[Senate Hearing 115-548]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 115-548

                PRESIDENT'S BUDGET FOR FISCAL YEAR 2019

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 14, 2018

                               __________

          
          
          
          
          
          
          
          
          
          
          
          
          
          
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            Printed for the use of the Committee on Finance

                                   ______
		 
                     U.S. GOVERNMENT PUBLISHING OFFICE 
		 
35-666-PDF               WASHINGTON : 2019                 






















                          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              SHELDON WHITEHOUSE, Rhode Island

                     A. Jay Khosla, 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......................     3

                         ADMINISTRATION WITNESS

Kautter, Hon. David J., Acting Commissioner, Internal Revenue 
  Service, and Assistant Secretary for Tax Policy, Department of 
  the Treasury, Washington, DC...................................     5

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Hatch, Hon. Orrin G.:
    Opening statement............................................     1
    Prepared statement with attachment...........................    31
Kautter, Hon. David J.:
    Testimony....................................................     5
    Prepared statement...........................................    33
    Responses to questions from committee members................    36
Wyden, Hon. Ron:
    Opening statement............................................     3
    Prepared statement...........................................    53

                             Communication

American Institute of Certified Public Accountants (AICPA).......    55

                                 (iii)

 
                PRESIDENT'S BUDGET FOR FISCAL YEAR 2019

                              ----------                              


                      WEDNESDAY, FEBRUARY 14, 2018

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 2:35 p.m., 
in room SD-215, Dirksen Senate Office Building, Hon. Orrin G. 
Hatch (chairman of the committee) presiding.
    Present: Senators Crapo, Thune, Portman, Heller, Cassidy, 
Wyden, Cantwell, Menendez, Carper, Cardin, Brown, Casey, 
Warner, McCaskill, and Whitehouse.
    Also present: Republican staff: Jay Khosla, Staff Director; 
Chris Armstrong, Chief Oversight Counsel; Rory Heslington, 
Professional Staff Member; Eric Oman, Senior Policy Advisor for 
Tax and Accounting; Mark Prater, Deputy Staff Director and 
Chief Tax Counsel; and Nicholas Wyatt, Tax and Nominations 
Professional Staff Member. Democratic staff: Adam Carasso, 
Senior Tax and Economic Advisor; Michael Evans, General 
Counsel; Daniel Goshorn, Investigative Counsel; Ian Nicholson, 
Investigator; and Tiffany Smith, Chief Tax Counsel.

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

    The Chairman. The hearing will come to order. We are 
gathered here for the second time today to talk once again 
about the President's proposed budget for fiscal year 2019.
    We are very grateful to have Mr. David Kautter with us, the 
Acting IRS Commissioner, here today. He is going to talk 
specifically about the President's proposed budget for the IRS.
    Mr. Kautter has served admirably in this capacity. He has 
filled two critical roles with the administration during the 
busiest time the tax policy world has seen in decades, and this 
is no easy task. Mr. Kautter deserves our thanks for serving 
with such distinction.
    Now, some of my colleagues may tune me out for the next 
several minutes, as they have already heard me talk effusively 
about the success of the new tax reform law, but I hope people 
are listening, because there has been quite a bit of good news 
lately.
    Any major change to the tax system should be evaluated on 
the merits, whatever they may be. And by and large, we are 
seeing great things from tax reform. Some have argued that our 
tax reform bill, which provides middle-class tax relief and 
lower taxes on job creators, benefits only the rich or the 
high-ranking officers of greedy corporations. Well, that is 
kind of a bogus, stupid comment, but that is common every time 
you do one of these things.
    Others tend to vilify companies' statements about their 
capital structure, including dividend payments, indebtedness, 
or share buybacks as things that benefit only the wealthy 
stockholder or investor. Yet quite often, a business's success 
or bottom-line results in increased valuations of middle-class 
retirement accounts and pensions. In fact, our private 
retirement system has been the biggest generator of middle-
class wealth in our Nation's history. And because more than 
one-third of all corporate stock holdings in the United States 
are in various forms of retirement accounts, growing businesses 
contribute directly to the expansion of that middle-class 
wealth.
    So yes, with lower corporate tax rates and other reforms to 
our business tax system, we have seen some immediate success, 
as hundreds of major companies have publicly announced their 
plans to raise wages, distribute bonuses, or boost employee 
401(k) contributions. At the same time, today's success is 
helping to improve the retirements and investments of millions 
of middle-class Americans. I would say those are really good 
things.
    That said, despite all of this good news, we still have a 
great deal of work to do to ensure that the tax laws are 
implemented correctly. The Treasury Department, IRS, and 
Congress, especially the tax-writing committees, have to work 
together to ensure that the law is implemented and administered 
as Congress intended. We look forward to working with the 
administration and with IRS specifically as they continue to 
implement this law and issue guidance to us.
    This committee will also be examining possible 
administrative reforms at the IRS, giving the IRS greater 
flexibility and bringing it into the 21st century. Now, I look 
forward to continued feedback from the IRS and Treasury on ways 
we can work to improve the taxpayer system and taxpayer 
services and administration.
    That said, I have made no secret about my disagreements 
with the Internal Revenue Service over the years. I led, along 
with my good friend Ranking Member Wyden, the most thorough and 
comprehensive bipartisan investigation of the IRS in decades. I 
have gone after the IRS for everything from wasteful spending 
to political targeting to questionable enforcement practices. 
No one here needs to remind me about IRS missteps, regardless 
of which President or Commissioner has been at the helm.
    But personally, I think it is high time that Congress 
reexamines its approach to the agency. Because IRS will bear 
the brunt of the burden in implementing and administering the 
tax code and the new tax provisions, it needs sufficient 
personnel and resources to carry out its important missions at 
this critical juncture.
    Let us keep in mind that the IRS is the only agency in the 
government that touches every single American every single 
year. And that is why I have pushed for such robust oversight 
over the years. It is also why the IRS should get the resources 
it needs to do its job right. For example, the IRS is still 
using computer software that is older than most of my committee 
staff. And you can take a look at them: they are not all 
millennials. In fact, a number of them are anything but 
millennials. [Laughter.]
    The agency is shedding staff and resources. Agency 
reductions might be a good thing in some cases, but it should 
be done through thoughtful reforms, not the blunt axe of blind 
budget cuts. The administration in its budget has proposed 
additional cuts to funding for the IRS. I think that is a 
mistake. While I have had quite a bit to say over the years 
about the allocation of resources at the IRS, now, directly 
after passage of a major overhaul of the tax system, is not a 
great time to further reduce the taxpayer services' budget of 
the agency that will do most of the work in implementing the 
updated tax code.
    We need to take a close look at this issue and be fiscally 
responsible with any solutions. But as we do this, we should 
also consider what is in the best interests of proper and 
effective administration of our recently reformed tax code.
    Before I close, I do want to state that we have noticed an 
executive business meeting for this time. If at any point 
during the hearing a suitable quorum is present, I intend to 
pause the hearing and move to votes on the nominations of Mr. 
Dennis Shea and Mr. C.J. Mahoney. Thereafter, we will resume 
our hearing.
    And with that, I will turn to Senator Wyden and give the 
floor to him.
    [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. As we 
talked about this morning and I think you noted, we have had a 
spirited discussion so far.
    Based on public documents--and this tally, colleagues, is 
going to be a running one--it is $120 billion for stock 
buybacks to $5 billion for worker compensation. So we will 
continue to provide updates on that matter.
    Less than 2 months ago, Republicans passed legislation 
making $10 trillion in tax changes pretty much on the fly, the 
biggest overhaul in 3 decades, and there was a web of 
complicated rule changes. Now they are giving short shrift to 
the IRS, which is the agency that actually has to implement 
those changes and provide services to American families and 
businesses based on the new rules.
    The IRS said it would need nearly $400 million to implement 
the new law, but the Trump budget holds the agency's funding 
flat. The budget makes a fake reference to increasing 
enforcement dollars, but it kicks the actual decision to the 
appropriators in Congress, who are unlikely to fork over the 
necessary resources. And that comes at a time when tax cheats 
are looking at the Trump tax law and licking their chops, 
planning complicated new schemes of abusing the rules to get 
out of paying their fair share, particularly with the new pass-
through loophole. The law is an open invitation for scamsters 
to game the system, leaving a heavier burden for Americans who 
do follow the rules.
    This is not an academic matter. Denying the IRS the 
resources it needs to be an effective agency impedes its 
ability to serve the public. And the Trump administration knows 
that. By the administration's own projections, as a result of 
continued budget cuts for taxpayer service, fewer than half the 
people who pick up the phone to call the IRS for filing 
services in 2019 will get through, down from 75 percent in 
2018. And that is with lawmakers on both sides already speaking 
out about the poor service provided to taxpayers by the IRS.
    Bottom line: the IRS might not be anybody's favorite 
Federal agency, but the American people do expect it to 
function without political agenda or interference.
    So that brings me to another issue that needs to be 
addressed this afternoon. Mr. Kautter, who is here with the 
committee this afternoon in the middle of a tax-filing system, 
is the Acting IRS Commissioner. This is supposed to be a 
nonpartisan job overseeing the administration of tax law. But 
Mr. Kautter is also currently the Assistant Secretary for Tax 
Policy, and that position in this administration is about as 
partisan a position as you can find.
    The committee recently spent years investigating 
accusations of political interference at the IRS. The 
bipartisan investigation determined that sloppy work by IRS 
officials led to both conservative and progressive tax groups 
being subject to unfair scrutiny.
    In my view, both sides would agree that the IRS ought to be 

politics-free when it comes to administering the law. I recall 
a lot of strong speeches to that effect, particularly from my 
Republican colleagues.
    But now the party in control of the White House has 
flipped. There is a Republican political appointee running the 
IRS at the very same time it is implementing an enormously 
complicated and partisan law his department helped write.
    In December, I wrote a letter to Mr. Kautter asking how he 
would guarantee their politics are not bleeding into the IRS, 
what policies or safeguards have been created to avoid 
conflicts, any guidance regarding communication between the 
White House and the agency, and several other subjects. I have 
not received a response to these questions.
    Given the energy and focus this committee has placed on the 
issue of political influence at the IRS in the recent past, it 
would certainly be hypocritical not to take it seriously now.
    So, Mr. Kautter, we appreciate your being here. We are 
going to have questions on those issues. And, Mr. Chairman, I 
look forward to the hearing.
    The Chairman. Well, thank you, Senator.
    [The prepared statement of Senator Wyden appears in the 
appendix.]
    The Chairman. Today we have the pleasure of being joined by 
Mr. David J. Kautter, the Acting IRS Commissioner as well as 
the Assistant Secretary of Treasury for Tax Policy. Mr. 
Kautter, I want to thank you for being here today and 
cooperating with the committee.
    As one would hope, Mr. Kautter has extensive tax 
practitioner experience. In fact, he has been a tax 
practitioner for the past 43 years.
    There must be something wrong with you. [Laughter.]
    I know there is not. You are great.
    Most recently, before his government service, Mr. Kautter 
was a partner at RSM. He has also taught numerous courses in 
tax law, including as an executive in residence for 4 years at 
the Kogod School of Business at American University.
    Prior to teaching, Mr. Kautter provided advice to clients 
ranging from individuals to small businesses to global 
multinational companies. For 20 years at Ernst and Young, he 
provided this type of really competent service. During much of 
that time, he was the leading tax specialist at the firm with 
respect to the taxation of compensation and benefits.
    Mr. Kautter has also served in the government before as tax 
legislative counsel to Senator John ``Jack'' Danforth from 1979 
to 1982, one of our colleagues for whom I have tremendous 
feelings of respect. But during that time, he worked on the 
Economic Recovery Tax Act of 1981.
    Mr. Kautter graduated with a bachelor's degree from the 
University of Notre Dame and later received his juris doctor 
from Georgetown University.
    Mr. Kautter, we are grateful to have you here, and please 
proceed with your statement.

   STATEMENT OF HON. DAVID J. KAUTTER, ACTING COMMISSIONER, 
   INTERNAL REVENUE SERVICE, AND ASSISTANT SECRETARY FOR TAX 
       POLICY, DEPARTMENT OF THE TREASURY, WASHINGTON DC

    Mr. Kautter. Thank you, Mr. Chairman.
    Chairman Hatch, Ranking Member Wyden, and members of the 
committee, thank you for the opportunity to discuss the IRS's 
budget and current operations.
    Today, we are 2\1/2\ weeks into the filing season, and I am 
pleased to report that the 2018 filing season began on schedule 
and is going well so far.
    The IRS has successfully received more than 30 million tax 
returns and has issued $28.9 billion in tax refunds to over 13 
million taxpayers. The average refund so far is a little over 
$2,000.
    Against that backdrop, the President's fiscal year 2019 
budget requests an appropriation of $11.135 billion for the 
IRS, plus an additional $362 million through a program 
integrity cap adjustment.
    The budget balances competing priorities and increases 
funding to operations support by 6.2 percent. Dedicated funding 
is needed now to modernize IRS hardware and software so that we 
have the technology needed to run day-to-day operations, 
transform the taxpayer experience, improve cybersecurity, and 
ensure we can continue to safeguard taxpayer data.
    The IRS is subject to 2\1/2\ million cyberattacks on 
average each day, 1 million of which are sophisticated attacks. 
Some of the attacks are efforts to acquire taxpayer data, and 
some are efforts to disrupt the functioning of the United 
States government.
    Increasing our investment in IRS infrastructure is 
critical. Fifty-nine percent of IRS hardware and 32 percent of 
its software are out of date. While the IRS has done a good job 
of prioritizing its technology spending to safeguard taxpayer 
data, ward off cyberattacks, and carry out a smooth filing 
season, we are at a point where greater investment is needed.
    Turning to taxpayer services under the budget, the IRS will 
continue investing in the development of online tools to 
improve taxpayer service for the increasing number of taxpayers 
who prefer to interact with the IRS online.
    At the same time, we recognize the importance of serving 
the needs of all taxpayers, including those who prefer not to 
interact with us online. So we will continue our efforts to 
improve service on all our channels, including in person and 
over the phone.
    As I mentioned, protecting taxpayers and their personal 
data from identity theft is an important aspect of taxpayer 
service. The IRS has continued increasing taxpayer protections 
to make the act of filing a tax return as safe and secure as 
possible and is making solid progress.
    The number of victims of tax-related identity theft last 
year was down to 242,000, a 40-percent drop from 2016. The 
number of tax-related identity theft victims has fallen nearly 
65 percent in the past 2 years. Still, more remains to be done: 
242,000 is too big a number.
    This year, one of the IRS's highest priorities is 
implementing the new tax reform law. This will be a major 
effort for us throughout 2018 and next year as well. Our goal 
is to ensure that taxpayers and tax professionals can 
understand and navigate the changes made by the new law. This 
is a huge undertaking.
    We estimate that we will need to create or revise about 450 
tax forms, publications, and instructions. We will need to 
publish extensive guidance, including regulations, notices, and 
frequently asked questions. And we will need to reprogram about 
140 interrelated tax return processing systems to be ready for 
the 2019 filing season. This work is already well underway.
    For this work to be completed on time, we estimate the IRS 
needs about $397 million in additional funding over the next 2 
years. We are making this request separately from the 
President's fiscal 2019 budget.
    In addition to ensuring adequate funding for the agency, 
Congress can also help the IRS by enacting three pieces of 
legislation that will improve tax administration: renewing 
streamlined critical pay authority, allowing correction 
procedures for specific errors, and giving IRS authority to 
require minimum qualifications for paid tax return preparers. 
These provisions, along with other items highlighted in the 
budget, will help the IRS continue building on its work to 
serve the Nation's taxpayers.
    I would also ask, as Congress considers proposals for 
updating and reforming the IRS, that you include provisions 
giving us the flexibility we need to respond to the evolving 
needs of taxpayers.
    In closing, I would like to make one final observation. 
Since becoming Acting IRS Commissioner 3 months ago, I want you 
to know how impressed I have been by the commitment of those I 
have worked with at the IRS to taxpayer service and to doing 
the right thing. It is clear to me that the typical IRS 
employee is dedicated to providing taxpayers with high-quality 
assistance and being a judicious steward of taxpayer dollars.
    I would urge this committee and Congress to give the IRS 
the funds it needs to effectively carry out its mission.
    Chairman Hatch, Ranking Member Wyden, and members of the 
committee, that concludes my statement. I would be happy to 
take your questions.
    The Chairman. Well, thank you, Mr. Kautter.
    [The prepared statement of Mr. Kautter appears in the 
appendix.]
    The Chairman. Let me just ask a couple of questions to you. 
Last December, Congress passed the Tax Cuts and Jobs Act, the 
most comprehensive tax reform in a generation. The new law 
included changes across the tax code: lowering individual tax 
rates across the board, simplifying the tax code for tens of 
millions of American families, business tax rate cuts, and 
converting the U.S. tax system away from a worldwide system and 
toward a territorial one.
    These reforms are already making a real difference for 
taxpayers across the country, but a lot of work remains to be 
done, and much of it at the IRS as it works with the Treasury 
Department to implement and administer the new law.
    Earlier this month, you issued the 2017-2018 Priority 
Guidance Plan. The plan outlined an ambitious list of 
priorities, including initial implementation related to the Tax 
Cuts and Jobs Act. Can you describe the IRS's Tax Cuts and Jobs 
Act implementation efforts and how you see implementation 
affecting agency needs in the near term?
    I would also ask that you comment on any additional 
flexibility or agency reforms that might be helpful to us here 
today.
    Mr. Kautter. Thank you, Mr. Chairman. Well, we are 
requesting $397 million for implementation of the tax cut act. 
Seventy-three percent of that money is for technology and 
hardware. The IRS has 140 integrated programs that operate the 
systems for the Internal Revenue Service. And 19 percent of the 
funds we are seeking are for taxpayer assistance, for taxpayer 
outreach, and education. Four percent of the money would go for 
guidance, that is about $15 million, and 4 percent would go for 
forms, publications, and program management.
    The Secretary has been granted 79 different grants of 
regulatory authority in the Tax Cuts and Jobs Act. We figure 
that, as I mentioned earlier, we will need to adjust about 450 
forms.
    What is interesting is, compared to 1986 when we had the 
last major tax reform bill, there were no personal computers, 
there was no Internet, and 73 percent of the funds used to 
implement the 1986 act did not go to technology. But we have 
now become so dependent on technology that is a critical 
element of what we have to do.
    About 4 percent of the funds, as I said, would go to 
guidance. We have issued the Priority Guidance Plan after 
carefully reviewing the legislation and trying to identify 
those areas of the law where we think taxpayers need the 
greatest guidance.
    In part, our challenge is that, in order to adjust the 
software, we have to know what the forms are going to look 
like. And to know what the forms are going to look like, we 
need some guidance on what the law actually means. So we have 
already started the process of updating forms where we can 
without the guidance. And we have gotten a pretty good start, 
so the wind is at our back.
    The Chairman. Well, good. Let me just ask this question. 
Congress increasingly recognizes that the IRS is in need of 
reforms and improvement, including more money to efficiently 
and appropriately implement the Tax Cuts and Jobs Act bill.
    Recently, congressional leaders reached an agreement to 
seek adequate funds for IRS in the fiscal year 2018 omnibus and 
the fiscal year 2019 appropriations bills. Unfortunately, parts 
of the President's budget appear to move in the opposite 
direction and request additional cuts to critical areas such as 
taxpayer services.
    Now, effective tax reform implementation is a high priority 
for this committee, as is IRS customer service and 
effectiveness. Can you describe for the committee the effect 
that additional budget cuts might have on both of these 
priorities?
    Mr. Kautter. Sure. Well, in developing the budget, Senator, 
some difficult decisions had to be made. Given the increasing 
number and sophistication of cyberattacks on the IRS system and 
the age of some of its hardware and software, the decision was 
made to increase the amount of funding going toward technology.
    There is a small increase in the amount allocated to 
enforcement. Enforcement since 2010 is down by over 40 percent. 
We are proposing a small increase in the budget for 
enforcement. Virtually every category that the IRS audits is 
down since 2010.
    Against that backdrop, the budget allocated more money 
toward operations support and a slight amount more toward 
enforcement. That came at the cost of taxpayer assistance.
    With $397 million, we think we can effectively implement 
the new Tax Cuts and Jobs Act, but it is true that we have a 
formidable task in front of us.
    The Chairman. Well, thank you.
    Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    Commissioner, the tax bill passed in December capped State 
and local taxes at $10,000. As you know, there have been many 
news articles about how States might respond to the impact of 
these changes on State budgeting and revenue. The Secretary, 
Secretary Mnuchin, stated his intention to, quote, ``audit the 
real estate taxes issue,'' which certainly has suggested an 
audit focus on blue States, like maybe Oregon.
    So I would like you to tell us, how would these audits 
work?
    Mr. Kautter. Well, Senator, at this point, no decision has 
been made with respect to how the 2017 tax returns would be 
audited. So it is--that decision will be made as time goes by.
    Senator Wyden. So what should the American people make, 
like people in my State, of his intention to do this? Is this 
just kind of empty political talk, or is it a plan? How are you 
going to go about doing this? Are you guys going to have a 
meeting, and is there going to be a date when something is 
offered up to describe how these audits would work?
    Mr. Kautter. Well, the IRS has a very detailed process of 
determining who will be audited and how the audits will be 
conducted. And the formula that the IRS uses is not a matter 
that is disclosed publicly. So the IRS----
    Senator Wyden. So the American people are basically going 
to be in the dark on something that implies certainly the 
consideration of politics. The public is just going to be in 
the dark.
    Mr. Kautter. For decades, the IRS has followed the same 
policy.
    Senator Wyden. Okay. Have you been directed by the 
Secretary to gear up for these audits?
    Mr. Kautter. I have not.
    Senator Wyden. So you have not had any discussion with him 
about this comment that he made publicly?
    Mr. Kautter. No.
    Senator Wyden. Do you believe it is appropriate for the 
Treasury Secretary to target taxpayers in the manner this 
suggests?
    Mr. Kautter. I think the desire to make sure that we 
enforce the law as it is written is wholly appropriate.
    Senator Wyden. So you do not think there is anything about 
this that smacks of any politics at all?
    Mr. Kautter. Well, my interpretation of the Secretary's 
comment was that he believed the law applied a certain way and 
that we should impartially apply the law as it is written.
    Senator Wyden. Well, I have just got to tell you, given the 
fact that you have told us all of this is going to be 
determined in the dark, we are going to have a lot of questions 
about this. Because, you know, we spent a lot of time looking 
at politics at the IRS, and I think this area and the 
Secretary's statement is fraught with opportunities for 
political mischief, so this is not going to be the last time we 
talk about it.
    Now let me turn, if I could, to the implementation of the 
new pass-through provision. The pass-through deduction, as you 
know, enacted by the Republican tax bill has left small-
business owners tangled up and baffled by a web of complex 
rules.
    Multinational corporations enjoy assurance of their 14-
percent rate slash; the small-business owners struggle to 
figure out if they even qualify for the pass-through deduction. 
Within the very same provision, the complexity added by 
Republicans leaves the door wide open to gaming and scheming by 
the fortunate few. So there is an immediate need for guidance 
here.
    I would like you to confirm the timing of the guidance. And 
will there be specific guidance for the small businesses?
    In my State, we are overwhelmingly small businesses. You 
can practically count the multinational corporations on the 
fingers of both hands. We are overwhelmingly a small-business 
State. So confirm the timing of the guidance on the pass-
through provision. And will there be specific guidance for the 
small businesses, who certainly dominate my State? I have heard 
Senator Cardin, a ranking member and very knowledgeable on 
small-business issues, express concern about this, so if you 
could respond to that question.
    We will have some more on pass-throughs later in the 
afternoon. But confirm the timing of the guidance, and will 
there be specific guidance for small businesses?
    Mr. Kautter. Sure. One of our top priorities is to get 
guidance out on the new pass-through rules. We have not set a 
target date for issuing that guidance, but we are focused on 
getting it out as soon as we possibly can. And we will have a 
focus on small business.
    Senator Wyden. So where we are left on this, and hopefully 
we will learn some more in the afternoon, multinational 
corporations enjoy certainty with respect to their 14-percent 
rate slash, and for small businesses it is, well, we are very 
interested in it and we hope to do it soon--another clear 
example of the double standard established in this bill. The 
powerful and the most fortunate come first, the small-business 
people, who are so important in Oregon and elsewhere, maybe 
they will see some clarity sometime down the road.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Let us go to Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman.
    As the budget calls for a decrease of, I think, 1,784 
employees, yet at the same time the IRS has received more than 
150 million returns, individuals are facing new rates and the 
withholding schedule. How can we be sure that they are 
withholding enough in the face of this huge change? What is 
going to happen? So can you describe the efforts that are 
currently underway to ensure the transition from the old system 
to the new system and how that impacts individuals and small 
businesses?
    Mr. Kautter. With respect to withholding, Senator?
    Senator Cantwell. Yes.
    Mr. Kautter. Sure. The withholding tables are adjusted 
every year. This year we followed the same procedure that we 
did in prior years, which is a joint effort between Treasury 
and the IRS.
    We have issued initial withholding tables. They have been 
implemented by many employers. We urge employers to implement 
them by February 15th.
    We are planning to issue a revised withholding calculator 
at the end of February, which people can find at IRS.gov. That 
withholding calculator will allow individuals to enter their 
information. They do not have to identify themselves; it is not 
personal information. They will be able to enter their income, 
the withholding year-to-date, number of dependents, and 
calculate how much they are withholding, how many allowances 
they should claim in order to have their withholding work out 
pretty close to what is actually owed at the end of the year. 
So that should be due in February. We are putting a lot of 
effort into that and view that as a critically important 
project.
    Senator Cantwell. I know you are just dealing with the 
aftermath of this, but for us in Washington and other States--
well, first of all, I still firmly believe in our deductibility 
rights as a State to deduct from our Federal tax obligation, 
but we will see what the courts have to say about that.
    But nonetheless, for States like mine, which have been able 
to deduct and also do not have an income tax, the complexity to 
the taxpayer who has been using this as an analysis for what 
they might be owing--I know a lot of people think they are 
going to come out without owing, but I have news. There are 
people, because of the change in the law, who are actually 
going to see a tax increase. So I hope you will work 
specifically with those States that have these issues so that 
that calculator helps address some of that. Because I think of 
it as a very big sea change for States like mine and others in 
how they are going to be impacted.
    Can I ask you about cybersecurity and are we taking enough 
steps to make sure that we have upgraded our system of 
protection from hacking of the IRS by outside entities?
    Mr. Kautter. The focus on cybersecurity at the Internal 
Revenue Service is constantly evolving. The sophistication of 
the attacks that are directed to the IRS website continues to 
grow. The criminals continue to grow in their knowledge and 
sophistication and the amount of resources that they direct 
toward the IRS websites.
    We specifically asked this year in the budget for an 
increase of 6.2 percent in the funds allocated to operations 
support specifically to deal with this sort of an issue. We are 
very concerned about what we are seeing.
    Senator Cantwell. Do you have the people and the resources 
then?
    Mr. Kautter. One of the things we are asking for is 
streamlined critical pay authority. I do not know if you have 
dealt with that. But streamlined critical pay authority would 
allow the IRS to hire people in these critical positions in a 
fraction of the time it would otherwise take, and it would 
allow us to pay them more than we would otherwise be able to 
pay under the government pay scale.
    Streamlined critical pay was part of the 1998 restructuring 
act. We do not have anyone at this point in time under 
streamlined critical pay, because our authority has expired. 
That is a very important proposal.
    Senator Cantwell. Well, I am happy to work with you on 
that. I certainly believe that you should, and we should, 
protect taxpayers with the best cybersecurity, technology, and 
personnel that can be hired today.
    So thank you very much, Mr. Chairman.
    The Chairman. Thank you.
    Let us see, who is next? I guess you are next.
    Senator Cardin. Thank you, Mr. Chairman. I appreciate it.
    Let me first follow up on Senator Wyden's point on small 
business. Clearly, we all have a responsibility to be very 
sensitive to small-business owners who do not have the same 
capacity as large companies to understand and comply with laws. 
We try to simplify things for small businesses, we exempt them 
from some of the regulatory issues, because we recognize the 
burden.
    And quite frankly, the 20-percent deduction is going to be 
a challenge for some small businesses, particularly when they 
do not quite understand exactly how it operates and whether 
they are using what type of structure for their income. And I 
would hope that that would be a top priority.
    And I can tell you that we want to work with you on that so 
that the small-business community can have the least burden as 
possible as they try to figure out these new tax laws.
    Mr. Kautter. Well, Senator, one of our key areas of focus 
is revising the forms, the instructions, and the IRS 
publications. And we try to draft those forms and publications 
and instructions in such a way that they could be understood by 
the small-business person.
    We are very focused on making those understandable, as much 
as we can with a complicated tax law. So we are focused on it.
    Senator Cardin. Good. Now, I look forward to working with 
you then.
    I was with my colleagues in the State legislature on 
Monday. They are trying to wrestle with how to change the 
Maryland tax code as a result of the Federal tax code. It is 
very difficult.
    You know, one of my principal objections on process is that 
we have a federalism system where the income tax was allowed as 
a result of the cooperation with the States on the 
constitutional amendment. And now we have passed a bill without 
fully understanding the impact on our State governments.
    What services are you providing to our State tax collectors 
so that they can figure out if they want to change policies, 
but may not have the same capacity because they have relied 
upon the pre-2018 tax law? Is there any way that you can work 
with the State tax collectors so that they can get help in 
trying to figure out how to now administer things that they 
before did not have to administer?
    Mr. Kautter. Sure. The IRS does work with State 
administrators in a number of areas today. One of them is in 
identity-related theft, so we do have an existing relationship 
with all State administrators.
    Senator Cardin. My concern is that, for example, in 
Maryland, if you do not itemize at the Federal level, you are 
not allowed to itemize at the State level. A lot less people 
are going to be itemizing now. The State wants to consider some 
State itemizations that were not allowed before, but they will 
not have the same type of verifications that they had because 
they were relying on the Federal Government. Are you prepared 
to work with the States on that issue?
    Mr. Kautter. Yes, sir.
    Senator Cardin. Good. I will put them in touch with you 
then. Thank you.
    I am going to talk about private debt collection.
    Mr. Kautter. Yes, sir.
    Senator Cardin. The National Taxpayer Advocate just 
recently issued a report showing that for every $3 that is 
spent, we collect $1 in private debt collection. The total cost 
of about $20 million collected $6.7 million. They go on to say 
taxpayers' right to be informed, right to quality services, 
right to pay no more than the correct tax, right to challenge 
the IRS, right to finality, right to privacy, right to 
confidentiality, all are compromised by private debt collection 
by the IRS.
    Now, I would hope that we would have learned our lesson 
when we tried this in the past and it did not work, but here we 
go again. So I have introduced some legislation, because it is 
legislation-based, I understand that, to prevent this from 
happening. There have been some letters written to you and to 
the Inspector General on this issue by some of my colleagues.
    The bottom line is, we all have a responsibility to protect 
taxpayers' rights and to protect the taxpayers' dollars. And 
this debt collection, as pointed out by the National Taxpayer 
Advocate, violates all those conditions.
    So when are you going to come in here with a recommendation 
that we get rid of this thing?
    Mr. Kautter. Well, Senator, the private debt collection 
effort this time around is less than a year old. The first 
cases that were assigned to private debt collection agencies 
were last April. Up to this point, we have had no problems with 
data security or data breaches.
    Senator Cardin. Is the National Taxpayer Advocate wrong 
when they say improper commissions have been paid for work not 
performed?
    Mr. Kautter. I am not familiar that those have been paid, 
but I can look at it, Senator.
    Senator Cardin. I am just reading from the report. And that 
the warnings that taxpayers would normally get from the IRS are 
not being given by the private debt collectors, are they wrong 
on that issue too?
    Mr. Kautter. Senator, I am not familiar with those sorts of 
details on the private debt collection. I am aware of the 
program overall, and overall it seems to be working well.
    Senator Cardin. Working well? Twenty million dollars spent, 
$6 million collected, and the ones that are collected are some 
of which--we do not believe as a result of the private debt 
collectors--would have been collected anyway?
    Mr. Kautter. Well, the only cases that have been assigned 
to private debt collectors so far are about 240,000 of the 
toughest cases to collect.
    The cost of setting up the program is the $20-million 
number that you are citing. That investment will stand the 
program up for several years. So what we are doing is comparing 
sort of several years of investment with 1 year of collections.
    As I said, the program is less than a year old; it is 10 
months old. And I understand that the Taxpayer Advocate has 
concerns. And I think those concerns are fair concerns, and I 
need to look into them more closely.
    Senator Cardin. Thank you, Mr. Chairman.
    The Chairman. Senator Cassidy?
    Senator Cassidy. Hey, sir, thank you for being here. Thanks 
for serving our country.
    You mentioned that the number of identity theft victims has 
decreased, but has the amount of money dispensed in fraudulent 
refunds, has that also decreased? And if so, by how much?
    Mr. Kautter. Senator, I do not have the exact number, but 
it has decreased. I mean, we have decreased the number of 
fraudulent returns entering into the system, and we have 
decreased the number of improper payments.
    Senator Cassidy. I get that. I guess I want to know, is it 
low-hanging fruit, you know, a relatively small value? And I am 
not criticizing, I am just trying to get a feeling for it.
    Mr. Kautter. Yes, sure.
    Senator Cassidy. And if this is what it was a year or 5 
years ago, is it roughly that or is that also down 40 percent?
    Mr. Kautter. I can get you that number, Senator.
    Senator Cassidy. Next, how much roughly are we dispensing 
in fraudulent refunds?
    Mr. Kautter. Well, at this point, we are in the process of 
gathering that data for the latest year, so that is another 
number I would prefer to get you a more specific number on than 
what I have right now.
    Senator Cassidy. And I am not trying to play ``got you,'' 
but if you are asking for $300 million in software or IT 
systems to combat fraud, but we are losing $20 billion, then we 
probably should give you more than $300 million. You know what 
I am saying?
    Mr. Kautter. Yes, sir.
    Senator Cassidy. Lawyers, guns, and money--but let us 
address this problem.
    And what is--I mean, at some point, you are always going to 
have a certain number of fraudulent returns. Do you have a 
sense of what the acceptable rate of those returns are?
    Mr. Kautter. Well, what we would say is, zero would be the 
acceptable number of returns. We do not know that we will ever 
get there.
    But working with the State and local governments and the 
tax return preparation software community, as well as tax 
return preparers, we have made good progress. As I said, we 
have gotten the number of claims down by about two-thirds in 
the last 2 years. The number of improper returns at this point 
is about----
    Senator Cassidy. I heard that, so I am going to move on, 
not just because I caught that; I listened to what you said 
earlier.
    Mr. Kautter. Yes.
    Senator Cassidy. I would like to now change topics away 
from tax returns and talk about something I have been 
interested in vis-a-vis trade-based money laundering. And I 
will start off with transfer pricing between subsidiaries of a 
multinational corporation.
    Now, it is easy to imagine that there could be arbitrage of 
pricing so that gain is realized in a low-tax country and loss 
is realized in the high-tax country.
    And how does the IRS audit or monitor to make sure that 
gain or loss is being declared appropriately?
    Mr. Kautter. Sure. Well, first thing I would say, Senator, 
is that we are hoping, we are hopeful that the new tax reform 
legislation will decrease the desire for engaging----
    Senator Cassidy. I accept that, but I am actually more 
interested in--I am going to follow into trade-based money 
laundering, but I want to start with something which is 
legitimate, if you will.
    Mr. Kautter. Sure. And so we have a division within the 
Internal Revenue Service that focuses specifically on transfer 
pricing controversy between U.S. companies and foreign-based 
subsidiaries or related affiliates.
    Senator Cassidy. Now, is there a standard invoice or 
declaration form that you can look at and plug into a computer 
and use analytics on as to whether it seems legitimate or not?
    Mr. Kautter. Well, the transfer pricing calculation tends 
to be very case-specific. And there are sort of general 
guidelines, but it really is case by case.
    Senator Cassidy. Now, case by case does not give itself to 
big analytics. And it does seem as if--and I say this because, 
allegedly, $110 billion a year is moving from the United States 
down to Mexico related to drug trade. And Treasury has 
confiscated, best we can tell, about $7 billion. Now, that is a 
$103-billion delta, and some of that is trade-based money 
laundering. So we are trying to figure out how to get at that. 
And it is ultimately up to our Federal agencies to cooperate to 
kind of go after this issue.
    So let me ask, to what degree do you all, does IRS, 
collaborate with Customs to make sure that that which is being 
declared is actually being shipped as opposed to a double 
invoice or is as presented on the invoice?
    Mr. Kautter. Sure. So the IRS does work closely with the 
Customs Bureau, as does the Treasury Department.
    Senator Cassidy. Now, if you do an audit, I mean, what 
percent of these transfers are audited?
    Mr. Kautter. I do not know that number off the top of my 
head.
    Senator Cassidy. Okay. We will ask for a QFR.
    Mr. Kautter. Sure.
    Senator Cassidy. And to what degree are we sharing 
information? You mentioned with other governments, but what 
about with Mexico?
    Mr. Kautter. We do have some agreements to exchange 
information with Mexico.
    Senator Cassidy. Is there a standard invoice that is filed 
when someone declares the value of a traded object? Or is it, 
you know, kind of up to their choice as to how to file the 
information?
    Mr. Kautter. Well, Customs does have forms, standard forms 
that are filled out. But the numbers that go on the forms, of 
course, are subject to the individual filers' view of the 
value.
    Senator Cassidy. But if you were to look at, say, a 
multinational, you would look just at what they are declaring, 
but not necessarily audit to make sure that it is correct?
    Mr. Kautter. The audit selection criteria that the IRS uses 
involve a fairly sophisticated formula which we feel is pretty 
good, but it is constantly being refined. But it is a fairly 
sophisticated analysis.
    Senator Cassidy. We will follow up, because I hear the tap 
and I know that I am over, so I will yield back. And I thank 
you for your answers.
    The Chairman. Well, thank you, Senator. Your time has 
expired.
    Senator Menendez?
    Senator Menendez. Thank you.
    Thank you, Commissioner.
    Commissioner, prior to the passage of the Trump corporate 
tax bill, was there any prohibition against deducting prepaid 
State income taxes or local property taxes in the year that 
they were paid?
    Mr. Kautter. Yes, sir.
    Senator Menendez. There was. And let me ask you this. Then 
why did section 1142 of the Trump corporate tax bill 
specifically prohibit the deduction of prepaid State income 
taxes? Why would the bill prohibit something that was already 
disallowed?
    Mr. Kautter. Senator, I cannot answer that question. I do 
not know the answer to that.
    Senator Menendez. Well, it seems pretty illogical to me. 
Let me ask you this. Is there anything in the tax bill that 
prohibited the deduction of prepaid State and local income 
taxes, in the legislation itself?
    Mr. Kautter. In the legislation itself, no.
    Senator Menendez. Okay. So you are saying that, before the 
legislation, you could not deduct prepaid State income taxes as 
well?
    Mr. Kautter. Yes, sir.
    Senator Menendez. Let me ask you this. Why is it that 
corporations will be able to deduct? We hear a lot about them 
issuing bonuses in 2017. But regardless of whether or not they 
actually made the payment, they are going to be able to deduct 
it in 2017. Why is it that a corporation can get the deduction, 
but a middle-class taxpayer cannot?
    Mr. Kautter. Sure. Well, under the Internal Revenue Code, 
most corporations are accrual-basis taxpayers. Under the 
accrual-basis rules, if an expense is accrued by the end of the 
year and paid within 2\1/2\ months after the end of the year in 
the compensation area, the corporation is allowed a deduction 
in the year of accrual.
    The real property tax deduction operates under a completely 
different section of the code. And most of those deductions are 
claimed by cash-basis taxpayers. So it is a different 
accounting principle.
    Senator Menendez. So the code is written in a way that 
benefits corporations, but does not benefit middle-class 
taxpayers.
    Mr. Kautter. Well, there are two methods of accounting: 
cash and accrual.
    Senator Menendez. Well, can an individual taxpayer create 
that accounting for themselves and then be subject to the same 
availability?
    Mr. Kautter. In certain circumstances, they could be on the 
accrual basis if they were in a trade or business, but not just 
as an----
    Senator Menendez. But the average person is not in a trade 
or business.
    Mr. Kautter. Yes; no, not a----
    Senator Menendez. So therefore, the code is written in such 
a way that middle-class families cannot take the same advantage 
that a corporation can take, saying, we are going to give you a 
bonus, not pay that bonus in 2017, and get the deduction, but a 
middle-class family wanting to pay their State income or 
property tax in the year cannot get that deduction.
    Mr. Kautter. Under the Internal Revenue Code, that is how 
it works.
    Senator Menendez. Well, something is wrong with that.
    Let me ask you this. Several States have so-called 
scholarship programs, some of which are nothing more than a 
thinly veiled ruse designed to strip money from public schools 
and funnel it to private religious schools. And in order to 
avoid the separation of church and state constitutional issues, 
some red States offer dollar-for-dollar State income tax 
deductions for donations. That makes it appear that the funding 
source is private, when in fact it is really coming from public 
dollars.
    How does this not violate the IRS's substance over form 
principle?
    Mr. Kautter. That practice has been allowed now for several 
years.
    Senator Menendez. Well, just because it has been allowed 
does not mean--you are telling me I cannot get my property tax 
payers in New Jersey, who just got screwed under this 
legislation, to pay their taxes in the year that they wish to 
and not get a deduction? But just because something has existed 
does not mean it is right.
    Mr. Kautter. Well, under the general principles for 
charitable contribution, if the primary purpose of the 
contribution is donative, which is a disinterested and detached 
interest of generosity, then the taxpayer is allowed a 
charitable contribution. If a State wants to allow a credit for 
that against its tax liability, it can do that.
    Senator Menendez. Well, 32 States already have programs, 
many of which provide a full 100-percent credit for all 
contributions. Because, even before the tax bill gutted the 
State and local property tax deduction, high-paid tax lawyers 
and accountants already figured out that these State-run 
programs allow a person to avoid hitting the alternative 
minimum tax by reclassifying their State income tax deductions, 
which are limited by the AMT, to so-called charitable 
contribution deductions, which they are not.
    So it just seems to me that the code works against 
individual families, but works for those who are either in a 
corporate setting or those who are using this workaround, which 
I would have thought the IRS would say, oh, wait a minute, 
substance over form--substance over form, and you cannot do 
that.
    Mr. Kautter. Yes, I think the substance over form issue is 
there, Senator.
    Senator Menendez. Well, I do not see how it is not, when 
they are getting their charitable deduction from Federal income 
taxes as well, when in fact it is for a totally different 
purpose.
    The Chairman. Okay. Senator, your time is expired.
    We will go to Senator Carper.
    Senator Carper. Thanks, Mr. Chairman.
    Welcome. Thank you for your service. How many years of 
service do you have at the IRS?
    Mr. Kautter. At the IRS? Three months.
    Senator Carper. Three months. How is it going?
    Mr. Kautter. Good, good. I am very impressed with the IRS 
and the people there.
    Senator Carper. Is it challenging for the folks who follow 
you, the folks on your team, to be asked to take a handoff in 
terms of a major overhaul of the tax code? And we do it sort of 
like, at the last minute, at the end of the calendar year, and 
do not really provide the IRS with additional resources. We do 
not even, you know, respond to your request for streamlined 
critical pay authority. Is that demoralizing at all to the 
folks who work there?
    Mr. Kautter. One of the things that----
    Senator Carper. It is like, we are going to make your job a 
lot more difficult. We are not going to give you much time, and 
we are not going to do this streamlined critical pay authority 
which allows the IRS to draw on, I think, untapped private-
sector expertise in order to attract talent in critical areas. 
That has to be demoralizing.
    Mr. Kautter. It is challenging. The Internal Revenue 
Service, Senator, has a very strong, can-do, positive culture. 
And so----
    Senator Carper. Well, they must.
    Mr. Kautter. They do, and whatever is dealt out, they deal 
with and do it in a forthright manner.
    In trying to implement this tax reform legislation, IRS is 
going about it in a very disciplined, project-managed fashion. 
We do need the additional funds; the $397 million is critical 
to be able to effectively implement.
    Senator Carper. Give us some examples of what you could do 
with that and why that makes sense. I have always heard that if 
we provide the funding that is being sought by the IRS, they 
could actually provide a return, $5, $6 on the dollar. Is that 
true?
    Mr. Kautter. In the enforcement areas, that is exactly 
right.
    Senator Carper. Yes.
    Mr. Kautter. And under the President's budget, we do ask 
for an increase in enforcement funds.
    But the $397 million for implementation of the tax reform 
act is to update the IRS systems. The IRS runs 140 integrated 
software programs.
    Senator Carper. That is a lot.
    Mr. Kautter. That is a lot. And they are closely connected 
and difficult to update.
    And then, as I mentioned earlier, 19 percent is for 
taxpayer assistance, outreach, and taxpayer education.
    Interestingly, only 4 percent of the funds are to adjust 
the forms, the regulations, and the guidance. It is interesting 
to me how much technology takes of the total spend for 
implementation these days compared to, say, 1986.
    Senator Carper. Talk to us a little bit more. I know you 
have already discussed a little bit this streamlined critical 
pay authority. Just give us some examples of why that is 
important.
    Mr. Kautter. Sure. So under streamlined critical pay, the 
IRS would be able to bring someone on in 6 weeks instead of 6 
months. And they could pay someone up to probably a third more 
than they could otherwise pay if they have brought them in on 
the general government pay scale.
    And when you get into the areas of technology and 
cybersecurity, having that ability to hire someone in a hurry--
I have seen the IRS lose people because of the amount of time 
it takes to get them onboard, people who were critical who 
really wanted to serve the government.
    So those two in particular--the amount of time it takes to 
get somebody there and the amount we could pay to attract the 
talent--are the two key components of why streamlined critical 
pay matters.
    Senator Carper. Can you think of any reasonable reason on 
earth why we should not do that?
    Mr. Kautter. No, sir.
    Senator Carper. All right. You have, I think, another 
request that does not involve extra funding, but it would 
better ensure that some of the folks who are preparing tax 
returns for people are actually knowledgeable, competent, able 
to do that job well.
    Mr. Kautter. Yes, sir. Well, about 400,000 paid tax return 
preparers have no professional certification. And tax return 
preparers prepare almost 60 percent of all the returns filed. 
So having tax return preparers who have a minimum level of 
knowledge and competency with respect to the tax law not only 
is helpful to the taxpayers themselves, but to the 
administration of the Internal Revenue Code in terms of 
efficiency and errors that have to be corrected.
    Senator Carper. All right. Mention one more issue, one more 
area that you would like for us to focus our time and attention 
on to enable you to do your job more effectively, more 
efficiently, please.
    Mr. Kautter. Well, I would say I would think the key issues 
for us right now are streamlined critical pay and funding for 
tax reform implementation.
    I would say the increased funding for level of service----
    Senator Carper. Increased funding for----
    Mr. Kautter. Level of service, our ability to respond to 
calls from taxpayers. This year in the budget we had to make 
some choices, and the choice was to allocate a little bit more 
toward enforcement, a lot more toward systems and 
infrastructure. And level of service is very important.
    And so, if the IRS were to be granted more funding by 
Congress, I think that is the first place we would put it.
    Senator Carper. Great, thank you so much.
    Mr. Kautter. Yes, sir.
    The Chairman. Thank you, Senator.
    Senator Portman?
    Senator Portman. Thank you, Mr. Chairman.
    And I appreciate your being here, Mr. Kautter, to talk just 
a little about implementation.
    And we had a good hearing earlier today about some of the 
positive aspects of the tax reform legislation, and 
specifically that over 4 million people have now received a 
bonus or a pay increase and that many people are seeing 
benefits. And small businesses--the NFIB is reporting more 
optimism among small businesses than ever in the history of 
their taking that survey.
    And of course, we have heard the announcements from so many 
larger businesses. Over 350 of them have now come forward and 
said they are doing something to reinvest in their business, 
often investing in equipment to make their employees more 
productive, which, of course, we all know is important to 
economic growth and higher wages.
    I do think that the IRS is under-resourced. And by the way, 
I made this point, as did some of my colleagues, long before 
this tax reform bill was even being considered. I think you 
needed it with the old tax law. And certainly with the new tax 
law, it would be helpful to have resources. So I agree with 
what the chairman said at the outset about the fact that the 
additional resources are necessary to ensure that our 
constituents are properly taken care of; in other words, that 
taxpayer service is there so the phone gets answered and that 
there are capable people, as Senator Carper has indicated, to 
be able to answer tough questions about a complicated tax code. 
And it will always be complicated, because it is inherently 
difficult to determine the appropriate income.
    I do think it needs to be coupled with smart reforms. And 
you have talked about a couple you would like to see. You 
remember back in the 1990s, mid-1990s, there was an IRS concern 
about technology. And you have focused on that today. You said 
your software and your hardware are both out of date.
    At that time, there was a concern about, in the 1990s, 
when, as you indicate, technology was not as important as it is 
today, that there were stovepipes not talking to one another 
and there was, therefore, a lot of money that had been spent 
and not spent effectively; some said wasted. I remember the 
figure of $3 billion on technology because of inability to 
communicate across lines in the department.
    Do you think it is time for another review? At that time, 
there was a commission which studied this issue for a year or 
so. It was bipartisan, bicameral. It came out with the IRS 
reforms that were then passed. Subsequently, the budget has 
increased for the IRS, but in the context of reform.
    There have also been concerns, as you know, on both sides 
of the aisle about some of the IRS practices, in particular the 
targeting of conservative groups, which occurred in the Obama 
administration, I think, which also made it difficult for 
people to stand up and support additional resources and a sense 
that there maybe was not accountability.
    So you are Acting Commissioner. I know there is discussion 
of a nominee coming up here soon. And you have 40-some years of 
practice with the IRS as a private practitioner working with 
the IRS. Is it time for that kind of an overhaul, or is it just 
time to say, let us increase the funding and allow the IRS to 
determine where it goes? I mean, is there an opportunity here 
to back up and look at your technology and look at your service 
and look at how to make the IRS a first-rate service 
organization responding to taxpayers?
    Mr. Kautter. Thanks. Thank you, Senator. That is a terrific 
question.
    I think the time to back up and take a look at the IRS is 
here. It has been 20 years since the last IRS restructuring 
act. Within that act, certain structures were put in place with 
respect to the IRS and its organization and how it operated.
    There is not a private business today that has not revamped 
itself in the last 20 years. And so for the IRS to have the 
same operating organizational structure today as in 1998 does 
not make a lot of sense to me.
    I think we could make some changes that would facilitate 
taxpayer service and efficiency within the IRS if we were to 
take a step back and take a disciplined, thoughtful look at how 
the IRS is structured and how it operates, I really personally 
believe as a practitioner.
    So I have been at the IRS 3 months. I do not have a vested 
interest in how it was structured or why it works the way it 
does. I am pleasantly surprised at the attitude and dedication 
of the people who are there.
    I am also disappointed that the structure sometimes gets in 
the way of taxpayer service.
    Senator Portman. Three hundred ninety-seven million dollars 
you are requesting over the next 2 years outside of the budget, 
as I understand it.
    Mr. Kautter. Yes, sir.
    Senator Portman. And 73 percent is for technology. Is that 
correct?
    Mr. Kautter. Yes, sir.
    Senator Portman. So that seems to be your top priority in 
terms of the funding. You also, though, mentioned taxpayer 
service. Can you tell us, when someone calls the IRS and seeks 
an answer to a question, a taxpayer question, do you know how 
often that person gets a prompt and correct answer?
    Mr. Kautter. So the answer this year--well, last year it 
was around 75 percent, and this year it should be around 77 
percent. Next year, under the budget, it would go down.
    Senator Portman. So this means that somewhere between a 
quarter and a third of the people who are calling in are not 
getting an answer or not getting an accurate answer and maybe 
not getting the phone answered----
    Mr. Kautter. Not getting through.
    Senator Portman. Just not getting through.
    Mr. Kautter. Yes.
    Senator Portman. So I think, Mr. Chairman, we are at that 
point again.
    And I hope, you know--I know you are, again, in an acting 
capacity. And I know all of us are looking forward to the 
nominee and having the opportunity to go through a hearing and 
get someone confirmed. But can I make a request today that you 
submit to the committee--and I hope on a bipartisan basis the 
committee would follow up on this--what your recommendations 
would be?
    And if you find as you go back you are not able or 
comfortable doing that, I would still like personally to have 
that communication with you. Because I think it is time for us 
to back up and take a look.
    I think the chairman and ranking member have said it well 
that, whether this tax bill had passed or not, it is time for 
us to put the reforms in place and, with that, provide the 
necessary resources to be able to allow our constituents to get 
the kind of service that they deserve.
    Mr. Kautter. I would very much like to work with you on 
that.
    Senator Portman. All right, thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator McCaskill?
    Senator McCaskill. Thank you, Mr. Chairman. I do think 
there is a lot of bipartisan support for us giving the IRS the 
resources that it needs.
    I mean, I cannot imagine that anybody in America thinks it 
makes any sense that if we have an entity that is operating in 
a sea of red ink, that the first thing we do is see if we could 
not just cut and cut and cut the receivables department. I am 
pretty sure that if a business was in debt, they would be 
building up their receivables department, not tearing it down.
    We have cut, against the objections of many of us, almost a 
billion dollars from the IRS budget in the last 7 years. If we 
adjust that for inflation, we have cut it by almost 20 percent.
    And one of the things that stood out to me as I was 
preparing for this hearing was that the worst-performing phone 
line at the IRS in 2017--do you know what it was?
    Mr. Kautter. No.
    Senator McCaskill. Which phone line was the worst 
performing? It was the one dedicated to taxpayers who want to 
make a payment. The average length of time that someone had to 
sit on the phone if they wanted to make a payment in 2017 was 
46 minutes. So not only have we cut our receivables department, 
we clearly are not paying attention to the most important place 
that we can hope to, in fact, gain the revenue that would make 
this a level playing field for all Americans, because so many 
Americans are in fact doing the right thing. But as we all 
know, right now they are having to, you know, wait a long time.
    The line got 2,656,000 phone calls and change, and only 
1,071,000 of those ever got to talk to a real person.
    Mr. Kautter. You know, Senator, it is a terrific point. And 
I think there are some simple things--they are not all that 
expensive--that I think the IRS needs to do.
    For example, I think when someone calls, there should be a 
feature on the system that tells you how long the wait is. And 
secondly, there should be a feature to opt for a call back.
    So in many private businesses today, you can say, the wait 
is 32 minutes. If you would like a call back, leave your 
number. And we do not even have that feature right now, and I 
think we need things like that.
    Senator McCaskill. And in talking to the people who are on 
the front lines at the IRS who work in Missouri, there is a new 
phone system that has been put in. And there are a large number 
of complaints about how efficiently it is working.
    I do not know if you have had a chance to dig into that in 
the short time that you have had the big job. But they say they 
are so frustrated because someone will be sitting there, and a 
call will not be dropping into their line, and yet the wait is 
very, very long. So it is not working right.
    And in fact, they used to be able to log in one place and 
handle the phone call. Now they have to log in on the hard 
line, then log in on the screen. And if the call drops, they 
have to go back and log in both places again. So as usual, IT 
procurement has not quite, I think, met the mark.
    I wanted to complete my questioning by asking specifically 
about Equifax. The IRS found out about the Equifax breach at 
the same time the rest of America did, even though IRS had a 
very large contract with Equifax involving an awful lot of 
sensitive taxpayer data. Equifax claimed it did not need to 
notify the IRS about the breach because IRS data was not 
compromised.
    In a follow-up in a site visit, IRS went to Equifax and 
found that it was in fact mishandling and improperly storing 
IRS data.
    You know, I guess--are you all now making changes to your 
contracting practices and requiring that any breach of one of 
your contractors, whether it involves the IRS or not, is 
reported to you?
    Mr. Kautter. I will have to follow up to see if we include 
that clause. But your description of the Equifax contract is 
accurate. I mean, we were informed, and immediately we did a 
site visit. None of the IRS data had been compromised. We did 
find that they were storing some taxpayer data--it had not been 
compromised--that should not have been stored. We have dealt 
with that issue. That data no longer exists there. And the 
Equifax contract has been terminated.
    But your suggestion about a clause for future contracts is 
a terrific suggestion.
    Senator McCaskill. I would like to look into the 
contracting practices. And in connection with that, very 
briefly, you all had to do a bridge contract with Equifax. And 
I will follow up with questions for the record.
    I have some legislation on bridge contracts. I have seen 
them all over the Federal Government, and they almost always 
are a huge mistake. And so it is a lack of preparation, it is a 
lack of preparedness for terminating a contract, because I 
think too often everyone just assumes they are going to renew a 
contract, which is, of course, the wrong mindset if we are 
really trying to get the best value for our dollar.
    But I will give you some of those questions for the record.
    Thank you, Mr. Chairman, very much.
    Mr. Kautter. Thank you. Thank you.
    The Chairman. Thank you, Senator.
    Senator Whitehouse?
    Senator Whitehouse. You are going to have to twist your 
neck even more to get to me. [Laughter.]
    Thank you for coming here.
    Mr. Kautter. Yes, sir.
    Senator Whitehouse. This morning, Mr. Mnuchin was in that 
seat, and he and I spoke about the problem of income inequality 
in our country and the role of the tax system as a progressive 
system so that people who have much higher incomes are paying a 
higher rate than people who have much lower incomes. I think 
that has been a policy foundation of our country for a long 
time. Do you agree?
    Mr. Kautter. Yes, sir.
    Senator Whitehouse. Yes. And one of the things that I asked 
him was if the IRS, if he could instruct the IRS to go back to 
publishing the consolidated tax information of the 400 top 
taxpayers.
    Until recently, the IRS took the 400 top taxpayers, 
combined them into one so they were anonymized, and then took 
their tax payments and combined that into one so it was 
anonymized, but at least it gave America a look at how the 
highest-income folks in America were doing as far as paying 
income taxes into a progressive system.
    What we found out when the IRS was collecting and 
distributing this data, up until I guess 2014 was the last 
public report, was that those extremely high-end income earners 
were actually paying lower tax rates than most people.
    And I think that is important information for Americans to 
know, that the system is not serving them in terms of 
delivering actual progressivity. I think the latest information 
we have is that the highest 400 paid the same tax rate that you 
would pay if you were making about $70,000 a year. So if you 
are a moderately successful plumber or a local lawyer in a 
small community, there you are, and on the other hand you have 
people who are making hundreds of millions of dollars a year 
and they are not paying a higher rate than you are.
    So I will not put you on the spot right now, but I will ask 
you, particularly if the Treasury Secretary agrees, to go back 
to aggregating and publishing that information. Because I think 
it is a warning sign of a failure in our tax system.
    Mr. Kautter. Sure, Senator. And I will work with the 
Secretary to get back to you on that. Thank you.
    Senator Whitehouse. Great.
    The other thing that I wanted to talk to you about is the 
problem of foreign influence in our elections. We have been 
warned repeatedly by law enforcement witnesses, national 
security witnesses, and some of the very credible, experienced, 
bipartisan think tanks here in Washington that the easiest way 
for Russians, for instance, to manipulate our elections is to 
put money into our elections.
    It is a violation of Federal law for a foreign national 
directly or indirectly to make a contribution in connection 
with a Federal, State, or a local election or to a political 
party, or to make an independent expenditure in our elections 
or an electioneering communication.
    Now, a lot of that activity takes place through IRS-
regulated 501(c)(4) organizations. What steps does the IRS have 
in place to make sure that the donors to 501(c)(4) 
organizations are not foreign nationals or cutouts for foreign 
nationals or shell corporations hiding foreign nationals?
    Mr. Kautter. Sure. So at the moment, Senator, 501(c)(4) 
organizations submit a schedule with a list of donors attached 
to it.
    Senator Whitehouse. Correct.
    Mr. Kautter. I would have to check to see at this point----
    Senator Whitehouse. What do you do with that list?
    Mr. Kautter. I would have to check to see what we do with 
the list. I am not aware that we----
    Senator Whitehouse. Do you know if you cross-reference with 
FinCEN?
    Mr. Kautter. I do not know, but I can check and get back to 
you.
    Senator Whitehouse. Okay. And do you know if there is any 
secondary look at, say, phony baloney-seeming shell 
corporations to take a look at who might be behind them?
    Mr. Kautter. Yes, and----
    Senator Whitehouse. Acme Russian Corruption, LLC in 
Delaware might be a signal. [Laughter.]
    Mr. Kautter. It could be, Senator. In the short time I have 
been at the IRS, I have not gotten into that, but I will follow 
up with you.
    Senator Whitehouse. Okay. Do you agree that it is important 
that we try to enforce that law and to do the investigative 
work internally to determine whether or not Russian or other 
foreign nationals are putting money into our elections?
    Mr. Kautter. I know that it is important for the IRS, I 
think, to make sure that people comply with the rules and 
regulations. How this issue should be handled, which agency in 
the Federal Government is best to handle it--I am not sure it 
is the IRS.
    Senator Whitehouse. But you at least have the information, 
so you are--without you giving somebody else information, they 
do not even get off the dime, do they?
    Mr. Kautter. They would not. And we would have to, I mean, 
think through that.
    Senator Whitehouse. Okay. Well, we will keep working with 
you on it. I think it is an important thing.
    Mr. Kautter. Yes, sir.
    Senator Whitehouse. I know my time has run out. And I thank 
the chairman.
    Mr. Kautter. Thank you.
    The Chairman. Well, thank you, Senator.
    I understand that Senator Wyden has a question or two.
    Senator Wyden. Thank you, Mr. Chairman.
    I just want to follow up on one other area. It relates to 
that letter I sent to you, Mr. Kautter, about conflicts of 
interest.
    As you know, I have had concern about your dual roles as 
Assistant Secretary for Tax Policy and Acting Commissioner of 
the IRS. It seems to me there is essentially an inherent 
conflict of interest that is going to make it tough for 
somebody to navigate these two roles appropriately.
    Secretary Mnuchin stated an intention to audit the real 
estate taxes issue, which is something that inherently focuses 
on blue States. We talked about that earlier as just kind of 
one example.
    Now, in December I sent you a letter asking about real and 
potential conflicts. And I must say, I was concerned and 
troubled by some of your responses. So let me just see, as we 
wrap up, if we can get some answers to some of the questions 
that were unanswered.
    In your role as Assistant Secretary for Tax Policy, were 
you party to any decisions intended to disfavor one political 
constituency over another or disfavor particular States based 
on the political constituency of those States? That is pretty 
much a ``yes'' or ``no'' answer.
    Mr. Kautter. No.
    Senator Wyden. Okay. I am puzzled why you would answer 
straightforwardly today, but we could not get it in the 
response to my letter. So I am just going to leave it at that; 
you have answered it straightforwardly today.
    In your role as Assistant Secretary for Tax Policy, were 
you involved in the decision to remove from the Treasury 
Department's website the May 2012 Office of Tax Analysis 
Technical Paper 5 which showed that owners of capital rather 
than workers are the primary beneficiaries of corporate tax 
cuts?
    Mr. Kautter. No, sir.
    Senator Wyden. Okay. Since you were elected to serve as 
Acting IRS Commissioner, have you had any meetings with the 
President or prepared any written memos, reports, or other 
materials to be delivered to the President?
    Mr. Kautter. I have not met with the President. Whether 
something I have written has made its way to the President, I 
do not know. But I have not prepared anything directly for the 
President.
    Senator Wyden. Okay. Now, in your response to my letter, 
you included references to numerous policies intended to 
prevent political interference with taxpayer-specific actions 
like audits and investigations. But as we have seen in this 
committee, the way tax laws are interpreted by the IRS can 
affect public confidence.
    As the IRS works to implement a $1.5-trillion tax bill, can 
you tell us what you are doing there at the agency to make sure 
it is understood that the decisions are going to be made free 
of political bias?
    Mr. Kautter. Well, the implementation of the tax reform act 
at the Internal Revenue Service is being led by a career IRS 
employee. All of the individuals on the leadership team are 
career IRS employees, as are all of the individuals in the 
business operating divisions.
    So I have oversight at the IRS, but I am not directly 
involved in making decisions with respect to which forms go 
first or things like that, or even the----
    Senator Wyden. Let me ask you this. As you know, when you 
were in the private sector, there were some questions about 
matters that were delegated. You and I had some talks about it, 
pretty spirited talks. And one of the reasons that I felt that 
I could support your going forward is that you would make sure 
that on your watch there were not problems, because as we 
talked about, in the private sector there were problems.
    And you made the argument that you would delegate it. To 
your credit, you said, you know, I have to be careful about 
that in the future.
    So how do you reconcile what you told me today with what we 
were concerned about earlier?
    Mr. Kautter. Well, Senator Wyden, delegation is a very 
important tool, no question about it. But as we saw before, 
what happens is, if it is delegation, you know, the buck still 
stops, you know, with you.
    Senator Wyden. Sure. Sure. So do you, like, review their 
work or, I mean, how does that work?
    Mr. Kautter. I do. I am constantly informed of what is 
going on and how things are progressing. So it is a dialogue, 
but I have delegated the responsibility for day-to-day 
operations.
    There are two outstanding Deputy Commissioners, and we are 
in constant contact. We meet almost daily and discuss what is 
occurring.
    Senator Wyden. Okay. My time is up. And, Mr. Chairman, I 
appreciate the additional round.
    I just want to make it clear, I do not want to hear about 
problems along the lines of what we saw in that private-sector 
area, because I was very concerned about the delegation when 
you were in the private sector. And your response--and you told 
me it was going to be a new day, and that is why I felt that I 
could advance your nomination.
    I do not want to be back here in a few months and we see 
political problems and you tell me, well, it was delegated to 
all these career people and, you know, that was that.
    So, I am just putting everybody on notice. And I appreciate 
the chance to continue this discussion. Thank you.
    The Chairman. Thanks, Senator.
    Now, Senator Warner, we had not counted on you coming, but 
you are going to be the last questioner.
    Senator Warner. Thank you, Mr. Chairman. And, Commissioner, 
I think you probably thought you were in the clear, but I do 
have one set of questions.
    As Acting Commissioner, you have about 70,000 employees who 
work for you at this point, is that right?
    Mr. Kautter. Yes, sir.
    Senator Warner. And given the complexity of the tax code--
and I do not fully agree with the chairman's characterization 
of the tax reform--but clearly there is a lot of work to be 
done now to try to implement that.
    You have really got to recruit good candidates and maintain 
the quality of the workforce. Isn't that a top priority?
    Mr. Kautter. Yes, sir.
    Senator Warner. And you have been a tax practitioner most 
of your life. That is correct, is it not?
    Mr. Kautter. Yes, sir.
    Senator Warner. And as a matter of fact, most of your 
employees, I think, with that expertise could actually probably 
make more money in the private sector, could they not?
    Mr. Kautter. They could indeed.
    Senator Warner. And to quote, actually, the budget: 
``Federal employees with professional degrees are actually 
undercompensated relative to private-sector peers in a CBO 
analysis.''
    Now, you have to make sure as well, obviously, that you 
have a lot--are the majority of your employees college 
graduates?
    Mr. Kautter. Yes, sir.
    Senator Warner. Okay. So we have notice that they are 
underpaid; we know they could make more in the private sector. 
But I look at the budget that was put out, and the budget cuts 
retirement benefits for Federal employees, it increases the 
amount Federal employees have to contribute to their pensions, 
it increases the number of years tested for determining the 
value of the pensions, and it eliminates the cost-of-living 
adjustments once they retire.
    So you have a tough job trying to recruit and retain 
quality employees, and yet the budget that the administration 
has put forward wants to cut back on their pensions, make it 
harder for them to retire, not recognize the amount of 
competition that they have with the private sector.
    You know, how can the IRS, with the stress it is under, and 
hopefully under your leadership the IRS gets back to the kind 
of service--and I appreciate the chairman's comments earlier 
saying the kind of wanton meat-axe cuts that have been made to 
the IRS by Congress recently do not really help the matter--but 
how are you able to do your job with this kind of budget, which 
I think would undermine the ability to recruit and retain good 
employees?
    Mr. Kautter. Senator, one of the things I have been 
exceedingly impressed by is the dedication of the people at the 
Internal Revenue Service to serve the country. And their 
commitment to excellence and to serving the public, I think, is 
something any organization would be proud of.
    And I think it is a challenge to recruit people into any 
aspect of government these days for a whole variety of reasons.
    We will do the best we can, and the IRS will get the job 
done. I am confident.
    Senator Warner. Well, one thing, Commissioner, I would just 
say is that in another--we all sit on different committees. I 
have another committee that has gotten a lot of attention these 
days, that has brought up the President's constant request for, 
you know, knowing people's political affiliation or asking 
Federal employees to pledge their loyalty to him.
    You know, with an agency that is independent and so 
important as the IRS, I just want to make sure that you are 
going to assure me that within the responsibilities that you 
have--and obviously no one dictates what the President says or 
tweets--that you are going to do your utmost to make sure that 
the President and this sense of loyalty requirement, political 
affiliation requirement, which I believe, and hopefully you do 
as well, flies in the face of what the IRS should be all about 
in terms of its independence, regardless of who is President, 
that you will do all you can to combat any impressions that 
that kind of loyalty test or political affiliation test would 
become part and parcel of your administration of the IRS.
    Mr. Kautter. Well, Senator, I take my responsibilities as 
Acting Commissioner very seriously, including the 
responsibility to administer and enforce the tax laws in a fair 
and equitable manner, and in a way that is free from political 
influence.
    And I will give you my assurance that both myself and, to 
the best of my ability, the IRS will live up to the letter and 
the spirit of those obligations.
    Senator Warner. Well, thank you. And my time is running 
out, but I just want to say doing your job well is so important 
since, on even the administration's current projections, we are 
going to bring our revenue run rate down to slightly over 16 
percent of GDP when we have had historic averages more between 
17 and 18. And we will see whether the growth comes about that 
some have predicted.
    I was not supportive of the tax bill, but I hope it does 
come about. But boy, if it does not, we are going to need to 
make sure those employees are loyal, dedicated, and can collect 
every bit of that revenue that is owed the United States 
Government.
    Thank you, Mr. Chairman, for letting me come in late.
    And thank you, Acting Commissioner, for answering my 
questions.
    The Chairman. Well, thank you, Senator. I would like to 
respond to the comments of some of my friends on the other side 
regarding the new pass-through deduction known as section 199A.
    I want to put this new tax policy in context. It is a newer 
and more expanded version of former section 199. Millions of 
small businesses will benefit from the deduction. It is 
important to note the deduction is simplified for small service 
providers.
    When we passed section 199 in 2004, it was a bipartisan 
success. There were some glitches, and we fixed them over time. 
No one defined the policy in section 199 as a loophole because 
of glitches. Some criticized it as complex, but the businesses 
it was targeted to, largely manufacturers, grew accustomed to 
it. I expect we will see the same development with new section 
199A.
    In the case of section 199A, we need to define it for what 
it is, a meaningful deduction for pass-through businesses.
    The National Federation of Independent Business, NFIB, on 
December 22nd, 2017 stated, quote: ``NFIB fought for decades 
for a real tax cut for small-business owners. The Tax Cuts and 
Jobs Act dramatically improves the way small businesses are 
treated, delivering hundreds of billions of dollars in tax 
cuts,'' unquote.
    So I will, by unanimous consent, insert in the record a 
copy of the NFIB statement.
    [The statement appears in the appendix on p. 32.]
    The Chairman. And I will note, NFIB represents 325,000 
small-business owners in this country.
    And what I am hearing from small businesses in my State is 
consistent with what NFIB said. They welcome the tax relief.
    Now, I want to tell you personally how much I have 
appreciated you appearing here today and the forthrightness 
with which you testified.
    And I will just add this. Since it appears that we will not 
obtain a quorum here, we will have to postpone the markup 
scheduled for today to occur during a rollcall vote of the 
Senate at a location to be determined that will be off the 
floor. So we will schedule that.
    And I want to thank Acting Commissioner Kautter for 
attending today and being as patient as he has been.
    And I want to thank all of my colleagues for their 
participation in today's hearing.
    For any of my colleagues who have written questions, I ask 
that you submit them by close of business next Wednesday, 
February 21st.
    We are grateful to you, Mr. Kautter. We are grateful for 
your service to this country. We are grateful for your 
intelligence and the way you have helped this committee time 
after time. And we are grateful for the future work that you 
are going to be doing for us.
    So with that, we will just adjourn this hearing. And I 
think it has been a good hearing, and we will go from there. 
Thanks so much. I appreciate it.
    Mr. Kautter. Thank you, Mr. Chairman.
    [Whereupon, at 4:10 p.m., the hearing was concluded.]

                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


              Prepared Statement of Hon. Orrin. G. Hatch, 
                        a U.S. Senator From Utah
WASHINGTON--Senate Finance Committee chairman Orrin G. Hatch (R-Utah) 
today delivered the following opening statement at a Finance Committee 
hearing to consider the administration's fiscal year (FY) 2019 budget 
request for the Internal Revenue Service (IRS). The hearing will 
include discussions about the agency's critical role in implementing 
tax reform.

    We're gathered here for the second time today to talk once again 
about the President's proposed budget for fiscal year 2019. We are 
grateful to have Mr. David Kautter, the acting IRS commissioner here 
today to talk specifically about the President's proposed budget for 
the IRS.

    Mr. Kautter has served admirably in this capacity. He's filled two 
critical roles with the administration during the busiest time the tax 
policy world has seen in decades.

    This is no easy task.

    Mr. Kautter deserves our thanks for serving with such distinction.

    Now, some of my colleagues may tune me out for the next several 
minutes, as they've already heard me talk effusively about the success 
of the new tax reform law. But, I hope people are listening, because 
there's been quite a bit of good news lately. Any major change to the 
tax system should be evaluated on the merits, whatever they may be. 
And, by and large, we are seeing great things from tax reform.

    Some have argued that our tax reform bill, which provides middle-
class tax relief and lowered taxes on job creators, benefits only the 
rich or the high-ranking officers of greedy corporations. Others tend 
to vilify companies' statements about their capital structure, 
including dividend payments, indebtedness, or share buybacks, as things 
that benefit only the wealthy stockholder or investor.

    Yet, quite often, a business's success or bottom line results in 
increased valuations of middle-class retirement accounts and pensions. 
In fact, our private retirement system has been the biggest generator 
of middle-class wealth in our Nation's history. And, because more than 
one-third of all corporate stock holdings in the United States are in 
various forms of retirement accounts, growing businesses contribute 
directly to the expansion of that middle-class wealth.

    So yes, with lower corporate tax rates and other reforms to our 
business tax system, we have seen some immediate success as hundreds of 
major companies have publicly announced their plans to raise wages, 
distribute bonuses, or boost employee 401(k) contributions. At the same 
time today's success is helping to improve the retirements and 
investments of millions of middle-class Americans.

    I'd say that's a good thing.

    That said, despite all of this good news, we still have a great 
deal of work to do to ensure that the tax law is implemented correctly. 
The Treasury Department, IRS, and Congress--especially the tax writing 
committees--have to work together to ensure that the law is implemented 
and administered as Congress intended.

    We look forward to working with the administration, and with IRS 
specifically, as they continue to implement this law and issue 
guidance.

    This committee will also be examining possible administrative 
reforms at the IRS, giving the IRS greater flexibility and bringing it 
into the 21st century. I look forward to continued feedback from the 
IRS and Treasury on ways we can work to improve taxpayer services and 
administration.

    That said, I've made no secret about my disagreements with the 
Internal Revenue Service over the years. I led--along with my good 
friend, Ranking Member Wyden--the most thorough and comprehensive 
bipartisan investigation of the IRS in decades. I've gone after the IRS 
for everything from wasteful spending to political targeting to 
questionable enforcement practices.

    No one here needs to remind me about IRS missteps, regardless of 
which President or Commissioner has been at the helm. But personally, I 
think it's high time that Congress reexamines its approach to the 
agency.

    Because IRS will bear the brunt of the burden in implementing and 
administering the tax code and the new tax provisions, it needs 
sufficient personnel and resources to carry out its important mission 
at this critical juncture.

    Let's keep in mind that the IRS is the only agency in the 
government that touches every single American every single year. And 
that's why I've pushed for such robust oversight over the years. It is 
also why the IRS should get the resources it needs to do its job right.

    For example, the IRS is still using computer software that is older 
than most of my committee staff. And, you can take a look at them--
they're not all millennials.

    The agency is shedding staff and resources. Agency reductions might 
be a good thing in some cases, but it should be done through thoughtful 
reforms, not the blunt axe of blind budget cuts.

    The administration, in its budget, has proposed additional cuts to 
funding for the IRS. I think that is a mistake. While I've had quite a 
bit to say over the years about the allocation of resources at the IRS, 
now, directly after passage of a major overhaul of the tax system, is 
not a great time to further reduce the taxpayer services budget of the 
agency that will do most of the work in implementing the updated tax 
code.

    We need to take a close look at this issue and be fiscally 
responsible with any solutions, but, as we do this, we should also 
consider what is in the best interest of proper and effective 
administration of our recently reformed tax code.

    Before I close, I do want to note that we've noticed an executive 
business meeting for this time. If, at any point during the hearing, a 
suitable quorum is present, I intend to pause the hearing and move to 
votes on the nominations of Mr. Dennis Shea and Mr. C.J. Mahoney. 
Thereafter, we'll resume our hearing.

                                 ______
                                 

        NFIB Celebrates Hard-Fought Victory on Historic Tax Law

December 22, 2017

President's signature marks the end of a decades-long fight for small 
business tax reform and paves the way for robust growth.

Washington, DC (December 22, 2017)--The National Federation of 
Independent Business (NFIB) issued the following statement today on 
behalf of the president and CEO Juanita Duggan on the Tax Cuts and Jobs 
Act becoming law:

        NFIB fought for decades for a real tax cut for small business 
        owners. The Tax Cuts and Jobs Act dramatically improves the way 
        small businesses are treated, delivering hundreds of billions 
        of dollars in tax cuts.

        Small business optimism has been near record highs all year 
        long in anticipation of this moment. Starting in 2018, millions 
        of small businesses will have substantially more money to 
        convert their optimism into investments. They can buy new 
        equipment, increase inventory, pay workers more, create new 
        jobs, and engage in the economic activities that drive the U.S. 
        economy.

        The Tax Cuts and Jobs Act is a once-in-a-generation 
        achievement. This is a historic day for small business and the 
        country. We are grateful to President Trump for his leadership 
        on this issue, which started even before he took office. Today 
        he fulfilled his promise to cut taxes for American small 
        businesses.

For more information about NFIB, please visit www.nfib.com.

                                 ______
                                 
   Prepared Statement of Hon. David J. Kautter, Acting Commissioner, 
   Internal Revenue Service, and Assistant Secretary for Tax Policy, 
                       Department of the Treasury

INTRODUCTION

    Chairman Hatch, Ranking Member Wyden, and members of the committee, 
thank you for the opportunity to discuss the IRS's budget and current 
operations, including efforts to improve taxpayer service.

    In allocating resources, the IRS strives to balance three competing 
and overarching priorities: basic tax administration, sustaining our 
information technology (IT) systems and modernizing our operations. The 
President's fiscal year (FY) 2019 budget request attempts to balance 
these priorities by investing in key mission-
critical requirements and build on the work the IRS has already begun 
in FY 2018 to implement the Tax Cuts and Jobs Act.

    This piece of legislation was the first major tax reform 
legislation in more than 30 years. With hundreds of provisions intended 
to provide relief to American families and make America's businesses 
more competitive, the new law will require extensive work by the IRS in 
calendar years 2018 and 2019 to serve the needs of both taxpayers and 
tax professionals. It is crucial that the IRS receive additional 
funding this fiscal year to avoid any disruptions during next year's 
tax filing season.

    The IRS remains mindful of the need to do everything possible to 
provide taxpayers and their representatives with secure, high-quality 
assistance and services, through every available channel. The agency 
spends a significant amount of time and resources each year working to 
fulfill this critical part of our mission, and our workforce remains 
dedicated to helping taxpayers understand and meet their filing 
obligations. Taxpayer needs have been evolving, with more taxpayers 
conducting their business using digital tools at the time and place of 
their choosing. The FY 2019 budget invests resources to meet these 
needs by reducing dependency on a single point of entry and ensuring 
the IRS meets the needs of all taxpayers.

The most visible service the IRS provides each year is delivery of a 
smooth tax filing season. I'm pleased to report that the 2018 filing 
season began on schedule on January 29th and is going well so far. 
During calendar year (CY) 2017, the IRS received more than 150 million 
individual income tax returns, 87 percent of which were filed 
electronically. We issued more than 111 million refunds for a total of 
approximately $320 billion, with the average refund totaling 
approximately $2,800.

THE PRESIDENT'S FY 2019 BUDGET

    The President's FY 2019 budget request of $11.135 billion includes 
savings and reductions of $23.7 million and 2,163 full-time equivalent 
equivalents (FTE) compared to the FY 2018 Annualized Continuing 
Resolution level.

    The budget invests in high-priority programs to allow the IRS to 
assist more taxpayers by becoming more efficient and effective. The 
budget also invests in technology and data analytics, to increase the 
use of ``lighter touch'' compliance contacts and focus enforcement on 
closing the tax gap, and to protect taxpayer refunds from fraud. 
Importantly, the budget increases funding for security and replacing 
obsolete hardware to protect taxpayers' sensitive data from growing 
cyber threats. In addition, the budget requests modest changes to the 
IRS transfer and reprogramming authority to provide the IRS with the 
flexibility necessary to manage its resources more effectively.

    Operations Support. The President's budget request includes $4.16 
billion for operations support programs including rent, cyber and 
physical security, IT services for all IRS employees, and core tax 
processing and compliance systems. Within that total, $2.29 billion is 
allocated for information services, which is $217.8 million, or 10.5 
percent, above the FY 2018 annualized continuing resolution level.

    The management, maintenance, and ongoing enhancement of the IRS's 
information technology systems are central to the reliability of its 
operations, and to the successful accomplishment of its mission. The 
2019 budget includes dedicated funding to refresh IRS hardware and 
software to provide a stable foundation for delivering technology 
services required for day-to-day operations, transforming the taxpayer 
experience, and modernizing IRS operations.

    At the end of FY 2017, more than 59 percent of IRS hardware was 
past its useful life compared to 64 percent at the end of FY 2016, and 
32 percent of software was two or more releases behind the most current 
commercially-available version. The FY 2019 budget provides $187.8 
million to enable the IRS to implement critical hardware and software 
upgrades and reduce system outages and failures.

    Sustained investments in IT are also required to improve 
cybersecurity and ensure the IRS can continue to safeguard taxpayer 
data. The IRS combats more than 1 million cyberattacks daily, and 
operates strong network perimeter defenses to mitigate threats, detect 
vulnerabilities and monitor network security. The 2019 budget includes 
$303.7 million for these critical activities.

    Taxpayer Services. The President's budget request includes $2.24 
billion for taxpayer services, which is $108.7 million, or 4.6 percent, 
below the FY 2018 annualized continuing resolution level. The IRS is 
mindful of the need to continually improve our efforts to ensure 
taxpayers can file their taxes as quickly and easily as possible. We 
will continue expanding opportunities for taxpayers and their 
representatives to complete service and compliance interactions through 
their preferred channel, be it online, over the phone, or in-person at 
one of the IRS's many Taxpayer Assistance Centers (TACs).

    At the same time, we will continue our investments in improving the 
use of online tools and offerings and modernizing the taxpayer 
experience. Over the last several years the IRS has launched a number 
of digital applications that allow taxpayers to conduct various 
transactions online, such as paying their tax bill, having access to 
certain return information, and requesting an online payment agreement. 
Our work in this area also includes continuing the development, over 
time, of online accounts at the IRS where taxpayers can log in 
securely, obtain the information they need about their account and 
interact with the IRS as needed.

    Effectively serving taxpayers who prefer to be served through 
electronic channels allows the IRS to reduce costs, increases taxpayer 
satisfaction and frees up funds to serve those taxpayers who prefer to 
be served differently. Not only that, efforts to continue improving our 
online offerings will allow the IRS to simplify return filing for the 
vast majority of taxpayers. Enhancing taxpayer service in this way will 
in turn increase voluntary compliance, improve tax administration, and 
increase taxpayer satisfaction.

    Enforcement. The President's FY 2019 budget includes $4.63 billion 
for enforcement programs, which is $21.2 million, or 0.5 percent, above 
the FY 2018 annualized CR level. In addition, the budget also includes 
a program integrity cap adjustment for improving the effectiveness and 
efficiency of the IRS's overall tax enforcement program.

    The IRS remains committed to increasing compliance by assisting 
taxpayers in fulfilling their tax obligations and enforcing the tax 
laws. As a result of these efforts, the agency remains one of the most 
cost-effective investments within the Federal Government. In FY 2017, 
the IRS collected $3.4 trillion in revenue to fund the Federal 
Government, which represents more than 90 percent of all Federal 
receipts, and resources invested in the agency lead to significant 
revenue increases for the Nation.

    One of the IRS's highest priorities in the enforcement area remains 
the effort to combat tax-related identity theft and refund fraud. 
Protecting taxpayers and their personal data from identity theft is a 
critical aspect of taxpayer service, and the IRS has worked to improve 
its efforts in this critical area. During FY 2017, the IRS continued 
increasing taxpayer protections to make filing a tax return as safe and 
secure as possible. As a result, the number of fraudulent refunds 
declined and the number of taxpayers reporting to the IRS that they 
were victims of identity theft has also declined. The number of victim 
reports declined from 401,000 in CY 2016 to 242,000 in 2017, a drop of 
40 percent.

    Business Systems Modernization. The President's budget includes 
$110 million for business systems modernization, which is $178.0 
million, or 61.8 percent, below the FY 2018 annualized continuing 
resolution level.

    To gain efficiencies, secure and protect data, and reduce the 
resources necessary to maintain existing systems, the IRS will continue 
efforts to modernize its systems. Our main initiatives in this area 
are: expanding the digital conversion of paper case files, automating 
repetitive manual processes, leveraging existing data to detect tax 
noncompliance earlier, and enabling a strong and secure systems 
platform for 
taxpayer-facing applications.

FUNDING REQUEST TO IMPLEMENT THE NEW TAX LAW

    Implementing the Tax Cuts and Jobs Act is one of the IRS's highest 
priorities. The IRS has established a Tax Reform Implementation Office, 
led by one of its most senior leaders, to ensure its successful 
administration. Preliminary efforts to implement this new law are 
already underway, and two important pieces of guidance related to the 
new law have already been issued: on December 29, 2017, the IRS issued 
notices that address amended section 965 of the Internal Revenue Code 
and the new section 1446(f).

    Additionally, the IRS and the Treasury Department released new 
withholding guidance indicating that employees should see the tax 
reform changes reflected in their paychecks as early as this month.

    Additional published guidance on the new tax law will be provided 
as the IRS continues to analyze the law and its impact on tax 
administration. On February 7th, the IRS and the Treasury Department 
issued a revised Priority Guidance Plan that includes projects related 
to the law.

    To ensure successful implementation, the IRS will need additional 
resources in FY 2018. After considering FTE staffing needs and non-
labor costs, preliminary estimates indicate the IRS would need at least 
$397 million to implement tax reform. This funding is needed 
immediately to ensure that the IRS can start critical implementation 
activities on time. The funding should be available for 2 years to 
ensure contracts can be let appropriately and resources are available 
throughout the critical testing period of September through December of 
the calendar year, the first quarter of FY 2019.

    Activities to implement tax reform will include: re-programming 
approximately 140 interrelated return processing systems in conjunction 
with creating or revising approximately 450 tax forms, publications and 
instructions; publishing guidance, notices, and Frequently Asked 
Questions (FAQ); preparing the IRS workforce to help taxpayers 
understand how the new law applies to them; and importantly, providing 
taxpayer assistance and outreach.

    These estimates reflect one-time costs associated with updating 
major systems and enabling the IRS to quickly respond to the new tax 
law changes and anticipated higher taxpayer demand for assistance in 
2018 and 2019. As with other major investments, the IRS expects some 
recurring operations and maintenance costs which will be funded within 
base appropriations.

    The $397 million funding request for tax law implementation 
includes the following:

      $291 million for updating information technology systems;
      $75 million for taxpayer assistance, education and outreach;
      $3 million for creating and revising tax forms, instructions and 
publications;
      $15 million for developing and issuing published guidance and 
notices;
      $8 million for tax and information returns processing; and
      $5 million for program management.

LEGISLATIVE PROPOSALS IN THE PRESIDENT'S FY 2019 BUDGET

    Along with the funding requested in the President' FY 2019 budget, 
we are also asking for Congress's help legislatively, particularly in 
four important areas that would improve tax administration and support 
the IRS in fulfilling its mission:

    Program Integrity Cap. In addition to the base appropriations 
request of $11.135 billion, the FY 2019 budget proposes a $362 million 
program integrity cap adjustment to fund new and continuing investments 
in expanding and improving the effectiveness and efficiency of the 
IRS's overall tax enforcement program.

    The budget also proposes additional cap adjustments to fund new 
initiatives and inflation. The investments will generate about $44 
billion in additional revenue over 10 years and will cost about $15 
billion for net savings of $29 billion. Notably, the return on 
investment (ROI) likely is understated because it does not reflect the 
effect that enhanced enforcement has on deterring noncompliance.

    Streamlined Critical Pay Authority. The IRS Restructuring and 
Reform Act of 1998 increased the IRS's ability to recruit and retain a 
small number of key 
executive-level staff by providing the agency with streamlined critical 
pay authority. This allowed the IRS, with approval from Treasury, to 
move quickly to hire well-qualified individuals to fill positions 
deemed critical to the agency's success, and that required expertise of 
an extremely high level in an administrative, technical, or 
professional field. Executives hired under this authority included our 
former Chief Information Officer, a senior cybersecurity expert, our 
system architect, the director of our online systems development team 
and other senior IT executives. This authority expired at the end of FY 
2013. The last appointment made under Streamlined Critical Pay 
authority expired on September 29, 2017. Without this authority, the 
IRS continues to face challenges recruiting and retaining top-level 
talent, especially IT professionals who can help modernize our IT 
systems and protect taxpayer data from cyberattacks. The President's FY 
2019 budget request proposes reinstating this authority through FY 
2022.

    Correction Procedures for Specific Errors. Under current law, the 
IRS has authority in limited circumstances to identify certain 
computation mistakes or other irregularities on returns and 
automatically adjust the return for a taxpayer. At various times, 
Congress has expanded this limited authority on a case-by-case basis to 
cover specific, newly enacted tax code amendments. The IRS would be 
able to significantly improve tax administration--including reducing 
improper payments and cutting down on the need for costly audits--if 
Congress were to enact a proposal in the President's FY 2019 budget to 
provide the IRS with greater flexibility to correct specific errors on 
taxpayer returns. This proposal would allow the IRS to correct errors 
in cases when the information provided by the taxpayer does not match 
the information contained in government databases, or when the taxpayer 
has exceeded the lifetime limit for claiming a deduction or credit.

    Authority to Require Minimum Qualifications for Return Preparers. 
The President's budget request proposes providing the Secretary with 
explicit authority to require that all paid tax return preparers have a 
minimum knowledge of the Code. This is especially important to ensure 
that the estimated 400,000 tax preparers without credentials can meet 
minimum standards for competency. Incompetent and dishonest tax return 
preparers harm taxpayers by subjecting them to potential audits and by 
potentially subjecting them to penalties and interest as a result of 
incorrect returns. Requiring all paid tax preparers to keep up with 
changes in the code would help promote high-quality service from 
preparers, improve voluntary compliance and foster taxpayer confidence 
in the fairness of the tax system.

    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. David J. Kautter
               Questions Submitted by Hon. Chuck Grassley
    Question. Acting Commissioner Kautter, I have concerns with the 
slow roll-out with the IRS private debt collection program. Several 
times in 2017, I raised concerns that the number of accounts the IRS 
planned to release for private collection were woefully inadequate, 
guaranteeing the program would fall far short of collecting the 
hundreds of millions in revenue JCT estimates is possible. 
Unfortunately, this is exactly what has occurred. I understand the need 
for a testing period to ensure all systems are go, but what concerns me 
is that we are nearly a year in and the IRS is still placing accounts 
at little more than a trickle. I am told the program has the capacity 
to do more than 10 times the volume it is presently operating at.

    Why hasn't the IRS implemented the program to the full extent 
required under the law?

    Answer. The IRS takes its obligations under the Private Debt 
Collection program seriously and is working diligently toward a fully 
engaged Private Debt Collection program that will endure for years to 
come. The IRS delivered the first Private Debt Collection accounts to 
the Private Collection Agencies on April 10, 2017. The initial number 
of assigned cases was small to ensure the protection of taxpayer rights 
and the secure transmission of sensitive information. Over the next 
nine months, we increased the number of assigned cases and by the end 
of calendar year 2017, the IRS had delivered over 240,000 cases with a 
total of $1.7 billion outstanding tax debt to the Private Collection 
Agencies. In 2018, IRS will assign an additional 700,000 to 800,000 
individual taxpayer cases. Business cases will be assigned beginning in 
2019. By 2019, we expect to have begun assigning all of the various 
types of cases to Private Collection Agencies.

    Question. Are there plans to increase the volume of accounts placed 
with private debt collectors going forward? Please provide information 
on the planned placement volumes for 2018, including types and a 
breakdown of dollar sizes of the accounts placed.

    Answer. In calendar year 2018, the IRS plans to deliver between 
700,000 and 800,000 cases totaling approximately $5 to $5.5 billion in 
total debt. The planned breakdown by dollar (balance due) level is as 
follows:


----------------------------------------------------------------------------------------------------------------
                                                                        Dollar Levels
                                            --------------------------------------------------------------------
                                                   $500-$10k              $10k-$50k             $50k-$100k
----------------------------------------------------------------------------------------------------------------
# Cases                                                  512-585k               166-190k                 20-24k
----------------------------------------------------------------------------------------------------------------


    Question. In its 2017 annual report to Congress, the Taxpayer 
Advocate raised concerns that commissions may be being paid to private 
debt collectors for work done by the IRS. Could you please explain the 
rules and procedures for determining whether commissions are payable?

    Answer. The contract with the Private Collection Agencies outlines 
the rules and procedures for determining whether commissions are 
payable.

    The IRS is contractually obligated to pay commissions on any 
payment received 11 calendar days or more after the date the account is 
transferred to the Private Collection Agency, and up to 10 calendar 
days after the date the account is returned to the IRS.

    When the Private Collection Agency Contractor collects less than 
the total amount of the debt referred, the commission fee is calculated 
based on eligible dollars collected and applied to accounts. When the 
debt is collected in installments, the commission rate will be paid to 
the Private Collection Agency Contractor based on the eligible dollars 
collected and applied to accounts for each installment payment.

                                 ______
                                 
                 Questions Submitted by Hon. John Thune
    Question. Thank you for making sure the revised withholding tables 
were issued so promptly last month and for doing so in an impartial 
manner. Employees are starting to see the benefits of the new law in 
their paychecks this month, and that's a very good thing. When the new 
tables were released, the IRS announced that the agency is also working 
on revising the W-4 form, which employees use to set their paycheck 
withholding. Can you talk about those revisions and specifically 
whether they will include a way for employees to take into account the 
$2,000 child tax credit or the new $500 non-child tax credit? It would 
be ideal if parents and those who care for adult dependents could see 
the benefit of these credits in their paychecks without having to wait 
until they file their tax return.

    Answer. Yes, the 2018 Form W-4, which was released on February 
28th, does allow employees to take into account the expanded child tax 
credit, as well as the new non-child tax credit. The IRS also released 
the updated withholding calculator on the same day. This provides a 
simple and accurate way for employees to check whether they should 
adjust their withholding to avoid having too much or too little 
withheld.

    Question. Mr. Kautter, in your prior life, you focused extensively 
on taxes and small businesses. With the Tax Cuts and Jobs Act only in 
effect for 45 days, I suspect many small businesses are still factoring 
the new rules and tax relief into their business plans. Can you share 
with us how you expect small businesses to react to changes like the 
expanded expensing for equipment and inventory under the new law and 
the broader application of cash accounting for small enterprises?

    Answer. Treasury and IRS are working to provide guidance on these 
(and other) provisions as expeditiously as possible so that small 
businesses and their tax advisors are aware of the changes in the new 
law and can plan accordingly. We also expect small businesses to react 
positively to expanded expensing and broader application of cash 
accounting under the new law.

    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. I was pleased to see reports that incidences of tax-related 
identify theft have fallen, but we need to stay vigilant. Can you talk 
about the steps the IRS is taking to prevent identity theft and help 
resolve identify theft cases faster, especially for taxpayers who are 
entitled to a refund?

    Answer. Refund fraud caused by identity theft (IDT) continues to be 
one of the biggest challenges facing the IRS today. As identity thieves 
continue to become more sophisticated, the IRS has tightened its 
security in response to the increased threat. We are making it harder 
for identity thieves to successfully masquerade as taxpayers and file 
fraudulent refund claims on behalf of these taxpayers. Over the last 
several years, the IRS IDT fraud filtering processes has been effective 
in stopping misuse of information even when data breaches resulted in 
release of personally identifiable information (PII). Under recently 
enacted legislation, the due date for filing Forms W-2 and W-3 with the 
Social Security Administration (SSA) and Forms 1099 reporting 
nonemployee compensation with the IRS has been accelerated to January 
31st, beginning in calendar year 2017. Enhancements to IRS systems that 
allow income information received from SSA to be processed and, in 
turn, leveraged for systemic income and withholding verification enable 
the IRS to identify and stop fraudulent returns and release refunds 
related to compliant returns quicker.

    To help taxpayers resolve IDT cases faster, we centralized our IDT 
victim assistance policy, oversight, and campus case work in a new 
Identity Theft Victim Assistance (IDTVA) organization. Benefits to this 
centralized approach include a common inventory system, reducing hand-
offs between multiple IRS functions, improved case processing through 
streamlined, consistent procedures, and improved communication.

    In the victim assistance area, we have reduced the time it takes to 
resolve a case. For most cases, the average time is now less than 120 
days, which is substantially less than 2012, when cases could take over 
300 days to resolve. Centralization of IDTVA work significantly reduced 
case resolution time. Since implementation, we resolve those cases in 
less than 120 days 75 percent of the time, compared to 34 percent prior 
to implementation.

    We are continuing to develop and implement new procedures to 
improve the service we provide to IDT victims such as:

          New IDTVA telephone process allowing a taxpayer to make 
        direct contact with the employee assigned to the case (August 
        2017).

          New procedures to achieve a single point of contact when 
        more than 1 year is open within IDTVA.

          Removing requirement to attach proof of identity 
        documentation, to Form 14039, Identity Theft Affidavit e.g., 
        driver's license, passport, etc., (reducing taxpayer burden).

          Utilizing multiple methods to obtain required information to 
        resolve the taxpayer's IDT complaint (often avoiding requesting 
        additional information or documentation).

          Automatic case assignment (reducing time to resolve the 
        cases).

          Standardizing procedures in the Internal Revenue Manual to 
        allow cross-
        functional casework.

          Using Correspondence Imaging System for IDT cases with 
        current or past compliance activity (resulting in quicker case 
        resolution).

          Improving the way we track and report the status of IDT 
        cases to quickly identify and make any improvements in the 
        process.

          Revising taxpayer letters to provide more information on 
        case status and actions taxpayers can take to facilitate 
        resolution.

          Cross-training IDTVA assistors enabling additional 
        flexibility to assign cases to assistors with the appropriate 
        skills (reducing transfers and expediting case resolution).

                                 ______
                                 
               Question Submitted by Hon. Johnny Isakson
    Question. A provision in the Tax Cuts and Jobs Act deals with stock 
attribution rules as they pertain to inbound companies as well as U.S.-
headquartered companies with investments in foreign companies. As the 
Treasury Department and the IRS issue guidance on the new tax law, I 
urge its implementation in a manner that is consistent with the 
provision's historical application and the intent of Congress. 
Specifically, prior to its repeal in the new tax law, Internal Revenue 
Code section 958(b)(4) prevented the ``downward attribution'' of stock 
ownership from a foreign person to a related U.S. person for purposes 
of determining the status of a corporation as a controlled foreign 
corporation (CFC).

    The new law's legislative history--the Senate Finance Committee 
report; a colloquy between Chairman Hatch and my colleague from 
Georgia, Senator Perdue; and the Conference Report--shows that Congress 
intended the modification of CFC rules should not result in income 
inclusions to a U.S. shareholder of a foreign corporation in cases 
where the U.S. shareholder is neither in control of the foreign 
corporation nor related to an affiliated group of which the foreign 
corporation is a part. The treatment outlined throughout the 
legislative process is also consistent with the purpose and historical 
application of the CFC rules over their 55-year history.

    Given this clear legislative intent and the grant of regulatory 
authority to implement such intent, will the Treasury Department and 
the IRS issue administrative guidance to ensure that the modification 
of the stock attribution rules is implemented in a manner that is both 
consistent with its historical application and the intent of Congress?

    Answer. We are aware of the legislative history of this provision, 
and we continue to evaluate how best to implement this provision 
consistent with the statutory text and other indications of legislative 
intent.

                                 ______
                                 
                 Question Submitted by Hon. Pat Roberts
    Question. The IRS has for many years sought to collect the Federal 
air transportation excise tax, also known as the airline ticket tax, 
from aircraft management services (AMS) companies that manage and 
maintain fractional and wholly owned aircraft programs even though they 
provide private, non-commercial transportation. The IRS has pursued 
enforcement action for the ticket tax from AMS companies despite 
lacking statutory authority to do so. In addition, the agency's 
collection efforts against AMS companies has been inconsistent and 
arbitrary, effectively picking winners and losers and resulting in 
confusion within the AMS industry and an uneven playing field. Along 
with Senator Portman, I championed a fix for this issue in the recently 
passed Tax Cuts and Jobs Act (section 13822, H.R. 1) that was included 
in the final bill and states clearly that AMS companies are not subject 
to the ticket tax. Our view is that Congress has spoken and that the 
IRS should respect the law and stop trying to collect the ticket tax 
from AMS companies. Unfortunately, I understand that the IRS is still 
pursuing collection of the tax against certain AMS companies for past 
tax years, undermining the law and creating additional confusion and 
instability within the AMS industry.

    Will you follow the law and the clear intent of Congress by ceasing 
all ongoing and future collection activity of the air transportation 
ticket tax against aircraft management services companies?

    Answer. Guidance was provided to examiners to not pursue this issue 
on audits in June 2017 and the IRS is no longer pursuing the air 
transportation excise tax under Internal Revenue Code section 4261 on 
fees paid by an aircraft owner to an independent aircraft management 
company for whole aircraft management services. Audits of this issue 
were suspended and closed as a no change in 2017. We are also working 
with aircraft management companies to resolve any claims filed for 
taxes previously paid on whole aircraft management service fees.

                                 ______
                                 
             Questions Submitted by Hon. Sheldon Whitehouse
    Question. United States Code 26 U.S.C. Sec. 7206(1) makes it a 
felony punishable by up to 3 years of imprisonment and $100,000 in 
fines for a person who: ``[w]illfully makes and subscribes any return, 
statement, or other document, which contains or is verified by a 
written declaration that it is made under the penalties of perjury, and 
which he does not believe to be true and correct as to every material 
matter.''

    Why is it important to ensure that taxpayers are providing accurate 
information?

    Answer. It is important for taxpayers to provide accurate 
information to the IRS because our tax system is based on voluntary 
compliance. Voluntary compliance is essential in ensuring that all 
taxpayers pay their fair share. If taxpayers could provide false 
information, without concern about the consequences, compliance with 
the tax law would likely suffer.

    Question. Are persons also subject to penalty under the criminal 
false statement statute, 18 U.S.C. Sec. 1001, if they knowingly make 
material false statements to the IRS?

    Answer. Section 1001 is generally not used in the case of a false 
statement on a return because, if the return is signed under the 
penalties of perjury, as most are, section 7206(1) of the Internal 
Revenue Code is considered a more appropriate charge. Because section 
1001 is normally used in criminal tax cases involving a defendant's use 
of false statements or documents, the elements of the offense focuses 
on false statements or documents, rather than on concealment.

    Question. What steps does the IRS take to ensure that statements 
made to the IRS are true?

    Answer. IRS ensures the accuracy of tax returns by comparing, among 
other things, filed tax returns with other information received from 
outside sources submitted on various IRS forms to include Forms W-2, K-
1, 1099, etc. IRS Criminal Investigations (CI) also verifies the 
accuracy of returns by obtaining records from taxpayers and contacting 
third parties such as banks, witnesses, and payroll companies as part 
of the criminal investigation process.

    Question. Does the IRS review other filings and statements the 
person has made to the IRS to verify that the information regarding 
material matters is consistent?

    Answer. Yes, see response to (c) above. IRS-CI also reviews other 
tax years for consistency and patterns, and if applicable, coordinates 
with the other IRS divisions to obtain any documents or statements that 
the taxpayer may have provided.

    Question. Does the IRS review other filings the person has made to 
other Federal agencies to verify the information regarding material 
matters is consistent?

    Answer. Depending on the facts and circumstances of the 
investigation, IRS-CI may review filings or documents submitted by the 
taxpayer to other Federal agencies to either confirm or refute their 
statements, as permitted by law. For instance, title 12 U.S.C. 
Sec. 3412(f), Use of Information, allows agencies to disclose certain 
financial records to the Attorney General or the Secretary of the 
Treasury when there is reason to believe that the records may be 
relevant to a violation of Federal criminal law.

    Question. At the hearing, I asked you to provide information about 
why the IRS stopped publishing the ``The 400 Individual Income Tax 
Returns Reporting the Largest Adjusted Gross Incomes'' data.

    Why did the IRS stop publishing this information?

    Knowing that this information is useful to the public and to 
members of Congress, will you commit to reviving this annual report?

    Answer. The IRS eliminated the Top 400 table for two reasons. 
First, it posed a number of analytical challenges. Since the number of 
tax returns filed changes from year to year, based on economic 
conditions and tax law requirements, changes in the data over time are 
difficult to interpret. For example, in 1992 the top 400 represented 
.00035 percent of all returns filed, but this declined to .00027 
percent by 2014 because the number of returns filed increased over this 
period by more than 35 million. Thus, increases or decreases in the 
share of reported income or tax liability attributed to the top 400 
cannot be meaningfully connected to actual economic trends. Nor is the 
400 a static group. In addition, over an 18-year period, more than 71 
percent of individuals included in the top 400 were present for just 1 
year and only 3 percent were present for 10 or more years. This means 
that the top 400 also cannot be used as a panel to study the changes in 
income for a fixed group of taxpayers over time. Second, there are 
disclosure concerns created by producing detailed statistics on such a 
small group of highly visible taxpayers. The risk that presence or 
absence of particular data items in the annual table could be exploited 
by an intruder with access to other information on top earners to 
generate a credible claim of re-identification has increased over time 
as the amount of personal information in the public domain increased 
and the power of computers and analytic capabilities grew.

    Beginning with Tax Year 2014, the annual October release of 
Individual Income Tax Return percentile data was expanded to include a 
new table (Individual Income Tax Rates and Tax Shares, Table 3). This 
table contains all of the item content found in the top 400 data 
release and groups this information by percentiles of the income 
distribution. This new table shows data for filers at the .001 
percentile level--which in 2014 represented the top 1,396 returns. We 
believe, this is a more analytically useful tabulation compared to the 
top 400 tabulation, in that it provides a longitudinally consistent 
data point relative to the entire percentile distribution. As the 
number of returns increases with the growth of the economy, the number 
of returns in the .001 percentile will increase proportionally as well 
thus allowing for a consistent high-income data series. As a 
consequence, the top 400 data series was discontinued after Tax Year 
2014.

    The IRS Statistics of Income Division (SOI) discussed this change 
with the professional staff of the Joint Committee on Taxation in 
October 2014 and this change was endorsed for providing both more 
useful information to the public and better privacy protection than the 
Top 400 table. SOI presented the plan and proposed new tabulations at a 
public meeting, hosted by the Committee on National Statistics at the 
National Academies, that included more than 90 external stakeholders 
representing nonprofits, research facilities, and academia, as well as 
more than 19 Federal agencies. Again, there was universal agreement 
that the new detailed table on tax returns in the top .001 percent of 
filing population was a much more analytically useful tool than the Top 
400 table.

    Question. According to the IRS, the net tax gap, the difference 
between what people and companies owe in taxes and what the IRS 
ultimately collects exceeds $400 billion per year. This should be the 
low-hanging fruit of deficit reduction; this is money owed under the 
law. The budget request notes that an additional $15 billion for 
enforcement over 10 years will generate $44 billion in collections, 
``yielding a net savings of $29 billion.'' In other words, every dollar 
spent on enforcement brings in three.

    Do you agree that additional enforcement dollars would produce a 
positive return and help reduce the deficit?

    Answer. Yes, we agree additional enforcement dollars along with the 
associated Operations Support dollars would better support the IRS tax 
enforcement and compliance programs and would produce a positive return 
and reduce the deficit. The IRS FY 2019 budget includes, as part of the 
proposed Program Integrity Cap Adjustment, $362 million in additional 
investments to expand and improve the effectiveness and efficiency of 
the IRS's overall tax enforcement programs in 2019 as well as 
additional investments in future years. These investments will generate 
about $44 billion in additional revenue over 10 years and will cost 
about $15 billion for an estimated net savings of $29 billion. Of these 
investments, $290.1 million are in investments for traditional 
enforcement and strategic revenue programs, and those investments are 
projected to generate $2 billion in revenue once the investments reach 
full potential in FY 2021 an expected total ROI of $5.2 to $1. Notably, 
this return likely is understated because it includes only amounts 
directly recovered; it does not reflect the effect that enhanced 
enforcement has on deterring non-
compliance.

    Question. Are you aware that the FY19 request for the IRS 
enforcement budget is nearly $1 billion lower than Congress 
appropriated for it in 2011?

    Answer. The funding level for the enforcement account is not the 
only indicator of the IRS's tax enforcement efforts. Technology plays 
an increasingly important role in the IRS's enforcement strategy and 
has increased our capacity to identify and prevent non-compliance while 
also making it easier for taxpayers to comply voluntarily. The proposed 
investments in the Return Review Program, expanding online payment 
applications, and hardware and software for enforcement personnel--
activities funded from the Operations Support and Business Systems 
Modernization accounts--also increase enforcement productivity and 
revenue.

    Question. With the potential for enforcement dollars to cut the 
deficit, why hasn't the President requested more?

    Answer. The 2019 budget includes funding to ensure our 
infrastructure can sustain our programs, including filing season; that 
taxpayers are provided the services they need to comply with tax laws; 
that modernization efforts remain on track to provide taxpayers with 
the tools they need to interact with the IRS; and that enforcement 
efforts continue. The FY 2019 request also includes a Program Integrity 
Cap adjustment of $362 million in 2019 (as well as additional cap 
adjustments for new investments in future years) to fund new and 
continuing investments in expanding and improving the effectiveness and 
efficiency of the IRS's overall tax enforcement program.

    Question. United States Code 2 U.S.C. Sec. 441(e) makes it unlawful 
for a foreign national to ``directly or through any other person to 
make any contribution of money or other thing of value, or to promise 
expressly or impliedly to make any such contribution, in connection 
with an election to any political office or in connection with any 
primary election, convention, or caucus held to select candidates for 
any political office; or for any person to solicit, accept, or receive 
any such contribution from a foreign national.''

    What role does IRS play in ensuring foreign money does not enter 
our political system through outside organizations like LLCs and tax 
exempt organizations?

    Answer. This questions appears to refer to 52 U.S.C. Sec. 30121 
(previously 2 U.S.C. 441(e)), which the Federal Election Commission--
not the IRS--is responsible for enforcing.

    With respect to tax exempt organizations and LLCs, the IRS ensures 
compliance with the Internal Revenue Code and implementing regulations.

    We note that a section 501(c)(3) organization is not operated 
exclusively for one or more exempt purposes if it is an organization 
that participates or intervenes, directly or indirectly, in any 
political campaign on behalf of or in opposition to any candidate for 
public office. The term candidate for public office means an individual 
who offers himself, or is proposed by others, as a contestant for an 
elective public office, whether such office is national, State, or 
local. Activities which constitute participation or intervention in a 
political campaign on behalf of or in opposition to a candidate 
(political campaign intervention or ``PCI'') include, but are not 
limited to, the publication or distribution of written or printed 
statements or the making of oral statements on behalf of or in 
opposition to such a candidate. Treas. Reg. Sec. 1.501(c)(3)-
1(c)(3)(iii).

    Question. Section 501(c)(4) organizations are required to disclose 
their donors to the IRS. What does IRS do with that information?

    Answer. Treasury Regulations require section 501(c)(4) 
organizations to include Schedule B, Schedule of Contributors, with 
annual information returns on Forms 990/990-EZ. The IRS maintains this 
information for use, as needed, in compliance matters.

    Question. Does IRS review the donor lists to ensure that foreign 
actors are not funneling money into our elections through 501(c)(4) 
organizations?

    Answer. As noted above, this questions appears to refer to 52 
U.S.C. Sec. 30121 (previously 2 U.S.C. 441(e)), which the Federal 
Election Commission--not the IRS--is responsible for enforcing.

    Question. Does the IRS coordinate with FinCEN in these efforts?

    Answer. The IRS has procedures to provide for referrals to the 
Exempt Organizations Financial Investigation Unit (FIU) if, during the 
course of an audit, donor information is necessary to determine if an 
organization is in compliance with section 501(c)(4). Any requests 
relating to Treasury's Financial Crimes Enforcement Network (FinCEN) 
are performed by the FIU.

    Question. Does the IRS coordinate with any other Federal agencies 
to ensure foreign nationals are not prohibited from election activity?

    Answer. On a case by case basis, IRS coordinates, through its 
Criminal Investigation Division, with other Federal agencies, including 
FBI.

    Question. Are the current disclosures to the IRS by such groups 
sufficient to ensure that foreign actors are not funneling money 
through cutouts or domestic organizations?

    Answer. There is no requirement that the nationality of the 
contributor be shown on the Schedule B, or that an exempt organization 
request the nationality of its contributors.

    Question. Does the IRS have sufficient resources to enforce 
501(c)(4) rules?

    Answer. The IRS administers and enforces the tax laws as in effect 
with the resources available. The TE/GE FY 2018 Work Plan, dated 
September 28, 2017, sets forth the Exempt Organizations Division's FY 
2017 accomplishments and its plan for FY 2018 to continue to be an 
organization whose key elements are ``efficiency, effectiveness, and 
transparency.''

    Question. Currently the IRS has an 11-factor test to determine if a 
501(c)(4) social welfare organization is engaging in political 
activity.

    Would the IRS and social welfare organizations benefit from more 
clarity regarding what types of activities constitute under the rules 
and what amount of money groups are able to spend on ``political 
activity''?

    Answer. The IRS administers and enforces, and taxpayers are 
required to comply with, the tax laws as in effect. Section 501(c)(4) 
provides exemption, in part, for ``[c]ivic leagues or organizations not 
organized for profit but operated exclusively for the promotion of 
social welfare.'' An organization ``is operated exclusively for the 
promotion of social welfare if it is primarily engaged in promoting in 
some way the common good and general welfare of the people of the 
community.'' (Treas. Reg. Sec. 1.501(c)(4)-1(a)(2)(i).) The promotion 
of social welfare does not include direct or indirect participation or 
intervention in political campaigns on behalf of or in opposition to 
any candidate for public office (political campaign intervention, or 
``PCI''). (Treas. Reg. Sec. 1.501(c)(4)-1(a)(2)(ii).) Accordingly, 
although engagement in PCI is not prohibited for these organizations, 
the primary activities of organizations described in section 501(c)(4) 
must be the promotion of social welfare.

    In addition, section 501(c)(4) organizations that engage in PCI may 
be subject to tax under section 527(f) on their exempt function 
expenditures. Whether an organization is engaged in PCI depends upon 
all the facts and circumstances of each case. The IRS has provided 
examples illustrating facts and circumstances to be considered in 
determining whether activities are PCI. See, e.g., Rev. Rul. 2004-6; 
Rev. Rul. 2007-41. The analysis reflected in these revenue rulings for 
determining whether an organization has engaged in PCI, or has expended 
funds for a section 527 exempt function, is factual in nature.

    Question. Does the absence of bright-line rules for political 
spending by 501(c)(4) groups make prosecutions more difficult?

    Answer. As stated above, PCI is a factual determination made during 
the examination process. PCI are generally not subject to criminal 
prosecutions.

    Question. Do you think there should be a bright-line rule?

    Answer. Given the limitations imposed in the recent appropriations 
acts, the IRS currently cannot issue guidance relating to the standard 
used to determine whether an organization is operated exclusively for 
the promotion of social welfare for purposes of section 501(c)(4). The 
IRS will administer any further statutory direction from Congress on 
this matter.

    Question. Do the existing 501(c)(4) rules, and the way that they 
are interpreted within the IRS, hamper your ability to investigate and 
prosecute cases?

    Answer. The IRS administers IRC section 501(c)(4) as currently in 
effect, processing requests for recognition of exempt status and 
auditing section 501(c)(4) organizations using existing procedures and 
applying existing legal guidance. The IRS uses the historical rules 
that focus on the facts and circumstances in determining whether an 
organization is engaged in activities that primarily promote social 
welfare. The IRS provides appropriate training to its employees for 
this purpose, including mandatory PCI training before each Federal 
election cycle comprised of written materials, virtual e-learning 
sessions, and face-to-face, small group technical workshops.

    Question. Currently no jurisdiction in the United States requires 
shell companies to disclose their beneficial ownership. Jennifer 
Fowler, the Deputy Assistant Secretary, Office of Terrorist Financing 
and Financial Crimes at Treasury recently told the Judiciary Committee 
that the lack of beneficial ownership information for shell companies 
is ``a vulnerability.'' John Cassara, a former Treasury Special Agent 
and FinCEN Agent, agreed saying, ``[R]equiring the real owner of a U.S. 
company to be named during the incorporation process will cut down, in 
dramatic fashion, the ability of criminals to finance their crimes.''

    Do you agree that the United States' lack of beneficial ownership 
collection presents a serious shortcoming in our anti-money laundering 
regime?

    Answer. The IRS has recently made some progress in the area of 
transparency of entity ownership. Newly effective rules that provide an 
information reporting requirement for foreign-owned LLCs and revisions 
to the form used to apply for taxpayer identification numbers all will 
increase availability of beneficial ownership information.

    Question. How can shell companies be used by criminals to avoid 
paying taxes?

    Answer. Shell companies are sometimes a vehicle used in business 
transactions to avoid disclosing the identity of the beneficial owner 
of an entity and thus allow the entity to operate anonymously. Shell 
companies are used in lawful activities and in illegal activities.

    Question. Would having access to beneficial ownership information 
make it easier for the IRS to investigate tax evasion and other crimes?

    Answer. Yes, identifying the beneficial ownership of the assets and 
the income generated by these activities is essential in determining 
the correct tax liability and identifying related criminal offenses, 
both domestically and in assisting our foreign tax treaty partners 
through exchange of information. Noncompliant taxpayers often spread 
parts of a transaction among multiple countries and layers of entities 
to confound determination of ownership and income with respect to the 
transaction. Robust collection of beneficial ownership information 
would ease tax examinations by enabling the IRS to look through 
artificial structures and more clearly determine if the taxpayer was 
compliant with the tax laws as well as laws related to money 
laundering.

                                 ______
                                 
                Questions Submitted by Hon. Rob Portman
    Question. Mr. Kautter, my first question relates to a back-and-
forth that we have had on the production tax credit for refined coal 
facilities. Two years ago, the IRS Chief Counsel's office issued a 
memorandum that raised issues about the ability to claim the credit 
depending on the refined coal facilities' ownership structure. A 
similar memorandum was issued a year later. The analysis used in these 
memoranda appear to contradict prior rulings and guidance from the IRS, 
creating uncertainty for investors as to whether the ownership 
structures of such refined coal facilities would prohibit them from 
claiming the tax credit. This uncertainty resulted in many facilities 
being shut down, bringing with them a substantial loss of jobs and 
benefits within the industry.

    Approximately 10 months ago, six Senators--including Senator Enzi, 
Senator Cassidy, and myself--requested the IRS to issue immediate 
guidance to the refined coal industry so that investors could structure 
their investments to comply with the guidance, thereby preventing 
further harm to the industry. I understand that the office of Chief 
Counsel agreed to be responsible for this guidance in order to expedite 
its issuance. It has now been almost a year and, although the Chief 
Counsel's office has been telling the industry for the past 6 months 
that issuance of the guidance is imminent, to date this guidance has 
not been issued. This delay is continuing to be harmful to an industry 
that Congress intended to incentivize.

    Can you commit to have the Chief Counsel's office issue this 
guidance within the next 30 days?

    Answer. The IRS issued this guidance on March 9, 2018.

    Question. My second question pertains to Notice 2018-13, which was 
issued by the Treasury Department and the IRS on January 19th to 
address the rules surrounding the ``deemed repatriation'' tax. 
Generally, the new rule requires taxpayers with foreign operations to 
pay tax on their net CFC earnings, with different applicable tax rates 
depending on whether those earnings are held in cash or in permanently 
reinvested assets. I'd like to touch on the ``net'' part of this 
calculation.

    For the purposes of the rule, businesses are allowed to subtract 
the losses of CFCs with deficits from the earnings of CFCs with income 
to calculate an overall number on which tax is owed. Section 3.01 of 
the Notice provides rules for the treatment of income that has been 
previously taxed, or PTI. As one would think, PTI is not added to the 
earnings of earnings CFCs, as it is income that has already been taxed 
by the United States. However, the Notice states that companies must 
net PTI from loss CFCs. This leads to a strange result where, for 
economic purposes, this income is essentially taxed twice: once under 
subpart F, and again under the deemed repatriation rules. It also leads 
to strange results, where similarly situated companies that have 
similar amounts of overall CFC earnings, losses, and PTI have different 
tax results because of where their PTI is located.

    Can you commit to resolving the above-stated issues of double 
taxation and location-based disparity in the current rules governing 
PTI?

    Answer. Section 965 provides different definitions that apply for 
measuring positive earnings and for measuring deficits. The definition 
for measuring positive earnings specifically excludes earnings that 
were previously taxed under subpart F (referred to as ``previously 
taxed income,'' or ``PTI''), while the definition for measuring 
deficits does not. In section 3.01 of Notice 2018-13, the Treasury 
Department and the IRS provided our interpretation of the statute that 
in determining the amount of a deficit, PTI is taken into account. That 
is, PTI can reduce the amount of deficits otherwise available to reduce 
earnings subject to the transition tax.

    The Treasury Department and the IRS requested comments on these 
provisions described in Notice 2018-13, including the rules described 
in section 3.01. The Treasury Department and the IRS will consider all 
comments before issuing final regulations under section 965.

                                 ______
                                 
              Questions Submitted by Hon. Debbie Stabenow
    Question. I often say that we don't have an economy unless we are 
growing things and making things here. Small businesses are the ones 
willing to take the risks that grow the economy to create new jobs and 
innovations.

    I am concerned that the tax bill passed last year was not focused 
on helping small businesses and instead added new complications for 
them on their taxes. For instance, there is now a 20-percent pass-
through deduction, but a small business is not allowed to take the 
deduction if the ``principal asset of the trade or business is the 
reputation or skill of one or more of its employees or owners.'' If I 
owned a small business, I would be pretty confused as to whether I 
qualify for that deduction. One of the reasons most people decide to 
open a small business is because of their reputation and/or skill.

    Is the IRS prioritizing releasing guidelines for small businesses, 
to help them figure out if they can take the pass-through deduction?

    What is the IRS's plan to get that information out to small 
business owners?

    Answer. Guidance in this area is one of our top priorities. This is 
reflected in the Second Quarter Update to the 2017-2018 Department of 
the Treasury Priority Guidance Plan published on February 7, 2018, that 
includes section 199A guidance. This guidance will address the issue of 
when the principal asset of a trade or business is the reputation or 
skill of its employees or owners. We are also working with Treasury on 
various communications, including revisions to Forms, Instructions, and 
Publications to assist taxpayers, including small businesses, in 
determining whether they are eligible to claim this deduction for small 
businesses.

    Question. What I am hearing out of the IRS currently is not 
reassuring me that the changes to the tax code are going to make it 
easier for families to understand their taxes.

    The IRS has given employers new withholding tables, but has also 
said that families need to go to the IRS's website to make sure the 
amount of taxes being taken out of their paychecks is correct. Under 
the previous tax law, more than four times as many Michigan families 
received a tax rebate compared to those who owed additional taxes.

    If an individual or family does not have sufficient taxes withheld, 
what are the consequences?

    Answer. In January, we released new withholding guidance under the 
Tax Cuts and Jobs Act. The withholding guidance was designed to work 
within the constraints of the existing payroll withholding system in 
order to minimize the burden on taxpayers and employers. We have 
encouraged taxpayers to use our withholding calculator to ensure they 
have the correct amount of withholding. The results of the calculator 
can be used to determine if they should file a new Form W-4 with their 
employer.

    If individuals or families do not have sufficient taxes withheld, 
they will owe the additional tax at the time they file their tax 
return. Payment of the tax with a return filed by the due date will not 
result in interest being due. However, an underpayment tax penalty 
might be owed unless the taxpayer qualifies for an exception.

    If taxpayers discover their withholding will not be sufficient to 
pay their tax obligation during the tax year, they may increase their 
withholding or make estimated tax payments throughout the year. 
Estimated taxes are generally calculated using the Form 1040-ES, which 
may be found on IRS.gov, along with in-depth information on estimated 
taxes.

    If the taxpayer cannot pay the tax with the return, we encourage 
taxpayers to request an installment agreement by using our on-line 
payment application on IRS.gov. Interest and failure to pay penalty 
will apply to late tax payments.

    Question. What data can the IRS provide about how many taxpayers 
will be receiving a smaller refund check for their 2018 taxes compared 
to the one they received for their 2017 taxes, based on the withholding 
changes?

    Answer. The Treasury Department's Office of Tax Analysis research 
suggests that if people do nothing, about the same number will receive 
refunds for 2018 as would have under prior law. However, because 
individual circumstances will vary and because many taxpayers receive 
large refunds (and some owe tax) when they file for any given year, the 
IRS is encouraging all workers to do a ``paycheck checkup'' to ensure 
that they are not having more or less tax withheld than they intend. 
The withholding calculator found at IRS.gov is designed to assist 
taxpayers in making sure they have the proper amount of tax withheld 
from their paychecks.

    Question. Two years ago, the IRS Office of the Chief Counsel issued 
a memorandum calling into question the eligibility of investors 
participating in some types of ownership structures for production tax 
credits for refined coal facilities.

    Both the Department of the Treasury and the IRS stated their 
commitment to quickly issuing guidance to provide certainty to the 
industry and avoid further shutting down of facilities and losses of 
jobs. Thus far, the promised guidance has not been forthcoming, even in 
light of assurances that its issuance was imminent.

    Congress created the refined coal production tax credit to 
encourage the production of coal that is less polluting. However, the 
uncertainty surrounding the eligibility of this tax credit has led to 
less investment and shuttering of facilities--the opposite of the 
legislative intent of this provision.

    Can you commit to a firm timeline for releasing guidance on the 
refined coal production tax credit to provide certainty to the industry 
moving forward?

    Answer. The IRS issued this guidance on March 9, 2018.

    Question. Michigan families are extremely charitable. Eighty-five 
percent of Michigan families make charitable donations to help their 
community and those in need. Charitable giving helps feed families that 
do not have enough to eat, delivers education and support to children, 
and provides housing to those who are not fortunate enough to have a 
roof over their head.

    However, the tax bill passed last year has caused great concern 
among charitable organizations. There are countless estimates that the 
recent tax legislation could reduce charitable giving by billions of 
dollars every year. As charitable organizations scramble to try to make 
up the difference, corporations are projecting record profits.

    What data will the IRS and/or Treasury be collecting about how this 
new tax law is impacting charitable giving?

    Answer. The IRS will continue to collect and publish detailed data 
from Form 1040, Schedule A filers, including lines 16-19. This data 
will continue to be reported in detailed tables further disaggregated 
by filing status, AGI class, etc. IRS will also continue to produce 
regular statistics on the types of non-cash contributions claimed on 
Schedule A. In addition, during the 2019 filing season, the IRS will 
augment current filing season reports (released in late May, mid-July 
and mid-November on IRS.gov) to provide high-level, early statistics on 
the impact of tax law changes on filing behavior, including for example 
changes in the number of taxpayers electing the standard deduction. 
However, it is important to remember that we can only observe 
charitable contributions claimed as a deduction using data from Form 
1040 Schedule A; we will not have any information on charitable gifts 
made by individuals who claim the standard deduction.

    The IRS will also continue producing statistics on the income and 
balance sheets of charities (that file Forms 990 and 990-EZ) and 
private foundations (that file Form 990-PF). About 24 percent of all 
active, IRS-recognized charities file these information returns, and 
for them, we will be able to track changes in reported contributions 
over time. The remaining 76 percent, which include churches, religious 
organizations and organizations with annual gross receipts less than 
$50,000 are not subject to detailed filing requirements. It is also 
important to note that donations received by charities during calendar 
2018 will be reported on information returns filed in 2019 or 2020, 
depending on the accounting period adopted by each charity. This means 
that complete data on the potential impact of tax reform on charitable 
giving to organizations that have a Form 990 filing requirement will 
not be available for several years.

    Question. What percentage of people do you estimate will take the 
charitable deduction after the changes to the tax law passed at the end 
of last year?

    Answer. The IRS does not have a projection of the percentage of 
individual income taxpayers who will claim a charitable deduction for 
tax years 2018 and beyond.

                                 ______
                                 
                Questions Submitted by Hon. Bill Cassidy
                             identity theft
    Question. While your testimony noted that IRS has reduced the 
number of fraudulent returns, has the amount of improper payments 
related to those fraudulent returns also decreased? If so, by how much?

    Answer. The number of tax returns with confirmed identity theft 
declined to 597,000 in 2017, compared to 883,000 in 2016--a 32 percent 
decline. The amount of refunds protected from those fraudulent returns 
was $6 billion in 2017, compared to $6.4 billion in 2016. In 2015, 
there were 1.4 million confirmed identity theft returns totaling $8.7 
billion in refunds protected. Overall during the 2015-2017 period, the 
number of confirmed identity theft tax returns fell by 57 percent with 
more than $20 billion in taxpayer refunds being protected.

    Question. How much did Treasury dispense in improper payments 
related to fraudulent returns for the most recent year available?

    Answer. The IRS monitors the extent of identity theft refund fraud 
through our Taxonomy. This research-based effort aims to report on the 
effectiveness of IRS's identity theft defenses to internal and external 
stakeholders, help us identify identity theft trends and evolving 
risks, and refine identity theft filters to better detect potentially 
fraudulent returns, while reducing the likelihood of flagging 
legitimate tax returns.

    For 2016, refunds attributable to identity theft that were paid are 
estimated to be between $1.68 to $2.31 billion whereas identity theft 
refunds protected are estimated to be between $10.56 to $10.61 billion. 
Both estimates are lower than they were in 2015 ($2.24 to $3.34 billion 
unprotected refunds and $12.35 to $12.88 billion protected refunds).
                      trade-based money laundering
    Question. What factors does IRS consider in determining whether to 
pursue a transfer pricing audit? Is potential involvement in a trade-
based money laundering scheme considered?

    Answer. Transfer pricing audits determine whether transactions 
between related parties comply with Internal Revenue Code 482 and meet 
the arms-length standard of the section 482 regulations. Factors 
considered in determining whether to pursue a transfer pricing audit 
include the volume and type of intercompany transactions, and the risk 
for income shifting. Transfer pricing cases require a thorough analysis 
of functions, assets, and risks, and an accurate understanding of the 
related financial information. Because trade-based money laundering 
involves a process of disguising criminal proceeds through trade to 
legitimize their illicit origins, it is not the focus of transfer 
pricing audits. The IRS has, however, studied the use of trade data in 
the past to identify transfer pricing issues based on anomalies in such 
data.

    Question. What percentage of cross-border transactions are subject 
to a transfer pricing audit?

    Answer. As of February 28, 2018, approximately 1,600 out of 8,000 
open examination cases in the Large Business and International (LB&I) 
division involve transfer pricing issues. For Tax Year 2015 (returns 
filed in calendar years 2016 and 2017), the most recent year for which 
complete statistics are available, there were more than 6 million Form 
1120 series returns filed. Based on the attachment of certain 
international forms, an estimated 1.9 percent of them have the 
potential for transactions subject to transfer pricing. It is not 
possible to precisely estimate how many of these returns have cross-
border transactions because these transactions can include a wide range 
of activities, including sales of tangible and intangible property, 
certain interest payments, managerial or service fees, commissions, 
rents, royalties, and other types of payments, not all of which can be 
identified from tax data without an audit.

    Question. Please describe the extent to which IRS exchanges 
transfer pricing or other data with FinCEN, CBP, DHS, DOJ, and other 
Federal agencies to assist with their anti-trade-based money laundering 
activities.

    Answer. IRS generally does not exchange transfer pricing or other 
trade-based money laundering (TBML) data due to the restrictions 
imposed by 26 U.S.C. Sec. 6103; however, the IRS-Criminal Investigation 
(IRS-CI) special agents that are detailed to law enforcement and 
intelligence community partner agencies do at times encounter TBML-
related data and may share this data with other sections within IRS-CI.

    In addition, IRS-CI participates with other Federal law enforcement 
agencies in significant, impactful money laundering investigations 
which often have a TBML component.

                                 ______
                                 
              Questions Submitted by Hon. Claire McCaskill
    Question. The recent changes to our tax laws may create new avenues 
for tax fraud. Does the IRS have the tools needed to identify new and 
emerging threats?

    Answer. IRS uses several tools to assist in combating tax-related 
identity theft and fraud. This includes tools that are specific to 
addressing taxpayers who have been victims of a data loss of Federal 
tax information (FTI). Because the data losses involving Federal tax 
related data can be used to file returns that appear to be coming from 
the true taxpayer, IRS has implemented measures to address this. IRS's 
existing models and filters have been updated to address the level of 
sophistication used to file these fraudulent returns. We have 
implemented the use of Dynamic Selection Lists that allow IRS to 
monitor accounts of specific taxpayers who have been victims of an FTI 
data breach when the data compromised would have a direct impact on 
Federal tax administration. This allows the IRS to more effectively 
identify these suspicious returns and results in better protection for 
taxpayers' Federal tax accounts and increased revenue protection. In 
addition, there are multiple points in the processing life cycle to 
identify, prevent, and assist possible IDT victims: pre-filing, at 
filing, and post-filing.

    To prevent IDT returns from even coming in the door (pre-filing), 
we have worked with tax software providers to improve the procedures 
that new and returning customers must use to identify themselves in 
order to minimize the chance that the taxpayer's online account can be 
taken over by identity thieves. This additional security is one of the 
most visible signs of increased protection to taxpayers because they 
will notice password requirements and other website security features. 
In addition, we have implemented a variety of mechanisms to prevent 
criminals from using a deceased individual's identity information to 
perpetrate fraud. We routinely lock the accounts of deceased taxpayers 
and have locked more than 30 million accounts so far.

    At filing, our IDT and fraud detection systems contain complex 
models and filters developed from historical and newly emerging known 
fraud characteristics. Address and bank account changes as well as 
historical taxpayer filing data are characteristics that are used in 
conjunction with other filters to identify potentially fraudulent/IDT 
returns. When returns are selected by a filter, the refunds are frozen 
until additional reviews verify whether the refunds are legitimate.

    Question. In 2009, the IRS changed longstanding rules for the St. 
Louis Carpenters Pension Plan, preventing members from receiving 
pension payments while remaining in covered employment. The Vested 
Employee Pension Benefit Protection Act (S. 1080) would allow for the 
IRS to reinstate this practice for some workers. Will you commit to 
reviewing and reconsidering this earlier IRS ruling?

    Answer. Code section 6103 generally precludes us from commenting on 
questions relating to particular taxpayers. However, please let us know 
if we can provide any other information that is not subject to section 
6103.

    Question. If you recall, the Internal Revenue Service (IRS) found 
out about the Equifax breach in the news, as the rest of America did. 
Equifax claimed it didn't need to notify IRS about the breach because 
IRS data wasn't compromised. Does the IRS now require that contractors 
notify the IRS if they suffer breaches exposing data, regardless of 
whether IRS data is specifically breached? Are there other requirements 
in place for what a contractor must do if they experience a 
cyberattack?

    Answer. No, the IRS only requires contractors to notify the IRS if 
they suffer breaches exposing IRS data. However, the IRS extensively 
updated requirements (i.e., Publication 4812) to strengthen contractor 
security controls and reduce the agency's exposure to risk as a direct 
result of the Equifax data breach.

    The IRS inserts clause IR1052.224-9008--Safeguards Against 
Unauthorized Disclosure of Sensitive But Unclassified (SBU) Information 
(November 2015)--in all solicitations and resulting contracts, 
agreements and orders, if the contractor (or subcontractor) will have 
access to SBU information. This clause requires contractors who perform 
work at contractor (including subcontractor) managed sites using 
contractor or subcontractor managed IT resources to adhere to the 
guidance, requirements, and specific security control standards 
contained in Publication 4812, Contractor Security Controls; IRM 
10.23.2--Personnel Security, Contractor Investigations; and IRM 
10.8.1--Information Technology (IT) Security, Policy and Guidance.

    Below is some relevant language that describes specific reporting 
requirements in these documents:

     Excerpt from Clause IR1052.224-9008--Safeguards Against 
Unauthorized Disclosure of Sensitive But Unclassified Information 
(November 2015):
          Publication 4812, IRM 10.8.1 and 10.23.2 provide 
        comprehensive lists of all security controls and guidance.
          In addition, if the SBU information is or involves returns 
        or return information, or threatens the safety or security of 
        personnel or information systems, the contractor shall report 
        the incident/situation to the Treasury Inspector General for 
        Tax Administration (TIGTA) hotline.
          The contractor (including subcontractor) shall report any 
        incident/situation in accordance with IRM 10.8.1.4.8.5--
        Incident Reporting--to the COR. This includes a variety of 
        different levels of incidents such as the installation of 
        malicious code, unauthorized access to a system, or denial of 
        service attacks, when IRS data is breached.

     Excerpt from Publication 4812--Contractor Security and Privacy 
Controls; Section 18--Incident Response:
          A data breach is the loss of control, compromise, 
        unauthorized disclosure, unauthorized acquisition, or any 
        similar occurrence where (1) a person other than an authorized 
        user accesses or potentially accesses personally identifiable 
        information or (2) an authorized user accesses or potentially 
        accesses personally identifiable information for an other than 
        authorized purpose.

    Whenever there is a compromise of IRS information, it is important 
to contact the IRS within one (1) hour if an incident or potential 
incident has been detected. The IRS shall work closely with IRS 
contractors to quickly respond to a suspected incident of unauthorized 
disclosure or inspection.

     Excerpt from IRM 10.8.1--Information Technology (IT) Security, 
Policy and Guidance; Section 10.8.1.4.8.5 (July 8, 2015)--Incident 
Reporting:
          All IRS employees and contractors shall be responsible for 
        reducing the impact and severity of security-related incidents 
        by immediately reporting suspicious or anomalous (e.g., 
        uncharacteristic, atypical, inconsistent) events, all losses 
        and thefts of assets, and any disclosures of personally 
        identifiable information (PII) in accordance with policy and 
        procedures specified in the IRS CSIRC organization's Computer 
        Security Incident Reporting Procedures. (IRS-defined)

    In keeping with OMB directives, any incident that involves 
compromised PII must be reported to US-CERT (via the Treasury Computer 
Security Incident Response Center (TCSIRC)) within 1 hour regardless of 
the incident category reporting timeframe (TD P 85-01 App G).

    Question. Using site visits, IRS found that Equifax was mishandling 
and improperly storing IRS data, although IRS determined that none of 
the data was exposed. How did the discovery that IRS was mishandling 
data change the way IRS conducts oversight of contracts or how the IRS 
develops requirements for future contracts? What changes has the IRS 
made to its contracting practices?

    How did the discovery that IRS was mishandling data change the way 
IRS conducts oversight of contracts.

    Answer. NOTE.--The IRS was not mishandling data. Equifax was 
improperly storing IRS data in transaction log files in violation of 
contractual requirements.

    The IRS continues to use Publication 4812, Contractor Security 
Controls, as the framework and guiding principles and processes for 
conducting security assessment to monitor compliance and assess the 
effectiveness of a contractors' security controls. The Offices of 
Information Technology (IT) and Procurement collaboratively identify 
and prioritize which contracts align with critical applications 
supporting filing season. If new information technology is being 
developed in support of an IRS program, a review is conducted before 
data is shared and then included in the annual prioritization process. 
IRS IT will conduct on-site Contractor Security Assessments (in 
accordance with Publication 4812) to assess and validate the 
effectiveness of security controls established to protect IRS 
information and information systems. These assessments help to 
determine if, and when, additional controls or protections are 
necessary to protect returns and return information or personal 
privacy, or other SBU information, and organizational assets and 
operations.

    Question. How did the discovery that Equifax was mishandling data 
change how the IRS develops requirements for future contracts?

    Answer. The IRS is undertaking various initiatives to improve 
requirements definition and the procurement process, as well as 
strengthen contract administration by the Contracting Officers 
Representative. For example, we have instituted an innovative method 
for bringing the entire acquisition team together early in the 
procurement process to discuss and define requirements, adjudicate 
issues/concerns, leverage ``wisdom of crowds,'' and document complete 
and accurate acquisition packages and milestone timelines. The 
acquisition team consists of the contracting officer, requirements 
owner (business unit and/or IT), legal counsel, policy/quality 
assurance specialist, and cost and price analyst. Other subject matter 
experts (such as other Bureaus if Treasury-wide) participate, depending 
on the requirement, risk, complexity, magnitude, and scope. This is 
called a Procurement Innovation Team. Additionally, the IRS 
Cybersecurity team identifies a single point of contact to assist 
Procurement in understanding any unique or complex security issues. 
This has improved collaboration and knowledge sharing across all 
organizations. Furthermore, the Office of Procurement Policy is leading 
a review of all IRS-specific clauses to verify accuracy, confirm 
language and requirements are up-to-date, and ensure prescription(s) 
for use are precise.

    Question. What changes has the IRS made to its contracting 
practices?

    Answer. The IRS has taken a number of steps to improve its 
contracting practices, including the development of a new Procurement 
Strategic Framework. It includes 31 key initiatives to promote 
proactive, data-driven actions that increase transparency and 
accountability, improve productivity, and cultivate an agile workforce 
with the skills to adapt to an evolving acquisition environment. Below 
are a few examples of actions underway:
Acquisition Planning
    Acquisition planning is the process by which the efforts of all 
personnel responsible for an acquisition are coordinated and integrated 
through a comprehensive plan for fulfilling the agency need in a timely 
manner and at a reasonable cost. We are proactively engaging 
requirements owners earlier in the acquisition process to strengthen 
our ability to identify and develop customer requirements, as well as 
to improve long-term acquisition planning. This includes a specific 
focus on identifying requirements vulnerable to a cybersecurity attack 
to assure all required clauses are included in the solicitation and 
resulting contract.
Risk Identification and Mitigation
    The framework includes the identification of potential risk areas 
for key acquisitions and the development of strategies to better 
mitigate these risks. We are collaborating with Treasury's Office of 
the Procurement Executive to develop risk-based criteria for reviews/
approvals instead of using total dollar value as the main determining 
factor for senior level oversight. Additionally, the Chief Procurement 
Officer (CPO) initiated a simple method (i.e., CPO Critical Information 
Requirements) for contracting staff, at any level, to elevate a 
potential risk or issue immediately through the chain of command.
Use of Government-wide Contracts
    We have developed an implementation plan to migrate actions from 
IRS stand-alone vehicles to government-wide and Best-In-Class 
contracts. This approach leverages best industry practices and allows 
the IRS to benefit from economies of scale. The plan is continually 
reviewed and new actions are added as requirements are received.
Business Process Improvements
    We are streamlining and simplifying processes to improve efficiency 
and flexibility of procurement operations. This includes taking steps 
to reduce higher-risk procurement methods, including the use of bridge 
contracts. We drastically reduced our procurement policies and 
procedures by deleting over 800 pages of redundant, outdated or overly 
complex requirements. Additionally, we are automating the pre-
solicitation review processes to decrease administrative burden and 
lessen procurement action lead time.

    Question. The Federal Information Technology Acquisition Reform Act 
(FITARA) requires agencies, and specifically Chief Information Officers 
of agencies, to conduct risk assessments when procuring information 
technology goods or services. What type of risk assessments did the IRS 
conduct when reviewing the bid proposals for the contract currently 
held by Experian?

    Answer. The contract with Experian was awarded against GSA schedule 
520, Financial Business Solutions, as a professional services contract 
and therefore not subject to FITARA.

    Prior to making an award to Experian on July 5, 2017, IRS validated 
Experian met basic connectivity and transaction interface requirements. 
After award, we planned to perform a comprehensive on-site security 
review with Experian prior to sharing data; however, it was put on hold 
because the protest filed by Equifax on July 7, 2017 triggered an 
automatic stay of performance with Experian. Immediately following 
GAO's decision to deny the protest on October 16, 2017, IRS conducted 
the review as previously planned with Experian. The results identified 
16 findings, including one high risk finding. Experian was given 30 
days to remediate the findings. The IRS conducted a follow-up review on 
November 30, 2017 and validated that Experian had corrected 9 findings 
including the high-risk finding prior to going live. An additional on-
site review was performed on March 2, 2018. There are 3 outstanding 
moderate findings remaining, and the low finding is no longer 
applicable to the environment.

    Question. When IRS issued the bridge contract to Equifax, it 
clearly did not have all of the information it needed to understand the 
full extent of the security issues. It also seemed that IRS did not 
build in enough time to account for a possible bid protest. What steps 
has IRS taken to improve the acquisition planning process to ensure 
that bridge contracts are truly an option of last resort?

    Answer. We are developing a new Procurement Strategic Framework 
with key initiatives that focus on strengthening the IRS's ability to 
identify and develop customer requirements. An emphasis is on earlier 
customer engagement in the planning process between Procurement and the 
customer to ensure acquisition strategies are executable, mandatory 
contract vehicles are identified, and milestones are defined and agreed 
to in order to eliminate the need for short-term contract actions. 
Additionally, we are providing concentrated training in areas that will 
directly reduce the chance of a protest, such as how to perform best 
value tradeoffs and how to perform a debriefing after award. Lastly, we 
are increasing transparency and outreach to industry partners by 
posting information on FedBizOps, issuing requests for information and 
draft solicitations, and holding requirement-specific industry days.

    Question. The Senate Homeland Security and Governmental Affairs 
Committee recently approved my bill, S. 2413, to bring greater 
accountability and transparency to bridge contracts.

    Notably, the bill requires amending the Federal Acquisition 
Regulations to develop a common definition of bridge contracts, 
increases reporting requirements for agencies on their use of bridge 
contracts, holds senior officials accountable for approving of long-
term bridge contracts, and requires public notice when an agency enters 
into a bridge contract. I believe that this will help to avoid the 
situation the IRS faced with Equifax. Can you provide a current list of 
all bridge contracts that the IRS has entered into in the past year, 
broken down by category of contract, and the amounts and duration of 
those bridge contracts? What assurances can you provide the committee 
that the IRS has strengthened its acquisitions and contracting program 
to avoid a similar instance to the Equifax data breach and bridge 
contract incident?

    Answer. Neither the IRS contract writing system nor the Federal 
Procurement Data System (FPDS) currently has the capability to 
distinguish a bridge contract from other types of contracts.

    The IRS takes risk management and security issues very seriously 
and is committed to fulfilling its mission while safeguarding the 
public's trust. We have taken the opportunity to learn from the Equifax 
situation and implemented several process improvements and safeguards 
across the agency. Below are a few examples of actions underway.
Procurement Strategic Framework
    The Office of Procurement is crafting a deliberate strategic 
framework that includes 31 tactical initiatives to enhance internal 
operations and promote proactive, data-driven actions that increase 
transparency and accountability, improve productivity, and cultivate an 
agile workforce with the skills to adapt to an evolving acquisition 
environment.
Earlier Engagement
    The Office of Procurement is proactively engaging requirements 
owners earlier in the acquisition process to strengthen the IRS's 
ability to identify and develop detailed requirements, as well as 
improve long-term acquisition planning. This includes a new initiative 
that Procurement has instituted for bringing the entire acquisition 
team together earlier in the acquisition process to discuss 
requirements, adjudicate issues/concerns, leverage ``wisdom of 
crowds,'' and document complete and accurate acquisition packages and 
milestone timelines. This method is called a Procurement Innovation 
Team (PIT).
Elevation of Issues Quickly
    Ensuring information is elevated to the highest levels of the 
organization quickly has been instituted within the Office of 
Procurement. The Chief Procurement Officer (CPO) established a process 
(i.e., CPO Critical Information Requirements) whereby an employee, at 
any level, can elevate information, unimpeded, through the chain of 
command as soon as an issue/concern is recognized. This will allow an 
opportunity for executive involvement and influence prior to actions 
being executed.
Incident Response Team
    The value of immediately standing up a multi-disciplinary team with 
all stakeholders has proved beneficial in sharing information timely 
and synchronizing various actions. While we recognize this is employed 
after an incident has occurred, it is a critical component of our risk 
mitigation strategy.

                                 ______
                                 
               Question Submitted by Hon. Robert Menendez
    Question. Mr. Commissioner, in October, 32 members of the House 
Ways and Means Committee--both Republicans and Democrats--sent a letter 
to the Treasury Department asking it withdraw IRS Notice 2007-55 which 
was issued over a decade ago and continues to deter foreign investment 
in the United States. The notice relates to the Foreign Investment in 
Real Property Tax Act, or FIRPTA. In short, the notice treats certain 
distributions from REITs as the sale of REIT assets rather than the 
sale of REIT stock. The result is that the distributions are subject to 
tax rates as high as 54 percent. The practical effect is to raise the 
tax burden on investors in U.S. commercial real estate and 
infrastructure to levels that are punitive and prohibitive. Cal-
Berkeley professor and economist Ken Rosen recently estimated that 
FIRPTA costs the United States between $65-125 billion in lost 
investment and between 147,000-284,000 in lost jobs. This is an 
infrastructure issue--FIRPTA blocks private investment in U.S. 
infrastructure. Repealing IRS Notice 2007-55 is a simple and immediate 
thing that the administration could do to boost private investment in 
U.S. real estate and infrastructure.

    Many of us have been working on this issue for years--no senior 
official seems willing to defend the current notice, but it just keeps 
getting kicked down the road.

    Could you review this matter and let us know within 30 days, in 
writing, whether you will repeal section two of the Notice and restore 
prior law, as dozens of members of Congress have encouraged?

    Answer. Thank you for your inquiry. IRS is aware that this long-
standing issue is a priority for many members of Congress. We look 
forward to continuing dialogue with the Treasury Department, members of 
Congress, and other stakeholders as we work on this issue.

                                 ______
                                 
                 Prepared Statement of Hon. Ron Wyden, 
                       a U.S. Senator From Oregon
    Less than 2 months ago, Republicans passed legislation making $10 
trillion in tax changes virtually on the fly--the biggest tax overhaul 
in 3 decades, requiring a web of complicated rule changes. Now they're 
giving short shrift to the IRS, which is the agency that actually has 
to implement those changes and provide service to American families and 
businesses based on the new rules.

    The IRS said it would need nearly $400 million to implement the new 
law, but the Trump budget held the agency's funding flat. The budget 
makes a fake reference to increasing enforcement dollars, but it kicks 
the actual decision to appropriators in Congress who are unlikely to 
fork over the necessary resources. And that comes at a time when tax 
cheats are looking at the Trump tax law and licking their chops, 
planning complicated new schemes of abusing the rules to get out of 
paying their fair share. Particularly with the new passthrough 
loophole, the law is an open invitation for scamsters to game the 
system, leaving a heavier burden for Americans who do follow the rules.

    This isn't an academic matter. Denying the IRS the resources it 
needs to be an effective agency impedes its ability to serve the 
American people, and the Trump administration knows it. By the 
administration's own projections, as a result of continued budget cuts 
for taxpayer service, fewer than half the people who pick up the phone 
to call the IRS for filing services in 2019 will get through, down from 
75 percent in 2018. And that's with lawmakers on both sides already 
bemoaning poor service provided to taxpayers by the IRS.

    Bottom line, the IRS might not be anybody's favorite Federal 
agency, but Americans expect it to function without political agenda or 
interference. That brings me to another issue I need to address this 
afternoon.

    Mr. Kautter, who is here with the committee this afternoon in the 
throes of tax filing season, is the acting IRS commissioner. That is 
supposed to be a non-partisan job, overseeing the administration of tax 
law. But Mr. Kautter is also currently the assistant secretary for tax 
policy, which in this administration is about as partisan a position as 
they come.

    This committee recently spent years investigating accusations of 
political interference at the IRS. That bipartisan investigation 
determined that sloppy work by IRS officials led to both conservative 
AND progressive tax-exempt groups being subjected to unfair scrutiny. 
And in my view, both sides would agree that the IRS should be politics-
free when it's administering the law. I recall a lot of insistent 
speeches to that effect, particularly from my Republican colleagues. 
But now that the party in control of the White House has flipped, 
there's a Republican political appointee running IRS at the very same 
time it's implementing a monumentally complicated and partisan law his 
department helped write.

    In December, I wrote a letter to Mr. Kautter asking how he would 
guarantee their politics aren't bleeding into IRS, what policies or 
safeguards have been created to avoid conflicts of interest, any 
guidance regarding communication between the White House and IRS, and 
much more. I have not received a response to my specific questions. 
Given the energy and focus this committee has placed on the issue of 
political influence at IRS in the recent past, it would be awfully 
hypocritical not to take it seriously now.

                                 ______
                                 

                             Communication

                              ----------                              


       American Institute of Certified Public Accountants (AICPA)

                      1455 Pennsylvania Avenue, NW

                       Washington. DC 20004-1081

                 T: +1 202-737-6600 F: +1 202-638-4512

   https://www.aicpa-cima.com | https://www.cimaglobal.com | https://
                  www.aicpa.org | https://www.cgma.org

INTRODUCTION

The American Institute of CPAs (AICPA) appreciates the leadership taken 
by the Senate Finance Committee for your commitment to ensuring the 
success of the new tax reform laws and for considering various 
approaches to enable the Internal Revenue Service (IRS or ``Service'') 
to implement those changes while providing quality service to 
individuals and businesses, as well as their advisers.

As taxpayers face a period of uncertainty regarding the sweeping tax 
law changes of Pub. L. No. 115-97, it is critical that the IRS has the 
appropriate resources to proceed as a modern functioning agency that 
will issue immediate guidance on priority issues,\1\ focus on the needs 
of taxpayers and tax preparers,\2\ and implement the legislation in an 
effective and efficient manner.
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    \1\ See AICPA letter, ``Request for Immediate Guidance Regarding 
Pub. L. No. 115-97,'' January 29, 2018.
    \2\ See AICPA statement, ``What the Taxpayers Want or Need From the 
IRS to Comply With the Tax Laws,'' May 17, 2016.

In this statement, we provide a series of recommendations that will 
strengthen tax administration and improve compliance programs while 
protecting the public. An effective tax administration system should 
include proper governance and oversight, proficient taxpayer services 
and a practitioner-focused services unit, which can collectively 
improve the taxpayer experience while streamlining the tax 
administration system. Furthermore, the regulation of tax return 
preparers and the limited use of contingency fees are necessary to 
promote voluntary compliance and protect taxpayer rights.

RECOMMENDATIONS

1. IRS Governance and Oversight

As practitioners with vast experience working with the IRS, we have 
incorporated the lessons learned and built upon the foundation 
established by the report of the National Commission on Restructuring 
the IRS (``Restructuring Commission'' or ``commission'') and outline 
below governance and oversight recommendations to shape the agency of 
the future that everyone desires.

Governance Objectives. Successful governance of the IRS will include 
strong leadership, accountability, and transparent policies working 
collectively towards needed change. In order to hold the IRS 
accountable, the agency's governance, management and oversight 
structure must:\3\
---------------------------------------------------------------------------
    \3\ The National Commission of Restructuring the Internal Revenue 
Service, ``A Vision for a New IRS: Report of the National Commission on 
Restructuring the Internal Revenue Service,'' June 25, 1997, page 8.

      Develop and maintain a shared vision among all personnel and 
stakeholders with continuity;
      Set and maintain consistent priorities and strategic direction;
      Impose accountability on senior management;
      Develop appropriate measures of success;
      Ensure that the budget and technology support priorities and 
strategic direction; and
      Coordinate oversight and identify problems at an early stage.

Congressional Oversight. Congressional oversight is a critical process 
in ensuring executive branch compliance with laws, evaluating 
performance, and providing the transparency necessary to maintain the 
public's trust. We recommend reestablishing the annual joint hearing 
review \4\ to focus on the following priorities: (1) strategic and 
business plans; (2) taxpayer service and compliance; (3) technology and 
modernization; and (4) filing season.
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    \4\ Pub. L. 105-206, sec. 4002, expanded IRC section 8022(c) 
regarding reporting by the Joint Committee on Taxation. Pub. L. 108-311 
(October 4, 2004) modified this provision by removing the specifics 
required for the annual report and eliminating the joint review after 
2004 (also see IRC section 8021(f)). A statutory change is needed to 
reinstate the required joint review.

As once required by statute,\5\ the Joint Committee on Taxation should 
provide a bi-annual report on the overall state of the Federal tax 
system.\6\ However, the statute stipulates that the report is only 
required if the necessary resources are appropriated to carry out the 
requirement. Such a report would contribute to stability at the IRS and 
assist it in achieving its mission. Therefore, we urge Congress to 
appropriate the necessary funds for the report.
---------------------------------------------------------------------------
    \5\ Id.
    \6\ IRC section 8022(3).

IRS Oversight Board. The IRS Oversight Board was intended to provide 
experience, independence, and stability to assist the IRS in moving 
forward in a focused direction. However, the board received criticism 
for being ``ineffective'' and ``missing in action'' in achieving its 
stated mission,\7\ and suspended operations due to an insufficient 
number of members to constitute a quorum.
---------------------------------------------------------------------------
    \7\ Morningstar, Inc., ``The IRS Has no Independent Oversight This 
Tax Season,'' April 18, 2016.

We recommend that Congress require a Government Accountability Office 
(GAO) review of the private sector board and determine if it is an 
essential component to providing the trust and continuity that will 
allow the IRS to become a respected, service-oriented organization. The 
GAO could provide recommendations to ensure the board has sufficient 
authority to (1) hold the IRS accountable for successfully fulfilling 
its mission; (2) oversee the implementation of key recommendations from 
advisory groups; and (3) ensure the IRS remains independent and non-
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partisan.

Human Resources. Congress should enable and encourage the IRS to 
utilize the full range of available authorities to hire and compensate 
qualified and experienced professionals from the private sector, as 
needed, to improve the Service's ability to meet its mission. It is 
also crucial for the IRS to designate a senior-level executive 
dedicated to overseeing and collaborating with the practitioner 
community in creating a practitioner services unit (see discussion 
below).

2. IRS Taxpayer Service

Congress should determine the appropriate level of service it desires 
and that is needed by the IRS, and dedicate the appropriate resources 
for them to meet these goals. Agreed upon measures of success are 
necessary to improve both customer service and voluntary compliance.

To instill trust in the tax administration system, we recommend 
taxpayer service goals based on the following two guiding principles:

      The IRS should only initiate contact with a taxpayer if the IRS 
is prepared to devote the resources necessary for a proper and timely 
resolution of the matter.
      Customer satisfaction must be a goal in every interaction the 
IRS has with taxpayers, including enforcement actions. Taxpayers expect 
quality service in all interactions with the IRS, including taxpayer 
assistance, filing tax returns, paying taxes, and examination and 
collection actions.\8\
---------------------------------------------------------------------------
    \8\ Verbatim quote of the two guiding principles, The National 
Commission of Restructuring the Internal Revenue Service, ``A Vision 
for a New IRS: Report of the National Commission on Restructuring the 
Internal Revenue Service,'' June 25, 1997, page 23.

Resources necessary. Appropriate hiring, adequate training, skillful 
management, and the necessary technological tools are essential for the 
IRS to meet its responsibilities. The leaders of the IRS must have the 
experience and skills to motivate their workforce and lead them to the 
realization of the desired vision. Organizational alignment from 
Congress, the President, the Commissioner, and through the ranks of the 
---------------------------------------------------------------------------
IRS, is necessary to delivering the promised goals.

Furthermore, to enable the IRS to achieve the improvements required for 
a 21st-century tax administration system, the IRS needs a modern 
technological infrastructure. Currently, the IRS has two of the oldest 
information systems in the Federal Government making the information 
technology function one of the biggest constraints overall for the 
IRS.\9\ Without modem infrastructure, the IRS is unable to timely and 
efficiently meet the needs of taxpayers and practitioners.
---------------------------------------------------------------------------
    \9\ National Taxpayer Advocate, ``Annual Report to Congress 2016, 
Executive Summary: Preface, Special Focus and Highlights,'' 2016, page 
31-32. The report references a 2016 GAO report (GAO-16-468) which found 
that some of the technology the IRS still relies on was first placed in 
use 56 years ago.

Customer satisfaction. Measurement tools are required to achieve 
customer satisfaction goals, including fairness in enforcement. The IRS 
made significant progress in measuring taxpayers' opinions in the years 
following the issuance of the Restructuring Commission. However, in 
recent years, the Service has stopped reporting on customer 
satisfaction surveys and analysis. We recommend that customer 
satisfaction surveys, gauging performance at all levels within the IRS, 
continue as an appropriate success measure. Congress should utilize the 
survey results during the oversight and appropriations processes to 
---------------------------------------------------------------------------
ensure the Service is continually meeting the needs of taxpayers.

A service-focused approach, with taxpayer education in mind, will 
require the IRS to take into consideration the needs of both tax 
practitioners and un-represented taxpayers, and the varying methods 
needed to interact with them.

3. IRS Practitioner Services Unit

The IRS should create a new dedicated ``executive-level'' practitioner 
services unit that would centralize and modernize its approach to all 
practitioners. Over time, the IRS has established a number of 
functional departments. These individuals are dispersed across the IRS 
and are not coordinated in a manner that enables practitioners to 
timely access critical information (such as their clients' account 
status or the availability of dispute resolution opportunities). Nor do 
the current teams or processes systematically solicit, gather or 
evaluate practitioner feedback. Enhancing the relationship between the 
IRS and practitioners would benefit both the IRS and the millions of 
taxpayers served by the practitioner community.

A dedicated practitioner services unit would allow the IRS to 
rationalize, enhance, and place under common management the many 
current, disparate practitioner-
impacting programs, processes, and tools. Moreover, by centralizing 
these programs, IRS employees would have a consolidated approach to 
timely resolving issues. This coordination and improved access of 
information would prevent unnecessary delays and inefficiencies (such 
as requiring practitioners to submit the same information multiple 
times to multiple IRS employees). Finally, to ensure success of the 
practitioner services unit, it is essential for these services to 
approximate comparable private sector services and allow practitioners 
to resolve account issues for their clients in a timely and efficient 
manner.

Online tax professional account. The IRS should provide tax 
practitioners with a tax professional account as part of the IRS's 
online portal with account access to all of their clients' information 
(both individual and business accounts) where the practitioner has a 
valid power of attorney (POA) on file. Additionally, the secure tax 
professional account should allow the IRS to communicate directly to 
practitioners the information necessary to improve taxpayer awareness 
and allow practitioner correspondence with timely acknowledgement of 
receipt.

Furthermore, a centralized login system allowing for single sign-on 
authentication of the practitioner and immediate access to all client 
data, as opposed to practitioner authentication before accessing each 
client's account, is an indispensable efficiency for the IRS and 
practitioners alike.

Secure platform. The development of the online portal should include a 
comprehensive, agile platform that protects users' identities and their 
data, detects threats and immediately responds to potential security 
breaches. In order to enhance taxpayer protection, practitioners who 
want access to taxpayer accounts should consent to guidelines such as 
Circular 230 or other similarly approved requirements. Professional tax 
practitioners can become particularly active and safe users of online 
services if the IRS invests early in providing a digital mechanism for 
POA and disclosure authorization and creates practitioner accounts 
contemporaneously with individual online accounts.

To continue to improve efficiency, the IRS should also focus its 
attention on replacing the Centralized Authorization File with a 
consolidated online solution utilizing electronic signatures and an 
algorithmic-driven approval process that is as close to real time as 
possible.

Robust practitioner hotlines. IRS should provide practitioners with a 
robust practitioner priority hotline (or hotlines) with higher-skilled 
employees. These employees should have the experience and training to 
understand and address more complex technical and procedural issues. 
This expertise would allow the IRS to focus its training on a 
particular technical area allowing designated employees to resemble its 
counterparts in the private sector. The IRS should also consider hiring 
experienced people, such as, graduate students or retired practitioners 
seeking part-time or seasonal employment.

Designated customer service representatives. Under the practitioner 
services unit, the IRS should assign customer service representatives 
(also known as a single point of contact) to each geographic area to 
address unusual or complex issues that practitioners were unable to 
resolve through the priority hotlines. We recommend allocating the 
number of representatives based on the number of practitioners in a 
specific geographic area.

4. Regulation of Tax Return Preparers

The AICPA has always been a steadfast supporter of the goals of 
enhancing compliance and elevating ethical conduct. We support the use 
of a preparer tax identification number (PTIN) for all signing tax 
preparers, and subjecting all tax preparers to Circular 230. To help 
protect the interests of taxpayers, the AICPA thinks Congress should 
provide the IRS with a focused and well-defined approach to the 
regulation of tax return preparers with Congressional oversight.

Subjection of all tax preparers to Circular 230. Requiring tax return 
preparers to follow the Circular 230 standards of conduct as delineated 
in the Internal Revenue Service Return Preparer Review report is 
essential \10\ In the report, the IRS proposed requiring:
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    \10\ Internal Revenue Service Return Preparer Review, December 
2009, page 37.

        . . . all signing and non-signing \11\ tax return preparers to 
        comply with the standard of conduct in part 10 of title 31 of 
        the Code of Federal Regulations and reprinted in Treasury 
        Department Circular 230. The authority of attorneys, certified 
        public accountants, enrolled agents, enrolled actuaries and 
        enrolled retirement plan agents to practice before the IRS will 
        not change from the authority they have under current Treasury 
        Department Circular 230.
---------------------------------------------------------------------------
    \11\ See AICPA comment letter, ``Chairman's Mark of a Bill to 
Prevent Identity Theft and Tax Refund Fraud,'' September 15, 2016, 
position on ``Limitation on IRS's Authority to Require a PTIN,'' page 
6.

        The remaining tax return preparers will be authorized to 
        prepare returns and to represent a client before the IRS during 
        an examination of any return that the tax return preparer 
        prepared for the client as they are currently permitted under 
        the limited practice provisions in section 10.7(viii) of 
        Treasury Department Circular 230. The conduct of the tax return 
        preparer in connection with the preparation of the return and 
        any representation of the client during an examination will be 
        subject to standard of conduct in Treasury Department Circular 
        230. Further, inquiries into possible misconduct and 
        disciplinary proceedings relating to tax return preparer 
        misconduct will be conducted under Treasury Department Circular 
---------------------------------------------------------------------------
        230.

Defined parameters for examination and continuing education. Congress 
should mandate that the IRS enact a testing and continuing education 
program similar to the registered tax return preparer program in effect 
prior to Loving v. IRS that would apply exclusively to ``unenrolled 
preparers.'' The one-time basic 1040 ``entrance'' examination to ensure 
competency in individual income tax return preparation and the 
requirement for unenrolled preparers to satisfy 15 hours of annual 
continuing education were both appropriate and necessary to protect 
taxpayers from incompetence and misconduct, while not raising the bar 
so high that there are an insufficient number of preparers to assist 
taxpayers wanting and needing such assistance. Specific parameters and 
limitations regarding an examination and continuing education are also 
appropriate to ensure a tax return program does not expand beyond 
Congress's goals of protecting the public from incompetent and 
unscrupulous tax return preparers.

Limitation on IRS's Authority to Require a PTIN. Congress should limit 
the IRS's authority to require a PTIN. In order to protect the 
interests of the public, the IRS should track (through the use of the 
PTIN) all individuals that sign a tax return. However, in order to 
prevent potential overregulation and duplicative filing obligations, 
Congress should (i) exclude non-signers from the requirement to obtain 
a PTIN if those non-signers are supervised by an attorney, CPA, or 
enrolled agent; and (ii) the supervising professional signs the tax 
returns or claims for refund prepared by the individual. Such an 
exclusion from the current PTIN system would recognize the inherent 
regulatory regime within which CPAs and other Circular 230 legacy 
practitioners already practice, as well as the fact that CPA firms must 
stand, as a matter of licensure, behind the work done by the members 
and employees of their firms.

Authorization to Revoke PTINs. The IRS could more effectively utilize 
their current PTIN system to protect the public from incompetent and 
fraudulent tax return preparers. We, therefore, recommend that Congress 
grant the IRS specific authority to revoke a PTIN to efficiently 
prevent unqualified and unscrupulous preparers from continuing to file 
inaccurate and fraudulent tax returns.

GAO Study on IRS's Exchange of Information With State Taxing 
Authorities. The AICPA supports directing a GAO study on the impact of 
increasing the exchange of information relating to return preparers 
between the IRS and state taxing authorities. Such exchange of 
information (for example, a list of revoked PTINs and the reasons for 
the revocations) would improve tax administration by reducing duplicate 
government resource expenditures and increasing taxpayer compliance.

Mitigation of Marketplace Confusion. Congress should also require the 
IRS to take steps to mitigate marketplace confusion. For example, prior 
to Loving v. IRS, the IRS recognized the potential for marketplace 
confusion when it required subjecting the currently-unenrolled 
community to the guidance in Notice 2011-45, 2011-25 IRB 886, with 
regard to advertising restrictions.

5. Contingent Fees

Finally, the AICPA opposes any expansion of the use of contingent fee 
arrangements which are not in the best interest of the public. The 
AICPA's Code of Professional Conduct and State Boards of Accountancy 
have rules addressing the appropriate use of contingent fees in tax 
practice and allow for contingency fees on a limited basis. Allowing 
tax preparers a financial interest in a tax return (in other words, a 
contingent fee arrangement), encourages tax preparers to take positions 
that increase their fee rather than positions supported by the law. The 
AICPA is available to work with Congress and the IRS in addressing 
adequate use of contingent fees.

CONCLUDING REMARKS

The AICPA appreciates the opportunity to submit a statement for the 
record. We look forward to working with the Committee to ensure that 
the IRS has the appropriate resources needed to implement the extensive 
tax law changes through a modernized and effective tax administration 
system.

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.

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