    [Senate Hearing 114-181]
    [From the U.S. Government Publishing Office]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2016

                                  ----------

                             TUESDAY, MARCH 3, 2015

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 2:35 p.m., in room SD-124, Dirksen
    Senate Office Building, Hon. John Boozman (chairman) presiding.
        Present: Senators Boozman, Moran, Coons, and Mikulski.

                           DEPARTMENT OF THE TREASURY

                            Office of the Secretary

    STATEMENT OF HON. JACOB LEW, SECRETARY

                   opening statement of senator john boozman

        Senator Boozman. The Subcommittee on Financial Services and
    General Government will come to order.
        Good afternoon. The subcommittee, as I said, will come to
    order. Today marks the first hearing of the Financial Services
    and General Government Subcommittee for the 114th Congress.
    This is also my first hearing as subcommittee chairman, and I
    am pleased to serve alongside the new ranking member, my good
    friend Senator Coons.
        I would also like to acknowledge the other members of our
    subcommittee--Senator Moran, Senator Lankford, and Senator
    Durbin. Although our subcommittee is small, the number of
    agencies we fund is large, and their impact on our economy is
    significant. I am confident that our members are up to the task
    before us.
        As we begin this important hearing to review the budget
    request of the Department of the Treasury and the Internal
    Revenue Service, we welcome our witnesses, Secretary Jacob Lew,
    Commissioner John Koskinen--Koskinen. I will bet I am not the
    first one that struggled with that a little bit. Boozman?
    Boozman?
        Voice. It took me 4 years to learn it. So you got more
    time.
        Senator Boozman. Very good. And the Treasury Inspector
    General for Tax Administration, J. Russell George.
        Thank you for being here. We look forward to your
    testimony.
        As members of this subcommittee, we have a tremendous
    responsibility to ensure the hard-earned tax dollars from
    millions of Americans are spent appropriately. Unfortunately,
    the President has put forth a budget that is out of touch with
    the needs and concerns of hard-working taxpayers. In his budget
    for fiscal year 2016, the President proposes to create $2.1
    trillion in new taxes, increase spending by 65 percent, and add
    $8.5 trillion to the debt over the next 10 years.
        While hard-working Arkansans have been forced to cut their
    spending significantly in the last few years, the President has
    been unwilling to do the same in Washington. Our country is in
    need of serious budgeting. All too often, Washington loses
    sight of the fact that every dollar the Government spends comes
    out of the pocket of the taxpayer and is one less dollar that a
    taxpayer could spend to provide for their family, grow their
    businesses, or help their neighbor.
        As members of this subcommittee, we have a responsibility
    to ensure that decisions about Federal funding are made with
    those taxpayers in mind. Nowhere is the need for oversight more
    apparent than in the agencies before us today.
        When the Internal Revenue Service (IRS) takes actions that
    breach the trust of the American people, it undermines
    taxpayers' faith in the impartiality of the agency. This self-
    inflicted damage harms the credibility that is essential for
    our voluntary compliance system to function.
        Americans have lost faith in the institution, and you have
    a responsibility to regain their trust. We have all heard too
    often that investigations into these issues are distracting and
    that everyone should move on. Unfortunately, to taxpayers,
    these responses appear to reflect a continued lack of
    accountability and a lack of leadership.
        To repair that damage, there has to be fundamental change
    in the agency's culture, and that change must begin with
    complete transparency and acceptance of responsibility. And
    unfortunately, there is continued evidence of a culture that is
    simply out of touch with taxpayers.
        For example, hiring employees with past performance or
    conduct issues undermines the public trust in tax
    administration. Additionally, it weakens the public's
    confidence in the IRS's ability to safeguard taxpayers' rights
    and privacy.
        Making bonuses a priority does not help the IRS regain the
    trust of taxpayers or raise confidence that the agency will
    enforce tax laws impartially without regard to an individual's
    exercise of their constitutional rights.
        As was the case in the previous fiscal year, in 2015, one
    of the IRS's first actions after the enactment of their
    appropriations bill was to announce they would pay out $67
    million in awards to employees. Once again, IRS management
    seems to have forgotten that their most important customers
    aren't their own employees. They are the American people.
        It is disappointing to see that the IRS budget request is
    again unrealistic. The President's request for the IRS for
    fiscal year 2016 is almost $12.9 billion, a $2 billion
    increase.
        Under the Budget Control Act, the discretionary spending
    caps for fiscal year 2016 limit nondefense spending to $493
    billion. This represents an increase of $1.1 billion over the
    fiscal year 2015 level for nondefense departments and agencies.
        Yet for fiscal year 2016, the IRS has increased, has
    requested--I am sorry. Yet for fiscal year 2016, the IRS has
    requested a base increase that is higher than the total
    increase available for all nondefense discretionary spending.
    Also troubling is the request for an additional $667 million
    above the limit on spending set by current law.
        Treasury and the IRS are fully aware that such cap
    adjustments were not included in the Budget Control Act of
    2011. No cap adjustment for the IRS has been authorized since
    then.
        Given this fact, submitting an unrealistic request simply
    sets unreasonable expectations. This is even more troubling
    when funding for critical work--for example, to protect
    taxpayers in the future from the trauma of identity theft--is
    left to be funded through a cap adjustment.
        The American people want a government that works for them,
    not against them. They want us to curb Washington's wasteful
    spending habits; make the Government more efficient, effective,
    and accountable; and pursue policies that create economic
    opportunities for everyone.
        These are the priorities of the American people. They will
    be reflected in the critical oversight we conduct as we
    consider the fiscal year 2016 budget request for all of the
    agencies within our jurisdiction.
        And with that, I yield back and turn to Senator Coons.

                   statement of senator christopher a. coons

        Senator Coons. Thank you, Mr. Chairman.
        Thank you for bringing us together today. I look forward to
    working with you, and I hope that with new blood, new energy,
    and a new approach, we might build a strong partnership on the
    subcommittee.
        I would like to welcome our witnesses. Secretary Lew,
    Commissioner Koskinen, and Inspector General George, I look
    forward to your testimony. You have important and difficult
    jobs under challenging scenarios, and I just want to thank you
    for your service at the outset.
        Responsible stewardship of taxpayers' hard-earned money is
    among the most important obligations we have in public service.
    As members of the Appropriations Committee, it is important we
    work diligently and together to uphold the trust our
    constituents put in us. I recognize there will be areas where
    we disagree, but it is my sincere hope we can approach our work
    with the seriousness it deserves.
        Today, we consider the budget for the Treasury Department,
    an agency central to our Government's stability and our
    Nation's fiscal health. I welcome the chance to examine
    Treasury's budget request and have what I hope will be a frank
    discussion about what is required to fulfill your
    responsibilities.
        Now I am eager to learn how Treasury has adapted to budget
    constraints and how you will deal with resource competition and
    competing demands. Much of Treasury's budget goes to the IRS,
    but there are a number of important bureaus and functions I
    look forward to hearing about.
        Three in particular, I am pleased the President requested
    strengthening the Community Development Financial Institutions
    Fund, the CDFI Bond Guarantee Program, and the State Small
    Business Credit Initiative. I believe programs like these can
    provide access to capital for small businesses around the
    country and help them to grow jobs and support affordable
    housing and develop communities. I look forward to talking more
    about those.
        I do have concerns about the Department's proposal to cut
    funding for the Office of Terrorism and Financial Intelligence,
    given pressing issues and the sanctions enforcement against
    Iran and Russia. I look forward to hearing your thoughts on
    that topic.
        No Government agency is more visible to the American people
    than the Internal Revenue Service. It collects the revenues
    that fund 95 percent of our Federal Government, and each year,
    more than 80,000 public servants at the IRS make hundreds of
    millions of contacts with taxpayers as the face of Government
    to more Americans than any other agency.
        It is my hope, as the National Taxpayer Advocate has
    suggested, that the IRS could be best described as the accounts
    receivable department of our Government, and not by less
    positive monikers. For fiscal year 2016, the President's budget
    requests an 18 percent funding increase for the IRS.
        On this point, I think it is valuable that we reflect on
    the fact that while there is, I think, a broad bipartisan
    dislike of paying taxes, we shouldn't cut off our nose to spite
    our face. The more we cut IRS funding, the harder it becomes
    for the agency to respond to the needs of taxpayers, to
    investigate tax fraud or abuse.
        I hear from Delawareans who are frustrated when their calls
    go unanswered or it takes an interminably long time to connect
    and get responsible answers to questions. I am sure many other
    Senate offices have the same experience.
        Every dollar cut from the IRS budget results in $7 fewer
    revenue collected, by one estimation by former IRS Commissioner
    Douglas. That was a 2011 estimate.
        So we have a lot to discuss today, ways that we can improve
    the functioning and operation of the IRS, its responsiveness
    and engagement, ways that we can improve the functioning and
    operation of the Treasury Department.
        The fiscal year 2016 funding forecast is not encouraging,
    as significant budgetary constraints do remain in place, and I
    look forward to hearing Secretary Lew and Commissioner
    Koskinen's perspectives on what is required to deliver top-
    notch service to taxpayers and to enforce our laws with
    integrity and fairness.

                               prepared statement

        I look forward to working with you, Chairman Boozman, and
    to having an open exchange of ideas as our hearings progress.
        Thank you.
        [The statement follows:]
               Prepared Statement of Senator Christopher A. Coons
        Thank you, Mr. Chairman, for bringing us together today. I'm
    looking forward to working together with you and hope that with new
    blood, new energy, and new enthusiasm we can build a strong partnership
    on this subcommittee.
        I'd like to welcome our witnesses, Secretary Lew, Commissioner
    Koskinen, and Inspector General George. You have incredibly difficult
    and important jobs under challenging scenarios, so I am thankful for
    your service and appreciate you joining us here today.
        Responsible stewardship of taxpayers' hard earned money is among
    the most important obligations we have in public service. And as
    members of the Appropriations Committee it is critical that we work
    diligently, together, to uphold the trust our constituents have put in
    us. Of course, I recognize there will be areas where we disagree, but
    it is my sincere hope that we can approach our work with the
    seriousness and humility it deserves.
        Today, on this subcommittee, we consider the budget for the
    Treasury Department, an agency that is central to our Government's
    stability and our Nation's fiscal health.
        I welcome today's opportunity to examine the Treasury Department's
    budget request and have what I hope will be a frank discussion about
    where the Department is today, where it needs to be, and how we can
    work together to help Treasury fulfill its vital and broad
    responsibilities.
        At a time of constrained budgets, I am eager to learn from our
    witnesses about how Treasury has adapted. I know that a gap has
    remained in recent years between what the Department has requested and
    how much funding it has received. If that persists, what will be the
    impact on Treasury's ability to carry out its important missions? How
    will Treasury prioritize scarce resources amid competing demands?
        I'd encourage our witnesses to use today's public forum as an
    opportunity to clearly articulate their most compelling case for what
    they need and why.
        It's critical that we gain a deeper understanding and appreciation
    for how funding and management decisions will affect Treasury's
    operations in the next year and in the years to come.
        Now, while most of the Treasury Department's funding will go to the
    IRS, the Department includes a number of other bureaus and offices that
    carry out a wide array of important activities, from forecasting
    economic indicators and managing the Federal Government's spending, to
    combatting money laundering and fighting financial crimes.
        There are three programs in particular, for which I'm pleased the
    President has requested increased funding or strengthening--the
    Community Development Financial Institutions fund, CDFI bond guarantee
    program, and the State Small Business Credit Initiative. Programs like
    these provide access to capital for small businesses around the
    country. They help businesses create jobs, build affordable housing,
    develop our communities, and grow our economy, especially in
    economically distressed neighborhoods.
        I do have concerns, however, about the Department's proposal to cut
    funding for the Office of Terrorism and Financial Intelligence, which
    has the critical responsibility of enforcing economic sanctions. At a
    time when sanctions regimes with Iran and Russia are at the forefront
    of our foreign policy, it's crucial that we track and halt the
    financing of terrorist groups like ISIL, we need to ensure we devote to
    the office adequate funding. I will be interested to hear from the
    witnesses how the requested level of funding will support this office
    and its mission.
        Now, there is of course no Government agency that is more visible
    to the American people, than the Internal Revenue Service. The IRS
    collects the revenues that fund more than 95 percent of our Federal
    Government's operations, public services, and programs. Each year, the
    more than 80,000 public servants at the IRS make hundreds of millions
    of contacts with American taxpayers and businesses. As the face of
    Government to more American citizens than any other agency, it is apt
    that the National Taxpayer Advocate has described the IRS as the
    ``Accounts Receivable Department'' of our Government.
        For fiscal year 2016, the President's budget requests an 18 percent
    funding increase, which would fund the IRS at a total of $12.93
    billion. On this point I'd like to make an important observation. It
    won't be lost on anyone here that this is a fairly substantial funding
    increase--one that asks for an adjustment on previous budget caps. But
    what we need to remember is that in our dislike of paying taxes--which
    is a bipartisan dislike--we shouldn't cut off our nose to spite our
    face. The more we cut IRS funding, the harder it becomes for the agency
    is to respond swiftly to the needs of taxpayers or investigate tax
    fraud or abuse.
        My office often hears from Delawareans who are frustrated when
    their calls to the IRS go unanswered or it takes a long time to connect
    with an official at the IRS. I would imagine many Senate offices hear
    from constituents with similar concerns. Nationally, less than half of
    the callers to the IRS actually reach someone on the other end, and
    those who do have to wait an average of more than half an hour. And as
    former IRS Commissioner Douglas Shulman stated in 2011, every dollar
    that is cut from the IRS budget results in seven fewer dollars of
    revenue collected. So I'd remind us all that funding the IRS at the
    levels it needs does not lead to a more intrusive government or higher
    taxes--it leads to a less wasteful, less responsive government.
        We have a lot to discuss today, and some important ground to cover.
    The fiscal 2016 funding forecast is not encouraging as budgetary
    constraints remain in place. It will be helpful to hear Secretary Lew
    and Commissioner Koskinen's perspectives on what is required to deliver
    top notch service to taxpayers and to enforce our tax laws with
    integrity and fairness to all. I know Delawareans expect no less.
        I look forward to working with you, Chairman Boozman, and to having
    an open exchange of ideas as our fiscal 2016 process continues. Thank
    you.

        Senator Boozman. Thank you, Senator Coons.
        And now we turn to Secretary Lew and look forward to his
    testimony.

                      SUMMARY STATEMENT OF HON. JACOB LEW

        Secretary Lew. Thank you, Chairman Boozman, Ranking Member
    Coons, members of the subcommittee. It is a pleasure to be here
    to discuss the Treasury's budget.
        As we meet here today, our economy and our country have
    made considerable progress that we can all take pride in. By
    almost every metric--from job creation, economic growth, and
    deficit reduction to manufacturing, exports, and energy
    independence--America has come a long way.
        The fact is, in 2014, we saw the best year of job growth
    since the 1990s, and over the past 5 years, America's
    businesses have created nearly 12 million new jobs, the longest
    stretch of sustained private sector job growth in our Nation's
    history.
        Our economy continues to expand, with healthy growth in
    2014 and forecasts projecting above-trend growth for this year.
    We continue to outperform our trading partners, many of which
    are still struggling to recover from the global economic
    crisis.
        American exports set another record last year for goods and
    services sold overseas, and this record was largely driven by
    small businesses. Our deficit, which has fallen by almost
    three-quarters, is forecast to decline even further in the next
    fiscal year. These achievements underscore America's enduring
    economic strength, and we can keep this progress going with the
    right policies and with bipartisan cooperation.
        The President's budget is a blueprint for Washington to
    work together, and it not only lays out a path to find common
    ground, it puts forward sensible solutions to make sure every
    American who works hard has a chance to get ahead.
        This budget knocks down barriers for working families so
    things like child care, mortgage payments, and a college
    education are more affordable. It modernizes our job training
    system, fuels research and development, and repairs our roads,
    bridges, and ports so more companies will invest, locate, and
    hire in the United States. It reforms our tax system so we can
    eliminate special interest loopholes, strengthen the middle
    class, and level the playing field for business.
        The bipartisan Budget Act of 2013 reversed a portion of
    sequestration and allowed for higher investments in 2014 and
    2015, but it did nothing to alleviate sequestration in 2016.
    Sequestration imposed arbitrary spending cuts that are bad for
    our economy and for our security.
        These across-the-board cuts were never intended to go into
    effect. Rather, they were purposely unpalatable to create
    pressure to pass balanced, responsible deficit reduction.
    Congress should act to provide acceptable funding to meet our
    domestic and national security requirements.
        As part of the President's approach, Treasury's budget will
    allow the department to carry out its vast responsibilities
    efficiently and effectively. Treasury is instrumental in
    helping shape and implement the President's economic policies,
    and today's request will allow the department to promote
    economic prosperity, fiscal responsibility, and a resilient
    financial system even as it addresses our national security
    objectives and bolsters stability at home and abroad.
        The Treasury Department touches the lives of virtually
    every American through our work to responsibly manage the
    Government's finances, streamline and reform the tax system,
    fuel lending to small businesses, spur economic development in
    struggling communities, advance our strategic interests, make
    Social Security payments, and produce our Nation's currency.
        Since President Obama took office, the Treasury Department
    has had to marshal its resources to confront deep domestic and
    global challenges, and we have consistently met our obligations
    efficiently and at the lowest cost to taxpayers. This budget
    request continues to achieve savings and fund vital programs
    alongside strategies that will make the Department more
    effective.
        The primary area where we are requesting additional
    resources is in the Internal Revenue Service. Funding for the
    IRS has been cut dramatically over the past 5 years. These cuts
    amount to a total of $1.2 billion, or 10 percent of the
    agency's budget.
        As a result, taxpayers now face longer and unacceptable
    wait times on the phone, and it takes the IRS longer to respond
    to taxpayer correspondence. A sustained deterioration in
    taxpayer service, combined with reduced enforcement activity,
    presents serious long-term risks for the U.S. tax system, which
    is based on voluntary compliance.
        The Treasury budget request restores funding to the IRS so
    it can provide an acceptable level of customer service that the
    American taxpayers deserve, as well as continued modernization
    to meet legislative mandates set by Congress. These funds will
    help the IRS to update antiquated computer systems and protect
    taxpayer information.
        In addition, we are seeking an adjustment of the program
    integrity cap to allow the IRS to invest in enforcement
    initiatives, investments that will generate a sizable return.
    To be specific, it will yield $60 billion in additional revenue
    at a cost of $19 billion, meaning it will reduce the deficit by
    $41 billion over the next 10 years.
        This budget also includes additional funding so Treasury
    can meet its obligations under the Digital Accountability and
    Transparency Act and provide Americans with the most accurate
    information about Government spending. On top of that, we are
    requesting a reauthorization of programs that have proven
    results.
        For instance, the budget proposes an extension of the
    Community Development Financial Institution Fund's Bond
    Guarantee Program, which unlocks long-term financing for
    financial institutions in underserved communities. It proposes
    a new investment in the State Small Business Credit Initiative,
    which leverages private lending to strengthen small businesses
    nationwide.

                               PREPARED STATEMENT

        In closing, I want to thank the talented team of public
    servants at the Treasury Department. They are dedicated to the
    work of the Department and committed to the American people. I
    am proud to represent them here today, and on behalf of these
    hard-working men and women, I want to say how much we
    appreciate the support of this committee.
        Thank you, and I look forward to answering any questions
    that you have.
        [The statement follows:]
                    Prepared Statement of Hon. Jacob J. Lew
        Chairman Boozman, Ranking Member Coons, members of the
    subcommittee, thank you for giving me the opportunity to appear before
    you today to discuss Treasury's fiscal year 2016 budget.
        As we meet here this morning, our economy and our country have made
    considerable progress that we can all take pride in. By almost every
    metric--from job creation, economic growth, and deficit reduction to
    manufacturing, exports, and energy independence--America has come a
    long way. The fact is, in 2014, we saw the best year of job growth
    since the 1990s, and over the past 5 years, America's businesses have
    created nearly 12 million new jobs--the longest stretch of sustained
    private sector job growth in our Nation's history. Our economy
    continues to expand, with healthy growth in 2014 and forecasts
    projecting above-trend growth for this year. We continue to outperform
    our trading partners, many of which are still struggling to recover
    from the global economic crisis. American exports set another record
    last year for goods and services sold overseas, and this record was
    largely driven by small businesses. And our deficit, which has fallen
    by almost three-quarters, is forecast to decline even further in the
    next fiscal year.
        These achievements underscore America's enduring economic strength,
    and the continued progress we can make with the right policies and
    bipartisan cooperation. The President's budget is a blueprint for
    Washington to work together. It not only lays out a path to find common
    ground, it puts forward sensible solutions to make sure every American
    who works hard has a chance to get ahead.
        This budget knocks down barriers for working families so things
    like child care, mortgage payments, and a college education are more
    affordable. It modernizes our job training system, fuels research and
    development, and repairs our roads, bridges, and ports so more
    companies will invest, locate, and hire in the United States. And it
    reforms our tax system so we can eliminate special-interest loopholes,
    strengthen the middle class, and level the playing field for
    businesses.
        At the end of 2013, policymakers came together on a bipartisan
    basis to partially reverse sequestration and to pay for higher
    discretionary funding levels with long-term reforms. We have seen the
    positive consequences of that bipartisan agreement for our ability to
    invest in areas ranging from research and manufacturing to
    strengthening our military. We have also seen the positive consequences
    for the economy, with an end to mindless austerity and manufactured
    crises contributing to the fastest job growth since the late 1990s. The
    President's budget builds on this progress by reversing sequestration,
    paid for with a balanced mix of commonsense spending cuts and tax
    loophole closers, while also proposing additional deficit reduction
    that would put debt on a downward path as a share of the economy.
        Meanwhile, the President has made clear that he will not accept a
    budget that reverses our progress by locking in sequestration going
    forward. Locking in sequestration would bring real defense and non-
    defense funding to the lowest levels in a decade. As the Joint Chiefs
    and others have outlined, that would damage our national security,
    ultimately resulting in a military that is too small and equipment that
    is too old to fully implement the defense strategy. It would also
    damage our economy, preventing us from making pro-growth investments in
    areas ranging from basic research to early childhood education and our
    Nation's infrastructure. As the President has stated, he will not
    accept a budget that severs the vital link between our national and
    economic security, both of which are important to the Nation's safety,
    international standing, and long-term prosperity.
        As part of the President's approach, Treasury's budget request will
    allow the department to carry out its vast responsibilities efficiently
    and effectively. Treasury plays a key role in shaping and implementing
    the President's economic policies. Today's request will allow the
    department to promote economic prosperity, fiscal responsibility, and a
    resilient financial system even as it advances our national security
    objectives and bolsters stability at home and abroad. The Treasury
    Department touches the lives of nearly every American through our work
    to responsibly manage the Government's finances, streamline and reform
    the tax system, fuel lending to small businesses, spur economic
    development in struggling communities, advance our strategic interests,
    make Social Security payments, and produce and modernize our Nation's
    currency.
        Since President Obama took office, the Treasury Department has had
    to marshal its resources to confront deep domestic and global
    challenges, and we have consistently met our obligations efficiently
    and at the lowest cost to the taxpayer. Treasury's fiscal year 2016
    budget continues to achieve savings and fund vital programs alongside
    strategies that will make the department more effective. The request
    includes strategic investments in improved taxpayer services,
    enforcement, and technology at the Internal Revenue Service (IRS);
    funding for select high priorities such as implementing the Digital
    Accountability and Transparency Act of 2014; and increasing the
    availability of healthy food options for low-income communities via the
    Healthy Food Financing Initiative.
            investing in a high-performing internal revenue service
        Despite the IRS's critical role of collecting more than 90 percent
    of the Federal revenue, Congress has continually reduced funding for
    the agency over the last 5 years by a total of $1.2 billion or 10
    percent. A sustained deterioration in taxpayer services combined with
    reduced enforcement activity could create serious long-term risk for
    the U.S. tax system, which is based on voluntary compliance.
        The fiscal year 2016 Treasury budget includes a $1.3 billion
    increase within the discretionary caps to begin restoring taxpayer
    services to acceptable levels. Funds are also included to continue
    major IT projects, which aim to protect taxpayer information, modernize
    antiquated systems, continue development of a state-of-the-art online
    taxpayer experience, and build efficiencies throughout the agency.
    Finally, funds are included for initiatives that are critical to full
    and effective IRS implementation of legislative mandates including the
    Affordable Care Act and the Foreign Account Tax Compliance Act.
        In addition, the budget includes $667 million--financed by a
    proposed program integrity cap adjustment for enforcement initiatives--
    that provide a high return on investment. This proposed cap adjustment
    funds strategic investments that will help close the tax gap and return
    $6 for every dollar invested, once fully implemented in fiscal year
    2018. This multi-year effort is expected to generate $60 billion in
    additional enforcement revenue at a cost of $19 billion, thereby
    reducing the deficit by $41 billion over the next 10 years.
        Treasury's request includes substantial investments to help
    strengthen taxpayer services and to adequately fund tax enforcement to
    make sure all taxpayers play by the same rules.
            increasing transparency in federal financial management
        The Treasury budget also includes funding for efforts to increase
    transparency and accountability in Federal financial management and to
    implement the Digital Accountability and Transparency Act of 2014 (DATA
    Act). The DATA Act requires additional Federal spending data to appear
    on USAspending.gov as well as the establishment of government-wide
    financial data standards for any Federal funds made available to or
    expended by Federal agencies and entities receiving these funds.
            strengthening the economy and creating job opportunities
        The Treasury budget request makes key investments that will help
    spur economic growth and job creation and increase financial access and
    capability for local communities and small businesses, while boosting
    confidence in the safety and soundness of the U.S. financial system.
        Our request includes $233.5 million for the Community Development
    Financial Institutions (CDFI) Fund, which promotes economic development
    investments in low-income communities. The budget proposes to extend
    the CDFI Bond Guarantee program through fiscal year 2017, to provide a
    source of long-term capital to financial institutions that support
    lending in underserved communities. Of the total request, $35 million
    for the Healthy Food Financing Initiative will support the growth of
    businesses that improve the availability of affordable, healthy food
    options in low-income communities.
        The Treasury budget also supports small business growth through
    reauthorization of the State Small Business Credit Initiative (SSBCI).
    From fiscal year 2011 to fiscal year 2013, SSBCI programs in all 50
    States supported over $4.1 billion in loans and investments to 8,500
    small businesses across the country--creating or saving more than
    95,000 American jobs. To continue our support for State economic
    development agencies' work to boost lending to small businesses, the
    budget proposes a new investment of $1.5 billion for SSBCI. This
    additional funding would be awarded in two allocations, with $1 billion
    awarded on a competitive basis to States best able to target local
    market needs, promote inclusion, attract private capital for start-up
    and scale-up businesses, strengthen regional entrepreneurial
    ecosystems, and evaluate results. An additional $500 million will be
    allocated to States according to a need-based formula. A new
    authorization of the SSBCI program will keep local economic development
    efforts strong and allow States to continue to support small
    businesses, job creation, and leverage greater levels of private
    lending and investments.
        Treasury also proposes an authorization of $300 million for Pay for
    Success projects that demonstrate measurable outcomes, resulting in
    greater Federal savings and programmatic efficiency.
     protecting national security interests and preventing illicit use of
                              the financial system
        Treasury's financial intelligence, sanctions policy, and
    enforcement activities play a significant role in protecting our
    financial system from threats to our national security.
        The budget proposes $109.3 million for the Office of Terrorism and
    Financial Intelligence (TFI) to oversee and marshal Treasury's
    intelligence, enforcement, and economic sanctions functions in support
    of U.S. national security policies and interests. Our funding request
    reflects Treasury's continued efforts to combat rogue nations,
    terrorist facilitators, money laundering, drug trafficking, and other
    crime as well as other threats to our Nation's security. These efforts
    include disrupting the Islamic State of Iraq and the Levant's (ISIL)
    finances, enforcing sanctions against Iran, implementing sanctions
    against Russia in support of Ukraine's stability, and enhancing global
    financial transparency.
        Treasury's request also includes $113 million for the Financial
    Crimes Enforcement Network (FinCEN) to support Treasury's efforts to
    safeguard the financial system from illicit use, combat money
    laundering, and support national security interests through the
    collection, analysis, and dissemination of financial intelligence and
    strategic use of financial authorities.
                  supporting international assistance programs
        Finally, while not under this subcommittee's jurisdiction, I also
    want to note that Treasury's request on its International Programs aims
    to promote our national security, open new markets for U.S. exporters,
    and address global challenges such as food insecurity, the environment,
    and poverty. Treasury proposes to increase the U.S. quota in the
    International Monetary Fund (IMF) and simultaneously reduce, by an
    equal amount, U.S. participation in the IMF's New Arrangements to
    Borrow. The administration believes that a strong and well-resourced
    IMF is in the U.S. vital interests. Our priority has been and remains
    to secure congressional support as soon as possible to implement the
    2010 reforms. The immediate ratification of these reforms is essential
    to modernizing the IMF's governance and bolstering its ability to
    respond to urgent international crises--and will preserve the United
    States' influence in the institution without increasing our financial
    commitment. Failure to ratify will hurt our national security both
    today and in the future.
       furthering wall street reform, consumer protection and financial
                                   stability
        Reforms like increased capital standards and limits on excessively
    risky practices, among others, are transforming the way Wall Street
    operates, strengthening our financial system and making it more
    resilient. In the coming year, Treasury will continue to work with the
    Federal agencies to finalize efforts in areas such as compensation
    reform. Likewise, through the Financial Stability Oversight Council, we
    will continue to work across the member agencies to assess risks to
    financial stability and work to mitigate them where needed. Going
    forward, we must remain vigilant to potential new threats to the
    stability of the financial system, constantly monitoring how risks
    change and evolve.
                                   conclusion
        The fiscal year 2016 Treasury budget reflects key investments
    needed to create economic and job opportunities, protect our national
    security interests, and the integrity of the financial system, and
    manage and reform the U.S. Government's Federal financial management
    and tax systems.
        The Treasury budget plays an important role in the President's
    budget, which aims to bring middle class economics into the 21st
    Century. It is carefully designed to make our economy stronger while
    maintaining a responsible fiscal course. What is more, it is an
    opportunity for bipartisan cooperation to achieve meaningful reform
    that will help hard-working Americans share in our economic gains.
        In closing, I want to thank the talented team of public servants at
    the Treasury Department. They are dedicated to the work of the
    department and committed to the American people. I am proud to
    represent them here today, and on behalf of these hard-working men and
    women, I want to say how much we appreciate the support of this
    subcommittee.
        Thank you, and I look forward to answering any questions that you
    have.

        Senator Boozman. Thank you very much, Mr. Secretary.
        At this time, we will proceed to our questioning, where
    each Senator will have 7 minutes per round. If there is
    sufficient interest from our members for additional rounds of
    questions today, we will try to accommodate them.
        I read your testimony and appreciate it. In there, you
    mentioned the need for finding common ground, and I think you
    mention infrastructure, you know, things like that, which,
    again, I would agree on totally and very much support
    infrastructure. Now we have different viewpoints as to how you
    get the dollars to get that done, and that is a sticking point.
        But the other thing is, and let me do this in the form of a
    question, it concerns our community bankers. I feel like the
    backbone of America is small business, but the backbone of
    small business is community banks. And a number of community
    bankers and credit unions have expressed concerns about the
    cost of complying with what they feel like are onerous
    regulatory burdens.
        Community banks are the backbone of small business, as I
    said and, again, the backbone of our--which are also the
    backbone of our communities. Harvard University researchers
    released a report in February about the plight of community
    banks in the United States and how poor regulatory coordination
    and inappropriately designed regulations are stifling community
    banks.
        This is of particular concern to States like Arkansas,
    where there are 96 towns with only one physical banking
    location, and two-thirds of these communities have less than
    1,000 residents. What do you propose, what is the
    administration doing to ease the burdens and compliance cost
    facing community banks?
        Secretary Lew. Mr. Chairman, we very much share with you
    the view that community banks not only play an important part
    in our communities, but in the fabric of our national economy.
    I think if you look at the design of many of the laws and the
    rules, you will see that there are standards that reflect the
    differences between smaller and larger financial institutions.
    There are exemptions in many cases for smaller institutions,
    and there are bars that are easier to clear for smaller
    institutions that do not present the same level of financial
    risk.
        I know the regulators, as they look at the discretion that
    they have, are always looking for whether there is flexibility
    and whether or not there is a risk they need to be concerned
    about. They have consistently made judgments to have the burden
    on smaller financial institutions reflect the, in general,
    lower level of risk.
        But I do think we have to be careful to remember the
    purposes of financial reform. The purpose of financial reform
    was to make sure we never again face the kind of economic
    crisis that we had in 2008. I think the standards that we use
    have to be mindful of the fact that the architecture that was
    put in place was designed to prevent the taking of risks that
    could add up to a risk to the country.
        The relatively easier standards for smaller institutions I
    think is appropriate, but I do think the oversight that we have
    now is more appropriate than where we were in 2008, when,
    frankly, we had a lapse in our ability to see risks developing
    and to respond in a way to protect the U.S. economy. So I think
    financial reform, both the legislation and the rules have been
    quite effective at making our financial system safer and
    sounder, and we have tried to do it in a way that is mindful of
    the burdens on smaller banks and smaller communities.
        Senator Boozman. I guess my concern is, is that when you
    get out and you visit and you go to various institutions like
    this, if you go to these 96 towns, you know, small towns with
    one bank and then other towns with a few banks, again, it is
    universal. You know, they feel like that things have changed
    dramatically.
        And I would argue that these types of community banks just
    didn't have anything at all to do with the meltdown that we
    experienced several years ago. So I really wish that you would
    look at that. It is something that we are looking at. We are
    having kind of a one size fits all, and again, I think the
    idea, like I said, that these banks are somehow responsible for
    that, I simply don't agree with.
        Recent cybersecurity reports revealed that a cyber criminal
    ring from Russia, China, Ukraine, and other parts of Europe has
    stolen $1 billion from up to 100 banks and e-payment systems in
    our countries around the world, including the United States,
    since 2013. So cybersecurity is a huge thing that we are very,
    very concerned about.
        In your opinion, is America's personal and financial
    information at banks safe from cyber attacks?
        Secretary Lew. Senator, I think cybersecurity is an
    enormously important and difficult issue, and it is one that I
    know I worry about every day. And when I talk to CEOs of
    financial institutions, retail businesses, they worry about
    every day.
        I think that we are doing an awful lot that is the right
    kind of defense against cyber attack. But the cyber criminals
    are always honing their attacks, and we cannot think that we
    can get ahead of them. You know, our challenge is going to be
    to keep up with them, to make sure that we have good practices
    in place to detect attacks so that we have the ability to
    respond when there are attacks and to share information so that
    best practices can be available throughout the system.
        We have legislation pending that the President has proposed
    which we think would go a long way towards providing the
    ability to share information, which we think would make the
    system safer. I think the financial sector is probably in a
    better position now than other sectors are, but I do not think
    anyone can sit back and rest comfortably.
        Mr. Chairman, I cannot help but notice that the ranking
    member of the committee came in while I have been responding to
    your question. I hope I can take just a moment to welcome her
    and thank her for her service and wish her well.
        Senator Mikulski. Thank you. I will have more to say in a
    minute.
        But I am here for 2 years, Jack. So we are going over these
    line items. Look forward to working with you, and even
    particularly with all of the issues. So we will talk in a
    minute.
        Senator Boozman. Thank you.
        Very quickly and very shortly--I am running over my time--
    but I am encouraged by recent steps to reform the U.S.-Cuba
    relationship. Boosting our commercial ties would have
    significant benefits for both of our economies.
        My home State of Arkansas exported nearly $34 million in
    goods to Cuba in 2004 before payment restrictions were
    tightened in 2005. Earlier this year, researchers at the
    University of Arkansas estimated expanded trade and travel to
    Cuba would bring an additional $50 million in economic gains to
    Arkansas.
        What is being done to ease payment restrictions, and how
    will this impact U.S. agriculture exports to Cuba?
        Secretary Lew. Mr. Chairman, the actions that the President
    announced just a few months ago regarding easing of some of our
    sanctions against Cuba we think will help U.S. businesses. But
    mostly, we think it will help advance the kind of positive
    change in Cuba, which could be positive in terms of making a
    difference where the old policies were not. We have tried to
    make it easier for the kinds of transactions that have been
    frustrating for American agriculture to go forward, consistent
    with the legal restrictions that remain in place.
        I think that there are opportunities for Americans in
    agriculture and other sectors to do business in Cuba, but I
    think the bigger story in terms of U.S.-Cuba relations is it is
    a chance for Cuba to be more exposed to U.S. values and U.S.
    ways of doing business and U.S. freedoms in a way that will be
    more effective at pushing back on the practices of Cuba that
    still need to change, than the old policies, which were both
    not productive in terms of changing Cuba and hurting U.S.
    interests.
        Senator Boozman. Senator Coons.
        Senator Coons. Thank you. Thank you, Chairman Boozman.
        Thank you, Secretary Lew, for your testimony.
        On the theme that Chairman Boozman started with about
    access to capital in small towns and how community banks can
    make a significant difference, just describe briefly, if you
    would, how the Community Development Financial Institutions
    Fund is used to help rebuild distressed neighborhoods and
    support small businesses and what the CDFI Bond Guarantee
    Program, if it were to ramp up to $1 billion, might be able to
    do and how they might play a constructive role in providing
    access to capital in small communities, first.
        Second, Senator Boozman asked about the burden, the
    regulatory burden on smaller banks. I have heard from a number
    of folks from the financial community who believe that once
    banks obtain more than $50 billion in assets, they suddenly
    become subject to all the regulatory oversight of the mega
    banks.
        And while I am a strong supporter of the steps taken in
    Dodd-Frank to prevent future crises, I wonder if that is really
    quite accurate or whether there is a step series where you sort
    of steadily ratchet up regulations in accordance with growing
    size and would welcome your insights into that point as well.
        Secretary Lew. Thank you, Senator.
        CDFI, I think, has been an enormously effective program,
    both because of what it does directly and because of the
    institution-building role it plays in the communities it
    serves. Just looking at the raw numbers, in 2014, we made $146
    million in awards, and it produced 50,000 new jobs, almost
    10,000 businesses were financed.
        In the communities where they are present, there is a
    financial institution that local businesses can go to. So in
    places where community banks were not able to have a foothold,
    it has created access to the benefits of what community banks
    offer.
        The CDFI Bond Guarantee Program addresses one of the
    fundamental challenges in revitalizing communities. In many
    low-income and underserved communities, access to long-term,
    fixed-rate financing is just hard to find or impossible to
    find. The guarantee program to date has guaranteed $525 billion
    in bonds through the program to help CDFIs provide financing
    needs for the community.
        So I think it is a very well-leveraged and successful
    program, which is why we have proposed the reauthorization
    again.
        And Senator, with regard to the threshold question that you
    asked about, I think you are totally correct. It is not a hard
    line where everything happens to an institution if they pass
    the $50 billion threshold. There are many requirements from
    which institutions remain exempt. There are other cases in
    which there are standards that are modified to reflect the
    lower level of risk.
        With that said, and as I said to the chairman, we remain
    very much focused on what can we do to make that burden even
    less without creating risks to the kind of general architecture
    of financial security. It is an area that I know all the
    regulators are focused on and we are focused on at Treasury.
        Senator Coons. Well, good. Because I share that concern,
    that we find ways to provide better access to capital, more
    lending at the community banking level, without increasing risk
    to the financial system as a whole and without making basic
    changes to what I think are important safety and soundness
    protections.
        Let me just briefly ask you about sanctions. I made
    reference in my opening statement. In a hearing in the last
    Congress, Senator Mikulski was--Vice Chairman Mikulski was
    central in advocating for a significant increase to make sure
    that we have got the resources in the Office of Terrorism and
    Financial Intelligence.
        I was struck, given the ongoing issues with Russia in the
    Ukraine, with Syria, and in particular with Iran, that the
    budget proposes a reduction. Why does it propose to cut funds
    for this office, knowing there are these significant threats?
    Do you believe it is over resourced? And given the real
    potential that we may return to enforcing sanctions against
    Iran, do we have the resources that this office needs?
        Secretary Lew. Senator, I think the work that our Office of
    Terrorism and Financial Intelligence does is enormously
    important, and the sanctions programs we administer have added
    to this President's and all future Presidents' arsenal of tools
    that are extraordinarily effective and powerful, and I must say
    that when I think of how much time I spend working in this
    area, it is a bit of a surprise to me how much of my time goes
    into this because of the world we live in today.
        As far as resources go, we requested the resource level as
    a floor, not as a ceiling. And we proposed putting it in the
    departmental offices so that we would have a little bit more
    flexibility. There were some one-time expenditures last year
    that may or may not recur.
        As far as the Iran sanctions go, we have not lessened our
    level of activity on Iran sanctions. So we are fully funded on
    Iran sanctions, and the Russia sanctions were a new start this
    year. I do not think we missed a beat in terms of any of the
    other sanction programs we administer, and we came up to speed
    very quickly when there was a need for Russia sanctions.
        I am very proud of our team for having mastered the
    intricacies of both Russia's financial institutions, its
    interconnection to the global financial system, and how we
    could use targeted and really surgical sanctions to put the
    maximum pressure on the targets of the sanctions with the
    minimal spillover to Europe and the rest of the world.
        So I think we have funded it at the right level. But it is
    a floor, not a ceiling, and you know, we appreciate the support
    that this committee has given for this very important function.
        Senator Coons. I think, just speaking for myself, this is
    an area I intend to follow closely. And I want to be
    continually reassured you have more than adequate resources for
    the fight.
        Two quick questions in closing, if I might. Just your IT
    investments, which are significant, relative to the total
    increase requested and DATA Act implementation. I share the
    chairman's concerns about cybersecurity. These two strike me as
    ways that you can modernize and strengthen your IT systems and
    the transparency of your budget.
        And then last, I have a question about master limited
    partnerships (MLPs). So if you would briefly talk about your IT
    investments?
        Secretary Lew. Yes, I agree. I think the investment in the
    DATA Act is extremely important. We worked with Congress on the
    development of that legislation. We are eager to implement it
    well. I do not think we can implement it without resources. We
    cannot implement it as well as we should without the resources
    to do it properly.
        I do think it helps to safeguard our systems to invest in
    cybersecurity by having better systems to begin with, and as
    you know, many of our systems are quite old.
        Senator Coons. I was struck that the budget proposes
    eliminating master limited partnerships as a structure. As you
    know, I have long been an advocate on a bipartisan basis for
    instead opening them to renewable energy. I think it is a
    technology-neutral, politically feasible way to provide long-
    term financing support for renewable energy.
        I wondered if you had a comment?
        Secretary Lew. Senator, it is an area that I would be happy
    to follow up with you on. Our proposal--obviously, we have many
    proposals to promote renewable energy, both in terms of
    financing and research and development. With regard to master
    limited partnerships, we have had concerns over the years, and
    I would look forward to discussing it with you.
        Senator Coons. Thank you, Mr. Chairman.
        Senator Boozman. The Senator from Kansas is recognized.
        Senator Moran. Mr. Chairman, thank you very much.
        Mr. Secretary, welcome. Before asking any questions, since
    I last saw the Senator from Maryland, she has announced her
    intentions not to seek reelection, and I just wanted to use
    this as an opportunity to thank her for her service. I have
    enjoyed your tenure as Chairwoman of the Appropriations
    Committee and appreciate the tenacity with which you have
    tackled our spending and the continual attempt to get us in the
    appropriations process back to regular order.
        So thank you very much and appreciate the way you have
    treated me for the last several years.
        Mr. Secretary, I think three relatively quick questions. As
    I was walking in, I was told that the chairman was questioning
    you about community banking regulations. I would add my voice
    to that issue.
        My understanding is that your response was something along
    the lines that community banks are better regulated today than
    they previously were. I would indicate that I don't think that
    is the case. I think community banks have been caught up in a
    broader regulatory scheme than they deserve to be in. The
    consequences are significant to the economy.
        In a State like mine in which community banks provide
    necessary capital to a growing business, to a start-up, the
    relationship banking is very important. And the example that I
    use that has become so annoying to me and so devastating is
    that many of my community banks have made the decision no
    longer to make home loans, home mortgage loans to individuals
    who want to buy a home in their hometown where the bank is
    located because of the significant regulatory environment which
    they now operate in.
        I doubt that Dodd-Frank intended consequence was to reduce
    the availability of mortgage credit in a town of several
    thousand people, but that has been the end result. It is not
    only the regulatory environment, but also the consequences if
    there is a failure by the bank to cross every T and dot every
    I.
        And the reason that it is necessary for me to bring this
    kind of issue to you is that so many of the regulators are not
    subject to appropriations. Therefore, in this setting, you are
    our one opportunity to express concern about things that are
    happening certainly within the Treasury Department, but broader
    in the bank regulatory environment that those banks face.
        Secretary Lew. Senator, I understand the concern about
    community banks and share the concern because I agree with all
    of you who have expressed the view that community banks are an
    enormously important part of the fabric of our economic system
    in our communities. I do think, as we were discussing a few
    moments ago, what happens at the cut-off points is not quite as
    dramatic as sometimes it is described because there are
    different rules for smaller institutions.
        With specific regard to the housing issue you mentioned, I
    know that some of the regulators are reviewing some of the
    rules that have been of concern to community banks. I do not
    think the intention was to stop the lending that you described.
        It was intended to put burdens on lenders to know their
    clients better and to offer different kinds of products, but it
    was not to shut down the lending. I know that things like
    looking at put-back risk, regulators have been trying to take
    some of that unknown out of the system by being clear what
    would and would not be considered an actionable kind of error.
        So I think the regulators are attuned to it. Obviously,
    most of this is not directly in the jurisdiction of Treasury,
    but I am very much concerned, both as Chair of the Financial
    Stability Oversight Council (FSOC), but also as someone who
    cares deeply about the health of our banking and financial
    system and would look forward to working with you. But I do
    think we have to be careful not to undo the architecture that
    has made our system so much safer than it was in 2008.
        Senator Moran. Is there anyone that answers to you at the
    Treasury Department that would be a good person for us to talk
    to about this issue?
        Secretary Lew. Yes. We have an Office of Domestic Finance,
    and we have people who work on these banking issues, and I am
    happy to have them be in contact with your staff.
        Senator Moran. I appreciate that. Thank you.
        And part of the review that is underway is a Government
    Performance and Results Act (GPRA) in which banking regulations
    are now being considered on a periodic review, and I would
    welcome a report back as to how that process is going and
    whether we are headed in a direction that would eliminate or
    modify existing rules and regulations as they affect----
        Secretary Lew. Senator, I am very much focused on that.
    When I was the Office of Management and Budget (OMB) Director,
    we did a look-back of rules across the Federal Government, and
    we didn't have the ability to reach into the independent
    regulatory agencies. So I am now pleased to see this process
    underway where independent regulatory agencies are doing the
    same thing.
        I know from the conversations I had that the heads of these
    agencies are very focused on it. They are participating in
    regional hearings, and I think it will be very interesting to
    see what they come back with.
        Senator Moran. I am pleased by your smile to the question,
    and I am pleased by your interest in this topic. And the OMB, I
    wasn't sure that you would know about this process, but I guess
    you would know that, hopefully as Treasury Secretary, but also
    certainly as Director of OMB.
        Let me ask a question. This Congress passed last year, last
    session, the Tribal General Welfare Exclusion Act. What was
    going on was IRS activity on Native American lands involving
    their activities.
        That legislation requires that a tribal advisory committee
    be established to advise you on matters related to taxation of
    Indians and establishing a training and educational system for
    the IRS field agents. It seems to me that the Treasury
    Department is going out of its way to not have Native Americans
    on the advisory committee. Would you dispel me of that belief?
        Secretary Lew. Well, I am not sure where that notion comes
    from. We filed the charter for the Treasury Tribal Advisory
    Committee, and we have issued a call for nominations for the
    three members to be appointed by the Treasury Secretary. We
    have expressly contacted tribal leaders for their nominations,
    and the deadline for the nomination applications is April 28.
        So we are still very much in the process of reviewing
    candidates.
        Senator Moran. Do you have any belief that tribal leaders
    should or should not be involved in that as members of that
    advisory committee?
        Secretary Lew. You know, I do not start out with a
    preconceived notion. I think we should review the applicants
    that come in and look for the most qualified and strongest
    candidates.
        Senator Moran. That is a good answer, and I would suggest
    that tribal leaders--at least in part of that make-up of that
    advisory committee, tribal leaders would be a significant and
    important component in providing you and the Treasury
    Department, the IRS, advice.
        Secretary Lew. I must say I did have a meeting with tribal
    leaders several months ago, and it was a good exchange, and I
    think the feedback I got was that they welcome the interaction
    with the Treasury Department, and we will continue to stay very
    much working with them.
        Senator Moran. Thank you.
        Do you want me to stay on time? Okay.
        Senator Boozman. The Senator from Maryland.
        Senator Mikulski. Thank you, Mr. Chairman and my
    colleagues, for your kind words.
        And Secretary Lew, I could thank you for your service. We
    have been together a really long, long time.
        Secretary Lew. A long time.
        Senator Mikulski. Yes. Back when we were discussing
    earmarks in the old VA-HUD bill. So, again, thank you for your
    words and also for your own service.
        I want to reiterate some questions about community banks
    that I see as a common theme here among all of our colleagues
    on both sides of the aisle. And perhaps, Mr. Chairman, it is
    going to require maybe a meeting with this Domestic Finance.
    Maybe not a hearing, but a conversation.
        So, Mr. Lew, let me get to my questions. I am concerned
    that, one, the shrinking number of community banks. And number
    two, I am also concerned about the shrinking number of
    minority-owned community banks that have demonstrated solvency
    and stability. But I know since even the last year, we have
    gone from 47 to the number in their 20s.
        So I think these are issues we need to really be looking
    at. We could talk about the merits of a community bank, as
    compared to being, you know, a regional or franchise banking in
    our community.
        Well, let me get you to my question. One of which is where
    the very rules of Government are interfering with banks being
    able to get back on their feet. A specific question that I have
    is that there is a community bank in Maryland that needs the
    approval from the Federal Reserve Bank of Richmond in order to
    buy back what they had gotten in the Troubled Asset Relief
    Program (TARP).
        They are told that they can't buy it back, but it could
    make it ripe for a hedge fund to come along and buy the bank.
    Well, they have got the money to buy it back. They have been
    prudent, and I don't want to get into individual cases. But it
    is where the very rules of Government seem to be either
    torpedoing or derailing community banks to move out of the
    recession and get their own solvency, which we are absolutely
    committed to, and so on.
        Do you have any thoughts about what Treasury is telling
    people about buying back preferred stock and the regulators
    kind of might view on actions on this?
        Secretary Lew. Senator, from a Treasury perspective, we
    obviously have been working our way through the TARP assets,
    trying to resolve them so that we can recover taxpayer
    investments fully wherever possible. We have worked with
    community institutions and have no objection when community
    institutions are able to do that.
        I am not sure of what the regulatory issue is, what you are
    describing, but I would be happy to look into it. We obviously
    do not have any authority over the Fed decisions. But I will--
    --
        Senator Mikulski. No, but one of the things is how the Fed
    really does have to coordinate with Treasury.
        Secretary Lew. Yes.
        Senator Mikulski. I would like to get you a formal letter
    on this.
        Secretary Lew. Sure.
        Senator Mikulski. So that you could review----
        Secretary Lew. I would be happy to look into it.
        Senator Mikulski [continuing]. And be aware of it.
        Two other points that are very specific to the Maryland-DC
    area, just to bring to your attention and ask you to look into
    them, and then I have a pretty big question. One of which is
    that the retired DC firefighters have called my office, as
    along with Eleanor Holmes Norton, that there is an accounting--
    an old accounting error was discovered, and several retirees
    are getting notifications that their benefits might be reduced.
        These are the pensions that you are responsible for. So I
    would like to get you a letter on that and a letter from
    Eleanor Holmes Norton. You know, that is the last that they
    need. I am not asking for a response there.
        The other is the Treasury I know is merging Financial
    Management Service with the Bureau of Public Debt. The
    Financial Management Service is in Hyattsville. I was able to
    negotiate a 5-year delay with Treasury in terms of this move,
    but we hear that there are employees at Treasury so grouchy
    about what I did to protect those people so that we could sort
    this out that they are being demoted, intimidated, and pushed
    out.
        Could you take a look at that?
        Secretary Lew. I will take a look at it. It obviously would
    be unacceptable if that were true. I think the merger has been
    effective, but there should be no--no kind of treatment like
    you have described.
        Senator Mikulski. Well, you know, they were looking for $8
    an hour accountants in West Virginia. I don't think any
    accountant is $8 an hour, but I am not going to get into the
    legacies of Bob Byrd. I can assure you I am going to have as
    many legacies of Barbara Mikulski as I can.
        Now the other is a larger question for my colleagues. You
    and I have lived through two appropriations together when I was
    the chair, now the vice chair. Could you tell me the impact of
    crisis-driven appropriations, with last-minute agreements
    through an omnibus? Very well organized. I have nothing but
    excellent words to say about my colleagues and, of course,
    Congressman Hal Rogers.
        But it was a hell of a time, and I wonder, as you as the
    Secretary of the Treasury, our domestic economy and our global
    economy, what is the impact of crisis-driven appropriations,
    just what I would like to raise and just as colleague Moran has
    raised about getting back to regular order?
        Secretary Lew. Well, Senator, I think that is an
    extraordinarily important question, and I commend you for the
    work you did last year to put together an omnibus appropriation
    bill with funding levels that were designed to meet current
    needs, which is so important in terms of having our system
    maintain its responsiveness and its agility. Continuing
    resolutions do not have that ability.
        I think when you look at the deadline-driven, crisis-driven
    funding decisions that have been made over the last number of
    years, it has caused substantial anxiety not just in the United
    States, but around the world. I think that when one looks at
    the business investment environment, it is psychology.
    Psychology is about confidence.
        The sense that Government is behaving in the way that a
    reasonable set of institutions should behave adds to
    confidence. The sense that we are hurtling off of a cliff
    destroys that sense of confidence.
        I detected considerable improvement in both the United
    States and internationally in confidence in the U.S. as a
    system and its economy since we have seen a return to something
    that approaches regular order. I think maintaining regular
    order is extraordinarily important to keeping the recovery we
    have going and having the investment decisions that depend on
    people thinking will things be going in the right direction in
    a year, 2 years, 3 years? Not just in a week, a month, or for
    maybe part of this year.
        I applaud the efforts that you went through to put an
    omnibus together. If Congress can meet the requirements to fund
    the Government, to make sure that our debt does not become an
    issue of anxiety again, that would be very important.
        Senator Mikulski. Mr. Chairman, I know my time is up, but I
    have got more late-breaking news. This is good news. The Senate
    version of the Homeland Security bill cleared the House 257 to
    167. It is on its way to the President.
        So that means that we--on the Appropriations Committee, we
    now have passed 12 bills, and we have completed now today our
    fiscal year 2015 work.
        Secretary Lew. Congratulations.
        Senator Boozman. Thank you, Mr. Secretary, for being here.
    We appreciate you coming and testifying, and I think that we
    got some really valuable information.
        We will follow up with additional questions for the record
    that our members may have in the future. We would appreciate
    your timely responses, as always.
        Senator Boozman. In order to move through the witnesses
    today, would the next panel----
        Secretary Lew. Thank you very much, Mr. Chairman.
        Senator Boozman. So thank you again for being here.
        Commissioner Koskinen, I now invite you to present your
    testimony on behalf of the Internal Revenue Service.

                            INTERNAL REVENUE SERVICE

    STATEMENT OF HON. JOHN KOSKINEN, COMMISSIONER
        Mr. Koskinen. Chairman Boozman, Ranking Member Coons, and
    members of the subcommittee, thank you for the opportunity to
    discuss the IRS budget and current operations.

                               BUDGET REDUCTIONS

        I remain deeply concerned that the significant reductions
    in our budget over the last 5 years are undermining the
    agency's ability to continue to deliver on its mission both
    this filing season and in the future. As you know, IRS funding
    has been reduced by $1.2 billion over the last 5 years,
    dropping to $10.9 billion for fiscal year 2015.
        At the same time, the number of taxpayers has increased by
    over 7 million, and the IRS has been given significant
    additional responsibilities. These include implementation of
    the Foreign Account Tax Compliance Act and the Affordable Care
    Act.
        The disconnect between our funding levels and our
    responsibilities is illustrated in some way by the fact that
    just 3 days after cutting our budget by about $350 million,
    Congress passed legislation requiring the IRS to design and
    implement two new programs by July 1. Implementation of the
    ABLE Act and the certification requirement for professional
    employer organizations is occurring while we are in the middle
    of our most complicated filing season in years.
        In discussing our need for adequate funding, I understand
    we have an obligation to be careful stewards of the taxpayer
    dollars we receive, and we must be as efficient as possible.
    The IRS has, in fact, made considerable efforts for several
    years to find efficiencies in our operations, both in regard to
    personnel and nonlabor spending. Through cuts in office space,
    contracts, printings, and mailings, we are saving over $200
    million a year.

                                 FILING SEASON

        We have also made significant progress over the past few
    years in moving millions of taxpayer inquiries from our call
    centers and walk-in sites to our significantly updated and
    improved Web site. Already this filing season, there have been
    more than 150 million visits to IRS.gov and more than 2.7
    million visits to the section devoted to the Affordable Care
    Act.
        We have had over 125 million hits on our ``Where's My
    Refund?'' site, the electronic tracking tool on IRS.gov. Also,
    more than 11 million copies of previously filed tax information
    have been obtained online with our ``Get Transcript''
    application. In the past, all of these inquiries would have
    inundated our phone lines and resulted in even longer lines at
    our walk-in sites.
        I would also emphasize that we have taken seriously issues
    raised about inappropriate actions and activities in the past
    by making necessary changes and improvements in our policies
    and procedures to ensure that these situations do not recur. We
    have cut conference spending by 80 percent. We have established
    review boards for video productions and training expenses. We
    have ensured that those who willfully fail to meet their tax
    obligations are not eligible for performance awards.
        We are reviewing our hiring process to ensure, to the
    extent possible by law, that former employees with serious
    prior conduct issues are not rehired. We now require that all
    contractors maintain the same high standards for tax compliance
    as our employees, and we have implemented the recommendations
    of the Inspector General with regard to the serious management
    failures surrounding the review of applications by
    organizations seeking to achieve social welfare status.
        But there is a limit to how much we can do in finding cost
    effectiveness. This year, we reached the point of having to
    make very critical performance tradeoffs. There was simply no
    way around the severity of the budget cuts without taking
    difficult steps, which have had negative impacts on service,
    enforcement, and information technology.
        The funding cuts have also limited our ability to work
    toward giving taxpayers a more complete online filing
    experience. Taxpayers, in our view, ought to have the same
    level of service from the IRS that they have now from their
    financial institutions, whether it is a bank, mortgage company,
    or brokerage firm.

                                 BUDGET REQUEST

        The President's fiscal year 2016 budget request for the
    IRS, which totals $12.9 billion, would help the agency move
    ahead in all of these critical areas. For example, we would be
    able to bring our phone level of service up from the current 43
    percent to 80 percent. We would also significantly increase
    enforcement and collection activities, generating over $2
    billion more in increased Government revenues every year, and
    we would be able to take steps toward building a more modern
    interface between the agency and taxpayers.
        I understand and appreciate the concerns raised over the
    past few years about activities of the agency, but I took this
    job 15 months ago because I also understand the critical role
    the IRS plays in the lives of taxpayers and in the collection
    of the revenues that fund the Government.

                               PREPARED STATEMENT

        I know I speak for the thousands of professional,
    experienced, and dedicated employees of the agency when I say
    that we are committed to working with you and the other members
    of Congress to lead the agency effectively and appropriately
    into the future. But we need your help and support if we are
    going to be successful.
        This concludes my statement, and I would be happy to take
    your questions.
        [The statement follows:]
                  Prepared Statement of Hon. John A. Koskinen
                                  introduction
        Chairman Boozman, Ranking Member Coons, and members of the
    subcommittee, thank you for the opportunity to appear before you today
    to discuss the Internal Revenue Service (IRS) budget and current
    operations.
        After 15 months as IRS Commissioner, it remains an honor for me to
    lead this great institution. My respect for the agency's role and
    admiration for its workforce continue to grow. I'm pleased to report
    that the 2015 tax filing season opened on schedule on January 20th, and
    is going well so far.
        Opening the current filing season on schedule was a major
    accomplishment, given the challenges we faced. I attribute this
    achievement to the dedication, commitment and expertise of the IRS
    workforce. Along with normal filing season preparations, there was a
    significant amount of extra work to get ready for tax changes relating
    to the Affordable Care Act (ACA) and the Foreign Account Tax Compliance
    Act (FATCA). We also had to update our systems to reflect the passage
    of the tax extender legislation in December.
        Even with the demonstrated capacity of our workforce to meet these
    challenges to successfully open filing season on time, I remain deeply
    concerned that the significant reductions in the IRS budget will
    degrade the agency's ability to continue to deliver on its mission
    during filing season and beyond. In fact, one of my highest priorities
    since becoming Commissioner has been to advise Congress about the
    ramifications of continued substantial cuts to our funding, and that is
    what I will focus on in my testimony today.
        IRS funding has been reduced $1.2 billion over the last 5 years,
    dropping to $10.9 billion in fiscal year 2015. That level is $346
    million below the enacted level for fiscal year 2014. But the total
    reduction from fiscal year 2014 is actually closer to $600 million when
    accounting for nearly $250 million in mandatory costs and inflation.
        The IRS is now at its lowest level of funding since fiscal year
    2008. When inflation is taken into account, the current funding level
    is comparable to that of 1998. Since then, however, the number of
    individual and business tax filers has increased by more than 30
    million, or 23 percent, along with an increase in the number of
    legislative mandates that the IRS is required to implement.
              impact of budget cuts on fiscal year 2015 operations
        There is simply no way around the severity of the budget cuts
    without taking some difficult steps. Essentially, we are at the point
    of having to make very critical performance tradeoffs. I recently
    worked with IRS senior leadership to determine how to allocate our
    limited resources based on our final fiscal year 2015 budget numbers.
    We reviewed our operations to determine where we could make cuts that
    would have the smallest possible impact on taxpayers and tax
    administration. In making these decisions, we strove to maintain a
    balanced and fair approach, keeping in mind the needs of both service
    and enforcement, to avoid overly harming one part of our mission in the
    attempt to maintain another.
        Let me now describe for this subcommittee the difficult decisions
    we made to absorb the latest round of budget cuts, and the impact of
    those decisions.
      --Delays to critical information technology (IT) investments of more
            than $200 million.--We anticipate that these delays will reduce
            taxpayer service and cost-efficiency efforts, as well as reduce
            outside contractor support for critical IT projects. For
            example, we are being forced to delay replacement of aging IT
            systems. While we have made some progress in modernizing these
            systems, more than 50 applications are still in need of
            replacement. Delays to our IT investment harm our ability to
            protect taxpayer data; combat tax fraud and schemes; address
            non-compliance that contributes to the tax gap; and fight
            against cyber-attacks. In addition, we will not be able to
            invest upfront money to develop future capabilities, such as
            improved Web services that would enable taxpayers to more
            easily obtain information and improve their interaction with
            the IRS.
      --Enforcement cuts of more than $160 million.--We estimate the agency
            will lose through attrition about 1,800 key enforcement
            personnel during fiscal year 2015 that we will not be able to
            replace. We anticipate the outcome will be fewer audits and
            fewer resources focused on collection. We estimate that as a
            result of these enforcement cuts the Government will lose at
            least $2 billion in revenue. In addition to this loss, the
            curtailment of enforcement programs is extremely troublesome
            because these programs help create a deterrent effect that is
            the key to preserving high levels of voluntary compliance and
            maintaining the integrity of the Nation's tax system.
      --Reductions in staffing during filing season totaling more than $180
            million.--Normally, the IRS uses employee overtime and
            temporary staff to provide the extra resources needed during
            the busy filing season. However, the IRS will be reducing
            overtime and seasonal staff hours during fiscal year 2015. We
            anticipate that these cuts will result in delays in refunds for
            some taxpayers. People who file paper tax returns could wait an
            extra week--or possibly longer--to see their refund. Taxpayers
            with errors or questions on their returns that require
            additional manual review will also face delays in getting their
            refunds. It is also expected that taxpayers will have to wait
            longer to get answers to their questions from the IRS.
            Responses to written correspondence will take longer, and
            taxpayers will have more difficulty getting through to the IRS
            on the phone and in person. Our phone level of service (LOS)
            was at 54 percent at the start of the current filing season. As
            we have gotten further into the filing season, LOS has
            continued to deteriorate, dropping below 50 percent. This means
            that fewer than half of the people who try to reach the IRS by
            phone, will end up getting through. That is significantly below
            the fiscal year 2014 average of 64 percent, which was itself
            below desired levels. Those who do reach the IRS are facing
            extended wait times that are unacceptable to all of us.
      --Continuing the agency hiring freeze.--The IRS is extending the
            exception-only hiring freeze that began in fiscal year 2011
            through fiscal year 2015. As a result, and assuming normal
            attrition rates, the IRS expects to lose approximately 3,000
            additional full-time employees in fiscal year 2015. That would
            bring the total reduction in full-time staffing since fiscal
            year 2010 to over 16,000. This reduction in staffing will have
            continued negative impacts on taxpayer service and enforcement
            as noted above.
        Even with all of these reductions, the IRS still faces a
    significant budget shortfall for fiscal year 2015. We have taken and
    continue to take steps to try to close this gap. As stated in the past,
    one of our concerns has been the possibility of a shutdown of IRS
    operations for 2 days later this fiscal year, which would involve
    furloughing employees on those days. If this does become necessary, our
    goal will be to minimize disruption to taxpayers, employees, and our
    operations. We have made it clear we would do the best we can to avoid
    taking this drastic action. We have been monitoring the situation on a
    regular basis, and at this point we are hopeful we can avoid a shutdown
    of the agency this fiscal year.
        In discussing the agency's budget, it is important to point out
    that the IRS has been working and continues to work to find savings and
    efficiencies wherever possible, so as to absorb the reductions to our
    funding that have occurred since fiscal year 2010. This has not been
    easy, because labor costs are by far the largest portion of the IRS
    budget. In fact, approximately 75 percent of our budget represents
    staffing, which is critical to providing adequate levels of taxpayer
    service and maintaining robust compliance programs. Moreover, it is not
    possible to shift enforcement personnel into service jobs, or vice
    versa, without providing them with substantial training, which, of
    course, is resource-intensive. Nonetheless, the IRS has for several
    years made considerable effort to find efficiencies in our operations.
    For example, the IRS has implemented significant reductions in its non-
    labor spending.
        The agency reduced annual travel and training expenditures by $248
    million, or 74 percent, between fiscal year 2010 and 2014. Any such
    expenses of $50,000 or more must be reviewed and approved personally by
    me and then by the Treasury Department. Therefore, at this point, I am
    satisfied that there are no excesses in these areas, and that there
    have been none for quite some time.
        Additionally, in an effort to promote more efficient use of the
    Federal Government's real estate assets and to generate savings, in
    2012 the agency began a sweeping office space and rent reduction
    initiative. We estimate that these measures have reduced rent costs by
    more than $47 million each year and reduced total IRS office space by
    more than 1.8 million square feet.
        We will continue our efforts to find savings and efficiencies
    wherever we can. For example, we continue to evaluate our space needs,
    and under the processes we now have in place, each time a lease comes
    up for renewal we carefully consider whether to renew it. In fact, a
    few weeks ago the agency cancelled a lease in New York City, which will
    save us about $4.5 million in fiscal year 2015, and $15 million over
    the life of that lease. We will continue to review all upcoming real
    estate transactions to make sure we are as cost effective as possible.
        But there is a limit to how much we can do in the area of finding
    cost efficiencies. And as I said in my testimony to the Appropriations
    Committees almost 1 year ago, the cuts to the IRS are so significant
    that efficiencies alone cannot make up the difference.
              the administration's fiscal year 2016 budget request
        The President's fiscal year 2016 budget provides $12.93 billion for
    the IRS. This amount includes $12.3 billion in base discretionary
    resources, an increase of $1.3 billion from fiscal year 2015, allowing
    us to make strategic investments to continue modernizing our systems,
    improving service to taxpayers, and reduce the deficit through more
    effective enforcement and administration of tax laws. The budget also
    proposes a $667 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. This multi-
    year effort is expected to generate $60 billion in additional revenue
    over the next 10 years at a cost of $19 billion over that 10 year
    period, thereby reducing the deficit by $41 billion.
        It is fair to ask what value the American taxpayer would receive
    for this increase in funding requested by the President. Let me detail
    for you several notable examples of how the IRS intends to spend these
    additional funds:
        Improve taxpayer service: $301.5 million.--This additional funding
    will allow the IRS to meet the expected increase in demand for taxpayer
    services in fiscal year 2016, through the hiring of approximately 3,000
    additional staff to increase the telephone level of service to an
    acceptable level of 80 percent. Resources are also needed to meet the
    increased demand for taxpayer face-to-face assistance resulting from
    ACA implementation; expand staffing to assist with managing the ACA
    submission processing workload; and provide advanced technology to
    electronically receive amended returns.
        Leverage new technologies to advance the IRS mission and enhance
    service options for taxpayers: $107.8 million.--This additional funding
    combines two programs that leverage new technologies, one of which
    ($91.6 million) will assist the IRS in advancing its mission generally
    and another ($16.2 million) that will enhance service options. Together
    the programs will provide the foundation for the IRS to develop, over
    several years, an IT-based strategy that will help improve the online
    filing experience for taxpayers. The strategy will focus on enhancing
    the filing experience by understanding taxpayers' service channel
    preferences. By creating new digital capabilities and reducing the
    burden on taxpayers, the strategy will allow for earlier and more
    efficient engagement between the IRS and taxpayers. This initiative
    will improve the speed and convenience of interacting with the IRS. The
    funding will be used to implement a new Enterprise Case Management
    (ECM) solution for performing standard case management functions across
    the IRS, which will allow us to operate more efficiently; expand the
    capabilities of the existing Customer Account Data Engine (CADE 2)
    database; provide secure digital communications between taxpayers and
    the IRS; and continue development of the fraud detection, resolution,
    and prevention Return Review Program (RRP).
        Improve upfront identification and resolution of identity theft
    returns: $18.9 million.--This additional funding will strengthen the
    integrity of the tax system by improving the IRS' ability to detect and
    prevent improper refunds. Resources will allow the IRS to expand
    programs to prevent identity theft-related refund fraud, protect
    taxpayer identities and assist victims of identity theft.
        Implement ACA: $490.4 million.--This additional funding, the
    majority of which is for required information technology upgrades, will
    allow the IRS to increase efforts to ensure compliance with a number of
    tax-related provisions of the ACA, including the premium tax credit and
    individual shared responsibility provision. The funding will provide
    enhanced technology infrastructure and applications support, and allow
    necessary, major modifications to existing IRS tax administration
    systems. A portion of the funding also addresses new audit requirements
    related to the employer shared responsibility provision.
        Implement FATCA: $71.0 million.--With this additional funding, the
    IRS will invest in advanced technology to allow the agency to continue
    implementing FATCA, which in turn will provide more information to us
    on offshore accounts of U.S. citizens. FATCA includes new reporting and
    withholding requirements for foreign financial institutions. In order
    to properly process and analyze the data we receive as a result of
    these new requirements, the IRS will need to build new technology
    systems and modify existing systems. This initiative provides funding
    for enforcement staff to implement FATCA's new reporting and disclosure
    requirements, and thus will allow the IRS to address foreign
    withholding compliance and expand coverage of international tax return
    filings. As a result of these activities, we project additional annual
    enforcement revenue of $155.1 million once new hires reach full
    potential in fiscal year 2018, an ROI of $2.3 to $1.
        Sustain critical IT infrastructure: $188.5 million.--This
    initiative will restore resources for mainframes, servers, laptops,
    network devices, and communication equipment to keep IT infrastructure
    (hardware and software) current for existing and newly developed IRS IT
    systems. The IRS' IT division provides technology services and
    solutions that drive effective tax administration, improve service,
    modernize systems, and ensure the security and resiliency of IRS
    information systems and data. With this funding, the IRS will be able
    to enhance systems security to help anticipate and protect against
    evolving threats; increase reliability of enterprise infrastructures to
    support increased electronic filing; increase the use of cloud and
    virtual environments; and expand the use of the next generation of
    advanced telecommunication technologies.
        Program integrity enforcement and compliance increases.--Enactment
    of the program integrity cap adjustment proposal would facilitate
    funding for high return on investment (ROI) revenue-producing
    enforcement and compliance initiatives, including the following:
      --Prevent refund fraud and identity theft: $82.2 million.--This
            additional funding will provide for additional staffing and
            investments in advanced technologies needed to handle the
            increased workload associated with identity theft and refund
            fraud. Specifically, the funding will help the agency improve
            upfront identification and resolution of identity theft;
            address the backlog of identity theft cases associated with
            pre-refund and post-refund compliance activities; recover
            erroneous refunds due to fraud; prevent prisoner tax refund
            fraud; stop refund fraud by limiting the number of refunds that
            can be sent to a single bank account; continue the expansion of
            the specialized Criminal Investigation (CI) Identity Theft
            Clearinghouse that processes identity theft leads; and invest
            in information technology projects to reduce identity theft and
            stop fraudulent tax refunds before they are paid. We project
            that investment in these activities will protect nearly $1
            billion in revenue once the new hires carrying out these
            activities reach full potential in fiscal year 2018, a return
            on investment (ROI) of $13.2 to $1.
      --Address offshore tax evasion: $40.7 million.--This additional
            funding will allow us to expand our efforts to identify and
            pursue U.S. taxpayers with undisclosed offshore accounts.
            Funding will allow the IRS to: promote voluntary compliance
            with U.S. laws through strategic enforcement actions directed
            at identifying U.S. taxpayers involved in abusive offshore tax
            schemes through banks, other financial institutions and third
            party structures; expand information gathering and data
            analysis to identify promoters or facilitators of abusive
            offshore schemes; and expand the pursuit of international tax
            and financial crimes as well as grow the IRS attache presence.
            We estimate these activities will produce additional, direct
            annual enforcement revenue of approximately $159.6 million once
            the new hires carrying out these activities reach full
            potential in fiscal year 2018. That is an ROI of $3.7 to $1.
      --Increase audit coverage: $161.8 million.--This additional funding
            will allow the IRS to hire additional personnel to improve our
            examination efforts in regard to individuals. Tight budget
            constraints have eroded the examination staff available to
            conduct audits, causing the individual audit coverage rate to
            decline below 0.9 percent. Reduced coverage causes increased
            risk to the integrity of the voluntary compliance system. The
            funding will help the agency begin the multiyear process of
            reversing that trend, by providing additional field employees.
            The funding will also allow the agency to increase individual
            and business document matching programs to identify and reduce
            income misreporting. These activities are expected annually to
            produce additional enforcement revenue of approximately $1.3
            billion once the new hires reach full potential in fiscal year
            2018, an ROI of $8 to $1.
      --Improve audit coverage of large partnerships: $16.2 million.--This
            additional funding will allow the IRS to increase the number of
            agents with specialized knowledge in partnership law,
            strengthen enforcement activities relating to flow-through
            entities, and improve compliance by enhancing IRS processes and
            procedures with respect to Tax Equity and Fiscal Responsibility
            Act (TEFRA) partnerships. As a result, we expect to produce
            additional annual enforcement revenue of approximately $129.1
            million once the new hires reach full potential in fiscal year
            2018, an ROI of $7.6 to $1.
      --Enhance collection coverage: $122.8 million.--This additional
            funding will help the IRS work its collection inventory and
            bring taxpayers who fail to pay their tax debts into
            compliance. IRS will address growing collection case
            inventories and call volumes that have resulted from reduced
            staffing levels in recent years; increase coverage of the
            growing number of employment tax collection cases with respect
            to business taxpayers; provide resources to reach out to
            taxpayers earlier in the collection process; help taxpayers
            experiencing economic hardship resolve their liabilities
            through the Offers in Compromise (OIC) program; and improve the
            capability to identify nonfilers of business returns. As a
            result of these activities, we project additional annual,
            direct enforcement revenue of approximately $1.2 billion once
            new hires reach full potential in fiscal year 2018, an ROI of
            $9.0 to $1.
      --Improve efforts in the tax-exempt sector: $23.5 million.--This
            additional funding will help the IRS to build and maintain
            public trust by: anticipating and addressing the tax-exempt
            sector's needs; encouraging voluntary compliance; and
            effectively enforcing the law to ensure compliance. The IRS
            will be able to accomplish the following: enhance the
            streamlined application process for exempt organizations
            seeking tax-exempt status; protect participants in retirement
            plans and their assets, which total more than $23 trillion;
            provide voluntary correction opportunities related to
            employment taxes and retirement plans; improve service and
            compliance by integrating three separate determination
            application systems into one end-to-end system; and focus
            resources on areas with the greatest risk, so that resources in
            the Tax Exempt and Government Entities arena are developed and
            deployed appropriately.
      --Pursue employment tax and abusive tax schemes: $17.2 million.--This
            additional funding will improve our efforts in the core
            enforcement areas of corporate fraud, employment tax, and
            abusive tax schemes, which will increase the number of
            convictions and assessments of unpaid tax. A portion of the
            funding will be used to acquire computer software that will
            enable the IRS to detect corporate fraud and abuse. With this
            software tool, the IRS will be able to identify schemes by
            linking together multiple potentially fraudulent returns or
            information items. These resources will improve the sharing of
            information among the agency's operating divisions, and expand
            the IRS' capability to identify significant tax cases.
      --Consolidate and modernize IRS facilities: $85.5 million.--This
            initiative will provide space renovation resources needed to
            alter and reduce office space throughout the IRS inventory and
            realize an estimated annual rent savings of $23 million. The
            IRS plans to reinvest the rent savings from this initiative to
            fund rent increases for the remaining buildings and for other
            new space reduction projects. Space reductions and
            consolidation strategies include reducing workstation size in
            accordance with revised National Workplace Standards; workspace
            sharing for frequent teleworkers and employees who work outside
            of their assigned post of duty more than 80 hours per month;
            realignment of occupied workspace; and consolidation of vacant
            workspace.
      --Improve IRS financial accounting systems: $12.2 million.--This
            additional funding will help the IRS with more timely and
            accurate reporting of data on the revenue we collect. The
            funding will also be used to make necessary system and
            programming changes to comply with various Federal mandates,
            and to stay current with internal changes made to IRS's tax
            processing systems for tax administration that also affect
            financial reporting.
        Along with the funding request, we are also asking for Congress's
    help legislatively. In that regard, let me highlight several important
    legislative proposals in the President's fiscal year 2016 budget that
    would help to narrow the tax gap and reduce erroneous and fraudulent
    refunds, including fraud resulting from identity theft. Overall, the
    legislative proposals to strengthen tax administration, improve
    compliance by business, and expand information reporting would increase
    revenue by $84 billion over the next 10 years, of which $60 billion
    would come from enacting program integrity cap adjustments.
      --Acceleration of information return filing due dates.--Under current
            law, most information returns, including Forms 1099 and 1098,
            must be filed with the IRS by February 28 of the year following
            the year for which the information is being reported, while
            Form W-2 must be filed with the Social Security Administration
            (SSA) by the last day of February. The due date for filing
            information returns with the IRS or SSA is generally extended
            until March 31 if the returns are filed electronically. The
            budget proposal would require these information returns to be
            filed earlier, which would assist the IRS in identifying
            fraudulent returns and reduce refund fraud, including fraud
            related to identity theft.
      --Correctible error authority.--The IRS has authority in limited
            circumstances to identify certain computation errors or other
            irregularities on returns and automatically adjust the return
            for a taxpayer, commonly known as ``math error authority.'' 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 budget proposal to replace the existing specific
            grants of this authority with more general authority covering
            computation errors and incorrect use of IRS tables. Congress
            could also help in this regard by creating a new category of
            ``correctible errors,'' allowing the IRS to fix errors in
            several specific situations, such as when a taxpayer's
            information does not match the data in certain government
            databases.
      --Authority to regulate tax return preparers.--The budget proposal
            would provide the agency with explicit authority to regulate
            all paid tax return preparers. The regulation of all paid tax
            return preparers, in conjunction with diligent enforcement,
            would help promote high quality services from tax return
            preparers, improve voluntary compliance, and foster taxpayer
            confidence in the fairness of the tax system.
      --Preparer penalty.--Under current law, the penalty imposed on
            preparers for understatement of tax on a Federal return due to
            an unreasonable position taken on the return is the greater of
            $1,000 or 50 percent of the income derived by the preparer from
            preparation of the return. A separate penalty can be imposed if
            the understatement is due to the preparer's willful or reckless
            conduct. That penalty is the greater of $5,000 or 50 percent of
            the income derived by the preparer from preparation of the
            return. The administration's proposal would increase the
            penalty in cases of willful or reckless misconduct to the
            greater of $5,000 or 75 percent of the income derived by the
            preparer (instead of 50 percent). This proposal is necessary
            because in many cases, 50 percent of income derived by the
            preparer is far greater than the fixed dollar penalties
            imposed, so that, under the present penalty regime, preparers
            who engaged in reckless or willful conduct would end up paying
            the same dollar penalty as preparers whose conduct did not rise
            to that level.
      --Due diligence.--Return preparers who prepare tax returns on which
            the Earned Income Tax Credit (EITC) is claimed must meet
            certain due diligence requirements. In addition to asking
            questions designed to determine eligibility, the preparer must
            complete a due diligence checklist (Form 8867) for each
            taxpayer, which is filed with the taxpayer's return. The
            administration's proposal would extend the due diligence
            requirements to all Federal income tax returns claiming the
            Child Tax Credit (CTC) and the Additional Child Tax Credit. The
            existing checklist would be modified to take into account
            differences between the EITC and CTC.
        There are a number of other legislative proposals in the
    administration's fiscal year 2016 budget request that would
    specifically assist the IRS in its efforts to combat identity theft.
    They include the following:
      --Providing Treasury and the IRS with authority to require or permit
            employers to mask a portion of an employee's Social Security
            Number (SSN) on W-2s, an additional tool that would make it
            more difficult for identity thieves to steal SSNs;
      --Adding tax-related offenses to the list of crimes in the Aggravated
            Identity Theft Statute, which would subject criminals convicted
            of tax-related identity theft crimes to longer sentences than
            those that apply under current law; and
      --Adding a $5,000 civil penalty to the Internal Revenue Code for tax-
            related identity theft cases, to provide an additional
            enforcement tool that could be used in conjunction with
            criminal prosecutions.
        In discussing legislative proposals in the President's fiscal year
    2016 budget, it is also important to mention streamlined critical pay
    authority. The IRS Restructuring and Reform Act of 1998 increased the
    IRS' ability to recruit and retain a handful 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, and that required expertise of an extremely high level in an
    administrative, technical or professional field. This authority expired
    at the end of fiscal year 2013, and the President's fiscal year 2016
    budget proposes reinstating it. We greatly appreciate the action taken
    last year by the Senate Appropriations Committee to renew streamlined
    critical pay, the absence of which has created major challenges for us.
        The agency has already lost or will soon lose several senior
    experts in areas such as international tax, IT cyber security, online
    services and analytics support. Streamlined critical pay authority is
    an invaluable tool in our effort to replace them with people of the
    same high caliber expertise. It is my hope that this critical program,
    which ran effectively for 14 years before it expired, will be
    reinstated. Again, I appreciate the Appropriations Committee's support
    for streamlined critical pay authority, and hope that support will be
    forthcoming again this year.
                 critical need to further modernize it systems
        In looking to the future, we believe that it is not an option to
    stay at our current level of funding, given the extent to which both
    taxpayer service and enforcement will suffer as a result. It is
    especially troubling to me that these cuts prevent us from fully
    improving and modernizing our IT infrastructure and operations support.
    This hurts taxpayers and the entire tax community.
        Earlier in this testimony I described some examples of IT projects
    that must be deferred as a result of budget reductions in fiscal year
    2015. But the problem is much broader. We are operating with antiquated
    systems that are increasingly at risk, as we continue to fall behind in
    upgrading both hardware infrastructure and software. Despite more than
    a decade of upgrades to the agency's core business systems, we still
    have very old technology running alongside our more modern systems.
    This compromises the stability and reliability of our information
    systems, and leaves us open to more system failures and potential
    security breaches.
        In regard to software, we still have applications that were running
    when John F. Kennedy was President. Also, we continue to use a decades-
    old programming language that was already considered outdated back when
    I served as chairman of the President's Council on Year 2000
    Conversion, and it is extremely difficult to find IT experts who are
    versed in this language. I give our IT employees a tremendous amount of
    credit, as keeping things going in the face of these challenges is
    really a major accomplishment.
        It is important to point out that the IRS is the world's largest
    financial accounting institution, and that is a tremendously risky
    operation to run with outdated equipment and applications. Our
    situation is analogous to driving a Model T automobile that has
    satellite radio and the latest GPS system. Even with all the bells and
    whistles, it is still a Model T. Our core IT systems are not
    sustainable without significant further investment over the next few
    years, and I look forward to working with you on this in the future.
        The concerns I have about the IRS' IT funding level relate not only
    to the negative impact these cuts have on the present operations of the
    agency, but also the impact on our ability to advance the agency into
    the future and provide a more up-to-date and efficient tax filing
    process for the taxpaying public.
        The experience that taxpayers have with the IRS should give them
    confidence in knowing they can take care of their tax obligations in a
    fast, secure, transparent, and consistent manner. This is not an
    unrealistic goal. We're not trying to go to the moon. We're simply
    saying that people should expect the same level of service when dealing
    with the IRS as they have now from their financial institution, whether
    it's a bank, brokerage, or mortgage company.
        To the extent possible within our budget constraints, the IRS has
    already made some significant improvements in its technology to better
    serve taxpayers. For example, one of the most popular features on
    IRS.gov is the ``Where's My Refund?'' electronic tracking tool, which
    reduces phone traffic the IRS receives regarding questions about
    refunds. Taxpayers have already used this tool more than 125 million
    times so far this year.
        Another good example is IRS Direct Pay, which provides taxpayers
    with a secure, free, quick, and easy online option for making tax
    payments, thereby reducing the need for the IRS to process payments by
    check. Still another example is Get Transcript, a secure online system
    that allows taxpayers to view and print a record of their IRS account
    in a matter of minutes, which saves taxpayers time and reduces IRS
    resources needed to process paper requests for transcripts.
        While these are important steps forward, more needs to be done. We
    have begun to ask ourselves what the online filing experience ought to
    look like 3 to 5 years down the road, and what it would take to make
    that a reality. In the future, most things that taxpayers do to fulfill
    their tax obligations could be done virtually, and there would be much
    less need for in-person help or for calling the IRS. The idea is that
    taxpayers would have an account at the IRS where they could log in
    securely, get all of the information about their account, and interact
    with the IRS as needed.
        Improving service to taxpayers in this way can also help us on the
    compliance side of the equation. In this future state, the IRS could
    identify problems in tax returns shortly after a return is filed, and
    interact with taxpayers as soon as possible. That way, those issues
    could be corrected while tax records are available without costly
    follow-up contact or labor-intensive audits.
        While the President's fiscal year 2016 budget makes important
    investments in IT to help build this approach, it is not an approach
    that we will be ready to fully implement within the next year. We want
    to make it a reality in the future, some years from now. Of course, how
    quickly we can deliver on this vision will depend on future levels of
    agency funding.
                                   conclusion
        Chairman Boozman, Ranking Member Coons, and members of the
    subcommittee, thank you again for the opportunity to discuss the IRS
    budget and current operations. Given the impacts we are already seeing
    on our ability to deliver on our mission, I believe it is vital that we
    find a solution to our budget problem, so that the IRS can be put on a
    path to a more stable and predictable level of funding. I look forward
    to working with Congress to do just that. This concludes my statement,
    and I would be happy to take your questions.

        Senator Boozman. What I would like to do is go ahead and go
    to you, Senator.
        Senator Mikulski. Go ahead, and then if I could--you go
    ahead, and then I will come in.
        Senator Boozman. Okay. Thank you very much.
        Thank you again for being here today, and I appreciate your
    testimony.

                               IRS ACCOUNTABILITY

        The problem is, is lack of confidence, and we can go all
    through these things. But IRS targeting, hiring people that had
    left, rehiring people that had left with bad records. Some of
    them actually having marked on their file ``don't hire.''
        Tax refunds for prisoners, 25 percent earned income tax
    credit fraud. The IG, no safeguards--or not no safeguards, but
    not enough safeguards on sensitive information. One employee
    taking home over $1 million--over a million not dollars, a
    million records, and the list goes on and on.
        Whistleblower programs in shambles. Cybersecurity,
    licensures wasting billions of dollars, bonuses to people for
    poor performance records, taking of bank accounts from people
    with little evidence of wrongdoing, still having tax entities
    that are waiting for tax deductions for literally years. And
    still no execution plan on how to implement the ACA that we
    have been aware of.
        So, again, the problem is, is accountability and getting
    some confidence back. So in your budget request, you are asking
    for almost $12.9 billion for the IRS. Even without the request
    for $667 million above current spending limits, you are still
    asking for a $1.3 billion increase.
        For comparison under the Budget Control Act, total
    nondefense discretionary spending for the entire Federal
    Government will increase by only $1.1 billion. Given current
    budget constraints and past history, is it clear--it is clear
    that this request favors hope over reality.
        The question is, are you developing contingency plans on
    how to carry out your mission based on a more realistic budget
    expectation?
        Mr. Koskinen. Well, first, I would note that the difference
    between the IRS and the other agencies is if you give us money,
    we give you more money back. So that in terms of deficit
    reduction, which is a critical issue going forward, it is
    counterproductive when the more the budget and support for the
    IRS get cut, the greater the difficulty we have in collecting
    revenues.
        But I do take the point, and we are continuing to assume
    that one of the options going into the future is that we will,
    in fact, stay at the flat level. In fact, that was our
    assumption going into 2015 when we ended up with a budget cut
    of $350 million, the only major agency in the Government with a
    cut.
        And in fact, we are the only major agency in the Government
    that was not restored to the presequester level. So combined
    together with the cut, we have, in effect, had the impact of
    two sequesters while everyone else is waiting to see what
    happens with the next sequester.
        So as I have told OMB, we are two sequesters ahead of
    everybody else, and so, to that extent, we already have had to
    deal with a very difficult reality----
        Senator Boozman. Very good. Thank you.
        Mr. Koskinen. So we are--we are prepared. All I can tell
    you, last year when I testified, I said if we did not get the
    increase in funding requested for customer service, for
    example, the customer service level was going to drop below 50
    percent, and it has done that.
        To the extent that we do not get additional funding for
    enforcement, I can tell you that the enforcement revenues
    available to the Government are going to decrease by six to
    eight times more than the cut in the budget.
        But we are prepared. As I have always said, we will play
    the hand that is dealt to us. Whatever decisions you make, we
    will abide with them. I will tell you that there are great
    threats to taxpayer service, tax enforcement, and information
    technology.
        Cybersecurity has been a critical issue for us. We get
    attacked 145 million times a year. There is no database that is
    more attractive than our database, and yet we are dealing with
    less and less support for our IT system than we think is
    appropriate.
        So we will deal with whatever you give us, but I can tell
    you that we are significantly underfunded at this point
    already.
        Senator Boozman. Right. How much money did you waste in
    licensure?
        Mr. Koskinen. In where?
        Senator Boozman. In licensure last year.
        Mr. Koskinen. In licensure?
        Senator Boozman. Yes.
        Mr. Koskinen. I don't know if we wasted any money in
    licensure. I don't know. In what sense? You mean in terms of IT
    licensure?
        Senator Boozman. Yes.
        Mr. Koskinen. There is an IT report that we had
    disagreement with in terms of use of licenses for software as
    to whether, in fact, we had lost money on those software
    licenses by not using them, and it was an issue of how you
    measured it. But we have taken actions to make sure, because I
    am a big supporter of IGs, that when they raise an issue like
    that, we deal with it.
        Senator Boozman. Right. And we will visit with the IG about
    that.

                                  IMMIGRATION

        But during a hearing last month, Senator Grassley asked you
    about the tax consequences of the President's unilateral
    actions on immigration and whether it would allow individuals
    to claim billions of dollars in tax benefits for unauthorized
    work.
        Your follow-up letter to him last week that individuals may
    claim up to 3 years of refunds on income even if they were
    working off the books or never paid taxes is truly startling.
    Why are you allowing individuals who cheated by not paying any
    taxes to now claim a refund that will be financed by hard-
    working Americans who have been paying taxes all along?
        Mr. Koskinen. It has to be clear that you are eligible for
    the earned income tax credit only if you had earnings and
    earnings that meet the requirements of the statute. We have
    700,000 undocumented residents who pay taxes every year. They
    use what is called an Individual Taxpayer Identification Number
    (ITIN), which is an identification number for them. They are
    paying even though they are undocumented, and they are already
    paying into the system.
        Anyone who now under the President's program is provided a
    Social Security number would be eligible to file an amended
    return. But they have to then demonstrate that they actually
    had earnings, and they have had to pay taxes on those earnings
    or rather at least file a return. And only then would they be
    eligible.
        A single employee at the low end of the scale without a
    family is eligible to a little less than $600 a year in the
    earned income tax credit. So you have to have worked in those 3
    years. If you file an amended return, you have to provide the
    evidence and the documentation that you worked. You have to
    file taxes on what you earned to be eligible, in fact, for any
    kind of an earned income tax credit payment.
        Senator Boozman. So the statement then that individuals may
    claim up to 3 years of refunds on income even if they were
    working off the books or never paid taxes is not true?
        Mr. Koskinen. No. If they want to file an amended return,
    they have to file for the income they earned. As I noted, there
    are 700,000 undocumented residents filing taxes every year with
    us.
        So to qualify for the earned income tax credit, you have to
    have worked. And if you file a return, you have to provide us
    the documentation that showed you actually had earnings that
    year. You will file taxes on those earnings, and it will be
    factored into then what, if any, earned income tax credit you
    are entitled to. There is not an automatic payment.
        Senator Boozman. The Senator from Maryland.
        Senator Mikulski. Thank you, Mr. Chairman.
        And thank you, Mr. Koskinen.
        First of all, I really appreciate that someone of your
    caliber has decided to continue a life of public service and to
    do it at IRS. The IRS has taken a beating, both in the budget,
    by Members of Congress. We have demonized the men and women who
    work there, and then we underfund it and give them an
    impossible job. And when they can't do the impossible, we
    punish them by giving them even less money. So the impossible
    goes to the catastrophic.
        So I really want to appreciate you just showing up every
    day and trying to run this ship. I really do think the
    President's budget, if not--if we don't fund at the least the
    full close to $13 billion, we are talking about the need to add
    more money in taxpayer service, beefing up enforcement,
    strengthening operations, and looking at these new
    technologies.

                          EMPLOYEE AND FUNDING LEVELS

        So let me get to my question, which goes to service. I am
    concerned that by giving you less money, we end up with more
    fraud and abuse. So tell me how many people have been--what is
    the staff level reduction since 2010?
        Mr. Koskinen. Since 2010, we have lost 13,000 employees. We
    estimate we will lose another 3,000 at the end of fiscal year
    2015. So we will be down a total of an estimated 16,000
    employees.
        Senator Mikulski. Sixteen thousand employees in 4 years?
        Mr. Koskinen. Five years, since 2010.
        Senator Mikulski. Five years. And then, having looked at
    that, I understand from the Taxpayer Advocate that for every
    dollar spent on tax enforcement, we get $6 back. But I am
    concerned about the fraud issues, as I know you are. We have
    talked about it.
        Mr. Koskinen. Right.
        Senator Mikulski. You know, the guys in prison who come up
    with dummy accounts. This recent thing with TurboTax. The--we
    could go through one fraudulent thing after another. What is
    the impact of shrinking amount of money, both in the area of
    enforcement and then the investigation staff and all that you
    have?
        Mr. Koskinen. Well, it cuts across the board because we
    have no choice but to cut across the board. Three-quarters of
    our budget is people. So as we have fewer people, we have to
    have fewer people everywhere.
        We have tried to support and maintain the number of people
    helping taxpayers who have been victims of fraud, but the
    underfunding of our information technology means we have made
    less progress in the development of our filters and our system
    capable of dealing with the influx of those returns. We have
    5,000 fewer revenue agents, officers, and criminal
    investigators.
        So while, again, an increasing percentage of our criminal
    investigation work is focused on tracking down identity thieves
    and those responsible for refund fraud, there is a limit to
    what our revenue agents can do. There is a limit to what our
    criminal investigators can do.
        There is a reference to the earned income tax credit, a
    problem I am very greatly concerned about, and as noted in my
    testimony, we need help from Congress in terms of legislative
    fixes. But there, again, we have a limited number of people to
    do audits in that area as well.
        Senator Mikulski. Well, with this double sequester and the
    reductions that we have--Congress has forced upon you, are you
    having a hard time recruiting people?
        Mr. Koskinen. Well, at this point, we have some difficulty.
    Our only way to get through this year is that, except for
    emergencies, we are not hiring anybody. So when people leave--
    --
        Senator Mikulski. So do you have a freeze?
        Mr. Koskinen. We have a freeze, total freeze. I said we
    have taken 10 percent of what we would save with a total freeze
    for emergencies because it makes no sense, obviously, when
    division heads or senior managers leave not to replace them.
    But as a general matter, we are basically not replacing anyone
    when they leave.
        Senator Mikulski. Well, and when you have a freeze and
    people leave, like in the enforcement area, the investigation
    area, do you replace them?
        Mr. Koskinen. No.
        Senator Mikulski. So it is not only a freeze, but it is a
    freeze on replacement?
        Mr. Koskinen. It is a freeze on replacement--so we are
    having----
        Senator Mikulski. It is not only that you don't hire more--
    --
        Mr. Koskinen. The way we are going to lose 3,000 people
    this year is by simply not replacing those who leave. We have
    1,000 people right now who have applications in to retire. They
    will retire in the near-term future. They won't be replaced.
    That is a significant amount of experience going out the door
    that won't be replaced.
        My concern in the long run is we are going to have an
    employee base that has a kind of baby bust in the middle of it
    because we have been replacing only one in every five over the
    last 2 years. So as you look out into the future, there is
    going to be a time at which we are going to have a gap in our
    experience level. And 3 to 5 years from now, that is going to
    start to be a serious problem for the agency, no matter what we
    do now.

                             PAYROLL PROVIDER FRAUD

        Senator Mikulski. Well, let me go to the impact. I don't
    know--I want to raise an issue related to helping victims of
    the payroll provider fraud problem.
        I have many constituents who were victims of a crime
    related to a company called AccuPay. And as you know, when they
    hire a company, a small business, whether it was a brew pub or
    a home improvement agency, they hire someone to do their books.
    I mean, that is the way they talk about it.
        And then this company, AccuPay, took their money that they
    gave them to pay the taxes, didn't pay IRS, and then kind of
    disappeared. I got into it. I have been trying to get it
    straight. And what I find is that approximately 500 to 600
    businesses were scammed in my State.
        The IRS has only offered 54 offers in compromise to these
    businesses. Remember, they paid the company, who didn't pay
    IRS. So IRS comes back and goes after the brew pub, the home
    improvement, the beauty shop. You know, this is the kind of--
    when we say small business, it is that really Main Street,
    strip mall type business.
        And I put in legislation that requires IRS to do more, but
    they haven't. They just haven't follow my laws. I mean,
    followed my laws, and it has even become an issue with the
    National Taxpayer Advocate and for the Most Serious Problem
    (MSP) Number 21.
        The IRS does not comply with the law regarding victims of
    payroll service provider failure. Can you help me out with
    this, and can you help them out?
        Mr. Koskinen. Yes. We now have a new requirement that is a
    very thoughtful, sensible one in that every time a tax
    preparer, an intermediary payroll provider, makes any change in
    the taxpayer's residence, we will actually notify the
    constituents that their payroll provider has changed their
    address.
        We also, again within the constraints of personnel, are
    trying not only in this area but across the board. Whenever
    anyone misses an estimated tax payment, rather than waiting
    until the end of the year and then chase people, we are going
    to try to more affirmatively reach out and identify when
    payments are not made on a quarterly basis so that we can catch
    these problems earlier.
        Part of the problem with AccuPay was nobody had actually
    known there was a problem until well after the end of the year.
    So now what we are going to try to do with, again, with limited
    resources, to the extent we can, identify where we are not
    getting the quarterly payments of employee taxes that we should
    be getting and both notify the payers as well as the
    intermediaries.
        Senator Mikulski. That is the solution. But can I ask you
    to really look into what the Taxpayer Advocate says that they
    are not complying with the law. Your agency is not implementing
    the law.
        Mr. Koskinen. I will be delighted to look into that. As I
    said, I know we are now in the process of notifying people when
    there are address changes to make sure that people know about
    that.
        Senator Mikulski. No, I got that. But----
        Mr. Koskinen. I will be happy to talk to the Taxpayer
    Advocate. I meet with her regularly and will ensure that we do
    that.
        Senator Mikulski. Yes.
        Mr. Koskinen. In fact, I have asked her last year and this
    year as well to take her 23 most significant challenges that
    she lists every year and to give me the list of those we could
    implement without having to spend more money. Last year, she
    gave me that list, and we implemented most of them, including
    the Taxpayer Bill of Rights. And I have made the same offer to
    her this year.
        I have told her, I said, ``Nina, if you will give me your
    list of things that we should do, the things we could do
    without any expenditure of money, which we obviously don't
    have, we will make a serious effort to do those things.'' And
    this would be one of those.
        Senator Mikulski. Thank you.
        Do you want to take this over? We will give it to you right
    now.
        Senator Boozman. Thank you.
        Senator Mikulski. Thank you.
        Senator Boozman. Thank you, Senator. I think you brought up
    an excellent point.
        The Senator from Kansas.

                             VETERANS ORGANIZATIONS

        Senator Moran. Mr. Chairman, thank you very much.
        Commissioner, a couple of topics. First of all, dealing
    with veterans. My understanding is that the American Legion,
    the National American Legion has been required by the IRS to
    provide tax identification numbers from every post across the
    country when they file their return, and that, they are
    incapable of doing.
        Their charter indicates that they are not a parent
    organization for various American Legion posts across the
    country, and they have been trying to sort this out with the
    IRS without any success. A number of letters and requests have
    been made to the IRS, and if you could bring me up to date on
    this topic?
        And then I would also say that I met with you or your
    predecessor back in 2013 in which the topic was American Legion
    posts across the country were being required to provide the DD-
    214, the service-connected discharge document for every veteran
    that was a member of their post. And my understanding was that
    practice was coming to a conclusion, that the IRS had concluded
    that wasn't a beneficial use of their limited resources.
        I just, in fact, before I walked in this hearing, came from
    a meeting with VFW members who indicate that that circumstance
    is again occurring across the country, that VFW posts now, like
    American Legion posts, are being required to provide the DD-214
    for every post member, which is something very difficult, if
    not impossible, to accomplish. That is the issue that arose in
    2013 that I was assured had come to an end.
        And then, more recently, the American Legion being told
    they must provide the tax-exempt status documentation from
    every post across the country, which they are incapable of
    doing, but also have been unable to receive a response to their
    inquiry from the IRS.
        Mr. Koskinen. I am happy to assume responsibility for
    everything the IRS does, even before I got there at the end of
    2013. So whatever the discussions were in 2013, obviously, I am
    not privy to them.
        I thought we had resolved the issue on the DD-214. If your
    staff would get us the background information, we would be
    delighted to make sure.
        Obviously, our challenge is, again with our limited
    resources and the limited resources of the tax-exempt
    organizations, is to try to ensure, to the extent we can and
    they can, that they are operating within the realm of their
    charters and their exemption. And that involves for veterans
    organizations confirmation that they are basically dealing with
    veterans and not expanding their operations to include
    nonveterans.
        But I take the point, and I thought we had taken the point
    in the past that this has to be done in a reasonable way. We
    can't be layering impossible burdens on top of people.
        So if you will get me the details about that, I would be
    happy to both look into it and get back to you promptly.
        Senator Moran. Does the second and larger aspect of
    American Legion, the national posts, the National American
    Legion being required to provide information from every post
    across the country to the IRS, which is a different issue than
    the one you and I just described, do you know anything about
    that topic?
        Mr. Koskinen. I have not heard that problem. To the extent
    that they are not in control and don't charter and don't
    establish posts across the country, obviously, and don't have
    the records, that wouldn't make much sense either. Again, the
    Employer Identification Number (EIN) issue is primarily for
    payroll taxes and withholding and employee taxes.
        But again, I would be happy to look at both those issues
    for you and let you know the status of them and get back to you
    quickly.
        Senator Moran. Commissioner, based upon your tone and
    words, your response, my assumption is this appears to be
    something that ought to be able to be resolved quickly and
    satisfactorily toward veteran service organizations?
        Mr. Koskinen. Yes. Again, I am not an expert at where we
    are in that and the details of it. But our goal in a lot of
    these areas is primarily to try to make it easy for people to
    establish that they are still operating, serving--within their
    charters and serving the people they were meant to. But we
    ought to be able to figure out how to do that with them in a
    way that works out efficiently.
        Senator Moran. I was surprised because, again, as I say, I
    think in 2013 I think it was your predecessor, the Acting
    Commissioner, assured me that this practice was coming to a
    conclusion. I hadn't heard about it at the local level until,
    as I say, this meeting right before.
        I said, ``I got to go question the IRS Commissioner,'' and
    immediately, they had a request. And this apparently is three
    VFW posts in New York State.
        Mr. Koskinen. I would be happy to look into it. If Acting
    Commissioner Werfel said the process was coming to an end, it
    should have come to an end.
        Senator Moran. All right.
        Mr. Koskinen. If there are residual elements out there, I
    would be delighted to look into them.
        Senator Moran. Thank you very much.

                              TRIBAL ORGANIZATIONS

        Then in regard to a similar question that I asked Secretary
    Lew on this legislation that Congress passed, the Tribal
    General Welfare Exclusion Act, the law stipulates that all
    audits related to benefits under the general welfare exclusion
    should be suspended until tribal advisory committees are
    established and the IRS field agents are properly trained and
    educated in Federal law and how it relates to sovereign
    tribal--I am sorry, sovereign Indian tribes.
        What this issue is, and maybe you are familiar with it?
        Mr. Koskinen. I am familiar.
        Senator Moran. You are? All right.
        Mr. Koskinen. And I met with the tribal leaders late last
    fall when they were here in Washington. It may have been the
    first time an IRS Commissioner had done that.
        Senator Moran. Well, thank you for doing that. I think the
    concern that exists is that the IRS audits continue, even
    though the tribes believe that the issues that are being
    audited are related to the general welfare exclusion. And so,
    my question to you is can you provide me with the standards
    being used to determine whether an audit relates to the general
    welfare exclusion and confirmation that deference is being
    provided to the tribal governments based upon that exclusion?
        Mr. Koskinen. I will be delighted to get you that
    information. My understanding was that had been made clear,
    that the general welfare exclusion applied, and that we would
    honor that. But again, I am delighted to be able to go back,
    check on that, and get back to you quickly.
        So, again, if your staff could just let us know the details
    of where they are hearing that from, again, I can't talk about
    an individual case, but clearly, that was our understanding
    when I met with the tribal leaders that we were going to try to
    have a better working relationship, understand the significance
    of their sovereignty, and make sure that our people, as you
    note, were properly trained and respectful of that sovereignty.
        Senator Moran. Do you have an idea of how many audits have
    been suspended as a result of this requirement of the Exclusion
    Act?
        Mr. Koskinen. I do not.
        Senator Moran. Okay.
        Mr. Koskinen. But I cannot believe there are----
        Senator Moran. And I guess I would ask another question is
    as you provide me information, in addition to how many audits
    have been put on hold, suspended as a result of awaiting the
    training and the appointment of the advisory committees, I
    would ask that if there is a tribe that believes that they--
    that the audit is improper, how do they appeal the decision
    that they are being audited?
        They, in their conversations with me, seemed to have no
    recourse. The IRS is here. They shouldn't be auditing us, but
    we don't know what to do about it.
        So if you could respond----
        Mr. Koskinen. I would be delighted to do that. Every
    taxpayer has a right to our appellate process, which is totally
    independent of our compliance process. But if you will include
    that in your inquiry, we will be delighted to get them the
    roadmap as to what they should be doing to make sure they feel
    they have an appropriate way to raise their concerns.
        Senator Moran. Thank you for responding to both my Native
    American as well as my veteran questions. Thank you.
        Mr. Koskinen. Delighted.
        Senator Boozman. Senator Coons.
        Senator Coons. Thank you, Chairman Boozman.
        And I would associate myself with Senator Moran's expressed
    concerns about the veteran issues in particular, would
    appreciate follow-up on that.
        And although she has departed, I joined the Appropriations
    Committee in no small part because of the fervor and the
    passion and the commitment that the chair and now vice chair,
    Senator Mikulski, demonstrated towards returning us to regular
    order, and her very effective leadership in that will be sorely
    missed at the end of these 2 years.

                                 IDENTITY THEFT

        You identified service and enforcement and IT as sort of
    three core themes where you think funding shortfalls have
    caused real challenges for IRS and taxpayers, and I want to
    touch on a few of those. Take to the Treasury Inspector General
    for Tax Administration identified security for taxpayer data as
    its number-one priority challenge for you this year, and I
    assume that is not unrelated to your IT investments.
        Let me talk, if I could, for a moment about identity theft
    and combating refund fraud. Your estimate was you paid out $5.8
    billion in identity theft refunds in tax year 2013. Just tell
    me a little bit more about your strategy for dealing with
    refund fraud and identity theft.
        Is it comprehensive enough and aggressive enough to keep
    pace with fraudsters who keep finding more and more
    sophisticated ways either to hack in and access or to take
    advantage of different schemes? And what measures would help
    the IRS better detect fraud and halt fraud schemes before they
    get out of hand?
        Mr. Koskinen. Right. It has been historically a growing
    problem. It exploded in the 2010 to 2012 timeframe and
    overwhelmed law enforcement as well as the IRS. We have made
    significant progress, but to some extent, the point you raise
    is the important one to know. That, as I have said, we have
    gotten over 2,000 convictions of people going to jail for an
    average of 40 months or higher. And we have gotten a lot of the
    individuals, including prisoners, identified and prosecuted.
        But what we are finding, not surprisingly, because it is
    consistent across all the cyber areas, is that we are
    increasingly dealing with organized crime syndicates here and
    around the world. We are dealing with people not filing just
    one return at a time, but people filing 500 returns at a time.
    People who are reverse engineering our filters, trying to
    figure out what gets through, and adjusting accordingly as they
    go.
        So we have continued over the last 3 or 4 years to increase
    our investigations and prosecutions on the one hand, while
    increasing the level of sophistication of our filters on the
    other. Last year, we stopped approximately 5 million refunds
    before they went out because of suspicions about identity theft
    and refund fraud. Unfortunately, we estimate that 300,000 to
    500,000 taxpayers will have their identity stolen, and refund
    fraud as a result of that, as we go forward.
        We have doubled, even with the resource constraints, the
    number of people helping taxpayers. We have got over 3,000
    people focused on working with taxpayers with identity theft.
    It used to take us a year. Now our goal is to get them resolved
    in less than 120 days.
        Part of our challenge with the funding is while this is a
    high priority, there is a limit to all of the priorities we
    have. So we have been slower at developing more sophisticated
    fraud filters and detection devices than we would like to have
    been, but we are making progress.
        This year, we are stopping more returns at the front end
    before they are processed than we did last year as a result of
    the improvements. But if we had the funding we are suggesting
    for next year, we would actually be able to get to a point
    where we would be even more effective.
        In terms of additional tools, across the board, if we got
    W-2 information returns earlier, it would help us
    significantly. We also are working on legislation requirements
    that if we could get, in effect, unique identifiers to every W-
    2, which would be easy enough to do, we would be able to
    identify legitimate W-2s.
        There is a move afoot by criminals to form false
    corporations, get false EINs, and file false W-2s, for which
    they would then file a return against those. So both those
    legislative fixes would be significantly important for us.
        Senator Coons. Well, thank you for the input.
        Let me just raise with you the Taxpayer Advocate, in terms
    of dealing with those who have been victims of identity fraud,
    has advocated an approach that would assign a single account
    representative to tax-related identity theft of victims to help
    them navigate the case rather than be frustrated by having
    several different IRS employees handle it.
        Is that something you are intending to implement? What is
    the direction on that?
        Mr. Koskinen. Well, we have done what we think is the
    appropriate response to that over the last couple years. That
    is, and we are just completing it now, is move all of the
    refund fraud activity into a single location. It used to be
    spread throughout the agency. So there is, in fact, a single
    point of contact working these issues.
        The Taxpayer Advocate's suggestion is then we have an
    individual employee who is assigned to each of the 300,000 to
    500,000 taxpayers, working their way through. We disagree with
    that only in the sense if you think of your experience dealing
    with call centers anywhere else, whether you call Amazon or a
    bank or someone else, when you get assistance, you get a case
    number. You get help. But the next time you call back, you
    don't ask for Joan or Susan because Joan or Susan may be on
    vacation. They may be talking to somebody else. They may be out
    of the office.
        What you want to be able to do is call back in and make
    sure that when you call back in to the single point of contact,
    they know who you are. You don't have to start all over again.
        In the past, many taxpayers have had that experience. They
    got moved from one part of the agency to another. They had to
    start all over again. We don't think----
        Senator Coons. Let me ask----
        Mr. Koskinen. Besides not being cost-effective, we don't
    think if you had to track down your single appointed IRS
    employee that that is a help.

                                TAXPAYER SERVICE

        Senator Coons. Commissioner, in the time I have got left,
    just service levels is a significant concern to me. My
    impression is that roughly a decade ago, the IRS answered 87
    percent of calls in a wait time of 2\1/2\ minutes.
        Your projection, given the significant reduction in your
    workforce, for this taxpaying season is that less than half the
    callers seeking advice and assistance, answers to tax questions
    will ever succeed in having their calls answered, and there is
    an average wait time of 33 minutes.
        What do you think would be an acceptable level of service
    for taxpayers calling the toll-free line trying to get a
    question answered? What dollar amount of increased funding
    would be required to return you to your 2004 service level? And
    what is the consequences--revenue consequences, social
    consequences--of having those who are trying to figure out how
    to comply voluntarily unable to get their questions answered?
        Mr. Koskinen. In the budget, we identify if we had $380
    million applicable in that area, we would be able to bring our
    TAC level of service to 80 percent. We actually think that 85
    percent, 87 percent is the ultimate right number. You don't
    want to be at 100 percent because then you've got a lot of
    people just sitting around waiting for the calls.
        But the waiting time ought to be less than 5 minutes. You
    ought to be able to call, be comfortable you are going to get a
    live assister in less than 5 minutes.
        The impact that we are concerned about, that I am
    personally concerned about, is we focus on how much money we
    collect with our activities and you get six or eight times as
    much as the cost. But enforcement revenues on the one hand and
    activities around taxpayer service on the other, trying to help
    people figure out what they owe and how to pay it, are two
    sides of the compliance coin. And the number I am concerned
    about is that we collect $3 trillion a year in a voluntary
    compliance system.
        If the compliance rate goes down by 1 percent, either
    because people think the chances of getting caught are down or
    because they can't find out the right information or they just
    get aggravated with us, a 1 percent decline in the compliance
    rate costs the Government $30 billion annually. On the 10-year
    window we are looking at, it is $300 billion, besides the fact
    that it is not an on/off switch.
        That goes to the chairman's concern, which I have as well,
    and if people lose confidence in the agency, if they lose
    confidence in the fairness of the system, the risk to us is not
    that our collections will go down, although they will, the real
    risk is what happens to the overall compliance rate? What
    happens to that $3 trillion number?
        And I am concerned about it. The people most concerned
    about our taxpayer level of service are our employees because
    they view the service the taxpayers ought to get, they are
    committed to. And as I go around the country, I have talked to
    13,000 individual IRS employees, and the biggest concern I have
    is not that they are overworked. The biggest concern I hear
    from them is there aren't enough people to be able to provide
    the services to taxpayers that they think is important.
        Senator Coons. Thank you, Commissioner.
        I have additional questions, but I will submit them for the
    record. Thank you, Commissioner.
        Senator Boozman. Thank you for your testimony today,
    Commissioner. I know you have got a big job, and we really look
    forward to working with you in an effort to serve and protect
    the American taxpayer. So thank you for appearing here today.
        At this time, I would like to call forward Inspector
    General George to present his testimony.
        Thank you.
        Mr. Koskinen. Thank you, Mr. Chairman.
        Senator Boozman. Inspector General, please proceed.

               TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

                           DEPARTMENT OF THE TREASURY

    STATEMENT OF HON. J. RUSSELL GEORGE, INSPECTOR GENERAL
        Mr. George. Thank you. Mr. Chairman, Ranking Member Coons,
    thank you for the opportunity to appear today.
        In my testimony, I will address the Internal Revenue
    Service's fiscal year 2016 budget request and specific areas
    where it could perform its mission more effectively. I will
    also address the fiscal year 2016 budget request for TIGTA, the
    Treasury Inspector General for Tax Administration.
        The proposed IRS budget requests appropriated resources of
    $12.9 billion. This is an increase of $2 billion from fiscal
    year 2015 enacted levels. This proposed increase is intended to
    improve taxpayer service levels and enforcement efforts. It
    also provides for critical information technology changes
    related to the Affordable Care Act and other requirements to
    sustain information technology infrastructure.
        We have reported that a trend of lower budgets and reduced
    staffing has affected the IRS's ability to deliver its priority
    program areas, including customer service and enforcement. At
    the same time, it has increased responsibilities of
    implementing certain provisions of the Affordable Care Act.
        The IRS also continues to dedicate significant resources to
    detect and review potential identity theft tax returns and
    assist victims. IRS employees who work the majority of identity
    theft cases are telephone assisters who also respond to
    taxpayers' calls to the IRS's toll-free telephone lines.
        This has contributed to the IRS's inability to timely
    resolve victims' cases, as well as the continued decline in its
    ability to timely respond to taxpayers' written correspondence.
    As of February 14, 2015, the average wait time for the IRS to
    answer a call was 28 minutes, the level of service was only 43
    percent, and its over-age correspondence inventory was 1.3
    million.
        While the IRS faces many resource challenges, TIGTA has
    recently reported on several areas where the IRS can operate
    more effectively. For example, we believe the IRS could save
    about $17 million per year if it allowed taxpayers to
    electronically file amended tax returns, rather than only
    allowing paper returns.
        This would also enable the IRS to use the same validation
    processes that it utilizes to verify originally filed tax
    returns. TIGTA estimates that this could prevent the issuance
    of more than $2.1 billion in potentially erroneous refunds over
    the next 5 years.
        The IRS could also make more informed business decisions
    when determining how to use its limited resources. For example,
    the IRS eliminated or reduced services at taxpayer assistance
    centers. Although the IRS stated that the services eliminated
    or reduced were in part the result of the IRS's anticipated
    budget cuts, the IRS plans did not show to what extent the
    services cut would lower costs. Moreover, it later had to
    reverse certain decisions.
        TIGTA also found that the IRS's field work collection
    process is not designed to ensure that cases with the highest
    collection potential are identified. Additionally, changing the
    law to require third parties to file information returns
    earlier would provide the IRS the opportunity to use the
    information contained on these forms to verify tax returns at
    the time they are processed rather than after refunds are
    issued.
        However, even if the third-party information returns are
    received more timely, the IRS still needs certain authorities
    to more efficiently and effectively use this data. Generally,
    the IRS must audit any tax return it identifies with a
    questionable claim before the claim can be adjusted or denied,
    even if the IRS has reliable data that indicates the claim is
    erroneous.
        The Department of the Treasury has included a legislative
    proposal as part of the IRS's budget request since fiscal year
    2013 to obtain correctable error authority, which would permit
    the IRS to systematically deny all tax claims for which the IRS
    has reliable data showing the claim is erroneous.
        TIGTA estimates that this authority, along with the
    expanded use of the National Directory of New Hires, part of
    the Department of Health and Human Services, could have
    prevented the issuance of more than $1.7 billion in
    questionable earned income tax credit claims in tax year 2012.
        TIGTA's fiscal year 2016 proposed budget requests
    appropriated resources of $167 million, an increase of 5.7
    percent compared to the fiscal year 2015 enacted budget.
    TIGTA's budget priorities include mitigating risks associated
    with tax refund fraud and identity theft, monitoring the IRS's
    implementation of the Affordable Care Act and other tax law
    changes, and assessing the IRS's efforts to improve tax
    compliance involving foreign financial assets and offshore
    accounts.

                               PREPARED STATEMENT

        In addition, investigating allegations of serious
    misconduct and criminal activity by IRS employees, ensuring IRS
    employees are safe, and IRS facilities, data, and
    infrastructure are secure and not impeded by threats of
    violence, and protecting the IRS against external attempts to
    corrupt or otherwise interfere with tax administration will
    continue to take priority.
        Chairman Boozman, Ranking Member Coons, and members of the
    subcommittee, thank you for the opportunity to share my views.
    I am happy to take your questions.
        [The statement follows:]
                  Prepared Statement of Hon. J. Russell George
        Chairman Boozman, Ranking Member Coons, and members of the
    subcommittee, thank you for the opportunity to testify on the Internal
    Revenue Service's (IRS) fiscal year \1\ 2016 budget request, our recent
    work related to the most significant challenges currently facing the
    IRS, and the Treasury Inspector General for Tax Administration's
    (TIGTA) fiscal year 2016 budget request.
    ---------------------------------------------------------------------------
        \1\ The Federal Government's fiscal year begins on October 1 and
    ends on September 30.
    ---------------------------------------------------------------------------
        The Treasury Inspector General for Tax Administration, also known
    as ``TIGTA,'' is statutorily mandated to provide independent audit and
    investigative services necessary to improve the economy, efficiency,
    and effectiveness of the IRS, including the IRS Chief Counsel and the
    IRS Oversight Board. TIGTA's oversight activities are designed to
    identify high-risk systemic inefficiencies in IRS operations and to
    investigate exploited weaknesses in tax administration. TIGTA's role is
    critical in that we provide the American taxpayer with assurance that
    the approximately 91,000 \2\ IRS employees, who collected over $3.1
    trillion in tax revenue, processed over 242 million tax returns and
    other forms, and issued $374 billion in tax refunds \3\ during fiscal
    year 2014, perform their duties in an effective and efficient manner
    while minimizing the risks of waste, fraud, or abuse.
    ---------------------------------------------------------------------------
        \2\ Total IRS staffing as of January 24, 2015. Included in the
    total are approximately 19,000 seasonal and part-time employees.
        \3\ IRS, Management's Discussion & Analysis, Fiscal Year 2014, page
    2.
    ---------------------------------------------------------------------------
             overview of the irs's fiscal year 2016 budget request
        The IRS is the largest component of the Department of the Treasury
    and has primary responsibility for administering the Federal tax
    system. The IRS's budget request supports the Department of the
    Treasury's Strategic Goal of fairly and effectively reforming and
    modernizing Federal financial management, accounting and tax systems
    and the Department of the Treasury Agency Priority Goal of increasing
    self-service and electronic service options for taxpayers.
        The IRS Strategic Plan for fiscal year 2014-2017 provides a central
    direction for the agency and guides program and budget decisions. The
    IRS's strategic goals are to: (1) deliver high quality and timely
    service to reduce taxpayer burden and encourage voluntary compliance,
    and (2) effectively enforce the law to ensure compliance with tax
    responsibilities and combat fraud. To achieve these goals, the proposed
    fiscal year 2016 IRS budget requests appropriated resources of
    approximately $12.9 billion.\4\ The total appropriation amount is an
    increase of $2 billion, or approximately 18 percent more than the
    fiscal year 2015 enacted level of approximately $10.9 billion. This
    increase is illustrated in Table 1. The budget request includes a net
    staffing increase of 9,245 Full-Time Equivalents (FTE) \5\ for a total
    of approximately 90,524 appropriated FTEs.
    ---------------------------------------------------------------------------
        \4\ The fiscal year 2016 budget request also includes approximately
    $127 million from reimbursable programs, $33 million from non-
    reimbursable programs, $450 million from user fees, $386 million in
    available unobligated funds from prior years, and a transfer of $5
    million to the Alcohol and Tobacco Tax and Trade Bureau for a total
    amount of $13.9 billion in available resources.
        \5\ A measure of labor hours in which one FTE is equal to 8 hours
    multiplied by the number of compensable days in a particular fiscal
    year.

               TABLE 1--IRS FISCAL YEAR 2016 BUDGET REQUEST INCREASE OVER FISCAL YEAR 2015 ENACTED BUDGET
                                                     [In thousands]
    ----------------------------------------------------------------------------------------------------------------
                                                               Fiscal year   Fiscal year
                     Appropriations account                   2015 enacted  2016 request    $ change      % change
    ----------------------------------------------------------------------------------------------------------------
    Taxpayer Services.......................................    $2,156,554    $2,408,803      $252,249          11.7
    Enforcement.............................................     4,860,000     5,399,832       539,832          11.1
    Operations Support......................................     3,638,446     4,743,258     1,104,812          30.4
    Business Systems Modernization..........................       290,000       379,178        89,178          30.8
                                                             -------------------------------------------------------
          Total Appropriated Resources......................    10,945,000    12,931,071     1,986,071          18.2
    ----------------------------------------------------------------------------------------------------------------
    Source: Treasury Inspector General for Tax Administration's analysis of the IRS's Fiscal Year 2016 Budget
      Request, Operating Level Tables.

        The three largest appropriation accounts are Taxpayer Services,
    Enforcement, and Operations Support. The Taxpayer Services account
    provides funding for programs that focus on helping taxpayers
    understand and meet their tax obligations, while the Enforcement
    account supports the IRS's examination and collection efforts. The
    Operations Support account provides funding for functions that are
    essential to the overall operation of the IRS, such as infrastructure
    and information services. Finally, the Business Systems Modernization
    account provides funding for the development of new tax administration
    systems and investments in electronic filing.
        As shown in Table 1, the Operations Support budget request for
    fiscal year 2016 increased by over 30 percent or $1.1 billion and 1,820
    FTE compared to fiscal year 2015. The three largest components driving
    this increase are as follows:
      --$495 million (975 FTE) for Information Technology changes related
            to the Affordable Care Act and other requirements to sustain
            critical information technology infrastructure;
      --$118 million (164 FTE) for improved taxpayer service and return
            processing, including efforts to address the projected growth
            in demand for traditional taxpayer services as well as to
            improve taxpayer assistance;
      --$85 million (74 FTE) for consolidating and modernizing IRS
            facilities, including reducing office space to realize an
            estimated annual rent savings of $23 million.
                reductions in the irs's fiscal year 2015 budget
        The IRS's appropriated funding was reduced by $346 million over the
    last year, from $11.3 billion in the fiscal year 2014 enacted budget to
    $10.9 billion in fiscal year 2015. To address this, the IRS reduced
    planned spending in a variety of key areas for fiscal year 2015. The
    areas with the largest cuts are total personnel compensation ($142
    million), equipment ($65 million), communication and utilities ($55
    million), and operation and maintenance of equipment ($42 million). The
    IRS also reduced overall net spending on services by $40 million.\6\
    Finally, the IRS had an exception-only hiring freeze in place during
    fiscal year 2014 which also remains in place in fiscal year 2015.
    ---------------------------------------------------------------------------
        \6\ The overall net reduction in services includes a decrease of
    $100.2 million in other services from non-Federal sources and an
    increase of $60.3 million in advisory and assistance services.
    ---------------------------------------------------------------------------
        Even with these reductions, the IRS Commissioner testified on
    February 3, 2015 \7\ that the IRS still faces a significant budget
    shortfall for fiscal year 2015. As a result, the IRS is planning for
    the possibility of a shutdown of IRS operations for two days later this
    fiscal year, which will involve furloughing employees on those days.
    The IRS Commissioner also testified that these budget cuts will have
    negative impacts on taxpayer service and enforcement. For example, the
    Commissioner stated the IRS will delay replacement of aging information
    technology systems, increasing the risk of downtime and negatively
    affecting taxpayer service. In addition, the Commissioner indicated
    reduced staffing will result in decreased audits and collection
    activities, as well as delays in customer service during the 2015
    filing season.
    ---------------------------------------------------------------------------
        \7\ Written Testimony of John A. Koskinen, Commissioner of the IRS,
    before the Senate Finance Committee, dated February 3, 2015.
    ---------------------------------------------------------------------------
                           challenges facing the irs
        Achieving program efficiencies and cost savings is imperative, as
    the IRS must continue to carry out its mission with a significantly
    reduced budget. TIGTA reported that implementation of the mandated
    sequestration,\8\ coupled with a trend of lower budgets, reduced
    staffing, and the loss of supplementary funding for the implementation
    of the Patient Protection and Affordable Care Act of 2010 and the
    Health Care and Education Reconciliation Act of 2010 (collectively
    referred to as the Affordable Care Act or ACA) \9\ affected the IRS's
    ability to deliver its priority program areas, including customer
    service and enforcement activities.\10\
    ---------------------------------------------------------------------------
        \8\ Sequestration involves automatic spending cuts of approximately
    $1 trillion across the Federal Government that took effect on March 1,
    2013.
        \9\ Public Law No. 111-148, 124 Stat. 119 (2010) (codified as
    amended in scattered sections of Internal Revenue Code and 42 U.S.C.),
    as amended by the Heath Care and Education Reconciliation Act of 2010,
    Public Law No. 111-152, 124 Stat. 1029.
        \10\ TIGTA, Ref. No. 2014-10-025, Implementation of fiscal year
    2013 Sequestration Budget Reductions (June 2014).
    ---------------------------------------------------------------------------
        For example, the IRS's toll-free Level of Service \11\ decreased
    from 68 percent in fiscal year 2012 to 61 percent in fiscal year 2013.
    As of February 14, 2015, more than 26 million taxpayers contacted the
    IRS during the 2015 Filing Season by calling various Accounts
    Management toll-free telephone assistance lines \12\ seeking help to
    understand the tax law and meet their tax obligations. The IRS answered
    more than 9.3 million calls through automated scripts and more than 2.6
    million calls by an IRS assistor. The Average Speed of Answer for an
    IRS assistor-answered telephone call was 28 minutes. As of February 14,
    2015, the IRS reported a 43 percent Level of Service for calls answered
    by an assistor. In addition, as of February 14, 2015, the over-age
    correspondence inventory totaled more than 1.3 million.
    ---------------------------------------------------------------------------
        \11\ The primary measure of service to taxpayers. It is the
    relative success rate of taxpayers who call for live assistance on the
    IRS's toll-free telephone lines.
        \12\ The IRS refers to the suite of 29 telephone lines to which
    taxpayers can make calls as ``Customer Account Services Toll-Free.''
    ---------------------------------------------------------------------------
        Key examination and collection statistics also declined.
    Examinations of individual tax returns decreased approximately 5
    percent from fiscal year 2012 to fiscal year 2013. In addition,
    collection activities initiated by the IRS, such as liens, levies, and
    property seizures, decreased approximately 33 percent during the same
    period. Our analysis of select customer service and enforcement
    statistics indicates that the downward trend in these areas may
    continue.
        For example, budget cuts have resulted in significant declines in
    the IRS collection program.\13\ From fiscal year 2010 to fiscal year
    2014, the budgets for the Automated Collection System (ACS) \14\
    operations and Field Collection were reduced by over $269 million. ACS
    staffing has been reduced by 24 percent since fiscal year 2011, and the
    number of revenue officers has decreased 24 percent since fiscal year
    2011. As a result, in fiscal year 2014 revenue officers closed 34
    percent fewer cases and collected $222 million less than in fiscal year
    2011. ACS contact representatives answered 25 percent fewer calls in
    fiscal year 2014 than in fiscal year 2011 and collected $224 million
    less in fiscal year 2014 than in fiscal year 2011.
    ---------------------------------------------------------------------------
        \13\ TIGTA, Audit No. 201330013, Budget Cuts Resulted in
    Significant Declines in Key Resources and Unfavorable Trends in
    Collection Program Performance, report planned for April 2015.
        \14\ The Automated Collection System consists of 15 call sites with
    contact representatives to engage taxpayers and their representatives
    on resolving unpaid tax debts. Field Collection consists of over 400
    offices across the country through which revenue officers contact
    taxpayers in person to resolve tax debts and secure unfiled returns.
    ---------------------------------------------------------------------------
        At the same time the IRS is operating with a reduced budget, it
    continues to shoulder increased responsibilities as it implements and
    administers provisions of the Affordable Care Act. This filing season
    represents the first time taxpayers must report on their tax returns
    whether they and their dependents maintained minimum essential
    healthcare insurance coverage or face a tax penalty for not maintaining
    this coverage. The IRS must also ensure that the more than 6 million
    individuals who purchased insurance from a Health Care Exchange \15\
    accurately reconcile on their tax returns advance payments of the
    Premium Tax Credit (PTC) \16\ they may have received.
    ---------------------------------------------------------------------------
        \15\ Exchanges are intended to allow eligible individuals to obtain
    health insurance, and all Exchanges, whether State-based or established
    and operated by the Federal Government, are required to perform certain
    functions.
        \16\ A refundable tax credit to assist individuals and families in
    purchasing health insurance coverage through an Affordable Insurance
    Exchange.
    ---------------------------------------------------------------------------
        Since enactment of the Affordable Care Act, these responsibilities
    have required the IRS to develop new information technology, modify
    existing computer systems, and establish new or revised filing,
    reporting, and compliance processes and procedures. The IRS's fiscal
    year 2016 budget request includes $490 million to fund 2,539 FTEs for
    continued efforts related to the implementation of ACA. The largest
    components of this increase are $306 million to implement information
    technology changes to deliver ACA tax credits; $101 million to improve
    taxpayer service and return processing; and $67 million to address the
    impact of new ACA statutory requirements.
        In addition, the IRS continues to dedicate significant resources to
    detect and review potential identity theft tax returns as well as to
    assist victims. Resources have not been sufficient for the IRS to work
    identity theft cases dealing with refund fraud, which continues to be a
    concern. IRS employees who work the majority of identity theft cases
    are telephone assistors who also respond to taxpayers' calls to the
    IRS's toll-free telephone lines. This has contributed to the IRS's
    inability to timely resolve victims' cases as well as the continued
    decline in its ability to respond to taxpayers' written correspondence.
    The allocation of limited resources requires difficult decisions, with
    a focus on balancing taxpayer assistance on the toll-free telephone
    lines during the filing season with other various priority programs,
    such as identity theft and aged work.
        For example, the IRS previously reallocated ACS staff, who attempt
    to collect taxes through telephone contact with taxpayers, to work the
    growing inventory of identity theft cases. The combination of fewer
    resources and the need to continue answering telephone calls has
    contributed to trends that have been unfavorable to several ACS
    business results over the past 4 years. Specifically, we determined
    that inventory is growing because new inventory is outpacing case
    closures; cases in inventory are aging because inventory is taking
    longer to close; revenue declined while more cases were closed as
    uncollectible; and fewer enforcement actions (liens and levies) were
    taken.\17\
    ---------------------------------------------------------------------------
        \17\ TIGTA, Ref. No. 2014-30-080, Declining Resources Have
    Contributed to Unfavorable Trends in Several Key Automated Collection
    System Business Results (Sep. 2014).
    ---------------------------------------------------------------------------
        During the past several years, the IRS has continued to take steps
    to more effectively detect and prevent the issuance of fraudulent
    refunds resulting from identity theft tax return filings. The IRS
    reported that in Filing Season 2013, its efforts prevented between $22
    billion and $24 billion in identity theft tax refunds from being
    issued.\18\ This is a result of the IRS's continued enhancement of
    filters used to detect tax returns with a high likelihood of involving
    identity theft at the time the returns are processed. For example, the
    IRS used 11 filters in Processing Year (PY) 2012 to identify tax
    returns with a high likelihood of involving identity theft, compared to
    114 filters used in PY 2014. The use of these filters assists the IRS
    in more effectively allocating its resources to address identity theft
    tax refund fraud.
    ---------------------------------------------------------------------------
        \18\ IRS Identity Theft Taxonomy, dated September 15, 2014, page 1.
    ---------------------------------------------------------------------------
        The IRS has also taken steps to more effectively prevent the filing
    of identity theft tax returns by locking the tax accounts of deceased
    individuals to prevent others from filing a tax return using their name
    and Social Security Number. The IRS has locked approximately 26.3
    million taxpayer accounts between January 2011 and December 31, 2014.
    In addition, the IRS issues an Identity Protection Personal
    Identification Number (IP PIN) to any taxpayer who is a confirmed
    victim of identity theft or who has reported to the IRS that he or she
    could be at risk of identity theft. Once the IRS confirms the identity
    of a victim or ``at-risk'' taxpayer, the IRS will issue the taxpayer an
    IP PIN for use by the taxpayer when filing his or her tax return. The
    presence of a valid IP PIN on the tax return tells the IRS that the
    rightful taxpayer filed the tax return, thus reducing the need for the
    IRS to screen the tax return for potential identity theft. The IRS has
    issued more than 1.5 million IP PINs for PY 2015.
        Despite these improvements, the IRS recognizes that new identity
    theft patterns are constantly evolving and, as such, it needs to adapt
    its detection and prevention processes. The IRS's own analysis
    estimates that identity thieves were successful in receiving over $5
    billion in fraudulent tax refunds in Filing Season 2013. This will
    require the continued expenditure of resources that could otherwise be
    used to respond to taxpayer telephone calls, answer correspondence, and
    resolve discrepancies on tax returns.
        In addition, TIGTA reported that not all eligible individuals are
    receiving an IP PIN and victims continue to experience delays and
    errors in receiving refunds. Specifically, we reported that the IRS did
    not provide an IP PIN to 557,265 eligible taxpayers for PY 2013.\19\
    Excluding eligible taxpayers from the IP PIN program will delay IRS
    processing of their tax returns and receipt of their tax refund. We
    also reported that the IRS continues to make errors on the tax accounts
    of victims of identity theft.\20\ These errors further delayed refunds
    issued to taxpayers and required the IRS to reopen cases and expend
    limited resources to resolve the errors.
    ---------------------------------------------------------------------------
        \19\ TIGTA, Ref. No. 2014-40-086, Identity Protection Personal
    Identification Numbers Are Not Provided to All Eligible Taxpayers (Sep.
    2014).
        \20\ TIGTA, Audit No. 201340036, Identity Theft Victim Assistance--
    Follow-Up, report planned for March 2015.
    ---------------------------------------------------------------------------
        Another challenging area is the ongoing IRS impersonation scam.
    Between October 2013 and January 31, 2015, TIGTA has logged
    approximately 300,000 contacts from taxpayers who reported that they
    received telephone calls from individuals claiming to be IRS employees.
    The impersonators told the victims that they owed additional tax and,
    if the tax was not immediately paid, they would be arrested, lose their
    driver's licenses, or face other consequences. As of January 31, 2015,
    more than 3,000 victims have reported an aggregate loss in excess of
    $15 million dollars. While TIGTA investigates these complaints, we have
    worked closely with the IRS, the Federal Trade Commission and local
    media outlets to publish press releases, warnings, and other public
    awareness announcements in order to warn taxpayers of the scam. The
    sheer volume of contacts from concerned taxpayers is an additional
    strain on IRS resources.
        The IRS must continue to identify and implement innovative and
    cost-saving strategies to accomplish its mission of providing America's
    taxpayers with top-quality service by helping them understand and meet
    their tax responsibilities and enforce the law with integrity and
    fairness.
                    effectiveness and efficiency of the irs
        While the IRS faces many challenges, TIGTA has recently reported on
    several other areas where the IRS can achieve cost savings, more
    efficiently use its limited resources, and make more informed business
    decisions. In addition, timelier reporting of third-party data and
    additional authority would assist the IRS in improving tax
    administration.
    Opportunities Exist for Additional Cost Savings
        In August 2012, TIGTA reported that the IRS can achieve additional
    cost savings by better managing its real property costs. TIGTA reported
    that the IRS completed 17 space consolidation and relocation projects
    from October 2010 through December 2011, which the IRS estimated would
    result in $2.8 million of realized rent savings in fiscal year 2012.
    However, we reported that the IRS continues to incur rental costs for
    more workstations than required. TIGTA estimated that if the employees
    the IRS allows to routinely telework on a full- or part-time basis
    shared their workstations on days they were not in the office, 10,244
    workstations could potentially be eliminated. The sharing of these
    workstations could allow the IRS to reduce its long-term office space
    needs by almost one million square feet, resulting in potential rental
    savings of approximately $111 million over 5 years. The IRS agreed with
    our recommendations and indicated it would revise interim and long-
    range portfolio strategies for future space needs at sites to include
    workstation sharing as appropriate.\21\
    ---------------------------------------------------------------------------
        \21\ TIGTA, Ref. No. 2012-10-100, Significant Additional Real
    Estate Cost Savings Can Be Achieved by Implementing a Telework
    Workstation Sharing Strategy (Aug. 2012).
    ---------------------------------------------------------------------------
        In September 2014, TIGTA also reported that potential cost savings
    could be achieved from expanded electronic filing of business
    returns.\22\ IRS efforts have resulted in considerable growth in the
    electronic filing of individual tax returns, which stood at an 81
    percent rate in PY 2012. In comparison, the electronic filing rate of
    business tax returns in Tax Year (TY) 2012 was 41 percent. Employment
    tax returns provide the most significant opportunity for growth in
    business electronic filing. For TY 2012, more than 21.1 million (71
    percent) employment tax returns were paper-filed. The Electronic
    Federal Tax Payment System (EFTPS) has been used in the past to
    facilitate the e-filing of employment tax returns for Federal agencies.
    TIGTA recommended that the IRS consider this option for business
    taxpayers. Providing businesses the ability to electronically file
    their tax returns concurrently with payment of their tax due on the
    same system could provide one-stop service which would benefit business
    filers.
    ---------------------------------------------------------------------------
        \22\ TIGTA, Ref. No. 2014-40-084, A Service-Wide Strategy Is Needed
    to Increase Business Tax Return Electronic Filing (Sep. 2014).
    ---------------------------------------------------------------------------
        The IRS did not agree to implement this recommendation and offered
    as an explanation that the Modernized e-File system has been
    established as the system for receiving employment tax returns
    electronically. This system provides taxpayers with the ability to
    remit tax payments when submitting their returns. Notwithstanding this
    explanation, the implementation of this system has not resulted in a
    significant increase in the e-filing rate for these tax returns.
    Moreover, this system does not accept quarterly employment tax
    deposits.
        In September 2014, TIGTA reported that the IRS does not effectively
    manage server software licenses and is not adhering to Federal
    requirements and industry best practices. Until the IRS addresses these
    issues, it will continue to incur increased risks in managing software
    licenses. TIGTA estimates that the inadequate management of server
    software licenses potentially costs the Government between $81 million
    and $114 million, based on amounts spent for licenses and annual
    license maintenance that were not being used.\23\ While the IRS agreed
    with our recommendation to improve the management of server software
    licenses, it believes it has subsequently mitigated some of these
    issues.
    ---------------------------------------------------------------------------
        \23\ TIGTA, Ref. No. 2014-20-042, The Internal Revenue Service
    Should Improve Server Software Asset Management and Reduce Costs (Sep.
    2014).
    ---------------------------------------------------------------------------
        Finally, TIGTA estimates that the IRS may have issued more than
    $439 million in potentially erroneous tax refunds claimed on 187,421
    amended returns in fiscal year 2012. Currently, amended tax returns can
    only be filed on paper and are manually processed. TIGTA's review of a
    statistical sample of 259 amended tax returns identified 44 tax returns
    (17 percent) with questionable claims. TIGTA reported that the
    processes the IRS uses to verify originally filed tax returns would
    have identified most of the 44 questionable amended returns TIGTA
    identified as needing additional scrutiny before the refund was paid.
    TIGTA forecasts using these same processes could prevent the issuance
    of more than $2.1 billion in erroneous refunds associated with amended
    tax returns over the next 5 years. In addition, TIGTA reported that the
    IRS could have potentially saved $17 million in fiscal year 2012 if it
    allowed taxpayers to electronically file amended tax returns.\24\ The
    IRS agreed with TIGTA's recommendation to expand electronic filing of
    amended tax returns.
    ---------------------------------------------------------------------------
        \24\ TIGTA, Ref. No. 2014-40-028, Amended Tax Return Filing and
    Processing Needs to Be Modernized to Reduce Erroneous Refunds,
    Processing Costs, and Taxpayer Burden (Apr. 2014).
    ---------------------------------------------------------------------------
    The IRS Could Take Actions to More Efficiently Use Its Limited
            Resources
        TIGTA has identified other opportunities for the IRS to more
    efficiently use its available resources. For example, TIGTA identified
    potential improvements in the efficiency of the ACS.\25\ The ACS plays
    an integral role in the IRS's efforts to collect unpaid taxes and
    secure unfiled tax returns. ACS employees are responsible for
    collecting unpaid taxes and securing tax returns from delinquent
    taxpayers who have not complied with previous notices. The number of
    ACS contact representatives in fiscal year 2013 was 39 percent less
    than in fiscal year 2010 due either to attrition or reassignment, and
    these resources are needed to answer incoming telephone calls and work
    identity theft cases. This resulted in fewer resources available to
    devote to the collection of unpaid taxes. However, the IRS's overall
    collection inventory practices were not changed to reflect the reduced
    workforce and, as a result, new inventory continued to be sent to the
    ACS without interruption, even though inventory was infrequently
    worked. This has had a substantial impact on the amount of Federal
    taxes that remain uncollected.
    ---------------------------------------------------------------------------
        \25\ TIGTA, Ref. No. 2014-30-080, Declining Resources Have
    Contributed to Unfavorable Trends in Several Key Automated Collection
    System Business Results (Sep. 2014).
    ---------------------------------------------------------------------------
        The IRS agreed with our recommendations to re-examine the ACS's
    role in the collection workflow process, including inventory delivery
    to the ACS as well as case retention criteria, and to align ACS
    resources accordingly. In addition, the IRS also agreed to establish
    performance metrics for ACS call data to measure the impact that
    answering taxpayer calls has on compliance business results. Capturing
    these data could allow ACS management to assess the impact of
    prioritizing call handling versus working inventory and of limiting
    enforcement actions in order to reduce the volume of incoming calls to
    the ACS.
        TIGTA also found that the IRS's fieldwork collection process is not
    designed to ensure that cases with the highest collection potential are
    identified, selected, and assigned to be worked.\26\ Although the IRS
    has begun some initiatives intended to improve the workload selection
    process, TIGTA believes further action is warranted.\27\ With
    significant growth in delinquent accounts and a reduction in the number
    of employees, it is essential that the field inventory selection
    process identifies the cases that have the highest risk and potential
    for collection.
    ---------------------------------------------------------------------------
        \26\ The IRS's Collection function has the primary responsibility
    for collecting delinquent taxes and tax returns while ensuring that
    taxpayer rights are protected.
        \27\ TIGTA, Ref. No. 2014-30-068, Field Collection Could Work Cases
    With Better Collection Potential (Sep. 2014).
    ---------------------------------------------------------------------------
        TIGTA is currently following up on our recommendations regarding
    inappropriate criteria the IRS used to identify organizations applying
    for tax-exempt status for review in the area of political campaign
    intervention. TIGTA has determined that the IRS has taken significant
    actions to (1) eliminate the selection of potential political cases
    based on names and policy positions, (2) expedite processing of
    Internal Revenue Code Section 501(c)(4) social welfare applications,
    and (3) eliminate unnecessary information requests.\28\
    ---------------------------------------------------------------------------
        \28\ TIGTA, Audit Number 201410009, Status of Actions Taken to
    Improve the Processing of Tax-Exempt Applications Involving Political
    Campaign Intervention, report planned for April 2015.
    ---------------------------------------------------------------------------
    Better Processes and Information Would Assist the IRS in Making
            Informed Decisions
        TIGTA has also identified areas in which the IRS could make more
    informed business decisions when determining how to use its limited
    resources. For example, the IRS eliminated or reduced services at
    Taxpayer Assistance Centers, or TACs. This move was completed to
    balance taxpayer demand for services with the IRS's anticipated budget
    cuts, redirect taxpayers to online services, enable assistors to
    dedicate more time to answer tax account-related inquiries, and offer
    other services at the TACs, such as identity theft services and
    acceptance of payments. Although the IRS stated that the services
    eliminated or reduced were, in part, the result of the IRS's
    anticipated budget cuts, TIGTA reported that the IRS's plans did not
    show to what extent the service cuts would lower the costs.
        The services the IRS reduced or eliminated at the TACs include
    preparation of tax returns, refund inquiries, transcript requests, and
    assistance with tax law questions.\29\ These services were reduced or
    eliminated without evaluating the burden that the changes would have on
    the low-income, elderly, and limited-English-proficient taxpayers who
    seek face-to-face service. For example, management decided to stop
    providing tax transcripts at the TACs, informing customers that they
    should use its online application ``Get Transcript.'' However, this
    decision was made with no analysis of the anticipated increase in
    traffic to this online application to ensure that it could meet the
    increased demand. In February 2014, IRS management modified its plan to
    stop providing transcripts at the TACs, based on concerns about the
    expected volume of online requests for transcripts as well as concerns
    raised regarding the launch of another Federal Government Web site.
    Management subsequently changed its position, alerting assistors at the
    TACs to encourage taxpayers to use the ``Get Transcript'' application
    but also indicated it will not turn away taxpayers who request
    transcripts.
    ---------------------------------------------------------------------------
        \29\ TIGTA, Ref. No. 2014-40-038, Processes to Determine Optimal
    Face-to-Face Taxpayer Services, Locations, and Virtual Services Have
    Not Been Established (June 2014).
    ---------------------------------------------------------------------------
        Furthermore, we reported that a process has not been developed to
    expand Virtual Service Delivery, which integrates video and audio
    technology to allow taxpayers to see and hear an assistor located at
    remote locations. Taxpayers can use this technology to obtain many of
    the services available at the TACs. The IRS's stated goals for Virtual
    Service Delivery are to enhance the use of IRS resources, optimize
    staffing, and balance its workload. We recommended that the IRS
    establish a process to identify the best locations for virtual face-to-
    face services. However, the IRS did not agree to follow through on this
    recommendation because, in its view, it has established a process to
    identify the best locations for virtual face-to-face services. However,
    we believe that the IRS's geographic coverage methodology does not
    identify optimal underserved areas across the country that would
    benefit the most from Virtual Service Delivery expansion.
        TIGTA also found that the IRS's use of cost/benefit information in
    managing its enforcement resources could be significantly improved.\30\
    The allocation of enforcement resources represents an increasingly
    complex challenge for the IRS in light of significant reductions in its
    budget. Return on investment (ROI) information, including both
    estimated ROI for new enforcement initiatives and cost/benefit
    calculations based on actual program results and costs, is an important
    tool available to assist IRS senior executives in managing enforcement
    resources. Although cost/benefit information is considered in making
    resource allocation decisions, the IRS does not document how or to what
    extent it uses the information and has no policies or procedures to
    guide this process. TIGTA also found that the IRS continues to be
    unable to measure actual revenue from new enforcement initiatives
    funded in prior years.
    ---------------------------------------------------------------------------
        \30\ TIGTA, Ref. No. 2013-10-104, The Use of Return on Investment
    Information in Managing Tax Enforcement Resources Could Be Improved
    (Sep. 2013).
    ---------------------------------------------------------------------------
        We also determined that the IRS's processes do not ensure that
    corporations accurately claim carryforward general business
    credits.\31\ During PY 2013, corporate filers claimed more than $93
    billion in general business credits. These credits offset taxes owed by
    more than $21 billion. TIGTA identified 3,285 e-filed Forms 1120, U.S.
    Corporation Income Tax Return, filed in PY 2013 on which corporations
    claimed potentially erroneous carryforward credits totaling more than
    $2.7 billion. We recommended the IRS develop processes to address the
    deficiencies identified in our report. The IRS does not plan to
    implement this recommendation due to lack of information technology
    resources and competing priorities.
    ---------------------------------------------------------------------------
        \31\ The general business credit is offered as an incentive for a
    business to engage in certain kinds of activities considered beneficial
    to the economy or the public at large and is used to reduce a
    corporation's regular tax liability. A carryforward is the amount of
    the general business credit that is unused because of the tax liability
    limit for claiming the credit.
    ---------------------------------------------------------------------------
        In addition, TIGTA recently reported that the IRS hired some former
    employees with prior substantiated conduct or performance issues.\32\
    The practice of rehiring former employees with known conduct and
    performance issues presents increased risk to the IRS and taxpayers.
    For example, TIGTA found that nearly 20 percent of the rehired former
    employees TIGTA sampled who had prior substantiated or unresolved
    conduct or performance issues also had new conduct or performance
    issues after being rehired. This is significant because the time spent
    by IRS managers addressing performance and conduct issues is time taken
    away from serving taxpayers and enforcing the law.
    ---------------------------------------------------------------------------
        \32\ TIGTA, Ref. No. 2015-10-006, Additional Consideration of Prior
    Conduct and Performance Issues Is Needed When Hiring Former Employees
    (Dec. 2014).
    ---------------------------------------------------------------------------
        The IRS is also dedicating significant resources toward addressing
    what it believes to be the most significant risks to compliance, such
    as the challenge presented by taxpayers' increasing use of flow-through
    entities, such as partnerships.\33\ In the IRS's 2014-2017 Strategic
    Plan,\34\ one of its stated goals is to ensure compliance with tax
    responsibilities and to combat fraud, and one of its stated measures of
    success is an increase in voluntary compliance by 3 percent from 83
    percent to 86 percent by 2017.
    ---------------------------------------------------------------------------
        \33\ Between 2008 and 2012, the number of business partnership
    filings increased by 21 percent.
        \34\ IRS Strategic Plan Fiscal Year 2014-2017.
    ---------------------------------------------------------------------------
        TIGTA continues to audit the efficiency and effectiveness of the
    IRS's efforts to reduce the Tax Gap \35\ and improve voluntary tax
    compliance. In the area of partnership compliance, for example, the IRS
    initiated its Partnership Strategy in July 2012 to improve the
    partnership audit process in light of the significant increase in
    partnership filings and complexities associated with auditing
    partnership returns. TIGTA recently completed a review of the
    partnership audit program and found that the IRS has no effective way
    to assess the productivity of its partnership audits since many complex
    partnerships have multiple layers of flow-through entities.\36\ In
    order to track partnership audits, the IRS uses a decade's old system
    that is unable to provide information on the total amount of taxes that
    are ultimately assessed to the taxable partners as a result of
    adjustments made to the partnership returns. Therefore, the IRS is
    unable to assess the full impact of its partnership compliance
    activities.
    ---------------------------------------------------------------------------
        \35\ The Tax Gap is the difference between what all taxpayers owe
    and what they pay. The IRS estimated the net tax gap (after factoring
    in forced collections) to be approximately $385 billion annually.
        \36\ TIGTA, Audit No. 201430027, Additional Improvements Are Needed
    to Measure the Success and Productivity of the Partnership Audit
    Process, report planned for March 2015.
    ---------------------------------------------------------------------------
        The IRS agrees that this is a significant problem but asserts that
    a new information technology system is the only means to obtain the
    necessary information on the productivity of its partnership compliance
    program. Until such time as the IRS upgrades its systems, TIGTA
    believes the IRS could make better use of the significant research
    capacity within the IRS to address this formidable tax compliance
    challenge. Although the IRS has requested over $16 million as part of
    its fiscal year 2016 budget request to increase the number of agents
    with specialized experience in auditing large partnerships, it has not
    taken the steps to improve the tracking of the results of its
    partnership audits so that it can make the best use of its resources
    devoted to this area.
    More Timely Third-Party Reporting and Correctable Error Authority
        Each year, the IRS receives information returns filed by third
    parties such as employers and educational institutions. These returns
    provide the IRS the information needed to verify taxpayers' claims for
    benefits such as the Earned Income Tax Credit (EITC) and the American
    Opportunity Tax Credit (AOTC). However, information returns are
    generally not filed with the IRS until after most taxpayers file their
    annual tax returns. As a result, the IRS cannot use the information
    contained on these information returns to verify tax returns until
    after those tax returns are processed and refunds are issued.
        For example, the IRS estimates that in fiscal year 2013, 30 percent
    of (or $4.35 billion) in improper EITC payments resulted from
    verification errors associated with the IRS's inability to identify
    taxpayers who misreport their income to erroneously claim the EITC.
    TIGTA's review of TY 2012 tax returns identified more than $1.7 billion
    in potentially erroneous EITC claims on tax returns for which no third-
    party Forms W-2, Wage and Tax Statement, supporting the wages reported
    had been received by the IRS. However, the IRS does not have the Forms
    W-2 information at the time most of these tax returns are processed.
    Employers who file paper Forms W-2 are not required to file these forms
    until February of each year. Employers who e-file Forms W-2 have until
    the end of March each year to file.
        TIGTA also estimates that the IRS issued more than $3.2 billion in
    potentially erroneous education credits in TY 2012 for students for
    whom the IRS did not receive a Form 1098-T, Tuition Statement, from a
    postsecondary educational institution.\37\ Educational institutions are
    required to provide a Form 1098-T to students who attend their
    institution and file a copy of Form 1098-T with the IRS. The Form 1098-
    T provides the name and Employer Identification Number of the
    institution, the name and Taxpayer Identification Number of the student
    who attended, and information on whether the student attended half-time
    or was a graduate student. However, these forms are not available at
    the time the tax returns are filed. Consequently, the IRS is not able
    to use this information to identify potentially erroneous claims when
    tax returns are processed. As with the Form W-2, Forms 1098-T generally
    do not have to be filed with the IRS until the end of March each year.
    ---------------------------------------------------------------------------
        \37\ TIGTA, Audit Number 201440015, Billions of Dollars in
    Potentially Erroneous Education Credits Continue to be Claimed for
    Ineligible Students and Institutions, report planned for March 2015.
    ---------------------------------------------------------------------------
        Requiring third parties such as employers and educational
    institutions to file information returns earlier will provide the IRS
    with the opportunity to use the information contained on these forms to
    verify tax returns at the time they are processed rather than after
    refunds are issued. This could significantly improve the IRS's ability
    to prevent the issuance of billions of dollars in erroneous tax
    benefits, including the EITC and education credits.
        However, even if the third-party information returns are received
    more timely, the IRS still needs certain authorities to more
    efficiently and effectively use these data to address taxpayer
    noncompliance. Generally, the IRS must audit any tax return it
    identifies with a questionable claim before the claim can be adjusted
    or denied, even if the IRS has reliable data that indicate the claim is
    erroneous. However, the number of tax returns the IRS can audit is
    limited to available resources and the need to provide a balanced
    enforcement program among all taxpayer segments.
        The IRS does have math error authority \38\ to systemically address
    erroneous claims that contain mathematical or clerical errors or EITC
    claims with an invalid qualifying child's Social Security Number. The
    IRS estimates that it costs $1.50 to resolve an EITC claim using math
    error authority, compared to $278 to conduct a pre-refund audit.
    ---------------------------------------------------------------------------
        \38\ Under current law, the IRS can adjust tax returns on which the
    taxpayer has made a math error utilizing summary assessment procedures.
    ---------------------------------------------------------------------------
        However, the majority of erroneous claims that the IRS identifies
    do not contain the types of errors for which it has math error
    authority. For example, in TY 2011, the IRS identified approximately
    6.6 million potentially erroneous EITC claims totaling approximately
    $21.6 billion that it could not address using existing math error
    authority. In addition, the number of potentially erroneous EITC claims
    that the IRS can audit is further reduced by its need to allocate its
    limited resources among the various areas of taxpayer noncompliance to
    provide a balanced tax enforcement program. As a result, billions of
    dollars in potentially erroneous EITC claims go unaddressed each year.
        The Department of the Treasury has included a legislative proposal
    to obtain correctable error authority as part of the IRS's budget
    requests each year since fiscal year 2013, which would permit the IRS
    to disallow tax benefit claims when Government data sources do not
    support information on the tax return, or when taxpayers have failed to
    include required documentation with their tax return or exceeded the
    lifetime limit for claiming a deduction or credit. This authority would
    enable the IRS to systemically deny all tax claims for which the IRS
    has reliable data showing the claim is erroneous. The data available
    for IRS use in verifying tax returns go beyond that which is provided
    to the IRS on information returns such as the Form W-2.
        For example, the Affordable Care Act requires Health Care Exchanges
    to provide data to the IRS on a monthly basis for each individual
    enrolled in the Exchange who purchased a qualified health insurance
    plan, including the amount of advance Premium Tax Credits (PTC)
    received. The Department of Health and Human Services estimates more
    than 6 million individuals purchased insurance through an Exchange in
    Calendar Year 2014. The Exchange data are available at the time tax
    returns are processed and can be used to ensure taxpayers have
    purchased insurance through an Exchange as required and have properly
    reconciled advance PTC payments on their tax returns before refunds are
    paid. However, the IRS was not given the authority to use the Exchange
    data to systemically disallow a PTC claim for which the data show the
    claim is erroneous. As a result, the IRS must audit these tax returns.
        The IRS has authority to use the Department of Health and Human
    Services National Directory of New Hires (NDNH) which contains wage
    information to verify EITC claims. However, the IRS does not have the
    authority to systemically disallow an EITC claim that is not supported
    by NDNH data. Therefore, the IRS must audit the EITC claims it
    identifies for which NDNH data indicate the income reported is
    potentially erroneous. TIGTA estimates the use of correctable error
    authority along with expanded use of the NDNH could have potentially
    prevented the issuance of the more than $1.7 billion in questionable
    EITC claims in TY 2012 for which the IRS had no Form W-2 from an
    employer. TIGTA forecasted that these processes could prevent the
    issuance of more than $8.5 billion in potentially erroneous EITC claims
    over the next 5 years.
        A similar issue also exists with education credits. To qualify for
    an education credit, students must attend a postsecondary educational
    institution that is certified by the Department of Education to receive
    Federal student aid funding. The Department of Education Postsecondary
    Education Participants System (PEPS) database includes all educational
    institutions certified to receive Federal student aid funding. TIGTA's
    comparison of TY 2012 tax returns with the Department of Education PEPS
    database identified more than 1.6 million taxpayers who received
    education credits totaling approximately $2.5 billion for students who
    attended institutions that are not certified to receive Federal student
    aid funding. As with the EITC, the IRS must audit these tax returns
    before the erroneous claim can be denied.\39\
    ---------------------------------------------------------------------------
        \39\ TIGTA, Audit Number 201440015, Billions of Dollars in
    Potentially Erroneous Education Credits Continue to be Claimed for
    Ineligible Students and Institutions, report planned for March 2015.
    ---------------------------------------------------------------------------
        Despite the IRS's numerous efforts, it is unlikely that it will
    achieve any significant reduction in erroneous payments without more
    timely access to third-party information and the ability to
    systemically deny erroneous claims at the time a tax return is
    processed. Given the scope of the improper payments that the IRS
    reports each year, in addition to the improper payments that remain
    unreported, changes in existing compliance methods could have a
    significant financial impact by enabling the IRS to more efficiently
    and effectively address this problem.
                   tigta budget request for fiscal year 2016
        As requested by the subcommittee, I will now provide information on
    our budget request for fiscal year 2016.
        TIGTA's fiscal year 2016 proposed budget requests appropriated
    resources of $167,275,000, an increase of 5.7 percent from the fiscal
    year 2015 enacted budget. TIGTA will continue to focus on its mission
    of ensuring an effective and efficient tax administration. The fiscal
    year 2016 budget resources include funding to support TIGTA's critical
    audit, investigative, and inspection and evaluation priorities, while
    still maintaining a culture that continually seeks to identify
    opportunities to achieve efficiencies and cost savings.
        During fiscal year 2014, TIGTA's combined audit and investigative
    efforts have recovered, protected, and identified monetary benefits
    totaling $16.6 billion,\40\ including cost savings, increased revenue,
    revenue protection,\41\ and court-ordered settlements in criminal
    investigations, and have affected approximately 3.6 million taxpayer
    accounts. Based on TIGTA's fiscal year 2014 budget of $156.4 million,
    this represents a return on investment of $106-to-$1.
    ---------------------------------------------------------------------------
        \40\ This figure includes dollars potentially compromised by
    bribery; dollar amount of tax liability for taxpayers who threaten and/
    or assault IRS employees; dollar value of resources protected against
    malicious loss; dollar amount of embezzlement or taxpayer remittance
    theft; dollar value of Government property recovered; dollar value of
    court ordered criminal and civil penalties, fines, and restitution; and
    dollar value of seizures, forfeitures, and recoveries from contract
    fraud.
        \41\ Recommendations made by TIGTA to ensure the accuracy of the
    total tax, penalties, and interest paid to the Federal Government.
    ---------------------------------------------------------------------------
    TIGTA's Audit Priorities
        TIGTA's audit priorities include mitigating risks associated with
    tax refund fraud and identity theft, monitoring the IRS's
    implementation of the Affordable Care Act and other tax law changes,
    and assessing the IRS's efforts to improve tax compliance involving
    foreign financial assets and offshore accounts.
        Recent audit work has shown that the IRS could develop or improve
    processes that will increase its ability to detect and prevent the
    issuance of fraudulent tax refunds resulting from identity theft. In
    addition, TIGTA has concerns about the security of tax data provided to
    the Exchanges and is also concerned that the potential for refund fraud
    and related schemes could increase as a result of processing ACA
    Premium Tax Credits.
        Several key ACA provisions became effective in fiscal year 2015,
    and the IRS must ensure that the tax administration system is able to
    fully implement these provisions. Consequently, TIGTA has implemented a
    multi-year audit strategy to assess the IRS's implementation of the
    ACA. This strategy includes coordination with other agencies, including
    the Department of Health and Human Services Office of Inspector
    General. TIGTA is conducting or planning to initiate 10 ACA-related
    audits during fiscal year 2015.
        The tax compliance of business and individual taxpayers involved in
    international transactions remains a significant concern for the IRS.
    Complex transfer pricing issues and identifying U.S. taxpayers with
    hidden foreign assets and accounts continue to demand additional IRS
    resources. TIGTA will continue to perform audit work to assess the
    IRS's compliance with provisions of the Foreign Account Tax Compliance
    Act \42\ and its efforts to improve tax compliance involving foreign
    financial assets and offshore accounts.
    ---------------------------------------------------------------------------
        \42\ Public Law No. 111-147, Subtitle A, 124 Stat 97
    (2010)(codified in scattered sections of 26 U.S.C.).
    ---------------------------------------------------------------------------
    TIGTA's Investigative Priorities
        TIGTA's investigative priorities include investigating allegations
    of serious misconduct and criminal activity by IRS employees; ensuring
    that IRS employees are safe and IRS facilities, data and infrastructure
    are secure and not impeded by threats of violence; and protecting the
    IRS against external attempts to corrupt or otherwise interfere with
    tax administration.
        IRS employees are entrusted with the sensitive personal and
    financial information of taxpayers. It is particularly troubling when
    IRS employees misuse their positions in furtherance of identity theft
    and other fraud schemes. TIGTA will continue to proactively review the
    activities of IRS employees who access taxpayer accounts for any
    indication of unauthorized accesses that may be part of a larger fraud
    scheme and conduct investigations into suspected wrongdoing.
        For TIGTA's investigators, our experience has shown that the IRS's
    expanded role under the ACA may spark a new wave of animosity directed
    toward IRS employees that could result in threats of violence or the
    actual assault of IRS employees and attacks on IRS facilities. For
    example, TIGTA has investigated threats made by taxpayers to IRS
    employees as a result of the IRS offsetting their Federal tax refunds
    for the repayment of student loans or court-ordered child support
    payments. As ACA provisions start to take effect, additional resources
    will be dedicated to investigating related threats.
        Shortly after the Supreme Court upheld the constitutionality of the
    ACA, the media reported that criminals impersonated a Federal agency in
    an attempt to fraudulently obtain personally identifiable information
    from unsuspecting taxpayers. Criminals could use such sensitive
    information to further their identity theft schemes and other crimes
    under the guise that the information was required for ACA compliance.
    Based upon our experience investigating this type of criminal activity,
    TIGTA anticipates a significant increase in the number of ACA-related
    impersonation attempts as the IRS begins its role in ACA compliance
    activity.
        Between fiscal years 2011 and 2014, TIGTA processed over 10,240
    threat-related complaints and conducted over 4,990 investigations of
    threats made against IRS employees. TIGTA will continue to aggressively
    investigate individuals who threaten the safety and security of the IRS
    and its employees.
        As mentioned earlier, the TIGTA Hotline has received over 300,000
    reports from taxpayers victimized by individuals impersonating IRS
    employees in an effort to defraud them. As of January 31, 2015, more
    than 3,000 victims have reported an aggregate loss in excess of $15
    million dollars. TIGTA will continue to investigate these crimes
    against taxpayers and alert the public to this scam to ensure that
    innocent taxpayers are not harmed by these criminals.
        We at TIGTA are committed to our mission of ensuring an effective
    and efficient tax administration system and preventing, detecting, and
    deterring waste, fraud, and abuse. As such, we plan to provide
    continuing audit coverage of the IRS's efforts to operate efficiently
    and effectively and investigate any instances of IRS employee
    misconduct or fraud in IRS operations.
        Chairman Boozman, Ranking Member Coons, and members of the
    subcommittee, thank you for the opportunity to share my views.

        Senator Boozman. Thank you very much.
        I know that Senator Coons has a classified briefing that he
    is supposed to be at. So we will go to him on this round.
        Senator Coons. That is very kind of you. Thank you,
    Chairman.
        And I will try to be brief, if I might.
        Mr. George, TIGTA identified security of taxpayer data as
    the number-one management challenge facing the IRS. What are
    your key concerns about the adequacy of their information
    security, and how responsive has the IRS been to your
    recommendations to bolster its systems? And what would you
    recommend they make their top priority in terms of responding
    to this concern?
        Mr. George. They have been responsive, Senator. The new
    Commissioner and I have had a long-term relationship, meaning
    we have worked together in various capacities. He listens to
    the concerns that we provide. They don't agree with 100 percent
    of them, but they agree with enough so that I feel secure or
    confident at least that some of the issues that we identify are
    addressed.
        I think it is very important to note, as the Commissioner
    noted, they are under attack on a daily basis hundreds of
    times. Fortunately, we have not yet detected any breaches to
    the tax system that would undermine it, which obviously would
    be devastating to this Nation. So, in that sense, we feel
    confident.
        Three, limited resources and their having to make difficult
    choices as to what to focus on is going to put some of what I
    just said to you possibly at risk or make it completely
    inaccurate, depending upon what happens day to day. So----
        Senator Coons. Given the response to your concerns,
    criticisms, suggestions, what level of confidence do you have
    that increased investment, increased available resources in
    this area might actually result in a significant increase in
    the security of this vital data?
        Mr. George. There is no question if they had additional
    resources to devote to this, it would enhance my confidence
    that it would be more secure, sir.
        Senator Coons. You identified implementing the ACA as the
    number-two management challenge, and I just wondered what your
    chief concerns are about the capacity of the IRS to meet their
    responsibilities both for implementing rule writing and
    administering the new responsibilities, and what
    recommendations have you offered IRS on how to improve their
    responsiveness here?
        Mr. George. At the request of Congress, we are now in the
    process of working both with the Inspector General of the
    Department of Health and Human Services, as well as with my
    people on this very important issue, sir. This is unprecedented
    territory for the Internal Revenue Service, and so at this
    stage, I am not in a position to give you a definitive answer.
    All I can say is that we are monitoring it, and we will be
    reporting out information in the very near future.
        Senator Coons. And last, because I don't want to impose too
    much on the chairman's kindness, the tax gap is estimated at
    about $450 billion. That is about a 17 percent noncompliance
    rate, which is really striking. What are your views on the
    adequacies of the IRS's strategy to narrow the gap, and what
    are the impediments that most need to be dealt with to attack
    this or to deal with this, given the declining resources
    available to the IRS?
        Mr. George. First of all, we believe that that figure,
    which is an IRS-produced figure, is actually understating the
    problem. We believe that the international aspect of the tax
    gap is not adequately included in that figure, and there is no
    question that some of the many recommendations that we made in
    this area and will continue to make include third-party
    reporting.
        There is a figure or a few figures, and I beg your
    indulgence because it is so important that I think people
    understand that, and this is according to the Internal Revenue
    Service, there is such a high correlation between tax
    compliance and third-party information reporting and
    withholding of taxes.
        The IRS estimates individuals whose wages are subject to
    withholding report 99 percent of their wages. Self-employed
    individuals who operate nonfarm businesses are estimated to
    report only 68 percent of their income for tax purposes. But
    the most striking figure, sir, is self-employed individuals
    operating on a cash basis are estimated to report just 19
    percent of their income.
        So there is no question this is a tax policy question. If
    everyone were required to fill out a form when someone cut
    their lawn or painted their home, this third-party reporting
    would help increase the amount of money that is reported as
    tax--as income, rather, and ultimately taxes paid to the
    Federal Government. But this is just one aspect of, what can be
    done to address the tax gap.
        Senator Coons. Well, thank you, and I look forward to
    working with you this year and in the future to make sure that
    your recommendations are being responded to appropriately by
    the IRS.
        Mr. Chairman, I was going to ask consent. There was a
    statement received, I understand, by the subcommittee from the
    president of the National Treasury Employees Union, just that
    that be made a part of the record.
        Senator Boozman. Sure. Without objection.
        [The statement follows:]
          Prepared Statement of the National Treasury Employees Union
        Chairman Boozman, Ranking Member Coons and distinguished members of
    the subcommittee, I would like to thank you for allowing me to provide
    comments on the Internal Revenue Service (IRS) budget request for
    fiscal year 2016. As president of the National Treasury Employees Union
    (NTEU), I have the honor of representing over 150,000 Federal workers
    in 31 agencies, including the men and women at the IRS.
        Mr. Chairman, despite the critical role that the IRS plays in
    helping taxpayers meet their tax obligations and generating revenue to
    fund the Federal Government, the IRS' ability to continue doing so has
    been severely challenged due to funding reductions in recent years.
        Since fiscal year 2010, IRS funding has been cut by almost $1.2
    billion, or 17 percent after adjusting for inflation. The funding
    reductions have forced the IRS to operate under an exception-only
    hiring freeze since December 2010, and will have forced the Service to
    reduce the total number of full-time, permanent employees by 17,000 by
    the end of the fiscal year. In particular, the number of employees
    assigned to answer telephone calls from taxpayers fell from 9,400 in
    2010 to 6,900 in 2014, a 26 percent drop. And despite the critical role
    they play in maximizing taxpayer compliance and generating revenue, the
    total number of Revenue Officers and Revenue Agents was down more than
    3,600 at the end of fiscal year 2013, and without additional resources,
    the IRS has warned it will lose another 1,800 enforcement personnel
    through attrition by the end of fiscal year 2015. The lack of
    sufficient staffing has strained IRS' capacity to carry out its
    important taxpayer service and enforcement missions.
        The drastic cuts to IRS' budget come at a time when the IRS
    workforce is already facing a dramatically increasing workload with
    staffing levels down by 13,000 since 2010, and more than 26 percent
    below what they were just 18 years ago. In 1995, the IRS had a staff of
    114,064 to administer tax laws and process 205 million tax returns. By
    the close of 2013, staffing had fallen to 83,613 to administer a more
    complicated tax code and process 242 million much more complex tax
    returns and other forms. The IRS predicts it will lose another 4,000
    full-time employees by the end of fiscal year 2015.
            internal revenue service fiscal year 2016 budget request
        NTEU was pleased to see that the administration's budget request
    for the IRS would provide the agency with a total of $12.9 billion in
    funding for fiscal year 2016, including $12.3 billion in base funding
    and $667 million via a program integrity cap adjustment. The $12.9
    billion in funding would represent an increase of more than $1.9
    billion over the current fiscal year 2015 level, which would help
    restore funding for important taxpayer service and enforcement
    activities that have been slashed in recent years. These funding
    reductions have adversely impacted IRS' ability to meet its mission,
    and without action by Congress, IRS' ability to serve taxpayers and
    enforce our Nation's tax laws will continue to erode.
        I would also note that in previous years, NTEU has supported the
    budget recommendations proposed by the IRS Oversight Board which have
    generally called for additional resources above that requested by the
    administration. For fiscal year 2016, the Oversight Board has
    recommended $13.5 billion in funding for the IRS. While we have not
    seen the specific details of the Board's proposal, we would be inclined
    to support providing additional funding for the IRS above the
    administration's request and look forward to reviewing the Board's
    recommendation.
                               taxpayer services
        Providing quality taxpayer service is a critical component of the
    IRS' efforts to help the taxpaying public understand their tax
    obligations while making it easier to participate in the tax system.
    Unfortunately, the IRS' ability to provide excellent taxpayer service
    has been severely challenged due to reduced funding in recent years and
    the cuts mandated by sequestration. Without additional resources,
    further degradation in taxpayer services will occur, jeopardizing our
    voluntary compliance system.
    Impact of Inadequate Funding on Taxpayer Services
        In the past few years, many experts in the tax community, including
    the National Taxpayer Advocate, IRS Oversight Board and the IRS
    Advisory Council have all warned of the dangers of underfunding the IRS
    and the adverse impact it has had on taxpayer service.
        In January, the National Taxpayer Advocate, Nina Olson, released
    her 2014 Annual Report to Congress which identifies the decline in IRS
    taxpayer services due to reduced funding as the #1 most serious problem
    facing taxpayers. The report describes in detail the severe reduction
    to taxpayer services caused by repeated cuts to the IRS budget. Among
    the report findings are:
      --In fiscal year 2015, the IRS predicts that it will be able to
            answer less than 50 percent of calls from taxpayers seeking
            assistance--down from 87 percent in fiscal year 2004.
      --Taxpayers who do manage to get through are expected to wait on hold
            for 30 minutes on average, up from 2.6 minutes in fiscal year
            2004.
      --During the upcoming filing season, the IRS will not answer any tax-
            law questions except ``basic'' ones. After the filing season,
            the IRS 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.
      --The IRS has also said the funding reductions could result in delays
            in refunds for some taxpayers. Those taxpayers who file paper
            returns could wait an extra week or longer to see their refund.
            Taxpayers with errors or questions on their returns that
            require additional manual review will also face delays.
        Mr. Chairman, it is evident that funding reductions in recent years
    have seriously eroded the IRS' 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 taxpayers seeking to resolve issues with taxes
    due or looking to set up payment plans.
        That is why we strongly support the President's request of $2.4
    billion in funding for taxpayer services in fiscal year 2016, a $252
    million increase over the current level. We believe this increase will
    allow the IRS to restore customer service levels to meet rising
    taxpayer demand and help taxpayers understand their obligations,
    correctly file their returns, and pay taxes due in a timely manner.
    Enforcement
        Mr. Chairman, the funding reductions to the IRS budget in recent
    years have also negatively impacted its ability to maximize taxpayer
    compliance, prevent tax evasion and reduce the deficit.
    Impact on Voluntary Compliance and Tax Gap
        NTEU strongly believes our system of voluntary tax compliance is
    most effective when the IRS is able to assist those trying to meet
    their obligations under the law. In particular, by assisting taxpayers
    with their tax questions before they file their returns, the IRS can
    help prevent inadvertent noncompliance and reduce burdensome post-
    filing actions, such as audits and penalties.
        Unfortunately, as noted previously, funding reductions have
    resulted in the inability of millions of taxpayers to get answers from
    IRS call centers and at taxpayer assistance centers (TACs), which
    lessens their ability to meet their tax obligations.
        The National Taxpayer Advocate has previously warned that limited
    resources were impeding IRS' ability to conduct education and outreach
    to taxpayers, including small businesses, which is critical to ensuring
    they are able to understand and comply with their tax obligations. For
    example, she has repeatedly warned staffing levels at TACs across the
    country are woefully inadequate, with taxpayers lining up to enter IRS
    offices well before those offices were even open and with some people
    being turned away.
        Inadequate staffing and the lack of availability of services at
    TACs has long been a problem at the IRS and disproportionately impacts
    the most vulnerable in our population who use TACs most often,
    including non-English speaking taxpayers, the elderly and low income
    individuals and families, who often need additional assistance in
    understanding and meeting their tax responsibilities. If these
    taxpayers are not provided the assistance they need to understand their
    tax obligations, they may inadvertently file an incorrect return which
    could necessitate the need for IRS to undertake post-filing actions
    that are costly and burdensome to both the taxpayer and the IRS.
        Incorrect filings could also result in taxpayers paying less than
    they owe, further hampering efforts to close the tax gap, which is the
    amount of tax owed by taxpayers that is not paid on time.
        The adverse impact on IRS' capacity to collect revenue critical to
    reducing the Federal deficit is clear. In fiscal year 2014, on a budget
    of $11.2 billion, the IRS collected $3.1 trillion, roughly 93 percent
    of Federal Government receipts. According to the IRS, every dollar
    invested in IRS enforcement programs generates roughly $7 in return,
    but reduced funding for enforcement programs in recent years has led to
    a steady decline in enforcement revenue since fiscal year 2007. In
    fiscal year 2014, IRS enforcement activities brought in $57.1 billion,
    down more than $2 billion from the $59.2 billion in fiscal year 2007.
        The $345 million reduction to IRS' budget for fiscal year 2015 will
    further reduce IRS' ability to collect revenue and would result in the
    loss of billions in revenue in fiscal year 2015 alone. That lost
    revenue could otherwise be invested in critical Government programs or
    be used to reduce the Federal deficit.
        The IRS has warned that enforcement staffing will continue to be a
    significant concern under the fiscal year 2015 funding level and has
    cautioned that under this insufficient level of funding, the IRS will
    lose another 1,800 enforcement personnel in fiscal year 2015. The
    impact of the reduced staffing in enforcement will result in in at
    least 46,000 fewer individual and business audit closures and more than
    280,000 fewer Automated Collection System and Field Collection case
    closures.
        That is why NTEU was happy to see the administration's budget
    request would provide a $539 million increase in funding for IRS tax
    enforcement above the current level. This increase includes a program
    integrity cap adjustment which provides critical funding designed to
    protect revenue by identifying fraud and preventing issuance of
    questionable refunds, including tax-related identity theft, addressing
    offshore noncompliance, and improving collection coverage rates.
    According to the administration, the additional funding provided via
    the cap adjustment is expected to generate $2.8 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 fiscal year
    2018. 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
        Chairman Boozman, Ranking Member Coons and members of the
    subcommittee, thank you for the opportunity to provide NTEU's views on
    the administration's fiscal year 2016 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.

        [This statement was submitted by Colleen M. Kelley, National
    President.]

        Senator Coons. And let me thank you very much for your
    forbearance, allowing me to get to this classified briefing.
        Senator Boozman. Good luck in your meeting.
        Senator Coons. Thank you very much.
        And thank you for your testimony.
        Senator Boozman. Hopefully, you will learn a little.
        Senator Coons. I hope.
        Senator Boozman. Thank you very much, Mr. George, for being
    here.
        Mr. George. Certainly, sir.
        Senator Boozman. The earned income tax credit has
    previously been declared a high-risk program by OMB. The IRS
    estimates that 24 percent of all payments made in fiscal year
    2013, or $14.5 billion, were paid in error.
        In addition, the IRS estimates that it has paid between
    $124 billion and $148 billion in improper EITC payments, earned
    income tax payments, in fiscal years 2003 to 2013. The IRS has
    developed a strategy in an attempt to reduce the improper
    payments that focuses on early intervention to ensure that
    individuals claiming the credit are in compliance with the
    earned income tax credit rules.
        However, despite those efforts, the estimated improper
    payment rate has remained relatively unchanged since fiscal
    year 2003, and the amount of tax credit claims paid in error
    has literally grown. I guess the question is the IRS noted that
    it cannot fully address the earned income tax credit
    noncompliance by simply auditing returns and must pursue
    alternatives to traditional compliance efforts.
        Have you made any recommendations to the IRS as to how to
    combat the problem?

                               PREPARED STATEMENT

        Mr. George. We have, sir. And you know, what I would like
    to do at this point is allow or seek permission to include a
    report that we have conducted on the earned income tax credit
    into the record.
        Senator Boozman. Without objection.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        This report presents the results of our review to assess the
    Internal Revenue Service's efforts to identify and address the root
    causes of erroneous Earned Income Tax Credit and Additional Child Tax
    Credit payments. This audit is included in our Fiscal Year 2014 Annual
    Audit Plan and addresses the major management challenge of Fraudulent
    Claims and Improper Payments.
        Management's complete response to the draft report is included in
    Appendix IX.
        Copies of this report are also being sent to the Internal Revenue
    Service managers affected by the report recommendations. Please contact
    me if you have questions or Russell Martin, Acting Assistant Inspector
    General for Audit (Returns Processing and Account Services).

                                   HIGHLIGHTS

                   Final Report issued on September 29, 2014

        Highlights of Reference Number: 2014-40-093 to the Internal Revenue
    Service Commissioner for the Wage and Investment Division.
                              impact on taxpayers
        The Earned Income Tax Credit (EITC) and Additional Child Tax Credit
    (ACTC) are refundable credits designed to help low-income individuals
    reduce their tax burden. The IRS estimated that it paid $63 billion in
    refundable EITCs and $26.6 billion in refundable ACTCs for Tax Year
    2012. The IRS also estimated that 24 percent of all EITC payments made
    in Fiscal Year 2013, or $14.5 billion, were paid in error.
                            why tigta did the audit
        This audit was initiated because the IRS is required to identify
    and take actions to address the root causes of improper payments in
    Federal programs identified as being at high risk for improper
    payments. The only IRS program identified as a high risk is the EITC.
    The overall objective of this review was to assess the IRS's efforts to
    identify and address the root causes of erroneous EITC and ACTC
    payments.
                                what tigta found
        Processes have been developed to identify improper EITC payments
    and their root causes. However, the IRS has not developed processes to
    quantify or identify the root causes of improper ACTC payments.
        The IRS has continually rated the risk of improper ACTC payments as
    low. However, TIGTA's assessment of the potential for ACTC improper
    payments indicates the ACTC improper payment rate is similar to that of
    the EITC. Using IRS data, TIGTA estimates the potential ACTC improper
    payment rate for Fiscal Year 2013 is between 25.2 percent and 30.5
    percent, with potential ACTC improper payments totaling between $5.9
    billion and $7.1 billion. In addition, IRS enforcement data show the
    root causes of improper ACTC payments are similar to those of the EITC.
        Significant changes in IRS compliance processes would be necessary
    to make any significant reduction in improper payments. Expanded
    authority to make corrections to tax returns when data obtained from
    the Department of Health and Human Services indicate the taxpayer's
    refundable credit claims are not valid would help reduce improper
    payments. TIGTA estimates such authority could have potentially allowed
    the IRS to prevent more than $1.7 billion in questionable EITC payments
    in Tax Year 2012.
                             what tigta recommended
        TIGTA recommended that the IRS ensure that the results of the ACTC
    Improper Payment Risk Assessment accurately reflect the high risk
    associated with ACTC payments, identify the root causes of the improper
    ACTC payments, and establish a plan to reduce erroneous payments.
    Furthermore, if correctable error authority is granted, the IRS should
    contract with the Department of Health and Human Services to obtain the
    complete National Directory of New Hires database.
        In addition, the IRS should work with the Assistant Secretary of
    the Treasury for Tax Policy to consider a legislative proposal to
    obtain expanded National Directory of New Hires database authority to
    systemically verify claims for other income-based refundable credits
    (e.g., the ACTC).
        The IRS agreed with our recommendation to pursue expanded National
    Directory of New Hire authority. The IRS did not agree with our other
    recommendations. TIGTA's concerns with the IRS's response to the
    recommendations are noted in the report.

                                 ABBREVIATIONS

    ACTC                              Additional Child Tax Credit

    CTC                               Child Tax Credit

    DDV                               Due Diligence Visit

    EITC                              Earned Income Tax Credit

    HHS                               Department of Health and Human
                                       Services

    IPERA                             Improper Payments Elimination and
                                       Recovery Act

    IPERIA                            Improper Payments Elimination and
                                       Recovery Improvement Act

    IPIA                              Improper Payments Information Act

    IRS                               Internal Revenue Service

    NDNH                              National Directory of New Hires

    NRP                               National Research Program

    OMB                               Office of Management and Budget

    SSN                               Social Security Number

    TIGTA                             Treasury Inspector General for Tax
                                       Administration

                                   BACKGROUND

        Refundable credits are designed to help low-income individuals
    reduce their tax burden or to provide incentives for other activities.
    The number of these credits has varied over time because some credits
    are available for a limited period that is set by law. The Internal
    Revenue Service (IRS) reported that the amount of refundable tax
    credits claimed by taxpayers has grown from approximately $9.4 billion
    in fiscal year \1\ 1993 to more than $104 billion in fiscal year 2013.
        The two largest refundable credits designed to help low-income
    individuals are the Earned Income Tax Credit (EITC) and Additional
    Child Tax Credit (ACTC). The EITC is used to offset the impact of
    Social Security taxes on low-income families and to encourage them to
    seek employment. The ACTC is used to adjust the individual income tax
    structure to reflect a family's reduced ability to pay taxes as family
    size increases. The EITC and the ACTC combined have increased almost 40
    percent from Tax Year \2\ 2007 to Tax Year 2012. The IRS estimated that
    it paid $47.5 billion in refundable EITCs and $16.4 billion in
    refundable ACTCs for Tax Year 2007 compared to $63 billion and $26.6
    billion, respectively, for Tax Year 2012.
    ---------------------------------------------------------------------------
        \1\ Any yearly accounting period, regardless of its relationship to
    a calendar year. The Federal Government's fiscal year begins on October
    1 and ends on September 30.
        \2\ A 12-month accounting period for keeping records on income and
    expenses used as the basis for calculating the annual taxes due. For
    most individual taxpayers, the tax year is synonymous with the calendar
    year.
    ---------------------------------------------------------------------------
    The EITC
        Congress created the EITC in 1975. Since then, the EITC has been
    modified a number of times to help improve the administration of the
    credit and to make the law less complex. For example, the initial
    eligibility requirements were revised to make taxpayers ineligible to
    receive the credit when the taxpayer has a Social Security Number (SSN)
    that is not valid for employment.\3\ Congress also implemented a
    uniform definition of a qualifying child that applied to most child-
    related tax provisions. Most recently, the EITC was expanded to provide
    for a temporary increase in the EITC and expansion of the credit for
    workers with three or more qualifying children.
    ---------------------------------------------------------------------------
        \3\ Non-U.S. citizens who do not have an employment authorization
    must prove a valid nonwork reason for requesting an SSN in order to
    receive one, generally for obtaining Government benefits (Federal,
    State, or local) to which the individual is entitled.
    ---------------------------------------------------------------------------
        Taxpayers use Form 1040 (Schedule EIC), Earned Income Credit, to
    report the EITC qualifying child information. Taxpayers must meet
    specific criteria to qualify for the EITC that includes having a valid
    SSN. Additional criteria apply for those taxpayers who have qualifying
    children, including certain age, relationship, and residency tests. The
    resulting amount of the EITC a taxpayer can receive is based on the
    taxpayer's earned income and the number of qualifying children.
    Appendix V lists the rules taxpayers must meet to qualify for the EITC.
    The ACTC
        The Child Tax Credit (CTC) and the ACTC (the refundable portion of
    the CTC) were enacted by the Taxpayer Relief Act of 1997.\4\ Congress
    believed that a tax credit for families with dependent children would
    reduce the individual income tax burden for families, better recognize
    the financial responsibilities of raising dependent children, and
    promote family values. To qualify for the CTC, a taxpayer must have a
    qualifying child.\5\ Taxpayers use Schedule 8812, Child Tax Credit, to
    compute the ACTC and document whether the children claimed on the tax
    return who have an Individual Taxpayer Identification Number \6\ meet
    the qualifying eligibility tests of substantial presence in the United
    States. The amount of the ACTC a taxpayer may receive, if any, is
    dependent on the total amount of the taxpayer's CTC and the taxpayer's
    earned income.
    ---------------------------------------------------------------------------
        \4\ Public Law No. 105-34, 111 Stat. 788.
        \5\ A qualifying child for purposes of the CTC is a child who must
    be claimed as a dependent on your tax return and meets other specific
    eligibility tests, such as relationship, age, filing status, and
    support. See Appendix VI for qualifying criteria.
        \6\ An Individual Taxpayer Identification Number is an IRS-issued
    identification number available to individuals who are required to have
    a Taxpayer Identification Number for tax purposes but who do not have
    and are not eligible to obtain an SSN because they are not authorized
    to work in the United States.
    ---------------------------------------------------------------------------
        The CTC can reduce an individual's taxes owed by as much as $1,000
    for each qualifying child.\7\ Because the CTC is nonrefundable, the
    amount that can be claimed is limited to an individual's reported tax
    liability. The ACTC is the refundable portion of the CTC and is
    provided to qualifying individuals even if no income tax is withheld or
    paid; that is, the credit can exceed the tax liability. Appendix VI
    lists the basic eligibility and qualifying child requirements for the
    CTC and the ACTC.
    ---------------------------------------------------------------------------
        \7\ The CTC amount has been $1,000 since Tax Year 2003.
    ---------------------------------------------------------------------------
        Like the EITC, Congress has changed the CTC and the ACTC several
    times since they were enacted in Calendar Year 1997. These changes
    allowed more families to be eligible for the ACTC. For example, the
    American Recovery and Reinvestment Act of 2009 \8\ reduced the minimum
    earned income amount used to figure the ACTC to $3,000.\9\ Reducing the
    amount to $3,000 expanded the number of taxpayers who could then
    qualify for the ACTC as well as increased the amount of the ACTC they
    could receive. The $3,000 minimum earned income amount has been
    extended by law through Tax Year 2017.
    ---------------------------------------------------------------------------
        \8\ Public Law No. 111-5, 123 Stat. 115.
        \9\ Taxpayers must deduct the minimum earned income amount from
    their earned income before applying the percentage allowed to figure
    the refundable ACTC.
    ---------------------------------------------------------------------------
    Improper payments of refundable credits
        The Office of Management and Budget (OMB) defines an improper
    payment as any payment that should not have been made, was made in an
    incorrect amount, or was made to an ineligible recipient. Various ways
    have been put forth to identify, measure, and reduce Federal improper
    payments, including laws specifically addressing improper payments, an
    Executive order, and guidance by certain oversight agencies such as the
    OMB. In addition, agency Inspectors General serve a role by evaluating
    agency information related to improper payments. For example:
      --The Improper Payments Information Act (IPIA) of 2002 \10\ requires
            Federal agencies, including the IRS, to estimate the amount of
            improper payments and report to Congress annually on the causes
            of and the steps taken to reduce improper payments.
    ---------------------------------------------------------------------------
        \10\ Public Law No. 107-300, 116 Stat. 2350.
    ---------------------------------------------------------------------------
      --The Improper Payments Elimination and Recovery Act (IPERA) of
            2010,\11\ enacted on July 22, 2010, amended the IPIA by
            strengthening agency reporting requirements and redefining
            ``significant improper payments.'' Significant is defined as
            gross annual improper payments, i.e., the total amount of
            overpayments plus underpayments, made in the program during the
            fiscal year reported that exceeded (a) both 2.5 percent of
            program outlays and $10 million of all program or activity
            payments or (b) $100 million.
    ---------------------------------------------------------------------------
        \11\ Public Law No. 111-204, 124 Stat. 2224.
    ---------------------------------------------------------------------------
      --Executive Order 13520, Reducing Improper Payments and Eliminating
            Waste in Federal Programs, signed by the President on November
            20, 2009, further increases Federal agencies' accountability
            for reducing improper payments while continuing to ensure that
            Federal programs serve and provide access to their intended
            beneficiaries.
      --The Improper Payments Elimination and Recovery Improvement Act
            (IPERIA) of 2012,\12\ enacted in January 2013, further expanded
            agency improper payment requirements to foster greater agency
            accountability. The IPERIA requires the OMB to designate the
            programs with the most egregious cases of improper payments as
            high-priority and requires agencies to develop additional or
            supplemental measures for tracking progress in reducing
            improper payments in these programs.
    ---------------------------------------------------------------------------
        \12\ Public Law No. 112-248.
    ---------------------------------------------------------------------------
        The OMB's improper payment reporting guidance \13\ requires
    agencies that identify programs with a high risk of improper payments
    to report root causes of these errors using the following three
    categories:
    ---------------------------------------------------------------------------
        \13\ OMB Circular A-123, Requirements for Effective Measurement and
    Remediation of Improper Payments, Part III to Appendix C (Mar. 22,
    2010).
    ---------------------------------------------------------------------------
      --Documentation and Administrative Errors.--Errors caused by the
            absence of supporting documentation necessary to verify the
            accuracy of a payment or errors caused by incorrect inputting,
            classifying, or processing of applications or payments by a
            relevant Federal agency, State agency, or third party who is
            not the beneficiary.
      --Authentication and Medical Necessity Errors.--Errors caused by an
            inability to authenticate eligibility criteria through third-
            party databases or other resources because no databases or
            other resources exist, or providing a service that was not
            medically necessary given the patient's condition.
      --Verification Errors.--Errors caused by the failure or inability to
            verify recipient information, including earnings, income,
            assets, or work status, even though verifying information does
            exist in third-party databases or other resources (in this
            situation, as contrasted with ``authentication'' errors, the
            ``inability'' to verify may arise due to legal or other
            restrictions that effectively deny access to an existing
            database or resource), or errors due to beneficiaries failing
            to report correct information to an agency.
        For fiscal year 2011 reporting and beyond, agencies with programs
    that are susceptible to significant improper payments under the IPIA
    are required to report information on the three categories of errors
    annually in their Performance and Accountability Report or Agency
    Financial Report. Furthermore, both the IPERA and Executive Order 13520
    require the Treasury Inspector General for Tax Administration (TIGTA)
    to annually review the IRS's compliance with improper payment
    assessment and reporting requirements.
    The process to identify IRS programs for improper payment risk
            assessment
        The Department of the Treasury identifies the programs that the IRS
    must assess for the risk of improper payments. The IRS used the
    Improper Payments Elimination and Recovery Risk Assessment
    Questionnaire for fiscal year 2013 (the Questionnaire) and related
    guidance provided by the Department of the Treasury to assess the level
    of risk for each identified program. The Questionnaire computes a risk
    score for each program based on the IRS's response to the questions
    contained in the Questionnaire. The risk score determines whether there
    is a low, medium, or high risk of improper payments in a program. The
    Department of the Treasury establishes the level of risk for improper
    payments in a program based on the risk score ranges and considers
    programs with a risk score of 0 to 11 as low risk, 12 to 28 as medium
    risk, and 29 and greater as high risk.
        The IRS is required to forward the results and documentation for
    all risk assessments to the Department of the Treasury. For any program
    identified as having a high risk for improper payments, the IRS must
    provide the following information to the Department of the Treasury for
    inclusion in the Department's annual Agency Financial Report:
      --The rate and amount of improper payments.
      --The root causes of the improper payments.
      --Actions taken to address the root causes.
      --Annual improper payment reduction targets.
      --A discussion of any limitations to the IRS's ability to reduce
            improper payments.
        The EITC has previously been declared a high-risk program by the
    OMB and as such the annual Improper Payments Elimination and Recovery
    Risk Assessment Questionnaire is not required to be prepared for this
    program. The EITC is currently the only IRS program identified as
    having a high risk for improper payments for the purposes of the IPERA
    and the only program with information included in the Agency Financial
    Report. The IRS estimates that 24 percent of all EITC payments made in
    fiscal year 2013, or $14.5 billion, were paid in error.\14\ In
    addition, the IRS estimates that it paid between $124 billion and $148
    billion in improper EITC payments in fiscal years 2003 through 2013.
    ---------------------------------------------------------------------------
        \14\ The estimated EITC improper payment range for fiscal year 2013
    was from 22 to 26 percent and from $13.3 billion to $15.6 billion.
    ---------------------------------------------------------------------------
        This review was performed at IRS National Headquarters Office of
    Research, Analysis, and Statistics in Washington, DC, and in the Office
    of Return Integrity and Correspondence Services in Atlanta, Georgia,
    during the period May 2013 through July 2014. We conducted this
    performance audit in accordance with generally accepted government
    auditing standards. Those standards require that we plan and perform
    the audit to obtain sufficient, appropriate evidence to provide a
    reasonable basis for our findings and conclusions based on our audit
    objective. We believe that the evidence obtained provides a reasonable
    basis for our findings and conclusions based on our audit objective.
    Detailed information on our audit objective, scope, and methodology is
    presented in Appendix I. Major contributors to the report are listed in
    Appendix II.

                               RESULTS OF REVIEW

    Processes Have Been Developed to Identify Root Causes of Improper
            Earned Income Tax Credit Payments

        The IRS has determined that EITC improper payments primarily result
    from two root causes--authentication and verification. Authentication
    errors include errors associated with the IRS's inability to
    authenticate qualifying child requirements, taxpayers' filing status,
    and EITC claims associated with complex or nontraditional living
    situations. Verification errors relate to the IRS's inability to
    identify individuals improperly reporting income to erroneously claim
    an EITC amount to which they are not entitled. Verification errors
    include underreporting and overreporting of income by wage earners as
    well as taxpayers who report they are self-employed. For fiscal year
    2013, the IRS estimates that 70 percent, or $10.15 billion, in improper
    EITC payments resulted from authentication errors and the remaining 30
    percent, or $4.35 billion, resulted from verification errors.
        The IRS uses the following methods to identify the root causes of
    EITC improper payments:
      --National Research Program (NRP).--The NRP Individual Income Tax
            Reporting Compliance Study, also known as the NRP 1040 Study,
            is performed annually and involves the IRS examining a
            statistically representative sample of tax returns. The NRP
            allows the IRS to estimate taxpayers' compliance with the EITC
            and to estimate the improper payment rate each year. The NRP is
            designed to ensure consistency, uniformity, and thoroughness in
            the examination process in order to ensure a reasonable chance
            to uncover the noncompliance that is actually present on a
            return. Complete and accurate examination results are the
            foundation of good estimates.
      --Compliance Studies.--The IRS conducted a series of studies in the
            1990s to better understand compliance issues specific to the
            EITC and to aid EITC administration. These studies culminated
            in the IRS report Compliance Estimates for Earned Income Tax
            Credit Claimed on 1999 Returns (referred to as the 1999
            Compliance Study).\15\ In addition to providing estimates of
            EITC overclaims, this report was used to develop strategies to
            improve the administration of the credit. Since its release,
            the 1999 Compliance Study has been the authoritative source on
            the nature of EITC compliance. The IRS recently updated the
            1999 Compliance Study using data from the NRP for Tax Years
            2006 through 2008. The study results provide information about
            overall compliance of taxpayers claiming the EITC with specific
            emphasis on the nature of errors made. The IRS plans to use the
            updated study data to further explore and understand the nature
            of the errors and formulate future actions to address
            noncompliance.
    ---------------------------------------------------------------------------
        \15\ Dated Feb. 28, 2002.
    ---------------------------------------------------------------------------
        In response to the IRS's identification of root causes of EITC
    improper payments, it has developed a strategy in an attempt to reduce
    EITC improper payments. This strategy focuses on early intervention to
    ensure that individuals claiming the credit are in compliance with the
    EITC rules. The IRS's strategy includes: \16\
    ---------------------------------------------------------------------------
        \16\ See Appendices VII and VIII for more details.
    ---------------------------------------------------------------------------
      --Education and outreach.--Programs designed to educate taxpayers and
            tax return preparers on the legal requirements for EITC
            eligibility so they can apply the law accurately. For example,
            the IRS hosts annual EITC Awareness Days to market the EITC to
            lower income taxpayers and the Nationwide Tax Forum EITC
            Training for tax return preparers on EITC due diligence
            requirements and qualifying child requirements.
      --Enforcement actions.--Programs intended to contribute to the
            broader strategy of identifying errors as early in the process
            as possible, which include math error authority, an automated
            process to match reported income to third-party documents, and
            audits.
      --Paid tax return preparer compliance initiative.--An EITC paid
            preparer strategy that focuses on tax return preparers who are
            not compliant with the EITC due diligence requirements. The
            EITC due diligence requirements are intended to assist tax
            return preparers in accurately determining their clients'
            eligibility for the EITC and require that preparers maintain
            proof that they complied with the due diligence requirements.
      --Legislative proposals.--The IRS has proposed legislative changes to
            enable it to put into place processes and programs that are
            needed to enable it to do its job more effectively and to
            address the root causes of EITC improper payments.
        According to the IRS, the above efforts reached more than 1.8
    million taxpayers and 10,000 tax return preparers and identified and
    protected almost $4 billion in erroneous EITC claims during fiscal year
    2013.\17\ However, despite the IRS's efforts, the estimated EITC
    improper payment rate has remained relatively unchanged since fiscal
    year 2003 (the first year the IRS was required to report estimates of
    these payments to Congress), and the amount of EITC claims paid in
    error has grown. The IRS estimates that improper EITC payments totaled
    from $9.5 billion to $11.5 billion in fiscal year 2003 \18\ and from
    $13.3 billion to $15.6 billion in fiscal year 2013.\19\ The IRS
    estimates the total EITC paid in error over these 11 years is between
    $124 billion and $148 billion.
    ---------------------------------------------------------------------------
        \17\ See Appendices VII and VIII for detailed results of the
    various IRS programs to address EITC improper payments.
        \18\ EITC improper payment estimates obtained from the Department
    of the Treasury Performance and Accountability Report for fiscal year
    2003.
        \19\ EITC improper payments estimates obtained from the Department
    of the Treasury fiscal year 2013 Agency Financial Report.
    ---------------------------------------------------------------------------
        As previously discussed, the IRS has processes to identify the
    causes of improper EITC payments and to identify erroneous EITC
    payments. However, the IRS does not have the resources nor does it have
    alternative compliance tools needed to adequately address the erroneous
    EITC payments identified. As we have previously reported, the IRS will
    be unable to make any significant reduction in erroneous payments. In
    the IRS's April 2014 \20\ report to TIGTA on its efforts to reduce
    erroneous EITC payments, IRS management acknowledged the limitations
    faced in significantly reducing noncompliance using the traditional
    process of auditing tax returns. The IRS noted that it cannot fully
    address EITC noncompliance by simply auditing returns and must pursue
    alternatives to traditional compliance efforts.
    ---------------------------------------------------------------------------
        \20\ IRS, Report on Earned Income Tax Credit (EITC) Improper
    Payments Executive Order 13520: Reducing Improper Payments (April 15,
    2014).
    ---------------------------------------------------------------------------

    Annual Risk Assessments Do Not Accurately Reflect the Risk Associated
            With Additional Child Tax Credit Improper Payments

        Each year since fiscal year 2011, the IRS has continually rated the
    risk of improper payments associated with the ACTC as low. However, our
    review of the IRS's own enforcement data indicates that the ACTC
    improper payment rate is similar to that of the EITC. We estimate that
    the ACTC improper payment rate for fiscal year 2013 is between 25.2
    percent and 30.5 percent, with potential ACTC improper payments
    totaling between $5.9 billion and $7.1 billion.
        The Department of the Treasury has selected the ACTC as one of the
    revenue program funds \21\ for which the IRS must perform a risk
    assessment to assess the level of improper payment risk. The Department
    of the Treasury selected the ACTC based on its materiality to the IRS's
    financial statements. On March 20, 2014, the OMB issued supplemental
    improper payment guidance to the Department of the Treasury clarifying
    the requirement for annual risk assessments of all refundable tax
    credits. Although the IRS has conducted the annual risk assessment of
    the ACTC as required by the Department of the Treasury, the methodology
    that the IRS uses to conduct the risk assessment continues to provide
    an inaccurate assessment of the risk of ACTC improper payments.
    ---------------------------------------------------------------------------
        \21\ The IRS's custodial activity includes revenues collected and
    refunds disbursed. However, in this report the general term ``revenue''
    is used in place of ``custodial.'' The revenue program funds for which
    the IRS performed risk assessments generally represent specific
    individual tax credits or refund payments.
    ---------------------------------------------------------------------------
        To determine the potential risk of ACTC improper payments, we used
    the same data sources and methodologies to the extent possible that the
    IRS uses to estimate the EITC improper payment rate to compute an
    estimate of the potential ACTC improper payment rate. For example, we
    used the results of the IRS's NRP 1040 Study for Tax Year 2009, which
    is the same study the IRS used to estimate the fiscal year 2013 EITC
    improper payment rate. The IRS was unable to provide an estimate of the
    amount of ACTC overclaims recovered through compliance programs for Tax
    Year 2009; therefore, we used the same ratio of overclaims recovered to
    improper payments that the IRS used to compute its fiscal year 2013
    EITC improper payment rate.\22\ Finally, we computed the estimated
    amount of potential ACTC improper payments by applying our estimate of
    the potential ACTC improper payment rate to the OMB budget estimates
    that are consistent with the budget estimates used by the IRS to
    compute fiscal year 2013 EITC improper payments. Figure 1 shows the
    methodology we used to estimate the potential ACTC improper payment
    rate for fiscal year 2013.
    ---------------------------------------------------------------------------
        \22\ The IRS ratio of EITC overclaims recovered to EITC improper
    payments for fiscal year 2013 was 13.5 percent.

        Figure 1: Methodology Used to Compute the Potential ACTC Improper
                        Payment Rate for Fiscal Year 2013
    ------------------------------------------------------------------------

    ------------------------------------------------------------------------
                 Potential ACTC                ACTC Improper Payments--ACTC
                    Improper                        Overclaims Recovered
                 Payment Rate =               ------------------------------
                                                  -----------------------
                                                     Total ACTC Claims
    ------------------------------------------------------------------------
    ACTC Improper Payments.--The amount of the difference between the amount
     of the ACTC claimed by the taxpayer on his or her tax return and the
     amount the taxpayer should have claimed based on NRP results for Tax
     Year 2009. This amount includes ACTC overclaims and ACTC underpayments.
     This amount totaled $8.07 billion.
    ------------------------------------------------------------------------
    ACTC Overclaims Recovered.--The amount of ACTC overclaims that the IRS
     prevents from being paid through activities such as math error
     processing and prerefund examinations or recovers after being paid
     through Automated Underreporter document matching and post-refund
     examinations. This amount was estimated by applying the ratio of EITC
     overclaims recovered to EITC improper payments from the IRS's Fiscal
     Year 2013 EITC improper payment rate calculation. Using the EITC
     overclaims recovered ratio of 13.5 percent, we estimated the ACTC
     overclaims recovered to total $1.09 billion.
    ------------------------------------------------------------------------
    Total ACTC Claims.--The amount of the ACTC claimed on all tax returns
     based on the NRP results for Tax Year 2009. This amount totaled $25.03
     billion.
    ------------------------------------------------------------------------
                 Potential ACTC                   Estimated ACTC Claims
                    Improper                      Potential ACTC Improper
                Payment Dollars =                       Payment Rate
    ------------------------------------------------------------------------
    Source: TIGTA analysis of Tax Year 2009 1040 NRP ACTC data and the IRS's
      calculation of the Fiscal Year 2013 EITC improper payment rate.

        The IPERA defines a program as having significant improper payments
    when improper payments exceed both 2.5 percent of program outlays and
    $10 million of all program or activity payments made during the fiscal
    year reported or $100 million at any percent of program outlays.
    Audit results indicate a high degree of noncompliance with ACTC
            eligibility requirements
        The IRS's rating of the ACTC as low risk for significant improper
    payments is contrary to its own enforcement data, which show that in
    fiscal year 2013 the IRS adjusted \23\ over $347 million of ACTC claims
    on returns also claiming the EITC. Our review of EITC closed audit data
    found that there is a close relationship between taxpayers' compliance
    with the EITC and the ACTC. According to the IRS, 283,806 (59 percent)
    of the 482,468 tax returns it audited in fiscal year 2013 with an EITC
    claim also included an adjustment record for the ACTC. Figure 2 shows
    the results of the IRS's EITC audits.
    ---------------------------------------------------------------------------
        \23\ The ACTC can be adjusted if it was not claimed or if it was
    claimed incorrectly on the taxpayer's tax return.

      Figure 2: Results of EITC Audits of Tax Returns That Also Include an
                        ACTC Adjustment--Fiscal Year 2013
    ------------------------------------------------------------------------
                                                                 Percentage
           Audit Disposition          Number of   ACTC Dollars   of Returns
                                       Returns      Adjusted      Adjusted
    ------------------------------------------------------------------------
    EITC/ACTC Tax Returns Audited.       283,806  $347,844,351          100%
        ACTC Disallowed \24\......       279,306  $350,324,178        98.41%
        Additional ACTC Allowed...         2,916  ($2,479,827)         1.03%
        No Change.................         1,584             0         0.56%
    ------------------------------------------------------------------------
    Source: IRS Examination Operational Automated Database.\25\

        When we provided our estimate of the potential ACTC improper
    payment rate to IRS management as well as our concern that the risk
    assessment process did not accurately reflect the risk associated with
    ACTC payments, the IRS raised the following concerns related to our
    estimate. We do not agree with the IRS's conclusions. We respond to
    each concern below.
    ---------------------------------------------------------------------------
        \24\ Includes full disallowance of 269,561 returns for a total of
    $342,622,748 and partial disallowance of 9,745 returns for a total of
    $7,701,430
        \25\ Provided by the IRS on February 27, 2014.
    ---------------------------------------------------------------------------
      --An assessment of the ACTC improper payment rate must also include
            an assessment of the validity of the CTC.

           In March 2014, the OMB issued improper payment guidance to the
    IRS clarifying that all refundable credits are subject to IPERA
    requirements as they represent an additional outlay of funds by the
    Government. The CTC is a nonrefundable credit that reduces an
    individual's tax liability and represents an offset of excess taxes
    that were already paid to the Government and therefore does not result
    in an additional budget outlay. The ACTC is a refundable tax credit and
    therefore represents an additional expense or outlay to the Government
    because it is paid in excess of a taxpayer's net tax liability. As a
    result, it is appropriate per OMB guidance to consider only the
    refundable ACTC for purposes of assessing the risk of improper payments
    and estimating the improper payment rate.

      --The NRP 1040 Study was not designed to meet IPERA precision
            requirements for computing an ACTC improper payment rate.

           Our estimate of the potential ACTC improper payment rate was
    computed to show that the IRS's improper payment risk assessment
    process should have ranked the ACTC Program as a high risk instead of
    low risk. We agree that the NRP 1040 Study was not designed to meet
    IPERA precision requirements. However, the 2,041 ACTC claims that the
    IRS audited as part of the NRP 1040 Study were selected by the IRS as
    part of a statistically valid sample of all Forms 1040, U.S. Individual
    Income Tax Return. As such, these tax returns are representative of the
    general tax return population for Tax Year 2009.

      --The potential ACTC improper payment rate does not account for
            recovered revenue.

           Our ACTC improper payment rate does account for recovered
    revenue. As we previously mentioned, the IRS was unable to provide us
    the data for the ACTC for Tax Year 2009. As such, we estimated the ACTC
    overclaims recovered using the same ratio of overclaims recovered to
    improper payments that the IRS used to compute the fiscal year 2013
    EITC improper payment rate. Therefore, our calculation of the potential
    ACTC improper payment rate is consistent with the IRS's calculation of
    the EITC improper payment rate.
    Prior audits raise concerns with the reliability of the IRS's improper
            payment risk assessment process
        In January 2013, TIGTA reported that the IPERA risk assessment
    process did not provide a reliable assessment of improper payment risk
    for IRS revenue program funds.\26\ Specifically, we concluded that the
    risk assessments were not performed in compliance with Department of
    the Treasury guidelines and that the Questionnaire did not effectively
    address risks associated with tax refund payments.
    ---------------------------------------------------------------------------
        \26\ TIGTA, Ref. No. 2013-40-015, Improper Payments Elimination and
    Recovery Act Risk Assessments of Revenue Programs Are Unreliable (Jan.
    2013).
    ---------------------------------------------------------------------------
        In response to our audit recommendations, the IRS met with the
    Department of the Treasury to revise the risk assessment Questionnaire
    for revenue funds. In addition, the IRS Office of the Chief Financial
    Officer established guidelines for retaining risk assessment
    documentation and worked with the business unit executives to ensure
    that the appropriate subject matter experts were identified and
    participated in the review process.
        In March 2014, we reported \27\ that the IRS performed risk
    assessments for each of the 25 program fund groups identified by the
    Department of the Treasury for review for fiscal year 2013--six
    administrative program funds and 19 revenue program funds.\28\ However,
    we again concluded that the process still may not provide a valid
    assessment of improper payments in tax administration because the EITC
    remains the only revenue program fund to be considered a high risk for
    improper payments despite numerous indicators that other refundable tax
    credits, e.g., the ACTC, also potentially result in significant
    improper payments.
    ---------------------------------------------------------------------------
        \27\ TIGTA, Ref. No. 2014-40-027, The Internal Revenue Service
    fiscal year 2013 Improper Payment Reporting Continues to Not Comply
    With the Improper Payments Elimination and Recovery Act (Mar. 2014).
        \28\ The EITC Program has been declared a high-risk program for
    improper payments by the OMB; therefore, no formal risk assessment is
    required for it.
    ---------------------------------------------------------------------------

    Recommendation

        Recommendation 1: The Commissioner, Wage and Investment Division,
    should ensure that the results of the ACTC Improper Payment Risk
    Assessment accurately reflect the high risk associated with ACTC
    payments and provide a reliable estimate of improper payments.
    Completion of the ACTC Improper Payment Risk Assessment should include
    an evaluation of available NRP and enforcement data when determining
    the overall risk of improper payments.
              Management's Response: The IRS disagreed with this
            recommendation. IRS management stated that the Improper Payment
            Risk Assessment is completed for the ACTC following the
            guidance of the Department of Treasury and the OMB. The IRS
            stated that the assessment questionnaire and scoring
            methodology reflect operational risks associated with
            administration of the credit. The IRS already considers
            enforcement data and overall risks associated with
            administration of the ACTC by its inclusion in the Tax Gap
            estimate.
              Office of Audit Comment: As we have repeatedly reported, the
            risk assessment process performed by the IRS does not provide a
            reliable assessment of improper payments. The IRS has
            previously acknowledged this in its response to a prior review.
            Moreover, the IRS's own enforcement data clearly contradicts
            the IRS conclusion that the risk of ACTC improper payments is
            low.

    Data Show Root Causes of Additional Child Tax Credit Improper Payments
            Are Similar to Those of the Earned Income Tax Credit

        The IRS indicated that it does not have the same level of detail
    regarding the source of ACTC errors as it does for EITC claims. The IRS
    noted that for the NRP EITC audits, all aspects related to the credit
    are verified as part of the audit. As a result, the IRS has very
    detailed information about the condition that caused the EITC claim to
    be in error. Although the IRS has not developed a strategy to identify
    the root causes of ACTC improper payments, we believe it has
    information that indicates that the root causes are similar to those of
    the EITC. As discussed previously, 283,806 (59 percent) of the 482,468
    EITC tax returns the IRS audited in Fiscal Year 2013 also included an
    adjustment record for the ACTC. The IRS adjusted the ACTC on 282,222
    (99.4 percent) of these 283,806 EITC returns.
        The correlation between causes of EITC and ACTC improper payments
    results from the commonality in many of the eligibility requirements.
    Figure 3 is a comparison of the eligibility requirements for the EITC
    and the ACTC.

            Figure 3: Comparison of the Eligibility Requirements for the EITC and the ACTC for Tax Year 2013
    ----------------------------------------------------------------------------------------------------------------
                Eligibility Test                               The EITC                             The ACTC
    ----------------------------------------------------------------------------------------------------------------
    Relationship...........................  Son, daughter, stepchild, foster child, or a             Same
                                              descendant of any of them (for example,
                                              your grandchild).
                                             Brother, sister, half-brother, half-sister,
                                              stepbrother, stepsister, or a descendant of
                                              any of them (for example, your niece or
                                              nephew).
                                             Adopted child. An adopted child is always
                                              treated as your own child. The term
                                              ``adopted child'' includes a child who was
                                              lawfully placed with you for legal
                                              adoption.
    ----------------------------------------------------------------------------------------------------------------
    Joint Return...........................  The child does not file a joint return for               Same
                                              the year (or files jointly to claim a
                                              refund).
    ----------------------------------------------------------------------------------------------------------------
    Age....................................  A qualifying child must be:                   A qualifying child must
                                               --Under age 19 at the end of Tax Year 2013   be:
                                              and younger than you (or your spouse, if       --Under age 17 at the
                                              filing jointly);                              end of the tax year.
                                               --Under age 24 at the end of Tax Year
                                              2013, a student, and younger than you (or
                                              your spouse, if filing jointly); or
                                               --Permanently and totally disabled at any
                                              time during 2013, regardless of age.
    ----------------------------------------------------------------------------------------------------------------
    Residency \29\.........................  The child must have lived with the claimant   The child must have lived
                                              in the United States for more than half of    with claimant for more
                                              the year.                                     than half of the
                                                                                            year.\30\
    ----------------------------------------------------------------------------------------------------------------
    Qualifying Child Required?                                    No                                  Yes
    ----------------------------------------------------------------------------------------------------------------
    SSN Required?..........................                       Yes                      No--The IRS allows
                                                                                            Individuals issued an
                                                                                            Individual Taxpayer
                                                                                            Identification Number to
                                                                                            receive the ACTC.
    ----------------------------------------------------------------------------------------------------------------
    Source: IRS Publication 972, Child Tax Credit, and IRS Publication 596, Earned Income Credit (EIC), for use in
      preparing Tax Year 2013 Returns.

    Recommendation
    ---------------------------------------------------------------------------

        \29\ Exceptions apply.
        \30\ There are some exceptions to the residence test, which can be
    found in IRS Publication 972.
    ---------------------------------------------------------------------------
        Recommendation 2: The Commissioner, Wage and Investment Division,
    should, as required by the IPERA, identify the root causes of the
    improper ACTC payments, determine if tools and/or resources are
    available to address erroneous ACTC payments, and establish a plan to
    reduce the erroneous payments and then meet that plan.
              Management's Response: The IRS disagreed with this
            recommendation and stated that the OMB acknowledges that it
            already conducts analysis of the Tax Gap that incorporates
            these credits. According to the IRS, refundable tax credit
            noncompliance is included in the Tax Gap estimate and in the
            assessment and regular updating of its compliance strategies.
            The IRS considers available tools, resources, and alternative
            treatment options when preparing and updating compliance
            strategies. The IRS stated that reduction of erroneous payments
            is a primary goal of those activities.
              Office of Audit Comment: Because of the substantial number
            and amount of ACTC improper payments, excluding this credit
            from the IRS's assessment results in a substantial
            understatement of improper payments. We estimate this
            understatement to be in the range of $5.9 billion to $7.1
            billion. If the IRS includes improper payments in its Tax Gap
            study, it should be clear on what portion of the Tax Gap is due
            to improper payments. Furthermore, the IRS advised us that the
            Tax Year 2006 Tax Gap estimation methodology did not estimate
            the number or amount of disallowed ACTC claims. Instead, it
            provides an aggregate estimate for the net misreported amount
            for all tax credits. As such, it cannot ensure that its Tax Gap
            strategy accurately identifies and addresses the causes of ACTC
            improper payments as required by the IPERA. The IPERA requires
            agencies to identify the root causes for improper payments for
            all programs for which improper payments exceed both 2.5
            percent of program outlays and $10 million of all program or
            activity payments made during the fiscal year reported or $100
            million.

    New Compliance Processes Are Needed to Make Any Significant Reduction
            in Improper Payments

        As we have previously reported,\31\ the IRS continues to report
    significant improper EITC payments each year. For example, $13.3
    billion to $15.6 billion in erroneous EITC payments were estimated to
    have been paid in fiscal year 2013. Compliance resources are limited,
    and additional alternatives to traditional compliance methods have not
    been developed. Consequently, the IRS does not address the majority of
    potentially erroneous EITC claims. This is despite the fact that the
    IRS has processes that successfully identify billions of dollars in
    potentially erroneous EITC payments. For example, the IRS identified
    more than 6.6 million potentially erroneous EITC claims totaling
    approximately $21.6 billion for Tax Year 2011. *****2*****.
    ---------------------------------------------------------------------------
        \31\ TIGTA, Ref. No. 2014-40-027, The Internal Revenue Service
    fiscal year 2013 Improper Payment Reporting Continues to Not Comply
    With the Improper Payments Elimination and Recovery Act (Mar. 2014).
    ---------------------------------------------------------------------------
        In addition to limited compliance resources and the reliance on
    traditional compliance methods, statutory requirements further limit
    the IRS's ability to ensure that EITC claims are valid before they are
    paid. The Internal Revenue Code requires the IRS to process tax returns
    and pay any related tax refunds within 45 calendar days of receipt of
    the tax return or the tax return due date, whichever is later. Because
    of this requirement, the IRS cannot conduct extensive eligibility
    checks similar to those that occur with other Federal programs that
    typically certify eligibility prior to the issuance of payments or
    benefits.
    Some actions have been taken to address recommendations made in a prior
            TIGTA report
        In our fiscal year 2009 report,\32\ we recommended the IRS conduct
    a study to identify alternative processes that will expand its ability
    to effectively and efficiently address erroneous EITC claims for which
    data show that the taxpayer does not meet the EITC qualifying child
    relationship and/or residency tests. We also recommended that the IRS
    work with the Assistant Secretary of the Treasury for Tax Policy to
    obtain the authority necessary to implement alternative processes to
    adjust erroneous EITC claims for which data show that the taxpayer does
    not meet the EITC qualifying child relationship and/or residency tests.
    ---------------------------------------------------------------------------
        \32\ TIGTA, Ref. No. 2009-40-024, The Earned Income Tax Credit
    Program Has Made Advances; However, Alternatives to Traditional
    Compliance Methods Are Needed to Stop Billions of Dollars in Erroneous
    Payments (Dec. 2008).
    ---------------------------------------------------------------------------
        In response to our recommendations, the IRS analyzed the
    information included in the Federal Case Registry \33\ and found that,
    although the information in the registry provides information as to a
    child's custodial/noncustodial parent, the database cannot be solely
    relied upon to systemically adjust a potentially erroneous EITC claim.
    ---------------------------------------------------------------------------
        \33\ The Federal Case Registry is a national database that aids the
    administration and enforcement of child support laws. It consists of
    records that identify children, custodial parties, noncustodial
    parents, and putative (assumed) parents along with other relevant
    information.
    ---------------------------------------------------------------------------
    Math error authority is not sufficient to effectively address erroneous
            EITC claims
        The IRS, in conjunction with the Assistant Secretary of the
    Treasury for Tax Policy, has requested additional authority (hereafter
    referred to as correctable error authority) to systemically disallow a
    tax claim, including the EITC, when information contained in reliable
    Government data sources does not support the claim. According to the
    IRS, reliable Government data sources include information obtained from
    the Social Security Administration, the Department of Health and Human
    Services (HHS), the Federal Bureau of Prisons, and the States'
    Departments of Corrections. The IRS requested correctable error
    authority as part of its fiscal year 2015 budget submission. However,
    as of May 2014, the IRS has not been provided any additional authority
    or tools to expand its ability to prevent the issuance of improper EITC
    payments.
        Currently, under the Internal Revenue Code, the IRS can use its
    math error authority to address erroneous EITC claims by systemically
    correcting mathematical or clerical errors on EITC claims, such as
    correcting entries made on the wrong line on the tax return or
    mathematical errors in computing income or the EITC. In addition, the
    IRS can use math error authority to adjust an EITC claim if a
    qualifying child's SSN is not valid. However, the majority of
    potentially erroneous EITC claims the IRS identifies do not contain the
    types of errors for which it has math error authority. For example, the
    IRS identified approximately 6.6 million potentially erroneous EITC
    claims totaling approximately $21.6 billion in Tax Year 2011 for which
    it does not have math error authority. In Tax Year 2011, the IRS used
    math error authority to identify and systemically correct only 270,492
    (.009 or less than 1 percent) \34\ of more than 27.4 million EITC
    claims. The 270,492 returns claimed the EITC totaling $314 million.
    ---------------------------------------------------------------------------
        \34\ An additional 59,024 EITC claimants received approximately $21
    million more in EITCs than claimed.
    ---------------------------------------------------------------------------
        While the IRS has the authority to audit potentially erroneous EITC
    claims for which it does not have math error authority, doing so is
    more costly than the math error process. The IRS estimates that it
    costs $1.50 to resolve an erroneous EITC claim using math error
    authority compared to $278 to conduct a prerefund audit.\35\ In
    addition, the number of potentially erroneous EITC claims the IRS can
    audit is further reduced by its need to allocate its limited resources
    among the various segments of taxpayer noncompliance to provide a
    balanced tax enforcement program. As a result, billions of dollars in
    potentially erroneous EITC claims go unaddressed each year.
    ---------------------------------------------------------------------------
        \35\ Cost to use math error authority as of June 25, 2014, as
    provided by the IRS. The IRS provided the cost of a prerefund audit
    based on fiscal year 2010 financial data, which are the most current
    estimate available.
    ---------------------------------------------------------------------------

    National Directory of New Hires Wage and Employment Data Along With
            Correctable Error Authority Could Significantly Reduce Improper
            Payments

        Significant changes in IRS compliance processes would be necessary
    to reduce improper payments. Expanded authority to make corrections to
    tax returns when data obtained from the HHS indicate the taxpayer's
    refundable credit claims are not valid would significantly reduce
    improper payments. For example, the information could be used at the
    time tax returns are filed to identify those individuals who claim the
    EITC based on wages that do not appear to be valid. For example, our
    review of Tax Year 2012 tax returns identified more than $1.7 billion
    in potentially erroneous EITC claimed on tax returns with no third-
    party Forms W-2, Wage and Tax Statement, received by the IRS supporting
    the wages reported. As we have noted previously, the IRS estimates that
    verification errors, i.e., underreporting and overreporting of income
    by wage earners, account for 30 percent, or $4.35 billion, of EITC
    improper payments.
        The IRS is granted the authority to use the National Directory of
    New Hires (NDNH) to verify EITC claims. However, the IRS does not have
    the authority to systemically disallow an EITC claim that is not
    supported by NDNH data (*****2*****). Therefore, the IRS must audit the
    EITC claims it identifies for which NDNH data indicate the income
    reported is potentially erroneous. The number of EITC claims the IRS
    can audit is limited to available resources and the need to provide a
    balanced enforcement program. As such, the IRS's use of the NDNH to
    identify potentially erroneous EITC claims is limited to only those
    EITC claims it has the resources to address. The IRS does not have the
    authority to use the NDNH to verify any other refundable credit.
        The Social Security Act, 42 U.S.C. Section 653(i)(3), grants
    authority to the Secretary of the Treasury to use the HHS NDNH to
    verify an individual's claim of employment with regard to the EITC. The
    Act states:

            The Secretary of the Treasury shall have access to the
            information in the National Directory of New Hires for purposes
            of administering section 32 of the Internal Revenue Code of
            1986, or the advance payment of the earned income tax credit
            under section 3507 of such Code, and verifying a claim with
            respect to employment in a tax return.

        The NDNH is a national database of wage and employment information.
    The NDNH file contains the following information:
      --New Hire (W-4) File: The New Hire File contains information on all
            newly hired employees reported by employers to each State
            Directory of New Hires. Federal agencies report directly to the
            NDNH.
      --Quarterly Wage (QW) File: The Quarterly Wage File contains
            quarterly wage information on individual employees from the
            records of State workforce agencies and Federal agencies.
      --Unemployment Insurance (UI) File: The Unemployment Insurance File
            contains unemployment insurance information on individuals who
            have received or applied for unemployment benefits as reported
            by State workforce agencies.
    Analysis identified more than $1.7 billion in potentially erroneous
            EITC claimed on tax returns with no Forms W-2 to support wages
        Because of its current processes for using the NDNH, the IRS was
    only able to resolve approximately $20 million in potentially erroneous
    EITC claims on 3,728 tax returns between January and June 2013.
    However, the NDNH could be used to identify and resolve many more
    claims. Our analysis of the 26.7 million EITC claims received by the
    IRS for Tax Year 2012 identified approximately 23.6 million (88
    percent) tax returns with EITC claims totaling more than $53.8 billion
    for which the taxpayer claimed wages as the source income to support
    the EITC. Of the 23.6 million tax returns with wages reported, we
    identified 676,992 (3 percent) tax returns for which third-party Forms
    W-2 were not sent to the IRS by the employer for either the taxpayer
    and/or spouse listed on the tax return.\36\ These 676,992 tax returns
    claimed EITCs totaling more than $1.7 billion. We forecast the IRS
    could prevent the payment of more than $8.5 billion in questionable
    EITC claims over the next 5 years.\37\
    ---------------------------------------------------------------------------
        \36\ Some of the tax returns we identified could also be the result
    of employer errors or employer nonreporting.
        \37\ See Appendix IV. The 5-year forecast is based on multiplying
    the base year by five and assumes, among other considerations, that
    economic conditions and tax laws do not change.
    ---------------------------------------------------------------------------
        The IRS initially found the NDNH data to be valuable in identifying
    tax returns for which the income used to claim the EITC was potentially
    fraudulent. However, the IRS believes it is no longer cost beneficial
    to continue to use the NDNH to verify EITC claims. As such, it has
    decided not to renew the contract to use NDNH data with the HHS for
    fiscal year 2015. The IRS's decision to discontinue the NDNH contract
    is based on two primary factors:
      --Improvements in the IRS's fraud detection filters to incorporate
            the characteristics of EITC claims the NDNH helps identify have
            increased the IRS's ability to more accurately detect EITC
            claims that appear to be based on potentially fraudulent
            income.
      --The use of the NDNH does not result in a significant resource
            savings because the IRS must continue to incur additional
            resource costs to verify the income and subsequently audit EITC
            claims even when NDNH data indicate the claim is erroneous. For
            example, the average cost to obtain NDNH data is more than $1.6
            million per fiscal year. During the period January 1, 2013,
            through June 30, 2013,\38\ the IRS submitted NDNH data requests
            for 136,175 EITC claims totaling more than $787 million.
            However, the IRS was only able to close 3,728 (2.7 percent)
            claims totaling more than $20 million based exclusively on NDNH
            data. The remaining 132,447 (97.3 percent) EITC claims required
            the IRS to use additional resources other than NDNH data to
            verify the claim and close the case because either the NDNH
            contained no data for the taxpayer or the data were not
            sufficient to verify the amount of income claimed.
    ---------------------------------------------------------------------------
        \38\ The IRS obtains NDNH data for EITC claims filed between
    January and June each year. After this period, the IRS has access to
    income information documents filed by third parties, including
    employers, for use in verifying income.
    ---------------------------------------------------------------------------
    The NDNH data have the potential to significantly reduce EITC improper
            payments
        The IRS can use NDNH data during the processing of tax returns to
    significantly increase its ability to identify potentially erroneous
    EITC claims on tax returns with unsupported wages. However, to realize
    the full potential of NDNH data, the IRS needs to:
      --Obtain the authority to systemically disallow EITC claims for which
            NDNH data do not support the claim. Through legislative
            proposals, the IRS has requested correctable error authority to
            deny taxpayers' claims without conducting an audit when
            reliable Government data sources do not support information on
            the tax return. However, the IRS has not yet been granted this
            authority.
      --Modify the processes it uses to obtain and use NDNH data. The IRS
            process to obtain NDNH data is a transactional manual process
            and is limited to the verification of only electronically filed
            tax returns with an EITC claim. If it obtained a copy of the
            complete NDNH database, the IRS could systemically verify all
            EITC claims to the NDNH.
        Figure 4 provides a comparison of the IRS's current transactional-
    based processes to use the NDNH to identify a potentially erroneous
    EITC claim compared to the systemic processes that could be implemented
    if the IRS obtained a copy of the NDNH database.

     Figure 4: Comparison of Existing NDNH Processes to Identify Potentially
                Erroneous EITC Claims to a Systemic NDNH Process
    ------------------------------------------------------------------------
                                          Potential Systemic NDNH Processes
    Existing NDNH Processes to Identify   to Identify Potentially Erroneous
     Potentially Erroneous EITC Claims               EITC Claims
    ------------------------------------------------------------------------
    The IRS evaluates EITC claims for    The IRS evaluates all EITC claims
     potential fraud using established    regardless of fraud potential.
     fraud filters.
    ------------------------------------------------------------------------
    EITC claims with specified           The IRS systemically matches all
     characteristics are suspended from   EITC claims for which income
     processing and NDNH data are         reported is wages to an NDNH file
     requested from the HHS for the       the IRS obtains from the HHS to
     taxpayer.                            verify the taxpayer's claim of
                                          employment.
    ------------------------------------------------------------------------
    The IRS evaluates the NDNH data and  The IRS identifies those EITC
     determines the income claimed is     claims for which the NDNH
     potentially erroneous.               indicates the taxpayer was not
                                          employed during the tax year.
    ------------------------------------------------------------------------
    The IRS conducts additional          The IRS systemically disallows the
     analysis to verify the amount of     EITC claim on the basis that the
     income claimed.                      claim is unsubstantiated.
    ------------------------------------------------------------------------
    The IRS audits the EITC claim on     Taxpayer is sent a notice detailing
     those tax returns for which the      adjustment made to the tax return
     income claimed is determined to be   and is provided with a telephone
     erroneous.                           number and mailing address to
                                          contact the IRS if he or she
                                          questions the validity of the
                                          adjustment.
    ------------------------------------------------------------------------
    Source: Existing processes provided by the IRS. Potential systemic
      processes are a hypothetical example of how the IRS could use the NDNH
      if correctable error authority was provided.

        Receiving a copy of NDNH data rather than using a transaction-based
    process may result in a lower cost to the IRS. The cost to obtain NDNH
    data under the current information sharing agreement with the HHS
    includes a set user fee and an additional transactional-based
    component. As such, the cost to obtain NDNH data increases as the
    number of data requests sent to the HHS increases. The cost to obtain
    NDNH data under this current information sharing agreement averaged
    more than $1.6 million a year for fiscal years 2010 through 2013. By
    receiving a complete copy of NDNH data, the IRS can eliminate the
    transactional cost associated with the existing agreement. Because the
    IRS has not pursued this option, the potential cost savings of doing so
    is unknown.
        It should be noted that the IRS has processes in place for
    taxpayers to dispute systemic adjustments. For example, our review of
    this process in July 2011 \39\ found that when the IRS makes math error
    adjustments to a taxpayer's tax return, it sends a notice, generally a
    Computer Paragraph 11 Notice (Balance Due (Over $5.00)) or a Computer
    Paragraph 12 Notice (Overpayment of $1.00 or More), to the taxpayer
    explaining the error(s) identified and the amount of any resulting
    adjustment(s). The math error notice includes an account statement
    showing how the changes affected the tax return and showing the
    corrected tax return information compared to what was reported on the
    original tax return. In addition, the math error notice provides both a
    telephone number and mailing address for the taxpayer to contact the
    IRS if he or she questions the validity of the adjustments.
    ---------------------------------------------------------------------------
        \39\ TIGTA, Ref. No. 2011-40-059, Some Taxpayer Responses to Math
    Error Adjustments Were Not Worked Timely and Accurately (Jul. 2011).
    ---------------------------------------------------------------------------
        Taxpayers who question the validity of the adjustments are given 60
    calendar days from the date of the notice to respond to the IRS
    disputing the validity of the adjustments made to their tax returns.
    During this 60-day period, the IRS will place a freeze on the
    taxpayer's account to prevent the issuance of the portion of the refund
    associated with the error(s) identified or prevent the initiation of
    collection action resulting from any balance due. Once a math error
    adjustment is made, any subsequent action depends on the response from
    the taxpayer and can include:
      --Agreed Response: The taxpayer agrees with the math error
            adjustments made to his or her tax return. This includes
            taxpayers who do not respond to the IRS notice. The IRS removes
            the freeze from the taxpayer's account, which will then release
            any refund or initiate collection of a balance due of taxes.
      --Substantiated Response: The taxpayer disagrees with the math error
            adjustments and either provides the IRS with written
            correspondence/documentation or information via telephone
            contact supporting his or her disagreement. The IRS agrees with
            the taxpayer based on the information provided and reverses the
            math error adjustments. The IRS removes the freeze from the
            taxpayer's account, which will release any refund or initiate
            collection of a balance due of taxes.
      --Unsubstantiated Response: The taxpayer disagrees with the math
            error adjustments. However, the taxpayer does not provide
            adequate support for his or her disagreement. Generally, the
            IRS reverses the math error adjustments and places an
            examination freeze on the taxpayer's account resulting in his
            or her tax return being referred to the Examination function
            for further review.

    Recommendations

        If the IRS is granted correctable error authority, the
    Commissioner, Wage and Investment Division, should:
        Recommendation 3: Contract with the HHS to obtain a complete copy
    of the NDNH database for use during tax return processing to
    systemically identify unsupported wages reported on tax returns to
    erroneously claim the EITC.
              Management's Response: The IRS disagreed with this
            recommendation. The IRS stated that the cost of obtaining the
            limited NDNH is significant and, under current limitations on
            the IRS's use of the data, the IRS does not consider it to be a
            cost-beneficial tool. The IRS also disagreed with our outcome
            measure of $1.7 billion in potential cost savings, stating that
            the outcome is contingent on the IRS receiving expanded
            legislative authority and that its review of data from the
            recent EITC Compliance Study covering Tax Years 2006 through
            2008 found that a significant portion of EITC claims on returns
            with reported wages and no Form W-2 were accurate or disallowed
            for reasons other than misreported income.
              Office of Audit Comment: The IRS's disagreement is not
            consistent with its response to Recommendation 4 of this report
            in which the IRS states that it is pursuing expanded NDNH
            authority for use of the entire NDNH database as well as
            correctable error authority. Moreover, the EITC Compliance
            Study to which the IRS refers above excludes many EITC claims,
            such as fraudulent claims. Our analysis includes all EITC
            claims for which wages were reported and a Form W-2 was not
            filed by an employer for either the taxpayer or the taxpayer's
            spouse.

    Legislative Recommendation

        Recommendation 4: Work with the Assistant Secretary of the Treasury
    for Tax Policy to consider a legislative proposal to obtain expanded
    NDNH authority to systemically verify claims for other income-based
    refundable credits (e.g., the ACTC) based on NDNH employment data.
              Management's Response: The IRS agreed with this
            recommendation. The IRS stated that the General Explanations of
            the Administration's Fiscal Year 2015 Revenue Proposals
            presents a legislative request for expanded use of the NDNH
            database. The IRS's proposal would amend the Social Security
            Act to expand IRS access to NDNH data for general tax
            administration purposes, including data matching and
            verification of taxpayer claims during return processing. The
            IRS believes this proposal addresses the recommendation.

                                   APPENDIX I

                   Detailed Objective, Scope, and Methodology

        Our overall objective was to assess the IRS's efforts to identify
    and address the root causes of erroneous EITC and ACTC payments. To
    accomplish our objective, we:

    I.  Determined what actions the IRS has taken to identify the root
    causes of improper payments for the EITC and the ACTC and the results
    of its efforts.
            A.  Contacted the Office of Research, Analysis, and Statistics
            and the Office of Return Integrity and Correspondence Services
            to obtain copies of refundable credit studies conducted from
            Tax Year \1\ 2008 to the present, including any NRP Compliance
            Studies for the past 5 years.
    ---------------------------------------------------------------------------
        \1\ A 12-month accounting period for keeping records on income and
    expenses used as the basis for calculating the annual taxes due. For
    most individual taxpayers, the tax year is synonymous with the calendar
    year.
    ---------------------------------------------------------------------------
            B.  Reviewed reports provided by the IRS to determine if root
            causes for EITC and ACTC improper payments were identified. We
            evaluated the root causes identified by the IRS to determine if
            causes identified were actually root causes or just symptoms of
            root causes.
            C.  Reviewed the Department of the Treasury's Agency Financial
            Reports for fiscal years \2\ 2012 and 2013 to identify changes
            made between the two reports, and determined if the causes the
            IRS identified for EITC improper payments are the same as
            reported in the Executive Order and other studies.
    ---------------------------------------------------------------------------
        \2\ Any yearly accounting period, regardless of its relationship to
    a calendar year. The Federal Government's fiscal year begins on October
    1 and ends on September 30.
    ---------------------------------------------------------------------------
            D.  Reviewed data available on the IRS Office of Research,
            Analysis, and Statistics NRP and Compliance Data Warehouse Web
            sites to obtain guidance on conducting the annual NRP review,
            information available on the NRP methodology, format of the NRP
            electronic audit case files, and instructions to obtain direct
            access to NRP review data or how to obtain a data extract of
            the NRP review data.
            E.  Determined information, if any, the Office of Return
            Integrity and Correspondence Services uses and actions taken
            based on the data obtained in Steps I.B, I.C, and I.D above to
            identify the causes of taxpayer noncompliance with the EITC and
            the ACTC. Specifically, we:
                    1.  Discussed what efforts have been taken to identify
                    root causes of improper payments for the EITC and the
                    ACTC or refundable credits in general and any reasons
                    why efforts have not been made to identify root causes.
                    2.  Obtained and reviewed copies of relevant
                    documentation to include methodology, procedures, and
                    reports unavailable on the Web sites.
            F.  Obtained access to NRP data through a TIGTA Strategic Data
            Services Division extract request and performed analysis of the
            types of information available to identify the reasons the EITC
            and the ACTC were denied and to verify the IRS's assessment of
            the root causes for improper payments.
    II.  Determined what actions the IRS has taken to address the
    identified root causes for EITC and ACTC improper claims.
            A.  Reviewed the results of TIGTA and Government Accountability
            Office reports related to the EITC and the ACTC issued over the
            past 5 years to determine any IRS efforts to identify root
            causes or if any root causes were identified by TIGTA or the
            Government Accountability Office.
            B.  Reviewed the IRS's study results of the feasibility of
            using the Federal Case Registry dated October 2011 to identify
            potentially erroneous EITC claims.
            C.  Reviewed IRS guidance to determine what policies and
            procedures the IRS has in place to address the identified root
            causes.
            D.  Interviewed IRS personnel for current and planned efforts
            to address the identified root causes. Based on the IRS's
            input, we researched current initiatives, determined if EITC
            claims are analyzed for income misreporting to include
            overreported and underreported income, and determined if the
            IRS's initiatives present new alternatives or rely on
            traditional compliance efforts.
                    1.  Identified math error authorizations and determined
                    if the IRS has presented any additional requests for
                    tax policy changes.
                    2.  To determine how the IRS is using the NDNH, we met
                    with the HHS and the IRS to determine if the IRS has
                    restricted NDNH access and the amount the IRS pays for
                    access to the NDNH. We obtained and reviewed a copy of
                    the Memo of Understanding that the IRS has with the HHS
                    for use of the NDNH. We also reviewed the IRS's current
                    periodic report submitted to the HHS on the
                    effectiveness of the NDNH in identifying potentially
                    false EITC claims.
            E.  Analyzed what action the IRS has taken to measure the
            impact of any actions taken, assessed the challenges the IRS
            faces in addressing the root causes identified, and determined
            if the IRS's efforts to address noncompliance are appropriate
            to address the identified root causes.
    III.  Determined if there are root causes for EITC or ACTC improper
    payments that the IRS has not identified.
            A.  Reviewed legislation and IRS guidance to determine the EITC
            and ACTC eligibility requirements.
            B.  Conducted tests to identify additional root causes for
            improper refundable credits.
                    1.  Analyzed applicable Taxpayer Notice Code volumes
                    for Tax Year 2011 returns.
                    2.  Requested the Dependent Database \3\ rule break
                    volumes for Tax Year 2011.
    ---------------------------------------------------------------------------
        \3\ The Dependent Database is a risk-based audit selection tool
    used by the IRS to identify tax returns for audit. The Dependent
    Database scoring system uses business rules to identify EITC
    noncompliance at the point of filing through use of internal and
    external data elements.
    ---------------------------------------------------------------------------
            C.  Evaluated potential fraud.
                    1.  Identified Tax Year 2012 returns claiming the EITC
                    and wages on the Individual Return Transaction File and
                    matched to the Individual Master File \4\ to identify
                    those individuals who actually received the credit.
    ---------------------------------------------------------------------------
        \4\ The IRS database that maintains transactions or records of
    individual tax accounts.
    ---------------------------------------------------------------------------
                    2.  Matched the tax returns identified in Step III.C.1
                    to the Tax Year 2012 Form W-2 File to identify returns
                    for which the wages claimed on the tax return are not
                    supported by a third-party Form W-2. We quantified the
                    number of returns and amount of the EITC claimed on tax
                    returns for which the wages are not supported.
    IV.  Determined an ACTC improper payment rate. Using data from the IRS
    NRP 1040 Study for Tax Year 2009 and the OMB budget reports used by the
    IRS to estimate EITC improper payments, we computed the potential ACTC
    improper payment rate and dollars for fiscal year 2013. To the extent
    possible, we used the same methodology the IRS uses to estimate the
    EITC improper payment rate and dollars to compute the potential ACTC
    improper payment rate. The potential ACTC improper payment rate was
    computed with the assistance of the TIGTA contract statistician.
    Data validation methodology
        During this review, we relied on data extracted from the IRS's
    Individual Master File for Tax Year 2012, Individual Returns
    Transaction File for Processing Year \5\ 2013, and the Form W-2 File
    for Tax Year 2012 located on the TIGTA Data Center Warehouse. We also
    relied on a data extract of Tax Year 2012 Forms 1099-R, Distributions
    From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
    Insurance Contracts, etc.,\6\ from the IRS's Information Returns
    Processing database and a data extract of Tax Year 2008 EITC NRP data
    from the IRS's Compliance Data Warehouse that was provided by the TIGTA
    Office of Investigations' Strategic Data Services Division.
    Additionally, we used Tax Year 2009 1040 NRP data that were provided by
    the IRS's NRP staff. We were able to verify a random sample of each
    data set to the IRS's Integrated Data Retrieval System. As a result of
    our testing, we determined the data used in our review were
    sufficiently reliable.
    ---------------------------------------------------------------------------
        \5\ The calendar year in which the tax return or document is
    processed by the IRS.
        \6\ We specifically requested information on Form 1099-R with a
    Distribution Code 3 for disability income.
    ---------------------------------------------------------------------------
    Internal controls methodology
        Internal controls relate to management's plans, methods, and
    procedures used to meet their mission, goals, and objectives. Internal
    controls include the processes and procedures for planning, organizing,
    directing, and controlling program operations. They include the systems
    for measuring, reporting, and monitoring program performance. We
    determined that the following internal controls were relevant to our
    audit objective: controls in place to identify and address the root
    causes of erroneous EITC and ACTC payments. We evaluated these controls
    by interviewing management, reviewing policies and procedures, and
    reviewing the process used to identify root causes and any initiatives
    taken to address root causes identified.

                                  APPENDIX II

                       Major Contributors to This Report

    Russell P. Martin, Acting Assistant Inspector General for Audit
            (Returns Processing and Account Services)
    Deann L. Baiza, Director
    Sharla J. Robinson, Audit Manager
    Roy E. Thompson, Audit Manager
    Sandra L. Hinton, Lead Auditor
    Linda L. Bryant, Senior Auditor
    W. George Burleigh, Senior Auditor
    Jennie G. Choo, Senior Auditor
    Johnathan D. Elder, Auditor
    Nathan J. Smith, Auditor
    James M. Allen, Information Technology Specialist
    Kevin O'Gallagher, Information Technology Specialist

                                  APPENDIX III

                            Report Distribution List

    Assistant Secretary of the Treasury for Tax Policy
    Commissioner C
    Office of the Commissioner--Attn: Chief of Staff C
    Deputy Commissioner for Operations Support OS
    Deputy Commissioner for Services and Enforcement SE
    Chief Counsel CC
    Director, Office of Research, Analysis and Statistics RAS
    Deputy Commissioner, Wage and Investment Division SE:W
    Director, Customer Account Services, Wage and Investment Division
            SE:W:CAS
    Director, Return Integrity and Correspondence Services, Wage and
            Investment Division
    SE:W:RICS
    Director, Submission Processing, Wage and Investment Division
            SE:W:CAS:SP
    Director, Office of Legislative Affairs CL:LA
    Director, Office of Program Evaluation and Risk Analysis RAS:O
    National Taxpayer Advocate TA
    Office of Internal Control OS:CFO:CPIC:IC
    Audit Liaisons:
                Chief, Program Evaluation and Improvement, Wage and
                        Investment Division
                SE:W:S:PEI
                Director, Communications and Liaison, National Taxpayer
                        Advocate TA:CL

                                  APPENDIX IV

                                Outcome Measure

        This appendix presents detailed information on the measurable
    impact that our recommended corrective actions will have on tax
    administration. This benefit will be incorporated into our Semiannual
    Report to Congress.
    Type and Value of Outcome Measure:
    -- Funds Put to Better Use--Potential; $1,712,725,533 in questionable
    EITC claims paid on 676,992 Tax Year \1\ 2012 tax returns;
    $8,563,627,665 \2\ in questionable EITC claims issued over 5 years.
    This outcome is potential because it depends on whether the IRS is
    granted correctable error authority and obtains the complete NDNH
    database to verify these claims.\3\
    ---------------------------------------------------------------------------
        \1\ A 12-month accounting period for keeping records on income and
    expenses used as the basis for calculating the annual taxes due. For
    most individual taxpayers, the tax year is synonymous with the calendar
    year.
        \2\ The 5-year forecast for potential funds put to better use is
    based on multiplying the base year by five and assumes, among other
    considerations, that economic conditions and tax laws do not change.
        \3\ The amount may also be affected by employer reporting errors or
    employer nonreporting.
    ---------------------------------------------------------------------------
    Methodology Used to Measure the Reported Benefit:
        We conducted computer analysis of the Tax Year 2012 Individual
    Master File to identify 26,715,006 tax returns that received EITC
    totaling $61,989,202,110.\4\ Of the 26,715,006 tax returns,
    approximately 23,571,365 (88 percent) included EITCs totaling
    $53,773,385,436 for which the taxpayers claimed wages on Line 7 of
    their Form 1040 as the source of EITC supporting income.
    ---------------------------------------------------------------------------
        \4\ Our analysis did not include taxpayers who had an EITC reversed
    on their account.
    ---------------------------------------------------------------------------
        We matched the 23,571,365 tax returns to the IRS's Form W-2 File on
    the TIGTA Data Center Warehouse for Tax Year 2012 using both the
    primary and secondary SSNs to determine if a Form W-2 was on file that
    would support the wages being claimed on Line 7 of the Form 1040.\5\ Of
    the 23,571,365 tax returns with wages reported, we identified 676,992
    (3 percent) tax returns for which third-party Forms W-2 were not sent
    to the IRS by the employer for either the taxpayer and/or spouse listed
    on the tax return.\6\ These 676,992 tax returns received EITC totaling
    $1,712,725,533. We forecast that the IRS could prevent the issuance of
    $8,563,627,665 in questionable EITC claims over the next 5 years
    ($1,712,725,533  5).
    ---------------------------------------------------------------------------
        \5\ We removed tax returns on which disability payments were
    reported on the Form 1040, Line 7--Wages which were supported by Forms
    1099-R, Distributions From Pensions, Annuities, Retirement or Profit-
    Sharing Plans, IRAs, Insurance Contracts, etc., with a Distribution
    Code 3 for disability income.
        \6\ Some of the tax returns we identified could also be the result
    of nonreporting of income and withholding by the employer.
    ---------------------------------------------------------------------------
        This outcome is achievable if: (1) the IRS is granted expanded
    legislative authority to systemically disallow EITC claims based on
    NDNH employment results and (2) the IRS obtains an entire copy of the
    NDNH database for use during tax return processing to systemically
    identify unsupported wages reported on tax returns to erroneously claim
    the EITC.
        The actual amount of questionable EITC claims the IRS will identify
    and prevent is dependent on the actions the IRS takes to obtain needed
    authority and access to NDNH data and will not be known until such
    authority and data use are implemented.

                                   APPENDIX V

                   Earned Income Tax Credit Eligibility Rules

        Taxpayers claiming the EITC must meet specific criteria to qualify
    for the credit. Additional criteria apply for those taxpayers who have
    qualifying children. Figure 1 lists the basic EITC eligibility
    requirements. Figure 2 shows the additional eligibility tests of age,
    relationship, residency, and joint return requirements that must be met
    by taxpayers claiming the EITC with a qualifying child. The maximum
    EITC available for Tax Year 2013 ranges from $487 for taxpayers with no
    qualifying children to $6,044 with three or more qualifying children.

                  Figure 1: Basic EITC Eligibility Requirements
    ------------------------------------------------------------------------
                              Second, you must meet all the
                             rules in one of these columns,
                                    whichever applies           Third, you
     First, you must meet  ----------------------------------  must meet the
     all the rules in this    Rules if you   Rules if you do   rule in this
            column               have a         not have a        column
                               qualifying       qualifying
                                 child            child
    ------------------------------------------------------------------------
    1. Your adjusted gross   8. Your child   11. You must be  15. Your
     income must be less     must meet the    at least age     earned income
     than:                   relationship,    25 but under     must be less
      --$46,227 ($51,567     age,             age 65.          than:
     for married filing      residency, and  12. You cannot     --$46,227
     jointly) if you have    joint return     be the           ($51,567 for
     three or more           tests.           dependent of     married
     qualifying children,    9. Your          another          filing
      --$43,038 ($48,378     qualifying       person.          jointly) if
     for married filing      child cannot    13. You cannot    you have
     jointly) if you have    be used by       be a             three or more
     two qualifying          more than one    qualifying       qualifying
     children,               person to        child of         children,
      --$37,870 ($43,210     claim the        another           --$43,038
     for married filing      EITC.            person.          ($48,378 for
     jointly) if you have   10. You cannot   14. You must      married
     one qualifying child,   be a             have lived in    filing
     or                      qualifying       the United       jointly) if
      --$14,340 ($19,680     child of         States more      you have two
     for married filing      another          than half of     qualifying
     jointly) if you do      person.          the year.        children,
     not have a qualifying                                      --$37,870
     child.                                                    ($43,210 for
    2. You must have a                                         married
     valid SSN.                                                filing
    3. Your filing status                                      jointly) if
     cannot be married                                         you have one
     filing separately.                                        qualifying
    4. You must be a U.S.                                      child, or
     citizen or resident                                        --$14,340
     alien all year.                                           ($19,680 for
    5. You cannot file                                         married
     Form 2555, Foreign                                        filing
     Earned Income, or                                         jointly) if
     Form 2555-EZ, Foreign                                     you do not
     Earned Income                                             have a
     Inclusion (relating                                       qualifying
     to foreign earned                                         child.
     income).
    6. You must have
     earned income.
    7. Your investment
     income must be $3,300
     or less.
    ------------------------------------------------------------------------
    Source: IRS Publication 596, Earned Income Credit (EIC), for use in
      preparing 2013 Returns.

        Figure 2: Additional EITC Eligibility Tests of Age, Relationship,
                    Residency, and Joint Return Requirements
    ------------------------------------------------------------------------
                Eligibility Test                Qualifying Child Criteria
    ------------------------------------------------------------------------
    Relationship...........................  Must meet one of the following
                                              relationship tests:
                                               --Son, daughter, stepchild,
                                              foster child, or a descendant
                                              of any of them (for example,
                                              your grandchild), or
                                               --Brother, sister, half-
                                              brother, half-sister,
                                              stepbrother, stepsister, or a
                                              descendant of any of them (for
                                              example, your niece or
                                              nephew).
                                             Adopted child. An adopted child
                                              is always treated as your own
                                              child. The term ``adopted
                                              child'' includes a child who
                                              was lawfully placed with you
                                              for legal adoption.
    ------------------------------------------------------------------------
    Age....................................  Must meet one of the following
                                              age tests:
                                               --Under age 19 at the end of
                                              Tax Year 2013 and younger than
                                              you (or your spouse, if filing
                                              jointly),
                                               --Under age 24 at the end of
                                              Tax Year 2013, a student, and
                                              younger than you (or your
                                              spouse, if filing jointly), or
                                               --Permanently and totally
                                              disabled at any time during
                                              Tax Year 2013, regardless of
                                              age.
    ------------------------------------------------------------------------
    Residency..............................  Your child must have lived with
                                              you in the United States for
                                              more than half of Tax Year
                                              2013.
    ------------------------------------------------------------------------
    Joint Return...........................  The child cannot file a joint
                                              return for the year.
                                              Exception: An exception to the
                                              joint return test applies if
                                              your child and his or her
                                              spouse file a joint return
                                              only to claim a refund of
                                              income tax withheld or
                                              estimated tax paid.
    ------------------------------------------------------------------------
    Source: IRS Publication 596.

                                  APPENDIX VI

     Qualifying Child Criteria for the Child Tax Credit or the Additional
                                Child Tax Credit

        The CTC can reduce an individual's taxes owed by as much as $1,000
    for each qualifying child. For Tax Year 2013, the ACTC is equal to the
    lesser of the CTC that was not allowed or 15 percent of earned income
    that is more than $3,000.\1\ Figure 1 shows the seven eligibility tests
    a child must meet to qualify for the CTC or the ACTC.
    ---------------------------------------------------------------------------
        \1\ Tax-exempt combat pay is included as earned income when
    calculating the ACTC.
        \2\ A U.S. national is an individual who, although not a U.S.
    citizen, owes his or her allegiance to the United States. U.S.
    nationals include American Samoans and Northern Mariana Islanders who
    chose to become U.S. nationals instead of U.S. citizens.
        \3\ Publication 519, U.S. Tax Guide for Aliens, states that an
    individual will be considered a U.S. resident for tax purposes if they
    meet the substantial presence test for the calendar year. To meet this
    test, the individual must be physically present in the United States on
    at least 31 calendar days during the current year and 183 calendar days
    during the three-year period that includes the current year and the 2
    years immediately before.
        \4\ There are some exceptions to the residence test, which can be
    found in IRS Publication 972.

    ------------------------------------------------------------------------
                Eligibility Test                   Qualifying Criteria
    ------------------------------------------------------------------------
    Age....................................  A qualifying child must be
                                              under age 17 at the end of the
                                              tax year.
    ------------------------------------------------------------------------
    Relationship...........................  The child must be the
                                              taxpayer's son, daughter,
                                              stepchild, foster child,
                                              brother, sister, stepbrother,
                                              stepsister, or a descendant of
                                              any of them (for example, a
                                              grandchild, niece, or nephew)
                                              and an adopted child (includes
                                              a child lawfully placed for
                                              legal adoption).
    ------------------------------------------------------------------------
    Support................................  The child must not have
                                              provided more than one-half of
                                              their own support for the tax
                                              year.
    ------------------------------------------------------------------------
    Dependent..............................  The taxpayer must claim the
                                              child as a dependent on the
                                              Federal tax return.
    ------------------------------------------------------------------------
    Citizenship............................  The child must be a U.S.
                                              citizen, U.S. national,\2\ or
                                              U.S. resident alien.\3\
    ------------------------------------------------------------------------
    Joint Return...........................  The child does not file a joint
                                              return for the year (or files
                                              joint to claim a refund).
    ------------------------------------------------------------------------
    Residence..............................  The child must have lived with
                                              claimant for more than one-
                                              half of the year.\4\
    ------------------------------------------------------------------------
    Source: IRS Publication 972, Child Tax Credit, for use in preparing 2013
      returns.

        Limitations: The CTC is limited if modified adjusted gross income
    is above a certain amount (which varies depending on the taxpayer's
    filing status).\5\ In addition, the CTC is generally limited by the
    amount of the income tax owed as well as any alternative minimum tax
    owed.
    ---------------------------------------------------------------------------
        \5\ For married taxpayers filing a joint return, the phase-out
    begins at $110,000. For married taxpayers filing a separate return, it
    begins at $55,000. For all other taxpayers, the phase-out begins at
    $75,000.
    ---------------------------------------------------------------------------

                                  APPENDIX VII

    Efforts to Address the Root Causes of Earned Income Tax Credit Improper
                                    Payments

        The IRS has several programs to address the root causes of EITC
    improper payments. The IRS considers these programs as part of its
    overall strategy to ensure compliance with the rules. Many of these
    programs are aimed at identifying and preventing erroneous payments
    once a tax return is filed rather than correcting the underlying reason
    that the error is occurring.
        Outreach and Education.--Programs designed to educate taxpayers and
    tax return preparers on the legal requirements for EITC eligibility so
    they can apply the law accurately.
      --Annual EITC Marketing Campaign.--This campaign, which includes the
            EITC Awareness Day, targets underserved populations and
            includes print and media tours.
      --EITC Due Diligence Training Modules.--A Web-based initiative in
            which tax return preparers can earn a certificate of
            completion.
      --Nationwide Tax Forum EITC Training.--Annual seminars that educate
            tax return preparers on EITC due diligence requirements and
            qualifying child requirements.
      --External Stakeholders.--The IRS works with external stakeholders
            including the tax return preparer community to share
            information regarding the EITC in an effort to identify trends
            and improve compliance.
        Enforcement.--Programs intended to contribute to the broader
    strategy of identifying errors as early in the process as possible. The
    IRS's prevention activity focuses on three main areas:
      --Audits.--The IRS identifies returns for examination usually before
            the refund is released. Because of the refundable nature of the
            credit, the high error rate, and the high dollar amount
            associated with the credit, returns with EITC claims are twice
            as likely to be audited as other individual taxpayer returns.
            According to the IRS, 70 percent of the examinations the IRS
            conducts each year are prerefund examinations in which the IRS
            determines the validity of the EITC claim before the EITC
            refund is issued. The remaining 30 percent of the examinations
            are conducted post refund.
      --Math Error.--An automated process performed while tax returns are
            being processed and before refunds are sent to taxpayers in
            which the IRS identifies math or other irregularities and
            automatically prepares an adjusted return for a taxpayer filing
            on paper and generally rejects electronic returns. The IRS
            currently has limited legislative authority to use this
            process.
      --Document Matching.--The IRS matches income claimed on tax returns
            to income reported by employers and other third parties to
            identify discrepancies that involve instances in which EITC
            claimants underreport income.
        Figure 1 shows the main EITC compliance activities and the
    resulting total revenue protected for fiscal years \1\ 2008 through
    2014.
    ---------------------------------------------------------------------------
        \1\ Any yearly accounting period, regardless of its relationship to
    a calendar year. The Federal Government's fiscal year begins on October
    1 and ends on September 30.

                    Figure 1: EITC Compliance Activities and Total Revenue Protected (Dollars in Billions) for Fiscal Years 2008 Through 2014
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Fiscal    Fiscal    Fiscal               Fiscal    Fiscal    Fiscal   Fiscal Years
                            Compliance Activity                            Year      Year      Year      Fiscal     Year      Year      Year      2008-2014
                                                                           2008      2009      2010    Year 2011  2012 \2\  2013 \3\  2014 \4\      Total
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Examination Closures...............................................   503,755   508,180   473,999    483,574   487,408   483,139   483,000     3,423,055
    Math Error Notices \5\.............................................   432,797   355,416   341,824    293,450   270,492   240,000   210,000     2,143,979
    Document Matching..................................................   727,916   688,087   904,920  1,178,129   985,172   906,994   907,000     6,298,218
    Amended Returns \6\................................................    32,473    25,395    19,347     14,317    13,284     8,129     8,000       120,945
                                                                        ------------------------------------------------------------------------------------
      Total Revenue Protected (in Billions)............................    $ 3.74    $ 3.79    $ 3.87     $ 3.75    $ 3.95    $ 3.84    $ 3.69       $ 26.63
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Source: The Department of the Treasury's Agency Financial Report for Fiscal Year 2013.

    ---------------------------------------------------------------------------
        \2\ Restated actual.
        \3\ Preliminary estimates.
        \4\ Estimated based on fiscal year 2013 preliminary data.
        \5\ The EITC withheld from the claimant; includes decreases in the
    amount of the EITC claimed as well as disallowance of the full EITC
    claim.
        \6\ Amended returns are a subset of Examination Closures.
    ---------------------------------------------------------------------------

                                 APPENDIX VIII

             Earned Income Tax Credit Tax Return Preparer Strategy

        As part of its efforts to address EITC improper payments, the IRS
    developed an EITC paid preparer strategy that focuses on tax return
    preparers who are not compliant with the EITC due diligence
    requirements. Figure 1 provides results of this strategy for Fiscal
    Year 2013.

                     Figure 1: Results of the EITC Tax Return Preparer Strategy for Fiscal Year 2013
    ----------------------------------------------------------------------------------------------------------------
                                                                                         Penalties     EITC Revenue
                Treatment                     Description           Program Results     Proposed (in   Protected (in
                                                                                         millions)       millions)
    ----------------------------------------------------------------------------------------------------------------
    Due Diligence Visit (DDV)\1\....  Prefiling season DDVs       540 visits           .............  ..............
                                                                  86 percent penalty   $14.9          $43.8
                                                                   rate
                                     -------------------------------------------------------------------------------
                                      Filing season DDVs          300 visits           .............  ..............
                                                                  81 percent penalty   Almost $2.9    $7.5
                                                                   rate
                                     -------------------------------------------------------------------------------
                                      Filing season follow-up     27 visits            More Than      ..............
                                       DDVs \2\                   67 percent penalty   $200,000       Not Measured
                                                                   rate                                \3\
    ----------------------------------------------------------------------------------------------------------------
    Knock and Talk Visit............  Visits made by auditors     ...................  .............  ..............
                                       and Criminal               ...................  .............  ..............
                                       Investigation agents to    105 visits           None \4\       $10.0
                                       educate EITC preparers on
                                       EITC laws and due
                                       diligence requirements.
    ----------------------------------------------------------------------------------------------------------------
    EITC Due Diligence Injunction...  Court action to prevent     ...................  .............  ..............
                                       egregious preparers from   4 injunctions        $0             $15.4
                                       filing future returns.
    ----------------------------------------------------------------------------------------------------------------
    DDV Warning Letter..............  Prefiling season letters    ...................  .............  ..............
                                       to advise preparers of     9,453 letters        $0             $275.1
                                       EITC due diligence
                                       problems.
                                     -------------------------------------------------------------------------------
                                      Filing season letters to    ...................  .............  ..............
                                       advise preparers of        1,781 letters        $0             $16.9
                                       continuing EITC due
                                       diligence problems.
    ----------------------------------------------------------------------------------------------------------------
    Source: The Internal Revenue Service Filing Season 2013 EITC Real Time Return Preparer Initial Finding and
      Fiscal Year 2013 Executive Order Report.

        \1\ Field examiners audit EITC preparers to verify that they are
    meeting their due diligence requirements and assert penalties as
    warranted.
        \2\ A filing season follow-up DDV is for continuing noncompliant
    preparers who received an educational visit.
        \3\ Insufficient sample size.
        \4\ Integrated approach for educational purposes.
    ---------------------------------------------------------------------------

                                  APPENDIX IX

                   Management's Response to the Draft Report

       [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Thank you for the opportunity to review and respond to the subject
    draft report on the challenges of administering the Earned Income Tax
    Credit (EITC), the Child Tax Credit (CTC), and the Additional Child Tax
    Credit (ACTC) through traditional tax compliance processes and
    treatments. To detect and stop potentially fraudulent claims for the
    credits and to improve taxpayer compliance with the provisions of the
    Tax Code authorizing them, we continue to explore alternative
    strategies to supplement the traditional tax administration authority
    provided to us and to maximize the use of limited compliance resources.
        We agree with the Treasury Inspector General for Tax Administration
    (TIGTA) that new and innnovative processes are needed to achieve
    significant reductions in the amount of improper payments. The tax
    system, as established by the Internal Revenue Code (the Code) is based
    on the premise that taxpayers will voluntarily comply with its
    provisions in self-reporting their tax liabilities. The administrative
    provisions of the Code allow for the examination of tax returns to
    assess the accuracy of reported liabilities and to serve as an
    incentive for voluntary compliance. This balancing control, however, is
    subject to the constraints of limited resources and statutory
    provisions that assure taxpayers of their rights for the review of
    assessments of additional tax, or denials of credits by the U.S. Tax
    Court before the assessments or denials occur. Since February 2005 \1\,
    the IRS has submitted legislative proposals that would permit expanded
    access and use of the National Directory of New Hires database, as
    recommended by the TIGTA in this report. With the March 2014 release of
    the administration's Fiscal Year 2015 revenue proposals \2\, the IRS
    has submitted legislative proposals for supplemental authority that
    would provide for correctable error authority, similar to math error
    authority, in situations when information provided by taxpayers does
    not match the information contained in government databases. The IRS
    also requested acceleration of the filing dates of information returns
    to make the information available to the IRS earlier, the authority to
    regulate return preparers, increases in return preparer penalties for
    willful or reckless misconduct, and extending due diligence
    requirements to include the EITC, CTC, and ACTC.
    ---------------------------------------------------------------------------
        \1\ General Explanations of the Administrative's Fiscal Year 2006
    Revenue Proposals, 132, February 2005, http://www.treasury.gov/
    resource-center/tax-policy/Documents/General-Explanations-FY2006.pdf.
        \2\ General Explanations of the Administration's Fiscal Year 2015
    Revenue Proposals, March 2014, 229230, 245-246, http://
    www.treasury.gov/resource-center/tax-policy/Documents/General-
    Explanations-FY2015.pdf.
    ---------------------------------------------------------------------------
        Considering the unique attributes of refundable credits claimed and
    payable through the tax system, the IRS has prepared annual risk
    assessments under the Improper Payments Elimination and Recovery
    Improvement Act of 2012 (IPERIA) for the specific outlays identified by
    the Office of Management and Budget (OMB), under guidance provided by
    the Department of the Treasury. Additional guidance provided by the OMB
    recognizes Treasury's assertion that there is significant complexity
    and difficulty in separately reporting the refunded amount of each
    credit claimed and paid through the tax system. The OMB further
    acknowledges that the IRS already conducts analysis of the tax gap that
    incorporates these credits. Refundable tax credit non-compliance is
    included in the tax gap estimate, and in the assessment and regular
    updating of our compliance strategies.
        Since 2005, the IRS has been reporting separate estimates for the
    EITC because this program was determined to be high risk under the
    Improper Payments Information Act, a predecessor to IPERIA. All
    overclaims of refunds, including refundable credits, are included in
    the IRS tax gap estimate. The IRS' overall compliance strategy includes
    efforts to reduce the EITC error rates separately, but also takes into
    account efforts to improve compliance overall, including refundable
    credits claimed on the tax return. The OMB confirmed in March 2014 that
    this is permissible so long as the IRS explains in its Annual Financial
    Report why there is no further break out. This OMB agreement is based
    on the recognition of how tax returns are administered, including
    refundable credits, as being integral to the IRS assessment of
    compliance with tax reporting requirements. This allows for the
    appropriate resource focus within the IRS compliance strategy, since
    the largest component of the tax gap falls outside of traditional
    refundable tax credit payments. If the IRS compliance strategy required
    IPERIA reporting and compliance standards for all refundable tax
    credits, the IRS would need to divert a disproportionate amount of
    compliance resources to satisfy those requirements
        Refundable tax credits differ from other Federal outlays, such as
    Federal vendor or grant payments, in that the potential outlay can be
    fully or partially absorbed by taxpayers' tax liabilities, and can be
    combined with other refundable and/or non-refundable tax credits in
    arriving at the net tax due or overpayment to be refunded. Some
    refundable tax credits, such as income tax withheld from wages, Federal
    tax deposits, and estimated tax payments, are recorded as reductions of
    receipts rather than as outlays.\3\ Refundable tax credits are reported
    as outlays when they exceed the tax liability and are a part of the
    refund. When refunds are due; the IRS issues a single payment for the
    net refund amount.
    ---------------------------------------------------------------------------
        \3\ OMB Circular A-11 Section 20.10.
    ---------------------------------------------------------------------------
        Another important difference between refundable tax credits and
    other Federal outlays subject to the IPERIA is that taxpayers self-
    certify their eligibility for the applicable credits through the act of
    filing a tax return. Amounts reported on tax returns or required tax
    forms are based on voluntary compliance and are signed by taxpayers
    under penalty of perjury, attesting that the information provided is
    complete and accurate. The IRS is legally obligated \4\ to refund
    amounts collected from taxpayers and refundable tax credits Congress
    has authorized qualifying taxpayers to claim in excess of the
    taxpayer's income tax liability within 45 days of processing a
    taxpayer's request. Otherwise, IRS must pay interest to the taxpayer.
    This contrasts with other contractual or benefit payments where the
    eligibility for payment and the accuracy of the amount to be paid are
    reviewed and approved prior to disbursement of the funds.
    ---------------------------------------------------------------------------
        \4\ 31 U.S.C. Sec. 1324.
    ---------------------------------------------------------------------------
        The IRS has compliance processes in place to identify questionable
    refunds and stop their issuance. To the extent permitted by law, the
    IRS uses other government data sources to identify questionable claims
    for refundable tax credits and address them appropriately. For claims
    of EITC, CTC, and ACTC, refunds are stopped and the returns are
    referred to the IRS Examination functions for review. Examiners will
    contact taxpayers to request documentation to support their claims for
    the credit(s) and, when taxpayers are found to be ineligible, the
    examiners will make the requisite adjustments to the return to
    eliminate the unallowable credit. Claims disallowed by these pre-refund
    examinations are not improper payments because the refunds were not
    issued.
        In addition to performing examinations of questionable claims,
    approximately 70 percent of which are performed before the refund is
    issued, soft notices are used to alert taxpayers to questionable items
    and encourage improved future compliance. Several fraud detection
    filters are in place specifically to help detect issues with claims for
    the EITC, CTC, and ACTC. Last year, the IRS detected specific patterns
    indicating potential fraud in returns with Individual Taxpayer
    Identification Numbers and developed filters during the filing season
    to stop those refunds from being issued.
        Approximately 57 percent of returns claiming the EITC are prepared
    by tax return preparers, and we are supplementing our traditional
    return preparer initiatives with strategic programs intended to improve
    compliance with the EITC and other refundable credit provisions.
    Compliance and warning notices are sent before and during the filing
    season to preparers who prepare large numbers of returns claiming the
    EITC to educate them on their responsibilities and the consequences of
    non-compliance. Preparer audits are performed by field examiners to
    ensure preparers are complying with EITC due diligence rules. We are
    also using data analytics to identify tax return preparers with a
    history of submitting incorrect or potentially fraudulent tax returns
    falsely claiming the EITC and related tax credits. Intervention methods
    used to address these preparers include letters, telephone calls, and
    site visits, both before and during the filing season, to allow the
    preparers to immediately adjust their practices. During its pilot year
    in 2012, this process reduced improper EITC payments by an estimated
    $198 million. The program was expanded in 2013 and is estimated to have
    prevented another $590 million in improper payments.
        We disagree with the TIGTA's potential outcome measure estimate of
    $1.7 billion as funds put to better use for two reasons. First, as
    noted in the report, the outcome cannot be achieved without changes to
    existing legislation; an action that is beyond the control of the IRS.
    Second, our review of data from the recent EITC Compliance Study,
    covering Tax Years 2006 through 2008, found that a significant portion
    of EITC claims on returns without a Form W-2, Wage and Tax Statement,
    sent to the IRS and with wages reported on the return were either
    accurate or disallowed for reasons other than misreported wages.
        Attached is our response to your recommendations. If you have any
    questions, please contact me, or a member of your staff may contact
    Jodi L. Patterson, Director, Return Integrity and Correspondence
    Services, Wage and Investment Division, at (404) 338-8961.

    Attachment

                                   ATTACHMENT

    Recommendation

        Recommendation 1: The Commissioner, Wage and Investment Division,
    should ensure that the results of the ACTC Improper Payment Risk
    Assessment accurately reflect the high risk associated with ACTC
    payments and provide a reliable estimate of improper payments.
    Completion of the ACTC Improper Payment Risk Assessment should include
    an evaluation of available NRP and enforcement data when determining
    the overall risk of improper payments.

        Corrective Action: We disagree with this recommendation. The
    Improper Payment Risk Assessment is completed for the Additional Child
    Tax Credit (ACTC) following the guidance of the Department of Treasury
    and the Office of Management and Budget (OMB). The assessment
    questionnaire and scoring methodology reflect operational risks
    associated with administration of the credit. Enforcement data and
    overall risks associated with administration of the ACTC are already
    considered by its inclusion in the tax gap estimate.

        Implementation Date: N/A

        Responsible Official: N/A

        Corrective Action Monitoring Plan: N/A

    Recommendation

        Recommendation 2: The Commissioner, Wage and Investment Division
    should, as required by the IPERA, identify the root causes of the
    improper ACTC payments, determine if tools and/or resources are
    available to address erroneous ACTC payments, and establish a plan to
    reduce the erroneous payments and then meet that plan.

        Corrective Action: We disagree with this recommendation. The OMB
    acknowledges that IRS already conducts analysis of the tax gap that
    incorporates these credits. Refundable tax credit non-compliance is
    included in the tax gap estimate and in the assessment and regular
    updating of our compliance strategies, The IRS considers available
    tools, resources, and alternative treatment options when preparing and
    updating compliance strategies. The reduction of erroneous payments is
    a primary goal of those activities.

        Implementation Date: N/A

        Responsible Official: N/A

        Corrective Action Monitoring Plan: N/A

    Recommendations

        If the IRS is granted correctable error authority, the
    Commissioner, Wage and Investment Division, should:

        Recommendation 3: Contract with the HHS to obtain a complete copy
    of the NDNH database for use during tax return processing to
    systemically identify unsupported wages reported on tax returns to
    erroneously claim the EITC.

        Corrective Action: We disagree with this recommendation. The
    limited National Directory of New Hires (NDNH) data is used now in our
    filters when third party wage information is not yet available to the
    IRS on the Information Returns Master File (IRMF). An analysis was
    performed to determine the extent to which the NDNH data is beneficial
    in processing claims for the EITC. The analysis revealed that the data
    was being used on only a small percentage of the claims filed, and that
    volume is decreasing each year as wage information is posted earlier to
    the IRMF. The cost of obtaining the limited NDNH is significant and,
    under current limitations on our use of the data, we do not consider it
    to be a cost beneficial tool. However, as we respond to the
    recommendation below, we agree and are pursuing legislative authority
    to expand our access to and authority for use of the entire NDNH
    database which will be useful for identifying noncompliance, identity
    theft, and refund fraud.

        Implementation Date: N/A

        Responsible Official: N/A

        Corrective Action Monitoring Plan: N/A

    Legislative Recommendation

        Recommendation 4: Work with the Assistant Secretary of the Treasury
    for Tax Policy to consider a legislative proposal to obtain expanded
    NDNH authority to systemically verify claims for other income-based
    refundable credits (e.g. ACTC) based on NDNH employment data.

        Corrective Action: We agree with this recommendation. The General
    Explanations of the Administration's Fiscal Year 2015 Revenue Proposals
    presents a legislative request for expanded use of the NDNH database.
    The proposal would amend the Social Security Act to expand IRS access
    to NDNH data for general tax administration purposes, including data
    matching and verification of taxpayer claims during return processing.
    We believe this proposal addresses the recommendation.

        Implementation Date: Implemented

        Responsible Official: Director, Return Integrity and Correspondence
    Services, Wage and Investment Division

        Corrective Action Monitoring Plan: We will monitor this corrective
    action as part of our internal management control system.

        Mr. George. But suffice it to say, as a refundable credit,
    all refundable credits that the IRS issues are so difficult to
    manage because once the money is out of the door, it is so much
    more expensive for the IRS to reclaim it, recoup it. It is they
    have to make a cost-benefit analysis as to whether or not it is
    worth doing.
        Now there are ways that the IRS could address this, which
    we have recommended in the past, and that included, you know,
    earlier reporting of earnings under--per the W-2 form. So,
    again, the earlier the IRS has information on what people are
    paid, the earlier they can address problems that they
    ultimately find.
        But this is in conjunction with the request that the
    Treasury Department as well as recommendations that we have
    made and the IRS has made for what is known as correctable
    error authority. So, for example, once the tax filing season
    begins, which, in effect, is the second or third week in
    January, depending on the year, people can file their tax
    return and seek a refund.
        The IRS is not required to receive from the payee, the
    employer or whomever, for another 3 months, sometime in March,
    that same information on that individual. Now if the individual
    claims a different amount than what the employer claims, that
    individual could receive more money and then receive a
    refundable credit, whether it is the EITC or the additional
    child tax credit or an education credit, what have you.
        Now if the IRS had what is known as correctable error
    authority, it does not have to necessarily wait until again, as
    I pointed out in my opening statement, that all of the
    information is in hand and what have you. They could
    automatically hold off paying that refund and making the
    corrections themselves. And of course, the taxpayer would still
    have the right to contest the IRS's decision if they believe it
    is inaccurate, but so it is a symbiotic relationship in terms
    of legislation that the IRS and the Department of the Treasury
    is seeking.
        So there are ways to address this, but it is obviously a
    very delicate area for all involved.
        Senator Boozman. I guess the frustration is this is an area
    where throwing money at it is not--won't help in the sense of,
    you know, making it more--we have a program that is in error 24
    percent of the time, which is, you know, certainly
    unacceptable.
        In the past, TIGTA has identified refund fraud committed by
    prisoners that is a significant problem for tax administration.
    Just last fall, a report noted that refund fraud associated
    with prisoner Social Security numbers remains a serious
    problem.
        The number of fraudulent tax returns filed using a
    prisoner's Social Security number that were identified by the
    IRS increased from more than 37,000 tax returns in calendar
    year 2007 to more than 137,000 tax returns in calendar year
    2012. The refunds claimed on these tax returned increased from
    $166 million to $1 billion.
        I understand that Treasury has the authority to share
    information with the Federal Bureau of Prisons and State
    Departments of Corrections to help determine if prisoners may
    have filed or helped the filing of a fraudulent return. Would
    you please give us an update on the effectiveness of the IRS
    efforts to reduce these improper payments to prisoners?
        Mr. George. Yes, and thank you for posing this question,
    Mr. Chairman. Because I have to admit, this is one of the areas
    where I am most disappointed. Because this was one of the first
    subjects that I testified before Congress on almost a decade
    ago about the problem that existed and that has since just
    continued to grow.
        Congress did empower the IRS to take actions to address
    this by forming agreements with various States and Federal
    penitentiary or correctional organizations. And they have--they
    did at some point take positive steps to doing so. Some of
    those expired. Others, again, just fell by the wayside.
        But this is a multi-billion dollar problem. It is still
    going on. And a lot of these individuals have so much time on
    their hands and, in all candor, really have nothing left to
    lose that they are not going to stop.
        And until something more tangible is done, meaning further
    prosecutions or more authority or, in all candor, the IRS
    somehow feeling the pinch if they don't take action with
    signing up what data information sharing programs and the like
    with States, this problem will continue to grow and
    metastasize.
        Senator Boozman. I read the IG report, you know, talking
    about this, and one of the recommendations was I think there
    was 300 and some odd prisoners that they had identified to--you
    know, to essentially give that information--to make it such
    that that group that they had, you know, that they could fix it
    where they couldn't do it, and they refused to do that. Is that
    correct?
        Mr. George. I don't know whether they refused to do it. But
    again, at one point, they did not have the authority to do it.
    And so, and I am not sure what you are describing predates the
    authority that Congress did ultimately provide or not. But I
    can get back to you with clarity.
        Senator Boozman. It is fine. Again, it is just a
    frustration, you know, among the many things that we talked
    about.
        One last question, and then we will let you go. I know that
    you have got lots of stuff to do. TIGTA has identified
    significant concerns about fraudulent claims to premium tax
    credits and security of Federal tax data as the IRS provides
    data to health exchanges. The IRS will also have to administer
    penalties related to the individual mandate and try and seek
    collection of premium tax credits provided to ineligible
    taxpayers and collection of overpayments of tax credits.
        According to your audits, the IRS continues to report that
    more than 20 percent--we talked about this--of the earned
    income tax credit is a problem, issued improperly. Again, $15
    billion, and $13 billion to $15 billion in 2013 in improper
    payments, as we discussed earlier.
        Do you believe that there is the potential for similar
    problems with implementation of the premium tax credit?
        Mr. George. Most definitely, sir. And--and it starts from
    the outset. The bottom line is if someone is able to provide
    fraudulent information at the outset, when they first apply for
    this credit, that starts the ball rolling downhill.
        Now to its credit, the IRS has established some filters in
    their system to try to weed these out. And so, I hope the
    magnitude of the problem isn't anything like the other--well,
    the refundable credits we referred to earlier. But we are--
    TIGTA is in the process now of evaluating this very issue to
    see whether the IRS has adequate processes, both in formation
    and ultimately in effect because this could be a budget buster,
    sir.
        Senator Boozman. Very much. Thank you so much for your
    testimony today. Thank you for being here. We really do
    appreciate it. Appreciate your hard work.
        As again, all of the witnesses that have testified, I know
    that everybody is doing their best to work in a very difficult
    situation, again trying to restore confidence in the agency.
        I want to thank again the other two witnesses for being
    here. Appreciate hearing from these individuals with the
    Treasury Department, the IRS, the IG's office, and having the
    opportunity to explore a number of important and very timely
    issues.
        Today's discussion will be helpful as we move forward with
    our work on the fiscal year 2016 funding and especially in
    light of the answer to the last question about getting these
    things straight on the front end, or we are going to have real
    problems and not let history repeat itself.

                              PREPARED STATEMENTS

        At this time, I ask unanimous consent that a statement by
    the Taxpayer Advocate, Nina Olson, be included in the hearing
    record.
        I ask unanimous consent that a report prepared for the
    subcommittee by the Government Accountability Office (GAO) and
    the IRS fiscal year 2016 budget request and the 2015 filing
    season also be included in the record.
        As there is no objection, they will be included.
        [The statements follow:]
        Prepared Statement of Nina E. Olson, National Taxpayer Advocate
        Chairman Boozman, Ranking Member Coons, and distinguished members
    of this subcommittee:
        Thank you for inviting me to submit this statement regarding the
    proposed budget of the Internal Revenue Service for fiscal year
    2016.\1\
    ---------------------------------------------------------------------------
        \1\ The views expressed herein are solely those of the National
    Taxpayer Advocate. The National Taxpayer Advocate is appointed by the
    Secretary of the Treasury and reports to the Commissioner of Internal
    Revenue. However, the National Taxpayer Advocate presents an
    independent taxpayer perspective that does not necessarily reflect the
    position of the IRS, the Treasury Department, or the Office of
    Management and Budget. Congressional testimony requested from the
    National Taxpayer Advocate is not submitted to the IRS, the Treasury
    Department, or the Office of Management and Budget for prior approval.
    However, we have provided courtesy copies of this statement to both the
    IRS and the Treasury Department in advance of this hearing.
    ---------------------------------------------------------------------------
        In my 2014 Annual Report to Congress, I designated inadequate
    taxpayer service as the #1 most serious problem for our Nation's
    taxpayers. This year, taxpayers are receiving the worst levels of
    taxpayer service since at least 2001, when the IRS implemented its
    current performance measures.
        I do not think it is hyperbolic to say we are facing a crisis in
    taxpayer service. Many metrics bear this out, but to cite the most
    obvious: From January 1 through February 21, the IRS answered only 40
    percent of the calls it received from taxpayers seeking to speak with a
    customer service representative, and those who managed to get through
    waited on hold for an average of about 26 minutes.\2\ By comparison, 76
    percent of taxpayers got through and waited on hold an average of about
    11 minutes during the same period last year.\3\
    ---------------------------------------------------------------------------
        \2\ IRS Joint Operations Center, Snapshot Reports: Enterprise
    Snapshot (week ending Feb. 21, 2015).
        \3\ Id.
    ---------------------------------------------------------------------------
        The proposition that the Government should provide taxpayers with
    high quality service may seem obvious, but it is worth considering why
    taxpayer service is so important. In my view, there are two related but
    independent reasons.
        First, good service is, very simply, the right thing for the
    Government to provide for its taxpayers. The requirement to file a
    return and pay taxes is generally the most significant burden a
    government imposes on its citizens. The Government therefore has a duty
    to make compliance as simple and painless as possible.
        Second, it is in the Government's self-interest to facilitate
    voluntary compliance, because voluntary compliance is far more cost-
    effective than enforced compliance. For context, more than 98 percent
    of all tax revenue collected by the Government is paid voluntarily and
    timely. Less than 2 percent is collected through enforcement action.\4\
    If the IRS were to collect 10 percent less in enforcement revenue, tax
    revenue would decline by less than $6 billion. If voluntary tax
    payments were to drop by 10 percent, tax revenue would decline by more
    than $300 billion.
    ---------------------------------------------------------------------------
        \4\ In fiscal year 2014, the IRS collected total tax revenue of
    about $3.1 trillion. Of that amount, it collected $57.1 billion through
    enforcement actions. Government Accountability Office (GAO), GAO-15-
    173, Financial Audit: IRS's Fiscal Years 2014 and 2013 Financial
    Statements 29 (Nov. 2014), at http://www.gao.gov/assets/670/666863.pdf.

        There are three factors that explain why the IRS is unable to meet
    ---------------------------------------------------------------------------
    taxpayer needs:

        1.  Tax-Law Complexity. The complexity of the tax code as it stands
    today is overwhelming, making compliance difficult for taxpayers and
    enforcement difficult for the IRS. With a simpler tax code, taxpayers
    would not need as much help complying, and the IRS could deliver on its
    revenue-collection mission with a smaller budget. For purposes of this
    hearing, I will not discuss tax reform in detail, but I continue to
    believe it should be a top priority.\5\
    ---------------------------------------------------------------------------
        \5\ I have written and testified extensively about the need for
    comprehensive tax reform. See National Taxpayer Advocate 2012 Annual
    Report to Congress 3-23 (Most Serious Problem: The Complexity of the
    Tax Code); Testimony of Nina E. Olson, National Taxpayer Advocate, at
    Hearing on Fundamental Tax Reform Before H. Comm. On Ways and Means,
    112th Cong. (2011), at http://waysandmeans.house.gov/calendar/
    eventsingle.aspx?EventID=219701; National Taxpayer Advocate 2010 Annual
    Report to Congress 3-14 (Most Serious Problem: The Time for Tax Reform
    Is Now); National Taxpayer Advocate 2010 Annual Report to Congress 365-
    372 (Legislative Recommendation: Enact Tax Reform Now); National
    Taxpayer Advocate 2005 Annual Report to Congress 375-380 (Key
    Legislative Recommendation: A Taxpayer-Centric Approach to Tax Reform);
    Presentation of Nina E. Olson, National Taxpayer Advocate, at Public
    Meeting of the President's Advisory Panel on Federal Tax Reform (Mar.
    3, 2005) at http://www.taxreformpanel.gov/meetings/meeting-
    03032005.shtml. Over the past decade, the National Taxpayer Advocate's
    annual reports have contained dozens of additional proposals to
    simplify particular sections or areas of the tax code.
    ---------------------------------------------------------------------------
        2.  Resource Constraints and Increasing Workload. Because of a
    combination of sequestration and concerns about IRS management
    practices, Congress has been cutting the IRS's budget, and IRS funding
    now stands about 17 percent lower on an inflation-adjusted basis than
    in fiscal year 2010. At the same time, the IRS's workload has been
    increasing in recent years due to a variety of factors, including
    implementation of basis reporting and merchant-card reporting laws, the
    Patient Protection and Affordable Care Act, and the Foreign Account Tax
    Compliance Act. In short, the combination of more work and reduced
    resources has produced declining performance.
        3.  Questionable Resource-Allocation Decisions. While I believe the
    IRS requires more funding, I also believe it is incumbent on the IRS to
    spend the resources it has as effectively and efficiently as possible.
    The IRS must be able to demonstrate that it is making responsible
    decisions in allocating its existing resources; that it is basing these
    decisions on research data that is comprehensive, not just on what is
    convenient for the IRS; and that it has a strategic and creative vision
    for the future--one that considers the needs of taxpayers even as it
    tries to go about doing its work efficiently. For example, the IRS has
    substantially stopped providing answers to tax-law questions by phone
    and in its walk-in offices. It decided to answer only ``simple''
    questions during the filing season and to answer no questions at all
    after the filing season, despite the fact that about 15 million
    taxpayers obtain proper extensions or otherwise file later in the year.
    One would think that answering tax-law questions would be viewed as a
    core function the Federal tax agency should perform, yet I do not
    believe the IRS undertook a comprehensive analysis comparing the cost
    savings associated with curtailing answers to tax-law questions against
    other ways of achieving equivalent savings.

        Overall, I believe the solution to the crisis in taxpayer service
    is a combination of more funding and better resource-allocation
    decisions in the near term and comprehensive tax reform over the longer
    term.

        In my testimony today, I will elaborate on the following key
    points:

        1.  The IRS is currently failing to meet taxpayer needs, which
    erodes taxpayer trust in the system and undermines voluntary
    compliance.
        2.  The IRS is making resource-allocation decisions without hard
    data to show that its decisions are the best ones to drive voluntary
    compliance and collect revenue in an effective and efficient manner.
        3.  Understanding the taxpayer base is key to providing effective
    taxpayer service and to maintaining and enhancing voluntary compliance.
        4.  IRS compliance initiatives are often based on outdated or
    unproven assumptions and can generate significant volumes of rework for
    the IRS and tremendous burden for taxpayers.
        5.  The IRS is undertaking a review of its approach to tax
    compliance and service delivery, but greater transparency and
    Congressional oversight would improve taxpayers' confidence and trust
    in the tax system.
        6.  The IRS requires funding to acquire modern IT systems,
    particularly case management systems, in order to meet taxpayer needs
    and improve productivity.

    I.  The IRS Is Currently Failing to Meet Taxpayer Needs, Which Erodes
            Taxpayer Trust in the System and Undermines Voluntary
            Compliance.

        The tax code as it stands today is overwhelming in its complexity
    and thus poses a significant compliance barrier for taxpayers. Large
    numbers of taxpayers contact the IRS for assistance. In addition to
    publishing forms and instructions, the IRS now typically receives more
    than 100 million telephone calls,\6\ 10 million letters,\7\ and five
    million visits from taxpayers each year.\8\
    ---------------------------------------------------------------------------
        \6\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
    Snapshot (final week of each fiscal year for fiscal year 2008 through
    fiscal year 2014).
        \7\ IRS, Joint Operations Center, Adjustments Inventory Reports:
    July-September Fiscal Year Comparison (Fiscal Year 2008 through Fiscal
    Year 2014).
        \8\ IRS Wage & Investment Division, Business Performance Review 7
    (4th Quarter--Fiscal Year 2014, Nov. 6, 2014).
    ---------------------------------------------------------------------------
        The IRS reached its high-water mark in providing taxpayer service
    in fiscal year 2004, when it answered 87 percent of the calls it
    received from taxpayers seeking to speak with an assistor and hold
    times averaged 2.5 minutes; \9\ it responded to a wide range of tax-law
    questions from taxpayers both on its toll-free lines and in its roughly
    400 walk-in sites; it prepared nearly 500,000 tax returns for taxpayers
    who requested help, particularly low income, elderly, and disabled
    taxpayers; \10\ and it maintained a robust outreach and education
    program, estimating that its outreach efforts touched 72 million
    taxpayers.\11\
    ---------------------------------------------------------------------------
        \9\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
    Snapshot (Sept. 30, 2004).
        \10\ This data was provided to TAS by the IRS Wage & Investment
    Division in connection with the National Taxpayer Advocate 2007 Annual
    Report to Congress 162-182 (Most Serious Problem: Service at Taxpayer
    Assistance Centers). TAS does not have data on tax-law questions asked
    outside the filing season for more recent years.
        \11\ IRS Data Book, Fiscal Year 2004, Table 23.

        By comparison, the IRS's service expectations for fiscal year 2015
    ---------------------------------------------------------------------------
    are as follows:

      --The IRS is unlikely to answer even 50 percent of the telephone
            calls it receives.\12\
    ---------------------------------------------------------------------------
        \12\ Email from Commissioner Koskinen to All Employees, Fiscal Year
    2015 Funding (Dec. 17, 2014).
    ---------------------------------------------------------------------------
      --For taxpayers who manage to get through, wait times are expected to
            be at least 30 minutes on average \13\ and will run
            considerably longer during peak periods.
    ---------------------------------------------------------------------------
        \13\ Id.
    ---------------------------------------------------------------------------
      --The IRS will answer far fewer tax-law questions than it used to.
            During the filing season, it will not answer any questions
            except ``basic'' ones. After the filing season, 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 any
            answers to their questions by calling or visiting IRS
            offices.\14\
    ---------------------------------------------------------------------------
        \14\ IRS, e-News for Tax Professionals--Issue Number 2013-49, Item
    4, Some IRS Assistance and Taxpayer Services Shift to Automated
    Resources (Dec. 20, 2013), available at http://www.irs.gov/uac/Some-
    IRS-Assistance-and-Taxpayer-Services-Shift-to-Automated-Resources.
    These restrictions were implemented in 2014.
    ---------------------------------------------------------------------------
      --The IRS has eliminated return preparation.\15\
    ---------------------------------------------------------------------------
        \15\ Id.
    ---------------------------------------------------------------------------
      --The IRS has reduced its training funds by 83 percent since fiscal
            year 2010, leaving employees less equipped to do their jobs
            properly.\16\
    ---------------------------------------------------------------------------
        \16\ IRS Chief Financial Officer, Corporate Budget.

        The following chart shows the IRS's performance in handling
    telephone calls from January 1--February 14, 2015, and the comparable
    ---------------------------------------------------------------------------
    period during 2014:

    IRS Telephone Performance--Jan. 1-Feb. 21, 2015 \17\
    ---------------------------------------------------------------------------
        \17\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
    Snapshot (week ending Feb. 14, 2015).

                                                                JANUARY 1, 2015-FEBRUARY 21, 2015
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                2014                                         2015                       2014 to 2015 Change
                                           -----------------------------------------------------------------------------------------------------------------
                                                Net                                          Net
                                              Attempts                                     Attempts
                     Line                    (includes    Assistor  Customer  Avg Speed   (includes    Assistor  Customer  Avg Speed   LOS Change     ASA
                                               calls       Calls     Service  of Answer     calls       Calls     Service  of Answer  (Percentage    Change
                                            answered by   Answered   Rep LOS  (Minutes)  answered by   Answered   Rep LOS  (Minutes)     Point)    (Minutes)
                                            automation)                                  automation)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Accounts Management...................   22,044,858  4,594,021       76%         11   20,570,926  3,131,536       40%         26        -36%          15
    Individual Income Tax Line TAX-1040...    3,046,235    819,409       83%          9    3,986,631    498,914       26%         22        -57%          13
    Refund Hotline (1954).................   10,241,288     33,499       52%          8    6,947,594     26,008       33%         23        -19%          15
    W&I Individual Customer Response Line.      819,733    312,061       74%          9      910,023    179,356       34%         23        -40%          14
    NTA (4778)............................       86,146     36,023       58%         10      143,049     36,281       34%         27        -24%          18
    Practitioner Priority Line (PPS)......      268,689    166,960       73%         21      257,793     99,570       45%         56        -28%          35
    --------------------------------------------------------------------------------------------------------------------------------------------------------

        The official measure of IRS telephone performance is based on calls
    made to the ``Accounts Management'' telephone lines. So far this year,
    the IRS has answered only 40 percent of calls from taxpayers seeking to
    speak with a telephone assistor, and wait times for those who got
    through averaged 26 minutes.\18\ That is an extraordinary decline from
    last year, when the IRS answered about 76 percent of its calls, with an
    average wait time of 11 minutes for the comparable period. The other
    rows on the chart show important telephone lines that are subsets of
    the Accounts Management total.
    ---------------------------------------------------------------------------
        \18\ The percentage of calls answered from taxpayers seeking to
    speak with a customer service representative is referred to as the
    Customer Service Representative Level of Service, which is abbreviated
    as ``Customer Service Rep LOS'' on the above chart. The wait time for
    callers who get through to a customer service representative is
    referred to as the Average Speed of Answer, which is abbreviated as
    ``Avg Speed of Answer (Minutes)'' on the above chart. In both cases, we
    have rounded to the nearest whole numbers, but the LOS change and ASA
    change columns were computed using decimals and therefore do not all
    total exactly.
    ---------------------------------------------------------------------------
        As the filing season has kicked into higher gear, the IRS's
    telephone performance has dropped below the year-to-date average. For
    the week ending February 7, the IRS answered 34 percent of its
    calls.\19\ For the week ending February 14, it answered 36 percent.\20\
    And for the week ending February 21, it answered 31 percent.\21\
    ---------------------------------------------------------------------------
        \19\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
    Snapshot (week ending Feb. 7, 2015).
        \20\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
    Snapshot (week ending Feb. 14, 2015).
        \21\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
    Snapshot (week ending Feb. 21, 2015).
    ---------------------------------------------------------------------------
        The IRS's ability to timely process taxpayer correspondence has
    also been declining. The following chart shows open inventory levels
    and the percentage of the inventory that was not handled within
    established timeframes for two key programs run by the Accounts
    Management function:

    IRS Correspondence Performance--Jan. 1-Feb. 21, 2015 \22\
    ---------------------------------------------------------------------------
        \22\ IRS, Customer Account Services Accounts Management Paper
    Inventory Reports, Inventory Age Report--All Programs (week ending Feb.
    21, 2015).

                                     ACCOUNTS MANAGEMENT CORRESPONDENCE INVENTORIESP(WEEKS ENDING 02/22/2014 AND 02/21/2015)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                      2014                           2015                2014 to 2015 Change
                                                                        ------------------------------------------------------------------------------------
                                                                                                                                                   Overage
                              Key AM Programs                                               Percentage                      Percentage  Overage     Change
                                                                           Total   Overage    Overage     Total    Overage    Overage    Change  (Percentage
                                                                                                                                                    Point)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Individual Taxpayer Correspondence.................................   177,504   82,083        46%    247,699   162,141        65%    80,058        19%
    Amended Return/Duplicate Filing....................................   126,901   65,833        52%    158,618   107,419        68%    41,586        16%
    --------------------------------------------------------------------------------------------------------------------------------------------------------

        In both programs, at least 65 percent of the inventories are
    overage (i.e., have not been handled within established timeframes),
    which represents a substantial increase over last year's already-high
    levels. These lengthy backlogs in processing taxpayer correspondence
    often lead to adverse taxpayer impact. For a taxpayer who owes
    additional tax, interest charges and penalties generally will continue
    to accrue. For a taxpayer who has overpaid, a delay in processing
    correspondence may translate into a delay in receiving a refund.
        Overall, the decline in the IRS's taxpayer service levels results
    from a combination of more work and reduced resources. On the workload
    side, the IRS is receiving 11 percent more returns from
    individuals,\23\ 18 percent more returns from business entities,\24\
    and 70 percent more telephone calls (through fiscal year 2013) than a
    decade ago.\25\ Implementation of the Patient Protection and Affordable
    Care Act \26\ during the current filing season will add considerable
    new work.
    ---------------------------------------------------------------------------
        \23\ See IRS Data Books, Table 2 (showing return totals for fiscal
    year 2005 through fiscal year 2013). Data for fiscal year 2014 are
    projections made by the IRS Office of Research, Analysis, and
    Statistics; see IRS Publication 6292, FYReturn Projections for the
    United States 2014-2021, at 4 (Fall 2014).
        \24\ Id.
        \25\ The majority of the additional calls were handled by
    automation. The increase in calls seeking to speak with a customer
    service representative was 23 percent. See IRS, Joint Operations
    Center, Snapshot Reports: Enterprise Snapshot (final week of fiscal
    years 2005 and 2013) (indicating that the number of calls seeking to
    reach a representative on the Account Management telephone lines
    increased from about 40.4 million to about 49.8 million). The
    percentage increase in calls seeking to reach an assistor likely would
    have been considerably higher absent IRS policies that have
    increasingly restricted personal service options.
        \26\ Public Law No. 111-148, 124 Stat. 119 (2010).
    ---------------------------------------------------------------------------
        On the funding side, the IRS's budget has been reduced by about 17
    percent in inflation-adjusted terms since fiscal year 2010.\27\ As a
    consequence, the IRS has already cut its workforce by nearly 12,000
    employees,\28\ and projects it will have to cut several thousand
    additional positions during fiscal year 2015.\29\
    ---------------------------------------------------------------------------
        \27\ In fiscal year 2010, the agency's appropriated budget stood at
    $12.1 billion. In fiscal year 2015, its budget was set at $10.9
    billion, a reduction of about 9.9 percent. Inflation over the same
    period is estimated at about 9.4 percent. Adjusting for the interactive
    effects of these cuts and the impact of the Federal pay freeze, we
    estimate the inflation-adjusted reduction in funding was about 17
    percent.
        \28\ IRS Chief Financial Officer, Corporate Budget. This reduction
    represents actual full-time equivalent employees realized through
    appropriated dollars.
        \29\ Email from Commissioner Koskinen to All Employees, Fiscal Year
    2015 Funding (Dec. 17, 2014). The IRS anticipates it can make these
    reductions through attrition.
    ---------------------------------------------------------------------------
        I believe the IRS, like any agency, can operate more effectively
    and efficiently in certain areas. However, I do not see any substitute
    for sufficient personnel if the IRS is to provide high-quality taxpayer
    service. The only way the IRS can assist the tens of millions of
    taxpayers seeking to speak with an IRS employee is to have enough
    employees to answer their calls. The only way the IRS can timely
    process millions of taxpayer letters is to have enough employees to
    read the letters and act on them. And the only way the IRS can meet the
    needs of the millions of taxpayers who visit its walk-in sites is to
    have enough employees to staff them.
        I believe that Congress and the IRS have a shared responsibility to
    ensure that the taxpayers who pay our Nation's bills receive the
    assistance they need when they seek to meet their tax obligations. As I
    wrote in my recent report, I do not think it is acceptable for the
    Government to tell millions of taxpayers who seek help each year, in
    essence, ``We're sorry. You're on your own.''
    Recommendations
        I recommend that Congress:
      --Over the short term, carefully monitor taxpayer service trends and
            ensure that the IRS receives the oversight and funding it
            requires to meet the needs of U.S. taxpayers.
      --Over the longer term, enact comprehensive tax reform to reduce the
            complexity of the Internal Revenue Code and reduce compliance
            burdens on taxpayers and the IRS alike.

    II.  The IRS Is Making Resource-Allocation Decisions Without Hard Data
            to Show That Its Decisions Are the Best Ones to Drive Voluntary
            Compliance and Collect Revenue in an Effective and Efficient
            Manner.

        While I believe the IRS requires more funding, I also believe it is
    incumbent on the IRS to spend the resources it has as effectively and
    efficiently as possible. Doing so is always important, but in light of
    Congress's concerns about IRS management decisions, it is particularly
    important now for the IRS to demonstrate that it is a good steward of
    the funding it is given. Funding reductions, even significant ones, do
    not provide a blanket justification for service reductions. Reductions
    in service always should be made with the goal of minimizing the impact
    on taxpayers and performance. The IRS has had to make difficult choices
    and it is trying hard, but I am not convinced it is making the right
    choices for taxpayers or for itself. I question the decisions to
    substantially stop providing answers to tax-law questions by phone or
    in its walk-in offices. One would think that answering tax-law
    questions would be seen as a core function the Federal tax agency
    should perform, and I do not believe the IRS undertook a comprehensive
    analysis, comparing the cost savings associated with curtailing answers
    to tax-law questions, against other ways of achieving equivalent
    savings.
        Another concern is the IRS's decision to cut back the availability
    of the forms and publications taxpayers require to prepare their
    returns. Not only has the IRS reduced the number and types of forms,
    instructions, and publications that it will print and distribute this
    year, but it is delaying the delivery of those documents to its
    Taxpayer Assistance Centers (TACs) and its Tax Form Outlet Partners
    (TFOPs), including libraries and post offices. Forms will not be
    available at these sites until February 28, almost halfway through the
    filing season.\30\ Moreover, the IRS ordered fewer forms this year than
    in previous years and decided not to stock Form 1040EZ in its own walk-
    in sites. Once a TAC or TFOP runs out of forms or publications, it
    cannot order more.
    ---------------------------------------------------------------------------
        \30\ IRS, Talking Points About IRS Forms Availability (Feb. 10,
    2015).
    ---------------------------------------------------------------------------
        In an alert to all employees on February 10, 2015, the IRS
    acknowledged that these changes have ``created questions and concerns
    from taxpayers.'' \31\ The IRS has advised its employees that they
    should not give out the 1-800 number for ordering tax forms and
    publications unless the taxpayer affirmatively states that he or she
    does not have a computer or Internet access or otherwise presses the
    IRS employee about ordering by telephone.\32\
    ---------------------------------------------------------------------------
        \31\ Id.
        \32\ IRS SERP Alert 15A0052, Forms and Pubs in Taxpayer Assistance
    Centers (revised Feb. 10, 2015).
    ---------------------------------------------------------------------------
        The IRS has also decided to cease widespread distribution of
    Publication 17, Your Federal Income Tax for Individuals, which
    consolidates information about individual tax issues into one helpful
    document. The IRS based this decision on the fact that taxpayers could
    obtain Publication 17 content through other publications,\33\ thus
    imposing on taxpayers the burden of locating information dispersed
    throughout multiple publications and instructions. Each TFOP will
    receive one copy of Publication 17; taxpayers will have to pay to make
    photocopies. The IRS has advised its employees that when asked about
    Publication 17, they are not to tell the taxpayer about limitations on
    availability but instead remind the taxpayer that he or she can access
    the publication online or through the Government Publishing Office
    (GPO). Taxpayers can attempt to purchase Publication 17 for $23 from
    the GPO, but there is no guarantee of success. When a TAS employee
    recently placed an order for Publication 17 through the GPO, she
    received a postcard advising her that her order was cancelled and her
    check would be returned. As best we can tell, the IRS did not order
    sufficient copies to meet the demand of taxpayers willing to pay $23
    for help in complying with the tax laws.
    ---------------------------------------------------------------------------
        \33\ IRS SERP Alert 15A0052, Forms and Pubs in Taxpayer Assistance
    Centers (revised Feb. 10, 2015).
    ---------------------------------------------------------------------------
        The reductions in service on the phones go beyond taxpayers trying
    to call in. Tax professionals who are acting on behalf of clients in
    attempting to resolve problems with the IRS are reporting long wait
    times on the Practitioner Priority Service (PPS) hotline. In recent
    weeks, practitioners have reported to the National Taxpayer Advocate
    about hold times of up to 6 hours. One practitioner reported she used
    her office phone to dial the PPS hotline first thing in the morning so
    she could get in the queue, and conducted other client business on her
    cell phone while waiting on hold. Once she got through to the IRS and
    completed her business for that taxpayer, she would immediately re-dial
    the PPS hotline to get in the queue for her next case. Another
    practitioner, who had information prepared to resolve issues for six
    different taxpayers, reported reaching a live assistor and being told
    she would have to hang up and call back after the first two cases were
    resolved because the call had exceeded the permitted time.
        Taxpayers (and practitioners) call and write the IRS not only to
    get answers to tax-law questions, refund status, or transcripts, but
    also to request penalty abatements, respond to math error notices, and
    make payment arrangements. The IRS faces an impossible choice in
    deciding which of these services is more important than the others--all
    are essential and necessary for a tax system based on self-assessment
    and reliant on voluntary compliance. An erosion of any of these
    services impairs taxpayers' ability to comply with the tax laws. The
    current state of affairs also violates essential taxpayer rights,
    including the right to be informed, the right to quality to service,
    the right to pay no more than the correct amount of tax, the right to
    challenge the IRS's position and be heard, and the right to a fair and
    just tax system.
    The IRS's Rationale and Methodology for Making Specific Cuts in
            Taxpayer Service Are Unclear.
        It is difficult to ascertain exactly how the IRS made its resource-
    allocation decisions with respect to taxpayer service or on what data
    it relied. For years, the IRS had been reducing taxpayer services in
    its TACs, including the availability of return preparation for low
    income, disabled, elderly, and limited English proficiency taxpayers.
    Having made it harder and harder for taxpayers to obtain these
    services, it is disingenuous for the IRS to cite the declining
    utilization of tax return preparation assistance as a justification for
    cutting these services outright. The deliberate downward trend became a
    self-fulfilling proposition.
        Unfortunately, the measures stakeholders often apply to the IRS do
    not acknowledge the importance of service delivery. The typical focus
    is on reducing the tax gap through enforcement efforts, or improving
    efficiency as measured by return on investment (ROI). These are, of
    course, measures of fundamental importance, but they tell us nothing
    about the level of service the IRS is providing to taxpayers, nor do
    they tell us anything about the taxpayer's experience from the
    taxpayer's perspective. In fact, a focus on these measures to the
    exclusion of a meaningful set of service delivery measures ensures that
    the IRS will not provide a reasonable level of service to taxpayers.
        Given budget constraints, the IRS's service activities inevitably
    compete with its enforcement programs for funding. It is relatively
    easy to measure the ROI of enforcement programs--just track the dollars
    collected attributable to an audit or a wage levy, as compared to the
    various costs (including employee time) associated with that audit or
    levy. By contrast, while research shows that taxpayer service
    contributes to voluntary compliance,\34\ measuring the impact of
    service on compliance (i.e., the ROI of IRS services) is at best very
    difficult, and should not be the basis for funding IRS service
    delivery. If we acknowledge that quality taxpayer service is an
    integral component of the IRS's mission, then funding for the Taxpayer
    Services account should be based on service measures and set at a level
    that ensures the IRS will be able to provide an adequate level of
    service to the Nation's taxpayers.
    ---------------------------------------------------------------------------
        \34\ The classic economic model of compliance--that compliance
    depends upon the risk (or perception of risk) of being caught and the
    cost (punishment) if caught--does not adequately explain our high
    compliance rate in the tax system. Research shows that other factors,
    such as taxpayers' attitudes about government and their perception that
    they are being treated fairly by the tax system, also influence
    taxpayer compliance decisions. Many researchers refer to these factors
    collectively as ``tax morale.'' For an introduction to the concept of
    tax morale, see National Taxpayer Advocate 2007 Annual Report to
    Congress vol. 2, 138-182 (Normative and Cognitive Aspects of Tax
    Compliance: Literature Review and Recommendations for the IRS Regarding
    Individual Taxpayers).
    ---------------------------------------------------------------------------
    The IRS Needs Better Taxpayer Service Measures that Incorporate Both
            the Government and Taxpayer Perspectives.
        The IRS should develop and publish a comprehensive suite of service
    measures that can serve as the basis for funding decisions, while
    holding the IRS accountable for efficient service delivery.
        I have elsewhere offered detailed guidelines for the creation of a
    portfolio of measures that would enable both the IRS and external
    stakeholders to evaluate the effectiveness of IRS service delivery.\35\
    These measures would also enable the IRS to identify performance gaps
    that could guide the creation of performance improvement goals. A
    principal feature of this proposed framework is the inclusion of the
    following types of measures for each of the IRS's service delivery
    channels (i.e., telephone, face-to-face, online, and correspondence):
    ---------------------------------------------------------------------------
        \35\ See IRS Pub. 4701, Annual Report to Congress: Progress on the
    Implementation of the Taxpayer Assistance Blueprint (April 2009 to
    September 2010) 54-57.
    ---------------------------------------------------------------------------
      --Access--level of service, wait time (including, where applicable,
            time waiting for service and time waiting for a response).
      --Customer satisfaction.
      --Accuracy.
      --Issue resolution (i.e., did the IRS completely resolve the
            taxpayer's problem(s)?).
        The IRS currently provides a level of service measure for telephone
    service, but it does not provide comparable access measures for other
    channels: Internet, correspondence, and walk-in assistance.
        Stakeholders are also keenly interested in how well the IRS is
    delivering each of its major services (e.g., return preparation, refund
    inquiries, tax law inquiries). I have recommended that the IRS report
    select service delivery measures for each of its major service
    activities: \36\
    ---------------------------------------------------------------------------
        \36\ Id.
    ---------------------------------------------------------------------------
      --Taxpayer awareness of the availability of the various service types
            by channel.
      --Customer satisfaction with each service type by channel.
      --Issue resolution for each service type by channel.
      --Access for limited English proficiency and disabled taxpayers for
            each service type by channel.
      --Number of returns prepared by Taxpayer Assistance Centers and by
            the Volunteer Income Tax Assistance (VITA) and Tax Counseling
            for the Elderly (TCE) programs.
    Implementation of the Service Priorities Initiative Will Provide a
            Clear Rationale for Taxpayer Service Budgetary Allocation
            Decisions.
        In response to my concerns about the erosion of taxpayer service
    delivery, the Wage & Investment (W&I) Division and TAS are
    collaborating on the development of a ranking methodology for the major
    taxpayer service activities offered by W&I. The new methodology will
    take taxpayer needs and preferences into account while balancing them
    against the IRS's need to conserve limited resources, thus enabling the
    IRS to make resource allocation decisions that will optimize the
    delivery of taxpayer service activities given resource constraints.\37\
    Congress will also be able to use the results of this methodology to
    determine whether it is adequately funding core taxpayer service
    activities.
    ---------------------------------------------------------------------------
        \37\ We use the word ``optimize'' to mean that the ranking
    methodology will provide the IRS with a rigorous way to select the
    combination of competing taxpayer service initiatives that maximizes
    the ``value'' of service delivery given available resources.
    ---------------------------------------------------------------------------
        The methodology measures ``value'' by using separate sets of
    criteria for taxpayers and the IRS. This is necessary because taxpayers
    and the IRS have different priorities. The IRS is concerned with
    conserving resources, especially in a tight budget environment.
    Taxpayers need services that will enable them to understand their tax
    obligations, prepare their returns, and resolve problems without undue
    burden. Frequently, these needs are best met by personal services that
    are more costly to the IRS than automated services, such as Internet-
    based services.
        Limitations imposed by the lack of available data have delayed this
    initiative, and it is unclear whether the IRS will devote the resources
    necessary to complete development of the methodology. In the absence of
    this or a similar methodology, the IRS will continue to make difficult
    resource-allocation decisions based on limited data and gut instinct
    rather than through comprehensive analytic rigor.
    Recommendations
        I recommend that Congress:
      --Encourage the IRS to continue the work it has done to date on
            developing a meaningful portfolio of to develop a more
            comprehensive suite of performance measures in the area of
            taxpayer service, consistent with the guidelines I have
            recommended.
      --Encourage the IRS to complete the ranking process for the Service
            Priorities Project with newly available tax year 2013 data and
            identify all steps needed to fully populate and implement the
            ranking tool.
        Effective measures will help the IRS determine where it needs to
    improve and will assist the Appropriations Committees in determining
    where the IRS requires additional resources.

    III.  Understanding the Taxpayer Base is Key to Providing Effective
            Taxpayer Service and to Maintaining and Enhancing Voluntary
            Compliance.

        In order to provide taxpayer service in an effective and efficient
    manner, the IRS needs to understand its taxpayer base. While in the
    current budget environment it may be tempting to migrate taxpayer
    service toward low-cost self-assistance options, such efforts may
    ultimately be a wasted and costly effort if the IRS does not properly
    address taxpayers' actual service needs.
    Comprehensive Studies Demonstrate that Low Income and Other Vulnerable
            Taxpayer Populations Need Person-to-Person Assistance to Comply
            With Their Federal Tax Obligations.
        To adequately address these needs and, as a result, maximize
    voluntary compliance, the IRS should take into consideration the
    following data points:
      --In 2013, nearly 133 million people had incomes below 250 percent of
            the Federal poverty level (FPL), which Congress has determined
            to be the income level at which taxpayers are eligible for
            assistance from Low Income Taxpayer Clinics (LITCs).\38\ This
            is an increase of almost 16 million people since 2007.
    ---------------------------------------------------------------------------
        \38\ At least 90 percent of the taxpayers represented by an LITC
    must have incomes that do not exceed 250 percent of the FPL. See IRC
    Sec. 7526(b)(1)(B)(i). The U.S. Department of Health and Human Services
    publishes yearly poverty guidelines in the Federal Register each year,
    which are used to establish the 250 percent FPL thresholds. For the
    2015 FPL thresholds, see 80 F.R. 3236 (Jan. 22, 2015).
    ---------------------------------------------------------------------------
      --The percentage of persons below the 250 percent FPL threshold rose
            from 39.2 percent to 42.5 percent between 2007 and 2013.\39\
    ---------------------------------------------------------------------------
        \39\ U.S. Census Bureau, Current Population Survey, Annual Social
    and Economic Supplement, Age and Sex of All People, Family Members and
    Unrelated Individuals Iterated by Income-to-Poverty Ratio and Race,
    Below 250 percent of Poverty (2013 and 2007 poverty data, available at
    http://www.census.gov/hhes/www/poverty/data/incpovhlth/2013/index.html.
    ---------------------------------------------------------------------------
      --For tax year 2013, more than 63 million tax returns, or about 45
            percent of the tax returns filed, reported incomes below 250
            percent of the FPL.\40\
    ---------------------------------------------------------------------------
        \40\ IRS Compliance Data Warehouse, Individual Returns Transaction
    File (Tax Year 2013) (computation based on ``total positive income''
    for income and number of exemptions for household size and includes
    returns filed through Oct. 2014 and based on 250 percent of HHS poverty
    levels for 2013).
    ---------------------------------------------------------------------------
        In 2014, the Taxpayer Advocate Service, as the organization that
    oversees and administers the LITC program for the IRS, commissioned a
    survey by Russell Research to better understand the needs and
    circumstances of taxpayers eligible to use the clinics.\41\ The program
    provides representation to low income individuals who need help
    resolving tax problems with the IRS. The ``LITC-eligibles'' survey had
    the following pertinent findings:
    ---------------------------------------------------------------------------
        \41\ This Random Digit Dialed (RDD) telephone survey utilized both
    cell phone numbers and landline numbers to reach participants. This
    approach was used to make sure all groups of the LITC-eligibles were
    represented in the survey. The survey included more than 1,100
    individuals and gathered information on eligible taxpayers' awareness
    and use of LITC services, the types of issues for which they would
    consider using clinic services, and other items including demographic
    information. See National Taxpayer Advocate 2014 Annual Report to
    Congress vol. 2, 1-26 (Research Study: Low Income Taxpayer Clinic
    Program: A Look at Those Eligible to Seek Help from the Clinics).
    ---------------------------------------------------------------------------
      --A significant percentage (approximately 9 percent) of LITC-
            eligibles has less than a high school education. Almost 30
            percent of Spanish-speaking LITC-eligibles had only an
            elementary school education.
      --Fifteen percent of LITC-eligibles reported receiving notices from
            the IRS. In response, 55 percent called the IRS, 29 percent
            replied by letter, 24 percent contacted their preparers, and
            nearly 20 percent did nothing. (More than one response was
            allowed in the survey).
      --A majority of all LITC-eligibles used return preparers, as did
            approximately 75 percent of Spanish-speaking eligibles.
            However, a significant percentage of these preparers did not
            satisfy the very basic statutory requirements established for
            commercial tax return preparation under IRC Sec. 6695(a) and
            (b).\42\ More than 15 percent of the time, for example, the
            preparer either did not sign the return or did not give the
            taxpayer a copy. This percentage rose to more than 30 percent
            of Spanish-speaking eligibles.
    ---------------------------------------------------------------------------
        \42\ IRC Sec. 6695(a) imposes a penalty on a tax return preparer
    for failure to provide a copy of the return to the taxpayer, unless the
    failure is due to reasonable cause and not to willful neglect. IRC
    Sec. 6695(b) imposes a penalty on a tax return preparer for failure to
    sign a return when required by regulation to do so, unless the failure
    is due to reasonable cause and not to willful neglect.
    ---------------------------------------------------------------------------
        In addition, the Pew Research Center conducted several surveys to
    determine the percentage of adult individuals who are offline (not
    using the Internet or email). The following shows the categories of
    individuals found by the surveys to have the highest offline rates in
    2013: \43\
    ---------------------------------------------------------------------------
        \43\ Pew Research Center's Internet & American Life Project, Who's
    Not Online and Why? (Sept. 2013) (Phone survey conducted in 2013); see
    also Pew Research Center, Older Adults and Technology Use: Adoption is
    Increasing, but Many Seniors Remain Isolated from Digital Life (April
    2014) (Phone survey conducted in 2013); Pew Research Center's Internet
    Project July 18 to September 30 Tracking Survey, African Americans and
    Technology Use: A Demographic Portrait (Jan. 2014).
    ---------------------------------------------------------------------------
      --Senior citizens (aged 65+): 44 percent offline;
      --Adults with less than a high school education: 41 percent offline;
      --Adults with high school diploma: 22 percent offline;
      --Living in households earning less than $30,000 per year: 24 percent
            offline;
      --Living in rural areas: 20 percent offline;
      --Hispanics: 24 percent offline; and
      --African Americans: 20 percent offline (rising to 25 percent offline
            if household income is less than $30,000 and to 37 percent for
            those with no high school diploma).
        Finally, a 2014 online survey by Forrester Research found
    interesting data about the use of certain devices to conduct some
    transactions online. While this study was conducted online and thus
    excluded responses from individuals who were offline or had limited
    online capabilities, there were some noteworthy findings: \44\
    ---------------------------------------------------------------------------
        \44\ Because this survey was conducted online, the reported usage
    rates may be higher than for the general population. Forrester, North
    American Consumer Technographics Online Benchmark Survey, Part 2
    (2014).
    ---------------------------------------------------------------------------
      --On average, only 19 percent of adults search for government
            services and policies with a personal computer or laptop. This
            rate drops to 11 percent when using personal tablets and to 4
            percent when using a mobile phone.
      --With very few exceptions, the lower income brackets used all the
            devices to conduct online financial transactions less
            frequently than the national average.
      --On average, 21 percent of adults use their mobile phones to check
            financial statements. Only 13 percent use their mobile phones
            to pay bills or transfer money between accounts.
        I believe the LITC-eligibles survey and the Pew and Forrester
    findings support the need for the IRS to design a taxpayer service
    strategy based on the actual needs of the taxpayer population rather
    than focusing on short-term resource savings. For example, while online
    self-help tools address the needs of many taxpayers in a low-cost
    manner, the IRS is harming those offline taxpayers when it
    significantly decreases the provision of face-to-face and person-to-
    person telephone services. In addition, the LITC-eligibles survey
    findings raise questions about the appropriateness of relying on
    preparers as intermediaries for the low income population, especially
    the Spanish-speaking population within this category, and particularly
    with respect to the unregulated return preparer population.
    The Lack of a Geographic Presence of Key IRS Personnel, Including
            Appeals Personnel, Limits the Effectiveness of IRS Taxpayer
            Service and Compliance Initiatives.
        The Internal Revenue Service Restructuring and Reform Act of 1998
    (RRA 98) required the IRS to replace its geographic-based structure
    with organizational units serving groups of taxpayers with similar
    needs.\45\ While the new taxpayer-based structure has produced some
    benefits, the elimination of a functional geographic presence, with IRS
    employees understanding the needs and circumstances of a specific
    geographic economy, may harm taxpayers and erode compliance.
    Maintaining a local presence in both service and enforcement operations
    is important because such presence enables the IRS to:
    ---------------------------------------------------------------------------
        \45\ Internal Revenue Service Restructuring and Reform Act of 1998
    (RRA 98), Public Law No. 105-206, Sec. Sec. 1001(a)(1)-(3), 112 Stat.
    685, 689 (1998).
    ---------------------------------------------------------------------------
      --Better understand local economic, social, and cultural conditions
            and tailor initiatives accordingly to maximize voluntary
            compliance;
      --Identify local variations of nationwide compliance problems;
      --Identify and address significant local compliance problems that are
            unique to a particular region and do not show up nationwide;
            and
      --Put a local, human face on the IRS organization through the
            presence of employees who live in the communities and interact
            with taxpayers on a day-to-day basis.
        When designing an outreach campaign, the IRS should give
    significant attention to local culture and how different messages will
    be received across geographic lines. Instead, IRS localized outreach
    and education have all but disappeared, and front-line local compliance
    personnel have been significantly reduced. For example:
      --The Small Business/Self-Employed Division (SB/SE), which serves
            approximately 65 million taxpayers, has no outreach and
            education employees in 13 States, plus the District of
            Columbia.\46\
    ---------------------------------------------------------------------------
        \46\ IRS, Individual Returns Transaction File, IRS Compliance Data
    Warehouse (Tax Year 2013 returns filed through Oct. 2014); IRS Human
    Resources Reporting Center, Report of SB/SE Job Series 0526,
    Stakeholder Liaison Field Employees as of November 1, 2014 (Nov. 19,
    2014). The 13 States are Alaska, Delaware, Hawaii, Kentucky,
    Mississippi, Montana, North Dakota, Nebraska, New Hampshire, South
    Dakota, Vermont, West Virginia, and Wyoming.
    ---------------------------------------------------------------------------
      --The W&I Division, which is responsible for helping approximately
            126 million individuals understand and comply with their tax
            obligations, devotes only about 6 percent of its outreach and
            education budget to activities that involve face-to-face
            contact with taxpayers.\47\
    ---------------------------------------------------------------------------
        \47\ See National Taxpayer Advocate 2012 Annual Report to Congress
    319-333 (Most Serious Problem: The IRS Is Substantially Reducing Both
    the Amount and Scope of Its Direct Education and Outreach to Taxpayers
    and Does Not Measure the Effectiveness of Its Remaining Outreach
    Activities, Thereby Risking Increased Noncompliance). The 6 percent
    figure was as of fiscal year 2011. Due to recent budget reductions, the
    percentage now may be lower.
    ---------------------------------------------------------------------------
      --IRS personnel in densely-populated Manhattan have decreased by 34
            percent between 2001 and 2014, although filings of Forms 1040,
            1120, 1120S, and 1065 increased by almost 14 percent in
            Manhattan between tax years (TY) 2000 and 2013.\48\
    ---------------------------------------------------------------------------
        \48\ IRS Compliance Data Warehouse, Individual Returns Transaction
    File and Business Returns Transaction File (Tax Years 2000, 2007, and
    2013).
    ---------------------------------------------------------------------------
      --In sparsely-populated Wyoming, total tax filings increased by 22
            percent between TYs 2001 and 2013, while IRS staffing dropped
            by more than 50 percent.\49\
    ---------------------------------------------------------------------------
        \49\ Filing data from IRS Databooks for 2001, 2008, 2013, rounded
    to the nearest thousand. Filing data for 2014 will not be available
    until March 2015.
    ---------------------------------------------------------------------------
        Almost one quarter of the States (12 out of 50) have no permanent
    presence by the IRS Office of Appeals, and this number of States
    lacking a permanent field office has increased by 33 percent, from 9 to
    12, since 2011.\50\
    ---------------------------------------------------------------------------
        \50\ National Taxpayer Advocate 2014 Annual Report to Congress 46;
    IRS, Human Resources Reporting Center. The following States lack both
    Appeals Officers and Settlement Officers: Alaska, Arkansas, Delaware,
    Idaho, Kansas, Montana, North Dakota, New Mexico, Rhode Island, South
    Dakota, Vermont, and Wyoming. The following States have at least one
    Appeals Officer but no Settlement Officer (to handle appeals on
    collection matters): Hawaii, Iowa, Maine, and West Virginia. The
    territory of Puerto Rico has also lacked a permanent Appeals office
    during this time.

       [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Not only are States without an Appeals post of duty increasing, but
    the number of Appeals Officers and Settlement Officers located in
    existing field offices has diminished. Between the summer of 2010 and
    the summer of 2014, these Appeals personnel, who also comprise the
    group capable of traveling to states without a permanent field office
    (referred to as ``riding circuit''), have dropped by approximately 27
    percent, from 817 to 593.\51\ Unsurprisingly, the overall number of
    Appeals cases closed via circuit riding likewise has progressively
    fallen in each of the last 4 years.\52\
    ---------------------------------------------------------------------------
        \51\ National Taxpayer Advocate 2014 Annual Report to Congress 49;
    see user data from on-rolls listing, comparing personnel data from Aug.
    23, 2010 with personnel data from Aug. 23, 2014.
        \52\ Id. at 50; Appeals response to TAS information request (Aug.
    5, 2014).
    ---------------------------------------------------------------------------
        Even where geographic coverage eventually is achieved through
    circuit riding, taxpayers are disadvantaged. Circuit riding Appeals
    cases often take an additional 6 months or more to resolve and have
    significantly lower levels of agreement than face-to-face Appeals cases
    conducted in field offices.\53\ Congress desired better for taxpayers,
    and more from the IRS, when it passed RRA 98 Sec. 3465(b) to require
    that an Appeals Officer be ``regularly available'' within each
    State.\54\
    ---------------------------------------------------------------------------
        \53\ National Taxpayer Advocate 2014 Annual Report to Congress 52,
    Figures 3 and 4.
        \54\ Public Law No. 105-206, Sec. 3465(b), 112 Stat. 685, 768
    (1998).
    ---------------------------------------------------------------------------
    Recommendations
        I recommend that Congress direct the IRS to:
      --Re-staff local outreach and education positions to achieve an
            actual presence in every State, the District of Columbia, and
            Puerto Rico.
      --Provide face-to-face service with mobile vans and satellite offices
            in each State.
      --Expand Appeals duty locations in a way that ensures that at least
            one Appeals Officer and one Settlement Officer are permanently
            stationed within every State, the District of Columbia, and
            Puerto Rico.
      --Reinvigorate local compliance initiatives by increasing local
            staffing and research in outreach and education, Exam,
            Collection, and Appeals.
    The Elimination of Face-to-Face Services Abroad Increases Compliance
            Challenges for International Taxpayers and Erodes Trust in the
            Fairness of the U.S. Tax System.
        Despite the growth of the international taxpayer base, the IRS has
    announced plans to eliminate all IRS tax attache posts abroad, citing
    the multi-year decrease in funding.\55\ As a result, over 7.5 million
    U.S. taxpayers living abroad,\56\ over 300,000 U.S. military personnel
    and their families,\57\ and hundreds of thousands of students and
    foreign taxpayers with U.S. tax obligations \58\ who benefitted from
    the Taxpayer Assistance Centers overseas are left with the options of
    obtaining all their information from IRS.gov pages or calling the IRS
    telephone number in the United States with only about a 50 percent
    chance of reaching a live assistor after 30 minutes or more of wait
    time --and having to pay country-to-country long-distance charges for
    the call.\59\ The elimination of overseas posts could not come at a
    worse time as taxpayers abroad are facing unique challenges complying
    with their obligations under the Foreign Account Tax Compliance Act
    (FATCA),\60\ the Foreign Bank and Financial Accounts (FBAR) reporting
    requirements,\61\ and the Affordable Care Act (ACA).\62\ The inability
    of international taxpayers to access IRS services from abroad
    contributes to growing confusion and frustration about U.S. tax
    administration and undermines voluntary compliance.
    ---------------------------------------------------------------------------
        \55\ On November 30, 2014, the IRS closed its Beijing office.
    Memorandum from Acting Deputy Commissioner, International (LB&I),
    Beijing Post Closure (Oct. 16, 2014). The IRS has also announced the
    closure of the remaining attache offices in U.S. Embassies in London
    and Paris, and the consulate in Frankfurt. Memorandum from Deputy
    Commissioner, International (LB&I), Post Closures of Frankfurt, London
    and Paris (transmitted on Feb. 18, 2015). The IRS has stated the
    closures will save about $4 million a year. See David Kocieniewski, IRS
    Will Shut Last Overseas Taxpayer-Assistance Centers, Bloomberg (Jan.
    14, 2015).
        \56\ The Department of State estimates that 7.6 million U.S.
    citizens live abroad and more than 70 million U.S. citizens travel
    abroad annually. U.S. Department of State, Bureau of Consular Affairs
    (May 2014), available at http://travel.state.gov/content/dam/travel/
    CA%20Fact%20Sheet%202014.pdf (last visited on Jan. 19, 2015). The
    number of U.S. citizens overseas increased by more than 50 percent in
    just 5 years. National Taxpayer Advocate 2013 Annual Report to Congress
    205-213 (Most Serious Problem: International Taxpayer Service: The IRS
    is Taking Important Steps to Improve International Taxpayer Service
    Initiatives, but Sustained Effort will be Required to Maintain Recent
    Gains).
        \57\ U.S. Department of Defense, Active Duty Military Personnel,
    Strength by Regional Area and by Country (Mar. 31, 2011).
        \58\ National Taxpayer Advocate 2011 Annual Report to Congress 129-
    272. Since 2011, the National Taxpayer Advocate has recommended
    establishing international LTA offices at the IRS's four tax attache
    offices abroad. See also National Taxpayer Advocate 2013 Annual Report
    to Congress 213.
        \59\ See IRS, Contact My Local Office Internationally, available at
    http://www.irs.gov/uac/Contact-My-Local-Office-Internationally. See
    also National Taxpayer Advocate 2013 Annual Report to Congress 205-213
    (Most Serious Problem: International Taxpayer Service: The IRS Is
    Taking Important Steps to Improve International Taxpayer Service
    Initiatives, but Sustained Effort will be Required to Maintain Recent
    Gains).
        \60\ FATCA was enacted as part of the Hiring Incentives to Restore
    Employment Act, Public Law No. 111-147, Sec. Sec. 501(a), 511(a), 124
    Stat, 71, 97, 109 (2010) (adding Internal Revenue Code (IRC)
    Sec. Sec. 1471-1474 & 6038D). See also National Taxpayer Advocate 2013
    Annual Report to Congress 238-248 (Most Serious Problem: Reporting
    Requirements: The Foreign Account Tax Compliance Act Has the Potential
    to be Burdensome, Overly Broad, and Detrimental to Taxpayer Rights).
        \61\ See 31 U.S.C. Sec. Sec. 5314, 5321; 31 C.F.R.
    Sec. Sec. 1010.350, 1010.306(c); FinCEN Form 114, Report of Foreign
    Bank and Financial Accounts (FBAR), available at http://www.fincen.gov/
    forms/bsa_forms. See also National Taxpayer Advocate 2014 Annual Report
    to Congress 79-93 (Most Serious Problem: Offshore Voluntary Disclosure
    (OVD): The OVD Programs Initially Undermined the Law and Still Violate
    Taxpayer Rights).
        \62\ The Patient Protection and Affordable Care Act of 2010 (ACA),
    Public Law No. 111-148, 124 Stat. 119 (2010) (codified as amended in
    scattered sections of the U.S. Code), as amended by the Health Care and
    Education Reconciliation Act of 2010, Public Law No. 111-152, 124 Stat.
    1029 (2010).
    ---------------------------------------------------------------------------
        In addition to keeping the remaining four IRS tax attache offices
    open, it would be helpful to establish international Local Taxpayer
    Advocate (LTA) offices abroad. TAS is statutorily required to assist
    taxpayers in resolving their problems with the IRS, to identify areas
    in which taxpayers are experiencing systemic problems with the IRS, and
    to the extent possible, to propose changes in the administrative
    practices of the IRS to mitigate the problems identified.\63\ TAS is
    the only IRS function exclusively devoted to resolving taxpayer
    problems with the IRS.\64\ The provision of basic service to taxpayers
    abroad would promote the taxpayer rights to be informed, to quality
    service, and to a fair and just tax system, as described in the
    Taxpayer Bill of Rights (TBOR) adopted by the IRS.\65\ Establishing
    Local Taxpayer Advocate offices abroad would ensure that the IRS's
    international policies, processes, and procedures protect the rights
    granted to taxpayers by the TBOR and encourage future compliance by
    taxpayers dealing with the complexity and procedural burden of the
    international tax rules.
    ---------------------------------------------------------------------------
        \63\ IRC Sec. 7803(c)(2)(A)(i)-(iii).
        \64\ See generally IRC Sec. Sec. 7803; 7811. See also IRS Pub. 1,
    Your Rights as a Taxpayer. The law requires that there be at least one
    LTA for each State. See IRC Sec. 7803(c)(2)(D)(i)(I). International
    taxpayers cannot access TAS or IRS personnel toll-free from abroad.
        \65\ IRS, Taxpayer Bill of Rights, at http://www.irs.gov/Taxpayer-
    Bill-of-Rights.
    ---------------------------------------------------------------------------
    Recommendations
        I recommend that Congress:
      --Require the IRS to retain and provide funding for its four tax
            attache offices abroad.
      --Provide funding for and require the IRS to establish Local Taxpayer
            Advocates in each of those cities.

    IV.  IRS Compliance Initiatives Are Often Based on Outdated or Unproven
            Assumptions and Can Generate Significant Volumes of Rework for
            the IRS and Tremendous Burden for Taxpayers.

        There is general agreement that the IRS is supposed to collect the
    correct amount of tax. This implies that the IRS has a responsibility
    to ensure that taxpayers do not pay more taxes than they owe. Further,
    there is general recognition that the IRS must weigh the burden it
    imposes on taxpayers against its mission to collect the taxes owed. Few
    believe, for example, that it would be acceptable for the IRS to
    conduct extensive audits of every taxpayer every year. Besides being
    far too intrusive, such an approach would place an unreasonable
    financial burden on the vast majority of honest taxpayers.
        The U.S. tax system is based on self-assessment, but the tax laws
    are complicated and become more so each year. Computing the correct
    amount of tax poses a daunting challenge for many taxpayers, and they
    frequently require assistance, which some can readily afford but
    millions cannot. For these taxpayers, paying for tax assistance creates
    a significant financial burden.
        Millions of low and middle income taxpayers are ``touched''
    annually by IRS programs that propose additional assessments, such as
    correspondence audits and our math error and automated underreporter
    (AUR) programs. Other programs hold refunds that IRS filters have
    identified as questionable or potentially fraudulent. These proposed
    additional assessments and refund holds are not always correct, but
    taxpayers frequently need help understanding IRS notices and other
    communications in order to challenge IRS positions.
        In some programs, the IRS fails to use data available internally to
    resolve return discrepancies without contacting the taxpayer, and it
    thereby burdens hundreds of thousands of taxpayers a year
    unnecessarily. In other programs, the IRS's reliance on outdated data,
    processes, or assumptions, and its failure to evaluate the results of
    its programs from the perspective of taxpayers as well as dollars
    collected, leads to significant delays, increased phone calls and
    correspondence, and ineffective compliance policies.
        In this section, I provide examples of programs in which I believe
    the IRS can utilize its resources more effectively and efficiently.
    These examples include: (1) math error processes; (2) identity theft;
    (3) the automated substitute for return program; (4) early intervention
    in collection cases; and (5) audit selection.
    IRS Math Error Processes Create Significant IRS Rework and Unnecessary
            Taxpayer Burden.
        In my 2011 Annual Report to Congress, TAS reported on a research
    study that reviewed IRS accuracy with respect to math error adjustments
    related to dependents claimed on Forms 1040. For tax year 2009, nearly
    300,000 returns contained errors with dependent taxpayer identification
    numbers (TINs). During math error processing, the IRS disallowed over
    $200 million of credits claimed on these returns, but it subsequently
    reversed at least part of its dependent TIN math errors on 55 percent
    of them. Ultimately, about 150,000 taxpayers had their refunds
    restored. On average, the IRS allowed nearly $2,000 per return after
    the initial disallowance, with a delay of nearly 3 months.\66\
    Furthermore, analysis of a sample of taxpayers who did not contest
    these assessments showed that about 40,000 taxpayers were denied
    refunds they were probably entitled to receive.\67\
    ---------------------------------------------------------------------------
        \66\ The total restored to taxpayers was about $292 million. This
    amount exceeds the amount of credits that were initially disallowed,
    because it includes both restored credits and related tax reductions
    (e.g., taxpayers received the benefit of exemptions that were initially
    disallowed when the credits were disallowed). See National Taxpayer
    Advocate 2011 Annual Report to Congress vol. 2, 116-20 (Math Errors
    Committed on Individual Tax Returns--A Review of Math Errors Issued on
    Claimed Dependents).
        \67\ Id.
    ---------------------------------------------------------------------------
        In this example, the IRS not only imposed significant burden and
    caused anxiety for these taxpayers, but it created significant rework
    for itself. TAS research identified about 55 percent of the abated math
    errors that could have been resolved if the IRS had used internally
    available data.\68\ Thus, a modest investment of time to research IRS
    databases prior to issuing math error assessments would have eliminated
    the need to send out about 28 percent of the math error notices, the
    related phone calls and correspondence from taxpayers, and the employee
    time spent abating the assessments and processing later refunds.
    ---------------------------------------------------------------------------
        \68\ Id. at 119.
    ---------------------------------------------------------------------------
    Recommendation
        I recommend that Congress:
      --Ensure the IRS reviews its math error processes to identify
            opportunities to resolve apparent discrepancies with internally
            and externally available data before issuing math error notices
            to taxpayers.
    Despite Improvement, IRS Identity Theft Processes Continue to Burden
            Victims and Drive Multiple Contacts and Incomplete Case
            Resolution.
        In my 2014 Annual Report to Congress, I included the results of a
    case review conducted by the Taxpayer Advocate Service that analyzed a
    statistically significant sample of identity theft (IDT) cases closed
    by the IRS. The results from this review not only confirmed my
    suspicion that IDT cases are complex--requiring the victim to interact
    with multiple IRS assistors--but also revealed glaring inefficiencies
    in current IRS procedures. For example:
      --Overall, about two-thirds (67 percent) of all IDT cases reviewed in
            our sample were either (1) worked in more than one function or
            (2) reassigned to another assistor within a function.\69\
    ---------------------------------------------------------------------------
        \69\ For a detailed discussion of this study, see National Taxpayer
    Advocate 2014 Annual Report to Congress vol. 2, at 43 (Identity Theft
    Case Report: A Statistical Analysis of Identity Theft Cases Closed in
    June 2014).
    ---------------------------------------------------------------------------
      --When a case is transferred or reassigned, it delays resolution and
            adds to the frustration experienced by the victim. We found
            that 42 percent of the cases analyzed in our sample had periods
            of inactivity (i.e., times when no work was performed on the
            case for more than 30 days).
      --For those cases with periods of inactivity, the average period of
            inactivity was 78 days.
        For complex IDT cases that require the victim to deal with multiple
    IRS functions, I have recommended that the IRS designate a sole contact
    person with whom the victim can interact for the duration of the case.
    I believe that this approach not only will put the victim more at ease,
    but it will also reduce instances where IDT cases fall through the
    cracks, require more work, and add to cycle time.
        Another finding from this IDT case review was that the IRS's global
    account review procedures are ineffective. Before an IDT case is
    closed, the IRS completes an account review to ensure that all related
    issues have been fully addressed. Yet in 22 percent of the cases in our
    sample, the IRS had closed an IDT case without taking the appropriate
    steps to fully resolve the victim's account. In these closed IDT cases,
    there remained unaddressed account issues--for example, a victim had
    not yet received a refund or the IRS failed to update the victim's
    address to receive an Identity Protection personal identification
    number. Projecting this error rate to the population of nearly 270,000
    identity theft returns of this type closed in fiscal year 2014 suggests
    that almost 60,000 taxpayers would face additional burden because the
    IRS prematurely closed their cases. Clearly, the global account review
    process is not working as it should, which leads to rework when the
    taxpayer contacts the IRS again to address the lingering IDT-related
    issues.
    Recommendations
        I recommend that Congress:
      --Require the IRS to conduct comprehensive global account reviews
            upon receipt of an IDT case to determine whether the case
            involves multiple issues or years.
      --Assign IDT victims with multiple issues to a sole IRS contact
            person who will interact with them throughout the pendency of
            the case and oversee its resolution, regardless of how many
            different IRS functions need to be involved behind the scenes.
      --Conduct a comprehensive global account review prior to closing an
            IDT case to ensure all issues and years relating to IDT have
            been fully resolved.
    The Automated Substitute For Return (ASFR) Program Artificially
            Inflates Accounts Receivables, Produces Questionable Business
            Results, and Needlessly Increases the Demand on IRS Collection
            Resources, While Creating Unnecessary Burden on Taxpayers.
        The Automated Substitute for Return (ASFR) program is the key
    program used by the IRS to address the ``non-filer'' population--those
    taxpayers who have not filed tax returns but appear to have incurred a
    tax liability. The ASFR program matches third-party information returns
    and other data, including Forms W-2 and Forms 1099 for Miscellaneous,
    Brokerage, Interest, Dividend, and Cancellation of Debt income, to
    determine whether a taxpayer who has not filed a return has a filing
    requirement based on the income reported. Because the ASFR program
    generally treats the taxpayers as single (or married filing separately
    where there is evidence the taxpayer is married) with no dependents,
    and only allows a standard deduction (even where there is a larger
    mortgage interest statement on file with the IRS), these ``substitutes
    for returns'' almost always overstate the person's tax liability. The
    rationale is that when the taxpayer sees the liability proposed by the
    IRS, the taxpayer will file a correct return.
        The IRS always has more information on taxpayers than it has
    resources to handle, so it is very important that the IRS utilize that
    information in a way that drives compliance and does not generate
    unnecessary work for itself and taxpayers. Unfortunately, just the
    opposite is happening in the ASFR program.
        In practice, as I discussed in my 2011 and 2012 Annual Reports to
    Congress, most taxpayers do not respond to proposed ASFR assessments
    with voluntarily filed returns, nor are these assessments paid early in
    the collection notice process.\70\ Consequently, most become delinquent
    collection accounts. In fiscal year 2014, the IRS collected (through
    both refund offsets and enforcement actions) approximately $934 million
    in delinquent ASFR assessments. However, the IRS abated more than $2
    billion of these assessments, and it reported another $5.3 billion as
    Currently Not Collectible (CNC).\71\ That is, in fiscal year 2014, the
    IRS abated or CNC'd almost eight times the amount of ASFR dollars it
    actually collected.
    ---------------------------------------------------------------------------
        \70\ For more detailed discussions of the National Taxpayer
    Advocate's concerns and recommendations regarding the ASFR program, see
    National Taxpayer Advocate 2011 Annual Report to Congress 93-108 (Most
    Serious Problem: Automated ``Enforcement Assessments'' Gone Wild: IRS
    Efforts to Address the Non-Filer Population Have Produced Questionable
    Business Results for the IRS, While Creating Serious Burden for Many
    Taxpayers); National Taxpayer Advocate 2012 Annual Report to Congress
    456-461 (Status Update: The IRS's Reliance on Automated ``Enforcement
    Assessments'' Has Declined Significantly, but Concerns Remain).
        \71\ IRS, Collection Activity Report, NO-5000-242, Type Assessment
    Report (Sept. 2014).
    ---------------------------------------------------------------------------
        Each time a taxpayer calls the IRS to request an abatement or be
    put into CNC status, an employee has to work the case. (Sometimes more
    than one employee must get involved, because TAS receives its fair
    share of these cases.) Someone has to open the taxpayer's
    correspondence and read the letter objecting to the assessment. Someone
    then must make the necessary adjustments to the taxpayer's account. I
    believe it would be a far more efficient use of resources to better
    identify the correct ASFR cases up front. Similarly, I believe that by
    placing more emphasis on personal contacts during the proposed
    assessment process, the IRS would significantly reduce the
    ``downstream'' costs it currently incurs to adjust these accounts.
        ASFR is an example of a program I would immediately halt in its
    present form.\72\ Although the IRS has substantially scaled back the
    number of new ASFR assessments since I first reported on it in 2011,
    recent business results do not indicate that the reduced volumes of
    ASFR assessments have been the result of productive program changes
    (i.e., in fiscal year 2014, 58 percent of the closed ASFR accounts were
    reported as CNC and more than $2 billion was abated).\73\ I am
    concerned that the reduction in ASFR assessments has been driven
    primarily by a lack of resources and reflects a trend that would be
    reversed in the future if more resources become available. That would
    be an unfortunate development, because even at current activity levels,
    further investments in the ASFR program would not appear to be a
    prudent use of resources. For the rest of the fiscal year, I would only
    use ASFR authority for those returns where there is an extremely high
    level of unreported income. I would simultaneously assign five or six
    employees (including IRS Research staff and a TAS representative) to
    examine the case selection rules and samples of past inventory to
    determine how better to screen cases for true nonfiling and design an
    assessment process that will result in more collected revenue and fewer
    abatements.
    ---------------------------------------------------------------------------
        \72\ Placing a temporary pause on this program will not impair the
    Government's ability to assess tax against these taxpayers in the
    future, because there is no time limit for assessing tax where a return
    has not been filed.
        \73\ IRS, Collection Activity Report, NO-5000-242, Type Assessment
    Report (Sept. 2014).
    ---------------------------------------------------------------------------
        There is no doubt the IRS must devote resources to combat non-
    filing, and it may turn out that aspects of the ASFR program are
    effective. But the high rate of abatements and the large percentage of
    cases placed into CNC status indicate there are significant
    opportunities to achieve efficiencies and a higher return-on-investment
    if the IRS can refine its case-selection criteria to weed out the
    unproductive cases.
    Recommendation
        I recommend that Congress:
      --Encourage the IRS to use this fiscal year to take a pause,
            scrutinize some programs, and improve them from the perspective
            of IRS rework, taxpayer burden, and promoting voluntary
            taxpayer compliance.
    The Taxpayer Delinquent Account Collectibility Curve Can Provide a
            Roadmap for How to Prioritize the Collection of Tax Debts.
        A Taxpayer Delinquency Account (TDA) is a case assigned to or
    awaiting assignment to Collection personnel. In past Annual Reports to
    Congress, I have noted that many of the TDAs in the IRS Automated
    Collection Branch and the Collection Field function are delinquencies
    that have existed for several years. The following statistics highlight
    the age of the IRS TDA inventory: \74\
    ---------------------------------------------------------------------------
        \74\ IRS Collection Activity Report 5000-2 (Oct. 3, 2014).
    ---------------------------------------------------------------------------
      --Overall, 53 percent of the IRS Individual Master File (IMF) TDA
            inventory has been in the IRS function assigned to handle the
            delinquency for at least 10 months (the delinquency may have
            been in TDA status much longer).
      --More than 70 percent of the IMF TDAs in IRS inventory at the end of
            2014 are Tax Year 2010 and prior liabilities (i.e., they are at
            least 4 years old).
      --More than 20 percent of the TDAs have less than 4 years remaining
            on the collection statute, meaning that the delinquency has
            existed for more than 6 years.
        TAS Research examined the Individual Master File (IMF) Accounts
    Receivable Dollar Inventory (ARDI) to determine how dollars collected
    fluctuate as time elapses. We looked at delinquencies that originated
    in each of 6 years (2005 to 2010) and analyzed those delinquencies for
    the next 3 years. This analysis showed the following:
      --Dollars collected decrease by over 50 percent from the first year
            to the second year and an additional 30 percent from the second
            year to the third year. In other words, collections are over
            twice as much during the first year as in the following year
            and over three times the collections in the third year.
      --Even within that first year, collections decreased by about one-
            third after every three-month period elapsed.
      --Not only do raw collections decrease, but the percent of the
            balance due collected declines as time progresses, with only
            about 8 percent collected in the third year.
      --Meanwhile, although the balance of tax due continues to decrease
            slightly, the amount of assessed and accrued penalties and
            interest continue to rise.
        Budgetary constraints will make the efficient collection of
    delinquencies paramount. The IRS should use data on the practical
    delinquency collection ``window'' to form the basis for its Collection
    policies. Good information on the time available to effectively collect
    various delinquencies will assist the IRS in determining what
    liabilities should be collected first and whether it makes sense to
    focus on collection of smaller, more current liabilities rather than
    older, larger liabilities. Furthermore, this research may provide
    significant insights into which delinquencies are placed in the
    Collection TDA queue and which delinquencies are shelved. Finally, the
    collection curve can help demonstrate which delinquencies are able to
    be resolved early through collection alternatives rather than being
    left to fester until they become essentially unresolvable.
    Recommendation
        I recommend that Congress:
      --Direct the IRS to revise its collection strategy to acknowledge and
            address the findings of the collectability curve data.
            Specifically, the IRS should (1) provide timely, effective
            interventions for emerging collection problems; (2) place more
            emphasis on case resolutions during the initial contacts with
            taxpayers; and (3) offer reasonable payment alternatives, such
            as installment agreements and offers in compromise, much
            earlier in the collection process.
    Incorporating an Understanding of Taxpayer Behavior into IRS Audit
            Selection Will Increase the Effectiveness of Audits.
        In addition to rebuilding trust through taxpayer service, the IRS
    can foster trust through its audit selection techniques if the IRS:
      --Engages in social science and behavior research to better
            understand taxpayer behavior and the causes of tax
            noncompliance; and
      --Designs compliance initiatives, including audit selection, in light
            of its research findings.
        The IRS recognizes the importance of a more holistic approach to
    compliance, but it has not carried out the necessary research.\75\ It
    continues to base compliance initiatives primarily, if not exclusively,
    on tax data such as returns and third-party information reports.
    Proceeding on the basis of social science research findings would
    instead allow the IRS to adopt the least intrusive enforcement measure
    necessary in light of known taxpayer behaviors and motivators, thereby
    protecting taxpayers' right to privacy. It would also allow the IRS to
    take into account taxpayers' facts and circumstances, thereby
    protecting their right to a fair and just tax system. Demonstrating
    that the IRS selects returns for audit in the light of relevant
    research and in ways that enhance taxpayer rights would help rebuild
    trust in the IRS.
    ---------------------------------------------------------------------------
        \75\ As the IRS fiscal year 2015 Budget Request notes: ``Social
    science research reveals that the traditional deterrence theory, fear
    of detection and/or punishment, contributes a portion to actual
    compliance rates. Recent studies indicate that social norms, personal
    values, and attitudes may have a large impact on compliance decisions.
    Market segmentation approaches--behavioral, psychographic, and
    attitudinal, are widely used in commercial marketing to develop,
    design, and position products and services towards the right customer
    base. The knowledge gained from both social science and marketing
    research can assist the IRS with appropriate identification and
    alignment to the proper taxpayer.'' Internal Revenue Service Fiscal
    Year 2015 Budget Request, Congressional Budget Submission 187,
    available at http://www.treasury.gov/about/budget-performance/CJ15/
    10.%20-%2015.%20IRS%20CJ.pdf.
    ---------------------------------------------------------------------------
        Other tax authorities, such as the United Kingdom (UK), have made
    more progress in incorporating research into audit selection processes.
    In 2012, for example, the UK tax authority's external research program
    examined why small and medium-sized businesses enter and operate in the
    hidden economy, identified six hidden economy ``typologies,'' and
    provided insights about how to reach each group and advice on what
    messages to avoid for each group.\76\ The UK also seeks to prevent tax
    noncompliance in ways that involve the tax authority only indirectly,
    for example by working with private industry regulators to make tax
    compliance a condition of retaining an operating license.\77\
    ---------------------------------------------------------------------------
        \76\ HM Revenue & Customs, Business Customer & Strategy,
    Behavioural Evidence & Insight Team, Understanding key problems for
    SMEs: Hidden Economy Levers, Ghosts and Moonlighters: Identifying
    effective levers to reduce entrants into, and encourage SMEs out of the
    Hidden Economy (May 2012), available at https://www.gov.uk/government/
    uploads/system/uploads/attachment_data/file/344827/report208.pdf.
        \77\ See Security Industry Authority (SIA), Approval Conditions,
    available at http://www.sia.homeoffice.gov.uk/Pages/business-
    conditions.aspx.
    ---------------------------------------------------------------------------
    Recommendations
        I recommend that Congress direct the IRS to:
      --Incorporate applied and behavioral research into all of its
            compliance initiatives.
      --Fund or activate compliance initiatives only pursuant to an overall
            strategy that establishes how the IRS will use education,
            outreach, partners, assistance, non-invasive compliance
            touches, and enforcement touches to increase compliance and how
            it will test the initiative, measure its success, and adjust to
            continuing research findings and trends.

    V.  The IRS Is Undertaking a Review of Its Approach to Tax Compliance
            and Service Delivery, But Greater Transparency and
            Congressional Oversight Would Improve Taxpayers' Confidence and
            Trust in the Tax System.

        The best way for Congress to hold the IRS accountable for how it
    allocates resources and makes decisions is through active, consistent
    oversight of the agency. After Congress passed the IRS Restructuring
    and Reform Act of 1998, it held annual joint hearings to review, among
    other things, the IRS's progress in meeting its objectives and
    improving taxpayer service and compliance.\78\ Each hearing was
    conducted jointly by majority and minority members of the House
    Committees on Ways and Means, Appropriations, and Government Reform and
    Oversight and the Senate Committees on Finance, Appropriations, and
    Governmental Affairs. However, the hearings were discontinued because
    the legislation only required them to be held for 5 years.
    ---------------------------------------------------------------------------
        \78\ See Public Law No. 105-206, Sec. 4001, 112 Stat. 685, 783
    (1998). The statute refers to a ``joint review [to] be held at the call
    of the Chairman of the Joint Committee.'' The legislative history,
    however, makes clear that there was to be ``one annual joint hearing''
    before June 1 of each of the succeeding five calendar years. H.R. Rep.
    No. 105-599, at 328 (1998) (Conf. Rep.).
    ---------------------------------------------------------------------------
        I believe it would be helpful for Congress to resume these joint
    oversight hearings --not just on the issue du jour, but on the routine
    work the IRS does. Focusing on current tax administration challenges,
    these hearings could address issues such as how the IRS is making
    decisions related to taxpayer service, whether the IRS is effectively
    using existing resources to collect past due liabilities, whether the
    IRS's administration of penalties promotes voluntary compliance, and
    whether IRS employees have appropriate training to deal with diverse
    taxpayer populations. The hearings would provide a useful vehicle for
    multiple committees of Congress to review the IRS's progress, examine
    whether the IRS is meeting the needs of particular taxpayer segments
    and protecting taxpayer rights, gain a better understanding of
    potential problem areas, and help the IRS by passing legislation or
    providing additional funding where the IRS can demonstrate sufficient
    need.
        The IRS is currently developing its Concept of Operations (CONOPS)
    for the type of tax administration it wants to transform itself into
    over the next few years. Thus, now is the appropriate time for Congress
    to conduct oversight to ensure that the IRS is creating a plan that not
    only works for itself, but also for taxpayers--the full diversity of
    our taxpayer base. Conducted in a respectful way, in full recognition
    of the important service the IRS provides to this Nation and the
    serious challenges its employees face every day in fulfilling the IRS
    mission, the hearings can help restore trust and foster a shared sense
    of purpose between the IRS and Congress, and thus enhance the
    confidence of taxpayers as well.
    Recommendation
        I recommend that Congress:
      --Reinstate joint oversight hearings to review the IRS's progress in
            meeting its objectives and improving taxpayer service,
            enforcing the tax laws, and promoting voluntary compliance.

    VI.  The IRS Requires Funding to Acquire Modern IT Systems,
            Particularly Case Management Systems, in Order to Meet Taxpayer
            Needs and Improve Productivity.

        I have outlined in the preceding sections several areas in which I
    believe the IRS can achieve greater effectiveness and productivity by
    analyzing its current processes and reassessing its preconceived
    notions about what influences compliance behavior. While these
    improvements mostly require an investment of time and creativity, in
    other areas of tax administration there must also be an investment of
    funding to permit real improvements and productivity gains. The need
    for this type of investment is most pressing in the area of information
    technology and, in particular, for case management systems.
        I use the term ``case management'' in a comprehensive sense to
    refer to electronic recordkeeping systems the IRS uses to keep track of
    information about interactions with respect to taxpayers' tax returns
    or other tax-related matters. These systems include case records for
    audits and collection matters for individuals and large, medium-size,
    and small businesses, exempt organization determinations, whistleblower
    claims, automated substitute for returns (discussed above), the
    automated underreporter (AUR) program, criminal investigations, and the
    Taxpayer Advocate Service.
        Today, the IRS has approximately 80 case management systems. Few of
    these systems talk with one another. None provide a virtual substitute
    for the paper case file (i.e., there are reams of paper supplementing
    whatever records are included in the electronic system). The IRS's
    current case management system structure requires employees to retrieve
    data from many systems manually, maintain both paper and electronic
    records, transcribe or otherwise import information from paper and
    other systems into their own case management systems, and ship, mail,
    or fax hundreds of thousands, if not millions, of documents annually
    for management approval or quality review.
        Within my own organization, the wastefulness of these processes is
    apparent in how TAS employees must conduct and record their work.
    Taxpayers who come to TAS for assistance all have a ``significant
    hardship'' as a result of the way the Internal Revenue laws are being
    administered. That is, their cases are among the most urgent in the
    IRS. TAS employees must access many of the specialized IRS case
    management systems to do their jobs, including the Automated Lien
    System, Account Management Services, Automated Offer in Compromise,
    Correspondence Exam Automation Services, Correspondence Imaging
    Services, Employee User Portal, Integrated Automation Technologies,
    Integrated Collection System, Online Retrieval System, Return Request
    Display, Remittance Transaction Research, and Treasury Check
    Information System.
        None of this access is automated. That is, the employee must log in
    to the specific system each time he or she needs access to files. In
    some instances, because the IRS does not have enough licenses for a
    particular system, the TAS employee must request system information
    from a designated TAS liaison who has access to that system, thus
    involving two people in the simple act of obtaining taxpayer
    information. In other instances, TAS does not have access to a system,
    and the TAS employee must send a request (known as an ``Operations
    Assistance Request'' or OAR) to the related IRS function to retrieve
    and send us the information. All of these actions involve significant
    manual and clerical work, cause time delays in case resolution that can
    harm taxpayers, and waste valuable employee time (which is TAS's and
    the IRS's greatest resource).
        It is this state of affairs that led TAS leadership several years
    ago to design a replacement for our current case management system, the
    Taxpayer Advocate Management Information System, or TAMIS. TAMIS is a
    version of the original case management system created in the 1980's
    for TAS's predecessor, the Problem Resolution Program. Thus, TAS
    decided to develop a system that would integrate into a single
    environment all of the systems TAS employees use on a regular basis.
    This new system is called the Taxpayer Advocate Service Integrated
    System, or TASIS. One of the principal components of TASIS is a new
    case management system, which will replace TAMIS. The Senate
    Appropriations Committee has included TASIS on its list of six ``major
    information technology project activities'' about which it directed the
    IRS to submit quarterly status reports.\79\
    ---------------------------------------------------------------------------
        \79\ See S. Rep. No. 113-80, at 34 (2013) (committee report
    relating to IRS fiscal year 2014 appropriation). The draft committee
    report relating to the IRS fiscal year 2015 appropriation also
    contained this provision, but the full committee did not vote on the
    fiscal year 2015 funding bill so the draft report was not adopted.
    ---------------------------------------------------------------------------
        We designed TASIS from the ground up. With respect to the case
    management aspect of TASIS, we asked our case advocates, intake
    advocates, and their managers what drove them crazy about the current
    system, and what tools and capabilities they would like to have in a
    new system. We asked them to think about all the manual tasks they have
    to perform in a day that waste their time. Based on those submissions,
    and my own ``wish list'' of items, we developed over 4,000 business
    requirements for our new case management system. These requirements
    formed the basis of TASIS Release 1 and 2. Here are some of the things
    the new case management system will include:
      --Fully virtual case files, in which all documentation (whether IRS
            or taxpayer-generated) will be scanned or received digitally
            into an electronic case file.
      --Electronic access to almost all other IRS case-management systems
            so that automatic retrieval of taxpayer information is
            programmed into the system and TAS employees will no longer
            have to obtain and import the information manually.
      --Electronic submission and tracking of OARs (including receipt,
            acknowledgement, assignment, and response), whereby TAS sends
            requests, with supporting documentation, to IRS functions to
            take actions on cases, thereby eliminating delays and time-
            wasting manual tracking.
      --Full access to all virtual case information for purposes of
            management and quality review, eliminating the delay and cost
            associated with transporting files.
      --Taxpayer ability to submit Form 911, Request for Taxpayer Advocate
            Service Assistance, electronically.
      --Taxpayer ability to submit documentation electronically.
      --TAS and taxpayer ability to communicate digitally, through email
            and text messages, including both substantive case information
            and reminder notices that help move the case along timely.
      --Taxpayer (and representative) ability to electronically check the
            status of a case in TAS and what actions have been taken or are
            underway.
      --An electronic case assignment system that matches, in real time,
            the complexity and direct time associated with the case with
            the skills and available direct time associated with each case
            advocate in any given office, taking into account an employee's
            unavailability because of annual leave, sick leave,
            administrative leave for training, or on-the-job instruction.
            This approach eliminates delays in case assignment and
            minimizes the need to transfer cases.
        As this short list of functions demonstrates, TASIS will
    significantly increase the productivity of TAS case advocates because
    they will no longer spend their valuable time tracking down paper
    documents and inputting information on multiple systems. Moreover,
    taxpayers will be able to communicate more quickly with us and
    electronically (and quickly) send us information and documents that are
    key to their cases. This functionality will enable our case advocates
    to spend their time advocating for taxpayers, rather than performing
    manual input and tracking of documents and IRS actions.
        Because TAS has a working knowledge of almost all the other IRS
    case management systems, we designed our new system to serve as the
    basic unit upon which other IRS divisions could add modules and
    functionality to meet their specific needs. Thus, the time, planning,
    development, and programming that TAS and IRS Information Technology
    (IT) have invested in TASIS will benefit all of the IRS.
        Unfortunately, because of the demands on the IRS IT function, all
    IT activity on TASIS has come to a halt.\80\ To date, about $20 million
    has been invested in TASIS Release 1, and about two-thirds of the
    programming is complete. We are ready to begin the final programming as
    soon as funds are available. It is estimated that $12 million will be
    needed to complete Release 1 programming, testing, and launch, with
    another $4 million for operation and maintenance. At this time, despite
    the demonstrated savings of TASIS and its benefits for all of the IRS,
    no funds are allocated to TASIS.\81\
    ---------------------------------------------------------------------------
        \80\ The case management component of TASIS was originally
    scheduled to ``go live'' in December 2014. However, on March 1, 2014,
    the IRS placed a moratorium on all programming (with limited
    exceptions) not impacting the 2015 filing season or implementation of
    the Affordable Care Act and FATCA.
        \81\ In the meantime, TAMIS, the legacy TAS case management system,
    is woefully inadequate for the work TAS does. Because there is no
    resumption or completion date for TASIS Release 1, TAS staff is
    exploring what can be done to shore up TAMIS in order to meet our 21st
    century business needs. But this is throwing good money and time after
    bad, since TAMIS will be unsupported and obsolete in a few years.
    ---------------------------------------------------------------------------
        I believe that the design and implementation of TASIS is critical
    not only for TAS but to the IRS's ability to move forward and begin to
    harness the savings and burden reduction that a sophisticated case
    management system promises. For that to happen, the IRS requires
    sufficient IT funding to invest in new systems that have great promise.
    TASIS is one such program.

    VII.  Conclusion

        The Federal Government is currently failing badly to meet the
    service needs of its taxpayers. To address this problem, the IRS will
    need more resources to answer taxpayer telephone calls, process and
    respond to taxpayer correspondence, and assist taxpayers who seek
    assistance in its walk-in sites. The IRS can also take steps to improve
    its resource-allocation decisions and achieve greater efficiencies.
        To be blunt, several incidents over the last few years have reduced
    the confidence of many Members of Congress in the leadership of the
    IRS. The IRS has undergone several leadership changes since that time,
    and I believe it is critical that Congress and the IRS now work
    together to find a better way forward. The IRS must take steps to
    rebuild congressional trust and Congress must respond by providing the
    IRS with the funding it needs to do its important work of helping
    taxpayers meet their tax obligations and collecting the revenue on
    which the rest of Government depends. In this testimony, I have tried
    to offer some recommendations to help in this regard.
                                     ______

           Prepared Statement of the Government Accountability Office
                                                     February 27, 2015.
    Hon. Orrin Hatch, Chairman,
    Hon. Ron Wyden, Ranking Member,
    Committee on Finance, U.S. Senate, Washington, DC.

    Hon. John Boozman, Chairman,
    Hon. Christopher A. Coons, Ranking Member,
    Subcommittee on Financial Services and General Government, Committee on
            Appropriations, U.S. Senate, Washington, DC.

    Hon. Charles W. Boustany, Jr. Chairman,
    Subcommittee on Human Resources, Committee on Ways and Means, House of
            Representatives, Washington, DC.

    Hon. Peter Roskam, Chairman,
    Hon. John Lewis, Ranking Member,
    Subcommittee on Oversight, Committee on Ways and Means, House of
            Representatives, Washington, DC.
     internal revenue service: observations on irs's operations, planning,
                                 and resources
        This letter transmits briefing slides in response to your requests
    for information based on our ongoing reviews of the fiscal year 2016
    budget request for the Internal Revenue Service (IRS) and the 2015 tax
    filing season. See the enclosed briefing slides which include the
    information used to brief your staff in February 2015.
        Our briefing objectives were to describe (1) trends in IRS's budget
    and operations for fiscal years 2009 through 2015, including the 2015
    filing season to date; (2) key aspects of the President's fiscal year
    2016 budget request for IRS; and (3) IRS's actions to strategically
    manage operations.
        To describe trends in IRS's budget and operations, we reviewed the
    President's budget requests and IRS's congressional justifications for
    fiscal years 2009 through 2016, reviewed IRS filing season performance
    data, and interviewed IRS officials on performance and challenges. To
    describe key aspects of the fiscal year 2016 budget request, we
    reviewed budget proposals and interviewed IRS officials. To analyze
    IRS's actions to strategically manage operations, we reviewed planning
    documents and interviewed IRS officials. We also reviewed prior GAO
    work that recommended improvements to IRS's strategic management, and
    we interviewed IRS officials about the status of recommendations. To
    assess the reliability of IRS's filing season performance data, we
    interviewed knowledgeable officials about computer systems and data
    limitations. To assess the reliability of budget numbers presented in
    the congressional justification, we compared the numbers to those
    presented in the President's budget. We determined that the data
    presented in this report were sufficiently reliable for our purposes.
        We conducted this performance audit from January 2015 to February
    2015 in accordance with generally accepted Government auditing
    standards. Those standards require that we plan and perform the audit
    to obtain sufficient, appropriate evidence to provide a reasonable
    basis for our findings and conclusions based on our audit objectives.
    We believe that the evidence obtained provides a reasonable basis for
    our findings and conclusions based on our audit objectives.
        In summary, we found the following:
      --IRS's fiscal year 2015 appropriation ($10.9 billion) and staffing
            levels (81,279 full-time equivalents, or FTE) continue a
            decline that has occurred over several years and are now below
            fiscal year 2009 levels. Since fiscal year 2010, IRS's annual
            appropriation has declined by $1.2 billion, and staffing has
            fallen by about 11,000 FTEs since fiscal year 2009, while the
            agency's workload has increased for reasons such as a surge in
            identity theft-related refund fraud and the implementation of
            key provisions of the Patient Protection and Affordable Care
            Act (PPACA). In response to budget cuts, IRS has taken steps to
            reduce staffing costs including extending a hiring freeze and
            limiting seasonal employment. According to the Commissioner of
            Internal Revenue, IRS may also furlough employees for 2 days
            later in the fiscal year. IRS is concerned about filing season
            performance, and anticipates it may face some challenges
            processing returns that claim the Premium Tax Credit--an
            advanceable, refundable tax credit designed to help eligible
            individuals and families with low or moderate income afford
            health insurance purchased through the Health Insurance
            Marketplace. As a result, IRS expects that some refunds may be
            delayed. IRS also projects significant declines in telephone
            level of service--only 38 percent of taxpayers who seek help
            from a live assistor will receive it and wait times will
            average almost 1 hour. IRS cites resource constraints and
            increased call volume as primary factors contributing to the
            decline in telephone performance.
      --IRS's fiscal year 2016 budget request is $12.9 billion. This amount
            is almost $2 billion (18 percent) more than IRS's fiscal year
            2015 appropriation, and $667 million above the discretionary
            spending cap. About half of the requested increase is for
            operations support. The largest requested FTE increase is about
            4,000 FTEs for enforcement. The budget request includes $490
            million and 2,539 FTEs to implement PPACA.
      --Additional funding is not the only solution to performance declines
            across IRS. Although resources are constrained, IRS has some
            flexibility in how it allocates resources to ensure that
            limited resources are utilized as effectively as possible. This
            environment of constrained resources also highlights the
            importance of strategically managing operations to make tough
            choices about which services to continue providing and which
            services to cut. IRS has begun to plan more strategically. For
            example, in 2014 the agency established the Planning,
            Programming and Audit Oversight office to improve coordination
            of resource decisionmaking and long-term strategic planning.
            This was, in part, a response to our June 2014 recommendation
            that IRS develop a long-term strategy to address operations
            amidst an uncertain budget environment. Further, IRS is
            developing a 6-year initiative to better understand how
            taxpayers want to interact with the agency. The initiative's
            overall goal is to provide taxpayers with secure self-service
            options and to improve taxpayer service. We have previously
            recommended additional actions IRS could take to improve
            operations, plan more strategically, and improve revenue
            collection. These recommendations included that IRS develop a
            long-term strategy to improve Web services provided to
            taxpayers. As of February 2015, IRS officials reported that the
            agency does not have a separate online services strategy.
            Rather, this strategy is a key component of IRS's Service on
            Demand strategy, which aims to deliver service improvements
            across different taxpayer interactions such as individual
            account assistance, refunds, identity theft, and billings and
            payments.
                                agency comments
        On February 20, 2015, IRS provided technical comments on our
    findings, which we have incorporated where appropriate.
        As arranged with your offices, unless you publically announce the
    contents of this report earlier, we plan no further distribution until
    4 days after the date of this report. At that time, we will send copies
    of this report to the Chairman and ranking members of other Senate and
    House committees and subcommittees that have appropriation,
    authorization, and oversight responsibilities for IRS. We will also
    send copies to the Commissioner of Internal Revenue, the Secretary of
    the Treasury, and other interested parties. The report is available at
    no charge on the GAO Web site at http://www.gao.gov.
        If you or your staff have any questions about this report, please
    contact me at (202) 512-9110 or mctiguej@gao.gov. Contact points for
    our offices of Congressional Relations and Public Affairs may be found
    on the last page of this report. GAO staff members who made major
    contributions to this report were Joanna Stamatiades, Assistant
    Director; Libby Mixon, Assistant Director; Theodore Alexander; Jeff
    Arkin; Amy Bowser; James Cook; John Dicken; Mary Evans; Shannon
    Finnegan; Charles Fox; Robert Gebhart; Melissa King; Kirsten Lauber;
    Paul Middleton; Susan E. Murphy; Edward Nannenhorn; Sherice Nelson;
    Sabine Paul; Ellen Rominger; Mark Ryan; Erinn L. Sauer; Cynthia
    Saunders; Erin Saunders Rath; and James White.

       [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    James R. McTigue, Jr.
    Director, Tax Issues
    Strategic Issues

    Enclosure--1

                           ENCLOSURE: BRIEFING SLIDES

     Internal Revenue Service: Observations on IRS's Operations, Planning,
                                 and Resources

                     Prepared for Congressional Requesters

                                 February 2015

                                   objectives
        Our objectives are to provide preliminary information on the
    President's fiscal year 2016 budget request for the Internal Revenue
    Service (IRS) and on IRS's 2015 filing season performance. This
    briefing describes:
      --trends in IRS's budget and operations, focusing on fiscal years
            2009 to 2015, including the 2015 filing season to date;
      --key aspects of the President's fiscal year 2016 budget request for
            IRS; and
      --IRS's actions to strategically manage operations.
                             scope and methodology
      --To describe trends in IRS's budget and operations, we reviewed the
            President's budget requests and IRS's congressional
            justifications for fiscal years 2009 through 2016; reviewed IRS
            filing season performance data; and interviewed officials on
            filing season performance and challenges.
      --To describe key aspects of the fiscal year 2016 budget request, we
            focused on budget proposals for funding, staffing, new
            initiatives, return on investment estimates for enforcement
            initiatives, and legislative proposals related to our prior
            work.
      --To describe IRS's actions to strategically manage operations, we
            reviewed planning documents and interviewed IRS officials in
            the Planning, Programming and Audit Oversight (PPAO) office. We
            also reviewed our prior work that recommended improvements to
            IRS's strategic management and interviewed IRS officials about
            the status of those recommendations.
      --For each objective, we interviewed IRS budget and operations
            management officials. We interviewed IRS officials and
            determined that the data presented in this report were
            sufficiently reliable for our purposes.
                                results in brief
      --IRS's fiscal year 2015 appropriation ($10.9 billion) and staffing
            levels (81,279 full-time equivalents) continue a decline that
            has occurred over recent years and are now below fiscal year
            2009 levels.
        --This filing season, IRS expects to face some challenges
                processing returns that include the Premium Tax Credit
                (PTC) claim under the Patient Protection and Affordable
                Care Act (PPACA); this could cause delays in some refunds.
                IRS projects its telephone level of service (LOS)
                performance (the percentage of callers seeking live
                assistance and receiving it) will be about 38 percent and
                wait times will average about an hour. Finally, identity
                theft-related refund fraud remains an ongoing challenge.
      --For fiscal year 2016, IRS requested $12.9 billion in
            appropriations, an increase of about $2 billion over fiscal
            year 2015. This level of funding would support staffing of
            about 91,000 full-time equivalents (FTEs), an increase of about
            11 percent.
      --IRS has begun to plan more strategically. For example, in 2014 IRS
            established the Planning, Programming and Audit Oversight
            (PPAO) office to better coordinate strategic long-term
            planning. This was, in part, a response to our prior
            recommendation that IRS develop a long-term strategy to address
            operations amidst an uncertain budget environment. IRS is also
            developing a 6-year strategy to better meet taxpayers' needs
            and preferences for interacting with the IRS. The strategy's
            overall goal is to provide secure self-service options for
            taxpayers and to improve taxpayer service.

                                  OBJECTIVE 1

      Funding Trends: IRS's Fiscal Year 2015 Appropriations are Near the
              Fiscal Year 2000 Level After Adjusting for Inflation

       Figure 1: IRS Appropriations Nominal and Inflation Adjusted (2014
            Dollars), From Fiscal Year 2000 Through Fiscal Year 2015

       [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of Congressional Research Service reports for
    fiscal years 2000 through 2004, Internal Revenue Service congressional
    justifications for fiscal years 2005 through 2014, and Consolidated and
    Further Continuing Appropriations Act, 2015, Public Law No. 113-235
    (Dec. 16, 2014).  GAO-15-420R
        Note: Inflation adjustments were made using Bureau of Economic
    Analysis data and CBO projections of the fiscal year chain weighted GDP
    price index.

                                  OBJECTIVE 1

     Funding Trends: IRS's Total Funding Declined to Fiscal Year 2009 Level

             Figure 2: IRS Funding, Fiscal Years 2009 Through 2015

                             [Dollars in Millions]

       [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                      Fiscal Year

        Source: Congressional justifications for IRS, fiscal years 2011
    through 2016.  GAO-15-420R
        Notes: Total budgetary resources includes funds such as user fees
    and reimbursables. Dollars are nominal and not adjusted for inflation.
    See appendix I for additional detail.

                                  OBJECTIVE 1

      Funding Trends: IRS Total FTEs Reduced by 11,166 (12 Percent) Since
                                Fiscal Year 2009

     Figure 3: IRS Full-Time Equivalents (FTE), Fiscal Years 2009 Through
                    2014 Actual and Fiscal Year 2015 Enacted

       [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                      Fiscal Year

        Source: Congressional justifications for IRS, fiscal years 2011
    through 2016.  GAO-15-420R
        Notes: Total actual and total enacted full-time equivalents include
    FTEs funded with other budgetary resources, such as user fees. See
    appendix II for additional detail.
      Funding Trends: Budget Reductions Realized Through Multiple Efforts

    Figure 4: IRS Savings, Reductions, and Efficiencies, Fiscal Years 2010
                                  Through 2013

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: Congressional justifications for IRS, fiscal years 2012
    through 2015.  GAO-15-420R

                                  OBJECTIVE 1

     Funding Trends: IRS Plans to Further Reduce Staffing Costs in Fiscal
                                   Year 2015
        For fiscal year 2015, IRS is reviewing travel, training and
    contracting for further cuts, but the agency has determined it will
    need to cut labor costs, which account for about 76 percent of its
    budget.
        In response to the budget cuts, IRS has taken action to reduce
    staffing costs and other expenses through the following efforts:
      --extending its hiring freeze through fiscal year 2015 and reducing
            staffing through attrition;
      --eliminating most overtime taken by IRS staff;
      --planning to limit the number of months it uses seasonal staff for
            answering telephones and responding to correspondence during
            and after the 2015 filing season; and
      --considering whether to furlough all IRS employees for 2 days later
            in the fiscal year.
        Workload Trends: IRS Increased FTEs Working on Refund Fraud and
                          Identity Theft (IDT) Issues
      --IRS increased FTEs allocated towards refund fraud (including IDT)
            from 1,018 in fiscal year 2011 to 3,993 in fiscal year 2014 (an
            increase of about 292 percent).
      --IRS estimated that $30 billion in IDT refund fraud was attempted in
            filing season 2013, with about $24.2 billion (81 percent)
            prevented or recovered and $5.8 billion (19 percent) paid.\1\
            The full extent is unknown.

       Figure 5: Estimated Identity Theft-Related Refund Fraud in Filing
                                  Season 2013

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.  GAO-15-420R

      --IRS has taken important steps to prevent IDT refund fraud,
            including instituting IDT filters. However, IDT refund fraud
            takes advantage of IRS's ``look-back'' compliance model. Under
            this model, rather than holding refunds until completing all
            compliance checks, IRS issues refunds after conducting selected
            reviews.
    ---------------------------------------------------------------------------
        \1\ See GAO, Identity Theft and Tax Fraud: Enhanced Authentication
    Could Combat Refund Fraud, but IRS Lacks an Estimate of Costs, Benefits
    and Risks, GAO-15-119 (Washington, D.C.: Jan. 20, 2015).
    ---------------------------------------------------------------------------

                                  OBJECTIVE 1

    Workload Trends: IRS Increased FTEs to Implement PPACA With Funds From
                               Multiple Accounts

           TABLE 1: PATIENT PROTECTION AND AFFORDABLE CARE ACT SPENDING BY ACCOUNT, FISCAL YEARS 2010 TO 2015
                                                  [Dollars in Millions]
    ----------------------------------------------------------------------------------------------------------------
                                                                               Fiscal years
                      Appropriations account                   --------------------------------------------   Total
                                                                 2010     2011     2012     2013     2014
    ----------------------------------------------------------------------------------------------------------------
    Department of Health and Human Services, Health Insurance    $20.7   $168.2   $299.2  .......    $49.9    $538.0
     Reform Implementation Fund...............................
    Taxpayer Services.........................................  ......  .......  .......      4.3     12.1      16.4
    Enforcement...............................................  ......  .......  .......     19.3     16.6      35.9
    Operations Support........................................  ......  .......  .......    190.7    122.3     313.0
    User Fees.................................................  ......  .......  .......     69.7    185.7     255.4
                                                               -----------------------------------------------------
          Total...............................................   $20.7   $168.2   $299.2   $284.0   $386.6  $1,158.7
    ----------------------------------------------------------------------------------------------------------------
    Source: IRS.  GAO-15-420R

        IRS increased FTEs dedicated to PPACA from approximately 30 in
    fiscal year 2010 to over 1,200 in fiscal year 2015.
     Workload Trends: Return Examination and Collection Coverage Measures
                                  Show Decline

    Figure 6: IRS Exam and Collection Coverage Measures, Fiscal Years 2009
           Through 2014 Actual and Fiscal Year 2015 and 2016 Targets

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of the congressional budget justification for
    IRS, fiscal year 2016.  GAO-15-420R

                                  OBJECTIVE 1

      Filing Season Trends: IRS Anticipates Challenges With Returns That
                    Include Premium Tax Credit (PTC) Claims
      --As of February 6, IRS has processed about 27 million individual
            income tax returns and 20 million refunds totaling $66 billion
            have been issued.
      --Some States discovered attempts to file fraudulent tax returns and
            stopped accepting or processing returns, but IRS officials said
            Federal returns were not affected.
      --IRS officials reported they have not processed many returns
            claiming the PTC,\2\ reporting information required by the
            Foreign Account Tax Compliance Act (FATCA), or involving the
            previously expired provisions which Congress renewed at the end
            of 2014, such as the deduction of mortgage insurance premiums.
    ---------------------------------------------------------------------------
        \2\ The PTC is an advanceable, refundable tax credit designed to
    help eligible individuals and families with low or moderate income
    afford health insurance purchased through the Health Insurance
    Marketplace.
    ---------------------------------------------------------------------------
      --However, IRS officials anticipate challenges with returns that
            include PTC claims because (1) IRS must reconcile PTC amounts
            reported by the taxpayer with information reported by
            marketplaces, and (2) for those taxpayers who received an
            advance payment of the credit based on the income reported at
            time of enrollment, IRS must reconcile the income reported at
            enrollment with income claimed on the tax return, which may
            result in differences that affect the amount of the taxpayer's
            refund.
      --Third parties (i.e., the marketplaces) had until February 2 to
            provide taxpayers with Form 1095-A, Health Insurance
            Marketplace Statement, which taxpayers need to compute the
            amount of their PTC.
      --In addition, IRS does not yet have complete marketplace data from
            all 50 States and the District of Columbia to proceed with pre-
            refund matching for PTC claims. As a result, IRS is holding
            some returns pending receipt of these data.
      --IRS does not have Math Error Authority (to quickly correct errors
            without the need for an audit) specifically for PTC claims. In
            February 2010, we suggested that Congress provide IRS with
            broader authority to correct errors.\3\ Treasury has also
            proposed that Congress provide IRS with this authority. Without
            this authority, IRS must write to the taxpayer to resolve
            discrepancies, which delays any potential refund. Congress has
            not taken action on this suggestion.
    ---------------------------------------------------------------------------
        \3\ See GAO, Recovery Act: IRS Quickly Implemented Tax Provisions,
    but Reporting and Enforcement Improvements Are Needed, GAO-10-349
    (Washington, D.C.: February 10, 2010).
    ---------------------------------------------------------------------------
    Filing Season Trends: IRS Expects Telephone Service to Decline Based on
            Resource Limitations and Increased Demand for Assistors
      --In fiscal year 2015, IRS received approximately the same
            appropriated funding for taxpayer services as it did in fiscal
            year 2014. However, IRS is confronted with absorbing other
            costs that typically occur on an annual basis, such as salary
            adjustments and increases for inflation.
      --IRS expects demand for assistors to increase about 20 percent from
            fiscal year 2014 (from 39.9 to 48 million) in part due to
            PPACA-related questions, and expects assistors to answer about
            27 percent fewer calls (from about 23.1 to 16.8 million).
      --IRS is shifting additional staff to work correspondence earlier in
            the filing season than in the past. Since IRS uses the same
            staff to work correspondence and answer telephones, this shift
            contributed to the expected decrease in telephone level of
            service (LOS). Further, IRS provides limited interactive
            services for taxpayers on its Web site. Therefore, taxpayers
            with questions about their accounts who do not successfully
            receive service from the Web site or an IRS assistor on the
            phone may have little choice but to send correspondence to IRS
            or visit a walk-in site, potentially increasing IRS's costs.

                                  OBJECTIVE 1

     Filing Season Trends: IRS Projects Significant Declines in Telephone
                Service and Average Wait Times of Almost an Hour

      Figure 7: IRS Telephone Level of Service and Average Telephone Wait
      Times, Fiscal Years 2009 Through 2014 and Fiscal Year 2015 Forecast

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.  GAO-15-420R
    Filing Season Trends: IDT Calls During the Filing Season Have Increased
                         Significantly in Recent Years

    Figure 8: IRS Identity Theft Call Volume and Performance from January 1
      Through Late March or Early April, 2009 Through 2014 Filing Seasons

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.  GAO-15-420R
        Note: Dates are cumulative for IRS from January 1 of each year to
    April 4, 2009; April 3, 2010; April 2, 2011; March 31, 2012; March 30,
    2013 and March 29, 2014.

                                  OBJECTIVE 1

     Filing Season Trends: Overage Correspondence Has Almost Doubled Since
                                Fiscal Year 2009

     Figure 9: IRS Taxpayer Correspondence Performance, Fiscal Years 2009
                                  through 2014

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.  GAO-15-420R
        Note: Aggregate data are from two IRS units that jointly handle
    taxpayer correspondence. The same employees that provide telephone
    service are also responsible for responding to correspondence. Data
    cover equivalent periods for each fiscal year with slight variation in
    the exact dates depending on the year and data source.

                                  OBJECTIVE 2

    Fiscal Year 2016 Budget Request: The Largest Requested Increase is $1.1
                         Billion for Operations Support

      Figure 10: Fiscal Year 2015 Funding for IRS Compared to Fiscal Year
                       2016 Request (Dollars in Millions)

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of the congressional budget justification for
    IRS, fiscal year 2016.  GAO-15-420R
        Note: Other budgetary resources includes FTEs funded with user fees
    and reimbursables.
      Fiscal Year 2016 Budget Request: The Largest FTE Increase is About
                             4,000 for Enforcement

     Figure 11: Fiscal Year 2015 Enacted Full-Time Equivalents Compared to
                            Fiscal Year 2016 Request

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of the congressional budget justification for
    IRS, fiscal year 2016.  GAO-15-420R
        Note: Other budgetary resources includes FTEs funded with user fees
    and reimbursables.

                                  OBJECTIVE 2

      Fiscal Year 2016 Budget Request: Request is 18 Percent ($2 Billion)
      Above the Fiscal Year 2015 Appropriation and $667 Million Above the
                           Discretionary Spending Cap

        Figure 12: Breakdown of IRS Fiscal Year 2016 Requested Increase
                             (Dollars in Millions)

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of IRS data.  GAO-15-420R
        Note: The scale begins at $7,000 million.

                                  OBJECTIVE 2

         Fiscal Year 2016 Budget Request: IRS Proposed 14 Enforcement
                                  Initiatives

                                 TABLE 2: FUNDING REQUESTED FOR ENFORCEMENT INITIATIVES
                                                  [Dollars In Millions]
    ----------------------------------------------------------------------------------------------------------------
                                                           Fiscal year 2016 funding requested, by
                                                                   appropriations account
                                                   ------------------------------------------------------
       Description of requested budget increase                                               Business     Total \a\
                                                     Taxpayer    Enforcement   Operations     Systems
                                                     services                   support    Modernization
    ----------------------------------------------------------------------------------------------------------------
    New enforcement initiatives below the cap.....        $0.1         $107           $66  .............        $172
    ----------------------------------------------------------------------------------------------------------------
        Implement Foreign Account Tax Compliance    ..........           34            37  .............          71
         Act......................................
        Address Impact of Affordable Care Act              0.1           45            22  .............          67
         Statutory Requirements...................
        Implement Merchant Card and Basis Matching  ..........           28             6  .............          34
    ----------------------------------------------------------------------------------------------------------------
    New enforcement initiatives above the cap.....  ..........          352           203  .............         555
    ----------------------------------------------------------------------------------------------------------------
        Prevent Identity Theft and Refund Fraud...  ..........           48            34  .............          82
        Increase Audit Coverage...................  ..........           97            64  .............         162
        Improve Audit Coverage of Large             ..........           14             3  .............          16
         Partnerships.............................
        Address International and Offshore          ..........           35             5  .............          41
         Compliance Issues........................
        Enhance Collection Coverage...............  ..........           83            40  .............         123
        Leverage Data to Improve Case Selection...  ..........            5            34  .............          39
        Address Compliance Risks in the Tax-Exempt  ..........           16             8  .............          23
         Sector...................................
        Pursue Employment Tax and Abusive Tax       ..........            9             9  .............          17
         Schemes..................................
        Enhance Investigations of Transnational     ..........           37             5  .............          43
         Organized Crime..........................
        Ensure Ethical Standards of Conduct for     ..........            3            .9  .............           4
         Practitioners............................
        Transfer to TTB for High-Return on          ..........            5   ...........  .............           5
         Investment (ROI) Tax Enforcement
         Activities...............................
    ----------------------------------------------------------------------------------------------------------------
    New non-enforcement initiatives...............         218  ............          754            88        1,060
    ----------------------------------------------------------------------------------------------------------------
    Changes to base...............................          34           81            82             1          198
    -----------------------------------------------=================================================================
          Total requested increase in                     $252         $540        $1,105           $89       $1,986
           appropriations.........................
    ----------------------------------------------------------------------------------------------------------------
    Source: Congressional budget justification for IRS, fiscal year 2016.
    Note: \a\ Numbers may not add due to rounding.

                                  OBJECTIVE 2

       Fiscal Year 2016 Budget Request: IRS Proposed 12 Non-Enforcement
                                  Initiatives

                               TABLE 3: FUNDING REQUESTED FOR NON-ENFORCEMENT INITIATIVES
                                                  [Dollars In Millions]
    ----------------------------------------------------------------------------------------------------------------
                                                           Fiscal year 2016 funding requested, by
                                                                   appropriations account
                                                   ------------------------------------------------------
       Description of requested budget increase                                               Business     Total \a\
                                                     Taxpayer    Enforcement   Operations     Systems
                                                     services                   support    Modernization
    ----------------------------------------------------------------------------------------------------------------
    New non-enforcement initiatives below the cap.        $218  ............         $642           $88         $948
    ----------------------------------------------------------------------------------------------------------------
        Improve Taxpayer Services.................         183  ............          118  .............         302
        Leverage New Technologies to Advance the    ..........  ............            4            88           92
         IRS Mission..............................
        Implement Information Technology Changes    ..........  ............          306  .............         306
         to Deliver Tax Credits and Other
         Requirements.............................
        Improve Upfront Identification and                  16  ............            3  .............          19
         Resolution of Identity Theft Returns.....
        Sustain Critical Information Technology     ..........  ............          189  .............         189
         Infrastructure...........................
        Enhance Service Options for Taxpayers.....          14  ............            2  .............          16
        Restore Staffing for Essential Support      ..........  ............           20  .............          20
         Programs.................................
        Increase Service for Low-Income Taxpayers            5  ............           .6  .............           6
         and Taxpayers in Need of Hardship Relief.
    ----------------------------------------------------------------------------------------------------------------
    New non-enforcement initiatives above the cap.  ..........  ............          111  .............         111
    ----------------------------------------------------------------------------------------------------------------
        Consolidate and Modernize IRS Facilities..  ..........  ............           85  .............          85
        Maintain Integrity of Revenue Financial     ..........  ............           12  .............          12
         Systems..................................
        Implement Agency Wide Shared Services       ..........  ............           11  .............          11
         Priorities...............................
        Implement Federal Investigative Standards.  ..........  ............            3  .............           3
    ----------------------------------------------------------------------------------------------------------------
        New enforcement initiatives...............         0.1          459           269  .............         728
    ----------------------------------------------------------------------------------------------------------------
    Changes to base...............................          34           81            82             1          198
    -----------------------------------------------=================================================================
          Total requested increase in                     $252         $540        $1,105           $89       $1,986
           appropriations.........................
    ----------------------------------------------------------------------------------------------------------------
    Source: Congressional budget justification for IRS, fiscal year 2016.
    Note: \a\ Numbers may not add due to rounding.

                                  OBJECTIVE 2

    Fiscal Year 2016 Budget Request: Four Enforcement Initiatives Expected
          to Produce Revenue Are Under the Discretionary Spending Cap

      Figure 13: Estimated Return on Investment for Proposed Enforcement
                  Initiatives Below Discretionary Spending Cap

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of congressional budget justification for IRS,
    fiscal year 2016.  GAO-15-420R

      Fiscal Year 2016 Budget Request: Eight Enforcement Initiatives With
     Expected Return on Investment are Above the Discretionary Spending Cap

      Figure 14: Estimated Return on Investment for Proposed Enforcement
                  Initiatives Above Discretionary Spending Cap

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Source: GAO analysis of congressional budget justification for IRS,
    fiscal year 2016.  GAO-15-420R

                                  OBJECTIVE 2

    Fiscal Year 2016 Budget Request: $3.2 Billion Requested for Information
                                   Technology
        Of the $3.2 billion requested,
      --$2.3 billion is planned to fund 20 major IT investments.\4\ The
            requested funding for major IT investments would come from
            multiple sources, as shown in the figure to the right.
        --This includes $24 million for Web Applications, a major IT
                investment initiated in fiscal year 2015 to meet continued
                growth in demand for customer service from taxpayers across
                all channels.
      --$976 million is planned to fund non-major IT investments.

               Figure 15: Major IT Investments by Funding Source
                             (Dollars in Millions)

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        \4\ According to IRS, major investments are defined by Treasury as
    those that cost $10 million in either the current year or budget year,
    or $50 million over the 5-year period extending from the prior year
    through budget year +2.
    ---------------------------------------------------------------------------

                                  OBJECTIVE 2

     Fiscal Year 2016 Budget Request: $490 Million and 2,539 FTEs Proposed
                     to Implement PPACA in Fiscal Year 2016

               TABLE 4: FISCAL YEAR 2016 PATIENT PROTECTION AND AFFORDABLE CARE ACT (PPACA) BUDGET REQUEST
                                                  [Dollars in Millions]
    ----------------------------------------------------------------------------------------------------------------
                                                  Taxpayer         Enforcement       Operations           Total
                                                  services     ------------------      support     -----------------
                   Initiatives               ------------------                  ------------------
                                              Dollars    FTEs   Dollars    FTEs   Dollars    FTEs   Dollars    FTEs
    ----------------------------------------------------------------------------------------------------------------
    Expand telecom infrastructure to handle   .......  .......  .......  .......    $16.0  .......    $16.0  .......
     increased demand.......................
    Improve taxpayer services...............    $78.3    1,231  .......  .......    $23.2        7   $101.5    1,238
    Address impact of PPACA statutory            $0.1        1    $44.8      432    $22.3       50    $67.2      483
     requirements...........................
    Implement information technology changes  .......  .......  .......  .......   $305.6      818   $305.6      818
     to deliver tax credits and other
     requirements...........................
                                             -----------------------------------------------------------------------
          Total fiscal year 2016 PPACA          $78.5    1,232    $44.8      432   $367.1      875   $490.4    2,539
           budget request...................
    ----------------------------------------------------------------------------------------------------------------
    Legend: FTE = Full time equivalent.
    Source: Congressional budget justification for IRS, fiscal year 2016.  GAO-15-420R
    Note: Some numbers do not add due to rounding.

       Fiscal Year 2016 Budget Request: Selected GAO Analyses Related to
                             Legislative Proposals

                            TABLE 5: SELECTED LEGISLATIVE PROPOSALS RELATED TO PRIOR GAO WORK
                                                  [Dollars in Millions]
    ----------------------------------------------------------------------------------------------------------------
                                                      Projected
     Selected IRS legislative proposals related    revenues over 10   Projected costs
                  to prior GAO work                   years (in       over 3 years (in       Related GAO reports
                                                      millions)          millions)
    ----------------------------------------------------------------------------------------------------------------
    Modify reporting of tuition expenses and                   $618               $0.2                    GAO-10-225
     scholarships of Form 1098-T, Tuition
     Statement..................................
    Authorize the Department of Treasury to                  \a\ 10               11.2                    GAO-05-491
     require additional information to be
     included in electronically filed Form 5500
     annual reports and electronic filing of
     certain other employee benefit plan reports
    Increase certainty with respect to worker                10,170                1.9                    GAO-09-717
     classification.............................
    Require taxpayers who prepare their returns              \a\ 10               14.6                     GAO-12-33
     electronically, but file their returns on
     paper, to print their returns with a
     scannablePcode.............................
    Allow IRS to absorb credit and debit card                    20                9.6                     GAO-10-11
     processing fees for certain tax payments...
    Provide IRS with greater flexibility to                     639                1.4  GAO-15-163, GAO-11-481, GAO-
     address correctable errors.................                                                              10-349
    Improve whistleblower program...............         Negligible                  0                    GAO-11-683
                                                     revenue effect
    Explicitly provide that the Department of                   427      Not available       GAO-14-467T, GAO-08-781
     Treasury and IRS have authority to regulate
     all paid return preparers..................
    Rationalize tax return filing due dates so                 1630                1.0                    GAO-13-515
     they are staggered.........................
    Combat tax-related identity theft...........         Negligible                2.7  GAO-15-119, GAO-14-633, GAO-
                                                     revenue effect                                          13-132T
    ----------------------------------------------------------------------------------------------------------------
    Source: GAO analysis based on congressional budget justification for IRS, fiscal year 2016 and Department of the
      Treasury, General Explanations of the Administration's fiscal year 2016 Revenue Proposals (Washington, D.C.:
      February 2015).
    Note: \a\ Department of Treasury includes this legislative proposal under ``Enhance Electronic Filing of
      Returns'' and provides a single projected revenue for this proposal, as well as several others.

                                  OBJECTIVE 3

       Strategic Management: IRS Created a New Office in 2014 to Better
               Coordinate Strategic Long-Term Planning Decisions
      --Responding in part to a June 2014 GAO recommendation,\5\ IRS
            established the Planning, Programming, and Audit Oversight
            office (PPAO) in 2014 to improve coordination of (1) current
            and completed audits, and (2) resource decisionmaking and
            strategic planning.
      --PPAO is to facilitate coordination among business units and
            operating divisions to improve resource allocation and
            planning.
      --PPAO is to drive long-term planning for resource allocation to be
            seen first in the fiscal year 2017 budget.
      --The new strategic approach is to include consideration of short-
            term trade-offs with long-term investments, allocation of
            finite resources, and post-evaluation of investments.
    ---------------------------------------------------------------------------
        \5\ See GAO, IRS 2015 Budget: Long-Term Strategy and Return on
    Investment Data Needed to Better Manage Budget Uncertainty and Set
    Priorities, GAO-14-605 (Washington, D.C.: June 12, 2014), in which we
    recommended that IRS develop a long-term strategy to address operations
    amidst an uncertain budget environment.
    ---------------------------------------------------------------------------
    Strategic Management: IRS is Implementing Taxpayer Service Initiatives
                           for the 2015 Filing Season
        IRS is implementing service initiatives, with the goal of serving
    the maximum number of taxpayers possible more effectively and
    efficiently, by
      --redesigning notices, in part to inform taxpayers about online
            resources and self service tools as an alternative to calling
            or writing to IRS;
      --expanding use of IRS's Oral Statement Authority tool to accept
            verbal requests for penalty relief; and
      --directing qualified taxpayers to apply and set up installment
            payment agreements online or through self-service kiosks
            instead of calling or visiting IRS.
        We previously reported that shifting taxpayers to self-service
    tools reduces the need for taxpayers to speak with IRS assistors, which
    in turn reduces IRS's costs while improving taxpayer services.\6\
    ---------------------------------------------------------------------------
        \6\ See GAO, Tax Filing Season: 2014 Performance Highlights the
    Need to Better Manage Taxpayer Service and Future Risks, GAO-15-163
    (Washington, D.C.: Dec. 16, 2014).
    ---------------------------------------------------------------------------
    Strategic Management: IRS's Service on Demand Initiative is Intended to
                          Improve Taxpayer Experience
      --IRS is developing a 6-year strategy known as Service on Demand,
            which is intended to better meet taxpayers' needs and
            preferences for interacting with the IRS. The overall goal is
            to provide secure self-service options for taxpayers and to
            improve taxpayer service.
      --IRS has ranked 71 projects that are designed to improve taxpayer
            services and is exploring how to implement the top 20, which
            are grouped into 6 programs:
        --developing an online account,
        --streamlining digital self-service options,
        --expanding third party services,
        --analyzing taxpayer behaviors to reduce errors,
        --accepting mobile payments, and
        --upgrading all IRS forms, publications, and instructions to a Web-
                friendly format written in plain language.
      --In fiscal year 2015, IRS anticipates piloting an online Web-based
            secure communications portal that is expected to improve
            taxpayer services, for example, by enabling IRS and taxpayers
            to communicate by sending both one-way and two-way secure
            messages.
    Strategic Management: Open GAO Recommendations Highlight Opportunities
     for IRS to Improve Operations, Manage More Strategically, and Improve
                               Revenue Collection
        For example:
      --IRS 2015 Budget (GAO-14-605)
        --Develop a long-term strategy to address operations amidst an
                uncertain budget environment
        --Calculate actual return on investment for implemented initiatives
                and use that information to inform resource allocation
                decisions
      --IRS Web site (GAO-13-435)
        --Develop a long-term strategy to improve Web services to
                taxpayers, including business cases for new services to
                prioritize projects
      --Large Partnerships (GAO-14-732)
        --Multiple recommendations to improve overall audit efficiency
      --Correspondence Audits (GAO-14-479)
        --Recommendations to establish formal program objectives and ensure
                that the program measures reflect those objectives
                            Concluding Observations
        IRS has absorbed $1.2 billion in cuts to its annual appropriation
    since fiscal year 2010. Meanwhile, the agency has assumed additional
    responsibilities related to identify theft refund fraud and the
    implementation ofPPACA. A reduced budget and increased workload has
    contributed to performance declines across the agency, including
    serious concerns about service to taxpayers during filing season.
    However, additional funding is not the only solution. Although
    resources are constrained, IRS has some flexibility in how it allocates
    resources to ensure that limited resources are utilized as effectively
    as possible. This environment of constrained resources also highlights
    the importance of strategically managing operations to make tough
    choices about which services to continue providing and which services
    to cut. IRS established its PPAO office in 2014 to improve coordination
    and long-term planning, in part based on our recommendation. We have
    other open recommendations and suggestions for Congress that, if fully
    implemented, would help IRS strategically manage operations and
    generate additional revenue.

                                   APPENDIX I

          Dollars by Appropriations Account, Fiscal Years 2009 to 2016

                                   TABLE 6: FISCAL YEARS 2009 THROUGH 2015 ENACTED AND FISCAL YEAR 2016 BUDGET REQUEST FOR IRS
                                                                      [Dollars in Millions]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Dollar    Percent
                                                                                                                                          change     change
                                                                                                                                          fiscal     fiscal
                                                     Fiscal    Fiscal    Fiscal    Fiscal   Fiscal year   Fiscal    Fiscal     Fiscal   year 2015  year 2015
                Appropriations account                year      year      year      year        2013       year      year    year 2016   enacted    enacted
                                                      2009      2010      2011      2012    enacted \a\    2014      2015    requested   compared   compared
                                                     enacted   enacted   enacted   enacted                enacted   enacted             to fiscal  to fiscal
                                                                                                                                        year 2016  year 2016
                                                                                                                                        requested  requested
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Enforcement...................................    $5,117    $5,504    $5,493    $5,299      $4,949     $5,022    $4,860     $5,400       $540      11.11
    Operations support............................     3,867     4,084     4,057     3,947       3,801      3,799     3,638      4,743      1,105      30.36
    Taxpayer services.............................     2,293     2,279     2,293     2,240       2,136      2,157     2,157      2,409        252      11.70
    Business Systems Modernization................       230       264       263       330         313        313       290        379         89      30.75
    Health Insurance Tax Credit Administration            15        16        15         0           0          0         0          0  .........  .........
     (HITCA)\b\...................................
                                                   ---------------------------------------------------------------------------------------------------------
          Subtotal................................    11,523    12,146    12,122    11,817      11,199     11,291    10,945     12,931      1,986      18.15

    Other resources, such as user fees............       390       539       655       695         855        815     1,031        991        -40      -3.86
                                                   ---------------------------------------------------------------------------------------------------------
          Total funding available for obligations.   $11,913   $12,686   $12,777   $12,512     $12,053    $12,106   $11,976    $13,922     $1,946      16.25
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Source: Congressional budget justifications for IRS, fiscal years 2011 through 2016.  GAO-15-420R
    Notes: Dollars are nominal and not adjusted for inflation, and numbers may not add due to rounding.
    \a\ Fiscal year 2013 enacted represents the operating level after applying across-the-board rescission and reductions required by sequestration.
    \b\ In fiscal year 2012 and thereafter, amounts appropriated for HITCA, which had been a separate account, were moved to the Taxpayer Services
      appropriation.

                                  APPENDIX II

       Staffing by Appropriations Account, Fiscal Years 2009 Through 2016

                             TABLE 7: FISCAL YEARS 2009 THROUGH 2014 ACTUAL, 2015 ENACTED, AND 2016 REQUESTED FULL-TIME EQUIVALENTS
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                           FTE      Percent
                                                                                                                                          change     change
                                                                                                                                          fiscal     fiscal
                                                        Fiscal    Fiscal    Fiscal    Fiscal    Fiscal    Fiscal    Fiscal     Fiscal   year 2015  year 2015
                  Appropriations account                 year      year      year      year      year      year      year    year 2016   enacted    enacted
                                                         2009      2010      2011      2012      2013      2014      2015    requested   compared   compared
                                                        actual    actual    actual    actual    actual    actual    enacted             to Fiscal  to fiscal
                                                                                                                                        year 2016  year 2016
                                                                                                                                        requested  requested
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Enforcement......................................    47,361    50,400    49,920    47,189    44,174    42,119    40,564     44,800      4,236       10.4
    Operations support...............................    12,101    12,262    12,103    11,499    11,610    11,652    12,043     13,863      1,820       15.1
    Taxpayer services................................    32,422    31,607    31,574    30,236    29,646    28,535    28,274     31,285      3,011       10.7
    Business Systems Modernization...................       322       337       309       562       451       337       398        576        178       44.7
    Health Insurance Tax Credit Administration               10        12         0         0         0         0         0          0          0          0
     (HITCA) \a\.....................................
                                                      ------------------------------------------------------------------------------------------------------
          Subtotal...................................    92,216    94,618    93,906    89,486    85,881    82,643    81,279     90,524      9,245       11.4

    Other resources, such as user fees...............     1,153       752     1,003     2,185     1,884     2,118       924        962         38        4.1
                                                      ------------------------------------------------------------------------------------------------------
          Total......................................    93,369    95,370    94,909    91,671    87,765    84,761    82,203     91,486      9,283       11.3
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Source: Congressional budget justifications for IRS, fiscal years 2011 through 2016.  GAO-15-420R
    Note: \a\ The administrative resources for HITCA were moved to the Taxpayer Services appropriation.

                         ADDITIONAL COMMITTEE QUESTIONS

        [The following questions were not asked at the hearing, but
    were submitted to the Departments for response subsequent to
    the hearing:]
                    Questions Submitted to Hon. Jacob J. Lew
                  Questions Submitted by Senator John Boozman
                      tribal general welfare exclusion act
        Question. Last year, Congress unanimously passed the Tribal General
    Welfare Exclusion Act (GWE). As the lead sponsor in the Senate, I'm
    intent to see that the law is implemented as Congress intended.

      --Secretary Lew, this Act establishes a Tribal Advisory Committee
            that will advise you on matter relating to the taxation of
            Indians and establish training and education for IRS field
            agents. Will you commit to appointing tribal leaders to the
            Tribal Advisory Committee established by this law?
      --The GWE requires consultation with tribes to better understand
            tribal sovereignty and the roles of tribal nations in providing
            general welfare benefits. Will you detail for me the efforts to
            fulfill these consultations at both the national and regional
            levels?

        Answer. Treasury has sought the recommendations of tribal leaders--
    without placing any restrictions on their choices. After filing the
    charter, we contacted tribal leaders on February 19, 2015 for their
    nominations to the Tribal Advisory Committee. We will be reviewing the
    nominations and applications for the best candidates.
        The Department looks forward to working closely with the Tribal
    Advisory Committee, once formed, on consultation. As part of Treasury's
    ongoing consultation efforts, I met with tribal leaders in December. In
    addition, on December 3, 2014, in response to requests from Indian
    Country, Treasury released an interim Tribal Consultation Policy and
    requested comment on that interim policy.
        Question. The law also stipulates all audits that relate to
    benefits under the general welfare exclusion should be suspended until
    the Tribal Advisory Committee is established and IRS field agents are
    properly trained and educated in Federal law and how it relates to
    sovereign Indian tribes.

      --Would you provide for me a description of the standards being used
            to determine whether an audit relates to the GWE and
            confirmation that deference is being provided to tribal
            governments?
      --What recourse do tribes have if they believe an audit has not been
            properly suspended?
      --And finally, would you provide us with an overview and approximate
            number of audits or examinations the IRS has suspended pursuant
            to this Act and how many have NOT been suspended in cases where
            tribes asserted the audit relates to the exclusion?

        Answer. It is our understanding that all relevant audit issues have
    either been closed or suspended. However, the application of the
    relevant standards to a particular audit or examination is a matter for
    the IRS to determine.
     community development financial institutions (cdfi) program awards to
                                  rural areas
        Question. The CDFI program is intended to serve low-income
    communities in both urban and rural States. However, the awards
    continue to be skewed towards urban States. Since the program's
    creation in 1994, entities based in New York have received $270
    million. California entities have received $250 million. Illinois
    entities have received $150 million. Meanwhile, entities located in
    Arkansas and Oklahoma have only received $23 million. Delaware entities
    have received less than $9 million, and Kansas entities have received
    less than $5 million.

      --Is the Treasury Department making any changes to the CDFI program
            to expand participation of organizations located in rural
            States?
      --What outreach is the CDFI Fund doing to expand participation among
            entities based in low-income communities that have been
            neglected by the CDFI Program?
      --What is the CDFI Fund doing to direct technical assistance grants
            and the CDFI Capacity Building Initiative to rural States that
            have received significantly fewer awards than urban States?

        Answer. The CDFI Program is competitive and awards are merit-based.
    Awards are made to institutions with the highest capacity to leverage
    and deploy the award funds. Currently, there are 79 CDFIs in
    California, 70 in New York, 33 in Illinois, 13 in Oklahoma, eight in
    Arkansas, four in Delaware and three in Kansas. But many CDFIs have a
    national footprint and invest in non-metropolitan areas as well as
    metropolitan areas. Per CDFI Program regulations, the CDFI Fund follows
    OMB's definition of metropolitan \1\; CDFI Fund data show that from
    fiscal year fiscal year 2003 through fiscal year 2012, 25 percent or 1
    of every 4 reported transactions, and 20 percent or $1 of every $5
    transaction dollars were invested in non-metropolitan areas. This is
    higher than the 16 percent of the U.S. population that live in non-
    metropolitan areas per the latest U.S. Census data.
    ---------------------------------------------------------------------------
        \1\ 44 U.S.C. 3504(e) and 31 U.S.C. 1104(d) and Executive Order
    10253 (3 CFR, 1949-1953 Comp., p. 758), as amended.
    ---------------------------------------------------------------------------
        Further, the CDFI Fund created the Small and Emerging CDFI
    Assistance (SECA) category under the CDFI Program to enable smaller
    CDFIs--which are often located in non-metropolitan areas--to better
    compete for awards. In fiscal year 2014, almost 27 percent of all
    Financial Assistance awards made under the CDFI Program went to
    certified CDFIs primarily serving non-metropolitan communities and over
    90 percent of awards made under the Native American CDFI Assistance
    Program (NACA Program) went to CDFIs primarily serving non-metropolitan
    communities.
        The CDFI Fund hosts application workshops before every CDFI Program
    round and produces an array of Webinars to explain the application
    process for the public. In addition, the CDFI Fund plans to launch an
    Innovation Challenge later this year to finance the development of a
    method, model, tool, or product that the CDFI industry can use to build
    CDFI capacity to expand or increase investments in underserved areas.
    The Innovation Challenge will enable the CDFI Fund to support local
    efforts to expand CDFI coverage, including rural communities, and
    provide complementary support to the training and technical assistance
    occurring under the CDFI Fund's Capacity Building Initiative.
        The CDFI Fund's programs are merit-based and awards are made to
    institutions with the highest capacity to leverage and deploy the award
    funds. They are not based on a State population-based formula like some
    other Federal programs. While the CDFI Fund does not have the authority
    to direct funding to non-metropolitan areas, we are actively taking
    steps to encourage CDFIs that serve non-metropolitan areas to apply to
    our programs.
        Technical Assistance awards build the capacity of nascent CDFIs to
    become certified and scale up smaller certified CDFIs, many of which
    are located in non-metropolitan areas. Over 18 percent of Technical
    Assistance awards under the CDFI Program went to organizations
    primarily serving non-metropolitan areas in the fiscal year 2014 CDFI
    Program funding round, and over 93 percent of Technical Assistance
    awards under the NACA Program went to organizations primarily operating
    in non-metropolitan communities.
        The CDFI Fund continues to work diligently to encourage investments
    in rural communities. For example, the CDFI Fund's Capacity Building
    Initiative has two recent training series directed towards building the
    capacity of CDFIs to serve non-metropolitan areas--the Expanding
    Coverage in Underserved Areas series and the Building Native CDFIs'
    Sustainability and Impact series.
                     financial stability oversight council
        Question. Financial Stability Oversight Council (FSOC) decisions
    have the potential to exert broad influence over our financial markets
    and the economy, yet deliberations are often held behind closed doors
    with limited transparency.
        At the principal level, the SEC and the Commodity Futures Trading
    Commission (CFTC) are only represented by their respective chairs at
    FSOC meetings. Conversely, the Federal Reserve is typically represented
    by its chairperson, the New York Federal Reserve President, and Fed
    Governor Daniel Tarullo.
        Senate-confirmed commissioners are prevented from being present to
    offer their regulatory expertise, including when the Council considers
    reforms to areas where their agency serves as the primary regulator.

      --Why are non-chair commissioners at member agencies of the Council
            prohibited from attending FSOC meetings and deliberations?
      --Given the number of bank regulators that participate in FSOC
            meetings compared to capital markets regulators, what is the
            Council doing to ensure FSOC decisions are not unnecessarily
            imposing a bank-regulatory construct on our capital markets?
      --Would you be supportive of allowing Senate-confirmed commissioners
            at FSOC member agencies to attend FSOC meetings as non-
            participating guests in all meetings and deliberations?

        Answer. By statute, the Council is a body of 15 specific members.
    Aside from public meetings, attendance at Council meetings is generally
    limited to Council members designated by statute plus one additional
    individual from their agencies. Our practice is to defer to individual
    Council members as to who accompanies them to meetings. Generally,
    Council members have chosen members of their staffs as their ``plus
    one.''
        Before the creation of the Council, no agency had responsibility
    for identifying and responding to potential risks to financial
    stability. Based on the lessons from the financial crisis, the Council
    was established by the Dodd-Frank Act with a clear statutory mission to
    identify risks to the financial stability of the United States, to
    promote market discipline, and to respond to emerging threats to the
    stability of the U.S. financial system. When the Council identifies
    potential risks within the existing jurisdiction of a regulator, the
    regulator is often best positioned to take action to mitigate those
    risks, and the Council works closely with all the Federal financial
    regulators. At the same time, the Council has the unique statutory
    responsibility under the Dodd-Frank Act to look across the financial
    system and to prevent risks to financial stability from slipping
    through the cracks. The participation on the Council by regulators of
    diverse parts of the financial system strengthens the Council and helps
    ensure that risks do not slip through the cracks.
        With respect to the Council's evaluations of nonbank financial
    companies for potential designation, members with expertise relevant to
    a particular company often provide important insights, and they work
    together with other Council members to reach decisions regarding
    designations. As the GAO found in its recent report on the designations
    process, all of the voting and non-voting members of the Council can
    participate in the evaluation of all nonbank financial companies. The
    report also highlights that member agency staff who contributed to
    company evaluations held various positions and contributed a range of
    expertise, including from the primary regulators, and that member
    agency officials generally indicated that their agency's expertise was
    well utilized. Analytical teams composed of staff of Council members
    and member agencies work closely with each company under review. These
    analyses are guided by the Council's Deputies Committee and Nonbank
    Financial Company Designations Committee, both of which include
    representatives of all the Council members. Ultimately, proposed and
    final designations are made by the affirmative vote of at least two-
    thirds of the voting members of the Council then serving.
               terrorism and financial intelligence (tfi) funding
        Question. TFI plays a key national security role in administering
    and enforcing sanctions. The fiscal year 2016 budget proposes a
    reduction for TFI from $112.5 million to $109.6 million.

      --In light of recent actions by Russia and the approaching deadline
            for Iran negotiations, are you able to assure the Committee
            that TFI has the resources necessary to carry out its mission
            effectively?

        Answer. Yes, TFI has adequate resources to carry out its mission
    effectively, particularly in the areas of the Russia/Ukraine crisis and
    the approaching deadline for negotiations with Iran. TFI's workforce
    and varied skill sets enables the office to quickly redeploy existing
    assets and resources to meet new and unexpected crises.
        Question. Should we be concerned that your enforcement capability
    may be impacted by your funding?
        Answer. TFI's funding is adequate to meet our enforcement
    requirements capabilities. TFI has developed an agile workforce of
    flexible skill sets capable of addressing new and emerging issues or
    areas of concern with minimal disruption. We employ several methods
    (working/targeting groups, etc.) to address new and rising issues while
    ensuring current projects and efforts are not significantly impacted or
    fall by the wayside.
        Question. Will the allocation of any administrative or shared
    services costs to TFI change in fiscal year 2015 compared to fiscal
    year 2014?
        Answer. The fiscal year 2015 enacted appropriation provided $112.5
    million for Office of Terrorism and Financial Intelligence (TFI)
    operations, of which not to exceed $27.0 million was provided for
    administrative expenses. The fiscal year 2014 enacted appropriation
    provided $102.0 million for TFI, of which not to exceed $26.0 million
    was provided for administrative expenses. The increase provided in
    appropriations is adequate to support the administrative support and
    shared services costs.
        Question. Does funding TFI through a separate appropriations
    account affect the allocation of these costs?
        Answer. While the funding of TFI through a separate appropriations
    account does not affect the allocation of the overhead administrative/
    shared services costs, it does complicate the central management,
    financial oversight, and increase the complexity of executing the
    budget. The administrative support provided to TFI continues to be
    provided by the same offices funded within the DO Salaries and Expenses
    (DO SE) 0101 appropriation. With the establishment of TFI as a separate
    appropriations account in fiscal year 2015, all TFI-related program and
    administrative costs that had obligated and expensed (disbursed)
    against the DO SE 0101 appropriation at the beginning of fiscal year
    2015 had to be moved within the accounting system to the TFI SE 1804
    appropriation. These costs affected include the salaries for all TFI
    personnel, travel, supplies, and contracts awarded, in addition to the
    associated administrative support costs, prior enactment of the fiscal
    year 2015 appropriation on December 16, 2014.As of May 11 there is
    residual clean-up work still being done to move the obligations and
    expenses from the 0101 appropriation to the TFI SE appropriation; most
    of these costs are travel related and the corrections in the accounting
    system must be done based on the individual travel order.
                                     ______

               Question Submitted by Senator Christopher A. Coons
        Question. There are currently issues that have been brought to my
    attention involving State level policies that modify the traditional
    ``net metering'' agreements between utilities and residential customers
    that generate electricity from solar panels affixed to rooftops.
    Several new State level policies require that electric utilities
    purchase all electricity generated by residential solar customers, but
    not necessarily at the applicable retail rate. Correspondingly, the
    utility sells, at the applicable retail rate, all electricity that the
    homeowner consumes. This includes any electricity actually produced by
    the homeowner's solar panels. These arrangements are commonly referred
    to as Value of Solar Tariffs, or VOSTs. It is my understanding that
    there is uncertainty surrounding the tax consequences for a homeowner
    that participates in a VOST arrangement. Specifically, I would like to
    understand whether a homeowner who participates in a VOST arrangement
    (1) is eligible to claim the Federal tax credit under Section 25D of
    the Tax Code and (2) must treat VOST payments as Federal taxable
    income.
        Answer. Generally, the tax treatment of an arrangement such as the
    one you describe will depend on the specific facts and terms of the
    arrangement between the homeowner and the public utility. The IRS is
    aware that taxpayers have questions about the treatment of VOSTs for
    Federal income tax purposes and is currently looking at these issues.
    The IRS is considering whether published guidance would be useful in
    helping taxpayers apply the law to particular factual situations.
    Before issuing any such guidance, the IRS likely will request comments
    from the public on common fact patterns involved in these arrangements
    along with how these arrangements should be treated for Federal income
    tax purposes.
                                     ______

                   Questions Submitted by Senator Jerry Moran
        Question. Through the Financial Stability Board and Federal
    Insurance Office (FIO), your Department has had extensive engagement in
    the International Association of Insurance Supervisors (IAIS) process
    of developing capital rules for insurance companies on an international
    basis. As you know, the U.S. insurance regulatory regime is quite
    different than that of Europe--and our State-based system is not going
    away any time soon. Have you conducted any analysis of the potential
    impacts of IAIS standards on the U.S. domestic insurance industry--in
    terms of financial, rate-setting, legal, and accounting regimes U.S.
    companies now U.S. confront--as well as the impacts that could be felt
    by policyholders and consumers? If this analysis has not been
    conducted, do you feel that this information would be necessary before
    developing international capital standards? If you have conducted this
    analysis, would you please share this information with the committee?
        Answer. The work on a comprehensive supervisory framework for
    internationally active insurance groups (IAIGs) has been ongoing since
    2009 and is shaped by the input of the U.S. Federal and State
    participants. As part of these discussions, Treasury agrees that any
    capital standards for insurers should be based on insurance business
    models and risk metrics. In addition, prior to implementation, the
    international capital standards will be tested directly with U.S.-based
    insurers and, more broadly, the marketplace. The testing and the study
    will allow for the implementation of international standards that
    account for the impact in the United States. Additionally, work on the
    ICS should proceed incrementally toward milestones that are realistic,
    achievable, and that are fact-driven and consensus-driven.
        As has always been true in the insurance sector, international
    standards are not self-executing. U.S. State or Federal authorities may
    impose a standard or requirement on a U.S. insurance organization. In
    the case of the United States, for firms that operate as part of a bank
    or savings and loan holding company or nonbank financial company
    designated by the Financial Stability Oversight Council (FSOC), the
    Federal Reserve has the authority to implement the standard. For firms
    not subject to oversight by the Federal Reserve, the State insurance
    regulators would have authority to implement the standard.
        Question. Describe the role of your department/agency's Chief
    Information Officer (CIO) in the development and oversight of the
    information technology (IT) budget for your department/agency. How is
    the CIO involved in the decision to make an IT investment, determine
    its scope, oversee its contract, and oversee continued operation and
    maintenance?
        Answer. The role of the Treasury CIO in development and oversight
    of the IT budget relies heavily on Treasury bureau level data on IT
    investments; this data focuses on major investments. In terms of IT
    budget data, Treasury does not have a single, stand-alone budget
    account to request funds to support all of the Department's IT
    investments. Each Treasury bureau is responsible for identifying and
    requesting funds to support their IT investments, which can be found in
    the bureau program budgets or in component specific IT budgets.

        Given that context, the Treasury CIO's current role is as follows:

      --Through reviews conducted by the Assistant Secretary for Management
            (ASM), the Treasury CIO is directly involved in proposing
            bottom-up budgets, resource levels, and scope of all
            investments funded by Departmental Offices (DO) IT budgets and
            DO's managed funds within the Treasury Franchise Fund for
            shared IT services. Decisions on levels of budget and resources
            dedicated to DO IT under these funding mechanisms are made by
            the ASM as directed by the Secretary. For major and non-major
            investments, the Treasury CIO conducts both oversight and
            execution of contracts, operations, and maintenance.
      --Conducts an annual review with each bureau CIO to review their
            proposed IT portfolio to be submitted in conjunction with their
            organization's budget request. Provides recommendations
            directly to the bureau CIO and, as warranted, provides
            recommendations to Treasury's Budget Director. For major
            investments, the Treasury CIO conducts oversight activities
            such as monthly reviews to identify opportunities to improve
            investment performance.
      --Through reviews conducted by the ASM as part of the annual budget
            process, the Treasury CIO is asked for comment on submissions
            by program offices across all appropriated Treasury programs on
            their specific budget requests (above guidance requests)
            related to IT.

        Question. Describe the existing authorities, organizational
    structure, and reporting relationship of the Chief Information Officer.
    Note and explain any variance from that prescribed in the newly-enacted
    Federal Information Technology and Acquisition Reform Act of 2014
    (FITARA, Public Law 113-291) for the above.
        Answer. As per Treasury Order 102-10 (dated January 13, 1999) the
    Deputy Assistant Secretary for Information Systems is designated as the
    Chief Information Officer. The CIO reports to Treasury's Assistant
    Secretary for Management (ASM). The responsibilities of the position
    include:

      --The general responsibilities and the duties specified in sections
            5125(b) and (c) of the Clinger-Cohen Act of 1996 (40 U.S.C.
            1425 (b) and (c));
      --The responsibilities of the Department under chapter 35 of title
            44, U.S.C., titled ``Coordination of Federal Information
            Policy;'' and
      --The Chief Information Officer management responsibilities
            designated in Executive Order 13011, dated July 16, 1996.

        Order 102-10 provides that the CIO shall have direct access to the
    Secretary.
        In anticipation of formal guidance to be released from OMB on the
    implementation of FITARA, the Treasury Department is currently
    evaluating its existing policies and the role of the CIO within the
    Department.
        Question. What formal or informal mechanisms exist in your
    department/agency to ensure coordination and alignment within the CXO
    community (i.e., the Chief Information Officer, the Chief Acquisition
    Officer, the Chief Finance Officer, the Chief Human Capital Officer,
    and so on)?
        Answer. The Department of the Treasury has had some level of
    coordination and alignment within the Department's CXO community in
    place since fiscal year 2012. In 2011, a series of Department-wide
    performance elements were included in the performance plans of the
    bureau CXOs. For Treasury this includes the Chief Financial Officer,
    Chief Information Officer (CIO), Human Resources Officer, Senior
    Procurement Official, and the Equal Employment Opportunity (EEO)
    Officer. The purpose of prescribing performance elements was to promote
    greater uniformity across the bureaus and strengthen alignment with
    Department-wide goals. Fiscal year 2012 results were very good and
    additional improvements were made for fiscal year 2013.
        For fiscal year 2015, all CXO Commitments are linked to Strategic
    Goal 5 of the Treasury Strategic Plan (fiscal year 2014-fiscal year
    2017) and one or more of the objectives below:
        Strategic Goal 5:
              Create a 21st century approach to government by improving
            efficiency, effectiveness and customer interaction.

        --Objective 5.1: Increase workforce engagement, performance, and
                diversity by instilling excellence, innovation, and
                inclusion in Treasury's organizational culture and business
                practices.
        --Objective 5.2: Support effective, data-driven decisionmaking and
                encourage transparency through intelligent gathering,
                analysis, sharing, use and dissemination of information.
        --Objective 5.3: Promote efficient use of resources through shared
                services, strategic sourcing, streamlined business
                processes, and accountability.
        --Objective 5.4: Create a culture of service through relentless
                pursuit of customer value.

        Most of the Department's CXO commitments in fiscal year 2015 are
    substantially similar to those developed in the past. However, the CIO
    commitment was revised to reflect a new visioning and strategic
    planning process.
        Question. According to the Office of Personnel Management, 46
    percent of the more than 80,000 Federal IT workers are 50 years of age
    or older, and more than 10 percent are 60 or older. Just 4 percent of
    the Federal IT workforce is under 30 years of age. Does your
    department/agency have such demographic imbalances? How is it
    addressing them?
        Answer. Yes, and this creates the risk that too many essential
    employees might retire at the same time without sufficiently trained
    employees in place to succeed them. The consequences of a demographic
    shift of information technology (IT) workers, specifically the risk
    that too many essential employees could retire simultaneously without
    sufficiently trained employees to succeed them, has been a longstanding
    concern for the Department of the Treasury. As part of Treasury's
    benchmarking efforts related to PortfolioStat and the President's
    Management Agenda (PMA), Treasury provided an analysis to OMB on the IT
    workforce demographic for Treasury's 2210 series workers (a subset of
    Treasury's IT workforce). Items of interest among the findings include:

      --The average age of the IT workforce at the Department of the
            Treasury \2\ is 50.

        \2\ Consisting of IT employees working across both Departmental
    Offices and Treasury's Bureaus.

    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Total
                                                                2200     Under                        % of       % of                                65 and
                              Year                             Series      20     20-29    30-39     hires      hires     40-49    50-59    60-64     over
                                                               Hires                                under 30   under 40
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    2014...................................................        383        0       19      101       5.0%        31%      146       97       18         2
    2013...................................................        381        0       33      111       8.7%        38%      132       85       14         0
    2012...................................................        333        0       23       90       6.9%        34%      128       75       15         0
    2011...................................................        655        0       38      166       5.8%        31%      261      151       31         8
    2010...................................................        256        1       51       68      20.3%        47%       89       39        6         0
    2009...................................................        186        0       34       64      18.3%        53%       57       23        6         0
    2008...................................................        312        0       57       81      18.3%        44%      108       56       10         0
    --------------------------------------------------------------------------------------------------------------------------------------------------------

        Current mitigations include fostering increased utilization of
    existing Pathways and fellowship programs. Examples include recruiting
    through the Scholarship for Service program under the Federal Cyber
    Service (FCS) Training and Education Initiative for appointments under
    the Federal Pathways program. The Departmental Offices fiscal year 2016
    budget includes a request to develop a Digital Service Team similar to
    the Federal Digital Service Team. The Digital Service Team will bring
    the private sector's best practices in the disciplines of design,
    software engineering, and product management to bear on the agency's
    most important services. The hope is this effort will also help
    catalyze further changes to Treasury's IT staffing demographic.
        To address the identified concern, Treasury is pursuing additional
    use of available hiring flexibilities, including the Pathways Program
    and the recently authorized government-wide excepted service hiring
    authority for Smarter IT Delivery. However, due to budget
    considerations, Treasury bureaus have been finding it difficult to fund
    positions, and to fund compensation and recruitment incentive
    flexibilities.
        Question. How much of the department/agency's budget goes to
    Demonstration, Modernization, and Enhancement of IT systems as opposed
    to supporting existing and ongoing programs and infrastructure? How has
    this changed in the last 5 years?
        Answer. Since 2011 the percentage of Treasury's overall IT budget
    spent on Development, Modernization and Enhancement (DME) has increased
    from 18.37 percent to 20.58 percent in 2016, as included in the fiscal
    year 2016 budget. These statistics are based on Treasury's fiscal year
    2013 and fiscal year 2016 budget submissions.
        Extracts from Treasury's 4.1 tables for the aforementioned 2 years
    include the following:

                                                                       TREASURY 4.1 TABLE
                                                                      [Values in millions]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 PY 2011 Funding (Actuals)                BY 2016 Funding (Requested)
                                                                        ------------------------------------------------------------------------------------
                                                                            DME       O&M       Total      % DME      DME        O&M       Total      % DME
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    IT Total...........................................................   625.211   2752.869   3402.831    18.37%    932.683   3568.505   4531.033    20.58%
    --------------------------------------------------------------------------------------------------------------------------------------------------------

        Question. What are the 10 highest priority IT investment projects
    that are under development in your department/agency? Of these, which
    ones are being developed using an ``agile'' or incremental approach,
    such as delivering working functionality in smaller increments and
    completing initial deployment to end-users in short, 6-month
    timeframes?
        Answer. Rapid Delivery Methods (RDM) have been in use within
    Treasury since 2012 to help foster the faster and more responsive
    delivery of IT development efforts across a broad spectrum of projects.
    Applying RDM is fostering an agile development environment allowing IT
    to respond to changing business needs while improving employee
    satisfaction and accountability through streamlined processes.
        The following are Treasury's 10 highest priority IT investments
    that have development efforts in fiscal year 2015:

    ------------------------------------------------------------------------
                                                    Currently using Rapid
                    Investments                    Delivery Method/AGILE/
                                                          Iterative
    ------------------------------------------------------------------------
    IRS--Foreign Account Tax Compliance Act--   Yes
     FATCA.
    IRS--Customer Account Data Engine 2 TS2     Yes
     (CADE 2).
    IRS--Modernized e-File--MeF (Next Release)  Yes
    IRS--Affordable Care Act (ACA)............  Yes
    Fiscal Service--Retail Security Services    Yes
     (RSS/MyRA).
    Fiscal Service--USASpending...............  Yes
    Fiscal Service--Wholesale Securities        Yes
     Services (WSS/TAAPS).
    Fiscal Service--Central Accounting and      Yes
     Reporting System (CARS).
    Fiscal Service--Electronic Federal Tax      Yes
     Payment System (EFTPS).
    CDFI--Award Management Information System.  Yes
    ------------------------------------------------------------------------

        Question. To ensure that steady State investments continue to meet
    agency needs, OMB has a longstanding policy for agencies to annually
    review, evaluate, and report on their legacy IT infrastructure through
    Operational Assessments. What Operational Assessments have you
    conducted and what were the results?
        Answer. An operational analysis was conducted by the bureaus for
    the following IT investments in fiscal year 2014:

    ------------------------------------------------------------------------
                                                              Operational
               Investment                   Bureau         Analysis Results
    ------------------------------------------------------------------------
    Affordable Care Act               IRS...............  Re-Invest--Both
     Administration.                                       (Modernization
                                                           and Enhancement)
    Account Management Services       IRS...............  Re-Invest--Both
     (AMS).                                                (Modernization
                                                           and Enhancement)
    e-Services......................  IRS...............  Re-Invest--Both
                                                           (Modernization
                                                           and Enhancement)
    Integrated Customer               IRS...............  Re-Invest--Both
     Communication Environment                             (Modernization
     (ICCE).                                               and Enhancement)
    Integrated Data Retrieval System  IRS...............  Re-Invest--Both
     (IDRS).                                               (Modernization
                                                           and Enhancement)
    Integrated Financial System/CORE  IRS...............  Re-Invest--Both
     Financial System (IFS).                               (Modernization
                                                           and Enhancement)
    Individual Master File (IMF)....  IRS...............  Re-Invest--Both
                                                           (Modernization
                                                           and Enhancement)
    Information Reporting and         IRS...............  Re-Invest--Both
     Document Matching (IRDM).                             (Modernization
                                                           and Enhancement)
    Integrated Submission and         IRS...............  Re-Invest--Both
     Remittance Processing System                          (Modernization
     (ISRP).                                               and Enhancement)
    Service Center Recognition/Image  IRS...............  Re-Invest--Both
     Processing System (SCRIPS).                           (Modernization
                                                           and Enhancement)
    Customer Account Data Engine 2    IRS...............  Continue As-Is
     (CADE 2).
    Electronic Fraud Detection        IRS...............  Re-Invest--Both
     System (EFDS).                                        (Modernization
                                                           and Enhancement)
    Modernized e-File (MeF).........  IRS...............  Continue As-Is
    IRS.GOV--Portal Environment.....  IRS...............  Re-Invest--Both
                                                           (Modernization
                                                           and Enhancement)
    Automated Standard Application    Fiscal Service....  Continue As-Is
     for Payments (ASAP).
    Central Accounting and Reporting  Fiscal Service....  Re-Invest--
     System.                                               Modernize
    Debit Gateway...................  Fiscal Service....  Continue As-Is
    Deposit and Data Management       Fiscal Service....  Continue As-Is
     (DDM).
    Do Not Pay (DNP) (previous name   Fiscal Service....  Re-Invest--Enhance
     GOVerify Business Center
     (GVBC)).
    EFTPS (Electronic Federal Tax     Fiscal Service....  Re-Invest--Enhance
     Payment System).
    FedDebt.........................  Fiscal Service....  Continue As-Is
    Franchise Financial and           Fiscal Service....  Continue As-Is
     Administrative Services (FFAS).
    International Treasury Services   Fiscal Service....  Continue As-Is
     (ITS.gov).
    Invoice Processing Platform.....  Fiscal Service....  Re-Invest--Enhance
    Over the Counter Channel          Fiscal Service....  Continue As-Is
     Application (OTCnet).
    Pay.gov.........................  Fiscal Service....  Continue As-Is
    Payment Application               Fiscal Service....  Re-Invest--Both
     Modernization (PAM).                                  (Modernization
                                                           and Enhancement)
    Retail Securities Services (RSS)  Fiscal Service....  Continue As-Is
    Summary Debt Accounting Services  Fiscal Service....  Continue As-Is
     (SDAS).
    Wholesale Securities Services     Fiscal Service....  Re-Invest--Enhance
     (WSS).
    BSA IT Modernization............  FinCEN............  Re-Invest--Enhance
    ------------------------------------------------------------------------

        Question. What are the 10 oldest IT systems or infrastructures in
    your department/agency? How old are they? Would it be cost-effective to
    replace them with newer IT investments?
        Answer. The oldest systems at Treasury were built in the 1960's.
    This does not mean Treasury has not made changes to these systems since
    then. As Treasury's annual budget allows, Treasury takes the
    opportunity to upgrade the hardware and software to the current
    release. However, some of the core system components exist on older
    technology. The strategy has been, and will continue to be, to migrate
    off these systems/components in a methodical manner. Because of system
    interdependencies, it is often not as simple as replacing an entire
    system with another. Often, components are replaced using a risk based
    approach where more fragile and frequently failing components are
    replaced first. Other more robust components are left in place to
    maximize return on investment. Treasury always looks for opportunities
    to introduce these changes without impacting the core mission or
    incurring unnecessary costs.
        Question. How does your department/agency's IT governance process
    allow for your department/agency to terminate or ``off ramp'' IT
    investments that are critically over budget, over schedule, or failing
    to meet performance goals? Similarly, how does your department/agency's
    IT governance process allow for your department/agency to replace or
    ``on-ramp'' new solutions after terminating a failing IT investment?
        Answer. Within the Department, the Capital Planning and Investment
    Control (CPIC) office has the oversight responsibility for preparing
    and publishing a monthly performance report of the Treasury's IT
    Portfolio status on the Federal IT Dashboard, which is hosted by the
    Office of Management and Budget (OMB). The bureaus' Chief Information
    Officer and supporting CPIC staff are responsible for timely, accurate
    and complete updates to the monthly performance report for their
    investments. The same monthly data submission to OMB is hosted by
    Treasury, Information Technology Strategy and Technology Management,
    Performance Measurement and Governance.

        There are three primary dates that drive the monthly reporting
    cycle:

        1.  Bureaus must update project execution data and operational
    performance for each major investment by the 15th of each month. Cost
    and schedule variances are analyzed, along with operational metrics and
    project risks, and a bureau-level view of the monthly variance report
    can be prepared at the bureau level.
        2.  The monthly updates are consolidated at the Departmental level
    and presented to the Treasury CIO near the 25th of each month.
        3.  The Department's monthly submission is due to OMB by the last
    day of each month. Treasury's Monthly Variance Report, complete with
    portfolio variance analysis, investment summaries, and trend analysis
    is published for the Assistant Secretary for Management, bureau heads
    and posted on the CPIC Web site.

        One of the avenues through which new investments can be ``on-
    ramped'' after an existing investment has been terminated, is through
    Treasury's Operational Assessment (OA) process.
        Question. What IT projects has your department/agency
    decommissioned in the last year? What are your department/agency's
    plans to decommission IT projects this year?
        Answer. The IT projects decommissioned in the last year (fiscal
    year 2014) include the following:

    ------------------------------------------------------------------------
                      Bureau                      Business Application Name
    ------------------------------------------------------------------------
    IRS.......................................  Information Return Document
                                                 Matching Case Management
                                                 (IRDMCM)
    IRS.......................................  Integrated Production Model
    Departmental Offices......................  DTS decommission
    Departmental Offices......................  Alpha decommission
    Fiscal Service............................  Summary Debt Accounting
                                                 System (SDAS)
    OCC.......................................  ADD Request Tracking System
                                                 (Retired)
    OCC.......................................  BankNet Application Request
                                                 Queue (Retired)
    OCC.......................................  BankNet Viewer (Retired)
    OCC.......................................  BERT (Bank Expert)
    OCC.......................................  Compensation & Benefits
                                                 Board
    OCC.......................................  Historical OCCNet Operating
                                                 Committee Database
                                                 (Retired)
    OCC.......................................  Large Banks Library
    OCC.......................................  Library Information Request
                                                 Form (Retired)
    OCC.......................................  News/Joint Release Template
                                                 (DocPub) (Document
                                                 Publishing Pilot) (Retired)
    OCC.......................................  Notice Board System
                                                 (Retired)
    OCC.......................................  OCC Publication Plans
    OCC.......................................  Printed Publications Order
                                                 Form (Retired)
    OCC.......................................  Security/Authorize
    OCC.......................................  Trouble Ticket Dashboard
                                                 Front End
    ------------------------------------------------------------------------

        The Department plans to decommission the following IT projects in
    fiscal year 2015:

    ------------------------------------------------------------------------
                      Bureau                      Business Application Name
    ------------------------------------------------------------------------
    Fiscal Service............................  Deposit and Data Management
                                                 (DDM)
    Fiscal Service............................  Retail Security Services
                                                 (RSS)
    Fiscal Service............................  Centralized Accounting and
                                                 Reporting System (CARS)
    ------------------------------------------------------------------------

        Question. The newly-enacted Federal Information Technology and
    Acquisition Reform Act of 2014 (FITARA, Public Law 113-291) directs
    CIOs to conduct annual reviews of their agency/department's IT
    portfolio. Please describe your agency/department's efforts to identify
    and reduce wasteful, low-value or duplicative information technology
    (IT) investments as part of these portfolio reviews.
        Answer. The Treasury Capital Planning and Investment Control Office
    conducts monthly reviews of Treasury IT investments. (Please see
    response to Question 2 for a description of the Treasury monthly and
    annual processes). These reviews inform the Treasury CIO about the
    cost, schedule, and performance variances of each major investment in
    the Treasury IT portfolio. Based on these monthly reviews, investment
    managers for poorly-performing investments must explain reasons for
    variances and their planned corrective action.
        Currently each Treasury bureau CIO has the responsibility for
    performing the capital planning and investment control selection
    process that reviews all IT investments annually and determines the
    composition of their IT investment portfolio. As OMB develops final
    guidance for implementing FITARA, the Department will implement new
    policies which we believe will maximize efficiencies in IT spending,
    consolidate investments where appropriate, and reduce and eliminate
    lower priority investments as feasible.
        Treasury has a long history of being a shared services provider
    offering essential services (both business and technical) to
    constituencies both within and external to our Department. These shared
    services are funded through the Treasury Franchise Fund which achieves
    cost savings, promotes economies of scale, and increases productivity
    and efficiency in the use of resources by providing centralized
    services. Some key examples of the shared services Treasury offers
    include:
      --HR Connect is one of the six Federal Office of Personnel Management
            Human Resource Lines of Business providing HR-related services
            in the Federal Government.
      --The Administrative Resource Center (ARC), within the Bureau of the
            Fiscal Service, has been in operation since 1996 and is
            recognized across government as a leader in multiple service
            lines. ARC provides a full range of administrative services for
            various Federal agencies to include:

        --Financial Management
        --Internet-based procurement
        --Travel services
        --Information Technology
        --Human Resources Management
        --Investment Portfolio Management

      --The Treasury Network (TNet) provides a secure enterprise data
            network that connects authorized domestic and international
            government facilities across the United States, the U.S.
            Territories, and at select U.S. Embassies via the State
            Department's network.
      --Treasury's Public Key Infrastructure (PKI) is a cooperative effort
            between OCIO and the Bureau of the Fiscal Service (formerly the
            Bureau of the Public Debt) for the issuance of digital
            certificates to enable secure communications between agencies
            and customers transacting business, and for identity proofing
            of individuals. Treasury's PKI is well known throughout the
            Federal Government, and is extended to its trading partners and
            other government organizations that conduct business with the
            Department in a secure manner.
      --The Invoice Processing Platform (IPP) provides a centralized
            electronic invoicing and payment information portal accessible
            to all participants in Federal payment transactions: agencies,
            payment recipients, and Bureau of the Fiscal Service.
      --The Department's Do Not Pay Business Center is designed to give
            paying agencies access to the critical information needed to
            identify, reduce, and prevent improper payments. This program
            was initiated as part of a June 18, 2010, Presidential
            Memorandum directing agencies to review current pre-payment and
            pre-award procedures to ensure that a thorough review of
            available databases, with relevant information on eligibility,
            occurs before Federal funds are disbursed.

        Question. In 2011, the Office of Management and Budget (OMB) issued
    a ``Cloud First'' policy that required agency Chief Information
    Officers to implement a cloud-based service whenever there was a
    secure, reliable, and cost-effective option. How many of the agency/
    department's IT investments are cloud-based services (Infrastructure as
    a Service, Platform as a Service, Software as a Service, etc.)? What
    percentage of the agency/department's overall IT investments are cloud-
    based services? How has this changed since 2011?
        Answer. Treasury is unable to compare this percentage to fiscal
    year 2011, as there is no fiscal year 2011 data on cloud usage. OMB
    only began asking for investment-level cloud data in the fiscal year
    2015 budget year. Government-wide guidance on measuring the extent and
    impact of cloud computing continues to mature, making year-to-year
    comparisons difficult.
        With the launch of a new Treasury.gov platform in 2011, Treasury
    was one of the first civilian agencies to leverage commercial cloud
    based offerings to host its public Web presence. Treasury was also one
    of the early collaborators with the National Institute of Standards and
    Technology (NIST), General Services Administration, and other agencies
    on the formal definition of cloud computing.
        As one of the early adopters of commercial cloud services, Treasury
    is also aware of the challenges of moving Federal IT infrastructure
    into the cloud. A significant portion of Treasury data is comprised of
    PII and financial data. Treasury looks forward to FedRAMP's continued
    expansion of the number of commercial cloud providers able to meet the
    government's security requirements.
        That aside, Treasury has regularly sought out services to improve
    efficiency, increase utilization and decrease time to market. The
    Department maintains an active portfolio of shared service programs
    that service organizations throughout government. Further, across
    Treasury, IT organizations have instituted virtualization and usage
    based cost models that allow IT organizations to more effectively
    follow the best practices established by commercial cloud providers.
        Using the narrow definition found in the National Institute of
    Standards and Technology standard (special publication 800-145), 3.7
    percent of Treasury's current IT investments are ``cloud based'' (11
    out of 298 investments). Many other investments use other forms of
    shared and/or virtualized infrastructure.
        Question. Provide short summaries of three recent IT program
    successes--projects that were delivered on time, within budget, and
    delivered the promised functionality and benefits to the end user. How
    does your department/agency define ``success'' in IT program
    management? What ``best practices'' have emerged and been adopted from
    these recent IT program successes? What have proven to be the most
    significant barriers encountered to more common or frequent IT program
    successes?
        Answer. The following provides short summaries of three recent
    Department IT program successes. The Treasury CIO evaluates the
    performance of major investments every month. Ratings of 4-5 reflect
    successfully operating investments on the basis of:

      --Cost and Schedule Baseline Management: Cost and schedule within 10
            percent threshold and trends are neutral or positive.
      --Project Risk Management: Low impact and low probability with/or
            without a mitigation plan.
      --Performance Measures Management: Measures with quantifiable
            description that provide baselines, targets, and actual
            results; reporting accuracy is within tolerance.

        The following Treasury IT programs all have CIO ratings of ``5'':

      --The Bank Secrecy Act (BSA) Information Technology (IT)
            Modernization Program: The Financial Crimes Enforcement Network
            (FinCEN) transformed its IT capabilities through the innovative
            use of technology and data standards to provide mission
            critical support to the bureau's broad user base, which
            includes law enforcement and regulatory customers that access
            and analyze financial data to detect and deter financial
            crimes. The Program established FinCEN as the ``authoritative
            source'' for all BSA data with 11+ years (approximately 190
            million records) of data readily available to all stakeholders:

        --An enterprise-wide, information management framework that equips
                over 10,000 authorized users from approximately 350
                agencies with access to BSA financial data and advanced
                analytic decisionmaking abilities performing over 1,000,000
                queries per year.
        --A more streamlined data collection and filing process aimed at
                60,000 regulated entities (Banks, Money Service Businesses,
                etc.) and over 500,000 individual foreign bank account
                holders to electronically file reports in support of the
                Department's ``paperless'' initiative, with FinCEN now
                averaging 96 percent electronically-filed BSA reports.
        --Advanced analytics and modeling capabilities for financial crime
                detection. With regard to IT program management, FinCEN
                defines success as the completion of the agreed upon scope
                of Program capabilities within the allocated timeframe and
                budgeted costs.

      --Customer Account Data Engine 2 (CADE 2) Program: The Internal
            Revenue Service (IRS) revamped the way it does business by
            providing a data-centric solution that provides daily
            processing of taxpayer accounts.

        --In January 2012, CADE 2's Transition State 1 (TS 1) began to
                deliver daily tax return processing--enabling faster
                refunds to taxpayers, more timely account updates, and
                faster issuance of taxpayer notices. The Service also began
                deployment of the CADE 2 database--a single centralized
                relational database of trusted data for individual taxpayer
                accounts--to improve service to taxpayers and enhance IRS
                tax administration. CADE 2 Transition State 2 (TS2) is
                focused on delivering early results.
        --On July 29, 2013, the TS2 team took the first step in addressing
                the longstanding Financial Material Weakness by delivering
                the first TS2 project--the 2013 Mid-Year Release of the
                Integrated Data Retrieval System Penalty & Interest
                project. A full rollout of the Penalty & Interest Common
                Code Base was deployed on January 2, 2014.
        --In January 2015, the IRS deployed Penalty and Interest Filing
                Season 2015 code changes for the Individual Master File
                (IMF), Business Master File (BMF) and Integrated Data
                Retrieval System (IDRS) investments into production, and
                addressed both TS2 common code break-fixes and operations
                and maintenance work.

      --Electronic Federal Tax Payment System (EFTPS): The Bureau of the
            Fiscal Service (Fiscal Service) administers the world's largest
            government funds collections systems through a network of more
            than 10,000 financial institutions. The EFTPS provides
            businesses and individuals with a free service for making tax
            payments to the U.S. Federal Government and collects over $2
            trillion per year. The EFTPS includes the following key
            services:

        --EFTPS.gov--used by both businesses and individuals to make tax
                payments.
        --IRS Direct Pay--a citizen focused, mobile accessible Web site,
                IRS Direct Pay assists individuals with making tax payments
                online.
        --EFTPS Contact Center--a world class call center staffed to assist
                tax payers with questions and enable tax payments.
        --Bulk and Batch tax collection--provides integration with tax
                professionals, payroll providers, and large tax collection
                entities.

        In late July, 2014, ForeSee was utilized to measure tax payers'
    satisfaction with using EFTPS Online. The survey measures a customer's
    overall experience based on ``Look and Feel'', Navigation, Language
    (how clearly information is communicated on the site), Site
    Performance, Task/Transaction completion, and overall Satisfaction.
    Each measure is scored from 1-10, with an average score over 8 being
    considered strong performance. All measures for EFTPS are well over 8
    with customer satisfaction averaging 8.6. This makes EFTPS one of the
    highest performing Federal Web sites.
        The EFTPS investment consistently performs at the highest levels in
    terms of project management, scope management, cost and schedule
    baseline management, risk management, and demonstrating successful
    operational performance. EFTPS has delivered above 90 percent accuracy
    on cost, schedule, and operational performance results for the past 18
    months.
    Best Practices:
        Several key best practices stand out from the three successful
    investments, with each practice sustained over several years.

      --Sustained funding--Investments seeking to implement major changes
            in technology must have access to predictable funding levels in
            order to plan and execute against schedule. Lacking reliable
            funding levels, projects are prone to constant schedule changes
            and reassignment of resources--which further contribute to
            project instability.
      --Strong, technical program management--With sustained funding and
            resource stability, program managers have the ability to build
            and lead strong teams, maintain accurate data on all elements
            of investment performance, and deliver against funding
            commitments.
      --Engaged oversight--Whether it at by Congress or OMB, agency or
            component level CIOs, with GAO or IG reports, oversight is
            vital. Oversight establishes demands for transparency and
            accountability that are critical to proper stewardship of
            government resources.
    Significant Barrier:
      --GAO has already published many reports on the impact of
            unpredictable funding levels on the IRS. Congress should
            consider that the success experienced in CADE2 is subject to
            risk as already reported in the IRS 2015 Q1 IT Investment
            Report.

        Question. In 2014, GAO examined efforts in the Federal Government
    to manage software licenses and offered several important findings and
    recommendations. Department of the Treasury has an estimated IT Budget
    of $3.7 billion for fiscal year 2015. The largest component of the
    Treasury Department is the IRS, whose Inspector General reported in
    2013 that the agency failed to centralize management of its software
    licenses or to use proven best practices and technology to track,
    manage, and optimize those licenses. In addition, the Department of the
    Treasury has not established a Department-wide comprehensive process
    for managing its software licenses. According to industry averages,
    agencies that do not proactively implement software license management
    and optimization best practices are likely overspending on software by
    as much as 25 percent. The GAO offered six recommendations to improve
    effective management of software licenses. Has the Department adopted
    any of these recommendations? Please describe what efforts the
    Department of Treasury has made to improve the software license
    management practices.
        Answer. GAO's findings primarily focus on the development of a
    centralized ``system'' for storing, tracking and managing Treasury's
    software license assets. In this vein, Treasury is continuing to work
    with the Department of Homeland Security on the implementation of the
    Continuous Diagnostics and Mitigation program. Once these capabilities
    are implemented, Treasury will work with its constituent bureaus to
    develop common procedures, policies and capabilities for auditing and
    tracking software inventories. Treasury's Office of the CIO (OCIO) is
    also currently working with Treasury's Office of Privacy, Transparency
    and Records to revise Treasury Directive (TD 85-02) to establish a
    policy for authorized software. Additionally, to assist with
    consolidating requirements across the Treasury enterprise for multiple
    types of commodity software, hardware and IT services, Treasury's OCIO,
    in conjunction with the Senior Procurement Executive, launched an
    Integrated Project Team (IPT). The IPT believes it can meet the intent
    of the GAO recommendations through enterprise-wide strategic sourcing
    and facilitating communication between key IT hardware and software
    vendors and Treasury Bureaus/Offices. These steps alone will contribute
    to Department-wide cost savings and/or cost avoidance by identifying
    and eliminating the duplication of procurement and contract
    administration activities for IT products and services.
                                     ______

                 Questions Submitted by Senator James Lankford
        Question. In your testimony, you highlight the fact that our
    deficit has fallen by almost 75 percent since its peak in the same
    narrative as you tout our Nation's job creation and economic growth
    data. Yet, you advocate for increased deficit spending in fiscal year
    2016 over current law, stating that breaking the budget caps is vital
    to our national and economic security. Moreover, the President's budget
    calls for an additional $5.7 trillion in debt over the next decade--
    despite proposing $2.1 trillion in tax increases.
        Does the administration believe that reducing our annual deficits
    is akin to strong job creation and economic growth or does reducing our
    deficits damage our economy and threaten our long-term prosperity?
        Answer. The administration believes that the effects of deficit
    reduction on job creation and economic growth depend on several
    factors, including: (1) how deficits are reduced, (2) whether the
    reduction is seen as permanent or temporary, and (3) whether the
    economy is near full employment.
        There is widespread agreement among mainstream economists that the
    countercyclical fiscal support put in place in the wake of the
    financial crisis prevented the United States economy from experiencing
    an even deeper recession than it did. Deficits have shrunk since then,
    but imposing excessive fiscal austerity on the economy at this point
    would require us to forgo investments that are needed to accelerate
    growth and expand opportunity. The President's budget allows for such
    investments while also putting the Nation on a sustainable fiscal path.
        Question. The Congressional Budget Office (CBO) warned about the
    impacts that excessive borrowing will have on the economy, noting that
    ``because Federal borrowing reduces national saving over time, the
    Nation's capital stock would ultimately be smaller and productivity and
    total wages would be lower than they would be if the debt was
    smaller.''
        Do you agree with the assessment that relatively higher Federal
    borrowing levels ultimately reduces productivity and wages?
        Answer. The deficit has fallen from $1.4 trillion in fiscal year
    2009 to less than $500 billion in fiscal year 2014. Last year's deficit
    represented 2.8 percent of GDP, a drop of 7.0 percentage points from
    the fiscal year 2009 peak of 9.8 percent of GDP, as a result of both
    explicit policy actions, including a ratio of spending cuts to new
    revenues that is more than 2.5 to 1, and improvement to the economy
    over the last 5 years. In addition to making progress on deficit
    reduction, the administration has focused on targeted investments, such
    as infrastructure, job training, and education, to support our
    economy's recovery. As of June 2015, the economy has achieved 52
    consecutive months of job growth and added 9.7 million private sector
    jobs, the longest stretch of consecutive months of job growth since the
    Bureau of Labor Statistics began collecting data in 1939.
        Near full employment, increased borrowing can crowd out private
    investment and reduce productivity and wages, depending on the relative
    productive value of the private use of borrowing versus public use.
    Accordingly, the administration's fiscal year 2016 budget proposals
    would reduce the Federal deficit from fiscal year 2016-2025 by an
    additional $1.2 trillion (0.5 percent of GDP), as estimated by the
    Congressional Budget Office.
        Question. Budgetary caps on discretionary spending are not going to
    solve our Nation's long-term fiscal problems. However, it's important
    to remember the original intent of the sequester caps in the Budget
    Control Act was to force consensus to achieve structural fixes to our
    Nation's budget problem. While the administration has previously
    proposed to use chain CPI as a means to deal with some of the projected
    growth in our Nation's entitlement programs, the fiscal year 2016
    budget proposal does not propose any substantive entitlement reforms.
        Is it the administration's view that our entitlement programs are
    sustainable in long-term and are not in need of any changes?
        Answer. The administration takes the financial sustainability of
    our entitlement programs very seriously. That is one reason why the
    administration remains committed to the Affordable Care Act. In 2009,
    75-year projected unfunded obligations for Medicare and Social Security
    totaled 5.6 percent of GDP. In 2014, that share was down to 3.9
    percent, a 30 percent reduction, largely due to the Affordable Care
    Act. While there remain long-run challenges to the financial
    sustainability of our entitlement programs, we have made excellent
    progress in this administration. We look forward to working with you
    and others in going further.
        Question. The budget requests a $1.5 billion allocation for the
    State Small Business Credit Initiative (SSBCI). The SSBCI supports
    ``State capital access programs, collateral support programs, loan
    participation programs, loan guarantee programs, and venture capital
    programs.'' The Federal Government has an entire agency, the Small
    Business Administration, dedicated to small business financial support,
    including capital access and loan guarantees for small businesses.
        Can you explain what is unique about the eligible activities of
    Treasury's SSBCI that are not adequately handled by programs
    administered by the SBA? What advantages does the SSBCI have over SBA
    capital access and loan guarantee programs?
        Answer. SBA loan guarantee programs and the Small Business
    Investment Company (SBIC) program are typically administered federally
    and directly through financial intermediaries with little to no
    interaction with State or local governments. By contrast, SSBCI was
    designed with flexibility for State and local governments to fund
    programs that best target local small business needs. These programs
    take a wide variety of forms and are typically designed to be
    complementary to SBA programs rather than redundant. This is because
    SSBCI also provides States incentives to deploy funding in support of
    small business financing expeditiously and efficiently \3\ meaning
    States also have an incentive to design programs that do not compete
    with SBA programs for small businesses seeking credit.
    ---------------------------------------------------------------------------
        \3\ SSBCI funds are disbursed in three increments and Participating
    States must expend, obligate, or transfer at least 80 percent of a
    disbursement before qualifying for the next disbursement. In addition,
    this must be completed within the 7-year program authorization.
    ---------------------------------------------------------------------------
        State credit support programs have been active in their various
    forms for decades, co-exiting with SBA programs, but have struggled to
    maintain funding through State fiscal cycles. Extending SSBCI would
    give these programs a consistent source of funds and local leaders
    would have the resources they need to support economic development in
    their communities. Below are some of the ways State credit support
    programs complement SBA:

      --The ability to support loans to non-profits. Non-profit
            organizations provide crucial human services and create jobs.
            However they often face challenges securing financing because,
            by definition, they tend not to build strong balance sheets
            through retained earnings. SSBCI allows States to enroll loans
            to non-profits in credit support programs. For example:

        --The New Mexico Finance Authority (NMFA) provided a $241,000
                subordinate loan participation enabling a bank to extend a
                $1.6 million loan to purchase and renovate the new Greater
                Albuquerque Habitat for Humanity headquarters and Habitat
                Restore.\4\
    ---------------------------------------------------------------------------
        \4\ SSBCI Quarterly Report as of September 30, 2014.
    ---------------------------------------------------------------------------
        --The Virginia Small Business Financing Authority used its Cash
                Collateral Program to support a loan to It's About Time, a
                social service provider for individuals with intellectual
                disabilities. As a result of the transaction, the
                organization upgraded and doubled the size of its facility.
                The company employs 76 people and will add 18 to 20 jobs as
                a result of the expansion.\5\
    ---------------------------------------------------------------------------
        \5\ SSBCI Quarterly Report as of December 31, 2014

      --Many small banks don't participate in SBA programs. Some small
            banks do not do a high enough volume of loans to justify the
            administrative cost of managing an SBA lending operation. State
            credit support programs offer an alternative to community banks
            that would like to be able to support underserved borrowers.
      --Capital Access Programs (CAPs) effectively support small dollar
            loans. CAPs provide a loss reserve on a portfolio of loans at
            each participating lending institution. The State matches
            contributions to the loss reserve by the borrower and the bank.
            While SBA does have other programs targeting small dollar
            transactions, it does not operate CAPs as defined in the Small
            Business Jobs Act of 2010. Through 2014, approximately 90
            percent of all SSBCI CAP loans were for less than $100,000 and
            many were as low as a few thousand dollars.
      --All banks, credit unions, and Community Development Financial
            Institutions (CDFIs) are eligible to enroll loans in SSBCI
            programs subject to review by the States. The flexibility to
            support CDFI loans allows SSBCI to reach businesses in
            underserved communities. Approximately 41 percent of all
            transactions supported by SSBCI since 2011 have been to
            businesses located in low- or moderate-income communities.

        States also use SSBCI funds to support investment in small
    businesses. The State-sponsored investment programs funded by SSBCI are
    different in kind from the SBA's SBIC program in that they generally
    target earlier stage businesses with equity investment or flexible debt
    instruments. The SBIC program requires current interest payments
    limiting small businesses recipients to companies mature enough to
    service debt. A more patient source of capital is necessary to launch
    and grown new businesses.
        Oklahoma directed its entire SSBCI allocation to an investment
    program administered by i2E, a private, non-profit corporation that
    helps entrepreneurs, companies, inventors and researchers turn their
    innovations into high growth business opportunities for Oklahoma. For
    example, using SSBCI funds, i2E invested in Oklahoma City-based Selexys
    Pharmaceuticals, which is developing a treatment for Sickle Cell
    Disease, and WeGoLook, also based in Oklahoma City, that provides site
    inspection services. i2E's investments in these companies were
    catalytic given the scarcity of co-investment partners in Oklahoma.
        Thirty-seven other States directed some portion of their SSBCI
    program to programs supporting high-growth potential early-stage
    companies. State economic developers see these programs as part of a
    long-term strategy to retain talent and technology in State and grow
    local businesses with the potential to create high-wage jobs.
        In these ways, SSBCI can also be seen as creating a State-led
    laboratory for the development of and improvement of small business
    finance support. The SBA programs work very well for a large population
    of business borrowers, but States are experimenting with ways to reach
    businesses outside of the SBA universe. Extending SSBCI will build on
    the momentum of the program's first round of funding and strengthen the
    Federal Government's relationships with State economic development
    agencies which are highly responsive to capital needs in local markets.
        Question. The fiscal year 2016 budget request for Community
    Development Financial Institutions (CDFIs) is $233.5 million. Part of
    the CDFI's responsibility is to receive and dole out the allocations
    provided under the New Markets Tax Credit (NMTC) program. The NMTC is
    supposed to ``encourage investors to make investments in impoverished,
    low-income communities that traditionally lack access to capital.''
    However, according to the Congressional Research Service (CRS), ``as a
    result of the definition of qualified LICs, virtually all of the
    country's census tracts are potentially eligible for the NMTC.''
    Moreover, there have been numerous examples of NMTC financing for
    frivolous projects outside of low-income census tracks, including the
    expansion of the world's largest aquarium in Atlanta.

      --Is the New Markets Tax Credit program appropriately tailored to
            meet its purpose of serving impoverished communities, despite
            the fact that ``virtually all of the country's census tracts
            are potentially eligible'' for the credit?
      --Is subsidizing the expansion of an aquarium in Atlanta an
            appropriate use of NMTC resources?

        Answer. Nationally, 40.8 percent of all 74,000 census tracts are
    eligible for the NMTC Program. The New Markets Tax Credit Program
    requires that all investment be made in low-income census tracts. To
    qualify for the program, a community must have a poverty rate of at
    least 20 percent or median family income of 80 percent or less.
    Further, the NMTC Program gives competitive preference for transactions
    located in highly distressed communities, defined as a poverty rate of
    30 percent or greater; median income of 60 percent or less; or an
    unemployment rate of 1.5 times the national average. Seventy-five
    percent of NMTC transactions are located in highly distressed census
    tracts.
        The Atlanta Aquarium is located in a census tract with a poverty
    rate of 46.6 percent based on the U.S. Census' 2006-2010 American
    Community Survey 5-year estimates, qualifying it as a highly distressed
    census tract. In addition, this project brought revitalization to the
    community by creating 756 jobs, of which 473 are permanent, including
    many entry-level positions, among other benefits.
        Museums comprise a small percentage of the overall NMTC portfolio--
    less than 5 percent. But the profile of the community--high poverty
    rates and severe economic distress--is precisely what the NMTC was
    intended to target. Museums and cultural amenities are often a small
    but very important part of a comprehensive revitalization plan for many
    urban and rural communities. In addition to the jobs, investment, and
    foot traffic they bring to local small businesses, these organizations'
    programming, education, and outreach efforts deliver intangible
    benefits to the surrounding low income community.
                                     ______

                Questions Submitted by Senator Richard J. Durbin
        Question. I applaud the action taken by the administration last
    September to reduce the economic benefits associated with corporate
    inversions by issuing temporary regulations under Section 7874 of the
    Internal Revenue Code.
        Is Treasury considering additional rules changes that would
    eliminate incentives for corporations to avoid paying U.S. taxes by
    inverting? Specifically, would Treasury consider rules to prevent
    abusive earnings stripping practices, perhaps using authority under
    Section 385 of the Internal Revenue Code? Does Treasury have authority
    to prevent corporations from structuring an inversion in a way to
    shield shareholders from gain recognition, as is reportedly being done
    in the Burger King-Tim Horton's merger?
        Answer. The Treasury Department and the IRS expect to issue
    additional guidance to further limit inversion transactions that are
    contrary to the purposes of section 7874 and the benefits of post-
    inversion tax avoidance transactions. In particular, the Treasury
    Department and the IRS are considering guidance to address strategies
    that avoid U.S. tax on U.S. operations by shifting or ``stripping''
    U.S.-source earnings to lower-tax jurisdictions, including through
    intercompany debt and have requested comments on this topic.
        Moreover, Treasury is aware that certain structures are being used
    to shield shareholders from gain recognition in the context of
    inversion transactions. We addressed certain structures in Notice 2014-
    52, as well as earlier in 2014 in Notice 2014-32 (which, among other
    things, limited the ability of shareholders to avoid gain through the
    use of so-called Killer B structures). We continue to consider what
    additional steps we may take.
        However, there are limits to what Treasury can do without
    legislative action by Congress. As we have consistently said, business
    tax reform that contains specific anti-inversion legislation is the
    most effective way to fully address these transactions.
        Question. A government-wide ban on inverted corporations receiving
    Government contracts has been included in appropriations bills since
    2008, preventing a company from profiting from doing business with the
    Government while avoiding paying U.S. taxes by inverting. However, a
    Bloomberg article from July 8, 2014, ``Tax Runaways Win Billions in
    U.S. Contracts Despite Bans,'' outlines several cases where inverted
    companies continue to receive Government contracts.
        How can Treasury and the IRS better work with other Federal
    agencies to ensure companies that have inverted do not receive Federal
    Government contracts?
        Answer. The President's fiscal year 2016 budget proposal contains a
    proposal, ``Limit the Ability of Domestic Entities to Expatriate,''
    that would (among other things) provide the Internal Revenue Service
    with authority to share tax return information with Federal agencies
    for the purpose of administering an agency's anti-inversion rules.
    Federal agencies receiving this information would be subject to the
    safeguarding and recordkeeping requirements under section 6103.
        Unfortunately, information sharing alone will not fully address the
    problem. This is because the anti-inversion statutes applicable to
    other agencies in administering contract prohibitions generally are not
    same as the anti-inversion provision included in the Internal Revenue
    Code (section 7874). Furthermore, the regulations and guidance issued
    by the Treasury under section 7874 (for example, Notice 2014-52)
    generally are not applicable for purposes of applying other anti-
    inversion statutes. Improvements in this area result if consideration
    would be given to defining an inversion transaction by reference to
    section 7874 of the Internal Revenue Code in drafting future
    legislation related to banning Government contracts for inverted
    companies.
                                     ______

                   Questions Submitted to Hon. John Koskinen
                  Questions Submitted by Senator John Boozman
                        information technology security
        Question. The IRS is responsible for safeguarding a vast amount of
    sensitive financial and personal data, processing returns that contain
    confidential information for over 100 million taxpayers. The agency
    needs to protect taxpayer information from misuse, improper disclosure,
    or destruction. This responsibility is even more complex given the vast
    amount of date being sent and exchanged as part of the Affordable Care
    Act.
        TIGTA has consistently ranked protection of taxpayer data as one of
    the highest priority challenges facing the IRS. In addition, GAO noted
    that although the IRS is making progress in addressing information
    security, weaknesses remain that could affect the confidentiality,
    integrity, and availability of financial and sensitive taxpayer data.
        TIGTA's fiscal year 2014 Federal Information Security Management
    Act report identified four security program areas which were not fully
    effective due to one or more Department of Homeland Security (DHS)
    guideline program attributes that were not met. The TIGTA noted that
    the IRS had not yet implemented its Information Security Continuous
    Monitoring strategy, and that the IRS did not always report incidents
    involving Personally Identifiable Information to the U.S. Computer
    Emergency Response Team (US-CERT) within established timeframes. The
    report also noted that the IRS had not yet fully implemented a process
    for identifying and tracking contractors who are required to complete
    specialized training, and had not fully implemented unique user
    identification and authentication that complies with Homeland Security
    Presidential Directive-12 (HSPD-12).
        In that report, the TIGTA noted that until the IRS takes steps to
    improve its security program deficiencies and fully implements all 11
    security program areas required by the FISMA, taxpayer data will remain
    vulnerable to inappropriate use, modification, or disclosure, possibly
    without being detected.
        Would you please update the subcommittee with specific information
    on the status of the IRS' progress on addressing these deficiencies?
        Answer. The security and privacy of taxpayer information and the
    integrity of the IRS's systems continues to be sound, and the IRS
    remains committed to the ongoing programs to manage the security risks
    in the IT infrastructure as required by the Federal Information
    Security Management Act, National Institute of Standards and Technology
    guidance, and other appropriate standards. The IRS continues to improve
    its Cybersecurity Program focusing on managing information security
    risk on a continuous basis; monitoring the security controls in IRS
    information systems and the environments in which those systems operate
    on an ongoing basis; and maintaining ongoing awareness of information
    security.
        As responses to the TIGTA audits mentioned above, the following
    actions are occurring as resources allow:

      --The Department of the Treasury (Treasury) recently published the
            Enterprise level approach for Information Security Continuous
            Monitoring (ISCM) in February 2015 to ensure standardization
            across the Bureaus. The IRS is currently aligning its practices
            and methodologies to enable ongoing authorizations to improve
            the IRS's security posture through informed risk management
            decisionmaking.
      --The IRS understands the importance of timely reaction, including
            reporting to Treasury/US-CERT, and makes every effort to report
            expeditiously. The IRS implemented enhancements to its incident
            reporting system interface during late 2014. These enhancements
            streamlined the process by which IRS employees report both IT
            and paper-based inadvertent disclosures and allows for an
            accelerated processing of received incidents within the
            Incident Response program. Combined with ongoing Service-wide
            training on data protection and employee reporting
            responsibilities, these enhancements will ensure continued
            timeliness, compliant with OMB standards for incident
            reporting, response, and notification.
      --The IRS has updated its contractual obligations to ensure the
            requirement for completing specialized training is documented
            in all IT contracts and is in the process of developing the
            ability to track contractors completing specialized security
            training. The IRS anticipates maturing the tracking and
            accountability progress during the summer of 2015.
      --While progress has been hampered by declining budget, the IRS
            continues in its efforts to comply with HSPD-12. Currently
            62.64 percent of IRS's employees are using the HSPD-12 smart
            card for network and remote access. The IRS expects to have
            largely completed its efforts to comply with this portion of
            HSPD 12 by the end of fiscal year 2015.
                                 prisoner fraud
        Question. In the past TIGTA has identified refund fraud committed
    by prisoners as a significant problem for tax administration. Just last
    fall a report noted that refund fraud associated with prisoner Social
    Security Numbers remains a serious problem. The number of fraudulent
    tax returns filed using a prisoner's Social Security Number that were
    identified by the IRS increased from more than 37,000 tax returns in
    calendar year 2007 to more than 137,000 tax returns in calendar year
    2012. The refunds claimed on these tax returns increased from $166
    million to $1 billion.
        According to TIGTA, Treasury has the authority to share information
    with the Federal Bureau of Prisons and State Departments of Corrections
    to help determine if prisoners may have filed or help the filing of a
    fraudulent return.
        Has the IRS shared fraudulent prisoner tax return information with
    Federal or State prison officials?
        Answer. The Internal Revenue Code (IRC) 6116 requires the Bureau of
    Prisons (BOP) and Departments of Corrections (DOCs) to provide the IRS
    with certain information about all incarcerated individuals on an
    annual basis. Under section 6116, the IRS receives information from the
    BOP, all 50 States, and the District of Columbia. With this data, the
    IRS builds a ``prisoner file'' which is the cornerstone of our efforts
    to prevent the issuance of fraudulent refunds to individuals filing
    false tax returns using prisoner Social Security Numbers (SSNs). The
    IRS processing systems use this prisoner file to identify returns filed
    under prisoner SSNs and to identify potential fraud and other
    compliance issues that may arise when an individual is incarcerated.
    The IRS continues to use this data and work with the corrections
    agencies to improve the quality and reliability of the data they
    provide to us each year.
        The IRS continues to work with the BOP and the Departments of
    Corrections (DOCs) to secure Memoranda of Understanding (MOU) to
    authorize the IRS to disclose prisoner tax return information under IRC
    6103(k)(10). This information would allow Federal and State prison
    officials to take actions against prisoners who commit refund fraud.
        As of March 23, 2015, the IRS has completed MOUs with 7 State
    correctional authorities (Mississippi, South Carolina, Illinois,
    Vermont, North Dakota, Colorado, and Wyoming); 13 State DOCs have
    declined to participate. We continue to work the issues and concerns of
    the remaining State agencies and the BOP. The IRS remains committed to
    addressing agencies' concerns related to enrolling in this program so
    they may begin receiving inmate tax return information from the IRS.
        In addition, we are working with the Social Security Administration
    (SSA) to allow the IRS access to the SSA database of prisoners under
    authority provided in the Bipartisan Budget Act of 2013. The SSA
    receives prisoner information directly from a number of correction
    agencies, including local jails. But until December 2013, the SSA did
    not have the authority to share the data with the IRS for tax
    administration purposes. This information from the SSA could
    significantly expand the number of records in the IRS prisoner file.
        The IRS continues to inform the Federal and State prison officials
    about the ``Blue Bag'' program, an important IRS program aimed at
    detecting prisoner tax fraud. Through the Blue Bag program, prisons
    send prisoner tax forms, correspondence, and other tax-related
    documents to a special IRS address for additional review. IRS analysts
    review the prisoner tax returns and correspondence to take appropriate
    actions.
        Question. Please provide the subcommittee with the most recent
    annual prisoner fraud report to Congress.
        Answer. The Calendar Year (CY) 2012 and 2013 reports are attached.

        [Clerk's note: The Calendar Year 2012 and 2013 reports are included
    as an appendix at the end of the hearing transcript.]

        Question. Has the Commissioner, Wage and Investment Division,
    established a Memoranda of Understanding with the Federal Bureau of
    Prisons and all State Departments of Corrections?
        Answer. The IRS receives data from the BOP and State DOCs. This
    data allows the IRS to detect fraudulent returns filed with prisoner
    SSNs. The IRS continues to work with the BOP and DOCs to establish a
    Memorandum of Understanding (MOU) to authorize the IRS to disclose
    prisoner tax return information under IRC 6103 (k)(10). This
    information would allow Federal and state prison officials to take
    action against prisoners who commit refund fraud.
        As of March 23, 2015, the IRS has completed MOUs with seven state
    correctional authorities (Mississippi, South Carolina, Illinois,
    Vermont, North Dakota, Colorado, and Wyoming); 13 State DOCs have
    declined to participate. We continue to work the issues and concerns of
    the remaining State agencies and the BOP. The IRS remains committed to
    addressing agencies' concerns related to enrolling in this program so
    they may begin receiving inmate tax return information from the IRS.
        Question. Has the IRS developed processes to identify tax returns
    filed that have the same characteristics of confirmed fraudulent
    prisoner tax returns? If no why not?
        Answer. The IRS has developed a methodology to identify returns
    filed with prisoner SSNs that meet certain characteristics. In
    addition, we are able to prevent prisoner fraud by identifying claims
    for refunds filed using a prisoner's SSN. These returns receive
    increased scrutiny.
        Question. Has the IRS determined whether these tax returns should
    be included in the annual report to Congress?
        Answer. Yes, we report all known false and fraudulent returns filed
    under the SSN of a prisoner in the annual report to Congress.
        Question. Has the IRS ensured that all tax returns that are filed
    using a prisoner Social Security Number are assigned a prisoner
    indicator?
        Answer. A prison indicator is assigned on returns filed under SSNs
    of prisoners that meet our Electronic Fraud Detection System (EFDS)
    data mining rule and are requesting a refund. We monitor this indicator
    as part of our internal management system.
        The fraud filters identify tax returns claiming refunds and select
    returns in which the primary (primary and/or secondary on a joint
    return) Social Security Number matches the annual prisoner file.
    Returns with prisoner SSNs are reviewed by IRS tax examiners to verify
    the income and withholding amounts reported on a return, and the
    refundable credits claimed on the return. If items cannot be verified,
    the refund claim is denied.

        As a result:

      --The number of fraudulent tax returns filed using a prisoner's SSN
            (identified by the IRS) decreased from over 137,000 tax returns
            in calendar year (CY) 2012 to less than 56,000 tax returns in
            CY 2014 (preliminary findings);
      --Refunds claimed on these tax returns increased from $1 billion in
            CY 2012 to $1.8 billion in CY 2014 (preliminary findings);
      --IRS stopped $1.8 billion in fraudulent refunds in CY 2014, up from
            $936 million in CY 2012 (preliminary findings).

        Question. Has the IRS identified and addressed the cause of the
    cases TIGTA found that were not identified with a prisoner indicator?
        Answer. We have made programing changes for filing season 2015.
    These tax returns are now sent through the filters specific to the
    prisoner filed tax returns, and receive one of the prisoner indicators.
        Question. According to the TIGTA, a computer programming error
    resulted in the IRS not assigning a prisoner indicator to 3,139 tax
    returns TIGTA identified. Without the proper assignment of a prisoner
    indicator, the tax returns are not sent through those fraud detection
    filters specific to a prisoner-filed tax return.
        Has the IRS corrected this error?
        Answer. Please see the previous response.
                               performance awards
        Question. This year, you made the decision to spend almost $67
    million in fiscal year 2015 funds to pay out performance awards to
    employees, managers and executives for fiscal year 2014. The previous
    commissioner had made the decision to suspend awards because of funding
    pressures and the need to fund more critical priorities.
        Previously you have stated ``Some may ask if the award money would
    be better spent in other ways. Following my visits with employees in
    recent weeks, I believe the answer is clear: This money is best spent
    on our existing employees.'' Would you please explain why these awards
    took priority over funding other mission critical activity, such as
    taxpayer services?
        Answer. The IRS senior leadership uses a deliberate decisionmaking
    process to determine priorities based on a variety of factors,
    including whether it is statutorily mandated or discretionary. The
    Service then allocates available appropriated resources against those
    requirements. We then determine the unfunded mission critical
    requirements and identify what additional resources are available from
    other sources, such as user fees or reimbursable services, and allocate
    those resources against the Servicewide requirement.
        As part of our ongoing investment in our workforce, the IRS will
    continue to recognize qualifying employees who do exceptional work. It
    is also important to point out that the IRS recently achieved
    significant cost savings in this area. As a result of negotiations with
    the National Treasury Employees Union (NTEU) concluded last year, the
    overall pool for awards was reduced to about 1 percent of the employee
    salary base, which is about $42 million less than the 1.75 percent
    provided in previous years.
        The IRS has a contractual obligation with the Union to pay awards,
    and in the interest of fairness, applied the same treatment to its non-
    Union employees. Beyond our contractual obligations, one of the
    agency's highest priorities is its people. Rewarding high-performing
    employees is a vital investment for the Nation's tax system and the
    IRS. Since fiscal year 2010, the IRS has 13,000 fewer employees, but is
    still processing tax returns and refunds during the filing season and
    running a tax system with new mandates, all the while ensuring the
    Nation collects nearly $3 trillion in revenue to fund everything from
    defense to social programs. Performance awards are a good investment
    that pays off--and they reflect the hard work the staff does on a daily
    basis for the Nation.
                      awards to employees with misconduct
        Question. Previously TIGTA did a review of IRS performance
    awards.That review found that more than 2,800 employees with recent
    substantiated conduct issues resulting in disciplinary action received
    more than $2.8 million in monetary awards, more than 27,000 hours in
    time-off awards, and 175 quality step increases. Among these, more than
    1,100 IRS employees with Federal tax compliance problems received more
    than $1 million in cash awards, more than 10,000 hours in time-off
    awards, and 69 quality step increases within a year after the IRS
    substantiated their tax compliance problem.
        According to the review, with few exceptions, the IRS does not
    consider tax compliance or other misconduct when issuing performance
    awards or most other types of awards. The IRS code makes mandatory the
    removal of IRS employees who are found to have intentionally committed
    certain acts of misconduct, including willful failure to pay Federal
    taxes. According to TIGTA, providing awards to employees with conduct
    issues, especially those who fail to pay Federal taxes, appears to be
    in conflict with the law.
        Given the serious need to restore the credibility of the IRS, does
    management consider conduct issues resulting in disciplinary actions,
    especially the nonpayment of taxes, before giving out all types of
    awards?
        Answer. Effective for the 2014 performance awards the IRS
    implemented measures to ensure that any IRS employee who violates
    Section 1203(b) of the IRS Restructuring and Reform Act of 1998 is
    ineligible to receive a performance award. Section 1203(b) addresses
    certain employee misconduct, including the willful failure to file
    taxes, the understatement of Federal tax liability, and threatening
    taxpayers.
        No IRS employee will be eligible for a discretionary or performance
    award (including bilingual awards and discretionary pay adjustments,
    such as Quality Step Increases (QSIs), and manager performance-based
    increases), if a final agency decision is made that the employee
    violated Section 1203(b). The ineligibility determination will apply to
    the fiscal year in which the final agency decision is made. In
    addition, employees who are suspended for more than 14 days as a result
    of any misconduct are ineligible for QSI's. When deciding whether to
    deny a performance award to a bargaining unit employee, who is
    otherwise eligible, the IRS must adhere to the terms of the 2012
    National Agreement II between the IRS and the National Treasury
    Employees Union.
        Question. Did any of the awards recently paid out go to employees
    with conduct issues or unpaid taxes?
        Answer. As stated above, employees found in violation of Section
    1203(b) were ineligible for 2014 performance awards, which the IRS paid
    on March 19, 2015.
        Question. Did any of the awards go out to employees subject to
    ongoing investigations relating to the targeting of taxpayers?
        Answer. To the IRS's knowledge, four congressional committees,
    TIGTA and the Department of Justice have been involved in
    investigations concerning alleged targeting of taxpayers. Thus far,
    none of these investigating committees or agencies has identified to
    the IRS specific current employees who are subjects or targets of any
    pending investigations.
        If you have questions about specific individuals, you can contact
    the IRS, or have your staff contact the IRS. However, please note the
    Privacy Act (5 U.S.C. Section 552a) precludes the IRS from responding
    to questions about particular employees in a public setting or
    communication.
        Question. Would you tell us whether employees have actually been
    removed because of misconduct?
        Answer. Employees may be removed for reasons other than misconduct,
    however, between October 1, 2012, and March 20, 2015, a total of 854
    employees were removed because of various types of misconduct either
    during or after their probationary periods.

    ------------------------------------------------------------------------
                                                       Number of Employees
                      Fiscal Year                            Removed
    ------------------------------------------------------------------------
    2012..........................................                      302
    2013..........................................                      248
    2014..........................................                      245
    2015*.........................................                       59
                                                   -------------------------
          Total...................................                      854
    ------------------------------------------------------------------------
    * Total removed between Oct. 1, 2014, and March 20, 2015.

        Question. Would discriminating against a taxpayer be considered
    misconduct?
        Answer. Discriminating against a taxpayer is misconduct and a
    violation of Section 1203(b). An employee can be removed after a final
    administrative or judicial determination of a violation of this
    statute.
        Section 1203(b) specifically covers discrimination-related acts or
    omissions, such as:

      --Violating a taxpayer's or taxpayer's representative's:

        --(A) Rights under the U.S. Constitution, or

        --(B) Civil right established under:

          -- (i)  Title VI or VII of the Civil Rights Act of 1964;
          -- (ii) Title IX of the Education Amendments of 1972;
          -- (iii) the Age Discrimination in Employment Act of 1967;
          -- (iv) the Age Discrimination Act of 1975;
          -- (v) Section 501 and 504 of the Rehabilitation Act of 1973; or,
          -- (vi) Title I of the Americans with Disabilities Act of 1990;

      --Falsifying or destroying documents to conceal mistakes made by an
            IRS employee with regard to a matter involving a taxpayer or
            taxpayer representative;
      --Violating the Internal Revenue Code of 1986, Treasury regulations
            or policies of the Internal Revenue Service, including Internal
            Revenue Manual, for the purpose of retaliating against, or
            harassing, a taxpayer or taxpayer's representative; and
      --Threatening to audit a taxpayer for purpose of extracting personal
            gain or benefit.
                     hiring employees with past misconduct
        Question. A TIGTA report issued in December of last year found that
    between January 2010 and September 2013, IRS records show that the IRS
    hired more than 7,000 former employees (78 percent were temporary or
    seasonal positions).
        It is troubling to learn that in this process the IRS rehired
    hundreds of former employees with performance or conduct issues
    including willful failure to file their Federal tax returns,
    unauthorized access to taxpayer information, leave abuse, falsification
    of official forms, unacceptable performance, misuse of IRS property,
    and off-duty misconduct. The report also found that many employees
    hired with prior substantiated or unresolved conduct or performance
    issues had new conduct or performance issues.
        I understand that IRS wanted to consult with Legal Service to
    determine if consideration of prior conduct and performance issues
    violates Federal regulations.
        Doesn't common sense tell you that the IRS should consider a
    potential employee's previous track record with the agency before
    hiring them again?
        Answer. Yes; therefore, the IRS considers prior conduct and
    performance issues before rehiring a former employee, and believes it
    has sufficient legal basis to do so at any time during the hiring
    process.
                  erroneous tax forms for healthcare.gov users
        Question. According to a disclosure from the Centers for Medicare
    and Medicaid services on February 20, the IRS provided erroneous tax
    information to 800,000 Americans who enrolled in insurance policies
    through Healthcare.gov.
        This is yet another example of the administration's failed
    implementation of the healthcare law and the confusion and frustrations
    countless Americans have experienced. These latest problems could be
    particularly painful for low-income families who were counting on
    receiving a tax refund and must now wait weeks before filing their
    taxes.
        When did the IRS first discover that these forms had been
    incorrectly issued? And when did you personally learn there was a
    problem?
        Answer. As CMS is the provider of these forms, any questions you
    have concerning how and where the error occurred, the timing of the
    error, which consumers were affected, and the extent to which they were
    affected should be directed to CMS. On February 8th, CMS alerted IRS
    staff there was an issue with the second lowest cost Silver plan
    (SLCSP) contained on some Forms 1095-A that CMS provided to consumers
    and IRS staff alerted the Commissioner the following day. It was not
    until the afternoon of February 17th that CMS informed the IRS of the
    known magnitude of the issue, i.e. that over 800,000 Forms 1095-A were
    affected.
                              erroneous tax forms
        Question. Last week, the IRS announced that it would not pursue
    collection of additional taxes from any of the 50,000 taxpayers who
    already filed their taxes using the incorrect forms. IRS officials
    stated some of the mistakes favor the Government and some favor the
    taxpayer, making it basically a wash.
        What authority do you have to suspend enforcement? And what is the
    citation in the Internal Revenue Code upon which you are relying to
    suspend enforcement in this situation?
        Answer. The Secretary and the Commissioner have the authority under
    several sections of the Internal Revenue Code, including but not
    limited to sections 6404 and 7803, not to pursue the collection of
    unpaid taxes in certain circumstances, such as when the administration
    and collection costs involved would not warrant collection of the
    amounts due.
        Question. Would overpayment or underpayment this year affect their
    returns for next year?
        Answer. No. The amount of tax reported for 2014 will not affect the
    amount of tax for 2015.
        Question. How many IRS employees are working to address these
    errors and what will be the total cost to the IRS to resolve this
    situation?
        Answer. As the provider of these forms, any questions you have
    concerning the cost to provide corrected forms should be directed to
    CMS. The IRS accepts roughly billions of information returns every year
    and is very accustomed to receiving corrected information returns in
    the normal course of operations.
        Question. California recently announced it sent incorrect tax forms
    to 100,000 households that received Federal premium subsidies on its
    State exchange.
        Is the IRS planning to allow California residents who underpaid
    Federal taxes to be off the hook?
        Answer. On March, 20, 2015, Treasury announced relief for tax
    filers who enrolled through a State-based Marketplace. That relief was
    similar to the relief it had announced for individuals who enrolled in
    federally facilitated Marketplace qualifying coverage, received an
    incorrect Form 1095-A, and filed his or her tax return based on that
    form.
                                   aca costs
        Question. According to GAO, from 2010 to 2014, the IRS has already
    spent $1.1 billion on implementation of the Affordable Care Act. Your
    fiscal year 2015 budget requested $451 million for ACA and you've
    requested another $490 million in fiscal year 2016, to be supplemented
    with user fees and other resources. The passage of the ACA has had a
    significant impact on the IRS.
        Does the IRS have a comprehensive multi-year strategic plan for
    implementing its significant responsibilities under the Affordable Care
    Act?
        Answer. The IRS's 2014-2017 Strategic Plan (http://www.irs.gov/pub/
    irs-pdf/p3744.pdf) provides for the implementation of the tax
    provisions of the ACA in a timely and straightforward manner, including
    significant IT development and systems modifications. Different tax
    provisions of the ACA are administered by different Business Operating
    Divisions at the IRS. For example, the insurance provider fee under
    section 9010 of the ACA is administered by the Large Business and
    International Division, while the premium tax credit is administered by
    the Wage and Investment Division. These divisions have already
    implemented most of the nearly 50 tax provisions of the ACA. The 2014
    Internal Revenue Service Data Book (http://www.irs.gov/pub/irs-soi/
    14databk.pdf, pages 71-72) contains a summary of the provisions
    implemented through 2014. The schedule of the significant remaining
    provisions to be implemented is as follows:

      --2015.--Accept and validate new voluntary ACA Information Returns
            (employer and provider reporting) (IRC sections 6055 and 6056);
      --2016.--Expand intake and validation for paper and electronic
            submissions of mandatory ACA Information Returns (employer and
            provider reporting) (IRC sections 6055 and 6056);
      --2016.--Enforcement of employer shared responsibility provision (IRC
            section 4980H); and
      --2018.--Implementation of Excise Tax on High-Cost Health Plans (IRC
            section 4980I).

        Question. Will you provide the subcommittee with a copy of that
    plan including expected milestones and a detailed breakdown of the
    source of these funds that will be used to implement the plan, how
    funds have been spent so far, and an estimate of on-going costs of the
    implementation?
        Answer. Please see the previous response for links to the IRS's
    Strategic Plan. Below is a table showing amounts spent to date on each
    provision, as well as the projected funding for fiscal year 2015 and
    request for fiscal year 2016.

                                                 ACA ACTUALS BY FUNCTION
                                            FISCAL YEAR 2010-FISCAL YEAR 2012
    ----------------------------------------------------------------------------------------------------------------
                                     Taxpayer Services      Enforcement      Operations Support         Total
                                   ---------------------------------------------------------------------------------
                                      $000       FTE      $000       FTE       $000       FTE       $000       FTE
    ----------------------------------------------------------------------------------------------------------------
    Fiscal Year 2010:
        Administer New Fees on      ........  ........       345         1  .........  ........        345         1
         Drug Manufacturers and
         Health Insurers..........
        Strengthen Oversight of            5  ........       407         3          2  ........        414         3
         Exempt Hospitals.........
        Promoting Compliance with        130         1       674         4         22  ........        826         5
         Other New Provisions.....
        Program Management........  ........  ........  ........  ........        122  ........        122         0
        Support of Implementation          4  ........     2,356        14  .........  ........      2,360        14
         & Taxpayer Issues (e.g.
         Counsel, Appeals)........
        Customer Service Support       1,209         9        61         1         29  ........      1,299        10
         (Outreach, Phones & Other
         Support).................
        Information Technology,     ........  ........  ........  ........     15,340  ........     15,340         0
         Operations & Support &
         Infrastructure/Deliver
         New Tax Credits &
         Individual Coverage
         Requirement..............
                                   ---------------------------------------------------------------------------------
            Fiscal Year 2010 Total    $1,348        10    $3,843        23    $15,515         0    $20,706        33

    Fiscal Year 2011:
        Administer New Fees on             0  ........       667         4  .........  ........        667         4
         Drug Manufacturers and
         Health Insurers..........
        Strengthen Oversight of           39  ........     4,476        39         10  ........      4,525        39
         Exempt Hospitals.........
        Promoting Compliance with        373  ........    11,160        89        109         1     11,642        90
         Other New Provisions.....
        Program Management........         0  ........        35         1      8,331        41      8,366        42
        Support of Implementation         96         1     4,913        30  .........  ........      5,009        31
         & Taxpayer Issues (e.g.
         Counsel, Appeals)........
        Customer Service Support       3,359        42     2,563        34         97         1      6,019        77
         (Outreach, Phones & Other
         Support).................
        Information Technology,            0  ........         0  ........    131,928       294    131,928       294
         Operations & Support &
         Infrastructure/Deliver
         New Tax Credits &
         Individual Coverage
         Requirement..............
                                   ---------------------------------------------------------------------------------
            Fiscal Year 2011 Total    $3,867        43   $23,814       197   $140,475       337   $168,156       577

    Fiscal Year 2012:
        Administer New Fees on      ........  ........     1,136         8  .........  ........      1,136         8
         Drug Manufacturers and
         Health Insurers..........
        Strengthen Oversight of          168         1     3,859        34          2  ........      4,029        35
         Exempt Hospitals.........
        Promoting Compliance with        258         2     8,035        65  .........  ........      8,293        67
         Other New Provisions.....
        Program Management........         6  ........       105         0     17,798        49     17,909        49
        Support of Implementation         16  ........     5,158        37  .........  ........      5,174        37
         & Taxpayer Issues (e.g.
         Counsel, Appeals)........
        Customer Service Support       2,291        32     2,354        32         66  ........      4,711        64
         (Outreach, Phones & Other
         Support).................
        Information Technology,     ........  ........  ........  ........    257,961       407    257,961       407
         Operations & Support &
         Infrastructure/Deliver
         New Tax Credits &
         Individual Coverage
         Requirement..............
                                   ---------------------------------------------------------------------------------
            Fiscal Year 2012 Total    $2,739        35   $20,647       176   $275,827       456   $299,213       667
                                   =================================================================================
    Total Fiscal Year 2010-2012...    $7,954        88   $48,304       396   $431,817       793   $488,075     1,277
    ----------------------------------------------------------------------------------------------------------------

                                                 ACA ACTUALS BY ACCOUNT
                         FISCAL YEAR 2013 AND FISCAL YEAR 2014 WITH FISCAL YEAR 2015 PROJECTION
    ----------------------------------------------------------------------------------------------------------------
                                    Taxpayer Services       Enforcement      Operations Support         Total
                                  ----------------------------------------------------------------------------------
                                      $000       FTE      $000       FTE       $000       FTE       $000       FTE
    ----------------------------------------------------------------------------------------------------------------
    Fiscal Year 2013:
        Administer New Fees on     .........  ........     1,509        10  .........  ........      1,509        10
         Drug Manufacturers and
         Health lnsurers.........
        Promoting Compliance With        211         1     9,036        71        112         1      9,359        73
         Other New Provisions....
        Strengthen Oversight of           34  ........     3,464        30         29  ........      3,527        30
         Exempt Hospitals........
        Administer Adoption        .........  ........       241         3  .........  ........        241         3
         Credit..................
        Support of lmplementation         46  ........     5,020        32  .........  ........      5,066        32
         & Taxpayer Issues
         (Counsel, Appeals & TAS)
        Applications Development/  .........  ........  ........  ........    248,694       446    248,694       446
         Systems Software
         Contracts Systems
         Testing & Delivery......
        Program Management,              225         2        38  ........     11,556        58     11,819        60
         Business Design and
         Specifications and
         Oversight of Data
         Sharing of Federal Tax
         Information.............
        Customer Service Assist        3,752        47  ........  ........  .........  ........      3,752        47
         Taxpayers...............
                                  ----------------------------------------------------------------------------------
            Fiscal Year 2013          $4,268        50   $19,308       146   $260,391       505   $283,967       701
             Total...............

    Fiscal Year 2014:
        Administer New Fees on     .........  ........     2,133        14  .........  ........      2,133        14
         Drug Manufacturers and
         Health lnsurers.........
        Promoting Compliance With        396         2     6,581        46        194         1      7,171        49
         Other New Provisions....
        Strengthen Oversight of            3         1     2,829        25         25         0      2,857        26
         Exempt Hospitals........
        Assist Taxpayers              11,477       164     1,039        10        803         6     13,319       180
         Understanding ACA lssues
        Support of Implementation        521         4     3,979        24  .........  ........      4,500        28
         & Taxpayer Issues
         (Counsel, Appeals & TAS)
        Applications Development   .........  ........  ........  ........    341,352       628    341,352       628
         Systems Software
         Contracts Systems
         Testing & Delivery......
        Program Management,             -258  ........         4  ........     15,489        51     15,235        51
         Business Design and
         Specifications and
         Oversight of Data
         Sharing of Federal Tax
         Information.............
                                  ----------------------------------------------------------------------------------
            Fiscal Year 2014         $12,139       171   $16,565       119   $357,863       686   $386,567       976
             Total...............

    Fiscal Year 2015 Projection:
        Administer New Fees on     .........  ........     2,337        15  .........  ........      2,337        15
         Drug Manufacturers and
         Health lnsurers.........
        Promoting Compliance With      1,213         9     5,930        45        243         2      7,386        56
         Other New Provisions....
        Strengthen Oversight of          290         2     2,834        24         11  ........      3,135        26
         Exempt Hospitals........
        Assist Taxpayers             110,091     1,628     5,671        84      1,284        10    117,046     1,722
         Understanding ACA lssues
        Support of Implementation     16,433       164     3,809        22  .........  ........     20,242       186
         & Taxpayer Issues
         (Counsel, Appeals & TAS)
        Applications Development   .........  ........  ........  ........    369,591       767    369,591       767
         Systems Software
         Contracts Systems
         Testing & Delivery......
        Program Management,        .........  ........  ........  ........     13,867        56     13,867        56
         Business Design and
         Specifications and
         Oversight of Data
         Sharing of Federal Tax
         Information.............
                                  ----------------------------------------------------------------------------------
            Fiscal Year 2015        $128,027     1,803   $20,581       190   $384,996       835   $533,604     2,828
             Projection Total....
    ----------------------------------------------------------------------------------------------------------------

        For fiscal year 2016, the President's budget request includes
    $490.4 million for implementation of the Affordable Care Act. Those
    funding requirements are further explained in the chart below:

                                       FISCAL YEAR 2016 AFFORDABLE CARE ACT (ACA)
                                                 [Dollars in thousands]
    ----------------------------------------------------------------------------------------------------------------
                                     Taxpayer Services      Enforcement      Operations Support         Total
                                   ---------------------------------------------------------------------------------
                                      $000       FTE      $000       FTE       $000       FTE       $000       FTE
    ----------------------------------------------------------------------------------------------------------------
    Fiscal Year 2015 Enacted:
        Reinvestment:
            Expand Telecom          ........  ........  ........  ........     16,025  ........     16,025  ........
             Infrastructure to
             Handle Increased
             Demand...............
                                   ---------------------------------------------------------------------------------
                Subtotal Fiscal     ........  ........  ........  ........    $16,025  ........    $16,025  ........
                 Year 2016 Changes
                 to Base..........

    Fiscal Year 2016 ACA Program
     Increases:
        Improve Taxpayer Services.    78,343     1,231  ........  ........     23,154         7    101,497     1,238
        Address Impact of                108         1    44,775       432     22,323        50     67,206       483
         Affordable Care Act (ACA)
         Statutory Requirements...
        Implement Information       ........  ........  ........  ........    305,645       818    305,645       818
         Technology (IT) Changes
         to Deliver Tax Credits
         and Other Requirements...
                                   ---------------------------------------------------------------------------------
            Subtotal Fiscal Year     $78,451     1,232   $44,775       432   $351,122       875   $474,348     2,539
             2016 ACA Program
             Increases............
                                   ---------------------------------------------------------------------------------
    Total Fiscal Year 2016 ACA       $78,451     1,232   $44,775       432   $367,147       875   $490,373     2,539
     Budget Request...............
    ----------------------------------------------------------------------------------------------------------------

        Question. Will you also provide us with specific information on the
    impact of ACA implementation on the IRS's ability to carry out its core
    mission responsibilities?
        Answer. The tax provisions of ACA are a core activity of the
    Service, like all other tax administration. The IRS does not consider
    customer service and enforcement and implementation of the ACA distinct
    priorities. No funds have been appropriated to the IRS for ACA
    implementation, including the increased demand for customer service and
    enforcement as a result of the legislative changes. To help fund
    implementation, the IRS has relied on a mix of base appropriations and
    external sources, including the Health Insurance Reform Implementation
    Fund and user fee collections. As we move forward, the President's
    budget outlines the investments that would ensure IRS is able to
    successfully deliver its core mission. The IRS will continue to balance
    its requirements and funding availability to ensure accomplishment of
    mission critical requirements. The IRS will continue to review and
    evaluate all risks, plan to mitigate those risks, and manage residual
    risk to implement all legislative requirements while reducing the
    burden on the taxpaying public and its staff. Approving the President's
    budget would greatly enhance the ability to do this. Funding below this
    request will, for example, delay critical IT upgrades for aged hardware
    and other infrastructure assets, with 52 percent approaching end-of-
    life in fiscal year 2016; delay upgrades for operating systems and
    middleware that support our current production environment, many of
    which are slipping to 3 and 4 versions behind current; delay roll-out
    of our converged networks initiative for more efficient and cost-
    effective voice and data system consolidation and hinder the IRS's
    efforts to move to a CloudFirst technology platform and reap
    efficiencies by moving toward this new platform.
                               aca implementation
        Question. The TIGTA has identified significant concerns about
    potential fraudulent claims related to premium tax credits and the
    security of Federal tax data as the IRS provides data to health
    exchanges. The IRS is also administering penalties related to the
    individual mandate and may be trying to seek collection of premium tax
    credits provided to ineligible taxpayers and collection of overpayments
    of tax credits.
        The IRS continues to report that more than 20 percent of Earned
    Income Tax Credit (EITC) payments are issued improperly each year. How
    is the IRS ensuring that implementation of the premium tax credit isn't
    being plagued with the same problems?
        Answer. An individual is not entitled to the premium tax credit
    unless the individual was enrolled in qualifying Marketplace coverage
    for at least 1 month during the year. At the time the individual files
    his or her income tax return, the IRS has data from the Marketplaces
    indicating whether the person had qualifying Marketplace coverage, who
    in the family was covered, amount of premiums paid and whether the
    individual received advance payments of the premium tax credit. Thus,
    unlike the EITC, the IRS has probative third party information at the
    time the return is filed that will be used to minimize the likelihood
    that a fraudulent claim for credit will be successful. In addition, the
    IRS has other fraud filters and tools to detect and deter taxpayers
    from filing fraudulent tax returns.
        Question. How is the IRS planning to seek collection of premium tax
    credits provided to ineligible taxpayers and collection of overpayments
    of tax credits?
        Answer. As indicated in the previous response, the IRS has third
    party information from the Marketplaces that can be used to determine
    whether or not an individual is entitled to the premium tax credit.
    Before the IRS processes claims for premium tax credit, it may
    correspond with taxpayers if additional information is required. If
    necessary the IRS will use its normal collection processes to recover
    erroneous payments of the premium tax credit. Erroneous premium tax
    credit payments can be recovered through future refund offsets.
                                   user fees
        Question. The IRS collects a long list of fees it charges for
    services provided to taxpayers. Those fees are then used to supplement
    appropriations made to the IRS. To use the funds, the IRS simply has to
    submit a user fee spend plan with justification to OMB. The fiscal year
    2016 budget anticipates $450 million in user fees. In fiscal year 2015,
    the IRS anticipates $480 million in fees and plans to spend $384
    million on Operations Support, which includes $220 million on ACA
    information technology needs. The IRS is on track to spend over $475
    million in user fees on ACA from fiscal year 2013 through fiscal year
    2015.
        Please provide the subcommittee with specific information as to how
    you decide how to allocate those fees? Why did you decide to spend $220
    million on ACA implementation in fiscal year 2015 but only $45 million
    on Taxpayer Services?
        Answer. The IRS's senior leadership uses a deliberate
    decisionmaking process to determine priorities based on a variety of
    factors, including whether it is statutorily mandated or discretionary.
    The Service then allocates available appropriated resources against
    those requirements. We then determine the unfunded mission critical
    requirements and identify what additional resources are available from
    other sources, such as user fees or reimbursable services, and allocate
    those resources against the Servicewide requirement.
        The IRS determines the distribution of user fees based on a
    detailed review of agency-wide requirements and the total IRS funding
    availability in a given year. The fiscal year 2015 budget reduction
    necessitated a series of difficult decisions. These decisions included
    developing and implementing a user fee spend plan that will allow the
    Service to fund mission critical requirements, including unfunded
    legislative mandates, IT operations and maintenance, life cycle
    replacement, modernization, and improving online and toll-free customer
    services.
                                 identity theft
        Question. Identity theft tax refund fraud is a persistent, evolving
    threat which has a significant impact on tax administration. According
    to GAO, the IRS estimates it paid $5.2 billion in fraudulent identity
    theft refunds in filing season 2013, while preventing $24.2 billion
    (based on what it could detect).
        According to GAO, IRS does not know the full extent of the
    occurrence of identity theft. Officials said that they count the refund
    fraud cases that IRS identifies but that they do not estimate the
    number of identity theft cases that go undetected. Unless IRS pursues a
    criminal investigation, IRS generally does not know the real identity
    of the thieves or whether a fraudulent return is an individual attempt
    or part of a broader scheme.
        IRS officials have also told GAO that the agency does not
    systematically track characteristics of known identity theft returns,
    including the type of return preparation (e.g., paid preparer or
    software), whether the return is filed electronically or on paper, or
    how the individual claimed a refund (e.g., check, direct deposit, or
    debit card).
        Given the enormity of this problem and the impact on innocent
    taxpayers, how is the IRS working with other agencies to leverage
    resources and coordinate efforts to address a problem which is growing
    exponentially?
        Answer. The IRS has a comprehensive and aggressive identity theft
    strategy focused on preventing refund fraud, investigating these
    crimes, and assisting taxpayers victimized by identity thieves. In
    calendar year 2014 alone, our efforts have suspended or rejected 5.6
    million suspicious returns. We stopped 1.8 million confirmed identity
    theft returns, totaling in $10.8 billion refunds stopped. Additionally,
    we stopped $5 billion worth of refunds for other types of fraud,
    totaling $15.8 billion of confirmed fraudulent refunds protected.
    During this time we also worked with victims of identity theft to
    resolve and close more than 826,000 cases. Effectively combating
    identity theft is costly. In fiscal year 2014, for example, the IRS
    spent more than $380 million combating identity theft and assisting
    innocent victims, but this effort needs to be expanded. The fiscal year
    2016 President's budget requests an additional $101 million to continue
    and expand this important work.
        The IRS works with many agencies and organizations to leverage
    resources to combat identity theft refund fraud. For example, on March
    19, 2015, the IRS convened a meeting with leading tax-preparation
    firms, payroll and tax refund processors, and State tax administrators
    in order to combat the growing threat of tax refund fraud. Participants
    in the meeting included the CEOs of Intuit, H&R Block, Jackson Hewitt,
    Liberty Tax, CCH, and Green Dot unit TPG, among others. Also present
    were a representative of ADP; members and staff of the Federation of
    Tax Administrators, a group of State tax officials; and Council for
    Electronic Revenue Communication Advancement (CERCA), which provide a
    forum and a liaison between the IRS and the tax software industry. The
    participants agreed to set up three working groups to create a list of
    solutions that could be acted on immediately in time for the 2016
    filing season, as well as some longer-term changes. The groups will
    focus on taxpayer authentication; fraud schemes; and information
    sharing among private industry, State administrators and the IRS. Each
    will have representatives from the IRS, State agencies and private
    industry. The three working groups had their kick-off meeting on April
    2, 2015.
        Another example of working with other agencies is the State Fraud
    Referrals initiative. This program encourages States to share their tax
    fraud data with the IRS in order to combat ID theft and fraud. In
    November 2013, the IRS initiated testing of the State Fraud Referral
    project which proved to further deter tax fraud. This project was
    implemented in calendar year 2014. The State Fraud Referral project
    leverages State tax agencies as an additional source of fraud data.
    Currently 34 States have signed agreements to participate. The IRS has
    been working with State revenue agencies to provide fraudulent State
    tax data to the IRS and continues to work with the remaining States to
    receive suspicious filer information. From January through March 13,
    2015, the IRS has received referrals from 15 States:

      --Current referrals: 74,740
      --Total number of filed returns based on these referrals: 28,643
      --Stopped a total of 5,157 returns with over $26.5 million in refunds
            claimed
      --Of the 5,157 returns, 4,981, were identified by IRS filters for
            over $25.5 million in refunds stopped

        IRS Criminal Investigation (CI) investigates tax-related crimes
    such as identity theft fraud and recommends prosecution to the
    Department of Justice. The number of identity theft investigations
    initiated by CI increased from less than 300 in fiscal year 2011 to
    1,063 in fiscal year 2014. Indictments in fiscal year 2014 increased to
    896 while 748 convicted thieves were sentenced to an average prison
    sentence of 43 months.
        To leverage shrinking resources and remain effective in combating
    identity theft crimes, CI partners with other IRS Operating Divisions,
    numerous Federal and local law enforcement agencies, as well as the
    private sector. For example, CI participates in many task forces and
    working groups to find and investigate identity thieves. CI administers
    a Law Enforcement Assistance Program designed to allow local law
    enforcement to access return and return information with an identity
    theft victim's consent and these cases are prosecuted in State courts
    which reduce the burden on Federal court resources. CI also works with
    private sector partners to increase awareness and establish
    communications for reporting data breaches impacting tax identity
    theft.
        In addition, CI uses information and trends identified during
    ongoing investigations to assist in developing analytics which it
    devotes to identify and prevent further losses to the Treasury. Lists
    of victim identities recovered in the field are shared to assist in
    protecting taxpayers from further victimization, which reduces the
    burden on all Federal resources.
        The IRS also continues to collaborate with the software and
    financial institution industries to identify patterns, trends and
    schemes that impact refund returns. IRS also has initiated additional
    collaboration with the Bureau of the Fiscal Service on multiple direct
    deposits and payments shared between government agencies in the
    development of the new Payment Processing System (PPS). The PPS system
    is expected to be online in September 2016.
        We agree that more could and should be done to battle identity
    theft and refund fraud, but the current budget situation has severely
    hampered our ability to effectively deal with this problem. The IRS is
    committed to doing all that we can to prevent the payment of fraudulent
    refunds, pursue the perpetrators, and assist victims to resolve their
    issues as quickly and efficiently as possible.
        Question. Why are the funds requested to address to prevent future
    identify theft cases included in a program integrity cap adjustment
    rather than the IRS base budget?
        Answer. Identity theft is a Service-wide effort and funds are
    requested in both the base request and as part of the Program Integrity
    Cap adjustment request. Those components, which are expected to yield a
    high return-on-investment (stopping identity thieves and mitigating
    identity theft), are requested in the cap adjustment, while those
    components which assist victims of identity theft are included in the
    base request. Both requests are equally important, regardless of which
    part of the budget they appear.
                  irs bank account seizure of small businesses
        Question. A number of alarming stories about the civil forfeiture
    practices at the IRS has raised concerns about your practice of seizing
    bank accounts of small businesses that routinely make bank deposits
    just under $10,000 and never charging them with a crime.
        In many cases, small business owners are forced to go months if not
    years without access to working capital for their businesses.
        In testimony before the House Ways and Means Committee on February
    11, 2015, a representative of the Institute for Justice stated that the
    IRS seized more than $242 million between 2005 and 2012 from Americans
    suspected of hiding transactions below $10,000, yet more than half of
    that amount was not ultimately forfeited by the IRS.
        Do you agree with these statistics? And are you concerned that the
    IRS seized substantial amounts of money that it ultimately could not
    justify keeping?
        Answer. The IRS Criminal Investigation (CI) division provided the
    Institute for Justice with seizure and forfeiture data captured in our
    asset forfeiture tracking system from October 2004 to December 2013. We
    agree that while the raw data is accurate, it is also incomplete. A
    number of open cases had not yet been resolved (forfeiture perfected)
    by December 31, 2013, thus giving a false impression that the
    Government had not prevailed in many of the seizures that were
    reported. Also, the Institute excluded seizure/forfeiture data from the
    U.S. Territories, which was incorporated in our FOIA response.
        CI does not believe that the IRS seized substantial amounts of
    money that it ultimately could not justify keeping. The Institute for
    Justice interpreted the difference between the value of assets at the
    time of seizure and the value of assets at the time of forfeiture as an
    indication that probable cause for the seizures was lacking. However,
    there may be a number of reasons that explain the lower asset value at
    the time of forfeiture which have nothing to do with the merits of the
    initial seizure. For example, the raw data contains seizures which
    relate to open investigations in which the assets have not yet been
    forfeited, or a portion of the seized asset may have been returned to
    the owner as part of a negotiated settlement which is not uncommon in
    judicial proceedings. The Institute of Justice made conclusions based
    on assumptions from incomplete raw data.
        Question. Under the new IRS policy governing civil asset
    forfeitures, do you expect a higher percentage of the seized funds to
    ultimately be forfeited rather than returned to innocent taxpayers?
        Answer. IRS Criminal Investigation changed its policy regarding
    ``legal source'' structuring seizures occurring on or after October 17,
    2014. Under this policy, the IRS will not pursue the seizure and
    forfeiture of funds associated solely with ``legal source'' structuring
    cases unless (1) there are exceptional circumstances justifying the
    seizure and forfeiture and (2) the case has been approved at the
    Director of Field Operations, a Headquarters level executive. Under the
    new policy there will be no ``legal source'' structuring seizures
    unless there are exceptional circumstances, which will be rare.
                         proposed 501(c)(4) regulations
        Question. The IRS received over 150,000 comments in response to
    proposed regulations it issued in November of 2013 on the rules
    governing the political activities of 501(c)(4) social welfare
    organizations.
        As a result, the IRS announced that it will repropose the
    regulations, after taking the comments into account, and will not hold
    a public hearing on the new rules until they are reproposed.
        When does the IRS plan to issue new revised proposed regulations?
        Does the IRS intend to hold a public hearing on new proposed rules?
        Given the unfair treatment of taxpayers based on the exercise of
    their constitutional rights, what steps is the IRS taking to ensure the
    new rules won't target the first amendment rights of these same grass-
    roots groups?
        Answer. Proposed regulations under Sec. 501(c) relating to
    political campaign intervention are on the 2014-2015 Priority Guidance
    Plan released by Treasury and the IRS in August 2014. The Priority
    Guidance Plan represents projects on which Treasury and the IRS intend
    to work during the plan year. Although the current plan year ends on
    June 30th, the Priority Guidance Plan does not place any deadline on
    completion of projects. The IRS continues to work expeditiously on
    drafting new proposed regulations under Sec. 501(c), with the goal of
    providing clearer guidelines regarding political campaign intervention
    both for the IRS employees who administer the laws and for
    organizations that have or seek tax-exempt status. The public input the
    IRS received on the November 2013 proposed regulations has greatly
    informed the drafting process. Consistent with the IRS's normal
    procedure, there will be an opportunity for the public to submit
    written comments on new proposed regulations. In addition, Treasury and
    the IRS plan to hold a public hearing after new proposed regulations
    are issued, and, consistent with the IRS's normal procedure, a notice
    of public hearing will be published in the Federal Register [] in
    advance of the scheduled hearing date.
                                     ______

              Questions Submitted by Senator Christopher A. Coons
                     clarity in rules for tax-exempt status
        Question. Commissioner Koskinen, I support the need to make
    meaningful changes to ensure that the rules to qualify for tax-exempt
    status are abundantly clear. We need a bright-line test to replace the
    guidance that has led to over a half a century of confusion and
    inconsistent application. I understand the IRS is currently developing
    a revised proposal to bring long-needed clarity to the determination of
    eligibility for tax-exempt status of social welfare groups.
        What are the current plans and timetable for issuing a revised
    proposal for tax-exempt status rules?
        What opportunities will be made available for soliciting public
    input?
        Until the rules are changed, what test or criteria is the IRS
    currently using to evaluate applicants for tax-exempt status as social
    welfare groups?
        Answer. Proposed regulations under Sec. 501(c) relating to
    political campaign intervention are on the 2014-2015 Priority Guidance
    Plan jointly released by the Department of the Treasury (Treasury) and
    the IRS in August 2014. The Priority Guidance Plan represents projects
    on which Treasury and the IRS intend to work during the plan year.
    Although the current plan year ends on June 30th, the Priority Guidance
    Plan does not place any deadline on completion of projects. The IRS
    continues to work expeditiously on drafting new proposed regulations
    under Sec. 501(c), with the goal of providing clearer guidelines
    regarding political campaign intervention both for the IRS employees
    who administer the laws and for organizations that have or seek tax-
    exempt status. The public input received on the November 2013 proposed
    regulations has greatly informed the drafting process. Consistent with
    the IRS's normal procedure there will be an opportunity for the public
    to submit written comments on new proposed regulations. In addition,
    Treasury and the IRS plan to hold a public hearing after the new
    proposed regulations are issued, and, consistent with the IRS's normal
    procedure, a notice of public hearing will be published in the Federal
    Register in advance of the scheduled hearing date.Final regulations
    would be published only after taking into consideration public comments
    received on the proposed regulation. Until final regulations are
    issued, whether an organization qualifies for tax exempt status under
    Sec. 501(c)(4) is determined under the current regulations.
    Accordingly, the IRS will consider whether, based on all the facts and
    circumstances, the organization primarily engages in activities that
    promote social welfare.
                        enhanced online services options
        Question. The IRS's fiscal year budget request seeks $16.2 million
    to support development of a customer-centric ``Service on Demand''
    strategy to improve the taxpayer experience. Investments would create
    digital capabilities to make taxpayer interactions with the IRS quicker
    and more convenient. The GAO has also identified some opportunities for
    the IRS to potentially realize hundreds of millions of dollars in cost
    savings and increased revenues, including enhancing online and
    interactive Web services to improve service to taxpayers and encourage
    greater tax law compliance.
        Please elaborate on this proposal and your vision. Is it your view
    that advancements to IRS online services would improve service to
    taxpayers and encourage greater tax law compliance? How?

        Answer. American consumers have grown accustomed to instant digital
    exchanges with their banks and other financial institutions. We believe
    that delivering top quality service to America's taxpayers requires us
    to catch up with those expectations to operate seamlessly in a digital
    and global environment. Our proposal would make tax accounts work much
    like bank accounts, thereby simplifying compliance and making tax
    administration more sustainable. This budget item is the initial
    funding required to begin to improve service and promote compliance by
    providing taxpayers with virtual assistance and online self-service
    tools to communicate with the IRS, identify issues, resolve errors, and
    receive on-demand digital access to tax law, and account information,
    helping taxpayers to voluntarily comply.
        Virtual assistance and digital self-service tools could help
    taxpayers quickly identify issues and resolve errors, and taxpayers who
    are trying to comply but who have overlooked a payment or an item on
    their return could avoid being trapped in a long, cumbersome paper-
    trail just to fix a mistake or resolve an uncontentious issue. With
    faster error resolution, we could identify issues at the same time that
    we identify math errors, fraud and identity theft, and we would
    communicate them up-front, so that the majority of taxpayers could
    resolve even complex compliance issues sooner, without incurring
    unnecessary interest costs. In addition, versatile communications
    channels would allow taxpayers to reach the IRS through their mobile
    smart-phone, laptop computer, or a self-service kiosk, which would
    empower them to take more active control of their tax account. These
    advancements will leverage capabilities built and proven in the private
    sector.
        Question. The IRS's approach to the future supports all taxpayers--
    individuals, corporations, partnerships, and other for-profit and non-
    profit businesses. What impediments currently prevent the IRS from
    doing more to improve online services for taxpayers? What resources
    would be required for the IRS to do more in this area?
        Answer. The fiscal year 2016 President's budget includes $18
    million for information technology upgrades and new capabilities to
    Enhance Service Options for Taxpayers, an additional $5.5 million above
    the fiscal year 2015 level in Business Systems Modernization (BSM)
    funding, to start moving the Service toward a more digitally focused
    customer service strategy. These resources will enable the IRS to
    define a long-term vision and deliver new online service tools and
    technologies to begin the transition to a digital operating
    environment. However, transitioning to a digital environment will be a
    multi-year process requiring IT investments in key building blocks such
    as identity authentication to protect taxpayer information, integrated
    case management to ensure a seamless taxpayer experience, and data
    analytics to continuously improve effectiveness.
                      implementing the affordable care act
        Question. The Affordable Care Act (ACA) represents the largest set
    of tax law changes in more than 20 years, with more than 40 provisions
    that amend the tax laws. The IRS has significant responsibilities in
    implementing and administering the ACA, including taxpayer education
    and outreach, deliverance of tax credits, and development of new IT
    infrastructure to support all of these areas.
        What challenges is the IRS facing as it implements and administers
    the ACA?
        Answer. Since the ACA is a legislative mandate, the IRS is doing
    everything possible to sufficiently fund its implementation. The tax
    provisions of the ACA are a core activity of the Service, like all
    other tax administration. The IRS does not consider customer service
    and enforcement and implementation of the ACA distinct priorities. No
    funds have been appropriated to the IRS for ACA implementation,
    including the increased demand for customer service and enforcement as
    a result of ACA. To help fund implementation, the IRS has relied on a
    mix of base appropriations and external sources, including the Health
    Insurance Reform Implementation Fund and user fee collections. As we
    move forward, the President's budget outlines the investments that
    would ensure IRS is able to successfully deliver its core mission.
        Question. The $452 million dollars the IRS requested in fiscal year
    2015 specifically for ACA activities was not enacted. What funding
    level are you budgeting for ACA work this year in the absence of
    receiving the increased dedicated funds?
        Answer. As noted, no funds have been appropriated to the IRS for
    ACA implementation, including the increased demand for customer service
    and enforcement as a result of ACA. The table below outlines the fiscal
    year 2015 projected funding level by use.

    ----------------------------------------------------------------------------------------------------------------
                                    Taxpayer Services       Enforcement      Operations Support         Total
                                  ----------------------------------------------------------------------------------
                                      $000       FTE      $000       FTE       $000       FTE       $000       FTE
    ----------------------------------------------------------------------------------------------------------------
    Fiscal Year 2015 Projection:
        Administer New Fees on     .........  ........     2,337        15  .........  ........      2,337        15
         Drug Manufacturers and
         Health lnsurers.........
        Promoting Compliance With      1,213         9     5,930        45        243         2      7,386        56
         Other New Provisions....
        Strengthen Oversight of          290         2     2,834        24         11  ........      3,135        26
         Exempt Hospitals........
        Assist Taxpayers             110,091     1,628     5,671        84      1,284        10    117,046     1,722
         Understanding ACA lssues
        Support of Implementation     16,433       164     3,809        22  .........  ........     20,242       186
         & Taxpayer Issues
         (Counsel, Appeals & TAS)
        Applications Development   .........  ........  ........  ........    369,591       767    369,591       767
         Systems Software
         Contracts Systems
         Testing & Delivery......
        Program Management,        .........  ........  ........  ........     13,867        56     13,867        56
         Business Design and
         Specifications and
         Oversight of Data
         Sharing of Federal Tax
         Information.............
                                  ----------------------------------------------------------------------------------
            Fiscal Year 2015        $128,027     1,803   $20,581       190   $384,996       835   $533,604     2,828
             Projection Total....
    ----------------------------------------------------------------------------------------------------------------

        Question. How will the IRS's budget request for 2016 for $490.4
    million support successful fulfillment of IRS's responsibilities in
    administering the requirements of the ACA?
        Answer. The IRS's fiscal year 2016 budget request will allow us to:

      --Meet the projected increased taxpayer demand for toll-free and
            face-to-face assistance and outreach resulting from ACA
            implementation and improve the effectiveness and efficiency of
            service responses;
      --Expand staffing to assist with managing the ACA submission
            processing workload and provide advanced technology to
            electronically receive amended returns;
      --Conduct compliance around the premium tax credit, process
            individual exemptions from health insurance coverage
            requirements, and assess individual responsibility payments;
      --Process new information reporting for certain employers and health
            insurance providers;
      --Send ACA compliance-related notices to taxpayers;
      --Implement new technology and modify existing systems to be able to
            calculate and assess Employer Shared Responsibility Payments;
      --Maintain and expand repositories that store data about household-
            level income to help determine eligibility for and
            reconciliation of the premium tax credit;
      --Administer fees on drug manufacturers and health insurers; and
      --Strengthen oversight of tax exempt hospital organizations,
            including refining the community benefit reviews and leveraging
            this data to conduct examination.

        Question. How does the IRS plan to continue to implement
    legislative requirements, such as the ACA and the Foreign Account and
    Tax Compliance Act (FATCA) also enacted in 2010, if additional funding
    is not received?
        Answer. The IRS senior leadership uses a deliberate decisionmaking
    process to determine priorities based on a variety of factors,
    including whether it is statutorily mandated or discretionary.The IRS
    then allocates available appropriated resources against those
    requirements. We then determine the unfunded mission critical
    requirements and identify what additional resources are available from
    other sources, such as user fees or reimbursable services, and allocate
    those resources against the Servicewide requirement. For any given
    fiscal year, the IRS faces challenges when it does not receive the
    requested funding. With the IRS's responsibilities to administer all of
    the tax laws, including implementing the tax provisions of the ACA and
    FATCA, the IRS must balance its responsibilities to provide services to
    taxpayers, follow up on potential non-compliance, and invest for the
    future in information technology and workforce development.
        Question. From what core activities will resources be diverted away
    in order for IRS to address the ACA and FATCA requirements?
        Answer. The tax provisions of ACA and FATCA are a core activity of
    the IRS, like all other tax administration. The IRS does not consider
    customer service and enforcement and implementation of the ACA and
    FATCA distinct priorities. No funds have been appropriated to the IRS
    for ACA and FATCA implementation, including the increased demand for
    customer service and enforcement as a result of the legislative
    changes. To help fund implementation, the IRS has relied on a mix of
    base appropriations and external sources, including the Health
    Insurance Reform Implementation Fund and user fee collections. As we
    move forward, the President's budget outlines the investments that
    would ensure IRS is able to successfully deliver its core mission. The
    IRS will continue to balance its requirements and funding availability
    to ensure accomplishment of mission critical requirements. The IRS will
    continue to review and evaluate all risks, plan to mitigate those
    risks, and manage residual risk to implement all legislative
    requirements while reducing the burden on the taxpaying public and its
    staff. Approving the President's budget would greatly enhance the
    ability to do this. Funding below this request will, for example, delay
    critical IT upgrades for upgrades for aged hardware and other
    infrastructure assets, with 52 percent approaching end-of-life in
    fiscal year 2016; delay upgrades for operating systems and middleware
    that support our current production environment, many of which are
    slipping to 3 and 4 versions behind current; delay roll-out of our
    converged networks initiative for more efficient and cost-effective
    voice and data system consolidation and hinder the IRS's efforts to
    move to a CloudFirst technology platform and reap efficiencies by
    moving toward this new platform.
                       error rates and taxpayer education
        Question. Does the IRS track and evaluate the extent to which
    particular aspects of the forms, instructions, or Tax Code provisions
    tend to generate a significant amount of taxpayer confusion or produce
    inadvertent unintentional errors in filed returns?
        Answer. Please see answer below.
        Question. When the IRS identifies an item or issue that appears to
    be causing routine or systemic problems, what do you do in response?
        Answer. The IRS updates and enhances forms, instructions and
    publications annually to reflect tax changes. We also provide
    worksheets, tips and other information to make it easier for taxpayers
    to meet their tax filing obligation and reduce errors. Each year, we
    include in many publications and instructions a ``What's New'' section
    that summarizes important tax changes that took effect. For tax year
    2014, for example, these topics included expired tax benefits, the
    Health Care Premium Tax Credit, the personal exemption amount increased
    for certain taxpayers, and more. In addition, we offer a wide variety
    of resources to assist taxpayers such as IRS Tax Tips, calculators, IRS
    ``Services Guide'' (e.g. how to get help with general tax law
    information, getting a transcript or copy of a return, finding a
    qualified tax professional, finding information about the Health Care
    Law, etc.).

        Each year, the IRS also tells taxpayers how to avoid common tax-
    filing errors including:

        1.  Wrong or missing Social Security Numbers.--Be sure you enter
    all SSNs on your tax return exactly as they are on the Social Security
    cards.
        2.  Wrong names.--Be sure you spell the names of everyone on your
    tax return exactly as they are on their Social Security cards.
        3.  Filing status errors.--Some people use the wrong filing status,
    such as Head of Household instead of Single. The Interactive Tax
    Assistant on IRS.gov can help you choose the right status. If you e-
    file, the tax software helps you choose.
        4.  Math mistakes.--Double-check your math. For example, be careful
    when you add or subtract or figure items on a form or worksheet. Tax
    preparation software does all the math for e-filers.
        5.  Errors in figuring credits or deductions.--Many filers make
    mistakes figuring their Earned Income Tax Credit, Child and Dependent
    Care Credit, and the standard deduction. If you're not e-filing, follow
    the instructions carefully when figuring credits and deductions. For
    example, if you're age 65 or older or blind, be sure you claim the
    correct, higher standard deduction.
        6.  Wrong bank account numbers.--You should choose to get your
    refund by direct deposit. Be sure to use the right routing and account
    numbers on your return. The fastest and safest way to get your tax
    refund is to combine e-file with direct deposit.
        7.  Forms not signed.--An unsigned tax return is like an unsigned
    check--it's not valid. Both spouses must sign a joint return.
        8.  Electronic filing PIN errors.--When you e-file, you sign your
    return electronically with a Personal Identification Number. If you
    know last year's e-file PIN, you can use that number. If you don't know
    it, enter the Adjusted Gross Income from the 2013 tax return you
    originally filed with the IRS. Do not use the AGI amount from an
    amended return or a return the IRS corrected.

        Filing electronically vastly reduces tax return errors as the tax
    preparation software does the calculations, flags common errors and
    prompts taxpayers for missing information. Whether self-prepared by the
    taxpayer or prepared by a paid preparer, the best way to avoid errors
    is to use tax preparation software. For Processing Year 2015 (through
    week ending March 27, 2015) the error rate for individual paper tax
    returns was 28.01 percent versus only 4.30 percent for e-filed
    individual tax returns. IRS e-file is the most accurate way to file a
    tax return.
        When the IRS identifies certain mathematical or clerical errors, or
    other specific irregularities on returns during processing, we can
    automatically adjust the return for the taxpayer. At various times,
    Congress has expanded this math error authority on a case-by-case
    basis. 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 Budget
    proposal Provide the IRS with Greater Flexibility to Address
    Correctible Errors, to replace the existing specific grants of this
    authority with more general authority covering computation errors and
    incorrect use of IRS tables. Congress could also help in this regard by
    creating a new category of ``correctible errors,'' allowing the IRS to
    fix errors in several specific situations, such as when a taxpayer's
    information does not match the data in certain Government databases.
        Question. Are there particular tax credits that typically
    experience high error rates? What remedial actions do you recommend to
    reduce error rates?
        Answer. One challenge in processing the millions of tax returns
    each year is that certain tax credits are more likely to have erroneous
    claims, as well as fraudulent claims and schemes. The IRS continues to
    improve the ways we detect errors and help taxpayers avoid making
    common mistakes.
        One example is the Earned Income Tax Credit (EITC). We remind
    taxpayers of common EITC errors, including:

      --Claiming a child who does not meet these qualifying child tests:
            relationship, age, and residency
      --More than one person claiming the same child
      --Filing as single or head of household when married
      --Over- or under-reporting of income or expenses

        These errors are caused by the complexity of the Tax Code. On
    IRS.gov, we provide EITC information and tools to assist taxpayers and
    help them avoid inadvertent or unintentional errors (http://
    www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit).
        Another example is the Child Tax credit. To help a taxpayer
    determine if the various criteria regarding the qualifying child are
    met, the IRS developed Schedule 8812 (Child Tax Credit). We also
    provide taxpayers with frequently asked questions such as:

      --Can a noncustodial parent claim the child tax credit for his or her
            child?
      --Can I claim both the child tax credit and the child and dependent
            care credit?
      --Can I claim the child tax credit for a child who has an individual
            tax identification number (ITIN) rather than a Social Security
            number?

        We also help taxpayers to avoid errors when claiming the American
    Opportunity Tax Credit and the Lifetime Learning Credit. We remind
    taxpayers of these common errors made when claiming education credits:

      --Students listed as a dependent or spouse on another tax return
      --Students who don't have a Form 1098-T showing they attended an
            eligible educational institution
      --Students who are not paying qualified education expenses
      --Claiming the credit for a student not attending a college or other
            institute of higher education
         irs management and performance challenges for fiscal year 2015
        Question. Each year, the Treasury Inspector General for Tax
    Administration (TIGTA) evaluates IRS programs, operations, and
    management functions to identify the areas of highest vulnerabilities
    to the Nation's tax system. On October 15, 2014, TIGTA issued its
    assessment enumerating the top ten management challenges. The #1
    priority challenge cited by TIGTA for this year is security for
    taxpayer data and IRS employees.
        The IRS relies extensively on its computer systems to support both
    its financial and mission--related operations. Effective information
    systems security is essential to ensure that data are protected against
    inadvertent or deliberate misuse, improper disclosure or destruction,
    and that computer operations supporting tax administration are secured
    against disruption or compromise.
        Computer security has been problematic for the IRS since 1997. In
    April 2014, GAO reported that the IRS is making progress in addressing
    information security control weaknesses; however, the GAO noted that
    weaknesses remain that could affect the confidentiality, integrity, and
    availability of financial and sensitive taxpayer data.
        Mr. Koskinen, what are your perspectives on TIGTA's identification
    of the most challenging management concerns?
        Answer. The IRS understands and honors the trust given to it by
    American taxpayers to safeguard their personal and private information.
    As part of that trust, the IRS realizes the importance of cybersecurity
    as a primary component of its information technology infrastructure.
    The IRS has been storing taxpayer data in digital form since 1970 and
    has a strong culture of placing a high-level of importance on
    protecting this data. Currently, the IRS takes a very aggressive
    approach in protecting taxpayer data by restricting Internet access;
    encryption of taxpayer data for any transmission externally; content
    filtering and strict firewall policies, and network security
    monitoring.
        The IRS feels confident its systems demonstrate high resistance to
    the normal daily cyber-attacks seen across Government; however, there
    are no absolutes and, as with nearly all such current commercial cyber-
    defenses, it is very difficult to defend against sophisticated
    technologies as seen in recent state-sponsored attacks. While the IRS
    has a long history of successfully defending against attempts to steal
    taxpayer data, constant vigilance is needed. The IRS continues to
    divert scarce resources to cybersecurity, but with 5 years of
    decreasing appropriations, it is currently much more challenging for
    the IRS to continuously stay ahead of evolving threats to its
    cybersecurity.
        The IRS is currently trying to move to a more robust interactive
    Web-based means of interacting with taxpayers. The American people have
    grown accustomed to instant financial exchanges with lenders, brokers,
    and banks. The IRS believes that delivering top quality service to
    America's taxpayers requires catching up to those expectations to
    operate seamlessly but securely in a digital and global environment.
    This change will significantly increase cybersecurity risks, requiring
    more resilience and protection of data.
        Question. How does IRS leadership under your helm integrate
    findings and recommendations for corrective action suggested by GAO and
    TIGTA audits into strategic management decisionmaking and budget
    planning processes?
        Answer. Each year GAO and TIGTA collectively issue dozens of
    recommendations from numerous audits. Those recommendations vary widely
    in scope and impact, and the IRS carefully considers each in the
    context of business processes and the IRS's ability to implement them.
    Where recommendations are minimally complex or relatively
    straightforward, such as those suggesting a change to the Internal
    Revenue Manual or an adjustment to the policy or processes that is
    limited in scale, has a minimal strategic impact, and requires few
    resources to implement, changes can be made with the approval of the
    appropriate official(s) and without significant consideration during
    the strategic planning and budgeting process.
        Some recommendations, however, are more expansive in nature and
    require a significant investment of resources to accomplish. These
    recommendations necessitate the IRS carefully consider the suggestion
    in the context of existing business processes and investment plans, and
    assess the benefit of implementing the recommendation versus the
    opportunity cost of doing so. When considering these recommendations,
    the IRS evaluates them just as it does other investment needs, based on
    the vision of the IRS delineated in the 2014-2017 Strategic Plan--that
    being of an organization providing an advanced taxpayer experience
    leveraging a robust digital environment, a condensed enforcement cycle,
    and data-driven taxpayer service and enforcement efforts. Within this
    context, the IRS' strategic planning and budgeting process provides for
    the identification of all strategic investment needs, subsequent
    analyses assessing initiative scope, impact and the potential benefit
    of each, and a decisionmaking process that allows us to determine the
    highest priorities to pursue using the resources the agency is
    allotted.
                   Questions Submitted by Senator Jerry Moran
        Question. Describe the role of your department/agency's Chief
    Information Officer (CIO) in the development and oversight of the IT
    budget for your department/agency. How is the CIO involved in the
    decision to make an IT investment, determine its scope, oversee its
    contract, and oversee continued operation and maintenance?
        Answer. The IRS Chief Technology Officer (CTO)/Chief Information
    Officer (CIO) has the authority to govern all areas related to
    information resources and technology management. The CTO/CIO has
    management and oversight responsibility for both the IT organizational
    functions and the evaluation, selection and management of vendors,
    ensuring that the goods and services received not only align with, but
    can help drive forward, the critical operational and information
    technology (IT) priorities of the business strategy. This
    responsibility combines a thorough knowledge of the Federal acquisition
    system and a deep understanding of the dynamic commercial IT
    marketplace. The Vendor Management Organization (VMO), which is under
    the authority of the CTO/CIO, is solely focused on this activity and
    has a straightforward mission--to maximize IT investments. This is
    accomplished by developing a set of repeatable, sustainable processes
    with goals that focus on:

      --Achieving greater transparency around organizational structures,
            roles, and responsibilities to ensure accountability and limit
            ``surprises'';
      --Committing more time and energy to limit supplier advantage, e.g.,
            through competitive bidding processes, market research on
            rates, and internal staff training;
      --Cultivating existing vendor relationships that drive value by
            effectively managing the vendor throughout the contract
            lifecycle, from sourcing and selecting the vendor, to
            establishing contracts, purchasing and managing payments;
      --Maintaining focus on value delivery by making sure that the
            benefits promised are the beginning of a project or investment
            are delivered, and;
      --Managing spending to enable repeatable savings opportunities.

        The CTO/CIO also has a well-established IT Governance structure to
    align IT with business strategy and to ensure that investments stay on
    track to achieve the IRS's strategies and goals, with measures to
    monitor performance. The Infrastructure Executive Steering Committee
    (IESC) within the CTO/CIO organization, for example, ensures that
    project objectives are met, risks are managed appropriately, and the
    expenditure of IRS resources is fiscally sound. The CTO/CIO has also
    established an Enterprise Software Governance Board (ESGB) to develop a
    standardized approach to software acquisition management practices. An
    ESGB working group is also in place to gather and document existing
    software acquisition processes, document a proposed software lifecycle,
    gather software usage metrics, and evaluate and recommend a software
    asset/license management tool, all of which will identify installed
    software products, match products to licenses and confirm compliance
    status of those products. This governance ensures that all
    stakeholders' interests are taken into account and that processes
    provide measurable results.
        Question. Describe the existing authorities, organizational
    structure, and reporting relationship of the Chief Information Officer.
    Note and explain any variance from that prescribed in the newly-enacted
    Federal Information Technology and Acquisition Reform Act of 2014
    (FITARA, Public Law 113-291) for the above.
        Answer. Pursuant to Delegation Order 2-1 (formerly DO-261, Rev. 1),
    Internal Revenue Manual Section 1.2.41.2 (08-17-2000), the IRS
    Commissioner gives the IRS CTO/CIO authority to govern all areas
    related to information resources and technology management. It gives
    the CTO/CIO authority to perform those functions the Commissioner is
    authorized to perform having Servicewide effect and relating to, or
    concerning, the acquisition of information technology (IT) and the
    management of information resources, other than the duties delegated to
    the Director of Procurement.
        While the CTO/CIO is accountable to the Commissioner under DO 2-1
    to lead the IT organization and govern its resources and technology
    management, the CTO/CIO also has line reporting to the Deputy
    Commissioner for Operations Support, along with the Chief Officers,
    i.e., Chief Financial Officer; Human Capital Officer; Chief, Agency-
    wide Shared Services; and Director, Privacy, Governmental Liaison and
    Disclosure. This structure enables collaboration and alignment among
    the Chief Officers in building a strategic foundation for
    organizational excellence. This strategic foundation is critical in
    delivering the IRS's objectives and goals outlined in the IRS strategic
    plan.
        As the Treasury Department implements FITARA, the IRS CIO/CTO will
    continue to exercise responsibility and authority over the IRS
    portfolio, but will work in a much closer relationship with the
    Department CIO. For example, the IRS CIO shall immediately ensure
    information reported on the IT Dashboard accurately reflects all
    current status maintained internally at the IRS. Further, under the
    leadership of Treasury CIO, the IRS CIO/CTO shall identify and
    implement common enterprise IT services (e.g., infrastructure, cyber),
    common architecture standards and federated governance opportunities to
    improve the efficiency and effectiveness of all the organizations
    operating within the Treasury Department.
        Following are charts that show organizational structure:

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Question. What formal or informal mechanisms exist in your
    department/agency to ensure coordination and alignment within the CXO
    community (i.e., the Chief Information Officer, the Chief Acquisition
    Officer, the Chief Finance Officer, the Chief Human Capital Officer,
    and so on)?
        Answer. The IRS has structures in place on several levels to create
    opportunities for collaborative decisionmaking, to increase
    information-sharing across organizational elements, and to ensure
    alignment within the CXO community.
        The IRS holds an agency-wide Senior Executive Team (SET) meeting
    monthly, chaired by the IRS Commissioner, and including the Deputy
    Commissioner for Services and Enforcement (DCSE), Deputy Commissioner
    for Operations Support (DCOS), and Functional Operating Division Chiefs
    and their deputies, to include the entire CXO community. The design of
    the SET meetings ensures top-level strategies and policies are driven
    down into the organization with consistency, and to enable coordination
    and alignment on enterprise and cross-organizational initiatives,
    risks, and current events facing the agency.
        The DCOS also meets each week with his or her direct reports, which
    includes CXO community chiefs. The DCOS conducts these meetings to
    build a collaborative community of leaders under the DCOS to ensure
    coordination and alignment as a strategic foundation for organizational
    excellence and in delivering on the objectives and goals outlined in
    the IRS strategic plan. Cross-organizational strategies and priority
    initiatives are discussed; organizational risks, impacts and mitigation
    strategies are brought to the table for discussion; administrative
    requirements and recent items of significance are shared; and general
    updates on current events are brought to light during these meetings.
        DCOS also holds working sessions with the CXO community. The DCOS
    designs these sessions to build and gain alignment on various themes/
    strategies that require concerted time, deeper thinking and cross-
    coordination among the team members. Subject matter discussed in these
    types of meetings is usually specialized and high priority with
    potentially large impacts on the CXO community and the entire Service.
        DCOS conducts quarterly Business Performance Reviews (BPRs) with
    each of the individual organizations within the CXO community.
    Representatives from other CXO offices also attend to facilitate
    information-sharing across the lines of business. The BPRs enable the
    DCOS to get a comprehensive update on high-priority programs and
    initiatives, to review program results and performance measures, and to
    drive down guidance and preferences in managing various aspects of the
    programs. Action items are noted in BPRs and implemented with follow-up
    reporting at subsequent meetings.
        Question. According to the Office of Personnel Management, 46
    percent of the more than 80,000 Federal IT workers are 50 years of age
    or older, and more than 10 percent are 60 or older. Just 4 percent of
    the Federal IT workforce is under 30 years of age. Does your
    department/agency have such demographic imbalances? How is it
    addressing them?
        Answer. The IRS Information Technology organization performs
    extensive ongoing workforce analysis and data production to assist in
    workforce planning. Over 5344 of the 7218 total IRS IT workers are over
    age 50 (74 percent) and only 112 of the 7218 (or 2 percent) are under
    30 years of age. These levels reflect a higher percentage of older IT
    employees at the IRS, and lower percentage of younger employees than
    OPM's analysis of the overall Federal IT workforce. Current budget
    conditions and the hiring freeze in place since 2011 have challenged
    the IRS to recruit a diverse workforce; therefore, the workforce will
    continue to age and worse this demographic problem.
        Question. How much of the department/agency's budget goes to
    Demonstration, Modernization, and Enhancement of IT systems as opposed
    to supporting existing and ongoing programs and infrastructure? How has
    this changed in the last 5 years?
        Answer. In 2012, the IRS spent 27 percent of its IT budget on
    Development, Modernization and Enhancement (DME). DME spending between
    2012 and 2015 has remaining relatively constant, averaging 27 percent
    primarily due to development for new programs like the Affordable Care
    Act and the Foreign Account Tax Compliance Act. The constancy occurred
    during a period of decreases in the IT appropriated budget.
    Unfortunately, keeping DME constant in a declining budget environment
    occurs at the expense of investment in refreshing equipment and systems
    to address the IRS's aging IT Infrastructure. The fiscal year 2016
    budget request seeks to obtain funds to help refresh the aging IT
    infrastructure, which would increase the proportion of the budget spent
    on existing and ongoing programs and infrastructure (O&M).

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Question. What are the 10 highest priority IT investment projects
    that are under development in your department/agency? Of these, which
    ones are being developed using an ``agile'' or incremental approach,
    such as delivering working functionality in smaller increments and
    completing initial deployment to end-users in short, 6-month
    timeframes?
        Answer. The IRS IT is currently implementing Rapid Delivery Methods
    (RDM) to realize faster, better, and less expensive delivery of
    development efforts across a broad spectrum of projects. Applying RDM
    is fostering an agile development environment allowing IT to respond to
    changing business needs while improving employee satisfaction and
    accountability through streamlined processes. This enterprise RDM
    effort is being implemented in waves. With each new wave, more project
    teams are supporting IT as the agency goes deeper into agile execution,
    use of state-of-the-art development tools, continuous integration and
    test automation, and development of more mature knowledge bases and
    artifacts (Play books, Wiki, Community of Practice). The following
    shows the IRS IT's priorities that are in development in fiscal year
    2015, showing status in use of Rapid Delivery Methods:

    ------------------------------------------------------------------------
                                            Currently using Rapid Delivery
                  Projects                             Methods?
    ------------------------------------------------------------------------
    Foreign Account Tax Compliance Act-- Yes
                   FATCA
    ------------------------------------------------------------------------
    The FATCA legislation enhances the Service's ability to identify and
     monitor US income movement in Foreign Financial Institutions,
     ultimately improving international tax administration efforts.
    ------------------------------------------------------------------------
     Customer Account Data Engine 2 TS2  Yes
                  (CADE 2)
    ------------------------------------------------------------------------
    CADE 2 Transition State 2 (TS2) is the next step toward IRS's data-
     centric vision. In TS2 IRS will make system enhancements to address
     IRS's longstanding Unpaid Assessments Financial Material Weakness for
     individual taxpayer accounts, rewrite its core taxpayer account
     processing applications in modern programming languages, and establish
     CADE 2 as the authoritative source for individual taxpayer account
     data. TS2 will provide on-demand access to updated taxpayer account
     information, enabling faster issue resolution and additional self-
     service options for taxpayers.
    ------------------------------------------------------------------------
        Modernized e-File--MeF (Next     Yes
                  Release)
    ------------------------------------------------------------------------
    MeF next release will complete the migration and implementation of MeF
     element names from nonstandard XML to XML standard compliancy. Begin to
     define requirements for the implementation of Form 1040NR (US
     Nonresident Alien Income Tax Return) and Form 1040NR-EZ ( US Income Tax
     Return for Certain Nonresident Aliens With No Dependents) along with 11
     supporting forms and schedules and 2 new interfaces.
    ------------------------------------------------------------------------
         Affordable Care Act (ACA)       Yes
    ------------------------------------------------------------------------
    ACA IT activity encompasses the planning, development, and
     implementation of IT systems needed to support IRS' tax administration
     responsibilities associated with key provisions of the Affordable Care
     Act legislation. The work is organized into Releases that deploy
     functionality to meet key legislative dates. Each release encompasses
     multiple projects that need to be delivered at a specific point in
     time. Currently IT is delivering functionality to address work to
     support the Health Insurance Marketplaces and tax compliance
     activities, as well as annual updates for non-Marketplace provisions in
     the law.
    ------------------------------------------------------------------------
              Web Applications           Yes
    ------------------------------------------------------------------------
    Web Applications will transition the IRS to the future digital
     government by providing an enhanced taxpayer experience, a broad range
     of self-service and innovative options that will enable taxpayers to
     securely access their accounts through multiple digital channels (e.g.,
     mobile, Web). Taxpayers will be able to obtain historical tax return
     data, submit online payments, and receive status updates (e.g., return
     status).
    ------------------------------------------------------------------------
         Enterprise Case Management      Yes (planned)
    ------------------------------------------------------------------------
    The Enterprise Case Management system will provide an enterprise-wide
     solution that uses Commercial Off-the Shelf (COTS) products, common
     services and custom code to perform case management functions on a
     standard infrastructure platform.
    ------------------------------------------------------------------------
    Information Returns/Document         Yes
     Matching (IRDM)
    Tech Demos
    ------------------------------------------------------------------------
    IRDM improves business taxpayer compliance through the identification of
     potential underreporters by using technology to match business tax
     return filings to third-party information returns that focus on
     merchant card payments and securities basis reporting. Increased
     compliance reduces the tax gap.
    ------------------------------------------------------------------------
        Return Review Program (RRP)      No
    ------------------------------------------------------------------------
    RRP enhances IRS capabilities to detect, resolve and prevent criminal
     and civil non-compliance by advancing IRS effectiveness in detecting,
     addressing, and preventing tax refund fraud. Through the application of
     predictive fraud and non-compliance detection models the program will
     seek out subtle data patterns to determine reliability of return data,
     including filer's identity.
    ------------------------------------------------------------------------
              E-authentication           No
    ------------------------------------------------------------------------
    E-authentication provides the common service framework to proof/register
     individual identities and provide/validate credentials for electronic
     access to IRS systems, applications and data repositories. This
     capability enables the public the convenience of using a single
     credential, via the Internet, to access a wide range of IRS
     applications and services.
    ------------------------------------------------------------------------
      Infrastructure Currency/Refresh    N/A
    ------------------------------------------------------------------------
    Infrastructure currency investments increase the long-term
     sustainability of the IT enterprise through technology refreshment and
     innovation to mitigate the risk of systems failure during the filing
     season and to meet the industry standards required for the new IT
     system design requirements for modernization projects. Examples of
     infrastructure currency projects include critical refreshment of our
     end user IT assets through a Customer Pain Points initiative, migration
     of the our servers from Windows 2008 to 2012, and the implementation of
     a unified communication platform, Network Convergence, that combines
     voice, video and data onto a common network.
    ------------------------------------------------------------------------

        Question. To ensure that steady state investments continue to meet
    agency needs, OMB has a longstanding policy for agencies to annually
    review, evaluate, and report on their legacy IT infrastructure through
    Operational Assessments. What Operational Assessments have you
    conducted and what were the results?
        Answer. The IRS has completed Operational Analysis (OAs) annually
    (since 2010) on purely steady-state major IT investments and the
    steady-state portion(s) of mixed-lifecycle major IT investments. The
    IRS shares the results internally through the IT chain of command and
    then forwarded to Treasury. The IRS has conducted 82 OAs from fiscal
    year 2010 to fiscal year 2013; 5 of 7 (71 percent) assessment areas had
    overall mean scores in the green range (normal)--Cost, Schedule,
    Performance, Stakeholder Satisfaction, and Business Results. However,
    two assessment areas slipped from green into the yellow range in 2013--
    Stakeholder Satisfaction and Business Results. Two of seven (29
    percent) assessment areas had overall mean scores within the yellow
    range (needs of attention)--Risk and Innovation. Risk ratings improved
    significantly in 2013, which the agency attributed to increased
    coaching support. Innovation is the newest assessment area in need of
    attention. The agency conducted OAs on 17 major investments for fiscal
    year 2014, the results of which should be available later this spring.
        Question. What are the 10 oldest IT systems or infrastructures in
    your department/agency? How old are they? Would it be cost-effective to
    replace them with newer IT investments?
        Answer. The oldest systems are those the IRS built in the 1960s.
    This fact does not mean the IRS has made no changes since then. As the
    budget allows, the IRS takes the opportunity to upgrade the hardware
    and upgrade to the newest software release. However, the core
    components and logic still exist on older programming languages. The
    strategy has been and will continue to be to migrate off these systems
    in a methodical manner. Because of system interdependencies, it is
    often not as simple as replacing one system with another. The agency
    must understand the chain effect and replace systems in the entire
    chain or modify the business process to ensure nothing breaks. The IRS
    always looks for opportunities to introduce these changes without
    impacting the core mission.
        Operating and maintaining these antiquated systems that date back
    to the JFK era is very expensive and adds significant risk. These
    systems are not nimble. We have few people at the IRS who have the
    knowledge and skills to make needed programming changes year after
    year, and they simply will not support new services expected by the
    21st century taxpayer.
        There is also a host of aging components in our base infrastructure
    that need refreshing to keep our environments current for existing and
    newly developed IT systems. Refreshment of our aging mainframes,
    servers, laptops, network devices and communications equipment will
    reduce operations and maintenance costs and risks associated with
    components that no longer operate reliably or need additional
    capability that is not available through an upgrade; that are being
    retired because of non-support; and that are unable to support the
    latest release of software, growth of current application demand or
    meet the latest Federal security configuration standards
        Question. How does your department/agency's IT governance process
    allow for your department/agency to terminate or ``off ramp'' IT
    investments that are critically over budget, over schedule, or failing
    to meet performance goals? Similarly, how does your department/agency's
    IT governance process allow for your department/agency to replace or
    ``on-ramp'' new solutions after terminating a failing IT investment?
        Answer. The IRS leverages its Capital Planning and Investment
    Control process to terminate troubled IT investments (or their
    component projects and activities) that are no longer forecast to
    deliver within acceptable cost or time constraints, and to initiate new
    investments to meet the business needs.
        As part of the Pre-Select phase of the process, the Commissioner
    sets the strategic direction and the Senior Executive Team (SET). The
    SET includes the Deputy Commissioners, CTO/CIO, CFO and all the
    business operating division commissioners and is the executive-level
    decisionmaking body for pre-selection, selection, and reselection of
    information systems and technology capital investments. Activities in
    this phase include identification and assessment of the mission-based
    business need for proposed or ongoing IT investments, and/or
    eliminating proposals (in the concept phase of development) that fail
    to meet minimal acceptance criteria.
        The IRS designed the Select phase to select proposals for funding
    consideration that are critical to supporting the Treasury and IRS
    missions and strategic objectives, and are technically viable and
    financially sound. As an activity within this phase, on-going projects
    that are no longer viable are either terminated (``off ramped''), or
    paused, pending reassessment. The SET's approved fiscal year portfolio
    codifies the re-selection and de-selection (off ramping) of any
    investment. In past years, the Technology Investment Review Board
    (TIRB) served this enterprise approval authority role, however the IRS
    is enhancing its IT governance process to ensure alignment with the
    Commissioner's enterprise governance framework and the changing Federal
    Capital Programming policies. The Executive Review Team (ERT), which is
    the executive body responsible for conducting the preliminary review
    and evaluation of the IT investment proposals based on alignment to
    strategic priorities, business value, return on investment, risk,
    dependencies, business alternatives, business benefits, and performance
    measures, supports the SET. The ERT develops and submits an IT
    investment portfolio recommendation to the SET.
        The IRS conducts monthly reviews of cost/schedule/performance data
    versus planned data in support of the Control phase to determine if
    investments are on track, or if the IRS needs to take corrective
    actions. Monthly meetings with Treasury are held to review any
    significant variances and address any corrective actions.
        In the Evaluate phase of the investment lifecycle, the IRS conducts
    an annual Operational Analyses on its major IT investments that have
    been in operations and maintenance for at least 12 months. The IRS
    provides the results to Treasury, and IT and Business executives. The
    IRS utilizes the results to decide to keep/maintain the current
    investment and to inform future investment decisions (lessons learned).
        Question. What IT projects has your department/agency
    decommissioned in the last year? What are your department/agency's
    plans to decommission IT projects this year?
        Answer. The IT portfolio really has three parts: run, mature and
    transform. The ``run'' portion relates to sustaining operations with a
    focus on maintaining the current infrastructure and systems to support
    the core mission of tax adjudication. The ``mature'' portion is all
    around enhancing the current environment to advance the IRS's world
    class and data-centric vision. The ``transform'' portion focuses on
    modifying the framework to meet the new challenges of a digital age. A
    staple in each part includes finding ways to become more efficient.
    Efficiency can take multiple forms like automating previously manual
    tasks, putting in enhancements that streamline operations, business re-
    engineering that eliminates steps and systems or reducing redundancy in
    the portfolio. Regarding the latter, the IRS has a risk based approach
    to the portfolio that uses factors like age of infrastructure, number
    of users, count of trouble tickets against system, types of changes,
    etc. to inform where to reduce the portfolio. The agency has stopped
    further work on Information Return Document Matching Case Management
    (IRDMCM) as it understood the project was going down a different path
    than the enterprise approach. Additionally, the IRS has turned off an
    older version of the data warehouse, the Integrated Production Model.
    As the workforce shrinks, the IRS must continue to look at
    opportunities to simplify its portfolio. The IRS has a significant case
    management initiative where it is looking to collapse dozens of
    applications into a small handful of reusable services. This effort
    will be a multiple year project, but the expected outcome is to
    decommission systems along the way.
        Question. The newly-enacted Federal Information Technology and
    Acquisition Reform Act of 2014 (FITARA, Public Law 113-291) directs
    CIOs to conduct annual reviews of their agency/department's IT
    portfolio. Please describe your agency/department's efforts to identify
    and reduce wasteful, low-value or duplicative information technology
    (IT) investments as part of these portfolio reviews.
        Answer. The IRS's Operational Analysis (OA) process is applied, per
    the Capital Programming Guide (a supplement to Office of Management and
    Budget (OMB) Circular A-11) to major investments that have been in
    operations and maintenance (O&M) for at least 12 months. The objective
    of the OA process is to be able to make one of the following
    recommendations:

      --The investment should remain in steady state for the foreseeable
            future, because it is performing as expected;
      --In order to ensure continued investment viability, the investment
            team should commence planning for Development/Modernization/
            Enhancement (DME); or
      --The investment should be considered as a candidate for
            decommissioning and replaced because it is not meeting its
            performance goals as identified within the scope of the
            operational analysis.

        The IR uses the outputs of the process to support key
    decisionmaking, inform internal and external stakeholders, and provide
    critical feedback to the select, control and evaluate phases of the IRS
    Capital Planning and Investment Control (CPIC) process.
        Question. In 2011, the Office of Management and Budget (OMB) issued
    a ``Cloud First'' policy that required agency Chief Information
    Officers to implement a cloud-based service whenever there was a
    secure, reliable, and cost-effective option. How many of the agency/
    department's IT investments are cloud-based services (Infrastructure as
    a Service, Platform as a Service, Software as a Service, etc.)? What
    percentage of the agency/department's overall IT investments are cloud-
    based services? How has this changed since 2011?
        Answer. The IRS embraces every opportunity to be a leader in
    government. The pace in which it can embrace new practices,
    technologies, and tools must be balanced against the existing funding
    and resource capacities.
        In the spirit of Cloud First, the IRS has made significant
    investments in cloud technologies since 2011. For example, the IRS now
    embraces an internal cloud concept with infrastructure-as-a-service
    virtualization. The principle of elasticity is gained in this service
    by being able to increase hardware for critical filing season needs and
    reallocating hardware to other purposes outside of filing season. In
    addition, IRS.gov is now using a private cloud for all non-personally
    identifiable information (PII), with benefits such as auto scaling of
    its computer and storage infrastructure to address peaks in usage of
    popular IRS.gov offerings such as ``Where's my Refund.'' The IRS has
    also used the Federal Risk and Authorization Management Program
    (FedRAMP) approved public cloud offerings for several tests, including
    performance testing of end-to-end filing season systems and scaling of
    new applications. Although it is difficult to say what percentage of
    the IRS's investments are cloud based services (e.g.one could argue the
    entire ecosystem is a private cloud), the IRS continues to leverage
    cloud offerings where it makes the best sense according to a project's
    lifecycle, type of data and privacy considerations, and integration
    with existing IRS applications.
        Question. Please provide short summaries of three recent IT program
    successes--projects that were delivered on time, within budget, and
    delivered the promised functionality and benefits to the end user. How
    does your department/agency define ``success'' in IT program
    management? What ``best practices'' have emerged and been adopted from
    these recent IT program successes? What have proven to be the most
    significant barriers encountered to more common or frequent IT program
    successes?

        Answer.--
    Project #1: Customer Account Data Engine 2 (CADE 2) Penalty and
            Interest Project
        On October 1, 2009, the IRS Commissioner formally launched the
    Customer Account Data Engine 2 (CADE 2) program to take advantage of
    new technology and revamp the way the IRS does business by providing a
    data-centric solution that provides daily processing of taxpayer
    accounts. In January 2012, the decades-long rhythm fundamentally
    shifted when CADE 2's Transition State 1 (TS 1) began to deliver daily
    tax return processing--enabling faster refunds to taxpayers, more
    timely account updates, and faster issuance of taxpayer notices. The
    Service also began deployment of the CADE 2 database--a single
    centralized relational database of trusted data for individual taxpayer
    accounts--to improve service to taxpayers and enhance IRS tax
    administration.
        CADE 2 Transition State 2 (TS2) is focused on delivering early
    results. On July 29, 2013, the TS2 team took the first step in
    addressing the longstanding Financial Material Weakness by delivering
    the first TS2 project--the 2013 Mid-Year Release of the Integrated Data
    Retrieval System (IDRS) Penalty & Interest (P&I) project. A full
    rollout of the Penalty & Interest Common Code Base was deployed on
    January 2, 2014. Penalty and Interest ensures all major IRS
    applications compute penalty and interest in the same way using the
    same algorithm. P&I is now calculating penalty and interest on
    individual and business accounts for taxes that are not received by the
    due date consistently across all master files (Business Master Files
    and Individual Master Files) and IDRS--and it provides service
    improvements for taxpayers such as more accurate notices and enhanced
    service in helping taxpayers meet their tax obligation. The solution
    uses the existing master file common code modules as baselines and
    incorporates additional requirements for IDRS.
        Since 1996, the Individual Master File (IMF) and Business Master
    File (BMF), the authoritative sources for taxpayer account data, have
    been using common code modules written in C programming language to
    calculate penalty and interest on unpaid balances. On the other hand,
    the Integrated Data Retrieval System (IDRS), the primary system used by
    48,000 IRS customer facing representatives to collect unpaid taxpayer
    account balances and manage unresolved cases, uses COBOL programming
    language to do its calculations. The differences in the two programming
    platforms in calculating penalty and interest causes discrepancies,
    which the Government Accountability Office (GAO) deemed a financial
    material weakness in IRS's tax processing systems. Hundreds of annual
    legislative tax code changes and updates to the Master File Files and
    IDRS systems at the request of the IRS's business partners have
    exacerbated these discrepancies over the years.
        In January 2015, the IRS deployed Penalty and Interest (P&I) Filing
    Season 2015 code changes for the IMF, BMF and IDRS into production, and
    addressed both TS2 common code break-fixes and operations and
    maintenance work. The team also submitted 26 Unified Work Requests
    (UWRs) as candidates for development in upcoming P&I releases.
    Project #2: Foreign Account Tax Compliance Act (FATCA)
        The IRS deployed the Foreign Account Tax Compliance Act (FATCA)
    Release 2.0 on January 12, 2015, enabling registered Foreign Financial
    Institutions (FFIs) and Host Country Tax Authorities (HCTAs) to send
    Form 8966 electronically to the IRS via the International Data Exchange
    Service (IDES). The 8966 data contains foreign account holdings of U.S.
    taxpayers for Filing Season 2014 and will be stored in the
    International Compliance Management Model (ICMM).
        FATCA Release 2.0 was funded in March 2014--and in the span of 10
    months--deployed brand new infrastructure and capabilities and an
    interface with IDES. IDES represents a huge triumph for the IRS. It is
    the first system that allows the international exchange of tax data
    through the XML schema which has been accepted across the globe.
        FATCA Release 2.0 represents the combined efforts of the IRS FATCA
    Program Management Office (PMO), Large Business & International
    collaborators, IT delivery partners, and other stakeholders from across
    the Service. The IRS deployed FATCA Release 2.0 on time and delivered
    the required IT functionality in compliance with legislative mandates.
    Moreover, FATCA Release 2.0 was a tremendous success for the program in
    the face of significant resource constraints, compressed delivery
    timelines, technical complexity, and shifting requirements.
        While FFIs have been able to register with the IRS and receive a
    Global Intermediary Identification Number (GIIN) since December 2013,
    FATCA Release 2.0 deployment on January 12, 2015 enables registered
    FFIs and HCTAs to send Form 8966 to the IRS via IDES. This
    functionality will enable reporting on the foreign account holdings of
    U.S. taxpayers for Filing Season 2015, and that data will be stored in
    the ICMM system for future refund and compliance activities.
        Underreporting accounts for over 80 percent of the overall tax gap,
    with an estimated $100 billion of tax revenues lost each year due to
    offshore tax avoidance activities. FATCA's goal is to identify U.S.
    taxpayers who attempt to shield and divert assets by depositing funds
    in foreign accounts thus reducing the burden on compliant taxpayers.
    Moreover, FATCA supports the IRS's efforts to ensure taxpayers with
    income abroad and at home receive fair and equitable treatment and pay
    the taxes they owe.
        The FATCA PMO established channels and processes to ensure close
    coordination and ongoing communication with FATCA business and IT
    delivery partners (e.g., Governance Board, Advisory Board, town hall
    and integration meetings, integrated production team meetings,
    requirements working sessions, risk meetings, SharePoint tools/
    resources, FATCA Fast Facts newsletter, etc.). These efforts were
    instrumental in achieving a comprehensive understanding of business
    requirements, building shared ownership in program successes, promoting
    a mutual understanding of the risks/challenges, and identifying
    mitigation strategies to address those challenges.
    Project #3: Modernized e-File (MeF)
        Modernized e-File (MeF) is a mixed life-cycle investment that is
    the primary system to receive and process all tax returns submitted
    electronically. MeF provides extensive error checking, data validation,
    and acceptance or rejection acknowledgements to ensure successful
    processing of returns by downstream tax systems. MeF Release 9.5
    focused on the Affordable Care Act (ACA) verification service
    interface, the Foreign Account Tax Compliance Act (FATCA) extensible
    markup language phase 2 standardization, legislative mandates, and
    operations and maintenance.
        MeF is a major application sponsored by Wage & Investment and eFile
    Services (formerly Electronic Tax Administration). The IRS initially
    deployed MeF deployed in 2002 and it provides the following
    functionality:

      --Improved customer service to taxpayers by providing a framework for
            modernizing the way tax returns are electronically filed and
            processed;
      --Operational efficiencies through the receipt of electronic returns
            and supporting documentation through receipt, acceptance, and
            faster acknowledgement; and
      --Timely, consistent, and reliable information for external
            stakeholders participating in e-filing.

        MeF success is defined by delivering services or capabilities that
    achieve the end user requirements and needs along with efficient and
    effective supportability. MeF has been able to leverage lessons learned
    from previous releases to improve its ability to deliver within scope,
    on time, and within budget. Additionally, during Release 9.5 the MeF
    Program Management Office (PMO) created a dependency swim lane chart
    that allowed the program to improve its ability to track and report
    dependencies with external projects and organizations. One of the most
    significant barriers has been related to working with new legislative
    programs that were unfamiliar with internal IRS processes which ensure
    that dependencies related to other IRS projects are captured and
    tracked.
                                     ______

                 Questions Submitted by Senator James Lankford
        Question. In February, a Federal district court judge found that
    the President's executive action on immigration violated the
    Administrative Procedure Act and enjoined implementation.
        Is the IRS complying with the injunction?
        If the injunction has not been lifted or if the appeals process has
    not been exhausted by April 15, will those living here illegally be
    allowed to file back taxes and claim the tax credits?
        Answer. The IRS does not believe that the creation of Deferred
    Action for Parents of Americans (DAPA) or the expansion of Deferred
    Action for Childhood Arrivals (DACA) (if implemented by Department of
    Homeland Security U.S. Citizenship and Immigration Services (DHS
    USCIS)) creates new tax administration responsibilities for the IRS.
    The executive actions do not generate any new filing requirements under
    the tax law. The executive actions also do not increase IRS compliance
    responsibilities in relation to program implementation because
    applicants are not required to show proof of Federal income taxes paid
    when applying to either program. The injunction does not affect tax law
    or IRS processes.
        Individuals working in the United States, including those who
    ultimately receive deferred action, are expected to comply with tax
    requirements and U.S. tax laws. Under the Internal Revenue Code, an
    individual who works in the United States regardless of legal status,
    and who meets the requirements to file a Federal income tax return,
    must file a return. All returns that claim refundable tax credits will
    be subject to the same rigorous compliance programs developed to reduce
    improper payments resulting from erroneous refundable credit claims
    generally. The same audit and collection activities, as well as
    criminal and civil enforcement mechanisms, will continue to apply to
    these claims, subject to budget constraints.
        Question. GAO has identified the enforcement of tax laws as a high
    risk area since its inaugural report in 1990. The IRS estimates it paid
    $5.2 billion in fraudulent identity theft (IDT) refunds in 2013 and it
    has been reported that IDT refunds could rise to more than $20 billion
    annually in the next few years.
        What steps has the IRS taken to combat W-2 filings? What can
    Congress do to make sure you have the tools to prevent the projected
    increase in IDT refunds from skyrocketing into the future?
        Answer. As noted in the GAO report, the IRS recovered or prevented
    the issuance of $24.2 billion of the estimated attempted refund fraud
    in Processing Year 2014, in part, by re-directing both funds and
    resources from traditional tax compliance activities. However, identity
    theft refund fraud continues to be an emerging and evolving issue.
    Investing in new technology and techniques is critical to stopping and
    preventing identity theft and refund fraud. For the IRS to continue
    making progress, without degrading tax compliance, adequate resources
    are critical to the mission. A major obstacle to more effectively
    combatting identity theft and refund fraud is the current budget
    situation.
        Effectively combating identity theft is costly. In fiscal year
    2014, for example, the IRS spent more than $380 million combating
    identity theft and assisting innocent victims, but this effort needs to
    be expanded. The fiscal year 2016 President's budget requests an
    additional $101 million to continue and expand this important work.
        The IRS efforts to combat identity theft are ongoing. Our
    commitment to preventing refund fraud, investigating these crimes, and
    assisting taxpayers victimized by identity theft is a top priority. We
    have made significant progress in this area. In calendar year 2014
    alone, our efforts have suspended or rejected 5.6 million suspicious
    returns. We stopped 1.8 million confirmed identity theft returns,
    totaling $10.8 billion in refunds stopped. Additionally, we stopped $5
    billion worth of refunds for other types of fraud, totaling $15.8
    billion of confirmed fraudulent refunds protected.
        The IRS's fraud detection/revenue protection activities address
    millions of questionable returns each year. All refund returns flow
    through the Electronic Fraud Detection System (EFDS) and Dependent
    Database (DDb) which contain complex fraud models and filters developed
    from historical fraud characteristics used to identify questionable
    income, withholding, refundable credits and/or taxpayer identity. In
    addition to these systemic fraud checks, we perform analysis and pull
    into inventory for review returns with similar characteristics that
    indicate refund schemes. These fraud prevention efforts occur all year
    long. In January 2013, we implemented a new program which allows
    financial institutions to reject questionable refunds when the name/TIN
    listed on the Department of Treasury Automated Clearing House (ACH)
    file for the tax refund does not match the account holder information.
        In addition, the IRS implemented the following improvements to
    further combat fraud in fiscal year 2015:

      --We began limiting the number of direct deposit refunds that can be
            made to a single account to three (3) and additional refunds
            are issued by paper check or are stopped for further review.
            This change is expected to deter fraud and identity theft.
      --We began receiving Device ID information to identify potential
            identity theft or fraud. The Device ID is the unique serial
            number of the device (for example, Computer, Smart Phone or
            Tablet) which is transmitted when e-filing. The unique ID will
            be transmitted as part of the electronically filed return via
            our existing transmission process and will enable the IRS to
            easily associate fraudulent returns that are filed from the
            same device.
      --For the 2015 filing season, we also increased the number of
            identity theft filters over the previous filing season and
            utilized dynamic lists to update filters based upon current
            schemes, historical characteristics and/or patterns.

        A major IRS project under development that will assist with pre-
    refund fraud detection, income verification and taxpayer authentication
    is the Return Review Program (RRP). This application will replace the
    EFDS, enhancing many aspects of IRS compliance activity. RRP will
    perform historical filing analysis and use improved complex programming
    to review all returns for fraud potential enhancing IRS' ability to
    identify and treat fraud and identity theft filings.
        Congress can help the IRS in several ways to provide us the tools
    and resources to continue making progress combating identity theft and
    refund fraud but without degrading traditional tax compliance efforts.
    For example, the enactment of a number of the administration's
    legislative proposals contained in the General Explanations of the
    Administration's fiscal year 2016 Revenue Proposals (the Green Book)
    would further enhance IRS efforts to reduce refund fraud and identity
    theft including:

      --Accelerate Information Return Income Reporting: Requiring
            information returns other than Forms 1099-B, Proceeds from
            Broker and Barter Exchange Transactions, to be filed with the
            IRS (or SSA, in the case of Form W-2) by January 31. Forms
            1099-B would have to be filed with the IRS by February 15. The
            proposal would also eliminate the extended due date for
            electronically filed information returns. This legislative
            proposal, if enacted, would give us the ability to verify the
            amount of withholding taxpayers claim before refunds are paid
            out.
      --Correctable Error Authority: The IRS has authority in limited
            circumstances to identify certain computation or other
            irregularities on returns and automatically adjust the return
            for a taxpayer, colloquially known as ``math error authority.''
            At various times, Congress has expanded this limited authority
            on a case-by-case basis to cover specific, newly enacted 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 budget proposal to replace the existing specific
            grants of this authority with more general authority covering
            computation errors and incorrect use of IRS tables. Congress
            could also help in this regard by creating a new category of
            ``correctible errors,'' allowing the IRS to fix errors in
            several specific situations, such as when a taxpayer's
            information does not match the data in certain government
            databases.
      --Authority To Regulate Return Preparers: In the wake of court
            decisions striking down the IRS' authority to regulate
            unenrolled and unlicensed paid tax return preparers, Congress
            should enact the budget proposal to provide the agency with
            explicit authority to regulate all paid preparers. The
            regulation of all paid preparers, in conjunction with diligent
            enforcement, would help promote high quality services from tax
            return preparers, improve voluntary compliance, and foster
            taxpayer confidence in the fairness of the tax system.
      --Expanded Access to Directory of New Hires: Under current law, the
            IRS is permitted to access the Department of Health and Human
            Services' National Directory of New Hires only for purposes of
            enforcing the Earned Income Tax Credit and verifying employment
            reported on a tax return. The proposal would allow IRS access
            to the directory for individual income tax administration
            purposes that include data matching, verification of taxpayer
            claims during return processing, preparation of substitute
            returns for non-compliant taxpayers, and identification of levy
            sources.

        There are a number of other legislative proposals in the
    administration's fiscal year 2016 budget request that would also assist
    the IRS in its efforts to combat identity theft, including: giving the
    Department of Treasury (Treasury) and the IRS authority to require or
    permit employers to mask a portion of an employee's Social Security
    Number (SSN) on W-2s, which would make it more difficult for identity
    thieves to steal SSNs; adding tax-related offenses to the list of
    crimes in the Aggravated Identity Theft Statute, which would subject
    criminals convicted of tax-related identity theft crimes to longer
    sentences than those that apply under current law; and adding a $5,000
    civil penalty to the Internal Revenue Code for tax-related identity
    theft cases, to provide an additional enforcement tool that could be
    used in conjunction with criminal prosecutions.
        Another way is fully funding the IRS. IRS funding for fiscal year
    2015 is $10.9 billion, which is significantly less than fiscal year
    2014 budget of $11.3 billion or the fiscal year 2010 budget of $12.1
    billion. Along with shrinking budgets is a diminished work force. The
    IRS fiscal year 2014 full-time equivalent (FTE) realization was more
    than 11,500 employees less in comparison with those of fiscal year
    2010. And for fiscal year 2015, we anticipate further staffing
    reductions for a total reduction of over 13,000 employees since fiscal
    year 2010.
        Maintaining adequate staffing levels is an increasingly difficult
    challenge at current funding levels and critical work on developing new
    identity theft prevention tools has been delayed. Examples of new
    information technology capabilities that could not be implemented in
    fiscal year 2014 due to lack of funding included: adding steps to the
    e-file PIN phone and Web applications to prevent identity thieves from
    obtaining e-file PINS, and developing an IRS Web site for taxpayers
    victimized by identity theft to validate their identities using third-
    party data. Continued funding limitations will negatively affect
    critical work on developing new identity theft prevention tools, such
    as the Return Review Program (RRP). The solution to address these
    challenges begins with fully funding the IRS.
        Question. How could the acceleration of W-2 deadlines help combat
    IDT refunds? When do you expect the ongoing cost-benefit analysis on W-
    2 acceleration to be publically released?
        Answer. To effectively stop identity theft refund fraud, the IRS
    must evaluate innovative approaches to supplement conventional
    measures. Information returns (forms such as Forms W-2 and 1099)
    submitted by third parties provide authoritative source data that can
    serve an important role in preventing tax return-based identity theft
    and fraud. A delay in receiving information returns makes return
    verification more difficult. The ability to use information documents,
    submitted by third-party payers to verify suspicious tax returns at the
    time of filing, before refunds are issued, would give the IRS the
    ability to stop more refund fraud.
        Under current law, Forms W-2 must be filed with the Social Security
    Administration (SSA) by the last day of February, or by March 31 if
    filed electronically. Currently, the IRS screens returns for fraud and
    identity theft at multiple points in the processing life cycle and
    addresses the lag time in receiving third-party information reporting
    by using filters and compliance checks to identify potential identity
    theft and fraud. If any is detected, the IRS holds suspect refunds
    until the amounts claimed can be validated. When necessary, the IRS
    contacts employers to verify questionable return information. As the
    identity theft program evolved, the IRS leveraged the identity theft
    indicators on taxpayers' accounts to place additional proactive tools
    that identify fraudulent returns when they are filed and accelerate the
    use of information returns received to identify questionable returns
    earlier.
        Accelerating information return filing due dates would greatly
    enhance the IRS's ability to verify suspicious returns earlier in the
    process and help us do a better job of stopping improper payments. The
    IRS convened a working group of internal stakeholders and subject
    matter experts to identify the costs and benefits of accelerating Form
    W-2 deadlines.
        Question. You have requested authority to reduce the current, 250-
    return threshold for employers electronically filing information
    returns.
        How has the utilization of electronic filings succeeded in creating
    costs savings thus far?
        Answer. Electronic filing supports the broader goals of improving
    IRS service to taxpayers, enhancing compliance, and modernizing tax
    administration. Expanding electronic filing will help provide tax
    return information in a more uniform electronic form, which will
    enhance the ability of the IRS to more productively focus its audit
    activities. This can reduce burdens on businesses where the need for an
    audit can be avoided. Overall, increased electronic filing of returns
    may improve satisfaction and confidence in the filing process.
        It costs the IRS $3.54 to process a paper 1040 versus only 18 cents
    to process the 1040 electronically. With the increase in electronic
    filing, the IRS has realized savings in multiple areas including
    reducing the number of sites processing incoming returns from 10 to 5.
        Question. What are the estimated cost savings that can be achieved
    by lowering the threshold to 5 or 10 filings?
        Answer. Your question references the administration's legislative
    proposal ``Enhance Electronic Filing of Returns'' which is included in
    the Green Book. Congress can help us further enhance our efforts to
    reduce costs and increase accuracy by enacting this proposed
    legislation.
        The proposal requests that regulatory authority be expanded to
    allow reduction of the 250-return threshold in the case of information
    returns such as Forms 1042-S, 1099, 1098, 1096, 5498, 8805, 8955-SSA,
    and 8966. Any new regulations would be required to balance the benefits
    of electronic filing against any burden that might be imposed on
    taxpayers, and implementation would take place incrementally to afford
    adequate time for transition to electronic filing. Taxpayers would be
    able to request waivers of this requirement if they cannot meet the
    requirement due to technological constraints, if compliance with the
    requirement would result in undue financial burden, or as otherwise
    specified in regulations.
        If legislation was enacted, and the e-file threshold for
    information returns was lowered from 250 to 5, we estimate
    approximately 38 million more information returns that are currently
    filed on paper would be submitted electronically. This change in paper
    receipts would result in an opportunity to reinvest approximately $16
    million annually.
        In addition to receiving more information returns electronically,
    earlier receipt of information returns would enable the IRS to prevent
    more identity theft and fraud. Another fiscal year 2016 legislative
    proposal would require information returns to be filed with the IRS (or
    SSA, in the case of Form W-2) by January 31. The exception is Form
    1099-B, Proceeds from Broker and Barter Exchange Transactions, which
    would have to be filed with the IRS by February 15. The proposal would
    also eliminate the extended due date for electronically filed
    information returns. If enacted, this proposal would further enhance
    IRS efforts to reduce refund fraud and identity theft.
        Question. Billions of dollars are wasted every year because the IRS
    has little ability to monitor overpayments or prevent EITC payments to
    ineligible recipients. In the last decade, 21 to 29 percent of all EITC
    payments were erroneously awarded each year, including between $13.3
    and $15.6 billion in fiscal year 2013. A GAO audit of improper payments
    found much of the waste is preventable, attributing EITC's unacceptable
    error rate to a number of factors including, ``complexity of the tax
    law, structure of the program, confusion among eligible claimants, high
    turnover of eligible claimants, and unscrupulous return preparers.''
        Your testimony mentions preparer penalties and due diligence
    requirements to help mitigate the overpayment problems.
        Can you go into more specifics on what these initiatives entail?
        Answer. The IRS improper payment strategy is to intervene early to
    ensure compliance with the rules and regulations. We address improper
    payments through our compliance programs for both preparers and
    taxpayers, as well as through extensive outreach and education.

        Results of our fiscal year 2014 actions include:

      --Detected and stopped 645,813 fraudulent returns through fraud
            detection filters from being processed, preventing nearly $3.2
            billion in improper EITC payments;
      --Protected another $3.2 billion in revenue through the following
            compliance activities:

        --435,638 audits
        --1,053,304 misreported income cases
        --210,000 math error adjustments

      --Completed a new error rate estimate based on the EITC component of
            the Tax Year 2010 National Research Plan (NRP) study that meets
            IPIA standards for measuring and reporting on improper
            payments;
      --Completed the fiscal year 2015 action plan to reduce improper
            payments and a root cause analysis based on NRP and compliance
            study data;
      --Continued to analyze the most recent compliance study and NRP data
            to inform our compliance strategy and update EITC
            administration where feasible;
      --Imposed over 4,774 2-year bans and 102 10-year bans on taxpayers
            from claiming the EITC in cases where the IRS determined during
            an EITC audit that the taxpayer intentionally disregarded the
            rules and regulations or committed fraud;
      --Alerted approximately 97,000 taxpayers that a qualifying child for
            the EITC claimed on their returns had also been claimed by
            another person; and
      --Stopped fraudulent EITC refund claims through our Criminal
            Investigation (CI) division indictments

        --285 EITC Questionable Refund Program (QRP) scheme indictments
                with 262 convictions
        --108 EITC Return Preparer indictments with 83 convictions.
    Return Preparer Programs
        Paid return preparers assisted in the preparation of 55 percent of
    all EITC claims in tax year 2013. Because evidence suggests that
    unscrupulous preparers and preparers not exercising due diligence
    contribute to overall improper EITC claims, the IRS has expanded its
    efforts to address preparers in recent years.
        The IRS continues to have an EITC-focused paid return preparer
    initiative. This effort includes continued outreach and compliance
    actions to address preparer EITC due diligence noncompliance using
    existing treatments and continued testing of new preparer treatments
    and approaches. The objective is to reduce the risk of EITC erroneous
    refunds by focusing efforts on noncompliant return preparers before and
    early in the filing season.
        In fiscal year 2014, the IRS expanded the EITC Return Preparer
    Strategy to include over 18,000 non-compliant taxpayers. Corrective
    actions taken prior to the filing season to address noncompliance
    included pre-filing season letters, educational visits, prior year
    client return audits, and preparer due diligence audits. The filing
    season corrective actions included letters, phone calls, client return
    audits, and preparer due diligence audits. For example:

      --Pre-Filing Season and Filing Season Notices: The IRS sends
            compliance and warning notices to preparers to educate them on
            their due diligence responsibilities and the consequences of
            noncompliance.
      --Due Diligence Visits (DDVs): Field examiners audit EITC preparers
            to verify they are meeting their due diligence requirements and
            assess penalties as warranted. In fiscal year 2014 examiners
            completed 411 pre-filing season DDVs with a penalty rate of 84
            percent and over $22 million in proposed penalties, 296 filing
            season DDVs with a penalty rate of 80 percent and over $3.5
            million in penalties, and almost $300,000 on 21 filing season
            DDVs as a follow-up for continuing noncompliant preparers who
            received an educational visit.
      --Knock and Talk Visits: This integrated approach consists of
            Criminal Investigation (CI) agents and examiners visiting EITC
            preparers to educate them on EITC laws and due diligence
            requirements. During fiscal year 2014, 96 Knock and Talk Visits
            were conducted.
      --EITC Due Diligence Injunctions: This initiative utilizes the
            results of previous IRS compliance actions to enable an
            efficient injunction process to prevent egregious preparers
            from filing future returns. For fiscal year 2014, the IRS,
            working with the Department of Justice, obtained four civil
            injunctions with a revenue impact of $14.5 million.
      --Undercover Shopping: The IRS continues its efforts around EITC paid
            preparers, including undercover shopping by CI agents and
            preparer investigations.

        Fiscal year 2014 was the third year that preparers were subject to
    the increased IRC Sec. 6695(g) penalty that increased from $100 to $500
    and were required to comply with the expanded Treasury Regulations
    Sec. 1.6695-2. As part of their due diligence, these regulations
    require paid preparers to attach Form 8867 (the EITC due diligence
    checklist), previously retained in their records, to their clients'
    returns and require preparers to retain client records on which they
    had relied to make an EITC eligibility determination.
        The IRS sends Letter 1125, Transmittal of Examination Report,
    proposing due diligence penalties on noncompliant return preparers who
    fail to attach or submit the Form 8867 to their clients' EITC returns.

      --For tax year 2012, the IRS issued Letter 1125 to 774 noncompliant
            EITC return preparers proposing over $13 million in due
            diligence penalties.
      --For tax year 2013, the IRS issued 225 letters proposing almost $2.9
            million in due diligence penalties.

        Return preparers have 30 days from the issuance of the letters to
    respond and request an Appeals hearing.
        We continue to conduct outreach and education activities to EITC
    return preparers regarding EITC due diligence requirements. Over 13,600
    preparers received a certificate of completion for the English and
    Spanish interactive EITC Due Diligence Training modules. At the 2014
    Nationwide Tax Forums, more than 4,150 preparers attended the EITC due
    diligence presentation and 5,486 attended the child-related tax
    benefits presentation.
        Question. What other steps can IRS and Congress take to prevent 25
    percent overpayment rates?
        Answer. Congress can help us further enhance our efforts to reduce
    EITC improper payments by enacting the following legislative proposals:

      --Correctable Error Authority (CEA): The proposal would remove the
            existing specific grants of math error authority, and provide
            that ``math error authority'' will refer only to computational
            errors and the incorrect use of any table provided by the IRS.
            In addition, the proposal would add a new category of
            ``correctable errors.'' Under this new category, Treasury would
            have regulatory authority to permit the IRS to correct errors
            in cases where (1) the information provided by the taxpayer
            does not match the information contained in government
            databases, (2) the taxpayer has exceeded the lifetime limit for
            claiming a deduction or credit, or (3) the taxpayer has failed
            to include with his or her return documentation that is
            required by statute. The proposal would be effective on the
            date of enactment. However, the IRS' current grant of math
            error authority would continue to apply until Treasury and the
            IRS issue final regulations addressing correctable errors.
              The IRS detects far more potential non-compliance using
            filters than it can pursue given limited examination resources.
            If enacted, correctible error authority, combined with
            resources to develop and perfect new data sets and compliance
            filters, could potentially allow the IRS to prevent billions
            more in EITC improper payments than it does today.
      --Accelerated Information Return Income Reporting: Under current law,
            most information returns, including Forms 1099 and 1098, must
            be filed with the IRS by February 28 of the year following the
            year for which the information is being reported, while Form W-
            2 must be filed with the SSA by the last day of February. The
            due date for filing information returns with the IRS or the SSA
            is generally extended until March 31 if the returns are filed
            electronically. The administration's proposal would require
            information returns to be filed with the IRS (or the SSA, in
            the case of Form W-2) by January 31, except that Form 1099-B
            would have to be filed with the IRS by February 15. The
            proposal would also eliminate the extended due date for
            electronically filed returns.
      --Authority To Regulate Return Preparers: In the wake of court
            decisions striking down the IRS' authority to regulate
            unenrolled and unlicensed paid tax return preparers, Congress
            should enact the budget proposal to provide the agency with
            explicit authority to regulate all paid preparers. The
            regulation of all paid preparers, in conjunction with diligent
            enforcement, would help promote high quality services from tax
            return preparers, improve voluntary compliance, and foster
            taxpayer confidence in the fairness of the tax system.
      --Due Diligence: Return preparers who prepare tax returns on which
            the EITC is claimed must meet certain due diligence
            requirements to ensure their clients are in fact eligible to
            receive this credit. In addition to asking questions designed
            to determine eligibility, the preparer must complete a due
            diligence checklist (Form 8867) for each client and file the
            checklist with the client's return. The administration's
            proposal would extend these additional due diligence
            requirements to all Federal income tax returns claiming the CTC
            and the ACTC. The existing checklist would be modified to take
            into account differences between the EITC and CTC.

        Question. The President's recent actions on immigration and the IRS
    confirmed that those that get Social Security Numbers will be able to
    file retroactively to gain EITC refunds for three back years.
        Do you anticipate that the EITC fraud rates will rise or fall with
    this new influx? What is the anticipated amount of additional EITC
    payments resulting from the immigration action? How does the IRS plan
    to evaluate fraud associated with the influx?
        Answer. The IRS does not believe that the creation of DAPA or the
    expansion of DACA (if implemented by DHS USCIS) creates new tax
    administration responsibilities for the IRS. The executive actions do
    not generate any new filing requirements under the tax law. The
    executive actions also do not increase IRS compliance responsibilities
    in relation to program implementation because applicants are not
    required to show proof of Federal income taxes paid when applying to
    either program.
        A taxpayer may claim the EITC for a taxable year using an SSN
    acquired in a later taxable year (subject to refund limitations under
    section 6511 of the Internal Revenue Code). Section 32 of the Code
    requires an SSN on the return, but a taxpayer claiming the EITC is not
    required to have an SSN before the close of the year for which the EITC
    is claimed. There is no requirement for individuals who claim
    refundable credits to identify themselves, at filing, as having
    received a deferred action or employment authorization under these
    programs.
        In working to ensure compliance with EITC rules, the IRS uses
    third-party data to verify that individuals claiming the EITC meet the
    requirement that they are a U.S. citizen or resident alien. Applicants
    must supply valid SSNs on their tax returns in order for the EITC claim
    to be processed. The IRS uses the SSA database to check that
    individuals claiming the EITC have provided valid SSNs for themselves
    and any qualifying children.
        Participants in the existing DACA program who claim refundable tax
    credits will be subject to the same rigorous compliance programs
    developed to reduce improper payments resulting from erroneous
    refundable credit claims generally. The same audit and collection
    activities, as well as criminal and civil enforcement mechanisms, will
    continue to apply to these claims, subject to budget constraints.
        The IRS will continue to take actions to reduce improper payments
    as they relate to refundable credits.
        Question. A glitch in the healthcare.gov Web site used the wrong
    year's data for subsidy calculations that caused 800,000 taxpayers to
    receive erroneous tax forms for their subsidy. The administration
    announced that it will not require the 50,000 taxpayers who filed
    returns based on inaccurate subsidy data, although taxpayers who are
    owed a larger subsidy can file an amended return.
        What are the estimated total costs for this glitch through both the
    overpayments to the 50,000 taxpayers who had already filed and the
    administrative costs to resend the correct subsidy data?
        Answer. The IRS believes any overpayments to taxpayers who had
    already filed their income tax returns using Forms 1095-A that
    contained the incorrect second lowest cost silver plan are relatively
    small--smaller than the administration and collection costs that would
    be involved in processing an amended return or determining the correct
    amount and collecting it. As the provider of the forms, any questions
    you have concerning the cost of resending corrected forms should be
    directed to CMS.
                                     ______

                Questions Submitted by Senator Richard J. Durbin
        Question. Americans now hold more than $1.2 trillion in student
    loan debt, which has become the largest household debt following
    mortgage debt, even surpassing credit card debt. Student loan balances
    have tripled over the past decade, forcing many to delay important
    financial steps like buying a home, starting a business, and saving for
    retirement. Most unfortunately, delinquencies are on the rise as many
    struggle to repay student loan debt. Understanding these trends, it is
    critical borrowers have options to successfully repay.
        Income-driven repayment options give Federal student loan borrowers
    the opportunity to include income in monthly payment calculations,
    which prove helpful for the millions of students whose debt far exceeds
    their income. These repayment plans help give borrowers a more
    affordable monthly payment, enabling them to stay current on their
    loans.
        Currently, Federal student loan borrowers wishing to continue
    enrollment in income-driven repayment plans must submit tax returns to
    provide income information on an annual basis, regardless of any change
    in income. If a borrower fails to do so--which many do--then his or her
    monthly payments default to higher amounts which in many cases is
    unaffordable, leading them to delinquency or default.
        The IRS in previous years has allowed borrowers in income-
    contingent repayment to give multi-year advance consent to share the
    relevant income information required to continue participation in the
    program. Many have suggested reinstating this option would ensure
    borrowers in income-driven plans can manage their monthly loan
    payments, preventing delinquency and default. Further, it would reduce
    the paperwork burden on the IRS, borrowers, and servicers.
        Has the IRS considered reinstating multi-year consent to share
    income information for Federal student loan borrowers enrolled in
    income-driven repayment plans? If so, what opportunities or barriers
    exist to doing so?
        Answer. There is no statutory or regulatory prohibition to a multi-
    year consent, so long as the taxpayer may revoke it. However, the
    instructions to Form 8821, ``Tax Information Authorization,'' and Form
    2848, ``Power of Attorney and Declaration of Representative,'' indicate
    the period of consent may not extend for more than 3 years going
    forward. This language reflects strong legal and policy concerns over
    ``stale'' consents. In addition, IRS' systems are only programmed for
    the 3-year rule.
        In previous years, the multi-year consents to share tax return
    information with the Department of Education (DOE) had to be submitted
    to the IRS on paper. This format is still required as the IRS does not
    have the capability to accept these consents electronically. Based on
    discussions with DOE, it is the IRS's understanding DOE does not want
    to obtain paper consents from students, but wants to be able to obtain
    and allow students to file these consents electronically. Currently,
    the IRS's limited IT resources are required to implement unfunded
    legislative mandates, i.e., ACA, FATCA, ABLE accounts, and Certified
    Professional Employment Organizations, and are not available to develop
    a system for accepting consent forms electronically. Also, an
    alternative to using multi-year consents for income-driven repayment
    plans currently exists: the IRS has modernized its transcript delivery
    options to provide taxpayers with an easy and automated option for
    requesting their tax information. A taxpayer can submit a request
    online at www.irs.gov to receive an online copy of his or her tax
    account transactions, line-by-line tax return information or wage and
    income reported to us for a specific tax year. The student may then
    share this information with DOE to enroll in an income-drive repayment
    plan.
        Question. Last month, GAO highlighted estimates by the IRS which
    showed $5.8 billion was paid out last year on fraudulent tax returns. I
    commend the IRS for working within its challenging budget and
    dedicating resources to combat this criminal problem, which also led to
    recovering or preventing $24.2 billion from being paid to tax frauds
    last year.
        At the same time, the IRS can and should do better--this problem
    cannot be eliminated without strong resources for enforcement, such as
    technology, research, and personnel.
        Can you explain how investing in preventing identity theft and tax
    fraud would benefit the Federal Government and taxpayers and what would
    happen should the agency not have the ability to do so? What
    improvements would be made if the IRS had additional resources to
    address the $5.8 billion paid out last year on fraudulent tax returns,
    as well as identify other fraudulent tax returns not currently
    identifiable?
        Answer. As noted in the GAO report, the IRS recovered or prevented
    the issuance of $24.2 billion of the estimated attempted refund fraud
    in processing year 2014, in part, by re-directing some funding and
    resources from traditional tax compliance activities. But identity
    theft refund fraud is an emerging and evolving issue. Continually
    investing in new technology and techniques is critical to stopping and
    preventing identity theft and refund fraud. For the IRS to continue
    making progress, without degrading traditional tax compliance efforts,
    adequate resources are critical to the mission. A major obstacle to
    more effectively combatting identity theft and refund fraud is the
    current budget situation.
        In the National Taxpayer Advocate's 2014 Annual Report to Congress
    she writes ``The IRS's ability to meet taxpayer needs has been
    deteriorating for the past decade as the agency's workload has
    increased and its budget has declined.'' \1\
    ---------------------------------------------------------------------------
        \1\ Taxpayer Advocate Service--2014 Annual Report to Congress--
    Volume One page 5.
    ---------------------------------------------------------------------------
        The IRS funding for fiscal year 2015 is $10.9 billion, which is
    significantly less than fiscal year 2014 budget of $11.2 billion or the
    fiscal year 2010 budget of $12.1 billion. Along with shrinking budgets
    is a diminished work force. The IRS fiscal year 2014 full-time
    equivalent (FTE) realization was more than 11,500 employees less in
    comparison with those of fiscal year 2010. And for fiscal year 2015, we
    anticipate further staffing reductions for a total reduction of over
    13,000 employees since fiscal year 2010.
        Maintaining adequate staffing levels is an increasingly difficult
    challenge at current funding levels and critical work on developing new
    identity theft prevention tools has been delayed.
        Identity theft refund fraud is an evolving issue. Ongoing
    investment in new technology and techniques is critical to stopping and
    preventing identity theft and refund fraud. For the IRS to continue
    making progress and without degrading traditional tax compliance
    efforts, adequate resources are critical to the mission.
        The solution to address these challenges begins with fully funding
    the IRS.
        Question. A recent front-page New York Times article, ``Some Owners
    of Private Colleges Turn a Tidy Profit by Going Nonprofit,'' raised
    concerns about the way in which some for-profit colleges have converted
    to non-profit status. This may be a growing trend in the industry.
        Are you aware of the circumstances surrounding these transactions,
    especially where they appear in reports to have been structured in a
    way that enriches the schools' owners and abuses the non-profit
    structure through questionable self-dealing? Please provide an
    assessment of such transactions to date.
        Answer. Section 6103 of the Internal Revenue Code (``Code'')
    prohibits the disclosure of information about specific taxpayers unless
    a Code provision authorizes such a disclosure. Therefore, the IRS
    cannot comment about the circumstances, or provide an assessment of,
    any particular transactions. As a general matter, an organization will
    not qualify under section 501(c)(3) unless ``no part of [its] net
    earnings . . . inures to the benefit of any private shareholder or
    individual.'' This prohibition on inurement is implicated when there
    are transactions between the exempt organization and an individual who
    is an insider. Generally, an insider is a person who is in a position
    to exercise control or influence over the organization and would
    generally include, but is not necessarily limited to, an organization's
    founders, trustees, directors, officers, and key employees.
        There is nothing in section 501(c)(3) to prohibit dealings between
    a charitable organization and its insiders (those in controlling
    positions) as long as those dealings are at arm's length, in good
    faith, and reasonable. For example, if an organization pays a
    reasonable compensation to its founder for services rendered, that is
    not inurement. However, when the interests of the charity are
    sacrificed to the private interests of the founder or another insider,
    exemption may be jeopardized.
        The courts have broadly construed the term ``net earnings'' as used
    in the prohibition on inurement to include more than gross receipts
    minus disbursements as shown on the organization's books and records.
    Examples of inurement include: excessive compensation (see Church of
    Scientology, 823 F.2d 1310 (9th Cir. 1987)); interest-free, unsecured
    loans and payment of personal expenses (see John Marshall Law School v.
    U.S., 228 Ct. Cl. 902 (1981)); excessive rents and improvements made on
    real estate owned by insiders (see Texas Trade School v. Commissioner,
    272 F.2d 168 (5th Cir. 1959)); reports and surveys furnished to members
    (see General Contractors' Ass'n v. U.S., 202 F.2d 633 (7th Cir. 1953));
    and, services to members (see Chattanooga Auto Club v. Commissioner,
    182 F.2d 551 (6th Cir. 1950)).
        Additionally, under section 4958, an excise tax is imposed on
    disqualified persons who engage in excess benefit transactions with the
    charitable organization. A disqualified person is any person in a
    position to exercise substantial influence over the affairs of the
    organization and also includes family members of the disqualified
    person and entities controlled by the disqualified person (owning more
    than 35 percent voting power). An excess benefit transaction is ``any
    transaction in which an economic benefit is provided by an applicable
    tax-exempt organization directly or indirectly to or for the use of any
    disqualified person if the value of the economic benefit provided
    exceeds the value of the consideration (including the performance of
    services) received for providing such benefit'' (IRC Sec. 4958(c)(1)).
    The legislative history of section 4958 provides that the section 4958
    excise tax may be imposed in lieu of (or in addition to) revocation of
    an organization's tax-exempt status.
        As described above, executive compensation may implicate both
    inurement and excess benefit transaction rules. The final report,
    Colleges and Universities Compliance Project, describes what the IRS
    learned about the amounts of compensation paid by colleges and
    universities that were examined, the process by which compensation
    amounts were determined, and whether those amounts were reasonable. For
    top management officials in both public and private colleges that were
    examined, the average total compensation was a little over $600,000 and
    the median total compensation was about $500,000. It should be noted
    the schools selected for examination did not represent a statistical
    sample of all colleges and universities, which means the results are
    not attributable to all colleges and universities, only to the schools
    examined. As a result of the issues identified in the report, the IRS
    is seeking to ensure, through education and examinations, that tax-
    exempt organizations are aware of the importance of using appropriate
    comparability data when setting compensation.
        Finally, the IRS maintains an ongoing examination program to ensure
    exempt organizations continue to meet the requirements for tax-exempt
    status. When the IRS receives information about an organization that
    raises questions about its continued exempt status or compliance with
    the tax laws, it reviews it to determine if it warrants an examination
    or other action.
                                     ______

                 Questions Submitted to Hon. J. Russell George
                  Questions Submitted by Senator John Boozman
                        information technology security
        Question. The IRS is responsible for safeguarding a vast amount of
    sensitive financial and personal data, processing returns that contain
    confidential information for over 100 million taxpayers. The agency
    needs to protect taxpayer information from misuse, improper disclosure,
    or destruction. This responsibility is even more complex given the vast
    amount of data being sent and exchanged as part of the Affordable Care
    Act.
        TIGTA has consistently ranked protection of taxpayer data as one of
    the highest priority challenges facing the IRS. In addition, GAO noted
    that although the IRS is making progress in addressing information
    security, weaknesses remain that could affect the confidentiality,
    integrity, and availability of financial and sensitive taxpayer data.
        In your fiscal year 2014 Federal Information Security Management
    Act report you identified four security program areas which were not
    fully effective due to one or more Department of Homeland Security
    (DHS) guideline program attributes that were not met. You noted that
    the IRS had not yet implemented its Information Security Continuous
    Monitoring strategy, and that the IRS did not always report incidents
    involving Personally Identifiable Information to the U.S. Computer
    Emergency Response Team (US-CERT) within established timeframes. The
    report also noted that the IRS had not yet fully implemented a process
    for identifying and tracking contractors who are required to complete
    specialized training, and had not fully implemented unique user
    identification and authentication that complies with Homeland Security
    Presidential Directive-12 (HSPD-12).
        In that report your office noted that until the IRS takes steps to
    improve its security program deficiencies and fully implements all 11
    security program areas required by the FISMA, taxpayer data will remain
    vulnerable to inappropriate use, modification, or disclosure, possibly
    without being detected.
        Would you please update the subcommittee with specific information
    on the status of the IRS' progress on addressing these deficiencies?
        Answer. We plan to begin an assessment of the Federal Information
    Security Management Act (FISMA) for fiscal year 2015 later this year,
    with a final report scheduled for issuance in September 2015. As in
    previous years, we will evaluate the progress being made on the
    security program areas required by the FISMA. For fiscal year 2015, one
    security area, Security Capital Planning, has been dropped for this
    year's FISMA assessment by the Office of Management and Budget and the
    Department of Homeland Security. When we complete this year's FISMA
    audit, we would be happy to share our assessment of the IRS's progress
    to better protect taxpayer information in the context of the 10
    security program areas.
                             payments to prisoners
        Question. In the past TIGTA has identified refund fraud committed
    by prisoners as a significant problem for tax administration. Just last
    fall a report noted that refund fraud associated with prisoner Social
    Security Numbers remains a serious problem. The number of fraudulent
    tax returns filed using a prisoner's Social Security Number that were
    identified by the IRS increased from more than 37,000 tax returns in
    calendar year 2007 to more than 137,000 tax returns in calendar year
    2012. The refunds claimed on these tax returns increased from $166
    million to $1 billion.
        I understand that Treasury has the authority to share information
    with the Federal Bureau of Prisons and State Departments of Corrections
    to help determine if prisoners may have filed or help the filing of a
    fraudulent return.
        Would you please give us an update on the effectiveness of the IRS'
    efforts to reduce these improper payments to prisoners, specifically:
        Has the IRS shared fraudulent prisoner tax return information with
    Federal or State prison officials? Has the Commissioner, Wage and
    Investment Division, established a Memoranda of Understanding with the
    Federal Bureau of Prisons and all State Departments of Corrections?
        Answer. As of March 24, 2015, the IRS has still not shared any
    fraudulent prisoner tax return information with Federal or State prison
    officials. In addition, the IRS indicated that as of March 24, 2015, it
    has not completed a Memorandum of Understanding with the Federal Bureau
    of Prisons. The IRS has completed Memoranda of Understanding with seven
    State Departments of Corrections. Thirteen State Departments of
    Corrections have elected not to participate in this program.
        Question. Has the IRS developed processes to identify tax returns
    filed that have the same characteristics of confirmed fraudulent
    prisoner tax returns? If no, why not? Has the IRS determined whether
    these tax returns should be included in the annual report to Congress?
        Answer. The IRS has not developed processes to identify tax returns
    filed that have the same characteristics of confirmed fraudulent
    prisoner tax returns.
        We recommended that the IRS develop processes to identify tax
    returns filed that have the same characteristics as confirmed
    fraudulent prisoner tax returns, including those fraudulent tax returns
    identified as part of the IRS's other fraud detection programs, and
    determine whether these tax returns should be included in the annual
    report to Congress. However, the IRS disagreed with our recommendation,
    stating that the methodology used in the annual report to Congress is
    consistent with the methodology used in reports of previous years. The
    IRS stated that it reports all known false and fraudulent returns filed
    by prisoners as required by the statute. We remain concerned that the
    IRS's annual report only includes false and fraudulent tax returns
    filed using the Social Security Number (SSN) of a prisoner. The report
    does not include, as required, information related to the filing of
    false and fraudulent tax returns by prisoners. The characteristics that
    we provided in our report were used to show information that could be
    used by the IRS to better determine the possible extent of the filing
    of false or fraudulent tax returns by Federal and State prisoners that
    is not included in the IRS's annual reports to Congress.
        Question. Has the IRS ensured that all tax returns that are filed
    using a prisoner Social Security Number are assigned a prisoner
    indicator? Has the IRS identified and addressed the cause of the cases
    TIGTA found that were not identified with a prisoner indicator?
        Answer. No, the IRS is not ensuring that all tax returns that are
    filed using a prisoner SSN are assigned a prisoner indicator. In
    September 2014, we reported that our analysis of tax returns filed
    during Calendar Year 2013 identified 43,030 tax returns that were filed
    using a prisoner SSN that were not assigned a prisoner indicator and
    recommended that the IRS ensure all tax returns filed using a prisoner
    SSN are assigned a prisoner indicator. The IRS agreed with this
    recommendation to the extent that it agrees that all accounts for which
    a tax return is filed using a prisoner SSN should be identified. The
    IRS stated that the Master File displays that information for all
    prisoner accounts to alert IRS employees addressing other issues
    related to the tax return or to that account. The IRS disagreed that an
    indicator should be assigned to returns for Electronic Fraud Detection
    System (EFDS) screening when a refund is not being claimed.
        As we noted in our report, the IRS incorrectly stated that the
    Master File could be used by IRS employees to identify tax returns
    filed using a prisoner SSN. Our research of the specific returns we
    identified found that not all of them were identified on the Master
    File. As we previously reported, we believe the IRS should assign a
    prisoner indicator to all prisoner tax returns. The assignment of a
    prisoner indicator is an automated process requiring the IRS to expend
    no additional resources to ensure that tax returns with a prisoner SSN
    are consistently assigned.
        Question. According to a TIGTA report, a computer programming error
    resulted in the IRS not assigning a prisoner indicator to 3,139 tax
    returns TIGTA identified. Without the proper assignment of a prisoner
    indicator, the tax returns are not sent through those fraud detection
    filters specific to a prisoner-filed tax return. Has the IRS corrected
    this error?
        Answer. No, the IRS has not corrected the error that resulted in
    our identification of 3,139 tax returns without a prisoner indicator
    assigned. In our September 2014 report, we recommended that the IRS
    correct the computer programming errors that resulted in not assigning
    a prisoner indicator to these 3,139 tax returns. The IRS disagreed with
    our recommendation, stating that the condition that caused the 3,139
    returns not to receive prisoner indicators by the EFDS is a systemic
    limitation caused by unperfected entity data included in the return
    record that is delivered to the EFDS. According to the IRS, the
    condition affected approximately 3 percent of transcribed paper
    returns. The IRS stated other processing systems validate and perfect
    the data before the return information posts to the Master File, and
    the returns are still processed through the EFDS to screen them and
    assign a data mining score to assess fraud potential. We agree these
    tax returns are still screened for fraud through the EFDS; however,
    these tax returns will not be screened using the filters specific to
    prisoner fraud unless the return is assigned a prisoner indicator.
                                    e-filing
        Question. In the past TIGTA has noted that IRS E-Services need to
    improve cyber-security for the IRS Registered User Portal used for
    electronic filing of tax returns.
        Has the IRS made sufficient progress in securing this gateway into
    the IRS system?
        Answer. Yes, the IRS has made some progress in this area. We are
    available to brief the committee in person to provide further
    information on this issue.
                                     audits
        Question. As we have discussed, there are ongoing investigations
    related to IRS treatment of certain groups when they applied for tax-
    exempt status. These activities, and the TIGTA investigation, were
    revealed to the press 2 days after this subcommittee's hearing with the
    IRS. A hearing at which there was no indication of the disclosure to
    come.
        Since that time, there were more TIGTA reports relating to
    excessive spending on travel by IRS executives, as well as excessive
    and questionable spending on conferences.
        Given that experience, we need to ask you, is TIGTA engaged in any
    other audits related to serious mismanagement issues at the IRS?
        Answer. We have ongoing audits that have identified areas in which
    IRS management can improve its processes. Examples of upcoming reports
    in the near future include:

      --Awarding of contracts and new work on existing contracts through
            modifications to contractors (corporations) with Federal tax
            debt;
      --Retaining employees with a history of willful violations of tax law
            without sufficient documentation of the basis for the decision.

        For those issues we believe will be of interest to the Congress, we
    offer briefings to congressional committees before the reports are
    released.
                                 missing emails
        Question. In testimony before the House last week, I understand
    your office provided some new information on the investigation you are
    conducting into the disappearance of certain emails associated with the
    targeting of tea party groups for special scrutiny.
        According to reports, your investigators have found hundreds of
    backup tapes, hard drives from email services, and over 32,000 unique
    emails that the IRS told Congress could not be retrieved.
        The subcommittee understands this is an ongoing investigation but
    would you please give us an update on this matter as is appropriate?
        Answer. We have made significant progress in the investigation to
    date. As we currently understand the facts and evidence in hand, we
    will be able to complete our investigative work after we complete our
    review of the newly discovered e-mails we obtained from the back-up
    tapes and conduct necessary additional follow up interviews. We are
    also finalizing our examination of Microsoft Exchange Server hard
    drives to determine if any additional e-mails can be obtained from that
    source.
        Question. Would you give us any projected timeline you may have for
    concluding your work?
        Answer. Barring any unforeseen complications, and based on
    obtaining the results from the examination of the Microsoft Exchange
    Server hard drives, we will complete the investigation in the near
    future.
                                 irs challenges
        Question. IRS faces funding challenges as do many Federal agencies.
    The GAO noted in their review of the IRS budget request that additional
    funding is not the only solution. GAO noted that it has recommendations
    on IRS's operations that may help it achieve efficiencies over time,
    such as developing a long-term plan to improve web services.
        Are there any particular recommendations TIGTA can provide to help
    improve IRS services without additional funding or through redeployment
    of existing resources?
        Answer. Achieving program efficiencies and cost savings is
    imperative, as the IRS must continue to carry out its mission with a
    significantly reduced budget. TIGTA has recently reported on several
    areas where the IRS can achieve cost savings, more efficiently use its
    limited resources, and make more informed business decisions. For
    example, we reported that the IRS continues to incur rental costs for
    more workstations than required. TIGTA estimated that if the employees
    the IRS allows to routinely telework on a full- or part-time basis
    shared their workstations on days they were not in the office, over
    10,000 workstations could potentially be eliminated. The sharing of
    these workstations could allow the IRS to reduce its long-term office
    space needs by almost 1 million square feet, resulting in potential
    rental savings of approximately $111 million over 5 years. We also
    reported that potential cost savings could be achieved from expanded
    electronic filing of business returns. Providing businesses the ability
    to electronically file their tax returns concurrently with payment of
    their tax due on the same system could provide one-stop service which
    would benefit business filers.
        In addition, we reported that the IRS could have potentially saved
    $17 million in fiscal year 2012 if it allowed taxpayers to
    electronically file amended tax returns rather than require these types
    of returns to be only filed on paper. By electronically filing these
    returns, the IRS could use the same processes it uses to verify
    originally filed tax returns. TIGTA forecasts using these same
    processes could prevent the issuance of more than $2.1 billion in
    erroneous refunds associated with amended tax returns over the next 5
    years.
        TIGTA has also identified other opportunities for the IRS to more
    efficiently use its available resources. For example, TIGTA identified
    potential improvements in the efficiency of the Automated Collection
    System (ACS). We found the IRS's overall collection inventory practices
    were not changed to reflect the reduced ACS workforce and, as a result,
    new inventory continued to be sent to the ACS without interruption,
    even though inventory was infrequently worked. This has had a
    substantial impact on the amount of Federal taxes that remain
    uncollected. TIGTA also found that the IRS's fieldwork collection
    process is not designed to ensure that cases with the highest
    collection potential are identified, selected, and assigned to be
    worked. With significant growth in delinquent accounts and a reduction
    in the number of employees, it is essential that the field inventory
    selection process identifies the cases that have the highest risk and
    potential for collection.
        We have also reported that a process has not been developed to
    expand Virtual Service Delivery, which integrates video and audio
    technology to allow taxpayers to see and hear an assistor located at
    remote locations. Taxpayers can use this technology to obtain many of
    the services available at the Taxpayer Assistance Centers. We
    recommended that the IRS establish a process to identify the best
    locations for virtual face-to-face services.
        In addition, timelier reporting of third-party data and additional
    authority would assist the IRS in improving tax administration. Each
    year, the IRS receives information returns filed by third parties such
    as employers and educational institutions. These returns provide the
    IRS the information needed to verify taxpayers' claims for benefits
    such as the Earned Income Tax Credit (EITC) and the American
    Opportunity Tax Credit (AOTC). However, information returns are
    generally not filed with the IRS until after most taxpayers file their
    annual tax returns. As a result, the IRS cannot use the information
    contained on these information returns to verify tax returns until
    after those tax returns are processed and refunds are issued. Requiring
    third parties such as employers and educational institutions to file
    information returns earlier would provide the IRS with the opportunity
    to use the information contained on these forms to verify tax returns
    at the time they are processed rather than after refunds are issued.
    This could significantly improve the IRS's ability to prevent the
    issuance of billions of dollars in erroneous tax benefits, including
    the EITC and education credits.
                                 death by delay
        Question. As you noted in your 2013 report, the IRS had improperly
    targeted conservative and tea party groups' applications for nonprofit
    status, asking repeated intrusive questions and delaying their
    applications well beyond a reasonable time. Some of those groups are
    still waiting, with their applications now pending for years.
        Do you agree that organizations deserve to have a determination
    made in a timely manner?
        Answer. TIGTA believes that organizations deserve timely responses
    to applications for tax-exempt status.
        Question. How long were some organization's tax-exempt applications
    pending before the IRS made a decision?
        Answer. TIGTA will be issuing a report in the near future following
    up on the recommendations we made in our 2013 report. As part of this
    new report, we discuss the current status of the 160 cases noted in our
    prior report that were open from 206 to 1,138 calendar days as of
    December 17, 2012. With the exception of those cases involving
    litigation, proposed denials, or appeals, these applications have now
    been closed. Based on our review of IRS records, a small number of
    cases were closed within 1 year. For those cases that were closed,
    Figure 1 shows the length of time the cases were open.

                 FIGURE 1: TOTAL LENGTH OF TIME CASES WERE OPEN
    ------------------------------------------------------------------------
     Range of Elapsed Days From Postmark Date
                  to Closing Date                        Percentage
    ------------------------------------------------------------------------
    Up to 1 year..............................   3 percent
    More than 1 year to 2 years...............  40 percent
    More than 2 years to 3 years..............  42 percent
    More than 3 years to 4 years..............  13 percent
    More than 4 years to 6 years..............   2 percent
    ------------------------------------------------------------------------

                              SUBCOMMITTEE RECESS

        Senator Boozman. And with that, I adjourn the meeting.
        [Whereupon, at 4:24 p.m., Tuesday, March 3, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

                                    APPENDIX

        [Clerk's note: The following material was submitted by the
    Internal Revenue Service to be included in the hearing record
    at the request of Senator John Boozman.]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   Appendix C

                    Inmate Tax Fraud Prevention Act of 2008

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   Appendix D

                Homebuyer Assistance and Improvement Act of 2010

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   Appendix E

         Section 502 of the United States - Korea Free Trade Agreement
                               Implementation Act

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   Appendix F

            Section 209 of the American Taxpayer Relief Act of 2012

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   Appendix G

                Section 204 of the Bipartisan Budget Act of 2013

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   Appendix C

                    Inmate Tax Fraud Prevention Act of 2008

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   Appendix D

       The 2010 Amendment to the Inmate Tax Fraud Prevention Act of 2008

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   Appendix E

         Section 502 of the United States - Korea Free Trade Agreement
                               Implementation Act

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   Appendix F

            Section 209 of the American Taxpayer Relief Act of 2012

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   Appendix G

                Section 204 of the Bipartisan Budget Act of 2013

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]