[Senate Hearing 115-239]
[From the U.S. Government Publishing Office]








                                                        S. Hrg. 115-239

                      THE 2017 TAX FILING SEASON:
                  INTERNAL REVENUE SERVICE OPERATIONS
                      AND THE TAXPAYER EXPERIENCE

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 6, 2017

                               __________

                                     



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]











                                     

            Printed for the use of the Committee on Finance
                                   ______

                         U.S. GOVERNMENT PUBLISHING OFFICE 

30-194-PDF                     WASHINGTON : 2018 



















                          COMMITTEE ON FINANCE

                     ORRIN G. HATCH, Utah, Chairman

CHUCK GRASSLEY, Iowa                 RON WYDEN, Oregon
MIKE CRAPO, Idaho                    DEBBIE STABENOW, Michigan
PAT ROBERTS, Kansas                  MARIA CANTWELL, Washington
MICHAEL B. ENZI, Wyoming             BILL NELSON, Florida
JOHN CORNYN, Texas                   ROBERT MENENDEZ, New Jersey
JOHN THUNE, South Dakota             THOMAS R. CARPER, Delaware
RICHARD BURR, North Carolina         BENJAMIN L. CARDIN, Maryland
JOHNNY ISAKSON, Georgia              SHERROD BROWN, Ohio
ROB PORTMAN, Ohio                    MICHAEL F. BENNET, Colorado
PATRICK J. TOOMEY, Pennsylvania      ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina            CLAIRE McCASKILL, Missouri
BILL CASSIDY, Louisiana

                     Chris Campbell, Staff Director

              Joshua Sheinkman, Democratic Staff Director

                                  (ii)

























                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman, 
  Committee on Finance...........................................     1
Wyden, Hon. Ron, a U.S. Senator from Oregon......................     2

                         ADMINISTRATION WITNESS

Koskinen, Hon. John, Commissioner, Internal Revenue Service, 
  Washington, DC.................................................     5

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Hatch, Hon. Orrin G.:
    Opening statement............................................     1
    Prepared statement...........................................    27
Koskinen, Hon. John:
    Testimony....................................................     5
    Prepared statement...........................................    28
    Responses to questions from committee members................    33
Roberts, Hon. Pat:
    Letter from Representative Brady et al. to President Trump, 
      April 5, 2017..............................................    54
Wyden, Hon. Ron:
    Opening statement............................................     2
    Prepared statement...........................................    56

                             Communication

American Institute of Certified Public Accountants (AICPA).......    59

                                 (iii) 
 
                      THE 2017 TAX FILING SEASON: 
                  INTERNAL REVENUE SERVICE OPERATIONS 
                      AND THE TAXPAYER EXPERIENCE 

                              ----------                              


                        THURSDAY, APRIL 6, 2017

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 9:53 a.m., 
in room SD-215, Dirksen Senate Office Building, Hon. Orrin G. 
Hatch (chairman of the committee) presiding.
    Present: Senators Grassley, Roberts, Thune, Toomey, Heller, 
Scott, Cassidy, Wyden, Stabenow, Cantwell, Carper, Cardin, 
Bennet, Casey, and McCaskill.
    Also present: Republican Staff: Mark Prater, Deputy Staff 
Director and Chief Tax Counsel; and Chris Armstrong, Deputy 
Oversight Counsel. Democratic Staff: Joshua Sheinkman, Staff 
Director; Michael Evans, General Counsel; Tiffany Smith, Chief 
Tax Counsel; Adam Carasso, Senior Tax and Economic Advisor; and 
Daniel Goshorn, Investigator.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
              UTAH, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. We will now proceed with our scheduled 
committee hearing on tax-related matters.
    Every year, the committee holds a hearing on the tax filing 
season. It provides us with a great and relevant opportunity to 
discuss and examine the operations of the Internal Revenue 
Service, the agency charged with administering our complicated, 
convoluted tax code and collecting taxes from workers and 
employers across the country.
    With each passing year, taxpayers face new challenges as 
they file their tax returns, including but not limited to 
protecting their private information. Today we will discuss, 
among other things, the IRS's efforts to address these types of 
challenges as well as the plans for progress and modernization 
in the near future.
    The Finance Committee has always taken its oversight 
responsibility with the IRS very seriously and for good reason. 
The IRS is virtually the only Federal agency that deals with 
every American citizen, everyone who does business here, every 
large employer, every mom-and-pop business, and every community 
organization.
    Over recent decades, as our tax code has grown more 
complex, we have given the IRS more and more to do, including 
administering social policy and implementing an ever-growing 
number of rules, regulations, and notices. And quite frankly, I 
do not think many people are satisfied with the results.
    While I know the people at the agency often point to 
limited funding, there are other matters that have contributed 
to the current level of dissatisfaction, including outdated 
collection practices and bureaucratic wrangling as well as a 
number of poor management decisions.
    This committee has conducted oversight on a number of those 
poor decisions, including the politicization of tax 
administration, excessive spending on executive travel, and 
improper contracting practices.
    Congress needs to look closely at the IRS and work to 
modernize and streamline its operations. This should include 
changes to the bloated and poorly managed technology used by 
the agency and the elimination of bureaucratic waste.
    Hopefully, during the course of today's hearing, we can get 
a better sense of the agency's plans to address these and other 
issues as well as its suggestions for congressional action.
    Of course, looming over this conversation is the ongoing 
and hopefully bipartisan effort to reform our broken tax 
system. Tax reform, if done right, should simplify the tax code 
and make the IRS's job much easier and allow the agency to 
focus on collecting revenue in the fairest and most efficient 
manner possible.
    More importantly, tax reform, if done right, should improve 
the way taxpayers interact with the IRS, reducing the countless 
hours and billions of dollars spent every year just to comply 
with the tax code and file accurate returns.
    The IRS is probably the most feared of all government 
agencies. The IRS wields immense power and authority over the 
lives of our citizens. And for hardworking taxpayers, direct 
contact with the IRS is rarely, if ever, desirable.
    I think we can take steps to improve this, but it will 
likely require us to make significant changes to the tax code 
and to the IRS itself. Hopefully, the leadership at the IRS 
will be willing partners in this effort.
    Toward that end, I appreciate Commissioner Koskinen's 
willingness to appear today. I look forward to what I hope will 
be a meaningful and substantive discussion of these important 
issues. And I personally appreciate the work that he has done 
over the years. We have a good relationship. He has worked well 
with me. And I personally want to thank him and tell him I 
appreciate him and appreciate the service that he has given to 
this wonderful country.
    With that, I will turn it over to Senator Wyden for his 
opening remarks.
    [The prepared statement of Chairman Hatch appears in the 
appendix.]

             OPENING STATEMENT OF HON. RON WYDEN, 
                   A U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you very much, Mr. Chairman.
    I will have a couple of comments about tax reform at the 
end as well.
    Now that Americans are getting into crunch time with tax 
filing season, I want to begin today's hearing by discussing 
what usually happens when early April rolls around.
    Around this time of year, Presidents usually release their 
tax returns to the public. It has been a tradition for decades, 
but apparently that is not going to happen in 2017. It looks 
like this President will choose to keep hiding his returns and 
ignoring this very low ethical bar, even though it is clear his 
blind trust is not blind at all and the separation he promised 
he would make from his businesses seems to be nonexistent.
    Second, around this time of year is when the whole 
executive branch gets on the same page to pitch its budget 
proposal to the public and the Congress. Not so this year. With 
this executive branch, it seems like the one hand often does 
not know what the other hand is up to.
    On the one hand, you have the Treasury Secretary who came 
before this committee as a nominee and said he was committed to 
making sure the IRS had the resources to do its job.
    Mr. Mnuchin said he wanted to protect taxpayer data, close 
the tax gap, improve customer service, and he said the big 
staffing cuts in recent years were, to Mr. Mnuchin, a concern 
and it would be a ``very quick conversation with Donald Trump'' 
to get it fixed. Apparently, that conversation has not 
happened, or if it did, the message did not get through.
    When the public got its first glimpse of the Trump budget, 
the IRS did not get the investment Secretary Mnuchin talked 
about when he was here at the committee. For next year, instead 
it got another $239 million cut.
    What that would mean is that customer service would get 
worse, more taxpayers would fall victim to hackers and 
preventable scams, and the good times will roll again while 
honest taxpayers get fleeced.
    This is not an academic debate. Right now the online data 
retrieval tool that students and families use to fill out their 
financial aid forms is down because of cybersecurity problems. 
Hackers were using stolen personal information like names, 
birth dates, and Social Security numbers to steal taxpayer 
dollars.
    You would think that an administration that talks about 
running government like a business would want to go out and 
invest in cybersecurity when it finds a hack. But that is not 
what is happening here. Instead, the administration is 
repeating the same old pattern: cut after cut to IRS resources, 
meaning taxpayer service and data security could get worse and 
worse.
    And I want to close with a couple of comments as it relates 
to this whole discussion of tax reform that the chairman 
mentioned.
    Usually around this time, taxpayers are collecting all 
their forms and receipts, they are sitting down to file their 
taxes, and they are saying, will the Congress ever manage to 
simplify this mess we call the tax code and help the middle 
class? And they might even be a little hopeful this year 
because they have heard the President and members of Congress 
say tax reform is right at the top of the agenda.
    But so far, when you parse the details, it looks like some 
Republican members of Congress and the administration are 
locked in competition to see who can propose the biggest tax 
cut for the fortunate few.
    And for the typical working family, there is not a lot in 
the Trump plan or the House Better Way blueprint that helps 
that working-class family get ahead. And in some respects, it 
really looks like they are getting a tax increase.
    So I will close, Mr. Chairman, by way of saying that, to 
me, right at the heart of bipartisan tax reform is recognizing 
that we really today have two tax codes.
    There is one system for the cop and the nurse, and it is 
compulsory. Every time they get a paycheck, that tax is taken 
right out of it. No special deals for them in the Cayman 
Islands.
    Then there is the other system for those who are fortunate, 
who can hire all the lawyers and accountants and take advantage 
of these murky kind of rules. In that system, with the right 
advice from the tax experts, you can sort of pay what you want, 
when you want to, and sometimes you pay nothing at all.
    It is grossly unfair to just sit by when you have these two 
tax systems in America, one of which is stacked against the 
working family. That has to be a key part of bipartisan tax 
reform. And nobody is going to tell me that it is not possible 
to do it.
    In my time on this committee, I have been involved with a 
number of our thoughtful members from the other side of the 
aisle. Senator Gregg and I sat next to each other on a sofa 
every week for 2 years to produce a bipartisan, comprehensive, 
Federal income tax plan. And Danny Coats, when he was on this 
committee, did exactly the same thing.
    But, Mr. Chairman, what we have to do is get away from this 
partisan reconciliation-only kind of approach and say from the 
get-go that Democrats and Republicans, as you and I do so 
often, should sit down at the outset and try to make sure that 
we have a system that works for everybody and that the working 
person gets a fair shake.
    And I want to repeat that I think there are a lot of 
members on our side of the aisle who would like to work in that 
kind of vein. And I look forward to our discussions.
    The Chairman. Well, thank you, Senator. I appreciate your 
comments.
    [The prepared statement of Senator Wyden appears in the 
appendix.]
    The Chairman. Today's witness is the Honorable John 
Koskinen, the 48th Commissioner of the Internal Revenue 
Service. Commissioner Koskinen was confirmed to this position 
in December 2013.
    Before coming to the IRS, Commissioner Koskinen served for 
4 years as a nonexecutive chairman of Freddie Mac, including a 
period where he was the acting CEO.
    Prior to that, he held various high-profile public-service 
positions, including president of the U.S. Soccer Foundation, 
Deputy Mayor of the District of Columbia, and Deputy Director 
for Management at OMB.
    The Commissioner also spent more than 2 decades in the 
private sector holding various leadership positions at The 
Palmieri Company, including vice president, CEO, and chairman. 
This came after his work for several years in various 
legislative and administrative offices in Federal and municipal 
government as well as a number of years practicing law.
    Commissioner Koskinen has a law degree from Yale University 
School of Law and a bachelor's degree from Duke University.
    We want to welcome you back to the Finance Committee, Mr. 
Commissioner. And I want to thank you once again for being here 
today. And we would like to have you please begin with your 
opening remarks. And I ask that you limit your opening 
statement to around 5 minutes if you can.

STATEMENT OF HON. JOHN KOSKINEN, COMMISSIONER, INTERNAL REVENUE 
                    SERVICE, WASHINGTON, DC

    Commissioner Koskinen. Thank you, Mr. Chairman.
    Chairman Hatch, Ranking Member Wyden, members of the 
committee, thank you for the opportunity to appear before you 
today. And, Mr. Chairman, I genuinely appreciate your kind and 
thoughtful words of support.
    I am pleased to report that the 2017 filing season has gone 
well so far. Through March 31st, the IRS has received more than 
93 million individual returns on the way to a total of about 
152 million. We have issued over 74 million refunds for more 
than $213 billion, with an average refund totaling $2,900.
    But the 2017 filing season is notable for a change Congress 
made in 2015 that took effect this year. It requires the IRS to 
hold tax returns until February 15th each year if they claim 
the Earned Income Tax Credit or the Additional Child Tax 
Credit.
    This change has slowed the overall pace of refunds early in 
the filing season, but that pace accelerated with the release 
of more than $50 billion in EITC and ACTC refunds after 
February 15th.
    The new requirement to hold Earned Income Tax Credit and 
Child Tax Credit returns, and another change enacted by 
Congress to accelerate the filing date of Forms W-2, together 
have helped the IRS spot incorrect or fraudulent returns. 
Receiving W-2s earlier also allows us to release refunds to 
compliant taxpayers more quickly, avoiding unnecessary delays.
    In regard to phone service, I am pleased to report we are 
again seeing an improved level of service on our toll-free 
lines, as we did during filing season 2016. Our phone level of 
service is currently running above 76 percent, and we 
anticipate the average for the filing season overall will be 
about 75 percent.
    The improvement is the direct result of additional funding 
granted by the Congress in 2016 to improve service to taxpayers 
as well as to strengthen cybersecurity and expand our efforts 
against identity theft. The funding also freed up resources to 
reduce our correspondence inventory. The inventory totaled more 
than 850,000 pieces of correspondence at the end of fiscal 
2015, and that is now down to 660,000.
    We continue to experience strong demand for our online 
services. Taxpayers have visited our website, IRS.gov, more 
than 320 million times so far this year. The popular Where's My 
Refund? electronic tracking tool has been used more than 228 
million times. Other tools, including Direct Pay, which allows 
taxpayers to make tax payments online, have been used more than 
4.6 million times this year.
    A brand-new tool, the Balance Due feature, lets taxpayers 
view their IRS account balance online, including the amount 
they owe for tax, penalties, and interest. This online tool has 
been used about 547,000 times since it was launched in 
November.
    The new Balance Due feature is also important because it 
represents the first step toward a fully functional IRS online 
account for taxpayers. We are developing this as part of our 
efforts to enhance and expand important services for all 
taxpayers no matter what their circumstances.
    Service at our Taxpayer Assistance Centers has also 
improved this year. In recent years, many assistance centers 
saw such heavy demand during the filing season that taxpayers 
were lining up for hours before the centers opened.
    In 2015, we tested the idea of letting people make 
appointments in advance. This worked so well that we extended 
the appointment process to all of our assistance centers this 
filing season. As a result, we have no reports of long lines so 
far anywhere in the United States.
    Another important area is the growing problem of stolen 
identity refund fraud. Over the past few years, we have made 
steady progress in protecting against this crime, and that 
progress has accelerated since 2015 thanks to the collaborative 
efforts of the Security Summit Group.
    This strong, unique partnership between the public and 
private sectors has produced real results. In fact, the number 
of people who reported to us that they were victims of identity 
theft declined from 698,000 in calendar year 2015 to 376,000 in 
2016, a drop of 46 percent.
    Even with this progress, the fraud filters in our systems 
are still catching a large number of false returns. Last year, 
our system stopped more than $6.5 billion in fraudulent refunds 
on 969,000 returns filed by identity thieves. This shows that 
identity theft is still a major threat to tax administration, 
and we need to keep up the fight.
    Turning to upcoming legislation, we recognize that the 
Congress is considering tax reform. The IRS does not take a 
position on policy questions in tax reform or any other area, 
but we do have a great interest in working with Congress to 
make sure whatever policies are adopted are easy for us to 
administer and easy for taxpayers to understand.
    We also hope that Congress will make any tax changes 
prospective and build in lead time so we can prepare taxpayers 
and our systems for the changes.
    Chairman Hatch, Ranking Member Wyden, and members of the 
committee, that concludes my introductory statement, and I look 
forward to your questions.
    The Chairman. Thank you, Commissioner.
    [The prepared statement of Commissioner Koskinen appears in 
the appendix.]
    The Chairman. We appreciate you being here, and we 
appreciation your comments.
    Let me begin the questioning with this question. Last 
month, the Internal Revenue Service and the Department of 
Education took down the data retrieval tool for student aid 
applicants. You took this action after it became apparent that 
data thieves may have used previously stolen personal 
information of taxpayers to access the system and obtain 
additional sensitive tax information.
    Now, I appreciate the confidential briefing the IRS 
provided to committee staff last week, and I will not go into 
more details, given the ongoing criminal investigation, but 
this is not the first time thieves have used stolen information 
to obtain sensitive taxpayer information and likely will not be 
the last.
    Mr. Koskinen, is it true that the Inspector General warned 
your agency of this threat last year? And if so, what actions 
did the IRS take following that warning?
    And number two, has the IRS notified each of the tens of 
thousands of taxpayers affected by this incident? If not, when 
does it expect to do so?
    Commissioner Koskinen. After our problem with Get 
Transcript 2 years ago, I asked the agency to look at every way 
anyone gets either money or information out of our systems. I 
thought there might be 30 or 40; it turns out there are over 
200 different ways we provide tax data to mortgage companies, 
finance companies, the Department of Education.
    So we have begun an agency-wide process over the last 2 
years to look at each of those avenues of approach, see where 
the risks are, and solve those risks.
    One of the things we did a year ago was--it used to be you 
could file your return by going online and getting what is 
called an e-File PIN. All you needed was your Social Security 
number, a name, and an address. But of course, Social Security 
numbers can be bought online for $10 by organized criminals.
    So last year, we discovered, of course, that in addition to 
legitimate taxpayers, criminals were filing their fraudulent 
returns with the use of the e-File PIN. So we shut that down, 
and that meant that this year any criminal filing of a tax 
return, a fraudulent one, had to actually have last year's 
adjusted gross income.
    Last summer, again, working with the Inspector General and 
our criminal investigators, we got some preliminary indications 
that when mortgage companies, through consolidators, were 
asking us to confirm income for people applying for a loan or a 
mortgage, that data was coming through a system that did not 
necessarily make us comfortable that the consolidators knew 
their customers.
    So last summer, we shut that system down--it is called the 
Income Verification Express Service system--for 2 weeks while 
we developed a program with the consolidators, in the short run 
as well as the long run, to ensure that they know with whom 
they are dealing before they pass those requests on to us.
    As we moved through the early fall, we also focused on the 
student loan application process at the Department of 
Education. We had an early indication in September that it was 
possible, with relatively little stolen information, to pretend 
you were a student, go online, start to fill out an 
application, give permission for us to populate that 
application with tax data, most importantly the adjusted gross 
income, and then complete the application.
    We started working with Education in October, telling them 
that we were very concerned that that system could be utilized 
by criminals. But on the other hand, we recognized that 12 to 
15 million applicants also use what we call the Convenience App 
for populating their application with their own tax return.
    So Education--we worked together--developed a long-term 
solution that will mask that data, but they cannot execute and 
implement that until next October. So we agreed with them, 
since we did not have at that time any volume of criminal 
activity, that rather than shutting it down and add to the 
burden of people applying for financial aid, we then would 
monitor that system as we moved through the tax system.
    But I told them, as soon as there was any indication of 
criminal activity, we would have to take that application down. 
And that occurred as we monitored through into the early part 
of February, middle of February. It became clear that there was 
a pattern of activity that I will not go into detail about--we 
briefed you on that--that was clearly not consistent with 
people going on to actually apply for student loans.
    And as we tracked that pattern down, we discovered that in 
fact it was clear that some of that activity was legitimate 
students, some of it was criminals. So we shut the system down 
and spent the last 3 or 4 weeks working with Education to see, 
was there any interim solution we could use before they 
finished their work in October to bring the system back up?
    And it turned out there was no way we could satisfy 
ourselves that opening that avenue again would be free from 
risk, that criminals would not get in. And our highest priority 
is to make sure we protect taxpayers and their identity and as 
well against fraudulent refunds.
    So what is going on is, at this point, you can still file a 
student loan application, you just have to put in the tax 
information yourself. If you do not have it, you can go online 
with our new authentication system and get a transcript and get 
it online, or we will mail to your last address of record the 
tax information you need.
    What you will not be able to do until probably October is 
go in and have the data automatically populated.
    Fortunately, we caught this at the front end. We think that 
at this time we estimate fewer than 8,000 fraudulent returns 
were actually filed, processed, and refunds issued. So again, 
we are at the front end of the problem, but we have been 
monitoring it.
    We have other areas where we are monitoring. We are trying 
to anticipate where the criminals will attack next.
    The Chairman. Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    We are working very closely, the chairman and I, to get on 
top of this, because this is not complicated. Cyber-thieves 
have been ripping off students and parents.
    And I heard you give a number that I thought, Commissioner, 
was for February. Did you go back, you know, earlier? Give us 
your best estimate of how many taxpayers will end up having 
their data stolen. Because I think what people want to know 
is--and you have worked with us, and we appreciate it--is this 
the tip of the iceberg; is it going to be more?
    So go back briefly and then give us your sense overall 
about how much more is still out there.
    Commissioner Koskinen. Originally, we were concerned about 
the filing season, but we have gone back as far as last 
September and have determined that there are no indications at 
this point, although we are still looking at it, of any illegal 
activity in September through December. As you can track the 
changes, there is a spike in activity that begins in the latter 
part of January.
    As we work through the pool of people in the suspicious 
area of activity who did not complete their application, it is 
about 100,000 people. But it is clear some of those are 
legitimate people who actually just did not complete the 
application.
    But our position has been, as we have been working with 
Education, we cannot confidently distinguish the smaller part 
of that pool, or the part of the pool that had their data 
stolen, from those who may have had their data stolen.
    So out of an abundance of caution, we are going to notify 
all 100,000--35,000 of those letters are already on the way--
because we know our filter stopped 52,000 returns out of that 
100,000, and of those 52,000 right now, we know 14,000 were 
identity theft refund, illegal returns, that did not get out 
the door, but were there.
    So we marked all 100,000 accounts, so whenever a return is 
filed, they will be protected. But while a number of them--
again, we do not want to unnecessarily worry people, but we 
will advise everyone that there is some indication that they 
may be at risk.
    Senator Wyden. Commissioner, are you confident that the 
pool of possible students and parents who got ripped off is not 
greater than 100,000?
    Commissioner Koskinen. These numbers always have a way of 
growing. We are actually now starting to look through all of 
last year, although last year you did not need this 
information. As I said, if you were a criminal, you could just 
get an e-File PIN to file.
    What is motivating the criminals is, they need adjusted 
gross income, because that is the key that we have this year 
for all taxpayers. So the number may grow, although we have 
continued to look at it and analyze it.
    At this point, all of the analytics with the Department of 
Education show that the pool is about 100,000 people.
    Senator Wyden. If you could continue, Commissioner, as you 
have, to inform Chairman Hatch and I about it--we are working 
together on this. We are going to make sure we get to the 
bottom of it.
    Let me ask you about the tax returns, the President's tax 
returns. As you know, since Watergate, it has been routine for 
presidential nominees and sitting Presidents to release their 
returns.
    It seems to me public disclosure is all the more important 
today. We hear stories practically every few hours about 
conflicts of interest, ties to foreign governments, all of 
these issues being debated in the press, and leaks hanging over 
President Trump and his administration.
    If IRS agents found ties to Russia in the President's tax 
returns, would they now be able to share that information with 
national security agencies?
    Commissioner Koskinen. I cannot talk about anyone's 
individual tax situation.
    Senator Wyden. No, this is just a question. Would they be 
able to?
    Commissioner Koskinen. As a general matter, tax information 
and tax audits are highly protected. We think every taxpayer 
needs to be confident that when they deal with us, they are 
going to be dealing with us and we are not sharing that 
information with anyone else.
    As a general matter, you know, if we find evidence of 
criminal activity in an audit, our criminal investigators work 
with the Department of Justice on that matter.
    But for the vast, overwhelming majority of taxpayers, that 
information about their return, the information about the 
audit, is highly secretive. And no IRS employee, for instance, 
can look at anyone's tax return unless they have a good reason 
to, and we monitor that. The IRS Commissioner cannot look at 
anybody's return.
    So at this point, I think the more important message we 
have for taxpayers is, if you are dealing with the IRS, we view 
that information as important to protect, important to keep 
within the bounds of the activities of the IRS.
    Senator Wyden. I think what we are interested in knowing is 
just how--because this is a very unique situation. You know, in 
effect, IRS agents may be looking at information that involves 
the boss, involves the President.
    And I was pondering for a second your comment about the 
relationship with the Justice Department. So if an agent now 
found matters that could be criminal on tax returns of the 
President as it relates to the President and Russia, under 
current IRS rules and procedures, that information would go to 
the Justice Department. Is that right? I think that is what you 
said.
    Commissioner Koskinen. Senator, as I said, we are not in a 
position to talk about anybody's situation----
    Senator Wyden. Right.
    Commissioner Koskinen [continuing]. Or any hypothetical. 
All I can tell you is, we treat taxpayer data confidentially. 
We protect it to the maximum extent we can. And every taxpayer 
gets treated the same.
    Senator Wyden. All right.
    Mr. Chairman, can I ask one other question with colleagues' 
forbearance? Because Chairman Grassley is gone, and it deals 
with his good work.
    The Chairman. Sure.
    Senator Wyden. Mr. Chairman and colleagues, Senator 
Grassley and I have introduced legislation to strengthen 
incentives for whistleblowers under the tax code while also 
enhancing whistleblower protections.
    The chairman cannot be here; obviously he is on the floor.
    You cannot endorse legislation obviously, you know, 
Commissioner. But I would be interested in just one quick 
question. Do you believe that there is a need for additional 
whistleblower protections? And set aside the bill Senator 
Grassley and I have. But just generally, do you believe there 
is a need for more whistleblower protection?
    Commissioner Koskinen. I do. As you know, I am a big 
supporter of the whistleblower program. But I do think that 
whistleblowers ought to be protected against retaliation, 
whether they are in a private-sector company or in a government 
agency.
    We need to encourage people, if they think there is a 
problem going on, wherever it is, to be able to raise their 
hand, make that problem known, without having retaliation 
against them.
    Senator Wyden. Thank you, Mr. Chairman.
    Thank you, colleagues, for the extra time.
    The Chairman. Senator Roberts?
    Senator Roberts. Thank you, Mr. Chairman.
    The former chairman of the committee, my good friend, Max 
Baucus, said at your confirmation vote, one of the essential 
tasks you had was to rebuild public trust in the IRS after the 
political targeting scandal.
    I note with interest--well, let me just back up and see if 
I can make sense out of this. This really gives me no pleasure, 
and it is with some degree of sadness that I want to ask you 
this question.
    The House Ways and Means Committee chairman Kevin Brady and 
14 members of his committee have called for you to step down 
immediately. I have their letter, and I would like to insert it 
in the record at this point and ask unanimous consent for that.
    The Chairman. Without objection.
    [The letter appears in the appendix on p. 54.]
    Senator Roberts. Thank you.
    This has always been about the First Amendment and 
protecting those rights and preventing the government from 
restricting them.
    I want to go back to when you first came to my office. I 
was very pleased to see you. You told me confidently that you 
would focus on implementing the Affordable Care Act, that you 
would use your business expertise to make the agency run as 
smoothly as possible, and that you would keep the IRS free from 
any political interference.
    These are all laudable goals. I was very persuaded that you 
would run the agency in a businesslike manner. You seemed like 
you just would be the man for the job.
    Again, it gives me no pleasure and it is with sadness that 
I say, with all due respect, I have been disappointed in your 
record in the agency.
    I am not going to go over all of the things listed in this 
letter. And I am sure you are familiar with them and would have 
quite a rebuttal.
    But again, this has always been about the First Amendment 
and protecting those rights. Seven years after the IRS 
commenced its campaign against conservative groups and close to 
4 years after Lois Lerner publicly apologized for what was 
going on, I do not believe we have meaningfully addressed the 
issues that political targeting raises, whether they be 
conservative, liberal, you know, whomever. And I do not think 
anybody has been held accountable. In fact, in checking, these 
organizations are still experiencing delays. And I think this 
is really unacceptable.
    Now, the advent of a new administration and new leadership 
at the Treasury does give us a chance for a clean break. And 
basically, my question to you is, do you intend to serve out 
your full term, or will you submit your resignation to 
Secretary Mnuchin as soon as possible?
    Commissioner Koskinen. Well, I appreciate the inquiry. I 
regret that you are disappointed in my performance.
    I think the record will demonstrate--and a number of 
members of the Ways and Means Committee did not sign that 
letter. But I think our record will demonstrate we have 
implemented every recommendation by the Inspector General and 
this committee, including the majority and minority report 
recommendations, to ensure that a situation that should never 
have occurred never occurs again.
    And the IG has reviewed those activities and verified that 
we have implemented those rules and those regulations. The IG 
has reviewed our production of information and documents and 
found that no one has done anything purposely at any level in 
the organization to interfere with any congressional 
investigation.
    We have produced over 1,300,000 pages of documents to 
everyone. There is no indication--the IG has responded to every 
question about whether anyone has been targeted unfairly for an 
audit ever since this unfolded. They have looked into over 100 
cases and not found a single one.
    And in light of that, my concern, as I have made very 
public, is--my term ends in early November. I have talked with 
the transition team for the administration, and I have said 
publicly I think it is important for there to be continuity in 
leadership for this organization. I have encouraged----
    Senator Roberts. Have you received anything back from the 
administration?
    Commissioner Koskinen. I have not received feedback. My 
position has been--I have encouraged them to find someone in 
the next month or two to nominate for this position, because, 
as you know, the confirmation process, appropriately, for the 
IRS Commissioner is lengthy, thorough, and detailed. And it is 
important to have a Commissioner----
    Senator Roberts. Any confirmation process at this 
particular time in the United States Senate has proven to be 
lengthy. I will not go into that right now.
    So I take it, I understand that you are doing a very good 
job of summarizing what you believe that you have accomplished 
at the agency. I am not going to quarrel with that.
    I would just note the letter from the Ways and Means folks. 
I simply do not agree with your summation in terms of what has 
been done with regards to the First Amendment rights of many 
Americans.
    So I take it your answer is ``no''?
    Commissioner Koskinen. So I was going to say--let me 
respond to that. Yes, my plan--I signed up for a term that ends 
in November. Where I come from, if you sign up for a 
commitment, you keep that, you complete that commitment.
    My concern is, in fact, that there will not be a 
Commissioner ready to take charge when I leave. And running an 
organization without a permanent head is not a good idea in the 
private sector or in the public sector.
    So I encourage--again I have talked to Secretary Mnuchin 
about it. We need to find someone to occupy this space, and it 
is going to be vacant come November. But in the meantime----
    Senator Roberts. I appreciate that.
    Commissioner Koskinen [continuing]. I plan to complete my 
term.
    Senator Roberts. I appreciate that.
    I am way over time. Thank you.
    The Chairman. Senator Scott?
    Senator Scott. Thank you, Mr. Chairman.
    Commissioner, good to see you again.
    Commissioner Koskinen. Good to see you.
    Senator Scott. The Treasury IG for Tax Administration 
issued a report just last week detailing how IRS criminal 
investigators mainly pursued law-abiding citizens and 
businesses when seizing assets in civil forfeiture cases 
related to anti-structuring rules. The IRS seized more than $17 
million worth of assets from innocent businesses over a 2-year 
period of time.
    The report also found the rights of some individuals and 
businesses were compromised during the investigations.
    Mr. Commissioner, I am pleased that the IRS has undertaken 
some policy changes to deal with civil asset forfeiture in the 
alleged structuring cases fiasco. But the management response 
in the report from the IRS noted that the IRS never violated 
structuring laws and that the relevant laws do not 
differentiate between legal or illegal sources.
    And since what you have enacted is only a policy change, I 
believe the legislation Congressman Roskam introduced on the 
House side and I have introduced with Senator Brown on this 
side, which would limit the IRS's ability to seize people's 
money without first charging them with a crime, is absolutely 
necessary to ensure we do not read about, and our citizens do 
not undergo, any further nightmare scenarios like these 
seizures.
    Tell me you agree.
    Commissioner Koskinen. I agree.
    Senator Scott. This is wonderful. [Laughter.]
    The Chairman. May I interrupt for a second? I am going to 
have to leave, and Senator Wyden will chair the rest of the 
hearing.
    So I apologize for interrupting you, and you can have some 
seconds----
    Senator Scott. No, no, please. When you get such a clear 
answer, you can take all the time you want to. This is 
fantastic. [Laughter.]
    Commissioner Koskinen. First, let me just elaborate a 
little bit. We changed the policy almost a year and a half ago.
    Senator Scott. Yes, sir.
    Commissioner Koskinen. We had since then one seizure, and 
it has been in a criminal matter. We are mindful of this. It is 
a policy change that is now fully implemented. But if the 
legislation were passed to make clear that that policy change 
is now a legislative change, we would be supportive of that.
    Right now, again, the act provides that, if you structure 
your payments, whether with criminal funds or otherwise, to 
either avoid taxes or for convenience, it is a violation of the 
law. And so a legislative change making clear that, unless the 
funding is from an illegal source, there will not be a seizure, 
would be fine with us.
    Senator Scott. Perfect. Thank you, sir.
    In 2012, IRS employees spent about 573,319 hours of 
official work time on union activity. That is about 72,000 
days' worth of official work being done by IRS employees not 
helping U.S. taxpayers.
    If you had these hours back, what better service and 
efficiency could you provide to the millions of Americans 
currently suffering through long wait times and courtesy 
disconnects and process delays?
    Commissioner Koskinen. Clearly, if we had--my position has 
been for some time, the more resources we have, the better 
service we will have. And as I noted, those wait times have 
been cut significantly.
    Senator Scott. Yes.
    Commissioner Koskinen. And service is much better.
    I would note the 573,000 hours is down by 100,000. We have 
a program as part of our contract with the union to work 
together to try to limit official-time hours wherever we can. 
But official time is provided to employees in the union by 
statute. We do not have an ability to tell them they cannot do 
it.
    We do have an ability to try to work with them to contain 
it and to make sure it is used for official purposes. There has 
never been any investigation showing that the union has misused 
those times. And the employees under the law have a right to be 
represented by union representatives. And that is what the 
official time is used for.
    Senator Scott. No question that there has not been a 
suggestion that there has been a violation of law. We are just 
talking about $21.6 million, 573,000 hours that could be better 
used to help taxpayers with their taxes as opposed to union 
activities. So they could do those activities off the clock, 
from my perspective.
    But thank you very much for your clarity and for being 
succinct.
    Commissioner Koskinen. Thank you.
    Senator Wyden [presiding]. Thank you, Senator Scott.
    Senator Carper is next.
    Senator Carper. Thanks, Mr. Chairman.
    Mr. Commissioner, welcome.
    Senator Wyden. Excuse me, Senator Carper. My apologies.
    Senator Thune was next, and you are right after him. Is 
that okay?
    Senator Carper. I object. [Laughter.]
    No. He literally raced down the hall to get ahead of me so 
he could get seated. That is okay; I will get over it.
    Senator Thune. Just because I know the Senator from 
Delaware is so fast.
    Thank you, Mr. Chairman.
    And thank you, Commissioner, for appearing this morning. We 
appreciate your update and testimony on the IRS's progress with 
the 2017 filing season.
    There are a couple of issues I would just like to ask about 
with tax reform, of course, on the immediate horizon. I think 
this is a once-in-a-generation opportunity to simplify the tax 
code, which is critical to taxpayers, but also ought to help 
the IRS when it comes to administering the tax law in a more 
efficient manner.
    I hope that during the remainder of your term you will 
redouble your efforts to help put the IRS back on the right 
path, especially in terms of improving customer service and 
preventing tax-related identity theft.
    I know that has been touched on already. But, I would say 
it is probably one of the biggest issues under your 
jurisdiction that is facing South Dakotans when it comes to 
their Federal taxes, and that is the problem of tax-related 
identity theft. It affects not only those who have their 
identity stolen, but also those who find their refund delayed 
while the IRS verifies their identity.
    So I want to ask if you could talk about the steps, and I 
know you have probably perhaps touched on this already, that 
the IRS is taking to improve its defenses and to help taxpayers 
fight ID theft. Are there any statutory changes that Congress 
needs to make to help you in those efforts to protect 
Americans' tax data and minimize the risk of related identity 
theft?
    We have had some reports of people in South Dakota--when 
they have had an identity theft issue, it is taking up to a 
year to resolve their cases. So, if you could, please talk 
about how you might be able to get some of those cases resolved 
faster.
    Commissioner Koskinen. Right. Working backwards, we now 
have that time, on average, down to 103 days, so that we are 
sensitive to that and are working hard, so we, as a general 
matter, think we can process faster.
    One of the reasons we can process faster, as I noted 
earlier, is because last year for the first time the number of 
taxpayers identifying themselves as victims dropped by almost 
50 percent. That drop is a result of not only improved filters 
on our part--and the chairman had asked and we are providing 
tomorrow more details about our return review program. But we 
are now able to stop--we have over 200 filters.
    But more importantly, or equally importantly, 2 years ago I 
brought in the CEOs of H&R Block, Intuit, TurboTax, all the 
software developers and all the State tax commissioners, not to 
tell them what to do, but to create a partnership where we 
could, in real time during the tax filing season, share 
information about suspicious patterns of activity, where we 
think there are problems.
    But also, equally importantly, we could jointly work 
together to improve the level of security from the time a 
taxpayer signs on to their software to the time they file with 
us to the time they file with the States.
    And we now have included financial sector participants who 
in fact can help us, if an illegal refund does get out, to 
recapture those funds.
    And so a big part of the decline in the number of identity 
theft victims is the result of this public/private partnership. 
As the number declines, that is why we can deal with those who 
are actually victims more quickly, because if you cut the 
number by half, obviously you can actually be more effective.
    So for a number of years, we made steady, but very slow 
progress. I think together with the technology, a lot of off-
the-shelf software that we bought, some of it with the money 
that Congress gave us, I think we are in a much better position 
with identity theft.
    But I have said from the start, we are dealing with 
organized crime syndicates around the world. And the minute you 
think you are done is when you have lost, so we will continue 
to have to upgrade our systems, continue to expand our 
partnerships with the private sector.
    And we are now reaching out to individuals. Individuals 
have a role to play making sure they protect their data, making 
sure that they have security on their systems. And it is a 
joint effort. And I think that is why we have made the progress 
we have.
    Senator Thune. In addition to the funds that you get 
appropriated by Congress, the IRS raises about $800 million a 
year in user fees and other sources of revenue that you 
collect.
    Could you share with the committee how you allocate those 
user fees and the extent to which they have been dedicated to 
customer service for this filing season?
    Commissioner Koskinen. We file a plan with the Congress 
every year as to how we are allocating those funds. 
Historically, we have allocated a significant portion of them 
to taxpayer service, but we also have significant needs in 
cybersecurity and information technology, as well as 
enforcement. So each year, we make a decision as to where the 
funding is--our funding comes in those buckets--where we need 
to, in fact, support that funding.
    Initially, user fees were meant to allow us to respond to 
unfunded mandates or other activities coming up during the 
year. Our hope is, one of these days we would fully fund 
taxpayer service, information technology, cybersecurity, and 
operations so that user fees would allow us to respond to 
changes. Right now, we virtually use all of them filling those 
gaps.
    This year, as I have noted, our level of taxpayer service, 
partially with user fees, but also with the funding that 
Congress provided, is over 75 percent, so that it means that we 
are reaching--our goal would be to be in the low 80s, so it 
takes a little more funding to do that. But we are at double 
the rate we were in 2015 when we had just an unacceptable 
level.
    So since then, the combination of user fees and the 
combination of support from the Congress has allowed us to, on 
the call centers, be able to raise the level of service. But 
equally important, it has allowed us in our communications in 
writing with taxpayers to significantly lower the inventory so 
that we can actually respond in a more timely way to those 
letters.
    Senator Thune. Thank you.
    Thank you, Mr. Chairman.
    Senator Wyden. Thank you.
    The long-waiting Senator Carper.
    Senator Carper. Thank you.
    Mr. Commissioner, again, welcome.
    My father used to have a saying. He had a lot of sayings. 
But one of the things he used to say is, ``Quitters never win, 
and winners never quit.'' And I would just urge you to stay on 
the job until your term expires in November.
    And I know you have some critics. We all do. And when you 
take on tough jobs--there are even a few people critical of us. 
Hard to imagine.
    But thank you for all that you do and the leadership that 
you provide in a very, very difficult job.
    One of the things I like to do--used to do it as a 
Governor, still do it as a Senator--I do customer calls. And I 
know you come out of the private sector, but I visit businesses 
in Delaware, large and small, businesses outside of Delaware 
that have operations in Delaware, large and small, even 
businesses outside of America that have operations in Delaware, 
large and small.
    And I ask them three questions. How are you doing? I ask 
them, how are we doing? We, State of Delaware; we, the Federal 
Government. And then I ask a third question: what could we do 
to help you?
    And you have done a lot in the time that you have been our 
Commissioner to lead a team to do a better job, even though we 
have reduced your resources, your funding, I think by about 20 
percent in real numbers, since the time that you were 
confirmed--a reduction of about 20 percent.
    We passed changes in the tax code. We do not give you 
plenty of time to adjust and train your employees to respond to 
questions and prepare the programs and the paperwork and 
everything to allow folks to file their taxes. We pass it right 
before Christmas, right before it is time for people to start 
preparing to file their taxes.
    And we do not make the tax code easier; we make it more 
complex. And then we say, ``Go off and do a good job.'' And in 
spite of all that, I think that the IRS is doing, in a number 
of respects, in spite of all the hacks and the attacks, the 
cyberattacks, I think you are doing a better job. And I think 
it is in no small part because of your leadership.
    There are three areas I think where we might be able to 
help the IRS do an even better job. One is to fund the IRS. We 
are looking again at another request to reduce funding for the 
IRS from this administration.
    And I understand that for every dollar that we invest in 
the IRS, not only do we get better service for taxpayers as 
they prepare their taxes, but we also find that for every 
dollar we invest, we increase revenues by at least $4, maybe 
more. So obviously, there might be something we could do on the 
budget side here. That is one thing I have heard about.
    The issue of paid tax return preparers--you have been 
asking, the IRS has been asking for years, to make sure that 
the folks who are actually helping folks prepare tax returns 
are qualified and competent to do that.
    It turns out--this is one of the numbers I saw that said 
about 60 percent of the tax preparers, they are not CPAs, they 
are not accountants, but about 60 percent of them help submit 
tax returns that are erroneous. And you asked us to do 
something about that. I think we should. I mentioned the 
funding.
    The last thing I want to mention and then just ask you to 
comment on is streamlined critical pay authority. We had over 
1,000, maybe 2,000 vacancies over at the Department of Homeland 
Security for cyber-warriors. They have the authority to pay 
them, they have the money to pay them, they are just having a 
hard time finding them.
    And I think one of the things that you all have asked for 
is streamlined critical pay authority; it has expired a couple 
of years ago. That would seem to me maybe another area where we 
could help.
    Would you just respond to those three, at least those 
three, and say are those in the past, are those still needs and 
requests that you have?
    Commissioner Koskinen. Well, on funding, we are still, in 
absolute terms, $900 million below where we were 7 years ago, 
even with 10 million more taxpayers and a more complicated 
code.
    Senator Carper. So down $900 million compared to how many 
years ago?
    Commissioner Koskinen. Well, if we are looking at the 2018 
budget, it would be 8 years ago.
    Senator Carper. Okay.
    Commissioner Koskinen. 2010.
    Senator Carper. And that is out of a budget of about, what, 
$12 billion?
    Commissioner Koskinen. The budget was $12.3 billion, $12.2 
billion, and now----
    Senator Carper. Yes. So it is close to 10 percent. Okay.
    Commissioner Koskinen. Yes.
    Senator Carper. Not corrected for inflation--not corrected 
for inflation.
    Commissioner Koskinen. Yes. If you take inflation, you are 
closer to your 20, 23 percent there.
    Senator Carper. Yes, okay.
    Commissioner Koskinen. So funding is an issue, particularly 
with regard to just personnel. We are down over 17,000 people. 
That impacts not only taxpayer service; it impacts enforcement, 
it impacts IT.
    On streamlined critical pay, it was historically used, for 
the 14 years or so we had it, primarily for technical 
positions, like cybersecurity. Our chief technology officer, 
our chief cybersecurity person, our architecture for our IT, 
were all streamlined critical pay. The last of those people are 
rolling off.
    The most critical thing it does is, it allows us, when we 
are competing with the private sector and others, when we find 
someone, we can say, we want to hire you for cybersecurity 
purposes and we can put you on payroll with streamlined 
critical pay in about a month.
    If we go through the normal process, it is 4 to 6 months. 
Asking one of these people in high demand to hang around for 4 
to 6 months while we process them through the system generally 
does not work very well. We have great people in the IRS, 
wonderful people working in IT, but without streamlined 
critical pay it is a significant challenge for us to upgrade 
those folks.
    Otherwise, as you say, we have paid preparers. As I always 
say, the saying goes, your barber needs more qualifications to 
cut your hair than it takes to prepare your tax return. And our 
proposal is not to regulate preparers or do anything different, 
it is to require them, in effect, to know something about the 
tax code if they are going to represent themselves to taxpayers 
as being competent, and to have a continuing education 
requirement, just the way lawyers and CPAs and doctors and 
others do.
    We ran the program for about a year and a half, so 
everybody could see what it looks like. It is not a threat to 
regulate; it is really a requirement to have minimum standards 
of competence. And I think that would be important. It will not 
drive criminals out of business, but it will give taxpayers 
some confidence that when they hire a preparer, that person 
knows something about the tax code.
    Senator Carper. Thank you.
    Senator Wyden, you have led the way on this point for 
years, and I have been your wingman. And I sign up again. 
Hopefully, it will not be a long mission. We need to get this 
done. This is crazy. Thank you.
    Senator Wyden. High time, thank you--in a bipartisan way.
    Senator Bennet?
    In fact, colleagues, if we all go 5 minutes, it would go 
Bennet, Cassidy, and Cantwell. We will all get 5 in, and we 
would be able to get it in before the vote.
    Senator Bennet. I am going to go 45 minutes. [Laughter.] 
No, just kidding.
    Commissioner Koskinen. Well, my answer will be long. 
[Laughter.] Just kidding.
    Senator Bennet. Commissioner, this may be the last time you 
testify before this committee, and I want to take a second to 
thank you for your willingness to serve as IRS Commissioner at 
what has been an enormously difficult time in the country's 
history, through budget cuts and unfortunate, and I would say 
sometimes pathetic, actions by some that inappropriately turn 
the IRS into a political football.
    You have taken on the difficult task of leading this 
agency. You have not been perfect. None of us in public service 
is perfect. I am sure that you, like me, would have things you 
would do differently in hindsight.
    But the IRS is an easy target in Washington, and you have 
taken on more incoming than most in your role. So much of what 
you have endured has not been a reflection on you or your work, 
but a symptom of this dysfunctional moment in our country's 
politics.
    With that as a backdrop and in this last hearing that you 
have, I would like to offer you the opportunity to tell anyone 
who is watching who may not understand, why did you take this 
job in the first place? What have you achieved in the job?
    And roughly 40 months into the experience and far longer 
than that in your public service, what would you have to say to 
other Americans who are contemplating public service?
    Commissioner Koskinen. I took the job. It took me about, as 
I have said, 15 seconds to agree to do it because I knew, 
having been around Washington, of the critical role the IRS 
plays, both in funding the government--we collect $3.3 trillion 
a year--but also because we touch virtually every American.
    We will get 152 million individual tax returns this year. 
So to the extent we could make the system work more 
efficiently, more effectively, we could, in fact, improve that 
situation for 152 million taxpayers filing.
    What have we achieved? We have talked a lot about the gains 
in identity theft. We have talked about the gains in the 
ability to access information at the IRS more efficiently and 
more effectively from the standpoint of taxpayers who more and 
more deal with their financial institutions online in secure 
accounts and never call. There is no reason that ultimately we 
should not be able to provide a totally secure way for 
taxpayers to deal with us without having to call.
    We have managed to get through the last 3\1/2\ years with, 
I think, a reasonable amount of employee morale, even though 
the agency has been under continued attack. We have a great 
workforce. And while we have not been able to replace most 
people leaving, I think we have demonstrated, given resources, 
as the additional resources in 2016, we can do the job and we 
can do it well.
    And one of the ironies is that--it is not a time for irony 
these days--but one of the ironies is, while the IRS continues 
on occasion to be under attack, whenever there is a new idea or 
a new program, oftentimes people say, let us give it to the IRS 
because they will get it done. And we appreciate that 
confidence, and, in fact, we do get it done.
    I have told the employees, sometimes we are our own worst 
enemies because we do so well, even in the face of resource 
constraints, that people think they can continue to eliminate, 
to cut the resources and it will not make a difference. And my 
concern is that it will make a difference at some point in 
time, both to the effectiveness of the agency, its ability to 
collect the revenues, and its ability to service taxpayers.
    So what I would like taxpayers to know is that we take 
taxpayer service very seriously. We also take treating every 
taxpayer the same and fairly very seriously, which is why what 
has been called the targeting of conservative groups based 
solely on the basis of their name for further review was 
unacceptable, should never have happened. I personally 
apologize to anyone who was stuck in that queue. You should be 
able to get an answer from the IRS quickly, not have to wait 
for a year or two or longer to get that answer.
    But it is important for people to understand that even with 
our limited resources, we will still do a million audits this 
year. And those will be audits of people who are Democrats and 
Republicans. They are people who go to church, they are people 
who do not go to church. They will be people who were active in 
a campaign or not active in a campaign. It does not make any 
difference to us.
    If you get a letter from us, if you get an examination by 
us, it is because of something in your tax return. And subject 
to resource constraints, anyone else who had that issue in 
their tax return would hear from us as well. We are involved in 
tax administration. There is not a political way to do it. 
There is not a Republican or a Democratic way to administer the 
tax code. There is a professional way to do that.
    We have a group of employees dedicated to service to 
taxpayers, to service to the country.
    Senator Bennet. Thank you, Commissioner. I thank you for 
your service. Thank you.
    Thank you, Senator.
    Senator Wyden. I thank my colleague.
    We now have three Senators here, and the vote is going to 
start in 10 minutes.
    Senator Cassidy?
    Senator Cassidy. Mr. Commissioner, again, thank you for 
your service.
    As you know, one of the things before us right now is the 
proposals to replace Obamacare, repeal Obamacare, or to repair 
Obamacare, whatever the semantics are. And one of the 
criticisms of the approaches that would use an advanceable, 
refundable tax credit, is that the EITC has a fairly 
significant overpayment rate.
    Now, I guess my issue or my question--and you know, this is 
a conversation, it is not a ``gotcha''--is, what do you think 
of the IRS's capability of administering an advanceable, 
refundable tax credit using as a context both the EITC and the 
subsidies that were paid out to insurance companies under the 
Affordable Care Act?
    Commissioner Koskinen. Well, I would start out by, as I do 
with tax reform, saying we do not have a policy view about what 
should happen with health care.
    Senator Cassidy. I understand; I totally get that. I am 
just talking mechanics.
    Commissioner Koskinen. Right. So you can blow it up if you 
would like, and that is fine with us.
    Senator Cassidy. Yes.
    Commissioner Koskinen. We are concerned, because one of the 
areas that we have struggled with from the start, for some 
time, is improper payments in the EITC. Any time you have a tax 
credit that is refundable, that is, you get it whether you owe 
taxes or not, it is a magnet, a target for identity thieves, a 
target for criminals, a target for preparers who are 
fraudulent, hanging out a sign saying, ``Come with me, I will 
get you a big refund.''
    The advance premium tax credit in the present system has 
not presented that problem because the money does not go to the 
taxpayer; the money goes to the insurance company.
    Senator Cassidy. So let me interrupt. The proposal that 
Susan Collins and I have put forward actually would have an 
account that would be created that could only be used for 
health care or health insurance.
    Commissioner Koskinen. Right.
    Senator Cassidy. So that kind of bridges the difference. It 
does not go to the individual; rather, it is under the 
individual's control, but then is subject to IRS regulations 
vis-a-vis HSA regulations. So, thoughts on that context?
    Commissioner Koskinen. Anything that causes you to be able 
to not have the money just disappear into somebody's bank 
account is a major, significant advantage in terms of dealing 
with the risks of improper payments.
    Senator Cassidy. So if I may say then, the concern that 
EITC is the kind of paradigm through which we should view these 
advanceable, refundable tax credits, you would say, well, maybe 
it should be more judged as in the Affordable Care Act subsidy 
in which it does not go directly to the individual; rather, it 
is someone who has fiduciary responsibility over it.
    Commissioner Koskinen. Right. And that is why, as I have 
said, the policy decisions are your decision.
    Senator Cassidy. I totally get that.
    Commissioner Koskinen. We are anxious to continue to have 
discussions about just these kinds of levels of implementation 
and technical ways----
    Senator Cassidy. So let me ask you something else, because 
I have limited time, and the chair is kind of rapping me.
    Another concern has been--I have a Health Savings Account, 
or at least I did before Obamacare took it away from me. And 
that said, I had a card and I would swipe it and it would tell 
me automatically if it was an allowable expense. Somehow that 
was there.
    It has also been suggested, though, that the Health Savings 
law and the ability to monitor how the expenditure truly works 
is lacking.
    Do you have a sense of the degree to which these folks who 
issue these cards--insurance companies issuing cards--and the 
coordination between that card, what it will pay for and what 
is considered allowable under the IRS's statute of appropriate 
care for HSAs, how well that works? Is there fraud there, or do 
you think it works pretty well?
    Commissioner Koskinen. Thus far, we have not seen any major 
indications of----
    Senator Cassidy. So when someone says that they have seen 
folks go up to the counter at the pharmaceutical store with a 
bunch of potato chips and swipe their HSA card, is that an 
urban myth or do you see evidence of that?
    Commissioner Koskinen. We do not see evidence of that that 
I know of at this point.
    Senator Cassidy. And do you know if you have audited that? 
Again, not accusatorily, I am just asking because I have to 
defend this to others.
    Commissioner Koskinen. I do not know what our audit history 
on that is.
    Senator Cassidy. Could you ask? Could you ask your staff to 
let me know that?
    Commissioner Koskinen. I would be delighted to do that.
    Senator Cassidy. Yes. And again, this is purely interest.
    Now lastly, let me tell you, I have been a victim of 
identity theft. And so just let me revisit that, because it is 
rather personal. And I remember the way it happened is that 
somebody filed on my behalf, somehow they got my Social, but it 
was pretty evident. You know, I was in the campaign, so either 
it was my opponent--or probably not. [Laughter.]
    But it was somebody who could just look at news reports and 
knew a lot about me and somehow got my Social.
    And so I guess when I looked at it though, you could have 
easily--and when your folks came to talk to me, you could have 
easily looked at what information the IRS had about me. You 
know, I had an income stream from my work as a physician, as a 
teacher I should say, and my income stream from work in the 
Congress, and you could have coordinated those and seen that 
the filing was not correct.
    And they told me that these databases--yes, it should be 
done--but the databases did not communicate with each other. 
And really, what would have been a very simple sort of, this 
drops out because either historically it does not match or 
because it does not match from what has been filed currently, 
did not happen.
    I see that your data systems may not come online until 
2022. It really seems like Google could have figured that out 
about me really quickly. You follow what I am saying?
    Commissioner Koskinen. Yes. We figure that out about you 
now pretty quickly. We have put in place our return review 
program that has 200 filters looking for just those anomalies.
    Senator Cassidy. Now, this was a year and a half ago this 
occurred. So you are saying in a year and a half this has 
transpired?
    Commissioner Koskinen. RRP went up on a pilot program last 
year and was part of the way identity theft victims dropped by 
50 percent last year. The filters are even better this year, 
and, more important, we also have information coming from 
States and preparers. So we are significantly more capable and 
aggressive at stopping fraud.
    Last year, we stopped a million fraudulent refunds with $6 
billion worth of refunds that never went out.
    Senator Cassidy. Thank you very much.
    Senator Wyden. Great.
    Senator Cantwell, then Senator Cardin. And the vote starts 
in 3 minutes. I am going to stay.
    Senator Cantwell. Thank you, Mr. Chairman.
    I was heartened to hear Secretary Mnuchin during his 
confirmation hearing say that the IRS was understaffed and that 
we needed to make sure that we moved beyond the punitive budget 
cuts. So has the IRS been exempted from the President's hiring 
freeze?
    Commissioner Koskinen. We have not been.
    Senator Cantwell. Do you know of any steps the Secretary is 
taking to advocate for the IRS's exemption?
    Commissioner Koskinen. The Secretary has been very 
supportive, and his staff is working with us to identify areas 
where we should be able to make hires in areas that are 
critical to the operation of the agency. The Treasury and the 
Secretary have been very supportive.
    Senator Cantwell. So they are pursuing some exemptions?
    Commissioner Koskinen. They are pursuing. We have given 
them a list. We have worked on a list. They are working with 
OMB on a set of exemptions.
    Senator Cantwell. And how is that affecting the agency not 
having the staff? What would you say the effects of that are?
    Commissioner Koskinen. Well, as I have said, we are kind of 
the poster child for a hiring freeze. We have not really hired 
very many people for the last 6 years, so it is not as if we 
have a cast of thousands that we could afford to fund. We are 
talking about a relatively small number of positions that are 
leadership positions in IT or in critical areas. And those are 
hampering us a little.
    But again, I would stress, the Secretary and the Treasury 
Department could not be more supportive working through this.
    Senator Cantwell. Well, we definitely want to see those 
exemptions. And I guess I would be the wingwoman on the wingman 
team on this issue of streamlined critical pay authority. 
Because the notion that you say that the hiring freeze does 
affect IT and that we then need to find other people, to me 
this whole issue of cybersecurity and information and securing 
the IRS database is so important. So I hope that if you need 
anything from us to help push that awareness or advocacy, 
please let us know.
    Commissioner Koskinen. Thank you.
    Senator Wyden. Thank you, Senator Cantwell, for making that 
point and making it so succinctly.
    Senator Cardin, we will wrap up, and we will go vote.
    Senator Cardin. Thank you, Mr. Chairman.
    I want to raise the issue of private debt collection. I 
understand it is the law. And in addition to receiving other 
information, taxpayers are now receiving a notice that they may 
be contacted by private debt collectors with all the risk 
factors that go along with that.
    I regret that we are at this point, but I understand the 
law, and I understand your responsibility is to carry out the 
law.
    My concern is that the last time we tried this, between 
2006 and 2009, the Treasury ended up receiving $63.4 million in 
revenues, but paying out $67.8 million, for a net loss of $4 
million.
    Can you share with us--and perhaps you will do it for the 
record with a written response because of the time we do not 
have today--how you are taking steps to, first, protect the 
public against the abuses of private debt collectors, and 
secondly, how you are going to ensure that we are not going to 
lose money by using private debt collectors?
    Commissioner Koskinen. On protecting taxpayers, we have had 
good sessions with the private debt collectors in terms of 
training. The people understand they have to----
    Senator Cardin. What are the consequences if they do not 
follow your direction?
    Commissioner Koskinen. Ultimately, we can terminate the 
contract if they do not follow the normal structure.
    Senator Cardin. And that is clear in the contract?
    Commissioner Koskinen. It is, in the contract, but the 
companies have been very cooperative. The last thing in the 
world any of them wants is to be----
    Senator Cardin. So when I get a complaint, you will follow 
up on it? And if it is accurate, you will fire the debt 
collector?
    Commissioner Koskinen. Yes, if there is a pattern of 
activity. Obviously, nobody is perfect.
    Senator Cardin. Well, the pattern--it is hard for me to 
find a pattern. I get individual complaints.
    Commissioner Koskinen. And we will collect those and will 
be delighted to have those.
    Senator Cardin. Thank you. And just make sure that we do 
not lose money.
    Commissioner Koskinen. And to make sure we do not lose 
money--one of the arguments made in the past was that we kind 
of, to protect taxpayers, overloaded the system with a lot of 
overhead and activities. And this time around, we do not have 
the resources to do that. We have streamlined the program.
    My commitment has been that we will do everything we can to 
make sure this program is effective, both in terms of 
protecting taxpayers, but also collecting revenue. Because if 
it works, that would be fine, but if it does not work, I do not 
want anyone saying, well, we actually sandbagged it some way or 
the other.
    So we will monitor carefully the expenditures. We will 
monitor carefully the resources that are returned to the 
government, and we think we will have a very good database.
    Senator Cardin. Will you make information available to my 
office as to how this process is moving forward, including the 
accountability issues that you have talked about, and how the 
accounting is being done in a straightforward way to make sure 
that taxpayers are not subsidizing private debt collectors?
    Commissioner Koskinen. I would be delighted to do that.
    Senator Cardin. Thank you.
    Thank you, Mr. Chairman.
    Senator Wyden. Thank you, Senator Cardin.
    No speeches, Mr. Commissioner, because we have this vote 
on.
    Chairman Hatch wanted me to thank you very much for 
appearing today. He also wanted to make it clear that we are 
going to be working with you all on trying to improve the tax 
system.
    And I would ask that members who have written questions 
submit them by 6 p.m. on Thursday, April 13th.
    Those are all comments from Chairman Hatch, who has to be 
on the floor.
    I would just like to add one last thought. And that is, you 
know, Mr. Commissioner, I think everybody understands that 
nobody likes the IRS and the IRS will always be a punching bag. 
And my view is, you have been accessible and you have been 
honorable in your service, and we will look forward to talking 
with you further, undoubtedly on a variety of issues.
    With that, the Finance Committee is adjourned.
    Commissioner Koskinen. Thank you.
    [Whereupon, at 11:03 a.m., the hearing was adjourned.]

                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


              Prepared Statement of Hon. Orrin G. Hatch, 
                        a U.S. Senator From Utah
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah) 
today delivered the following opening statement at a hearing to examine 
IRS operations for the 2017 filing season and beyond:

    Every year, the committee holds a hearing on the tax filing season. 
It provides us with a great and relevant opportunity to discuss and 
examine the operations of the Internal Revenue Service, the agency 
charged with administering our complicated, convoluted tax code and 
collecting taxes from workers and employers across the country.

    With each passing year, taxpayers face new challenges as they file 
their taxes, including, but not limited to, protecting their private 
information. Today we will discuss, among other things, the IRS's 
efforts to address these types of challenges as well as its plans for 
progress and modernization in the near future.

    The Finance Committee has always taken its oversight responsibility 
with the IRS very seriously, and for good reason.

    The IRS is virtually the only Federal agency that deals with every 
American citizen, everyone who does business here, every large 
employer, every mom-and-pop business, and every community organization.

    Over recent decades, as our tax code has grown more complex, we 
have given the IRS more and more to do, including administering social 
policy and implementing an ever-growing number of rules, regulations, 
and notices.

    And, quite frankly, I don't think many people are satisfied with 
the results.

    While I know the people at the agency often point to limited 
funding, there are other matters that have contributed to the current 
level of dissatisfaction, including outdated collection practices and 
bureaucratic wrangling as well as a number of poor management 
decisions. This committee has conducted oversight on a number of those 
poor decisions, including the politicization of tax administration, 
excessive spending on executive travel, and improper contracting 
practices.

    Congress needs to look closely at the IRS and work to modernize and 
streamline its operations. This should include changes to the bloated 
and poorly managed technology used by the agency and the elimination of 
bureaucratic waste.

    Hopefully, during the course of today's hearing, we can get a 
better sense of the agency's plans to address these and other issues as 
well as its suggestions for congressional action.

    Of course, looming over this conversation is the ongoing--and 
hopefully bipartisan--effort to reform our broken tax system.

    Tax reform, if done right, should simplify the tax code and make 
the IRS's job much easier and allow the agency to focus on collecting 
revenue in the fairest and most efficient manner possible.

    More importantly, tax reform, if done right, should improve the way 
taxpayers interact with the IRS, reducing the countless hours and 
billions of dollars spent every year just to comply with the tax code 
and file accurate returns.

    The IRS is probably the most feared of all government agencies. The 
IRS wields immense power and authority over the lives of our citizens, 
and, for hardworking taxpayers, direct contact with the IRS is rarely, 
if ever, desirable.

    I think we can take steps to improve this, but it will likely 
require us to make significant changes to the tax code and to the IRS 
itself.

    Hopefully, the leadership at the IRS will be willing partners in 
this effort.

    Toward that end, I appreciate Commissioner Koskinen's willingness 
to appear today. I look forward to what I hope will be a meaningful and 
substantive discussion of these important issues.

    With that, I'll turn it over to Senator Wyden for his opening 
remarks.

                                 ______
                                 
        Prepared Statement of Hon. John Koskinen, Commissioner, 
                        Internal Revenue Service
    Chairman Hatch, Ranking Member Wyden, and members of the committee, 
thank you for the opportunity to provide you with an update on the 2017 
tax filing season and discuss IRS operations.

    I am pleased to report that the 2017 filing season has gone well 
thus far in terms of tax return processing and the operation of our 
information technology (IT) systems. In fact, I believe this has been 
the smoothest filing season since I became Commissioner. As of March 
31st, the IRS received more than 93.6 million individual returns, on 
the way to a total of about 152 million. We have issued over 74.1 
million refunds for more than $213.5 billion, with the average refund 
totaling approximately $2,900.

    The smooth operation of the filing season is a testament to the 
hard work and dedication of the IRS workforce. It is important to note 
that administering the filing season does not happen automatically or 
by accident, but because thousands of IRS employees spend months 
planning in advance for the filing season and then administering it 
effectively.

    The 2017 filing season is notable for certain Protecting Americans 
from Tax Hikes (PATH) Act changes that were enacted in 2015 and took 
effect this year. One of those provisions requires the IRS to delay the 
payment of tax refunds until February 15th each year to taxpayers who 
claim either the Earned Income Tax Credit (EITC) or the Additional 
Child Tax Credit (ACTC). Although this change slowed the overall pace 
of refunds at the beginning of the filing season, that pace accelerated 
once the IRS released approximately $51 billion in EITC and ACTC 
refunds after February 15th.

    The new requirement to hold EITC and ACTC refunds, and another 
change enacted by Congress to accelerate the filing date of Form W-2s, 
have together helped the IRS improve its ability to spot incorrect or 
fraudulent returns. Receiving W-2s earlier has also assisted in the 
quicker release of refunds for those returns that appear suspicious but 
where we are able to verify the taxpayer's identity, which reduces 
unnecessary delays for compliant taxpayers.

    Another PATH Act provision requires Individual Taxpayer 
Identification Numbers (ITINs) to expire if they were issued before 
2013 or if they were not used on a Federal tax return for 3 straight 
years. This change was also designed to increase the IRS's ability to 
detect and stop potential tax fraud.

    I am pleased to say that the IRS has been able to implement these 
important 
revenue-protecting changes while delivering a successful filing season 
thus far. It is also important to note that Congress set the effective 
date for these changes about a year after enactment, which gave the IRS 
sufficient lead time to get our systems ready and also to prepare 
taxpayers and tax practitioners for the changes. We greatly appreciate 
this date, as adequate lead time is critical to maintaining the 
efficiency and seamlessness of our operations.

    The lead time also allowed us to work extensively with many partner 
groups across the country and use various outreach and communications 
channels--including press releases, social media, speeches and the 
annual IRS Nationwide Tax Forums--to get the word out so people would 
understand what the changes would mean for them. This has greatly 
reduced the need for taxpayers to call or write us with questions.
                      taxpayer assistance efforts
    Another critical component of the tax filing season involves the 
assistance the IRS provides to taxpayers through various channels, to 
help them fulfill their tax obligations as quickly and easily as 
possible.

    One important area involves digital services. The IRS has been 
working to improve and expand our online offerings, in response to 
increasing taxpayer demand. We provide a wealth of tax information on 
IRS.gov, which was visited more than 500 million times during fiscal 
year (FY) 2016, and more than 320 million times so far in FY 2017. 
Taxpayers use IRS.gov to get forms and publications, find answers to 
their tax questions, and perform transactions such as paying their tax 
bill. The most heavily used part of our website is the ``Where's My 
Refund?'' electronic tracking tool, which was used about 300 million 
times in FY 2016, and more than 228 million times already this filing 
season.

    The IRS understands the need to continually improve the online 
content we provide to taxpayers. For that reason, over the last few 
years, we have updated many of the most-often used sections of IRS.gov 
through our Content Upgrade program. Over time, we have also launched a 
number of digital applications to further increase the security of 
taxpayers' confidential tax information and improve taxpayers' 
interactions with the IRS. These include:

          Get Transcript, which allows taxpayers to go online, verify 
        their identity with strengthened security, and download a copy 
        of their tax records from prior years. Taxpayers have used this 
        tool 7.4 million times so far in FY 2017;

          Online Payment Agreement, a secure, safe, and easy process 
        which taxpayers can use to set up a payment plan and pay their 
        tax obligations over time. More than 247,000 online agreements 
        have been set up so far in FY 2017; and

          Direct Pay, which provides taxpayers with a secure, free, 
        quick and easy online option for making tax payments. This tool 
        has been used more than 4.6 million times in FY 2017.

    Our goal has been to find out how we can enhance and expand 
important services for all taxpayers, no matter what their 
circumstances.

    In November 2016, we took the first step toward a fully functional 
IRS online account with the launch of an application on IRS.gov that 
provides information to taxpayers who have straightforward balance 
inquiries. This new feature allows taxpayers to view their IRS account 
balance, including the amount they owe for tax, penalties, and 
interest, in a secure, easy, and convenient way. Since its launch in 
December, this new tool has been used successfully about 547,000 times.

    We recently added another feature that will let taxpayers see 
recent payments posted to their account. These balance-due and recent-
payment features, when paired with existing online payment options, 
will increase the availability of self- service interactions with the 
IRS.

    These are important steps, and over time, subject to the 
availability of resources, we will be adding other features to this 
platform as they are developed and tested with taxpayers and tax 
professionals. One such service improvement is Taxpayer Digital 
Communications. This feature, which is now in testing, provides a 
secure online messaging capability so that taxpayers, their authorized 
representatives and IRS employees can correspond electronically and 
resolve issues more quickly than through traditional mail while 
maintaining security.

    As we improve the online experience, we understand the 
responsibility we have to serve the needs of all taxpayers, whatever 
their age, income, or preferred method of communication. Although our 
research tells us that taxpayers increasingly prefer to interact with 
the IRS through digital channels, we recognize there will always be 
taxpayers who do not have access to the digital economy, or who simply 
prefer not to conduct their transactions with the IRS online.

    Consequently, the IRS remains committed to providing the services 
these taxpayers need. In fact, we believe that providing more online 
services for those who want them will free up valuable resources to 
allow us to further improve service on our other channels--phone, in 
person, and correspondence, particularly for those taxpayers with more 
complex issues.

    In regard to phone service, I'm pleased to report that during the 
2017 filing season we are again seeing an improved level of service 
(LOS) on our toll-free lines, as we did in 2016. These improvements 
have been the direct result of the funding granted by Congress to 
improve service to taxpayers, as well as to strengthen cybersecurity 
and to expand our ability to address identity theft.

    Our phone LOS currently is running above 76 percent, and we 
anticipate that the average for the 2017 filing season as a whole will 
be about 75 percent. We are still performing research to understand 
what other factors, aside from resources, may be contributing to this 
year's sustained high LOS. But we believe a major factor is a relative 
lack of major tax law changes enacted in 2016, which reduces the number 
of taxpayers calling with questions. Additionally, as noted above in 
regard to the PATH Act, the IRS had time to prepare taxpayers for those 
changes, which we believe also reduced the number of taxpayers needing 
to contact us this filing season.

    Along with improvements in phone service, we have substantially 
reduced our correspondence inventory. In 2014 and 2015 this inventory 
grew significantly above normal levels, because our constrained funding 
forced us to shorten the period of employment for our seasonal 
employees who help answer taxpayer correspondence. To illustrate, 
inventory of pending correspondence stood at 900,000 at the end of FY 
2014 and 859,000 at the end of FY 2015. By the end of FY 2016 that 
inventory had declined to 690,000, and now stands at about 660,000.

    The IRS has also been successful in providing timely assistance 
this filing season to taxpayers who visit one of our Taxpayer 
Assistance Centers (TACs) located around the country. In recent years, 
TACs in many locations had experienced such heavy demand during the 
filing season that taxpayers were lining up for hours before the 
centers opened, just to ensure they would get in the door. To cut down 
on those long lines, the IRS in 2015 began testing a new way of doing 
business: letting people make appointments in advance, which is a 
process that had already been used successfully in other countries.

    We found the pilot conducted in 2015 to be so successful that, with 
some adjustments, we moved to extend the appointment process to all 
TACs as of this year. I am pleased to report that the appointment 
process has dramatically cut wait times for taxpayers seeking 
assistance at TACs, and we have had no reports of long lines so far 
this filing season.

    We have also found that this arrangement provides major advantages 
to the taxpayer. First, when a person calls for an appointment, we can 
tell them what documents they need to bring with them, reducing the 
number of return trips. Second, the IRS employee making the appointment 
can often help the taxpayer resolve their issue over the phone or refer 
them to the help they need, eliminating altogether the need to visit a 
TAC. In fact, we have found that about 50 percent of the taxpayers who 
call for an appointment resolve their issues during that initial phone 
contact and do not need to make a personal visit to a TAC.

    This fiscal year, through March 11th, more than 1.3 million people 
have called for an appointment. Of that total, about 741,000 were able 
to resolve their issue over the phone, meaning there was no need for 
the time and expense of visiting a TAC. This is an important point, 
because TAC employees can now spend more time with those who do visit, 
as they tend to have more complex issues that cannot be resolved over 
the phone.

    In implementing this new arrangement, we realized it would take 
time for people to adjust, so we have also served 685,000 people who 
walked in without an appointment so far this fiscal year, bringing the 
total number served so far in FY 2017 to approximately 2 million. The 
685,000 number for walk-ins includes people who visit TACs to pick up a 
tax form or pay their tax bill. These are transactions for which no 
appointment is needed.

    I would note that the operation of this filing season has been 
accomplished while using antiquated IT systems, as approximately 60 
percent of the agency's hardware and 28 percent of its software are out 
of date and in need of an upgrade.

    Congress enacted a number of provisions over the last several years 
that came with little or no funding for their implementation. This list 
includes: the Affordable Care Act (ACA); Foreign Account Tax Compliance 
Act (FATCA); a new certification program for professional employer 
organizations; reauthorization of the Health Coverage Tax Credit 
(HCTC); the registration requirement for newly created 501(c)(4) 
organizations; the seriously delinquent debt certification program; and 
the 2015 PATH Act changes noted above.
               safeguarding irs systems and taxpayer data
    A critical component of tax administration, both during the filing 
season and throughout the year, involves safeguarding our systems and 
protecting taxpayer data, as well as working to thwart stolen identity 
refund fraud.

    The IRS continues to work to protect our main computer systems from 
cyber-
incidents, intrusions and attacks, with our primary focus being on 
preventing criminals from accessing taxpayer information stored in our 
databases. These core tax processing systems remain secure, through a 
combination of cyber-defenses, which currently withstand more than 1 
million attempts to maliciously access our systems each day.

    The IRS is also continuing its battle against stolen identity 
refund fraud. Over the last several years we have made steady progress, 
even within our reduced resources, in protecting against fraudulent 
refund claims, criminally prosecuting those who engage in this crime, 
and helping minimize the adverse effect on victims.

    That progress has accelerated since 2015, thanks to the 
collaborative efforts of the Security Summit Group. Over the past 2 
years, this strong, unique partnership between the public and private 
sectors has allowed us to coordinate our efforts on many different 
levels. As a result, we put in place many new safeguards beginning in 
the 2016 filing season that produced real results. To illustrate, the 
number of people who reported to the IRS that they were victims of 
identity theft declined from 698,700 in calendar year (CY) 2015 to 
376,500 in CY 2016--a drop of 46 percent.

    Even with this progress, the fraud filters in our processing 
systems are still catching a large number of false returns, which shows 
that identity theft continues to be a major threat to tax 
administration. During FY 2016, our systems stopped more than $6.5 
billion in fraudulent refunds on 969,000 tax returns confirmed to have 
been filed by identity thieves.

    Along with the work being done by the Security Summit Group, 
another critical factor in our ability to improve efforts against 
stolen identity refund fraud has been the development and phase-in over 
the last several years of the Return Review Program (RRP). The RRP 
delivers an integrated and unified system that enhances IRS 
capabilities to detect, resolve, and prevent criminal and civil tax 
non-compliance.

    This filing season, through the use of the RRP, we have become even 
more sophisticated than before in detecting anomalies in both paper and 
electronic tax returns. This has allowed us to continue strengthening 
our anti-fraud filters to block false returns before a refund can be 
issued. This year through March 22, the RRP has selected approximately 
631,000 potentially fraudulent tax returns claiming approximately $4.7 
billion in refunds. We have developed RRP to identify all of our fraud 
cases that were previously identified by our legacy system, the 
Electronic Fraud Detection System (EFDS).

    Despite all the progress we have made, we realize we cannot let up 
in the fight against identity theft. We are finding that, as the IRS 
improves monitoring capabilities and shuts off certain avenues of 
entry, identity thieves look for new ways of getting in. As the IRS 
enhances return processing filters and catches more fraudulent returns 
at the time of filing, criminals attempt to become more sophisticated 
at faking taxpayers' identities so they can evade those filters and 
successfully obtain fraudulent refunds.

    Therefore, the IRS is working not just to react better and faster, 
but to anticipate the criminals' next moves and stay ahead of them. To 
fully protect taxpayers and the tax system, the IRS must not only keep 
pace with, but also get ahead of, criminals and criminal organizations, 
as they improve their efforts to obtain personal taxpayer information.

    In that regard, we continue to be concerned that identity thieves, 
in their never- ending hunt for taxpayer data, are targeting tax return 
preparers. For that reason, the Security Summit Group in 2016 began a 
stronger collaboration with the tax practitioner community. Working 
with our Summit partners, the IRS has alerted tax practitioners to 
various identity-theft schemes focused on preparers that have come to 
light over the past year.

    Additionally, the IRS, in conjunction with the States and the tax 
community, has been conducting a public awareness campaign aimed at 
return preparers, called ``Protect Your Clients, Protect Yourselves.'' 
The goal of this campaign is to get the word out to preparers about 
steps they can take themselves to safeguard taxpayer data and avoid 
becoming victims of identity theft. We also continue to educate and 
share similar information with individual taxpayers through the ``Taxes 
Security Together'' campaign, which is now in its second year.

    Along with these initiatives, which have been very helpful, we have 
also undertaken a broader effort to protect the security of data and 
strengthen authentication standards for programs where we share 
taxpayer information.

    One example of this effort was our decision last year to eliminate 
the electronic filing Personal Identification Number (PIN) as an option 
for taxpayers to use to verify their identity when filing their tax 
return. An electronic tool on IRS.gov allowed taxpayers to enter 
identifying information to receive the e-file PIN. After discovering 
unauthorized attempts had been made to obtain PINs using data stolen 
from sources outside the IRS, we halted use of the PIN. Although our 
analysis of the situation found that no personal taxpayer data was 
compromised or disclosed by IRS systems, and no fraudulent refunds were 
issued, we believe it was necessary to discontinue the PIN to protect 
taxpayers and their data.

    Our efforts to strengthen authentication standards also extend to 
programs where taxpayer data is routinely shared with organizations 
that use it to verify eligibility for customers who apply for loans. 
Since last summer, we have been working with banks, mortgage companies 
and others to ensure they were implementing strong ``know your 
customer'' requirements.

    Along those lines, in June 2016 the IRS announced new, stronger 
requirements for participants using the Income Verification Express 
Service (IVES). The IVES service is used by pre-screened companies who, 
in turn, are hired by mortgage firms and loan companies that need to 
verify applicants' income. Going forward, the IRS will only accept 
requests for taxpayer data from IVES participants who certify that they 
are using the new requirements to verify their clients.

    We took this step out of an abundance of caution to protect 
taxpayer information as well as safeguard the vital IVES program. IVES 
has been a successful program for the government and the private sector 
since 2006, and participants have a strong track record. While the IRS 
has concerns about limited areas in the program, these center on 
suspicious activity and customer validation issues. At issue is whether 
all IVES participants are always fully validating their clients, a 
situation we are currently investigating.

    Student financial aid is another area where we have concerns about 
the potential for unauthorized attempts at obtaining taxpayer 
information. We have been working with the Department of Education to 
secure the online process through which student financial aid 
applicants obtain their family's financial information, which they need 
in order to complete the Free Application for Federal Student Aid 
(FAFSA) or apply for an income-driven repayment (IDR) plan for their 
student loans.

    As part of this effort, in early March we disabled our IRS Data 
Retrieval Tool (DRT) found on the fafsa.gov website after we became 
concerned about the misuse of taxpayer data by criminals masquerading 
as students. Our IT, cybersecurity and privacy experts spent the next 3 
weeks working with their counterparts in the office of Federal Student 
Aid (FSA) to find a way to secure the data provided to applicants for 
financial aid.

    We recognize the burden on applicants if the convenience of the IRS 
data retrieval return is not available. However, in the process of 
considering potential, short-term technical solutions, we realized that 
none of them could clearly ensure the protection of student loan 
applicant financial information. Therefore, as we announced last week, 
we will not be able to activate the DRT until longer-term system 
upgrades are implemented.

    Families can still complete applications for student financial aid 
by manually providing the requested financial information from copies 
of their tax returns. And, if necessary, they can obtain a copy of 
those returns either online through the Get Transcript application, by 
mail, or from their tax preparer. Although we realize this is less 
convenient than obtaining the information online, we have a 
responsibility to ensure all of our online tools, such as the DRT, are 
fully protected from identity thieves.
                             looking ahead
    We recognize that Congress is considering possible legislation on 
tax reform, as well as other tax legislation. As your committee knows, 
the IRS has a great interest in working with you to make sure that 
whatever legislation is enacted can be administered as efficiently and 
effectively as possible for taxpayers and the tax system as a whole. To 
that end, early consideration of the impact of tax law changes on tax 
administration plays an important role in assisting IRS in achieving 
this goal.

    We also encourage Congress to carefully consider the impact of the 
timing of tax law changes. It is our experience that implementation is 
smoother and less costly from both the government's and taxpayers' 
perspectives if there is sufficient lead time to ensure that the IRS 
can prepare both taxpayers and our own systems for those changes, as 
was the case with the PATH Act changes I referenced earlier.

    Chairman Hatch, Ranking Member Wyden, and members of the committee, 
that concludes my statement. I would be happy to take your questions.

                                 ______
                                 
        Questions Submitted for the Record to Hon. John Koskinen
               Question Submitted by Hon. Orrin G. Hatch
    Question. Commissioner, an area of critical importance is the fight 
against identity theft refund fraud. The Tax ISAC that IRS has created 
(Information Sharing and Analysis Center) is a strategically essential 
defense for the integrity of the tax system, just as are the ISACs in 
the Aviation, Financial Services, and Health care sectors. But to be 
successful and effective, an ISAC is dependent on secure and 
confidential information sharing by all parties.

    What are the obstacles, if any, to IRS being able to be a full 
participant in its own ISAC? Are any obstacles insurmountable under 
current law, and, if so, what do we need to do to enable the Tax ISAC 
to be robust and optimally effective?

    Likewise, what if any funding does IRS need to ensure that the ISAC 
is fully successful in the fight against tax refund cyber-fraud?

    Answer. We chartered the Identity Theft Tax Refund Fraud 
Information Sharing and Analysis Center (IDTTRF-ISAC) in December 2016 
and began pilot operations at the beginning of this filing season on 
January 23, 2017. The IDTTRF-ISAC is a natural outgrowth of our 
Security Summit activities which began in 2015 to look holistically at 
the tax refund identity theft problem across a return's lifecycle. The 
purpose of the IDTTRF-ISAC is to share identity theft tax refund fraud 
data and related analysis with public and private entities in order to 
detect, prevent, and deter identity theft tax refund fraud. As of late 
April 2017, the IDTTRF-ISAC has 36 member organizations from State 
departments of revenue and the tax software and tax preparation 
industries.

    The two primary capabilities we are piloting this year are: (1) 
sharing of tax ecosystem alerts; and (2) analyzing leads generated by 
the tax software and tax preparation industry as well as other member 
data. Tax ecosystem alerts are akin to a neighborhood listserv for the 
tax ecosystem. Members report any tax ecosystem threats they encounter 
so that others can protect themselves against the threat. Thus far, 
threats have included employer W-2 breaches, compromised return 
preparers, new schemes, and dark web chatter about system 
vulnerabilities. Allowing one member's detection to be another member's 
prevention is a powerful paradigm. Already, the IDTTRF-ISAC has 
received indicators that members are using alerts to identify 
suspicious returns in their own systems and stop the further processing 
of returns seeking fraudulent refunds.

    With regard to the second capability, namely the analytical 
function, members submit data to the IDTTRF-ISAC for the purposes of 
finding anomalies indicative of potentially fraudulent activity. This 
capability, of course, is dependent on the volume and quality of the 
data the IDTTRF-ISAC receives. In preparation for filing season 2018, 
the IDTTRF-ISAC plans several data experiments this summer to help 
identify data with the greatest predictive capacity. We anticipate the 
IDTTRF-ISAC will realize fuller capability in the next filing season 
with its increased number of members and a better understanding of what 
data is most relevant to identifying and reducing identity theft fraud.

    Under the law, we are limited in the ability to share with the 
IDTTRF-ISAC and certain other external organizations fraudulent or 
potentially fraudulent data received on a tax return. Section 6103 
protects largely all data on a return received by the IRS or gathered 
by it in connection with the processing of the return, whether the 
return was filed by the true taxpayer or a fraudulent taxpayer.

    We will spend an estimated $3.9 million in FY 2017 operating the 
ISAC. In addition, the IRS plans to spend $4.7 million in FY 2016 
expired balances for IDTTRF-ISAC activities in FY 2017, as outlined in 
the May 2017 letter to the House and Senate Appropriations Committees.

                                 ______
                                 
                 Questions Submitted by Hon. Ron Wyden
    Question. Ever since Watergate, it has been routine for 
presidential nominees and sitting Presidents to release their tax 
returns. Public disclosure is all the more important today, when 
serious questions about conflicts of interest and ties to foreign 
governments hang over President Trump and his administration.

    IRS procedure requires that the IRS audit the individual income tax 
returns of the President annually, and provides for an expedited audit 
process. While I understand IRC section 6103 limits your ability to 
discuss information related to individual taxpayers, I respectfully 
request you provide answers to the following questions with respect to 
the underlying IRS policy that requires audit of the tax returns of any 
President.

    How can the IRS guarantee to the American people that the audit of 
the President's tax returns is independent of political pressure from 
the White House or other groups?

    Answer. The IRS follows the laws and policies in effect that ensure 
examination of a President's tax return is independent of political 
pressure. Experienced IRS employees, whom we select to conduct 
sensitive examinations of this type, are subject to Federal Civil 
Service laws that protect them from being disciplined or terminated 
without appropriate cause. IRS employees are specifically trained to 
recognize and report inappropriate interference with an examination to 
the Office of the Treasury Inspector General for Tax Administration 
(TIGTA) for investigation.

    In addition, the Internal Revenue Manual provides instruction for 
handling an examination of a President's individual tax return. 
Furthermore, the examination is subject to mandatory quality review by 
Examination Technical Services under IRM 4.2.1.11. This review 
evaluates the examination of the President's tax return against 
objective criteria and provides an internal system of checks and 
balances to ensure that the completed audits are technically and 
procedurally correct.

    Question. The requirement to audit the President's tax returns is 
provided under the Internal Revenue Manual (IRM), which is neither 
statute nor regulation. Given that this mandate exists only under IRS 
procedure, is it possible for the IRS, Treasury Department, or White 
House to exempt the President's tax returns from this requirement?

    Answer. The individual income tax returns for the President and 
Vice President that are filed while they are in office are subject to 
mandatory examinations by the Internal Revenue Service as a matter of 
IRS policy and procedure, and described in the Internal Revenue Manual 
since at least 1977, now at IRM 4.2.1.11. We have no plans to modify 
this longstanding policy.

    Question. IRC section 7217 prohibits the President and employees of 
the Executive Office of the President from interfering in the audit of 
any specific taxpayer. An exception to this prohibition applies to 
cases in which the Secretary of the Treasury intervenes in an audit as 
a consequence of the implementation of a change in tax policy. As such, 
can IRS definitively state that any revision to revoke or limit the 
scope of IRM 4.2.1.11 at the direction of the White House, Treasury 
Department, or IRS Commissioner is prohibited under IRC section 7217? 
Please explain your interpretation of this provision.

    Answer. We have no plans to modify the scope of IRM 4.2.1.11.

    Question. IRM 4.2.1.11(1) specifically requires audit of the 
individual income tax returns of the President. How does the IRS 
interpret the term ``individual?'' Does this include any business tax 
returns or information returns? Does this include tax returns of 
partnerships, corporations, or trusts wholly owned by the President? 
Does this include the tax returns of related parties who are engaged in 
business with the President, such as the President's adult children? 
Please describe any limitations IRS faces due to the scope of the 
mandatory audit.

    Answer. Individual income tax returns are those filed on the Form 
1040 series, which do not include business tax returns or information 
returns. However, under IRM 4.2.1.11, examiners may review a 
President's ``related returns'' in accordance with procedures that 
apply to all taxpayers. According to IRM 4.10.5.4, Related Returns, 
returns are related if adjustments made to one return require 
corresponding adjustments to the other return to ensure consistent 
treatment, or the returns are for entities over which the taxpayer has 
control and which can be manipulated to divert funds or camouflage 
financial transactions. Therefore, returns of businesses a President 
owns or returns of family members may be included in an examination of 
the President's individual income tax return if they are related. There 
are no specific limitations regarding the scope of a mandatory return 
examination.

    Question. Are IRS agents qualified to identify ethical conflicts of 
interest that may arise as part of the audit of the President's tax 
returns? Would doing so be within the scope of their authority?

    Answer. This matter is not within the scope of a return 
examination.

    Question. Are IRS agents qualified to identify ties to foreign 
governments which could undermine the integrity of the United States 
Government? Would doing so be within the scope of their authority?

    Answer. This matter is not within the scope of a return 
examination.

    Question. On January 30, 2017, President Trump issued Executive 
Order (EO) 13771, titled ``Reducing Regulation and Controlling 
Regulatory Costs.'' The EO requires that ``for every one new regulation 
issued, at least two prior regulations be identified for elimination.''

    What challenges does the IRS face in determining the types of 
guidance that are covered by the EO? For example, are Revenue Rulings 
or Letter Rulings, which some taxpayers may rely on for certainty, 
covered by the EO?

    Answer. Under EO 13771, the Office of Management and Budget (OMB) 
issues guidance on the implementation of the EO, including what actions 
are subject to the EO's requirements.

    Question. Could IRS compliance with the EO impair the ability of 
taxpayers to properly calculate their Federal tax obligations?

    Answer. The Treasury Department and the IRS are working with OMB to 
comply with the executive order. We do not anticipate that the EO will 
impair taxpayers' ability to properly calculate their Federal tax 
obligations.

    Question. Do you expect that compliance with the EO will require 
significant IRS resources? If so, could you estimate the resources that 
will be needed--such as the number of hours IRS employees will spend?

    Answer. The Treasury Department and the IRS are working with the 
Office of Management and Budget (OMB) to determine how the executive 
order applies to Treasury and the IRS.

    Question. Could the EO increase the likelihood of a loss of Federal 
revenue directly, through lacking guidance, or indirectly, through the 
redirection of IRS employee resources?

    Answer. The Treasury Department and the IRS are working with OMB to 
comply with the executive order. We do not anticipate that the EO will 
increase the likelihood of a loss of Federal revenue directly or 
indirectly.

    Question. Could the EO prevent or slow down the issuance of 
critical guidance needed to swiftly shut down abusive transactions, 
like certain inversion transactions or other abusive emerging tax 
strategies?

    Answer. The Treasury Department and the IRS are working with OMB to 
comply with the executive order. We do not anticipate that the EO will 
prevent or slow down guidance needed to address abusive transactions.

                                 ______
                                 
             Questions Submitted by Hon. Michael F. Bennet
    Question. Congress slashed the IRS budget by 16 percent in real 
terms from 2010 to 2016 with corresponding reductions in its workforce. 
As you've noted, these cuts also came as the IRS took on increased 
responsibilities.

    You've expressed concerns about this funding squeeze affecting 
voluntary tax compliance. This is a particular risk given that many of 
our constituents become frustrated as they are not able to get the help 
they need from the Service due to unanswered calls or long wait times.

    You've noted that even a modest reduction in voluntary compliance 
could have an effect comparable with the entire amount of revenues 
collected through enforcement.

    Have you seen any early trends in voluntary tax compliance so far 
this filing season?

    Answer. Through the week ending May 12, 2017, we processed 
134,127,000 individual income tax returns compared to 134,438,000 from 
the prior year. However, it is too soon to identify any trends because 
taxpayers with automatic filing extensions still have until October to 
file a return. Also, taxpayers without a filing requirement, but who 
file tax returns for other reasons, may file a return after the April 
due date. We will continue to monitor return filings throughout the 
remainder of the year.

    Question. Given that the President's skinny budget proposes to cut 
the IRS budget further, what effect would those cuts potentially have 
on voluntary compliance?

    Answer. Effective service and enforcement programs are essential to 
maintaining and improving voluntary compliance. We will continue to 
develop our analytic capabilities to improve case selection and 
management to maximize collections, reduce taxpayer burden, and shorten 
the enforcement cycle.

    Question. I know that Congress has reduced the Service's budget and 
that your team is often just trying to deliver a basic level of service 
alongside desperately needed modernization with the funding you have.

    Setting aside the current politics and funding constraints, what 
would an ideal system of tax administration and tax enforcement in the 
United States look like to you and roughly how much do you think it 
might cost?

    Answer. Under an ideal system of tax administration and 
enforcement, taxpayers and the IRS would be able to interact in the 
same way that individuals interact with their banks and financial 
institutions. The IRS plans to provide taxpayers with an account where 
they, or their authorized representatives, can log in securely, get 
information about their tax account, and interact with the IRS as 
needed. The IRS realizes that not all taxpayers are capable of or 
comfortable with interacting with us online, and for this reason we 
will maintain the ability for taxpayers to discuss their tax situation 
with us in person at an IRS assistance center or by telephone through 
our toll-free taxpayer assistance line. Our goal is to make online 
systems available for the many taxpayers who want to interact with us 
this way, freeing up more resource-intensive in-person assistance for 
those taxpayers who are unable or uncomfortable communicating with us 
electronically.

    The IRS also aims to make IRS interactions with taxpayers about 
anomalies or potential noncompliance more timely, which means 
identifying issues earlier, contacting taxpayers sooner, and resolving 
issues faster. This would be accomplished in part through a more robust 
anomaly detection capability that leverages available information, 
historical patterns, service and enforcement results, and established 
precedents. Once it is determined that taxpayer contact is warranted, 
taxpayers could be informed, either through their account or other 
communications and outreach channels, and would be afforded the 
opportunity to self-correct errors, provide additional information, or 
explain the anomaly. Self-correction and early opportunities to provide 
additional information and explain anomalies could help reduce 
contentious compliance issues in later years.

    Here are some of the key building blocks of the improved tax 
administration and enforcement capabilities.
Virtual Taxpayer Assistance Center
    In the virtual taxpayer assistance center, taxpayers could securely 
access and control account information. They would be alerted to 
account updates via this method if they have identified that this is 
their preferred communication channel. Taxpayers could see return and 
refund status, payment confirmations, letters mailed, or completed 
actions, all on one convenient account history page. The virtual 
taxpayer assistance center would include secure and easy-to-use self-
service tools for taxpayers and their representatives, with clear steps 
to resolve most errors and issues, seek a tax refund, or make an online 
payment. The need for phone calls and correspondence would be greatly 
reduced.
Identity Authentication
    The IRS must continue to protect taxpayers' private information and 
confirm that we are interacting online and on mobile devices with the 
right person when we implement the IRS Future State. While we have made 
significant strides, we need to continue our efforts to expand and 
evolve our capabilities to authenticate taxpayer identities and secure 
their data as part of building systems to implement the Future State. 
Strong systems for identity authentication help to ensure taxpayers 
have secure access whenever and wherever needed, including when the 
taxpayer communicates with IRS systems using the virtual taxpayer 
assistance center.
Up-Front Issue Identification
    The ability for the IRS to find errors and issues in a tax return 
within a short time after the taxpayer files that return is central to 
detecting and resolving discrepancies early and efficiently. This is in 
contrast to today, when the taxpayer may wait months after filing a 
return to hear from us. Developing better up-front issue identification 
capabilities as part of the Future State would help us take immediate 
actions such as keeping a false refund out of the hands of an identity 
thief or finding an unclaimed tax credit on the taxpayer's return.

    Better access to data sources would also help us detect issues more 
quickly after a return is filed. Recent legislation requiring employers 
to file Forms W-2 earlier enables IRS validation of income reporting in 
filed returns in a more timely manner. The 2018 Budget includes 
proposals for (1) correction authority for specific errors to help 
resolve problems if reliable data contradicts information on a tax 
return; and (2) correction authority when IRS return data shows 
taxpayer deductions or credits exceed statutory limitations.
End-to-End Taxpayer Experience
    As part of the Future State, we plan to build the capabilities to 
ensure that taxpayers experience seamless interactions with us, no 
matter which of our employees or teams are working with them. An 
integrated case management capability would also increase IRS 
efficiencies by allowing us to move information to and among the right 
workgroups electronically, without delays caused by mailing of case 
files. For example, this capability would permit multiple expert 
employees to contribute to complex audits through online sharing of 
audit materials. It would also allow for a taxpayer's audit case to 
move from examination to appeals quickly and without the need to 
transfer voluminous paper files.
Expanded Data Analytics Capabilities
    Integrating the latest developments in data analytics into IRS 
systems is an important aspect of the Future State. Incorporating the 
latest generation of data analytics into IRS systems will enable the 
IRS to improve tax administration and the taxpayer experience through a 
``test and learn'' process by continuously collecting and evaluating 
data. Data analytics enables the IRS to use the data feedback loop to 
improve the efficiency and effectiveness of our interactions. Through 
analytics, we would get early warning of new tax issues and could help 
taxpayers to avoid them by both working directly with taxpayers and 
working with return preparers and tax software providers to establish 
remedies. Analytics will also make audits faster by reducing taxpayer 
burden.

    Question. Are there countries whose public revenue collection 
agencies deliver an exceptionally high quality of service to their 
citizens? Are there practices you would borrow from them?

    Answer. Australia, Belgium, New Zealand, Norway, and many other 
countries, offer online portals through which their citizens can 
interact with their tax administrators. These portals offer a variety 
of online services, including tax and other information, forms and 
calculators, electronic filing of tax returns, electronic payment 
options, and secure detailed taxpayer information. These online 
services are easy and attractive for taxpayers to use, making it easier 
for them to comply with the law and receive a high standard of service, 
while the tax administrators benefit from lower costs and greater 
voluntary compliance. The IRS, through its participation in the 
Organisation for Economic Co-operation and Development's (OECD) Forum 
on Tax Administration, is able to learn about the practices in other 
tax administrations and is working to incorporate similar types of 
online opportunities as part of our Future State project.

                                 ______
                                 
               Questions Submitted by Hon. Maria Cantwell
    Question. Last year, Congress decided in a bipartisan way to 
increase funding for the IRS in order to improve customer service, 
prevent identity theft and improve cybersecurity. I was heartened to 
hear Secretary Mnuchin say during his confirmation hearings that the 
IRS was ``understaffed'' and ``under-resourced'' and hoped we could 
move beyond the era of punitive budget cuts for the IRS and make the 
Service the most efficient and effective it can be.

    I was disappointed along with many of my colleagues by the $239 
million budget cut the President proposed for the IRS, nearly erasing 
the bipartisan efforts we made last year.

    Can you describe how the IRS has spent the additional money 
Congress appropriated last year for increased cybersecurity? How has 
the IRS improved its cyber-capability, and how would a cut in funding 
impact your ability to fight identity theft and protect taxpayers?

    Answer. In FY 2016, we spent $72 million, and plan to spend an 
additional $78 million in FY 2017, of the section 113 Administrative 
Provision on IRS cybersecurity, including labor. The following projects 
span multiple years and are designed to strengthen IT security 
controls:

          Cybersecurity Skills and Workforce--The IRS successfully 
        recruited high quality candidates to fill IT security roles 
        that were vacant through attrition or newly created to support 
        mandates or initiatives that improve protections for critical 
        infrastructure and taxpayer data. The IRS also invested in 
        enhancing workforce skills through training, accreditations, 
        and certifications.

          User and Network Security--The IRS will update its Personal 
        Identity Verification (PIV) enablement solution that controls 
        both physical access to IRS facilities and virtual access to 
        IRS systems. This update requires the IRS to replace its 
        installed network equipment that lacks the necessary software 
        to improve security.

          Enterprise Operations Infrastructure Security--The IRS 
        continues to expand its Integrated Enterprise Portal (IEP) 
        environment security protections and tools that detect and 
        remediate attempted external attacks on IRS.gov via automated 
        scripts, bots, and suspicious and malicious Internet Protocol 
        addresses.

          Cyber Strategy and Improvement Plan (CSIP)--The IRS 
        continues to implement the CSIP issued by OMB to identify and 
        address critical Cybersecurity gaps and emerging priorities. 
        The IRS has launched and continues to strengthen its Security 
        Summit initiative. This initiative allows us to leverage 
        external partnerships with the States and the tax industry to 
        identify safeguards to protect Federal and State tax accounts 
        from identity thieves.

          Cyber Secure Data Technology--The IRS is enhancing its 
        infrastructure and tools with modern capabilities to identify, 
        isolate, and respond to current and emerging data security 
        issues. This effort addresses critical needs in the IRS 
        Computer Security Incident Response Center (CSIRC) security 
        zone infrastructure, including bandwidth capacity expansions, 
        required to adequately evaluate content and web traffic.

          Cyber Analytics and 24x7 Monitoring--The IRS continues to 
        expand its advanced analytics and 24x7 monitoring capabilities. 
        This will complement the Continuous Diagnostics and Mitigation 
        (CDM) implementation led by the Department of Homeland Security 
        to automate security controls, enhance deficiency management, 
        and standardize risk reporting across Federal agencies.

          IT Security Audits, Vulnerability Assessments and 
        Remediation--The IRS used these funds to get contractor 
        services, hardware, and tool enhancements to provide 
        vulnerability assessments via enhanced attack simulations and 
        exercises. These capabilities are essential to identifying 
        weaknesses that we must incorporate into remediation plans 
        across the IT infrastructure ecosystem.

    A reduction in cybersecurity funds would severely limit our ability 
to deliver the multi-year implementation strategy described above to 
defend against the persistent and organized threat to the security of 
taxpayer information, their identities, and the tax refunds the IRS 
processes each filing season. In its FY 2016 report, Security for 
Taxpayer Data and IRS Employees, the Treasury Inspector General for Tax 
Administration recognized information security as the number one 
management and performance challenge facing the IRS for the sixth 
consecutive year.

    Question. President Trump signed an executive order on January 30th 
that would require the elimination of two regulations for every one new 
regulation issued.

    The executive order also instructs agency heads that the total 
incremental cost of all new regulations, including repealed regulations 
to be finalized in 2017 shall be no greater than zero, unless otherwise 
required by law or consistent with advice provided in writing by the 
Director of OMB.

    To what extent is the IRS impacted by the Trump ``two for one'' 
executive order? What types of notices has the IRS identified that 
would be impacted by the executive order?

    Answer. The Treasury Department and the IRS are working with OMB to 
determine the scope and effect of the executive order.

    Question. Has the IRS compiled its list of regulations to be 
eliminated? What types of tax regulations will be proposed for 
elimination? Does it include all guidance, notices, and revenue 
rulings?

    Answer. The Treasury Department and the IRS are working with OMB to 
comply with the executive order. In relation to EO 13789, on July 7, 
2017, Treasury and the IRS issued Notice 2017-38, identifying eight 
regulations as meeting the criteria of EO 13789.

    Question. To what extent will the ``two for one'' edict hinder the 
IRS's ability to provide appropriate guidance to taxpayers?

    Answer. The Treasury Department and the IRS are working with OMB to 
comply with the executive order. We do not anticipate that the 
executive order will hinder our ability to provide appropriate guidance 
to taxpayers. We have been able to publish regulations and issue so-
called ``sub-regulatory'' guidance in the form of revenue procedures 
and letter rulings, which are helpful to taxpayers interpreting the 
Internal Revenue Code.

    Question. Has the Director of OMB provided the IRS with guidance on 
the implementation of the EO? For example, what are the standards for 
determining the costs of existing regulations that are considered for 
elimination? Or, has OMB told the IRS what its total amount of 
incremental costs is for issuing new regulations will be for 2017?

    Answer. The Treasury Department and the IRS are working with OMB to 
comply with the executive order.

    Question. I understand that last year, the IRS had informed 
software providers that tax returns for the 2016 filing season that did 
not indicate whether or not the taxpayer was complying with the 
Affordable Care Act's mandate would be automatically rejected by the 
Service.

    After the President's executive order on Obamacare was issued on 
January 20th, the IRS reversed this policy, and will continue the 
current practice of accepting these ``silent'' returns.

    Does the IRS anticipate this change will lead to fewer people 
obtaining health insurance coverage or raise the price of health 
insurance coverage for other people because fewer people will obtain 
coverage? Was any analysis of the impact of this change on coverage or 
prices undertaken before this decision was made?

    Answer. Consistent with the President's executive order directing 
Federal agencies to exercise authority and discretion to reduce burdens 
under the Affordable Care Act (ACA), we decided to continue to allow 
electronic and paper returns to be accepted for processing for the 2017 
tax filing season in instances where a taxpayer does not indicate 
whether he or she has health insurance coverage as we had in previous 
years. However, the ACA is still in force until changed by law, and 
taxpayers remain required to follow the law and pay what they may owe. 
The IRS administers the ACA consistent with the statute and the 
executive order. The IRS does not have the capability of measuring 
impact on coverage or prices.

    Question. Is the IRS considering any other regulatory changes 
regarding enforcement of the individual mandate? Can the administration 
direct the IRS not to collect this penalty?

    Answer. We are not considering any regulatory changes regarding 
enforcement of the individual mandate at this time.

    Question. I understand that during the past open enrollment period, 
the IRS coordinated with the Department of Health and Human Services to 
inform taxpayers who had not previously obtained insurance what their 
potential individual responsibility payment could be and encourage them 
to instead obtain coverage. Do you plan to continue this practice in 
the upcoming open-enrollment period?

    Answer. We understand that the Department of Health and Human 
Services is developing plans for the next open-enrollment period, and 
defer to it for information about those plans. The IRS has not made a 
decision as to whether we will issue notices to uninsured taxpayers.

    Question. On January 19, 2017, it was reported that the IRS would 
propose regulations to implement the centralized partnership audit 
regime that was passed by Congress as a part of the Balanced Budget Act 
of 2015, and later amended by the PATH Act. However, those proposed 
rules were never officially published in the Federal Register after 
President Trump's inauguration.

    Why were the proposed rules not published? Have they been delayed 
or cancelled? What is the current timetable for the issuing of these 
regulations?

    Answer. Proposed regulations to implement the new centralized 
partnership audit regime were sent to the Federal Register, but were 
withdrawn prior to publication in the Federal Register in compliance 
with the White House Chief of Staff's memorandum issued on January 20, 
2017. Proposed regulations to implement the centralized partnership 
audit regime were resubmitted to the Federal Register and published on 
June 14, 2017.

                                 ______
                                 
                Questions Submitted by Hon. John Cornyn
    Question. Mr. Commissioner, last month I sent you and Attorney 
General Sessions a letter about the enforcement of the so-called 
``Johnson Amendment'' and its interaction with both the First Amendment 
and the Religious Freedom Restoration Act. As you know, the Johnson 
Amendment prohibits churches and other houses of worship that are 
deemed as a 501(c)(3) organization, or a non-profit, from engaging in 
certain campaign activities. My constituents have concerns about the 
agency's approach on this issue, and I share their concerns. The 
Johnson Amendment has been a burden for some churches for a number of 
years--casting a shadow over what can be said in a sermon and other 
communications that some religious institutions may wish to make to 
their members about politics or candidates.

    In 1993, President Clinton signed into law The Religious Freedom 
Restoration Act. This statute says that the government shall not 
substantially burden a person's exercise of religion--even if the 
burden results from a rule of general applicability. The statute allows 
a substantial burden of a person's exercise of religion only if the 
government demonstrates that its action is in furtherance of a 
compelling government interest and is the least restrictive means of 
furthering that compelling governmental interest. This requirement 
applies broadly to all Federal laws--including the Johnson Amendment.

    In my letter, I suggested that the IRS and the Department of 
Justice conduct a thorough review of the interaction between the 
Johnson Amendment and both the First Amendment and the Religious 
Restoration Act of 1993. Furthermore, I asked that the IRS and DOJ 
consider suspending enforcement, including audits and examinations 
under the Johnson Amendment until a review has been satisfactorily 
completed.

    Some argue that the 1993 Religious Restoration Act allows houses of 
worship to speak to their members about matters of religious 
conviction, including political issues or candidates, and the 
government cannot burden such speech by denying charitable tax status 
or other penalties. A law review article by Notre Dame Law professor 
Lloyd Mayer entitled, ``Politics at the Pulpit: Tax Benefits, 
Substantial Burdens, and Institutional Free Exercise'' discusses the 
1993 Act in context of the Johnson Amendment. The Professor concludes 
that ``. . . the government will have a difficult time demonstrating 
that they are compelling and that the prohibition as applied to sermons 
is the least restrictive means for furthering them.''

    Could you tell me if your agency is conducting a review of the 
Johnson Amendment and how it interacts with the First Amendment and the 
Religious Restoration Act of 1993? If so, when do you expect the review 
will be completed by?

    Answer. We appreciate receiving your letter dated March 15, 2017 
about the ``Johnson Amendment'' and its interaction with the First 
Amendment and the Religious Freedom Restoration Act of 1993 (Pub. L. 
103-141). As I explained in my response dated April 11, 2017, we do not 
take a position on matters of tax policy, and we defer to the Congress 
as to whether the Johnson Amendment or other tax laws should be 
changed. We strictly adhere to the protections that the First Amendment 
and Federal statutes, including the Internal Revenue Code and the 
Religious Freedom Restoration Act of 1993, provide to churches, 
religious organizations, and other taxpayers.

    Question. What are your thoughts about suspending IRS enforcement 
activities under the Johnson Amendment until there is a better 
understanding of the burdens that churches and other houses of worship 
face?

    Answer. We have an obligation to administer and enforce the tax law 
as enacted, with due regard to the Constitution as well as other 
Federal statutes and guidance. We defer to Congress and the Department 
of the Treasury to set tax policy.

    Question. Could you explain to the committee the audit process that 
churches and other houses of worship go through?

    Answer. The Exempt Organizations office of our Tax-Exempt/
Government Entities Division considers a wide range of compliance 
issues, including political campaign intervention, before initiating an 
audit. To initiate a church audit, section 7611 of the Internal Revenue 
Code imposes a high standard that generally requires an approving IRS 
official to reasonably believe that the church has not met its tax 
obligations, such as withholding employment taxes and filing employment 
tax returns, or has engaged in activities resulting in private 
inurement or impermissible political campaign activities, such that the 
organization may not qualify for tax exemption based on a written 
statement of the facts and circumstances. If the reasonable belief 
requirement is met, the IRS begins an inquiry by providing a church 
with written notice explaining its concerns. If the church fails to 
respond within the required time, or if its response is insufficient to 
alleviate IRS concerns, the IRS may, generally within 90 days, issue a 
second notice, informing the church of the need to examine its books 
and records. After issuing a second notice, but before beginning an 
examination of its books and records, the church may request a 
conference with an IRS official to discuss IRS concerns. If at any time 
during the inquiry process the church supplies information sufficient 
to alleviate the concerns of the IRS, the matter will be closed without 
examination of the church's books and records. Generally, examination 
of a church's books and records must be completed within two years from 
the date of the second notice from the IRS. For more information about 
the audit process for churches, please see IRS Publication 1828, Tax 
Guide for Churches and Religious Organizations.

    Question. Mr. Commissioner, Congress passed the 1998 IRS 
Restructuring Act in part to curb IRS abuses. This legislation, among 
other things, requires the IRS to notify the taxpayer before contacting 
third parties regarding examination or collection activities with 
respect to the taxpayer. As benign as a third-party contact by the IRS 
would seem, it carries with it an undeniable stigma. A taxpayer whose 
employer, friend, or neighbor, learns of an IRS audit or unpaid taxes 
unquestionably has a changed perception of that individual. Some cases 
might not impact that relationship or business, but more often than not 
a taxpayer will suffer irreparable harm.

    I have heard from my constituents that the IRS is not meeting its 
commitment to protect taxpayers' rights regarding third party contacts. 
I have been told that in practice taxpayers are not being given a 
substantive opportunity to first provide the information to the IRS and 
that in many instances the IRS are circumventing these protections. In 
addition, the National Taxpayer Advocate has found that the IRS's 
third-party contact procedures do not follow the law and may 
unnecessarily damage taxpayers' businesses and reputations. The 
Advocate listed this as one of the most serious problems facing the 
IRS.

    The Advocate found that under current procedures, the IRS issues 
vague or non-specific Third-Party Contact (TPC) notices and potentially 
incomplete TPC reports that do not allow taxpayers to be informed about 
what information the IRS has decided it needs from third parties, 
whether it has actually contacted third parties, and how to obtain a 
list of the third party contacts.

    I find this disturbing and I trust raises concerns for you as well. 
It is important that IRS agents are educated on the proper protection 
of taxpayer rights.

    What is the IRS doing to ensure that the protections regarding 
third-party contacts are fully respected?

    Answer. The IRS makes every effort to ensure our examination and 
collection processes, including third-party contacts (TPCs), are 
conducted fairly and impartially, balancing taxpayer expectations of 
privacy with the needs of effective tax administration. We are 
extremely sensitive to taxpayer concerns about reputational harm with 
respect to their tax matters. As a result, our procedures promote and 
prioritize open communication with taxpayers to gain their cooperation, 
encouraging them to voluntarily provide the requested information. When 
a TPC is necessary, we adhere to the provisions of Internal Revenue 
Code section 7602(c) and 26 Code of Federal Regulations (CFR) 301.7602-
2, requiring us to provide advance notification to the taxpayer, make a 
record of each third party contacted, and provide a list to the 
taxpayer of third parties contacted upon request.

    The IRS issues several publications to taxpayers, including 
Publication 1, Your Rights as a Taxpayer (Examination and Collection), 
and Letter 3164, Third Party Notice (Collection). Letter 3164 provides 
advance notice that a TPC might become necessary if the taxpayer does 
not have the ability to produce books and records as required by law, 
or if such a contact is required to verify information or document 
witness testimony.

    In an examination, the examiner requests information from the 
taxpayer using Form 4564, Information Document Request (IDR). 
Similarly, in the collection process, Form 9297, Summary of Taxpayer 
Contact, is used to request information needed to address collection 
tax issues. Information taxpayers voluntarily provide usually reduces 
the need to request information through other means, such as a third-
party contact or a summons.

    The IRS has additional procedures in place to ensure the 
protections regarding TPCs are fully respected, including managerial 
review of TPC cases and internal training.

    Question. Will you commit to my constituents that the IRS will 
consult with the Taxpayer Advocate and the Treasury Inspector General 
for Tax Administration and conduct a review of IRS's practice and 
guidance, including the Internal Revenue Manual, in this area?

    Answer. The IRS is committed to the regular review of IRS policy 
and procedures. Internal Revenue Manual (IRM) 1.11.2, Internal 
Management Documents System, requires program owners to review the IRM 
at least annually for procedural, operational and editorial changes. 
Moreover, the IRS is continually looking for ways to improve its 
processes. As a result of a review of our current TPC practices and 
guidance, the IRS is updating IRM 25.27.1, Third Party Contacts--Third 
Party Contact Program, and revising TPC notices to instruct employees 
to inform taxpayers on how to request TPC reports. In addition, we are 
coordinating with the National Taxpayer Advocate on proposed procedural 
and policy changes on this issue.

    Question. What is the IRS doing in response to the Taxpayer 
Advocate's recommendations?

    Answer. We are taking the following actions to address concerns in 
the FY 2015 NTA's Most Serious Problems Annual Report to Congress:

          Revising Publication 1, Your Rights as a Taxpayer, to 
        include instructions on how to secure TPC listings;

          Updating Collection Letter 3164, Third Party Notice, to 
        inform taxpayers of their right to receive post-TPC reports and 
        instructions on how to request TPC reports;

          Updating Internal Revenue Manual (IRM) 25.27 and IRM 
        4.11.57, to include guidance to IRS employees on a taxpayer's 
        right to receive information regarding TPC reports;

          Including TPC training as part of the Revenue Officers 
        Continuing Professional Education (CPE) training;

          Including TPC training as part of the current Examiner CPE 
        training; and

          Revising Field Examination's Third-Party Contact Procedures 
        Job Aid to better clarify TPC procedures for examiners.

                                 ______
                                 
               Questions Submitted by Hon. Chuck Grassley

    Question. Recently, the Treasury Inspector General for Tax 
Administration (TIGTA) issued a report on the IRS's enforcement of 
structuring laws through civil asset forfeiture. TIGTA's review of the 
program, spanning 2012 through 2014, showed the IRS enforced 
structuring laws ``primarily against legal source funds.'' This 
resulted in hundreds of individuals, many of whom were small business 
owners, having their bank accounts seized with no evidence of any 
underlying criminal activity. This included an owner-operator of a 
small Mexican restaurant in Arnolds Park, Iowa. After public outrage at 
cases such as this, the IRS announced a policy change that it would 
only pursue cases in which there was underlying criminal activity, 
except in exceptional circumstances.

    What procedures and protections you have put in place to ensure 
this new policy is being adhered to?

    Answer. Since implementing our new policy in October 2014 
(described in IRM 9.7.1.3.1(6)), IRS-CI adopted a number of measures to 
ensure it is being followed, including the development of standard 
operating procedures, additional and annual training, and enhanced 
internal oversight. For example, in June 2016, we implemented standard 
operating procedures for the Bank Secrecy Act (BSA) violations. The 
procedures require that the seizure affidavit document meets the 
probable cause element for evidence of illegal source funds. Moreover, 
all seizure affidavits must be sworn by an IRS special agent and 
document the specified unlawful activity underlying the seizure. The 
special agent in charge must verify that seizures are not conducted 
independent of an ongoing criminal case. Seizures must generally be 
tied to an approved subject criminal investigation.

    Our Financial Crimes section has quarterly BSA conference calls for 
field office special agents, task force officers, and their 
supervisors. In June and August 2016, supervisors, coordinators, and 
task force officers attended training at the National Criminal 
Investigation Training Academy, which we expect to repeat annually, 
including at a meeting scheduled in June and August this year. The BSA 
enforcement program requires case reviews of open structuring 
investigations, including a periodic review by the directors of field 
operations to verify compliance with IRS-CI policies for BSA 
enforcement. In addition, the Headquarters Review and Program 
Evaluation staff must review field office BSA enforcement programs.

    Question. The new policy still allows the IRS to pursue legal 
source structuring cases in ``exceptional circumstances.'' Could you 
help me understand what the IRS would consider an ``exceptional 
circumstance''?

    Answer. While we have not specifically defined the term 
``exceptional circumstance,'' we have advised our field offices that we 
will limit IRS-CI Headquarters approval to the rarest of situations.\1\ 
One such example would be activity that connects the structuring 
activity to terrorism financing. To date, we have not used the 
exceptional circumstance exception for seizures.
---------------------------------------------------------------------------
    \1\ Memorandum for Special Agents in Charge of Criminal 
Investigation, October 17, 2014, available at http://ij.org/wp-content/
uploads/2015/07/IJ068495.pdf.

    Question. I understand the IRS has notified individuals whose 
assets were seized after fiscal year 2009 that they may submit a 
petition seeking return of their funds. Could you provide me with 
information on how many individuals the IRS has returned funds to, as 
---------------------------------------------------------------------------
well as how many have availed themselves of this process?

    Answer. For individuals or business entities that received a notice 
under the petition for remission or mitigation process, our records 
reflect that 454 individuals and business entities filed petitions. The 
table below provides information about the disposition of the petitions 
as of May 3, 2017.


            SUMMARY OF THE IRS PETITION FOR REMISSION PROGRAM  ON SPECIFIC TITLE 31 STRUCTURING CASES
----------------------------------------------------------------------------------------------------------------
                                                              Judicial        Administrative         Total
----------------------------------------------------------------------------------------------------------------
Notices issued                                                        895                966              1,861
Petitions received                                                    246                208                454
Petitions granted or recommendation to grant made to                  188                174          362 (80%)
 DOJ
Petitions denied or recommendation to deny made to DOJ                 58                 33           91 (20%)
Petitions withdrawn                                                     0                  1                  1
Petitions paid (quantity)                                               7                163                170
Petitions paid (dollar value)                                 $442,695.23      $9,281,238.26      $9,723,933.49
Total approved payments                                       $709,239.23     $10,034,324.33     $10,743,356.56
Petition payments pending DOJ approval                     $15,790,605.93
----------------------------------------------------------------------------------------------------------------


    Question. During the IRS targeting investigation it became evident 
that the IRS had some gaps in its policies and procedures to safeguard 
electronic records, particularly emails. Since 2012, all agencies have 
been under an Office of Management and Budget (OMB) directive to 
``manage both permanent and temporary email records in an accessible 
format'' by December 31, 2016. In compliance with this directive, the 
National Archives recommended all government departments and agencies 
adopt the ``Capstone'' approach for electronic management of email 
records. Has the IRS met its requirements under the OMB directive and 
fully implemented the ``Capstone'' approach for managing email records? 
If not, please explain why and when you expect the IRS to be in 
compliance.

    Answer. The IRS takes its obligation to preserve Federal records 
very seriously. Our efforts ensure records management practices adhere 
to the National Archives and Records Administration (NARA) and the 
Office of Management and Budget (OMB) M-12-18, Managing Government 
Records Directive, requirement.

    In response to the OMB directive, we implemented an interim 
solution to archive email of IRS executives consistent with NARA 
guidance in October 2014. In 2015, we identified a cloud-based approach 
to meet the OMB/NARA Capstone requirements and made significant 
progress to meet the December 31, 2016 deadline. However, a bid protest 
filed with the Government Accountability Office (GAO) in March 2016, 
and upheld in June 2016, required us to re-compete the solution to an 
on-premises based system. The revised approach required new procurement 
actions and the purchase and installation of hardware and software. 
Given the timing of the protest, we could not meet the December 2016 
deadline. We are on course to implement the enterprise-wide NARA 
compliant solution for all agency email by the end of fiscal year 2017.

    Question. Thank you for your call the other day to update me on the 
IRS's progress in implementing the Private Debt Collection program. I 
appreciate your assurances that the IRS is working to make the program 
a success. One of the challenges facing previous iterations of the 
program was the limited volume of cases the IRS chose to place with 
private collection agencies. The success of the program depends on it 
achieving economies of scale so that efficiencies are realized. I 
understand the need for a testing period to ensure there aren't any 
process problems. However, once this is completed, can you assure me 
that the IRS is planning to move with deliberate speed to include all 
eligible accounts in the program so that the billions in revenue the 
Joint Committee on Taxation estimates the program can collect is 
realized?

    Answer. The IRS delivered the first Private Debt Collection 
accounts to the Private Collection Agencies (PCAs) on April 10, 2017. 
As noted, the initial volumes were small to ensure there were no 
process issues. Over the next 6 months, we will increase the volumes 
with the goal of delivering nearly 140,000 accounts to the PCAs by the 
end of FY 2017. During this time, the IRS will continually evaluate the 
inventory delivered to ensure we give the PCAs the right mix and type 
of inventory. Based on this continuing evaluation, the IRS plans to 
deliver increased volumes of work through FY 2018, including more 
complex taxpayer accounts. This approach is designed to ensure that the 
maximum amount is collected under this program.

    Question. The Government Accountability Office (GAO) has issued two 
of three reports regarding the oversight and administration of the Low 
Income Housing Tax Credit program at my request to find out if it's 
being administered as intended. In the July 2015 report, GAO found that 
the IRS, the Federal agency responsible monitoring and enforcing the 
program, provides only ``minimal'' oversight.

    Specifically, GAO found that LIHTC is a ``peripheral program in IRS 
in terms of resources and mission.'' Additionally, the IRS has only 
performed 7 audits of HFAs (of 56 total HFAs) between 1986 and 2015. 
GAO further stated, ``As a result of minimal monitoring, IRS does not 
know the extent of compliance monitoring by HFAs, which limits its 
ability to determine if the HFAs appropriately awarded credits to 
projects.'' As such, State entities ``increasingly'' have missed the 
deadline to submit their annual report to the IRS and ``often submit 
incomplete or inaccurate forms.''

    In the May 2016 report, the GAO concluded that the IRS doesn't give 
State and local agencies clear guidance on how to report program 
noncompliance and doesn't organize or track information from 
noncompliance reports. For example, the IRS has inputted less than 2 
percent of the information from the LIHTC compliance Form 8823. Thus, 
there is no way to estimate taxpayer compliance or determine if any tax 
credits have ever been recaptured. Moreover, the IRS doesn't 
participate in the ``interagency efforts to modernize, standardize, and 
improve compliance monitoring of [LIHTC] properties.'' GAO has provided 
a number of recommendations that would improve IRS oversight of the 
LIHTC program. Has the IRS implemented all of the recommendations? If 
not, why not.

    Answer. To date, we have implemented three of the four GAO 
recommendations regarding Low Income Housing Tax Credits (LIHTCs). We 
participated in the Housing Finance Agency Portal 2017 Interagency 
Physical Inspection Alignment Initiative working group and the U.S. 
Department of Housing and Urban Development (HUD) Real Estate 
Assessment Center (REAC) team meetings to improve our understanding of 
the prevalence of noncompliance with LIHTC requirements and to leverage 
existing resources. We also have participated in bi-weekly REAC 
meetings throughout each calendar year since 2013 to ensure IRS 
inclusion in the REAC's physical inspection alignment initiative.

    We participated in the Physical Inspection Alignment Meetings at 
the National Council of State Housing Agencies Conferences (three per 
year) to assess the utility of the HUD-REAC database to improve our 
processes for identifying the most significant noncompliance issues.

    Finally, we procured a new server that allows data on credit 
allocation and certifications to be input, thereby enabling us to 
better assess basic compliance requirements by using the credit 
allocation information in our database. This allows the IRS to 
implement a wide range of improvements to procedures and controls, 
including improved data entry control and report generating 
functionality; improved data reliability; and continued enhancements, 
such as the capability to produce additional reports that will allow 
management to review accuracy and anomalies more easily.

    We continue to work on the remaining recommendation to receive more 
consistent information on LIHTC noncompliance, including a review of 
the Form 8823 Audit Technique Guide to determine whether allocating 
agencies need additional guidance and clarification to understand when 
to report noncompliance, building disposition or other information on 
Form 8823.

    Question. The IRS said an existing database would be converted to 
improve LIHTC monitoring and evaluation of data agencies submit on Form 
8823. Has this been done? If yes, what have been the results of the 
increased monitoring? If not, when will the conversion be complete?

    Answer. The existing database has been moved to the new server. We 
continue to improve the database to allow full capacity to input data 
and offer a variety of reports that will estimate taxpayer compliance 
and allow the IRS to determine if any tax credits should be recaptured. 
These improvements are scheduled to be completed by September 2018.

    Question. LIHTC is significantly larger than the New Market Tax 
Credit program in terms of foregone revenue, yet the number of full-
time equivalent (FTEs) personnel administering the LIHTC program is 
about \1/3\ that of the New Market Tax Credit program (5.6 to 15). 
Please explain the disparity in the number of personnel administering 
these programs. What, if any, steps have been taken to increase the 
number of FTEs working on LIHTC. If none, please explain why.

    Answer. A direct comparison of IRS staffing of Low-Income Housing 
Tax Credits (LIHTCs) and New Markets Tax Credits (NMTCs) is difficult 
since these two credits differ in terms of their complexity and involve 
other organizations to assist in their administration. For example, the 
Internal Revenue Code provides both LIHTCs over a 10-year period and 
other tax benefits to investors in low income housing. The program is 
jointly administered by the IRS and State-authorized agencies that 
determine which proposed housing projects will be eligible to earn 
credits and how many credits are the maximum that can be earned by the 
project. These agencies also monitor properties for compliance with 
LIHTC requirements and report noncompliance to the IRS.

    NMTCs, in comparison, are more complex. NMTCs, which are available 
over a 7-year period for investments in a qualified Community 
Development Entity (CDE), often involve multi-tiered, flow-through 
entity financing structures and large corporate taxpayers that have 
dozens of NMTC arrangements in place in a tax year. Examination of 
NMTCs requires IRS examiners with advanced tax knowledge of flow-
through entities, particularly partnerships. Although the Community 
Development Financial Institutions Fund, another office within the 
Department of the Treasury, jointly administers NMTCs with the IRS, it 
does not assist the IRS with ensuring tax compliance during the 7-year 
period like the State agencies who jointly administer LIHTCs. These 
differences inform the staffing levels for administering each of these 
credits.

    Question. The Taxpayer Advocate's most recent report to Congress 
called into question the adequacy of the IRS's streamlined application 
for 501(c)(3) status, which it adopted in 2014. According to a 2015 
study by the Taxpayer Advocate of organizations approved by the 
streamlined approach, 37 percent did not meet the organizational test 
for 501(c)(3) status. If accurate, this raises serious concerns about 
the ability of donors to rely on IRS determinations when making tax 
deductible donations. What, if any efforts, is the IRS undertaking to 
improve the streamlined application process to more accurately weed out 
non-compliant applicants in the pre-determination process?

    Answer. Since implementation in 2014, Form 1023-EZ has dramatically 
reduced taxpayer burden and IRS backlog. To help identify potential 
compliance issues, the IRS conducts both pre- and post-determination 
review of Form 1023-EZ submissions. The IRS also continues to consider 
improvements to Form 1023-EZ based on its own experience and comments 
received from the public and other stakeholders. For example, in 
response to one of the recommendations the National Taxpayer Advocate 
made, the IRS will add to Form 1023-EZ a narrative question on the 
applicant's exempt mission or activities. The IRS also is considering 
additional questions that would assist applicants in confirming 
eligibility to use the form.

    Question. On June 9, 2016, I wrote a letter to you about my 
investigation into Mosaic Life-Care, a 501(c)(3) non-profit charitable 
hospital. I started the investigation because news reports at the time 
indicated that Mosaic had placed thousands of low-income persons in 
collection and sued many of them, rather than providing charity care as 
they are required to do as a charitable hospital. Due to my 
investigation, Mosaic instituted a debt forgiveness program that 
resulted in thousands of low-income patients receiving, in total, $16.9 
million dollars in debt forgiveness. As you are aware, I authored 
nonprofit hospital reforms that were ultimately enacted in 2009. Among 
these reforms were requirements that nonprofit hospitals establish and 
make public a financial assistance policy (FAP) and imposing 
restrictions on certain billing and collection procedures.

    In your June 27, 2016 reply, you noted that the IRS reviews 1,000 
charitable hospitals annually to determine if any of them are out of 
compliance with the financial assistance policy requirements. Further, 
you noted that hospitals identified as potentially non-compliant are 
assigned to examination. As of June 2016, the IRS had identified 163 
hospitals for examination but at the time of your letter the 
examinations had not yet been completed.

    Of the 163 hospitals under examination, how many cases have been 
closed by the IRS? For those examinations that have concluded, please 
detail the result of each examination and the corrective action 
employed by the IRS.

    Answer. In our June 27, 2016 response, we indicated that 163 
hospital organizations had been referred for field examinations for 
potential violations of various provisions under section 501(r) of the 
Internal Revenue Code. Out of the 163 hospitals that had been referred, 
we have closed 55 cases as of March 31, 2017, with the following 
results for 45 of those cases: (1) 15 cases closed with no changes or 
adjustments; (2) 4 cases have been assigned to an examiner; and (3) 26 
cases closed with a written advisory sent to the taxpayer and no 
follow-up actions required. To avoid disclosure of specific taxpayer 
information, we cannot disclose the results for the remaining 10 cases. 
These results may include an agreement to additional tax and penalties, 
a change to a related return, or a protest and review by our Office of 
Appeals.

    Question. Separate from the 163 hospitals previously identified, 
has the IRS identified additional charitable hospitals for examination? 
If so, how many?

    Answer. As of April 28, 2017, we identified 436 additional 
charitable hospitals that have been referred for examination for 
potential violations of various provisions under section 501(r).

    Question. I want to bring to your attention reports of poor 
customer service at a Taxpayer Assistance Center (TAC) in Iowa. I 
understand as a matter of general policy TAC's no longer operate as 
walk-in centers, but require taxpayers to schedule appointments. While 
this general policy has caused confusion for taxpayers and made it more 
difficult for taxpayers to get assistance at TACs, it is not my primary 
concern. My concern is TAC's may be abusing this policy to turn away 
taxpayers in need of assistance. Many have complained of being turned 
away even though the office was completely empty, other than the 2 IRS 
employees that worked there. One taxpayer, who in fact had an 
appointment, was initially told she did not and was only served by the 
TAC employee after the employee looked through the computer system for 
5 to 10 minutes to confirm the appointment.

    Is it the IRS's policy to turn away taxpayers that don't have an 
appointment, even where TAC employees have no other appointments with 
taxpayers scheduled?

    Answer. We are serving all taxpayers that come into a TAC without 
an appointment if we have the capacity to assist them in between 
scheduled appointments. We also serve individuals by exception in cases 
of hardships. For example, for the fiscal year through April 22, 2017, 
TAC employees served more than 253,000 taxpayers without an 
appointment. Taxpayers that want to make a payment by check or money 
order, drop off a current year tax return, and get forms do not need an 
appointment. However, a taxpayer who wants to visit a TAC to resolve a 
tax issue should schedule an appointment. With the appointment process, 
our waiting rooms may not be occupied and it may appear that we are not 
assisting taxpayers. While our TAC employees are also responsible for 
administrative items, they spend the majority of their time serving 
taxpayers during their scheduled appointment or a walk-in customer.

    Question. In instances where TAC employees are otherwise engaged 
with appointments, are there procedures to allow taxpayers to schedule 
a future appointment while at the center?

    Answer. If a non-technical employee (greeter) is available, he or 
she can schedule an appointment for the taxpayer while the taxpayer is 
in the TAC. However, many of our one and two-person TACs do not have a 
greeter to provide this service. Therefore, we recommend taxpayers call 
the toll-free line for an appointment. Another benefit of calling the 
toll-free line is that the phone assistor may be able to resolve the 
taxpayer's issue over the phone. For example, in fiscal year 2017 
(through April 22, 2017), phone assistors answered more than 2 million 
calls on the appointment scheduling line, and after speaking with 
assistors, only 43.7 percent of callers needed to schedule an 
appointment.

    Question. What type of review or oversight of TAC offices is 
performed to ensure TAC employees are fulfilling their mission and 
offering good customer service?

    Answer. To ensure TAC employees are fulfilling their mission and 
offering good customer service, we have managers on site to review 
service provided and other mechanisms, such as Field Assistance Contact 
Recording, which is a system to monitor TAC employee interactions with 
taxpayers. Managers also monitor their employees' appointment service 
calendars daily. Currently, with the appointment service, nearly 94 
percent of taxpayers are waiting less than 30 minutes for service.

                                 ______
                                 
               Questions Submitted by Hon. Johnny Isakson
    Question. I appreciated your quick reply to my December 20, 2016, 
request to extend by 90 days the deadline for taxpayers to comply with 
the new reporting requirement in IRS Notice 2016-66, pertaining to 
micro-captive insurance transactions. As I noted in that letter, I 
believe it is important for the IRS to have time to consider taxpayer 
comments carefully and thoroughly before the new reporting requirement 
takes effect.

    Following up on my previous request, I would like to know how the 
IRS has processed these taxpayer comments, which were due on January 
30, 2017, as we approach the taxpayers' new reporting requirement 
deadline of May 1st.

    How many total comments were received?

    Answer. We received 22 public comments and four congressional 
inquiries, including your December 20, 2016, letter. In addition to the 
comments of record, we met with every group that requested a meeting to 
discuss the application of the notice and hear their concerns.

    Question. Were there common underlying themes, concerns, or 
proposed changes recommended by taxpayers who submitted comments on the 
Notice?

    Answer. We received several requests for extensions of time for 
filing required disclosure statements. In response, we issued Notice 
2017-08 to provide a 90-day extension, until May 1, 2017, for taxpayers 
to file the disclosure statements identified in Notice 2016-66.

    In general, taxpayers understood and supported the IRS's need to 
identify and stop abusive micro-captive transactions, but expressed 
concern that Notice 2016-66 is overbroad and burdensome. Comments also 
requested that the IRS consider modifying tax forms so that taxpayers 
may provide and the IRS may review this information in one place, 
avoiding any potential duplication. Finally, comments requested Notice 
2016-66 be modified to exempt those captives that are currently under 
IRS audit from the disclosure requirements.

    Question. What process will the IRS use to respond to and, as 
appropriate, modify the reporting requirements based on legitimate 
concerns, issues, and proposals submitted by taxpayers?

    Answer. We continue to review comments from the public about Notice 
2016-66. To minimize the effect of additional disclosure requirements, 
we carefully crafted objective criteria in section 2 of Notice 2016-66 
that describe the type of micro-captive transactions that are subject 
to disclosure. To date, we have not received any comments that 
identified additional factors or industry standards that would further 
refine our objective factors. We will also consider the disclosures 
that we receive in response to the notice in determining whether to 
modify the reporting requirements to minimize taxpayer burden and limit 
potential disclosures of transactions that do not have the potential 
for tax avoidance.

                                 ______
                                 
              Questions Submitted by Hon. Claire McCaskill
    Question. Due to a change in the law, the IRS will soon use private 
debt collectors to collect old tax debt. Does the IRS have staff who 
are trained and experienced at collecting taxes owed by ordinary 
taxpayers, and if so, why do we need to hire outside contractors to do 
this work?

    Answer. The Fixing America's Surface Transportation (FAST) Act 
requires the IRS to hire private debt collectors.

    Question. In 2015, you established the IRS Security Summit to 
address the explosion of stolen identity fraud in the online, do-it-
yourself tax filings. As a result of that work, the private-sector tax 
industry, State tax agencies, and the IRS agreed to anti-fraud and 
security measures aimed at preventing and/or reducing stolen identity 
return fraud. As the Summit activity completes its second tax season, 
what measures have you taken to ensure that the anti-fraud and security 
measures adopted by current members of the Summit are expanded to all 
electronic tax software providers, including new entrants into the tax 
preparation market?

    Answer. As demonstrated by our signed Security Summit Memorandum of 
Understanding consisting of 41 State departments of revenue, 21 
industry partners, and 9 endorsing organizations, we worked with 
industry and States to establish minimum trusted customer requirements 
for front-end customer identity authentication using recognized 
national standards from the National Institute of Standards and 
Technology (NIST) and the IRS Office of Safeguard. All e-file 
providers, including those currently in the program and those that are 
new entrants, must meet these requirements, which we review and 
strengthen annually. We updated Publication 1345, Handbook for 
Authorized IRS e-file Providers of Individual Income Tax Returns, and 
Publication 3112, IRS E-File Application and Participation, to require 
industry e-file participants to perform due diligence data analysis and 
report suspicious activity to the IRS. We also updated and expanded the 
tax return data elements that we provide to software developers to 
strengthen the authentication protocols to verify that the real 
taxpayer is filing a tax return.

    Question. Federal law requires the government to provide a reward 
or compensation to a whistleblower of a percentage of all collected 
revenues in a successful prosecution, yet, the IRS limits rewards to a 
percentage of only back taxes collected. Can you explain why IRS 
policies do not conform to the statute?

    Answer. The collected proceeds for purposes of determining a 
whistleblower award are not limited to back taxes. Section 7623 of 
States describes ``collected proceeds'' as including penalties, 
interest, additions to tax, and additional amounts. Following public 
notice and comment, the Department of the Treasury and the IRS 
published final regulations that define ``collected proceeds'' to 
include tax, penalties, interest, additions to tax, and certain 
additional amounts collected. The regulations clarify, however, that 
collected proceeds are limited to amounts available to the Secretary of 
the Treasury for payment under the provisions of title 26, United 
States Code.

                                 ______
                                 
                 Questions Submitted by Hon. John Thune
                             identity theft
    Question. One of the biggest issues facing South Dakotans when it 
comes to their Federal taxes is the problem of tax-related identity 
theft. This not only affects those who have their identity stolen, but 
also those who find their refund delayed while the IRS verifies their 
identity. While your testimony described a number of steps the IRS is 
taking to improve its defenses and help taxpayers fight ID theft, I 
have received reports from practitioners in South Dakota that some 
taxpayers are still waiting to resolve cases from last year and, as a 
result, still have not received their 2015 refunds. I have also 
received reports that even after a tax-related identify theft case is 
resolved, the taxpayer's future returns are held up and refunds are 
delayed.

    What steps is the IRS taking specifically to resolve identify theft 
cases faster, especially for taxpayers who are entitled to a refund?

    When a taxpayer has been the victim of tax-related identity theft 
and has been issued a PIN, does the IRS delay processing of returns and 
refunds in subsequent years when the PIN is included on the return? If 
so, what purpose does the PIN serve in helping to establish the 
taxpayer's identity?

    Answer. Refund fraud caused by Identity Theft (IDT) is one of the 
biggest challenges facing the IRS today, and the harm it inflicts on 
innocent taxpayers is a problem we take very seriously. To resolve IDT 
cases faster, we centralized our IDT victim assistance policy, 
oversight, and campus case work under our new Identity Theft Victim 
Assistance (IDTVA) organization. Benefits to this centralized approach 
include managing work using a common inventory system, reducing hand-
offs between functions, improved case processing through streamlined, 
consistent procedures, and improved communication. In addition, we 
resolve IDT cases faster using our toll-free hotline for IDT victims. 
All customer service representatives staffing this line are trained IDT 
specialists who can review the taxpayer's case file and respond to the 
IDT victim's call any time during business hours. For FY 2016, 
taxpayers who became IDT victims had their situation resolved, on 
average, in less than 120 days, a significant reduction from a few 
years ago when cases could take over 300 days to resolve.

    The Identity Protection Personal Identification Number (IP PIN) 
protects taxpayers from subsequent tax-related IDT and will not delay 
the processing of returns and refunds if the IP PIN is included on the 
return. The IP PIN authenticates the return received is the taxpayer's 
real return. A delay in processing and refunds will occur if the IP PIN 
is not included on the return since we will have to authenticate the 
return received is the taxpayer's real return.
                      taxpayer assistance centers
    Question. In your written testimony, you described at some length 
the success of the advance-appointment arrangement that the IRS has 
implemented at Taxpayer Assistance Centers (TACs). In particular, you 
pointed out that the advance appointments have been successful 
``because TAC employees can now spend more time with those (taxpayers) 
who do visit, as they tend to have more complex issue that cannot be 
resolved over the phone.'' Unfortunately, that conclusion is not 
consistent with reports my office has received from South Dakotans who 
have visited one of the TACs in South Dakota (in some cases driving 
more than 100 miles) only to be turned away because they were unaware 
that an appointment is required. And to add insult to injury, I have 
received reports that when informed that they need an appointment, 
constituents have been told that they cannot use their cell phone while 
at the TAC to make such an appointment.

    In general, the IRS has permitted visitors to bring personal cell 
phones with or without camera capability into TACs and other IRS 
facilities. However, the use of cell phones with camera capability 
raises security issues as it relates to the confidentiality and privacy 
of tax returns and related sensitive information. Therefore, while 
taxpayers may bring their cellphones into a TAC, the use of the phones 
inside a TAC is prohibited. Taxpayers may step outside the TAC office 
in the appropriate areas to call and make appointments.

    Is it true that a taxpayer can no longer seek assistance with a tax 
problem (other than needing a form or to pay a tax bill) at a TAC 
without an appointment?

    Answer. We are serving all taxpayers who come into a TAC without an 
appointment if we have the capacity to assist them in between scheduled 
appointments. We also serve individuals by exception in cases of 
hardships. For example, for the fiscal year through April 22, 2017, TAC 
employees served more than 253,000 taxpayers without an appointment. 
However, we recommend taxpayers call the toll-free line for an 
appointment to ensure they receive service at their requested time. A 
significant benefit of calling the toll-free line is that the phone 
assistor may be able to resolve the taxpayer's issue over the phone. 
For example, in fiscal year 2017 (through April 22, 2017), phone 
assistors answered more than 2 million calls on the appointment 
scheduling line, and after speaking with assistors, only 43.7 percent 
of callers scheduled an appointment.

    Question. Are taxpayers turned away even if TAC employees do not 
have scheduled appointments and are available to provide assistance?

    Answer. We are serving all taxpayers that come into a TAC without 
an appointment if we have the capacity to do so in between 
appointments. Therefore, if employees do not have a scheduled 
appointment and are available to provide assistance, they will assist 
walk-in customers during this time.

    Question. How does the IRS forewarn taxpayers that assistance is 
``by appointment only'' at a TAC and prevent individuals from traveling 
long distances only to be turned away?

    Answer. We have issued several news releases throughout the year 
informing taxpayers that appointments are required to obtain service at 
the TAC, which many media outlets have picked up. This information is 
also available on IRS.gov and we placed it on the voicemail for local 
phone numbers for each TAC. Additionally, signs have been placed at 
each office location.
                       new statutory refund delay
    Question. The PATH Act required that the IRS delay refunds until 
February 15th for returns that claim the Earned Income Tax Credit or 
the refundable child tax credit in order to reduce fraud and improper 
payments. Additionally, the PATH Act required employers to file their 
copies of Forms W-2, W-3 and 1099-MISC for non-employee compensation by 
January 31st, rather than the end of February (or March if filing 
electronically) under prior law.

    Can you share with the committee any assessments of these new 
requirements and your efforts to reduce fraud and improper payments 
with respect to the EITC and refundable child tax credit more broadly?

    Answer. The PATH Act requirement that employers submit Forms W-2 to 
the government earlier than has been required in prior years allowed 
us, during the refund hold period, to use this earlier Form W-2 
information in our Return Review Program (RRP), which identifies 
suspicious returns, to systemically verify taxpayers' wages and 
withholding. If the income information was inconsistent with the 
taxpayer's return, we selected the return for further review. This 
accelerated filing date of Forms W-2, together with the new 
requirements to hold EITC and refundable child tax credits, has 
improved our ability to identify incorrect or fraudulent returns. As a 
result, we identified 162,000 returns involving $862.7 million for 
further review.

    We continue to address improper payments through education, 
outreach, and compliance efforts. For example, we prevent more than $2 
billion in suspicious EITC claims from being paid each year through our 
fraud and identity theft prevention enforcement programs. We use 
sophisticated detection models and the early receipt of employer-
provided income information in these programs. In addition, we protect 
between $3 and $4 billion in total revenue each year through additional 
EITC-
related taxpayer compliance activities, one of which is our income 
document matching program. We also address paid preparer error through 
our EITC return preparer strategy that protects $465 million in EITC 
and Child Tax Credits. We are creating a Refundable Credit Operational 
Strategy which will document our existing refundable credit efforts and 
identify potential new activities that could help address improper 
payments. We continue working with stakeholders to identify new 
opportunities. For example, we hosted an EITC Summit on June 29 and 30, 
2016, to get different perspectives from our stakeholders on improving 
compliance while fostering participation.

    Question. How has the earlier availability of Forms W-2, W-3 and 
1099-MISC for non-employee compensation enabled the IRS to improve its 
matching of tax data to reduce fraud and improper payments? Are there 
any specific results you can share with the committee?

    Answer. The earlier availability enhances our defenses against 
identity theft and refund fraud and allows us to determine return 
consistency with known third-party reporting. As of February 16, 2017, 
the RRP received data for 220 million W-2 forms, compared to 97 million 
at that time last year. We held a total of 10.3 million returns for $51 
billion in refunds in accordance with the PATH Act provision to hold 
returns claiming the EITC or the Additional Child Tax Credit (ACTC) 
until February 15, 2017. Receiving earlier W-2 data and having 
additional time during the refund hold period allowed us to select 
additional returns for closer review that we otherwise would not have 
selected. As a result, we identified 162,000 returns involving $862.7 
million for further review.

    Question. Are other statutory changes needed to help the agency 
stop improper refunds before they go out the door?

    Answer. While the PATH Act provisions helped us to administer 
refundable credits, further statutory authority is needed. Currently we 
lack the statutory authority to address at the time of filing errors 
due to claims in excess of lifetime limitations and lack of required 
documents. Instead we must address these errors through the audit 
process, which is a lengthier process that requires significant 
resources. For example, without an audit, the IRS cannot address claims 
for the American Opportunity Tax Credit (AOTC) where a student has been 
claimed for more than the 4-year limit, has attended an ineligible 
institution, or did not attend at least half-time. Granting the IRS the 
authority to correct specific errors at filing, for example allowing 
the IRS to address claims for AOTC for students attending ineligible 
institutions or claiming the AOTC for more than 4 years, would increase 
our ability to address more of the fraud and errors we identify and 
help decrease improper payments from refundable credits. Taxpayers 
would still have all of their rights protected since they could 
disagree with our information, provide additional documentation, and 
appeal any adverse decision.

    Additionally, since paid preparers prepare more than half of the 
returns that are filed for refundable credits, providing the Treasury 
Department with authority to regulate all tax return preparers would 
enable Treasury to require them to meet minimum competency standards 
through testing and continuing education requirements and would help 
promote higher quality service, improve voluntary compliance and foster 
taxpayer confidence in the fairness of the tax system. This will 
benefit all taxpayers including those claiming refundable credits.

    The FY 2018 budget included proposed legislative changes for 
greater flexibility to address correctible errors and increased 
oversight of paid preparers.

                                 ______
                                 
               Questions Submitted by Hon. Mark R. Warner
    Question. In 2015, you announced the Security Summit, a partnership 
between the IRS, States, and members of the tax filing industry to help 
address rampant issues with identity theft. What new improvements has 
the Summit implemented for the 2017 filing season, and what steps is 
the IRS taking to ensure broad industry participation in the Security 
Summit?

    Answer. For the 2017 filing season, the IRS and Summit partners 
took additional actions to identify and stop fraudulent ID theft 
returns including the following:

          We updated and expanded authentication data elements 
        transmitted by the tax industry with every tax return. We added 
        37 new data elements for 2017, providing additional information 
        to strengthen the authentication protocols that verify the real 
        taxpayer filed a tax return.

          The tax industry is sharing with the IRS and States 
        approximately 30 data elements from business tax returns (Forms 
        1120, U.S. Corporation Income Tax Return; 1065, U.S. Return of 
        Partnership Income; and 1041, U.S. Income Tax Return for 
        Estates and Trusts)--extending more identity theft protections 
        to business filers, as well as individuals.

          More than 20 States are working with the financial services 
        industry to create their own version of a program that allows 
        the industry to flag suspicious refunds and return those funds. 
        Also, private-sector partners are enhancing efforts to identify 
        the ``ultimate bank account'' to ensure that the refunds go 
        into the true taxpayers' accounts.

          The Form W-2 Verification Code initiative started by the IRS 
        last year expanded to 50 million forms in 2017 from 2 million 
        in 2016. This initiative requires individuals and tax 
        professionals to enter a verification code when prompted to do 
        so by tax software in order to validate the information on the 
        Form W-2, helping to protect against the filing of false Forms 
        W-2.

          The software industry continues to enhance software password 
        requirements for individuals and tax professional users--
        providing additional safety prior to filing.

          The Summit team continued outreach campaigns such as 
        ``Taxes. Security. Together.'' to encourage taxpayers to 
        protect their personal information. The team held a National 
        Tax Security Awareness Week in December that provided daily tax 
        tips/fact sheets to educate taxpayers and tax preparers about 
        security awareness. The team also launched a ``Protect Your 
        Clients; Protect Yourself'' campaign aimed at increasing 
        security awareness among tax professionals.

          The new Identity Theft Tax Refund Fraud Information Sharing 
        and Analysis Center pilot began on January 23, 2017. This 
        serves as an improved early warning system identifying emerging 
        identity theft schemes and quickly sharing that information 
        among Summit partners so that all participants can enact 
        safeguards.

    We are continuing our collaborative efforts with our partners to 
enhance and expand our anti-fraud and security measures. For example, 
the Security Summit partnership now consists of 41 State departments of 
revenue, 21 industry partners, and 9 endorsing organizations. In 
addition, the National Society of Tax Professionals (NSTP) and National 
Society of Accountants (NSA) are newly active Summit partners. For 
returns filed in 2016 (tax year 2015), our Security Summit partners 
filed 99.6 percent of the total accepted filed returns. The Security 
Summit's endorsing agencies represent a wide range of industry 
participants from software firms, nationally branded tax preparation 
companies, financial services companies, payroll professionals, and tax 
practitioners.

    This collaboration, and the continued work by IRS employees to 
improve our filters, resulted in a 46 percent decrease from 2015 to 
2016 in the number of taxpayers identifying themselves as victims of 
identity theft.

    Question. I remain concerned about the lack of minimum standards 
for paid return preparers and the identity theft issues that result 
from unscrupulous preparers. Is the IRS seeing an increase in tax-
related identity theft cases or other tax refund issues that can be 
tracked to these unregulated tax return preparers? How would licensing 
paid return preparers reduce instances of identity theft?

    Answer. Tax return preparers have increasingly become targets for 
identity and data thieves given the vast amount of personal and 
financial information made available to them by taxpayers. Subjecting 
tax return preparers to minimum standards gives the IRS more 
opportunities to provide directed outreach and education to the 
preparer community about issues such as identity protection and data 
and system security. Requiring minimum standards for return preparers 
would also help the IRS with identifying unscrupulous preparers and 
developing more effective compliance and enforcement strategies.

    Question. I know that over the last several years, the IRS has been 
operating under a drastically reduced budget, making it more difficult 
to both effectively serve taxpayers and modernize your systems to 
address the challenges of an increasingly digital economy. What are the 
top IT modernization challenges that you face when not fully funded? 
How are cybersecurity efforts being hampered by your current budget?

    Answer. Our top IT challenges are cybersecurity, aged 
infrastructure, skilled resources and unmet demand. Our cybersecurity 
threat is ever changing. We are battling sophisticated organized crime 
syndicates around the world, and the solutions we implemented as little 
as a year ago are starting to become obsolete, requiring us to come up 
with new solutions that need additional funding. Further, specialized 
skills in this area are very hard to obtain and hiring freezes as a 
result of our budget constraints are making it nearly impossible to 
hire staff to support all the changes needed; in particular, the 
safeguarding of our high value assets. To fund these challenges, in 
2017, in addition to base resources, we have directed up to $130 
million in reprogramed funds to these critical needs.

    Our aged infrastructure not only presents a security risk, but also 
jeopardizes our ability to deliver the mission effectively and 
efficiently. Costs are driven up with increased outages, need for 
expensive manual workarounds, increased support costs, increased 
dependency on contractors for support, and more. Presently, over 60 
percent of our hardware and 30 percent of our software are out of date.

    People resources continue to be the biggest obstacle to IT 
modernization including delaying some modernization projects. Quite 
simply, there are not enough IRS technologists and subject matter 
experts to deliver on our modernization plans. Over the last few years, 
many highly-skilled, brilliant lead technologists on our IT programs 
have left. With approximately 25 percent of IT employees eligible to 
retire by the end of FY 2017 and approximately 40 percent by the end of 
FY 2019, the significance of this challenge cannot be overstated.

    Question. In the past, I have communicated with the agency 
regarding the unique challenges that on-demand workers may face when 
filing their individual income tax returns. Last year, the IRS 
implemented its Sharing Economy Resource Center. Has the agency 
received feedback on that Resource Center? Does the agency have further 
plans to ensure that this population of taxpayers is receiving the 
appropriate services and guidance to meet their tax filing obligations?

    Answer. The IRS recognizes the need to provide information and 
continue to monitor the communication needs related to the sharing 
economy, both for employees and employers. We launched the Sharing 
Economy Resource Center on IRS.gov in August 2016, and we have received 
positive comments about the center and our continuing communications 
efforts from the tax community as well as others involved in the 
sharing economy. We have been particularly active in this area with our 
communication products, sharing information through traditional media 
and social media channels, including Twitter, as well as sharing 
information with tax professionals and our stakeholder partners. Our 
communication efforts will continue in this area, and we will continue 
to look for ways to address additional needs for information on tax 
issues in the sharing economy. The Treasury Department is unable to 
provide any specific guidance on an individual's status as an employee 
or independent contractor because section 530(b) of the Revenue Act of 
1978 prohibits formal written guidance on the issue of worker 
classification.

    Question. I understand from your testimony that the IRS's Data 
Retrieval Tool is not expected to be restored for use until October 
2017. I appreciate that privacy and data security are paramount, and 
support your efforts to prioritize these things.

    What are the specific additional security measures that you 
anticipate needing to put in place before you feel confident restoring 
the tool?

    Answer. Before restoring the Data Retrieval Tool (DRT), we need to 
implement a data encryption or a ``locked briefcase'' solution. This 
would be the equivalent of handing the taxpayer a locked briefcase that 
they would be able to hand to the Department of Education, but not have 
the key to open and look inside. The Department of Education however 
would be able to open the briefcase, but not display the data to the 
taxpayer. We will also need to send notice to the taxpayer's address of 
record whenever they use the DRT indicating that their tax information 
was accessed in order to confirm that the true taxpayer, and not 
identity thieves, initiated the transaction.

    Question. What costs do you anticipate being associated with these 
efforts?

    Answer. The development costs for our IT system changes are 
approximately $100,000. The IRS is reviewing the longer-term costs of 
providing notices to the taxpayers and any associated taxpayer support.

    Question. What do we know now about the extent of hackers' 
infiltration? What questions remain unanswered?

    Answer. We know that access was facilitated by obtaining high 
quality Personally Identifiable Information (PII) from a non-IRS 
source. We also know that access was limited to the PII of each 
individual identity, as there was a one-to-one match on the access. 
This means the perpetrators were not able to move around the system, 
and the system was not ``hacked'' in the technical sense of the word. 
Rather, an impersonation of the taxpayer occurred.

    What remains unanswered is where the impersonator obtained the high 
quality PII. Both IRS and Treasury Inspector General for Tax 
Administration criminal investigations are underway and would need to 
conclude to determine the exact origin of the PII. However, high 
quality PII is readily available on the ``dark web'' for fraudulent 
activity.

                                 ______
                                 
    Letter Submitted by Hon. Pat Roberts, a U.S. Senator From Kansas

                      COMMITTEE ON WAYS AND MEANS

                     U.S. HOUSE OF REPRESENTATIVES

                          washington, dc 20515

                             April 5, 2017

President Donald J. Trump
The White House
Washington, DC 20500

Dear Mr. President:

As members of the House Ways and Means Committee, we believe it is 
imperative that the Internal Revenue Service (IRS) work for the best 
interest of all taxpayers, and that the taxpayers in turn have 
confidence in the IRS's ability to fairly administer the tax code. This 
trust is at the core of our system of voluntary tax compliance. Trust 
in the IRS is hitting rock-bottom under IRS Commissioner John Koskinen. 
Not only was key evidence relevant to this Committee's investigation 
destroyed under his watch, but he also misled Congress in the process, 
intentionally degraded customer service at the agency, and has since 
lost the trust of the American people. We believe that trust cannot be 
fully restored under Commissioner Koskinen's leadership. For this 
reason, we are writing to request the removal of John Koskinen as 
Commissioner of the IRS and to request that a new leader be put in 
place as soon as possible.

In 2011, this Committee began its investigation into the concerns that 
the IRS was improperly targeting conservative groups who had applied 
for tax-exempt status. The investigation uncovered that IRS employees 
had crafted a targeting scheme to single out applicants based on their 
political beliefs. Based on these findings, in April 2014, the 
Committee referred then Director of Exempt Organizations, Lois Lerner, 
to the Department of Justice for criminal prosecution.

Although the targeting scheme took place prior to Commissioner 
Koskinen's tenure, his subsequent handling of the investigation was 
shockingly inept. In February 2014, the IRS discovered that 2 years 
worth of Ms. Lerner's emails--thousands of documents vital to the 
Committee' investigation--had been destroyed. In April 2014, the IRS 
informed Treasury and the White House about the lost emails. On May 8, 
2014, after years of document requests by the Committee, the IRS agreed 
to turn over all of Ms. Lerner's emails, despite knowing that it could 
not follow through with this promise. Weeks after this agreement was 
made, the IRS revealed that it could not fully comply because some of 
the emails were determined to be unrecoverable. The agency asserted 
that due to a computer crash, it lost years of Ms. Lerner's emails--a 
loss that the IRS withheld from Congress, for more than 4 months, 
despite the IRS's having been aware of it when making the May 2014 
agreement. In April of 2014, Commissioner Koskinen had promised during 
a speech that his goal as IRS Commissioner was to ``find problems 
quickly, fix them promptly, make sure they stay fixed, and be 
transparent about the entire process.'' Despite that promise of 
transparency, it was not until the IRS informed the Senate Finance 
Committee of the loss in an unrelated June 2014 letter that the 
Committee became aware of the loss of thousands of emails central to 
its investigation. When the IRS ``lost'' Ms. Lerner's emails and misled 
Congress, the agency also lost the trust of Congress and the American 
people.

In June 2014, the Committee held a hearing with Commissioner Koskinen 
in order to explore how exactly Ms. Lerner's emails were lost, and why 
the IRS had not only knowingly withheld that information from Congress, 
but in fact promised to provide the lost emails. When asked why he had 
not notified Congress about the email loss at the time it was 
discovered, Commissioner Koskinen stated that he thought the internal 
IRS investigation was ``important,'' and that it was ``[his] decision'' 
to ``complete the investigation'' before advising Congress. When 
questioned about his promise to provide all of Ms. Lerner's emails, 
despite knowing that it would not be possible, the Commissioner stated 
that he ``knew that, in fact [the IRS] would provide [the Committee] 
all of the Lois Lerner emails that [the IRS] had.'' In his testimony, 
Commissioner Koskinen stated ``I don't think an apology is owed.'' On 
this, we agree with the Commissioner--the American taxpayers are not 
only owed a simple apology, they are also owed a fair IRS that works 
for the people.

In July 2014, the Committee learned that the data lost in the computer 
crash may have been recoverable, but that the IRS had ignored the 
advice of outside information technology professionals on how to 
navigate such a recovery. According to the Treasury Inspector General 
for Tax Administration, many of the tapes containing backed-up emails 
were destroyed despite an order in place to preserve them. Following 
the delayed revelation that years' worth of documents and emails had 
been destroyed, the Committee sent multiple letters to the Obama 
Administration requesting information about the destroyed emails. 
Ultimately, neither Ms. Lerner, nor any IRS official in the Office of 
Exempt Organizations, was ever held accountable for the targeting of 
taxpayers based on their political beliefs.

The destructive behavior continued into 2016. As recently as last year, 
the Committee discovered that the IRS had again destroyed documents 
subject to a preservation order relevant to an unrelated investigation. 
This provides further evidence that once again that the IRS, under the 
leadership of Commissioner Koskinen, refuses to be held accountable to 
the public. The American people lost confidence in the IRS as a result 
not only due to the targeting scandal itself, but also as a result of 
the repeated, gross mishandling of the investigation on the part of 
Commissioner Koskinen.

In 2015, Commissioner Koskinen informed IRS staff that due to budget 
cuts, the IRS would have to do ``less with less.'' As a result, 
customer service for the 2015 filing season was ``abysmal'' with 
taxpayers waiting for hours to talk to an IRS employee, or worse being 
hung up on. The Committee investigated the poor customer service 
because taxpayer services was level-funded by Congress from 2014 to 
2015. The Committee discovered that in fact, the IRS had cut its own 
taxpayer service budget by diverting funds traditionally allocated to 
taxpayer services towards other priorities. This contributed 
significantly to the IRS's inability to provide prompt customer service 
to taxpayers. Despite significant needs for serving taxpayers, the IRS 
continued to waste money and prioritized spending in other areas 
including implementing the Affordable Care Act, paying employees for 
unofficial union time, and paying bonuses to employees (including those 
with known misconduct issues). The American people deserve better than 
a Commissioner who vows to ``do less'' to serve the taxpayers to whom 
he is ultimately accountable.

It is the goal of both this Committee and your Administration to reform 
our outdated tax code. Our primary focus must be making the tax code 
simpler and fairer while providing exemplary customer service to the 
American people. As we work to reform the tax code and restructure the 
IRS, we must ensure that the agency has the tools it needs to 
accomplish the tasks at hand and to achieve a smooth transition. During 
this transition, the IRS would benefit immeasurably from new leadership 
and a fresh start. In order for the IRS to fully reap the benefits of 
new leadership and regain the trust of the American people, the 
Committee believes that we must have a new Commissioner appointed as 
soon as possible.

We look forward to working with your Administration to create a tax 
code that is fair and an IRS that is service-oriented.

Sincerely,

Kevin Brady                         Sam Johnson
Chairman                            Member of Congress

Kristi Noem                         Peter Roskam
Member of Congress                  Member of Congress

Kenny Marchant                      George Holding
Member of Congress                  Member of Congress

Mike Bishop                         Erik Paulsen
Member of Congress                  Member of Congress

David Schweikert                    Tom Rice
Member of Congress                  Member of Congress

Jackie Walorski                     Jason Smith
Member of Congress                  Member of Congress

Diane Black                         Devin Nunes
Member of Congress                  Member of Congress

Lynn Jenkins
Member of Congress

                                 ______
                                 
                 Prepared Statement of Hon. Ron Wyden, 
                       a U.S. Senator From Oregon
    Now that Americans are getting into crunch time with tax filing 
season, I want to begin today's hearing by discussing what usually 
happens when early April rolls around each year.

    Around this time of year, Presidents usually release their tax 
returns to the public. It's been a tradition for decades, but 
apparently that's not going to happen in 2017. It looks like this 
President will choose to keep hiding his returns and ignoring this very 
low ethical bar, even though it's clear his ``blind trust'' isn't blind 
at all and the separation he promised he'd make from his businesses 
seems to be nonexistent.

    Second, around this time of year is when the whole executive branch 
gets on the same page to pitch its budget proposal to the public and 
the Congress. Not so this time. With this executive branch, it seems 
like one hand often doesn't know what the other is doing.

    On one hand, you have the Treasury Secretary, who came before this 
committee as a nominee and said he was committed to making sure the IRS 
had the resources it needs to do its job--protecting taxpayer data, 
closing the tax gap, improving customer service. He said the big 
staffing cuts in recent years were a concern, and it would be a ``very 
quick conversation with Donald Trump'' to get it fixed.

    Apparently that conversation hasn't happened, or if it did, the 
message didn't get through. When the public got its first glimpse of 
the Trump budget, the IRS didn't get the investment Secretary Mnuchin 
talked about. For next year it got a $239 million cut. What that would 
mean is that customer service would get worse, more taxpayers would 
fall victim to hackers and preventable scams, and the good times will 
roll for tax cheats while honest taxpayers get fleeced.

    And this isn't just some academic debate. Right now, the online 
Data Retrieval Tool that students and their families use to fill out 
financial aid forms is down because of cybersecurity problems. Hackers 
were using stolen personal info like names, birthdates and Social 
Security numbers to steal taxpayer dollars.

    You'd think that an administration that talks about running 
government like a business would want to invest in cybersecurity when 
it discovers a hack. But that's not what's happening in this case. 
Instead, this administration is repeating the same old pattern: cut 
after cut after cut to IRS resources, meaning taxpayer service and data 
security could get worse and worse and worse.

    The third example of what usually happens this time of year: right 
around now, taxpayers are collecting all their forms and receipts and 
sitting down to file their taxes, and they're wondering if the Congress 
will ever manage to simplify the tax code in a way that helps middle-
class families. And they might even be a little hopeful, because they 
hear the resident and members of Congress say tax reform is right up at 
the top of the agenda. But so far, when you parse the details, it looks 
like some Republican members of Congress and the administration are 
locked in competition to see who can propose the biggest tax cut for 
the wealthy. And for a typical working family, there's not much in the 
Trump plan or the House Better Way blueprint that helps you get ahead, 
and you might even get hit by a tax increase.

    Real tax reform, in my view, starts with the reality that our tax 
code today is a tale of two systems. There's one compulsory system that 
applies to the wage earner. Their taxes come straight out of their 
paychecks. Then there's the other system for the wealthy with 
impossibly complicated and murky rules. And that system says that with 
the right advice, you can pay what you want, when you want to pay it. 
And sometimes you can pay nothing at all. That grossly unfair system, 
which is stacked against working families, is what I'll be focused on 
as this debate goes forward.

    With that, I want to thank Commissioner Koskinen for being here 
today, and I look forward to our discussion.

    Thank you, Chairman Hatch.

                                 ______
                                 

                             Communication

                              ----------                              


       American Institute of Certified Public Accountants (AICPA)

                       1455 Pennsylvania Ave., NW

                       Washington, DC 20004-1081

                  Tel: 202-737-6600 Fax: 202-638-4512

                      http://www.aicpaglobal.com/

The American Institute of CPAs (AICPA) \1\ applauds the leadership 
taken by the Committee to address ways to improve the tax filing 
season, review the complexity faced by taxpayers, and examine how the 
Internal Revenue Service (IRS or ``Service'') can better serve the 
public. While tax season always causes some level of anxiety for 
taxpayers, in recent years, the repeated delays in information returns, 
lack of guidance on emerging issues, and the IRS's inability to timely 
respond to written communications have added to the growing trepidation 
America's taxpayers have towards the annual filing season.
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    \1\ See AICPA Tax webpage at: http://www.aicpa.org/InterestAreas/
Tax/.

We hear a resounding echo of confusion from tax practitioners as our 
members advise clients and continue to work on filing 2016 returns. The 
issuance of delayed guidance has been a significant factor since it 
increases compliance uncertainty. For example, on March 30, 2017, the 
IRS released partial guidance for small business use of the research 
credit per law changes made in 2015.\2\ This guidance affects the 2016 
returns of individuals and business entities, some of which were due by 
March 15, 2017. In addition, the IRS issued Notice 2017-09 on January 
4, 2017 to provide guidance on 2015 law changes relevant to information 
returns starting from 2016, many of which were due by January 31, 2017. 
As a result, many taxpayers are in a state of confusion regarding not 
only how to comply with this season's new rules but also how to proceed 
with tax planning.
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    \2\ Notice 2017-23 (March 30, 2017) and IR-2017-70 (March 30, 
2017).

In the interest of good tax policy and effective tax administration,\3\ 
we are submitting feedback and recommendations on IRS taxpayer 
services, information reporting and Forms 1099, Individual Taxpayer 
Identification Numbers (ITIN), due diligence requirements, deadlines 
related to disasters, guidance needed on emerging issues, and other tax 
filing season concerns, where legislative changes can help improve 
future filing seasons.
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    \3\ AICPA, Guiding Principles for Good Tax Policy: A Framework for 
Evaluating Tax Proposals, 2017; http://www.aicpa.org/Advocacy/Tax/
DownloadableDocuments/tax-policy-concept-statement-no-1-global.pdf.
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1. IRS Taxpayer Services

As we approach the 20th anniversary of the Report of the National 
Commission on Restructuring the IRS \4\ (``Restructuring Commission''), 
we recommend that any effort to modernize the IRS and its technology 
infrastructure build on the foundation established by the Restructuring 
Commission. The current degradation of the IRS taxpayer services is 
unacceptable. The percentage of calls from taxpayers the IRS answered 
between 2004 and 2016 dropped from 87% to 53%. Comparing 2004 to 2016, 
the number of calls the IRS received from taxpayers increased from 71 
million to 104 million, yet the number of calls answered by telephone 
assistors declined from 36 million to 26 million.\5\
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    \4\ Report of the National Commission on Restructuring the IRS, ``A 
Vision for a New IRS,'' June 25, 1997; http://www.house.gov/natcommirs/
report1.pdf.
    \5\ National Taxpayer Advocate, ``Annual Report to Congress 2016, 
Executive Summary: Preface, Special Focus and Highlights,'' 2016, page 
16; https://taxpayeradvocate.irs.gov/Media/Default/Documents/2016-ARC/
ARC16_ExecSummary.pdf.

As tax professionals, we represent one of the IRS's most significant 
stakeholder groups.\6\ As such, we are both poised and committed to 
being part of the solution for improving IRS taxpayer services. We 
recently submitted a letter \7\ to Senate Finance Committee and House 
Ways and Means Committee members in collaboration with other 
professional organizations. Our recommendations include modernizing IRS 
business practices and technology, re-establishing the annual joint 
hearing review, and enabling the IRS to utilize the full range of 
available authorities to hire and compensate qualified and experienced 
professionals from the private sector to meet its mission. The 
legislative and executive branches should work together to determine 
the appropriate level of service and compliance they want the IRS 
accountable for and then dedicate appropriate resources for the Service 
to meet those goals. We encourage the IRS to continue its customer 
satisfaction surveys as a success measure for the agency and also use 
its traditional account services to provide face-to-face interaction 
with those taxpayers who cannot afford or do not use online account 
features.
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    \6\ Sixty percent of all e-filed returns in 2016 were prepared by a 
tax professional, according to the ``Filing Season Statistic for Week 
Ending December 2, 2016''; https://www.irs.gov/uac/newsroom/filing-
season-statistics-for-week-ending-december-second-2016.
    \7\ AICPA comment letter, ``Ensuring a Modern-Functioning IRS for 
the 21st Century,'' dated April 3, 2017; http://www.aicpa.org/Advocacy/
Tax/DownloadableDocuments/IRS-Service-Improvement-Practitioner-
Report.pdf.

Additionally, we recommend the IRS create a new dedicated practitioner 
services unit to rationalize, enhance, and centrally manage the many 
current, disparate practitioner-impacting programs, processes, and 
tools. As part of this new practitioner service unit, the IRS should 
provide practitioners with an online tax professional account with 
access to all of their clients' information. The IRS should offer 
robust practitioner priority hotlines with higher-skilled employees 
that have the experience and training to address complex issues. 
Furthermore, the IRS should assign customer service representatives (a 
single point of contact) to geographic areas in order to address 
challenging issues that practitioners could not resolve through a 
priority hotline.

2. Information Reporting and Forms 1099

Taxpayers and the tax practitioner community are substantially burdened 
by the growing volume of corrected and delayed information returns. 
Taxpayers receiving corrected Forms 1099 are obligated to file amended 
tax returns in order to report the corrected amounts. This process 
compresses the tax filing season and causes time-consuming and 
expensive efforts for corrections that often result in insignificant 
differences. Congress should not require taxpayers that receive 
corrected information returns to file amended tax returns for 
relatively minor dollar amounts. A simplified safe harbor would not 
only reduce burdenson taxpayers and practitioners to repeatedly correct 
returns, but also reduce the expenditure of IRS resources in processing 
such returns.

     a. De Minimis Error Safe Harbor for Taxpayers
       Under Notice 2017-09, if an inadvertent error is made by the 
payor (or ``issuer'') in the preparation of information returns, such 
that the amount of the error does not exceed $100 or an error in 
reporting taxes withheld does not exceed $25, then the penalties \8\ 
authorized under these sections are waived. However, if the payee 
(recipient of the incorrect information return) elects a corrected 
statement but one is not issued, the penalty is not automatically 
waived.
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    \8\ Under Internal Revenue Code (IRC) sections 6721 and 6722.

       The election process outlined in the statute and notice will 
create compliance burdens for information return issuers, some of which 
are large brokerage firms with thousands of individual recipients. 
Issuers will need to track whether elections were made to waive the de 
minimis error safe harbor. Small businesses that issue Forms 1099-MISC 
will have the administrative burden of using their limited resources to 
comply with these new rules and track their information return 
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recipients' elections.

       Under the current rules, there is no de minimis safe harbor for 
recipient taxpayers. If the issuer decides to issue a corrected Form 
1099 for an immaterial amount (even if not required), the taxpayer must 
file an amended tax return. Throughout this filing season, our tax 
practitioner members continue to receive corrected Forms 1099, 
including those under the de minimis error safe harbor threshold. As a 
result, we have seen no easing of the burdens on taxpayers and their 
return preparers.

       In the interest of effective tax administration, the AICPA 
proposes a simplified approach for the de minimis error safe harbor 
rules under sections 6721 and 6722,\9\ as follows:
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    \9\ All references in this letter to the Internal Revenue Code are 
to the Internal Revenue Code of 1986, as amended.

        1.  If a recipient of information returns notifies the issuer 
of an error, the issuer has 30 days in which to provide a corrected 
document to the recipient. If the issuer fails to provide a corrected 
document, it is subject to the penalties (unless the IRS determines 
there is other justification for a penalty waiver).\10\
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    \10\ Issuers could still file corrected information returns 
addressing de minimis errors.

        2.  Recipients of incorrect information returns have 18 months 
from the original issuance date to request corrected information 
returns from the issuer.\11\ This timeline protects issuers from 
incurring penalties many years past their original year of error.
---------------------------------------------------------------------------
    \11\ Section 6722(c)(2)(B) would need to include this time limit.

        3.  Recipients of corrected information returns are allowed a 
de minimis safe harbor such that small changes do not require the 
filing of amended Forms 1040, 1041, 1065, 1120-S or 1120. In such 
cases, the IRS would not issue a matching notice (such as, a CP2000). 
The section 6721 and 6722 de minimis error dollar amount guidelines are 
used for these purposes. Thus, if corrected amounts on any information 
return do not change Adjusted Gross Income (AGI) by more than $100 or 
change tax liability by more than $25, the recipient of the corrected 
information return would not incur penalties for failure to file an 
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amended tax return.

        4.  If a corrected information return changes AGI by more than 
$100, but less than $200, the recipient can ``true-up'' the error on 
the next year's tax return.

        5.  Allow reporting entities (including employers, 
partnerships, corporations, estates and trusts) to ``roll over'' small 
information return errors, contained on Forms 1099 and W-2 and 
Schedules K-1, in the following year rather than file amended or 
corrected forms if the corrected amount for a recipient exceeds $100 
but is no more than $200 in income.

       For example, if ordinary dividends of $200 are reported on a 
client's tax return for 2016, the client should not file an amended tax 
return if the client receives a corrected Form 1099 showing $210 of 
dividends. Offering this safe harbor to taxpayers will not only save 
individuals from costly tax preparation expenses, but will improve 
efficiency for both tax preparers and the IRS.

     b. Delayed/Late Forms 1099
       An important concern to both taxpayers and tax preparers is the 
growing number of corrected information returns. Tax filing seasons 
have become increasingly challenging for practitioners due to the late 
issuance of corrected Forms 1099-B, Proceeds from Broker and Barter 
Exchange Transactions, and amended Forms 1099-DIV, Dividends and 
Distributions, by brokerage firms.

       Generally, issuers must furnish a copy of Form 1099-DIV to 
taxpayers by January 31, 2017.\12\ Many brokerage firms, however, are 
sending corrected Forms 1099-DIV after the January 31st date with 
relatively small changes. This late issuance occurs because brokerage 
firms can amend a Form 1099 at any time.
---------------------------------------------------------------------------
    \12\ IRC section 6045(b).

       While we recognize that the brokerage firms face challenges to 
meet reporting requirements in a timely manner after close of the 
calendar year, corrected forms create anxiety, confusion, and an 
increase in tax preparation fees. Taxpayers are willing to file an 
amended return if necessary, but strongly prefer to file only once. As 
a result, many taxpayers now tend to wait until they have received 
their annually-anticipated late corrected Forms 1099 before bringing 
their tax records to their CPA. Although taxpayers can file an amended 
Form 1040 after April 15th,\13\ clients want to ensure they do not owe 
any late payment penalty or obtain their refund as soon as possible, 
thus preferring to complete amended returns as soon as possible. Tax 
practitioners are suffering a more compressed tax filing season as a 
result of this increasingly shortened timeline.
---------------------------------------------------------------------------
    \13\ See IR-2016-167: ``The filing deadline to submit 2016 tax 
returns is Tuesday, April 18, 2017, rather than the traditional April 
15th date''; https://www.irs.gov/uac/2017-tax-filing-season-begins-jan-
23-for-nations-taxpayers-with-tax-returns-due-april-18.

       We believe our recommendations listed above regarding de minimis 
errors will also address this common problem of delayed and amended 
Forms 1099 with de minimis changes.

3. Individual Taxpayer Identification Numbers (ITINs)

It is critical for the IRS to effectively administer the ITIN program, 
including ITIN renewals, without disrupting the tax filings of the 
individual taxpayers who want to remain compliant with their annual 
filing obligations. We have submitted comments to the Service \14\ on 
the provisions amended by Pub. L. 114-113, also known as the Protecting 
Americans from Tax Hikes Act of 2015 (PATH Act),\15\ and their 
implementation by the IRS as outlined in Notice 2016-48.
---------------------------------------------------------------------------
    \14\ AICPA comment Letter, ``Notice 2016-48, Implementation of PATH 
Act ITIN Provisions,'' dated September 27, 2016; https://www.aicpa.org/
Advocacy/Tax/DownloadableDocuments/AICPA-Comment-Letter-Notice-2016-48-
Implementation-of-PATH-Act-ITIN-Provisions-9-27-16.
pdf.
    \15\ Pub. L. 114-113 (December 18, 2015), ``Protecting Americans 
from Tax Hikes Act of 2015,'' amending sections 6109(i) and 6213(g) 
regarding ITINs; https://www.congress.gov/114/plaws/publ113/PLAW-
114publ113.pdf.

The PATH Act changes to the ITIN processes require technical 
corrections for effective tax administration to occur. We suggest that 
Congress reintroduce and enact the Tax Technical Correction Act of 2016 
\16\ previously introduced on December 6, 2016 in the 114th Congress. 
Specifically, we support the provision in the bill regarding procedures 
used by overseas taxpayers to obtain or renew their ITIN. This 
provision would simplify the application and renewal process for 
millions of overseas taxpayers who are affected by the changes to the 
procedures. Under current law, overseas taxpayers can no longer use 
community-based CAAs to process their ITIN applications. This rule 
imposes an unduly harsh burden on those taxpayers who are attempting to 
fulfill their U.S. tax filing obligations. The proposed technical 
corrections in the Tax Technical Correction Act of 2016 would allow 
ITIN holders living abroad to use CAAs.
---------------------------------------------------------------------------
    \16\ S. 3506, ``Tax Technical Corrections Act of 2016,'' https://
www.congress.gov/114/bills/s3506/BILLS-114s3506is.pdf. Additionally, 
the AICPA supports technical corrections included in the bill relating 
to partnership audit rules, which are included in the Bipartisan Budget 
Act of 2015, to mitigate negative impacts on the IRS and taxpayers. 
These corrections would improve the IRS's ability to fairly and 
equitably administer the new partnership audit regime and reduce the 
administrative burdens on the IRS and taxpayers.
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4. Due Diligence Requirements

The PATH Act added the Child Tax Credit (CTC) and the American 
Opportunity Tax Credit (AOTC) to the due diligence requirements of paid 
preparers that claim these refundable credits. Prior to this new 
requirement for paid preparers to complete Form 8867, Paid Preparer's 
Due Diligence Checklist, many tax preparers were already subject to due 
diligence rules with penalty consequences. Congress likely expanded the 
section 6695(g) penalty to these additional refundable credits due to 
taxpayer errors in claiming them.

However, this additional checklist is an unnecessary burden to 
professional preparers who are already subject to multiple levels of 
due diligence requirements. These existing requirements include the 
section 6694 preparer penalty regulations, the U.S. Department of the 
Treasury's (``Treasury'') Circular 230 rules, professional association 
ethical standards, and state licensing board regulations.

The AICPA recommends that Congress modify section 6695(g) by adding an 
additional sentence as follows:

        The Secretary must consider simplified approaches that 
        recognize that taxpayers are responsible for the accuracy of 
        their return and that certain tax return preparers are already 
        subject to additional due diligence requirements.

Most professional preparers properly adhere to the requirements listed 
in the Form 8867 checklist (even without such a specific checklist) and 
we question if the additional burden to complete a multi-page check 
list is a true deterrent for those practitioners who are failing to 
fulfill their due diligence requirements. We urge Congress and the IRS 
to consider whether the information obtained from Form 8867 provides 
value to warrant the added administrative burdens to both professional 
tax preparers and the IRS.

5. IRS Deadlines Related to Disasters

Similar to IRS's authority to postpone certain deadlines in the event 
of a presidentially declared disaster, Congress should extend that 
limited authority to state-declared disasters and states of emergency. 
Currently, the IRS's authority to grant deadline extensions, outlined 
in section 7508A, is limited to taxpayers affected by federal-declared 
disasters. State governors will issue official disaster declarations 
promptly but often, presidential disaster declarations in those same 
regions are not declared for days, or sometimes weeks after the state 
declaration. This process delays the IRS's ability to provide federal 
tax relief to disaster victims. Individuals have the ability to request 
waivers of penalties on a case-by-case basis; however, this process 
causes the taxpayer, tax preparer, and the IRS to expend valuable time, 
effort, and resources which are already in shortage during times of a 
disaster. Granting the IRS specific authority to quickly postpone 
certain deadlines in response to state-declared disasters allows the 
IRS to offer victims the certainty they need as soon as possible.

This past year, multiple states along southeastern United States were 
affected by Hurricane Matthew, including Florida, Georgia, North and 
South Carolina, and Virginia. From October 6th through 10th, Matthew 
traveled north along the southeast coast. A federal state of emergency 
was declared for Florida on October 6th and later extended to include 
Georgia and South Carolina. Tax preparers and taxpayers living in the 
affected regions not only lost access to power and the Internet, but 
lost tax documents and financial information due to flooding and 
destruction of both their homes and businesses. On October 13, 2016, 
the IRS issued IR-2016-132 offering federal tax relief to regions of 
North Carolina. The relief arrived 2 days before the major October 15th 
individual extended tax filing dead line--which caused tax 
practitioners unnecessary stress and burden for the days leading up to 
the issuance of the relief. Three days after the extended filing 
deadline, on October 18th, the IRS issued relief for Florida and 
Georgia--which was, unfortunately, too late to make a substantial 
difference.

More recently, on March 13, 2017, Winter Storm Stella hit the Northeast 
and Mid-Atlantic U.S. covering many states in multiple feet of snow 2 
days before the March 15th business return due date. Before 2:00 p.m. 
(ET) on the first day of the storm, governors in New York and other 
states began issuing emergency declarations while the AICPA and state 
CPA societies along the Northeast received calls from members needing 
federal filing relief from the IRS. Two days later, at approximately 
4:30 p.m. (ET) on the March 15th filing due date, the IRS finally 
issued IR-2016-61 offering business taxpayers affected by Winter Storm 
Stella additional time to file. Receiving federal extensions are 
helpful, but the sooner the IRS can grant this relief, the greater the 
beneficial impact on victims.

The AICPA has long supported a set of permanent disaster relief tax 
provisions \17\ and we acknowledge both Congress's and the IRS's 
willingness to help disaster victims. To provide more timely 
assistance, however, we recommend that Congress allow the IRS to 
postpone certain deadlines in response to state-declared disasters or 
state of emergencies.
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    \17\ AICPA comment Letter, ``Request for Permanent Tax Provisions 
Related to Disaster Relief,'' dated November 22, 2013; https://
www.aicpa.org/Advocacy/Tax/Individuals/Downloadable
Documents/11-22-
13_Permanent_Tax_Related_Disaster_Relief_Provisions_Comment_Letter.pdf.

6.  Guidance Needed on Emerging Issues

Online crowdfunding and the sharing economy are quickly expanding 
mediums through which individuals obtain funds or seek new sources of 
income. Individuals may understand the steps through which they can use 
these new crowd funding and sharing economy opportunities to their 
advantage. However, many tax preparers and their clients do not have 
the guidance necessary to accurately comply with the complex, out-of-
date, or complete lack of tax rules in these emerging areas.

Lawmakers and tax administrators must regularly review existing laws, 
against new changes in the ways of living and doing business, to 
determine whether tax rules and administration procedures need 
modification and modernization. We urge Congress and the IRS to develop 
simplified tax rules and related guidance in the emerging sharing 
economy and crowdfunding areas. Some of the areas in need of 
modernization include information reporting (such as to avoid reporting 
excluded income (such as a gift) as income), simplicity in reporting 
and tracking rental losses from year to year, and simplified approaches 
for recordkeeping for small businesses. Offering clarity on these 
issues will allow taxpayers to follow a fair and transparent set of 
guidelines while the IRS benefits from a more efficient voluntary tax 
system.

7.  Other Tax Filing Season Concerns

     a.  Tax-Related Identity Theft
       The AICPA supports efforts to combat identity theft and tax 
fraud.\18\ The growing amount of fraudulent tax refunds \19\ paid and 
the economic and emotional impact to individual victims of identity 
theft are unacceptable. Therefore, we recommend a single point of 
contact for identity theft victims to streamline the process and help 
identify areas of duplication and causes for delays, and support a 
criminal penalty form is appropriating taxpayer identity.\20\
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    \18\ See AICPA comment letter, ``Tax Reform Discussion Draft on Tax 
Administration,'' dated January 16, 2014; http://www.aicpa.org/
Advocacy/Tax/DownloadableDocuments/AICPA-Comments-on-Discussion-Draft-
on-Tax-Administration.pdf; and AICPA comment letter, ``Chairman's Mark 
of a Bill to Prevent Identity Theft and Tax Refund Fraud,'' dated 
September 15, 2015; https://www.aicpa.org/Advocacy/Tax/
DownloadableDocuments/2015-09-15-Prevent-ID-Theft-and-Tax-Refund-Fraud-
Comment-Letter-FINAL.pdf.
    \19\ AICPA comment letter, ``Comments on the Identity Theft and Tax 
Fraud Prevention Act of 2013 and Recommendations on Efforts to Combat 
Identity Theft,'' dated June 27, 2013; http://www.aicpa.org/Advocacy/
Tax/DownloadableDocuments/2013_06_27_Comments_on_Identity_
Theft_and_Tax_Fraud.pdf. See AICPA testimony to U.S. Senate Committee 
on Finance hearing on, ``Tax Fraud, Tax ID Theft, and Tax Reform: 
Moving Forward With Solutions,'' April 16, 2013; http://www.aicpa.org/
Advocacy/Tax/DownloadableDocuments/2013.04.16_Testimony_on
_Tax_Fraud_Tax_ID_Theft_and_Tax_Reform.pdf.
    \20\ An adoption TIN is a temporary identification number for a 
child in the process of an adoption where the SSN is not obtained or 
unattainable at that moment.

       We are concerned, however, about certain other measures intended 
to address identify theft. In recent years, the IRS and some state tax 
agencies have started requiring additional personal data, such as a 
driver's license number, for electronic filing. Taxpayers and their 
return preparers are reluctant to provide additional personal data to 
online tax software databases and state agencies as this process could 
increase identity theft risk. Therefore, the AICPA supports 
consideration of alternatives to reduce the need for submitting 
personal identification data in the tax compliance process beyond the 
personal data traditionally requested (TIN, address, employer, etc.). 
As a suggestion, we ask Congress to require the IRS to provide a report 
to the congressional tax committees on its operation of the current 
identity protection personal identification number (IP PIN) system. We 
believe this report would encourage and support the expansion of the 
PIN system, which is currently used on a limited basis, to help prevent 
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identity theft.

     b.  IRS Private Debt Collection
       Taxpayers have growing concerns about the actions of private 
collection agencies and their legal authority. Due to the proliferation 
of fraudulent tax return scams, we believe the use of private 
collection agencies will add security, authentication, verification, 
and complexity concerns to an already overburdened system. We urge 
Congress to repeal section 6306(c)(1) as it will likely harm taxpayers 
and further degrade the trust in our voluntary tax compliance system 
while increasing the costs of collections.

       From 2006 to 2009, the IRS employed private debt collection 
agencies to assist in locating and contacting taxpayers, and requesting 
installment agreements for unpaid tax liabilities. However, in 2009, 
the IRS announced that it would not renew the private collection 
agencies' contracts because the Service's internal collection 
activities were more successful and cost-effective. Now that the 
private debt collection program is reestablished, taxpayers are 
concerned, or many are unaware, that these collectors do not recognize 
economic hardships nor do they offer taxpayers the same relief that the 
IRS is required to provide under statutory law.

       Additionally, the IRS does not have the ability to ensure 
consistent and fair treatment of taxpayers across multiple private 
collection agencies.

CONCLUDING REMARKS

The AICPA appreciates this opportunity to submit a statement for the 
record and we urge this Committee to consider our suggestions as 
Congress decides how to improve tax compliance and IRS taxpayer 
services. We look forward to working with the Committee as you continue 
to address the needs of tax preparers and taxpayers.

The AICPA is the world's largest member association representing the 
accounting profession with more than 418,000 members in 143 countries 
and a history of serving the public interest since 1887. Our members 
advise clients on federal, state, local and international tax matters 
and prepare income and other tax returns for millions of Americans. Our 
members provide services to individuals, not-for-profit organizations, 
small and medium-sized businesses, as well as America's largest 
businesses.

                               [all]