[Senate Hearing 114-67]
[From the U.S. Government Publishing Office]
S. Hrg. 114-67
INTERNAL REVENUE SERVICE OPERATIONS
AND THE PRESIDENT'S BUDGET
FOR FISCAL YEAR 2016
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 3, 2015
__________
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COMMITTEE ON FINANCE
ORRIN G. HATCH, Utah, Chairman
CHUCK GRASSLEY, Iowa RON WYDEN, Oregon
MIKE CRAPO, Idaho CHARLES E. SCHUMER, New York
PAT ROBERTS, Kansas DEBBIE STABENOW, Michigan
MICHAEL B. ENZI, Wyoming MARIA CANTWELL, Washington
JOHN CORNYN, Texas BILL NELSON, Florida
JOHN THUNE, South Dakota ROBERT MENENDEZ, New Jersey
RICHARD BURR, North Carolina THOMAS R. CARPER, Delaware
JOHNNY ISAKSON, Georgia BENJAMIN L. CARDIN, Maryland
ROB PORTMAN, Ohio SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania MICHAEL F. BENNET, Colorado
DANIEL COATS, Indiana ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina
Chris Campbell, Staff Director
Joshua Sheinkman, Democratic Staff Director
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman,
Committee on Finance........................................... 1
Wyden, Hon. Ron, a U.S. Senator from Oregon...................... 3
ADMINISTRATION WITNESS
Koskinen, Hon. John A., Commissioner, U.S. Internal Revenue
Service, Washington, DC........................................ 5
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Hatch, Hon. Orrin G.:
Opening statement............................................ 1
Prepared statement........................................... 43
Koskinen, Hon. John A.:
Testimony.................................................... 5
Prepared statement........................................... 44
Responses to questions from committee members, with
attachments................................................ 48
Wyden, Hon. Ron:
Opening statement............................................ 3
Prepared statement........................................... 80
Communication
National Association of College and University Business Officers
(NACUBO)....................................................... 83
(iii)
INTERNAL REVENUE SERVICE OPERATIONS
AND THE PRESIDENT'S BUDGET.
FOR FISCAL YEAR 2016
----------
TUESDAY, FEBRUARY 3, 2015
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:33
a.m., in room SD-215, Dirksen Senate Office Building, Hon.
Orrin G. Hatch (chairman of the committee) presiding.
Present: Senators Grassley, Crapo, Roberts, Cornyn, Thune,
Burr, Portman, Coats, Heller, Scott, Wyden, Stabenow, Nelson,
Menendez, Carper, Cardin, Brown, Bennet, and Casey.
Also present: Republican Staff: Chris Armstrong, Deputy
Chief Oversight Counsel; Kimberly Brandt, Chief Healthcare
Investigative Counsel; Chris Campbell, Staff Director; Jim
Lyons, Tax Counsel; and Harrison Moore, Professional Staff
Member. Democratic Staff: David Berick, Chief Investigator;
Adam Carasso, Senior Tax and Economic Advisor; Michael Evans,
General Counsel; Christopher Law, Investigator; Todd Metcalf,
Chief Tax Counsel; Joshua Sheinkman, Staff Director; and
Tiffany Smith, Senior Tax Counsel.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
UTAH, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The committee will come to order.
The committee welcomes Internal Revenue Service
Commissioner John Koskinen, who comes before us today to
discuss his agency's budget and operations. We also will be
discussing President Obama's fiscal year 2016 budget proposal.
Commissioner Koskinen, this morning's hearing continues a
long tradition of the close relationship between the Senate
Finance Committee and your agency. More than 152 years ago, the
Finance Committee received a letter from George Boutwell, whom
President Lincoln had appointed as the first Commissioner of
Internal Revenue. The letter came in response to an inquiry
from the committee seeking information about the Commissioner's
organization, his budget, and the activities of his office.
Does that sound familiar?
In his letter dated January 21, 1863, Commissioner Boutwell
tried to answer the committee's questions, but started by first
asking Congress for more money. Specifically, he wrote,
``Before proceeding to estimate the expenses of assessing and
collecting the revenue, I desire to express the opinion that an
increase in the pay of assessors is very important, if not
absolutely necessary.''
Now, that part does sound familiar to me. As you and I
continue this historic and important relationship, I hope we
can begin the 114th Congress on a new footing.
The issues before us are too great for that relationship to
be anything but open, honest, and productive. We will certainly
disagree a lot on your agency's implementation of Obamacare, on
the application of premium tax credits to Federal exchanges,
and on IRS spending, just to name a few issues.
Sometimes a relationship will be contentious. Sometimes it
will be congenial. Hopefully, more the latter than the former,
but that will depend a lot on you and maybe a little bit on us
too.
When we look at the IRS's operations, there are a handful
of basic principles the agency must follow in order to maintain
its good working relationship with this committee. Today I am
going to talk about three of those principles.
First, the IRS must spend taxpayer dollars wisely. As the
agency that collects taxes from American workers and
businesses, your agency will continue to be under especially
tough scrutiny when it comes to how it spends the money
Congress appropriates, and, unfortunately, the IRS's operations
do not appear to be able to withstand such scrutiny at this
time.
When you reverse the positions of your predecessors and
award bonuses to employees who have not paid their taxes, when
your agency throws lavish conferences, and when you spend tens
of millions of dollars on public sector union activity, the
public loses faith in your ability to spend more money wisely.
Now, some of that was not your fault.
When your agency pays tens of billions of dollars in
improper payments every year, when the IRS mails thousands of
fraudulent refund checks to a single home address, and when a
quarter of all Earned Income Tax Credit payments are improper,
the public loses faith in the IRS's ability to protect tax
dollars carefully.
Secondly, the IRS must treat taxpayers fairly and respect
their rights. Recent scandals have given Americans reason to
doubt that the IRS will treat them fairly. While the targeting
of applicants for tax-exempt status may have happened before
your tenure, taxpayers must have confidence that those days are
over.
Now just before, Mr. Koskinen, you became Commissioner, the
IRS and the Treasury Department released a proposed regulation
that would limit the ability of social welfare organizations to
engage in speech about matters of public importance. After an
outcry from all sides of the political spectrum, the proposed
regulation was withdrawn. But now I hear you have a plan to
reissue it. I think this would be a mistake, and I hope you do
not go down that path of trying to limit political speech. That
would only further entangle your agency in needless political
debate and controversy.
Third and finally, the IRS must be open and honest with
this committee. We must have a mutual trust between us. I
believe you to be an honest man, and, when you tell me
something, I take you at your word. But it is because of this
trust that I am concerned about a recent development in the
committee's investigation of political targeting at the IRS.
Last July, your agency told the committee that it had
completed its production of documents regarding Lois Lerner,
the central figure in the investigation. Then late last month,
as the committee worked to finalize its investigative report,
your agency delivered 86,000 pages of new documents, including
30,000 pages of new Lois Lerner documents, including new e-
mails--30,000 pages of new documents, e-mails that fill 8
boxes, and I have here about a tenth of those just in this pile
that I cannot even lift. I might be able to if I stand up. But
I have about a tenth of those.
These documents are central and relevant to the committee's
investigation. They were given to us without notice or
explanation roughly 20 months after we made our initial
document request and really after Senator Wyden and I and other
members of this committee thought we were going to be able to
have a final report on this matter.
Now, this is not the way to build trust with this
committee. This prolongs the committee's investigation and
raises more questions than it answers. We will be following up
on this matter more after today's hearing.
Now, Commissioner Koskinen, we are here today to discuss
your agency's operations and the President's budget proposal.
There is much to discuss on these two topics, and I look
forward to hearing your testimony and answers.
In your opening remarks, I would appreciate it if you took
the time to address three specific concerns that I have. First,
I would like to hear what the IRS plans to do to address the
consistently high levels of fraud and overpayments for the
Earned Income Tax Credit.
Second, I would like to hear what specific changes you plan
to make in the agency's spending habits to deal with the
budgetary shortfalls you have publicly decried.
Third, I would like to hear about any contingency plans you
have in place in case the Supreme Court invalidates the current
structure of the Affordable Care Act tax subsidies later this
year.
I hope that today can mark the beginning of a new chapter
in the long, historic relationship between the IRS and Senate
Finance Committee. I hope it is a good chapter, but, once
again, that is ultimately up to you, it seems to me.
Let me just say that this is one-tenth of what we are
talking about. This is a huge number of documents, and you can
see the reason why I am a little bit concerned and maybe a
little bit upset as well.
[The prepared statement of Chairman Hatch appears in the
appendix.]
The Chairman. Senator Wyden, we will turn to you for your
opening statement.
OPENING STATEMENT OF HON. RON WYDEN,
A U.S. SENATOR FROM OREGON
Senator Wyden. Thank you very much.
Mr. Koskinen, I share Chairman Hatch's concern about
bringing our bipartisan inquiry to a halt, and to get that
done, to complete it in a thoughtful and a bipartisan way, we
are going to need these documents. And as the chairman noted,
we thought we were going to get some, and we are going to need
them and need them quickly.
Whenever I talk with Oregonians in meetings or town halls,
the conversation nearly always comes down to the same core
issue: the struggling middle class. Years after economists
first said that the recession officially ended, too many
middle-class Americans feel like they are standing on quicksand
because the recovery has yet to reach them. So the challenge
facing policymakers is putting America's middle class on solid
economic ground, growing their paychecks, and ensuring that our
recovery reaches every one across America.
That challenge is going to be top of mind at each of the
three hearings, colleagues, that we hold this week. Tomorrow
and Thursday, the committee will talk with HHS Secretary
Burwell and Treasury Secretary Lew about the administration's
plan to save Americans money on health care, create jobs,
increase wages, and invest in the middle class. Today the
committee has an opportunity to discuss the status of America's
accounting department, the Internal Revenue Service, with the
Commissioner, John Koskinen.
With W-2 forms in the mail and the tax season beginning,
our country's annual headache is now setting in. And I want to
emphasize that, today, taxpayers reside in two separate worlds.
In one world, a middle-class office employee pays taxes
directly out of her wages, and she is subjected every spring to
the painstaking process of filing returns.
Colleagues, for that office worker, there are no
complicated tax avoidance strategies at her disposal. She does
not have any shelters. She does not have any vehicles for her
to hide her income. Meanwhile, in the other tax world, teams of
accountants go out to pry open loopholes that are hidden in the
tax code, and the line between right and wrong is murky at
best.
The inherent unfairness of America's tax system is a blow
that falls hardest on the middle class, and it takes a number
of forms. The most obvious is that, every year, families spend
more time and money filling out their taxes. People are worried
about compiling all their records, completing all the forms,
and then filing them correctly.
Unfortunately, the tax code itself has not gotten any
simpler, and the lack of resources at the IRS has slowed
service in a number of instances to a crawl. Nina Olson, who is
the independent IRS Taxpayer Advocate, says, and I quote here,
``This is the most serious problem facing taxpayers.''
When Americans call into IRS help lines, they often sit in
long queues listening to hold music. Protections against
identity theft are delayed. Taxpayers who worry they might be
victims of scams cannot end up getting the timely assistance
that they need. Families that depend on a refund to help cover
the mortgage or tuition get left waiting.
Now, there is a second issue to consider today. According
to the Internal Revenue Service, nearly $400 billion in taxes
go unpaid each year. That is the tax gap. One of its biggest
causes is the dishonesty of tax cheats and scammers who avoid
paying what they owe. And it is important to reflect on who
gets the short shrift as a result. It is the middle-class wage
earner once again whose taxes come straight out of their
paycheck.
Honest taxpayers have to make up the difference when the
scofflaws dodge their responsibilities, and that is wrong. But
until Congress simplifies and restores fairness to the broken
tax code, multinationals and those with high-priced accountants
can continue to find loopholes.
There is no question that the IRS can make better use of
the resources it has. That is true for every Federal agency,
every private business, and the Congress itself, and it has
been acknowledged by Commissioner Koskinen and his predecessor.
Meanwhile, policymakers cannot lose sight of the biggest
challenge today, which is putting our middle class on solid
economic ground.
There are going to be many more opportunities for this
committee to work on a bipartisan basis with the Commissioner
and the IRS to make the system work better for middle-class
families, including through comprehensive tax reform. The
ultimate goal ought to be fairness. And as I wrap up, I want to
come back to the fact that taxpayers should not be divided into
two worlds, one of which today carries a much heavier burden
than the other.
Commissioner, we look forward to working with you and our
colleagues to make that a reality.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Wyden.
[The prepared statement of Senator Wyden appears in the
appendix.]
The Chairman. Our witness today is IRS Commissioner John
Koskinen. Commissioner Koskinen has been serving as the head of
the Internal Revenue Service since December 2013.
Mr. Koskinen has broad public-sector experience, including
having served as Chairman of the Board of Freddie Mac, City
Administrator for the District of Columbia, and Deputy Director
for Management of the Office of Management and Budget, three
really difficult and trying positions.
Mr. Koskinen also has extensive private-sector experience,
including working as the president of the United States Soccer
Foundation and as the president and CEO of Palmieri Company.
Mr. Koskinen graduated with a JD from Yale University
School of Law and a BA in physics from Duke University.
We want to thank you, Mr. Commissioner, for being here
today. Please begin with your statement.
STATEMENT OF HON. JOHN A. KOSKINEN, COMMISSIONER, INTERNAL
REVENUE SERVICE, WASHINGTON, DC
Commissioner Koskinen. Chairman Hatch, Ranking Member
Wyden, and members of the committee, thank you for the
opportunity to discuss the IRS budget and current operations.
As the chairman noted, we at the IRS value our working
relationship with this committee, with the chairman and the
ranking member, and we look forward to a productive dialogue
and constructive working relationship over the next 2 years of
this Congress.
First of all, I am pleased to report that the 2015 tax
filing season opened on schedule on January 20th and is going
well so far. We have accepted more than 16 million tax returns,
and we have started issuing refunds. And in fact, to show you
how much people care about the refunds, we have accepted 16
million returns and already had 8 million hits on our Where's
My Refund? app on the website.
Opening the current filing season on schedule was a major
accomplishment given the challenges we faced. This achievement
is a direct result of the dedication, commitment, and expertise
of the IRS workforce.
Along with normal filing season preparations, there were
significant challenges and extra work to get ready for the tax
changes related to the Affordable Care Act and the Foreign
Account Tax Compliance Act. We also had to update our systems
to reflect the tax extender legislation passed in December.
Despite this success, I remain deeply concerned about the
agency's ability to continue to deliver on its mission in light
of significant reductions in our budget. Just a month ago, the
agency's fiscal year 2015 budget was set at $10.9 billion, $346
million less than 2014, and really $600 million less than last
year when another $250 million in mandated costs and inflation
that we must absorb are counted. Plus, that is on top of a
$600-million cut the IRS had already taken as a result of
government-wide sequestration in 2013. The IRS is the only
major agency that was not subsequently restored to the pre-
sequester level.
These funding cuts are so significant that efficiencies
alone cannot make up the difference. We continue to find
efficiencies wherever we can and are presently saving $200
million a year as a result of significantly reduced office
space, printing and mailing, and use of contractors. But we
have reached the point of having to make very critical
performance tradeoffs.
In allocating our limited resources for 2015, we tried to
keep in mind the needs of both taxpayer service and enforcement
to avoid overly harming one part of our mission while
attempting to do another.
Rather than going into greater detail about this, let me
respond quickly to the points the chairman raised. First, with
regard to the Earned Income Tax Credit, we are concerned about
the high level of improper payments and the volume. The agency
has been working for over 10 years struggling with this
challenge, and, as I have testified before this committee
before, we are asking Congress to give us additional tools to
deal with the problem. They would include legislation to
provide us with W-2s earlier. We should be able to get them at
the same time employees do so that we could match them and find
fraud and improper payments earlier.
If we had correctable error authority, we could correct
errors in returns, particularly EITC returns, when we have data
that show that the returns are erroneous; but the only way we
can correct them now is by doing an audit.
And finally, if we had the ability to require minimum
standards of tax preparers--over half of the EITC returns are
prepared by preparers, the vast majority of whom do a great
job. A reasonable number are stymied by the complications of
the Act, and a small number of preparers are actually crooks
who take advantage of taxpayers and seize all or some portion
of their refunds. This committee and Senator Wyden have a bill
that would restore our ability to require minimum standards for
tax preparers, just the way there are minimum standards for
everybody from hairdressers to others who provide public
services.
With regard to spending, as I have noted, we have taken
actions wherever we can. The famous convention that was held
inadvisably 5 years ago no longer could be held. Every
expenditure of $50,000 or more for training or conferences has
to be signed off personally by me and reviewed and signed off
by the Treasury Department. So I am confident that those
situations are not going to arise again.
With regard to the 501(c)(4) investigation, we represented
to you last spring that we had completed the production of
documents related to the determination process. Since then we
have provided hundreds of thousands of pages of additional
documents requested by any one of the six various
investigations going on.
The documents you have received are not more documents
about the determination process. They are documents that have
been requested by different committees, particularly in the
House, or more information about other peripheral players in
the program and other detailed documents with regard to e-mails
from those participants.
All of those are responsive to requests we have had.
Virtually none of them have anything to do with the
determination process, but we have been pleased to provide them
in an attempt to answer any question that anybody has and
requests for documents on any matter. Our cover letter I
thought explained where these documents came from. They are
not, in fact, inconsistent with the earlier representations we
have made.
My time is running out. I will be happy to answer questions
about the President's budget for 2016, which would go a
significant way toward restoring our ability--if I had a little
additional time, that would be very helpful.
The other point you raised was with regard to our payment
of performance awards to those who are delinquent on their
taxes. First of all, I would like the record to note that the
IRS has the highest compliance rate of any agency in
government, including the Congress. Over 99 percent of our
employees are compliant with their taxes, and that is because
they take it seriously. It is an important responsibility for
anybody who works for the Internal Revenue Service to be
current on their taxes.
Those who are not compliant include those who are making
installment payments, who are working toward compliance. But it
is clear, and it is clear to our employees that if you
willfully do not pay your taxes, not only are you not eligible
anymore for an award, you are subject to disciplinary action,
including, in some cases, severance from the Service, and we do
that on a regular basis. So I am confident that performance
awards are only going to go to those who are eligible for them.
Let me talk just a minute about the President's fiscal year
2016 budget. The request totals $12.9 billion and is consistent
with recommendations the President has made over the last
several years. The level of funding would provide substantial
support for our mission and help the agency move ahead in a
number of critical areas. For example, we would be able to
raise our phone service level to nearly 80 percent and
significantly reduce the inventory of taxpayer correspondence.
With respect to information technology, we would be able to
properly maintain our current IT infrastructure. The funds
would also help us work toward our goal of providing taxpayers
with the same experience dealing with the IRS online as they
now have with their financial institutions.
On the enforcement side, the President's budget proposal
would allow us to reverse the decline in individual audit
coverage and increase document matching programs, which are
critical to ensuring high rates of voluntary tax compliance. We
would also be able to expand programs to prevent refund fraud
related to identity theft and to improve international tax
compliance.
Using the resources provided by the President, we estimate
that our efforts to improve enforcement will generate $60
billion in additional revenue over the next 10 years at a cost
of $19 billion, thereby reducing the deficit by $41 billion.
We would also use a portion of the funding request to
continue implementing legislative mandates, including the
Affordable Care Act, the Foreign Account Tax Compliance Act,
and the newly passed ABLE Act. As I noted in my complete
testimony, the irony did not escape me that we were assigned
new responsibilities under the new ABLE Act, and the pay-for
for it, which is a program for professional employer
organizations, is the same bill that cut our budget by $350
million.
I want to stress, though, that we are required to implement
these laws. So, if we do not receive necessary funding, we will
have to continue to take funds from taxpayer service,
enforcement, or IT. That is because we believe that we have an
obligation to enforce and implement statutory mandates, and we
will do that with the ABLE Act and with the Professional
Employer Organizations provisions.
Along with providing the IRS with adequate funding,
Congress can also help improve tax administration by enacting
several proposals in the administration's 2016 budget request,
which include the proposals I mentioned earlier with regard to
earlier provision to the IRS of third-party information
returns, such as W-2s, which would allow us to match the
documents, and also if we could correct errors without having
to audit returns, we would become much more efficient in terms
of stopping improper payments.
That concludes my statement. I appreciate the additional
time. I will be happy to take your questions.
The Chairman. Thank you, Mr. Koskinen.
[The prepared statement of Commissioner Koskinen appears in
the appendix.]
The Chairman. Your fiscal year 2015 budget is about 3
percent lower than your fiscal year 2014 budget, which has been
decreasing since the high water mark of 2010.
Now, we may disagree about how best to spend taxpayer
dollars, but we will stipulate the fact that your agency has
been forced to absorb budget cuts, although, as you will see in
the chart behind me, your budget fluctuations look a little
less dramatic when we do not use 2010 as the baseline.
I have another chart that I think reveals the true problem.
It is not IRS's budget. It is an ever-growing set of tax laws
and an ever-increasing number of Federal programs the IRS is
charged with administering. A lot of that is our fault, as I
view it.
Instead of only focusing on spending more money, we should
instead focus on what is driving that need for bigger budgets,
and that is the growing complexity of the tax code. The length
of the tax laws has more than tripled since 1975. American
families and businesses spend an estimated 6.1 billion hours,
that is with a ``b,'' and $163 billion each year simply
complying with the tax laws.
Now, we should not blame you for this. Congress is the one
that keeps adding to your growing responsibilities, and
Congress enacted the poorly designed and bureaucratically
unmanageable behemoth known as Obamacare, or should we use the
other term, quote, ``Affordable Care Act,'' unquote.
Congress enacted the labyrinth of new rules known as the
Foreign Account Tax Compliance Act. But I hope you can
recognize that there are two sides to this coin: the amount of
money that Congress gives you to do your work and the amount of
work that Congress gives you to do.
I would love to hear you talk about the latter and not just
the former. I want to hear your thoughts about the growing
number of programs and policies your agency is tasked with that
you have to administer.
Will you work with the committee on ways we can reduce the
burdens of tax compliance and streamline the number of growing
responsibilities placed on your agency?
Commissioner Koskinen. Yes. I appreciate that. As I have
told our employees as I have visited offices around the country
(I have now talked with over 13,000 IRS employees), in many
ways, even with the background noise and challenges the agency
faces in some charges, it is instructive that, as you note, Mr.
Chairman, the IRS continues to be asked to implement new
programs.
To some extent, that is because there is some confidence
that if you give the program to the Internal Revenue Service,
it will get done, and it is a can-do agency. And, as I have
noted earlier, we are committed to implementing whatever
statutory proposals the Congress provides.
But you are correct that the tax code has gotten to be
extremely unwieldy. And I always preface any remarks I make by
saying that tax policy is the domain of the Treasury
Department, the White House, and the Congress. We are in the
tax administration business. You tell us what the tax laws are,
and we will do our best to administer them.
Having said that, as I have also, I think, made clear to
you in our meetings and also publicly, I am a great believer in
tax simplification for the very reasons you mentioned. If we
could simplify the tax code, it would, on the most important
basis, make life simpler for taxpayers. It would be easier for
them to determine how much they owe and how to pay it.
Our experience is, most taxpayers want to do the right
thing, want to be compliant. They are spending those 6 billion
hours simply trying to determine what the right amount of tax
is to be paid. To the extent we could simplify the code, it
would make their lives simpler, and it would clearly make our
life much simpler.
So the two things we look at, as you say, beyond where we
are in terms of budget cuts are, first, if the tax code were
simpler, it would allow us to function more efficiently with
the resources we have without adding back.
The other thing I would emphasize, which I mention in my
testimony, is we feel strongly that we need to look to where we
want to be in 3 to 5 years, what should the taxpayer experience
be 3 to 5 years down the road. And, if we had the funding
provided in the President's budget, we would continue to build
our online capacity, ultimately hoping to provide taxpayers
with the same online account with us that they have with their
banks or their financial institutions.
They should be able to come online, be properly
authenticated, look at previous tax returns, and look at the
status of their filings. We should be able to immediately
communicate back to them when they file without having to write
a letter or have them call us and say, ``Did you forget this?
We have another schedule here that is not in your return.'' And
they should simply be able to make that correction without even
filing an amendment. It should be able to be done quickly and
efficiently.
If that happened, we could obviously run much more
efficiently and effectively. The people who called us would be
people who needed to get specific information, not people
calling as a regular matter of course.
So I think on both counts, if we could actually build
toward a better taxpayer experience from our standpoint, if we
had a simpler tax code, taxpayers would have a much easier time
determining what they owe and filing, and we would have a much
easier time and be more efficient running the tax
administration.
The Chairman. Thank you. We are going to try to do that. It
is going to be difficult with this Congress, but we will do the
best we can.
Senator Wyden?
Senator Wyden. Thank you, Mr. Chairman.
Commissioner, let us talk about the middle class in this
filing season. Senator Cardin and I, we are going after these
unscrupulous tax preparers. And the combination of that and
Nina Olson's comment about the shrinking resources you have,
particularly to go after tax cheats, the costs of those things
get heaped onto the middle class.
What should the middle-class taxpayer expect this filing
season?
Commissioner Koskinen. As I noted, we are delighted that
the filing season thus far, 3 weeks into it, has gone smoothly.
We encourage people to file electronically. Over 85 percent of
people filed electronically last year. We have said, ``Collect
all of your information; make sure, to the extent you can, your
return is accurate.'' If you file an accurate return online, it
will be processed quickly. Your refund will be processed within
21 days. Your filing experience should be a positive one.
The difficulties come where people often inadvertently file
incorrect returns, which causes us to have to write them. They
have to write us back, they have to call, and we end up with a
significant amount of work for us and a certain amount of
concern on the part of taxpayers.
But I would stress, overall we expect to process 150
million individual tax returns this year. We expect that the
vast majority of those will go through without a problem. Over
80 percent of people under the Affordable Care Act, for
instance, will simply check a box and say they have coverage.
But most importantly, the vast majority of those people,
particularly the 85--we hope it will be higher--percent of
people who will file electronically, will simply file and that
will be it.
Senator Wyden. Another concern of middle-class families is
the growing problem of identity theft. And the Internal Revenue
Service is supposed to issue these PINs, identity protection
PINs, to taxpayers who have been the victims of identity theft.
But I am hearing from taxpayers in Oregon that many of them
have not received these PINs, and I am also hearing stories in
my State that some victims of identity theft are already being
re-victimized this filing season, as the fraudsters go out and
file tax returns with their Social Security numbers while they
wait day after day for the IRS to send them these
identification PINs.
I think it would be very helpful if you could tell the
committee when Americans are going to receive these PINs and,
particularly, what to do to help these people who otherwise
could be victimized again.
Commissioner Koskinen. I would say it is an important
problem that is at the top of our list. We have been fighting
refund fraud and identify theft for several years now.
With regard to the identity protection PINs, we expect to
issue about 1.5 million of those.
Senator Wyden. And when will that happen?
Commissioner Koskinen. The PINs will all be out at the end
of this week in the mail. Our problem has been, we are running
an antiquated IT system.
Part of the question has been, why do we spend so much on
IT? The real question is, how come we cannot spend more? We are
running applications we were running when John F. Kennedy was
President. That is how antiquated this system is.
We had a problem over the last couple of weeks with the
part of the system that issued IP PINs. Every year, if you have
an IP PIN, you get a new one. It has to be authenticated, and
we mail it to you. The system had difficulties. We have solved
those difficulties. But they are difficulties that should not
exist. It should be a straightforward issue.
In any event, they will be in the mail before the week is
out.
Senator Wyden. One last question with respect to the
Affordable Care Act. We are starting to get a lot of questions
with respect to people filing their tax returns to comply.
What are you all doing to inform and assist taxpayers with
these requirements?
Commissioner Koskinen. We have spent the last 9 months
trying to spread the word about how the Affordable Care Act was
going to operate. We were concerned starting in the spring that
anyone who bought a policy through the marketplaces and was
getting an advance payment paid to the insurance company for
their premium, to help them with their premium, needed to make
sure that, if there was a change in their circumstance--their
spouse got a job, they got an increase in pay, their family
situation changed--they went back immediately to the
marketplace to correct that information so they would not be
surprised during filing season.
We have provided a special section on our website devoted
totally to the Affordable Care Act. We have met with tax
preparers around the country, tax attorneys. We had tax forums
with 10,000 preparers last summer who were given--we had 40
seminars at those gatherings about the Affordable Care Act. We
have over 100 YouTube videos.
We have already had about 800,000 hits on the Affordable
Care Act part of the website. When you call us, while you are
waiting to get through, one of the things we have put in is an
information channel that you can dial into. It will give you
all of the frequently asked questions and answers about the
Affordable Care Act.
We have been sharing information with all of your offices
so, when your constituents call, you will be able to work
through what are the basic questions, what are the answers.
So we have flooded the zone with information.
Senator Wyden. My time is up, Commissioner. I just hope
that you all will recognize that taxpayers who received
assistance last year, of course, are going to have some
questions about the steps to take to comply this year, and I
hope there will be a special effort to reach out to them. Thank
you.
Thank you, Mr. Chairman.
The Chairman. Senator Cornyn?
Senator Cornyn. Thank you. Mr. Commissioner, no doubt you
have a daunting responsibility, but American consumers and
middle-class families whom the ranking member alluded to
several times have had to make do with less during the years
following the Great Recession and when middle-class wages have
been stagnant.
So the question is, why can't the government do more with
less, and, specifically, estimates are that about a quarter of
Earned Income Tax Credit payments in fiscal year 2013 alone
were paid in error. This means that about $15 billion--$15
billion--was wrongly paid. But if you spread it over 10 years,
from 2003 to 2013, obviously, that is a big number too. It is
$150 billion of improper EITC payments.
It appears that the improper payment rate has remained
relatively unchanged and the amount of EITC claims paid in
error has grown despite the efforts that your agency has made.
On top of that, as you know, it appears that the improper
payment rate for the Additional Child Tax Credit is similar to
the Earned Income Tax Credit. According to the Inspector
General, at least a quarter of all ACTC payments for fiscal
year 2013 were improperly made, with potential improper
payments totaling as high as $7.1 billion; so, just in 1 year,
2013, more than $22 billion in improper payments by the
Internal Revenue Service.
And then there is the issue that I know you are familiar
with about the tens of millions of dollars that the agency
spends on union members who perform no work that benefits the
taxpayer. It is estimated that in 2013, roughly 500,000 hours
were spent at a value of roughly $23.5 million. Again, these
are union members who represent their union in the workforce
there at the IRS who perform zero work that benefits the
American taxpayer, and yet their appears to be no real concern
about how to cut down that cost and redirect more of that money
to doing the IRS's job.
So I would just ask you this question. Given the amount of
money that the IRS pays out improperly, some $22 billion just
in 2013 alone, and given the money spent on nonproductive
activity, at least in terms of that benefitting the taxpayer,
due to the union activity, not to mention employee bonuses and
the like, how do you think that the American people will feel
about your coming here and just asking for more money?
It seems to be, as the chairman points out, a historically
established activity where bureaucrats come in and ask for more
money without cleaning up their own house and taking care of
their business. It seems to me that if you are coming here
asking for more money, we would be more likely motivated to
provide more money if, in fact, the IRS was spending the money
that it currently gets to deal with things like these improper
payments.
Commissioner Koskinen. It is a good point. I would note
that we are not asking for more money over history. We are
asking for money back that has been taken away. Our budget has
been cut, in absolute terms, $1,200,000,000 since 2010.
As the chairman notes, the tax code has gotten more
complicated. We have 7 million more taxpayers. We are charged
with implementation of the Affordable Care Act, the Foreign
Account Tax Compliance Act, and tax extenders as they go
forward. So we are actually doing significantly more with
significantly less.
There comes a point at which you have to do less with less,
and we have reached that point. We have, as I said, saved $1
billion over that 5 years in efficiencies, with less office
space, fewer contractors, less printing.
We have worked very hard, as we have talked about, on the
Earned Income Tax Credit. Part of our problem is, we do not
have the resources--we have declining resources to audit in
that area. We have 5,000 fewer revenue agents, revenue
officers, and criminal investigators than we had 5 years ago,
and that is solely because of the decline in expenditures.
Senator Cornyn. And you have asked for roughly 9,000 more,
or the President's budgets asks for roughly 9,000 more
employees for the IRS to implement the Affordable Care Act.
Correct?
Commissioner Koskinen. The 9,000 employees would not be to
implement the Affordable Care Act. The 9,000 employees--if we
got 9,000 back, we would replace some of the 5,000 revenue
officers we lost. We would replace all of the 3,000 fewer
people we have answering phone calls than we had 5 years ago.
The number of phone calls has gone up significantly, as you can
imagine.
With regard to union time, first of all, it is part of the
bargaining relationship with our union, the way it is in every
government agency across the government. That work benefits
taxpayers to the extent that it represents workers and works
with them to ensure that their working conditions are
appropriate.
We have, in fact, cut those with the union, cut that time
that is being spent by over 10 percent, and we continue to work
with them to make sure that that time is spent effectively. But
we are not the only agency that does that. That is a program
that exists every place there is a union across the government.
We find that the union is an effective partner with us in terms
of trying to improve the operations of the agency.
But I would conclude by saying we have done significantly
more with significantly less. But my concern for the last year
has been that we are beyond the point of being able to do more
with less. We are at a point where we have no choice but to do
less with less.
Senator Cornyn. Mr. Chairman, I would just ask for your
help perhaps. I know Representative Boustany over in the House
had sent a letter to the Commissioner in September 2014 asking
him specifically to respond to some questions about the union
activity at the IRS, and its alleged benefit to taxpayers, and
there has been no response. That has been since September 2014.
So if we could get an answer to that letter and some of
those questions, it would be very helpful to our understanding
of what you are talking about.
Commissioner Koskinen. I would be delighted. I am not aware
of that letter. My operating assumption, as the chairman knows,
my commitment was that I read every letter I get, and we try to
respond as quickly as we can, and no later than a month.
The Chairman. I appreciate that. Let us have Mr. Boustany
resend him the letter, directly to him, and let us see if we
can get that answered.
Commissioner Koskinen. In fact, I have met with Congressman
Boustany a couple of times. We have what I think is a good
working relationship, and I am very surprised to find out there
is a letter that has not been answered for that period of time,
because that is not our present mode of operation.
In fact, the chairman----
The Chairman. We will get that letter resubmitted, and
maybe you can get us an answer.
Commissioner Koskinen. I would note that the chairman last
week sent me two different letters, and I hope to have an
answer to those letters to you in the next few days.
The Chairman. That would be great.
Senator Cardin?
Senator Cardin. Thank you, Mr. Chairman.
Mr. Commissioner, I want to thank you. This is a tough job,
and you continue to serve your country in this capacity, and I
thank you very much for your willingness. You are the right
person. I wish you had more support.
It seems to me there are two things that this committee--
the Senate and particularly this committee--should be doing.
First, we should look at our tax code and make it simpler and
more predictable, and I know the chairman and ranking member
are working to see whether we cannot find common ground in that
regard, and that would certainly help a great deal. If we gave
Americans more confidence in the tax code, I think taxpayers
would appreciate that, and that would make your job a lot
easier.
The second thing is that this committee particularly should
be an advocate for you having the resources you need in order
to carry out the mission. I remember--I guess it has now been a
decade ago--working, when I was in the House of
Representatives, with then-Congressman Portman following up on
the study that was done at the IRS at the time, and it was the
Ways and Means Committee and the Senate Finance Committee that
said to the appropriators, you have to have resources to
modernize. And it lasted about 1 year before the cuts came
back.
So this committee should be your advocate for adequate
resources. Instead, as you pointed out, you have sustained real
cuts while your missions have increased dramatically.
And we want to have tax compliance in all sections. I
listened to Senator Cornyn's concerns about the Earned Income
Tax Credit. The Earned Income Tax Credit is an extremely
important provision in our tax code that offers fairness to
middle-income working families. And yes, we want to make sure
it is complied with, and Senator Wyden and I are going after,
and hope to give you the authority to go after, paid tax
preparers who are not doing the right thing in that regard.
We want to give you those tools. But it is interesting that
I do not hear the same strength on behalf of compliance with
the high-income provisions that Senator Wyden mentioned in his
opening comments that are available to high-income people or on
business income. I know there was an IRS study that showed
that, in some cases, over 50 percent of business income is not
being reported.
So, how do you decide with these limited resources how you
are going to be able to get tax compliance when it is
complicated and you are going against, particularly in the
business side or high-income side, individuals who have
tremendous resources to try to minimize their tax liability?
How do you make those judgments? I would just urge you to
spend more effort dealing with those who have sophisticated
services that are not paying their fair share of taxes.
Commissioner Koskinen. It is the challenge we have.
Ultimately, we are all concerned with the compliance rate, to
make sure we collect $3 trillion a year. My concern is that
when the compliance rate drops by 1 percent, it costs the
government $30 billion a year.
The two sides of the compliance coin are enforcement and
taxpayer service. And our challenge, as our budget is cut, is
to try to make sure that we maintain as much effort in all of
those areas as we can.
But even in the area of auditing, we cannot take one area
of the tax-paying public and say, well, we are not going to
bother with you because there are other people out here who
have more revenues, because, if you look at where the revenues
come from, they come from across the spectrum.
So our challenge is to continue, in our exam plans and our
audit plans, to try to maximize the enforcement activities of
the agency. But as I noted, we have 5,000 fewer people doing
that now. So inevitably, our audit rates are going down, and
our concern about that is that at some point that is going to
affect the overall compliance rate.
Senator Cardin. I would just make the point that if you had
the additional resources, we would not only get better
compliance--which is our responsibility, to make sure we have
compliance--we would get greater revenue, which would help
those taxpayers who are paying their taxes get the relief, so
they are not over-taxed while other people are not paying their
fair share.
So it seems to me what this Congress has done in cutting
your budgets makes no sense, and I am disappointed that this
committee has not been a stronger advocate on your behalf, on
the agency's behalf.
One last point I would make. You are now implementing the
Affordable Care Act and the provisions under the Affordable
Care Act in this tax season. Booz Allen, which has a large
presence in my State, has given high marks to the program you
are using in regard to the refundable tax credit. What
reactions are you receiving as you have tried to implement this
as to the tools available to IRS to try to make the tax season
as friendly as possible?
Commissioner Koskinen. Thus far, we have had no significant
challenges, although I would stress that we are at the front
end of the return process. We expect the month of February will
see a significant increase in the volume of returns.
One of the best things we have going for us is that 91
percent of the tax-paying public uses software, either with a
paid preparer or they buy the software, and we have worked with
software providers. So the software will take people through
the application of the Affordable Care Act in whatever way it
applies to the taxpayer, whether it is simply showing coverage,
applying for an exemption, or reconciling the advanced payment
they have gotten.
Again, as I have noted, we have calculators on our website
that will allow people to make the determinations that need to
be made, and thus far we have had positive responses. But I
would stress we are at the front end of what is going to be a
very interesting filing season.
Senator Cardin. Thank you. Thank you, Mr. Chairman.
The Chairman. Senator Coats?
Senator Coats. Thank you, Mr. Chairman.
Mr. Koskinen, first of all, I want to state that what the
chairman and vice chairman have stated relative to our
unbelievably complex tax code has to be addressed, and I know
both the chairman and vice chairman are committed to that
process, and I hope all of our colleagues here are committed to
that process, because it is clearly having a negative economic
impact on us.
The complexity of just simply going through the process of
paying your taxes every year and the money that is spent and
the hours that are spent, we just simply cannot keep pushing
this down the road.
So your response to that is that you applaud that very act,
and I appreciated that. And I know you are concerned about the
amount of money you have to spend and the burdens that you
have. I would like to just give you a little bit of what I
think might be some quick relief. This is a small ball thing.
But Senator Cardin, who just spoke, and I are going to be
introducing, this week, legislation that I hope you will be
able to support. It is legislation that addresses the
notification--it is called the NOTICE Act--legislation that
will give charities, 501(c)(3)s and so forth, notice if their
status is going to expire.
A few years ago, the law was changed so that if the
applicant's information, information required by the IRS to
keep the status, was not supplied over a period of time, they
would be automatically dropped from the qualification of tax-
exempt status.
Now, there are a bunch of little--I mean, there are tens of
thousands of small charitable organizations out there that
simply do not have the back room for this, do not have lawyers
waiting and plowing through the regulations and advising them
of what they need to do and when they need to do it. And so it
seemed to us, Senator Cardin and I--this is a bipartisan effort
here--it seemed to us that a simple fix on this would be simply
to provide them sufficient time of notice that, hey, your
status is going to expire because we have not received your
paperwork relative to annual reporting.
What has resulted is thousands of hours and tens of
millions of dollars to reinstate tax-exempt status, which I
think imposes a significant burden on the IRS. And so what we
are really calling for here is--well, let me just give you an
example.
There is a small women's auxiliary in Indiana that had
filed for and received tax-exempt status. They had some
leadership changes during that time. They wanted to raise
$15,000 to help with the volunteer fire department, and,
because of the leadership changes and because they did not
really have somebody in the back room to give them notice and
they did not have the money to hire lawyers and accountants and
so forth and so on, they hit the deadline, and they were
automatically then denied their tax-exempt status. It cost them
$10,000 to reinstate, a lot of paperwork, and months and months
and months of waiting. I think the figure is something like
80,000 to 85,000 of these that have had to reapply.
Our act would just simply require IRS to provide notice.
Now, I would think in today's digital age, you probably have
all these 501(c)(3)s listed somewhere in the database and it
would be simply a matter of adjusting that so that, say, within
90 days out or 100 days out, you hit a button, notices go out,
whether it is by mail or by e-mail or both, to these, saying
``warning'' or ``take notice,'' you did not file your
information report and your tax-exempt status is going to
expire unless you respond and file that. That is just one piece
of paper. But it would save, I think, thousands of hours and
months and months of delay and significant cost to these small
charities if we could do that.
So I would like to just put that on your plate. It is a
small ball thing. It is just one step toward finding efficiency
and effectiveness, which I think we can use, and it is needed
so much throughout government, which is still doing a lot of
things the old-fashioned way--a lot of files, a lot of
paperwork, rules that do not seem to make much sense.
I do not know if you want to comment on that. My time is
about to run out. But we are going to introduce that, and, if
you could work with us on that, we would appreciate it.
Commissioner Koskinen. We would be delighted to work with
you on that. We have about 1,600,000 outstanding tax-exempt
organizations. So it is a big ball number when you look at it
that way.
We were concerned--it was before I got here. We streamlined
the reinstatement process for entities. They could simply send
us their notice. They hopefully did not have to spend $10,000.
For small organizations, we have also streamlined the
application process. You can now apply with a 3-page
application rather than the 26-page application, because our
concern is, for a lot of small charities out to do very good
things, for them to have to spend $5,000 or $10,000 simply to
get certified, if they are a very small organization, does not
make much sense.
We are delighted to work with you on this. I think there
are thousands of these organizations out there. And you are
exactly right. For a lot of them, the secretary moved, the
president changed, they lost track of it, and we need to make
sure that we streamline the process for any reinstatement
necessary.
We are continually trying to streamline the process for the
application so we can have people out there doing good work.
Senator Coats. That is good for going forward. I am told
that--a staffer just told me that the simplified application is
not available to charities that need retroactive reinstatement.
So this would address retroactive reinstatement.
Commissioner Koskinen. And we would be delighted to work
with you on it.
Senator Coats. Terrific. Thank you.
The Chairman. Senator Brown?
Senator Brown. Thank you, Mr. Chairman, very much for doing
this hearing to clarify a lot of issues that are out and about
in the media all over this country.
I want to talk for a moment--a number of people have
brought up the Earned Income Tax Credit and the Child Tax
Credit. The chairman did, Senator Cardin did, Senator Cornyn
did.
Let us not forget what this is about. The Earned Income Tax
Credit began as a temporary program with President Ford and was
made permanent by President Carter. It was expanded
dramatically by President Reagan and has been supported by
Presidents of both parties for--I believe this is the 40th
anniversary this year.
So we know that they collectively--EITC and CTC--have
reduced poverty for 32 million people, including 13 million
children. We should not forget that as we talk about this.
Now, we hear of the 23-percent fraud rate. Many call it the
fraud rate, others say it is an error rate. That factor assumes
a bunch of things. That 23 percent assumes that all audited
returns are fraudulent. It does not factor in underpayments.
The Office of the Taxpayer Advocate, an independent office
within the IRS, has found that findings of fraud were
overturned in 40 percent of cases where a taxpayer was accused
of alleged EITC fraud and then sought the advocate's
assistance. We know that people who file for EITC are less
likely to have a strong advocate whom they employ to fight for
them. We know all of that.
Now, when you take into account those factors, what is the
incidence of genuine fraud for EITC? How would the actual loss
of revenue to the Treasury look if EITC also counted
underpayments, because underpayments are part of that 23
percent is my understanding?
Commissioner Koskinen. As you note, it is a complicated
issue. That is why it is called the improper-payment question
rather than fraud, because only a portion of the money that
goes out is----
Senator Brown. But many here call it fraud.
Commissioner Koskinen. Right. But it is an improper-payment
issue derived, to some extent, by the complexity of the statue
determining where children are resident and who has authority
over them. There are inadvertent errors made by taxpayers
filing on their own without a lot of background.
As I have noted, one of the reasons we support the
provision of the act to require tax preparers to have some
minimum level of competence and understanding of the law is
that over 50 percent of those filing for the EITC rely upon
preparers, and many of them, as you note, are lower-income or
middle-income families who rely on somebody in the
neighborhood. And our hope is that the somebody in the
neighborhood ought to be able to file for them a correct return
as we go forward.
So as I have said, we have asked for additional statutory
authority which would allow us, particularly if we got W-2s
earlier, to check whether there is under- or overstatement of
income before we actually make the payment, which would help
significantly.
Also, in some cases, we know that there has been an error.
When somebody thinks they have three children and our database
shows two, we ought to be able to correct that rather than
making the payment or holding the payment and having to go
audit, which is now the only way we can make that change.
If we could make the change, the taxpayer could still come
in and say, ``Wait a minute, I really do have three children,''
and they would not lose anything. We would simply be able to
get much more at the heart of the range of improper payments.
The overall issue is that, even within this, we have this
duality. We just had EITC Awareness Day in which we tried to
make sure that everybody eligible for the program actually
participates. But our estimate is about 80 percent of the
people eligible participate, but 20 percent do not.
So we have this dual obligation, on the one hand, to make
sure people participate, are aware of the program, and, on the
other hand, to make sure that the payments are appropriate and
that we are actually paying the right amount to the right
people.
And if we had the additional legislative authority that we
are asking for, I think we could actually give a greater----
Senator Brown. That 23 percent would markedly be reduced.
Commissioner Koskinen. It would be reduced. We will
probably never get it down to zero, but we have been
concerned--I have been concerned since I started--that that
level has been pretty constant over the last 10 years,
notwithstanding all of the activities the agency has done.
So I had the meeting early in my tenure, and I said, I want
everybody who knows about this to sit down to figure out what
would help. And it turns out the legislative proposals we have
made were the consensus of things we need to do to be able to
attack this problem going forward.
Senator Brown. I echo the comments that Senator Cardin made
in his comments and questions, that there is so much less
attention paid in the halls of Congress to the fact that we are
not auditing as many upper-income people as you were just
because of budget issues and that we seem to pay a lot less
attention to the fraud of upper-income taxpayers than we do to
EITC.
It is a peculiar kind--the worst kind, in my mind--the
worst kind of class warfare by people who are paid good
salaries and get good pensions and health care from the
government. Members of Congress spend an awful lot of time
attacking a program that has brought literally millions of
people out of poverty and has had a long, long, long, good
history of support from Presidents of both parties across the
liberal to conservative spectrum.
Mr. Chairman, thank you.
The Chairman. Senator Thune?
Senator Thune. Thank you, Mr. Chairman.
Commissioner, welcome. I joined with other members of this
committee last year on a letter to you after it was reported by
the Inspector General for Tax Administration that more than
1,100 IRS employees with Federal tax compliance issues have
been awarded over $1 million in cash awards and more than
$10,000 in hours of time-off awards. In your response last May,
you stated that the IRS was working toward trying to address
this problem across the entire IRS, but you made no commitments
nor did you set any deadlines for making certain this does not
happen again in the future.
I know that you have talked a little bit about this already
this morning, but I just wanted, for the record, to get you to
speak clearly on this issue, because it seems to me it is
awfully hard to go to the hardworking American taxpayers and
ask them to comply with the tax laws when you have employees in
your own organization who do not comply and, more than that,
who are getting bonuses, hours off, additional benefits,
payments, and cash bonuses when they have tax-compliance
issues.
So can you commit to me that you are going to fix this
problem and ensure that it is not going to happen again in the
future?
Commissioner Koskinen. We have already adopted policies to
address the problem. Anyone who willfully is not complying with
their tax obligations is not only ineligible for awards, but is
subject to disciplinary action.
That number of employees there who are viewed as, quote,
``not compliant'' includes employees who were engaged in
installment agreements, who are becoming compliant, but we
still count those as noncompliant. We say you will have to be--
if you are going to be counted as compliant, you have to
actually be current today with your taxes. Even if you are
current with an installment agreement, that does not count. But
that is not a willful violation.
There have been proposals and suggestions where, if you
willfully do not file your taxes with the IRS, not only are you
not eligible today for a bonus--and we have a program and we
are making sure that that applies as we look at performance
awards--but as I say, under section 1203 of the code, if you
willfully are in violation of not being compliant, it is
grounds for dismissal, and we take disciplinary action against
employees.
Over 99 percent of the employees are compliant and they
understand. Anybody who signs onto the IRS understands part of
their obligation, because we are the tax administrators for the
country, part of their obligations individually is to be
compliant.
But I would remind everybody we have a lot of GS-4s, GS-5s
who are not tax attorneys, tax accountants, or CPAs, and they
are capable of making the same mistakes, not willfully, but
inadvertently, as everybody else does. We count those people as
not compliant, but they are not people who, in fact, are
willfully trying to cut corners or not pay their taxes.
So our policy is in place, and it includes issues about
other disciplinary actions. We firmly and totally agree that
for you to be eligible for a performance award, you should be
performing well, and that includes being compliant with your
taxes, not willfully avoiding them, and you should not have any
major disciplinary action going on at the same time, and that
is a new policy.
Senator Thune. I would just say, whether it is willful or
not, voluntary or involuntary, just with absolute clarity,
without any ambiguity, make it clear, because, as you know, the
agency has a huge trust issue, a huge credibility issue with
the American people. It needs to be crystal clear that people
within the agency, the IRS employees, are not in any way going
to be rewarded either through cash bonuses or time off if they
have tax-compliance issues. It just has to be that crystal
clear. Otherwise, I do not know how the American people can
expect anything less when it comes to that issue.
In your testimony, you cited the recent decline in IRS
funding as a cause for poor customer service and insufficient
tax enforcement. But there is also in the budget a request, in
your 2016 budget, a request for $490 million and over 2,500
employees, full-time equivalents, to implement and administer
Obamacare.
Now, I think it is needless to say that none of these
employees would be necessary had Congress not chosen to enact
all the mandates and taxes in the law. But is it not time to
admit that the increased burden on the IRS is from Obamacare
and not simply lower funding?
I mean, we have funding issues, I understand. That is what
you are here to talk about. But it strikes me at least that the
resource issue is the result of a shift away from customer
service and other core IRS functions and toward Obamacare.
Commissioner Koskinen. As I have stated from the start of
my tenure, it is exactly clear that our responsibilities have
grown. It is not only the implementation of the Affordable Care
Act. It is the implementation of the Foreign Account Tax
Compliance Act. It is about to be the implementation of the
ABLE Act and the related Professional Employer Organization
responsibilities, where we are being asked to start new
programs. All of those are resource-intensive. So it is not--if
we did not have any of the statutory mandates we have to
implement, we would have more resources available for both
enforcement and taxpayer services, obviously.
But I have stated from the start, and I agree with you,
that every time there is a new program that is given to the
IRS, it does not get done out of whole cloth. It is a mandate
that we will pay attention to, but it takes resources away from
either enforcement, services, or information technology
advancement.
The Chairman. Senator Heller?
Senator Heller. Mr. Chairman, thank you.
Commissioner, thank you for being here today and spending
time with us.
I want to thank Senator Thune for his questioning. It was
one of the issues I wanted to talk about, obviously, the
bonuses to the employees.
Mr. Chairman, if I could request that we get a copy of the
agency policy on this issue so we can take a look at it, I
would appreciate it.
Commissioner Koskinen. That is fine. We will be happy to
provide that.
Senator Heller. Also, I would like to mention what National
Taxpayer Advocate Nina Olson said in a recent report to
Congress. She said, ``Taxpayers this year are likely to receive
the worst level of taxpayer services since at least 2001 when
the IRS implemented its current performance measures.''
I guess I want to ask you if this is a fair assessment.
Commissioner Koskinen. I am not an expert on what 2001
looked like, but it clearly is going to be a difficult filing
season, and the service is going to be if not miserable,
abysmal. Whatever it is, it will be a level of service that
none of us believes taxpayers deserve.
Senator Heller. So ``miserable'' is a word that you guys
use quite a bit. That would be a reasonable assessment of what
taxpayers can expect.
Commissioner Koskinen. Right.
Senator Heller. You said multiple times during the hearing
today that you are doing significantly more with significantly
less.
Could you quantify ``significantly less''? You have
mentioned it several times, but quantify it. Is it 3 percent
less, 5 percent less? What are we talking about?
Commissioner Koskinen. In terms of our ability to perform?
Senator Heller. What are you talking about when you say
``necessary budget cuts,'' ``significantly less''? What is the
dollar amount or percentage we are talking about?
Commissioner Koskinen. Of the budget cuts?
Senator Heller. Yes.
Commissioner Koskinen. Since 2010 the budget has been cut
by $1,200,000,000. At the same time, all of the----
Senator Heller. What percentage is that?
Commissioner Koskinen. Pardon?
Senator Heller. What percentage is that?
Commissioner Koskinen. That is--what?--10 percent or 12
percent.
Senator Heller. Ten or 12 percent. So we would argue that
the average taxpayer family also has to do significantly more
with significantly less, so perhaps the IRS should also.
Commissioner Koskinen. We are doing significantly more with
significantly less. As just discussed, we have significant
statutory mandates we have been given that we have no choice
but to implement. In fact, as I noted, it is ironic that, at
the same time in the bill that cut our budget, we were given
yet two new programs to set up, start, and initiate.
So it is not a question of our doing the same amount of
work with less money; we are doing significantly more work.
Senator Heller. And I would argue that the average taxpayer
is out there doing the same thing.
Commissioner Koskinen. Right.
Senator Heller. The chairman of Ways and Means recently
introduced legislation--I believe it is called the Stop
Targeting of Political Beliefs by the IRS Act--that would bar
the IRS from changing the guidelines for tax-exempt 401(c)(4)
groups until the end of 2017.
I think the IRS, if I am not mistaken, is expected to
reissue new rules. Could you be more specific as to when those
new rules would come about?
Commissioner Koskinen. We do not have a timeline for those.
As I have noted, one of the Inspector General's
recommendations--about a year and a half ago when he made the
report about the use of what were, he termed, improper criteria
for identifying organizations applying for tax-exempt status--
said that we should review and clarify what the facts and
circumstances would be that would determine how much political
activity was allowable.
The first proposal put out by the IRS and Treasury before I
started managed to sort of aggravate people across the entire
spectrum and generated 160,000 comments. We have worked our way
very carefully through those comments. I have read over 1,000,
1,200 pages of the most thoughtful and detailed comments. Our
goal is to make sure that we end up with a standard that is
clear, much clearer than the present standard, fair to
everybody--we are looking at which organizations it should
apply to--and easy to administer.
To the extent we can, we would like to get out of the
determination of political activity one way or the other and
have a standard that is clear not only for us, but a standard
that is clear for organizations as they are operating. They
ought to have a clear, much clearer than facts-and-circumstance
standard so they are comfortable that what they are doing is
appropriate and that nobody is going to second-guess them and
suddenly say they are no longer tax-exempt because they have
exceeded vague, hard-to-understand terminology.
But at this point, I cannot give you a deadline.
Senator Heller. Commissioner, thank you. I want to go back
to Nina Olson's recent report. I was disturbed that that
report, in assessing the IRS, said that it lacked a clear
rationale of resource allocation. Specifically, Ms. Olson said
the agency has said that it would not answer complex tax laws
on the phone or at walk-in centers. Further, after tax season,
employees are being told not to answer any tax law question
despite the fact that 15 million taxpayers will have obtained
filing exemptions.
I guess the question is, how do you expect taxpayers to
adequately comply with the complex tax laws under Obamacare or
FATCA since they have no resources to help them implement it?
Commissioner Koskinen. It is a significant challenge and
one that we are concerned about. My only disagreement with Nina
on that is that we have actually carefully looked at how we can
provide the best service we can with the resources we have.
And the decision was made last year that if we continued to
answer, which we used to do, complicated calls, by definition,
the queue would get longer. And so, therefore, we told
employees that they needed to answer straightforward questions.
For complicated questions, the taxpayer would have to go to our
website or elsewhere.
The people who care most about that are our employees. As I
wandered around the country last year visiting offices, their
question was, ``We know the answer, why can we not help?'' And
the answer I gave them was, if you take longer to answer a
complicated call, the number of people in line gets longer, the
waiting time gets longer. Trying to minimize the inconvenience
to taxpayers as much as we can, we had no choice.
Senator Heller. Is that significantly more or significantly
less from expectations of the taxpayers?
Commissioner Koskinen. I think the taxpayers have a right
to expect that they can call the IRS, get an answer, get on the
phone with an assistor within 2 to 5 minutes, get their
questions answered satisfactorily so they can file. That is not
something that our resources allow, and all I am saying is, as
has been said----
Senator Heller. It sounds like significantly less.
Commissioner Koskinen. It is significantly less.
Senator Heller. Not significantly more.
Commissioner Koskinen. What is happening now is we have
significantly less resources, and our service is significantly
less----
Senator Heller. But you just told me you were doing more.
Commissioner Koskinen. We are doing more. We are answering
more calls than we have answered before with our people. But
because of the fact that there are even more calls, the demand
is up, the level of service is down, and that is simply because
we do not have enough people.
It is not because they are not dedicated. It is not because
they do not care. They care substantially about it.
Senator Heller. And I am not arguing that point.
Commissioner Koskinen. Right.
Senator Heller. Commissioner, thank you.
Mr. Chairman, thank you.
The Chairman. Thank you. Senator Scott?
Senator Scott. Thank you, Mr. Chairman.
Thank you, Commissioner, for being here with us today.
Some of this, of course, started before your tenure. Much
has been made about the 3-percent reduction in resources. But
at the height of your agency's high staffing levels and robust
budgets, your employees started targeting religious, pro-life,
and conservative groups, groups in my State, including Tea
Party groups, whose members are mostly hardworking, everyday
Americans who decided to simply exercise their First Amendment
rights.
And in response, in what some have perceived as a
coordinated effort between the IRS and liberal groups aimed at
targeting these Americans and their groups in an election year,
we saw an absolutely chilling effect on certain types of
supposedly free speech.
I want you to understand and know that the actions of the
IRS hurt my constituents.
My first question is, has the IRS stopped targeting
churches and religious organizations with oppressive and
intrusive interference with their operations?
Commissioner Koskinen. I have said from the start, and I
think it is a fair question, that those were mistakes that were
made. They should never have been made, and they should not be
made again.
And I have said that we are committed to trying to ensure
the best we can that taxpayers are confident when they deal
with us, wherever they deal with us, that they are going to get
treated fairly no matter who they are, no matter what
organization they belong to, no matter who they voted for in
any election in the past. And we need to be able to do that,
because it is critical for the confidence of taxpayers in the
fairness of the system.
So I am as troubled as anybody else is by the events that
took place in 2010--well, after 2010. The Inspector General, a
year and a half ago, almost 2 years ago, revealed that. We have
implemented every one of the Inspector General's
recommendations to try to do our best to ensure that it never
happens again.
One of those recommendations was to try to clarify the
standard that is in the regulations now so that people would
have a better--externally and internally--would have a better
idea of what is permissible, what counts, and what does not
count.
Senator Scott. I appreciate your answer. Certainly, I am
hopeful that we are moving in the right direction, but I hope
you understand and appreciate my concern about the issue. I
have a letter dated December 22, 2014 from the ACLJ where they
represented 41 different conservative groups, and they are
still working their way through the process. I think all but
five have received their tax-exempt status. Unfortunately, some
of those groups were in South Carolina, and it took more than
4\1/2\ years to get their tax-exempt status.
One of the questions I have, as well, goes to the IT
challenges that you all face at the agency, Commissioner.
Congress gives you hundreds of millions of dollars to modernize
your IT system: $290 million this year, $300 million in 2013
and 2014, $330 million in 2012, $260 million in 2011, $260
million again in 2010, $230 million in 2009. I can go on and
on, but I will not. Your total IT spending is over $2 billion
each and every year, and last year included, as I said, $300
million in IT spending for the ACA alone.
In your written testimony, you told the committee that the
IRS is operating with antiquated systems and still has
applications that were running when John F. Kennedy was
President. You said your agency still uses the computer
programming language COBOL, which was invented, of course, in
1959.
Commissioner, the IRS has been spending nearly $1 million a
day in the last year or two to modernize its IT system, and
that is a lot of money. Can you please help me understand how
in the world you are still operating with antiquated systems
that go back to the Kennedy administration after we have spent
over $2 billion of resources to get it there?
Commissioner Koskinen. Our system, all of it was customized
and developed in the 1950s and 1960s when there was no off-the-
shelf software. As I have frequently referred to it, it is like
driving a Model T that now has a great GPS system and a
wonderful sound system, has a rebuilt engine. So we have
replaced a significant amount of that antiquated system with
those expenditures.
But we still have over 50 applications that need to be
replaced. But to show what we have been able to do, that refund
app, Where's My Refund?, got 200 million hits last year. A
hundred and fifty million returns are processed; 85 percent of
them are now processed electronically. That was not only not
possible, it was inconceivable 15 years ago.
So we have made substantial strides, but the $300 million
on the Affordable Care Act, the $100 million we are spending on
the Foreign Account Tax Compliance Act, are all challenges for
us. Fortunately, the filing season this year is going smoothly
because all of that has been implemented.
We have 145,000 foreign financial institutions about to
provide us data under the Foreign Account Tax Compliance Act.
All of those systems had to be built and rebuilt to absorb that
data.
If we could continue to get the resources we need, we would
get rid of a lot of these systems. Taxpayers would be able to
just go online, as they do with Bank of America, Wells Fargo,
or Fidelity, and deal with us without paper, without calls.
They would be able to do all their transactions easily and
efficiently.
We are not talking about, as I said, going to the moon. We
are talking about, ``Can I catch up with where financial
institutions are?'' And to do that, we have to keep spending
the money.
Senator Scott. I certainly would like to--I know my time is
up, so I will make this my last question, 53 seconds late.
How much did it cost for that last technological
advancement in the ``get the refund,'' whatever the last thing
you said was?
Commissioner Koskinen. I do not have the answer to that,
but I will get it for you.
Senator Scott. My thought is that the new software is
relatively cost-effective. I will not call it inexpensive, that
might be an overstatement, but it simply does not cost that
much to add in new software to create an expedited process. I
might be wrong.
Commissioner Koskinen. No, no, no. You are exactly right.
But part of our problem is, we have data from 150 million
returns plus the returns you have had historically. All of that
is stored in antiquated systems that we are starting to process
and go forward with in what is called CADE 2, for Customer
Account Data Engine.
We are trying to build a relational database so all the
applications can reach the data rather than having to hunt for
the return. Right now we have automated the return as if it was
being processed as paper. We need to automate the process so we
actually deal with data as it goes forward.
But I would be delighted to chat with you, and our IT
people would be more than delighted to explain the roadmap we
have trying to get from here to there. But you are right. If we
could ever get there----
The Chairman. Senator, your time is up.
Senator Scott. That would be helpful. Thank you, sir.
Commissioner Koskinen. Sure.
The Chairman. Let me just make a couple of comments here at
this time which I think are appropriate.
The committee takes the allegations of misconduct by the
IRS with respect to applications for tax-exempt status very
seriously. Maybe you did not hear that. I will just repeat
that. The committee takes the allegations of misconduct by the
IRS with respect to the applications for tax-exempt status very
seriously.
We have been investigating this matter since May of 2013.
Our staff has interviewed over 30 IRS and Treasury officials
and reviewed over 1 million pages. Last year, Senator Wyden and
I were almost ready to ask the committee to release the final
report, and, in fact, we had a draft at that time. However,
right around that time, we learned that IRS could not produce
all e-mails to and from Lois Lerner, a key figure in the
investigation, because of what the IRS claimed was a crashed
hard drive.
As a result, Senator Wyden and I decided to give the
Treasury Inspector General for Tax Administration, TIGTA, time
to investigate that particular matter. And I was pleased to
recently learn the TIGTA apparently has recovered some or all
of the missing e-mails. TIGTA expects they will be able to
start providing the recovered e-mails to our investigators as
early as 2 weeks from now. As soon as we have reviewed the e-
mails, we are hoping to renew the effort to move forward with
the report, and at that time members of this committee will
have ample opportunity to explore the IRS matter in great
detail.
We will have to do this carefully because of the
restrictions imposed by section 6103 of the tax code, which
generally prohibits the release of taxpayer-specific
information. In the interest of efficiency and caution, I urge
all members to save their questions on the investigation of IRS
tax-exempt organizations, on that matter, until they have had a
chance to review the final report.
Senator Wyden, do you have any comments about that?
Senator Wyden. Just very briefly, Mr. Chairman and
colleagues.
This is the only bipartisan inquiry that has been conducted
or is being conducted on this issue. So thank you, Chairman
Hatch, for your statement. I want to emphasize that we are
working very closely to finalize the IRS tax-exempt inquiry.
I personally think it will be more productive and more
efficient in terms of our time use to focus on this issue in
the context of the upcoming release of our report. I just want
to emphasize, as Chairman Hatch did in his statement, that we
are working very closely together, and, colleagues, we are
committed to making sure that this will be the one bipartisan
inquiry on this important topic.
Thank you, Senator Hatch.
The Chairman. Senator Casey?
Senator Casey. Mr. Chairman, thanks very much.
Mr. Commissioner, I am grateful to have you here and
grateful for your work. You have a very tough job, probably
among the toughest in this town.
I want to ask you a couple of questions regarding a letter
I sent you about a week ago. But before getting to that, I want
to focus a little bit on this budget question, because I am a
great believer that if we point out problems in an agency or
program and ask for reforms and change and better service, we
have to be willing to support the resources to get the IRS
there, to get any other agency where they need to go.
I was struck by--and I know we have a long list of
examples--but I was strike by what you said on page 3 of your
testimony. You said, and I am quoting, under the enforcement
cuts category, ``We estimate the agency will lose about 1,800
enforcement personnel through attrition through fiscal year
2015 that we are not able to replace.'' When you go down that
list of cuts and consequences, one of the results of that is
middle-class families and very vulnerable folks out there
having to navigate a complex system with little help.
So your challenges in the budget become problems down the
road for the middle class and for vulnerable families. So I
support your efforts to get the resources you need to be able
to do your job. It is not good enough for us to just say, there
is a problem and we are not going to help you solve it.
But I want to ask you about the letter I sent a little more
than a week ago, last Monday, on the 26th, regarding--and
everything has an acronym, as we know, but this is the TFOP,
the Tax Forms Outlet Program, where, as many folks know, free
tax forms and instruction booklets are sent out.
I know in Pennsylvania--and I do not know if this is true
in every State--but in Pennsylvania, we are getting a high,
high volume of calls and communication regarding the fact that,
because of the budget cuts, the distribution of that material
is limited.
One of the most significant parts of this problem for our
State is our rural communities. We have literally millions of
people who live in rural areas in Pennsylvania. So it is a big
issue.
So I would ask you--and some of the questions, obviously,
are outlined in the letter I sent--what additional resources or
tools or support would allow you to maintain the past year's
level of service regarding these forms and instruction
booklets?
Commissioner Koskinen. It is an important question, and we
take it seriously, because people have relied on those forms.
One of the things we are trying to make clear to people--
and I had hoped to have an answer to your letter before the
hearing, but we will get you the answer before the week is
out--is that forms are all downloadable from our website. So
everybody has access to the forms through the website.
Now, we recognize there are some people who do not have
access to the Internet----
Senator Casey. That is a problem.
Commissioner Koskinen [continuing]. And the challenge for
libraries--many of which provide a great service to people
because they allow you to, in fact, use their computers--is
that they can download those forms, but there is a cost to
that. They have to run their printers, and they are running on
tight budgets. So we do not underestimate the significance of
that problem.
Overall, our concern has been--we try to figure out where
to minimize the impacts as much as we can. We have historically
sent out large volumes of paper both to libraries and our walk-
in sites. As we track them, only about 10 percent or 15 percent
of those papers are used.
So we are producing a huge volume of paper that never gets
used. We have tried to, therefore, figure out which forms get
used so we can produce those. But it is directly a result of
trying to avoid shutting the place down, where can we cut costs
as much as we can.
So it is only a matter of a few million dollars to be able
to produce all that. We have cut back over time, as part of our
$200 million we saved. We used to send every taxpayer a copy of
the instructions and the return. Nobody gets those anymore, and
we save about $60 million a year in printing and mailing costs
because of those and other attempts to go forward.
But we are anxious to work with libraries and others--we
have no choice, being where we are this year--to try to figure
out what the right mix is for them so that they can have copies
for people who need them and not burden the libraries with this
cost. But that is, in effect, what has happened, to some
extent: that cost burden has been shifted to them, and we are
concerned about that, but there is not a lot we can do about it
at this time.
Senator Casey. Well, as quickly as you can, get an answer
for my letter, because we are getting a lot of calls on this.
And one of the problems is--and I know I am out of time--but
one of the problems is, the IRS gave an 800 number, and when
they call the 800 number, they say we are going to have this
problem solved in 4 weeks, 5 weeks, 6 weeks. That is not enough
time.
We have something on the order of 20 million people in the
country, 14 percent of the total, who do not file
electronically. So the faster you can get answers to this and
get those forms to people, the better.
Commissioner Koskinen. On that point, part of our problem
with the production of printed forms, while you can download
them today, is that the tax legislation that passed got passed
late, so it throws our printing process off, and that is why,
by the end of this month, we will, for people who call the 1-
800 number, be able to mail them their returns.
But I understand when you call in the middle of January and
are told it is the end of February, that seems like forever,
and especially if people are trying to file for refunds. But we
will have those forms available and printed, back from the
printer, before the month is out. But I will get you the answer
to that letter this week.
Senator Casey. Thanks very much. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
There is a vote on the floor at noon, but we are going to
continue to hold this hearing during the vote. So I would like
to make sure all members are able to ask their questions.
Senator Nelson, you are next.
Senator Nelson. Thank you.
Almost $5 billion a year is going out as a result of
criminals using somebody else's Social Security number. You
answered, in a previous question, that you hoped to introduce
the personal identification number next week for those who
request it.
You have a pilot study going on in three jurisdictions:
Florida, Georgia, and the District of Columbia. You are doing
it in Florida, in large part, because I have raised a ruckus as
a result of a lot of these criminals.
Street crime is actually reduced, because they find using a
laptop enables them to achieve their goal of stealing people's
money by putting in a false tax return, much to the annoyance
and heartache of the legitimate taxpayer. And unless the
taxpayer can get that PIN, personal identification number, they
cannot get the system to operate, because the IRS says, oh, you
have already filed a tax return, and they cannot get their
legitimate taxpayer return filed and their refund, if they have
one due. So I thank you for getting out those PIN numbers next
week.
But in those three jurisdictions, you have a pilot study
going for a permanent PIN number. And since one of those
jurisdictions is my State, I am going to apply for a permanent
personal identification number and see how the system is, and I
am filing this week legislation to set up a personal, permanent
PIN.
Now, the next and most egregious part of this is that a lot
of these false tax returns are being filed by inmates in the
prisons, in the Federal prison system, as well as the States.
We brought this to the attention of the IRS a couple of
years ago. You all implemented and we passed a law that gave
you temporary authority so you could then break your
confidentiality and share with the prison systems the fact that
someone had filed a false tax return and, indeed, it was an
inmate. We then followed up that temporary authority with a
permanent authority in law 2 years ago, but it has yet to be
implemented.
Can you help us, please?
Commissioner Koskinen. It is now implemented with the
Federal prison system, and so the number of prisoner returns
fraudulently filed has dropped significantly. We were down to
about 53,000 last year, which is still a lot, but not compared
to where it was.
You are exactly right. A lot of this began with prisoners.
We have to work memorandums of understanding with State prison
authorities, and we are trying get them all to sign up, because
it is in their interest as well to find out whether prisoners
are actually engaged in illegal action.
And so the statutory support from the Congress was critical
to us, and it has already made a big impact. But you are right,
we need now to have all the State prison authorities enter into
the MOUs with us to go forward.
Senator Nelson. So you have the memorandum in place with
regard to the Federal prison system.
Commissioner Koskinen. Yes. The Federal prisons, we
exchange data with them, and we know what the rolls are like,
and we are there. It is really at the State level where we need
State authority and State agreements.
Senator Nelson. Then I want to utilize this hearing here
today for the word to go out to the respective 51 prison
systems that if you want your folks to get mad, just let them
know that prisoners are filing false tax returns, cheating the
system, getting lots of money back. The State prison systems
ought to get on the ball and sign this memorandum of
understanding.
I also want to use this hearing to encourage your people to
get those MOUs. When a State steps forth and wants an MOU, get
it done.
Commissioner Koskinen. I would like to correct one thing,
just because, as you go online, you will discover that, while
we are actively pushing the pilot program in the three States
you note, when you get an IP PIN, identity protection PIN, we
give it to you for 1 year. It is a permanent process--you are
protected--but each year you will get a new PIN, because
otherwise we are concerned that the PINs will be stolen.
So what it is is a way of updating every year. So when you
get yours--some people I know personally, me, have discovered
that it is a very good program.
The reason we have not launched it nationally is simply
that we want to see what the burden is on taxpayers, what the
cost is for us, and how efficiently it goes. So we hope this
year as many people as possible in Florida, Georgia, and the
District of Columbia will sign up for IP PINs. It does
significantly increase the protection they have against having
their refunds stolen or their identity used against them in the
Internal Revenue Service.
Senator Nelson. Well, you just had another person sign up--
me.
Commissioner Koskinen. Good.
The Chairman. Senator, your time has expired.
Senator Roberts?
Senator Roberts. Thank you, Mr. Chairman. For nearly 30
years, the IRS did not apply the gift tax to contributions made
to charitable organizations of any type. Beginning in 2011, at
the same time the IRS began targeting (c)(4) applicants, the
IRS began gift-tax audits of individuals who had made
contributions to various tax-exempt organizations.
These audits were contrary to congressional policy and
legal precedent. When we got wind of this, several members of
the Finance Committee, including myself, sent a letter to the
agency questioning these audits. The IRS stopped auditing these
contributions. But since this is a very complicated area of the
law, the IRS said that it would issue administrative guidance
to ensure that the IRS audits would not be ramped up again.
It has been about 3 years. We have yet to see any guidance
or information. It is important to provide certainty to our
citizens that the IRS is not going to select for audit gift tax
assessments based on politics.
So my question is, when do you plan to provide guidance on
these audits, or would you be in favor of Congress codifying
existing IRS policy with respect to application of the gift tax
to (c)(4) and other tax-exempt organizations?
Commissioner Koskinen. It is in consideration. We are
taking a look at it across the board, because it is related to
the whole question of the tax-exempt status of organizations
across the spectrum.
But in response to your question, anytime Congress would
like to legislate in this area would be fine with us. We would
be happy to have the IRS making as few decisions as possible in
the area of political activity and exemptions and gift taxes
related to that.
So if the Congress would like to, on this particular
question, create a statute that created whatever policy the
Congress thought was appropriate, that would be helpful. But in
the meantime, we want to make sure that whatever we do is, as I
say, fair to everybody, and is clear and easy for people to
understand.
And so it is tied up with the entire question of tax-exempt
organizations across the board----
Senator Roberts. Well, we will try to be of help to you.
Commissioner Koskinen. Good.
Senator Roberts. I am sort of fascinated by the amount of
money that you feel would be appropriate so you could do a
better job. I understand you want $67 million more. Is that the
number?
Commissioner Koskinen. Actually, the President's budget for
this year would be--our present budget is $10.9 billion. The
President's request is for, in effect, a total of $12.9
billion; $12.3 billion through appropriations and about $600
million through a program integrity cap adjustment.
Senator Roberts. You said ``fair to everybody.'' According
to Senator Brown and Senator Cardin, I wish they were here,
they really want to use the money that you are not receiving
now for 9,000--you indicated 9,000 enforcement employees.
Commissioner Koskinen. No. Actually it would be--we have
lost 5,000 enforcement employees. The actual increase in the
budget would allow us to restore employees, not totally because
we are down 13,000, headed to 16,000 down, but it would allow
us to hire, for instance, 3,000 employees in the service
centers answering phone calls, so our level of service would go
back to----
Senator Roberts. So this is answering phone calls. This is
not enforcement employees knocking on doors with regard to
audits, so on and so forth.
Commissioner Koskinen. No. Some of the 9,000 would be
enforcement employees as well. As you say, overall----
Senator Roberts. Are you going to just really aim at
sophisticated rich people?
Commissioner Koskinen. No. We cannot afford to aim.
Senator Roberts. I know some rich people who are not
sophisticated.
Commissioner Koskinen. We cannot afford to aim at any
particular segment of the tax-paying population. Everybody
paying taxes--most people want to be compliant. So we are
anxious to----
Senator Roberts. Exactly.
Commissioner Koskinen. We divided the world into two kinds
of taxpayers. If you are trying to become compliant, we are
going to work very hard with you to----
Senator Roberts. Well, what I am worried about is,
everybody wants to talk middle class and class warfare. And the
idea that was promoted by my colleagues was about 9,000
enforcement people who would just really focus on the rich. I
do not know who is rich. Who is rich? Is that $250,000? I mean,
is there a number there?
Commissioner Koskinen. We do not divide it that way.
Senator Roberts. Good. Good. Good.
Commissioner Koskinen. We look at the entire spectrum.
Senator Roberts. Good. Good. Fine. But rich and
sophisticated. In other words, they could hire somebody because
they have a myriad of problems, they cannot figure it out, and
so this is supposed to be a target.
I just want to let you know there is one Senator who does
not agree with that. I appreciate that. And thank you for
coming and thank you for trying to get the trains to run on
time. That is what you told me when you first came to my
office.
Commissioner Koskinen. We are still working on it.
Senator Roberts. All right. Thank you so much.
Senator Grassley [presiding]. Mr. Commissioner, you have
said some good things about the IRS whistleblower program.
Commissioner Koskinen. Yes.
Senator Grassley. I am not worried about what you said. I
am worried about whether or not your words at the top are
getting down. Particularly, I am interested if they heard you
at the Office of Chief Counsel.
So what I am going to do on that issue is not ask you to
answer questions for me right now, but I would like to raise
with you questions and points about that program and submit
them for answer in writing and give you an opportunity to give
very complete answers.
And I would just ask now for your commitment to provide a
complete and thorough response for the record on that issue of
whistleblowers.
Commissioner Koskinen. I would be delighted to do that.
Senator Grassley. My next issue is EITC and immigration. I
would like to have you help me better understand the tax
implications of the President's executive action on
immigration.
Congress established the EITC program to encourage and
reward work. Obviously, since those in the United States who
are undocumented are not legally allowed to work, it makes no
sense to provide them a subsidy to work.
Current policy reflects this by requiring those claiming
the EITC to provide a Social Security number for themselves,
their spouse, and any children. However, the IRS Chief Counsel
advice issued March of 2000--not now, 2000--suggests that
individuals granted deferred action will be able to amend
returns for the previous years to claim the EITC for years they
worked illegally in the United States once they obtain a Social
Security number.
So, Mr. Commissioner, can you confirm that those granted
deferred action will be eligible to benefit from the EITC for
years in which they were working without papers in the United
States once they obtain a Social Security number?
Commissioner Koskinen. The way the program works is, those
without a Social Security number--and there are thousands who
file with ITINs every year--people paying their taxes even
though they are not legally here, they are not eligible for the
Earned Income Tax Credit program.
Once you get a Social Security number, however, whatever
the programs are, then the program allows you to file for
Earned Income Tax Credits.
In terms of whether you can do that retroactively, the
normal statute of limitations would apply as to when you can
apply and file an amended return, in effect.
Underneath all that is the requirement that you have to
have filed returns in the past. As I say, there are thousands
of people here illegally who have ITINs and regularly pay
income taxes. If you did not pay the income taxes, obviously
you cannot now file a return and say, I am eligible for
something else because I did not file when I was required to
file.
Senator Grassley. Now, I am not going to argue with you
about what you said, because I think you stated it the way it
is. But this is a problem you get into. The IRS's
interpretation of the EITC eligibility requirements undermines
congressional policy of not awarding those to workers illegally
in the United States.
Does the IRS have any intention of revisiting the 2000
Chief Counsel advice in light of the President's executive
action on immigration?
Commissioner Koskinen. At this point, I am not aware that
we are going to do that, but I would be happy to look into that
further and get back to you.
Senator Grassley. I am suggesting to you that it should be
done, because congressional policy is that you do not reward
those who come here undocumented. But with the President taking
his action to legalize some people, to get Social Security and
the ability to retroactively claim something would undermine
the congressional policy. So I would ask you to look at that
and respond in writing.
Commissioner Koskinen. I would be pleased to do that.
Senator Grassley. My last question will have to be this. I
have been investigating charitable hospitals that are suing
their low-income patients when they cannot afford to pay for
care. As part of the tax-exempt status, charitable hospitals
are required to offer a community benefit. Also, the law
requires hospitals to have financial assistance policies to
help low-income patients afford care.
What is the IRS doing to identify hospitals that are not
meeting the requirements to create financial assistance
policies, or hospitals that are not following their own
policies when it comes to low-income care?
Commissioner Koskinen. We take this issue seriously. As you
know, we have had additional regulatory guidance for hospitals
as to how to meet their requirements, which are required. At
this point, we audit tax-exempt organizations on a regular
basis. Without sounding the old refrain, obviously, we have
fewer people able to do that.
One of our hopes is, by streamlining the application
process for small 501(c)(3) organizations, we both make it much
easier for them to qualify and give us more efficient use of
our resources to audit at the back end.
So we think the points you have been raising are very
important ones. These are, in many cases, significant financial
institutions that are tax-exempt, to some extent, because they
have a requirement to provide community services.
And it is an important area for us to be aware of and for
hospitals and those running them to understand what their
responsibilities are. And it is our responsibility across the
entire tax code to make sure that we undertake enough audits
and enforcement activities to reinforce the need for
compliance.
Senator Grassley. Senator Portman, you are next.
Senator Portman. Thank you, Mr. Chairman.
Thank you, Commissioner, for being here. I was here for
part of your testimony and responses to questions, but you have
a tough job. And as you know, I co-chaired the IRS
Restructuring and Reform Act process with Senator Kerry now 17
years ago, and we made a lot of progress.
If you look at the increases in the budget during that
time, I think they are reflected in the fact that the IRS
undertook some reforms that people on this side of the aisle
and that side of the aisle thought were appropriate. And I
think we are in a situation now where people are looking for a
commitment by the IRS to do a better job on the probably dozen
things that have been raised today. I have heard about four or
five of them while I have been here. And maybe with that, there
is a willingness to provide additional funding.
After that process with the IRS Restructuring and Reform
Act, I know that the image of the agency improved. It is a
tough agency to love because it is taking away your hard-earned
dollars, but the standing of the agency improved because
taxpayer service improved.
And I am very concerned with what I hear about this tax
filing season. So I think we do have to figure out how to have
the IRS run more efficiently. One thing that we always pushed
with the IRS Restructuring and Reform Act, long before the
Internet was used as extensively as it is now, was more
technology.
And one of my concerns has been a specific program that
would help in terms of this budget issue that you have talked
about today. There was a decision made by your managers that
has significantly raised costs for the agency, but also for
practitioners, and also for taxpayers. It has resulted, as I
understand it, in an additional 370,000 calls being dropped
into your practitioner phone queue--and I am referring to the
Taxpayer Advocate's report on this recently--your decision to
shut down the online e-services disclosure authorization
electronic account resolution applications.
This was a service that allowed practitioners to go online
and to get the power of attorney, access client information
online, and for them it took a matter of hours. Now it is
taking 10 to 20 days, on average, which costs everybody more,
again, not just the practitioner and the taxpayer, but the IRS.
I would think, with your manpower being stretched and your
resources being stretched, that you would not want to make a
decision like that that would cost the agency so much and be
harmful to taxpayers.
So my question to you is, I guess, is this type of
Internet-based solution that the e-services program provided
something that you are intending to get back involved with, and
are you going to implement it more effectively next time? Why
did you shut it down? The IRS has received over $190 million
for business systems modernization in the fiscal year 2014
budget.
Can you make assurances to us today that using available
resources, you are going to reestablish those e-services
applications, that that would be a priority during this fiscal
year?
Commissioner Koskinen. I am happy to take a look at it,
because I agree with you, as you know. My goal is--and we are
trying to get people to understand what the world would look
like 3 to 5 years out if we could actually better use
technology as we go.
We do not have any flexibility left this year to do almost
anything beyond the minimum that we are doing, but I do think
this is an important area. We have heard those same concerns.
Our concern is making sure that the program runs
efficiently, that the authentication is satisfactory, so it is
in fact not available to--we talked earlier about refund fraud
and identity thefts.
You have to understand, as you know, we are dealing with
criminal syndicates here and around the world now. We have
gotten almost 2,000 people put in jail. So a lot of the
amateurs, the people who used to do it by themselves, are not
there.
What we are really dealing with is people who are very
sophisticated, have systems more sophisticated than ours. But I
can commit to you that we are concerned overall about the
practitioners. Our practitioner priority line, as I said, is
almost an oxymoron anymore, because it takes so long to get
through. And practitioners are critical of us because they
often represent more than one taxpayer, and if they have a
question we could answer, it would make a whole series of
returns more likely to be accurate, and with less work.
So practitioners are really at the highest level of our
concern, and whatever we can do to make the system work better
for them, we will. But as I say, we are constrained as to what
changes at all we can make this year. We talked earlier about
how even the production of forms to libraries is a problem for
us.
Senator Portman. And the library problem is one we have had
back in Ohio. Constituents have come to us and said, ``We
cannot get the forms we normally could get by going to the
public library.''
I think there are certain things like the e-services
program that are going to save you so much money and hassle
over time, and not just for, again, the taxpayer and
practitioner, but for your people and for downstream costs.
In terms of identity theft, this is something that I have a
strong concern about, and I think you talked about this earlier
today with some folks.
Let me give you an example. We get a call from a
constituent. It is a woman. She is a mom. She has a child. She
has applied for EITC, and she has claimed the child on her EITC
filing. She finds out her child has already been claimed by
somebody else. So the IRS is telling her, ``I am sorry, you are
not going to get your EITC even though you are working, even
though you meet all the other requirements, because your child
has already been claimed.''
So we are working through that with your agency. I am not
asking you to get involved in that one, because I think we are
going to work that out with some of your folks. But the Social
Security number apparently got into the wrong hands.
What is the agency doing to combat that kind of identity
theft? And what options do we, as legislators, have to help you
with that? Because it is a growing problem.
Commissioner Koskinen. Well, as I said, if we could get W-
2s earlier, that would help deal with some identify theft and
fraud, because we will be able to see the returns. Particularly
children's Social Security numbers are attractive to criminals
because, oftentimes, children are not filing a return, and, if
you are not claiming them on the return, they are an easy
target. That is why the death files used to be where this all
started, because there was nobody filing a return for someone
who had died.
We have increasingly sophisticated filters designed to
identify where those returns are coming from. We stopped about
$15 billion worth of fraudulent returns from going out last
year, but we are still dealing with several billion dollars
that got through those filters.
Part of our problem is that, with our famous antiquated
system, we have upgraded to the extent we can, but the people
filing these returns are not filing one or two. They are filing
hundreds of them and then reverse-engineering the process to
see what our filters are doing, and then they are end-running
them.
And so this year for the first time--it started last year--
we can actually update our filters on an ongoing basis rather
than once a year, which was where we were 2 or 3 years ago.
Senator Wyden [presiding]. This is a very important issue,
but Senator Menendez has been very patient. And since I asked
about it earlier today as well, I am interested in working with
my colleague.
Senator Portman. Thank you, Mr. Chairman. I appreciate it.
Thank you, Commissioner.
Senator Wyden. Senator Menendez?
Senator Menendez. Thank you, Mr. Chairman.
Thank you, Commissioner. Look, I know the IRS is not the
most popular agency in government, and it is politically
popular for some to take shots at you and your workers. But at
the end of the day, the main purpose of the IRS is to enforce
the law and serve the American people. And when we try to
punish the IRS, as some do, by cutting their budget, it is the
American taxpayer who suffers the collateral damage through
reduced service and efficiency.
According to the National Taxpayer Advocate's annual report
to Congress, and I will quote from it, ``The budget environment
in the last 5 years has brought about a devastating erosion of
taxpayer service, harming taxpayers individually and
collectively.'' The report goes on to estimate that taxpayers
will have to wait at least an average of 30 minutes on hold
before they will be able to speak with someone and less than
half of those calling in will be able to reach a
representative. Less than half.
Like you, I think this is completely unacceptable, not to
mention that, for all who work hard and pay their taxes to
support our Nation collectively, it really allows those who
cheat to get away with it, to some degree, when you do not have
the ability to ultimately enforce the law.
So let me ask you, is there any way to reduce wait times
and increase customer service by reallocating resources to that
critical purpose, and if so, what would be the consequences of
reprogramming funding away from other functions?
Commissioner Koskinen. We have looked, as I said, at trying
to be as even and fairly balanced as we can, because
enforcement is a big part of our responsibilities, as is
taxpayer service. Part of the limitation of saying, well, let
us give up on enforcement and turn everybody to answering the
phones is that the people who are revenue agents and officers
are not trained to deal with, in fact, call center operations,
just as our call center operators are not trained to become
revenue agents overnight. Clearly, we could train them over
time.
So our judgment has been to kind of lower everything. As I
say, we have 5,000 fewer revenue agents, officers, and criminal
investigators. At the same time, we have 3,000 fewer people
answering the phones, and this year we have 2,000 fewer
temporary people available for the phones.
Seventy-five percent of our budget is people, and they are
spread across enforcement, operations, taxpayer service, and
information technology. So there is no magic hidden pool that
we can access that would move some people into taxpayer service
and would go unnoticed.
Senator Menendez. So at the end of the day, people who are
calling and trying to find out exactly how to abide by the law,
get information so that they can be a responsible filer, get
delayed, and those who cheat on their taxes, to the detriment
of all those who pay, are made less likely to be found out
because you have less agents. Is that a fair characterization
of what happens?
Commissioner Koskinen. That is a fair characterization.
Senator Menendez. Let me turn to another subject that I am
very seriously concerned about. That is the Child Tax Credit,
its refundable portion, the Additional Child Tax Credit, which
is being criticized based on allegations of fraud.
While fraud in any tax program must be addressed, a focus
solely on one anti-poverty tax program that is threatening to
completely deny an economic lifeline to needy children, in my
mind, is not a meaningful solution.
So there is a lot of talk about combating fraud in the
Child Tax Credit, particularly among low-income immigrant
families, and so I have a couple of questions that hopefully
you can answer in short order.
Is fraud in the CTC and ACTC a significant contributor to
the $450 billion tax gap?
Commissioner Koskinen. It is not. It is a problem we take
seriously, but it is not at the core of the tax gap.
Senator Menendez. By what percent would the gap be narrowed
if there was zero fraud in the CTC program?
Commissioner Koskinen. It might be narrowed by a
percentage.
Senator Menendez. Are unscrupulous tax preparers a
significant cause of this fraud?
Commissioner Koskinen. We are very concerned about
unscrupulous tax preparers. As I would stress, the vast
majority do a good job, know what they are doing. A smaller
percentage of them mean well, but do not know really a lot of
what they are doing. And then there is a percentage who are
crooks, and they are the ones who are a major part of the
problem of fraud across the board.
Senator Menendez. And do you believe that denying the
credit to anyone without a Social Security number is merely
fraud prevention or a significant policy change that will deny
this important credit to families that are currently eligible
today?
Commissioner Koskinen. No. Obviously, we would love to move
everybody off Social Security numbers and just do an identity
protection PIN someday, but at this juncture, the issue of
fraud is one that applies to ITINs, it applies to any
identifier. People are forever stealing identification
information from taxpayers to, in fact, generate fraud.
Senator Menendez. Well, I will close, Mr. Chairman, and say
I find it interesting that with $450 billion in tax avoidance
and fraud occurring every year, some colleagues have focused
solely on poor children and families, which make up a mere
fraction of the overall problem. In fact, businesses underpaid
taxes by approximately $122 billion in 2006 alone, yet we do
not seem to hear the same level of outrage in that regard.
So I am for rooting out the fraud everywhere, but at the
end of the day, I am not for denying individuals who
legitimately have the right to get the credit who, because of
the way that it is being pursued here, would be denied that
right, and I think that approach is fundamentally flawed and
there has to be a better way.
Thank you.
The Chairman. Thank you, Senator.
Senator Wyden?
Senator Wyden. Thank you, Mr. Chairman.
Commissioner, I have one question, but I think you want to
correct something for the record in a discussion that you had
with Senator Nelson.
Commissioner Koskinen. Senator Nelson focused on an
important problem, which is our exchange of information with
prisons, and I noted we are working on developing MOUs with
States, and I stated we had an MOU with the Bureau of Prisons.
Actually, we get automatically, as a result of support from the
Hill, the information from the Bureau of Prisons about the
prisoner rolls, and we are able to, in fact, cut down
significantly on prisoner fraud. But we do not actually have an
MOU, as such, with the Bureau of Prisons.
Senator Wyden. I want to talk to you now about what I
consider to be a decade's worth of foot-dragging at the agency,
and I am using that word very deliberately, because it has just
not been possible to get some answers and get this resolved.
As you know, because we have talked about it, there are
some hedge funds that masquerade as insurance companies, and
then they go to places like Bermuda and the Cayman Islands
where they are not taxed and where their earnings are sheltered
from U.S. taxes.
Now, the IRS has been onto this for over a decade, since
2003, has issued guidance: we have to scrutinize this. There
are many responsible hedge funds that have offered suggestions
on how to correct this. Every time I bring it up, you all say
it is the Treasury's doing, that they are not getting at it,
and Treasury says it is IRS that is not getting at it.
I am going to bulldog this until this is resolved. I think
this is outrageous that this has gone on for more than a
decade, Commissioner, more than a decade since that guidance.
And just to go back and forth between you all and the Treasury
as I have is just unacceptable. These are people who are taking
advantage of the law-abiding taxpayers we have talked about.
So what is it going to take to get this actually resolved?
Commissioner Koskinen. We have actually prepared guidance
and are working with Treasury on putting it into final form, to
a significant extent as a result of conversations you and I
have had over the last few months.
Our people and Treasury's have met with the insurance
associations to get their suggestions and ideas on what would
work and not work. The concern everybody has is, there are
legitimate reinsurance companies that have large reserves
because their claims are episodic. But within that context, we
ought to be able to move this forward, and we are committed to
doing that.
And as I say, we are working with Treasury to get those
regulations out.
Senator Wyden. So guidance was issued in 2003. When do you
think this is actually going to get accomplished? Can you give
me a date this morning? Because otherwise it just sounds like
more of the same, more of what everybody has talked about since
2003: we are talking to our colleagues, it is going back and
forth. Yes, there are legitimate hedge fund companies, we all
acknowledge that, and legitimate insurance.
These are people who are ripping taxpayers off. So give me
a date when I can expect that this is going to be completed.
Commissioner Koskinen. Well, as you know, I do not control
that because ultimately regulations come out of both agencies.
All I can commit to you is that we are pushing very hard to get
this done.
Senator Wyden. Ninety days? Can I expect this will get done
in 90 days?
Commissioner Koskinen. Ninety days has a nice ring to it.
Senator Wyden. Good.
Commissioner Koskinen. Let us say we will do our best to
get it done in 90 days. It will help to have a deadline out
there.
Senator Wyden. But let us get it done in 90 days,
Commissioner. After 10 years, 10 years plus 90 days seems to be
enough time.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
Thank you for your patience here, Mr. Commissioner. We
appreciate you, and we appreciate you coming to the committee
and being open to all these questions that have been asked of
you.
Let me just say a couple of things and ask a couple of
questions.
The President has indicated that he would be for corporate
or business tax reform. Has anybody in the administration
contacted you about how you think that ought to occur? It is a
Treasury issue, but have they contacted you or talked to you
about it?
Commissioner Koskinen. I am not personally aware of any
contact about that, but we have, with inversions and all of the
issues that are kicking around, an ongoing set of reviews with
the Treasury Office of Tax Policy about regulatory advice and
development of programs.
So, within that ongoing exchange, we meet every 2 weeks. I
am not aware of a specific focus on what the policies would be
or the recommendations would be, although my understanding is
that in the budget presentation, there were going to be basic
principles provided to you as to where they were going.
But as always, tax policy, as I have said, belongs in the
domain of Treasury, the White House, and the Congress. We are
tax administration. But as such, we are anxious to cooperate
with anybody thinking about tax reform, because it has to be
administrable.
The Chairman. That is right. And have they consulted with
you about these tax proposals that the President is making in
his budget that he filed here yesterday?
Commissioner Koskinen. As I say, we do not have
communications with the White House on----
The Chairman. Why not? I mean, it seems to me you would
know more about it than they do.
Commissioner Koskinen. We do, but ultimately, for all the
reasons we have talked about over the last year and a half, we
are involved in tax administration. And so in discussions about
tax policy, certainly at the very higher level of policy, not
the drafting of the statutes, we usually are not consulted and
do not reach out to them.
But as you move forward, as I say, whatever the policy is
that people are considering, it has to be administered, and it
has to be administrable. And so we are very anxious to
cooperate with anybody looking at reform or simplification of
the code.
The Chairman. Well, we appreciate you being here today. I
want to thank you for appearing here today. I also want to
thank all the Senators who participated. It has been a good
hearing, in my opinion, and any questions for the record should
be submitted no later than Tuesday, February 10th.
So with that, the committee will adjourn until further
notice.
Commissioner Koskinen. Thank you, Mr. Chairman.
The Chairman. Thank you. I appreciate you being here.
[Whereupon, at 12:40 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Hon. Orrin G. Hatch, a U.S. Senator From Utah,
Chairman, Committee on Finance
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah)
today delivered the following opening statement at a committee hearing
on the President's FY 2016 budget request for the IRS:
The committee welcomes Internal Revenue Service Commissioner John
Koskinen, who comes before us today to discuss his agency's budget and
operations. We will also be discussing President Obama's fiscal year
2016 budget proposal.
Commissioner Koskinen, this morning's hearing continues a long
tradition of the close relationship between the Senate Finance
Committee and your agency.
More than 152 years ago, the Finance Committee received a letter
from George Boutwell, who President Lincoln had appointed as the first
Commissioner of Internal Revenue. The letter came in response to an
inquiry from the committee, seeking information about the
commissioner's organization, his budget, and the activities of his
office.
Does that sound familiar?
In his letter, dated January 21, 1863, Commissioner Boutwell tried
to answer the committee's questions, but started by first asking
Congress for more money.
Specifically, he wrote, ``Before proceeding to estimate the
expenses of assessing and collecting the revenue, I desire to express
the opinion that an increase in the pay of assessors is very important,
if not absolutely necessary.''
That part sounds familiar to me.
As you and I continue this historic and important relationship, I
hope we can begin the 114th Congress on new footing. The issues before
us are too great for that relationship to be anything but open, honest,
and productive.
We will certainly disagree a lot--on your agency's implementation
of Obamacare, on the application of premium tax credits to federal
exchanges, and on IRS spending, just to name a few issues. Sometimes,
the relationship will be contentious. Sometimes, it will be congenial.
I hope it will be more the latter than the former, but that will depend
on you.
When we look at the IRS's operations, there are handful of basic
principles the agency must follow in order maintain its good working
relationship with this committee. Today, I'm going to talk about three
of those principles.
First, the IRS must spend taxpayer dollars wisely.
As the agency that collects taxes from American workers and
businesses, your agency will continue to be under especially tough
scrutiny when it comes to how it spends the money Congress
appropriates. And, unfortunately, the IRS's operations do not appear to
be able to withstand such scrutiny.
When you reverse the positions of your predecessors and award
bonuses to employees who have not paid their taxes; when your agency
throws lavish conferences; and when you spend tens of millions of
dollars on public sector union activity, the public loses faith in your
ability to spend money wisely.
When your agency pays tens of billions of dollars in improper
payments every year; when the IRS mails thousands of fraudulent refund
checks to a single home address; and when a quarter of all Earned
Income Tax Credit payments are improper, the public loses faith in your
ability to protect tax dollars carefully.
Second, the IRS must treat taxpayers fairly and respect their
rights.
Recent scandals have given Americans reason to doubt that the IRS
will treat them fairly. While the targeting of applicants for tax-
exempt status may have happened before your tenure, taxpayers must have
confidence that those days are over.
Just before you became Commissioner, the IRS and Treasury
Department released a proposed regulation that would limit the ability
of social welfare organizations to engage in speech about matters of
public importance. After an outcry from all sides of the political
spectrum, the proposed regulation was withdrawn.
But, now I hear you plan to reissue it.
This would be a mistake--and I hope you do not go down the path of
trying to limit political speech. That would only further entangle your
agency in needless political debate and controversy.
Third and finally, the IRS must be open and honest with this
committee. We must have mutual trust between us.
I believe you to be an honest man and when you tell me something, I
take you at your word. But it's because of this trust that I am
concerned about a recent development in the committee's investigation
of political targeting at the IRS.
Last July, your agency told the committee that it had completed its
production of documents regarding Lois Lerner, the central figure in
the investigation. Then, late last month, as the committee worked to
finalize its investigative report, your agency delivered 86,000 pages
of new documents, including 30,000 pages of new Lois Lerner documents,
including new emails. Thirty thousand pages of new documents.
Emails that fill eight boxes, and I have here about a tenth of
those. These documents are central and relevant to the committee's
investigation, and were given to us without notice or explanation
roughly twenty months after we made our initial document request.
This is not the way to build trust with this committee. This
prolongs the committee's investigation and raises more questions than
it answers.
We will be following up on this matter more after today's hearing.
Commissioner Koskinen, we are here today to discuss your agency's
operations and the President's budget proposal. There is much to
discuss on these two topics, and I look forward to hearing your
testimony and answers.
In your opening remarks, I'd appreciate it if you took the time to
address three specific concerns that I have.
First, I'd like to hear what the IRS plans to do to address the
consistently high levels of fraud and overpayments for the Earned
Income Tax Credit.
Second, I'd like to hear what specific changes you plan to make in
the agency's spending habits to deal with the budgetary shortfalls
you've publicly decried.
Third, I'd like to hear about any contingency plans you have in
place in case the Supreme Court invalidates the current structure of
the Affordable Care Act tax subsidies later this year.
I hope that today can mark the beginning of a new chapter in the
long, historic relationship between the IRS and the Senate Finance
Committee.
I hope it is a good chapter, but, once again, that is ultimately up
to you.
______
Prepared Statement of Hon. John A. Koskinen,
Commissioner, Internal Revenue Service
Chairman Hatch, Ranking Member Wyden, and Members of the Committee,
thank you for the opportunity to appear before you today to discuss the
IRS's budget and current operations.
After just over a year as IRS Commissioner, it remains an honor for
me to lead this great institution. My respect for the agency's role and
admiration for its workforce continue to grow. I'm pleased to report
that the 2015 tax filing season opened on schedule on January 20, and
is going well so far.
Opening the current filing season on schedule was a major
accomplishment, given the challenges we faced. I attribute this
achievement to the dedication, commitment and expertise of the IRS
workforce. Along with normal filing season preparations, there was a
significant amount of extra work to get ready for tax changes relating
to the Affordable Care Act (ACA) and the Foreign Account Tax Compliance
Act (FATCA). We also had to update our systems to reflect the passage
of the tax extender legislation in December.
Even with the demonstrated capacity of our work force to
successfully meet these challenges to open filing season on time, I
remain deeply concerned that the significant reductions in the IRS
budget will degrade the agency's ability to continue to deliver on its
mission during filing season and beyond. In fact, one of my highest
priorities since becoming Commissioner has been to advise Congress
about the ramifications of continued substantial cuts to our funding,
and that is what I will focus on in my testimony today.
IRS funding has been reduced $1.2 billion over the last five years,
from $12.1 billion in Fiscal Year (FY) 2010 to $10.9 billion in FY
2015. Just over a month ago, the agency's FY 2015 budget was cut by
$346 million from FY 2014, to $10.9 billion. But the total reduction
from last year is actually closer to $600 million when the $250 million
increase in mandated costs and inflation are counted.
The IRS is now at its lowest level of funding since FY 2008. When
inflation is taken into account, the current funding level is
comparable to that of 1998. Since then, however, the number of
individual and business tax filers has increased by more than 30
million, or 23 percent, along with the number of legislative mandates
that the IRS is required to implement.
It is important to point out that prior to this year the IRS was
already reducing costs in order to absorb the reductions to our funding
that began in FY 2011. This has not been easy because labor costs are
by far the largest portion of the IRS budget. In fact, approximately 75
percent of our budget represents staffing, which is critical to
providing adequate levels of taxpayer service and maintaining robust
compliance programs. Moreover, it is not possible to shift enforcement
personnel into service jobs, or vice versa, without providing them with
substantial training, which of course is resource-intensive.
Nonetheless, the IRS has for several years been working hard to
reduce costs and find efficiencies in our operations. The IRS has
implemented significant reductions in its non-labor spending. In an
effort to promote more efficient use of the Federal government's real
estate assets and to generate savings, the agency in 2012 began a
sweeping office space and rent reduction initiative. We estimate that
these measures have reduced rent costs by more than $47 million each
year and reduced total IRS office space by more than 1.8 million square
feet.
During the last several years, the agency generated annual savings
of $60 million in printing and postage savings by eliminating the
printing and mailing of selected tax packages and publications, and by
transitioning to paperless employee pay statements.
We will continue our efforts to find savings and efficiencies
wherever we can. But as I said in my testimony to the Appropriations
Committees almost one year ago, the cuts to the IRS are so significant
that efficiencies alone cannot make up the difference. Now, we are at
the point of having to make very critical performance tradeoffs. There
is simply no way around the severity of these budget cuts without
taking some difficult steps. We have been attempting to cope by
protecting the core operations of the agency, in the belief that we
must not hollow out the organization. We must identify the things that
absolutely need to get done, and do them well.
Our determination to protect the core operations of the agency has
led us to the decision that we need to continue to invest in our
workforce. The ability of the IRS to fulfill its mission depends on the
experience, skills and dedication of our employees. We need to do
everything we can to ensure that every employee has the leadership,
systems and training to help us retain good employees, to support them
in their work and to allow them to perform at the highest levels,
whether they are involved in customer service, compliance programs or
information technology (IT) infrastructure and operational support.
As part of this investment in our workforce, the IRS will continue
to recognize qualifying employees who do exceptional work. Performance
awards are anecessary incentive to motivate the workforce and retain
highly qualified employees, and in that regard, I firmly believe they
provide the agency and taxpayers with a good return on the dollar. This
investment will ensure that highly qualified employees have an
incentive to stay with the agency and improve performance. As a result
of negotiations with the National Treasury Employees Union (NTEU), the
overall pool for awards was reduced to about 1 percent of the
bargaining unit (BU) employee salary base, which is significantly less
than the 1.75 percent provided to these employees in previous years.
I recently worked with IRS senior leadership to determine how to
allocate our limited resources in FY 2015. We reviewed our operations
to determine where we could make cuts that would have the smallest
possible impact on taxpayers and tax administration. In making these
decisions, we strove to maintain a balanced and fair approach, keeping
in mind the needs of both service and enforcement, to avoid overly
harming one part of our mission in the attempt to maintain another.
Let me now describe for this Committee the difficult decisions we
made to absorb the latest round of budget cuts, and the impacts of
those decisions. They include:
Delays to critical IT investments of more than $200 million. We
anticipate that these delays will reduce taxpayer service and
cost-efficiency efforts as well as reduce outside contractor
support for critical IT projects. For example, we will not be
replacing aging IT systems, increasing the risk of downtime and
negatively affecting taxpayer service. In addition, we will not
be able to invest up front money to gain future operational
savings, such as moving to a shared cloud infrastructure and
reducing data center space.
Enforcement cuts of more than $160 million. We estimate the agency
will lose about 1,800 enforcement personnel through attrition
during FY 2015 that we are not able to replace. We anticipate
the result will be fewer audits and resources focused on
collection. We estimate that as a result of these enforcement
cuts the government will lose at least $2 billion. In addition
to the revenue loss, the curtailment of enforcement programs is
extremely troublesome because these programs help create a
deterrent effect that is the key to preserving high levels of
voluntary compliance.
Reductions in staffing during filing season totaling more than $180
million. Normally, IRS uses employee overtime and temporary
staff to provide the extra resources needed during the busy
filing season. However, IRS will be reducing overtime and
seasonal staff hours during FY 2015. We anticipate that these
cuts will result in delays in refunds for some taxpayers.
People who file paper tax returns could wait an extra week--or
possibly longer--to see their refund. Taxpayers with errors or
questions on their returns that require additional manual
review will also face delays in getting their refunds. It is
also expected that the taxpayers will have to wait longer to
get an answer to their questions from the IRS. In addition to
responses to written correspondence taking longer, taxpayers
will have more difficulty getting through to the IRS on the
phone and in person. We anticipate that about 50 percent of
callers will be able to get through to an assistor and as we
get further into the filing season, the telephone level of
service will continue to deteriorate, dropping below 50
percent. This means that for every person who tries to reach
IRS by phone, only half will end up getting through. That is
significantly below the FY 2014 average of 64 percent, which
was itself below desired levels. The 50 percent who reach the
IRS will face extended wait times that are unacceptable to all
of us.
Continuing the agency hiring freeze. The IRS is extending the
exception-only hiring freeze begun by the IRS in FY 2011
through FY 2015. As a result, and assuming normal attrition
rates, the IRS expects to lose approximately 3,000 additional
full-time employees in FY 2015. That would bring the total
reduction in full-time staffing since FY 2010 to over 16,000.
The resulting reduction in staffing will have negative impacts
on taxpayer service and enforcement as noted above.
Even with all of these reductions, the IRS still faces a
significant budget shortfall for FY 2015. So at this time, the agency
is contingency planning for the possibility of a shutdown of IRS
operations for two days later this fiscal year, which will involve
furloughing employees on those days. If this does become necessary, our
goal will be to minimize disruption to taxpayers, employees and our
operations. We will continue to do the best we can to avoid taking this
drastic action. In fact, these dates will be very late in the fiscal
year to give the agency time to do everything possible to avoid a
shutdown and, if one is necessary, to do it at a time that causes as
little disruption as possible.
The concerns I have about the IRS's funding level relate not only
to the negative impact these cuts have on the present operations of the
agency, but also the impact on our ability to advance the agency into
the future and provide a more up-to-date and efficient tax filing
process for the taxpaying public.
To the extent possible within our budget constraints, the IRS has
already made some significant improvements in its technology to better
serve taxpayers. For example, one of the most popular features on
IRS.gov is the Where's My Refund? electronic tracking tool, which
reduces phone traffic IRS receives regarding questions about refunds.
Another good example is IRS Direct Pay, which provides taxpayers with a
secure, free, quick and easy online option for making tax payments,
reducing the need for IRS to process payments by check. Still another
example is Get Transcript, a secure online system that allows taxpayers
to view and print a record of their IRS account in a matter of minutes,
saving taxpayers time and reducing IRS resources needed to process
paper requests for transcripts.
In looking to the future, we believe that it is not an option to
stay at our current level of funding, given the extent to which both
taxpayer service and enforcement will suffer as a result. It is very
troubling to me that these cuts prevent us from fully improving and
modernizing our IT infrastructure and operations support. This hurts
taxpayers and the entire tax community.
Earlier in this testimony I described some examples of IT projects
that must be deferred as a result of budget reductions in FY 2015. But
the problem is much broader. We are operating with antiquated systems
that are increasingly at risk, as we continue to fall behind in
upgrading both hardware infrastructure and software. Despite more than
a decade of upgrades to the agency's core business systems, we still
have very old technology running alongside our more modern systems.
This compromises the stability and reliability of our information
systems, and leaves us open to more system failures and potential
security breaches.
In regard to software, we still have applications that were running
when John F. Kennedy was President. And we continue to use COBOL
programming language. COBOL was considered outdated back when I served
as chairman of the President's Council on Year 2000 Conversion and it
is extremely difficult to find IT experts who are versed in this
language. I give our IT employees a tremendous amount of credit as
keeping things going in the face of these challenges is really a major
accomplishment.
It is important to point out that the IRS is the world's largest
financial accounting institution, and that is a tremendously risky
operation to run with outdated equipment and applications. Our
situation is analogous to driving a Model T automobile that has
satellite radio and the latest GPS system. Even with all the bells and
whistles, it is still a Model T. Our core IT systems are not
sustainable without significant further investment over the next few
years.
The President's 2016 Budget provides $12.3 billion in base
discretionary resources, an increase of $1.3 billion from FY 2015 to
make strategic investments in the IRS to continue modernizing our
systems, improve service to taxpayers, and reduce the deficit through
more effective enforcement and administration of tax laws. The Budget
also proposes a $667 million cap adjustment to support program
integrity efforts aimed at restoring enforcement of current tax laws to
acceptable levels and to help reduce the tax gap. This multi-year
effort is expected to generate $60 billion in additional revenue over
the next ten years at a cost of $19 billion, thereby reducing the
deficit by $41 billion. In addition, there are several important
legislative proposals in the President's FY 2016 Budget related to tax
administration. Specifically, let me highlight the following proposals:
Acceleration of information return filing due dates. Under current
law, most information returns, including Forms 1099 and 1098,
must be filed with the IRS by February 28 of the year following
the year for which the information is being reported, while
Form W-2 must be filed with the Social Security Administration
(SSA) by the last day of February. The due date for filing
information returns with the IRS or SSA is generally extended
until March 31 if the returns are filed electronically. The
Budget proposal would require these information returns to be
filed earlier, which would assist the IRS in identifying
fraudulent returns and reduce refund fraud, including refund
fraud related to identity theft.
Provide correctable error authority. The IRS has authority in
limited circumstances to identify certain computation or other
irregularities on returns and automatically adjust the return
for a taxpayer, colloquially known as ``math error authority.''
At various times, Congress has expanded this limited authority
on a case-by-case basis to cover specific, newly enacted tax
code amendments. The IRS would be able to significantly improve
tax administration--including reducing improper payments and
cutting down on the need for costly audits--if Congress were to
enact the Budget proposal to replace the existing specific
grants of this authority with more general authority covering
computation errors and incorrect use of IRS tables. Congress
could also help in this regard by creating a new category of
``correctable errors,'' allowing the IRS to fix errors in
several specific situations, such as when a taxpayer's
information does not match the data in certain government
databases.
Authority to regulate return preparers. In the wake of court
decisions striking down the IRS's authority to regulate
unenrolled and unlicensed paid tax return preparers, Congress
should enact the Budget proposal to provide the agency with
explicit authority to regulate all paid preparers. The
regulation of all paid preparers, in conjunction with diligent
enforcement, would help promote high quality services from tax
return preparers, improve voluntary compliance, and foster
taxpayer confidence in the fairness of the tax system.
Streamlined critical pay. The IRS Restructuring and Reform Act of
1998 increased the IRS's ability to recruit and retain a
handful of key executive-level staff by providing the agency
with streamlined critical pay authority. This allowed the IRS,
with the approval of the Treasury Secretary, to hire well-
qualified individuals to fill positions deemed critical to the
agency's success, and that required expertise of an extremely
high level in an administrative, technical or professional
field. This authority expired at the end of FY 2013. The
President's budget request proposes renewing this authority,
which is essential to ensuring that the IRS has needed
expertise in a number of important areas, including IT--in
particular, cyber security--as well as international tax
compliance and operational support.
Simplify large partnership audits. Auditing of large partnerships
has become a very challenging area for the IRS, in part because
the number and complexity of partnerships has grown
significantly over the last several years, and also because of
inefficiencies in the partnership audit rules contained in the
Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). The
procedures set up under TEFRA were designed to improve tax
administration by making it possible for the IRS to conduct
audits at the partnership level, instead of auditing each
individual partner. But TEFRA was enacted when partnerships
generally were smaller than they are today, and before they had
complicated tiered structures. Therefore, having to follow the
TEFRA procedures is now more of a burden for the agency than a
help. Congress could ease this situation by enacting the Budget
proposal to streamlined audit procedures for large
partnerships.
Chairman Hatch, Ranking Member Wyden, and Members of the Committee,
thank you again for the opportunity to discuss the IRS budget and
current operations. Given the impacts we are already seeing on our
ability to deliver on our mission, I believe it is vital that we find a
solution to our budget problem, so that the IRS can be put on a path to
a more stable and predictable level of funding. I look forward to
working with Congress to do just that. This concludes my statement, and
I would be happy to take your questions.
______
Questions Submitted for the Record to Hon. John A. Koskinen
Questions Submitted by Hon. Orrin G. Hatch
discretionary funding
Question. This year, your agency has almost $800 in resources
outside of appropriations, including nearly $400 million in user fees
alone. Can you give the Committee better insight into the decision-
making process at IRS, and how the agency prioritizes its discretionary
funding between taxpayer services, enforcement, employee bonus awards,
and other spending?
Answer. The IRS senior leadership uses a deliberate decision making
process to determine priorities based on the hierarchy of statutory,
regulatory, and Department/Service-directed requirements. The Service
then allocates available appropriated resources against those
requirements. We then determine the unfunded mission critical
requirements and identify what additional resources are available from
other sources, such as user fees, and allocate those resources against
the Servicewide requirement.
procurement and spending practices
Question. Reviews by the Treasury Inspector General for Tax
Administration (TIGTA) found the IRS is ineffectively managing its
software licenses by failing to adhere to industry best practices and
failing to maintain agency-wide policies or procedures.\1\ As a result,
the IRS may have wasted between $81 and $114 million on unused software
licenses and annual license maintenance. Further, the IRS may have
over-deployed licenses valued between $24 and $29 million, and it has
not been able to account for whether these licenses were ever used.
---------------------------------------------------------------------------
\1\ Treasury Inspector Gen. for Tax Admin., Additional
Consideration of Prior Conduct and Performance Issues is Needed When
Hiring Former Employees (Dec. 30, 2014), 2015-10-006.
How much is the IRS currently spending on software asset
---------------------------------------------------------------------------
management?
Answer. The IRS estimates expenditures of approximately $16.7
million on software asset management, including contractor support,
software operations and maintenance, infrastructure support, and IRS
labor to support its software asset management capability. While there
are various software asset management processes, capabilities, and
tools in place to support asset management for desktops/laptops,
servers, and mainframe computers, some of the tools and associated
processes are not yet fully integrated and institutionalized. We would
like to reach an industry standard level of asset management known as
Information Technology Infrastructure Library (ITIL) Level III
capability. The IRS has chartered an Enterprise Software Governance
Board (ESGB) to provide guidance and oversight in the development of
software asset management processes, specific support centers for
development of internal audit processes for software licenses,
development of software asset management tool(s) requirements for an
integrated asset management capability, and overall governance
processes.
Question. In light of TIGTA's findings, why should spending levels
be increased?
Answer. The IRS's 2016 infrastructure initiative requires
investment in three elements: people, processes, and technology.
Although TIGTA's estimates of underutilized software spending and over-
deployed software are dramatically higher than the IRS's estimates, the
IRS does agree with TIGTA that there are significant benefits to be
realized with an enterprise-wide software asset management capability
that meets more mature ITIL and industry best-practice standards. In
the future and after a resource review, the IRS can build on existing
processes, capabilities, and tools to deliver an enhanced software
asset management structure, enterprise-wide inventory, and software
license management tools that are in line with TIGTA's recommendations.
While there are some capabilities and tools currently in place, funding
for this enterprise-wide effort has been significantly reduced due to
budget reductions in FY 2014 and FY 2015. Without additional resources,
we continue to cobble together the existing discovery tools, harvested
data from various repositories, spreadsheets, and direct contact calls
to manage our software assets. While the IRS has realized some
significant savings following our existing processes, there is room to
improve to rise to the level of industry standards and obtain the
associated results.
Within the FY 2016 President's request the IRS could backfill key
positions that have been vacated due to natural attrition and
retirements and to bring in external industry experts to begin to
implement the recommendations made by TIGTA and the ESGB. Those
resources would be used as appropriate to optimize existing software
agreements as well as to implement the processes and procedures
necessary to manage an overall effort at an enterprise level. The IRS
believes there is a large upside potential for savings if appropriate
staffing and funding can be allocated to this effort.
Question. What structural reforms has the IRS implemented to
improve software asset management and avoid irresponsible and wasteful
spending of taxpayer money in this area?
Answer. The IRS has chartered the ESGB, which is a collaborative
effort with key stakeholders from all functional areas of IT that are
overseeing the implementation of new processes and procedures for
Software Asset Management. The ESGB is bringing together all ongoing
software asset management capabilities at the IRS, such as the
Infrastructure Currency (N/N-1) effort. The IRS enterprise system
software is on average 3 releases behind industry standards, and in
some cases it is 4 or more releases behind. Our goal is to have
software remain current (N) or one version from current (N-1). The N/N-
1 team recently used Lean Six Sigma methodologies to assess and develop
a plan that leverages existing software asset management capabilities
and tools to ensure all installed versions of commercial off-the-shelf
software remain N or N-1. This effort identified many opportunities to
improve software management processes to gain efficiencies and
quantifiable results.
The roles and responsibilities of the ESGB also include selection
of an enterprise tool(s) for software asset management, implementation
of internal audit procedures for software agreements, and
implementation of software asset management policies and governance.
There is good momentum on the ESGB with the right level of
executive leadership at meetings to move forward on this effort.
However, continued lack of funding to build out an enterprise
management structure and implement the policies, processes, and tools
will jeopardize the effort.
Question. How much investment is needed to accomplish this goal?
Answer. The investment requested in the President's FY2016 budget
to sustain IRS's Critical IT infrastructure includes resources that
will allow the IRS to restore mainframes, servers, laptops, network
devices and communications equipment to keep the IT infrastructure
(hardware and software) current for existing and newly developed IT
systems. This includes updating and replacing infrastructure components
that are no longer operating reliably or need additional capability
that is not available through an upgrade; that are being retired
because of non-support; and that are unable to support the latest
release of software, growth of current application demand or meet the
latest federal security configuration standards. This also includes
movement toward the goal of having software at N or N-1. These funds
will also enable IRS to hire 157 qualified FTE, and contract for
external subject matter experts, to build out its planned integrated
capability for software asset management and to operate and maintain
infrastructure components.
hiring practices
Question. A TIGTA review found that between January 1, 2010 and
September 30, 2013, the IRS hired 824 employees who had ``substantial
employment issues'' during previous employment with the IRS.\2\
---------------------------------------------------------------------------
\2\ Treasury Inspector Gen. for Tax Admin., Additional
Consideration of Prior Conduct and Performance Issues is Needed When
Hiring Former Employees (Dec. 30, 2014), 2015-10-006.
For fiscal year 2013 and 2014, how much did the IRS pay these 824
---------------------------------------------------------------------------
employees in salary and benefits?
Answer. The IRS is following up with TIGTA to identify the
methodology used to enumerate 824 employees in the report, to ascertain
the identities of the employees, and to coordinate the response to this
question about how much the IRS paid these employees in salary and
benefits for fiscal year 2013 and 2014.
Question. According to TIGTA, ``The IRS stated that, during the
process of evaluating qualifications of applicants, prior IRS conduct
and performance issues do not play a significant role in deciding the
candidates who are best qualified for hiring.'' Is this an accurate
statement of IRS policy? If it is, why does the IRS believe that these
factors are not relevant when rehiring former employees?
Answer. The IRS considers prior conduct and performance issues
before hiring or rehiring employees, and believes it has sufficient
legal basis to consider past conduct and performance at any time during
the hiring process.
Question. Although the IRS revamped its hiring process in 2012,
TIGTA believes that ``the IRS needs to reassess its current process to
more fully consider prior conduct and performance issues before
rehiring employees.'' Does the IRS have sufficient legal basis to
implement this recommendation? If not, what changes to the law are
necessary to allow the IRS to more fully consider prior employment and
performance issues when rehiring employees?
Answer. Yes. The IRS believes it has sufficient legal basis to
consider prior conduct and performance issues at any time during the
hiring process, and it currently does so.
exempt sector enforcement
Question. The IRS's fiscal year 2015 budget request provides
funding for expanded criminal investigation capabilities and addresses
compliance issues in the tax-exempt sector, including exempt
organizations. In 2014, TIGTA found that the IRS had improperly
disclosed confidential taxpayer information, which is protected under
the Internal Revenue Code, in 21% of surveyed Freedom of Information
Act (FOIA) and Privacy Act requests. Unauthorized disclosure occurred
in 16.4% of surveyed requests in the previous year's audit.
Describe the extent to which IRS employees suspected of tax code
violations, including the unauthorized disclosure of Section 6103
information, were appropriately investigated. How will these sorts of
investigations change based on the IRS's fiscal year 2015 budget
request?
Answer. The IRS takes violations of section 6103 very seriously.
Any and all IRS employees suspected of tax code violations, including
the unauthorized disclosure of section 6103 information, are
investigated to determine if a violation of the tax code occurred, and
if so, an appropriate level of discipline. Managers are responsible for
ensuring employees understand their obligations and do not improperly
disclose taxpayer information. When improper disclosures are
identified, managers are required to report those incidents to TIGTA
and follow IRS incident-management procedures. TIGTA makes a
determination to investigate based on the egregiousness of the incident
and will, as appropriate, take action to pursue criminal charges. Non-
criminal disclosures of taxpayer information, records, or taxpayer-
privacy violations are adjudicated in accordance with the IRS Guide for
Penalty Determinations and result in discipline ranging from a written
reprimand to removal.
The improper disclosures of confidential information noted in the
most recent TIGTA annual review of FOIA compliance were determined to
be inadvertent disclosures, not negligent or reckless. The findings
report included an acknowledgment by TIGTA that the 13 occurrences of
unauthorized disclosure found in their review were inadvertent and all
were properly reported as unauthorized disclosures as required. TIGTA
did not make a separate finding in this area because training was
previously done to educate the staff in the errors noted and TIGTA
included an acknowledgement in its report that all employees received
that training.
In fiscal year 2014, 129 employees were found to be in violation of
section 6103 disclosure and security rules. Despite the changes in the
IRS fiscal year 2015 budget request, the IRS will continue to
investigate any and all employees suspected of tax code violations.
records maintenance and processing
Question. From fiscal year 2009 to 2012, the IRS consistently
reduced its backlog of FOIA requests. Yet, in fiscal 2013, there was an
84% increase in the number of backlogged FOIA requests at the IRS.\3\
Halfway through fiscal year 2014, the FOIA backlog increased an
additional 16%. In over 11% of surveyed requests, the IRS over-withheld
information to which requesters were legally entitled because of
improper redactions or inadequate search methods.
---------------------------------------------------------------------------
\3\ Treasury Inspector Gen. for Tax Admin., Fiscal Year 2014
Statutory Review of Compliance with the Freedom ofInformation Act
(Sept. 17, 2014).
As a percentage of its budget, how much has the IRS spent annually
on FOIA and Privacy Act request processing since fiscal year 2013? If
the share of spending is decreasing, which programs received additional
budget allocations that would have otherwise been allocated for the
---------------------------------------------------------------------------
processing of records requests?
Answer. The IRS does not separately track costs related to FOIA and
Privacy Act request processing.
Question. What is the IRS's spending plan to improve statistics
concerning improper redactions or withholdings on FOIA and Privacy Act
records? What does the IRS foresee as the cost for properly training
FOIA and Privacy Act officers to avoid improper practices with respect
to records processing? Why have prior training efforts or investments
failed to remedy what appears to be an ongoing, if not worsening,
problem?
Answer. The IRS processes thousands of Freedom of Information Act
(FOIA) requests each year that require labor intensive searches of
paper and electronic files. Many requests involve hundreds, and some
involve millions, of pages of responsive documents. Additionally,
because of the advent of the electronic age combined with the
increasing complexity of the tax law, the number, volume and complexity
of FOIA requests have significantly increased. First quarter FY 2015,
FOIA receipts are 25% higher than the same period in 2014, and our
complex inventory has increased over the last fiscal year by 53%.
Therefore, the IRS is pursuing a technology solution to improve our
ability to process, search and, when needed, redact necessary
information in responsive documents. An automated solution is necessary
to address the increased volume of electronic records and improve our
ability to provide all responsive documents and reduce errors. Any
potential automated solution, however, will still require human
intervention and oversight to ensure accuracy and avoid inadvertent and
inappropriate disclosures.
The IRS agrees that training is critical to ensure the
effectiveness and efficiency of the FOIA program. The IRS allocated
$74,000 for the training of FOIA and Privacy Act officers in fiscal
year 2015. In addition, to improve records processing we are holding a
series of low-cost, high-impact virtual technical updates to address
emerging case processing issues and questions.
The IRS has always offered intensive, face-to-face technical
training specifically for Disclosure employees, as well as Disclosure
Awareness sessions to all IRS employees. Challenges remain because of
significant attrition in our FOIA professional ranks. The current level
of funding does not address the needs resulting from increased FOIA
volume and complexity and years of attrition. A hiring freeze prevents
replacement of staff due to attrition throughout the IRS, in order to
meet restrictive funding cuts over the last several years. Hiring
authority alone is not an immediate solution, however, due to the time,
attention and oversight necessary to bring replacement staff up to the
expert level required to properly process complex FOIA and Privacy Act
inquiries.
______
Questions Submitted by Hon. Rob Portman
contractor performance
Question. Mr. Commissioner, a lot of the discussion today has
focused on how the IRS spends the money that it is allocated, so let me
continue on that theme and ask about how your agency measures contract
performance. As you know, last month the Department of Health and Human
Services' inspector general found that CMS did not always meet
contracting requirements when hiring outside contractors to help create
the healthcare.gov website. This ended up with the government spending
$800 million to build what we all found out was ultimately a very
flawed product.
Among other things, the report found that:
CMS failed to appoint anyone to coordinate the efforts of the 33
contractors who helped develop the healthcare.gov website;
Only two of the six key contracts underwent CMS Contract Review
Board Oversight prior to award;
CMS did not conduct thorough reviews of past contractor
performance; and
CMS chose a contract type that placed the risk of cost overruns
solely on the U.S. government.
Looking at the IRS's current list of contracts, it appears that the
agency has awarded over $150 million in contracts with outside groups
to administer the Affordable Care Act alone, and over $800 million in
overall IT contracts.
Given these past problems in other areas of the government,
particularly when implementing the ACA, what can you tell us about the
IRS's contracting process?
Answer. The IRS IT contracting process uses best practices in
acquisition management and uses a six-phase strategic sourcing model.
Each of the phases provides critical planning, execution, and control
of the overall contracting process, and is integral to the success of
the IT contract and contractor performance. The phases include the
following.
Requirements Planning involves the process of identifying which
business needs can be best met by procuring products or services
outside the organization. This process involves determining whether to
procure, how to procure, what to procure, how much to procure, and when
to procure. This phase includes defining the procurement requirement,
conducting market research, and developing preliminary budgets and cost
estimates.
Solicitation Planning involves the process of preparing the
documents needed to support the solicitation. This process involves
documenting program requirements and identifying potential sources.
This phase includes selecting appropriate contract type, determining
procurement method, and determining proposal evaluation criteria, and
contract award strategy.
Solicitation is the process of obtaining information (bids and
proposals) from the prospective sellers on how project needs can be
met. This phase of the contracting process includes conducting a pre-
proposal conference (if required), conducting advertising of the
procurement opportunity, or providing notice to interested suppliers,
and developing and maintaining a qualified bidder's list.
Source Selection is the process of receiving bids or proposals and
applying the proposal evaluation criteria to select a supplier. The
source selection process includes the contract negotiations between the
buyer and the seller in attempting to come to agreement on all aspects
of the contract, to include cost, schedule, performance, terms and
conditions, and anything else related to the contracted effort. This
source selection process includes applying evaluation criteria to
management, cost, and technical proposals; negotiating with suppliers;
and executing the contract award strategy. At this point, IRS obtains
independent cost estimates to assist in evaluating supplier proposals
and conducting a price realism analysis on each supplier proposal.
Contract Administration is the process of ensuring that each
party's performance meets the contractual requirements. The contract
administration process includes conducting a pre-performance
conference, monitoring and controlling risk, managing the contract
change control process, measuring and reporting the contractor's
performance (cost, schedule, performance), and conducting project
milestone reviews.
Contract Closeout is the process of verifying that all
administrative matters are concluded on a contract that is otherwise
physically complete. The contract closeout process includes processing
property dispositions, conducting final acceptance of products or
services, processing final contractor payments, documenting the
contractor's performance, and conducting a post-project audit.
Question. Does anyone coordinate actions between the contractors?
Answer. Shortly after the Affordable Care Act (ACA) legislation was
enacted, the IRS Information Technology (IT) organization established
the ACA IT Program Management Office (PMO), which serves as the primary
integration point for the multiple ACA releases of functionality and
coordinates the work completed by contractors supporting IT in
developing and testing software applications related to the ACA. All
contractors supporting the IRS IT organization in software development,
including those supporting the ACA software development efforts, must
follow the established IT processes, procedures, and controls that
govern how software applications are built, tested, integrated, and
deployed. Program governance and controls are in place to guide and
manage the IT ACA software delivery, including a program governance
board with frequent program reporting using dashboards and status
reports that report task status, progress, performance, risks, and
issues. The IRS has an established Enterprise Life Cycle (ELC), which
is a foundational and repeatable set of controls for software
development, testing, and deployment. IRS IT contractors are required
to adhere to these IT controls.
Question. Does the IRS have a Contract Review Board?
Answer. Within the IRS, Contract Review Boards are established in
accordance with the Department of Treasury Acquisition Procedures
(DTAP) 1004.7203, and governed by IRS policy.
Question. What goes in to reviewing prior contractor performance?
Answer. In accordance with the Federal Acquisition Regulation, the
IRS reviews contractor performance both prior to awarding new contracts
and before the IRS exercises options to continue performance. Reviewing
contractor qualifications is governed by FAR Part 9, Contractor
Qualifications, which prescribes, among other things, policies,
standards, and procedures pertaining to prospective contractors'
responsibility; debarment, suspension, and ineligibility; and
organizational conflicts of interest. In making the determination of
responsibility, the contracting officer is required to consider
information in the Federal Awardee Performance and Integrity
Information System (FAPIIS), including information that is linked to
FAPIIS such as from the System for Award Management (SAM) Exclusions,
the Past Performance Information Retrieval System (PPIRS), and any
other relevant past performance information. The contracting officer is
required to consider all information in PPIRS and other past
performance information when making a responsibility determination, and
is required to document the contract file to indicate how the
information in PPIRS was considered in any responsibility
determination, as well as the action that was taken as a result of the
information.
Additionally, past performance can be evaluated as part of a
technical evaluation. The contractor is required to provide information
on their past performance with their offer; this information is
reviewed and evaluated as part of an acquisition, as appropriate. The
information contained in PPIRS is governed by FAR Subpart 42.15,
Contractor Performance Information, which requires past performance
information regarding a contractor's actions under previously awarded
contracts, including the contractor's record of--
(1) Conforming to requirements and to standards of good workmanship;
(2) Forecasting and controlling costs;
(3) Adherence to schedules, including the administrative aspects of
performance;
(4) Reasonable and cooperative behavior and commitment to customer
satisfaction;
(5) Reporting into databases, as necessary;
(6) Integrity and business ethics; and
(7) Business-like concern for the interest of the customer.
country-by-country reporting
Question. Mr. Commissioner, we have heard concerns from the
business community about the potential effects of country-by-country
reporting requirements that may come from the OECD's Base Erosion and
Profit Shifting (BEPS) project. Essentially, companies would be
required to provide their complete financial information to tax
authorities in each country where they do business. Do you have
concerns about these reporting requirements from an administrative
perspective?
Answer. Country-by-country reporting will require multi-national
enterprises (MNEs) to report annually and for each tax jurisdiction in
which they do business the following: revenue, profit before income
tax, income tax paid and accrued, total employment, capital, retained
earnings, employees, tangible assets, and the business activity in
which each entity within the group engages. The requirement only
applies to MNEs with annual consolidated group revenue of at least 750
million euros (equating to approximately 1 billion dollars at the time
the threshold was established). This standard will exclude
approximately 85 to 90 percent of MNE groups (and approximately 93
percent of US companies) from the filing requirement, while still
covering MNE groups that control approximately 90 percent of corporate
revenues. We are working with the OECD and G20 to ensure that the
concerns and burdens of businesses and tax administrations are kept in
mind as guidelines are developed regarding these reporting
requirements.
This reporting will require the IRS to build systems to obtain,
transmit, store and analyze the data; develop new forms and a legal
framework to obtain and exchange the information; determine how to best
use the information; and train and deploy appropriate personnel. In a
time of significant budgetary constraints and diminished human capital
and technology resources, these tasks, as well as meaningful evaluation
and use of the information, will be difficult.
irs voluntary return preparer regulatory program
Question. Following the Internal Revenue Service's loss last year
in the Loving case, the IRS announced a new ``voluntary'' certification
program under which tax return preparers who take a comprehension
examination and complete 18 hours of continuing education each year
would receive a Record of Completion and be listed in a publicly
available IRS database showing return preparer qualifications. There
are several aspects of this ``voluntary'' program that concern me:
a. Doesn't this new ``voluntary'' program of continuing education
and knowledge assessment include the same components that the court in
Loving ruled the IRS lacked statutory authority to implement?
Answer. No. The court in Loving found the IRS to be without
statutory authority to mandate competency testing and continuing
education. The court did not preclude voluntary continuing education
efforts. The IRS's Annual Filing Season Program established in Rev.
Proc. 2014-42 is a voluntary program focused on preparer education. It
does not provide for competency testing.
b. Despite the ``voluntary'' label, won't many return preparers
actually feel compelled to enter the new program? Do you acknowledge
that return preparers who do not get the official IRS listing could be
placed at a competitive disadvantage, particularly since after 2015
they would lose the ability to represent their clients in
administrative proceedings with the IRS regarding the returns they have
prepared? Since the IRS lacks the authority to require return preparers
to undergo continuing education and knowledge assessment, doesn't it
also lack the authority to coerce them into doing so?
Answer. Revenue Procedure 2014-42 establishes the Annual Filing
Season Program as permitted under authority described in sections 7803
and 7805 of the Internal Revenue Code. The Annual Filing Season Program
will aid in the administration of the provisions of Title 26 of the
United States Code by enhancing return preparer competency, which will
assist in increasing the accuracy of tax returns prepared by those
preparers.
The goal of the Annual Filing Season Program is to encourage tax
return preparers to improve their knowledge of federal tax law and
return preparation. Approximately 12% of unenrolled tax return
preparers have taken advantage of the opportunity to participate in the
program and to obtain the Annual Filing Season Program Record of
Completion. This participation rate does not suggest that unenrolled
preparers have felt pressured into participating in the program.
Moreover, as recognized by the district court in AICPA v. IRS, 2014
U.S. Dist. LEXIS 157723 (D.C. 2014) competitive pressure or economic
considerations do not transform an otherwise voluntary decision into a
coerced one.
With regard to whether Annual Filing Season Program participants
who are listed in the Directory of Federal Tax Return Preparers with
Credentials and Select Qualifications (the ``Directory'') will have a
competitive advantage over unenrolled tax return preparers who do not
participate, many factors may contribute to competitive advantage.
Inclusion in the Directory may be a factor, as well as market forces,
individual preferences, cost of tax preparation services, overall
experience and training of the tax return preparer, proximity of the
tax return preparer to the taxpayer, or reputation in the community. It
is difficult, if not impossible to determine which factor is the most
important influencer for any taxpayer.
Question. Preparers who undergo the IRS program's continuing
education and testing will receive a ``Record of Completion'' and be
listed in a publicly available IRS database.
a. Isn't there a risk that this IRS imprimatur could be used by
unscrupulous return preparers to lure unsuspecting clients?
Answer. The goal of the IRS in offering the Annual Filing Season
Program Record of Completion is to encourage tax return preparers to
remain current with federal tax law requirements. Obtaining a Record of
Completion for the 2015 Annual Filing Season Program generally requires
return preparers to have completed 11 hours of continuing education
during 2014 (8 hours for those exempt from the refresher course),
including 2 hours of ethics or professional responsibility. To obtain a
Record of Completion for the 2016 Annual Filing Season Program
generally requires return preparers to have completed 18 hours of
continuing education during 2015 (15 hours for those exempt from the
refresher course), including 2 hours of ethics of professional
responsibility. The purpose of the Directory is to identify tax return
preparers with active Preparer Tax Identification Numbers (PTINs) and a
credential or some education that may qualify them to prepare a tax
return and to assist taxpayers in choosing a preparer by listing
credentials and qualifications. Making this information available will
raise taxpayer awareness of the various kinds of tax professionals that
offer tax preparation services.
b. Won't the IRS designation of certain tax return preparers as
having obtained a Record of Completion create significant consumer
confusion? The official IRS listing of these preparers will suggest to
consumers that unlisted PTIN holders lack the authority to prepare
returns--which is flatly incorrect. The official listing will also
create the false impression among consumers that returns from listed
return preparers are more likely to go unchallenged by the IRS. Does
the IRS have any plan to address the inevitable marketplace confusion?
Answer. To address concerns about potential confusion, the IRS in
partnership with tax professional organizations launched a major
campaign this filing season to help taxpayers choose tax return
preparers wisely and help taxpayers understand the different categories
of tax return preparers.
The education campaign was launched with a press release and a new
web page, irs.gov/chooseataxpro. The web page includes the following
information:
Which tax preparer is right for me? Explaining enrolled agents,
CPAs, attorneys, and others.
Do some tax return preparers belong to professional organizations?
IRS tips for choosing a tax preparer.
When the IRS launched the new online Directory of Federal Tax
Return Preparers With Credentials and Select Qualifications (the
``Directory'') on February 5, 2015, the message was reiterated to
choose a tax return preparer wisely and understand the different types
of return preparers.
IRS communications state clearly that anyone with a Preparer Tax
Identification Number may prepare returns for compensation.
preparer tax identification numbers (ptins)
Question. To date, how much has the IRS collected from the
mandatory fee (now $64.25 for the first year and $63 for renewals) for
issuance of preparer tax identification numbers (PTINs)? Can you
provide this committee a detailed accounting of how the IRS has spent
those funds?
Answer. The IRS portion of the fee for new and renewed PTINs is
$50. The vendor charges $14.25 for new applications and $13.00 for
renewals and remits the $50 to a Treasury account designated for the
Return Preparer Office (RPO) of the IRS.
All funds collected by RPO are by law required to be spent by the
RPO and cannot be spent elsewhere or for any other purpose. The
attached spreadsheet entitled ``Return Preparer Office PTIN
Collections, Expenses, and Available Cash'' provides a breakdown of RPO
receipts (i.e., user fees of $50 for each new and renewed PTIN) and
expenditures from fiscal year 2011 through January 31, 2015.
Question. Last year, the U.S. Court of Appeals for the District of
Columbia ruled (Loving v. IRS) that the IRS exceeded its statutory
authority in seeking to regulate tax return preparers. As a result of
the court's decision, the IRS may no longer impose testing or
continuing education requirements on tax return preparers. The Loving
case did not preclude the IRS from requiring return preparers to have
and use preparer taxpayer identification numbers (``PTINs'') and to pay
annual fees to renew their PTINs.
It is my understanding that return preparers filed suit against the
IRS in September alleging that the PTIN registration fees are not
authorized by law and, in any case, are excessive because they exceed
the costs of issuing PTINs (as distinct from costs of maintaining the
education and testing programs struck down in Loving). Do the annual
PTIN fees in fact exceed the costs of issuing PTINs? If yes, how has
the IRS used the excess funds? What authority does the IRS rely on for
collecting these excess funds?
Answer. The IRS does not collect excess funds. The PTIN
registration and renewal fees comply with the user fee requirements
outlined in OMB Circular A-25. Under the OMB Circular, unless OMB
provides an exception, the IRS like all government agencies must
calculate a user fee to recover the full costs of services provided.
Because the IRS cannot predict the exact number of PTIN registrations
and renewals to be received in any given year the PTIN user fee was
calculated recognizing that PTIN collections may exceed operating
expenses in some years, while operating expenses may exceed PTIN
collections in other years. As recognized by the district court in
Buckley v. U.S., 2013 U.S. Dist. LEXIS 184758 (N.D. Ga 2013) ``. . . a
government agency such as the IRS may permissibly spread its cost over
multiple years.'' Additionally, the IRS is required and the PTIN
registration fee complies with the rules for user fees in OMB Circular
A-25. Because the IRS cannot predict the exact number of PTIN
registrations we will receive, PTIN collections may exceed operating
expenses, or operating expenses may exceed PTIN collections in any
given year. The IRS is required to collect and maintain sufficient
funds to:
Fully fund fiscal years in which operating expenses exceed
collections.
Fully fund 25% of operating expenses for the subsequent fiscal
year. At the end of each fiscal year sufficient amounts must be
maintained to fund 25% of the anticipated operating expenses
for the first quarter of the coming year.
The spreadsheet attached shows the funds maintained to fulfill
these requirements.
Return Preparer Office PTIN Annual Changes to Cash
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
FY 2015
FY 2012 FY 2013 FY 2014 FY 2011-- FY ------------------------------------------------ FY 2011-- FY
FY 2011 Actual Actual Actual Actual 2014 Total Actual & 2015 TOTAL
Actual * Projected ** Projected
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Annual User Fee Collections
---------------------------------------------
PTIN Collections $36,963,246 $37,030,952 $35,726,028 $35,666,618 $145,386,844 $33,910,806 $2,145,715 $36,056,521 $181,443,365
Annual User Fee Operating Expenses
---------------------------------------------
Salaries & Benefits $2,783,805 $11,985,267 $14,483,602 $13,000,832 $42,253,505 $3,542,008 $6,924,655 $10,466,663 $52,720,168
Contract Support $14,216,601 $16,203,046 $30,832,950 $7,853,735 $69,106,332 $1,818,086 $14,784,790 $16,602,876 $85,709,208
Misc Expenses--e.g., Travel, Printing, $690,142 $635,521 $241,507 $241,920 $1,809,090 $64,080 $330,920 $395,000 $2,204,090
Supplies, etc
---------------------------------------------------------------------------------------------------------------------------------------------------
Salaries, Contracts, etc Expenses Total $17,690,548 $28,823,834 $45,558,060 $21,096,487 $113,168,928 $5,424,174 $22,040,365 $27,464,538 $140,633,466
PTIN Collections Less Expenses (Annual $19,272,698 $8,207,119 $(9,832,032) $14,570,132 $32,217,916 $8,591,983 $40,809,899
Increase (Decrease) to Available Cash)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* As of 1/31/2015
** From 2/1/15 through 9/30/15
irs efforts to address problem return preparers
Question. Does the IRS have compliance or enforcement strategies in
place to track returns by PTIN? If yes, what data has the IRS collected
on PTIN holders since it first implemented the PTIN program at the end
of 2010?
Answer. The current PTIN requirement gives the IRS an important and
better line of sight into the return preparer community than ever
before. With only a few years of data available, compliance efforts are
still in their infancy, but PTINs allow the IRS to collect more
accurate data on who is preparing returns, the volume and types of
returns being prepared and the qualifications of those doing return
preparation. Thus, the information obtained through the PTIN process
helps us do more to analyze trends and spot anomalies, so that we have
a much better understanding of the return preparer community as a
whole, and can design more appropriate compliance and educational
activities in response to the data we collect.
Question. In a September 2014 report, the Treasury Inspector
General for Tax Administration found that almost half the complaints
filed by taxpayers regarding return preparers hadn't been reviewed by
the IRS. Of 8,534 complaints reported to the IRS between Oct. 2012 and
Sept. 2013, 83 percent had no work done on them or were still being
processed. 3,953 complaints, or 47 percent, had not had any work
initiated whatsoever and no case processor reviewing the complaint. Of
those, 1,920, or 49 percent, had been in the IRS's inventory for at
least 60 days without any work being started.
In light of these findings, what steps has the IRS taken to ensure
that it will promptly and effectively review taxpayer complaints about
return preparers?
Answer. Having no baseline for the volume of complaints to be
anticipated at the start of the Complaint Referral Program in December
2011, complaint volume quickly outpaced available resources to manage
the workload. Prior to the start of TIGTA's review, the IRS had
identified that a significant number of complaints had not been
reviewed. Subsequently, the IRS eliminated all backlogged complaints by
December 31, 2014, by focusing efforts on improving processes, by
securing additional resources to address the backlogged complaints, and
by conducting a dedicated effort to prioritize, evaluate, and resolve
these complaints.
New investments proposed in the FY 2016 budget should help prevent
future backlogs. In the Budget, the IRS requested an additional $14.3
million to help ensure ethical standards of conduct of practitioners,
including hiring more staff to handle complaints.
______
Questions Submitted by Hon. Chuck Grassley
Question. As I mentioned at your hearing, I appreciate kind words
you have given concerning the IRS whistleblower program and look
forward to hearing back from you related to the issues I lay out below.
First, the payments to whistleblowers have slowed to a trickle at
best. This is whistleblowers waiting for payment where dollars have
been collected and the holdup is with the IRS processing and checking
the boxes for a payment. Often it is the whistleblower office waiting
for someone in the field, or in senior management to move paper. I ask
that that your office review all whistleblower cases pending payment
and bring the Drano to unclog the holdup.
Second, I again find myself frustrated with an IRS Chief Counsel
office that seems to wake up every day seeking ways to undermine the
whistleblower program both in the courts and the awards. I am
especially concerned that chief counsel is throwing every argument it
can think of against whistleblowers in tax court. It appears at times
that the Chief Counsel's office thinks its job is to come up with
hyper-technical arguments and seek to deny awards to whistleblowers who
have risked their lives to uncover big time tax cheats. I ask that your
office and the director of the whistleblower office review the chief
counsel's wasteful and harmful litigation positions that undermine the
whistleblower program and go directly against your support for the
whistleblower program.
Third, with tight budgets at the IRS it is all the more imperative
that the IRS works with whistleblowers and their counsels on cases. The
IRS criminal investigators have had great success using whistleblowers
to go after banks and terrorist organizations, but the IRS civil
division still hasn't gotten the message of working with
whistleblowers. I note that the IRS hasn't been shy about paying
outside law firms big money to help it in big examinations, yet ignores
the possibility of harnessing whistleblowers and their lawyers who
won't cost the IRS a dime from its budget.
Commissioner, I appreciate your willingness to provide detailed
written response addressing these three points.
Answer. I have discussed with the Director of the Whistleblower
Office the pace of award payments under section 7623, and have verified
that he has made timely processing of claims for which an award is
payable a top priority. Awards cannot be paid until the relevant
taxpayer audit or investigation is completed (including any appeals),
proceeds are collected, and the statute of limitations for filing a
refund claim has expired. When those preconditions are met, the
Whistleblower Office moves as quickly as possible to notify the
whistleblower of a proposed award, obtain comments on the proposal, and
make an award decision. To date, the Whistleblower Office has paid 12
awards under section 7623(b). The Director estimates that six to twelve
additional 7623(b) awards will be paid in FY 15.
With respect to your second point, the IRS Office of Chief Counsel
is responsible for defending the determinations of the IRS in the U.S.
Tax Court, including those of the Whistleblower Office. The Office of
Chief Counsel coordinates with the Whistleblower Office in defending
its determinations before the Tax Court to ensure that Chief Counsel's
litigating positions are consistent with the program's goals as well as
the statutory and regulatory framework. In most cases before the Tax
Court, the record of the case is sealed to protect both whistleblower
and taxpayer interests. As a result, I cannot comment on specific
arguments made in defending particular Whistleblower Office
determinations that are subject to an order of the Tax Court sealing
the record. The positions taken by the Office of Chief Counsel support
the IRS's administration of the law.
The suggestion that the IRS can do more to work with whistleblowers
and their counsel is one that the IRS takes seriously. In a memorandum
dated August 20, 2014, the IRS's Deputy Commissioner of Services and
Enforcement reinforced previous guidance on the importance of thorough
debriefing of whistleblowers during the evaluation of their
submissions. After the IRS begins an investigation based on
whistleblower information, section 6103 provides limited authority to
interact with a whistleblower since disclosure of taxpayer information
would be necessary to gather additional information while pursuing the
audit or investigation.
Question. During the hearing, I asked you about the ability of
individuals receiving deferred action to amend tax returns and claim
the earned income tax credit (EITC) as a result of the President's
executive action. Your answer essentially confirmed that this is the
case, but in doing so you also suggested that those receiving deferred
action would have had to of already filed tax return for the year in
question. However, a page on IRS's website titled ``Claiming EITC for
Prior Tax Years'' would appear to suggest even if one failed to file a
tax return in a previous year, they may now file a return for that year
and claim the EITC.\4\ Could you please clarify your remarks and
address whether someone receiving deferred actually must have
previously filed a tax return during the year in question to claim the
EITC retroactively? Also, please verify, whether or if, the IRS intends
to revisit the March 2000 IRS Chief Counsel Advice concerning the
ability of individuals to amend their tax returns to claim the EITC
once obtaining a Social Security Number.
---------------------------------------------------------------------------
\4\ Internal Revenue Service, ``Claiming EITC for Previous Tax
Years.'' Available at:
http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-
Credit/Claiming-EITC-Prior-Years.
Answer. To clarify my earlier comments on EITC, not only can an
individual amend a prior year return to claim EITC, but an individual
who did not file a prior year return may file a return and claim EITC
(subject to refund limitations under section 6511 of the Internal
Revenue Code). I would note that filing new returns for prior years
would likely be difficult, since filers would have to reconstruct
earnings and other records for years when they were not able to work on
---------------------------------------------------------------------------
the books.
Section 32 of the Internal Revenue Code requires an SSN on the
return, but a taxpayer claiming the EITC is not required to have an SSN
before the close of the year for which the EITC is claimed. At your
request, the IRS has reviewed the relevant statutes and legislative
history, and we believe that the 2000 Chief Counsel Advice (CCA) on
this issue is correct.
Question. The Affordable Care Act created tax credits that can go
directly to your insurance company to pay for coverage. If the credits
were more than a person was supposed to get, they were supposed to pay
that back to the IRS at the end of the year. Last month the IRS decided
that it would waive some of these overpayments.
How much money do you estimate this decision will cost?
Answer. Notice 2015-9 provides limited penalty relief for certain
taxpayers who received excess advance payments of the premium tax
credit through Affordable Insurance Exchanges (also known as
Marketplaces). It provides relief only for the failure to pay penalty
and the estimated tax payment penalty. Notice 2015-9 does not provide
relief from the underlying tax liability or the associated interest
related to excess advance payments. Because the Notice likely only
affects a small number of taxpayers, and because it provides relief for
modest penalty amounts, it is not estimated that the Notice will have
significant fiscal impact.
Question. Will you report back to me after tax season has ended, to
give me the exact amount of money the IRS waived?
Answer. As noted above, Notice 2015-9 does not provide relief from
the underlying tax liability or the associated interest related to
excess advance payments received through the Marketplaces. Rather, it
provides relief only for the failure to pay penalty and the estimated
tax payment penalty. Moreover the notice applies only for the 2014 tax
year and is only available for taxpayers who are otherwise compliant
with their filing and payment obligations.
Because the penalties to be abated under Notice 2015-9 are expected
to affect a small number of taxpayers, in small amounts per taxpayer,
it was decided to provide taxpayers seeking relief under the notice
with a simple method of seeking relief. Taxpayers seeking relief from
the penalty under section 6651(a)(2) for failure to pay were instructed
to send a letter stating they are eligible for relief because they
received excess advance payment of the premium tax credit; taxpayers
seeking relief from the penalty under section 6654(a) for failure to
pay estimated tax were instructed to file Form 2210, Underpayment of
Estimated Tax by Individuals, Estates and Trusts, with a statement that
they are eligible for relief because they received excess advance
payment of the premium tax credit. Because of the simplified method
provided to obtain relief, it is not administratively feasible to
obtain precise data on the penalty amounts waived.
Question. How will the IRS determine whether people actually need a
waiver, or just don't want to pay what they owe?
Answer. As noted above, Notice 2015-9 does not provide relief from
the underlying tax liability or the associated interest related to
excess advance payments received through the Marketplaces. Rather, it
provides relief only for the failure to pay penalty and the estimated
tax payment penalty. The eligibility requirements and the specific
procedures by which a taxpayer can request penalty relief are outlined
in Notice 2015-9. Generally, eligible taxpayers must complete existing
IRS Form 2210 to seek relief from the estimated tax payment penalty and
must assert, in response to IRS correspondence, that they are eligible
for relief from the failure to pay penalty.
Question. I asked you about nonprofit hospitals and whether the IRS
is doing enough to ensure they are complying with requirements,
particularly financial assistance policy requirements in the ACA.
Please describe the IRS's efforts to audit hospitals for financial
assistance policy requirements in FY 2014 and FY 2015, and any planned
activity the IRS intends to conduct in this area going forward.
Answer. The IRS reviews, at least once every three years, the
Community Benefit Activities (CBA) of tax-exempt hospital organizations
(estimated at more than 3,100 hospital organizations, many with
multiple facilities) to which Internal Revenue Code (IRC) section
501(r) applies. Under IRC section 501(r), the IRS began conducting CBA
reviews in March 2011 and has completed the first cycle of reviews of
hospital organizations. In FY 2014, the IRS started the second cycle of
reviews of hospital organizations and conducted 1,033 reviews during FY
2014. By February 20, 2015, the IRS had conducted 406 reviews. A total
of 32,201 IRS labor hours have been spent conducting these reviews
since they began.
The general requirements of the Financial Assistance Policy (FAP)
have been effective for tax years beginning after March 23, 2010. On
December 29, 2014, the IRS issued final regulations under section
501(r) that are effective for taxable years beginning after December
29, 2015. A comparative analysis of hospitals that have been reviewed
twice since reviews began in 2011 shows the hospitals with an FAP have
increased by 6.8% (1,362 to 1,466). In addition, the following
observations have been noted from the hospital reviews:
1. 97.13% (1,390) of tax-exempt hospitals are using the Federal
Poverty Guidelines (FPG) to determine the eligibility for free
care.
2. 95.0% (1,312) are using the FPG to determine the eligibility for
discounted care.
3. A comparison between first and second review responses to
facility level questions (regarding eligibility criterion, FPG,
and the basis of calculating amounts charged to patients, etc.)
shows a significant increase, on average 25.4%, in positive
responses. This may imply hospitals are providing more details
in the FAP or a more complete FAP since the first reviews were
conducted.
4. To date, 17 hospital organizations (for 49 tax years) have been
referred for audit of non-ACA issues, including unrelated
business income (UBI) tax, lack of profit motive, net operating
losses (NOL), etc. None was referred for noncompliance with FAP
requirements. Twenty-four of these examinations have been
closed, with six resulting in change due to various issues
including compensation adjustment, UBI, NOL adjustment, and
FICA adjustment.
As the regulatory requirements become effective, the Exempt
Organizations Examination office will expand the audits of
organizations that have failed to meet the statutory provisions
outlined in section 501(r)(1) including the assertion of the section
4959 excise tax associated with a failure under section 501(r)(3),
Community Health Needs Assessment (CHNA). Training materials are being
prepared for employees to enforce the final provisions of the section
501(r) regulations.
Question. Commissioner, in an email you sent to IRS employees you
referenced the need to make tough choices given budget constraints and
suggested employee furloughs may have to be implemented. Before you
take such actions, I hope that you consider cutting back on the number
of hours dedicated by IRS employees to union work while on the taxpayer
dime, which reportedly topped 500,000 for fiscal year (FY) 2013. If the
budget constraints are as dire as you contend, existing resources must
be used efficiently and effectively as they can. IRS agents performing
union work, when they could instead be assisting taxpayers, is
certainly not the most efficient use of resources. What, if any,
changes have you taken or do you plan to take to reduce hours spent on
union time or ``official time'' given current budget constraints?
Additionally, please provide me with the number of hours IRS employees
dedicated to union work in FY 2014 and, as well the number of hours so
far spent on union work in FY2015. Additionally, please include the
number of IRS agents who have dedicated 50% or more of their working
hours to union activities.
Answer. Congress found collective bargaining to be in the public
interest and through 5 U.S.C. Chapter 71 required a grant of official
time in many circumstances and binding collective bargaining in others.
Because official time is mandated by statute and by collective
bargaining agreements, IRS management does not have unilateral
authority to control the amount of official time used. In addition,
employees performing representational duties on official time are often
able to resolve issues at early stages. Therefore, official time is an
efficient use of resources particularly given the strain of overwork
under which the current workforce is operating. Even so, the IRS and
National Treasury Employees Union (NTEU) recently completed a round of
negotiations through which IRS secured a new collective bargaining unit
agreement designed to further reduce official time use over the next
three years. The new agreement is expected to go into effect on October
1, 2015. These changes are expected to include:
Establishing benchmarks for reducing per capita official time;
Reducing the number of face-to-face formal meetings by combining
multiple meetings into one and disseminating more information
electronically;
Reducing travel time and the number of full time stewards; and
Creating an IRS-NTEU committee to implement official time
mitigation strategies.
These newly agreed upon strategies supplement previously agreed
measures, including: placing limits on the amount of official time that
non-full time stewards may use in a year; incentivizing NTEU to better
manage official time usage; and establishing official time
coordinators, who can address any potential underreporting of official
time with NTEU.
There were 491,948 official time hours during Fiscal Year (FY) 2014
and 113,294 hours in the first quarter of FY 2015. Since 2011, the
amount of official time hours has been cut by 16.7 percent. In FY 2014,
there were 36 revenue agents that dedicated 50% or more of their
working hours to union activities; in the first quarter of FY 2015,
there were 37.
______
Questions Submitted by Hon. Pat Roberts
tax delinquent irs personnel--bonuses and rehiring
Question. Mr. Koskinen, following up on your statements concerning
Internal Revenue Service policy on IRS personnel who are delinquent in
their federal income taxes, you state in your testimony that
Those who are not compliant include those who are making
installment payments who are working toward compliance, but it
is clear--and it's clear to our employees--that if you
willfully do not pay your taxes, not only are you not eligible
anymore for an award, you're subject to disciplinary action
including, in cases, severance from the service. And we do that
on a regular basis. So I am confident that performance awards
are only going to go to those who are eligible for them.
Please provide the latest available information concerning the
number of current IRS personnel who have been identified as delinquent
in paying federal income tax and former IRS personnel who have been
separated from employment with your agency, for the Fiscal Years 2010-
2014 based on your stated policy concerning willful failure to pay
taxes.
Answer.
IRS Personnel Who Have Been Identified for Being Delinquent in Paying Federal Income Tax *
----------------------------------------------------------------------------------------------------------------
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
----------------------------------------------------------------------------------------------------------------
881 1,151 1,236 1,135 1,034
----------------------------------------------------------------------------------------------------------------
* Includes employees who have been admonished, suspended, counseled, received last chance agreements for
employment, and whose cases were closed without action. The numbers include current and former personnel.
Former IRS Employees Who Have Separated, Been Removed, Retired Pending Action, or Resigned Pending Action for
Delinquency in Paying Federal Income Tax
----------------------------------------------------------------------------------------------------------------
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
----------------------------------------------------------------------------------------------------------------
23 31 38 27 36
----------------------------------------------------------------------------------------------------------------
The IRS conducts tax checks on all employees twice a year to ensure
continued tax compliance. For the purposes of IRS employee tax
compliance, delinquencies refer to a failure by the employee to timely
file or pay any required tax returns. An employee is considered
delinquent regardless of whether a balance is due or the return was
subsequently filed, and covers delinquencies that were the result of
both willful and non-willful intent. Section 1203(b) of the IRS Reform
and Restructuring Act of 1998 requires the removal of employees found
to have willfully failed to file any tax return or understated their
Federal tax liability.
Question. Can you please also provide to me the full Internal
Revenue Service policy on the provision of bonuses or other awards,
including performance awards and promotions under I.R.C. Section 1203,
for employees who are identified as delinquent in their federal income
taxes, together with your current definition of ``delinquent'' for
purposes of this policy?
Answer. The IRS has implemented measures to ensure that any IRS
employee who violates section 1203(b) of the IRS Restructuring and
Reform Act of 1998 is ineligible for a performance award. Attached is
the IRS Bonus and Awards Recognition Program Policy applicable to all
employee misconduct and tax compliance issues, excluding executives and
other high-level officials. Also attached are two memos explaining the
impact of disciplinary actions on performance-based pay adjustments,
bonuses and awards for members of the Senior Executive Service and
other high-level officials at the IRS.
No IRS employee will be eligible for a discretionary award or
performance award (to include bilingual awards, and discretionary
salary increases such as Quality Step Increases (QSIs) or manager
performance-based increases) if a final agency decision is made that
the employee violated section 1203(b), such as by the late filing of,
or underreporting income on, a federal tax return. The ineligibility
determination will apply to the fiscal year in which the final agency
decision is made.
The IRS definition of ``delinquent'' when addressing employee tax
noncompliance is the failure to timely pay his or her tax liability or
balance due by April 15 of the year the return is due without incurring
interest or penalties. Failure to timely pay, while not a potential
section 1203(b) violation, is serious misconduct and subject to
discipline up to and including termination of employment.
Question. Later in response to questions, you state
There have been proposals and suggestions if you willfully do
not file your taxes--not--in the IRS not only are you not
eligible today for a bonus--and we have a program that we are
making sure that that applies as we look at performance
awards--but, as I say, under section 1203 of the code, it's
grounds--if you willfully are in violation of not being
compliant it's grounds for dismissal. And we take disciplinary
action against employees.
This statement is very concerning given information we have
recently received from the Treasury Inspector General for Tax
Administration (Report 2015-10-06) on the rehiring of former IRS
personnel with prior disciplinary issues. In this report, TIGTA says
that between January 2010 and September 2013, IRS has rehired hundreds
of former employees with disciplinary issues associated with their
prior IRS service. This includes well over a hundred employees with
prior tax issues, including willful failure to file federal tax
returns. In an understatement, TIGTA says this presents increased risk
to the IRS. I think that this entirely unacceptable practice.
Can you assure the committee that if you are able to hire the
additional 9,000 new personnel as you have requested in your Fiscal
Year 2016 budget submission that none of these prospective personnel
will be currently delinquent in paying their federal income tax
liabilities?
Answer. The IRS is committed to ensuring all new hires, including
the new employees referenced in the FY 2016 budget submission, are tax
compliant at the time of hiring.
The IRS applies the Office of Personnel Management's Suitability
Processing and Handbook, 5 C.F.R. 731.103(d), to its hiring process. In
addition to meeting government wide suitability standards, all IRS
candidates must have filed all required tax returns during the prior
three years, and either have paid or be current on all taxes due as a
condition for receiving a final offer of employment.
The IRS maintains the most rigorous employee tax compliance program
in the federal government. Though they may have had prior tax issues,
all former employees included in the TIGTA study were determined to be
tax compliant at the time of re-hire. This is verified during the
suitability phase of the hiring process, prior to the employee being
offered a position. Additionally, the IRS conducts tax checks on all
employees twice a year to ensure continued tax compliance.
Historically, IRS employees have had very high tax compliance rates
as compared to federal employees generally, including the civilian and
militaryworkforce. The IRS employee tax delinquency rate is less than
one percent, compared with a rate of almost 9 percent among the general
U.S. population.
Tax Delinquency Rates
------------------------------------------------------------------------
------------------------------------------------------------------------
Federal civilian 3.99
percent
------------------------------------------------------------------------
Military active duty 1.41
percent
------------------------------------------------------------------------
IRS employees, including full-time, part-time and seasonal 0.96
percent
------------------------------------------------------------------------
Source: Federal Employee/Retiree Delinquency Initiative (FERDI) Annual
Report, September 30, 2014.
fiscal year taxpayer services request
Question. While the IRS has had its overall budget reduced in
recent years, so has virtually every other department and agency of the
federal government. Notwithstanding this, the budget authority for the
taxpayer services account has remained largely static since Fiscal Year
2009.
Taxpayer Services (enacted except for FY16)
(dollars in millions)
----------------------------------------------------------------------------------------------------------------
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
----------------------------------------------------------------------------------------------------------------
2,293 2,279 2,293 2,240 2,136 2,157 2,157 2,409
----------------------------------------------------------------------------------------------------------------
Not including transfers and additional funding through ($13 million
in FY13; $34 proposed FY14), the taxpayer services account has been
reduced only about $136 million from its most recent peak, and
certainly not to the point where threats of service reductions are
appropriate. Given that taxpayer services funding is close to its
historic level, can you tell me what the appropriate funding level is
for those services? Do you anticipate any additional transfers to the
taxpayer services account, either from other accounts or from special
programs?
Answer. The appropriate funding level for Taxpayer Services is
$2.409 billion as requested in the FY 2016 Congressional Justification.
This level of funding would allow us to deliver an 80% level of service
to meet taxpayer demand and continue delivering high-quality services
to the taxpaying public. The IRS further anticipates augmenting
Taxpayer Services funding with $55 million in user fee collections in
both FY 2015 and FY 2016.
While Taxpayer Services funding has been reduced to a lesser extent
than other accounts, it is important to note that costs have risen over
the same time period. Since FY 2011, the IRS has had nearly $100
million in unfunded requests to maintain current levels (MCLs) of
effort due to inflation in the Taxpayer Services appropriation,
exacerbating the impact of the nominal $136 million reduction since FY
2011. In FY 2016 alone, for example, MCLs are expected to be over $53
million. As a result, full-time equivalent staffing in Taxpayer
Services will decline over 9% (almost 3,000 FTE) from FY 2011 to FY
2015. At the same time, over 6 million new individual filers have
entered the tax system, an increase of 4.6%.
Additionally, Taxpayer Services functions require corresponding
funds in the Operations Support account which funds information
technology, security, rent payments, and other administrative support.
Reductions to Operations Support, therefore, precipitate reductions in
effectiveness in Taxpayer Services.
earned income tax credit (eitc) error rates
Question. In responses to written questions asked during your
confirmation process, you indicated that you didn't have information
about the sources of improper EITC payments but you understood that 70%
of EITC tax returns were prepared by paid preparers. You also indicated
that you thought all EITC taxpayers should consider the same questions
regardless of how they prepare their tax returns and that you were open
to working with the tax software industry to identify problems and
propose solutions. Well, IRS's own data indicates that the paid
preparers now prepare only 58% of EITC returns and that the improper
payment rate on self-prepared returns has skyrocketed. I understand
that your agency has developed proposed changes to the Schedule EIC
that should help reduce improper payments. Could you explain why these
changes have not been implemented yet?
Answer. I would like to correct the record that the error rate on
self-prepared returns has skyrocketed. Our updated compliance study for
tax years 2006 to 2008, released in August 2014,\5\ includes a detailed
analysis of errors on EITC returns. It is based on the IRS's National
Research Program (NRP) information which includes the results from a
statistically valid, random sample of EITC tax returns. The study found
that there was no difference in either the frequency of error or the
dollar error percentage on returns prepared by paid preparers as
compared to those prepared by taxpayers themselves.
---------------------------------------------------------------------------
\5\ Publication 5162 (8-2014) Catalog Number 66766H Department of
the Treasury Internal Revenue Service.
Much of the difficulty in administering the EITC derives from the
complexity of its statutory eligibility requirements, many of which are
known only to the taxpayer and cannot be independently confirmed
because there is no third-party corroborating data. Based on the most
recent compliance study which examined the causes for erroneous EITC
claims, the vast majority of improper payments are from inability to
authenticate eligibility. They include errors associated with the
inability to authenticate qualifying child eligibility requirements,
mainly relationship and residency requirements. They also include
filing status errors, when married couples file as single or head of
household; and income misreporting errors, when taxpayers misreport
self-employment income that is not reported to IRS by third parties.
Finally they include errors in rules for all taxpayers claiming EITC,
when taxpayers claim the credit using an invalid SSN, or when the
credit is claimed by a non-citizen who has not been in the US for the
entire year, or when the taxpayer meets the rule to be a qualifying
child for another taxpayer; none of which can be authenticated by IRS
---------------------------------------------------------------------------
at time of filing.
The Compliance Study also estimates the rest of the improper
payments are due to program design errors. These errors relate to
income misreporting, tiebreaker errors, and joint return errors of
qualifying children. These errors occur because information needed to
confirm payment accuracy is not available at the time the return is
processed and the refund is issued. For income misreporting, payer
information is typically not available until after the filing season,
therefore wages and other income sources cannot be matched against the
return at time of filing. For tiebreaker errors and joint return errors
of qualifying children, because returns are processed as filed, the IRS
is unaware of a duplication of a qualifying child occurs when the first
return is filed. The IRS cannot wait until all returns are filed to
determine whether a child is claimed more than once and which taxpayer
is actually entitled to claim the child, or to determine whether
children claimed for EITC have filed a joint return.
Since the tax years in the study, the IRS has continued its
outreach and compliance programs directed at taxpayers. The IRS has
also conducted significant outreach to educate paid preparers on their
EITC due diligence responsibilities as well as revising the
Regulations, improving the preparer checklist, and delivering its EITC
paid preparer strategy. The IRS also continues to believe that
requiring minimum qualifications for paid preparers would improve the
accuracy of all returns, including EITC returns, and we continue to
support legislation that would allow the IRS to require minimum
qualifications for paid return preparers.
The IRS has been following the trend in the decrease in paid
preparer returns and corresponding increase in self-prepared returns
that started with tax year 2007, likely facilitated by the availability
of software. IRS data shows that for tax year 2012, 57% of EITC returns
were prepared by paid preparers. Over the last several years, the IRS
and the Treasury Department have considered new ways to ensure
taxpayers preparing their own returns carefully consider EITC
eligibility requirements. The IRS worked with our IRS/EITC Software
Developers Working Group on proposals. The Department of the Treasury
is currently conducting a pilot with a Free-File Alliance partner to
test new ideas. Based on Treasury's test results and continued
discussions, the IRS and Treasury will address potential changes that
could improve areas of EITC noncompliance while taking taxpayer burden
into consideration.
______
Questions Submitted by Hon. Debbie Stabenow
1. taxpayer services
Question. The National Taxpayer Advocate's 2014 report to Congress
describes the kinds of difficulties that families have faced and will
continue to face as they file their taxes.
Of particular concern are the large number of taxpayers who are
unable to actually be connected with a person at the IRS to get their
basic tax questions answered. More than a third of calls end with the
caller hanging up before having their question answered, receiving a
busy signal, or being disconnected.
In recent years, the agency has lost more than ten thousand
employees, including thousands of employees dedicated to helping
taxpayers.
What can we do to improve the service that taxpayers receive from
the IRS? Would granting the President's request for more money and more
staff help you deliver better service?
Answer. The best thing that Congress can do to improve the service
that taxpayers receive from the IRS is to approve the President's
budget request in totality.
Funding for the IRS has been reduced by $1.2 billion over the last
five years, dropping to $10.9 billion in Fiscal Year (FY) 2015. The IRS
is now at its lowest level of funding since 2008. If adjusted for
inflation, the agency's budget is now comparable to where it was in
1998.
Since 75 percent of the IRS budget is personnel, the agency has
been absorbing the budget cuts mainly by reducing our workforce. As a
result, IRS ended FY 2014 with more than 13,000 fewer permanent full-
time employees compared with 2010. The IRS expects to lose another
3,000 or more through attrition by the end of this fiscal year.
This year, the IRS was forced to substantially reduce hiring of
extra seasonal help we usually have during the filing season. As a
result, IRS's phone level of service at the start of the filing season
was 54 percent, and dipped below 40 percent toward the end of filing
season. That means many callers were forced to call more than once to
get through, and more than six out of every ten calls did not reach a
live assistor. Further, IRS expects to end the fiscal year with an
average phone level of service of 40 percent. That is truly an
unacceptable level of taxpayer service, especially given that the goal
for phone service in a given year, if the agency were adequately
funded, would be 80 percent.
To further illustrate how serious IRS's phone service difficulties
have been, the number of taxpayers disconnected by IRS's phone system
when it becomes overloaded with calls is substantially higher this
year. The number of these disconnects has reached 8.1 million so far
this year, as compared with 951,000by this time last year.
Additionally, taxpayers who have gotten through to an assistor have
faced extended wait times that are unacceptable.
As for in-person assistance, during the filing season many
taxpayers had to line up outside our Taxpayer Assistance Centers (TACs)
hours before they opened in order to get service. This is not a new
problem this year, but it has gotten worse over time. IRS encouraged
taxpayers to utilize the resources and self-service options available
online at www.irs.gov this filing season to help reduce the need for
in-person assistance, but the problem persisted due to a lack of
funding. Approving the President's budget request for the IRS in
totality would allow the IRS to provide the staff, services, and
infrastructure it needs to meet taxpayer demand, including restoring
its toll-free level of service to 80 percent, providing adequate
staffing to meet the demands of taxpayers at its TACs, and enhancing
its web applications to provide a broad range of self-service options.
Question. Which taxpayers are affected the most by these cuts to
services? It seems to me as though lower-income and middle-class
taxpayers, who can't afford to hire accountants and lawyers to follow
up with the IRS, suffer the most from these cuts to the important
services the IRS provides.
Answer. As noted in your remarks, the IRS has lost several thousand
employees dedicated to helping taxpayers. All areas are affected by the
difficult choices budget cuts and increased responsibilities have
forced us to make. In 2014, the IRS began prioritizing limited staffing
and resources to help those taxpayers who must interact with us by
phone or in person, while encouraging all those who can to use self-
service or other, more efficient options.
As projected, many taxpayers and tax preparers would not be able to
reach us by telephone or at our Taxpayer Assistance Centers (TACs) this
filing season. Those who did experienced a considerable hold and wait
time. While our service levels were lower than we would prefer, our
employees worked hard again this filing season to help the nation's
taxpayers.
We urge all taxpayers to take advantage of the many resources
available 24/7 on IRS.gov. These resources include online forms and
publications, tax law interactive tools and references, Get Transcript,
Where's my Refund? and help understanding an IRS notice or letter--
again, all available anytime on IRS.gov. Those without internet access
can use their telephone to access automated response systems. We
created the IRS Services Guide to help taxpayers locate the services
they need (http://www.irs.gov/pub/irs-pdf/p5136.pdf). Additionally,
taxpayers without internet access may be able to use a Facilitated
Self-Assistance kiosk, available at a few of our TACs.
During filing season we answer basic tax law questions on our phone
lines and at the TACs. Alternatively and during the rest of the year we
encourage taxpayers to try the Interactive Tax Assistant http://
www.irs.gov/uac/Interactive-Tax-
Assistant-(ITA)-1 that takes them through a series of questions just
like one of our customer service representatives would to determine
exactly what help or information they need. Taxpayers can also look to
tax return preparation software packages since tax law help is included
as part of software. We also offer more than 100 short instructional
videos, tax tips, and other resources year-round through a variety of
social media platforms. Taxpayers should find these automated services
convenient and easy to use. Many are available any time, day or night.
Seniors and low-to-moderate-income taxpayers also have the option
to get free help with return preparation through our Volunteer Income
Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE)
programs. These programs also serve persons with disabilities, those
with limited English proficiency, and Native Americans. We leverage
national and local partners to deliver free tax preparation and
outreach programs to millions of taxpayers throughout the nation. As of
April 13, 2015, over 90,000 volunteers prepared more than 3.37 million
federal tax returns at 12,057 VITA/TCE sites, compared to 3.35 million
returns as of the same time last year.
To expand the availability of alternative preparation and filing
options, some of our partners offer taxpayers self-service options such
as Facilitated Self-Assistance (FSA) and Virtual VITA. The FSA service
option empowers taxpayers to prepare their own return with the
assistance of a certified VITA volunteer. Virtual VITA helps our
partners to provide free tax preparation services ``virtually'' to
disabled, elderly and those with transportation or other issues.
2. corporate tax enforcement
Question. Corporations have tax departments and can hire firms and
consultants to take ``aggressive'' tax positions.
These aggressive strategies might involve claiming deductions or
characterizing income in a way that the IRS may or may not agree with.
It might also involve claiming deductions or characterizing income in a
way that the IRS doesn't have the manpower to catch. This means that
some companies can avoid paying what they owe, while so many taxpayers
are just trying to play by the rules.
In his budget request, the President has requested increasing the
appropriation for enforcement by $540 million.
What impact would this increased enforcement funding have on your
ability to go over corporate tax returns?
Answer. The additional enforcement funds requested in the FY 2016
Budget support an array of examination, collection, investigation, and
regulatory programs that focus on all taxpaying segments. Initiatives
that will support improved compliance by businesses include
implementing business document matching programs; improving the
identification and audit coverage of large, tiered partnerships and
strengthening the administrative procedures that apply to partnerships,
S corporations and Real Estate Mortgage Investment Conduits with more
than 10 members or partners under the Tax Equity and Fiscal
Responsibility Act (TEFRA); expanding international compliance efforts,
including offshore criminal investigations; enhancing large corporate
compliance through improved issue identification; and acquiring network
analysis tools to identify potentially abusive returns.
______
Questions Submitted by Hon. Mark R. Warner
Question. I have heard from Virginia institutions of higher
education about penalties for filing Forms 1098-T with incorrect or
missing TINs.
The IRS started fining institutions for filing 1098-Ts with
incorrect or missing PINs going back to the 2011 tax year. Although the
IRS issued a blanket waiver for the 2011 tax year, they have declined
to issue similar blanket waivers for subsequent years, even though
institutions filed their Forms 1098-T for the 2012 tax year without
knowledge of the penalties. Institutions must request a waiver each
year, creating bureaucratic burden. In addition, institutions must rely
on student-supplied information and they cannot use independent
verifying programs to ensure that the Forms 1098-T contain the correct
TINs.
For one Virginia college, the 2012 proposed penalty is $800,000.
What is the IRS doing to fix the unnecessary confusion caused by
the proposed penalties and come to a long-term solution that does not
unduly harm or burden colleges or universities?
Answer. Accurate information reporting is critical to the IRS's
ability to administer the tax laws. The IRS provides guidance and
regularly works with taxpayers to help them comply with the information
reporting requirements.
IRC section 6050S requires colleges and universities to report to
the IRS the amounts of qualified tuition and related expenses received
or billed and provide a statement to the student containing the same
information. This provision was enacted in 1997 for academic periods
beginning after 1997. Under section 6050S(b)(2)(A), the educational
institution is required to include the name, address, and TIN of the
student on Form 1098-T and the student statement. Final regulations
under section 6050S were published in 2002 after notice soliciting
public comments; these regulations were effective for Forms 1098-T
required to be filed after 2003.
Sections 6721 and 6722, enacted in 1986, impose penalties for
failure to file correct information returns and failure to furnish
correct payee statements respectively. The 1997 legislation amended
sections 6721 and 6722 to apply the section 6721 penalties to Form
1098-T and the section 6722 penalties to the student statement.
Regulation 1.6050S-1 details the information required to be reported on
Form 1098-T, the penalties for failure to comply, and the grounds for
obtaining relief from the penalties. The underlying law is not new, and
colleges and universities filing these information returns should have
been aware of their legal requirements under sections 6050S, 6721, and
6722 for many years. However, the IRS granted blanket waivers to
colleges and universities for tax year 2011 from penalties under
sections 6721 and 6722 as this was the first year Form 1098-T was
included in the systemic penalty notice program.
The blanket waivers were designed to provide affected educational
institutions with additional time to conduct the due diligence
necessary to ensure the filing of correct information returns and
compliance with the statutory provisions of the law. Although blanket
waivers were not provided after tax year 2011, penalty relief is
available under section 6724 if the educational institution acted in a
responsible manner when soliciting tax identification numbers (TINs).
The IRS has undertaken a review of its procedures and communication
tools. As a result of this review, the actions listed below are being
taken to ensure that the IRS provides correct and complete information
in communications and to ensure employees apply the correct criteria
when considering penalty waiver requests from these institutions.
Revise Internal Revenue Manual guidance.
Revise Publication 1586, Reasonable Cause Regulations and
Requirements for Missing and Incorrect Name/TINs.
Revise Notice 972CG that is sent to the institutions proposing a
penalty.
Revising CPE training materials to include additional guidance on
penalty relief for Forms 1098-T.
In addition, and as discussed below, the Department of the Treasury
has proposed legislation to provide an exception to the limitation on
disclosing tax return information to expand TIN matching beyond forms
where payments are subject to back-up withholding. This would allow
educational institutions to validate the accuracy of TINs included on
Form 1098-Ts prior to filing, and if used, could be factored into
reasonable cause penalty waiver considerations.
Question. Is the IRS willing to work with universities to help them
verify TINs?
Answer. The IRS has always worked and will continue to work with
taxpayer entities to help them comply with the law. Under current law,
TIN verification is allowed for filers of information returns that
report payments made by the filer that are subject to back-up
withholding, such as dividends or other income. In such cases, the tax
law allows the payor, before filing the return, to verify with the IRS
the TIN furnished by the payee. Otherwise, the law precludes the IRS
from disclosing a taxpayer's name, TIN, or other return information
without specific authorization from the taxpayer. See IRC sections 3406
& 6103; Treas. Reg. section 31.3406(j)-1; Rev. Proc. 2003-9, 2003-8
I.R.B. 516.
Form 1098-T does not report a payment issued by the educational
institution, like many information documents, but rather reports that
the institution received or billed for tuition. The provisions of the
law authorizing TIN verification do not, therefore, apply to Form 1098-
T. Consequently, permitting TIN verification for Form 1098-T would
require legislation. Accordingly, the Department of the Treasury has
proposed legislation to provide an exception to the limitation on
disclosing tax return information to expand TIN matching beyond forms
where payments are subject to back-up withholding. See Gen.
Explanations of the Administration's FY 2016 Revenue Proposals at pg.
217, http://www.treasury.gov/resource-center/tax-policy/Documents/
General-Explanations-FY2016.pdf.
Without legislative action, the IRS remains bound to follow the law
as currently prescribed.
______
Questions Submitted by Hon. Benjamin L. Cardin
Question. As you know, the IRS has released a Form 1023-EZ as part
of its effort to handle a large application backlog. While you should
be commended for the streamlining work you've done at the IRS with
limited resources thus far, I am concerned that the IRS may be missing
important pieces of information from Form 1023-EZ filers. Exempt
organizations that file the regular Form 1023 application must submit
their organizing/governance documents at that time. Form 990 and 990-EZ
filers must submit changes to those documents with those annual
returns.
When a 1023-EZ filer ``grows'' to the level where they should be
filing a Form 990-EZ or 990, will they be expected to file the basic
organizing documents at that time?
Answer. When an entity that files a Form 1023-EZ, Streamlined
Application for Recognition of Exemption Under Section 501(c)(3) of the
Internal Revenue Code, files a Form 990, Return of Organization Exempt
from Income Tax, or 990-EZ, Short Form Return of Organization Exempt
from Income Tax, for the first time, the entity is not required to
provide its organizational documents with its return. As is the case
for other exempt organizations, if the entity files a Form 990 or 990-
EZ and the entity's organizational documents have changed, it must
describe any significant changes to documents on its Form 990 or 990-
EZ.
Question. The Work Opportunity Tax Credit is an incredibly
important incentive that is used by employers throughout Maryland.
While WOTC is now expired, it was made available retroactively in 2014.
For WOTC processing to begin, the IRS must issue guidance that
recognizes that the program has been reauthorized and that provides
some transition relief so that employers can submit WOTC paperwork for
hires in 2014 to their state agencies. The need for guidance to come
out quickly is especially great because the program has only been
extended for one year.
When do you expect IRS to release guidance, similar to Notice 2013-
14, that will enable the WOTC program to be efficiently implemented
retroactively?
Answer. On December 19, 2014, Congress retroactively extended the
Work Opportunity Tax Credit (WOTC) for the 2014 tax year. To claim the
credit, an employer who hires a member of a targeted group listed in
section 51(d)(1)(A) through (I) ordinarily has 28 days from the date of
hire to submit to the Designated Local Agency (DLA) a Form 8850, Pre-
Screening Notice and Certification Request for the Work Opportunity
Credit. Recognizing the concern raised that because of the retroactive
enactment of WOTC, employers who hired individuals during 2014 would
need additional time to file the form, on February 19, 2015, the IRS
issued Notice 2015-13 providing employers until April 30, 2015, to file
the form with the DLA.
______
Questions Submitted by Hon. Dean Heller
Question. In my opinion, properly done tax reform would reduce the
IRS to its core function of collecting tax revenues, not implementing
new tax-related regulations and reporting requirements under Obamacare.
How many full time equivalents (FTE) or what percentage of the agency
are dedicated to implementing Obamacare this tax filing season?
Answer. The IRS projects requirements of approximately 2,828 full-
time equivalents (FTE) related to the tax law changes included in the
ACA for fiscal year 2015. This includes FTEs to implement both the
Marketplace provisions (such as the premium tax credit provision) and
non-Marketplace provisions (such as the fee on branded drug
manufacturers). This level of FTE is approximately 2.5% of our FY 15
operating plan.
Question. Under the IRS's own estimates, Obamacare will cost
individuals and businesses millions of hours. Do you have an estimate
of how many hours (or percentage of the agency) are expected to be
spent on implementing Obamacare this FY?
Answer. See the answer above, which tracks full-time equivalents,
i.e. hours spent by IRS employees.
Question. On February 5, 2015, the IRS announced (IR-2015-22) its
new online directory of Federal tax return preparers. The searchable
directory includes attorneys, CPAs, enrolled agents and those who have
completed the requirements for the IRS Annual Filing Season Program
(AFSP). All of those listed in the directory have Preparer Tax
Identification Numbers (PTINs). However, ``Tax return preparers with
PTINs who are not attorneys, CPAs, enrolled agents or AFSP participants
are not included in the directory.''
a. Haven't return preparers who obtained PTINs complied with the
only mandatory requirements applicable to return preparers?
Answer. Individuals preparing federal tax returns for compensation
are required to have a preparer identification number (PTIN). They are
also required to provide that number on the returns they prepare, sign
the returns they prepare, and furnish a copy of the prepared return to
the taxpayer.
b. What is the rationale for excluding from the directory those who
have PTINs but who are not also attorneys, CPAs, enrolled agents or
AFSP participants?
Answer. The directory is a tool to assist taxpayers with finding a
preparer or verifying credentials and/or select qualifications. As
such, the preparers listed in the Directory have earned and maintained
professional credentials (CPA, enrolled agent, or attorney) or have
completed a certain number of hours of continuing education from IRS-
approved continuing education providers in the specific categories of
federal tax law topics, tax law updates, and ethics.
Question. The IRS website page for the directory search (http://
irs.treasury.gov/rpo/rpo.jsf) contains the following statement:
``Additionally, the IRS does not endorse any preparer or credential
over another.''
a. How do you reconcile that statement with the fact that the
official IRS return preparer directory excludes thousands of compliant
preparers who are PTIN holders?
Answer. The description of the Directory on the IRS website (and
information on linked webpages that include Information on
Understanding Tax Return Preparer Qualifications and Credentials, and
information on Choosing a Preparer) notes that anyone can be a paid tax
return preparer as long as they have an IRS Preparer Identification
Number (PTIN), and they sign and enter it on all returns they prepare.
This information provides that tax return preparers who have PTINs but
are not listed in the Directory may provide quality return preparation
services, but cautions taxpayers to choose any return preparer wisely
and to always inquire about their education and training.
Question. Please provide the following information about the return
preparer directory (as of February 5, 2015):
a. How many return preparers are listed in the directory?
Answer. There are 312,298 return preparers listed in the directory,
some holding more than one designation.
b. How many return preparers are listed in each of the six
searchable categories?
Answer.
i. Attorney Credential..................................... 27,729
ii. Certified Public Accountant Credential................. 202,943
iii. Enrolled Agent Credential............................. 48,322
iv. Enrolled Actuary Credential............................ 350
v. Enrolled Retirement Plan Agent Credential............... 641
vi. Annual Filing Season Participant....................... 41,863
c. How many PTIN holders are not listed in the directory?
Answer. As of February 6, 2015, 360,592 return preparers with PTINs
only are not included in the directory.
Question. Has Congress ever specifically authorized the creation of
this directory of return preparers?
Answer. The Directory is a tax administration tool and requires no
Congressional authorization. More than 140 million individual tax
returns were filed last year, and more than half of them were prepared
with the help of a paid preparer. The Directory is a practical tool for
the millions of Americans who rely on the services of a paid return
preparer. The purpose of the Directory is to help taxpayers find a tax
professional with credentials and select qualifications to help them
prepare their tax returns. It is part of a broader effort to provide
taxpayers with information to understand the different categories of
return preparers and their representation rights so they can choose a
qualified tax return preparer who best meets their needs.
Question. How much did the IRS spend in developing this online
directory? What is the estimated annual cost to maintain it?
Answer. Total development costs for the directory were $244,000
with an estimated annual maintenance cost of $24,000.
Question. Last year, you acknowledged, in your April testimony that
the vast majority of return preparers operate with the highest ethical
standards. That said, the GAO and the IRS's own research have admitted
that a large number of returner preparers continue to engage in fraud.
If this is true, how does urging thousands of return preparers to
complete costly and time-consuming continuing education combat return
preparer fraud?
Answer. The IRS and the National Taxpayer Advocate have long agreed
that the professionalism of tax return preparers can be increased
through a framework that provides for registration, testing,
certification, continuing education, and consumer education. (See, the
Return Preparer Review, IRS Publication 4832 (Rev. 12-2009) at pages
22-23) (http://www.irs.gov/pub/irs-pdf/p4832.pdf). See also, the
Taxpayer Advocates 2015 Objectives Report to Congress (June 2014 at
page 71) (http://www.taxpayeradvocate.irs.gov/2015ObjectivesReport).
Absent the authority to require tax return preparers to have minimum
qualifications or to mandate testing and continuing education,
encouraging tax return preparers to maintain currency with federal tax
law through continuing education improves compliance with the tax laws
and filing requirements. Encouraging taxpayers to choose preparers
wisely and to familiarize themselves with their preparer's
qualifications also reduces opportunities for fraud to be perpetrated.
Given that more than half of all taxpayers rely on a paid preparer
to complete their tax returns, accurate return preparation, improved
compliance and effective tax administration necessitate that tax return
preparers have a basic level of competency to complete federal tax
returns. Sixty percent of all paid tax return preparers are
uncredentialed. With the escalation of taxpayer fraud and identity
theft, it is more important than ever that a taxpayer choose his/her
tax return preparer wisely and that should mean a tax return preparer
who is knowledgeable in the tax law and return preparation. Remaining
current with the tax law and tax law changes through continuing
education benefits the preparer, the taxpayer and tax administration.
Question. Over the past decade, the IRS Tax Division has obtained
numerous injunctions against fraudulent tax return preparers. Despite
these injunctions, I have seen alarming reports that the IRS is
continuing to send out questionable refunds long after the IRS should
have realized there was a problem. Can you list the steps the IRS is
taking over the next year to block improper refunds from going out and
increase its vigilance against return preparer fraud?
Answer. The IRS maintains an office whose primary responsibility is
fraud detection/revenue protection activities, addressing millions of
questionable returns each year. All refund returns flow through the
Electronic Fraud Detection System (EFDS) and Dependent Database (DDb)
which contain complex fraud models and filters developed from
historical fraud characteristics used to identify questionable income,
withholding, refundable credits and/or taxpayer identity. In addition
to these systemic fraud checks, employees perform analysis and review
groups of returns with similar characteristics that indicate refund
schemes. These fraud prevention efforts occur all year long and the IRS
has implemented the following improvements to further combat fraud:
In January 2013, we rolled out a program allowing financial
institutions to reject questionable refunds using a special
code on current year direct deposit refunds when the name/TIN
listed on the Treasury ACH file for the tax refund does not
match the account holder information in the bank's records for
a specified set of banking filters. An internal transcript is
then generated in order to review the refund.
In January 2015, we limited the number of direct deposit refunds
that can be made to a single account to three (3) and any
additional refunds are sent via paper checks. This change is
expected to deter fraud and identity theft.
For the 2015 filing season, we also increased the number of
identity theft filters over the previous filing season and utilize
dynamic lists to update filters based upon current schemes, historical
characteristics and/or patterns.
A major IRS project under development that will assist with pre-
refund fraud detection, income verification and taxpayer authentication
is the Return Review Program (RRP). This application will replace the
EFDS, enhancing many aspects of IRS compliance activity. RRP will
perform historical filing analysis and use improved complex programming
to review all returns for fraud potential improving the IRS's ability
to identify and treat fraud and Identity Theft filings.
Return preparer fraud is also addressed by IRS Criminal
Investigation (CI). CI continues to investigate tax return preparers
who promote schemes designed to obtain fraudulent refunds or to
fraudulently reduce their clients' tax liabilities. CI will continue to
investigate paid preparers who use invalid identifiers or fail to sign
returns. CI will also increase its focus on preparers who promote
schemes to US citizens living abroad.
Each year, CI uses information collected from various sources to
identify return preparer schemes. CI uses investigative analysts in
CI's Scheme Development Centers (SDCs), special agents in 25 Field
Offices, and data base information on return preparers to identify and
evaluate preparers for potentially fraudulent activity. Return
preparers are evaluated on a set of characteristics representative of
the set of returns submitted by individual preparers. CI uses a Return
Preparer Analysis Tool to perform a collection of fraud tests on return
preparer data in the returns that the IRS has determined may indicate a
higher-than-normal probability of fraud. The research into the pattern
of suspicious return preparer schemes provides insights into the
following questions:
Who is preparing the returns?
Does the preparer only file during the filing season (January-
April)?
Do returns come in large batches?
Does the preparer only send in returns in October?
Where does the preparer conduct business?
Where does the preparer live?
What are the mailing locations of the returns?
For the 2015 filing season, CI is using a six prong approach to
create an enhanced enforcement presence among tax practitioners, tax
preparers, and other third parties in the return preparer community:
Undercover special agent shopping activities.
Coordinated legal and enforcement actions during filing season.
Enhanced compliance partnerships with internal stakeholders.
Enhanced partnership with external stakeholders.
Outreach with the return preparer community.
Coordinated cross-functional publicity.
CI continues to use undercover investigations as one of the most
effective methods of uncovering and investigating questionable return
preparer schemes.
CI continues to recommend appropriate e-file sanctions at the
conclusion of any criminal investigation that involves an authorized e-
file provider who has violated the requirements of the e-file program.
Sanctions imposed may be a written warning, a written reprimand,
suspension, or revocation of the Electronic Filing Identification
Number (EFIN).
CI continues to support civil operations in the return preparer
area by its many partnerships throughout the IRS to:
Conduct Knock and Talk Visits with potentially abusive EITC return
preparers;
Conduct parallel investigations in order to deter preparer
noncompliance (because they result not only in criminal
convictions and publicity, but also civil injunctions and
preparer penalties);
Identify and investigate return preparers who do not readily
identify themselves because they do not sign their clients'
returns;
Determine electronic filing suitability of all e-file applicants
based on their criminal history; and
Work CI cases that involve disreputable conduct before the IRS by
an attorney, certified public accountant or enrolled agent.
______
DEPARTMENT OF THE TREASURY
internal revenue service
washington, d.c. 20224
DEPUTY COMMISSIONER
November 18, 2014
MEMORANDUM FOR SENIOR EXECUTIVE TEAM
FROM: John M. Dalrymple, Chairman, Executive Resources Board
SUBJECT: Impact of Disciplinary/Adverse Action on Performance-based
Pay Adjustments, Bonuses, and Awards
Please be advised that pursuant to a September 24, 2014 Department of
the Treasury policy transmittal number TN-14-003 , entitled
Departmental Oversight for Executive Misconduct in Determining Pay
Adjustments, Bonuses and Awards (Enclosure 1), the following is
effective immediately:
An Executive (including members of the Senior Executive
Service (ES), Senior Leaders (SL), Streamlined Critical
Pay employees (AD), or the equivalent, or IR-01
Executive Officers (i.e., ``SES-in-waiting'')), who is
reprimanded or suspended, as result of any form of
misconduct, is ineligible for the following:
A monetary performance-based award for the rating
period in which the disciplinary action or adverse
action was administered (e.g., performance bonus,
Special Act Award, Quality Step Increase, Presidential
Rank Award, a performance-based salary adjustment
otherwise authorized under 5 CFR 534.404 , etc.)
The Treasury-wide policy is already incorporated in the corresponding
IRS policy, promulgated on March 14, 2014, via my memorandum entitled
Policy and Procedures for High-Level Personnel (Enclosure 2).
Additionally, the following policy is effective immediately for all
Executives and Executive Officers:
If there was a final Agency decision that an IRS
Executive (including members of the Senior Executive
Service (ES), Senior Leaders (SL), Streamlined Critical
Pay employees (AD), or the equivalent, including IR-01
Executive Officers (``SES-in-waiting'')) committed any
act or omission set forth in 26 USC Sec. 7804, note
Sec. Sec. 1203(b)(1)-(10) of the Internal Revenue
Service Restructuring and Reform Act of 1998, such an
employee shall not be eligible for a monetary
performance award. If any final agency decision on a
Sec. 1203(b) finding is overturned by an administrative
or judicial third-party, the third-party may order a
retroactive award so long as such award is consistent
with the Back Pay Act.
If you have any questions regarding this matter, please contact Dan
Riordan, Human Capital Officer, at (202) 317-7600, or a member of your
staff may contact Max Goodman, Manager, Executive Misconduct Unit,
Workforce Relations Division, Human Capital Office, at (202) 302-7571.
Enclosures (2)
cc: All Executives
Associate Chief Counsel (General Legal Services)
TIGTA Deputy Inspector General for Investigations
______
DEPARTMENT OF THE TREASURY
internal revenue service
washington, d.c. 20224
HUMAN CAPITAL OFFICE
February 4, 2015
MEMORANDUM FOR SENIOR EXECUTIVE TEAM
FROM: Daniel T. Riordan, IRS Human Capital Officer
SUBJECT: Interim Guidance: Impact of Employee Misconduct on Awards,
Bonuses, Performance-Based Pay Increases, and Quality Step
Increases to be Paid in Fiscal Year (FY) 2015
This is to inform you that we will issue the attached interim guidance
and procedures to the Embedded HR directors notifying them about the
screening for Section 1203(b) violations that will be conducted in
FY2015 before granting performance awards, bonuses, performance-based
pay increases (PBI), and Quality Step Increases (QSls).
This guidance applies to recognition to be paid or made effective in
Fiscal Year FY2015 and applies to all bargaining (BU) and non-
bargaining unit (NBU) IRS employees except executives and other high-
level officials who are covered by separate misconduct policy and
procedures approved by the Chair of the Executive Resources Board.
An employee shall not be eligible for covered recognition (excluding
QSls) to be paid or made effective in FY2015 if there has been a final
Agency decision in FY2014 that a Section 1203(b) violation has
occurred. Additionally, employees will not be eligible for QSls paid in
FY2015 if there has been a final Agency decision in FY2015 that a
Section 1203(b) violation has occurred or a decision to impose any
discipline with a penalty of suspension of 15 days or longer.
Further guidance will be issued regarding misconduct screening for
recognition to be paid or made effective in FY2016. This guidance will
incorporate recently issued Treasury policy once an agreement is
reached with NTEU. This interim guidance will be in effect until the
final policy is issued.
If you have any questions, please contact me or have a member of your
staff contact Terri DeAngelis, Associate Director, Pay, Leave and
Performance Branch at
[email protected], or (215) 861-0775, or Marilyn Cain, Chief,
Payband, Performance and Awards Programs at [email protected] or
(512) 499-5431.
Attachment
cc: Human Capital Advisory Council
FMA/PMA
Attachment Interim Guidance: HCO-06-1214--02-04-2015
The following changes are effective immediately for IRM 6.451.1, Awards
and Recognition.
New IRM Subsection: Screening for Employee Misconduct Before Granting
Covered Recognition.
1) Covered Employees. These procedures apply to all bargaining (BU)
and non-bargaining unit (NBU) IRS employees except executive
and other high-level officials who are covered by separate
misconduct policy and procedures approved by the Chair of the
Executive Resources Board.
2) Covered Recognition. These procedures cover the following types
of recognition to be paid or made effective in Fiscal Year (FY)
2015.
a.BU employees: monetary and time-off performance awards, bilingual
awards, and paybanded (IR) employees' performance bonuses
and performance-based (pay) increases.
b. BU employees: monetary and time-off performance awards,
bilingual awards, and monetary/time-off awards elected by
BU employees instead of Quality Step Increases (QSIs) under
negotiated provisions.
c. NBU and BU employees: QSIs.
3) Excluded Recognition. These procedures do not cover suggestion
awards, travel gain-sharing awards, referral bonuses, foreign
language awards,\6\ or any other award or bonus not listed
under paragraph 2, Covered Recognition.
---------------------------------------------------------------------------
\6\ Foreign language awards are distinguished from IRS bilingual
awards. Foreign language awards may be granted only to law enforcement
officers as defined in statute (for example, GS-1811 Criminal
Investigators (Special Agents) assigned to the Criminal Investigation
Division). However, bilingual awards are covered recognition under
these procedures.
a. NBU and BU employees: Manager's Awards and Special Act Awards
are not covered by this policy because they are not being
---------------------------------------------------------------------------
paid during the applicable period.
4) Disqualifying Misconduct will result in ineligibility for covered
recognition.
a. 1203(b) Violations. A Covered Employee shall not be eligible
for recognition described in paragraphs 2a and 2b to be
paid or made effective in FY 2015 if there has been a final
Agency decision in FY 2014 that a Section 1203(b) violation
has occurred.
NOTE 1: Section 1203(b) violations are described in Section
1203(b)(1)-(10) of the Internal Revenue Service
Restructuring and Reform Act of 1998 (``RRA '98'') which
provides that IRS employees must be terminated from Federal
employment if they violate any of the ten specific acts or
omissions described. Acts or omissions of IRS employees
will be subject to the discipline prescribed by section
1203(b) only if those acts are taken, or those omissions
are made, with some degree of intent. The statute also
allows the IRS Commissioner to mitigate the sanction of
termination.
NOTE 2: With respect to Section 1203(b) violations, ``Final
Agency decision'' refers to when the IRS deciding official
makes the decision that an employee violated Section
1203(b) of RRA '98 after the employee's oral and/or written
reply occurs (if applicable).
b. 1203(b) Violations. A Covered Employee shall not be eligible
for recognition for a QSI as described in paragraphs 2c to
be paid or made effective in FY 2015 if there has been a
final Agency decision in FY 2015 that a Section 1203(b)
violation has occurred. See Notes 1 and 2 above.
c. Non-1203(b) Violations. A Covered Employee shall not be
eligible for recognition for a QSI as described in
paragraph 2c if there has been a final Agency decision in
FY 2015 to impose any discipline with a penalty of
suspension of 15 days or longer, or removal.
NOTE: With respect to discipline, ``Final Agency decision''
refers to when the IRS deciding official makes the decision
that an employee will be disciplined as described in
paragraph 4c, after the employee's oral and/or written
reply occurs (if applicable).
NOTE: See summary chart below:
------------------------------------------------------------------------
Award/Recognition Ineligibility Standard
------------------------------------------------------------------------
Cash/TOA for FY 2014 performance Final Agency decision in FY 2014 that
paid in March 2015 a Section 1203(b) violation has
occurred
QSI for FY 2015 performance paid Final Agency decision in FY 2015
in FY 2015 that a Section 1203(b) violation has
occurred
Final Agency decision in FY 2015
to impose any discipline with a
penalty of suspension of 15 days or
longer
PBI based on FY 2014 performance Final Agency decision in FY 2014 that
rating paid in FY 2015 a Section 1203(b) violation has
occurred
------------------------------------------------------------------------
5) Screening for Disqualifying Misconduct. The Human Capital Office
will use the HCO Automated Labor Employee Relations Tracking
System (ALERTS) to perform centralized screening for
disqualifying misconduct and will ensure that employees, who
have been the subject of final Agency decisions in FY 2014 or
FY 2015 as applicable, shall not be granted Covered Recognition
in FY 2015.
6) Employee Notification. Ineligible employees will receive a letter
mailed to their home address of record prior to the effective
date of the covered recognition. Upon receipt of the letter, a
BU employee may file a grievance under Article 41 of the
National Agreement to contest his/her ineligibility. For NBU
employees, a determination of ineligibility under these
procedures is not grievable under the Agency Grievance
Procedure, IRM 6.771.1.
7) Documentation. The Workforce Relations Division shall maintain
ALERTS screening documentation in accordance with records
retention standards.
______
DEPARTMENT OF THE TREASURY
internal revenue service
washington, d.c. 20224
DEPUTY COMMISSIONER
March 14, 2014
MEMORANDUM FOR SENIOR EXECUTIVE TEAM
FROM: John M. Dalrymple, Chairman, Executive Resources Board
SUBJECT: Misconduct Policy and Procedures for High-Level Employees
[Supersedes Deputy Commissioner for Services and Enforcement Memorandum
of January 06, 2014]
This memorandum and its attachments promulgate Internal Revenue Service
policy and procedures pertaining to the adjudication of misconduct
allegations involving high-level employees (i.e., Executives [ES; SL;
AD]; Executive Officers [IR-01]; Senior Managers [IR-01]; Front Line
Managers [IR-03]; and non-bargaining unit employees at grade GS-15,
with the exception of those serving at grade via temporary promotion),
and is issued under my authority and responsibilities as Chairman,
Executive Resources Board.
One of our responsibilities as stewards of our nation's tax system is
to establish and maintain the highest standard of professionalism and
personal integrity throughout the IRS. All high-level employees must
set an example through impeccable conduct. An allegation that a high-
level employee has failed to meet this obligation must be promptly
addressed and accurately and effectively resolved. The IRS has
determined that high-level employees must be held to a higher standard
of professionalism, integrity, and accountability than employees of
lower grade and organizational rank. Accordingly, high-level employees
who engage in misconduct generally will be subject to corrective action
exceeding that which is suggested for comparable offenses committed by
employees of lower grade and rank.
Attached are the Policies and Procedures for Adjudicating Conduct-
Related Matters Involving High-Level Employees; Standards for Conduct-
Based Inquiries; and Report of Inquiry template. The policies,
procedures, and guidelines contained in the attachments will help to
ensure consistency, objectivity, and accountability in resolving
allegations of misconduct. Each allegation of misconduct will be
evaluated thoroughly and accurately by either internal administrative
review/inquiry, or by formal investigation conducted by the Treasury
Inspector General for Tax Administration (TIGTA).
Every allegation of misconduct, involving a high-level employee, must
be presented to the Executive Misconduct Unit (EMU), of the Workforce
Relations Division, Human Capital Office, for guidance and processing.
Additionally, all formal and informal agreements to resolve complaints
of misconduct (including Equal Employment Opportunity-related
misconduct), and all formal and informal appeals of a disciplinary or
adverse action, must be coordinated with the EMU before settlement
terms or commitments may be communicated to complainants, grievants, or
appellants.
If you have any questions regarding the policies and procedures related
hereto, please contact Lia Colbert, Acting Director, Workforce
Relations Division, Human Capital Office, at (202) 317-4390, or Max
Goodman, Manager, EMU, at (202) 302-7571.
Attachments (3)
cc: All Executives
All Executive Officers
All Senior Managers
All Front-Line Managers
All Human Resources Managers
All EEO Managers
Associate Chief Counsel (General Legal Services)
TIGTA Deputy Inspector General for Investigations
______
attachment 1
Policies and Procedures for Adjudicating Conduct-Related Matters
Involving High-Level Employees
1. Applicability. These policies and procedures apply only to conduct-
based issues. [The respective Operations Branches within the Labor/
Employee Relations Field Operations Office, Workforce Relations
Division, Human Capital Office, provide services and support for all
performance-based actions involving high-level employees at grades GS-
15, IR-03, and IR-01, and conduct-based actions involving employees
serving at grades GS-15, IR-03, and IR-01 via temporary promotion. The
Office of Executive Services, Human Capital Office, provides services
and support for all performance-based actions involving Executives and
Executive Officers.]
2. Referring Allegations of Misconduct. All allegations of misconduct
involving high level employees must be promptly referred to the
Executive Misconduct Unit (EMU) or to the Treasury Inspector General
for Tax Administration (TIGTA). The EMU can be reached at (202) 302-
7571. Complaints may be filed with TIGTA at http://www.treas.gov/tigta/
contact_report.shtml#theform, or by phone at 1-800-366-4484. [Note:
TIGTA Complaint Referral Memoranda (TIGTA Forms 2070 and 2070A) and
Reports of Investigation (TIGTA Form 2076) involving a high-level
employee, and received by the Business Unit from a source other than
the EMU, must be forwarded immediately to the EMU.]
3. Role of the EMU. The EMU is the exclusive servicing Employee
Relations (ER) office for all conduct-based issues involving high-level
employees. On occasion, the EMU will request assistance and support
from other ER components within the Human Capital Office or the
Business Units. When a complaint referred to the EMU includes a co-
subject who is not a high-level employee, the case associated with that
employee will be adjudicated by that individual's servicing ER office,
after adjudication of the primary case.
4. Processing Misconduct Cases. The EMU will receive and evaluate all
complaints of misconduct against high-level employees, regardless of
the source of the complaint (e.g., TIGTA, Employee Tax Compliance
Branch, Credit Card Services Branch, IRS management official, Member of
Congress, taxpayer, etc.).
The EMU may close conduct referrals at its own discretion; typically
this occurs when an allegation of misconduct lacks sufficient
information to justify administrative inquiry or formal investigation.
The EMU will analyze all referrals of potential or confirmed
misconduct, before forwarding the cases to the responsible Business
Unit Commissioner or Chief. When it is determined by the EMU that a
misconduct matter requires the attention of the impacted Business Unit,
the EMU will refer the matter with instructions, guidance, and/or
recommendation. A due date for the Business Unit's recommendation for
disposition will also be identified.
When appropriate, the EMU will consult with TIGTA; the Office of the
Associate Chief Counsel, General Legal Services (GLS); and/or the AWSS
Office of Equity, Diversity, and Inclusion Field Services for the
purpose of assisting the responsible Business Unit with its case
analysis and subsequent deliberations.
When an allegation of misconduct has been subjected to formal
investigation by TIGTA, the resulting Report of Investigation (ROI)
will be referred by the EMU to the responsible Business Unit for review
and recommendation. The Business Unit may conduct additional
administrative inquiry if deemed necessary or request that the EMU seek
supplemental investigation by TIGTA and/or legal opinion from GLS. If
an allegation of misconduct was not subjected to formal investigation
by TIGTA, the EMU will determine whether to request a formal
investigation or forward the matter to the responsible Business Unit
for administrative inquiry (see attachments 2 and 3). In all cases, the
Business Unit Commissioner/Deputy Commissioner or Chief/Deputy Chief
must submit a written recommendation for disposition to the EMU by the
identified response date. The EMU will advise as to whether the
recommended disposition is consistent with previously adjudicated
cases, involving comparable facts, circumstances, infractions, and
grade level.
Note: Before the matter is returned to the EMU, the recommendation for
disposition must be discussed with the management official (typically
the first or second-level supervisor) who will be responsible for
issuing any recommended corrective action upon final approval. No
discussion with the affected employee may occur until the Business Unit
is notified by the EMU that the recommended disposition is approved.
When the adjudication process results in confirmation of misconduct by
a high-level employee, and the Business Unit recommends either
disciplinary action (i.e., Letter of Admonishment, Letter of Reprimand,
or Suspension of 1 to 14 days) or adverse action (i.e., Suspension of
15 days or more, involuntary Change-To-Lower-Grade, or Removal from the
Federal service), the EMU will refer the case and recommendation for
disposition to the Chairperson, Executive Resources Board (currently,
the Deputy Commissioner for Services and Enforcement) for approval to
proceed with the initiation of the recommended administrative action.
Cases involving Operations Support employees will be routed through the
Deputy Commissioner for Operations Support.
Note: Under no circumstances may corrective action be administered or
may the matter be otherwise resolved without contacting the EMU in
advance.
5. Penalty Selection. General penalty guidelines are set forth in the
IRS Guide to Penalty Determinations, IRS Document 11500 (Rev. 08-2012).
6. Proposing and Deciding Officials. Notices of proposed disciplinary
or adverse action will be prepared by the EMU and issued by the
employee's immediate supervisor (or second-level supervisor, when
deemed appropriate). Disciplinary or adverse action decision letters
will be prepared by the EMU and issued by the employee's first-level
supervisor, second-level supervisor, or third-level supervisor, as
deemed appropriate by the affected Business Unit Commissioner or Chief.
However, the deciding official for actions involving Executives or
Executive Officers cannot be delegated below the Business Unit Deputy
Commissioner or Deputy Chief.
7. Adjudication Actions. The following dispositions are available:
Non-disciplinary Actions (not appealable):
Clearance Notification
Closed-Without-Action Notification
Oral Counseling (confined to first offenses of minor consequence)
Letter of Caution
Disciplinary Actions (may be appealed internally only, via the Agency
Grievance System):
Letter of Admonishment (this is the lowest level of formal disciplinary
action)
Letter of Reprimand
Suspension (less than 15 calendar days) *
Adverse Actions (may be appealed externally only, pursuant to U.S.
Merit Systems Protection Board regulations and procedures):
Suspension (greater than 14 calendar days)
Reduction in Grade and Pay *
Removal from the Federal service
* Note: by Federal regulation, these dispositions are not available to
members of the Senior Executive Service.
8. Disposition Letters.
a. Clearance Notification:
The subject of a misconduct complaint may receive a Clearance
Notification if: (a) he or she was interviewed during the investigation
or administrative inquiry; (b) the allegation was unequivocally
disproved; and (c) the subject or Business Unit requests such
notification. If all conditions are met, the responsible Business Unit
will issue such notification, orally or in writing, following
consultation with the EMU. Confirmation that such notification was
issued must be provided to the EMU.
b. Closed-Without-Action Notification:
The subject of a misconduct complaint may receive a Closed-Without-
Action Notification if: (a) he or she was interviewed during the
investigation or administrative inquiry; (b)the allegation was
unresolved; and (c) the subject or Business Unit requests such
notification. If all conditions are met, the responsible Business Unit
will issue such notification, orally or in writing, following
consultation with the EMU. Confirmation that such notification was
issued must be provided to the EMU.
c. Letter of Caution:
A Letter of Caution may be issued to the subject of a misconduct
complaint when the facts of the case suggest only a need for the
subject to exercise maximum diligence in the future with respect to the
identified issue (i.e., the offense is not attributed to carelessness,
negligence or intentional disregard). The letter will be prepared by
the EMU and issued by the employee's immediate supervisor (or second-
level supervisor, when deemed appropriate).
d. Letter of Admonishment:
A Letter of Admonishment will be retained in the Employee Drop File
(EDF) for 2 calendar years from the date it was received by the
employee. The letter will be prepared by the EMU and issued by the
employee's immediate supervisor (or second-level supervisor, when
deemed appropriate).
e. Letter of Reprimand:
A Letter of Reprimand will be retained in the employee's Official
Personnel Folder (OPF) for 2 calendar years from the date it was
received by the employee (for tax-related offenses, Letters of
Reprimand will be retained in the OPF for 5 calendar years). The letter
will be prepared by the EMU and issued by the employee's immediate
supervisor (or second-level supervisor, when deemed appropriate).
9. Other Actions.
a. High-level employees are ineligible for ``Alternative Discipline.''
b. An Executive who is reprimanded, suspended, or reduced in grade as
result of misconduct, is ineligible for the following:
a monetary performance-based award for the rating period in which
the disciplinary action or adverse action was administered
(e.g., performance bonus, Special Act Award, Presidential Rank
Award, etc.);
a performance-based salary adjustment, otherwise authorized under 5
CFR 534.404.
An Executive Officer who is reprimanded, suspended, or reduced in grade
as result of misconduct, is ineligible for the following:
a monetary performance-based award for the rating period in which
the disciplinary action or adverse action was administered
(e.g., performance bonus, Special Act Award, Quality Step
Increase, etc.);
* Note: Senior Managers (IR-01), Front Line Managers (IR-03), and GS-15
(NBU) employees are unaffected by Section 9.b.
10. Settlement Agreements. All formal and informal agreements to
resolve a complaint of misconduct (including EEO-related misconduct),
and all formal and informal appeals of a disciplinary or adverse
action, must be coordinated with the EMU before a settlement commitment
or terms of settlement can be communicated to the complainant,
grievant, or appellant.
11. Agency Grievance System. High-level employees may grieve a
disciplinary action via the Agency Grievance System (IRM 6.771.1). Such
grievances will be referred directly to an external grievance examiner
(i.e., private contractor). The grievance examiner's findings and
recommendation will be submitted directly to the management official
one level above the management official who issued the disciplinary
action decision.
______
attachment 2
STANDARDS FOR CONDUCT-BASED INQUIRIES
Independence:
When appropriate and feasible, it is preferred that the fact-finding
responsibility be assigned to an Executive outside the subject's chain-
of-command. The inquiry should be conducted with thoroughness and
impartiality.
Scope of Work:
Inquiries should provide an objective and thorough review of the
issue(s). Facts should be sufficiently developed to ensure that an
informed decision could subsequently be rendered. Guidance is available
from the EMU, Workforce Relations Division, Human Capital Office, if
desired.
Affirmative response to the following questions generally will ensure
that the fact-finding was thorough:
Were all the issues in the referral addressed?
Were all key individuals (e.g., complainant, subject, witnesses)
contacted? [With regard to interviews of IRS employees, the fact-finder
has a right to full cooperation from the interviewee. Refusal to
cooperate may result in disciplinary or adverse action. The fact-finder
also has the right to expect truthful answers from the interviewee. The
lack of candor, false statement, or misrepresentation may also result
in disciplinary or adverse action.]
Were all relevant questions asked?
Were all relevant policies, regulations, and procedures researched?
Were legal opinions and technical advice solicited, when appropriate?
[Requests for legal opinions unrelated to tax administration should be
referred to the EMU.]
Documentation Acquired in the Course of the Inquiry:
A copy of all documentation acquired in the course of the inquiry must
accompany the report of inquiry upon its release to the head of the
Business Unit.
______
attachment 3
REPORT OF INQUIRY
NAME, TITLE, GRADE OF SUBJECT:
TIGTA Case No. or ALERTS No.:
Inquiry conducted by:
Name of Management Official:
Position and Grade:
Organization:
Telephone Number:
Date of Report:
Scope of Inquiry:
State the issue(s); name of complainant, if identified; name all
individuals from whom information was obtained; identify the date on
which each individual was interviewed; attach a copy of all documents
acquired during the course of the administrative inquiry.
Summary:
State the facts as they relate to each issue. For each issue, provide
an analysis of the facts and conclusions drawn from the analysis.
Conclusions should state, with regard to each issue, whether the
allegation was substantiated, disproved, or unresolved.
A recommendation for disposition should NOT to be inserted in the
Report of Inquiry. Rather. it should be delivered orally to the
Business Unit Commissioner or Chief, if desired or requested, but only
if the fact-finder is in the subject's chain-of-command.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
Whenever I talk with Oregonians in meetings or town halls, the
conversation nearly always comes down to the same core issue--the
struggling middle class. Years after economists first said the
recession officially ended, too many middle-class Americans feel like
they're standing on quicksand because the recovery has yet to reach
them. So the challenge facing policymakers is putting America's middle
class on solid economic ground--growing their paychecks and ensuring
that our recovery reaches everybody across the country.
That challenge will be top of mind at each of the three hearings
the Finance Committee is holding this week. Tomorrow and Thursday, the
committee will talk with HHS Secretary Burwell and Treasury Secretary
Lew about the administration's plans to save Americans' money on health
care, create jobs, increase wages, and invest in the middle class.
Today, the committee has an opportunity to discuss the status of
America's accounting department--the Internal Revenue Service--with IRS
Commissioner John Koskinen.
With W-2 forms in the mail and tax season beginning, the nation's
annual headache is setting in. Taxpayers today live in two separate
worlds. In one world, a middle class office employee pays taxes
directly out of her wages and is subjected every spring to the
painstaking process of filing returns. There are no complicated tax
avoidance strategies at her disposal--no shelters or vehicles for her
to hide income. Meanwhile, in the other world, teams of accountants pry
open loopholes hidden in the tax code, and the line between right and
wrong is murky at best.
The inherent unfairness of our tax system is a blow that falls
hardest on the middle class. And it takes a number of forms. The most
obvious is that every year, families spend more time and money filing
their taxes. People are concerned about compiling all their records,
completing all the forms and filing correctly. Unfortunately, the tax
code itself hasn't gotten any simpler, and the lack of resources at the
IRS slows service to a crawl. Nina Olson, the independent IRS Taxpayer
Advocate, calls this the ``most serious problem'' facing taxpayers.
When people call into IRS help lines, they sit in long queues
listening to hold music. Protections against identity theft are
delayed, and taxpayers who worry they might be victims of scams can't
get the timely assistance they need. Families depending on their refund
to help cover the mortgage or tuition are left waiting.
There's a second issue to consider today. According to the IRS,
nearly $400 billion in taxes go unpaid every year. It's called the tax
gap. One of its biggest causes is the dishonesty of tax cheats and
scammers who avoid paying what they owe.
Who's getting short shrift as a result? The middle-class wage
earners whose taxes come straight out of their paychecks. Honest
taxpayers have to make up the difference when scofflaws dodge their
responsibilities, and that's not right. But until Congress simplifies
and restores fairness to our broken tax code, multinationals and people
with high-priced accountants will continue to find loopholes.
There's no question that the IRS could make better use of the
resources it has. That's true for every federal agency, every private
business, and even Congress itself. It has also been acknowledged by
Commissioner Koskinen and his predecessor.
Meanwhile, policymakers cannot lose sight of the biggest challenge
facing Congress today, which is putting the middle class on solid
economic ground. There will be many more opportunities ahead for this
committee to work on a bipartisan basis with Commissioner Koskinen and
the IRS to make the system work better for middle class families--
including through comprehensive tax reform.
The goal should be fairness. Taxpayers should no longer be divided
into separate worlds, one of which carries a much heavier burden than
the other. I look forward to working with Commissioner Koskinen and the
committee to making that our reality.
______
Communication
----------
Statement for the Record of the National Association of
College and University Business Officers
This statement is submitted for the record on behalf of the more
than 2,100 public and nonprofit colleges and universities belonging to
the National Association of College and University Business Officers.
NACUBO represents chief financial officers and their staff at member
institutions and our mission is to advance sound financial management
and business practices of higher education institutions in fulfillment
of their academic missions. Our members take their responsibilities for
filing IRS information returns seriously and strive to the best of
their abilities to comply with agency rules and regulations.
Today provides an opportunity, as the Senate Finance Committee
addresses the current state of operations and the budget of the
Internal Revenue Service, to address an issue that gets to the heart of
the current allocation of IRS resources. We write this statement in
order to draw attention to an example of government wheel-spinning that
for the past few years has burdened already squeezed college compliance
offices. IRS has unnecessarily created an endless annual cycle of
proposed fines, waiver requests, notices of delayed response, and
eventually confirmation of waivers. This is bureaucracy at its worst.
On behalf of colleges and universities across the country, NACUBO
requests that the Internal Revenue Service stop issuing penalty notices
to colleges and universities related to missing or inaccurate taxpayer
identification numbers (TINs) on 2012 Forms 1098-T and take steps to
rescind the notices that have been issued. Under existing rules,
institutions must solicit a TIN at least once a year from certain
enrolled students, but are not responsible if students fail to respond
or respond with incorrect information.
In August 2013 the IRS began asserting penalties against a large
number of colleges and universities for filing Forms 1098-T with
incorrect or missing TINs. These proposed penalties for the 2011 tax
year generated unnecessary confusion for both the IRS and the regulated
community.
Following an outcry, IRS decided to waive such penalties for the
2011 tax year. However, many schools still have yet to receive official
notice that their fines for 2011 have been waived, despite the fact
that the IRS announced the blanket waiver for 2011 one year ago.
Hundreds of campuses again received penalty notices addressing the
2012 tax year. Given that Forms 1098-T for 2012 were all filed long
before the proposed fine notices were issued for the 2011 tax year, and
also given that nothing has changed that should cause the IRS to come
to a different outcome for 2012, it is unclear why the IRS is committed
to repeating the cycle. We strongly believe that penalties should be
waived until a long-term solution has been identified.
background
Section 6050S of the Internal Revenue Code requires colleges and
universities to report to the IRS, and to students, certain information
on enrollment, tuition and related expenses, and scholarships related
to claims for education deductions or credits. Form 1098-T is used for
this purpose. It requires the college or university to identify the
student by name, address, and TIN. The regulations at 26 CFR 1.6050S-
1(e) allow for a waiver of penalties for filing Form 1098-T with a
missing or incorrect TIN if the failure is due to reasonable cause
(such as the student's failure to provide a correct TIN) and the
institution acted in a responsible manner. Under the IRS regulations,
an institution acts in a responsible manner if it solicits a TIN at
least once a year from anyone with a missing or incorrect TIN.
In the course of complying with the tuition reporting requirements,
it is inevitable that colleges and universities will submit Forms 1098-
T with incorrect TINs because they must rely on student input to obtain
TINs and have no way to verify TINs prior to filing. By statute,
colleges and universities are not permitted to use IRS-approved TIN
matching services to verify TINs reported on Form 1098-T. This is
because the IRS generally may not disclose a taxpayer's name, TIN, or
other return information under Section 6103. Although there is a
limited exception under Section 3406 that enables payers of reportable
payments subject to backup withholding to verify TINs with the IRS
prior to filing, tuition reporting does not qualify for this exception.
As a result, it would be a violation of taxpayer confidentiality under
Section 6103 for the IRS to permit colleges and universities to use TIN
matching for tuition reporting.
Further, some students do not have, or choose not to provide, a
TIN. With the popularity of dual enrollment programs increasing,
particularly at community colleges, high school students may comprise a
significant population of those with missing TINs. However, the rules
require institutions to file Forms 1098-T for these students regardless
of missing or inaccurate numbers. Foreign students may or may not have
a TIN. In this context, it is inappropriate to assert penalties on
colleges and universities for filing Forms 1098-T with incorrect TINs.
Notably, we appreciate the step IRS made to include guidance under
section 6050S of the Internal Revenue Code regarding information
reporting on tuition and related expenses on the 2014-2015 Priority
Guidance Plan.
recommendations
It is manifestly unfair to penalize colleges and universities for
erroneous information that is beyond their control and which they
cannot independently verify. The IRS should promptly issue another
blanket waiver for proposed fines associated with 2012 Forms 1098-T and
not repeat this mistake in future years. There are no material
differences between the 2011 and 2012 tax years that could justify
disparate treatment. Other possible solutions going forward include:
1. The IRS should issue new guidance to reinstate its past practice
of forbearance until a long-term solution has been identified.
Until 2013, the IRS's longstanding policy had been not to
assert penalties against colleges and universities for
incorrect TINs on Form 1098-T.
2. The IRS should revise the process used to file Forms 1098-T with
the IRS to allow the filing organization to affirmatively
certify that it has ``acted in a responsible manner'' and met
the standards for soliciting TINs from its students.
3. The IRS should revise its regulations at Sec. 1.6050S-1 to allow
higher education institutions to not file a 1098-T for students
who fail to provide a TIN. Institutions could be required to
notify such students that they will not receive a form unless
they provide a TIN by a certain date.
We are very willing to work with Congress and with the Service to
find a solution, eliminate the morass of red tape and identify both
short- and long-term alternatives to the current information-reporting
enforcement program.
[all]