[Senate Hearing 114-423]
[From the U.S. Government Publishing Office]
S. Hrg. 114-423
IRS CHALLENGES IN IMPLEMENTING THE AFFORDABLE CARE ACT
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HEARING
BEFORE THE
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
APRIL 15, 2015
__________
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COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
RON JOHNSON, Wisconsin Chairman
JOHN McCAIN, Arizona THOMAS R. CARPER, Delaware
ROB PORTMAN, Ohio CLAIRE McCASKILL, Missouri
RAND PAUL, Kentucky JON TESTER, Montana
JAMES LANKFORD, Oklahoma TAMMY BALDWIN, Wisconsin
MICHAEL B. ENZI, Wyoming HEIDI HEITKAMP, North Dakota
KELLY AYOTTE, New Hampshire CORY A. BOOKER, New Jersey
JONI ERNST, Iowa GARY C. PETERS, Michigan
BEN SASSE, Nebraska
Keith B. Ashdown, Staff Director
Emily Martin, Counsel
Gabrielle A. Batkin. Minority Staff Director
John P. Kilvington, Minority Deputy Staff Director
Troy H. Cribb, Minority Chief Counsel for Governmental Affairs
Peter P. Tyler, Minority Senior Professional Staff Member
Laura W. Kilbride, Chief Clerk
Lauren M. Corcoran, Hearing Clerk
C O N T E N T S
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Opening statements:
Page
Senator Johnson.............................................. 1
Senator Carper............................................... 4
Senator Portman.............................................. 15
Senator Sasse................................................ 18
Senator McCaskill............................................ 21
Senator Ernst................................................ 23
Senator Ayotte............................................... 25
Senator Lankford............................................. 29
Prepared statements:
Senator Johnson.............................................. 39
Senator Carper............................................... 42
WITNESSES
Wednesday, April 15, 2015
Hon. John A. Koskinen, Commissioner, Internal Revenue Service,
U.S. Department of the Treasury................................ 6
Prepared statement of John A. Koskinen........................... 44
APPENDIX
WI constituent letter............................................ 52
Responses to post-hearing questions for the Record from Mr.
Koskinen....................................................... 53
IRS CHALLENGES IN IMPLEMENTING THE AFFORDABLE CARE ACT
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WEDNESDAY, APRIL 15, 2015
U.S. Senate,
Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 10:01 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Ron Johnson,
Chairman of the Committee, presiding.
Present: Senators Johnson, Portman, Lankford, Ayotte,
Ernst, Sasse, Carper, McCaskill, and Peters.
OPENING STATEMENT OF CHAIRMAN JOHNSON
Chairman Johnson. Good morning. This hearing will come to
order.
Commissioner Koskinen, I appreciate you coming here and
preparing your testimony. I think we are all aware, probably
painfully aware, that it is Tax Day today. We chose this day
because we figured you are not particularly busy. But I know
millions of Americans are trying to comply with our Tax Code.
My wife was talking to me, actually last night--now, she is a
former Internal Revenue Service (IRS) agent. And now that I
have my job, she is actually doing our own family taxes, and
she did ask me, when I retire from this gig, will I take it
back over? But I think I am pretty satisfied with the current
arrangement, so I would like to do that.
But, of course, it is Tax Day, which is different from Tax
Freedom Day. So I did ask my staff to find out when that is,
which means, that is the day when Americans actually have paid
taxes to the Federal Government. All the money that they have
earned up to that point in time on average goes to the Federal
Government. Past that point they get to keep the fruits of
their labor. Tax Freedom Day is April 24, which my recollection
of this is actually starting to move back a little bit closer
to the actual Tax Day. But it is still a very long period of
time that we work for the Federal Government.
Now, as is my custom, I have got an opening statement,
which I will ask unanimous consent to enter into the record.\1\
And I always get it because Senator Carper is a nice man.
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\1\ The prepared statement of Senator Johnson appears in the
Appendix on page 39.
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Senator Carper. Reserving the right to object. I will not
object.
Chairman Johnson. Without objection, it is entered.
What I would like to do is read something else, and this is
the letter we received from a constituent, and I think it is
pretty appropriate to read today. It is a little bit long, but
if you would bear with me, I think this would set really the
discussion that we need to have today, because it is a serious
letter and there are some serious concerns.
``Senator Johnson: We are writing to you because we are not
sure where else to turn and also to make you aware of yet
another issue with our affordable health care. We are both
retired. We live on a moderate annuity payment which we each
have and Scott's Social Security. We had been receiving a
distribution from an additional retirement plan, which was
discontinued in May 2014.''
By the way, let me mention this is written to me by Scott
and Julie Thompson. They did allow me to use their name, which
we are finding is getting more and more difficult to have
taxpayers allow us to use their name because they are concerned
if the IRS knows who they are and they are complaining about
something at the IRS, they are afraid of being targeted. Now,
that is pretty sad.
But, anyway, Scott and Julie Thompson were willing to let
us use their name, so let me continue.
``In the spring of 2014, we moved back to Wisconsin from
Colorado to care for Scott's elderly, dying father. In doing
that, we moved out of the network of our Colorado health
insurance. With the changes in the health insurance for 2014,
we were buying a high-deductible health insurance plan through
an insurance agency in Colorado. At that time our income was
too high for us to qualify for subsidized premiums.''
``In April 2014, we contacted the Health Insurance
Marketplace because that was the contact for health insurance
coverage for Wisconsin. We were unsure if we would be able to
change insurance in the middle of the calendar year. We spoke
with the Marketplace agent who informed us that we had two
qualifying events: the move from Colorado out of the network of
our health insurance and the substantial reduction in our
income as of May 2014. We were told we were eligible for
coverage through the Marketplace and arranged for coverage with
a plan that has providers in our area, effective June 1, 2014.
We were told that we were eligible for a premium credit and
arranged the full premium credit would be applied toward our
monthly premium, leaving us with a monthly cost we could
afford, just over $400 a month.'' ``We were told we needed to
submit proof of our new current income by July 20, which we
did. In response, we received a letter from the Marketplace
dated September 20, 2014, stating, ``We have verified your
information. Your eligibility as described in your eligibility
determination notice will continue unchanged.''
``Fast forward to February 2015. In the process of
completing our 2014 Federal income taxes, we now find out that
our total income for 2014 is being used as the basis for our
eligibility for the health insurance coverage. With that, we
are not eligible for subsidized premiums and are now told we
must pay a penalty, returning the entire subsidy amount of
$11,550.''
``There is nothing in the reporting process which allows
for taxpayers to report when there was a qualifying event. We
knew that our income in the first half of 2014 was too high for
us to be eligible for coverage. That is why we had to buy our
own insurance in Colorado. We were very straightforward about
our situation in coming back to Wisconsin when we spoke with
the Marketplace in April. We were told that a qualifying event
would make us eligible for the premium subsidy, even in mid-
year.''
Now, again, this is a couple moving to Wisconsin to take
care of a dying father. They followed all the rules. They
talked to people they thought were knowledgeable. They were
told they would be eligible for a subsidy. And now all of a
sudden they are finding that they are going to have to pay back
$11,550 of subsidy.
I will continue: ``Our entire gross annual income for 2014,
including the distribution received for 4 months early in the
year and Scott's Social Security, is just over $62,000. The
penalty being imposed is $11,550. This is 18.5 percent of our
entire gross annual income. Considering the fact that it is
being imposed via our income taxes, it is actually going to
have to be paid out of our after-tax dollars, raising that
percentage of our income even higher. And for a real ironic
turn of events, we will possibly have to withdraw this money
from a retirement account, which will create $11,550 of income,
which will probably create a penalty for our 2015 coverage.''
``We do not know what the threshold is for eligibility for
health insurance, but an $11,550 penalty on an annual income of
approximately $60,000 for two people seems excessive. We really
do not have any options except to pay this penalty in order to
file our Federal and State income taxes by April 15. We do
intend to file an appeal with the Marketplace. We did not do
anything criminal. We did exactly as we were told by the agents
for the Marketplace. We paid for coverage even when it was very
expensive so that we would be compliant with the new law.''
``Moving to Wisconsin was a difficult, emotional time for
us. We were thrilled that our new circumstances would allow us
to have some good health insurance coverage. We never expected
that what we were told would not be true. It seems to us that
there must be many other people who had things happen to them
during the year that affected their health insurance and their
ability to pay for it. Can you help us at all? Scott and Julie
Thompson.''
Now, the sad fact of the matter is--and this is what this
hearing is about--how the IRS is trying to comply with the
Patient Protection and Affordable Care Act (ACA). That law is
in place now. It did not particularly protect Scott and Julie
Thompson. And there are thousands, if not millions, of
Americans that we know lost their health care coverage, are
paying higher amounts, are having to comply with now an even
more complex tax system. And, of course, that is really the
purpose of the hearing: How is the IRS trying to grapple--
again, I have a great deal of sympathy for your agency in terms
of the task it has trying to deal with and help taxpayers try
and comply with the even added complexity of the Patient
Protection and Affordable Care Act.
So, again, that is the purpose of the hearing. I am looking
forward to your testimony and your answers to our questions.
With that, I will turn it over to our esteemed Ranking
Member, Senator Carper.
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. Thank you, Mr. Chairman. And, Commissioner
Koskinen, it is great to see you. You have a tough job. Our
jobs are not easy; you have a really tough job. And I just want
to say thank you for your willingness to do this, to continue
to serve the people of our country, and our thanks to those on
the team that you lead for the difficult work they do. We do
not make your job any easier. We do not make your job any
easier because we do not fully fund the work that needs to be
done, whether it is providing service to people or whether it
is actually doing the audits and so forth to make sure that
people are paying what they ought to be paying. We wait and
delay passing Tax Code changes until it is well beyond any kind
of reasonable deadline. We provide uncertainty in the Tax Code,
and we expect you to come along and clean it up after us.
There is an old cartoon character, Pogo, who said, ``We
have seen the enemy and it is us.'' And many of the concerns
that were cited by our Chairman can be really laid at our feet.
My hope is that he will be able to help this constituent.
People call my office every day for help in any variety of
areas. And one of the reasons that people have called my
office, probably thousands of times in the last 14 years, is
because they did not have any health care coverage. And for a
lot of them, health care was a visit to the emergency room or,
frankly, just doing without. And that is not a good option
either.
The question is: What are we going to do about it? People
talked about doing something about it for years. And we did
not. When Hillary Clinton was First Lady, she tried to do
something about it, and it foundered and did not work out. And
Barack Obama becomes President, and he says, ``Well, let us
give it another shot.''
I serve on the Finance Committee, along with Senator
Portman here. I do not know if he was with us when we did this
work on the Finance Committee, but we tried a bipartisan effort
for months involving three Democrats and three Republicans to
try to figure out how to try to extend health care coverage to
a lot of people that did not have it and rein in the growth of
health care costs. And, frankly, after three or four efforts
and months of trying led by Max Baucus and Chuck Grassley, two
good friends, guys who worked across the aisle, we just could
not do it. And in the end, we took two Republican ideas--the
exchange, the marketplace, and creating large purchasing pools
so that people did not have to be part of a big organization in
order to get health care coverage and better coverage. We took
that idea and we incorporated it into the law. And we took
another Republican idea--thank you, Governor Romney--of the
individual mandate, because the insurance companies said, ``If
you do not require people to get coverage, we will end up
having to cover just the lame, the unhealthy, and the blind,
and it is not an economically feasible approach.''
So we ended up taking those two good ideas and incorporated
them into the law, and one of the ideas behind the exchange, as
you know, is that for people whose income is not great, we
wanted them to be able to purchase health insurance through
this purchasing pool to maximize their leverage. But for folks
whose income is low, they get a tax credit, and the tax credit
eventually phases out at, I think, 400 percent of poverty.
Whether the origin of those ideas was Republican or
Democrat, I think they are good ideas. And the question is: How
do we make it work? And one of the ways we make it work is to
make sure that you have at the IRS the resources so when people
call you with questions about this stuff, you can actually give
them a good answer.
On Thursdays, tomorrow, our Senate chaplain, Barry Black,
hosts a Bible study group. He does it every Thursday that we
are in session for the most part. It includes Democrats and
Republicans, those of us who need the most help. And one of the
things he often shares with us is Matthew 25: ``When I was
hungry, did you feed me? When I was naked, did you clothe me?
When I was sick and in prison, did you visit me? When I was
thirsty, did you give me to drink?'' Matthew 25 does not say
anything about, ``When I had no health care coverage, did you
do anything for me?'' Two thousand years ago I guess they were
not thinking about that.
But it is very real to us today. We had some 40 million
people who had no health care coverage just a few years ago, 40
million people. And today that number has been knocked down by
about a third. And on behalf of all those people who have
coverage, including the kids the--the young people up to the
age of 26 who have coverage on their parents' plan, that is a
very good thing that has happened. The question is: Can we do
better at this? You bet we could. And we will. And my hope is
that we will, as we go forward, instead of trying to kill the
Affordable Care Act, we will find ways, in a bipartisan way,
working with the administration to fix the problems that need
to be fixed. And I am encouraged that we will do just that.
I have more in a statement here that I would like to enter
for the record.\1\ But I am happy that you are here and look
forward to a good conversation. And if it is not perfect--as I
like to say, let us make it better.
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\1\ The prepared statement of Mr. Carper appears in the Appendix on
page 42.
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Thanks so much.
Chairman Johnson. So are you going to ask permission for
that?
Senator Carper. Yes.
Chairman Johnson. Without objection.
I would also like to ask that I enter the letter from the
Thompsons into the record as well.\2\ Without objection, so
ordered.
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\2\ Constituent letter submitted by Senator Johnson appears in the
Appendix on page 52.
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Chairman Johnson. It is the tradition of this Committee to
swear in witnesses, so, Commissioner, if you would please
stand? Do you swear that the testimony you will give before
this Committee will be the truth, the whole truth, and nothing
but the truth, so help you, God?
Mr. Koskinen. I do.
Chairman Johnson. Thank you.
Commissioner John Koskinen is the Commissioner of the
Internal Revenue Service. Prior to his appointment, Mr.
Koskinen served as the Non-Executive Chairman of Freddie Mac
from 2008 to 2012 and as Acting Chief Executive Officer (CEO)
in 2009. Commissioner.
TESTIMONY OF HON. JOHN A. KOSKINEN,\1\ COMMISSIONER, INTERNAL
REVENUE SERVICE, U.S. DEPARTMENT OF THE TREASURY
Mr. Koskinen. Thank you, Chairman Johnson, Ranking Member
Carper, and Members of the Committee, thank you for the
opportunity to appear before you today. In the spirit of
without objection, I would like to have my entire testimony
submitted for the record and give you a brief synopsis.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Koskinen appears in the Appendix
on page 44.
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Chairman Johnson. So ordered.
Mr. Koskinen. The subject of today's hearing, IRS
implementation of the tax-related provisions of the Affordable
Care Act, is an important one and is discussed in detail in my
written testimony. But before addressing the Affordable Care
Act and because today is, as the Chairman noted, April 15, I
would like to provide the Committee with an update on the tax
return filing season.
I would also like to note that today marks the 60th
anniversary of the April 15 tax deadline. Congress moved the
deadline back from March 15 to April 15 starting in 1955 to
provide more time for processing tax returns.
In some ways, this is like the start of a Dickens novel, as
I have said in other contexts. It is the best of times; it is
the worst of times.
Let us begin with the best of times. I am pleased to report
that the 2015 filing season has gone smoothly in terms of tax
return processing and the operation of our information
technology (IT) systems. Thus far, the IRS has received more
than 120 million tax returns from individuals on the way to an
expected 150 million individual returns. We have issued more
than 83 million refunds for more than $230 billion. For the
vast majority of taxpayers who did not have issues with their
returns and who chose direct deposit, refunds moved quickly
through the system and reached them in 21 days or less.
Since today is the filing deadline, I would like to remind
anyone who has not finished their taxes that, while time is
running out, anyone who cannot make the deadline can file an
automatic 6-month extension.
Return processing this filing season has gone even better
than anticipated given the challenges we faced beforehand.
Along with our normal preparations, we also had to prepare for
the tax-related Affordable Care Act changes and changes related
to the Foreign Account Tax Compliance Act, and there was also
late tax extenders legislation passed in December.
Integrating all of these changes into our antiquated IT
systems and still being able to open filing season on schedule
on January 20 was a great accomplishment by our experienced and
dedicated employees. I deeply appreciate their commitment to
the mission of the IRS and their hard work.
I also want to thank our partners in the tax industry,
especially tax professionals and developers of tax software and
other products. Without them, the filing season could not run
smoothly.
We are also indebted to the more than 90,000 volunteers who
help people prepare their returns at more than 12,000 volunteer
income tax assistance sites all over the country each year. I
am proud to say that many of these volunteers are current IRS
employees or retirees.
Specifically regarding the IRS portion of the ACA, all
indications are that most taxpayers have been able to fulfill
their filing obligations without a great degree of difficulty.
I would like to talk a little later about the letter you
received.
We provided an array of communication products to taxpayers
and tax preparers well in advance of the tax filing season. We
also developed a special section on our website providing
information about the Affordable Care Act. We also worked with
software developers to ensure that the estimated 90 percent of
taxpayers who were going to file using software or tax
preparers would be easily able to provide the necessary
information required by the ACA and file their returns without
difficulty.
We believe these activities taken together were a big
reason why processing of returns with shared responsibility
payments and premium tax credits generally went smoothly. I
would note that for the vast majority of people, the ACA
provisions only took a moment or two to handle. All most
taxpayers had to do was check a box when prompted by their tax
software indicating that they had coverage.
Now a word about the worst of times. Return processing has
gone smoothly if you are simply filing your return without
questions or need to contact us. That is the situation most
taxpayers found themselves in this tax season. But if you
needed to contact us, it has been very difficult and a much
less positive story.
Customer service both on the phone and in person has been
far worse than anyone would want. It is a simple matter of not
having enough people to answer the phones and provide services
at our walk-in sites as a result of the cuts in our budget.
We are dismayed by the reports of taxpayers lining up
outside our Taxpayer Assistance Centers hours before they open
just to get service. Taxpayers who called us had long wait
times on the phones. On bad days, fewer than 40 percent of the
calls were able to reach a live assister, and that was often
after a 30-minute wait or longer. This was frustrating not just
for taxpayers but also for the IRS customer service
representatives who want to have the resources to be able to
provide much better customer service.
As we begin preparations next month for next year's filing
season, one complicating factor is the need for us to implement
as part of the ABLE Act the certification requirement for
professional employer organizations on a tight timeline and
without any additional funding.
Complicating matters still more is the work ahead of us to
continue implementing the tax-related provisions of the ACA for
the next filing season along with the expanded requirements for
the Foreign Account Tax Compliance Act. And we expect another
round of tax extender legislation later in the year which we
hope will be passed well in advance of December.
So I am concerned that when I testify next year on the 2016
filing season, the report on the return processing front may
not be as good as it was this year. The employees of the IRS
will do everything they can to effectively and efficiently
deliver next year's filing season, but we need help. We need
the Congress to pass any legislation regarding tax extenders as
early as possible this year and to provide us additional
resources in the 2016 budget. With that help, I am much more
confident about the chances of delivering another smooth filing
season for the Nation's taxpayers next year.
With regard to the letter the Chairman recited and
received, obviously this is the first year of the program, and
taxpayers are, in fact, and tax preparers are adjusting to the
requirements of the act. There is a reference there to the
penalty. It is not a penalty. It is actually a repayment of the
premium advanced payment provided. We spent a significant
amount of time last year, starting about a year ago, trying to
remind taxpayers that if their circumstances changed during the
year, particularly if their family size changed or if their
income changed, either up or down, they should contact the
marketplaces and advise them. It sounds as if they provided
income information that was not properly applied to their
situation, which is a relatively rare circumstance. It is
actually the first time I have heard someone say that they got
the wrong information from the health care marketplaces. We
have encouraged most of the people who discovered that they
have underestimated or overestimated their income and,
therefore, have an adjustment in their premium tax credit, did
it because it is difficult for all of us to estimate a year in
advance what our income is going to be. But the indications are
that close to half of the people, about 45 percent of the
people, are actually getting a bigger refund because they
overestimated their income to be careful; 50 to 55 percent are
getting a smaller refund. Again, while we will not have full
data for another 3 or 4 weeks, it does appear that there are
relatively few people who are in a situation where they
actually owe taxes as a result of having underestimated their
income for the year.
I would stress that we are doing everything we can in this
transition year to help taxpayers whatever their difficulties
are. The Treasury Department issued a policy saying that, to
the extent that taxpayers are having difficulty with their
payments, either in terms of understanding exactly what they
owe on April 15, or to the extent that they owe additional
funds, there will not be any penalty for an inability to pay.
You still owe interest and you still should file, but the
Treasury has removed any penalties for difficulties in this
transition year.
As I say, we have been delighted--and I think it is because
over 90 percent of people used software--that we have not
seen--and we monitor the calls we get every day--a significant
response from the public with regard to any difficulties they
are having. As I say, if you use the software, you just answer
the questions. You never have to deal with the instructions.
You never have to deal with the forms.
I am struck by the Chairman's concern, which it is my
concern, and that is, the point that people are nervous about
revealing their names if they have a problem because somehow
they will then be disadvantaged in dealing with the IRS. I
think it is critical for compliance and it is critical for just
the operation of the tax system in the United States for every
taxpayer to feel comfortable that they are going to be treated
fairly no matter who they are, no matter who they voted for in
the last election, no matter what organization they belong to,
and, in particular, they are going to be treated fairly even if
they have a problem. We encourage not only our employees but
taxpayers to let us know if things are not going the way they
think they ought to or the way we think they are going to go,
because the only way we will be able to fix systems, the only
way we will be able to get better is if we know what the
problems are.
So my encouragement to any taxpayer is if you have a
problem, we are here to help you. As our revenue agents say, we
distinguish between those trying to become compliant and those
trying to cheat. If you are trying to become compliant and you
have a problem--you have had a change in circumstances, you
have difficulty with your ability to pay your taxes--we really
want to work with you. We spend a significant amount of time
and money trying to help taxpayers figure out what they owe and
how to pay it. We have online installment agreements you can
enter into if you cannot meet your payments when you file on
April 15. We negotiate offers in compromise for people who have
difficulty now and into the future meeting their tax
obligations. And we simply want to stress that if you have a
problem, we are here to help you.
I would also remind people, though, if you are going to try
to cut corners and cheat, we actually are going to find you,
and we will not be happy about that. But we are anxious, as I
say, wherever a taxpayer has difficulty, to try to help them. I
always say, ``Call us and we will help.'' I always get a little
nervous when I say call us because I know how long it takes to
get through. And as Senator Carper said, when we ask for more
funds, it is not that we want to add back the 13,000 people
that already have been retired from the agency and not
replaced, but we do need funds in the interim while we are
building toward the future to be able to have enough people
simply to answer the phones when people call.
With that, I would be delighted to answer any questions you
might have.
Chairman Johnson. Well, thank you, Mr. Commissioner.
I will say that this is not unusual that taxpayers are
afraid to offer their names because of fear of retribution.
That is very prevalent in people that certainly I talk to. And
that is a real problem because of the targeting, and I think it
makes it even more important that we actually hold people
accountable, that the American people see that those that did
the targeting are brought to some semblance of justice, and
that it is actually correct in the IRS. This is a problem, and
it is very prevalent. This is not just something that is
unusual.
It did strike me, I was actually surprised, that this is
the first time you have ever heard that the marketplace or one
of the exchanges gave out incorrect information. I would think
that because of the complexity of the law it would be far more
prevalent.
Mr. Koskinen. I meant in terms of an individual being told
the wrong information about the validity of their income.
Obviously, as has been widely publicized in this first year,
the Centers for Medicare and Medicaid Services (CMS) has been
very forthcoming about the 1095 information returns and the
errors that have appeared in some of those and have been trying
to make sure that taxpayers get the updated, correct
information in their 1095-As. I know CMS has been working with
thousands of taxpayers to make sure that the information in
those 1095-As is correct. So to that extent, clearly in a
transition year there have been a reasonable number of cases,
but still compared to the 4.5 million taxpayers we expect to
file, the numbers are surprisingly smaller than you would
expect. But you are exactly right. As you would expect in the
first year of one of these programs, some of the information
returns have had to be corrected, have had to be updated. Some
taxpayers, appropriately, have said the information in that
return does not correspond with either the payments I have made
or the premium support I have gotten. And there are 30,000 or
40,000 of those that are being worked through by CMS.
Chairman Johnson. I think correctly, and you did correctly
state that what they are paying, the $11,550, is not a penalty.
It is just reimbursement of the subsidy that they were
incorrectly provided. But, again, they view that as a penalty.
You can kind of understand that.
Mr. Koskinen. I understand.
Chairman Johnson. They followed all the rules. I was just
reading what they said. I take your point.
But speaking of penalties, one of the things I found
interesting in the briefing packet here is that the average
penalty paid by people, an individual decided to really
exercise their freedom and not purchase insurance--by the way,
is that a penalty or a tax, that $95 or the greater of one
percent? Is that a penalty or a tax? I forgot how that was
ruled.
Mr. Koskinen. The ruling I think has been it is a tax. It
is called the ``shared responsibility payment.''
Chairman Johnson. OK. So my point being that the average
tax, shared responsibility tax, is not the $95 minimum. It is
the one percent of income, which ends up being about $172. Is
that correct for this year?
Mr. Koskinen. I do not have that number, but clearly 95 is
the minimum, but it goes to one percent of your income.
Chairman Johnson. And it is the greater of?
Mr. Koskinen. Yes. And it is $95 for adults in your family.
So if you have two or three people----
Chairman Johnson. So if you extrapolate that, that is about
80 percent higher than the minimum. So the average, 172 is 1.8
times the minimum of 95. So if you extrapolate that to next
year, the minimum penalty will be $325, correct?
Mr. Koskinen. Yes.
Chairman Johnson. Or one percent of your income, whichever
is greater.
Mr. Koskinen. Next year it goes to 2 percent, I think.
Chairman Johnson. Oh, OK, it goes to 2 percent. OK. So I
just did the math on one percent. It is going to double that
then. So what I was looking at is $325 times 1.8 percent would
be 588, double that then. Correct? So the average tax penalty
will be closer to $1,200 next year.
Mr. Koskinen. Well, the one percent, you do not add both
the 95 or the----
Chairman Johnson. I understand. I am just trying to
extrapolate what this is going to be in the future.
Mr. Koskinen. Clearly, the statutory shared responsibility
payment is geared to go up, and that is designed to encourage
people to get health insurance.
Chairman Johnson. I am trying to figure out about what we
can extrapolate that penalty will be next year. So you are
saying it is the greater of $325 or 2 percent of income?
Mr. Koskinen. That is right, but let me just check. I have
experts here.
Chairman Johnson. Is that correct?
Mr. Koskinen. OK. The consensus is we think it goes to 2
percent. We would be happy to make that clear. In any event,
either way, the statutory framework provides that the payment
goes up if you do not have coverage in the second year to a
reasonable higher amount than for the first year. So it will be
increasingly encouraging people to buy health insurance.
Chairman Johnson. Right. So here is my point, because what
gets laid out there is the $95, the $325, and the $695. That is
a number. And then as a percentage of income, the greater of.
So this year, the percentage of income is really what drove it,
so the average penalty was 1.8 times that minimum $95. So if
you extrapolate that, if it is one percent, it will be $588
next year; if it double that, it will be $1,176.
Mr. Koskinen. You would not----
Chairman Johnson. If you are talking as a percentage of
income, that will be a pretty good extrapolation in terms of
what the average penalty would be.
Mr. Koskinen. Right.
Chairman Johnson. If this year's is 172 at one percent,
next year's at 2 percent will be $1,176. And the third year of
the implementation of Obamacare, then we could look for,
instead of--not $695 as the minimum penalty, extrapolate our
experience from this year, it will be closer to $2,500 will be
the average penalty paid if Americans exercise their freedom
and choose not to buy an individual policy. So I kind of want
to lay that on the table there. That is what the government is
going to tax--I think it is a penalty, but that is what we will
tax the American people for not buying health care.
I was a little surprised--I should not have been
surprised--that only 4 percent of the subsidies that are
provided are calculated properly, and you say about half of
them are calculated too high, half of them are calculated too
low. Do you kind of expect that trend to continue? It is just
going to always be difficult to calculate that and estimate it,
correct?
Mr. Koskinen. No, I think what is going to happen, right
now 70 percent of people, give or take a little, get refunds on
their taxes generally, and they do that because we all over-
withhold. Nobody knows exactly--well, if you get the same job
and do not do anything different, you know what your income is
going to be. But most taxpayers estimating their income
understand you cannot estimate accurately, so they tend to
over-withhold so that, in fact, they get a refund rather than
having tax owed. We expect that taxpayers have done that--
nobody tells them they have to do that. Taxpayers do that,
learning the situation, we expect that what will happen is
people will be careful in estimating their income as the basis
for calculating the premium tax credit, and they will make sure
that they overestimate their income to make sure that, in
effect, the adjustment is in their favor when they get to file
their taxes.
So we expect that as consumers adjust to the law,
increasingly what will happen is that there will be positive
increases in refunds or declines in amounts owed because people
will have adjusted to the fact that you want to be careful when
you estimate your income and you want to build in the
possibility that you will get a pay raise or your spouse will
get a job, and if there is a big change, again, you should call
the marketplace. But I think what we have seen in withholding
generally is people are careful, and they basically in the case
make sure that they have a refund coming rather than a tax
owing.
Chairman Johnson. Very quickly, last question. How are you
coming in terms of 100 percent income verification to really
evaluate the correctness of those subsidies? Do we have 100
percent income verification now?
Mr. Koskinen. Well, to the extent we ever have 100 percent
income verification--that is one of the reasons I say it would
be nice to get W-2s in January rather than March. Most
taxpayers are trying to be compliant. They provide us their
income, and we then audit it over time when we get information
returns. Ultimately it is as correct as what the taxpayers tell
us and what the information returns do. We assume ultimately
that the income provided to us after the fact is correct.
Chairman Johnson. OK. Thank you. Senator Carper.
Senator Carper. Commissioner Koskinen, I often say, almost
every day, find out what works, do more of that. When we are
trying to figure out how to make sure that we did not end up
with an insurance pool which was largely older people, sicker
people, less healthy people, to try to find out what works. We
turned to Massachusetts, the one State that actually tried to
address this issue, set up exchanges for health care coverage,
and Governor Romney and the State of Massachusetts established
the individual mandate. That is really where we took that idea
from. They were several years ahead of us, and we are just
going through our first tax filing season where all this is
before us and before your employees.
Massachusetts has been doing this for not just one year.
They have had several years of experience. Do you have any
idea, does anybody with you have some idea of has it smoothed
out? Has it smoothed out over time as people become used to
this, working with the exchanges, working with their Tax Code
there? Has it gotten any easier?
Mr. Koskinen. Anybody know? At this point--and, again----
Senator Carper. And what, if anything, can we learn from
them?
Mr. Koskinen. I think we could probably learn a lot. The
tax policy side of this in terms of what works or does not work
really is--tax administration, the policy issues are Treasury,
the administration, and the Congress. But in all that I have
seen, I have not seen that there is an ongoing issue in
Massachusetts which would lead you----
Senator Carper. I have not heard about it, if there is one.
Mr. Koskinen. We have not, so that would lead you to
conclude, to the extent the mandate still exists there, people
have adjusted to it, and it has been implemented and executed
without difficulty over time, because, as I say, policy is the
issue of--people outside of tax administration, we have and I
have personally just kept track of what is in the press, and I
have not seen any indications that Massachusetts has run into
any difficulties at this point.
Senator Carper. OK. Good enough.
I want to go back to the example cited by our Chairman to
make sure I understand this. Let us say a year ago my family
and I thought we were going to earn about $50,000 in 2014, and
my wife got a job, and we ended up making twice that. We will
say $100,000. And we had felt at the beginning of the year we
were going to be eligible for tax credits at a certain level
toward the purchase of our health care through the exchange.
And as it turns out, at the end of the year, because of her
income, additional income that we had not anticipated, we were
not eligible for either as much in tax credits or maybe any tax
credit at all. And we will say in this example it turns out I
got a tax credit for $5,000, and ultimately I was not eligible
for that. I had to pay that back, I presume through the Tax
Code, through the filing. But that is not a penalty. That is
basically an overpayment for a tax credit that was extended to
me that I ultimately was not eligible for.
I want to make sure we are talking apples and apples here,
but is what I just laid out, is that essentially what is
happening in the situation that Senator Johnson shared?
Mr. Koskinen. Yes. Actually, it is important to understand
where the money went. In effect, a taxpayer generally comes to
the marketplace, buys a policy. It is determined what their
premium is going to be and what portion of that premium paid to
the insurance company will be paid on their behalf as a credit.
So in the particular case here, or any case, at the end of the
year what has happened is you bought insurance, the premiums
have been paid to the insurance company, and the question is:
How much of that premium you owe and how much was eligible for
the credit?
So in this particular case, ultimately it was determined
that the insurance was bought, that $11,000 was a premium
payment to the insurance company, and the question is in this
particular case the taxpayer owes the premium, was not entitled
to a credit for that premium paid. So it is not a penalty. It
is not money that went to the taxpayer. It helped buy the
insurance for the taxpayer.
It is one of the reasons we spent a lot of time last year
and we are going to continue to spend time this year reminding
people in your circumstance, for instance, where your situation
changes, your wife gets a job, you get a pay raise of any
significant amount, you should contact the marketplace and
advise them of the change, and the premium advance payment will
be adjusted accordingly. Therefore, over time we think that as
more and more people get adjusted to the fact that it is not
just a question of stopping payment, you actually need to make
sure the marketplace is updated, as I said to the Chairman
earlier, we expect over time people will make those calls and
make those adjustments earlier. They also will be careful in
their estimates of what they are going to earn to make sure
that they do not underestimate it. And so we think that this
will work its way out to even a smoother filing system.
As I say, thus far--we monitor the calls that come in--we
have not seen a significant number of calls with people who
have problems. We know, as I said, there have been adjustments
made by CMS, which runs the marketplace with any number of
taxpayers, but even there, of the estimated 4.5 million
taxpayers who will file returns reconciling the premium tax
credit, the number of people affected is a relatively smaller
percentage for the first year.
Senator Carper. OK. Thank you.
Gene Dodaro was here sitting in your seat yesterday, by
himself, and he spoke, as you have, pretty much without notes
and did a terrific job. One of the questions that I asked him
was what more can we do to help the IRS serve the people of
this country to make sure that we are meeting our
responsibilities as taxpayers, but also making sure that we are
providing the kind of service that we would expect, hopefully
the kind of service that--Claire McCaskill was auditor for the
State of Missouri, and when I was State treasurer, we tried to
provide really good service. And the State of Delaware Division
of Revenue won the quality award a couple of years ago because
they provide excellent service. We are very proud of that.
But it galls the hell out of me to know that people call
the IRS and they have to wait forever to get somebody on the
line, or they go to the IRS office and they have to wait to go
see somebody. We are complicit in that. We in the Legislative
Branch are complicit in that because we are not providing a
reasonable amount of funding for the IRS.
Yesterday, Gene Dodaro said there are things that the IRS
has done to be able to use the resources they have more
efficiently, and he said this is good. He said there are some
things that you have not done that they believe you ought to.
And he said we should provide more in terms of resources, like
three things. And what I would hope that we will do is act on
his advice, and certainly with your participation and that of
your team.
The last thing I want to say, we have a bunch of people who
are preparing tax returns on which there is an earned income
tax credit. We know there is a high improper payment related to
earned income tax credits. A lot of those tax returns are
prepared by people who are not credentialed. And I know you
have been pushing for us to do something to better ensure that
people who are helping millions of taxpayers prepare their
returns have some reasonable amount of credentials. Would you
just take a minute on that? I know I have run out of time, but
this is an important point.
Mr. Koskinen. Yes. I would stress, as I said, we have a
wonderful working relationship with the tax preparer community,
and the vast majority know what they are doing, do a good job,
work their way through the complexities of this Tax Code, which
is obviously more complex than anybody wants it to be.
But there are about 400,000 of those tax preparers that
have no credentials. They have not become enrolled agents. They
are not CPAs, they are not lawyers. Of that 400,000, as I say,
a lot of them study hard, work hard, and do provide a good
service.
There are a group of them that do not have a lot of
background, much training, and do their best but make a lot of
mistakes. And then there is a small percentage of them that are
crooks, that you can find them easily because you can drive
through any center city and there will be a sign saying, ``Come
to us. We can help you get a better refund. We can get you a
bigger refund. Just sign a blank return. We will take care of
it for you.''
And across the board we think people have noted numerous
times it takes more credentials to cut your hair than to
prepare your taxes. And at some point there ought to be some
minimum qualifications before you can actually go to a taxpayer
and say, ``I will take care of your taxes for you.'' And we
have a voluntary program. The courts ruled we did not have the
authority to require minimum qualifications, so we have asked
the Congress for legislation that would require some minimum
level of continuing education just the way CPAs and lawyers and
others have to just keep up.
Senator Carper. Thank you. I would just ask my colleagues
on this Committee, including those who serve on Finance, to see
if we cannot address this. This is an issue that cries out to
be addressed. Thanks so much.
Chairman Johnson. Thank you, Senator Carper. It does almost
speak probably to the overregulation of the hair-cutting
industry. [Laughter.]
For the record, because we got the information, my back-of-
the-envelope calculation here on the penalties. The first year,
$95 or one percent of your income. This year it is about $172.
That is 1.8 times the minimum. Next year it is going to be 2
percent of income, so the $325 minimum penalty times 1.8 times
2 is $1,176, would probably be the extrapolated average
penalty, tax, next year. The third year, $695 times 1.8 is
$1,258 times 2.5 percent would be $3,145. That is the
extrapolated average penalty over the next couple years, 172,
ramped up to about $1,176, to the third year over $3,000. So,
with that----
Mr. Koskinen. I think part of the calculation is you either
pay the minimum $95 or the $325 or the 1 or 2 percent, but you
do not add them all up.
Chairman Johnson. I understand, whichever is greater.
Again, I am just saying the average penalty goes from 172,
probably to 1,176, probably to 3,146, in the ball park. Senator
Portman.
OPENING STATEMENT OF SENATOR PORTMAN
Senator Portman. Thank you, Mr. Chairman. And,
Commissioner, thank you for being here today. I usually see you
over at the Finance Committee, and this I guess is really a Tax
Day hearing, so it is appropriate to talk about the broader
issues. But I want to focus in on the 1095-A issue that--the
relationship to the Affordable Care Act. A couple months ago,
as you know, the administration announced that it had sent out
about 800,000 incorrect tax statements, and obviously it is
very important to my constituents and folks around the country
because they rely on these statements. I think they were
initially told, do not worry about filing your taxes until we
get a corrected statement, and then more recently told go ahead
and file your taxes and you will not be penalized based on
information you relied on that is inaccurate.
So it has caused a lot of confusion, and I am sure you have
heard a lot about it.
Mr. Koskinen. Yes.
Senator Portman. I have, as I am sure many of my colleagues
have. I have a constituent named Linda from Ohio. Unlike the
Chairman's constituent, she is not interested in sharing her
last name today, but she got the incorrect 1095-A from the
marketplace in mid-January. She has been trying to correct it
ever since. And, one of these stories of contacting folks at
the IRS, February 15, she was informed by two different people
her correction was denied. February 17, she received a phone
call that it had not been denied, but it was in escalation. She
was able to arrange a phone call between the supervisor and the
marketplace, but, anyway, she was still not able to get a
straight answer out of the system.
Mr. Koskinen. I would note that she is calling CMS, not the
IRS. The issues about the 1095, the data in it, is all managed
by CMS. And they do have a very vigorous customer service
effort working through those kinds of questions.
Senator Portman. I appreciate that and stand corrected. I
believe she did call the IRS initially but was redirected----
Mr. Koskinen. Probably got referred to the CMS.
Senator Portman. Yes. Anyway, lots of questions about how
we can help solve this problem and really the scope of the
problem. If you could today give us what the IRS' best estimate
is of the percentage of people who received a subsidy in 2014
and have to repay a portion of that subsidy, do you have a
sense of that?
Mr. Koskinen. We will not know because it takes us awhile
to post, and it will be another 3 or 4 weeks. But thus far, it
appears that slightly less than half of the people are getting
an increased refund because they got smaller advance payment of
the premium tax credit than they were entitled to, and that is
based on their final income. About 50 to 55 percent are getting
a smaller refund because they got too much advance payment
beyond what they were--but they are still getting a refund, but
it has an adjustment. And the adjustments are--we do not know
what the dollars are. I have seen tax preparers estimating that
their experience is that it is $300 one way, $500 another way.
We do not have information or indication of who actually as
a result of having gotten too much of an advance payment to the
insurance company on their behalf actually end up as a result
owing tax, the situation that the Chairman's constituent is in.
Thus far, the indications are--although, again, I would stress
we will have better information in 2 or 3 weeks when we
evaluate it is a small number of people in that category. That
was what our estimate was, that to say the vast majority of
people get a refund in any event, the swings in whether you got
too much of an advance payment or too little of an advance
payment are relatively modest enough that they are absorbed
within the refund itself. But we will have much better data for
you in probably about 3 weeks.
Senator Portman. We would appreciate getting that data.
Without answering the question today, just if we could submit
the question to you today, and we will also submit more for the
record, an estimate of what that percent would be in terms of
the folks receiving a subsidy that have to repay a portion of
it if the income verification process were more accurate and
working properly, because that is obviously one of the big
challenges that we have.
The other issue that I think is going to continue to be
something we hear about from our constituents is the State-
Federal data sharing. There was a story in the Wall Street
Journal--you probably saw it; I think it was yesterday--about
Marta Champan from New Mexico. She expected to receive an $850
Federal refund. Instead, she had to pay taxes, and the reason
is that apparently the exchange did not account for her
husband's Social Security benefits of $9,000. So there may be a
lot of reasons for that failure, but it gives me concern that
the State-based exchanges might not be communicating properly
with the Federal databases. It seems like the government should
have been able to help her avoid that error.
In any event, she reports that she felt this was--a quote
in the Wall Street Journal--``kind of a trick'' that she would
not have gotten the insurance had she understood its full price
and now has dropped her plan for this year. So I guess my
question for you there is: In terms of the information flow
between the State and the Federal Government, do you believe
that that is adequate? And how could that be improved?
Mr. Koskinen. At this point, about income verification I
should explain a little how the process works. The taxpayer
goes to the marketplace and makes an estimate of what they are
going to earn.
Senator Portman. Right.
Mr. Koskinen. For instance, if you enrolled last fall, you
would estimate what you are going to earn in 2015. We then get
pinged by the marketplace, either the State or the Federal
marketplace, and asked for an income verification, and that
income verification, surrounded by protections and not
revealing it to anybody outside, basically says what was your
earnings in the previous tax year. So in the case of the Social
Security payment, if that was on the income the year before,
that data would have gone back to the marketplace. So, in other
words, suppose the taxpayer came and said, ``I am going to make
$25,000 new year,'' we would be asked what did they actually
file the year before, and if that was $42,000 or $35,000 with
some Social Security payments, that information would go back
to the marketplace, and they would have a discussion with the
applicant or make a note to the applicant that their estimate
of income does not correspond with the verification.
The Inspector General (IG) looked at the income
verification information we provided in the initial enrollment
period over 15 to 20 million, and found that we were 99.5
percent accurate in terms of the information we gave both to
the State and to the Federal marketplaces. So it ultimately is
up to the consumer to make an estimate, just as I say we all do
when we are filing our withholding estimates and our estimated
tax payment estimates. What are we going to earn in the next
year? Most people with any variety in their employment
circumstances never know exactly what that is going to be. So,
again, our expectation is that as the process moves, more and
more people will understand they have to be careful about
estimating their income. If you underestimate it and,
therefore, get a bigger premium paid to the insurance company
on your behalf, it will all work out when you have to reconcile
and you will pay it back. So our expectation is that those
percentages of the number of taxpayers when they reconcile who
get larger refunds will go up because just the same way people
when they file their taxes, 60 to 70 percent of them get
refunds, because they, in effect, overestimated what they are
going to owe, so they will have a refund. And we think that is
where it will work.
But in terms of the actual accuracy, the accuracy of the
information that we are providing to verify the estimate
provided by the taxpayer thus far is not a difficulty and not a
problem, and the States get the same information from us
automatically.
Senator Portman. Commissioner, I have lots of other
questions for you, and I will submit those for the record. And
a lot of it to me goes to the process here. One of the things
that the Inspector General, as you know, has said is that the
ability to detect overpayment of subsidies is going to be tough
until you have implemented a predictive and analytical fraud
model. So I will submit some questions to the record about that
process.
Again, I appreciate your service and the fact that it is
going to be a complicated tax season for you, and we will be
following up with more questions.
Mr. Koskinen. That would be fine.
Senator Portman. Thank you.
Chairman Johnson. Thank you, Senator Portman. Senator
Sasse.
OPENING STATEMENT OF SENATOR SASSE
Senator Sasse. Thank you, Mr. Chairman. Thank you, Mr.
Commissioner, for being here.
Are you familiar with the Jonathan Adler piece in the
Washington Post yesterday about the 100 to 400 percent Federal
poverty level (FPL) qualification levels for the ACA?
Mr. Koskinen. No, I did not see that article.
Senator Sasse. OK. So he is summarizing essentially a Yale
Journal of Regulation Piece about the ACA's authorities and who
qualifies for the tax credits, and it is my understanding that
it is 100 percent to 400 percent of the Federal poverty line.
Correct?
Mr. Koskinen. I think that is right, yes.
Senator Sasse. OK. It looks like you all have written a
rule essentially rewriting Section 36B of the statute that
disregards the 100-percent income level. I am curious if that
is true and how you have the legal authority to do that.
Mr. Koskinen. I am not aware of that. I will be delighted
to get you information. I am not aware that we have done
anything that would ignore the statutory framework.
Senator Sasse. OK, great. Thank you. We will followup with
a letter and try to engage your staff and understand how that
would work.
The particular concerns I have are related to the broad
application of IRS discretion, obviously in the regulatory and
rulemaking process, but also in particular cases. I think as
the Chairman and Ranking Member mentioned, many of our
constituents, when I travel Nebraska, there is genuine fear of
the IRS because there is a lack of understanding about how
discretion is applied by the agency. And if Section 36B were
rewritten, it is not clear that an employer would not be
subject to employer mandate penalties if employees that they
have that would have been Medicaid eligible end up on exchange
through no fault of the employers, they could suffer a penalty
in that case. So I would love to get more information about
that.
Could you help us understand more broadly how policy
decisions in the rulemaking process are made between the
Department of Health and Human Services (HHS), the IRS, and the
White House? You have 36 components of the ACA under your
jurisdiction. Is that true?
Mr. Koskinen. Actually, all the tax provisions of the ACA
come under our jurisdiction. As I said, as a general matter,
our role in life is tax administration. So policy issues about
what legislation ought to look like, what changes in this act
ought to be, are decisions made by the Treasury, the White
House, and the Congress ultimately. We simply implement what
goes on.
Issuance of regulations is a joint effort between the
Treasury Department and the IRS. We are a bureau of the
Treasury Department. We do not issue regulations by ourselves.
They technically have the authority, but obviously we design
and draft regulations with an eye on what is the impact on tax
administration.
If there is a policy decision about do you increase this or
that, for instance, the policy decision about the penalty
application, that is a decision by the Treasury Department. We
get involved in that only to the extent that it is a question
of what are the implications for tax administration and would
it work better, easier, which is the best way for it to work.
But all of the policy issues are decided, again, by the
administration and ultimately by the Congress in terms of
legislative either recommendations or fixes.
Senator Sasse. So would that be true with regard to the
credits for illegal immigrants as well, the decisions that were
made about the refundability of credits for folks that under
the ACA would not have qualified under the statute but appear
to be getting credits in certain cases? The IRS plays no role
in that rulemaking process?
Mr. Koskinen. In the rulemaking process, we participate in
the discussions about if you are going to make that change--we
may chime in on what we think the law is, but the policy
decision--there is an Office of Tax Policy in the Treasury
Department that is responsible for tax policy. We meet every 2
weeks going over regulations to make sure that as those
regulations are designed, that they are designed with tax
administration not only in mind but as a part of that to make
sure that as the regulations get changed, they do not
inadvertently either make life more difficult for taxpayers or
more difficult for the administration of the tax laws.
Senator Sasse. Got you. So in the King v. Burwell case that
we are going to probably have a ruling from the Court in June,
when those decisions were made about credits in the States that
did not have state-based exchanges, those decisions were made
in the Treasury Department's Tax Policy Division?
Mr. Koskinen. Yes. Those interpretations of the policy
issue are up to Treasury. We participate, as I say, in those
issues giving our view as to how it would be for tax
administration, what works or does not work. But the policy
calls and the development of the act to begin with are the
responsibility of Treasury, the White House, HHS, and
ultimately the Congress.
Senator Sasse. OK. So going back to the Chairman's opening
issue with his constituent, if a decision was made--what was
the number, $11,000, Chairman Johnson, of a tax bill?
Chairman Johnson. Correct.
Senator Sasse. How will the decision be made about the
timeline of repayment of that--you said you want to dispute
calling it a ``penalty,'' but that obligation that they have?
Mr. Koskinen. To repay the premium that went to the
insurance company. That is tax administration, and so the
taxpayer will either file their taxes and add the $11,000 back
that they owe. Or if they have difficulty with that, they will
contact us. We keep encouraging them to do that. You do not
have to hire somebody off late-night TV to come deal with the
IRS. They can work on an installment agreement. Actually, you
can develop an installment agreement yourself online, which is
one of the new things we have developed over the last year.
If they have substantial financial difficulties, they can
work with us about an offer in compromise to actually figure
out how to settle it. Those are all tax administration issues,
and we are responsible for those.
Senator Sasse. I am nearly into Senator McCaskill's time,
so one last question. I earlier said 36 provisions. It is 34
provisions of the ACA. Who is the point person inside the IRS
for the tax administration of all the new ACA authorities?
Mr. Koskinen. Ultimately the Commissioner is, which is why
I am here. In other words, I have met every 2 weeks for the
last 15 months with the IT people, the program office, the
business people, working toward the implementation of--the
development of the systems, the implementation of them, making
sure this filing season got started. And so I am ultimately
responsible.
Senator Sasse. And it is your judgment that the IRS is up
to the task of administering all the new ACA authorities?
Mr. Koskinen. Thus far, I think the filing season has shown
that we have done a remarkable job in the face of both the
challenges, getting them into--we have a very--what I call
fondly ``a Model T'' with a great sound system and a GPS system
and a new engine, but it has applications running for 60 years.
To pull that off, I am delighted. You could have made a lot of
money betting on that result 15 months ago.
So I think we are up to it. I do think--and I have thought
for a year about it--we do statutory mandates, so we will
always have a highest priority of whatever statute you pass.
But when our resources are cut, it means that we cannot do
other things that we have discretion over. So it is tax
enforcement, taxpayer service, improvement of our IT systems
have to be put on hold. But I think in terms of the
implementation of the Affordable Care Act, I could not be more
pleased with what the employees of the IRS have been able to
do.
Senator Sasse. Thank you, Commissioner.
Mr. Koskinen. Thank you.
Chairman Johnson. Thank you, Senator Sasse.
Let me just admit that back-of-the-envelope calculations
are dangerous because my logic was in error. Really the
extrapolation would be about $172 times 2, it would be $344 in
the second year, and about $430. So I want to correct the
record. I was wrong. So it really looks like the minimum
penalty would probably be the maximum penalty if we extrapolate
it. So we are not talking about 3,000 bucks. We are really
talking the 325 and 695 as being average. So I just want to
correct that. Senator McCaskill.
OPENING STATEMENT OF SENATOR MCCASKILL
Senator McCaskill. Thank you----
Mr. Koskinen. I appreciate your staff's input because I
could not do that on my own.
Chairman Johnson. It was me. I was just thinking about it.
It just seemed, man, that is why, I started going through that
logic. This is unbelievable. And it was unbelievable, so I was
wrong.
Mr. Koskinen. 435 sounds a lot better.
Senator McCaskill. Commissioner, everyone is offended at
the notion--I was offended, everyone is offended, regardless of
party or ideology--at the notion that the IRS would ever target
groups based on their beliefs in this country. I understand the
outrage. I understand the need to hold people accountable. But
I would like you to explain that when we vent that frustration
by cutting funding from your agency, who exactly we are
punishing?
Mr. Koskinen. Well, as other people have noted, when you
punish the IRS by cutting its budget, ultimately you are
punishing taxpayers because you limit our ability to provide
the service to them that our employees want to provide. The
people who care most about it are the people working in our
call centers, in our assistance centers, whose satisfaction
comes from helping people, and they feel they do not have the
resources to do that.
Senator McCaskill. Your budget has been cut by 18 percent
since this scandal came up. What is the call wait now for a
taxpayer who has a problem? What is the average amount of time
they have to wait on the phone because you do not have enough
personnel to answer the phones?
Mr. Koskinen. At this point, when you get through, if you
get through, it on average would have taken you about 28 to 30
minutes.
Senator McCaskill. And what percentage of the phone calls
can you even answer at this point after these draconian budget
cuts that supposedly were punishing you, but as it turn out
they are punishing my constituents who cannot talk to anybody
because you have had to cut so many people?
Mr. Koskinen. About 60 percent of the calls this year are
not going through, and that increases, that exacerbates the
problem, because if you do not get through--we have had over 6
million--the phone industry calls and courtesy disconnects,
they are basically when the system gets overloaded and we know
you are going to be there too long, you will just simply get
disconnected. So you aggravate the problem because what happens
is people have to call back. So, on average, a lot of people
are calling two, three, or four times just to get into that
queue to wait for the half-hour.
Senator McCaskill. And scams. We are going to have a
hearing later today on the Aging Committee about the scam that
is going on in this country where people make phone calls
claiming to be the IRS. Then they basically steal money from
victims through coercive efforts and misrepresentations on the
phone. When you are able to go after the criminals, what is the
return on investment for every dollar that you are given to go
after the criminals? And I saw those criminals firsthand as a
prosecutor who are using the IRS and the tax code to cheat all
of us people in America who pay their taxes. What is the return
on investment for every $1 you get? What do you return to the
Treasury in terms of your ability to go after the criminals?
Mr. Koskinen. Well, on enforcement alone, the return is
over 10 times the amount. As a general matter, when you give us
$1, you get $4 to $6 back.
Senator McCaskill. OK.
Mr. Koskinen. So we are the only agency in the government,
if you give us money, we promise to give you more back.
Senator McCaskill. And let me make sure I understand and
make the point because, this sometimes--and I do not want to
get to, well, maybe I will get to an aggressively partisan
place here. When you estimate your taxes, you are deciding what
you are going to make and what you are going to owe to the
government. Then you decide what is going to be withheld. If
you are right, if you are perfect, then it is even. You do not
owe anything and you do not get anything back. But if you
underestimate your income, you might owe more. If you get less,
and if you overestimate, you might have to pay more. So this is
something every taxpayer has to do every year, correct?
Mr. Koskinen. That is correct.
Senator McCaskill. So really what we are doing with the ACA
is exactly the same thing.
Mr. Koskinen. That is right.
Senator McCaskill. The individual has to estimate whether
or not they are entitled to get this amount of money for their
insurance premium or if, in fact, they are entitled to that
amount. If they estimate wrong, they are either going to get
money back or they are going to owe money.
Mr. Koskinen. That is correct. And one of our goals is to
try to educate the public--we have been doing that for a year--
to understand that.
Senator McCaskill. And they are going to get better and
better at this.
Mr. Koskinen. They will, and all of our experience in all
of these kinds of programs is after the first year, everybody
then pays even closer attention and understands that it is not
a free good.
Senator McCaskil1. OK.
Mr. Koskinen. That when you get a premium, advance payment,
it ultimately has to be reconciled with the reality of your
income.
Senator McCaskill. And, finally, calling it a ``personal
responsibility tax'' I have a couple of minutes, and I am going
to take them. A 32-year-old man in America has enough money to
either buy a new Harley or health insurance. And under the
umbrella of freedom, he decides, ``I want a new Harley.'' And
he goes out, and he puts that Harley on the pavement, and he is
life-flighted to the nearest hospital. In America, we do not
say to him, ``You know what? You decided to buy the Harley. We
are going to let you die.'' Instead, we take him in the
hospital and sometimes give him millions of dollars of health
care. He goes bankrupt. The hospital has uninsured care.
Now, there is no magic fairy that I am aware of--I do not
think there is one at the IRS--that comes into that hospital
and pays the bill. So what happens when that happens? When that
guy decided to buy the Harley instead of the health insurance,
the hospital calls the insurance company and says, ``We are
going to have to charge you more for labor and delivery. We are
going to have to charge you more for a knee replacement. We are
going to have to charge you more for an angioplasty.'' Then,
that insurance company calls the small business down the road
and says, ``You know what? I am going to have to raise your
premiums.'' And those premiums have been going up by double
digits every year for years prior to this reform.
Now the question we have here is one of personal
responsibility, and I am lectured about personal responsibility
from some of my friends on the other side of the aisle
constantly. So the question is: Do we owe, all of us who pay
insurance, should we pay a higher premium because he got to get
a Harley? Or should he have personal responsibility to be able
to cover his medical bills? And that is really the essence of
this question.
We say you have to have insurance when you are driving a
car because you might, in fact, harm someone else. Well, when
you go into the hospital with uninsured care, you are passing
those costs on to people who have taken personal
responsibility.
So I get so tired of this notion that somehow this is the
big arm of government instead of the notion that it is time in
America we acknowledge that personal responsibility in the
health care sector is just as important as personal
responsibility in any other sector.
I feel better. Thank you, Mr. Chairman.
Chairman Johnson. Thank you, Senator McCaskill. Senator
Ernst.
Senator Carper. Mr. Chairman, could I just say something?
Chairman Johnson. Sure.
Senator Carper. I am Tom Carper, and I approve that
message. [Laughter.]
Chairman Johnson. Senator Ernst.
OPENING STATEMENT OF SENATOR ERNST
Senator Ernst. Thank you, Mr. Chairman, and I would like to
state for the record I do ride a Harley, I have insurance, and
I wear personal protective gear. So, yes, thank you very much.
I am personally responsible.
Mr. Koskinen. Did you all work this out beforehand?
Senator Ernst. No, we did not. Fortunately, I do not make
that choice. I know what I can afford, and do so accordingly.
Anyway, a little bit more--I know Senator Sasse had brought
up some good discussion about King v. Burwell where your role
will be once that decision is made. If it goes the way I
believe it should go, then we will have subsidies that have
gone to States and to individuals that should not have gone to
those individuals. But what do we do--and maybe you have
thought about this--in those hybrid situations? There is a
handful of States, of which Iowa is one. It is a hybrid
exchange. It is neither State nor Federal. It is a combination
of both. Have you thought through that and what role the IRS
might be playing, Commissioner?
Mr. Koskinen. No, we have not. Basically there is no way
for us--so we do not spend any time thinking about it--of
trying to predict what the Court will hold and what it will
decide in terms of how to parse through all of this and what
the responsibilities are of States, the Federal Government, the
Congress. And much like potential tax extenders, we basically,
as I say, play the hand we are dealt. The Court will make a
decision, and then we will respond.
The policy issues, back to the earlier questions, about
what the implications are beyond tax administration will be
decisions made by the Treasury Department and the
administration. But at this point, we have enough challenges
running the filing season and the program as it is, and so it
is what we are focused on.
Senator Ernst. OK. I do appreciate that. I hope that once
the decision is made we can all jump on that together and
figure out how we are going to handle that situation. So I do
appreciate that.
Since September 2014, Health and Human Services has dropped
over 300,000 individuals from Obamacare because those
individuals have failed to document their legal residency. So
we do not know what their status is. Many of those were
enrolled under the law for over a year, so 300,000 individuals.
And during that time, many of them did receive premium
assistance, tax credits, and cost-sharing subsidies for which
they are not entitled. They cannot prove their residency; they
are not entitled to those.
So under the administration's current policies, if an
individual or family is unable to prove his or her citizenship
or lawfully present status, HHS provides coverage and taxpayer-
funded subsidies under the Affordable Care Act before the
individual's legal status can be verified by any government
agencies. So if citizenship or lawfully present status is not
verified or cannot be verified, then those individuals are
dropped. So, again, 300,000 individuals have been dropped from
Obamacare. And because many of those are part of this 300,000,
if they are illegal immigrants, they are not necessarily filing
tax returns, and so I understand that it would be difficult for
the IRS to try and recoup improper payments or credits or
subsidies because they will not be subject to the
reconciliation process when they file tax returns, because they
do not file tax returns.
So how as the IRS are you able to handle that situation?
What is the plan moving forward for those folks that were
receiving credits or subsidies that are not filing?
Mr. Koskinen. Those determinations and qualifications were
made by CMS and HHS, which runs Medicare and Medicaid and has
experience on recouping improper payments or payments made in
error. And so this is an area where they will be responsible
for doing that.
Senator Ernst. That will not even be run through the IRS?
Mr. Koskinen. No. In other words, if they were not filing,
they will--if the premiums have been paid on their behalf, at
this point the idea is that CMS will pursue those to the extent
that they pursue any other payments that they make, that turned
out to be improper.
Senator Ernst. OK. I can see that this is going to be a
very difficult situation with so many different entities that
are involved with subsidies, with tax credits, one agency not
knowing how another agency is going to handle it.
Mr. Koskinen. Well, no, we work together on that. There is
not a gap. This has been, as somebody noted earlier, an effort
that is not totally unique, but for us we spend a lot of time
with CMS and have very good communications and working
relationship with them. We spend a lot of conversation with the
Treasury Department. As I note, we are bureau. But the policy
issues are regularly reviewed by HHS and Treasury together. We
chime in in terms of how it is going to affect tax
administration, but I do not think there is any gap in where
they are. As new issues come up, they obviously have to be
resolved. But that is part of an ongoing discussion the
agencies have.
Senator Ernst. OK. Well, I do appreciate that. I know it is
a very difficult situation. You have been thrown into this, and
I appreciate your service, and thank you for coming today to
testify.
Thank you, Mr. Chairman.
Mr. Koskinen. Thank you.
Chairman Johnson. Thank you, Senator Ernst. Senator Ayotte.
OPENING STATEMENT OF SENATOR AYOTTE
Senator Ayotte. Thank you, Chairman. Thank you,
Commissioner, for being here.
So I wanted to ask you about a situation that we have been
facing in New Hampshire, but I do not think New Hampshire is
unique on this. I received a number of complaints from my local
libraries that they did not receive the necessary tax forms and
instruction booklets. So in New Hampshire, we happen to have a
high percentage of people that actually will file by paper, and
historically they have been able to go to their local library
and get the tax forms so that they can do their taxes.
I wrote to you originally, I believe, in February about
this issue, and the first response I got back, one of the
primary reasons, you said, that these forms were not being
provided to people at their libraries in New Hampshire was that
the IRS budget was cut. But the reality is that on taxpayer
services, Congress allocated the same amount of money. So why
is it the IRS is unable to provide the same level of customer
service this year? Because it is not just this library issue.
For us in New Hampshire to have to go through the runaround
that we did to get our libraries the basic tax forms so people
could file their taxes, I mean, it just was kind of
unbelievable to me when my staff told me all the runaround we
were going through.
So can you help me understand why this is happening? And
what troubles me even more is that the National Taxpayer
Advocate recently testified before the Senate Appropriations
Committee that this year taxpayers are receiving the worst
levels of taxpayer service since at least 2001, and the
statistics are staggering in terms of 40 percent of the calls
that the IRS is receiving from taxpayers are not being answered
or responded to in any way.
Mr. Koskinen. Right, and the answer to that is we get an
appropriation in buckets for enforcement, for operations, which
is taxpayer service and information technology; IG and Taxpayer
Advocate are off on the side. We also have user fees that go
through part of our operating budget that the appropriators are
aware of. Historically, we have never been fully funded for
taxpayer service. The amount of money provided has been then
supplemented by, on average, about $150 million out of the
various user fees that we charge.
Because in both 2014 and 2015 we were zeroed out in funding
for the Affordable Care Act, we asked for $300 million each
year just for IT, and the Congress provided us zero. So the
only way we could do it was to move money from wherever it was.
So while the base appropriation for taxpayer service is the
same, we had to take $100 million out of our user fee
allocation to taxpayer service to put it into information
technology to implement the act. So we have a significantly
smaller amount of money available for taxpayer service than we
have had before, and the appropriators understand that because
we go through that with them regularly.
We are as concerned as you are about the low level. As I
said, I have now visited 37 cities. I have talked with, in town
halls and otherwise, 13,000 IRS employees. And one of the
common themes is not that they are overworked. One of the
common themes is they want to help taxpayers. They get
satisfaction out of answered questions. One of the concerns
they had was when we told them they could only answer simple
questions, not complicated questions, because complicated
questions let the queue get longer.
So it is clear, and we have tried to make it clear, we told
the Congress last year, the appropriators, that if our budget
was flat let alone cut by $350 million, we expected the level
of service would drop to 53 percent. When we got cut by an
additional $350 million, we had no choice, because we have to
implement the statutory mandates. We have to run the filing
season. We collect over $3 trillion for the government in the
ordinary run of the filing season. So we cannot afford to have
that not work. So when you cut our budget, the only places that
get cut are enforcement, taxpayer service, and improvements in
our information technology.
Now, with regard to the forms, first of all, as I hope I
thought when I read the letter to you and signed it and talked
to people--our experience has been 85 percent of the forms we
have been sending out do not get used. So we have been actually
providing a lot of forms for landfills. For the libraries, as,
again, we have tried--we worked with the Library Association.
We provided them the basic forms, not schedules and others, but
we provided them a format that would allow them to make copies
of any form they wanted. They could download and make other
copies of those. Anybody could call us--we have a special line
for documents--and ask for documents; we would mail them to
you.
Now, there was as problem because with the extenders and
the development of the forms, we could get them up online and
you could download them online. You could go straight online to
get them. If you called us, it was going to take a few weeks
longer before they actually got through the formal process.
So we tried for taxpayers to give them alternatives. The
library concern, which I understand, was printing documents,
making copies is not a free good, you know, whether it is 10
cents or 15 cents a copy. With limited budgets libraries are
strained by that. But that is why we tried to encourage them to
say for their constituents they could go online and download
them themselves. Some people do not have access to----
Senator Ayotte. The problem is the people are going to
libraries do not necessarily have access to that.
Mr. Koskinen. Have access to the Web, and those people--we
have tried to give visibility to it--could call a special line,
and we would mail them the form.
Senator Ayotte. Well, I literally had to send my staff
repeatedly over to get these forms for people in New Hampshire,
and, we were only able to get 10 at a time. It was a little
crazy.
Let me just point out that from your testimony the one
thing that people need to understand is you had to take money
from the taxpayer services line to fund the implementation of
the Affordable Care Act, essentially is what happened here.
Mr. Koskinen. Yes.
Senator Ayotte. Because we funded you the same on taxpayer
services, and you took the money to implement Obamacare.
Mr. Koskinen. The money you gave us for taxpayer service is
spent on taxpayer service. We actually put $50 million of user
fees into it. It is the $100 million we had to put into the
statutory mandate, and we have to do statutory mandates. We do
not have a choice----
Senator Ayotte. Well, yes, and in the 2015 budget, the GAO
found the IRS used $12.1 million that was appropriated for
taxpayer services to implement the Affordable Care Act.
Mr. Koskinen. Yes. We have no choice. If you pass an act,
the Congress passed--as I have said, ironically, 3 days after
our budget was cut by $350 million, the Congress passed the
ABLE Act with no additional funding and said, ``You have until
June 1 to do that,'' and the Professional Employees
Organization Act.
Senator Ayotte. So before I leave----
Mr. Koskinen. We will do that because you have told us to
do it. But the only way we do that is we have to find the money
somewhere. We have to take it where we have discretion.
Senator Ayotte. Right, so we are taking it from our core
functions to do this.
Mr. Koskinen. That is correct.
Senator Ayotte. I wanted to followup on an issue that--
someone may have already asked you, but I want to followup, and
that is the incorrect 1095-A forms sent to 800,000 individuals
who enrolled in the health insurance through the Federal
exchange. Do you know how many taxpayers in New Hampshire
received an incorrect 1095-A form?
Mr. Koskinen. I do not. Those forms are provided and
designed and filled out by CMS, so they would be the ones
that--if anybody knows, they would know.
Senator Ayotte. And do you think that the people who waited
a little longer, as I understand, they are being treated
differently and are still on the hook for paying, that if they
owe a larger premium, that they--as I understand, there may be
a distinction between those, depending on when they filed and
how they are going to be treated. How are the people in this
country that, were misled in terms of what they thought that
they were going to be receiving or not receiving or having to
pay, how are you going to treat those individuals? And what are
we going to do with the lost revenue on that?
Mr. Koskinen. We have to sort through this. Of the 800,000,
the estimate by CMS was about 50,000 had filed, and 750,000
were in the same pool, and the 50,000 could file amendment if
they wanted to. So it is not a distinction.
In terms of being misled, we have had a long, I think
informative decision that--and I think after the transition of
the first year, people will understand it better. When you
register and apply for insurance coverage, you make an estimate
of what your income is going to be for the year going forward,
the way we all make estimates when we file our estimated
payments and withholding. You make that judgment. We then
provide income verification about what your last tax return
filings were so that the marketplace can determine whether, in
fact, you have an accurate estimate going forward. And on that
basis, a determination is made. First, by working through what
the premium for your insurance is, and then a calculation is
made, how much of that premium will be paid on your behalf to
the insurance company in an advance payment.
One of the things that we have tried to make clear from our
standpoint, because we wanted people to make sure if they had a
change in circumstances, if they had a different estimate of
what they were going to earn, they needed to go back to the
marketplace so they would not have any bigger adjustment than
necessary. But a lot of people actually, I think, went through
and assumed that once they got the premium payment paid to the
insurance company that somehow it was never going to get
reconciled. Most people understood that it had to be
reconciled, but a lot of people have, one way or the other, not
understood that. We think going into next year everybody will
understand when you make an estimate of your income and your
family circumstances--if your income goes up, then you are
entitled to less support for your insurance payment that goes
forward. You still have the same insurance policy. It is just a
question of how much do you pay, how much does the government
pay. If the amount of income you are making goes up, you are
going to be eligible for less. And if you let the marketplace
know that immediately, it will adjust the advance payment
immediately, and you will have no change or reconciliation at
the end of the year.
So we have spent a lot of time, CMS has spent a lot of time
over the last year trying to get people to understand as 2014
unrolled that if your estimate was wrong or changed, you needed
to get back to the marketplace. A number of people did. That
would mean you would get a 1095-A for the part of the year that
you were under one coverage, and then you would get another
1095-A when your premium changed. So at the end you would know
exactly what your premiums were. We think that is going to get
much better in the second year because everybody will have now
been through it once and will understand that you are making an
estimate of your income, and you just have to be careful that
that is as close to what the reality is going to be as you can
make it. And if it changes over the course of the year, you
need to get back to the marketplace.
Senator Ayotte. Thank you.
Chairman Johnson. Senator Lankford.
OPENING STATEMENT OF SENATOR LANKFORD
Senator Lankford. Thank you. Commissioner, it is good to
see you again. Thanks for the work you are trying to do for the
American people and all that is going on. There is a tremendous
amount that needs to be done. You have walked into the middle
of a lot of chaos with laws that we all have some frustration
with, and I appreciate what you are trying to do.
I want to talk through just a couple of things. We have
talked before about the EITC and the identity theft issues. I
want to just try to get a general sense of a timeline. You put
together working groups. You are trying to get outside input on
this. How do we get on top of this? We have a 22-percent
estimated fraud rate over the EITC, somewhere around $13 to $16
billion in loss in that one program, and trying to be able to
manage that.
The challenge has always been--this has been a high-
priority issue of how to get on top of this. You have come in
in the last 2 years. You walk into the middle of all this. What
is the plan now to try to get on top of this $13 to $16 billion
of loss?
Mr. Koskinen. It is a major challenge for us. I have been
concerned about it since I started. When I started, the
challenges were to implement the back end of the Affordable
Care Act, the front end of the Foreign Account Tax Compliance
Act (FATCA), deal with extenders, deal with the filing season,
deal with overall identity theft. We have made progress, good
progress in some areas, progress in all those areas except for
EITC. And if you look back over it over the last 10 years, the
percentage of improper payments and the dollar volume of those
have been pretty much within a range and not changing.
Senator Lankford. Right. So how do we get on top of that?
What is the plan for----
Mr. Koskinen. So the plan is I did put together a working
group of everybody who knew anything about this to say we
cannot keep doing the same thing--although we have tried a lot
of stuff, we cannot keep doing it expecting somehow it is
magically going to get better. So we went back to the drawing
board.
and we asked for support from the Congress. We need to get
W-2s earlier so we can front-end validate what people are
asking for. We need to have what is called ``correctable error
authority.'' We see in the returns when there are errors. Two
people claim the same dependent. You have said you have four,
and our database says you have two. We cannot make that
correction without sending you a letter and entering into a
formal negotiation or audit or exam, and there is a limit to
what we can do. We did last year about 450,000 of those exams,
but we have 27 million applicants. And to the extent that 20
percent of them, 4 or 5 million, are getting the improper
payment, we are never going to be able to audit our way out of
the problem with resources.
So we have said if we had correctable error authority, we
could make that correction, advise the taxpayer. The taxpayer
would still have the right to come in and say, ``No, the person
who claimed the child was wrong,'' or, ``I have really got
three kids as opposed to one.'' So you would always have the
ability to make that clear. But we would be able to make those
corrections directly.
And then as we talked earlier, over 50 percent of the EITC
returns are filed by tax preparers, and as I say, most of them
know what they are doing. They tried to do the best they can.
It is a complicated statute that if somebody wanted to
simplify, we would be happy to support that. But it is
complicated. So for an untrained preparer, it is very difficult
to work through, so they are making honest mistakes.
Then as I say, there are crooks who are advertising, ``Come
with us. We know how to get you a good refund.'' We have tried
to warn taxpayers. Certainly if your preparer says, ``Just sign
a blank return. I will take care of it for you,'' you better
get another return preparer, because, A, you may never see the
refund; B, the refund may have nothing to do with what your
reality is.
So if we could get W-2s earlier, if we had correctable
error authority, and if we had minimum requirements and
qualifications training for tax preparers, we think the
evidence is over the last 10 years we could make a dent in this
problem. We are never going to get it to zero, but to me, you
just cannot--I have told people you cannot keep running the
system this way. It looks either like we do not know it is a
problem or we do not care about it or we cannot do anything
about it. I think we can.
Senator Lankford. And I would say that is a prime aspect of
this Committee, is to be able to determine where we are stuck,
let us know what we need to do so we can get it unstuck.
Mr. Koskinen. Right.
Senator Lankford. And you just articulated three different
issues that you need Congress to be able to help with: the W-2
issue, correctable error authority, and simplify the statute,
EITC, so there is less gray area, basically that it is more
black and white of who gets it and who does not get it, and how
that gets applied. Is that correct, those three that I am
picking up?
Mr. Koskinen. What you got is really four. We need W-2s
earlier.
Senator Lankford. Right.
Mr. Koskinen. We need correctable error authority. We need
minimum requirements, qualifications for preparers. And if we
could simplify the statute, it would be helpful.
Senator Lankford. All right. This again is something you
are trying to manage in the middle of all the transition in
Obamacare. In September 2014, HHS dropped 300,000 people saying
that they did not have the correct documentation for legal
residency status. Some of those individuals were already in the
process with the tax credits and the subsidies and everything
else. What is the plan to recoup? Is there a way to recoup? Is
there just a loss? We have 300,000 people there that received a
subsidy that HHS came later back to and said no, they are not
eligible for this after all? How is that working out?
Mr. Koskinen. As you can imagine, it is a complicated
situation. Basically what they got was advance payments of the
premium tax credit, so they actually never got to the tax
credit form. Basically the government had made an advance
payment to the insurance company on their behalf. And so as a
general matter, the policy has been that HHS and CMS, who deal
with Medicare and Medicaid payments that often sometimes are
made improperly, are retrieving those. And so the basic policy
is that CMS and HHS are responsible. But when the payments are
made on the basis of improper identification, at that point
recouping those or collecting them again is up to them.
Senator Lankford. So that is not up to you; that is up to
HHS to----
Mr. Koskinen. That is right.
Senator Lankford. We have 300,000 people that apparently
received that advance payment that do not have citizenship or
do not have documentation for citizenship at this point, and
they are receiving this advance payment. But that is over
there.
Mr. Koskinen. That is over there, yes.
Senator Lankford. OK. Let me ask another issue on this. The
law itself with the Affordable Care Act, the law prohibits
employers from reimbursing or otherwise providing financial
support to employees to help them pay for an individually
purchased plan for these smaller businesses and individuals. So
if someone says they are going to go out onto the general
market, the employer is going to just provide them some sort of
tax-free amount. In the past, employers, especially small
businesses, would say, ``OK, I cannot afford you a policy, but
I know you are going to go buy something; I am going to try to
find some way to be able to help you do that.'' My
understanding is that is not legal anymore under the Affordable
Care Act. Are you aware of what the tax policy is and the tax
implications of that?
Mr. Koskinen. That is my understanding, that is the tax
policy. Again, it is not a policy the IRS sets. It is a policy
set by the Treasury Department in response to the statutory
language.
Senator Lankford. Would the IRS have to carry out the
penalty part of that, though, for the employer especially?
Because my understanding is the employer actually----
Mr. Koskinen. Once somebody has decided either in the
statute or the policy under the statute, what the policy is,
the tax administration is our responsibility. So to the extent
that once the rules are set, we are responsible for
administering them so the penalties or the tax payments would
be our responsibility.
Senator Lankford. So at this point there is a consequence
that could come down on someone who is trying to help someone
pay for their premiums out on the general market rather than
providing an individual coverage?
Mr. Koskinen. Right. The Treasury Department has provided
guidance in that regard, and so that point has been made.
Senator Lankford. Mr. Chairman, can I make just one quick
comment as well?
Chairman Johnson. Sure.
Senator Lankford. The Kaiser Family Foundation has done a
tremendous amount of research on all this and has done a very
good job of getting the background. They listed in their
research only 4 percent of households received the correct
Obamacare subsidy. Now, again, that is not your responsibility
to chase that down, but that becomes a big issue long term on
managing, and it affects a lot of people as they go through all
their tax planning and preparation. It is one of the aspects
that has to be corrected. If we have 4 percent of these folks,
according to the Kaiser Family Foundation, that are receiving
the correct subsidy amount up front to know what they are
dealing with, we have a major problem that needs to be dealt
with, with CMS and HHS. Otherwise, they are trying to clean up
the consequences of it.
Mr. Koskinen. I would just simply note that I am not sure
we have a much higher percentage of people estimating their
income and their withholding. In other words, what you are
doing at the front end is making an estimate of what are you
going to earn in the future. And that determines the advance
payment you are entitled to. And so unless you know your job
today and you know that no income is going to change, your
family is not going to change, you are always going to be
making an estimate that almost by definition is never going to
be 100 percent.
Senator Lankford. So this basically sets up Americans to
fail at this point, or it sets them up to where they are going
to have to file multiple forms through the year to be able to
update pay.
Mr. Koskinen. No, what is going to happen is what people do
with their withholding. Right now the reason 60 to 70 percent
of people get refunds is because they overestimate----
Senator Lankford. They guess high.
Mr. Koskinen [continuing]. And that is what we expect
people will do here, is they will be careful about estimating
their income. They will not try to make it down the last
dollar. They will say, ``I am going to overestimate my income
to make sure that the premiums going to the insurance company I
am entitled to, and that means I will probably get a bigger
refund, because when it gets calculated, much like people
getting refunds for their withholding and estimated tax
payments, I will get a refund in April.'' And so it will be, I
think, that normal taxpayer behavior, which is the way they
behave generally.
Senator Lankford. Thank you. I yield back.
Chairman Johnson. Thank you, Senator Lankford.
Mr. Commissioner, in probably June of this year, the
Supreme Court is going to be deciding on an IRS ruling in the
King v. Burwell decision. Has the IRS done any planning in case
that ruling comes down and is an adverse ruling in terms of
your rulemaking?
Mr. Koskinen. Well, as I said earlier, there are a wide
range of possibilities of how the Court is going to rule in
terms of both what it decides and how it decides it wants to
have its ruling implemented. And in light of our challenges,
just moving forward and actually, as I say, next month we have
to start preparing for the next filing season, there is no way
we can adjust the filing season planning trying to anticipate
the various options. So much like we do with tax extenders, we
basically run on the assumption life will continue to look like
it is, and then we have to adjust afterwards.
Chairman Johnson. So, bottom line, no planning whatsoever.
If the Supreme Court rules the way I believe the law is
written, that the subsidies can only be paid through exchanges
established by the State, that is going to create some real
problems for the IRS, correct?
Mr. Koskinen. But it depends on how the Court rules. The
Court could rule----
Chairman Johnson. I understand that, but let us say they
actually follow the law the way it is written, and they say
that only subsidies can be paid through those exchanges
established by the States, we have how many States that have
Federal exchanges? How would you possibly handle that? Have you
made any--again, my question is: Have you given any thought to
that, any planning whatsoever in terms of that very possible
eventuality here?
Mr. Koskinen. No, there will be a set of issues, just as
with statutes, there are policy questions about how to
implement them. Some statutes are passed, and then people are
given more time to transition. So depending on what the Court
decision is, there will be policy decisions made about how to
transition from one point to another. But depending on the
decision, it could make life much more complicated for
everybody.
Chairman Johnson. You were not Commissioner when that
ruling was handed down, correct?
Mr. Koskinen. That is correct.
Chairman Johnson. Did you ever look into or research how
that ruling was developed?
Mr. Koskinen. No. I have a rule of life--I have spent 45
years parachuting into 20 years in the private sector, 20 years
in the public sector, agencies and organizations under
challenge. And my rule of life is play the hand you are dealt
and move forward. And so that decision was made before I got
here, and my job is to administer the agency as best I can
where we are.
Chairman Johnson. So you have never looked into whether or
not the IRS was working hand in glove with the White House and
trying to get direction from them in terms of how they should
rule on that?
Mr. Koskinen. No, except as a general matter, we do not
work hand in glove with the White House on anything, but these
policy discussions we have are primarily with the Treasury
Department. The regulatory process is worked with the Treasury.
But I have no idea who talked to whom and how that process and
those decisions were made.
Chairman Johnson. OK. The IRS is also responsible for
evaluating the exemptions for the individual mandate. How many
Americans in general--or what is the estimate in terms of
Americans that will qualify for the various exemptions that
have been provided for?
Mr. Koskinen. At this point, as I say, we have not pulled
that data out of the returns, so I cannot give you an answer on
that. But the assumption was basically that probably more
people would file for exemptions, hardship exemptions, or that
they had coverage for part of the year than people who will pay
the shared responsibility payment. It will be, a number that we
will actually see, and as I say, in 3 or 4 weeks we will be
able to accumulate all of that data and understand where it is.
Chairman Johnson. And, again, those that will be granted
exemptions, that is going to be pretty much on an honor system?
Is there going to be any way of trying to verify that through a
potential auditing process?
Mr. Koskinen. Yes, what we will do in all of these matters,
as we always do, is the computer selects returns that have
issues, whatever they are. When we go into those, then we look
at everything. And so of the 75 percent, give or take a little,
of Americans who have checked boxes saying they have coverage,
if we actually have an issue with your return, we will ask you
for backup support for the fact that you had coverage, because
you said you did.
So we will track through, when somebody says, ``Well, I had
a hardship,'' and it turns out you made a lot of money, and we
are auditing you on that basis, it will be noted that while you
applied for this exemption, you do not seem to qualify for it.
And then you are subject to, in effect, penalties and interest,
and the penalties for purposely understating your income can
over time mount up.
Chairman Johnson. Getting back to the couple that wrote me
the letter and their $11,550 of subsidy they have to repay and
just the timing of that, at what point in time, if they are
just unable to repay it--I mean, they were talking about
because they do not have the cash on hand, they do not have the
ability to pay other than potentially having to pull money out
of their retirement fund--which there is a pretty high penalty
for doing that, correct? I mean, if you pull money out of your
retirement fund, there is, what, a 10-percent penalty on that,
plus you have to count it as income?
Mr. Koskinen. If you have already retired and you are 59\1/
2\, then you can pull money out of your retirement fund, and
all you do is pay income tax on it. There is on----
Chairman Johnson. They are not retired. They are actually--
well, they might have been retired.
Mr. Koskinen. If they are over 59\1/2\, they do not have
that problem, other than you pay tax on it because that is how
the fund works. If you are under 59\1/2\, then there is a
penalty.
Chairman Johnson. OK. So, again, somebody in that situation
that was working, that had to pay that back, if they had to
pull out--they may be paying a penalty in that.
Mr. Koskinen. Right.
Chairman Johnson. What about the timing of paying the
subsidy anyway?
Mr. Koskinen. As I have said, you can actually go online,
and if you qualify--and in a case like this, you probably
would--you can do an online installment agreement with us that
would allow you to spread those payments over time. And you can
do that online, or you can call us after the filing season, and
hopefully you will be able to get through a little quicker. And
you can arrange that. So you do not have to immediately take
draconian steps to pay everything on time if you have
legitimate concerns. And it sounds like in this particular
case, an online installment agreement--or an installment
agreement, online or otherwise, would be an appropriate
response.
Chairman Johnson. Over what time period would that be
installment?
Mr. Koskinen. It depends on the situation, but it is
usually over 3 to 5 years.
Chairman Johnson. Do they pay interest on that as well?
Mr. Koskinen. Yes, if you have not paid on time, then there
is an interest charge, but there is no penalty charge.
Chairman Johnson. OK. What is the interest payment on that?
Mr. Koskinen. The interest rate goes at the government
interest rate, which these days is, very low.
Chairman Johnson. OK. That is all I have. Senator Carper.
Mr. Koskinen. Not that I want to encourage people not to
pay on time just because the interest rate is low.
Chairman Johnson. I understand.
Senator Carper. My dad always used to say to my sister and
me, ``Just use some common sense.'' When we were little kids
growing up, ``Just use some common sense.'' My mother used to
say to us growing up, she always said, ``Treat other people the
way you want to be treated, Golden Rule.''
In your response to Senator Johnson's questions explaining
how people can file online, go online and ask for an
installment payment and pay no penalty but interest at the
Government's cost of borrowing, which is very low, that seems
to me to be using some common sense. So it seems to me at least
at first blush to be treating people the way I would want to be
treated. So good for you.
When I had to walk out, I said to Senator Johnson, another
Committee I serve on, Environment and Public Works (EPW), we
focused on the Nuclear Regulatory Commission (NRC) today. My
Subcommittee jurisdiction there has jurisdiction over the NRC,
so I wanted to be there for that. So I am kind of in and out
here. I walked in and you were responding to Senator James
Lankford's questions, sort of like, What can we do, what do we
need to do to be of assistance?
I am a big believer in repetition, and I am going to ask
you--this is important, and I just want to make sure we got
this straight in terms of what we can be doing on this side of
the dais to enable you and your folks to do a better job, a
more cost-effective job. I just want to have you hit it again.
Mr. Koskinen. This was in the context of what can we do
with what thus far has been an intractable problem of improper
payments in the earned income tax credit area.
Senator Carper. You may have answered this question----
Mr. Koskinen. But I am happy to repeat it again. The
marketers say you have to make seven impressions before anybody
hears you, so this will be two.
Senator Carper. OK.
Mr. Koskinen. We need to get W-2s earlier so we can match
up front. It would help us in a lot of ways, not just EITC, but
in the EITC area it particularly would be helpful. We need what
is called ``correctable error authority'' when we can see there
is an error, either on a given return or a set of returns, that
we now have to go out and audit, and we just do not have the
resources. We probably never would want to do it that way. If
we can make the correction, send the correction notice to the
taxpayer, they can always come back and say, ``Well, I really
do have three kids instead of one,'' or, ``That other person
who claimed the child, it is not my fault. I get credit for
it.''
The third point is that we need help, because over half the
returns for EITC are by paid preparers, making sure there are
some minimum qualifications for people who are filling out tax
returns on behalf of someone else.
And then those are three things that are in what is called
``the green book'' that have been up on the Hill that weave out
of that big telephone book, said these would be very important
for EITC.
Then I said the fourth thing would be the statute is very
complicated in terms of trying to figure out who is in charge
and where the children are and who gets credit for them, who
had them for more than 6 months and what the relationships are.
So I think a lot of tax preparers and low-income people are
stymied by that complication, and so if somebody wanted to step
back and say it is a great program, it has bipartisan support,
it always has had, it has been reputed to be Ronald Reagan's
favorite poverty program, if there were a way to make it easier
for people to figure out, both beneficiaries and their
preparers, exactly who gets the credit and when, that would be
helpful.
But the first three are things that could be done now that
would immediately give us a significant opportunity to make a
dent, a significant dent in the issue, and if we were given the
tools, we should be held accountable for, in fact, making that
improvement. It will not go to zero, but it is a situation
where I think we cannot keep running it without beginning to
make progress in limiting those improper payments.
Senator Carper. Good. All right. Maybe one or two other
quick ones. When you are sort of looking ahead and I do not
know how long we will be fortunate that you will be our
Commissioner at the IRS, but looking ahead into the future----
Mr. Koskinen. I think I have another 2\1/2\ fun-filled
years.
Senator Carper. Well, that is good. I am tempted to ask you
what gives you joy in your work? I ask this of a lot of people.
Mr. Koskinen. That give me joy, two things. One is it is an
important agency. It is critical to the function of the
government. So, you do not get up on Monday morning having to
worry about whether what you are doing is important.
The second thing is I have said it--and I do not say it for
morale purposes or otherwise; I believe it. It is a wonderful
workforce. As I say, I have talked to 13,000 employees across
the country, and they are dedicated to the mission. A lot of
their time is spent trying to help taxpayers. I have said it
may take me awhile to convince people that we are from the IRS
and we are here to help you. But we really do spend a lot of
time trying to get information out, trying to help people in
installment agreements, wherever it is. If you are trying to be
compliant and trying to figure out how to pay your taxes, we
want to help you do that.
And so it has been a remarkable experience dealing with
employees. We have been under a lot of stress, a lot of
pressure, a lot of attacks. And to go talk with them, I have 37
cities I have been to. I have had lunch with 15 to 20 randomly
selected employees in addition to the town halls. They are a
remarkable group, and so it gives me great satisfaction to work
with them, and it is a great honor for me to be the IRS
Commissioner.
Senator Carper. A couple years ago, I was listening to
national public radio (NPR) on my way to the train station in
the morning in Delaware, and they reported at the top of the
news at 7 a.m., they said they had done an international
survey. I guess some opinion research outfit had done an
international survey and asked what is it that people most like
about their jobs. And some people said they liked getting paid.
Some people said that they liked having benefits--pension,
health care, vacation time. Some people said they liked the
folks they worked with. Some people said they liked the
environment in which they worked.
Most people said what they really liked about their work
was the fact that what they were doing was important and they
felt they were making progress. That was it. What most people
said the thing they liked about their work is what they were
doing was important and they felt they were making progress.
And I find that we--God knows the work that you all are
doing at the IRS is important. I think it was Oliver Wendell
Holmes, what did he say? We need to have taxes in order to have
a civilized society. We would have a less civilized society,
that is for sure.
But we are not allowing you to make the kind of progress
that you ought to be able to make, and I think with your
leadership and stewardship and, frankly, some good advice from
GAO from time to time, and others, you are making progress. But
you are not making the kind that you want to make and, frankly,
that we want, the kind of wait times that we hear people are on
the phones and people showing up at the offices and waiting and
waiting, not having forms available because of us, because we
change the tax laws so late in the game. We have a job to do
here in concert with you so that the people that we serve can
feel better about the job that you are doing, and you can as
well.
Thank you so much.
Chairman Johnson. Thank you, Senator Carper.
We always do give the witnesses a last chance at making a
closing comment. If there is anything that was on your mind
that you wanted to get off your chest here, we are happy to let
you do that.
Mr. Koskinen. I appreciate it. I think it has been a very
important discussion about a very important subject matter. I
think hopefully it has been helpful to the Members of the
Committee. I think we are on television as well, so my hope is
that people watching have a better idea about the Affordable
Care Act, how it works, the efforts that we are making to try
to make sure that it goes as smoothly as possible for people,
the issues that I hope are helpful for the public to
understand, those who are participating in the marketplaces,
what they should pay attention to. And, again, when their
circumstances change, they should get back to the marketplace
to make sure that their reconciliation at the end of the year
is totally painless, in fact, as it goes.
But I do take Senator Carper's point that, yes, the IRS is
important. People ask me why I have been at this now going on a
year and a half, why I continue to seem to be energetic and
enthusiastic about it. And I have said again if you spent 45
years of your life doing turnarounds and dealing with agencies
under stress, you have to be optimistic. You have to assume
that it is going to get better; otherwise, it does grind you
down a little. And so I am optimistic. I do think that there
are people anxious to be supportive of us. I think we have a
responsibility--I have tried to stress that--to spend taxpayer
dollars carefully. We are given these monies from people who
worked hard to provide them to us, and we have to make sure
that we use the funds well. We have to make sure people
understand when there are problems, my goal in life--it would
be nice, as I said at my confirmation hearing, to have no
problems and say that is our goal. But even with a shrunken
workforce, it is 87,000 people. It is the world's most
complicated Tax Code, and we deal with virtually every American
and every American family.
So our goal needs to be--and I think we should be held
accountable for it--that when we have a problem, things do not
go the way we expected, that we find it quickly, we fix it
quickly, and we are transparent about it. And taxpayers need to
be comfortable and confident we are spending their money
wisely, we are going to treat all of them the same, we are
going to treat them fairly. We are going to do, even with the
limited resources, over a million audits this year. I do not
want individuals thinking, ``I am getting audited because of
something I said, somebody I contributed to.'' I want them to
understand there is an issue in their return that caused us to
look at it. And if somebody else had that issue, we would be
looking at them as well, because I do think it's basically a
system that depends upon voluntary compliance. We collect $3.1
trillion a year, primarily because Americans are trying to pay
the right amount and do the right thing.
And so for that system to work, they have to have
confidence in and be comfortable with the fact that tax
administration is not a political enterprise. It is, in fact,
designed to treat everybody fairly, to make sure that people
pay their fair amount; if they have difficulty with it, that
they can work with us to try to figure out how to deal with
that. And if we can move in that direction, then we will be
making progress in the most important way, which is to protect
the voluntary tax compliance system of this country.
Chairman Johnson. Mr. Commissioner, I appreciate that. The
fact of the matter is the agency has lost credibility, and that
credibility needs to be restored. I hope you do everything you
can to restore that credibility. I appreciate your service,
your thoughtful testimony, your forthright answers to our
questions.
This hearing record will remain open for 15 days until
April 30 at 5 p.m. for the submission of statements and
questions for the record. This hearing is adjourned.
Mr. Koskinen. Thank you.
[Whereupon, at 11:52 a.m., the Committee was adjourned.]
A P P E N D I X
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