[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]









         CONTINUED OVERSIGHT OVER THE INTERNAL REVENUE SERVICE

=======================================================================

                             JOINT HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         GOVERNMENT OPERATIONS

                                AND THE

     SUBCOMMITTEE ON HEALTHCARE, BENEFITS, AND ADMINISTRATIVE RULES

                                 OF THE

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 17, 2018

                               __________

                           Serial No. 115-78

                               __________

Printed for the use of the Committee on Oversight and Government Reform






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              Committee on Oversight and Government Reform

                  Trey Gowdy, South Carolina, Chairman
John J. Duncan, Jr., Tennessee       Elijah E. Cummings, Maryland, 
Darrell E. Issa, California              Ranking Minority Member
Jim Jordan, Ohio                     Carolyn B. Maloney, New York
Mark Sanford, South Carolina         Eleanor Holmes Norton, District of 
Justin Amash, Michigan                   Columbia
Paul A. Gosar, Arizona               Wm. Lacy Clay, Missouri
Scott DesJarlais, Tennessee          Stephen F. Lynch, Massachusetts
Virginia Foxx, North Carolina        Jim Cooper, Tennessee
Thomas Massie, Kentucky              Gerald E. Connolly, Virginia
Mark Meadows, North Carolina         Robin L. Kelly, Illinois
Ron DeSantis, Florida                Brenda L. Lawrence, Michigan
Dennis A. Ross, Florida              Bonnie Watson Coleman, New Jersey
Mark Walker, North Carolina          Raja Krishnamoorthi, Illinois
Rod Blum, Iowa                       Jamie Raskin, Maryland
Jody B. Hice, Georgia                Jimmy Gomez, Maryland
Steve Russell, Oklahoma              Peter Welch, Vermont
Glenn Grothman, Wisconsin            Matt Cartwright, Pennsylvania
Will Hurd, Texas                     Mark DeSaulnier, California
Gary J. Palmer, Alabama              Stacey E. Plaskett, Virgin Islands
James Comer, Kentucky                John P. Sarbanes, Maryland
Paul Mitchell, Michigan
Greg Gianforte, Montana

                     Sheria Clarke, Staff Director
                  Robert Borden, Deputy Staff Director
                    William McKenna, General Counsel
                Michael Koren, Professional Staff Member
                         Kiley Bidelman, Clerk
                 David Rapallo, Minority Staff Director

                 Subcommittee on Government Operations

                 Mark Meadows, North Carolina, Chairman
Jody B. Hice, Georgia, Vice Chair    Gerald E. Connolly, Virginia, 
Jim Jordan, Ohio                         Ranking Minority Member
Mark Sanford, South Carolina         Carolyn B. Maloney, New York
Thomas Massie, Kentucky              Eleanor Holmes Norton, District of 
Ron DeSantis, Florida                    Columbia
Dennis A. Ross, Florida              Wm. Lacy Clay, Missouri
Rod Blum, Iowa                       Brenda L. Lawrence, Michigan
                                     Bonnie Watson Coleman, New Jersey
                                 ------                                

     Subcommittee on Healthcare, Benefits, and Administrative Rules

                       Jim Jordan, Ohio, Chairman
Mark Walker, North Carolina, Vice    Raja Krishnamoorthi, Illinois, 
    Chair                                Ranking Minority Member
Darrell E. Issa, California          Jim Cooper, Tennessee
Mark Sanford, South Carolina         Eleanor Holmes Norton, District of 
Scott DesJarlais, Tennessee              Columbia
Mark Meadows, North Carolina         Robin L. Kelly, Illinois
Glenn Grothman, Wisconsin            Bonnie Watson Coleman, New Jersey
Paul Mitchell, Michigan              Stacey E. Plaskett, Virgin Islands


























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 17, 2018...................................     1

                               WITNESSES

The Honorable David Kautter, Acting Commissioner, Internal 
  Revenue Service
    Oral Statement...............................................     5
    Written Statement............................................     8
The Honorable J. Russell George, Inspector General, Treasury 
  Inspector General for Tax Administration
    Oral Statement...............................................    14
    Written Statement............................................    16
Ms. Nina Olson, National Taxpayer Advocate, Internal Revenue 
  Service
    Oral Statement...............................................    37
    Written Statement............................................    39

                                APPENDIX

Rep. Mark Walker Statement for the Record........................   116
Letter from EPIC.org, submitted by Ms. Maloney...................   118
Questions for the Record, submitted by Members of the Committee..   121

 
         CONTINUED OVERSIGHT OVER THE INTERNAL REVENUE SERVICE

                              ----------                              


                        Tuesday, April 17, 2018

                   House of Representatives
  Subcommittee on Government Operations Joint with 
         Subcommittee on Healthcare, Benefits, and 
                               Administrative Rules
               Committee on Oversight and Government Reform
                                                     Washington, DC
    The subcommittees met, pursuant to call, at 10:08 a.m., in 
Room 2154, Rayburn House Office Building, Hon. Jim Jordan 
presiding.
    Present: Representatives Jordan, Meadows, Walker, Hice, 
Issa, Sanford, Massie, Grothman, DeSantis, Mitchell, Blum, 
Krishnamoorthi, Connolly, Maloney, Norton, and Lawrence.
    Also Present: Representatives Gianforte and Duncan.
    Mr. Jordan. The Subcommittees on Healthcare, Benefits, and 
Administrative Rules, and Government Operations, will come to 
order.
    Without objection, the presiding member is authorized to 
declare a recess at any time.
    We will get to our witnesses here in a second. We will do 
some opening statements and then hear their testimony, but we 
appreciate everyone being with us this morning, especially our 
three important witnesses.
    Today is tax day, the deadline for American taxpayers to 
file their taxes with the Internal Revenue Service. We have 
before us the Acting Commissioner of the IRS, its Inspector 
General, and the National Taxpayer Advocate, all who play a 
role in taxpayer service, tax enforcement, IRS oversight, and 
implementing the tax code with fairness and integrity.
    Integrity at the IRS is something I want to address in 
particular today, something former Commissioner John Koskinen 
disregarded as was made clear to this committee during his 
tenure as he tried to cover up IRS targeting conservative 
groups. While under subpoena, 422 backup tapes potentially 
containing up to 24,000 emails were conveniently destroyed. The 
continued shortcomings make it difficult for taxpayers to trust 
the IRS.
    At our most recent hearing about the IRS mismanagement, we 
learned that the agency rehired bad employees who engaged in 
fraud, who were under investigation, and who repeatedly 
violated internal policies and the law.
    In January we wrote to the IRS to ensure this problem has 
been fixed. Today we plan to hear an update on whether full 
compliance is actually in place.
    But we are seeing repeated failures. There is yet another 
report issued in February highlighting the IRS continues to 
give bonuses to employees who have had all kinds of 
shortcomings in their record, with recent misconduct and tax 
compliance issues as part of those shortcomings.
    Only at the IRS are bad employees, those with conduct 
issues, unauthorized access to taxpayer information, rewarded 
with bonuses.
    Another area of concern is the IRS' implementation of the 
employer mandate. In April of 2017, TIGTA assessed the IRS was 
not capable of starting to implement Obamacare's employer 
shared responsibility provision, finding processes were not 
functioning. But then in March, TIGTA issued a report finding 
that the process to identify employers subject to the employer 
mandate needed improvement, the Inspector General's reporting 
problems for the IRS enforcing the employer mandate. Yet last 
November, when Mr. Koskinen was heading out the door, the IRS 
decided to start collecting penalties from companies going all 
the way back to 2015. I know many members have concerns about 
this, and we will have questions about this, particularly 
Congressman Hice from Georgia.
    This month we requested documents about the IRS' capacity 
to evaluate compliance and assess penalties regarding the 
employer mandate. In 2016 the Government Accountability Office 
released a report suggesting that the IRS is systematically 
evading the law when issuing their expansive regulations. In 
February we requested documents from Treasury about IRS 
rulemaking practices. Mr. Kautter, I am still waiting for those 
documents.
    We need to hear how these and other issues will be 
resolved. The American people are tired of this pattern of IRS 
abuse. It is time for the Internal Revenue Service to fulfill 
its duties with fairness and integrity.
    Thank you to our witnesses for appearing here today on tax 
day, and I look forward to your testimony.
    With that, I think we will allow our Democratic colleagues, 
the Ranking Members, to offer their opening statements if they 
wish, when they arrive, but I will turn now to the gentleman 
from Georgia, Mr. Hice, for an opening statement, and then we 
will get right to our witnesses.
    Mr. Hice. Thank you, Mr. Chairman.
    As you mentioned, today is one of the most dreaded days in 
America, tax day. I hope that the recent passage of the tax 
reform bill will provide relief to American citizens and 
hopefully less dread in the future as this day comes upon them.
    Not only does this hearing allow us to continue our 
oversight of the IRS, but it is also the first since the 
passage of the Tax Cut and Jobs Act, and so this is 
particularly good timing for the hearing that we have today.
    The new tax cuts are critical to individuals and small 
businesses, and the IRS must move quickly to implement that 
law. It is my sincere hope that the culture and the management 
problems that have proven so prevalent at the IRS throughout 
the course of previous administrations does not imperil the 
implementation of the Tax Cuts and Jobs Act and the reforms 
that are in it.
    The IRS has been entrusted with the most powerful tools of 
the Federal Government. I think it is safe to say that nothing 
strikes fear in the heart of a person like receiving a letter 
from the IRS, and the abuses that have taken place in the past 
are unacceptable.
    I personally have experienced the aggressive IRS tactics 
prior to running for office. In fact, as a pastor I joined a 
group of other pastors that since then has turned into 
thousands of pastors to fight to resist the IRS intimidation 
and their chilling efforts to chill freedom of speech in 
churches. That fight, of course, is still ongoing.
    Ninety-eight percent of tax compliance is voluntary. This 
means that the IRS must work with, not against, taxpayers. This 
starts with ensuring taxpayers receive the best customer 
service possible at every level. I am sure the witnesses today 
will probably say that the IRS needs more money to provide 
better services. I disagree with that personally, but 
nonetheless Congress has provided additional resources this 
year to improve customer service and implement tax reforms.
    But we have to be clear that these additional funds cannot 
be used as an opportunity for the IRS to sweep its longstanding 
problems under the rug. To quote the Taxpayer Advocate, 
``Limited resources cannot be used as an all-purpose excuse for 
mediocrity.'' It is time for the IRS to hold itself to the same 
high standards that it requires of the American taxpayers. And 
this committee, I can assure you, will be watching closely.
    I want to thank our witnesses for being here today. I look 
forward to hearing your testimony.
    I yield back.
    Mr. Jordan. I thank the gentleman.
    I now recognize the gentleman from Virginia for an opening 
statement.
    Mr. Connolly. I thank you, Mr. Chairman.
    I guess I couldn't disagree more vehemently than with my 
friend who just spoke. Year after year, the IRS has been asked 
to do more with less. Since 2010, when the Republicans took 
over Congress, the number of individual tax returns filed 
increased by 11 percent, while the IRS budget in inflation 
terms decreased by 20 percent. That might have something to do 
with the mediocrity that was just characterized.
    These funding reductions have substantially weakened the 
agency's capacity to enforce the tax code and meet taxpayer 
needs. In fact, it looks like it has delivered.
    Over the same time, the IRS workforce has been reduced by 
18,000, leaving one-third the number of enforcement agents and 
less than half the number of customer service representatives. 
That might have something to do with customer service quality.
    In her written testimony for today's hearing, Nina Olson, 
the Taxpayer Advocate, states: ``There is no substitute for 
having enough IRS employees to answer the 100 million telephone 
calls and 10 million pieces of correspondence the IRS receives 
every year.''
    The IRS budget constraints are impeding the agency's 
ability to update its outdated IT systems, something this 
committee on a bipartisan basis has been concerned about, 
delaying more than $200 million in investments. Approximately 
59 percent of the information technology systems at the IRS 
have aged beyond their useful life, leaving the IRS and 
taxpayers at risk of a cyber intrusion or a catastrophic 
failure that prevents taxpayers from filing tax-related 
paperwork.
    The recently passed Trump tax scheme will only exacerbate 
these issues in the coming years. The law contains 119 
provisions that must be addressed by the IRS, and its estimated 
to cost the agency $397 million to implement. This figure 
includes the need to hire over 1,700 new employees, reprogram 
approximately 140 IT systems, revise or create roughly 450 
different tax forms and publications and instructions, issue 
guidance and other activities to help taxpayers comply with the 
new law.
    In the recently passed omnibus spending bill, as my friend 
did indicate, Congress did provide IRS a total of $11.4 billion 
for Fiscal Year 2018, an increase of $196 million over the 
previous fiscal year. Despite an increase of $196 million, 
funding for the IRS is still below the $12.1 billion the agency 
received before the Republicans took over the Congress in 2010.
    Now, despite all these increased responsibilities with the 
new tax code, they are still below their funding level of eight 
years ago.
    Additionally, the omnibus directs the IRS to spend $320 
million to implement changes in that new tax law, which means 
that funding for other IRS functions will probably have to be 
reduced to meet that requirement. So net new funding for normal 
IRS activities actually goes down.
    The increased funding in Fiscal Year 2018 will do little to 
address the need for increased enforcement capacity or the 
well-documented customer service problems my friend just talked 
about that have plagued the IRS. This week the House will vote 
on legislation that includes new IT and cyber requirements for 
the IRS. The 21st Century IRS Act would, among other things, 
promote electronically filed tax returns, enforce strict 
standards for confidentiality safeguards among IRS contractors, 
and strengthen efforts to combat identity theft. If Congress 
wants the IRS to deploy 21st century technology to improve 
services it provides, we must provide adequate resources to 
enable it to do so.
    However, it is important to recognize that new technology 
alone cannot replace the nearly 9,500 customer service 
representatives that the IRS has lost since Fiscal Year 2010. 
For example, 46 percent of taxpayers calling the IRS have 
already checked IRS online resources and still need assistance. 
Depending on online resources also ignores the millions of 
households across the country that have no broadband access, 
especially low-income and elderly taxpayers. Additionally, 
those who reach out to the IRS by phone or through a taxpayer 
assistance center often have more complicated issues that can't 
easily be addressed simply online. Therefore, while I support 
efforts to modernize the IRS IT systems--in fact, I 
passionately advocate for it--these efforts must be done in 
conjunction with, not at the exclusion of, increasing customer 
service employees needed to answer those phones and provide 
thoughtful guidance to taxpayers.
    I hope my colleagues on both sides of the aisle will 
recognize that our constituents deserve better, and now is the 
time to fully and adequately fund the IRS so it can do so.
    I yield back.
    Mr. Jordan. I thank the gentleman.
    Today we have before us Mr. David Kautter, Acting 
Commissioner of the Internal Revenue Service. We welcome you 
here for the first time, Mr. Kautter, and look forward to your 
testimony and your participation with the questions from our 
members.
    Mr. George, the Inspector General for the Treasury and for 
Tax Administration. He has been in front of our committee many 
times. We welcome you back, Mr. George.
    And, of course, Ms. Olson, Nina Olson, the National 
Taxpayer Advocate at the IRS, has been in front of us several 
times as well. We welcome you back and look forward to all your 
testimony.
    You know how it works. You have to stand up and we swear 
you in, and then you get your 5 minutes. So if you will please 
stand, raise your right hand.
    [Witnesses sworn.]
    Mr. Jordan. Let the record show each witness answered in 
the affirmative.
    Mr. Kautter, we are going to start with you. You have 5 
minutes, and then we will move right down the list.

                       WITNESS STATEMENTS

               STATEMENT OF HON. J. DAVID KAUTTER

    Mr. Kautter. Mr. Chairmen Jordan and Meadows, Ranking 
Members Krishnamoorthi and Connolly, and members of the 
subcommittees, thank you for the opportunity to provide you 
with an update on IRS operations. My appearance today is 
particularly appropriate since, as has been noted, this is tax 
day, and the filing deadline is at midnight tonight.
    In case you haven't filed yet, just a reminder that we have 
a six-month extension request available on IRS.gov. Look for 
Form 4868.
    As of last Friday, 119 million returns have been filed and 
refunds have gone out quickly to more than 86 million taxpayers 
so far. About 92 percent of the returns have been filed 
electronically, and the average refund is up by $16 from last 
year, to $2,831. Visits to IRS.gov are up by 24 percent.
    On my way over here this morning I was told that a number 
of IRS systems are unavailable at the moment. We are working to 
resolve this issue, and taxpayers should continue to file their 
returns as they normally would.
    Having said that, this year's tax season is a good example 
of what the IRS must do more of going forward, delivering for 
the nation's taxpayers.
    Following five months on the job at the IRS, I would like 
to share with you my observations about the IRS so far and 
offer a few thoughts about how to improve its performance in 
the future.
    When I agreed to Secretary Mnuchin's request to serve as 
the Acting IRS Commissioner, I told him that if I was going to 
bring value to this role, I needed to approach my 
responsibilities with an analytical, unbiased perspective, and 
that is what I have tried to do. At one point in my career I 
served on the Senate staff, but most of my career, more than 
four decades, has been spent as a tax practitioner running 
large business units within a Big Four firm. I spent 13 of 
those years as the Director of National Tax within my firm, and 
after leaving public accounting I spent four years as a full-
time professor at American University, where I established a 
tax center focused on small businesses and middle-income 
taxpayers.
    I frequently dealt with the IRS throughout my career, and I 
like to think I came to the IRS with an objective, unbiased 
view of the tax agency. Clearly, the IRS has had significant 
difficulties during the past five years, both from an internal 
operations point of view and when it comes to dealing with 
taxpayers. Those difficulties have been well documented by 
these subcommittees, TIGTA, and others.
    As I have met with people at the IRS, I have several 
observations that I would like to share with you today.
    First, my personal experience is that the vast majority of 
its employees and its current career senior leadership are 
committed to helping taxpayers, to operating an efficient 
agency, and to doing the right thing. They realize they need to 
do better, and they realize they need to serve taxpayers, not 
the other way around.
    Second, I found the senior career leadership currently in 
place to be open-minded, forward thinking, and willing to 
implement change. It is worthwhile to keep in mind that the 
vast majority of the leadership now in place at the IRS is new. 
The Deputy Commissioner for Services and Enforcement has been 
in her job just over a year. The Deputy Commissioner, which is 
the second of the two primary deputy commissioners, has been in 
his job for a little over two years. Most of the leaders of our 
internal operations and support functions have been in place 
for less than two years.
    This is a group that seems not only open to change but 
eager to change. Having said that, my view is that the path to 
improvement involves the critical elements of leadership, 
measurement, and accountability. These are areas where the IRS 
must do better.
    At this point, my belief is that there are six key things 
that need to change at the IRS, and all flow from the elements 
I just mentioned.
    First and foremost, the IRS needs to make improvements in 
taxpayer service to help taxpayers meet their obligations under 
the tax law. While enforcement is important, leadership needs 
to make clear that taxpayer assistance and enforcement are part 
of a continuum and not mutually exclusive concepts.
    Second, for operations support work, we need to be clear 
that we must be judicious stewards of taxpayer dollars. While 
following the many rules of contracting, hiring, and firing are 
important, developing new ways of operating more efficiently, 
especially when it comes to software development, technology, 
and cyber security are not a ``nice to have,'' they are part of 
the job.
    Third, measurements that determine whether various parts of 
the IRS are facilitating compliance with the law and being 
careful stewards of taxpayer dollars are critical.
    Fourth, there needs to be accountability. I cannot stress 
this enough. That has not been a strength of the IRS in recent 
years.
    Fifth, the IRS needs to be adequately funded, but with 
oversight.
    Finally, the cardinal rule of organizational management is 
that structure follows strategy. I would consider restructuring 
the IRS in a manner that facilitates a focus on taxpayer 
service and operational efficiency.
    I think the IRS is heading in the right direction, but 
there is still a long way to go. For example, I think the IRS 
is doing a solid job implementing tax reform, but that promises 
to be a lengthy and intensive effort. And with the tax deadline 
approaching tonight, I think the work of the IRS this filing 
season is an encouraging sign of the agency's commitment to 
taxpayers.
    As someone who has been in this business for over 40 years, 
I am impressed that the IRS has delivered an extremely smooth 
filing season so far in view of the legislation enacted in 
February, which required the IRS to adjust its systems after 
the tax filing season had begun.
    IRS has answered 23 million taxpayer questions this filing 
season. The average hold time this filing season is less than 6 
minutes, down a minute from last year.
    Still, I think the IRS needs to do better in a range of 
areas. The IRS needs to do more, it needs to continue to get 
better, and it needs to enhance accountability.
    Chairmen Jordan and Meadows, Ranking Members Krishnamoorthi 
and Connolly, and members of the subcommittees, that concludes 
my statement. I would be happy to answer your questions. Thank 
you.
    [Prepared statement of Mr. Kautter follows:]
    
    
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    Mr. Jordan. Thank you, Mr. Kautter.
    Mr. George, you are up.

              STATEMENT OF HON. J. RUSSELL GEORGE

    Mr. George. Chairmen, Ranking Members, members of both 
subcommittees, thank you for the opportunity to provide a 
status report on the 2018 filing season and other challenges 
facing the IRS.
    A continuing challenge the IRS faces each year in 
processing tax returns is the implementation of tax law 
changes. The recent Tax Cuts and Jobs Act will result in 
significant changes to both business and individual income 
taxes.
    The IRS indicates that implementation will require it to 
create or revise about 450 forms, publications, and 
instructions. Moreover, the IRS estimates that 140 information 
technology systems will require modification.
    TIGTA's initial assessment found that the IRS used several 
well-established processes to immediately begin implementing 
the new provisions. This assessment was the first in a series 
of reviews we will be conducting to monitor the IRS' efforts to 
implement the first major tax reform legislation of more than 
30 years.
    The IRS is projecting its toll-free telephone level of 
assistance to be 80 percent for this year's filing season, a 
slight increase from the 79 percent achieved last year. The IRS 
also plans to assist 3 million taxpayers at tax assistance 
centers, a 9 percent decrease from last fiscal year.
    For the 2018 filing season, the IRS transitioned all of its 
taxpayer assistance centers to an appointment service model. 
Although the IRS reports that it had 363 tax assistance 
centers, 24 are not open because they have not been staffed.
    Improper payments are another continuing challenge to the 
IRS encounters. The IRS now receives wage documents earlier in 
the filing season, but the law does not give the IRS authority 
to systematically adjust refundable credits when the income 
used to compute the credit is not supported by third-party 
income documents.
    We estimate the IRS issued nearly $25 billion in improper 
payments associated with refundable credits in Fiscal Year 
2017. It is unlikely that this situation will improve 
significantly without additional authority or compliance 
resources.
    As the IRS continues to expand its online tools to assist 
taxpayers, the risk of unauthorized access to taxpayer accounts 
increases. As such, it is critical that the methods the IRS 
uses to authenticate individuals' identities provide a high 
level of confidence that tax information and services are 
provided only to authorized individuals. The IRS spends a 
significant amount of time and resources combatting external 
attempts to compromise our nation's tax system. However, our 
work has shown that more actions are needed to address internal 
threats.
    Hiring employees of high integrity is critical to the IRS 
protecting taxpayer information from internal threats. In two 
separate reports we found that the Service rehired hundreds of 
employees with prior conduct performance issues. Hiring 
employees with serious financial problems and integrity issues 
and giving them access to taxpayer information is a risky 
practice that must end.
    In response to our 2014 report, the IRS said its process 
was more than adequate to mitigate risks to America's 
taxpayers. However, in July of 2017, we reported that the IRS 
had not effectively implemented our past recommendations and 
rehired more than 200 former employees who were previously 
terminated from the IRS or who had separated while under 
investigation for conduct or performance issues. The IRS has 
agreed to the recommendations from our July 27th report, which 
we will follow up with an audit later this year.
    The IRS has also provided awards to employees with 
misconduct, including the Federal compliance issues relating to 
tax. Using taxpayer funds to reward IRS employees with tax 
problems sends the wrong message to the vast majority of 
taxpayers who pay their taxes in full and on time. In March of 
2014, we reported that the IRS provided $2.8 million in 
monetary awards to more than 2,800 employees disciplined for 
recent conduct issues.
    In February of this year, we reported that the IRS had made 
progress in this area. However, we did find that nearly 2,000 
current employees with tax compliance or misconduct issues 
received more than $1.7 million in awards. The IRS has also 
agreed to our recommendations relating to awards.
    In conclusion, TIGTA plans to provide continuing audit 
coverage of the IRS' efforts to provide high-quality service to 
taxpayers and to operate efficiently and effectively.
    Chairmen, Ranking Members, members of the subcommittees, 
this ends my statement. Thank you for the opportunity to share 
my views.
    [Prepared statement of Mr. George follows:]



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Mr. Jordan. Thank you, Mr. George.
    Ms. Olson, you are recognized.

                   STATEMENT OF NINA E. OLSON

    Ms. Olson. Mr. Chairmen and Ranking Members and members of 
the subcommittees, thank you for inviting me to testify today 
at today's hearing on IRS operations. As you well know, 
Congress has passed the most comprehensive tax law reform since 
1986. The IRS faces serious challenges as it implements and 
administers the new law, from issuing guidance to creating new 
forms and publications, to answering basic questions about the 
new law. The stakes are high for both taxpayers and the IRS. 
The IRS is dedicating significant resources to these efforts, 
and my office will continue to support the IRS to ensure that 
taxpayers have the information and assistance they need to 
comply with the new tax law.
    Tax reform notwithstanding, the IRS still must fulfill its 
continuing tax administration duties. Since Fiscal Year 2010, 
the IRS budget has been reduced by 20 percent on an inflation-
adjusted basis, and the IRS workforce has declined about that 
same percentage. These reductions have led to significant cuts 
in taxpayer service levels, including a 23 percent decline in 
the number of employees conducting pre-filing taxpayer 
assistance and education.
    Moreover, these cuts have prevented the IRS from deploying 
new technology that would improve the taxpayer experience, 
including customer call-back technology.
    While the IRS generally ran a smooth 2018 filing season, 
this morning notwithstanding, especially given the mid-season 
enactment of extender provisions, taxpayers were burdened by an 
overly-restrictive appointment-only system at the taxpayer 
assistance centers and inconsistent service on phone lines. The 
IRS' official measure of telephone service, its account 
management customer service representative level of service, or 
LOS, excludes the significant majority of taxpayer telephone 
calls the IRS receives. In Fiscal Year 2017, the official LOS 
reflected the results of only 32 percent of IRS calls. Thus, 
unlike the official LOS of 79 percent for the accounts 
management lines, the Fiscal Year 2018 LOS for calls to the 
installment agreement balance due line was only 50 percent. 
These are people calling to make payments to us.
    The IRS' response to its resource constraints has been to 
push taxpayers to online self-service. Now, I have long 
advocated that the IRS develop an online account application, 
but it must be positioned as just one component of an omni-
channel service strategy, including telephone and in-person 
assistance. Taxpayers must be the focus of this strategy, and 
their needs and preferences paramount.
    In 2016 and 2017, TAS conducted a nationwide survey of U.S. 
taxpayers about their needs, preferences, and experiences with 
IRS taxpayer service. The survey results confirm that taxpayers 
choose different channels of communication to accomplish 
different types of service tasks. We found that about 41 
million U.S. taxpayers do not have broadband access in their 
homes. About 50 percent disagreed with the statement ``I feel 
secure sharing personal financial information over the 
Internet.'' Forty-six percent of taxpayers calling the IRS 
already checked IRS online resources and still needed 
assistance. And we found the single biggest driver of customer 
satisfaction is the first contact resolution rate. Yet, almost 
40 percent of taxpayers calling the IRS felt one call did not 
fully resolve their problems.
    Another filing season problem is the unacceptably high 
false-positive rates, or FPRs, associated with IRS' identity 
theft and fraud detection filters. While the IRS has improved 
its detection of questionable refund returns, it has not 
devoted the same level of attention to preventing false 
positives, resulting in significant delays or freezes of 
refunds due to hundreds of thousands of legitimate taxpayers 
filing legitimate returns.
    In 2017, the FPR was over 60 percent for both identity 
theft and non-identity theft filters, and the rate will be 
higher this year. High FPRs harm legitimate taxpayers and 
create unnecessary and often manual work for the IRS and for 
the Taxpayer Advocate Service. Our cases in this area have 
increased 98 percent this year over last year.
    The IRS can, while stopping fraud, can also reduce false 
positives. It can and should be able to walk and chew gum at 
the same time.
    Finally, the current state of IRS technology substantially 
limits the IRS' ability to carry out effective tax 
administration. As an example, the IRS possesses the two oldest 
information system databases, each nearly six decades old, in 
the entire Federal Government. Today, no IRS employee, much 
less the taxpayer or the taxpayer's representative, has a 360-
degree view of the taxpayer's account and interactions with the 
IRS.
    Improving taxpayer service and IRS operations generally 
requires a combination of strong leadership and adequate 
resources. I encourage Congress provide more funding to the IRS 
to improve taxpayer service and modernize its technology, and 
to pair that funding with sufficient oversight to ensure the 
funds are well spent.
    Thank you.
    [Prepared statement of Ms. Olson follows:]
    
    
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    Mr. Jordan. Thank you, Ms. Olson.
    I now recognize the gentleman from Georgia for his 5 
minutes of questioning.
    Mr. Hice. Thank you, Mr. Chairman.
    Mr. Kautter, the IRS decided to begin enforcing the 
employer mandate this past fall, as Commissioner Koskinen was 
leaving office. This was the first time that the IRS ever 
actually enforced that employer mandate since the law came into 
existence in 2010. Is that correct?
    Mr. Kautter. Yes, sir, that is correct.
    Mr. Hice. Okay. And at this point, I understand your agency 
is issuing penalty letters to employers. I understand somewhere 
in the ballpark of 9,000 or so letters have been sent out. Is 
that right?
    Mr. Kautter. Yes, sir. It is around 10,000 at this point.
    Mr. Hice. Ten thousand, okay. Were these employers notified 
prior to receiving a penalty letter? I mean, after all, we are 
talking years of no enforcement, and then all of a sudden this 
is a pretty big change coming down the pike. These employers 
are accustomed to this employer mandate not being enforced. 
Were they notified beforehand?
    Mr. Kautter. No, the letter is the first they have heard 
from the IRS on this.
    Mr. Hice. Okay. That sounds pretty harsh, to say the least, 
for these folks to be living for years under no enforcement, 
and then all of a sudden being slapped with it.
    Mr. George, TIGTA has examined the IRS' ability to enforce 
the employer mandate. I understand that you have found multiple 
problems with the enforcement systems for that employer 
mandate. Is that correct?
    Mr. George. That is correct, Congressman.
    Mr. Hice. Okay. Can you briefly explain what some of those 
problems are?
    Mr. George. Yes. Our review of the IRS' process to identify 
tax year 2015 applicable large employers potentially liable for 
the employer shared responsibility payment found that the IRS 
did not identify 840 employers potentially subject to more than 
$113 million in employer shared responsibility payments. Now, 
the difference in identified applicable large employers 
occurred because the data used by the IRS were not complete or 
accurate.
    We subsequently made five recommendations to improve the 
process. The IRS agreed with all five of those recommendations, 
and we certainly shall follow up with them to see if they enact 
those changes.
    Mr. Hice. Okay. So, change is coming, but would you be able 
to say with a strong degree of confidence right now that the 
IRS is effectively and accurately enforcing the employer 
mandate?
    Mr. George. I would say this, sir: When the IRS puts its 
mind to something, it gets the job done.
    Mr. Hice. But that is not my question. You said they have 
problems. The solution to those problems has not yet been 
implemented. So the assumption I have is at this point they 
can't with confidence say that this is being handled 
effectively and accurately.
    Mr. George. Until we have had a chance to analyze the 
actions taken, that is correct, sir.
    Mr. Hice. Sure. Okay.
    Mr. Kautter, are you familiar with the President's 
Executive Order 13765?
    Mr. Kautter. Yes, sir.
    Mr. Hice. Okay. And you understand that basically that 
directs the Federal agencies to ease the financial burdens of 
the Affordable Care Act?
    Mr. Kautter. Yes, sir.
    Mr. Hice. Okay. Is the IRS subject to that executive order?
    Mr. Kautter. It is.
    Mr. Hice. Okay. It seems to me pretty obvious that it is 
rather burdensome for employers, having no previous 
communication whatsoever, to all of a sudden be forced with 
penalties on the employer mandate. Would you agree with that?
    Mr. Kautter. I would.
    Mr. Hice. Okay. So based on your testimony and based on the 
executive order, why would the IRS be rushing to enforce the 
employer mandate?
    Mr. Kautter. Sure. So, let me give you a little bit of 
background, if I can.
    Mr. Hice. Not too much. I have less than a minute, still 
have some questions.
    Mr. Kautter. Okay. At this point, the letters are the IRS' 
best estimate of what the employers owe. There have been 
constant negotiations as those letters have gone out. About 
3,000 of the 10,000 letters that have gone out, cases have been 
settled, and in 82 percent of those cases the employers have 
not owed anything as a result of the letter.
    What we found are two responses when we have gone to 
employers. One is the forms were filled out incorrectly. So 
once we work with the taxpayer, there is nothing owed. And then 
in the other 18 percent of the cases the employers have 
basically said we haven't been able to determine the amount of 
the penalty ourselves, we were waiting to hear from you.
    Mr. Hice. Okay. But we still have the admission that we 
can't accurately be doing this. We have an executive order not 
to do it, or to ease the burden, not specifically on the 
employer mandate but to ease the burden that comes with this.
    My question to you would be would you agree that we need to 
cease the enforcement of this employer mandate until your 
agency at least can straighten out the mess and for this 
committee to review all the documents that we have requested?
    Mr. Kautter. Well, I think we have done a pretty good job, 
Congressman, of trying to straighten out the problems that ----
    Mr. Hice. But my question is, Mr. Chairman--and I know my 
time just expired. But the question is this thing needs to 
cease until the problems are resolved and this committee gets 
the documents that have been requested and until--I mean, these 
employers don't even know that it has been reinstituted, or 
instituted for them.
    Mr. Kautter. We are trying to work with everyone who we 
have sent a letter out to, Congressman, and our challenge is it 
is the law, and I don't think anybody on this committee wants 
the IRS determining which laws it is going to enforce and which 
ones it is going to ignore.
    Mr. Hice. But it was not enforced for eight years, and now 
all of a sudden it is being enforced, even with an executive 
order.
    I thank you for your graciousness, Mr. Chairman. I yield 
back.
    Mr. Kautter. I cannot disagree.
    Mr. Hice. Thank you.
    Mr. Jordan. The gentleman from Virginia is recognized.
    Mr. Connolly. I thank the Chair.
    Mr. Jordan. If you could hold for one second?
    Mr. Connolly. Sure.
    Mr. Jordan. With unanimous consent, I ask that Mr. 
Gianforte be allowed to participate in today's hearing, along 
with Mr. Duncan.
    Mr. Connolly. We have no objection.
    Mr. Jordan. The gentleman is recognized.
    Mr. Connolly. Welcome to the panel.
    Mr. Kautter, I was just going to remind you, but you didn't 
need reminding, to be advised not to enforce a provision of the 
United States law would put you in grave jeopardy, actually, 
until and unless Congress repeals the law or parts of the law, 
which it has tried to do and hasn't succeeded. He is all for 
it; I am not. And thank God there were enough votes to block 
that. So it remains the law on the books, it is working, and 
the IRS has a constitutional responsibility to uphold the law. 
Is that not correct?
    Mr. Kautter. That is correct.
    Mr. Connolly. It was also characterized as all of a sudden 
companies are unaware. The law has been on the books how long?
    Mr. Kautter. Since 2010.
    Mr. Connolly. So that is how many years?
    Mr. Kautter. Eight years.
    Mr. Connolly. So it is not exactly all of a sudden, is it?
    Mr. Kautter. No.
    Mr. Connolly. And the individual mandate idea, one might 
remember, came from the Heritage Foundation. In fact, when Bill 
Clinton was president and had a health care program, Newt 
Gingrich, et al., objected to it precisely because it lacked an 
individual mandate. So the idea that it is all of a sudden and 
a terrible thing, and the novel interpretation that the 
President's executive order to ease the burden could be 
construed as suspend enforcement, those are two very different 
things, are they not?
    Mr. Kautter. Yes, sir.
    Mr. Connolly. Thank you.
    Commissioner Kautter, is it true that IRS' budget is only 
about 80 percent of what it was in 2010?
    Mr. Kautter. That is true.
    Mr. Connolly. And that is how many years ago?
    Mr. Kautter. That would be eight years.
    Mr. Connolly. So even with inflation, that is a big cut.
    Mr. Kautter. Yes, sir.
    Mr. Connolly. Is it also true you have 18,000 fewer 
employees than you did in 2010?
    Mr. Kautter. Yes, sir.
    Mr. Connolly. I am just spit-balling here, but could that 
level, that magnitude of cuts and employee decreases, have 
anything to do with performance at IRS?
    Mr. Kautter. Those reductions have had an impact on the 
performance at the IRS. Yes, sir.
    Mr. Connolly. Your predecessor testified once before this 
committee that one of the problems plaguing IRS, besides those 
that also affect performance and quality of service, is aging 
IT systems. Is that true?
    Mr. Kautter. Yes, sir.
    Mr. Connolly. And I think he said one system that is still 
in operation went back to the administration of Lyndon Johnson. 
Is that true?
    Mr. Kautter. It does. Yes, sir.
    Mr. Connolly. Lord almighty, that is a long time ago.
    I don't know, could you just elaborate a little bit on how 
aging IT systems might also, on top of budget cuts and 
personnel reductions, affect performance?
    Mr. Kautter. Certainly. The IRS hardware, 59 percent of it 
is obsolete; 32 percent of its software is at least two updates 
behind, so that is out of date. The IRS systems are subject to 
2.5 million cyber attacks a day.
    Mr. Connolly. I am sorry. Would you repeat that statistic?
    Mr. Kautter. The IRS systems are subject to 2.5 million 
cyber attacks a day, 1 million of which are sophisticated 
attacks. So that is on an average day.
    Mr. Connolly. So you are saying that works out to 
something, if I am doing my math right, like three-quarters of 
a billion a year?
    Mr. Kautter. Yes, sir.
    Mr. Connolly. Wow.
    Ms. Olson, are you concerned at all about what we are 
hearing?
    Ms. Olson. I am very concerned, obviously, on the cyber 
security. On the taxpayer service side, and enforcement, there 
is a real impact with our aging taxpayer systems, IT systems. 
The IRS, depending on how you count it, has between 60 to 200 
case management systems where taxpayer data is stored, and how 
that impacts taxpayers is if you call the IRS, the person on 
the phone assisting you will not see the whole picture of what 
is going on. They may not have access to 40 of those 60 major 
systems, so they can't tell you. They can say ``I can see that 
you wrote us, but I have no idea what you wrote us about, and I 
can't see what is being done on that.''
    Mr. Connolly. And presumably aging systems, Mr. Kautter and 
Ms. Olson, also can't be encrypted. They don't adjust to 
current encryption methodologies or software, and therefore 
they are vulnerable to the hacking you described.
    Mr. Kautter. They are more vulnerable. Yes, sir.
    Mr. Connolly. And how many Americans have data stored at 
the IRS?
    Mr. Kautter. Pretty much all.
    Mr. Connolly. All.
    Mr. Kautter. Pretty much.
    Mr. Connolly. So the threats are real threats that you are 
dealing with every day, with 2.5 million cyber attacks.
    Mr. Kautter. Yes, sir.
    Mr. Connolly. And with aging equipment, that threat is 
enhanced.
    Mr. Kautter. It is. I mean, I think, Congressman, just one 
point. Over years, over recent years, what the IRS has done a 
pretty good job of is taking the technology money that it has, 
the IT money, and using it to update the core filing system so 
that the equipment that surrounds the core filing system is in 
pretty good shape. It is not as good as we would like, but it 
uses old language, and it is built block upon block, so it is 
not as integrated as it needs to be. Where a lot of our old 
equipment rests is in the day to day functioning of the laptops 
that the employees have, the printers and so forth.
    About two weeks ago we conducted four calls with IRS 
managers, about 3,000 managers. What impressed me was the theme 
that came through was a workforce that wants to do well but 
feels as though it is handicapped by the tools and the 
equipment that it has.
    Mr. Connolly. Mr. Chairman, my time is up, although on a 
lighter note I am informed, I hope reliably, one silver lining 
in legacy systems, the Chinese don't know how to hack into 
COBOL.
    [Laughter.]
    Mr. Connolly. I thank the Chair for his indulgence.
    Mr. Jordan. I thank the gentleman.
    The gentleman from North Carolina is recognized for 5 
minutes.
    Mr. Meadows. Thank you, Mr. Chairman. I want to thank my 
vice-chair for his eloquent opening remarks and questioning and 
pitch hitting.
    I thank all of you for coming. Obviously, many of you, this 
is not your first rodeo in terms of the date or when you come 
to try to give what I would say is the annual to-do list.
    Ms. Olson, I want to say thank you for your work. 
Obviously, you have been very responsive to my personal office, 
but also from a committee standpoint on helping taxpayers. So I 
look forward to making sure that there is a good relationship, 
and I want to reinforce that--a good relationship, if not great 
relationship--with Ms. Olson. There has been previously, but we 
want to make sure we have that going forward, and we will be 
looking at that very closely.
    Mr. Kautter, I am assuming that--you are nodding yes--that 
you will do that.
    Mr. Kautter. Before I joined government I was a fan of Ms. 
Olson. I read her reports, her two reports, religiously every 
year, and I think she does great work.
    Mr. Meadows. That is great. So now in this new position, we 
want to make sure that you not only read her reports but that 
they actually get implemented. So we will go forward from 
there.
    Ms. Olson, I would ask, can you tell me about the false 
positives in terms of fraudulent reports?
    Ms. Olson. Well, I stand with everyone here about stopping 
refund fraud and improper payments coming out from the system. 
But I have been concerned for the last four years that the 
false-positive rate, the rate of stopping legitimate returns 
beyond the normal time for just being able to review them and 
determine, oh, this is a legitimate return, these returns to be 
false-positive are already past that timeline, and that is what 
makes them false. And then they turn out to be from legitimate 
taxpayers.
    My concern is the way the filters and the rules are run. I 
think there are almost 200 rules that are in the systems to 
identify these things, and I am very concerned about their 
interaction, and I think that the IRS has been focusing a lot 
on stopping the fraud but not enough on the refinements. And I 
try to keep reminding people this is the 21st century, we have 
data mining techniques, artificial intelligence, all sorts of 
things. We can learn from past experience and focus as much on 
not harming the legitimate taxpayers.
    I have talked to tax administrations around the world, and 
all of them are shocked at the over 60 percent false-positive 
rates.
    Mr. Meadows. So what do you say to that, Mr. Kautter?
    I mean, Mr. George, do you see that happening as well, 
false positives?
    Mr. George. We are currently taking a look at this very 
issue, Mr. Meadows, and we will be issuing a report shortly. I 
agree with Ms. Olson that it is an issue for anyone who is 
entitled to a refund not to get it, but it is also 
extraordinarily important that Congress keep in mind that once 
the IRS lets money go out the door, it is almost next to 
impossible to get it.
    I want to give time for the Commissioner to respond, but I 
will say this, that the IRS itself reports that if they are 
able to use something called math error authority, or, in 
effect, the ability to correct mistakes that they identify 
internally before the money goes out, it costs the IRS about 
$1.50. But once the money goes out, in order to do a pre-audit 
review, it is $278.
    Mr. Meadows. So, Mr. Kautter, based on Mr. George's 
testimony, what would stop us from being able to do that? Do 
you need a legislative fix to help you?
    Mr. Kautter. I don't think it is a legislative fix, 
Congressman. I think it is a matter of balance.
    Mr. Meadows. A matter of what?
    Mr. Kautter. Of balance.
    Mr. Meadows. Okay.
    Mr. Kautter. So the IRS has put in place, as the taxpayer 
advocate states, about 200 filters. That may be too many. But 
it is this balance of trying to protect taxpayer dollars from 
going out the door and trying to protect ----
    Mr. Meadows. Yes, but when you get to 60 percent false 
positive, let me just tell you, once you go beyond 50 percent, 
you have a problem, because what you have is you have the 
assumption that it is wrong even though you have it kicking out 
as a fraudulent claim.
    Mr. Kautter. There is no question, we need to look at it.
    Mr. Meadows. Well, you need to do more than look at it. Do 
you have a plan to address that and to bring the false 
positives under 50 percent?
    Mr. Kautter. I will go back and develop a specific plan.
    Mr. Meadows. What would be a reasonable timeframe to get a 
plan to this committee on how you are going to do that?
    Mr. Kautter. We are constantly looking at it. So I would 
think within, say, two to three months.
    Mr. Meadows. So within 90 days you can have a plan to this 
committee on how you are going to get false positives under 50 
percent.
    Mr. Kautter. Yes, sir. I think we can do that.
    Mr. Meadows. All right.
    In my 11 seconds--well, I don't have any time remaining, so 
I will yield back to the Chairman.
    Mr. Jordan. We would have let you go there.
    We will now go to the Ranking Member, I think, and then we 
will come to Ms. Norton, I believe, if that is all right. So 
the Ranking Member is recognized.
    Mr. Krishnamoorthi. Thank you, Chairmen Jordan and Meadows, 
and Ranking Member Connolly, for facilitating this joint 
subcommittee hearing.
    Thank you to all of you for testifying today, and all the 
audience members for coming, and all of my colleagues as well.
    I also want to thank basically these witnesses specifically 
for participating in this very important hearing.
    In the recently passed Tax Cuts and Jobs Act, I was 
dismayed by my Republican colleagues' decision to cap the state 
and local tax deduction, otherwise known as the SALT deduction, 
at just $10,000 per person or family. In my district, the 8th 
Congressional District of Illinois, the average family files a 
SALT deduction of nearly $14,000 a year. Furthermore, one in 
every three tax filers in Illinois relies on this important 
deduction annually. In 2015, for example, Illinois residents 
deducted $1.4 billion and saved a total of $345 million on 
their Federal tax returns thanks to SALT. As a result, our 
local institutions received critical funding for public 
services, while my constituents avoided being subject to double 
taxation.
    Mr. Kautter, welcome back. I am sure you have heard that 
before.
    Mr. Kautter. That is the best day of my life when that show 
went off TV.
    [Laughter.]
    Mr. Krishnamoorthi. The Pew Charitable Trusts published an 
interactive map illustrating the most recent SALT deduction 
data. This data showed that the average SALT deduction for 
working families in the U.S. is $12,471. The first question, 
very basic, is this number higher or lower than the devastating 
$10,000 cap imposed by the Tax Cuts and Jobs Act?
    Mr. Kautter. It would be higher.
    Mr. Krishnamoorthi. Thank you. It is higher. It is $2,471 
higher, is it not?
    Mr. Kautter. Yes, sir.
    Mr. Krishnamoorthi. Well, it should come as no surprise 
that state and local tax jurisdictions across the country are 
introducing legislation to circumvent changes to the SALT 
deduction. Are you aware of these efforts?
    Mr. Kautter. Yes, sir.
    Mr. Krishnamoorthi. And in my home state of Illinois, where 
$2,500 is, naturally, a lot of money for most hard-working 
families, elected officials are trying to restore full 
deductibility to contributions to local services. In fact, both 
Democratic and Republican legislators in the Illinois Assembly 
have proposed legislation to create the Illinois Excellence 
Fund, a law that will mitigate the damage caused by the 
Republican changes to the SALT deduction. As this legislation 
forges ahead and other states begin to follow suit, I sincerely 
hope the IRS will recognize the validity of these proposals.
    Thank you, and I yield back the balance of my time.
    Mr. Jordan. I thank the gentleman.
    I think we will go to Ms. Norton, and then move to Mr. 
Grothman. Since that was sort of a combination opening 
statement and some questions, we will get back to you, Mr. 
Krishnamoorthi.
    Ms. Norton. I thank you, Mr. Chairman. I thank you for this 
hearing.
    I am particularly interested in this hearing because the 
Americans I represent who live in the District of Columbia pay 
the highest Federal taxes per capita in the United States, 
higher per capita than any member of this committee, and they 
do so without a vote on the House floor and with no vote in the 
Senate. We do have a vote in this committee, which I intend to 
use.
    This tax cut is not yet popular with the American people, 
but they will be looking for service from the IRS, and 
certainly my residents will be.
    I note that the IRS has an amazing half the number of 
customer services than it had in 2010. Now, I congratulate the 
IRS on what it has done with digital upgrading, but at the same 
time the IRS has closed 30 taxpayer assistance centers, and 
that is again over the last eight years.
    Mr. Kautter, does the IRS believe, for example--this is for 
you and Ms. Olson--that whatever digital impact we now have, 
that that will make up for loss of half the customer service 
representatives and the closing of 30 taxpayer assistance 
centers?
    Mr. Kautter. Thank you, Congresswoman. What the IRS is 
trying to do is meet taxpayers in the way they want to be met. 
In other words ----
    Ms. Norton. And you think they do not want to be met face 
to face? Particularly now I ask this question when there are 
100 new provisions that they have never seen before, that you 
have never seen before, that you have to enforce. You think 
that they would just as soon go online?
    Mr. Kautter. Oh, no. I think there are some taxpayers 
clearly who would prefer to be dealt with face to face, some 
that would like to discuss issues on the phone, and then an 
increasing number prefer technology. The number of ----
    Ms. Norton. Do you think taxpayers who are, let us say, 
over 55, 65, prefer the digital approach or the face to face 
approach, Mr. Kautter?
    Mr. Kautter. Interestingly, I think most would prefer face 
to face or on the phone, but an increasing number do prefer 
technology.
    Ms. Norton. What has the IRS done this year to make up for 
the fact that there are going to be hordes of people coming 
forward to say what do these 100 new provisions mean? Will you 
be able to accommodate these people with half the number of 
customer service representatives and with no assistance in 
their communities in the case of 30 of those centers that have 
now been closed? Are you able to accommodate this rush of need 
for assistance in light of what the Congress has put on your 
shoulders to bear?
    Mr. Kautter. We will try to do the best we can with the 
resources we have available to us.
    Ms. Norton. What do you think, Ms. Olson? What will be the 
effect of the 100 new provisions as people try to figure out 
their taxes in an entirely new way for the first time?
    Ms. Olson. Our survey that we did of U.S. taxpayers, a 
representative sample of U.S. taxpayers nationwide over the 
last two years showed that taxpayers, many will go online. But 
for tax law questions and tax issues like notices and needing 
to resolve a problem, they want to either talk to someone or 
they want in-person assistance. And although there does seem to 
be some concentration in low-income and elderly, it is really 
surprising how many not-low-income people prefer talking over 
the phone to resolve a problem.
    Ms. Norton. Is this going to increase with the new 
provisions? For example, SALT is ----
    Ms. Olson. Absolutely. No matter how good your system is 
online, people have specific circumstances, and I am 
particularly concerned that in the past the IRS has ended its 
tax law phone line after today.
    Ms. Norton. What does that mean, please?
    Ms. Olson. They have a dedicated tax law question line, and 
since 2014 that line has discontinued as of the last day of the 
filing system.
    Ms. Norton. Mr. Kautter, why is that happening, and what 
does it do?
    Mr. Kautter. In the past it has been a matter of resources. 
We continue to answer certain tax law questions ----
    Ms. Norton. Now, these are tax law questions put by ----
    Ms. Olson. Taxpayers.
    Ms. Norton.--taxpayers, not lawyers, taxpayers.
    Mr. Kautter. That is right. And we have decided for all of 
this year, we will answer questions with respect to the new tax 
law throughout the year.
    Ms. Norton. So wouldn't this be the time you need a tax 
line? Because there are 100 new tax laws.
    Mr. Kautter. And that is what we intend to do.
    Ms. Norton. But the tax law line is gone as of today, 
according to Ms. Olson.
    Mr. Kautter. I guess what I was trying to say, 
Congresswoman, and I wasn't clear, this year we will keep that 
tax law line with respect to the new Tax Cuts and Jobs Act open 
for the entirety of the year.
    Ms. Norton. This is very important, Mr. Chairman, as I 
yield back my time. We have learned at this hearing that this 
tax law line, which was discontinued in 2014, will be renewed, 
and I must thank the IRS for that in light of the new tax law. 
And I thank you very much, Mr. Chairman.
    Mr. Jordan. I thank the gentle lady.
    I think, just to clarify, you have had the tax question 
line open, and it just always closed on filing date.
    Mr. Kautter. That is right.
    Mr. Jordan. Now they are going to keep it open for a longer 
period of time.
    Mr. Kautter. Right.
    Mr. Jordan. Right, just to be clear.
    The gentleman from Wisconsin is recognized.
    Mr. Grothman. First of all, this is to Mr. George a little 
bit. Thanks for being here, first of all. You guys are always 
very impressive.
    You issued reports last July on the IRS giving out awards 
to employees with serious misconduct issues. There have been 
examples, apparently, of employees even being removed and 
rehired. Could you comment on that? Do you think that has been 
cleared up? How can that possibly go on? What type of culture 
would there be where you let somebody go and then rehire them, 
or give out bonuses to people who are engaged in misconduct?
    Mr. George. Congressman, it was simply an issue of a lack 
of--I want to say common sense in some instances, but of a 
process that allowed the person making the hiring decision to 
have all of the information he or she needed regarding the 
candidate by their side or in the paperwork associated with the 
candidate's application.
    Mr. Grothman. So you mean the person made the hiring 
decision and didn't have access to the file on this person in 
the past?
    Mr. George. Well, I don't necessarily want to use the word 
``access,'' but they didn't have it with them while making that 
decision. We have been told now that has changed and that the 
IRS has implemented policies where the hiring decision-maker 
will have all of the relevant information relating to the 
candidate, especially someone who previously worked at the IRS.
    Mr. Grothman. Okay. I know some people want to hire more 
people for the IRS. Years ago I used to do tax returns, and at 
the time sometimes you would have a sticky question and you 
would ask the IRS questions. Quite frankly, at the time I and 
the other preparers almost unanimously felt that the Wisconsin 
Department of Revenue understood Internal Revenue Service laws 
better than the average IRS employee.
    So to me, the important thing is not hiring more employees, 
because what is the sense of hiring an employee if they give 
you the wrong answers, right?
    Do you guys, in your audits, do you test IRS employees to 
see if they are giving right or wrong answers to inquiries?
    Mr. George. That was a regular process that we did employ 
many years ago, and when we initially did this, especially at 
taxpayer assistance centers, the numbers were abysmal. I mean, 
more than 50 percent, almost 60 percent of the information or 
the answers given to our testers were inaccurate.
    Mr. Grothman. I will cut you off just because I will ask 
you to follow up. I mean, 60 percent, I believe this. When I 
was doing taxes, that is entirely believable. You would ask an 
IRS employee a tax question, 60 percent of the time they would 
give you a wrong answer. That would be typical of my experience 
25 years ago.
    Go ahead.
    Mr. George. But it has improved dramatically, though, since 
then. So I don't have the latest figures. We can supply that 
for the record. But it has improved tremendously, and we don't 
do it every single year in terms of having people vet the 
taxpayer assistance centers, so I will supply that information 
for the record.
    Mr. Grothman. Okay. Do you have a guess? I mean, is it 20 
percent wrong, 30 percent wrong?
    Ms. Olson. If I might add ----
    Mr. Grothman. Sure.
    Ms. Olson. One of the ways it improved is that the IRS 
then, after those abysmal numbers, it took a whole bunch of 
more complex questions and put them in what they call ``out of 
scope.'' So the numbers improved because the IRS just simply 
refused to answer questions that it was getting wrong.
    Mr. Grothman. Oh, like schools.
    Ms. Olson. Yes, there you go. So one of the things we are 
going to do this summer is we are going to be testing--my 
office is going to be calling the tax law line, posing some 
typical questions relating to the new tax law to see how they 
are being answered, or are they even in scope.
    Mr. Grothman. That is a real good idea. If you are hiring 
new people who don't know the tax law, that is worse than 
hiring nobody at all, correct? Do we all agree on that? If you 
are in an audit or the IRS audits you and asks for more money 
and interest and penalties, and you say this is the way the IRS 
told me to fill out the return, what does the IRS do? I know 
what the IRS will do. What will the IRS do to you?
    Ms. Olson. You know, one side effect of the funding or just 
priorities is that the training for the employees in the Wage 
and Investment Division who answered the phones last year was 
$87 per employee. That is it.
    Mr. Grothman. Well, okay.
    Mr. George. I found, sir, that they are not Draconian. If 
you can reasonably state and point to a time when you called 
into the IRS and the information that they provided you, they 
will take that into consideration. That is anecdotal, but that 
is still my understanding.
    Mr. Grothman. Thank you.
    Mr. Jordan. Now to turn to the gentle lady from New York, 
Ms. Lawrence.
    Ms. Lawrence. Thank you, Mr. Chair.
    I have a question for Mr. Kautter. As we know, the new tax 
law, I feel strongly, does a lot of damage to our community. In 
Michigan, the poorest 20 percent of families will pay $120 more 
in taxes by the year 2027, and the richest will pay 1 percent.
    However, Working Women and I sent a letter to Gene DeLauro 
outlining the impact that this law will have on women in low-
income families, because Working Women represents the largest 
portion of low-income working people in America. However, you 
have stressed that you are reducing the assistance centers. Is 
the IRS planning specific outreach and assistance to vulnerable 
groups to better assist them in the next tax season, including 
working women and mothers? Can you tell me the details of what 
the new outreach campaigns, community work, advertising, and 
new materials have you planned?
    Mr. Kautter. About 19 percent of the funds we have asked 
for to implement tax reform involves outreach to taxpayers. We 
are in the process of developing a detailed plan, so I don't 
have those details at this point as to which groups we will 
reach out to and in what manner.
    Ms. Lawrence. So you don't know who you are reaching out 
to, you just know you need to do it.
    Mr. Kautter. We are developing a plan at the moment. Yes, 
ma'am.
    Ms. Lawrence. So through the Chair, it is important that we 
know who you are reaching out to and what the plan is, and I 
don't expect the plan to be two days before the next tax 
season. So what is the date for the new plan?
    Mr. Kautter. It should be developed by early summer. So I 
would think mid-June at the latest, probably before then.
    Ms. Lawrence. I want you to know that I am very concerned 
because I get calls in my congressional office. We are talking 
about the accuracy of the information that the employees are 
given, but actually getting to a person is an extreme challenge 
right now, and it is frustrating, especially for those.
    Ms. Olson, you know that going online is not an action to a 
lot of people and to our seniors. It is extremely challenging. 
And so while you have to have a sense of the challenge that the 
public is having now just to get to resources, and it is not 
acceptable.
    Ms. Olson. You know, there are only about 390 IRS employees 
charged with doing outreach and education to individual 
taxpayers, the 150 million U.S. individual taxpayers. There are 
only about 96 IRS employees charged with doing outreach and 
education of small businesses and self-employed, and that goes 
to the cuts of pre-filing assistance and education and 
outreach, being in the communities.
    It is not just about telling taxpayers what the law is but 
hearing from them what their challenges are so that then you 
can do better online materials, better ----
    Ms. Lawrence. Ms. Olson, that gets back to Mr. Kautter. It 
doesn't do us any good if you create a plan that is not going 
to solve the problem, and we have a serious problem. We 
implemented a tax plan, we have cut the workforce in the IRS, 
we have now not done our outreach, we are doing a plan, and I 
am telling you I am very, very concerned.
    Mr. Kautter. Thank you, Congresswoman. I agree, we need a 
meaningful plan that reaches those folks who need help. Let me 
just say with respect to the phones, this filing season the 
average wait time has been about 6 minutes. Last year it was 7. 
This year it is 6 minutes. In addition, we are looking at some 
features like amending the phone assistance line so taxpayers 
know how long the wait is, and to add a call-back feature.
    So I think there are some things we can do that are fairly 
straightforward that we need to do. But the numbers I have at 
the moment say the average wait time so far this busy season 
has been about 6 minutes.
    Ms. Lawrence. If I could, you say some of these taxpayers 
can be helped by the phone, but in 2018, 33 million calls have 
been made to the IRS, and only 6.4 million have been answered 
by a real person or a tax assistant. This information is what 
we have, and you are saying it is 6 minutes to an answer, and 
so many of these people aren't even getting an answer.
    Mr. Kautter. Many folks, when they call the telephone 
numbers, are prompted to see if their question can be answered 
by a recorded message, and many taxpayers opt to opt out of 
talking to a live person and go to a recorded message with 
respect to the topic they are interested in.
    Ms. Lawrence. My time, I have gone over, but I just want to 
close with this. The reduction in the workforce, we cannot 
continue to say that we have this overall objective and our 
philosophy and our values if you don't have the workforce and 
the trained workforce to perform the job. It is not acceptable 
for you as the leadership to not bring that to Congress and be 
truthful about what is happening. It is one thing to try to be 
appeasing in these hearings. It is another thing for us to hear 
the truth, and I hear from those Federal employees who are 
inundated with lack of resources and technology without having 
enough resources to perform the job that they swore and took an 
oath to.
    I am going to continue to push this and not sit here and 
listen to ``we are trying, and our philosophy is to perform the 
job'' when we know we are not. We have to roll up our sleeves 
and fix this.
    And I yield back. Thank you.
    Mr. Meadows. Mr. Chairman, with your indulgence.
    Mr. Kautter, Ms. Lawrence makes a very good point. I used 
to manage a phone center. There is no way possible that your 
sworn testimony right now is accurate. If her numbers are 
accurate in terms of the number of calls that went unanswered, 
there is no way that 6 minutes is the average wait time. So I 
would ask you to maybe, before you enter that into the record, 
to go back and have a look at that and let's make sure we get 
accurate information. I am just telling you.
    Mr. Kautter. Yes, sir. Well, I will confirm that, but I 
would also say that many people, as I mentioned, many people 
opt out of ----
    Mr. Meadows. I get that. But even with that, if there are 
that many unanswered phone calls, there is no way that it can 
be 6 minutes, Mr. Kautter. I used to manage a phone center.
    Mr. Jordan. I appreciate the gentleman.
    The gentleman from California is recognized.
    Mr. Issa. Thank you, Mr. Chairman.
    You know, there is always an impossible question, Mr. 
Kautter, but I am going to ask you the impossible question.
    Today, how can the American people know that a Lois Lerner 
couldn't do again what she did to so many Americans?
    Mr. Kautter. That is a hard question. Thank you. I think 
the IRS ----
    Mr. Issa. And by the way, after you I am going to the 
Inspector General and ask the same question.
    [Laughter.]
    Mr. Kautter. Having been there five months, I will give you 
my impression. I think over the last couple of years the IRS 
has implemented a number of changes with respect to reporting 
structures and with respect to annual evaluations to make sure 
that these sorts of things don't happen again. It is partly the 
people you hire, it is partly the processes that you have in 
place, and I think the IRS has tried to be judicious in who it 
hires, and it has tried to be pretty deliberate about its 
annual review process structurally and through HR processes. 
Thank you.
    Mr. Issa. Mr. George, as you know, Lois Lerner had already 
abused people when she was at the Federal Election Commission. 
She had already testified before Congress, this committee in 
the '90s, that going after the Republican Party of Florida and 
not the Democratic Party of Florida for the exact same illegal 
donors' money, that, in fact, she was already a bad actor with 
a long history who, it is not surprising, hated Republicans, 
hated conservatives, was a strident Democratic activist.
    So I appreciate the Commissioner's ``we have to hire 
better,'' but from a systems standpoint, which is what you look 
at so often, from a systems standpoint, where are the checks 
and balances? Who is it besides yourself, sometimes locked out 
of the process, but who is it besides yourself who is the 
watchdog to look for these and, early on, stop the kinds of 
abuses that Lois Lerner did for most of the Obama 
Administration?
    Mr. George. It is not a single point of contact, 
Congressman. It starts from the hiring of the person to the 
managing of that person during the process, and to looking at 
the results that person achieves or doesn't achieve. It is a 
multifaceted enterprise. The bottom line is, it is impossible 
to stop someone who, with ill intent, who can put on a fa?ade 
that will get them through the door, get them access to 
sensitive information, and that allowed them to engage in 
egregious behavior. So it does require at all times people 
monitoring the activity of their subordinates and of 
supervisors. When you see something wrong, you have to say 
something about it.
    Mr. Issa. As you know, the groups that were being asked 
absurd questions, sometimes unlawful questions, and not being 
granted their status were saying things, but it went on deaf 
ears at the time. It was a process. There was no one to 
complain to, essentially, within the process.
    So let me ask you a related question, and then I want to 
get to Ms. Olson. If somebody is guilty of sexual harassment at 
the IRS, do you today have a process that only takes one 
offense, one claim in order to open an active investigation and 
go to the bottom of that to prevent it from happening a second 
time?
    Mr. George. It is a very fact-specific answer. If it is 
something that occurred outside of the workplace and is within 
local law authority jurisdiction, we have to be deferential to 
the separation of Federal and state ----
    Mr. Issa. But I am talking about on the worksite, if 
somebody does something that would qualify for that, there is 
in most of the agencies a fairly rapid response where, for 
political leaning wrongdoing, it is less obvious. Is that a 
fair statement?
    Mr. George. That is a fair statement. But again, for the 
administrative versus criminal, that is a distinction that has 
to be made. But that problem does exist within the IRS as you 
know.
    Mr. Issa. Ms. Olson, I am using those two examples because 
they do seem like they are both important and they both have to 
be dealt with systematically. As an outsider looking in, what 
should we know?
    Ms. Olson. You know, I have thought a lot about my 
organization's role in that whole process. We had 19 cases come 
in over two-and-a-half years dealing with C4 issues out of a 
million cases, and it is really hard to see a pattern with 
that. But I have really thought that most of those taxpayers 
complained to their congressional offices, and we really need 
to rely on the congressional offices to raise to my office when 
you see those kinds of cases and those kinds of concerns, get 
them to us, because if they really are, then I can get them to 
the Inspector General, or we can delve into is it just an 
employee who doesn't understand, is it leadership, what is it 
and where does it need to go, because 19 out of a million, I am 
not going to see a pattern. But if they come from a 
congressional office, that will help us. They will be better 
developed, and I may be able to get more than 19. That will at 
least be a protection going forward.
    Mr. Issa. Excellent. Thank you.
    Yield back.
    Mr. Jordan. I thank the gentleman.
    The gentle lady from New York is recognized.
    Ms. Maloney. Thank you, Mr. Chairman, and welcome to all 
the panelists.
    First, Mr. Chairman, I would like to ask unanimous consent 
to place in the record a letter from EPIC.org to the Chairman 
of the committee, the Electronic Privacy Information Center.
    Mr. Jordan. Without objection.
    Ms. Maloney. Thank you.
    My first question is to Inspector General George. Good to 
see you again. I know you used to work for the committee, and 
it is nice to see your presence here with us today.
    For years the IRS has struggled to keep the information 
technology systems up to date and in line with industry 
standards. So my question to you is, how does aging IT threaten 
the IRS' ability to do its job?
    Mr. George. This question was addressed slightly earlier in 
more detail, but I will give you from my perspective. Aging IT 
depends, of course, on the particular system you are referring 
to. So, for example, a laptop could be considered aged after 
three years. A mainframe, it could be five to ten years. And 
then, of course, you have the master file and the Kade, and as 
you are aware, because you have been involved in this issue for 
many years, they are still using software or language from the 
1960s.
    So it is a problem, especially if you try to adapt to a 
21st century environment. The IRS had many grand plans for 
modernization to make it easier for taxpayers to identify their 
tax obligation and to comply with it. Unfortunately, because of 
budgetary constraints, they have had to make hard choices. Some 
of those again include whether to implement extenders, and now 
with the new tax law changes, the largest in 30 years, provide 
more customer service, people answering phones, or--and this is 
an area that really hasn't been touched upon, but going after 
people who owe money; in other words, doing examinations and 
audits. I mean, it is almost at a record low, and the IRS, 
hence the American taxpayers, the honest taxpayers, are being 
harmed because the IRS has had to have made very tough 
decisions, which I don't necessarily fault them on because of 
the lack of resources.
    Ms. Maloney. Well, it really hurts IT workers because they 
are very much in demand and they are very well paid, and I can 
imagine that it is hard to recruit them, and you need them in 
order to modernize for the 21st century. One of the biggest 
sticking problems has been the IRS' inability to hire and 
retain experienced IT workers and professionals because of the 
pay gap.
    I know from 1998 to 2013 the IRS was able to address this 
by hiring 40 individuals under what is known as the streamlined 
critical pay authority. So I would like to ask the Acting 
Commissioner, is it accurate to say that the IRS filled a total 
of 168 positions critical to this area of IT over the past 15 
years by using this program? But I understand the program has 
expired and that you can no longer hire from this program, and 
what has that meant to the agency?
    Mr. Kautter. You are exactly right, Congresswoman. The 
ability to hire and to streamline critical pay was enacted in 
1998. Between then and 2017, I think the actual number is 171 
people that have been hired under that program. We were 
authorized to hire 40 people at a time. The most we ever had 
was 30. The last person on that program left in September of 
2017.
    Under streamlined critical pay, which we have asked for for 
the last three years, we would be able to hire somebody in six 
weeks, which now takes six months, and we would be able to pay 
them competitively, which we cannot do at the moment. So our 
ability to deal with data analytics, cyber security and other 
critical technology needs is limited at the moment.
    Ms. Maloney. So right now that authority has expired, and 
you are calling for it to be re-implemented because this would 
help you address many of the issues that we are talking about 
today?
    Mr. Kautter. Yes, ma'am. It is included in the President's 
budget.
    Ms. Maloney. It is included in his budget?
    Mr. Kautter. It is in the budget.
    Ms. Maloney. Mr. George?
    Mr. George. I would just add, though, there is a secondary 
hiring authority that is government-wide that can be used. The 
difference is the pay differential. Under the special authority 
that the IRS had, they could pay substantially more, up to the 
Vice President's salary, whereas under the existing program it 
is less, but it is rarely used in government, and I don't 
believe the IRS at this time has anyone at that rate.
    Ms. Maloney. But you say this authority is in the 
President's budget?
    Mr. Kautter. It is.
    Ms. Maloney. But the funding is not in the President's 
budget. Is that the problem?
    Mr. Kautter. It is included for the Fiscal Year 2019 
budget. It was also in 2018, and it wasn't included in the 
final bill.
    Ms. Maloney. Okay. Well, my time has expired. Thank you.
    Mr. Jordan. Thank you.
    The gentleman from Montana is recognized.
    Mr. Gianforte. Thank you, Mr. Chairman, and thank you for 
letting me sit in today.
    To the committee, being here on tax day, this is game day 
for the IRS.
    Mr. Kautter. Yes, sir.
    Mr. Gianforte. Ms. Olson, in your testimony you discuss 
metrics for customer service regarding taxpayer phone calls. 
Have those metrics been improving or getting worse over the 
last three years?
    Ms. Olson. It depends on what your metric is. If you are 
looking at the level of service on the phone, a percentage of 
calls that are answered, the calls from taxpayers who want to 
speak to a live human being on the main phone line, that has 
been improving. My observation has been that it has been 
improving at the expense of other phone lines, and the measure 
doesn't reflect a comprehensive measure of all the phone lines 
the IRS has.
    The other thing that we did this year is that we did a 
survey of private sector, private industry customer service 
practices and the measures that they used, and based on our 
research, which we reported in our annual report, the most 
important measure that they used was first contact resolution 
rate. The IRS doesn't measure that. And when we did find some 
measures just from survey, in our survey we found that the vast 
majority of taxpayers did not have their issue resolved on the 
first point of contact.
    Mr. Gianforte. Okay. Thank you, Ms. Olson.
    Mr. Kautter, I know you are acting head for just five 
months, so you are just getting started, so I want to tell you 
a little story. Prior to being here, I built a technology 
business focused on customer service, and we had about 2,000 
major corporations all over the world, including 170 Federal 
agencies that we work with. We handled about 8 million customer 
interactions a day on behalf of our clients, and our mission 
was really to help organizations instrument and improve 
customer service. That is what we did.
    So I want to talk to you for part of my time here about how 
you are driving a culture of customer service within IRS. The 
first question: Who is in charge? Who on your executive team is 
responsible for customer experience?
    Mr. Kautter. I think it is the Commissioner, frankly. It is 
me. Yes, sir.
    Mr. Gianforte. So you have no one on your team whose sole 
focus is customer experience?
    Mr. Kautter. In the executive team, we don't. That is a 
responsibility of everyone on the team.
    Mr. Gianforte. That is fine. I would just encourage you to 
consider that.
    If you had to name the top two or three customer service 
metrics that are important to the agency, what would they be?
    Mr. Kautter. I think the first one would be the level of 
assistance in complying with the law, and I think it would be a 
broader measure than just phone response. In other words ----
    Mr. Gianforte. Do you think citizens are happiest if you 
are following the law?
    Mr. Kautter. I think it is assisting citizens to comply 
with the law. So it is providing advice to taxpayers in a way 
that is meaningful to them.
    Mr. Gianforte. Do you have a dashboard from this individual 
who is responsible for customer service that shows you how you 
are doing on the most important metrics? And how often do you 
review those metrics?
    Mr. Kautter. I do not believe we have a dashboard at the 
moment.
    Mr. Gianforte. Okay. Let me switch topics for a second. In 
your opening testimony, you said that 92 percent of taxpayers 
are filing online, and you also testified that the website is 
down today. So in a real sense, this is game day for the IRS, 
and it seems the IRS can't get out of the locker room. So my 
question for you is, on the biggest day of the year for the 
IRS, how did you prepare for game day, and why were those 
preparations deficient?
    Mr. Kautter. Sure. So, we have--well, first of all, 
taxpayers can continue to prepare their returns and submit them 
to their electronic Turbotax, Intuit. They can continue. The 
challenge we have is between the transmission from the software 
providers--H&R Block, Intuit--to the IRS systems. So taxpayers 
will be unaffected at the moment. They can file, fill out the 
return, give it to their submitter. Then the challenge is the 
transmission, as I said, between that processor and the IRS.
    We have backup systems that we are bringing up online, and 
I haven't had an update since we have been in the hearing, but 
hopefully we will have that issue resolved quickly.
    Mr. Gianforte. Okay. I did get an update, and it says that 
the IRS direct payment system is down, which means people 
cannot pay the IRS currently. Clearly, we understand the 
significance of this. Generally, for most Americans, there is 
one day when they interact with the IRS. It is today. And the 
system, by your testimony, that 92 percent of Americans use is 
not available.
    So with that, my time is up and I yield back.
    Mr. Jordan. I thank the gentleman.
    Mr. George, has the IRS hired people who they previously 
fired?
    Mr. George. Yes.
    Mr. Jordan. And in one instance there were specific 
instructions not to rehire this individual who they had 
previously fired. Is that accurate?
    Mr. George. That is my understanding, yes.
    Mr. Jordan. And does the IRS give bonuses to their 
employees?
    Mr. George. Yes, they do.
    Mr. Jordan. In 2016, wasn't there approximately 1,000 
employees at the Internal Revenue Service who had trouble 
paying their taxes on time or had some kind of tax complication 
of their own who received a bonus?
    Mr. George. That is correct.
    Mr. Jordan. And last year, isn't it true that there were 
approximately 2,000 employees at the IRS who got bonuses, and 
yet during the year they had some kind of disciplinary action 
against them?
    Mr. George. Correct.
    Mr. Jordan. So, Commissioner, when you talk about the 
critical pay, the streamlined critical pay, you have to 
remember the background, and there is a reason why--I just went 
through a few of them--why the Congress is a little reluctant 
to give you this ability to hire whomever you want and pay them 
just about whatever you want in light of what we just went 
through with Mr. George.
    Mr. Kautter. I agree. I mean, it is indefensible to be in 
the position that the IRS has been in. Back in 2014, Mr. 
George's organization made a series of recommendations, all of 
which we implemented. We stopped about 80 percent of the 
payments that would have gone to people who had performance 
problems. We didn't stop 100 percent.
    In February, Mr. George's organization made three more 
recommendations, which we have implemented. But it is 
indefensible for those types of payments to be made. It 
shouldn't be.
    Mr. Jordan. Again, I appreciate that, and I appreciate the 
fact that you as the interim commissioner understand how the 
American taxpayer looks at this, 2,000 employees with 
disciplinary actions getting a bonus of their hard-earned tax 
money, 1,000 employees who can't file their taxes right getting 
a bonus when they are in the business of collecting tax money 
from the American taxpayer. And then for you to ask for, oh, by 
the way, we have to have this streamlined critical pay ability 
to pay folks way above the Federal pay scale which, frankly, a 
lot of Americans think is too high already, that is just tough, 
and I don't know that you are going to find a receptive 
audience, at least with Republicans, on that issue. We will 
look at it.
    Now, we talked earlier with Mr. Hice--and I know he wants 
to come back to it--about the employer mandate. So, Obamacare 
is passed in 2010. It starts to be implemented in 2013, but the 
employer mandate for small businesses was not implemented, was 
not enforced until just the end of last year. Is that right?
    Mr. Kautter. Yes, sir.
    Mr. Jordan. So what happened at just the end of last year 
where suddenly it was, shazam, we have to enforce it now? Mr. 
Koskinen has one foot out the door, and all of a sudden the 
last thing he does before he officially leaves as the 
commissioner is say we are going to now enforce something that 
we haven't since the law passed seven years prior, and we 
haven't since it has been in effect, in essence, since 2013, 
but suddenly we are going to do it.
    Mr. Kautter. Sure. So, let me give you the chronology as I 
understand it. The employer mandate was deferred until taxable 
year 2015. The information returns required in 2015 were due 
June of 2016. When the IRS got that data, there were about 330 
applicable large employers who could be subject to the penalty. 
So June of 2016 IRS has the data to determine who has provided 
coverage and who hasn't. It was not ready, frankly, to process 
those effectively. It took about 15 months for it to determine 
that the population of employers likely to owe the mandate is 
about 33,000. So it started to send those notices.
    So June of 2016, they have the information. It takes them 
about 15 months to process it. November, before I get to the 
IRS, the notices go out. At this point about 10,000 notices 
have gone out. The potential population is about 33,000 
employers who have said they haven't provided coverage. The 
notices are based on the data that was submitted by the 
employers in 2016. Of the 10,000 letters that have gone out, 
about 3,000 cases have been settled, and of those 3,000, as I 
mentioned earlier, 82 percent--so we sent letters out saying it 
looks like this amount is owed in those 3,000 cases that we 
settled. Eighty-two percent of those, the employer owed 
nothing. In part, the forms had been filled out incorrectly.
    So, as I said, we have gotten two responses in general in 
the cases where we talked to taxpayers. One is we filled out 
the paperwork incorrectly or a third-party processor filled it 
out incorrectly, and the other 18 percent has been pretty much 
we knew we didn't provide coverage, we knew we owed the 
penalty, and we were waiting to find out how much it was 
because we can't determine it on our own.
    Mr. Jordan. I will go to the gentleman from Georgia for 
some follow-up.
    Mr. Hice. Thank you, Mr. Chairman.
    I do want to continue down this line of thought, and I 
regret that the gentleman from Virginia was not able to follow 
my reasoning and thought with this. I am in no way asking you 
or anyone else not to abide by the law, but the fact is the law 
has not been followed, has not been enforced for eight years, 
requiring the employer mandate, and then all of a sudden it is, 
by your own sworn testimony, without any notification, it is 
implemented and businesses are facing penalties without any 
notification that it is now being implemented.
    So, it is wrong. It is wrong yesterday, it is wrong today, 
it will be wrong tomorrow for us basically to communicate that 
this law is not going to be enforceable, and then all of a 
sudden start penalizing them for not being in compliance. That 
is the point. And for that reason we ought to continue not 
enforcing it until we get our act together here, until these 
employers are notified that this is going to be enforced.
    What are the total number of companies not in compliance? 
What is the universe?
    Mr. Kautter. Our estimate for 2015 is about 33,000.
    Mr. Hice. All right, 33,000, which I find very difficult to 
believe, to be very honest with you. Do you know how many 
businesses there are in America that employ over 50 people?
    Mr. Kautter. I believe it is about 330,000, 340,000.
    Mr. Hice. Okay. By my rough estimates, and this is by 2010, 
the 2010 Census, there are almost 28 million businesses, small 
businesses, that employ less than 50 people. The Treasury says 
that 96 percent are less than 50 people. That means 4 percent 
are 50 people or more. That is over a million, over a million 
companies that employ over 50 people.
    Now, you say 33,000 are not in compliance. Am I supposed to 
believe, then, that we have a law that we say is not going to 
be enforced, and yet only 33,000 out of a million are not in 
compliance? So you have almost a million companies out there 
complying with the law that they are told they don't need to 
comply with. It doesn't add up.
    Mr. Kautter. I will go back and check our numbers, 
Congressman.
    Mr. Hice. But it doesn't add up, any number that it is. You 
say 500,000. Whatever number it is, are we really to believe 
that these companies are complying with a law that they have 
already been told they don't need to comply with because it is 
not going to be enforced?
    Mr. Kautter. From the data that I have seen, the vast 
majority of companies do provide health care coverage for their 
employees. So the 330,000 is the number of applicable large 
employers that are not providing the coverage.
    Mr. Hice. The numbers don't add up to me, and I want to get 
to the bottom of all of this because how in the world do you 
pick 10,000 out of a million, even if your own statements right 
here are correct, that 33,000 are not in compliance, but we are 
only reaching out to 10,000 of those? How do we determine which 
10,000 or whatever number it may be that we are going to pick 
on?
    Mr. Kautter. First we have looked at those employers who 
clearly state they do not provide coverage. So we started with 
them, with a group of those, and we are continuing to send out 
letters periodically.
    Mr. Hice. And so we start with them and say you are now 
under penalty for not complying with a law that we said you 
didn't have to comply with yet because it is not going to be 
enforced. I mean, that whole concept is wrong.
    Mr. Kautter. Congressman, the letter is not an assessment. 
The letter says based on the data that we have in front of us, 
it looks like you owe this amount. And then there is a 
discussion, and as I have said, in 82 percent of these 3,000 
cases that we settled it has been agreed that the employer 
didn't owe anything.
    Mr. Hice. I understand that. Here is part of my problem 
with all this, and it is just part of the problem. Under 
Commissioner Koskinen, we know that there was targeting of 
certain groups and individuals. The last thing Koskinen does 
when he leaves is instate a law that has previously been not 
enforced. How do we know that this 10,000 is not still 
targeting certain groups? We have a million companies out here, 
and we are supposed to believe that they have all been 
complying with something that has been communicated is not 
going to be enforced? The numbers don't add up, and then all of 
a sudden we have 10,000 of them that we are penalizing.
    I want to know, how do you pick these? I hear what you are 
saying, but the whole thing just smells fishy. I think we need 
a backup and make sure we know what we are doing before we 
start imposing penalties on companies that have been 
communicated just the opposite.
    Mr. Kautter. I think that is fair, Congressman, and let me 
get more detail to you.
    Mr. Hice. Thank you, and I yield back.
    Mr. Jordan. I thank the gentleman.
    Commissioner, we sent you a letter a week-and-a-half ago 
that goes right to what the gentleman from Georgia was asking 
about. I believe we are still waiting for you guys to respond. 
So the documents and the responses we requested will go a long 
way, I think, into clearing up the very real concerns that the 
gentleman has.
    Let me just ask, do you anticipate us getting the response 
and the documents sometime soon?
    Mr. Kautter. We do. We had a good conversation with the 
staff yesterday, and I think we can get most of the information 
you requested to you pretty quickly.
    Mr. Jordan. That would be important. Thank you.
    The gentleman from North Carolina is recognized.
    Mr. Meadows. Mr. Kautter, let me come back to the customer 
service side of things, because the gentleman from Montana was 
asking you some unique questions, and when you answered the way 
you did it gave me a real concern, mainly because I have been 
to the IRS and talked to some of your employees. I found the 
vast majority, in fact, the overwhelming majority of them want 
to just serve this country and do their job.
    And yet, if we are not placing importance on customer 
service, you will continue to get bad customer service, and it 
is partly because of the system that we created that creates 
bad customer service. I didn't see anybody sitting back eating 
bon-bons when I was there. I mean, they were actually working.
    So in doing that, how can you expect good customer service 
if you don't have a senior-level person with the responsibility 
of the customer experience, like the gentleman from Montana 
outlined?
    Mr. Kautter. I think his point is an excellent point.
    Mr. Meadows. So here is my request of you. If you would 
take some of your senior officials and you require them to call 
into the same phone center that we have to call into, make it 
mandatory. The punishment of having them do that alone would 
require them to do things differently, I promise you. Let me 
just tell you, you have no idea what it is like to call in and 
get the type of--I have often said, in the private sector, if 
CEOs would only go into their own phone system, they would 
change it immediately because there are certain companies--and 
I won't name them in this public forum--that I don't do 
business with just because I can't get to anybody.
    I would say that the IRS, it is a systemic problem. Ms. 
Olson would agree with that. I have talked with her a number of 
times on that.
    So why don't we do that? Would you agree in this particular 
venue to take your top 10 senior officials and make them call 
in at random during the random hours for the customer service 
experience, and then report back to Congress in 90 days on what 
they found?
    Mr. Kautter. I will do that, Congressman. I will tell you, 
I was a tax practitioner for 40 years and, believe it or not, 
the telephone service today is remarkably better than it had 
been, which is not to say it is where it should be, and I think 
it has to start at the top. I think it has to start with a 
commissioner who emphasizes taxpayer service. And as I tried to 
emphasize in my oral statement ----
    Mr. Meadows. You did.
    Mr. Kautter.--it has to be infused in everything this 
agency does.
    Mr. Meadows. All right. Let me go to the issue that the 
gentlemen from Ohio and Georgia have mentioned, on the mandate 
and the enforcement. Do you enforce every single law that you 
have with the same priorities?
    Mr. Kautter. I would hope so. I mean, I would hope that we 
implement everything within the Internal Revenue Code.
    Mr. Meadows. Well, maybe since this is your first hearing, 
I will give you a swing and a miss on that particular answer.
    Does the IRS--let me ask it a different way--put a 
different priority on who they go after, on who they audit? Is 
there a matrix which is going after those who they think might 
be the problem?
    Mr. Kautter. Sure. The taxpaying population is segmented 
with respect to a selection for audit. So, for example, for 
individuals, the likelihood of being audited for someone who 
makes more than $1 million ----
    Mr. Meadows. But you have criteria is my point.
    Mr. Kautter. Oh, yes, very detailed.
    Mr. Meadows. So in your testimony a few minutes ago, what 
was really troubling is it sounded like you were going after 
the people that were honest with you and said we didn't provide 
it, and the other 23,000 you didn't.
    Mr. Kautter. No, that is not ----
    Mr. Meadows. That is what it sounded like.
    Mr. Kautter. No. Then I am sorry. I did not properly 
convey. The plan is to approach all 33,000 ----
    Mr. Meadows. But you went after the 10,000 that admitted 
they were not providing it first, because they were the most 
honest with you. So you went after the first 10,000 that said, 
hey, by the way, we didn't provide it.
    Mr. Kautter. We went after those who were clearly in 
violation of the law.
    Mr. Meadows. By their own admission.
    Mr. Kautter. By their own admission.
    Mr. Meadows. But that is my whole point. So the 23,000 that 
make it more difficult for you, they are getting a little bit 
of delayed action.
    Mr. Kautter. Not much, but yes, sir, a little bit.
    Mr. Meadows. Okay. So the ones who admitted that they 
hadn't--and here is the interesting point that both the 
gentlemen have been making. The IRS did not have their act 
together as it related to this particular implementation of 
this particular law. Is that correct?
    Mr. Kautter. That is correct.
    Mr. Meadows. So inaction and inability on the part of IRS 
creates a crisis for the taxpayer. Do you see that as fair?
    Mr. Kautter. I don't think it is fair for taxpayers to be 
disadvantaged when the IRS can't function properly. I just do 
not think that is fair.
    Mr. Meadows. So this is a question of fairness, to me. We 
start to look at this, we have 10,000 people who say we didn't 
do it, we wanted to comply. By the way, we didn't provide the 
insurance, so they are the ones who won't complain to Ms. 
Olson. It is the other 23,000 that will. So when we look at 
that, are they getting treated differently because they 
admitted that they didn't do it, versus the ones who did?
    Mr. Kautter. By the time the process is completed, all 
33,000 ----
    Mr. Meadows. That is not the question I asked. Are they 
getting treated differently? Did you send out the same demand 
letters to all 33,000?
    Mr. Kautter. All 33,000 will get the same letter. It is 
just a matter of timing.
    Mr. Meadows. You are answering a good question that I 
didn't ask. Did you send out the same response to all 33,000 at 
the same time?
    Mr. Kautter. We did not send 33,000 out on the same day.
    Mr. Meadows. So people are getting treated differently.
    Mr. Kautter. In that sense, yes, sir.
    Mr. Meadows. Okay. Here is what I would ask you to do, 
because you seem like a fair guy. I would ask you to re-look at 
this with some of your senior officials and work with the 
National Taxpayer Advocacy group, with Ms. Olson's group, 
because we are creating a situation that individual taxpayers 
are getting treated differently based on their response. But we 
are also creating a situation where ultimately, because of our 
inability to implement a law, that they are getting perhaps 
penalties that they wouldn't normally get because of our 
inability for 15 months, according to your sworn testimony, 
that we didn't have our act together.
    It is bad enough when we have a law that is clear and it 
gets implemented that we go after people, but it is really bad 
when it is not clear and we are holding them accountable. Can 
you re-look at that for this committee?
    Mr. Kautter. Yes, sir.
    Mr. Meadows. All right. I yield back.
    Mr. Jordan. I thank the gentleman.
    The gentleman from Wisconsin is recognized.
    Mr. Grothman. No, thank you, Mr. Chairman.
    Mr. Jordan. Okay. Well, I will do a couple of quick things. 
All right. I appreciate that.
    Commissioner, the Office of Personnel Management has 
indicated that there are approximately a quarter of a million 
Federal employees whose salaries are now redacted, compared to 
3,400 that were in the previous year. A number of those 
redactions are IRS employees. Now taxpayers can't see what some 
people are actually making.
    Do you know what the number is of IRS employees who fall 
into that category?
    Mr. Kautter. I do not. Sorry. I just became aware of the 
issue yesterday, so I just don't. I can get back to the 
committee on that.
    Mr. Jordan. Okay. We would appreciate knowing the number of 
folks there.
    Let me do one other quick thing. There was a Memorandum of 
Understanding that the IRS was exempt from the typical OIRA 
rulemaking process. My understanding is that that is no longer 
in existence as of just a few weeks ago. Is that accurate?
    Mr. Kautter. That is correct. Last week we reached 
agreement, Treasury Department reached agreement with OMB on a 
new Memorandum of Understanding which I think strikes a pretty 
good balance between greater OMB review of regulations that 
might impose a burden on the American public while letting 
Treasury get regulations out in a timely fashion. It was a very 
thoughtfully negotiated agreement, and I think it is going to 
be pretty effective.
    Mr. Jordan. Okay. Well, we appreciate that step, what I 
would consider a step in the right direction. It is my 
understanding, though, that the IRS still, most of the 
regulations you view as interpretive versus actually rulemaking 
requirements, and therefore still a bunch of what you do 
doesn't go through the typical rulemaking authority.
    I see Ms. Olson nodding her head.
    So I would hope we can improve that as we go forward, as 
well.
    Mr. Kautter. Sure. What the Office of Management and Budget 
typically reviews are regulations. Regulations have the force 
and effect of law once finalized. So OMB has looked at those 
for decades. There is a lot of what is called sub-regulatory 
guidance that is issued by the Internal Revenue Service, which 
are expressions of the IRS view of the law. So fact sheets, 
frequently asked questions, revenue rulings, and those are not 
typically subject to review by the Office of Management and 
Budget, and they were specifically considered as part of this 
negotiation.
    Mr. Jordan. Right, but you can obviously see the problem. 
If you as the agency get to define what you believe is 
interpretive and guidance and don't have to follow the rules 
even though you got rid of the Memorandum of Understanding 
which exempted you from all of them in the first place, but now 
you are not, it is basically the same difference.
    Mr. Kautter. Yes, sir. That is not our intent.
    Mr. Jordan. Okay.
    The gentleman from North Carolina.
    Mr. Meadows. So, Mr. Kautter, can you give us a copy of 
this new MOU?
    Mr. Kautter. Yes, sir.
    Mr. Meadows. All right. If you will do that.
    The gentleman from Ohio's point is this. I know the IRS has 
had a unique--I want to thank you for working with OMB to look 
at a more transparent regulatory process. If your, as you 
called it--what was it, sub-regulation?
    Mr. Kautter. Sub-regulatory guidance.
    Mr. Meadows. That is a unique one for the IRS. Normally 
they call it guidance in other areas. But if it has the 
function of law--i.e., somebody is going to get audited and a 
penalty would be attached to that--then it would still come 
under the review process. Is that your ----
    Mr. Kautter. Yes, sir. That is correct.
    Mr. Meadows. All right. I yield back. I thank the 
gentleman.
    Mr. Jordan. I thank the gentleman. We look forward to 
getting that memorandum.
    I would just say, Mr. Commissioner, you have a tough job. 
God bless you for taking it on, even for whatever length of 
time, until Mr. Rettig is confirmed. But when you have an 
agency that has rehired people they were specifically told not 
to rehire, it is giving bonuses to people who haven't actually 
paid their taxes, giving bonuses to people who have been 
disciplined, I just think you have a tough job, particularly in 
light of what we just witnessed with the previous Commissioner 
and what took place at the IRS over the last several years and 
the whole targeting scandal. But I feel like I have the 
confidence that you are going to do it right and get us the 
information we need in a timely fashion.
    I want to thank all of you for the work you do, Ms. Olson, 
Mr. George, for the numerous times you have appeared before 
this committee with important information for the American 
taxpayer. And, Commissioner, thank you for being with us today.
    And with that, we are adjourned.
    [Whereupon, at 11:58 a.m., the subcommittees were 
adjourned.]


                                APPENDIX

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