- THE 2018 TAX FILING SEASON AND FUTURE IRS CHALLENGES

[Senate Hearing 115-628]
[From the U.S. Government Publishing Office]

S. Hrg. 115-628

THE 2018 TAX FILING SEASON
AND FUTURE IRS CHALLENGES

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HEARING

BEFORE THE

COMMITTEE ON FINANCE
UNITED STATES SENATE

ONE HUNDRED FIFTEENTH CONGRESS

SECOND SESSION

__________

APRIL 12, 2018

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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

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OPENING STATEMENTS

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

ADMINISTRATION WITNESS

Kautter, David J., Acting Commissioner, Internal Revenue Service;
and Assistant Secretary for Tax Policy, Department of the
Treasury, Washington, DC....................................... 4

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Hatch, Hon. Orrin G.:
Opening statement............................................ 2
Prepared statement........................................... 11
Kautter, David J.:
Testimony.................................................... 4
Prepared statement........................................... 12
Responses to questions from committee members................ 16
Thune, Hon. John:
``The Wages of Tax Reform Are Going to America's Workers,''
by Kevin Hassett, The Wall Street Journal, April 18, 2018.. 44
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 45

Communications

Center for Fiscal Equity......................................... 47
Desai, Anand..................................................... 48
Electronic Privacy Information Center (EPIC)..................... 49
Goding, Susan.................................................... 51

(iii)

THE 2018 TAX FILING SEASON
AND FUTURE IRS CHALLENGES

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THURSDAY, APRIL 12, 2018

U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:15
a.m., in room SD-215, Dirksen Senate Office Building, Hon.
Orrin G. Hatch (chairman of the committee) presiding.
Present: Senators Thune, Heller, Wyden, and Whitehouse.
Also present: Republican staff: Chris Armstrong, Chief
Oversight Counsel; and Alex Monie, Professional Staff Member.
Democratic staff: Joshua Sheinkman, Staff Director; Tiffany
Smith, Chief Tax Counsel; Adam Carasso, Senior Tax and Economic
Advisor; and Sarah Schaefer, Tax Policy Advisor for Small
Business and Pass-throughs.
The Chairman. The committee will come to order.
We are going to start with my partner today, because he has
to get back to the floor. And then I will give my statement
after he finishes his.

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

Senator Wyden. Mr. Chairman, I just want to thank you for
your courtesy. You always go to such great lengths to give me
the opportunities to juggle a hectic schedule. And the majority
leader, Senator McConnell, and I are getting ready to introduce
our big agriculture bill in just a few minutes. So I appreciate
having a chance to make this opening statement. And I will keep
it brief, and then I will come right back after the majority
leader and I are finished.
The Chairman. Sure.
Senator Wyden. The annual hearing on tax filing typically
inspires the level of enthusiasm most people bring to a
prolonged root canal procedure. But this year, there are tax
policy issues with serious consequences for millions of
Americans.
First, our small businesses are increasingly stuck in a
bureaucratic twilight zone. There is rampant confusion about
how the new tax law works, untested policies, sloppy
legislative drafting, and outright mistakes in the law.
On top of that, there is a Trump Cabinet turf battle that
has added to the uncertainty and lengthened the time that small
businesses are going to be in the dark about how the tax rules
apply to them.
So here is the bottom line: estimated tax payments are due,
but millions of small businesses do not know how to estimate
what they owe.
The owner of a restaurant known as a local landmark, the
highly regarded mechanic whose expertise has built a loyal base
of regular customers, the finish carpenter whose sought-after
work is prized for its sturdiness and good looks, they are all
mired in this tax code mystery zone while Trump officials go 12
rounds over who is going to get the final say on the
regulations.
I understand there has been news on this issue this
morning. The fact is, deadlines for guidance from the
administration are slipping. Tax experts are so unsure of the
road ahead that they are advising small-business clients to
bump up their estimated payments from last year just to be
safe.
Now, it is important that we understand that certainty was
one of the most important selling points of the tax bill. There
would be sure footing for businesses to focus on growing and
hiring rather than deciphering a byzantine, outdated tax law.
The magical growth effects were going to kick in right away;
workers were going to see the big raises.
The fact is, the reality looks awfully different.
All of this confusion and delay, by the way, has created
another golden opportunity for powerful lobbyists and special
interests to creep in and twist the rules in their favor. They
will be after more exclusive carve-outs and sweetheart deals,
exactly the kind of favoritism that Americans want eliminated
from our tax law. And the likelihood they will be able to
exploit these tax loopholes is even greater than in the past
because taxpayer audits have fallen to a 15-year low. And the
audits of the high-income earners have dropped the most.
I want to thank Acting Commissioner Kautter for joining the
committee here today. I want to apologize to him for the bad
manners. I will return as soon as we have gotten the bill
introduced with the majority leader.
As I said at the outset, I would wager that most Americans
would think that a hearing on a tax filing season was about as
sleep-inducing as it gets on Capitol Hill.
But I do think this morning we have a chance to uncover
important information about what is ahead for taxpayers this
year, and going forward, as the law, according to the sponsors,
was supposed to be implemented.
Mr. Chairman, I want to again thank you for being so
gracious. And I will return just as soon as we have finished
our work with the majority leader. And I look forward to
working with you on these issues and the rest of our agenda.
The Chairman. Well, thank you, Senator.
[The prepared statement of Senator Wyden appears in the
appendix.]

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

The Chairman. Good morning, and I want to welcome everybody
to today's hearing. This is indeed an exciting time. And I am
grateful Acting Commissioner Kautter could be here today to
talk with us about the 2018 tax filing season, tax reform, and
the challenges and opportunities before the IRS.
As we all know, the IRS is the one agency in our Federal
Government upon which virtually all other Federal activities
depend. The reason for that is simple: the IRS collects the
Federal revenue required to keep the government functioning.
This is an important function in our government and a function
where process really matters. Therefore, it is critical that
the IRS collect the revenue under our new tax laws in a fair,
efficient, and effective manner.
When we drain the IRS of resources and handicap its ability
to collect revenue, that is not merely a loss in revenue for
the Federal Government, it also means that the Treasury must
borrow more money, causing our country to go further into debt.
That is because the Federal Government does not shrink when the
IRS fails to collect taxes owed.
Therefore, handicapping the IRS is also saddling future
generations with billions of dollars of debt that they are
going to have to repay, one way or another.
But having said that, let me be clear: the IRS stands at a
crossroads. On the one hand, the IRS has made marked
improvements in recent years, including catching more identity
fraud, preventing more fraudulent returns, and moving forward
to implement the multitude of tax law changes that have
occurred, including the most comprehensive tax reform in a
generation.
But on the other hand, it is an agency stuck in the past.
It relies on software and core processing systems designed
during the Kennedy administration. IRS employees routinely have
to manually input return information into agency computers and
often require taxpayers to send information via fax machine.
Now, with that said, the IRS is staffed by many of the
government's most dedicated, hardest-working civilians, many of
whom work in my home State, back in Ogden, UT, yet there are
some bad apples who have hurt the service's standing back here
in Congress.
Mismanagement, taxpayer abuse, and discrimination against
certain taxpayers are all-too-recent memories for those of us
who oversee the agency. Nonetheless, it is high time that we
work together, as Republicans and Democrats, to help the IRS
modernize itself to meet the challenges of the 21st century.
We need to do this to promote bipartisanship, but also to
keep the IRS accountable and moving on the right track to best
serve hardworking American taxpayers.
That is why, this week, I am watching the House Ways and
Means Committee as they mark up legislation to reform several
aspects of the IRS. I appreciate their efforts on that front.
And I look forward to working with my good friend and colleague
Senator Wyden as we explore legislative options here in the
Senate.
I am confident that we can find meaningful bipartisan
solutions that will help the IRS perform its duties while still
remaining clearly under congressional supervision.
Acting Commissioner Kautter has been doing an admirable job
leading the agency. On his watch, taxpayer and fraud prevention
services have made noticeable gains and are truly great success
stories. But it is time we get Mr. Kautter back to his other
full-time day job as the Assistant Secretary for Tax Policy.
As such, I am looking forward to the Finance Committee
processing the nomination of Mr. Chuck Rettig, who has been
nominated by the President to lead the IRS, as well as the
nomination of Michael Desmond to be Chief Counsel of the IRS.
As soon as the committee receives their paperwork, we will
begin processing the nominations.
So with that, today we have the pleasure of being joined by
the Acting IRS Commissioner David J. Kautter, who was confirmed
last year as the Assistant Secretary of Treasury for Tax
Policy.
And, Mr. Kautter, thank you for being here. We appreciate
it.
As one would hope, Mr. Kautter has extensive tax
practitioner experience. In fact, he has been a tax
practitioner for the past 44 years.
I empathize with you. You do not look that bad. [Laughter.]
But that is a long time.
Prior to his government service, Mr. Kautter came from RSM,
where he worked as a partner starting in 2014.
He has also taught numerous courses in tax law, including
four as an executive-in-residence 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. And during much of that time, he was the
leading tax specialist for compensation and benefits.
Mr. Kautter has also served in the government before, as
tax legislative counsel to Senator Jack Danforth from 1979 to
1982, during which 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.
So, Mr. Kautter, please proceed with your statement, and we
look forward to hearing from you.
[The prepared statement of Chairman Hatch appears in the
appendix.]

STATEMENT OF 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, members of the committee, thank you for the
opportunity to provide you with an update on the 2018 tax
filing season and to discuss IRS operations, both current and
in the future.
With the tax deadline for individuals just 5 days away, I
am pleased to report the filing season continues to go well. As
of last Friday, the IRS had received more than 103 million
individual tax returns, which is about two-thirds of all the
returns we expect to receive. We have issued more than 75
million refunds so far for $226 billion. About 80 percent of
all the returns filed so far claimed a refund, with the average
refund totaling approximately $2,900.
These numbers are consistent with those for 2017, with the
number of returns received up from last year by about 150,000
at this point. The number of returns filed electronically is up
about 440,000. And the average size of refunds is up $13.
This year, the IRS faced two major challenges as it worked
to deliver the filing season. The first was the need to begin
implementing the Tax Cuts and Jobs Act. This new statute
requires extensive work by the IRS this year and next to serve
the needs of taxpayers and tax professionals. In fact, the IRS
began implementation efforts shortly after the legislation was
signed last December.
The second major challenge was the need to implement tax-
related provisions of the Bipartisan Budget Act enacted in
early February shortly after the filing season had started.
This required us to reprogram our processing systems to handle
the retroactive extension through December 31st of 2017 of more
than 30 individual and business tax benefits that had expired
at the end of 2016. This was the first time the IRS had ever
been required to implement retroactive tax extensions after the
beginning of a filing season.
This filing season was also the second in which the IRS
delayed issuing tax refunds until February 15th for returns
claiming the Earned Income Tax Credit or the Additional Child
Tax Credit under a requirement established by the PATH Act.
Like last year, this change slowed the overall pace of
refunds early in the filing season, but that pace accelerated
with the release of nearly $47 billion of EITC and Additional
Child Tax Credit refunds shortly after February 15th.
During the filing season and throughout the year, the IRS
provides assistance to taxpayers to help them meet their tax
obligations through a variety of channels. So far this year,
for example, we have handled more than 20 million calls on our
toll-free helpline, provided in-person assistance to more than
790,000 people who visited one of our Taxpayer Assistance
Centers, and provided a wealth of tax information on our
website, IRS.gov, which has been visited more than 335 million
times.
The IRS also supports about 11,000 Volunteer Income Tax
Assistance and Tax Counseling for the Elderly sites around the
country. These sites offer free tax preparation services for
low-income taxpayers, older Americans, people with
disabilities, and those with limited proficiency in English. So
far this year, more than 2.6 million tax returns have been
prepared at VITA and Tax Counseling for the Elderly sites.
Another important program we support is Free File, which
allows taxpayers earning $66,000 or less to prepare and e-file
their taxes at no cost. Each year, more than 2.5 million tax
returns are prepared using Free File.
In regard to phone service, I am pleased to report that
this filing season we are again seeing a strong level of
service on our toll-free line, as we did in 2017. As of March
31st, our phone level of service was close to 80 percent, and
we anticipate the average for the filing season as a whole will
be about 80 percent.
While all our service channels are important, we realize
that taxpayers' needs have been evolving, with more taxpayers
conducting their business using digital tools at the time and
place of their choosing. We are continuing our investments in
improving the use of online tools and offerings and modernizing
the taxpayer experience.
As we delivered the 2018 filing season, the IRS also made
and continues to make important progress in implementing the
Tax Cuts and Jobs Act. Our initial steps have included revising
the withholding system to take into account various changes
made by the statute. We started in January by issuing updated
withholding tables for employers to use. Then at the end of
February, we released an update to our withholding calculator
on IRS.gov to help employees adjust their withholding amount
based on their particular financial situation.
Also in February, we issued a new Form W-4 to more fully
reflect the law.
Apart from our efforts on withholding, we have also begun
issuing guidance. This includes several notices and other
information to help corporations begin complying with the
transition tax under new section 965.
Another area where we are working to issue guidance as soon
as possible involves the deep reduction in the corporate income
tax rate to 21 percent. We realize the need for guidance is
especially acute for fiscal year taxpayers, so we are making
that a priority.
Going forward, implementing tax reform will remain a
priority for the IRS in 2018 and 2019. This effort touches on
many of the issues of concern to the IRS as we move into the
future, including providing adequate staffing to serve
taxpayers and ensuring modern, secure IT systems to support our
work for the Nation.
In my previous testimony to this committee, I noted the IRS
would need additional resources for fiscal 2018 and 2019 to
ensure successful implementation of tax reform. We very much
appreciate the additional $320 million that was approved by
Congress recently as part of the omnibus budget bill. This
funding ensures we can move forward with critical
implementation activities in a timely manner, and we will be
able to test our processing systems in the first quarter of
fiscal 2019, shortly before the filing season.
Finally, I should mention that yesterday Treasury and OMB
reached agreement on a new framework for OMB review of certain
tax regulations, which we believe meets the twin objectives of
increasing economic analysis and review of tax rules while
preserving timely tax guidance for taxpayers.
Mr. Chairman and members of the committee, I would be happy
to take your questions. Thank you.
The Chairman. Well, thank you. We appreciate your report
and appreciate the hard work that you are doing.
[The prepared statement of Mr. Kautter appears in the
appendix.]
The Chairman. Let me begin with this. Last December,
Congress passed the most historic tax reform legislation in a
generation. Now, the lack of implementation of those reforms
falls to the IRS and the Treasury Department.
In February, the Treasury Department released its priority
guidance plan, which listed 18 items under, quote, ``initial
implementation of the Tax Cuts and Jobs Act,'' unquote.
Acting Commissioner Kautter, can you provide the committee
an update on how this process is going and whether there is a
timeline for these provisions? For instance, when should we
expect new information on these matters and new guidance
concerning pass-through deductions under section 199-A?
Mr. Kautter. Yes, sir. Well, immediately upon enactment of
the Tax Cuts and Jobs Act, we started to approach tax reform
implementation in a disciplined, project-managed approach. We
have built a roadmap of what needs to be done. We are
constantly adjusting that roadmap.
We have sought stakeholder input as part of the process.
And we have mapped out at this point all the forms that need to
be amended, all the instructions that need to be updated, and
the publications that need to be changed.
At this point, our estimate is that we will need to amend
as many as 450 tax forms, instructions, and publications to
fully implement the tax reform act.
We expect to have new forms drafted by the end of April,
for the most part. We expect to have most new instructions
drafted by the end of May. And our plan is to release those
forms and instructions over the summer for taxpayers and tax
advisers to review and comment on.
Also this month, we will begin programming our new systems.
There are about 140 integrated, interrelated tax systems,
programming systems that need to be updated. Probably three-
fourths of the cost of tax reform implementation will be the
cost of changing technology. We estimate about 19 percent of
the cost will relate to guidance in terms of education of the
taxpayers, education of the IRS workforce, outreach, and so
forth.
About 4 percent will relate to regulations and frequently
asked questions. And another 4 percent is for the forms and the
publications.
So we are off to a good start. I am confident at this point
that we have a good plan. We are executing the plan. I think
the time line is aggressive.
We do not really have a choice; we need to get this done.
And we are focused--we are focused on it.
I think you mentioned, Mr. Chairman, section 199-A. With
respect to that, I would estimate that we will have some
guidance out by summer, early summer hopefully.
The Chairman. Okay. As you know, the House Ways and Means
Committee recently approved IRS reform legislation. This
committee is currently reviewing the legislation, and I will be
working closely with Ranking Member Wyden and other members of
this committee as we move forward with legislation here.
Now, Acting Commissioner Kautter, you have been at the IRS
for a short time, but you have been there long enough, it seems
to me, and working on tax administration issues for your entire
career, to make some suggestions to us here.
In your opinion, what are some of the key legislative
changes that we could help you with that would most improve the
IRS's performance?
Mr. Kautter. Sure, Mr. Chairman. Well, I think the bill
that was approved by the Ways and Means Committee yesterday is,
by and large, a constructive piece of legislation.
I would propose three probably legislative changes. One
thing I would do is require mandatory electronic filing of all
business and information returns.
I would require the IRS to establish online taxpayer
accounts to move the IRS forward. It is on that road, but I
would encourage the IRS to establish accounts online for all
taxpayers.
And I would codify the IRS mission with a focus on taxpayer
service. After that, I think it becomes a matter of leadership,
measurement, and accountability.
For the most part, my personal view is that the IRS has at
its access the tools that it needs, for the most part, to be a
taxpayer-responsive, high-performing organization.
But I think, first, it has to be clear that the highest
priority for everyone in the IRS is to help taxpayers meet
their obligations under the tax law. We have to acknowledge
that enforcement is part of our responsibility, but I think we
have to continuously message the responsibility to help
taxpayers comply with the law.
Secondly, I would put in place measurements that determine
whether various parts of the IRS are facilitating compliance
with the tax law. For example, right now we measure a level of
service by how quickly telephone calls are answered. I think
that is an important measurement, but I think it is too narrow.
I think if we are going to measure taxpayer service, we
should expand the measurements that we focus on to include
service provided through Taxpayer Assistance Centers, Free
File, returns prepared by the volunteer organizations, and so
forth.
Third, while I think enforcement is important, as I said, I
think it needs to be viewed as part of a continuum, in that
enforcement and taxpayer assistance are not mutually exclusive.
Fourth--you have mentioned this already--I would adequately
fund the IRS, but with oversight. I would focus on building out
online accounts and services.
Fifth, I would make sure there was accountability within
the organization.
And finally, the cardinal rule of organizational management
is that structure follows strategy. So if strategy is greater
focus on taxpayer assistance, I think the IRS needs to look at
restructuring itself along lines that would facilitate greater
taxpayer assistance.
The Chairman. Well, thank you.
Let me turn to Senator Whitehouse.
Senator Whitehouse. Thank you, Mr. Chairman.
Commissioner Kautter, I stopped by today to renew the
conversation that we had back in February. I asked you a number
of questions then, and we have not had a response, so I would
like to pursue them.
We were talking about the IRS's role in combating foreign
election spending. As you know, one of the dominant vehicles
for influence in American elections these days is the so-called
501(c)(4), which is an entity regulated by the IRS.
And my questions to you had to do with what the IRS does to
prevent foreign interests from laundering money through
501(c)(4)s and into our elections.
Since February, we have learned a little bit more. In
particular, thanks to Senator Wyden's inquiries, we have
learned that the National Rifle Association has accepted
foreign donations. Now, the NRA claims that none of those
donations goes towards political expenditures, but given the
fungible nature of money, that is a questionable assertion at
best.
What the NRA told Senator Wyden is that ``a review of our
records has found no foreign donations in connection with a
United States election.'' That is the way they phrased it. It
sounds a bit like a lawyered answer.
So I would like to renew some questions and add some new
ones. One is--and these can be questions for the record; I do
not expect you to know this off the top of your head--has the
IRS investigated or is it investigating this claim by the
National Rifle Association that the Russian money did not go to
its election efforts?
Second, how does the IRS ensure that foreign money is not
entering our political system through outside organizations,
like LLCs and tax-exempt organizations?
The 501(c)(4) organizations are required to disclose their
donors to the IRS, but I am interested to know, first, what
does the IRS do with that information? Does it forward it to
FinCEN and other places? And second, what does it do when a
potential shell corporation emerges as the donor?
I made a sort of snarky remark in my last question to you
about, what if it says ``Russian Influence, LLC, a Delaware
Corporation?'' Presumably, somebody would want to look behind
Russian Influence, LLC to see what it is up to.
Now obviously, the Russians are not going to use such an
obvious name, but the problem with shell corporations obscuring
our ability to know who is influencing our elections is a real
one. And I am interested in what the IRS does to probe through
shell corporation information in dealing with politically
active 501(c)(4)s. Do you coordinate with FinCEN?
And also, I would like an overview of what resources you
devote to policing the rules about 501(c)(4)s.
Which takes me to a second but related question, which is
that we see very often in the IRS filings entities that aver to
you, under oath, that they are not spending any money at all in
any effort to influence or attempt to influence State, Federal,
municipal, or other elections. I think it is question 15 on the
form, as I recall it--I do not have it in mind. And then they
run over to the Federal Election Commission and disclose that
they spent $17 million or $35 million on electioneering
advertisements.
It seems to me that that predicates at least an inquiry as
to whether somebody is perhaps not telling the truth on one or
the other of those Federal forms. And I would like to know what
steps the IRS is taking to make sure that those questions are
in fact being answered truthfully to the IRS.
So I know that is putting a lot on your plate, but I am
sincere about trying to get these questions answered. We have
not had a response to the February questions. I hope you will
treat this as a priority and make sure that we do get answers
to what I think are fair and sensible questions, particularly
in light of the election manipulations we have seen.
Mr. Kautter. Certainly, Senator. Those are fair questions.
And we have been working on the response to your questions from
the last hearing.
It is accurate that the 501(c)(4) organizations are
required to submit donor lists to the Internal Revenue Service.
Our focus in auditing those organizations is primarily on
whether they are engaged in excessive political campaign
intervention. It has not been focused on the source of the
funds that are contributed to those organizations.
And we will look into--at this point, we are not sharing
any information, to my knowledge, with FinCEN or other
organizations. But I take your question seriously, and we will
look into it, I promise.
Senator Whitehouse. Thank you.
Mr. Chairman, if it does turn out, particularly given all
of the interest in this issue that has emerged, that the IRS is
not in fact looking behind shell corporations and seeing what
are the potential avenues for foreign influence through
501(c)(4)s, I would like to work with you and other members of
the committee to try to make sure that they understand that
they do have that authority to test these propositions.
And similarly, if they are looking at the extent to which
the 501(c)(4) is focused on political activity, then,
particularly if they are taking a flat-out ``no'' at face value
on the question when that flat-out ``no'' appears to be belied
by disclosures to State and Federal election commissions,
again, I think we ought to do what we can to make clear that
the IRS has the authority to answer those questions and get
back to us.
So we will see how this turns out, but I may very well be
turning to the chairman to make sure that the IRS has the right
authority and we are getting the right answers.
The Chairman. Well, thank you, Senator. We will certainly
work with you and see if that can happen.
We have had a vote over on the floor, but it has been quite
a while since the vote.
So, Mr. Kautter, I think what we will do is, we will keep
the record open for Senators to ask you questions that you can
answer in writing, if we can do that.
Mr. Kautter. Yes, sir.
The Chairman. I have a number of questions that I will
submit to you.
And with that, we will just recess this hearing until
further notice.
Mr. Kautter. Thank you, Mr. Chairman.
The Chairman. Thanks so much. We appreciate you coming here
today and appreciate your testimony here.
Mr. Kautter. Yes, sir. Thank you.
The Chairman. Thank you so much.
With that, we will recess until further notice.
[Whereupon, at 10:46 a.m., the hearing was concluded.]

A P P E N D I X

Additional Material Submitted for the Record

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Prepared Statement of Hon. Orrin G. Hatch,
a U.S. Senator From Utah
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah)
today delivered the following opening statement at the Senate Finance
Committee hearing entitled ``The 2018 Tax Filing Season and Future IRS
Challenges.''

This is an exciting time, and I am grateful Acting Commissioner
Kautter could be here today to talk with us about the 2018 tax filing
season, tax reform, and the challenges and opportunities before the
IRS.

As we all know, the IRS is the one agency in our Federal Government
upon which virtually all other Federal activities depend.

The reason for that is simple: the IRS collects the Federal revenue
required to keep the government functioning. This is an important
function in our government, and a function where process really
matters.

Therefore, it is critical that the IRS collect the revenue under
our new tax laws in a fair, efficient, and effective manner. When we
drain the IRS of resources and handicap its ability to collect revenue,
that isn't merely a loss in revenue for the Federal Government, it also
means that the Treasury must borrow more money, causing our country to
go further into debt.

That's because the Federal Government doesn't shrink when the IRS
fails to collect taxes owed.

Therefore, handicapping the IRS is also saddling future generations
with billions of dollars of debt they will have to repay, one way or
another.

But having said that, let me be clear, the IRS stands at a
crossroads.

On the one hand, the IRS has made marked improvements in recent
years. Including catching more identity fraud, preventing more
fraudulent returns, and moving forward to implement the multitude of
tax law changes that have occurred, including the most comprehensive
tax reform in a generation.

But on the other hand, it is an agency stuck in the past. It relies
on software and core processing systems designed during the Kennedy
administration. IRS employees routinely have to manually input return
information into agency computers, and often require taxpayers to send
information via fax machine.

Now with that said, the IRS is staffed by many of the government's
most dedicated, hardest working civilians. Many of whom work in my home
State, back in Ogden, UT.

Yet, there are some bad apples who have hurt the service's standing
back here in Congress.

Mismanagement, taxpayer abuse, and discrimination against certain
taxpayers are all too recent memories for those of us who oversee the
agency.

Nonetheless, it's high time that we work together, as Republicans
and Democrats, to help the IRS modernize itself to meet the challenges
of the 21st century.

We need to do this to promote bipartisanship, but also to keep the
IRS accountable and moving on the right track to best serve hard-
working American taxpayers.

That is why, this week, I am watching the House Ways and Means
Committee as they mark up legislation to reform several aspects of the
IRS. I appreciate their efforts on that front. And I look forward to
working with my good friend and colleague, Senator Wyden, as we explore
legislative options here in the Senate.

I am confident that we can find meaningful, bipartisan solutions
that will help the IRS perform its duties while still remaining clearly
under congressional supervision.

Acting Commissioner Kautter has been doing an admirable job leading
the agency.

On his watch, taxpayer and fraud prevention services have made
noticeable gains and are truly great success stories. But it's time we
get Mr. Kautter back to his other full-time day job as the Assistant
Secretary for Tax Policy.

As such, I am looking forward to the Finance Committee processing
the nomination of Mr. Chuck Rettig, who has been nominated by the
President to lead the IRS, as well as the nomination of Michael Desmond
to be Chief Counsel of the IRS. As soon as the committee receives their
paperwork, we will begin processing the nominations.

______

Prepared Statement of Hon. David J. Kautter, Acting Commissioner,
Internal Revenue Service; and Assistant Secretary for Tax Policy,
Department of the Treasury
Chairman Hatch, Ranking Member Wyden, and members of the committee,
thank you for the opportunity to provide you with an update on the 2018
tax filing season and discuss IRS operations.

I am pleased to report that the 2018 filing season, which began on
January 29th, has gone well in terms of tax return processing and the
operation of our information technology systems. As of March 30th, the
IRS received more than 94.1 million individual returns. We have issued
more than 73.3 million refunds for more than $212.3 billion. About 80
percent of returns filed so far claimed a refund, with the average
refund totaling approximately $2,900. It is important to note that,
although the tax filing deadline for individuals is only a few days
away, the work of the filing season continues throughout the year, as
IRS employees continue to process tax returns, including amended
returns, and returns for which taxpayers had requested an extension
beyond April 17th.

While the IRS was working to deliver the filing season, we also had
two policy implementations to deliver on. The first was the need to
begin implementing the Tax Cuts and Jobs Act, which was the most
sweeping change to tax law in more than 30 years. This new statute
requires extensive work by the IRS this year and next to serve the
needs of taxpayers and tax professionals. In fact, the IRS began
implementation efforts shortly after the legislation was signed into
law last December.

The second major policy implementation was the tax-related
provisions in the Bipartisan Budget Act enacted in early February,
shortly after the filing season had started. The IRS began work
immediately after passage of the legislation to reprogram its
processing systems to handle more than 30 individual and business tax
benefits that had expired at the end of 2016. This was the first time
the IRS had ever been required to implement retroactive tax extensions
this late in a filing season.

Thanks to the extraordinary efforts of IRS employees and assistance
from the Nation's tax community, by late February we had completed
system reprogramming for the three benefits that were most likely to be
claimed on tax returns early in the filing season. We estimate that
approximately 7 million taxpayers are eligible to claim those three
benefits. They are:

The exclusion from gross income of discharge of qualified
principal residence indebtedness;

The treatment of mortgage insurance premiums as qualified
residence interest, generally claimed by low- and middle-income
filers; and

The deduction for qualified tuition and related expenses.

Since then, the IRS has completed reprogramming its systems and has
updated forms and instructions to accommodate the other extender
provisions in the Bipartisan Budget Act. They include extensions for
several energy-related tax incentives: a credit for nonbusiness energy
property; the alternative motor vehicle credit; and credits for
qualified plug-in electric drive motor vehicles and certain two-wheeled
vehicles.

This filing season was also the second in which the IRS held tax
refunds until February 15th for returns claiming the Earned Income Tax
Credit (EITC) or the Additional Child Tax Credit (ACTC) under a
requirement established by the Protecting Americans from Tax Hikes
(PATH) Act. Like last year, this change slowed the overall pace of
refunds at the beginning of the filing season, but that pace
accelerated once the IRS released 9.4 million EITC and ACTC refunds,
totaling approximately $46.9 billion, shortly after February 15th.
taxpayer assistance efforts

A critical component of the filing season involves the assistance
the IRS provides to taxpayers, to help them fulfill their tax
obligations as quickly and easily as possible. The IRS remains mindful
of the need to do everything we can to deliver secure, high-quality
assistance through every available channel, including online, in
person, and over the phone. We continue to expand opportunities for
taxpayers and their representatives to complete service and compliance
interactions through their preferred channel.

While all of our service channels are important, we realize that
taxpayer needs have been evolving, with more taxpayers conducting their
business using digital tools at the time and place of their choosing.
We will continue our investments in improving the use of online tools
and offerings and modernizing the taxpayer experience.

The IRS provides a wealth of tax information on IRS.gov, which was
visited more than 495 million times during fiscal year (FY) 2017, and
more than 335 million times so far in FY 2018. The most heavily used
part of our website is the ``Where's My Refund?'' electronic tracking
tool, which was used about 278 million times in FY 2017, and more than
205 million times already this filing season.

Over the last several years, the IRS has launched a number of
digital applications to improve taxpayers' interactions with the IRS.
These include:

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

Online Payment Agreement, a secure, safe, and easy process
taxpayers can use to set up a payment plan and pay their tax
obligations over time. A total of 798,000 online agreements
were set up in FY 2017, and 303,000 have been set up so far
this fiscal year; and

Direct Pay, which provides taxpayers with a secure, free,
quick, and easy online option for making tax payments. This
tool was used 10.2 million times in FY 2017 and has been used
4.1 million times so far this fiscal year.

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.

In 2016, we took the first step toward a fully functional IRS
online account with the launch of an application on IRS.gov that
provides information to taxpayers who have straightforward balance
inquiries. We followed that up with another feature that lets taxpayers
see recent payments posted to their account. We anticipate the online
account will remain a key point of contact between the IRS and
taxpayers, and, subject to the availability of resources, we will add
other features to this platform over time, as they are developed and
tested with taxpayers and tax professionals.

Another important service delivery channel continues to be our
toll-free telephone line, which constitutes one of the world's largest
customer service phone operations. In FY 2017, the IRS received more
than 52 million taxpayer calls, with more than 40 percent, or about 23
million, handled by our customer service representatives. The rest were
calls made to lines providing automated messages containing helpful tax
information.

In regard to phone service, I'm pleased to report that during the
2018 filing season we are again seeing a strong level of service (LOS)
on our toll-free lines, as we did in 2017. As of March 31st, our phone
LOS was close to 80 percent, and we anticipate that the average for the
2018 filing season as a whole will be about 80 percent. Average LOS
during the 2017 filing season was 75 percent, and 70 percent for the
2016 filing season.

The IRS has also been successful in providing timely assistance to
taxpayers who visit one of our Taxpayer Assistance Centers (TACs)
around the country. This is the second year that all TACs are offering
appointments in advance, a process that we have found dramatically cuts
wait times for TAC visitors. As in 2017, we have had no reports of long
lines during the 2018 filing season--clear evidence that the
appointment process reduces burden on taxpayers who seek in-person
assistance.

We have also found this arrangement provides major advantages to
taxpayers. First, when people call for an appointment, we can tell them
what documents they need to bring with them, reducing the number of
return trips. Second, the IRS employee making the appointment can often
help taxpayers resolve their issue over the phone or refer them to the
help they need, eliminating the need to visit a TAC. So far this year,
about half of those who called for an appointment were able to resolve
their issue without actually having to come in for an appointment. This
is an important point, because TAC employees can now spend more time
with those who do visit, as they tend to have more complex issues that
cannot be resolved over the phone.

The total number of taxpayers served at TACs this year through
March 31st is more than 790,000, which includes nearly 52,000 who
visited a TAC without an appointment. We encourage taxpayers to make
appointments in advance, so they can be assured of quick and efficient
service, but we are also doing whatever we can to serve taxpayers who
show up without an appointment.
safeguarding irs systems and taxpayer data

Another important aspect of taxpayer service, during the filing
season and throughout the year, involves the IRS's efforts to protect
IRS systems and taxpayers' personal data from tax-related identity
theft. Over the last several years, the IRS has made significant
progress in this area.

Much of that progress is the result of Security Summit initiatives
that help safeguard the Nation's taxpayers. In fact, the 2018 filing
season was the third in which the IRS worked with its Security Summit
partners to put in place many protections to help stop fraudulent
returns from entering tax processing systems.

I'm pleased to report recent statistics show there continues to be
a substantial decline in several indicators of tax-related identity
theft. That includes the number of taxpayers reporting to the IRS they
are victims of identity theft; the number of tax returns with confirmed
identity theft; and the number and amount of fraudulent refunds
recovered by financial institutions. The following table shows the
declines in these areas between 2015 and 2017.

Table 1: Identity Theft Refund Protection by Activity and Dollar Amount, PCalendar Years 2015-2017

Percent Change
2015 2016 2017 (2015-2017)

IRS Forms 14039, Identity Theft Affidavit---------------677,000---------401,000---------242,000-------------65%-
----------------------------------------------------------------------------------------------------------------
Tax returns with confirmed identity theft 1,400,000 883,000 597,000 -57%

Estimated dollar amount of revenue protected $8.7 billion $6.4 billion $6 billion -31%
----------------------------------------------------------------------------------------------------------------
Fraudulent tax refunds recovered by financial 249,000 124,000 144,000 -42%
industry

Estimated dollar value of recovered refunds $852 million $281 million $204 million -76%
----------------------------------------------------------------------------------------------------------------

Source: IRS data

Despite all the progress that has been made, we realize we cannot
let up in the fight against tax-related identity theft. As we have
strengthened our defenses, identity thieves are becoming more
sophisticated, and attempting to obtain more detailed financial
information to help them do a better job of impersonating legitimate
taxpayers and file more realistic-looking tax returns to attempt to
obtain fraudulent refunds.

Cyber-thieves are targeting tax professionals, human resources
departments, businesses, and other places with large amounts of
sensitive financial information. For that reason, the IRS and its
partners are not only continuing to improve our safeguards against
fraudulent returns, but we also continue to encourage taxpayers, tax
professionals, and businesses to do everything they can to protect
their data and avoid becoming victims of the tax scams that continue to
proliferate.
tax reform implementation update

The IRS continues to make important progress in implementing the
Tax Cuts and Jobs Act. As I noted when I testified to this committee in
February, implementing the new tax law is one of the IRS's highest
priorities, and will be a major Service-wide effort for some time. This
work touches on many major aspects of the tax system affecting both
individual and business taxpayers. Our main goal is to ensure everyone
can navigate and understand the changes made by the new law, and be
able to file their returns in 2019 as quickly and easily as possible.

Our Tax Reform Implementation Office (TRIO), which was set up in
January, continues to coordinate our efforts. The TRIO is responsible
for interacting with our business divisions and our Office of Chief
Counsel to ensure a smooth roll-out of everything needed to implement
the law. Where there is overlap in responsibilities, the TRIO will
ensure IRS divisions collaborate to get the job done. The TRIO has a
broad portfolio: it is responsible for identifying areas of impact,
establishing and monitoring implementation action plans, ensuring
communication with external and internal stakeholders, and making sure
we address any risks that arise in our work.

Regarding recent implementation activities, one critical area we
identified early on was income tax withholding. The IRS moved quickly
to begin revising the withholding system to take into account various
changes made by the statute, such as increasing the standard deduction,
removing personal exemptions, increasing the Child Tax Credit, limiting
or discontinuing certain deductions, and changing the tax rates and
brackets. This issue affects literally every taxpayer who receives a
paycheck.

We started in January by issuing updated withholding tables for
employers to use. These tables were designed to produce the correct
amount of tax withholding for taxpayers with simple tax situations.
Then at the end of February, we released an update to our Withholding
Calculator on IRS.gov, to help employees adjust their withholding
amount based on their particular financial situation. This will be
especially helpful for taxpayers with more complex tax situations.
Through March 8th, the Withholding Calculator page on IRS.gov had been
viewed more than 1.2 million times.

Also in February, we issued a revised Form W-4, Employee's
Withholding Allowance Certificate, to more fully reflect the new law.
This form takes into account such provisions as the changes in
available itemized deductions, increases in the Child Tax Credit, the
new dependent credit, and the repeal of dependent exemptions.

The IRS is continuing efforts to encourage taxpayers to check their
withholding, and do so as soon as possible. For example, in late March
we conducted a ``Paycheck Checkup'' public awareness campaign to get
the word out to taxpayers about what they can do to make sure the
correct amount of tax is being withheld from their pay. The activities
during this special weeklong campaign included the release of an IRS
YouTube video series and several online Tax Tips. These were designed
to walk taxpayers through what they need to know about withholding, and
help them navigate complex issues that might affect how much should be
withheld from their pay.

Another important area where the IRS has made significant early
progress on tax reform implementation involves the guidance taxpayers
and tax professionals need to understand and navigate the new law. This
involves both formal guidance, such as regulations and notices, and so-
called ``soft'' guidance, such as press releases and Frequently Asked
Questions (FAQ) about tax topics.

In February, the Treasury Department and the IRS provided an
initial idea of where we are headed, with an update to the Priority
Guidance Plan. As a first step, the revised plan contains 18 new
guidance projects related to tax reform. There are many other areas of
the law that will require additional guidance, given that, overall,
there are 79 explicit grants of regulatory authority in the tax reform
statute.

While much of the guidance we are developing will take time, there
were certain areas we needed to address quickly. In late December, we
released initial guidance to help corporations begin complying with the
transition tax imposed on untaxed foreign earnings of foreign
subsidiaries of U.S. companies under new code section 965, which became
effective upon enactment of the new law. We followed that up with
additional notices, and last month released a set of FAQs with
information to assist taxpayers filing their 2017 tax returns,
including how to report section 965 income and how to report and pay
the associated tax liability.

Another area where we are working to issue guidance as soon as
possible involves the deep reduction in the corporate income tax rate
to 21 percent. We know there is much guidance needed in regard to this
change, and there are several projects underway. We realize the need
for guidance is especially acute for fiscal year filers, so we are
making that a priority.

Those are just a few of the actions the IRS has taken so far in its
ongoing efforts to implement the new tax law. We are also continuing
the work needed to create or revise approximately 450 forms and
publications affected by tax reform. Work also continues on
reprogramming about 140 information technology systems, with special
focus on returns processing and compliance systems, to ensure those
systems are ready for next year's tax filing season. We are also
developing the training that will be needed to familiarize our
workforce with the new tax law and, in particular, ensure our customer
service representatives can provide the most effective service possible
to taxpayers when they have questions about the tax changes.

In my previous testimony to this committee, I noted the IRS would
need additional resources to ensure successful implementation of tax
reform. We appreciate the additional $320 million approved by Congress
as part of the omnibus appropriations bill for FY 2018. This funding
ensures the IRS can move forward with critical implementation
activities in a timely manner, and we will be transmitting updated
implementation plans and 2-year cost estimates to Congress in the very
near term.

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 David J. Kautter
Questions Submitted by Hon. Orrin G. Hatch
Question. Perhaps one of the most difficult challenges the IRS
faces is with information technology. Directly related to that
challenge is the question of human capital. For instance, the IRS's
Individual Master File is its legacy tax processing system and is in
many ways the backbone of the IRS's information technology
infrastructure. But that system, which is based on antiquated software,
has only 17 developers whom the IRS considers to be subject matter
experts. We have heard concerns that some of those employees will
retire soon, and many of those remaining will be eligible for
retirement within 4 years. Young IT experts aren't necessarily eager to
join the IRS to learn how to run antiquated systems.

Almost 60 percent of the IRS's workforce is over the age of 50, and
there are not enough younger workers coming in to replace those who
retire.

What can IRS do to attract younger skilled workers, and what can
Congress do to help?

Answer. The IRS recognizes that the current age distribution of its
workforce poses a long-term risk to the organization, particularly in
highly skilled, technical programs. As of May 2018, 32.2 percent of the
IRS's current permanent workforce will be eligible to retire by the end
of fiscal year (FY) 2020. As you note, IRS's human capital challenges
include a limited number of subject matter experts in key information
technology (IT) areas. Similar challenges exist in other technical and
specialized fields.

The IRS has taken several steps in recent years to mitigate this
risk. It has expanded partnerships with colleges and universities and
participated in job fairs to recruit new talent, with a focus on
military veterans and IT disciplines such as cybersecurity. The IRS is
establishing a centralized recruitment office to better coordinate and
oversee these efforts. The IRS has also leveraged flexibilities under
the Federal Pathways internship program and recent graduate hiring
authorities to attract and retain new talent. In FY 2017, the IRS hired
307 Pathways interns and recent graduates. This includes 121 IT
positions. Additionally, the IRS has increased use of the Student
Volunteer Program and other unpaid third-party internships to help
students explore IRS career opportunities.

Congress can assist the IRS by reinstating the IRS's streamlined
critical pay authority (SCP), which provided the IRS some flexibility
to recruit and retain highly skilled employees with specialized
expertise, particularly in high-demand areas of information technology.
Established under the Restructuring and Reform Act of 1998, SCP allowed
the IRS to hire up to 40 uniquely qualified experts for 4-year
appointments to revitalize and enhance its workforce. The SCP authority
allowed the IRS to hire top-caliber talent under an abbreviated
timeline and at a salary more competitive with private industry. The
IRS SCP authority expired in 2013, and the administration's FY 2019
budget requests that Congress reinstate this authority through FY 2022.
Reinstating the SCP authority would allow IRS to recruit and hire other
highly specialized talent for critical positions to modernize,
innovate, protect taxpayer data, and accomplish the IRS mission.

Question. Access to telephone customer service has improved since
it reached a low point in 2015. IRS has also redesigned its website,
added online access to account information, and offered appointments to
its walk-in locations serving taxpayers in person.

What has IRS done to achieve these improved customer service
results?

Answer. Each year, we integrate IRS messaging, communication
strategies, and outreach efforts. This approach allows us to
effectively deliver information and guidance to the public about the
services and resources available to help taxpayers and their
representatives understand and comply with their tax obligations. In
recent years, the IRS has employed two communication strategies that
further focus our efforts to help taxpayers. First, to increase the
number of taxpayers we serve, the IRS continues to educate our
customers to the availability of self-help options on IRS.gov.

Second, in the last two filing seasons, there have been important
changes taxpayers needed to know before filing. In response, we
implemented the Get Ready campaign in fall 2016 and 2017. The campaigns
focused on helping taxpayers understand, before filing season, the
changes that may affect processing their tax returns and issuing
refunds. These messages were also incorporated in communications
throughout filing season. The IRS is continuing to build on these best
practices in preparation for the 2019 filing season.

The IRS toll-free telephone line, which constitutes one of the
world's largest customer service phone operations, is critical to
taxpayer service. Taxpayers calling this line first navigate through
automated menus informing them how to get their questions answered by
selecting from menu options of frequently asked topics, such as refund
status, transcripts, tax reform law, individual and business tax
topics, and how to find information on IRS.gov.

In FY 2017, the IRS received more than 52 million taxpayer calls,
with more than 40 percent, or about 23 million, handled by IRS customer
service representatives. The rest were calls made to lines providing
automated messages containing helpful tax information. Through April
for FY 2018, the IRS received more than 34 million taxpayer calls, with
more than 40 percent, or about 14 million, handled by IRS customer
service representatives.

Recognizing that taxpayers may have questions about the Tax Cuts
and Jobs Act provisions, the IRS will now answer tax reform tax law
questions year-round, not just in filing season. The IRS also decided
to route calls to dedicated CSRs for topics such as Basic Tax Reform
(Itemized Deductions, Tax Rates, Child Tax Credit, etc.), Roth
Conversions, Tax Rollover Period for Plan Loan Offset Amounts,
Qualified Business Income Deduction, Disaster Areas Relief for 2016,
Casualty Loss, Moving Expenses Deduction, and Affordable Care Act.

The IRS has also been successful in providing timely assistance to
taxpayers who visit one of its Taxpayer Assistance Centers (TACs)
around the country. This is the second year that all TACs are offering
appointments in advance, a process that the IRS has found dramatically
cuts wait times for TAC visitors. As in 2017, the IRS has had no
reports of long lines during the 2018 filing season.

The IRS has also found this arrangement provides advantages to the
taxpayer. When taxpayers call for an appointment, the IRS employee
making the appointment can often help the taxpayers resolve their issue
over the phone or refer them to the resources they need, eliminating
the need to visit a TAC. For those that need an appointment, we can
tell them what documents they need to bring with them, reducing the
number of return trips. About half of those who called for an
appointment resolved their issue without actually having to come in for
an appointment.

In February 2018, the IRS implemented a new appointment scheduling
tool which has further enhanced its ability to provide appointments.
While the IRS encourages taxpayers to make appointments in advance, so
they can be assured of quick and efficient service, it attempts to
serve taxpayers who show up without an appointment.

The IRS provides a wealth of tax information on IRS.gov. In late
summer 2017, it launched a redesigned IRS.gov website. The refreshed
design improves how taxpayers interact with the IRS online. While tax
issues can often be complex, the IRS.gov transformation should make it
easier for taxpayers to navigate both the IRS website and tax law. One
of the most important changes was to make IRS.gov mobile friendly. This
means the site will resize and adapt based on the screen size or the
type of device used, including a smartphone, laptop, tablet, or
desktop.

The new IRS.gov also improved content organization, highlighting
the important tasks taxpayers come to IRS.gov to complete. Several
links at the top of the pages give users one-click access to help,
news, content in other languages, and more. In addition to reorganizing
content, IRS.gov now has drop-down menus on every IRS.gov page for
those using a computer web browser. Each drop-down menu groups popular
content options to eliminate scrolling--giving users quicker access to
the information they need. We monitor how IRS.gov is performing, and
user reactions, to better serve taxpayers and their representatives.

The IRS has invested significant resources in developing a series
of online tools and applications so that those who prefer to interact
with the IRS online can do so easily and securely. The plan is to
continue investments in online tools and offerings and modernizing the
taxpayer experience. Here are several key online applications the IRS
has developed in response to increased taxpayer demand for online
services:

``Where's My Refund?'', an electronic tracking tool, is the
most heavily used part of our website. Taxpayers used it about
278 million times in FY 2017, and already been used more than
275 million times this fiscal year.

Direct Pay, which provides taxpayers with a secure, free,
quick and easy online option for making tax payments. This tool
was used 10.2 million times in FY 2017 and has been used 6.6
million times this fiscal year. The IRS is also continuing the
development 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.

In 2016, the IRS took the first step toward a fully functional IRS
online account with the launch of an application on IRS.gov that
provides information to taxpayers who have straightforward balance
inquiries. The IRS followed that up with another feature that lets
taxpayers see recent payments posted to their account.

Question. How will IRS achieve similar results during the 2019
filing season to help taxpayers understand new requirements resulting
from the tax law changes?

Answer. For filing season 2019, the IRS will continue the Get Ready
campaign to provide the latest information to taxpayers. To reach as
many people as possible, the IRS is using a variety of communications
and outreach platforms. In January 2018, it started with the release of
the withholding tables. The IRS followed up with the Withholding
Calculator launch in February. For March, the IRS created a special
campaign, Paycheck Checkup week.

The IRS will expand our communications through filing season 2019,
adding information about other parts of the TCJA as guidance is issued.
IRS outreach, communications, and customer-facing employees, as well as
external partners, will be equipped with the same messaging to generate
awareness and consistently encourage taxpayers to consider actions
outlined on IRS.gov and Get Ready campaign.

Based on anticipated volumes, IRS will ensure that a sufficient
number of CSRs are available to answer taxpayer questions and that all
CSRs and all assistors in our TACs are trained on the new tax law. In
addition, IRS will answer tax reform tax law questions year-round, not
just during filing season.

The IRS will provide additional online tool enhancements as they
are developed and tested with taxpayers and tax professionals. The IRS
will continue to expand its outreach and communications effort through
the summer and for the rest of 2018 so that taxpayers are informed
before the start of the 2019 filing season. A critical piece of the
strategy is working with third parties to help them share this
information. During this summer, the IRS will conduct sessions across
the country, reaching taxpayers and tax professionals. Additionally,
the IRS will again conduct its Nationwide Tax Forums for tax
professionals in five cities around the country, where the new tax law
will take center stage.

Question. There's been much discussion on the need for reforming
and/or modernizing taxpayer services. However, at the same time, GAO
recently noted that IRS's core tax processing system is over 50 years
old, relies on archaic software, and is highly risky. GAO also noted
that there is not a solid plan with realistic costs and milestones to
replace the core tax processing system.

How is IRS balancing the need to reform and/or modernize taxpayer
services while ensuring the critical internal systems supporting these
taxpayer services are also appropriately modernized?

Answer. Delivering new services and modernizing existing services
provided to taxpayers are both dependent upon our ability to stabilize
and enhance our existing IT infrastructure and operations. In
implementing modern technology and methods, the IRS will simultaneously
improve the taxpayer experience and effectively advance modernization
of IT infrastructure and operations. As efforts to modernize continue,
the IRS will upgrade the currency of existing hardware and software,
increasing redundancy, eliminating single points of failure, and
building an IT workforce with the requisite skills. Success will be
based upon effectively leveraging all resources and available sources
of funding.

In several instances, modernizing services for taxpayers has
included modernizing the internal systems supporting those services.
One example in particular worth noting is the progress on the CADE 2
program to modernize the Individual Master File (IMF) core tax
processing system. Through the CADE 2 program, the IRS has delivered
significant improvements to taxpayer services, with faster refunds,
notices, and broader, agency-wide availability of more current taxpayer
information. Through CADE 2, the IRS is also addressing technical
limitations imposed by the antiquated Assembly Language Code (ALC).

While we have many successes in delivering both modernized taxpayer
services and modernized systems and infrastructure, the IRS has a great
deal of work ahead of us. Modernization is a continuous process, and
the IRS is taking every opportunity to leverage all available
resources--not just Business Systems Modernization (BSM)--to continue
to make progress. The IRS is enhancing our strategic planning processes
and changing its approach to better integrate scheduled systems
upgrades while implementing legislative mandates and BSM initiatives
into an overall modernization strategy. The IRS is confident that this
holistic approach will accelerate modernization and ensure all
investments are planned and executed according to the IRS Strategic
Plan.

Question. Recently, IRS officials have made public comments
questioning the usefulness of the Form 990 Schedule B from
organizations formed under IRC section 501(c)(4) or (6), and
acknowledging the risks that Schedule B filing poses to
confidentiality. Given that this requirement, unlike that on
organizations formed under IRS section 501(c)(3), comes from IRS and
Treasury rulemaking rather than the IRS, will IRS be reconsidering the
requirement that 501(c)(4) and (6) organizations file a Schedule B?

Answer. On July 16, 2018, after careful review, the IRS and
Department of the Treasury released Revenue Procedure 2018-38 limiting
the requirement to file names and addresses on Schedule B to
organizations described in section 501(c)(3) or section 527 of the
Internal Revenue Code.

______

Questions Submitted by Hon. Ron Wyden
office of tax policy comments on tax reconciliation
Question. During the consideration of the 2017 tax reconciliation
bill, did the Office of Tax Policy or others at Treasury submit written
comments to Congress? If so, and if such comments were not specifically
submitted to the Senate Finance Committee Minority staff, please
provide copies.

Answer. The IRS Office of Congressional Affairs-Legislation Branch
did not provide written comments to Congress on the Tax Cuts and Jobs
Act during its consideration.
conservation easement syndication
Question. Mr. Kautter, on March 29, 2017, I wrote to IRS
Commissioner John Koskinen about the growth in abusive tax shelters
involving the syndication of conservation easements. I asked the IRS to
provide a report on the nature and scope of this problem. On July 13,
2017, the IRS provided a partial response that revealed participants in
these syndication deals claimed deductions that were nine times the
amount of their original investment. Subsequent preliminary responses
indicate IRS may have lost billions of dollars to this tax shelter in
hundreds of tax shelter transactions.

The Treasury Department issued Notice 2017-10, identifying these
syndication transactions as abusive tax shelters and requiring
participants to disclose their involvement to the IRS. The notice was
also intended to deter future deals, however, media reports suggest
these deals are still taking place.\1\
---------------------------------------------------------------------------
\1\ Peter Elkind, ``The Billion-Dollar Loophole,'' ProPublica,
December 20, 2017.

Historically, when the Treasury Department and IRS issue a notice
``listing'' a certain transaction as an abusive tax shelter, the
promotion and use of such schemes stops. Can you confirm whether this
---------------------------------------------------------------------------
activity is continuing despite the notice?

Answer. Current data suggests that the number of transactions has
declined since the issuance of Notice 2017-10. The IRS, however,
continues to receive additional disclosures, and it is still in the
process of reviewing the disclosures received in 2018. As of May 31,
2018, the IRS has processed 552 of the 2018 Forms 8886 for this
transaction and 1,928 Forms 8918. While forms continue to be processed,
the current ratio from the 310 2018 Forms 8886 filed that provided both
an investment and deduction amount is 4.91.

Question. Please describe whether the administration has taken
enforcement actions against the promoters of these abusive shelters
identified via Notice 2017-10.

Answer. Approximately 40 of the top-tier pass-through entities
(i.e., the entity where the contribution transaction occurred,
generally TEFRA partnerships) have open enforcement activity.

Question. Please describe whether the administration has developed
plans to take any enforcement actions against the promoters of these
abusive shelters identified via Notice 2017-10.

Enforcement actions against illegal syndicated conservation
easement tax shelter transactions have proven challenging and time-
consuming for the IRS. For example, earlier this month the Tax Court
issued a ruling disallowing tax write-offs from a sham conservation
easement transaction that occurred more than a decade ago.\2\ While
Notice 2017-10 may have extended the statute of limitations period for
certain transitions, the time in which IRS can take enforcement actions
on those tax shelter transactions grows shorter by the day. Please
describe what actions IRS is taking to ensure that promoters of
syndicated conservation easement tax shelter transactions are held
accountable before the close of the statute of limitations.
---------------------------------------------------------------------------
\2\ Tax Court Memorandum 2018-45.

Answer. The IRS is determining its specific enforcement strategy,
which will also address entities that failed to properly disclose
pursuant to the notice. The information included in the disclosures, as
well as experience with current inventory, shows the need for a varied
---------------------------------------------------------------------------
approach for this issue.

Question. Do you believe IRS currently has the tools needed to put
an end to this abuse? Will Treasury propose regulatory or statutory
changes to address these abuses if Notice 2017-10 and other tools are
shown to be insufficient to curb the use of these tax shelters?

Answer. Enforcement in this area requires the significant
assistance of appraisers and resources. The IRS is working to address
this issue and will evaluate the results from its enforcement strategy
and work with Treasury if additional regulatory or statutory changes
are needed to curb misuse of the syndicated conservation easements.

Question. As Acting Commissioner, how high of a priority is it for
IRS to stop this abuse?

Answer. The IRS is committed to pursuing those transactions that
are abusive.

Question. Do you believe the transactions described in Notice 2017-
10 are abusive on their face?

Answer. Notice 2017-10 sets forth that a transaction that results
in a charitable deduction that equals or exceeds an amount that is 2\1/
2\ times the amount of the investor's investment is a tax avoidance
transaction.

Question. To what extent will IRS challenge the tax benefits of
each and every transaction covered by Notice 2017-10?

Answer. As stated above, IRS's experience with current inventory
shows the need for a varied approach for this issue. The IRS is
determining its enforcement strategy.

Question. As Assistant Secretary for Tax Policy, do you support
Notice 2017-10?

Answer. Yes. Notice 2017-10 alerts persons involved in syndicated
conservation easement transactions that disclosure responsibilities may
arise from their involvement in the transactions. The Internal Revenue
Service uses these disclosures as a significant tool in carrying out
its enforcement responsibilities.
new taxes on tax-exempts and charities
Question. Mr. Kautter, the Republican tax bill \3\ passed in
December 2017 imposed nearly $10 billion in new taxes on charities and
tax-exempt organizations. Many of these provisions were carelessly
drafted, leaving charities and other tax-exempt organizations uncertain
how the provisions will be implemented and how much tax they will have
to pay. One of the most pressing sources of uncertainty is section
13702 of the Republican tax bill, which requires tax-exempt entities to
calculate unrelated business income tax (UBIT) separately for each
trade or business. The provision, however, failed to make any attempt
to define ``trade or business,'' causing significant confusion and
uncertainty for charities and other tax-exempt organizations across the
Nation.
---------------------------------------------------------------------------
\3\ H.R. 1, an act to provide for reconciliation pursuant to titles
II and V of the concurrent resolution on the budget for fiscal year
2018.

Earlier this week the American Institute of Certified Public
Accountants (AICPA) sent a letter to congressional leaders stating that
section 13702 of the Republican tax bill would be difficult or
impossible to comply with without significant regulatory guidance from
Treasury. The letter states: ``The burden of new section 512(a)(6) on
tax-exempt organizations is substantial, and nearly all tax-exempt
organizations are affected.'' This issue is further complicated by the
fact that the provision went into effect January 1, 2018, just days
after it became law. Charities and other tax-exempt entities are in the
process of making 2018 estimated tax payments, and are left guessing
---------------------------------------------------------------------------
how to calculate the new tax.

Did Treasury or IRS know that this provision as drafted would cause
uncertainty to charities and other tax exempt entities without further
regulatory guidance?

Answer. The Department of Treasury was in communication with
Congress throughout the legislative process for H.R. 1 and is working
diligently to implement the legislation. The Department of Treasury and
the IRS appreciate the need for guidance that clarifies outstanding
issues relating to newly enacted section 512(a)(6). The Second Quarter
Update to the 2017-2018 Priority Guidance Plan includes guidance on the
computation of unrelated business taxable income for separate trades or
businesses. This guidance is one of the IRS's top priorities.

Question. Did Treasury or IRS believe at the time of the Republican
tax bill's passage that they would be able to issue regulations fully
clarifying this issue before the provision went into effect on January
1, 2018?

Answer. The Department of Treasury was in communication with
Congress throughout the legislative process for H.R. 1 and is working
diligently to implement the legislation.

Question. Did Treasury or IRS believe at the time of the Republican
tax bill's passage that they would be able to issue regulations fully
clarifying this issue before the first 2018 quarterly estimated tax
payment was due?

Answer. The Department of Treasury was in communication with
Congress throughout the legislative process for H.R. 1 and is working
diligently to implement the legislation.

Question. Did Treasury or IRS communicate to the chairmen of the
Senate Finance Committee or Ways and Means Committee (or their staffs)
that this provision as drafted could cause uncertainty to charities and
other tax exempt entities?

Answer. The Department of Treasury was in communication with
Congress throughout the legislative process for H.R. 1 and is working
diligently to implement the legislation.

Question. If yes, did Treasury or IRS suggest modified statutory
language to further clarify the provision? Was any proposed language
adopted in the final legislation?

If no, why did Treasury not communicate to Congress any concerns
over the uncertainty this provision would cause?

Answer. See above.
minimum standards for paid tax return preparers
Question. We continue to hear reports of unscrupulous tax return
preparers preying on vulnerable taxpayers and pocketing the money. This
is why Senator Cardin and I introduced legislation to allow the IRS to
require minimum standards for paid return preparers. Since the 1970s,
Oregon has had minimum standards in place for tax preparers since the
1970s, and when GAO looked at the program, it found that returns filed
by Oregon paid preparers were 72 percent more likely to be accurate
than comparable returns filed in another State. Consequently, GAO has
been recommending for years that the IRS set minimum requirements for
paid preparers.

Mr. Kautter, do you still see preparers taking advantage of
taxpayers as a problem?

Answer. Yes, there are still preparers taking advantage of
taxpayers. Whether the preparer is unscrupulous or just underprepared
the outcome for the taxpayer and tax administration is much the same--a
lack of compliance with tax obligations. To improve overall tax
compliance, the IRS continues to support minimum standards for tax
return preparers, as this will improve preparer competency and return
preparation accuracy.

Question. Do you support legislation that would require minimum
standards for paid preparers to protect taxpayers, such as was proposed
in the President's budget?

Answer. Yes. Such legislation would enable the IRS to ensure that
all preparers have a basic level of competency and integrity.
Additionally, greater oversight for return preparers would help the IRS
identify unscrupulous preparers and develop more effective compliance
and enforcement strategies.
cyber-attacks on irs systems
Question. Your predecessor, Commissioner Koskinen, testified before
the Finance Committee in April 2016 that IRS computers ``withstand more
than 1 million malicious attempts to access them each day.''

Mr. Kautter, can you confirm for the committee whether the rate of
cyber-attacks on IRS systems has increased to 2.5 million per day, as
reported in Politico on April 10, 2018, and whether taxpayer data or
IRS operations are at risk?

Answer. The IRS observes and mitigates more than 2.5 million
unauthorized access attempts per day (>1 billion per annum), including
denial-of-service attacks, unsuccessful intrusion attempts, probes or
scans, and other unauthorized connectivity attempts. To date, the
multi-layered defenses the IRS has in place have been extraordinarily
effective in most cases. The bulk of these attempts have, presented
minimal risk of exposure of taxpayer data and IRS operations.

Question. What is the IRS doing to combat these attacks?

Answer. The IRS continues to leverage congressionally provided
funds to implement a multi-layered defense strategy. To date, the
strategy has been successful, but the IRS is mindful that bad actors'
evolving tactics mandate continual investment in defense.

The IRS has established 24 x 7 x 365 incident response capability
with teams that perform around-the-clock intrusion and fraud analytics
to identify, respond to, and mitigate emerging threats or fraudulent
access/transactions. These employees are highly skilled across the
realms of intrusion analysis, fraud analytics, and data analytics in
general, with a very diverse skillset across the spectrum of
cybersecurity.

The IRS leverages myriad integrated technologies and processes to
provide proactive mitigation, timely detection, and rapid containment/
response to identified cyber-threats. Collectively, the IRS's
enterprise security stack delivers safeguards and monitoring across
disparate threat vectors ranging from publicly accessible applications
to endpoint devices. A snapshot of the enterprise security stack
consists of the following:

Perimeter-based security infrastructure, which is comprised
of firewalls, intrusion detection/prevention sensors, internet
proxy and email gateway content filtering, and Einstein 3
Accelerated. Collectively, these infrastructure components
enforce traffic policy to permit connectivity that is
explicitly authorized, while prohibiting all other
connectivity.

IRS's Publicly Accessible Internet websites, which have
dedicated security protections in place to authenticate users
in a manner commensurate with the data being accessed, traffic
shaping and web application firewalls to ensure accesses are
compliant with protocol standards, and denial of service
protections to mitigate excessive volume-based target attacks.

Endpoint Protections, which serve as an additional line of
defense through standardized common operating environments,
antivirus and firewall to prevent split tunneling, patch/
vulnerability analysis and remediation, software license
metering and endpoint health monitoring to ensure applicable
endpoint agents are operational and current.

Analytics and monitoring, which occur across the enterprise
security stack using the big data ecosystem to provide
normalization, aggregation, and correlation of datasets.
Analysts can interrogate the data to answer specific questions
and/or glean new insights or trends from the data.

Question. What can Congress do to assist?

Answer. Congress can assist by funding the requests for
cybersecurity initiatives in the 2019 budget. Approval of streamlined
critical pay for technology positions is one of the most impactful
steps Congress could take.
failure of irs e-file on tax day
Question. Mr. Kautter, we would like to get a full accounting of
the circumstances behind the failure of IRS systems to accept
electronically filed returns that occurred early in the morning on
April 17th. The outage lasted 11 hours, with few details provided in
the interim to the public and no direction given to taxpayers needing
to file their returns.

As part of this accounting, can you tell us whether it is correct
that this was simply a glitch in a piece of IRS hardware and not the
result of interactions with any third parties? Is it correct that no
taxpayer data was lost or compromised in any way? Has the backlog of
transmitted-but-not-accepted returns since been processed by IRS? What
specific processes have been put in place to ensure this type of outage
will not happen again, especially on one of the busiest days of the tax
filing season?

Answer. Addressing your specific questions first:

As described in greater detail below, a firmware bug caused
the mainframe to fail on Tax Day. The outage did not result
from third-party actions.

The IRS did not lose or compromise any taxpayer data as a
result of this outage.

The IRS processed the backlog within 24 hours of restoring
the mainframe.

IBM and IRS deployed a script to find and automatically
correct this storage array problem should it recur.
Details and background:
The circumstances around the failure of IRS systems on April 17th
are as follows. At approximately 2:57 a.m. EST on April 17, 2018, the
IRS's core tax processing mainframe system used its automated ``call
home'' capability to send an ``alert'' to the vendor, IBM, when it
detected a deadlock condition after a warm start (system reboot
initiated by the operating system). It sent a second automated alert to
IBM at 4:45 a.m. EST. Meanwhile, at 2:24 a.m. EST, IRS's Information
Technology Operations Command Center (ITOC) began receiving system-
generated messaging and invoked our established processes to
troubleshoot the problem. By 3:30 a.m. EST, IRS ITOC had detected
problems with several systems and submitted a work ticket. By 5:15 a.m.
EST, IRS ITOC was in communication with the vendors (IBM and Unisys),
and technical assessments had begun. Extensive troubleshooting and
system diagnostics testing by a joint IRS, IBM, and Unisys team
revealed an extremely rare hardware failure caused by a firmware bug on
the storage array (a subsystem component of the mainframe). A unique
set of workload and timing conditions prevented deletion of data from
the read cache (temporary memory), causing the cache to fill up. As a
result, the system was unable to service any new requests for read or
write cache, resulting in a deadlock condition that halted mainframe
processing.

IBM product engineers cleared the deadlock condition on the storage
array and then deployed a prevention script (temporary hardware
instructions) to automatically run if any deadlock conditions were to
occur again. By mid-afternoon on April 17, 2018, the mainframe was
fully operational and, shortly thereafter, tax and payment processing
resumed. Within 24 hours, the IRS had fully recovered and was current
with processing, with no data corruption, data loss, or system breaches
associated with this event. There have been no further occurrences of
the deadlock condition.

While the IRS cannot guarantee that a rare hardware outage will
never happen again, it has spent significant time assessing how we
could reduce the effects of a similar failure. The IRS has worked with
its vendors to improve the incident response and notification process.
The IRS is also exploring options for increasing availability of
mainframe systems. In accordance with our most recent IT Vision, the
IRS is actively exploring solutions that will provide onsite resiliency
to enable High Service Availability for our systems. The IRS is also
considering ways to accept electronically-filed tax returns and
payments independent of the mainframe systems to minimize risk should
another mainframe interruption occur. Because the current backup system
for an event of this magnitude requires considerable time to become
operational, the IRS needs to invest in more failover options to
increase mainframe systems availability.

Question. And what new procedures will IRS implement (including
postings on social media) to ensure that taxpayers and government
officials are kept abreast of developments and given the timely
direction they need to file their tax returns and comply with tax laws?

Answer. The IRS released a variety of public messaging on April 17,
2018, informing taxpayers of the outage and providing direction on how
taxpayers should file their tax returns.

This included a widely circulated mid-morning press statement and
televised comments from the Acting Commissioner during the House
Oversight and Government Reform Committee hearing. IRS issued a Quick
Alert at 8.48 a.m. By mid-morning April 17th, the IRS had also sent e-
filing software providers the following message: ``Currently, a number
of IRS systems are experiencing technical difficulties. The IRS is
looking into the issue and will provide updates as soon as possible.
Taxpayers should continue filing their tax returns as they normally
would.'' The IRS added outage messages to affected tools on IRS.gov. On
IRS telephones, the IRS instructed our toll-free representatives how to
respond to questions from callers. In addition, the IRS issued internal
alerts under our Servicewide Electronic Research Program on both April
17th and 18th to internal audiences, which includes IRS Accounts
Management and Field Assistance personnel, with messaging similar to
the public messaging.

During the afternoon on April 17th, the IRS began to publicize the
filing deadline extension until midnight on Wednesday, April 18, 2018.
This message was shared as quickly as possible. The IRS shared the
announcement of the extension widely through a national news release,
on IRS.gov, on Twitter, and through the news media and national tax
association and partner groups, to ensure wide awareness of the
additional day to file.

The IRS is looking for ways to focus additional attention on these
sorts of issues should they occur in the future, including higher
profile messaging on the front page of IRS.gov and wider use of social
media.

529 plans
Question. As you know, the new tax law expanded IRC section 529
plans to allow for qualified distributions from these plans for K-12
education expenses. These distributions can be made directly to the
school, the student or the parent and are limited to $10,000 per
student per year. I am concerned that current practices do not allow
for proper oversight of this expansion.

As you are aware, 529 plans are required to provide taxpayers
receiving distributions and the IRS a Form 1099-Q recording the amount
distributed from the plan that year. Qualifying colleges and
universities are required to provide a Form 1098T to both the taxpayer
and the IRS which report the expenses that were paid to the respective
institution by the taxpayer for that year. This data is not collected
or included on the annual Form 1040. Instead, taxpayers are only
required to self-report to the IRS on Form 1040 when there are non-
qualified distributions or distributions in excess of qualified
expenses.

How many individual tax returns were flagged and/or caught on audit
each year for the past 3 years for reporting violations of 529 plan
contribution rules? Please also provide the dollar amounts of these
violations?

Answer. The IRS is unable to provide this information, as its
systems do not capture this information. Such income would be reported
on Form 1040 as ``Other Income,'' which may include other types of
income.

Question. Does the IRS match or track the 1098-T or 1099-Q
information with the information that is filed by the corresponding
taxpayer or is this only manually matched if the taxpayer is audited?

Answer. The IRS currently matches both Forms 1098-T received from
qualifying colleges and universities and Form 1099-Q from either a 529
or 530 education plan.

Question. With the expansion to K-12 education expenses, how does
the IRS intend to ensure that taxpayers are not taking distributions in
excess of $10,000 per student per year? Similarly, how does the IRS
intend to ensure that multiple taxpayers are not claiming the same
student? For example, parents and grandparents both claiming the same
child up to the maximum amount of $10,000 would be claiming $20,000 in
qualified distributions.

Answer. The IRS is currently considering options to address the
additional compliance issues generated by the expansion of qualified
expenses to K-12 education and the associated limitations. The ability
of multiple taxpayers to claim tax-free distributions relating to the
same beneficiary existed under the prior law.

Question. How does the IRS intend to determine the qualifying
expenses for K-12 educational institutions for matching purposes since
these institutions do not file a 1098-T with the IRS or the taxpayer?

Answer. Form 1098-T is filed under the authority of IRC section
6050S. The filing of this form does not apply to IRC 529 under either
prior or present law. Because the IRS will not have the information on
Form 1098-T available, it determines qualifying expenses through a
manual process if the return is audited and the issue warrants
examination.

Question. Many States that provide State income tax deductions are
claiming that their State laws must be modified to come into compliance
with the Federal law so their taxpayers will be able to continue to
contribute to the same 529 plan. For example, a State has defined
eligible 529 contributions to their plan to ``colleges or
universities'' without a reference to IRC section 529 so the change in
IRC section 529 for eligible expenses is not controlling. In these
cases, can the IRS provide guidance that States do not have to
participate in 529 plans and that the changes to 529 plan rules as
contained in H.R. 1 are not mandatory on the States. In other words,
States do not have to change their laws so their citizens can continue
to contribute to their 529 plans as they were able before the change in
law.

Answer. Public Law 115-097 expanded the definition of ``qualified
higher education expense'' for IRC section 529 to include tuition
expenses at or below the $10,000 tax-year ceiling for K-12 schools.
This expanded definition is applicable for Federal income tax purposes
regardless of how States elect to manage their 529 plans. A State's
decision to participate in 529 plans or the deductibility of
contributions to such plans will not impact the qualification of
distributions for Federal tax purposes. The law did not modify the
allowable contributions to 529 plans or related deductions provided by
the States. Additionally, on July 30, 2018, The Internal Revenue
Service and Department of the Treasury announced their intent to issue
regulations on three recent tax law changes affecting popular 529
education savings plans.

Question. Are there any recommendations forthcoming from IRS for
changes in law or technical corrections to ensure that taxpayers are
compliant with the rules for the new expansion for K-12 expenses?

Answer. Not at this time.

______

Questions Submitted by Hon. John Thune
Question. One of the biggest issues facing South Dakotans when it
comes to their Federal taxes has been 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 the IRS's new partnership
with the Federal Trade Commission to provide taxpayers with an online
portal to report instances of tax-related identity theft.

Can you give us an update on the IRS's efforts to improve its
defenses and help taxpayers fight ID theft?

Answer. Refund fraud caused by identity theft (IDT) is one of the
biggest challenges facing the IRS today, and the harm it inflicts on
innocent taxpayers is a problem the IRS takes very seriously. The IRS
has a comprehensive strategy focusing on preventing refund fraud,
investigating these crimes, and assisting taxpayers victimized by tax-
related IDT. Through the Security Summit, an unprecedented partnership
between the IRS, the software industry, and the States, the IRS
continues a unified battle against identity theft and works on
collaborative solutions to combat stolen IDT refund fraud. IRS data
shows significant improvements as fewer identity theft returns entered
the tax system, fewer fraudulent refunds were issued, and fewer
taxpayers were reporting themselves as victims of identity theft. The
number of taxpayers reporting to the IRS that they are victims of
identity theft continues to decline, it's fallen nearly 65 percent
between 2015 and 2017. Also, 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.

As identity thieves evolve to become more sophisticated, the IRS
has tightened its security in response to the increased threat. The IRS
is making it harder for identity thieves to successfully masquerade as
taxpayers and file fraudulent refund claims on behalf of these
taxpayers. The IRS and partners recognize that large data breaches of
personally identifiable information (PII) are difficult and frustrating
for the victims and financial ecosystem. Large-scale data breaches are
a reminder of the value of data for fraudulent purposes and identity
theft. Over the last several years, the IRS IDT fraud filtering
processes have remained effective even in situations of large losses of
PII.

The IRS continues to endeavor to strike the necessary balance
between preventing identity theft and ensuring that legitimate refunds
are released quickly. The IRS implemented strategic initiatives to
assist tax preparers with authenticating their clients who have been
victims of a data breach, as well as identifying refunds that can be
released quickly, based on specific criteria. To stop fraudulent
refunds from being paid, the IRS continually conducts analyses and
looks for ways to improve and fine tune identity theft and fraud
detection filters, as well as reduce the false detection rate. If the
filter's selection criteria result in lower accuracy or performance,
they may be revised or retired to minimize taxpayer burden.

The IRS uses several primary tools to combat tax-related identity
theft and fraud. This includes tools specific to addressing taxpayers
who have been victims of a data loss of Federal tax information (FTI).
Data losses involving FTI can be used to file returns that appear to be
coming from the true taxpayer. IRS models and filters continue to be
modified to address the level of sophistication used to file these
fraudulent returns. The IRS has implemented the use of Dynamic
Selection Lists, allowing the IRS to monitor specific accounts of
taxpayers who have been victims of an FTI data beach when the data
compromised would have a direct impact on Federal tax administration.
In doing so, the IRS is able to identify these suspicious returns more
effectively, resulting in better protection for taxpayers' Federal tax
accounts and increased revenue protection.

In addition, there are multiple points in the return processing
lifecycle to identify, prevent, and assist possible IDT victims: pre-
filing, at filing, and post-filing.

To prevent IDT returns from ever coming in the door (pre-filing),
the IRS worked with tax software providers to improve the procedures
that their new and returning customers must use to identify themselves.
This minimizes the chance that the taxpayer's software provider's
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.

To prevent taxpayers impacted by tax-related identity theft from
becoming a repeat victim, the IRS issues an Identity Protection
Personal Identification Number (IP PIN). The IP PIN authenticates the
return received as belonging to the taxpayer.

The IRS has also implemented a variety of mechanisms to prevent
criminals from using a deceased individual's identity information to
perpetrate fraud. The IRS routinely locks the accounts of deceased
taxpayers and have locked more than 30 million accounts so far.

In addition, IRS has taken the following actions to prevent fraud
and enhance cybersecurity:

Sponsored the first Bureau-led Cybersecurity Community of
Practice forum to enhance information sharing of Cybersecurity
best practices. This led to two additional forums sponsored
subsequently by the Mint and the Alcohol and Tobacco Tax and
Trade Bureau.

Established Identity Theft Tax Refund Fraud Information
Sharing and Analysis Center (ISAC) that provides a public-
private partnership for participants to collaborate and share
information; to detect and deter identity theft tax refund
fraud; and to protect taxpayers.

Implemented network protection capability that blocked
transmission of over 196,000 un-encrypted emails from leaving
the IRS network, preventing the possible disclosure of
sensitive data such as social security numbers and passwords.

Implemented and leveraged multiple cybersecurity threat
countermeasures to prevent malware from being accessed or
installed within infrastructure assets.

Expanded the Integrated Enterprise Portal (IEP) environment
security protections and tools that significantly improved the
detection and remediation of attempted external attacks aimed
at IRS.gov via automated scripts, bots, and suspicious and
malicious Internet Protocol addresses. The layered security
tools protect taxpayer facing applications at the earliest
entry point of the IRS infrastructure, which is the edge of the
security and portal environment.

Implemented advanced analytics and fraud detection
capabilities within the IRS IEP and eAuthentication
environments to better protect access to the Get Transcript
application.

Enhanced monitoring and analytic capabilities through
investments in infrastructure, tools, and development expertise
to accelerate continuous data monitoring.

Question. Are there statutory changes that Congress needs to make
to help you in those efforts to protect American's tax data and
minimize the risk of tax-related identity theft?

Answer. The IRS appreciates the recent action of Congress enacting
legislation requiring the accelerated filing dates for certain
information returns.

Currently, under Internal Revenue Code sections 6011(e) and 6724,
taxpayers that file 250 or more information returns, including Forms W-
2, must file them electronically. The IRS uses this external third-
party information, plus internal historical taxpayer filing data,
business rules, and sophisticated algorithms, to identify potentially
improper and erroneous refund claims, including tax-related identity
theft.

Question. The PATH Act required that the IRS delay refunds until
February 15th for returns that claim the Earned Income Tax Credit or
the refundable Child Tax Credit in order to reduce fraud and improper
payments. Additionally, the PATH Act required employers to file their
copies of Forms W-2, W-3 and 1099-MISC for non-employee compensation by
January 31st, rather than the end of February (or March if filing
electronically) under prior law.

With 2018 being the second year that the refund delay has been in
place, can you share with the committee any assessments of these new
requirements and your efforts to reduce fraud and improper payments
with respect to the EITC and refundable Child Tax Credit more broadly?

Answer. The earlier availability of Form W-2 data enhances the
IRS's defenses against identity theft and refund fraud. The IRS
conducted systemic verification of information reported on taxpayers'
returns against third party information reporting earlier, before
issuing refunds. In addition, the IRS utilizes the earlier Form 1099-
MISC for non-employee compensation information as a variable in the
filtering process.

This filing season, the IRS leveraged both the Return Review
Program (RRP), and the PATH Act refund hold to automate and expand the
selection of potentially fraudulent returns. Through February 15th, the
IRS identified approximately 312,000 returns claiming Earned Income Tax
Credit (EITC) and Additional Child Tax Credit (ACTC) with potential
issues with overstated income or withholding. Some employers may obtain
short 30-day extensions based on certain exigencies and submit their
information returns after the January 31st due date. If the information
comes in later and the return information is verified, the refund will
be released.

About 3.5 percent of EITC related refunds were held for additional
pre-refund compliance review by the Income Verification Program.
Additional returns could also be selected for identity theft and pre-
refund audit.

Other strategies to reduce improper payments with respect to
refundable tax credits include education, outreach, and compliance
efforts. The IRS is exploring enhancements and improvements to our
enforcement efforts, while balancing taxpayer burden. For example, the
IRS created a Refundable Credit Operational Strategy, which documents
existing refundable credit efforts and identifies potential new
activities that could reduce improper payments. The IRS also hosted an
EITC summit in June 2016, and a follow-up summit in September 2017.
These summits provided us a wide variety of stakeholder perspectives on
improving compliance.

Administering EITC represents a significant challenge for the IRS
due to the nature of tax credits and the lack of available information
to verify certain aspects of taxpayer eligibility at the time a return
is filed. Many factors continue to serve as barriers to reducing
overclaims in the EITC program. These include no single comprehensive
government database or third-party data source that we can use to
confirm all EITC eligibility requirements, complexity of the tax law;
and declining IRS resources. These factors need to be addressed through
legislative changes including error authority so an examination is not
required to adjust EITC.

As detailed earlier, while the PATH Act provisions helped to reduce
refund fraud with respect to refundable credits, further statutory
authority is needed including correctable error authority to address
issues at the time of filing and increasing the IRS's oversight
authority over paid tax return preparers. The administration has
proposed both in its FY 2019 budget.

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

Answer. See previous question.

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

Answer. As detailed earlier, the IRS does not currently have
correctable error authority to adjust erroneously claimed EITC based on
the income discrepancies reported to the IRS. In addition, the IRS
cannot address claims for the American Opportunity Tax Credit (AOTC)
where a student has been claimed for more than the 4-year limit, has
attended an ineligible institution, or did not attend at least half-
time. Therefore, the IRS addresses these errors through audits, which
require significant time and resources. The administration has proposed
to increase IRS's authority to correct certain errors before refunds
are issued.

The IRS appreciates Congress's enactment of legislation requiring
accelerated filing dates for information returns.

In addition, increasing the authority to regulate paid tax return
preparers, would help stop improper payments. Many taxpayers who claim
these credits use professional tax preparers. If the IRS had the
authority to ensure that paid preparers had certain minimal
qualifications, that would improve the quality of returns that those
preparers submit and thus, lower the number of errors that the IRS has
to address in processing returns. The administration included a
proposal in its FY 2019 budget.

______

Questions Submitted by Hon. Bill Nelson
Question. As you know, in the wake of the hurricanes last year, the
IRS delayed a number of reporting and filing deadlines. On behalf of
Florida taxpayers, I want to thank the IRS for that relief. However, in
response to a letter I sent the IRS following Hurricane Irma, the IRS
said it could not halt its private debt collection program--which the
National Taxpayer Advocate says often comes down hardest on low-income
people already facing significant hardship.

Please explain why the IRS could not suspend its private debt
collection program across the board for taxpayers in Federally declared
disaster areas.

Answer. The IRS determines the debt collection relief to be granted
based on an assessment of the impacted area. For catastrophic disasters
that affect entire States/territories, the relief granted includes
suspending collection activity for a specified period of time in the
designated disaster area, including initiating contact with the
taxpayer. The IRS marks the accounts of taxpayers with the type of
relief granted based on the last filed return showing an address in the
designated disaster area.

The IRS granted relief from collection activity following Hurricane
Irma in Florida from September 4, 2017 to January 31, 2018 and in
Puerto Rico and U.S. Virgin Islands from September 5, 2017 to January
31, 2018. On September 12, 2017, the IRS notified the public of
expanded relief to any area designated by FEMA as
qualifying for either individual assistance or public assistance in all
67 counties in Florida, https://www.irs.gov/newsroom/tax-relief-for-
victims-of-hurricane-irma-in-florida.

The issued notice provides that: ``Affected taxpayers who are
contacted by the IRS on a collection or examination matter should
explain how the disaster impacts them so that the IRS can provide
appropriate consideration to their case.'' The private debt collection
agencies are required to follow similar procedures to those that the
IRS follows for debt collection. Thus, the private debt collection
agencies were required to suspend all contact with taxpayers, cease all
collection activity, and return the case to the IRS if a taxpayer
requests relief verbally or in writing. The IRS alerts taxpayers
through our press releases, postings on IRS.gov, and published
guidance.

Question. I understand that the number of tax-related identity
theft cases has declined in recent years, but criminals now have more
information on us than ever before--with all the data breaches and
privacy lapses that's occurred in recent years.

What do you plan to do to stay on top of this crime and protect
Americans from identity theft abuse or other scams, as criminals become
increasingly sophisticated?

Answer. Refund fraud caused by Identity Theft (IDT) is one of the
biggest challenges facing the IRS today, and the harm it inflicts on
innocent taxpayers is a problem the IRS takes very seriously. To
resolve IDT cases faster, the IRS centralized its IDT victim assistance
policy, oversight, and campus case work under its new Identity Theft
Victim Assistance organization. Benefits to this centralized approach
include managing work using a common inventory system, reducing hand-
offs between functions, improved case processing through streamlined,
consistent procedures, and improved communication. In addition, the IRS
resolves IDT cases faster using the toll-free hotline for IDT victims.
All customer service representatives staffing this line are trained IDT
specialists who can review the taxpayer's case file and respond to the
IDT victim's call any time during business hours. For most cases, the
average time to resolve a case is now less than 120 days. For more
complex cases it can take up to 180 days to resolve. This is
substantially less than a few years ago, when cases could take over 300
days to resolve.

In addition, IRS has taken the following actions to prevent fraud
and enhance cybersecurity:

Implemented and leveraged multiple cybersecurity threat
countermeasures to prevent malware from being accessed or
installed within infrastructure assets.

Implemented advanced analytics and fraud detection
capabilities within the IRS IEP and eAuthentication
environments to better protect access to the Get Transcript
application.

Enhanced monitoring and analytic capabilities through
investments in infrastructure, tools, and development expertise
to accelerate continuous data monitoring.

Question. Last year, I introduced the Identity Theft and Tax Fraud
Prevention Act (S. 606), which grants the Treasury Department authority
to oversee paid tax preparers, among other reforms to protect taxpayers
from tax-related identity theft. Unfortunately, the paid tax preparer
provision is considered controversial by some members of Congress. The
provision, Section 115 of the bill, provides the following:

SEC. 115. MINIMUM STANDARDS FOR PROFESSIONAL TAX PREPARERS.

(a) In General.--Subsection (a) of section 330 of title 31, United
States Code, is amended--
(1) by striking paragraph (1) and inserting the following:
``(1) establish minimum standards regulating--
``(A) the practice of representatives of persons before the
Department of the Treasury; and
``(B) the practice of tax return preparers; and'', and
(2) in paragraph (2)--
(A) by inserting ``or tax return preparer'' after
``representative'' each place it appears, and
(B) by inserting ``or in preparing their tax returns, claims
for refund, or documents in connection with tax returns or
claims for refund'' after ``cases'' in subparagraph (D).
(b) Authority to Sanction Regulated Tax Return Preparers.--
Subsection (b) of section 330 of title 31, United States Code, is
amended--
(1) by striking ``before the Department'',
(2) by inserting ``or tax return preparer'' after
``representative'' each place it appears, and
(3) in paragraph (4), by striking ``misleads or threatens'' and
all that follows and inserting ``misleads or threatens--
``(A) any person being represented or any prospective person
being represented; or
``(B) any person or prospective person whose tax return, claim
for refund, or document in connection with a tax return or
claim for refund, is being or may be prepared.''.
(c) Tax Return Preparer Defined.--Section 330 of title 31, United
States Code, is amended by adding at the end the following new
subsection:
``(e) Tax Return Preparer.--For purposes of this section--
``(1) In general--The term `tax return preparer' has the meaning
given such term under section 7701(a)(36) of the Internal
Revenue Code of 1986.
``(2) Tax return--The term `tax return' has the meaning given to
the term `return' under section 6696(e)(1) of the Internal
Revenue Code of 1986.
``(3) Claim for refund--The term `claim for refund' has the
meaning given such term under section 6696(e)(2) of such
Code.''.

Does the administration oppose this provision? If so, please
explain why and provide suggested changes to address any concerns you
may have about the provision.

Answer. The administration's FY 2019 budget includes a similar
proposal to regulate paid tax return preparers. The above provision
achieves the objective in the administration's proposal.

Question. How will you work to ensure Public Law 115-97 (TCJA) will
not provide a tax benefit to companies that outsource U.S. jobs?

Answer. The tax policies advanced in TCJA, including a reduction of
the corporate tax rate and modernizing our international system of
taxation, will place U.S. companies in a more competitive position with
their foreign counterparts, and encourage investment, repatriation of
funds, and job growth in the United States.

______

Questions Submitted by Hon. Michael F. Bennet
Question. Mr. Kautter, you and the IRS have a tall task ahead of
you to implement the recently enacted tax legislation. I am very
concerned that some of the provisions add significant complexity and
uncertainty in ways that could lead both to an inability for businesses
to invest until they understand the rules as well as significant
revenue losses from gaming the system.

Do you have sufficient resources and authority to implement the tax
legislation?

Answer. The IRS sincerely appreciates the funds, along with the
multi-year authority and the flexibility to spread the funds between
its appropriations, that Congress provided the IRS to implement TCJA.
Based on the IRS's initial analysis of the provisions and the
associated requirements, the initial $320 million allocation, along
with the requested $77 million in FY 2019, are sufficient for FY 2018
and FY 2019.

Question. How much additional funding do you think you will need?

Answer. At this time, this funding ($397 million) is sufficient.

Question. What additional authorities would be helpful?

Answer. 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
that required expertise of an extremely high level in an
administrative, technical, or professional field. Executives hired
under this authority included the former Chief Information Officer, a
senior cybersecurity expert, the system architect, the director of the
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 its IT systems and protect taxpayer data from
cyberattacks. The administration's FY 2019 budget proposes reinstating
this authority through FY 2022.

Question. When do you think businesses will have the clarity they
need to fully understand the implications of the tax law on their
investing and hiring decisions? Can you give me a timeline on when you
expect to be halfway done, 80 percent of the way done, 100 percent
done?

Answer. The Department of the Treasury and the IRS appreciate the
need for guidance that helps businesses determine the implications of
the tax law on their investing and hiring decisions. We are working to
provide guidance on these provisions as expeditiously as possible so
that that taxpayers and tax practitioners may be aware of the changes
in the new law and plan accordingly. The Second Quarter Update to the
2017-2018 Priority Guidance Plan contains specific timelines for the
issuance of key guidance. Our goal is to issue guidance in at least
proposed form on the most significant provisions of the tax reform bill
by the end of this calendar year (2018).

Question. We are already being made aware of the ways that firms
will game the pass-through deduction. Unfortunately, this was entirely
predictable when the legislation was jammed through the Senate without
a single hearing or significant debate on massively important
provisions like the pass-through deduction. Even with that hasty
consideration, academics wrote up dozens of ways this provision and
others would be gamed.

Can you tell me what you are doing to prevent ``cracking and
packing,'' where lawyers, doctors, and other high-income professionals
who are not supposed to receive the deduction are shifting all of their
profits into a separate entity that is eligible for the deduction?

Answer. The Department of Treasury and the IRS appreciate the need
for guidance that clarifies outstanding issues relating to newly
enacted section 199A. Proposed regulations under section 199A were
released on August 8, 2018. The proposed regulations address ``crack
and pack'' and propose a rule to prevent such strategies.

Question. Would you say that the pass-through deduction simplifies
the tax code or makes it more complicated?

Answer. The IRS recognizes that all changes in law, including new
tax provisions, involve a learning curve for those affected. The IRS
and Department of Treasury are creating resources to assist taxpayers
and tax practitioners in properly computing this deduction. In addition
to the published guidance previously mentioned, the IRS is working on
various communications, including revisions to forms, instructions and
publications. Additionally, the IRS issued a Q&A along with the
proposed regulations.

Question. As someone who has done a lot of tax planning yourself,
do you think the pass-through deduction will reduce or increase tax
planning activity?

Answer. As previously mentioned, all changes in law require some
learning on the part of those affected. The Department of Treasury and
the IRS are aware that taxpayers and tax practitioners are reviewing
the new tax law provisions, reviewing their immediate impact and
planning for the future. The IRS is working to provide guidance on
these provisions as expeditiously as possible so that that taxpayers
and tax practitioners may be aware of the changes in the new law and
plan accordingly. Additionally, the proposed regulations mentioned
above propose anti-abuse guidance to make certain that the rules are
used appropriately.

______

Questions Submitted by Hon. Sherrod Brown
Question. The House of Representatives has passed the VITA
Permanence Act, which would allow the IRS to fund the Volunteer Income
Tax Assistance (VITA) program with up to $30 million using its own
discretionary funds. According to the Congressional Research Service,
the IRS collects about $1 billion in miscellaneous fees that it can use
however it wants.

What is the process by which the IRS decides how to direct those
resources?

Answer. Congress establishes the funding level for VITA in the
annual appropriation for Taxpayer Services. For example, $15 million of
the $2.507 billion appropriated for Taxpayer Services in FY 2018 (Pub.
L. 115-141) was designated for VITA grants, compared to $12 million in
FY 2015 (Pub. L. 113-235).

The IRS collects on average $350 million in user fees annually and
uses the budget authority from these fees to address high-priority
business requirements including new legislation and preparations for
the upcoming filing season, including taxpayer service activities. Over
the last several years, the majority of the user fees have been
allocated to critical IT operations necessary to implement and enforce
legislative mandates, including the Patient Protection and Affordable
Care Act, Foreign Account Tax Compliance Act, Trade Preferences
Extension Act, and Achieving a Better Life Experience Act.

Question. If the VITA Permanence Act becomes law, will you work
with my office to ensure this program has the funding it needs to carry
out its services?

Answer. If the VITA Permanence Act becomes law, the IRS will work
with the VITA partners to provide services to taxpayers.

Question. On the issue of Private Debt Collectors, according to the
Taxpayer Advocate, 28 percent of taxpayers who have had their debts
assigned to private collectors have incomes below $20,000, and 44
percent have incomes below 250 percent of the Federal poverty level.
The Taxpayer Advocate says you have legal authority to prevent
collection on low-income taxpayers. Is that true, and if so, what steps
is the IRS taking to shield low-income taxpayers from these collection
efforts?

Excluding cases where the income reported on the tax return is
below 250 percent of the Federal Poverty Level fails to consider that
the taxpayer may have assets and, thus have an ability to pay. For this
reason, the IRS has not excluded these cases from being assigned to a
PCA.

Question. How are debt collectors instructed to prioritize
collection? For instance, why are debt collectors targeting low-income
individuals when underreported business income accounts for about twice
the percentage of the tax gap as non-business income?

Answer. Section 32102 of the Fixing America's Surface
Transportation Act (FAST Act) requires the IRS to use private
collection agencies (PCAs) for the collection of outstanding inactive
Federal tax debts. Under the FAST Act, IRS is required to assign
accounts to PCAs where taxpayers owe money but the IRS is no longer
actively working the accounts.

Under the FAST Act, the IRS cannot assign accounts to PCAs
involving taxpayers who are: deceased; under the age of 18; in
designated combat zones; victims of tax-related identity theft;
currently under examination, litigation, criminal investigation, or
levy; subject to pending or active offers in compromise; subject to an
installment agreement; subject to a right of appeal; classified as
innocent spouse case; and in presidentially declared disaster areas and
requesting relief from collection.

PCAs are required to work the accounts as they are assigned to
them. PCAs do not know the reason why the taxpayer has outstanding
Federal tax debts. For example, the tax debt may be the result of the
taxpayer filing a return but not paying the tax at the time of filing.
The tax debt may be the result of a compliance action. PCAs only know
the amount of the unpaid debt, the tax year, and information about the
taxpayer.

The PCAs offer payment arrangements to taxpayers in a manner
consistent with IRS installment agreement procedures for similarly
situated taxpayers who call the IRS. As is the practice within the IRS,
a taxpayer's proposal to pay is accepted without questioning the
ability to pay if the case meets certain criteria.

If a taxpayer reports an inability to pay in full or through a
payment arrangement for any reason, IRS procedures require the PCA to
return the account to the IRS.

Question. On the issue of taxpayer service, according to the
Taxpayer Advocate, the IRS is answering only 60 percent of taxpayer
phone calls during this year's filing season, and is not answering
questions after the filing deadline. From a funding perspective, what
does Congress need to provide your agency so that taxpayers can have
prompt, in-person help navigating the tax code?

Answer. The IRS achieved an 80-percent level of service on its
phones during the 2018 filing season and projects achieving 75 percent
for the full year. The resources requested for tax reform
implementation will help ensure that the IRS can provide prompt help to
taxpayers navigating the changes to the tax code during filing season
2019. In addition, Customer Service Representatives will be answering
tax
reform-related questions from taxpayers and representatives all year,
rather than just in filing season.

______

Questions Submitted by Hon. Dean Heller
Question. The Tax Cuts and Jobs Act represents a meaningful
simplification and modernization of our outdated tax code. However,
much work remains to be done to review existing and outdated
regulations to ensure they do not place undue compliance burdens on
individuals and businesses. One unduly burdensome regulation that still
needlessly harms Nevadans is the current $1,200 slot jackpot reporting
threshold, which has been in place for approximately 40 years.
Accounting for inflation, that number should be more than four times
higher today--roughly $5,000. Unfortunately, however, the threshold
amount has remained static and, as a result, continues to impact many
more of my constituents than was originally intended.

Are you willing to consider updating the current slot jackpot
reporting threshold to reflect 4 decades of inflation?

Answer. As you know, the current $1,200 threshold for reporting
winnings from slot machine play was set in regulations published in
1977, despite the fact that section 6041 of the Internal Revenue Code,
the operative statute, provided in 1977 (and currently provides) that,
generally, a payment of income of $600 or more made in the course of a
trade or business is subject to information reporting. When the IRS
published proposed regulations in 2015 to update the regulations for
information reporting for bingo, keno, and slots, it asked for public
comments regarding the feasibility of reducing the reporting thresholds
to $600 at a future time. The IRS received numerous comments in
response to this request. Almost all of the comments recommended
against lowering the thresholds, and many recommended raising the
thresholds. None of the comments, however, provided information that
could be used as a basis for raising the threshold or determining what
a higher threshold should be. As there has not been congressional
action on these thresholds in over 40 years and we have no basis on
which to determine what a new threshold should be, the IRS finalized
these regulations in 2016, retained the status quo, and did not change
the reporting thresholds. Notably, the final regulations provide an
optional aggregate reporting method and simplified payee identification
requirements, both of which lessen the information reporting burden for
the industry.

Question. I have long been a champion of policies that promote the
development of alternative energy technologies like solar and
geothermal, and I was instrumental in securing the enhanced solar
investment tax credit (ITC) last Congress. However, while this
provision was signed into law nearly 3 years ago, stakeholders in my
home State of Nevada and across the country are still waiting to
receive guidance on the qualification standard and phasedown. When can
we expect to receive this guidance on the solar ITC?

Answer. The IRS issued guidance on the solar tax credit (Notice
2018-59) in June 2018.

______

Questions Submitted by Hon. Sheldon Whitehouse
Question. At the hearing, we discussed the IRS's role in combating
foreign election spending. I asked about what the IRS does to prevent
foreign nationals from laundering money through opaque LLCs or
501(c)(4) organizations and into our elections.

Thanks to Senator Wyden's inquires, we have learned that the
National Rifle Association (NRA) accepts foreign donations, although
the NRA claims that none of those donations go toward political
expenditures. The NRA told Senator Wyden ``Our review of our records
has found no foreign donations in connection with a United States
election, either directly or through a conduit.'' Has the IRS
investigated or is it investigating this claim?

Answer. As a general rule, section 6103 of the Internal Revenue
Code (IRC) precludes the disclosure of whether the IRS investigated or
will be investigating a particular taxpayer's conduct under the
Internal Revenue laws.

Question. Section 501(c)(4) organizations are required to disclose
their donors to the IRS. What does the 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. This regulation also
authorizes the Commissioner to grant relief from those requirements. On
July 16, 2018, the Commissioner exercised his discretion with the
publication of Revenue Procedure 2018-38 limiting the requirement to
file names and addresses on Schedule B to organizations described in
section 501(c)(3) or section 527 of the Internal Revenue Code. These
organizations must continue to collect and keep this information in
their books and records and to make it available to the IRS upon
request, when needed for compliance purposes.

Question. What does the IRS do when a potential shell corporation
is listed as a donor to a 501(c)(4)?

Answer. The IRS maintains or obtains information for use, as
needed, in compliance matters. The Federal tax consequence of the
characteristics of any corporate donor would depend on the facts and
circumstances of the particular case.

Question. What resources do you devote to policing the rules about
501(c)(4)s?

Answer. The IRS administers and enforces the tax laws as in effect.
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. Question 15 of IRS Form 1024, the application for
recognition of tax exemption, asks: ``Has the organization spent or
does it plan to spend any money attempting to influence the selection,
nomination, election, or appointment of any person to any Federal,
State, or local public office or to an office in a political
organization?'' Tax-exempt organizations are also required to report
political activity annually on Form 990. Both forms are signed under
penalty of perjury, 26 U.S.C. Sec. 7206.

What is the process by which the IRS would initiate and pursue a
false statements investigation under 26 U.S.C. Sec. 7206?

Answer. The IRS follows processes set forth in the Internal Revenue
Manual (IRM) to initiate a criminal investigation. See IRM 9.4.1,
Investigation Initiation (March 2, 2008); IRM 25.1, Fraud Handbook; IRM
9.1.3.3.7.1, 26 U.S.C. Sec. 7206(1) (False or Fraudulent Return,
Statement, or Other Document Made Under Penalty of Perjury)--Elements
of the Offense (May 15, 2008).

Question. Does the IRS review public FEC filings to see if
organizations are reporting conflicting data regarding political
spending?

Answer. Depending on the facts of any particular case, the IRS
considers information that is necessary to determine if an organization
meets the applicable requirements for tax exemption.

Question. If an organization says on a 1024 or 990 form that it has
not engaged in any political activity or that it has no plans to, and
you subsequently find out that it has engaged in political activity, is
that sufficient to initiate a Sec. 7206 investigation?

Answer. Evidence that a filer made a statement ``which he does not
believe to be true and correct as to every material matter'' may lead
to a Sec. 7206 investigation. If an IRS function identifies a potential
violation of Sec. 7206, it follows established procedures to refer the
case to IRS's Criminal Investigation Division. See Internal Revenue
Manual 4.75.35.6, Criminal Referrals (August 19, 2016).

Question. Where there is an obviously false statement regarding
political activity on a Form 1024 or 990, how does the IRS determine
whether that statement rises to the level of materiality required under
26 U.S.C. Sec. 7206?

Answer. In the given circumstances, the IRS reviews evidence
whether a filer made a statement ``which he does not believe to be true
and correct as to every material matter.''

Question. Do you think there is something wrong where a group may
be reporting millions of dollars in spending to the FEC, but zero to
the IRS?

Answer. IRS administers and enforces the provisions of the Internal
Revenue Code (IRC). The IRC and rules thereunder require information to
be reported to the IRS on Form 1024 (now Form 1024-A) and Form 990 as
necessary to determine whether an organization meets the applicable
requirements. IRS is unable to confirm that Federal tax reporting
requirements are the same as the reporting requirements of other
agencies.

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

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)). 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. Applicable rules contain
examples illustrating facts and circumstances 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 fact-intensive. Generally,
criminal prosecutions require proving willful evasion of the tax laws.

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

Answer. The IRS will administer any statutory direction on this
matter.

______

Questions Submitted by Hon. Maria Cantwell
irs funding/customer service
Question. In FY 2019, the administration requested $2.24 billion in
the budget for taxpayer services--a cut of $215 million.

What steps can the IRS take to the same level of customer service
to taxpayers at a time of increased complexity, especially for pass
through businesses, as a result of the 2017 tax bill?

Answer. The FY 2019 budget request was prepared prior to the
enactment of TCJA and did not take into account the $397 million the
administration subsequently requested in FY 2018 for implementation and
service requirements through FY 2019. The IRS plans to hire the
necessary number of Customer Service Representatives (CSRs) to address
the expected increase in call volume during filing season 2019. IRS is
now answering tax reform tax law questions year-round, including
questions on the new Qualified Business Income Deduction for pass-
through businesses. IRS and the Department of the Treasury issued
proposed regulations in August 2018, along with accompanying materials,
to help businesses understand the new pass-through deduction changes.

Question. About 60 percent of customer service calls are handled by
automated responses. The IRS also provides in person assistance at
Taxpayer Assistance Centers (TAC's). For taxpayers who wish to talk to
an IRS employee in 2019 during the next filing season, is there any
plan to expand the network of TAC's so that taxpayers will have the
resources and access to information they need to file their taxes under
the new law?

Answer. The IRS continues to evaluate the needs and options for
delivering services to taxpayers. We routinely review face-to-face
Taxpayer Assistance Center (TAC) locations. During these reviews, we
analyze taxpayer access to face-to-face service in the community and
determine how to effectively meet taxpayer demand and preferences for
service.

We also offer virtual face-to-face services where taxpayers
interact with live assistor remotely via high-resolution video
capabilities at partner locations. So far, this calendar year, nine
Virtual Service Delivery (VSD) systems were installed at community
partners, for a total of 39 locations around the country. These include
two new VSD partner locations where face-to-face taxpayer services were
not previously available in the community. The IRS has identified
additional VSD locations and is planning and preparing for the
installation.

Seniors and low to moderate-income taxpayers can get free help with
return preparation through the Volunteer Income Tax Assistance (VITA)
and Tax Counseling for the Elderly (TCE) programs during the filing
season. At over 11,500 sites, taxpayers may obtain free face-to-face
help preparing their tax returns. These programs provide services to
primarily low to moderate income taxpayers, senior citizens, persons
with disabilities, those with limited English proficiency, those
located in rural locations, and Native Americans. TCE offers free tax
preparation for all taxpayers, particularly those who are 60 years of
age and older, specializing in questions about pensions and retirement-
related issues unique to seniors.
irs private debt collectors
Question. Debt collectors were mostly targeting lower-income
taxpayers, including some who are receiving Social Security Disability
Insurance (SSDI)--these people are not supposed to be part of the
program. The report also noted that of the 4,100 taxpayers who made
payments after their debts were assigned to private collectors, 1,100,
or 28 percent, had incomes below $20,000.

What steps can the IRS take to ensure that taxpayers who also
receive Social Security Disability Insurance (SSDI) are not targeted by
private debt collection?

Answer. The Fixing America's Surface Transportation (FAST) Act,
enacted in December 2015, requires the IRS to enter into qualified
collection contracts for the collection of inactive tax receivables.
The law is very specific about the types of cases that are excluded
from the program. Accounts the IRS identifies as ``currently not
collectible'' are not assigned to Private Collection Agencies (PCAs).
Although the statute does not exclude from the program those taxpayers
receiving Social Security Disability Income (SSDI) or Supplemental
Security Income (SSI), the PCA will return any account to the IRS when,
during discussion with taxpayers, they give any indication of receipt
of SSDI or SSI, or when the taxpayer, for any reason, States they are
unable to pay. As of January 25, 2018, the PCAs returned 2,109 accounts
because the taxpayer self-reported receipt of SSDI or SSI.

The IRS provides oversight of the PCAs' taxpayer interactions,
contractual compliance, and adherence to policies and procedures.
Overall, the PCAs are performing at a 98.5 percent accuracy rate. The
IRS will continue to provide this oversight and consider improvement
opportunities to address any concerns if they arise.
cybersecurity and identity theft
Question. Can you describe the steps you are taking to prevent tax
return fraud and assist the taxpayers who are tax identity theft
victims while the customer service budget at the IRS is being cut?

In addition, the IRS resolves IDT cases faster using its toll-free
hotline for IDT victims. All customer service representatives staffing
this line, are trained IDT specialists who can review the taxpayer's
case file and respond to the IDT victim's call anytime during business
hours. For most cases, the average time to resolve a case is now less
than 120 days. For more complex cases it can take up to 180 days. This
is substantially less than a few years ago, when cases could take more
than 300 days to resolve.

To prevent taxpayers impacted by tax-related identity theft from
becoming a repeat victim, we issue an Identity Protection Personal
Identification Number (IP PIN). If an attempt is made to e-file a
return without entering the IP PIN or if an incorrect IP PIN is
entered, the return is rejected until the correct IP PIN is entered.

Question. What additional resources do you need to protect those
systems and keep our taxpayer account information secure?

Answer. The 2019 President's budget included a program integrity
cap adjustment proposal that includes funding for automating online
fraud prevention capability to deliver actionable intelligence in near
real time. The IRS also needs funding and flexibility to hire
additional IT specialists skilled in data analytics/science and
interrogating voluminous data, and additional cyber security
specialists and the 2019 budget also included a request to extend the
streamlined critical pay authority program.

Question. What is the IRS doing specifically to help small
businesses to prevent them from falling victim and mitigating any
impact if their business identity becomes compromised?

Answer. The IRS has increased business identity theft protections
by expanding the upfront filtering and modeling to identify potential
identity theft in business returns. In addition, the IRS continues to
take a variety of steps to help make small businesses aware of the
threat from identity theft. This has been a key component of the
Security Summit external outreach and communications effort. The
Security Summit is a partnership between the IRS, State tax
administrators, and the private sector tax community and tax
professionals, to battle tax-related identity theft. The IRS Security
summit brings Federal, State, and tax preparation industry together to
work together to eliminate tax refund fraud.

Here are some examples of our communications-related work touching
on small businesses and identity theft:

Small Business Week 2018. During national Small Business Week in
May, the IRS issued a series of news releases aimed at small
businesses, including the following May 3rd news release: IRS urges
small businesses: Protect IT systems from identity theft. The release
links to a variety of resources, including: Has your business become
the victim of a data security breach?

e-News for Small Business. e-News for Small Business is an IRS
electronic newsletter distributed regularly to more than 300,000
subscribers. This year, the newsletter has included several security-
related articles to help raise awareness among small businesses about
identity theft and related issues.

Protect Your Clients, Protect Yourself. The ongoing Protect Your
Clients, Protect Yourself campaign has helped educate the small
business community about identity theft and what to do in the event a
business identity or its information is compromised. An outgrowth of
the Security Summit, the campaign launched in 2016 with a series of
news releases and tax tips. The campaign initially focused on tax
professionals, but has resources helpful to all small businesses.

Don't Take the Bait. As part of the Security Summit effort, the
IRS, State tax agencies and the tax industry sponsored an educational
series during summer 2017 called Don't Take the Bait. The series, part
of the ``Protect Your Clients, Protect Yourself'' campaign, raised
awareness of the critical need for tax professionals--as well as small
business and taxpayers--to increase their computer security and be
cautious when reviewing their inbox--specifically with regard to
successful email scams, dubbed ``spear phishing,'' that impersonate
friends, customers, or companies.

At the beginning of the 2017 holiday shopping season, the IRS and
its Security Summit partners conducted National Tax Security Awareness
Week with a series of 10 news releases and tax tips to encourage both
individual and business taxpayers to take steps to protect their tax
data and identities in advance of the 2018 filing season. This work
with State and private-sector partners, local consumer groups, law-
enforcement agencies, and other government groups led to 32 different
events across the country, more than 50 local television stories and
coast-to-coast media attention. Twenty-four State revenue departments
participated in the effort.

Question. Has there been an effort to bring small businesses into
this, as they have a much harder time recovering if their identity is
stolen or their credit is compromised?

Answer. Security Summit initiatives have focused on protecting all
taxpayers, including small businesses, from identity theft. As stated
above, outreach and educational efforts have focused on making all
businesses, including small businesses aware of the potential threat of
identity theft and steps businesses should take to protect themselves.
The IRS, however, has conducted extensive outreach to make all
businesses aware of the potential threat of identity theft. For
example, the IRS issued a Newswire article on December 1, 2017 (Issue
Number IR-2017-198), as part of the outreach communication efforts
specifically focused on small businesses.

The IRS has also addressed protecting clients at the Nationwide Tax
Forums.

Question. Have you brought business credit reporting agencies into
the working groups to identity the right data points to help protect
businesses in real or near real time?

Answer. Business credit reporting agencies are not currently
participants in the Security Summit working groups. The IRS, however,
worked with industry, States, and financial institutions to identify
characteristics or elements of business returns that would be helpful
in the identification of identity theft. In addition, the IRS
established a payroll sub-working group to engage payroll companies in
the fight against identity theft.
solar investment tax credit
Question. In December 2015, Congress passed The Protecting
Americans from Tax Hikes (PATH) Act of 2015, which extended the tax
credits for wind and solar production. The bill also made changes
regarding the placed in service definitions so that investors can start
earning the credit when construction begins. The IRS has provided
guidance for wind energy facilities PTC in June 2016. The solar energy
facilities ITC has not yet received any guidance from the IRS

The Protecting Americans from Tax Hikes (PATH) Act was enacted in
2015 and included a provision to extend and phase out the wind
production tax credit (wind PTC) and the solar investment tax credit
(solar ITC) and to change the qualification for to the solar ITC to the
start of construction.

The wind PTC received its guidance in 2016.

Businesses need certainty and clarity. Solar companies are bidding
on projects now and need to know how the changes from the PATH Act
would apply. Guidance is needed from the IRS to provide that certainty
and clarity.

Given that it has been 2\1/2\ years since the provision for the
solar ITC was enacted, will this guidance be issued shortly?

Answer. Guidance on the solar tax credit was issued in June 2018
((Notice 2018-59).

______

Questions Submitted by Hon. Robert P. Casey, Jr.
Question. Taxpayer Assistance Centers, which operate across
Pennsylvania and across the country, are a critical service provided by
the IRS. I note that TACs now operate by appointment. This is a recent
change, and my staff has heard of individuals being turned away from
TACs for lack of an appointment. In States like mine, taxpayers may
drive quite a distance to go to a center to receive tax assistance.

What kind of procedures do you have in place for individuals who
show up without an appointment?

Answer. Whenever possible, the IRS attempts to accommodate and
serve all taxpayers that come into a TAC without an appointment, if
there is capacity between scheduled appointments. The IRS also serves
individuals by exception in cases of hardship, including senior
citizens or those who have traveled long distances. For fiscal year
2018 through April 30th, TACs served more than 1.6 million customers,
of which more than 6 percent were served without an appointment.
Taxpayers do not need an appointment to make a payment by check or
money order, drop off a current year tax return, and get forms.

Question. Do you have special procedures for seniors or other
individuals who may have difficulty coming back to a TAC at a later
date?

Answer. See previous question.

Question. In your testimony, you said the total number of taxpayers
served at TACs this year through March 31st was 790,000, of which about
6 percent visited a TAC without an appointment. Please provide State-
by-State data both for total taxpayers served by TACs and also those
served by TACs without an appointment. Please also provide data on the
number of taxpayers served prior to the requirement for an appointment,
as well as data on how many taxpayers were turned away from a TAC this
year because they lacked an appointment?

Answer. The chart below shows the total number of taxpayers served
face-to-face at TACs by State, DC, and Puerto Rico for fiscal years
2015-2017.

------------------------------------------------------------------------
State FY 2015 FY 2016 FY 2017
------------------------------------------------------------------------
Alaska 23,000 18,700 9,800
------------------------------------------------------------------------
Alabama 114,700 86,500 58,700
------------------------------------------------------------------------
Arkansas 40,200 38,000 23,900
------------------------------------------------------------------------
Arizona 143,200 129,100 68,900
------------------------------------------------------------------------
California 702,800 540,900 409,900
------------------------------------------------------------------------
Colorado 62,000 53,500 40,500
------------------------------------------------------------------------
Connecticut 69,900 55,700 44,100
------------------------------------------------------------------------
District of Columbia 30,000 23,300 20,900
------------------------------------------------------------------------
Delaware 23,700 20,900 11,400
------------------------------------------------------------------------
Florida 387,100 313,300 277,000
------------------------------------------------------------------------
GA 201,400 177,000 139,400
------------------------------------------------------------------------
Hawaii 29,500 11,600 6,900
------------------------------------------------------------------------
Iowa 35,700 24,900 16,500
------------------------------------------------------------------------
Idaho 27,500 22,900 15,900
------------------------------------------------------------------------
Illinois 170,900 139,800 108,600
------------------------------------------------------------------------
Indiana 97,400 82,300 53,800
------------------------------------------------------------------------
Kansas 30,900 24,100 19,200
------------------------------------------------------------------------
Kentucky 51,500 37,000 29,300
------------------------------------------------------------------------
Louisiana 124,800 93,900 66,300
------------------------------------------------------------------------
Massachusetts 67,000 59,700 40,700
------------------------------------------------------------------------
Maryland 119,100 87,500 60,700
------------------------------------------------------------------------
Maine 38,000 32,500 18,000
------------------------------------------------------------------------
Michigan 71,800 59,300 39,300
------------------------------------------------------------------------
Minnsota 62,300 51,000 34,600
------------------------------------------------------------------------
Missouri 135,900 108,000 54,700
------------------------------------------------------------------------
Mississippi 60,700 49,800 32,100
------------------------------------------------------------------------
Montana 31,700 24,400 11,100
------------------------------------------------------------------------
North Carolina 121,700 96,400 95,000
------------------------------------------------------------------------
North Dakota 29,900 27,500 18,400
------------------------------------------------------------------------
Nebraska 37,500 35,200 21,800
------------------------------------------------------------------------
New Hampshire 25,600 21,000 12,300
------------------------------------------------------------------------
New Jersey 169,200 146,000 106,300
------------------------------------------------------------------------
New Mexico 62,200 36,300 18,700
------------------------------------------------------------------------
Nevada 78,000 53,100 31,200
------------------------------------------------------------------------
New York 343,600 286,500 214,800
------------------------------------------------------------------------
Ohio 105,900 106,400 76,300
------------------------------------------------------------------------
Oklahoma 54,300 58,500 35,900
------------------------------------------------------------------------
Oregon 74,100 63,300 59,200
------------------------------------------------------------------------
Pennsylvania 149,900 123,100 93,700
------------------------------------------------------------------------
Puerto Rico 62,700 63,900 52,900
------------------------------------------------------------------------
Rhode Island 25,200 16,400 12,800
------------------------------------------------------------------------
South Carolina 74,500 59,400 44,900
------------------------------------------------------------------------
South Dakota 18,400 14,500 10,900
------------------------------------------------------------------------
Tennessee 107,200 84,200 62,200
------------------------------------------------------------------------
Texas 525,700 439,000 327,300
------------------------------------------------------------------------
Utah 49,100 36,600 24,700
------------------------------------------------------------------------
Virginia 114,200 86,100 52,600
------------------------------------------------------------------------
Vermont 6,780 4,180 3,240
------------------------------------------------------------------------
Washington 141,500 114,000 77,900
------------------------------------------------------------------------
Wisconsin 50,300 41,900 33,100
------------------------------------------------------------------------
West Virginia 34,300 28,900 16,700
------------------------------------------------------------------------
Wyoming 19,900 19,000 11,000
------------------------------------------------------------------------
Total 5,434,380 4,426,980 3,226,040
------------------------------------------------------------------------

The chart below shows total number of taxpayers served face-to-face
at TACs with and without an appointment and total number of taxpayers
served face-to-face at TACs without an appointment by State, DC, and
Puerto Rico for fiscal year 2018 from October 1, 2017 to April 30,
2018.

------------------------------------------------------------------------
Taxpayers served Taxpayers served
face-to-face at TACs face-to-face at
State with and without an TACs without an
appointment appointment
------------------------------------------------------------------------
Alaska 5,780 1,380
------------------------------------------------------------------------
Alabama 30,800 2,560
------------------------------------------------------------------------
Arkansas 10,100 1,880
------------------------------------------------------------------------
Arizona 40,900 4,140
------------------------------------------------------------------------
California 230,500 15,100
------------------------------------------------------------------------
Colorado 21,600 1,000
------------------------------------------------------------------------
Connecticut 23,700 1,560
------------------------------------------------------------------------
District of Columbia 12,100 270
------------------------------------------------------------------------
Delaware 5,120 410
------------------------------------------------------------------------
Florida 144,600 9,130
------------------------------------------------------------------------
Georgia 72,900 6,070
------------------------------------------------------------------------
Hawaii 4,220 100
------------------------------------------------------------------------
Iowa 8,730 920
------------------------------------------------------------------------
Idaho 7,640 750
------------------------------------------------------------------------
Illinois 59,200 1,520
------------------------------------------------------------------------
Indiana 24,100 3,400
------------------------------------------------------------------------
Kansas 10,400 1,650
------------------------------------------------------------------------
Kentucky 15,100 1,040
------------------------------------------------------------------------
Louisiana 25,800 3,330
------------------------------------------------------------------------
Massachusetts 19,000 1,860
------------------------------------------------------------------------
Maryland 30,800 1,310
------------------------------------------------------------------------
Maine 9,100 990
------------------------------------------------------------------------
Michigan 19,800 1,310
------------------------------------------------------------------------
Minnesota 17,200 1,650
------------------------------------------------------------------------
Missouri 23,400 860
------------------------------------------------------------------------
Mississippi 13,800 2,280
------------------------------------------------------------------------
Montana 6,380 580
------------------------------------------------------------------------
North Carolina 48,200 3,760
------------------------------------------------------------------------
North Dakota 10,900 650
------------------------------------------------------------------------
Nebraska 11,100 1,140
------------------------------------------------------------------------
New Hampshire 6,750 1,390
------------------------------------------------------------------------
New Jersey 52,200 2,520
------------------------------------------------------------------------
New Mexico 9,700 110
------------------------------------------------------------------------
Nevada 16,800 170
------------------------------------------------------------------------
New York 96,700 5,030
------------------------------------------------------------------------
Ohio 40,700 4,420
------------------------------------------------------------------------
Oklahoma 17,800 2,820
------------------------------------------------------------------------
Oregon 32,600 3,270
------------------------------------------------------------------------
Pennsylvania 43,600 4,210
------------------------------------------------------------------------
Puerto Rico 25,200 1,080
------------------------------------------------------------------------
Rhode Island 6,350 300
------------------------------------------------------------------------
South Carolina 27,100 2,580
------------------------------------------------------------------------
South Dakota 5,870 540
------------------------------------------------------------------------
Tennessee 32,800 1,650
------------------------------------------------------------------------
Texas 172,100 10,180
------------------------------------------------------------------------
Utah 12,700 550
------------------------------------------------------------------------
Virginia 18,800 1,040
------------------------------------------------------------------------
Vermont 2,180 180
------------------------------------------------------------------------
Washington 43,000 1,820
------------------------------------------------------------------------
Wisconsin 16,400 480
------------------------------------------------------------------------
West Virginia 8,400 650
------------------------------------------------------------------------
Wyoming 4,700 820
------------------------------------------------------------------------
Total 1,655,420 118,410
------------------------------------------------------------------------

Before requiring an appointment, in FY 2015 a total of 5.4 million
taxpayers were served face-to-face at TACs. The IRS does not have data
of how many taxpayers may have been unable to obtain service at a TAC
because they lacked an appointment. This is difficult information to
capture as some taxpayers choose not to wait; some find assistance
through other channels such as IRS.gov or toll-free telephone lines;
and some obtain their answer through information sources provided at
the TAC.

Question. This committee has discussed cybersecurity and tax-
related ID theft prevention quite a bit in the last few years. This
threat is even more pronounced with the massive Equifax data breach
last year.

Can you discuss investments you've made to better protect
taxpayers' personal information?

Answer. The IRS has made significant investments in predictive
analytics, forensics, and monitoring capabilities. The IRS has
developed indicators/models to detect and/or prevent fraudulent
activity in online applications. The IRS conducts in-depth analysis of
anomalous behavior of online applications and coordinate our findings
for appropriate and timely response. Going forward, the IRS will
enhance these capabilities with investments in next generation advanced
analytics, to generate actionable threat intelligence in near real-
time.

______

Submitted by Hon. John Thune

From The Wall Street Journal

The Wages of Tax Reform Are Going to America's Workers

In a dynamic, competitive economy, what's good for companies is good
for their employees.

By Kevin Hassett
April 18, 2018

In a dynamic, competitive economy, the relationship between companies
and their employees is symbiotic, not antagonistic. Research by
economists Alan Krueger and Lawrence Summers, both of whom served in
the Obama administration, shows that more-profitable employers pay
higher wages. Any company that attempts to pay a worker less than he is
worth will quickly lose that worker to a competitor. Thus, firms that
want to thrive must invest in their plants and workers.

When profits go up, capital investment goes up, and wages follow.
That's the reason we estimated, based on what has happened around the
world, that households will get an average $4,000 wage increase from
corporate tax reform, once its changes are fully implemented and swoosh
through the nation's economic engine.

Naysayers have been invested in the law's failure from day one. But the
data are already proving them wrong. An increase in the return to
investment should drive investment and profits up, increase
productivity and wages, and ultimately boost economic growth. Here's
what we've seen so far this year:

More investment. The President's promise to lower corporate
taxes and reduce red tape has led to a surge in American business
investment. Real private nonresidential fixed investment increased 6.3
percent during the fourth quarter of 2017, according to data from the
Bureau of Economic Analysis. Equipment investment rose 8.9 percent,
thanks largely to the tax law's allowance for full expensing of
equipment investment retroactively to September 2017. In March 2018,
the Morgan Stanley Composite Capital Expenditure Plans Index reached
its highest level since it began tracking in 2006.

Greater productivity. Capital investment raises capital per
worker and thus labor productivity. Here again, the early signs are
positive. For perspective, real private nonresidential fixed investment
was anemic at the end of the Obama administration: On a year-over-year
basis, it fell 0.6 percent in 2016. As a result, during the post-
recession expansion under President Obama (2010-16), the moving 4-year
average contribution that capital made to labor productivity growth in
the private sector turned negative for the first time in history. But
boosted by a strong finish to the year, capital added 0.3 percentage
point to productivity growth in 2017--and will add more in 2018 if the
Morgan Stanley index is correct.

Pay raises. The average increase in wages from the year-earlier
period for January through March 2018 is the highest for any 3-month
period since mid-2009. A flurry of corporate announcements provide
further evidence of tax reform's positive impact on wages.

As of April 8th, nearly 500 American employers have announced bonuses
or pay increases, affecting more than 5.5 million American workers, as
a result of the TCJA. Walmart, the largest private employer in the
country, has announced a $2-an-hour increase in the starting wage of
new workers and $1-an-hour rise in its base wage for employees of more
than 6 months. For someone working 40 hours a week, that is up to
$3,040 per year in additional pay.

Other employers have done the same, including BB&T Bank, where full-
time workers earning the bank's minimum wage will see a $6,000 increase
in their annual income. Companies that have announced new bonus plans
have lifted compensation by an average of $1,150. Ten firms have also
announced minimum-wage hikes that imply annual income gains of at least
$4,000 for full-time workers.

Faster growth. Forecasters around the world are now predicting
this growth can be sustained. The Organization for Economic Cooperation
and Development has boosted its forecasts for real U.S. economic growth
in 2018 and 2019 to nearly 3% to reflect the impact of the TCJA. The
Congressional Budget Office also increased its growth projection for
this year and next by an average of 1 percentage point relative to its
last forecast before the tax bill was passed.

With the political battle over passage behind us, economists are again
focusing on the data. All indications are that the tax bill delivered a
much-needed boost to
capital-starved American workers, and wages are doing what economics
says they should when companies invest aggressively in more and better
machines and share profits with workers. Perhaps it is a time to put
aside the archaic notion that the conflict between capital and labor is
the central story of our society. In a modern competitive economy,
workers do well when their employers do.

Mr. Hassett is chairman of the White House Council of Economic
Advisers.

______

Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
The annual hearing on tax filing season typically inspires the
level of enthusiasm most people bring to a prolonged root canal
procedure. But this year, there are big tax policy issues with serious
consequences facing millions of Americans.

First, small businesses are increasingly stuck in a bureaucratic
twilight zone. There is rampant confusion about how the new tax law
works--untested policies, sloppy legislative drafting, and outright
mistakes in the law. On top of that, a Trump Cabinet turf battle has
been adding to the uncertainty and lengthening the time that small
businesses are going to be in the dark about how the tax rules apply to
them.

So here's the bottom line. Estimated tax payments are due, but
millions of small businesses don't know how to estimate what they owe.

The owner of a restaurant known as a local landmark, the highly
regarded mechanic whose expertise has built a loyal base of regular
customers, the finish carpenter whose sought-after work is prized for
its sturdiness and good looks--they've all been mired in this tax code
mystery zone while Trump officials go 12 rounds over who's going to get
final say on regulations. I understand there's been news on this issue
this morning. But the fact is, deadlines for guidance from the
administration are slipping. Tax experts are so unsure of the road
ahead, they're advising small business clients to bump up their
estimated payments from last year just to be safe.

Let's not forget that certainty was one of the key selling points
of the tax bill--sure footing for businesses to focus on growing and
hiring rather than deciphering a byzantine, outdated tax system. The
magical growth effects were going to kick in right away, and workers
were going to see big raises. The reality of the law looks awfully
different.

All this confusion and delay create yet another golden opportunity
for powerful lobbyists and special interests to creep in and twist the
rules in their favor. They'll be after even more exclusive carve-outs
and sweetheart deals--exactly the kind of favoritism that Americans
want eliminated from our tax laws.

And the likelihood they'll be able to exploit these tax loopholes
is even greater than in the past, because taxpayer audits have fallen
to a 15-year low, with audits of high-income earners dropping the most.

I want to thank Acting Commissioner Kautter for joining the
committee here today. As I said at the outset, I'd wager that most
Americans would expect a hearing on tax filing season to be about as
sleep-inducing as it gets on Capitol Hill. But I hope we're able to
uncover some important information about what's ahead for taxpayers
this year and going forward as the Trump tax law is implemented.

______

Communications

----------

Center for Fiscal Equity

14448 Parkvale Road

Rockville, MD 20853

Chairman Hatch and Ranking Member Wyden, thank you for the opportunity
to comment on this year's tax filing season and future IRS challenges.
This tax season will be much like last year's, as the new tax bill is
not effective for that year's income. For most people, next year will
be much the same as last year, although many will no longer itemize,
but they will also lose exemptions. For those who use tax preparers or
preparation software, there will be little difference.

Some enjoy their civic duty to file taxes, but those who use preparers
probably do not, which is most people. The rich will likely use
accountants who have other money management duties and who, like the
IRS employees, must figure out the new tax rules on pass-through
income. For some, these rules equalize the treatment of ownership
income between corporate and non-corporate firms, to others this is
just another give away to donors. For all businesses, the ending of
corporate income taxation and its replacement with a value-added tax
and/or a net business receipts/subtraction VAT would have been so much
easier, save for the resistance of Chairman Hatch.

The reality is that an implicit hidden value-added tax is already in
force. It is the tax withheld by employers for the income and payroll
taxes of their labor force. A VAT simply makes these taxes visible
while an NBRT makes them more manageable, allowing employers to adjust
pay more easily for larger families, pay for health care or insurance
and fund public and non-public schools for dependents and college or
technical training for workers, as well as retirement plans that give
employees a stake and a say in the firm and a more secure retirement.

As you see, we still firmly believe that it is the tax code more than
the IRS that needs reform, and that what the IRS needs most is an
adequate budget, although that budget will decline under our
recommended reforms. By now, you are very familiar with our usual
submission.

A Value-Added Tax (VAT) to fund domestic military spending and
domestic discretionary spending with a rate between 10% and 13%, which
makes sure every American pays something.

Personal income surtaxes on joint and widowed filers with net
annual incomes of $100,000 and single filers earning $50,000 per year
to fund net interest payments, debt retirement and overseas and
strategic military spending and other international spending, with
graduated rates between 5% and 25%.

Employee contributions to Old-Age and Survivors Insurance (OASI)
with a lower income cap, which allows for lower payment levels to
wealthier retirees without making bend points more progressive.

A VAT-like Net Business Receipts Tax (NBRT), which is
essentially a subtraction VAT with additional tax expenditures for
family support, health care and the private delivery of governmental
services, to fund entitlement spending and replace income tax filing
for most people (including people who file without paying), the
corporate income tax, business tax filing through individual income
taxes and the employer contribution to OASI, all payroll taxes for
hospital insurance, disability insurance, unemployment insurance and
survivors under age 60.

The collection of the employee contribution to Social Security will
be exactly as it is now. Like proposals for a Fair Tax, the Value-Added
Tax and NBRT/Subtraction VAT will be collected by the states. If the
basic structure of reform is adopted in the states, the biggest change
will be the need for a common base between federal and state
consumption taxes.

Shifting from retail sales taxes and gross receipts taxes to value-
added taxes and VAT-like net business receipts taxes will change the
nature of most state taxation, while enabling ease of collection of
taxes on online sales, since taxes would be levied at every stage of
the production process. The IRS will assist states in this process,
which will likely take the form of some federal-state compact
commission to draft and approve the transitional rules.

If a common base agreement can be negotiated for these taxes, state
treasurers can collect both their own taxes and the federal taxes, as
well as analytical information on tax credit usage, which can then be
shared with the U.S. Internal Revenue Service in order to track income
accruing to payers of the federal high-income surtax, as well as to
recipients of the federal child tax credit, which would be paid to
employees with wages under the NERT and then verified by a mailing from
both the employer and the Internal Revenue Service, with employees
verifying that their employees paid every dollar to them reported as a
credit.

There will likely be problems to resolve in our proposed system, where
the states collect the Value-Added Tax and the Net Business Receipts
Tax and forward the money and records to the Internal Revenue Service.
This will not impact most taxpayers, since once they have bought a
product, no further action is necessary.

The IRS will likely supplement state-based auditing with reviews of
their own, but this is a small price to pay for a reform that will
reduce the income tax payment and audit workload by at least 80%.
Indeed, income tax simplification (through the elimination of all but a
few deductions), will further eliminate the workload generated by
remaining income tax payers. As you see, this is a much bigger change
than reform around the edges.

Employees with children will need to annually verify the information
provided by employers and, if they received less than was reported to
the government, notify the IRS who will send a refund and collect the
difference from the employer. This may trigger a dispute, but likely
most employers will simply pay if there was an error. Fraud is another
matter, which is criminal not a dispute to be settled. Other disputes
may involve parents double-dipping on two jobs or two earners, but
these will likely work out a payment plan or contact their divorce
lawyers to negotiate who pays.

Whenever an employee or an heir is paid interest, a dividend, a capital
gain or an heir sells an inherited asset, information will be
transmitted to the IRS, as well as sales to a qualified Employee Stock
Ownership Program (untaxed) and aggregated by Social Security Number.
Verification will be accomplished to make sure that tax avoidance does
not occur through use of multiple SSNs.

Individuals making over $50,000 per year and joint filers making over
$100,000 will have their information stored to compare to tax filings,
unless the Congress authorizes an automatic filing system where all
income surtax payers will receive notification when all data should
have arrived and what their refund or payment will be once they correct
the information or certify it is correct already. Banking information
should be on file, so authorization for payment, either at once or
installments should be easy. Very little IRS administration will be
required to do this. Indeed, data management and mailing could be
contracted out. All IRS employees could fit in a bathtub with room for
Grover Norquist.

Thank you for the opportunity to address the committee. We are, of
course, available for direct testimony or to answer questions by
members and staff.

______

Letter Submitted by Anand Desai
Members and staff of the Senate Committee on Finance:

Thank you for the April 12, 2018 hearing on ``The 2018 Tax Filing
Season and Future IRS Challenges'' and the opportunity to contribute my
opinions to the record. I share these opinions solely in my personal
capacity, as a citizen.

Two recent Inspector General reports show a big gap between the law
the IRS explains and the standards that the IRS ultimately enforces in
large, complex cases. ``Barriers Exist to Properly Evaluating Transfer
Pricing Issues,'' which the first highlights. (Transfer pricing is
generally about economic allocations of a business's income between the
United States and foreign countries, often tax havens.) In a year,
$10.5 billion in audit tax adjustments for cases involving this ``most
prevalent international tax issue representing the greatest tax
compliance risk facing the [Large Business and International
division]'' entered IRS Appeals, its structured, detached settlement
forum just short of court. Two billion dollars came through as
``final'' and $321 million ``posted to taxpayer accounts.'' Three cents
on the dollar. But why?

``Better Documentation is Required to Support Office of Appeals'
Decisions in International Cases,'' the next puts mildly. In over two-
thirds of the multi-million-dollar cases sampled, ``Appeals did not
weigh the relative strengths and weaknesses of both the taxpayers and
the Government's position as required by IRS guidance.'' Appeals also
accepted unsupported claims that taxpayers had failed to support during
audits, and did not address IRS Counsel opinions that did support
Exam's positions.

The tax code and its interpretation and application could be part
of the problem too, of course. But statutes, regulations, court
decisions and even staff levels benefit from regular and robust debate
and review. Meanwhile, broad nondisclosure of settlement practice,
including ``efforts to settle similar cases at similar rates,'' risks
the ``development of a body of `secret law' known only to a few members
of the tax profession.'' The Joint Committee explained that mandatory
summary reporting of issues and methods--one alternative to releasing
edited individual rulings--helps prevent businesses' advance pricing
agreements with the IRS. (See JCS-2-01.)

When a taxpayer calls the IRS for advice, it's nice if they pick
right up. But it's vital that the IRS apply that advice--compromised
only sparingly and accountably--across the board, so one can trust that
following it really does mean paying one's fair share toward funding
effective, dependable government. Recurring and comprehensive
independently led reporting on the IRS's key enforcement challenges and
efforts to fix them, like the Taxpayer Advocate's work on particular
taxpayers' difficulties that the ``Taxpayer First Act'' reform bill
embraces, would be a great step.

Sincerely,
Anand Desai

______

Electronic Privacy Information Center (EPIC)

1718 Connecticut Avenue, NW, Suite 200

Washington, DC 20009

Ph. 202-483-1140

Fax 202-483-1248

https://epic.org

April 12, 2018

Senator Orrin Hatch, Chairman
Senator Ron Wyden, Ranking Member
U.S. Senate
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20515

RE: ``The 2018 Tax Filing Season and Future IRS Challenges,'' April
12, 2018

Dear Chairman Hatch and Ranking Member Wyden:

We write to you regarding the hearing on ``The 2018 Tax Filing
Season and Future IRS Challenges'' \1\ to bring your attention to EPIC
v. IRS, a Freedom of Information Act case to obtain the tax records of
President Trump.\2\
---------------------------------------------------------------------------
\1\ ``The 2018 Tax Filing Season and Future IRS Challenges,''
hearing before the Senate Committee on Finance, 115th Congress, https:/
/www.finance.senate.gov/hearings/the-2018-tax-filing-season-and-future-
irs-challenges (April 12, 2018).
\2\ EPIC v. IRS, No. 17-5225 (D.C. Cir. appeal docketed October 4,
2017).

As you are aware, candidates for the Presidency have routinely
released tax record information to the American public. Mr. Trump broke
with that tradition even though he pledged to make this information
publicly available. That fact combined with legitimate questions about
the President's financial relations with a foreign government that
sought to influence the outcome of the 2016 Presidential election
provided the basis for EPIC's FOIA case to the IRS.\3\
---------------------------------------------------------------------------
\3\ The Electronic Privacy Information Center (``EPIC'') is a
nonpartisan research center established in 1994 to focus public
attention on emerging privacy and civil liberties issues, https://
epic.org/epic/about.html. EPIC is also a leading advocate for civil
liberties and democratic values in the information age. In response to
the finding of the intelligence community that the Russian Government
interfered with the 2016 Presidential election, EPIC launched a new
project on democracy and cybersecurity: EPIC, Democracy and
Cybersecurity, https://epic.org/democracy/.

On April 15, 2017, EPIC filed a Freedom of Information Act lawsuit
against the IRS to enable the public release of President Trump's tax
records.\4\ As EPIC stated in the original FOIA request to the agency:
---------------------------------------------------------------------------
\4\ Press release, EPIC, ``EPIC v. IRS: A Freedom of Information
Act Lawsuit to Obtain the Tax Returns of Donald J. Trump'' (April 15,
2017), https://epic.org/foia/irs/trump-taxes/EPIC-v-IRS-Press-Release-
Apr-2017.pdf; EPIC v. IRS, 261 F. Supp. 3d (D.D.C. 2017).

At no time in American history has a stronger claim been
presented to the IRS for the public release of tax records to
``correct misstatements of fact.'' \5\ If the Freedom of
Information Act means anything, it means that the American
public has the right to know whether records exist in a federal
agency which reveal that the U.S. President has financial
dealings with a foreign adversary.\6\
---------------------------------------------------------------------------
\5\ 26 U.S.C. Sec. 6103(k)(3).
\6\ FOIA request from EPIC to IRS (February 16, 2017), https://
epic.org/foia/irs/trump-taxes/EPIC-17-02-16-IRS-FOIA-20170216-
Request.pdf.

There is a key provision in the Internal Revenue Code that permits
the release of tax records in certain circumstances to correct
misstatements of fact. This provision, 26 U.S.C. Sec. 6103(k)(3), was
enacted to ensure the ``integrity and fairness [of the IRS] in
administering the tax laws'' in the aftermath of the Watergate scandal
and related misuses of tax information by the Nixon White House.\7\ It
allows the IRS to release tax records ``with respect to any specific
taxpayer to the extent necessary for tax administration purposes to
correct a misstatement of fact.'' \8\ Former IRS Commissioner Margaret
Milner Richardson stated that Sec. 6103(k)(3) ``permits the IRS to
disclose tax return information to correct misstatements of fact
without a waiver from the taxpayer.'' \9\ In other words: the IRS does
not need a waiver from President Trump to release his tax returns.
---------------------------------------------------------------------------
\7\ ``Confidentiality of Tax Return Information,'' hearing before
the Committee on Ways and Means, 94th Congress, 22-23 (1976) (statement
of Donald C. Alexander, Commissioner of Internal Revenue).
\8\ 26 U.S.C. Sec. 6103(k)(3).
\9\ Final remarks by Margaret Milner Richardson, Commissioner of
Internal Revenue, Fed. B.A. Sec. Tax'n Rep., Spring 1997, at 6, 9.

The IRS has used this disclosure power before. In 2000, the IRS
used its Sec. 6103(k)(3) authority to make ten separate disclosures of
tax information.\10\ Indeed, as Senator Grassley has observed,
Sec. 6103(k)(3) dictates that certain ``type[s] of factual
misstatements should trigger disclosure of return information''
depending on the ``consequences of these misstatements'' and ``their
degree of seriousness.'' \11\
---------------------------------------------------------------------------
\10\ Internal Revenue Service, ``Disclosure Report for Public
Inspection Pursuant to Internal Revenue Code Section 6103(p)(3)(C) for
Calendar Year 2000,'' at 3 (2001).
\11\ 127 Cong. Rec. 22,510 (1981).

There has never been a more compelling request presented to the IRS
than the request from EPIC to obtain the tax records of President
Donald J. Trump. Many individuals, including the President, have
published conflicting statements of fact about the contents of Donald
J. Trump's tax returns and the extent of his business dealings with the
Russian Government. Following the election, President Trump tweeted on
January 11, 2017: ``Russia has never tried to use leverage over me. I
HAVE NOTHING TO DO WITH RUSSIA--NO DEALS, NO LOANS, NO NOTHING!'' \12\
However, family members, public figures, and news organizations have
squarely disputed the President's denials of Russian financial ties,
including Donald Trump, Jr., Eric Trump, Senator Chris Murphy, The New
York Times, The Washington Post, and CBS News.
---------------------------------------------------------------------------
\12\ EPIC v. IRS, 261 F. Supp. 3d 1, 4 (D.D.C. 2017).

The IRS has the authority to release the President's tax returns
with the approval of the Joint Committee on Taxation. We urge the
Senate Finance Committee to support this release. The public has a
right to review the tax returns of President Trump and to know about
---------------------------------------------------------------------------
the extent of Russian interference with the 2016 Presidential election.

We ask that this statement be entered in the hearing record. EPIC
looks forward to working with the Committee on these issues of vital
importance to the American public.

Sincerely,

Marc Rotenberg Caitriona Fitzgerald
EPIC President EPIC Policy Director

John Davisson Christine Bannan
EPIC Counsel EPIC Policy Fellow

______

Letter Submitted by Susan Goding
April 20, 2018

U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200

RE: ``The 2018 Tax Filing Season and Future IRS Challenges,'' April
12, 2018

Honorable Members of the Senate Committee on Finance:

In November 2016 my husband and I mailed to the IRS an amended 2015
return. In the return we had adjusted the depreciation of a new
building on a farm we own. The following has been our experience with
IRS since then.

We never received any acknowledgement from the IRS that the amendment
had been received. Twice we contacted them and were told to check the
IRS website. There was no answer there. Our CPA also checked on the
status of our amended return and received no answer other than to check
back. This was in late April 2017.

During the summer of 2017, I stopped at the IRS office in the Zorinsky
Building in Omaha. The IRS customer service representative said the IRS
mails a letter to acknowledge its receipt of an amendment, and follows
up with a monthly letter providing its status. We never received
anything of this nature from the IRS, nor had our CPA.

Finally, on September 14, 2017, our CPA was able to speak to an IRS
person, Mr. Karmin (employee #100084316). Mr. Karmin said our amended
return was ``stuck and buried'' someplace. Mr. Karmin did send an
internal inquiry. He also said the IRS should have done this earlier
when we or our CPA had made contact. This shows lack of proper
training, follow-through, and organization methods of IRS staff.

On October 13, 2017, we received IRS Letter 2205 that said our 2015
return had been selected for an examination. The letter stated we had
to call the IRS by October 23rd. After the IRS had 12 months it gave us
10 days. We perceived this to be retaliatory and aggravating.

On October 16, 2017, we receive a letter from Chris Wagner, an IRS
representative/agent in Omaha, asking us to confirm an appointment to
meet him on October 23rd, and for us to have additional items for the
IRS review. On October 19, 2017, we received notice that Mr. Wagner had
been out sick, but that he believed he had all the paperwork needed to
finish our 2015 tax examination.

On October 23, 2017, I met Mr. Wagner at the IRS office in Omaha. We
discussed our activities on the farm and the intent and purpose of the
recently built farm shed on our property. Following our meeting, I
emailed him additional information he'd requested. The next day
additional emails were sent between us to clarify information and
statements he'd questioned.

On November 13, 2017, our CPA received information from us to discuss
with Mr. Wagner. Our CPA said he called Mr. Wagner three times and left
messages before Mr. Wagner responded.

On November 14, 2017, our CPA received a call from Mr. Wagner to
clarify things. Our CPA requested a few more items from us and
commented that this examination did not appear to be handled in a very
professional manner.

On November 27, 2017, we received an email from our CPA telling us Mr.
Wagner had missed a 9 a.m. appointment to meet him that day. Mr. Wagner
said he'd forgotten about it. The meeting had to be rescheduled for
later that day at 2 p.m.

On November 29, 2017, we received IRS form 4564, requesting additional
information and notice that on December 8th Mr. Wagner wanted an onsite
inspection to see the farm shed and property.

On December 8, 2017, my husband and I each took annual leave from our
jobs to meet Mr. Wagner at our farm. The inspection took about an hour.
At that time Mr. Wagner said we had met the 500- and 100-hour tests for
being actively engaged in our farm's day-to-day operations and
management. Mr. Wagner also stated that his supervisor was Darcy Smith.
We bring this up because several times in his discussions with us and
our CPA, Mr. Wagner had said he could not make the decisions but would
have to check with his supervisor. This was the first time he told us
who that was. She had not been present at any meetings, nor had she
corresponded with us. At this time, Mr. Wagner also said he would have
the results of the 2015 examination sent to us in January 2018.

As of February 12, 2018, there still was no report from IRS. We did
receive IRS letter 2205a from Mr. Wagner with notification that our
2016 return was selected to be examined and included another list of
what we needed to provide.

On February 14, 2018, our CPA contacted Mr. Wagner. Mr. Wagner told him
that a report from IRS should be in the mail tomorrow (February 15th)
that would address the 2015 tax filing examination.

On February 17, 2018, no letter from IRS had been received regarding
the 2015 examination. Our CPA coordinated with Mr. Wagner date of
delivery information that had been requested of us for the 2016
examination. My husband was out of town on business.

On February 27, 2018, our CPA confirmed with Mr. Wagner the delayed
delivery of our information. Mr. Wagner also said he had ``misspoken''
about when the IRS letter regarding 2015 examination would be sent to
us. But Mr. Wagner then stated that a letter would be forthcoming.

As of April 18, 2018, almost 2 months later, there is no letter from
IRS regarding either 2015 or 2016 examinations. There are no
conclusions. There is no communication from IRS as to when we might
expect the matter to be closed. Does Mr. Wagner still work there?

The IRS has had our 2015 amended return for 18 months and has
repeatedly given us time frames they have failed to meet, and there has
been no explanation. This should have been a simple audit. Shouldn't
there be a trained and competent IRS agent who is familiar with farms
and farming on staff in Nebraska? It has been a very unprofessional and
unrespectful manner in which the IRS has operated. There was no
response for 12 months after the IRS had received the amendment. There
were constant and unaddressed IRS delays. What is the status of our
2015 amendment and the additional 2016 return examinations? When will
we know? Who at the IRS is responsible or accountable for how these
examinations have been handled? Is there anyone in charge? Is there an
organized system?

Repeatedly hearing Mr. Wagner say, ``Let me check with my supervisor''
makes us wonder why Mr. Wagner is there and why the supervisor isn't
present or available in this process? Doesn't Mr. Wagner have the
knowledge or tools to do these examinations? Mr. Wagner said he'd been
with the IRS for 5 years. It has been our experience with the IRS that
it is understaffed and lacks necessary training. Hiring practices are
weak.

The IRS needs more funding and better leadership to do its job. The
lack of professional and efficient management and poor hiring practices
and training make it a costly organization.

Sincerely yours,

Susan Goding

cc: U.S. Senator Deb Fisher (Nebraska)
U.S. Senator Ben Sasse (Nebraska)
Mr. Dan Dudley, CPA (O'Donnell, Ficenec, Wills, and Ferdig,
LLP, Omaha, NE)

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