    [Senate Hearing 114-488]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 114-488

                      PRESIDENT'S FISCAL YEAR 2017 BUDGET

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

                                    HEARING

                                   before the

                              COMMITTEE ON FINANCE
                              UNITED STATES SENATE

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                               FEBRUARY 10, 2016

                                   __________

      [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                Printed for the use of the Committee on Finance
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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......................     3

                             ADMINISTRATION WITNESS

    Koskinen, Hon. John A., Commissioner, Internal Revenue Service,
      Washington, DC.................................................     5

                   ALPHABETICAL LISTING AND APPENDIX MATERIAL

    Hatch, Hon. Orrin G.:
        Opening statement............................................     1
        Prepared statement...........................................    31
    Koskinen, Hon. John A.:
        Testimony....................................................     5
        Prepared statement...........................................    32
        Responses to questions from committee members................    39
    Wyden, Hon. Ron:
        Opening statement............................................     3
        Prepared statement...........................................    53

                                 Communications

    Federation of Genealogical Societies.............................    55
    National Treasury Employees Union (NTEU).........................    61

                                     (iii)

                      PRESIDENT'S FISCAL YEAR 2017 BUDGET

                                  ----------

                          WEDNESDAY, FEBRUARY 10, 2016

                                           U.S. Senate,
                                          Committee on Finance,
                                                        Washington, DC.
        The hearing was convened, pursuant to notice, at 2:05 p.m.,
    in room SD-215, Dirksen Senate Office Building, Hon. Orrin G.
    Hatch (chairman of the committee) presiding.
        Present: Senators Grassley, Crapo, Roberts, Thune, Burr,
    Isakson, Portman, Heller, Wyden, Cantwell, Nelson, Menendez,
    Carper, Cardin, Brown, Bennet, and Casey.
        Also present: Republican Staff: Chris Armstrong, Deputy
    Chief Oversight Counsel; Kimberly Brandt, Chief Oversight
    Counsel; Eric Oman, Senior Policy Advisor for Tax and
    Accounting; and Justin Coon, Detailee. Democratic Staff: Joshua
    Sheinkman, Staff Director; Adam Carasso, Senior Tax and
    Economic Advisor; and Tiffany Smith, Senior Tax Counsel.

     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.
        Today, the committee welcomes the Commissioner of the
    Internal Revenue Service, John Koskinen. Commissioner Koskinen
    comes before us this afternoon to discuss his agency's
    operations and President Obama's budget proposal for fiscal
    year 2017.
        Commissioner Koskinen, today's hearing is the fourth time
    you have appeared before this committee during my chairmanship.
    Over the past year, we have seen both progress and setbacks at
    the IRS. As you well know--and as I think everyone here knows--
    I tend to be first in line to challenge and critique your
    agency when I believe it is wrong. But, for today, I would like
    to change things a little bit. Let me be the first to offer
    praise for the IRS where it is due.
        Here are some successes I would like to acknowledge.
        Last spring, the committee launched an investigation of the
    online tax return software industry. We were looking
    specifically at how the industry deals with stolen identity
    refund fraud and to what level the industry cooperates with the
    IRS to combat that fraud. In the wake of our investigation, the
    IRS and industry leaders launched a Security Summit and agreed
    to new initiatives to prevent and counter fraud. So I want to
    applaud these efforts, and I do look forward to continuing the
    committee's oversight of its implementation and results.
        Let me mention one more. Last year, this committee issued a
    report following a 2-year bipartisan investigation of the IRS's
    treatment of organizations applying for tax-exempt status. Our
    report included a number of recommendations for changes at the
    IRS, and, as of right now, all signs indicate that the agency
    is taking appropriate steps toward implementing those
    recommendations. So I appreciate your ongoing work there as
    well and am grateful for your responsiveness.
        There is, of course, more to be done, and I look forward to
    working with you to ensure that taxpayers are never again
    targeted because of their political beliefs.
        While these are all signs of progress, a number of great
    challenges still lie ahead. The most obvious challenge facing
    the IRS is the need for modernization. On the one hand, the
    agency must be brought into the digital age in a way that
    provides the greatest convenience and efficiency for taxpayers.
    But on the other hand, the agency must also better protect
    against data thieves that thrive in the digital age.
        We were reminded of these risks last year when data thieves
    breached the IRS's own website through the Get Transcript
    portal and successfully stole the tax records of 330,000
    taxpayers. Now, that is 330,000 taxpayers who now have their
    most sensitive tax information sitting out there in the hands
    of criminals waiting to use that information to do further
    damage this tax year, or the next, or even 10 years from now.
    We were reminded of this threat yet again just yesterday, when
    news broke of another large-scale attack against the IRS, but
    thankfully it appears that that attack was unsuccessful. The
    Get Transcript breach is going to haunt us for years to come,
    and, unfortunately, it is only one of many.
        On the customer service front, we look forward to hearing
    more about the IRS's comprehensive ``Future State'' plan to
    modernize how taxpayers interact with the agency. I applaud
    this initiative, but I will be watching very closely to see how
    it is carried out and how it does impact taxpayers. Once again,
    modernization is probably the central challenge facing the IRS,
    and it requires a careful balance of sometimes competing
    priorities. Much hangs in the balance of how these efforts are
    carried out.
        Another issue I look forward to hearing about today is a
    provision of the recently enacted FAST Act--specifically, the
    provision dealing with the inactive tax debt collection
    program. As noted in the conference report to the bill and as
    we will hear today from Senator Grassley and perhaps others,
    Congress's intent was that Treasury and the IRS would
    expeditiously implement the provision by utilizing private
    collection contractors and debt collection centers that are
    approved by the Bureau of the Fiscal Service at the Department
    of Treasury. Further, the statute requires that contracts be
    entered into and signed within 3 months after enactment of the
    FAST Act. That deadline of March 4th is fast approaching. So I
    look forward to hearing an update today on your efforts to get
    those contracts signed and cases released and to ensure that
    the taxpayers are made aware of the program and how it will be
    implemented.
        With that, I will now turn to Senator Wyden for any remarks
    that he cares to make.
        [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, Mr. Chairman, and thank
    you for holding this hearing. And as I noted this morning, I
    think it is very good that we are having multiple hearings this
    week, because I think that is a big part of launching the year,
    to really start the debate with these hearings. With tax season
    underway and the President's final budget at hand, there are
    obviously important issues to discuss with the IRS, and we want
    to thank the Commissioner for joining us today.
        The first is the big, ongoing challenge for the IRS, and
    that is, providing the best possible service to taxpayers, even
    though this is a tough budget environment. The good news is,
    the Congress recently made a badly needed investment in ID
    protection, telephone service, and cybersecurity for 2016. I
    think--and the Commissioner would probably be the first to say
    this--no one should think that the fraudsters and organized
    criminals who have made headlines preying on taxpayers have
    somehow vanished and moved on. It is my view that we are going
    to have an ongoing challenge as the criminals continue to get
    more sophisticated and inventive, which is something that the
    Commissioner has emphasized.
        And my view is that budget cuts that hobble our ability to
    fight back against these tax ripoffs are tantamount to
    kickbacks to the criminals. So the down payment that the
    Congress made is going to help protect taxpayers and improve
    services.
        I also want to note at the outset, there is a lot more that
    needs to be done, particularly with respect to upgrading our
    information technology. The Commissioner has been quite
    forthright in saying that this is a very large challenge for
    the Internal Revenue Service. First of all, processing the
    universe of taxpayer data is a year-round job. There is no
    opportune time for the IRS to say, well, let us just go dark
    and now we can have a big chunk of time, months and months, to
    put in a new batch of servers and software. And this is a
    particular challenge given the fact that some of the systems in
    use date back to the Kennedy era. Decades of modified
    technology and programming code have built up like layers in an
    onion. When Congress updates a complicated policy like the
    alternative minimum tax, the IRS has to figure out a way to dig
    through all those layers to adjust the system and then correct
    everybody's tax bill.
        For these reasons and more, upgrading information
    technology at the Internal Revenue Service is going to be
    demanding and time-consuming. And you cannot get all this done
    when you have a tight budget, which in effect means that when
    you are going up against the fraudsters, you have one hand tied
    behind your back.
        Now, there is one issue--and we started talking about it
    this morning with Secretary Lew, and I have discussed it with
    the Commissioner--that I think very much deserves bipartisan
    attention here in the Finance Committee, and that is, what is
    going to be done to tackle this issue of corporate taxes going
    unpaid? Now, the latest estimate with respect to the tax gap
    comes in at $385 billion per year. And my sense is, when it
    comes to individuals skipping out on their taxes, the IRS is
    moving to make real progress in terms of sharing information
    that the Congress can use to crack down on these shady
    avoidance strategies and cheaters on the individual side. When
    it comes to the corporate tax gap, however--and that adds up to
    two-thirds of a trillion dollars over a decade--it is my view
    that the Internal Revenue Service has some heavy lifting to do.
        I sent a letter last week to the Commissioner asking how
    the IRS studies the corporate tax gap, what it knows and what
    it is going to do about it. We got a limited response to that
    question yesterday, and today I hope we will hear more details
    about how we can have an aggressive action plan to root out a
    significant portion of this corporate tax gap and particularly
    the most serious areas of growth in this gap.
        We have 5 million Americans today living in deep poverty.
    Assistance for the hungry has been cut. We have veterans across
    the country on wait lists for health care. Wildfire prevention
    in my part of the world is neglected while the fires get bigger
    and hotter. And again and again, you have painful cuts being
    proposed for services that are essential to older people and
    families of limited means.
        So, if you can come up with an effective, targeted, all-
    hands-on-deck approach to reducing this corporate tax gap, you
    are not going to meet all the revenue needs certainly in this
    country, but you could make a real difference in terms of
    getting our priorities straight. And my sense is, this is going
    to require much bolder action and more information than the IRS
    currently provides about how companies dodge their
    responsibilities.
        I have talked to the Commissioner about this, and my hope
    is, this afternoon we will hear how the agency and the
    Commissioner can, in concert with us, on a bipartisan basis,
    put in place a strategy that ups the ante in terms of dealing
    with the most serious aspects of corporation tax avoidance.
        Mr. Chairman, thank you for scheduling this hearing.
    Commissioner, we thank you for coming.
        The Chairman. Well, thank you, Senator Wyden.
        [The prepared statement of Senator Wyden appears in the
    appendix.]
        The Chairman. Our witness today is Internal Revenue Service
    Commissioner John Koskinen. Commissioner Koskinen has been
    serving as the head of the Internal Revenue Service since
    December 2013. Mr. Koskinen has broad public-sector experience,
    including having served as Chairman of the Board of Freddie
    Mac, City Administrator for the District of Columbia, and
    Deputy Director for Management at the Office of Management and
    Budget. Mr. Koskinen also has extensive private-sector
    experience, including working as the president of the United
    States Soccer Foundation and as the president and CEO of
    Palmieri Company. Mr. Koskinen graduated with a J.D. from Yale
    University School of Law and a B.A. in physics from Duke
    University.
        I want to thank you, Mr. Commissioner, for being here
    today, and please go ahead with your statement.

      STATEMENT OF HON. JOHN A. KOSKINEN, COMMISSIONER, INTERNAL
                    REVENUE SERVICE, WASHINGTON, DC

        Commissioner Koskinen. Thank you, Mr. Chairman, Ranking
    Member Wyden, and members of the committee. I appreciate the
    opportunity to join you today to discuss the IRS's budget and
    current operations, and I particularly appreciate the
    chairman's recognition of the progress we are making in several
    areas.
        But I want to begin by thanking the Congress generally,
    including the members of this committee, for approving the $290
    million in additional funding we received for fiscal year 2016.
    These funds were specifically designated, as Senator Wyden
    noted, for improving taxpayer service, strengthening
    cybersecurity, and expanding our efforts against identity
    theft. This is the first time in 6 years that the IRS has
    received significant additional funding. It is a major step in
    the right direction, and I can assure the Congress that we will
    use these resources wisely and efficiently.
        But the IRS is still under significant financial
    constraints. Even with the additional $290 million, our budget
    for this year is still about $900 million below where it was 6
    years ago in 2010. Our budget as a whole is actually down for
    this year when you consider that the Service must absorb about
    $300 million in mandated cost increases and inflation.
        As a result, we have no choice but to continue the
    exception-only hiring policy that began in fiscal year 2011.
    That leaves us unable to replace most employees we lose this
    year through attrition. In fact, we expect the IRS workforce to
    continue to shrink by another 2,000 to 3,000 full-time
    employees this year, for a total loss of over 17,000 employees
    since 2010.
        We recognize the importance of spending taxpayer dollars
    wisely and will continue working to find efficiencies in our
    operations. But a fact that often gets overlooked is that the
    U.S. is much more efficient in its tax collection than
    virtually all other countries. The average OECD member country
    spends $8.87 to collect $1,000 of revenue while the U.S. spends
    only $4.70--about half of what the average is. So I believe it
    is important to understand that we already are one of the most
    efficient tax administrations in the world.
        The IRS is also continuing to strengthen our operations as
    we move forward. In that regard, as the chairman noted, we have
    addressed a number of management problems that have developed
    in the past, especially in the tax-exempt area. For example, we
    welcomed this committee's bipartisan report issued in August
    and accepted and are implementing all of its recommendations
    that are under our control. The last report I have is that we
    have implemented 82 percent of the recommendations of this
    committee.
        In developing our funding request for fiscal year 2017, we
    felt it was important to be as specific as possible in
    describing our priorities and the cost of each one. So, while
    the President's 2017 budget for the IRS requests a total
    increase of about $1 billion, we have broken that down into 15
    separate initiatives. We believe this will give Congress a good
    sense of how we intend to spend any increase in funding we
    might receive, and we are prepared to be held accountable for
    achieving the goals related to each initiative. Let me briefly
    highlight some of the major areas covered by these initiatives.
        First, of concern to everyone is taxpayer service. The
    additional funding in the new budget will help us improve
    service delivered through traditional channels and allow us to
    continue modernizing the services we offer to help transform
    the taxpayer experience.
        Second, stolen identity refund fraud. The additional
    funding in the fiscal year 2017 request will allow us to keep
    investing in resources and tools to stay ahead of criminals who
    continue to become more sophisticated in stealing identities
    and filing false returns.
        Third, our core enforcement programs. With this additional
    funding, we would, for example, be able to increase audits and
    collections. This is critical, because the ongoing decline in
    enforcement activities we have seen in the last several years
    has translated into billions of dollars of lost revenue for the
    government.
        Fourth, the Affordable Care Act. We must continue to invest
    in the IT infrastructure to support implementation of the ACA's
    major tax-related provisions. I would point out that for the
    past 4 years, the IRS has received almost no funding for
    implementation, and we have had to use over $1 billion of
    resources needed for other critical IT functions in order to
    meet our statutory obligations.
        And fifth, electronic records management. Although we have
    been making progress in preserving and protecting e-mails and
    other electronic records, we need to continue making
    improvements so we can respond faster to legal and
    congressional inquiries as well as FOIA requests.
        While providing adequate funding to these and other areas
    is critical, Congress can also help us by passing legislation
    to improve tax administration. We appreciate the efforts of
    this committee last year to secure passage of a number of
    important measures. The President's 2017 budget request
    contains additional legislative proposals that would further
    improve tax administration. They include: renewing streamlined
    critical pay authority, which is critical for us; allowing us
    to extend the matching program for Taxpayer Identification
    Numbers; granting us authority to require minimum
    qualifications for paid tax preparers; and expanding electronic
    filing requirements for businesses.
        That concludes my statement, Mr. Chairman, and I would be
    happy to answer your questions.
        [The prepared statement of Commissioner Koskinen appears in
    the appendix.]
        The Chairman. Well, thank you, Mr. Koskinen. As I said in
    my opening statement, this is the fourth time you have appeared
    before the committee during my time as chairman, and each time
    we have discussed the issue of cybersecurity and the threat
    from data thieves who steal and abuse taxpayer information.
        In the past year alone, cyber-criminals have conducted a
    number of breaches that are aimed at stealing personal
    information, including 1.1 million identities of CareFirst Blue
    Cross Blue Shield customers, 80 million Anthem customers,
    330,000 taxpayer records through the IRS's own Get Transcript
    portal, and thousands of records from the online tax
    preparation site, TaxSlayer. Just yesterday, we learned of
    another large-scale attack against the IRS, though thankfully
    this one appears to have been unsuccessful, and that is the
    botnet cyber-attack last month.
        Commissioner Koskinen. Right.
        The Chairman. Commissioner Koskinen, these attacks are not
    going away. What can you tell us about this latest attack? And
    how can the IRS be sure that it has fully identified and
    contained this attack and other attacks that may come? Attacks
    of this nature can often result in malware or a virus being
    embedded in a compromised system even after the event is known.
    And my second question would be, can you assure this committee
    that the IRS is doing everything it can to ensure the security
    of taxpayer information following this attack?
        Commissioner Koskinen. It is a serious question, as we have
    discussed before. As you note, the caliber of the enemy we are
    facing is increasingly more sophisticated and more global. We
    are dealing with organized crime syndicates all around the
    world. We are attacked or pinged over a million times every
    day, which means that people continue to probe and push and try
    to figure out how to get into our database.
        I would note that both the Get Transcript difficulty and
    the more recent attack in the last couple weeks were
    sophisticated forms of identity theft. The criminals already
    had all of the personal information of the taxpayer that they
    needed. None of those attacks breached our system itself. They
    were not cyber-breaches in the sense that our database was
    accessed. The more recent one was simply an attempt by
    criminals to get a filing PIN to allow them to, in fact, use
    information that they have stolen to try to file for a false
    refund. And as you note, fortunately, with our improved
    systems, we were able to catch it quickly, and we think we will
    be able to shut it down equally as quickly.
        But it is axiomatic that we and every financial institution
    in the world are under attack, and that is because criminals
    already have a vast amount of personal information, and they
    are trying to figure out how to monetize that information. I
    think it is safe to say, as you say, that we cannot solve it by
    ourselves, which is why we did create this partnership with the
    private sector and the States to try to jointly this year and
    going forward permanently share information and develop
    standards and protections. Already we see, as the filing season
    begins, the advantage of the information we are sharing on a
    regular basis, particularly with the private sector, as we go.
        Ultimately, I think we have to recognize this is going to
    be an ongoing problem. We have been attempting to move from
    being solely reactive to pulling together the resources we need
    and the partnerships we need to try to get ahead of the game,
    get ahead of where the criminals are going.
        It is clear that as we close off one avenue of attack, the
    criminals simply move to another. We could see that in this
    particular attack as they moved from country to country, as
    they were shut down, you could actually see the attacks then
    moving around the world.
        The Chairman. Well, let me just ask you another question.
    In your written statement, you note that the IRS had to defer
    hundreds of millions of dollars from critical information
    technology projects because of Obamacare. The agency's budget
    justification shows that over $400 million and nearly 2,000 IRS
    employees are dedicated to Obamacare implementation, a sizable
    amount in this time of budget constraints. But even with all
    this spending, we still have serious problems regarding the
    integrity of Obamacare tax credits.
        So I have two questions about how we might better protect
    taxpayer dollars from Obamacare problems. Yesterday, Senator
    Grassley and I sent a letter to the Centers for Medicare and
    Medicaid Services about the agency's failure to provide the IRS
    with advanced premium tax credit payment data which would help
    improve the integrity of these credits. What additional
    information does the Service need to make sure that these
    credits only go to those who qualify for them?
        And then the second question is, you wrote to Congress
    that, of the 4.6 million people who received subsidies and are
    required to reconcile their advance premium tax credit, roughly
    1 million either have not filed a tax return or have not
    reconciled those payments. Now, this represents billions of
    dollars. What is the IRS doing to ensure these payments went
    only to people who qualified for the credit?
        Commissioner Koskinen. The determination of who qualifies
    for premium tax credits is made by HHS and CMS. What we do is,
    we provide them income information so that they can then
    validate the projections to see if people are eligible on their
    income basis, and then we get data from the marketplaces each
    year. And this year we are getting the data in real time, so we
    will actually be able to have the data that shows what were the
    premium tax advance payments made to individuals and compare
    them against the reconciliations that are made. Last year, we
    got the so-called VP data on a rolling basis through the filing
    season.
        So, once CMS decides they are qualified and the applicant
    makes an estimate of what their earnings are going to be and,
    therefore, what their advance payment will be, all that
    information is recorded, and for the first time really in a
    major program, we get that information before we get the tax
    returns. Last year, what happened was a number of taxpayers did
    not realize, because they had low incomes, that they actually
    had to file a return because they had not filed in the past. We
    have written to all of those people. We actually have decreased
    the number of people who did not file by over 50 percent in
    response to our letters--one of our better compliance
    activities.
        This year, going forward, we will not process, we will
    actually be able to pull out of the processing queue, anyone
    who has not reconciled the information we have about the
    advance premiums they have gotten with the payments they got.
    In addition, last year we actually had a very successful
    compliance activity of those who did reconcile, where we
    actually were able to figure out who had overpaid and who had
    underpaid. Those who owed us funding, we have collected about
    98 percent of the additional money owed.
        The Chairman. Great. Well, my time is up. Let us all try to
    stay within the 5 minutes. I am sorry I did not. We will turn
    to you, Senator Wyden.
        Senator Wyden. Thank you very much.
        Commissioner, let us go to the tax gap question that we
    have talked about, two-thirds of a trillion dollars over a
    decade. It is obviously lots of money. That is what we are
    losing. According to the most recent numbers, it is probably
    higher in terms of the corporate tax gap. We have been talking
    to the IRS office, and I was particularly struck by the agency
    indicating that it has no mechanism to track the specific
    sources of the corporate tax gap. So I have written you on it,
    and I just want to highlight a couple of the areas and see if
    we can, particularly with Democrats and Republicans having an
    interest in this, find some ways to get started.
        Because you have told me that you agree this is a serious
    problem, what would you do to get started? What are the areas,
    coming out of the box in an effort to turn this around, where
    you would start?
        Commissioner Koskinen. Well, we actually have already
    agreed with you and are moving forward. Our large business and
    high-net-worth-individual division--we have four operating
    divisions pertaining to taxpayers' incomes--has spent the last
    2 years really looking at an aspect of this. The number of
    people available and enforcement agents there are down about 20
    percent, and so they have looked at how we can become more
    efficient and effective at dealing with corporations,
    collecting those taxes. They have had a very visible
    restructuring that is really just now being completed in which,
    instead of just auditing companies one at a time or looking at
    specific issues on a one-off basis, they have decided the more
    efficient and effective way to do it is to look at just the
    point you are raising. Where are the areas where we are seeing
    either noncompliance or basic issues that are being raised? And
    so they are actually designing our exam program so we will look
    at the tax gap in what they call campaigns. That is, if there
    is a problem in transfer pricing, we look at transfer pricing
    internationally. But one of the areas that we do track directly
    nationally is, many corporations have divisions, separate
    corporations, that are owned, and they engage in transactions
    back and forth. They buy and sell services, buy and sell
    products. Oftentimes you can skew the tax results according to
    what the charges are, which may or may not be at the market
    rate. There are other ways that people have of increasing
    compensation as opposed to dividends if it is a closely held
    corporation. So the compensation is a deduction; the dividends
    are not a deduction.
        So going forward--and we have been very visible about this.
    We are not trying to sneak up on anybody. And in fact, to the
    extent people know what we are looking at, we will get better
    compliance. We think if we look at issue-based auditing rather
    than simply individual organizational auditing, we will be able
    to begin to make a dent in that tax gap.
        I would note, as we discussed, that overall in our
    enforcement and collection activity, we are down over 5,000
    revenue agents, officers, and criminal investigators. So no
    matter how good we are at highlighting issues, we have to have
    the personnel to go and audit them. And thus far, our
    experience is that each revenue officer generates over $1.5
    million a year just in collections of taxes that are owed to
    the government. So we need to actually be more efficient in
    highlighting areas we are pursuing, but ultimately we need more
    people.
        Senator Wyden. As you and I have talked about, I think we
    will be better positioned to get the resources when Democrats
    and Republicans on this committee understand exactly what the
    action plan is to turn this around. And in the letter I wrote
    you yesterday that we will await an answer on, we said 60 days.
    Is that reasonable to get a sense of what the action plan is
    for turning around the corporate tax gap?
        Commissioner Koskinen. We will get you--because, as I say,
    we are already moving, I think, in this direction. We would be
    delighted to get you a response and an explanation. That
    explanation will continue, though, to understand that no matter
    how creative we are with identifying where we are going,
    ultimately it all depends on audits, and audits depend on
    people, and we do not have enough people.
        Senator Wyden. Point appropriately taken.
        One last question on something else that the committee has
    been interested in, and that is this question of the tax return
    preparers who prey on vulnerable taxpayers and pocket their
    money. And as you know, there have been some recent news
    reports on this. Why don't you give us the latest on what you
    see in terms of these fraudulent tax preparers and just kind of
    update us on the latest?
        Commissioner Koskinen. I think it is important for
    everybody to understand, our view is that the vast majority of
    tax preparers are honest, informed, and try to do the best they
    can. There are a cadre of tax preparers who sort of set up shop
    in the spring who do not have much background. The tax code is
    very complicated, and so they are making a lot of mistakes that
    we find. And then there is a small percentage, very small, who
    are crooks who, in fact, file returns on behalf of taxpayers
    who do not know they are being filed, file for refunds that
    they take that the taxpayers do not get, hold out false
    expectations as to how much money they are going to get the
    taxpayer. And so our view is that we are not going to put the
    crooks out of business by actually requiring minimum standards,
    but taxpayers at least have to have a better indication for the
    300,000 or 400,000 unregulated tax preparers what their minimum
    qualifications are.
        So we think that it would be helpful--we are not requesting
    a big regulatory program. We just think that taxpayers ought to
    be comfortable that there is a minimum set of qualifications
    anyone preparing their return has to meet.
        Senator Wyden. My time has expired. In your seat or perhaps
    the one right next to you, we had a preparer from the State of
    Oregon talk about how Oregon has put in place in effect exactly
    what you have described, those minimum standards, and it has
    been well accepted by the vast majority of preparers who, as
    you appropriately note, are honest and scrupulous. So we will
    look forward to working with you on both counts.
        Thank you, Mr. Chairman.
        The Chairman. Thank you, Senator.
        Senator Grassley?
        Senator Grassley. Welcome. The chairman brought up this
    issue in his opening comment, so you know that, if it is
    important to him, it is important to somebody besides Chuck
    Grassley. He brought up the necessity of Treasury and the IRS
    working expeditiously to get the IRS private debt collection
    program up and running. Provisions in the law require that the
    IRS partner with the Bureau of Fiscal Services within Treasury
    and the private-sector companies that it employs to collect
    inactive tax receivables. The law requires further that you
    begin signing contracts and agreements with the Bureau of
    Fiscal Services collectors no later than March 1, 2016 and
    releasing cases soon thereafter.
        Is the IRS on schedule to meet the March 4th deadline
    provided by Congress?
        Commissioner Koskinen. As a normal matter, even off a
    schedule, getting a procurement done in 90 days, let alone
    setting up a whole program and getting procurement up, is
    really impossible. What we are committed to doing--and I
    personally am committed--is, we are going to do everything we
    can to make this program work, to get it up and running as
    quickly as we can. We are planning and are organizing and have
    gotten a positive response to have a bidders conference this
    month, and, within the 90 days, we are committed to providing
    this committee and the Congress a timeline as to when the
    program will actually be up and running and implemented. The
    bidding conference is to get us started with bidders to get
    their input back in terms of what they are looking for, how we
    can actually put this together to make it work.
        Our goal, if we can pull it off, is to actually design this
    program, learn from the past and what were the mistakes, what
    were the problems and the challenges, so we give this program
    the best chance we can to succeed. And as it stands now, in the
    normal procurement process plus developing the program, we
    expect and hope to have contracts with those acceptable
    collectors before the end of the fiscal year.
        But we will provide you with that update, and I can only
    stress to you that we are going to do everything we can to make
    it work. I cannot help but note that this is yet another
    unfunded mandate. Nobody has given us any of the funding we
    need to actually design the program or oversee it, but we are
    going to do it anyway, because we do statutory mandates.
        Senator Grassley. Did you just tell me that you are not
    intending to partner with your fellow agencies at the
    Department of Treasury to save time and money? It seems to me
    that you have people there you can contract with who are
    already in that business, and we did it for the sole purpose
    that the excuse you just gave us, that it gives us time to get
    it up and running, would not----
        Commissioner Koskinen. You have to understand, Senator,
    there is no program yet. We have to design the IT to take the
    cases that the statute provides appropriately go. We have to be
    able to monitor those. Private debt collectors have to be able
    to collect money and actually provide back through that IT
    system where they go. We have to provide them training, we have
    to educate them----
        Senator Grassley. Okay. Let us stop there. I will go on to
    another question.
        Commissioner Koskinen. Okay. Anyway, we are going to do our
    best. I have told our people I want no stone left unturned, and
    I want it to be done as quickly as we can. But it will not do
    us any good to put it together in a way that does not work and
    then have people say, well, we did that purposely. We are going
    to make the best effort we can to make sure that it works.
        Senator Grassley. Well, remember, in this case you might
    make the chairman unhappy if it does not work out.
        Commissioner Koskinen. If it does not work out, it will not
    be our fault.
        Senator Grassley. You might not worry about me, but you had
    better worry about Chairman Hatch.
        Commissioner Koskinen. Listen, I worry about every member
    of Congress.
        The Chairman. And I am unhappy all the time. [Laughter.]
        Senator Grassley. Yes. In 2014, I was successful in getting
    the bipartisan Small Business Efficiency Act passed into law.
    The legislation establishes a voluntary certification program
    for professional employer organizations. These PEOs are
    certified, and it gives them the authority, rather than the
    small businesses that hire them, to take sole liability for the
    collection and remittance of Federal employment taxes for
    worksite employees. Last year, the IRS failed to meet the
    statutory July 1, 2015, deadline for establishing the
    certification program. The IRS announced at that time that it
    intended to begin accepting applications by July 1, 2016, a
    full year behind schedule. I am concerned that another failure
    to meet the new deadline will penalize small businesses that
    work with PEOs and could even result in double taxation.
        So will the IRS stick to that new self-imposed deadline and
    begin accepting applications by July 1st this year? If not,
    when do you expect to have the program up and running?
        Commissioner Koskinen. We expect to meet that deadline. We
    have been aiming for it since the program was established.
    Again, I would simply note in passing, this is a program we
    have to set up. People have to be able to register. We have to
    be able to get their bonds. We have to be able to certify
    them--all of this with no additional funding at all and a very
    tight time frame. But it is a statutory requirement, and I
    would stress, whether it is ACA or the ABLE Act or this act, we
    do statutory mandates, and we will get this up and running
    because it is, in fact, an important program for small
    businesses to be able to be comfortable that the people they
    are dealing with in certified professional employee
    organizations actually have the financial capacity to meet
    their needs. There have been unfortunate examples where small
    businesses, much like with tax preparers, have been taken
    advantage of or where people they have dealt with have gone out
    of business and left the small business responsible for all of
    those tax payments.
        Senator Grassley. Thank you, Mr. K.
        The Chairman. Senator Menendez?
        Senator Menendez. Thank you, Mr. Chairman. And thank you,
    Commissioner, for your service.
        I want to explore with you the question of unregulated paid
    preparers. As you know, in 2011 the IRS created a certification
    program that required paid preparers without specialized
    training or education to register with the agency, to pass a
    competency test, and to meet continuing education requirements.
    But even those most basic standards were struck down by a
    Federal appeals court in 2014, which ruled that the IRS did not
    have the statutory authority to regulate those paid preparers.
        To fill this void, several of us have been working for
    several months to pass bipartisan legislation that would give
    the IRS the power to regulate paid tax preparers. The idea is
    simple: make sure that those who are handling sensitive
    financial information and filing returns on behalf of taxpayers
    have some training and actually know what they are doing. It is
    critically important, as unenrolled preparers have
    disproportionately high error rates as well as troubling levels
    of outright fraud, particularly when filing for the Earned
    Income Tax Credit. This problem is so pervasive, the IRS once
    again included it on its annual ``Dirty Dozen'' list of scams,
    and the National Taxpayer Advocate Nina Olson noted that
    unenrolled return preparers overclaimed the EITC on 49 percent
    of the returns they submitted. And when asked about combating
    EITC improper payments, she made very clear that regulating
    paid preparers is the best way to improve accuracy and reduce
    overpayments. So, quite simply, if you are serious about
    addressing improper payments, refund fraud, and taxpayer
    schemes, you have to be serious about regulating paid
    preparers.
        Now, unfortunately, some of our friends are concerned that
    the IRS would somehow abuse its authority to impose minimal
    standards on paid preparers, this despite a poll conducted last
    month by the Consumer Federation of America that indicated 80
    percent of Americans wanted paid tax preparers to pass a test
    administered by the government that would ensure that those
    preparers have the knowledge and training to complete taxpayer
    returns correctly.
        So, Commissioner, is it necessary to regulate paid
    preparers in order to reduce improper payments, fraud, and
    identity theft?
        Commissioner Koskinen. The short answer to that is ``yes.''
    I have tried to stress--in fact, in an answer in an earlier
    hearing before this committee--that we are not proposing a new
    regulatory scheme. We have actually set up--and people know
    what it would look like--a requirement of minimum capacity,
    minimum standards. And all we are talking about is requiring
    minimum standards of those who practice. We do not plan any
    audits or anything else. It is just a question of, can we ask
    them to demonstrate some minimum capacity to understand the
    code and perform appropriately? We have a voluntary program
    where we have about 60,000 people who went through the minimum
    requirements and met them and now get a certificate of
    completion, a record of completion. But clearly, unless there
    is a requirement that everyone pass an exam voluntarily, we are
    not going to be able to get through it. And we do need to have
    that minimum level of competency if we are going to deal with
    and make a dent in the improper payment rate, particularly in
    the EITC program.
        Senator Menendez. So there is no reason to have any concern
    about an abuse by the IRS of such minimum standards?
        Commissioner Koskinen. No. As I have tried to make clear,
    everybody knows what the program would look like. We had it
    running for a year before the court said we did not have the
    statutory authority. And I do not think anyone participating in
    that program felt that there was anything untoward done by the
    IRS. We set up vendors who gave the exams. If you passed the
    exam without any other questions, you got the certificate.
        Senator Menendez. I hope we can do that, because I know
    many of my colleagues on this committee are worried about fraud
    across the board and certainly in the EITC program. Well, if
    preparers who are not ultimately meeting a minimum set of
    standards are 49 percent of the time more likely to be
    committing fraud, then it would seem to get to a significant
    heart of the problem.
        The other thing I am concerned about is scams, and I have
    been concerned now that the IRS has been given the power to use
    independent collectors to go collect against taxpayers who are
    due and owing. And I am all for collecting, but we already had
    a big problem before this power was given to the IRS, with
    scammers calling individuals telling them that they owe the IRS
    money and threatening them with all types of actions. And of
    course, it is not you; it is not the IRS. But nonetheless,
    hundreds of thousands if not millions of dollars have been paid
    to individuals who are using this scam.
        So my question is, now that you have been given the
    authority to go ahead and use outside collectors--and when I
    see the other scam that is being pursued where people who have
    no health insurance are getting scamed as well, which affects
    minority communities disproportionately--what is the IRS doing
    and what will it do to ensure that we maximize the protection
    against such scams?
        Commissioner Koskinen. It is a new challenge. The last two
    times we have used private debt collectors, we did not have
    phone scams going on at the same time. Part of my response is,
    Senator, the reason it takes time to set this program up is, we
    think, at a minimum, we need to write a taxpayer when we are
    turning their account over to a collector to tell them their
    account is being turned over to a specific collection agency.
    Part of the training and the requirements in our contract will
    be that the debt collector will then have to write the
    taxpayer, will have an obligation to write the taxpayer,
    introduce themselves, and say, ``We have been assigned your
    account, as you know, and we will be calling you,'' so that no
    calls should be made before the taxpayer gets two letters.
        Now, crooks are pretty good about trying to figure out how
    to masquerade behind the letters and do their own false
    letters. But we do need to--and we are focusing on trying to do
    everything we can to give taxpayers as much information to
    protect them against the scams. At the same time, for the last
    2 years we have been working with everyone to try to get the
    information out that, as I have said, if you are surprised to
    be hearing from us, the chances are pretty good you are not
    hearing from us. We never threaten people. We never say, make a
    payment of your taxes to a bank account or to a debit card. We
    never threaten you that you are going to lose your house or you
    are going to go to jail. That is just not the way we operate.
        And so our concern is that people are still picking up
    those phones. It is a low cost-of-entry scam. You just have to
    start dialing robocalls. We work with the IG. We are tracking
    down, we are criminally prosecuting some people when we catch
    them. But it seems to be a persistent scam that we just simply
    cannot stamp out.
        Senator Menendez. Well, I appreciate your attention to it.
    We have a series of law enforcement entities in New Jersey that
    have shared the experiences of individuals who have been
    scammed. And it is pervasive, and it is a challenge. And under
    the new authorities, I just hope we do not exacerbate the
    problem.
        Thank you, Mr. Chairman.
        The Chairman. Thank you, Senator.
        Senator Cardin?
        Senator Cardin. Thank you, Mr. Chairman.
        It is a pleasure to have you back before our committee.
    Thank you very much for your service, and I was pleased to see
    the President's budget did provide for a modest increase in
    your budget. It is clear that you need the resources to get the
    job done, and given the resources, you are not only going to do
    it more effectively for the taxpayers of this country as far as
    service is concerned, you also will be more efficient in the
    collection of the revenues.
        I also understand that your budget is asking Congress to
    pass the authorization for your streamlined critical pay
    authority. You and I have talked about that, and I hope we can
    act on that to give you the ability to bring in the type of
    expertise that you need.
        I want to go on to one area that was in the omnibus bill
    that was signed by the President 2 months ago that dealt with
    the Work Opportunity Tax Credit. The President's budget would
    make that program permanent. We extended it for 5 years,
    including that the long-term unemployed now qualify for the
    Work Opportunity Tax Credit. The challenge is, there are a lot
    of people who would like to be able to participate in it, but
    you have not issued the guidelines necessary to give clear
    direction as to how that will be implemented with the long-term
    unemployed.
        Can you just give the committee some guidance as to when
    you believe that will be available to the taxpayers?
        Commissioner Koskinen. We have been working on it. Again,
    the statute had a whole series of suggestions and requests and
    requirements. Our hope is before the month is out--certainly if
    not then, shortly thereafter--we will have that guidance out,
    because we do understand that it is critical to have the
    guidance out so people can respond accordingly. So we have a
    number of guidance projects, obviously, but it is at the top of
    our list, and with any luck at all we will get it out in the
    next 3 or 4 weeks.
        Senator Cardin. Thank you. I appreciate that. If it is the
    end of the month, you only have about 2 weeks or 2\1/2\ weeks.
    It is a short month.
        Commissioner Koskinen. It is a short month, plus 1 extra
    day.
        Senator Cardin. One extra day this year.
        We also have talked about this Taxpayer Rights Act where we
    have tried to deal with some of the significant issues
    affecting taxpayers. One is their retirement savings and the
    IRS policies of going after retirement savings on flagrant
    activities. There seems to be a lack of certainty in this area
    and maybe even a different view as to what is appropriate or
    not in regards to retirement security, a lien attachment by the
    IRS.
        Can you just share with us how we could try to harmonize
    this? We have the Taxpayer Advocate who is working with us on a
    Taxpayer Bill of Rights. We have the IRS working on this. Are
    we going to be able to come together and try to have a meeting
    of the minds on this?
        Commissioner Koskinen. I hope so and I think so. I know the
    Taxpayer Advocate's basic view would be that she would rather
    not have any liens on retirement accounts, and, you know, her
    role is to be the advocate. Our role under the statute is, we
    have to collect taxes. We do not reach retirement accounts
    until we have exhausted a lot of other remedies with taxpayers.
    And in particular, the situation of concern to us is where
    people are making additional contributions into their
    retirement account rather than using those funds to pay the
    taxes they owe right now. And that is one of the indicators
    where clearly that is of great concern to us, because
    everybody, small businesses and individuals, has an obligation
    to pay their current taxes. And if you are taking money that
    should be paying your taxes and putting it in your retirement
    account, that should not be shielded, because otherwise there
    are going to be a lot of contributions to your retirement
    account.
        So we need to work out an appropriate protection to make
    sure that we are doing it in a way that protects taxpayers to
    the extent possible as we go. As I say, it is not the first
    place we go. We look at other sources of repayment. We have
    online installment agreements that people can make with us. We
    only end up with this situation where, in most cases, we have a
    very recalcitrant taxpayer.
        Senator Cardin. And I understand that is the policy. I just
    would urge you to be a little more transparent. Then we might
    be able to reach a common position on this if we understand how
    you are applying the flagrant conduct standard.
        Commissioner Koskinen. I think we ought to be able to come
    to an agreement as to what the appropriate standard is.
        Senator Cardin. And I know Senator Portman is here, and he
    and I are working on retirement issues. One of the issues is,
    obviously, we are trying to strengthen retirement savings.
    Senator Portman and I joined forces on the Work Opportunity Tax
    Credit to extend it to the long-term unemployed. So there is
    bipartisan interest in all these issues.
        Thank you.
        The Chairman. Senator Burr?
        Senator Burr. Thank you, Mr. Chairman.
        Commissioner, welcome. I think we all share your
    understanding that you need to increase the number of
    individuals working at the IRS. I want to explore in my time
    whether those individuals have the qualities to work at the
    IRS. And this really goes back to the Inspector General's
    report that showed between 2010 and 2013 the IRS hired 7,000
    former employees, of which 824, or 11 percent, had prior
    substantiated employment issues, meaning they had been let go
    by the IRS; and 141 had a prior tax issue, including 5 who were
    found to willfully have failed to file their tax returns, which
    requires automatic termination of employment under section 1203
    of the 1998 IRS Restructuring and Reform Act.
        The Inspector General then took a sample of 50 of those 824
    and found this: other types of prior misconduct included
    unauthorized access of taxpayer accounts, 11 employees; fraud,
    4 employees; falsification of documents, 17 employees; threats,
    sexual harassment, and criminal misconduct, 5 employees.
        Now, that is a sample of 50 of the 824 and what they were
    let go by the IRS for, and these are all people who were then
    hired back by the IRS. Let me just ask you something. What do I
    say to a North Carolinian who asks me, how can they have a
    practice like this when the private sector would never think of
    hiring somebody with a prior employment track record like that?
        Commissioner Koskinen. You can tell your constituents that
    is not going to happen again. Basically, what we are talking
    about is, when we hire seasonal and temporary employees, we
    hire 8,000 to 10,000 a year to staff filing season, and
    historically that is a process that takes a lot of time. And
    once the IG released that report, we went back through and made
    sure that if there is a prior substantial performance issue, or
    if someone has not complied with their taxes, or certainly if
    anybody has actually had unauthorized access to returns, they
    are not eligible to be rehired.
        Senator Burr. None of these people I have described, though
    their names are not here, currently works at the IRS? Is that
    what you are telling me?
        Commissioner Koskinen. Most of those were temporary, and if
    they came back again the next year, they would not be working
    for the IRS. We do not hire people with prior issues--anymore.
    Most of that report was before I got here. We do not hire
    people with prior performance issues. We do not hire people who
    certainly, as I say, abused any taxpayer record.
        Senator Burr. Well, let me go to a quote in the Inspector
    General's report where the IRS stated that, ``During the
    process of evaluating qualifications of applicants, prior IRS
    conduct and performance issues do not play a significant role
    in deciding the candidates who are best qualified for hiring.''
        Then in answer to a question from Congressman Roskam, this
    was your response this month, with reference to the Inspector
    General's Recommendation 1. Congressman Roskam asked, ``Does
    the IRS consider conduct and performance issues before an offer
    is made to a candidate, and if not, why?'' Your response was:
    ``Yes, we consider prior conduct and performance issues before
    making a final offer to a candidate.''
        Now, I interpret the response to the IG to mean that we do
    not take into account, when deciding who we are going to
    interview, their prior work experience with us. Your answer I
    take to mean that we go through a lengthy process, we narrow it
    down, but before we offer them a job, we will look at their
    prior conduct. Explain for me, if----
        Commissioner Koskinen. We get applications in, and at that
    point, we do not know who they are, and they may or may not be
    there. Before we make an offer to anyone, our process now is--
    --
        Senator Burr. Before you make an offer. Do you interview
    before you look at their prior experience at the IRS?
        Commissioner Koskinen. That I do not know for sure. All I
    can tell you is, they will not get a final offer----
        Senator Burr. One of the individuals out of the 50 who were
    sampled, in their employment record at the IRS, it stated this:
    ``Do not rehire.''
        Commissioner Koskinen. And they will not get rehired again.
        Senator Burr. Well, they got rehired with that in their
    record.
        Commissioner Koskinen. That was under the old process, and
    that will not happen again.
        Senator Burr. So share with me what you have done to make
    sure that does not happen. And share with me and the committee,
    if you will, how have you changed the personnel who make up
    your hiring process? Who lost their job over this--anybody?
        Commissioner Koskinen. People who actually, at that point
    in time, were following whatever the IRS rules at that time
    were, those people were operating under a different set of
    rules and regulations, which they understood. If people do not
    follow the rules, they are subject to personnel actions. I have
    no indication that anybody working for the IRS has not followed
    the updated procedures, and they understand that if they do not
    follow the procedures--we dismiss a reasonable number of people
    every year for not following our employment procedures or our
    operational procedures. I would be happy to share that data
    with you.
        Senator Burr. I thank you for that answer, and I wish you
    would share the data, and I wish you would share the procedures
    that have changed.
        Commissioner Koskinen. I would be delighted to do that.
        Senator Burr. Thank you, Mr. Commissioner.
        Thank you, Mr. Chairman.
        The Chairman. Thank you, Senator.
        Senator Carper?
        Senator Carper. Mr. Chairman, I would just like to get
    something off my chest while we are here today.
        I think we are lucky that you are willing to take on this
    job. This may be among the most thankless jobs in the Federal
    Government, and we needed somebody who was smart and honest,
    hardworking, a great leader, and I think you are that person.
        Commissioner Koskinen. Thank you.
        Senator Carper. Can I go on?
        Commissioner Koskinen. Well, no, perhaps we should quit
    while we are ahead.
        Senator Carper. All right. [Laughter.]
        The Chairman. If you keep that up----
        Senator Carper. If I keep that up, my time will have
    expired.
        We spend time in this room, more than I would like to think
    about, trying to figure out how to pay for things. We want to
    extend tax breaks, tax credits, whatever. We are looking for
    pay-fors. We are looking at other programs that we want to pay
    for like transportation, and we end up doing crazy things to
    pay for roads, highways, and bridges that have nothing to do
    with roads, highways, and bridges. And yet we have all these
    pay-fors that you and your colleagues at the IRS sort of give
    us on a silver platter, and we ought to take fuller advantage
    of them.
        You mentioned one of them. For every person we hire to do
    audits and that sort of thing, compliance, how much did you say
    that person is worth? How much money?
        Commissioner Koskinen. Over a million and a half dollars a
    year.
        Senator Carper. A million and a half. So if we were to hire
    just 1,000 of them, that would be a billion and a half dollars
    a year.
        Commissioner Koskinen. Right.
        Senator Carper. That would pay for a lot of stuff--and good
    stuff.
        Commissioner Koskinen. And in the President's budget this
    year, it is called the ``program integrity cap'' for $500
    million. Over a 10-year period, the hiring in the programs
    under that would generate a net after expenditure of $46
    billion for the government.
        Senator Carper. Go back and talk to us about something that
    does not cost money, and that is, to try to better ensure that
    the folks who are actually doing tax preparation work for some
    Americans actually know what they are doing, they are capable,
    qualified, going to do good work, honest for the person whose
    taxes are being reported, but also fair to the Treasury. Just
    talk about what we can do to help there.
        Commissioner Koskinen. Again, as we have been discussing,
    our proposal is not to have a regulatory program. Our proposal
    is to reinstitute the program we had before which simply
    requires minimum qualifications, the demonstration of minimum
    qualifications, and continuing education, a modest number of
    hours----
        Senator Carper. Can you give us some idea of what that
    might include, minimum qualifications?
        Commissioner Koskinen. Minimum qualifications would be, you
    would take a test to show an understanding of the tax code, and
    you would take 18 hours a year of continuing education on tax
    developments, much like the continuing education requirements
    for lawyers and accountants and others.
        Senator Carper. Okay. All of us have constituent services
    operations in our offices back home in our respective States,
    and every Friday at the end of the work week, I get a report
    from my constituent services team. Every month we send out a
    questionnaire to a representative sample of the people we have
    served in Delaware just to say, ``How was the service that we
    provided for you? Was it excellent? Was it good? Was it fair?
    Was it poor?'' And one of the issues that we get graded on is
    the IRS. And it is uneven. Sometimes it is pretty good.
    Sometimes people are pretty disappointed.
        We like to think that in our own office we provide
    excellent service. I am sure we can always do better. But for
    the last 15 years, we are running 98 percent excellent and
    good, 1.5 percent fair, a half percent poor. But we know we can
    do better. And in terms of how we could help you do better--you
    have already answered this question, but I just want you to
    continue to repeat it. What can we do to help provide better
    service?
        I spend a lot of time focusing on the Postal Service, and
    one of our goals in Postal Service reform is to put the
    ``service'' back in Postal Service. And one of the things that
    we need to do--and I know you are trying to do, and others--is
    put the ``service'' back in the Internal Revenue Service.
        Commissioner Koskinen. The whole goal of what we call our
    Future State is not to look at what the IRS ought to look like
    3 to 5 years down the road. It is, what should the taxpayer
    experience be 3 to 5 years down the road? How can we expand and
    improve on taxpayer service for all taxpayers? That ought to be
    our primary measure of where we are going. And I think we are
    moving in that direction. The support we need is obviously the
    resources, it is a lot of technology to make life easier and
    simpler for most taxpayers.
        Senator Carper. All right. If you could just ask one thing,
    if you had a magic wand and you could wave a magic wand and get
    one thing out of the Congress this year--one thing out of the
    Congress this year that would help you and your folks, the
    members of your team, do a better job for the American people,
    what would it be?
        Commissioner Koskinen. It would be the same thing I told
    you at my confirmation hearing almost 2\1/2\ years ago, and
    that is, if we could simply put the budget of this agency on a
    stable, sustainable basis, it would make a huge change and
    improvement in taxpayer service and enforcement. And that is
    really my goal. I got asked by an employee--I do employee town
    halls. I have talked with over 20,000 IRS employees personally
    since I started. One of them asked me recently, ``What is your
    goal? How are you going to measure your time?'' And I said,
    ``If we could just have stable, sustainable funding for this
    agency before I leave, I would feel that I had accomplished a
    major goal.''
        Senator Carper. Okay. Well, hopefully you will do a lot
    better than that. Thank you for your leadership and for being
    with us today.
        Commissioner Koskinen. Thank you.
        The Chairman. Senator Roberts?
        Senator Roberts. Well, thank you, Commissioner. I want to
    thank Senator Carper for his comments with regards to the task
    that you have before you, a lot of brickbats but not many
    ``attaboys.''
        I think one thing I can do for you is, I will sit down with
    Senator Grassley and see if he cannot pronounce your name.
    [Laughter.] This should not take too long.
        Commissioner Koskinen. I always say it took me 4 years to
    learn.
        Senator Roberts. ``Koskinen,'' that is not that hard,
    really. Maybe if you changed your middle name to ``ethanol'' it
    might help. I am not quite sure. [Laughter.] That is easy to
    say. And Senator Hatch does not get mad. He just maybe
    sometimes is pleasantly irascible. So do not worry about that
    either.
        I want to bring up something from the not-so-thrilling days
    of yesteryear. You are familiar with the topic. I know we
    thought it was behind us. But I have pledged not to rest until
    we fully understand the actions concerning our conservative
    social welfare organizations, the 501(c)(4) business. This to
    me has always been about the First Amendment and protecting
    those rights and preventing the government from restricting
    them. And the exercise of those rights does not threaten our
    democracy, nor does it threaten the tax system or the tax base.
    It is the attempt to restrict these rights that I think we must
    fear.
        I still remain deeply disturbed over how the IRS responded
    to this committee's investigation. I still remain concerned
    that the issues we explored in the Finance Committee's report
    that was just issued last summer still remain unresolved. As
    recently as last month, the IRS was still processing exemption
    applications that had been held up while we investigated the
    (c)(4) issue.
        So, basically, what I would like to do--I know we have
    stopped the agency from moving forward with new rules that
    would have revised how social welfare groups are able to
    participate in political discourse, and I think you would agree
    the agency should be directed back to its core mission, which
    is tax enforcement and taxpayer services.
        Do you have any comment with regards to where we are or
    where you think the IRS is in regards to this whole situation?
        Commissioner Koskinen. I certainly do. As I said when I
    started, the delays the organizations faced should never have
    happened. I was not here, but I apologize for that. I think
    taxpayers deserve prompt and fair answers and consideration.
    The management structure that caused that problem to exist for
    as long as it did without it being seen needed to be changed,
    and we have done that. As I said, we have taken every
    recommendation of the IG except for updating the (c)(4)
    regulations, which were not under the congressional constraint.
        As I said, we did not do it willy-nilly. We went through
    and decided we would take and implement every recommendation
    this committee made in that report and every recommendation in
    the majority report and every recommendation in the minority
    report as well, because I do think they were thoughtful and
    they will be helpful, and we have implemented all but a couple
    of them. We have 82 percent of them up and running and
    implemented. But I think it is important, because we need to
    make sure that situation does not happen again of the lengthy
    delays which then lead people to wonder why are they being
    selected for that delay.
        But beyond that, people need to be comfortable that the
    organization, the IRS, is going to treat every taxpayer fairly
    and the same. And as I said, we do not care who you voted for,
    what party you belong to. If you hear from us, it is because of
    an issue in your tax return, and subject to resource
    constraints, if somebody else had that issue on their return,
    they would hear from us as well. And it is critical for
    compliance processes in the United States to work for people to
    feel and understand and be comfortable that the IRS is not
    targeting them, is not selecting them for any reason other than
    something to do with their tax return.
        Our goal in the (c)(4) regulation since I have been here,
    if we are going to do it, as I said, was not to change the
    rules. It was to try to provide greater clarity to the
    organizations and the IRS. The ``facts and circumstances'' test
    that we now still have is confusing. It is not only at the
    front end. It means every year you have to wonder, is somebody
    else going to look at the facts and circumstances differently?
    What we wanted to do was provide a clearer line of sight, not
    change the rule, just make it easier for everybody to comply,
    because I agree with you. We ought to be in the tax compliance
    and tax enforcement area. We certainly do not want to be any
    closer to political issues than we have to be under the tax
    code, and people should be comfortable with that.
        Senator Roberts. Well, I thank you for that answer, and it
    is a very complete answer, and I hope we can see some progress
    in that whole situation or simply put it behind us.
        My time has expired, but I did want to point out that I do
    agree with Senator Menendez. I do not want bad incentives to
    result in aggressive behavior on your minimum standards on tax
    preparers. And I am just thinking, while you were talking about
    small-town and rural America, a person who has been preparing
    taxes for a long time probably, you know, would like to get out
    of this business, but at any rate, be a little careful there.
    You know, taking a test and 12 hours of education for some
    secretary who got into this and then got into tax preparation
    and probably operates out of her home, we do not want to deny
    that. And contracting out, I am concerned about that as well.
        I am way over my time. Thank you, Mr. Chairman.
        Commissioner Koskinen. Well, let me--if I could respond,
    Mr. Chairman----
        The Chairman. Sure.
        Commissioner Koskinen [continuing]. Because I think that is
    an appropriate concern. We have over 12,000 VITA sites,
    Volunteer Income Tax Assistance sites. We train 90,000 people a
    year to work in those sites. A lot of them are part-time
    people. Some are, fortunately, IRS former executives or
    existing executives. But the training program is
    straightforward. You do not have to be a rocket scientist to be
    able to understand it, and those people provide great service.
    They prepared 3.5 million returns last year for free for
    taxpayers who came in. And the experience on the exam--when we
    were running the program before it was shut down--was nobody
    complained the exam was too difficult or it was hard to deal
    with. Because I agree with you: our goal here is not to put
    people out of business, except the crooks. Our goal really is
    to provide people an opportunity across the board,
    standardized, to keep up with the tax code, to be able to
    provide appropriate advice to people where they are actually
    completing their returns.
        One of the reasons we have an advantage, I think, in
    considering this is, we have seen what the program looked like.
    So I want people to know that is what it is going to look like.
    We do not have some new idea for more regulations or audits or
    anything else. It is just a simple question of, can people
    demonstrate a minimum ability to provide assistance to the
    people whom they are getting paid to prepare the return for?
        The Chairman. Senator Thune?
        Senator Thune. Thank you, Mr. Chairman.
        Commissioner, I understand one of the biggest issues facing
    South Dakotans when it comes to their Federal taxes--at least
    this is what we hear in many of our offices across the State--
    is the problem of tax-related identity theft. I know you have
    talked a little bit about this already and probably responded
    to some questions about it, but it not only impacts those who
    have their identities stolen, but also those who find their
    refund delayed while the IRS verifies their identity.
        So I am wondering if maybe you could talk about the steps
    the IRS is taking to fight ID theft, and can we expect that the
    IRS will improve its capabilities to fight fraud so that the
    process will be quicker and, over time, fewer refunds will be
    delayed?
        Commissioner Koskinen. That is one of the major challenges
    we have had for some time. As I noted earlier, we have created
    a partnership with the private sector, tax software developers,
    tax preparers, payroll providers, 40 State tax commissioners,
    because, as I told them when we got together, the goal was not
    for me to tell them what to do. The goal was, we cannot solve
    this problem without everybody working together. And we have
    made significant steps forward. The private sector and the
    States and we have all agreed on minimum standards for
    authentication for taxpayers. Most taxpayers will not notice.
    It is a few more questions. It is a way of making sure we know
    who they are. We are sharing data in a way that has never been
    done before. But suspicious patterns of activity--we had, as
    you know, a recent activity where we had organized criminals
    trying to figure out just how to get a filing PIN. All of that
    data and all of those Social Security numbers that we know
    people have, have been shared with States and preparers so they
    all can, in fact, advise their clients to take appropriate
    actions.
        I appreciate the Congress requiring us to get W-2s next
    year in January. Because of this partnership we have, we have
    had volunteers in the private sector already providing us this
    month 20 million W-2s. When we have a W-2 that is verified, it
    means when we have a suspicious return, if we can verify it
    with a W-2, we can release that return for a refund. Over 80
    percent of people who file with us electronically get a refund.
    So it is important for them to get them as quickly as they can.
        Last year, we stopped over 3.5 million suspicious returns.
    Now, some of those were false positives. They were legitimate
    taxpayers. To the extent we can process through those
    suspicious applications faster and get the legitimate taxpayers
    out of them, they will get their refunds faster, and we will be
    able to apply our resources to the truly suspicious returns. Of
    the funding we got under the $290 million, a significant
    amount, $60 million, will go toward improving cybersecurity,
    $16 million of it will go to identity theft, and $10 million of
    that will go to implementing a lot of the recommendations from
    this private-sector partnership we have. So our goal is to do
    the best we can.
        We also have a challenge, if your identity is stolen, you
    then have to go through a lot of steps for us to ascertain you
    are really the taxpayer. Taxpayers have trouble understanding
    that, but we have criminals who file secondly and then are
    trying to figure out why they cannot get their refund. I mean,
    talk about chutzpah.
        So we recognize that there is nothing more aggravating or
    angst-producing than having your identity stolen and your
    refund held up. And so, we are trying to prevent that, to the
    extent we can, at the front end by stopping suspicious returns
    with better filters and trying to improve and speed up at the
    back end. If your refund is held up because somebody has filed
    before you, we want to be able to process that. Our goal is 120
    days or less. Even that is a delay for people, but we are doing
    our best to try to get that faster.
        Senator Thune. As a follow-up, you may know the National
    Taxpayer Advocate has recommended the IRS provide a single
    point of contact for someone who has their identity stolen, and
    I have heard the frustration of taxpayers in my State who have
    had to deal with various IRS employees on multiple occasions in
    trying to fix a single ID theft problem. Is the IRS moving
    toward giving each taxpayer a single point of contact when it
    comes to tax-related identity theft? And is this a
    recommendation that the IRS plans to implement?
        Commissioner Koskinen. We do conceptually, but not in the
    way the Taxpayer Advocate has suggested. We have consolidated,
    since she started making this recommendation, all the ID theft
    and all the contact points for taxpayers into a single office.
    Anybody you deal with in the private sector when you call and
    get service, you do not get a number to call back, because what
    happens, if you have Sam Jones and Sam is on vacation, he is
    out, he is on the other phone, then you are held up. And our
    goal is to be able to make it so you do not have to explain the
    situation twice. There ought to be a single office and a
    coordinated office where you call, and when you call the next
    time, they know what your situation is and you can pick it up,
    and you can get somebody immediately rather than depending on
    vacation schedules, who is at lunch, where they are.
        So I think having an individual--in the old days, when we
    were all over the place and we were pulling this together in
    five different places, then I think it was difficult for
    taxpayers. But as it is now, as we have consolidated, we think
    we actually have a single organizational response to taxpayers.
        Our goal in the longer run is to, as I say, move that as
    quickly as we can so that the taxpayers actually get the
    service they deserve.
        Senator Nelson. Would the Senator yield for an observation
    on that issue?
        Senator Thune. Yes, sir.
        Senator Nelson. There is legislation a number of us have
    filed that the chairman's staff is working on very hard right
    now that would address a number of the issues that you just
    raised.
        Senator Thune. Good. We will look forward to----
        Commissioner Koskinen. Just again, as I say, requiring a
    single individual to track each taxpayer is probably, I think,
    in the long run not going to be good for the taxpayer. They are
    going to take more time to find out where Sam Jones is today as
    opposed to if we can just be more efficient when they call--
    some of it is IT--that your record is there and anybody can
    look at it who needs to talk with you.
        Senator Thune. Thank you.
        Thank you, Mr. Chairman.
        The Chairman. Thank you.
        Senator Isakson?
        Senator Isakson. Thank you, Mr. Chairman.
        Thank you, Mr. Commissioner, for your service to the
    country. We appreciate it. And I also appreciate your printed
    testimony and your acknowledging of the $290 million that we
    appropriated to enhance cybersecurity and the identity theft
    effort. I hope that is paying off for you. I appreciate your
    acknowledging that.
        I want to ask you a question about that. On Monday,
    February 8th, the Columbus Ledger-Enquirer, which is the local
    newspaper in Columbus, GA, reported on the sentencing trial of
    one Sawan Shah, who pled guilty to one count of operating an
    illegal monetary transmitting system where he admitted to
    cashing 567 fraudulent tax refund checks from the IRS worth
    more than $1.3 million, and he was part of a ring that cashed
    more than 4,000 checks for a total of more than $24 million.
        In the sentencing hearing, Judge Land, who is the Federal
    judge who did the sentencing, made the comment that this was
    one of very few tax cases he had even seen, and he had learned
    Columbus, GA, was number 2 in the United States in terms of tax
    fraud in the country.
        My question to you would be, if in fact that is true, that
    they are number 2--and I have the statistics that show that--
    and if, in fact, the Federal judge who did the sentencing in
    the Federal case had seen very few cases, are we making enough
    cases based on tax fraud and the theft of these returns?
        Commissioner Koskinen. I am not sure we ever make enough
    cases. We have thrown 2,000 people in jail for identity theft.
    We have several hundred cases pending right now. We work
    collaboratively with U.S. Attorneys across the country in those
    prosecutions. I think it is important for us, wherever we can,
    to engage in those prosecutions.
        I am a little surprised that the judge in that part of
    Georgia was surprised that he had not seen relatively the
    number of prosecutions that he should, because we have a
    significant number in Florida, obviously, which has been the
    epicenter of this. But in Georgia, we have had a number of
    prosecutions. I get a list every day of the prosecutions that
    are public of people who are being prosecuted for identity
    theft and refund fraud.
        Senator Isakson. I would love to see that. If you could
    send me that information, I would love to see that information,
    because I am asked about this subject all the time.
        Commissioner Koskinen. I would be delighted. As I say, it
    is over 2,000. I would be happy to get you, to the extent I
    can----
        Senator Isakson. I understand--privacy respected; I know
    that.
        Commissioner Koskinen [continuing]. A breakdown as to where
    those people live.
        Senator Isakson. Now, Florida is first, Miami-Dade County,
    Fort Lauderdale area. Columbus, GA is second, and the District
    of Columbia is third in terms of tax fraud. You all created the
    IP PIN system a couple years ago to issue IP PIN numbers to try
    to stop the amount of theft. Is that program working?
        Commissioner Koskinen. The IP PIN works very successfully.
    We have about 2.7 million people who over time have either had
    identity theft or suspicious activity on their account, about
    half of each. We have offered a pilot program to see what it
    would be like and what the burden on taxpayers would be,
    because, once you have an IP PIN, you have to use it. And so,
    if you forget it, you have to get us to mail you a new one.
        We are in the third year of that pilot. Actually, I have an
    IP PIN, because I thought, well, I am the Commissioner, I live
    in the District, I should actually see how it works. It turns
    out I am one of the few people in the District with an IP PIN.
    There has been a relatively small take-up, even though we
    publicized it and we have had a lot of people interested in it.
    If you have an IP PIN, you have much more security because that
    is not a number that is available anywhere else. Millions,
    literally millions, hundreds of millions of Americans who have
    their data stuck in the Dark Net with criminals, do not have IP
    PINs in that area.
        One of the things when I first started, I thought, well,
    why don't we just give the Social Security numbers and have a
    new identifier? It turns out that is easier said than done.
        So we have been a little surprised that the take-up has
    been so small in Florida, Georgia, and the District. But
    whenever there is a suspicious occurrence, in the case of
    three-quarters of the attempts in the last couple weeks to get
    a filing PIN--you know, there were 460,000 Social Security
    numbers they had in their possession--three-quarters of them
    did not do them any good. All of those people are going to get
    letters from us saying your Social Security number is out
    there, and for anyone who has been at risk, we offer them an IP
    PIN.
        In the long run, we are working on authentication programs
    as a result of our Get Transcript issue that we think are
    probably going to be the more efficient, effective way to
    protect taxpayers, and that is to, in fact, do what people call
    ``multifactor authentication,'' so that anytime you interact
    with us, we will double-check who you are.
        Senator Isakson. We talked to your office regarding how IRS
    is promoting the IP PIN number, and I think there is probably
    some additional work you all could do to expose that benefit to
    the public, either through notifications that you send out
    normally that have that attached to it or something, because I
    think it is out of sight, out of mind. I think some more
    promotion of it would get you a lot more users.
        Commissioner Koskinen. That is a good point. We should look
    into that, because, as I say, we are hoping to learn from the
    pilot, and one of the things we have learned is nobody seems
    very interested. So we need to do more outreach.
        Senator Isakson. Thank you for your service.
        The Chairman. Thank you, Senator.
        Senator Casey?
        Senator Casey. Thank you, Mr. Chairman. Commissioner, thank
    you for your service, and thanks for being here with us today.
        I want to reiterate two of the numbers that your testimony
    pointed to in terms of your budget and your workforce. By the
    end of this fiscal year, am I correct in saying that you are
    going to be down 17,000 employees and $911 million? Is that
    right?
        Commissioner Koskinen. Yes. Since 2010.
        Senator Casey. Since 2010, right. They are big numbers, and
    that is a substantial hit. So those of us who call on you to do
    more have to be mindful of those numbers.
        I just really have one question. I want to get into tax
    scams, because I am on the Aging Committee, and we are dealing
    with that issue of scams there, so I am trying to be in both
    places at one time. But I did want to ask you a question about
    taxpayer services, the so-called Tax Forms Outlet Program.
    Everything has an acronym--T-F-O-P. Just as society is trying
    to get away from too much paper, whether it is tax forms or
    instruction books, we do know that as many as 20 million
    returns, about 14 percent of the total, were filed on paper. So
    there is still a need and a demand for some of these paper
    instructions or forms. And I know that you have a toll-free
    number to deal with this issue.
        I just want to ask you, in terms of the toll-free number--
    that is where we get a lot of complaints about long wait times.
    I just want to ask you, with regard to the new funding that you
    got at the end of the year from the so-called omnibus, if you
    can tell us how specifically that additional funding is being
    used to improve taxpayer services, at least on this particular
    issue.
        Commissioner Koskinen. Of the $290 million, about $178
    million will be devoted to taxpayer service. We are in the
    process of hiring up to 1,000 more people who will be able to
    provide service for us on the phone and in correspondence. In
    particular, with the number for ordering forms, we want to make
    sure people get to it quickly and get those forms. They are
    free, so you can get forms either by downloading them online,
    or you can get them from libraries. But we want that phone line
    to work better. Already we have gotten indications that thus
    far in the filing season, our level of service is up as high as
    in the low 70s. So that means that people are getting through
    much faster and better than they were last year.
        Senator Casey. When you say ``low 70s,'' you mean----
        Commissioner Koskinen. Low 70 percent. That means that when
    you call, 70 percent of people are getting right through. And
    so it is going to make a big difference. My hope is, we will be
    able to establish that, (a) we can spend the money wisely and
    carefully, and (b) if you give us money, you get a result. If
    you gave us more money for taxpayer service, you would get an
    even better result, because we will not solve the taxpayer
    service problem at the level we think taxpayers deserve with
    the additional funding, but the funding is a great help.
        Senator Casey. How do you measure, just on the question of
    a good level of improvement in service, how do you measure that
    over the next year or two?
        Commissioner Koskinen. We measure the number of people who
    get through without difficulty, and we measure how long they
    have to wait. Our ultimate goal in the old days, in the mid-
    2000s, was an 80-percent level, which meant 80 percent of the
    people got through and they waited less than 5 minutes,
    sometimes on average 2 minutes. So last year's average wait
    time at 25 to 30 minutes really was unconscionable for
    taxpayers.
        Our focus is, taxpayers ought to get the best service they
    can. As I said, the money we are going to put into it will make
    a big difference this year, but it will not get us to the level
    we want. It is not the amount--we requested an additional $700
    million for the three areas and got $290 million. The $290
    million is a great help, but that means there is still another
    $410 million that we could have spent to apply to those three
    areas.
        Senator Casey. Great. Thank you very much.
        The Chairman. Senator Nelson?
        Senator Nelson. Mr. Chairman, I want to go back to the
    issue that Senator Roberts raised, which was the 501(c)(4)s. He
    was asking about the big brouhaha that occurred a couple of
    years ago, but there is another side to the brouhaha, and that
    is, the statute says that these 501(c)(4)s are ``exclusively
    for the promotion of social welfare.'' And in a Treasury
    Department reg, ``exclusively'' was changed to ``primarily''--
    ``primarily for the promotion of social welfare.'' Now, that
    seems to me to be changing, on its face, the intent of the
    statute, but it is what it is. So there is a reg there.
        Well, there is one of these groups that has the tax-exempt
    status, 501(c)(4), and they list in their promotional materials
    to donors that for political campaigns they need $3 million for
    research, $2 million for polling research, $18 million for
    issue advocacy, $5 million for acquisition of campaign lists,
    and $15 million for targeted grass-roots activity in political
    campaigns.
        Now, it seems like it defies common sense that under the
    Treasury reg, and certainly the statute, whether you use the
    word ``exclusively'' or ``primarily'' for the promotion of
    social welfare, do you have any idea how you would classify one
    of those activities as ``social welfare''?
        Commissioner Koskinen. Well, part of the reason I was
    hoping we would be able to clarify the regulations would be to
    make the answer to that question much simpler for the
    organizations as well as the IRS. We ought to get out of the
    discussion, as much as we can, about determining what is
    political and what is not political. If we had a clear set of
    guidelines, the organizations would benefit, and we would
    benefit.
        Right now, we have pages of examples of what the facts and
    circumstances mean, so you cannot take any particular category
    and say by definition it is either social welfare or it is not.
    Clearly, a lot of issue advocacy is social welfare, and people
    take positions on both sides of issues, and that has been
    viewed over time as appropriate social welfare activity. The
    question is, when does the issue advocacy fold over into
    political activity? And then you have to say, what are the
    facts and circumstances, and then you get into a very muddy
    area.
        Senator Nelson. Right. But you are surely aware that
    501(c)(4)s are primarily engaged in political activity instead
    of social welfare.
        Commissioner Koskinen. There has been some misunderstanding
    that perhaps, while the regs were pending, we were not actually
    in business. We actually have a statutory responsibility to
    review and enforce the code, and our Exempt Organization
    division continues to review activities of all tax-exempt
    organizations, not just (c)(4)s. We have (c)(3)s, (5)s, and
    (6)s.
        Senator Nelson. I understand that. You look at everything.
        Commissioner Koskinen. And we look at everything.
        Senator Nelson. Are you aware in general by reading the
    newspaper or watching TV that some of these 501(c)(4)s are
    being used primarily for political activity?
        Commissioner Koskinen. I cannot tell that by the publicity.
    I am aware that there are some 501(c)(4)s that are very active
    politically, but what I do not know by the reading of that is
    what else they are doing. Are they actually involved in other
    activities that are social welfare? That is the requirement.
    The requirement, as you note, is that 51 percent of your
    activity or the majority, ``primarily,'' has to be social
    welfare.
        Senator Nelson. And you cannot examine them as the IRS
    Commissioner to determine that?
        Commissioner Koskinen. The IRS Commissioner does not get
    involved in the selection of any examination for any reason. So
    whether it is----
        Senator Nelson. Well, how are you going to make sure that
    the laws are being faithfully executed then if you, as the
    administrative agency, are not going to look at it?
        Commissioner Koskinen. No, no. You talked about the
    Commissioner. The Commissioner personally does not get involved
    in selecting anybody for an audit or review.
        Senator Nelson. Doesn't your agency?
        Commissioner Koskinen. The agency has a responsibility to
    review and audit across the board everyone who is required
    either to pay taxes or has tax exemption. And one of the issues
    we have with our resources is trying to make sure we marshal
    those appropriately. In the 1023, the tax-exempt area, we now
    have a streamlined program for small organizations that allows
    them to get through without filling out a 27-page application--
    --
        Senator Nelson. You know, Commissioner----
        Commissioner Koskinen [continuing]. Which allows us to have
    more people who can actually be involved in reviewing what
    people are actually doing out there. And so we do that. We
    review people. We have a selection process. One of the
    recommendations from the IG and from this bipartisan report was
    to make sure that those reviews were appropriate, that people
    were appropriately trained, that when we select someone for a
    review, there is a review of that decision--because they are
    all active in one way or another--to make sure when somebody
    hears from us, it is a fair process and they have not been
    selected by one category or another, whatever they were
    involved in. It is, are you spending all of your resources
    primarily on social welfare activities, and we do review them.
        Senator Nelson. Now, if you have concluded with your
    answer, I just want to respectfully suggest to you that that is
    a non-answer. You are the head of an agency. If there are
    abuses, just like Senator Thune was talking about with regard
    to ID theft, you have a responsibility as a leader to see that
    the laws are faithfully executed and followed.
        Commissioner Koskinen. Exactly, and I take that
    responsibility seriously and willfully and fully.
        Senator Nelson. Well, I have been asking the IRS on this
    committee for the last 4 years about following this statute,
    even as it is interpreted by the Treasury Department,
    ``primarily for the promotion of social welfare,'' in order to
    be tax-exempt as a 501(c)(4), and I have yet to get an answer.
        Commissioner Koskinen. Well, if you will take whatever that
    last letter was, I have given an answer, as the chairman knows.
    My view is, I read every letter, and you get an answer within
    30 days. So, if you would like to send me that letter, I will
    be happy to respond to you. But I would just emphasize, my
    responsibility is to make sure the processes are effective----
        Senator Nelson. Right.
        Commissioner Koskinen [continuing]. The processes are fair,
    and that we follow them. And I am doing that and taking it
    seriously. But with regard to any particular case, no one at
    the IRS----
        Senator Nelson. Would you stop just a minute?
        Commissioner Koskinen. Yes.
        Senator Nelson. We are way over my time.
        Commissioner Koskinen. Okay. Sorry.
        Senator Nelson. I will write you a letter.
        Commissioner Koskinen. Good.
        Senator Nelson. But you are in front of the committee that
    has the jurisdiction for overseeing the execution of the laws,
    and we are--we, this Senator, is asking you a simple question.
    So, if you say that I cannot get you to respond in front of the
    Senate Finance Committee, I will write you another letter.
        Commissioner Koskinen. Right. What I cannot respond to,
    even if you write me a letter, is a question about any specific
    taxpayer.
        Senator Nelson. I am not asking you--I am asking you in
    general.
        Commissioner Koskinen. In general, and I will tell you--and
    you can send me that letter. As I told you, the problem with
    facts and circumstances is when you say ``issue advocacy,'' as
    a general matter, issue advocacy is social welfare. It can in
    some facts and circumstances be issue advocacy that is directly
    involved in a political campaign and which is political
    activity. And that is what the IG said: we ought to clear all
    that up and try to give clear guidelines. So I can tell you
    that, in fact, we have, as I say, pages of regulation trying to
    give people guidance about what counts, what does not, what is
    on which side of the line and on the other.
        So I am happy to give you as much information as I can in a
    context where I would remind people we are still in business,
    our process is upgraded in response to all the recommendations
    to make sure it is fair and aboveboard. But it does not mean
    that people do not get reviewed.
        The Chairman. Senator, I have to bring this to a close.
    Thank you.
        Senator Nelson. Oh, I understand, Senator, and I apologize.
        The Chairman. You do not have to apologize.
        Senator Nelson. I apologize for going over time. But I am
    just trying to get a direct answer.
        The Chairman. I understand. Well, I thought he gave you a
    direct answer. But maybe your letter will----
        Senator Nelson. I doubt it.
        Commissioner Koskinen. No, I would like a little more
    confidence that our goal is to try to respond as effectively
    and quickly as we can to any inquiry.
        The Chairman. Well, let me say, I want to thank
    Commissioner Koskinen for appearing here today as well as all
    of our colleagues who have participated in this hearing. It is
    my hope that the issues we discussed today can be addressed as
    we work to improve the Nation's tax code and ensure that the
    IRS has sufficient resources to do their job properly. Now,
    this is something we owe to the dedicated taxpayers and
    citizens of this great country.
        I would ask that any written questions for the record be
    submitted by Wednesday, February 24, 2016.
        With that, we thank you, Mr. Commissioner, and the hearing
    is adjourned.
        [Whereupon, at 3:35 p.m., the hearing was concluded.]

                                A P P E N D I X

                  Additional Material Submitted for the Record

                                  ----------

                  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 hearing examining
    the Obama Administration's Fiscal Year (FY) 2017 budget request for the
    Internal Revenue Service (IRS):

        Today, the committee welcomes the Commissioner of the Internal
    Revenue Service, John Koskinen. Commissioner Koskinen comes before us
    this afternoon to discuss his agency's operations and President Obama's
    budget proposal for Fiscal Year 2017.

        Commissioner Koskinen, today's hearing is the fourth time you've
    appeared before this committee during my chairmanship. Over the past
    year, we've seen both progress and setbacks at the IRS.

        As you well know--and as I think everyone here knows--I tend to be
    first in line to challenge and critique your agency when I believe it
    is in the wrong. But, for today, I'd like to change things up. Let me
    be the first to offer praise for the IRS where it is due.

        Here are some successes I'd like to acknowledge:

        Last Spring, this committee launched an investigation of the online
    tax return software industry. We were looking specifically at how the
    industry deals with stolen identity refund fraud and to what level the
    industry cooperates with the IRS to combat that fraud. In the wake of
    our investigation, the IRS and industry leaders launched a Security
    Summit and agreed to new initiatives to prevent and counter fraud. I
    want to applaud these efforts and I look forward to continuing the
    committee's oversight of its implementation and results.

        Let me mention one more.

        Last year, this committee issued a report following a 2-year
    bipartisan investigation of the IRS's treatment of organizations
    applying for tax-exempt status. Our report included a number of
    recommendations for changes at the IRS, and, as of right now, all signs
    indicate that the agency is taking appropriate steps toward
    implementing those recommendations. I appreciate your ongoing work
    there as well and am grateful for your responsiveness.

        There is, of course, more to be done, and I look forward to working
    with you to ensure that taxpayers are never again targeted because of
    their political beliefs.

        While these are all signs of progress, a number of great challenges
    still lie ahead. The most obvious challenge facing the IRS is the need
    for modernization.

        On the one hand, the agency must be brought into the digital age in
    a way that provides the greatest convenience and efficiency for
    taxpayers. But on the other hand, the agency must also better protect
    against data thieves that thrive in the digital age.

        We were reminded of these risks last year when data thieves
    breached the IRS's own website through the Get Transcript portal and
    successfully stole the tax records of 330,000 taxpayers. That is
    330,000 taxpayers who now have their most sensitive tax information
    sitting out there in the hands of criminals waiting to use that
    information to do further damage this tax year, or the next, or even 10
    years from now. We were reminded of this threat yet again just
    yesterday, when news broke of another large-scale attack against the
    IRS, but thankfully it appears that the attack was unsuccessful. The
    Get Transcript breach is going to haunt us for years to come, and,
    unfortunately, it's only one of many.

        On the customer service front, we look forward to hearing more
    about the IRS's comprehensive ``Future State'' plan to modernize how
    taxpayers interact with the agency. I applaud this initiative, but I
    will be watching very closely to see how it is carried out and how it
    impacts taxpayers.

        Once again, modernization is probably the central challenge facing
    the IRS and it requires a careful balance of sometimes competing
    priorities. Much hangs in the balance of how these efforts are carried
    out. Another issue I look forward to hearing about today is a provision
    of the recently enacted FAST Act--specifically, the provision dealing
    with the inactive tax debt collection program.

        As noted in the conference report to the bill and as we'll hear
    today from Senator Grassley and perhaps others, Congress's intent was
    that Treasury and the IRS would expeditiously implement the provision
    by utilizing private collection contractors and debt collection centers
    that are approved by the Bureau of the Fiscal Service at the Department
    of Treasury.

        Further, the statute requires that contracts be entered into and
    signed within three months after enactment of the FAST Act. That
    deadline of March 4th is fast approaching. So, I look forward to
    hearing an update today on your efforts to get those contracts signed
    and cases released and to ensure that taxpayers are made aware of the
    program and how it will be implemented.

                                     ______

          Prepared Statement of Hon. John A. Koskinen, Commissioner,
                            Internal Revenue Service
                                  introduction
        Chairman Hatch, Ranking Member Wyden, and members of the committee,
    thank you for the opportunity to discuss the IRS's budget and current
    operations.

        Let me begin by expressing my appreciation to Congress, including
    the members of this committee, for approving $290 million in additional
    funding for the IRS for Fiscal Year (FY) 2016, to improve service to
    taxpayers, strengthen cybersecurity and expand our ability to address
    identity theft. This brings the total IRS budget for FY 2016 to $11.2
    billion. It is an important development for the IRS and for taxpayers,
    and is the first time in 6 years that the agency has received
    significant additional funding. It is a major step in the right
    direction, and I can assure the Congress that we will use these
    resources wisely and efficiently.

        Even with this additional funding, however, the IRS is still under
    significant financial constraints. This is illustrated by the fact that
    the IRS appropriation remains $911 million below the FY 2010 enacted
    level and that the $290 million increase is less than half the amount
    that had been requested for FY 2016 in the three critical areas
    mentioned above. In addition, the IRS must absorb mandated cost
    increases and inflation during FY 2016 that are greater than the
    additional funding provided.

        As a result, we will need to continue the exception-only hiring
    policy that began in FY 2011, leaving us unable to replace most
    employees we lose this year through attrition. In fact, we expect the
    IRS workforce to continue to shrink by another 2,000 to 3,000 full-time
    employees during FY 2016, equaling a loss of over 17,000 since FY 2010.

        While this decline in our workforce has been occurring, the number
    of individual returns filed grew by more than 10 million (or nearly 7
    percent), from 153 million in 2010 to 163 million in 2015. Further
    increasing our workload, the IRS during this period has had to
    implement a number of significant legislative mandates, nearly all of
    which came with no additional funding. These include: the Affordable
    Care Act (ACA); the Foreign Account Tax Compliance Act (FATCA); the
    Achieving a Better Life Experience (ABLE) Act, which includes a new
    certification requirement for professional employer organizations; and
    reauthorization of the Health Coverage Tax Credit (HCTC). In FY 2016,
    several additional legislative mandates were put in place that carried
    no implementation funding with which to execute them--for example, new
    passport restrictions, a private debt-collection program and a
    registration requirement for newly created 501(c)(4) organizations. We
    have had to defer hundreds of millions of dollars worth of important
    information technology (IT) projects and improvements since FY 2014 in
    order to meet our statutory requirements to implement the ACA.

        Against this backdrop, a fact that often gets overlooked is that
    the U.S. is much more efficient in its tax collection operations than
    most other countries. According to statistics compiled by the
    Organization for Economic Cooperation and Development (OECD), the
    average OECD member country spends $8.87 to collect $1,000 of revenue,
    while the U.S. spends only $4.70. The tax administrations of Germany,
    France, the United Kingdom, Canada and Australia each spend twice as
    much as the IRS to collect a dollar of revenue. So while the IRS will
    continue to look for efficiencies in our operations, it is important to
    understand that we are one of the most efficient tax administrators in
    the world.

        We continue to recognize the importance of spending taxpayer
    dollars wisely and working to strengthen our operations as we move
    forward. In that regard, the IRS has addressed a number of management
    problems that had developed in the past. Actions taken to solve these
    problems have in some cases been in place for several years. For
    example, spending on conferences has been reduced by 80 percent since
    2010. In order to achieve this, since 2012, any division planning to
    spend more than $20,000 on a conference is required to obtain prior
    approval from the IRS Commissioner. Any proposed conference expense
    over $50,000 must also be approved by the Secretary of the Treasury or
    his designee. With regard to videos, any IRS division seeking to make a
    video must receive prior approval from an executive review board the
    agency created in 2013 for this purpose. As for performance awards, the
    IRS no longer pays such awards to IRS employees who are disciplined for
    serious misconduct issues or who have willfully failed to pay their
    taxes. In addition, processes are in place to ensure the IRS does not
    rehire former employees who had significant conduct or performance
    problems during prior employment with the agency.

        In the tax-exempt area, the IRS has acted on all of the
    recommendations made by the Treasury Inspector General for Tax
    Administration (TIGTA) in his May 2013 report describing the use of
    improper criteria in reviewing applications for tax-
    exempt status under section 501(c)(4). The changes we made in response
    to those recommendations include: eliminating the use of inappropriate
    criteria; implementing improved and expanded training for employees;
    expediting the processing of section 501(c)(4) applications; and
    establishing a new process for documenting the reasons why applications
    are chosen for further review, with appropriate oversight of the entire
    process.

        In addition, the Department of the Treasury and the IRS followed
    TIGTA's remaining recommendation and began the process of drafting
    guidance on how to measure social welfare and non-social welfare
    activities of section 501(c)(4) organizations. In light of language in
    the appropriations legislation for FY 2016, the IRS halted work on
    those proposed regulations.

        Along with responding to TIGTA's May 2013 report, the IRS also has
    been working to address the recommendations by this committee in its
    report issued last August. As we advised the committee in October, the
    IRS accepted all of the recommendations in the report that are within
    our control--those that did not involve tax policy matters or
    legislative action. They include 15 of the report's 18 bipartisan
    recommendations and also six of the recommendations in the separate
    sections prepared by the Majority and Minority. Moreover, I am pleased
    to report that the IRS has substantially completed action on all of
    these recommendations.
               planning for the future of the taxpayer experience
        Within our tight budget constraints, the IRS has also continued to
    analyze and develop plans for improving how the agency can fulfill its
    mission in the future, especially in delivering service to taxpayers
    and, along with that, maintaining a robust compliance program. Our goal
    is to improve and expand taxpayer services for all taxpayers, no matter
    what their circumstances.

        In requesting adequate resources to allow the IRS to improve
    taxpayer service, it is important to point out that our goal is not to
    fund today's staff functions at historically high levels. We need to
    be, and are, looking forward to a new, improved way of doing business
    that involves a more robust online taxpayer experience. This is driven,
    in part, by business imperatives; when it costs between $40 and $60 to
    interact with a taxpayer in person, and less than $1 to interact
    online, we must reexamine how we provide the best possible taxpayer
    experience, in response to taxpayer expectations and demands.

        The improvements we are planning are a natural outgrowth of
    modernizations made to our business systems over many years. These
    include the development and implementation of the Customer Account Data
    Engine 2 (CADE2), which allowed the IRS to migrate to daily processing
    and posting of individual taxpayer accounts, enabling faster refunds
    for more taxpayers, more timely account updates and faster issuance of
    taxpayer notices. Another advance put in place several years ago was
    Modernized e-File (MeF), which processes tax returns electronically in
    real time, rather than in several batches a day. MeF has reduced
    turnaround time, and allows acknowledgments to be sent much more
    quickly to those who transmitted the returns.

        After years of study, and in response to taxpayer demand, the IRS
    has also worked to improve our website, IRS.gov, and to provide more
    web-based tools and services. These include the ``Where's My Refund?''
    electronic tracking tool, which was used nearly 235 million times in FY
    2015, and the IRS2Go smartphone application. In FY 2015, there were
    more than 2.3 million downloads of the application.

        With regard to compliance programs, an excellent example of actions
    the IRS has taken to improve interactions with taxpayers involves our
    Large Business and International (LB&I) division. LB&I recently
    restructured its operations to center around issues, rather than
    organizations, which will focus resources to better meet taxpayers'
    evolving needs in a global environment.

        An important change in the compliance area has been the development
    and phase-in of the Return Review Program (RRP), which delivers an
    integrated and unified system that enhances IRS capabilities to detect,
    resolve, and prevent criminal and civil tax non-compliance. Continued
    investment in the RRP will allow the IRS to retire the legacy
    Electronic Fraud Detection System (EFDS), and save between $10 million
    and $15 million a year.

        Going forward, the IRS intends to further improve compliance
    programs through investment in an Enterprise Case Management (ECM)
    system, which will address the need to modernize, upgrade, and
    consolidate over 100 aging IRS case management systems. A unified case
    management environment will yield efficiencies by implementing standard
    case management functions, providing visibility across all types of tax
    transactions and improving data accessibility and usability.

        Even with the improvements we have made and continue to make, we
    are at the point where we believe the taxpayer experience needs to be
    taken to a new level. Building on improvements made and new
    applications provided over the past 10 years, our goal is to increase
    the availability and quality of self-service interactions, which will
    give taxpayers the ability to take care of their tax obligations in a
    fast, secure, and convenient manner.

        As I have discussed in numerous congressional appearances and
    speeches, the idea is that taxpayers would have an account with the IRS
    where they, or their preparers, could log in securely, get all the
    information about their account, and interact with the IRS as needed.
    Most things that taxpayers need to do to fulfill their obligations
    could be done virtually, and there would be much less need for in-
    person help, either by waiting in line at an IRS assistance center or
    calling the IRS.

        As we improve the online experience, we understand the
    responsibility we have to serve the needs of all taxpayers, whatever
    their age, income, or station in life. We recognize there will always
    be taxpayers who do not have access to the digital economy, or who
    simply prefer not to conduct their transactions with the IRS online.
    The IRS remains committed to providing the services these taxpayers
    need. For example, while the IRS will continue to offer more web-based
    services, taxpayers will still be able to call our toll-free help lines
    or obtain in-person assistance if that is their preferred method of
    receiving service from the IRS.

        A good example of our commitment to serving all taxpayers, whether
    or not they participate in the digital economy, involves the return
    filing process. While the number of taxpayers who e-filed their income
    tax returns exceeded 85 percent last year and is expected to do so
    again this year, millions of people still choose to file paper returns.
    The IRS will not leave any taxpayer behind as we move into the future
    and will continue to offer taxpayers who prefer filing on paper the
    option to do so.

        In moving toward the future of taxpayer service, it is also
    important to note that actions the IRS takes to help taxpayers
    increasingly will have a positive impact in the enforcement area, and
    will in turn help improve voluntary compliance. An excellent example of
    such an action is the Early Interaction Initiative we launched last
    December to help employers.

        Under this initiative, the IRS seeks to identify employers who
    appear to be falling behind on their interim employment tax payments
    before they file their annual employment tax returns. The IRS will
    offer helpful information and guidance through contacts such as letters
    and automated phone messages. In the past, the first attempt by the IRS
    to contact an employer having payment difficulties often did not occur
    until much later in the process, after unpaid tax obligations were
    already beginning to mount. This initiative is designed to help
    employers stay in compliance and avoid needless interest and penalty
    charges. You could call this initiative a form of improved taxpayer
    service, or a more efficient enforcement activity. We believe that it
    is both.

        This initiative illustrates why I believe it is important to view
    taxpayer service and enforcement as two sides of the same coin. While
    the IRS collects $50 billion to $60 billion a year as a result of our
    enforcement operations, those numbers pale in comparison to the more
    than $3 trillion that is collected each year as a result of taxpayers
    voluntarily fulfilling their tax obligations. That is why we continue
    to be extremely concerned about the decline in both taxpayer service
    and enforcement as a result of the continued cuts in IRS funding. These
    declines threaten to undercut the basic voluntary compliance fabric of
    our tax system. If you consider that a 1-percent drop in the compliance
    rate translates into a revenue loss of approximately $30 billion a
    year, or $300 billion over the 10 year budget window often used, then
    declining voluntary tax compliance results in a cut to the funds the
    government needs to operate.
                  the administration's fy 2017 budget request
        In preparing the FY 2017 budget request, the IRS's senior
    leadership recognized the need to prioritize funding of key activities
    that help support enhanced digital service delivery discussed earlier
    in this testimony, while preserving the agency's core mission
    functions. As a result, the IRS established a new investment process
    and created six key strategic themes that outline how the agency will
    execute tax administration to meet the needs of taxpayers in the
    future. IRS leadership set priorities for new investments based on how
    those investments align with these themes:

            Facilitating voluntary compliance by empowering taxpayers with
    secure innovative tools and support;

            Understanding non-compliant taxpayer behavior and developing
    approaches to deter and change it;

            Leveraging and collaborating with external stakeholders;

            Cultivating a well-equipped, diverse skilled workforce;

            Selecting highest-value work using data analytics and a robust
    feedback loop; and

            Driving more agility, efficiency and effectiveness in IRS
    operations.

        Following from these themes, the administration's FY 2017 budget
    request includes a number of initiatives that provide the building
    blocks to move the IRS into the future. These initiatives represent a
    large portion of the increased funding requested in the IRS budget for
    FY 2017. They are as follows:

        Additional funding to improve taxpayer service: $48 million. Under
    this initiative, the IRS will work both to improve taxpayer service
    delivered through traditional channels and continue modernizing the
    services we offer in order to help transform the taxpayer experience.

        The additional staffing funded by these resources by itself will
    deliver phone level of service (LOS) for the full year on our toll-free
    helplines at 53 percent; if the President's Budget is enacted in full,
    the IRS will be able to combine this funding with additional resources
    through user fees to achieve a 70 percent LOS throughout the year. It
    is worth noting, however, that we expect to have the lowest user fee
    balance available for carryover into FY 2017 since FY 2008, meaning
    that we will not have that contingency available to boost service if
    other needs are not sufficiently funded.

        In terms of modernizing the taxpayer experience, the additional
    funding will allow the IRS to continue moving toward the development
    of: secure online taxpayer accounts; secure online digital
    communications between the taxpayer and the IRS; and new web-based
    self-service products and more interactive capabilities to existing
    products, so that taxpayers would potentially be able to, for example,
    securely authenticate their identity, view and print tax records
    online, pay outstanding debts, enter into installment agreements,
    establish powers of attorney, and get tax law information.

        Taken together, these improvements will ultimately allow taxpayers
    to resolve more issues online, leaving our employees more time to
    support the transactions that are best completed by phone or in person.

        Additional funding to continue implementing the Affordable Care
    Act: $153 million. The additional funding provided by this initiative,
    above current resources, will allow the IRS to develop advanced
    technology infrastructure and applications support and to modify
    existing IRS tax administration systems, so the agency can continue
    implementing the tax-related provisions of the ACA.

        For example, the funds will improve the IRS's ability to: validate
    taxpayer claims for the premium tax credit; collect penalties, taxes
    and fees related to the ACA provisions that the IRS administers; and
    administer the individual shared responsibility provision. The
    additional funding also supports administration of the new reporting
    requirement for health coverage providers, as well as the employer
    shared responsibility provision, both of which took effect in 2015.

        To further illustrate the importance of funding this initiative, I
    would note that over the last several years the IRS has had to divert
    resources from other critical functions, including taxpayer services
    and IT, and expend user fees to fund ACA implementation. In particular,
    these diversions have depleted user fees and made it difficult to use
    those fees to help fund core mission activities and other unfunded
    legislative mandates.

        Additional funding to leverage new technologies to advance the IRS
    mission: $53 million. Under this initiative, the IRS will continue
    using new technologies to develop critical IT systems needed to support
    the IRS's taxpayer service and enforcement programs. This includes
    making improvements to such systems as CADE2 and MeF. The IRS will also
    be able to provide the necessary IT infrastructure to support efforts
    to improve the online taxpayer experience, including the infrastructure
    portions of secure digital communications and more interactive
    capabilities to existing web-based self-service products.

        Another major component of this initiative is the implementation of
    the Event Driven Architecture (EDA) framework, which is designed to
    improve return processing by allowing the IRS to process and share data
    internally from returns more easily. Through the use of EDA, for
    example, returns with minor errors can be addressed at the time of
    filing. Implementation of EDA is a prerequisite for a number of planned
    improvements to the online taxpayer experience, including immediately
    notifying taxpayers of errors on a return as soon as it is filed, and
    allowing taxpayers to self-correct return errors through an online
    tool.

        Additional funding to help prevent stolen identity refund fraud and
    reduce improper payments: $90 million. The IRS has made significant
    progress in combating stolen identity refund fraud over the last
    several years, though it has been a challenge to find the resources for
    investments in this area because of the ongoing cuts to our budget. We
    therefore appreciate the additional funding Congress approved for FY
    2016 for cybersecurity and identity theft.

        Nonetheless, the IRS needs to continue investing in resources and
    tools to stay ahead of criminals. The additional funding requested
    under this initiative will allow the IRS to invest in the additional
    staffing and technology to continue improving our efforts to: detect
    and prevent refund fraud related to identity theft; assist identity
    theft victims; and apprehend the criminals who perpetrate these crimes.

        With this additional staffing, the IRS will be able to, for
    example: resolve taxpayer cases of tax-related identity theft more
    quickly, and expand the capacity of the IRS's Identity Protection
    Specialized Unit (IPSU) to handle additional cases; expand the IRS
    External Leads program, through which the IRS works in cooperation with
    financial institutions, state agencies and other external sources to
    recover fraudulent refunds; and do a better job of detecting prisoner
    refund fraud through the use of Prisoner Update Processing System
    (PUPS) data.

        Technology investments under this initiative will allow the IRS to
    make a number of other improvements, including: reducing the use of
    Social Security Numbers (SSN) on IRS mailings to taxpayers;
    establishing a centralized fraud repository within the IRS to expand
    the agency's ability to identify significant tax cases and streamline
    and standardize the fraud referral process; and accelerating IRS access
    to employment tax data from the Social Security Administration (SSA).

        Additional funding to improve electronic enterprise records
    management: $19 million. The additional funding provided under this
    initiative will allow the IRS to continue its efforts to manage
    official records more effectively through the implementation of new
    systems to maintain unified records of IRS policy, program and project
    development, and to create a unified searchable archive of IRS e-mails
    to avoid redundant archiving. By making these improvements, the IRS
    will be able to respond in a timelier manner to legal and congressional
    inquiries and requests under the Freedom of Information Act (FOIA).
    These improvements, which will be phased in over several years, will
    allow the IRS to more easily comply with various recordkeeping
    requirements under the Federal Records Act.

        The investment-related increases I have just described must be
    viewed in the context of the overall budget request for the agency. The
    President's FY 2017 Budget provides $12.3 billion for the IRS, an
    increase of $878.5 million in investments and an additional $167
    million in funding for inflation for a total of $1.045 billion over the
    FY 2016 level. This amount includes $11.8 billion in base discretionary
    resources and an additional proposed $514.7 million program integrity
    cap adjustment to support program integrity efforts aimed at restoring
    enforcement of current tax laws to acceptable levels and to help reduce
    the tax gap, which is the difference between taxes owed and taxes paid
    on a timely basis. This multi-year effort is expected to generate $64
    billion in additional revenue over the next ten years at a cost of $18
    billion over that 10-year period, thereby reducing the deficit by $46
    billion.

        Enactment of the program integrity cap adjustment proposal would
    facilitate funding for several initiatives, including the following:

        Additional funding to strengthen enforcement programs: $399
    million. This set of initiatives allows for investment to strengthen
    core enforcement programs to help the IRS improve the resolution of
    non-compliance with fairness and integrity. Budget cuts over the last
    several years have led to rising case inventories and call volumes,
    preventing the IRS from bringing into compliance taxpayers who fail to
    pay their tax debt, and reducing individual audit coverage to levels
    below 0.8 percent.

        With this additional funding, the IRS will be able to: increase
    collection and audit coverage; conduct compliance activities related to
    FATCA; pursue employment tax noncompliance and abusive tax schemes;
    increase investigations of transnational organized crime; and develop a
    digital version of the Form 990, Return of Organization Exempt from
    Income Tax.

        The investments made through this initiative will, for example
    allow us to: handle more than 30,000 additional collection cases; close
    more than 32,000 additional individual audits; expand the Automated
    Underreporter (AUR) program to process more than 400,000 additional
    cases; and implement a quality review program for penalty and interest.

        Additional funding to maintain the integrity of revenue financial
    systems: $10 million. The current revenue financial systems do not use
    commercial software, so the IRS is reliant on internal resources to
    maintain them. This investment will merge multiple financial systems
    into one repository to ensure the integrity of the IRS's financial data
    and make necessary changes to ensure that systems comply with
    accounting standards and requirements. This will automate
    reconciliations of the IRS ledger systems and assist in the gathering
    of data to respond to audits by TIGTA and the Government Accountability
    Office (GAO). Savings and efficiencies will be achieved in future years
    through the reduction or elimination of the resources required to
    maintain the multiple systems supporting operational decision making
    and the financial audit. This will close a material weakness.

        Additional funding for operations and maintenance of deployed
    Business Systems Modernization (BSM) projects: $92 million. The IRS
    receivesfunding for major IT modernization projects through the BSM
    appropriation, but BSM funds can only be used for developing new
    systems. Once development is completed, regular operations and
    maintenance begins, and the IRS is required to pay for this maintenance
    through its Operations Support appropriation. Since 2013, the IRS has
    incurred more than $95.5 million in unfunded increased annual
    requirements to its Operations Support appropriation as a result of BSM
    systems deployments. The additional funding requested partially
    restores the Operations Support base so that the funding will not have
    to be redirected from other areas to pay for the operation of deployed
    BSM projects. Resources will fund additional staff, hardware and
    software, and contractual services for these deployed systems.
              legislative proposals to improve tax administration
        The IRS appreciates the actions taken by Congress last year to
    approve legislation designed to improve tax administration. These
    measures include: accelerated filing dates for information returns;
    allowing SSNs to be masked on W-2 forms and other information returns;
    creating a safe harbor for minor errors on information returns; and
    expanding the due diligence requirements for paid tax return preparers.

        The President's FY 2017 Budget contains several additional
    legislative proposals that would further improve tax administration and
    enhance IRS operations. They include:

        Streamlined critical pay authority. The IRS Restructuring and
    Reform Act of 1998 increased the IRS's ability to recruit and retain a
    small number of key executive-level staff by providing the agency with
    streamlined critical pay authority. This allowed the IRS, with approval
    from Treasury, to hire well-qualified individuals to fill positions
    deemed critical to the agency's success in areas such as international
    tax, IT, cybersecurity, online services and analytics support. This
    authority, which ran effectively for 14 years, expired at the end of FY
    2013. The loss of streamlined critical pay authority has created major
    challenges to our ability to retain employees with the necessary high-
    caliber expertise in the areas mentioned above. In fact, there are only
    10 IT senior executives and leaders hired under this authority
    remaining at the IRS and we anticipate there will be no staff left
    under critical pay authority by next year. The President's FY 2017
    Budget proposes reinstating this authority.

        Authority to expand the Taxpayer Identification Number (TIN)
    matching program. The IRS operates a voluntary program under which
    entities that issue payments subject to backup withholding can confirm
    with the IRS that the name and TIN of the person receiving the payment
    match the name and TIN on file with the IRS. Although IRS code section
    6103 generally prohibits the IRS from disclosing taxpayer data, the
    agency is permitted to disclose this information to payers under
    authority of section 3406. But this authority only covers instances
    where payments are subject to backup withholding. The proposal would
    broaden the agency's authority to cover any situation where a person is
    required to provide the TIN of another person to the IRS.

        Correction procedures for specific errors. The IRS has authority in
    limited circumstances to identify certain computation mistakes or other
    irregularities on returns and automatically adjust the return for a
    taxpayer. At various times, Congress has expanded this limited
    authority on a case-by-case basis to cover specific, newly enacted tax
    code amendments. The IRS would be able to significantly improve tax
    administration--including reducing improper payments and cutting down
    on the need for costly audits--if Congress were to enact the proposal
    in the President's Budget that replaces the existing authorities that
    specify specific tax code amendments with authority to correct specific
    errors instead. This would allow the IRS to fix errors where the IRS
    has reliable information that a taxpayer has an error on his/her
    return. Thus, for example, the IRS could use data from completed state
    tax return audits to adjust information on the federal return.

        Authority to require minimum qualifications for return preparers.
    The proposal would provide the agency with explicit authority to
    require all paid preparers to have a minimum knowledge of the tax code.
    Requiring all paid preparers to keep up with changes in the Code would
    help promote high quality services from tax return preparers, improve
    voluntary compliance, and foster taxpayer confidence in the fairness of
    the tax system. It would thereby help the IRS to focus resources on the
    truly fraudulent returns.

        Expanded electronic filing requirements for businesses. The
    proposal would require all corporations and partnerships with $10
    million or more in assets to file their tax returns electronically. In
    addition, regardless of asset size, corporations with more than 10
    shareholders and partnerships with more than 10 partners would be
    required to file electronically. Paid tax return preparers who expect
    to prepare more than 10 corporate income tax returns or partnership
    returns annually would be required to file these returns
    electronically. Additionally, all tax-exempt organizations required to
    file Form 990 series returns would be required to file electronically.

        Chairman Hatch, Ranking Member Wyden, and members of the committee,
    this concludes my statement. I would be happy to take your questions.

                                     ______

          Questions Submitted for the Record to Hon. John A. Koskinen
                   Questions Submitted by Hon. Orrin G. Hatch
        Question. Commissioner Koskinen, TIGTA recently made seven separate
    recommendations to the IRS, in a report dated December 22, 2015,
    regarding reliability of Federal Unemployment Tax Certification Files
    and Work Multi-State Cases. TIGTA indicated that a review of the data
    submitted by State Agencies identified that 49 of the 50 States,
    District of Columbia, and the U.S. Virgin Islands submitted data that
    contained formatting errors in one or more of the key data fields used
    in the IRS's automated comparison process. In fact, the report
    indicated that the IRS does not have a process to ensure that State
    certification data are even complete.

        Additionally, the TIGTA report identified potential discrepancies
    for 3,729 multi-State employers totaling more than $200 million. What
    is more, the TIGTA review of FUTA discrepancy cases involving TY 2011
    Forms 940 identified that the IRS incorrectly assessed 12,171 employers
    more FUTA tax than what the employer owed. The total amount of excess
    assessments exceeded $3.2 million. And these, Commissioner, are just a
    few highlights in a report totaling more than 30 pages.

        Commissioner, while there were corrective action monitoring plan
    responses submitted by the IRS to this TIGTA report, I am curious why
    the IRS is apparently resisting some of these important changes and
    updates. For example under Recommendation #1, the IRS claims that lack
    of funds prohibit developing a process to identify errors in key data
    fields that have already been identified in this report. Has the IRS
    done a cost estimate of what it would cost to implement this
    recommendation? If so, what is the estimated cost of enacting this
    recommendation? Is there not some way to utilize the work already done
    by TIGTA to identify at least some of the errors materially affecting
    the calculation of allowed FUTA tax credit? And if the IRS has
    discovered a means of responding to the issue without increasing costs
    to taxpayers, would you please include that in your response? If not,
    when does the IRS anticipate having the funding available to address
    this recommendation?

        Has the IRS done a cost estimate of what it would cost to implement
    this recommendation? If so, what is the estimated cost of enacting this
    recommendation?

        Answer. The IRS has identified the information technology
    requirements to implement this recommendation and is in the process of
    completing a cost estimate. Funding was not available for additional
    programming due to budgetary constraints when this recommendation was
    made so the IRS did not commit to implementation. When the cost
    estimate is complete, we will determine the feasibility of implementing
    the recommendation. The 2017 President's Budget provides for
    modernizing many IRS systems, which would make it easier for IRS to
    address these types of data quality issues.

        Question. Is there not some way to utilize the work already done by
    TIGTA to identify at least some of the errors materially affecting the
    calculation of allowed FUTA tax credit?

        Answer. The IRS is using the information provided by TIGTA
    regarding the incorrect FUTA tax assessments that resulted from
    programming errors: (1) Actions are currently being taken to correct
    these accounts and notify taxpayers of the corrective action; (2)
    Additionally, changes to existing programming have been identified and
    corrections were submitted to Information Technology in a Unified Work
    Request.

        Question. And if the IRS has discovered a means of responding to
    the issue without increasing costs to taxpayers, would you please
    include that in your response? If not, when does the IRS anticipate
    having the funding available to address this recommendation?

        Answer. The IRS Information Technology organization is developing
    the requirements that will determine the cost of the changes necessary
    to improve the up-front validation process of State certification data
    files. We will pursue cost effective programming changes to the extent
    we are able, but continued funding constraints mean that we cannot
    provide an implementation date.

                                     ______

          Question Submitted by Hon. Orrin G. Hatch and Hon. Ron Wyden
        Question. In Western States, appropriative water rights derive from
    beneficial use and are fundamentally state-defined real property
    rights, and they are independent and separate from the land. Entities
    or persons possessing these rights are able to purchase, lease, or
    donate them in the stream of commerce. Management and transferability
    of western water rights are important to economic vitality in the West,
    where growing municipalities, new businesses, and regional quality of
    life depend on viable water supply.

        The lack of published guidance over the tax deductibility of
    donations or bargain-sold water rights has created ambiguity and
    uncertainty, diminishing potential donations of water rights and
    stymying the many benefits of those transactions. Clarification on this
    issue by the Internal Revenue Service (IRS) will enhance the critical
    role of private conservation stewardship, which aids the efforts of
    charitable organizations working for sustainable water supplies.

        In light of the need for clarity regarding the federal tax
    deductibility of a contribution of an appropriative water right to a
    charitable organization, will you commit to directing the IRS and other
    appropriate officials within the Treasury Department to publish
    guidance on the deductibility of a contribution of both: (1) an entire
    interest of an appropriative water right, and (2) an ``an undivided
    portion of the taxpayer's entire interest'' in an appropriative water
    right under the Internal Revenue Code Section 170(f)(3)(B)(ii)?

        Answer. Generally, a donor can claim a section 170 deduction for a
    contribution of real property to a charitable organization if the donor
    contributes its entire interest in the property, or an undivided
    portion of the donor's entire interest in the property, and it
    satisfies other requirements in section 170. In many Western States,
    state law treats water rights as separate interests in real property.
    Whether a taxpayer may claim a section 170 deduction for a charitable
    contribution of an appropriative water right depends on applicable
    state water rights law and various facts and circumstances.

        We understand that guidance in this area is important to taxpayers
    in Western States. We have participated in numerous meetings with
    outside stakeholders and personnel from the Treasury Department, the
    Department of the Interior, and the Council on Environmental Quality to
    better understand the issue. States have created and implemented a
    considerable body of law relating to the transfer, permitting, and use
    of appropriative water rights that is unique to each state. The lack of
    uniformity in the state laws regarding water rights raises challenges
    in the development of general guidance that will be useful and
    equitable for the array of taxpayers across the Western States.

        Given the importance of this issue to taxpayers in Western States,
    we will continue working with our colleagues in the Treasury Department
    to develop meaningful guidance in this area and will recommend
    including this guidance project on the Treasury Department's Priority
    Guidance List for the 2016-2017 fiscal year.

                                     ______

                     Questions Submitted by Hon. Ron Wyden
        Question. Nina Olson, the National Taxpayer Advocate, has raised
    concerns about the IRS moving to provide more online services. One of
    her main concerns is by doing so, the IRS will decrease telephone and
    in-person services. There is also concern about identity theft and the
    security of the system.

        Please tell us your plans for the future state of the IRS.

        Answer. Taxpayers expect to be able to interact with the IRS the
    same way that they interact with their banks and financial
    institutions. The IRS future state will meet this expectation by making
    services quickly, consistently, and securely available online. The IRS
    will continue to offer individuals the option of interacting with us
    over the phone, in person, or by mail. Better and more widely available
    self-
    service options will free up in-person resources and enable shorter
    wait times, greater availability, and improved quality for those
    taxpayers who choose conventional service options.

        The IRS remains committed to servicing the needs of all taxpayers.

        A cornerstone of the future state is for taxpayers to have an
    account at the IRS where they, or their authorized representatives, can
    log in securely, get information about their account, and interact with
    the IRS as needed. Under the future state, most things that taxpayers
    need to do to fulfill their federal tax obligations could be done
    virtually, and there would be much less need for in-person help, either
    by waiting in line at an IRS assistance center or calling the IRS.

        The future state also includes efforts to make IRS interactions
    with taxpayers about anomalies or potential noncompliance more timely,
    which means identifying issues earlier, contacting taxpayers sooner,
    and resolving issues faster. This would be accomplished in part through
    a more robust anomaly detection capability that leverages available
    information, historical patterns, service and enforcement results, and
    established precedents. Once it is determined that taxpayer contact is
    warranted, taxpayers could be informed, either through their account or
    other
    communications and outreach channels, and would be afforded the
    opportunity to self-correct errors, provide additional information, or
    explain the anomaly. Self-
    correction and early opportunities to provide additional information
    and explain anomalies could help reduce contentious compliance issues
    in later years.

        Question. What's your time frame for implementation and changes?

        Answer. It's important to note that our future state development is
    an evolutionary process that began over 10 years ago. We have already
    taken steps toward implementation of the future state, including
    expansion of our website, IRS.gov, which receives nearly 400 million
    hits a year, development of self-service online applications such as
    ``Where's My Refund?'', which received about 280 million hits this
    filing season, and providing access to other services online, such as
    installment agreements, offers in compromise, and direct payment of tax
    obligations. To move this process forward, we recently formed seven
    initiative groups made up of individuals from various offices within
    the IRS to develop plans to deliver the capabilities and
    functionalities necessary to get us to the envisioned future state.
    These planning efforts, which are expected to take several months, will
    help identify the prioritization, sequencing, dependencies, and other
    needs to get from our current state to the envisioned future state. We
    are also consulting with our stakeholders to ensure that the Future
    State addresses taxpayer needs and concerns. The next update to the IRS
    Strategic Plan, covering FY 2017 through FY 2021, will include
    information developed by these groups. How far and how fast we can go
    toward the envisioned future state will be, in part, dependent on our
    ability to make the investments in people, process and technology
    needed for implementation.

        Question. What type of resources are needed for these plans?

        Answer. For this future state to become a reality, we must have
    sufficient budgetary resources to invest in the right information
    technology building blocks along with the right skills and alignment
    for our workforce to effectively apply the technology. Adequate funding
    for these building blocks is necessary to provide a vastly improved
    experience for taxpayers and increase the efficiency and effectiveness
    of IRS services and enforcement actions. The 2017 Budget includes
    funding for online accounts to modernize and improve self-service
    options for individual taxpayers, and ultimately business and
    international taxpayers, by creating an integrated and easy-to-use
    source for timely, accurate, and consolidated tax filing and tax
    account information as well as up-front error resolution. Here are some
    of the key building blocks of the improved taxpayer experience we
    envision that the future state will allow the IRS to deliver.
                the building blocks to achieve the future state
    Virtual Taxpayer Assistance Center
        One of the central components of the future state vision is a
    taxpayer account. In the virtual taxpayer assistance center, taxpayers
    would be able to access and control their account information. They
    would be alerted to updates via their preferred communication channel.
    Taxpayers and, if permitted by the taxpayer, their representatives
    could be able to see in their account history, return and refund
    status, amounts due, payment confirmations, letters mailed, and
    completed actions on a taxpayer's account. We plan for the virtual
    taxpayer assistance center to include easy-to-use self-service tools
    for taxpayers and their representatives, with clear instructions on how
    to resolve most errors and issues, resolve issues with refunds, view
    amounts due, and make payments if needed. Taxpayers under an
    examination would be able to upload information directly to the virtual
    taxpayer assistance center to more efficiently communicate with agents.
    As a result of these self-service options made possible by the virtual
    taxpayer assistance center, phone calls or correspondence would not be
    needed as often to handle these account issues for taxpayers who are
    comfortable interacting with the IRS online. The IRS will continue to
    fully support traditional communications channels, including phone
    support, mail correspondence, and walk-in assistance, but demand is
    expected to decrease as more taxpayers interact with the IRS online.
    Identity Authentication
        While we have made significant strides in protecting taxpayers'
    information, we continue to look for ways to expand our capabilities to
    authenticate taxpayer identities and secure their data to ensure a
    secure environment to interact with taxpayers online and on mobile
    devices. Taxpayers deserve to have confidence in the security of their
    information, and adoption of technology to ensure identity
    authentication being implemented today and in the future will help the
    IRS deliver secure access whenever and wherever taxpayers need it,
    including access to the virtual taxpayer assistance center. IRS
    recently made available a new capability, secure access, which allows
    taxpayers to securely authenticate and conduct business with the IRS
    online. The Get Transcript application, which allows taxpayers to
    access their tax return information online, is once again available for
    use by taxpayers who establish accounts using secure access. This
    application is the first of many IRS hopes to make available to
    taxpayers so they can securely interact with IRS online and feel
    confident in their transactions.
    Up-Front Issue Identification
        Establishing ways for IRS to find errors and issues during filing
    and provide a means to resolve them soon after they are discovered
    would be central to the power of the virtual taxpayer assistance
    center. This is in contrast to today, where it takes a significant
    amount of time for the IRS to identify issues and contact the taxpayer,
    meaning that resolution is also delayed. Up-front issue identification
    would allow the IRS to sift through huge amounts of return information
    and identify errors and anomalies on tax returns at the time or soon
    after taxpayers file their returns. Early identification of errors and
    anomalies would not only accelerate resolution of issues with
    legitimate taxpayers, it would also help the IRS take immediate actions
    that are beneficial to taxpayers, such as keeping a false refund out of
    the hands of an identity thief or finding an unclaimed tax credit on
    the taxpayer's return. With this up-front issue identification
    capability, the IRS would be able to assure more taxpayers that they
    will not have future contact from the IRS regarding issues on that
    return.

        Newly enacted legislation and better access to data sources will
    help us detect issues earlier in the filing season, such as recently
    enacted acceleration of the due date for filing Form W-2 information
    with the IRS, which assists in validation of income reporting. Other
    statutory changes and access to other data sources would also be
    helpful to authenticate taxpayer submissions and protect against
    identity theft and refund fraud, such as easier access to the National
    Directory of New Hires and enhanced math error authority to correct
    specific errors using reliable government data.
    End-to-End Taxpayer Experience
        Under the future state, we would be building integrated case
    management capabilities to ensure that taxpayers experience seamless
    interactions with us, no matter which of our employees or teams is
    working on their issue. An integrated case management capability would
    allow us to move information to and among the right workgroups. It
    would also allow us to have multiple expert employees work on complex
    audits.
    Expanded Data Analytics Capabilities
        With the expanded use of data analytics envisioned under the future
    state plan, the IRS could continuously improve the taxpayer experience,
    enhance our compliance efforts, and learn as much as we can from tests
    and data. Data analytics enables the IRS to improve the efficiency and
    effectiveness of our interactions. Through expanded use of data
    analytics, we would get early warning of new tax compliance issues and
    could help taxpayers avoid issues, confusion, or misunderstanding of
    the tax laws before errors are made. Expanded use of these data
    analytics capabilities will also allow us to work with tax software
    providers and return preparers to identify and implement technology
    solutions to reduce taxpayers' mistakes. During an audit, expanded use
    of data and data analytics would help us better identify issues to
    avoid wasting the taxpayer's and IRS's time working on the wrong
    issues. The future state itself would not be possible without these
    expanded data analytics capabilities.

                                     ______

                    Questions Submitted by Hon. Rob Portman
     aca reporting requirements for businesses; reporting health coverage
            information on irs forms 1094-b/1095-b and 1094-c/1095-c
        Question. Senator Warner and I have been working with your office
    to ensure the employer reporting requirements, as mandated by the
    Affordable Care Act, are not overly burdensome--and that your agency
    will collect useful information rather than rushed information that
    would possibly need to be re-submitted. Our constituents appreciate the
    extra time provided by the automatic extension, but we think more
    should be done to simplify the reporting process.

        Can you provide further detail on the reason(s) why these deadlines
    were extended? Was the extension motivated by concerns that the IRS
    will be unable to process the Forms the agency will receive
    electronically or on paper? Under what circumstances will the IRS
    further extend these deadlines, if at all?

        Will you personally commit to working with me on my bill to achieve
    a streamlined and simplified reporting approach that also ensures your
    agency gets the information needed?

        Answer. Notice 2016-4 extended the deadlines for furnishing the
    statements and filing the returns required by sections 6055 and 6056 of
    the Internal Revenue Code. As noted in the Notice, the Service has been
    prepared to accept returns for filing since January 2016, and in fact
    has been processing returns since that time. Following consultation
    with stakeholders, however, Treasury and IRS determined that some
    employers, insurers, and other providers of minimum essential coverage
    needed additional time to adapt and implement systems and procedures to
    gather, analyze, and report this information to the Service, and to
    furnish the required information to employees and covered individuals.
    In addition to consultation with stakeholders, the Service received
    hundreds of written requests to extend the furnishing and filing
    deadlines. Notwithstanding the extensions provided in the notice,
    employers and other coverage providers were encouraged to furnish
    statements and file the information returns as soon as they were ready,
    and coverage providers have been doing so since mid-January.

        I am committed to working with you to explore simplified reporting
    methods that ensure the Service gets necessary information to enforce
    the applicable provisions of the Code. The IRS supports simplification
    efforts that reduce taxpayer burden, and we would be happy to work with
    you or your staff in determining the implications of simplification to
    IRS operations. As always, changes to existing IT systems would require
    adequate resources to implement those changes within a reasonable
    period of time.
                        employer reporting requirements
        Question. The ACA reporting requirements compel employers to report
    significant amounts of data detailing information about employees,
    their health plans and who had access to employer sponsored insurance
    to the IRS after the end of each year. This information will be used to
    levy the individual mandate penalties. It will also be used to levy
    penalties on low-income workers who were erroneously granted an
    advanced premium tax credit by the Exchanges when the employee had an
    existing offer of employer-sponsored insurance.

        Unfortunately, because employers are reporting information on the
    availability of employer-sponsored insurance up to 17 months after the
    exchange granted the erroneous advanced premium tax credit--these
    lower-income employees could be left with a shocking tax bill over a
    year and a half later.

        When will the IRS notify individuals of their potential tax
    liability?

        Answer. As you know, applicable large employers (ALEs) must report
    to the IRS information about the health care coverage, if any, they
    offered to full-time employees. ALEs are also required to furnish a
    statement to each full-time employee that includes the same information
    provided to the IRS. The IRS will use this information to administer
    compliance with the employer shared responsibility provisions and the
    premium tax credit provisions. Individuals who purchased health
    insurance coverage through the Marketplace may use this information to
    verify their eligibility for employer-sponsored coverage. Like other
    information reporting, this information is provided after the
    conclusion of the year, reflecting that coverage may change over the
    course of the year.

        Tools are used to help employers determine whether an individual
    enrolling in Marketplace coverage is eligible for employer-sponsored
    coverage.

        For example, starting in 2016, the Federally-facilitated
    Marketplace (FFM) will notify certain employers whose employees
    enrolled in Marketplace coverage with advance payments of the premium
    tax credit (APTC) because the employee attested that he or she was
    neither enrolled in employer sponsored coverage nor eligible for
    employer coverage that is affordable and meets the minimum value
    standard. The FFM will send notices to employers if the employee
    received APTC for at least one month in 2016 and if the FFM has a
    complete address for the employer. Employers receiving this notice may
    appeal the Marketplace's eligibility determination.

        APTC eligibility is based on the Marketplace's estimate of the
    premium tax credit the individual will be able to take on his or her
    tax return. If APTC is paid for an individual or a member of his or her
    family, the individual must reconcile (or compare) the APTC paid during
    the year with the actual premium tax credit for which the individual
    qualifies at the time the individual files his or her tax return. If
    the APTC is more than the premium tax credit, the individual must repay
    the excess APTC, which occurs as part of the individual's tax filing
    process. However, the amount that an individual is required to repay
    may be limited based on the individual's household income and filing
    status. Individuals calculate the amounts they are owed or owe a result
    of reconciliation on their tax returns. The IRS compares the
    information on the tax returns with information reported by the
    Marketplaces to verify the taxpayers' calculations and eligibility for
    the premium tax credit.

        Question. Wouldn't it help low-income individuals and improve tax
    administration if the Administration used up-to-date information about
    the availability of employer-sponsored insurance at the time
    individuals were applying for tax credits rather than 17 months later?

        Answer. The question of whether this data would be useful in
    determining eligibility for the advance premium tax credit (APTC) at
    the time an individual enrolls in Marketplace coverage is a question
    best addressed to CMS. As to whether this data would be useful in
    determining eligibility for the premium tax credit at the time the
    taxpayer files his or her income tax return, it generally would not.
    Knowing whether an individual had access to employer-sponsored coverage
    at the time a tax return is filed is not sufficient information to help
    either taxpayers or the Service determine eligibility for the premium
    tax credit (PTC) as it would not include information about
    affordability and minimum value. The general rule is that individuals
    are not eligible for the premium tax credit if they are eligible for
    employer-sponsored coverage that provides minimum value and is
    affordable. Whether available employer-sponsored coverage is affordable
    or provides minimum value is determined at the time of enrollment in
    Marketplace coverage, and the Service's rules and instruction provide a
    safe harbor for taxpayers who provide accurate current information on
    their Marketplace application. The instructions for Form 8962 and
    Publication 974 explain this process. The instructions tell taxpayers,
    ``Employer-sponsored coverage is not considered affordable if, when you
    or a family member enrolled in a qualified health plan, you gave
    accurate information about the availability of employer coverage to the
    Marketplace, and the Marketplace determined that you were eligible for
    APTC for the individual's coverage in the qualified health plan.'' Pub.
    974 expands on that statement and provides six examples to help
    taxpayers determine whether available employer-sponsored coverage was
    affordable at the time of enrollment.

                             aca tax credit notices
        Question. Obamacare requires HHS to send a notice to an employer
    when an employee is deemed eligible for an advanced premium tax credit.
    These notices are important because they allow employers to warn
    employees that they may be subject to a surprising tax bill when the
    employer has already offered the employee health coverage.

        Would a more up-to-date and substantiated data base help decrease
    the number of erroneous advanced premium tax credit determinations?

        Employers expected to receive notices beginning in 2015. What date
    will you begin sending employers notices so they can help their low
    income workers avoid unexpected tax penalties?

        Answer. HHS is best able to answer these questions. The 2016
    Employer Notice Program is described here: https://www.cms.gov/CCIIO/
    Resources/Fact-Sheets-and-FAQs/Downloads/Employer-Notice-FAQ-9-18-
    15.pdf.
                          enrolled agent fee increase
        Question. The Service is proposing to increase its user fee for the
    enrolled agent Special Enrollment Exam from $33 to $297, bringing the
    total cost of taking the exam cost close to $600. Isn't such a large
    increase unprecedented, and won't it act as a deterrent to increasing
    the number of enrolled agents?

        The proposed regulations are rather opaque on why the sudden
    increase. Could you provide me with details on how the IRS arrived at
    this figure?

        IRS suggests in the proposed regulations that part of the reason
    for the increase is that the number of tests administered annually is
    much lower than originally forecast--the difference is 34,000 v.
    approximately 20,000. What has IRS done to encourage unenrolled
    preparers to take the enrolled agent exam?

        In the wake of the Loving decision, why did the agency choose to
    create the Annual Filing Season Program Record of Completion, which is
    not a credential at all, rather than promote its own existing enrolled
    agent credential? Encouraging more preparers to take the comprehensive
    enrolled agent exam just seems like a better investment for taxpayers.

        Answer. Per OMB Circular A-25, the IRS is required to recover the
    full cost for user fee programs, unless there is a waiver granted by
    OMB to charge less than full cost, which in some cases is a waiver of
    the fee entirely. As required by OMB Circular A-25, the IRS reviews
    biennially its user fee programs and recalculates the full cost to the
    agency of providing the services subject to those fees. Through the
    IRS's 2015 review of the Enrolled Agent (EA) program, the IRS
    determined that the current testing fee of $11.00 per part does not
    reflect the costs to the agency of providing, maintaining and
    monitoring this testing program. In order to comply with Circular A-25,
    which requires the IRS to charge a user fee that reimburses the full
    cost of the service, the IRS proposed increasing the testing user fee.

        The EA is a nationally recognized credential for tax professionals.
    The proposed increase to the testing user fee is not inconsistent with
    the testing costs for securing other professional credentials. Based on
    our research, the average cost for state bar exams and certified
    professional accountant exams are consistent with the proposed EA
    testing fee, but with the EA testing fee at the lower end of this
    spectrum. For example, in Ohio it costs $743 to take all four parts of
    the Uniform CPA exam, plus a $140 application fee. The costs for the
    state bar exam totals $737.

        Any fee increase to any program may, of course, deter some from
    participating in the program. The user fee for Special Enrollment Exam
    for EAs, however, has remained consistent for 10 years at a level below
    the full cost to the IRS. The low agency testing fee alone has not
    caused large numbers of individuals to sit for the test. The number of
    parts of the EA test taken each year has also been very consistent,
    which reflects the fact that the EA designation is respected as a
    credential that may only be obtained by those who are highly qualified
    and who pass the examinations. The fact that applicants must engage in
    significant preparation for and pass a rigorous examination likely
    limits the number of EA test takers, regardless of the fee. In calendar
    year 2013, there was an increase in the number of EA test applicants
    following the announcement of the mandatory Registered Tax Return
    Preparer test. The increase in those numbers immediately declined in
    2014 following the appellate decision in Loving v. IRS. The rollout of
    the Annual Filing Season Program and the promotion of both the Annual
    Filing Season Program and the EA program by the IRS (see below) again
    resulted in a spike in interest in the EA exam in 2015.

        Question. The proposed regulations are rather opaque on why the
    sudden increase. Could you provide me with details on how the IRS
    arrived at this figure?

        Answer. The current user fee proposal is consistent with OMB
    Circular A-25, which requires calculating both direct and indirect
    costs associated with the testing program. The proposed user fee
    reflects the estimated salary and benefits of 6.4 full time equivalent
    positions used to carry out the various activities or benefits
    necessary to deliver the testing program. It also reflects the indirect
    costs that are applied to labor and benefits costs as a corporate
    overhead factor. The overhead factor is used to allocate to the testing
    program a share of the organizational expenses that are commonly
    consumed by multiple business unit activities, but that are not
    specifically identifiable to any one activity or program. The overhead
    factor includes costs for services such as:

           General management and administration services
            Facilities management and ground maintenance services (rent,
    utilities, security and building maintenance)
           Procurement and contracting services
           Financial management and accounting services
           Information technology services
           Research, analytical and statistical services
           Human resources and personnel services, etc.

        As background checks for the employees of the vendor providing the
    testing are required, these costs are also amortized into the proposed
    user fee.

        The projected total cost of the program for a 3 year period, which
    includes all the elements above, is then divided by the number of tests
    estimated to be delivered over that same period to determine the
    proposed user fee.

        Question. IRS suggests in the proposed regulations that part of the
    reason for the increase is that the number of tests administered
    annually is much lower than originally forecast--the difference is
    34,000 v. approximately 20,000. What has IRS done to encourage
    unenrolled preparers to take the enrolled agent exam?

        Answer. The IRS is fully committed to the EA program, and we have
    and will continue our efforts to encourage participation.

        In the last year alone, the IRS Return Preparer Office made 19
    presentations to preparer groups, all of which started with a
    description of the EA program as an elite professional status with
    unlimited representation rights, included a discussion of the benefits
    of the EA program, explained the requirements for becoming an EA and
    concluded with an endorsement of the program for all non-credentialed
    preparers holding themselves out as tax professionals. We distributed
    approximately 20,000 EA brochures at the IRS Nationwide Tax Forums and
    other events in the past year, provided staff for a minimum of 2 of the
    3 days at each Forum to address any questions that preparers may have
    about the EA program, and encouraged non-credentialed preparers to
    consider the benefits of the EA credential in the 10 Forum cities in
    the last 2 years. In our promotional e-mail communications to non-
    credentialed preparers, 390,000 tax return preparers received
    information about the EA program and its benefits.

        We also established a toll free telephone line for EAs and
    applicants of the program. We have ensured that EAs receive printed
    certificates and enrollment cards reflecting the elite status of their
    credential so that taxpayers and other tax professionals can readily
    identify an EA and possibly aspire to that same status. We also
    deployed new Preparer Tax Identification Number (PTIN) identity
    monitoring functionality and made it available only to the EA community
    during the last two filing seasons. As part of a pilot program, EAs
    preparing 50 or more 1040 returns were provided access to information
    on the number of tax returns processed by the IRS with their PTIN. This
    allowed EAs to determine and report possible misuse of their PTINs. We
    welcome ideas about other ways we could promote this program.

        Question. In the wake of the Loving decision, why did the agency
    choose to create the Annual Filing Season Program Record of Completion,
    which is not a credential at all, rather than promote its own existing
    enrolled agent credential? Encouraging more preparers to take the
    comprehensive enrolled agent exam just seems like a better investment
    for taxpayers.

        Answer. As indicated above, the IRS has taken steps to promote the
    Enrolled Agent credential and encourage unenrolled preparers to apply
    for the EA credential. Enrolled Agents make up about 7% of all active
    return preparers (50,000) and they prepare about 12% of all tax returns
    prepared for a fee. The EA program has been in existence since 1959 and
    the number of active enrolled agents has consistently been at or around
    50,000 for a number of years. Last year more than 150 million
    individual tax returns were filed and over half that number were
    prepared with the help of a paid tax return preparer. Of the over
    700,000 individuals with a PTIN, 60% are non-credentialed preparers.
    The fact that EA enrollment has remained constant, attracting and
    maintaining on average 50,000 practitioners each year, demonstrates
    that it is unlikely that this program is going to attract substantially
    larger numbers of participants in the near term. In addition, we
    believe that the existence of the Annual Filing Season Program has
    resulted in increased interest in the EA program, which has resulted in
    applicants taking an additional 2,000 parts of the EA test in 2015. The
    increased numbers for EA testing were about the same during 2013 when
    the mandatory competency testing program was in existence.

        There may come a time when all tax return preparers aspire to be
    elite tax professionals like Enrolled Agents and when the market will
    demand such credentials, but that is not the situation today. While we
    continue to advocate for authority to require that all tax return
    preparers meet minimum standards of competency, we have a
    responsibility to taxpayers and our tax system to keep moving forward
    under existing authority with efforts to improve the quality of tax
    return preparation. The Annual Filing Season Program is an interim step
    in that forward path. While the Annual Filing Season Program does not
    provide participants with an elite professional credential, it is an
    incentive program to encourage non-credentialed tax return preparers to
    improve their knowledge of federal tax law and filing season
    requirements through continuing education, enabling them to better
    serve taxpayers.
                             business examinations
        Question. The IRS recently announced a sweeping reorganization of
    its Large Business and International Division including significant
    examination process reforms. We've heard from many taxpayers that this
    reorganization will make it difficult to complete an examination, and
    that exams could drag on for years. Officials with the IRS have
    publicly stated that timely closure of audits is a lower priority under
    the reorganization. Are you open to discussing these examination
    process reforms with the taxpayer community before you complete this
    sweeping reorganization?

        Answer. The Large Business and International Division of the IRS
    (LB&I) is making significant changes to streamline post-filing
    examinations to focus resources strategically on the complex issues we
    encounter with our taxpayer base. LB&I recently initiated a new
    examination process to replace the former Quality Exam Process for
    cases starting as of May 1. For cases already in progress as of May 1,
    LB&I will adopt the changes to the execution and resolution phases of
    the exam process.

        The LB&I Exam Process (LEP) was jointly developed with external
    stakeholders such as the American Institute of Certified Public
    Accountants and the Tax Executives Institute and includes significant
    input from the LB&I workforce. It is based on best practices of
    examination teams observed during peer reviews. LEP establishes roles
    and responsibilities for both LB&I examiners and taxpayers and sets
    specific expectations with respect to claims for refund. Under the new
    process, once LB&I determines the issues to be examined, it will work
    together with the taxpayer to establish effective steps to complete the
    examination in a timely manner. Case timelines will be determined by
    the most complex issues. The new issue development process relies on
    active dialogue and fact sharing between the taxpayer and LB&I. Both
    LB&I and the taxpayer are expected to make a clear commitment of
    resources to be provided to achieve the established case and issue
    timelines. One of the goals of the LEP is for both the taxpayer and
    LB&I to achieve tax certainty at the earliest appropriate point by
    reaching agreement on the tax treatment of each issue examined and
    resolving tax controversies. These changes to the examination process
    are incorporated in the recently released Publication 5125 and IRM
    section 4.46. As reflected in the changes to LEP discussed above and
    the process by which they were developed, LB&I will continue to
    maintain an open, transparent relationship with stakeholders and will
    endeavor to do so into the future.

        Question. Since 1996 (Sec. 1003 of TBOR2, Pub. L. No. 104-168), the
    IRS has been required to submit a report each year to both the Senate
    Finance Committee and the House Ways and Means Committee on the number
    of designated summonses issued under section 6503(j) of the Internal
    Revenue Code. We have been unable to locate any such report. Have any
    such reports been issued, and if not, would you please provide this
    information to the committee for each year since and including 1996?

        Answer. During the period 1995 through 2015, only three designated
    summonses were issued and they were issued in 1996, 2013, and 2014. The
    first annual report was issued on February 8, 2016. We are not aware of
    any prior annual reports.

        Question. There are press reports that the IRS has hired an outside
    law firm by the name of Quinn Emmanuel to assist the IRS in auditing
    U.S. taxpayers. I don't recall that the IRS has ever outsourced the
    audit of an American taxpayer to a private law firm. Could you tell me
    if an outside law firm has ever before been hired to audit a private
    taxpayer? Have you hired Quinn Emmanuel or any other law firm to
    participate in the audit of any other taxpayers? Could you tell us how
    much you have paid the law firm of Quinn Emmanuel to assist you with
    IRS audits to date and how much you may pay them if that audit actually
    goes to trial? Could you tell this committee the hourly billing rates
    that are charged by Quinn Emmanuel to the American taxpayers? Do you
    intend to renew this contract?

        Answer. The IRS typically hires expert contractors such as
    economists and industry experts and, on occasion, it has also hired
    attorneys where there is an issue of foreign law, state law, or non-tax
    subject matter law (e.g., intellectual property or food and drug law)
    that requires specialized expertise that either is not found within the
    IRS or is limited and must be supplemented to effectively scrutinize an
    issue. It is important to emphasize that the IRS is not outsourcing the
    audit of taxpayers when it hires experts to assist it in an audit;
    those contractors hired do not conduct the audit of the taxpayer but
    simply provide support to the IRS employees managing the audit. We are
    unable to respond to questions concerning the examination of any
    particular taxpayer because of the restrictions in I.R.C. Sec. 6103.

        Question. Businesses tell us that the IRS has been using tactics,
    such as designating cases for litigation and issuing immediate
    statutory notices of deficiency, to prevent taxpayers from going to the
    IRS Appeals Office. These tactics also impede taxpayer rights under our
    international treaties to engage the ``competent authority'' process
    which is designed to avoid double taxation of income by the U.S. and
    another country. When the IRS choses to go straight to litigation
    rather than allow the IRS Appeals Office to review a case before going
    to litigation or to block a taxpayer from the competent authority
    process, please provide to me the estimated additional cost to the IRS
    of resolving a case in litigation versus the cost of using the IRS
    Appeals Office or competent authority to resolve a disagreement.

        Answer. The procedures for designating an issue for litigation are
    set forth in the IRS Chief Counsel Directives Manual (CCDM) 33.3.6.
    These procedures have been in the CCDM since at least 1993. See
    35.3.14.2 (2000) (amending CCDM provisions from 12-08-1993). The
    procedures are used when there is a critical need for enforcement
    activity with respect to such issues. Cases are designated for
    litigation in the interest of sound tax administration to establish
    judicial precedent, conserve resources, or reduce future litigation
    costs for the Service and taxpayers. We do not perform a comparative
    analysis of how much it costs to litigate a case versus to settle a
    case at Appeals. This analysis should not be done on a case-by-case
    basis because designation is meant to develop precedent that can be
    used to resolve other cases. When viewed from that perspective, the
    designation process was designed as a resource and cost saving measure.
    Moreover, even if a case proceeds to litigation, a taxpayer still has
    the ability to use the competent authority process to relieve double
    taxation after the Court has rendered a decision.

        Question. Staying on the concept of cases being ``designated for
    litigation,'' as I understand the concept, it means that there is
    precedential value for both the IRS and a class of taxpayers if the
    case is resolved through a court ruling, rather than through the IRS
    Appeals Office. Can you explain to me how large a class of taxpayers
    you think would generally warrant designating a dispute for litigation?
    When are taxpayer informed that an issue is being designated for
    litigation by the IRS?

        Answer. Certain cases present recurring, significant legal issues
    affecting large numbers of taxpayers. In addition, cases are designated
    for litigation in the interest of sound tax administration to establish
    judicial precedent, conserve resources, or reduce litigation costs for
    the Service and the taxpayers. In considering whether a case should be
    designated under this framework, a variety of factors are considered,
    including but not limited to: the absolute number of cases that the IRS
    is aware of involving the issue, the potential number of taxpayers that
    could be affected by the issue in the future, the significance of the
    issue for overall tax enforcement, the size of the particular
    adjustments in those cases and the litigation costs associated with
    such cases, and the overall impact to the government's budget. As to
    the timing of designating a case for litigation, IRS Counsel can
    designate a case for litigation while the case is in examination,
    appeals or even after the case has been docketed. The time of notice to
    the taxpayer regarding designation depends upon whether the case is in
    examination, appeals or docketed for litigation. In accordance with the
    CCDM, the taxpayer is notified by IRS personnel of the proposal to
    designate the case for litigation and the reasons for the proposed
    designation. The taxpayer is also notified that its views on the
    proposed designation may be presented, in a meeting, to IRS personnel
    and Counsel.

                                     ______

                    Questions Submitted by Hon. Dean Heller
        Question. Public trust is crucial to the IRS's success. Would you
    agree? At the Finance hearing with Treasury Secretary Lew, I asked him
    about the IRS's abysmal service record answering taxpayer's phone
    calls. As many of my fellow colleagues have said, this past tax season,
    the IRS provided ``the lowest level of telephone service during fiscal
    year 2015,'' with only 38 percent of callers able to reach an IRS
    representative. Additionally, the IRS has not developed any plans,
    which we as lawmakers are aware, for a comprehensive customer service
    strategy to address these problems.

        Answer. I agree that public trust is critical to the IRS's success.
    Additionally, I share your dissatisfaction with the level of service
    provided to taxpayers during 2015. As you know, our appropriation for
    fiscal year 2015 was $346 million less than the previous year's
    appropriation. Additionally, we absorbed approximately $250 million in
    unfunded inflationary costs because of mandatory pay raises, benefits,
    and non-labor cost increases. Combined, this deficit of nearly $600
    million required us to scale back activities across the agency.
    Telephone level of service has improved substantially in 2016 as a
    result of increased funding provided for that purpose, but is still
    unacceptably low. The IRS achieved a telephone level of service of more
    than 70 percent during filing season but expects the level of service
    to dip to 47 percent for the full year.

        The IRS's customer service strategy is embedded in the IRS future
    state plans. Taxpayers expect to be able to interact with the IRS the
    same way that they interact with their banks and financial
    institutions. The IRS future state will meet this expectation by making
    services quickly, consistently, and securely available online. The IRS
    will continue to offer individuals the option of interacting with us
    over the phone, in person, or by mail. Better and more widely available
    online self-service options will free up in-person resources and enable
    shorter wait times and greater availability when taxpayers choose
    conventional service options. The IRS remains committed to servicing
    the needs of all taxpayers.

        A cornerstone of the future state is for taxpayers to have an
    account at the IRS where they, or their authorized representatives, can
    log in securely, get information about their account, and interact with
    the IRS as needed. Under the future state, most things that taxpayers
    need to do to fulfill their federal tax obligations could be done
    virtually, and there would be much less need for in-person help, either
    by waiting in line at an IRS assistance center or calling the IRS.

        As we are moving toward this future state, we continue to adjust
    and innovate in response to customer behavior and available
    technological advances to improve the taxpayer experience and increase
    security. We will continue working on improving the taxpayers'
    experience by providing greater access through use of web applications.
    We recently began offering scheduled appointments at our Taxpayer
    Assistance Centers (TAC) to decrease wait times. Our experience with
    the TAC appointment test indicates that up to 60% of customers calling
    for an appointment determined that it was not necessary once we
    explained how easily help was available on IRS.gov or the customer
    service representative resolved their issue over the phone. For most
    taxpayers, immediate answers and resources are available on IRS.gov and
    the IRS2Go mobile application.

        Question. I asked Secretary Lew what his expectation of IRS
    telephone service level should be. I want to ask you as well. What is
    the threshold you want to meet this tax filing season?

        Answer. This filing season taxpayers were able reach us more
    quickly, and with significantly fewer disconnects due to system
    overloads. In particular, we expect to achieve a level of service of 47
    percent for the FY 2016 full year, but this level is still unacceptably
    low. We achieved a telephone level of service greater than 70 percent
    during this filing season, which is a significant improvement over the
    37 percent level during the last filing season. This improvement was
    made using the additional $290 million that Congress provided for
    improvements in taxpayer service, cybersecurity, and identity theft and
    refund fraud prevention. We are using $178.4 million of this additional
    funding to improve our service to taxpayers, including hiring
    approximately 1,000 additional employees who have allowed us to
    increase the telephone level of service during this filing season.

        Question. Do you agree with the 70% threshold that Secretary Lew
    suggested at the hearing earlier in the day?

        Answer. Yes, I agree with the 70% threshold, and with the
    appropriate additional funding for 2017, we could provide taxpayers
    with phone service at this level for the entire year, rather than just
    through the filing season.

        Question. Are you personally invested in fixing this?

        Answer. Yes, I am personally invested in fixing this and all facets
    of the IRS's performance, but will need your help to secure proper
    funding to achieve this level of service. We will continue to work
    diligently to improve web-based services to give taxpayers more
    electronic options to resolve their issues and we are constantly
    looking at ways to improve existing services to enhance the customer
    experience.

        Question. As the overseer of this agency, how do you rate yourself
    this year?

        Answer. Thanks to the good work of an outstanding workforce, I
    think we are making significant progress dealing with the challenges
    the IRS faces, and I am pleased with all that we have been able to
    accomplish, even with constrained resources. The IRS provides year-
    round assistance to millions of taxpayers through many sources,
    including outreach and education programs, issuance of tax forms and
    publications, rulings and regulations, toll-free call centers, IRS.gov,
    Taxpayer Assistance Centers (TACs), VITA sites, and Tax Counseling for
    the Elderly (TCE) sites.

        The IRS provided valuable services to millions of taxpayers while
    making it easier for them to participate in the tax system. The IRS:

            Partnered with 12,057 VITA/TCE sites that prepared more than
    3.75 million tax returns in fiscal year 2015.
            Launched the Free File campaign at the beginning of the 2015
    filing season and received more than 650,000 visits in the first week.
            Produced 117 Tax Tips (110 with Spanish translations) reaching
    more than 632,000 e-mail subscribers in fiscal year 2015.
            Issued 102.6 million refunds to individuals totaling $276.9
    billion. Already this year through June 3 we have processed over 104
    million refunds with more returns to be filed by those requesting an
    extension.
            Received more than 285 million hits this filing season through
    June 4 on our ``Where's My Refund?'' application.
            Provided information to taxpayers on our website, IRS.gov,
    through almost 366 million hits this filing season through June 4.

        We expect to achieve a level of service of 47 percent for the FY
    2016 full year, a substantial improvement over FY 2015 full year
    telephone level of service of 38 percent, but this level is still
    unacceptably low. We achieved a telephone level of service greater than
    70 percent this filing season, which is a significant improvement over
    the 37 percent level during the last filing season. This improvement
    was made using a portion the additional $290 million that Congress
    provided for improvements in taxpayer service, cybersecurity, and
    identity theft and refund fraud prevention.

        The IRS is using $178.4 million of this additional funding, to
    improve our service to taxpayers, including hiring approximately 1,000
    additional employees who have allowed us to increase the telephone
    level of service during this filing season. As of May 13, 2016, the IRS
    has answered more than 14.5 million calls from taxpayers this filing
    season, which is 5.5 million more than at this time last year. We also
    received and processed more than 140 million individual income tax
    returns this year. Even with our increased efforts to stop identity
    theft and refund fraud in the battle against criminals around the
    world, the IRS is still issuing 90 percent of all legitimate refunds
    within 21 days from the date the return is filed.

        With regard to the management failures that left numerous
    organizations for social welfare status pending for 2 years or more, we
    have implemented all of the Inspector General's recommendations as well
    as those in this committee's bipartisan report, over which we have
    control, including the recommendations in the majority report and those
    in the minority report. We are committed to doing everything possible
    to insure that this situation never happens again.

        Our partnership with the private-sector tax community and the
    states has been a success, increasing the amount of leads and
    information that can be used to stop tax refund fraud and identity
    theft being shared in real time. As a result of this partnership, the
    private sector has also agreed to operate with standard security
    protocols and this filing season has increased the authentication
    requirements for taxpayers using their services, thus increasing
    security of taxpayer information. As a result of these and other
    efforts, in calendar year 2015, the IRS rejected or suspended the
    processing of 4.8 million suspicious returns. The IRS stopped 1.4
    million confirmed identity theft returns, totaling $8.7 billion.
    Additionally, in calendar year 2015, the IRS stopped $3.1 billion worth
    of refunds in other types of fraud. That's a total of $11.8 billion in
    confirmed fraudulent refunds protected.

        Question. Commissioner Koskinen, as you are aware, the National
    Taxpayer Advocate released its annual report earlier this year and
    discussed its strong concerns with the ``Future State'' of the IRS.
    Many lawmakers, including myself, feel like we are in the dark on what
    this ``Future State'' is. Can you walk us through what is your 5 year
    plan?

        It is my understanding that this long-term plan would have the IRS
    getting out of the process of directly interacting with taxpayers, that
    what the IRS wants to move to is taxpayers looking online or using
    their phones to address concerns with their tax returns. I understand
    your need to be efficient and save costs, but given a large population
    of our state contains rural taxpayers, this would be catastrophic to
    our state and I presume to many Finance members in rural states. Some
    Nevadans may not have access to a computer or the Internet. Some do not
    trust Federal agencies, including the IRS. How do you expect to address
    these taxpayers in this new ``Future State''?

        Answer. Our envisioned future state would provide better service to
    taxpayers, not fewer services. This would be accomplished, in part, by
    serving those taxpayers who are able and interested in interacting with
    us through their secure online account, thereby easing the demand on
    telephone and in-person service channels. This would enable us to
    better serve taxpayers who are unable to interact with us
    electronically or otherwise prefer telephone or other service channels
    to online channels.

        We recognize and are committed to meeting our responsibility to
    serve all taxpayer through whatever means of communication they choose.
    We have no plans to eliminate or decrease service through traditional
    communications channels (telephone, written correspondence, and in-
    person). Both taxpayers and the IRS benefit when we interact through
    the channel most efficient for addressing the taxpayer's issue, which
    in some cases means a telephone or in-person interaction. Currently,
    rural taxpayers are typically served through telephone interactions as
    Internet access is not always easily accessible or reliable. Those who
    prefer in-person interactions may visit a Taxpayer Assistance Center
    (TAC), but we understand that in rural areas our TACs may not always be
    geographically convenient. We are testing ways to extend our in-person
    services to those who live in rural areas. First, we now offer
    taxpayers appointments, rather than requiring taxpayers to go to a TAC
    and wait for an assister to be available. We are also exploring a
    virtual TAC to allow assisters in one location to interact with
    taxpayers in another location through a video connection. As more
    taxpayers interact with us online, including through mobile devices,
    contacts through traditional in-person or phone channels should decline
    and allow us to focus on those who have to or prefer to interact with
    us in traditional ways. Therefore, rural taxpayers, as well as others
    who are more comfortable interacting with us by phone or in-person,
    should be able to reach us and receive service more quickly than today.

        Question. Following up on the ``Future State,'' I am disturbed to
    hear that our IRS Vegas Walk-In Center will only accept appointments
    later this summer.

        Answer. The IRS is committed to providing the best customer service
    for all taxpayers. In 2015, we tested in-person service by appointment
    at 44 Taxpayer Assistance Centers (TACs). Test results show the
    appointment approach not only eliminates long lines, but also helps us
    serve even more taxpayers that need assistance as many callers receive
    help before they arrive in the TAC. The appointment-based service
    assures taxpayers they will be assisted, saves them from waiting in
    line, and reduces the need for them to make multiple trips to the TAC.

        The Las Vegas walk-in office was converted to appointment service
    May 23, 2016. When we implement the appointment process in a TAC, we
    notify taxpayers through media releases, IRS.gov, and by posted signs.
    We also update the TAC's local telephone information message. IRS.gov
    (under Contact Your Local Office) provides more information on the
    appointment service process.

        Question. How do you address vulnerable taxpayers who do not have
    the Internet to make an appointment much less those that have the funds
    for transportation to visit the walk-in center only to make an
    appointment?

        Answer. All taxpayers can schedule appointments at our appointment-
    based service locations whether they have Internet access or not. To
    make an appointment at these locations, taxpayers can call the
    dedicated TAC Appointment toll free line at 1-844-545-5640. Taxpayers
    do not have to drive to the TAC to make an appointment. However, if a
    taxpayer arrives at an appointment-service location without an
    appointment, we will try to accommodate them with a same-day
    appointment if our schedules permit.

        During the testing of the appointment-service location concept,
    when taxpayers called to make an appointment, the assistor answering
    the call was able to resolve the issue on the phone more than half the
    time, or offer a convenient automated self-service option to allow the
    taxpayer to get refund information, make a payment, or order a
    transcript through IRS.gov or the IRS2Go mobile app. As a result, many
    taxpayers who thought they would need to visit a TAC saved themselves a
    trip by accessing the service they needed using a self-service option.

        Taxpayers will find the vast majority of services offered at a TAC
    are conveniently available online or by calling our toll free telephone
    line (1-800-829-1040).

        Question. What do you believe is the role of the IRS at this point,
    if not to help those taxpayers who are the most in need of guidance?

        Answer. Serving all taxpayers is a priority for the IRS and,
    recognizing that some taxpayers lack Internet access or prefer not to
    use the Internet, we offer a variety of ways to access the products and
    services taxpayers need to meet their tax obligations. This year, more
    than 25.5 million callers accessed our automated phone assistance
    during filing season. The recorded messages accessed through the
    automated phone assistance system answer many common questions and were
    used by taxpayers nearly twice as often as live customer service
    representatives. While the IRS will continue to offer more web-based
    services, taxpayers will still be able to call our toll-free help
    lines, obtain in-person assistance, or correspond with us via mail if
    that is their preferred or only available method of receiving service
    from the IRS.

        The IRS also partners with local volunteers to provide filing
    assistance for eligible taxpayers. Seniors and low to moderate-income
    taxpayers can get free help with return preparation at one of thousands
    of IRS Volunteer Income Tax Assistance (VITA) operated by community-
    based organizations and Tax Counseling for the Elderly (TCE) sites
    operated by AARP Tax-Aide. The IRS is currently exploring options for
    assisting eligible taxpayers in areas that do not have VITA or TCE
    sites.

        Question. Commissioner Koskinen, as part of the December deal, you
    are aware that the IRS received additional funding, approximately $290M
    this tax year. Can you walk me through how you are using this
    additional funding? What measurements are you taking to make sure your
    use of the funds are the most effective?

        Answer. The IRS is using the funds allocated under section 113 to
    invest in high priority programs: Level of Service (LOS), Cyber
    Security, and Identity Theft programs, as directed in the law. A
    spending plan providing details of how the funds are being used was
    forwarded to the Committees on Appropriations on January 27, 2016 (as
    well as a small revision to the plan in May 2016).

        The IRS established a mechanism to track the use of these funds in
    our financial systems. This will enable IRS to ensure that funds are
    used in accordance with the spending plan submitted to Congress and
    will allow IRS to measure the improvement in performance achieved from
    the availability of these additional funds.

        Pursuant to the spending plan submitted to Congress, IRS is
    investing the additional $290 million as follows:

            Increase Telephone Level of Service (LOS) ($178.4 million)
              Achieve over 70 percent LOS during the filing season
    (January 1-April 23; up from 37 percent last filing season).
              Achieve 47 percent LOS for full fiscal year 2016 (up from 38
    percent in FY 2015).
              Improved LOS will result in more calls answered and reduced
    wait times for callers.
              Improved performance on the Taxpayer Protection Program Line
    (also known as the Identity Theft Toll Free Line).

            Enhance Cybersecurity ($95.4 million). Enhancements to
    cybersecurity also support identity theft prevention by improving
    protections for taxpayer data. Planned investments include:

              Network security improvements including new network
    segmentation work, more effective monitoring of data traffic, and
    replacement of outdated equipment.
              Protection of taxpayer data from unauthorized access by
    identity thieves through specific investments in network segmentation
    and monitoring.
              Insider threat detection by implementing a system to help
    analyze IT system logs.

            Prevent Stolen Identity Refund Fraud ($16.1 million)

              Implement refund fraud mitigation actions established by the
    Security Summit, including start-up costs for an Information Sharing
    and Analysis Center (ISAC).
              Implement Secure Access initiative to enable re-launch of
    Get Transcript Online. (In addition, IRS will apply $30 million in
    additional base resources for staffing to improve its ability to combat
    identity theft and assist victims through the Taxpayer Protection
    Program and the leads reporting process.)

        Question. Commissioner Koskinen, first, I would like to take this
    opportunity to address a key priority of mine and my home state. I've
    heard from many of my constituents their strong concerns over the
    proposed IRS changes to the filing of information returns to report
    winnings from bingo, keno, and slot machine play (IRS REG-132253-11).
    Due to the administrative burden imposed, thousands of customers have
    signed a petition so that the reporting threshold for bingo, keno and
    slot machine play would not be reduced. I, too, share their concerns
    about these proposed rules. Phil from Vegas recently told me this
    proposed rule would put an undue hardship on casinos and winning
    patrons. Across the U.S., the gaming industry supports 1.7 million jobs
    and $240 billion in activity. My staff has had multiple conversations
    with your office and I've sent several letters including formal
    comments in regards to these proposed rules. I was pleased that we
    could discuss some of my concerns with you over the past year. I no
    longer want myself or Nevadans to be kept in the dark in regards to
    receiving responses from the IRS to better address these proposed
    rules. When do you believe these proposed rules will be finalized?

        Answer. The regulations for reporting winnings from bingo, keno,
    and slots are on the 2015-2016 Priority Guidance Plan. These
    regulations are something we are actively working this year. Let me
    assure you that we have heard the concerns expressed by your
    constituents and others in the over 14,000 comments received in
    response to the proposed regulation, and, as with all regulations we
    will take these comments into account as we work towards final
    regulations.

        Question. Can I get confirmation that you will inform our office
    when these rules will be finalized, because I want to make sure I can
    let Nevadans and the gaming industry know as soon as possible?

        Answer. We will inform your office when these rules are finalized.

                                     ______

                     Prepared Statement of Hon. Ron Wyden,
                           a U.S. Senator From Oregon
        Thank you, Chairman Hatch, for scheduling this hearing. And thank
    you, Commissioner Koskinen, for joining the Finance Committee this
    afternoon during a very busy time of year for the IRS.

        With tax season underway and President Obama's final budget
    proposal at hand, there are a few specific issues relating to the IRS
    that I'd like to focus on today.

        First is the biggest ongoing challenge for the IRS: providing the
    best possible service to taxpayers, even though the IRS has limited
    resources. The good news is, the Congress recently made a badly needed
    investment in I.D. protection, telephone service, and cybersecurity for
    2016. But you can bet that the fraudsters and organized criminals who
    made headlines preying on taxpayers last year are still at it.

        In my view, budget cuts that hobble our ability to fight back
    against these schemes are tantamount to kickbacks to the criminals. So
    the down payment from Congress will help protect taxpayers and improve
    services. But there's a lot more to be done--particularly with respect
    to upgrading IT.

        It's important to understand how enormous a challenge IT is for the
    IRS. First of all, processing the universe of taxpayer data that comes
    in is a year-round job. There's no opportune time for the IRS to go
    dark and install a new batch of servers and software. And second, some
    of the systems in use date back to the Kennedy era. Decades of modified
    technology and programming code have built up like layers in an onion.
    When Congress updates a complicated policy like the Alternative Minimum
    tax, the IRS has to dig through all those layers to adjust the system
    and correct everybody's tax bill.

        For these reasons and more, upgrading IT at the IRS is
    extraordinarily demanding and time-consuming. It can't be done when a
    tight budget means you have one hand tied behind your back.

        The next issue I want to discuss today, Mr. Koskinen, has to do
    with corporate taxes going unpaid. The most recent estimates put the
    overall tax gap at $385 billion per year. When it comes to individuals
    skipping out on their taxes, the IRS has done a good job of sharing
    information Congress can use to crack down on shady avoidance
    strategies and cheaters. But when it comes to the corporate tax gap--
    which adds up to $67 billion per year--it's my view that the IRS has
    dropped the ball.

        I sent a letter last week asking how the IRS studies the corporate
    tax gap and what it knows. My staff and I got a limited response
    yesterday that I see as an initial step, and I expect a lot more.

        This is a matter of more than two-thirds of a trillion dollars in
    taxes going unpaid over the course of a decade. In my view, that's a
    figure you have to weigh against the big economic challenges this
    country faces and the rounds of belt-tightening Federal budgets have
    recently gone through.

        More than 5 million Americans today live in deep poverty.
    Assistance for the hungry has been cut. Far too many veterans are on
    wait lists for health care. Wildfire prevention is neglected while
    fires in Oregon and across the West get bigger and hotter. Again and
    again, lawmakers propose painful cuts to health care programs that are
    vital to seniors and families of limited means.

        The bottom line is that it's long past time for Congress to attack
    the corporate tax gap. And that will require a lot more information
    than the IRS is currently providing about how companies are dodging
    their responsibilities.

        I hope to get your commitment today, Commissioner Koskinen, to work
    with us in the days and months ahead on this important issue.

                                     ______

                                 Communications

                                  ----------

                      Federation of Genealogical Societies

                                P.O. Box 200940

                             Austin, TX 78720-0940

                       Linking the Genealogical Community

                            Statement for the Record

                                       by

                          Frederick E. Moss, JD, LL.M.

    Executive Summary

    We add our commendations to those offered in the opening statement by
    Chairman Hatch by noting that the IRS has dramatically improved its
    ability to intercept tax fraud by identity theft (especially those
    using the SSNs of deceased individuals.) We ask Senators to revisit the
    wisdom of limiting access to and the content of the Social Security
    Administration's Death Master File. While commending the work of the
    Department of Commerce in crafting regulations implementing Section 203
    of the Bipartisan Budget Act of 2013, as written, we suggest areas
    where changes in legislative language might enhance the ability to (1)
    achieve the stated goal of reducing the opportunities for identity
    theft, and (2) minimize the unintended adverse consequences of limiting
    access and content available to legitimate users. Further question
    whether these provisions belong in permanent legislation and suggest
    ways of assessing their effectiveness and the impact of more targeted
    measures. Preliminary results of an ongoing case study are presented.

    This statement for the record is filed on behalf of the Federation of
    Genealogical Societies (FGS) in response to the invitation that
    accompanies the Full Committee Hearing at: http://
    www.finance.senate.gov/hearings/the-presidents-fiscal-year-2017-budget.
    We greatly appreciate the opportunity to do so and to seize an
    opportunity to commend the Internal Revenue Service (IRS) for
    noteworthy progress in their effort to address tax fraud by identity
    theft.

    I serve as the legal advisor to the Federation of Genealogical
    Societies and as a member of the Records Preservation and Access
    Committee (RPAC), a joint committee of FGS, the National Genealogical
    Society (NGS), and the International Association of Jewish Genealogical
    Societies (IAJGS). This statement has been reviewed and endorsed by the
    President of the Federation of Genealogical Societies.

    Genealogists Share Privacy Concerns

    Family Historians and their families are as vulnerable to the
    predations of identity thieves as any other citizen. Our names appear
    on the lists of those compromised by reported major data breaches at
    Target, Home Depot, and Anthem among others. Some of our colleagues
    have been issued PINS by the IRS to be used in filing their 2015
    returns because fraudulent tax returns using their information have
    been filed by identity thieves in the past. Those who believe that
    genealogists are reckless with Personally Identifiable Information
    might be pleasantly surprised at some of the measures taken by websites
    and individual researchers.

    Be assured that the genealogical community is prepared to be supportive
    of measures which actually protect us from identity theft. We fervently
    wish that we could believe that the measures mandated by Section 203 of
    the Bipartisan Budget Act of 2013 limiting access to and the content of
    the Social Security Administration's Death Master File would have that
    effect. Our analysis has suggested otherwise.

    The circumstances leading up to this legislation do, however, provide
    an unique opportunity to gather the data needed to evaluate and develop
    responses with the actual potential to effectively combat the scourge
    of tax fraud by identity theft.

                  Initiatives to Restrict Access to Records--
                               Targeting the Data

    In recent years, we have seen more than a thousand legislative
    initiatives impacting access to records at the Federal, state and local
    levels, the vast majority of which would have had the effect of
    limiting that access for genealogical and other purposes. The rationale
    used to justify these measures suggests an almost reflexive belief that
    the best or only way to prevent the fraudulent use of such data by
    identity thieves is to close the records. This logic carries with it
    the unstated assumption that no harm or loss accompanies such closures
    [about which we will have much more to say.]

    Section 203 of the Bipartisan Budget Act of 2013 represents the most
    dramatic modern example of this approach at the federal level. Although
    it presented as an access issue, the provisions that reduce the display
    of historically available data elements and diminishing the content of
    the Death Master File trigger equally significant preservation
    concerns.

    Since 2011, representatives of the genealogical community have
    monitored approximately a dozen Congressional hearings in which the
    scourge of tax fraud by identity theft has been raised. In most of
    those hearings, although not asked to actually testify, we have
    provided Statements for the Record suggesting that better alternatives
    might be available http://www.fgs.org/rpac/. In these hearings, we were
    frequently informed of the acknowledged harm resulting from the theft
    in the context of explaining why consideration was being given to
    dismantling, closing, or otherwise limiting access to the Death Master
    File. Rarely, if ever, during a hearing was concern expressed (or even
    awareness of the possibility) that costs might be paid or harm might be
    done by closing the record.

    In the process of fulfilling their mandate to develop the Certification
    program required by this statute, the Department of Commerce National
    Technical Information Service (NTIS) has provided a forum for those
    adversely impacted by the limitations of access to the DMF to begin to
    document the fact that records closures come at a price.

    Ninety contributors have offered their comments on a proposed final
    rule at http://www.regulations.gov/
    #!docketBrowser;rpp=25;po=O;dct=PS;D=DOC-2014-0001.

    The most recent FGS contributions to this process are found at http://
    www.regulations.gov/#!documentDetail;D=DOC-2014-0001-0093.

                               The IRS Experience

    Although scattered incidents of fraudulent tax returns involving
    identity theft were reported over a decade ago, their frequency and
    magnitude prior to 2010 could be said to fall within the noise level on
    the IRS radar. The emphasis within the IRS and on Capitol Hill was to
    expedite refund payments to the point that checks were being issued
    within days of electronic filing early in the filing season and well
    before the IRS would have received information returns that would be
    used months later to verify the accuracy of the data on the return
    justifying a significant refund. Instead of taking steps designed to
    prevent improper payments, the IRS practice as 2011 began was to pay
    claimed refunds as quickly as possible and then chase the filer in a
    labor intensive effort to recover the fraudulent or otherwise improper
    payment; http://www.gao.gov/products/GAO-15-482T.

    As stories began to make headlines during 2011 of thieves filing
    fraudulent tax refund claims abusing the SSNs of recently deceased
    children, the public was made to realize that the harm being
    perpetrated was no longer just a manageable drain on the Treasury. The
    disruption and pain inflicted upon the grieving parents (the legitimate
    taxpayers) for them felt like losing their child all over again. The
    IRS was prompted to revisit the wisdom of continuing the ``pay and
    chase'' approach to correcting improper payments to possible identity
    thieves. Prevention of fraudulent payments became a new focus of their
    enforcement efforts.

    The comparison between the TY 2010 and TY 2011 experience as reflected
    in publically available data confirms the assertion that the IRS
    enforcement policies changed in December of 2011 to institute practices
    intended to prevent improper payments by diverting suspicious returns
    for further scrutiny before they were processed for payment. The first
    year impact of this change in policy was dramatic, especially where the
    SSN of a deceased individual had been abused.

    [GRAPHIC] [TIFF OMITTED] T21016.001

    The dollar impact of this effort is equally informative:

    [GRAPHIC] [TIFF OMITTED] T21016.002

    IRS testimony in the Senate Finance Committee hearing held April 16,
    2013 announcing the development of filters designed to intercept
    potentially fraudulent refund returns prompted my previous supportive
    RPAC Statement for the Record found at page 138 of the hearing record.
    http://www.finance.senate.gov/download/2013/04/16/tax-fraud-and-tax-id-
    theft-moving-forward-with-solutions.

    Further, I was already on record more than a month in advance of the
    current hearing with a series of blog posts documenting the basis for
    the conclusion that the IRS filters were really working:
    http://www.fgs.org/rpac/2015/12/22/irs-does-use-the-death-master-file-
    now-since-2012/
    http://www.fgs.org/rpac/2016/0l/08/death-master-file-impact-of-irs-
    filters-ty2010-ty201l-ty2012/
    http://www.fgs.org/rpac/2016/01/13/death-master-file-analysis-irs-
    filters-really-work/

    The legislative implications of these findings will be addressed
    shortly.

             The Department of Commerce Notice and Comment Process

    NTIS has shown us what a robust notice and comment process really looks
    like. Prior to the RFI and hearing no one really knew how long-time
    legitimate users of the SSDI made use of the information therein or,
    for that matter, how thieves were filing fraudulent tax refund claims
    by identity theft. Providing insight into that initial issue may
    represent the most lasting contribution to our understanding,
    potentially informing future program decisions. Representatives of the
    genealogical community have actively participated with many others in
    (1) responding to the initial Request for Information, (2) a Public
    Hearing on 4 March 2014, (3) Response to an Interim Final Rule, and now
    (4) providing the Response to Proposed Final Rule.

                Previous FGS Comments on Interim and Final Rule

    Our previous Response to Interim Final Rule submitted April 25, 2014
    (and incorporated herein by reference) documents several points we
    there emphasized:

        1.  In 2011 the DMF was widely available on the Internet. The IRS
    was employing very limited filters to intercept suspicious tax returns
    before checks were issued. As needed data has become available, it
    becomes clear that tax refund fraud by identity theft was much more a
    reflection of the incredible vulnerabilities of the IRS on-line filing
    system than an inevitable result of the ``burned'' social security
    numbers of recently deceased children being made publically available
    in the DMF.
        2.  In fact, if thieves had attempted to use numbers taken from the
    Death Master File in most commercial transactions, they would have been
    rejected. In their rush to expedite refund payments in 2011, the IRS
    was not using the DMF to flag suspicious cases or to help validate
    legitimate returns. When used, the DMF (listing what should be inactive
    SSNs) is an effective fraud prevention tool.
        3.  More targeted measures than simply closing the DMF were
    available.
        4.  In December 2011, all major genealogical sites making the DMF/
    SSDI available to the public began masking the SSNs of recently
    deceased persons for a minimum of three years. At about the same, the
    IRS began to strengthen the use of filters designed to flag potential
    fraudulent refund returns before payment was made.

                             What Have We Learned?

    Timely information on death is of critical importance across a broad
    spectrum of endeavors that exceed those of genealogists, the financial
    interests represented at the 2014 public hearing, or even those of the
    114 entities participating on-line.

    When representatives from the financial sector voiced concerns about
    the 2011 removal of data provided by the States from the DMF, and
    feared a further degradation of that resource, they spoke for all
    traditional subscribers. Pension Benefits Information:
    http://www.regulations.gov/#!documentDetail;D=DOC-2014-0001-0092.
    Members of the research community had previously voiced similar
    concerns:
    http://www.nvtimes.com/2012110/09/us/social-security-death-record-
    limits-hinder-researchers.html.

    We were all particularly alarmed by the possibility that administration
    decision-makers believed that alternatives to the DMF were available
    and that historical users of the DMF could readily find what they
    needed from other sources. Those in attendance at the March 4, 2014
    public hearing suggested otherwise, a posture also adopted by the
    Council of Professional Associations on Federal Statistics in their
    comment at http://www.regulations.gov/#!documentDetail;D=DOC-2014-0001-
    0061.

    For most financial purposes, verifying that an individual already known
    to them has died enables the enterprise to begin ``closing the file''
    on the deceased individual. For researchers (especially for
    genealogical projects) finding an individual referenced in the DMF is
    more likely to be the beginning of the project with a need for them to
    continue the search for other relatives through the DMF. Locality
    information in the DMF suggests where one might look for additional
    documentation.

    The challenges remaining between the already implemented Interim Final
    Rules and the pending final rule may best be found in the comments of
    the Consumer Data Industry Association at
    http://www.regulations.gov/#!documentDetail;D=DOC-2014-0001-0088
    and the Berwyn Group at
    http://www.regulations.gov/#!documentDetail;D=DOC-2014-0001-0070.

                               What Have We Lost?

    Limitations on access and the reduced utility of the Limited Use DMF
    have already impeded the work of those genealogists:

          Assisting the Department of Defense in locating heirs for the
    repatriation of remains from previous wars,
          Assisting county coroners in the identification of unclaimed
    persons,
          Working with attorneys in locating missing and unknown heirs
    involving estates, trusts, real estate quiet title actions, oil and gas
    and mineral rights, and other similar legal transactions,
          Tracing and tracking heritable medical conditions where finding
    distant cousins can facilitate early treatment and possibly prevent a
    premature death,
          Repatriating stolen art and artifacts, and
          Identifying American Indians, Native Alaskans, and Native
    Hawaiians to determine eligibility for tribal benefits and blood
    quantum when required.

    The academic research community and those engaged in medical-related
    research can likely provide even more dramatic examples. American
    Economics Association:
    http://www.regulations.gov/#!documentoetail;D=DOC-2014-0001-0078.
    Kaiser Permanente: http://www.regulations.gov/#!documentoetail;D=DOC-
    2014-0001-0046.
    Anesthesia Quality Institute: http://www.regulations.gov/
    #!documentoetail;D=DOC-2014-0001-0065.

                          What Legislation Might Help?

    Section 203 provides a very restrictive definition of those to be
    authorized access to the Limited Use DMF and other measures adversely
    impacting what most would consider legitimate users of the information.
    We are prepared to work with the Congress and all interested parties
    should changes in the statutory mandate be indicated. Possible areas
    for consideration might include:

        1.  Other legitimate researchers authorized for timely access, to
    include academics in recognized long term studies, federal program
    evaluations, genealogical studies for which a three year delay would be
    problematic.
        2.  Explore ways in which third-party providers might be able to
    share non-
    sensitive information and their state-of-the-art search engines by
    masking the information needed by thieves (perhaps only the SSN.)
        3.  Explore whether security measures used for active SSNs are the
    best way to protect from abuse those of the deceased.
        4.  Develop alternatives to this limitation on access and reduction
    of content of the DMF.
        5.  Should the Section 203 program be considered for sunset?

               The Path Forward--A Rigorous Case Study Indicated

    The way in which the challenge of tax fraud by identity theft has
    evolved in recent years presents a unique opportunity to evaluate the
    effectiveness of several approaches to combating it.

        1. Initial baseline period--TY 2010 and before

    During the period immediately preceding December 2011, the DMF was
    widely available on the Internet and the IRS was doing minimal
    filtering that might have flagged fraudulent refund claims. Apparently
    the IRS was not filtering against the SSA's Death Master File in 2010
    before issuing potentially fraudulent refund checks. The data necessary
    to initially determine the nature and magnitude of tax fraud by
    identity theft cases first coming to public attention in 2011 would not
    become available until the fall of 2013 with the publication of the
    report of the Treasury Inspector General for Tax Administration drawn
    from the TY 2011 data, issued September 20, 2013 and found at:
    http://www.treasury.gov/tigta/auditreports/2013reports/201340122fr.pdf.

        2. Period 2--December 2011 to April 2014

    In December 2011, genealogical web sites began masking the SSNs of
    recently deceased persons and the IRS reportedly significantly improved
    their software filters. The IRS effort has included continuing
    refinement of the filters to flag returns demonstrating characteristics
    of those found to have been fraudulent. Thieves change; we learn.

        3. Period 3--April 2014 to present

    In April of 2014, the limitations on access and content of the DMF
    mandated by the Bipartisan Budget Act of 2013 are implemented.

    Having a comparable chart for TY 2012, TY 2013, TY 2014, (and possibly
    a look back to 2010) could give visibility over where our challenges
    still lie, what measures are working, and which measures may be of only
    marginal utility. I appreciate that it may take a year or more for a
    suspicious return to be fully resolved so we may be asking for TIGTA to
    undertake an ongoing project.

    A rigorous analysis could confirm that the measures taken by the IRS,
    together with those measures taken by genealogical entities, have
    largely intercepted this particular form of identity theft in advance
    of this legislation. It might also suggest better approaches to
    intercepting the far more prevalent misuse of the SSNs of the living.

    Conclusions

        1. Closing death records comes at a cost.

    The IRS track record demonstrates that using the DMF and other filters
    provides an effective counter to tax fraud by identity theft. Closing
    these records have the potential of doing more harm than good in the
    fight against identity theft.

        2. NTIS has implemented the statutory mandate, as written.

    Operating within the constraints of their current statutory mandate,
    there is little more that NTIS can do to create a more functional
    Certification program. We are prepared to work with appropriate
    Congressional committees to suggest more effective statutory changes.

    But, many clearly legitimate historical users of the DMF are currently
    denied access.

    Additionally, that content is no longer as comprehensive as it once was
    prior to the 2011 decision to withhold state-provided content.
    Financial services representatives voiced particular concern that the
    on-going withholding of state data will further degrade the value of
    the DMF resource and make their fraud prevention efforts less
    effective. Pension Benefits Information:
    http://www.regulations.gov/#!documentDetail;D=DOC-2014-0001-0092.

    We are, in effect, seeing the incremental dismantling of the
    historically valuable DMF. Most users would likely agree that the then
    publically available pre-2011 DMF (even with all its flaws) came the
    closest of any available death record to meeting the needs of the user
    community when measured against comprehensiveness, timeliness, and
    costs.

        3. This statute may not be the final answer.

    Limiting access to the DMF is not the ``silver bullet'' solution to the
    scourge of tax fraud by identity theft. It could do more harm than
    good.

    Our strongest message is that steps already taken by the IRS and
    genealogical entities to protect SSNs listed in the DMF had largely
    intercepted this particular form of identity theft in advance of this
    legislation. Its primary impact may be to burden legitimate users both
    operationally and financially. Our suggestion for a case study provides
    a way to assess the effectiveness of various measures taken.

        4. The statutorily mandated Limited Use Death Master File is
    inadequate.

    Those of our genealogical colleagues who have been certified and begun
    to work with the LUDMF resulting from this effort report that the
    search engine and the data elements displayed for this product no
    longer meet our needs. Genealogists were not the only DMF users
    concerned that the DMF is being incrementally degraded. The new limited
    access DMF needs a much improved search engine.

        5. The path forward.

    The genealogical community is anxious to work with all interested
    parties in an effort to develop a truly comprehensive nation-wide death
    index. The concerns of State Vital Records officials that led to the
    ongoing removal of state data from the DMF in 2011 must be addressed.

    We recognize a need to work with the Congress and other interested
    parties to improve existing measures and suggest additional approaches
    to combat the scourge of identity theft.

    The SSNs of living people will remain vulnerable as long as the IRS
    mandate is to rush payments of tax refunds before information returns
    can be compared with the submitted return to assure its validity.

                                     ______

                    National Treasury Employees Union (NTEU)

          1750 H Street, N.W.  Washington, DC 20006  (202) 572-5500

                               Anthony M. Reardon

                               National President

                            Statement for the Record

        Chairman Hatch, Ranking Member Wyden, and distinguished members of
    the Committee on Finance, I would like to thank you for allowing me to
    provide comments on the IRS budget request for FY 2017. As President of
    the National Treasury Employees Union (NTEU), I have the honor of
    representing over 150,000 federal workers in 31 agencies, including the
    men and women at the IRS.

        Mr. Chairman, NTEU strongly supports the Administration's FY 2017
    budget request of $12.28 billion for the IRS, an increase of more than
    $1 billion above the current FY 2016 level. We are particularly pleased
    the Administration's request would provide the IRS with the additional
    resources necessary to restore customer service levels that have fallen
    in recent years due to funding cuts totaling $1.2 billion, and to begin
    rebuilding its depleted workforce which is down more than 18,000 since
    FY 2010. Without this additional funding, the IRS's ability to serve
    taxpayers and enforce our nation's tax laws will continue to erode.

                               Taxpayer Services

        Providing quality customer service to the taxpayer is an important
    part of IRS efforts to help the taxpaying public understand their tax
    obligations while making it easier to comply. Unfortunately, the IRS's
    ability to provide excellent taxpayer service has been severely
    challenged due to reduced funding in recent years and the cuts mandated
    by sequestration. Without additional resources, further degradation in
    taxpayer services will occur, jeopardizing our voluntary compliance
    system.

             Impact of Funding Reductions on IRS Taxpayer Services

        Mr. Chairman, funding reductions in recent years have had a
    devastating impact on IRS's ability to provide taxpayers, including
    victims of identity theft, with the service they need in a timely
    manner. Since FY 2010, the IRS has absorbed $1.2 billion in cuts
    despite the fact that they are handling more than 10 million additional
    tax returns a year, and the number and complexity of tax refund fraud
    cases is on the rise. The funding cuts have resulted in a reduction of
    about 34 percent in the number of assistors answering telephone calls
    between fiscal years 2010 and 2015 and contributed to the lowest level
    of telephone service in fiscal year 2015 compared to recent years. In
    addition, reduced funding forced the IRS to implement a number of
    service initiatives during FY 2015 that included reducing or
    eliminating certain telephone and walk-in services, and redirecting
    taxpayers toward other service channels such as IRS's website.

        In a recent letter to Congress, the IRS highlighted some of the
    adverse impacts these reductions had on the IRS's ability to deliver
    taxpayer services during the most recent filing season. These include:

            A reduction in the percentage of callers seeking live
    assistance who received it (telephone level of service) to 38 percent--
    down from 74 percent in FY 2010.

            Taxpayers waiting about 23 minutes on average for an IRS
    representative to get on the line, with more than 60 percent of calls
    going unanswered. This represents a sharp decline from 2010, when the
    IRS answered three-quarters of calls and had an average wait time of
    just under 11 minutes.

            The IRS was not able to answer any tax-law questions except
    ``basic'' ones during the last filing season, and now it will not
    answer any tax-law questions at all, leaving the roughly 15 million
    taxpayers who file later in the year unable to get answers to their
    questions by calling or visiting IRS offices.

            The IRS historically has prepared tax returns for taxpayers
    seeking its help, particularly for low income, elderly, and disabled
    taxpayers. Eleven years ago, it prepared some 476,000 returns. That
    number declined significantly over the past decade, and last year the
    IRS announced it will no longer prepare returns at all.

        In addition, as a result of budget cuts, the IRS was forced to
    reduce staff devoted to face-to-face assistance at walk-in sites by
    about 4 percent in FY 2015 compared to the previous year, and directed
    customers to self-service options. However, the percentage of customers
    at walk-in sites waiting for longer than 30 minutes for service
    increased by 7 percentage points in fiscal year 2015 (from about 25 to
    32 percent) during the same period.

        The importance of providing taxpayers with timely assistance over
    the phone or in person is of particular importance for victims of
    identity theft and other types of tax refund fraud. These cases are
    extremely complex cases to resolve, frequently touching on multiple
    issues and multiple tax years and the process of resolving these cases
    can be very frustrating for victims.

        While the IRS has made considerable progress in this area,
    additional work remains. Fighting identity theft is an ongoing battle
    as identity thieves continue to create new ways of stealing personal
    information and using it for their gain. Therefore, it is critical that
    the IRS has the resources and staffing necessary to prevent refund
    fraud from occurring in the first place, investigate identity theft-
    related crimes when they do occur and help taxpayers who have been
    victimized by identity thieves as quickly as possible.

        That is why NTEU strongly supports the President's request of $2.4
    billion in funding for taxpayer services in FY 2017. This funding will
    allow the IRS to increase the telephone level of service to 70 percent,
    provide assistance to victims of identity theft in a timely manner, and
    help taxpayers understand their obligations, correctly file their
    returns, and pay taxes due in a timely manner.

        Mr. Chairman, it is evident that drastic funding reductions in
    recent years have seriously eroded the IRS's ability to provide
    taxpayers with the services they need. Without the additional funding
    proposed in the Administration's budget request, taxpayers will
    continue experiencing a degradation of services, including longer wait
    times to receive assistance over the telephone, increasing
    correspondence inventories, including letters from victims of identity
    theft and taxpayers seeking to resolve issues with taxes due or looking
    to set up payment plans.

                                  Enforcement

        Mr. Chairman, NTEU believes a strong enforcement program that
    respects taxpayer rights, and minimizes taxpayer burden, plays a
    critical role in IRS's efforts to enhance voluntary compliance, combat
    the rising incidence of identity theft and reduce the tax gap.

                Impact on Efforts to Reduce the Federal Deficit

        Unfortunately, funding reductions in recent years are undermining
    IRS's ability to maximize taxpayer compliance, prevent tax evasion and
    reduce the deficit. The adverse impact of insufficient funding on IRS's
    capacity to collect revenue critical to reducing the federal deficit is
    clear. In FY 2015, on a budget of $10.9 billion, the IRS collected $3.3
    trillion, roughly 93 percent of federal government receipts. According
    to the IRS, every dollar invested in IRS enforcement programs generates
    roughly $6 in increased revenues, but reduced funding for enforcement
    programs in recent years has led to a steady decline in enforcement
    revenue since FY 2007. In FY 2015, IRS enforcement activities brought
    in $54.2 billion, down $5 billion from the $59.2 billion of FY 2007.

        The reduction in revenue can be partly attributed to a reduction in
    the total number of IRS enforcement personnel, including revenue agents
    and employees in the correspondence audit program, which have limited
    the IRS's impact on voluntary compliance. The number of revenue agents
    fell seven percent from 11,422 to 10,657 in FY 2015, the lowest it has
    been since before 2005, when there were 20 million fewer taxpayers,
    while reduced staffing in the correspondence audit program resulted in
    the roughly 16,000 fewer case closures and potentially $75 million in
    lost revenue.

        Without sufficient staffing to effectively enforce the law to
    ensure compliance with tax responsibilities and combat fraud, our
    voluntary tax compliance system is at risk. And as the IRS Commissioner
    has repeatedly noted, a simple one-percent decline in the compliance
    rate translates into $30 billion in lost revenue for the government.

        Sufficient enforcement staffing is also critical if the IRS is to
    make further progress on closing the tax gap, which is the amount of
    tax owed by taxpayers that is not paid on time. According to the IRS,
    the amount of tax not timely paid is $450 billion, translating to a
    noncompliance rate of almost 17 percent.

        While the tax gap can never be completely eliminated, even an
    incremental reduction in the amount of unpaid taxes would provide
    critical resources for the federal government. At a time when Congress
    is debating painful choices of program cuts and tax increases to
    address the federal budget deficit, NTEU believes it makes sense to
    invest in one of the most effective deficit reduction tools: collecting
    revenue that is owed, but hasn't yet been paid.

        That is why NTEU was happy to see the Administration's budget
    request would provide a $587 million increase in funding for IRS tax
    enforcement above the current level. This increase includes a program
    integrity cap adjustment totaling $515 million which supports the
    enforcement ($231 million) and operations support accounts ($283
    million). This additional funding is designed to restore enforcement of
    current tax laws to acceptable levels, investigate transnational
    organized crime, pursue abusive tax schemes and enforce the new Foreign
    Account Tax Compliance Act (FATCA). According to the Administration,
    the additional funding provided via the cap adjustment is expected to
    generate more than $2.6 billion in additional annual enforcement
    revenue, resulting in a return on investment (ROI) of more than 6 to 1,
    once new hires reach full potential in FY 2019. According to the
    Administration, the $515 million cap adjustment will help generate $46
    billion in net savings over the next 10 years. This estimate does not
    account for the deterrent effect of IRS enforcement programs, estimated
    to be at least three times larger than the direct revenue impact.

                                   CONCLUSION

        Mr. Chairman, thank you for the opportunity to provide NTEU's views
    on the Administration's FY 2017 budget request for the IRS. NTEU
    believes that only by restoring critical funding for effective
    enforcement and taxpayer service programs can the IRS provide America's
    taxpayers with quality service while maximizing revenue collection that
    is critical to reducing the federal deficit.

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