[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
SCAM SPOTTING: CAN THE IRS EFFECTIVELY PROTECT SMALL BUSINESS
INFORMATION?
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HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
APRIL 6, 2017
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 115-015
Available via the GPO Website: www.fdsys.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
22-966 PDF WASHINGTON : 2017
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
TRENT KELLY, Mississippi
ROD BLUM, Iowa
JAMES COMER, Kentucky
JENNIFFER GONZALEZ-COLON, Puerto Rico
DON BACON, Nebraska
BRIAN FITZPATRICK, Pennsylvania
ROGER MARSHALL, Kansas
VACANT
NYDIA VELAZQUEZ, New York, Ranking Member
DWIGHT EVANS, Pennsylvania
STEPHANIE MURPHY, Florida
AL LAWSON, JR., Florida
YVETTE CLARK, New York
JUDY CHU, California
ALMA ADAMS, North Carolina
ADRIANO ESPAILLAT, New York
BRAD SCHNEIDER, Illinois
VACANT
Kevin Fitzpatrick, Staff Director
Jan Oliver, Deputy Staff Director and Chief Counsel
Adam Minehardt, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Steve Chabot................................................ 1
Hon. Nydia Velazquez............................................. 2
WITNESS
Hon. J. Russell George, Inspector General, Treasury Inspector
General for Tax Administration, Washington, DC................. 3
APPENDIX
Prepared Statement:
Hon. J. Russell George, Inspector General, Treasury Inspector
General for Tax Administration, Washington, DC............. 20
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
SCAM SPOTTING: CAN THE IRS EFFECTIVELY PROTECT SMALL BUSINESS
INFORMATION?
----------
THURSDAY, APRIL 6, 2017
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in Room
2360, Rayburn House Office Building, Hon. Steve Chabot
[chairman of the Committee] presiding.
Present: Representatives Chabot, Radewagen, Kelly,
Gonzalez-Colon, Bacon, Fitzpatrick, Marshall, Velazquez,
Murphy, Lawson, Clarke, Espaillat, and Schneider.
Chairman CHABOT. The Committee will come to order.
We have votes we think approximately 15 to 20 minutes from
now. So, and the ranking member will be here shortly. We both
spoke on the floor and we understand that she will be here in a
few minutes. So I am going to go ahead and give my opening
statement now.
I cleared it with my colleagues on the other side of the
aisle to make sure I took out all my attacks on Nydia in my
opening statement because she was not here to defend herself.
So, and I am just kidding, obviously, for those who may take
that seriously.
So good morning. We thank everyone for being here. A
special thanks to our witness, the Honorable J. Russell George,
who is taking time away from his busy schedule to be here with
us today.
As tax season heats up, so, too, does tax fraud season. In
testimony before this Committee last year, IRS Commissioner
John Koskinen reported that a cyber breach had exposed taxpayer
data from over 700,000 accounts. Commissioner Koskinen also
told us that IRS computer systems are under constant attack
from would-be hackers to the tune of 1 million attempted
cyberattacks per day. A million cyberattacks every single day.
Criminals are becoming ever more sophisticated and ruthless in
the ways that they can make attacks on identity theft and file
fraudulent returns with ill-gotten personal information.
At a minimum, the goal of the IRS must be to make this
crime harder, not easier, for identity thieves to commit.
Identity theft is growing at a truly alarming rate. According
to the most recent figures from the Bureau of Justice
Statistics, more than 17.6 million Americans, including 2.6
million seniors, fell victim to this terrible crime in 2014.
Seniors are attractive targets for identity thieves because
they are more likely to have life savings, own their own home,
and have good credit. All of us on this Committee have heard
heartbreaking stories from our constituents, especially
seniors, who have been victimized by this crime. Identity theft
does not just rob its victims of their money and their credit;
it robs them of their sense of security and peace of mind.
As we have heard in previous hearings, most recently our
series on small business cybersecurity, too often small
businesses are targeted for this type of cybercrime because
they often lack the resources to protect themselves. It has
become clear that the IRS, like all agencies trusted with the
American people's most sensitive personal information needs to
step up its game. While the IRS may have taken a few limited
steps in the right direction, there are countless additional
steps that must be taken to ensure taxpayer information is
adequately protected. To be clear, this is not an issue of
funding at the IRS; it is an issue of priorities at the IRS. If
the IRS can pay out big bonuses to its employees, some of whom
were implicated in the targeting of Americans for their
political views, it should be able to find the money to protect
people's data from identity thieves. If the IRS can pay for its
employees to travel to new training events and prioritize the
enforcement of Obamacare over basic customer service, then
there really is no excuse for failing to protect taxpayer
information from thieves.
Our witness today is charged with periodically evaluating
the IRS's efforts to safeguard taxpayers' personal information,
including those of small businesses. It is my hope that he will
shed light on the specific systems and procedures currently in
place at the IRS and make recommendations for improvement going
forward.
I look forward to hearing from our witness, Inspector
General George, this morning, and I will yield to the ranking
member when she gets here, which we understand will be very
soon.
The ranking member is recognized for 5 minutes.
Ms. VELAZQUEZ. Thank you, Chairman.
It is the first week of April and that means tax day is
right around the corner. Over the next few weeks, millions of
Americans will be trying to get their taxes filed on time. But
this time of year also brings out criminals who target
individual taxpayers, business owners, and tax preparers. In
recent years, thousands of people have lost millions of dollars
and their personal information to tax scams and fake IRS
communication. The Association of certified 5 Fraud Examiners
found that a typical organization loses an average of 5 percent
of revenues each year due to fraud, translating to $3.7
trillion total. And although we typically hear of scams
targeting individual taxpayers via phishing emails and phone
calls, small businesses are actually more vulnerable. Whether
it is a lack of awareness of cybercriminals, small firms and
their tax preparers are increasingly becoming the focus of
identity theft. Small business owners are already hampered by
complying costs and the worry about data security adds an
additional layer to that complexity.
Identity theft and the refunds claimed from it has become
an increasing problem the IRS is battling to address. In fact,
the agency said it rejected 1.8 million fraudulent returns
filed in 2014 worth $22.5 billion in refunds. Unfortunately,
the IRS also paid out approximately $3.1 billion in fraudulent
returns.
Not only must the IRS protect itself from fraud; they are
also tasked with alerting taxpayers to popular tax scams. Every
year the IRS releases its ``daily dozen,'' a list of scams from
phishing, phone scams, preparer fraud, and employer
noncompliance schemes. In addition to publications, the IRS
took steps to bring all stakeholders to the table for their
Security Summit Initiative, a public-private partnership to
amplify security risks and design new and innovative
safeguards. The summit has led to a more active role by
taxpayers to protecting their personal financial information.
While this is a step in the right direction, more must be
done to address the needs of small business taxpayers and their
battle against criminals.
Today's hearing will give us the chance to hear from the
Treasury Inspector General for Tax Administration about how the
IRS is educating, mitigating, and preventing scams for a small
business customer. I hope we can take a lesson from the
audience performed by TIGTA and develop multi-tiered approaches
to combat identity theft and other scams harming our nation's
small businesses.
With that, I welcome the gentleman for taking time to share
his insights and help us seek solutions to this issue. Thank
you.
Mr. Chairman, I yield back.
Chairman CHABOT. Thank you very much. The gentlelady yields
back.
It is a close call, but I am inclined since we have got a
fair number of members here to let you testify now. If members
have to leave to vote, you know, the first vote is open longer.
So, and I am going to forgo the explanation of your
distinguished background. The gentleman before us today, of
course, is Inspector General for Tax Administration, and you
are recognized for 5 minutes, sir.
STATEMENT OF THE HONORABLE J. RUSSELL GEORGE, INSPECTOR
GENERAL, TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
Mr. GEORGE. Thank you, Chairman Chabot, Ranking Member
Velazquez, members of the Committee. Thank you for the
opportunity to testify on scams and their impact on individuals
and the business taxpayers.
Can the IRS protect taxpayer information? That is the
primary premise of this hearing. Our ongoing work shows that
the IRS is making progress. However, tax scams are constantly
evolving, which will require the IRS to continually adapt its
detection and prevention processes.
Since May 2012, my office has issued a number of reports
that address the IRS's efforts to detect and prevent the filing
of fraudulent individual and business tax returns by identity
thieves, as well as the IRS's efforts to assist victims.
Identity theft refund fraud occurs when an individual uses
another person's or our businesses name and taxpayer
identification number to file a fraudulent tax return for the
purpose of receiving a tax refund. For example, identity
thieves file fraudulent business tax returns using the employee
identification numbers of active or inactive businesses. Most
recently, we reported in February 2017, that IRS efforts are
resulting in improved detection of identity theft of individual
tax returns before fraudulent tax refunds are released.
Beginning with the 2017 filing season, the IRS now has more
timely access to third-party income and withholding information
to compare against tax returns while processing these returns.
Previously, the IRS did not have this information early enough
in the filing season which had prevented it from making
substantial improvements in its fraud detection efforts. Access
to this information at the beginning of the filing season is
the single most important tool to detect and prevent tax fraud
related identity theft.
As I stated earlier, the IRS recognizes that new identity
theft patterns are constantly evolving. As such, the IRS needs
to continually adapt its fraud prevention processes. In
September 2015, we reported that the IRS recognized a growing
threat of business-related identity theft, and in response was
implementing the processes to detect identity theft on business
returns. However, TIGTA found that the IRS is not using data
that it has readily available to proactively identify business
identity theft. In response to TIGTA's recommendations, the IRS
is expanding its detection filters to identify business
identity theft. For the 2017 filing season, the IRS is using 25
filters to identify potentially fraudulent business tax returns
and prevent the issue of fraudulent tax refunds.
Individuals can also be victims of employment-related
identity theft which occurs when a taxpayer's stolen identity
is used to gain employment. This can cause a significant burden
due to the incorrect computation of taxes and Social Security
benefits based on income that does not belong to the taxpayer.
In August 2016, we reported that during the period February
2011 to December 2015, the IRS identified almost 1.1 million
taxpayers who were victims of employment-related identity
theft, but were not notified. In January 2017, the IRS began
notifying victims. In addition, our ongoing audit found that
the IRS's processes are not sufficient to identify all
employment-related identity theft victims.
Finally, TIGTA has reported that the IRS is not effectively
providing assistance to taxpayers who report that they have
been victims of identity theft, resulting in an increased
burden for those victims. In July 2015, the IRS created a
centralized unit to combine the skills of employees working
identity theft cases and multiple functions into one
directorate. This has resulted in improvements in case closure
timeframes and a reduction in case closing errors. To help
protect identity theft victims and improve authentication, the
IRS began using unique identification numbers for victims in
fiscal year 2011. This number helps the IRS verify a victim's
identity when their tax return is filed so that the processing
of the return and the refund is not delayed. However, TIGTA has
identified that victims of identity theft tax accounts were not
always consistently updated to ensure that these identification
numbers were generated as required.
Identity theft imposes significant financial and emotional
hardship on individuals and businesses.
Chairman CHABOT. Excuse me, General, I am going to ask if
you would suspend at this time. I think what we should do is go
over and vote and then we will let you continue when we come
back.
Mr. GEORGE. Mr. Chairman, that is fine. I am effectively
done, so.
Chairman CHABOT. Okay. We will be back. We have two votes.
Since this vote is almost through we should be back, I am
guessing, in 20 minutes or so, 25 minutes at the most, I think.
Mr. GEORGE. Very good, sir.
Chairman CHABOT. So we are in recess until we come back
after votes.
[Recess]
Chairman CHABOT. I note for the record that the ranking
member did beat me back here today.
We will go ahead and continue. And General, if you had any
concluding remarks there, or you could take up where you left
off if you would like?
Mr. GEORGE. I have one additional paragraph, Mr. Chairman.
Chairman CHABOT. Okay.
Mr. GEORGE. And so suffice it to say, identify theft often
imposes significant financial and emotional hardships on
individuals and businesses. We at TIGTA remain concerned about
these attempts to defraud taxpayers through identity theft and
other scams. We will continue to review the IRS's efforts to
prevent tax-related identity theft and investigate any
instances of attempts to corrupt or otherwise interfere with
the Nation's system of tax administration. Thank you.
Chairman CHABOT. Thank you very much. And now members will
have 5 minutes. I am not sure how many members we will have
actually come back because once votes are over for the week we
tend to scurry to all parts of this great Nation.
Ms. VELAZQUEZ. And a storm.
Chairman CHABOT. Yeah, and there is a storm going on.
Mr. GEORGE. That is true, too.
Chairman CHABOT. So, you know, planes, and I think people
are heading for the airport, including myself and the ranking
member probably in the near future.
So I will recognize myself for 5 minutes.
First of all, you mentioned the State Suspicious Filer
Exchange Initiative in both your September 2015 and February
2017 reports. How many States are now participating? And has
this program been expanded to business filers as you
recommended back in 2015?
Mr. GEORGE. As of January 1st, 43 States now participate in
the program. IRS now includes business tax filings in the
information shared with State tax agencies. Again, of the 43
States that participate, 33 have elected to receive confirmed
business identity theft/fraud information from the Internal
Revenue Service.
Chairman CHABOT. Thank you. In your testimony, you noted
that the Consolidated Appropriations Act of 2014 requires the
IRS to issue a notice to an employer requesting an address
change to make employers aware in case the request was
unauthorized. What process did the IRS use prior to that time
to confirm that an address change request was authorized, if
any?
Mr. GEORGE. Sir, it was surreal. First of all, we are not
aware of any prior processes, formal processes that the IRS
used prior, or at least proactively to confirm address changes,
but the perverse part of all of this, sir, was that in many
respects, the IRS was communicating with people who were, in
effect, identity thieves. So if someone used a legitimate
taxpayer's address or name and taxpayer identification number
and then used an address for themselves, in effect, a fake
address, the IRS could communicate with the fraudster, the
criminal. And the legitimate taxpayer was left in the dark.
Chairman CHABOT. Thank you very much.
With regard to the telephone impersonation scam, you
mentioned the advise-and-disrupt strategy that you are using to
flood reported telephone numbers with automated calls. However,
you also noted that these scammers often generate a fake number
for the caller ID. How effective is this program if most of the
phone numbers the intended victims see are not the numbers from
which the calls originate? And has this strategy ever resulted
in calling some innocent person's phone line over and over
again?
Mr. GEORGE. Yeah, this has been one of the biggest
challenges to the IRS in this modern age, sir. A lot of the
crooks are using VoiceOver internet protocols which allow them
to fake ID caller ID information on people's telephone numbers.
We have been effective in a number of ways in terms of
addressing this.
One, we have put out the word, and that is something that I
wanted to ask all members of this Committee and every member of
Congress if they could help us in terms of your communications
with your constituents, please put out the word about this.
Knowledge is the most powerful, I think, tool that anyone can
have in terms of addressing this overall issue so that people--
my late mother used to, because this first occurred while she
was still alive, she would say to me, ``Russell, I got this
call. I hung up on them.'' And she was so proud of that. I
mean, she was emphatic about, ``I hung up on them.'' And I
said, ``Mom, that is the right thing to do.''
But what we have done, two things. We have established on
the web a listing of telephone numbers that we are aware of
where many of these calls are emanating from so that a taxpayer
or someone who suspects that they were approached by criminals
can input the telephone number and see that, yes, we have
identified this as a false number. Two, we have called back a
lot of these numbers and in effect said to the people who
answered, ``Hey, we are aware of what you are doing. Cease and
desist.'' And three, we have also attempted to work with some
of the telecommunications companies to help put these numbers
out of service.
Chairman CHABOT. Thank you very much. My time is almost
expired so rather than go into it and go over, I am going to go
ahead at this time and recognize the ranking member for 5
minutes to ask questions.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
Many small business taxpayers are not aware of identity
theft until it is too late. What would you suggest is the best
way for the IRS to reach out to businesses to educate them on
identity theft and how to protect themselves?
Mr. GEORGE. Great question, Ranking Member Velazquez.
One, the IRS has taken efforts. They recently convened a
group of private sector organizations to help, one, inform them
of the problem, and two, to enlist their assistance in both
becoming aware of the problem further, but to help educate once
again those who are potentially the victims.
Ms. VELAZQUEZ. Okay. So do you believe that the Small
Business Administration has a role to play assisting the IRS?
And are you aware if such collaboration exists?
Mr. GEORGE. You know, that is outside of my area of
expertise, but yes, my thinking is and my recommendation is
that the Small Business Administration should play an active
role in this.
Ms. VELAZQUEZ. In fiscal year 2016, Congress appropriated
an additional $290 million to the IRS for key areas that
directly support taxpayers, including increasing telephone
Level of Service, cybersecurity activities, and identity theft
prevention and refund fraud mitigation activities. Do you
believe this additional increase was sufficient for the IRS to
carry out its duty to protect small businesses?
Mr. GEORGE. It was of assistance, yes. Now, the vast
majority of that additional funding was used to increase the
level of service that the Internal Revenue Service provides to
taxpayers by way of its toll-free telephone number, which is
extraordinarily important, especially during the tax filing
season. But at the same time, if given additional resources,
the IRS is able to do additional work.
Ms. VELAZQUEZ. Thank you. We often hear about tax scams
during this time of the year, but what we do not realize is
that small businesses are considered good targets by the scam
artists. In order to be adequately prepared, what is the best
practice for a small business owner when they encounter such a
scheme?
Mr. GEORGE. To, one, again, knowledge is power. You have
heard that in various areas of your lives, but it is so true in
this regard. Two, I mean, use common sense. I mean, just as you
as an individual hopefully check your bank statements,
businesses need to do so, also. Three, you cannot rely on the
CFO necessarily alone, especially if you outsource. You have to
be actively engaged here. And four, in all candor, I mean,
there is too much reliance on assuming that electronic systems
of accounting for your work will watch out for you and be in
your best interest. You know, you have to be proactive. You
have to ensure that you take the steps necessary to ensure that
you safeguard your business and your employees.
Ms. VELAZQUEZ. Okay, thank you. In your written testimony
you indicate that the IRS uses 197 identity filters for
individual returns and 25 filters for business tax returns, and
these are used to identify potential fraudulent tax returns. I
know business tax returns are different, but do you think 25
filters is enough for a business tax return?
Mr. GEORGE. You know, I hesitate, Ms. Velazquez, to
elaborate too much on the number of filters and how the IRS is
going about doing this only because I do not want to give a
roadmap to the perpetrators of this.
Ms. VELAZQUEZ. Sure. Okay.
Mr. GEORGE. The bottom line is the IRS, and I give them a
lot of credit, they are being proactive in this regard to help
produce processes to identify this area. In addition, it is
important that we note, and I am not just wanting to give
credit to my auditors and my investigators, you know, the IRS
really did not have a great grasp of the magnitude of the
problem. First of all, we brought it to their attention, and
they did work on their own, also, I am not taking anything away
from them, of the individual tax fraud problems. And then we
followed up with the business tax-related problems, fraud-
related problems. So they really did not have their arms around
this. We have outstanding work that we are doing that we hope
to complete in the not too distant future which will assist
them further in this regard.
Ms. VELAZQUEZ. Thank you.
Chairman CHABOT. Thank you.
Ms. VELAZQUEZ. I yield back.
Chairman CHABOT. Thank you. The gentlelady yields back. Her
time is expired.
And the gentleman from Kansas is recognized for 5 minutes.
Mr. MARSHALL. Mr. Chairman, can you get back to me in 30
seconds, after the next person?
Chairman CHABOT. I would be happy to do that. We are going
to go into a second round at this point, so I will go to myself
if that is okay and give you a little time there.
General, the report you released earlier this week
contained some very disturbing findings, particularly for small
businesses. You mentioned that in October 2014, IRS Criminal
Investigations, CI, instituted a policy that it would no longer
pursue seizure and forfeiture of funds from legal sources that
merely appeared to have been structured. However, you found
that most of the seizures for structuring involved legally
obtained funds while the intent of the statute is to pursue
illegal activity. This is really important for small businesses
because, based on their size, they are likely to make bank
deposits in frequent intervals of less than $10,000. If CI is
not following its own policy in this regard, what do you
recommend to ensure that innocent small business owners are not
unfairly targeted?
Mr. GEORGE. Thank you for that question, Mr. Chairman. This
is the first time I have had a chance to speak publicly about
this extraordinarily troubling situation. We discovered over 91
percent of the seizures were of a legal source of income. And
again, just for the benefit of those who may not be familiar
with the overall issue, there is a Federal statute that
requires financial institutions to report transactions in
excess of $10,000 to the appropriate government agency.
And what the Internal Revenue Service was doing in the
meanwhile is a lot of bad people would structure, meaning
transfer $7,000 and then $3,000, which if they had done the
$10,000 transfer would have spurred the reporting requirement.
But by breaking it up, otherwise saying structuring, they were
able to avoid that. And so the IRS Criminal Investigation
Division had a system established so that they spotted these
unusual tactics.
Now, in an ideal world, perfect if it were to work that way
because, in all candor, a lot of people who engage in illegal
behavior do try to avoid the reporting requirement by doing
that. But again, our report showed that of the vast majority of
the people who were being caught up by the IRS's Criminal
Investigations Division processes were not engaged in criminal
behavior, and the most troubling aspect of this is they were
having a very difficult time either getting their money back
because the IRS was allowed to seize that money, to forfeit it.
So then the burden of proof was shifted to the innocent
taxpayer, and in many instances that money was never returned
to the innocent taxpayer. So the IRS has now stopped that
practice. We hope through this report, and again, the actions
of members of Congress, people will, one, seek to get their
money back and, two, that the IRS never again engages in this
type of behavior. This is very troubling, sir.
Chairman CHABOT. Thank you very much. I am glad you had the
opportunity to clear that up because it is really unfair to a
lot of small businesses that have been caught up in that.
In the short time I have remaining, let me ask you this. I
had an opportunity during votes to talk with my Democratic
colleague from Illinois, Brad Schneider, and he had a
suggestion which I would like to raise at this point if I can.
He said he is all the time getting notices that somebody has
logged in under your name at such and such, and it is him, and
I have had this happen to me. I am sure a lot of the folks in
this room have as well. So in this area about somebody else
filing a tax return and it is not you, and by the time you file
yours you find out somebody else already fraudulently did that
and got a return and then maybe you can get it cleared up. You
ultimately get your money, but it is going to be slower and it
is a hassle to go through this. Why not when a taxpayer files
his or her return, why not have the IRS immediately send back a
notice to them saying, hey, thanks, we just got your return?
Because then you know that it happened. What about that?
Mr. GEORGE. Well, in theory that does occur, especially if
you use some of those tax preparation software where literally
they say to you the moment you file your return, check back
within 24 hours to confirm that the IRS received your return
and that everything is fine. So what was extraordinarily
troubling, Mr. Chairman, is when the IRS would say, you know,
our advice to you is to file early so that you beat the bad guy
before he or she files a return in your name. So, but in terms
of paper returns that was not the case in terms of paper
returns. That, what you are suggesting, was not happening, and
I do not believe it is happening.
Chairman CHABOT. I thought Mr. Schneider had a great idea
so I am going to ask probably staff on both sides to maybe look
into this and see if there is not some way we can put this into
effect, maybe save a lot of people a lot of heartache.
My time is expired, so we will now recognize the gentlelady
from Florida, Ms. Murphy, who is the Subcommittee ranking
member on Contracting and Workforce, for 5 minutes.
Ms. MURPHY. Great. Thank you so much for being here and for
your testimony.
Mr. GEORGE. Good morning.
Ms. MURPHY. Efiling has become more prevalent, but so has
identity theft and refund fraud which we talked a little bit
about here. TIGTA has been actively involved in working with
the IRS to find solutions to combat this fraud. In your
opinion, is the IRS doing enough with the stakeholder community
to prevent that identity theft?
Mr. GEORGE. They are doing, candidly, as much as they can
given the resources that they have. Over the last few years, as
you may be aware, the IRS's budget has been cut dramatically
and their responsibilities have been increased dramatically
given the ACA and the role that they have to play with that.
Could they do more? Yes, but it is almost--I am trying to think
of a right metaphor here, but the bottom line is if they do
more in this area, they have to do less in this area.
Ms. MURPHY. So you are saying that they do not really
prioritize protection against identity theft against the other
responsibilities that they have?
Mr. GEORGE. Well, during the filing season their goal is,
to the extent that they can, is to ensure that taxpayers who
either reach them by phone, which again is an issue because of
reduced resources, or who go to Taxpayer Assistance Centers, or
have the ability to get questions answered. And yet, until
they--and again, during my opening statement I made reference
to a new directorate that the IRS created which is dedicated to
helping victims of tax-fraud related identity.
Prior to that they used to have those same individuals who
would normally handle those types of cases, one, answer the
telephone for people who had basic tax questions and, two,
those types of cases were assigned to random IRS officials.
There was no dedicated person for the taxpayer to reach out to
as you may find in the private sector where if you have a
problem with a credit card, it is Ms. Jones or Mr. Jones whose
extension is given to you and that is the person you would
reach out to. So that is changing for the better, but again,
the bottom line is more resources would help the IRS in this
area.
And as I pointed out earlier, the tax cheaters, they are a
very, you know, flexible sort. They change their means. They
are located across the globe. This is truly a challenge for not
only the IRS, but in this obvious instance we are referring to
them.
Ms. MURPHY. And then to just dig into the part that you
talked a little bit about, trying to streamline a bit of the
processing of the fraudulent cases, you know, for small
businesses it is really critical for them to have timely
processing of their refunds, and they operate on such slim
margins. What else do you think TIGTA can do to ensure that
small firms are not hindered by the fraud prevention efforts?
Mr. GEORGE. Information. Getting the word out. Again, I
mentioned that earlier. It is so important, and this is a group
effort. At TIGTA, we have done it through television interviews
and media releases. I do not know if you have this at your
local pharmacy, but I saw at my pharmacy where the inspector
general of the Department of Health and Human Services says--
there was a sticker from him that said if you encounter fraud,
if something suspicious is occurring, you know, call us. We
have done the same at TIGTA now, and it is effective in that we
get the word out. If you suspect someone is cheating you
because of a telephone impersonation scam or any other type of
criminal wrongdoing, call us at our 800 number, email us, and
that is how we get a lot of the leads that we pursue.
Ms. MURPHY. Great. Thank you very much. And I will yield
back the remainder of my time.
Chairman CHABOT. Thank you. The gentlelady yields back.
The gentleman from Kansas, Dr. Marshall, is recognized for
5 minutes.
Mr. MARSHALL. Thank you, Mr. Chairman.
I guess my first question has to do with cybersecurity in
the sense of, in this case, identity theft. I think it is
probably the same bucket of problems. I go to the Science and
Space Technology Committee meeting and we talk about healthcare
records being attacked, and I am sure if I was on a military
committee we would be talking about it. What type of
communications are we doing between the different agencies to
work with each other? Is there one particular group of people
that is really, really studying this problem hard and fast and
trying to disseminate that information to let you do your job
better, I guess?
Mr. GEORGE. You know, that is a very good question, Dr.
Marshall. The problem that the IRS encounters is the Tax Code.
Title 26, Section 6103 of the United States Code places severe
restrictions on the type of information that the IRS can share
with anyone, and these include criminal penalties. So
literally, I cannot tell you about a particular constituent's
tax information without--my lawyer is here--without risking
prosecution. So being specific regarding that in terms of an
individual's case, I mean, a taxpayer can sign a waiver to
allow you as the congressman or representative or someone, a
lawyer or an accountant, to represent them on their behalf. At
last, there are efforts, government-wide, obviously, to look at
cybersecurity threats. And in a couple of instances, again, as
it related to the Affordable Care Act, where we and HHS-OIG
were able to work together because of the overlapping role that
we both played in that area.
Mr. MARSHALL. Yeah, and it seems like the privacy issues
are backfiring. People give oversight to commodities. When one
commodity system gets hacked, they are not allowed to share
with their brethren that there has been a hack and prevent the
next person. I do not have a solution, but at least I am trying
to recognize the problem.
I think I am going to change the direction a little bit.
If, indeed, we could get the majority of taxpayers to be able
to file their income tax on a postcard, how would that help
free up your life or make your life better or worse?
Mr. GEORGE. Candidly, I think you would have some of these
scammers produce postcards or addresses and say send that
information or that remittance or what have you to this address
versus the official. It would help the taxpayer in terms of
complying. That has been my position ever since holding this
job, sir. Make the ability to comply with the tax burden as
simple as possible and most likely you are going to get an
increase in tax compliance and revenue owed to the U.S.
Now, technically, that is a tax policy question, and ever
since the Reagan administration, sir, the Secretary of the
Treasury has indicated that it is the assistant to the
secretary for Tax Policy who speaks on it. But given the way
you phrase it, I feel comfortable with the answer that I gave.
Mr. MARSHALL. Are you given a chance to make suggestions
how to make it simpler?
Mr. GEORGE. That is tax policy, so. The short answer,
though, is yes, if we say--and this was the case with the
First-Time Homebuyers credit that you may recall from the
Reinvestment Act, the forms were such that people were able to
bypass some legal requirements that they would otherwise be
required to comply with. So when we identified the problems
with the forms--and these were basic issues like how much money
is a property worth, something along those lines, which
ultimately affects how much money they would have to pay back
every year--we were able to make the suggestion which the IRS
did adopt, which made it more efficient.
Mr. MARSHALL. Okay. I will try to slip in one last question
here. My constituents talk about wanting a kinder, gentler IRS,
and I think of the fire marshal who comes by and he gives us a
list of things to fix and if we get it fixed within 30 days we
are okay. Do you feel like in the past several years you are
kind of going in that direction? Is there more room to grow, or
what are you doing from that standpoint?
Mr. GEORGE. Yes, I think there is. And again, and I did not
bring, I normally keep it in my pocket, but third-party
information. If a taxpayer knows that the money that he or she
is being taxed on is reported by a third party, the compliance
rate, meaning the amount of money in taxes that they pay, is in
the upper 90 percent. And I am just going to cut to the other
end. The same statistics, and they are somewhat dated, but the
bottom line is people who engaged in all-cash transactions, the
tax compliance rate was near 20 percent, you know, 20, 30
percent. So having third-party information, and thanks to
Congress recently passing a law that requires the IRS to
receive information prior to processing tax returns, that is
extraordinarily helpful in terms of compliance.
Chairman CHABOT. The gentleman's time is expired.
Mr. MARSHALL. Thank you. I yield.
Chairman CHABOT. Thank you.
The gentleman from Florida, Mr. Lawson, who is the ranking
member of the Subcommittee on Health and Technology, is
recognized for 5 minutes.
Mr. LAWSON. Thank you very much, Mr. Chairman. And welcome
to the Committee.
Mr. GEORGE. Good morning, sir.
Mr. LAWSON. For several years the IRS has been criticized
for lack of efficiency. Can you speak to the budget issue that
would probably make the IRS operate more efficient? I do not
know whether you can speak to that issue or not, but early on I
just heard you say cuts in the budget caused some restraints on
what you could do.
Mr. GEORGE. You are correct on both accounts, sir. I am not
in a position, because the President's budget has not been
formally released, to address the impact of whatever the
current administration is going to ultimately propose for the
IRS formally. But the bottom line is with additional resources,
the IRS could do more, there is no question. And again, many of
the reports that my office has issued during my tenure did in
the past show a waste on the part of the IRS with conferences
and with videos and the like, and bonuses to people, which were
not a good use of the taxpayers money.
But at the same time, for the most part, the IRS is really
down. They used to be at least 100,000, an equivalent, you
know, the FTE number of employees that they had, and they are
now in the 80,000 range. Now, they have been able to automate a
lot of things, and they have collected a record amount of tax
revenue over the last few years, but in terms of the amount of
customer service, in terms of the amount of time someone has to
wait to speak to an IRS employee over the telephone, those
numbers have also increased in a way that I think is
unacceptable. But otherwise, I am going to have to stop there
in terms of the impact of the current budget because we do not
have the formal number.
Mr. LAWSON. Okay. I understand.
I hear commercials on the radio all the time, if your debt
exceeds $10,000, give us a call and we will get the IRS, put
them in place, and reduce this down. And people pay money to do
that. How does that work? I mean, do they have a special inside
track with the IRS than the average person that are running
these commercials?
Mr. GEORGE. You know, sir, you really touched on something
that is important, but, you know, I have got to be careful here
because it also touches on tax policy, but also with Dr.
Marshall, if you make it as easy as possible for people to
comply with their tax obligations, they are going to do so. And
there is an interesting statistic, but I want to get right to
your point. That commercial is advertising a service that an
individual could do by him or herself. So you can reach out. It
is Offer in Compromise. You could call the IRS and do it
yourself. However, as like a lawyer, sometimes it is better to
have an expert who has experience to do it for you, whether it
is for time reasons or just out of convenience.
So yes, I have seen that. I do not know how much they
charge. I have not had a need to take advantage of that,
fortunately, but the bottom line is, again, it is a matter of
convenience. And there are some people who are in dire straits,
but there is no question the IRS is willing to work with
taxpayers. And so it is not criminal. It is not criminal for
these businesses to engage in this, but, again, too many
taxpayers do not realize they do not need to do that. They can
do it themselves.
Mr. LAWSON. Another quick question I am going to try to get
in. When people have gone delinquent for maybe 3 years and the
interest rates that you all charge, do you all work with them
on reducing the interest rate so that you all can get the
amount of money that you need from the tax return?
Mr. GEORGE. No, that is the IRS. Just to make sure we are
clear. The inspector general, we are separate. We are not part
of the IRS. We are part of the Department of the Treasury
overseeing the IRS.
Mr. LAWSON. Okay.
Mr. GEORGE. And so I am not very familiar with the amount
of interest that they charge, but I do know, in all candor, the
IRS is flexible as it relates to any past due debt. They would
rather that people who owe money pay money than someone not pay
it. And you are right, many times the interest can exceed the
initial amount owed.
Chairman CHABOT. The gentleman's time----
Mr. LAWSON. I yield back, Mr. Chairman.
Chairman CHABOT. Thank you. The gentleman's time is
expired. And I would compliment the gentleman on an excellent
question on the $10,000. I have heard those ads many times. I
sort of wondered the same thing. Fortunately, as the general, I
have not been in that position so I have not needed those
services, but I thought about that. And I would assume that the
$10,000 they are saying is because the company, they say if
your debt is more than $10,000, because they do not want to
mess around with folks that are below that so they are trying
to make more money by hitting folks that have bigger debts.
Would that be--there is no magic in $10,000?
Mr. GEORGE. There is no magic in $10,000, and again, I am
guessing here, but I am almost certain that it depends on the
amount of money that you owe and the amount of money that you
ultimately pay will figure into their fee.
Chairman CHABOT. The IRS does negotiate with people on
occasion if they think they are in tough financial straits and
are not going to be able to pay and they are trying to work
with them. Is that correct?
Mr. GEORGE. That is my understanding.
Chairman CHABOT. So if you ever want to use services,
perhaps they do so much of it they sort of know how to, for
lack of a better term, work the system, and maybe that benefits
the person, and then again, maybe it does not.
Mr. GEORGE. That is my understanding, sir.
Chairman CHABOT. Okay, thank you. Excellent question.
Chairman CHABOT. The gentlelady from American Samoa, Mrs.
Radewagen, who is the chairman of the Subcommittee on Health
and Technology, is recognized for 5 minutes.
Mrs. RADEWAGEN. Thank you, Chairman Chabot, and Ranking
Member Velazquez. Inspector General George, welcome. Thank you
for testifying today.
American Samoa, like the other States, files taxes with the
IRS. What resources do you believe that the U.S. Department of
Treasury and the IRS can provide to U.S. territorial
governments to protect the identities and information of their
residents?
Mr. GEORGE. That crosses, you know, not only the
territories, but every State and the District of Columbia. It
has to make sure that the American people have the confidence
that the information that they provide to the IRS is
safeguarded. If people lose confidence that the information
they provide is not going to be cared for, it could undermine
the overall system of our Nation's tax administration system
and that could be problematic.
This is not a direct response to your question, but this is
something that I was averring to earlier when I was responding
to an earlier question. A study done by the IRS Tax Oversight
Board showed that most people would say, literally, again,
almost approaching 100 percent, that they should pay the taxes
that they owe when the question was posed to them. But when the
question was varied slightly and they said, well, your neighbor
down the block only pays 50 percent of what she owes, then they
say, well--then what should your requirement be? And the number
grows from near 100 percent closer to 50 or 60 percent. So when
people know that everyone is paying what they owe and that the
IRS is doing what it needs to do, they have confidence. They
will comply. Again, it also goes to a simplicity of complying.
Mrs. RADEWAGEN. Thank you. Mr. Chairman, I yield back the
balance of my time.
Chairman CHABOT. Thank you very much. The gentlelady yields
back.
The gentleman from Nebraska, Mr. Bacon, is recognized for 5
minutes.
Mr. BACON. I want to thank the inspector general for being
here. As a 30-year Air Force veteran, I know the importance of
the inspector general. And I would like to also say I have been
a victim of credit card and fake identity, or a combination
thereof, three different times. One time while deployed to the
Middle East, a guy took my identity. He was living in a five-
star hotel. My wife caught him and had to fight really hard to
get him arrested and held accountable.
But I think Americans are tired of this because so many of
us have been victims. I would like to ask you, how does the IRS
work with law enforcement when they finally catch someone
scamming?
Mr. GEORGE. Great question. Again, there are hoops that
have to be jumped through. Again, I made mention of Title 26 of
the United States Code, it is Section 6103, places severe
restrictions on the type of information that the IRS can
proactively share.
Mr. BACON. With law enforcement?
Mr. GEORGE. Even to law enforcement. But the individual can
give the IRS license to release information, and that is
normally how it is pursued. That is my understanding at least.
Mr. BACON. Can we pass a bill of some type or legislate,
making it easier to hold these people accountable?
Mr. GEORGE. You know, I do not think it is a question of
legislation in this instance, Congressman. I really do not.
One, you do have to have a victim who is willing to cooperate
with law enforcement, as most victims are unless they are
engaged in somewhat----
Mr. BACON. Or you have some who have been dead for a while
and they are using a deceased person. So it is hard to get
their permission.
Mr. GEORGE. Well, again, you know, obviously, I would argue
an estate, you know----
Mr. BACON. Right.
Mr. GEORGE.--or someone would on their behalf. So, but
there is no question it is knowledge, sir.
Mr. BACON. Right.
Mr. GEORGE. And that is part of the problem. A lot of
people, especially seniors, obviously deceased individuals, may
not have an estate which is large enough to have an executor or
someone or administrator or someone who is being proactive in
that regard.
Mr. BACON. Right.
Mr. GEORGE. So this is an area, sir, where can you
eliminate all types of crime?
Mr. BACON. No, but I would like to put a lot more of them
in jail.
Mr. GEORGE. I am with you 100 percent, sir.
Mr. BACON. So I would love to work with--or us with you and
as a team to figure out how do we put our brains together
because I think this is way too rampant. People are getting off
scot-free, and I think if we put an effort on this--I believe
in deterrence. Throw more people in jail, maybe less people
will do it.
Maybe a parallel question. How do you tackle this when it
is an overseas scam, say from Nigeria or wherever it may be?
Mr. GEORGE. Another great question. I am extraordinarily
proud to give my colleagues, especially on the investigative
side of my house at TIGTA, a pat on the back. We recently,
working with the Department of Justice and a few others,
announced the indictment of a number of firms in India, and
these were firms--the irony is a lot of those call firms that
are legitimate, if you call Xerox--not Xerox, but you know, one
of these telephone or computer companies and you are
transferred, you do not where they are; many of them are
located in India. These small call centers where in the morning
or night, depending on the time of day, you had a segment who
were answering legitimate questions from consumers, and then we
found that there was a small division over there who were
engaged in these telephone scam things. I am calling from the
IRS. You owe $10,000. You need to pay immediately. You need to
use an iTunes card. You need to stay on the phone and do this
while I am talking to you. And you would be surprised, sir, how
many people fall prey to that, especially senior citizens and
the like. So, by working with the Indian Government, as well
as, obviously, Interpol and other law enforcement agencies, we
were able to obtain indictments. And unfortunately, those
indictments were here in the U.S., so while there were a number
of people who were domestic who we were able to arrest, more
were overseas, and unless they come into the United States--it
is not just India, too, just to be clear. There are many other
countries.
Mr. BACON. I really think your favorable status as an IRS
would go way up if you start showing some convictions on people
scamming and doing fake IDs and taking advantage of the
taxpayers.
A related question or something that you were talking about
and you may not be able to speak to it here, I realize when you
have your funding cut it is very hard to do everything that you
want to do and that is just a fact of life. And part of that
was because of the targeting of the conservative and religious
groups. Are there any investigations within the IG that are
still working in that realm?
Mr. GEORGE. The short answer is yes, and we will be
releasing shortly, in effect, a follow-up report to that
initial. But I have to once again, Congressman, make it clear,
I am not part of the IRS.
Mr. BACON. Okay. Part of the inspector general.
Mr. GEORGE. I am part of the Treasury. So, and we are the
ones who identified that problem back in 2013.
Mr. BACON. Thank you.
Mr. GEORGE. No, thank you.
Chairman CHABOT. The gentleman's time is expired.
The chair is going to suggest that the gentleman, since you
have had this experience a number of times, I am going to put
at your disposal the resources of our staff here to see if we
cannot move forward in conjunction with the witnesses we have
here today and others to see if we cannot make some progress in
this area, whether it is legislative or whether it is
regulatory or whatever it is, there are a lot of people getting
ripped off for an awful lot of money and I commend the
gentleman--would the gentleman accept that?
Mr. BACON. I would love to have that responsibility. Thank
you, Mr. Chairman.
I think it is so widespread, Americans want to see
accountability and people held responsible for doing this. And
I do not think we see it, so we sense it has happened all
around us and not enough is being done to counter it.
Chairman CHABOT. Thank you. And I would note for the record
that the gentleman is literally a general, you know, a real
general. You are a real general, too, but I mean a military
general and is used to ordering people around. So I think he
will get to the bottom of this.
Mr. BACON. I appreciate the inspector general in the Air
Force not having to look my way too often, so.
Chairman CHABOT. The gentleman's time, as I say, has
expired.
The gentleman from Pennsylvania, Mr. Fitzpatrick, is
recognized for 5 minutes.
Mr. FITZPATRICK. Thank you, Mr. Chairman and the Ranking
Member. Thank you, Mr. George, for your time.
Mr. GEORGE. Good morning.
Mr. FITZPATRICK. Two questions. Number one, in our region,
I suspect we are not unique as well, there has been somewhat of
an uptick in criminal prosecutions by the U.S. Attorney's
Office surrounding the Earned Income Tax Credit. What we have
seen in some of the cases are parents selling the tax credits
for their children; in some cases, disabled children in homes
having their identities being used for tax credit purposes. Do
you think that that tax credit in particular is more
susceptible to fraud than others? And if so, what can we do
here in Congress to mitigate that risk?
Mr. GEORGE. That issue, sir, has been so pervasive. Over 20
years ago, I was a staffer here on Capitol Hill, and it was the
Government Reform and Oversight Committee at that time. It was
a Government Management, Information, and Technology
Subcommittee, and we issued a report on improper payments, and
the earned income tax--refundable credits in general, but the
Earned Income Tax Credit in particular was one of the most--I
do not want to use the word ``wasteful'' because it does have a
beneficial impact on the part of taxpayers who need it, but it
is so susceptible to fraud. It was back then in the billions of
dollars. It is now 20-plus years later in the billions of
dollars.
So it is a program that is not--I do not want to say
effectively overseen, but because it is refundable, meaning
that someone does not necessarily have to owe taxes in order to
receive the benefits of it, it is abused. And it is something
that Congress--we have brought it to Congress' attention many
times. I have testified I cannot tell you the number of times
about it and the additional child tax credit, the education tax
credit. There are so many tax credits that the IRS has not
effectively overseen in terms of its use. Are they reducing the
number of improper payments? Yes. But is it to the extent that
it should be? There should be none. There should be none, but
there are.
Mr. FITZPATRICK. In the area of debt collections, it is my
understanding that private debt collectors are being used now
by the Treasury Department. Is there a concern that that is
going to create some confusion, particularly amongst the elder
population who have been targeted by a lot of these scams?
Mr. GEORGE. Literally this week, the IRS will be formally
rolling out this program. The short answer is yes, I think
there will be confusion. It used to be, literally a week ago,
my response to this question would have included the IRS will
never reach out to you or a representative of the IRS would
never reach out to you proactively. So if someone calls and
claims to be calling on behalf of the IRS, it is a scam. Hang
up. Now, that has changed. But the only thing that could
possibly benefit the overall system is prior to that phone call
the IRS is to send a letter indicating that their case, your
tax obligation, has been assigned to a private debt collector
and do expect a telephone call from someone who is trying to
collect the amount of money that you owe.
Now, of course, again, as a former prosecutor, and again,
having been in this job for a while, I can imagine the bad guys
will soon catch on to this, and I hesitate to say this
publicly, but it is what it is, will then now send a letter and
find some logo and say we are going to call you. And then, of
course, you know, give them some fake number to use or whatever
the case might be.
But this is a challenge for the IRS, sir. There have been a
couple of iterations of private debt collectors being used by
the IRS dating back to the 1990s with very mixed success in
terms of their effectiveness. But it is either this or, in all
candor, having hundreds of billions of dollars sitting there
uncollected by the IRS, accruing interest, but ultimately not
paying, and there is a statute of limitations in effect on how
long the IRS can avoid collecting money from taxpayers.
Mr. FITZPATRICK. Thank you. My time is expired. I just want
to say that I think it goes without saying, but if the Treasury
Department could just try to be vigilant in staying a step
ahead because it does create a lot of angst, particularly
amongst the senior population, and if there is a place that
they could go, a hotline that people would actually answer
questions that we could send to our constituents, it would be
incredibly helpful.
Mr. GEORGE. And Mr. Chairman, with your indulgence----
Chairman CHABOT. Go right ahead.
Mr. GEORGE. Congressman, that is extraordinarily important,
and I made this point. I do not know if you were in the room at
the time, it is so important in your mailings to your
constituents, you know, TIGTA--the Treasury Inspector General
for Tax Administration, TIGTA--we have a hotline, we have
websites, we have a telephone number. Please, if in doubt, even
with the legitimate, call us, call the IRS to confirm. Do not
fall prey. And too many people, and the amounts of money,
especially amongst seniors that they are paying in false
requests, it is troubling.
Chairman CHABOT. Thank you very much. The gentleman's time
has expired.
And we want to thank the inspector general for
participating today. The IRS faces truly a daunting challenge
in combating tax identity theft, and this battle is one that we
must win. It is essentially for the fair and efficient and
effective functioning of our tax administrative system overall,
and we appreciate the hard work of General George in overseeing
the IRS performance and progress in this area. And thank you
for sharing that today.
Equally important to the objective evaluation of current
conduct are your thoughtful recommendations for improvement
going forward. You play an important role, and we want to thank
you for being here today to share your insights with us, and we
hope that we can continue to work together to improve the
safety and security of our small businesses in particular, but
individuals on their personal tax forms as well in the tax
arena as we move forward.
I would ask unanimous consent that members have 5
legislative days to submit statements and supporting materials
for the record. Without objection, so ordered.
And if there is no further business to come before the
Committee, we are adjourned. Thank you very much.
Mr. GEORGE. Thank you, Mr. Chairman.
[Whereupon, at 11:28 a.m., the Committee was adjourned.]
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