[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 [email protected]. 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]