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


                                                        S. Hrg. 115-628

                      THE 2018 TAX FILING SEASON 
                       AND FUTURE IRS CHALLENGES

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

                                HEARING

                               BEFORE THE

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 12, 2018

                               __________


[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                                                                         

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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

                              ----------                              

                           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

                              ----------                              


                        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

                              ----------                              


              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.

          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 9.6 million times so far in 
        FY 2018.

          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 571,000 have been set up so far 
        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.

    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.

    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:

          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 
        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. 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?

    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).

    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?

    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 the 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 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)

                                   [all]