[Senate Hearing 117-]
[From the U.S. Government Publishing Office]


 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2022

                              ----------                              


                        WEDNESDAY, MAY 19, 2021

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

    The subcommittee met at 2:01 p.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Christopher Van Hollen (Chairman) 
presiding.
    Present: Senators Van Hollen and Hyde-Smith.

                        INTERNAL REVENUE SERVICE


          opening statement of senator christopher van hollen


    Senator Van Hollen. Good afternoon everybody. This hearing 
will come to order. And I will be brief because there's lots of 
material to cover today. First, I want to welcome Senator Hyde-
Smith. This is our first hearing as Chairman and Ranking Member 
of the Financial Services and General Government Appropriations 
Subcommittee. And I'm looking forward to working with you, 
Senator, as we move forward on the appropriations process this 
year. I also want to thank our staff on both sides of the 
aisle.
    I want to welcome our witnesses. IRS Commissioner Charles 
Rettig, Former IRS Commissioner Charles Rossotti, and IRS Tax 
Advocate Erin Collins. Thank you all for making the time to be 
here in person today.
    And I want to give a special shoutout to Commissioner 
Rettig for your recent efforts at the helm of IRS to ensure a 
quick and efficient roll-out of the expanded child tax credit 
benefits so that we're secured in the American Rescue Plan. 
Funds will start reaching families as soon as July 15. And that 
support will help cut child poverty nearly in half this year.
    Today's hearing will focus on two big issues at the IRS. 
The first is narrowing America's tax gap, identifying the 
components of that gap, and working to close it. The second is 
improving taxpayer services. And I believe that these two 
issues are deeply linked.
    Our tax system runs on the assumption that Americans 
voluntarily comply with the Nation's tax laws. Each year, 
millions of people pay what they owe, fill out their tax forms, 
and send them in to the IRS honestly and on time. And they 
trust that others do the same.
    But we know that while most people pay what they're 
required to under the law, some do not. There is anywhere from 
$500 billion to $100 trillion in taxes each year that are owed 
and not paid. That is a staggering figure. This is commonly 
called the tax gap, but that gap is really a gorge.
    The yearly amount of tax dollars owed is more than the 
Federal Government spent on Medicaid in 2020. And that is an 
insurance program that helps more than 72 million Americans. 
These are billions of dollars that are legally due under 
current tax law, and which could go toward funding crucial 
policies that support everyday Americans.
    The first tool in our arsenal to help narrow this gap is 
taxpayer services, which help people know what they owe and 
when they owe it. And taxpayer services help take the headache 
out of tax season at least as much as possible.
    Better taxpayer services are also essential for the IRS to 
deliver vital programs for American families, such as the 
economic impact payments that have gone out during the 
pandemic, and the child tax credit payments that will go out 
starting in July.
    The second tool is to invest in enforcement capabilities. 
We need to crack down on those who evade their tax 
responsibilities, those who refuse to do their part to help our 
country. This does not mean targeting working families who are 
already paying their taxes in withholding from each and every 
paycheck.
    Closing the tax gap and ensuring the IRS has the resources 
they need for taxpayer services and enforcement must be top 
priorities. And this hearing will help us better understand how 
to tackle each of these pressing challenges.
    With that, I want to end where I began by thanking all of 
you for coming here today to share your perspectives. And 
before we begin, I would like to turn to Senator Hyde-Smith for 
her opening statement. Senator.


             opening statement of senator cindy hyde-smith


    Senator Hyde-Smith. Thank you very much Mr. Chairman for 
that warm welcome. And it's an honor to be here today as 
Ranking Member, I am certainly grateful for this opportunity on 
this important subcommittee, and looking forward to crafting 
very responsible legislation for fiscal year 2022.
    I also want to welcome the IRS Commissioner to our hearing 
today. We look forward to your testimony this afternoon and to 
the testimony of our second panel as well.
    While there are significant disagreements in Congress on 
what the proper level of taxing and spending should be, there 
should be no doubt that taxes legally owed to the government 
should be paid. The so-called tax gap is a serious issue, and I 
appreciate the Chairman calling this hearing today to draw 
attention to this topic.
    In recent years, we have heard wildly varying estimates 
from the IRS on what the tax gap actually is. And I just look 
forward to hearing from the Commissioner today about the issue 
and his proposed solutions. I also look forward to hearing from 
the witnesses on our second panel today about their 
perspectives on both the tax gap and how the IRS can improve 
the quality of services that it provides to the taxpayers. 
Today, I expect one of the recurring things from our witnesses 
to be the need of more resources at the IRS.
    While more money always seems to be the proposed solution 
in Washington, DC, I remain concerned that funding increases 
marketed as the solution to the tax gap will instead be 
diverted away from enforcement and squandered on IT projects 
that have a checkered history of success.
    Since 2013, the IRS has transferred $1 billion away from 
its tax enforcement account to its operations support account 
to address its information technology and systems. Over the 
past 14 months, the IRS has received more than $3 billion in 
supplemental funding, including $2 billion for its systems and 
technology. Unfortunately, the IRS is still planning to divert 
more than $200 million away from the enforcement this year, to 
yet again address IT cost.
    Congress originally designated these funds to beef up the 
IRS enforcement ranks. Unfortunately, we have seen the IRS 
repeatedly call attention to the tax gap, and then divert the 
funds somewhere else. I hope the Commissioner will reconsider 
this practice and instead today focus on exploring common 
ground on how to increase compliance with our tax laws and to 
increase services to the taxpayers.
    Mr. Commissioner, I know you have your hands full with 
responding to additional responsibilities placed on the agency 
and adapting to COVID-19. And I just want to thank you for your 
service. And I look very forward to your testimony today. Thank 
you, Mr. Chairman.
    Senator Van Hollen. Thank you, Senator. Our first witness 
today is IRS Commissioner Charles P. Rettig. Prior to his 
confirmation in September 2018, Commissioner Rettig worked in 
private practice for 36 years, representing thousands of 
individuals and businesses before the IRS, the Department of 
Justice tax division, Federal and State courts, and State 
taxing authorities.
    He received his B.A. in Economics from the University of 
California at Los Angeles, as well as a J.D from Pepperdine 
University, and an L.L.M. in taxation from New York University.
    Commissioner, thanks again for being here. You can now 
begin your testimony.
STATEMENT OF CHARLES RETTIG, COMMISSIONER, INTERNAL 
            REVENUE SERVICE
    Mr. Rettig. Thank you very much, Chairman Van Hollen, 
Ranking Member Hyde-Smith, and Members of the Subcommittee. 
Thank you for the opportunity to discuss our efforts to help 
taxpayers, especially during the COVID-19 pandemic, and our 
ongoing efforts to address the tax gap.
    Before I begin, I want to thank Congress for recognizing 
the efforts of our employees during the pandemic, and on 
working on behalf of the country. Our employees have worked 
extremely hard for the last 14 to 16 months to bring about 
unprecedented relief to vulnerable taxpayers and to taxpayers 
across the system.
    We're very proud and privileged to have had that 
opportunity. And we're exceptionally proud of the recognition 
that we've received from Members of Congress individually and 
collectively. We are proud to serve our country. We want to 
provide meaningful services of a nature and quality that every 
American deserves.
    The problems facing tax administration today are not new. 
It is not unusual. I'm sitting here with Commissioner Rossotti, 
and a lot of the issues that I have faced during my term so 
far, he faced during his term and Commissioners prior to 
Commissioner Rossotti faced during their term.
    It will take time to overcome the challenges of the past. 
The agency will continue to struggle to replace more than 
50,000 workers lost through attrition over the next 6 years to 
expand our workforce, to support implementation of our multi-
year integrated modernization plan, to implement the provisions 
of the Taxpayer First Act, and to continue enhancing both 
meaningful service and compliance efforts.
    Like all Federal agencies, the IRS is best suited to 
provide services Americans deserve and appropriately enforce 
the tax laws in support of compliant taxpayers when it receives 
the resources that it needs to do so.
    At a time when the IRS has faced consequential resource 
challenges, it has been called upon to take on new 
responsibilities. Our response to the unprecedented COVID 
challenges illustrates the importance of every American to the 
IRS and the importance of the IRS to every American.
    During the pandemic, in a bit more than 14 months, IRS and 
Treasury employees delivered 472 million payments for EIP 1, 2, 
and 3, totaling more than $807 billion, plus 214 million 
individual refunds totaling over $573 billion. The total of 
those EIP payments and the refunds to date--because it includes 
filing season 2020 and 2021--is more than $1.38 trillion during 
the pandemic from an agency that I shut down in March of 2020.
    We sent our employees home. We closed about 500 facilities, 
had to flip into a teleworking virtual environment. I'm 
extremely proud of our employees, the efforts that they went 
through to be able to accomplish what we have accomplished to 
date. I respect the fact that Members of Congress, the Chair, 
and Ranking Member have echoed those compliments already.
    Turning to the 2021 filing season, this season has gone 
smoothly. At the peak, we were receiving 335 submissions per 
second. Yesterday, which was the conclusion of filing season 
2021, we received a record 15.36 million returns. Through May 
14, the IRS has processed more than 124 million individual 
returns, including almost 89 million refunds, totaling $253 
billion. We have also received, in total, more than 260 million 
Federal, State, and business returns and are processing those. 
And we're very proud of the volume and our ability to handle 
this during the pandemic.
    With respect to the unemployment insurance and the change 
in the law, which made the first $10,200 excludable for certain 
taxpayers, we adjusted the first payments for the people who 
filed before the law changed. The first refunds went out last 
week. Refunds will continue to go out through the summer, and 
the vast majority of those folks will have to take no action.
    As to the Advanced Child Tax Credit, we are on track to 
issue the first payments on July 15. We have completed over 50 
percent of the build of the two separate tools, which will 
allow people to go online to check the status and to provide us 
with filing information. Individuals will also be able to 
interact with us in person and on the phone, with respect to 
the 6-month advanced tax credit provisions.
    We did not have, nor did most others, a pandemic playbook. 
We worked hard with limited resources in a lot of arenas. We 
made some mistakes; we tried our best. We think that looking 
back, folks will be very proud of the role of the Internal 
Revenue Service during the past year.
    As I turn it back to you, we should not overlook the fact 
that about 96 percent of the gross revenue of the United States 
of America flows through the Internal Revenue Service. Our 
Agency is important to the country and to the people of the 
country, and the fact is that we're reflective of the people of 
the country. I'm very proud of the diverse nature of our 
workforce and the communities that we have presence in. We are 
on the ground in these communities.
    We are available for Congress and others to continue 
serving the people of this country. We're very proud of our 
role. With that, Mr. Chairman, Ranking Member, I turn it back 
to you, and am available for questions.

    [The statement follows:]
              Prepared Statement of Hon. Charles P. Rettig
                              introduction
    Chairman Van Hollen, Ranking Member Hyde-Smith and Members of the 
subcommittee, thank you for the opportunity to update you on IRS 
operations, especially the work we have been doing to help taxpayers 
during the COVID-19 pandemic.
    I am pleased to report the 2021 filing season has gone smoothly in 
terms of tax return processing and the operation of our information 
technology (IT) systems. Through May 7, the IRS received more than 
126.7 million individual Federal tax returns and issued more than 84.8 
million refunds totaling more than $242.8 billion. A more detailed 
discussion of the filing season is provided later in this testimony.
    At the same time, the IRS is working closely with the Treasury 
Department to implement the American Rescue Plan Act of 2021 (ARP Act) 
as quickly as possible to help the Nation's taxpayers. As part of these 
efforts, we took immediate steps to begin delivery of the third round 
of Economic Impact Payments (EIP) to millions of Americans within days 
of the legislation being signed on March 11. Through May 12, we have 
disbursed about 165 million payments totaling approximately $388 
billion. The IRS is also coordinating with Treasury on another 
important provision, which provides periodic advance payments of the 
Child Tax Credit (CTC) to eligible Americans. The IRS will be working 
hard to deliver this program quickly and efficiently.
    Now in my third year as Commissioner, I remain extremely proud to 
be working for the IRS and excited about the future of our agency. We 
are grateful for the increased and multi-year funding that will allow 
the IRS to (i) modernize our systems, (ii) increase our workforce and 
their capabilities through a robust recruitment and training program, 
(iii) implement the provisions of the Taxpayer First Act, including 
improving the taxpayer experience, and (iv) conduct compliance 
activities that support our voluntary tax compliance system.
    My experiences as Commissioner have strengthened my belief that a 
fully functioning IRS is critical to the success of our Nation. In 
fiscal year 2019, the IRS collected $3.56 trillion in taxes and 
generated almost 96 percent of the funding that supports the Federal 
Government's operations. We serve and interact with more Americans than 
nearly any other public or private organization.
    This unprecedented pandemic illustrates the significant role that 
the IRS plays in the overall health of our country. We have been called 
to provide economic relief during this national crisis while also 
fulfilling our routine responsibilities of tax administration.
    I am proud that IRS employees have responded admirably to the 
COVID-19 situation by quickly facilitating financial assistance and 
administrative relief to hundreds of millions of deserving and needy 
Americans--including distributing $800 billion in Economic Impact 
Payments since the spring of last year. People at the IRS continually 
demonstrate just how much they care, and how important the agency is to 
our country, by their heroic response to events over the past year. At 
the same time, the IRS remains focused on its core mission, striving to 
serve taxpayers in a manner that facilitates voluntary compliance by 
providing meaningful guidance and proper levels of staffing and support 
at points of significant taxpayer interaction.
    Given the events of the past year, we appreciate the $3.1 billion 
in additional funding we received from Congress to respond to the 
COVID-19 pandemic and implement the EIPs and other tax changes. In 
addition, our base fiscal year 2021 funding level (excluding these 
additional resources) represents a 3.6 percent increase over fiscal 
year 2020. However, it will take time to overcome the challenges of the 
past decade, and the agency will continue to struggle to replace 
employees lost through attrition and expand our workforce, support 
implementation of our multi-year Integrated Modernization Business Plan 
as designed, and continue enhancing meaningful service and compliance 
efforts that will earn the trust and respect of every American and 
improve our working relationships with taxpayers and others in the tax 
community.
    We respect and proudly serve all taxpayers, none more or less so 
than any other. We must operate from their perspective, through their 
eyes, enhancing their experiences while striving to provide clear, 
meaningful guidance and services, in the language of their choice, 
wherever possible. In support of compliant taxpayers, we must 
aggressively pursue non-compliant taxpayers by maintaining robust, 
visible civil and criminal enforcement efforts. We are making a 
difference, and we want to continue to successfully pursue our mission 
on behalf of our great country.
           investing in the irs to improve tax administration
The President's Fiscal Year 2022 Discretionary Funding Request
    The President's Fiscal Year 2022 Discretionary Request advances key 
Treasury Department priorities, including ensuring that all Americans 
are treated fairly by our tax system. The request provides increased 
funding for the IRS to provide additional oversight of high-income and 
corporate tax returns, ensuring that the wealthy and well-connected pay 
what they owe and play by the same rules as everybody else.
    To ensure that all Americans are treated fairly by the Nation's tax 
system, including that the wealthy and corporations comply with 
existing laws, the discretionary request provides $13.2 billion for the 
IRS, an increase of $1.2 billion or 10.4 percent above the 2021 enacted 
level.
    With this funding, the IRS would: increase oversight of high-income 
and corporate tax returns to ensure compliance; provide new and 
improved online tools for taxpayers to communicate with the IRS easily 
and quickly; and improve telephone and in-person taxpayer customer 
service, including outreach and assistance to underserved communities.
    In addition to increases for base IRS enforcement funding, the 2022 
discretionary request provides an additional increase of $417 million 
in discretionary funding through a proposed discretionary cap 
adjustment for tax enforcement as part of a multiyear tax initiative 
that would increase tax compliance and increase revenues. Altogether, 
the 2022 discretionary request would increase resources for tax 
enforcement by $900 million.
    I would be happy to discuss the request further when we submit our 
more detailed Budget Justification later this spring.
The American Families Plan
    A robust and sustained investment in the IRS is necessary to ensure 
it can do its job of administering a fair and effective tax system. In 
the American Families Plan, the President has included a series of 
proposals in that overhaul tax administration and provide the IRS the 
resources and information it needs to address tax evasion. All told, 
these reforms will generate an additional $700 billion in tax revenue 
over the course of a decade, net of the investments made. Specifically, 
the tax administration reforms will:

  --Provide the IRS the resources it needs to stop sophisticated tax 
        evasion.--The IRS needs additional resources to pursue costly 
        tax evasion. These cases are not easy to resolve; the average 
        investigation of a high-wealth individual takes 2 years to 
        complete and often requires the IRS to commit substantial 
        resources. Moreover, the lack of adequate investment in 
        compliance has significant revenue consequences. A key 
        component of this initiative is the provision of a sustained, 
        multi-year stream of funding. Altogether, the proposal directs 
        roughly $80 billion to the IRS over a decade to fund an array 
        of priorities--including overhauling technology to improve 
        enforcement efforts, which is more effectively implemented with 
        the assurance of a consistent funding stream. This investment 
        will also facilitate the IRS hiring and training auditors to 
        focus on complex investigations of large corporations, 
        partnerships, and global high-wealth individuals. The 
        President's proposal directs that additional resources go 
        toward enforcement against those with the highest incomes, 
        rather than Americans with actual income of less than $400,000.
  --Provide the IRS with more complete information.--When the IRS has 
        information from third parties, income is accurately reported, 
        and taxes are fully paid. However, high-income taxpayers 
        disproportionately accrue income in opaque sources--like 
        partnership and proprietorship income--where the IRS struggles 
        to verify tax filings. This reform aims to provide the IRS 
        information on account flows so that it has a lens into 
        investment and business activity--similar to the information 
        provided on income streams such as wage, pension, and 
        unemployment income. Importantly, this proposal provides 
        additional information to the IRS without any increased burden 
        for taxpayers. Instead, it leverages the information that 
        financial institutions already know about account holders, 
        simply requiring that they add to their regular, annual reports 
        information about aggregate account outflows and inflows. 
        Providing the IRS this information will help improve audit 
        selection so it can better target its enforcement activity on 
        the most suspect evaders, avoiding unnecessary (and costly) 
        audits of ordinary taxpayers.
  --Overhaul outdated technology to help the IRS identify tax 
        evasion.--Elements of IRS IT systems are antiquated and make it 
        difficult for the IRS to identify those who are not paying what 
        they owe and to help those who want to comply. The President's 
        proposal provides the IRS much-needed resources to modernize 
        its technological infrastructure. Leveraging 21st century data 
        analytic tools will enable the IRS make use of new information 
        about income that accrues to high-earners and will help revenue 
        agents unpack complex structures, like partnerships, where 
        income is not easily traced.
  --Improve taxpayer service and deliver tax credits.--A well-
        functioning tax system requires that taxpayers be able to 
        interact with the IRS in an efficient and meaningful manner. 
        Inadequate resources often mean that IRS employees are unable 
        to provide taxpayers timely answers to their tax questions. 
        Service enhancement will improve the ability of the IRS to 
        communicate with taxpayers securely and promptly. Importantly, 
        the proposal also includes the necessary resources to ensure 
        that the IRS effectively and efficiently delivers tax credits 
        to families and workers, including newly expanded Child Tax 
        Credits and Child and Dependent Care Tax Credits.
  --Regulate paid tax preparers.--Taxpayers often make use of 
        unregulated tax preparers who lack the ability to provide 
        accurate tax assistance. These preparers submit more tax 
        returns than all other preparers combined, and they make costly 
        mistakes that subject their customers to painful audits, 
        sometimes even intentionally defrauding taxpayers for their own 
        benefit. The President's plan calls for giving the IRS the 
        legal authority to implement safeguards in the tax preparation 
        industry. It also includes stiffer penalties for unscrupulous 
        preparers who fail to identify themselves on tax returns and 
        defraud taxpayers (so called ``ghost preparers'').
                    update on the 2021 filing season
    The IRS workforce navigated preparation for the 2021 filing season 
while continuing to implement COVID-related relief measures and 
delivering an extended 2020 filing season. These circumstances 
challenged our ability to make the necessary annual changes for filing 
season 2021. Nonetheless, as a result of the ongoing efforts of our 
employees, the IRS is on track to deliver a smooth filing season again 
this year.
    I'm pleased to report the filing season opened successfully on 
February 12. To give you an idea of how well our systems performed, the 
IRS over that initial weekend received a total of 55 million 
submissions, which includes individual Federal returns along with other 
items such as State tax returns, amended returns and returns filed by 
businesses. At the peak that weekend, our IT systems enabled us to 
successfully receive 335 submissions per second.
    The February 12 opening of the filing season was slightly later 
than in previous years. The delayed start gave the IRS time to do 
additional programming and testing of our systems following the 
December 27 tax law changes that provided the second round of EIPs and 
other benefits. The additional programming and testing ensured that 
people would receive their needed tax refunds quickly, and also receive 
any remaining stimulus tax credits they might be eligible for as 
quickly as possible.
    The delay in the start of the filing season did not add any 
additional delays to refunds on returns claiming the Earned Income Tax 
Credit (EITC) or the Additional Child Tax Credit (ACTC). By law the IRS 
cannot issue these refunds before February 15. This filing season, the 
IRS was able to issue refunds for EITC and ACTC returns on February 16 
and 18, 2021. We expect those refunds were promptly available in 
taxpayer bank accounts if they chose direct deposit and there were no 
other issues with their tax return. We have encouraged taxpayers to e-
file their returns and to check the Where's My Refund online tool on 
IRS.gov or the IRS2Go app to find out their estimated refund date.
    On March 17, Treasury and the IRS announced that the deadline for 
individuals to file Form 1040 and pay their Federal income tax has been 
extended from April 15, 2021 to May 17, 2021. IRS Notice 2021-21 
provides details on the additional tax deadlines which have been 
postponed until May 17. After carefully considering all the options, 
the Department of the Treasury and the IRS determined a limited 2021 
filing season deadline extension for individuals filing Form 1040 to 
May 17, 2021, was in the best interest of tax administration.
    All individuals had the option to obtain an automatic extension of 
time to file a Federal income tax return until October 15, 2021. 
Taxpayers needed to request the filing extension on or before May 17, 
2021. For most, the request only required their name, address and 
Social Security number.
    While we recognized the desire and importance of requests to 
further extend the 2021 filing season deadline or expand the scope of 
the extension, doing so would have posed a significant potential risk 
to implementing the ARP Act. Additionally, it could have further 
delayed delivery of Recovery Rebate Credits (RRCs) and the third round 
of EIPs, as well as refunds--including EITC and CTC payments--to the 
most vulnerable Americans.
    As part of our work on the filing season, the IRS continues to 
spread the word about EIPs by reminding people who didn't initially 
qualify for a payment--or didn't receive the full amount--that they 
should check to see if they qualify to claim the payment as an RRC. The 
EIPs represented advance payments of the RRC, and this credit can be 
claimed on the 2020 tax return, by taxpayers and by individuals who 
don't normally file. The 2020 Instructions for Forms 1040 and 1040-SR 
include a worksheet that can be used to calculate the amount of any RRC 
for which a taxpayer is eligible. Individuals are encouraged to file 
electronically to claim this credit, and most can do so at no cost with 
IRS Free File, including those who do not have a filing requirement.
    This process should not be a burdensome action for individuals, 
including those who normally do not file. We realize that delayed 
processing of some 2019 returns could affect the ability of some 
taxpayers to claim the RRC, so we are working as quickly as possible to 
process outstanding returns.
    The IRS also will continue working with groups inside and outside 
the tax community to get information directly to people experiencing 
homelessness and other groups to help them receive payments in this 
latest round of EIPs. Our message to these groups is: For those who 
don't normally file a tax return, they will need to file a basic return 
with the IRS. Doing so will provide the IRS with the information we 
need to deliver an EIP to them. Once that return is processed, the IRS 
can quickly send stimulus payments to an address selected by the 
eligible individual. People do not need a permanent address or a bank 
account, and the IRS will still issue the payment even if they haven't 
filed a tax return in years.
    Another important filing season reminder involves people who 
received unemployment compensation during 2020. We are working to make 
sure they understand the tax law governing unemployment benefits they 
received pursuant to U.S. law or that of a State. In general, these 
payments are taxable and must be reported as income on taxpayers' 
Federal returns. These individuals should receive Form 1099-G showing 
the amount they were paid, along with any Federal income tax they 
elected to have withheld. Since some States do not mail Form 1099-G, 
some recipients will need to get the electronic version of the form 
from their State's website.
    However, the ARP Act exempts the first $10,200 in unemployment 
compensation from Federal taxation for individuals with income below 
$150,000. For those who received unemployment benefits last year and 
have already filed their 2020 tax return, they should not file an 
amended return.
    As set forth in an IRS news release (IR-2021-71) issued on March 
31, 2021, because the change occurred after some people filed their 
taxes, the IRS will take steps in the spring and summer to make the 
appropriate change to their return which may result in a refund. The 
first refunds are expected to be made in May and will continue into the 
summer. For those taxpayers who already have filed and figured their 
tax based on the full amount of unemployment compensation, the IRS will 
determine the correct taxable amount of unemployment compensation and 
tax. Any resulting overpayment of tax will be either refunded or 
applied to other outstanding taxes owed. For those who have already 
filed, the IRS will do these recalculations, in two phases starting 
with those taxpayers eligible for the $10,200 exclusion. The IRS will 
then adjust returns for those married filing jointly taxpayers who are 
eligible for the $20,400 exclusion and others with more complex 
returns.
    There is no need for taxpayers to file an amended return unless the 
calculations make the taxpayer newly eligible for additional Federal 
credits and deductions not already included on the original tax return. 
For example, the IRS can adjust returns for those taxpayers who claimed 
the EITC (or other credits) and, because the exclusion changed the 
income level, they may now be eligible for an increase in the EITC 
amount which may result in a larger refund. However, taxpayers would 
have to file an amended return if they did not originally claim the 
EITC but now are eligible because the exclusion changed their income. 
These taxpayers may want to review their State tax returns as well.
    The IRS is also working to alert taxpayers to an identity theft 
scam involving these payments. There have been instances of criminals 
using stolen identities to fraudulently apply for and receive 
unemployment compensation. For many individuals who did not claim 
unemployment compensation last year, this issue came to light when they 
began receiving 1099-G forms with amounts they never applied for or 
received. We encourage anyone in this situation to file an accurate 
return only reporting the taxable funds they actually received, report 
this fraud to the state agency that issued the 1099-G, and ask the 
agency to issue them a corrected 1099-G showing the correct amount. 
They can also go to dol.gov/fraud for more information about how to 
reach their State workforce agency and report this type of fraud.
    During this filing season, the IRS has continued to emphasize the 
safety and health of taxpayers and our employees. For that reason, our 
face-to-face operations have been limited to appointment services, with 
provision for assisting taxpayers with hardships on a walk-in basis. We 
believe that this year, it is more critical than ever for taxpayers and 
tax professionals to take advantage of e-filing and online and virtual 
services to help them with their taxes. We continue to encourage 
taxpayers to use electronic tools to the extent possible, including 
IRS.gov, where they will find a wealth of helpful information.
    For taxpayers who need help preparing and filing their returns, I'm 
pleased to report that the Volunteer Income Tax Assistance (VITA) and 
Tax Counseling for the Elderly (TCE) programs supported by the IRS have 
again been providing free assistance to eligible individuals. I'm very 
proud of the work our VITA and TCE partners do during the filing season 
to help taxpayers at approximately 8,000 sites around the country, 
including military bases. This year, to ensure the health and safety of 
taxpayers and volunteers, many volunteer tax preparation sites have 
been offering virtual help to taxpayers, either over the phone or 
online. Some sites have still offered in-person tax help, but safety 
and social distancing have been emphasized.
    Understanding the need to plan for the future and the desire to 
maintain a safe operating environment, the IRS will continue operating 
under its current posture until further notice, and we will continue to 
follow--and where possible, exceed--applicable CDC guidelines for 
public health and safety and measures. We will continue to balance 
responding to urgent tax administration needs with doing everything 
possible to protect taxpayers and our employees.
    We appreciate the patience and understanding of taxpayers and tax 
professionals as we work to deliver the filing season during this 
challenging time. I am confident the IRS will deliver for the Nation, 
just as it has during other times of national urgency.
Phone Level of Service During the 2021 Filing Season
    An important service delivery channel, during the filing season and 
throughout the year, continues to be our toll-free telephone line, 
which constitutes one of the world's largest customer service phone 
operations. This filing season through April 16 the IRS has handled 
approximately 25.4 million taxpayer calls, with nearly one third, or 
8.1 million, answered by our Customer Service Representatives (CSRs). 
The rest were calls made to lines providing automated messages 
containing helpful tax information.
    When we were submitting our Congressional Budget Justification 
level of service (LOS) estimates for the 2021 filing season last spring 
(before the pandemic, EIP1, EIP2, EIP3, partial exclusion of 
unemployment compensation, and other tax law changes emanating from 
several rounds of legislation), there was no way to predict the 
pandemic and the impact it would have on our call volume, filing 
season, and hiring. We are still working through the impacts of COVID-
19, which created staffing shortages and closures, and we have been 
experiencing a much higher-than-expected call volume coupled with an 
increase in call handling time caused by greater call complexity due to 
three rounds of EIPs and other tax law changes.
    We attempted to mitigate these issues by starting the CSR hiring 
process for the 2021 filing season earlier than normal, with the 
anticipation that the high unemployment rate throughout the country 
might result in larger applicant pools in all locations. However, this 
was not the case. We set a CSR hiring goal for fiscal year 2021 of 
5,000 CSRs but have encountered significant hiring challenges during 
the pandemic, including low applicant pools in some locations, delays 
in fingerprinting due to closed facilities, and delays in processing 
applicants virtually. As such, the IRS has onboarded approximately 
3,800 CSRs (our largest-ever hiring of phone assistors for a filing 
season), for a total of approximately 13,760 CSRs. We also expect to 
hire an additional 1,000 CSRs to be ready this summer with the funding 
provided in the ARP Act for implementation of the child tax credit 
changes, to address potential call volume increases.
    While we have many CSRs, we also experienced record-breaking and 
unprecedented phone demand this year. For example, on March 15, 2021, 
we had 8.6 million calls, which is approximately 1,500 calls per 
second. That volume was a 600 percent increase compared to normal call 
traffic. During a typical filing season, we average 2 to 3 million 
calls each day. Our ability to manage telephone demand is constrained 
by two factors: the number of assistors available and the capacity of 
the telephone routing equipment used to place callers in line for 
service. Accordingly, our current LOS for the 2021 filing season is 
significantly less than where we want to be, and that may fluctuate 
further based on increasing call volumes throughout the summer.
Improving Service to Diverse Communities
    We view our efforts through the eyes and experience of those we 
proudly serve. An important way the IRS serves taxpayers during the 
filing season and throughout the year is by communicating with them in 
their most comfortable language. In preparing for the 2021 filing 
season, the IRS took important steps to further improve the amount of 
service we provide in multiple languages.
    Prior to this filing season, the IRS for years had been working to 
provide tax information in additional languages. For example, many 
pages of IRS.gov are available in Spanish, Vietnamese, Russian, Korean, 
Haitian Creole and Chinese (Simplified and Traditional), and basic tax 
information is available on the website in 20 languages. And the IRS 
continues to expand its efforts to post and link to information 
available in multiple languages on social media platforms, including 
Twitter and Instagram.
    I'm proud to say that this filing season, we are providing the Form 
1040 in Spanish for the first time. Also for the first time, the 2020 
Form 1040 gives taxpayers the opportunity to indicate whether they wish 
to be contacted in a language other than English.
    Other recent changes include making Publication 1, Your Rights as a 
Taxpayer, available in 20 languages. In addition, we have issued a new, 
streamlined version of Publication 17, Your Federal Income Tax, that is 
easier to navigate and faster to download than previous versions, and 
is now accessible on most personal electronic devices. The new 
Publication 17 is available in English, Spanish, Chinese (Traditional 
and Simplified), Vietnamese, Russian and Korean.
    Additionally, taxpayers who interact with an IRS representative now 
have access to over-the-phone interpreter services in more than 350 
languages. The IRS has also recently begun inserting information about 
translation services and other multilingual options into the high-
volume notices we send out to taxpayers. Our diverse workforce is proud 
to be reflective of the diverse communities we serve.
       providing relief to taxpayers during the covid-19 pandemic
Delivering Economic Impact Payments
    While delivering last year's filing season--which was the longest 
in history--and preparing for the 2021 filing season, IRS employees 
also worked many long hours to implement major provisions of the 
Coronavirus Aid, Relief and Economic Security (CARES) Act, including 
developing new tools and meaningful guidance to deliver the first round 
of EIPs in record time. In fact, millions of Americans started seeing 
EIPs show up in their banking accounts within 14 days after the March 
27, 2020 enactment of the CARES Act. IRS employees successfully 
disbursed more than 160 million payments of nearly $275 billion in this 
first round of EIPs.
    The IRS also quickly delivered the second round of EIPs included in 
the Tax Relief Act enacted on December 27, 2020. The IRS disbursed 
approximately 147 million payments totaling about $142 billion and in 
many cases, these payments started posting to bank accounts just 2 days 
after the law's enactment. IRS employees worked nonstop through the 
holidays to get these payments out, while remaining hard at work 
preparing for the 2021 tax filing season. I want to emphasize the 
amount of advance preparation our employees did, once it started to 
become apparent that a second round of payments would be enacted, in 
order for us to achieve such a quick turnaround.
    Another factor helping us speed the effort on the second round of 
EIPs was our ability to build off and use the data we had accumulated 
in delivering the first round. That accumulation of data again helped 
us move quickly on delivery of the third round of EIPs that began in 
March.
    The vast majority of people did not need to take any action to 
receive an EIP, either in the first or second round, and we have been 
working to ensure the same is true for the third round of EIPs. The IRS 
calculated and automatically sent the payments to taxpayers as well as 
others eligible, including many people who may not normally need to 
file returns, such as senior citizens with modest incomes, others 
receiving Social Security retirement, survivors or disability insurance 
benefits, and railroad retirees. The IRS also issued EIPs last year to 
those whose only income is from Supplemental Security Income (SSI) 
benefits and people receiving disability compensation, pension or 
survivor benefits from the Department of Veterans Affairs (VA).
    In our initial work on EIPs during the spring of 2020, the IRS 
worked cooperatively with the Social Security Administration (SSA), the 
VA, and other government agencies to pull these agencies' information 
into our systems to ensure that we could send payments to these groups 
of people without requiring them to file a return or take any other 
action. These agencies provided critical help that allowed the IRS to 
reduce the burden for these individuals, including reducing the need 
for them to seek in-person tax return preparation to file a return. 
This effort was a significant step beyond anything the IRS was able to 
do during previous stimulus efforts to help taxpayers. For the first 
round of EIPs in the spring of 2020, these groups received their 
payments in four to six weeks after the CARES Act was signed into law.
    Again this year, the IRS began working with the SSA and the VA 
early on to help ensure we could deliver the latest round of EIPs as 
soon as possible to non-filers who receive Federal benefits such as 
those described above. Because information about who receives Federal 
benefits changes over time, the IRS needed these agencies to provide 
updated 2021 information, and we requested this information as quickly 
as possible so we could process the beneficiary data and make these 
automatic payments.
    For the latest round of EIPs, we have surpassed key milestones in 
last year's timeframe, and we will continue working to get these 
payments out to Federal beneficiaries as soon as possible. Thus far we 
have disbursed more than 19 million EIP3 payments with a total value of 
more than $26 billion to Retirement, Survivors, and Disability 
Insurance (commonly referred to as ``Social Security'') program 
beneficiaries who didn't file a 2020 or 2019 return and who did not use 
the Non-Filers tool last year. We have also disbursed more than 3 
million payments to SSI beneficiaries with a total value of nearly $5 
billion, and nearly 85,000 payments with a total value of more than 
$119 million to Railroad Retirement Board beneficiaries. Additionally, 
we have disbursed more than 320,000 payments, with a total value of 
$450 million, to VA beneficiaries who receive Compensation and Pension 
benefit payments but who don't normally file a tax return.

    In its efforts last year to quickly deliver EIPs and provide 
information to eligible recipients, the IRS provided two new online 
tools:

  --The Non-Filers tool, which was launched on IRS.gov on April 10, 
        2020 and available through November 21, 2020 in both English 
        and Spanish, allowed people who normally don't have a filing 
        obligation to enter basic information so that they could 
        receive their payment.
  --The Get My Payment tool, which launched on IRS.gov on April 15, 
        2020 and is available in English and Spanish, allows many 
        taxpayers to check the status of their payment or enter their 
        bank account information to receive their payment 
        electronically, if it was not already provided on a 2019 or 
        2018 tax return or through the Non-Filers tool.

    Since the launch of Get My Payment, nearly 350 million successful 
status checks have been made using this tool. And nearly 15 million 
people have successfully provided their banking information, meaning 
they received their payments much more quickly via direct deposit.
    The IRS has taken significant steps to reach all potential EIP 
recipients throughout each round of EIPs. We extended our reach far 
beyond our normal contacts to many lower-income, military, veterans, 
retired, older, limited English proficient, and homeless communities 
around the country. In fact, we worked with our partners to distribute 
EIP outreach materials in 35 languages within these communities.
    We have continued to ask for assistance from hundreds of local 
community groups and religious organizations, as well as the national 
associations to which they belong, and numerous others to reach into 
their respective communities. We worked with thousands of homeless 
organizations, including more than 300 organizations that became 
``Trusted Partners'' where an unsheltered homeless individual could 
designate to receive their payment. We also expanded the authority of 
Low-Income Taxpayer Clinics (LITCs) to provide return preparation 
assistance for individuals seeking their EIPs. To support these ongoing 
efforts, we developed a special online toolkit containing helpful 
information for groups to use in identifying and getting the word out 
to people who qualify for EIPs. The toolkit, IRS Publication 5420, can 
be found on IRS.gov. We also provided information regarding a similar 
online toolkit to every Member of Congress.
    Also as part of this effort, we mailed a letter in September 2020 
to millions of Americans who might be eligible, but hadn't received an 
EIP and didn't file a return for either 2018 or 2019. We obtained these 
names by performing an extensive internal analysis of records 
corresponding to individuals who did not file returns or receive 
Federal benefits and were not responsive to other EIP outreach efforts. 
These individuals did not typically have a tax return filing 
requirement but had received Forms W-2, 1099s and other third-party 
statements. We sent letters to these individuals to notify them of 
their potential eligibility as we lacked information on: whether they 
would qualify; whether they had eligible dependents; or whether an 
individual may be ineligible due to being claimed as a dependent by 
someone else.
    To help these groups, we extended the initial access to the Non-
Filers Tool five weeks to November 21, 2020. This new deadline provided 
additional time for individuals to use the tool without adversely 
affecting our work on the 2021 filing season. On November 10 we held 
National EIP Registration Day (and supported other similar events), to 
encourage people who had not received a payment to use the Non-Filers 
tool before the November 21 deadline.
    Our outreach effort during delivery of this third round of EIPs 
includes reminding people who did not receive payments in the first or 
second rounds last year that, if they qualify for them, they can 
receive those payments by filing a tax return and claiming the RRC. We 
are also encouraging these people, when filing their return, to check 
to see if they qualify to claim other tax credits, including the EITC 
and the CTC.
    The IRS has also been providing support to Members of Congress who 
have been receiving inquiries from constituents about the payments. To 
help provide these answers, the IRS set up a special online ``EIP 
Mailbox'' last May to which congressional staffs could send inquiries.
    The EIP Mailbox received more emails than we anticipated, with the 
number of emails averaging 700 a day at first and reaching 1,000 a day 
by the summer. To make sure we helped as many people as possible, we 
modified our processes and temporarily reassigned IRS employees to 
respond to these inquiries. By the time we closed the mailbox in 
December, we had received a total of more than 130,000 inquiries and 
resolved an estimated 90 percent of the questions. To accommodate 
inquiries related to the second round of EIPs, we reopened the EIP 
mailbox on January 11, 2021, and it has remained open since then. 
Currently, we are receiving approximately 150 emails a day.
Implementing Business Tax Relief
    Along with EIPs for individuals, the IRS has also been working to 
make sure businesses know about important tax relief available to them, 
and we continue to provide guidance about business tax relief. This 
assistance was originally provided in COVID-relief legislation last 
year. Two important measures, the Employee Retention Credit and the 
Credit for Sick and Family Leave, have already resulted in, as of May 
3, 2021, credit amounts claimed on returns of more than $18 billion. 
These measures were extended and/or modified by the ARP Act as follows:

  --Credit for Sick and Family Leave.--Eligible employers are entitled 
        to receive a refundable (and advanceable) tax credit for the 
        qualified sick leave and family leave they provide to employees 
        dealing with specified health and family issues related to the 
        coronavirus between April 1, 2020, and September 30, 2021. The 
        IRS is working to ensure that eligible employers (employers 
        with fewer than 500 employees and certain governmental 
        employers) know the ARP Act allows them to claim a tax credit 
        for providing leave for employees receiving COVID-19 
        vaccinations and recovering from the vaccines.
  --Employee Retention Credit.--This refundable credit is designed to 
        encourage businesses to keep employees on their payroll. As 
        amended by the American Rescue Plan, the refundable credit is 
        70 percent of up to $10,000 in qualified wages per quarter paid 
        by employers financially affected by COVID-19. Qualifying 
        wages--including health plan expenses--are those paid after 
        June 30, 2021 and before January 1, 2022. The credit was 
        modified to include: eligibility for certain startup 
        businesses; special rules for ``severely financially distressed 
        employers'' that experienced a gross receipts reduction of more 
        than 90 percent; and a 5-year statute of limitations for the 
        IRS to make an assessment of any amount attributable to the 
        employee retention credit.

    In addition, for the Credit for Sick and Family Leave and the 
Employee Retention Credit, the IRS set up a system that allowed 
businesses to claim these refundable credits in advance during 2020 and 
thus have more funds available to keep their workers employed without 
having to wait to claim the credits on tax returns filed in 2021.
    Another important area where Congress provided relief involves net 
operating losses of businesses. The CARES Act includes a provision 
allowing businesses to carry back net operating losses over 5 years and 
obtain tax refunds for those years. The IRS issued Revenue Procedures 
2020-23 and 2020-24 and Notice 2020-26 to clarify this provision and 
help businesses and partnerships take advantage of the relief it 
provides.
Providing Administrative Relief and Protecting Taxpayers
    Along with implementing the CARES Act, the IRS provided significant 
administrative relief in 2020 to ease the burden on taxpayers:

  --A postponement of the deadline for individuals to file Federal 
        returns and pay Federal income tax from April 15, 2020, to July 
        15, 2020. This relief covered all taxpayers with a tax return 
        filing deadline or payment due date between April 1, 2020, and 
        July 15, 2020. As noted above, this year we provided a more 
        limited extension, applying to individuals filing Form 1040, to 
        May 17, 2021.
  --The IRS People First Initiative, under which we temporarily 
        adjusted our processes to help people and businesses during 
        these uncertain times. This included limiting certain 
        collection and examination activities.

    While it has been important to the tax system, and the Nation, for 
the IRS to resume its critical tax compliance responsibilities, we 
continue to assess the wide-ranging impacts of COVID-19 and other 
difficulties people are experiencing.

    To that end, the IRS continues to offer a wide range of taxpayer 
relief options. We are:

  --Doing everything we can under existing rules for immediate, broad-
        based relief from unpaid liabilities resulting from COVID-19 
        issues, including those affected by IRS mail processing and 
        correspondence delays;
  --Removing bureaucratic barriers and expanding flexibilities to all 
        taxpayers whose financial condition has been affected by COVID-
        19; and
  --Balancing the relief provided against the need to serve all 
        taxpayers and uphold the Nation's tax laws.

    When appropriate, the IRS can help taxpayers by abating penalties, 
extending payment plans, expanding access to installment agreements, 
and providing relief for taxpayers having difficulty meeting the terms 
of previously accepted offers to settle tax debts.
    Our initiatives offer help in a variety of ways. Taxpayers without 
income or the ability to pay can request a temporary suspension of 
collection activity through the Currently-Not-Collectible program. 
Taxpayers with balance due amounts may qualify for installment 
agreement options with generous terms and timeframes, and taxpayers 
with existing Online Payment Agreements, or Direct Debit Installment 
Agreements can propose lower monthly payment amounts and update their 
payment due dates. Other penalty relief options include first-time 
abatement for reasonable cause.
    The IRS has also been diligently working to alert taxpayers and tax 
professionals to scams related to COVID-19, especially calls and email 
phishing attempts tied to the EIPs. The IRS and its partners throughout 
the country have been publicizing these scams.
               maintaining irs operations during covid-19
    The IRS's initial efforts to provide relief to taxpayers came 
during Filing Season 2020 and at a time when the agency had to 
temporarily scale back operations to protect the health and safety of 
both IRS employees and taxpayers. Even with our reduced operations, the 
IRS continued to successfully deliver the 2020 filing season, by 
processing electronic tax returns, issuing tax refunds, and accepting 
electronic payments.

    During COVID-19, the IRS has been using innovative approaches to 
make sure our employees can deliver on the agency's mission:

  --We have set records for the number of IRS employees teleworking, 
        thanks to the continued support of our Information Technology 
        (IT) division;
  --Our IT systems continue to perform at a high level. Our internal 
        networks are supporting nearly 61,000 employees online at the 
        same time, all in a secure environment;
  --IT provided the equipment necessary to allow thousands of our 
        customer service representatives (CSRs) to telework, which gave 
        critical help to the IRS in its efforts to resume phone 
        assistance to taxpayers while maintaining the safety of 
        employees during the COVID pandemic;
  --Our external-facing IT systems also continue to work extremely well 
        in a time of increased demand, including filing season systems 
        as well as IRS.gov tools; and
  --We have been able to continue bringing on new employees through the 
        use of a successful virtual onboarding process.

    As part of these efforts, the IRS continues to find ways to provide 
new virtual services and online tools for practitioners to ensure the 
critical work of the agency continues.
    Last summer, for example, we moved quickly to shift our Nationwide 
Tax Forums for tax professionals into an all-virtual setup rather than 
handling these in person at locations across the country. And in our 
30th year of offering the forums, I'm proud to report our virtual 
version last year still attracted more than 10,000 practitioners from 
across the country. This summer, we will again offer the Tax Forums 
virtually.
    Another great example is our announcement earlier this year that we 
are giving tax professionals a new online option to obtain signatures 
from individual and business clients and submit authorization forms 
electronically. This option applies to Form 2848, Power of Attorney and 
Declaration of Representative, and Form 8821, Tax Information 
Authorization. This development is an important first step in our 
ongoing efforts to expand digital options for tax professionals using 
electronic signatures and online uploads.
    New options for taxpayers include the launch last year of an 
electronic filing option for those who need to amend their income tax 
returns. Providing an online filing option for the amended individual 
income tax return--also known as Form 1040-X--has been an IRS goal for 
many years and is a major milestone for us. Electronically accepting 
Form 1040-X posed a number of unique challenges, but we succeeded 
thanks to a great deal of hard work by employees across the agency.
Resuming Operations and Answering Taxpayer Needs
    Last summer, the IRS began resuming operations for non-portable 
services, as more States and local areas also began reopening. As we 
have continued our work during this unusual period, we have been aware 
of the continuing taxpayer needs and the backlog of work at our campus. 
We are investing in our Human Capital Office to ensure that we can hire 
the necessary taxpayer service personnel in our priority areas.
    One area we have worked hard to improve upon is opening the mail. 
Because we had to scale back mail-processing functions last spring due 
to the pandemic, we developed a backlog of unprocessed paper returns 
and other mail. At one point, the backlog reached more than 20 million 
pieces. But since last summer, we have been working through this 
backlog, and we are now current.

    While working to reduce the paper backlog, we also have provided 
relief for taxpayers who sent us mail that was unopened for a period of 
time. For example:

  --For people who had tax refunds affected by our closure, the IRS has 
        paid interest on refunds. These payments, which can sometimes 
        show up as a second deposit, averaged $18 for nearly 14 million 
        taxpayers.
  --For people who made a payment but where there was a delay in when 
        the mail was opened, we credited people on the date the mail 
        was received, not the day we processed the payment.

    As difficult as these last months have been, we have seen many 
examples of how this crisis has brought out the best in people, 
including the IRS workforce. I am proud of what our employees have 
accomplished during the pandemic. Our employees shared the same health 
and safety concerns for themselves and their families as every other 
American. However, they not only went the extra mile in doing their 
jobs; they also made a difference in their communities.
    For example, we saw IRS employees across the country doing some 
amazing things: getting out their sewing machines and creating homemade 
face masks for family members and friends; donating essentials to 
protect first responders on the front lines in their communities; and 
delivering ``care packages'' to seniors in nursing homes. During last 
summer's Feds Feed Families Campaign, employees at our Memphis Campus 
donated a record-breaking 51,800 pounds of food to the Mid-South Food 
Bank!
    Another good example of providing help during the pandemic involved 
our Criminal Investigation division. A group of 12 special agents 
deployed to Travis Air Force Base in Fairfield, California, in March 
2020. They helped provide security and quarantine enforcement at 
hospitals and other locations, such as COVID-19 quarantine sites 
operated by the Department of Health and Human Services (the Assistant 
Secretary for Preparedness and Response and the Centers for Disease 
Control and Prevention).
    It is important to note that, in addition to their efforts during 
the pandemic, IRS employees routinely deliver in times of need for the 
nation when disasters strike. Since 2012, more than 10,000 IRS phone 
assistors have stepped up to help take the burden off the Federal 
Emergency Management Agency's (FEMA) call centers in the aftermath of 
hurricanes and other natural disasters, answering an estimated 1.6 
million calls from storm survivors seeking help. We have also had many 
agents from our Criminal Investigation division provide their help and 
expertise during disasters. For example, in September 2020, a team of 
about two dozen special agents deployed to Oregon in support of those 
fighting wildfires in that State. More recently IRS phone assistors 
were called upon to be ready to help FEMA with respect to the weather-
related difficulties in Texas.
                        ensuring tax compliance
    Enforcement activities of the IRS affect revenues directly, through 
the collection of unpaid taxes, and indirectly, by influencing 
taxpayers' behavior. Nearly all of the IRS's funds are appropriated 
annually by Congress. Appropriations for the IRS fell by about 20 
percent (adjusted for inflation) since fiscal year 2010. About 70 
percent of the IRS's overall budget is for labor, and thus the decline 
in the overall IRS budget resulted in a 15 percent decline in the 
number of full-time employees at the agency (since fiscal year 2010) 
and a 31 percent decline in the number of full-time employees working 
in enforcement roles (since fiscal year 2010). The number of examining 
revenue agents, who handle complex enforcement cases, fell by 35 
percent, and field collection revenue officers, who manage difficult 
collections cases, dropped by 48 percent. The loss of approximately 
17,436 enforcement employees since 2010 has resulted in the examination 
rate for individual returns falling by about 45 percent; for businesses 
with assets equal to or exceeding $10 million, the examination rate 
fell by about 72 percent.
    Despite these resource challenges, the IRS remains committed to 
having a strong, visible, robust tax enforcement presence to support 
voluntary compliance. When taxpayers file their returns, they should 
feel confident others are doing the right thing too. Enforcement of the 
tax laws is critical to ensuring fairness in our tax system. IRS 
employees who collect taxes, audit returns and investigate fraud, as 
well as tax-related identity theft, work hard throughout the year to 
enforce the tax laws while treating taxpayers fairly and respecting 
their rights. This commitment is true across our agency--our divisions 
that deal with individuals, large businesses, small businesses and 
exempt organizations are highly coordinated. In fact, the IRS's Office 
of Fraud Enforcement (OFE), which was created in March 2020, is 
actively encouraging and ensuring this coordination across IRS, 
promoting compliance, strengthening the IRS' response to fraud and 
mitigating emerging threats.
    Over the past 2 years, we have shifted significant examination 
resources and technology to increase our focus on high-income and high-
wealth taxpayers. For example, an IRS initiative announced last year 
involves improving tax compliance among high-income taxpayers by 
increasing visits to those generally with incomes above $100,000 who 
failed to file tax returns in 2018 or previous years. Substantially all 
experienced examiners--those who are the most highly trained with 
substantial accounting skills--are almost entirely focused on tax 
returns that include complex issues, such as high-income taxpayers, 
pass-through entities, multi-national taxpayers involving international 
tax issues, large pension plans, private foundations and the most 
egregious situations.
    As reported in the IRS's 2019 Data Book, the exam coverage rate 
(closed and in-process) for Tax Year 2015 of taxpayers with income of 
$10 million or more was about 8.16 percent (down from almost 23.06 
percent in 2010). The rate for taxpayers with income between $5-10 
million was 4.39 percent; for those with income between $1-5 million 
was about 2.39 percent; for those with income between $500,000-$1 
million was about 1.13 percent; and for those with income between 
$200,000-$500,000 was about 0.55 percent. The IRS receives more third-
party information (Forms W-2s, Forms 1099, etc.) for taxpayers with 
income between $200,000-$1 million than for those above $1 million. 
These audit rates are higher than for any other category of individual 
filers. We expect to see that trend generally continue with Tax Years 
2016, 2017, and 2018.
    We also have new compliance programs addressing virtual currency 
(non-filers and filers), return preparer non-filers, those who fail to 
file Form 8300, Report of Cash Payments Over $10,000, and others. These 
programs require experienced, specialized examiners
    Along with launching our OFE, where technical advisors provide 
fraud policy and operations support to all IRS operations, we also 
created an Office of Promoter Investigations (OPI) within the past 
year. OPI is focused on taxpayers and the promoters of abusive tax 
avoidance transactions, including abusive syndicated conservation 
easements and abusive micro-captive insurance arrangements, as well as 
the use of virtual currencies, offshore transactions and other 
transactions to inappropriately avoid or under-report tax. 
Substantially all of these transactions are engaged in by high-income 
individuals. OPI coordinates Service-wide enforcement activities, most 
often interacting with our Large Business & International division, our 
Small Business/Self-Employed division, OFE, the Office of Chief Counsel 
and our Criminal Investigation division.
    We are also investing in our Human Capital Office to ensure that we 
can hire the necessary enforcement and related personnel in our 
priority areas, such as the oversight of large corporations, 
partnerships and other pass-through entities, and high income/high 
wealth taxpayers.
    The IRS is committed to pursuing those who would intentionally 
evade their tax obligations and commit fraud. We are also pursuing 
those who promote and make use of abusive tax shelters, and are 
especially concerned about certain variations, including abusive 
syndicated conservation easements and micro-captive insurance shelters. 
The IRS Office of Chief Counsel, which appointed a National Fraud 
Counsel last year, is working closely with IRS compliance officers to 
properly and fully develop cases with indicators of fraud across all 
operating divisions, in pursuit of a civil fraud penalty where 
appropriate, or for the most egregious violations, a criminal fraud 
referral. Our Criminal Investigation division also does important work 
to uncover tax fraud,
    Additionally, the IRS--in particular, the OFE and the National 
Fraud Counsel--has been focused on preventing COVID-19-related fraud 
and scams, working closely with the Small Business Administration, the 
Bureau of Fiscal Service and the Department of Justice to prevent and 
stop improper claims for tax credits and see that the unscrupulous 
individuals face appropriate civil and criminal sanctions.
    Importantly, the IRS is using technology to develop new enforcement 
tools. Our advanced data and analytic strategies allow us to catch 
instances of tax evasion that would not have been possible just a few 
years ago. We also recognize that we must evolve our enforcement 
efforts to address new types of tax fraud and criminal behavior. For 
example, the IRS has been working to ensure taxpayers with virtual 
currency transactions understand the tax laws governing virtual 
currency and meet their tax obligations. Our Criminal Investigation 
Cyber Crimes Unit has been involved in new complex types of tax 
enforcement, including: taking down the largest child exploitation site 
operating in the Dark Net utilizing virtual currencies; uncovering 
international money laundering operations involving the theft of 
virtual currencies; and the seizure of terrorism financing sites 
maintained on behalf of al Qaeda, Hamas, and ISIS.
              taxpayer first act: update on implementation
    Even during this challenging period, the IRS is meeting not only 
the immediate needs of taxpayers but is also developing an innovative 
approach to the future of tax administration that will better serve 
everyone, including those in underserved communities.
    The IRS is using its implementation of the Taxpayer First Act 
(TFA), to make significant improvements in the way we serve taxpayers, 
enforce the tax laws in a fair and impartial manner, and ensure our 
workforce collaborates and is well-trained. In January, pursuant to the 
statutory requirement, we submitted our TFA Report to Congress. This 
report includes strategic recommendations to improve the taxpayer 
experience, employee training, and the current agency organizational 
structure. The report is the culmination of input and feedback from our 
employees, our partners in the tax community, and other stakeholders.

    I'm pleased to report that we will have strong, experienced leaders 
guiding us in our efforts to improve the taxpayer experience:

  --Heather Maloy, a former IRS executive, has returned to the agency 
        to be the new director of the Taxpayer First Act Office. 
        Heather held many prominent positions while at the IRS, 
        including Commissioner of our Large Business and International 
        Division.
  --Just two weeks after issuing the Report to Congress, we announced 
        the creation of the Chief Taxpayer Experience Officer position 
        to unify and expand efforts across the agency to serve 
        taxpayers. We selected Ken Corbin, the Commissioner of our Wage 
        and Investment Division, for this role. With more than three 
        decades at the IRS, Ken Corbin is ideally suited to lead our 
        efforts to improve interactions with the IRS for taxpayers and 
        the tax professional community.

    As we move forward on TFA implementation, our Enterprise Case 
Management initiative (ECM) is a major part of our Integrated 
Modernization Business plan and is a critical component in the 
implementation of long-term TFA changes. ECM will allow us to modernize 
key IRS business processes and migrate them to a common case management 
platform. This in turn will allow us to decommission as many legacy 
components and systems as possible. For our employees, implementing ECM 
will mean giving them appropriate access to a 360-degree view of a 
taxpayer's account and also support our ability to give taxpayers more 
digital options in their interactions with us. The employees who 
interact with taxpayers are helping to develop features and services 
that will best help their customers, and they have been the key to the 
success of ECM thus far.
    The Tax Exempt/Government Entities Division's (TE/GE) Exempt 
Organizations Correspondence Unit process was the first business 
process to migrate to our new ECM platform in 2020. This milestone 
transitioned paper-based processes to an electronic format that enabled 
the Correspondence Unit to work more efficiently, speeding up the 
response time to organizations that interact with TE/GE. The lessons 
learned while migrating this business process to ECM will allow us to 
build on this initial success and migrate other business processes 
quickly and efficiently in the coming years. We are currently working 
on migrating the IRS Grants Management program in time to award grants 
under the new system in 2021 to organizations participating in the VITA 
and TCE programs.
    Our progress thus far on implementation of the TFA shows how 
committed IRS employees are to serving the Nation. With our TFA Report 
guiding us, and with ongoing support and feedback from our employees 
and partners in the tax community, we will continue to make 
improvements to ensure the IRS can serve the needs of the Nation's 
taxpayers well into the future.
                               conclusion
    Chairman Van Hollen, Ranking Member Hyde-Smith and Members of the 
subcommittee, thank you again for the opportunity to update you on IRS 
operations, especially our responses to the COVID-19 situation. The IRS 
is dedicated to improving service to taxpayers, modernizing its systems 
and maintaining the integrity of the tax system, while also protecting 
the health of its workers and American taxpayers.
    We believe we have made great strides over the past year and will 
continue this progress with the help of Congress, as we move the agency 
into the future. This concludes my statement, and I would be happy to 
take your questions.

    Senator Van Hollen. I thank you Mr. Commissioner. And I 
want to you and the extraordinary work you and the entire team, 
all the employees at the IRS, have done during these very 
difficult times. And many of those employees are constituents 
of mine in the State of Maryland. But of course, you have part 
of your team and all over the country.
    We're going to do 8-minute rounds because of the, I think, 
the nature of this hearing. We really want to drill into some 
of the keys issues and identify how we can narrow that tax gap.
    Mr. Commissioner, you recently testified that you believe 
the tax gap could be as high as $1 trillion every year. Can you 
discuss the composition of that tax gap? I realize we don't 
have full visibility into it, that's why it is a tax gap. But 
if you could help break it down into some of its larger 
component parts that would help guide our discussion.
    Mr. Rettig. The individual component parts of the tax gap 
information that we provide are not overly difficult. Since 
2001 we've been providing tax gap estimates, which for the most 
part, with respect to individuals, are broken into a non-filing 
tax gap, an underreporting tax gap, and an underpayment tax 
gap.
    The recent testimony that I think you're referring to, 
which was supported by more recent testimony in front of the 
Senate by the Acting Director of our research group, was the 
emphasis and the focus on the fact that our tax gap estimates 
are based on actual audit results randomly performed by non-
specialized agents. That's where we have been receiving 
information since the first tax gap of 2001, moving into the 
present. The most recent tax gap was released in 2019, and it 
related to tax years 2011 to 2013.
    Being sensitive to the fact that the Agency uses the tax 
gap to try to understand where and how to essentially deploy 
resources and limited resources, it was not lost on me when I 
was on the outside that the importance of this tool is the 
importance of the data that we receive and the information that 
we provide.
    The tax gap information most recently that we provided was 
2011 to 2013 and based on actual audit results. The assumption 
is that actual audit results are a good measure. In fact, 
they're the best measure that we might have, but a good measure 
not necessarily so.
    When you look at declining audit resources, you look at 
declining training. For years the Agency has gone with no in-
person training. We've gone to online training, and just quite 
frankly, I don't understand how an individual can learn the 
704(b) regulations online or remotely.
    Tax is complex. We have our agents on the examination side 
put into situations with people who have 20, 30, 40 years 
specialized experience, maybe on the inside, but also on the 
outside, for minute areas of tax law. We put people into that 
room for an examination where, quite frankly, I think the 
terminology that I used last time is that we get outgunned, not 
for a lack of desire on the part of our people.
    I think the comments that you're driving to, which again 
were supported by our Director of Research, is what is the 
difference between the tax gap information that we publish? The 
last published was 2011 to 2013.
    When I was asked, what's my feeling as to the accuracy, 
essentially, of the information that we publish, it was the 
same as when I came onboard. Tax year 2013 is, essentially, 
irrelevant in tax year 2021, if you're looking to where to put 
your resources when you consider the change in the world from 
that period of time.
    You look at, just as an agency, the switch from the IRS 
going from paper to digital, our more recent switch going into 
a virtual environment, but the rest of the world too. I can sit 
here today and, on my phone, adjust----
    Senator Van Hollen. I'm sorry, Mr. Commissioner, I don't 
mean to cut you off, I don't.
    Mr. Rettig. I just go on, and I, you know,----
    Senator Van Hollen. I just got to get to some more 
questions, okay?
    Mr. Rettig. I feel passionate about----
    Senator Van Hollen. I know, I appreciate that. Even with 8 
minutes, I'm going to have to get some more questions in here. 
Because what I'm really trying to get at, since we're trying to 
focus on how to narrow this gap, is not just the overall size 
but what tools you need.
    And you and others have said that there's a high degree of 
compliance by taxpayers where their money is confirmed by three 
third parties, like wage payers, like pensions. But that is not 
the case from pass-through entities, like S corporations or 
partnerships. The President and others have suggested that the 
IRS be given authority to collect additional information from 
banks about this other kind of income.
    And my question to you is do you agree that that has to be 
one of the tools in this arsenal to close the tax gap?
    Mr. Rettig. Increased information reporting and increased 
electronic receipt by the Internal Revenue Service of 
information reporting would be extremely helpful. We also need 
legislative changes. We need certain enforcement support. It is 
a multifaceted approach. It is not a single approach. I don't 
believe that one is maybe more important than the other.
    We need to have the appropriate presence. We also need to 
have an appropriate balance between enforcement and taxpayer 
rights.
    Senator Van Hollen. Sure. But I guess my question is--
because I'm going to ask you about your budget request in a 
minute. But the budget request in terms of the dollars you need 
is not in itself sufficient to close this gap, isn't that 
right?
    Mr. Rettig. That's correct. We cannot audit----
    Senator Van Hollen. Because you would need these other 
tools that the President has talked about, right?
    Mr. Rettig. That's correct.
    Senator Van Hollen. Okay. So, now I want to get to the 
money because it's been reported, I think confirmed, that the 
request--budget request, will be $80 billion over 10 years. And 
that you have projected that with that allocation of money, 
combined with these additional tools we just mentioned, that 
you could close the tax gap by $700 billion over 10 years. Is 
that right?
    Mr. Rettig. That's a Treasury Tax Policy figure that was 
delivered.
    Senator Van Hollen. So, let me ask you this. Because Mr. 
Rossotti has estimated that if we gave the IRS the tools they 
needed, including that third-party verification of income and 
additional resources, that you could potentially get as high as 
$1.4 trillion in narrowing the tax gap over 10 years. What do 
you think about that estimate?
    Mr. Rettig. I believe that if the IRS is given the 
appropriate tools and resources, it can take us a little bit of 
time to implement. We need to train and upscale. I believe that 
the IRS could effectively recover between 10 and 20 percent of 
the tax gap. And that's a meaningful figure. I leave it to the 
economist to determine what actually those recoveries would be.
    Senator Van Hollen. So, I guess, we're anticipating the 
budget request of $80 billion. You mentioned the legislative 
changes required.
    I guess my question then is if we make the legislative 
changes, how much--and we could give you as much as you wanted 
to close the tax gap--what is your maximum estimate of what 
that would be over 10 years if we gave you everything you 
needed?
    Mr. Rettig. The maximum amount that we could recover?
    Senator Van Hollen. Yes, over a 10-year period.
    Mr. Rettig. Because I thought you were going to say the 
maximum amount we would appreciate receiving. We appreciate 
receiving the maximum amount that Congress will allow us to 
receive.
    Based on the information that I've seen, and I see the 
difference, and a lot of different people are analyzing it, I 
don't think it's fair for me to comment without having done the 
homework on these numbers. They range significantly.
    I've seen people say that we could recover $100 billion. 
I've seen the tax policy estimate of $700 billion. I know that 
those were over 10-year periods, and people also tie in a 
succeeding 10-year period. I've seen Commissioner Rossotti's 
figures. I have not gone back and done the homework. And I 
don't think it'd be fair for me as a tax administrator to 
comment on that.
    I do know that the information that we're talking about, 
the multifaceted approach we're talking about, and I'm quite 
respectful to the Ranking Members' comments about the use of 
the funds, but I do know it would be a gamechanger for the 
country in terms of what the IRS would be able to bring from 
amounts lawfully owed to the government.
    Senator Van Hollen. Right. Now, we are talking about the 
amounts, you know, lawfully owed.
    Mr. Rettig. Correct.
    Senator Van Hollen. And I appreciate that. Let me it turn 
over to the Ranking Member for questions.
    Senator Hyde-Smith. Mr. Commissioner, when you testified 
last before this subcommittee in 2019, you told Senator John 
Kennedy that, ``I am not a believer in shifting funds from 
enforcement operations,'' yet the IRS has transferred $295 
million away from its enforcement account since you made that 
statement.
    And you are planning to transfer an additional $208 million 
away from the enforcement account this summer. What are you 
doing to manage the growing IT maintenance cost at the agency? 
And why does the IRS continue to follow a pattern of shining a 
light on enforcement and the tax gap when the public is 
watching, then transfer the money to IT contracts when it's not 
watching?
    Mr. Rettig. I stand by my statements to Senator Kennedy. I 
am an enforcement person. I was recently asked, I have the same 
position, the same thought process that I have on the inside 
that I did on the outside, that every dollar that has left the 
enforcement side of our house to go on operations support has 
been pulled through a very rigorous procedure, and that we do 
not have sufficient funds to maintain our operations support.
    We have a modernization business plan that we launched in 
2019. It was launched as a 6-year plan. We have only received 
55 percent of the amount called for in that plan. In order to 
keep modernization on schedule, we have had to pull resources 
from every part of the service, and we are still not on 
schedule. We do not have the funds to take the activities that 
we need.
    Without appropriate financial support on the operations 
support side of the house, we cannot be effective in 
enforcement. We have to buy things like laptops. And that comes 
out of the operations support.
    Senator Hyde-Smith. Are you having any success on the 
modernization act that you've implemented so far with the funds 
that you have?
    Mr. Rettig. We are. We're actually having considerable 
success. I would appreciate the opportunity to sit with you or 
with your staff and go through where we have been. We're not 
where we would want to be, but we've made huge strides in that 
area.
    Senator Hyde-Smith. And right now, how are we to have 
confidence that the requested funding increase for enforcement 
will not be transferred to IT at this point?
    Mr. Rettig. There is also in the Administration's budget 
that I anticipate, or I was told I think is going to be 
released this week. You'll see support on the Operations 
Support side.
    I am exactly where you are in your mindset of saying 
Enforcement dollars should stay on the enforcement side of the 
house, Operations Support should be on that side of the house. 
We are looking at over a $1 billion deficit on Operations 
Support by 2026. That's to maintain our systems. We need to 
modernize in order to level that curve.
    I would appreciate the opportunity to sit with you because 
I think that people need to understand that situation.
    Senator Hyde-Smith. And I look forward to seeing the 
evidence of where and when you are transferring this money, it 
is actually benefitting the agency and the taxpayers. Because 
you're coming right now with a budget request, I want to see 
when you're diverting these funds, that it is accomplishing our 
goals on the tax gap?
    Mr. Rettig. We share your concerns for that.
    Senator Hyde-Smith. And in March, I sent you a letter 
urging the IRS to clear a large backlog of 2019 tax returns 
before the 2020 tax return deadline. Taxpayers continue to face 
financial uncertainty from the pandemic, as we well know, and 
this should not be compounded by the Federal Government's 
inability to return money lawfully owed to them.
    Can you give me an update on what the IRS is doing to work 
through the backlog of cases that I wrote you a letter about?
    Mr. Rettig. As of yesterday, we have 335,000 tax returns 
that were filed during calendar year 2020 to work through. 
That's down from about 7 million, give or take, around the turn 
of the beginning of this year. We've put our people on 
mandatory overtime and weekends. We've pulled people back into 
shifts.
    As I think people are pretty well aware, we got caught in a 
staffing issue, not of our own making. But, as we ask for 
funding, we got funded based on a normal year. And the volume 
of intake in terms of taxpayer contacts and otherwise is up 
about 300 percent.
    We've done our best. That's what I was referring to when I 
talked about we've worked hard. We've tried to do our best. 
We've moved around resources. We've moved around filings. We've 
moved around the electronic filings at different campuses based 
on pandemic-related and staffing issues. It's been very 
difficult.
    Senator Hyde-Smith. Do you have an estimated time of how 
long it would take to finish up those 335,000 tax returns from 
last year?
    Mr. Rettig. Given the progress that we've seen and the 
numbers that we've seen, I'll give you a conservative 
estimate--then I can hear it when I get back to our office. Our 
people seem to just say that.
    I cannot imagine looking at the curve, it's more than 60 
days. I will get back to you with a more appropriate response 
on that, but I'm just going from the curve, from the volume we 
had and the volume we have today. It might be considerably less 
than that.
    Senator Hyde-Smith. But you do think 60 days may be a 
reasonable guess?
    Mr. Rettig. Oh, I do. I said it, and I believe it, but keep 
in mind this is for returns that were filed prior to January 1, 
2021. They are the 2019----
    Senator Hyde-Smith. Correct.
    Mr. Rettig [continuing]. Returns.
    Senator Hyde-Smith. That's what I am----
    Mr. Rettig. And that is----
    Senator Hyde-Smith [continuing]: Referring to.
    Mr. Rettig [continuing]. The number that I'm referring to.
    Senator Hyde-Smith. Yes.
    Mr. Rettig. And I should be able to get back to you today, 
on a better timeline than that.
    Senator Hyde-Smith. The IRS Criminal Division consists of 
very talented investigators who have broken up criminal 
enterprises across the country. I've read about them. Their 
targets include drug rings, human trafficking, money 
laundering, and sanction violations at some of the largest 
financial institutions. Criminals and tax dodgers, as we call 
them, continue to get more and more sophisticated, and yet I'm 
worried the Criminal Investigation division of your budget 
remains insignificant or insufficient, they're just getting 
smarter and smarter every day. Where does this division fit 
into your vision for greater expanding funding for enforcement 
activities?
    Mr. Rettig. In my mindset, IRS Criminal Investigation is 
one of the most important functions of the Internal Revenue 
Service. It is the law enforcement arm, of the Internal Revenue 
Service, that every individual who's thinking about a Title 26 
violation should be concerned about. It is the one arm that 
makes referrals to the Department of Justice for prosecution, 
which leads to incarceration. We have a very close relationship 
with the Department of Justice.
    If I may, increasing IRS funding without increasing funding 
for the Department of Justice--they're the recipients of our 
criminal cases. They represent us in district courts and 
bankruptcy courts. They need a similar increase in resources, 
or we're going to have a bottleneck as we move cases over to 
that side. But IRS CI, as you've indicated--we are not looking 
in any sense to ever reduce their resources. They've not only 
been significant for what I refer to as traditional tax cases, 
but they've been significant in terrorism financing cases; 
they've been significant in a child exploitation case, the 
largest on the planet, operating in the dark net, using virtual 
currencies; and we are the only law enforcement agency that has 
Title 26 jurisdiction. We also have money-laundering 
jurisdiction. And inside our house, it's IRS CI and IRS CI 
Cyber Crimes that are really exceptional, and the individuals 
there are exceptional.
    Senator Hyde-Smith. The thing that concerns me the most is 
that the solution is always an increase, and that's very 
concerning for me, but my time is up. Thank you, Mr. Chairman.
    Mr. Rettig. Thank you.
    Senator Van Hollen. Thank you, Senator. And unless there 
are other Members right now, we're going to have another round, 
between myself and the Ranking Member, of questions, Mr. 
Commissioner, and I'm going to focus still on the enforcement 
piece and then a couple questions on the service end, and I--
they are related, I think. So, in terms of enforcement, I agree 
with the Ranking Member. We do want to see enforcement dollars 
spent on enforcement. That's the only way we're going to 
address this huge tax gap: people who are not paying taxes that 
are owed and cheating the system and cheating the rest of the 
country.
    Now in your testimony, you indicated that you were often 
outgunned. The IRS was often outgunned when it came to the 
expertise of tracking down some of these taxpayers. I'm 
assuming, based on that and our conversations earlier, you're 
talking about individuals who have the capability to hire 
sophisticated tax lawyers or people who can set up partnership 
structures that are very difficult to track. Is that the case? 
As, you know, Willie Sutton said, you know, ``Go to where the 
money is.'' And when it comes to unpaid-but-due taxes, we want 
to go where the money is. And is that where it is?
    Mr. Rettig. Well, I'm also talking about the corporate 
arena. We have cases that involve large corporations, billions 
and billions of dollars of tax, and if you're a corporation and 
you had an $8 billion tax bill, and you're litigating against 
the Internal Revenue Service, you're willing to spend maybe a 
billion dollars to save $7 billion, and we operate on a $12 
billion budget, all across the Agency. And so they will put as 
many people as necessary on that, and a large expenditure of 
staffing on a large corporate case for us might be in the range 
of 15 to 20 to 30 staff, including Counsel Lawyers.
    Senator Van Hollen. So, Mr. Commissioner, let me ask you, 
in order to close this tax gap, do you need additional 
authorities to hire people who are particularly expert in some 
of the--in tax laws and some of the shenanigans people use?
    Mr. Rettig. We, and I, have already reached outside the 
Internal Revenue Service. I'm very respectful of the employees 
of the IRS and of giving them career opportunities. I came on 
board with that as one of my goals. I don't expect to leave 
that, but we are hopeful for a significant hiring at what I 
refer to as three different levels: college and graduate school 
folks, that's building the future for the Internal Revenue 
Service; mid-career folks, I would like to say is myself, but 
maybe who are 20 years younger than myself, who have a degree 
of experience that might be looking to come on board for 
government experience for an amazing agency; and then folks 
closer to my age, who are at the end of their career, who 
include former IRS employees who want to come back and help.
    I will say that in my outreach actions in the communities 
that I'm very familiar with, tax practitioner and taxpayer and 
others in the industry, we get a lot of people who express an 
interest to come on board. The mid-year and more senior folks 
are looking at it as a way of giving back to a country that 
gave them a lot, which is----
    Senator Van Hollen. Good.
    Mr. Rettig [continuing]. Exactly why I came on board.
    Senator Van Hollen. Thank you. So, you have the authorities 
you currently need for this purpose, right?
    Mr. Rettig. We have the authorities. We don't have the 
funding.
    Senator Van Hollen. Got it. That's--okay. The GAO reported 
that some third-party data on business income--so, we're 
talking K-1s--is provided to the IRS by financial institutions; 
however, the GAO also reported that that information is only 
matched manually as part of an audit. Is that because you do 
not have the technology to do so? The Inspector General of the 
Tax Administration identified over 314,000 business taxpayers 
with 335-plus billion in Form 1099-K income that appeared to 
have a filing obligation but were not identified as non-filers 
by the IRS. Can you speak to that issue?
    Mr. Rettig. It helps this country, to the extent the IRS 
has automated systems that can read information that we 
receive. That's significant. Getting more information sooner is 
better than getting information later.
    If you recall, with respect to W-2s and electronic filing, 
there was a 3-year phase-in of a requirement for firms and 
entities to do the electronic filing. Would've helped us 
significantly if that was just put into play initially. Any 
delay in getting information to the IRS creates issues. To the 
extent we cannot automate a review of tax return-related 
information, it pushes us into an environment where we need to 
manually do that. An IRS employee needs to look at something, 
whether it's a computer screen or if something comes in paper 
form. An IRS employee needs to do that, and we don't have the 
employees to do that.
    I will say that a change that we made when I came on board 
was rather than having no people in certain arenas, we put some 
people in every arena. If you've seen what we talk about, we 
talk about trying to be in every neighborhood. We cannot do an 
effective job everywhere, but we do have responsibilities to 
you and the people in this country to be in as many different 
areas as possible. We are trying.
    Senator Van Hollen. All right. Well, let me--I do want to 
turn to the issue the Ranking Member raised, as well, regarding 
the 2019 tax returns. I think all of us are hearing from 
constituents about that backlog, and we do recognize that 
you've taken extraordinary efforts during the pandemic to do 
all the other things Congress has asked you to do, but on that 
front, I want to make sure I understood you correctly when you 
said you thought it would be about 60 days before you could 
clear that backlog. Did I understand you correctly?
    Mr. Rettig. That's correct. That's the returns that came in 
in 2019. There's a separate issue that I believe you want to 
talk about, which would include the returns that are in 
suspension, where we've received information for some reason, 
and a return--other than being automatic filing and going to a 
refund within what's typically 21 days--gets pushed out, and we 
need manual review of that. In that scenario, there's about 6 
million or so.
    The majority of the returns that are in suspense are 
returns where we have taken a look at the return--and actually 
did that, automated, for electronically filed returns--and 
there's two huge issues, and I'm sure that the Taxpayer 
Advocate is probably going to address this, but two big issues. 
The change in the recent legislation giving EITC filers the 
ability to trigger the amount of their EITC off of 2019 income, 
as opposed to 2020, requires us to manually look at that, to 
verify the 2019 number. A significant amount of the returns in 
suspense are that.
    Then another portion of those are returns where the 
Recovery Rebate, the EIP, became part of the return, the 
Recovery Rebate amount set forth on a return does not match our 
information, and that also requires a manual review. Then on 
EITC claims, there's a fairly significant amount that do not 
include a particular form that is required to be included.
    So, essentially--and I'm giving you round numbers, but I 
can get you specific numbers on these for that group, we have 
sent out information to taxpayers, asking for a verification of 
some sort, and so they're in that process. It's not a situation 
we're happy to be in, particularly with respect to the EITC 
folks. These folks need their money. They need it quickly, and 
we take that to heart.
    Senator Van Hollen. I appreciate that.
    Mr. Rettig. We're----
    Senator Van Hollen. No, I think what--expediting it all--
and my last question, at this point: Can you--I mean, can you 
open up returns and quickly determine whether it's a situation 
where the IRS owes somebody and prioritize those, so people can 
get their money, or do you do that already?
    Mr. Rettig. We do that already. We prioritize----
    Senator Van Hollen. So, you open all the envelopes, to see 
whether it's a case where the IRS is----
    Mr. Rettig. Once we open the envelopes, they get that 
priority. Keep in mind, we get about a million to a million and 
a half pieces of mail a week. We can stay current with that. We 
got back because we shut down our facilities, so the physical 
mail built up. We had to plow through that. But on the 
electronic side and on the paper side, we prioritize 2019 and 
2020 refunds, and then we go into the rest----
    Senator Van Hollen. Thank you.
    Mr. Rettig [continuing]. As I think you would hope we would 
do.
    Senator Van Hollen. Yes. Thank you. Senator Hyde-Smith?
    Senator Hyde-Smith. Thank you. As I've already alluded to, 
over the past 14 months the IRS received more than $3 billion 
in supplemental funding, in addition to what you had, yet the 
IRS has obligated less than one-third of this funding, and it's 
actually spent even less. Only 23 percent is what you've spent. 
How much do you expect to spend during the remainder of the 
year, and how long will it take you to spend $3.1 billion?
    Mr. Rettig. The funds we've received were 2-year funds, and 
I can get you the specifics as to where all of those funds have 
been received, and then the ones that are in suspense, what 
they are scheduled for, and I think I would appreciate the 
opportunity to do that and to get you that information. I hear 
and appreciate the concern, and I share the concern. We look at 
the funds as though they're our own. There's a lot of people 
involved in this, in terms of trying to do things 
appropriately, and I would like to get you the specific 
information, rather than me giving you generalities. I think 
that you deserve that.
    Senator Hyde-Smith. And, of the $1 billion that has been 
designated for long-term IT that we've talked about, none of 
this $1 billion has been spent, as of last week. Zero. None of 
it. Is that correct?
    Mr. Rettig. The actual expenditure versus the services I'm 
not sure are actually in line, but it has been entirely 
allocated in our planning on how to most effectively use these 
funds. We have schedules on that. We actually are in a 
situation where we need to look at some things that have come 
on the radar screen more recently. Child Tax Credit, for 
example, where we got funding, but I think you're aware, last 
year, with the EIPs, we certainly received funding, but we went 
at risk for the Advance Child Tax Credit, I think the number 
exceeds $100 million, in order to carry out the mission, and we 
have to take a similar look at this because we need to do the 
activities before we actually might get supplemental funding on 
any of these. I can walk you through those, but the effort 
allocation, identification of where funds need to go--we have 
that, and I can provide that.
    Senator Hyde-Smith. And what I'm hearing from my 
constituents, as well, is the calls. And the IRS has only 
answered between 7 percent and 14 percent of taxpayer calls 
this year, depending on which metric you cite, and more than 30 
million dollars in tax returns, or 30 million tax returns have 
not been processed. When you last testified before the 
subcommittee in 2019, the appropriate level for the IRS was 
$11.3 billion. In 2021, the IRS has received $14.3 billion, a 
$3 billion increase in the span of 2 years. And again, most of 
your proposed solutions say that you need more spending, rather 
than instituting, and I would just like for you to respond to 
that.
    Mr. Rettig. Let me address your comments on the level of 
service. The level of service for us, the phone service, is an 
appropriated amount. Every 10 percent is approximately $100 
million. We put in a request 2 years ago--before there was a 
pandemic; before there was EIP 1, 2, or 3; before, you know, 
everything that we've all lived through in the last year--for a 
75 percent level of service, which would've been about $750 
million.
    We were appropriated for our phone service at 50 percent 
without taking into account the volume that we were going to 
receive. The volume of telephone calls we've received to date 
is about 151 million calls. Two years ago, that was less than 
50 million calls.
    We have 13,760 folks who answer the phones. They're our 
Customer Service Representatives. We got more recent funding to 
add 1,000 CSRs, so we have just under 15,000 CSRs answering 
phones. The last thousand, it takes 12 to 14 weeks to train 
them. They did not come on board prior to February 15, which is 
the high-volume calls. That's the date, pursuant to the PATH 
Act, that we're able to issue refunds, and so we get a lot of 
calls right around that point in time.
    It also ties into the fact that we extended this group 
through yesterday, which was the extended filing date, to 
remain on the phones for taxpayers. This is the same group 
that, once filing season ends, we pivot to help us in our 
Submission Processing, the paper processing of returns and 
whatnot.
    So, it brought us down to, obviously, about 15,000 short of 
the submission processing helpers when we could've pivoted 
April 15th, that got--we delayed filing season, these folks 
stayed on the phones. There's a connection for how the 
resources that we had got appropriated or got allocated, and 
it's created situations across the board. In 2021, between 
automated calls and actual CSR calls--and we use both--we have 
answered 31 million calls. During 2020, the average time on a 
call is 19 minutes. The average time historically was 14 
minutes.
    People need to understand that we are the primary contact 
for most people, government contact, and with the exception of 
possibly VA or SSA, we're probably the only contact. Our 
employees who are front line on these phones are listening to 
pandemic life stories of people who are calling in. I have 
encouraged that, rather than have our people cut people off the 
phone and say, you know, ``I've got to go. I've got calls 
backed up.''
    It's very important. We have people crying on the phone, 
not related to anything we're doing, just that we happen to be 
their contact person. It's been difficult for our employees, 
but when you think that we've increased the call time from 11 
minutes last year to 19 minutes this year--we only have, you 
know, a little under 15,000 employees. We have 151 million 
phone calls coming in. At one time, we were receiving 1,500 
phone calls per second, and I'm not sure any organization in 
the public or private sector would be able to provide the 
service that the people placing those calls deserve.
    We really are trying our best within the constraints that 
we have, and we are working through this. We appreciate the 
patience, understanding of everyone, Members of Congress as 
well as taxpayers, and we are sensitive to trying to make it 
better. We are advancing. We're improving, but, some of the 
volume and the level of service numbers, when you consider that 
we shut down our system in March and our CSRs, only 3 percent 
of them were telework eligible in March of 2020. Now, 100 
percent of them are telework eligible.
    Where that becomes important--we had the recent snowstorms 
and weather shutdowns at some of our facilities. We didn't miss 
a beat. Our CSRs continued to answer the phones from home, 
rather than coming in. So, we've had some improvements, but I 
share your thoughts, your concerns, and for your constituents, 
as well. This has been extremely difficult. It's not without 
effort and desire on the part of our employees.
    Senator Hyde-Smith. Thank you.
    Senator Van Hollen. Senator Boozman.
    Senator Boozman. Thank you, Mr. Chairman, and thank you for 
holding this really important hearing. I guess the problem that 
I have is that all of what you said is true, but we had all 
these problems before the pandemic. Part of the problem is, 
it's almost impossible to have face-to-face meetings with the 
IRS now, so everything is telephone. What percentage of the 
calls do you answer?
    Mr. Rettig. Like I said, there have been 151 million calls 
in calendar year 2021. Between automated and CSR, we've 
answered 31.3 million.
    Senator Boozman. So, what percentage is that? It's not very 
high. Do you still do the courtesy disconnects after people are 
on hold for a while?
    Mr. Rettig. People can hang up. We actually have----
    Senator Boozman. What----
    Mr. Rettig [continuing]. Callback, customer----
    Senator Boozman. How long does it take to----
    Mr. Rettig [continuing]. Callback.
    Senator Boozman. If you do answer the phone, how long does 
it take to actually--for a person to get with the--another 
person? What's the average wait time?
    Mr. Rettig. I don't have the average wait time. I'm sure 
the Taxpayer Advocate has the average wait time, but I don't 
have the average wait time.
    Senator Boozman. It's a long time.
    Mr. Rettig. It's a lot less than what we seem to read in 
the newspapers, but----
    Senator Boozman. No----
    Mr. Rettig [continuing]. Keep in mind the points I was 
making before, and it may have been, sir, before you came into 
the room. The amount of people we can put on the phone is a 
specific appropriated item. We get a certain amount of funding 
for a certain----
    Senator Boozman. No, I----
    Mr. Rettig [continuing]. Amount of bodies.
    Senator Boozman [continuing]. Understand. I understand 
totally, and I've been on this subcommittee for several years 
now, but it's the same story every year. I don't know why we 
would consider going after folks more until we get this problem 
straight. So, what you should be advocating is, let's fix this 
problem first, and then, in the future, once we do the job that 
we're doing regarding people that are having problems now, then 
it would be appropriate to go after additional folks.
    We have situations all the time. We deal with this, and the 
Taxpayer Advocate does a tremendous job, but we're constantly 
referring them, people that have problems with the IRS, and 
then they have the problem, and they simply can't get through 
to have the problem adjudicated. I mean, nobody answers the 
phone. So, these are real things. It's not related to the 
pandemic. It was going on before the pandemic, and these are 
things that we simply have to deal with. It is true that--it is 
true, also, that I think it's, again, everything is switching 
to non-personal interviews and things, so that's another reason 
that you're having problems with the phones, is that there's 
simply nobody to talk to at the IRS.
    Mr. Rettig. What I am advocating, in terms of the tax gap, 
is not a single approach, a multi-faceted approach, which is 
service, as well as enforcement. Enforcement supports the 
efforts of compliant taxpayers. We, the IRS, need to get timely 
understandable guidance out to people. We're very proud that 
during the pandemic, last year in September, we announced our 
multicultural language project, and I think you're aware that, 
for the first time in history, the Form 1040 is in English and 
Spanish. People can fill out a Schedule LEP and check one of 20 
boxes of different languages they would like us to interact 
with them in writing. Our call centers, now have translation 
services in more than 350 different languages. We are highly 
cited on the underserved communities, which I also include as 
visually impaired, hearing impaired, folks in rural 
communities. We have lost Taxpayer Assistance Centers in many 
of the rural communities as a result of attrition. We had to 
flip to having our other taxpayer assistance folks ride a 
circuit, essentially: you know, come into town on a Tuesday and 
things. We've tried to do what we can do. We've had very 
significant difficulty hiring in certain areas where some of 
our employees have retired, and, you know, we're--a statistic I 
gave earlier--our net attrition rate, over the next 6 years, 
for an organization of about 83,000 employees, we have about 
52,000 employees who are no longer going to be employed. And 
when I say ``net,'' that's the real figure, because the average 
statistic is that an employee stays 5 years beyond the time, 
they're eligible, so it's the net that I'm referring to. We 
need to replace that. That's just to maintain status quo. And 
our target level of service is in the 60 percent range, and 
there's history in the 60 percent range, but when the phone 
call volume goes from 46 to 50 million up to 151 million, 
coming on the heels of having shut down the agency, we will 
not--when you build in the denominator of the fraction that 
you're referring to, we will not make 60 percent. And I am with 
you. I was on the outside.
    Senator Boozman. I understand.
    Mr. Rettig. People here deserve----
    Senator Boozman. I understand.
    Mr. Rettig [continuing]. A 60 to 80 percent.
    Senator Boozman. But if you go back a year ago, before 
COVID, you weren't anywhere close to that, then. I appreciate 
the fact that you are sending out in Spanish and doing those 
things. Those are things we can do. The tax code is very, very 
complicated, and it's really difficult once you get that in 
whatever language. If you've got a question, there's simply 
nobody to go and see to get the question answered, in person, 
and then again, you know, you try and make the phone call, now 
and in the past, there's nobody to answer. You have an action 
against somebody. They try and contact the IRS, and it's 
difficult for them to get through while they're trying to get 
the action cleared up. So--and don't misunderstand. I'm not----
    Mr. Rettig. No, I appreciate it.
    Senator Boozman. I'm not saying you or the personnel--in 
fact, just the opposite. In us dealing with the IRS, they've 
been very responsive. The taxpayer advocates do a great job. 
And then again, just the personnel at the IRS, you know, do a 
great job. You know, I mean, these are caring individuals that 
are--that--it's just the system, the way it is now, it's kind 
of a Catch-22 for all of us. So, what I'm interested in doing 
is I hope we can work together, I hope the committee, in a very 
bipartisan way--and this has been a bipartisan, you know, 
through the years--can work with you to really kind of clean up 
some problems that are just kind of part of the system. So, 
again, like I said, don't misunderstand. I'm not attacking you. 
I'm attacking the system. But we've got ourselves in a 
situation now where we've got a very complicated tax code. We 
do have enforcement going on now, but it gets really difficult, 
so we----
    Mr. Rettig. And I, and we--myself, our staff--would 
appreciate the opportunity. This is well beyond what we can 
exchange the information in an 8-minute exchange. We really 
want you to understand the situation that we're in, with 
detail, with, information.
    Senator Boozman. I appreciate it.
    Mr. Rettig. We can all get better at this. I didn't come on 
board to be defensive, and I hope I don't sound defensive. I 
came on board to make a difference for the taxpayers in this 
country, tax professionals in this country, and the employees 
of the IRS, and everybody. I believe that we can get this 
better. Tax administration is the responsibility of everyone, 
not just the IRS.
    Senator Boozman. All right. Thank you, Mr. Chairman.
    Senator Van Hollen. Well, thank you, Senator. And I do 
think we have bipartisan agreement on the need to provide the 
resources necessary to provide the service, need to get that 
up, and on compliance and enforcement, and look forward to 
working with the Ranking Member and all the members of the 
committee on that. Mr. Commissioner, thank you for your 
testimony and your service. And if you could convey our 
appreciation to your employees who have been working through 
these difficult times. Thank you.
    Mr. Rettig. I appreciate it. Appreciate your time, and I am 
available for meetings with you or with your staff, as well as 
my staff. We do want you to understand the situation we're in, 
and we think, working together, we can get this right. I share 
your concerns with respect to the enforcement. I'm focused on 
the enforcement. I'm not necessarily the operation support 
back-room guy. We need to make a difference, and we need to 
make a difference in taxpayer service. Those two go hand in 
hand. And with your help, I do believe that we can.
    Senator Van Hollen. Thank you, Mr. Commissioner. Next, 
we're going to turn to our other two distinguished witnesses. 
Ms. Collins is the head of Taxpayer Advocate Service, which is 
an independent organization at the IRS. She joined the Taxpayer 
Advocate Service in March 2020. She has more than 35 years of 
experience in tax law, including 15 years at the IRS Office of 
General Counsel and with a private accounting firm.
    Mr. Rossotti served as the Commissioner of the IRS from 
1997 to 2002. He earned his A.B. from Georgetown University and 
his M.B.A. from Harvard Business School. In 1970, Mr. Rossotti 
founded American Management Systems and served with AMS until 
his confirmation as Commissioner in 1997. Thank both of you for 
being here, and we will begin, Ms. Collins, with you.
STATEMENT OF ERIN M. COLLINS, NATIONAL TAXPAYER 
            ADVOCATE, INTERNAL REVENUE SERVICE
    Ms. Collins. Thank you. Mr. Chairman, Ranking Member Hyde-
Smith, and Members of the subcommittee: Thank you for inviting 
me to testify today about taxpayer service. In 1998, Congress 
created my position, the National Taxpayer Advocate, together 
with the office I lead, Taxpayer Advocate Service, or 
affectionately referred to as TAS, to be the office of and the 
voice of taxpayers within the IRS, to advocate for and assist 
taxpayers facing IRS problems and to make recommendations to 
the IRS and Congress for change.
    First, I want to take this opportunity to thank and 
recognize our TAS team for their efforts assisting taxpayers 
during this difficult time. This past year, our local taxpayer 
advocates have helped over 230,000 taxpayers and their 
families. Our centralized case intake advocates have assisted 
more than 33,000 taxpayers, and currently we have over 68,000 
open cases. At the same time, our systemic advocacy employees 
have advocated for taxpayers on multiple issues throughout the 
year, impacting millions of taxpayers. I'm proud of what all of 
our TAS employees have been able to accomplish, and although, 
like the IRS, we still are facing challenges with high call 
volumes and increased case number. I also want to give a quick 
shout-out to our low-income tax clinics and Taxpayer Advocacy 
Panel. Together with the VITA and TCE volunteers, they provide 
an essential service for taxpayers and tax administration.
    Although this hearing addresses narrowing the tax gap, 
which is an admirable pursuit by Congress and the IRS, my 
testimony will focus on the filing season, improving taxpayer 
service, and protecting taxpayer rights, and ensuring a fair 
and just tax system that individuals have confidence in and can 
trust. And I appreciate your recognition that service is 
paramount to a good tax administration.
    On a positive note, I do want to commend IRS leadership and 
its employees for what they did accomplish this past filing 
season. As of last week, the IRS had processed over 116 million 
tax returns. They issued over 85 million refunds of about $243 
billion and issued three rounds of stimulus payments over the 
last year, most without a problem. And then, as the 
Commissioner indicated, on May 17th they received a record 
number of filed returns, on the last day, of over 15 million 
returns.
    At the same time, the combination of office closures 
required by the pandemic, additional responsibilities to 
administer the stimulus and other relief programs, late 
legislative changes, the challenges in processing paper 
returns, and the reduced staffing has combined together to make 
this the IRS's most challenging filing season probably in my 
memory, if not history. As of this writing, the IRS is still 
trying to struggle and manually processing more than 30 million 
individual and business tax returns. Most taxpayers who are 
entitled to refunds--they check the IRS tool ``Where's My 
Refund?'' but unfortunately it provides little information for 
those backlogged, unprocessed, or suspended returns, so 
taxpayers take to calling the IRS, which results in more calls 
and lower level of service than any prior year.
    At the height of the filing season, the IRS has experienced 
record-breaking, unprecedented calls and have received 
approximately, as the Commissioner just noted, 1,500 calls per 
second. I mean, think of that: 1,500 calls per second, which is 
a tremendous increase. And I think at one time during the 
filing season, their 1040 toll-free line--unfortunately, the 
level of service reached a low of about 5 percent. Although 
there is no quick fix to eliminate the challenge currently 
facing taxpayers, my written statement I offer some 
recommendations to improve taxpayer experience and enhance 
taxpayer administration during the filing season, especially 
for those able to file electronically.
    My first recommendation is for Congress. The IRS needs more 
resources of helping taxpayers, collecting revenue, and 
providing those social programs such as the stimulus payments 
and the annual credit. By providing additional funding and 
oversight, we can improve IRS capabilities by providing 
taxpayers better service while protecting their rights.
    Second, the IRS must prioritize an accessible, robust, and 
functional online account for practitioners and taxpayers. This 
should not be a luxury. This should be a standard tool the IRS 
provides all taxpayers.
    Third, expand customer calling-back technology for all IRS 
toll-free lines and keep moving forward with other 
technological options under development. Fourth, reduce the 
barriers for e-filing tax returns. Fifth, for future paper 
returns that are prepared electronically but submitted through 
the mail, IRS should utilize technology for more accurate, 
quicker, and cheaper processing.
    Six, expand and make permanent the digital acceptance and 
electronic transmission of documents and digital signatures, 
what you all do every day: use of email, uploading, and 
downloading documents in a secure environment. And the last 
recommendation is to consider to offer video conferencing 
options to taxpayers, even as IRS facilities begin to open.
    So, in closing, taxpayer service must continue to improve. 
Our citizens deserve a responsive and respectful tax 
administration that serves all taxpayers fairly. Closing the 
tax gap should not result in reduced taxpayer service or 
undermine any taxpayer rights. To the contrary, voluntary 
compliance should be rewarded and not a victim of increased 
enforcement. And I believe the Congress and the IRS share that 
goal of ensuring that the efforts to narrow the tax gap are 
consistent with taxpayers' fundamental rights and to encourage 
a fair and just tax system.
    So, thank you for inviting me here today. I look forward to 
continue working with the IRS and Congress to help improve 
taxpayer service, and I'll be happy to answer questions.

    [The statement follows:]
   Prepared Statement of Erin M. Collins, National Taxpayer Advocate
internal revenue service: narrowing the tax gap and improving taxpayer 
                                services
    Chairman Van Hollen, Ranking Member Hyde-Smith, and distinguished 
Members of this subcommittee:

    Thank you for inviting me to testify about taxpayer service issues 
at today's hearing titled Internal Revenue Service: Narrowing the Tax 
Gap and Improving Taxpayer Services.\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. 
We have provided courtesy copies of this statement to both the IRS and 
the Treasury Department in advance of this hearing.
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    Although this hearing also addresses narrowing the tax gap, my 
testimony will focus on improving taxpayer service, protecting taxpayer 
rights, and ensuring a fair and just tax system for all taxpayers.
    Over the past year, taxpayer service at the IRS has been 
historically poor. There is no way to sugarcoat it. Refund delays have 
been long, telephone assistance has been poor, and taxpayers have not 
been receiving help with refunds, stimulus payments, or the information 
they need to be compliant. At the same time, IRS statistics show 
taxpayers with incomes below $50,000 fail to respond to proposed 
adjustments in correspondence audits 45 percent of the time.\2\ These 
non- responses, known as ``defaults,'' result in the issuance of 
statutory notices of deficiency, requiring taxpayers to file petitions 
in the U.S. Tax Court or be assessed the deficiency and left to deal 
with collection issues. This high rate of default makes me ask: What is 
wrong with this system?
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    \2\ The non-response rate includes taxpayers with undelivered IRS 
audit notices or statutory notices of deficiency and taxpayers who did 
not respond to IRS audit notices.
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    Today, most taxpayers are focused on the challenges associated with 
the current filing season. Even with IRS employees working long hours 
and IRS leadership making efforts to move resources around, the IRS has 
struggled to handle a backlog of about 30 million individual and 
business income tax returns requiring manual processing for most of the 
filing season, including several million 2019 returns that were filed 
in 2020. Most taxpayers receive refunds, so when the IRS falls behind 
in processing returns, refunds are delayed. This year's delays are 
unprecedented.
    Even as Congress and the IRS focus on the tax gap, we cannot 
overlook the importance of improving taxpayer service, protecting 
taxpayer rights, and ensuring the IRS receives sufficient funding to 
achieve these critical goals. In 2015, then-Commissioner Koskinen 
termed the IRS's customer service ``abysmal.'' \3\ Yet during the 2015 
filing season, return processing delays were minimal, the telephone 
``Level of Service'' during the filing season was 37 percent, and 15 
percent of callers reached an IRS telephone assistor.\4\ If 2015 was 
``abysmal,'' I am not sure the English language has a strong enough 
word to describe the delays and challenges taxpayers experienced this 
recent filing season.
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    \3\ Remarks of Commissioner John A. Koskinen Before the National 
Press Club (Mar. 31, 2015) (cited in Kevin McCoy, Report: IRS taxpayer 
service goes from bad to terrible, USA Today
(July 15, 2015), https://www.usatoday.com/story/money/2015/07/15/irs-
taxpayer-service-2015/30181465).
    \4\ IRS, Joint Operations Center (JOC) Snapshot Reports, Accounts 
Management (week ending Apr. 18, 2015).
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    When taxpayers did not receive timely refunds, many checked the 
IRS's Where's My Refund? online tool or IRS2Go app to find out why. But 
most of the backlogged returns had not reached a stage in the 
processing pipeline where information was available through Where's My 
Refund? or IRS2Go. Largely for that reason but also for others, 
frustrated taxpayers are calling the IRS for help and information. The 
IRS had received more telephone calls by the end of April 2021 than it 
had ever received in a full fiscal year.\5\ Although IRS employees have 
answered more calls than last year, they have not been able to manage 
the flood of calls. Through May 1, the IRS reported a ``Level of 
Service'' on its Accounts Management telephone lines of 14 percent, 
with only 7 percent of taxpayer calls reaching a telephone assistor.\6\ 
The most frequently called toll-free number is the ``1040'' line for 
individual income tax services. It has logged about 82 million calls, 
and only 2.6 percent of callers have reached a customer service 
representative (one out of 38).\7\
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    \5\ Until this year, the IRS had received its highest number of 
telephone calls in fiscal year (FY) 2008 when it logged about 167 
million net attempts. As of May 1--with 5 months still left in fiscal 
year 2021--the IRS had received 177 million calls. IRS, JOC Snapshot 
Reports, Enterprise Total (comparing fiscal year ending Sept. 30, 2008, 
with week ending May 1, 2021).
    \6\ IRS, JOC Snapshot Reports, Accounts Management (week ending May 
1, 2021).
    \7\ IRS, JOC Snapshot Reports, Product Line Detail: Individual 
Income Tax Services (week ending May 1, 2021).
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    Despite the recent challenges, I try to focus on the positive, so I 
want to emphasize and acknowledge the following points:

  --Most taxpayers this filing season experienced no problems. More 
        than 90 percent of taxpayers filed their returns 
        electronically, and most received their refunds within 21 
        days--many in under a week. Through April 30, the IRS had 
        processed 110 million returns and issued 81 million refunds, 
        totaling about $233 billion, without a hitch.\8\
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    \8\ IRS, 2021 Filing Season Statistics (week ending Apr. 30, 2021), 
https://www.irs.gov/
newsroom/filing-season-statistics-for-week-ending-april-30-2021.
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  --Congress authorized three rounds of stimulus payments and most 
        eligible individuals received their stimulus payments without 
        problem. Taken together, the IRS has issued more than 470 
        million payments totaling about $800 billion.\9\
---------------------------------------------------------------------------
    \9\ The IRS reports it issued 160 million payments worth $270 
billion under the Coronavirus Aid, Relief, and Economic Security 
(CARES) Act; 147 million payments worth $142 billion under the COVID-
related Tax Relief Act of 2020; and 164 million payments worth $386 
billion under the American Rescue Plan Act of 2021. See IRS News 
Release, IR-2021-38, As required by law, all first and second Economic 
Impact Payments issued; eligible people can claim Recovery Rebate 
Credit (Feb. 16, 2021), https://www.irs.gov/newsroom/as-required-by-
law-all-first-and-
second-economic-impact-payments-issued-eligible-people-can-claim-
recovery-rebate-credit; IRS News Release, IR-2021-103, More than 1.1 
million additional Economic Impact Payments disbursed under the 
American Rescue Plan; payments total approximately 164 million (May 5, 
2021), https://www.irs.gov/newsroom/more-than-1-point-1-million-
additional-economic-impact-payments-disbursed-under-the-american-
rescue-plan-payments-total-approximately-164-million.
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  --The primary cause of the processing backlogs and phone challenges 
        was the COVID-19 pandemic. This was literally a once-in-a-
        century occurrence that caught most individuals, businesses, 
        and government agencies off guard and presented challenges that 
        could not easily be overcome. However, most taxpayers do not 
        understand the reasons for the delays, causing frustration, 
        stress and, for many, financial harm. Secondary causes of the 
        IRS's problems are the reduction in the IRS workforce over the 
        past decade and congressional directives to issue stimulus 
        payments and provide other financial relief to mitigate the 
        impact of the pandemic, which substantially increased the IRS's 
        workload and the strain on its employees.
  --To reduce taxpayer burden, the IRS provided almost complete relief 
        from enforcement actions during the early part of the pandemic. 
        Under its ``People First Initiative,'' \10\ it suspended most 
        collection activities, including the filing of notices of 
        Federal tax lien, the issuance of summons, and levies, suits, 
        and seizure actions. It granted extensions to respond to 
        Collection Due Process notices and appeals of adverse offer in 
        compromise and Collection Appeal Program decisions. It 
        suspended installment agreement and offer in compromise payment 
        requirements. Significant relief was provided with the Taxpayer 
        Relief Initiative, including expanded installment agreement 
        options and additional flexibilities for taxpayers to pay 
        accepted offers in compromise.\11\
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    \10\ See IRS, People First Initiative--Providing Relief to 
Taxpayers, https://www.irs.gov/
newsroom/people-first-initiative-providing-relief-to-taxpayers.
    \11\ See IRS, Taxpayer Relief Initiative aims to help those 
financially affected by COVID-19 (updated Apr. 15, 2021), https://
www.irs.gov/newsroom/taxpayer-relief-initiative-aims-to-help-those-
financially-affected-by-covid-19.
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  --Over the long run, the lessons learned from the pandemic are 
        valuable in helping to identify needs for improved tax 
        administration. The pandemic exposed weaknesses and 
        vulnerabilities that can be strengthened, it prompted the IRS 
        to experiment with new approaches to old problems, it led to a 
        renewed awareness of the impact of cuts to the IRS's budget 
        over the past decade and its need for additional funding, and 
        it is causing the IRS and congressional overseers to 
        collaborate on steps to improve the IRS's performance going 
        forward.
  --The IRS workforce deserves enormous praise for its work over the 
        past year. Like all Americans, IRS employees have faced 
        personal challenges, including childcare challenges, financial 
        challenges for individuals out of work, and the mental health 
        challenges of being cooped up in a house or an apartment for 
        the year. Throughout the year, some employees worked in IRS 
        facilities at personal risk, and unfortunately, some contracted 
        COVID-19.

          I also want to note that I could not be prouder of the 
        employees in my own function, the Taxpayer Advocate Service, 
        for their efforts during the past year assisting taxpayers 
        during this difficult time. Although this year has been and 
        continues to be challenging for many taxpayers, it is important 
        for the public to understand the problems in tax administration 
        over the past year have been situational and would have been 
        worse if not for the hard work and commitment of the employees 
        and leadership of the IRS.

    In this statement, I will describe some of the challenges taxpayers 
have experienced during the filing season and offer my priority 
recommendations to improve the experience of U.S. taxpayers in their 
dealings with the IRS while trying to comply with their tax return 
filing obligations.
i. taxpayers are experiencing significant challenges in their dealings 
     with the irs due to the impacts of the pandemic and workforce 
                      reductions on irs operations
    Between fiscal years 2010 and 2019, the IRS budget was cut by 20.4 
percent after adjusting for inflation, and IRS staffing was reduced by 
22 percent--from 94,711 to 73,554 full-time equivalent (FTE) 
positions.\12\ When COVID-19 began to spread in March 2020, the IRS--
like many entities in the United States and around the world--was 
forced to shut down many of its core operations to comply with social 
distancing requirements to protect the health and safety of its 
employees, taxpayers, and our local communities.
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    \12\ Budget data provided by the IRS Office of Chief Financial 
Officer (Oct. 2, 2019). FTE data published in IRS, 2019 Data Book 74, 
Table 31: Collections, Costs, Personnel, and U.S. Population, fiscal 
years 1990-2019 (2020), https://www.irs.gov/pub/irs-pdf/p55b.pdf.
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    In March 2020, December 2020, and March 2021, Congress directed and 
entrusted the IRS with the responsibility to administer critical 
programs designed to provide financial relief to struggling families 
and individuals and to boost the U.S. economy generally.\13\ While the 
pandemic-induced shutdowns had the largest impact on IRS operations, 
the combination of the shutdowns, the addition of three rounds of 
stimulus payments, the responsibilities of implementing new 
legislation, and a decade of reduced staffing have created a perfect 
storm, leading to an extraordinary imbalance between the IRS's workload 
and the resources available to manage it for its annual filing season.
---------------------------------------------------------------------------
    \13\ See CARES Act, Public Law No. 116-136, 134 Stat. 281 (2020); 
COVID-related Tax Relief Act of 2020, enacted in Division N of Title II 
of the Consolidated Appropriations Act, 2021, Public Law No. 116-260, 
134 Stat. 1182, 1965-71 (2020); and American Rescue Plan Act of 2021 
(ARPA), Public Law No. 117-2, 135 Stat. 4 (2021).
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    The two most significant consequences have been a huge backlog in 
the manual processing of tax returns and an inability to keep up with 
the unprecedented volume of taxpayer telephone calls the IRS has 
received.
A. The IRS has struggled with a backlog of about 30 million individual 
        and business income tax returns that require manual processing
    The IRS has a backlog of about 30 million individual and business 
income tax returns that require manual processing--meaning that 
employee involvement is generally required before a return can advance 
to the next stage in the processing pipeline. Unprocessed paper tax 
returns account for almost half the backlog. Returns suspended during 
processing, meaning returns set aside because of issues that require 
additional review, account for just over half.
    These processing backlogs matter greatly because most taxpayers 
overpay their tax during the year and are entitled to receive refunds 
when they file their returns. In addition to repaying overpayments of 
tax, refunds may include Earned Income Tax Credit (EITC) benefits that 
can be worth up to $6,660,\14\ Additional Child Tax Credit benefits 
that can be worth up to $1,400 per qualifying child \15\ and, this 
year, Recovery Rebate Credits (RRCs).\16\ The IRS's backlog of 30 
million income tax returns means that most individual taxpayers in this 
group and many business taxpayers will not receive their refunds until 
the IRS eventually processes their returns.
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    \14\ See IRC Sec. 32.
    \15\ See IRC Sec. 24(d)(1).
    \16\ See IRC Sec. Sec. 6428, 6428A.
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    After the pandemic forced IRS office closures last March, the IRS 
over time was able to make a significant amount of its work portable, 
and it instructed its field examination and collection employees to 
postpone the start of examinations, liens, and levies. Most employees 
could perform their jobs from home. To protect the confidentiality and 
security of tax return information, however, the IRS could not allow 
employees who open and enter data from paper tax returns to take them 
home, requiring employees to work in the IRS campuses and only when 
necessary gather information from local offices.
    The IRS received approximately 17 million individual income tax 
returns \17\ and an estimated 50 million other tax returns on paper 
last year,\18\ in addition to more than 13 million pieces of 
correspondence.\19\ The shutdown of processing operations meant these 
returns and letters sat unopened on trucks for months. When IRS 
employees slowly returned to their jobs, the backlogs were 
overwhelming.
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    \17\ IRS, 2020 Filing Season Statistics (week ending Dec. 11, 
2020), https://www.irs.gov/
newsroom/filing-season-statistics-for-week-ending-december-11-2020 
(reporting that 152.8 million of 169.7 million individual income tax 
returns received had been filed electronically).
    \18\ IRS Pub. 6186, Calendar Year Projections for the United States 
and IRS Campuses: 2027-2027 (2020 Update) 7, Table 2 (Nov. 2020), 
https://www.irs.gov/pub/irs-pdf/p6186.pdf.
    \19\ IRS, Customer Account Services Accounts Management Paper 
Inventory Reports, Receipt Comparison Report (fiscal year 2020).
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    As of May 1, the IRS has a backlog of about 12.9 million paper tax 
returns waiting to be processed. The backlog includes 2.5 million tax 
returns received in 2020 and 10.4 million returns received in 2021. 
They are split about evenly between individual returns and business 
returns.
    In addition, there is a second group of about 15.1 million returns 
suspended during processing. These returns generally require employee 
review to verify the legitimacy of some aspect of the return. There are 
also about 2.5 million amended returns awaiting processing.

    The breakdown of the processing backlog is as follows:

               FIGURE 1: STATUS OF INVENTORY REQUIRING MANUAL PROCESSING (AS OF MAY 1, 2021) \20\
----------------------------------------------------------------------------------------------------------------
                                                                                            Not
                                                               Individual    Business    Specified      Total
----------------------------------------------------------------------------------------------------------------
Paper Returns Awaiting Processing
    Calendar Year 2020......................................    1,000,000    1,500,000  ...........    2,500,000
    Calendar Year 2021......................................    4,900,000    3,700,000    1,800,000   10,400,000
                                                             ---------------------------------------------------
      Total Paper Returns Awaiting Processing...............    5,900,000    5,200,000    1,800,000   12,900,000
 
Paper and Electronic Returns--Processing Suspended..........   13,200,000    1,900,000  ...........   15,100,000
Amended Returns Inventory...................................    1,900,000      500,000  ...........    2,500,000
                                                             ---------------------------------------------------
      Total Unprocessed Returns.............................   21,000,000    7,600,000    1,800,000   30,500,000
----------------------------------------------------------------------------------------------------------------
\20\ Data from IRS systems and Wage & Investment Division. Totals are not necessarily exact due to rounding.

    The returns suspended during processing consist mostly of e-filed 
returns but include some paper returns. The bulk of the suspended 
returns have been sent to the IRS's ``Error Resolution System'' (ERS) 
for review. This year, the issues that have caused the largest number 
of returns to be sent to ERS have been RRC claims that do not match IRS 
records and taxpayer elections to use 2019 incomes rather than 2020 
incomes to compute the EITC. To date, more than four million returns 
contained RRC errors. These have included dependents listed on multiple 
returns, missing or invalid Social Security numbers or Individual 
Taxpayer Identification Numbers without a military indicator, 
individuals who were deceased prior to the tax period, dependents who 
exceeded the age limitation, and RRC amounts computed incorrectly.
    Beside ERS cases, returns may be suspended if identify theft is 
suspected (e.g., if a return comes in with a missing or incorrect 
Identity Protection Personal Identification Number), if a return is 
rejected for processing (e.g., if a schedule or required signature on a 
paper return is missing), or if a return is classified as 
``unpostable'' (e.g., if the IRS has a date of death on file that 
precedes the current tax year).
    Now that the filing season has ended, the good news is that the 
stream of new returns entering the processing pipeline will slow 
dramatically, at least until we approach the extended filing deadline 
of October 15. The bad news is that it will take considerable time for 
IRS employees to work through the backlog of about 30 million 
individual and business income tax returns. Commissioner Rettig 
recently testified that the IRS anticipates completing the processing 
of the backlog sometime this summer. But it is a heavy lift to 
accomplish this high volume of manual reviews. Moreover, even with a 
possible summer completion date, taxpayers will continue to be 
frustrated and, in some cases, will experience financial hardships 
because they will not receive the refunds to which they are entitled 
until the processing of their returns is complete.
B. IRS telephone service this year has been historically poor
    The IRS received more telephone calls during this year's filing 
season than it has ever received in a previous filing season. Taxpayers 
whose returns are caught up in processing backlogs called, and I 
suspect many called multiple times, trying to get an answer and to 
understand the reason for the delays and what, if anything, they need 
to do. Taxpayers who did not receive their stimulus payments when they 
expected also called, and most likely called often. The IRS received 
more than 150 million calls during the filing season (through May 1). 
Employees answered 13.3 million--just nine percent.
    The IRS staffs dozens of telephone lines, and some fared better 
than others. About 90 percent of calls came in on lines that fit under 
the ``Accounts Management'' umbrella. On those lines, fewer than 7 
percent of taxpayers reached a telephone assistor. The largest Accounts 
Management line is the ``1040'' number. The IRS received about 82 
million calls on the 1040 number, and only about 2.6 percent of callers 
got through to an employee (one out of 38).\21\
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    \21\ IRS, JOC Snapshot Reports, Product Line Detail: Individual 
Income Tax Services (week ending May 1, 2021).
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    By contrast, the IRS did a better job answering calls from 
taxpayers to whom it had sent notices. For example, about five million 
taxpayers called the Automated Collection System toll-free lines, and 
employees answered about 40 percent of their calls.
    Because the IRS toll-free telephone lines were shut down and then 
slowly reopened during 2020, a comparison of the current filing season 
with the 2019 filing season will provide better context. Overall, the 
IRS has received more than three times as many calls this year. It has 
answered slightly more calls, but it could not keep pace with the 
volume. Figure 2 compares telephone service in the current filing 
season with the 2019 filing season.

                       FIGURE 2: IRS TELEPHONE RESULTS (2021 AND 2019 FILING SEASONS) \22\
----------------------------------------------------------------------------------------------------------------
                                                    Calls Not                        % of
                                  Calls    Primary   Directed    Calls     Calls     Calls     ``CSR     Time on
                                Received  Abandons   to CSRs   Directed  Answered  Answered   Level of  Hold (in
                                                       \23\     to CSRs   by CSRs   by CSRs  Service''  minutes)
----------------------------------------------------------------------------------------------------------------
Enterprise 2021...............   151 mil    48 mil     28 mil    75 mil    13 mil        9%        18%        20
Enterprise 2019...............    46 mil    12 mil     14 mil    20 mil    11 mil       25%        59%        14
Accounts Management 2021......   137 mil    46 mil     26 mil    65 mil     9 mil        7%        14%        19
Accounts Management 2019......    38 mil    11 mil     13 mil    14 mil     9 mil       24%        67%         9
1040 Line 2021................    82 mil    35 mil      9 mil    38 mil     2 mil      2.6%       5.6%        20
1040 Line 2019................     8 mil     4 mil      0 mil     0 mil     2 mil       27%        67%         9
Automated Collection System        5 mil     0 mil      0 mil     5 mil     2 mil       40%        43%        22
 2021.........................
Automated Collection System        4 mil     0 mil      0 mil     4 mil     1 mil       30%        33%        41
 2019.........................
----------------------------------------------------------------------------------------------------------------
\22\ Data for 2021 is through May 1 and data for 2019 is through May 4 and has been rounded to the nearest
  million (mil). ``Primary abandons'' reflect taxpayer hang-ups before they respond to all prompts presented by
  the phone tree--typically within the first five minutes of a call. ``Percentage of Calls Answered by CSRs''
  reflects the number of calls answered by CSRs divided by the number of calls received. ``CSR Level of
  Service'' is an IRS performance measure that reflects the number of calls answered by CSRs divided by the
  number of calls directed to CSRs (i.e., it excludes primary abandons, taxpayers who encounter busy signals or
  are disconnected, and calls routed for automated responses).

    As Figure 2 shows, the challenges taxpayers have experienced while 
navigating this difficult filing season show up in the surge of calls 
the IRS has received. Because the IRS does not yet offer robust online 
accounts and mail processing is significantly delayed, the toll-free 
lines remain the best or only option for most taxpayers who need to 
communicate with the IRS or are seeking answers regarding delays in 
their refunds or stimulus payments.
    While there are no magic bullets to improve telephone service this 
year, it is anticipated that the volume of calls will decrease now that 
the filing season has ended and substantially all of the third round of 
stimulus payments have been issued. However, with the much-anticipated 
start of Advance Child Tax Credit payments in July and the opening of 
the associated portal, I have concerns about the likely increase in 
calls from affected taxpayers searching for advice and answers. I 
strongly recommend the IRS provide complete guidance on its website and 
through its outreach programs. I further recommend the IRS leverage its 
many partnerships with tax organizations, particularly those in 
underserved communities, and even encourage Members of Congress to 
provide relevant information on their webpages. I would also remind 
taxpayers of the standard advice the IRS provides: Call early or call 
late--the IRS toll-free lines are open Monday through Friday from 7 
a.m. to 7 p.m. in each time zone--and it's best to call midweek. Even 
so, there is no guarantee that taxpayers will be successful in reaching 
a customer service representative or that wait times will not be long.
C. Taxpayers have faced an array of other challenges this filing season
    While the processing backlog and phone service difficulties have 
affected the largest number of taxpayers, numerous other challenges 
have arisen. A few examples:

  --Additional effects of unprocessed tax year (TY) 2019 individual 
        income tax returns.--The adverse impact of the IRS's failure to 
        process TY 2019 paper tax returns extends beyond refund delays. 
        Taxpayers seeking to e-file their TY 2020 tax returns generally 
        must verify their identities by providing either (i) their TY 
        2019 adjusted gross income (AGI) or (ii) a prior year Self-
        Select PIN. If a taxpayer used the same commercial software to 
        prepare the prior year return, the software will typically 
        populate the prior- year AGI. Otherwise, taxpayers enter the 
        information themselves.\24\ The AGI amount the taxpayer enters 
        must match the AGI amount reflected on the IRS's systems.
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    \24\ IRS, Validating Your Electronically Filed Tax Return, https://
www.irs.gov/individuals/
electronic-filing-pin-request (last visited May 12, 2021).
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          Where the IRS has not processed a TY 2019 return, a taxpayer 
        entering his or her TY 2019 AGI will be prevented from e-filing 
        a TY 2020 return. Although the IRS provided guidance that 
        taxpayers with unprocessed returns could enter ``0'' as their 
        TY 2019 AGI, many practitioners and taxpayers were unaware of 
        the guidance and ended up filing TY 2020 paper returns. The 
        processing of paper returns will take considerably longer. 
        Similarly, mortgage and other lenders generally require 
        applicants to supply prior-year tax returns to evaluate their 
        creditworthiness. We understand some taxpayers whose TY 2019 
        returns have not yet been processed have encountered 
        difficulties qualifying for mortgages and other needed loans.
  --Effects of mid-filing season change to Advance Premium Tax Credit 
        repayment requirement.--Taxpayers with household incomes 
        between 100 percent and 400 percent of the Federal Poverty 
        Level are entitled to receive tax credits if they purchase 
        health insurance through a Federal or State Health Insurance 
        Marketplace.\25\ Eligible taxpayers may choose to receive these 
        ``advance premium tax credits'' in monthly installments paid 
        directly to the taxpayer's insurance provider. At the end of 
        the year, taxpayers are required to ``reconcile'' the amount of 
        advance premium tax credits they received with the amounts to 
        which they are ultimately entitled, as computed on their tax 
        returns. Taxpayers who received a larger advance credit than 
        the allowable amount generally must pay back the excess. ARPA 
        suspended the repayment requirement for TY 2020. However, the 
        Act was signed into law on March 17--after almost half of all 
        taxpayers had filed their returns. Therefore, some taxpayers 
        had already filed returns including a repayment of excess 
        credit amounts. This has caused confusion and concern for 
        taxpayers. The good news is that the IRS will automatically 
        reimburse taxpayers who have already made a repayment.\26\
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    \25\ See IRC Sec. 36B.
    \26\ See IRS News Release, IR-2021-106, IRS offers overview of tax 
provisions in American Rescue Plan; retroactive tax benefits help many 
people now preparing 2020 returns (May 11, 2021), https://www.irs.gov/
newsroom/irs-offers-overview-of-tax-provisions-in-american-rescue-plan-
retroactive-tax-benefits-help-many-people-now-preparing-2020-returns.
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  --Effects of mid-filing season change to taxation of unemployment 
        insurance benefits.--Unemployment insurance benefits are 
        generally taxable, as they are viewed as a replacement for 
        wages. ARPA contained a provision that excludes up to $10,200 
        in benefits from fiscal year 2020 taxation ($20,400 for joint 
        filers when each receives benefits) if the taxpayer's modified 
        AGI is less than $150,000. Clearly, this was a welcome change 
        for millions of taxpayers who otherwise would have had a larger 
        tax bill due to their increased unemployment benefits. As with 
        the advance premium tax credit repayment relief provision, 
        however, this relief was not enacted until March 17.
          Understandably, this change caused confusion and concern that 
        potentially 10 million taxpayers or more might have to file 
        amended tax returns to claim the exclusion. Fortunately, the 
        IRS has been able to program its systems to recalculate the 
        AGI, reducing the tax due or increasing the refund owed to 
        taxpayers in most cases. The IRS anticipates it will begin 
        issuing refunds of overpayments by the end of May and will 
        continue until all payments are made.\27\
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    \27\ Id.
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          If the IRS has the taxpayer's banking information, the 
        overpayment will be made by direct deposit. This will expedite 
        the additional refunds and is notable because IRS systems 
        historically have been programmed to make subsequent refund 
        payments via check. In rare circumstances, the reduction in 
        income may make a taxpayer eligible for a credit that was not 
        claimed on the filed tax return. Any taxpayer who falls into 
        this bucket must file an amended tax return to claim the credit 
        except for the childless worker EITC, for which the IRS has 
        said an election will be made on the taxpayer's behalf.\28\
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    \28\ Erin M. Collins, 2021 Filing Season Bumps in the Road: Part 
II, National Taxpayer Advocate Blog (Apr. 27, 2021), https://
www.taxpayeradvocate.irs.gov/news/nta-blog-2021-filing-
season-bumps-in-the-road-part-ii.
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  --Potential impact of unemployment insurance fraud on victims.--
        Sadly, when Congress authorized higher unemployment insurance 
        benefits as part of the CARES Act, fraud ``exploded,'' \29\ and 
        many innocent taxpayers are now bearing the brunt of this 
        fraud. As States must report unemployment insurance benefit 
        amounts to the IRS and the recipients on a Form 1099-G, Certain 
        Government Payments, many individuals received Forms 1099-G in 
        January reporting unemployment insurance benefits they had 
        neither claimed nor received. Even though these individuals 
        generally were victims of fraud perpetrated by identity thieves 
        who were able to falsely claim and receive benefits in their 
        names, they will now have to persuade their State unemployment 
        divisions to issue corrected Forms 1099-G.
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    \29\ Office of Inspector General, Department of Labor, DOL-OIG 
Oversight of the Unemployment Insurance Program (updated Mar. 31, 
2021).
---------------------------------------------------------------------------
          If they do not, the IRS is likely to send them notices 
        seeking tax and interest (and potentially penalties) on the 
        purportedly unreported amounts. Starting in late summer, fall, 
        or early winter, taxpayers will begin to receive IRS notices 
        proposing tax adjustments based on inconsistencies between 
        Forms 1099-G and their filed returns. My office is continuing 
        to work with the IRS and recommending that it delay the 
        issuance of notices to provide taxpayers and the States with 
        additional time to correct inaccurate Forms 1099-G.
  --Impact of mistaken enforcement actions.--In general, the IRS has 
        substantially scaled back its enforcement activities during the 
        pandemic. Initially, it announced its ``People First 
        Initiative'' under which it provided almost complete relief 
        from enforcement actions during the early part of the pandemic. 
        While examination and collection activity has resumed since 
        that time, the IRS is continuing to show forbearance in several 
        areas. Due to the mail processing backlog, for example, it has 
        temporarily waived any requirements to secure 2019 tax returns 
        to qualify for an installment agreement, an offer in 
        compromise, or currently-not-collectible-hardship status.\30\ 
        However, the IRS has sent taxpayers collection and other 
        notices with response dates that have passed. In addition, 
        although the IRS granted relief by offering filing extensions, 
        programming errors caused it to incorrectly assess and collect 
        the failure-to-pay penalty in some cases.\31\
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    \30\ See IRM 5.19.1.4.4.1(4) (Mar. 19, 2021) (granting an exception 
to secure an installment agreement without a 2019 tax return through 
June 30, 2021); IRM 5.16.1.2.9(12) (Apr. 13, 2021) (granting 
authorization to place accounts into CNC status even with one or more 
unfiled tax returns).
    \31\ See IRC Sec. 6651(a)(2).

    These are just a sampling of the additional challenges taxpayers 
have faced during this unprecedented filing season. I do not believe 
there are quick fixes this year. But there are steps the IRS can take 
over the next few years that will improve the taxpayer experience, 
protect taxpayer rights, and provide more cushioning if a disaster of 
this nature strikes in the future.
         ii. recommendations to improve the taxpayer experience
    We have recommended several steps Congress and the IRS can take to 
improve the taxpayer experience and enhance tax administration. Key 
recommendations are as follows:
A. Provide sufficient funding for the IRS to meet taxpayers' needs
    There has been considerable discussion in recent months about 
increasing IRS funding over a sustained period to help close the tax 
gap. While the goal of requiring taxpayers to pay their fair share is 
laudable, I want to emphasize that more funding is also needed to 
improve taxpayer service and ensure the protection of taxpayer rights.
    In fiscal year 2020, the IRS received 100.5 million telephone 
calls. Its employees answered only 24 percent of those calls, with hold 
times averaging 18 minutes.\32\ In fiscal year 2019, before the 
pandemic struck, the results were similar. The IRS received 99.4 
million calls and employees answered 29 percent.\33\
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    \32\ IRS, JOC Snapshot Reports: Enterprise Total (fiscal year 
ending Sept. 30, 2020).
    \33\ IRS, JOC Snapshot Reports: Enterprise Total (fiscal year 
ending Sept. 30, 2019).
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    The President's Management Agenda emphasizes the importance of 
high-quality customer service as measured by the American Customer 
Satisfaction Index (ACSI) and the Forrester U.S. Federal Customer 
Experience Index.TM \34\ By these measures, the IRS performs 
poorly. The ACSI report for 2019 ranked the Treasury Department 11th 
out of 12 Federal departments and said that ``[m]ost IRS programs score 
. . . in line with the overall rating for the Treasury Department.'' 
\35\ The 2019 Forrester report ranked the IRS 13th out of 15 Federal 
agencies and characterized the IRS's score as ``very poor'' \36\--and 
that was before the pandemic.
---------------------------------------------------------------------------
    \34\ Office of Management and Budget, President's Management Agenda 
7, 28 (2018), https://www.performance.gov/PMA/
Presidents_Management_Agenda.pdf.
    \35\ American Customer Satisfaction Index, ACSI Federal Government 
Report 2019, at 4 (2020).
    \36\ Forrester Research, Inc., The US Federal Customer Experience 
Index, 2019, at 15-16 (June 11, 2019).
---------------------------------------------------------------------------
    To underscore its concerns about taxpayer service, Congress enacted 
the Taxpayer First Act (TFA) in 2019 but did not provide additional 
funding to implement changes.\37\ The TFA directed the IRS to develop 
comprehensive multiyear plans to improve taxpayer services and 
modernize its information technology (IT) systems.\38\ The IRS 
submitted its TFA plans in January 2021.\39\ These plans will require 
significant additional funding to implement. In the National Taxpayer 
Advocate 2021 Purple Book, I made the following specific 
recommendations:
---------------------------------------------------------------------------
    \37\ Public Law No. 116-25, 133 Stat. 981 (2019).
    \38\ Id. at Sec. Sec. 1101 & 2101(a), 133 Stat. at 985, 1008.
    \39\ IRS Pub. 5426, Taxpayer First Act Report to Congress (Jan. 
2021), https://www.irs.gov/pub/irs-pdf/p5426.pdf.

  --Provide multiyear sustained funding for the IRS to finalize 
        implementation of its Integrated Modernization Business Plan so 
        it can replace its 1960s IT systems, create an integrated case 
        management system, and offer robust online accounts for 
        taxpayers and practitioners.\40\
---------------------------------------------------------------------------
    \40\ The IRS's IT challenges are discussed in more detail in the 
Most Serious Problems section of the National Taxpayer Advocate 2020 
Annual Report to Congress. See Most Serious Problem: Information 
Technology Modernization: Antiquated Technology Jeopardizes Current and 
Future Tax Administration, Impairing Both Taxpayer Service and 
Enforcement Efforts; Most Serious Problem: Online Records Access: Lack 
of Electronic Access to Taxpayer Records Through an Online Account 
Makes Problem Resolution Difficult for Taxpayers and Results in 
Inefficient Tax Administration; Most Serious Problem: Refund Delays: 
Taxpayers Whose Legitimate Returns Are Flagged by IRS Fraud Filters 
Experience Excessive Delays and Frustration in Receiving Their Refunds.
---------------------------------------------------------------------------
  --Provide sufficient funding for the IRS to implement the TFA, which 
        will change how the IRS engages with taxpayers and increase 
        digital interactions.\41\
---------------------------------------------------------------------------
    \41\ The IRS's funding needs to implement the TFA are discussed in 
more detail in the Most Serious Problems section of the National 
Taxpayer Advocate 2020 Annual Report to Congress. See Most Serious 
Problem: Digital Communications: Limited Digital Communications With 
the IRS Make Problem Resolution Unnecessarily Difficult for Taxpayers.
---------------------------------------------------------------------------
  --Replace the IRS budget structure with a new structure that better 
        reflects how the IRS operates and gives the IRS more 
        flexibility to move funds among its accounts so it can pay for 
        the full costs associated with its programs and initiatives 
        (e.g., the overhead and downstream taxpayer service costs 
        associated with compliance initiatives).
  --If Congress retains the current budget structure, ensure the IRS 
        receives balanced funding by considering the interactive 
        effects of changing the funding level for one IRS account on 
        other IRS accounts, including the downstream increase in 
        telephone calls and TAS cases likely to result from increased 
        enforcement funding.\42\
---------------------------------------------------------------------------
    \42\ The importance of balanced funding among the IRS's budget 
accounts is discussed in more detail in the Most Serious Problems 
section of the National Taxpayer Advocate 2020 Annual Report to 
Congress. See Most Serious Problem: Information Technology 
Modernization: Antiquated Technology Jeopardizes Current and Future Tax 
Administration, Impairing Both Taxpayer Service and Enforcement 
Efforts.

    The recent increase in customer service representatives will begin 
to help later this year, but I also urge Congress to provide additional 
funding for the IRS to continue to increase staffing on its toll-free 
telephone lines. Ideally, I would like to see the IRS answer every 
taxpayer's call. One hundred percent of calls answered in a timely 
fashion is a worthy goal and one to which taxpayers are entitled. Given 
that call volumes wax and wane, I understand that funding the IRS to 
answer every call would mean that customer service representatives 
would sometimes be underutilized. For that reason, my recommendation is 
that the IRS be staffed to answer at least 85 percent of taxpayer 
calls. As discussed below, customer callback technology could be 
utilized to ensure the needs of all taxpayers are met, even during peak 
call periods.
B. Prioritize the development of accessible, robust, and functional 
        online taxpayer accounts
    The IRS offers an online account option for individual taxpayers, 
but its usefulness is limited in two respects. First, most taxpayers 
who try to establish online accounts cannot do so because they cannot 
pass the e-authentication requirements.\43\ Second, the functionality 
of the accounts is very limited.
---------------------------------------------------------------------------
    \43\ IRS, Office of Privacy, Governmental Liaison and Disclosure 
response to TAS information request (Oct. 13, 2020) (stating that the 
authentication rate for IRS online applications requiring the highest 
level of assurance authentication, including online taxpayer accounts, 
was 42 percent in fiscal year 2020).
---------------------------------------------------------------------------
    For the majority of taxpayers who have been doing their banking 
online for two decades or more, the contrast between their online bank 
accounts and an online IRS account is stark. Most bank customers can 
pay their bills online, deposit checks online, and withdraw cash from 
the nearest ATM. They rarely need to speak with a bank representative. 
Because online accounts substantially reduce call volumes, customers 
who require personal service typically experience short hold times.
    Taxpayers who manage to establish online accounts on IRS.gov can 
view only limited information. They cannot view most relevant account 
information, including correspondence and account status, and they 
cannot conduct numerous transactions online. With the existing online 
account, for example, taxpayers cannot view images of the tax returns 
they have filed or information returns filed by third parties; view 
most notices (including the statutory notice of deficiency, the 
collection due process notice, and the notice of claim disallowance); 
update their contact information; file documents; submit an offer in 
compromise; access employee contact information for open examination, 
collection, or Appeals cases; view the status of compliance actions; or 
utilize secure messaging to communicate with an IRS employee. This 
functionality should not be considered a luxury for taxpayers; rather, 
these should be standard services the IRS provides for all taxpayers.
    Of the IRS's many technology needs, the development of robust, 
secure online accounts should be at the top of the list. This tool 
would be a game changer in how practitioners and taxpayers can 
communicate and work with the IRS. My version of a robust online 
account would allow taxpayers the ability to view all relevant 
information and conduct transactions through their online accounts, 
with strong security using two-factor authentication or similar 
safeguards. This would be the single most significant step the IRS can 
take to improve the taxpayer experience for the vast majority of 
taxpayers. Another key benefit of a robust online account would be the 
ability to free up IRS employees to assist taxpayers who are not able 
or not comfortable utilizing online accounts. This portion of the 
taxpayer population would greatly benefit from having immediate access 
to IRS employees through phone service or in person at Taxpayer 
Assistance Centers (TACs). Over time, robust online accounts will 
produce cost savings for the IRS, as the demand for IRS telephone 
service will substantially decline.\44\
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    \44\ For additional background, see National Taxpayer Advocate 2020 
Annual Report to Congress 44-59 (Most Serious Problem: Online Records 
Access: Limited Electronic Access to Taxpayer Records Through an Online 
Account Makes Problem Resolution Difficult for Taxpayers and Results in 
Inefficient Tax Administration).
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C. Expand customer callback technology to all IRS toll-free telephone 
        lines
    Many large businesses and Federal agencies with telephone call 
centers offer customers the option of receiving a callback when the 
wait time to speak with a customer service representative is long. The 
IRS offers this option on a few of its telephone lines, but the option 
is not yet offered on most lines, including the high-volume lines. 
Providing that option would reduce the time taxpayers spend waiting on 
hold and serve as a workload management tool for the IRS. When call 
volumes are low, telephone assistors can answer calls quickly. When 
call volumes are high, telephone assistors can call back taxpayers in 
the order in which their calls are received.\45\
---------------------------------------------------------------------------
    \45\ For additional background, see National Taxpayer 2020 Annual 
Report to Congress 28-43 (Most Serious Problem: Telephone and In-Person 
Service: Taxpayers Face Significant Difficulty Reaching IRS 
Representatives Due to Outdated Information Technology and Insufficient 
Staffing).
---------------------------------------------------------------------------
D. Reduce barriers to e-filing tax returns
    One of the biggest challenges the IRS has faced over the past year 
has been processing paper returns. Although more than 90 percent of 
individual taxpayers now e-file their returns, about 10 percent still 
mail them in on paper. Many of these taxpayers would prefer to file 
electronically but are prevented from doing so by IRS e-filing 
limitations. There are three principal limitations: (i) taxpayers 
sometimes are required to submit statements or other substantiation 
with their returns, and these attachments generally cannot be e-filed; 
(ii) some tax forms used by limited numbers of taxpayers are not 
accepted electronically; and (iii) taxpayers sometimes need to override 
default entries when preparing their returns with tax software, and 
some of these overrides make returns ineligible for e-filing. The IRS 
should address these limitations to allow all taxpayers the option of 
e-filing their returns.\46\
---------------------------------------------------------------------------
    \46\ For additional background, see National Taxpayer 2020 Annual 
Report to Congress 75-83 (Most Serious Problem: E-Filing and 
Digitalization Technology: Failure to Expand Digitalization Technology 
Leaves Millions of Taxpayers Without Access to Electronic Filing and 
Wastes IRS Resources).
---------------------------------------------------------------------------
E. Utilize scanning technology for individual income tax returns 
        prepared electronically but submitted on paper
    When taxpayers file returns on paper, IRS employees must manually 
transcribe the data line-by- line into IRS systems. Manually entering 
data from 17 million individual income tax returns is an enormous task, 
and transcription errors are common, particularly on longer returns. 
Transcription errors result in notices to taxpayers, taxpayer telephone 
calls, and taxpayer correspondence that must be reviewed and evaluated.
    Technology is available that would allow the IRS to machine read 
paper returns and avoid the need for manual data entry. One option is 
2-D barcoding. To utilize it, tax software companies would generate and 
imprint a horizontal or vertical barcode containing all the information 
on the return, and an IRS machine would read the barcode. (This is 
similar to the barcodes on items in supermarkets and other retail 
stores.) Many States have been using 2-D barcoding for paper-based 
income tax returns for more than a decade. A second option is optical 
character recognition software. This software has the advantage of 
reading handwritten returns as well as returns prepared with software, 
so it could eliminate the need to transcribe any individual income tax 
returns. With handwritten returns, however, sloppy handwriting could 
lead to errors.
    We understand the IRS is exploring the implementation of one of 
these forms of scanning technology. I encourage the IRS to move 
quickly. Scanning technology will improve accuracy and reduce costs, 
and it should be relatively easy to implement.\47\
---------------------------------------------------------------------------
    \47\ For additional background, see National Taxpayer Advocate 2021 
Purple Book 14 (Legislative Recommendation: Require the IRS to Work 
with Tax Software Companies to Incorporate Scanning Technology for 
Individual Income Tax Returns Prepared Electronically But Filed on 
Paper).
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F. Expand digital acceptance and transmission of documents and digital 
        signatures
    The March 2020 closure of IRS offices and mail facilities made it 
impossible for IRS employees to receive paper documents from taxpayers. 
As a workaround, the IRS issued temporary guidance that authorizes 
employees to accept and transmit documents related to the determination 
or collection of a tax liability by email using an established secured 
messaging system.\48\ Employees are also permitted to accept images of 
signatures (scanned or photographed) and digital signatures on 
documents related to the determination or collection of a tax 
liability. I strongly recommend the IRS make these temporary solutions 
permanent. In addition, the TFA requires the IRS to develop guidance to 
establish uniform standards and procedures for the acceptance of 
taxpayers' electronic signatures for powers of attorney (Form 2848) and 
tax information authorizations (Form 8821).\49\ It is my understanding 
that the first version of this tool is anticipated to go live this 
summer, and I hope the IRS will stick to that schedule.
---------------------------------------------------------------------------
    \48\ See Memorandum from Sunita B. Lough, Deputy Commissioner, 
Services and Enforcement, for All Services and Enforcement Employees, 
Control Number: NHQ-01-1120-0004, (1) Approval to Accept Images of 
Signatures and Digital Signatures [and] (2) Approval to Receive 
Documents and Transmit Encrypted Documents by Email (Dec. 1, 2020), 
https://www.irs.gov/pub/irs-utl/approval-to-accept-images-of-
signatures-and-digital-signatures.pdf; Memorandum from Sunita B. Lough, 
Deputy Commissioner, Services and Enforcement, for All Services and 
Enforcement Employees, Control Number: NHQ-01-0620-0002, (1) Approval 
to Accept Images of Signatures and Digital Signatures [and] (2) 
Approval to Receive Documents and Transmit Encrypted Documents by Email 
(June 12, 2020), https://www.irs.gov/pub/foia/ig/spder/nhq-01-0620-
0002.pdf.
    \49\ Public Law No. 116-25, Sec. 2302, 133 Stat. 981, 1013 (2019). 
For additional background, see National Taxpayer 2020 Annual Report to 
Congress 75-83 (Most Serious Problem: E-Filing and Digitalization 
Technology: Failure to Expand Digitalization Technology Leaves Millions 
of Taxpayers Without Access to Electronic Filing and Wastes IRS 
Resources).
---------------------------------------------------------------------------
    All of these changes are beneficial for taxpayers and practitioners 
and improve tax administration. I recommend that the IRS continue to 
move forward into the 21st century with additional digital taxpayer 
services.
G. Offer videoconferencing options to taxpayers
    Videoconference technology allows taxpayers and their authorized 
representatives to be both seen and heard and to share documents 
without being physically present. The IRS Independent Office of Appeals 
offers WebEx technology for virtual face-to-face conferences between 
taxpayers, representatives, and Appeals Officers. The IRS Office of 
Chief Counsel and the U.S. Tax Court are also conducting video 
communications and virtual trials using ZoomGov.com. Although 
videoconferencing should not replace in-person or telephone conference 
options, it adds a digital option to communicate with taxpayers when 
appropriate and may provide options for those with difficulty traveling 
or the inability to take extended time off from work.
    I recommend that the IRS evaluate the feasibility of expanding use 
of these technologies to as many taxpayer-facing functions as possible, 
without removing the in-person options for taxpayers. Unfortunately, 
existing bandwidth has been too limited to handle extensive use of 
these technologies. It is only recently that the IRS has permitted 
limited internal videoconferencing during COVID-19 closures. 
Videoconferencing should continue to be expanded and offered as an 
option to taxpayers because it can help fill current or future voids in 
face-to-face service at TACs and in dealing with revenue agents or 
revenue officers.
    In addition, taxpayers who are geographically remote from a TAC and 
taxpayers with mobility or transportation challenges may find 
videoconferencing technology more helpful and economical than traveling 
for an in-person conference. Even taxpayers who are not geographically 
remote may prefer the convenience of a virtual meeting. The IRS has 
utilized Virtual Service Delivery (VSD) in the past, but it should 
modernize its VSD capabilities to allow taxpayers to use neighborhood 
facilities such as local post offices, community centers, Volunteer 
Income Tax Assistance sites, and other partner locations to log onto 
secure IRS applications. It is my understanding that the IRS is 
exploring the feasibility of this option for remote locations. We 
encourage the agency to continue down this path.
                            iii. conclusion
    The 2021 filing season has presented unprecedented challenges for 
taxpayers and the IRS. The pandemic created some of these challenges 
and highlighted others. The challenges the IRS faced this year were 
heightened by its reliance on outdated technology and a workforce that 
has shrunk by more than 20 percent over the past decade.
    Taxpayer service must improve, and our citizens deserve a 
responsive and respectful tax administration that serves all taxpayers 
fairly. Closing the tax gap should neither result in reduced taxpayer 
service nor undermine taxpayer rights. To the contrary, voluntary 
compliance should be rewarded and not become a victim of increased 
enforcement. Congress and the IRS should ensure that efforts to narrow 
the tax gap are consistent with taxpayers' fundamental rights and 
encourage a fair and just tax system.
    I believe adversity creates opportunities, and the pandemic helped 
focus attention on areas where improvements are necessary and 
achievable. With congressional support and creativity, the IRS can 
capitalize on its ``lessons learned'' and improve its processes. I look 
forward to continuing to work with the IRS and Congress to help improve 
the taxpayer experience.

    Senator Van Hollen. Thank you, Ms. Collins. Commissioner 
Rossotti.
    Senator Hyde-Smith. Can you turn your mic up?
    Senator Van Hollen [continuing]. Rossotti, please--yes.
STATEMENT OF THE HONORABLE CHARLES O. ROSSOTTI, FORMER 
            COMMISSIONER, INTERNAL REVENUE SERVICE
    Mr. Rossotti. Sorry.
    [Laughter.]
    Mr. Rossotti. Sorry. So, thank you for inviting me about 
the tax gap. So, we estimate that the amount of taxes that were 
legally due but not paid in 2019 was actually about $574 
billion, and that would actually accumulate to $750 trillion 
over the next 10 years if nothing more is done. And by 
comparison, that amount is equal to all of the taxes paid by 
the lower-earning 90 percent of taxpayers, about 135 million 
people. And Commissioner Rettig, of course, just testified that 
the number might even be higher than that.
    So, we do estimate that it is practical to recover $1.4 
trillion over 10 years, but that would still only be 19 percent 
of the tax gap over that period, and in our estimate, all of 
that gain would be from the top 25 percent of taxpayers. So, 
tax compliance is very heavily driven by whether income is 
reported by third parties in a form that the IRS can 
efficiently use it. Where income is reported on documents such 
as W-2s and 1099s, compliance is 95 to 99 percent, and almost 
all that tax is paid voluntarily, without the IRS having to 
audit or do anything. But where income is not reported at all, 
compliance is as low as 50 percent.
    So, our proposed plan for shrinking this gap is based on a 
three-part program. First, move more of the income that's now 
low visibility into a higher-visibility category by filling 
some gaps in information that is not currently reported. 
Secondly, it is necessary to upgrade IRS technology in order to 
make use of this information, including information the IRS 
already has, as well as to improve the efficiency of all our 
IRS service and compliance activities. And third, it will be 
necessary to rebuild the IRS's skilled workforce and to provide 
them the tools to resolve taxpayer cases more rapidly and 
efficiently. And I want to stress that it is critical to use 
technology to make the entire service and compliance process 
more efficient, because just scaling up what the IRS does today 
will not accomplish the desired results, either for service or 
compliance.
    For example, currently, all the auditing that the IRS does 
only recovers about two and a half percent of the tax gap. For 
example, the IRS cannot efficiently evaluate information on 40 
million K-1 returns, on 1099-K returns reported by payers, and 
on foreign financial institutions that report under FATCA. It 
can't do that automatically, but modern technology would make 
it possible to use that information to precisely identify 
deficiencies.
    Technology would also allow the IRS to transform the 
follow-up process when deficiencies are identified, to make it 
far more accurate and efficient for both taxpayers and the IRS, 
more efficient than traditional auditing. And this kind of 
technology is not futuristic. It's widely used today, 
including, on a limited scale in the IRS, for example, in 
screening refunds. As noted by the Taxpayer Advocate, most of 
the gain from taxes and from our plan as well is from voluntary 
compliance, increased voluntary compliance. So, it is essential 
to make it easy for taxpayers to comply when they want to, and 
the investments that we propose would increase the ease and 
speed of dealing with the IRS and also avoid unnecessary 
audits.
    We also recommend that, if Congress grants the IRS 
additional authority, it should follow what is a bipartisan 
practice of establishing pertinent and specific taxpayer rights 
that would be relevant to the plan. And we have proposed 
several in our program. I would note that our program would 
require both authorization and consistent long-term funding 
from Congress, and we recommend not a sudden increase but a 
steady increase of 6 percent per year, over and above what is 
required for general operations, because spreading this over 10 
years is what will make it possible for the IRS to use this 
funding efficiently. But we think that, over a decade, this 
kind of an investment could gain revenue equal to about 20 
times its cost and also vastly increase the quality of service 
to taxpayers, which has been a subject today.
    I do have to acknowledge that this program, to implement, 
would be very challenging, but I've been running programs in 
business and government for 50 years, and I believe that it is 
achievable. But equally important, the gains would clearly 
outbalance the risk that involved. And as Congress did when it 
passed a law called the IRS Restructuring and Reform Act, it 
could set very clear compliance and service goals that could be 
established and monitored by Congressional committees, year by 
year.
    Finally, I just want to note that our proposals are for a 
long-term investment. In the short term, as we heard today, the 
IRS has to focus its immediate priorities on the filing season 
and economic recovery programs.
    And I would just close by noting that I believe that, apart 
from money, that fundamental fairness alone is a compelling 
reason to address the tax gap problem, especially when Congress 
might be considering increasing taxes on people who are already 
paying what they owe. Thank you, Mr. Chairman. I'm glad to take 
questions.

    [The statement follows:]
 Prepared Statement of Charles O. Rossotti, IRS Commissioner, 1997-2002
internal revenue service: narrowing the tax gap and improving taxpayer 
                                services
    Mr. Chairman and Ranking Member, thanks for allowing me to testify 
on how to shrink the ever-growing tax gap.
    We estimate that the amount of taxes that were legally owed but not 
paid was $574 billion in 2019 and will accumulate to $7.5 trillion over 
10 years. This amount in 2019 was equal to what the lower 90 percent of 
individuals, 135 million taxpayers, paid in Federal income taxes. 
Commissioner Rettig recently testified the tax gap may be even larger 
than that.
    We estimate that it is practical to recover $1.4 trillion of this 
tax gap over 10 years, which is still only 19 percent of the total. All 
this gain would be from the top 25 percent of taxpayers and the 
majority from the top 3 percent.
    Tax compliance is heavily driven by whether a taxpayer's income is 
reported by third parties in a manner that the information can be 
efficiently used by the IRS. Where income is reported and easily 
checked from forms such W-2's and 1099's, compliance is 95 to 99 
percent. Almost all the tax on that income is paid voluntarily without 
IRS intervention. Where income is not reported, compliance is as low as 
50 percent.

    Our plan for shrinking this tax gap is based on an integrated 
three-part program:

    First, move more income from low visibility to higher visibility by 
filling the gaps on income that is not reported by third parties to the 
IRS.
    Second, upgrade IRS technology to make full use of all the 
information available to the IRS to increase the effectiveness and 
efficiency of all IRS compliance activities.
    Third, rebuild IRS's skilled workforce and provide them technology 
to resolve taxpayer cases more rapidly and efficiently.

    It is critical to use technology to make the entire compliance 
process far more efficient because simply scaling up what the IRS does 
today will not produce the desired results. Currently, all of IRS 
auditing activity recovers only about 2.5 percent of the tax gap.
    For example, the IRS today cannot efficiently evaluate information 
on 40 million K-1 forms, on the 1099-k reports from payers, or on 
submissions required by FATCA. Modern technology can effectively use 
this information to identify potential deficiencies.
    Technology will also allow the IRS to transform the follow-up 
process when deficiencies are identified to one that is far more 
accurate and efficient for taxpayers and the IRS than traditional 
auditing.
    The technology we propose is not futuristic. It is widely used 
today including on a limited scale in the IRS, for example in screening 
refunds.
    Most of the gain in our plan comes from increased voluntary 
compliance so it is essential to make compliance as easy as possible. 
The investments we propose would increase the ease and speed of dealing 
with the IRS and reduce the number of unnecessary audits.
    We also recommend that this committee follow its bipartisan 
practice of establishing pertinent taxpayer rights when it considers 
legislating authority for the IRS and our plan proposes several new or 
clarified taxpayer rights.
    Our program requires both authorization and consistent long-term 
funding from Congress. We recommend a funding increase of about 6 
percent per year above what is required to sustain IRS operations. 
Spreading this increase over 10 years is what will allow the IRS to 
make effective use of the funds Congress is providing.
    Over a decade this investment will produce a revenue gain of about 
20 times its cost and will vastly increase the quality of service the 
IRS provides to taxpayers.
    Implementing this program will be challenging, but based on my 50 
years of managing programs in business and government I believe it is 
achievable and clearly outbalances any risks. As Congress did when it 
passed the IRS Restructuring and Reform Act, compliance and service 
goals can be established, progress could be measured year-by-year and 
closely monitored by Congressional oversight committees.
    I note that our proposals are for long term investment. In the 
short term, the IRS must focus on the immediate priorities of the 
filing season, the economic recovery program and the new child tax 
credit.
    Finally, I believe that fundamental fairness alone is a compelling 
reason to address this problem, particularly when Congress is 
contemplating raising taxes on people who already pay what they owe.

    Senator Van Hollen. Thank you, both, for your testimony. I 
think we'll also stick to 8-minute rounds for this second 
panel. And, Mr. Rossotti, let me start with you. Thank you for 
going through the different elements of your plan. And you're 
proposing a 6 percent increase in the IRS budget, per year, 
over a 10-year period. Is that correct?
    Mr. Rossotti. Yes, but over and above--you'd need some just 
for inflation, just to keep the lights on, probably 2, 2.5 
percent. So, if you add those two together, it would be about 8 
to 8.5----
    Senator Van Hollen. Got it. I haven't done that math. How 
does that translate into real dollars, for example, in the 
first year?
    Mr. Rossotti. Well, if you said 8 percent that would be 
about--what would that be? About a billion, I believe.
    Senator Van Hollen. Got it. So, part of it is--and I think 
both your testimony and that of Ms. Collins indicates that this 
cannot be an either/or and that, in other words, we need to 
invest in service, and we need to invest in enforcement, and 
technology actually helps both improve. Mr. Rossotti, in 
addition to the dollar investment increase, you also mention 
the need to collect additional information at the IRS; in other 
words, to match incomes with reporting. And we have that with 
certain kinds of income. Can you be a little more specific 
about exactly what authorities--additional authorities would be 
required----
    Mr. Rossotti. Yes.
    Senator Van Hollen [continuing]. In that area?
    Mr. Rossotti. There is already a very extensive reporting 
machine, as you know. There's about 22 different kinds of 
1099s. There's about 3.5 billion of those actually produced 
every year, so it's an everyday experience for every taxpayer 
to receive a 1099, and it helps the taxpayer prepare an 
accurate return, and it helps the IRS to check it.
    But there's certain gaps or holes if you will. It's like a 
bucket that has a lot of water in it, but it's got several 
holes. So, if you can fill those holes, which is what we 
propose, which is just one additional 1099 that would recover 
information, that report information on just money in and money 
out, on certain bank accounts, that would be an additional 
resource, together with the technology to put all this 
information together, because some of it--which, as I 
mentioned, that they already have but they can't use--you put 
that together, it would, first of all, help taxpayers, as it 
does today when they receive a 1099, to prepare an accurate 
return.
    It would allow the IRS to more efficiently check on whether 
the return is accurate, and we believe it would also help to 
avoid unnecessary audits. One of the problems that really 
bothers taxpayers today is that even though there's less 
auditing, some of it is very unproductive. It's not because 
they want it to be unproductive but because they don't have the 
information, the tools, to select the correct return. So, 
there's about as much as 20 percent of individual audits, and 
sometimes as much as 40 percent of corporate audits, that 
really were unnecessary. They were what's called no-change 
audits. Better information will help to eliminate that problem 
and target the effort where it will do the most good.
    Senator Van Hollen. Got it. And as I understand your 
proposal--and think you said you would have the IRS, again, 
focus where most of the money in this tax gap is, in terms of 
people who owe but don't pay, and that's at the higher income 
levels, whereas----
    Mr. Rossotti. Well, but roughly speaking. I mean, there is 
noncompliance, of course, at all levels, but the largest dollar 
amounts are in the upper income. And we estimate that about 85 
percent is in the top 25 percent of taxpayers, including 
related businesses that they own.
    Senator Van Hollen. Got it. Thank you. Ms. Collins, 
listening to your testimony and Mr. Rossotti's testimony, it 
does seem like this investment in technology can make a 
substantial improvement, potentially, in responsiveness to 
taxpayers' concerns. Can you talk specifically about what kinds 
of technology upgrades you think are important? I know you 
touched on some of them in your testimony.
    Ms. Collins. Yes. I think, if you think about the pandemic, 
some of the challenges taxpayer had were not being able to 
speak with the IRS because their phones were just inundated 
with calls. So, how else do you reach out to the IRS? You would 
have to physically go to one of their buildings. Unfortunately, 
due to COVID, we do not have a lot of the buildings staffed and 
open up to the public. So, it's really a challenge for 
taxpayers.
    Think about what we all do, every day. You send emails. You 
fax over a document. You upload a document. You receive 
documents. A lot of those, because of security reasons and 
others, the IRS has been unwilling to do. Due to COVID, they 
have made some temporary arrangements to allow some electronic 
transmission of documents, which has been huge. We have sort 
of, I would say, those who are fluent with respect or 
``comfortable,'' maybe is a better word, with electronics, 
either using a computer or their phone. So, for those 
individuals, having an online account where they could access 
their information, they can conduct a transaction, they could 
actually talk to--you know, think about, you call an airline or 
a hotel, you get Bob or, you know, this mythical person who 
actually sits there and would email you.
    Things like that would really make an improvement for those 
who are comfortable, but we also have a percentage of our 
society that are not comfortable or not able to do that. So, I 
do believe if we could provide a very robust online account, 
the majority of tax professionals--and no disrespect to my 
colleagues--would probably prefer not to talk to the IRS, and 
it would be quicker just to go online and get the information. 
But for those percentage of the population who don't have that 
ability, we could free up those 15,000 customer service 
representatives to actually answer calls and help those people. 
So, technology, I think, would take the pressure off the IRS, 
for a large percentage of taxpayers, to resolve their issues 
and then free up their employees to do those who really need 
it.
    Senator Van Hollen. Well, that makes sense. And you 
indicated that they may have done this on a pilot basis, right? 
You know, in terms of----
    Ms. Collins. Well, they've allowed some of their agents and 
others to do electronic messaging and other types of pilots 
that we've done, so to open up those communications. It was 
originally issued as temporary guidance because of COVID, and 
we have been pushing the IRS to consider making it permanent, 
as well as other additions to increase the digital 
communication.
    Senator Van Hollen. So, if one of my constituents today 
wanted to contact an IRS agent online, like through email, is 
that something--how would they do it?
    Ms. Collins. Right now, no. However, if they had an open 
case and they had an agent assigned to them, they might be able 
to work with that agent and do, through secure messaging and 
other types of things, a program where they could contact it, 
but there are hoops that the person has to jump through. So, 
if, again, my hypothetical Bob just wanted to pick up, you 
know, an email and talk to the IRS, that's not going to happen 
today.
    I would like to see that as part of the online account, 
that they could contact an IRS agent and get that information, 
whether it be 10 o'clock at night or 10 during the day because 
I do think, again, the overwhelming majority, especially the 
youth--they would much prefer to go online than actually pick 
up a phone. So, I do see, as future generations--as an 
organization, we really need to change how we do business.
    Senator Van Hollen. Well, that makes a lot of sense. I 
mean, obviously, we have to deal with the cybersecurity and 
confidentiality piece, but do you have a rough estimate of how 
much that would reduce the phone call volume by? I don't know 
if you've had a chance----
    Ms. Collins. I don't think we've ever----
    Senator Van Hollen [continuing]. To look at that.
    Ms. Collins [continuing]. Done a statistic, but I----
    Senator Van Hollen. Yes.
    Ms. Collins [continuing]. Do think, if you think about 
where we were as an organization 10 years ago, filing 
electronic returns, to where we are today, I don't think people 
would've thought we would get as far. I'm not sure the actual 
number. I know it's far in excess of 90 percent of the returns 
that have been filed have been filed electronically. I think, 
Commissioner Rossotti, you would be shocked to know that, 
during your tenure, it would've been 90 percent. So, I do 
think, as time is changing, we are seeing people going more 
towards digital than actually, unfortunately, human 
interaction.
    Senator Van Hollen. All right. Thank you. Senator Hyde-
Smith.
    Senator Hyde-Smith. Thank you. My question is for both 
witnesses, something that we've covered a little bit. In recent 
years, there have been rapid advancements in technology and 
increasingly complex tax avoidance strategies, some of which 
are legal and some which are not legal. Are IRS employees 
properly equipped to handle all of the intricately complex 
cases, or should the IRS evaluate where training of existing 
employees is sufficient or when it is necessary to recruit 
outside tax experts to bring new perspectives and skill sets to 
the agencies to address this?
    Ms. Collins. Who would like to go first?
    [Laughter.]
    Mr. Rossotti. Okay. Thank you, Senator Smith. I think that 
you are absolutely correct. I think the IRS, as Commissioner 
Rettig actually just mentioned, with several different 
approaches, both hiring, you know, the workforce of the future, 
well-trained people out of college, early in their career, but 
also mid-career and sometimes senior people--and I had a little 
bit of authority to do that when I was Commissioner, and, you 
know, you might be surprised--maybe you wouldn't be surprised--
to find that there are actually very, very capable people who 
would come in, even at a substantially reduced income, for a 
few years, maybe three to 5 years, to work at the IRS, to do 
those sorts of things, if they had the proper support and the 
proper funding.
    So, I do believe that you are exactly on target with your 
question, and I believe that should be part of a long-term 
program. The kind of program we said--I said, ``Rebuild a 
skilled workforce.'' I didn't go into detail, but it's very 
much along the lines of what Commissioner Rettig said about his 
three different tiers of employees.
    Ms. Collins. And I would agree with that. So, a year ago, I 
joined as the NTA. Prior to that, I was 20 years on the 
outside. So, similar to Commissioner Rettig, I represented 
individuals all the way to very large corporations. And again, 
no disrespect, but it's the experience. If you don't work in 
that arena, it's very difficult to be trained. Partnerships is 
an area that a lot of people are very confused with the law, 
and partnerships, in my opinion, is an area that you probably 
have a lot of abuses. So, it is very difficult for the IRS to 
be able to work efficiently when you have 10, 15, 20 very high-
priced, very well-informed, trained folks sitting on the other 
side of the table.
    So, the IRS does have a heavy lift, technically, to get up 
to speed, especially ever-changing--cryptocurrency, a lot of 
other things that are new, that agents have not had to 
historically deal with. So, one of the things, through the 
Taxpayer First Act, the IRS is really revisiting, and we're 
actually working with them on, is really the training program. 
Where do we have to go? For two reasons. One, we're focusing 
specifically on service and what we could do better for 
taxpayers, but, two, also, technology. How do we use 
technology, data mining, data analytics, and help agents get 
the information they need, and then how do we train these 
folks, or how do we bring people, entice them from the outside 
to come in to help work with our teams and train them so that 
our future leaders and our future employees are up to speed on 
technical issues?
    Senator Hyde-Smith. Very interesting. And, Ms. Collins, I 
just want you to describe some of the challenges that the IRS 
faces in its hiring process and what reforms the IRS could 
institute to quickly hire staff. I think you've got an opinion 
on that, and I'd like to hear it.
    Ms. Collins. Well, I like how you use the word ``quickly,'' 
because that's probably one of our bigger concerns. The IRS 
hiring process is a little slow, and as a result, I think we 
lose good talent, because if the process takes three to 6 
months before we make a commitment and make you an offer, you 
probably have had four or five offers somewhere else, and 
``Thank you very much, IRS. Have a nice day.''
    So, that is a real challenge. How do we get our folks--we 
have a division called Human Capital Resources Office, which 
basically is the equivalent of our HR group, that do most of 
the hiring. The advertising of the positions, we have a 
struggle, because as part of our agreement with the union, a 
lot of our positions we have to advertise from internal, which 
means--and I'll use TAS as an example. We may have a position 
at a mid-level leadership that we fill from within. So, we 
advertise, we interview, we get the position filled, but it's 
from within. We advertise that position. Somebody from within 
applies. So, great, we're promoting someone's career. You go 
all the way down; we've hired six people but only one new 
person. And that's what happens. And I could now have 12 months 
go by before I got that one new person.
    And as an organization, the IRS is seeing that. A lot of 
people move from within the organization, and they should have 
that opportunity to develop and build their careers, but I 
would like to see that there's some flexibility with the union, 
especially if we're going to be able to hire larger amounts of 
individuals, that we somehow work out that position so that we 
could advertise externally and internally and move the process 
along. So, it's really got to speed up the timeframe to make 
the offers, to do the interviews, and get people on board, 
because right now it's taking anywhere from three to 6 months, 
on average, to get folks in the door, which is just 
unacceptable.
    And in this environment, we're seeing--very difficult to 
have people want to come work here, not in the sense of--I 
mean, IRS, I believe, is a great place to work. I came back 
after my 30-some-odd years. I'm one of the old-timers that the 
Commissioner referred to. But, you know, it is a great place to 
work. It's just right now we're not seeing, across the board--
and private industry is seeing the same thing--applicants 
rushing in. So, we're going to be competing with outside 
industry. We need to be nimble, and we need to be--hire 
quickly, to get, you know, good people through the door.
    Senator Hyde-Smith. Thank you for that. And I've got a 
little bit of time left. Mr. Rossotti, we've heard calls from 
various interest groups to double the funding for a number of 
the FSGG agencies, including the IRS. And although the Budget 
Control Act spending caps will not be in place in the fiscal 
year 2022, we still face fiscal constraints as we make resource 
allocation decisions, of course, but why do you propose a 6 
percent increase for the IRS as a more reasonable trajectory 
for the agency?
    Mr. Rossotti. Well, I think that the situation that has 
been described by you and others about lack of service, as well 
as the gigantic tax gap, it's just too big a problem to fix in 
1 year or even 2 years. It simply has been accumulated over the 
period--when you kind of talk about technology--and I think Ms. 
Collins did a great job of describing what could be done on the 
service side, and there's so much more that could be done with 
information on the compliance side--but it just takes time.
    I'll answer your question about technology. I spent most of 
my time in the private sector, and I've been involved with 
several large banks. The four largest banks in this country 
each spend on technology, each, about four times what the IRS 
has for technology, and they only have about 20 percent as many 
customers, if you want to call a taxpayer a customer. So, 
that's, like, a 20-to-1 ratio, and they've been doing that for 
years. There's no way to make up that kind of a--you know, 
immediately. If you tried to, you really fail, and you would be 
back here asking questions of why the IRS isn't. But it is, as 
Ms. Collins said, able to do things on incremental steps.
    So, if you had an assured funding at a reasonable level, 
which I say is 6 percent per year, you know, as my estimate, 
over a period of 10 years, you would make enormous progress. If 
you tried to give them a huge amount for 2 years and then say, 
``Okay, now tell me what happened,'' frankly, it wouldn't work. 
So, if you really want to rebuild this to improve the service 
and compliance, it has to be done steadily, it has to be done 
carefully. And I believe the Congress--I've even submitted a 
proposal in my written testimony of how you could measure their 
progress, year by year; measure it on both the service and the 
compliance, so that you could see if they were actually 
accomplishing what they do. But if you said, ``Send it to me 
and then come back in 2 years,'' I'm sorry, it just wouldn't 
work.
    Senator Hyde-Smith. Thank you. I'm out of time.
    Senator Van Hollen. Thank you. I think we'll do one more 
round of 5 minutes each, and other Members of the committee can 
join in if they arrive, but, Mr. Rossotti, just so I understand 
your conclusion as to what the taxpayer and the country would 
gain from the 6 percent-a-year budget, I think you said it 
would yield a return of 19 times that investment over a 10-year 
period. Is that what you said?
    Mr. Rossotti. That is my estimate, you know, in 
approximately that range. And let me just say, it does--these 
numbers are sufficiently strong that I don't have to be 
precise. I mean, obviously, it's an estimate, but let's say I 
was wrong. And I did do an estimate of--so, if I was wrong, and 
it took another 5 years, it would still come out to 11 times, 
because there's just an enormous amount of money that is not 
being collected that should be, and it's not fair to the people 
who are paying.
    On the service side, it's the same thing. I totally agree 
with all the comments that have been made here about the vastly 
poor effect of having--on compliance, if you have service--I 
mean, what I hear from people, when I talk--people still call 
me up, because I'm a former Commissioner, not that I can do 
anything about it. But they say, ``You know what? I got this 
letter from the IRS. I couldn't even figure out what it said, 
but I was trying to get through to somebody. I finally got 
through to somebody, and they--you know, they didn't have the 
information to even answer my question.'' And it just goes on 
and on.
    That is terrible for the taxpayer. It's terrible for the 
IRS, but it's not because the IRS employees are incompetent, or 
they don't want to do the job. If they don't have the 
information at their fingertips or, you know, there's not 
enough of them to even answer the phone, then, you know, you 
have that problem for people who are honestly complying. So, it 
is not a single problem for a single year. It is a process of 
rebuilding, and I--you know, I don't want to tick off my three 
elements again, but that's what I believe is really required.
    Senator Van Hollen. No, I appreciate that, and I--there's 
clearly a direct link between service and being able to get 
someone on the phone or online and compliance. That's one 
category of lack of compliance: people who want to comply but 
just can't get the answer and information. The other category, 
of course, are people who are deliberately ducking their 
responsibilities----
    Mr. Rossotti. Sure.
    Senator Van Hollen [continuing]. Which--as you mentioned. 
And, you know, Ranking Member Hyde-Smith raised a really 
legitimate issue in her questions with respect to the 
Commissioner about past investments in technology----
    Mr. Rossotti. Yes.
    Senator Van Hollen [continuing]. Not always yielding the--
--
    Mr. Rossotti. Yes.
    Senator Van Hollen [continuing]. Results that have been 
promised. I understand that you've put forward a particular 
proposal with respect to technology. You do think--can assure 
us the gains that we----
    Mr. Rossotti. Well----
    Senator Van Hollen [continuing]. Could make?
    Mr. Rossotti. You know, I mean, assurance--I believe that--
what I would say is that the gains far outweigh the risks. If 
you go through any major change program, and this is true in a 
private business, you are going to have some setbacks. I'm not 
going to say that you won't. But let me just point out that the 
IRS has made significant progress with the funds that it has 
been given.
    When I was Commissioner, we were always on the GAO high-
risk list for technology. You know, they put out a list of the 
ten most risky agencies. We were right up there, and I was 
Commissioner. They're off that list. They're not on that list 
anymore. The GAO has written reports about some technology 
programs the IRS has done that have produced 15-to-1 returns, 
for example, on certain kinds of identity theft and so forth.
    So, they have made significant progress, but I think that, 
you know, Senator Hyde-Smith, you asked the question about the 
Commissioner. I can't comment about how he transferred funds, 
but I can say this--that if I was running a factory to build 
cars and you gave me money to build more cars, you know, more 
labor and more--but the electricity went off because there was 
a flood in the basement or the floor caved in, I wouldn't be 
able to produce more cars. I mean, that is almost the situation 
that the IRS can be in because you can't do compliance and you 
can't do enforcement unless you have information and if you 
have an information system that is not functioning, it doesn't 
do any good. So, it is really the two, together, that makes the 
difference. It's really impossible to segregate them. They 
absolutely have to go together.
    Senator Van Hollen. Ms. Collins, I have one last question 
for you regarding IRS enforcement. And as we've heard, over the 
past decade, IRS enforcement diminished due to a lack of 
funding. Audit rates fell, especially sharply for higher-
income----
    Ms. Collins. Right.
    Senator Van Hollen [continuing]. Individuals making more 
than $1 million a year, whereas, in contrast, IRS audits of 
working-class people receiving the EITC fell at a much lower 
rate. Did you look into this, and can you explain why 
enforcement, while it went down a little bit on both, went down 
a lot more on higher-income individuals, where I think the 
evidence is clear that there's a bigger tax gap?
    Ms. Collins. Right. I think part of the challenge for low-
income folks is it's a lot easier to automate an examination 
for someone who's either potentially a W-2 or an Earned Income 
Tax Credit return. A lot of that's automated. You don't need 
the same human resources; you don't need the same level of 
skill set to go through their return. It's probably four or 
five pages, versus two, three, four inches. So, it takes a 
different level of IRS employees.
    And if you look at the allocation of--in the enforcement 
side of large business and international, it's--I forget the 
actual number, but it's far less than 10 percent of the total 
IRS employees, where if you look at the individuals who focus 
on return processing smaller individuals, it's probably 
substantially half. So, they do have the resources, and they 
are focusing on that.
    Senator Van Hollen. Thank you. Senator Hyde-Smith, any----
    Senator Hyde-Smith. Ms. Collins, we've heard a lot today 
about COVID-19 as the reason for so many things happening, and 
then as Senator Boozman, who stated he'd been on this committee 
for several years, that a lot of these problems have been going 
on for several years. Which challenges to the filing seasons 
are unique to COVID-19 pandemic, in your opinion, and which are 
recurring problems the IRS will continue to face? Can you 
separate that out?
    Ms. Collins. I can try, but can I just real quick follow up 
on your last question about hiring? One thing I do want to 
point out--that the IRS has a new group or project that we're 
calling IRS Next, which is our future employees. We are working 
really hard to try and resolve the issue so that when and if a 
budget is approved that we can hire additional folks. We are 
trying to come up with solutions so that we can get people in 
the door quicker. So, although it is a current problem, we have 
potential solutions on the table to try and fix that. So, that 
is the goal that hopefully, come October, we can start focusing 
on.
    So--and back to your question, part of the challenges, 
especially on the returns that have been unprocessed, 
suspended, backlogged--you know, we use the different terms 
interchangeably--the paper returns was a challenge. As the 
Commissioner indicated, the service was shut down, so 
literally, if you filed your paper return, it sat in a trailer 
for potentially months or longer, and then by the time it got 
to an office to be processed, literally the pile was quite 
high. By the end of December, I think there was approximately 7 
million Form 1040s that still needed manually processed.
    So, with a paper return--and back to electronics--you need 
a human to sit down, take the return, and go line by line and 
enter it into the system. That's very time-consuming, versus if 
it's electronic or it can be scanned, I mean, literally, that's 
seconds, versus how many minutes does it take for a human? And 
then also susceptible to problems, because someone could type 
an error, transpose a number. So, paper returns are much more 
difficult for IRS individuals, for processing, so it's very 
time-consuming.
    So, if you are one of those 7 million people, you're 
probably not overjoyed to hear that we're finally down to 
300,000-plus. I'm a little more optimistic than the 
Commissioner. If they're down to 300,000 now, I think it'll be 
less than 60 days, based on the numbers that we're seeing, but 
again, if you're one of those 300,000, that's nothing to cheer 
about, because most likely your return's been sitting there for 
over a year. So, paper returns is a real problem for the IRS, 
and COVID made it even worse.
    The other challenge was, on one hand, thank you to 
Congress, by changing the law to allow the application of what 
we call the look-back rule to use your income from '19 versus 
'20 to determine the benefits of your credits, because it would 
potentially increase the credits. IRS was not able to change 
its systems fast enough, so again, those required manual 
processing. So, that's a large percentage of those cases 
sitting in suspense. They need a human to go into the systems 
and verify the 2019 return.
    The other challenge that, again, is COVID related, was 
the--what we refer to--the EIP payments, the Economic Impact 
Payments or the stimulus payments. You have to compare that to 
what is on line 30 of the 1040, which is a rebate credit. If 
there's any discrepancy on those, again, it gets pulled out, 
and you need a human to go ahead and process that.
    So, a lot of the cases sitting in suspense that are being 
worked are the result of change of law. They had challenges 
because, again, thank you, Congress, they reduced the 
unemployment income taxability by the 10,200. Again, that took 
a lot of resources off for the IRS to quickly go ahead and fix 
those. So, a lot of the challenges they're facing is indirectly 
the result of COVID, because it's legislation, but on top of 
it--this filing season's much better than last, because people 
are able to work remotely on electronic filing documents, but 
again, paper, paper correspondence, someone has to physically 
be in the building and work through--as the Commissioner said, 
sometimes it's a million a week--and that's a lot of 
correspondence to go through.
    Senator Hyde-Smith. Thank you very much.
    Senator Van Hollen. Thank you, Senator. Ms. Collins, thank 
you for being a terrific advocate on behalf of the taxpayers in 
the country, and Mr. Rossotti, thank you for sharing your 
expertise as a former commissioner. I think we've learned a lot 
from both of you on this panel, and we look forward to getting 
to work to try to implement the recommendations that you've 
both made. And thank you to the Ranking Member for your 
questions, and we've got a lot of work ahead of us.

                     ADDITIONAL COMMITTEE QUESTIONS

    The hearing record will be kept open for 7 days if Members 
want to submit questions for the record. This hearing is now 
adjourned.
    Senator Hyde-Smith. Thank you.
    Senator Van Hollen. Thank you.
    Ms. Collins. And please feel free to reach out, to the 
extent you all have questions or would like to get additional 
information.

    [The following questions were not asked at the hearing, but 
were submitted to the Internal Revenue Service for response 
subsequent to the hearing:]
      Questions Submitted to Hon. Charles P. Rettig, Commissioner
            Questions Submitted by Senator Chris Van Hollen
    Question 1. You have said that one issue contributing to the tax 
gap is abuse of conservation easements. This is an important program 
that the vast majority of participating landowners use honestly to 
protect land for future generations, but can you elaborate on how 
certain developers and promoters have abused this?

    IRS Response. Internal Revenue Code (IRC) Sec. 170(h) provides for 
a charitable contribution deduction so long as the easement donor meets 
all of the statutory and regulatory requirements. The value of the 
easement is determined based on a qualified appraisal as defined in 
Treas. Reg. Sec. 1.170A-13(c)(3) for contributions made on or prior to 
July 30, 2018, and Treas. Reg Sec. 1.170A-16 for contributions made 
after July 30, 2018. To claim a deduction, there must be a reduction in 
the property value due to the granting of the conservation easement. If 
there is no loss in value, no deduction is allowed. Many landowners 
correctly apply the law and use conservation easements as legally 
intended. However, not all conservation easements qualify for a 
charitable contribution deduction. In some instances, the taxpayers 
fail to satisfy the statutory and regulatory requirements. In others, 
the legal requirements are satisfied yet the value of the contribution 
is not properly determined.
    The IRS issued Notice 2017-10, designating specific syndicated 
conservation easement transactions as listed transactions and requiring 
disclosure statements by both investors and material advisors. In 
syndicated conservation easements, promoters take a provision of tax 
law for conservation easements and twist it. These abusive arrangements 
are designed to generate inflated and unwarranted tax deductions, often 
by using inflated appraisals of undeveloped land and partnerships 
devoid of a legitimate business purpose. These transactions are then 
sold to investors as a tax savings strategy. Typically, taxpayers are 
allocated a charitable contribution deduction that significantly 
exceeds their original investment. Taxpayers save on taxes, and the 
promoter, appraisers, and other professionals promoting the transaction 
receive large fees. The government must invest significant resources to 
try to collect the correct taxes due. As previously reported, from 
2016-2018 there are almost 800 cases claiming over $22 billion in 
conservation easements that the IRS is actively examining. The IRS 
continues to vigorously litigate these cases. Criminal Investigations 
is pursuing criminal fraud, and the Department of Justice has 
injunctions against and plea agreements from some promoters.
    On August 25, 2020, the Senate Finance committee issued its report 
on their investigation into Syndicated Conservation Easement 
Transactions. The investigation found:

        The transactions involve land valuations that appear so 
        inflated above their original purchase prices that they cannot 
        reasonably be characterized as anything other than abusive tax 
        shelters. Despite the formal documentation developed by the 
        promoters and nominal votes by investors, documents obtained in 
        this investigation clearly show that both the promoters and the 
        taxpayer-investors in these deals understood them simply as tax 
        shelters. At their core, they are transactions in which 
        taxpayers can save two dollars in taxes for every one dollar 
        they give to transaction promoters--with promoters pocketing 
        millions of dollars in fees for organizing the deals.

    Unfortunately, despite considerable enforcement activity, taxpayers 
and promoters continue to engage in these transactions. The IRS is 
committed to addressing this non-compliance and stopping abuse of the 
conservation easement provisions.

    Question 2. Does the use of virtual currency, which may allow 
anonymity in transactions, lead to the possibility of some avoiding tax 
reporting obligations? What has the IRS done in recent years to address 
problems that may arise due to the increased use of virtual currencies?

    IRS Response. Virtual/Cryptocurrency does provide different levels 
of anonymity in transactions. Typical transactions involving a 
blockchain provide access to publicly available data and certain levels 
of tracing. Other obfuscation methods are being instituted throughout 
the ecosystem of virtual/cryptocurrency to provide more anonymous 
activities.
    There are compliance risks inherent in digital asset use. The IRS 
works to mitigate these risks and promote voluntary compliance by:

  --Promoting awareness of compliance issues associated with digital 
        assets;
  --Issuing guidance;
  --Adding a question about virtual currency to Form 1040;
  --Sending letters to taxpayers identified through third-party 
        sources;
  --Acquiring technological enforcement tools;
  --Utilizing data analytics;
  --Enhancing existing compliance strategies;
  --Working with our law enforcement partners, both domestic and 
        international, to address common reporting standards, 
        deconfliction and elevated capabilities to identify and combat 
        criminal activities; and
  --Working with academia and the private sector to enhance internal 
        capabilities and look toward technical solutions to tracing 
        transactions.

    Question 3. Congress provided funds in the recently enacted 
American Rescue Plan for IRS system upgrades--almost $1 billion. Have 
you developed a plan on how you plan to use those funds? If so, can you 
share that plan with the subcommittee?

    IRS Response. We appreciate the additional funding Congress 
provided through the American Rescue Plan to support IRS's Integrated 
Modernization Business Plan (Modernization Plan) and related 
information technology (IT) modernization efforts. With the 
Modernization Plan funding, we will continue to make meaningful 
improvements in taxpayer service and compliance, while transforming 
foundational IRS technology to allow future innovation and quicker 
delivery of IT capabilities.
    Attached are the American Rescue Plan spend plan tables. We are 
committed to documenting our continued progress through the quarterly 
Omnibus reporting to Congress and to our oversight partners at the U.S. 
Government Accountability Office and the Treasury Inspector General for 
Tax Administration (TIGTA).
    We've developed an approach for this funding that accelerates 
existing Modernization Plan initiatives, begins initiatives from phase 
2 of the plan, and introduces new initiatives based on emerging needs 
and technologies. As shown in the attached preliminary spend plan 
(Table 4), IRS will invest in themes described in the Modernization 
Plan, including:

  --Security.--Accelerate expansion and integration of Secure Access 
        Digital Identity (SADI)--IRS's new NIST-compliant 
        authentication solution--across all taxpayer facing 
        applications, as well as accelerate existing cybersecurity 
        programs including identity and access management, 
        vulnerability and threat management, and security operations 
        and management.
  --Taxpayer/Customer Experience.--Continue the development of 
        foundational digital platforms and capabilities aligned with 
        the IRS Taxpayer First Act Taxpayer Experience Strategy, such 
        as expanding online accounts for individuals and tax 
        professionals, improving live assistance, and expanding multi-
        lingual access to information.
  --Infrastructure.--Establish off-premises capabilities and 
        efficiencies in the cloud to house modern applications.
  --Data.--Build new data platforms and capabilities for analytics 
        across service, enforcement, and operations support efforts, 
        including the use of Customer Account Data Engine 2 (CADE2) 
        data to move toward near real-time access to modernized 
        individual account data.
  --Legacy Systems Modernization.--Begin execution of the Individual 
        Master File (IMF) modernization strategy and accelerate IRS 
        technology footprint reduction through retirement, 
        consolidation, and refactoring of legacy applications.

    Question 4. The law requires publicly traded corporations to 
disclose ``Uncertain Tax Benefits'' in their filings with the 
Securities and Exchange Commission, which are tax breaks that 
authorities are more likely than not to disallow. However, for years 
now, we have seen corporations keep billions of dollars from these tax 
breaks, not because they were investigated and found to be legitimate, 
but because the statute of limitations runs out before the tax 
authorities reached any conclusion. According to recent analysis by 
Institute for Taxation and Economic Policy, in 2020 alone, ExxonMobil, 
General Electric, Verizon, Apple and 10 other corporations reported 
that they would keep $1.3 billion in previously claimed tax breaks for 
this reason.

    Question 4a. Corporations also report Uncertain Tax Positions to 
the IRS. What processes does the IRS use to scrutinize Uncertain Tax 
Benefits disclosed to the SEC, and Uncertain Tax Positions reported to 
the IRS?

    IRS Response. The Institute for Taxation and Economic Policy 
analysis referred to above does not give the complete picture. Due to 
IRC Sec. 6103, we can't comment on specific taxpayers or their 
situations, but we can say generally that such findings don't reflect 
whether or not the taxpayer had been examined. The IRS does not give 
taxpayers a finding that an issue is legitimate during an examination. 
Therefore, even if an examination is conducted, any release of tax 
reserves for book purposes will cite the expiration of the statute as 
the reason and not that the IRS found the issue to be legitimate. 
Furthermore, the Unrecognized Tax Benefits reported in the SEC Form 10-
K filings represents a global reserve balance that does not necessarily 
relate entirely to U.S. Federal Income tax. The unrecognized tax 
benefits could also relate to foreign or State income tax positions 
that do not affect the U.S. Income Tax filing.
    Taxpayers report uncertain tax positions to the IRS on Schedule 
UTP. The Schedule UTP is a tool used in conjunction with other risk 
analysis factors to identify the highest compliance risks among our 
taxpayer base and to assist in working issues effectively and 
efficiently. As part of that risk analysis, examiners review 
disclosures, external information like SEC filings, and other similar 
information to identify large, unusual or questionable items. TIGTA 
reviewed the Schedule UTP in 2018 and recommended that IRS consider 
modifications that would improve the information reported on the 
Schedule UTP. The IRS agreed with this recommendation and continues to 
evaluate potential improvements to the Schedule UTP.

    Question 4b. Would the IRS be able to investigate more of these 
Uncertain Tax Benefits with additional enforcement resources?

    IRS Response. Additional enforcement resources would position the 
IRS to increase audits and compliance activities of large corporate 
taxpayers.

    Question 4c. Why would the IRS allow the statute of limitations to 
run out on any claim for a corporate tax break when the corporation 
itself does not believe its claims can withstand legal scrutiny?

    IRS Response. Without specific facts, this is difficult to answer. 
The IRS does not have sufficient resources to examine every corporation 
that has disclosed uncertain tax benefits or uncertain tax positions. 
And, as stated previously, these disclosures are not a guarantee of tax 
non-compliance. However, for large corporations, it is unlikely that 
the IRS allowed the statute to expire on an examination or did not 
protect the statute on future tax years the IRS plans to examine. IRS 
examiners conduct a thorough risk analysis to determine whether to 
examine a taxpayer and what issues to examine. There are many variables 
to consider in making these determinations, including resources and 
materiality. As part of the risk analysis process, they look at 
disclosures, external information, and other sources to establish an 
examination plan.

    Question 5. On June 19, 2020, I joined Senator Cortez Masto and 
several of my colleagues to write you a letter that included 10 
recommendations to ensure that survivors of domestic violence can 
access their Economic Impact Payments.
    Please identify any recommendations included in the letter that the 
IRS has implemented.
    For any recommendations that the IRS has not implemented, please 
explain the reason why it was not implemented.
    As the IRS implements the monthly payments for the expanded Child 
Tax Credit that were included in the American Rescue Plan, what steps 
is the IRS taking to ensure that survivors of domestic violence are 
able to access these payments?

    IRS Response. The legislation authorizing the IRS to issue Economic 
Impact Payments (EIP) requires the payments to be based on a tax 
return. When a return is filed and joint payment is issued, we cannot 
legally determine who receives their rightful portion or benefit from 
the payment and it becomes a civil matter. None of the legislation 
authorizing the IRS to issue EIP authorizes the IRS to issue duplicate 
payments, even in the event an individual reports they are a victim of 
domestic violence. We continue to perform extensive outreach and an 
education campaign to help people understand the EIP and ensure 
awareness of the payments in vulnerable and underserved communities. We 
also have information available on IRS.gov regarding innocent spouse, 
filing a superseding return, and filing a claim if your payment is lost 
or stolen. When we did not have banking information on file for the 
second and third EIPs, we used banking information available from other 
Federal benefit accounts to deliver payments as quickly as possible. We 
also have a dedicated toll-free telephone line to provide assistance 
regarding questions and or misdirected payments.
                                 ______
                                 
   Questions Submitted to Erin M. Collins, National Taxpayer Advocate
            Questions Submitted by Senator Chris Van Hollen
    Question 1. The IRS has stated that a correspondence audit, which 
is often how the IRS audits working class taxpayers claiming the EITC, 
costs approximately $150 for the IRS. In your testimony, you cite IRS 
statistics showing that taxpayers with incomes below $50,000 fail to 
respond to proposed adjustments in correspondence audits 45 percent of 
the time. How can the IRS make this process work better for taxpayers, 
so they are able to answer the questions asked of them by the IRS?

    Response. Low-income taxpayers who receive the EITC must navigate 
complex eligibility requirements. The notices they receive from the IRS 
obfuscate these requirements. Some taxpayers do not know how to respond 
to the notices and therefore don't respond. As a result, some give up 
refundable credits to which they are entitled. For the National 
Taxpayer Advocate's 2021 Annual Report to Congress, we will be 
analyzing this issue, and we expect to provide details and 
recommendations to improve the level of response.
    My office has recommended that Congress simplify the EITC 
eligibility requirements with the twin goals of (i) increasing the 
number of taxpayers eligible for the EITC who claim and receive their 
benefits and (ii) reducing the improper payments rate. For a detailed 
set of proposals, see National Taxpayer Advocate fiscal year 2020 
Objectives Report to Congress, vol. 3 (Special Report: Earned Income 
Tax Credit: Making the EITC Work for Taxpayers and the Government), 
https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2020/08/
JRC20_Volume3.pdf.
    Short of Congress' restructuring the EITC and related family 
credits, I believe the IRS should take three steps to ease the burden 
on the taxpayers it examines.
    First, the IRS should create notices that are easier for taxpayers 
to understand and set forth clearly the issue it is examining (e.g., 
relationship or residency or income). For each issue, the IRS should 
explain why it is questioning the item on the return. It should include 
a questionnaire on which the taxpayer could itemize the list of 
documents he or she is providing to support the claim, along with an 
IRS-provided envelope the taxpayer may use to mail back a response. 
With each such notice, the IRS also should include a paper version of 
its online ``EITC Assistant,'' as many taxpayers do not have access to 
the Internet and therefore cannot avail themselves of online tools. 
With more informative notices designed to elicit a response from the 
taxpayer, more audited taxpayers will be able to respond and provide 
the necessary information to support their claims.
    Second, low-income taxpayers who are audited generally qualify for 
free assistance from a Low Income Taxpayer Clinic (LITC). To its 
credit, the IRS includes a list of clinics with its audit notices, but 
the information about LITCs could be given more prominence. For 
example, the notices could include two black-bordered boxes, one 
containing LITC information and the other containing TAS contact 
information.
    Third, if a taxpayer responds to an examination notice, whether in 
writing, by phone, or by visiting a TAC, the IRS should assign one 
employee to be the point of contact and to work the case. For field or 
office examinations, the IRS routinely assigns an auditor to each case 
so the taxpayer can interact directly with that individual concerning 
the exam. For correspondence examinations, the IRS does not provide 
audited taxpayers with the name or direct contact information of an 
employee with whom to work. Rather, the taxpayer must call a toll-free 
number and likely will speak to a different employee every time he or 
she calls.
    We understand the IRS initially does not assign cases in 
correspondence examinations in order to achieve processing 
efficiencies, but if a taxpayer responds to a notice to dispute it, we 
have recommended that the IRS provide the taxpayer with the ``name, 
telephone number, and unique identifying number of an IRS employee who 
can serve as their direct contact throughout the correspondence audit 
process, along with the employee's secure email address or the 
[Taxpayer Digital Communications] Secure Messaging access needed to 
send and receive documents and communicate electronically with the 
assigned examiner.'' See National Taxpayer Advocate 2020 Annual Report 
to Congress 102, 118 (Most Serious Problem: Taxpayers Encounter 
Unnecessary Delays and Difficulties Reaching an Accountable and 
Knowledgeable Contact for Correspondence Audits), https://
www.taxpayeradvocate.irs.gov/wp-content/uploads/2021/01/
ARC20_MSP_07_Correspondence.pdf.
    Assigning an employee to work with a taxpayer once the taxpayer 
responds to an examination notice would assist the IRS by ensuring it 
receives the information it needs to resolve the examination. More 
importantly, it would assist the taxpayer with preparing and submitting 
the information needed to resolve the exam expeditiously and 
efficiently. It would also educate the taxpayer as to the refundable 
credits' requirements. (We note that approximately one-third of each 
filing season's EITC claimants are new). This process would ensure the 
IRS records the correct address for the taxpayer, which is particularly 
important because lower income individuals change homes more frequently 
than affluent taxpayers. In our three-part EITC section of the 2015 
Annual Report to Congress, we noted that low-income taxpayers relocate 
at a rate of 20 percent per year, as compared to 12 percent of the 
population at large.

    Question 2. The IRS offers an online account option, but I 
understand its usefulness is limited. Why is it that we cannot 
communicate with the IRS as we do with our banks, and do you have 
recommendations for improvement?

    Response. The IRS offers an online account option for individual 
taxpayers, but as your question correctly states, its usefulness is 
limited in two respects. First, most taxpayers who try to establish 
online accounts cannot do so because they cannot pass the e-
authentication requirements.\1\ Second, the functionality of the 
accounts is very limited. For the majority of taxpayers who have been 
doing their banking online for two decades or more, the contrast 
between their online bank accounts and an online IRS account is stark. 
Most bank customers can pay their bills online, deposit checks online, 
and withdraw cash from the nearest ATM. They rarely need to speak with 
a bank representative.
---------------------------------------------------------------------------
    \1\ IRS, Office of Privacy, Governmental Liaison and Disclosure 
response to TAS information request (Oct. 13, 2020) (stating that the 
authentication rate for IRS online applications requiring the highest 
level of assurance authentication, including online taxpayer accounts, 
was 42 percent in fiscal year 2020).
---------------------------------------------------------------------------
    As I stated in my testimony and in my 2020 annual report, I believe 
the IRS should prioritize the development of robust online accounts so 
that taxpayers and their authorized representatives have the option of 
interacting online with the IRS for all common transactions, just as 
customers routinely interact with their financial institutions through 
online accounts. During the 2021 filing season, the IRS received 167 
million telephone calls. Only 9 percent of taxpayers reached a customer 
service representative--and only after lengthy hold times. This low 
level of service must not be repeated. An online account would allow 
taxpayers and the IRS to exchange information at their convenience, 
reducing their need to telephone the IRS and freeing up telephone 
assistors for taxpayers who have complex issues or do not have the 
ability or desire to communicate electronically.
    My understanding is that there are two reasons the IRS has not 
already made robust online accounts available--data security concerns 
and lack of funding to create the accounts and add key functionality. 
For obvious reasons, the IRS must ensure that taxpayer return 
information is protected and not subject to hacking. On a positive 
note, the IRS is implementing Secure Access Digital Identification 
(SADI) in conjunction with its Child Tax Credit Upload Portal and will 
be implementing it for other systems beginning in fiscal year 2022. 
SADI is anticipated to modernize the e-authentication platform and 
improve online access for all taxpayers.
    The IRS's technology challenges are well known, and it has not had 
the resources to make many critical systems upgrades or the ability to 
include key functionality required for online accounts. However, banks 
and other financial institutions face similar data security challenges, 
and as noted above, most of them have been offering robust online 
accounts for more than two decades. The IRS received significant 
supplemental funding for its Business Systems Modernization account as 
part of the American Rescue Act, and the Administration's fiscal year 
2022 budget proposal calls for an increase in base funding. It is my 
recommendation that the IRS use this funding to build better online 
accounts, increase functionality, and address data security challenges 
as quickly as possible.
    The IRS must prioritize the development of accessible, robust, and 
functional online taxpayer and practitioner accounts. Currently, 
taxpayers who manage to establish online accounts on IRS.gov cannot 
view most relevant account information, including correspondence and 
account status, and they cannot conduct numerous transactions online. 
With the existing online account, for example, taxpayers cannot view 
images of the tax returns they have filed or information returns filed 
by third parties; view most notices (including the statutory notice of 
deficiency, the collection due process notice, and the notice of claim 
disallowance); update their contact information; file documents; submit 
an offer in compromise; access employee contact information for open 
examination, collection, or Appeals cases; view the status of 
compliance actions; or utilize secure messaging to communicate with an 
IRS employee. This functionality should not be considered a luxury for 
taxpayers; rather, these should be standard services the IRS provides 
for all taxpayers.
                                 ______
                                 
      Questions Submitted to Hon. Charles P. Rettig, Commissioner
              Questions Submitted by Senator Patrick Leahy
(1).  Throughout the pandemic, and before it, my office has 
consistently heard from Vermonters who struggle to get ahold of 
employees at the Internal Revenue Services (IRS) when they have 
questions about their taxes. The IRS has been plagued by significant 
wait times and deteriorating rate of response for assistance provided 
through the national toll-free line. In 2020, only one in four callers 
ultimately got through to an IRS employee with an average wait time of 
27 minutes. At the same time, the IRS has been ``closing'' Taxpayer 
Assistance Centers (TACs) throughout the country and especially in 
rural areas such as towns in Vermont.
         For taxpayers living in rural communities with limited access 
to the Internet, the TACs are often the only option to receive 
assistance or guidance from the IRS. However, the overall number of 
TACs have declined and the number of TACs currently staffed with only 
one employee has increased in recent years. To make matters worse, many 
of the TACs that are supposed to be open are essentially closed with 
the no plans to reopen. Vermont has four TAC sites, of which two are 
virtual service delivery (VSD) only. Of the four, currently only one 
site is open and scheduling appointments with taxpayers. For some of my 
constituents, that would be a five to 6 hour roundtrip for an 
appointment.
         With Vermont's aging population and limited Internet access, 
many taxpayers still rely on paper forms. Reductions in the number of 
participating Tax Forms Outlet Program (TFOP) sites and in the number 
and type of forms provided through that program have also created 
barriers for taxpayers who would like to comply with the tax code.
         While budget restraints have undoubtedly forced the IRS to 
make difficult choices in recent years, reductions to taxpayer services 
are disproportionately impacting rural communities and making it 
difficult for rural taxpayers to efficiently and accurately pay their 
annual taxes. With President Biden's emphasis on closing the tax gap, I 
am hopeful that the IRS will be investing more in taxpayer services 
that can help increase compliance with the tax code and errors that can 
cost the IRS money in foregone revenue and error resolution.

    Question 1. How does the IRS plan to better serve and assist rural 
Americans, so that taxpayers in rural areas can correctly file their 
taxes?

    IRS Response. We recognize the need to serve all taxpayers through 
multiple channels so they can obtain assistance in the most convenient 
manner available to them. Providing taxpayer service continues to be a 
top priority for us, whether at Taxpayer Assistance Centers (TACs), 
through free tax preparation at a Volunteer Income Tax Assistance 
(VITA) site, over the phone, or online.
    We are committed to ensuring that we reach those taxpayers who are 
considered underserved and unserved. Over the past year, we have made 
significant progress in our outreach to the homeless, engaging directly 
with more than 7,300 private and local government agencies to provide 
EIP information to more than 6.8 million individuals. We have also 
greatly expanded services to those with limited English proficiency, 
providing translation services to taxpayers on the phone and in our 
TACs in 350 languages, and establishing an aggressive translation 
program on IRS.gov.
    A planned outreach program to taxpayers in rural communities was 
delayed due to the impacts of COVID-19; however, we will resume the 
program as soon as it is safe to deploy face-to-face services and 
targeted virtual services in communities our data has identified for a 
pilot program. This program will allow us to identify the types of 
expansion channels that will provide the services needed in those 
communities.
    Taxpayers in rural areas can access our products locally through 
the Tax Forms Outlet Program supported by our partnership with various 
Post Offices and Libraries. These participating locations provide 
taxpayers the ability to pick up tax products in their local area. In 
addition, we provide taxpayers the ability to order the products they 
need by calling our toll-free line, 800-829-1040.

    Question 2. What is the IRS' plan for reopening the TACs in rural 
areas that are currently closed, such as the center in Brattleboro, VT?

    IRS Response. Unfortunately, the Brattleboro, VT TAC is closed 
because our Individual Taxpayer Advisory Specialist retired in 2020. We 
hired a replacement specialist, who then resigned in January 2021. Our 
current hiring plans for this office include recruiting two new 
employees. That recruitment process has started. Our TAC leadership 
team has developed an Optimal Staffing Plan, which includes expanding 
our smaller, one-person TACs to a minimum of two technical employees. 
We are hopeful that we can initiate this plan effective October 1, 
2021. Doing so will reduce closures due to normal employee absences and 
due to normal attrition and retirements. Of the current 358 TACs, 20 
are unstaffed, 85 are one-person locations and 94 are two-person 
locations.
    Face-to-face service through the TACs is augmented by Virtual 
Service Delivery (VSD) in trusted partner locations. These locations in 
Vermont, like Montpelier and Rutland, provide service to taxpayers 
through a face-to-face computer video connection. We have been working 
with our partners at these sites to re-open that service to taxpayers. 
Unfortunately, the Montpelier VSD is in a State building that is closed 
to the public until September. The Rutland site is in a library that 
has not fully re-opened; they are waiting on funding to update their 
HVAC system. We will continue to work with the Rutland site to 
determine when it will be able to re-open.
    The IRS has also recently completed a VSD pilot that allowed 
taxpayers to use their personal computers, tablets, and smart phones to 
connect to assistors to resolve their issues. We are completing the 
analysis of that pilot and hope to incorporate that capability in our 
Rural Outreach Strategy.
    Currently, taxpayers in rural areas, who can't resolve an issue 
using online tools or the toll-free line, can call the dedicated TAC 
appointment line at 844-545-5640. More than half the time, the IRS 
assistor can resolve the issue immediately or offer a convenient self-
service option. When the taxpayer needs face-to-face service, the 
assistor schedules an appointment at the closest available TAC, which 
for our Vermont taxpayers can also currently include locations in New 
Hampshire or Massachusetts. However, taxpayers can get many services 
more conveniently through the mail or online at IRS.gov.
    We encourage taxpayers to view, download and print tax products 
from IRS.gov, where all finalized tax products are available. With the 
exception of Publication 17, taxpayers can order a paper copy of any 
current-year form, instruction, or publication from IRS.gov/OrderForms 
or by calling 800-829-FORM (3676). Generally, taxpayers receive 
products within 10 business days if the products are available.
    Most taxpayers can resolve their inquiries by visiting IRS.gov or 
by calling our toll-free line, 800-829-1040, from the convenience of 
their home or office. Resources available on IRS.gov include:

  --Forms and publications
  --Interactive tax law tools
  --Get Transcript by Mail
  --Where's My Refund?
  --Direct Pay
  --Online Payment Agreement
  --Understanding Your IRS Notice or Letter

    Taxpayers without Internet access can call our toll-free automated 
response systems that provide recorded information on a variety of 
topics. We also created Publication 5136, IRS Services Guide, to help 
taxpayers and practitioners locate the services they need.
    Taxpayers in rural areas can access our products locally through 
the Tax Forms Outlet Program supported by our partnership with various 
Post Offices and Libraries. These participating locations provide 
taxpayers the ability to pick up tax products in their local area. In 
addition, taxpayers can order the products they need by calling our 
toll-free line, 800-829-1040.
    We also make additional services available to taxpayers through our 
community partners and IRS programs. VITA and Tax Counseling for the 
Elderly (TCE) sites throughout the State offer free assistance with 
return preparation. VITA sites help people who generally make $59,000 
or less and people with disabilities or limited-English ability. TCE 
offers free tax preparation for all taxpayers, particularly those who 
are 60 years of age or older. The TCE program specializes in questions 
about pensions and retirement-related issues unique to seniors.
    During the traditional filing season, taxpayers can find VITA/TCE 
sites for their local area on IRS.gov. They may also check the IRS2Go 
mobile application. IRS2Go allows taxpayers to check their refund 
status, make a payment, find free tax preparation assistance, sign up 
for helpful tax tips, and more. IRS2Go is available in both English and 
Spanish.

    Question 3. What level of funding does the agency believe is 
necessary for the IRS to able reopen TACs and expand tax assistance 
programs for rural Americans throughout the country?

    IRS Response. The IRS and TACs need consistent funding levels to 
maintain current services and to expand services to the currently 
underserved and unserved communities. For example, the Optimal Staffing 
Plan outlined in question 2, above, costs approximately $30 million 
over the current level for Field Assistance operations.

(2).  Amid the pandemic, my office regularly hears from constituents 
asking about the status of their refunds. One single mother has had to 
reschedule needed medical treatment for her disabled son. Another had 
to postpone a home purchase. Normally the Taxpayer Advocate is able to 
help ensure that hardship cases are expedited. According to a recent 
report by the Treasury Department, the IRS has a backlog of over 8 
million individual returns and other transaction to process included 
within that backlog is over 3.5 million individual paper returns and 
almost 1.5 million amended returns. That is a 1,835-percent and 1,238-
percent increase, respectively, compared to the end of 2019 As of April 
7, the Taxpayer Advocate advised us that there were over 7 million 
returns in the IRS ``error resolution unit''. In this tax return 
``purgatory'', the Taxpayer Advocate has no ability to ``see'' the 
return or direct the IRS to process hardship cases.

    Question 1. The National Taxpayer Advocate issued a Taxpayer 
Advocate Directive to the IRS generally directing it to ``complete its 
processing of all unprocessed prior year tax returns and correspondence 
by May 1, 2021, or by April 15, 2021, provide a detailed plan for 
completion of the backlog processing.'' Has the IRS responded to this 
directive? How long does the IRS expect it will take to clear the 
backlog?

    IRS Response. We responded to the Taxpayer Advocate Directive (TAD) 
on March 1, 2021. In our response, we explained that we would not be 
able to complete the backlog by the dates indicated by TAS. The TAD 
contains planned actions that are underway for completing the backlog. 
As of June 2, 2021, the individual return backlog has been processed 
through the transcription function and the business return backlog has 
811,000 returns remaining to be processed. We are closely monitoring 
inventories to ensure all work is processed in the order received. This 
sometimes requires trans-shipping work from center to center according 
to resource availability. It also requires strategically using overtime 
in all operations to help work through the backlog inventories.

    Question 2. How many additional employees will be necessary to 
clear this backlog?

    IRS Response. It is difficult to provide an estimate on the amount 
of time it will take to clear the backlog completely through all the 
pipeline functions. To address the backlog inventories, we will 
continue hiring an additional 1,400 employees at our processing centers 
throughout the summer months. We will also convert over 1,000 seasonal 
employees to a permanent work schedule, which will ensure more 
employees are available to work throughout the year.

    Question 3. How does the IRS expect Americans to file their taxes 
on time when the agency cannot process people's tax returns in a timely 
manner?

    IRS Response. The IRS workforce navigated preparation for the 2021 
filing season (FS2021) while continuing to implement COVID-related 
relief measures and delivering an extended 2020 filing season. These 
circumstances challenged our ability to make the necessary annual 
changes for FS21. Nonetheless, due to the ongoing efforts of our 
employees, we delivered a successful filing season again this year.
    FS2021 opened successfully on February 12. To give you an idea of 
how well our systems performed, the IRS received over that initial 
weekend a total of 55 million submissions. These submissions included 
individual Federal returns and other items such as state tax returns, 
amended returns and returns filed by businesses. At the peak that 
weekend, our IT systems enabled us to successfully receive 335 
submissions per second.
    The February 12 opening of the filing season was slightly later 
than in previous years. The delayed start gave us time to do additional 
programming and testing of our systems following the December 27 tax 
law changes that provided the second round of EIPs and other benefits. 
The additional programming and testing ensured that people would 
receive their needed tax refunds and any remaining stimulus tax credits 
they might be eligible for as quickly as possible.
    After carefully considering all the options, the Department of the 
Treasury (Treasury) and the IRS determined a limited FS2021 deadline 
extension for individuals filing Form 1040 to May 17, 2021, was in the 
best interest of tax administration. On March 17, Treasury and the IRS 
announced that the deadline for individuals to file Form 1040 and pay 
their Federal income tax was extended from April 15, 2021 to May 17, 
2021. IRS Notice 2021-21 provided details on the additional tax 
deadlines that were postponed until May 17.
    We are now opening mail within normal timeframes and all error-free 
individual returns received prior to 2021 that do not require further 
review have been processed. We understand the importance of timely 
processing tax returns and issuing refunds. We continue to work the 
returns that need to be manually reviewed due to errors. We are 
rerouting tax returns and taxpayer correspondence from locations that 
are behind to locations where more staff is available, and we are 
taking other actions to minimize any delays.
    Tax returns are opened and processed in the order received. As the 
return is processed, it may be delayed because of issues such as errors 
concerning the Recovery Rebate Credit, missing information, or 
suspected identity theft or fraud. If we can fix the issue without 
contacting the taxpayer, we will. If we need more information or need 
the taxpayer to verify that it was they who sent the tax return, we 
will write the taxpayer a letter. The resolution of these issues 
depends on how quickly and accurately the taxpayer responds, and the 
ability of trained IRS staff working under social distancing 
requirements to complete the processing of the return.
                                 ______
                                 
            Questions Submitted by Senator Joe Manchin, III
(1).  Earlier this year, you appeared before the Senate Finance 
Committee and explained how the U.S. Government is losing billions in 
unpaid taxes. While the tax code has grown more complex over the past 
decade, the agency's budget and staffing has not kept pace. Since 2010, 
the number of tax returns has grown by 9 percent, but IRS funding has 
been cut by 21 percent, the number of revenue agents, who can conduct 
audits, has fallen by 35 percent, and the audit rate has fallen by 45 
percent. The most recent official IRS estimates said that every year 
from 2011 and 2013, the IRS failed to collect $441 billion in tax 
money, but you have stated that it could possible exceed $1 trillion 
per year. That is a shocking number. The administration has proposed to 
boost the IRS's budget by $80 billion over the next decade to increase 
enforcement to acquire an additional $300 billion in new revenue from 
2022 through 2031.

    Question 1. Are you supportive of the administration's plan to 
allocate $80 billion to the IRS for enforcement and how do you plan on 
using that funding to increase enforcement?

    IRS Response. Yes, the IRS contributed to the development of this 
proposal and fully supports it. With the American Families Plan Tax 
Compliance Agenda--approximately $80 billion over 10 years--the 
administration proposed an ambitious program to foster a tax system 
where Americans pay the taxes they owe. The proposal has four 
transformational elements:

  --Provide the IRS the resources it needs to address sophisticated tax 
        evasion.
  --Provide the IRS with more complete financial information and 
        resources to intake and analyze the data.
  --Overhaul outdated technology to help the IRS identify tax evasion 
        and serve customers.
  --Regulate paid tax preparers and increase penalties for those who 
        commit or abet evasion.

    The plan proposes ramping up IRS enforcement of the tax laws and 
the associated funding and staffing over a decade but the additional 
resources will go toward enforcement against those with the highest 
incomes and audit rates will not rise relative to recent years for 
those earning less than $400,000 in actual income. Because the 
expansion in the IRS's budget is phased in over a 10-year horizon, each 
year the IRS's workforce should grow by no more than a manageable 15 
percent. It also includes increased funding for technology which is 
phased over the 10-year period so IRS IT can modernize in an orderly 
and effective way. The combination of authority to regulate paid 
preparers, additional staff, additional financial information 
reporting, and technology to analyze it will allow the IRS to increase 
enforcement dramatically.

    Question 2. How does the IRS plan to collect unpaid taxes on 
transactions using cryptocurrency?

    IRS Response. The IRS has announced a campaign to address 
transactions related to cryptocurrency. The virtual currency campaign 
addresses noncompliance related to the use of virtual currency, 
including cryptocurrencies, through multiple treatment streams 
including outreach, soft letter contacts, and examinations. These 
compliance activities have begun and follow the general tax principles 
applicable to all transactions in property, as outlined in Notice 2014-
21. The initial soft letter mailings have resulted in numerous amended 
returns. We will continue to implement appropriate compliance activity 
under this campaign to address potential cryptocurrency non-compliance.
    The IRS can identify, collect, and liquidate virtual currency, as 
it would other assets. When applicable, the IRS considers all assets in 
determining specific plans of action to collect taxpayers' unpaid 
taxes.
    We are working on multiple collaborative initiatives with the 
private sector, academia and others to identify tax signatures in 
blockchain data, ways to identify unreported income and look at sectors 
of the ecosystem that are facilitating this activity.
    We will also continue to work with Treasury's Financial Action Task 
Force (FATF) and Organization for Economic Cooperation and Development 
(OECD) to highlight the challenges in this area and propose new 
reporting requirements to ensure proper compliance.

    Question 3. Do you believe that most of the uncollected taxes are 
sitting in an international tax shelter?

    IRS Response. We do not believe that most of the uncollected taxes 
are sitting in international tax shelters. The most recent estimate of 
the gross tax gap is $441 billion. The gross tax gap is composed of 
three components: nonfiling, underreporting, and underpayment. The 
estimated gross tax gaps for these components are $39 billion, $352 
billion, and $50 billion respectively. The gross tax gap estimates are 
also segmented by type of tax. The estimated gross tax gap for 
individual income tax is $314 billion; for corporate income tax, it is 
$42 billion; for employment tax, it is $81 billion; and for estate and 
excise tax combined, it is $3 billion. The tax gap estimate is not 
segmented by issue (e.g., international tax shelters). If international 
noncompliance is identified in the examinations that are the foundation 
for each estimate, they are implicitly included in the estimate.
    Outside of the tax gap methodology, recent research indicates that 
there could be as much as $50 billion in underreported tax owed on 
income generated from offshore assets and from pass-through business 
activities like partnerships. These activities are difficult to detect 
and are likely under-represented in IRS official tax gap estimates.

    Question 4. Besides funding, what authorities does the IRS need to 
improve the collection of taxes in the future?

    IRS Response. Treasury recently released the Green-book, listing 
various legislative proposals aimed at improving tax administration. 
These proposals, if passed into law, will help to close the tax gap. 
The American Families Plan Tax Compliance Agenda also includes 
proposals to improve our ability to promote compliance. Research 
demonstrates that mandatory third-party information reporting 
dramatically improves voluntary compliance. Additional reporting 
requirements related to digital assets would improve the Service's 
ability to collect taxes in the future.

    An additional IRS authority that would benefit tax administration:

  --The authority to regulate return preparers: IRS justification on 
        the benefits of regulating return preparers is well documented. 
        IRS-CI has historically spent approximately 25 percent of our 
        investigative time working refund crimes, such as the Return 
        Preparer Program, Questionable Refund Program, and Stolen 
        Identity Refund Fraud schemes. IRS authority to regulate return 
        preparers would enable us to more readily stop refund crimes 
        before they occur and keep those issues in the realm of a civil 
        regulatory issue. Post enactment, we would reduce the time 
        currently expended on refund crimes matters significantly and 
        divert those resources to high impact cases such as 
        international and offshore tax evasion cases.

(2).  A 2016 flood in Richwood, West Virginia caused massive 
destruction and millions of losses. The flood destroyed 80 homes and 
businesses and damaged another 100 structures, including the middle and 
high schools and the wastewater treatment plant and sewer lines. 
Unfortunately, ninety-five residents had to be rescued from the nursing 
home, which closed, eliminating 136 jobs. Overall, losses totaled more 
than $50 million. A review of the Richwood's flood spending plan 
illustrated that the mayor and other city officials were not paying the 
employment taxes for the city employees. According to the city, there 
was no money to pay the taxes because, years after the flood, the 
Federal Emergency Management Agency (FEMA) had not reimbursed the city 
for the cost incurred to hire people during the recovery. The Trust 
Fund Recovery Penalty and fines totaled approximately $325,504 a few 
years ago. The nonpayment also lead to criminal charges and IRS liens 
against the mayor and other city officials. Currently, the city of 
Richwood is striving to pay the amount owed and remove the IRS lien, 
but have ran into a few hurdles getting this issue resolved.

    Question 1. How often does the IRS pursue municipal officials for 
unpaid employment taxes?

    IRS Response. As a matter of Federal tax administration, employment 
tax is generally the liability of the employing entity rather than the 
individual officials of the entity. Under certain circumstances, 
individual liability may arise.
    One such example is the Trust Fund Recovery Penalty (TFRP), 
authorized by IRC Sec. 6672. The TFRP represents the amount of the 
unpaid trust fund taxes. It may be assessed against any person required 
to collect, account for, and pay over taxes held in trust who willfully 
fails to perform any of these activities. As such, this penalty could 
apply to any individual who bears the responsibility and willfully 
fails to take the actions described above, not just municipal 
officials.

    Question 2. Could you commit to working with my office and the City 
of Richwood to calculate the amount owed to remove the IRS lien?

    IRS Response. The IRS is always willing to work with taxpayers and 
their duly authorized representatives to resolve tax liabilities. 
Taxpayers or their authorized representative can find out the amount 
required to fully pay any Notices of Federal Tax Lien that attach to 
their property or rights to property by contacting our Centralized Lien 
Operation at (800) 913-6050. If you need assistance with a particular 
case, please contact our Legislative Affairs--National Congressional 
Affairs office.

(3).  Last time that you appeared before this Committee, we were able 
to have a discussion regarding the modernizations of the IRS. Now, more 
than 2 years after the Integrated Modernization Business Plan was 
released, I am still appreciative of your commitment to putting the 
agency's information technology on a path toward modernization over the 
course of the next 6 years. There's no question that the efficient 
operation of the Internal Revenue Service is integral to the 
functioning of our government. However, I want to point out that the 
dynamics in rural areas like West Virginia need to kept in mind as the 
modernization plan is rolled out. If the IRS begins to limit 
constituent access to paper forms to make their processing more 
efficient and switches to online services it may only be favorable to 
some. For the people who don't have broadband access or don't feel 
comfortable using the Internet this will result in a disservice. And 
unfortunately, this is the case for many West Virginians.

    Question 1. Can you provide the committee with an update on the 
modernization plan? As a result of the COVID-19 pandemic, do the IRS 
intend to maintain a 6 year window for completion?

    IRS Response. The IRS Integrated Modernization Business Plan (Mod 
Plan) was published in April 2019 and provided a 6-year view of IT 
modernization goals. Since then, we have adjusted and executed the Mod 
Plan, delivering significant modernized capabilities as described in 
the fiscal year 2019 and fiscal year 2020 Annual Key Insights Reports 
(AKIR). We delivered these reports to Congress on April 13, 2020, and 
March 31, 2021, respectively.
    Although 2020 was a year of unprecedented challenges for the 
country, we are proud to have successfully implemented the CARES Act, 
managed an extended tax filing season, and delivered 100 percent of the 
planned modernization capabilities. Examples include expanding customer 
callback options for taxpayers to a total of five lines, saving 
taxpayers 486,000 hours of live hold time, and delivering a new 
platform that uses layers of artificial intelligence to detect 
potential fraud. We are committed to modernizing IRS IT in support of 
our mission to provide top-quality taxpayer service and to enforce the 
tax laws fairly. We continue to deliver required technological 
improvements that are comparable to leading financial institutions, 
while maintaining privacy and security and meeting new legislative 
mandates with unprecedented speed and accuracy.
    The enactment of the American Rescue Plan Act of 2021 (American 
Rescue Plan) has enabled us to reimagine the modernization program and 
go beyond the parameters of the original Mod Plan published in April 
2019. The funding received through the American Rescue Plan will aid 
the IRS in modernizing IT foundational capabilities and infrastructure 
through the acceleration of existing programs and the addition of new 
programs to the portfolio. IRS Omnibus quarterly reports will include 
updates on the entire modernization program, including those 
capabilities funded through the American Rescue Plan legislation, 
beginning in the first quarter of fiscal year 2022.
    Our modernization efforts have been constrained by the lack of 
predictable and consistent funding. Through the first 3 years of the 
plan (fiscal year 2019-2021), we have received just over half (55 
percent) of the Business Systems Modernization funding envisioned in 
the initial plan. This has resulted in rescoping and rescheduling, even 
with our use of user fees and inter-appropriation transfers to support 
delivery. We have consistently delivered on our modernization efforts, 
though often more slowly than initially planned due to this rescoping 
and rescheduling. Additional multi-year funding included in the 
American Families Plan will allow us to address foundational 
modernization needs to bring our technology up to modern standards and 
deliver IT improvements to tax administration that meet the needs and 
expectations of taxpayers.

    Question 2. What efforts have been made to this point to ensure 
rural areas are not being left behind during this transition?

    IRS Response. We recognize the need to serve all taxpayers through 
multiple channels, so they can obtain assistance in the most convenient 
manner available to them. Providing taxpayers with free tax preparation 
at VITA sites continues to be a top priority for us. We are committed 
to ensuring we reach those taxpayers who are considered underserved and 
unserved. Recently, we engaged community organizations in a national 
symposium identifying resources available for anyone interested in 
partnering with the IRS to start a VITA program in rural areas.
    Currently, taxpayers in rural areas who can't resolve an issue 
using online tools or the toll-free line can call the dedicated TAC 
appointment line at 844-545-5640. More than half the time, the IRS 
assister can resolve the issue immediately or offer a convenient self-
service option. Taxpayers can get many services more conveniently 
through the mail or online at IRS.gov.
    We encourage taxpayers to view, download and print tax products 
from IRS.gov, where all finalized tax products are available. With the 
exception of Publication 17, taxpayers can order a paper copy of any 
current-year forms, instructions and publications, they can order them 
(except Publication 17), from IRS.gov/orderforms or by calling 800-829-
FORM (3676). Generally, taxpayers receive products within 10 business 
days if the products are available.
    Most taxpayers can resolve their inquiries by visiting IRS.gov or 
by calling our toll-free line, 800-829-1040, from the convenience of 
their home or office. Resources available on IRS.gov include:

  --Forms and publications
  --Interactive tax law tools
  --Get Transcript by Mail
  --Where's My Refund?
  --Direct Pay
  --Online Payment Agreement
  --Understanding Your IRS Notice or Letter

    Taxpayers without Internet access can call our toll-free automated 
response systems that provide recorded information on a variety of 
topics. We also created Publication 5136, IRS Services Guide, to help 
taxpayers and practitioners locate the services they need.
    Taxpayers in rural areas can access our products locally through 
the Tax Forms Outlet Program supported by our partnership with various 
Post Offices and Libraries. These participating locations provide 
taxpayers the ability to pick up tax products in their local area. In 
addition, taxpayers can order the products they need by calling our 
toll-free line, 800-829-1040.
    We also make additional services available to taxpayers through our 
community partners and IRS programs. VITA/TCE sites throughout the 
State offer free assistance with return preparation. VITA sites help 
people who generally make $59,000 or less and people with disabilities 
or limited English ability. TCE offers free tax preparation for all 
taxpayers, particularly those who are 60 years of age or older. The TCE 
program specializes in questions about pensions and retirement-related 
issues unique to seniors.
    During the traditional filing season, taxpayers can find VITA/TCE 
sites for their local area on IRS.gov. They may also check the IRS2Go 
mobile application. IRS2Go allows taxpayers to check their refund 
status, make a payment, find free tax preparation assistance, sign up 
for helpful tax tips, and more. IRS2Go is available in both English and 
Spanish.

(4).  It is no secret that the talk of Congress right now is the 
possibility of an infrastructure package. However, in order for an 
infrastructure package to be passed, it goes without saying that we 
have to have a way to pay for it and pass some sort of tax reform. I 
believed, and still do, that real reform needs to meet a few goals: it 
needed to focus on permanent relief for working class families; make 
small businesses and corporations competitive in a global economy; be 
fiscally responsible; and simplify the tax code. As we continue to 
debate and discuss next steps on an infrastructure package, we need to 
keep these thoughts in mind. We cannot return to the strictly partisan 
methods that have been used by both parties to advance legislation with 
no input from our friends on the other side of the aisle. Reaching an 
agreement on a package can be done if we work together.

    Question 1. In your mind, what areas of tax reform should Congress 
examine as we look for potential pay fors for an infrastructure 
package?

    Treasury Office of Tax Policy Response. The administration has 
provided numerous revenue proposals in the American Jobs Plan. These 
proposals are described in more detail in https://home.treasury.gov/
policy-issues/tax-policy/revenue-proposals and generally focus on 
reforming corporate taxation, particularly in the international tax 
area. Treasury will continue to work with Congress on these reforms.

    Question 2. Are there portions of the 2017 tax bill that are being 
discussed for reform that should be changed? Are there things that 
should be left untouched?

    Treasury Office of Tax Policy Response. The American Jobs Plan 
proposal fixes the problems of both prior law and current law. The plan 
raises the corporate income tax rate from 21 percent to 28 percent. 
This is an administratively simple way to raise revenue and increase 
the progressivity of the tax system. Similarly, in the international 
tax area, the American Jobs Plan proposes eliminating the (QBAI) 
exemption in the GILTI minimum tax for the first 10 percent return on 
offshore tangible assets, and repealing FDII. These changes would 
eliminate offshoring incentives. A much stronger minimum tax (with 
country-by-country administration and a higher rate) will put an end to 
the profit shifting incentives that were present in current and prior 
law. Accompanying this change, the administration recommends reforms to 
the BEAT (as described in the SHIELD proposal) that will curtail 
foreign multinational company profit shifting.

(5).  In the past year, Congress has authorized numerous programs aimed 
at helping vulnerable Americans weather the new economic challenges 
presented by the pandemic. This included over $850 billion of direct 
payments to taxpayers. While I commend you for steering the Federal 
Government's massive effort to deliver billions to impacted Americans, 
including 964,000 West Virginians, I remain concerned that the payments 
are not getting to those who need it the most. The American Rescue Plan 
contained several provisions directly aimed at helping parents: Larger 
stimulus payments of $1,400 for each dependent, an increase in the 
child tax credit, and more money funneled through the tax credit to 
help parents offset work-related child-care expenses. Unfortunately, 
West Virginia has over 10,000 homeless youth. The COVID-19 pandemic, 
along with the opioid epidemic, has compounded this issue with high 
unemployment, unstable living conditions, and job insecurity, resulting 
in higher rates of homelessness in children, youth and families. As 
such, more and more grandparents are raising their grandchildren in 
West Virginia. That's why it is imperative that we ensure that money 
gets to the children or their real caretakers in these households.

    Question 1. How should a grandparent or relative notify the IRS 
that they have become the primary caretaker of a child?

    IRS Response. Advance Child Tax Credit (CTC) payments are based on 
the children claimed for the CTC on a 2020 tax return (or 2019 tax 
return, if the 2020 tax return has not been processed as of the payment 
determination date for monthly advance CTC payments). Later this year, 
we will update the Child Tax Credit Update Portal (CTC UP) to allow 
taxpayers who have already claimed a child to inform us about the 
qualifying children they will claim on their 2021 tax return. This 
information will allow us to adjust the estimated 2021 Child Tax 
Credit, including the amount of monthly advance CTC payments.
    If a taxpayer does not receive advance CTC payments for a 
qualifying child now, they may claim the full amount of allowable CTC 
for that child when they file their 2021 tax return.

    Question 2. What should a grandparent do if he/she is the primary 
caretaker of a child and that child's tax credit or EIP payment goes to 
their noncustodial parent or parents?

    IRS Response. See the response to question 1, above, for 
information about how eligibility is determined and how a grandparent 
can claim a child.
    If a taxpayer will not be eligible for the CTC for the 2021 tax 
year, they can unenroll through the CTC UP. CTC UP was available in 
June and allowed taxpayers to unenroll before the first advance CTC 
payment was made (and taxpayers can unenroll moving forward). The total 
amount of advance CTC payments that a taxpayer receives during 2021 is 
based on the IRS's estimate of their 2021 CTC. If the total amount 
received is greater than the actual CTC a taxpayer can claim on their 
2021 tax return, they may have to repay the excess amount on their 2021 
tax return during the 2022 tax filing season. For example, if they 
receive advance CTC payments for two qualifying children properly 
claimed on their 2020 tax return, but no longer have qualifying 
children in 2021, the advance CTC payments they received will be added 
to their 2021 income tax unless they qualify for repayment protection.

    Question 3. What mechanisms or procedures can the IRS set up to 
ensure that future tax credits and/or benefits go to the child's actual 
caretaker?

    IRS Response. As described above, advance CTC payments in 2021 are 
based on an estimate of the 2021 CTC. The payments are based on 
eligible children claimed on a 2020 tax return (or 2019 if the 2020 tax 
return hasn't been processed). If taxpayers will not be eligible for 
the CTC in 2021, they should consider unenrolling from the advance CTC 
payments. When taxpayers file their 2021 tax return during the 2022 tax 
filing season, they will need to compare:

    1.  The total amount of the advance CTC payments received during 
2021; with
    2.  The amount of the CTC they can properly claim on their 2021 tax 
return.

       Excess Child Tax Credit Amount: If the amount of CTC exceeds the 
total amount of advance CTC payments, the taxpayer can claim the 
remaining amount of CTC on their 2021 tax return.

       Excess Advance Child Tax Credit Payment Amount: If they receive 
a total amount of advance CTC payments that exceeds the amount of CTC 
they can properly claim on their 2021 tax return, they may need to 
repay some or all of that excess payment to the IRS.

    In January 2022, the IRS will send Letter 6419 to provide the total 
amount of advance CTC payments paid to the taxpayer during 2021. 
Taxpayers may need to refer to this letter when filing their 2021 tax 
return during the 2022 tax filing season.
                                 ______
                                 
              Questions Submitted by Senator John Kennedy

(1).  The fiscal year 2022 budget proposes to create a comprehensive 
financial account information reporting regime. As part of this 
proposal, banks and third-party payment providers would be required to 
report account holders' aggregate account outflows and inflows. Using 
banks as an extension of the IRS would be incredibly burdensome and 
costly to regional and smaller banks.

    Question 1. Banks already submit CTRs for deposits and withdraws of 
more than $10,000, with the option to report transactions below that 
threshold. Does the IRS feel that this is not sufficient reporting? Who 
is the IRS trying to target by receiving reports of transactions below 
$10,000?

    Treasury Office of Tax Policy Response. When the IRS is able to 
verify the accuracy of tax filing with third-party information 
reporting, compliance rates are more than 95 percent. For opaque 
sources of income, where no such reporting exists, compliance rates are 
under 50 percent. Strengthening third-party reporting is one of the 
most effective ways to improve tax compliance. The tax gap for business 
income (outside of large corporations) is driven primarily by the lack 
of comprehensive third-party information reporting and the resulting 
difficulty identifying noncompliance outside of an audit. The IRS 
selects returns for examination based on an assessment using 
information available on the potential for noncompliance. But when the 
IRS has no visibility into opaque income streams, it lacks the ability 
to focus enforcement activity effectively. Requiring comprehensive 
information reporting on the inflows and outflows of financial accounts 
will increase the visibility of gross receipts and deductible expenses 
to the IRS. The IRS will use this new information to better focus 
enforcement activities, detecting obvious areas of gross non-compliance 
and decreasing the likelihood that fully compliant taxpayers will be 
subject to audit. Under the enhanced information reporting, voluntary 
compliance will rise, as taxpayers realize that the IRS has an 
additional lens into previously underreported income streams.

    Question 2. The IRS is proposing banks send them all financial 
account flows. Does the IRS have the ability to sort through this 
volume of transactions?

    Treasury Office of Tax Policy Response. It will be imperative to 
provide the IRS the resources it needs to best deploy this information, 
as well as existing information it collects--as the administration's 
proposal does. For example, today the IRS cannot efficiently evaluate 
all of the information on submissions required by the Foreign Account 
Tax Compliance Act. With modernized IT and the additional funding 
proposed in the American Families Plan, the IRS will be able to intake 
and analyze financial information by applying artificial intelligence 
and other modern techniques.

    Question 3. What safeguards is the IRS proposing to ensure 
information does not get in the hands of the wrong people?

    Treasury Office of Tax Policy Response. The IRS is dedicated to 
protecting taxpayer privacy and safeguarding returns and return 
information from unauthorized access, use, or disclosure. Modernization 
funding would allow the IRS to support efforts to meet threats to the 
security of the tax system, including the 1.4 billion cyberattacks the 
IRS experiences annually.

(2).  The administration is proposing to increase the corporate tax 
rate in the U.S. from 21 percent to 28 percent. Typically, small 
businesses are organized as sole proprietorships, partnerships, LLCs, 
and S Corporations. These entities are taxed at the individual level 
and are not subject to the corporate tax rate. However, small 
businesses can also be C Corporations, which will be taxed at 28 
percent if the proposal passes.

    Question. Do you support raising taxes on small businesses? Please 
explain.

    Treasury Office of Tax Policy Response. The administration has 
focused this year on providing direct assistance to small businesses 
and working families to help them deal with the challenges of the 
pandemic and building back from that. The American Rescue Plan provided 
significant economic relief in the form of loans for small businesses, 
expanded tax credits to help employers retain and safely bring back 
workers, and grants to millions of the hardest hit businesses. As you 
noted, most small businesses are organized as sole proprietorships, 
partnerships, LLCs, and S Corporations that are not taxed at the entity 
level. These businesses would not be affected by a higher corporate tax 
rate.

(3).  Practitioners are experiencing difficulty in reaching the IRS to 
help their clients in a timely manner. Taxpayer written correspondences 
in response to IRS notices is not processed before the next scheduled 
IRS correspondence is sent to the taxpayer escalating the penalty 
situation for the taxpayer that otherwise would have been handled with 
the first written correspondence.

    Question. What is being done to address Taxpayer Rights regarding 
the backlog of unprocessed IRS mail that impacts them?

    IRS Response. We are not aware of a backlog of remittances awaiting 
processing. We are opening mail within normal timeframes and all error-
free individual returns received prior to 2021 that do not require 
further review have been processed. We understand the importance of 
timely processing tax returns and issuing refunds. We continue to work 
the returns that need to be manually reviewed due to errors. We are 
rerouting tax returns and taxpayer correspondence from locations that 
are behind to locations where more staff is available, and we are 
taking other actions to minimize any delays.
    Tax returns are opened and processed in the order received. As the 
return is processed, it may be delayed because of issues such as errors 
concerning the Recovery Rebate Credit, missing information, or 
suspected identity theft or fraud. If we can fix the issue without 
contacting the taxpayer, we will. If we need more information or need 
the taxpayer to verify that it was they who sent the tax return, we 
will write the taxpayer a letter. The resolution of these issues 
depends on how quickly and accurately the taxpayer responds, and the 
ability of trained IRS staff working under social distancing 
requirements to complete the processing of the return.

(4).  The slowed down IRS processes for practitioners power of 
attorneys (POT) being posted has greatly impacted taxpayers receiving 
help. It takes approximately four weeks before the POT is in the 
Centralized Authorization File (CAF) system.

    Question. The IRS has recently announced they are rolling out an 
online Tax Pro portal in July to mitigate the delays in processing 
POTs. A practitioner cannot respond on behalf of a taxpayer's letter 
that requires a response within four weeks of receipt while waiting for 
final processing. What steps do you recommend the practitioner take to 
best meet the needs of the taxpayer?

    IRS Response. Practitioners do not have to wait for their power of 
attorney to be processed before being able to respond on behalf of the 
taxpayer. We accept a completed ``unprocessed'' paper or faxed copy of 
a third-party authorization as valid. We provide immediate assistance 
to the practitioner when the document submitted contains all the 
essential elements, including the following:

  --Taxpayer's name and address;
  --Taxpayer Identification Number;
  --Representative's name and address;
  --Type of tax;
  --Form number and tax year or period;
  --Representative designation, signature, and date; and
  --Taxpayer's dated signature.

(5).  The zip codes for all 64 Louisiana parishes are supposed to be 
flagged in the IRS system for Severe Winter Storm tax relief but when 
practitioners call in to have relief granted for a taxpayer, they are 
sometimes told their zip code is not eligible for the relief.

    Question. Please explain why this is occurring. What needs to be 
done to remedy this situation?

    IRS Response. All parishes in Louisiana were granted relief 
following the disaster declaration FEMA-4590-DR, and all taxpayers 
residing in those parishes or having books and records within those 
parishes are eligible for relief. Taxpayers with an address of record 
with the IRS in the designated disaster area do not need to call or 
request disaster tax relief. The IRS provides disaster tax relief to 
qualifying taxpayers automatically. However, taxpayers or their 
preparers may need to self-identify that they are qualified for relief 
if they maintain records in a covered disaster area that are necessary 
to meet a tax deadline falling within the disaster period. We are happy 
to work with any taxpayer who needs assistance determining their 
eligibility for relief. In the event relief is being requested or was 
previously denied, practitioners can contact the IRS at 866-562-5227 or 
send bulk requests to:

        Internal Revenue Service
        Planning & Analysis Staff
        4800 Buford Highway
        Stop 96C
        Chamblee, GA 30341

(6).  There are 2019 Amended returns that were mailed in that are still 
waiting to be processed. This is creating undue hardship on taxpayers 
receiving lien notices for taxes not owed.

    Question. What is the current backlog of unopened mail from 2019? 
Why is the IRS issuing lien notices before addressing unopened mail?

    IRS Response. We no longer have a backlog of unopened mail from 
2019.

    We are not aware of a backlog of remittances awaiting processing. 
We continue to balance the need to issue lien notices and other 
compliance correspondence with the possibility that we have not 
processed a payment or account adjustment. As always, taxpayers who 
believe that a notice they receive is incorrect should contact the IRS 
at the number on the notice.
                                 ______
                                 
              Questions Submitted by Senator John Boozman
    1. American Families Plan Farm Impact (Ag Committee):

    -- As you know, the recently proposed American Families Plan 
        proposes significant tax changes with respect to capital gains 
        tax rates, like-kind exchanges and stepped-up basis.
    -- In my home state of Arkansas, the economic impact of food and 
        agriculture contributes to over 48,000 jobs, over $91 billion 
        in economic output and nearly $9 billion in taxes.
    -- Administration officials, however, suggest that 98 percent of 
        family farms in the U.S. would not be impacted by these 
        proposed tax changes. What is your perspective Commissioner on 
        how these proposed tax changes will impact family farms and the 
        farm economy?

          Treasury Office of Tax Policy Response. Family farms will not 
        be affected by the proposal to tax unrecognized gain (and thus 
        the increased capital gains tax rate) unless and until the farm 
        ceases to be both family owned and operated.

    -- And can you share any analysis that the IRS has done that has 
        led you to reach these conclusions?

         Treasury Office of Tax Policy Response. We understand that, 
        according to USDA data, only 2.4 percent of U.S. farms are 
        farms where the proprietor and his or her relatives do not own 
        a majority interest in the farm.

    2. IRS Backlog:

    -- I support a tax code and system that ensures hard-working 
        Arkansans keep more money in their pocket, and part of that is 
        ensuring that Arkansans receive the correct amount of their tax 
        refund, and they receive it in a timely fashion.
    -- One problem I'm hearing a lot from Arkansans is that they aren't 
        getting their tax refunds in a timely fashion. In fact, many 
        constituents have told me that they've logged onto the IRS 
        website and have read that the IRS states ``we issue most 
        refunds in less than 21 calendar days.''
    -- Despite that ``less than 21 calendar days'' timeline, 
        constituents tell me that it's taking much longer than that to 
        get their refund, often times double the 21-day mark and, in 
        some cases, up to 16 weeks. In fact, constituents have told me 
        that they have called the IRS after the 21-day mark, and the 
        IRS representatives have informed them that, given the impact 
        of COVID-19 on IRS staffing, that 21-day timeline is 
        unrealistic.
    -- As you may imagine, it is extremely confusing and upsetting to 
        hard-working constituents to read one thing on the IRS website 
        and hear another, especially as they're waiting on their 
        important refund check.
    -- While the IRS website provides information regarding IRS refund 
        processing during the COVID-19 pandemic, the IRS has not 
        updated the website to factor in the clear delays that the IRS 
        has in processing and distributing these refunds.
    -- This delay and lack of updated timelines has resulted in a 
        backlog in refunds, and constituent confusion. Why does the IRS 
        website still provide pre-COVID timeframes, notably ``less than 
        21 calendar days'' in most cases, when in fact it is often 
        taking double that time to process and receive refunds?

         IRS Response. We regularly update information on IRS.gov to 
        realistically reflect our processing timeframes. Please visit 
        our Status of Operations page for additional information and 
        ongoing updates here: https://www.irs.gov/newsroom/irs-
        operations-during-covid-19-mission-critical-functions-continue. 
        As the return is processed, it may be delayed because of issues 
        such as errors concerning the Recovery Rebate Credit, missing 
        information, or suspected identity theft or fraud. If we can 
        fix it without contacting the taxpayer, we will. If we need 
        more information or need the taxpayer to verify that it was 
        them who sent the tax return, we will write the taxpayer a 
        letter. The resolution of these issues depends on how quickly 
        and accurately the taxpayer responds, and the ability of 
        trained IRS staff working under social distancing requirements 
        to complete the processing of the return.

    -- Can I count on you to take steps to both ensure that the IRS 
        will update its timeframes in order to avoid confusion and 
        provide transparency if it cannot meet the ``less than 21 
        calendar days'' timeframe, and that the IRS will work to 
        process and distribute refunds in a timelier fashion so that 
        Arkansans and Americans across the country can receive their 
        refunds in a timely manner?

          IRS Response. We understand the importance of timely 
        processing tax returns and issuing refunds. We have processed 
        all error-free returns received prior to 2021 that do not 
        require further review. We continue to work the returns that 
        need to be manually reviewed due to errors. We are rerouting 
        tax returns and taxpayer correspondence from locations that are 
        behind to locations where more staff is available, and we are 
        taking other actions to minimize any delays.
          Tax returns are opened and processed in the order received. 
        As the return is processed, it may be delayed because of issues 
        such as errors concerning the Recovery Rebate Credit, missing 
        information, or suspected identity theft or fraud. If we can 
        fix the issue without contacting the taxpayer, we will. If we 
        need more information or need the taxpayer to verify that it 
        was them who sent the tax return, we will write the taxpayer a 
        letter. The resolution of these issues depends on how quickly 
        and accurately the taxpayer responds, and the ability of 
        trained IRS staff working under social distancing requirements 
        to complete the processing of the return.
          As mentioned in our response above, we regularly update 
        information on IRS.gov to realistically reflect our processing 
        timeframes. Please visit our Status of Operations page for 
        additional information and ongoing updates here: https://
        www.irs.gov/newsroom/irs-operations-during-covid-19-mission-
        critical-functions-continue.

                          SUBCOMMITTEE RECESS

    [Whereupon, at 3:40 p.m., Wednesday, May 19, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]