[Senate Hearing 115-191]
[From the U.S. Government Publishing Office]




 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2018

                              ----------                              


                        WEDNESDAY, JULY 26, 2017

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.

    The subcommittee met at 10:01 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Shelley Moore Capito (chairwoman) 
presiding.
    Present: Senators Capito, Moran, Boozman, Lankford, Daines, 
Coons, Durbin, Manchin, and Van Hollen.

                       DEPARTMENT OF THE TREASURY

STATEMENT OF HON. STEVEN T. MNUCHIN, SECRETARY

           OPENING STATEMENT OF SENATOR SHELLEY MOORE CAPITO

    Senator Capito. Want to go ahead and come up. We will just 
go ahead. Oh, we are going to do Secretary--I am sorry--
Secretary Mnuchin first. Okay. Well, welcome to everybody and 
good morning. Senator Coons and Senator Lankford.
    Today we had the opportunity to review the budget requests 
of the Department of Treasury and the Internal Revenue Service. 
As we begin this important hearing, we welcome our witnesses 
today, Treasury Secretary Steven Mnuchin, IRS Commissioner John 
Koskinen--I should know that from our common alma mater--and 
the Treasury IG for Tax Administration, Russell George. Thank 
you for being here.
    The Department of the Treasury has an important mission. 
Its work is to promote economic growth and stability and 
safeguard our financial system, which is critical to 
maintaining a strong economy and creating economic opportunity. 
Equally important is its work to combat terrorism, the 
proliferation of weapons of mass destruction, money laundering, 
drug trafficking, and other national security threats.
    The Internal Revenue Service has the significant role of 
administering our Nation's tax laws. To carry out these 
responsibilities effectively, taxpayers must have the faith 
that the IRS will do its job without regard to an individual's 
exercise of their constitutional rights. The IRS must also 
protect taxpayers' personal information and privacy. As the IRS 
continues to evolve and make changes to its service delivery 
systems, there must be improvements in its ability to manage 
that change without adversely affecting taxpayers or 
compromising their personal information. We look forward to 
hearing from all of our witnesses today about the details of 
your budget requests, as well as your plans to address cyber 
security threats and vulnerabilities within Treasury and in our 
Nation's financial sector.
    In addition, we also want to learn more about Treasury's 
plan to make a comprehensive approach to regulatory relief. 
Hopefully those efforts will help spur economic growth and job 
creation.
    Thank you and I will now turn to my Ranking Member, Senator 
Coons, for his opening statement.

               STATEMENT OF SENATOR CHRISTOPHER A. COONS

    Senator Coons. Thank you, Chairwoman Capito, for convening 
this hearing. I appreciate the opportunity we have on this 
subcommittee to examine a very wide diverse range of interests 
across many agencies, and in particular, the Department of 
Treasury. And I look forward to finding common ground and 
strengthening our partnership. And I would like to welcome our 
witnesses, Secretary Steve Mnuchin, Commissioner John Koskinen, 
and Inspector General Russell George. Thank you for joining us 
this morning and for your service to our Nation.
    Today we are considering the budget request by the Treasury 
Department, a Department that is central to our Government's 
stability and operations, that helps sustain our country's 
fiscal health and protect our national security from collecting 
taxes and processing over $3 trillion in Federal payments to 
pursuing financial crimes here in the United States and 
identifying individuals here and abroad that would promote 
terror.
    I am concerned the budget request we are considering would 
undermine the Department's ability to fulfill all these 
critical roles. In the non-IRS parts of Treasury, the budget 
requests $1.3 billion, 26 percent less than current levels, and 
to achieve that reduction, the budget would rely on staff cuts 
achieved through Department wide hiring freeze. My concern is 
that this might not result in a strategic realignment of 
resources, but instead drain the Department's best and 
brightest to meet an arbitrary budget goal.
    The budget also cuts some common-sense investments like 
cyber security improvements and upgrades to financial systems 
that I think the entire Federal Government relies on for 
Treasury services. I am also concerned about proposed cuts to 
the Office of Terrorism and Financial Intelligence, which it 
helps enforce economic sanctions and reductions in the 
Financial Crimes Enforcement Network, which combats domestic 
and international money laundering. I think these are all areas 
of your Department worthy of full investment.
    I have continually called upon this administration and its 
predecessor to crack down on Iran and North Korea and other 
regimes that support terror. And although there have been some 
mixed signals, I believe the administration shares and strongly 
supports these goals and I would be interested in hearing 
whether the requested funding levels are sufficient for these 
vital bureaus.
    The budget also proposes to eliminate grants to CDFIs, to 
Community Development Financial Institutions, which support 
development and create jobs in underserved neighborhoods around 
our country and cuts funds for entities created in the wake of 
the financial crisis, an 8 percent cut for FSOC, or Financial 
Stability Oversight Council, and 25 percent to the Office of 
Financial Research, both of which I think have real value. But 
let us look at the majority of the budget before us, which is 
the IRS.
    No government agency is more visible, more impactful to the 
American people than the Internal Revenue Service, which 
collects the revenues that fund more than 95 percent of the 
Federal Government's operations and public service. And each 
year more than 80,000 public servants at the IRS make hundreds 
of millions of contacts with American taxpayers. There have 
been 7 consecutive years of either budget freezes or budget 
cuts to IRS. And the proposal we are reviewing today would 
continue that trend by cutting I think $260 million from an 
under resourced agency. And my concerns are not based on the 
partisan politics of this.
    To put the scale of this proposed cut in context, President 
Trump's level for the IRS falls $400 million short of what 
President Bush asked for in 2009. And I think the predictable 
impact of this reduction would be the loss of more than 4,000 
staff in taxpayer services, which would significantly diminish 
the services for taxpayers seeking pre-filing and post-filing 
guidance in order to timely and accurately meet their tax 
obligations.
    The level of service in the upcoming year if this cut is 
enacted would drop to nearly 40 percent, 45 percent during peak 
filing. That would mean more than 6 out of 10 callers--that 
more than 6 of 10 callers will not be helped on toll-free lines 
as they seek guidance. My office hears from Delawareans 
frustrated when their calls to IRS go unanswered and when it 
takes a long time to connect with an IRS official. I imagine 
many other Senate offices hear from constituents with similar 
concerns. And I think the solution is to give the agency the 
resources to meet these constituent needs.
    So I look forward to hearing more about why the Department 
and the IRS think it is a good idea to reduce service delivery 
rates and what we might do together to address that. We have a 
lot more to discuss today. Let me just move to the end and say 
in the absence of a funding agreement on our subcommittee, we 
will continue to work here. I am grateful for your service and 
look forward to your testimony. And I know that our respective 
constituents expect no less than a highly efficient and well-
functioning IRS and Department of Treasury. And I look forward 
to working with you, Chairwoman Capito, as we move forward in 
our 2018 process. Thank you.
    Senator Capito. Thank you, Senator Coons.
    And Secretary Mnuchin, I now invite you to present your 
remarks on behalf of the Department of the Treasury.

              SUMMARY STATEMENT OF HON. STEVEN T. MNUCHIN

    Secretary Mnuchin. Thank you and good morning. Chairwoman 
Capito, Ranking Member Coons, and Members of the subcommittee, 
thank you for inviting me today. I look forward to working with 
this subcommittee on funding key priorities for the benefit of 
the American people.
    One of the President's promises to the American taxpayer 
was that he would make sure that their money was spent wisely. 
A budget should not be an end in itself, but a means of 
improving the lives of Americans. More money does not 
necessarily translate into better policy. The President has 
challenged every agency and department to identify greater 
efficiencies and savings that can be realized both immediately 
and in coming years.
    The administration is proud to submit a budget that 
achieves this goal. This budget makes some difficult choices 
because of some necessary constraints. We carefully evaluated 
the allocation of resources to each of the Department's 
important functions and made prudential reductions where 
needed. These choices in no way diminish our ability to operate 
the Government effectively. The President made it clear: 
national security is a top priority, and in accordance, the 
Treasury's request prioritizes national security and cyber 
security programs.
    Another top goal of Treasury is creating sustained economic 
growth. This much-needed growth will be achieved through a 
combination of tax reform, regulatory reform, and trade. We 
will work with Congress to pass legislation that allows 
American taxpayers to keep more of their hard-earned paychecks. 
If we develop the right policies today, we will secure a 
prosperous future for our children and grandchildren. The 
difference between recent sluggish growth and a return to 3 
percent or higher GDP is trillions of dollars into the economy, 
making a meaningful difference in the lives of all Americans.
    This budget prioritizes funding for Treasury's wide array 
of economic and financial tools, including sanctions. As our 
enemies have changed, so too have our weapons to combat them. 
We are honing the economic and financial tools in our arsenal 
to disrupt the financial resources and procurement capabilities 
of those who wish to do us harm. This includes actions against 
destabilizing regimes, terrorist networks, and drug 
traffickers. Stopping the flow of funding to dangerous non-
state actors, working with foreign partners to keep their 
financial systems secure, protecting our own financial system--
these key programs are critical to the continued safety and 
stability of the Nation.
    Protecting Treasury and the financial system from cyber 
attacks is critical to our financial stability. Cyber attacks 
against our agency or the financial system have the potential 
to impact markets, the economy, and our national security. The 
Cybersecurity Enhancement Account makes investments into 
enterprise-wide cybersecurity capabilities that allow Treasury 
to better defend against cyber attacks and more efficiently 
respond and recover when they do occur. This account also makes 
investments in critical infrastructure protection, allowing 
Treasury to work collaboratively with the financial services 
sector to increase their operational resilience.
    In recent months, our Office of Terrorism and Financial 
Intelligence agreed with the Gulf counterparts on the intent to 
establish a Terrorist Financing Targeting Center, a bold new 
initiative to fight terrorist financing. The TFTC is a key 
outcome of the President's Summit in Saudi Arabia and will 
enhance cooperation with Gulf countries. It will support the 
administration's priority to fight terrorism, counter Iran's 
influence, and deprive terrorists globally of the access to 
Gulf countries.
    As I mentioned earlier, tax and regulatory reform are 
marquee items for economic growth and job creation. It has been 
over 30 years since we have had comprehensive tax reform in 
this country. We are committed to changing that. Such reform 
means a simplified code that will provide simpler taxes and 
relief to middle income Americans, while making our business 
competitive again.
    We have taken a comprehensive approach to regulatory 
relief, meeting with hundreds of business people across the 
financial industry, including community, regional, and large 
financial institutions, consumer advocacy groups, academics, 
think tanks, trade groups, and insurers. We have heard about 
what works and what does not. Our reforms will spur economic 
growth by increasing access to credit and providing relief for 
community banks and making regulations more efficient, 
effective, and appropriately applied. We will do this while 
ensuring that our financial system is secure and stable and 
does not put taxpayers at risk.
    We have the opportunity to do great things for the American 
people and I look forward to working with Members of this 
subcommittee on these important issues. Thank you very much and 
I am happy to answer any questions today.
    [The statement follows:]
              Prepared Statement of Hon. Steven T. Mnuchin
    Chairwoman Capito, Ranking Member Coons, and Members of the 
subcommittee, thank you for inviting me to meet today. I look forward 
to working with this subcommittee on funding key priorities for the 
benefit of the American people.
    One of the President's promises to the American taxpayer was that 
he would make sure that their money is spent wisely. A budget should 
not be an end in itself, but a means of improving the lives of 
Americans. More money does not necessarily translate into better 
policy. The President has challenged every agency and department to 
identify greater efficiencies and savings that can be realized both 
immediately and in the coming years.
    The administration is proud to submit a budget that achieves this 
goal. This budget makes some difficult choices because of necessary 
constraints. We carefully evaluated the allocation of resources to each 
of the Department's important functions and made prudential reductions 
where needed. These choices in no way diminish our ability to operate 
the government effectively. The President has made it clear: national 
security is a top priority, and in accordance, Treasury's request 
prioritizes national security and cyber security programs.
    Another top goal of Treasury is creating sustained economic growth.
    This much-needed growth will be achieved through a combination of 
tax reform, regulatory reform, and trade. We will work with Congress to 
pass legislation that allows American taxpayers to keep more of their 
hard-earned paychecks. If we develop the right policies today, we will 
secure a prosperous future for our children and grandchildren. The 
difference between recent sluggish growth and a return to 3 percent or 
higher GDP growth is trillions of dollars into the economy--making a 
meaningful difference in the lives of all Americans.
    This budget prioritizes funding for Treasury's wide array of 
economic and financial tools, including sanctions. As our enemies have 
changed, so too have our weapons to combat them. We are honing the 
economic and financial tools in our arsenal to disrupt the financial 
resources and procurement capabilities of those who wish to do us harm. 
This includes actions against destabilizing regimes, terrorist 
networks, and drug traffickers. Stopping the flow of funding to 
dangerous non-state actors, working with foreign partners to keep their 
financial systems secure, protecting our own financial system--these 
key programs are critical to the continued safety and stability of the 
Nation.
    Protecting Treasury and the financial system from cyber attacks is 
critical to our financial stability. Cyber attacks against our agency 
or the financial system have the potential to impact markets, the 
economy, and our national security. The Cybersecurity Enhancement 
Account makes investments in enterprise-wide cybersecurity capabilities 
that allow Treasury to better defend against cyber attacks and more 
efficiently respond and recover when they do occur. This account also 
makes investments in critical infrastructure protection, allowing 
Treasury to work collaboratively with the financial services sector to 
increase their operational resilience.
    As I mentioned earlier, tax and regulatory reform are marquee items 
for economic growth and job creation. It has been over 30 years since 
we have had comprehensive tax reform in this country. We are committed 
to changing that. Such reform means a simplified code that will provide 
simpler taxes and relief to middle income Americans, while making our 
businesses competitive again.
    We have taken a comprehensive approach to regulatory relief, 
meeting with hundreds of people across the financial industry, 
including community, regional, and large financial institutions, 
consumer advocacy groups, academics, think tanks, trade groups, and 
insurers. We have heard about what works and what does not work. Our 
reforms will spur economic growth by increasing access to credit, 
providing relief for community banks, and making regulations more 
efficient, effective, and appropriately applied. We will do this while 
ensuring that our financial system is secure and stable and does not 
put taxpayers at risk.
    We have an opportunity to do great things for the American people 
and I look forward to working with Members of this subcommittee on 
these important issues. Thank you very much and I am happy to answer 
your questions.

    Senator Capito. Thank you, Mr. Secretary.
    And at this time, we will proceed to our questioning where 
each senator will have 5 minutes. So I am going to begin the 
questioning and I would like to welcome you and thank you also 
for the visit, recent visit to my office. I appreciate the 
opportunity to get to know you and see your vision of where the 
Department of Treasury is going to go.
    Let us talk about regulatory reform. You mentioned it in 
your remarks. I know that you have talked to stakeholders all 
around the country: independent, regional, and large banks, 
regulators, FSOC members, consumer advocates, academics, 
analysts, and investors, the whole range, to get a clearer 
picture of what the regulatory framework is now. What would you 
say is your most significant challenge that you have 
encountered to this point to getting real meaningful regulatory 
relief?
    Secretary Mnuchin. Thank you very much. First of all, let 
me just say under the President's Executive order, we have 
examined regulatory changes for the financial system. While 
this looks at many aspects of Dodd-Frank, it goes much further 
than Dodd-Frank. So we are pleased we delivered the first 
report on banks and credit unions and we look forward to 
delivering three more reports as it impacts other areas.
    I think for us the biggest challenge is making sure we deal 
with the issue of regulatory overlap and making sure that the 
regulators are working together. And that is something that as 
Chair of FSOC, I am very focused on. I am pleased to report 
that we have had very good reception from both sides of the 
aisle on our suggestions in the report and we look forward to 
working with Congress on some meaningful changes, particularly 
for community banking.
    I think, as you know, the top institutions account for 
about 50 percent of the assets in the banking system in the 
United States. We need to create a system where community banks 
and regional banks can thrive. We also look forward to working 
with the regulators on many of the proposals.
    Senator Capito. Thank you. And I appreciate your emphasis 
on community banks, as somebody from a smaller State where 
community banks really are the life blood of a small community, 
by providing access to credit, familiarity with regions and 
areas, and customers. We want to preserve that model for those 
of us who do not have large bank entities, you know, close by. 
And I know, as a former member of the Financial Services 
Committee on the House side, this was a topic of great concern 
to all of us to make sure that we can provide flexibility and 
reasonable regulation and not a one size fits all. So I 
appreciate that.
    I would like to, first of all, we talked the other day that 
I am proud of the work that is being done in Parkersburg, West 
Virginia at the Bureau of Fiscal Services. We have 2,000 folks 
there that are doing a lot of great things. And one of the 
things that they are doing is to promote Government efficiency 
through a shared services model. And I would like to, first of 
all, invite you to come and visit Parkersburg and the Bureau of 
Fiscal Service there, but also would like to see a commitment 
from you that you are willing to kind of push this concept of 
shared services. I think it has been rather successful in the 
beginning and we would like to see it grow for obvious reasons. 
Do you have any comments on that?
    Secretary Mnuchin. Well, first of all, thank you for the 
invitation. I will take you up on that.
    Senator Capito. Great.
    Secretary Mnuchin. I look forward to visiting the facility. 
It is a very important facility of ours. I very much appreciate 
the model we have at the Fiscal Service, where it provides 
shared services across the government. I think that it is our 
obligation to look at other areas that we can use a similar 
approach. One of them, I believe, is technology. We have too 
many different technology departments in the different 
agencies. We do not have consistent technology. I fully support 
a shared services model for technology across the executive 
branch, amongst other ideas.
    Senator Capito. Sounds great. Thank you very much. I know 
we are going to have other questions on cybersecurity, so I 
would like to kick it off because I think we are all very--
probably each one of us on the dais here has been affected by, 
in some way, a breach of our own personal information or our 
financial access to maybe one of the cards that we have. Very 
frustrating from a consumer standpoint and at the same time it 
can be very frightening and damaging to an individual's 
financial stability.
    I know you are doing a lot. Is there one particular thing 
you would like to highlight that might make us rest a little 
bit easier at night on this particular issue?
    Secretary Mnuchin. Well, unfortunately, I do not want to 
let you rest too easy on it because it is a significant issue. 
I will tell you it is something I have spent a lot of time on. 
I do have experience in technology, having served as the CIO of 
Goldman Sachs. I do bring technology experience to the 
Treasury.
    I am very focused on two aspects of it. One is our internal 
infrastructure, whether it be at the IRS or at Treasury. We 
obviously are responsible for keeping many taxpayers' 
information secure. So within the budget, we have prioritized 
technology spending within the IRS. I have also worked very 
closely with the financial infrastructure of our banking 
systems, whether it is with the Financial and Banking 
Information Infrastructure Committee (FBIIC) or through our 
other interagency processes. We are very focused on various 
mechanisms to make sure we can respond to a technology crisis 
within the financial sector.
    Senator Capito. Thank you so much.
    Senator Coons.
    Senator Coons. Thank you, Chairwoman Capito. I would just 
like to ask unanimous consent that a written statement 
submitted by Anthony Reardon, President of the National 
Treasury Employees Union, be included in the record.
    Senator Capito. Without objection.
    [The statement follows:]
                Prepared Statement of Anthony M. Reardon
                           National President
                   National Treasury Employees Union
    Chairwoman Capito, Ranking Member Coons and distinguished Members 
of the subcommittee, I would like to thank you for allowing me to 
provide comments on the administration's fiscal year 2018 budget 
request for the IRS. As President of the National Treasury Employees 
Union (NTEU), I have the honor of representing over 150,000 Federal 
workers in 31 agencies, including the men and women at the IRS.
    Madam Chairwoman, since fiscal year 2010, IRS funding has been cut 
by almost $1 billion. The funding reductions have forced the IRS to 
operate under an exception-only hiring freeze since December 2010, and 
has forced the Service to reduce the total number of full-time 
employees by approximately 18,000 across every State in the country. 
The lack of sufficient staffing has strained IRS' capacity to meet its 
mission of providing America's taxpayers top quality service by helping 
them understand and meet their tax responsibilities, and to enforce the 
law with integrity and fairness to all.
    The drastic cuts to IRS' budget come at a time when the IRS 
workforce is already facing a dramatically increasing workload with 
staffing levels down almost 20 percent below what they were just 6 
years ago. In 2010, the IRS had 92,148 full-time employees to 
administer tax laws and process 230 million tax returns. By the close 
of 2016, that number had fallen to 74,151 to administer a more 
complicated tax code and process 244 million much more complex tax 
returns and other forms.
    In addition, over the last several years the IRS has had to 
implement a number of significant legislative mandates, nearly all of 
which came with no additional funding. These include the Affordable 
Care Act (ACA), the Foreign Account Tax Compliance Act (FACTA), the 
Achieving a Better Life Experience (ABLE) Act, reauthorization of the 
Health Coverage Tax Credit (HCTC), the seriously delinquent debt 
certification program and the 2015 Protecting Americans from Tax Hikes 
(PATH) Act.
    NTEU was disappointed that the administration's fiscal year 2018 
budget calls for reducing IRS funding by an additional $260 million 
below the fiscal year 2017 enacted level and reducing overall staffing 
by more than 4,200. NTEU knows any further reductions in funding and 
staffing will further exacerbate the adverse impact previous cuts have 
had on IRS' ability to provide taxpayers with the service they need and 
enforcement of our Nation's tax laws. We believe that in order to 
continue to make improvements in taxpayer services while handling a 
growing workload and increasing collections, it is imperative to 
reverse the severe cuts in IRS staffing levels and begin providing 
adequate resources to meet these challenges. With the future workload 
only expected to continue to rise, the IRS will be under a great deal 
of pressure to improve customer service standards while simultaneously 
enforcing the Nation's tax laws.
           impact of inadequate funding on taxpayer services
    Madam Chairwoman, providing quality taxpayer service is a critical 
component of the IRS' efforts to help the taxpaying public understand 
its Federal tax obligations while making it easier to comply with the 
tax system. Unfortunately, the IRS' ability to provide excellent 
taxpayer service has been severely challenged due to reduced funding in 
recent years. Since fiscal year 2010, overall funding for the IRS has 
declined by more than $900 million (7 percent), while the number of 
individual taxpayers has increased by 10 million, or more than 6 
percent. These reductions have resulted in a reduction in the number of 
employees assigned to answer telephone calls from 9,400 in 2010 to 
6,200 in 2015, a 34 percent drop.
    In a letter to Congress following the close of the 2015 filing 
season, the IRS highlighted some of the adverse impacts these 
reductions had on its' ability to deliver taxpayer services during the 
filing season. These include:

  --A reduction in the percentage of callers seeking live assistance 
        who received it (telephone level of service) to 38 percent--
        down from 74 percent in fiscal year 2010.
  --Taxpayers waited about 23 minutes on average for an IRS 
        representative to get on the line, and more than 60 percent of 
        calls were never answered. This represents a sharp decline from 
        2010, when the IRS answered three-quarters of calls and had an 
        average wait time of just under 11 minutes.
  --The IRS was not able to answer any tax-law questions except 
        ``basic'' ones during the filing season, and now that the 
        filing season is over, it will not answer any tax-law questions 
        at all, leaving the roughly 15 million taxpayers who file later 
        in the year unable to get answers to their questions by calling 
        or visiting IRS offices.
  --The IRS historically has prepared tax returns for taxpayers seeking 
        its help, particularly for low income, elderly, and disabled 
        taxpayers. Eleven years ago, it prepared some 476,000 returns. 
        That number declined significantly over the past decade, and in 
        2014 the IRS announced it would no longer prepare returns at 
        all.

    Additionally, because funding reductions forced the IRS to shorten 
the period of employment for their seasonal employees who help answer 
taxpayer correspondence, the IRS' inventory of correspondence from 
taxpayers in 2014 and 2015 grew significantly above what it normally 
would have been to more than 900,000.
    For fiscal year 2016 and fiscal year 2017, the IRS was provided 
with $290 million to improve the customer service representative level 
of service (LOS) rate, among other things. With this funding, the IRS 
was able to hire additional temporary telephone assistors which 
drastically reduced taxpayer wait times and helped the IRS raise the 
phone level of service from 38 percent during the 2015 filing season to 
72 percent during the 2016 filing season and to 79 percent during the 
2017 filing season. The additional funding also freed up more resources 
to help the IRS reduce the correspondence inventory to 690,000 by the 
end of fiscal year 2016, a drastic reduction from just 2 years prior.
    Despite the clear evidence that providing the IRS with additional 
funding enabled them to drastically reduce taxpayer wait times and 
improve the phone level of service during the 2016 and 2017 filing 
seasons, the administration's fiscal year 2018 budget request actually 
calls for reducing taxpayer services seasonal staffing costs by $239 
million and overall taxpayer services staffing by almost 2,200 FTEs. 
The administration's request seems to acknowledge the adverse impact 
that these reductions will have on IRS' ability to provide quality 
service by noting the target level of service for all of fiscal year 
2018 is just 39 percent, a drop of 25 percent from the fiscal year 2017 
level. It is clear that the administration's proposed reductions in 
funding and staffing for taxpayer services will simply reverse the 
gains made in recent years and leave the IRS unable to provide 
taxpayers with the assistance they need.
    The importance of providing taxpayers with timely assistance over 
the phone or in person is also of particular importance for victims of 
identity theft and other types of tax refund fraud. These cases are 
extremely complex cases to resolve, frequently touching on multiple 
issues and multiple tax years, and the process of resolving these cases 
can be very frustrating for victims.
    While the IRS has made considerable progress in this area, 
additional work remains. Fighting identity theft is an ongoing battle 
as identity thieves continue to create new ways of stealing personal 
information and using it for their gain. Therefore, it is critical that 
the IRS has the resources and staffing necessary to prevent refund 
fraud from occurring in the first place, to investigate identity theft-
related crimes when they do occur, and to help taxpayers who have been 
victimized by identity thieves as quickly as possible.
    Madam Chairwoman, it is clear that drastic funding reductions in 
recent years have seriously eroded the IRS' ability to provide 
taxpayers with the services they need. Without additional funding, 
taxpayers will continue experiencing a degradation of services, 
including longer wait times to receive assistance over the telephone, 
increasing correspondence inventories, including letters from victims 
of identity theft and taxpayers seeking to resolve issues with taxes 
due or looking to set up payment plans.
     impact on enforcement & efforts to reduce the federal deficit
    NTEU believes a strong enforcement program that respects taxpayer 
rights, and minimizes taxpayer burden, plays a critical role in IRS' 
efforts to enhance voluntary compliance, combat the rising incidence of 
identity theft, and reduce the tax gap.
    Unfortunately, funding reductions in recent years are undermining 
the Service's ability to maximize taxpayer compliance, prevent tax 
evasion and reduce the deficit. The adverse impact of insufficient 
funding on IRS' capacity to collect revenue critical to reducing the 
Federal deficit is clear. In fiscal year 2016, operating on a budget of 
$11.2 billion, the IRS collected $3.3 trillion, roughly 93 percent of 
Federal Government receipts. According to the IRS, every dollar 
invested in IRS enforcement programs generates roughly $6 in increased 
revenues, but reduced funding for enforcement programs in recent years 
has led to a decline in enforcement revenue since fiscal year 2007. In 
fiscal year 2016, IRS enforcement activities brought in $54.3 billion, 
down almost $5 billion from the $59.2 billion of fiscal year 2007.
    The reduction in revenue can be partly attributed to a reduction in 
the total number of IRS enforcement personnel, including revenue 
officers and revenue agents--two groups critical to efforts to reduce 
the Federal budget deficit. Since fiscal year 2010, the total number of 
revenue officers and revenue agents fell more than 32 percent from 
20,510 to 13,791, a reduction of almost 6,800 positions.
    Without sufficient staffing to effectively enforce the law to 
ensure compliance with tax responsibilities and combat fraud, our 
voluntary tax compliance system is at risk. And as the IRS Commissioner 
has repeatedly noted, a simple one-percent decline in the compliance 
rate translates into $30 billion in lost revenue for the Government.
    Sufficient enforcement staffing is also critical if the IRS is to 
make further progress on closing the tax gap, which is the amount of 
tax owed by taxpayers that is not paid on time. According to the IRS, 
the amount of tax not timely paid is $450 billion, translating to a 
noncompliance rate of almost 17 percent.
    While the tax gap can never be completely eliminated, even an 
incremental reduction in the amount of unpaid taxes would provide 
critical resources for the Federal Government. At a time when Congress 
is debating painful choices of program cuts and tax increases to 
address the Federal budget deficit, NTEU believes it makes sense to 
invest in one of the most effective deficit reduction tools: collecting 
revenue that is owed, but hasn't yet been paid.
    Despite the clear evidence that reductions to enforcement funding 
and staffing have had on the Service's efforts to generate revenue and 
to enforce our Nation's tax laws, NTEU was disappointed to see the 
administration's fiscal year 2018 budget request would slash funding 
for enforcement by $50 million from the current level, and result in 
the loss of more than 2,100 enforcement FTEs. With enforcement staffing 
already down by more than 30 percent since fiscal year 2010, these 
additional proposed reductions will simply further reduce IRS' ability 
to enforce our Nation's tax laws, maximize taxpayer compliance, combat 
identity theft and other types of fraud, and generate revenue 
collection that is critical to reducing the Federal deficit.
    Madam Chairwoman, the adverse impact of recent funding cuts on the 
IRS' ability to provide taxpayers with the service they need and 
enforce our Nation's tax laws is clear. NTEU strongly believes that 
only by providing the IRS with additional resources will the IRS be 
able to meet the rising workload level, stabilize and strengthen tax 
compliance and customer service programs, and allow the Service to 
address the Federal deficit in a serious and meaningful way.
                         private tax collection
    Madam Chairwoman, I would also like to note NTEU's strong 
opposition to the resumption earlier this year of the use of private 
collection agencies (PCAs) to collect taxes on a commission basis. NTEU 
believes this twice failed program is a waste of taxpayer's dollars, 
invites overly aggressive collection techniques, jeopardizes the 
financial privacy of American taxpayers, and may ultimately serve to 
undermine efforts to reduce the deficit.
    As you know, in late 2015, Congress approved a long-term highway 
funding bill which offset part of the costs of the bill by requiring 
the Treasury Department to contract with PCAs to collect Federal tax 
debt on a commission basis despite the objections of the 
administration, the National Taxpayer Advocate and a coalition of civil 
and consumer rights groups.
    The use of PCAs to collect tax debts has repeatedly been shown to 
be a waste of taxpayer dollars. The first attempt to use PCAs to 
collect Federal taxes came in 1996 and 1997, when Congress authorized 
IRS to conduct a 2 year pilot project testing the use of PCAs to 
collect tax debts. The 1996 pilot was so unsuccessful it was cancelled 
after 12 months. Contractors participating in the pilot programs were 
found to have regularly violated the Fair Debt Collection Practices Act 
(FDCPA), and the program resulted in a $17 million net loss.
    Under legislation enacted in 2004, the IRS again attempted the use 
of PCAs to collect Federal taxes in 2006. In September of that year, 
the IRS began turning over delinquent taxpayer accounts to three PCAs 
who were permitted to keep between 21-24 percent of the money they 
collected. While the program was projected to bring in $2.2 billion in 
new revenue, data from the IRS showed that the program resulted in a 
net loss of almost $4.5 million to the Federal Government, after 
subtracting $86.2 million in program administration costs and more than 
$16 million in commissions to the PCAs.
    Before terminating the program in March 2009, an independently-
reviewed study by the IRS found that IRS employees are three times more 
efficient at collecting taxes than private tax collectors.
    In addition to being fiscally unsound, allowing PCAs to collect tax 
debt on a commission basis led to taxpayer abuse. According to the IRS, 
between September 2006 and March 2009, the IRS received dozens of 
taxpayer complaints against the PCAs, five of which were confirmed by 
an IRS Complaint Panel to be serious violations of law. In addition, 
one of the three original private contractors was dropped by the IRS 
for dubious practices despite the Service's previous assurance that its 
oversight would prevent abuse, and penalties totaling at least $10,000 
were imposed by the IRS on the PCAs for violations against taxpayers. 
In one instance, private collectors made 150 calls to the elderly 
parents of a taxpayer after the collection agency was notified he was 
no longer at that address. I would note that one of the four companies 
currently under contract with the IRS to collect taxes lost its 
contract with the U.S. Department of Education in 2015 for providing 
inaccurate information to student loan recipients.
    Concerns that this latest attempt to turn over tax collection to 
private contractors could lead to taxpayer abuse were reinforced 
recently after a review of the call scripts used by the PCAs to contact 
taxpayers exposed potential violations of taxpayer privacy protections. 
The review, undertaken by a group of four Senators concerned the PCA 
program could lead to taxpayer abuse, showed the scripts may include 
implied threats to taxpayers, violations of taxpayer privacy 
protections due to information shared with third parties, and 
inadequate responses to taxpayer cease and desist requests. Concerns 
over their findings led the group of Senators to recently request the 
Federal Trade Commission to investigate whether the collection agencies 
are violating the Fair Debt Collections Practices Act.
    In addition to concerns that the PCAs could be violating the FDCPA, 
NTEU is concerned that given the proliferation of tax schemes in recent 
years, allowing private companies to contact taxpayers on behalf of the 
IRS will lead to confusion among taxpayers and invite aggressive tax 
schemes.
    In February the IRS released its annual ``Dirty Dozen'' list of tax 
scams for 2017 which highlights various illegal schemes that taxpayers 
may encounter throughout the year. Among the top scams the IRS warned 
taxpayers to guard against were aggressive and threatening phone calls 
from criminals impersonating IRS agents. The IRS has seen a surge of 
these phone scams in recent years as con artists threaten taxpayers 
with police arrest, deportation and license revocation, among other 
things. While the IRS has historically preferred to contact taxpayers 
by letter and not by phone, often saying that ``if you are surprised to 
be hearing from us, then you're not hearing from us,'' under the 
private debt collection program, private collection firms are now 
calling taxpayers directly and identifying themselves as contractors of 
the IRS. This will simply confuse taxpayers that have been told 
repeatedly they will not receive calls from the IRS.
    I would note that in April the Treasury Inspector General for Tax 
Administration (TIGTA) announced 11 people had been charged with crimes 
involving schemes to impersonate IRS agents and steal money from 
innocent taxpayers by claiming they owed back taxes. Furthermore, in 
recent testimony before Congress, both TIGTA and the National Taxpayer 
Advocate warned that the use of private debt collectors could 
exacerbate or widen the impersonation scam and noted their offices 
would be closely watching this issue as the outsourcing of taxpayer 
cases to PCAs continues to ramp up.
    We also believe this latest attempt to turn over tax collection to 
private contractors will unfairly target low-income taxpayers. The IRS 
has estimated that almost 80 percent of the cases that would be 
referred to the PCAs would involve taxpayers with incomes below 250 
percent of the Federal poverty level. Furthermore, a review by the 
National Taxpayer Advocate of returns of those taxpayer cases to be 
assigned to the PCAs showed the median reported income was about 
$32,000 and more than one-third of the returns reported incomes of less 
than $20,000.
    Subjecting taxpayers that are struggling to make ends meet and 
can't afford legal representation to private contractors whose sole 
motivation is to maximize their own profits at the taxpayers' expense 
is simply unfair. In the words of the National Taxpayer Advocate, this 
would ``place a bulls-eye on the back of low income taxpayers.''
    IRS employees, unlike the PCAs, have a variety of tools at their 
disposal with which they can help delinquent taxpayers meet their tax 
obligations, in particular, those facing financial difficulties. These 
include the ability to postpone, extend or suspend collection 
activities for limited periods of time; making available flexible 
payment schedules that provide for skipped or reduced monthly payments; 
the possibility of waiving late penalties or postponing asset seizures 
and Offers In Compromise (OIC), an agreement between a struggling 
taxpayer and the agency that settles a tax debt for less than the full 
amount owed.
    In contrast, the PCA's sole interest is to collect from a taxpayer 
the balance due amount they have been provided. They have no interest 
in whether the taxpayer owes other taxes or may not have filed required 
returns, nor do they have access to any other taxpayer records, so they 
are unable to answer any questions, provide any advice or use any of 
the tools IRS employees have, such as extensions or offers in 
compromise. In the current economic climate, it is more important than 
ever that taxpayers be able to deal with the IRS directly to work 
through any financial hardships they may be experiencing.
    Upon ending the latest attempt to use PCAs in 2009, the IRS 
committed to working the tax cases recalled from the PCAs. As part of 
its 2013 Annual Report to Congress, the National Taxpayer Advocate 
undertook a study that analyzed the results the IRS obtained while 
working the inventory recalled from the PCAs and analyzed whether the 
IRS or the PCA performed better when working the PCA inventory. The 
study found the IRS collected about 62 percent more than the PCAs 
($139.4 million compared to $86.2 million), and was significantly more 
effective in collecting taxes. The study noted that the results likely 
understated the difference in effectiveness, since the PCAs worked the 
cases first and collected the easy dollars while the IRS only got cases 
the PCAs had already handled.
    NTEU is not alone in our opposition to private tax collection 
program. Opposition to allowing private companies to collect taxes on a 
commission basis has been voiced by a number of public advocacy groups, 
tax experts, former IRS Commissioners as well as the National Taxpayer 
Advocacy Panel. In addition, the National Taxpayer Advocate, an 
independent official within the IRS, previously identified the IRS 
private tax collection initiative as one of the most serious problems 
facing taxpayers and repeatedly called on Congress to repeal the IRS' 
authority to outsource tax collection work to private debt collectors.
    Outsourcing the collection of taxes to private companies has also 
been opposed by a number of public advocacy groups including, Consumer 
Federation of America; NAACP; National Active and Retired Federal 
Employees Association; National Consumer Law Center; National Consumers 
League; Citizens for Tax Justice; OMB Watch, AFSCME, National Council 
of La Raza; and the U.S. Public Interest Research Group.
    Madam Chairwoman, NTEU understands and commends efforts to ensure 
that all taxpayers pay their fair share of taxes. Without a doubt, rank 
and file IRS employees are committed to achieving this goal in the most 
cost-effective manner while providing a high level of customer service 
to American taxpayers. But the facts make clear that the use of private 
tax collection companies is not in the best interest of American 
taxpayers, could potentially undermine future efforts to close the tax 
gap, and should be terminated immediately.
                               conclusion
    Madam Chairwoman, thank you for the opportunity to provide NTEU's 
views on the administration's fiscal year 2018 budget request for the 
IRS. We believe that to ensure the IRS is able to continue making 
improvements in taxpayer services while handling a growing workload and 
increasing collections, it is imperative that the agency is provided 
with the resources necessary to meet these challenges. With the 
complexity of tax administration and future workloads only expected to 
rise, the IRS will be under a great deal of pressure to improve 
customer service standards while simultaneously enforcing the Nation's 
tax laws.

    Senator Coons. Secretary Mnuchin, thanks for our 
conversation before this hearing and for your service. I just 
want to ask five questions quickly, if I might.
    First, just there has been some concern that the 
administration is directing Cabinet secretaries to not respond 
to requests from the minority party despite a longstanding 
tradition upheld by both parties. Will you commit to responding 
to questions from both the majority and minority?
    Secretary Mnuchin. I will and I believe we have been 
responsive----
    Senator Coons. You have.
    Secretary Mnuchin [continuing]. To that already, but we 
will continue to do so.
    Senator Coons. Thank you very much, Mr. Secretary. I wanted 
to talk about the Office of Terrorism and Financial 
Intelligence and the Financial Crimes Enforcement Network and 
the TFTC that you mentioned in your opening remarks. I view 
these as highly valuable. As we spoke about, I think enforcing 
sanctions is a critical role that your Department plays, but 
the budget proposes modest, but reductions in these funding--
funding in these agencies.
    Do you think this budget provides sufficient funding for 
these two bureaus given their vital missions and given that 
there is other places--we talked about South Sudan, but there 
is places in the world where you are not currently prioritizing 
them because there is so many others, whether it is North Korea 
or Russia or sanctions that are currently being enforced 
against a whole range of other nations? Do you think you have 
asked for sufficient funding for these two bureaus?
    Secretary Mnuchin. Well, let me first comment. I very much 
believe in the sanctions authorities and what we do within the 
Treasury. I am probably spending 50 percent of my time on this 
area because it is so important and so critical to what we are 
doing.
    When we submitted the budget, and again, we had to manage 
the President's priority, which was additional money for the 
military and look for cuts where appropriate. When we did that, 
the intent was to keep TFI flat. I think actually it went down 
slightly because we got a little bit more money this year than 
we had expected at the time. So the intent was to keep it flat, 
was not to reduce it.
    Now, I might add, as I mentioned to you when we had the 
opportunity to meet, since we submitted the budget, we do have 
other requirements. One of them, as I mentioned, is the 
Terrorist Financing Targeting Center, where we are seeking 
additional funds for that. I think it is a very, very important 
investment over the next 10 years and very effective. And this 
is something that Secretary Tillerson and Secretary Mattis 
fully support.
    Senator Coons. Thank you. I look forward to exploring that 
further, but I think we have a shared enthusiasm for vigorous 
sanctions enforcement in partnership with our allies, both here 
and in other parts of the world.
    Let me move to the Community Development Financial 
Institutions, CDFIs. The fund that supports them has strong 
bipartisan support because CDFIs have a record of creating jobs 
in underserved communities. They leveraged Federal funds 
roughly 12 to 1 in the last oversight analysis, investing about 
$3 billion a year. That is why last year's appropriations bill 
increased their funding 6 percent, but the fiscal year 2018 
budget proposes to eliminate them.
    Would you commit to following congressional intent in fully 
utilizing all of the funds that we provided in the fiscal year 
2017 appropriations? And help me understand why you would 
eliminate a program with a proven record of economic growth. 
Was this making tough choices in the context of a difficult 
budget environment or do you think they actually should not be 
funded?
    Secretary Mnuchin. This was, as I mentioned, in the context 
of making difficult choices. I do agree that CDFIs have played 
an important role in the community. This was merely a function 
of us making difficult decisions across.
    Now, the one thing I would also add is that when we came 
out with our recommendation on financial reforms, one of the 
areas that I recommended that we look at is the Community 
Reinvestment Act. So one of the things we want to make sure is 
as banks are dedicating significant money under the CRA that it 
is being used appropriately. We want to make sure we meet with 
community groups and advocates because that is a big area of 
investment that we think can be more effective.
    Senator Coons. Two quick questions if I might, Mr. 
Secretary. First, I want to make sure you have answered the 
question, but will you commit to follow congressional intent in 
the funded----
    Secretary Mnuchin. Yes.
    Senator Coons. Thank you. There is also a proposed cut to 
the Alcohol and Tobacco Tax and Trade Bureau, an area actually 
strongly supported by industry because it helps them get their 
products to market faster. Are you concerned that those budget 
cuts would reverse an area where the industry actually supports 
more action by the Treasury Department?
    Secretary Mnuchin. Well, again, let me just emphasize. I 
have personally met with that group. I think they perform a 
very important function. It is actually quite effective what 
they do. They manage it under a very reasonable budget. And 
again, we have scaled back their budget slightly. This is in no 
way intended to signal that it is not important. It is, quite 
frankly, very important what they do.
    Senator Coons. Thank you, Mr. Secretary. As we spoke about, 
the U.S. reached the debt limit in March and you are using 
extraordinary measures to avoid default. Do you agree allowing 
the Government to default on its debts is a terrible idea that 
would have significant consequences for our market and economy 
and even the threat of default has the potential for costly 
implications for the Government and undermines our credibility?
    Secretary Mnuchin. Senator, yes. Thank you for asking that 
question which is on one of my favorite subjects and was also 
one of the previous Secretary's favorite subjects. So, let me 
again emphasize that the United States credit is of utmost 
important. We are the reserve currency and we must pay our 
bills on time.
    So as I have suggested in the past, based upon our best 
estimate at the time, we do have funding through September, but 
I have urged Congress to take this up before they leave for the 
recess.
    Senator Coons. I appreciate your leadership on that and I 
will ask one last question if I might or should I----
    Senator Lankford. You are the Ranking Member. I am the 
fill-in Chairwoman.
    Senator Coons. You are the fill-in Chairwoman for the 
moment. I will ask one last question about level of service for 
the IRS. As you heard in my opening remarks, I am concerned 
that the cuts proposed to the IRS would reduce service levels, 
but do you think it is acceptable to provide a level of service 
where more than 4 out of 10 callers will not connect to an 
account representative as they are trying to meet their legal 
obligations to pay their taxes?
    Secretary Mnuchin. So, let me just comment on that. First 
of all, I think as you know, tax reform is a major focus of 
ours. On the personal side, our objective is to simplify tax 
reform, cutting down the number of brackets. Under our proposed 
plan, 95 percent of Americans will be able to fill out their 
taxes on a simple postcard. While I agree with you the service 
levels are an issue, my view, the solution is two-fold. One is 
let us simplify our tax system so not as many people need to 
call, and two, how do we use technology more effectively as 
opposed to having to use call centers, how can we communicate 
with the taxpayers electronically.
    Senator Coons. Thank you, Mr. Secretary.
    Senator Lankford.
    Senator Lankford. Thank you. Let me ask you a couple of 
questions. I want to pick up where Senator Coons left off on 
the issue on debt ceiling. We are currently using extraordinary 
measures. Do extraordinary measures have a cost to the 
taxpayer?
    Secretary Mnuchin. Yes, they do.
    Senator Lankford. Give me a good guess of what 
extraordinary measures cost the taxpayer when we move past the 
debt ceiling limit time period and wait and delay that decision 
on that action.
    Secretary Mnuchin. Well, there is a significant cost and it 
is two-fold. The first cost is a real cost, which is right now 
effectively, as opposed to borrowing in the market at lower 
rates, we are borrowing and making our trust funds whole at 
slightly higher rates, so there is a real cost to doing that. 
There is also an implied cost of uncertainty into the market. 
The longer we wait, the more than uncertainty will be. So, 
again, I full urge Congress to deal with this issue as soon as 
possible.
    Senator Lankford. So I will talk through a couple of things 
on that. The best guess that I have in working with your team 
and trying to get an accurate number of the cost of 
extraordinary measures is around $2.5 billion to the taxpayer 
in real dollars that we pay in because we are covering our own 
interest to be able to do that. That is a significant cost and 
a loss to the taxpayer.
    The second thing is, as you and I have spoken about before, 
we should and will do a debt limit issue because that is taking 
care of already when budget decisions are made. There is 
something that has to be resolved at that point. My request to 
you is to be able to work with Congress to be able to figure 
out a way that when we get to a debt limit moment we do address 
the issue of debt because we cannot just ignore that and 
continue to be able to pile on debt and assume there is no 
consequence. But those key moments should be with the fiscal 
year decisions that we make and how we resolve those issues and 
to be able to find some sort of a consistent calendar.
    What I have recommended is a 2-year debt limit time period 
that every 2 years we have to address this and it has to come 
up and to try to determine do we have the deficit going up or 
down. If the deficit is going down, then the President has the 
authority to be able to make the decision on the debt limit. If 
the deficit is rising or is static, then Congress has to debate 
it. That forces us to get back to how are we dealing with the 
issue of deficit.
    For me, we have half a trillion dollars in overspending 
this year. We cannot just pretend that is going to go away. We 
do have to address it and I believe a debt ceiling moment is a 
moment to address it, but if we are actually cutting away at 
the deficit, I think that should be a process that is ongoing 
and very, very predictable. The only time it is not predictable 
is the moment when the deficits are rising or static because 
then there is something has to be addressed at that moment and 
we have to be able to take that on. We will have further 
conversations on this because I want to continue to press on 
this.
    Let me ask you a question, again, following up on some of 
the things that Senator Coons was saying as well about some 
international actions. Outline the steps for me that Treasury 
is taking right now to deal with the finances of Hezbollah. 
This has been a focus in previous administrations that I think 
needs continued attention. What are we doing currently to be 
able to deal with the finances of a known terrorist 
organization like Hezbollah and what are we doing to be able to 
limit their access to the world market?
    Secretary Mnuchin. Well, let me just assure you that it is 
a major focus of ours. I do not want to go through in this 
public environment the specifics of what we are doing, but I am 
happy to meet with you privately and provide you a classified 
briefing.
    Senator Lankford. Great.
    Secretary Mnuchin. I can assure you that it is a major 
focus of mine and this administration.
    Senator Lankford. Terrific. We will get a chance to visit 
another time in a closed session on that. You have mentioned to 
Senator Capito as well some of the actions that you are taking 
to deal with community banking. I would like to ask you two 
specific issues on that. If we are going to release the economy 
and some of the regulatory issues that you have mentioned both 
in public statements and in your written statement today, one 
of the things is going to be community banking and community 
lending again.
    What recommendations would you make to Congress of actions 
that we need to take that you are limited on and cannot respond 
to the issues with community banking that we need to respond 
to? And the second one is the Qualified Mortgage issue, what 
can be done to be able to help? In my State, there are very few 
banks now that do mortgage lending anymore which used to be the 
anchor for a rural State like Oklahoma, but few banks can do it 
anymore because of the QM rules. So recommendations you would 
make to Congress for things that we need to do for community 
banking and the QM rules.
    Secretary Mnuchin. Thank you. Those are very important 
issues and I look forward to working with you on it.
    We do have a laundry list of items that we recommended to 
Congress. Some of them, I would highlight, are raising the $50 
billion threshold so that we can have regional banks that can 
continue to grow. I think that is too low of a limit under the 
current Dodd-Frank rules. I know there has been bipartisan 
support for raising that, so I look forward to working with 
Congress on that.
    You also mentioned the Qualified Mortgage exemption. That 
is also something we think needs to be looked at, and more 
importantly, housing reform. Right now we have Fannie Mae and 
Freddie Mac that have existed in conservatorship. As I have 
said publicly before, I am committed that we have a long-term 
solution to housing and that these are not controlled by the 
Government for the next 4 years, and also looking at FHA as a 
part of that.
    I am concerned that FHA has gone from a 10 percent market 
share to 20 percent market share and has displaced proper bank 
lending. Community banks know how to make loans. They should be 
encouraged to make loans and keep them on their balance sheet 
and not be forced to make loans to be securitized or turned 
into FHA or Fannie or Freddies.
    Senator Lankford. Well, I would completely agree. They can 
keep it on their books and that's a very safe way to be able to 
protect the economy and what is happening within that bank. 
Forty percent of the banks in Oklahoma no longer make mortgage 
loans any more, 40 percent and rising because of the QM rules 
that have been put on them. That is very toxic for those 
communities. Thank you.
    Senator Capito. Thank you.
    Senator Manchin.
    Senator Manchin. Thank you, Madam Chairman, and thank you, 
Secretary, for being here.
    First of all, the national debt is almost $20 trillion now, 
100 percent of GDP, and no end in sight. I think it is 
projected by 2027 that we would have an annual debt of $1.5 
trillion. And I know you all worked on a proposal, tax proposal 
overhaul, which I agree wholeheartedly. I am concerned about 
the seriousness of working on this debt. I mean, that debt is 
going to eat us alive. And the question I asked the first time 
I was here and in Senate was Mike Mullins who was the head of 
the Joint Chiefs of Staff, what was the greatest threat the 
United States faces. And he says--I thought he was going to say 
China or Russia, you know, one of the countries. He said, ``The 
national debt will be the greatest threat we face.''
    So, with that being said, you had a rate of, what, 15 
percent corporate, kind of you all threw out and you were 
talking about you had three rates of 10, 25, 35, and there was 
no rate on repatriation. But it was kind of vague, but I know 
that is--I can follow the path you all were going. But 
everybody scored that as adding a tremendous more debt to us 
and I knew you would probably be--you were probably looking at 
more of dynamic scoring on that to help raise that or change 
that, which we cannot score dynamically. What is your thought 
process on the debt load we are carrying?
    Secretary Mnuchin. Well, Senator, first of all, thank you 
because I think that is a very important question that you have 
raised.
    First of all, I do share your concern about the national 
debt. The fact that it has gone from $10 trillion to $20 
trillion is very concerning. I think it is critical for 
Congress to look at this in the long-term issues, and that is 
one of the reasons why the administration submitted a budget 
that eventually gets to a balanced budget. So I think that is 
critical.
    I would say that the number one threat is not the debt. The 
number one threat is economic growth. If we continue to have 
lackluster economic growth, that will not fund our economy and 
opportunities for Americans and our leadership in the world. We 
are very focused on creating economic growth. Having said that, 
we are also sensitive to increasing the debt. And I look 
forward to working with you and other Senators. We are very 
close to releasing a detailed plan and I can assure you that we 
believe that that detailed plan will be responsible as we look 
at the impact on the economy and the cost to the debt.
    Senator Manchin. Well, the Bowles Simpson movement a few 
years back was the only one that went in depth, I think, in 
trying to find a pathway for bipartisan. And it failed, but it 
was close. I am thinking some type of a commission. Do you all 
support some type of a Bowles Simpson, or call it whatever you 
may, commission that would look at this and try to support the 
movement you are having? To gain more support here might be of 
help.
    Secretary Mnuchin. Well, I do not have a view as to whether 
it should be a commission or not a commission, but I do have a 
view of getting towards a balanced budget is something that is 
a very important goal.
    Senator Manchin. Let me say--ask another question. 
Marketplace fairness.
    Secretary Mnuchin. I am sorry.
    Senator Manchin. Marketplace fairness, which is basically 
the taxation through the Internet. Probably 50 percent or more 
of the goods that are being sold or purchased in States and we 
receive no income from that to support our local State 
functions, but we expect every small business and every 
established business in our State to collect that tax for us. 
Do you all support fair taxation on Internet States for State 
by State, which is marketplace fairness?
    Secretary Mnuchin. This is an issue that we have been 
looking at very carefully within the administration and we 
expect to come out with a position shortly. I will tell you 
that I think, as you know, many States do have a use tax that 
goes along with the sales tax, so this is really more of a 
function of collection. I am encouraged that Amazon is now 
charging tax I believe on their own sales, but not the 
Marketplace. Not sure I understand the consistency----
    Senator Manchin. Right.
    Secretary Mnuchin [continuing]. On that, but I respect the 
States' ability that there is an awful lot of money that is not 
being collected that is in fact due to them under a use tax. 
This could be a very important means for the States to fund 
infrastructure, which is critical.
    Senator Manchin. It is going to be almost a salvation to 
most of the States, especially rural States that do not have 
the expertise or the far-ranging ability to chase down all 
these Internet sales that are coming in. But if it was a 
State--if it was a national movement we think it would give us 
the support we need to make sure that collections would be 
made. And I would hope that you would look at that seriously 
for the salvation of our States.
    The final question I have is on CFIUS. You all just--you 
have oversight on CFIUS. This subcommittee examines the 
national security implications of certain foreign investment 
transactions. It usually involves critical infrastructure, 
proximity to national security assets or sensitive trade 
secrets. You all just recently--CFIUS approved the sale to a 
Chinese conglomerate of the Chicago Stock Exchange. Can I have 
your thoughts on that?
    Secretary Mnuchin. Again, let me assure you that I take my 
role as chair of CFIUS very seriously, that I have examined 
many transactions since I have been in office. There are many 
transactions that have been withdrawn. It is a confidential 
process, so I am not comfortable talking about any one 
transaction, but I can assure you it is something that I take 
very seriously.
    Now, one other thing I may advocate is I have had the 
opportunity to meet with Members in Congress about talking 
about certain changes to the legislation of CFIUS that I think 
are important to consider. One of the areas in particular are 
joint ventures are not covered and I think they should be. 
There is other areas. I know that there is many people in 
Congress who want us to look at a lot more transactions. And 
one of the things I think perhaps as we get through the next 
budget cycle is perhaps CFIUS should have central funding, 
because it is a very important function, that can be doled out 
on the inter agencies. But again, we fully support the CFIUS 
function and think this is something that we need to work with 
Congress to review.
    Senator Manchin. I was just concerned about CFIUS taking 
the approach maybe of not national security, but having a 
Chinese conglomerate having all this information into our 
financial economic wherewithal. It is just very concerning to 
me that we allowed that.
    Secretary Mnuchin. Again, I can assure you that when we 
look at CFIUS cases we take into account national security very 
seriously. Again, in this setting, I cannot comment on any----
    Senator Manchin. Well----
    Secretary Mnuchin [continuing]. Particular transaction, but 
look forward to working with you.
    Senator Manchin. Maybe we can talk further on that in 
closed session. Thank you.
    Senator Capito. Thank you.
    Senator Moran. Thank you, Chairman. Mr. Secretary, thank 
you for joining us. I would join Senator Manchin's comments 
about CFIUS. I corresponded with you on a CFIUS issue, a case. 
You responded. I appreciate that. I am pleased to hear how 
seriously you take those responsibilities. I applaud the 
seriousness behind my request.
    I also would follow up with the Chairwoman as well as 
Senator Lankford's comments about community banks. Your 
predecessors have been in front of this subcommittee and then 
as a Member of the Banking Committee I visited with your 
predecessors and all the variety of regulators that affect our 
financial institutions, credit unions, and banks, in 
particular. But I would highlight just so that you would know 
how important it is, so that you have heard at least from a 
third Senator this morning.
    Senator Lankford talked about lack of mortgage lending. To 
me, that is one of the most egregious examples of 
overregulation. Banks do not make--do not not make loans 
because it is not a creditworthy borrower. They do not make 
loans because of the overregulation, the burden, the cost, and 
the associated penalties of a minor error. That is not anything 
that rural America in particular can withstand. We have looked 
to our local lenders to be the pillars of our community to 
provide that funding for someone who wants to buy or remodel or 
build a home and it is not happening.
    And then secondly, particularly today with commodity prices 
in the agriculture sector at the levels that they are, I have 
great concern that because of consequences of Dodd-Frank and 
just the regulator environment generally, that what has 
happened in the past when times are tough is that long time 
relationships between lenders and farmers and ranchers, know 
the family, know the business plan, have a sense of their 
character. That has been a part of the decisionmaking that has 
occurred when loans are made.
    If we get to the point in which community banks are making 
loans based upon some kind of computer program and you punch in 
the numbers and none of the other factors are taken into 
account, we will not survive the agriculture crisis that we 
face today with low commodity prices. We will have a financial 
crisis as well, particularly damaging to places like my home 
State. So I am pleased to hear you reiterate, and you do not 
need to do it a third time, the efforts that are under way to 
alter.
    I am here to encourage, insist, demand. I have asked every 
regulator that has been in front of me, give me an example of 
something you have done that reduces the burden to a community 
bank. And without exception, no regulator has been able to give 
me an example. They will talk about how they have a committee, 
a task force, someone to advise them on community banking, but 
nothing seems to happen much at the Fed, at the FDIC, or the 
Office of the Comptroller of Currency. So I would ask you to 
redouble your efforts in that regard.
    On a much more specific topic, let me turn to a question 
that I asked the SEC Chairman Clayton in a similar setting here 
just a few days back. I am concerned about the negative impact 
that the European Union's MiFID II regulations could have on 
the ability of U.S. firms to provide investment research in the 
EU. Many small and mid-cap companies depend on that research to 
attract investment. And EU rules that impede the provision of 
research could have a direct impact on job creation here in the 
United States.
    I just wanted to gauge your awareness of that issue. And 
given your broad responsibilities at Treasury, would you commit 
to me that you are willing to work with EU and the SEC to find 
a path forward that could prevent negative impacts to 
investments in U.S. markets and companies? Do you see a role 
for the Treasury Department in potentially brokering some kind 
of agreement so that U.S. entrepreneurs and innovators are not 
excluded from this important analysis?
    Secretary Mnuchin. Thank you. Well, let me first say I will 
take an opportunity to mention for the third time how much I 
appreciate the support for community banking that there is from 
this subcommittee. This is an area that I have had personal 
experience in having managed banks, and I look forward to 
working with this subcommittee and others to making sure that 
we get the right regulatory balance that community banks can 
lend and that they are safe, particularly in the agricultural 
communities.
    These are the parts of our country that need to have access 
to credit and community banks know how to lend. They do this. 
It is not a function of just relationship lending. It is a 
function of they understand the agricultural market. These are 
not loans that should be securitized and sold off. These are 
loans that should be on the books of the banks and be held, so 
look for it.
    Senator Moran. I liked your previous two answers and I 
especially appreciate your third. Thank you, Mr. Secretary.
    Secretary Mnuchin. Okay. Now, on the EU issue, I very much 
look forward to working with you and Treasury is happy to be 
helpful in brokering a solution.
    Senator Moran. Thank you very much.
    Senator Capito. Thank you.
    Senator Van Hollen.
    Senator Van Hollen. Thank you, Madam Chairman. Mr. 
Secretary, good to see you here in Appropriations. We have had 
a chance to talk a little bit in the Budget Committee and 
Banking Committee. And I had not planned to say anything about 
the overall budget, but you made the statement that the Trump 
administration budget balanced in 10 years. I think it is 
important that the public and Members know that the CBO looked 
at that and said that just is not so and that you were way off.
    So I do want to say I appreciate your efforts on the debt 
ceiling and I do think it is really important that the Congress 
not engage in political games with something that has such an 
impact on our economy, so thank you for your voice in that 
debate.
    I want to reinforce the comments that Senator Coons made 
regarding CDFIs. I was pleased to hear that was not a cut made 
on the merits, but it just did not--I guess it just did not 
meet your overall priority list in the budget. I would say in 
Maryland and I think many communities around the country CDFIs 
have played a really important role in local economic 
development, so I hope this committee will work to restore 
those cuts.
    Just on inversions, and Senator Durbin has been very 
involved in this, I know we are looking to tax reform. In the 
meantime, I hope we can do everything possible to prevent 
people engaging in inversions and the Obama administration put 
in place some provisions, some rules to reduce that. I hope you 
will preserve those rules. I think we would like to go further 
in shutting down some of these inversions.
    Let me say a word about North Korea. And first I want to 
thank your team at Treasury. Senator Toomey and I have been 
working on bipartisan legislation. In fact, we have introduced 
a bill on North Korean sanctions that will be in the Banking 
Committee and we appreciate the input we have gotten from your 
team on that.
    As you know, and another report in the Washington Post 
today about the North Korea and the ICBM program moving at a 
faster pace than people previously anticipated, they already 
have nuclear weapons. I appreciate the action that 
administration took with respect to the Bank of Dandong. We 
also know from the February report of a U.N. panel of experts 
that there is incredible leakage in the international sanctions 
regime against North Korea. China is clearly the number one 
culprit in this effort.
    I think we are going to need to move much more aggressively 
with respect to letting China know that if they are going to 
continue to evade the international sanctions that they are not 
going to have such access, their banks, to our markets. I 
understand the challenges there. Let me ask you this. The House 
has passed a sanctions bill on North Korea. Does the 
administration support that part of the bill?
    Secretary Mnuchin. Again, thank you for your comments. I do 
want to just comment first on the CBO scoring, and I think the 
issue of the CBO is they just believe in lower growth than we 
do, but----
    Senator Van Hollen. Mr. Secretary, it is not a question of 
belief. It is a question of reasonable projections.
    Secretary Mnuchin. Well, we----
    Senator Van Hollen. I was going to let that--but your 
projections are out of line with the projections of every 
institution in our country and overseas with respect to growth 
rates. And I know you are going to say all the policies you 
guys are going to put forward are going to somehow change that 
trajectory. All we have is a one page document about your tax 
reform bill. So can we just go to North Korea because I have 
limited time?
    Secretary Mnuchin. Well, we can, but I am just going to 
say----
    Senator Van Hollen. Okay.
    Secretary Mnuchin [continuing]. We will note for the record 
that we respectfully disagree on this. I would just comment 
that our financial projections of growth are significantly 
lower than what the Obama administration used. I hope we all 
have a goal to get back to 3 percent GDP and can work together 
on that.
    But, in any event, on North Korea. I will tell you I have 
spent a lot of time on this issue. We have had various 
significant discussions at the National Security Council. I 
participated in a trilateral meeting with the President in 
Hamburg with Japan and with South Korea, the Republic of Korea. 
I can tell you this is a very big issue that the President is 
focused on.
    The Bank of Dandong was a very significant effort. That is 
something that had been considered previously and there were 
concerns. When this action came to my attention, we moved 
forward with it very quickly. I can assure you without 
highlighting what we will do going forward, there are lots of 
things we are looking at and we will continue to use sanctions 
to the maximum amount allowable by law independent of what 
bills get passed by Congress.
    Senator Van Hollen. If I could, do you--does the 
administration support the North Korean sanctions legislation 
passed by the House which I actually think is not as strong as 
it should be, but it is an important first step? And do you 
also support the Russian sanctions passed by the House? It is 
just a question, yes or no, at this point.
    Secretary Mnuchin. Yes. Again, what I will say on this is 
we will use sanctions to the maximum amount available. We have 
certain concerns about the reach into the executive powers and 
certain limitations, but we fully support sanctions on North 
Korea, on Russia, on Iran. We will use these super 
aggressively.
    Senator Van Hollen. Will the President sign the legislation 
that passed by the House if adopted by the Senate and sent to 
the President?
    Secretary Mnuchin. I do not know the answer to that. I have 
not had that discussion with the President, so I cannot comment 
on it. But again, there is concern about limitations on the 
executive authority on sanctions which through both Democrat 
and Republican Presidents they have previously had.
    Senator Van Hollen. Thank you.
    Senator Capito. Senator Boozman.
    Senator Boozman. Thank you, Madam Chair, and thank you for 
holding this important hearing. We appreciate you being here. I 
appreciate also your obvious knowledge of community banks and 
what they represent. We hear a lot about small business being 
the backbone of America, but the backbone of small business is 
the community bank. So, again, thank you for understanding and 
continuing to work on that.
    I would like to talk a little bit about Iran and tell us 
the steps that Treasury is trying to respond to in the sense 
of, their illicit activities with all of the things we know: 
terrorism, arms trafficking, human rights abuses, et cetera. 
Can you tell us what exactly you are doing in regard? What is 
Treasury's response in helping out in that area?
    Secretary Mnuchin. Sure. Well, let me first comment. The 
activities in Iran are very concerning. As the President has 
said and I agree with him, we have significant concerns about 
the JCPOA. My opinion is that sanctions worked. That is the 
only reason why they came to the table and I wish we had held 
out for a significantly better deal. Having said that, at the 
moment we are working within the constraints of the agreement 
which allow us to do sanctions outside of the nuclear efforts. 
We have just continued to roll out sanctions on areas of 
ballistic missiles, on areas of terrorism. So we will continue 
to aggressively pursue sanctions.
    I have also had conversations with all my foreign 
counterparts about this and our view of working together. And I 
can assure you, as you have heard from the President, the 
agreement is top of mind every time it comes to the 
certification. There is a lot of discussion and we will 
aggressively pursue our options against Iran.
    Senator Boozman. Part of the Omnibus appropriations bill 
that, many of us supported requested that you review all 
sanctions, designations over the past 2 years and determine 
whether these entities have engaged in any prohibited 
activities since the removal of sanctions. Then also Treasury 
was requested to either sanction entities engaged in prohibited 
activity or explain why not. Are you committed to following 
through with that process now?
    Secretary Mnuchin. Again, we look forward to working with 
you whether the bill is passed or not. I will comment. Just as 
we did not have the TFTC, the Terrorist Financing Targeting 
Center request, to the extent the bill is passed we will come 
back for additional funding to work with you, but we believe in 
the sanctions, as I have said, to the maximum amount available.
    Senator Boozman. Right. So that is current law though.
    Secretary Mnuchin. I am sorry.
    Senator Boozman. So that is current law.
    Secretary Mnuchin. Yes. And under the current law, we will 
continue to work with you as we are, absolutely.
    Senator Boozman. Do you have an estimate of what--has 
Treasury done an estimate of what sanctions relief, the impact 
that that has had on their economy?
    Secretary Mnuchin. Again, we have done analysis on both the 
impact of the JCPOA and other areas on their economy. Again, in 
a classified session we are happy to come and talk to you about 
some of the intelligence issues.
    Senator Boozman. Okay. Thank you very much. And again, 
thank you for being here. Thank you, Madam Chair.
    Senator Capito. Thank you.
    Senator Durbin.
    Senator Durbin. Thank you, Madam Chair. Let me say at the 
outset that with you in the Chair seat and the Acting Ranking, 
this is the boldest move by West Virginia since Robert Byrd 
left the Appropriations Committee.
    Senator Capito. Are you saying it takes two of us?
    Senator Durbin. I will let you be the judge of that.
    Senator Capito. I got it.
    Senator Durbin. Mr. Secretary, thank you for being here. 
Let me mention a couple of things. First, on the Marketplace 
Fairness Bill, which I have been cosponsoring with Senator Enzi 
for years and we have passed in the Senate, bogged down in the 
House. The use tax problem I want to tell you is pretty 
obvious. We have a use tax in Illinois and you know what it 
says? When I file my income tax, I decide to voluntarily 
declare how much I owe in sales tax to my State. And you can 
imagine, compliance is very low. So if you have collection at 
point of sale, it is dramatically different.
    And I might also add that Amazon does collect. They support 
marketplace fairness and Amazon does collect sales tax on their 
sales. On third party vendors, no. On their sales, yes. So I 
hope that you will take a look at that. It is very important.
    Secretary Mnuchin. Yes. I can assure you we are looking at 
it. We have had a lot of discussions on it. Again, I may be one 
of the few people in the world who have actually filed use tax, 
so I am aware of that.
    Senator Durbin. Well, because----
    Secretary Mnuchin. Again, I am not sure why Amazon is not 
collecting on the Marketplace. They can voluntarily start doing 
that.
    Senator Durbin. They did voluntarily on their own direct 
sales, but it is a policy.
    Secretary Mnuchin. But we----
    Senator Durbin. But they support the bill. In fairness to 
them, they support the bill.
    Secretary Mnuchin. As I said, the administration is looking 
very closely at this issue. We look forward to having 
discussions with you and we understand the issue and we do 
think that the States getting more money in one format or 
another is very important.
    Senator Durbin. Thank you. I would like to hit two issues 
and I have 3 minutes, so it may not be possible, but I will 
try. Economic growth. Here is the reality. Corporate profits in 
the United States of America as a share of GDP have never been 
higher. Corporate taxes as a share of GDP have never been 
lower. Now we are talking about cutting corporate tax rates. 
What we are missing in this conversation is an element of 
growth that really touches people, and it is this. Despite the 
growth in corporate profits in America, there has not been a 
parallel growth in earning power and wages of the people who 
are working for these corporations.
    Simply devising a strategy to reduce corporate taxes and 
increase corporate profits and CEO salaries is no guarantee 
that the average working family in America will feel this 
growth. And they have not for more than a decade. So I urge you 
as you take a look at economic growth look at it not in terms 
of the boardroom, but look at it in terms of the family room 
and the families that are working and falling further and 
further behind despite their best efforts. I hope you will 
translate your thinking in economic growth in that area.
    Secretary Mnuchin. Well, thank you, Senator, and I assure 
you I am. I had the opportunity to travel extensively with the 
President during the campaign and I did see that. The last 8 
years have been a terrific time for rich people and financial 
markets, but the average American has not seen their wages 
increase and that is something we are very, very focused on 
with economic growth.
    I will just tell you the problem we have right now with the 
corporate tax system. We have one of the highest corporate 
taxes in the world, but the effective rate is much, much lower. 
Many of our corporations leave money offshore because they get 
to defer the tax and not pay anything here. Our main priority 
is to change that system to a territorial system so trillions 
of dollars come back, can be invested here, and it will benefit 
workers.
    Senator Durbin. And our last experience in repatriation 
proved that unless you are careful in how you do that the money 
profits will be repatriated and will go out the back door in 
dividends and corporate salaries instead of what you just said, 
reinvestment in our economy. I want to work with you to make 
sure the reinvestment takes place.
    Secretary Mnuchin. Well----
    Senator Durbin. I would like to raise, if I could--I am 
sorry, but I am running out of time here, but one last issue 
which has already been noted. Corporate inversions. When 
corporations decide to move their headquarters, strictly a 
paper transaction, to some foreign capital to avoid paying U.S. 
taxes it is hurtful to our revenues, hurtful to our economy, 
and fundamentally unfair. They are still doing business in the 
United States. They still have the best market in the world. 
They still use our infrastructure. They still count on our 
national defense. They just do not want to pay taxes.
    So the Obama administration decided to go at that head on 
and they changed regulations in the Department of Treasury and 
made it more difficult for these inversions to take place and 
they slowed down dramatically. President Trump on the campaign 
trail was outspoken on this issue. I think he may have even 
tweeted on this issue, he feels so passionately about it, about 
these inversions. So how do we explain the Executive order from 
this administration which really weakens the regulations and 
changes that came out of the last administration when it came 
to inversions? It seems like the President is saying we do not 
want them, yet his Executive order is saying we are going to 
start to look the other way.
    Secretary Mnuchin. Well, Senator, I look forward to working 
with you on this, and first of all, let me say that I assure 
you that the President is very focused on us fixing the 
problem, not just through a regulation, but as I mentioned, to 
changing the tax system.
    Now, I can tell you this may be the first President that 
has ever picked up the phone and called CEOs when factories 
move, so I can assure you----
    Senator Durbin. Good for him.
    Secretary Mnuchin [continuing]. It catches his attention 
when headquarters move. He is going to do everything in his 
power, whether it is in our trade negotiations or whether it is 
in our tax plan to make sure that----
    Senator Durbin. May I stop you there? Everything in his 
power?
    Secretary Mnuchin [continuing]. American companies are 
here.
    Senator Durbin. Excuse me, but everything in his power? Why 
would he weaken existing regulations which are helping to 
lessen the number of inversions? If he is using everything in 
his power, it would be not only his regulatory authority and 
his statutory suggestions. Wouldn't he do both?
    Secretary Mnuchin. Well, again, I look forward to talking 
to you more about this. I can assure you that we are going to 
make sure that American companies stay here.
    Senator Durbin. Thank you.
    Senator Capito. Senator Daines.
    Senator Daines. Thank you, Madam Chair. Secretary Mnuchin, 
welcome. Nothing is more iconic of self-defeating policy than 
our Tax Code. And I say that as somebody who has spent most of 
my professional career in the private sector, most of that time 
running global operations. It is a relic of 1986. No one in 
Congress will stand by the status quo. From base erosion to 
fundamental fairness, the Tax Code's seven bracket overall 
rates simply are not competitive in the 21st century global 
economy.
    I spent a lot of time in Asia. I spent 6 years living in 
China with Proctor & Gamble. I just was over there in April. I 
will tell you what. More Americans need to go over and see what 
is going on around the world. We need to wake up as a nation 
and recognize it is game on in terms of global competitiveness 
for American companies to win. And I applaud your efforts going 
forward here on reforming our Tax Code. Tax policy has a 
tremendous impact on appropriations because it determines 
Congress' ability to reinvest through public funds, whether it 
is healthcare or defense.
    The question, Secretary Mnuchin, is this. As you stated, we 
are one of the few countries with an overall corporate tax rate 
in excess of 35 percent. In fact, 75 countries, 75 countries 
have corporate tax rates between 0 and 20 percent. How much 
economic growth do you estimate will accrue by reducing overall 
rates to 20 percent?
    Secretary Mnuchin. Thank you, Senator. I think 
significantly. My comment, as you have highlighted, although 
our tax rate is 35 percent, many, many multinational companies 
do not pay anything close to that, as I have mentioned, because 
of either the issue of deferrals or tax havens, so we look 
forward to working with you on that. And now that you have 
highlighted you spent 6 years in China, I am going to come and 
visit you and we will put you to help us on our China 
negotiating team.
    Senator Daines. Well, thank you. I would be happy to do 
that. I believe it is--they are the second largest economy in 
the world now. When I was over there with Proctor & Gamble in 
the nineties when we first moved there, their GDP was about 
$500 billion. Today, $11.3 trillion. So I would be happy to 
work with you together as we go forward.
    The question is what place does overall tax rate reduction 
play in President Trump's efforts and the administration to 
attain a 3 percent plus economic growth?
    Secretary Mnuchin. Tax reform is an enormous part of that, 
as I mentioned. It is a combination of tax reform, regulatory 
relief, and trade, but tax reform is critical. I very much look 
forward to very soon working with Congress. As I mentioned, we 
have been working since January on coming out with a combined 
plan with the House and the Senate and we look forward to 
working with you and getting this passed this year.
    Senator Daines. One of your observations which I completely 
agree with is that a high tax rate drives behaviors. And one 
issue of particular interest to me is certainly keeping us 
competitive and doing that by having a territorial tax system. 
We are the only developed country with a worldwide tax system, 
which incentivizes foreign takeovers. Since 2015 alone, at 
least 12 corporations have inverted overseas. In your 
discussions with the White House, where is the transition to 
territorial tax system in your priorities?
    Secretary Mnuchin. Very, very, very high.
    Senator Daines. I like the additional two verys on that. 
Thank you. Has Treasury calculated the economic growth spurred 
by adopting such a policy?
    Secretary Mnuchin. So we have over 100 people working on 
the tax plan in Treasury. We are scoring lots of different 
scenarios, and yes, we are working closely on that. We look 
forward to working with you, sir.
    Senator Daines. Thank you for the three verys. I will add 
one more. Add me for the fourth very on that.
    My last question relates back to an issue I have back in 
Montana. Winter wheat is one of our biggest crops. Montana 
truly does feed the world. Seventy percent of our wheat harvest 
goes overseas, most of that to Asia. Low grain prices are 
dogging our farmers in this country. Think about who put 
President Trump in the White House. It was hardworking American 
people fighting day to day where the month is often longer than 
the paycheck, and that includes our farmers and our ranchers. 
One of the provisions in the House tax blueprint was immediate 
expensing and it can achieve two tax objectives, simplification 
as well as helping rancher's and farmer's bottom lines. Based 
on your tax reform discussions, how likely is it that immediate 
expensing would be included?
    Secretary Mnuchin. Well, it is something that we are having 
active discussions on. Although no decisions have been made, I 
will tell you we are very sensitive to this as it relates to 
farms and agricultural and small businesses. So we are very 
focused on that issue, even more so than we are on that issue 
for giant multinationals.
    Senator Daines. All right. Thank you, Secretary Mnuchin.
    Senator Capito. Well, thank you for your testimony today, 
Secretary Mnuchin. We are going to excuse you, Secretary 
Mnuchin, and call forward our next panel, Commissioner Koskinen 
and Inspector General Russell George.
    Secretary Mnuchin. Thank you very much.
    Senator Capito. Thank you so much for your testimony. Given 
our time constraints, I ask that you summarize your statements 
so that we can have an opportunity to proceed with questioning. 
Thank you very much, Mr. Secretary.
    All right. Let's get started. Commission Koskinen, thank 
you for coming, and I now invite you to summarize your remarks 
on behalf of the Internal Revenue Service.
                              ----------                              


                        INTERNAL REVENUE SERVICE

STATEMENT OF HON. JOHN KOSKINEN, COMMISSIONER
    Mr. Koskinen. Chairman Capito, Ranking Member Coons, 
Members of the subcommittee, thanks for the opportunity to 
appear before you today for the last time to discuss the IRS 
budget and current operations. I am happy to summarize my 
opening statement, but I would like the full opening statement 
admitted to the record if that would be appropriate.
    Senator Capito. We will submit that without objection. 
Thank you.

            THE PRESIDENT'S FISCAL YEAR 2018 BUDGET REQUEST

    Mr. Koskinen. We look forward to working with Congress as 
you continue to determine the IRS' appropriate funding level 
for the next fiscal year. As you know, my term as IRS 
Commissioner ends in November, so all but a few weeks of the 
agency's fiscal year 2018 budget will cover the term of the 
next IRS Commissioner. I feel it is my obligation to do 
everything I can to make sure the new Commissioner starts with 
sufficient resources for the agency to meet its 
responsibilities to the Government and to taxpayers.
    The President's fiscal year 2018 budget request for the IRS 
is $10.975 billion, a $260 million cut from our 2017 budget. 
While we support the administration's budget reform efforts, it 
is also important to note that years of sustained funding 
reductions have left the IRS with critical personnel and 
infrastructure requirements. Our budget is now $900 million 
below the level 8 years ago in 2010. We are now 18,000 full-
time employees fewer than we had in 2010. And under the 
proposed budget, we expect to lose another 3,000 employees this 
year.
    The effects have been felt throughout the agency. For 
example, by not hiring any significant number of new employees 
since 2010, we now have only 3,000 employees under age 30 out 
of a workforce of 80,000, creating a major challenge in years 
to come as we look for the next generation of IRS managers and 
executives. We have lost over 5,500 revenue officers, revenue 
agents, and criminal investigators, resulting in a proposed 
overall audit rate for the fiscal 2018 year of .5 percent, down 
from 1.2 percent in years past, and a decline of hundreds of 
criminal investigations and prosecutions.
    The IRS fiscal year 2018 budget submission seeks less 
costly ways of delivering taxpayer service and maintaining 
enforcement using technology, training, and internal 
efficiencies. However, even with these efforts to maintain 
current performance levels in fiscal 2018, the IRS' budget 
would need to be $220 million above fiscal year 2017 just to 
cover scheduled pay raises and inflationary costs.

                 IRS INITIATIVES TO IMPROVE EFFICIENCY

    In highlighting these critical needs, I would point out 
that the IRS understands how important it is for us to be 
careful stewards of the fundings we receive from Congress. In 
that regard, the IRS for several years has achieved major 
savings and efficiencies in a number of areas. For example, tax 
return processing. As more people file their returns 
electronically, we have reduced the number of locations where 
we process tax returns from 10 to 5. Over the next several 
years, we will further reduce those locations from 5 to 2.
    With regard to real estate, since 2012, the IRS has reduced 
its space inventory by approximately 3 million square feet. If 
we still occupied that space, the cost would be $81 million 
more for rent.
    The fourth area is taxpayer services. In response to 
taxpayer demand, we have been increasing options for taxpayers 
to get information and interact with us online. We have 
hundreds of millions of hits on our IRS application Where's My 
Refund? Online services are also a source of significant 
savings. It costs us about $50 to answer a question on the 
phone or in person and less than 50 cents to provide that same 
information online.

                      IDENTITY THEFT REFUND FRAUD

    Finally, I would note that a critical problem facing the 
IRS and mentioned earlier and taxpayers when I began as 
Commissioner about 4 years ago was the amount of identity theft 
and the filing of false refund claims. Thanks to the good work 
of IRS employees and the contributions made through our new 
partnership with the private sector and State tax 
administrators, the number of taxpayers identifying themselves 
as victims of identity theft for tax season 2016 dropped by 46 
percent from the previous year. We were delighted and somewhat 
amazed to see that number of victims dropped another almost 50 
percent this past filing season so that the overall decline in 
victims over the 2 years has been reduced by about two-thirds.

                      PROPOSED LEGISLATIVE CHANGES

    Along with providing adequate funding for the IRS, Congress 
can also help the agency by passing legislation to improve tax 
administration. In that regard, the President's budget request 
contains a number of legislative proposals that I urge Congress 
to approve including: renewing streamlined critical pay 
authority, adding correction procedures for specific areas, and 
giving the IRS authority to require minimum qualifications for 
paid tax preparers.
    Chairman Capito, Ranking Member Coons, and Members of the 
subcommittee that concludes my statement. I would be happy to 
take your questions after you hear from the Inspector General.
    [The statement follows:]
              Prepared Statement of Hon. John A. Koskinen
                              introduction
    Chairwoman Capito, Ranking Member Coons, and Members of the 
subcommittee, thank you for the opportunity to appear before you today 
to discuss the IRS's budget and current operations.
    Let me start by saying we look forward to working with Congress as 
you continue to assess the IRS's appropriate funding level. It is 
important to note that, since my term as IRS Commissioner ends in 
November, all but a few weeks of the agency's fiscal year 2018 budget 
will cover the term of the next IRS Commissioner. I want to do 
everything I can to help ensure that the budget situation for the 
agency will be as strong as possible for the new Commissioner.
    The IRS remains very appreciative of Treasury Secretary Mnuchin's 
support for the IRS to have appropriate resources, and in particular 
for upgrading our information technology (IT) systems. We also strongly 
support the administration's efforts to reduce the Federal budget 
deficit. We recognize that the IRS must always appropriately analyze 
and control our expenditures, and continue to be as efficient as 
possible with the funding granted by Congress.
    At the same time, I would note that the IRS remains one of the most 
cost-effective investments in the Federal Government; resources 
invested in the IRS increase revenue collections. This unique and 
critical role is vital to the function of the Government and to keeping 
the Nation and economy strong. In fiscal year 2016, the IRS collected 
more than $3.3 trillion in tax revenue, processed more than 244 million 
tax returns and other forms, and issued more than $426 billion in tax 
refunds. The IRS's enforcement programs collected more than $54.3 
billion in fiscal year 2016, a return on investment (ROI) of about $5 
for every dollar invested in the agency.
    While we will continue to look for efficiencies in our operation, 
it is important to recognize that the IRS remains one of the most 
efficient tax administrators in the world. For every $100 collected in 
taxes, the IRS spends about 35 cents, which is far less than most other 
developed countries, according to statistics compiled by the 
Organization for Economic Cooperation and Development (OECD).
    As the IRS budget has declined over recent years, we have 
consistently found ways to increase our efficiency to meet expanding 
workloads and new challenges. From 2010 to 2015, the number of returns 
filed grew by more than 10 million (or nearly 7 percent).
    Further increasing our workload, the IRS during this period has had 
to implement a number of significant legislative mandates, nearly all 
of which came with no additional funding. This list includes: the 
Affordable Care Act (ACA); the Foreign Account Tax Compliance Act 
(FATCA); the Achieving a Better Life Experience (ABLE) Act; a new 
certification program for professional employer organizations; 
reauthorization of the Health Coverage Tax Credit (HCTC); the 
registration requirement for newly created 501(c)(4) organizations; and 
the Private Debt Collection program. Legislative mandates carry 
significant costs, in particular the technological changes required to 
successfully integrate them into the tax system.
    Because more than 70 percent of the IRS's budget is personnel, the 
agency has dealt with the funding cuts through an exception-only hiring 
freeze that has been in effect since fiscal year 2011. This has left us 
unable to replace most employees who retire or leave for other jobs in 
government or the private sector. As a result, the agency has lost 
about 18,000 full-time employees since 2010.
    I am concerned that continued erosion of the IRS workforce will 
threaten the agency's effectiveness and its ability to provide 
appropriate taxpayer service, enforcement of the tax laws, and 
ultimately, our ability to collect the revenues the Government depends 
upon for operations.
    Against this backdrop, we are appreciative of the funding 
flexibility provided by Congress in 2016, which continued in 2017 to 
improve taxpayer service, increase cybersecurity and improve our 
efforts against identity theft.
    In the cybersecurity area, we implemented the use of monitoring and 
other capabilities that are more sophisticated than what we had used 
previously. This has helped us detect suspicious activity in our 
various online tools and applications more quickly.
    In regard to identity theft, we put many new taxpayer protections 
in place for the 2016 tax filing season that produced significant 
results. We had fewer false returns entering our systems, fewer 
fraudulent refunds issued, and fewer tax-related identity theft 
victims. Most important, the number of people who reported to the IRS 
that they were victims of identity theft declined from 698,700 in 
Calendar Year 2015 to 376,500 in 2016--a drop of 46 percent. 
Preliminary indications are that this number is again declining in 
2017.
                the president's fiscal year 2018 budget
    The President's fiscal year 2018 budget request for the IRS is 
$10.975 billion, which is $260 million, or 2.3 percent, below the 
fiscal year 2017 enacted budget. The IRS will continue to seek less 
costly ways of delivering taxpayer service and maintaining enforcement 
using technology, training and internal efficiencies. Major areas 
outlined in the President's budget request include the following:
Operations Support
    A priority in the President's budget is helping the IRS improve 
information services by addressing its antiquated IT systems. 
Approximately 63 percent of IRS IT hardware systems are aged and out of 
warranty, and 32 percent of software products are two or more releases 
behind the industry standard, with 15 percent more than four releases 
behind. The importance of keeping systems updated was demonstrated 
recently with the spread of the ``WannaCry'' virus to IT systems around 
the world.
    The President's budget request includes $3.9 billion for operations 
support. Within that total, $2.07 billion is allocated for information 
services, $216.1 million, or 11.6 percent, above the fiscal year 2017 
enacted budget. This funding will allow the IRS to take the initial 
steps needed to bring our IT infrastructure up-to-date.
    With the growing reliance on IT as an integral part of the solution 
to provide improved taxpayer service and enforcement, the IRS will 
continue to modernize to harness new information delivery models and 
manage data. Infrastructure modernization is necessary to increase 
agility, efficiency and service quality, ultimately reducing 
operational cost.
Taxpayer Services
    The President's budget includes $2.21 billion for taxpayer 
services, which is $153.4 million, or 6.5 percent, below the fiscal 
year 2017 enacted budget. While the IRS will continue to provide 
service to taxpayers across all channels, we will emphasize improving 
and expanding the use of online tools and offerings such as virtual tax 
assistance sites, which will help the agency operate in a cost-
effective manner.
    The IRS has, in fact, been working to increase our online offerings 
for several years, in response to increasing taxpayer demand. We 
provide a wealth of tax information on IRS.gov, which was visited more 
than 500 million times during fiscal year 2016, and more than 354 
million times so far in fiscal year 2017. Taxpayers use IRS.gov to get 
forms and publications, find answers to their tax questions, and 
perform transactions such as paying their tax bill. The most heavily 
used part of our website is the ``Where's My Refund?'' electronic 
tracking tool, which was used about 300 million times in fiscal year 
2016, and more than 264 million times already this year.
    The IRS will continue working toward a more proactive and 
interactive relationship with taxpayers by enhancing and expanding our 
communications with them. This includes offering taxpayers and tax 
professionals more services, tools and support that are both innovative 
and secure, and specific to their needs, especially in relation to 
online and virtual interactions.
Enforcement
    The President's budget includes $4.71 billion for enforcement 
programs, which is $153.5 million, or 3.2 percent, below the fiscal 
year 2017 enacted budget.
    The IRS remains committed to increasing compliance and reducing the 
tax gap, while minimizing burden on the vast majority of taxpayers who 
pay their taxes accurately and on time. The tax gap represents the 
difference between taxes owed and taxes paid on time. In fiscal year 
2016, the IRS released updated tax gap estimates for tax years 2008 
through 2010, and found that the annual average gross was an estimated 
$458 billion, and the estimated voluntary compliance rate was 81.7 
percent.
Business Systems Modernization
    The President's budget includes $110 million for business systems 
modernization, which is $180 million, or 62.1 percent, below the fiscal 
year 2017 enacted budget. As noted above, this decline is a result of 
reallocating funding to IT infrastructure systems to decrease the 
backlog of deferred software and hardware updates, which is a critical 
priority, and must be accomplished before development and modernization 
of new systems.
    With the fiscal year 2018 request, the IRS will continue operating 
the Return Review Program (RRP) which has significantly enhanced fraud 
detection capabilities. In fiscal year 2018, RRP will make a wider 
array of data available to other systems for expanded fraud detection.
    The IRS will also continue developing web applications to simplify 
the taxpayer's online experience, provide secure digital communications 
and add more interactive capabilities to existing web self-service 
products. This includes continuing the development of online account 
capabilities for taxpayers. The initial features of the online account, 
launched during fiscal year 2017, include allowing taxpayers to check 
if they have a balance due, make payments and see prior payment and 
other tax records.
            legislative proposals in the president's budget
    Along with the funding request, we are also asking for Congress's 
help legislatively. In that regard, let me highlight several important 
legislative proposals in the President's fiscal year 2018 budget that 
would improve tax administration and support the IRS in fulfilling its 
mission:
Streamlined Critical Pay Authority
    The IRS Restructuring and Reform Act of 1998 increased the IRS' 
ability to recruit and retain a small number of key executive-level 
staff by providing the agency with streamlined critical pay authority. 
This allowed the IRS, with approval from Treasury, to move quickly to 
hire well-qualified individuals to fill positions deemed critical to 
the agency's success, and that required expertise of an extremely high 
level in an administrative, technical or professional field. Executives 
hired under this authority included our former Chief Information 
Officer, a senior cybersecurity expert, our system architect, the 
director of our online systems development team and other senior IT 
executives. After having been renewed several times by congressional 
appropriators, this authority expired at the end of fiscal year 2013 
without being renewed. The President's fiscal year 2018 budget proposes 
reinstating this authority through fiscal year 2021. It is my hope that 
this critical program, which ran effectively for 14 years before it 
expired, will be renewed.
Correction Procedures For Specific Errors
    Under current law the IRS has authority in limited circumstances to 
identify certain computation mistakes or other irregularities on 
returns and automatically adjust the return for a taxpayer. At various 
times, Congress has expanded this limited authority on a case-by-case 
basis to cover specific, newly enacted tax code amendments. The IRS 
would be able to significantly improve tax administration--including 
reducing improper payments and cutting down on the need for costly 
audits--if Congress were to enact a proposal in the President's budget 
to replace the existing specific grants of this authority with 
authority to correct specific errors instead. This would allow the IRS 
to fix errors where we have reliable information that a taxpayer has an 
error on their return in areas such as the Earned Income Tax Credit 
(EITC) program, educational tax credit programs or child tax credit 
programs.
Authority To Require Minimum Qualifications For Return Preparers
    The President's budget proposes providing the Secretary with 
authority to require all paid tax return preparers to have a minimum 
knowledge of the tax code. Requiring all paid preparers to keep up with 
changes in the Code would help promote high quality service from return 
preparers, improve voluntary compliance, and foster taxpayer confidence 
in the fairness of the tax system.
    Chairwoman Capito, Ranking Member Coons and Members of the 
subcommittee, that concludes my statement. I would be happy to take 
your questions.

    Senator Capito. Thank you. Thank you. And next we will turn 
to the Inspector General, Russell George. I now invite you to 
summarize your statement. Thank you.
                              ----------                              


           TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION


                       DEPARTMENT OF THE TREASURY

STATEMENT OF HON. J. RUSSELL GEORGE, INSPECTOR GENERAL
    Mr. George. Thank you.
    Senator Capito. Thank you for coming.
    Mr. George. Chairwoman Capito, Senator Manchin, thank you 
for the opportunity to appear today.
    My testimony addresses the Fiscal Year 2018 IRS budget 
request and significant cyber security challenges confronting 
that agency. The proposed IRS budget is a decrease of $260 
million from the Fiscal Year 2017 enacted level. In the 
request, the IRS realigned approximately $179 million from the 
business systems modernization appropriation to the operation 
support appropriation to address needed technology hardware and 
software updates.
    There are many challenges facing the IRS, the top challenge 
of which is protecting security over taxpayer data. The IRS 
processes and stores a vast amount of taxpayer data that is a 
prime target for domestic and international criminals.
    For example, in March 2017 because of significant 
suspicious activity, the IRS deactivated the online Free 
Application For Federal Student Aid Data Retrieval Tool. This 
tool is designed to be used by students and parents to obtain 
tax information needed to complete a student aid application. 
This incident is just the latest in several brazen attempts by 
bad actors to steal taxpayer data, to file fraudulent tax 
returns, and receive illegitimate tax refunds.
    Since May 2015, the IRS has experienced breaches to its Get 
Transcript and Identity Protection Personal Information Number 
applications. For online taxpayer access, the IRS has a 
difficult task of balancing the need to authenticate a 
taxpayer's identity with the need to make the applications 
accessible when taxpayers need them.
    The threat landscape against the IRS is ever changing. Bad 
actors continually seek different ways to take advantage of 
systems and processes and in an effort to access tax 
information without proper authorization. Therefore, the IRS 
must continually update its systems and processes to combat the 
threat. The risk of unauthorized access to tax accounts will 
continue to be significant as the IRS increases its efforts to 
deliver new online tools to taxpayers via its Future State 
initiative. These current efforts to exploit online systems 
have also highlighted the need to seek the capability to 
improve or build better systems. One element toward that end is 
hiring individuals with proven skills, knowledge, and abilities 
related to cyber security.
    The IRS's streamlined critical pay authority expired at the 
end of 2013. We reviewed whether the IRS subsequently used the 
government wide critical pay position authority which has been 
available since 1990 to fill technical positions such as those 
within a cyber security operation. We found that the IRS had 
not used this authority which could assist in recruiting highly 
qualified experts.
    TIGTA also continues to be concerned about cyber security 
in general at the IRS. Our audits have shown some problematic 
areas. An audit from 2016 showed that significant improvements 
are needed with security monitoring to detect deficiencies 
which could leave its computing infrastructure vulnerable to 
intrusion by hackers and malicious software. We also found that 
improvements are needed to ensure that all systems have secure 
configurations and that security vulnerabilities are addressed 
on a timely basis.
    We are also concerned about the significant percentage of 
information technology infrastructure at the IRS that is beyond 
its useful life. Such hardware is prone to failure over time. 
Moreover, older technology brings unnecessary security risks to 
an organization because manufacturers may not provide active 
support and hackers have a longer period to identify and 
exploit vulnerabilities.
    We have an ongoing audit that will evaluate how effective 
the IRS is addressing the operational challenges of replacing 
outdated hardware in the computer area. We expect to issue this 
report in September of this year.
    This concludes my statement. Chairwoman Capito, Senator 
Manchin, thank you for the opportunity to share my views.
    [The statement follows:]
              Prepared Statement of Hon. J. Russell George
    Chairwoman Capito, Ranking Member Coons, and Members of the 
subcommittee, thank you for the opportunity to testify on the Internal 
Revenue Service's (IRS) fiscal year \1\ 2018 budget request, our recent 
work related to the most significant challenges currently facing the 
IRS, and the Treasury Inspector General for Tax Administration's fiscal 
year 2018 budget request.
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    \1\ The Federal Government's fiscal year begins on October 1 and 
ends on September 30.
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    The Treasury Inspector General for Tax Administration (TIGTA) was 
created by Congress in 1998 to ensure integrity in America's tax 
system. It provides independent audit and investigative services to 
improve the economy, efficiency, and effectiveness of IRS operations. 
TIGTA's oversight activities are designed to identify high-risk 
systemic inefficiencies in IRS operations and to investigate exploited 
weaknesses in tax administration. TIGTA plays the key role of ensuring 
that the approximately 85,000 IRS employees \2\ who collected more than 
$3.3 trillion in tax revenue, processed more than 244 million tax 
returns, and issued more than $400 billion in tax refunds during fiscal 
year 2016,\3\ have done so in an effective and efficient manner while 
minimizing the risk of waste, fraud, and abuse.
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    \2\ In fiscal year 2016, the IRS employed, on average, 
approximately 85,000 people, including more than 16,000 temporary and 
seasonal staff.
    \3\ IRS, Management's Discussion & Analysis, Fiscal Year 2016.
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    TIGTA's Office of Audit (OA) reviews all aspects of the Federal tax 
administration system and provides recommendations to: improve IRS 
systems and operations; ensure the fair and equitable treatment of 
taxpayers; and detect and prevent waste, fraud, and abuse in tax 
administration. The OA places an emphasis on statutory coverage 
required by the IRS Restructuring and Reform Act of 1998 (RRA 98) \4\ 
and other laws, as well as on areas of concern raised by Congress, the 
Secretary of the Treasury, the Commissioner of Internal Revenue, and 
other key stakeholders. The OA has examined specific high-risk issues 
such as identity theft, refund fraud, improper payments, information 
technology, security vulnerabilities, complex modernized computer 
systems, tax collection and revenue, and waste and abuse in IRS 
operations.
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    \4\ Public Law No. 105-206, 112 Stat. 685.
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    TIGTA's Office of Investigations (OI) protects the integrity of the 
IRS by investigating allegations of employee misconduct, external 
threats to employees and facilities, and other attempts to impede or 
otherwise interfere with the IRS's ability to collect taxes. The OI 
investigates misconduct by IRS employees which manifests itself in many 
ways, including extortion, theft, taxpayer abuses, false statements, 
financial fraud, and identity theft. The OI places a high priority on 
its statutory responsibility to protect all IRS employees located in 
approximately 540 \5\ offices. In the last several years, threats 
directed at the IRS have remained the second largest component of the 
OI's work. Physical violence, harassment, and intimidation of IRS 
employees continue to pose challenges to the implementation of a fair 
and effective system of tax administration. The OI is committed to 
ensuring the safety of IRS employees and of taxpayers who conduct 
business in IRS facilities. As will be discussed in more detail later 
in the testimony, over the past several years, the OI has been 
conducting an investigation of a massive IRS impersonation scam that 
has impacted over 2 million people.
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    \5\ IRS, Management's Discussion & Analysis, Fiscal Year 2016.
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    TIGTA's Office of Inspections and Evaluations (I&E) provides 
responsive, timely, and cost-effective inspections and evaluations of 
challenging areas within the IRS, providing TIGTA with additional 
flexibility and capability to produce value-added products and services 
to improve tax administration. The I&E's work is not a substitute for 
audits and investigations. In fact, its findings may result in 
subsequent audits and/or investigations. Inspections are intended to 
monitor compliance with applicable law, regulation, and/or policy; 
assess the effectiveness and efficiency of programs and operations; and 
inquire into allegations of waste, fraud, abuse, and mismanagement. 
Evaluations, on the other hand, are intended to provide in-depth 
reviews of specific management issues, policies, or programs.
         overview of the irs's fiscal year 2018 budget request
    The IRS is the largest component of the Department of the Treasury 
and has primary responsibility for administering the Federal tax 
system. The IRS's role is unique within the Federal Government in that 
it collects the revenue that funds the Government and administers the 
Nation's tax laws. It also works to protect Federal revenue by 
detecting and preventing the growing risk of fraudulent tax refunds and 
other improper payments.
    The Department of the Treasury (Treasury) is in the process of 
developing a new strategic plan for fiscal years 2018-2022. The IRS 
will publish its fiscal year 2018-fiscal year 2022 strategic plan by 
June 2018, which will serve as a roadmap to guide future IRS 
operations. To achieve these goals, the proposed fiscal year 2018 IRS 
budget requests appropriated resources of approximately $11 billion.\6\ 
The total appropriation amount is a decrease of $260 million, or 2.3 
percent below the fiscal year 2017 enacted budget level of 
approximately $11.2 billion.\7\ A comparison of next year's request 
with the current budget is shown in Table 1.
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    \6\ The fiscal year 2018 budget request also includes approximately 
$122 million from reimbursable programs, $30 million from non-
reimbursable programs, $526 million from user fees, and $269 million in 
available unobligated funds from prior years for a total amount of 
$11.9 billion in available resources.
    \7\ The fiscal year 2017 enacted budget of $11.2 billion includes 
$290 million in Section 113 Administrative Provision funding in the 
following amounts: $209 million in Taxpayer Services and $81 million in 
Operations Support.

      TABLE 1.--COMPARISON OF IRS FISCAL YEAR 2018 BUDGET REQUEST TO FISCAL YEAR 2017 ENACTED BUDGET LEVEL
                                                 [In thousands]
----------------------------------------------------------------------------------------------------------------
                                                            Fiscal Year
                  Appropriations Account                   2017 Enacted   Fiscal Year     $ Change      % Change
                                                              Budget     2018 Request
----------------------------------------------------------------------------------------------------------------
Taxpayer Services........................................    $2,365,544    $2,212,311      ($153,233)      -6.5%
Enforcement..............................................    $4,860,000    $4,706,500      ($153,500)      -3.2%
Operations Support.......................................    $3,719,446    $3,946,189       $226,743        6.1%
Business Systems Modernization...........................      $290,000      $110,000      ($180,000)     -62.1%
                                                          ------------------------------------------------------
      Total Appropriated Resources.......................   $11,234,990   $10,975,000      ($259,990)      -2.3%
----------------------------------------------------------------------------------------------------------------
Source: IRS's Fiscal Year 2018 Budget Request, Operating Level Tables and Fiscal Year 2017 Enacted Budget.

    The three largest appropriation accounts are Taxpayer Services, 
Enforcement, and Operations Support. The Taxpayer Services account 
provides funding for programs that focus on helping taxpayers 
understand and meet their tax obligations, while the Enforcement 
account supports the IRS's examination and collection efforts. The 
Operations Support account provides funding for functions that are 
essential to the overall operation of the IRS, such as infrastructure 
and information services. Finally, the Business Systems Modernization 
account provides funding for the development of new tax administration 
systems and investments in electronic filing.
Appropriations Changes
    As shown above, the Taxpayer Services, Enforcement, and Business 
Systems Modernization appropriations decreased by $153 million, $154 
million, and $180 million, respectively, for an overall decrease of 
$487 million compared to the fiscal year 2017 level.
    The IRS realigned approximately $179 million and 266 Full-Time 
Equivalents (FTEs) \8\ from the Business Systems Modernization 
appropriation to the Operations Support appropriation to address a 
backlog of deferred information technology hardware and software 
updates. The Business Systems Modernization appropriations request 
decreased by 62 percent from fiscal year 2017.
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    \8\ A measure of labor hours in which one FTE is equal to 8 hours 
multiplied by the number of compensable days in a particular fiscal 
year.
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    As a result, the Operations Support appropriation request for 
fiscal year 2018 increased by $227 million compared to the fiscal year 
2017 level. The largest component of this increase is the realigned 
funds of $179 million to address deferred information technology 
updates. Overall, the IRS's fiscal year 2018 budget request reflects a 
total decline of appropriated resources of $260 million compared to 
fiscal year 2017.
                       challenges facing the irs
    In this section of my testimony, I will briefly discuss several of 
the key challenges now facing the IRS as it administers our Nation's 
tax laws.
Security Over Taxpayer Data
    As cybersecurity threats against the Federal Government grow, 
protecting the confidentiality of taxpayer information will continue to 
be a top concern for the IRS. The increasing number of data breaches in 
the private and public sectors means more personally identifying 
information than ever before is available to unscrupulous individuals. 
Many of the data are detailed enough to enable circumvention of most 
authentication processes. For example, in March 2017, as a result of 
significant suspicious activity, the IRS announced that it was 
deactivating its online Data Retrieval Tool (DRT) to protect sensitive 
taxpayer data.
    The DRT allows students and parents to access their adjusted gross 
income (AGI) information from the IRS to complete the Free Application 
for Federal Student Aid (FAFSA) by transferring the data directly into 
their FAFSA application form from the IRS website. Identity thieves 
used personal information of individuals that they obtained outside the 
tax system to start the FAFSA application process form in an attempt to 
secure the AGI tax information through the DRT. On March 3, 2017, the 
IRS reported that they disabled the DRT due to privacy concerns and to 
protect sensitive taxpayer data. As of April 25, 2017, the IRS reported 
that it identified approximately 8,000 suspicious returns with refunds 
issued totaling $32 million that it was reviewing for fraud. In 
addition, as of May 16, 2017, the IRS reported it stopped 67,000 tax 
returns filed in 2017, before refunds were issued, that appeared to 
have been filed using stolen taxpayer identification information from 
the incident. According to the IRS, they confirmed that 31,000 of those 
tax returns were fraudulent because the true taxpayers indicated they 
did not file them. The remaining 36,000 tax returns were still being 
evaluated to determine if they were fraudulent.
    Recently, TIGTA Special Agents conducted search warrants and 
arrested two individuals for their use of stolen DRT information in 
furtherance of a Stolen Identity Refund Fraud scheme. TIGTA is 
conducting a joint investigation of this exploitation with IRS Criminal 
Investigation and the Department of Education Inspector General.
    The risk of unauthorized access to tax accounts will continue to be 
significant as the IRS proceeds with its Future State initiative \9\ 
which includes expansion of online tools it makes available to 
taxpayers. The IRS's goal is to eventually provide taxpayers with 
dynamic online tax account access that includes viewing their recent 
payments, making minor changes and adjustments to their tax accounts, 
and corresponding digitally with the IRS. Increased online access will 
increase the risk of unauthorized disclosure of tax data. As such, the 
IRS's processes used to authenticate individuals' identities must 
promote a high level of confidence that tax information and services 
are provided only to individuals who are entitled to receive them.
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    \9\ Preparing the IRS to adapt to the changing needs of taxpayers 
is described generally as the IRS Future State initiative. A key part 
of this effort is for taxpayers to have a more complete online 
experience for their IRS interactions.
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    TIGTA reported in November 2015 that the IRS had not established 
effective authentication processes and procedures for its online 
services.\10\ This includes not performing risk assessments when 
required or, when performed, not ensuring authentication processes and 
procedures are implemented that are commensurate with the assessed 
level of risk. For example, we reported that the IRS did not complete 
the required authentication risk assessment for its Identity Protection 
Personal Identification Numbers (IP PIN) \11\ application. In March 
2017, we further reported that the IRS also did not complete a 
sufficient risk assessment for the IP PIN application after 
discovering, on May 17, 2015, that this application had been breached 
by unauthorized users.\12\
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    \10\ TIGTA, Ref. No. 2016-40-007, Improved Tax Return Filing and 
Tax Account Access Authentication Processes and Procedures Are Needed 
(November 2015).
    \11\ An IP PIN is a six-digit number assigned to taxpayers that 
allows their tax returns/refunds to be processed without delay and 
helps prevent the misuse of their Social Security Numbers to file 
fraudulent Federal income tax returns.
    \12\ TIGTA, Ref. No. 2017-40-026, Inconsistent Processes and 
Procedures Result in Many Victims of Identity Theft Not Receiving 
Identity Protection Personal Identification Numbers (March 2017).
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    In addition, we reported that the level of authentication that the 
IRS uses for its various services is not consistent, increasing the 
risk of unscrupulous individuals accessing and obtaining personal 
taxpayer information and/or defrauding the tax system. This was one of 
the main factors in the Get Transcript breach in which hundreds of 
thousands of tax accounts were accessed by unauthorized users. We 
reported that the IRS assessed the risk of the Get Transcript 
application as required but concluded that the risk was low to both the 
IRS and taxpayers. As a result, the IRS implemented single-factor 
authentication to access the Get Transcript application. The IRS now 
knows that the authentication risk was in fact high to both the IRS and 
taxpayers and should have required multifactor authentication.
    We have an ongoing review of the online Transcript Delivery System, 
which also provides access to tax return and tax account information, 
to assess whether authentication controls protect against unauthorized 
disclosure of tax information.\13\ We expect to issue our final report 
in October 2017.
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    \13\ TIGTA, Audit No. 201640032, Review of the IRS's Transcript 
Delivery Service, report planned for October 2017.
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    The IRS continues to take steps in response to TIGTA's 
recommendations to provide for more secure authentication, including 
strengthening application and network controls.\14\ However, we remain 
concerned about the IRS's logging and monitoring abilities over all 
connections to IRS online systems. We are currently assessing the IRS's 
efforts to improve its authentication.\15\ This includes evaluating 
whether the IRS has properly implemented secure eAuthentication in 
accordance with Federal standards for public access to IRS online 
systems and whether it has effectively resolved identified control 
weaknesses. We expect to issue the final report in September 2017.
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    \14\ TIGTA, Ref. No. 2016-20-082, Improvements Are Needed to 
Strengthen Electronic Authentication Process Controls (September 2016).
    \15\ TIGTA, Audit No. 201720004, Review of E-Authentication to IRS 
Online Services, report planned for September 2017.
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Providing Quality Taxpayer Service
    For the 2017 Filing Season, the IRS began accepting and processing 
individual tax returns on January 23, 2017, as scheduled at five Wage 
and Investment Division Submission Processing sites.\16\ As of May 5, 
2017, the IRS received approximately 138.9 million tax returns--123.2 
million (88.7 percent) were filed electronically and 15.7 million (11.3 
percent) were filed on paper. The IRS has issued 101.6 million refunds 
totaling approximately $281.7 billion.
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    \16\ IRS Submission Processing sites in Fresno, California; Kansas 
City, Missouri; and Austin, Texas, will process paper-filed and e-filed 
tax returns. Sites in Andover, Massachusetts, and Philadelphia, 
Pennsylvania, will process only e-filed tax returns.
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    Similar to prior filing seasons, the IRS was challenged with the 
implementation of new tax law changes. For the 2017 Filing Season, tax 
law changes include the continued implementation of the Patient 
Protection and Affordable Care Act and the Health Care and Education 
Reconciliation Act of 2010 \17\ (collectively referred to as the 
Affordable Care Act or ACA), and those provisions of the Protecting 
Americans from Tax Hikes Act of 2015 \18\ (PATH Act) specifically 
intended to reduce fraudulent and improper refundable credit claims. 
TIGTA has multiple reviews \19\ to evaluate IRS actions to implement 
key provisions of the PATH Act.
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    \17\ Public Law No. 111-148, 124 Stat. 119 (2010) (codified as 
amended in scattered sections of the U.S. Code), as amended by the 
Health Care and Education Reconciliation Act of 2010, Public Law No. 
111-152, 124 Stat. 1029.
    \18\ Consolidated Appropriations Act of 2016, Public Law No. 114-
113, Div. Q, (2015).
    \19\ TIGTA, Ref. No. 2017-40-042, Processes Do Not Maximize the Use 
of Third-Party Income Documents to Identify Potentially Improper 
Refundable Credit Claims (June 2017), TIGTA, Audit No. 201640023, 
Individual Taxpayer Identification Number Deactivation Process, report 
planned for August 2017; TIGTA, Audit No. 201740005, 2017 Filing 
Season, report planned for September 2017; TIGTA, Audit No. 201740031, 
Implementation of Refundable Credit Integrity Provisions Phase 2, 
report planned for October 2017.
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    Providing quality customer service that taxpayers expect will 
continue to present significant challenges for the IRS. At the same 
time the IRS is actively steering taxpayers to its website and other 
online tools to obtain assistance, the IRS is continuing to cut its 
traditional services. The IRS offers self-assistance options that 
taxpayers can access 24 hours a day, seven days a week. The IRS reports 
329.4 million visits to IRS.gov this filing season, as of May 6, 2017, 
as well as continued increases in the use of various other social media 
channels (e.g., Twitter, Facebook, and YouTube).
    However, the IRS continues to receive many more calls than could be 
answered. As of May 6, 2017, the IRS reports that 40.6 million call 
attempts were made to its various customer service toll-free lines 
during business hours from taxpayers seeking help to understand the tax 
law and meet their tax obligations. A total of 19.6 million calls were 
answered with automation, and telephone assistors answered nearly 11 
million calls and provided a 78.9 percent Level of Service\20\ with a 
6.9 minute Average Speed of Answer. In comparison, the Level of Service 
for the 2016 Filing Season was 72 percent.
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    \20\ The primary measure of service to taxpayers. It is the 
relative success rate of taxpayers who call for live assistance on the 
IRS's toll-free telephone lines.
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    In addition to telephone assistance, many taxpayers also seek 
assistance from one of the IRS's 376 Taxpayer Assistance Center (TAC) 
walk-in offices. Although the IRS reported that it had 376 TACs for the 
2017 Filing Season, 24 TACs were not open because they had not been 
staffed. The IRS estimates that the number of taxpayers it will assist 
at its TACs will continue to shrink this fiscal year. The IRS plans to 
assist approximately 3.4 million taxpayers at the TACs in fiscal year 
2017, which represents an approximately 23.6 percent decrease from 
fiscal year 2016.
    However, the IRS has implemented initiatives in an effort to better 
assist those individuals seeking assistance from a TAC. For example, in 
Calendar Year 2015, the IRS began providing services at select TACs by 
appointment. For the 2017 Filing Season, the IRS has transitioned all 
TACs to appointment service. The IRS reports that, as of April 29, 
2017,\21\ IRS employees answered over 2.1 million calls from taxpayers 
seeking to make an appointment, resulting in approximately 945,000 that 
necessitated an appointment. The IRS notes that taxpayers who travel to 
a TAC without an appointment are assisted if there is availability. As 
of April 29, 2017, the IRS reported that they provided a walk-in 
exception to the requirement for an appointment to nearly 264,000 
taxpayers.
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    \21\ For fiscal year 2017--October 1, 2016, through April 29, 2017.
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    The IRS also offers Virtual Service Delivery, which integrates 
video and audio technology to allow taxpayers to see and hear an 
assistor located at a remote TAC. For the 2017 Filing Season, the IRS 
is offering Virtual Service Delivery at 28 partner site locations, 
which represents a decrease from the previous year when this service 
was offered at 35 locations.\22\ The IRS reports that as of April 29, 
2017,\23\ 1,673 taxpayers have used the service. Finally, the IRS has 
an initiative to co-locate staff with the Social Security 
Administration (SSA) to better assist taxpayers. For the 2017 Filing 
Season, the IRS has placed employees in four SSA locations. TIGTA is 
planning a follow-up audit to assess the IRS's efforts to expand 
customer service options to taxpayers seeking face-to-face assistance.
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    \22\ For the 2017 Filing Season, the IRS is no longer offering 
Virtual Service Delivery at IRS locations. Access to this service is 
only available through external partner locations.
    \23\ For fiscal year 2017--October 1, 2016, through April 29, 2017.
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    The IRS also continues to devote significant resources to assisting 
victims of identity theft. Tax-related identity theft occurs when an 
individual uses another person's name and Taxpayer Identification 
Number (TIN) \24\ to file a fraudulent tax return. This adversely 
affects the ability of innocent taxpayers to file their tax returns and 
timely receive their tax refunds, often imposing significant financial 
and emotional hardship. Individuals can also learn that they are 
victims of employment-related identity theft if they receive a 
notification from the IRS of an income discrepancy between the amounts 
reported on their tax returns and the amounts employers reported to the 
IRS.
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    \24\ A nine-digit number assigned to taxpayers for identification 
purposes. Depending upon the taxpayer, the number can be an Employer 
Identification Number, a Social Security Number, or an Individual 
Taxpayer Identification Number.
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    In July 2015, the IRS created the Identity Theft Victim Assistance 
(IDTVA) Directorate to combine into one directorate the skills of 
employees working tax-related identity-theft cases in multiple 
functions. In June 2017, we reported that the centralization of 
identity theft victim assistance reduced case closure timeframes and 
tax account errors.\25\ However, we also reported in March 2017 that 
the IRS did not consistently update the tax accounts of victims to 
ensure that IP PINs were generated as required.\26\ We identified more 
than 2 million taxpayers for which the IRS did not update their tax 
accounts even though they confirmed that the taxpayer was in fact a 
victim of tax-related identity theft.
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    \25\ TIGTA, Ref. No. 2017-40-036, Centralization of Identity Theft 
Victim Assistance Reduced Case Closure Time Frames and Tax Account 
Errors (June 2017).
    \26\ TIGTA, Ref. No. 2017-40-026, Inconsistent Processes and 
Procedures Result in Many Victims of Identity Theft Not Receiving 
Identity Protection Personal Identification Numbers (March 2017).
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    Our work has also identified that further improvements are needed 
by the IRS to improve its assistance to victims of employment identity 
theft. In August 2016, we reported that, during the period February 
2011 to December 2015, the IRS identified almost 1.1 million taxpayers 
who were victims of employment-related identity theft, but were not 
notified of that fact.\27\ During this audit, the IRS announced that it 
would reverse its existing position and would begin notifying victims 
of employment identity theft in January 2017. However, the IRS plans to 
limit its notification to only those newly identified victims and not 
include the almost 1.1 million identified prior to January 2017. TIGTA 
is currently conducting a review to assess the IRS's actions to notify 
victims of identity theft, and we plan to issue our draft report in 
November 2017.\28\
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    \27\ TIGTA, Ref. No. 2016-40-065, Processes Are Not Sufficient to 
Assist Victims of Employment-Related Identity Theft (August 2016).
    \28\ TIGTA, Audit No. 201740033, Notification Letters to Victims of 
Employment Identity Theft, report scheduled for November 2017.
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    In June 2017, we further reported that the number of employment-
related victims is significantly greater than what the IRS 
identified.\29\ For example, IRS processes do not identify employment 
identity theft when processing paper tax returns. We reviewed a 
statistically valid sample of paper tax returns filed in Processing 
Year 2015 and projected that the IRS did not identify 272,416 victims 
of employment identity theft for the 685,737 paper tax returns filed by 
Individual Taxpayer Identification Number (ITIN) \30\ holders reporting 
wages in Processing Year 2015. The IRS agreed to establish processes to 
identify employment identity theft when processing paper tax returns.
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    \29\ TIGTA, Ref. No. 2017-40-031, The Number of Employment-Related 
Identity Theft Victims Is Significantly Greater Than Identified (June 
2017).
    \30\ The IRS created the ITIN to provide Taxpayer Identification 
Numbers, when needed for tax purposes, to individuals who do not have 
and are not eligible to obtain an SSN.
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    Nonetheless, we have certain concerns with the IRS's response to 
our June 2017 report. Management did not agree to establish a process 
to notify the parents or legal guardians of 229,755 dependents whose 
Social Security Numbers (SSN) were used by an ITIN filer to gain 
employment. We believe the IRS has this capability and has taken this 
action in other instances. For example, the IRS issued letters to the 
parents or guardians of dependents involved in the Get Transcript 
breach to notify them of the risk to their dependents' Personally 
Identifiable Information.\31\
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    \31\ Any information that, either alone or in combination with 
other information, can be used to uniquely identify an individual.
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Detecting and Reducing Refund Fraud
    For the 2017 Filing Season, the IRS transitioned fraud detection 
and selection capabilities from the Electronic Fraud Detection System 
(EFDS) to the Return Review Program (RRP). The IRS stated that the RRP 
provides real-time new and improved capabilities in its fraud detection 
and prevention processes. It should be noted that the IRS did not fully 
retire the EFDS, as it continues to use the EFDS case management 
functionality because the RRP does not have this capability. We have an 
ongoing review to ensure that the EFDS fraud detection capabilities 
were incorporated into the RRP.\32\
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    \32\ TIGTA, Audit No. 201740029, Processing Year 2017 Fraud 
Detection Activities, report planned for January 2018.
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    Refund fraud continues to evolve and become more sophisticated for 
both individual and business tax return filings. As such, the IRS will 
need to continue to adopt strategies to address the perpetrators of 
this crime. As of May 6, 2017, the IRS reported that it identified 
195,941 tax returns with over $2.1 billion claimed in fraudulent 
refunds and prevented the issuance of nearly $2 billion of those 
refunds. The IRS continued to expand its processes to prevent 
fraudulent tax returns from entering the tax processing system. For 
example, as of May 15, 2017, the IRS locked approximately 33.9 million 
taxpayer accounts of deceased individuals. The locking of a tax account 
results in the rejection of an e-filed tax return and the prevention of 
a paper-filed tax return from posting to the Master File if the SSN 
associated with a locked tax account is used to file a tax return. 
According to the IRS, as of April 30, 2017, it rejected 24,474 
fraudulent e-filed tax returns and, as of May 4, 2017, it stopped 4,672 
paper-filed tax returns from posting to the Master File.
    Unscrupulous individuals stealing identities to file individual and 
business tax returns for the sole purpose of receiving a fraudulent tax 
refund continue to be prevalent. Our ongoing audit work shows that the 
IRS is making progress in detecting fraudulent identity-theft tax 
return filings. Most recently, we reported in February 2017 that IRS 
efforts are resulting in improved detection of identity-theft 
individual tax returns at the time returns are processed and before 
fraudulent tax refunds are released.\33\
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    \33\ TIGTA, Ref. No. 2017-40-017, Efforts Continue to Result in 
Improved Identification of Fraudulent Tax Returns Involving Identity 
Theft; However, Accuracy of Measures Needs Improvements (February 
2017).
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    For the 2017 Filing Season, the IRS used 197 identity-theft filters 
to identify potentially fraudulent individual tax returns and prevent 
the issuance of fraudulent tax refunds. These filters incorporate 
criteria based on characteristics of confirmed identity-theft tax 
returns, including amounts claimed for income and withholding, filing 
requirements, prisoner status, taxpayer age, and filing history. Tax 
returns identified by these filters were held during processing until 
the IRS could verify the taxpayer's identity. As of April 29, 2017, the 
IRS reported that it had identified and confirmed 75,797 fraudulent tax 
returns and prevented the issuance of $581.6 million in fraudulent tax 
refunds as a result of its identity-theft filters.
    However, the IRS recognizes that new identity-theft patterns are 
constantly evolving and that, as a result, it needs to continuously 
adapt its detection and prevention processes. These evolving identity-
theft patterns affect not only individuals, but also businesses. The 
IRS defines business identity theft as creating, using, or attempting 
to use, a business's identifying information without authority, in 
order to claim tax benefits. In September 2015, we reported that the 
IRS recognized the growing threat of business-related identity theft 
and, in response, was implementing processes to detect identity theft 
on business returns at the time tax returns are processed.\34\ For 
example, in response to TIGTA's recommendations, the IRS expanded its 
filters to identify business identity theft for the 2017 Filing Season 
and used 25 identity-theft filters to identify potentially fraudulent 
business tax returns and prevent the issuance of fraudulent tax 
refunds. As of June 1, 2017, the IRS reported that it had identified 
and confirmed approximately 4,000 fraudulent tax returns for Tax Years 
2015 and 2016 and prevented the issuance of $390 million in fraudulent 
tax refunds as a result of these business identity-theft filters. TIGTA 
is conducting a follow-up audit to assess the IRS's efforts to expand 
on its processes and procedures to detect business identity theft.\35\
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    \34\ TIGTA, Ref. No. 2015-40-082, Processes Are Being Established 
to Detect Business Identity Theft; However, Additional Actions Can Help 
Improve Detection (September 2015).
    \35\ TIGTA Audit No. 201740037, Business Identity Theft Follow-Up, 
report planned for May 2018.
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    Finally, refund fraud associated with the use of prisoner SSNs 
continues to remain a significant problem for tax administration. The 
IRS identified more than 24,000 fraudulent tax returns using a prisoner 
SSN in Calendar Year 2015. The refunds claimed on those tax returns 
totaled more than $1.3 billion. Since 2005, my office has issued a 
number of reports that address the IRS's efforts to identify and 
prevent prisoner tax fraud. Although the IRS has taken a number of 
steps to improve its processes in response to TIGTA's recommendations, 
further improvements are needed in the IRS's identification of prisoner 
returns.
    To combat refund fraud associated with tax returns filed using 
prisoner SSNs, the IRS compiles a list of prisoners (the Prisoner File) 
received from the Federal Bureau of Prisons and State Departments of 
Corrections. The Prisoner File is the cornerstone of the IRS's efforts 
to prevent the issuance of fraudulent refunds to individuals filing 
false tax returns using a prisoner SSN. To further its efforts to 
identify prisoner tax returns, the Bipartisan Budget Act of 2013,\36\ 
enacted in December 2013, amended the Improper Payments Elimination and 
Recovery and Improvement Act \37\ to authorize the IRS to use prisoner 
information provided by the Social Security Administration (SSA). The 
IRS is using the SSA prisoner file as part of the 2017 Filing Season 
prisoner identification process.
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    \36\ Public Law No. 113-67, Sec. 204.
    \37\ Public Law No. 112-248, 126 Stat. 2390.
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    In July 2017, we reported IRS processes do not effectively ensure 
that the Federal Bureau of Prisons and the State Departments of 
Corrections comply with prisoner reporting requirements.\38\ TIGTA 
identified 861 prisons that reported to the SSA but did not report to 
the IRS. TIGTA also identified 272,931 prisoners who were in Federal 
Bureau of Prisons or State Departments of Corrections but were not 
reported to the IRS. Approximately $48 million in potentially 
fraudulent refunds were claimed by 16,742 individuals incarcerated in 
institutions that did not report to the IRS.
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    \38\ TIGTA, Ref. No. 2017-40-041, Actions Need to be Taken to 
Ensure Compliance with Prisoner Reporting Requirements and Improve 
Identification of Prisoner Returns (July 2017).
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    In addition, we identified that the IRS processes to validate and 
use prisoner data limits the ability to detect potentially fraudulent 
tax returns. For example, the IRS does not use prisoner records where 
the information provided by the reporting institutions for a prisoner 
is not valid to process tax returns. As such, any return filed using 
the mismatched prisoner information will not be evaluated for potential 
prisoner fraud. Our review of the 1.1 million records that the IRS 
identified as having a mismatch found 471,864 (41 percent) contained a 
valid SSN (i.e., SSN was issued by SSA) in IRS files, which could be 
indicative of a prisoner's use of a stolen SSN.
    TIGTA also identified that the validation process incorrectly 
identified 4,158 prisoner records as not matching IRS records when in 
fact the information provided by the Federal Bureau of Prisons and 
State Departments of Corrections did match IRS records. As a result, 
any tax return filed using one or more of these prisoner identities 
will not be assigned a prisoner indicator or evaluated using the 
prisoner fraud filters. TIGTA identified 1,113 tax returns with refunds 
totaling more than $1.7 million that were not identified as prisoner 
tax returns as a result of this error.
Reducing Refundable Credit Improper Payments
    Although refundable credits provide benefits to individuals, the 
unintended consequence of these credits is that they can result in the 
issuance of improper payments and can be the targets of unscrupulous 
individuals who file erroneous claims. Refundable credits can result in 
tax refunds even if no income tax is withheld or paid; that is, the 
credits can exceed an individual's tax liability. Consequently, they 
pose a significant risk as an avenue for those seeking to defraud the 
Government.
    The IRS issued an estimated $25 billion in potentially improper 
Earned Income Tax Credit (EITC),\39\ Additional Child Tax Credit 
(ACTC),\40\ and American Opportunity Tax Credit (AOTC) \41\ payments in 
fiscal year 2016. This represents a significant loss to both the 
Federal Government and taxpayers. TIGTA remains concerned with the 
IRS's inability to significantly reduce these payments.
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    \39\ The EITC was created in 1975 as part of the Tax Reduction Act 
of 1975 Sec. 204, 26 U.S.C Sec. 32. The EITC is used to offset the 
impact of Social Security taxes on low-income families and to encourage 
them to seek employment.
    \40\ The ACTC is intended to reduce the individual income tax 
burden for families, better recognize the financial responsibilities of 
raising dependent children, and promote family values.
    \41\ The AOTC is intended to help offset the costs of higher 
education for taxpayers, their spouses, and dependents who qualify as 
eligible students.
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    In April 2017, we reported that the IRS concluded that the ACTC and 
AOTC presented a medium risk of improper payments for fiscal year 
2016.\42\ However, the IRS's medium risk rating continues to be 
contrary to its own compliance data, which shows in fact that both the 
ACTC and AOTC programs present a high risk of improper payments. Our 
review of these revised assessments found that they still do not 
include the use of available IRS compliance data to quantify erroneous 
payments. Because the IRS does not rate these programs as high risk, it 
is not required to establish a corrective action plan to reduce the 
improper payments.
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    \42\ TIGTA, Ref. No. 2017-40-030, Revised Refundable Credit Risk 
Assessments Still Do Not Provide an Accurate Measure of the Risk of 
Improper Payments (April 2017).
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    Using the IRS's own compliance data, we computed the fiscal year 
2016 potential estimated improper payment rate for the ACTC and AOTC. 
We estimate that 25.2 percent ($7.2 billion) of ACTC payments were 
improper \43\ and 24.1 percent ($1.1 billion) in AOTC payments were 
improper.\44\ The IRS is not required to perform a risk assessment of 
the EITC because the EITC is designated as a high-risk program by the 
Office of Management and Budget. For fiscal year 2016, the IRS 
estimates EITC payments totaling $16.8 billion were issued improperly.
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    \43\ We estimate that the potential ACTC improper payment rate for 
fiscal year 2016 is between 22.7 percent and 27.8 percent and the 
potential improper payment dollars is between $6.5 billion and $7.9 
billion.
    \44\ We estimate that the potential AOTC improper payment rate for 
fiscal year 2016 is between 19.6 percent and 28.7 percent and the 
potential improper payment dollars is between $900 million and $1.3 
billion.
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    Congress enacted the PATH Act on December 18, 2015, which includes 
``program integrity provisions'' intended to reduce fraudulent and 
improper EITC, Child Tax Credit,\45\ ACTC, and AOTC payments. For 
example, one of the PATH Act's provisions is intended to ensure that 
the IRS has the information and time needed to verify the income of 
individuals claiming the EITC and ACTC before the related refund is 
issued. According to the House Committee on Ways and Means, these 
integrity provisions are projected to save roughly $7 billion over 10 
years by reducing fraud, abuse, and improper payments in refundable 
credit programs.
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    \45\ A tax credit for families with dependent children that is used 
to reduce the individual income tax burden for families, better 
recognize the financial responsibilities of raising dependent children, 
and promote family values.
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    In September 2014,\46\ we reported that the IRS has developed a 
strategy to reduce EITC improper payments. This strategy focuses on 
early intervention to ensure that individuals who claim the credit are 
in compliance with the EITC rules and includes education and outreach, 
enforcement actions, a paid tax return preparer compliance initiative, 
and legislative proposals. The IRS also performed compliance studies 
which found that EITC improper payments primarily result from two root 
causes--authentication and program design.
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    \46\ TIGTA, Ref. No. 2014-40-093, Existing Compliance Processes 
Will Not Reduce the Billions of Dollars in Improper Earned Income Tax 
Credit and Additional Child Tax Credit Payments (September 2014).
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    Authentication errors include errors associated with the lack of 
available data to which the IRS can verify self-employment income, 
authenticate qualifying children, and verify filing status. 
Verification errors relate to instances in which the IRS's is unable to 
identify underreporting and overreporting of income, and errors that 
arise when more than one individual can claim a qualifying child. Our 
analysis of Tax Year 2012 EITC claims, for which taxpayers claimed 
wages as the source of income to support the EITC, identified 676,992 
tax returns for which third-party Forms W-2 were not sent to the IRS by 
the employer for either the taxpayer or spouse listed on the tax 
return. These tax returns claimed EITCs totaling more than $1.7 
billion.
    However, as we continue to report, IRS compliance resources are 
limited and consequently, the IRS does not address the majority of 
potentially erroneous EITC claims. This is despite the fact that the 
IRS has established processes that identify billions of dollars in 
potentially erroneous EITC payments. Although the PATH Act gives the 
IRS more time to verify EITC and ACTC claims before refunds are issued, 
it did not expand the IRS's authority to systemically correct erroneous 
claims at the time tax returns are processed. Currently, under the 
Internal Revenue Code, the IRS's math error authority is limited to 
systemically addressing erroneous EITC claims to correct mathematical 
or clerical errors on such claims. For example, it can correct entries 
made on the wrong line on the tax return or mathematical errors made in 
computing income or the EITC. However, the majority of potentially 
erroneous EITC claims that the IRS identifies do not contain the types 
of errors for which it has math error authority. To address those 
potentially erroneous EITC claims identified that cannot be addressed 
using math error authority, the IRS must conduct an audit. The IRS 
estimated that it costs $1.50 to resolve an erroneous EITC claim using 
math error authority compared to $278 to conduct a pre-refund 
audit.\47\
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    \47\ Cost to use math error authority as of June 25, 2014, as 
provided by the IRS. The IRS provided the cost of a pre-refund audit 
based on fiscal year 2010 financial data, which is the most current 
estimate available.
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    The IRS, in conjunction with the Assistant Secretary of the 
Treasury for Tax Policy, has each year since fiscal year 2013 set forth 
a legislative proposal requesting additional error correction authority 
as part of its annual budget submission. Such authority, if provided by 
law, would allow the IRS to correct, during processing, tax returns 
when the information provided by the taxpayer does not match the 
information contained in Government databases (e.g., income information 
reported on the tax return does not match Forms W-2 from the Social 
Security Administration). Without this additional error authority, 
billions of dollars in identified potentially erroneous claims will 
continue to go unaddressed each year.
Tax Compliance
    Despite IRS efforts to reduce it, the Tax Gap remains a serious and 
persistent challenge. The IRS estimated that the average annual Tax Gap 
for Tax Years 2008 through 2010 to be $458 billion. TIGTA reviews have 
identified several areas that have contributed to the IRS's inability 
to reduce the Tax Gap. For example, in September 2016 we reported that 
nearly $9 billion in backup withholding tax was not withheld as 
required by payers \48\ submitting information returns with missing or 
incorrect TINs based on our review of TY 2013 information returns.\49\ 
Our review identified that the IRS's use of its authority provided by 
law has been extremely limited. IRS management speculated that the 
subsequent restructuring of the IRS in Calendar Year 1998, and other 
reorganizations that have followed, have resulted in unintended gaps in 
the enforcement of backup withholding as responsibilities were 
separated among multiple programs/organizations without adequate 
coordination. Enforcing payer backup withholding requirements is 
essential to ensuring that the Government is able to collect taxes on 
all appropriate income, particularly income that is not usually subject 
to withholding.\50\
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    \48\ ``Payers'' making certain payments to payees must withhold and 
pay to the IRS a specified percentage of those payments under certain 
conditions. For example, financial institutions (such as banks and 
brokerage firms) are payers that are required to withhold taxes.
    \49\ TIGTA, Ref. No. 2016-40-078, Due to the Lack of Enforcement, 
Taxpayers Are Avoiding Billions of Dollars in Backup Withholding 
(September 2016).
    \50\ Examples include interest income, rents, royalties, and 
certain gambling winnings.
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    In addition, employment tax noncompliance is steadily growing. As 
of December 2015, 1.4 million employers owed approximately $45.6 
billion in unpaid employment taxes, interest, and penalties. In March 
2017, TIGTA reported that the Trust Fund Recovery Penalty (TFRP) is an 
enforcement tool the IRS can use to discourage employers from 
continuing egregious employment tax noncompliance and provides an 
additional source of collection for unpaid employment taxes.\51\ In 
fiscal year 2015, the IRS assessed the TFRP against approximately 
27,000 responsible persons--38 percent fewer than just 5 years before 
as a result of a decline in the number of revenue officers. In 
contrast, the number of employers with egregious employment tax 
noncompliance (20 or more quarters of delinquent employment taxes) is 
steadily growing--it has more than tripled in a 17-year period.
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    \51\ TIGTA, Ref. No. 2017-IE-R004, A More Focused Strategy Is 
Needed to Effectively Address Egregious Employment Tax Crimes (March 
2017).
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    We also reported in July 2017 that billions of dollars of potential 
employer underreported taxes are not being addressed because most 
discrepancy cases identified by the IRS are not worked.\52\ Discrepancy 
cases result when employers' wage and withholding information reported 
on filed Forms W-3/W-2 do not match what was reported on the employers' 
employment tax return. Our analysis found that the IRS did not work 
discrepancy cases that had a potential underreported total tax 
difference of more than $7 billion.\53\ We plan to perform a separate 
review to assess the IRS's actions to resolve these cases.
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    \52\ TIGTA, Ref. No. 2017-40-038, Case Selection Processes Result 
in Billions of Dollars in Potential Employer Underreported Tax Not 
Being Addressed (July 2017).
    \53\ This includes Social Security tax, Medicare tax and Federal 
income tax.
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Telephone Impersonation Scam
    Since the fall of 2013, a significant amount of our OI workload has 
consisted of investigating a telephone impersonation scam in which over 
2 million intended victims have received unsolicited telephone calls 
from individuals falsely claiming to be IRS or Treasury employees. The 
callers demand money under the pretense that the victim owes unpaid 
taxes. To date, over 10,800 victims have reported to TIGTA that they 
have been victims of this scam. Our investigations have determined that 
victims have paid almost $58 million to the scammers.
    The telephone impersonation scam continues to be one of TIGTA's top 
priorities; it has also landed at the top of the IRS's ``Dirty Dozen'' 
tax scams. The numerous complaints we have received about this scam 
have cemented its status as the largest, most pervasive impersonation 
scam in the history of our agency. It has claimed victims in every 
State.
    Here is how the scam works: the intended victim receives an 
unsolicited telephone call from a live person or from an automated call 
dialer. The caller, using a fake name and sometimes a fictitious IRS 
employee badge number, claims to be an IRS or Treasury employee. The 
scammers use Voice over Internet Protocol technology to hide their 
tracks and create false telephone numbers that show up on the victim's 
caller ID system. For example, the scammers may make it appear as 
though the calls are originating from Washington, DC, or elsewhere in 
the United States, when in fact they may be originating from a call 
center located in India.
    The callers may even know the last four digits of the victim's SSN 
or other personal information about the victim. The caller claims that 
the intended victim owes the IRS taxes and that, if those taxes are not 
paid immediately, the victim will be arrested or charged in a lawsuit. 
Other threats for non-payment include the loss of a driver's license, 
deportation, or loss of a business license. They often leave ``urgent'' 
messages to return telephone calls and they often call the victim 
multiple times.
    According to the victims we have interviewed, these scammers often 
demand that the victims immediately pay the money using Apple iTunes 
gift cards, Target gift cards, prepaid debit cards, wire transfers, 
Western Union payments, or MoneyGram payments in order to avoid being 
immediately arrested. They are typically warned that if they hang up, 
local police will come to their homes to arrest them immediately. 
Sometimes the scammers also send bogus IRS e-mails to support their 
claims that they work for the IRS. By the time the victims realize that 
they have been scammed, the funds are long gone.
    TIGTA has made several arrests in connection with this scam and has 
numerous investigations underway. In July 2015, in one of the largest 
prosecutions on this scam that we have had to date, an individual pled 
guilty to organizing an impersonation scam ring. He was sentenced to 
over 14 years of incarceration and ordered to forfeit $1 million. In 
October 2016, after an extensive 3-year investigation, TIGTA, the 
Department of Justice, and the Department of Homeland Security 
announced the indictment of 56 individuals and five call centers 
located in India.
    In April 2017, 10 individuals were charged in an indictment with 
conspiracy to commit wire fraud in connection with this scam. The 
defendants traveled to 30 different States to collect money wired by 
unsuspecting taxpayers. Eight of the 10 individuals were arrested by 
TIGTA special agents and our law enforcement partners. Using 
approximately 80 different false identities, the defendants and their 
coconspirators received monies totaling over $8.8 million from more 
than 7,000 taxpayers.
    Although the investigations and prosecutions have reduced the 
number of scam calls being placed by over 90 percent, we are still 
receiving reports that between 5,000 and 10,000 people are receiving 
calls each week. Fortunately, thanks to extensive public outreach 
efforts, some of which are described below, the vast majority of those 
called are now simply hanging up on the scammers.
    In addition to the criminal prosecutions, to thwart scammers using 
robo-dialers, we have created and instituted an ``Advise and Disrupt'' 
strategy. The strategy involves cataloguing the telephone numbers that 
have been reported by intended victims. We then use our own automated 
call dialers to make calls to those telephone numbers to advise the 
scammers that their activity is criminal and to cease and desist their 
activity. Using this technique, we have placed more than 145,000 
automated calls back to the scammers. We are also working with the 
telephone companies to have the scammers' telephone numbers shut down 
as soon as possible. Of the 1,253 telephone numbers that have been 
reported by victims, we have successfully shut down 93 percent of them, 
some of them within one week of the numbers having been reported to us.
    TIGTA is also publishing those scam-related telephone numbers on 
the Internet. This provides intended victims an additional tool to help 
them determine if the call is part of a scam. All they have to do is 
type the telephone number in any search engine, and the response will 
indicate whether the telephone number has been identified as part of 
the impersonation scam. These efforts are producing results; our data 
show that it now takes hundreds of calls to defraud one victim, whereas 
in the beginning of the scam it took only a double-digit number of 
attempts.
    Further, TIGTA is engaged in public outreach efforts to educate 
taxpayers about the scam. These efforts include publishing press 
releases, granting television interviews, issuing public service 
announcements, and providing testimony to Congress. The criminals view 
this scam as they do many others; it is a crime of opportunity. 
Unfortunately, while we plan on arresting and prosecuting more 
individuals, the scam will not stop until people stop paying the 
scammers money. Our best chance at defeating this crime is to educate 
people so they do not become victims in the first place. Every innocent 
taxpayer we protect from this crime is a victory.
    In 2015, a law was enacted that mandated the IRS's use of private 
collection agencies (PCAs) to collect certain ``inactive receivables.'' 
\54\ Certain inventories were specifically excluded from the definition 
of inactive receivables. \55\ TIGTA initiated an audit soon after the 
enactment of the legislation to evaluate the IRS's establishment of 
policies, procedures, and other infrastructure necessary to operate 
this program, as well as to assess the IRS's efforts to mitigate risks 
to the program.\56\ We have identified numerous concerns during our 
audit, including the IRS's lack of commitment to assisting taxpayers 
who may be concerned that the PCAs calling them are actually part of an 
impersonation scam, as well as our concerns related to the IRS's 
process for receiving taxpayer complaints about PCAs. In addition, 
TIGTA is planning a future audit related to the operations of the 
program, as well as a review evaluating the PCA contractors' 
performance.
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    \54\ Fixing America's Surface Transportation Act, Public Law No. 
114-94, Div. C, Title XXXII, Sec. 32102,129 Stat. 1312, 1733-36 (2015), 
codified in Internal Revenue Code (I.R.C.) Section (Sec. ) 6306. The 
term ``inactive receivables'' means: receivables removed from active 
inventory due to inability to locate the taxpayer; inventory in which 
one-third of the collection statute of limitations has expired; or 
assigned inventory in which more than 365 days have passed since 
contact with the taxpayer occurred.
    \55\ I.R.C. Sec. 6306(d) excludes inventory that is: subject to a 
pending or active offer-in-compromise or installment agreement; is 
classified as an innocent spouse case; or involves a taxpayer 
identified as deceased, under the age of 18, in a designated combat 
zone, a victim of tax-related identity theft, is currently under 
examination, litigation, criminal investigation, or levy, or is 
currently subject to a proper exercise of a right of appeal.
    \56\ TIGTA, Audit No. 201630029, Planning and Implementation of the 
IRS's Private Debt Collection Program, report scheduled for September 
2017.
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    TIGTA provided the IRS with insight on how the widespread IRS 
impersonation scam might impact the Private Debt Collection program. 
Specifically, based on what TIGTA learned during its investigation of 
the impersonation scam, we provided the IRS with different ways it 
could consider notifying taxpayers about the program and that their 
accounts have been assigned to the PCAs. In addition, we have provided 
integrity and safety briefings to the PCAs' employees. TIGTA will 
closely monitor incoming impersonation complaints involving the PCAs, 
and we will work to take appropriate action and notify the IRS, the 
PCAs, and the public if we identify an impersonation scheme growing 
within the Private Debt Collection program.
               tigta budget request for fiscal year 2018
    As requested by the subcommittee, I will now provide information on 
TIGTA's budget request for fiscal year 2018.
    TIGTA's fiscal year 2018 proposed budget requests appropriated 
resources of $161,113,000, approximately a 5 percent decrease from the 
fiscal year 2017 enacted budget. TIGTA will continue to focus on its 
mission of ensuring an effective and efficient tax administration 
system in this lean budget environment. The fiscal year 2018 budget 
resources requested include funding to support TIGTA's critical audit, 
investigative, and inspection and evaluation priorities, while still 
enabling it to maintain a culture that continually seeks to identify 
opportunities to achieve efficiencies and cost savings.
    During fiscal year 2016, TIGTA's combined audit and investigative 
efforts recovered, protected, and identified monetary benefits totaling 
over $15.1 billion, including cost savings, increased revenue, revenue 
protection,\57\ and court-ordered settlements in criminal 
investigations, and affected approximately 1.1 million taxpayer 
accounts. Based on TIGTA's fiscal year 2016 budget of $167 million, 
this represents a Return on Investment of $90-to-$1.
---------------------------------------------------------------------------
    \57\ Recommendations made by TIGTA to ensure the accuracy of the 
total tax, penalties, and interest paid to the Federal Government.
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TIGTA's Audit Priorities
    TIGTA's audit priorities focus on assessing key areas in which the 
IRS faces major risks, including the risk of unauthorized access to tax 
account information, identity-theft detection and prevention, customer 
service to taxpayers, the use of private debt collectors, and 
international tax compliance.
    TIGTA will continue to provide oversight related to cybersecurity. 
The proliferation of data breaches reported in recent years and the 
types of information available on the Internet has compromised the 
effectiveness of controls used to authenticate individuals when they 
access their account information. Providing taxpayers with more avenues 
to obtain answers to their tax questions or access their own tax 
records online also creates more opportunities for exploitation by 
hackers and other fraudsters. TIGTA will evaluate the changes being 
considered for authenticating taxpayer access to their account 
information, the effectiveness of controls to mitigate external and 
internal threats to IRS systems, the security of data file transfers to 
third parties, and the effectiveness of controls to address 
cybersecurity incidents.
    Stopping identity theft and refund fraud also continues to be a top 
priority for the IRS and for TIGTA in our oversight role. As identity-
theft patterns are constantly evolving, the IRS needs to continuously 
adapt its detection and prevention processes. The risk for unauthorized 
access to tax accounts for the purpose of filing fraudulent tax returns 
will continue to grow as the IRS focuses its efforts on delivering 
taxpayers self-assisted interactive online tools. Tax account 
information obtained through unauthorized accesses, such as the Data 
Retrieval Tool breach, can be used to file fraudulent tax returns that 
more closely resemble a legitimate tax return, making it more difficult 
for the IRS to detect. TIGTA will continue to assess the IRS's efforts 
to detect refund fraud committed by identity thieves and authenticate 
individual taxpayers' identities at the time tax returns are filed and 
when services are provided.
    Additionally, TIGTA will be auditing the IRS's implementation of 
the new legislative requirement to mandate the use of PCAs to collect 
inactive tax receivables. As mentioned previously, TIGTA has ongoing 
audit work to address the IRS's use of PCAs. Further, pursuant to 
I.R.C. Sec. 306(j), TIGTA will also biannually provide an independent 
review of contractor performance.
    International tax compliance also remains a significant area of 
concern. As the IRS noted in its most recent strategic plan, the 
evolution and proliferation of virtual commerce has expanded the 
exchange of goods, services, and currencies--real and virtual--across 
jurisdictions, further complicating tax administration. We will be 
continuing to assess the IRS's compliance efforts in this area, 
including its use of the tools that the law provides to assist in its 
efforts. One of the most significant tools is the Foreign Account Tax 
Compliance Act,\58\ which mandates reporting obligations for certain 
U.S. taxpayers with foreign accounts and also provides for the sharing 
of information between the U.S. and foreign financial institutions to 
ensure compliance with those obligations.
---------------------------------------------------------------------------
    \58\ Public Law No. 111-147, 124 Stat. 71 (2010).
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TIGTA's Investigative Priorities
    TIGTA's investigative priorities include investigating allegations 
of serious misconduct and criminal activity by IRS employees; ensuring 
that IRS employees are safe and that IRS facilities, data, and 
infrastructure are secure and not impeded by threats of violence; and 
protecting the IRS against external attempts to corrupt or otherwise 
interfere with tax administration.
    IRS employees are entrusted with the sensitive personal and 
financial information of taxpayers. It is particularly troubling when 
IRS employees misuse their positions in furtherance of identity theft 
and other fraud schemes. TIGTA will continue to process and investigate 
complaints from taxpayers, the Congress, and IRS employees and 
managers, as well as continue to use sophisticated data mining tools to 
proactively search for internal and external criminal activity. This 
includes proactively reviewing the activities of the 56,000 IRS 
employees who access taxpayer accounts for an indication of 
unauthorized accesses that may be part of a larger identity-theft fraud 
scheme.
    Between fiscal years 2011 and 2016, TIGTA processed 14,095 threat-
related complaints and conducted 7,067 investigations of threats made 
against IRS employees. TIGTA will continue to aggressively investigate 
individuals who threaten the safety and security of the IRS and its 
employees.
    The recent large-scale cybersecurity incidents in which criminals 
were able to obtain the information of hundreds of thousands of 
taxpayers from IRS systems continue to be a major investigative focus 
for our investigators. We are in the midst of a multi-agency 
investigation into these incidents and we are, as able, sharing what we 
are learning from these investigations with the IRS. As mentioned 
earlier in my testimony, TIGTA has received almost 2 million reports 
from taxpayers claiming that they were contacted by individuals 
impersonating IRS employees in an effort to defraud them. TIGTA will 
continue to investigate these crimes against taxpayers and alert the 
public to this scam to ensure that taxpayers are not harmed by these 
criminals.
    We at TIGTA take seriously our mandate to provide independent 
oversight of the IRS in its administration of our Nation's tax system. 
As such, we plan to provide continuing audit coverage of the IRS's 
efforts to operate efficiently and effectively and to investigate any 
instances of IRS employee misconduct or other threats to tax 
administration.
    Chairwoman Capito, Ranking Member Coons, and Members of the 
subcommittee, thank you for the opportunity to share my views.

                   RURAL IN-PERSON TAXPAYER SERVICES

    Senator Capito. Thank you both very much for your opening 
statement and I will begin the question portion. In your 
opening statement, Commissioner, you talked about taxpayer 
services and the ease at which to do an automated reply as 
opposed to a person replying to an individual request for 
assistance, how an auto--or how an online reply is much 
cheaper. Obviously, we know that. Senator Manchin and I are 
from a very rural State. We do have challenges on our broadband 
deployment, deep challenges to our access.
    And, you know, I guess I would put a plug in for that 
person to person assistance still being a very vital part of 
taxpayer services. How do you view this and how do you balance 
it and what do you see for the future in terms of being able to 
maintain that personal assistance?
    Mr. Koskinen. It is an important issue. As I have said, 
while we are trying to give taxpayers who would like to have an 
online account equivalent to what they have already with their 
banks or financial institutions, we are not like a bank or a 
financial institution. We cannot take a group of customers and 
say, ``Well, let's forget about them. They do not provide 
enough revenue. They are difficult to deal with.''
    We have an obligation we happily accept to deal with every 
American to provide them communication opportunities in a way 
that they desire. We have tried to make it clear as we are 
moving people who want to be aligned with us in a digital 
environment, that what that does is not cause us to do away 
with call centers or taxpayer assistance centers. What it 
allows us to do is provide better services on the phone and in 
person for those people who need to be there, but also those 
people who want to be there or have to be there.
    This last year we had almost 88 percent of people file 
electronically. That meant that we will receive 15 to 18 
million paper returns. And if that is the easiest and most 
appropriate way for people to file, we are happy to have them 
do that. We recognize all of us know people who are either do 
not have the availability to the Internet or have really a 
great concern about using it and we are always willing and able 
to provide them those services.
    So going forward I would just stress we will always have 
call services available. We will always have in person services 
available because what will happen is we will be able to 
provide those much better if, for instance, like Where's My 
Refund, the application, we had 300 million hits on it. Those 
used to be calls. They are no longer calls, so we can now deal 
more effectively with people.
    Senator Capito. Let me just say that the taxpayer advocate 
and the assistance center that we have in Parkersburg, West 
Virginia, a lot of times we will get calls into our office 
asking for assistance and as soon as we call them they have 
been very responsive. And I just want to thank them, and you 
are the head of the ship there, so I want to thank them on my 
behalf for West Virginians because I have--they have really--I 
think they are sort of a hidden jewel in some ways. People do 
not know they are there and can be accessed as quickly, so we 
do know they are there and we appreciate they are there and I 
am sure we keep them very busy, so thank you for that.

                INCREASES IN THE NUMBER OF FILED RETURNS

    I did notice in the paper the other day a little paragraph 
that said more filings than ever had been filed at the IRS. Are 
you familiar with that statistic?
    Mr. Koskinen. Well, the number of individual tax returns 
this year will be, we estimate, 152 million, so we are every 
year getting more returns. When you go back to the famous 2010 
which I keep citing, since then we have 10 million more 
taxpayers. So part of our challenge is keeping up not only with 
technology, it is keeping up just with the increased volume.
    Senator Capito. And, Inspector General, you talked a lot 
about cyber or security of data, and I shared a personal story 
with you on the way in about an issue on something that I was 
very familiar with. And you mentioned something to me I thought 
was really interesting, that the more the agency changes, the 
more the bad actor can change ahead of it. Are you satisfied 
that the IRS is on the cutting edge of all of this or is it 
more of a reactive situation?
    Mr. George. Well, the IRS has certainly made progress in 
this area and to its credit, we have not found a single 
instance in which the IRS's systems itself have been breached, 
so that is something that needs to be pointed out and lauded 
and credit given to the IRS.
    That said, it is imperative that taxpayers have complete 
trust in the integrity or security of the information which 
they provide to the Internal Revenue Service. And to that end, 
there is still a major concern about the ability of the IRS to 
authenticate who it is that they are dealing with as it relates 
to tax information.
    Now, authentication could be in the form of e-
authentication. As the IRS progresses to more online types of 
activity, that presents a set of problems, but even prior to 
that if an individual because they either rifled through 
somebody's garbage or was able to convince someone in a 
different forum completely to provide name, Social Security 
Number, date of birth, they, in the past, have had the ability 
to gain information from the IRS or engage in transactions that 
they should not have or they should not be able to.
    Now, in the context of the e-authentication, the IRS has 
learned through trial and error that they need to do more 
checking than just name, date of birth, Social Security Number. 
There have to be a multi factor way of gaining information to 
confirm that the person they are giving information to or 
ultimately giving refunds to is a person who deserves that 
information. So the bottom line is the more that the IRS does, 
great, but again, the bad guys are still very aggressive----
    Senator Capito. Right.
    Mr. George [continuing]. And there is an international 
problem.
    Senator Capito. Right. Thank you.
    Senator Manchin.
    Senator Manchin. Inspector George, what is the greatest 
risk facing IRS today and what can Congress do to support the 
mitigation of these risks?
    Mr. George. That is a massive area in which to address your 
question.
    Senator Manchin. You have got about 30 seconds.
    Mr. George. Oh, well, and I would then point to 
authentication now, sir. And, again, I do not need to repeat 
everything I have just said, but so----
    Senator Manchin. Sure. I know that. That is the greatest 
risk?
    Mr. George. That, in my view, yes.
    Senator Manchin. Okay. And to Commissioner----
    Mr. George. Oh, excuse me. I am sorry. With the addition of 
additional resources, sir. It is imperative that taxpayers be 
able to comply with their tax obligation. And if the tax code 
is too complicated or if they cannot get through to the IRS to 
try to get a simple question answered, they are less likely to 
comply than if the opposite were the case.

             IRS USE OF MAIL TO COMMUNICATE WITH TAXPAYERS

    Senator Manchin. Thank you. And, Commissioner, you know, 
Senator Capito just touched on it. In rural American, rural 
West Virginia, sometimes broadband is not what it could be and 
should be and people are unfamiliar or not comfortable, elderly 
population. So I appreciate, you know, you all still 
understanding the importance of us receiving the mail and 
working through the traditional lines of communication.
    Mr. Koskinen. No, I understand. Chairman, I grew up in 
Ashland, Kentucky, not far from you.
    Senator Manchin. You are right across the river.
    Mr. Koskinen. So those are people I understand and----
    Senator Manchin. Well, however they are--well, it is still 
frustrating to many the way that we communicate by mail. Ten 
percent of our IRS notices do not reach their intended 
audience, which represents a total failure of communications at 
roughly twice the industry average. When a taxpayer receives a 
notice, it is often an indecipherable block of text using stock 
language and no visual or graphical clues as to what the 
taxpayer should do or why.
    Moreover, ISR plans to address its high failure rate which 
involved moving to online communications are destined to be 
incomplete solutions at best because of what we just talked 
about.
    Mr. Koskinen. Right.
    Senator Manchin. So my recommendation, for what it would be 
worth to the IRS, is to learn from the best practices as used 
in industry. When we all get statements from credit card or our 
utilities, they use a colored modern, iconographic in a clear 
text because the credit card utility knows it is in the best 
interest for all of us for me to be able to understand the 
information. So does the IRS have plans to implement color and 
iconographic in order to make its notices more understandable 
to this population we just spoke about?
    Mr. Koskinen. At this point, we are looking at--we have had 
a longstanding plain English goal, to have--when you get a 
letter from the IRS, be clear----
    Senator Manchin. Make sense.
    Mr. Koskinen [continuing]. Why you are getting the letter. 
We are not at the stage of going to color. Again, that is a 
resource issue as much as anything. We have an antiquated 
system. We have applications that----
    Senator Manchin. Right.
    Mr. Koskinen [continuing]. Were running when John F. 
Kennedy was President, but it is critical and I think your 
point is well taken that when people get a notice from us, it 
should not be unnecessarily confusing or unnecessarily 
frightening. It ought to say, ``You are getting this letter for 
the following reason.'' Our experience has been even when we 
are sending just an update notice to people that they have had 
a mistake and in the future they should ignore it. Whatever we 
say when even we say, ``This is just for information,'' people 
always call us. We expect that probably half the people who get 
any communication will call, and that is appropriate, but what 
is most important is for the letter to be clear, for the notice 
to be understandable by anyone.
    Senator Manchin. What about the 10 percent that are not 
even receiving their notices by mail?
    Mr. Koskinen. Well, our biggest problem is people move. It 
used to be that 20 percent of people moved every year. It has 
dropped somewhat because people are less mobile than they used 
to be, but they will often leave a forwarding address for the 
post office, but we never quite get that notice. And so it is a 
problem, and especially when we are trying to provide 
information to taxpayers, knowing where they are and where they 
were last year is important to us.

                 TAX ADMINISTRATION IN THE GIG ECONOMY

    Senator Manchin. My final question is going to be about the 
gig economy----
    Mr. Koskinen. Yes.
    Senator Manchin [continuing]. Because it is a whole other 
challenge. And where many people are freelance drivers with 
Uber or Lyft or freelance innkeepers with Airbnb, the nature of 
employment has drastically shifted, as we all know. In addition 
to the labor and benefits concerns this shift has created, we 
must also find a way to classify this type of work that both 
adjusted to growing portions of Americans engaging in this work 
and is appropriate for the workers themselves. So how does the 
Treasury and the IRS plan to ensure fair tax treatment for the 
incomes of those engaged in the new gig economy?
    Mr. Koskinen. It is an important question. It is a growing 
area of the economy. Many of the people in that economy, 
whether they are in Airbnb, Uber, or Lyft, whatever it might 
be, do not realize they are in fact taxpayers and if you make 
money, you are supposed to pay taxes on it. So over a year ago 
we put up a special section of our website that said, you know, 
if you are in the gig economy here are obligations. Here is 
advice as to how you can in fact make sure you have good 
records, make sure that you are in fact meeting your 
obligations, and what you do not have to do.
    One of the things worth looking at is whether for people 
who are regularly in that business even on an irregular basis, 
whether if they got a 1099 at the end of the year it would help 
them understand how much revenue they had and if they kept good 
records and we tried to help them with that, they would know 
what their expenses were and they would know what their tax 
obligation was. Most people want to be compliant, so part of 
our jobs is trying to help them understand what their tax 
obligations are and then try to make it as easy as we can for 
them to meet those obligations.

                 TAX COMPLIANCE IN THE DIGITAL ECONOMY

    Senator Manchin. I know I am out of time here real quickly, 
but since it is just the two of us, maybe I can have some 
exception here. Finding some of these people, let us say that 
some of them just do not know, just do not understand. They 
have to get a business license usually, whether it be Airbnb. I 
am sure you have to have a business license to be an Uber 
driver, is that correct?
    Mr. Koskinen. Well, I am not sure. It is a matter of State 
law. They have to have a driver's license obviously.
    Senator Manchin. Right.
    Mr. Koskinen. But we do not have control over whether they 
have a business license.
    Senator Manchin. Do we know that from you alls--I am sure 
you are auditing Uber. You are going to hit the big boys, I 
would think.
    Mr. Koskinen. Yeah. So, no, no. We obviously track that, 
but in terms of licensing, that is really a State and local 
issue as to what business license they have.
    Senator Manchin. So, so----
    Mr. Koskinen. If you are renting your house out, it is a 
question of what the local business license and requirements 
are.
    Senator Manchin. But if I am renting it through Airbnb who 
you are going to be targeting because you know who they are----
    Mr. Koskinen. Yes.
    Senator Manchin [continuing]. Do you all not check in to 
find out how the people register? If I want to be a part of 
Airbnb and on their Internet, that I had to have a license, am 
I filing and?
    Mr. Koskinen. No. We actually are happy to have you file 
whether you are properly licensed or not.
    Senator Manchin. Oh, I know----
    Mr. Koskinen. What our job is----
    Senator Manchin [continuing]. That, but again, coming from 
a rural State, sometimes we would prefer not to.
    Mr. Koskinen. I understand that. So that is again why one 
of our thoughts is with----
    Senator Manchin. Can you catch me if I prefer not to?
    Mr. Koskinen. With the coordinating bodies at Uber, the 
headquarters and that, if they provided 1099s to you, they 
would be providing 1099s to us as well. And having that third 
party information, we do have a reasonable number of people 
every year who are non-filers. And we know that because we get 
third party information. And with those people, we reach out to 
them. Sometimes we----
    Senator Manchin. The only thing I would say to that is that 
when I was Governor of the State of West Virginia and we had 
budget constraints and we would have to adjust our budgets a 
little bit, I never would cut back on my auditing staff. I 
would always increase their budget because for every dollar I 
spent, I got $100 in return. So I made sure that we were 
auditing and targeting and making sure those people----
    Mr. Koskinen. Yes.
    Senator Manchin [continuing]. Were paying. And the big guys 
are who you can hit who basically I have got to be connected in 
to them one way or another. And I am using the Uber or Lyft----
    Mr. Koskinen. Right.
    Senator Manchin [continuing]. Or Airbnb because----
    Mr. Koskinen. It is one of my great concerns, and as I am 
leaving, I am trying to make sure everybody understands that 
concern at your point.
    Senator Manchin. Well, continue to keep----
    Mr. Koskinen. People want to be compliant.
    Senator Manchin. Continue to keep helping us.

                          TAX COMPLIANCE RATES

    Mr. Koskinen. Right. People want to be compliant, but part 
of the reason people are compliant is because they think the 
system is fair, fair in the sense that everybody is paying.
    Senator Manchin. Sure.
    Mr. Koskinen. To the extent that our audit rate drops from 
1.2 to .5, we do not have the resources, in fact, to track the 
people who are trying not to be compliant. At some point, it is 
corrosive to compliance.
    Mr. George. And I would just simply not too, add to what 
the Commissioner stated, Senator, we have had numbers that 
demonstrated that when income is reported by a third party via 
1099 or other source, compliance rates are in the upper 90 
percent, but when people operate on a cash only basis, the 
compliance rate falls dramatically, meaning 20 percent, around 
that area. So that is the key issue that we have raised.
    Senator Capito. Thank you. Well, I thank you all for 
participating and preparing for this. I will have to say as a 
recipient of a letter from the IRS, we all recognize that black 
and white print and the little envelope, who it is from, and so 
I appreciate your service to the IRS and to this country. And 
if we do not meet again, I want to thank you for your service.
    I appreciate hearing from the top officials at Treasury, 
IRS, and Inspector General's office and having the opportunity 
to explore a number of important issues. Today's discussion 
will be helpful as we look at the 2018 funding, so at this time 
I ask unanimous consent that a statement by the taxpayer 
advocate, Nina Olson, be included for the hearing record. Since 
I am the only one here, I will give myself unanimous consent.
    [The statement follows:]
    Prepared Statement of Nina E. Olson, National Taxpayer Advocate
    Chairman Capito, Ranking Member Coons, and distinguished Members of 
this subcommittee:

    Thank you for inviting me to submit this statement regarding the 
proposed budget of the Internal Revenue Service for fiscal year 
2018.\1\
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    \1\ The views expressed herein are solely those of the National 
Taxpayer Advocate. The National Taxpayer Advocate is appointed by the 
Secretary of the Treasury and reports to the Commissioner of Internal 
Revenue. However, the National Taxpayer Advocate presents an 
independent taxpayer perspective that does not necessarily reflect the 
position of the IRS, the Treasury Department, or the Office of 
Management and Budget. Congressional testimony requested from the 
National Taxpayer Advocate is not submitted to the IRS, the Treasury 
Department, or the Office of Management and Budget for prior approval. 
However, we are providing courtesy copies of this statement to both the 
IRS and the Treasury Department.
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    The collection of revenue for the U.S. Government is a critical 
job, and the IRS has been forced to do it with substantially reduced 
resources in recent years. From fiscal year 2010 through fiscal year 
2017, we estimate the IRS's budget has been reduced by nearly 20 
percent on an inflation-adjusted basis.
    The combination of reduced resources and more work has eroded the 
IRS's ability to serve taxpayers and promote voluntary compliance. The 
additional $290 million in funding that Congress provided in fiscal 
year 2016 and fiscal year 2017 has been very helpful, and because of 
it, the IRS has done a much better job of answering taxpayer telephone 
calls than it did in fiscal year 2015. But taxpayer service is still 
not what it should be.
    Partly because of resource constraints and partly because the IRS, 
like all large organizations, engages in long-term planning, the agency 
has developed a ``Future State'' plan that envisions how it will 
operate in 5 years and beyond. While I have previously expressed and 
continue to harbor concerns about aspects of the plan, I commend the 
agency for the time and effort it has put into this planning, and I 
encourage a continuing dialogue about refining the plan so that it 
reflects the needs and preferences of U.S. taxpayers.

    To improve taxpayer service, I recommend the IRS take the following 
steps:

     1.  Continue to expand its digital service offerings but 
simultaneously ensure that in-person and telephone services remain 
available for tens of millions of taxpayers who require or prefer to 
interact with the IRS in those ways.
     2.  Improve its telephone technology.
     3.  Answer a broader range of tax-law questions during the filing 
season--and throughout the year.
     4.  Improve the level of service on its ``Installment Agreement/
Balance Due'' telephone line.
     5.  Establish a telephone line to answer questions about the 
eligibility and computational rules for the earned income tax credit 
(EITC).
     6.  Serve taxpayers without appointments at its Taxpayer 
Assistance Centers (TACs).
     7.  Expand outreach and education, particularly to small 
businesses, to improve tax compliance.
     8.  Assign at least one Appeals Officer and one Settlement Officer 
to every State.
     9.  Mail monthly bills to taxpayers who owe money, as private 
sector businesses routinely do.
    10.  Assign a single employee to work complex identity theft cases 
and correspondence examinations where a taxpayer calls the IRS or 
submits documentation.
    11.  Reduce the false positive rates produced by its identity theft 
and anti-fraud filters.

    In the following pages, I will provide additional information 
regarding these recommendations. I believe the rationale for each one 
is strong and that most can be implemented immediately. In a few cases, 
however, it may be appropriate for the IRS to conduct a research study 
or pilot, in collaboration with the National Taxpayer Advocate, before 
moving to full implementation.
    In addition, I recommend that the subcommittee continue to provide 
minimum funding levels in the Financial Services and General Government 
bill for the Tax Counseling for the Elderly (TCE) program, the Low 
Income Taxpayer Clinic (LITC) program, the Community Volunteer Income 
Tax Assistance (VITA) program, and the Taxpayer Advocate Service (TAS). 
In the case of the TCE, LITC, and Community VITA programs, a minimum 
funding level helps ensure that low income and elderly taxpayers 
receive the service and support they need when filing their tax returns 
and working with the IRS to resolve disputes. In the case of TAS, a 
minimum funding level helps ensure that TAS can fulfill its statutory 
mission as a ``safety net'' for taxpayers who are experiencing a 
``significant hardship'' \2\ and helps protect TAS's independence in 
advocating for taxpayers both individually and systemically.\3\
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    \2\ See Internal Revenue Code (IRC) Sec. 7811(a)(2) (defining the 
term ``significant hardship'').
    \3\ See IRC Sec. 7803(c)(2)(A) (functions of TAS) and 
Sec. 7803(c)(4) (independence of TAS).

I.  The IRS Should Continue to Expand Its Digital Service Offerings But 
        Simultaneously Ensure That In-Person and Telephone Services 
        Remain Available for Taxpayers Who Require or Prefer to 
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        Interact with the IRS in Those Ways.

    A central component of the IRS's ``Future State'' plan is to 
migrate taxpayers away from interacting with the agency by phone or in 
person and toward interacting with the agency through online accounts. 
I believe online accounts are a beneficial addition to the IRS's 
service offerings; in fact, I have advocated in the past that the IRS 
develop online accounts.\4\ However, online accounts should be viewed 
as a supplement to, not a replacement for, telephone and in-person 
assistance, as it is clear that many taxpayers either cannot utilize 
online accounts or do not feel comfortable using them for complex 
transactions.
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    \4\ See, e.g., National Taxpayer Advocate 2013 Annual Report to 
Congress, vol. 2, at 67-96 (Research Study: Fundamental Changes to 
Return Filing and Processing Will Assist Taxpayers in Return 
Preparation and Decrease Improper Payments).
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    During 2016, TAS undertook a series of steps to learn more about 
taxpayer needs and preferences. I myself traveled the country and held 
12 Public Forums on Taxpayer Needs and Preferences.\5\ Together with 
Members of Congress, I heard directly from taxpayers and their 
representatives about the challenges they face in complying with the 
tax laws and dealing with the IRS.\6\ TAS also held focus groups 
consisting of tax return preparers and practitioners at the IRS Tax 
Forums.\7\ Additionally, TAS conducted a nationwide survey of U.S. 
taxpayers to hear directly what they need in the way of taxpayer 
service.\8\ Finally, my immediate staff identified significant research 
on topics that have relevance for tax administration, including 
approaches to voluntary compliance, worldwide taxpayer service, 
alternative dispute resolution, taxpayer rights, fraud detection, 
online accounts, and the impact of geographic presence and focus.\9\
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    \5\ See National Taxpayer Advocate 2015 Annual Report to Congress 
xv. National Taxpayer Advocate Public Forums were held in the following 
locations: Washington, District of Columbia (February 23, 2016); Glen 
Ellyn, Illinois (March 9, 2016 with Congressman Roskam); Bronx, New 
York (March 18, 2016 with Congressman Serrano); Hendersonville, North 
Carolina (April 4, 2016 with Congressman Meadows); Harrisburg, 
Pennsylvania (April 8, 2016); Red Oak, Iowa (May 5, 2016 with Senator 
Grassley); Baltimore, Maryland (May 13, 2016 with Senator Cardin); 
Washington, District of Columbia (May 17, 2016); Parma, Ohio (August 
16, 2016 with Congressman Renacci); Portland, Oregon (August 18, 2016); 
Los Angeles, California (August 22, 2016 with Congressman Becerra); and 
San Antonio, Texas (August 30, 2016 with Congressman Doggett).
    \6\ For information about, and full transcripts from, the National 
Taxpayer Advocate Public Forums, see https://taxpayeradvocate.irs.gov/
public-forums (last visited April 25, 2017).
    \7\ TAS Communications and Liaison, 2016 IRS Nationwide Tax Forums 
TAS Focus Group Report: Preparers' Thoughts About IRS's Proposed Future 
State (October 2016), https://taxpayeradvocate.irs.gov/Media/Default/
Documents/ResearchStudies/2016_TaxForum_Future
State_FocusGroup_Report.pdf.
    \8\ See National Taxpayer Advocate 2016 Annual Report to Congress, 
vol. 2, at 1-30 (Research Study: Taxpayers' Varying Abilities and 
Attitudes Toward IRS Taxpayer Service: The Effect of IRS Service 
Delivery Choices on Different Demographic Groups).
    \9\ These literature reviews are published in Volume 3 of the 
National Taxpayer Advocate's 2016 Annual Report to Congress.
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    Based on what we learned about taxpayer needs and preferences and 
in light of the IRS's data security protections, we believe taxpayer 
demand for telephone service and in-person service is not likely to 
diminish in the near future. First, many taxpayers have technology 
limitations. Approximately 33 million U.S. taxpayers have no broadband 
access,\10\ and taxpayers with Internet service connections slower than 
broadband will likely experience delays when attempting to access large 
files or complex web pages. Further, we estimate 14 million U.S. 
taxpayers have no Internet access at all.\11\
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    \10\ See National Taxpayer Advocate 2016 Annual Report to Congress, 
vol. 2, at 1-30 (Research Study: Taxpayers' Varying Abilities and 
Attitudes Toward IRS Taxpayer Service: The Effect of IRS Service 
Delivery Choices on Different Demographic Groups).
    \11\ Id. TAS survey research also found that such vulnerable groups 
as the low income, seniors, and taxpayers with disabilities are less 
likely to have broadband access at home.
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    Second, many taxpayers--even millennials with strong computer 
skills and access--do not feel comfortable using online accounts to 
handle complex matters. While these taxpayers readily use the Internet 
to download tax forms or seek out instructions, many report that they 
want to speak with an employee when dealing with account-specific 
matters, such as an audit or an identity-theft problem.
    Third, the IRS has imposed stringent authentication requirements 
that taxpayers must satisfy when attempting to create online accounts. 
As a result, most taxpayers cannot establish an online account. As of 
July 22, 2017, of the nearly 2.2 million account registration attempts 
since the online account application launched, only about 22 percent 
were successful.\12\ I am not suggesting that the IRS reduce its 
security protections. I believe protecting the security of taxpayer 
information is absolutely essential. However, the IRS must recognize 
that providing necessary security has implications for how many 
taxpayers will be able to access online accounts and how many will need 
to use other service channels, such as telephones or TACs.
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    \12\ IRS, Wage and Investment Division, Joint Operations Center 
(JOC), Online Account External Launch Weekly Report (week ending July 
22, 2017).
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    For these reasons, I urge the IRS to continue to maintain high 
levels of service on its telephone lines and in its TACs. The IRS 
should not assume it can reduce these services--even over the long-
term--unless and until it sees that taxpayers are willingly and 
comfortably migrating to online services and the demand for telephone 
and in-person assistance is diminishing. In my view, it is not clear 
this will happen. The tax law is complex, and the consequences of 
making a mistake on one's tax returns are considerable. Therefore, many 
taxpayers will continue to want to speak with an IRS employee, so they 
can ask follow-up questions and be certain they understand the answers.
    By maintaining and strengthening the ability of taxpayers to obtain 
assistance by telephone and in person as well as online, the IRS would 
further the provision in the Taxpayer Bill of Rights that taxpayers 
have ``The Right to Quality Service.'' \13\
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    \13\ ``The Right to Quality Service'' is one of the ten rights 
included in the Taxpayer Bill of Rights that the IRS adopted in 2014 
and that Congress cross-referenced in subsequent legislation. See IRS, 
Taxpayer Bill of Rights, https://www.irs.gov/Taxpayer-Bill-of-Rights; 
see also Consolidated Appropriations Act, 2016, Public Law No. 114-113, 
Division Q, Sec. 401 (2015) (codified at IRC Sec. 7803(a)(3)).

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II.  The IRS Should Improve Its Telephone Technology.

    The IRS receives more than 100 million telephone calls every year, 
yet its telephone technology is old and prevents it from serving 
taxpayers efficiently. The IRS should conduct a study of best practices 
and technology in private industry call centers and then develop a plan 
to modernize its telephone operations.
    One example of a technology improvement would be the addition of 
customer callback technology. Many private businesses and Federal 
agencies, including the Social Security Administration and the 
Department of Veterans Affairs, have deployed customer callback systems 
that allow callers to choose between waiting on hold and electing to 
receive a call back when their place in the telephone queue is 
reached.\14\ We believe a customer callback system would substantially 
improve the taxpayer experience at a reasonable cost.
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    \14\ See Government Accountability Office (GAO), GAO-17-140, 
Financial Audit: IRS's fiscal years 2016 and 2015 Financial Statements 
116-117 (November 2016).
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    In the President's fiscal year 2015 and fiscal year 2016 budgets, 
the IRS proposed this initiative and estimated it would cost about $3.3 
million.\15\ In November 2015, Commissioner Koskinen said that although 
the customer callback technology itself would cost about $3.5 million, 
the IRS had determined its phone system would need to be upgraded at a 
cost of about $45 million to allow the customer callback technology to 
run.\16\
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    \15\ IRS, Congressional Justification for Appropriations 
accompanying the President's fiscal year 2015 budget at IRS-20 (2014); 
IRS, Congressional Justification for Appropriations accompanying the 
President's fiscal year 2016 budget at IRS-22 (2015).
    \16\ See Lisa Rein, IRS Customer Service Will Get Even Worse This 
Tax Filing Season, Tax Chief Warns, Washington Post.com, November 3, 
2015.
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    Even if that is accurate, we think customer callback technology 
would be a prudent investment. For context, the IRS's fiscal year 2016 
budget proposal requested about $186 million to increase the Level of 
Service (LOS) on its toll-free lines to 80 percent.\17\ The significant 
majority of that funding would have paid for additional customer 
service representatives and other costs that recur annually. By 
contrast, the deployment of a customer callback system would 
essentially be a one-time cost, and it would permanently improve the 
IRS's LOS.
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    \17\ IRS, Congressional Justification for Appropriations 
accompanying the President's fiscal year 2016 budget at IRS-22 (2015).
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    It should be emphasized that a high percentage of taxpayers who 
don't reach the IRS on their first attempt keep calling until they get 
through. The LOS during fiscal year 2016 averaged 53 percent, and those 
taxpayers who managed to reach an IRS telephone assistor had to wait an 
average of 18 minutes on hold.\18\
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    \18\ IRS, JOC, Snapshot Reports: Enterprise Snapshot--Accounts 
Management lines (week ending September 30, 2016).
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    With customer callback technology, unsuccessful calls would be 
substantially reduced--as would hold times. Most taxpayers would only 
have to call the IRS once. Thus, this one-time cost would improve 
taxpayer service and substantially increase the LOS for years into the 
future.
    In my view, customer callback would substantially strengthen the 
IRS's telephone operations, and there likely are other improvements the 
IRS can make. The IRS should develop a detailed plan to modernize its 
telephone operations.
    By improving its telephone technology to better serve taxpayers, 
the IRS would further the provision in the Taxpayer Bill of Rights that 
taxpayers have ``The Right to Quality Service.''

III.  The IRS Should Answer a Broader Range of Tax-Law Questions During 
        the Filing Season--and Throughout the Year.

    When a government asks its citizens to pay over large portions of 
their income, it has a responsibility to make the process of doing so 
as simple and painless as possible. One way to do this is to answer 
questions about how to comply with the requirements of computing and 
paying taxes. Given the complexity of the Internal Revenue Code, U.S. 
taxpayers understandably have a lot of questions.
    Beginning in 2014, largely citing funding limitations, the IRS 
sharply curtailed the scope of tax-law questions it would answer. It 
now answers only ``basic'' questions during the filing season. It does 
not answer tax-law questions at all after the filing season, including 
from the more than 15 million taxpayers who file their returns later in 
the year.\19\ This policy applies both on the IRS's telephone lines and 
in its TACs.
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    \19\ During 2016, the IRS received nearly 137 million tax returns 
by April 22 and nearly 153 million by December 30, indicating that 
nearly 16 million returns were received after the filing deadline. See 
IRS Filing Season Statistics (weeks ending April 22, 2016, and December 
30, 2016).
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    In my view, answering tax-law questions is a fundamental 
responsibility of a governmental tax agency, and the IRS's 
unwillingness to do more constitutes a breathtaking abdication of a 
core responsibility of tax administration.
    By helping taxpayers comply with the tax laws by answering their 
basic and more complex tax-law questions throughout the year, the IRS 
would further the provisions in the Taxpayer Bill of Rights that 
taxpayers have ``The Right to Quality Service'' and ``The Right to Be 
Informed.''

IV.  The IRS Should Improve the Level of Service on Its ``Installment 
        Agreement/Balance Due'' Telephone Line.

    Among the IRS's many telephone lines, one important one is the 
``Installment Agreement/Balance Due'' line. During the 2017 filing 
season, the IRS received about 2.7 million calls on this line. For the 
most part, these calls come from taxpayers who are seeking to make 
payment arrangements--the sort of calls most private businesses would 
pick up in a heartbeat. Yet the IRS answered only 40 percent of these 
calls, and the average wait time among taxpayers who got through was a 
staggering 47 minutes.
    The IRS's performance on this telephone line deteriorated markedly 
as compared with the 2016 filing season. In 2016, the IRS answered 76 
percent of these calls, and the wait time was 11 minutes. Thus, the 
percentage of calls the IRS answered from taxpayers seeking to make 
payment arrangements on this line during the 2017 filing season dropped 
nearly in half as compared with last year, and wait times were more 
than four-fold.\20\
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    \20\ IRS, JOC, Snapshot Reports: Product Line Detail, Installment 
Agreement/Balance Due (week ending April 22, 2017).
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    The poor service on this and certain other telephone lines is 
largely budget-driven. The additional funding the IRS has received over 
the last 2 years to improve telephone service has been helpful but 
limited, and the IRS has used that funding primarily to improve service 
on its core filing season telephone lines. Still, both to improve both 
taxpayer service and revenue collection, the IRS must do a much better 
job of answering telephone calls from taxpayers who owe money and are 
seeking information to enter into payment arrangements.
    By promptly answering telephone calls from taxpayers seeking to pay 
their debts through installment agreements, the IRS would further the 
provisions in the Taxpayer Bill of Rights that taxpayers have ``The 
Right to Quality Service,'' ``The Right to Privacy,'' and ``The Right 
to a Fair and Just Tax System.''

V.  The IRS Should Establish a Telephone Line to Answer Questions About 
        the Eligibility and Computational Rules for the Earned Income 
        Tax Credit.

    The earned income tax credit (EITC) is one of the Government's 
largest means-tested, anti-poverty programs. For tax year 2015, more 
than 27 million taxpayers claimed nearly $67 billion in EITC benefits.
    However, the EITC is plagued by an improper payments rate of about 
24 percent. While some improper payments are due to intentional 
overclaims, others are due to lack of knowledge about the law or how to 
compute the correct amount. The EITC eligibility rules are complex, and 
about one-third of taxpayers who claim it each year did not claim it in 
the prior year, which means they need to learn the eligibility rules 
for the first time or refresh their understanding if they qualified 
previously.
    The IRS devotes considerable resources toward reducing EITC 
improper payments. For example, it audits taxpayers claiming the EITC 
at about twice the rate of other taxpayers, even though these taxpayers 
are disproportionately low income.\21\ The IRS could better serve 
taxpayers and improve EITC compliance if it establishes a telephone 
line to answer EITC questions that is staffed by employees 
knowledgeable about EITC eligibility requirements and related rules.
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    \21\ See IRS, 2016 Data Book 23 (Table 9a).
---------------------------------------------------------------------------
    By establishing a telephone line to answer questions about the 
EITC, the IRS would further the provisions in the Taxpayer Bill of 
Rights that taxpayers have ``The Right to Quality Service,'' ``The 
Right to Be Informed,'' ``The Right to Pay No More Than the Correct 
Amount of Tax,'' and ``The Right to a Fair and Just Tax System.''

VI.  The IRS Should Serve Taxpayers Without Appointments at Its 
        Taxpayer Assistance Centers.

    The IRS operates nearly 400 Taxpayer Assistance Centers (TACs). In 
the past, the IRS has served more than five million taxpayers each year 
in the TACs, and it provided a wide range of services, such as 
assisting with tax return preparation and answering tax-law questions. 
Historically, the TACs were known as ``walk-in'' sites. But this year, 
the IRS has flipped its traditional approach toward serving taxpayers 
on its head, requiring that taxpayers schedule appointments in advance 
to receive service.\22\
---------------------------------------------------------------------------
    \22\ In response to complaints from TAS and others, the IRS has 
given TAC managers the discretion to make exceptions to the policy. But 
the general rule continues to require advance appointments.
---------------------------------------------------------------------------
    The IRS says that taxpayers are visiting the TACs less frequently 
because when they call for appointments, telephone assistors are often 
able to address their questions, obviating the need to visit. To some 
degree, that is undoubtedly true. But many taxpayers with tax problems 
still want to talk with an IRS employee face-to-face. If the IRS's 
current trend continues, taxpayers soon may not have that opportunity. 
The IRS has already reduced the number of TACs from 401 to 376 since 
2011.\23\ In addition, 22 TACs have no staff, while 95 have only one 
employee,\24\ and the IRS is considering closing a significant number 
of additional TACs through fiscal year 2018. Because of its new 
``appointment only'' policy, the IRS is projecting that the number of 
taxpayers visiting a TAC will decline from about 5.6 million in fiscal 
year 2015 to 3.5 million this year.\25\
---------------------------------------------------------------------------
    \23\ In 2011, the IRS operated 401 TACs. IRS response to TAS 
information request (December 23, 2014). As of December 31, 2016, the 
IRS operated 376 TACs, a reduction of six percent. IRS response to TAS 
fact check (December 20, 2016).
    \24\ IRS response to TAS fact check (December 20, 2016).
    \25\ IRS Wage & Investment Division, Business Performance Review 7 
(February 9, 2017).
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    I am concerned that the IRS will cite the reduced number of 
taxpayers served in the TACs as ``evidence'' of reduced taxpayer demand 
and then close more TACs, when in fact a key driver of the reduced 
number of taxpayers seeking services are the obstacles the IRS has 
created to obtaining service.
    This has happened before. On several occasions, the IRS has made 
important services less accessible to taxpayers and then cited the 
(predictable) decline in usage as a basis for making further reductions 
or eliminating the services altogether. For example, the IRS prepared 
nearly 500,000 tax returns for taxpayers in fiscal year 2004.\26\ Over 
time, it placed significant limitations on the number and type of 
returns employees could prepare, and it began to require advance 
appointments. As a result of making the service harder to obtain, the 
IRS prepared substantially fewer returns over time, reaching a low of 
about 125,000 during the 2013 filing season. The IRS then eliminated 
the service, citing low usage.
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    \26\ See National Taxpayer Advocate 2014 Annual Report to Congress 
3, 21 (Most Serious Problem: Taxpayer Service: Taxpayer Service Has 
Reached Unacceptably Low Levels and Is Getting Worse, Creating 
Compliance Barriers and Significant Inconvenience for Millions of 
Taxpayers) (and GAO data cited therein).
---------------------------------------------------------------------------
    The same is true with answering tax-law questions in the TACs. The 
Government Accountability Office has reported the number of tax-law 
questions answered by the IRS during the filing season alone dropped 
from 795,000 in 2004 to 110,000 in 2013.\27\ There is no evidence that 
taxpayers had fewer questions. Rather, the IRS reduced TAC staffing and 
reduced the scope of questions it was willing to answer, and wait times 
became unreasonably long. As it became harder and harder to obtain 
answers to tax-law questions, taxpayers became deterred from asking 
them. The IRS's decision to restrict employees from answering tax-law 
questions in 2014 was based partly on this ``reduced demand.''
---------------------------------------------------------------------------
    \27\ GAO, GAO-14-133, 2013 Tax Filing Season: IRS Needs to Do More 
to Address the Growing Imbalance between the Demand for Services and 
Resources 26 (December 2013); GAO, GAO-07-27, Tax Administration: Most 
Filing Season Services Continue to Improve, but Opportunities Exist for 
Additional Savings 29 (November 2006) (supplemented with more precise 
IRS data provided to TAS by the IRS Wage & Investment Division for 2004 
through 2006).
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    The IRS should not take this approach to reduce TAC assistance. 
Taxpayers often travel long distances to get to a TAC, not knowing that 
advance appointments are required. Many are senior citizens. Turning 
these taxpayers away or requiring them to come back at a later date to 
receive service can cause tremendous inconvenience and frustration.
    I previously recommended that the IRS allow taxpayers to schedule 
appointments, and I am glad it is doing so. I realize that at times 
scheduled appointments will limit the IRS's ability to assist others. 
But the IRS should change its policies to direct the TACs to assist 
walk-in taxpayers to the maximum extent possible. All TACs currently 
have a large sign on their front doors declaring ``APPOINTMENT ONLY.'' 
This is a negative message to send to taxpayers seeking assistance to 
comply with their tax obligations and have traveled sometimes long 
distances to obtain that assistance. How much better it would be if 
that sign instead read, ``APPOINTMENTS RECOMMENDED BUT WALK-INS 
WELCOME.''
    By assisting all taxpayers who visit Taxpayer Assistance Centers 
for help, the IRS would further the provision in the Taxpayer Bill of 
Rights that taxpayers have ``The Right to Quality Service'' and ``The 
Right to Be Informed.''

VII.  The IRS Should Expand Outreach and Education, Particularly to 
        Small Businesses, to Improve Tax Compliance.

    As a result of the IRS Restructuring and Reform Act of 1998,\28\ 
the IRS created units of employees to conduct outreach and education to 
individual and small business taxpayers. The rationale is, in essence, 
that ``an ounce of prevention is worth a pound of cure''--i.e., 
educating taxpayers about tax requirements in a pre-filing environment 
will improve return accuracy and reduce the need for (more costly) 
post-filing audits and other compliance actions. Pre-filing outreach 
and education is particularly important for small businesses, which 
often need to learn and comply with complex rules that individual 
taxpayers do not encounter, such as rules governing eligible business 
expenses, equipment depreciation, and employment taxes. Yet the IRS has 
whittled down these outreach units to the point where they are barely 
functional.
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    \28\ Public Law No. 105-206, 112 Stat. 685 (1998).
---------------------------------------------------------------------------
    The IRS dedicates only 365 employees to conduct outreach and 
education to the nearly 125 million Wage and Investment taxpayers 
(i.e., taxpayers who are classified as ``employees'') and only 98 
employees to conduct outreach and education to the roughly 62 million 
Small Business and Self-Employed taxpayers (i.e., taxpayers who are 
self- employed or own small businesses). In fact, 14 States have no IRS 
liaisons to small business taxpayers at all.\29\ By contrast, even 
after the workforce reductions of the last few years, the IRS has more 
than 8,800 revenue agents (who conduct field audit activities) and more 
than 3,000 revenue officers (who conduct field collection 
activities).\30\ Having at least one employee with a post of duty in 
each State and responsible for the field outreach and education 
activities in that State would ensure such activities are geared to the 
economy, businesses, geography, and culture of that State.
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    \29\ The 14 States are Alaska, Delaware, Hawaii, Kentucky, 
Mississippi, Montana, North Dakota, Nebraska, New Hampshire, South 
Dakota, Vermont, West Virginia, Wisconsin, and Wyoming. There also is 
no liaison in the District of Columbia. IRS response to TAS fact check 
(Dec. 15, 2016); IRS Human Resources Reporting Center, Report of Small 
Business/Self-Employed (SB/SE) Job Series 0526, Stakeholder Liaison 
Field Employees as of the week ending October 1, 2016 (December 1, 
2016).
    \30\ IRS response to TAS fact check (December 16, 2016).
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    The IRS should do more to educate taxpayers about tax requirements 
in a pre-filing environment both because it is the right thing to do 
and because it likely will reduce the need for more expensive 
compliance activities in a post-filing environment.
    By expanding outreach and education, the IRS would further the 
provision in the Taxpayer Bill of Rights that taxpayers have ``The 
Right to Be Informed.''

VIII.  The IRS Should Assign At Least One Appeals Officer and One 
        Settlement Officer to Every State.

    Congress has long recognized that ``all taxpayers should enjoy 
convenient access to Appeals, regardless of their locality.'' \31\ As a 
result, Congress required the IRS, among other things, to ``ensure that 
an appeals officer is regularly available within each State.'' \32\ Yet 
today, the IRS reports that 12 States do not have either an Appeals 
Officer or a Settlement Officer.\33\ That should change.
---------------------------------------------------------------------------
    \31\ S. Rep. No. 105-174, at 92 (1998).
    \32\ Internal Revenue Service Restructuring and Reform Act, Public 
Law No. 105-206, Title III, Subtitle E, Sec. 3465(b), 112 Stat. 685, 
768 (1998).
    \33\ An Appeals Officer conducts hearings when a taxpayer 
challenges an IRS audit determination. A Settlement Officer conducts 
collection due process (CDP) hearings. It is important that both 
Appeals Officers and Settlement Officers be available for face-to-face 
hearings and understand local economic conditions.
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    The IRS has suggested in the past that requiring an Appeals Officer 
and a Settlement Officer in each State would be costly. We do not 
agree. Placing at least one Appeals Officer and one Settlement Officer 
in each State would not require more Appeals personnel. It would simply 
require the IRS to relocate a small number of Appeals personnel 
currently posted in large IRS campuses to States with no Appeals 
Officers or Settlement Officers, which can be accomplished through 
attrition hiring.
    The IRS has also suggested that virtual conferences or circuit 
riding is sufficient. We do not agree with those contentions, either. 
In many cases, it would be impossible for an Appeals Officer to judge 
the credibility of a witness without an in-person conference, and 
``circuit riding'' does not happen often, requiring taxpayers to wait 
months, or even a year or more, to obtain a face-to-face hearing. 
Moreover, while virtual conferences may be suitable in many situations, 
having an Appeals Officer and a Settlement Officer reside in a State 
would ensure the particular conditions, economy, and culture of the 
State are understood, which can be relevant to a taxpayer's tax 
situation and ability to pay.
    By placing an Appeals Officer in each State, the District of 
Columbia, and Puerto Rico, the IRS would comply with the congressional 
directive and further the provisions in the Taxpayer Bill of Rights 
that taxpayers have ``The Right to Challenge the IRS's Position and Be 
Heard,'' ``The Right to Appeal an IRS Decision in an Independent 
Forum,'' and ``The Right to a Fair and Just Tax System.''

IX.  The IRS Should Mail Monthly Bills to Taxpayers Who Owe Money, as 
        Private Sector Businesses Routinely Do.

    Most businesses, particularly large businesses, send bills at least 
monthly to customers who owe debts. The IRS does not. After sending 
taxpayers four notices, the IRS largely disappears. By statute, the IRS 
is required to send taxpayers an annual statement,\34\ but that is 
often all it does unless and until it chooses to work the case or 
assigns it to a private collection agency, which often does not happen 
for several years. Moreover, when a tax debt is sent to a private 
collection agency, up to 50 percent of the taxes collected are diverted 
from the public treasury to the private collection agency and the IRS. 
Conversely, when the IRS receives payments in response to an IRS 
notice, 100 percent of the taxes remitted go to the public fisc.
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    \34\ See IRC Sec. 7524.
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    As a general matter, the first few bills a creditor sends generate 
more revenue than later bills. But later bills still generate revenue. 
(If businesses didn't benefit from sending monthly bills, they would 
stop sending them.) For example, an individual who loses his job may 
experience financial hardship and fail to pay creditors for a period of 
time but then begin to pay off his debts when he obtains a new job. If 
he is receiving monthly bills from most creditors but has not heard 
from the IRS in nearly a year, the IRS's ``invisibility'' is likely to 
mean he will prioritize paying off others creditors who are 
consistently making their presence known.
    Government agencies frequently speak about adopting ``best 
practices'' from the private sector. Sending monthly bills to debtors 
is one ``best practice'' the IRS should adopt now.
    By mailing monthly bills to taxpayers with tax debts, the IRS would 
further the provision in the Taxpayer Bill of Rights that taxpayers 
have ``The Right to Be Informed.''

X.  The IRS Should Assign a Single Employee to Work Complex Identity 
        Theft Cases and Correspondence Examinations Where a Taxpayer 
        Calls the IRS or Submits Documentation.

    When a taxpayer is audited in person, a single IRS employee 
typically works with the taxpayer from start to finish. If the taxpayer 
has questions or needs to provide follow-up information, he knows whom 
to call. The employee is familiar with the taxpayer's case, so the 
taxpayer does not need to start from scratch in every conversation. In 
addition, the employee is responsible for the timely and accurate 
resolution of the case.
    When a taxpayer experiences an identity-theft problem or is subject 
to a correspondence audit (and about three-quarters of all individual 
audits were conducted via correspondence in fiscal year 2016), the IRS 
generally does not assign a single employee to work the case. In many 
cases, the taxpayer will not need to speak with an employee. But in 
other cases, the taxpayer may call several times--perhaps to ask 
additional questions, to provide requested documentation, or to check 
on the status of his case.
    I believe the IRS should assign a single employee to work a case 
when either (i) the taxpayer has an identity theft problem that 
involves more than one issue or more than one tax year or (ii) the 
taxpayer calls in response to a correspondence examination notice or 
submits documentation. If subsequent telephone calls are required, the 
taxpayer should be given the opportunity to speak directly with that 
employee whenever possible, and if the employee is not available, the 
taxpayer should be given the option of either leaving a message for the 
employee for a call-back or speaking with another available assistor.
    Assigning cases to specific employees where a taxpayer calls or 
submits documentation should improve the taxpayer experience and 
improve case resolution.
    By allowing taxpayers who have experienced identity theft or are 
undergoing correspondence audits to work with a single IRS employee, 
the IRS would further the provision in the Taxpayer Bill of Rights that 
taxpayers have ``The Right to Quality Service'' and ``The Right to a 
Fair and Just Tax System.''

XI.  The IRS Should Reduce the False Positive Rates Produced by Its 
        Identity Theft and Anti-Fraud Filters.

    The IRS has made considerable progress in combating stolen identity 
refund fraud, and it deserves credit for doing so. However, the filters 
it uses to identify suspicious returns have high false positive rates. 
Notably, the filters used in the Taxpayer Protection Program, the 
primary set of filters for identity theft cases, had a false positive 
rate of 53 percent in 2016, and so far in 2017, the rate has risen to 
60 percent as of July 5. That means the majority of returns stopped by 
the filters have turned out to be legitimate.
    High false positive rates can impose a significant burden on 
taxpayers whose returns are frozen. The significant majority of 
taxpayers receive refunds, and the average refund amount in 2016 was 
$2,860.\35\ When the IRS stops a return due to suspicion of identity 
theft, it often requires the taxpayer to prove his or her identity, and 
that process can take several months. Thus, in addition to the time 
taxpayers must spend proving their identities and the frustration they 
experience in having to do so, they must wait extended periods of time 
to receive their refunds. For some taxpayers, this delay can cause a 
financial hardship.
---------------------------------------------------------------------------
    \35\ See IRS, 2016 Filing Season Statistics (week ending December 
30, 2016).
---------------------------------------------------------------------------
    In using filters to combat identity theft, the IRS must balance the 
twin goals of blocking as many illegitimate returns as possible and 
minimizing the number of legitimate returns it stops. The IRS has made 
major strides in blocking bad returns, but it can and should do a 
better job of refining its filters to stop fewer valid returns. In the 
National Taxpayer Advocate's 2016 Annual Report to Congress, we 
published a ``Literature Review'' of the various approaches taken to 
minimize false positive rates in government, the military, and 
business. We also made several recommendations to reduce the false 
positive rates produced by the IRS's filters, but the IRS has not 
agreed to adopt them.
    I recommend the IRS undertake a study before the 2018 filing 
season, in conjunction with my office, to identify best practices to 
reduce false positive rates and describe what steps it will take toward 
that end. This report should be shared with this Committee.
    By reducing the false positive rates in its identity theft and 
anti-fraud filters, the IRS would further the provision in the Taxpayer 
Bill of Rights that taxpayers have ``The Right to a Fair and Just Tax 
System.''

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Capito. If there are no further questions, the 
hearing record will remain open until August--Wednesday, August 
2, at noon for subsequent questions from the subcommittee 
Members who can submit statements and questions to the 
witnesses for the record.
    [The following questions were not asked at the hearing, but 
were submitted to the Department of the Treasury and the 
Internal Revenue Service for response subsequent to the 
hearing:]
             Questions Submitted to Hon. Steven T. Mnuchin
          Questions Submitted by Senator Shelley Moore Capito
    Question. Mr. Secretary, as you know, the National Association of 
Insurance Commissioners (NAIC) will consider in August 2017 a proposal 
to require a new, additional Risk Based Capital charge for all types of 
insurance, on top of the existing State Risk Based Capital formulas. 
Does the Treasury Department have a position on this proposal, and has 
it been conveyed to global regulators and the NAIC?
    Answer. Treasury does not currently have a view regarding the 
additional operational risk charge that was added to the NAIC Risk 
Based Capital formula by the Capital Adequacy (E) Task Force at the 
2016 NAIC Spring National Meeting. Treasury is reviewing the additional 
operational risk charge. Treasury, through the Federal Insurance 
Office, continues to engage with stakeholders, including State 
insurance regulators and the NAIC in order to further evaluate this 
issue and to ensure appropriate coordination and consultation.
    Question. Does the Department of Treasury believe that new Risk 
Based Capital requirements are necessary, especially considering the 
unique nature of U.S. health insurance markets? If so, can you provide 
a report to the Committee detailing this evidence?
    Answer. Treasury does not currently have a view regarding the 
additional operational risk charge that was added to the NAIC Risk 
Based Capital formula by the Capital Adequacy (E) Task Force at the 
2016 NAIC Spring National Meeting. Treasury is reviewing the additional 
operational risk charge. Treasury, through the Federal Insurance 
Office, continues to engage with stakeholders, including the State 
insurance regulators and the NAIC, to evaluate the issue and to ensure 
appropriate coordination and consultation.
    Question. Is the Department of Treasury aware of any justification 
for this new, additional risk charge, since the current Risk Based 
Capital calculations consider all elements of risk such as 
underwriting?
    Answer. Treasury does not currently have a view regarding the 
additional operational risk charge that was added to the NAIC Risk 
Based Capital formula. At this time, Treasury would refer you to the 
NAIC's public justification for the operational risk charge, available 
at http://www.naic.org/documents/cmte_e_capad_2016_
13_0.pdf. An August 2017 NAIC newsletter summarizing the operational 
risk charge and its status is available at: http://www.naic.org/
documents/cmte_e_
capad_hrbc_1708.pdf.
    Question. Will the Department of Treasury ask the NAIC how 
operational risk has been quantified under this proposal, and 
specifically what methodology and data was utilized? Did the NAIC use 
comparisons from other countries with vastly different healthcare 
systems to arrive at its conclusions?
    Answer. Treasury, through the Federal Insurance Office, continues 
to engage with stakeholders, including the State insurance regulators 
and the NAIC, to assess the issue and to ensure appropriate 
coordination and consultation.
    Question. Similarly, will the Department of Treasury ask the NAIC 
if they accounted for the fundamental differences in the health 
insurance business compared to other insurance markets such as life and 
property and casualty?
    Answer. Treasury, through the Federal Insurance Office, will 
continue to engage with stakeholders, including the State insurance 
regulators and the NAIC, to assess the issue and to ensure appropriate 
coordination and consultation.
    Question. Will the Department of Treasury ask the NAIC to examine 
the effects on the business of health insurance from this proposal 
before it is considered in August 2017, in order to avoid disruption in 
America's health benefits markets?
    Answer. Treasury, through the Federal Insurance Office, will 
continue to engage with stakeholders, including the State insurance 
regulators and the NAIC, to assess the issue and to ensure appropriate 
coordination and consultation.
                               __________
          Questions Submitted by Senator Christopher A. Coons
                              ofr and fsoc
    Question. One of the ``core principles'' established in President 
Trump's Executive order on regulating the financial system is ``to 
foster economic growth and vibrant financial markets through more 
rigorous analysis on risk and market failures''--yet the budget 
proposes a 25 percent cut for the very entity that was established to 
conduct that research, the Office of Financial Research. Similarly, the 
Treasury report submitted in response to that Executive order calls for 
an expansion in the role of the Financial Stability Oversight Council 
(FSOC) to better coordinate financial regulators, but the budget cuts 
its funding by 8 percent.
    What is your vision for the roles of FSOC and OFR, and how does 
this budget support their mission for financial stability in the US 
economy?
    Answer. The estimates for the Financial Stability Oversight Council 
(FSOC) and the Office of Financial Research (OFR) included in the 
President's 2018 budget are consistent with accomplishing the important 
missions of both entities in an efficient and effective manner. In 
Treasury's June 2017 review of the regulatory framework for the 
depository sector, Treasury recommended that Congress expand FSOC's 
authority to play a larger role in the coordination and direction of 
regulatory and supervisory policies. This can include giving it the 
authority to appoint a lead regulator on any issue on which multiple 
agencies may have conflicting and overlapping regulatory jurisdiction. 
Treasury also recommended that Congress reform the structure and 
mission of the OFR to improve its effectiveness and to ensure greater 
accountability. The current Director of OFR has announced he will be 
stepping down by the end of 2017. Treasury has appointed an interim 
head of OFR to manage OFR until a new Director is nominated and 
confirmed by the Senate.
                             cybersecurity
    Question. As you explained in your testimony, one of your top 
priorities is cybersecurity, but the budget proposes a 43 percent 
reduction for the new cybersecurity enhancement initiative.
    Do you believe the budget is requesting sufficient funds for this 
important purpose?
    Answer. Yes. The Cybersecurity Enhancement Account (CEA) for fiscal 
year 2018 is funded at the President's budget request level of $27 
million, which is in addition to the $47 million in multi-year money we 
received in fiscal year 2017. This funding was not enacted until May of 
2017. Treasury is in the process of implementing a targeted set of 
strategic investments to improve its cyber defenses using these new 
resources. The large majority of the requested fiscal year 2018 funding 
is for operations and maintenance of the strategic investments 
initiated in fiscal year 2017.
    Question. What is Treasury's role in improving cybersecurity across 
the financial sector, and what more can Treasury do on this issue?
    Answer. Treasury's work through its Office of Critical 
Infrastructure Protection and Compliance Policy depends on partnerships 
with various stakeholders, including private sector institutions and 
industry groups, and other government entities to enhance the security 
and resilience of the U.S. financial services sector.
    Treasury works closely with the Department of Homeland Security, 
law enforcement, Federal and State financial regulators through the 
Financial and Banking Information Infrastructure Committee (FBIIC), and 
the private sector to reduce cybersecurity risk to the financial 
sector. This work includes, for example, sharing cybersecurity 
information, enhancing the baseline cybersecurity protections, and 
supporting incident response and recovery efforts.
    FBIIC serves as a venue for coordinating approaches among agencies 
with different statutory authorities, and Treasury believes that FBIIC 
should be the focal point to drive domestic regulatory harmonization 
efforts. Within FBIIC, Treasury has supported efforts to promote the 
National Institute of Standards and Technology (NIST) Cybersecurity 
Framework as a common lexicon for regulatory agencies to incorporate 
into their supervisory efforts; to expand and complete efforts to map 
existing regulatory guidance to reflect and incorporate appropriate 
elements of the Framework; and to advance work as to whether 
cybersecurity examinations could be further coordinated.
    Internationally, Treasury has also encouraged further collaboration 
and partnership through the G-7 Cyber Experts Group in the financial 
area.
    Treasury is dedicated to working with the private sector and 
regulators and coordinating with other government agencies to improve 
the cybersecurity posture of the financial sector.
                              debt ceiling
    Question. As you know, the United States reached the debt limit in 
March and is now using extraordinary measures to avoid default.
    Do you agree that allowing the Government to default on its debts 
is a terrible idea that would have significant consequences for our 
markets and economy?
    Answer. Honoring our outstanding debt is critical. Failing to meet 
the Government's obligations could jeopardize the U.S. credit rating 
and have serious ramifications for the U.S. economy as a whole.
    Question. Do you agree that even the threat of a default has the 
potential to have costly implications for the U.S. Government and 
undermines our credibility?
    Answer. Recent debt limit impasses have drawn increased scrutiny 
from market participants as the date approaches when extraordinary 
measures are projected to be exhausted. Some market participants avoid 
holding Treasury securities (including collateral) with maturity or 
interest payment dates within close proximity to such projected dates. 
Additionally, a debt limit impasse can necessitate that Treasury draw 
down its operating cash balance to below prudent levels, leaving 
Treasury with increased risk exposure to a loss of market access.
    Question. As Treasury Secretary, do you think it is good fiscal 
stewardship to be engaging in a pattern where every year or 18 months 
Congress manufactures a debt-ceiling showdown that leads to questions 
about whether we'll pay our debts?
    Answer. We need to issue debt to pay for the expenditures that 
Congress has already authorized. Congress should address its concerns 
during the annual budget and appropriations process, not after it has 
already authorized expenditures.
    Question. What are you doing to ensure that the limit is lifted as 
soon as possible?
    Answer. Throughout the most recent debt limit impasse, I worked 
with Members of Congress on both sides of the aisle to ensure that the 
debt ceiling was raised in a timely manner. On September 8, 2017, the 
President signed into law Public Law 115-56, which suspended the 
statutory debt limit through December 8, 2017. This will continue to be 
a priority, and I will continue to reach out to Members as needed to 
address any debt limit impasses that may occur in the future.
                               tax reform
    Question. Since I first arrived in the Senate in 2010, I have 
strongly supported tax reform that lowers rates, supports innovation, 
and simplifies the code. Most of my colleagues share this view as well. 
President Trump continues to advocate for tax reform, however much like 
healthcare reform, I'm concerned that this may be another attempt to 
make major policy changes without bipartisan engagement.
    Will you commit to work with Democrats to develop and advance a tax 
reform package that is bipartisan?
    Answer. I have long said that the administration's hope is for the 
tax reform process to be bipartisan. I am committed to continuing to 
work with Congress and other stakeholders to accomplish the 
administration's priority of creating a tax system that is fair, 
simple, and efficient and that puts Americans back to work and puts 
America first.
    Question. Would you support advancing reform through regular order 
(rather than reconciliation)? I stand ready to work with you, President 
Trump, and my Republican colleagues to advance bipartisan tax reform.
    Answer. Tax reform has been my number one priority since I was 
appointed to serve as Secretary of the Treasury. This is the most 
important issue for the American economy. I am committed to using 
whatever means necessary to reform our tax system so that it better 
serves and supports the American people.
                   fiscal service & wasteful payments
    Question. Through Treasury's Fiscal Service, the department issues 
payments and collects debt for nearly all other Federal agencies--
processing millions of dollars every day. Treasury has the ability to 
reduce costs across the Federal Government by improving these payment 
and collection systems, to reduce wasteful, improper payments and catch 
fraud before it happens. In fact, Treasury's Do Not Pay Center 
identified and prevent over $25 million in improper payments. Yet, the 
budget proposes to eliminate funding for these types of investments in 
the Fiscal Service, including addressing specific weaknesses identified 
in the financial audit and known critical system weaknesses.
    Are you concerned that eliminating these small investments now 
could result in greater costs in future years?
    Answer. From October 2014 through June 2017, the Do Not Pay 
Business Center (DNP) has assisted agencies in identifying or stopping 
$116 million in improper payments. Of this amount, almost $59 million 
was identified or stopped during fiscal year 2016.
    Treasury is confident that it can continue to address improper 
payments at the funding level in the President's 2018 budget. Instead 
of additional funding, DNP could be a more effective tool in addressing 
improper payments if Treasury has explicit legislative authority to 
obtain additional data sources. For example, Treasury, working with the 
Office of Management and Budget and the Social Security Administration, 
has sought explicit legislative authority to acquire and use for DNP 
the Social Security Administration's full death file to prevent, 
identify, or recover improper payments. This data source contains at 
least 10 percent more death records than the public Death Master File 
to which Treasury currently has access. An amendment to the Social 
Security Act to allow Treasury to use the full death file for DNP would 
improve the timely detection and prevention of payments to deceased 
individuals. Treasury has also sought explicit authority to acquire 
access to the Department of Health and Human Services' (HHS) National 
Directory of New Hires for DNP. This HHS data source would increase the 
efficiency and effectiveness of DNP efforts to prevent and detect 
improper payments in means-tested programs.
    Question. What do you believe is Treasury's responsibility over the 
payments it makes for other Federal agencies?
    Answer. Treasury's Bureau of the Fiscal Service (Fiscal Service) is 
responsible for the centralized disbursement of almost 87 percent of 
the Federal Government's payments to businesses, government entities, 
and individuals throughout the world. In fiscal year 2016, the Fiscal 
Service disbursed more than 1.2 billion payments, on behalf of Federal 
agencies. These disbursements totaling $3.3 trillion included Social 
Security, Veterans' benefits, and income tax refunds to more than 100 
million people, vendor and loan payments supporting businesses; grant 
monies; and State funding for critical infrastructure projects and 
State-administered programs.
    The Fiscal Service has established a robust set of internal 
controls and data-centric electronic tests throughout the payment 
lifecycle. The Fiscal Service controls and provides financial integrity 
to the Federal payment process, including through its support of the 
DNP Program, which helps agencies identify, prevent, and recover 
improper payments, as well as through its post-payment activities, such 
as reconciliation, accounting, claims activities, and the support of 
law enforcement actions against criminals who have defrauded the 
Government. Fiscal Service employs various techniques to protect the 
payment system from direct deposit enrollment fraud and identity theft 
fraud, preventing fraudsters from misdirecting Social Security, 
Veterans', and other benefit payments.
    In fiscal year 2016, Treasury processed 6 million ``exceptions'' to 
the payment process so that monies erroneously paid to deceased 
individuals were recovered; payee claims of non-receipt were processed; 
stale uncashed checks were cancelled; misdirected electronic payments 
were returned; and checks returned in the mail were properly 
safeguarded with the funds redirected to the correct payee address or 
held safely in the U.S. Treasury. In addition, Fiscal Service supports 
inspectors general, Federal prosecutors, and State and local law 
enforcement agencies in the investigation and prosecution of criminals 
engaged in fraud related to the Treasury payment system. In fiscal year 
2016, this collaboration resulted in 107 arrests, 83 convictions, and 
$24 million recovered through fines, restitution, and seizures.
                       irs reporting requirements
    Question. In November 2016, the IRS issued Internal Revenue Notice 
2016-66. There have been numerous complaints that this notice imposes 
burdensome and duplicative information reporting requirements on 831(b) 
Captives, their owners and, in some cases, even their service 
providers.
    Will Treasury commit to carefully reexamine the requirements 
imposed by this Notice, including meeting with small and medium-sized 
businesses that are impacted by new reporting requirements to 
understand their concerns?
    Answer. The IRS issued Notice 2016-66 late last year to identify 
certain micro-captive transactions as transactions of interest because 
they have the potential for tax avoidance or evasion. As you note, the 
notice requires disclosure from participants in the identified 
transactions and their material advisors. These disclosures allow the 
IRS to gather information to determine which transactions are or have 
the potential to be abusive tax avoidance transactions. We have begun 
to evaluate the information we have received in these disclosures to 
determine what steps are appropriate as we work toward addressing 
potential tax abuse in this area.
    To minimize the burden of the disclosure requirements, we carefully 
crafted the objective criteria in Section 2 of Notice 2016-66, which 
describes the micro-captive transactions that are subject to 
disclosure. Specifically, we require disclosure only if an insured 
entity or a related party owns at least 20 percent of an electing 
section 831(b) captive insurance company, and the captive insurance 
company either has a loss ratio of less than 70 percent for the most 
recent 5-year period or makes the captive insurance company's capital 
available to the insured entity or a related party.
    We requested comments from the public about the notice and received 
27 comments and six congressional inquiries, including this question. 
In addition, we met with those who requested meetings and responded to 
telephone calls regarding the notice. Subsequently, the United States 
Tax Court issued its first decision on a micro-captive transaction 
challenged by the IRS (Avrahami v. Commissioner, 149 T.C. No. 7, filed 
August 21, 2017), concluding that the entity purported by the taxpayers 
to be a micro-captive insurance company was not an insurance company 
and that payments made to that entity did not qualify as insurance 
premiums. We will continue to evaluate the disclosures received and 
developments in this area.
                               __________
            Questions Submitted by Senator Joe Manchin, III
                                 cfius
    Question. I appreciate the Trump administration's commitment to the 
security of our Nation. However, there are many facets that comprise 
the security of a nation.
    You have under your oversight, the Committee on Foreign Investment 
in the United States (CFIUS). As you know, this Committee examines the 
national security implications of certain foreign investment 
transactions. This usually involves critical infrastructure, proximity 
to national security assets, or sensitive trade secrets.
    The Committee looks at various factors when determining if a 
transaction is passable, however they are somewhat constrained by law 
from doing what is necessary to complete their mission. For example, 
though CFIUS may review any foreign investment, CFIUS reviews are 
largely initiated on a voluntary basis by the foreign company.
    In addition, they are constrained by making decisions purely on the 
basis of ``national security.'' I would argue that the economic 
security of our Nation is critical as well.
    Do you think that these constraints are troubling, or do you think 
the existing structure of CFIUS is adequate to ensure that the national 
security of the United States is protected from troubling foreign 
investment, especially from an adversary?
    Answer. CFIUS is a robust process to address potential national 
security risks arising from foreign acquisitions of U.S. businesses. 
The statute already provides CFIUS with broad authority to determine 
whether transactions pose a national security risk, including whether 
the economic effects of a transaction pose a national security risk. 
Maintaining CFIUS' nexus to national security is critical; expanding 
CFIUS beyond national security could dilute the effectiveness of CFIUS 
in addressing national security risks.
    While the CFIUS process is voluntary, the Committee is not solely 
dependent upon parties to a transaction voluntarily notifying 
transactions to CFIUS. The CFIUS statute allows the Committee to 
unilaterally initiate a review of any covered transaction. CFIUS 
agencies monitor mergers and acquisitions activity to identify 
transactions that have not been voluntarily notified to CFIUS and 
consider whether the transactions may present national security 
considerations that warrant CFIUS review.
    However, there are certain steps that can be taken to enhance 
CFIUS' ability to address national security concerns posed by certain 
types of transactions. For example, CFIUS should have the ability to 
review certain additional types of joint ventures that could raise 
national security concerns. We are prepared to work with Congress to 
ensure that CFIUS has the necessary and appropriate tools to address 
these concerns.
                       following the opioid money
    Question. As you know, West Virginia has been reeling from the 
opioid and heroin epidemic for a number of years. I have been working 
with FDA, NIH, DEA, CDC, and DOJ to ensure that they are making 
combatting opioids, especially in rural underserved areas, a priority 
in their programs and plans.
    The Congress has allocated a lot of money to treatment and criminal 
justice, but I believe we also need to be focused on cash flow that 
supports the distribution and trafficking of the illegal uses of 
opioids and heroin.
    We need your help to cut off the supply and financing of these drug 
operations.
    What is Treasury doing to track the money that is flowing through 
the economy as a result of these illicit opioid and heroin sales? Has 
the Financial Crimes Enforcement Network (FinCEN) been involved or well 
position to play a role in this effort?
    Answer. Financial Crimes Enforcement Network (FinCEN) has exploited 
keywords, typologies, and known trafficking networks to analyze and 
expand upon fentanyl-related financial flows in Bank Secrecy Act data. 
FinCEN is leveraging known precursor providers and opioid traffickers 
to identify trafficking networks, characterize trends and behavior 
patterns, and pinpoint nodes of vulnerability. We are identifying the 
typical cost/payment structure of fentanyl-associated transactions and 
what sets these transactions apart from the trafficking of other drugs. 
FinCEN is paying particular attention to financial flows between 
regions in the United States, China, Mexico, and the Dominican 
Republic. FinCEN has also identified potential drug traffickers 
marketing overtly and covertly online. These traffickers deal in 
virtual currencies and online payment methods and falsely label illicit 
drugs as ``research chemicals'' in an attempt to avoid detection. 
FinCEN shares the results of its analysis with interagency and 
international counterparts.
    Question. Are you working with the DEA and DOJ to track illicit 
financing of the drug trade?
    Answer. The Department of the Treasury's Office of Terrorism and 
Financial Intelligence works closely with both DEA and DOJ to track 
illicit financing of the drug trade of both domestic and international 
organizations. For example, the Office of Foreign Assets Control (OFAC) 
works closely with DEA and DOJ to implement the Foreign Narcotics 
Kingpin Designation Act and administer other authorities. OFAC, DOJ, 
and DEA conduct joint investigations, which have allowed OFAC sanctions 
investigators to build designation packages and DEA special agents to 
carry out criminal cases simultaneously. These joint investigations 
uncover foreign individuals and entities engaged in the laundering or 
investment of drug proceeds. These discoveries in turn can lead to OFAC 
sanctions, DOJ criminal cases, and further joint investigations into 
other entities and individuals. In one instance in 2015, the DEA Denver 
Field Division and the U.S. Attorney's Office for the District of 
Colorado charged Mexican heroin trafficker Jose Luis Ruelas Torres with 
running a Continuing Criminal Enterprise, along with related narcotics 
trafficking and money laundering offenses. OFAC subsequently worked 
with DEA Denver agents, which led to the May 2017 identification of 
Ruelas Torres and his criminal organization as Tier I Kingpins along 
with a network of key criminal associates. These collaborative 
investigative efforts allow for the U.S. Government to not only target 
U.S.-based drug trafficking activities but also use financial sanctions 
to disrupt the efforts by foreign drug traffickers to invest their drug 
proceeds and use their investments to fund future drug shipments.
    Additionally, FinCEN assists in large-scale DEA investigations 
through a number of initiatives, including detailing an analyst to 
DEA's Special Operations Division. The collaboration provides 
assistance in large-scale DEA investigations and fosters strategic and 
tactical information exchange. For instance, FinCEN provides bulk data 
access to the Organized Crime Drug Enforcement Task Force Fusion 
Center, and has convened public-private information sharing meetings 
regarding information requests made pursuant to Section 314(a) of the 
USA PATRIOT Act in support of DEA money laundering investigations. 
FinCEN also provides training to DEA analysts and agents regarding 
illicit finance. To further facilitate close FinCEN-DEA collaboration, 
the DEA Headquarters/Financial Operations Section has assigned a full-
time detailee to both the FinCEN and OFAC portfolios to support these 
efforts as well as counter-illicit finance, counter-narcotics, and 
other mission areas of mutual concern.
          community development financial institutions (cdfis)
    Question. In my State of West Virginia, community development 
financial institutions (CDFIs) are critical in filling a large need 
that just isn't met in many rural areas. For example, Woodlands 
Community Lenders (WCL) in Elkins, West Virginia has leveraged in both 
public and private financing at a 10:1 ratio. Since Woodlands Community 
Lenders' inception in 2013, they have financed over 50 new and 
expanding small businesses, leveraging in a total of $4.6 million in 
outside investment, supporting over 100 jobs in our 3-county region.
    WCL provides loans, business development services, and finance 
packaging for small businesses that are otherwise ``unbankable.'' WCL 
takes an alternative approach to assessing and mitigating risk, 
allowing it to support small business development in ways that 
traditional lenders often cannot.
    The administration's budget zeroes out the CDFI Financial 
Assistance Program.
    Question. If these programs are eliminated, what do you believe the 
will be on rural areas utilizing this program?
    Answer. The budget eliminates discretionary grant funding for the 
CDFI Fund to reflect the administration's priority to support fiscal 
responsibility and to focus resources on activities that promote 
national security and public safety. However, the budget provides 
funding for the CDFI Fund to continue to operate the non-grant 
programs, which provide support for CDFIs and other community 
organizations lending and investing in economically-distressed 
communities across the country, including those in rural areas.
    The Budget also proposes to extend the Bond Guarantee Program to 
allow $500 million in new guarantees in fiscal year 2018. This program 
provides capital to CDFIs, at no cost to the taxpayer.
    Question. How will Treasury ensure that the critical capital 
injections needed to support the transitioning economies in West 
Virginia continue?
    Answer. I will work with the team at Treasury to be sure that all 
CDFI Fund programs are operating consistent with all applicable laws, 
rules, and administration policies.
    Question. Has Treasury explored any special initiatives or 
technical assistance programs to build capacity of CDFIs serving coal 
communities?
    Answer. Treasury would be happy to work with your office to 
preserve access to low-cost capital in coal-impacted communities.
                             cybersecurity
    Question. Recent estimates have found the cost of criminal data 
breaches will cost global businesses $8 trillion over the next 5 years. 
I continue to believe that a comprehensive approach to cybersecurity 
best practices is necessary to properly work towards preventing, 
detecting, and responding to cyberattacks.
    I applaud efforts to centralize cybersecurity leadership within 
Treasury to work collaboratively and transparently to protect critical 
financial infrastructure. While cyberattacks have grown exponentially, 
I am concerned that investments made in cybersecurity capabilities will 
not keep up with the threat.
    Beyond threat sharing, how can you work with small, rural 
institutions to implement best practices and make these investments in 
cybersecurity where necessary?
    Answer. I cannot emphasize enough the importance of a public-
private partnership when it comes to our Nation's cybersecurity, 
especially because the private sector owns and operates the bulk of the 
critical infrastructure that Treasury and others in Government seek to 
help protect. It is also critically important to highlight that 
Treasury's cybersecurity mission is designed to support not just large 
financial institutions, but also the smaller financial sector companies 
that are the primary interface with the financial system for millions 
of Americans.
    Treasury works on a regular basis to assist all financial sector 
companies large and small by encouraging the use of baseline 
protections, assisting with response and recovery activities, and 
facilitating information sharing. Treasury does this work in close 
partnership with the Department of Homeland Security, the Federal 
Bureau of Investigation, financial regulators, and industry groups such 
as the Financial Sector Information Sharing and Analysis Center.
    A great example of this work is the Hamilton Exercise Program. Over 
the past 2 years, Treasury has carried out regional cybersecurity 
exercises focused specifically on smaller financial sector companies. 
These exercises are an opportunity for firms to practice incident 
response procedures, share and refine good practices, and develop 
stronger connections with similar firms in their communities. This 
program, and others like it, benefits smaller firms, which are a key 
component of our financial sector.
                 state small business credit initiative
    Question. West Virginia found great success with the State Small 
Business Credit Initiative (SSBCI) program created under the 2010 Jobs 
Act. New companies were able to launch and existing companies were able 
expand. Those activities created jobs, helped to retain jobs and 
fostered private investment.
    The $13 million West Virginia received created and/or retained 
almost 1,000 jobs and fostered over $90 million in private investment. 
WV's success was not the only successful State in the program. West 
Virginia and other States in Appalachia have not seen the economic 
recovery that other parts of the country have seen. The SSBCI program 
allows these struggling States to help diversify their economies, grow 
jobs and foster entrepreneurship. However, the President's budget 
eliminated this program for fiscal year 2018.
    Given the success seen by West Virginia and other States that lack 
access to business capital, would it be beneficial to continue to fund 
programs such as SSBCI?
    Answer. The SSBCI was created by the Small Business Jobs Act of 
2010 to support State-level small business financing programs to 
improve access to capital in the wake of the Great Recession. As set 
forth in the original statute, Treasury's administration of SSBCI ended 
in September 2017. SSBCI funds will remain with the States to be 
recycled to support more small businesses over time.
                          marketplace fairness
    Question. I believe that restoring fairness in the tax system is 
one of the most important things we can do to set this Nation on a 
strong financial path, improve our economy, and get people back to 
work. Businesses, no matter how they sell their goods, should compete 
on a level playing field.
    Over the last 25 years, brick-and-mortar businesses in West 
Virginia and around the United States have found it increasingly 
difficult to compete against out-of-state online retailers who offer 
lower prices because they can avoid charging sales tax. This imbalance 
is unfair to the hard-working small business owners who support our 
communities and create good, local jobs.
    Products ordered online are delivered to your door using the 
airports, roads, and bridges often funded by State tax dollars.
    Do you believe brick-and-mortar retailers in West Virginia should 
be the only businesses funding State infrastructure, while their out-
of-state competitors take advantage of that infrastructure to put them 
out of business?
    Answer. Fairness and equity are important principles in evaluating 
tax reform proposals, along with simplicity and the impact of the 
proposal on economic efficiency and growth.
                                 ______
                                 
               Questions Submitted to Hon. John Koskinen
              Questions Submitted by Senator Thad Cochran
    Question. Commissioner Koskinen, in your opening statement you 
mentioned that the Internal Revenue Service (IRS) is gradually 
transitioning towards online services to assist citizens. Many of my 
constituents do not have access to computers or broadband service, 
especially in rural areas of Mississippi. What is the IRS doing to 
ensure taxpayers are not adversely affected by the IRS's focus on 
online services? Please provide the Committee with data from the 
previous three fiscal years about the number of in person and phone 
interactions the IRS has conducted with taxpayers. Additionally, what 
is the average wait time for taxpayers to reach an IRS employee through 
in person visits or phone interactions? Does the IRS plan to transition 
to online services only? If so, please provide a timeline and details 
of such plan.
    Answer. As we improve the online experience, we understand the 
responsibility we have to serve the needs of all taxpayers, whatever 
their age, income, or preferred method of communication. Although our 
research tells us that taxpayers increasingly prefer to interact with 
the IRS through digital channels, we recognize there will always be 
taxpayers who do not have access to digital services, or who simply 
prefer not to conduct their transactions with the IRS online.
    Consequently, we remain committed to providing the services these 
taxpayers need. While we will continue to offer more web-based 
services, taxpayers will still be able to call our toll-free lines, 
write to us, or obtain in-person assistance, if that is how they want 
to interact with the IRS. In fact, we believe that providing more 
online services for those who want them will free valuable resources to 
allow us to further improve service on our other channels--phone, in 
person, and correspondence, particularly for those taxpayers with more 
complex issues.
    The tables below provide the metrics requested for the previous 
three fiscal years.


                                           WAGE AND INVESTMENT PHONES
----------------------------------------------------------------------------------------------------------------
                                                                                               Fiscal Year 2017
                                   Fiscal Year 2014    Fiscal Year 2015    Fiscal Year 2016      through July
----------------------------------------------------------------------------------------------------------------
Average Wait Time...............  19 min............  30 min............  17 min............  8 min
----------------------------------------------------------------------------------------------------------------
Total number of Calls Answered    63.9 million......  55.7 million......  63.8 million......  47.3 million
 (assistor and automated).
----------------------------------------------------------------------------------------------------------------



                                           TAXPAYER ASSISTANCE CENTERS
----------------------------------------------------------------------------------------------------------------
                                                                                               Fiscal Year 2017
                                   Fiscal Year 2014    Fiscal Year 2015    Fiscal Year 2016      through July
----------------------------------------------------------------------------------------------------------------
Total Number of Face-to-Face      5.5 million.......  5.4 million.......  4.4 million.......  2.8 million
 Contacts.
----------------------------------------------------------------------------------------------------------------
Percent of customers waiting 30   75%...............  68%...............  73%...............  94%
 minutes or less **.
----------------------------------------------------------------------------------------------------------------
** Beginning in 2015, we started offering service by appointment at a small number of Taxpayer Assistance
  Centers (TACs). In fiscal year 2017, all IRS TACs offered service by appointment.


    Question. Commissioner, the understaffing and closure of Taxpayer 
Assistance Centers (TAC) has been a cause of concern for this 
Committee. In fiscal year 2017, this Committee directed the IRS to hold 
public forums and notify the Senate and House Committees on 
Appropriations before closing a TAC. Will you share with the Committee 
what the IRS is doing to analyze the impact of closing a TAC? Describe 
how the agency determines the impact in rural areas. What metrics is 
the IRS using when deciding to close a TAC? Describe the process that 
the IRS uses to notify communities of TAC closures.
    Answer. To best use our resources and to meet the demand for 
services in our Taxpayer Assistance Centers (TACs), in 2015 we started 
offering service by appointment in a small number of locations. We 
received favorable taxpayer response, and expanded the pilot. In fiscal 
year 2017, all of our TACs offered service by appointment. As each 
traditional TAC location comes under review, we compile data to 
determine the most efficient methods to meet taxpayer face-to-face 
service needs. For example, we have a service strategy that considers 
items such as the services most requested by taxpayers at the TAC 
location, available staffing, proximity of the next closest TAC, 
availability of a partner to provide virtual assistance, availability 
of Voluntary Income Tax Assistance and Tax Counseling for the Elderly 
locations, and local demographic information.
    If the IRS makes a tentative determination to change the method of 
providing service (either through moving the TAC location or changing 
from one service-delivery method to another--such as to virtual 
assistance provided by a community partner), we will invite taxpayers 
in the community to provide input in the decisionmaking process. Should 
the data and preliminary public comments suggest that face-to-face 
service is no longer required through any service channel, we would 
schedule a formal public hearing to obtain further public comment. We 
would follow the public hearing process with a report to oversight 
agencies, as requested in previous and current committee reports.
    We routinely review locations to promote more efficient use of the 
Government's real estate assets and to comply with Executive Orders, 
OMB directives, Federal Acquisition Regulations administered by the 
General Services Administration, and congressional mandates regarding 
real estate. This review includes evaluating small, mid-size, and large 
posts-of-duty with a high percentage of vacant workstations, a high 
number of field-based employees, and space reduction projects initiated 
because of lease expirations, relocations, review of training space 
needs, and other reasons. During these reviews, we analyze taxpayer 
access to face-to-face service in the community and determine how to 
effectively meet taxpayer needs and preferences for service.
    Question. Commissioner, I am pleased to hear that the number of 
tax-related identity theft has declined in the past 2 years. The 
Taxpayer Advocate Service has recommended that constituents with 
multiple identity theft issues be assigned one point of contact at the 
IRS to assist them until the resolution of their case. What is the IRS 
doing to help simplify assisting taxpayers affected by identity theft? 
Has the IRS taken this proposal into consideration? When does the 
agency plan to implement this proposal?
    Answer. Our work on identity theft (IDT) and refund fraud touches 
nearly every part of the organization. Helping victims and reducing the 
time it takes to resolve cases is a top priority for the IRS.
    During 2015, the IRS centralized IDT victim assistance policy, 
oversight, and campus case work into a new Identity Theft Victim 
Assistance (IDTVA) organization within the Wage and Investment (W&I) 
Division. IDTVA can work IDT cases from beginning to end, providing an 
improved taxpayer experience.
    In the victim assistance area, we have reduced the time it takes to 
resolve a case. For most cases, the average time is now less than 120 
days, but for more complex cases, resolution can take up to 180 days. 
This timeframe is substantially less than a few years ago, when cases 
could take over 300 days to resolve. While this change marks a 
significant improvement, we continue to look for ways to shorten this 
time and ease the burden IDT places on these taxpayers.
    Whenever possible, the same employee processes multiple claims 
(often for multiple years) from the same taxpayer, to make sure there 
is consistent processing. In January 2015, the IRS developed automation 
to associate IDT documentation with existing IDT cases/category codes. 
In April 2016, we expanded the programming to include the association 
of documentation with new categories of work resulting from the 
centralization effort under the IDTVA organization.
    Centralization of IDTVA work significantly affected our ability to 
resolve those cases more quickly. Since implementation, we resolve 
those cases in less than 120 days 75 percent of the time, compared to 
34 percent prior to implementation.
    Our toll-free hotline for IDT victims helps taxpayers reach a 
trained IDT specialist any time during business hours, without having 
to rely on the availability of a single IRS employee. Customer service 
representatives staffing this specialty line can review the taxpayer's 
case file and respond to the IDT victim's call. While we believe this 
approach provides the best possible experience for the victim, we are 
aware that sometimes the customer service representative cannot respond 
to the IDT victim's call. For these instances, beginning on August 1, 
2017, we implemented a process for IDT victims to have direct contact 
with the employee working their IDT cases. The customer service 
representative will provide the IDT victim with a different toll-free 
number to call to directly contact the employee working his or her 
case. If the employee is unavailable to answer the IDT victim's call, 
the victim can leave a message for the employee, and the employee will 
return the victim's call within five business days. In addition, we 
expanded procedures to provide a single point of contact when a 
victim's case spans multiple years.
                                 ______
                                 
               Question Submitted by Senator John Boozman
    Question. Commissioner Koskinen, I would like to discuss taxpayer 
services. There have been reports citing a continuing decline in the 
level of service that IRS provides to taxpayers, especially those who 
are victims of stolen identity refund fraud. Additionally, we have 
heard of increasing wait times for taxpayers contacting IRS, and a rise 
in the use of ``courtesy disconnects''--hanging up on a customer after 
an excessive wait time. What has your office done to remedy this, and 
going forward, what plans does your office have to improve on customer 
service and taxpayer assistance?
    Answer. We have had many notable achievements for 2017 in terms of 
improving the level of service provided to taxpayers on the calls the 
Wage and Investment (W&I) Division handles. Congress specifically 
appropriated additional funding to help the IRS improve customer level 
of service (LOS). This additional funding, along with effective 
planning and monitoring, allowed W&I toll-free phone operations to 
deliver a filing season telephone LOS of over 79 percent--the highest 
telephone LOS since 2007. This change is an increase over the 72.1 
percent achieved in this same timeframe in 2016. The 2017 fiscal year 
LOS is at 76.7 percent through the beginning of August, a substantial 
improvement over the 53.4 percent in 2016. We are on pace to have the 
best fiscal year LOS in 10 years.
    In the IDT victim assistance area, we have reduced the time it 
takes to resolve a case. For most cases, the average time is now less 
than 120 days, but for more complex cases, resolution can take up to 
180 days. This timeframe is substantially less than a few years ago, 
when cases could take over 300 days to resolve. In addition, we 
continually improve our efforts to stop fraudulent refunds from being 
paid. For example, we have improved the filters that help us spot 
suspicious returns before we process them. The number of people 
reporting to the IRS that they were victims of IDT declined from 
698,700 in calendar year (CY) 2015 to 376,500 in CY 2016--a 46 percent 
drop. This downward trend has continued into 2017.


------------------------------------------------------------------------
                          Taxpayer Assistance      Taxpayer Assistance
                         Toll-Free Line Fiscal    Toll-Free Line Filing
                                Year LOS                Season LOS
------------------------------------------------------------------------
Fiscal Year 2007......  82.08%.................  83.46%
Fiscal Year 2008......  52.81%.................  77.41%
Fiscal Year 2009......  70.02%.................  63.97%
Fiscal Year 2010......  74.04%.................  75.28%
Fiscal Year 2011......  70.07%.................  74.64%
Fiscal Year 2012......  67.55%.................  68.31%
Fiscal Year 2013......  60.50%.................  70.12%
Fiscal Year 2014......  64.39%.................  70.88%
Fiscal Year 2015......  38.10%.................  37.28%
Fiscal Year 2016......  53.43%.................  72.11%
Fiscal Year 2017......  .......................  79.12%
------------------------------------------------------------------------


    Through April, filing season (FS) average speed of answer (ASA) 
(wait time) was 6\1/2\ minutes on the taxpayer assistance toll-free 
line. This wait compared to 11 minutes in FS 2016 and 23 minutes in FS 
2015, and reflects a decrease of 16\1/2\ minutes. During this same 
period, disconnects (calls terminated due to a lack of system or 
assistor resources) were 834,000 compared to 1.3 million in FS 2016 and 
8.8 million in FS 2015, a 90 percent (almost 8 million) decrease. Call 
volume was also a factor in delivering a higher LOS. By implementing 
robust communication and outreach strategies for filing season 
initiatives, the IRS successfully brought awareness to taxpayers and 
partners about key changes and programs, and equipped them to take any 
action needed timely. These efforts greatly diminished expected 
inquiries from taxpayers, media, and oversight resulting in reduced 
impact on operations and demand on customer service.
    The IRS also provides telephone assistance to other groups of 
taxpayers, such as to taxpayers responding to a notice received in the 
mail. Those phone lines may provide a different level of service than 
the toll-free assistance line and reflect our resource challenges.
                                 ______
                                 
          Questions Submitted by Senator Christopher A. Coons
             electronic tax return filing--business returns
    Question. Over the past decade, the rate for electronic filing of 
individual tax returns grew exponentially from 54 percent in 2006 to 
86.4 percent in 2016. In the recent 2017 filing season, 90 percent of 
individual returns were submitted electronically. In contrast, in 2016, 
only 50 percent of the nearly 30 million business returns were 
electronically filed. The IRS fiscal year 2018 budget justification 
indicates that the business e-filing target will increase to 51 percent 
for fiscal year 2017 and to 52 percent for fiscal year 2018.

  --Can you elaborate on this phenomenon and explain what the IRS is 
        presently doing or planning to do to improve the e-filing rate 
        for business returns?
  --Is there a rational basis for not setting more ambitious targets as 
        an incentive to achieve a higher rate?
  --Are there any particular advantages for a business taxpayer to file 
        electronically?

    Answer. Our greatest challenge to achieving e-file increases in 
business returns is the employment tax series (Form 94x). This family 
of forms represents the greatest overall volume of business forms, and 
therefore the greatest opportunity to increase overall e-filing of 
business returns. During the past seven filing seasons, the Form 94x 
series e-file rate has consistently seen the slowest or close-to-
slowest growth of all major return types. In 2015, the IRS released a 
Federal Register request for comments on ways to increase the 
electronic filing of employment tax returns. The digital signature 
process was highlighted in the responses received as a key barrier to 
increasing e-file rates across these returns. We are evaluating the 
development of a Form 94x online signature preparer identification 
number (PIN). After removing this key barrier, we will pursue a means 
to offer free or low cost 94x e-file solutions with the goal of driving 
greater e-filing of this high-volume family of forms.
    We process e-file returns faster and with fewer errors. For 
taxpayers, this means quicker refunds and less contact with the IRS. 
IRS e-file provides proof of receipt within 24 hours of sending returns 
to the IRS. Individuals and businesses can e-file balance due returns 
and schedule an electronic funds transfer (EFT) from their account for 
any date.
      impacts of proposed cuts--diminished services for taxpayers
    Question. The Trump budget request for the IRS of $10.975 billion 
is expected to take a toll on the ability of the IRS to respond to 
taxpayers' telephone calls. In the budget justification materials 
submitted to Congress, the IRS states that the resources made available 
in 2016 supported a 53.4 percent Level of Service (with a 72 percent 
level during filing season which included a seasonal workforce). For 
2017, a target LOS of 64 percent is specified, with the most recent 
filing season achieving a 79 percent service level. But the IRS then 
projects a 39 percent target for 2018, even with a planned infusion of 
$58 million in user fees to augment appropriated dollars.

  --Commissioner Koskinen, providing access to quality customer service 
        helps taxpayers understand their obligations so they can pay 
        the right amount on time. It is important for me that hard 
        working Delawareans are able to readily obtain assistance they 
        need to act in good faith and pay the taxes they owe. That's 
        why the 2018 service target of 39 percent deeply concerns me, 
        particularly given that the IRS has, to its credit, made 
        significant strides to turn around an abysmal level of service 
        recorded for 2015, when only 38 percent of 100 million calls 
        were answered and experienced an average waiting time of 30 
        minutes?
  --Do you think it is acceptable to provide a level of service where 
        as many as 6 of 10 callers will not likely be able to connect 
        to an account representative or will be forced to spend 
        inordinate amounts of time waiting on hold?As Commissioner, 
        what do you consider to be an ``acceptable'' level of service 
        for taxpayers calling on the toll-free phones?
  --Is it conceivable that the IRS could ever achieve the level of 
        service experienced in 2004 when the IRS answered 87 percent of 
        phone calls with an assistor and waiting times averaged just 
        2.5 minutes?
  --What amount of funding would the IRS require in fiscal year 2018 in 
        order to sustain this year's results where there's a 64 percent 
        general target and a 79 percent service level during the filing 
        season?

    Answer. I consider an acceptable level of service (LOS) to be 
approximately 70 percent or above. Delivering a LOS much higher than 80 
percent can result in inefficiencies as our call site assistors could 
wait extended periods of time for the next call. Funding for Taxpayer 
Services is just one of many variables that influence the LOS. Call 
volume, often driven by external events such as the enactment of tax 
legislation, and the availability and reliability of IRS technology 
infrastructure, are other major factors the IRS would have to consider 
before committing to new targets.
                combating tax scams and identity thieves
    Question. In recent years, thousands of people have lost millions 
of dollars and their personal information to tax scams and fake IRS 
communication. Scammers use the regular mail, telephone, fax or email 
to set up their victims and regularly alter their tactics to perpetrate 
crimes in new ways. Even tax professionals are being targeted by 
identity thieves. On July 11, the IRS announced a new ``Don't Take the 
Bait'' awareness campaign aimed at tax professionals who may be 
vulnerable to sophisticated spear- phishing cybercrimes.

  --What resources is the IRS devoting to fighting tax scams? Have 
        successful prosecutions of scammers provided any measurable 
        deterrent effect?

    Answer. We have devoted significant resources to fighting tax scams 
and our work has had a measurable effect. The prosecutions by India and 
the United States resulted in a measurable drop in calls by scammers. 
Initially, the number of calls reported to TIGTA dropped from 40,000 a 
week to 1,000 a week. Unfortunately, the number of calls reported to 
TIGTA is creeping back up to 7,000 a week, indicating that we still 
have a problem.
    The Criminal Investigation (CI) Division, specifically, continues 
to devote significant resources in the battle against Tax Related ID 
Theft. In fiscal year 2017, as of July 31, CI has dedicated 13.9 
percent of its direct investigative time to this effort representing 
over 295,000 investigative hours. During that time, CI initiated over 
300 new investigations and over 450 identity thieves were sentenced. 
Additionally, CI has worked with partners within the IRS Security 
Summit to focus outreach efforts addressing the emerging schemes 
targeting tax professionals and payroll service providers. Examples of 
these efforts include generating a YouTube video warning tax 
professionals of the need to maintain an Information Security Plan, 
delivering presentations at regional and national conferences, and 
working with private sector entities within the tax eco-system to 
enhance information security. CI also works closely with IRS operating 
divisions to ensure data losses involving tax preparers and payroll 
service providers receive enhanced screening for ID Theft. As of August 
17, 2017, CI forwarded information on over 431 incidents involving data 
losses that affected 372,776 taxpayers.
    CI has noticed a downward trend in the street level crime. However, 
it has seen an increase in sophisticated and complex computer 
intrusions, spear phishing, and remote accesses takeovers that resulted 
in high consistency Stolen Identity Refund Fraud. As a result, IRS CI 
will continue to provide RICS (Return Integrity & Compliance Services) 
with updated information and personal identifying information for 
revenue protection.
    Question. What additional measures would help the IRS to better 
detect fraud and halt refund fraud schemes in their tracks?
    Answer. Several additional measures would help us to better detect 
fraud and halt refund fraud schemes. Combating the sophisticated 
criminals committing identity theft is a never-ending process that 
requires significant resources. Over the last several years, we have 
made steady progress against identity theft thanks to the collaborative 
efforts of the Security Summit. This strong, unique partnership between 
the public and private sectors has allowed us to coordinate efforts on 
many different levels and put in place many new and productive 
safeguards. These efforts to date have significantly affected the tax 
ecosystem. We continue to devote significant time and attention to this 
challenge and are committed to doing all that we can to prevent the 
payment of fraudulent refunds, pursue the perpetrators, and assist the 
victims.
    While the PATH Act provisions are assisting us in effectively 
administering refundable credits, we need further statutory authority. 
Currently, the IRS lacks statutory authority to address, at the time of 
filing, claims in excess of lifetime limits and the lack of required 
documentation. Instead, we must address these errors through audits, 
which takes longer and requires more resources. Granting the IRS the 
authority to correct such errors at filing (correctable error 
authority) would increase our ability to address more of the improper 
claims and errors we identify and decrease improper payments of 
refundable credits. We requested this additional authority in the 2018 
budget.
    In addition, since paid tax preparers prepare more than half of the 
returns filed for refundable credits, requiring them to meet minimum 
competency standards, through testing and continuing education, would 
help promote high quality services from paid tax preparers, improve 
voluntary compliance, and foster taxpayer confidence in the fairness of 
the tax system. This requirement would benefit all taxpayers, including 
those claiming refundable credits. We requested this additional 
authority in the administration's 2018 budget.
    Question. Is the IRS working in conjunction with other Federal 
agencies, such as the Federal Trade Commission and the U.S. Postal 
Service, to alert consumers?
    Answer. We conducted an extensive consumer education effort on tax 
scams and schemes for several years, making it a key part of filing 
season information for taxpayers, as well as a central component of 
communications work in the Security Summit effort. The Summit, a joint 
project between the IRS, State tax agencies, and the private-sector tax 
industry, has highlighted Identity Theft (IDT) and tax scams in joint 
communications since 2015. This outreach effort has included working 
with numerous private-sector partners as well as Government agencies, 
including the Federal Trade Commission (FTC). We have actively 
participated for several years with the FTC's identity theft efforts, 
participating in panels, issuing joint communications, and sharing 
information on their respective websites. For example, the IRS 
participated in FTC IDT awareness weeks in January 2016 and 2017. 
Similar communications efforts have been made with dozens of State tax 
agencies participating in the Security Summit.
    Question. To what extent is IRS working with paid preparers and the 
software industry to leverage their resources and share information 
about emerging threats? What are your expectations of the recently 
launched ``Don't Take the Bait'' campaign?
    Answer. We chartered the Identity Theft Tax Refund Fraud 
Information Sharing and Analysis Center (IDTTRF-ISAC) in December 2016 
and began pilot operations at the start of this filing season on 
January 23, 2017. The IDTTRF-ISAC is a natural result of our Security 
Summit activities, which began in 2015 to look holistically at the tax 
refund IDT problem across the lifecycle of a tax return. The purpose of 
the IDTTRF-ISAC is to share IDT tax refund fraud information, data, and 
related analysis with public and private entities to detect, prevent, 
and deter IDT tax refund fraud. As of late April 2017, the IDTTRF-ISAC 
has 36 member organizations from State departments of revenue and tax 
software and tax preparation industries. The two primary capabilities 
being piloted this year are: sharing of tax ecosystem alerts and 
analyzing leads generated by the tax software and tax preparation 
industry, as well as other member data.
    Tax ecosystem alerts are akin to a neighborhood listserv for the 
tax ecosystem. Members report and share tax ecosystem threats they 
encounter so that others can protect themselves against the same or 
similar threat. Past threats have included employer W-2 breaches, 
compromised return preparers, new schemes, and dark web chatter about 
system vulnerabilities. Because of Security Summit workgroup efforts, 
we are preventing more identity theft this year than last year, we are 
detecting fewer fraudulent refund claims, and fewer people are 
reporting that they have become tax-related identity theft victims. The 
IRS continues to prevent more fraudulent refunds at the door, which has 
a cascading effect on individuals reporting they've become victims of 
identity theft. The number of people reporting to the IRS that they 
were victims of IDT declined from 698,700 in calendar year (CY) 2015 to 
376,500 in CY 2016--a 46 percent drop. This downward trend has 
continued into 2017.
    We have also worked with State and industry participants to 
implement a Rapid Response team for the efficient communication of 
emerging threats. These alerts are shared with partners and in the ISAC 
functionality.
    We designed the ``Don't Take the Bait'' campaign to warn tax 
professionals to beware of spear phishing emails, a common tactic 
cybercriminals use to target practitioners. The expectation is that 
practitioners would become more aware of the types of cyber security 
threats facing their businesses and clients. This awareness should also 
lead to the establishment or improvement of cybersecurity plans to 
protect taxpayers and the IRS from the loss of critical personally 
identifiable information. We have been pleased at the significant media 
coverage thus far to our weekly releases warning against various 
threats to the public, tax preparers, and businesses.
            improving services for tax refund fraud victims
    Question. For several years, the National Taxpayer Advocate has 
endorsed an approach that would assign a single designated IRS account 
representative to tax-related identity theft and refund fraud victims 
to help navigate the case through the process from intake through 
disposition and maintain control of the taxpayer's case. This would 
improve the current scheme whereby an already frustrated victim has to 
often speak with multiple different assistors and frequently has to re-
explain or resubmit their cases.

  --What consideration is the IRS giving to the National Taxpayer 
        Advocate's proposal to assign a designated IRS account 
        representative to victims of tax refund fraud for consistent 
        service from intake to disposition? Why is such an approach not 
        feasible or preferable?
  --What other steps has the IRS taken to improve the handling of tax 
        refund fraud and identity theft and with what results?
  --What more should be done to assist victims?

    Answer. Our work on IDT and refund fraud touches nearly every part 
of the organization. Helping victims and reducing the time it takes to 
resolve cases is a top priority for the IRS.
    During 2015, the IRS centralized IDT victim assistance policy, 
oversight, and campus case work into a new Identity Theft Victim 
Assistance (IDTVA) organization within the W&I Division. IDTVA can work 
IDT cases from beginning to end, providing an improved taxpayer 
experience.
    In the victim assistance area, we have reduced the time it takes to 
resolve a case. For most cases, the average time is now less than 120 
days, but for more complex cases, resolution can take up to 180 days. 
This timeframe is substantially less than a few years ago, when cases 
could take over 300 days to resolve. While this change marks a 
significant improvement, we continue to look for ways to shorten this 
time and ease the burden IDT places on these taxpayers.
    Whenever possible, the same employee processes multiple claims 
(often for multiple years) from the same taxpayer to make sure there is 
consistent processing. In January 2015, the IRS developed automation to 
associate IDT documentation with existing IDT cases/category codes. In 
April 2016, we expanded the programming to include the association of 
documentation with new categories of work resulting from the 
centralization effort under the IDTVA organization.
    Centralization of IDTVA work enabled full capabilities to use the 
Correspondence Imaging System in handling the IDT cases with current or 
past compliance activity. This change has significantly affected our 
ability to resolve those cases more quickly. Since implementation, we 
resolve those cases in fewer than 120 days 75 percent of the time, 
compared to 34 percent prior to implementation.
    Our toll-free hotline for IDT victims helps taxpayers reach a 
trained IDT specialist any time during business hours, without having 
to rely on the availability of a single IRS employee. Customer service 
representatives staffing this specialty line can review the taxpayer's 
case file and respond to the IDT victim's call. While we believe this 
approach provides the best possible experience for the victim, we are 
aware that sometimes the customer service representative cannot respond 
to the IDT victim's call. For these instances, beginning on August 1, 
2017, we implemented a process for IDT victims to have direct contact 
with the employee working their IDT cases. The customer service 
representative will provide the IDT victim with a different toll-free 
number to call the employee working his or her case directly. If the 
employee is unavailable to answer the IDT victim's call, the victim can 
leave a message for the employee, and the employee will return the 
victim's call within 5 business days. In addition, we expanded 
procedures to achieve a single point of contact when a victim's case 
spans multiple years.
            restoring irs streamlined critical pay authority
    Question. As part of the 1998 restructuring of the IRS, Congress 
authorized some unique special personnel flexibilities to help the IRS 
recruit and retain highly skilled employees with specialized expertise. 
``Streamlined critical pay authority'' permits the IRS to bring in up 
to 40 uniquely qualified experts for 4 year appointments to revitalize 
and enhance the IRS workforce. The original authority had a 10 year 
sunset and was renewed in the fiscal year 2008 FSGG bill for 5 
additional years, but has now lapsed as of September 30, 2013. The 
President's fiscal year 2018 budget seeks language to reinstate the 
authority.

  --I understand that other than addressing funding requirements, one 
        of the IRS's top priorities for the fiscal year 2018 
        appropriations cycle is the reinstatement of streamlined 
        critical pay authority. How has the IRS used streamlined 
        critical pay authority and what have been the primary benefits?
  --What types of positions has this authority enabled the IRS to fill?
  --What are the ramifications if this now-expired authority is not 
        renewed?

    Answer. Since its inception under the Restructuring and Reform Act 
of 1998 (RRA '98), the IRS has found the Streamlined Critical Pay (SCP) 
authority to be an enormously valuable tool in recruiting top tier 
talent from private industry. The tool has been particularly valuable 
in recruiting for positions in the Information Technology (IT) 
organization where external talent has contributed greatly to our 
keeping pace with the technological advances needed to provide world 
class service to the American taxpayer. We have used the authority to 
recruit individuals with specific expertise in sensitive, high-level 
initiative areas such as:

  --IT Engineering
  --IT Architecture
  --Cybersecurity
  --Online/Web Services

    In addition to being a useful tool in Information Technology, the 
hiring authority has also been invaluable in helping to fill positions 
in sophisticated and complex areas of international taxation, risk 
management, and data analytics. Because the IRS has not been able to 
approve new SCP appointments since the authority expired on September 
30, 2013, we have lost all SCP appointees through either appointment 
expiration or separation.
    The incumbents were sitting in technical, highly-specialized 
positions where internal successors with the requisite skills to fill 
the position are not readily available to backfill behind the SCP 
appointee. Reinstating the SCP authority would allow us to recruit and 
hire other highly-specialized executives for critical positions to help 
deliver our mission and achieve modernization. To remain with the IRS 
absent SCP authority, SCP appointees would have to competitively apply 
to an open Senior Executive Service (SES) vacancy announcement and 
obtain SES certification from the Office of Personnel Management (OPM) 
prior to the end of their appointment. This process can take upwards of 
6 months to complete. To bring their salary in line with the pay cap 
limitations set under the Executive Schedule, SCP appointees would 
incur a significant pay cut to their annual rate of basic pay by 20 to 
30 percent. Due to each appointee's high-level of expertise and 
technical abilities within his or her related fields, each will be more 
than capable of obtaining salaries and compensation packages far 
exceeding IRS's capabilities in the private sector.
    The SCP authority allowed the IRS to hire top-caliber executives 
under an abbreviated timeline. Once a candidate has accepted an SCP 
position, IRS can bring the individual on-board within four to 6 weeks. 
This includes time to complete the required background and tax checks, 
as well as allowing the individual to provide sufficient notice to his/
her current employer. In rare cases, due to the critical nature of the 
position, IRS on-boarded a SCP appointee in as few as 2 weeks.
    This streamlined hiring capability was crucial in recruiting 
highly-skilled professionals. Particularly in the information 
technology and cybersecurity fields, the demand for top recruits can be 
so aggressive that a speedy hiring process, along with a competitive 
compensation offer, can be the difference between hiring a ``game 
changing'' executive and losing one to a competitor in either the 
public or private sector. Additionally, the SCP authority allows the 
Commissioner to set pay up to, but not exceeding, the Vice President's 
salary. This flexibility allows the IRS to attract candidates we would 
normally not be able to reach due to the pay limitations under the 
Executive Schedule.
    We used the SCP authority for 171 appointments between October 1, 
1998, and September 30, 2013, when the authority expired. The IRS has 
three SCP executives on-board; the last of whose term will expire on 
September 29, 2017. Since SCP was extended in 2008, the number of SCP 
positions has ranged between three (as of August 17, 2017) and 30 
(March 2010).
     irs management and performance challenges for fiscal year 2017
    Question. Each year, the Treasury Inspector General for Tax 
Administration (TIGTA) evaluates IRS programs, operations, and 
management functions to identify the areas of highest vulnerabilities 
to the Nation's tax system. On October 6, 2016, TIGTA issued its 
assessment enumerating the top 10 management challenges for 2017. The 
number one priority challenge TIGTA cited is security over taxpayer 
data and protection of IRS resources.
    TIGTA reported that while the IRS recognizes the growing challenge 
it faces in establishing effective authentication processes and 
procedures, the IRS has not established a service-wide approach to 
managing its authentication needs. Consequently, the level of 
authentication the IRS uses for its various services is not consistent. 
TIGTA emphasized that while the IRS is evaluating potential 
improvements to existing authentication methods to prevent identity 
theft, the IRS is not developing overall strategies to enhance 
authentication methods across IRS functions and programs.

  --Mr. Koskinen, what are your perspectives on TIGTA's identification 
        of the most challenging management concerns facing the IRS?

    Answer. Each year, TIGTA identifies the IRS's major management and 
performance challenges based on the findings and results of prior audit 
work and other analyses. TIGTA then designs and delivers an audit plan 
with audit work focused in each of the top 10 areas. In fiscal year 
2017, TIGTA reported IRS top management and performance challenges, in 
order of priority, as:

     1.  Security Over Taxpayer Data and Protection of IRS Resources
     2.  Identity Theft and Impersonation Fraud
     3.  Implementing the Affordable Care Act and Other Tax Law Changes
     4.  Improving Tax Compliance
     5.  Reducing Fraudulent Claims and Improper Payments
     6.  Improving Tax Systems and Expanding Online Services
     7.  Providing Quality Taxpayer Service Operations
     8.  Impact of Global Economy on Tax Administration
     9.  Protecting Taxpayer Rights
    10.  Achieving Program Efficiencies and Cost Savings

    TIGTA included identity theft as a new challenge in fiscal year 
2017, removing human capital from the list. We certainly agree these 
areas represent important challenges and opportunities for the IRS.
    TIGTA's Fiscal Year 2017 Annual Audit Plan contained 168 new or in-
process audits focused on these 10 challenges. Leadership and 
management enterprise-wide are actively engaged throughout the audit 
process and appreciate our auditors' objective reviews of IRS programs 
and processes. We carefully consider all reported findings and 
recommendations.
    I personally appreciate TIGTA's insightful and continued attention 
to the most challenging concerns the IRS faces, and consider TIGTA a 
partner in helping the IRS achieve its mission.
    Question. How does the IRS under your leadership integrate the 
findings and recommendations for corrective action suggested by GAO and 
TIGTA audits into strategic management decisionmaking and budget 
planning processes?
    Answer. As mentioned above, we carefully consider all reported 
findings and recommendations by TIGTA and the Government Accountability 
Office (GAO). We must ensure we use our budget and resources to address 
the most significant vulnerabilities identified. Since 2015, the GAO 
has provided a list of its Priority Recommendations, asking us to focus 
on the recommendations it cited as having the highest priority.
    Responsible officials at the management and executive level must 
assess whether taking corrective action in the finding area is mission-
critical and if funding is available. If funding is not available when 
management is responding to the reported findings, a business unit may 
place a recommendation on hold and leadership may periodically assess 
its status throughout the budget cycle. As of August 15, we have 219 
outstanding corrective actions in our inventory, with another 18 on 
hold. More than 100 new corrective actions will be added to our 
inventory as fiscal year 2017 audit activity concludes.
                       irs reporting requirements
    Question. In November 2016, the IRS issued Internal Revenue Notice 
2016-66. There have been numerous complaints that this notice imposes 
burdensome and duplicative information reporting requirements on 831(b) 
Captives, their owners and, in some cases, even their service 
providers.

  --Will the IRS commit to carefully reexamine the requirements imposed 
        by this Notice, including meeting with small and medium-sized 
        businesses that are impacted by new reporting requirements to 
        understand their concerns?

    Answer. We issued Notice 2016-66 late last year to identify certain 
micro-captive transactions as transactions of interest because they 
have the potential for tax avoidance or evasion. As you note, the 
notice requires disclosure from participants in the identified 
transactions and their material advisors. These disclosures allow the 
IRS to gather information to determine which transactions are or have 
the potential to be abusive tax avoidance transactions. We have begun 
to evaluate the information we have received in these disclosures to 
determine what steps are appropriate as we work toward addressing 
potential tax abuse in this area.
    To minimize the burden of the disclosure requirements, we carefully 
crafted the objective criteria in Section 2 of Notice 2016-66, which 
describes the micro-captive transactions that are subject to 
disclosure. Specifically, we require disclosure only if an insured 
entity or a related party owns at least 20 percent of an electing 
section 831(b) captive insurance company, and for the most recent five-
year period the captive insurance company either has liabilities less 
than 70 percent of its premiums earned or has made its capital 
available to the insured entity or a related party.
    We requested comments from the public about the notice and received 
28 comments and 6 congressional inquiries, including this Question for 
the Record. In addition, we met with those who requested meetings and 
responded to telephone calls regarding the notice. Subsequently, the 
United States Tax Court issued its first decision on a micro-captive 
transaction challenged by the IRS (Avrahami v. Commissioner, 149 T.C. 
No. 7, filed August 21, 2017), concluding that the entity purported by 
the taxpayers to be a micro-captive insurance company was not an 
insurance company and holding that payments made to that entity did not 
qualify as insurance premiums. We will continue to evaluate the 
disclosures received and developments in this area.
                                 ______
                                 
            Questions Submitted by Senator Joe Manchin, III
                     modification of tax documents
    Question. Commissioner Koskinen, IRS taxpayer notices are the 
primary mode by which the IRS communicates with taxpayers. As you often 
say, in an effort to prevent phone scams involving people impersonating 
IRS officials ``If you are surprised to be hearing from us, you aren't 
hearing from us.''
    However, the way that IRS communicates with taxpayers by mail is 
frustrating to many. Ten percent of IRS notices don't reach their 
intended audience, which represents a total failure of communications 
at roughly twice the industry average. When a taxpayer receives a 
notice, it is often an indecipherable block of text using stock 
language and no visual or graphical clues as to what the taxpayer 
should do or why.
    Moreover, IRS plans to address its high failure rate, which involve 
moving to online communications, are destined to be incomplete 
solutions at best.
    My recommendation would be for IRS to learn from the best practices 
at use in industry. When I get a statement for a credit card or 
utility, it uses color, modern iconography, and clear text because that 
credit card or utility knows that it is in their interest and my 
interest for me to be able to understand the information that is being 
conveyed.

  --When will IRS implement color and graphics in order to make its 
        notices more understandable?

    Answer. I agree that we need to ensure that our communications with 
taxpayers are as clear as possible. We began to revise notices in 2010 
to comply with the Plain Writing Act of 2010. Since 2010, we have 
reviewed all new and revised notices for compliance with the Plain 
Writing Act on a continuing basis. Our goal is to create notices that 
are clear, concise, and well-organized and that follow best practices. 
We do not have the color printers necessary to produce color notices. 
We need to conduct more in-depth analysis of the requirements necessary 
to determine a full implementation schedule and cost.
    Question. What is IRS doing to reduce its undeliverable mail 
problem?
    Answer. Over the past several years, we have implemented several 
mailing best practices to reduce undeliverable mail. To obtain the most 
current valid address, we run a series of address update routines. 
Following industry best practices, we use commercial address hygiene 
software approved by the United States Postal Service (USPS) that 
validates each address. We also consult the USPS National Change of 
Address (NCOA) dataset so our records are updated to reflect the most 
current address available. In 2013, we began using USPS Full Service 
Intelligent Mail barcodes that provide the ability for enhanced 
tracking and improved address quality. We are also exploring several 
other address initiatives, including providing a secure method for 
taxpayers to change their addresses online.
    We have improved since 2010 when TIGTA issued its report about 
undeliverable mail. The report stated that IRS fiscal year 2009 
undeliverable mail volume was 19.5 million (201 million mailed). The 
fiscal year 2016 undelivered mail volume was 16.3 million (215 million 
mailed). The current fiscal year 2017 IRS deliverability of mail rate 
is 92.6 percent. This rate is lower than the industry average. Most 
undeliverable mail is caused by a taxpayer moving and not providing a 
forwarding address or providing a bad, uncorrectable address.
                          tax-payer assistance
    Question. Commission Koskinen, as you mention in your testimony, 
there's no question that the efficient operation of the Internal 
Revenue Service is integral to the functioning of our Government. Plain 
and simple, our Government needs revenue to work.
    For many citizens, especially those in rural areas like West 
Virginia, the Internal Revenue Service has, in fact, become less of a 
service. As the IRS continues to find ways to cut costs, access to 
paper forms and assistance has continually been reduced. Furthermore, 
the switch to offering online services may be favorable for some--but 
only for people who have broadband access and feel comfortable using 
the Internet. Unfortunately, this is not the case for many West 
Virginians.
    Many West Virginians simply want to pay what taxes they owe and 
comply to the best of their ability. It just makes sense that the IRS 
would want to help people comply before they need to file so that we 
don't waste resources on the back end through enforcement measures and 
cause our citizens unnecessary headaches.

  --In the budget justification, a cut of $153 million is proposed to 
        the office of Taxpayer Services. How does this funding 
        reduction contribute to improving the service aspect of the 
        Internal Revenue Service?

    Answer. We provide service through a variety of channels, including 
toll-free service, walk-in assistance, correspondence, and a growing 
range of online self-assistance tools funded by the Operations Support 
account, not from the Taxpayer Services account. We support the 
Administration's efforts to reform the Federal Government and deliver 
services in the most efficient manner possible. Funds are provided to 
help us update our out-of-date IT infrastructure. We are committed to 
providing services that will satisfy taxpayer needs by taking advantage 
of the latest tools and technology aimed at transforming the entire 
taxpayer experience. We continue to develop ways to provide our 
services so taxpayers can conveniently and securely engage us at the 
time and place of their choosing.
    To do that, we need to continue to invest in new information 
technology and services. Reducing funding in Taxpayer Services may 
affect level of service on the phones and in-person interaction, 
depending on the volume of interactions. However, investing in our 
online capabilities will improve our ability to provide our services as 
more and more taxpayers choose to interact with us online in a secure, 
virtual environment in the same manner they do with other financial 
institutions. The more often taxpayers successfully obtain the 
information and help they need by visiting IRS.gov and using our online 
tools, instead of calling or visiting, allows for greater capacity to 
help those taxpayers who prefer or need to interact with us on the 
phone or in person.
                                 ______
                                 
             Questions Submitted to Hon. J. Russell George
          Questions Submitted by Senator Christopher A. Coons
                      implications of funding cuts
    Question. In your fiscal year 2018 budget request, you seek 
$161.113 million in appropriated funds. This proposed level represents 
a cut of $8.521 million (5 percent) below the $169.6 million in current 
year resources, and would appear to necessitate a significant reduction 
in TIGTA's workforce.
    Can you describe the implications of this funding level on staffing 
of critical TIGTA audits and investigations?
    Answer. Nearly 75 percent of TIGTA's budget supports labor and 
benefit expenses so that a cut in the fiscal year 2018 budget requires 
a reduction in labor costs and Full-Time Equivalents. Staffing for both 
the Office of Audit and the Office of Investigations will be reduced 
resulting in a decreased number of investigations and audits. TIGTA's 
Office of Investigations will be limited in its ability to respond to 
every allegation of Internal Revenue Service (IRS) employee misconduct 
and it will extend the amount of time it takes to investigate all of 
the allegations received by TIGTA. The budget cut will also affect 
TIGTA's ability to conduct investigations and audits of the IRS's 
electronic taxpayer data sharing programs. This is critically important 
as international criminals continue to target and exploit the IRS's 
data systems. TIGTA's Office of Audit will have a higher percentage of 
staff devoted to mandated audits versus high-risk audits.
    Question. With less resources, could TIGTA expect to experience a 
decline in the high-risk audits currently conducted that have had 
quantifiable positive outcomes such as cost savings, revenue 
protection, and taxpayer privacy and security benefits?
    Answer. Yes, with less resources, the Office of Audit will initiate 
less audits in areas such as information security, international tax 
compliance, and identity theft. Additional resources would allow TIGTA 
to more fully support critical audit priorities.
    Question. In fiscal year 2016, TIGTA realized several laudable 
accomplishments including $14.6 billion in increased or protected 
revenue, $40.8 million in cost savings; and $487 million through 
significant investigative work, for a commendable return on investment 
of $90 for every $1 invested. Do you believe a funding cut could 
adversely impact TIGTA's ability to sustain those successes?
    Answer. Yes. With less resources, the Office of Audit will initiate 
less audits in high-risk areas identified through our risk-based 
strategic planning. A reduction in the number of audits would adversely 
impact the amount of financial benefits resulting from the Office of 
Audit's work. Similar to the Office of Audit, the budget cut will 
reduce the number and complexity of TIGTA's investigations, especially 
in the IRS's automated environment where the majority of high-level 
criminal exploitations are occurring.
                   safeguarding taxpayer information
    Question. Like Inspectors General in other Federal departments and 
agencies, TIGTA issues an annual report regarding the top management 
challenges facing agencies. In TIGTA's top management challenges report 
of October 6, 2016, protecting the confidentiality of taxpayer 
information by the IRS was identified as the #1 priority concern for 
fiscal 2017.
    Why do you consider protecting the confidentiality of taxpayer 
information by the IRS to be the most critical challenge and what 
recommendations do you have for responding to this challenge?
    Answer. The threat landscape has become more prominent than ever. 
Bad actors are relentless and persistent in their pursuit of monetary 
gain. Recent cyber events against the IRS have illustrated that these 
bad actors are continually seeking new ways to attack and exploit IRS 
systems and processes in order to steal tax information for the purpose 
of identity theft and filing for fraudulent tax refunds. From the IRS 
Get Transcript incident to the FAFSA IRS Data Retrieval Tool incident, 
we have witnessed where the IRS closed one systemic weakness only to 
find that these criminals discovered another means to pilfer tax 
information from the IRS. Our investigations and audits have also 
identified significant internal threats to protecting the 
confidentiality of taxpayer information.
    For these reasons, we believe protecting the confidentiality of 
taxpayer information remains the top management challenge for the IRS. 
To assist the IRS in meeting its fiduciary responsibility to protect 
taxpayer data, we perform an array of cybersecurity audits and 
investigations of the IRS and make recommendations so the IRS can 
improve its security posture.
    Our audits have assessed the IRS's ability to protect its systems 
and data from external threat. For example, we have conducted audits of 
the Get Transcript online application and electronic authentication 
platforms and made recommendations to develop a Service-wide strategy 
that establishes consistent oversight of all authentication needs 
across IRS functions and programs, ensures that the level of 
authentication risk for all current and future online applications 
accurately reflects the risk, and ensures that the authentication 
processes meet Government Information Security Standards. In just one 
of our investigations involving the Get Transcript exploitation, 
TIGTA's agents and analysts were able to identify and cause freezes on 
tax accounts that could have resulted in over $168 million dollars in 
fraudulent IRS tax refunds.
    In addition to external threats, the IRS must ensure its systems 
and data are protected against internal threats. These threats may 
appear in the form of malicious insiders or disgruntled employees who 
seek to misuse their access privileges for personal gain. These threats 
may also come in the form of employees who unintentionally or 
accidentally do something that may create a security weakness that may 
be exploited by others or unnecessarily expose data to unauthorized 
access and/or disclosure.
    For example, TIGTA audits of various internal systems have 
highlighted the following problems: users have been given more access 
privileges than their job requires; systems have not been updated with 
security patches on a timely basis, and high-risk security 
vulnerabilities have not been mitigated as required. OI's data analysis 
techniques are instrumental in identifying IRS employees who access 
taxpayer records without authorization, then use the information for 
illegal activities. In one recent investigation, TIGTA identified an 
IRS employee who accessed the IRS data of thousands of names, dates of 
birth, and Social Security Numbers from IRS data systems and then filed 
hundreds of fraudulent returns that claimed over $550,000 in fraudulent 
tax refunds. The IRS employee worked with two co-conspirators to cash 
the refunds. As a result of TIGTA's investigation, the former employee 
was sentenced to serve over 9 years in Federal prison and was ordered 
to pay over $438,000 in restitution.
    Question. Do you believe the IRS is doing enough to address 
deficiencies in the security and effectiveness of authentication 
methods for access to information systems?
    Answer. Our audits have found that the IRS has performed well at 
protecting its perimeter network against cyberattacks. In that regard, 
we believe the IRS is doing enough to ensure hackers are not successful 
in their attempts to directly attack the IRS's Internet-facing 
applications. However, the IRS must make significant gains in its 
deployment of audit trails for all of its data systems to enable TIGTA 
and the IRS to identify IRS employees who abuse their access authority 
in order to steal or improperly manipulate taxpayer data (i.e., prevent 
insider threats). In addition, other audits have shown that much work 
needs to be done to strengthen the IRS's internal security posture.
    In regards to the effectiveness of authentication methods for 
access to information systems, we have found that the IRS continues to 
take steps in response to TIGTA's recommendations to provide more 
secure authentication, including the implementation of two-factor 
authentication, and strengthening application and network controls. 
However, as noted, we remain concerned about the IRS's logging and 
monitoring capabilities over all connections to IRS online services. We 
currently have two audits in process that will provide updated progress 
and assessments on authentication controls to online services: Review 
of the Online Transcript Delivery System and Electronic Authentication 
to IRS Online Services. Both audit reports are expected to be issued in 
October 2017.

                         CONCLUSION OF HEARINGS

    Senator Capito. Again, I thank you all and this 
subcommittee is hereby adjourned.
    [Whereupon, at 11:35 a.m., Wednesday, July 26, the hearings 
were concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]