[Senate Hearing 114-257]
[From the U.S. Government Publishing Office]








                                                        S. Hrg. 114-257

PROTECTING TAXPAYERS FROM SCHEMES AND SCAMS DURING THE 2015 TAX FILING 
                                 SEASON

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 12, 2015

                               __________




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                          COMMITTEE ON FINANCE

                     ORRIN G. HATCH, Utah, Chairman

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
DANIEL COATS, Indiana                ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina

                     Chris Campbell, Staff Director

              Joshua Sheinkman, Democratic Staff Director

                                  (ii)













                            C O N T E N T S

                               __________

                           OPENING STATEMENTS

                                                                   Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman, 
  Committee on Finance...........................................     1
Wyden, Hon. Ron, a U.S. Senator from Oregon......................     2
Coats, Hon. Daniel, a U.S. Senator from Indiana..................     7

                               WITNESSES

Ciraolo, Caroline, Acting Assistant Attorney General, Tax 
  Division, Department of Justice, Washington, DC................     4
Camus, Timothy P., Deputy Inspector General for Investigations, 
  Treasury Inspector General for Tax Administration, Department 
  of the Treasury, Washington, DC................................     5
Alley, Hon. Mike, Commissioner, Indiana Department of Revenue, 
  Indianapolis, IN...............................................     7
Valentine, Hon. John L., Chairman, Utah State Tax Commission, 
  Salt Lake City, UT.............................................    10
Klem, Ellen M., Director of Consumer Outreach and Education, 
  Office of the Attorney General, Oregon Department of Justice, 
  Salem, OR......................................................    11

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Alley, Hon. Mike:
    Testimony....................................................     7
    Prepared statement...........................................    29
Camus, Timothy P.:
    Testimony....................................................     5
    Prepared statement...........................................    36
Ciraolo, Caroline:
    Testimony....................................................     4
    Prepared statement...........................................    42
Coats, Hon. Daniel:
    Opening statement............................................     7
Hatch, Hon. Orrin G.:
    Opening statement............................................     1
    Prepared statement...........................................    44
Klem, Ellen M.:
    Testimony....................................................    11
    Prepared statement...........................................    44
Valentine, Hon. John L.:
    Testimony....................................................    10
    Prepared statement...........................................    46
Wyden, Hon. Ron:
    Opening statement............................................     2
    Prepared statement...........................................    48

                             Communication

Operation HOPE...................................................    51

                                 (iii)
 
                   PROTECTING TAXPAYERS FROM SCHEMES
                       AND SCAMS DURING THE 2015
                           TAX FILING SEASON

                              ----------                              


                        THURSDAY, MARCH 12, 2015

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:02 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. 
Orrin G. Hatch (chairman of the committee) presiding.
    Present: Senators Grassley, Crapo, Thune, Isakson, Toomey, 
Coats, Heller, Scott, Wyden, Cantwell, Menendez, Carper, 
Cardin, Bennet, Casey, and Warner.
    Also present: Republican Staff: Kimberly Brandt, Chief 
Healthcare Investigative Counsel; Chris Armstrong, Deputy Chief 
Oversight Counsel; and Justin Coon, Detailee. Democratic Staff: 
Joshua Sheinkman, Staff Director; Tiffany Smith, Senior Tax 
Counsel; David Berick, Chief Investigator; and Daniel Goshorn, 
Investigator.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
              UTAH, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will come to order.
    The committee meets today to hear about growing criminal 
activity that is targeting taxpayers across the country. These 
criminal acts are perpetrated by thieves hiding behind 
telephone lines and computers, preying on honest taxpayers and 
robbing the Treasury of tens of billions of dollars every year.
    This must stop, and we are here today to hear from some of 
the Federal and State officials on the front lines of the fight 
to catch these crooks and protect taxpayers. But first, I want 
to talk about one case in particular, and one very large 
number, by the way.
    This is a hearing that is long overdue, as far as I am 
concerned. We will get into it. I have to apologize, as Senator 
Wyden is not here yet, but he is coming.
    In this town, and especially right here on this committee, 
we often talk in terms of hundreds of millions, billions, or 
even trillions of dollars. Some joke about a number being 
referred to as ``budget dust,'' even if that number has 9 or 10 
zeroes behind it.
    But let me tell you about a number that is truly stunning: 
$15,800. Now, that $15,800 was saved through hard work, 
sacrifice, and honest living. That is $15,800 saved for the 
down payment on a new house for a growing family. That $15,800 
in savings was wiped away by criminals who used fear, 
confusion, and intimidation as their weapons.
    This is the story of the Degen family from Taylorsville, 
UT. I would like to play a news clip from KTVX, a Utah ABC 
affiliate, that tells their story. Can we do that?
    [Playing of video.]
    The Chairman. Well, that is just one family out of millions 
that have been targeted and thousands that have been 
victimized. This is just one scam. But make no mistake, 
taxpayers across the country are also facing identity theft in 
record numbers, account take-overs, and other criminal attacks.
    Once again, we have to stop this. Taxpayers must be more 
aware of the risks and better protected from attack, and these 
criminals must be found and brought to justice. I look forward 
to the testimony from our witnesses on today's panel and to 
hearing more about how we can accomplish these goals.
    Now, let me turn over the time to Senator Wyden for his 
opening remarks.
    [The prepared statement of Chairman Hatch appears in the 
appendix.]

             OPENING STATEMENT OF HON. RON WYDEN, 
                   A U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you very much, Chairman Hatch. I very 
much appreciate the opportunity to work on these issues in a 
bipartisan way.
    Colleagues, since the day that the IRS opened its doors, 
scam artists have been hatching up slick new ways of stealing 
taxpayer dollars from the Treasury. What is new is, the rip-off 
artists are now stealing Americans' identities and personally 
threatening them on an industrial scale, while directly robbing 
them of their hard-earned money. The fraudsters are constantly 
dreaming up new tactics, and then they milk them for all they 
are worth before they start getting caught. Then it is lather, 
rinse, and repeat, onto the next scam, always one step ahead of 
the law.
    Today the committee will closely examine several of the 
fraudsters' latest strategies that are plaguing taxpayers. The 
one that is hitting Oregonians hardest is the fake phone call 
demanding money or personal information on behalf of the IRS. 
In fact, these calls were the number-one consumer complaint 
registered with the Oregon Department of Justice just last 
year. Not everybody knows that the IRS simply does not cold-
call individuals, making demands or threats. So it is pretty 
clear from my vantage point, there is a lot more work to be 
done to defeat this scourge.
    Given the sophistication of this criminal activity and the 
fact that a lot of it comes from overseas, this sure looks to 
me like an emerging type of organized crime. So the real 
question is, what is it going to take to root it out and get 
the bad actors on the sidelines--more prosecutions, stronger 
deterrence, more cops on the beat? What is the best way of 
getting the word out so that taxpayers are not tricked into 
surrendering their life's savings to some intimidating voice on 
the other end of the phone line?
    But even if our people manage to avoid the phone calls, you 
can bet that the crooks find other ways to profit. Tax 
preparation software has become the scammers' new fast lane. 
These sharks manage to acquire a taxpayer's personal data from 
the black market or hack into commercial databases, and then 
they file false returns electronically. The victims may not 
find out until much later in the tax season, and by then it is 
just too late. Already there have been thousands of reports 
like this in 2015. As we will hear today, some software vendors 
are not doing enough to help prevent fraud.
    In my view, part of the challenge is getting the States' 
Internet tax services and the IRS on the same wavelength. They 
have to communicate and work together to make sure that the 
criminals cannot just, in a nimble fashion, slide from one 
jurisdiction to the next as they rip off more unsuspecting 
Americans.
    Now, some taxpayers may choose to avoid software, but not 
even a paid tax preparer is guaranteed to be safe. In fact, 
many of them do not meet any standards for competence. There 
are far too many of these con artists out there willing and 
able to prey on the people who come through their doors. In 
some of the most offensive cases, they secretly falsify their 
victims' returns to boost the refunds and then they pocket the 
difference. Once the tax season ends, the crooks disappear from 
the storefronts they occupied, and there is no trace of where 
they have gone.
    A few States, like mine, have rules in place to help shield 
the taxpayer from this kind of rip-off; most States do not. So 
Senator Cardin and I have introduced the Taxpayer Protection 
and Preparer Proficiency Act at the beginning of this Congress 
to give all Americans the security they deserve. Our colleague 
Senator Nelson is also a leader on this issue of keeping 
taxpayers safe from identity theft and fraud, and all of us 
wish, as I indicated to Chairman Hatch, to work on this in a 
bipartisan way.
    The bottom line is, there is no end to the ingenuity of the 
con artists, so my hope this morning is that we will get some 
fresh ideas for catching up to this wave of fraud and stopping 
it. Obviously, it cannot come soon enough. We have a 
distinguished panel here today. I am especially pleased that 
Ms. Ellen Klem, the Director of Consumer Outreach and Education 
in the Oregon Attorney General's office, is here. My thanks to 
Ms. Klem, and to all our witnesses.
    Mr. Chairman, I look forward to working with you and our 
colleagues on this in a bipartisan way.
    The Chairman. Well, thank you, Senator Wyden.
    [The prepared statement of Senator Wyden appears in the 
appendix.]
    The Chairman. Our first witness today is Acting Assistant 
Attorney General Caroline Ciraolo of the Tax Division of the 
U.S. Department of Justice. Ms. Ciraolo was appointed Principal 
Deputy Assistant Attorney General and Deputy Assistant Attorney 
General of Planning and Policy of the Tax Division in January 
of this year. Prior to that, she was chair of the Tax and 
Litigation Group at Rosenberg, Martin, Greenberg in Baltimore.
    Ms. Ciraolo, we welcome you to the committee, and we look 
forward to hearing your testimony.

   STATEMENT OF CAROLINE CIRAOLO, ACTING ASSISTANT ATTORNEY 
  GENERAL, TAX DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, DC

    Ms. Ciraolo. Thank you, Senator.
    Chairman Hatch, Ranking Member Wyden, and members of the 
committee, thank you for the opportunity to appear before you 
to discuss the Department of Justice's efforts to combat 
identity theft and tax refund fraud.
    The Department greatly appreciates the commitment that this 
committee has brought to this very important issue. Combating 
the theft of personal information to file fraudulent tax refund 
claims is a top priority for both the Tax Division and U.S. 
Attorneys' offices across the country. Your efforts to bring 
attention to this growing and insidious crime will help educate 
taxpayers about the importance of detecting and reporting 
identity theft and fraud. Today's hearing also sends a strong 
message that the government is determined to identify and 
prosecute the individuals behind these schemes and, in doing 
so, will bring all its resources to bear.
    The Department's Tax Division, which I had the honor and 
privilege of leading as Acting Assistant Attorney General, has 
one purpose: to enforce the Nation's tax laws fully, fairly, 
and consistently through civil litigation and criminal 
prosecutions. Our close working relationships with IRS Criminal 
Investigation, TIGTA, the U.S. Postal Service, the FBI, the 
U.S. Attorneys' offices, and other Federal, State, and local 
law enforcement partners, continue to enhance the government's 
ability to respond quickly, efficiently, and forcefully to 
often-changing patterns of criminal conduct.
    Stolen identity refund fraud, or SIRF, is an example of 
this type of challenge. In SIRF crimes, offenders steal Social 
Security numbers and other personal information. They file tax 
returns early in the filing season, showing a false refund 
claim, and then have the refunds electronically deposited to a 
bank account, loaded on prepaid debit cards, or mailed to an 
address where the wrongdoer can access a check.
    SIRF crimes often involve multiple offenders at various 
levels in a conspiracy, and frequently involve employees with 
access to databases containing large volumes of personal 
information. SIRF crimes often hit the most vulnerable members 
of our society, like Melissa and Brendan Degen. These include, 
but are certainly not limited to, the elderly, the 
hospitalized, students, and members of our military deployed 
overseas. While the IRS will make good on any refund due to the 
taxpayer, there are inevitable burdens and delays while the 
matter is addressed, and the victims often experience a 
profound sense of violation. Moreover, we are all victimized by 
a loss to the U.S. Treasury.
    SIRF crimes require immediate action to prevent enormous 
harm to the American public. To this end, the Tax Division 
expedites its review procedures in SIRF cases, and has issued 
directive 144, which delegates to U.S. Attorneys' offices, 
among other things, the authority to initiate tax-related grand 
jury investigations in SIRF matters and to charge those 
involved in SIRF crimes by complaint without prior 
authorization from the Tax Division. The collaborative efforts 
of the Tax Division and its law enforcement partners have 
strengthened the response to this crime. Through December 31, 
2014, the Department prosecuted more than 1,400 individuals, 
and courts are imposing substantial sentences.
    To further leverage the information gained from each 
investigation, in February 2014, the Assistant Attorney General 
of the Tax Division created a SIRF Advisory Board, consisting 
of experienced SIRF prosecutors. The board works to develop and 
implement a national strategy to ensure consistent and 
effective nationwide enforcement and prosecution of SIRF 
crimes.
    For example, the board conducts training sessions for fraud 
analysts at the IRS Scheme Development Centers. The board 
provides training and resources to prosecutors across the 
country, and it works with U.S. Attorneys' offices to develop 
local task forces.
    These initiatives enable prosecutors and law enforcement 
agencies to work together to identify schemes and to pursue the 
most culpable offenders while providing the IRS with real-time 
information that can be used to improve its filters and stop 
the issuance of fraudulent refunds. The prosecution of SIRF 
crimes is a national priority, and, together with our law 
enforcement partners, we will continue to look for the most 
effective ways to punish the offenders and bring this conduct 
to an end.
    Thank you again for this opportunity to provide the 
Department's perspective on this issue, and I look forward to 
answering any questions you may have.
    The Chairman. Well, thank you so much.
    [The prepared statement of Ms. Ciraolo appears in the 
appendix.]
    The Chairman. Our next witness is Timothy Camus, the Deputy 
Inspector General for Investigations at the Treasury Inspector 
General for Tax Administration, or TIGTA. Mr. Camus has served 
at TIGTA and TIGTA's predecessor, the Internal Revenue 
Service's Inspection Service, for over 23 years. He has a long 
career of having successfully investigated cases of domestic 
terrorism, bribery, and fraud affecting the IRS.
    We certainly welcome you, Mr. Camus, and we look forward to 
taking your testimony at this time.

  STATEMENT OF TIMOTHY P. CAMUS, DEPUTY INSPECTOR GENERAL FOR 
      INVESTIGATIONS, TREASURY INSPECTOR GENERAL FOR TAX 
   ADMINISTRATION, DEPARTMENT OF THE TREASURY, WASHINGTON, DC

    Mr. Camus. Thank you, Chairman Hatch, Ranking Member Wyden, 
and members of the committee. Thank you for the opportunity to 
testify on the topic of tax schemes and scams during the 2015 
filing season.
    By raising public awareness about criminals' efforts to 
swindle honest Americans out of their money, we may prevent the 
next person from becoming a victim, which is a very good thing. 
Each year, the IRS compiles what it sees as the dirty dozen tax 
scams on its website. Many of these schemes peak during the 
filing season as people prepare their returns or utilize the 
service of paid preparers. My statement today briefly outlines 
the top schemes and scams currently affecting taxpayers, as 
they have proven to be surprisingly effective ways to steal 
money, in many cases before the victim even realizes they have 
been scammed.
    The first scam is the phone impersonation scam, which 
landed on the top of the dirty dozen list this year. It is the 
largest and most pervasive impersonation scam that we are aware 
of, and it has claimed thousands of victims in every State 
represented on this committee.
    Here is how it works. The intended victim receives an 
unsolicited phone call from a person claiming to be an IRS 
agent. The caller, using a fake name, tells the victim a made-
up badge number and claims that they owe tax and that they are 
criminally liable for some amount owed. The callers may even 
know the last four digits of the victim's Social Security 
number. They then threaten the victim by stating if they fail 
to pay immediately, the victim will be arrested or face other 
criminal sanctions, such as losing their driver's license.
    I myself received one of these calls at my home on a 
Saturday. TIGTA has received over 366,000 reports of these 
calls, averaging between 9,000 and 12,000 calls coming in to my 
agency each week. As of March 9, 2015, over 3,000 individuals 
have been victimized by this scam, by paying a total of $15.5 
million, or an average of $5,000 per victim.
    The highest reported loss by one individual was a 
staggering $500,000, and in one particularly sad story, a 
member of this committee forwarded a letter to us from a 
constituent whose close relative suffered a tragic death after 
receiving harassing phone calls from these scammers.
    To help educate taxpayers, we are reaching out via the 
media in conjunction with the IRS and the Federal Trade 
Commission, as well as providing testimony to this committee, 
in hopes of eliminating this type of abuse and preventing other 
vulnerable individuals from becoming victimized.
    Another ongoing scam I would like to highlight involves 
using the story that the victim has won a lottery. This is a 
continuation of an old scam. It starts with an e-mail or a 
telephone call out of the blue declaring that the victim has 
won the lottery, but, in order to collect the winnings, they 
must first pay the tax to the IRS. The lottery scam often, but 
not always, originates from outside of the United States. In 
the end, the victims pay the money, but they never receive any 
lottery winnings.
    Just as serious as these scams is the risk of taxpayer 
refund identity theft. The IRS has made improvements in its 
identification of identity theft returns before fraudulent tax 
refunds are released, but continued attention is needed to 
effectively combat this crime. For example, the IRS still does 
not have timely access to third-party income and withholding 
information. Most of this third-party information is not 
received by the IRS until well after the taxpayers begin filing 
their returns.
    The deadline for most information returns with the IRS is 
March 31st, yet taxpayers began filing their returns this year 
on January 20th. This gap in time prevents the IRS from 
conducting validity checks. Of course, legislation would be 
needed to accelerate the filing of the information returns.
    The IRS has taken steps to effectively prevent the filing 
of identity theft tax returns by locking the tax accounts of 
deceased individuals to prevent others from filing a return 
using the departed's name or Social Security number.
    For processing year 2014, the IRS rejected over 338,000 e-
filed returns and stopped nearly 16,000 paper-filed returns 
through the use of these locks. Just 11 days after the filing 
season this year began, the IRS reported that it had prevented 
the issuance of more than $2 million in fraudulent refunds as a 
result of these filters.
    Other schemes such as prisoner fraud, unscrupulous tax 
preparers, and phishing scams are discussed in depth in my 
written testimony. Much work is being done on multiple fronts 
to address these criminal activities. We hope this work will 
reduce or eliminate their impact on taxpayers.
    Chairman Hatch, Ranking Member Wyden, thank you for the 
opportunity to share my views. I look forward to questions.
    The Chairman. Thank you so much.
    [The prepared statement of Mr. Camus appears in the 
appendix.]
    The Chairman. I am going to turn, briefly, to Senator Coats 
to introduce our next witness.

            OPENING STATEMENT OF HON. DANIEL COATS, 
                  A U.S. SENATOR FROM INDIANA

    Senator Coats. Mr. Chairman, thank you very much. I thank 
you for inviting our Indiana Department of Revenue Commissioner 
Mike Alley to testify today.
    Thanks to the leadership of our Governor Mike Pence and 
Commissioner Alley, our Department of Revenue developed a plan 
that stopped $88 million in attempted identity theft in the 
last filing season. This involved 78,000 fraudulent returns and 
12 percent of all the refund dollars that were requested.
    The effort to do that, as Mr. Alley will explain, cost the 
State $8 million. The return on investment was $88 million. 
Compared with some of the things we do around here, which are 
usually the opposite--spend $88 and get $8--we spent $8 and got 
$88 back and saved a lot of taxpayers from this fraud, and we 
are currently bringing the needed savings to our State.
    Mr. Alley, Commissioner Alley, brings a wealth of private-
sector experiences to his job. He has worked for decades in 
leadership positions in the banking industry. He is a CPA. He 
has started businesses, so he understands, first-hand, how 
important the customer service role is for the Department of 
Revenue.
    Again, Mr. Chairman, I thank you for inviting Commissioner 
Mike Alley to testify this morning and look forward to his 
testimony.
    The Chairman. Great.

STATEMENT OF HON. MIKE ALLEY, COMMISSIONER, INDIANA DEPARTMENT 
                  OF REVENUE, INDIANAPOLIS, IN

    Commissioner Alley. Thank you, Senator Coats.
    Chairman Hatch, Ranking Member Wyden, and committee 
members, thank you for inviting me to discuss this important 
topic with you today. On behalf of Governor Pence and the 
citizens of Indiana, it truly is our honor to be here and share 
our story.
    I would like to share really three points with you today: 
the first, the nature of the problem and the overall breadth, 
which we have already heard here today is significant; the 
steps that Indiana has taken and the lessons we have learned; 
and then recommendations to more fully and effectively address 
this epidemic problem.
    Tax refund fraud is one of the most lucrative platforms for 
criminals to monetize the value of stolen identity information, 
and the advent of electronic filing and processing has only 
enhanced the ability of criminals to utilize economies of scale 
in filing large volumes of fraudulent returns at nominal cost.
    As Senator Coats indicated, in 2014, 12 percent of the 
total refund dollars that were requested from Indiana were 
found to be fraudulent. Fortunately, we were able to stop them. 
They represented 78,000 fraudulent returns that we stopped that 
contained manufactured or stolen IDs, and again we saved the 
State $88 million in the process.
    It is still early in the 2015 filing season, but we are 
already seeing a dramatic increase in the use of valid IDs 
which have been stolen. With the increase of the reported 
successful hacks all across the United States of U.S. 
companies, we believe the availability of valid stolen IDs has 
never been greater, and the fraudsters have clearly upped their 
game, and we must do the same.
    Second, let me share with you what we have done here in 
Indiana. In 2012, we realized that we were suffering 
substantial losses from refund fraud. Accordingly, we worked 
with Governor Pence and his team to effectively identify a 
program that we could begin building. We knew that we needed to 
make significant systemic modifications, and we needed to do it 
before the next filing season. Our staff reached out to fellow 
States through the Federation of Tax Administrators and also 
our partners at the IRS, to see if there were some ideas we 
could borrow and implement rapidly. The response was very 
supportive, though we noted partial solutions and fragmented 
efforts across the group.
    With strong support from Governor Pence, we initiated a 
pilot program to screen all returns for suspicious identities. 
This program used LexisNexis', a third-party 
commercial vendor, to screen returns and note identity theft 
information such as name, address, Social Security number, and 
other identifier information.
    We processed those returns. When they proved to be 
suspicious, we withheld those, and sent a confirmation letter 
to those taxpayers to have them confirm their identities. 
Again, this had a dramatic impact on our ability to recognize 
fraudulent identities and stop those refunds.
    The identity confirmation quiz is only a part of a larger 
process. It became very clear in the beginning that the 
Department would need to make some systemic changes by making 
significant investment in both staff and technology, and, 
further, we needed to change our approach to how we deal with 
fraud.
    For the 2015 filing season, we have continued to make 
enhancements. We have implemented some new pre-filter 
processing platforms that include a decision matrix that will 
allow us to better identify those valid IDs. We have also 
defined greater expectations from our certified software 
vendors as to the information they will provide to us and the 
level of fraud that they send our way.
    We are still battling this problem, but a few key lessons 
have been learned. First, it must be a strategic priority. 
Identity theft and refund fraud are here to stay, and we have 
to address them. It requires a fiscal investment in leadership, 
staff, technology, and third-party resources.
    Second, collaboration. No one has all the answers, and we 
cannot solve this problem by ourselves. Sharing data, best 
practices, and experiences among all of the revenue agencies 
across the States, as well as the Federal Government and 
software vendors, is going to be important. Having access and 
ability to communicate on a timely basis is critical. We have 
to develop some targeted solutions. Fraudsters will continue to 
change their approaches, and we have to stay ahead.
    Finally, I would just note that the pre-paid debit card is 
an issue that I think needs to be addressed. It is a preferred 
tool of fraudsters in receiving their refunds. We found that 
over 50 percent of those returns with pre-paid debit cards are 
fraudulent.
    In terms of some recommendations on things we can do, we 
consider that the solution really encompasses a three-legged 
stool concept which notes that the States, the IRS, and 
software vendors each represent a significant and important leg 
of the stool. Each has unique data, perspectives, and 
capabilities that the system as a whole requires in order for 
us to make better decisions.
    The IRS is certainly in a great position to help us manage 
highly sophisticated fraud. States must work more 
collaboratively together. Finally, software vendors also have 
great information and can be helpful in sharing their 
intelligence.
    In conclusion, I just want to summarize that, first, this 
problem is here to stay, and we have to address it. Second, 
collaboration and sharing of information among the IRS and the 
States, reducing some of the barriers to our ability to share 
anonymous aggregate information, is critical. Third, we have to 
make the investments. As Senator Coats noted, we made an 
investment that yielded over a ten-times return, and I am 
confident providing that continued investment is the only way 
that we can get out ahead of this and beat it.
    On behalf of Governor Mike Pence and the citizens of 
Indiana, thank you for allowing us to share our story. I look 
forward to trying to answer any questions you may have, but 
thank you for allowing us to be here.
    The Chairman. Well, thank you. Thank you, Senator Coats and 
Commissioner Alley. We appreciate you making an effort to be 
here.
    [The prepared statement of Commissioner Alley appears in 
the appendix.]
    The Chairman. Now I am very pleased to introduce our next 
witness, Commission Chair John Valentine of the Utah State Tax 
Commission. Chairman Valentine was a member of the Utah State 
Senate, where he served with distinction from 1998 until his 
confirmation as Tax Commission Chair in September 2014.
    Prior to that, he was in the Utah House of Representatives, 
and was also an attorney in private practice. Chairman 
Valentine, we are really grateful that you have taken time out 
of your schedule to be with us today. I want to thank you for 
coming to Washington during the filing season and joining the 
hearing this morning. So, we appreciate all of you being here.

         STATEMENT OF HON. JOHN L. VALENTINE, CHAIRMAN,
         UTAH STATE TAX COMMISSION, SALT LAKE CITY, UT

    Mr. Valentine. Thank you very much, Chairman Hatch and 
Ranking Member Wyden. Thank you also for giving us this time.
    Esteemed members of the committee, I am here to discuss 
ways to reduce the tax frauds that we are seeing envelop this 
country. There are four issues that you really ought to 
consider: (1) strengthening information sharing between the IRS 
and the States; (2) stricter regulation of the financial 
industry as it relates to pre-paid debit cards; (3) regulating 
the practice of applying refunds to payment of fees for filing 
services, a practice sometimes called in the industry ``refund 
transfers''; and (4) requiring third-party filing services to 
tighten front-end security by using multi-factor authentication 
and other measures to secure data from unauthorized disclosure 
and identity theft.
    Prior to the commencement of the 2015 filing season, Utah 
installed a state-of-the-art computer software system to 
identify potentially fraudulent returns. On January 20th of 
this year, the Utah Tax Commission opened filing of income tax 
returns and deployed this system. As we began to process 
returns, our system started sending out error notices that 
indicated that there were fraudulent returns.
    We then followed up with verification letters of the 
suspicious returns to the taxpayers. Within 10 days after 
opening the filing season, we began receiving calls from 
taxpayers saying, ``We have not filed our returns yet.'' We 
initially thought that these were isolated incidents, but, as 
the week progressed, it was clear that they were not.
    We found several factors that were common in all of these 
calls: (1) the returns had the direct deposit information 
changed from the previous year's bank account to a pre-paid 
debit card; (2) the returns contained routing and account 
numbers that differed between the Federal returns and the State 
returns; and (3) most of the returns appeared to have the exact 
2013 return data populated in the 2014 return.
    The next issue we found was common was that the address on 
the returns was the same as the address on the 2013 return, 
even when there was an error in the address. Finally, since 
most of the filings were made through one vendor, it appeared 
that something in their process was compromised.
    After communicating with that vendor and notifying other 
States of what we were finding, we talked with the Internal 
Revenue Service and said, ``We think there may be a compromise 
of the MEF system,'' that is the Modernized Electronic Filing 
system.
    The accounts in question that we were able to identify were 
immediately sent to the Ogden Service Center. Thirty-one 
returns in that first week were confirmed suspicious. We asked 
them in a phone conversation to confirm on their side. We are 
still waiting to hear from them.
    Many have asked what action was undertaken by the State of 
Utah when it discovered this attack. In short, we hurried. We 
stopped all refunds until we could get our arms around it. 
During that first week, we found five different fraud schemes, 
four of which were ones we had seen before--they are 
institutions, they are preparers. But one was a new one, and 
the new one involved someone who had actual tax returns--not 
just identity theft, but tax returns from the prior year.
    Now, as we continued to prevent the outflow of fraudulent 
refunds, we found great difficulty in determining the nature of 
the financial institution and the account information. 
Specifically, we found that there was no uniformity in 
numbering to determine traditional debit cards from traditional 
bank accounts. In other words, we could not tell whether we 
were refunding to a pre-paid debit card or whether we were 
refunding to a legitimate bank account. There is an easy fix on 
this one. The easy fix is to require the financial industries 
to have identifier numbers in the routing number or in the 
account number to identify the account as a pre-paid debit 
card. We do that already with checking accounts and savings 
accounts; we do not do it with pre-paid debit cards.
    While we progressed through the investigation, we found a 
practice that enables fraudsters to perpetrate fraud without 
having anything at all at risk: the refund transfer. Here is 
how it works. The fraudster is allowed to deduct the third-
party filing fees from the refund, the third-party filing fee 
gets paid, the fraudster receives the cash, and the State of 
Utah is out the money.
    Finally, we found third-party filing services often lack 
front-end identity security measures. Quality firewalls need to 
be installed by third-party vendors, both for the IRS and for 
the State Tax Commissions.
    Thank you, Mr. Chairman. Thank you, Ranking Member Wyden.
    The Chairman. Well, thank you. We appreciate your 
testimony.
    [The prepared statement of Mr. Valentine appears in the 
appendix.]
    The Chairman. Finally, we welcome Ellen Klem from the 
Office of the Oregon Attorney General. Ms. Klem serves as the 
Director of Consumer Education and Outreach at the Attorney 
General's Office and works to protect Oregonians from financial 
scams, including the types of scams and schemes we are talking 
about today. So we are happy to welcome you here as we have the 
others, and we look forward to taking your testimony.

 STATEMENT OF ELLEN M. KLEM, DIRECTOR OF CONSUMER OUTREACH AND 
EDUCATION, OFFICE OF THE ATTORNEY GENERAL, OREGON DEPARTMENT OF 
                       JUSTICE, SALEM, OR

    Ms. Klem. Thank you, Chairman Hatch and Ranking Member 
Wyden. It is an honor to be here today and share my expertise 
and experience with you.
    Every day I hear stories from Oregonians about a wide 
variety of frauds and scams. Lately, these stories have focused 
almost exclusively on the IRS imposter scam. That is because, 
as Senator Wyden mentioned earlier, in 2014 this scam topped 
Oregon's list of consumer complaints. Last year, we received 
more than 1,300, nearly twice the number as the next highest 
category. What is worse, these victims reported losses to us 
totaling more than $75,000, and we know from testimony 
presented here today that that number is just the tip of the 
iceberg. That is why I am here today to tell you the story of 
two of those victims and to talk a little bit about what the 
Oregon Attorney General is doing to prevent this from happening 
to others.
    The first story is that of a woman I will refer to as 
Diane. In August of 2014, she lost $15,000 to an IRS imposter 
scam. This is the largest individual loss reported to the 
Oregon Department of Justice in 2014. Like many other victims, 
she received a message on her answering machine from a man 
claiming to be from the IRS, directing her to call him back at 
a phone number with a 202 area code. She returned the call, and 
the person who answered read her an affidavit for her arrest, 
threatened her with a fine of $25,000, 18 months in prison, and 
told her she would be arrested later that day if she did not 
pay. Diane was terrified. She pleaded, she begged. The scammer 
said he could settle the matter, but only if she paid $15,000 
by purchasing a series of pre-paid money cards. Diane made the 
only choice she thought she had. She complied with the request, 
and she was out $15,000.
    Individuals like Diane who send money to the scammers are 
not the only victims of imposter scams. In September of 2014, I 
was contacted by Marissa Phillips, a small business owner whose 
employee, Linda, had fallen victim to an imposter scam. After 
sending a very small amount of money to the scammers, Linda 
quickly realized she had been had and stopped answering her 
phone. But the scammers kept calling. When it was clear they 
were not going to get a hold of Linda at that phone number, 
they began calling Marissa's small business, a business that 
provides in-home care services for seniors and persons with 
disabilities. When Marissa called me a few days later, she told 
me the scammers had called her business at a rate of 100 phone 
calls per minute for 20 minutes straight, and all of these 
calls prevented her from providing help to those who actually 
needed it, the seniors, their families, hospitals, doctors, and 
other staff. Ultimately, Marissa was forced to change her 
business's phone number and all of its accompanying marketing 
materials.
    Thankfully, not everyone in Oregon who receives a phone 
call from an IRS imposter falls victim to the scam, and I would 
like to think that is because we have been working very hard to 
educate all Oregonians, especially our most vulnerable. The 
Oregon Attorney General has several educational tools aimed at 
scam prevention, because she and I both know that well-informed 
Oregonians are much more likely to recognize fraud and less 
likely to become victims if they are educated.
    We also know that these scams can be very hard to track and 
prosecute. The Oregon Attorney General also has invested in 
strong partnerships with Federal, State, and local governmental 
entities and officials, tribes, community organizations, 
advocacy groups, and members of the media. Through these 
partnerships, we are able to share complaints, coordinate 
investigations, and disseminate information to the public. Our 
partners give us a stronger voice to share information and keep 
Oregonians like Diane, Linda, and Marissa safe.
    This concludes my testimony. Again, thank you, Chairman 
Hatch, and thank you, Senator Wyden, for the opportunity to 
share these stories with you today.
    The Chairman. Well, we want to thank you and all the 
witnesses here today. My gosh, I think a lot of people are 
going to be very surprised at how this is ballooning in our 
country.
    [The prepared statement of Ms. Klem appears in the 
appendix.]
    The Chairman. Let me turn to you, Commissioner Valentine. I 
want to thank you again for coming all the way back here to 
testify in the midst of filing season. I really applaud the 
innovative approaches that you are taking, that you and other 
State commissioners like Commissioner Alley are taking as well, 
to protect our taxpayers and to stop criminals.
    Now, in your testimony, you mentioned that you would like 
to strengthen information sharing between the IRS and the 
States. I would really appreciate it if you would elaborate a 
little bit more on that idea, just to explain what kind of 
information would be useful to you and what information you 
could provide to the IRS that would perhaps be useful to them. 
If you have any suggestions about how the Finance Committee 
could help facilitate the sharing of information, I would also 
like to have you comment on that, if you would care to.
    Mr. Valentine. Thank you, Mr. Chairman. There are actually 
a couple of places that are kind of rub points. Let me say this 
as the background though: we have a great working relationship 
with the IRS, especially the agents we deal with. The 
Memorandum of Understanding that we have with the Service 
allows us to share information. The trouble is, it is not being 
shared in real time. The information is very, very much 
delayed. Sometimes we are not getting the information that we 
could use in a timely fashion to be able to look at the returns 
as they are coming in.
    One of the things that the Senate Finance Committee may 
consider is the idea of moving up the filing deadline for the 
W-2s for employers. As I think Senator Wyden indicated, we have 
a problem. Right now, the W-2s go out to the individuals on the 
31st, but we have a big gap, because the employers do not have 
to have them out until March 31st. So we have a 2-month gap.
    States are under a lot of pressure, as is the Federal 
Government, to make the refunds. This is the people's money; 
they have overpaid it. Yet, we cannot give them the refund 
without knowing for certain that the right person is getting 
the refund. That gap is a big problem for us, and that one 
would help a lot.
    Another one is for the Senate and the House to be able to 
really encourage the IRS to have a more formalized sharing of 
information. I gave you the one example of the 31 returns we 
submitted 6 weeks ago. They should be able to respond pretty 
quickly on something like that. We had identified them as 
fraudulent returns, we confirmed with the taxpayers that the 
returns had not even been filed, and yet we still cannot hear 
back in real time. Those are the kinds of things that I think 
could really help.
    The Chairman. Well, thank you very much.
    Mr. Camus, let me ask you this. I want to thank you and the 
Inspector General as well for all of your efforts to catch 
these criminals and educate the public about these types of 
scams.
    In my opening statement, I showed the video about the Degen 
family. The same criminals who targeted them are likely out 
there at this very minute targeting other Americans. Can you 
pledge to me that your office is doing everything in its power 
to track them down and stop them? Can I have that commitment?
    Mr. Camus. Sir, you more than have that commitment. The men 
and women who work at the Treasury Inspector General for Tax 
Administration are working day and night on this crime, and we 
are partnering with other law enforcement agencies as well. It 
hurts us when these victims are victimized as described here.
    We instruct our agents that when they run into a victim or 
they hear from a victim who has actually lost money, we need to 
spend time with those victims, hear their stories, and attempt 
to get as much information as we can. We have a very 
aggressive, ongoing investigation at this time, and I would 
hope that in the very near future I could come and describe to 
you the successes of that investigation.
    The Chairman. That is great. Another scam that particularly 
worries me is the stolen identity refund fraud. A recent GAO 
report calculated that the IRS paid at least $5.8 billion of 
fraudulent refunds to identified thieves in 2013. Now, this 
type of fraud is usually not detected until the refund has 
already been issued. As a result, the government must attempt 
to recover funds that have already been disbursed to a 
criminal, which is no easy task. It would be better if we could 
detect more of this fraud before payments are made.
    Do you have any suggestions about how TIGTA and the IRS can 
detect this type of fraud earlier and stop fraudulent payments 
from going out the door?
    Mr. Camus. Well, as noted in opening statements by the 
witnesses and the committee members, one of the challenges is 
that criminals are out there watching the Internal Revenue 
Service. They realize that $3.1 trillion goes through the IRS 
on an annual basis, $374 billion in refunds. It is a very ripe 
target for them. So, as the IRS continues to try to advance its 
filters in response to new approaches to the fraud, the 
criminals change, because it is such a lucrative environment.
    Our audit staff continues to look at the filters that the 
IRS has in place and comment and recommend additional or 
improved filters. We have seen improvement in some of them, but 
it continues to be a major challenge to keep up with the 
criminal enterprises.
    The Chairman. Well, thank you.
    Senator Wyden, we will turn to you.
    Senator Wyden. Thank you very much. This has been a superb 
panel, Mr. Chairman. Ms. Klem, thank you for the wonderful work 
that you are doing in our State, particularly for older people. 
I think you know, those are my roots with the Gray Panthers, so 
I am really glad that you are out there on that beat. It is 
incredibly important.
    I want to ask you, Mr. Camus, about this question of the 
foreign governments, because it seems to me--and you mentioned 
it in your testimony--it is clear that the phone scams, a lot 
of them, are originating overseas. It looks to me like this is 
essentially an emerging form of organized crime. You are 
conducting an investigation, and I recognize that there are 
some things you cannot say, but let us talk a little bit about 
some of the things that we ought to be looking at from a policy 
standpoint.
    First, there is the question of whether we ought to be 
initiating efforts in terms of work with foreign governments 
and what they can do to assist with this. The second is, what 
is the appropriate role for local law enforcement, because you 
can go after the money runners who collect the payments. In 
other words, the rip-off artists are overseas, but they are 
going to need money runners to collect the payments.
    So let us start with those two, and there may be other 
opportunities. I know we have strike forces in terms of 
Medicaid, these interagency forces. But tell us a little bit--
nothing that will compromise your investigation--about what we 
can be looking at that will give you more tools to fight 
particularly the rip-off artists who have done so much damage 
from overseas.
    Mr. Camus. Thank you so much for the opportunity. Of 
course, the challenge when we are dealing with these attacks 
being launched offshore is, first of all, getting our hands on 
these people. As you pointed out, Senator, the agreements or 
working relationships we would have with various foreign 
governments can create issues there, and we would ask for help 
with that.
    The problem we are seeing now is that, because there has 
been money paid, we are seeing other spin-offs of this crime. 
So, although we are focused and we think we know where it 
originated to start, we are now starting to see indications 
that other criminals have ripped off the original idea, and now 
they are launching these types of attacks.
    So it continues to be a challenge, but I think we are onto 
something. But it would certainly be something we could use 
some help with on down the road as far as getting our hands on 
a foreign national and bringing him to justice in the United 
States for a white-collar crime.
    Senator Wyden. Without compromising the investigation, can 
you tell us a little bit--you said there were some problems in 
working with the foreign governments. Can you just give us a 
little bit of a sense of what those are?
    Mr. Camus. Well, as you could imagine, in the world today, 
not all foreign governments would feel sorry for the United 
States, with our citizens and the integrity of our financial 
systems suffering these types of scams. It is one of the 
reasons my agency takes this crime so seriously, because it 
impugns the integrity of the Internal Revenue Service. So there 
are those out there who do not feel bad for the United States 
and are not necessarily interested in helping us bring these 
types of criminals to justice, sir.
    Senator Wyden. Let us move on to the Anthem case, because 
this is one that really shows the industrial scale of these 
incredible rip-offs, something like 80 million people affected 
by cyber-ID theft. They are one of the biggest health insurers 
in the country. They have indicated now that 80 million 
Americans may have been hacked, opening the way to misuse of 
this data, certainly in terms of fraudulent health claims, but 
also this criminal enterprise we are talking about today with 
ID theft, including tax fraud.
    I have raised this question with the Inspector General in 
the past. It seems to me that blocking this type of tax fraud 
increasingly is going to fall on the shoulders of tax 
collectors, both the IRS and the States. So I would be 
interested in the panel's recommendations on what else we need 
to do to give you the tools to fight ID theft from cyber-
attacks. So, any of you who would like to get into it----
    I saw all the State officials already nodding their heads. 
Why don't we hear from Indiana first, just to keep things in 
the center. I always like to get to the center before the far 
right and the far left go at it. [Laughter.]
    Commissioner Alley. Thank you, Senator Wyden. Well, in 
fact, anecdotally we are seeing a significant increase in the 
number of valid stolen IDs in Indiana, with Anthem being based 
in Indiana. So we already are seeing the impact of that.
    I think many of the steps that corporations all across the 
country are having to take involve more multi-faceted 
authentication in terms of accessing their systems. I think 
many companies have not invested adequately to prepare 
themselves for that and it will leave them vulnerable, so I 
think that is one key thing that corporate America, and all of 
us even at the governmental level, need to focus on.
    In terms of what we can do as a group, I think it goes back 
to that three-legged stool I spoke about earlier. It is making 
sure that we are sharing those information elements more 
readily and more rapidly. As Commissioner Valentine indicated, 
oftentimes we do get a great deal of information that we share 
with one another, but it is not on a timely basis.
    I would also really like to see the IRS take a greater 
leadership role in terms of driving many of the standards or 
expectations. We have 50 States, and many of them do have 
taxing mechanisms and Departments of Revenue all doing 
disparate things. If we could have the IRS help us to bring 
everybody together to establish a coordinated, collaborated set 
of standards and expectations from our software vendors, from 
financial institutions as well, I think that could do a great 
deal to bring everybody together on the same platform.
    Senator Wyden. My time is up. That sounds too logical, so 
we will have to pursue it. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Senator Thune, your turn.
    Senator Thune. Thank you, Mr. Chairman. Thank you and 
Ranking Member Wyden for holding this important hearing. Thank 
you to our panelists for being here and for their willingness 
to testify.
    I think every taxpayer ought to feel confident knowing that 
their personal tax information is secure when they file it with 
the IRS and that there will not be a false return fraudulently 
filed in their name.
    I think we all know and have seen the devastating impact 
that tax-related identity theft can have on a family's 
financial well-being, so I appreciate the committee's interest 
in the subject, and I hope we are able to move legislation 
forward in Congress.
    One measure for preventing tax-related identity theft that 
has been recommended by a number of commentators is for the IRS 
to verify information from third parties, such as the Social 
Security Administration. I am wondering what your thoughts are 
about how much fraud that would prevent, and are there any 
potential downsides to that approach? I would just throw that 
open to anybody who would like to comment on that.
    Mr. Camus?
    Mr. Camus. Sir, thank you. Our auditors look at that on a 
regular basis, and they are in the middle of doing some audit 
work right now. But generally speaking--and Mr. Valentine 
pointed it out--the fact that the IRS does not have in its 
automated system a W-2, for example, to match at the same time 
the taxpayer files a return, that inhibits their ability to do 
a very simple validity check before issuing a refund.
    There is a great expectation to get the taxpayers a refund 
as soon as possible, because after all it is the taxpayer's 
money. So anything that we can do to increase the timeliness or 
to get the time the taxpayer can start filing their return--
which this year was January 20th--to jive with the time 
theSocial Security Administration has the W-2 information, 
which really is not due until March 31st, I think that would be 
a big help.
    Senator Thune. All right. Does anybody else want to comment 
on that subject, or are there any downsides to that approach?
    Mr. Valentine. I am not aware of the downsides, other than 
the fact that there would be more information being transferred 
and places for it to be leaked out.
    But there are actually three areas that can really affect 
the fraud issues. The one is on the front end, which is the 
authentication issue, which is what you are speaking of. The 
next one is in the discovery phase, which is those transfers of 
information that occur back and forth between the various 
different tax agencies. The third one is the method that you 
use to pay. That is why the suggestions that I made really 
tried to affect all three of those. Any one of those is 
helpful, but you need to approach it, I think, in all three 
areas. If you do that, then you can really have a better chance 
of actually cutting the frauds down.
    Senator Thune. All right. Thank you.
    It has been a number of years since Congress enacted a 
Taxpayers' Bill of Rights. When a taxpayer has a fraudulent 
return filed in his name, is the recourse with the IRS 
sufficient?
    Mr. Camus. Again, our audit staff looks at that: what the 
victim experience is like when they contact the Internal 
Revenue Service, what type of service they get, and what the 
IRS does to help the taxpayer victim. We are continuing to look 
at that and audit and recommend changes or improvements in that 
program.
    Senator Thune. And I was going to say, are there additional 
measures that ought to be considered to make it easier for 
individuals who find themselves in that situation to get the 
assistance that they need?
    Mr. Camus. Of course, it is a very traumatic issue for the 
victim. Anytime anybody's identity has been compromised, they 
are very, very upset. Again, I am not ready to comment on where 
we are and what we are doing, but I do understand from our 
auditors that there has been improvement, and they continue to 
work and look to make that experience better for the victim.
    Mr. Valentine. Senator, I can tell you, in the State of 
Utah we have a Taxpayer Services Division which focuses exactly 
on the issue that you are raising, and that is, when someone 
claims that they have a fraudulent return, they have to have a 
way to be able to process it quickly without having to go 
through the whole State bureaucracy.
    We have done that with our Taxpayer Services Division in a 
quiz letter that we send out to be able to authenticate that 
the person who is calling us is in fact the right person. That 
kind of thing may be something the Service could consider as 
well, to really have a way to expedite a particular complaint 
of identity theft.
    Senator Thune. Just very quickly, there have been recent 
breaches involving TurboTax that have made national news. Is 
there a reason why TurboTax has experienced this but other 
electronic providers of tax service have not? How preventable 
is this?
    Commissioner Alley. I am not so sure that others have not 
also been impacted. I think perhaps we have realized it and 
directly identified the particular breaches that occurred with 
the one vendor--which they have taken additional steps to try 
to mitigate--but I think we are finding in Indiana that it is 
not just TurboTax that has been impacted by this. I think the 
fraudsters are moving. I mean, they move with great agility. As 
they impact one and have success and those doors close, then 
they readily move to another open door. So I think it is a 
systemic issue and really broad across the entire industry, not 
limited to any particular vendor or party.
    Senator Thune. Thank you. Thank you, Mr. Chairman. Thank 
you all very much.
    The Chairman. Senator Warner?
    Senator Warner. Well, thank you, Mr. Chairman. Thank you 
for holding this hearing. We all have stories from our 
constituents. We hear the same kind of stories in Virginia.
    Mr. Chairman, one of the things that I think we could do 
that comes to my attention is--Senator Ron Johnson and I have 
some legislation on this--the IRS currently interprets the law 
as saying that if they find out that you have been the victim 
of identity fraud, they do not even have to tell you as a 
citizen that you are the victim of that fraud. They do not have 
to notify law enforcement. So, on the notion of whether I 
believe they could do it administratively, we have written to 
them.
    Perhaps you and the ranking member writing them might shake 
them up a little bit more. But if we cannot get at it 
administratively, one step that we could take would be making 
sure that the IRS is actually a partner in this effort in 
identification. When it comes to their attention that somebody 
has been a victim of identity theft, we notify the victim and 
law enforcement. I think we see some nods from the panel there. 
Again, the numbers are huge, as you pointed out in your 
testimony: $5.8 billion in 2013.
    A second item that I think we ought to consider is--and 
this is something I have been working on in the Banking 
Committee; I know Senator Carper walked in briefly--some level 
of mandatory data breach reporting. It is a very gray and 
developing area.
    When, particularly on the retail side, we have a data 
breach--we have seen countless indications of data breach, but 
there is no obligation, there is no standard yet, about when a 
company needs to report this information. I think there needs 
to be such a standard.
    One of the things we have urged from the Banking Committee 
side is that--this is an area where there is a lot of finger-
pointing between the retail sector and the financial sector, 
and rather than creating another interchange battle, we should 
try to have the financial sector and the retail sector actually 
collaborate better. I am going to get to a question here.
    It would seem to me as well, and one thing that I would 
like the panel's comments on is, is there not a way, either 
through the IRS or in collaboration with the private providers, 
the TurboTaxes--I agree with the panel's comments that this is 
not just a TurboTax problem, this is not something that can be 
simply solved by governmental entities. We need the private 
sector, which has a very vibrant business, as all.
    Why have we not created a single easy-to-use portal so 
that, for Mrs. Smith or the lady from the story in Utah, there 
is a single place where you can at least check whether this is 
a real claim or not? I mean, do you all want to speak to that 
notion of how we do a better job of consumer education and why 
we have not had the IRS more active in having, perhaps in 
collaboration with State tax departments and others, an easy-
to-find site? And frankly, what would be the responsibility as 
well of the private-sector providers, the TurboTaxes and 
others, to collaborate with that one single portal?
    Mr. Valentine. With the remaining time left, there are two 
issues that you are really raising. One is the notification 
issue, and the second one is, how does the taxpayer easily 
check to see if their return has been filed? Utah actually 
tried to address both of those issues by having a real-time 
notification that we believe your return has been hacked or 
that your return has been filed. We actually tell them.
    Senator Warner. Unlike the IRS.
    Mr. Valentine. We do not have the impediments that the IRS 
has in that regard.
    The second one is that we have an easy system now for 
taxpayers to check whether a return has been filed or not. We 
call it our Taxpayer Access Point or TAP system. You go to our 
Tax Commission website and you fill out the authentication 
issues.
    Once you have done that, you can determine whether your 
return has been filed. So we have been doing public service 
announcements saying, please check to see if your return has 
been filed. If your return has been filed and you have not 
filed it, here is the number to call.
    Senator Warner. Well, would it not be potentially better to 
have some national education process here since, again, the 
disproportionate amount of the fraud is taking place at the 
Federal level rather than the State level?
    Mr. Valentine. I would agree.
    Senator Warner. Commissioner, do you want to----
    Commissioner Alley. Yes, I would agree as well. It is just 
a matter of finding the resources and the funding and getting 
all the players collaborating with one another at the same 
time. But I think it represents an ideal scenario that should 
be played out, and we need to strive toward that. We just have 
to get it started, and we have to have the leadership.
    Senator Warner. I know my time is up, Mr. Chairman, but I 
would simply say that when we are looking at $5.8 billion in 
fraud--the Washington Post says this year we have seen a 37-
fold, 37 times increase in potentially fraudulent claims--the 
ability to have a little bit of resources to have that common 
site, number one, and two, either by administrative change or 
legislative change, making sure the IRS actually informs people 
when they know they have been the victim of identity theft, I 
think would be steps in the right direction.
    Thank you.
    The Chairman. Well, thank you so much, Senator.
    I might add that Senator Grassley is chairman of the 
Judiciary Committee, and he asked that I ask this question of 
you, Mr. Camus, and then we will turn to one of the other 
Senators.
    On behalf of Senator Grassley, the Treasury Inspector 
General for Tax Administration, or TIGTA, has detailed how IRS 
needs to do more to reduce improper payments for the Earned 
Income Tax Credit and the Child Tax Credit. For 2013, about 
$14.5 billion in improper EITC payments were made, and between 
$5.9 billion and $7.1 billion for the Child Tax Credit.
    Now, both of these credits pay cash benefits for exceeding 
any tax paid, making them a prime target for anyone looking to 
engage in tax scams or ID fraud. At the same time, the rules 
governing both these credits are complex, opening them to 
innocent human error.
    So the question is this, Mr. Camus. In your opinion, what 
amount of improper payments would you attribute to fraud versus 
innocent taxpayer error, and do you suspect that at least a 
significant amount of improper payments are the result of 
fraud?
    Mr. Camus. Well, it is clear that the fraudsters, as we 
pointed out today, look for any opportunity whatsoever to get 
at money, and they are ruthless in their attempts. The fact 
that they would use credits that are legally available to folks 
filing tax returns is not a foreign concept. I just do not have 
that information available, but I would be happy to meet with 
my audit staff and try to get a response to Senator Grassley.
    The Chairman. If you would, I would like to have that 
response as well.
    Mr. Camus. Yes, sir.
    The Chairman. Well, thank you.
    Senator Isakson?
    Senator Isakson. Thank you, Mr. Chairman, Ranking Member 
Wyden. I appreciate the opportunity.
    Ms. Klem, last week I returned home to Atlanta from a week 
in Washington, and when I walked in the back door, my wife--
whose name, by the way, is Diane--said, ``You need to listen to 
the voice mail I saved from the telephone this week.''
    It was precisely the call you talked about, where a woman 
with a very convincing voice informed me that the IRS had 
determined I owed them a substantial amount of money and that I 
should call a 202 number as quickly as I could or they would 
file suit next week. Fortunately, being a member of this 
committee, I realized that probably was not true. But the next 
morning, ironically, I was doing a free-file event with the 
director of the IRS in the Atlanta region and gave him the 
telephone number to follow up on.
    When I gave him that number, he said, ``Well, this cannot 
be real, because we do not make any solicitation by telephone; 
every one is in the mail.'' I thought to myself, ``I should 
know that,'' but the American public ought to know that as 
well.
    So it would seem like there would be more ombudsmanship on 
behalf of the IRS, and maybe even the IG or the Treasury, to 
let taxpayers know that there are no enforcements by phone, 
they are all done by mail, because that is a real problem, and 
it was a very convincing phone call.
    Ms. Klem. Yes. Thank you, Senator. It is very common, and 
it is very upsetting when that call comes in. That is precisely 
why this scam is so successful. We do have partnerships on a 
local level with our counterparts at FTC, the IRS, and others, 
and we do share information like this infographic that is in 
front of me right now, which is a really great infographic--I 
am happy to share it with the committee--about the IRS imposter 
scam.
    It says: ``Warning Signs: How Will the IRS First Contact 
You? By Phone? No. Email? No. By Mail? Yes.'' It is very clear 
to see, but this is not widely disseminated, and so we need to 
do a better job of getting that into the hands of the general 
public.
    Senator Isakson. That is the point I wanted to make. If the 
chairman would listen, or Ron Wyden would listen for a second, 
I want to make a point. One of our problems is, we do not have 
a game plan or a point man to get the consumer information out 
there, and that has been said by a number of you. We have a 
department that was created by the administration called the 
Consumer Finance Protection Bureau, which is in the business of 
protecting consumers.
    It would seem like Secretary of Treasury Lew would contact 
Richard Cordray and this would be a perfect way for them to use 
their investigatory and solicitation arm that tries to help 
people who are victims of business fraud, to protect them from 
tax fraud as well. I think that is something that Treasury 
could do.
    Mr. Camus. Yes, sir, Mr. Isakson. As a matter of fact, we 
have touched base with the Consumer Finance Protection Bureau, 
so we are going to include them. The majority of our focus has 
really been with the Federal Trade Commission and the IRS. The 
IRS has been putting out YouTube videos, and I myself have been 
interviewed.
    I will take any television interview that is put in front 
of me, not because I am a ham, but because I believe in my 
heart that if we protect one taxpayer from having these 
horrific stories, that is a good day for us. I am so happy 
about this hearing because I am hoping that this will also help 
get the word out that when you get those calls, please hang up 
the telephone. But I really, really appreciate it, and we are 
trying to work with that bureau.
    Senator Isakson. And I hope Director Cordray will be as 
aggressive on protecting people from tax fraud as he is from 
other frauds in society.
    Ms. Ciraolo, I represent Georgia, where Ft. Benning is 
located. I noticed in your testimony that a member of the 
medical team at Ft. Benning stole the information and 
identification of a number of soldiers at Ft. Benning, and tax 
fraud was perpetrated against them.
    Did you coordinate with the Department of Defense once that 
was determined to try to get the word out to DoD that they need 
to watch out for those who would take advantage of their 
position with the government to steal the identity of our 
soldiers?
    Ms. Ciraolo. Senator Isakson, thank you for that question. 
I joined the Department 2 months ago, so I was not involved in 
those types of discussions. I do not have that information with 
me today, but I can certainly report back on what efforts were 
made with the Department of Defense. We certainly take 
seriously any allegations and efforts by offenders to commit 
these offenses, and we are particularly focused on the 
vulnerable victims of our society, including our military 
members.
    Senator Isakson. Well, as chairman of the Veterans' Affairs 
Committee, I am going to take the initiative to do the same 
thing too, so, if you would do that with DoD leadership, I will 
do it with Veterans' Affairs leadership as well.
    Ms. Ciraolo. Of course.
    Senator Isakson. My last point is this. Each of the State 
Directors made a comment about information sharing, if I am not 
mistaken, and that would be a key to stopping this. One of the 
problems that exist is the U.S. Senate and House have not done 
a cyber-security bill, and, in the pending bill that we hope 
will be before us soon, there are provisions for idea sharing 
and exemptions from the anti-trust laws, so information can 
flow to the government to enforce against tax fraud and things 
of that nature that are used by cyber-security.
    So I would hope we will get the message that we are part of 
the problem. Our cyber-laws are way out of date with our cyber-
criminals, and the quicker we in Congress act on that 
legislation, the more taxpayers will be safe from fraud. That 
is my only editorial comment.
    The Chairman. Well, thank you, Senator.
    Senator Casey, you are next.
    Senator Casey. Mr. Chairman, thanks very much. I appreciate 
the hearing and want to thank the witnesses for your testimony, 
your presence, and your commitment to stopping this crime.
    I am struck by what I have seen in Pennsylvania. I am sure 
this could be replicated in many States, but I am just looking 
at a small sampling of headlines. This is from a television 
station in Erie, way up in the northwest corner of our State. 
The title of the news article about which they were reporting 
was, ``IRS Phone Scams Ramp Up in Erie.'' Then we go to the 
other end of the State, literally, the Lehigh Valley over by 
the eastern border of our State: ``IRS Scam, Widespread in 
Pennsylvania, Reported in Lehigh Valley.'' Then, in my home 
area of northeastern Pennsylvania: ``IRS Phone Scam Reaching 
More in Northeastern Pennsylvania.'' So this is, again, a lot 
of what you have heard and a lot of what you have had direct 
experience with trying to stop.
    I would start with Assistant Attorney General Ciraolo. I 
have a particular question about your assessment of kind of 
where we are in light of what I have seen, and what I am sure 
others have seen. I was in Berks County, which is on the 
eastern side of our State, a number of months ago with the 
District Attorney, John Adams. Mr. Adams was kind of walking 
through some of the basic challenges from a prosecutorial 
standpoint.
    He emphasized, among other things, that the perpetrators 
are, first, highly organized, and two, often reside in 
jurisdictions far away from the victims, and also beyond the 
reach of local authorities. And he even pointed to, as you have 
all seen, I am sure, perpetrators residing in foreign 
countries. So those are among the many challenges that much of 
your testimonies pointed to.
    I do not want to be pessimistic, because I do want to get 
to the part of your testimony where you talk about what has 
been happening with the Justice Department and some of the 
success you have had, but there is, I think, a sense, because 
of the scope and gravity of the problem, that we are not 
winning. I want to just, from a national perspective, ask you, 
how would you assess the war or the battle?
    Ms. Ciraolo. Thank you, Senator Casey. The Tax Division has 
a dual role in these matters. We prosecute the offenders, and, 
in doing so, we hope to change the calculus for would-be 
offenders with the substantial sentences that we are receiving, 
and we are receiving substantial and increasing sentences.
    In addition, we share information we obtain from these 
cases in real time with the IRS which, it is our understanding, 
is working very hard to improve its filters to better identify 
fraudulent returns and to prevent the issuance of fraudulent 
refunds. So that is the Tax Division's role. These cases 
certainly present unique challenges, and we will continue to 
devote our available resources in this area.
    Senator Casey. And I guess I would ask, starting with you 
and going down with your colleague from Treasury and others, 
and I know much of what you might say in the short answer--and 
it has to be short because of the time--is already imbedded in 
your testimony. But if you had to itemize one, two, or three 
action items that we could work on, resources or other tools 
that you need to do your job--and I am sure others who may not 
be in the Federal Government but play a role in this--what do 
you hope we would do by way of authority or authorization or by 
way of appropriation?
    Ms. Ciraolo. Senator, I think that holding hearings like we 
are having today is critical to getting the word out to the 
American public--our elected representatives taking the message 
back to their home States and making sure the information is 
out there as often and as loudly as possible.
    Many of these scams can be stopped if the American public 
is educated, and having a centralized location for that 
information, I think, is a wonderful idea. I am very happy to 
see the representatives here on the panel from across the 
country. It gives me hope that we will see further information 
in the future.
    Senator Casey. Thank you. I would maybe ask each of the 
remaining witnesses to do a 15-second, ``What should Congress 
do?''
    Mr. Camus. I echo what my colleague said. From a standard 
law-enforcement point of view, the scam is so simple. We will 
never be able to prevent somebody from picking up the phone 
claiming to be another person and demanding money. It is public 
awareness at the top of it. When the money dries up, the 
criminals will go away. But getting our hands on them, and 
bringing them to justice in the historic way, is one of the 
things we want to do because we want people to pay for this, 
but it is not a solution to the crime. It is people hanging up 
the telephone and not being victimized.
    Commissioner Alley. The criminals are going to continue to 
be very agile, so, as we close one hole, they will open a new 
one. But I think the greatest thing we can do is to ensure and 
require greater collaboration among all the groups, as well as 
provide some funding to ensure that that collaboration can take 
place.
    Senator Casey. Commissioner, thank you.
    Mr. Valentine. A final comment is that you still have to be 
able to cut off the vector that is used to be able to receive 
the money, and I think the identification of it is something 
Congress can require the financial industry to do, to say, you 
know what? We just have to know that this series is going to be 
a pre-paid debit card. We will not refund it that way, we will 
refund it by a check at that point.
    Senator Casey. Thank you.
    Ms. Klem. And, Senator, I would echo the comments about 
education and raising awareness around the issue. I travel the 
State every day and speak to mostly older adults about this 
fraud, and it is just devastating to hear their stories. 
Frequently after they have shared them with me they say, gosh, 
I wish I had talked to you last week. So, if we can get more 
awareness, more education, more media spotlight, that would be 
great.
    Senator Casey. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Well, thank you.
    Senator Cantwell, you are next.
    Senator Cantwell. Thank you, Mr. Chairman. I would like to 
join my colleagues who have been bringing up these issues about 
identity theft and fraud, but specifically to point out that 
the 111th Congress increased the IRS's responsibility while 
decreasing the funding, so the IRS is now responsible for 
implementing the Foreign Account Tax Compliance Act, and the 
program is in effect for calendar year 2015.
    So, in addition to the additional required legal tasks 
lawmakers will have, the IRS is being urged here--which we 
really want you to do to combat identity theft--to reduce 
errors in Federal tax programs and generally reduce tax fraud. 
So I just think we need to take this into consideration as it 
relates to the budget this year and make sure that the 
resources are there to do this.
    I am concerned that taxpayers will ultimately--we need to 
get a handle on what has been happening with identity theft. It 
was found that the IRS closed 22 percent of the identity theft 
cases without taking the appropriate steps to fully resolve the 
victim's account.
    So, examples include victims not receiving refunds, or IRS 
failing to update the victim's address so they could receive an 
Identity Protection Personal Identification Number. During 
fiscal year 2014, nearly 270,000 identity theft returns of this 
type were closed, so, if that reported rate, 22 percent, is 
accurate, about 60,000 taxpayers were burdened by having their 
cases closed in a premature fashion.
    So what do we need to do to fix that?
    Mr. Camus. That is a job that would fit in our audit 
staff's portfolio. When they look and see how the IRS is doing 
with their identity theft program, one of the things I always 
look at is the victim interface and how the IRS is processing 
the claims and the correspondence. I know that the auditors are 
doing work in that area as we speak.
    Senator Cantwell. But will we have this resolved for this 
tax season so we are not prematurely closing cases?
    Mr. Camus. Unfortunately, it is always in hindsight, in the 
rear view mirror that the audit team looks at the work that was 
done in a particular filing year, because they need to wait 
until the cases are closed before they can look back and see 
how they were handled. So I will share the sentiment.
    Senator Cantwell. Anybody else? Do you, Mr. Alley, or does 
anybody else have any thoughts about this? I mean, we need to 
do something better than to have these taxpayers affected this 
way.
    Commissioner Alley. I agree. I mean, it creates a 
tremendous amount of anxiety among the taxpayers. I mean, we 
also have Taxpayer Administration Services to work with our 
taxpayers who have been compromised with their identities to 
ensure that they receive the comfort and knowledge that their 
return has been properly reflected in their account and 
properly accounted for. We need to do the same thing at all 
levels.
    Senator Cantwell. Well, Mr. Chairman, I know that 
practically every committee has been asked to address the ideas 
of cyber-security and move forward, and I think our committee 
should certainly look at this particular aspect of making sure 
that our tax filers are also secure as well. So, thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Cantwell.
    Senator Wyden has another question.
    Senator Wyden. Thank you, Mr. Chairman. I just did not want 
to wrap up without giving you a chance, Ms. Klem, to talk about 
seniors, because I think we know how outrageous it is that 
seniors get ripped off this way. I mean, we have millions of 
older people in this country who are walking an economic 
tightrope every single day. They balance their food bill 
against their fuel bill, their fuel bill against housing costs.
    They get ripped off this way, and it is not some 
abstraction. They really suffer. So, as we wrap up, I just 
wanted to finish with this. What else do you think this 
committee can do to help beef up the fight to protect seniors 
from these kind of rip-offs?
    Ms. Klem. Senator Wyden, that is a great question. It is 
true that this particular imposter scam disproportionately 
affects vulnerable adults, especially older adults. They are 
home during the day; they answer their phones. That is because 
they grew up in a time where they were taught that it is rude 
not to answer the phone and listen to the caller on the other 
end.
    So I think some of the suggestions we have heard today are 
wonderful, but I am going to keep beating the drum of education 
and awareness. I think that that is really key. I think if we 
can let people know that this is a notoriously awful scam and 
that they should be alert to it and it is not rude to hang up 
the phone, in this particular case, I think that is a wonderful 
educational tool for people, especially older adults. It is 
very tough. I talk to them every day.
    It is going to be a struggle, but I think the more 
information and awareness we can get out there, the better. I 
always tell people who come to my presentations or call me on 
the phone to share their stories with one or two other people, 
because I think that personal story, that personal touch from 
somebody who maybe got that phone call and almost fell victim 
or did fall victim, letting others know, is important.
    Senator Wyden. Thanks for the good work you are doing.
    Ms. Klem. Thank you.
    Senator Wyden. Thank you, Mr. Chairman.
    The Chairman. Well, thank you, Senator.
    Senator Menendez?
    Senator Menendez. Thank you, Mr. Chairman. To all of our 
witnesses, thank you for your testimony.
    As many have noted, identity theft and tax schemes are some 
of the fastest-growing crimes in the United States. Not only do 
the victims, who are disproportionately low-income and 
vulnerable populations, lose millions of dollars to these 
schemes each year, they are also subject to, as Ms. Ciraolo 
noted in her testimony, months, if not years, of overwhelming 
paperwork, credit problems, and inconvenience.
    One constituent of mine, whom I will just refer to as 
Sandra, experienced this nightmare firsthand. She contacted my 
office in March of 2013 to request help in order to restore her 
identity, which had been stolen in 2010. She did not receive 
her tax refunds for 2010, 2011, and 2012 and was getting 
nowhere with the IRS over fixing this situation.
    Finally, after an additional 2 years--2 years--of working 
with her, the IRS, and the Taxpayer Advocate's Office, we were 
finally able to resolve the situation earlier this year. So, 
Mr. Camus, is the IRS doing enough to resolve cases of identity 
theft in a timely manner? Is the 4- to 5-year waiting period 
that Sandra experienced acceptable, in your view?
    Mr. Camus. In my personal view, no, because I am a criminal 
investigator, and I know how horrific that type of an 
experience is for an individual. But I can tell you, based on 
the audit work that I have read done by my agency, that the IRS 
has made great strides in trying to be better, faster, and more 
responsive to the victims.
    One of the things that they put in place was an identity 
theft victim PIN that, in the future years when the taxpayer 
files, they use to help validate their identity. I understand 
they are not always 100-percent on that either, but my 
observation from reading the audit reports that the audit staff 
has done is that they are making great strides and they are 
endeavoring to improve.
    Senator Menendez. What would you say is the status now of 
somebody who finds themselves in a situation like Sandra? What 
would they reasonably expect to be the period of time that 
their issue would be resolved?
    Mr. Camus. My understanding is that it would be much better 
than it was in 2010, 2011, and 2012. But whether or not it is 
up to par----
    Senator Menendez. Four to 5 years was her experience, so 
better is a relative question. What would you say? What is the 
average: a year, 2 years?
    Mr. Camus. Yes, sir. I wish I had that information 
available, but I do not.
    Senator Menendez. Well, I would love to get it from the IRS 
at the end of the day.
    Let me ask this. Commissioner Koskinen testified before 
this committee in February about the issue of unscrupulous tax 
preparers. In responding to a question I raised, he said, ``The 
IRS is very concerned about unscrupulous taxpayers'' and that 
there is ``a percentage who are crooks, and then there are ones 
who are a major part of the problem of fraud across the 
board.''
    Now, I know the IRS tried to regulate paid taxpayers a few 
years ago and was rebuffed by the D.C. Circuit Court of 
Appeals, which argued Congress has not explicitly authorized 
such legislation. I personally find it exceedingly strange and 
inappropriate that many States require hair barbers to have a 
license, but someone filing very complicated tax returns does 
not need a license.
    So, Mr. Camus, how critical is it for the IRS to be able to 
regulate tax preparers, and would doing so reduce the amount of 
fraud and identity theft?
    Mr. Camus. I think it is critically important for anybody 
who does such an important job in such an important area as tax 
administration, that there is training available and they are 
held accountable and there are standards that have to be met.
    I know we work closely with our partners in IRS Criminal 
Investigation and the Department of Justice Tax Division, when 
we come across an unscrupulous tax preparer, to bring them to 
justice. I think it is critically important that those 
individuals whom elderly folks and other people trust and 
depend on to file very complicated forms--because they do not 
understand--do not become victimized by the very people whom 
they trust.
    Senator Menendez. Well, let me ask you this. Can you or Ms. 
Ciraolo quantify for me in any way how much fraud is related to 
unscrupulous tax preparers?
    Ms. Ciraolo. Senator, we share your concerns with respect 
to fraudulent tax preparers and believe that the U.S. taxpayers 
who engage a preparer should be able to trust that person to be 
competent and qualified to prepare the returns and to prepare 
an honest and accurate return. In the last year alone, the Tax 
Division has obtained injunctions against more than 40 
fraudulent preparers and promoters and will continue to 
prosecute those individuals who willfully assist in the 
preparation of fraudulent returns.
    Senator Menendez. So do you have any idea how many tax 
preparers--this is my final question, Mr. Chairman--how many 
tax preparers there are?
    Ms. Ciraolo. Senator, I do not have that information in 
front of me today.
    Senator Menendez. Is that number based on complaints, or is 
it based on the 40 that you--it sounds like a small number 
compared to the universe of preparers that I would assume are 
out there. So is that based on complaints, or is that based on 
the Service's own investigations?
    Ms. Ciraolo. The Tax Division works with the Internal 
Revenue Service in identifying fraudulent preparers, and, based 
on the evidence that we have received, we follow that evidence 
where it leads and pursue injunctions, where appropriate, 
against preparers.
    Senator Menendez. Do you have a number of complaints filed 
with you?
    Ms. Ciraolo. I can tell you that, since 2000, we have filed 
over 500 injunctions against fraudulent preparers.
    Senator Menendez. All right. Thank you, Mr. Chairman.
    The Chairman. Well, thank you, Senator.
    I want to thank all our witnesses for appearing here today. 
I also want to thank all the Senators who participated. I think 
this has been a very good hearing, and hopefully we can move on 
from here.
    Any questions for the record should be submitted no later 
than Thursday, March 19th. This hearing will be adjourned at 
this point. Thanks so much. Thanks to all of you. We really 
appreciate it.
    [Whereupon, at 11:30 a.m., the hearing was concluded.]

                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


         Prepared Statement of Hon. Mike Alley, Commissioner, 
                     Indiana Department of Revenue
                              introduction
    Chairman Hatch, Ranking Member Wyden, and committee members, thank 
you for inviting me to discuss this important topic with you today. 
Senator Coats, thank you for that kind introduction. On behalf of 
Governor Mike Pence and the citizens of Indiana, it is my honor to 
appear before you today to address this critical issue that faces 
everyone in the tax and revenue processing industry.

    You have asked me to discuss Tax Schemes and Scams During the 2015 
Filing Season. Specifically, I would like to illuminate the identity 
theft and tax refund fraud experiences of Indiana over the last two 
years and note the extent of this challenge facing all government 
entities in today's environment. And I can tell you from first-hand 
experience that this is a problem that must be addressed at multiple 
levels. This morning I would like to address this issue from three 
perspectives:

    First: The nature of the problem and its overall breadth.

    Second: Steps Indiana has taken in an effort to combat the problem 
        and lessons we have learned.

    Third: Recommendations from our perspective on additional 
        approaches we must take to more fully and effectively address 
        this epidemic issue nationwide.
                       the nature of the problem
    Tax refund fraud is one of several lucrative platforms for 
criminals to monetize the value of stolen identity information. It is 
being perpetrated by thousands of culprits from the small time 
individual fraudster to large, sophisticated criminal enterprises. In 
the past, it has been very easy with negligible risk of apprehension or 
prosecution. The advent of electronic filing and processing has 
enhanced the ability of criminals to utilize economies of scale in 
filing large volumes of fraudulent returns, at a nominal cost, 
replicating numerous returns with only minor changes in original 
identity information. The zeal of departments of revenue to speed up 
the processing of returns and reducing turn-around time for refunds--
all in the spirit of good customer service--also has contributed to the 
problem making it easier for criminals to take advantage of the system. 
Our systems were designed to process rapidly and efficiently--not to 
screen for fraud and fabricated identities.

    The Identity Theft Resource Center,\1\ in their 2014 Annual Report, 
created a diagram that effectively illustrates the interrelationship of 
the criminal activity and our oftentimes disjointed responses. We must 
develop a coordinated effort to battle ID theft and mitigate the risks 
of misuse.
---------------------------------------------------------------------------
    \1\ http://www.idtheftcenter.org/images/page-docs/
2014AnnualReport20150227.pdf.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    In calendar year 2014, twelve percent of the total tax refund 
dollars requested from Indiana was found to be fraudulent. We 
identified more than 78,000 fraudulent tax returns filed using 
manufactured or stolen identities, and prevented more than $88 million 
in fraudulent refunds from being issued. This mirrors similar 
statistical reports from the U.S. Government Accountability Office that 
reports the IRS lost an estimated $5.8 billion to fraudulent refund 
claims in 2013 while blocking about $24 billion in attempts. They 
further reported that suspected identity theft incidents for 2013 were 
nearly 2 million, an increase of more than 350% from 2010. We hear 
anecdotally from other states that they also are experiencing 
---------------------------------------------------------------------------
comparable fraudulent activity.

    Though early in the 2015 filing season, we are already seeing a 
dramatic increase in the use of valid identities which have been 
stolen. With the advent of reported successful hacks at many large U.S. 
companies, we believe the availability of valid stolen identities for 
tax fraudsters has never been greater. This is particularly concerning 
because stopping fraud with valid identity information is much more 
difficult than screening for manufactured identities which was the most 
common practice of fraudsters in the past. The fraudsters have upped 
their game and we must respond accordingly.
                     what are we doing in indiana?
    In Indiana, we knew we were suffering some tax fraud based on 
identity theft, but we did not have a reliable method to calculate the 
actual impact. In 2012, we began conducting research and analysis of 
our processes and statistical filing results. We noted that it appeared 
Indiana was processing more returns and paying out more money in tax 
refunds than seemed reasonable based on our estimated population 
growth. Figure 1 (Return Growth) illustrates the growth of our total 
returns (Red Line) compared to our total refund returns (Blue Line). 
The green bars show our overall electronic filing percentage. The 
growth of two hundred thousand taxpayers in a just a couple of years 
strained credibility, so we looked for other reasons why we would be 
getting so many more tax returns.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Our analysis determined that identity theft and refund fraud was 
the most likely explanation for the accelerated growth in returns and 
refund requests. Once we identified these phenomena, we brought key 
staff together and worked with the office of Governor Pence and our 
General Assembly to develop a strategy to define elements of an 
effective identity fraud program for the Indiana Department of Revenue.

    Key objectives of our approach were:

        1.  Ensure that we do not mistreat legitimate taxpayers because 
        of a small number of dishonest individuals.

        2.  Protect taxpayer dollars and taxpayer identities.

        3.  Protect state revenues from issuance of fraudulent refunds.

        4.  Identify the criminals for deterrence efforts.

        5.  Ensure fraudulent dollars do not affect our revenue based 
        distributions and financial reporting.

    These became the guidelines that our identity protection team would 
follow. We knew that we needed to make significant systemic 
modifications and we needed to do it before the next tax season. Staff 
reached out to our fellow states through the Federation of Tax 
Administrators (FTA) and our partners at the IRS to see if there were 
ideas that we could borrow and implement.

    The response was very supportive and we were welcomed to view, 
visit, and exchange ideas with our counterparts across the United 
States. Many of them had partial solutions or had tried to implement 
incremental improvements. The time we spent working with other states 
confirmed that Indiana was less prepared and needed to catch up. On the 
positive side, we discovered that there were ready-made commercial 
solutions that we could bring to Indiana that could have a major impact 
in a short period of time.

    Governor Pence reviewed the data we provided and the potential 
solutions the department suggested. With his support, we initiated a 
pilot program to screen all returns for suspicious identities. The 
program used LexisNexis, a third party commercial vendor, to screen the 
returns and note identity information such as name, address, social 
security number, or other identifier information that appeared 
suspicious. Processing of those returns screened as suspicious was 
suspended and an identity confirmation quiz request was sent to the 
taxpayer at their filing address. Taxpayers were asked to confirm their 
identities by completing a short quiz. They could log into a secure 
website or could call our call center where we had dedicated analysts 
to handle their quiz. As a result of implementing this pilot effort the 
department expected to directly reduce fraudulent refunds by $25 
million with an investment of $8 million in staffing and technology. 
Our actual results confirmed more than $88 million of attempted refund 
fraud identified and stopped with $42 million attributable directly to 
this identity screening tool.

    The identity confirmation quiz is very powerful and made a 
significant difference. But it is not a panacea. It is only part of a 
larger process to strategically focus on identity theft and refund 
fraud which encompassed additional talent, new procedures, and new IT 
systems. We made it clear in the beginning that the department would 
need to make systematic changes. We took the following steps:

        1.  Procured an identity confirmation vendor (LexisNexis)

        2.  Hired additional staff

        3.  Conducted a public relations campaign

        4.  Made agreements with software vendors to begin setting 
        standards

        5.  Began modernizing infrastructure to specifically confirm 
        identity information and recognize fraud trends

    Figure 2 (2014 Indiana Fraud by Source) demonstrates that we 
stopped more than $88 million in fraudulent refunds being paid to 
manufactured or stolen identities in the pilot year alone (2014). The 
identity screening via the identity confirmation quiz was the simplest 
fraud to stop and we took advantage of that simple process to 
concentrate on the more sophisticated fraud schemes using our enhanced 
professional analysts and early analytics.


------------------------------------------------------------------------
   Source       # of Returns     Description      Total Refunds Stopped
------------------------------------------------------------------------
Analyst               34,300   Investigation                $45,642,625
 Review                         and decision
                                by trained
                                fraud
                                prevention
                                staff
------------------------------------------------------------------------
Identity              43,918   No response to               $42,426,289
 Confirmatio                    Identity
 n Quiz                         Confirmation
                                Quiz
                                notifications
------------------------------------------------------------------------
    Calendar                                                $88,068,914
     Year
     2014
     Total
------------------------------------------------------------------------

                 Figure 2: Indiana 2014 Fraud by Source

    In one sense, the $88 million was gratifying--but it was also 
astonishing. The problem was much larger than we had anticipated. The 
end-of-year fraud statistics were interesting as well. Almost four 
percent of returns we processed in 2014 were identity fraud. A 
surprising data point was that these 78,000 returns represented 12% of 
the value of all refund requests. While this was higher than expected, 
it makes sense when we consider that the fraudsters are attempting to 
maximize their profitability. We also identified that Indiana paid out 
$4 million in identity fraud refunds that we later identified as 
fraudulent but were unable to stop. Some fraud gets through before we 
can identify a new pattern and react. This illustrates that our efforts 
to identify and stop refund fraud must continue.

    We could not have achieved these positive results without 
additional resources and multiple components to our identity theft and 
refund fraud program, including an $8 million augmentation to the 
department's budget. Indiana added 15 call center people to assist our 
taxpayers with the identity confirmation quiz. We also added eight 
additional fraud analyst positions, a prosecutor with fraud experience, 
a public relations professional, and information technology 
professionals.

    Our public relations campaign was critical to our success in 
educating citizens, rallying market professionals, and explaining the 
outcomes to stakeholders and media. This allowed us to alert our 
taxpayers that protecting their identities was a priority for us and 
though it might slow down the refund process slightly, it would better 
ensure protection of their identities and avoid a strain on state 
finances. Further, it provided assurance that if they should receive an 
identity confirmation quiz, it was legitimate and no cause for alarm.

    One quiet, but crucial, key to our success was gaining more control 
of the interfaces and behavior of our software vendor partners. During 
the 2014 filing season, we began tracking fraudulent returns submitted 
by each software vendor. As the Fraud by Software Vendor Table (Figure 
3) clearly demonstrates, there was a large variability among software 
vendors of the incidence of fraud. The data shows that some vendors are 
taking fraud seriously and implementing protective screening while some 
are either unaware of, or unable to stop fraud. A few vendors claimed 
that they were not responsible for doing any fraud prevention at all.


----------------------------------------------------------------------------------------------------------------
                                                                              Fraud by requested  refund amount
                                         Fraud by Refund Return  Count (%)                   (%)
----------------------------------------------------------------------------------------------------------------
Highest                                                                92%                                85.0%
----------------------------------------------------------------------------------------------------------------
Average                                                              22.3%                                11.0%
----------------------------------------------------------------------------------------------------------------
Median                                                                  6%                                   2%
----------------------------------------------------------------------------------------------------------------
Mode                                                                    1%                                   1%
----------------------------------------------------------------------------------------------------------------
Lowest                                                                  1%                                   0%
----------------------------------------------------------------------------------------------------------------

                   Figure 3: Fraud by Software Vendor

    As a result, in 2015 Indiana required that all software vendors 
wishing to be certified to file Indiana returns sign agreements with 
the state. The agreements made it clear to vendors that they would be 
monitored for the fraud they sent along to Indiana. Software vendors 
that experienced excessive fraud in 2014 were not certified unless they 
provided evidence of increased fraud screening on their part. We 
concluded that there is no reason to maintain a business relationship 
with a vendor that is not playing their part in fraud prevention.

    For the 2015 filing season, we have continued to make significant 
enhancements to our identity theft and refund fraud program. We 
continue to use the identity theft screening tool contracted with 
LexisNexis with enhanced elements based upon lessons learned. In 
addition, we have implemented a new pre-filter processing platform that 
provides us the ability to run all of our individual returns through an 
extensive screening prior to being processed in our normal returns 
processing system. This pre-filter process includes a decision matrix 
toolset which allows us to establish multiple filter parameters to 
detect fraudulent returns and unusual activity. This provides 
dramatically enhanced agility and adaptability during the filing season 
as we experience various patterns or learn of new issues so that 
processing rules and parameters can be easily adjusted. This pre-filter 
platform was built with the assistance of Revenue Solutions, Inc. 
(RSI), a third party vendor specializing in tax processing.
                            lessons learned
    We are still early in battling this problem but the following early 
lessons are apparent:
         1.  Strategic priority: identity theft and refund fraud have 
        escalated dramatically over the last two years and in order to 
        effectively combat the problem, it must be a strategic 
        priority. This demands making a fiscal investment in 
        leadership, staff, technology, and third party resources. 
        Priority support must be in place from the top down. Governor 
        Pence has consistently supported our efforts to combat identity 
        theft and refund fraud, which has been crucial in our ability 
        to continue to invest in and improve our program.

         2.  Collaboration: no one has all of the answers. The 
        perpetrators are sophisticated and agile, moving from one 
        vulnerability to the next. Sharing data, best practices, and 
        experiences among revenue agencies, both state and federal, 
        along with software vendors and support vendors is critical. 
        The Federation of Tax Administrators (FTA) has actively assumed 
        a key role as facilitator but must be strongly supported by all 
        parties involved.

         3.  Taxpayer Support: Taxpayers are willing to be part of the 
        solution if they understand what you're trying to achieve. We 
        received minimal resistance to the identity confirmation quiz. 
        However, communicating in advance that this is a valid tool and 
        not another scam is critical.

         4.  Targeted Solutions: There are many types of fraud, 
        fraudsters, and different means for filing returns. It is 
        important to understand the intricacies so that targeted 
        solutions can be developed and applied. We can no longer review 
        returns individually but must identify broad traits so that we 
        can systemically identify suspicious activity and address it 
        collectively. In the past, we treated all fraud the same which 
        is neither efficient nor necessary.

         5.  Prepaid Debit Cards: Use of prepaid debit cards is the 
        preferred tool of fraudsters in receiving their refunds. They 
        can be purchased with virtually no identification or 
        registration and are readily transferable from the card to gift 
        cards, bank accounts, other debit cards, or even to purchase 
        goods and services.

         6.  Fraudsters Hide: Sophisticated fraudsters use stolen or 
        invalid identities to open bank accounts, transfer money, and 
        further insulate themselves from the refund once it is 
        received. This makes it even more difficult to apprehend and 
        prosecute the culprits.

         7.  Manufactured Identity: A ``Manufactured Identity'' is one 
        where the fraudsters have simply filled out federal or state 
        returns with completely made up identities and tax data. They 
        may use celebrity names or obscure names with bogus addresses 
        and social security numbers and have the refund deposited to a 
        prepaid debit card that requires virtually no purchaser 
        identification. These are often being perpetrated by relatively 
        unsophisticated fraudsters and rely upon tax software vendors 
        that allow filing fees to be deducted from the refund itself 
        thus requiring no cash outlay in advance. Fortunately, our 
        LexisNexis identity confirmation tool is very effective at 
        identifying these fraudulent attempts as the identity 
        information does not match to valid external information.

         8.  Unlinked Return: An ``Unlinked Return'' is one that does 
        not have a federal tax return associated with it and is filed 
        directly with a state bypassing many of the IRS fraud 
        safeguards. This unlinked return process is also used by 
        fraudsters to file in multiple states rather than simply one 
        using the same fraudulent identity. Though it is possible to 
        have a valid unlinked return, the rate of fraud is very high 
        and requires additional review.

         9.  Synthetic Identity: A ``Synthetic Identity'' is one which 
        has been amalgamated from existing identity information such as 
        children or deceased relatives and contains enough valid 
        identity information to appear to be a valid identity.

        10.  Stolen Identity: A ``Stolen Identity'' is one where the 
        fraudsters have obtained valid taxpayer information comprised 
        of names, addresses, social security numbers, and sometimes 
        even dependents, from real taxpayers. These culprits then seek 
        to gain fraudulent refunds in two ways. First, they file a 
        federal return early in the filing season before the real 
        taxpayer submits their valid return. Second, they file directly 
        with a state, or multiple states, that is usually not where the 
        valid taxpayer is actually located.
              the ultimate approach to combat this problem
    In order to effectively overcome the problem of identity theft and 
refund fraud, all parties involved must work collaboratively. We must 
develop cross-functional teams with significant coordination among the 
three key players in our tax system. Consider the Three Legged Stool 
concept depicted in Figure 4 which notes that the states, the IRS, and 
software vendors each represent an important leg of the stool. Each has 
unique data, perspectives, and capabilities that the system as a whole 
requires in order to make better decisions.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    The ``three legged stool'' concept allows each leg to execute 
appropriate roles within our present tax system resulting in an 
effective and collective solution.

    Indiana believes that our partners at the IRS are in the best 
position to centrally manage the highly sophisticated fraud. The IRS 
can help the states define the expected behavior of the software 
vendors which could include security requirements, potential fraud 
reporting, and corrective behavior for vendorsnot operating according 
to the systematic norm. The central location in this process also makes 
the IRS a better place to accomplish analytics to identify multi-state 
fraud patterns, manage a shared database, correlate with other data 
sets (Social Security Administration and others), and coordinate 
national and international enforcement efforts. Without data driven 
prosecution and enforcement, the culprits face little risk in 
continuing to conduct this sort of activity.

    States must also work collaboratively with one another to develop 
and share effective analytics, algorithms, and best practices. The 
Federation of Tax Administrators (FTA) has convened a Fraud Working 
Group comprised of multiple states, including Indiana, that have 
already made a significant commitment to developing taxpayer 
identification validation standards and consistent communication and 
monitoring mechanisms to ensure that uniform data elements can be 
captured and shared. Their intent is to establish uniform practical 
measures that the software vendor industry can support and that will be 
applied consistently, avoiding disparate rule sets and expectations 
from each state. This will enhance the likelihood of industry 
compliance. The FTA has also positioned itself as a facilitator and 
clearinghouse for the states as well as the IRS in sharing best 
practices and innovations. They can be very effective in helping 
communicate with members the importance of identity theft and refund 
fraud prevention programs and the positive economic impact it will 
have. States must recognize this value and be willing to commit the 
necessary resources.

    Software vendors must be responsive to the IRS and states as they 
learn more about the methods used by fraudsters. We have already 
learned that account access must be protected with multi-factor 
authentication. However, software vendors also have multiple other data 
sources and analytics which they must be willing to use to stop fraud 
from inception. Further, as their intelligence increases, they must be 
willing to share that intelligence with states and the IRS as their 
partners.
                               conclusion
    In conclusion, I would like to emphasize the following points:

    First, identity theft and refund fraud is an epidemic problem and 
growing rapidly. It currently represents one of the easiest means 
available for fraudsters to monetize stolen identity information. We 
are all aware of the increased vulnerability we face for protection of 
identity information.

    Second, collaboration and information sharing among the IRS, state 
departments of revenue, and tax processing and software vendors is 
essential. Strengthening of the ``three legged stool'' by tax 
processing partners will allow us to more effectively combat identity 
theft and refund fraud through enhanced analytics, sharing of 
information, and implementation of best practices. This sharing and 
collaboration must be in real time, not days or weeks down the road. 
Delays in digesting new information or implementing good ideas leaves 
the window of vulnerability open longer for fraudsters to enter.

    Third, investment in identity theft and refund fraud prevention 
tools will provide a strong return on investment. In 2014, Indiana 
realized greater than a 10 times return on investment based upon 
fraudulent refunds stopped compared to actual program costs. I 
encourage states as well as the federal government to make our battle 
against identity theft and refund fraud a strategic priority. This also 
means backing that priority with necessary funding to move the dial. 
I'm confident it will provide a significant return on investment and 
also protect our citizens.

    On behalf of Governor Mike Pence and the citizens of Indiana, I 
thank you for your time today. I appreciate the committee's willingness 
to examine this issue and we in Indiana stand ready to assist and 
participate in a comprehensive solution.

                                 ______
                                 
 Prepared Statement of Timothy P. Camus, Deputy Inspector General for 
  Investigations, Treasury Inspector General for Tax Administration, 
                       Department of the Treasury
    Chairman Hatch, Ranking Member Wyden, and Members of the Committee, 
thank you for the opportunity to testify on the topic of Tax Schemes 
and Scams during the 2015 filing season.

    I also want to thank you for holding a hearing on this topic, for 
by doing so, you are bringing attention to these schemes and scams, and 
thereby alerting your constituents and others across the country to 
their existence. By raising public awareness about such efforts to 
swindle people out of their money, we may prevent the next person from 
becoming a victim. And if we protect even one taxpayer from this type 
of theft, we have done a very good thing.

    The Treasury Inspector General for Tax Administration, also known 
as ``TIGTA,'' is statutorily mandated to provide independent audit and 
investigative services necessary to protect the integrity of Federal 
tax administration as well as to improve the economy, efficiency, and 
effectiveness of Internal Revenue Service (IRS) operations. TIGTA's 
role is critical in that we provide the American taxpayer with 
assurance that the approximately 91,000 IRS employees, who collected 
over $3.1 trillion in tax revenue, processed over 242 million tax 
returns and other forms, and issued $374 billion in tax refunds during 
Fiscal Year (FY) 2014, did so with the highest degree of integrity and 
in an effective and efficient manner while minimizing the risks of 
waste, fraud, or abuse. This includes investigating individuals who use 
the IRS as a means of furthering fraudulent, criminal activity that 
could call into question the integrity of the IRS, as well as 
investigating allegations of serious misconduct by IRS employees and 
investigating threats of violence against the IRS, its employees, and 
facilities. Over the past year, a significant part of our workload has 
been devoted to investigating scams that can negatively impact the 
integrity of tax administration.

    Tax scams are nothing new. For at least the last decade, the IRS 
has provided the public with information about what it sees as the 
``Dirty Dozen'' tax scams on its website. These scams range from 
offshore tax avoidance to fake charities and inflated refund claims. 
Compiled annually, the ``Dirty Dozen'' lists a variety of common scams 
that taxpayers may encounter. However, many of these scams peak during 
the filing season as people prepare their returns or utilize the 
services of paid preparers.

    The 2015 filing season has unfortunately brought more of the same. 
However, there are two tax scams in particular that are among the most 
pernicious and dangerous. They have proven to be surprisingly effective 
and fast ways to steal taxpayers' money, and in this fast-paced 
electronic environment, the money can be gone before the victims ever 
realize they have been scammed.
                        phone impersonation scam
    The phone impersonation scam has proven to be so large that it is 
one of my agency's top priorities, and it has also landed at the top of 
the IRS's ``Dirty Dozen'' tax scams this year. The number of complaints 
we have received about this scam make it the largest, most pervasive 
impersonation scam in the history of our agency. It has claimed 
thousands of victims, including victims in every State represented on 
this committee, with reported losses totaling more than $15.5 million 
dollars to date. Here is how it works:

    The intended victim receives an unsolicited telephone call from a 
person claiming to be an IRS agent. The caller, using a fake name, 
tells the victim their ``badge number,'' and claims that they owe taxes 
and are criminally liable for an amount owed. The callers may even know 
the last four digits of the victim's Social Security Number (SSN). They 
then threaten the victim by stating that if they fail to pay the amount 
immediately, the victim will be arrested, a suit will be filed, or some 
other form of adverse official action will be taken. These actions have 
been reported to include loss of a driver's license, deportation, or 
loss of a business license. They often leave ``urgent'' callback 
requests and call multiple times. Although these callers initially 
preyed on the most vulnerable people, such as the elderly, newly 
arrived immigrants and those whose first language is not English, they 
have expanded their scam to people from every walk of life. The 
continued number of people receiving these unsolicited calls from 
individuals who fraudulently claim to represent the IRS is alarming.

    We first started seeing concentrated reporting of these calls in 
August, 2013. As the reporting continued through the fall, in October 
2013, we started to specifically track this crime. To date, we have 
received hundreds of thousands of complaints about these calls. 
According to the victims, the scam artists made the threatening 
statements as described above, and then demanded that the victims 
immediately put money on prepaid debit cards in order to avoid being 
immediately arrested. The callers often warned the victims that if they 
hung up, local police would come to their homes to arrest them. The 
scammer may also send bogus IRS e-mails to support their scam. Those 
who fell for the scam withdrew thousands of dollars from their bank 
accounts and then purchased the prepaid debit cards as instructed by 
the callers. Once the prepaid debit cards were purchased, the criminals 
instructed the victims to call them back and to read the numbers off of 
the prepaid card. By the time the victims realized they had been 
scammed, the criminals had negotiated the prepaid cards and the money 
was long gone.

    One particularly sad story was shared with TIGTA by a member of 
this Committee in a letter written on behalf of a constituent regarding 
the tragic death of the constituent's father as a result of receiving 
several threatening calls from a scammer claiming to be from the IRS 
and demanding money. This scam has cost thousands of taxpayers millions 
of dollars, but to my knowledge, this may be the most heartbreaking 
result. TIGTA continues to work with the IRS to strengthen its efforts 
to crack down on this type of abuse and try to prevent other vulnerable 
individuals from being victimized by this kind of fraud.

    To date, TIGTA has received over 366,000 reports of these calls. We 
receive between 9,000 and 12,000 reports of these calls each week. As 
of March 9, 2015, 3,052 individuals have been victimized by this scam 
by paying a total of $15.5 million, averaging over $5,000 per victim. 
The highest reported loss by one individual was over $500,000. In 
addition, 296 of these victims also provided sensitive identity 
information to these scammers. The scam has claimed victims in almost 
every State in the country. For example, taxpayers in Utah have lost 
more than $276,000 to this scam, and taxpayers in Oregon have lost more 
than $180,000. As of February 28, 2015, the top five States for total 
dollar losses by victims are California ($3,840,000), New York 
($1,352,732), Texas ($795,884), Florida ($760,000), and Virginia 
($648,363).

    The criminals do not discriminate; they are calling people 
everywhere, of all income levels and backgrounds. In fact, I myself 
received one of these calls on my home telephone on a Saturday, and you 
may also have received a call or know of a family member or constituent 
who has received one as well. Based on reviewing the complaints we have 
received, we believe the calls are now being placed from more than one 
source. This scam is the subject of an ongoing multi-agency 
investigation. For this reason, there is much that we are doing to 
apprehend the perpetrators, but I am not at liberty to disclose 
specifically what is being done as it may impede our ability to 
successfully bring these criminals to justice. I can tell you it is a 
matter of high priority for law enforcement. As I told the individual 
who called me on my home phone, ``your day will come.''

    In the meantime, we are investigating some of the individuals who 
process the money, and most recently we arrested two individuals 
associated with this type of scam. The two individuals were arrested 
and prosecuted for their role in converting the prepaid money cards. 
When interviewed, one of the defendants estimated she had used prepaid 
debit cards to purchase approximately $5,000 in money orders per day, 
six days a week, since November 2013, or roughly $900,000 in money 
order purchases between November 2013 and July 2014.\1\ In another 
case, in March 2014, an individual was indicted for using an 
impersonation scam. More specifically, he was indicted for extortion, 
false impersonation, and fraud.\2\
---------------------------------------------------------------------------
    \1\ S.D. Fla. Crim. Compl. filed Sept. 5, 2014.
    \2\ S.D.N.Y. Indict. filed Mar. 6, 2014.

    However, there is much more that needs to be done, as these three 
examples are part of a broader ring of scam artists operating beyond 
our borders. This is unfortunately similar to most of the cybercrime we 
are seeing today--it is international in nature and committed using 
technology, e.g., in the case of the phone fraud scam, the use of Voice 
over Internet Protocol technology, and much of it originates from a 
computer outside of the United States. To further deceive their 
intended victims, by using this technology, the criminals create false 
telephone numbers that show up on the victim's caller ID system. For 
example, the criminals make it appear as though the calls are 
---------------------------------------------------------------------------
originating from Washington, D.C., or elsewhere in the United States.

    I am also concerned that these criminals and their copycats, like 
the bank robbers of old, will go where the money is, and will keep 
using this scam as long as people fall victim to it. For example, we 
have noted an increasing number of recent reports that the calls are 
coming in using robo-call technology. When the robo-calls are used, the 
scammers leave messages demanding that the victim immediately call back 
a telephone number and speak to a representative. Although the robo-
calls are a different approach, the outcome is the same: once the 
criminal gets the victim on the phone, they demand immediate payment 
and threaten the victim with arrest for failing to comply with their 
demands.

    Accordingly, we are reaching out aggressively by granting media 
interviews with all the major networks, and issuing warnings and 
multiple press releases to the media in conjunction with the IRS and 
the Federal Trade Commission (FTC), as well as providing this testimony 
to your Committee. Our message is simple: If someone calls unexpectedly 
claiming to be from the IRS with aggressive threats if you do not pay 
immediately, it is a scam artist calling. The IRS does not initiate 
contact with taxpayers by telephone. If you do owe money to the IRS, 
chances are you have already received some form of a notice or 
correspondence from the IRS in your mailbox.

    To recap, the IRS will never:

    Call to demand immediate payment, nor will the IRS call about 
        taxes owed without first having mailed you a notice;
    Demand that you pay taxes without giving you the opportunity to 
        question or appeal the amount they say you owe;
    Require you to use a specific payment method for your taxes, such 
        as a prepaid debit card;
    Ask for credit or debit card numbers over the phone; and
    Threaten to bring in local police or other law enforcement groups 
        to have you arrested for not paying.

    Remember, also, the IRS does not initially use e-mail, text 
messages, or any social media to discuss your personal tax issue 
involving taxes owed or refunds. For more information on reporting tax 
scams, go to www.irs.gov and type ``scam'' in the search box. If you 
have been targeted by this scam, report the incident to TIGTA at 
www.tigta.gov by clicking on the IRS Impersonation Scam Reporting tab 
in the upper right corner, or call the TIGTA hotline at 1-800-366-4484. 
In addition, contact the FTC and use their ``FTC Complaint Assistant'' 
at www.ftc.gov. Please add ``IRS Telephone Scam'' to the comments of 
your complaint. If you know you owe taxes or think you might owe, call 
the IRS at 1-800-829-1040. They can help you with a payment issue.
                            lottery winnings
    The lottery winnings scam we are seeing this filing season is a 
continuation of an older scam. It starts with an e-mail or telephone 
call stating that you have won the lottery and in order to collect the 
winnings, you need to send money to prepay the tax to the IRS. The 
lottery scam often, but not always, originates from outside of the 
United States, and continues because it capitalizes on a very common 
dream; getting rich quick and hitting the jackpot.

    In one of the largest cases of this type, an individual and his co-
conspirators operated a scheme to defraud numerous individuals through 
Internet solicitations, stealing more than $1 million as well as the 
identities of the victims. The criminals obtained and used massive e-
mail distribution lists containing thousands of e-mail addresses to 
send unsolicited e-mails falsely informing victims that they had won a 
lottery or had inherited money from a distant relative. Follow-up e-
mails instructed the victims to provide personal and bank account 
information to receive their lottery winnings or inheritance. 
Subsequent e-mails to victims falsely indicated that a Government or a 
quasi-governmental agency, such as the IRS or the United Nations, would 
not pay the money due to them because advance payment of taxes and 
other fees was required. The e-mails solicited the victims to wire 
money to pay the taxes and other fees to designated bank accounts 
controlled by the criminals.\3\
---------------------------------------------------------------------------
    \3\ E.D.N.Y. Response to Defendant's Sentencing Letter filed Dec. 
19, 2011 and E.D.N.Y. Superseding Info. Filed May 10, 2011.

    However, if the victims were unable to pay the taxes and fees, the 
criminals offered to loan them the money. The victims were then 
convinced to open online bank accounts and provide the necessary login 
information to the criminals. Using this information, the criminals 
stole money from various other bank accounts, transferred that stolen 
money to the victims' accounts, and then instructed the victims to wire 
the money to foreign bank accounts controlled by the criminals. In the 
end, the victims never received any lottery winnings, inheritance, or 
other money in connection with the scheme; however, they may have 
received much grief for unknowingly being placed in the middle of a 
---------------------------------------------------------------------------
money laundering scheme.

    The lead defendant was sentenced to a total of 30 months of 
imprisonment and five years of supervised release for Aggravated 
Identity Theft and Conspiracy to Commit Wire Fraud. He was also ordered 
to pay $1,741,822 restitution to his victims and a $200 assessment.\4\
---------------------------------------------------------------------------
    \4\ E.D.N.Y. Judgment filed Dec. 27, 2011.

OTHER FRAUDS IMPACTING TAX ADMINISTRATION
                             identity theft
    The IRS continues to make improvements in its identification of 
identity theft tax returns at the time the returns are processed and 
before fraudulent tax refunds are released. The IRS has described 
identity theft as one of its ``Dirty Dozen'' and recognizes that new 
identity theft patterns are constantly evolving and, as such, it needs 
to adapt its detection and prevention processes.

    Notwithstanding improvements in its detection efforts, the IRS 
still does not have timely access to third-party income and withholding 
information. Most of the third-party income and withholding information 
is not received by the IRS until well after taxpayers begin filing 
their tax returns. For example, the deadline for filing most third 
party information returns with the IRS is March 31, yet taxpayers began 
filing their tax returns for the 2015 Filing Season on January 20th. As 
of February 27, 2015, the IRS has received approximately 58.5 million 
individual tax returns. Legislation would be needed to accelerate the 
filing of the information returns.

    The IRS has taken steps to more effectively prevent the filing of 
identity theft tax returns by locking the tax accounts of deceased 
individuals to prevent others from filing a tax return using their name 
and SSN. The IRS has locked approximately 26.3 million taxpayer 
accounts between January 2011 and December 31, 2014. These locks 
prevent fraudulent tax returns from entering the tax processing system. 
For Processing Year 2014,\5\ the IRS rejected 338,807 e-filed tax 
returns and stopped 15,915 paper-filed tax returns through the use of 
these locks as of September 30, 2014.
---------------------------------------------------------------------------
    \5\ A processing year is the calendar year in which tax returns are 
processed by the Internal Revenue Service.

    Additionally, the IRS continues to take steps to more effectively 
detect and prevent the issuance of fraudulent refunds resulting from 
identity theft tax return filings. The IRS continues to expand identity 
theft filters to identify fraudulent tax returns at the time they are 
processed. It has expanded the number of identity theft filters used to 
identify potentially fraudulent tax returns and prevent the issuance of 
fraudulent tax refunds from 114 filters during Processing Year 2014 to 
196 filters during Processing Year 2015. The identity theft filters 
incorporate criteria based on characteristics of confirmed identity 
---------------------------------------------------------------------------
theft tax returns.

    Tax returns identified by these filters are held during processing 
until the IRS can verify the taxpayer's identity. As of January 31, 
2015, just 11 days after the filing season began, the IRS reported that 
it identified and confirmed 264 fraudulent tax returns and prevented 
the issuance of more than $2 million in fraudulent tax refunds as a 
result of the identity theft filters.

    In addition to the above actions, the IRS developed and implemented 
a clustering filter in response to TIGTA's continued identification of 
large volumes of undetected potentially fraudulent tax returns with tax 
refunds issued to the same address or deposited into the same bank 
account. The clustering filter tool groups tax returns based on 
characteristics that include the address, zip code, and/or bank routing 
numbers. Using this tool, the IRS reports that as of October 9, 2014, 
it identified 517,316 tax returns and prevented the issuance of 
approximately $3.1 billion in fraudulent tax refunds.
                             prisoner fraud
    Refund fraud associated with prisoner SSNs remains a significant 
problem for tax administration. The number of fraudulent tax returns 
filed using a prisoner's SSN that were identified by the IRS increased 
from more than 37,000 tax returns in Calendar Year 2007 to more than 
137,000 tax returns in Calendar Year 2012. The refunds claimed on these 
tax returns increased from $166 million to $1 billion. As of February 
28, 2015, the IRS reports that it identified 24,011 potentially 
fraudulent tax returns filed by prisoners for screening.

    In September 2014, TIGTA reported that the IRS has not yet shared 
fraudulent prisoner tax returns and return information with Federal or 
State prison officials.\6\ As of June 2014, the IRS has yet to complete 
needed agreements to begin sharing information related to false 
prisoner tax returns and return information with Federal and State 
prison officials. This is despite the fact that the IRS was initially 
given the authority to share certain information with Federal prison 
officials in 
October 2008. The authority for the IRS to share information with 
prison officials is intended to enable prison officials to take action 
to punish prisoners for perpetrating fraud and to help stop this abuse 
of our tax system.
---------------------------------------------------------------------------
    \6\ TIGTA, Ref. No. 2014-40-091, Prisoner Tax Refund Fraud: Delays 
Continue in Completing Agreements to Share Information With Prisons and 
Reports to Congress Are Not Timely or Complete (Sept. 2014).

    TIGTA also found that the required annual prisoner fraud reports to 
Congress are not timely and that the reports do not address the extent 
to which prisoners may be filing fraudulent tax returns using a 
different individual's SSN. In addition, we followed up on a condition 
identified in a past review and found that IRS processes still do not 
ensure that all tax returns filed using a prisoner SSN are assigned a 
prisoner indicator. Our analysis of tax returns filed during Calendar 
Year 2013 identified 43,030 tax returns that were filed using a 
prisoner SSN that were not assigned a prisoner indicator. When tax 
returns filed using a prisoner SSN are not assigned the required 
indicator, the tax return will not be subjected to the IRS's 
specialized prisoner fraud checks.
                       unscrupulous tax preparers
    Tax preparers who steal a client's identity information or their 
tax refunds can also cause great harm to the integrity of the Federal 
tax system. The following case highlights an example of this damage.

    Last December, an Ohio accountant was sentenced for wire fraud, 
engaging in monetary transactions in property derived from specified 
unlawful activity, mail fraud, and attempting to interfere with 
administration of the internal revenue laws. The accountant was 
sentenced to 36 months in prison, followed by three years of supervised 
release, and was further ordered to pay $987,050.00 in restitution to 
victims.\7\ From approximately 2009 through 2013, the accountant 
engaged in various schemes to defraud individuals to obtain money and 
property by means of false and fraudulent pretenses and 
representations, and to obstruct the due administration of the Internal 
Revenue laws.\8\
---------------------------------------------------------------------------
    \7\ E.D. Pa. Judg. filed Dec. 16, 2014.
    \8\ E.D. Pa. Indict. filed Jan. 9, 2014; E.D. Pa. Info. filed June 
3, 2014.

    After the IRS issued a levy to a financial firm in the amount of 
$91,193.53 to collect taxes owed by one of his clients, the accountant 
transmitted, via e-mail, a falsified IRS Form 668-D, Release of Levy, 
which purported to remove the levy from the couple's account. The 
accountant did so knowing the IRS had not authorized the release of the 
levy from that account.\9\
---------------------------------------------------------------------------
    \9\ Id.

    Prior to this, around April 2011, the accountant devised a scheme 
to defraud another victim, a senior citizen with little experience 
managing financial matters. The accountant falsely represented to the 
victim that the victim owed the IRS a substantial amount of taxes, and 
directed the victim to send him multiple payments for taxes purportedly 
owed by the victim. The accountant kept all of the money received from 
the victim and used it for his own personal and business expenses, 
defrauding the victim of approximately $237,050.\10\
---------------------------------------------------------------------------
    \10\ E.D. Pa. Info. filed June 3, 2014.

    In a different case, a tax preparer used the means of 
identification of other people to file false income tax returns and 
obtain refunds from the IRS. The preparer obtained most of the means of 
identification from his previous employment as a tax preparer and from 
other employment positions he held. He provided this information to co-
conspirators so they could also file false income tax returns and 
obtain refunds from the IRS. The preparer and his co-conspirators 
ultimately defrauded or attempted to defraud the IRS out of at least 
$560,000 in tax refunds.\11\
---------------------------------------------------------------------------
    \11\ S.D. Cal. Superseding Indict. filed June 19, 2012.
---------------------------------------------------------------------------
                             phishing scams
    Phishing is a scam that has been around for several years and is 
typically carried out through the use of unsolicited e-mails or a fake 
website that poses as a legitimate site in order to lure potential 
victims in to either pay some sort of fee, or provide valuable personal 
and financial information. Armed with this information, a criminal can 
commit identity theft or financial theft. Phishing is often used as the 
technique to gather information to start other scams, such as the 
lottery scam identified earlier.

    My investigators are alerted to hundreds of new phishing scams 
every year. For example, my agents can encounter numerous fake e-mails 
that lead to fraudulent websites appearing to be legitimate, but 
actually looking to steal taxpayers' personal information or to trick 
the victim into paying money. Also by clicking on any of the links in 
these e-mails or websites, innocent taxpayers have unknowingly invited 
the criminal into their computer where they can steal financial 
information, personal contact information, and even file more 
fraudulent documents. All the while, this activity is unknown to the 
victim.

    The best thing taxpayers can do is to be alert and to stop and 
think before clicking on any link. The first contact a taxpayer 
receives from the IRS will not be made via e-mail. If they receive an 
unsolicited e-mail that appears to be from either the IRS or an 
organization closely linked to it, they should be leery and call the 
IRS to verify the contact and report it by sending it to 
[email protected].

    TIGTA and the IRS office of Online Fraud Detection and Prevention 
work closely together to protect innocent taxpayers from criminals who 
create fake websites that impersonate the IRS. In fact, since 2012, 
when the number of identified phishing sites peaked at almost 19,000, 
we have seen a reduction in the number of identified phishing sites 
over the past two years to 1,200 in 2014.

    Chairman Hatch, Ranking Member Wyden, thank you for the opportunity 
to share my views. This concludes my testimony on some of the tax 
schemes and scams we have noted during the 2015 filing season. Much 
work is being done on multiple fronts to dismantle many of these 
schemes and scams, and our hope is that if we return to testify next 
year, these incidents will be greatly reduced or eliminated.

                                 ______
                                 
   Prepared Statement of Caroline Ciraolo, Acting Assistant Attorney 
           General, Tax Division, U.S. Department of Justice
    Chairman Hatch, Ranking Member Wyden, and Members of the Committee, 
thank you for the opportunity to appear before you this morning to 
discuss the 
Department of Justice's efforts to combat tax refund fraud arising from 
identity theft.

    The Department greatly appreciates the commitment that the 
Chairman, the Members of the Committee, and the staff have made to 
highlighting and addressing this important issue. Combatting the 
illegal use of social security numbers and other personal information 
to file false returns seeking fraudulent refunds is a top priority of 
both the Tax Division and the United States Attorneys' Offices across 
the country. Your efforts to bring attention to this growing and 
insidious crime will help educate taxpayers about the importance of 
detecting and reporting identity theft and tax fraud. Today's hearing 
also sends a strong message to those who would commit these crimes that 
their schemes will be detected and that they will be prosecuted to the 
fullest extent of the law.

    Using a variety of civil and criminal enforcement tools, the 
Division, with the assistance of our partners at the IRS and in the 
United States Attorneys' Offices, has successfully enjoined hundreds of 
unscrupulous return preparers and other individuals who viewed the 
Federal Treasury as a personal bank account. Their schemes have 
included filing returns containing inflated, false deductions or false 
W-2 income statements, or preparing returns and failing to remit the 
refund to the taxpayer. In recent years, an even more aggressive scheme 
has spread across the country at an alarming rate--stolen identity 
refund fraud (``SIRF'').

    The plan is frighteningly simple--steal social security numbers, 
file tax returns showing a false refund claim, and then have the 
refunds electronically deposited or sent to an address where the 
offender can access the refund checks. In many cases, the taxpayer 
whose social security number has been compromised will later face 
difficulties when he or she files a tax return after the IRS received a 
false return using that taxpayer's social security number. In other 
cases, the false returns are filed using social security numbers of 
deceased taxpayers or others from whom no federal tax return may be due 
for filing. These schemes are usually implemented in early January, 
before the proper taxpayer is expected to file their returns, with the 
goal of taking advantage of the IRS's efforts to pay out refunds 
quickly. In many cases, the most vulnerable in our society are the 
victims of this form of identity theft. Names and social security 
numbers have been stolen at medical firms, prisons, and hospitals by 
dishonest employees who are often paid for the information. Postal 
workers have been robbed, and in one instance, murdered to gain access 
to refund checks.

    The high potential for financial gain and low physical risk have 
made stolen identity refund fraud the new crime of choice for drug 
dealers and gangs. The scope and organization of these criminals is 
vast and growing, and in certain cases, the criminal proceeds of the 
crime have been used to purchase illegal narcotics for resale.

    For taxpayers who are direct SIRF victims, the economic and 
personal consequences can be severe and often long-term. While the IRS 
has invested substantial efforts and resources to address identity 
theft concerns, those victimized face months, if not years, of 
overwhelming paperwork, credit problems, and inconvenience. When a 
stolen identity is used to commit tax refund fraud, all taxpayers are 
victims, and all Americans are impacted by the loss to the Federal 
Treasury. In recognition of the severity of the problem, the Department 
and the IRS have devoted significant resources to the successful 
prosecution of individuals engaged in stolen identity refund fraud. 
Individuals engaged in this criminal conduct face a variety of charges, 
including aggravated identity theft, theft of government property, 
false claims for refund, false returns, and tax conspiracy.

    In the last several years, the Department has successfully 
prosecuted and received significant sentences in cases in which a 
stolen identity was used to commit tax refund fraud. For example:

           In October 2013, in Alabama, a U.S. postal employee was 
        sentenced to 111 months in prison for his role in a stolen 
        identity refund scheme. The mail carrier used mailing addresses 
        on his postal route to send debit cards loaded with false 
        refunds. Other defendants obtained the stolen identities used 
        on the returns from the Alabama Department of Corrections. The 
        defendants filed hundreds of fraudulent tax returns that 
        claimed over $1 million in false refunds.

           In May 2014, a superseding indictment was returned against 
        nine defendants for their roles in a $20 million dollar stolen 
        identity refund conspiracy. According to the allegations in the 
        indictment, between 2011 and 2013, the defendants ran a large-
        scale identity theft ring in which they filed over 7,000 tax 
        returns claiming false refunds. As part the scheme, one of the 
        defendants stole identities from the hospital at Fort Benning, 
        Georgia where she worked and had access to the identification 
        data of military personnel, including soldiers who were 
        deployed to Iraq and Afghanistan. Other defendants stole 
        identities from an Alabama state agency and from the Alabama 
        Department of Corrections.

           In June 2014, a Miami, Florida man was sentenced to 10 
        years in prison for stealing identities and then filing false 
        returns that requested over $13 million in false refunds by 
        fraudulently claiming gambling income and withholding from the 
        Florida Lottery Commission. His co-conspirator opened 
        approximately eighteen bank accounts to deposit these 
        fraudulent refunds.

           In December 2014, a Tennessee woman was sentenced to 102 
        months in prison. She and her co-conspirators unlawfully 
        obtained personal identifying information of victims, including 
        high school students, and used the information to file false 
        tax returns claiming millions of dollars of refunds. Two co-
        conspirators have been sentenced to 45 and 48 months in prison, 
        respectively, and three others have pled guilty and await 
        sentencing.

           In January 2015, a Maryland woman and former bank employee, 
        was sentenced to 87 months in prison for her role in a massive 
        and sophisticated identity theft and tax fraud network 
        involving more than 130 individuals. She is among approximately 
        a dozen people who have pleaded guilty in the U.S. District 
        Court for the District of Columbia to charges in one of the 
        largest prosecutions to date involving the use of stolen 
        identifying information. The overall case involves the filing 
        of at least 12,000 fraudulent federal income tax returns that 
        sought refunds of at least $40 million.

    As these examples illustrate, SIRF crimes are different from the 
crimes typically addressed by the Tax Division. While the typical 
criminal tax case may involve willfully filed false returns, evading 
the assessment of tax due and owing or the use of sophisticated 
financial schemes which invariably require lengthy in-depth 
investigations, SIRF crimes generally involve garden variety theft and 
fraud. Moreover, SIRF prosecutions are often reactive to exigent 
circumstances; in many cases, the crime is discovered by local law 
enforcement officers who come upon a large cache of Treasury checks or 
debit cards loaded with fraudulent tax refunds.

    Recognizing these fast-moving law enforcement needs, on October 1, 
2012, the Tax Division issued Directive 144, which delegates to local 
United States Attorneys' Offices the authority to initiate tax-related 
grand jury investigations in SIRF matters, to charge those involved in 
SIRF crimes by complaint, and to obtain seizure warrants for forfeiture 
of criminally-derived proceeds arising from SIRF crimes, without prior 
authorization from the Tax Division. The Tax Division retains authority 
in connection with forfeitures if any legitimate taxpayer refunds are 
involved.

    Directive 144 was the result of collaborative efforts among the Tax 
Division, the IRS, and the United States Attorneys' Offices to 
strengthen the law enforcement response to SIRF crimes. The Tax 
Division continues to work closely with the IRS and United States 
Attorneys' Offices across the country to ensure effective information 
sharing and investigative cooperation as permitted by law. And this 
approach is yielding significant results. Beginning with the 
implementation of Directive 144 (and the expedited review procedures) 
and ending December 31, 2014, the Tax Division has authorized more than 
975 SIRF investigations involving more than 1,700 subjects. As a 
result, during the same period the Tax Division and the U.S. Attorneys' 
Offices have brought more than 725 prosecutions involving more than 
1,400 individuals.

    The prosecution of SIRF crimes is a national priority, and, 
together with our law enforcement partners, we will continue to look 
for the most effective ways to bring this conduct to an end and to 
punish these wrongdoers. Indeed, enforcement efforts are critical, but 
the goal is to stop fraudulent refunds at the door. In the meantime, 
the Tax Division will continue to prosecute these cases and, in doing 
so, send a clear message to those who engage in this conduct that they 
will be held accountable for their actions.

    Thank you for the opportunity to provide the Department's 
perspective on this issue, and I look forward to answering any 
questions that you may have.

                                 ______
                                 
              Prepared Statement of Hon. Orrin G. Hatch, 
                        a U.S. Senator From Utah
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah) 
today delivered the following opening statement at a committee hearing 
on tax schemes and scams:

    The committee will come to order.

    The committee meets today to hear about growing criminal activity 
that is targeting taxpayers across the country. These criminal acts are 
perpetrated by thieves hiding behind telephone lines and computers, 
preying on honest taxpayers and robbing the Treasury of tens of 
billions of dollars every year.

    This must stop, and we are here today to hear from some of the 
federal and state officials on the front lines of the fight to catch 
these crooks and protect taxpayers.

    But first I want to talk about one case in particular, and one very 
large number. In this town--and especially right here on this 
committee--we often talk in hundreds of millions, billions, or even 
trillions of dollars. Some joke about a number being referred to as 
budget dust, even if the number has nine or ten zeros behind it.

    But let me tell you about a number that is truly stunning: $15,800.

    That's $15,800 saved through hard work, sacrifice, and honest 
living.

    That's $15,800 saved for the down payment of a new house for a 
growing family.

    And, that's $15,800 in savings that was wiped away by criminals who 
use fear, confusion, and intimidation as their weapons.

    This is the story of the Degen family from Taylorsville, Utah, and 
I would like to play a news clip from KTVX, a Utah ABC affiliate, that 
tells their story.

    This is just one family, out of millions that have been targeted 
and thousands that have been victimized. And this is just one scam.

    But, make no mistake, taxpayers across the country are also facing 
identity theft in record numbers, account takeovers, and other criminal 
attacks.

    Once again, this must be stopped.

    Taxpayers must be more aware of the risks and better protected from 
attack. And these criminals must be found and brought to justice. I 
look forward to the testimony from our witnesses on today's panel and 
to hearing more about how we can accomplish these goals.I'll now turn 
it over to Senator Wyden for his opening statement.

                                 ______
                                 
Prepared Statement of Ellen M. Klem, Director of Consumer Outreach and 
Education, Office of the Attorney General, Oregon Department of Justice
    Good morning. I'd like to begin by thanking Chairman Hatch, Ranking 
member Senator Ron Wyden and members of the Committee for allowing me 
the opportunity to testify today. My name is Ellen Klem and I am the 
Director of Consumer Outreach and Education for Oregon Attorney General 
Ellen Rosenblum. My job is to travel the state educating Oregonians on 
how to be savvy consumers and avoid being scammed by scammers and 
fraudsters.

    Every week, I'm in a different city talking to a different group of 
Oregonians. For example, last week I was on the northern Oregon coast 
in Astoria, Oregon with Attorney General Rosenblum talking to a group 
of older Oregonians at the Clatsop Retirement Village, and next week I 
will be in Albany, Oregon talking to a group of retired teachers.

    Every day, I hear stories from our most vulnerable citizens about a 
wide variety of scams and frauds. To an unassuming Oregonian, these 
scams can be threatening, and quite frankly, scary. While fraudulent 
behavior, imposter phone calls and unofficial mail solicitations have 
always been a part of a scammer's repertoire, today's scammers use new 
tactics.

    Lately, my conversations with Oregonians have focused almost 
exclusively on the IRS imposter scam. This is a major headache for too 
many Oregonians. Looking to take advantage of people during a busy tax 
season, these scammers tell victims over the phone that they owe money 
to the IRS or Oregon Department of Revenue. The caller demands that the 
person pay the money immediately through a temporary debit card or a 
wire transfer. If the victim refuses to pay, they are threatened with 
arrest, deportation or suspension of a business or driver's license. In 
many cases, the caller becomes aggressive and insulting. For a 
vulnerable Oregonian, this phone call can be devastating.

    In 2014, the IRS imposter scam topped Oregon's list of consumer 
complaints. Last year, 1,340 Oregonians filed complaints with the 
Oregon Attorney General about this scam, nearly double the complaints 
as the next highest category. Victims of this scam reported losses 
totaling $77,137.09. Unfortunately, we know this is just the tip of the 
iceberg. Many scam victims do not even report their losses because they 
either don't know whom to report to or are too ashamed that they have 
been scammed. For countless others, they may not even know they have 
been scammed.

    That is why I am here today; to bring you the voices of Oregonians 
who have lost money, time and a sense of security because of these 
scammers. In particular, I would like to tell you the stories of two of 
those victims and share what the Oregon Attorney General is doing to 
prevent this from happening to others.

    The first story I would like to share is that of a victim I'll 
refer to as Diane. Last year she fell victim to the IRS imposter scam 
to the tune of $15,000, the largest loss reported to the Oregon 
Department of Justice in 2014. Diane, a woman in her late 50s, lives 
and works in Turner, Oregon, a small town with fewer than 2,000 
residents. On August 12, 2014 she received a message on her answering 
machine from a man claiming to be from the IRS and directing her to 
call him back at a Washington, D.C. phone number. She dutifully called 
him back and the person who answered her call proceeded to read her an 
affidavit for her arrest, threatened her with a fine of $25,000 and 18 
months in prison, and told her she would be arrested later that day if 
she did not pay. Needless to say Diane was terrified. She feared for 
her job and her financial future, and begged for forgiveness. The 
scammer told her it was possible to settle the matter, but only if she 
paid $15,000 immediately by purchasing a pre-paid debit card at a local 
store. Hoping to avoid prison, and afraid of further consequences, 
Diane made the only choice she thought she had; she complied with the 
request--and she was out $15,000.

    Individuals like Diane who send money to the scammers aren't the 
only victims of imposter scams. In September 2014, I was contacted by 
Marissa Phillips, a small business owner outside of Portland, Oregon 
whose employee, Linda, had fallen victim to an imposter scam. After 
sending a small amount of money to the scammers, Linda realized her 
mistake and stopped answering the phone. But the scammers refused to 
give up. They kept calling. And, when it was clear that she wasn't 
answering the phone, the scammers began calling Marissa's small 
business; a business that provides in-home services for seniors and 
persons with disabilities. When Marissa called me, she reported that 
the scammers had called her business at a rate of 100 phone calls per 
minute for 20 minutes; that's 2,000 phone calls in less than half an 
hour. All the calls from scammers prevented the small business from 
providing help to those that actually needed it. The seniors, their 
families, hospitals, doctors and other staff could get nothing more 
than a busy tone when they called for assistance. Ultimately, the 
business was forced to change its phone number, and all of its 
marketing materials, incurring a significant cost.

    While this scam can seem daunting, thankfully not everyone in 
Oregon who receives a phone call from an IRS imposter will fall victim 
to the scam. I'd like to think that's because we have been working so 
hard to educate all Oregonians, especially our most vulnerable.

    The Oregon Attorney General has several educational tools aimed at 
scam prevention, because she and I both know that well-informed 
Oregonians are more likely to recognize fraud and less likely to become 
victims. We also know these scams can be hard to track and prosecute.

    Because education is so critical, we have a number of resources 
available for consumers, including:

          A brochure with ten tips to protect you and your family from 
        scams,

          A toll-free complaint hotline that is staffed 5 days a week 
        with some of the most knowledgeable volunteers in the state,

          An easy to remember website--www.oregonconsumer.gov,

          A searchable online consumer complaint database called Be 
        InfORmed, and

          Scam Alerts sent via email, our website, and Twitter.

    But our educational efforts do not stop there. We also have an 
entire section of the Oregon Department of Justice devoted to financial 
fraud and consumer protection.

    The 34 employees of the Consumer Protection & Financial Fraud 
section received 50,000 phone calls in 2014 alone and receives nearly 
8,000 written consumer complaints every year. Last year alone, this 
section opened more than 80 formal investigations and, at any given 
time, they are working on 220 open investigations.

    That is why we have also invested in strong partnerships with 
federal, state, and local government entities and officials, tribes, 
community organizations, advocacy groups, and members of the media. 
Through these partnerships we're able to share complaints, coordinate 
investigations, and disseminate information to the public. Our partners 
give us a bigger voice to share information and keep Oregonians safe.

    In fact, one of our most successful partnerships is the Social 
Services Fraud Working Group, which meets monthly. The work group--in 
existence since 2011--is multidisciplinary and comprised of more than 
30 federal, state, and local agencies working fraud cases in the field 
of social services. At each meeting, members of the work group share 
tips and work collaboratively to fight social services fraud. The 
success of the work group has spawned two additional workgroups, one in 
Alaska and another in Washington state.

    Unfortunately, Oregon is not unique in the number of reported 
scams. IRS imposter scam complaints are up nationally. Scammers target 
everyone, but especially older adults and other vulnerable individuals; 
they will not stop until they are caught and brought to justice. 
Unfortunately, that proves to be a challenge.

    We look forward to continuing our collaboration with the IRS, the 
FTC, and other federal agencies like the Office of the Inspector 
General of the Social Security Administration that hosts our Social 
Services Fraud Work Group.

    This concludes my testimony. Again, thank you Chairman Hatch, 
Ranking member Senator Ron Wyden and members of the Committee for 
inviting me today. I am available to answer questions.

                                 ______
                                 
        Prepared Statement of Hon. John L. Valentine, Chairman, 
                       Utah State Tax Commission
    Mr. Chairman and esteemed members of the Senate Finance Committee, 
I come before you this morning to discuss and recommend actions that 
can be taken to reduce the contagion of tax fraud which is sweeping the 
country.

    There are four issues for your consideration this morning:

  1.  Strengthen information sharing between the IRS and the States.

  2.  Stricter regulation of the financial industry as it relates to 
        ``pre-paid'' debit cards.

  3.  Prohibit the practice of applying refunds to payment of fees for 
        filing services, a practice sometimes called ``Refund 
        Transfer.''

  4.  Require third party filing services to tighten front end security 
        by using multi-factor authentication and other measures to 
        secure data from unauthorized disclosure and identity theft.

    Prior to the commencement of the 2015 filing season, Utah installed 
a state of the art computer software system to identify potentially 
fraudulent returns. On January 20 of this year, the Utah Tax Commission 
opened filing of income tax returns and deployed this system. As we 
began to process returns, our system started sending out verification 
letters to taxpayers whose returns appeared suspicious. Within ten days 
of the opening of the filing season, we began receiving calls from 
taxpayers who had received our communication about their return; they 
had not yet filed their returns.

    We initially thought these were isolated incidents, but they were 
not. As that week progressed, our software identified more and more 
suspicious returns. We found several factors that were the same in all 
the suspicious returns:

    All the suspicious returns had the direct deposit information 
        changed from the previous year's bank account to prepaid debit 
        cards, often Green Dot brand debit cards.

    All the suspicious returns contained routing and account numbers 
        that differed between the federal return and the state return.

    Most of the suspicious returns appeared to have the exact 2013 tax 
        return data populated to the fraudulent 2014 return.

    The address on the suspicious returns was the same as the address 
        on the 2013 return.

    Since most of these filings were being made through the Turbo Tax 
        system, it appeared that something in their process was 
        compromised.

    After communicating with the owners of Turbo Tax, (Intuit), and 
notifying other states through our national organization, we notified 
the Internal Revenue Service of the possible compromise of the 
Modernized Electronic Filing (MEF) systems. The accounts in question 
were immediately sent to the IRS for review. On February 10, 2015, we 
sent 31 returns to the Ogden IRS Service Center that we had verified by 
contact with the taxpayers as being fraudulent. As of the date of this 
testimony, the IRS has not contacted us with the results of any 
determinations on their part of the nature of the returns. They did 
inform us in a phone conversation that they had known about a filing 
scheme which took a previous year's return and copied it into a current 
year's filing. The IRS representative stated that they had known about 
this scheme since last year, but had not notified the states of this 
fact.

    Many have asked what action was undertaken by the state of Utah 
when it discovered this attack. In short, we hurried.

    We stopped all refunds until we could analyze the magnitude of the 
        problem.

    During the first week, we identified five different repeating 
        fraud schemes.

    We identified the returns with specific characteristics that were 
        potentially fraudulent.

    We deployed our identity quiz system and commenced sending ``ID 
        verification letters'' on the returns that met the unique 
        characteristics of potential fraud.

    If the taxpayer failed the quiz, they were instructed to send us 
        certain documentation to verify their identity, that included:

           Two forms of identification such as SSA card, passport, 
        drivers license, state ID card, government issued photo ID, 
        utility bill, bank statement, payroll stub, college transcript 
        or insurance policy, and

          One picture ID.

    If the taxpayer does not respond to the quiz or fails to provide 
        the needed information, the system will reverse the return as 
        though it had not been filed.

    To the extent we could identify them, refund deposit requests to 
        pre-paid debit cards have been converted to a paper warrant 
        (check) and sent to the taxpayer's address.

    As we continue to prevent the outflow of fraudulent refunds, we 
found great difficulty in determining the nature of financial 
institution routing and account information. We specifically found that 
there was no uniformity in numbering to distinguish traditional 
checking accounts and savings accounts from prepaid debit cards. For 
example, a prepaid reloadable debit card sold by Green Dot, appears to 
be linked to a bank account even though the debit card had no actual 
checking or savings account associated with it. (These cards may even 
appear as a Visa or Master Card.) Quoting from their card holder's 
agreement: ``Your card is a prepaid debit Visa or MasterCard card, 
which means that you must add funds or `load' your card in order to use 
it. There is no credit line associated with your Card.'' Once the funds 
are transferred to such cards, they cannot easily be traced or 
recovered, a perfect vehicle to commit fraud. A simple fix would be to 
require a different series, letter or additional numbers to distinguish 
these cards from cards connected to bank or credit union checking and 
savings accounts.\1\
---------------------------------------------------------------------------
    \1\ An ABA routing transit number is a nine digit code which 
identifies the financial institution on which it was drawn. It was 
originally used to facilitate sorting, bundling, and shipment of paper 
checks back to the drawer's (check writer's) account. As new payment 
methods were developed (ACH and Wire), the system was expanded to 
accommodate these payment methods.

    To obtain a Green Dot re-loadable prepaid Visa or MasterCard debit 
card, a customer is required to provide their name, address, date of 
birth, Social Security number, phone number, and other information that 
will allow Green Dot to identify customers.\2\ If a Green Dot customer 
is pretending to be someone else by assuming that person's identity, 
then the identity thief has successfully obtained a fraudulent method 
to gain access to resources or other benefits in that person's name 
without the use of a traditional bank account. Perpetrators then use 
these fraudulently obtained pre-paid debit cards to make thousands of 
dollars' worth of retail purchases, quickly cash them out or drain them 
at an ATM. Prepaid debit cards appear to be preferable to fraudsters 
because the identity thief doesn't have to bother with banks, credit 
unions or check-cashing stores that may become suspicious when one 
person starts bringing in multiple tax refund checks to be cashed or 
deposited.
---------------------------------------------------------------------------
    \2\ Green Dot maintains that it is compliant with Federal money 
laundering laws and with all Patriot Act elements.

    While we progressed though the investigation, we found a practice 
that enables fraudsters to perpetrate fraud without having anything at 
risk, a practice called ``refund transfers.'' Here is how it works: The 
fraudster is allowed to deduct the third party filing fees from the 
refund. The third party filing service gets paid, the fraudster 
receives the refund and the state and federal government (and 
potentially the taxpayer who may actually be entitled to a refund) are 
---------------------------------------------------------------------------
out the funds.

    Finally, we found third party filing services often lack the front 
end security measures necessary to protect their users in this cyber 
world. At a minimum, these services should install multi-factor 
authentication to assure that a person filing a tax return is indeed 
the person identified on the return. Quality fire walls and other data 
protections are a given, but since we are uncertain at this time of how 
the prior return information was obtained, it is a careful company, 
concerned about their product and its customers, that will invest the 
funds necessary to protect their data from cyber thieves.

    Unfortunately, prepaid debit cards cannot be specifically 
identified by routing numbers or bank account numbers using the present 
standardized methods. A standardization of routing or account numbers 
to include identification of prepaid debit cards would facilitate 
evaluation of suspicious filers and enhance the ability of Federal and 
State taxing authorities to deny refunds to the fraudsters and catch 
fraudulently filed income tax returns.

                                 ______
                                 
                 Prepared Statement of Hon. Ron Wyden, 
                       a U.S. Senator From Oregon
    Since the day the IRS opened its doors, scam artists have been 
hatching up slick new ways of stealing taxpayer dollars from the 
Treasury. What's new is, they're now stealing Americans' identities and 
personally threatening them on an industrial scale, while directly 
robbing them of their hard-earned money. The fraudsters dream up new 
tactics and milk them for all they're worth before they start getting 
caught. Then it's lather, rinse, repeat. Onto the next scam, always one 
step ahead of the law.

    Today the committee will closely examine several of the fraudsters' 
latest strategies that are plaguing taxpayers. The one that's hitting 
my home state of Oregon hardest is the fake phone call demanding money 
or personal information on behalf of the IRS. In fact, these calls were 
the number one consumer complaint registered with the Oregon Department 
of Justice last year. Not everybody knows the IRS simply does not cold-
call people making demands or threats. So it's pretty clear from my 
vantage point that there's a lot more work to be done taking on this 
scourge.

    Given the sophistication of this criminal activity and the fact 
that a lot of it comes from overseas, this sure looks to me like an 
emerging type of organized crime. So the real question is, what's it 
going to take to root it out and put the bad actors on the sidelines? 
How about more prosecutions, stronger deterrents, or more cops on the 
beat? And what's the best way of getting the word out so that taxpayers 
aren't tricked into surrendering their life savings to some 
intimidating voice on the other end of the phone line?

    But even if people manage to avoid the phone calls, you can bet the 
crooks are finding other ways to profit. Tax preparation software has 
become the scammer's new fast lane. These sharks manage to acquire a 
taxpayers' personal data from the black market or hack into commercial 
databases, and they file false returns electronically. The victims may 
not find out until much later in tax season, and by then it's too late. 
Already there have been thousands of reports like this in 2015. As 
we'll hear today, some software vendors aren't doing enough to help 
prevent fraud.

    In my view, part of the challenge is getting states, Internet tax 
services, and the IRS on the same wavelength. Everybody's got to 
communicate and work together to make sure criminals can't just nimbly 
slide from one jurisdiction to the next, as they rip off more 
unsuspecting Americans.

    Taxpayers may choose to avoid software, but not even a paid tax 
preparer is guaranteed to be safe. In fact, many of them don't have to 
meet any standards for competence. There are far too many con artists 
out there willing and able to prey on the people who come through their 
doors. In some egregious cases, they secretly falsify their victims' 
returns to boost the refunds, and they pocket the difference. And once 
tax season ends, the crooks disappear from the storefronts they 
occupied, leaving no trace of where they've gone.

    A few states, including Oregon, have rules in place to help shield 
taxpayers from this kind of scam. But most states don't. Senator Cardin 
and I introduced the Taxpayer Protection and Preparer Proficiency Act 
at the beginning of this Congress to give all Americans the security 
they deserve. Our colleague Senator Nelson is also a leader on this 
issue of keeping taxpayers safe from identity theft and fraud. And I'm 
sure they share my desire to take on these challenges on a bipartisan 
basis.

    There is no end to the ingenuity of tax scam artists. My hope this 
morning is that we'll get more fresh ideas for catching up to this wave 
of fraud and stopping it. That can't come soon enough. So I'm looking 
forward to talking with our witness panel here today, which I'm very 
happy to say includes Ms. Ellen Klem, the director of consumer outreach 
and education in the Oregon Attorney General's office. Thank you, Ms. 
Klem and all our witnesses, for being here during a time of year that's 
busy for all of you.

                                 ______
                                 

                             Communication

                              ----------                              


           Letter Submitted for the Record by Operation HOPE

March 11, 2015

Honorable Mike Crapo
Chairman
Senate Subcommittee on Taxation and IRS Oversight
219 Dirksen Senate Office Building
Washington, D.C. 20510

Honorable Robert P. Casey, Jr.
Ranking Member
Senate Subcommittee on Taxation and IRS Oversight
219 Dirksen Senate Office Building
Washington, D.C. 20510

Dear Chairman Mike Crapo and Ranking Member Robert Casey:

Operation HOPE is dedicated to financial empowerment for everyone in 
American society, and believes deeply that the expansion of the middle 
class depends on financial literacy and financial opportunity for lower 
income people so they can improve their lives and their futures. This 
year marks the 9th year for the advocation of IRS Earned Income Tax 
Credit Awareness (EITC) by Operation HOPE. Since 2006, we have worked 
to promote the EITC Program and there are many challenges we face to 
achieve this, but among them is the potential for an additional burden 
that efforts to combat tax fraud may have on the most vulnerable 
citizens.

Cyber fraud attacks on financial systems in the United States are a 
major threat for our government and our institutions. But these also 
represent a major threat to people. The human side of financial and tax 
fraud is deeply concerning, not only in terms of innocent people being 
victimized by fraudsters, but also by being inadvertently caught up in 
government battle tactics as the war against fraud is waged.

The IRS Taxpayer Advocate has written in multiple Annual Reports to 
Congress about innocent taxpayers being victims, both coming and going, 
in the story of tax fraud. She specifically addressed the problems of 
law-abiding individuals and families whose tax refunds have been held 
up or frozen by Government, suffering hardship and unnecessary 
financial crisis. She also warns of innocent citizens having their 
returns incorrectly flagged for investigation as the result of 
imprecise or overly sensitive anti-fraud filters and screens. Her 
reports should serve as a warning to carefully consider tactics as we 
consider how to go about ridding our tax system of fraud.

There is much recent talk about imposing requirements or encouraging 
the tax industry to help Government by identifying and flagging suspect 
returns, and Government increasing its fraud defenses to stop 
suspicious returns, freeze refunds, and investigate filers. While 
effective strategies for fighting fraud do require private sector 
cooperation with Government, there are also inherent risks to our 
citizens from a tax system dominated by fear of fraud and not balanced 
by concern for rights. It will not be a successful strategy for private 
industry to voluntarily or by government order act like deputized U.S. 
Marshalls, effectively making ``citizen's arrests.'' Doing so places 
businesses in the position of improperly investigating and reporting 
their customers to the IRS--essentially extending the policing powers 
of the government directly into the private sector.

Those working to escape poverty, as well as the underserved and the 
struggling middle class, deserve better than to be profiled, whether 
economically or by the circumstances of their lives. Those pulling 
themselves up the bottom rungs of the economic ladder should not be 
treated as a suspect class, targeted for either greater tax compliance 
burdens than the rest of the population, or flagged as a targeted 
population for tax examination and investigation. Claiming the Earned 
Income Tax Credit should not mark the citizen for suspicion, nor for 
imposition of heavier compliance burdens and costs.

In the tax context, this means we cannot embed an assumption in our 
voluntary compliance tax system that taxpayers should be treated as if 
they are guilty until proven innocent.

We know your Subcommittee will appropriately review the threat of tax 
fraud not only in the context of the security of our tax system, but in 
the necessity to avoid collateral damage to innocent people, swept up 
in broad and imprecise identification for investigative and enforcement 
activity based solely on computer algorithms.

We urge the Subcommittee to diligently examine and question both public 
and private strategies to satisfy itself that we stay true to our 
values as we combat wrongdoing. The tax industry needs rational 
regulations and standards on how this fight should be fought, and 
Government needs active oversight and accountability to ensure fairness 
and decency. Congress needs, through its Oversight, to ensure that we 
are not losing our values as we work to combat wrongdoing.

We stand ready to assist and support the Subcommittee in any way that 
might be helpful in your pursuit of these critical concerns on behalf 
of honest taxpayers, who represent the overwhelming majority of the tax 
a in public in this country.

All the best and . . .

With HOPE,

John Hope Bryant
Founder, Chairman and Chief Executive Officer
www.operationhope.org

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