual; that 
the agency provides taxpayer services in the form of easily 
understandable information and prompt answers to questions to 
make it as simple as possible for people and firms to pay their 
taxes; and that the agency creates a working environment that 
allows employees to reach their full potential and generates an 
enthusiastic, energetic, and high-performing workforce.
    In every area of the IRS, taxpayers need to be confident 
that they will be treated fairly, no matter what their 
background or their affiliations. Public trust is the IRS's 
most important and valuable asset.
    There are immediate challenges in each of these areas. To 
protect government revenues, the agency has to continue to 
increase its efforts to combat refund fraud. Taxpayer services 
need to be improved, particularly in the areas of tax-exempt 
organization filings and operations.
    There are several investigations ongoing into the delays 
encountered by many of those seeking to establish themselves as 
501(c)(4) social welfare organizations, and I look forward, if 
confirmed, to working with this committee as it concludes its 
investigation of that matter.
    And Senator Hatch has asked, and I am actually more than 
delighted to commit that, if confirmed as Commissioner, I will 
continue the good work that acting Commissioner Danny Werfel 
has done in this area and cooperate fully with the committee 
and its members as it seeks to bring this investigation to a 
close, providing you all of the information that you need.
    The IRS also needs to continue its successful 
implementation of the Affordable Care Act. Its responsibilities 
at the front end of the process have been effectively 
implemented, thanks to long planning and a smooth IT 
implementation.
    The new Commissioner also needs to address employee morale. 
My experience is that the people in an organization who know 
most about what is going on are the front-line employees. The 
next Commissioner needs to listen to those employees and make 
sure they understand that they are seen as part of the 
solution, not part of the problem. The IRS is fortunate to have 
an experienced workforce committed to the mission of the 
agency. We need to provide them with the leadership, systems, 
and training to support them in their work.
    We have to listen not just to our employees but, also, 
others who are most likely to know about the challenges the 
agency faces. A government manager's best friends can be the 
Inspector General and the Government Accountability Office. 
They do not create the problems they highlight, they just help 
you know about them before they get bigger.
    In addition, the IRS benefits from the information and 
perspective generated by the Office of the Taxpayer Advocate 
and the Whistleblower Office. And another important source of 
information is congressional inquiries. An individual complaint 
or question may be simply anecdotal. A series of them from 
various areas is a source of valuable information that needs to 
be pursued.
    To make all of this happen and to protect the revenues 
coming into the government, we need to solve the funding 
problem facing the IRS. This is a view shared today by the IRS 
Oversight Board, the Taxpayer Advocate, and, most recently, the 
Treasury Inspector General for Tax Administration and the 
Internal Revenue Service's Advisory Council.
    As the Inspector General report earlier this fall noted, 
the government has saved $1 billion in cuts to the IRS budget 
on an annual basis and lost $8 billion in compliance revenues.
    Even with all the challenges the IRS faces or, in fact, 
because of them, I am excited about the opportunity, if 
confirmed, to work with the employees of the agency as the IRS 
moves forward into the future. The IRS has a long and honored 
tradition of service to this country, and it is filled with a 
great number of public servants who take pride in their work to 
help the IRS achieve its mission with integrity and fairness to 
all.
    I appreciate the time each of you has spent with me 
individually, sharing your interests and concerns. If 
confirmed, I look forward to working with you and your staffs 
to help make the IRS the most effective, well-run, and admired 
agency in government.
    Thank you.
    [The prepared statement of Mr. Koskinen appears in the 
appendix.]
    The Chairman. Thank you, Mr. Koskinen, very much.
    I have four standard questions that are asked of all 
nominees.
    Number one, is there anything that you are aware of in your 
background that might present a conflict of interest with the 
duties of the office to which you have been nominated?
    Mr. Koskinen. There is not.
    The Chairman. Do you know of any reason, personal or 
otherwise, that would in any way prevent you from fully and 
honorably discharging the responsibilities of the office to 
which you have been nominated?
    Mr. Koskinen. No.
    The Chairman. Do you agree, without reservation, to respond 
to any reasonable summons to appear and testify before any duly 
constituted committee of Congress, if you are confirmed?
    Mr. Koskinen. I do.
    The Chairman. Do you commit to provide a prompt response in 
writing to any questions addressed to you by any Senator of 
this committee?
    Mr. Koskinen. Yes.
    The Chairman. Thank you. That last one was added fairly 
recently, because we have had problems with other nominees. So 
thank you very much.
    I want to start off by asking--I apologize. There is a vote 
going on now. We just have a few minutes left remaining on the 
vote. We will recess for--regrettably, we might have to recess 
for up to half an hour. There are two votes. So we will make 
those two votes and then come back as quickly as possible.
    The committee will stand in recess for one-half hour.
    [Whereupon, at 10:25 a.m., the committee was recessed, 
reconvening at 11:40 a.m.]
    The Chairman. The hearing will come back to order.
    I apologize to the witness and others for the delay. We had 
several votes which took our time here.
    I am going to be very brief and then let Senator Hatch ask 
a couple of questions.
    If you could, just very briefly, maybe in a couple, three 
words, Mr. Koskinen, tell me what you learned in your prior 
jobs, either crises jobs or near-crises jobs, whether it was 
Freddie Mac or DC or Y2K? What lessons did you learn there that 
you can bring to this job?
    Mr. Koskinen. Well, I think, as I said in my opening 
comments, the first thing you need to do, especially if you are 
running a very large organization, is to create a system where 
information flows freely both from the front-line workers up to 
the people at the top of the organization but, again, across 
silos that inevitably get created in an organization, because 
you need to know as quickly as you can what is actually going 
on with the organization.
    You also need to involve people within the organization, as 
well as externally, in discussions about what the problems are 
and what the solutions are. Because my experience has always 
been that a group of people addressing a problem will always 
come up with a better solution than any single member of that 
group, no matter how smart they think they are or how smart 
they might actually be, and that it is important to get as many 
different perspectives on a possible solution as you can. Also, 
the more people you involve in the decision-making process, the 
easier it is to execute that decision, because, to the extent 
they were involved in it, they then understand the reasoning 
behind it and they will go out and make it happen.
    So, in an organization this large, you need to have 
consistent messaging, and you need to ensure that people are 
participating, and I have found that it energizes people. If 
you spend your life simply being told what to do and nobody 
ever asks you what your view is, you have one response to your 
job. If you are regularly asked not only what you think the 
problems are or potential solutions are, but people listen to 
those answers, you are much more enthusiastic about your 
participation in the day-to-day operations of that 
organization.
    The Chairman. The Sunday New York Times business section--I 
think it is the business section--has a corner office page, 
which shares lessons that CEOs and other managers have learned 
while managing.
    Have you, by chance, ever glanced at any of those?
    Mr. Koskinen. I have not had the opportunity to.
    The Chairman. Well, I urge you to: Sunday mornings, 
business section, it is page--I forgot what page it is, but 
they are very interesting.
    Thank you very much for that answer.
    Senator Hatch?
    Senator Hatch. We have to get back over and vote, but let 
me ask you just one question, maybe two.
    As you know, Mr. Koskinen, Chairman Baucus and I have been 
conducting a joint bipartisan investigation into the IRS 
targeting scandal. If you are confirmed, will you assure us 
that you will cooperate with our investigation by continuing to 
produce all documents we deem relevant and by making any IRS 
employees we want to interview available for interviews? You 
can answer that ``yes'' or ``no.''
    Mr. Koskinen. Yes. Senator, as you and I have talked 
personally, I am delighted to be able to make that commitment 
to you.
    Senator Hatch. That means a lot.
    Mr. Koskinen. As both of you have said, I think Danny 
Werfel has done an excellent job, and I look forward to 
continuing his working relationship with this committee.
    Senator Hatch. I do too. And let me just say, I would like 
to talk for a moment about the IRS scandal involving 501(c)(4) 
organizations. In my opinion, the greatest single challenge 
facing the IRS is its need to recover the trust of the American 
people.
    It is not possible to overstate the amount of damage the 
IRS has done to its reputation by selectively targeting 
politically conservative tax-exempt social welfare groups for 
harassment during the last two elections. But rather than 
staying focused on cleaning up the mess caused by a scandal of 
its own making and waiting until this committee completes its 
bipartisan investigation, last month the IRS published a 
proposed regulation that once again targets social welfare 
groups only.
    The political activity rules for tax-exempt 501(c)(4) 
organizations also apply to 501(c)(5) labor unions and 
501(c)(6) trade associations. Now, as the Treasury Inspector 
General for Tax Administration, TIGTA, said in a report issued 
last May describing the IRS scandal, all three groups may 
engage in limited political campaign activities as long as that 
is not the primary activity of the organization.
    I know that the IRS asked for comments from the public on 
whether to apply the new regulations to unions, but the 
regulation, as drafted, only applies to 501(c)(4)s. That is 
strong evidence that the IRS intends to hammer social welfare 
groups and, in the end, let the unions slide by.
    Will you commit to this committee that, if confirmed, you 
will ensure that any political activity regulation the IRS 
finalizes will apply equally to 501(c)(4), 501(c)(5), and 
501(c)(6) organizations?
    Mr. Koskinen. Senator, it is an important question. The IRS 
and Treasury, as you know, have issued draft regulations for 
comment and suggestions. I think it is important for us to get 
active participation in that comment period, because there are, 
as you know, a wide range of organizations, and one of the 
specific questions the regulation asked for is for people to 
comment on just this issue: that is, what the definition of 
acceptable and unacceptable political activity ought to be and 
to which organizations it should apply. Should it apply to the 
other (c) organizations or not? It also asks for comments on 
the amount of activity that can be allowed before you run the 
risk of losing your exemption.
    Overall, my sense is that what we need, and I hope will 
come out of that comment period in the final regulations, is 
clarity--for all organizations making applications--about what 
the permissible level of political activity is and what the 
definition of that political activity is. Because the clarity 
is important, not only for people when they make their 
applications, but greater clarity is needed by the IRS 
employees when they review those applications. And then people 
running the organizations in the future need to know what the 
rules are so they can be comfortable that they are operating 
within them and are not exceeding whatever the limitations are.
    And part of the problem in the past has been that the 
definition of what is allowable political activity has not been 
clear, nor has it been clear what amount of that activity is 
acceptable before you run the risk of losing your exemption.
    So I think the question you raise is an important one, and 
I will commit that I will actively participate in the review of 
the comments that come in and try to make sure, as we have said 
earlier, that people view the IRS and its regulations and their 
application as fair, that you are not discriminated against 
because of your background, your views, or your affiliations.
    Senator Hatch. Well, thank you.
    I think we are going to have to wrap it up for the day, Mr. 
Chairman.
    The Chairman. Thank you, Mr. Koskinen. I regret that, 
because of the votes, we are unable to have a complete hearing 
at this point. And second, the other side of the aisle, the 
Republican party, has objected, as is their right under the 
Senate rules, for this committee to meet 2 hours after the 
Senate convened, and that 2 hours expires at noon today.
    So we are unable to have a hearing after noon today, but we 
will reconvene at the earliest possible time, given the 
complexities and special rules of the Senate.
    I, again, regret that we cannot continue the hearing now, 
but we will resume the hearing at an appropriate time. But I 
cannot resume the hearing after this next vote which is 
occurring right now because the Republican party has said--
which is their right--that the Senate hearings cannot continue 
for 2 hours after the Senate comes into session.
    Mr. Koskinen. Thank you, sir.
    The Chairman. The committee stands in recess subject to the 
call of the chair.
    [Whereupon, at 11:50 a.m., the hearing was recessed for the 
day, reconvening at 9:15 a.m. on Wednesday, December 11, 2013.]
    The Chairman. The hearing will come to order.
    Today we will pick up where we left off yesterday. Joining 
us again is John Koskinen, nominated to be the Commissioner of 
the IRS.
    I believe it is very important--and I think most Americans 
believe it is very important--to have a very strong leader at 
the helm of the IRS, and I am hopeful that we can approve this 
nomination very quickly and take it to the full Senate for a 
vote this year.
    As this is the continuation of yesterday's hearing, we will 
maintain the speaking order already established. That is, those 
Senators who arrived ahead of other Senators yesterday will 
speak ahead of those other Senators, at least have a chance to 
ask questions.
    The order will be Senator Menendez, Senator Grassley, 
Senator Carper, Senator Crapo, Senator Cardin, Senator Roberts, 
Senator Thune, Senator Bennet, and Senator Casey.
    Thank you very much again, Mr. Koskinen, for your 
willingness to serve. With the filing season upon us and this 
committee's ongoing investigation of the 501(c)(4) situation, 
it is critical to have a confirmed leader in place, especially 
when acting Commissioner Danny Werfel is anxious to leave. He 
has done such a super job and has stayed on longer than he 
anticipated, and we very much need a full-time Commissioner to 
replace Danny Werfel, who is doing a great job.
    Mr. Koskinen, when you and I spoke earlier, you said 
something I thought was quite insightful. If I remember the 
conversation correctly, it was essentially that a lot of your 
colleagues that you have worked with, and you yourself, do not 
mind paying income taxes, because, after all, you are all red-
blooded Americans, and it is important that we have the revenue 
to make our government function.
    But you were saying, as I recall--I would like you to 
expand on this a little bit--you and a lot of your colleagues 
are a little frustrated with the current code, the complexity 
of the code, and all the high-priced accountants who have to be 
hired these days, high-priced tax attorneys who have to be 
hired these days, to figure out how to get to the bottom line, 
to the total taxes that are owed. It is a very confusing 
process--a lot of high-priced talent goes into compiling that 
number.
    On the other hand, if the code were much more simple and 
you got that same number much more simply with much more 
transparency and much less wasted use of high-priced CPAs and 
high-priced tax attorneys, we would all be a little better off.
    I think that is what you said. I use that conversation 
sometimes to explain why we need to simplify the code. There 
are a lot of reasons why we have to simplify it, but this is 
just one person's observation of and experience in dealing with 
the code.
    If you could just expand on that a little bit, I would 
surely appreciate it.
    Mr. Koskinen. Mr. Chairman, some years ago, when I began my 
career in the private sector, we were responsible for the bulk 
of the non-rail assets of the Penn Central while it was in 
bankruptcy. Penn Central operated out of Philadelphia, and I 
commuted back and forth from Washington and discovered early on 
that the rule in Philadelphia was, if you were in the city more 
than 50 hours a year, you were supposed to file taxes, which, 
in the 1970s, most people were paying no attention to.
    Well, my thought was, it was very important for us to 
follow all of the laws and particularly that law. So, at the 
end of the first year, I asked for the form for non-resident 
filing in Philadelphia, and I got a 1-page form that called on 
me to fill in the adjusted gross income on the first line, 
multiply by a small percentage, write the number down, and 
write a check. And at that time, the non-resident form for 
Pennsylvania was the same 1-page form--adjusted gross income, a 
slightly different percentage, and you wrote a check.
    And, as I have told people ever since then, I became a fan 
of tax simplification because it was almost fun to pay your 
taxes, and it certainly was a lot simpler. There was great 
clarity about how much you owed, and you could do it in 5 
minutes. And so, ever since then, I have always thought that if 
we could simplify the code as part of tax reform, I think 
people--most people want to pay their taxes, they want to pay 
the right amount, and we ought to try to make it as easy for 
them to determine what the correct amount of their taxes is.
    The Chairman. I was quite struck by that, and I think you 
are right. As you know, one of the reasons for tax reform is 
just that--it is simplification. The code is immensely complex.
    I was told that since 1986, the last time we significantly 
reformed our tax code, there have been 15,000 changes to the 
code. This Congress has enacted 15,000 changes to the code, 
and, obviously, some of those--most of them were well-intended, 
some of them are dated, but they certainly caused the code to 
become unnecessarily complex. But I appreciate that insight.
    Senator Hatch?
    Senator Hatch. Thank you, Mr. Chairman.
    Mr. Koskinen, yesterday I asked you about the proposed 
regulations the IRS recently published that would define 
political activity for 501(c)(4) organizations, as currently 
drafted. But also, as currently drafted, the rules do not apply 
to 501(c)(5) labor unions and 501(c)(6) trade associations.
    Now, I asked if you would make a commitment to this 
committee that, if confirmed, you will ensure that any 
political activity regulation the IRS finalizes will apply 
equally to 501(c)(4), 501(c)(5), and 501(c)(6) organizations.
    You mentioned that the IRS asked for comments from the 
public on whether to apply the new regulations to unions and 
trade associations, and you said you would commit to the IRS 
being evenhanded and nonpartisan under your watch. And I 
appreciate that, but I am still concerned about the possibility 
of a final regulation under which the IRS once again singles 
out 501(c)(4) groups for harsher treatment.
    I will give you an example. Voter registration and ``get 
out the vote'' activities are currently treated as general 
advocacy, not political campaign activity on behalf of a 
particular candidate. The proposed regulation redefines voter 
registration and ``get out the vote'' activities as political 
activity, but only for 501(c)(4) groups and not for labor 
unions. It is crazy to have the same activity defined one way 
for social welfare groups and a different way for unions. But 
that is the result under the proposed regulation in its current 
form.
    I do not think the IRS can restore its reputation as a 
nonpartisan agency if it finalizes a regulation that favors one 
group over another like this. And the fact that the IRS is 
seeking comments on 501(c)(5) and 501(c)(6) organizations is 
not an adequate answer. The IRS should have asked for comments 
on all three groups before it published a proposed regulation 
or it should have proposed a regulation for all three groups at 
once and received comments on the regulation.
    In tax administration, there is a big difference between an 
advanced notice of proposed rulemaking, where the IRS asks for 
public comment before publishing a proposed regulation, and the 
actual publication of a proposed regulation. The publication of 
a proposed regulation, which is what the IRS has done for 
501(c)(4) groups, is a more significant step, in my view, down 
the regulatory road than a mere request for comments.
    So, Mr. Koskinen, I would ask again if you would commit to 
this committee that you will ensure that any political activity 
regulation the IRS finalizes will apply equally to 501(c)(4), 
501(c)(5), and 501(c)(6) organizations.
    Mr. Koskinen. Senator, as you know, I was not involved in 
any of the discussion or the decisions----
    Senator Hatch. I know that.
    Mr. Koskinen [continuing]. About how that regulation was 
issued, and I do not know the details of the range of--there 
are thousands, hundreds of thousands of organizations under all 
of the 501(c) categories.
    Senator Hatch. Right.
    Mr. Koskinen. I will commit that I will pay close attention 
as I participate in the process, if I am confirmed as 
Commissioner, and I do think that the regulations need to be 
evenhanded and fair and that people need to have a view that 
the IRS is a nonpolitical, nonpartisan agency and that they 
will all be treated fairly no matter what their affiliation or 
political views.
    Senator Hatch. Well, it is my contention that if the 
regulations do not apply to all three of those categories, it 
is not fair and could turn out to be very unfair.
    Mr. Koskinen. Well, as I say, I look forward to receiving 
comments and participating in that decision, and I look forward 
to and will be pleased to work with you and the committee as we 
move toward finalization of those regulations.
    Senator Hatch. Well, thank you.
    The Obamacare premium subsidies, in my opinion, are a 
fraudster's dream come true. Last week, the Treasury Inspector 
General for Tax Administration, TIGTA, issued a report that 
found that the Internal Revenue Service has an inadequate 
system in place for preventing fraudulent Affordable Care Act 
premium subsidy payments from occurring.
    Now, the TIGTA report makes clear that the very nature of 
these credits--pay first, verify a person's income later--will 
lead to potentially hundreds of billions of dollars of improper 
payments. Most troubling, over 3 years after the passage of 
Obamacare, the IRS has admitted to TIGTA that its system for 
preventing fraud in this core tax subsidy program is still, 
quote, ``under development''--that is bureaucrat-speak meaning 
``not ready''--and that is not very reassuring. And, while the 
IRS obviously needs to put safeguards in place, the fact is 
that the problems with these tax credits are deeply rooted in 
the law itself.
    Now, I fear that the IRS will never be fully capable of 
ensuring that advanced refundable tax credits go only to those 
who are truly eligible. The IRS struggles with similar tax 
subsidy programs, including, for example, the earned income tax 
credit, where improper payment rates are as high as 25 percent.
    Now, Mr. Koskinen, if confirmed, what steps will you take 
to protect taxpayers and ensure the new premium tax credits 
will not create a massive new opportunity for waste, fraud, and 
abuse?
    Mr. Koskinen. I think it is critical for the IRS to pay 
close attention to the possibilities of fraud, as well as the 
existence of fraud, and I know that is the position of the 
agency.
    In response to this Inspector General report, Danny Werfel, 
the acting Commissioner, responded that he remains confident 
that the work underway will appropriately protect the public 
and the government against refund fraud in this particular 
area.
    Fortunately, the bulk of the payments under the Affordable 
Care Act do not go to individuals. They go to insurance 
companies on behalf of individuals buying those policies. So 
there is less incentive for fraud than there is in programs 
where the refunds go directly to the beneficiary.
    But even having said that, I think it is an important 
matter. Thus far, as you know, the IRS participation in the 
rollout of Obamacare has been very successful, and I am 
confident that with Mr. Werfel's view, who has been working on 
this problem, that the IRS will meet its responsibilities in 
this area, that we will be able to do so, and it clearly will 
be a high priority for me, if confirmed, as Commissioner.
    Senator Hatch. Thank you, Mr. Koskinen.
    Mr. Chairman, could I just mention one thing? I just want 
to personally congratulate you. This is your birthday today, as 
I understand it.
    The Chairman. You are congratulating me?
    Senator Hatch. I am congratulating you for living this long 
and going through all this torment all these years on the 
Finance Committee, among others. We are proud of you.
    The Chairman. Well, I went this long because of your 
support and your help.
    Senator Hatch. Happy birthday.
    Mr. Koskinen. Many of us are delighted to see younger 
people continue to move on and make progress this way.
    The Chairman. You just won your confirmation. [Laughter.]
    Thank you. Thank you, Senator.
    Senator Menendez. Well, Mr. Chairman, happy birthday as 
well.
    The Chairman. Thank you.
    Senator Menendez. And if it was not that it was being 
televised, I would actually sing ``Happy Birthday.'' 
[Laughter.]
    Mr. Koskinen, your reputation as a strong manager precedes 
you, and I look forward to having you bring those skills to 
bear in an agency that has some very significant challenges and 
significant tasks.
    You write in your testimony, ``I don't know any 
organization in my 20 years' of experience in the private 
sector that has said, `I think I'll take my revenue operation 
and starve it for funds to see how it does.' '' And you also 
referenced a recent Inspector General's report which found that 
$1 billion in budgetary savings from the IRS has actually cost 
the Treasury $8 billion in compliance revenues.
    So my question is, would you say that you could increase 
revenues by having the budgetary appropriations that existed in 
years past and, thus, be able to actually either use those 
revenues for deficit reduction or critical programs that we are 
dealing with right now by ensuring the IRS has the funds 
available to accomplish its mission?
    Mr. Koskinen. I think the historic record would demonstrate 
that, Senator. As a general matter, the IRS budget has been in 
the range of $12 billion. The compliance revenues alone, which 
are the revenues received as a result of IRS actions pursuing 
taxpayers, have generated between $50 billion and $60 billion a 
year.
    So, historically, the ratio of expenditures for the entire 
budget of the IRS compared to the revenues generated by their 
activities has been 4:1 or 5:1. The IG report noted that the 
more recent impact has been an 8:1 ratio.
    So I think, while the IRS does not need unlimited funds and 
does not need substantial funds compared to the entire budget--
the President's budget for 2014 provided a budget of $12.8 
billion for the IRS. It is presently operating on an assumption 
of $11.2 billion. That difference is a substantial and 
significant one. If the funds were made available to the IRS, I 
am confident that more than the additional revenues provided to 
the IRS would be returned to the government in additional tax 
collections and revenues.
    Senator Menendez. Well, whether your recognition is of the 
historical 4:1 or 5:1 ratio or the Inspector General's 
suggestion of 8:1, that is a ratio that people would be willing 
to invest in at any given time, it seems to me, and it seems to 
me one that we should certainly consider. It is a great way, as 
we are dealing with the challenges of both budgetary and 
deficit reduction, to try to achieve that.
    Let me ask you a different question on a more specific 
issue. When the Finance Committee imposed a fee on branded 
prescription drugs during the creation of the Affordable Care 
Act, we made sure to exclude drugs used to specifically treat 
what we call orphan diseases. The intent was to protect the 
current incentives in law which encourage innovation and the 
development of treatments for rare diseases, a goal which I 
believe just about every colleague on this committee would 
share.
    The ACA says, and I quote, ``Branded prescription drugs 
shall not include sales of any drug or biological product with 
respect to which a credit was allowed for any taxable year 
under section 45(c),'' which is the section of the tax code 
that defines what the orphan drug tax credit is. In its 
temporary rule, however, the IRS has interpreted this orphan 
drug exemption as only applying to drugs that were allowed and 
granted the orphan drug credit rather than to all orphan drugs, 
as designated by the FDA.
    Now I can tell you, as a member of the committee during the 
drafting of the law, we intended to exclude all drugs whose 
design served the critical purposes laid out in the eligibility 
for the orphan drug credit, not just for those drugs for which 
the paperwork was filled out to claim the credit.
    There may be reasons why a company may or may not choose to 
claim the credit, but they, in fact, were allowed that credit. 
So, since not all makers of FDA-designated orphan drugs applied 
for and received the discretionary credit, the result is that 
now some orphan drugs are going to be subject to the fee, even 
though Congress clearly intended to exempt all orphan drugs.
    So my question is, knowing that congressional intent was to 
exempt orphan drugs from the Affordable Care Act's branded drug 
fee in order to encourage manufacturers to develop treatments 
for rare diseases, do you believe that using a definition of 
the orphan drug exemption that would allow the full spectrum of 
FDA-
designated orphan drugs to be eligible for the exemption would 
be more in line with the congressional intent than the current 
definition, which arbitrarily excludes those that are eligible 
and are allowable, but just did not claim it?
    Mr. Koskinen. Senator, I was not aware, until you raised 
this issue, of that particular question under the Affordable 
Care Act.
    Senator Menendez. Well, this is commonly known.
    Mr. Koskinen. But----
    Senator Menendez. I am kidding. I am just kidding. 
[Laughter.]
    Mr. Koskinen. Certainly, if confirmed, if I am 
Commissioner, I would be delighted to work with you and get 
back to you and discuss what the possibilities are to make sure 
that the congressional intent is followed. As I say, I am not 
familiar with the details of the regulation and the thinking 
behind it, but I would be pleased to talk with you further 
about it.
    Senator Menendez. I appreciate that.
    So let me close, Mr. Chairman. Clearly, our intent with 
those drugs, with the treatment we gave them under the code for 
avoiding the new fee under the Affordable Care Act, was to 
create the opportunity for those drugs to be available for rare 
diseases, where, in fact, the universe that will use them is 
not as great as other drugs that will maybe be used very 
commonly.
    And, unless there is that incentive, then there will be no 
incentive to create the drugs, and people who have rare 
diseases and critically need them will not have access to them. 
And so I hope we can work on that together.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Roberts?
    Senator Roberts. Thank you, Mr. Chairman.
    Good morning, John.
    Mr. Koskinen. Good morning, Senator.
    Senator Roberts. Second time around. Thank you for paying 
me a courtesy call, where we had a very nice discussion.
    When we met earlier, you acknowledged that the Internal 
Revenue Service is stretched very thin, that its role in 
implementing the Affordable Care Act will necessarily result in 
the scaling down of some of the other IRS core functions.
    The question is, in implementing this law, will you be able 
to do more with less or less with less? But this brings to mind 
a larger issue with the agency. Have we asked the Internal 
Revenue Service to do too much? Is the IRS too entrenched in 
everybody's life? Quite frankly, I have little confidence that 
the agency you are being asked to lead will be able to take on 
the Affordable Care Act in an efficient and effective way or in 
a way that does not increase the burdens all taxpayers face in 
dealing with the tax laws.
    In fact, the Treasury Inspector General has already 
identified substantive weaknesses in the IRS work to prevent 
fraud and abuse in implementing the Affordable Care Act. This 
has been confirmed in hearings held recently by the 
Intelligence Committee Chairman, Mike Rogers, over in the 
House, where it has been determined that the Affordable Care 
Act is rife with all sorts of security problems.
    The Affordable Care Act may be one step too far. One asks 
too much for the IRS to handle. But now we see the agency 
taking on a new role, rewriting the rules of political speech. 
Now, forgive me, but I thought we already had the Federal 
Election Commission working in this space.
    How is the tax administrator, your new job--already 
stretched thin and taking on a massive role in our health care 
system--going to be able to handle free speech issues after 
being caught selectively and egregiously attacking the First 
Amendment right to free speech?
    The IRS has not been able to conduct their current limited 
role in this area without engaging in blacklisting and 
attacking people's First Amendment rights. It is hard to see 
why the administration discounts these issues, in particular, 
when this committee continues its bipartisan investigation into 
the IRS actions, an investigation I hope that we will be able 
to conclude sooner rather than later.
    On a deeper level, I find it hard to understand how the IRS 
will be able to conduct a much broader role in regulating 
political activity, right or left, Democratic or Republican, 
without damaging Americans' ability to engage in free political 
discourse.
    Now, given all of the issues with the current tax code, 
with the IRS difficulty in implementing the current system, 
with fraud rife in a number of programs, with the huge workload 
hitting now with the health care law, and IRS's politically 
motivated targeting of nonprofit groups, is it time to 
fundamentally rethink the Federal tax system?
    The first step is--and this is the question--we should heed 
the admonition detailed yesterday in the Wall Street Journal 
and get the Internal Revenue Service out of politics 
permanently. I do not see why we are promulgating new rules 
when we have not even finished the investigation of the attack 
on people's First Amendment rights at this particular time.
    I would be interested in your comments.
    Mr. Koskinen. Thank you, Senator. I enjoyed our earlier 
meeting and, if confirmed, would look forward to more 
discussions about the full range of issues confronting the IRS.
    With regard to the draft regulations just put out, they are 
in response to a significant recommendation in the IG report 
that first raised the question of the handling of (c)(4) 
applications, in which the Inspector General suggested or 
requested that the IRS define with greater clarity what would 
be defined as acceptable and unacceptable political activity. 
Because part of the core problem in the implementation of that 
has been, I understand, that the lack of clarity as to what 
were permissible political activities caused the IRS and its 
employees, as they reviewed applications or audited 
organizations, to spend far more time trying to sort through 
the various activities and make those determinations.
    So my understanding, although I did not participate in the 
drafting of the draft regulations, is that the goal is to 
respond to the Inspector General's request, and I think 
everybody's goal, which is to have clearer definitions so that 
those creating organizations and making applications will have 
a very clear----
    Senator Roberts. If I might interrupt. It would be helpful 
if we would be able to conclude the investigation. I know we 
are working hard with Danny Werfel and others, and I hope we 
could conclude with that, and I hope we could get the IRS out 
of politics.
    Why are we trying to regulate free speech or the First 
Amendment rights? The IRS has become a 4-letter word with too 
many people, and that is not right. That is a tremendous burden 
you will have to face.
    Why do we not just disengage the tax system as much as 
possible for economic decision-making or political free speech? 
I think we need to start over. That is why I have supported a 
fundamental restructuring of the tax system, such as the 
proposed fair tax.
    But I look forward to discussing this with you, what I 
think is a burden and a very unnecessary step, and I thank you 
so much for coming.
    The Chairman. Thank you, Senator Roberts, very much.
    Senator Crapo, would you like to--so you will pass.
    Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    I want to pick up on Chairman Baucus's point with respect 
to tax simplification, because this is right at the heart of 
any successful reform effort. But it also goes to something 
that you talk about at length in your prepared statement, and 
that is the IRS budget situation.
    I just would be interested in your thoughts about whether a 
simpler tax code might also have the added benefit of reducing 
the administrative and enforcement costs of the Internal 
Revenue Service, and would that, in effect, free the Service up 
to allocate resources more efficiently to areas of greater 
need.
    What are your thoughts on that?
    Mr. Koskinen. I think, Senator, it is clear that if the 
code were simpler and easier to understand for taxpayers, it 
would be much easier to administer and enforce from the 
standpoint of the IRS and that a significant part of IRS 
activity is spent working with taxpayers, particularly the 
corporations, but individuals as well, sorting through a set of 
nuances in what counts as revenues, what are appropriate 
deductions.
    Senator Wyden. And, on the bottom-line point, do you share 
my view that a simpler tax code could help you stretch your 
resources at the Service in order to focus on areas of greater 
need?
    Mr. Koskinen. I think that would be one of the beneficial 
results of tax simplification.
    Senator Wyden. Very good. The second point deals with the 
IRS's technology deficit, which you have, to your credit and 
others, acknowledged. It is very clear that profound challenges 
remain with respect to the modernization of the Internal 
Revenue Service so that we have a 21st-century administrative 
system to go along with a 21st-century code.
    In your view, what does the Service most need from a 
technology standpoint?
    Mr. Koskinen. I think it is important, having watched the 
IRS over a long period of time, starting with my tour of duty 
as the Deputy Director for Management at OMB 20 years ago, to 
note that the IRS has made great strides in information 
technology, particularly in the last 5 to 7 years. So they are 
in a much stronger position than they were 20 years ago when 
they were struggling, sort of across the board.
    I think the challenge for the IT at the IRS is a challenge 
similarly that has been faced over time by financial 
institutions in the private sector, and that is that it is 
dealing with significant legacy systems developed 30 and 40 
years ago at a time when, obviously, technology was at a very 
different stage. And over time, those legacy systems have been 
built upon, so that the newest applications are very up-to-
date, but the basic underlying systems still need significant 
work and improvement.
    Senator Wyden. One of the reasons I am attracted to your 
candidacy is because you do have experience in this area. But 
whether it is expanded electronic filing or fraud efforts, 
increased information reporting or pre-filing compliance, I 
think we ought to recognize we still have a long way to go.
    So I hope that you will make that a priority early on.
    The last point I want to make is to just get your take with 
respect to the relationship between the taxpayer and the 
Service. Anybody who reads a newspaper sees that there is a 
real challenge with respect to making sure that the country 
clearly sees the Internal Revenue Service as an impartial 
collector of revenue.
    What do you think you can do to send that message?
    Mr. Koskinen. Well, I think it starts at the top. I think 
it is important for all of us to make clear that that is an 
important goal--in fact, the primary goal--that the operation 
of the IRS is to be seen as impartial so that people are 
comfortable they are being treated fairly no matter what their 
organizational affiliations, their political views, or 
otherwise.
    But I think the proof will be in the pudding. What we have 
to be able to do, besides having that as a goal, is to 
demonstrate day-in and day-out that that is the way the IRS 
operates. And I think taxpayers--inevitably, some will be 
audited, some will receive notices, and they have to be 
comfortable that they are receiving those notices, they are 
receiving those inquiries, because of something in their tax 
return, not because of who they are.
    And I think over time, that is a goal that I am confident 
the employees, the existing employees, at the IRS share, and my 
hope would be, as I have said earlier, that at the end of my 
tenure, people would look at the IRS and be comfortable that it 
meets that standard.
    Senator Wyden. My time is up. I just hope you will send the 
strongest possible message with your actions and your words 
early on that you want people in this country to understand 
that impartiality is going to be the coin of the realm. That is 
really what is going to be your priority, because I think we 
have some heavy lifting to do in terms of getting that message 
out.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Enzi, you are next.
    Senator Enzi. Thank you, Mr. Chairman.
    And I thank you for being here to testify. I have been 
following what was asked yesterday, and I know you have had a 
lot of questions on dealing with the tax-exempt organizations. 
So I am not going to cover that.
    Instead, I would like to know a little bit more about the 
current culture at the Internal Revenue Service that a lot of 
my constituents view as wasting taxpayers' money, as seen with 
the IRS internal conferences and the videos prepared for those 
conferences over the last several years.
    Can you tell me any ideas you have on how you can change 
that culture at the IRS, how you would expect to win back the 
American public's trust in this agency?
    Mr. Koskinen. Those examples were clearly unfortunate 
misjudgments, poor management.
    The publication of those issues, I think, was important so 
people understand that the IRS is reviewing them. Those 
activities took place, most of them, 3 or 4 years ago. They no 
longer are possible, I hope. Danny Werfel, the acting 
Commissioner, has worked hard to change that culture.
    I think, on the other hand, it is also important to 
recognize, though, that a lot of travel and training and 
conferences--both internally and externally, for the IRS, both 
with its own training facilities but also reaching out to 
practitioners and the public--are important functions.
    So what you need to do is ensure that there are appropriate 
reviews, appropriate standards, so that people are confident 
that the money being spent is being spent well. I think it is 
important for everyone in the agency to recognize we are 
spending taxpayer dollars.
    Senator Enzi. Yes.
    Mr. Koskinen. These are not funds that we found someplace 
along the way. And we have an obligation to the public to spend 
those dollars wisely.
    Senator Enzi. And, along that line, I have heard about some 
efforts by the IRS to create pre-populated individual tax 
forms, as well as an IRS online tax preparation system. During 
a time when Congress is looking for cost savings, estimates of 
what a Federal online system would cost the government are 
estimated to be tens of millions to build, not counting 
upgrades each year, which could cost billions of dollars over a 
10-year budget window.
    These efforts could dismantle a currently successful and 
free 
private-public partnership. I have concerns about the IRS 
performing the simultaneous roles of tax preparer, tax 
collector, and tax auditor. Do you share these concerns? Do you 
believe it would be a mistake for the IRS to create the pre-
populated tax forms?
    Mr. Koskinen. I have not looked into those problems in 
great detail, but I do think that there are significant 
priorities in the technology area that are ahead of where you 
might conceivably go down the road in terms of providing that 
kind of taxpayer service.
    I think the most important services we can provide to 
taxpayers at this point are clarity in their obligations to pay 
taxes, appropriate taxpayer response to inquiries they make, 
and answering their questions they have.
    I think it will be a long time before we get to the stage 
where the code is simple enough that the IRS can actually pre-
populate a form for you. At this point, everybody has a 
customized form. My understanding is the experience in States 
like California is that very few people are able to use 
anything that looks like a pre-
populated form, because there are not very many people to whom 
it applies.
    So I think, as I say, that is, in my understanding, not a 
high priority for the IRS at this time.
    Senator Enzi. Well, my emphasis on that, of course, is on 
the private sector, which has some real incentive for getting 
things done. And, when we start having government infringe on 
what the private sector has the capability to do and has 
already shown the ability to do, I hate for the IRS to step in 
and muddle it up.
    The IRS has a free file program. It is a public-private 
partnership between the electronic tax software companies and 
the IRS or the State departments of revenue that enables people 
who earn $57,000 or less a year, or 70 percent of all 
taxpayers, to choose between the best-known and most-trusted 
commercial tax preparation products to prepare for their 
Federal tax return for free.
    Now, the IRS free file program is up for renewal in 2014. 
It has been renewed twice since 2003. However, it is my 
understanding that the renewal discussions with the Free File 
Alliance and the IRS have not yet occurred.
    Will you commit to expediting discussions with the Free 
File Alliance upon your confirmation in order to renew the 
program for another 5 years?
    Mr. Koskinen. Senator, I am happy to commit that those 
discussions will move forward appropriately and quickly.
    Senator Enzi. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Grassley just walked in. Do you want to ask a 
question?
    Senator Grassley. Thank you. Congratulations on your 
nomination.
    Every Commissioner has a different view on how private 
individuals and companies can help the IRS. In particular, your 
predecessor, Douglas Shulman, did not embrace whistleblowers, 
and one of his first actions was to terminate the private debt 
collection program. Given our current fiscal challenges, I 
believe that the IRS should be working with as many partners as 
possible.
    In your response to my letter on whistleblowers and private 
debt collections, you indicated that you could not fully 
respond because you were not yet Commissioner, and I understand 
that. And in regard to that letter, Mr. Chairman, I would like 
to have that letter put in the record.
    The Chairman. Without objection.
    [The letter appears in the appendix on p. 41.]
    Senator Grassley. So to you, as a nominee, I ask now if you 
could commit to responding to this letter fully within 60 days 
of your confirmation.
    Right now, I would like to understand your views on working 
with third parties, like whistleblowers and private debt 
collection companies. So you can give me your Commissioner 
response in the letter, but give me your general view right 
now.
    Mr. Koskinen. Thank you, Senator. I think my letter 
contains my views, but I am delighted to review them with you.
    As I noted, I think the government has, in a range of 
agencies, experience with private debt collectors, including 
the IRS, and I am pleased to be able to commit that, if 
confirmed as Commissioner, I will review that information and 
get back to you with further discussions about what role, if 
any, private debt collection might play with the IRS.
    As I noted, it has been effective in many areas. In 
particular, with regard to the IRS, one of the goals would be 
to make sure that we do not do anything that causes taxpayers 
who have questions with the IRS to be treated in an overly 
aggressive or an unfair way, but that is not necessarily an 
insuperable obstacle.
    As you know from our conversations, I am a strong believer 
in the concept of the Whistleblower Office. As noted, I think 
particularly large corporations with complicated tax systems 
that decide that, for one reason or another, they are going to 
actually underpay their taxes knowingly, need to be a little 
uncertain about the fact that there are a number of people 
internally and externally in those corporations who are aware 
of that activity who would have an incentive to report it to 
the IRS.
    So I am pleased to be able to commit to you that, if 
confirmed as Commissioner, I will do what I can to ensure that 
the whistleblower program becomes effective as quickly as 
possible.
    Senator Grassley. The 2006 updates to the IRS whistleblower 
program required an annual study and a report to Congress on 
the program. In several previous letters to the IRS and 
Treasury, and that is, obviously, before you were involved, I 
have indicated the importance of having this report issued on a 
timely basis. However, every year, the report is delayed a 
month or months on end. Fiscal year 2013 ended more than 60 
days ago, yet no report has been issued.
    I hope that you could commit to finalizing and issuing a 
whistleblower report prior to the end of January, assuming you 
are in the position by then.
    Mr. Koskinen. I think all I can commit to is I will, if 
confirmed as Commissioner, as quickly as possible, get you that 
report.
    I agree with you. If the IRS has an obligation to provide 
the public and the committee an annual report, we ought to do 
it as close to the end of the fiscal year as possible, and we 
will do that going forward, if I am confirmed as Commissioner.
    Senator Grassley. I have a question about the carrying out 
of the Affordable Care Act.
    The Internal Revenue Service has been faced with many 
challenges these past years due to the current fiscal realities 
and its role in implementing and enforcing the Affordable Care 
Act. This Act will continue to consume large amounts of IRS 
time and resources in the coming years. Besides requesting more 
funds, what additional plans do you have to ensure IRS's core 
duties of tax collection are not undermined by its new role as 
chief Obamacare enforcer?
    Mr. Koskinen. The new statutory responsibilities that 
include the Affordable Care Act--there are other statutory 
requirements, including the Foreign Account Tax Compliance 
Act--impose additional responsibilities on the IRS.
    In the course of my general briefings and from people--
executives--across the IRS, as well as in my discussions with 
acting Commissioner Werfel, they are confident and, therefore, 
I am confident that the IRS will be able to discharge its 
responsibility in those new areas at the same time it protects 
the filing season and the collection of revenues.
    There obviously is a major set of resource decisions to be 
made in light of the constraints of the budget, but those 
resource decisions will not affect either the implementation of 
the statutory responsibilities or the basic filing season 
responsibilities of the IRS.
    Senator Grassley. Thank you, Mr. Chairman.
    Thank you, sir.
    The Chairman. Thank you, Senator.
    Senator Cardin?
    Senator Cardin. Thank you, Mr. Chairman. I want to join in 
wishing you a very happy birthday.
    The Chairman. Well, aren't you nice?
    Senator Cardin. Well, I hope it is a nice day.
    The Chairman. It is even better now.
    Senator Cardin. Good.
    The Chairman. Thank you.
    Senator Cardin. Again, I want to welcome our nominee and 
thank you for your willingness to step forward in public 
service.
    I am going to ask a somewhat different type of a question 
in that this committee has responsibility over the IRS. That 
is, we are the so-called authorizing committee. And you will 
also be subjected to the appropriators and the budgets and the 
realities of the budget.
    I want to make sure that we get information from you as to 
the resources you need in order to carry out your 
responsibility.
    I am deeply concerned about the morale at the IRS today of 
the very dedicated professional people who are there, and I 
want to make sure that we have our very best. And I want to 
make sure that you make available to this committee what you 
need in order to succeed, and that is to enforce our laws 
fairly and to collect the revenues that are due to this country 
under the laws that have been passed by the Congress.
    Several years ago, I joined with then-Congressman Portman 
in the House on the commission that was set up to review the 
operations of the IRS, and we enacted laws to try to help the 
IRS in modernizing to meet the current needs.
    Today, it is our responsibility, this committee's 
responsibility to oversight, to make sure that you have the 
resources necessary for the most professional people to do 
their jobs, as well as to recognize that you are also in a 
retail consumer business and you have to be able to reach 
millions of Americans in a way so that they understand their 
responsibilities and can interact with you in a non-
hostile way and comply with the laws of this country.
    So I know the pressures that are on you, and I know that at 
times you always seem to be on the defense of the IRS. But can 
we rely upon you to keep this committee informed in a very 
frank and honest way about the resources that are necessary in 
order to carry out the responsibilities, including the 
personnel needs, of your agency?
    Mr. Koskinen. I am happy to commit to that, Senator. As I 
said earlier, I think the IRS--and all government agencies, but 
certainly the IRS--has an obligation to the taxpayers to spend 
the funds provided to the IRS efficiently and effectively. And 
I know all organizations, when constrained, will become more 
efficient, and the IRS has taken steps to become more efficient 
in use of space, use of outside contractors, travel, and 
training.
    But, as I noted in my testimony, there comes a point at 
which you cannot be asked to do more and more with less and 
less without jeopardizing the operation of the agency. So I am 
delighted to, having opened that dialogue, continue it with 
this committee and the Congress to make sure that you are aware 
of the implications of the funding that is available to the IRS 
and the limitations provided therein.
    Senator Cardin. There have been several studies done by 
congressional agencies that have shown that by making more 
resources available to the IRS, we actually bring in more 
revenue to this country. So it is not only denying you the 
resources you need to carry out your professional 
responsibilities when budgets are cut below the level that is 
necessary, but it is also counterproductive to the revenue 
collections of this country.
    So we want the IRS not to be oppressive to the people, the 
taxpayers, of this country. We want them to be fair. We want 
them to be able to provide the services.
    The tax code is complicated. That is not the fault of the 
IRS. That is the fault of the Congress. And I know our chairman 
and ranking member are trying to simplify the tax code and 
reform the tax code. But you need to have the tools in order to 
be able to deal with what we have done here, including some 
recent changes that added more responsibility to the IRS.
    So I think your frank advice to this committee, recognizing 
that we are the committee that is responsible to make sure that 
you are organized in a way that you should be in order to carry 
out your responsibilities, is critically important to the 
responsibilities of this committee and to your agency.
    Mr. Koskinen. Thank you, Senator. I appreciate your concern 
and the concern of several of the members I have met with about 
the financing of the IRS, and I look forward to having further 
frank conversations with you about it.
    Senator Cardin. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Casey, you are next.
    Senator Casey. Mr. Chairman, thank you.
    And we are grateful that you are here with us today, not 
just for your testimony and your willingness to serve, but 
also, in your case, I guess, a continuing commitment to public 
service over a long period of time. So we are especially 
grateful that you are putting yourself forward at a difficult 
time to serve, and it is critically important that we have 
people who do that. So we are happy about that and looking 
forward to your confirmation.
    I have two questions that relate to the kind of 
definitional questions as relates to the Affordable Care Act. 
One of them--both represent significant issues in Pennsylvania, 
one in particular, the first one I will raise, with regard to 
volunteer firefighters.
    I was the State's Auditor General for 2 terms. It was an 
elected position. And one of our fundamental responsibilities 
was, we had to audit every volunteer firefighter relief 
association. So there are hundreds and hundreds of them across 
the State.
    And through that work, I became intimately aware of the 
impact of volunteer firefighters on a State like ours. I do not 
remember the exact percentage, but a very high percentage of 
our State is served by volunteers. A lot of the fire service is 
done by volunteers, probably on the order of more than three-
quarters of the State, once you are outside of the bigger 
cities.
    A question has arisen--and I know that the International 
Association of Fire Chiefs has sent the IRS a letter asking for 
clarification. The basic issue is this: whether it is volunteer 
firefighters or EMS personnel, under the IRS code, they are 
defined as employees. For purposes of the Affordable Care Act, 
the shared responsibility provision, the concern is that they 
would be counted for purposes of the Act as employees, and 
that, of course, would entail fees that really do not make 
sense in the context of the work that they do, even if they are 
defined as employees in other parts of the code.
    So I am just asking you about that issue and, in 
particular, asking you to commit to seeing that the IRS 
resolves this problem for both volunteer firefighters and EMS 
personnel.
    Mr. Koskinen. I am not aware of the details of that, but I 
certainly am willing to commit that, if confirmed, this would 
be one of the first issues I will address and get back to you 
about.
    Senator Casey. It is, obviously, a big population of people 
for our State, but I think you can go across the country and 
you will see a lot of States where most of the fire service--
fire protection--is provided by volunteer firefighters. So I 
appreciate your attention to that.
    Secondly, along the same lines to a certain extent, are 
institutions of higher education. We have, like a lot of 
States, a great network of community colleges. The concern 
there, as it relates to some of the definitional parts of the 
Affordable Care Act, would be community colleges determining 
how hours will be calculated for adjunct faculty members, and 
the same concern is raised there. And I know that the American 
Association of Community Colleges sent to the IRS comments 
asking for an alternate method to be used for applying the 
employer responsibility requirements.
    So, if you can take a look at that, as well, that would be 
very helpful.
    Mr. Koskinen. I would be delighted to take a look at it. 
Obviously, when you pass new legislation that covers everyone, 
then you have to start to actually work your way through how 
different people fit within it and what the appropriate 
definitions are. And, if confirmed, I will be pleased to look 
at that--and I am sure other similar issues like that--to make 
sure that we make as appropriate a decision as we can.
    Senator Casey. I appreciate that. And finally, identity 
theft: I know this has been an issue that has arisen, not only 
in your confirmation, but more broadly.
    Interestingly though, in Pennsylvania we are hearing more 
about it at the local level, local prosecutors coming to us 
seeking some kind of help or assistance. And I know that the 
Inspector General for Tax Administration at Treasury identified 
both fraudulent claims and improper payments as one of the 10 
most important challenges the IRS will face for this coming 
fiscal year, fiscal year 2014, and I just want to get your 
comments on that.
    Mr. Koskinen. It is an important problem and, 
unfortunately, a growing one that the IRS is devoting 
significant resources toward. It is reaching out--there have 
been pilot programs that have been very successful--to 
cooperate with State and local prosecutors within the context 
of protecting the privacy and security of taxpayer information.
    But the programs have been working where the taxpayer whose 
identity has been stolen provides appropriate releases to allow 
the IRS and local law enforcement to work together.
    As I say, it is a problem across the board that the IRS has 
been dealing with. It has grown significantly in the last 2 or 
3 years, and the IRS, both technologically and legally, is 
working vigorously to ensure that we limit that risk to the 
receipts of the IRS as much as we can.
    So, again, I am aware of the need for the continuing 
cooperation among State and local law enforcement with the IRS 
in this area.
    Senator Casey. Well, thanks very much. My time has expired. 
Thank you.
    The Chairman. Thank you, Senator.
    Senator Thune? If you want to, you can now ask questions, 
Senator Thune. You are next. Do you want to pass? You can pass.
    Senator Thune. I will pass.
    The Chairman. Senator Portman?
    Senator Portman. Thank you, Mr. Chairman.
    And to our nominee today, thank you for being willing to 
step up and take on what is considered by most to be a 
thankless task. I think it is a really important role, and, as 
you know, I was involved in the 1990s on the IRS Commission 
that Senator Bob Kerry and I co-chaired. I think Ben Cardin 
mentioned it earlier. Ben Cardin and I were the two House 
cosponsors of that legislation.
    The idea was to reform and restructure the IRS so that it 
would be more responsive to taxpayers' needs, particularly 
folks in taxpayer service, and to help regain trust in the IRS. 
At that time, the IRS was at the bottom of the heap in terms of 
Federal agencies' and departments' efficiency, trust, morale.
    And there have been some good steps taken. Unfortunately, I 
think what happened recently with regard to the IRS targeting 
certain groups based on their political views reversed a lot of 
that progress. And I do not have to tell you that there is a 
real concern now about public trust in this institution again, 
and so you are going to have your work cut out for you to try 
to restore that sense of public trust.
    I got involved in this a couple of years ago, when Ohio 
groups started to send me correspondence they got from the IRS 
and other information that led me to send a letter to the 
Deputy Commissioner back in March of 2012--never responded to 
initially--that was then finally responded to by saying, 
everything is fine.
    Unfortunately, we learned that that was not true. So I feel 
like I was misled, in a way. And so I have been following this 
closely and continue to believe that there is a need for more 
transparency and more information as to how this happened, why 
it happened.
    So I hope that, should you be confirmed, which I expect you 
will be, with my support, that you will be willing to really 
dig into this and get to the bottom of it and be able to 
provide this committee the answers that Chairman Baucus and 
Senator Hatch have asked for, but also that some of us have 
asked for individually, so that we can begin to repair this 
sense of trust that I think has been reversed and eroded 
through the process.
    So I guess the question I would ask you is, are you 
prepared to undertake that task, and then, to the extent you 
find there was misconduct that has not already been dealt with 
or perhaps has not been dealt with appropriately, to take swift 
action to ensure that there are meaningful consequences for 
those who are responsible for the misconduct?
    Mr. Koskinen. Yes, Senator. As I have already committed to 
with Senator Hatch generally, if confirmed, I look forward to 
working with this committee generally, but particularly to 
provide and make sure you have all the information you need to 
conclude the investigation and to respond appropriately to 
whatever the findings are.
    I think also, within the IRS, we need to make sure that we 
provide employees with appropriate training and support and 
structure to ensure that they have the resources necessary to 
make appropriate decisions when they are confronted with 
challenging questions, and that we do not end up in these 
situations going forward.
    But ultimately, going forward, I think it is important for 
us to be transparent. As I noted in my testimony, I think 
congressional inquiries, especially if there are numerous 
inquiries from a wide range of constituencies, are an important 
source of information that there is a problem worth pursuing. 
And, if confirmed as Commissioner, I am willing and pleased to 
commit that we will share all of that information with you.
    If there are difficulties we are confronting, this 
committee will know about them promptly and know that, 
ultimately, whatever goes on at the agency is the 
responsibility of the Commissioner.
    So I want employees to know, and I want the committee to be 
comfortable, that my position going forward is, if we have a 
problem, ultimately it is my problem, and the employees need to 
understand that we are all in it together.
    If there is a problem, we are going to find it as quickly 
as we can, we are going to fix it, we are going to make sure it 
stays fixed, and we are going to be transparent about it. But, 
ultimately, we are all accountable for whatever goes on in that 
organization.
    Senator Portman. I guess this accountability you are 
talking about would require some sort of consequences if you do 
find that people have engaged in some of these improper 
activities. And are you prepared to do that as well?
    Mr. Koskinen. Yes. I think that appropriate accountability 
is important. Acting Commissioner Werfel has set up an 
accountability review board to look into actions here, and also 
he has undertaken and completed an investigation to see if 
there are other similar problems across the agency, and, 
fortunately, he did not find any.
    But I do think that employees have to be held accountable 
for actions that they take, but at the same time, I think we 
need to understand that there are oftentimes mistakes made that 
are simply mistakes, and we need to ensure that we understand 
why they were made and make sure they are not made again. But 
every mistake does not necessarily mean that somebody gets 
fired.
    Senator Portman. Mr. Chairman, I would like to ask another 
question, but, since my time is up, if we could have a quick 
second round, it is about tax-exempt organizations, and we 
could give Mr. Koskinen a chance to answer.
    The Chairman. I think Mr. Thune is still getting ready, so 
why don't you go ahead and ask your question?
    Senator Portman. As you know, there are these new rules for 
tax-exempt social welfare organizations and their political 
activities. These were proposed just a week ago.
    I understand that the proposed rules are meant to try to 
clarify some confusion that I acknowledge is out there and some 
ambiguity with regard to the distinction between campaign 
intervention and social welfare activity, as well as regarding 
the measure of an organization's social welfare activities 
relative to its total activities, which are all parts of the 
current regs that probably could use some additional 
clarification.
    Have you had the opportunity to review these proposed 
rules, and, if so, do you have an opinion on them? Do you 
support them?
    Mr. Koskinen. I have had an opportunity just to look at 
them in the public domain. Obviously, I did not participate in 
the development of them. They raise a set of very important 
questions and have sought, I think, active comment and 
participation from the public in responding to the two basic 
questions that are: what is the definition of political 
activity that will count against the social welfare activities 
of an organization, and what amount of otherwise not allowed 
political activity can you engage in as an organization before 
you run the risk of decertification?
    I think an important question that Senator Hatch has 
raised, and others have raised, is, whatever the definition of 
political activity is, to which of the 501(c) organizations 
should it apply? And I think it is important, in whatever 
decision is finally made, for people to see it as a decision 
made by a nonpartisan, independent organization that is trying 
to treat everyone fairly, so that those applying for any 
application feel that the response is going to be 
straightforward and evenhanded across the board.
    Senator Portman. In particular, there is a concern that 
some of us have that the IRS is not very good at getting into 
political activity, and that there could be some political 
speech that is affected by some of these new rules.
    One thing that I looked at that concerned me was that 
(c)(4)s have to remove any records of officeholder votes or 
public statements from their websites 2 months before an 
election. There is another one that says (c)(4)s cannot 
publicly talk about a President's judicial nominee from 
February 2 to a national election, some 9 months later.
    It seems sort of arbitrary, one; but, two, it seems like 
that is getting the IRS in the middle of political stuff. And I 
guess my question to you is, does this concern you that some of 
these proposed rules might further entangle the IRS in making 
political judgments and open the door to more potential 
mischief, as we have seen over the last couple of years?
    Mr. Koskinen. I think it is all-important that it be 
reviewed. I think the goal of the regulations and, ultimately, 
the final regulation, will be to get the IRS out of politics as 
much as possible rather than into it. I think part of the 
difficulty with the previous regulations and their 
implementation was that the lack of clarity meant that the IRS 
had to make a whole series of political judgments on what 
counted and what did not count.
    And the goal of the regulations, and I think, ultimately, 
my hope would be, that you end up with clarity so that it is 
relatively easy for applicants to decide, for the reviewers to 
decide, and for people running an organization to decide, which 
political activity counts in the bucket that you are not 
supposed to be doing and which does not, and that the lines are 
clear enough that the IRS itself is not making those 
distinctions, that they are made and they are clear in the 
regulations, and the organizations all understand that and can 
respond accordingly.
    So I think the point is well-taken. I think everybody would 
like to make sure the IRS is involved in political decisions to 
the minimum amount necessary.
    Senator Portman. There was a recent statement that was made 
by the Taxpayer Advocate. This is Nina Olson in her June report 
to Congress. She said, ``It may be advisable to separate 
political determinations from the function of revenue 
collection.''
    That seems to me to make sense, and I guess my thought is, 
are there steps that you believe you can and should take to 
further depoliticize the IRS and take away some of those 
responsibilities? And I guess what you are saying is that, by 
establishing some standards that are clear, that helps.
    But the question is still, are these political judgments 
appropriate to be made, or is that something that should be 
done in a different way?
    Let me give you one suggestion, and that is that the IRS 
follow, for example, the determinations of the FEC, the 
bipartisan Federal Election Commission, on questions about what 
a group's political status is.
    What are your thoughts on that?
    Mr. Koskinen. Well, I think we are going to get a lot of 
comments in response to the regulations, and I would hope that 
some would include this discussion as well.
    I think when the dust settles, the goal really has to be, 
what can we do to ensure the public that, to the maximum extent 
possible, the IRS is in the business of tax administration, not 
in the business of making political decisions?
    And as I say, my goal, if confirmed as Commissioner, in 
reviewing with the Treasury the final regulations, would be, to 
the extent possible, to make the rules clear enough so that the 
decisions are not being made by the IRS on a case-by-case 
basis. They are clear on the regulations and everyone running 
an organization, everyone trying to set up an organization, 
would understand very easily what they are allowed to do and 
what is not permissible if they want to be a 501(c) 
organization.
    Senator Portman. Thank you, Mr. Chairman, for your 
indulgence, and Senator Thune. And again, I appreciate your 
willingness to serve in this important capacity. I think it is 
a critical time to restore trust, and, given your experience 
and background, I think you will have an opportunity to do just 
that.
    So thank you, Mr. Koskinen.
    The Chairman. Senator Thune?
    Senator Thune. Thank you, Mr. Chairman.
    I want to follow up on that a little bit, if I might.
    The IRS, during the last year, as it has been under all 
this scrutiny, has been accused of incompetence, mismanagement, 
stonewalling--a whole range of things. But I think one of the 
things that gets at what Senator Portman was talking about in 
terms of restoring the trust--and, frankly, we congratulate you 
on your willingness to take this on, because there is a huge, 
huge need, I think, to try to get the American people to trust 
the revenue collector again in our country.
    But I think the politicization of the IRS is a stigma that 
has attached to the agency, and that is something you do not 
want to have with the agency that has so much power over the 
American people when it comes to collecting revenue. And so the 
point that he is raising with regard to how the IRS is now sort 
of in this role of stepping on the scales to determine what is 
or is not political speech, to me, seems to be completely 
outside the realm of what the IRS ought to be about.
    And so I would just ask you a question as a general matter. 
Do you believe our country is better off with more political 
speech or less political speech and, if confirmed, what 
principals will you follow in applying your views? And I think 
it bears on this particular issue and these regulations that 
have been proposed.
    Mr. Koskinen. It is an important question. I think what the 
public needs to be confident about with any Commissioner, and 
certainly what I would try to do, if confirmed to be 
Commissioner, is that, whatever his political views are, he is 
not going to apply them to the IRS.
    So my sense would be, having served both Republican and 
Democratic administrations, having spent most of my time in 
management, not politics, I would want the public to be 
confident that the decisions we are making are primarily 
focused on what is the best for tax administration. So, while I 
may have political views of one kind or another, I want people 
to be comfortable that those views are not going to influence 
my decisions in terms of what is best for the IRS, what is best 
for the country.
    So I think, as a general matter, I think the country's 
political system works well. I think political speech is 
important. But I do not think it is my role to have a view as 
to what ought to happen in the political realm. I think my role 
is going to be, how do we most efficiently and effectively 
administer the tax code in a way that people have trust and 
have confidence that, whatever our views are politically, 
whatever organizations we happen to belong to, that they are 
not influencing the decisions we are making at the IRS?
    Senator Thune. And I would share the view that there should 
be a way to separate the tax administration role from these 
political determinations, because I just think that it 
completely undermines the confidence and the trust the American 
people have in an institution that is so important and so 
powerful in our country and in our culture.
    I want to just ask another question, too, because this 
comes back to the whole seriousness, I guess, with which you 
take these issues that have occurred in the last year. Because 
the President earlier, if you go back to May of this year, 
called the targeting of conservative groups for extra scrutiny 
by the IRS, quote, ``outrageous.'' And then a few months later, 
in July of this year, the President came out and referred to 
what he called, quote, ``the phony scandals'' in the context of 
discussing the IRS scandal.
    I guess what I would ask, just in terms of that 
characterization, is where you fall. What is your view of what 
happened there and all that came out of that and all it did to 
erode the trust of the American people.
    Mr. Koskinen. I think it is important for the 
investigations--of which there are numerous going on, but a 
significant one is the bipartisan investigation of this 
committee--to be concluded so that we can actually reach as 
much of a consensus as we can of what the facts are as to what 
actually happened. I think, as the President responded and 
everyone responded, to the extent that the facts show that 
conservative groups or liberal groups or any groups were 
targeted because of their political positions when they made 
applications, that really is intolerable.
    I think people, when they apply for certifications, whether 
it is a 501(c)(3), (4), (5), or (6), should be comfortable 
that, no matter who they are, no matter what their political 
beliefs are, their religious beliefs or other beliefs are, they 
are going to be treated fairly and evenhandedly and they will 
get the same treatment everybody else gets, and I think that 
that is a message that needs to go forward.
    I think, to the extent that that did not happen--and I hope 
that this investigation, when it is completed, will give us the 
facts and tell us what actually did happen--to the extent it 
did not happen, as the President said, that is intolerable, and 
I think people deserve to know that we have looked into it, 
that the investigations have been public and have revealed 
whatever the facts are, and appropriate responses have been 
taken.
    And as Commissioner, going forward, the best I can do at 
the start is to commit that we are not going to let that 
happen, that the culture will not be designed to further that; 
that we will be transparent about any problems we run into; and 
that the public and certainly this committee will know about 
those problems as soon as we do.
    Senator Thune. I guess what I hear you saying--at least I 
hope what I hear you saying--is, when you say ``intolerable,'' 
the President described this in May as ``outrageous'' and then 
later, as I said, in the summer, described it as a phony 
scandal.
    You do not view this to be a phony scandal?
    Mr. Koskinen. No. On the basis of what has been determined 
thus far, I think it has been an important matter to run to 
ground. I think to the extent that, for whatever reason, 
whether inadvertently or simply in an attempt to respond to the 
overwhelming number of applications that get filed, to the 
extent that organizations felt that they were treated poorly 
and that they were, that is not fair, it is not acceptable, it 
is intolerable.
    I think that is not the way the IRS operates generally. I 
think to the extent that the public can restore its confidence 
and be comfortable that this was, to the extent it happened, an 
unfortunate event that is not going to happen again, I think 
that is important, because, as I said yesterday, trust is the 
most important asset that the IRS has.
    And I will do the best I can, as I am sure the employees 
are prepared to do, to restore the American public's confidence 
and trust in the agency.
    Senator Thune. One final question, Mr. Chairman. And this 
comes back to what your view is on whether or not IRS employees 
who are going to be responsible for enforcing Obamacare ought 
to also have to be subject to that law, because earlier this 
year we learned that the National Treasury Employees Union, 
which includes IRS employees, opposes the legislation that 
would require them to leave the FEHBP and enroll in the 
exchanges.
    What is your view on whether or not the IRS, which is the 
enforcement agency, also ought to have to be participating in 
those?
    Mr. Koskinen. I had not been aware that the union had taken 
that position. I think IRS employees, as Federal employees, 
ought to be treated as all Federal employees, and, if the 
Federal employees are going to be in the program, the IRS ought 
to be in the program. I do not think the IRS employees should 
have some special status in regard to that issue.
    Senator Thune. Mr. Chairman, thank you.
    Mr. Koskinen, thank you.
    The Chairman. Thank you, Senator.
    Mr. Koskinen, I wish you very good luck. I was impressed 
with your statement yesterday that your goal is to make the IRS 
one of the most admired Federal agencies in government. I think 
that is a noble goal, and I commend you for it.
    I also, just for whatever it is worth, think it is a good 
idea for you, as you said you would pursue, to go around the 
IRS, listen to employees, find out what they are thinking, what 
is going on, what do they think, what ideas do they have, what 
do they like, what do they not like, et cetera. Now, that is a 
huge job, because I think there are about 600 locations in this 
country, maybe other countries too, for all I know. But that is 
a lot of visits, and it is a lot of people to talk to.
    But I urge you to talk to as many as you can and listen as 
much as you can and make some decisions. I think the best 
approach would be to be fair but firm. You listen, but if 
somebody is clearly not performing, then something has to be 
done about that. But what is to be done is, you have to try to 
get that person to perform, but if that person does not 
perform, you have to do something else about that.
    But I also, for whatever it is worth, offer gratuitous 
advice, and that is: you put a public face on the IRS. You 
present yourself very well. You, in addition to managing, 
obviously, should lead in the IRS and be inspirational so the 
employees are all pumped up: ``Hey, we like this new 
Commissioner we have here. He is a good man. We would like him 
to be our new Commissioner.''
    Then get around the country a little bit, putting a 
positive face on the IRS, and that will boost morale too. 
``Hey, our guy is out there, he is talking about us in an 
appropriate way. He is not overdoing it, he is not over the 
top, but he is very appropriate about it.'' And that is going 
to take time. It is going to take a lot of time.
    You have, technically, a 5-year term, but actually it is 
more like 4 years. So you can keep moving, keep going, not only 
under President Obama, but the next President. So you have 
almost a mandate. You have an opportunity here.
    So I urge you to get around, listen, make some decisions. 
You have a great track record, a great business track record. 
And then I also suggest you kind of get around the country a 
bit and talk to groups and be on television a little bit, 
explain what the IRS is doing and get that confidence back.
    It is a real opportunity. Among all the Commissioners I 
have known, I think you have a better opportunity to do that 
than any of them, and I urge you to think about that.
    Your response?
    Mr. Koskinen. Thank you, Mr. Chairman. I did early on make 
the comment that I would go to all of the IRS offices, before I 
discovered how many there were. My present position is, I am 
going to go to some of the offices, as many as I can.
    I actually, early on, want to go to Cincinnati to talk with 
the employees who were involved in the 501(c)(4) and (c)(3) 
issues. They have challenges. I want to review the work that 
acting Commissioner Werfel has already put in motion, to review 
the processing, to try to make sure that we solve whatever 
problems exist within the system, as opposed to employee 
actions.
    But I think it is important for the employees to, as I 
said, understand that we are all in this together, that they 
are part of the solution, and that I need to understand what 
their views are, what the obstacles are, and what we can do to 
make the agency more efficient. So I am going to do that.
    I would invite Senator Portman, if he has the time, to join 
me if I am in Ohio, and I will let all of you know when I am in 
your State visiting your employees of the IRS, because I do 
think you are exactly right, Mr. Chairman: it is important for 
the employees to see the Commissioner, to know that the 
Commissioner is interested in what they have to say, and, in 
particular, is interested in doing whatever he can to make 
their jobs easier, to allow them to have the resources they 
need to appropriately serve the public.
    My experience in these circumstances is that the employees 
who interface with the public, whether at the State and local 
level or at the Federal level, want to do a good job. They want 
to please the constituents. They want to make sure that 
customer service works.
    In the IRS, customer service is trying to make it as easy 
as possible, though not necessarily always pleasant, to pay the 
taxes that are owed. And I think that that is an important 
mission and mandate for the agency, and I look forward to 
working with the agency and its employees, and I look forward 
to working with this committee to make sure that that happens 
and to improve and restore the public trust in the agency.
    The Chairman. I appreciate that, and I am quite confident 
that you will. But in addition, it is helpful, in my judgment, 
to get around and talk not only to employees, but also to the 
public, because you will pick up stuff. They will tell you 
things that you might not otherwise pick up. And for you to do 
your job, you are going to have to know what that is and then 
be able to talk back to people in a positive way and say, 
``Yes, that is a good idea, but, you know, this is what we are 
trying to do, and we are doing that over there,'' so there is a 
dialogue between the people and the Commissioner.
    I think you have a huge opportunity here. It is a wonderful 
opportunity, as you begin your roughly 5-year term, so that at 
the end of 5 years, we look at the little scorecard there and 
say, ``Gee, my gosh, you would never believe it, but the IRS is 
one of the most admired agencies in the Federal Government.''
    We wish you well.
    Mr. Koskinen. Thank you, Mr. Chairman. That is very good 
advice that I will take.
    The Chairman. Thank you.
    Senator Hatch?
    Senator Hatch. I have a few more questions that I would 
like to ask that I think are important.
    For years, I have been concerned that the personal 
financial records of millions of Americans are at serious risk 
due to Obamacare's new information-sharing requirements. 
Individuals signing up in the Obamacare exchanges are required 
to provide personal information such as Social Security numbers 
and household income information, which is entered into the 
Federal Data Services Hub. That is a new information-sharing 
network that allows the State and Federal agencies like the IRS 
to access this sensitive information.
    But that is why I introduced the ``Trust But Verify Act,'' 
which would stop the Obamacare exchanges from operating until 
the GAO and HHS Inspector General can certify that necessary 
privacy and data security parameters are in place. 
Unfortunately, my fears about privacy and security have been 
confirmed in recent months as the implementation of the 
Obamacare exchanges has led to countless problems.
    The Healthcare.gov website, including the back-end data hub 
functions, were rushed to launch and were not adequately tested 
to ensure adequate security and privacy standards. It remains 
unclear as to whether the data hub has adequate security in 
place to prevent enrollees' information from falling into the 
hands of data thieves.
    Just last week, the Treasury Inspector General for Tax 
Administration released a report that found the IRS needs to 
improve Obamacare systems to protect security. In that report, 
the Inspector General reported that IRS security controls do 
not meet standards set by the Institute of Standards and 
Technology and Internal Revenue Manual guidelines. The report 
recommended the IRS develop a corrective action plan for 
resolving security issues.
    Now, Mr. Koskinen, do you support an independent review of 
data hub privacy and security protections, and, if confirmed, 
will you develop a corrective action plan at the IRS to ensure 
that this sensitive data is protected?
    Mr. Koskinen. Yes, Senator. The data hub and the exchanges 
are not run by the IRS. The IRS data that is provided to them 
on background information, as we noted yesterday, has worked 
very well and is security-protected. What the IG is concerned 
about and what the IRS is focused on is, at the back end, when 
the IRS enters into its review of the filings for 2014 to make 
premium determinations, to make sure that all of that 
information is secure.
    The IRS has actually a very strong record historically of 
protecting data, protecting taxpayer information, being very 
concerned about the loss of data and identity theft. So acting 
Commissioner Werfel has been confident, and the information 
technology people are confident, that the IRS security of data 
will meet the standards.
    It is important for the Inspector General to continue to be 
involved. In fact, several of the reports on information 
technology recently by the Inspector General were requested by 
the IT department, which I think is a good sign that they are 
reaching out for independent verification as the systems are 
developed.
    And, if confirmed as Commissioner, I would encourage that 
continued, in effect, independent review by the Inspector 
General, and ultimately by the General Accountability Office, 
of the systems, not only once they are established, but as they 
are being developed, because, if you get that information 
during the development period, obviously, you can continue to 
make midcourse corrections, and that is important.
    Senator Hatch. The Affordable Care Act provides for 
refundable advanced premium tax credits and cost-sharing 
subsidies for taxpayers who, one, purchase a policy through an 
exchange and, two, have household income between 100 percent 
and 400 percent of the Federal poverty level.
    The Obamacare website rollout has been--it has really been 
such a disaster that taxpayers are now being encouraged to 
purchase health insurance directly from insurance companies for 
2014 rather than through the exchange. Now, there are reports 
that the administration intends to pay subsidies for policies 
purchased directly from insurance companies, even though the 
tax code requires that a taxpayer purchase a policy through an 
exchange in order to qualify for a subsidy.
    Now, unlike income levels, which will have to be reconciled 
after 2014, when a tax return for 2014 is filed, the IRS will 
know from the outset whether a policy was or was not purchased 
through the exchange. So will you commit to this committee 
that, should you be confirmed, you would follow the tax code 
and ensure that premium subsidies are not paid on behalf of any 
taxpayer who purchases a policy directly from an insurance 
company?
    Mr. Koskinen. I am not familiar with the details of that 
particular question, but I certainly am willing to agree that, 
if confirmed as Commissioner, I will ensure that we look into 
that problem, as well as others, and that we appropriately 
implement the law.
    Senator Hatch. I think my time is up, Mr. Chairman.
    The Chairman. Thank you, Senator. Do you have another 
question?
    Senator Hatch. I have one more that, if I could ask it, I 
would surely like to ask. I do not mean to delay this.
    I am also very favorably disposed toward your nomination 
and want to see you confirmed.
    Mr. Koskinen. Thank you, Senator.
    Senator Hatch. And I will do what I can to see that you 
are.
    But in 2007, Congress enacted the new 20-percent penalty 
for credits or refunds erroneously claimed by individuals. It 
came to light that IRS was interpreting this new provision 
incorrectly and, thus, was not assessing the penalty in many 
situations where it should have. So the IRS revised its 
interpretation of the law concerning the erroneous refund 
penalty in May 2012.
    However, the Treasury Inspector General for Tax 
Administration, or TIGTA, issued a report in November 2013 
saying that, ``Despite the new and more accurate interpretation 
of the law, the reality is that many IRS agents in the field 
still are not aware of the erroneous refund penalty and are 
often under-assessing the penalty.'' TIGTA has stated, ``In 
view of the significant problem of erroneous claims for credits 
and refunds and the related costs to the government . . . the 
IRS should . . . put appropriate procedures and processes in 
place to comply with the erroneous refund penalty and to make 
sure it is assessed in those situations where a refund is 
erroneously claimed.''
    So, Mr. Koskinen, if you are confirmed as Commissioner, 
what will you do to assure that the TIGTA recommendation is 
followed and that the problem of erroneous credit claims is 
reduced?
    Mr. Koskinen. As we discussed, Senator, one of my concerns 
about the funding constraints is that travel and training have 
been cut by 80 percent to respond to the budget and some 
concern about previous meetings that were held. And my concern 
about that is, particularly on the training side, that we often 
think of training as training for new employees.
    But a significant amount of training money is spent 
educating existing employees, both to improve their capacity 
and to allow them promotion opportunities, but particularly, in 
situations like this, to make sure that, when you have 95,000 
employees and a lot of revenue agents, when there are changes 
in interpretation or mistakes are discovered, the training 
funds and the meetings and the exchange of information allow 
you to make sure that people are updated in terms of what the 
rules and regulations require, what the standards are, what 
they need to do to be effective in their work.
    And so, if confirmed as Commissioner, this would be one 
example where we need to make sure that the information is 
pushed out to the front lines. And one way to do that is to, on 
a regular basis, have meetings and training sessions where 
people are updated about a range of issues that they may not 
have understood previously or where we have discovered 
misinformation or misunderstandings, because we need to have 
revenue agents and those on the front lines as up-to-date as 
possible as regularly as possible.
    Senator Hatch. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Thank you, Mr. Koskinen, for your willingness to serve.
    With the filing season upon us and this committee's ongoing 
investigation of 501(c)(4)s, et cetera, I believe it is 
critical to have a confirmed leader in place at the IRS as soon 
as possible, and even more critical when the acting 
Commissioner, Danny Werfel, has indicated that he is going to 
be leaving by the end of this year.
    Therefore, I intend to hold a markup this Friday on your 
nomination, and this will allow the Senate enough time to 
consider your nomination by the end of the year, again, which I 
think is critically important.
    And I am asking all Senators to submit their questions for 
the record by 5 p.m. tonight, and I urge you to answer 
thoroughly and fully those questions by tomorrow.
    Mr. Koskinen. We are looking forward to a late-night 
session.
    Senator Hatch. Mr. Chairman, I would have to object to 
Friday, because I cannot be here Friday, unless we are voting; 
then I might have to change my schedule.
    But I do want to have you confirmed as quickly as we can, 
but I would prefer that we do it when I am here as well.
    The Chairman. Well, let us see what we can do. The Senate 
is in session this week, and it is my understanding there will 
be votes on Friday, and I do think it is critical that this 
nominee be confirmed by the end of the year. We should take 
every advantage that we can.
    Thank you very much. The hearing is adjourned.
    [Whereupon, at 10:42 a.m., the hearing was concluded.]



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