[Senate Hearing 117-204]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 117-204

 THE IRS, THE PRESIDENT'S FISCAL YEAR 2023 BUDGET, AND THE 2022 FILING 
                                 SEASON

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

                                HEARING

                               BEFORE THE

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION
                               __________

                             APRIL 7, 2022
                               __________


                  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
                                     
                                     
            Printed for the use of the Committee on Finance
                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE
                    
55-204--PDF               WASHINGTON : 2024               


                          COMMITTEE ON FINANCE

                      RON WYDEN, Oregon, Chairman

DEBBIE STABENOW, Michigan            MIKE CRAPO, Idaho
MARIA CANTWELL, Washington           CHUCK GRASSLEY, Iowa
ROBERT MENENDEZ, New Jersey          JOHN CORNYN, Texas
THOMAS R. CARPER, Delaware           JOHN THUNE, South Dakota
BENJAMIN L. CARDIN, Maryland         RICHARD BURR, North Carolina
SHERROD BROWN, Ohio                  ROB PORTMAN, Ohio
MICHAEL F. BENNET, Colorado          PATRICK J. TOOMEY, Pennsylvania
ROBERT P. CASEY, Jr., Pennsylvania   TIM SCOTT, South Carolina
MARK R. WARNER, Virginia             BILL CASSIDY, Louisiana
SHELDON WHITEHOUSE, Rhode Island     JAMES LANKFORD, Oklahoma
MAGGIE HASSAN, New Hampshire         STEVE DAINES, Montana
CATHERINE CORTEZ MASTO, Nevada       TODD YOUNG, Indiana
ELIZABETH WARREN, Massachusetts      BEN SASSE, Nebraska
                                     JOHN BARRASSO, Wyoming

                    Joshua Sheinkman, Staff Director

                Gregg Richard, Republican Staff Director

                                  (II)


                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee 
  on Finance.....................................................     1
Crapo, Hon. Mike, a U.S. Senator from Idaho......................     3

                         ADMINISTRATION WITNESS

Rettig, Hon. Charles P., Commissioner, Internal Revenue Service, 
  Washington, DC.................................................     5

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Crapo, Hon. Mike:
    Opening statement............................................     3
    Prepared statement...........................................    43
Rettig, Hon. Charles P.:
    Testimony....................................................     5
    Prepared statement...........................................    44
    Responses to questions from committee members................    60
Wyden, Hon. Ron:
    Opening statement............................................     1
    Prepared statement...........................................   122
    ``Information Technology: Cost and Schedule Performance of 
      Selected IRS Investments,'' Government Accountability 
      Office, October 2021.......................................   124

                             Communications

American Citizens Abroad.........................................   153
Balcerak, Amy....................................................   155
Callaway, Reginald...............................................   157
Center for Fiscal Equity.........................................   160
Coates, James Webster............................................   164
Connor, Geoffrey.................................................   167
Democrats Abroad.................................................   170
Foster, Brent....................................................   173
Gerretsen, Robert M..............................................   176
Goldberg, Melvyn and Judith......................................   179
Hemdal, Paula, Ph.D..............................................   182
Holmes, John.....................................................   186
Levenson, Lynn Frances...........................................   189
Matthew, Stephen.................................................   192
McCarthy, C. Chase...............................................   195
National Taxpayers Union.........................................   198
Professional Managers Association................................   202
Pulin, Keiko I...................................................   204
Purcell, Amy.....................................................   207
Ruh, Elizabeth, EA et al.........................................   208
Scurr, Linda.....................................................   209
Stop Extraterritorial American Taxation (SEAT)..............   212, 215 
Seeds, Steven Clark.............................................    217
Walther, Ronald..................................................   220
Wundheiler, Edward Francis.......................................   223

                                 (III)

 
 THE IRS, THE PRESIDENT'S FISCAL YEAR 2023 BUDGET, AND THE 2022 FILING 
                                 SEASON

                              ----------                              


                        THURSDAY, APRIL 7, 2022

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:15 
a.m., via Webex, in Room SD-215, Dirksen Senate Office 
Building, Hon. Ron Wyden (chairman of the committee), 
presiding.
    Present: Senators Menendez, Carper, Cardin, Brown, Casey, 
Warner, Whitehouse, Cortez Masto, Crapo, Thune, Portman, 
Toomey, Lankford, and Daines.
    Also present: Democratic staff: Eric LoPresti, Detailee; 
Joshua Sheinkman, Staff Director; and Tiffany Smith, Chief Tax 
Counsel. Republican staff: Michael Quickel, Policy Director; 
Gregg Richard, Staff Director; Don Snyder, Tax Counsel; and 
Jeffrey Wrase, Deputy Staff Director and Chief Economist.

   OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM 
             OREGON, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. Around the country are millions and millions 
of families who are feeling the pressure of rising prices. This 
year in particular, people are counting on getting their tax 
refunds to help cover the bills.
    I'll cut right to the heart of the matter for those 
families whose refunds might be delayed due to IRS backlogs. If 
you are frustrated by poor customer service from the IRS, you 
can blame years and years of Republican cuts that have 
contributed mightily to the ability of the agency to meet your 
expectations.
    And from all the talk about running government more like a 
business, an awful lot of Republicans want to turn the 
government into the kind of dysfunctional business that never 
gets repeat customers. The fact is, Republicans had an 
opportunity when they passed their big tax law in 2017 to fix 
the Internal Revenue Service comprehensively, and they could 
have included efforts to reduce backlogs and improve service.
    That just was not done. In fact, more complexity was added 
to the tax code, and it made the tax system more difficult to 
manage. This came after a long period of Republicans squeezing 
the IRS budget. It was clear at the time that Republicans were 
steering into a train wreck, and you are seeing the effects 
today.
    The number of revenue agents at the IRS--and these are the 
people who audit tax returns--is currently a third of what it 
was a decade ago. The officers who collect unpaid taxes are 
down by nearly a half. The agency has the same number of 
employees it did in 1970 when the country's population and the 
economy were a fraction of the size they are today.
    As of late March, the IRS was facing a backlog of 12 
million tax returns. Service agents struggle to keep up with 
the phone calls. So far this year, they have been able to 
answer only 11 percent of them. The IRS has recently been on a 
hiring mission, and that is thanks to funding and hiring 
authority passed by Democrats.
    The agency is making progress on the backlog and targeting 
resources to customer service and phone lines. But in the 
meantime, law-abiding taxpayers dealing with the after-effects 
of the Republican cuts are left with the impression that the 
government cannot manage a two-car parade.
    With that said, not everybody is pained by what is 
happening at the IRS. Customer service has fallen off, but tax 
enforcement is in even worse shape, which means that these are 
high and good times for wealthy tax cheats. The IRS is just 
totally outmanned against the tax cheats who use these 
complexity-driven loopholes to cheat their way out of paying 
their fair share. There are fewer revenue agents today than at 
any point since World War II, and the challenge they are up 
against is much bigger.
    One of the murkiest, most loop-hole-ridden parts of 
America's totally busted tax code is partnership income. It is 
a thicket of super-complicated rules that are supposed to apply 
to a third of all business income in America. It is a big and 
growing percentage.
    In Fiscal Year 2020, the IRS managed to audit a little more 
than one-tenth of 1 percent of partnership tax returns, the 
tiniest sliver. Meanwhile, new research from UC Berkeley found 
that the working poor are 12 times more likely to face an 
audit.
    So, look at the big picture. As a result of years of 
Republican budget cuts, IRS customer service is struggling, 
while wealthy tax cheats get away with breaking the law, and 
the burden of tax enforcement gets shifted onto working people 
who spend every day walking a tightrope.
    Now Democrats have begun to reinvest in taxpayer service 
and enforcement to crack down on the cheats. It made tax filing 
season less of a headache for everybody else. Part of that 
ongoing process, in my view, ought to be making it easier for 
Americans to file their tax returns directly online for free. 
Give them that option. Taxpayers are paying huge sums to file 
their taxes through private companies, and some of those 
companies, in deeply deceptive practices, steer them away from 
free options that they have a legal right to use.
    I have been a long-time supporter of the right to file 
directly with the Internal Revenue Service online. Again, it 
would be your right, your option, and you would use a simple 
return in which the forms are completed and all you've got to 
do is check the numbers. It is past time for Congress to tell 
these prep companies they no longer have a free pass to turn 
rip-offs and deception into profit.
    Wrapping up, Commissioner, I want to thank you and your 
front-line staff, specifically this morning. They have been 
putting in some long, long hours this filing season to 
particularly get these refunds out in a timely way. The people 
are not thinking about politics. They are thinking about 
helping people. And the people need those refunds, particularly 
right now when we are dealing with this inflation challenge. My 
view is, the job for those front-line folks has been made a lot 
harder than it had to be. It could have been easier with 
additional resources and additional assistance. We are going to 
be pursuing that, as you know, in the days ahead. We look 
forward to your views.
    [The prepared statement of Chairman Wyden appears in the 
appendix.]
    The Chairman. And let me recognize my friend, Senator 
Crapo. And as we said, we are going to be running back and 
forth, and we are used to it, but most other people will think 
it is a little bit odd to have everybody running a shuttle 
program, but we have to go to handle this vote.
    Senator Crapo?

             OPENING STATEMENT OF HON. MIKE CRAPO, 
                   A U.S. SENATOR FROM IDAHO

    Senator Crapo. Well, thank you, Senator Wyden. And I agree 
with your observations. We will make this work. And, 
Commissioner Rettig, we appreciate having you with us. And I 
know you can cover it, so I appreciate that.
    Thank you, Commissioner, for being here to testify today, 
and thank you for your service. I appreciate your efforts to 
make the IRS a more customer-focused place and understand that 
it is hard to change the course of an institution like this in 
just the few years that most of us have to work at it when we 
get the opportunity. And you have done a good job.
    There is a need to change course, but I do not believe the 
administration's outsized partisan approach is the solution. 
For the third filing season in a row, taxpayers find vexing 
customer service challenges as they attempt to fulfill their 
tax filing obligations. With tens of millions of 2021 tax 
returns still to be filed, the most recent data we have on this 
year's tax season is concerning, highlighting longstanding 
issues that the IRS has not yet adequately addressed.
    For example, more than 60 percent of the millions of items 
of taxpayer correspondence and amended returns have sat in 
storage for more than 3 months, an increase of nearly 30 
percent over the last year. Average hold times for the lucky 
few taxpayers who reach the IRS by phone are 28 minutes, an 
increase of nearly 50 percent over the last year. And scores of 
taxpayers have seen refunds delayed while their return is 
suspended for various reasons. Millions of prior-year tax 
returns await processing. The IRS's management of paper-filed 
returns is a persistent problem that the National Taxpayer 
Advocate recently noted goes back decades. By tax day this 
year, millions of paper-filed 2020 tax returns will not have 
been processed, while millions of current-year tax returns will 
likewise gather dust.
    Steps to prevent or minimize this disruption were not taken 
by the IRS, and in some cases still have not been taken. For 
example, many people may not be aware that in order for the IRS 
to process a paper-filed return, each entry on the return is 
manually inputted by an IRS employee. These taxpayer-funded 
employees would be better able to serve taxpayers by answering 
phones or responding to correspondence.
    This is not simply a problem of taxpayers choosing to 
deluge the IRS with paper-filed returns. In many cases, IRS 
forms and schedules simply cannot be electronically filed, 
including where a taxpayer could e-file and attempts to do so 
but is rejected by the IRS's confusing digital signature 
process.
    This is not a funding issue. Solutions to these challenges 
have existed for years, but to date have not been implemented. 
The IRS can further transition away from mandating any return 
or form to be paper filed. With respect to rejected e-filings, 
which I understand to be often caused by taxpayers being unable 
to locate or recall one of two possible e-filing PINs, the IRS 
could implement additional means to e-sign a return. And I am 
aware that the IRS, under your leadership, Commissioner, is 
working on this.
    The so-called 2D bar codes, much like the supermarket bar 
codes that have been used for decades, could eliminate the 
IRS's need to transcribe paper returns at all. Solutions like 
these have been held up for years with no clear reason why, 
leading to results that the current National Taxpayer Advocate, 
Erin Collins, called ``crazy.'' And I agree.
    Now to the question that has been raised by a number of my 
colleagues on the other side, trying to blame Republicans and 
the budget of the IRS for this. Some say that the IRS budgets 
are to blame for all that ails the IRS. But this misdirection 
distracts from real issues at the IRS. It also cherry-picks 
data to paint a misleading portrait. Many begin their analysis 
of the IRS budgets beginning only with Fiscal Year 2010, which 
was a 30-plus-year high-water mark for the IRS's budget, and an 
outlier. Viewed in the longer run, the IRS's average inflation-
adjusted budget is much lower, and it is in line with recent 
years that meet this average. The efforts to try to claim that 
Republicans have slashed the IRS budget are simply not 
accurate.
    Budget arguments are also often invoked in attempts to 
justify massive IRS funding for things that do not address the 
customer experience problems plaguing the IRS. For example, 
some advocate for increased IRS funding to generate revenue 
through heavy-
handed enforcement. This year's presidential budget request 
seeks a large enforcement funding boost, and its reserve fund 
placeholder for the reckless Build Back Better legislation 
would provide a truly massive $80-billion infusion of mandatory 
funding, primarily focused on enforcement. The reserve fund 
could also accommodate the administration's chilling proposal 
to monitor Americans' bank account flows of as little as $600. 
I strongly oppose forcing community banks and credit unions to 
report sensitive and private customer data of law-abiding 
taxpayers to the IRS in order to raise more money by snooping 
through customers' accounts, and I will continue to 
aggressively push back on any attempts to add this reporting 
scheme to the legislation.
    I remain concerned about huge funding boosts that would 
increase audits on small businesses and middle-class Americans, 
rather than prioritizing taxpayer services. Our hearing in 
February had a positive dialogue spotlighting IRS customer 
service challenges and solutions, and I have a number of 
questions about ways to address the longstanding IRS problems 
that I think we can agree on, such as outdated IT and ways to 
ensure the next filing season will be much better than the last 
several.
    Given your stated commitment to making these improvements, 
Commissioner, which I not only appreciate but accept, I look 
forward to continuing to work with you on this.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Crapo appears in the 
appendix.]
    The Chairman. I thank my colleague. And he and I often, 
after we hear each other's statements, go back and forth a 
little bit, and I am only going to say one very quick thing. I 
think Senator Crapo has a very good point with respect to the 
bar codes and ideas like that. But I also feel that the agency 
is being asked to do more with less. And at some point, when 
you try to do more with less, you simply get less with less. 
And I think that is what all these people waiting for refunds 
and the like are dealing with.
    So, we will have this back and forth for decades. You can 
tell both of us feel strongly about these issues.
    Our witness today is Charles P. Rettig. He is the 49th 
Commissioner for the IRS. He previously was a highly respected 
law partner for 35 years, representing thousands of taxpayers 
before the IRS at the Department of Justice Tax Division, 
Federal and State courts, and State taxing officials. He served 
as past chair and member of the IRS Advisory Council. He also 
served as chair of the Taxation Section of the State Bar of 
California, and has served on the Advisory Board of both the 
Franchise Tax Board and the Board of Equalization in his home 
State of California.
    Please go ahead, Commissioner.

  STATEMENT OF HON. CHARLES P. RETTIG, COMMISSIONER, INTERNAL 
                REVENUE SERVICE, WASHINGTON, DC

    Commissioner Rettig. Thank you very much, Chairman Wyden, 
Ranking Member Crapo, and members of the committee. Thank you 
for the opportunity to discuss the President's Fiscal Year 2023 
IRS budget, as well as the current status of the 2022 filing 
season.
    As you know, for Fiscal Year 2021, gross receipts to the 
Internal Revenue Service were approximately $4.1 trillion, 
representing approximately 96 percent of the gross receipts in 
the United States of America. A successful, fully functioning 
IRS is important to the continued success of our country. We 
have been at the forefront of successfully providing rapid 
economic relief to taxpayers, issuing more than $1.5 trillion 
in combined economic relief and individual refunds during the 
pandemic.
    The President's Fiscal 2023 budget is a proposal for $14.1 
billion, representing an increase of $2.2 billion. The budget 
would allow the agency to take important steps forward in 
improving taxpayer service, modernizing our systems, and 
ensuring fairness in the imposition and enforcement of tax law. 
The President's budget proposal also supports oversight of 
high-wealth individuals, that we stay current with our paper 
inventories, and that we accelerate the development of digital 
tools, which would obviously reduce the paper inventories and 
the processing that you have described.
    The President's legislative proposals also provide for 
oversight of paid tax return preparers. This has been an issue 
since about 2013. Personally, I would say it is critical for us 
to receive some form of oversight with respect to return 
preparers. There are other legislative proposals in there that 
are important that we can certainly discuss at another point.
    With the signing of the recent omnibus legislation on March 
15th providing the IRS with a Fiscal 2022 budget of $12.6 
billion, we are adjusting our spending plan, which we 
previously delivered to members of the committee on February 
12th, and we will adjust with respect to the funds that we 
have, the movement of those funds, implementation projects that 
were referenced in the plan that we provided, and we will be 
moving other funds to cover other remaining short- and long-
term shortfalls.
    As of April 5th, we have obligated $911 million of these 3-
year funds to maximize taxpayer service, and it has been 
eventful. Taxpayer service remains the most significant IRS 
priority, and funds provided by Congress, including ARP, have 
allowed us to implement many new innovative strategies to 
reduce our unprecedented current and projected inventories, and 
to get healthy, which is our commitment by the end of Calendar 
Year 2022, and before the beginning of filing season 2023.
    With respect to our current 2022 filing season, we are off 
to a healthy start in terms of tax processing and the operation 
of our IT systems. Through April 1st, we have processed more 
than 89 million returns, issued more than 63 million refunds, 
totaling more than $204 billion. However, there are essentially 
two distinct filing seasons. Taxpayers who choose to 
electronically file who request a direct deposit are receiving 
their refunds within approximately 21 days. Many individuals 
have received those refunds within 3 or 4 days of the 
submission of their electronic filing.
    With respect to taxpayers who submit paper returns, our 
processing is first in, first out. We are processing 
approximately 2.7 million returns still that were received in 
Calendar Year 2021. And so taxpayers who, during this filing 
season, choose to file a paper return end up at the end of that 
particular stack. And I am sure we will be discussing that.
    I want everyone to know that the employees of the IRS, 
including myself, but specifically our employees, are doing the 
best we can. We may not always have gotten it right, but we 
have tried our best. We have put taxpayers first as the number 
one priority, and I believe that following my term, the agency 
will continue to head in that direction.
    Our mitigation efforts as to our inventories are working. 
They are making a difference. We are trending in a very good 
direction that will allow us, and allow me, to commit that we 
will be healthy by the end of Calendar Year 2022. We are 
working to make sure that these inventories are addressed as 
quickly as possible, and have implemented many new innovative 
strategies never before used within the Internal Revenue 
Service.
    I believe that almost every Commissioner over the past 
decades has stated that inconsistent funding is among the most 
frustrating experiences for the Federal agency that touches and 
serves more Americans than any other government or private-
sector organization. Modernized technology would significantly 
improve our ability to respond to a crisis, pandemic-related or 
otherwise. It is simply unacceptable for us to remain largely a 
paper-based organization operating in a digital world 
environment.
    Chairman Wyden, Ranking Member Crapo, and members of the 
committee, this concludes my statement. I am happy to take 
questions.
    [The prepared statement of Commissioner Rettig appears in 
the appendix.]
    The Chairman. Thank you very much.
    Commissioner, last year I asked you about the current tax 
gap. And I was concerned, and still am, that it is higher than 
the official estimate, which always seems to be outdated. When 
I asked about it last year, you said the tax gap could be a 
trillion dollars a year. Nobody needs to go over that again.
    So the Congress needs updated information about the size of 
the tax gap. Who is cheating? What is the agency doing about 
the problem? So, my first question to you picks up on last 
year's question. Is the IRS going to start producing more up-
to-date tax gap estimates to give us more information about who 
is cheating?
    Commissioner Rettig. Yes, sir. When I got on board in 2018, 
we released the tax gap estimates for 2011 to 2013, which was 
more of a paper world. Virtual currencies did not exist. And 
so, we then began implementing the ability to be more current, 
and to actually be more engaging with respect to emerging 
issues.
    This summer we will issue tax gap data for 2014 to 2016, 
which I would submit is also somewhat dated in 2022, but we 
will also be submitting----
    The Chairman. It is certainly dated, Commissioner. Please 
go ahead and tell us what else you are doing.
    Commissioner Rettig. We will also be submitting projections 
for 2019. Know that the tax gap estimates that we submit for 
2014 to 2016 and the projections will again not include 
information with respect to virtual currencies and certain 
foreign-source income. We are working to get that information. 
We are not where we need to be.
    The Chairman. Is there anything that we can do, working 
with you, that can get us more updated projections? Because I 
think that is essential for a lot of the debates that we are 
having here: wealthy tax cheats, a variety of others.
    What else could we do, this committee, in a bipartisan kind 
of way, to get better data through these updates?
    Commissioner Rettig. In working with the Department of 
Justice on John Doe summons activity with respect to a variety 
of different exchanges, we are aware of a significant 
noncompliance from the reporting perspective in the virtual 
currency world. Information reporting in the virtual currency 
world is improving. It is definitely not where it needs to be. 
And there is a huge question as to what the aspect of it is. 
There were $14 trillion in transactions last year in that 
space, and the U.S. represents somewhere between 30 and 40 
percent of that, if you compare our GDP to the world.
    The Chairman. So you want additional resources to go after 
scams and rip-offs and the like, because I had made the point 
when we had the debate about cryptocurrency last year. I am all 
in in the fight against wealthy cheats and people who are 
money-
laundering. I just do not want to go after the innovators, the 
coders, and the like.
    So we can talk offline about this, but I just want to make 
sure that we get better and more current updates, because that 
is what this committee needs to deal with major policy 
questions.
    The timeline to eliminate backlogs--we talked a bit about 
this, and I think I would really like to get your sense here. 
In your view, what is a reasonable level of phone service? And 
when will the agency reach that level?
    Commissioner Rettig. The President's budget proposal for 
Fiscal 2023 requests $389 million, with a target level of 
service of 85 percent--so, answering 8\1/2\ out of 10 calls. 
Every IRS employee would like to answer 10 out of 10 calls. And 
the surge in the incoming volume of phone calls has obviously 
had a huge impact. And I think you all are aware that at one 
point we were seeing phone calls at the rate of 1,500 per 
second. One thousand five hundred calls per second. And that 
builds up such an inventory and a backlog, and we have never 
recovered from that.
    The Chairman. So what is a reasonable expectation for 
Americans on phone service?
    Commissioner Rettig. We need to crush our inventories, our 
paper inventories. We need to crush our return backlogs, 
because the folks who answer the phones also process paper. So, 
when we can get through the paper, we can get all those folks 
full-time back onto the phones to handle it. And we are 
committed to getting into that position by the end of Calendar 
Year 2022.
    The Chairman. Thank you.
    One other one that you and I have talked about: technology 
policy. And this has been a focus of my work. I showed up in a 
Senate where basically nobody was using a computer. And I 
understand the backlog is due, to a great extent, to the fact 
that the IRS employees have to transcribe paper returns 
manually.
    So when, in your view, can we expect the IRS to start using 
scanning technology to transcribe individual tax returns? And 
how does the President's budget affect that?
    Commissioner Rettig. The President's budget supports our 
ability to scan and electronically convert paper into something 
that we can have actually machine-readable and hopefully 
process automatically. I should say, with respect to the 2D bar 
code, the congressional budget justification for each year 
between 2013 and 2017 requested funding for 2D bar codes, and 
that funding was never provided. And the agency then pivoted 
into focusing on electronic filing. And we are currently 
running around 96 percent of e-filed income tax returns in our 
current filing season.
    The Chairman. Thank you very much, Commissioner.
    Let's go to Senator Grassley next.
    Senator Grassley. You know that all over the country 
taxpayers are at their wit's end this time of the year. I think 
there have been some improvements, from the cases that my staff 
in Iowa forward to the IRS, because in 2021, it took 570 days 
to get an answer, on average, and it is down now to 245 days. 
But this brings up the question about IRS employees working 
remotely.
    We have had the National Taxpayer Advocate say something 
along the lines that it is time for IRS to require all hands on 
deck. And I appreciate that the IRS recently unveiled a return-
to-work policy, but you know, for Iowans who have been back to 
work for a long time, probably for a year and a half, why 
have--the IRS will not be fully back until the end of June.
    Could you explain why that cannot be right now?
    Commissioner Rettig. I certainly can. That is not accurate. 
Ninety-nine percent of our employees have been working since 
June of 2020----
    Senator Grassley. At their office?
    Commissioner Rettig. Sir, before the pandemic, a 
significant percent of IRS employees were teleworking, and we 
have a union contract with NTEU, and we negotiate that contract 
every 6 years. And we follow the terms of that contract. And it 
requires telework-eligible positions to be teleworking.
    Senator Grassley. You may be right in regard to the 99 
percent, but your plan says that it is not going to be fully 
deployed until the end of June.
    Commissioner Rettig. Can I address that?
    Senator Grassley. What?
    Commissioner Rettig. Can I address that?
    Senator Grassley. Yes, go ahead.
    Commissioner Rettig. So, 53 percent of the employees are in 
a full-time telework capacity. The rest of the employees either 
have a blended capacity or they are on-site. Every employee who 
has interaction with respect to what are the major issues--the 
inventories, submission processing, and accounts management--
they came back in June 2020 in a socially distanced 
environment, and on principal campuses in Ogden, Kansas City, 
and Austin, TX.
    There were occasions where, because of COVID spikes and 
following the CDC, we needed to shut down briefly. But our 
front-line processing employees have been on-site in place 
since June of 2020.
    Senator Grassley. Okay.
    The IRS has spent $5.4 billion on IT modernization since 
1999, yet we are still using systems that go back to the 1960s. 
In 1999, the IRS started working on what they called a CADE 
system, which was intended to replace one such system, the 
Individual Master File, IMF. However, after spending $400 
million, IRS abandoned this project in 2009. In its place, IRS 
began CADE 2 with plans to replace the legacy IMF system by 
2014. According to GAO, after spending $1.5 billion, CADE 2 is 
now expected to replace core functions of the IMF only and not 
get that completed until 2013.
    So given this history, how can Congress have any confidence 
that additional funds will result in the IRS successfully 
replacing its 1960-era systems?
    Commissioner Rettig. As you know, I came onboard in 2018. 
In 2019 we launched our Business Modernization Plan, actually 
April 16th of 2019. That was a 6-year plan--$2.3 to $2.7 
million--at the same time that major financial institutions 
were spending $10 to $14 billion per year to modernize their 
systems.
    As of today, we have only received 57 percent of the 
funding of that plan. And that plan was actually reviewed by 
outside consultants McKinsey. Our initial plan was revised and 
adjusted in accordance with the comments from McKinsey, and 
they continue to be involved. And we have, and we welcome 
oversight. I have always welcomed oversight and interactions 
with every member on the Hill during my term, and I am 
convinced whoever would follow me as Commissioner later this 
year would do the same. As to how people can have confidence in 
the Internal Revenue Service, we were the agency called upon to 
issue the three rounds of the Economic Impact Payments and at 
least six payments on the Advance Child Tax Credit.
    We issued $1.5 trillion during the pandemic, more than $200 
million in Advance Child Tax Credit payments, and I think if 
you look at what we were able to do--and we were able to 
process electronically filed returns during this same period of 
time--I think people should have confidence in us. We were the 
agency that stood up for this country and supported Americans 
who for the first time were either unemployed, had health 
issues, and the rest. And our employees are very proud, and we 
were privileged to have that opportunity, as am I to be on 
board with our employees. But if you look at what we have done 
recently, I think that people would be impressed.
    I am not saying that IRS should be funded and then Congress 
goes away. I am saying that IRS should be funded as and where 
Congress approves, and bring us oversight.
    The Chairman. The time of the gentleman has expired.
    Senator Grassley. I will submit questions for the record.
    [The questions appear in the appendix.]
    The Chairman. Then I am going to submit something as well, 
because this point that my colleague from Iowa has offered up--
that the agency cannot be trusted with an increase because, in 
his view, they have wasted billions of dollars of IT funding--
is not in line with what the Government Accountability Office 
has said. The Government Accountability Office has said that 
between 2019 and 2020, a lack of funding delayed IT upgrades 
five times. This is not by people in politics and all the rest. 
This is according to the Government Accountability Office. And 
I am going to put that document into the record at this point.
    [The document appears in the appendix on p. 124.]
    The Chairman. All right.
    Next will be Senator Carper, who I believe is online.
    Senator Carper. I am right here. Can you hear me, Mr. 
Chairman?
    The Chairman. Yes. And after Senator Carper, we will go to, 
in order of appearance, Senator Menendez.
    Senator Carper?
    Senator Carper. Mr. Chairman, I could not agree more on 
what you just said about GAO. We ought to listen to GAO on this 
front. They got it right, and we should take their advice and 
counsel.
    I have a couple of questions. Commissioner Rettig, welcome. 
We are delighted you are here before us. And our thanks to you 
and your team for all that you do for our country.
    My first question deals with multiyear funding for the IRS. 
A decade ago, I sounded the alarm on the need for greater 
investments for the IRS. Today, you rely on a depleted 
workforce and generations-old technology, causing frustration 
and confusion for taxpayers. These challenges are a direct 
result of Congress neglecting our duty to fund you to do 
collections. The result is a growing tax gap that allows 
wealthy individuals and corporations to, in many cases, avoid 
paying the taxes that they legally owe.
    I believe that the Fiscal Year 2023 budget request will 
help ensure that the IRS can keep its head above water. What 
the agency really needs is the certainty of multiyear funding 
to address some of the significant challenges.
    My question, Commissioner Rettig, is how would long-term 
funding for the IRS help address the agency's systemic 
workforce and occupational challenges, and how would this 
funding improve taxpayer services and efficient tax collection?
    Commissioner Rettig. The agency, like every other Federal 
agency, has been in more than 100 continuing resolutions since 
Calendar Year 2001. We received our funding a year ago with ARP 
on March 11th. We received funding this year on March 15th. It 
is impossible to build a robust, meaningful technology 
infrastructure for any agency, or any private-sector 
organization, when we do not have consistent, timely multiyear 
funding. It is simply not the way to do that. The start and 
stop that this agency receives from a funding perspective--and 
I am focused on the technology side of the house--means we 
continually have to push projects off based on limitations and 
figure out how we can do something in--like I said, for this 
year and for last year, we got our omnibus funding with 6 
months left in the year, and it is really impossible to do 
anything.
    Senator Carper. I agree. I agree.
    Workforce challenges and direct hiring authority is my 
second question. In recent years, the IRS has faced tremendous 
difficulty--as you know, Mr. Commissioner--in attracting and 
retaining a robust workforce. Fortunately, the recent omnibus 
appropriations bill provides direct hiring authority for the 
IRS to expedite the hiring process for qualified applicants, 
especially those needed to address the backlogged tax returns.
    The question: how will the IRS implement this new 
authority? What impact will this have on the long-term 
recruitment challenges facing the IRS?
    Commissioner Rettig. Congress rescued the Internal Revenue 
Service by including direct hiring authority in that omnibus 
budget for us. And that passed on, I think it was March 11th, 
March 15th. The next day we started holding job fairs in our 
three key processing centers--Kansas City, Ogden, and Austin, 
TX. A lot of press, individuals showing up to these job fairs 
with resumes. Over 90 percent received job offers on the spot 
from us.
    Senator Carper. That is great.
    Commissioner Rettig. And we can bring them onboard between 
30 and 45 days. And we are doing so. We have over--I think the 
current count as of this week is over 2,200 people through 
these job fairs, which is a direct result of getting direct 
hire authority. Over 2,200 people with offers, and we are 
continuing to hold these job fairs. We also hold job fairs 
virtually, and those require a little more follow-up, but we 
anticipate a similarly high rate of offers. And this is 
critical to help us with our surge teams, our contractors, and 
everything else we are doing to get onto the inventories.
    Senator Carper. Thank you.
    My third and last question, Mr. Commissioner, deals with 
Economic Impact Payments. My casework team back in Delaware 
continues to hear from constituents who have not received their 
full Economic Impact Payments. And while the Recovery Rebate 
Credit is intended, as you know, to solve this issue, many of 
my constituents, and I would guess constituents of my 
colleagues across the country, do not know this credit exists, 
or if they do, how to claim it.
    It is especially challenging for our elderly or vulnerable 
taxpayers who have difficulty accessing, in many cases, online 
resources and information related to the question. What steps 
has the IRS taken or does it plan to take to provide critical 
information about the Recovery Rebate Credit to vulnerable 
taxpayers as part of the current filing season?
    Commissioner Rettig. We provide that information in 
multiple languages, and importantly this Saturday, April 9th, 
and on the second Saturday in May, we will have open houses at 
our Taxpayer Assistance Centers for people to walk in, no 
appointment needed, walk in on any issue. And anybody who has 
these issues should certainly come in to one of our Taxpayer 
Assistance Centers, and we should be able to resolve it.
    In many cases, when people did not get it, or they got a 
reduced amount, there were offsets, or it went to another 
location. But I will say that TIGTA, the Treasury Inspector 
General, issued a report about 2 weeks ago saying that, I think 
on the EIP3, we got it 99-percent accurate. And in May of 2020, 
they issued a report that we were 98-percent accurate. And I 
think that speaks to the quality of the people.
    Senator Carper. That is great. Commissioner Rettig, thank 
you very much to you and your team.
    The Chairman. I thank my colleague.
    Senator Menendez?
    Senator Menendez. Thank you, Mr. Chairman. Let me follow up 
by thanking the employees of the IRS who have been working 
around the clock to assist taxpayers, during exceptionally 
challenging times over the last 2 years. And, Commissioner 
Rettig, thank you for responding to my and my colleagues', 
including Senator Cassidy's, bicameral, bipartisan calls to 
suspend notices, allow employees to join surge teams, and 
implement mandatory overtime at the IRS in order to work down 
the backlog.
    Right now, as I understand it, the IRS has two main issues 
when it comes to working down the backlog. And until we address 
these issues, we are going to have more of the same next year. 
The first issue is staffing--some of that has been talked about 
here--and that we need more IRS employees. The second is that 
the IRS still relies on paper. And this paper needs to be 
opened, sorted, and also manually entered into the IRS systems.
    It seems to me, Commissioner, one of the ways to decrease 
the backlog is to hire more customer service representatives, 
or CSRs, at the IRS, especially the submissions processors. 
Both the National Taxpayer Advocate and the National Treasury 
Employees Union have identified that these employees are making 
less than $37,000 a year, and that, quote, ``this is competing 
with the fast-food industry with high stress and unreasonable 
expectations,'' and this is why applicants, quote, ``are not 
beating a path to the IRS's doors.''
    How many submissions processing CSRs is the IRS seeking to 
hire this year? And how many have you hired?
    Commissioner Rettig. Between this year and next year, we 
expect to onboard 10,000. And we have more--before that hiring, 
we have more CSRs onboard than we have ever had in history. And 
normally a lot of them come onboard as seasonal. And a year 
ago, we extended them to permanent. And we brought on an 
additional 1,000 about----
    Senator Menendez. So you are looking to hire 10,000?
    Commissioner Rettig. Ten thousand.
    Senator Menendez. And at this point, what do you have 
onboard?
    Commissioner Rettig. All total? There are different 
categories for them.
    Senator Menendez. Of this 10,000 that you are seeking to 
hire, is that still ``to be filled''?
    Commissioner Rettig. No. It is two 5,000 traunches. And I 
talked about--I think you were here when I talked about the 
hiring events we are having around the country, and we have 
made offers for 2,000 of that 5,000. We expect to fill that 
5,000 shortly. We are having quite a bit of success at out job 
fairs.
    Senator Menendez. I will look forward to hearing about 
that.
    Let me talk about the second issue, which is paper. The IRS 
is stuck in the 1960s, before the information age. Last year, 
IRS employees were expected to open the envelopes of over 21 
million paper returns that were filed. They were expected to 
manually process the returns, like this one [holding up a paper 
return]--this one may be a simpler one--but meaning that they 
had to enter in all of the numbers that a taxpayer writes on 
this form.
    This all takes time. It is the reason why the IRS is a year 
behind on working down the backlog. Just how do we fix this? 
Last week, the National Taxpayer Advocate issued a directive 
that asked the IRS to work with the tax software industry to 
implement bar coding and scanning technology for next year's 
tax season. This would speed up processing of returns, reduce 
errors, and allow the IRS to reassign employees where they are 
needed the most, such as answering the phone.
    Commissioner, does the current budget request include 
funding to accommodate implementing bar codes and scanning 
technology for next year's filing season?
    Commissioner Rettig. First, I would ask you to look at--we 
will issue our response to that directive, and I would ask you 
to look at that. And we will be available to discuss it with 
you in person.
    Second, I would say with respect to 2D bar coding, in our 
congressional budget justification for each year, 2013 to 2017, 
we specifically requested but did not receive funding for 2D 
bar coding.
    And then the third answer is, yes, the President's budget 
does provide for this. We absolutely need to do better. Absent 
a pandemic, we would have been in a lot better place with the 
paper. But we have to balance--the same individuals answer 
phones and do the paper. And the phones--as you know, we 
received over 400 percent more calls than ever before.
    Senator Menendez. So the bottom line----
    Commissioner Rettig. But we are headed--and we have had 
pilots, and have run pilots, and you will see this in our 
response in this space. There are some technological problems 
associated with us using the 2D bar code, but we need to get 
there.
    Senator Menendez. Okay.
    And then lastly, on February 15th, Senators Booker, Cortez 
Masto, Padilla, and myself sent you a letter expressing 
concerns about how the IRS implemented facial recognition 
technology. In this letter, we expressed concerns about whether 
taxpayers--especially last-minute filers, like the millions of 
Americans who will be filing their taxes this week and next--
would have a meaningful choice whether they wanted to use 
facial recognition or how their biometric data would be 
protected.
    Despite requesting a response to the letter by February 
25th, we received a response from the IRS yesterday in time for 
this hearing. And even though the IRS has allowed taxpayers to 
opt out of the video selfie and to instead conduct a live chat 
with an ID.me agent, I am still concerned that taxpayers do not 
have a meaningful choice here, as many have waited long times 
in trying to reach an agent. I am also extremely concerned 
about the amount of information ID.me collects and stores for 
every taxpayer who uses this website. As a matter of fact, as 
ID.me tells me, according to this California disclosure in its 
notice for residents, it includes things like age, gender, 
military veteran status, taxpayer's location, and maybe their 
citizenship status, and where they access the ID.me website.
    Even though tax returns and tax identity information 
including a taxpayer's name, address, and taxpayer ID number 
are protected from disclosure, or potential disclosure, by the 
Internal Revenue Code, the information disclosed in ID.me is 
not protected.
    So the congressional intent, it seems to me, was to prevent 
the erosion of trust in our tax system and encourage taxpayer 
compliance. So I look forward to working with colleagues on 
both sides of the aisle to update this outdated provision of 
the tax code.
    The Chairman. And, Senator Menendez, those of us who 
consider ourselves privacy hawks pretty much agree with you. So 
I look forward to working with you and with the committee.
    Senator Menendez. You are the ultimate privacy hawk, Mr. 
Chairman, so I look forward to working with you.
    The Chairman. Okay.
    Senator Whitehouse, we are dealing with a little bit of the 
logistics of the Senate. I would just ask my colleague, did you 
have a chance to vote on the second measure?
    Senator Whitehouse. Yes.
    The Chairman. Great. We do not have anyone online. Why 
don't you go ahead with your questions for the Commissioner? I 
am going to get over there as fast as I can. I think Senator 
Crapo may have to stay a few more minutes. I am going to 
return, and I think I can get here by the end of your 5 
minutes.
    Senator Whitehouse. Great. Thank you very much. If 
necessary, I will filibuster.
    The Chairman. Wonderful. Thank you.
    Senator Whitehouse. Thanks, Commissioner. Thank you for 
being here. My questions all relate to solving the bad problems 
of secrecy, which are particularly germane right now as we see 
international oligarchs stashing their loot in secrecy-
providing jurisdictions.
    One of the ways we have cleaned this up, in terms of the 
United States being one of the worst jurisdictions for that 
kind of evil, was with the passage of the beneficial ownership 
law which Ranking Member Crapo had such an important role in, 
along with Senator Graham, Senator Grassley, and others.
    Are you comfortable with the input that you have been able 
to have into the Treasury regulation process? And do you feel 
that you will be able to use it effectively to find tax cheats 
and people who are hiding, against the law?
    Commissioner Rettig. It is critical that we receive 
information for what are often referred to as bad actors, both 
in a civil and a criminal context. The beneficial ownership 
rules and regulations are really a Treasury primary issue, 
supported by FinCEN, which is another bureau of Treasury, as 
IRS is. And we are hugely supportive, and we have been engaged.
    Senator Whitehouse. Good. And you are comfortable with the 
way Treasury is going about it? You are getting your needs met?
    Commissioner Rettig. They are my boss. Yes. [Laughter.]
    Senator Whitehouse. That is different than getting your 
needs met.
    Commissioner Rettig. I am not shy, and you know that.
    Senator Whitehouse. Good.
    Second, with respect to the reciprocal FATCA bill, setting 
aside the staffing concerns that it creates for you with the 
additional workload, do you support the passage of reciprocal 
FATCA, and why?
    Commissioner Rettig. Absolutely. And when FATCA was passed, 
we committed to our partners, exchange partners around the 
world, that we would pass a similar provision with respect to 
reciprocal FATCA. And it has not occurred yet, and so we are 
receiving information from them, but U.S. institutions are not 
providing that information.
    And so--you know, I am a believer in transparency, where 
transparency is appropriate, and in the FATCA arena, I think it 
has proved that.
    Senator Whitehouse. Great. And then with respect to 
501(c)s, I have three questions. First, where 501(c) 
organizations are allowed to obscure the donors behind 
political influence efforts, what prevents Putin's influence 
effort from deploying itself through that vector into our 
politics?
    Commissioner Rettig. I honestly cannot speak as to any 
specific individual country or otherwise----
    Senator Whitehouse. Putin, generically. Foreign influence 
efforts from penetrating our political space using that device.
    Commissioner Rettig. Yes. The IRS needs transparency in 
this arena. This is an issue that predated me coming onboard, 
as many of you are aware and control votes in this room. So you 
know, we are supportive for getting the information we can, and 
processing that information----
    Senator Whitehouse. Is the answer a simple one, that if 
there is secrecy behind political spending, then foreign actors 
can take advantage of that secrecy just as readily as domestic 
actors?
    Commissioner Rettig. That is what I was going to say. 
Domestic people could do the same.
    Senator Whitehouse. Yes, but foreign actors can as well, 
correct?
    Commissioner Rettig. Correct.
    Senator Whitehouse. Okay.
    Second, the IRS has a so-called 50-percent rule about how 
much a 501(c) organization can spend in politics. I want to 
hypothesize a not-very-remote hypothetical, which is that you 
have four affiliated entities, just picking that number. They 
share the same office. They share the same staff. They share 
the same board. And one of them gets a check, let's call it, 
for round numbers, a million bucks. It can spend 50 percent of 
that on politics, correct?
    Commissioner Rettig. That is the principal, primary rule as 
far as the funding. Correct.
    Senator Whitehouse. And then the other 50 percent, let's 
say it gives it to the second affiliate in the same office with 
the same staff. And it can spend 50 percent of that on 
politics, correct?
    Commissioner Rettig. There is a point in time where I would 
believe that the agency's tax-exempt governmental entities 
agents would consolidate, if it is really a money circle.
    Senator Whitehouse. Could you tell me----
    Commissioner Rettig. We would have to be able to identify 
that there is a relationship----
    Senator Whitehouse. Could you tell me if that has ever 
happened? That is a question for the record. Because what I 
think is that they are organizing so that you get 50 percent in 
the first bite, 25 percent in the second bite, 12.5 percent in 
the third bite, 6-point-whatever it is, in the fourth bite. And 
when you add it all up, 90 percent of the money has gone into 
politics in plain violation of the spirit of the rule, and the 
IRS, I don't think, looks at that.
    So please look at that.
    Commissioner Rettig. I could not tell you where it happens. 
I will certainly make those inquiries and make sure that it 
does not happen.
    Senator Whitehouse. Because if it never happens, then I 
would like to know that.
    Commissioner Rettig. In the income tax context, it is the 
step transaction rule as it goes through a whole bunch of 
steps. Those steps are not independent----
    Senator Whitehouse. And the last piece is that it appears 
that, when there is an evidently false statement in a filing 
made under the 501(c) rules, i.e., a plain discrepancy between 
a filing under oath at the Federal Election Commission and a 
filing under oath at the IRS, that the IRS has never referred 
that question to the DOJ to inquire into whether a false 
statement has been made. And DOJ in return has always insisted 
on there being a referral. So that is 100 balls dropped between 
the second baseman and the shortstop here, and everybody is 
just pointing at each other. Could you address that, please?
    Commissioner Rettig. Yes. We talked about this yesterday, 
and I would have to be able to confirm ``never.'' My belief 
would be never, but I could not for the record say never, 
sitting here. But it is a difficult arena to get those cases--
--
    Senator Whitehouse. It is really easy, actually. You just 
make the referral to DOJ. They put the two statements next to 
each other. They send it into a grand jury. People ask 
questions. And if there is a case, they proceed.
    Commissioner Rettig. DOJ--we interact with DOJ Tax. They 
are more resource-constrained than we are. And they are very 
selective on what we do refer----
    Senator Whitehouse. False statement cases are easy. We have 
heard that from DOJ themselves. It is bread and butter stuff.
    Commissioner Rettig. Bring them in, and let's have a 
hearing together.
    Senator Whitehouse. Great. Let's do that. Because it is 
preposterous the way this is working right now.
    Commissioner Rettig. I am with you. I agree with you.
    Senator Whitehouse. Thank you. I am hearing you agreeing.
    Commissioner Rettig. To earn the trust and respect of 
everybody, we need to be present in all of these issues.
    Senator Whitehouse. And if it is obvious that the two 
numbers do not add up, and they are both under oath, the 
obvious predication of somebody lying is right in front of 
everybody's face in public filings. And I think it demeans 
government when government does not act on public information 
like that, that is presumptively false.
    Senator Crapo [presiding]. Thank you. And, Commissioner, I 
am back, and Senator Wyden is now over voting.
    Senator Whitehouse. I took the liberty while you were away, 
our ranking member, acting chairman, to appreciate the work 
that you did on beneficial ownership. That was our first topic. 
So, I just wanted to mention that, that the Commissioner was 
very appreciative of what we had done and how that will help 
him in his work.
    Senator Crapo. Well, thank you. And I appreciate your 
referencing that. It shows there is bipartisan work that goes 
on around here, notwithstanding what may appear to the public.
    One of the other issues that is a bipartisan effort is one 
that I just voted on, and Senator Wyden is voting on--actually 
two of them; the first vote has already occurred. It was a vote 
on denying Russia permanent normal trade relations. We passed 
that with a vote of 100 to 0. And so now, at least the Senate 
has gone on record, and we expect the House to pick this bill 
up, even today possibly, putting Russia in the same pariah 
trade status as Iran and North Korea. So at least some other 
bipartisan good things are happening as well.
    The bill that we are voting on now--which, when Senator 
Wyden gets back, I will leave again to go do--is one to put 
into statute the ban on U.S. purchases of Russian oil until 
Russia ceases its aggression.
    So anyway, let's get back to the IRS. As you know, 
Commissioner Rettig, I am interested in examining updates 
necessary to bring the IRS's outdated technology into the 21st 
century so taxpayers can get some better service. In April of 
2019, the IRS issued its most recent 6-year IT modernization 
plan, which had a top-line estimate of $2.3 to $2.7 billion. As 
background, from Fiscal Year 1996 through Fiscal Year 2021, 
actual IRS budgets have included nearly $5.6 billion in IT 
modernization spending. Just a couple of questions I have about 
this.
    Is the IRS certain that its 2019 6-year IT modernization 
plan, if implemented, would bring the IRS IT up to date without 
the need for further funding?
    Commissioner Rettig. That plan in 2019, as I may have 
indicated earlier, was reviewed by McKinsey--outside 
consultants. We were asked to do so. We did so. We actually 
modified the plan. What was released was the modified plan. 
Know that the 2.3 to 2.7 at that point, two of the largest 
financial institutions in the United States had announced that 
they were putting in between $12 and $14 billion per year to 
modernize their systems, and they interact with fewer people, 
obviously, than we do.
    It was a current plan at the time. As of today, we have 
only received 57 percent of the funding requested in the plan. 
We have taken resources from elsewhere for the priorities.
    Senator Crapo. Right.
    Commissioner Rettig. I would be remiss if I said that it 
will get us where you want us to be, where we want to be, and 
where every American deserves. It will not. We need more.
    Senator Crapo. You may have already covered this, and I 
apologize for that, but if you could give us an updated plan 
for what you expect we need today, given what you have already 
seen develop, that would be very helpful.
    Commissioner Rettig. And technology advances faster than 
maybe any other lane that is out there.
    Senator Crapo. Yes.
    Commissioner Rettig. And so, the idea of this 6 years--you 
know, at the time I made comments, I believe here, that by year 
3 we should be looking at something different in year 6. By 
year 6, we should be----
    Senator Crapo. Build that into your analysis. But I would 
love--and I understand that. I can totally accept what you are 
saying there. But I would like to just see a plan so that we 
here can understand what it is we need to fight for in order to 
get that.
    Commissioner Rettig. And we would invite everybody. I have 
made some tours in certain areas asking people to help us--not 
necessarily just Congress, but public statements to help us 
help others. Help us. Let us know what the technology is. And 
we use a lot of contractors, and obviously we have about 7,000 
internal IT folks, and about 6,000 outside contractors.
    So the hope is that we are cutting-edge for our layers. But 
you know, undoubtedly people come in with ideas every day.
    Senator Crapo. All right. Good. I appreciate your attention 
to this. And I just have time for maybe one more question. And 
it is sort of on data as well as on biometric data.
    As you and I have talked about, I am focused on the IRS's 
announcement of migration of all existing IRS accounts to 
requiring further authentication, including with biometric 
data. And I have two questions.
    I have received mixed messages about the IRS's plan for the 
migration of existing account holders that have been verified 
using the enhanced authentication. For the record, at what 
point will an existing IRS account holder be required to move 
to a newly authenticated account in order to retain access?
    Commissioner Rettig. We have no plan at present to require 
anybody to move to the current version. And importantly, as I 
think we discussed yesterday, we have two options available on 
ID.me. We are looking at other options on a go-forward basis, 
including login.gov, which right now cannot handle our 
capacity.
    And so, if we--and we are working with login.gov. We need 
about 1,500 transactions per second. They can handle less than 
30. So, if we can get them up, and we can get their 
authentication levels up--it is critical that we are at 
authentication level 2 so that we can actually start to open up 
and provide meaningful online services, self-service, for 
people. Otherwise, if we cannot get to that authentication 
level, we are forced to provide fewer services, because 
security is our number one priority in that space.
    Senator Crapo. I just have one quick follow-up on that. I 
am already over time, and I would just alert Senator Portman, 
if you are online, to be ready. You are next. And Senator 
Toomey, I understand, is the next in line after that.
    My quick follow-up on that is, you referenced that you were 
looking at possibly login.gov. And as I understand it, 
login.gov is powered by LexisNexis, which is a foreign data 
broker and requires the use of personally identifiable 
information.
    What is the IRS doing in that context to ensure that any 
new options will not themselves raise privacy and security 
issues?
    Commissioner Rettig. I couldn't address that today because 
we are with ID.me, not with login.gov. We cannot even get to 
our enhanced capacity, let alone the rest of the issues.
    Senator Crapo. Understood. I just alert you to the kind of 
issues that I am going to have.
    Commissioner Rettig. Our options in the space are pretty 
limited. The desire is strong to be able to have self-service 
portals so those who want to use them can use them for a lot of 
different transactions.
    Senator Crapo. I agree with that, by the way. I think you 
should expand the number of transactions that people can do 
with you in that way.
    Senator Portman, are you there?
    Senator Portman. Yes, I am. Thank you. And congratulations 
to you, Ranking Member Crapo, for the great vote we just had on 
making sure that Russia does not have access to our market. It 
is a privilege, not a right, the lower tariffs that they can 
get under PNTR. It was a 100-to-nothing vote, and it was a vote 
in favor of the people of Ukraine, and to crank up the 
sanctions on Russia. And I know, although it looks easy, in the 
end it was not. So, congratulations.
    Senator Crapo. Thank you for that.
    Senator Portman. Commissioner, thank you for being with us 
today. You and I had a good conversation prior to this hearing 
about one of my major concerns, which is the fact that we have 
so many unprocessed returns out there. I think we have gone 
from 76.5 million returns that have not been processed, to a 
backlog of about 11 million returns--11.5 million as of March 
25th. That is progress since our last meeting, but obviously we 
have a huge backlog. And as you know, you and I have talked 
about it, and I know others have raised it as well.
    We have small businesses in Ohio, as an example, that are 
still waiting for their refunds from a year and a half ago. And 
we have people, individuals telling me, ``I can't get a loan 
because I have to be able to show I have a processed tax return 
in order to get a loan.''
    So this is having a real-world impact out there. And 
obviously, we all have deep concerns about this backlog. As you 
know, Senator Cardin and I have worked with you and your 
predecessors on IRS reform, actually for the last decade and a 
half, or almost 2 decades. And our latest one is the Protecting 
Taxpayers Act, which is included in the text of the first act.
    We have another bill we are now looking at to provide 
additional funding for customer service from the IRS that I 
think American taxpayers deserve, as well as an overhaul of the 
Individual Master File and to begin revamping the Business 
Master File as well.
    We would require 2D scanning of paper returns to help 
prevent future backlogs. It is basically just putting a bar 
code on the returns so you can process them much more quickly. 
Increase the amount of funding for these Low-Income Taxpayer 
Clinics that are over-utilized now. Provide direct hiring 
authority to help get employees onboard more efficiently, which 
I know you value.
    We also, as you know, have revamped the Oversight Board, 
which was in our first legislation on IRS oversight, and we 
require regular reporting to Congress and to the Inspector 
General--and a recommendation for IT audit trails on IRS 
applications to increase the protection of taxpayer data.
    Anyway, talk to us about what that would mean. Do you think 
this would help in terms of addressing the backlog and 
preventing future ones? And a specific question for you: does 
the current budget proposal include funding to completely 
update the Individual Master File?
    Commissioner Rettig. The current budget proposal does not 
include sufficient funding to update the Master File entirely, 
and it has been, as all of you are aware, a long-term project 
for the agency. We want to and need to get there.
    We are, myself included--every employee in the Internal 
Revenue Service, and I think every American, is supportive of 
funding and bringing oversight over IRS in the technology space 
to be able to provide the services that every American 
deserves. I think the vote you all had today shows that we are 
the greatest country in the world. We should provide that level 
of service to our people. And a blend between employees--who I 
think in the IRS are spectacular, and I cannot say enough about 
the quality of the people and the desire--but we need to 
provide them the right tools and training and technology. The 
technology will change the skill sets, so the direct hiring 
authority, what we use it for, will change as we bring on 
technology.
    We are going to ask, in the direct hiring authority arena, 
for direct hiring authority beyond what we just received, which 
is in some of our specialist-type positions--more sophisticated 
examiners. We have a very difficult time bringing those people 
onboard when they are told it is going to take 6 to 9 months, 
or something, to get them onboard. So one of the comments, 
Senator, that you made about direct hiring authority in this 
space--and as we discussed prior to today, it will get you what 
we believe would be critical to be able to do what we need to 
do.
    Senator Portman. Yes, as we talked about, we need the 
specific positions that you need direct hiring for, what your 
priorities are. And I guess if you could, just answer my 
initial question also, Commissioner: do these various reforms I 
talked about--including the customer service funding increases, 
but also the scanning of paper returns and overhauling the 
Individual Master File--will this help in terms of the 
backlogs?
    Commissioner Rettig. They will absolutely help in terms of 
the backlog, and numerous other functions within the Service. 
It is critical that we receive them.
    Senator Portman. Well, thank you for that. And thank you 
for giving us the additional information on the specific 
positions for which you need direct hires that are so 
important. We want to help you. And as you said, it is all 
about the taxpayer.
    My time has expired. I am going to give you a question for 
the record on foreign tax credits. I know you just released 
your final regulations on that. I have some concerns about it, 
and I will be following up with you on that. Thank you, 
Commissioner. I appreciate it. Good luck with the filings.
    Commissioner Rettig. Thank you.
    [The question appears in the appendix.]
    Senator Crapo. Thank you, Senator Portman.
    Next is Senator Toomey, and he will be followed by Senator 
Cardin.
    Senator Toomey?
    Senator Toomey. Thank you, Senator Crapo. And I would also 
like to congratulate you on the work that you did to get us to 
this vote this morning. So, well done on that.
    Commissioner Rettig, I appreciate the conversation we had, 
I guess it was earlier this week. I do want to follow up on the 
issue that Senator Portman raised, which is the backlog, 
because as you know, this is a really big problem. And I am 
concerned about whether it is going to be solved, and how long 
it is going to take. I am concerned about how well-defined a 
plan is to get this wrapped up, to catch up, to get back to a 
normal steady state. And I have to tell you, one of the real 
frustrating problems for so many of my constituents is the 
combination of the backlog, the fact that their return has not 
been processed, and they cannot get through on the phone to any 
human being. That is a very, very frustrating situation.
    My understanding is that for 2021, only 11 percent of the 
calls that were made by taxpayers to the IRS actually were 
completed. That is obviously just a huge problem. And I have 
all kinds of letters from constituents complaining about not 
getting their tax refund for 2020, even after filing in 2021.
    I have a letter here from a constituent who said--and this 
is January 24th of this year: ``I received a letter from the 
IRS claiming they did not receive my 2020 tax return, but I 
mailed my return, a voucher, and my check, all in one envelope, 
and they cashed the check on April 27, 2021. Now they claim 
they do not have the return that was with the check.'' So, 
okay, I understand mistakes will happen, but you can imagine 
how frustrating it is when this person then tries to call and 
has like a 1-in-10 chance of getting through to any human being 
they can talk to.
    So I know you are very aware of this problem, but I would 
like to just have a little discussion with you about what is in 
the works. What is going to change? How quickly are we going to 
be able to catch up both on the backlog, but also on the 
ability to actually have a human being pick up the phone when a 
taxpayer calls?
    Commissioner Rettig. Let me give you some current numbers.
    Senator Toomey. Okay.
    Commissioner Rettig. As of March 31st, individual returns 
that were received in calendar year 2021, we have 2.7 million; 
individual returns received in calendar year 2022, we have 2.3 
million. So in total, we have just about 5 million individual 
returns waiting to be processed.
    When returns fall out, and they fall out for a variety of 
reasons--failure to reconcile Economic Impact Payment, Advance 
Child Tax Credit payment, mismatches, and whatnot--they move 
over to our error resolution cases. Last year at this point, we 
had 7.7 million returns in error resolution. As of March 31st, 
we have 741,000 returns in error resolution, less than 10 
percent. Our efforts are working. We are trending in the right 
direction.
    We will--you know, during the summer, you will start seeing 
the impact of this. And many people, beyond a telephone call 
with a live IRS employee--and I keep trying to make the point 
that the same employee in other times is processing paper 
returns, inventories, things that we get in that context----
    Senator Toomey. So, can I just follow up on that, because I 
am trying to understand? What you just said there invokes, in 
my mind, the image of a person who is processing tax returns in 
some form. And then a phone rings, and they have to drop what 
they are doing to pick up the phone? I assume it does not 
happen that way, right?
    Commissioner Rettig. Not at all. They are taken off the 
phones and moved to the paper.
    Senator Toomey. And so that would obviously suggest that we 
do not have enough people on the phones. How much does that 
relate----
    Commissioner Rettig. These are the areas where we are 
hiring: 5,000 this year, and 5,000 next year, and 2,500 
contractors. We have automated the processing in error 
resolution. We automated the processing with the ARP money, and 
we have cleared 7.1 million return recovery credits----
    Senator Toomey. That sounds like a tremendous amount, and I 
fully acknowledge--I realize that legislation that was passed 
made the work much more difficult and complex and added to the 
backlog.
    What do you think the goals should be regarding the ability 
of people to speak on the phone? And when do you anticipate a 
really significant improvement in the ability of constituents 
to get through?
    Commissioner Rettig. I am old-school, so I am more of an 
in-
person rather than an online person, and the President's budget 
proposal provides funding to have the telephone level of 
service be at 85 percent, and we would answer 8\1/2\ out of 10 
calls. I think that is a respectable figure. We would like to 
be at 100 percent. Every 10 percent in a normal year, non-
pandemic, every 10 percent is another $100 million. It is an 
appropriated item. We get X dollars for Y amount of people on 
the phone. So there is a direct relationship.
    Senator Toomey. So, my time has expired. If I could just, 
with one final question--and I appreciate your answers, 
Commissioner. If you got the full budget request appropriated 
in this next cycle, how long would it be before you are able to 
answer the 85 percent of the calls that, as I understand it, 
your request conforms with?
    Commissioner Rettig. That budget request is for Fiscal 
2023. I expect us to get to answering a meaningful percentage 
of the calls--which I have to hedge because, if we go into 
another spike in the pandemic, it changes our situation. But I 
expect us to be at normal, which we refer to as healthy, which 
is viewed through the eyes of the taxpayer, and the taxpayer's 
experience, during Calendar Year 2022. We cannot carry this 
into Calendar Year 2023.
    Senator Toomey. Will that be above 50 percent in Calendar 
2022 in terms of phone calls going through?
    Commissioner Rettig. Historically, and as you are aware, 
IRS comes up with a budget. It goes to Treasury. It goes to 
OMB. And so, what comes out of the building and what Congress 
passes does not necessarily always look the same. Sometimes we 
are told what numbers to put in there. But I think 
historically, the target has been right around 70 percent, and 
so that would be the mark that we would try to get up to.
    Where I would caution is--we operate on a fiscal year--not 
to use our annual level of service, but as you see our trends 
improving, look to what we will have on a monthly or a weekly 
basis. Because the denominator here is so big that we will 
never get off the mark. And we are currently running around 19 
to 20 percent level of service.
    Senator Toomey. Okay. Thank you very much.
    Thanks, Mr. Chairman.
    The Chairman. Thank you, Senator Toomey.
    Next will be Senator Cardin, and then Senator Cassidy.
    Senator Cardin. Thank you, Mr. Chairman.
    Commissioner Rettig, let me start by just saying ``thank 
you'' to you for your willingness to stay with this challenge. 
We have put so many additional responsibilities on your plate. 
We can talk about the 2017 tax bill. We can talk about the 
American Rescue Plan. We are asking you to do more and more. At 
the same time, your budgets have not at all kept up with 
inflation, let alone modernization, which is critically 
important for a longer period of time than just 2017.
    So I want to first acknowledge that. In addition, Congress, 
when it does not pass a full-year appropriation, you go into a 
continuing resolution, how can you possibly make the type of 
investments and planning that you need to in order to deal with 
the types of questions that we are asking you? So my first 
point is to say ``thank you.'' And I have been with the 
workforce at IRS. They are dedicated professionals, and I thank 
them for what they do every day in public service on the front 
line. And we appreciate that.
    Which leads me to the legislation that you already talked 
about with Senator Portman. I just want to concur in his 
comments. The legislation that we have introduced would provide 
enhancement of IRS resources, because you need resources. A 
multiyear operational plan, because we need to have longer-term 
planning on reaching the level that we want to in the modern 
tax collecting agency. IT upgrades and increased customer 
service, that is something that has grown and grown and grown 
as far as the consumer expectations; you have to have the IT 
that can meet that. Oversight is critically important so that 
the taxpayer gets the right return from the investments they 
make in regards to the IRS. Strategic Transformation Office, so 
that we can understand what the strategic strategies are moving 
forward. Hiring flexibility, which is something we have given 
you some help with. We need to give you more. Low-Income 
Taxpayer Clinics--they are critically important. And then the 
last thing: reinstating the authority to regulate paid tax 
return preparers.
    All we have to do is listen to the ads we hear every day 
where people are being told they can get something that is too 
good to believe, and many of them have bought into that. And 
your authority to regulate paid providers was compromised in 
2014, and to this day, we still have not responded. I know the 
chairman has been working on that, and I hope we can get our 
legislation moving forward, along with the paid preparer 
provisions.
    I am going to ask a question, though, about concerns--I 
know it is on your radar screen, but I want to do it in this 
forum. I also am the chair of the Small Business Committee, and 
we have provisions in the tax code to help small businesses. 
Very frankly, I think we need to examine the tax code as to its 
impact on small companies that generally use the individual tax 
rates rather than the corporate returns in order to carry out 
their business transactions.
    I do not think the individual tax return has been updated 
to deal with the realities of smaller business entities. And I 
think that is something we need to deal with. But in the 
meantime, we have the Employee Retention Credits, and we have 
heard from a large number of our small companies that have told 
us they just have not been able to get this credit in a timely 
manner.
    I would just ask, among the other priorities you have, to 
recognize that small businesses are at a crisis level as a 
result of COVID-19, and these Employee Retention Credits are 
critically important to their survival. If you could make that 
a priority, I would certainly appreciate it.
    Commissioner Rettig. Let me first address your opening 
comment and express my personal appreciation to you and every 
member of the committee for the appreciation that you have 
expressed for the IRS employees. This has been a very difficult 
few years, and it has been my privilege to be here with them 
during this period of time.
    The second part--what was going through my mind as you were 
making the appreciation to me personally is, not only do our 
employees watch these hearings, but my wife is watching this 
hearing. So I will have fewer critiques when I get home 
tonight, because I can say, ``Well, you know, the Senator said 
we are doing okay,'' right? So I appreciate you helping me out 
on the home front there. But she is on this journey with me and 
a significant part of my world, my life. My experiences are not 
only mine, but also hers.
    Small business--as you know, I come from a small business 
environment. My dad had a truck, and as we used to say, two big 
boys had to get in the truck when it was dark, and we got home 
when it was dark. And our reward was we got to eat dinner, as 
my mom explained to us, and that kind of thing. So small 
businesses, I believe, are the backbone of this country. They 
provide valuable services to real people in real situations, in 
real communities and local communities, that are just not 
otherwise available.
    So, the 941s and amended 941s, we have actually about 1.9 
million in inventory of 941s. We have 324,000 of 941-Xs, and 
those are current figures. We are working those on a priority 
basis. And you are right: we have a number of priorities. So 
within the priorities, obviously we have to make decisions. And 
they are at the top of the list, with a couple of others. But 
they are at the top of the list. And we need to earn that trust 
and respect of everyone, including the small businesses. We are 
aware of that.
    Senator Cardin. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Cardin. And before you go, 
I just want to make it clear, I so appreciate what you are 
talking about with respect to small businesses. Oregon is just 
overwhelmingly a small business State. You can almost count our 
larger businesses on both hands. We only have a small number of 
larger businesses, and so many smaller businesses. In the last 
few days, I have been struck by how many people are just coming 
up to me and saying they really want to see this Employee 
Retention Credit, because they like the fact that this is a 
kind of win/win arrangement that creates an incentive for 
people to pitch in and work together at a very challenging 
time.
    So I want you to know I am all in with you. We have talked 
about this often, and your leadership is much appreciated.
    Okay, let's see. Senator Cassidy, and then, because we are 
going back and forth, I think after Senator Cassidy will be 
Senator Casey, who is online. We are just going to do our best 
to keep this going.
    Senator Cassidy?
    Senator Cassidy. Yes, sir. Thank you for being here.
    Last week the IRS and Treasury announced a proposal to fix 
the so-called ``family glitch'' in Obamacare. Now the IRS had 
looked at this in the past, and in fact finalized a rule in 
2013 that determined that whether an employer's offer of 
coverage is, quote, ``affordable'' is determined based only on 
the employee-only rather than family coverage.
    Now the law has not changed, but why is the IRS suddenly 
interpreting the law differently? Frankly, it seems more like 
this is what we wish the law to read, as opposed to this is 
what the law was interpreted as being in 2013. So, thoughts on 
that?
    Commissioner Rettig. Yes. I cannot speak to that. My guess 
is that came from Treasury more so than IRS. Treasury does 
policy. IRS does administration. But if you will submit a 
question for the record, I will get back to you on that. I do 
not have that information.
    Senator Cassidy. So let me ask. I find that almost kind of, 
whoa! Because there is an article in Health Affairs which goes 
through all the considerations that IRS gave in 2013. This was 
clearly an IRS decision. So what I think I am hearing from you 
is that Treasury has gone this way without consulting IRS?
    Commissioner Rettig. I cannot confirm that Treasury--I do 
not have the personal knowledge. I will confirm what the 
thinking was and who did the thinking, whether it was IRS or 
Treasury. But know that Treasury is usually significantly 
involved, and they are the jurisdiction, if you will, for tax 
policy issues. So, if there has been a shift in policy, 
Treasury would have been involved. I will have to get back to 
you. I just do not have the personal knowledge.
    Senator Cassidy. I am just a little dumbfounded. I would 
have thought that this would have risen to your level, since 
this is such a significant reversal of previous IRS decisions.
    Okay. Let me ask about something which is near and dear, 
unfortunately, to my heart: disaster retirement legislation 
with 
penalty-free withdrawals. My State has been disproportionately 
affected by natural disasters. I could give you a list, but I 
think you are probably very familiar with them. Now one thing 
Congress has done in the past to help disaster victims is to 
allow penalty-free withdrawals from qualifying retirement 
plans. And so, since many Americans' big chunk of savings is in 
these plans, we can help them with penalty-free withdrawls. Now 
we typically enact this relief along with enhanced casualty 
loss deductions and other measures.
    But, despite recent disasters in Louisiana, New Jersey, New 
York, Pennsylvania, and other States, to date Americans have 
not received tax relief for disasters in 2021, which I do not 
think is a policy concern but a timing issue.
    Now, Commissioner, we have a bill, 2583, with Senator 
Menendez and Representatives Thompson and Kelly, that would 
make penalty-free withdrawals from retirement accounts 
automatic after the President issues a disaster declaration. I 
am hoping to get this included in retirement legislation that 
may move through this committee. As a Commissioner, giving you 
the certainty as to the implementation of this policy, and as 
regards timing, do you think that would be a good way to go?
    Commissioner Rettig. Absolutely.
    Senator Cassidy. Sounds great. And just to echo that, the 
Taxpayer Advocate Erin Collins talked on February 17th about 
how these last-minute tax law changes present challenges for 
IRS and for tax software companies.
    So again, in your last statement, I think you would agree 
with this, but is permanent legislation generally preferable 
from a tax administration standpoint?
    Commissioner Rettig. We are currently programming for 
filing season 2023. We are in 2022, so we begin preparation 
that far out. We got caught here with respect to the March 
legislation on unemployment compensation and a variety of other 
provisions that we did not have the ability to automate in our 
systems. And as a result, it led to more than 20 million 
returns being pushed into a manual processing.
    Senator Cassidy. You've got 20 million returns in manual 
processing?
    Commissioner Rettig. Correct. And then that led to 
inventories that led to delays in refunds, and the rest. There 
is a connection between all of this. And I am not saying it 
started there--that was one of the issues--but we had more than 
20 million. We had 11.2 million return Recovery Rebate 
reconciliations, Earned Income Tax Credits, ability to use 2019 
instead of 2020. We could not automate that. And the 
unemployment compensation we could not automate.
    Senator Cassidy. So many of the questions here, or many of 
the comments thank the IRS employees for their hard work, and 
thank you, and express concern about staffing, and express 
concern about backlogs.
    What I just heard from you is that if we made permanent 
this legislation that almost always passes when there is a 
disaster, we do something positive for the employees, positive 
for productivity, and positive for backlogs?
    Commissioner Rettig. And we would implement it 
automatically. There are other provisions that key off of 
national emergency declarations. We do not need to consult 
anybody. We implement immediately. Like delaying in filing a 
tax return, for example.
    Senator Cassidy. Sounds great.
    So, Mr. Chairman, just for the record, I think we have a 
solution that Congress always passes, but if we made permanent 
would help the IRS tremendously, and in turn help other 
taxpayers as regards any backlogs that may occur. So, knowing 
that all States--and this is a Menendez-Cassidy bill. So just 
to put that in your kind of front of brain as maybe something 
we could include in future legislation.
    The Chairman. We will have the staff follow up with you on 
that, Senator Cassidy. And I noted that you and Senator 
Menendez had teamed up in that kind of bipartisanship.
    Senator Cassidy. Thank you.
    The Chairman. Okay, Commissioner, I have to go be part of 
an effort to make some wonderful history and vote for Judge 
Jackson. So, we now have the good fortune of having our 
colleague from Nevada, who is willing to chair. And then we 
have a number of Senators, a colleague I think already on the 
phone. I think Senator Casey may be next. But we will work 
closely with you.
    And finally, Commissioner, because I am not sure I am going 
to be able to make it back, I want to thank you particularly 
for your candor, for your willingness to work with us, and to 
do it in a hands-on kind of way. That is really the litmus test 
here: whether people are really going to be hands-on, talk 
about where we ought to go, follow through, and you have 
clearly met that test. And I really look forward to talking 
with you in the days ahead.
    Commissioner Rettig. Thank you. I very much appreciate 
that.
    The Chairman. Thank you.
    Senator Cortez Masto, to run the hearing.
    Senator Cortez Masto [presiding]. Thank you. I believe, 
Commissioner--excuse me, is Senator Casey online?
    Senator Casey. Yes.
    Senator Cortez Masto. All right; Senator Casey?
    Senator Casey. Thanks very much.
    Commissioner, thanks for your time today and for your 
public service. I am glad we had a chance to chat yesterday. I 
really only have one question, in the interest of time, so I 
should take less than my 5 minutes. But it is true what you and 
I have talked about, and our teams have worked together on, is 
letting people know that in the next couple of days, if they 
have not already filed their taxes, there are a lot of families 
that can take advantage of a greatly enhanced Child and 
Dependent Care Credit. That is the long version of the name, 
but most people know it as the Child Care Credit--to be 
distinguished from the Child Tax Credit--a separate, individual 
tax credit just for child care and related expenses.
    So as you know, that is available to families now because 
of the American Rescue Plan. So, in the next couple of days, I 
hope that we keep promoting and talking about it, and that 
families will take advantage of it.
    By some estimates, families can have a tax credit that will 
be seven times more generous than the tax credit under the 
current version of the credit. And at a time when families are 
paying so much for the price of food, or gasoline, or so much 
else, this tax credit can be enormously helpful. Because one of 
those big costs, as you know, is the cost of child care that 
has exploded over the last 10 to 15 years.
    So here is my question. It is just one that you and I have 
talked about, but one of the frustrations we had was that we 
thought the IRS, as well as the administration more broadly, 
was not doing enough to promote this credit. And you and your 
team responded to that, and we appreciate that.
    I wrote a letter, with 13 Democratic Senators, to Vice 
President Harris and Secretary Yellen, urging them as well to 
be more aggressive on the outreach so that people know about 
this as a one-time-only opportunity on this particular tax 
credit before it goes back to the original version of it.
    So can you tell me what steps the IRS has taken already to 
make sure that families know about the credit and can claim the 
credit as they deserve on this year's tax forms?
    Commissioner Rettig. Certainly. And I appreciate the 
opportunity, and we are very supportive of the credit, and we 
are doing our best. I would agree that we are later than we 
should have been in getting the word out in as many channels as 
we have, but we issued an information release on March 8th that 
covered a lot of issues. We have frequently asked questions. 
But importantly, we have been very aggressive with social 
media, YouTube, both in English and in Spanish. And we have 
Taxpayer Assistance Centers open on Saturdays, this coming 
Saturday, and the second Saturday in May.
    We have relationships with community organizations, over 
18,000 community organizations around the country. When we were 
going into the pandemic, we only had relationships with about 
3,000. We are now at 18,000. We have relationships with 13,000 
public school districts in the country. Obviously that 
translates into millions of individual children that it can be 
impactful for. And we use all of the channels that we have. And 
we did not have those public school relationships either, 
before the pandemic. But I think it is a tribute to the IRS 
employees getting out there and figuring out how to get in the 
communities, get the word out, and we are using all the 
channels that are available on this, as well as the other ones.
    Senator Casey. Well, Commissioner, thanks. We look forward 
to continuing to work with you in the days ahead--literally 
now, we are down to days.
    And the last thing--I will just make a statement, because I 
know you and I have already talked about it. I look forward to 
working with you and the chairman to pass the President's 
budget request so that Pennsylvanians can get the level of 
service that they expect and deserve from the IRS. And I know 
that there are concerns about falling levels of service, and I 
know you are trying to work on that, but you need a budget to 
do it. So, thank you for your work.
    And, Madam Chair, I will turn it back over to you. Thank 
you very much.
    Commissioner Rettig. Thank you, sir.
    Senator Cortez Masto. Thank you.
    Senator Lankford?
    Senator Lankford. Thank you very much. It is good to see 
you again. Thanks for coming in. And let me give you one piece 
of positive news on this, because we are asking you all kinds 
of questions on the issues. I typically file my taxes, like 
millions of other Americans. I have already done that for my 
Federal return. Typically when I e-file, I will wait hours or a 
couple of days to be able to get the confirmation back that it 
has all been received. That took seconds this year. So the 
change in your system was pretty dramatic from what we have 
seen in the past. Literally after I e-filed, it came back 
within seconds, said ``confirmation done'' and that everything 
went through. So that part of it is working faster. I know we 
still have a lot of issues in the call center and being able to 
answer calls.
    I want to ask about the personnel issues and to zero in on 
this. You were given direct hiring authority. This has been an 
issue I have talked about in my other committees and in this 
committee as well. You have been given access for 10,000 of 
those, but I do not know yet what positions you are using those 
for.
    So, I do not need the exact type of position you are 
looking for in that direct hiring authority, but how are you 
using it?
    Commissioner Rettig. We are going to come back and ask for 
an expansion of that, so I always believe in transparency----
    Senator Lankford. That's good. That's fair.
    Commissioner Rettig. The first level is where we have our 
inventories, which is submission processing and accounts 
management. And the legislation limits direct hiring authority 
to essentially the clerks in those positions. They are lower-
graded individuals, if you will, on a pay grade. And that is 
what we have authority for. We have authority for 10,000, which 
is 5,000 this year and 5,000 next year. We have been holding 
job fairs around the country. We have been very successful in 
those job fairs. We fully expect to bring onboard the 5,000, 
which will make a difference. We also have other avenues.
    Senator Lankford. Do you have individuals who are in the 
processing center or answering phones? Is that in your direct 
hire authority, or are those not in your direct hiring 
authority?
    Commissioner Rettig. It is. Where we are hiring is Kansas 
City, Austin, and Ogden. And that is where our three big 
processing centers are. And we have direct hiring authority--
Congress rescued us; there is no question about it. We were 
able to onboard folks in those facilities within 30 to 45 days. 
We needed them in December, but without direct hiring 
authority, we are competing with Walmart. We are competing with 
Target, which is onboarding at $20 an hour. Our folks are at 
$15. And we are competing with Amazon. And then, without direct 
hiring authority, we have to tell these individuals it may be 6 
to 8 months before we can bring you onboard.
    For these folks, they need that job now. There was a news 
release recently, a press release out of Ogden. A lady got laid 
off on Friday and came to our Saturday hiring event and got 
hired. We were able to move that fast.
    Senator Lankford. Yes, that makes a big difference. So the 
onboarding process itself, once you have actually made the 
hire--before they can actually get engaged to actually doing 
the task, how long is that onboarding process?
    Commissioner Rettig. Thirty to 45 days. Individuals are 
showing up in person at these job fairs with resumes. We are 
also doing virtual job fairs, and it takes a little more 
follow-up to get some of their information. We do the 
background checks within that 30 to 45 days, but we can do 
everything else we need in person at the site. And it has been 
really superb.
    Senator Lankford. Terrific. You and I have talked before 
about the attrition rate in certain areas of the IRS, and then 
also the number of retirees that are out there. So, two 
questions on this. You have seen the high attrition rate in the 
processing centers before. How is that going? And the other 
side of it is, there are a lot of folks at IRS who are eligible 
to retire this year. Have you seen a lot of retirements this 
year?
    Commissioner Rettig. So, attrition--you know, we had a 
hiring freeze from 2011 to 2018, so we have a more experienced 
workforce on average than probably most other agencies. 
Attrition is holding true. I will say that the majority of our 
folks stayed during this period of time. We are seeing 
basically a 5- to 7-percent attrition rate on about 80,000 
employees. And some of our avenues are a little higher, 10 or 
11 percent, and we are addressing that. Although I will also 
say that I had been contacted by a number of folks before I 
came onboard at the IRS who were career IRS employees who 
retired, who have come back as retired annuitants.
    And so we are getting a sense of, if you will, the IRS 
community understands that they need to pitch in and help us 
out, and they have been doing that. So we are not where we need 
to be, not where you want us to be, but we are getting in a 
better position every day. And, you know----
    Senator Lankford. Do you have data at this point for 
individuals who chose not to get the COVID vaccine who retired 
early, or who left the IRS, what that number is, or a 
percentage of the workforce?
    Commissioner Rettig. We have that. I believe that we were 
among the leaders in Federal service in terms of the percentage 
of employees who were fully vaccinated. And I could not tell 
you whether that is or is not for folks who are leaving now. We 
do not have that requirement.
    Senator Lankford. Right. So there is no way to be able to 
know how many folks did leave before, based on that?
    Commissioner Rettig. We did not--to my knowledge, we did 
not see a noticeable spike in leaving, although it was in the 
hallways.
    Senator Lankford. We had lots of phone calls that came into 
our office saying, ``Hey, I already had COVID. Why am I doing 
this?'' We are grateful the pause is there at this point. We 
would love long-term clarification from OPM on what direction 
they are planning to go on that, because that is still hanging 
over some folks' heads who have had COVID three times since 
then.
    Commissioner Rettig. That is all beyond my pay grade.
    Senator Lankford. I get it. I get it. I just did not know 
if you all were tracking that number. Thank you very much.
    Commissioner Rettig. Thank you.
    Senator Cortez Masto. I believe Senator Warner is available 
virtually. Senator, are you there?
    Senator Warner. Yes, Senator Cortez Masto. Thank you so 
much. And Commissioner Rettig, it is good to see you again, at 
least remotely. And let me start, like so many of my other 
colleagues did, by thanking you and all of the IRS employees 
for their really diligent hard work during COVID. And it has to 
have been, I know, just brutal, and like Senator Lankford was 
talking about, what it has done to some of the workforce.
    Let me also move, as many of my other colleagues have, from 
the thanks to the enormous burden that so many Virginians are 
feeling by not getting their 2020 taxes processed. And that has 
obviously hurt in terms of child tax payments getting out, to 
getting their returns on a timely basis. And we are really 
going to need to put as much attention and focus there as 
possible.
    I want, in my first question, at least to start on 
something that I do not think has been raised yet, and that is 
the EIDL loan process. EIDL, as I am sure you know, 
Commissioner, is an SBA program that was utilized a great deal 
during the pandemic in conjunction with programs like PPP and 
others. Part of the EIDL process is a company that is going for 
an EIDL loan from the SBA has to, in effect, give permission to 
the IRS for the IRS to release their tax returns to the SBA so 
the SBA can process the application.
    And unfortunately, the SBA has been receiving either no 
returns, or in many cases partial returns. Our office has 
contacted the IRS. Our office has contacted the Taxpayer 
Advocate. And the Taxpayer Advocate has said, oftentimes, the 
applicant's tax returns cannot even be found in the IRS system. 
If this is the case, we have businesses that are in all 
likelihood eligible for these critical EIDL SBA loans that are 
not getting them because of this snag at the IRS.
    Are you aware of this problem? Is there anything that can 
be done? And can we have some kind of flagging system within 
the IRS process to make sure that there is at least some review 
done, or if a partial transcript is sent over to the SBA, that 
there is some ability to kind of work that out?
    Commissioner Rettig. If you have current situations on 
this, we should talk offline, because we created a work-around 
for this with the SBA, and with taxpayers, where they verify a 
current filing. And then we verify with the SBA. So if you have 
people who are hung up in that, we----
    Senator Warner. We have a number of people, and we have 
been in regular touch with the IRS. We have been, obviously, in 
regular touch with the Taxpayer Advocate. But I will definitely 
take you up on that. There are an awful lot of Virginia 
companies that are kind of lost in the ether at this point. And 
if there is a work-around that is actually working, I would 
love to engage with you on that. So, I appreciate that, 
Commissioner.
    In the last couple of minutes, I want to raise the issue of 
cyber-attacks. I know you indicated, I think at your Ways and 
Means hearing, that IRS is the victim of at least over a 
billion and a half cyber-attacks a year. And obviously many of 
those--most of those do not get through. So I commend you on 
that.
    But as chair of the Intel Committee, I can tell you, with 
the war in Ukraine, my expectation is quite high that we will 
see increased numbers of cyber-attacks. And I still do not 
believe we have seen Russia's full-on A game. And clearly, in 
addition to sectors like energy and financial, causing more 
disruption in a governmental entity like the IRS would be high 
on the Russians' hit list.
    I know the President's budget increased a bit here, but how 
do you feel you are doing in terms of cyber-protections, and 
even beyond the President's budget, what else should we be 
doing to give you the assistance you need?
    Commissioner Rettig. I am proud of our employees, and we 
receive about 2.5 million sophisticated cyber-attacks, which 
generally speaking are nation-states, a day--2.5 million a day. 
And we receive about 1.6 to 1.8 billion per year.
    We are ever-mindful of events that occur not only inside 
the United States, but certainly outside of the United States. 
Cyber, I think every Commissioner would say, is the primary 
thing that keeps them awake at night. It is not only protecting 
the data, which is obviously hugely significant, but I think 
that if we got hit in that space, it would be an emotional 
constraint on the country and the people of the country. They 
trust us, and we need to be there.
    I am hugely proud of our cyber folks and our IT folks, and 
I think you may know that, actually this week, there was a 
takedown of a very large dark-money site announced by the 
Department of Justice. That was an IRS co-led case. We 
identified it and led it and worked with the German Government 
for the seizure.
    And we have been doing those, been announcing those, about 
every 6 months or so when they become public. That is our cyber 
people. But like every agency--and I am speaking on behalf of 
IRS and Treasury at this point, to the extent I can speak on 
behalf of Treasury as a bureau head: we need resources in the 
cyber space.
    There are more than 470,000 cyber positions available in 
the United States of America, with a zero-percent unemployment 
rate. And we need not only to keep the people we have, but we 
need to continue getting new people. So, it is a high alert for 
us, as I think it is for every American.
    Senator Warner. As we go offline--I know my time is up--on 
the EIDL program, I want to visit with you more on this. I 
would point out, as you know--this is not your area, but the 
kind of psychic and emotional hit when OPM was hit a number of 
years ago by the Chinese--and we have not seen their full 
utilization of that, but it was really important. And then 
also, because of all the members in the Senate, we did pass 
finally cybersecurity reporting legislation. It is the law of 
the land now. So at least CISA will have that information.
    But thank you, Commissioner, and thank you, Senator.
    Senator Cortez Masto. Senator Daines?
    Senator Daines. Madam Chair, thank you.
    I want to, first of all, start off by thanking the 
hardworking men and women at the Internal Revenue Service for 
their tireless efforts. This has been one of the most 
challenging times, I think, in the agency's history. Your work 
is incredibly important and is very appreciated. With that 
said, Montana taxpayers remain frustrated with unanswered 
calls, delayed refunds, and inadequate customer service.
    Commissioner Rettig, as you know, Montana is a very rural 
State, with Internet service and cell coverage sparse in many 
parts of the State. Montanans rely on in-person Taxpayer 
Assistance Centers to get help with their tax issues. 
Currently, half of Montana's Taxpayer Assistance Centers remain 
closed, and I hope that does change in the near future.
    Moving to some questions. Commissioner Rettig, there are 
several States that have been successfully implementing IT 
modernization plans, including partnering with industry to 
adopt modern practices, state-of-the-art methods. For example, 
partnering with private industry in the State of Rhode Island, 
they were able to, over a period of years, nearly fully 
integrate their tax systems on time and on budget.
    The question is, after billions of dollars being spent by 
the IRS to modernize the system, why have we not achieved the 
equivalent results or something close to it? Presumably the 
States are under the same pressures of budget and hiring the 
IRS operates under, even if on a smaller scale.
    The IRS has yet to close dozens of outstanding and unfilled 
recommendations from GAO and TIGTA. So, what are your thoughts 
around how we can get modernized here?
    Commissioner Rettig. First, many of the recommendations 
from GAO are historic, and they are ones that the IRS 
completely disagrees with. So, there is a disagreement whether 
we should go into that space. They are not being ignored, but 
they are ones that we have looked at.
    Second, we have been in, like every Federal agency, over a 
hundred continuing resolutions since 2001. It is virtually 
impossible--last year we got our budget March 11th. This year 
we got it March 15th. It is virtually impossible to build out a 
viable, realistic technology space when right now we have 6 
months to do it. So it is start and stop. And you know, if you 
were to see our IT priority list, it is like 2-point font, 60 
pages, and we are trying in that space.
    So that is our continued ask: for consistent multiyear 
funding. Give us a target so we can build out the target. We 
will come up and show you what we want to do. But we cannot do 
it in 6 months. The start-stop just really is not the way it 
should be for us, or anyone else.
    Senator Daines. I completely agree with your frustrations. 
This is the most broken--and it should be the most fundamental 
process in building a budget prior to the start of the fiscal 
year.
    Commissioner Rettig. We spend billions a year just on 
operations maintenance. We have got to get there to not be 
spending that much.
    Senator Daines. I want to talk about conservation 
easements, Commissioner. You and I have had many conversations 
about the abusive easement syndications. You know how I feel, 
because I entered legislation with Senator Stabenow to outlaw 
the most egregious transactions.
    As you are aware, criminal indictments were recently handed 
down related to some of these syndicated conservation deals, 
and the IRS is auditing hundreds of other syndicated 
transactions.
    Mr. Commissioner, just help my understanding of the state 
of play here. When looking at syndicated easements, either 
those referenced in indictments or those you continue to review 
through the audit process, are there structural differences in 
the way a syndicated easement is designed, or are they similar?
    Commissioner Rettig. We are--the IRS is very supportive of 
the purpose of the legislation with respect to issues in 
conservation easements. And what has happened is, the abuse of 
syndicated easements has taken those and essentially created a 
situation where you can pay X dollars to avoid multiple X of 
tax.
    Senator Daines. So, to get back to that, what are some of 
the characteristics of those transactions? Can you name two or 
three of them?
    Commissioner Rettig. Enter and leave the transaction in 
less than 3 years. So I buy in, and often within a single 
year--and they are targeted toward, if I need to save this 
amount of tax I buy in, I buy this percentage, and I can save 
this amount of tax.
    Senator Grassley and Senator Wyden held a hearing on 
conservation easements, and I think if you see some of the 
information that came out associated with that hearing, public 
information, you would share our concerns as to why we need to 
devote significant resources to that space. It is not something 
that will generate trust and reliance of the people on the 
streets that other people can basically go buy a tax deduction.
    We are supportive of conservation easements. It is the 
abusive syndicated easements that I think Congress needs to 
consider legislation for.
    Senator Daines. So, with those comments in mind--and 
Chairman Wyden, I know, had to go vote--but I want to wrap up 
by looking back and applauding the investigative report that 
came out on this issue with Senator Grassley that Senator Wyden 
did. It really exposed the egregious nature of many of these 
transactions. And that was part of the indictments as well that 
came out. And these are indictments--and I encourage members of 
the committee to go look at these indictments on the fraud and 
abuse that are going on in some of these easements.
    Your report identifies some very troubling issues that DOJ 
is now highlighting as well. I think enough has happened on 
this issue that perhaps the Finance Committee should schedule a 
hearing to dig deeper into your reports and figure out, as a 
committee, what is going on here, and how we can stop it.
    And again, as you just articulated, and I want to 
reinforce, there are so many very legitimate conservation 
easements--Montana is one of the leaders in that regard, doing 
it the right way--but there are others, based on the 
indictments here, that are fraudulent. And we will let the 
courts decide what is going to happen there.
    I know the chairman has stepped out, but I guess I want to 
thank Senator Wyden for his support here, and I hope we can get 
a hearing on this issue.
    Commissioner Rettig. And you know the hearing would be, 
obviously, the prerogative of the chair and ranking member, but 
we would support that. And not only would I encourage you to 
look at the information that is in the investigative report, 
but also in the indictments. You know, we are in litigation 
with many transactions, and we have taken to amending our 
pleadings to assert civil fraud penalties in certain of these 
transactions. That should telegraph where the IRS believes many 
of these transactions are. The abuse in the syndicated 
transactions needs to stop. And our efforts have not been 
impactful, from what we have seen.
    Senator Daines. As you and I have talked about, it seems 
like, even though the indictments are coming out with that 
warning, and there was clear guidance given out here----
    Senator Cortez Masto. Thank you, Senator Daines. We need to 
wrap it up. Thank you.
    Senator Thune?
    Senator Thune. Thank you, Madam Chair. Commissioner, nice 
to have you here. Welcome.
    Since last year's IRS data breach, or leak of private 
taxpayer information in which the left-leaning ProPublica 
publicized confidential taxpayer details, there has been no 
meaningful follow-up from the administration. In your March 8th 
response letter to Finance Republicans, you pointed to 
Secretary Yellen's testimony that said the Department of 
Treasury, the Office of the Inspector General, the FBI, and the 
Department of Justice are conducting independent investigations 
into this matter.
    This apparent leak or hack of private taxpayer information 
is a serious breach of trust between taxpayers and their 
government. And it is simply inexcusable that the 
administration hasn't provided any accountability.
    So my question, Commissioner, because I think it is a 
fundamental one, is, when taxpayers' private information is 
stolen from the IRS and then shared by a partisan media outlet, 
how do you think that impacts trust in the agency?
    Commissioner Rettig. I do not believe it has been indicated 
that it was actually stolen from the IRS. I do not think there 
has been anything on that. I think the Treasury Inspector 
General for Tax Administration is the authority at the IRS that 
has the jurisdiction. So the investigation--and they announced 
that there has been an investigation, so they would be the 
people to talk to.
    Hypothetically, any data breach, I think, causes 
significant reputational risk, at a minimum, for the U.S. 
Government, and specifically the Internal Revenue Service, on a 
go-forward basis.
    We need to protect. We need to confirm to people that the 
information that they give us is safe, and information that 
they are required to give us is safe, and the security of 
taxpayer information is among the highest priorities, not only 
of myself, but I think any Commissioner who has been here, and 
any Commissioner who will follow me.
    Senator Thune. I am glad to hear you say that. And so, as a 

follow-up, when do you expect, based on what you just said, the 
administration to provide accountability regarding the 
unauthorized disclosure of taxpayer information?
    Commissioner Rettig. I can speak generally that, as most 
people, I get frustrated when investigations go on without 
public acknowledgment of what is there. You know, the timing is 
not helpful for maybe an agency to say what did or did not 
happen, and to rebuild the trust. But we do not control the 
timeline of the Treasury Inspector General.
    Senator Thune. I would hope that you would urge them to 
complete it in as quick a way as possible--as thorough a way as 
possible, but obviously so there is some accountability.
    I hear from a lot of South Dakotans who are frustrated with 
the IRS. Many are reaching out to my offices. Their returns are 
over 6 months behind. Not only are they frustrated with the 
delay, but with the lack of assistance, as it feels impossible 
sometimes to reach an IRS representative.
    When can taxpayers who are still waiting on their 2020 and 
2021 tax returns expect to receive a completed return?
    Commissioner Rettig. We have 2.7 million paper returns that 
were filed in Calendar Year 2021 in inventory. We have 2.3 
million paper returns filed in 2022 that are in inventory. 
Those are not necessarily dated, because that is our current 
system. The outdated are clearly the ones we received in 2021, 
and there are paper returns that are being processed.
    The over 95-98 percent of electronically filed returns are 
being processed quickly, timely, within 21 days. People who are 
entitled to refunds get the refunds. The ones that fall out--
the statistics I gave earlier--they fall out for a variety of 
reasons. Typically it is a non-matching of two Economic Impact 
Payments that do not add up, or something like that--a math 
error.
    They fall into our error resolution service. Last year at 
this time, we had 7.7 million returns in error resolution 
service. Today we have 741,000. So that has been less than 10 
percent there.
    A lot of the statistics that I could go through--and I will 
not necessarily belabor the point--but a lot of the statistics 
confirm that our decisions that we have been making in the last 
6 to 8 months are correct and accurate, and that we are 
trending in the right direction.
    I will also say we have tried innovative, creative things 
that were never tried by this agency before. We are a very 
risk-averse agency. We did not assume risk to get here. But we 
took really educated moves to put us there, and I will be the 
first to say that every suggestion--I will put it on myself--of 
how we can get through this did not work as intended. So we had 
to come back.
    But I will say that to the extent that that occurred, it 
was with the intent to get this right, and to get it right 
quickly. And so the effort and desire really was there. We get 
the importance, and appreciate the importance, of getting 
refunds out to individuals as quickly and as accurately as 
possible.
    Senator Thune. Well, I appreciate your attention on 
clearing the backlog, and I urge you to prioritize improving 
customer service. As you know, the timely, as you mentioned, 
processing of returns and the ability to talk with an IRS 
representative are cornerstones to good tax administration. And 
many taxpayers are trying to comply with the tax laws, and they 
deserve a responsive IRS.
    So, keep pressing in that area, because I think it is 
critical, as we talked about earlier, along with the other 
issue of the leaks of information, to establish that trust with 
the American people. And having a responsive tax collection 
service is key to that.
    So my time has expired. Thank you.
    Senator Cortez Masto. Senator Hassan?
    Senator Hassan. Thank you. I want to thank the chair and 
ranking member for this hearing. And, Commissioner, thank you 
for being here.
    I want to follow up on an issue that Senator Cardin talked 
about. I am hearing from small business owners, including an 
owner of many Dunkin' locations in New Hampshire, who are still 
waiting for their Employee Retention Tax Credit payment.
    Small businesses need this relief. And now, with the tax 
filing deadline approaching, many employers are facing higher 
taxes due to the delay in payments of these tax credits. What 
is the IRS doing to provide relief from higher taxes for small 
businesses still waiting for their Employee Retention Tax 
Credit?
    Commissioner Rettig. We have prioritized the processing of 
the related forms for that, which are the 941s, and in some 
cases 940-Xes. We have, in our inventory currently, 1.9 million 
941s and 324,000 940-Xes. We are moving through those quickly, 
and we have put a lot of employees there. We have mandatory 
overtime. We have authorized overtime. We just expanded 
mandatory overtime to another group to be able to move through 
that.
    Also, a logical question is, ``Well, okay, you gave me the 
numbers, but what is the date? When can I tell people that they 
are going to get this?''
    I do not have that for you yet, because we have some 
uncertainties that we are facing. We are bringing people 
onboard. We are training people. We are getting them in those 
lanes as quickly as possible. And I always hedge, if we get 
another COVID, or this or that. So we are careful----
    Senator Hassan. Right. So I understand that----
    Commissioner Rettig. Another comment, if I could actually 
interject--this is not IRS-Commissioner-speak--but some folks 
might want to put their individual return on extension until 
October 15th. We should be able to get this done before then, 
and then they could match it at that point.
    Senator Hassan. But the other possibility is that the IRS, 
of course, has the authority to waive penalties in certain 
circumstances so that you could provide that relief, because 
even with an extension, people have to pay their taxes, right? 
So that is the question: whether they will be penalized.
    Commissioner Rettig. After 36 years on the outside, I 
thought IRS was extremely easy to work with from a penalty 
perspective, pre-pandemic. I never really had--if I thought I 
had a case----
    Senator Hassan. Right. But look--I want to move on to other 
questions, but here's the thing. I think it would be very 
helpful for small businesses that have navigated through so 
much during the pandemic, to actually know ahead of time, not 
to have to negotiate on an individual basis about penalties. 
But if they have not gotten their Employee Retention Tax Credit 
yet, they should be able to know that their penalties would be 
waived if they did the calculation as if they got the tax 
credit that they are owed. So that is just a suggestion, and I 
look forward----
    Commissioner Rettig. We have a number of penalty 
provisions----
    Senator Hassan. Thank you.
    Last week--I am going to come around to an issue that 
Senator Daines was talking about too, about legacy IT. But last 
week, the Homeland Security and Governmental Affairs Committee 
passed my bipartisan Legacy IT Reduction Act, which requires 
agencies to identify their outdated and obsolete technology and 
publish robust modernization plans to dispose of, or update 
those systems--systems such as the 62-year-old processing 
system at IRS and its paper-based filing systems. Modernizing 
these systems could help reduce improper refund payments and 
address the current backlog of unprocessed tax returns, which 
has been significantly worsened by the IRS's outdated IT 
systems.
    How would IRS use the $310 million that it requested in the 
President's Fiscal Year 2023 budget to modernize this legacy 
tax processing system to reduce improper payments, while also 
working to get taxpayers their refunds more quickly?
    Commissioner Rettig. Currently, only about 16 percent of 
our systems are outdated. And going back to the 1960s--we do 
not use systems from the 1960s, but we do use COBOL language, 
which, you know, people say there are three people on the 
planet who understand it. I have not met the other two; one 
works for us.
    That is not an official IRS response. [Laughter.]
    Senator Hassan. We understand that: the challenge and 
frustration. That is what I was trying to get at. So how would 
you use----
    Commissioner Rettig. And let me just answer your question, 
which is what we will do, which is obviously increase our 
online presence, mostly focused on taxpayer service and 
taxpayer interactions, the portals. We will update our IMF 
systems so that they are actually workable among ourselves, as 
well as for taxpayers to come in. And it would be a noticeable 
improvement, and it is needed.
    Senator Hassan. Right. Thank you so much. I am running out 
of time as well. I have some additional questions, including 
about the backlog that people talked to you about on the 
amended returns. But I will submit those for the record.
    [The questions appear in the appendix.]
    Senator Hassan. Thank you so much.
    Thank you, Madam Chair.
    Senator Cortez Masto. Senator Warren?
    Senator Warren. Thank you, Madam Chair.
    Right now, millions of hardworking Americans are getting 
ready to file their taxes, but thanks to loopholes in our tax 
code for billionaires, paying taxes can be optional. This has 
to stop.
    Now last week, President Biden proposed a new minimum tax 
to ensure that the very, very rich pay at least 20 percent in 
taxes every year on their income. I have long called for a tax 
on wealth, not just income, of ultra-millionaires and 
billionaires. The President's proposal is different, but it is 
a giant step forward.
    Now, critics claim that the IRS just is not up to the task 
of administering a tax like this because it requires assessing 
the value of complicated assets and doing this calculation for 
many taxpayers. This is a question about your agency's 
competence, so I want to ask you about it, Commissioner.
    In fact, the IRS already has a lot of experience examining 
the assets of the ultra-wealthy. For more than 100 years, the 
IRS has valued the property of multimillionaires in order to 
apply the estate tax. So, Commissioner Rettig, about how many 
estate tax returns have been filed with the IRS in the last 10 
years?
    Commissioner Rettig. Just under 300,000.
    Senator Warren. Just under 300,000? All right. And do you 
know anything about the combined worth of those, offhand?
    Commissioner Rettig. I do not.
    Senator Warren. Okay. I think the estimate will be well 
over a trillion dollars. Does that make sense?
    Commissioner Rettig. Not from my private practice 
experience, but I'll go with it.
    Senator Warren. Okay. All right.
    For comparison, the President's billionaire's tax would 
only apply to 20,000 taxpayers. Now, the estate tax has got to 
be generally harder to administer because, by definition, it 
applies to new taxpayers every time it is paid, because it is 
not triggered until someone dies and an asset is transferred to 
an heir. By comparison, the President's billionaire's tax would 
mostly apply to the same taxpayers year after year, making 
valuation much simpler. Some of the valuations that the IRS 
already does can be quite complex.
    In 2020, the IRS completed 1,454 estate tax audits, 
including 770 estates valued at over $10 million. So, 
Commissioner Rettig, what kinds of assets do the IRS 
investigators examine in these estate tax audits that they are 
performing every year?
    Commissioner Rettig. The examiners in that space are known 
as estate tax attorneys. They are sophisticated examiners. They 
are among our best. And the estate tax is based on a valuation 
at a point of time--date of death, or either 6 months after the 
date of death. And the examiners look to see if the values were 
appropriate, if the deductions were appropriate, et cetera, et 
cetera.
    In appropriate cases, they may bring in engineers, which 
are really economists and valuation specialists.
    Senator Warren. What about the kind of property that they 
look at and value?
    Commissioner Rettig. The valuation of the assets and 
discounts people claim for the assets would be most of the 
issues.
    Senator Warren. So mansions, ownership of businesses----
    Commissioner Rettig. Cars, virtual currency----
    Senator Warren. There you go. There you go. So the IRS has 
lots of experience valuing assets like mansions, expensive art, 
and private companies--exactly the assets that would be subject 
to the President's billionaire's tax. But to make anything 
work, it is critical that we fund the IRS so that it has all 
the tools it needs to ensure that the ultra-wealthy pay the 
taxes that they owe.
    And that is why President Biden and congressional Democrats 
have proposed $80 billion in funding for the IRS. Commissioner 
Rettig, how would additional funding turbo-charge the IRS's 
ability to take on wealthy tax cheats, or to administer a new 
tax on billionaires like the kind that the President has 
proposed?
    Commissioner Rettig. We have the most sophisticated 
financial examiners on the planet, and they are also the most 
dedicated folks on the planet in this particular space. We need 
to support them by providing them meaningful tools, resources, 
and training. At some point in time, when I started in practice 
in 1981, the IRS was a place that people wanted to go and earn 
their stripes, if you will. And maybe some left for private 
practice; some certainly stayed.
    We need to get back to that. And the funding would 
certainly help get to that level.
    Senator Warren. Well, thank you. Thank you for your 
leadership on this, Commissioner Rettig. We need to fund the 
IRS to make sure that wealthy tax cheats pay what they owe. But 
we also need to fix our broken tax rules.
    Billionaires who pay a lower tax rate than public school 
teachers are freeloading, and we need to make it stop. The 
President's proposal for a minimum income tax on billionaires 
is about exactly that. And I am with him on this. The American 
people are with him on this. Let's get it done.
    Thank you, Madam Chair.
    Senator Cortez Masto. Commissioner, Nevadans are facing 
higher costs at the pump as the global supply chain recovers 
from the COVID-19 pandemic and other global factors, as we 
know. I have fought for a comprehensive approach and pushed for 
critical legislation to alleviate supply chain bottlenecks, led 
the charge for investments in clean energy, and called for the 
Biden administration to develop a long-term government-wide 
strategy to lower gas prices.
    Senator Bennet and I sent a letter to you requesting that 
the IRS increase the standard mileage rate to better reflect 
the recent shock in gas prices, and what businesses and some 
individuals are paying out of pocket every day. The letter was 
dated March 25th. And the reason being--and I know you are very 
aware of this--is that an increase in the per-mile 
reimbursement rate will offer some relief to Americans who use 
a personal vehicle for everyday needs like work travel or 
medical transport, by enabling independent contractors and 
businesses to adjust for increasing expenses. It will also 
offer relief to families in need, particularly in rural areas, 
as well as help small businesses struggling with higher costs 
for transporting goods.
    My question to you is, have you received the letter? And 
then, as requested in the letter, will the IRS take action in 
raising the standard mileage rate to better reflect the actual 
costs that businesses and consumers are currently paying at the 
pump?
    Commissioner Rettig. We did receive the letter. My first 
question was going to be if we responded, but when you said 
March 25th, I am confident we have not responded.
    Senator Cortez Masto. Okay.
    Commissioner Rettig. We have inventory in that as well, and 
so I apologize for that. Let me take a look at that and get 
back to you with the timing on that and see if we cannot also 
accelerate the letter.
    Senator Cortez Masto. If you would. Obviously, the sooner 
you act, the better for so many who are struggling right now 
and need the help because of the high prices that we are 
seeing.
    So let me jump to another request that I have for you, and 
it is another letter, but this letter was sent to you on March 
2nd by Senator Rosen and I. We, both of us, have really worked 
to provide relief for our hospitality and restaurant industry 
throughout the COVID pandemic and its recovery. And I was able 
to ensure that our hotels and live entertainment businesses 
were eligible for PPP loans, and I led on bipartisan 
legislation which is called the Hospitality and Commerce Jobs 
Recovery Act and a restaurants act to provide critical relief 
to these businesses and workers that were hardest hit by the 
pandemic.
    We know, and I know the hospitality industry is really--and 
the leisure and travel industry--the last to come out of this. 
I want to acknowledge the IRS, the work that you did for 
reducing the tip allocation rate during the COVID-19 pandemic. 
You actually reduced it by an average of 60 percent to assist 
our service-sector businesses and tipped wages like those in 
the hospitality/travel/tourism industry, and in my home State 
of Nevada.
    Unfortunately, I just recently learned from some of our 
workers at the Culinary Union, Local 226, that the IRS raised 
the tip allocation rate at the beginning of 2022 during the 
peak of the Omicron variant and while those in the food and 
beverage industry continue to face double the national 
unemployment rate, while this industry continues to safely 
recover.
    So my question to you is, what was your reasoning for 
changing the tip allocation in January? And when you did so, 
did you take into account that many of the hardest-hit 
businesses and workers in the industry are still trying to 
recover?
    Commissioner Rettig. These agreements tend to be negotiated 
with individual employers, so I cannot speak to any specific 
individual employer. But I am sensitive to the fact that, if in 
fact in certain industries and certain communities, if we 
were--I find it hard to believe that our people on the ground 
who negotiate these agreements would not be sensitive to that. 
They do live in these communities.
    Senator Cortez Masto. Well, here is my concern----
    Commissioner Rettig. Well, let me--I need to personally 
look into it and get back to you.
    Senator Cortez Masto. Yes, please look at it, because here 
is my concern. Traditionally in the past, you consulted, the 
IRS consulted with employers, organized labor, and those 
affected in this industry with the impact because of COVID. But 
my understanding is, that was done in the past, but it was not 
done this time. There was no consultation. And that is my 
concern, that without the consultation, you do not realize that 
this industry is still hard-hit.
    So, if you would, please, take a look at this and work with 
our offices, both mine and Senator Rosen's. I would really 
appreciate it.
    Commissioner Rettig. For sure.
    Senator Cortez Masto. Thank you. And I want to say ``thank 
you'' again. It has been a long morning for you. You are always 
here. You respond whether it is on Zoom or in person, 
Commissioner, so thank you so much for joining us today.
    I believe that is it for the Senators appearing, so just 
thank you again for joining the committee. Thank you for this 
discussion.
    I also want to remind my colleagues that questions for the 
record are due by close of business next Thursday, April 14th.
    And this committee hearing is adjourned.
    Commissioner Rettig. Thank you very much.
    [Whereupon, at 12:25 p.m., the hearing was concluded.]

                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


                Prepared Statement of Hon. Mike Crapo, 
                       a U.S. Senator From Idaho
    Thank you, Mr. Chairman, and thank you to Commissioner Rettig for 
your willingness to testify today, and for your service. I appreciate 
your efforts to make the IRS more customer-focused, and I understand 
that it is hard to change course in large organizations like the IRS. 
There is a need to change course, but I do not believe the 
administration's outsized, partisan approach is the solution.

    For the third filing season in a row, taxpayers confront vexing 
customer service challenges as they attempt to fulfill their tax filing 
obligations. With tens of millions of 2021 tax returns still to be 
filed, the most recent data we have on this year's season is 
concerning, highlighting longstanding issues the IRS has not adequately 
addressed.

    For example, more than 60 percent of the millions of items of 
taxpayer correspondence and amended returns have sat in storage for 
more than 3 months, an increase of nearly 30 percent over last year. 
Average hold times for the lucky few taxpayers who reach the IRS by 
phone are 28 minutes, an increase of nearly 50 percent over last year. 
Scores of taxpayers have seen refunds delayed while their return is 
suspended for various reasons. Millions of prior-year tax returns await 
processing. The IRS's management of paper-filed returns is a persistent 
problem that the National Taxpayer Advocate recently noted goes back 
decades.

    By tax day this year, millions of paper-filed 2020 tax returns will 
not have been processed, while millions of current-year returns will 
likewise gather dust. Steps to prevent or minimize this disruption were 
not taken by the IRS, and in some cases have still not been taken.

    For example, many may not be aware that in order for the IRS to 
process a paper-filed return, each entry on the return is manually 
inputted by an IRS employee. These taxpayer-funded employees would 
better serve taxpayers by answering phones or responding to 
correspondence.

    This is not simply a problem of taxpayers choosing to deluge the 
IRS with paper-filed returns. In many cases, IRS forms and schedules 
simply cannot be electronically filed, including where a taxpayer could 
e-file and attempts to do so but is rejected by the IRS's confusing 
digital signature process.

    This is not a funding issue. Solutions to these challenges have 
existed for years, but to date have not been implemented. The IRS can 
further transition away from mandating any return or form to be paper 
filed.

    With respect to rejected e-filings, which I understand to be often 
caused by a taxpayer being unable to locate or recall one of two 
possible e-filing PINs, the IRS could implement additional means to e-
sign a return. I am aware that the IRS, with your leadership, 
Commissioner, is working on this. So-called ``2D bar codes'' much like 
the supermarket bar codes that have been used for decades, could 
eliminate the IRS's need to transcribe paper returns at all. Solutions 
like these have been held up for years with no clear reason why, 
leading to results the current National Taxpayer Advocate Erin Collins 
calls ``crazy.'' I agree.

    Some say that IRS budgets are to blame for all that ails the IRS, 
but this misdirection distracts from real issues at the IRS. It also 
cherry-picks data to paint a misleading portrait. Many begin their 
analysis of IRS budgets beginning only with Fiscal Year 2010, which was 
a 30-plus year high-water mark for the IRS's budget and an outlier. 
Viewed in the longer-run, the IRS's average inflation-adjusted budget 
is much lower, with recent years aligning with this average. The 
efforts to try to claim that Republicans have slashed the IRS budget 
are simply not accurate.

    Budget arguments are also often invoked in attempts to justify 
massive IRS funding for things that do not address the customer-
experience problems plaguing the IRS. For example, some advocate for 
increased IRS funding to generate revenue through heavy-handed 
enforcement.

    This year's presidential budget request seeks a large enforcement 
funding boost, and its ``reserve fund'' placeholder for the reckless 
Build Back Better legislation would provide a truly massive $80-billion 
infusion of mandatory funding primarily focused on enforcement. The 
reserve fund could also accommodate the administration's chilling 
proposal to monitor Americans' bank account flows of as little as $600.

    I strongly oppose forcing community banks and credit unions to 
report sensitive and private customer data of law-abiding taxpayers to 
the IRS in order to raise more money by snooping through customer 
accounts, and I will continue to aggressively push back on any attempts 
to add this reporting scheme to legislation. I remain concerned about 
huge funding boosts that would increase audits on small businesses and 
middle-class Americans, rather than prioritize taxpayer services.

    Our hearing in February had a positive dialogue spotlighting IRS 
customer service challenges and solutions, and I have a number of 
questions about ways to address the longstanding IRS problems we can 
agree on, such as outdated IT, and ways to ensure the next filing 
season will be much better than the last several.

    Given your stated commitment to making these improvements, 
Commissioner, I look forward to continuing to work with you on this.

                                 ______
                                 
             Prepared Statement of Hon. Charles P. Rettig, 
                 Commissioner, Internal Revenue Service
                              introduction
    Chairman Wyden, Ranking Member Crapo, and members of the committee, 
thank you for the opportunity to discuss the filing season and the 
President's Fiscal Year (FY) 2023 budget proposal for the IRS.

    Taxpayer service remains the most significant IRS priority, and we 
have implemented many new, innovative strategies in an effort to 
improve our overall level of service and processing of our 
unprecedented current and projected inventories. The pandemic presented 
the IRS with a confluence of novel and critical demands at a time when 
we lacked the stable, long-term funding needed to appropriately serve 
the American people. Given these significant challenges, although we 
may not have always gotten it right or supported the important 
priorities of some, our employees have worked extremely hard to respond 
as best we could to a never-ending string of compounding challenges.

    I am pleased to report the 2022 filing season got off to a strong 
start in terms of tax return processing and the operation of our 
information technology (IT) systems. Through April 1st, the IRS 
processed more than 89 million individual Federal tax returns and 
issued more than 63 million refunds totaling more than $204 billion. We 
worked diligently to open the filing season earlier this year than 
last, on January 24, 2022, compared to February 12, 2021. A detailed 
discussion of the filing season is provided later in this testimony.

    While the current filing season has so far presented no major 
disruptions or surprises, we know we have a great deal of work to do in 
many other areas of the IRS. The IRS continues to focus on working to 
reduce paper correspondence inventory and process paper tax returns 
from 2021 as well as improve our response to an unprecedented level of 
phone demand--situations that have been compounded by the pandemic and 
related issues. For example, in FY 2021, we received more than 15 
million individual paper returns. We also had a significantly higher 
error rate on individual returns due in large part to challenges 
associated with reconciling funds received through important stimulus 
programs like Economic Impact Payments (EIPs). We received far more 
than 10 million returns where the taxpayer did not properly reconcile 
the two EIPs received in 2020 to the amount of the Recovery Rebate 
Credit (RRC) stated on their return filed in 2021. Similarly, more than 
10 million individuals reported unemployment compensation on their 
return that was subject to the exclusion enacted during the 2021 filing 
season. In addition, millions of taxpayers elected to use 2019 rather 
than 2020 as the base year for determining their EITC (and the 
legislative change for that was enacted after our IT development for 
the 2021 filing season had been completed). Each of these returns 
required a manual review and resolution by an IRS employee.

    We will continue to do our best as we face new challenges. Our 
workforce is strong and remains our most important resource, with 
substantially all of our employees engaged on a full-time basis. We 
have taken numerous steps to address these challenges, and we continue 
to look for other ways so that we can improve these operations and get 
healthy by the end of the year.

    The IRS is serving more people and entities in a global environment 
than ever before, while handling new and bigger responsibilities. This 
was the case before the pandemic and has only increased since then. At 
the same time, we have experienced delays in updating our IT systems, 
which means the IRS and taxpayers must continue to use certain paper-
based processes. This use of paper processes can result in significant 
delays, contributing to IRS inventories and limiting taxpayers' ability 
to know the status of their cases.

    We are in this position because we have not had the sustained 
sufficient multiyear investment for IT modernization necessary to 
improve our technology and operating systems. I am here to tell you 
today that nothing is more important than having those resources in 
place to make it possible for us to appropriately serve the American 
people. Absent consistent, timely, multiyear funding, we have largely 
been a paper-based organization operating in a digital world 
environment. In 2022, IRS employees should not be transcribing paper 
returns by hand. Taxpayers should not have to wait and wait on the 
phone--often to no avail. I want to better serve the American people--
and so do the dedicated employees at the IRS. They will finally be able 
to do so if you, and your colleagues, provide us the stable, multiyear 
funding we need.

    Like all Federal agencies, the IRS is best able to accomplish our 
mission when we receive the resources necessary to do so. And that 
mission is vital to the functioning of our government. The fact that 
the IRS collects approximately $4.1 trillion in gross revenue per year, 
representing about 96 percent of the gross revenue of the U.S., clearly 
shows that the success of our Nation is closely tied to the success of 
the IRS. The President's FY 2023 budget proposal, which provides $14.1 
billion for the IRS, will allow the agency to take important steps 
forward in improving taxpayer service, modernizing our systems and 
ensuring fairness in the tax system. But for the IRS to truly be able 
to deliver for the American people, it needs stable, multiyear funding 
to be in place to allow the agency to rebuild.

    Over the course of the last decade, the IRS's budget has decreased 
by more than 15 percent in real terms. Because of this decrease, in FY 
2021 we realized less than 79,000 full-time equivalents (FTEs), which 
is close to 1974 levels. Since 2010, IRS Enforcement FTEs have 
decreased by 30 percent, while the Nation's real Gross Domestic Product 
has increased by 29 percent, and the filing population has increased by 
14 percent. Over the next 6 years, we estimate we will need to hire 
52,000 employees just to maintain our current levels. Every measure 
that is important to effective tax administration has suffered 
tremendously in recent years, with profound deficiencies resulting from 
underinvestment in human capital and information technology.

    Although the IRS appreciates the $675-million increase to our 
budget in the FY 2022 Omnibus, sufficient funding remains a constraint 
to addressing the current paper inventory and supporting our IT 
operations adequately. For example, this year's funding left our 
Operations Support account, the account that funds all of the hiring, 
rent, laptops, and telecom for taxpayer services and enforcement 
employees, $100 million short of our inflationary cost increases. 
Without shifting the funds to the appropriate accounts, we are left 
depleting resources from one less-visible program to pay for another 
essential program, which causes us to slow or stop work on updates to 
our systems that must be modernized to provide digital services that 
citizens expect from us. Mandatory multiyear, consistent funding would 
help us deliver meaningful services to taxpayers, conduct critical 
enforcement initiatives and support long-term modernization efforts to 
improve both service and compliance for the Nation.

    When we are confronted with long-term Continuing Resolutions (CRs), 
we typically freeze nearly all external hiring. We take this action to 
ensure we have funds to pay all employees, including any applicable pay 
raises. Last fall, we increased staffing despite the CR, hiring at risk 
without the funding in place to support these positions, but assuming 
future resources would be provided by the eventual enactment of the FY 
2022 appropriation, to help address our inventory. The full Fiscal Year 
2022 President's budget request would have allowed us to maintain 
current staffing levels and fund 4,200 additional full-time equivalent 
employees. The Omnibus increased our Taxpayer Services account by $193 
million from FY 2021, which covered the inflationary increases in 
Taxpayer Services (what we refer to as ``maintaining current levels''), 
and about 42 percent of our requested program increases. We will now be 
required to use other funding sources to cover our remaining needs, 
including requesting an inter-appropriation transfer, redirecting user 
fees, and realigning American Rescue Plan (ARP) funds. Although the 
Omnibus reflects an important down payment on the necessary investments 
in the IRS, it is far, far from what the dedicated IRS employees need 
to serve the American people they way they deserve.

    Even with appropriate funding, the IRS continues to experience 
significant challenges recruiting talent to support the critical work 
the agency does for taxpayers and our Nation, particularly in the 
current labor market. With our limited funding, we have been hard at 
work to do all we can to bring talent on board. For example, we have 
major processing center operations in Austin, TX, Kansas City, MO, and 
Ogden, UT, where we are working to attract eligible applicants for more 
than 5,000 vacant positions. We have been holding both in-person and 
virtual job fairs in Austin, TX, Kansas City, MO, and Ogden, UT where, 
using recently received Direct Hiring Authority (DHA), we have been 
able to make more than 2,500 conditional offers at the conclusion of 
the interviews.

    IRS employees want to do more to help taxpayers. We want to be able 
to answer the phones and respond to questions. We want to be ready, 
whenever crisis hits, to deliver economic relief quickly--as our 
employees demonstrated repeatedly during the current pandemic, working 
long hours to deliver crucial programs. During this challenging period, 
the IRS has been operating in an ``all-hands-on deck'' approach, 
leaving nothing off the table for consideration to improve overall 
service.

    Our employees continue to expend every effort to balance the 
confluence of multiple, unprecedented demands--including successfully 
starting the current filing season and working our inventory of 
unprocessed tax returns, as well as looking for additional ways to 
minimize burden for taxpayers, tax professionals and businesses. We 
will continue to rapidly adapt to changing circumstances when 
appropriate to do so. We remain committed to ensuring the tax system is 
administered fairly and impartially and that every American receives 
the nature and quality of services they deserve.
         effects of the covid-19 pandemic and the irs response
    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. The 
IRS's response to COVID-19 includes issuing more than $1.5 trillion in 
combined historic economic relief and individual refunds over the past 
2 years. This effort shows the level of dedication of our workforce and 
illustrates how important the IRS is to the functioning of our 
government and the success of the Nation.

    IRS employees have worked hard since March 2020 to implement major 
provisions of the Coronavirus Aid, Relief, and Economic Security 
(CARES) Act, ARP, and other COVID-related relief legislation. This work 
included delivering more than $800 billion in EIPs to help Americans 
cope with the financial effects of COVID-19--which involved creating 
the internal processes to accomplish this effort. The Treasury 
Inspector General for Tax Administration (TIGTA) noted in a report 
released March 21, 2022, that the IRS computed the correct payment 
amount for more than 99 percent of the 175 million payments issued for 
the third round of EIPs. Our work also included delivering (and 
creating the internal processes for) more than 200 million advance 
payments of the Child Tax Credit totaling $93 billion that were made to 
eligible families between July and December of last year.

    Congress provided critical help to support our ability to implement 
the third round of EIPs and the advance CTC payments by appropriating 
$1.86 billion in supplemental funding for the agency under the ARP. 
These funds represent important 3-year funding (expiring FY 2023) and 
have provided, and will continue to provide, critical assistance in our 
effort to better serve taxpayers. As of March 27, 2022, the IRS has 
obligated $850 million of the total; we are continuing to use the funds 
over the remaining 2 years of the expenditure window provided by 
Congress in ways that are intended to maximize taxpayer service, 
including responding to taxpayer questions about EIPs and advance CTC 
payments. As identified in our ARP Spending Projections provided to 
Congress in February 2022, these funds are allowing us to help 
taxpayers efficiently obtain the payments they are rightfully due, with 
additional front-line staffing, systems and technology improvements to 
create safe and secure platforms, and with investments in long-term 
modernization enhancements that will pave the way for long-needed 
system improvements going forward.

    For both the third round of EIPs and the advance CTC payments, the 
IRS made an extensive effort to ensure we reached as many people as 
possible who might be eligible for these benefits. We worked with 
thousands of community groups, non-profits, associations, education 
groups and anyone else with connections to people with children to 
share critical information about EIPs, the CTC and other important 
benefits. As noted above, we are continuing to work this filing season 
to ensure that anyone eligible who did not receive an EIP understands 
they can claim the RRC on their return, and we continue reminding 
recipients of the advance CTC of the need to reconcile those amounts on 
their returns.
Reducing Inventory of Paper Returns and Correspondence
    The combination of the pandemic, new tax laws and numerous other 
factors led to an unprecedented amount of unprocessed tax returns and 
correspondence remaining in the IRS inventory during 2021.

    The IRS pursued significant actions during the 2021 filing season 
to address the return and correspondence inventory. But due to resource 
issues and numerous unique factors tied to new legislation and the 
pandemic, we have entered the 2022 filing season with a significant 
inventory of unprocessed returns and correspondence and, to date, the 
inability to meet our hiring goals. We must continue pursuing 
innovative strategies to fulfill our commitment to return inventories 
to a healthy level before entering the 2023 filing season.

    To reduce the current and projected inventory, we are taking 
aggressive actions that include:

        Surge Teams. We presently have more Customer Service 
Representatives (CSRs) onboard than ever before. We have retained 
temporary CSRs on a permanent basis to concentrate on the inventories. 
We took this risk in the context of an uncertain funding environment, 
hoping the annual appropriation process would deliver funding; however, 
this effort has not been sufficient to reduce the current and projected 
inventories The IRS is deploying surge teams, which are groups of 
employees across the agency organized to temporarily assist with urgent 
issues. For example, we temporarily moved approximately 900 employees 
with previous relevant experience back into key areas from other 
organizations. In addition to this accounts management surge team, 
which is now in place, we are working to assemble a similar surge team 
for our submission processing area with 700 employees who will start on 
this critical work this month.

        Direct Hire Authority (DHA). Working with Treasury, the Office 
of Personnel Management, and the National Treasury Employees Union, the 
IRS recently secured direct hiring authority for a total of 10,000 
positions--5,000 employees with the goal of onboarding them in the next 
several months, as well as an additional 5,000 new hires to be made 
over the course of the next year. Congress also helpfully provided 
hiring flexibilities in this month's Omnibus to further expedite hiring 
in critical positions. Due to the challenges of hiring during the 
pandemic and competition from other employers for the same talent, this 
environment is an exceptionally difficult one for hiring. DHA may 
improve our ability to be competitive in cities where these employees 
are most needed. We are extremely hopeful to satisfy our hiring goal 
over the coming months. Also, for the first time, we have partnered 
with the Military Spouse Employment Program and are engaging 
contractors while aggressively pursuing our hiring goals. We are 
grateful for the specific direct hiring authority language included in 
the recent Omnibus (Consolidated Appropriations Act, FY 2022) that will 
enable us to bring talent onboard more swiftly in needed locations.

        Mandatory Overtime. We have implemented mandatory overtime and 
are offering authorized overtime to certain employees to help with the 
reduction in inventory, and we are doing so for the first time in 
certain functions.

        Increased access to online self-service tools. Over the last 6 
months, more than 10 million individuals have created their individual 
online account through IRS.gov. Reducing call volumes through increased 
online service allows us to devote more resources to the inventories.

        EIP/CTC letters. We sent more than 250 million letters to help 
taxpayers match IRS records to prevent delays in processing. IRS Letter 
6475, Your Third Economic Impact Payment, and IRS Letter 6419, 2021 
Advance Child Tax Credit, set forth the amounts that individuals 
received in 2021. Individuals can also verify these amounts by 
accessing their individual online account through IRS.gov. Given that 
more than 10 million returns failed to properly reconcile two EIP 
payments received in 2020 on their returns filed during the 2021 filing 
season, it is critical that individuals (and their preparers) verify 
the possibly six to eight payments received in 2021 before submission 
of a 2021 return this year.

        Innovating to expedite case closures. We are employing new 
tools to help IRS employees review and process tax returns that include 
errors and manual reviews, a piece that is already helping taxpayers 
receive refunds quicker in 2022. These efforts have already 
demonstrated positive results.

        Expanded Saturday openings of certain Taxpayer Assistance 
Centers (TACs) to assist taxpayers this filing season in more than 90 
cities \1\ around the country. TACs provide important front-line, in-
person taxpayer assistance. We maintain 358 TACs but, due to attrition 
and resource limitations, 39 are presently not staffed on a full-time 
basis (24 TACs presently provide a virtual service delivery alternative 
to an in-person visit). All staffed TACs offer appointments as well as 
the ability to walk in.
---------------------------------------------------------------------------
    \1\ https://www.irs.gov/help/irs-face-to-face-saturday-help.

        Enhanced the EITC Assistant tool on IRS.gov to make it more 
user-
friendly for individuals to determine their potential eligibility 
(intended to reduce resources being dedicated to erroneous EITC 
claims). This important tool serves taxpayers and reduces erroneous 
---------------------------------------------------------------------------
claims, freeing up resources to help process our inventories.

        VITA/TCE. We are also continuing to notify taxpayers about 
``Free Tax Return Preparation for Qualifying Taxpayers''\2\ by 
encouraging use of the IRS's Volunteer Income Tax Assistance (VITA) and 
Tax Counseling for the Elderly (TCE) programs, which offer free basic 
tax return preparation to qualified individuals.
---------------------------------------------------------------------------
    \2\ https://www.irs.gov/individuals/free-tax-return-preparation-
for-qualifying-taxpayers.

        Created and expanded self-service portals for taxpayers to 
implement an Online Payment Agreement, request payment transcripts, 
request an Identity Protection Personal Identification Number (IP PIN), 
update their personal information, etc. These efforts reduce call 
---------------------------------------------------------------------------
volume, which releases resources to help process our inventories.

        Expanded ``Customer Callback'' to approximately 70 percent of 
our toll-free telephone demand. During FY 2022, we have offered this 
option to more than 4 million taxpayers with an acceptance rate 
exceeding 57 percent. We estimate this feature has saved taxpayers more 
than 1.3 million hours.

        Implemented Online Live Assistance, Voice Bots and Chat Bots 
(in English and Spanish) to better enable taxpayers to interact with 
IRS. Online Live Assistance leverages limited employee resources 
allowing a single employee to respond to multiple taxpayers at a time. 
Our Advance CTC Voice Bot launched February 18, 2022 (delivered 6-8 
weeks ahead of schedule) and handles the top 27 Advance CTC topics 
(English only at present, but the Spanish version is coming soon) to 
assist callers who need help reconciling the credits on their 2021 tax 
return. The IRS, in recent weeks, has deployed Voice and Chat Bots in 
English and Spanish for phone lines that assist taxpayers with tax 
payment issues or understanding an IRS notice they may have received. 
In addition to the payment lines, Voice Bots help people calling the 
EIP toll-free line, providing general procedural responses to the most 
frequently asked questions. Voice Bots are software powered by 
artificial intelligence (AI) that allow a caller to navigate an 
interactive voice response (IVR) system with their voice, generally 
using natural language. Chat Bots simulate human conversation through 
web-based text interaction, also using AI-
powered software to respond to natural language prompts. Taxpayers who 
request to speak with a CSR are placed in queue for English or Spanish 
telephone assistance. These efforts reduce call volume, releasing 
resources to help process our inventories.

        Reduced the percentage of our outdated hardware from more than 
60 percent a few years ago to approximately 10 percent at present. 
Funding provided by Congress has allowed us to pursue these efforts, 
reducing the risk associated with an interruption to our delivery of 
meaningful services.

    These steps are making a difference. Refunds for tax returns and 
amended tax returns in the inventory continue to flow out to taxpayers. 
We continue to consider and pursue additional relief measures while 
balancing the many other demands for our time and limited resources.

    We also instituted additional relief measures for taxpayers, such 
as:

        On January 27th, we announced the suspension of notices in 
situations where we have credited taxpayers for payments but have no 
record of the tax return being filed. Given that in some situations the 
return is still waiting to be processed, suspending this notice will 
help avoid confusion.
        On February 9th, we announced the suspension of more than a 
dozen additional notices, including automated collection notices 
normally issued when a taxpayer owes additional tax or has no record of 
filing a tax return. Note that many other IRS notices are statutorily 
required to be issued within a certain time frame to be legally valid.

    We are evaluating penalty relief options; however, we must also 
determine if systemic programming changes or manual intervention are 
required for the considered relief. Manual intervention would require 
re-direction of resources from processing original returns and amended 
tax returns, which complicates this area.
Other Taxpayer Assistance Offerings
    Important Update Information Available at IRS.gov. The IRS 
workforce is working hard to reduce current and projected inventories, 
meet taxpayers' continuing needs and provide relief or assistance 
whenever possible. We have issued various announcements available on 
IRS.gov outlining important steps we're taking this filing season to 
assist taxpayers with the aim of reducing current and projected future 
inventories. On February 14th, we issued a news release titled, ``IRS 
launches resource page on IRS.gov with latest details and information 
for taxpayers during filing season,''\3\ (IR-2022-32, February 14, 
2022) with a link to this important resource page (``Help for taxpayers 
and tax professionals: Special filing season alerts'').\4\
---------------------------------------------------------------------------
    \3\ https://www.irs.gov/newsroom/irs-launches-resource-page-on-
irsgov-with-latest-details-and-information-for-taxpayers-during-filing-
season.
    \4\ https://www.irs.gov/newsroom/help-for-taxpayers-and-tax-
professionals.

    The IRS is continuing to assess other changes and system 
modifications to assist taxpayers on an array of issues. We have 
redeployed and reallocated resources throughout the IRS and have 
implemented innovative strategies in an ongoing effort to provide a 
meaningful reduction in our inventories. As we make additional 
adjustments, we will continue to make information available to 
---------------------------------------------------------------------------
taxpayers throughout the filing season and beyond.

    Important Steps for Current Filers to Get Their Refund as Quickly 
as Possible. To prevent future inventory problems, the IRS has also 
worked diligently to encourage people to take extra precautions this 
year so they can get their refund quickly and avoid processing delays. 
During this filing season, refunds on error-free electronically filed 
returns continue to be processed within approximately 21 days. 
Requesting direct deposit accelerates receipt of the refund by the 
taxpayer. There are three important steps people can take to get their 
refund as quickly as possible:

        File electronically;
        File an accurate return (verify amounts reflected as received 
for the EIP and advance CTC payments); and
        Request a direct deposit of their refund.

    These steps are critical to accelerating delivery of the refunds 
people deserve and the IRS employees want to get out as quickly as 
possible. We have engaged in extensive outreach with community-based 
and professional organizations to reduce the otherwise manual review of 
returns that fail to reconcile these amounts. We're also encouraging 
taxpayers with questions to turn first to online resources, since we 
anticipate a continued high call volume again this year.
Responding to Unprecedented Demand for Phone Assistance
    The IRS provides phone service to individuals, businesses, tax 
professionals, and tax-exempt entities. We have specialty lines for the 
hearing impaired, identity theft victims, the taxpayer protection 
program, and for making appointments at our TACs. We also offer over-
the-phone translation services in 350 languages.

    Taxpayer Service Remains Our Top Priority. The long-term erosion of 
our budget has depleted every function of the IRS. Even though our Wage 
and Investment division--which is where the current and projected 
inventories exist--remains the most well-staffed function of the entire 
IRS, it is well below the levels necessary to deliver the service we 
aspire to achieve. We have implemented several approaches to reducing 
current and projected inventories and reducing call volumes which 
allows us to devote more resources to the inventories.

    Our customer service representatives (CSRs) operate from 10 main 
campus sites and 14 smaller satellite locations across all mainland 
United States time zones, plus Puerto Rico. The CSRs work 7 a.m. to 7 
p.m. shifts staggered nationally according to time zones. When we 
temporarily closed most of our facilities in March 2020 to protect 
employees from COVID-19, our IT operation worked rapidly--within 
weeks--to provide our CSRs with laptops, related equipment and training 
so they could work remotely in a virtual environment.

    Against that backdrop, IRS phone operations have faced an unusually 
challenging environment over the past year, with an unprecedented level 
of phone assistance demand. In 2021, we answered 4 million more 
taxpayer calls than the year before but had a lower level of service 
than prior years because demand was so high. In the first half of 2021 
alone, we received more than 199 million calls--about 400 percent more 
calls than we get in an average year. For comparison, we received a 
total of 42 million calls in all of 2018, 40 million calls in 2019, and 
55 million calls in 2020. On March 15, 2021, we received 8.6 million 
calls on just that one day, which is an average of about 1,500 calls 
per second. The high call volume has significantly hampered our ability 
to manage telephone demand.

    At the same time, the average duration of each call has also 
increased due to the complexity of COVID-related tax law changes and 
because taxpayers have personally endured a great deal throughout the 
pandemic. Our average time per call was 12 minutes for calendar year 
2019. Thus far in 2022 (through February 26) the average time per call 
is 16 minutes. Spending more time on each call to provide the needed 
customer service limits the CSRs' ability to handle more calls during a 
shift.

    We attempted to ease these challenges by starting the CSR hiring 
process for the 2021 filing season months earlier than normal. We 
repeated this approach for the 2022 filing season. During the pandemic, 
we transitioned into an entirely virtual recruiting and onboarding 
process for new employees to speed up the process. While we were able 
to hire an additional 3,800 CSRs, clerks and other support staff for 
the 2021 filing season, it was short of our goal of 5,000. While we did 
slightly better thus far in the 2022 filing season, we still have been 
able to hire just 3,805 of our overall goal of 5,000. The pandemic 
caused significant hiring challenges, including low applicant pools in 
some locations, delays in fingerprinting due to closed facilities, and 
delays in processing applicants virtually. And we routinely find 
ourselves being able to offer candidates significantly less than what 
the private sector can. We are trying innovative training approaches to 
get new CSRs ready to work the phones in less than the usual 14-week 
time frame. Working with NTEU, OPM, and congressional appropriators, we 
are also thrilled to have secured direct hire authority, discussed 
previously, which will allow us to be more successful in recruiting top 
talent by increasing the speed with which new employees can be 
onboarded.
                    update on the 2022 filing season
    The IRS successfully opened the 2022 tax season on January 24th--2 
weeks earlier than the year before--giving taxpayers more time to file 
returns and delivering more than 1 million refunds in the first days of 
processing. Getting underway in January has given taxpayers as much 
time as possible to meet the Federal tax filing deadline, which this 
year is April 18th for most taxpayers.

    Due to many factors, the 2022 tax filing season is a complex and 
challenging one for taxpayers, tax professionals, and for the IRS as 
well. During this tax season, taxpayers face a number of issues 
resulting from critical tax law changes that took place in 2021, as 
well as ongoing challenges related to the pandemic. Our dedicated 
workforce has done everything it can to prepare for the April 18th 
deadline, and our immediate focus is simplifying the taxpayer filing 
experience by streamlining the process, answering as many questions as 
possible and reducing the inventories mentioned earlier in this 
testimony.

    Our system that allows electronic filing of returns, Modernized 
eFile (MeF), took a major step forward this filing season. We made the 
latest in a series of changes that over time have made MeF more 
efficient, standardized and robust. This latest change expanded the 
availability of MeF so that our external partners who transmit returns 
electronically can access the system 24 hours a day, 7 days a week. 
This upgrade is a win not only for the transmitters and ultimately 
taxpayers, but also for the IRS, because it allows us to perform MeF 
maintenance during the week, enabling more rapid deployment of critical 
updates.
Providing Help to Navigate a Challenging Filing Season
    We continue to believe the filing season will go the smoothest for 
taxpayers who file electronically, file accurate tax returns and 
request direct deposit of their refund. In fact, filing electronically 
with direct deposit is more important than ever this year, given the 
additional complexities on many returns, such as those who were 
eligible for an EIP but did not receive it and are now claiming the 
RRC, as well as those who need to reconcile advance CTC payments on 
their return.

    We also want families who added a dependent--such as a child, a 
parent, a nephew or niece, or a grandchild--on their 2021 income tax 
return who was not listed as a dependent on their 2020 income tax 
return to know they may be eligible to receive a 2021 RRC of up to 
$1,400 for this dependent. Additionally, all eligible taxpayers with 
qualifying children born or welcomed through adoption or foster care in 
2021 are encouraged to claim the CTC--worth up to $3,600 per child--on 
their 2021 tax return.

    Another important credit we've been highlighting is the Child and 
Dependent Care Credit, which was expanded for 2021. This means that 
more taxpayers will qualify this year than ever before, and the credit 
will be worth more. We've been working to remind people who pay 
expenses for the care of a qualifying person while working or looking 
for work that they may qualify for this important tax credit. Depending 
on their income, taxpayers can get a credit worth 50 percent of their 
qualifying child-care expenses. For tax year 2021, the maximum eligible 
expense for this credit is $8,000 for one qualifying person and $16,000 
for two or more.

    We realize that taxpayers who are still waiting for their 2020 
return to be processed may be wondering whether they should wait to 
file their 2021 return. Our message to these individuals is that they 
can file their 2021 return when they are ready. If a taxpayer is 
electronically filing their 2021 tax return and we have not yet 
processed their 2020 tax return, they should validate their 2021 
electronic tax return by entering $0 (zero dollars) as their prior year 
adjusted gross income (AGI). If a taxpayer used the Non-filer Sign Up 
tool in 2021 to register for advance CTC payments or an EIP, they will 
instead enter $1 as their prior year AGI.

    Given that incredibly high call volume is continuing again this tax 
season, we understand the filing experience will be more difficult for 
taxpayers who need to interact with us. But we continue to make 
improvements and are confident this work will have us trending in the 
right direction. We are also encouraging taxpayers with questions to 
turn first to online resources. This area has been a huge focus for the 
IRS, and critical tools are available that people may overlook. These 
options range from the Where's My Refund? online tool to several other 
automated tools now available through the Online Account on IRS.gov. 
For many, there are ways to get help without calling.
Improving Service to Diverse Communities
    Amid the challenges posed for the agency by the pandemic and new 
tax law changes, the IRS has continued to focus on improving service to 
diverse communities. An important way we serve these taxpayers is by 
communicating with them in their most comfortable language. We are 
committed to enhancing the experience of all taxpayers, including those 
who have limited English proficiency. We know that these taxpayers 
respond to our efforts--as just one example, there were nearly 90 
million visits to non-English pages on IRS.gov last year. Already this 
year, through March 23rd, there have been about 14.3 million visits to 
non-English pages.

    Since 2021, the IRS has taken important steps to further improve 
the amount of service we offer in multiple languages:

        Provided the Form 1040 in Spanish during the 2021 filing 
season for the first time.
        Gave taxpayers the opportunity to indicate on new Schedule LEP 
(Limited English Proficiency) whether they want to be contacted by us 
in a language other than English. This schedule, filed with the 1040, 
allows taxpayers to select one of 20 languages in which to receive 
communications from the IRS. During Calendar Year (CY) 2021, the IRS 
received approximately 326,000 Schedule LEPs.
        Made Publication 1, Your Rights as a Taxpayer, available in 20 
languages.
        Issued a new, streamlined version of Publication 17, Your 
Federal Income Tax, that is available in seven languages.

    These efforts continue this year. We've completed conversion of 34 
Spanish notice inserts to Braille, text, audio, and large print as of 
January. We also recently converted Form 1040 and its main schedules, 
as well as Form 1040 NR, Form 1040 SR, Form W-4, and six publications, 
into Spanish Braille, text, and large print. We continue working to 
increase our communications and outreach materials--including 
information shared on social media channels--into additional languages. 
To ensure that taxpayers can easily provide their preferences in this 
area, we also released new Form 9000, Alternative Media Preference, 
this filing season. This form allows taxpayers to tell us they want to 
receive notices in Braille, large print, audio, or text, and can be 
filed alone or with the 1040.

    While those steps are all important, the IRS is continuing to do 
more to enhance the taxpayer experience for those who are more 
comfortable using a language other than English. We are, for example:

        Pursuing efforts to translate website applications for these 
taxpayers. We have already identified 17 of the most frequently used 
applications for translation into additional languages.
        Exploring opportunities to employ machine translation to help 
us add more multilingual content. This is a significant challenge, 
given how complex many tax terms are. We will need to carefully 
evaluate automated translation tools, so we anticipate this effort will 
be ongoing for several years.
                    update on modernization efforts
    One of my highest priorities as Commissioner is ensuring the 
agency's IT infrastructure remains on a path toward modernization. 
Modernization is vital to all our core functions: successfully 
delivering the annual tax filing season, ensuring the health of the 
Nation's tax system and supporting the Federal Government's financial 
strength. Today, we do not have the steady, consistent multiyear 
funding to support these efforts the way we need to in order to deliver 
appropriately for the American people.

    We have long sought levels of funding that would enable necessary 
IT investments. As noted above, absent consistent, timely, multiyear 
funding, we have largely been a paper-based organization operating in a 
digital environment. It is difficult to modernize a significant IT 
portfolio to improve processing and delivery of important taxpayer 
services when constantly funded through a CR.

    Until recently, we were operating under a CR for FY 2022. This 
year's Omnibus (Pub. L. 117-103) represents the largest funding 
increase for the agency in 2 decades. But the agency's needs are much 
deeper. Unfortunately, because our budget has fallen so significantly 
in real terms over the course of the last decade, we have lost 
foundational staff at the agency and need to rebuild. From a 
modernization perspective, many of our priorities, including upgrading 
the Individual Master File, one of the oldest IT systems in the Federal 
Government, are multiyear efforts. This situation means we have not 
been able to invest in modernizing and integrating our technological 
infrastructure, which processes the more than 160 million returns we 
anticipate receiving during the current filing season. The situation 
also affects other important interests of tax administration. 
Modernized technology would significantly improve the ability of the 
IRS to respond to a crisis, pandemic-related or otherwise.

    Since the initial release of our Modernization Plan in 2019, our 
operations and infrastructure have changed significantly. We have 
received only limited funding for our efforts: from FY 2019 through FY 
2021, we received only 57 percent of the planned Business Systems 
Modernization funding. But within the funding received, we have 
delivered critical technology improvements and at the same time 
responded to unprecedented demand due to the pandemic. We accelerated 
the development of our digital services. We expanded customer callback 
availability on our toll-free telephone lines. We created new web 
applications such as ``Get My Payment'' to track EIPs. We also created 
the Child Tax Credit Update Portal to help people manage advance CTC 
payments, a first-of-its-kind endeavor. And in another milestone, we 
also achieved the long-time goal of making it possible for individuals 
to e-file their amended tax return.

    Another example of modernization at work involved creating a tool 
last year to help eliminate several steps in the process an IRS 
employee is required to do to reconcile RRC discrepancies between the 
two EIPs that were made in 2020 and what the taxpayer reported on their 
tax return. Prior to the automation, an employee could reconcile about 
100 returns per day. Once we completed the modernization improvement, 
the employee can now process 600 per day. Not only does this 
improvement speed up the ability for the taxpayer to receive their 
refund, but it also avoids adding further to the backlog of inventory.

    We continue to investigate new ways of doing business to optimize 
the important work of IRS employees and improve the taxpayer 
experience; for example, we hope to be able to scan in a paper form and 
file it electronically later this summer, which will help us identify 
the potential for this approach to be used for other forms in the 
future. We are also looking into our ability to leverage an approach 
that we call Scanning-as-a-Service, where we may be able to 
significantly increase the availability of digital images for IRS 
employees to use to perform their work without owning and maintaining 
expensive equipment or paying to store the paper records. Both efforts 
seem straightforward on the surface, and although we are cautiously 
optimistic of their progress to date, it is important to note that they 
are not a sure thing, and a significant amount of work remains to 
confirm the viability of these pilots, as well as their ability to 
scale to other use cases.

    In addition to the above, we continue taking steps to safeguard 
taxpayer data while modernizing platforms to improve taxpayers' 
experiences. Investments in cybersecurity are essential. In 2017, IRS 
was experiencing just over 1 million cyber-
attacks per day. Today, we sustain more than 1.5 billion attacks each 
year. While IRS network defenses mitigate threats and keep our core tax 
processing systems secure, we must continue to advance our cyber 
capabilities, so we stay one step ahead of the bad actors who are 
attacking IRS systems.
IRS Online Account
    An important focus of our efforts has been the development of IRS 
Online Account, which allows taxpayers to interact with us online and 
perform various types of transactions in a secure environment. For 
example, they can view their payment history, make a payment online or 
request previous years' tax information. Since the initial launch of 
IRS Online Account in 2016, we helped taxpayers securely access the 
information and services they need, with more than 23 million sessions 
and 8.37 million new users in FY 2021. We are continually working to 
expand the transactions taxpayers can conduct through the online 
account.

    In July of last year, we launched a new online feature that allows 
individual taxpayers to authorize their tax practitioner to represent 
them before the IRS with a Power of Attorney (POA), and to view their 
tax accounts with a Tax Information Authorization (TIA). Tax 
professionals can go to the Tax Pro Account on IRS.gov to digitally 
initiate POAs and TIAs. Over time, we will continue building 
functionality so that other transactions involving tax professionals 
can be completed online in a secure digital environment.

    As we expand our digital options, security is always an important 
consideration. For that reason, in February we announced steps to 
change the way taxpayers authenticate their identities when signing on 
to their online accounts. Specifically, we began transitioning away 
from using a third-party service for facial recognition. The IRS is 
working closely with partners across government to roll out Login.Gov 
as an authentication tool for us. The General Services Administration 
is currently working with the IRS to achieve the security standards and 
scale required of Login.Gov, with the goal of moving toward introducing 
this option later this year.
                   efforts to improve tax compliance
    The IRS remains committed to doing everything we can, with our 
limited resources, to track down those who willfully refuse to fulfill 
their tax obligations or who commit tax fraud. We want to maintain a 
strong, visible, robust tax enforcement presence to appropriately 
support taxpayers who comply voluntarily. When taxpayers file their 
returns, they should feel confident others are doing the right thing 
too.

    Our efforts to ensure compliance with the tax laws cover a broad 
range of groups--individuals, small businesses, tax-exempt 
organizations and large entities. In our challenging resource 
environment, large entities are of particular concern because this 
group includes very sophisticated taxpayers--major U.S. corporations, 
multinational companies and complex multitiered partnerships--all of 
which require us to have highly trained, highly skilled enforcement 
personnel with special accounting and tax law skills, who can 
understand the issues raised by these returns, root out instances of 
noncompliance and litigate issues where necessary.

    We will continue emphasizing a number of special areas in our 
enforcement activities. This strategy includes keeping a focus on high-
income taxpayers engaged in offshore noncompliance, failure to file, 
unreported and improperly reported virtual currency transactions and 
abusive tax shelters, such as syndicated conservation easements and 
micro-captive insurance shelters, as well as monetized installment 
sales and Malta pension abuses.

    In this challenging environment, the IRS continues working to 
improve coordination of enforcement activities across the agency. In 
fact, the IRS's Office of Fraud Enforcement (OFE), which we created in 
March 2020, is actively encouraging and ensuring this coordination 
across the IRS, promoting compliance, strengthening the IRS's response 
to fraud and working to mitigate emerging threats. The Office of 
Promoter Investigations (OPI), created last year, is helping us better 
identify issues that involve abusive tax shelters as well as 
individuals promoting abusive tax transactions.

    It is vital that we improve our ability to identify and deter 
promoters, and that we do so more quickly--before they are able to 
widely market their transactions, as we have seen with syndicated 
conservation easements and micro-captive insurance. We are seeing many 
aggressive transactions being promoted on social media and the 
Internet, and we continually work to identify and evaluate potentially 
abusive trends and transactions to determine whether they need further 
enforcement actions. I have challenged OPI to lead our efforts against 
not only those who promote abusive tax avoidance transactions we know 
about, but to find the transactions that are being concocted today, and 
to coordinate our efforts to stop those promoters quickly and 
efficiently.
Recent Accomplishments
    We have made progress in a number of enforcement areas. For 
example, over the past 2 years, we have shifted significant examination 
resources and technology to increase our focus on high-income and high-
wealth taxpayers. As a result, examination coverage of the taxpayers in 
the highest income category (taxpayers with over $10 million of total 
positive income) increased to over 8 percent coverage for Tax Year (TY) 
2018, the most recent year for which complete statistics are available. 
This level is the highest coverage rate of this growing population 
since TY 2014, and we expect the TY 2019 numbers will show this level 
of coverage continued.

    Substantially all experienced examiners--those who are the most 
highly trained with substantial accounting and tax law skills--are 
almost entirely focused on tax returns that include complex issues, 
such as high-income taxpayers, pass-through entities, multinational 
taxpayers involving international tax issues, large pension plans, 
private foundations and the most egregious situations. We also continue 
to focus on employment tax cases where employers have failed to pay 
over taxes withheld from employees or have failed to file their 
employment tax returns.

    An IRS initiative announced in 2020 involves improving tax 
compliance by increasing visits to those generally with incomes above 
$100,000 who failed to file tax returns. These Revenue Officer 
Compliance Sweeps (ROCS) focus on the most egregious non-filers. A 
partnership between our Field Collection operations, the OFE and our 
Criminal Investigation (CI) division also worked to identify common 
attributes of successful fraud referrals resulting in recommendations 
for criminal investigation for non-filers.

    Another example of our accomplishments involves the development of 
a comprehensive, coordinated enforcement strategy to address abusive 
syndicated conservation easement transactions, and we have worked 
closely with the U.S. Department of Justice to shut down the promotion 
of them. Subsequently, the U.S. Tax Court held in the government's 
favor in a number of conservation easement cases, supporting the IRS's 
position on the abusive nature of the underlying deductions in these 
cases. While continuing to investigate these transactions, the IRS has 
also made settlement offers to certain taxpayers with docketed cases at 
the Tax Court involving this type of transaction.

    Our efforts have also borne fruit in another important area--
employment tax fraud. Noncompliance in this area means employers cheat 
the system and their employees without consequence. In so doing, they 
gain an unfair advantage over their honest competitors. We continue to 
work with the Justice Department's Tax Division to identify 
opportunities to better address noncompliance. These opportunities 
include using data analytics to identify egregious noncompliant 
employers. To cite one instance, we used our Innovation Lab's Data 
Analytics Program to identify thousands of taxpayers who reported wages 
on their individual income tax returns where the employer who paid 
those wages did not file their W-2 forms with the Social Security 
Administration and neither filed employment tax returns nor remitted 
taxes withheld from their employees. Seriously noncompliant employers 
were further investigated by the IRS examination, collection and CI 
organizations. This agency-wide commitment ensures consistent treatment 
of taxpayers and fair application of the tax law.

    The IRS's enforcement efforts have extended to preserving COVID-
related financial relief for those legitimately in need of financial 
support during this crisis. For example, the IRS has been working 
diligently to thwart scams related to COVID-19 by alerting taxpayers 
and tax professionals to these scams--especially calls and email 
phishing attempts tied to the EIPs. The IRS and our partners throughout 
the country have been publicizing these scams. Another example involves 
the OFE's efforts to prevent ineligible claimants from obtaining $1.2 
billion in COVID-related employer credits. The credits were intended to 
help employers retain employees who would otherwise be unable to work 
during the pandemic, but bad actors saw an opportunity to exploit the 
program for their own financial gain. Working collaboratively with 
teams of seasoned enforcement employees who identified the questionable 
claims, OFE investigated the suspect claims and either administratively 
disallowed the claims and/or referred cases for further investigation.

    In noting accomplishments on enforcement, I continue to be 
extremely proud of the investigative work done by CI. To take just one 
recent example, CI's Cyber Crimes Unit played a key role in the largest 
cryptocurrency seizure ever recorded for the Federal Government, valued 
at more than $3.6 billion. In February 2022, the Justice Department 
announced the arrest of two individuals in connection with an alleged 
conspiracy to launder cryptocurrency stolen during a 2016 hack of 
Bitfinex, a virtual currency exchange. IRS-CI Cyber Crimes Unit special 
agents were critical in unraveling a sophisticated laundering 
technique, enabling them to trace, access and seize the stolen funds. 
As well as being the largest cryptocurrency seizure, this was also the 
largest single financial seizure recorded by the Federal Government.

    In regard to recent events, CI is prepared to support the U.S. 
Government's efforts to impose sanctions on Russia. CI has a track 
record of successfully rooting out and stopping illegal kleptocracy 
money flowing into or through the U.S. CI's special agents expertly 
target those who launder money, including active investigations 
involving Russian oligarchs and politicians, as well as those who 
facilitate the illicit movement of money on behalf of sanctioned 
individuals or organizations. Agents on the Global Illicit Financial 
Team and throughout CI are not only experts in tracing assets and 
understanding the complex global financial world; they also work 
seamlessly with our domestic and global law enforcement partners to 
ensure the integrity of the U.S. financial system on behalf of U.S. 
taxpayers.
Resource Challenges
    Despite the progress we have made, our ability to enforce the tax 
laws against noncompliant taxpayers with complex returns continues to 
be hampered by a lack of resources. We can no longer audit a 
respectable percentage of large corporations, and we are often limited 
in the issues reviewed among those we do audit. These corporations can 
afford to spend large amounts on legal counsel, drag out proceedings 
and bury the government in paper. We are, quite simply, ``outgunned'' 
in our efforts to assure a high degree of compliance for these 
taxpayers. It is unacceptable for the Nation's tax administrator to be 
outgunned when appropriately challenging the return positions of some 
of the most sophisticated taxpayers. We must receive the resources to 
hire and train more specialists across a wide range of complex areas to 
assist with audits of entities (taxable, pass-through, and tax-exempt) 
and individuals (financial products, engineering, digital assets, 
cross-border activities, estate and gift planning, family offices, 
foundations, and many others).

    A lack of resources also threatens to reduce the effectiveness of 
our criminal investigative work. Much like other operating divisions in 
the IRS, CI is close to its lowest staffing level in the past 30 years. 
With fewer agents, we have fewer cases and fewer successful 
convictions. A strong, robust criminal tax enforcement presence 
provides significant deterrence to those willing to evade their lawful 
obligations to our country. Without adequate resources, we risk sending 
a much less powerful message to would-be and active tax evaders.

    Because of our current funding and staffing limitations across our 
enforcement functions, we are forced to make difficult decisions 
regarding priorities, the types of enforcement actions we employ, and 
the service we offer. Limited IT resources preclude us from building 
adequate solutions for efficiently matching or reconciling data from 
multiple sources. As a result, we are often left with manual processes 
to analyze reporting information we receive. Such is the case with data 
from the Foreign Account Tax Compliance Act (FATCA). Congress enacted 
FATCA in 2010, but we have yet to be appropriated any significant 
funding for its implementation. This situation is compounded by the 
fact that when we do detect potential noncompliance or fraudulent 
behavior through manually generated FATCA reports, we seldom have 
sufficient funding to pursue the information and ensure proper 
compliance. We have an acute need for additional personnel with 
specialized training to follow cross-
border money flows. They will help ensure tax compliance by improving 
our capacity to detect unreported accounts and income generated by 
those accounts, as well as the sources of assets in offshore accounts.

    In other programs, we have information but are unable to select all 
high-risk cases identified due to resource and funding constraints. In 
these situations, to the detriment of tax administration, we must make 
difficult enforcement decisions based on resources, return on 
investment, coverage of all types of taxpayers, and other high priority 
work. For example, our information document reporting programs are 
identifying potential discrepancies with taxpayers who have received 
Form 1099-K, Payment Card and Third-Party Network Transactions 
(including potential non-filers), but not all of these have been 
addressed due to resource constraints.

    As we make enforcement decisions, we try to balance resource 
limitations across a number of factors, including evaluating overall 
compliance effect and focusing resources into special projects. For 
example, we currently have fewer than 2,000 revenue officers, the 
lowest number of field collection personnel since the 1970s, and we 
have over 100,000 collection cases in active inventory. In addition to 
our active inventory, we have over 1.5 million cases (more than 500,000 
of which are considered high priority) awaiting assignment to these 
same 2,000 revenue officers. We have classified roughly 85 percent of 
those cases as high priority, many of which involve delinquent business 
employment taxes.

    In discussing our resource situation, another major concern is our 
ability to investigate and take enforcement actions against abusive 
transactions. While we are doing our best with the resources available 
to us, it is important to point out that the lack of funds and staffing 
makes it increasingly difficult for us to keep up with--much less stay 
ahead of--those who promote abusive transactions and the tax evaders 
who engage in them. Shelter promoters continue to innovate and invent 
new ways of gaming the system. We continue working to find them and 
identify their methods, but in order to ensure we can take meaningful 
enforcement actions against them, it is critical that we receive 
adequate resources.

    It is becoming easier for tax shelter promoters to pitch their 
wares to the wealthy, and we are concerned such pitches are taking 
hold. While we are doing what we can, we need more resources if we hope 
to keep these activities in check and continue our efforts to inform 
taxpayers about the problems with these transactions so they will be 
dissuaded from participating in them. These activities shift the 
required funding of our country onto the backs of wage earners. 
Everyone should pay their fair share, and no one should be able to 
inappropriately avoid their obligations.
         looking to the future: irs taxpayer experience office
    Along with our day-to-day efforts to help taxpayers and enforce the 
tax laws, our agency is also committed to delivering on the promise of 
a new IRS. We are continuing the work begun in 2019 with passage of the 
Taxpayer First Act (TFA) to develop an innovative approach to the 
future of tax administration that will better serve everyone, including 
those in underserved communities. The IRS is using the implementation 
of the 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.

    A key driver of these efforts is our Taxpayer Experience Office, 
launched last year to unify and expand the work being done across the 
agency to serve taxpayers. The Taxpayer Experience Office sets the 
strategic direction for improving the taxpayer experience and 
identifies opportunities to make continuous improvements in real time 
for taxpayers and the tax professional community.

    The Taxpayer Experience Office will identify changing taxpayer 
expectations and industry trends, focus on customer service best 
practices, and promote a consistent voice and experience across all 
taxpayer segments by developing agency-wide taxpayer experience 
guidelines and expectations. The office will be adding staff in the 
coming months to help support the effort.

    Some of the areas of improvement in the near term include expanding 
customer callback, expanded payment options, secure two-way messaging 
and more services for multilingual customers. These activities build on 
recent improvements such as digital tools to support EIPs and advance 
CTC payments, online chat, and the online tax professional account.
                     the president's fy 2023 budget
    The President's FY 2023 budget proposal for the IRS provides $14.1 
billion, an increase of $2.2 billion, or 18 percent more than the FY 
2022 Annualized Continuing Resolution level of $11.9 billion, to 
administer the Nation's tax system fairly, collect more than $4 
trillion in gross taxes to fund the government, and strengthen tax 
compliance. Because the administration drafted the FY 2023 budget 
submission ahead of the enactment of the FY 2022 Omnibus, the 
submission was not able to reflect the final enacted FY 2022 funding 
levels. The budget includes initiatives to improve the taxpayer 
experience that should ultimately lead to increased voluntary tax 
compliance. The request also aims to ensure we stay current with the 
paper inventory and improve telephone and in-person service; 
facilitates better oversight of high-income and corporate tax returns; 
and accelerates the development of digital tools to enable smarter 
communication with taxpayers. In addition, the administration continues 
to support a multiyear investment in IRS enforcement to increase tax 
compliance. An appropriate level of funding for the IRS will allow the 
agency to continue enhancing the taxpayer experience, narrowing the tax 
gap to ensure equitable administration of the tax code, protecting IRS 
systems and taxpayer data, and modernizing our information technology 
systems.
Specific Funding Areas
    The FY 2023 budget requests a total program increase of $1.31 
billion, including the following:

        Putting Taxpayers First: $320.2 million to continue 
implementing the Taxpayer First Act (TFA), which requires the IRS to 
put in place a Taxpayer Experience Strategy to improve the taxpayer 
experience with the IRS. The IRS's Taxpayer Experience Office, in 
partnership with key internal and external stakeholders and subject 
matter experts, identified certain areas of focus to inform development 
and implementation. The FY 2023 request focuses on: continuing to 
protect taxpayer data, increasing outreach and taxpayer education 
efforts, developing strategies to reach underserved communities, and 
providing human resources support for implementing the TFA.
        Enhancing Taxpayer Service: $389.1 million for increasing the 
telephone Level of Service (LOS) and enhancing information technologies 
to improve taxpayer services. This investment will build on the IRS's 
efforts to improve telephone services for the underserved, such as 
those who are deaf or hard of hearing, limited English proficiency 
communities, and victims of identity theft. This investment provides a 
projected LOS of 85 percent in FY 2023 assuming phone demand returns to 
pre-pandemic levels and the IRS can provide in-person services at pre-
pandemic levels. The increase in funding also will improve the ways 
taxpayers interact with the IRS by enhancing and expanding the range of 
modern, digital tools provided by the IRS to deliver a service 
experience comparable to that available in the private sector. By 
empowering taxpayers to address certain needs without requiring live 
assistance, development of these tools is essential to the IRS's long-
term success in satisfying taxpayer expectations and meeting the 
ongoing growth in demand for assistance.
        Increasing Compliance to Ensure Fairness: $469.3 million to 
allow the IRS to continue improving upon its compliance strategies and 
enforcement activities--including examination, collection, and 
investigation--to ensure fairness in the tax system and narrow the tax 
gap. We continue to develop innovative approaches to understanding, 
detecting, and resolving potential noncompliance, which helps to 
maintain taxpayer confidence in the tax system. It is important to note 
the IRS has an overall enforcement return on investment (ROI) of about 
$5 for every $1 invested compared to the IRS appropriated budget, not 
including significant deterrence effects.
        Maintaining Critical IT Operations: $39.5 million to sustain 
these operations to maintain optimum network performance and 
functionality. The IRS continues to transform its technological 
landscape, and it has made progress on its modernization journey to 
provide taxpayers with a seamless customer experience, while empowering 
employees with the tools and systems needed to provide top quality 
services and enforce the tax law. These successes have increased the 
need to sustain critical IT operations to maintain optimum network 
performance and functionality. The IRS continues to deploy and 
incorporate new, modernized tools for taxpayers, tax professionals and 
employees. Taxpayer service improvements (additional digital services, 
up-to-the-minute account information, etc.), enterprise efficiency 
advances (automation, artificial intelligence, machine learning, etc.) 
and new employee tools (case management, collaboration, learning 
platforms, etc.) all require additional bandwidth to sustain a high 
volume of users processing digitalized capabilities.
        Fostering Economic Development in Underserved Communities: 
$10.2 million to allow the IRS to cultivate new opportunities for 
adults and students in underserved communities. One focus of our 
efforts is the Mississippi delta region, which currently has the 
highest rate of poverty in the United States, excluding the U.S. 
territories. As an initial step, we are opening a new Automated 
Collection System (ACS) call site in Clarksdale, MS, and have announced 
plans to hire contact representatives to work at the call site. 
Initiatives in other regions are already underway, including a 
significant staffing increase for our ACS operation in Puerto Rico. We 
have increased staff at this site from approximately 79 employees in FY 
2020 to more than 400 as of February 2022. We plan to add another ACS 
call site in Puerto Rico during 2022 that will accommodate an 
additional 400 employees. The expansion offers employment to Puerto 
Rico residents and allows for a significant increase in bilingual ACS 
employees to better serve taxpayers with limited English proficiency.
Structural Changes to IRS Appropriations to Improve Mission Delivery
    The President's budget also proposes a change to the appropriations 
language that would allow Taxpayer Services and Enforcement funding to 
be used for certain associated support costs that are currently 
reserved for Operations Support funding. Currently, Taxpayer Services 
and Enforcement funding only pays for an employee's labor cost, not the 
cost to hire the employee nor the IT equipment and space needed to make 
them productive. There are significant benefits to this change: By 
including support costs, future IRS budgets would reflect the full cost 
of Taxpayer Services and Enforcement. The changes would also prompt IRS 
business units to be more efficient with their support costs because 
they would stand to directly benefit from savings.

    In addition to the IRS's FY 2023 budget request, stable, multiyear 
funding for the IRS is necessary to facilitate the types of longer-term 
investments that the agency needs to make to adequately serve the 
American people and enforce the tax laws.
        legislative proposals in the president's fy 2023 budget
    Along with the funding requested in the President's FY 2023 budget 
request, we are also asking for Congress's help legislatively in 
several important areas that would improve tax administration, 
including the following:

        Information reporting by financial institutions and digital 
asset brokers. Over time, the U.S. has established a broad network of 
information exchange relationships with other jurisdictions based on 
established international standards. The information obtained through 
those relationships has been central to recent successful IRS 
enforcement efforts against offshore tax evasion. The ability to 
exchange information reciprocally is particularly important in 
connection with the implementation of the Foreign Account Tax 
Compliance Act (FATCA). Currently, however, the U.S. provides less 
information to foreign governments than we receive from them. The 
proposal would expand reporting by financial institutions and digital 
asset brokers in a number of ways--for example, by requiring financial 
institutions to report the account balance for all financial accounts 
maintained at a U.S. office and held by foreign persons. These new 
reporting requirements would enable the IRS to provide equivalent 
levels of information to cooperative foreign governments in appropriate 
circumstances to support their efforts to address tax evasion by their 
residents. The proposal would be effective for returns to be filed 
after December 31, 2023.
        Require reporting by certain taxpayers on foreign digital 
asset accounts. Section 6038D(b) of the Internal Revenue Code contains 
an annual reporting requirement for individuals in regard to two 
categories of foreign financial assets, but there is no reporting 
requirement under this section for digital assets. Against this 
backdrop, tax compliance and enforcement with respect to digital assets 
is a rapidly growing problem. The global nature of the digital assets 
market offers opportunities for U.S. taxpayers to conceal assets and 
taxable income by using offshore digital asset exchanges and wallet 
providers. The proposal would amend section 6038D(b) to require 
reporting with respect to a new third category of asset: that is, any 
account that holds digital assets maintained by a foreign digital asset 
exchange or other foreign digital asset service provider. Reporting 
would be required only for taxpayers that hold an aggregate value of 
all three categories of assets in excess of $50,000. The proposal would 
be effective for returns required to be filed after December 31, 2022.
        Extend the statute of limitations for certain tax assessments. 
Section 6501 of the Internal Revenue Code generally requires the IRS to 
assess a tax within 3 years after the filing of a return. But for 
complex audits in the largest cases, critical issues may not be 
identified until late in the process of an examination, and in many 
cases these issues cannot be pursued further due to time and resource 
constraints. The proposal would amend section 6501 to extend the 3-year 
statute of limitations to 6 years if a taxpayer omits from gross income 
more than $100 million on a return. This change would give the IRS 
enhanced agility and flexibility in evaluating and staffing its case 
inventory and appropriately allocating its limited enforcement 
resources.
        Increase oversight of paid tax return preparers. Paid tax 
return preparers have an important role in tax administration because 
they assist taxpayers in complying with their obligations under the tax 
laws. The proposal would amend title 31, U.S. Code (Money and Finance) 
to provide the Secretary with explicit authority to regulate all paid 
preparers of Federal tax returns, including by establishing mandatory 
minimum competency standards. The proposal would be effective on the 
date of enactment.
        Expand and increase penalties for return preparation and e-
filing. Inappropriate behavior by paid tax return preparers harms 
taxpayers through the filing of inaccurate returns, erroneous refunds 
and credits and personal tax return noncompliance. Tax return preparer 
misconduct continues, in part, because the amounts of the penalties 
under current law do not adequately promote voluntary compliance. The 
proposal would increase the amount of the tax penalties that apply to 
paid tax return preparers for willful, reckless or unreasonable 
understatements, as well as for forms of noncompliance that do not 
involve an understatement of tax.
        Expand authority to require electronic filing for forms and 
returns. Under this proposal, electronic filing would be required for 
returns filed by taxpayers reporting larger amounts or that are complex 
business entities, including: (1) income tax returns of individuals 
with gross income of $400,000 or more; (2) income, estate, or gift tax 
returns of all related individuals, estates, and trusts with assets or 
gross income of $400,000 or more in any of the 3 preceding years; (3) 
partnership returns for partnerships with assets or any item of income 
of more than $10 million in any of the 3 preceding years; (4) 
partnership returns for partnerships with more than 10 partners; (5) 
returns of real estate investment trusts, real estate mortgage 
investment conduits, regulated investment companies and all insurance 
companies; and (6) corporate returns for corporations with $10 million 
or more in assets or more than 10 shareholders. Further, electronic 
filing would be required for the following forms: (1) Forms 8918, 
``Material Advisor Disclosure Statement''; (2) Forms 8886, ``Reportable 
Transaction Disclosure Statement''; (3) Forms 1042, ``Annual 
Withholding Tax Return for U.S. Source Income of Foreign Persons''; (4) 
Forms 8038-CP, ``Return for Credit Payments to Issuers of Qualified 
Bonds''; and (5) Forms 8300, ``Report of Cash Payments Over $10,000 
Received in a Trade or Business.'' Return preparers that expect to 
prepare more than 10 corporation income tax returns or partnership 
returns would be required to file such returns electronically. The 
Secretary would also be authorized to determine which additional 
returns, statements, and other documents must be filed in electronic 
form in order to ensure the efficient administration of the internal 
revenue laws without regard to the number of returns that a person 
files during a year.
        Improve reporting for payments subject to backup withholding. 
The proposal would treat all information returns subject to backup 
withholding similarly. Specifically, the IRS would be permitted to 
require payees of any reportable payments to furnish their TINs to 
payors under penalty of perjury. The proposal would be effective for 
payments made after December 31, 2021.
                               conclusion
    Chairman Wyden, Ranking Member Crapo, and members of the committee, 
thank you again for the opportunity to update you on the filing season 
and the President's FY 2023 budget proposal for the IRS.

    We continue to balance multiple unprecedented demands, including 
continuing the filing season and work on important new tax provisions. 
We remain focused on numerous taxpayer-related issues, and we have 
pursued innovative ideas and processes not previously deployed by the 
IRS in an effort to make improvements to the current inventory and 
provide meaningful taxpayer services.

    The reality at the IRS is that we know we need to do better; we're 
committed to doing better, and we are trending in a positive direction. 
We appreciate your patience and understanding and the many expressions 
of gratitude we have received for the efforts of our employees, who 
have consistently stepped forward despite their own health and safety 
concerns. Our employees are doing everything they can. But we need 
Congress to help us by providing adequate resources and a sustained, 
multiyear investment in the agency.

    I continue to be extremely proud of our workforce and their 
dedication to helping American taxpayers fulfill their tax 
responsibilities and resolve tax issues.

                                 ______
                                 
      Questions Submitted for the Record to Hon. Charles P. Rettig
                 Questions Submitted by Hon. Ron Wyden
    Question. The IRS Criminal Investigation Division (CI) plays an 
important role in enforcing sanctions on Russia and tracing the 
financial holdings of Russian oligarchs. It's been made clear to me 
that CI needs more resources to tackle the sophisticated networks of 
opaque shell companies and nominees to identify Russian assets. Yet of 
all of the requests the administration made for the recently passed 
Ukraine supplemental funding package, the request for additional 
resources for CI to apply their expertise to Russian oligarchs was the 
only one rejected by our Republican colleagues.

    Do you believe CI has all of the resources it needs to assist with 
investigations and enforce sanctions against Russian oligarchs?

    If CI does not get the resources it needs in a timely fashion, do 
you believe that will give the oligarchs time to move their assets out 
of the reach of the United States government?

    Answer. IRS Criminal Investigation's (CI) current investigative 
priorities cover three broad areas: traditional/core mission tax 
crimes, tax-related and other financial crimes, and narcotics related 
financial crimes. U.S. law enforcement agencies are encountering 
complex transnational organized crime conspiracies that involve a 
hybrid of criminal elements, including international money laundering, 
illicit use of virtual currency, cyber hacking, threat financing, 
prohibited technologies, and exploiting emerging payment systems to 
avoid detection and prosecution

    On March 2, 2022, Attorney General Merrick B. Garland announced the 
launch of Task Force KleptoCapture, an interagency law enforcement task 
force dedicated to enforcing the sanctions, export restrictions, and 
economic countermeasures. The task force is designed to isolate Russia 
from global markets and impose serious costs for this unjustified act 
of war, by targeting the crimes of Russian officials, government-
aligned elites, and those who aid or conceal their unlawful conduct. CI 
is an integral member of this task force and plays a crucial role 
assisting Treasury bureaus and other government entities with sanctions 
enforcement.

    CI is also currently working with OFAC and the Financial Crimes 
Enforcement Network to identify, develop, and add new individuals and 
entities to the Specially Designated Nationals and Blocked Persons List 
(SDN List) as part of Treasury's Russian Elites, Proxies, and Oligarchs 
Task Force, which leads the Treasury effort to block or freeze 
sanctioned Russians' assets, freeze or seize sanctioned Russians' high-
value goods, and heavily restrict sanctioned Russians' access to the 
international financial system. CI has analyzed cryptocurrency 
addresses associated with geographical regions of Joint Chiefs of 
Global Tax Enforcement (J5) by focusing on international enablers using 
a map which displays user activity and movement. This advanced 
capability can identify key users of cryptocurrencies (such as 
Oligarchs) and track their movement over time.

    CI will continue to participate in the sanction efforts with our 
limited resources. This requires redeploying special agents from other 
enforcement efforts. Should additional funding become available, CI 
would use the funding for the following needs to continue to assist the 
government's collective sanctions enforcement efforts, while 
maintaining adequate coverage of the other mission focuses.

          Hiring additional special agents, analysts, and 
        investigative staff.
          Direct investigative costs: travel, transcription and 
        translation services, investigative data analytics, data 
        management, enforcement costs, undercover operations, etc.
          Investigative technology: data storage and management 
        systems, servers, information technology infrastructure, 
        additional commercial licenses, and contractor support.
          Secure facility: secure storage and communication 
        capabilities to handle sensitive and classified information.
          Additional investigative support at the above-mentioned 
        taskforces would increase CI's ability to gather, analyze, and 
        act on available intelligence related to sanctions enforcement, 
        and other investigations targeting transnational criminal 
        organizations.

    These additional tools and software are instrumental for CI to 
identify and seize oligarchs' assets before they are out of the reach 
of the United States Government and identify the enablers and 
facilitators of illicit money on behalf of sanctioned individuals and 
entities. These much-needed tools and resources would help CI continue 
to make a significant impact in the area without diverting resources 
from other enforcement areas.

    Question. There's nothing worse than calling the IRS, navigating 
the phone tree, and then sitting on hold. The IRS has started using 
customer callback technology, which allows callers to request a call 
back from the IRS when the next employee is available. This makes a lot 
of sense, but it is only available on some of the IRS's phone lines.

    When will the IRS start using customer callback on all of its 
lines?

    Answer. The IRS first offered callback services to approximately 
300,000 callers in Fiscal Year 2019 as a pilot on one toll-free 
application.\1\ In Fiscal Year 2020, the IRS expanded customer callback 
to five toll-free applications and offered callback services to more 
than 1 million callers. In Fiscal Year 2021, the IRS further expanded 
customer callback to 16 toll-free applications, offering services to 
approximately 7.3 million callers.
---------------------------------------------------------------------------
    \1\ A single phone line can include multiple toll-free applications 
depending on the nature of the inquiry. An application is a systemic 
way of grouping calls by a similar topic, for routing and reporting 
purposes at a more granular level. Customer Callback services are being 
deployed at the application level rather than the product line level.

    In January 2022, the IRS further expanded customer callback to 31 
toll-free applications and through April 15, 2022, offered services to 
approximately 5.9 million callers and to 70 percent of viable toll-free 
live service demand. Cumulatively, the IRS has offered callback 
services in English and Spanish to nearly 14.8 million callers covering 
toll-free telephone services in the Wage and Investment, Small 
Business/Self-Employed, National Taxpayer Advocate, and Tax Exempt and 
---------------------------------------------------------------------------
Government Entities business operating divisions.

    In April 2022, the IRS began transitioning to a long-term 
Enterprise Solution with a target launch in December 2022 on our 
baseline of 31 toll-free applications. Further expansion is planned in 
Fiscal Year 2023 and Fiscal Year 2024 to optimize the use of the 
technology to improve the taxpayer experience. The IRS has a long-term 
goal of offering callback services to 95 percent of viable toll-free 
live service demand by Fiscal Year 2024.

    Question. How would the President's proposed budget accelerate 
these timelines?

    Answer. The proposed budget request would improve the taxpayer 
experience, ensure we stay current with improved telephone service, and 
accelerate development of digital tools to enable smarter communication 
with taxpayers. An appropriate level of funding for the IRS will allow 
the agency to continue enhancing the taxpayer experience.

    Question. I understand that part of the backlog is due to the fact 
that IRS employees have to transcribe paper returns manually. The IRS 
does not use automated scanning technology like many states. For 
example, if you fill out your Oregon State tax return on your computer 
and then mail it, the return will print with a bar code that the 
Department of Revenue can scan like a box of cereal at the grocery 
store. Nobody has to transcribe anything. Oregon has been doing this 
since 2006.

    Another technology called optical character recognition (OCR) 
transcribes returns, even if you fill them out with a pencil or the bar 
code is smudged. While this technology makes some mistakes, humans make 
even more.

    I understand the IRS plans to update its tax forms with 2D bar 
codes over the next 5 years, is negotiating with tax software companies 
to include bar codes on forms printed using software, and is running 
pilots to test OCR.

    The IRS can't go through another filing season with the same 
backlogs and delays that we have seen over the last 2 years. When will 
the IRS start using scanning technology to transcribe individual income 
tax returns?

    Answer. The IRS has been using various technologies to scan tax 
returns for more than 35 years, with an emphasis on optical character 
recognition (OCR) scanning information tax returns such as withholding 
document processing. The IRS implemented the Service Center 
Recognition/Image Processing System (SCRIPS) for individual tax returns 
before 2000. We used SCRIPS Forms 1040-EZ, various business tax returns 
such as Forms 940, Employer's Annual Federal Unemployment (FUTA) Tax 
Return and Form 941, Employer's Quarterly Federal Tax Return.

    Scanning Forms 1040-EZ through SCRIPS was discontinued when the 
volumes of that form type decreased, and the form changed from a one-
page document to a front and back 2-page document. In more recent 
times, the Form 1040-EZ also became obsolete.


    The IRS has several ongoing pilot projects to improve the 
efficiency and accuracy of processing paper tax returns with, optical 
character recognition (OCR) or 2D barcoding. These projects are:

          V-Coded Return Pilot. A V-coded return is when the taxpayer 
        used software to prepare the return, printed the return and 
        mailed it to the IRS. Using a vendor, this pilot was designed 
        to enable remote scanning and validation of Forms 1040 that are 
        V-coded to be submitted using Modernized e-File (MeF). The goal 
        is to accelerate this pilot so it will be scanning tax year 
        2022 Forms 1040 V-coded and Forms 940 and 941 in filing season 
        2023.
          OCR Scanning Service Pilot. This pilot used a third-party 
        contractor's OCR capability to scan Form 940 business returns. 
        The contractor will scan and submit the returns using MeF.
          2D Barcode Pilot. This pilot implemented 2D bar codes to 
        digitally intake data from Forms 8918 (Material Advisor 
        Disclosure Statement) and Forms 8886 (Reportable Transaction 
        Disclosure Statement). In December 2021 IRS released Form 8918 
        with 2D bar codes. Form 8886 was to follow with production of 
        the 2D bar code form in March 2022. The IRS has received 
        approximately 1,000 Forms 8918 to date, of which 253 were on 
        the old paper form and 837 on the new paper forms with 2D bar 
        codes. However, only 78 percent of the 2D bar-coded paper forms 
        received could be fully read into IRS systems, requiring close 
        scrutiny of the data. We are working to determine actions to 
        reduce the error rate. Before considering using 2D bar codes 
        for Form 1040, we need to engage with the software industry to 
        update industry standards to align them with how we intake and 
        process data. The industry would have to agree to provide such 
        code in forms printed after using their software to prepare the 
        tax return. We will start that engagement, develop a plan on 
        how it would work and report back to you with the results.

    In addition to pursuing scanning, we also plan to make more forms 
available to be e-filed. We are also reviewing administrative policies 
to determine whether we can make changes so more people are eligible to 
e-file.

    We believe a multi-faceted approach is necessary to address the 
paper inventory the IRS receives yearly.

    We caution that the expected benefit from bar codes and OCR would 
diminish if Congress modifies provisions of the Internal Revenue Code s 
shortly before the filing season or, as happened recently, during the 
filing season, increasing the likelihood of errors. For example, IRS 
and software vendors' ability to respond and produce accurate forms may 
preclude timely inclusion of bar codes or QR codes, resulting in more 
submissions with unreliable codes.

    Question. How would the President's budget accelerate this 
timeline?

    Answer. The proposed budget request would improve the taxpayer 
experience by ensuring we stay current with improved telephone service 
and accelerate development of digital tools to enable smarter 
communication with taxpayers. An appropriate level of funding will 
allow the IRS to continue enhancing the taxpayer experience and 
modernizing our information technology.

    Question. In July, the IRS began to pay out the Child Tax Credit 
monthly for the first time. The American Rescue Plan made an historic 
expansion to the credit, boosting it to $3,000 per child (and $3,600 
per child under age 6) and making the full credit payable at very low 
incomes. Families received monthly checks of up to $300 per child. Up 
to half of the credit was paid in advance. Now they need to reconcile 
those amounts on their returns.

    What has the administration been doing to help make sure taxpayers 
can claim the other half of the child tax credit?

    Answer. To assist taxpayers with calculating the Child Tax Credit, 
IRS issued Letter 6419, 2021 Total Advance Child Tax Credit (CTC) 
Payments, to more than 57 million taxpayers who received advance Child 
Tax Credit payments. The letter provided a summary of the total amount 
the taxpayer received. The letter instructed taxpayers to use this 
information to complete their tax return. For taxpayers who misplaced 
or never received the letter, the IRS added the information to the 
IRS's Online Account. The IRS has performed broad outreach advising 
taxpayers about reconciling the Child Tax Credit advance payments and 
where to find the amounts issued to them. The IRS also has Frequently 
Asked Questions, including information about repayment protection, 
available on IRS.gov.\2\ These FAQs were also issued as a news 
release.\3\
---------------------------------------------------------------------------
    \2\ https://www.irs.gov/credits-deductions/filing-season-2021-
child-tax-credit-frequently-asked-questions.
    \3\ https://www.irs.gov/newsroom/2021-child-tax-credit-and-advance-
child-tax-credit-payments-resources-and-guidance.

    The IRS shared the Advance Child Tax Credit outreach materials with 
Volunteer Income Tax Assistance (VITA)/Tax Counseling for the Elderly 
(TCE) partners. VITA/TCE partners shared this information directly with 
their clients, posted information on their web pages and social media. 
Additionally, the IRS incorporated this information in VITA/TCE 
training materials for Filing Season 2022 to assist volunteers with 
---------------------------------------------------------------------------
preparing the returns.

    In 2021, to promote awareness of Advanced Child Tax Credit (AdvCTC) 
and assist taxpayers who were not automatically enrolled to receive 
monthly payments, we hosted AdvCTC events in Taxpayer Assistance Center 
(TACs).

    In 2022, to reach working, lower income taxpayers, those less able 
to take off from work during the week, we provided expanded 
opportunities for face-to-face service beyond normal TAC office hours, 
with an emphasis on refundable credits. We targeted approximately 90 
TACs nationwide to provide expanded services on the second Saturday of 
each month from February through May. During the February, March, 
April, and May events, more than 700 IRS employees volunteered to 
assist nearly 15,000 taxpayers.

    Question. You testified last year that the IRS is ``outgunned'' 
when it comes to auditing large partnerships and the wealthy 
individuals that own them. This is especially concerning given that 
around 70 percent of all partnership income accrues to the top 1 
percent of households. In fact, an individual earning less than $25,000 
a year was 12 times as likely to be audited as a partnership in 2020. 
And to make matters worse, the Treasury Inspector General for Tax 
Administration (TIGTA) found that 78 percent of the IRS's audits of 
these large partnerships resulted in no change at all.

    What changes has the IRS implemented over the past year and what 
changes does it have planned to fix this glaring problem?

    Answer. Several efforts are underway that are dedicated to 
increasing and improving partnership examination coverage. For example, 
we launched the Large Partnership Compliance program (LPC) at the end 
of FY 2021 to support and increase our focus on identifying and 
auditing high risk partnership issues. We've undertaken form 
improvements to get better data and are updating our case selection 
models. The IRS's increased focus on high-income individuals, and the 
entities they control, is another compliance touch point that will 
increase enforcement coverage of partnerships. Also, to support our 
efforts to improve how we audit partnerships, we've recently completed 
a partnership-focused hiring initiative that increased staff of the 
subject matter experts and field agents who examine these returns. We 
have just begun a second round of partnership-focused hiring.

    With respect to TIGTA's audit, the high no change rate reported was 
based on the early results of partnerships subject to the newly 
implemented audit procedures under the Bipartisan Budget Act. They do 
not include the results of closed examinations for the existing 
partnership audit procedures under TEFRA or deficiency procedures. In 
addition, we explained that, generally, the first cases to close each 
tax year are no change cases. It can take several years to close 
partnership returns where we are developing complex issues. Based on 
prior experience, we anticipate that the final no change rate will be 
lower.

                                 ______
                                 
                 Questions Submitted by Hon. Mike Crapo
    Question. As you know, Congress recently made changes to the tax 
code to provide or modify certain refundable credits, including the 
recovery rebate credit (the so-called stimulus check) and the child tax 
credit. Because these are advance credits, they must be reconciled on 
the following year's tax return. The National Taxpayer Advocate and 
others have testified that these reconciliations on 2021 tax returns 
resulted in delays and other problems for millions of taxpayers.

    Please describe how reconciliation of tax credits, including 
advance-paying credits, has impacted taxpayers during the 2022 tax 
filing season, including changes to refund amounts and whether it has 
delayed refunds and the length of such delays.

    Answer. To claim the Tax Year 2021 Child Tax Credit (CTC), 
taxpayers must complete Schedule 8812, Credits for Qualifying Children 
and Other Dependents. If the taxpayer doesn't correctly determine the 
amount of CTC they are eligible to receive based on their 2021 tax 
return, the return cannot be processed and is routed to our Error 
Resolution System. Through the Error Resolution System processing, the 
IRS will correct the amount the taxpayer is eligible to receive and 
continue processing the return. A notice is sent to the taxpayer 
explaining the change to the Child Tax Credit amount and why the change 
was made.

    For Filing Season 2022, the IRS implemented a new tool to 
accelerate the resolution of e-filed returns that include errors such 
as calculating the Child Tax Credit, Earned Income Credit, and the 
Recovery Rebate Credit. The tool resolves these types of errors and 
issues the notice to the taxpayer with minimal human intervention. This 
has greatly reduced the amount of time it takes to process most returns 
with these types of errors on e-filed returns. The automation allows us 
to focus employee resources on paper inventories with the errors or e-
filed returns with more complex issues requiring manual review.

    Question. Comparing individual tax returns for 2021 to 2020, has 
there been an increase in the number of taxpayers who owe tax on their 
returns, so-called ``balance due'' returns? If so, what are those 
figures, including number of taxpayers as well as the dollar amount of 
tax owed?

    Answer. We do not have this information to share at this time.

    Question. Some taxpayers may not be aware that they are required to 
file a tax return this year in order to obtain the second half of the 
child tax credit. Does the IRS have an estimate for the number of 
taxpayers who received the Advance Child Tax Credit payments in 2020 
but who have yet to file their 2021 tax returns?

    Answer. While our data is not updated yet for tax year 2021, we 
estimate approximately 16 million taxpayers have received advance 
payments of the Child Tax Credit in 2021 but have yet to file their 
2021 tax return.

    Question. It has been almost a year since ProPublica announced it 
was in the possession of a huge trove of private taxpayer information. 
I understand TIGTA immediately commenced an investigation, and I 
understand you cannot comment on that ongoing investigation.

    However, the reality is that ProPublica continues to publish what 
it claims is private taxpayer information. As the Commissioner of the 
IRS, it is your responsibility, not TIGTA's, to ensure that all private 
taxpayer information is secure.

    As Commissioner, can you give any assurances to the American 
taxpayers that any vulnerabilities that may have existed in the lead up 
to the initial ProPublica publication have been addressed, or would you 
say that, almost one year later, it is possible that taxpayer 
information is just as vulnerable today as it was a year ago?

    Answer. The IRS is committed to protecting taxpayer data and 
continually works to enhance the security of taxpayer data through 
continual investments in cybersecurity that ensure the IRS aligns with 
Federal guidance and other directives. Due to the mutable nature of 
technology and the challenging environment in the 
government-wide threat landscape, the IRS leverages robust tools and 
technologies to harden the network against unauthorized access. This 
includes collection and review of application and platform security 
audit trails, identity management, provisioning and deprovisioning for 
just-in-time access and expanding coverage of data loss prevention.

    Question. On February 7, 2022, the IRS stated it will ``transition 
away from using a third-party service for facial recognition to help 
authenticate people creating new online accounts [and] [t]he transition 
will occur over the coming weeks. . . .'' As of April 2022, although it 
is one of a few options, the IRS still uses third-party facial 
recognition to authenticate new online accounts.

    When will the IRS follow through with its statement to ``transition 
away from using a third-party service for facial recognition to help 
authenticate people creating new online accounts?''

    Answer. On February 21, 2022, the IRS announced an alternative 
option for taxpayers to choose a non-biometric option to authenticate 
their identity. We no longer require facial recognition to establish an 
online account; eliminating that requirement was the point of the 
statement in February.

    Question. The new alternative to the biometric extraction option, 
has been reported as requiring taxpayers to follow a 17-step process to 
verify their identity. Is there data available the new alternative is 
not an overly burdensome to taxpayers? Is there data available on how 
many people start, but then abandon the alternative to the biometric 
approach?

    Answer. The new alternative verification option is a 7-step 
process. To utilize the live interview feature, taxpayers:

        1.  Navigate to the IRS application login page and select 
        ``Create an account with ID.me.''
        2.  Select the Video Chat Agent option and then select 
        ``Continue.''
        3.  Select ``Get Started'' and follow the prompts to: fill in 
        their personal information; confirm their Social Security 
        number; select identity documents for validation; select the 
        option to take a photo or upload an image of the identity 
        documents; and upload documents (front and back).
        4.  Once documents are uploaded, they are reviewed live by an 
        ID.me Video Chat Agent.
        5.  Taxpayers then receive an email from ID.me inviting them to 
        join a video call with an ID.me Video Chat Agent.
        6.  When prompted, taxpayers select ``Join Video Call to speak 
        with a Video Chat Agent.''
        7.  Taxpayers show the Video Chat Agent their documents, answer 
        a few questions, and complete the verification process.

    For the period February 21, 2022, through December 31, 2022:

          Of those who selected the alternative option and choose to 
        verify on a video call, 43.4 percent upload the required 
        identity documents and attempt to verify.
          Of those who selected the alternative option and submitted 
        approved documents, 88.1 percent successfully verified on a 
        video call.
          Those who are not successfully verified always have the 
        option to retry (e.g., reupload documents, upload different 
        documents, etc.).
          Eight percent of those who choose the alternative option 
        abandon the alternative flow and ultimately verify via the 
        self-service option.

    Question. The IRS's February 7, 2022 press release states it is 
transitioning away from third-party facial recognition. Does this mean 
the IRS might develop its own biometric extracting software?

    Answer. No, the IRS is not developing biometric extracting 
software.

    The original proposal that lead to the biometric extraction 
requirement included a provision where the mobile phone application 
used to submit a selfie could be used to track taxpayers. In 
particular: ``The use of mobile phones is required in order for the 
applicant to complete the IAL2 identity proofing process. Mobile phones 
are used as a piece of identity evidence themselves and to capture 
additional identity evidence (e.g., photo of government issued 
identification document). Geolocation can be gleaned from the Mobile 
Network Operators (MNOs) in the event of an investigation into a 
user.''\4\
---------------------------------------------------------------------------
    \4\ https://www.irs.gov/pub/irs-pia/id-me-pia.pdf.

    Question. What is the IRS's current position on capturing 
---------------------------------------------------------------------------
``additional identity evidence'' through a taxpayer's mobile phone?

    Answer. We have investigated geolocation technology through various 
vendors; however, the IRS does not have a current position or plans for 
capturing this type of evidence.

    Question. In FY 2021, the IRS received about 282 million telephone 
calls. During the same period, robo-calling services emerged allegedly 
using software to deluge the IRS phone lines in order for robo-call 
customers to ``jump the line'' and minimize their hold times.

    Of the 282 million telephone calls, how many were robo-calls?

    Answer. The IRS does not have a technology to definitively detect 
and/or deflect robo-calls. Until a technology solution is procured, the 
only tool the IRS has to assess robo-dialers is historical telephone 
data. Telephone data has its limitations. For instance, telephone data 
may show a call was answered and lasted 60 seconds, but it won't know 
whether the IRS customer service representative (CSR) interacted with a 
human being or if the call was dead air (when no taxpayer paid to skip 
the line, or no company representative was available at the time).

    Furthermore, the technology companies used to contact the IRS make 
a significant difference in our ability to detect and quantify their 
calls. Some organizations use older technology to contact the IRS and 
generally use one or two telephone numbers to reach us. These companies 
have higher call volumes and are easier to detect; others use newer 
technology which uses a variety of different telephone numbers to reach 
us, making it much harder to detect and quantify.

    The IRS is in pursuit of technologies to help detect, quantify, and 
potentially block calls from robo-dialers in real-time. We anticipate 
having a technology solution in Fiscal Year 2023.

    Question. Are robo-calls clogging IRS phone lines?

    Answer. These calls can impact our service delivery if no one 
purchased the space in line or there's no company representative 
available to handle the call when we answer. Customer Service 
Representatives (CSRs) lose valuable time asking whether someone is on 
the line and the call is a missed opportunity for other taxpayers 
attempting to reach the IRS. The systems cause competition for the 
limited resources the IRS uses to queue calls.

    Question. Has the IRS contacted the Federal Communication 
Commission about its possible robo-call problem?

    Answer. The IRS will explore this issue further with the Federal 
Communication Commission.

    Question. Please provide your opinion about the degree robo-callers 
are affecting IRS telephone service.

    Answer. Robo-calls have an impact on IRS call queues, but to what 
extent is unknown until new technologies are procured to help detect, 
quantify, and potentially block robo-calls.

    We sought to counter these companies through various actions. We 
implemented Customer Callback (CCB) in 2020. The CCB solution gives 
taxpayers the opportunity to bypass waiting in queue to instead be 
contacted by the IRS when the next CSR becomes available. We believe 
offering a government opportunity to receive a call back, will deter 
taxpayers or tax professionals from paying for or using other sources 
to hold their position in line when calling. CCB tracks the taxpayer's 
place in line and places a call to the taxpayer which frees up the 
taxpayer to do other things while waiting for the callback.

    We have expanded CCB to cover approximately 70 percent of our toll-
free telephone demand. During Fiscal Year 2022, we have offered this 
option to more than 5.3 million taxpayers, with an acceptance rate 
exceeding 57 percent and a reconnection rate of more than 91 percent. 
We estimate a savings of about 1.7 million taxpayer hours related to 
these efforts. We plan to continue expanding callback with a goal of 95 
percent of our demand provisioned for callback by Fiscal Year 2024.

    We continuously pursue solutions to help distinguish calls made 
from organizations using some form of technology that can impact 
service delivery online or through our phone system. These tools 
require hardware and software investments. Securing funds to deploy the 
necessary hardware and software (targeting 2022 after Filing Season) 
would give us the opportunity to identify and block calls placed 
through auto-dialer technology.

    Question. In your testimony you alluded to a substantial cost to 
the IRS of implementing 2D bar codes as described in the Taxpayer 
Advocate Directive. You also suggested, however, that the President's 
budget would include funds to implement the technology.

    I was unable to locate any line-item reference in the President's 
budget that is focused on implementing 2D bar code technology.

    How much would it cost the IRS to adopt this technology?

    Answer. A caution about the expected benefit from bar codes and OCR 
is that tax law changes enacted by Congress shortly before the filing 
season begins or, as happened recently, during the filing season, 
increase the likelihood of errors. For example, IRS and software 
vendors' ability to respond and produce accurate forms may preclude 
timely inclusion of bar codes or QR codes, resulting in more 
submissions with unreliable codes.

    To improve the efficiency and accuracy of processing paper tax 
returns, the IRS has had several projects ongoing for the past couple 
of years leading to the use of optical character recognition (OCR) or 
2D barcoding. These projects are:

          V-Coded Return Pilot. A V-coded return is when the taxpayer 
        used software to prepare the return, printed the return and 
        mailed it to the IRS. Using a vendor, this pilot was designed 
        to enable remote scanning and validation of Forms 1040 that are 
        V-coded to be submitted using Modernized e-File (MeF). The goal 
        is to accelerate this pilot so it will be scanning tax year 
        2022 Forms 1040 V-coded and Forms 940 and 941 in filing season 
        2023.
          OCR Scanning Service Pilot. This pilot used a third-party 
        contractor's OCR capability to scan Form 940 business returns. 
        The contractor will scan those returns submitted using MeF.
          2D Barcode Pilot. This pilot implemented using 2D bar codes 
        to digitally intake data from Forms 8918 (Material Advisor 
        Disclosure Statement) and Forms 8886 (Reportable Transaction 
        Disclosure Statement). In December 2021 IRS released Form 8918 
        with 2D bar codes. Form 8886 was to follow with production of 
        the 2D bar code form in March 2022. The IRS has received 
        approximately 1,000 Forms 8918 to date of which 253 were on the 
        old paper form and 837 on the new paper forms with 2D bar 
        codes. However, only 78 percent of the 2D bar coded paper forms 
        received were able to be fully read into IRS systems requiring 
        close and ongoing scrutiny of the data. Additional analysis is 
        being performed to assess potential actions to reduce the error 
        rate. Before the IRS can consider using 2D bar codes for Form 
        1040, we need to engage with the software industry to make 
        updates to industry standards to align them with how we intake 
        and process data. The industry would have to agree to provide 
        such code in forms printed after using their software to 
        prepare the tax return. We will start that engagement, develop 
        a plan on how it would work and report back to you with the 
        results. In assessing the pilot results, the final costing 
        would be dependent on the use cases and scope we would 
        ultimately pursue.

    In addition to pursuing scanning, we are also planning to make more 
forms available to be e-filed. We are also reviewing administrative 
policies to determine if changes are possible to make more people 
eligible to e-file.

    We believe that a multi-faceted approach is necessary to address 
the paper inventory that the IRS receives yearly.

    Question. By comparison, how much will the tax preparation industry 
need to spend in order to implement such technology?

    Answer. The IRS does not know the costs the tax preparation 
industry would incur to add bar codes to certain paper returns 
taxpayers file with the IRS. The individual tax preparation companies 
would determine these costs.

    Question. The IRS has hundreds of millions of dollars of unspent 
COVID-19-
related funds specifically allocated to business systems modernization.

    Can the IRS provide any reasons why these funds have not been 
utilized to implement 2D bar codes?

    Answer. The IRS received $1.46 billion from the American Rescue 
Plan, appropriations that expire on September 30, 2023, ``for the 
administration of the advance payments, the provision of taxpayer 
assistance, and the furtherance of integrated, modernized, and secure 
Internal Revenue Service systems.'' As of May 3, 2022, the IRS has 
obligated $683 million: $397 million to administer the third round of 
Economic Impact Payments and provide taxpayer assistance, and $286 
million for IT modernization. Of the remaining amount, the IRS has a 
robust plan in place to obligate the funding by the statutory deadline. 
The IRS will use $430 million to address the unprecedented backlog of 
paper correspondence and paper tax returns that still need to be 
processed. The $284 million remaining for IT modernization will be used 
to address cybersecurity and other critical ongoing modernization work.

    The IRS has implemented a 2D bar code pilot. This pilot implemented 
using 2D bar codes to digitally intake data from Forms 8918 (Material 
Advisor Disclosure Statement) and Forms 8886 (Reportable Transaction 
Disclosure Statement). In December 2021 IRS released Form 8918 with 2D 
bar codes. Form 8886 was to follow with production of the 2D bar code 
form in March 2022. The IRS has received approximately 1,000 Forms 8918 
to date of which 253 were on the old paper form and 837 on the new 
paper forms with 2D bar codes. However, only 78 percent of the 2D bar-
coded paper forms received were able to be fully read into IRS systems 
requiring close and ongoing scrutiny of the data. Additional analysis 
is being performed to assess potential actions to reduce the error 
rate. Before the IRS can consider using 2D bar codes for Form 1040, we 
need to engage with the software industry to make updates to industry 
standards to align them with how we intake and process data. The 
industry would have to agree to provide such code in forms printed 
after using their software to prepare the tax return. We will start 
that engagement, develop a plan on how it would work and report back to 
you with the results. In assessing the pilot results, the final costing 
would be dependent on the use cases and scope we would ultimately 
pursue.

    In addition to pursuing scanning, we are also planning to make more 
forms available to be e-filed. We are also reviewing administrative 
policies to determine if changes are possible to make more people 
eligible to e-file.

    We believe that a multifaceted approach is necessary to address the 
paper inventory that the IRS receives yearly.

    Question. During the hearing it was claimed that the IRS has the 
lowest headcount this year since 1974. Since 1974, however, there has 
been a multifold increase in worker productivity levels due to 
technological and human resources advances.

    Have productivity levels with respect to IRS employees kept pace 
with general worker productivity trends?

    If not, why not? If so, what is the utility of comparing the 
current IRS headcount with its headcount in 1974?

    For example, does the IRS maintain that it needs to have a 
commensurate or better headcount in order to fulfill its mission, and 
if so, why?

    Answer. The IRS is the primary source of funding for the United 
States government and collected more than $4 trillion in gross taxes in 
FY 2021. We make it possible for the government to perform its vital 
functions and be effective on everything from education to defense. But 
as the past 2 years show, we have become more than a tax administration 
agency. We have effectively supported economic growth and recovery 
through issuing three rounds of Economic Impact Payments and 6 monthly 
Advance Child Tax Credit payments, while fulfilling our core mission, 
including delivery of two extended tax filing seasons. This 
unprecedented scope of responsibilities illustrates the significant 
role the IRS plays in the overall economic health of our country. 
Comparing the ratio of net revenue collected to cost of 
administration,\5\ the IRS is among the most efficient national tax 
administration authorities.
---------------------------------------------------------------------------
    \5\ The Organisation for Economic Co-operation and Development's 
Tax Administration 2021 document includes Comparative Information on 
OECD and other Advanced and Emerging Economies. The United States was 
among the 5 most efficient out of 59 countries on their Cost of 
Collection metric. Tax Administration 2021: Comparative Information on 
OECD and other Advanced and Emerging Economies. Read online (https://
read.oecd-ilibrary.org/taxation/tax-administration-2021_cef472b9-
en#page182).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    .epsThe IRS has become more productive since 1974, but the IRS's 
task has also grown significantly. For example, the number of 
individual returns has nearly doubled since 1974.\6\ IRS activities, 
and especially IRS compliance activities, are labor-
intensive. Because of the nature of the IRS's work, fewer staff 
directly translates into reduced access to service and less enforcement 
activity, imperiling the foundation of taxation--voluntary compliance. 
The IRS must visibly enforce the tax laws to maintain high rates of 
voluntary tax compliance. For these reasons, I am concerned that low 
IRS staffing levels are harmful to the Nation's financial well-being.
---------------------------------------------------------------------------
    \6\ Individual returns filed rose from 81.4 million in 1974 to 
157.2 million in 2020.

    In recent decades, the Nation's tax law has become more complex, 
the number of taxpayers has risen, and the size and complexity of the 
U.S. economy has increased significantly.\7\ The chart above shows the 
relationship between individual returns filed and IRS staffing levels. 
Since peaking in 1992, IRS staff has decreased to 1974 levels, while 
the number of returns filed continues to increase. To the extent that 
the IRS has been able to continue to fulfill its mission, this 
demonstrates improved productivity. However, much of the IRS's work is 
inherently labor-intensive, and these reductions have come at a cost--
see example below.
---------------------------------------------------------------------------
    \7\ For example: gross tax collections rose from $269 billion in FY 
1974 to $4.1 trillion in FY 2021, and U.S. GDP rose from $1.5 trillion 
in FY 1974 to $22.4 trillion in FY 2021--roughly a factor of 15 for 
each.

    The IRS's productivity improvement is partially attributable to 
improvements in IRS technology, notably with electronic filing and 
online account services. But technology has experienced underinvestment 
also. Part of the administration's strategy to modernize the tax system 
is to address this underinvestment in IRS information technology.\8\
---------------------------------------------------------------------------
    \8\ The administration described the IRS challenges with compliance 
at length in a white paper: The-American-Families-Plan-Tax-Compliance-
Agenda.pdf (https://home.treasury.gov/system/files/136/The-American-
Families-Plan-Tax-Compliance-Agenda.pdf).

    However, even with improved technology, IRS compliance activities 
involve manual steps. For example, the Automated Underreporter (AUR) 
system can automatically compare the details of a tax filing to 
independently reported information returns and generate notices when 
there are discrepancies. When this happens, taxpayers call or reply by 
letter to the IRS with questions and additional information. IRS needs 
sufficient staff to answer those questions and evaluate the information 
provided to fairly resolve any discrepancies. When IRS lacks the staff 
to respond to the anticipated correspondence, we purposely hold back on 
some AUR cases, knowing we won't be able to answer questions when the 
---------------------------------------------------------------------------
taxpayer calls.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    .epsAnother example is examination--an inherently manual exercise. 
Examining tax returns, and especially complicated tax returns, requires 
corresponding with a taxpayer, reviewing their documentation, and 
assessing the appropriate tax liability. The IRS's ability to conduct 
these examinations is a direct function of the trained staff available. 
It is important to remember that, depending on the type of exams, these 
staff directly generate additional tax revenues of more than $5 for 
every $1 spent. This chart from the FY 2020 IRS Data Book shows the 
effect of dwindling staff on the number of returns the IRS was able to 
examine in the last 10 years. Put simply, fewer staff resulted in fewer 
audits.

    While there is nothing inherently special about 1974, the 
comparison highlights how IRS staffing has failed to keep pace with the 
growth in the U.S. population and economy. I used that comparison to 
illustrate how our staffing levels have regressed significantly, to the 
detriment of the IRS's ability to fulfill its mission of helping 
taxpayers and enforcing the tax law.

    Question. In the hearing, it was insinuated that a key problem the 
IRS faces with respect to its operating budgets is that spending bills 
are sometimes not passed on time and the IRS must operate under a 
continuing spending resolution (CR). Bearing in mind that all agencies 
face similar pressures, what is unique about the IRS that makes 
operating in a CR challenging?

    Additionally, there have been calls for multiyear funding for the 
IRS as a solution to the myriad of problems plaguing the IRS. Other 
agencies, such as the Social Security Administration, have likewise 
called for multiyear funding, which Congress has been highly reluctant 
to grant given that it removes (or diminishes) Congress's oversight 
power.

    What is unique about the IRS such that it requires multiyear 
funding?

    How large a factor does the IRS believe operating under a CR and/or 
not having multiyear funding is in terms of the IRS's ability to 
deliver on its mission?

    Answer. This year's individual filing season started on January 
24th and closed on April 18th. Through April 22nd, IRS processed nearly 
134 million tax returns, issued nearly 89 million refunds--totaling 
more than $267 billion, answered over 20 million calls (through live 
assistance and automation), provided face-to-face services to more than 
434,000 taxpayers, and prepared over 2 million returns through our 
volunteer program. Operating under continuing resolutions (CRs) poses 
challenges to IRS operations, particularly in the Taxpayer Services 
account as we prepare for the Filing Season. A significant amount of 
the activity in this account occurs when most CRs occur, prior to and 
during the 3-month filing season that starts in January. In this 
respect, IRS is different from other agencies whose activities are more 
evenly spread over the fiscal year. Filing and account services--which 
currently make up more than one-third of IRS staffing--must be fully 
staffed and trained by the start of filing season. IRS begins planning 
as early as October prior to Filing Season to ensure we provide the 
service customers expect from the IRS. Each fall, IRS brings on 
thousands of customer service representatives who require several weeks 
of training to be fully ready to provide for taxpayer needs during the 
filing season.

    IRS is a public-facing agency that directly interacts with and 
affects nearly every American taxpayer. Multiyear appropriations will 
allow IRS to carry over a planned amount of funding that would be 
available in addition to the funds allocated during the CR and provide 
IRS the ability to implement multiyear workforce planning and hiring, 
resulting in better service for America's taxpayers. Most hiring is a 
long process in a normal operating environment. Under a CR, hiring is 
put on hold due to funding uncertainty, leaving little time to proceed 
with hiring and spend labor dollars once a budget is passed. In 
addition, the IRS requires large government contracts that may need up 
to 9 months to bid and award before funding expires on September 30th. 
Multiyear funding would allow the IRS to implement its hiring plans and 
complex contracts uninterrupted throughout the year, positioning IRS to 
better meet the needs and expectations of taxpayers through improved 
levels of service and compliance efforts.

    IRS's Business Systems Modernization appropriation is a good 
example of the power of multiyear funding. The 3-year account allows 
IRS to build complex IT modernization plans that span longer than the 
current fiscal year, because funding levels are known beyond September 
30th. Inconsistent funding levels in our 1-year account mean plans need 
to be replanned when funding levels change, leading to both costlier 
projects and delays. IRS requires more consistent multiyear 
modernization funding to bring IRS processing into the modern age and 
away from paper.

    Question. In our February hearing on IRS customer service issues, 
several witnesses made statements with respect to the particular budget 
allocations made by the IRS's budget request. Generally, the IRS's 
budget is allocated among four activity-based accounts: (1) taxpayer 
services, (2) enforcement, (3) operations support, and (4) business 
systems modernization. The requested funding level for each of these 
activities reflects an agency's priorities. Put simply, money is spent 
on the ``important'' activities, and the more funding one activity 
receives, the more important the activity.

    With that as a backdrop, do you believe that the current IRS budget 
request demonstrates that the IRS's top priority is taxpayer service?

    Answer. All initiatives in the IRS's FY 2023 Congressional 
Justification (CJ) are high-priority. Besides continuing our 
enforcement investments, IRS seeks to restore taxpayer services 
activities to a level America's taxpayers expect and deserve, while 
maximizing efficiency and productivity.

    Our FY 2023 request highlights our urgent need to continue 
enhancing the taxpayer experience by providing services that help them 
meet their tax obligations with minimal burden. Another high priority 
in our request is a proposal to improve congressional appropriations 
for support services that house, hire, and equip IRS employees. We 
propose to allocate mission support costs back to the mission 
appropriations--Taxpayer Services and Enforcement--so that when 
Congress seeks to provide resources to the IRS, you are funding both 
the labor and the support costs that make taxpayer services or 
enforcement activities possible.

    Funding Taxpayer Services is critical to successfully delivering on 
our tax administration mission, and remains a high priority. Using the 
appropriated FY 2022 funding level that was not available when the 
administration submitted the Congressional Budget Justification, the 
IRS budget request increases the Taxpayer Services funding level by 
21.8 percent compared to our overall requested increase of 12.0 
percent. This increase in funding, along with the supporting costs 
required in Operations Support for telecommunications, laptops, etc., 
will allow us to dramatically increase Taxpayer Services by answering 
85 percent of incoming phone calls, fully staffing our walk-in sites, 
keeping current with incoming paper correspondence and paper returns, 
and providing the type of taxpayer service that Americans deserve and 
expect. Requesting the largest funding increase for Taxpayer Services 
demonstrates that the IRS considers those activities essential to our 
mission, and among our highest priorities.

    Question. The centralized partnership audit regime is designed to 
streamline IRS enforcement for partnerships subject to its rules, 
including the largest and most complex partnerships which may not opt 
out of the regime. In its March 17th report on the IRS's implementation 
of the centralized partnership audit regime, TIGTA identified that with 
respect to the hundreds of examinations conducted by the IRS under this 
regime between 2016 and 2019 just over 78 percent of the examinations 
overall resulted in no change to tax liability (79 percent when focused 
solely on the audits conducted by the IRS large business and 
international division on the very largest and most complicated 
partnerships). Stated differently, just under 22 percent of these 
audits overall identified any potential noncompliance. With respect to 
audits focused on the very largest and most complex partnerships, no 
change rates have increased year-over-year since enforcement under the 
new regime began. Stated differently, IRS-identified potential 
noncompliance by these partnerships has decreased year-over-year since 
the regime was enacted, including a zero percent identified 
noncompliance rate in 2019.

    Further, TIGTA identified that the IRS on average spent nearly 25 
percent more time working a ``no change'' audit under this regime than 
it spent working a case with the next most time-consuming type of 
disposition.

    There are a number of conclusions that could potentially be drawn 
from these statistics. TIGTA recommended that the IRS take specific 
measures to decrease the high no-change rate. Such recommendations 
would ultimately redirect IRS resources to where they are most 
effective. The IRS disagreed with two out of the three recommendations.

    Given the ``no change'' data TIGTA highlighted in its report, isn't 
it prudent to better understand where the IRS should best devote its 
finite resources in selecting centralized partnership audit cases?

    Answer. We agree it is prudent to better understand where the IRS 
should devote our finite resources. As we explained to TIGTA, we do not 
select returns based on the audit procedures to which a return would be 
subject. We select our work based on the tax compliance risk of each 
partnership tax return.

    There are several efforts underway specifically dedicated to 
improving our efforts to identify partnership compliance risk. For 
example, we recently launched the Large Partnership Compliance program 
(LPC) to identify risk on the largest and most complex partnerships. 
We've undertaken form improvements to gather better data and are 
updating our case selection models. Also, to support our efforts to 
improve how we audit partnerships, we've recently completed a 
partnership-focused hiring initiative that increased staff to both the 
subject matter experts and field agents who examine these returns. We 
have begun a second round of partnership-focused hiring.

    The high no change rate TIGTA reported was based on the early 
results of partnership returns subject to the newly implemented audit 
procedures under the Bipartisan Budget Act. TIGTA's report does not 
include the results of closed examinations for existing partnership 
audit procedures under TEFRA or deficiency procedures. In addition, we 
explained that generally, the first cases to close for each tax year 
are those that are no changed. It can take several years to close 
partnership returns where we are developing complex issues. Based on 
prior experience, we anticipate that the final no change rate will be 
lower.

    Question. In its March 28th report on so-called lien foreclosure 
collections actions,\9\ TIGTA identified that with respect to primary 
residences--that is, a taxpayer's home--the IRS used lien foreclosures 
far more often than it did comparable levy collection actions, 88 
percent of the time to 13 percent. As you know, levy collection actions 
provide affected taxpayers many rights and protections that lien 
foreclosures do not. TIGTA recommended that the IRS work with Treasury 
to develop a legislative proposal to ensure that the protections 
applicable to levy collection actions are likewise available for lien 
foreclosures.
---------------------------------------------------------------------------
    \9\ https://www.treasury.gov/tigta/auditreports/2022reports/
202230026fr.pdf.

    The IRS disagreed with this recommendation, arguing that lien 
foreclosures adequately protect taxpayer rights despite lacking many of 
the taxpayer-friendly features of levies (such as full, as opposed to 
limited, judicial review). The IRS also noted that in any case making 
---------------------------------------------------------------------------
these changes would benefit few taxpayers.

    I'm somewhat concerned with this response. There are a variety of 
circumstances where the IRS believes lien foreclosures should be 
utilized, including situations where the statute of limitations for 
collections actions is fast approaching. Troublingly, on this point 
TIGTA identified that often IRS delays in either working the collection 
action--or worse still, delays in the case being picked up by IRS 
collections in the first instance--at least contributed (if not caused) 
the looming deadline.

    Does the IRS have any substantive objections to taxpayers being 
provided the same rights and protections in lien foreclosures that they 
have with respect to levies?

    Answer. Taxpayers are offered similar protections with a lien 
foreclosure as with an administrative seizure. While these tools serve 
different purposes and are used in different circumstances, the IRS 
forecloses a lien on a principal residence only as a last resort, after 
taxpayers are offered numerous opportunities to resolve their tax 
liabilities. Taxpayers are afforded numerous rights and protections 
throughout the foreclosure process, prior to and during litigation. For 
example, Collection Due Process rights are granted with both enforced 
levy action and Notice of Federal Tax Lien filings.

    The IRS provides administrative protections in lien foreclosure 
cases. Federal law protects taxpayer rights through a neutral third-
party, a district court, with broad equitable powers to review the 
merits of all claims before ordering a sale.\10\ Before initiating 
foreclosure on a principal residence, the IRS must consider the same 
precautions as those required for seizures of principal residences. 
Specifically, the IRS must attempt to contact the taxpayer and consider 
other payment options. Also, when the taxpayer indicates that 
foreclosure on a principal residence may create economic hardship, the 
IRS must consider the taxpayer's ability to secure future housing, 
assist the taxpayer in completing the Taxpayer Advocate Service (TAS) 
assistance request, and forward the request to TAS. These actions occur 
prior to recommending a foreclosure suit on a principal residence to 
the Office of Chief Counsel and the Department of Justice.
---------------------------------------------------------------------------
    \10\ United States v. Rodgers, 461 U.S. 677 (1983).

    The IRS cannot administratively levy and sell a principal residence 
where the tax liability belongs to one of multiple owners, if the 
person liable for the tax debt has only a beneficial interest in the 
property or, where the person liable for the tax fraudulently transfers 
the property away. These reasons are the most likely cause for pursuing 
---------------------------------------------------------------------------
foreclosure on a principal residence.

    A court must resolve who has what interest in the property. 
Although taxpayers do not have a right of redemption in the lien 
foreclosure process, we have seen only about 5 percent of taxpayers 
take advantage of the right of redemption in the levy process. Further, 
the possibility of redemption lowers the sale price of the property in 
the levy process. Consequently, lien foreclosures result in more tax 
liability being satisfied, benefiting both the taxpayer and the United 
States.

    Question. Particularly given the role the IRS itself has to play in 
some instances in the need to use a lien foreclosure at all, does the 
IRS agree it would be a more ``fair'' outcome for taxpayers to have 
those same protections regardless of the collections approach?

    Answer. As TIGTA's audit report acknowledged, the IRS reviewed the 
imminent collection statute expiration date (CSED) lien foreclosure 
cases. Based on our review, we implemented steps to improve our 
processes in imminent CSED cases. To avoid missing time frame 
deadlines, we agreed to remind our employees to take timely actions in 
these cases and reassign cases when practicable.

    When enforcement action becomes necessary, we evaluate a variety of 
factors and circumstances to determine the most appropriate course of 
action. We use the appropriate collection device based on the facts of 
each case. Despite the difference in processes, the IRS has policies 
and procedures for each collection tool to ensure taxpayers' rights are 
protected.

    The IRS's mission is to provide America's taxpayers top-quality 
service by helping them understand and meet their tax responsibilities, 
while applying the tax law with integrity and fairness to all. We 
strive to comply with the law and protect taxpayer rights throughout 
the collection process, including cases requiring administrative 
seizure or lien foreclosure.

    Question. Does the IRS agree that the implementation of the 
Schedules K-2 and K-3, including complicated instructions such as the 
January 18th and April 12, 2022 updated FAQs, as well as the lack of a 
timely efiling option, is making (and has made) this filing season more 
difficult than it needs to be?

    As further background for this, National Taxpayer Advocate Erin 
Collins called paper the IRS's kryptonite, and there is currently a 
tremendous backlog of tax returns and correspondence. Notwithstanding, 
the IRS decided to push out two complex 39-page schedules that are 
possibly required to be filed by millions of pass-through entities. 
There is no statutory mandate to implement these forms for this tax 
filing season. Despite considerable discussion in the tax community, 
many practitioners continue to wonder:

    Who of my constituents has to actually file these forms?

    Whether the IRS will accept these forms in an electronic format?

    As you are aware, in some instances my constituents are being 
required to manually pull their financial data and handwrite the 
information to properly complete these schedules.

    How is this prudent for the American public?

    Answer. The Schedules K-2 and K-3 replaced existing required 
reporting on the Schedules K and K-1 and attached statements and 
footnotes. The Schedules' standardized reporting format will clarify 
reporting obligations for partners and flow through investors, 
ultimately easing flow through return compliance.

    The Schedules K-2 and K-3 are completed by flow through entities 
that have relevant international items, as provided in forms, 
instructions, and FAQs. See specifically FAQs 1-4 for additional 
background on the benefits and reasons for the Schedules K-2 and K-3. 
The IRS has taken steps to limit and clarify filing and reporting 
requirements suggested by taxpayer comments and feedback. See 
specifically FAQ #15. Completion and filing Schedules K-2 and K-3 does 
not impact or relate to the IRS's backlog issues. Flow through entities 
have been filing the Schedules K-2 and K-3 via PDF without issue. In 
addition, the MeF/XML filing capability for the Form 1065 became 
available on March 20, 2022. Finally, Notice 2021-39 provides penalty 
relief to those who make a good faith effort to comply with the new 
schedules for tax year 2021.\11\
---------------------------------------------------------------------------
    \11\ See FAQ #10 and IRS Notice 2021-39, https://www.irs.gov/pub/
irs-drop/n-21-39.pdf.

    Question. I understand that the IRS will be releasing a new 
---------------------------------------------------------------------------
estimate of the tax gap this summer.

    Will your estimate focus on ways to better understand the various 
factors that contribute to taxpayer errors and omissions, particularly 
on tax returns that are completed by individual income tax filers?

    Answer. The methodology for the new TY 2014-2016 tax gap estimates 
is similar to the approach used for our prior estimates. The tax gap 
methodology reports estimates by type of tax (e.g., individual or 
corporate) and whether the gap is the result of nonfiling, underpayment 
or underreporting. The data underlying the tax gap analysis is not 
granular enough to identify factors contributing to taxpayer errors and 
omissions. As part of our tax gap estimates, we publish individual 
income tax underreporting tax gap amounts. We also use the net 
misreporting percentages for certain line items from the individual 
income tax return. Outside of the tax gap framework, IRS has ongoing 
research to better understand line-item anomalies that may provide 
insight into factors contributing to errors and omissions on returns.

    Question. For example, will the study include an analysis of tax 
errors and/or fraud by method of preparation, such as those using an 
unregulated preparer?

    Answer. The current tax gap estimates do not include an analysis of 
errors or fraud by method of return preparation. This type of analysis 
may be conducted in the future, depending on agency priorities and 
resource availability.

    Question. Do you agree that trying to determine which methods of 
filing are subject to greater rates of error and/or fraud could have 
value as Congress and the IRS formulate new approaches to close the tax 
gap?

    Answer. The IRS agrees that determining which methods of filing are 
subject to greater rates of error and/or fraud is valuable for 
formulating new approaches to address noncompliance. One study the IRS 
conducted focused on the overclaim rates for refundable tax credits by 
tax preparation method. In general, this research shows the overclaim 
rates on returns done by paid preparers are slightly lower than self-
prepared returns. Further research would need to be conducted to 
determine root causes for the overclaim rates.

    Question. Does the IRS believe that so-called ``ghost preparers'' 
contribute to the tax gap and if so, is the IRS aware of how much they 
do?

    Answer. The IRS uses the term ``ghost preparers'' to refer to 
individuals who complete tax returns on behalf of their clients without 
providing the required information to indicate the return was prepared 
by someone other than the taxpayer. Prior research and worked cases 
show that ghost preparers frequently add overstated or fraudulent 
credits to tax returns to inflate the refunds issued to the taxpayers, 
while usually not including the compensation the ghost preparer 
received for preparing the return. One ghost preparer can be 
responsible for the submission of hundreds of bad returns. In some 
cases, the fraud is unknown to the ghost preparer's clients. To that 
end, ghost preparers can contribute to the tax gap in various ways 
including: failing to report or underreporting income earned from any 
return preparation; filing fraudulent returns that yield refunds; and 
claiming deductions that the taxpayers are not entitled to claim.

    The IRS continues to refine our processes and develop tools to 
identify ghost preparers and the returns they prepared. The IRS uses 
data and research methods to identify commonalities and shared 
characteristics of ghost preparers. Although we can stop a large 
percentage of suspicious returns using filters, the size of the ghost 
preparers' contribution to the tax gap cannot be confirmed. The IRS has 
initiated a research study to help identify ghost preparers with 
preliminary results expected in FY 2023. Leveraging these results, the 
IRS will test potential enforcement treatments in FY 2023 and 2024.

    Question. Does the IRS currently possess data that could shed light 
into how these ghost preparers are able to circumvent the current rules 
and regulations?

    Answer. There are minimal rules and regulations for Federal tax 
return preparers related to the preparation and submission of tax 
returns. To prepare a return for compensation, the preparer must be 18 
years old and have a valid Preparer Tax Identification Number (PTIN). 
Paid tax return preparers must include their PTIN on taxpayer returns.

    Ghost preparers generally fail to provide any or all of the 
required identification information in the paid preparer block on the 
taxpayer's return. The taxpayer's return appears to be self-prepared. 
There may be indicators that the return was not self-prepared, but the 
return belongs to the taxpayer, not the preparer. Unless there are 
specific indicia of fraud on the return, the IRS must process the 
taxpayer's return as there is no requirement that a taxpayer use a paid 
preparer or report to the IRS that a paid preparer was used in the 
completion of the return.

    Ghost preparers often use commercially available software or file 
the returns on paper. While using these filing methods makes it 
difficult to distinguish between legitimate taxpayer-filed returns and 
ghost-prepared returns, some ghost preparers use repeating patterns. By 
searching for these patterns in the data, the IRS has been able to find 
certain returns that appear to have been created by ghost preparers.

    Question. Do you agree that this tax gap estimate, and future tax 
gap estimates, should attempt to quantify how ghost preparers impact 
the tax system and specifically the tax gap?

    Answer. Compliance studies outside of the framework of the tax gap 
methodology are a better approach to quantify the impact of ghost 
preparers on the tax system because they would yield more detailed 
information, allowing for a better understanding of the scope of the 
problem and identification of potential mitigations to the problem. 
That said, regulation of paid tax return preparers would provide the 
most benefit to the tax system and may have a comparable impact on the 
tax gap. A more competent tax return preparer community allows the IRS 
to better distinguish preparers in need of additional outreach and 
education from preparers intent upon defrauding the tax system and to 
apply the appropriate resources accordingly. Without greater oversight 
of paid tax return preparers, the impact of ghost preparers on tax 
administration and the tax gap will continue to be a non-specific 
estimate.

    Question. Will the IRS accept the National Taxpayer Advocate's 
recommendation to exercise its authority under section 7508A to 
postpone the 2-year period for filing a refund suit in a U.S. district 
court or the Court of Federal Claims for up to 1 year for all notices 
and claim disallowances mailed within the last 2 years? If not, why 
not?

    Answer. This would be novel application of the IRS's authority 
under section 7508A. In a typical disaster relief situation, the IRS 
can postpone the time for filing a refund suit if taxpayers are 
affected by a federally declared disaster. In this situation, the IRS 
is affected by a disaster in the sense that pandemic-related backlogs 
could delay our ability to administratively process taxpayers' cases 
before the 2-year period to file a refund suit expires. There is no 
federally declared disaster preventing taxpayers from timely filing 
refund suits to protect their rights, and taxpayers do not need to wait 
for the IRS before doing so. Taxpayers who filed a timely claim for a 
refund but haven't received a written response from the IRS within 6 
months can file suit in the appropriate district court or the Court of 
Federal Claims. The National Taxpayer Advocate's recommendation to 
apply section 7508A in this manner is not something the IRS has 
previously contemplated and would require Treasury approval.

                                 ______
                                 
              Questions Submitted by Hon. Robert Menendez
    Question. Over the past 20 years, the IRS has provided an 
administrative waiver of penalties, including for late-filing 
penalties, late-payment penalties, and failure-to-deposit penalties, to 
taxpayers who have been tax compliant for the previous 3 years or who 
have not previously been required to file a return. This procedure is 
referred to as ``first-time abatement.'' This is an important tool for 
taxpayers who have an isolated filing or payment compliance issue, but 
it can only be used once every 3 years. Reasonable cause penalty 
waivers, on the other hand, are granted based on a facts-and-
circumstances test where taxpayers spell out their situation and try to 
prove how they exercised ordinary business care and prudence. In 2020, 
when taxpayers and their advisers were struggling with COVID-related 
health issues, new childcare arrangements, and work concerns, tax 
practitioner groups argued that reasonable cause penalty relief should 
be based on COVID impacts and that the IRS should consider a special 
one-time COVID-related first-time abatement. As this tax filing season 
continues, millions of unprocessed pieces of taxpayer correspondence 
remain and most taxpayers are unable to reach the IRS by phone.

    Are you considering allowing taxpayers to qualify for ``reasonable 
cause relief'' due to the impacts of the pandemic and backlog? If so, 
would the IRS implement such relief in a way that would ensure 
taxpayers are not required to request relief by writing to the IRS?

    Answer. On August 24, 2022, the Internal Revenue Service issued 
Notice 2022-36 granting penalty relief to most people and businesses 
who filed certain 2019 or 2020 returns late.

    The IRS is also taking an additional step to help those who paid 
these penalties already. Nearly 1.6 million taxpayers will 
automatically receive more than $1.2 billion in refunds or credits. 
These payments were completed by the end of September.

    This relief applies to forms in both the Form 1040 and 1120 series, 
as well as others listed in Notice 2022-36. To qualify for this relief, 
any eligible income tax return must have been filed on or before 
September 30, 2022.

    Question. The IRS has faced longstanding challenges in its hiring 
capabilities due to pandemic-related challenges and competition with 
the private sector. You noted that the IRS is seeking to hire for 5,000 
vacant positions this year and that the IRS has made 2,500 conditional 
offers. However, the agency has fallen short of this goal, only hiring 
about 3,805 new employees to date. Your testimony did not distinguish 
between the two categories of jobs the IRS is seeking to fill to reduce 
the backlog: submission processing and accounts management. According 
to the National Taxpayer Advocate, Erin Collins, submission processing 
positions are considerably more difficult to fill as employees must 
reside near one of the IRS submission processing centers in Ogden, 
Kansas City, or Austin, and are not eligible for remote work. Even with 
the recently secured direct hiring authority, the IRS still faces 
systemic barriers to hiring employees, compounded by the fact that 
52,000 employees are expected to retire or leave the agency over the 
next 6 years.

    Can you provide a breakdown for the submission processing and 
accounts management positions the IRS is seeking to fill, and how many 
positions in each respective category have been filled thus far? 
Accordingly, how does the IRS plan to hire for these more difficult to 
fill submission processing positions? Does the IRS's hiring strategy 
for in-person positions differ from easier-to-fill accounts management 
positions?

    Answer. Since March 2022, the IRS's hiring strategy has focused on 
filling 5,000 Clerk and Tax Examiner (TE) positions for Submission 
Processing for FY 2022. As of August 31, 2022, Submission Processing 
has filled 2,987 Clerk/TE positions (i.e., applicants have accepted 
firm job offers or have onboarded). In addition, 1,428 applicants 
accepted tentative offers and are in the onboarding process. To help 
fill additional positions to meet the Submission Processing goal, the 
IRS held Direct Hiring events in Austin (March 24th/25th, May 11th/12th 
and June 21st/22nd), Ogden (March 31st/April 1st, May 25th/26th and 
June 29th/30th), Kansas City (March 18th/19th and June 7th/8th), 
Philadelphia (August 10th), Memphis (August 18th), and Brookhaven 
(August 25th).

    Hiring for 5,000 Customer Service Representative (CSR), Clerk, and 
TE positions in Accounts Management began in June 2022 in preparation 
for the FY23 Filing Season. As of August 31, 2022, Accounts Management 
has filled 3,503 positions. In addition, 4,129 applicants accepted 
tentative offers and are in the onboarding process. Direct Hiring 
events began in June 2022 and were held in Andover (June 1st), Atlanta 
(June 2nd/3rd), Philadelphia (June 14th and August 10th), Fresno (June 
16th/17th), Cincinnati (June 22th/23th), Memphis (August 18th), 
Guaynabo, PR (August 19th), and Brookhaven (August 25th). Applicants 
began onboarding August/September 2022 (CSR) and into October 2022 
(Clerks/TE).

    Question. You have stated on multiple occasions that the IRS will 
be ``healthy'' by the end of calendar year 2022. When discussing 
taxpayer customer service with Senator Toomey, you state that 
``healthy'' is viewed in the eyes of the taxpayer. You also mention 
that historically, the target has been around 70 percent in terms of 
level of telephone service.

    Could you define what you consider to be a ``healthy'' amount of 
backlog at the IRS?'' Please specify what the threshold is for number 
of outstanding returns and pieces of taxpayer correspondence that 
adheres to your standard for a ``healthy'' agency.

    Answer. While addressing unprecedented backlogs of correspondence 
and unprocessed paper returns, the IRS delivered a successful 2022 
filing season processing over 140 million individual returns and 
issuing over 96 million refunds for over $292 billion thru May 20, 
2022.

    Healthy projected inventories vary by function. In our Submission 
Processing function, healthy inventory for individual paper returns 
waiting to be processed is about 100,000; business paper returns 
waiting to be processed is about 500,000; returns in our Error 
Resolution System, Rejects, and Unpostables is about 900,000; and Form 
1040-X amended returns is about 30,000. In our Accounts Management 
function, healthy inventory would be about 1,000,000, which includes 
amended individual 1040-X returns, amended business returns, tentative 
net operating loss carryback claims, individual and business general 
correspondence, and internal account maintenance.

    To achieve this goal of getting healthy, we created surge teams of 
experienced employees to focus on reducing the volume of paper returns 
and correspondence. Additionally, we are concentrating on hiring 10,000 
new employees, using direct hiring authority, and holding job fairs, as 
well as offering financial incentives. We are also developing and 
improving automated tools to better manage our resources and assist 
taxpayers, such as voice and chat bots, and a new automated tool that 
is closing error resolution cases.

                                 ______
                                 
               Questions Submitted by Hon. John Barrasso
    Question. Many of the issues the IRS currently faces, such as the 
paper backlog, slow processing times, and errors, are a result of the 
number of paper returns the IRS receives. Decreasing the amount of 
paper filings could alleviate some strain on the IRS's resources and 
result in better service for taxpayers.

    Despite the many incentives to file electronically, a good number 
of paper filings occur because the IRS does not accept some forms in 
digital format. Some forms cannot be e-filed. Even among those forms 
recently converted to digital, some are still manually processed. For 
example, in 2021, the IRS received 3.6 million amended individual tax 
return forms. If the IRS could automatically process these 3.6 million 
forms, processing delays would be significantly decreased.

    What is the agency's plan for expanding electronic forms and 
electronic filing?

    Answer. All IRS forms are available electronically, but not all 
forms can be filed electronically. Generally, electronic filing helps 
reduce errors and speed processing. Nearly all individual tax returns 
are available to be filed through the Modernized Electronic Filing 
(MeF) system. A small number of forms remain paper based. Adding these 
paper-based forms to the existing technology platform (Modernized 
eFile) requires funding. If fully funded, the IRS could dedicate the 
necessary resources to modernizing the Individual Master File and 
providing more digital options. Generally, the IRS considers which 
forms are the best candidates for MeF based on their volume and the 
ongoing cost of development and maintenance. Almost 94 percent of 
individual tax returns were filed electronically in FY 2021.

    Along with the funding requested in the President's FY 2023 budget 
request, we are also asking for Congress's help with legislation in 
several important areas to improve tax administration, including 
expanded authority to require electronic filing for forms and returns. 
The proposal requires electronic filing for taxpayers reporting larger 
amounts or complex business entities meeting certain thresholds. The 
Secretary would also be authorized to determine which additional 
returns, statements, and other documents must be filed electronically 
to ensure efficient administration of the internal revenue laws without 
regard to the number of returns that a person files during a year.

    The IRS continues to add new electronic forms and increase the 
availability of electronic filing for taxpayers. Funding and resources 
drive IRS priorities and determine the scope of electronic forms that 
can be completed in any given year. We are working on a solution for 
external stakeholders to submit web-based, adaptive forms to improve 
the taxpayer experience and streamline internal processing of forms 
that are currently only available for paper filing. These adaptive 
forms will generate 2D bar codes for stakeholders that choose to print 
and mail them, to allow faster and more accurate electronic data 
conversion.

    Question. The IRS began the 2021 filing season with roughly 8 
million unprocessed taxpayer returns from 2020, a number substantially 
higher than previous years. While the IRS was facing this large 
backlog, Congress passed the American Rescue Plan Act during the middle 
of last year's filing season.

    The bill required the IRS to implement major new policy changes and 
greatly expanded its role beyond that of a revenue collection agency. 
It required the IRS to do all of this during the middle of a filing 
season while still working out from under the backlog of 2020. This 
delayed refunds for people who were just trying to follow the law and 
pay their taxes.

    Can you identify the challenges created by such changes during the 
middle of the filing season and the impact they have on taxpayers?

    Answer. The IRS is an administrative agency and will take steps to 
deliver whatever is asked of us. If Congress enacts legislation, IRS 
employees will move quickly to implement it, as we did with major 
provisions of the Coronavirus Aid, Relief and Economic Security Act, 
COVID-Related Tax Relief Act of 2020, and the American Rescue Plan Act.

    The combination of the pandemic, new tax laws and numerous other 
factors led to an unprecedented amount of unprocessed tax returns and 
correspondence remaining in the IRS inventory during 2021.

    Passing sweeping legislation in the middle of the filing season, 
especially one in which a global pandemic, has driven historic taxpayer 
demand, creates serious challenges to our front-line employees. Most of 
our yearly employee update training occurs prior to the filing season 
starting and late legislation cannot be immediately implemented by the 
frontline IRS employee as it must first be translated into procedures 
for employees to follow. Once procedures are created, training must be 
developed and delivered while systems are being updated for use. The 
extent of the changes needed are dependent on the complexity of the 
legislation.

    With the current backlogs of inventory and the level of service on 
our toll-free lines, many taxpayers have been unable to get an 
appointment and have chosen to walk into the Taxpayer Assistance 
Centers (TACs) which creates challenges for our TAC staff. We had an 
approximately 200 percent increase in appointments scheduled for filing 
season 2022 compared to filing season 2021.

    From a tax forms and publishing standpoint upon enactment of COVID-
related legislation, like the American Rescue Plan Act, we had to 
immediately send messages to taxpayers and software companies about how 
to use existing forms to claim the unemployment exclusion, and how to 
report on returns the Suspension of Repayment of Excess Advance Payment 
of the Premium Tax Credit (PTC). We had to retroactively update our 
instructions for tax year 2020, after we had already started updating 
tax year 2021 products. 2021 forms had to be updated to reflect all the 
new provisions, which was a significant undertaking, and then undo 
those changes because most were only for one tax year. This led to 
instructions and publications being delayed for release to printing and 
electronically for taxpayers.

    The IRS pursued significant actions during the 2021 filing season 
to address the return and correspondence inventory. Due to resource 
limitations and numerous unique factors tied to new legislation and the 
pandemic, we entered the 2022 filing season with a significant 
inventory of unprocessed returns and correspondence.

    We continue to balance multiple unprecedented demands, including 
continuing the filing season and work on important new tax provisions. 
We remain focused on numerous taxpayer-related issues, and we have 
pursued innovative ideas and processes not previously deployed by the 
IRS to make improvements to the current inventory and provide 
meaningful taxpayer services.

                                 ______
                                 
               Questions Submitted by Hon. Sherrod Brown
    Question. In 2021, more than 2,800 VITA sites--many still dealing 
with the ongoing ramifications of COVID-19--prepared nearly one million 
returns generating more than $1.7 billion in refunds to lower-income 
families. Impressively, VITA sites maintained a 96-percent accuracy 
rate--the highest in the industry.

    Still, there is room for this model private-public partnership to 
grow. Our office, along with other Senate offices, are pushing to 
increase VITA funding from $30 million in FY 2022 to $45 million in FY 
2023. Funding VITA at $45 million would help programs grow tax credit 
outreach, increase capacity to file virtual returns, and build needed 
support of low-income tax filers due to decreased IRS capacity.

    What additional steps is the IRS taking to increase the good work 
and efficiency of this critical program?

    Answer. While the IRS would be grateful to receive additional 
Volunteer Income Taxpayer Assistance and Tax Counseling for the Elderly 
(VITA/TCE) funding, we also need additional funding for infrastructure 
improvements and additional staffing. Increasing grant funding without 
a corresponding increase in staff may be challenging.

    The IRS continues to focus on the growth of the VITA/TCE programs. 
In response to the pandemic, we offered VITA/TCE partners alternatives 
to the preferred face-to-face tax preparation service model, including 
drop off/pick-up, combination (in-person and virtual) and 100-percent 
virtual. These alternative service options will continue to be 
available to VITA/TCE partners to serve their communities. 
Approximately 9,000 VITA/TCE sites provided free tax preparation 
services during Filing Season 2022, filing slightly more than 2 million 
returns with a 96-percent accuracy rate. Additionally, the IRS 
implemented a more streamlined volunteer recruitment process. Potential 
volunteers can go through the IRS.gov portal to attend one of multiple 
volunteer orientation sessions. The volunteers are then paired with a 
partner/site in their local community.

    Question. Revenue Procedure 2022-12, authorizing simplified filing 
for TY 2021, mentions the EITC, but requires filers to provide their W-
2 data in order to claim the credit. Why are simplified filers required 
to provide this data, when the IRS already receives W-2 data from 
employers, and low-income populations struggle to access their tax 
documents? Specifically, why is it not possible to calculate EITC 
payments later in the year, after the initial crunch of tax season, and 
issue EITC as plus-up payments in a batch job later in the summer or 
the fall--much like the IRS issued plus-up EIPs throughout 2020? What 
resources would it take for the IRS to do such automation?

    Answer. Unlike the Economic Impact Payments (EIPs), the Earned 
Income Tax Credit (EITC) has an earned income requirement, in addition 
to other eligibility requirements (with respect to qualifying children 
and otherwise) to which a taxpayer must attest when claiming the EITC 
on the return. Unlike the EITC, the EIP required the IRS to make 
advance payments and specifically authorized the IRS to rely on 
information in prior year returns. While the IRS could, in theory, 
estimate the taxpayer's earned income and adjusted gross income from 
the filer's W-2 information to adjust the amount of EITC claimed on a 
return and make a ``plus-up'' payment based on W-2 information not 
reported on the return, such a program could lead to improper payments 
of the EITC because the W-2 information submitted to the IRS may not 
provide a complete picture of the taxpayer's earned income and adjusted 
gross income. The IRS must calculate separate totals to determine both 
credit eligibility and the correct credit amount.

    Other items of income, such as gig income, may not be reported to 
the IRS. Even gig income and other non-employee compensation reported 
to the IRS by third parties can't just be added to earned income 
because the amount reported is a gross payment that does not take into 
account any offsetting expenses that offset the payments if included in 
gross income and earned income. Including gross amounts of gig economy 
and other non-employee compensation payments may result in inflated 
self-employment tax liabilities for the taxpayer.

    Additionally, the IRS currently notifies taxpayers who appear 
eligible for EITC and fail to claim it on their return. These taxpayers 
will generally receive a CP 09 or CP 27 Notice inviting them to submit 
their information to determine eligibility for the EITC. The taxpayer 
must claim the EITC so that they can attest to the fact that they both 
qualify for the credit (for example, that their qualifying children 
satisfy the relationship and residency requirements), and that they 
want to receive the refundable credit, in addition to establishing the 
earned income and other computational requirements for EITC. Further, 
some taxpayers intentionally decline to claim the EITC despite meeting 
the eligibility requirements, due to religious objections or other 
sincerely held beliefs.

    Question. When during the year does the IRS have W-2 data available 
for use? When during the year does the IRS begin using its W-2 data for 
enforcement actions? When during the year does the IRS have 1099 data 
available for use? When during the year does the IRS begin using 1099 
data for enforcement actions, or for the Automated Underreporter 
Program?

    Answer. The Protecting Americans from Tax Hikes (PATH) Act of 2015 
accelerated the due date of the Forms W-2 and the Form 1099-MISC for 
non-employee compensation to January 31st. The IRS starts receiving the 
Forms W-2s from the Social Security Administration (SSA) in early 
January. The information is provided to the IRS within days of receipt 
at the SSA. The Form W-2 information is consumed by IRS systems, 
including the Return Review Program (RRP), and available for our 
identity theft and non-identity theft filters. During the filing 
season, the IRS consumes Form W-2 information on our systems daily. We 
leverage the earlier availability of Form W-2 data to systemically 
verify information reported on taxpayers' returns against third-party 
information reporting daily and release the returns that verify.

    In a pre-refund environment, using the Form W-2 reduces improper 
payments and reduces taxpayer burden, if the income reported on the 
return matches the information reported by the employer. The refunds 
are released once the wages/
withholding are verified. The IRS leverages the Form 1099-Miscellaneous 
for non-employee compensation or the Form 1099-NEC as an indicator the 
taxpayer is acting as an independent contractor or self-employed. This 
information reduces the risk that a taxpayer may submit a false or 
bogus Schedule C to claim refundable credits to which the taxpayer may 
not be entitled. If there is withholding included on the Form 1099, the 
withholding will be verified. If there is an unresolved discrepancy 
within tolerance, the taxpayer may be contacted with a proposed 
adjustment to income, withholding, and/or refundable credits in our 
Automated Questionable Credit Program or Withholding Only claim 
disallowance program.

    Both W-2 and Form 1099 data become available in late July for post 
processing compliance. This is when the Automated Underreporter Program 
begins the process of matching filed tax returns to information 
returns, such as the W-2 and Forms 1099 series. This is also the time 
when the data is available for field examiners for use in their open 
audits.

    Question. The IRS has implemented a procedure to automatically 
correct EIP3 and advance payment amounts reported by taxpayers.

    When was this process implemented?

    Answer. The tool was released and started live production on 
January 18, 2022.

    Question. How does this process work, and how quickly does it make 
corrections?

    Answer. Incoming electronic returns are sorted according to the 
errors specified in the tools programming, known as FixERS. Those 
returns are processed through the FixERS tool which resolves the errors 
using return information and IRS records. The program assigns a code 
resulting in a letter sent to the taxpayer explaining the automated 
corrections to the tax return. The tool processes electronically filed 
returns at an approximate rate of 1,000 returns per hour.

    Question. Are there any situations in which the automated process 
does not work?

    Answer. There are cases that the FixERS tool can't resolve. When 
the tool encounters a return that exceeds the boundaries of its 
programming, it refers the return for manual review.

    Question. How frequently and why?

    Answer. Approximately 3 percent of electronically filed returns 
processed through the FixERS tool are not resolved by the tool due to 
additional errors found on the return exceeding the boundaries of the 
FixERS programming. The 3 percent are suspended for manual review.

    Question. Has this process been communicated to taxpayers?

    Answer. General tax return correction processes and procedures 
(i.e., Internal Revenue Manuals) are available to the public on 
IRS.gov.

    In addition, I publicly shared use of the automation tool with the 
House Ways and Means Oversight Subcommittee on March 17, 2022 during my 
testimony on the 2022 filing season.,

    Question. If the amounts are automatically corrected, why are 
taxpayers still required to report their own advance payment amounts?

    Answer. The American Rescue Plan Act, subtitle G, Part I, 2021 
Recovery Rebates to Individuals, and Part II--Child Tax Credit, allows 
advance refunds of the Recovery Rebate Credit and Child Tax Credits as 
credits against income tax.

    Adjusted gross income (AGI), and dependents used for eligibility 
and calculation of total tax and credits the taxpayer reports may 
differ from information in IRS records. Additionally, the taxpayer may 
experience life changes not known to the IRS at the time of the advance 
payment, such as a marriage or birth of a child.

    Question. Can the IRS similarly use automation to utilize other 
data held by the agency, including income data for purposes of 
calculating credit amounts?

    Answer. We are exploring areas of expansion for use of similar 
automation tools.

    The IRS is authorized to use income information in its possession 
to calculate the amount of a credit a taxpayer is entitled to receive 
when the credit is based on the taxpayer's income. If the taxpayer 
understates or overstates their income, and the correct calculation 
results in an increase in tax, or a reduction of the refundable credits 
the taxpayer has already claimed, the IRS may issue a notice of 
deficiency to the taxpayer to adjust the amount of tax or credit. The 
Internal Revenue Code provides authority to adjust a math error, 
instead of requiring a notice of deficiency.

    The IRS also has authority to reduce the amount of tax reported on 
the return when the amount is overstated. Similarly, if the amount of a 
tax credit the taxpayer claimed is understated, the IRS is authorized 
to issue a refund to the taxpayer when it determines there is an 
overpayment (which can occur when a tax return understates refundable 
credits).

    However, the IRS must make assumptions about the taxpayer's 
eligibility for a credit if the taxpayer has not previously claimed the 
credit. These assumptions increase the risk of improper payments, 
compared to taxpayers who claimed a credit in the wrong amount. For 
instance, with the EITC, we need to know from the taxpayer whether they 
meet certain eligibility requirements, particularly whether their 
children meet relationship and residency tests. For the child tax 
credit, we may need to know if they have a Form 8332 the custodial 
parent signed to give up their claim for the credit. This type of 
information is generally not volunteered by the taxpayer in the absence 
of the taxpayer making an affirmative claim for the credit. Requiring 
this type of information on a return that is filed with the IRS before 
any type of adjustment can be made minimizes improper payments.

    Question. What data can you share about usage of the IRS/Fillable 
Forms Non-Filer Tool last year, so outreach efforts can improve and be 
more effective this year in reaching families?

    How many households used the IRS/Fillable Forms Non-filer Tool last 
year?

    Answer. For processing year 2021, approximately 1.3 million 
households with distinct primary account Social Security Numbers (SSNs) 
attempted to use the Non-filer Signup Tool to claim the Advance Child 
Tax Credit or missing stimulus payments.

    Question. How many of them successfully filed a return that was 
accepted by the IRS?

    Answer. Of those approximately 1.3 million households, 
approximately 390,000 returns were accepted via the portal. 
Additionally, regular e-file channels accepted more than 350,000 
returns.

    Question. How many of these returns were routed to some form of 
manual review?

    Answer. We aren't aware of existing data indicating the IRS/
Fillable Forms Non-filer Tool had a higher rate of manual review.

    Question. What was the median wait time for these returns before 
receiving payments, and what fraction of them waited for longer than 3 
weeks?

    Answer. IRS does not have this data.

    Question. If relevant, what caused higher-than-average wait times 
among these returns?

    Answer. Inherently, manual review of a return requires more time 
and human interaction to view and resolve questions or errors found on 
the return.

    Question. What fraction of households who used simplified filing 
last year misreported their RRC amount? What was the average magnitude 
of the error?

    Answer. IRS does not have this data.

    Question. How many children do you estimate did not receive the CTC 
last year because their families did not file a tax return?

    Answer. IRS does not have this data.

    Question. How many households who used simplified filing last year 
had more than $2,000 of W-2 income and thus were likely eligible for a 
meaningful amount of EITC?

    Answer. In tax year 2019, approximately 890,000 taxpayers filed 
simplified returns. They reported more than $2,000 in wages and less 
than the maximum income allowed for the Earned Income Tax Credit 
(EITC). In tax year 2020, this figure was approximately 12,000. Please 
note that for tax year 2020, the period for taxpayers to file 
simplified returns was limited to June 2021 through November 15, 2021, 
because the return was for taxpayers who needed to claim advance 
payments of the Child Tax Credit and did not file a tax year 2019 or 
tax year 2020 return.

    Question. Can the IRS assure Ohioans abroad that they will have 
continued access and the ability to set up an online IRS account 
without needing a U.S. address or U.S. phone number?

    Answer. Yes, international taxpayers, including Ohioans living 
abroad, may establish and access online accounts. Taxpayers without a 
U.S. address or U.S. phone number can create an IRS account for access 
to online services using the modernized platform. If taxpayers have 
difficulty proving identity with the self-service option, they can 
verify their identity via video chat with an ID.me Trusted Referee.

    Question. As you know, the American Rescue Plan Act temporarily 
expanded and improved the Earned Income Tax Credit for people without 
eligible children by increasing the amount and expanding the eligible 
age range, including a specific provision to lower the age to 18 for 
youth who have been in foster care and youth at risk of homelessness. 
As you might imagine, this specific provision benefits potentially 
hundreds of thousands of young people who may never have filed taxes 
before and likely don't know they qualify for this critical benefit for 
the first time. Please describe what outreach the IRS has taken, 
including coordination with other agencies and the States and local 
communities, to ensure young adults with experience in foster care and 
youth at risk of homelessness are being reached about the EITC and how 
to claim the benefit?

    Answer. The IRS hosts an annual ``EITC Awareness Day,'' a 
nationwide collaboration with national and local partners to increase 
awareness of refundable credits. For each Awareness Day, IRS invites 
community organizations, elected officials, State and local governments 
and other entities throughout the Nation to raise awareness of the 
EITC. We encourage external stakeholders to promote the EITC to 
taxpayers and tax professionals by hosting local events, contacting 
local media, and in social media communications. Concentrated 
traditional and social media activity helps us reach the broadest 
possible range of eligible taxpayers, including underserved populations 
and newly eligible taxpayers. The 16th annual EITC Awareness Day was 
held on January 28, 2022. The IRS messaging included social media 
communications that addressed American Rescue Plan (ARP) provisions for 
qualified former foster youths and qualified homeless youths. 
Information is posted on IRS.gov including frequently asked questions 
regarding qualified former foster and homeless youths.\12\ In addition, 
the EITC Assistant helps taxpayers determine if they are eligible and 
if they have a qualifying child or children, and it estimates the 
amount of the EITC they may receive.\13\
---------------------------------------------------------------------------
    \12\ EITC FAQs: IRS Issues Questions and Answers About the Tax Year 
2021 Earned Income Tax Credit, Internal Revenue Service, https://
www.irs.gov/newsroom/irs-issues-questions-and-answers-about-the-tax-
year-2021-earned-income-tax-credit.
    \13\ EITC Assistant: Use the EITC Assistant, Internal Revenue 
Service, (https://www.irs.gov/credits-deductions/individuals/earned-
income-tax-credit/use-the-eitc-assistant).

    The IRS also created Publication 5585, Child-Related 2021 Tax 
Credits, educational flyer that explains refundable credits. 
Circulating Publication 5585 has been instrumental in expanding this 
outreach initiative. The publication was shared with all VITA/TCE 
partners, local Taxpayer Advocate Offices and became the foundation for 
another new publication, Publication 5607, You Could Receive a Tax 
Refund even if You're Not Required to File. In addition, the IRS is 
planning to conduct targeted outreach to individuals raising children 
who lost both parents, foster children, and those living in domestic 
abuse centers and/or homeless shelters. To accomplish this, we will 
identify and share information with individuals and agencies/
---------------------------------------------------------------------------
organizations actively serving these populations.

    Question. The IRS has had its budget slashed over the past decade, 
with funding down roughly 20 percent since 2010 and some departments 
seeing even steeper cuts. Under your leadership, the IRS has also taken 
on new responsibilities as part of the Federal Government's response to 
the pandemic, providing rounds of stimulus payments and monthly Child 
Tax Credits, which provided a financial lifeline to millions of 
families but strained an already over-burdened agency.

    As you've previously acknowledged, the IRS's budget cuts present a 
serious challenge to the agency's operation, across departments. The 
audit rates on large corporations and millionaires have fallen by over 
half since 2010. The agency's IT system, integral for the health and 
security of our tax system, is woefully outdated. Insufficient funding 
has even made it hard for the IRS to answer most taxpayers' phone 
calls.

    Following the overdue but insufficient 6 percent increase in 
funding for the IRS in the 2022 omnibus, Congress must continue to 
rebuild the IRS after years of cuts. President's Biden's budget for 
2023 proposes to increase IRS appropriations by 12 percent over the 
2022 level, which would make important progress but still be about 13 
percent short of inflation-adjusted funding levels in 2010. Further, 
the House-passed Build Back Better legislation would provide roughly 
$80 billion in mandatory funding for the IRS over 10 years.

    Can you elaborate on the urgency and importance of this funding for 
the agency? How would this funding be used, and how would it help 
address the challenges the IRS faces as it confronts this and future 
filing seasons?

    Answer. The IRS is the primary source of funding for the United 
States Government. The IRS collected more than $4 trillion in gross 
taxes in FY 2021. This revenue makes it possible for the government to 
perform its vital functions ranging from education to defense. As the 
past 2 years have shown, we are more than a tax administration agency. 
The support we provided to the Nation during the COVID-19 pandemic 
illustrates the IRS's significant role in our country's overall 
economic health.

    As you note, since 2010 the IRS has experienced a dramatic decrease 
in funding in real terms. Because of this reduction, the number of 
returns the IRS is not able to examine is at historic levels. A recent 
GAO report discussed this problem at length.\14\ The following table 
from the 2021 IRS Data Book illustrates this problem succinctly. Across 
the board, the number of returns examined dropped significantly between 
tax years 2011 and 2019.
---------------------------------------------------------------------------
    \14\ https://www.gao.gov/products/GAO-22-104960.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    .epsThe IRS estimates the tax gap from 2011-2013 was $441 billion. 
Preliminary research suggests the gross tax gap for 2019 could be 
approximately $600 billion. Providing $80 billion in multiyear funding 
to the IRS--on top of the proposed discretionary budget request would 
allow the IRS to address this trend and increase amounts of tax owed 
but not paid. This problem has taken years to develop, though, and it 
will take years to reverse--that is why a 10-year infusion of mandatory 
funding would be so beneficial. The Biden administration \15\ and I 
\16\ have written extensively on this topic. The proposal contains 
elements that address three aspects of the problem:
---------------------------------------------------------------------------
    \15\ https://home.treasury.gov/system/files/136/The-American-
Families-Plan-Tax-Compliance-Agenda.pdf.
    \16\ https://www.warren.senate.gov/imo/media/doc/
Warren%20et%20al%20response%20to%20
Warren%20082721.pdf.

        1.  Provide the world-class customer service that taxpayers 
        deserve, which includes funding to increase staff and 
        technology for taxpayer services to provide taxpayers the 
        resources they need to voluntarily pay their taxes.
        2.  Modernize our tax administration information technology to 
        ensure IRS employees have the tools they need to assist 
        taxpayers and identify and target noncompliant taxpayers.
        3.  Build the IRS's enforcement capacity to address areas where 
        our tax gap analysis indicates underpayment of taxes such as 
        high income, partnerships, and business returns.

    Providing $80 billion in multiyear funding, on top of a 
complementary discretionary investment, includes would gradually 
restore IRS's enforcement capability and train a new generation of 
enforcement staff. The phased approach is necessary because it takes 
time to rebuild. For example, the skills necessary to audit complex 
returns take years to develop. It is important to recall, though, that 
from the perspective of the United States Government, IRS enforcement 
staff pay for themselves many times over. Investments in IRS's 
enforcement capacity generates about $5 of income to the Treasury for 
every $1 they cost, based on historical experience.\17\ The 
Congressional Budget Office (CBO) has confirmed this overall investment 
would pay for itself and more.\18\
---------------------------------------------------------------------------
    \17\ IRS Research Division estimated Build Back Better Act large 
business Enforcement staff returning $5.0 and small business 
enforcement staff returning $6.3 for every dollar of cost assuming a 7-
year career and collections for that period plus 10 years thereafter. 
The model assumes Revenue Agents assess tax liability during their 7-
year career and the IRS continues to collect on those assessments after 
they leave. These estimates are based on historical actuals for a mix 
of examination work that IRS expects would be worked with Build Back 
Better Act funds.
    \18\ https://www.cbo.gov/publication/57620.

    The $80 billion in mandatory funding also includes funding for 
Taxpayer Services appropriation. In tandem with the existing annual 
appropriations for taxpayer service, this funding would allow the IRS 
to hire additional staff to directly assist American taxpayers. 
Voluntary tax compliance is the cornerstone of our tax system. The IRS 
wants to make it as easy as possible for taxpayers who want to pay 
their fair share, but need our help to do so. Modernization is another 
critical element in expanding the IRS's ability to meet taxpayers' 
service needs. We are making meaningful progress with modernization 
efforts and promptly delivered recently enacted financial assistance 
and administrative relief to hundreds of millions of deserving and 
needy Americans. However, insufficient funding slows the speed at which 
we can deliver services to taxpayers and increase our efficiency 
---------------------------------------------------------------------------
through technology.

    With substantial new investment in modernization, IRS could support 
efforts to continue implementing its Integrated Modernization Business 
Plan for upgrading IT systems and retiring legacy applications. This 
funding will enable the IRS to advance significant modernization 
initiatives that directly benefit taxpayers. These initiatives include 
digital communications, customer callback, and Enterprise Case 
Management, all of which will allow our customer service to staff to 
provide more comprehensive service to taxpayers.

    Question. For people who cannot use ID.me to create an IRS online 
account, what is the alternative for them to access information about 
their tax filing history?

    Answer. Taxpayers may access the Where's My Refund? (WMR) and 
Where's My Amended Return? (WMAR) online tools at IRS.gov to check the 
status of their Form 1040, Individual Income Tax Return and Form 1040X, 
Amended U.S. Individual Income Tax Return.

    We are currently working to expand WMR technology. We recently 
added multiyear technology to allow taxpayers the ability to view 
refund information for multiple years. In FY 2023 we plan to expand 
capabilities to provide more detailed messaging on refunds delayed due 
to math errors and the identify theft filters for the taxpayer 
protection program. We are focused on expanding refund trace 
capabilities as well as modernizing and internationalizing the WMR 
application.

    Taxpayers may request a transcript by faxing or mailing Form 4506-
T, Request for Transcript of Tax Return. Transcripts are available for 
the following returns: Form 1040 series, Form 1065, U.S. Return of 
Partnership Income, Form 1120, U.S. Corporation Income Tax Return, Form 
1120-A, U.S. Corporation Short-Form Income Tax Return, Form 1120-H, 
U.S. Income Tax Return for Homeowners Associations, Form 1120-L, U.S. 
Life Insurance Company Income Tax Return, and Form 1120-S, U.S. Income 
Tax Return for an S Corporation. Return transcripts are available for 
the current year and returns processed during the prior 3 processing 
years.

    Electronic Tax payments may be made by using the below options: 
Direct Pay; debit or credit card; and online account.

    Question. What do you know about the effectiveness of the IRS 
notices mailed in September 2020 to inform people about their potential 
eligibility to claim the economic impact payment? How many people filed 
returns when IRS sent EIP notices in September 2020 based on employment 
info? Of the 9 million notices sent, how many were undeliverable? How 
many redelivered to a new address? How many received a response?

    Answer. The IRS sent Economic Impact Payment (EIP) notices to 
nearly 9 million recipients from September 17, 2020, through October 2, 
2020. The IRS used the United States Postal Service (USPS) Address 
Correction Service reports, which provide codes for non-delivery to 
attempt to deliver returned EIP notices.

    There were 1.6 million notices determined to be undeliverable 
putting the Secure Destruction rate at approximately 17.9 percent. 
Analysis of these codes showed that most error codes related to 
addressees no longer being located at the address and/or their 
forwarding order had expired.

    Question. In its recent report, TIGTA said there 51,000 cases of 
individuals mistakenly marked as living in a territory, who did not 
receive their EIP for this reason.

    In 2021, IRS staff provided my staff with an estimate that 500,000 
individuals were affected by this problem. Why was the 51,000 figure 
later reported by TIGTA so different from the earlier estimate provided 
by IRS?

    Answer. The figure TIGTA provided was based on reports the 
territories provided. The IRS took a broader approach and reviewed 
individuals who had a Federal tax history. We also allowed individuals 
to attest they were not residents of the territories and did not 
receive a payment from the territories.

    Question. How many individuals were mistakenly marked as living in 
a territory?

    Answer. The territories provided the IRS with individuals who filed 
a tax return with the territory and who they intended to issue an EIP 
territory payment. The IRS used listings the territories provided to 
mark approximately 946,000 accounts to prevent duplicate Economic 
Impact Payments (EIPs) (one from the U.S. Treasury and one from the 
Territory).

    Question. Has the IRS successfully reversed the territory marker 
for all of the individuals found to be affected by the mistaken marker? 
Are there other individuals mistakenly marked with the territory 
marker, that have not yet been reversed? If so, when will the marker be 
reversed for these individuals?

    Answer. The IRS has reversed approximately 663,000 markers. Any 
individual who believes they were eligible to receive an EIP from the 
U.S. Treasury, but did not receive one, may claim the 2021 Recovery 
Rebate Credit on their Federal income tax return (Form 1040).

                                 ______
                                 
               Questions Submitted by Hon. Maria Cantwell
    Question. Updating the IRS's technology needs to be at the top of 
the agency's to-do list. We've seen throughout the pandemic the 
problems with taxpayers having to call the IRS to get their tax 
questions answered.

    IRS call volumes have soared in the last year, and in 2021 only one 
in nine callers were able to actually reach an IRS employee. The GAO 
recently testified in this committee that the IRS expects customer 
service representatives to answer only about 35 percent of incoming 
calls during the 2022 filing season.

    As you know, the IRS is piloting its use of online chat features, 
but right now limiting it to resolving collection notices. It has not 
been expanded to allow taxpayers to chat with customer service 
representatives about their tax questions.

    A 2019 GAO study compared the IRS's online communication 
capabilities with other nations. It found that taxpayers in the U.K., 
Australia, and New Zealand were able to securely chat online with their 
tax agencies to get answers to their tax questions. And we don't even 
need to look abroad to find these capabilities: California and 
Alabama's revenue agencies offer similar online chat services.

    As we look at increasing funding for the IRS, we need to invest in 
the agency's technology and workforce to bring it into the 21st 
Century.

    As part of that 2019 report, the GAO recommended the IRS set 
targets to reduce taxpayers' burden through the development of new 
online services. Would the development of online services like those 
we've seen from California and other countries to allow direct 
communication with IRS staff help improve taxpayers' ability to get 
their questions answered?

    Answer. Developing online services that allow taxpayers to directly 
communicate with the IRS would presumably help taxpayers get answers to 
their questions and conduct business with the IRS more seamlessly. Key 
assumptions are the IRS has the staffing resources to support what 
could be an influx in demand and the IRS has sufficient modernization 
funding to support the technology enhancements.

    The IRS continues expanding the type of transactions taxpayers can 
conduct through IRS Online Account. We recently integrated 
functionality to make payments more seamless and to establish a payment 
plan if needed. Through Online Account, you can now: access tax 
records; make and view payments; manage communication preferences; view 
your balance; view or create payment plans; and view Tax Pro 
authorizations.

    Question. Will you commit to establishing these kinds of online 
communications services in order to help taxpayers get their questions 
answered quickly and securely?

    Answer. The IRS will continue exploring opportunities to modernize 
digital service to address taxpayer inquiries quickly and securely. 
Funding will determine which opportunities we can pursue and the pace 
at which the IRS can expand online services. Our future technology 
direction includes a fully digital experience for all taxpayers, 
including small business owners, corporations, and tax professionals, 
through an expanded IRS Online Account.

    Question. In your testimony you stated that the IRS lacks sustained 
sufficient multiyear funding for IT modernization. I strongly support 
this funding as investments in this technology would speed up the 
filing of paper tax returns and improve communication with taxpayers.

    The National Taxpayer Advocate's Annual Report to Congress stated 
that paper processing remains the IRS's biggest challenge. As of 
February 5th, the IRS still had 8.5 million paper returns that need to 
be processed. The only way we are going to prevent these kinds of 
backlogs from happening again and again is by modernizing the IRS's 
technology.

    Beyond the ability of taxpayers from being able to get their 
answers to tax questions online, I am also broadly concerned about the 
lack of information technology upgrades in the IRS.

    To help reduce call volumes during tax season, the IRS has directed 
taxpayers with questions about the status of their refund to use the 
agency's online Where's My Refund? tool.

    But the GAO in a report from this February found a number of issues 
with this tool, primarily that it provides very limited information to 
taxpayers. The tool only displays whether a return has been received, 
approved, or sent. It does not, for example, alert a taxpayer if there 
has been a delay in processing their return due to an error or another 
reason, which slows the process down.

    This resulted in increased call volumes as taxpayers tried to get 
more information on the status of their tax refund--the exact problem 
Where's My Refund? is supposed to help with.

    According to the GAO, the IRS has no plans to modernize the refund 
tool due to a lack of funding, even though this would help the IRS 
better serve taxpayers, lower call volumes, and reduce costs.

    The President's budget requests $310 million for IT upgrades 
through the IRS's business systems modernization program, including $78 
million specifically for IT systems to improve taxpayer services. How 
would this funding allow the IRS to improve communication with 
taxpayers?

    Answer. These multiyear funds are used for development, 
modernization, and enhancement activities that support the IRS mission, 
including efforts to improve communication with taxpayers. For example, 
this funding will be used to expand IRS Online Account capabilities to 
improve the taxpayer experience, enhancing self-
service options to establish and submit payment plans, as well as to 
make and view tax payments. The funding will enable the IRS to expand 
Tax Pro Account, providing authorized tax professionals with 
capabilities that modernize certain paper-based processes to help 
resolve issues with the IRS on behalf of their clients. In FY 2023, the 
IRS will continue to expand the Tax Pro capabilities to include the 
ability to view and manage authorizations and enable taxpayers to 
initiate new authorization requests online. These capabilities will 
reduce taxpayer and tax professional burden, the number of submitted 
paper forms, and the time it takes to submit authorizations. Taxpayers 
and tax professionals will also benefit from additional data accuracy 
and security because the process confirms and protects their identity. 
The IRS will continue to expand taxpayer access to digital notices, 
allowing taxpayers to choose to opt in or opt out of receiving paper 
notices and receive notifications through email or text message. This 
investment will increase taxpayer response rates to notices, reduce 
burden on taxpayers and the IRS, reduce printing and postage 
requirements, and promote more efficient interactions.

    Question. Will you commit to updating the Where's My Refund? 
application to provide more information to taxpayers on the status of 
their refunds?

    Answer. The IRS recently expanded Where's My Refund? (WMR) 
technology. We added technology to allow taxpayers the ability to view 
refund information for multiple years. In 2023 we plan to expand 
capabilities to provide more detailed messaging on refunds delayed due 
to math errors and identify theft filters for the taxpayer protection 
program. In addition, we are focused on expanding refund trace 
capabilities, as well as modernizing and internationalizing the WMR 
application.

    We recognize the importance of providing transparency in the refund 
processing status. The IRS has acknowledged that Where's My Refund? has 
limitations. We are in the early stages of making enhancements to 
Where's My Refund?, an initial step for an IT modernization effort. In 
June of 2022, we updated WMR to make it possible for taxpayers to get 
high-level processing status for multiple tax years. For example, if 
the IRS has records for a taxpayer's 2020 and 2021 returns, and the 
taxpayer enters the refund amount matching your 2020 return, WMR would 
display the status of the 2020 refund.

    The IRS tracks the status of a refund from start to finish. 
Currently, WMR provides the following information: high-level 
processing status; refund date; high-level offset and math error 
information; contact information for further questions; and helpful 
links for additional information.

                                 ______
                                 
                Questions Submitted by Hon. Rob Portman
    Question. In late December, Treasury released final regulations on 
Foreign Tax Credits (FTCs), which would deny creditability to a 
substantial portion of foreign taxes and result in double taxation on 
American companies. These ``updated regulations'' were promulgated 
under the guise of preventing Digital Services Taxes (DSTs) from 
receiving credits.

    My understanding is that the regulations would deny a tax credit 
for foreign taxes paid on royalties when the underlying intellectual 
property (IP) is located here in the United States. This result would 
not occur if the IP were located in the relevant foreign jurisdiction. 
Without consulting Congress and against the advice of the companies who 
utilize foreign tax credits, the Department of the Treasury has 
unilaterally issued regulations that will incentivize offshoring of 
both jobs and IP, undermining bipartisan efforts to do the opposite. We 
should be encouraging these investments here at home, not driving them 
to our competitors.

    The regulations' effective date is immediate, giving companies 
little time to adapt to the radically different system than the one 
they have operated under for decades.

    This requires time to review and analyze foreign tax law to 
determine its characterization under this new regime, and many 
companies are struggling to meet the deadlines.

    With the IRS now already facing substantial challenges, has the 
agency begun reviewing foreign law to determine which foreign taxes are 
eligible for credits under the new regime? If not, when do you plan to 
start preparing for this change and how long do you anticipate it will 
take to train audit agents and appeals on which country's taxes are 
eligible for the foreign tax credit?

    Answer. The IRS is coordinating with subject matter experts and 
counsel to review the creditability of various foreign taxes. To assist 
with this effort, the IRS obtained access to translations of many 
foreign tax laws to help examiners understand and analyze these foreign 
taxes. The IRS's Large Business and International division has 
conducted informal workshops on the new regulations and plans to 
conduct more detailed, formal training. Training and formal and 
informal guidance on this new area of the tax law is expected to be 
iterative and evolve with developments in the law and the IRS's 
understanding taxpayers' issues over several years.

    The Independent Office of Appeals has a group of Appeals Officers--
International Specialists. This group predominately works cases 
involving international issues, including Foreign Tax Credit issues. 
Appeals has delivered training to our Appeals Officer--International 
Specialists on the general provisions of Tax Cuts and Jobs Act. Appeals 
will not encounter issues related to these new regulations for several 
years, given the effective date of the regulations and the fact that 
Appeals works cases after IRS revenue agents complete audits. We 
generally provide just-in time training to our employees. To be 
effective, training in new and complicated areas is delivered soon 
after receiving the cases. We will collaborate with Counsel as we plan 
training on these credibility rules.

    Question. The bipartisan infrastructure bill I led was signed into 
law last year and included a provision to provide more certainty for 
Americans looking to invest digital assets.

    This would ensure that crypto investors receive the same tax 
documents from their brokers that stock traders receive, mainly a 1099-
B, which in turn will enable them to file their taxes more easily and 
promote higher compliance.

    This is one of our first efforts to incorporate digital assets like 
crypto into the tax code, so it is important that we help provide 
clarity into what this law means for the millions of taxpayers who hold 
crypto assets.

    In December, we urged Secretary Yellen to engage in rulemaking for 
this provision as quickly as possible, in particular with how 
``broker'' is defined. As we described in that letter, it was our 
intent that the reporting requirements only cover brokers who enable 
the transfer of digital assets for consideration--and not other parties 
which are ancillary to the process.

    What is the status of these regulations?

    Answer. The IRS and the Treasury Department are working on a notice 
of proposed rulemaking (NPRM) to implement information reporting rules 
for brokers of digital assets. We share Congress's goal to achieve 
greater certainty for Americans looking to invest in digital assets. 
This is especially important because section 80603 of the 
Infrastructure Investment in Jobs Act (IIJA) is one of the first 
efforts to address digital assets and incorporate them into our 
Nation's tax code, as digital assets become increasingly prevalent and 
mainstream.

    Question. Can you assure me that congressional intent will be taken 
into consideration throughout the rulemaking process?

    Answer. The IRS and the Treasury Department are aware of a colloquy 
between Senator Portman and Senator Warner about the purpose and 
meaning of the modification made by section 80603 of the IIJA to the 
definition of ``broker'' in section 6045(c). This colloquy is part of 
the legislative history of the IIJA amendment to the definition of 
``broker'' in section 6045(c). The IRS and the Treasury Department are 
considering these statements as they develop the NPRM. They are 
consistent with the IRS's and the Treasury Department's view that 
ancillary parties who cannot get access to information that is useful 
to the IRS are not intended to be captured by the reporting 
requirements for brokers. For example, persons who are just validating 
transactions through a consensus mechanism are not likely to know 
whether a transaction is part of a sale. And persons who are only 
selling storage devices used to hold private keys, or merely write 
software code are not carrying out broker activities. The IRS and the 
Treasury Department also will consider the extent to which other 
parties in the digital asset market, such as centralized exchanges and 
those often described as decentralized exchanges and peer-to-peer 
exchanges, should be treated as brokers given the clarification section 
80603 provides. The IRS and the Treasury Department intend to propose 
regulations that address the concerns expressed in the colloquy 
regarding the definition of broker.

    Question. The 2020 CARES Act allowed taxpayers to carryback net 
operating losses arising in a taxable year beginning after December 31, 
2017, and before January 1, 2021 to each of the 5 taxable years 
preceding the taxable year in which the loss arose. Generally, 
taxpayers had to file claims for refund on paper (Form 1139 for 
corporations or Form 1045 for individuals). In a report from January 
2022, the Government Accountability Office (GAO) found that the IRS was 
poorly prepared to contend with the influx of these paper refund 
claims. GAO found that the average time for refunds was approximately 
165 days, well exceeding the 90-day statutory limit on the issuance of 
refund. In addition, the Taxpayer Advocate reported in January 2022 
that the IRS is not providing information on refund wait times for the 
inventory backlog. These carrybacks were enacted to provide cash to 
taxpayers to offset costs and losses they incurred during the pandemic, 
but delays have meant that many taxpayers have not been provided the 
intended relief.

    My office has received reports that there has been a sharp increase 
in the denial of these carryback refund claims filed a year ago. These 
denials are supposedly for ``missing information'' or other 
administrative reasons related to the refund claims. Per Internal 
Revenue Manual 21.5.9.4.3, such denials are not to be issued until the 
IRS has contacted the designated IRS contact for the taxpayer and 
requested the missing information or stated other reasons for errors in 
the claim for refund. However, it is my understanding that no such 
requests for information or other requests have been made to many of 
these taxpayers. Some were only made aware of this denial when they 
received a``216C letter'' from the IRS stating their claim was denied. 
One taxpayer has an IRS liaison out of the Cincinnati Service Center to 
assist them and such liaison had no answer for why a denial was issued.

    I am told that if claims for refund are denied, taxpayers will have 
to file amended returns for the carryback years, and if these amended 
returns are refused in about 6-12 months, file suit in court. For 
publicly traded businesses, this process will likely require them to 
restate financial statements.

    Are you aware of such denials of CARES Act carryback refund claims?

    Answer. In all cases, IRS employees attempt to analyze the 
documents and correct minor math errors in the submitted forms so they 
can be processed. The Internal Revenue Manual (IRM) 21.5.9.4.3 states 
that employees must determine if missing information could make the 
Form 1139, Corporation Application for Tentative Refund, processable; 
if so, they make two attempts to contact the taxpayer to obtain 
specific missing information. Most return rejects occur when taxpayer 
figures do not match IRS's posted figures, or multiple errors prevent 
processing. When rejected, a Letter 216C is issued to the taxpayer with 
an explanation and states how to correct the return.

    Question. Is it possible that erroneous denials have increased as 
part of the effort to clear away past year return backlogs?

    Answer. The IRS has an effective and rigorous training strategy. 
Recent legislation has required the IRS to skill up additional staff to 
handle the demand. Employees must follow the IRM guidance, but 
erroneous rejects could occur occasionally. If this occurs, they can be 
identified through various quality review channels or by the taxpayer. 
If they are identified in quality review or by the taxpayer, the cases 
are reopened for correction. A timely filed application for tentative 
refund identified as erroneously rejected (IRS error) will be corrected 
without the taxpayer having to file an amended return Form 1120-X, 
Amended U.S. Corporation Income Tax Return.

    Question. Can you explain why it appears that the Internal Revenue 
Manual procedures on contacting taxpayers before denying these 
carryback claims are not being followed?

    Answer. Our quality review of carryback cases does not indicate 
this to be a recurring issue.

    Question. What are the options for taxpayers whose claims for 
refund have been denied erroneously?

    Answer. Rejected cases include Letter 216C or other appropriate 
letters, to explain the reason for rejection and how to correct it. The 
letters include a toll-free phone number and a mailing address for 
corrections to be returned. If an application for tentative refund was 
timely filed but erroneously rejected (IRS error), and the erroneous 
rejection is identified through quality review or notification by the 
taxpayer, the IRS will correct it without the taxpayer having to file 
an amended return.

    Question. Can you provide my office with a contact at the IRS who 
has reviewed these denials and can offer assistance if a taxpayer's 
claim was erroneously denied?

    Answer. We would be glad to research any outstanding constituent 
cases on the matter if your staff provides our Legislative Affairs team 
with the appropriate privacy release documentation.

                                 ______
                                 
               Questions Submitted by Hon. Maggie Hassan
    Question. Taxpayers in my State are struggling with the large IRS 
backlog in processing amended tax returns. Many families have reached 
out to my office because they missed their original opportunity to 
claim Economic Impact Payments on their tax returns--and are still 
stuck waiting for their Economic Impact Payments while the IRS 
processes their amended return.

    I've raised these concerns with you before, but I continue to hear 
from Granite Staters about these IRS delays. What more are you doing to 
expedite processing of tax returns in general--and amended returns 
specifically.

    Answer. We are utilizing overtime, including mandatory overtime, 
and redirecting resources as available. We are also currently using a 
new automated tool, called FixERS, to expedite the resolution for 
millions of taxpayers normally requiring manual review. This tool has 
had positive results dramatically expanding efficiencies. We are 
prioritizing work in a first-in, first-out order, with refund returns 
given priority.

    While we began intaking Form 1040-X returns electronically, Tax 
Examiners in our Submission Processing function and Customer Service 
Representatives in our Accounts Management function must input 
adjustments manually. We are using overtime and redirecting resources 
as available.

    Accounts Management continues to use surge employees. As of April 
18th, there were almost 900 former Accounts Management employees 
assisting with amended return case processing. We have seen a 
significant increase in amended return closures as a result of adding 
these surge employees. We expect the surge employees to remain in our 
Accounts Management function through at least the end of this fiscal 
year.

    Question. I've introduced legislation to raise the threshold 
determining when casual users of online marketplaces have to receive a 
1099-K tax form. Casual sellers who sell used goods online typically 
don't owe any income tax on those sales--but could nevertheless easily 
get a 1099-K under the $600 threshold.

    If many of these casual users are selling their personal items for 
less than they purchased them, do you agree that, under the $600 
threshold, the IRS will receive significantly more tax forms in the 
future for online sales of used goods that do not show any taxable 
income?

    Answer. The Form 1099-K is an information return. A taxpayer can 
use the information in the form with their other tax records to 
determine their correct tax. Whether the taxpayer has a tax liability 
depends on whether the proceeds from the asset sale are greater than 
the taxpayer's basis in the asset. Changes from the American Rescue 
Plan Act to information reporting requirements for payments settled by 
third party networks do not change the taxability of payments. If a 
taxpayer receives a Form 1099-K for a non-taxable transaction and is 
audited by the IRS, the individual can provide the facts and 
circumstances to support the non-taxable determination.

    Beginning with calendar year 2022, third-party settlement 
organizations must file and furnish a Form 1099-K to payees if the 
aggregate amount of payments to a participating payee exceed $600. This 
is less than the prior reporting threshold of $20,000 and 200 
transactions for third-party settlement organizations. We agree the 
volume of Form 1099-K filings will increase with the $600 threshold; 
however, we are unable to quantify that increase at this time.

    Question. You have previously stated your support for remote 
notarization, which allows consumers and small businesses to remotely 
and securely notarize important documents. Thirty-nine states, 
including New Hampshire, have passed laws supporting remote 
notarization.

    Will the IRS permanently extend its rule making this common-sense 
solution available to taxpayers?

    Answer. Notice 2020-42 \19\ provided relief through December 31, 
2020, from the physical presence requirement, allowing for remote 
notarizations under certain conditions. IRS Notice 2021-03 \20\ 
extended this relief, subject to certain requirements. IRS Notice 2021-
40 \21\ extended the temporary relief again, through June 30, 2022, if 
the notarization meets certain requirements in IRS Notice 2021-03. In 
May, we released IRS Notice 2022-27,\22\ which provides an additional 
6-month extension, through December 31, 2022, of the temporary relief, 
if the notarization meets certain requirements in IRS Notice 2021-03.
---------------------------------------------------------------------------
    \19\ 2020-26 Internal Revenue Bulletin (IRB) 986, published on June 
22, 2020.
    \20\ 2021-2 IRB 316, published January 11, 2021.
    \21\ 2021-28 IRB 15, published July 12, 2021.
    \22\ Released on May 13, 2022.

    Following the publication of the various notices extending the 
temporary relief, the Department of the Treasury (Treasury) and the IRS 
received comments from numerous stakeholders about the physical 
presence requirement. While some stakeholders requested permanent 
relief from the physical presence requirement, other stakeholders asked 
that we keep the physical presence requirement, describing concerns 
---------------------------------------------------------------------------
about potential fraud and spousal coercion.

    Treasury and the IRS are currently reviewing the stakeholder 
comments to determine whether to keep the physical presence requirement 
in Treasury Regulation section 1.401(a)-21(d)(6)(i) without 
modification, or to propose modifications.

                                 ______
                                 
               Questions Submitted by Hon. James Lankford
    Question. In February, the Taxpayer Advocate, Erin Collins, 
testified before the Senate Finance Committee. Her testimony noted that 
as of late December 2021, the IRS had backlogs of 6 million unprocessed 
original individual returns, 2.3 million unprocessed amended individual 
returns, and more than 2 million employer's quarterly tax returns. 
According to the IRS's website, as of April 1, 2022, the IRS had 7.1 
million unprocessed original returns, which includes returns received 
before 2022 and new tax year 2021 returns. In addition, as of April 2, 
2022, there were 2.2 million unprocessed amended individual returns 
(Forms 1040-X), and as of April 6, 2022, 1.9 million unprocessed 
employer quarterly Federal tax returns (Forms 941).

    Do all of these unprocessed returns require manual processing?

    Answer. Generally, no. This figure may include current and prior 
year, paper and electronic, business and individual returns, and 
returns that will be processed both with, and without, human 
intervention. We process returns in the order in which we receive them. 
We continue to work to reduce our amended return inventory using surge 
teams, employees we temporarily reassigned to processing. The surge 
team initiative moved hundreds of existing employees with previous 
processing experience to address the backlog.

    Question. How many of these unprocessed returns are from this 
filing season vs. prior filing seasons? Please provide a breakdown of 
unprocessed returns and the tax year to which they correspond.

    Answer. Unprocessed returns are a mixture of returns that have not 
yet been input into the system and returns that have been input and 
require further manual processing. We are unable to breakdown 
unprocessed returns by tax year until they are processed.

    IRS completed the processing of all error free individual income 
tax returns taxpayers filed in 2021 as of June 24, 2022. As of August 
5, 2022, we have approximately 140,000 business paper returns we 
received in calendar year 2021 waiting to be processed. For individual 
paper returns received in calendar year 2022, as of August 5, 2022, 
there are about 7.9 million waiting to be processed and about 6.2 
million business paper returns waiting to be processed.

    Question. How do you balance existing backlogs with other returns 
being filed in real time for this filing season?

    Answer. Returns filed electronically with no errors are processed 
within normal time frames without manual intervention. We work returns 
with errors within 14 days of receipt by either making corrections or 
sending correspondence to the taxpayer for additional information. We 
process paper returns in a first-in, first-out order, so we will work 
the current year paper returns once the returns of the same type we 
received prior to January 1, 2022, are input.

    Question. You have announced a plan to get the IRS ``healthy,'' 
allowing the IRS to eliminate backlogs and get back to standard 
processing times by the start of the 2023 filing season.

    Are you on track with that plan?

    Answer. The IRS is making every effort to redirect resources with 
the goal of getting healthy. Actions the IRS has taken to address the 
inventory include surge teams, mandatory overtime, innovating to 
expedite case closures and suspending various notices.

    Question. When exactly do you expect to eliminate backlogs--at 
least for returns and correspondence related to prior filing seasons?

    Answer. We have redeployed and reallocated resources throughout the 
IRS and have implemented innovative strategies in an ongoing effort to 
provide a meaningful reduction in our inventories. We continue pursuing 
innovative strategies to fulfill our commitment to return inventories 
to a healthy level.

    Question. Earlier this year, the IRS announced ``surge teams'' and 
the reassignment of 1,200 employees from existing jobs to processing 
positions to help with the backlog. Based on your April 5, 2022 letter 
in response to a letter that I sent on January 25, 2022, it is my 
understanding that you have recently moved 800 employees back into key 
accounts management positions and intend to move 700 employees into 
submissions processing.

    Have those ``surge teams'' worked to eliminate the backlog?

    Answer. Yes, as we had anticipated, the surge teams are helping 
reduce inventory at each of our processing sites.

    Question. Do you still intend to have those employees reassigned 
through September of this year?

    Answer. We plan to keep the surge team employees in their 
reassigned roles through the end of this year.

    Question. What is the plan for timely processing after that time?

    Answer. Once we achieve healthy inventory levels, we expect to have 
adequate staffing to remain timely.

    Question. In your testimony, you mentioned the creation of the 
Taxpayer Experience Office, an office launched last year to unify and 
expand the work being done to serve taxpayers. You noted that that 
office will focus on customer service best practices and will add staff 
in the coming months to support that effort.

    Please provide areas of improvement that the Taxpayer Experience 
Office has identified thus far with respect to customer service and 
taxpayer experience.

    How are you moving forward with those recommendations?

    Answer. To drive the IRS strategic direction for improving the 
taxpayer experience, the Taxpayer Experience Office identified key 
activities the IRS is focusing on over the next 5 years. These 
activities include the commitments in the President's Executive Order 
on Transforming Federal Customer Experience and Service Delivery to 
Rebuild Trust in Government. We developed the Taxpayer Experience 
Strategy (TXS) with input with internal and external stakeholders. As 
the Taxpayer First Act Report to Congress describes, the TXS has the 
following focus areas, representing goals the IRS hopes to achieve over 
the next several years:

1. Expanded Digital Services

    The IRS will expand access to digital information and assistance, 
offering an improved experience for people who prefer online self-
service. We will: enhance the IRS's Online Account for individual 
taxpayers and expand this service to tax professionals and businesses; 
enhance authenticated online self-services to include account updates, 
full interaction history, and issue status; and increase electronic 
filing receipts and scanning/data capture for paper filings, secure 
document exchange, and more.

2. Seamless Experience

    The IRS will offer personalized online interfaces for taxpayers and 
their authorized tax professionals. We will: enable taxpayers to seek 
service and information through the channel of their choice; pass 
taxpayer information from one interaction to the next employee or 
channel, streamlining processes and expediting resolution; and offer 
live web chat and train telephone employees to provide IRS navigation 
support.

3. Proactive Outreach and Education

    The IRS will educate the taxpayer community by proactively 
providing information in the language, timing, and method taxpayers 
need or prefer. We will: leverage multiple means including social 
media, trusted partnerships, customized digital options, and new 
technology to deliver information and personalized messages; and 
increase taxpayer confidence in meeting their tax obligations through 
this additional education.

4. Focused Strategies for Reaching Underserved Communities

    The IRS will establish a consolidated program to engage with 
historically underserved communities to address issues of 
communication, education, transparency, trust, and of the limited 
access to quality products and services. We will: develop custom 
strategies for each underserved segment based on focused research, best 
practices, and learning from partners on ways to better interact with 
these communities; and provide personalized education and outreach to 
ensure taxpayers are engaged, heard, informed, and clearly understand 
their obligations.

5. Community of Partners

    The IRS will create and facilitate a collaborative, interactive 
network of partnerships across the tax ecosystem and consolidate 
existing efforts. We will: bring innovative ideas and approaches to our 
stakeholder and trusted partner collaborations; collaboratively explore 
new ways to better serve the needs of different taxpayer segments and 
provide appropriate assistance; and seek new partnerships to better 
reach and interact with our taxpayers.

6. Enterprise Data Management and Advanced Analytics Capabilities

    The IRS will develop an Enterprise Data Management strategy with a 
cross-
enterprise understanding of customer experience, emerging needs and 
expectations, and operational data. This strategy will: assist in 
understanding customer profile, behavioral and transactional data, and 
customer support services; use a central repository of integrated data 
from IRS systems that stores current and historical data; and improve 
compliance efforts, resolving cases faster and focusing on addressing 
issues with the largest effects.

    Although planning is still underway to successfully implement the 
TXS, the IRS has already made considerable near-term progress across 
various focus areas and capabilities including:

          Expanding Customer Callback. In Fiscal Year (FY) 2022, 
        customer callback expanded from 16 applications to 30, meaning 
        over 70 percent of our toll-free demand is eligible for 
        customer callback. We plan to continue expanding, with a goal 
        of 95 percent by FY 2024.

          Expanded Taxpayer Outreach. We established special Saturday 
        Taxpayer Experience Days in several key locations to expand 
        availability of in-person assistance.

          Increased Services for Multilingual Customers. We translated 
        Form 1040 into Spanish, expanded over-the-phone interpreter 
        services, and developed a multilingual insert for the top 20 
        notices. We've also made Form 1040, its main schedules and six 
        publications available in Spanish, Braille, and large print and 
        developed a long-term enterprise-wide strategy to improve the 
        services we provide to multilingual taxpayers.

          Improvements to Digital Tools to Support Economic Impact 
        Payments and the Advance Child Tax Credit. We supported the 
        American Rescue Plan by allowing taxpayers to opt-out, update 
        qualifying children, link bank account, and change status for 
        receiving advance payments of the Child Tax Credit. We also 
        successfully gave citizens the ability to monitor the status of 
        Economic Impact Payments and enter bank information through the 
        Get My Payment tool on IRS.gov. We launched this tool only 3 
        weeks after the enactment of the Coronavirus Aid, Relief, and 
        Economic Security (CARES) Act.

          Enhanced Digital Communications. We have improved online 
        chat and deployed online tax professional accounts. With online 
        chat, taxpayers and their authorized representatives can 
        securely interact with designated IRS revenue agents and tax 
        examiners. We also launched a feature allowing taxpayers to 
        digitally control their representatives with Power of Attorney 
        or view their tax records with a Tax Information Authorization. 
        We released this feature in July 2021.

          Expanded Partnerships. We expanded partnerships with 
        multiple Federal agencies to send Economic Impact Payments to 
        groups without requiring the affected taxpayers to file a 
        return or take any action.

          Forms Modernization. We enabled digital submission of Forms 
        2848, Power of Attorney, Form 8821, Tax Information Disclosure 
        Authorization, Form 911, Request for Taxpayer Advocate Service 
        Assistance, and Form 3949-A, Information Referral.

    Question. In February, Jessica Lucas-Judy, the Director of 
Strategic Issues at the Government Accountability Office (GAO), 
testified before this committee on this year's filing season. In her 
testimony, Lucas-Judy detailed the difficulties taxpayers had 
contacting the IRS last filing season, noting that while the IRS 
answered more calls than previous years, the volume of calls 
contributed to a very low answer rate.

    According to GAO, during the 2021 filing season the IRS 
disconnected 53 percent of calls due to lack of a customer service 
representative, taxpayers abandoned 27 percent of calls, and taxpayers 
received a busy signal on 2 percent of calls. Additionally, according 
to the Taxpayer Advocate, only 11 percent of calls were answered by IRS 
customer service representatives in FY 2021.

    It is a primary responsibility of the IRS to provide adequate and 
ample customer service to the public.

    In response to a letter that I sent to you on January 25, 2022 and 
also noted in your testimony, you said that the IRS is working to 
expand ``Customer Callback,'' which allows taxpayers to select a 
callback when estimated wait times are higher than 15 minutes. In your 
testimony, you estimate that that function has saved taxpayers more 
than 1.3 million hours.

    What else can the IRS do to address call volume, hold times, and 
low answer rates?

    Answer. The IRS has begun expanding live taxpayer-assistance 
services. These services include new technologies such as automated 
self-service voice bots and chat bots with artificial intelligence and 
natural language technology. These automated services provide immediate 
information access without waiting for a customer service 
representative. Additionally, the IRS is exploring live chat technology 
with customer service representatives as an alternative to phone calls. 
When successful, these new services will help to reduce telephone 
demand. We will continue to utilize Direct-Hire authority to hire 
individuals without regard to sections 3309-3318 of title 5, United 
States Code, to fill these critical roles.

    Question. What can you do to ensure that those answering the phones 
are able to provide adequate and complete assistance to taxpayers?

    Answer. Employees receive a comprehensive training on phone and 
paper inventories, as applicable. New hire and existing employees 
receive regular training updates and Critical Filing Season Readiness 
Training prior to the filing season. Our goal is to ensure these 
employees maintain a strong knowledge base to assist taxpayers. Our 
Accounts Management function maintains a robust quality review process 
to identify error trends and metrics. This process enables them to 
provide feedback when necessary. IRS leadership has calls with field 
locations to provide this feedback according to established quality 
goals.

    Question. In a letter from you dated February 7, 2022, you said 
that the IRS received 145 million calls from January 1st through May 
17th of last year--more than 4 times the number of calls received in an 
average year. You also note that on March 15th of last year you 
received approximately 1,500 calls per second--a 600-percent increase 
in normal call traffic.

    Understanding that this is an unprecedented level of inbound calls, 
how do those numbers--those incredibly high call volumes--compare to 
what you're seeing this filing season?

    Answer. For the 2022 filing season, from January 1st through April 
16th, we received 56 million net attempts, which are the overall volume 
of callers dialing IRS product lines for automated live assistance 
during open and available hours, compared to 124 million net attempts 
for the same time frame (January 1st through April 17, 2021) last year.

    Question. What are most people contacting the IRS about? The Child 
Tax Credit? Recovery Rebate Credit? An unprocessed prior year return? 
Another error?

    Answer. During Filing Season 2022 most taxpayer calls we received 
are about: Individual Master File (IMF) accounts; IMF math errors; IMF 
refunds; Where's My Amended Return?; Affordable Care Act; Business 
Master File accounts; National Taxpayer Advocate; Practitioner Priority 
Services; and Taxpayer Assistance Center (TAC) (requesting a TAC 
appointment).

    Question. Earlier this year, the IRS announced 5,000 open positions 
at IRS campuses, but you noted at a House Ways and Means hearing in 
March that you had only filled 211 of those spots.

    I understand that it can take the IRS months to hire an employee--
oftentimes applicants will look for and find another job in that time, 
as they can't wait for months to get the job. The National Taxpayer 
Advocate's 2021 report says that on average, it took 88 days to hire an 
IRS employee in FY 2021 and 120 days in FY 2020.

    The IRS was recently granted direct hiring authority--through an 
OPM approval and the recent FY 2022 omnibus spending bill that passed 
in March. You have previously stated that direct hiring authority will 
allow you to hire on a more competitive basis, allowing you to fill 
positions and address backlogs and processing more quickly.

    Your testimony before this committee states that you have been 
granted direct hiring authority for 10,000 positions--hoping to onboard 
5,000 now and 5,000 over the course of the next year.

    What exact positions were these grants of direct hiring authority 
for?

    Answer. Office of Personnel Management (OPM)-approved direct hire 
authority (DHA) for filing season positions, on February 18, 2022, as 
follows:


 
 
 
Clerks                                          GS-0303     02 and above
Clerks                                          GS-0305     02 and above
Data Transcribers                               GS-0356     02 and above
Computer Assistants                             GS-0335     02 and above
Computer Operators                              GS-0332     02 and above
Mail Processing Equipment Operators             GS-0350     02 and above
Tax Examiners                                   GS-0592     04 and above
Remittance Perfection Clerks                    GS-0503     04 and above
Accounting Technician                           GS-0525     04 and above
Individual Taxpayer Advisory Specialist         GS-0501     04 and above
Tax Specialist                                  GS-0526     04 and above
Contact Representative                          GS-0962     05 and above
 


    Under the Consolidated Appropriations Act, 2022, DHA has also been 
approved for up to 400 Human Capital positions and up to 350 
Information Technology positions, as outlined below, that directly 
support the IRS's work to get inventory back to healthy levels.


 
 
 
Human Resource Specialists                      GS-0201     07 and above
Information Technology Specialist               GS-2210     07 and above
Computer Engineers                              GS-0501     04 and above
Computer Scientist                              GS-1550
 

    Question. How will these hires help address backlogs?

    Answer. All direct hire authority (DHA)-approved positions are 
critical to addressing IRS's urgent staffing needs. These 12 approved 
filing season position series will support millions of taxpayers, from 
individuals to businesses, who depend on IRS assistance, return and 
refund processing, and other support and services. The additional 
approved positions include Human Resource Specialists, critical to 
onboarding and training new hires, and Information Technology 
Specialists, Computer Engineers, and Computer Scientists, critical to 
updating our technology to address current backlogs and reduce the risk 
of future backlogs. The IRS is integrating scanned data and content 
management systems to improve digital intake of paper form data. This 
integration will improve paper data intake by reducing manual 
transcription and paper document storage. Taxpayers will be able to 
access their sensitive financial and tax information securely and 
easily from any device; they will also be able to resolve issues 
quickly and proactively using a variety of services.

    Question. Before the committee, you said that 2,200 positions had 
been filled thus far. What is your plan to fill the remaining spots?

    Answer. We plan to continue using the approved direct hire 
authority (DHA). We will also use all available recruitment resources, 
including: merit promotion, delegated examining, Veteran's and Schedule 
A appointing authorities, reemployed annuitants, Pathways recent 
graduates and Presidential Management Fellows, transfers, and 
reinstatements.

    Question. Are these long-term positions?

    Answer. We are filling most long-term positions with career and 
career conditional appointments. Available positions include temporary, 
term and permanent jobs.

    Question. How long does it take for these new hires to complete 
training and begin working in the field? Are these new hires able to 
help with existing backlogs?

    Answer. Training times depend on the job series and occupation. 
Generally, new hire Clerks take between 1 to 3 weeks to complete 
training and new hire Tax Examiners take between 3 to 6 weeks to 
complete training. The exact time needed depends on the functional 
area. After training is completed, new hires will be able to help with 
existing backlogs.

    Question. Earlier this year, GAO testified that the IRS reported an 
attrition rate of 17 percent for processing center staff at the end of 
FY 2021. This is more than twice the agency's overall attrition rate of 
7.6 percent. At the same time, the IRS encountered challenges hiring 
enough new processing staff, only meeting about 67 percent of your 
stated goal. GAO noted that for every 10 newly hired returns processing 
staff, the IRS needed about 4 to offset attrition.

    What is the cause of that attrition level?

    Answer. The IRS cannot definitively answer the cause of the 
attrition level.

    Question. What recommendations do you have to better retain IRS 
employees?

    Answer. The IRS's engagement and retention efforts focus on 
fostering a collaborative and inclusive culture, supporting employees 
with training opportunities and clear career paths, enhancing 
succession planning and knowledge transfer, and designing proactive 
talent management strategies to address business needs and workload 
demand. We are confident enhancing these efforts will lead to better 
staff retention.

    Question. Do you believe that the Biden administration's vaccine 
mandate led to attrition and early retirements?

    Answer. Individuals may consider many factors when deciding to 
retire or separate from Federal service. The IRS doesn't speculate 
about whether the vaccine mandate factored into an individual's 
decision to voluntarily separate or retire. We do not track this 
information.

    Question. How many early retirements have you seen in 2021 and 
2022?

    Answer. The IRS retirement trend for FY 2020 was 3.4 years beyond 
eligibility. This trend rose to 3.9 years beyond retirement eligibility 
in FY 2021. Thus far in FY 2022, the data is trending down to 3.0 years 
beyond retirement eligibility.

    Question. What were the causes of those early retirements?

    Answer. The IRS is unable to determine the exact cause of the 
downward trend of beyond retirement eligibility requests. The analysis 
indicates a combination of factors, such as the usual factors of 
ability to carry over leave beyond 240 hours and age of workforce and 
unusual factors from the pandemic, led to the increase in retirements.

    Question. How many early retirements were the result of the Biden 
administration's vaccine mandate?

    Answer. The IRS does not track an individual's reason for retiring 
from Federal service.

    Question. In late December, days before the end of the year, the 
Treasury Department released final regulations pertaining to foreign 
tax credits. These regulations were published in the Federal Register 
on January 4, 2022, and in a number of instances, are effective 
immediately. As such, these regulations are already impacting business 
decisions and financial statements.

    We've heard a number of concerns from taxpayers regarding these 
regulations, including their significant departure from precedent 
without any congressional action or direction, and the broad impact 
they will have on the creditability of certain income and withholding 
taxes. U.S. businesses have reached out to us concerned about the 
regulations' impact on their ability to compete and grow 
internationally, which would result in fewer jobs here in the U.S.

    Has the IRS considered postponing the effective date of these 
regulations to give businesses more time to understand how they will 
affect their operations, or re-
proposing the provisions that were not included in the proposed 
regulations?

    Answer. The final regulations released in December 2021 adopted the 
proposed regulations released in November 2020 in all substantive 
respects, while incorporating changes made after careful consideration 
of the numerous comments submitted through a public process. Since the 
final regulations were released, the IRS has engaged with numerous 
stakeholders and is considering whether any further changes or 
clarifications would be warranted. As the first part of that process, 
on July 26th, the Treasury Department and the IRS released technical 
corrections to the final regulations, which provide clarifications to 
the final regulations that apply to the same taxable periods as the 
final regulations.

    Question. If not, is there concern that if foreign tax credits are 
denied for royalty withholding taxes because IP is located in the 
United States, that taxpayers may actually be incentivized to move 
their IP offshore?

    Answer. As noted above, since the final regulations were released, 
the IRS has engaged with numerous stakeholders and is considering 
whether any further changes or clarifications would be warranted. As 
the first part of that process, on July 26th, the Treasury Department 
and the IRS released technical corrections to the final regulations, 
which provide clarifications to the final regulations that apply to the 
same taxable periods as the final regulations. Additionally, the 
Treasury Department and the IRS have previously announced that they 
anticipate releasing additional proposed guidance regarding the 
treatment of royalty withholding taxes as soon as possible.

    Question. The Social Security Administration recently announced 
that Social Security offices will restore in-person services, including 
for people without an appointment, beginning on April 7, 2022. This is 
a welcome development, as many constituents are in need of in-person 
assistance.

    Are IRS Taxpayer Assistance Centers back to pre-pandemic staffing 
levels and appointment availability?

    Answer. The IRS began to shut down Taxpayer Assistance Centers 
(TACs) in March of 2020 due to the COVID-19 pandemic. We began to 
reopen offices to the public in June of 2020. All TACs were re-opened 
by May 24, 2021, except for six IRS TACs that are in the Social 
Security Administration office buildings.

    In March of FY 2020, TAC had about 1,160 employees. In FY 2022, as 
of April 2022, TAC staffing is approximately 1,150 employees. We 
developed a Taxpayer Assistance Hiring and Expansion Strategy. We 
worked closely with our internal partners to identify underserved areas 
of the country to expand our TAC footprint. Through this coordination, 
we identified almost 60 potential locations throughout the country.

    We have five new TAC offices scheduled to open in late FY 2022 and 
early FY 2023. This strategy also has a staffing plan for our current 
TACs to meet the taxpayer needs. This strategy of establishing new TACs 
and staffing existing locations will allow us to provide more outreach 
to underserved communities and online support for taxpayers who can use 
virtual services.

    Question. It is my understanding that the IRS and its unions have 
recently come to an agreement on the return-to-office plan for the IRS. 
That plan states that during the week of April 24, 2022, executives, 
managers, and supervisors who have not been in the office regularly 
will be required to report as needed. During the week of May 8, 2022, 
employees without an approved telework agreement will have to return to 
the office, and during the week of June 25, 2022, employees who have 
not been required to report back to the office will be required to 
return. However, those with a valid telework agreement will simply 
follow the terms of their agreement, which may or may not require them 
to return the week of June 25, 2022.

    How many IRS employees telework now? This represents what 
percentage of total IRS employees? What are these positions?

    Answer. As of August 27, 2022, 59,600 or 73 percent of IRS 
employees (excluding Chief Counsel) telework part time and 151 or 0.18 
percent telework full time. (The 2,258 Chief Counsel employee 
population is excluded in the telework reporting data for the 81,718 
IRS employees. Many Chief Counsel employees are eligible for part-time 
telework; very few are eligible for full-time telework.) Approval for 
participation in the IRS Telework Program is within a supervisor's 
authority and is not guaranteed for an employee. Telework may not be 
suited for all positions and is not an employee entitlement. The 
operational needs of the IRS are paramount. The mission of the IRS, 
roles and responsibilities of a particular office, and the extent that 
the employee meets the eligibility requirements determine whether and 
to what extent telework is approved.

    Question. What percentage of IRS employees do you anticipate 
teleworking after the broader return to office date of June 25th?

    Answer. We completed our return to office plan in June 2022. We 
anticipated between 73 percent and 78 percent of IRS employees would 
telework part-time, meaning at least 1 day per week, and well under 1 
percent would telework full-time after the return to office.

    Question. What percentage of IRS employees teleworked prior to the 
COVID-19 pandemic?

    Answer. Pre-pandemic, which the Office of Personnel Management 
defines as beginning March 10, 2020, 51 percent of the workforce 
teleworked at least 1 day a week.

    Question. How were these dates--particularly the June 25th reentry 
date--determined?

    Answer. The IRS approached return to office planning consistent 
with government-wide guidance. The administration is committed to 
collaborating with labor partners; this plan reflects extensive 
conversations with the National Treasury Employees Union about ensuring 
a safe environment. The IRS phased in this plan to ensure a smooth 
transition with minimal disruption to taxpayers, operations, and 
employees.

    Question. In a March 8, 2022 response to Senate Finance Committee 
Republicans regarding a December 2021 letter that we sent concerning 
IRS privacy protections, you reiterated that the Treasury Department, 
Office of the Inspector General, FBI, and DOJ were each conducting 
independent investigations of ProPublica's claim to have 15 years of 
protected data from the tax returns of thousands of Americans.

    Are you aware of the status of any of those investigations?

    How often do you communicate with those agencies?

    To your knowledge, has the IRS or Treasury asked ProPublica for a 
copy of the information that they claim to have from the returns of 
thousands of taxpayers?

    Answer. I am not aware of the status of these investigations and do 
not communicate with them regarding their investigations. The IRS has 
not requested a copy of the information that ProPublica has in their 
possession.

                                 ______
                                 
              Questions Submitted by Hon. Elizabeth Warren
    Question. The Child Tax Credit is a historic child anti-poverty 
effort that brings over 100 billion Federal dollars to around 67 
million children in the U.S.\23\ However, millions of families have 
missed out on claiming this credit.\24\ IRS data shows that the Earned 
Income Tax Credit, another credit that helps to reduce poverty, also 
frequently goes unclaimed by qualifying taxpayers.\25\ Data on 
unclaimed tax credits is a critical tool in efforts to reach eligible 
families.
---------------------------------------------------------------------------
    \23\ Shah Family Foundation, ``Tax Benefits Outreach in 
Massachusetts,'' 2021, p. 3, https://static1.squarespace.com/static/
5e25d642e0556233b7fc89d2/t/61d32932b3e9d606167e4b99/1641
228600898/FindYourFunds+Outreach+Report+2021.pdf.
    \24\ Department of Treasury, ``By ZIP Code: Number of Children 
Under Age 18 With a Social Security Number Who Are Not Found on a Tax 
Year 2019 or 2020 Tax Return but Who Appear on a Tax Year 2019 Form 
1095 and Associated Number of Policy Holders,'' June 2021, https://
home.treasury.gov/system/files/131/Estimated-Counts-of-Children-
Unclaimed-for-CTC-by-ZIP-Code-2019.pdf.
    \25\ Internal Revenue Service, ``EITC Participation Rate by States 
Tax Years 2011 Through 2018,'' December 2021, https://www.eitc.irs.gov/
eitc-central/participation-rate/eitc-participation-rate-by-states.

    The IRS released data on the number of children under age 18 with a 
Social Security number who are not found on a Tax Year 2019 or 2020 tax 
return but who appear on a Tax Year 2019 Form 1095.\26\ Does the IRS 
have this same data for Tax Year 2021 and does the IRS plan to release 
it to assist in outreach efforts? If not, why not?
---------------------------------------------------------------------------
    \26\ Department of Treasury, ``By ZIP Code: Number of Children 
Under Age 18 With a Social Security Number Who Are Not Found on a Tax 
Year 2019 or 2020 Tax Return but Who Appear on a Tax Year 2019 Form 
1095 and Associated Number of Policy Holders,'' June 2021, https://
home.treasury.gov/system/files/131/Estimated-Counts-of-Children-
Unclaimed-for-CTC-by-ZIP-Code-2019.pdf.

---------------------------------------------------------------------------
    Answer. We do not have this data at this time.

    Question. The IRS released data on Earned Income Tax Credit 
participation rates for Tax Years 2011-2018.\27\ Does the IRS have this 
same data for Tax Years 2019-2021 and does the IRS plan to release it 
to assist in outreach efforts? If not, why not?
---------------------------------------------------------------------------
    \27\ Internal Revenue Service, ``EITC Participation Rate by States 
Tax Years 2011 Through 2018,'' December 2021, https://www.eitc.irs.gov/
eitc-central/participation-rate/eitc-participation-rate-by-states.

    Answer. We posted Tax Year 2019 participation rates on the IRS.gov 
webpage later this year and we expect to post the Tax Year 2020 
participation in 2023. The IRS collaborates with the U.S. Census Bureau 
to produce the Earned Income Tax Credit participation rates. The report 
provides information 3 years behind the current tax year to facilitate 
---------------------------------------------------------------------------
data collection and estimation procedures.

    Question. The IRS has previously released data on Federal 
individual income tax filers by ZIP code, including how the taxpayers 
filed.\28\ Can the IRS provide data on the number of returns filed by 
non-filers in 2021 by ZIP code and month, including the number of 
individuals who filed that are non-filers--including people who are not 
required to file a return and separately, people who hadn't filed 
returns in the last 3 years--and how they filed? And can the IRS 
provide the number of these individuals who filed full returns and how 
they filed returns (such as paid tax preparers, VITA), and the number 
of individuals who filed simplified returns and how they did so (such 
as IRS non-filer portal, GetCTC, and paper simplified returns)? If not, 
why not?
---------------------------------------------------------------------------
    \28\ Internal Revenue Service, ``SOI Tax Stats--Individual Income 
Tax Statistics--ZIP Code Data (SOI),'' December 7, 2021, https://
www.irs.gov/statistics/soi-tax-stats-individual-income-tax-statistics-
zip-code-data-soi; Brookings Institution, ``Earned Income Tax Credit 
(EITC) interactive and resources,'' December 21, 2016, https://
www.brookings.edu/interactives/earned-income-tax-credit-eitc-
interactive-and-resources/.

---------------------------------------------------------------------------
    Answer. We do not have this data.

    Question. How many low-income filers have received a Letter 5071C 
or 6331C this year, and how many were able to successfully verify their 
identities?

    Answer. This calendar year through April, approximately 1.3 million 
returns for taxpayers with an adjusted gross income of less than 
$50,000 received a letter 6331C or 5071C letter. We resolved and closed 
about 390,000. The remainder are open pending taxpayer authentication.

    A taxpayer may authenticate their identity by phone, online or in 
person at a Taxpayer Assistance Center. If the authentication is 
successful, we complete the processing of the taxpayer's return and 
quickly release the refund, generally within 21 days if there are no 
other issues.

    The IRS's pre-refund return selection process is critical to 
protect taxpayers from identity theft refund fraud and prevent lost 
revenue. We select a return for further review when it matches 
characteristics of an at-risk return in one of the many filters. We 
select returns for additional authentication only when they break our 
established filters or patterns. Each year, the refund returns that 
have suspicious indicators of refund fraud out of the individual tax 
returns processed represent only about 3 percent of returns filed.

    Question. I appreciate the tremendous efforts of the IRS to serve 
taxpayers even as it faces long-term underfunding and pandemic-related 
challenges. Through the end of 2021, the IRS issued more than 175 
million third-round Economic Impact Payments (EIPs) which served as a 
critical economic lifeline.\29\ Families who did not receive an EIP are 
eligible for the money in the form of a Recovery Rebate Credit (RRC) 
when they file their taxes. However, these families have to correctly 
input information on their tax returns to claim the credit. Similarly, 
the IRS issued about $16 billion to over 36 million families in the 
final batch of advance Child Tax Credit (CTC) payments in 2021, but 
families may remain eligible for half or more of the CTC amount to 
which they are entitled.\30\ In order to claim it, however, they need 
to accurately account for the advance CTC payments that they have 
received so far on their tax returns. Thus, it is more important than 
ever for low-income taxpayers to file and do so accurately.
---------------------------------------------------------------------------
    \29\ Internal Revenue Service, ``All third Economic Impact Payments 
issued; parents of children born in 2021, guardians and other eligible 
people who did not receive all of their third-round EIPs can claim up 
to $1,400 per person through the 2021 Recovery Rebate Credit,'' January 
26, 2022, https://www.irs.gov/newsroom/all-third-economic-impact-
payments-issued.
    \30\ Internal Revenue Service, ``Families will soon receive their 
December Advance Child Tax Credit payment; those not receiving payments 
may claim any missed payments on the upcoming 2021 tax return,'' 
December 15, 2021, https://www.irs.gov/newsroom/families-will-soon-
receive-their-december-advance-child-tax-credit-payment-those-not-
receiving-payments-may-claim-any-missed-payments-on-the-upcoming-2021-
tax-return.

    However, according to Erin Collins, the National Taxpayer Advocate, 
the IRS issued over 11 million math error notices relating to RRC 
claims and nearly 14 million math error notices overall.\31\ These 
error notices are sent to taxpayers when there are discrepancies 
between a tax return and IRS records, such as on EIP and CTC payments 
or W-2 income.
---------------------------------------------------------------------------
    \31\ National Taxpayer Advocate, ``Annual Report to Congress 
2021,'' January 2022, pp. 2-3, https://www.taxpayeradvocate.irs.gov/wp-
content/uploads/2022/01/ARC21_Full-Report.pdf.

    What is the average and maximum delay in processing and receiving 
tax refunds, if eligible, that taxpayers face if they make a math error 
---------------------------------------------------------------------------
on EIP and CTC payment amounts or W-2 income?

    Answer. Currently, the average delay for returns that fall out for 
error correction is 10 days. The maximum time is currently 14 days. We 
either then correct the return, send correspondence to the taxpayer 
about any changes, and issue refunds, or we send correspondence to the 
taxpayer requesting additional information. At this point, the time for 
resolution depends on the time it takes the taxpayer to respond.

    Question. How are math errors on EIP and CTC payment amounts or W-2 
income impacting the IRS backlog and burden on the IRS?

    Answer. Some types of math errors have more effect on the IRS than 
others. All math errors add to the processing time of tax returns and 
increase overall inventories. The continued increase in electronic 
filing will lead to an overall decrease in math errors and a higher 
probability of automated resolution.

    This filing season, we can correct most simple errors with Economic 
Impact Payments (EIPs) and Child Tax Credit (CTC) with our automated 
tool FixERS. Therefore, these errors have a very insignificant effect 
on our inventory and our ability to deliver a timely product.

    However, we need additional resources to review, correspond with 
taxpayers, and correct other types of errors, such as W-2 errors, 
because these errors must be addressed manually. Manually addressing 
these errors diverts resources from paper return processing.

    Question. The IRS has made efforts to make available to taxpayers 
the amount in EIP and CTC payments that they have received via IRS 
online accounts and letters to taxpayers. Do you have any data on the 
extent to which those steps have helped taxpayers file accurately? What 
are the limitations of these efforts in addressing math errors?

    Answer. We do not have data available on this as we can't establish 
a direct link between available information and filing accuracy.

                                 ______
                                 
             Questions Submitted by Hon. Sheldon Whitehouse
    Question. Under section 501(c)(4) of the tax code, an organization 
can be exempt from tax if it is operated exclusively for the promotion 
of social welfare. Treasury regulations further provide that to qualify 
for this tax exemption, its primary activity must be the promotion of 
social welfare, which does not include political campaign intervention. 
In practice, this means that a 501(c)(4) cannot spend more than 50 
percent of its funds on political campaign intervention.

    Let's say there are four 501(c)(4) organizations that are 
affiliated with one another, potentially sharing staff or even office 
space. The first spends half of its budget on political campaign 
intervention and gives the other half to the second organization, which 
proceeds to spend half of that on political campaign intervention and 
give the other half to the third organization, and so-on. In the end, 
over 90 percent of the budget of the four nominally separate 
organizations has been spent on political campaign intervention.

    You said during your appearance before this committee that under 
these circumstances, IRS agents would likely ``consolidate if it's 
really a money circle,'' and therefore find what is effectively a 
single organization to have engaged in impermissible activity.

    Has the IRS ever identified fact patterns of this nature or similar 
and if so, what enforcement actions, if any, has it taken in response? 
What tools or additional resources does the IRS need to effectively 
identify these schemes?

    Answer. The IRS receives information about noncompliance through 
analyzing quantitative information (Form 990 data) and internal and 
external referrals of alleged noncompliance. Taxpayer privacy law under 
Internal Revenue Code (IRC) section 6103 prevents us from discussing 
specific cases or taxpayers.

    An organization's eligibility for an IRC section 501(c)(4) Federal 
income tax exemption is based on all the facts and circumstances. A 
``facts and circumstances'' analysis, here, means determining whether 
activities promote social welfare or constitute political campaign 
intervention, and measuring the organization's social welfare 
activities relative to its total activities.

    This facts-and-circumstances analysis creates considerable 
confusion for the public and the IRS when making IRC section 501(c)(4) 
determinations and evaluating ongoing IRC section 501(c)(4) compliance. 
The Consolidated Appropriations Act, 2021, states that ``none of the 
funds made available in this or any other Act may be used by the 
Department of the Treasury, including the Internal Revenue Service, to 
issue, revise, or finalize any regulation, revenue ruling, or other 
guidance not limited to a particular taxpayer relating to the standard 
which is used to determine whether an organization is operated 
exclusively for the promotion of social welfare for purposes of section 
501(c)(4) of the Internal Revenue Code of 1986 (including the proposed 
regulations published at 78 Fed. Reg. 71535 (November 29, 2013)).''

    However, we can view circular transactions as a single transaction. 
The courts have sanctioned a doctrine under which related yet distinct 
steps in a transaction ``may not be considered independently of the 
overall transaction.''\32\ As to attribution of funds between entities, 
the court has said that the law ``requires only that the two groups be 
separately incorporated and keep records adequate to show that tax 
deductible contributions are not used to pay for lobbying.''\33\
---------------------------------------------------------------------------
    \32\ Commissioner of Internal Revenue v. Clark, 489 U.S. 726, 738 
(1989).
    \33\ Regan v. Taxation With Representation, 461 U.S. 540, 545 note 
6 (1983).

    Question. You noted during the hearing that the IRS would ``have to 
be able to identify'' that the type of abuse described above has 
occurred in order to take enforcement action. In 2020, the Treasury 
Department and the IRS finalized a rule that eliminated donor reporting 
---------------------------------------------------------------------------
requirements for 501(c)(4) organizations.

    Did this change make it harder for the IRS to identify the type of 
abuse described in the question above?

    Answer. No, the IRS does not need the names and addresses of 
substantial donors on Schedule B of Form 990 or Form 990-EZ.\34\ In 
general, the identity of substantial donors would not prove that the 
organization's activities promote social welfare. Similarly, donor 
identity would not affect a determination of the organization's primary 
purpose.
---------------------------------------------------------------------------
    \34\ See 85 Federal Register 31,963 (2020).

    Other data on Form 990, Schedule I (grants to domestic 
organizations) and Schedule R (information on related organizations and 
certain transactions with related organizations) is potentially more 
useful for this purpose. Schedule B of the Forms 990 and 990-EZ 
requires all tax-exempt organizations to report the amounts of 
contributions from each substantial contributor (but not the 
contributor's name or address). It also requires them to maintain the 
names and addresses of substantial contributors should the IRS need 
this information on a case-by-case basis. This is sufficient for the 
efficient administration of the Internal Revenue Code. The 2020 
regulation didn't compromise the requirement to present the data on 
---------------------------------------------------------------------------
exam.

                                 ______
                                 
                 Questions Submitted by Hon. Todd Young
    Question. The IRS's processing backlog ballooned to over 20 million 
unprocessed returns earlier this year.\35\ In response to the growing 
backlog, I understand the IRS increased hiring levels and reassigned 
some individuals to ``surge teams.'' While I laud these efforts to 
reduce the backlog, my constituents continue to experience significant 
delays in the processing of their returns and refunds.
---------------------------------------------------------------------------
    \35\ https://www.cnbc.com/2022/03/11/-irs-plans-to-hire-10000-
workers-to-tackle-massive-backlog.html.

    When can my constituents reasonably expect the IRS to have fully 
---------------------------------------------------------------------------
cleared its backlog from the 2021 and prior tax filing seasons?

    Answer. We redeployed and reallocated resources throughout the IRS 
and have implemented innovative strategies in an ongoing effort to 
provide a meaningful reduction in our inventories. These steps resulted 
in the IRS completing the processing of all error free individual 
income tax returns taxpayers filed in 2021 as of June 24, 2022. We must 
continue pursuing innovative strategies to fulfill our commitment to 
return inventories to a healthy level.

    Question. What quantifiable impact have ``surge teams'' had on the 
reduction of the backlog?

    Answer. Quantifiable results are not yet available. We are working 
to create a report to isolate surge employee efficiencies.

    Question. During the hearing, some of my colleagues brought up the 
IRS data leak of confidential taxpayer information to ProPublica. My 
colleagues and I remain frustrated that neither Congress nor the public 
has been informed on the cause of that massive data leak, which is 
unacceptable given that it's been over 10 months.

    One of the reasons I find this leak so concerning is that the IRS 
has a documented history of political targeting. Taxpayers need to know 
that the sensitive information they provide the IRS is not only kept 
confidential, but is also only used for the fair and unbiased 
administration of our tax laws.

    The Washington Post reported on April 4th that as part of its 
recruiting efforts in Ogden, UT, the IRS's ``marketing department'' had 
``sent postcards to homes with incomes under $50,000.''\36\ This would 
seem to indicate the IRS is still using taxpayer information for 
purposes beyond just tax administration.
---------------------------------------------------------------------------
    \36\ https://www.washingtonpost.com/politics/2022/04/04/irs-tax-
backlog-hiring/.

    Can you please confirm whether this reporting is true? In your 
response, please provide specific details on how the IRS identified the 
persons with household incomes below $50,000, what information it used 
---------------------------------------------------------------------------
to do so, and the origin of that information.

    Answer. Generally, the IRS will send postcards to individuals in 
the ZIP codes of the local commuting area prior to our initial 
recruitment efforts. We do not use any household income data.

    Question. If the IRS's internal taxpayer data was utilized for this 
targeted recruitment effort, do you believe this was an appropriate use 
of taxpayer information?

    Answer. We are not aware of any effort to use internal taxpayer 
income data for targeted recruitment efforts.

    Question. What additional safeguards does the IRS need to put in 
place to ensure that taxpayer information is not used for any kind of 
targeting--whether that be to achieve political goals, recruit new 
employees, or for any other reason?

    Answer. We are not aware of any effort to use internal taxpayer 
income data for targeted recruitment efforts.

    Question. Only 11 percent of calls to the IRS were answered by 
customer service representatives in 2021.\37\ With that said, I 
understand the IRS has rolled out new voice and chatbot services to 
assist taxpayers with simple inquiries.\38\
---------------------------------------------------------------------------
    \37\ https://www.taxpayeradvocate.irs.gov/news/nta-blog-hello-is-
anyone-there-taxpayers-and-practitioners-continue-to-experience-
frustration-over-lack-of-adequate-phone-service/#::text=
Taxpayers%20have%20difficulty%20reaching%20IRS,of%20calls%20reached%20a%
20CSR.
    \38\ https://www.irs.gov/newsroom/irs-unveils-voice-and-chat-bots-
to-assist-taxpayers-with-simple-collection-questions-and-tasks-
provides-faster-service-reduced-wait-times.

    What impact do you believe this new service offering will have on 
---------------------------------------------------------------------------
overall call volumes to the IRS?

    Answer. The new Collection voice and chatbots provide new self-
service options to taxpayers, allowing immediate service without 
waiting. Both voice and chatbots are relatively new technologies at the 
IRS. We launched the first Collection chatbot on December 10, 2021, 
followed by the Collection voicebot on January 3, 2022. The IRS 
previously used an Economic Impact Payment informational voicebot in 
May 2021.

    The IRS Collection voicebot has provided taxpayers assistance with 
One-Time Payment information, Notice Clarification, and Frequently 
Asked Questions. Taxpayers have used the Collection voicebots over 2 
million times, with the taxpayer not escalating to a live assistor 40 
percent of the time. Taxpayers have used the Collection chatbots over 
250,000 times to date; these bots reduced live agent chat requests by 
almost 80 percent, freeing agents to serve taxpayers with more complex 
issues.

    In June 2022, the IRS will also deploy an authenticated Collection 
voicebot. This voicebot allows taxpayers who have verified their 
identity to set up installment agreements and get account or return 
transcripts and account history without waiting for live telephone 
help.

    In addition, FY 2021 and FY 2022, the IRS Wage and Investment 
division deployed voicebot automated services on two toll-free product 
lines, the Economic Impact Payments line, and the Advance Child Tax 
Credit line. The voicebots provide unauthenticated responses to 
general, procedural questions using information from the frequently 
asked questions on IRS.gov. As of April 21, 2022, over 10.8 million 
callers have interacted with these voicebots combined, and we resolved 
over 4.8 million calls (45 percent) without transferring to a live 
assistor.

    Question. Are there other technologies the IRS is considering to 
help reduce call volumes? If so, please provide details on those 
technologies and anticipated timelines.

    Answer. Yes, the IRS is continuously exploring opportunities for 
online services and new technologies to meet taxpayer needs and reduce 
call volumes. The IRS analyzes data on call volumes and drivers to 
determine features to add to Online Account (for individual taxpayers) 
and to build new online applications. Our goal is to allow taxpayers 
with simple questions to use self-service tools. Live assistors can 
then focus on more complex issues requiring a live interaction. 
Examples include enabling taxpayers to update their address online (to 
be launched in summer 2022), improving and expanding online payment 
options, and integrating secure messaging into Online Account.

    There are other technologies the IRS is using or investigating to 
improve taxpayer service. These include:

        1.  Adding information about financial relief to both 
        Collection voicebots and chatbots;
        2.  Expanding voicebot functionality so taxpayers can verify 
        their identity to set up an installment agreement, order a 
        transcript, retrieve payment information, and receive a balance 
        due payoff figure;
        3.  Increase the use of Live Chat to provide taxpayers and tax 
        practitioners another channel for live assistor service;
        4.  Increase the use of Customer Callback to include the 
        ability to schedule a callback;
        5.  Modernize Online Payment Plan self-service options and 
        integrate them into the Online Account platform. This change 
        will improve user experience and our online taxpayer engagement 
        so taxpayers don't need to call or write the IRS. We plan to 
        deploy additional long term payment plan options and expanded 
        status information for taxpayers with existing plans in Fiscal 
        Year 2023.

    The IRS Wage and Investment (W&I) division identified several other 
uses for future voicebot and chatbot services. Currently, W&I and IRS 
Information Technology (IT) are developing automated chatbot services 
for Refund Status and Advanced Child Tax Credit topics. These chatbots 
will provide unauthenticated general information in a guided help 
format on IRS.gov. We aim to deploy these bots this summer.

    The IRS has future plans to add other authenticated and 
unauthenticated voicebot/chatbot uses on other topics. These bots will 
reduce call demand for live assistance on many topics, including: 
Change of Address, Amended Returns, Transmitter Control Codes, Identity 
Theft/Victim Assistance, e-File application maintenance, walk-in 
taxpayer appointments, Employer Identification Number frequently asked 
questions, Extension to file guidance, e-File rejection error guidance, 
and e-File Fingerprint instructions. The IRS is also exploring live 
chat technology with customer service representatives as an alternative 
to a call when escalating from a chatbot.

    Question. When the National Taxpayer Advocate testified before the 
Senate Finance Committee in February, the IRS had announced that it was 
hiring 5,000 positions in preparation for the 2022 filing season, but 
had only been able to fill 179 of those so far.\39\ Since that time, 
the IRS has announced plans to hire an additional 5,000 positions.\40\
---------------------------------------------------------------------------
    \39\ https://www.finance.senate.gov/imo/media/doc/
National%20Taxpayer%20Advocate%20
Testimony%20-
%20Senate%20Finance%20Hearing%20on%20Cust%20Serv%20Challenges%20-%
202-17-2022%20-%20updated%20chart.pdf.
    \40\ https://www.irs.gov/newsroom/irs-hiring-more-than-5000-
positions-in-austin-kansas-city-
ogden#::text=WASHINGTON%20%E2%80%94%20To%20help%20serve%20taxpayers,Mis
souri
%3B%20and%20Ogden%2C%20Utah.

    As part of the Consolidated Appropriations Act, 2022 signed into 
law in March, the IRS was granted hiring authorities to bring new 
employees onboard within 40 to 45 days, rather than the usual several 
months.\41\
---------------------------------------------------------------------------
    \41\ https://www.congress.gov/bill/117th-congress/house-bill/2471/
text.

    Can you provide me with an update on how many position have been 
---------------------------------------------------------------------------
filled out of the initial 5,000 job listings?

    Answer. As of August 31, 2022, Submission Processing has filled 
2,987 Clerk/TE positions (i.e., applicants have accepted firm job 
offers or have onboarded), and there are an additional 1,428 applicants 
who have accepted tentative offers and are currently in the onboarding 
process. Accounts Management has filled 3,503 CSR positions. In 
addition, 4,129 applicants accepted tentative offers and are in the 
onboarding process.

    Question. How will these new hiring authorities enable the IRS to 
hire more employees and onboard them more efficiently?

    Answer. The direct hire authority (DHA) allows the IRS to conduct 
on-the-spot hiring at recruitment events. At these events, IRS can make 
qualification determinations; interview and make selections; determine 
shift preferences based on availability; extend tentative job offers; 
receive applicants' acceptance; complete the required forms to begin 
the pre-employment process; and conduct fingerprints sessions on site, 
reducing hiring time by eliminating the need a separate fingerprint 
appointment. DHA reduces hiring time frames from 80-120 days to 45-60 
days.

    Question. The GAO Director of Strategic Issues, Jessica Lucas-Judy, 
noted in her February testimony before the Senate Finance Committee 
that attrition, particularly among returns processing staff, is a 
challenge nearly equivalent to the IRS's hiring woes. In 2021, the IRS 
had an attrition rate of 17 percent for this group of employees, more 
than double the average for the total IRS workforce.\42\ In fact, for 
every 10 new hired returns processing staff, four were needed just to 
offset the rate of attrition.\43\
---------------------------------------------------------------------------
    \42\ https://www.gao.gov/assets/gao-22-105802.pdf.
    \43\ Id.

    What is the IRS doing to lower the high attrition rate for returns 
---------------------------------------------------------------------------
processing staff?

    Answer. To assist with hiring and employee retention initiatives, 
we are standing up a Reskilling Academy at our three Submission 
Processing sites beginning in August 2022. The program provides 
employees an intensive training program with the opportunity to develop 
competencies necessary to qualify for a higher graded position. The 
curriculum includes a mix of self-study, direct instruction, hands-on 
learning and application, and assessments to track participant's 
progress. The program offers an accelerated promotion opportunity where 
participants successfully completing the program will be offered 
placement in a higher graded position within Submission Processing 
without competition. The rollout includes grade 3 and 4 clerical 
employees being reskilled to entry level Grade 5 Tax Examiner 
positions.

    We have also used our internal employee viewpoint survey to address 
issues that employees have identified as important, such as improving 
training, communication, and opportunities for advancement. During new 
hire orientations, managers are addressing career paths and future 
available opportunities for advancement.

    Question. How has high attrition rate significantly contributed to 
the unprecedented backlog we saw build up last year?

    Answer. The IRS experienced extraordinary challenges during the 
COVID-19 pandemic. The return processing inventory backlog was the 
result of a combination of factors including a temporary shutdown in 
2020 of all IRS processing sites due to the COVID outbreak; an 
increased number of e-file and paper returns filed to claim new COVID 
tax credits; increased employee turnover rates due to the COVID 
outbreak; and consolidation of our Fresno Submission Processing Center 
in calendar year 2021.

    Because of resource limitations, changes from new legislation and 
the pandemic, we entered the 2021 and 2022 filing seasons with a 
significant inventory of unprocessed returns and correspondence. 
Additionally, we haven't yet met our hiring goals.

    We continue to recruit and offer various Direct Hiring Authority 
(DHA) events. The DHA granted to the IRS in February 2022 gives us 
approval to hire 10,000 employees through the end of calendar year 2023 
for Accounts Management and Submission Processing to support inventory 
reduction efforts.

    We continue pursuing innovative strategies to fulfill our 
commitment to return inventories to a healthy level.

    Question. In an April 1, 2022, Forbes article, former IRS 
Commissioner Mark Everson--who praised the IRS's success in disbursing 
COVID funds and has advocated for increased funding for the IRS--said 
that the backlog of returns ``compromises the integrity'' of the tax 
system.\44\ Mr. Everson suggested the IRS bring all employees back to 
the office immediately and begin deploying everybody except criminal 
investigators to clear the backlog. I understand you are working to 
hire personnel, but that will certainly take some time. You have also 
said that this is an ``all-hands-on-deck'' situation.
---------------------------------------------------------------------------
    \44\ https://www.forbes.com/sites/ashleaebeling/2022/04/01/irs-we-
apologize-your-tax-refund-is-delayed/?sh=18e6bda87d62.

    If this indeed is an ``all-hands-on-deck'' situation, why not have 
the IRS bring back all employees now rather than phasing them in 
through May and June, and assign them to temporary duty in the Ogden, 
---------------------------------------------------------------------------
Austin, and Kansas City processing centers?

    Answer. In April 2020, IRS ceased numerous on-campus operations due 
to COVID-19. On June 1, 2020, employees with non-portable work began 
returning to campuses, using a phase approach and in accordance with 
current State and local guidelines. Following CDC guidelines, we 
implemented social distancing requirements that reduced the staff 
footprint by half in most areas. In January 2021, all employees had to 
return to duty. Employees were no longer permitted to remain on paid 
leave due to the pandemic.

    In February 2022, the IRS quickly established an Inventory Surge 
Team to improve the taxpayer experience and to address the 
unprecedented inventory and higher call volumes. To staff the Inventory 
Surge Team, the IRS identified employees with prior experience in this 
area and temporarily assigned them to the team. Eligible employees 
included those who were Accounts Management customer service 
representatives, tax examiners, clerks or had Campus Support experience 
within the last two fiscal years. We excluded positions that would not 
directly impact case closures, such as managers and analysts.

    In March 2022, the IRS further increased taxpayer assistance by 
asking 700 Small Business/Self-Employed (SB/SE) employees to 
temporarily work at our Wage and Investment Submission Processing 
sites. These teams are made of SB/SE Campus Collection and Examination 
employees at our Austin, Ogden, and Kansas City sites.

    Question. There have been reports of individuals improperly 
receiving Economic Impact Payments (EIP). In some cases, these are 
individuals who did not qualify in the first place, or received more 
than they should have, and in others, it is individuals who claimed the 
Recovery Rebate on their 2020 tax return despite having already 
received EIPs. I have also heard of similar issues relating to the 
Advanced Child Tax credit payments.

    What happens if a taxpayer who has received all three EIP checks 
claims an EIP payment on his or her tax return?

    Answer. The first and second rounds of Economic Impact Payments 
(EIPs) were advance payments of the Tax Year 2020 Recovery Rebate 
Credit (RRC). The third round of EIP was an advance payment of the Tax 
Year 2021 Recovery Rebate Credit (RRC). Taxpayers who already received 
the full amount of the EIP can't claim the RRC on the tax return. If a 
taxpayer makes this error, we adjust the return to remove and or reduce 
the credit, and the taxpayer receives a notice explaining the change 
made to their tax return.

    Question. What happens if two parents separately claim the Advance 
Child Tax Credit for the same child?

    Answer. Generally, a taxpayer cannot use a qualifying child's 
Taxpayer Identification Number (TIN) to claim a credit on more than one 
tax return per tax year. When a taxpayer reports a qualifying child on 
more than one tax return, they may inappropriately receive tax 
benefits.

    The IRS has ways to identify when the same qualifying child appears 
on multiple tax returns. For electronic returns, the IRS will reject 
the return if the qualifying child's TIN has already been used on 
another return. If we rejected the electronic return for a taxpayer but 
the taxpayer has a legitimate claim for the child, the taxpayer will 
need to file a paper return to claim the qualifying child.

    We have multiple potential compliance approaches for taxpayers with 
duplicate dependents. We can issue a notice about the duplication with 
the opportunity for the taxpayer to self-correct by filing an amended 
return removing the child and the related tax benefit. For some 
returns, we may conduct an audit. If we determine the taxpayer was 
ineligible to claim the child, they will have to repay any tax benefit 
they received, plus interest.

    Question. Does the IRS have an estimate of the total dollar amount 
of EIPs, Recovery Rebates, and Advance Child Tax Credits that have been 
improperly claimed?

    Answer. Recovery Rebate Credits (RRC) and related versions of 
Economic Impact Payments (EIP) are unprecedented in terms of magnitude 
and response times. A recent Treasury Inspector General for Tax 
Administration (TIGTA) audit report about the 175 million advance RRC 
payments (EIP3) we issued to 167.4 million individuals found that the 
IRS correctly computed the RRC amount for 166.6 million individuals 
(99.48 percent). Another TIGTA audit report states that the IRS 
correctly calculated the allowable RRC for 26.1 million (99.3 percent) 
of the 26.3 million tax returns that claimed an RRC as of May 27, 2021. 
We were able to achieve these results by developing programming for 
stimulus payments, quickly modifying programming for subsequent 
legislation, and enhancing internal controls. Comprehensive audits of 
the expansion of the Child Tax Credit are currently under way.

    The IRS assessed both the EIP and RRC in 2021 and will continue to 
evaluate controls to reduce improper payments. The IRS follows the 
Payment Integrity Information Act (PIIA) and Office of Management and 
Budget (OMB) Requirements for Payment Integrity Improvement. The IRS 
has reported the estimated improper payment rate for the Additional 
Child Tax Credit (ACTC) in Treasury's Agency Financial Report since FY 
2019. We will use the same methodologies to evaluate improper payment 
compliance for the Advance CTC, similar to other refundable credits. 
The IRS will perform a risk assessment to evaluate the program in FY 
2022. However, there are limited benefits to devoting significant 
resources to quantifying the amount and rate of improper payments for 
short-term programs such as COVID-19 related refundable tax credit 
(RTC) programs.

    PIIA doesn't consider all aspects of tax administration in a system 
that relies heavily on voluntary reporting. In keeping with PIIA 
requirements, the IRS reports risk assessments for refundable tax 
credits, as well as improper payments. The IRS's risk assessments on 
refundable tax credits have consistently found that overclaims are not 
due to internal control deficiencies. Instead, overclaims often result 
from the difficulty of verifying eligibility, including our lack of 
access to relevant third-party data, for refundable tax credits within 
the applicable deadlines. The Tax gap methodology provides a better 
framework for reporting refundable tax credit overclaims.

    Question. What controls does the IRS have in place to ensure 
taxpayers are not improperly claiming these tax credits or payments?

    Answer. In administering refundable credits, the IRS has two 
goals--to reduce errors leading to improper payments and to increase 
eligible taxpayer participation so they receive the appropriate 
credits. Credits that are refundable attract fraud and other 
noncompliance, while the complexity of the eligibility criteria often 
leads to unintentional errors, both of which may result in improper 
payments. Addressing improper payments is an ongoing effort for us. We 
do this with a balanced approach, delivering outreach and education and 
conducting compliance activities for both taxpayers and preparers. The 
IRS has enforcement tools to address noncompliance, including audits, 
to prevent and recover improper refunds.

    Although the payment integrity provisions of the Protecting 
Americans from Tax Hikes (PATH) Act of 2015 and provisions in the Tax 
Cuts and Jobs Act of 2017 have helped IRS combat noncompliance, we need 
more assistance from Congress to significantly reduce overclaims. 
Expanded correctable or math error authority to correct more errors on 
tax returns, including errors claimed on Earned Income Tax Credit 
(EITC) returns, would give IRS the additional enforcement options for 
potential noncompliance. IRS legislative proposals in the President's 
Fiscal Year 2023 budget would give IRS increased oversight authority 
over paid tax return preparers, to help reduce preparers filing 
erroneous and fraudulent returns. Strengthening relationships with paid 
tax return preparers, educating them about eligibility requirement for 
EITC and other refundable credits and enforcing due diligence 
requirements are significant parts of IRS's strategy to prevent and 
reduce improper payments.

    Question. A consistent source of my office's constituent casework 
stems from amended tax returns getting ``lost'' in the IRS's system. As 
you know, historically amended returns were required to be submitted 
via paper, so they are much more likely to get lost during processing. 
The IRS is now allowing certain individual amended returns to be 
submitted electronically ``using available tax software products.''\45\
---------------------------------------------------------------------------
    \45\ https://www.irs.gov/filing/amended-return-frequently-asked-
questions.

---------------------------------------------------------------------------
    What types of filings are still required to be done via paper?

    Answer. There are certain documents taxpayers can only provide to 
the IRS by paper. There are a range of reasons why, including the 
following: the IRS does not have the resources to create and process 
the electronic version of the document; we need to modernize existing 
or create new systems to meet the document's requirements, such as 
digital signatures; and legislation does not allow the document to be 
submitted electronically, for example, requiring a wet ink signature.

    Beginning in January 2022, filers needing to amend a 2020 Form 
1040, U.S. Individual Income Tax Return, are able to do so 
electronically. We added the ability to amend tax years 2019, 2020, and 
2021 in June 2022 for Form 1040-NR, U.S. Nonresident Alien Income Tax 
Return, Form 1040-SS, U.S. Self-Employment Tax Return (for Bona Fide 
Residents of Puerto Rico), and Form 1040-PR, Federal Self-
Employment Contribution Statement for Residents of Puerto Rico. 
Taxpayers will also be able to electronically amend returns they 
originally submitted on paper.

    Question. For each of the filings identified in part (a) above, 
please explain why they cannot be submitted electronically.

    Answer. There are over 3,900 forms taxpayers can't file 
electronically. The complexity varies depending on the form's data, 
whether it has child form attachments, the type of form (tax, 
information, etc.), and many other factors. We have different intake 
systems and are establishing new ones. We must match each form with the 
best platform. Limited resources restrict the IRS's ability to analyze 
the forms and implement information technology changes.

    Question. In a 2018 settlement announced by the Department of 
Justice and approved by then-Judge Ketanji Brown Jackson, the IRS 
expressed its ``sincere apology'' for any delay involved with the 
application of Z Street, a nonprofit corporation dedicated to educating 
the public about issues related to Israel and the Middle East, for tax-
exempt status as a public charity under section 501(c)(3) of the tax 
code.\46\ In that settlement, the IRS acknowledged that criteria for 
tax-exempt status should not be based ``. . . on the applicants' 
political viewpoints.''\47\ In her Declaratory Judgment in the 
agreement, Judge Jackson concluded that it was ``wrong'' to use the tax 
code against any group ``based solely on any lawful positions it 
espouses on any issues'' or its ``associations or perceived 
associations with a particular political movement, position, or 
viewpoint.''\48\
---------------------------------------------------------------------------
    \46\ https://www.justice.gov/opa/press-release/file/1030516/
download; https://www.wsj.com/articles/when-judge-jackson-ruled-
against-the-irs-abuse-of-power-first-amendment-supreme-court-
11649015861?mod=opinion_lead_pos10.
    \47\ https://www.justice.gov/opa/press-release/file/1030516/
download.
    \48\ Id.

    Question. Do you agree with the position laid out by then-Judge 
(now Justice) Jackson that tax law should not be used against any group 
``based solely on any lawful positions it espouses on any issues'' or 
its ``associations or perceived associations with a particular 
---------------------------------------------------------------------------
political movement, position, or viewpoint''?

    Answer. Yes, as indicated in the settlement, the IRS is fully 
committed to the evenhanded application of the law, respecting the 
viewpoints of all taxpayers. We charged the IRS Exempt Organizations 
Division with the responsibility to administer the tax code provisions 
related to tax-exempt organizations in a fair and impartial way. The 
IRS agrees criteria for selecting tax-exempt applications or tax-exempt 
entities for IRS review should focus on the activities of the 
organizations and whether they fulfill the requirements of the law, and 
not on the applicants' political viewpoints.

    Question. Since assuming the role of IRS Commissioner, what steps 
have you taken to ensure political ideology or positions on issues are 
not taken into consideration when the IRS makes decisions on such 
matters as tax-exempt status applications?

    Answer. Since joining the IRS, I have focused on improving service 
to the Nation's taxpayers, balancing appropriate enforcement of the 
Nation's tax laws while respecting taxpayer rights. In 2017, the IRS 
was a party to a consent order filed in the U.S. District Court for the 
District of Columbia. In 2018, we informed all employees of the IRS 
Exempt Organization Division of the terms of that agreement. These 
terms include the District Court declaration in that case that it is 
``wrong to apply the United States tax laws, including any and all tax 
rules, regulations, policies, procedures, and standards of review, to 
any tax-exempt applicant or entity based solely on such entity's name, 
any lawful positions it espouses on any issues, or its associations or 
perceived associations with a particular political movement, position, 
or viewpoint.''

    The training of IRS employees is ongoing, as we strive for 
continuous improvement in applying the tax law with fairness and 
integrity for all.

    Question. As you know, the Office of Management and Budget (OMB) 
issued a 2018 memorandum instructing all Federal agencies to transition 
``to a fully electronic environment, and end the National Archives and 
Records Administration's (NARA) acceptance of paper records by December 
31, 2022.\49\ I understand the IRS has been working to adopt an 
approach called Scanning-as-a-Service (SCaaS) to help the agency reduce 
its reliance on paper, and in August 2021, awarded five $7.5 million 
contracts to five different companies to help the IRS scan and digitize 
its paper files. In your April 8, 2022, letter to several of my 
Republican colleagues and me, you noted that ``although we are 
cautiously optimistic of [the five SCaaS contractors'] progress to 
date, it is important to note that a significant amount of work remains 
to confirm the viability of these pilots, as well as their ability to 
scale to other use cases.''
---------------------------------------------------------------------------
    \49\ https://www.archives.gov/files/records-mgmt/policy/m-19-21-
transition-to-federal-records.pdf.

    Question. What have been the biggest challenges the IRS has faced 
---------------------------------------------------------------------------
in adopting SCaaS functionality?

    Answer. The IRS is exploring Scanning as-a-Service (SCaaS) options 
using 
contractor-managed services to digitize or digitalize paper records. 
This functionality will let the IRS transition from a paper record 
environment to an electronic record environment, in accordance with 
Office of Management and Budget (OMB) guidance.

    In August 2021, the IRS awarded five contracts to test SCaaS-
managed service functionality and explore full-scale adoption if the 
initial use case is successful. The SCaaS contractors completed Phase 1 
of the contracts, and 3 contractors advanced to Phase 2 in anticipation 
of a target-State IT solution scheduled for December 2022. The scanning 
contractors are progressing through the onboarding process, completing 
necessary security assessments, and preparing to scan the first SCaaS 
use case.

    By its very nature, SCaaS is a fundamentally different approach to 
digitizing and digitalizing records that is sufficiently flexible to 
scale to other use cases when and as it proves successful. Challenges 
have included security clearance timelines, identifying prerequisites 
to safely and appropriately disposing of documents that have been 
digitized, and determining how to identify resources and prioritize 
additional use cases based on enterprise-wide needs. Although 
additional challenges undoubtedly remain, we are proud of our progress 
in this space and our consistent engagement with industry partners who 
are helping us examine the opportunities for tackling this complicated 
problem in a different way.

    Question. Do you believe the IRS will be able to meet the December 
31, 2022 OMB deadline for Federal agencies to fully transition to an 
electronic environment? If not, when do you expect the IRS will meet 
this deadline?

    Answer. No, the IRS will not be able to meet the December 31, 2022, 
deadline.

    The IRS processes nearly 169 million returns and other forms 
annually and stores between 5.7--7 million cubic feet of paper records 
(the bulk of which are tax returns) at Federal Records Centers (FRCs) 
nationwide. Although more than 90 percent of individual returns are 
electronically filed, IRS receives millions of returns and other 
taxpayer documents on paper every year.

    Given the paper-intensive nature of business operations, full 
compliance with OMB/NARA M-19-21 is not feasible by December 31, 2022. 
Therefore, IRS contacted the National Archives and Records 
Administration and formally requested an exception from the requirement 
and authorization to continue to transfer paper records to the FRCs 
until January 2028, during which time we will continue our 
digitalization efforts to further reduce reliance on and necessary 
storage of paper records.

    Question. As you know, audit logs can be an effective tool for 
retroactively determining unauthorized access to confidential taxpayer 
data sets. Additionally, user access reviews can help find individuals 
who may have been assigned a level of access incommensurate with their 
role and responsibilities. Audits logs and user access reviews are 
particularly relevant considering the source of the June 2021 leak of 
troves of private taxpayer information to ProPublica has apparently not 
yet been identified. I understand other Federal agencies have 
jurisdiction over this matter and are currently conducting 
investigations.

    How often does the IRS review audit logs for violations such as 
unauthorized access to taxpayer data sets and perform user access 
reviews for inappropriate privileges assigned to users?

    Answer. The IRS has several different monitoring methods of audit 
logs for multiple security threat and compliance purposes, including 
Unauthorized Access, which we call UNAX, on a daily, weekly, and 
monthly basis. The variation of frequency is driven by data 
availability, analytic platform capabilities, and policy. As a result 
of these efforts, the IRS has processed 462 violations resulting in 
suspension, resignation, and removal over the past 10 years.

    The IRS requires that individuals recertify their access to IRS 
applications on a regular schedule. For ``non-privileged'' roles such 
as an employee's access to the agency's official timekeeping system, 
the recertification process occurs annually. For ``privileged'' roles, 
the recertification process occurs every 6 months.

    Question. The IRS frequently says it is near-current on ``opening 
mail,'' and yet many of my constituents wait for months, sometimes 
close to a year, for any indication from the IRS that it has received a 
mailed return or other tax document. I understand there is a difference 
between opening the mail and ``processing'' the mail, but it seems hard 
to believe that should take upwards of a year.

    Can you please outline the process of what happens when one of the 
IRS's processing centers receives a mailed tax return from a taxpayer, 
from start to finish? Please also include the current average timeline 
for each step in the process.

    Answer. Please see the following link, as it provides a visual, 
simplified pipeline of one of our Submission Processing centers. This 
video is accessible to the public: http://www.irsvideos.gov/
Professional/IRSWorkProcesses/SubmissionProcessing
Pipeline.

    The primary purpose of the processing pipeline is to transfer 
taxpayer information from a paper return to the computer in an 
electronic version.

        1.  Incoming mail is automatically sorted and opened by a 
        machine called the Service Center Automated Mail Processing 
        System (SCAMPS) that reads the bar-coded envelopes that 
        identify the types of returns inside. The machine separates 
        returns with payments from those without payments by detecting 
        magnetic ink on enclosed checks.

        2.  Returns are extracted from their envelopes and further 
        sorted by type by employees using unique workstations called 
        sorting tables.

        3.  Before continuing their journey through the processing 
        pipeline, returns with payments are routed through a Remittance 
        Processing System to ensure deposit of revenue within 24 hours.

        4.  Returns are then batched into official units of work called 
        blocks, containing from 50 to 400 documents. Individual blocks 
        containing the same types of returns are combined, placed on 
        carts, and logged into a computer system which tracks their 
        movement through the pipeline.

        5.  Tax Examiners correct taxpayer errors, assign codes that 
        will facilitate data entry and, if necessary, correspond with 
        the taxpayer to request additional forms or information.

        6.  A Document Locator Number, used to identify and locate a 
        document anywhere within the IRS, is stamped on each return. It 
        indicates the processing center, type of return, Julian date, 
        block and sequence number and processing year.

        7.  Data Transcribers input tax return information into the 
        computer. Portions of returns are re-entered into the system by 
        a second transcriber to verify the original entry of the return 
        data.

        8.  The return data is then transmitted to the Martinsburg, WV 
        Computing Center, where it is subjected to math error and 
        validity checks before attempting to post to the IRS Master 
        File. If no errors or inconsistencies are found and all 
        requirements are met, refunds or balance due notices are issued 
        to the taxpayer.

        9.  Returns with errors or inconsistencies are transmitted back 
        to the processing centers where tax examiners make corrections 
        using an Error Resolution System (ERS). The corrected return is 
        transmitted back to the computing center for posting to the IRS 
        Master File.

        10.  The original paper returns are then stored in our 
        Submission Processing Center files until they are retired to a 
        Federal Record Center.

    E-file, the IRS's electronic alternative to paper tax returns, 
bypasses most of the processing pipeline process. Taxpayers can use a 
tax preparation service or software on their personal computer to file 
their taxes electronically. Since return information is already 
computer formatted, the IRS can quickly and efficiently check for 
errors and transmit the data to either the Martinsburg, WV Computing 
Center for posting to the IRS Master File or to the preparer for 
correction. E-file saves both the IRS and the taxpayer a lot of time 
and effort.

    Question. In the Treasury Inspector General for Tax 
Administration's (TIGTA) report from February 7, 2022, the hiring 
progress as of August 17, 2021, is reported for the four IRS tax 
processing centers: Austin, Kansas City, Ogden, and Fresno.\50\ While 
Austin, Kansas City, and Fresno have all struggled to meet their hiring 
goals, Ogden far surpassed theirs by over 200 hires.
---------------------------------------------------------------------------
    \50\ https://www.treasury.gov/tigta/auditreports/2022reports/
202240015fr.pdf.

    What factors do you believe contributed to the Ogden processing 
center over-
---------------------------------------------------------------------------
performing in hiring while the three other locations lagged?

    Answer. In recent hiring efforts, our Ogden location did not over-
perform. The economic factors and availability of job opportunities 
contributed to the overall results for hiring in each location.

    Question. Are there any lessons that can be learned from Ogden?

    Answer. The recruiting efforts and hiring processes were the same 
at Ogden, Austin, Kansas City, and Fresno. Throughout our recent hiring 
events at each campus, we have used a variety of platforms to share and 
socialize job opportunities including social media, news outlets, 
internal communications, job posting boards, and flyers. We also 
broadly share job postings with local congressional offices, tax 
professionals, and small business associations.

    Question. That February TIGTA report also estimated that the IRS 
lost out on $56.2 million in interest due to taxpayer checks that 
failed to be deposited by the IRS in a timely manner.\51\ In 2020, that 
amount was $367.7 million.\52\ From my understanding, these delays are 
due to the fact that the IRS uses 12 Service Center Automated Mail 
Processing System machines, or SCAMPS machines, to process paper mail 
containing physical checks, which according to TIGTA, are unable to 
``effectively identify'' checks included with taxpayer 
correspondence.\53\ Apparently in some cases, these machines even cut 
taxpayer correspondence and envelopes, forcing IRS employees to 
manually reconstruct these items with tape.\54\
---------------------------------------------------------------------------
    \51\ Id.
    \52\ Id.
    \53\ Id.
    \54\ Id.

    TIGTA has encouraged the IRS to either upgrade or completely 
replace this outdated equipment. According to TIGTA, it would cost 
around $360,000 to $650,000 to either upgrade or completely replace 
each machine; just a fraction of the cost compared to the amount of 
interest the IRS loses out on each year.\55\ In response to this 
recommendation, the IRS said, ``. . . [b]ecause this procurement action 
is dependent on funding and is subject to competing priorities, IRS 
management will reevaluate continuing actions if implementation is not 
successful within 3 years.''\56\
---------------------------------------------------------------------------
    \55\ Id.
    \56\ Id.

    Lastly, I would like to note that based on the Treasury 
Department's latest Quarterly Summary of Treasury COVID Response 
Programs, dated March 28, 2022, the IRS had approximately $538.5 
million and $382.3 million in unobligated funds in the IRS Operations 
Support and the IRS Business Systems Modernization programs, 
respectively. These figures represent supplemental COVID-related 
---------------------------------------------------------------------------
funding that the IRS received in addition to its annual appropriations.

    If funding is a concern, why does the IRS not use a tiny portion of 
the unobligated supplemental COVID funding to resolve this issue? It 
would cost only $7.8 million to completely replace every machine, and 
only about $4.3 million to upgrade.

    Answer. The Internal Revenue Service is taking a holistic approach 
to identify a Submission Processing Modernization (SPM) solution, 
before spending funds on a short-term fix. The effort is to ensure we 
obtain equipment that improves upon the efficiency of processing 
incoming mail while also being adaptable to future advancements in 
technology related to digitalization and the elimination of paper-
based, manual processes.

    Question. Why is the IRS giving itself 3 years to fix an issue 
which, according to the vendor of SCAMPS machines, can be resolved in 
about 6 weeks?

    Answer. Wage and Investment is working with IRS Procurement to 
solicit this solution through a competitive bidding process. IRS is 
currently working through our procurement process to ensure all 
equipment is obtained per government contract regulations

    Question. How does the IRS plan on utilizing the remaining 
unobligated IRS Operations Support and IRS Business Systems 
Modernization funding?

    Answer. The following is our current plan for the ARPA 
modernization funding as of May 12, 2022. The costs reflected are total 
costs, but the summary table breaks out the planned spending between 
actuals and plan. Previously, the IRS had planned on allotting $1 
billion of ARPA funds for the IT modernization portfolio. In order to 
deploy additional resources to reduce the inventory backlog and pay for 
IT requirements beyond what the FY 2022 appropriation provided, IRS 
will spend $584 million of the ARPA funds on the IT modernization 
portfolio, rather than $1 billion.


------------------------------------------------------------------------
                                                    Business
     ($ in millions)       Taxpayer  Operations      Systems      Total
                           Services    Support    Modernization
------------------------------------------------------------------------
Taxpayer Assistance            $166                                 $166
------------------------------------------------------------------------
Total Modernization                        $286            $298     $584
 Portfolio
------------------------------------------------------------------------
Information Technology                     $250                     $250
 Requirements
------------------------------------------------------------------------
    Total Requirements         $166        $536            $298   $1,000
------------------------------------------------------------------------

    This change illustrates a perennial problem for IRS IT. In recent 
years, the enacted budget typically has not covered all IT needs. 
Spending to address new legislation, inflation, and cybersecurity risks 
has left little room for other priorities and impaired our ability to 
modernize. The IRS has been required to use its scarce IT resources to 
meet current needs, such as filing season and correspondence inventory 
challenges, first. This scarcity has affected IRS's ability to invest 
in modern technology at the rate that we need and the taxpayer 
community desires.

    The ARPA funds were an opportunity to make such an investment, but 
we were forced by necessity again to shift resources that were intended 
for modernization to meet more immediate needs. The long-term effect of 
this is the IRS today does not have the tools in place to best serve 
the American people and enforce the tax laws.

ARPA Modernization Portfolio Spend Plan

                      ARPA-Modernization Spend Plan
                        (in millions of dollars)
------------------------------------------------------------------------
                                                          Total FY 2021-
                            FY 2021- FY                       FY 2023
  Modernization Pillars     2022 Actual    FY 2023 Plan    (Actual Spend
                             Spend \1\                        + Plan)
------------------------------------------------------------------------
Taxpayer Experience:               $23.5            $2.5           $26.0
 Deliver high-quality
 service experience
 while protecting
 taxpayer information
 and data
------------------------------------------------------------------------
Care Taxpayer Services            $106.9           $59.8          $166.7
 and Enforcement:
 Streamline and
 integrate IT programs
 that enable top-quality
 service
------------------------------------------------------------------------
Modernization IRS                $ 108.1           $47.2          $155.2
 Operations: Retire and
 decommission legacy
 systems, replace with
 more sustainable
 infrastructure
------------------------------------------------------------------------
Cybersecurity and Data            $124.7           $75.3          $200.0
 Protection: Continue to
 protect taxpayer data
 and address emerging
 threats
------------------------------------------------------------------------
Technology Planning and            $14.2           $21.9           $36.1
 Program Oversight
------------------------------------------------------------------------
    Total                         $377.4          $206.6          $584.0
------------------------------------------------------------------------
\1\ Spending for FY 2021-FY 2022 includes commitments, obligations,
  expenses, and disbursements (COED).


    The IRS started implementing the following capabilities within the 
ARPA Modernization portfolio in FY 2021 and continues to deliver 
through FY 2023. The following information is a high-level summary of 
the capabilities and outcomes expected as a result of this funding.

    Taxpayer Experience ($26 million total): IRS is delivering 
technology that helps taxpayers, third parties and IRS employees to 
respond proactively and efficiently. This enables a more human-
centered, digital experience that is easy-to-use, secure, and grants 
access to the most relevant information so that taxpayers can resolve 
issues quickly and efficiently, reducing burden. IRS will expand 
customer callback to the remaining major phone applications, providing 
taxpayers the option to keep their place in queue without staying on 
hold. This feature empowers taxpayers with information about their 
account by making services available to customers when they need them 
while protecting taxpayer information and data and implements 
technology enhancements that provide taxpayers with equal access to 
information, services, and documents in their desired media format and 
a choice of multiple languages. IRS will establish an enterprise 
solution to offer consistent translation and will implement 
accessibility solutions more rapidly to offer products in multiple 
languages, assisting taxpayers to comprehend their tax account 
information.

    Core Taxpayer Services and Enforcement ($166.7 million total): 
Modernize and integrate core tax processing systems to streamline 
processes, enable cost-effective operations, improve operational 
outcomes, and reduce taxpayer burden. The IRS will enable a modernized 
solution for acceptance, validation, perfection, management, and use of 
Information Returns data by delivering a user-friendly interface for 
taxpayers to securely submit their tax forms via a portal. This portal 
will improve filing experience and data access to the information 
returns for both IRS staff and the taxpayers. This will advance the use 
of data and analytics to combat noncompliance and improve taxpayer 
service.

    Modernized IRS Operations ($155.2 million total): The efforts in 
this area focus on reducing complexity, standardizing underlying 
technology infrastructure, and strengthening organizational agility 
through automation and streamlining processes. The migration to cloud 
will reduce cost on life cycle management of hardware and gain 
application management and reliability efficiencies. This will deliver 
more efficient, scalable, resilient, and secure infrastructure through 
cloud services and will improve the Taxpayer experience. Another focus 
is on expanding IRS network capacity. The IRS will expand current 
network capacity because we expect to exhaust our existing capacity in 
FY 2023. IRS will begin the activities to expand the bandwidth at the 
IRS data centers, 500+ offices, and dedicated cloud circuits to support 
the increased cloud usage, growing workforce, and rapidly accelerating 
bandwidth demand as consumption grows for modernized capabilities. IRS 
will also start to modernize asset management by ensuring that the 
assets required to deliver services are properly controlled and that 
accurate and reliable information about those assets is available when 
and where it is needed throughout IRS business processes. This will be 
achieved by migrating asset data from the legacy Asset Manager tool to 
the new Asset Management capabilities on the ServiceNow platform. 
Lastly, digitalization continues to convert large volumes of paper to 
digital data formats to improve operational performance, making the IRS 
more responsive and resilient.

    Cybersecurity and Data Protection ($200 million total): Protecting 
our systems and taxpayer information against cyber threats is a top 
priority for the IRS. The cyber landscape is constantly evolving, 
resulting in more sophisticated and frequent efforts by cybercriminals. 
In response, IRS IT Cybersecurity will expand monitoring of IRS High 
Value Assets (HVAs) from standard business hours to continuous 
monitoring (24 hours per day, 7 days per week). The IRS has 
transitioned most of its operations from a legacy system to a modern-
era big-data platform. The new platform with Next Generation Fraud 
Analytics significantly improves the accessibility of the massive 
cybersecurity data collection, fraud-detection research and 
development, facilitated large-scale cases investigations, and shortens 
the IRS response time to court orders and inquiries from the Congress 
and other law enforcement agencies. IRS has leveraged the big-data 
platform to develop and improve many data pipelines, fraud indicators, 
dashboards, risk models and web-based automation utilities. These 
developments reduced the complexity of data management and 
investigation activities, thus reducing the operating cost while 
increasing monitoring and analytics efficiency. This migration has 
streamlined and automated many data analysis and reporting tasks to 
replace many manual processes. IRS implemented the Privileged User 
Management and Access System (PUMAS) to manage privileged access 
accounts to servers, mainframes, and network devices and manage 
software on IRS endpoints and provide white/blacklisting of software 
applications to ensure the most secure technology products are used. 
IRS continues to upgrade the physical access control equipment at IRS 
facilities as well. Lastly, IRS will improve the user experience by 
providing a simpler and more secure method for secure registration, 
identity proofing, authentication and single sign on to its ever-
growing online applications and tools.

    Technology Planning and Program Oversight ($36.1 million total): 
Provides key technology planning, portfolio, and program management 
support to ensure seamless integration and fulfill oversight and 
reporting requirements of the American Rescue Plan modernization 
programs. This includes technology architectural and engineering 
requirements and impact analysis of additional opportunities to retire 
legacy technology as capabilities are deployed by the modernization 
programs.


------------------------------------------------------------------------
                                                    Business
     ($ in millions)       Taxpayer  Operations      Systems      Total
                           Services    Support    Modernization
------------------------------------------------------------------------
Taxpayer Assistance            $166                                 $166
------------------------------------------------------------------------
Total Modernization                        $286            $298     $584
 Portfolio
------------------------------------------------------------------------
Information Technology                     $250                     $250
 Requirements
------------------------------------------------------------------------
    Total Requirements         $166        $536            $298   $1,000
------------------------------------------------------------------------



----------------------------------------------------------------------------------------------------------------
                                                                     FY 2021-   FY 2022
                                               FY 2021    FY 2022    FY 2023     Actual    Cumulative
            Modernization Pillars               Actual     and FY     Total    Spend \1\  FY 2021- FY  Remaining
                                                Spend    2023 Plan     Plan    as of 05/   2022 Spend   Balance
                                                                                   12     as of 05/12
----------------------------------------------------------------------------------------------------------------
Taxpayer Experience: Deliver high-quality         $15.2      $17.2      $32.4       $7.1        $22.3      $10.1
 service experience while protecting
 taxpayer information and data
----------------------------------------------------------------------------------------------------------------
Care Taxpayer Services and Enforcement:            $0.1     $138.9     $139.0      $99.1        $99.2      $37.3
 Streamline and integrate IT programs that
 enable top-quality service
----------------------------------------------------------------------------------------------------------------
Modernized IRS Operations: Retire and             $30.6     $105.1     $135.7       $8.9        $39.5      $92.4
 decommission legacy systems in place of
 more sustainable infrastructure
----------------------------------------------------------------------------------------------------------------
Cybersecurity and Data Protection: Continue       $43.9     $156.1     $200.0      $61.8       $105.7      $94.3
 to protect taxpayer data and address
 emerging threats
----------------------------------------------------------------------------------------------------------------
Technology Planning and Program Oversight          $0.5      $28.8      $29.3      $10.9        $11.4      $17.9
----------------------------------------------------------------------------------------------------------------
    Subtotal                                      $90.3     $446.1     $536.4     $187.8       $278.1     $252.0
----------------------------------------------------------------------------------------------------------------
        Discontinued Programs                      $8.2      $39.1      $47.3      $45.4        $53.6       $0.0
----------------------------------------------------------------------------------------------------------------
            Total                                 $98.5     $485.2     $583.7     $233.2       $331.7     $252.0
----------------------------------------------------------------------------------------------------------------
\1\ Spending for FY 2022 includes commitments, obligations, expenses, and disbursements (COED).


    Question. Will you commit to providing the Senate Finance Committee 
membership with quarterly updates on the status of the IRS's 
supplemental COVID funding?

    Answer. IRS provides COVID obligation status updates in COVID Spend 
Plan reports provided through Treasury. Treasury also provides 
consolidated obligation updates on COVID funding spending for the 
Department that includes input from IRS. These status updates are 
either provided as a separate report or as a part of other consolidated 
budget specific submissions or requests. IRS plans to continue to 
provide the Hill with spend plan/obligation status updates for COVID 
and the American Rescues Plan allocations.

               Questions Submitted by Hon. Chuck Grassley
    Question. Last year, ProPublica began publishing stories that 
appear to be based on confidential taxpayer information leaked or 
hacked from the IRS. In a December letter to you from myself and 
several other members of this committee, you were asked if you were 
aware of any data breach of IRS systems. In your March 8th response, 
you suggested that this question would be better directed to the 
Treasury Inspector General, the FBI, and the Department of Justice. 
However, according to the Internal Revenue Manual ``[t]he IRS 
Commissioner is responsible for overall planning, directing, 
controlling and evaluating IRS policies, programs, and performance.''

    In light of this and the fact we are in the middle of filing 
season, do you evaluate IRS systems as safe and secure for the millions 
of returns currently being filed?

    Answer. Yes.

    Question. Are you working to ensure that IRS systems are secure or 
are you waiting for the results of a criminal investigation before you 
take any action?

    Answer. The IRS is continuously working to ensure that IRS systems 
are and remain secure.

    Question. On April 13, 2022, ProPublica published another story 
based on a claimed ``trove of IRS data'' ``revealing the incomes and 
tax rates of the 400 Americans with the highest incomes from 2013 to 
2018.'' It is very frustrating that for nearly a year what appears to 
be confidential taxpayer information has continued to be openly 
published without any sign from the IRS that a leak or hack has been 
identified much less addressed. While there are many entities such as 
the FBI that are responsible for Federal law enforcement, the IRS is 
responsible for protecting the taxpayer information that is entrusted 
to it.

    Since ProPublica first began publishing what appears to be 
confidential taxpayer information last year, has the IRS undertaken any 
effort to determine if there was a leak or hack of IRS systems? Please 
detail those efforts if any were undertaken.

    Answer. The Treasury Department has made clear that the matter was 
immediately referred to the appropriate authorities, including the 
Treasury Inspector General for Tax Administration, and that those 
entities conduct independent investigations.

    Question. In response to any of the information published by 
ProPublica, has the IRS reached out or had contact with any of the 
taxpayers who appear to have had their confidential taxpayer 
information leaked or hacked from the IRS?

    Answer. Particularly given statutory restrictions, I am constrained 
in what I can say about this matter. But the matter was immediately 
referred to the appropriate authorities, which conduct their 
investigations independently.

    Question. When what appears to be confidential taxpayer information 
is published by ProPublica or in any other public forum, does the IRS 
take note of it and investigate, or does the IRS need to receive a 
complain first?

    Answer. While the IRS certainly recognizes the significance of the 
ProPublica article, the Office of the Treasury Inspector General for 
Tax Administration (TIGTA) has ``jurisdiction and responsibility to 
enforce criminal law as it pertains to IRS operations, including IRS 
employee misconduct and external attempts to corrupt tax 
administration.'' As part of this mandate, TIGTA is charged with 
investigating ``unauthorized inspection and/or disclosure of tax 
information.'' The IRS fully supports any TIGTA investigation into this 
matter.

    Question. Do you think the responses to previous questions from 
Congress on this matter, which do not confirm that a leak or hack took 
place, show good stewardships of existing IRS resources, which would 
encourage Congress to entrust even more money to the IRS?

    Answer. Yes. The Department of Justice (DOJ) has sole authority to 
initiate any civil action (such as seeking an injunction) or criminal 
prosecution pertaining to an unauthorized disclosure of tax 
information. As stated above, TIGTA has ``jurisdiction and 
responsibility to enforce criminal law as it pertains to IRS operations 
including IRS employee misconduct and external attempts to corrupt tax 
administration.'' As part of this mandate, TIGTA is charged with 
investigating ``unauthorized inspection and/or disclosure of tax 
information.'' The IRS's prior answers appropriately referred questions 
to the agencies with jurisdiction and demonstrate its unwavering 
commitment to follow the laws enacted by Congress.

    Question. On March 8, 2022, you responded to a letter from Finance 
Committee Republicans that asked several questions relating to the 
possible leak or hack of confidential taxpayer information. In response 
to a question asking you to identify the holders of all contracts and 
sub-contracts over the past 10 years where 6103 information was 
transmitted outside of the IRS, you stated: ``We have no ready way of 
identifying the requested information for the last 10 years short of 
going into each of the tens of thousands of contract and sub-contract 
files, many of which exist only in paper form.''

    This response suggests the IRS is not able to track the full extent 
of its contracting activities. Does the IRS know how many contracts for 
various services, including IT, it has engaged in?

    Answer. The IRS uses several systems to track the number of 
contracts it has awarded. As the IRS awards thousands of contracts per 
year, we track and report on contract awards to prime contractors. The 
IRS tracks IT and non-IT contracts through standard reporting practices 
using North American Industry Classification System (NAICS) and Product 
Service Codes (PSC). Contract awards are reported on publicly available 
sites: Federal Procurement Data System (FPDS) and USASpending.gov. The 
IRS is actively modernizing its capabilities to capture procurement 
information at all levels.

    The government does not have a contractual relationship with sub-
contractors. Privity of contract is only at the awardee level for the 
government. Given that the IRS only has a contractual relationship with 
prime contractors, we do not track the names of sub-contractors 
affiliated on each contract awarded. The IRS does evaluate sub-
contracting plans when appropriate and required by Federal Acquisition 
Regulations.

    Question. How does the IRS track that contractor and sub-
contractors are in compliance with their contracts, including 
provisions relating to IRC section 6103, if the IRS is not even able to 
track the number of contracts it has engaged in?

    Answer. Protecting taxpayer data is an IRS priority. The IRS 
security process is thorough and in-depth for both contractors and IRS 
employees who have access to return information protected by IRC 
Sec. 6103. IRM section 10.5.1 describes the foundation for IRS's 
protection of Sensitive But Unclassified information, including return 
information.

    In the event Contracting Officers have concerns regarding the level 
of protection or the scope of work, they can contact the IRS Privacy, 
Government Liaison, and Disclosure (PGLD) division, whose mission is to 
preserve and enhance public confidence by advocating for the protection 
and proper use of that critical and sensitive information. 
Additionally, the Contracting Officer can contact Facilities Management 
and Security Services and IRS Chief Counsel's General Legal Services 
division to ensure that appropriate security controls for the 
requirement are in place.

    The IRS Contracting Officer (CO) appoints Contracting Officer 
Representatives (COR) on all contracts that exceed $250,000. These 
individuals work directly with the prime contractors to ensure contract 
compliance. When issues arise, the COR works with the CO to bring 
contracts back into compliance or move forward with alternative 
actions. Additionally, either or both the CO and COR engages leadership 
and appropriate stakeholders within the IRS to fully ensure that 
taxpayer information is protected.

    Question. How does the IRS ensure that confidential taxpayer 
information is only shared outside the IRS as appropriate, particularly 
in lights of the apparent inability to track which contracts allow for 
the sharing of that information?

    Answer. The IRS has very strict personnel security processes that 
involve both IRS IT's Cybersecurity team and PGLD's Privacy Compliance 
and Assurance division. The Internal Revenue Manual (IRM) lays the 
foundation to implement and manage security for systems used or 
operated by the IRS as well as systems operated by a contractor of the 
IRS, establishes the processes for evaluating companies before granting 
access to 6103 information, and notes other guidance such as Executive 
Orders and policy memoranda.

    In addition, we follow the standards published by the National 
Institute of Standards and Technology regarding security requirements 
and controls for contractors and adhere to the guidance set forth in 
the Federal Information Security Modernization Act of 2014 (FISMA) 
regarding periodic training to all contractors/subcontractors involved 
in the management, use, or operation of Federal information and 
information systems.

    The COR is responsible for ensuring each vendor is assessed 
appropriately based on the level of access to 6103 data required, how 
the data will be used, and where and how the data will be stored and 
accessed.

    We ensure we apply security and privacy clauses--including those in 
the National Institute of Standards and Technology (NIST) Special 
Publication 800 series, IRS Publication 4812, and Federal Risk and 
Authorization Management Program requirements--to all contracts where 
contractors will handle sensitive information.

    On an ongoing basis, contractors must follow the general guidance 
and specific security control requirements in Publication 4812, 
Contractor Security Controls; Internal Revenue Manual (IRM) 10.8.1, 
Information Technology (IT) Security, Policy and Guidance; and IRM 
10.23.2, Personnel Security, Contractor Investigations. Publication 
4812 and IRMs 10.8.1 and 10.23.2 provide comprehensive lists of all 
security controls and guidance.

    To monitor compliance with Publication 4812, we conduct annual 
onsite or virtual Contractor Security Assessments (CSAs) based on risk. 
During the CSAs, we assess and validate the effectiveness of security 
and privacy controls. Security control effectiveness addresses the 
extent to which the controls are implemented correctly, operating as 
intended, and producing the desired outcome with respect to protecting 
information and individual privacy, or meeting the security 
requirements for the information system in its operational environment. 
These assessments help determine whether additional controls or 
protections are necessary to protect returns, return information, 
personal privacy, other SBU data, and organizational assets and 
operations.

    Question. Despite spending $5.4 billion over the past 20 years on 
IT upgrades, the IRS still processes paper returns manually. In 
contrast, over the past 2 decades State revenue departments have 
automated the processing of paper returns. Recently, the National 
Taxpayer Advocate, Erin Collins, called on the IRS to work with tax 
software companies to voluntarily adopt features that allow IRS to use 
machine reading technology to process paper returns prepared with their 
software for the 2023 filing season. Moreover, by no later than the 
2024 filing season, Ms. Collins has directed the IRS to adopt optical 
character recognition software that can read any remaining paper 
returns. Please provide an overview of what actions IRS has taken, or 
is in the process of taking, in response to the NTA's directive.

    Answer. The IRS has several ongoing pilot projects to improve the 
efficiency and accuracy of processing paper tax returns with, optical 
character recognition (OCR) or 2D barcoding. These projects are:

          V-Coded Return Pilot. A V-coded return is when the taxpayer 
        used software to prepare the return, printed the return and 
        mailed it to the IRS. Using a vendor, this pilot was designed 
        to enable remote scanning and validation of Forms 1040 that are 
        V-coded to be submitted using Modernized e-File (MeF). The goal 
        is to accelerate this pilot so it will be scanning tax year 
        2022 Forms 1040 V-coded and Forms 940 and 941 in filing season 
        2023.
          OCR Scanning Service Pilot. This pilot used a third-party 
        contractor's OCR capability to scan Form 940 business returns. 
        The contractor will scan and submit the returns using MeF.
          2D Barcode Pilot. This pilot implemented 2D bar codes to 
        digitally intake data from Forms 8918 (Material Advisor 
        Disclosure Statement) and Forms 8886 (Reportable Transaction 
        Disclosure Statement). In December 2021 IRS released Form 8918 
        with 2D bar codes. Form 8886 was to follow with production of 
        the 2D bar code form in March 2022. The IRS has received 
        approximately 1,000 Forms 8918 to date, of which 253 were on 
        the old paper form and 837 on the new paper forms with 2D bar 
        codes. However, only 78 percent of the 2D bar-coded paper forms 
        received could be fully read into IRS systems, requiring close 
        scrutiny of the data. We are working to determine actions to 
        reduce the error rate. Before considering using 2D bar codes 
        for Form 1040, we need to engage with the software industry to 
        update industry standards to align them with how we intake and 
        process data. The industry would have to agree to provide such 
        code in forms printed after using their software to prepare the 
        tax return. We will start that engagement, develop a plan on 
        how it would work and report back to you with the results.

    In addition to pursuing scanning, we also plan to make more forms 
available to be e-filed. We are also reviewing administrative policies 
to determine whether we can make changes so more people are eligible to 
e-file.

    We believe a multifaceted approach is necessary to address the 
paper inventory the IRS receives yearly.

    We caution that the expected benefit from bar codes and OCR would 
diminish if Congress modifies provisions of the Internal Revenue Code s 
shortly before the filing season or, as happened recently, during the 
filing season, increasing the likelihood of errors. For example, IRS 
and software vendors' ability to respond and produce accurate forms may 
preclude timely inclusion of bar codes or QR codes, resulting in more 
submissions with unreliable codes.

    Question. The IRS recently experienced several legal defeats 
involving taxpayers challenging IRS guidance for failing to adhere to 
the Administrative Procedures Act (APA). In Mann Construction, the 
Sixth Circuit invalidated a 2007 IRS notice establishing ``a listed 
transaction'' for failing to follow the APA and similarly in Liberty 
Global, a District Court invalidated temporary regulations issued under 
section 245A of the Internal Revenue Code. These decisions potentially 
have broad implications as to the validity of other guidance issued by 
the IRS and raise a number of other questions pertinent to tax 
administration.

    With respect to the Mann Construction case, please provide an 
overview of how the IRS views this recent decision and what it means 
for the listed transaction regime going forward.

    Answer. The Treasury Department and the IRS disagree with the Sixth 
Circuit's decision in Mann Construction and continue to defend the 
validity of existing listing notices in litigation. The Treasury 
Department and the IRS recognize, however, that Mann Construction is 
controlling law in the Sixth Circuit, and the IRS has ceased enforcing 
disclosure and list maintenance requirements with respect to the 
listing notice at issue in Mann Construction in the Sixth Circuit. The 
IRS has also similarly ceased enforcing Notice 2017-10, relating to 
syndicated conservation easements, in the Sixth Circuit. The Treasury 
Department and the IRS recently issued proposed regulations identifying 
certain syndicated conservation easement transactions as listed 
transactions. The Treasury Department and the IRS intend to issue 
proposed regulations identifying additional listed transactions in the 
near future.

    Question. Please identify other such notices or instances of 
informal guidance that have been challenged, whether in administrative 
proceedings or litigation.

    Answer. While the IRS has seen more challenges to its non-
regulatory guidance in recent years, most challenges to IRS guidance 
have been to regulations, except for notices issued under the 
reportable transaction regime.

    Regarding the reportable transaction program, Notice 2007-83 
identifying certain abusive trust arrangements that purportedly provide 
welfare benefits as a list transaction, Notice 2016-66 identifying 
micro-captive insurance transactions as a transaction of interest, and 
Notice 2017-10 identifying syndicated conservation easements as a 
listed transaction have all been challenged. Notice 2017-10 has been 
challenged in numerous cases and administrative proceedings.

    Three documents published in the Internal Revenue Bulletin (IRB) 
have been held to be procedurally or substantively deficient. Notice 
2005-79 regarding refunds of illegally collected telephone excise taxes 
was held invalid by the District Court for the District of Columbia and 
Revenue Procedure 2018-38 regarding reporting of donors to certain 
charitable organizations was held invalid by the District Court for the 
District of Montana for failure to comply with the APA's notice and 
comment requirement. In re Long-Distance Telephone Service Excise Tax 
Refund Litigation, 853 F.Supp.2d 138 (D.C. Dist. 2012); Bullock v. IRS, 
401 F.Supp.3d 1144 (D. Mont. 2019). Revenue Procedure 99-21 regarding 
claiming financial disability was found to have not adequately 
explained the agency's decision to not treat a psychologist as a 
doctor. Stauffer v. IRS, 285 F.Supp. 3d 474 (D. Mass. 2017).

    One document published in the IRB has been upheld. Revenue 
Procedure 2014-42 establishing the Annual Filing Season Program was 
upheld by the Court of Appeals for the District of Columbia in a 
challenge that the revenue procedure should have complied with the 
APA's notice and comment procedures and was arbitrary and capricious. 
AICPA v. IRS, 746 Fed.Appx.1 (D.C. Cir. 2018).

    Finally, a challenge to one document published in the IRB is 
currently pending. A challenge to Notice 2017-5, which clarifies 
definitions of a vehicle chassis for the purpose of applying a safe 
harbor to excise taxes imposed under section 4051, is pending before 
the Middle District of Tennessee for failing to comply with notice-and 
comment.

    These challenges were brought in litigation. We do not have data 
about any challenges made during examinations or in Appeals although we 
understand there are several. Unless there is controlling precedent 
invalidating an IRS regulation or document published in the IRB these 
documents will be treated as valid during examinations or in Appeals. 
In some circumstances, Appeals may consider a final, unappealable 
decision invalidating IRS guidance when weighing the hazards of 
litigation and considering settlement of a Federal tax controversy.

    Question. Please provide an overview of current litigation 
challenging IRS guidance for failure to adhere to the APA process, 
including the number of case filings and the amount of revenue in taxes 
and penalties at issue.

    Answer. The IRS currently has numerous cases pending before various 
courts that challenge IRS guidance for failure to comply with APA 
procedural requirements.

    Several challenges to Notice 2007-83, which identifies certain 
abusive trust arrangements that purportedly provide welfare benefits as 
a list transaction, are pending. Govig v. United States is pending 
before the District Court for the District of Arizona. Govig alleged 
that Notice 2007-83 is invalid under the APA because it was issued 
without using notice-and-comment. There are approximately $251,000 at 
issue in this case. McGowan v. United States is pending in the Northern 
District of Ohio. McGowan also alleges that that Notice 2007-83 is 
invalid under the APA because it was issued without using notice and 
comment procedures. There are approximately $116,000 in taxes, 
penalties, and interest at issue in McGowan. Two cases have also been 
filed requesting refunds in light of the Sixth Circuit's opinion in 
Mann Construction. Coughlin v. Unites States was filed in the Eastern 
District of Michigan and approximately $29,000 is at issue in this 
case. Madison Avenue Pharmacy v. United States was filed in the 
Southern District of Ohio and approximately $40,000 in penalties is at 
issue in this case.

    Notice 2016-66 was invalided by the Eastern District of Tennessee 
in CIC Services, LLC v. IRS. Because this case was a pre-enforcement 
challenge to Notice 2016-66 no tax or penalties are at issues in the 
case. However, the court order vacating Notice 2016-66 will have 
collateral consequences for a penalty determined under section 6662A, 
6707, 6707A, or 6708 related to a micro-captive insurance transaction.

    There are also numerous challenges to Notice 2017-10 identifying 
syndicated conservation easements as a listed transaction pending the 
United States Tax Court (Tax Court). There are currently over 40 Tax 
Court cases with APA challenges to Notice 2017-10. In these cases, 
petitioners allege that they are not liable for penalties under section 
6662A, which imposed an accuracy-related penalty on understatement 
related to reportable transactions. Petitioners allege that Notice 
2010-17 was improperly issued without following notice and comment 
procedures and that it is arbitrary and capricious to apply Notice 
2017-10 to require disclosure of transactions reflected on returns 
filed before the notice was issued even when the period to assess tax 
with respect to those returns is open. Additionally, there is a pre-
enforcement challenge to Notice 2017-10 before the Northern District of 
Alabama.

    Numerous cases before the Tax Court have challenged regulations 
under section 170A regarding conservation easements, two of which have 
been appealed to circuit courts. The petitioner in Oakbrook Land 
Holdings, LLC v. Commissioner, alleged that the IRS acted arbitrarily 
and capaciously when it promulgated Treas. Reg. Sec. 1.170A-
14(g)(6)(ii), which addresses the contents of the proceeds clause in 
the deeds of easement. The Tax Court issued an opinion upholding the 
validity of the regulation. The Sixth Circuit affirmed, and the period 
for petitioning for certiorari remains open. In Hewitt v. Commissioner, 
the petitioner also challenged Treas. Reg. Sec. 1.170A-14(g)(6)(ii), 
and the Tax Court again upheld the regulation. The Eleventh Circuit 
reversed, holding that the IRS's interpretation of a provision in the 
regulation is arbitrary and capricious. There are at least 29 other 
deficiency cases pending before the Tax Court in which taxpayers have 
raised similar challenges to this regulation, none of which has become 
final yet.

    The total tax liabilities at issue in the cases challenging Notice 
2017-10 and regulations under section 170A are approximately 
$1,108,650,00 and total penalties at issue are approximately 
$521,400,000.

    There are several other challenges to IRS regulations pending 
before appellate or district courts. FedEx v. United States is a refund 
suit pending before the Western District of Tennessee in which the 
plaintiff alleges the regulations under section 965 are invalid under 
the APA. There are approximately $89,100,000 in taxes and interest at 
issue in FedEx. Liberty Global v. United States is a refund suit 
pending before the District of Colorado. The plaintiff alleges that the 
temporary regulations under section 245A are invalid under the APA 
because they are arbitrary and capricious and should have been 
submitted for notice and comment. The district court recently held that 
the temporary regulations are invalid because the government failed to 
comply with the notice and comment requirement and did not provide good 
cause for forgoing notice and comment. There are approximately in 
$104,500,000 in taxes and $4,800,000 in penalties at issue in Liberty 
Global. This holding could have collateral consequences in cases of at 
least eight other taxpayers who have raised questions regarding the 
validity of the section 245A regulations. The tax amounts at issue 
regarding these taxpayers exceeds $8,000,000,000.

    In Silver v. Internal Revenue Service, plaintiffs allege that the 
section 965 regulations were issued in violation of the APA, and in 
Silver v. Internal Revenue Service II, plaintiffs allege that the 
section 951A regulations were issued in violation of the APA, though 
the primary argument alleges a failure to comply with the Regulatory 
Flexibility Act. The IRS prevailed in Silver I, which plaintiffs have 
appealed to the Court of Appeals for the District of Columbia. 
Plaintiffs do not request monetary relief.

    State of New Jersey v. Mnuchin is a pre-enforcement challenge to 
regulations implementing the State and local tax cap alleging that the 
regulations are contrary to the law and arbitrary and capricious in 
violation of the APA. No monetary relief was requested.

    There also several challenges under the APA to different IRS 
regulations pending before the Tax Court. Bluescape v. Commissioner is 
a deficiency case in which the petitioner is challenging the validity 
of regulations issued under sections 61 and 461, which govern the 
taxable year of when a deduction is available. There is an 
approximately $226,050,000 tax liability at issue in Bluescape. 
Perficient, Inc. v. Commissioner is a deficiency case challenging 
Treas. Reg. Sec. 1.41-4A(d)(2), which provides standards for 
determining whether a credit for increasing research under section 41 
should be denied because the research is funded by clients. There is an 
approximately $1,677,000 tax liability at issue in Perficient. 3M v. 
Commissioner and The Coca-Cola Company and Subsidiaries v. Commissioner 
are deficiency cases in which the petitioners argue that Treas. Reg. 
Sec. 1.482-1(h)(2) was issued in violation of the APA. In 3M there is 
an approximately $8,565,000 tax liability at issue, and in Coca-Cola 
there is an approximately $3,436,6000,000 tax liability plus penalties 
at issue.

    Finally, in Fitzgerald Truck Parts v. United States, plaintiffs 
challenged Notice 2017-5, which clarifies definitions of a vehicle 
chassis for the purpose of applying a safe harbor to excise taxes 
imposed under section 4051, as violating the APA because it did not go 
through notice and comment. This case is pending before the Middle 
District of Tennessee, and approximately $202,000 in taxes are at issue 
in this case.

    Question. Please describe how the notice and comment process may 
affect timeliness of non-regulatory guidance.

    Answer. Subjecting non-regulatory guidance to the notice and 
comment process would significantly and detrimentally delay the 
issuance of non-regulatory guidance. The notice and comment process has 
many more steps than the current process for issuing guidance published 
in the Internal Revenue Bulletin (IRB), which is where non-regulatory 
published guidance is published. Documents submitted for notice and 
comment must be published in the Federal Register as a notice of 
proposed rulemaking, receive publics comments, and in some cases be the 
subject of a public hearing before the final document may be published. 
None of these steps is required for documents published in the IRB. 
Additionally, notice and comment documents are subject to a more 
complex approval process. This additional process can add years to the 
time is takes to publish a final document.

    This additional time may allow taxpayers to engage in abusive 
transactions for many more years than if the transaction had been 
identified without notice and comment. It also means that some 
limitations periods for determining a tax deficiency and penalties will 
expire before a final document can be published. Also, taxpayers may be 
able to take advantage of the delay between a notice of proposed 
rulemaking and a final rule. Combined, these factors could have a 
significant effect of the fisc, increase the tax gap, and reduce the 
taxpaying public's perception of the fairness of the tax system.

    Question. What matters that are generally addressed by revenue non-
regulatory publications may now be required to be the subject of 
regulations?

    Answer. The IRS does not use non-regulatory guidance documents to 
issue guidance that should go through the notice and comment process. 
If other courts agree with the Sixth Circuit's decision in Mann 
Construction, listed transactions will have to be identified in 
regulations unless Congress acts to address the issue by legislation.

    Question. Thank you for your response to questions from Finance 
Committee Republicans regarding the IRS use of a service provider to 
verify the identities of taxpayers accessing IRS services. You said 
that taxpayers would not be required to provide a ``video selfie'' and 
instead could conduct a live video chat.

    Do you have information on how many taxpayers have opted for a live 
video chat instead of providing a ``video selfie?''

    Answer. Between February 21, 2022, and December 31, 2022, 1,351,119 
taxpayers have opted for the video chat authentication option.

    Question. Has ID.me, the credential service provider the IRS is 
working with, identified any issues to the IRS in implementing this 
change in authentication procedure?

    Answer. No, ID.me has not reported any issues to the IRS in 
implementing this change in authentication procedure.

    Question. Does the IRS believe that providing this additional 
option will reduce the quality of the identification process, even if 
it complies with NIST and OMB rules and guidelines?

    Answer. No, we do not believe the quality of the identification 
process will be reduced with a live video option.

    Question. In your written testimony, you describe how the IRS is 
working with the General Services Administration to facilitate the use 
of Login.gov to provide identity authentication of taxpayers who want 
to access IRS services. What is the time frame for completing this 
transition, and does the IRS expect to continue to use any third-party 
credential service providers once the transition is complete?

    Answer. We continue to engage with GSA to determine when Login.gov 
will meet IRS requirements. Once the requirements are met, an 
implementation time frame may be established. We foresee the need to 
continue to use third-party CSPs to reduce risk by eliminating reliance 
on a single CSP and to provide continuity and choice for taxpayers who 
have already completed the credentialing process.

    Question. In a response to questions from Finance Committee 
Republicans regarding the IRS use of a service provider to verify the 
identities of taxpayers accessing IRS services, you responded to a 
question asking about actions taken in the event of a data breach 
affecting a credential service provider. You wrote that the agreement 
with ID.me ``requires contractors and subcontractors to report a 
suspected or confirmed breach in any medium'' as soon as possible.

    Are contractors and subcontractors required to undergo training on 
taxpayer data protection and if so, is the training administered by the 
IRS, the contractor, a subcontractor, or another third party?

    Answer. Yes, all contractors and subcontractor employees who 
require staff-like access to IRS information or information systems 
(regardless of their physical location) must complete Security 
Awareness Training (SAT) prior to being granted access to Sensitive But 
Unclassified (SBU) data. This training includes mandatory briefing on 
Annual Cybersecurity Awareness, Privacy, Information Protection and 
Disclosure, Records Management, Insider Threat Awareness, and 
Unauthorized Access (UNAX) training. The training is developed by the 
IRS and administered virtually.

    Question. How does the IRS verify and maintain records that service 
providers such as ID.me are aware of and follow the requirements for 
data security that are part of their contracts with the IRS?

    Answer. IRS Contracting Officers ensure contractors are aware of 
their contractual requirements, and contractors must maintain and 
furnish, as requested, records of initial and annual training and 
certifications. Contractors may also establish additional internal 
training, as needed (or as required under the terms of the contract), 
for personnel in the organization who require access to IRS information 
or information systems. System access may not be granted until required 
training is completed.

                                 ______
                                 
                 Prepared Statement of Hon. Ron Wyden, 
                       a U.S. Senator From Oregon
    This morning the Finance Committee meets to discuss the IRS budget 
for the year ahead and the filing season that's winding down later this 
month. Around the country are millions and millions of families who are 
feeling the pressure of rising prices. This year in particular, people 
are counting on getting their tax refunds to help cover the bills.

    I'll cut right to the heart of the matter for those families whose 
refunds might be delayed due to IRS backlogs. If you're frustrated by 
poor customer service from the IRS, you've got years and years of 
Republican cuts to blame for gutting the agency's ability to meet your 
expectations. For all the talk about running government more like a 
business, Republicans seem to want to turn government into the kind of 
dysfunctional business that never has a repeat customer.

    They had an opportunity, when they passed their tax law in 2017, to 
fix the IRS comprehensively, reduce backlogs, and improve service. They 
did not do it. In fact, they added more complexity to the tax code and 
made the tax system more difficult to manage. This came after 
Republicans had been squeezing the IRS budget steadily for years. It 
was clear at the time, Republicans were steering into a train wreck, 
and you're seeing the effects today.

    The number of revenue agents at the IRS, the people who audit tax 
returns, is currently a third of what it was a decade ago. The officers 
who collect unpaid taxes are down by nearly half. The agency has the 
same number of employees it did in 1970 when the country's population 
and economy were a fraction of the size they are today.

    As of late March, the IRS was facing a backlog of 12 million tax 
returns. Service agents are struggling to keep up with phone calls. So 
far this year they've been able to answer only 11 percent of them.

    The IRS has recently been on a hiring mission, thanks to funding 
and hiring authority passed by Democrats. The agency is making progress 
on the backlog and targeting resources at customer service and phone 
lines. But in the meantime, law-abiding taxpayers dealing with the 
aftereffects of these Republican budget cuts are left with the 
impression that the government couldn't manage a two-car parade.

    With that said, not everybody is pained by what's happening at the 
IRS. Customer service has fallen off, but tax enforcement is in even 
worse shape, which means these are high times for wealthy tax cheats. 
The IRS is totally outmanned against tax cheats who use those 
complexity-driven loopholes to cheat out of paying their fair share. 
There are fewer revenue agents working today than at any point since 
World War II, but the challenge they're up against is a whole lot 
bigger.

    Some of the murkiest, most loophole-ridden parts of America's 
broken tax code deal with partnership income. It is a thicket of super-
complicated rules that are supposed to apply to a third of all business 
income in the United States--a large and growing percentage.

    In Fiscal Year 2020, the IRS examined barely more than one-tenth of 
1 percent of partnership tax returns--the tiniest sliver. Meanwhile, 
new research from U.C. Berkley found that the working poor are 12 times 
more likely to face an audit.

    Look at the big picture. As a result of years of Republican budget 
cuts, IRS customer service is struggling at best, wealthy tax cheats 
are getting away with breaking the law, and the burden of tax 
enforcement has been shifted onto working people who spend every day 
walking a tightrope.

    Democrats in Congress have begun to reinvest in taxpayer service 
and enforcement to crack down on the cheats and to make tax filing 
season less of a headache for everybody else. Part of that ongoing 
process, in my view, must be making it easier for Americans to file 
their taxes directly online, for free. Taxpayers are paying huge sums 
to file their taxes through private companies, and some of those 
companies use deeply deceptive practices to steer them away from free 
options they have a legal right to use.

    I've been a longtime supporter of the right to file directly with 
the IRS online, as well as a ``simple return'' system in which your 
forms show up completed, and all you have to do is check the numbers. 
The bottom line is that it's past time for Congress to tell these tax 
prep companies that they no longer have a free pass to turn rip-offs 
and deception into profits.

    Wrapping up, I want to thank Commissioner Rettig and particularly 
the front-line staff at IRS for putting in long hours this filing 
season to get refunds out in a timely way. That job's been made a lot 
harder, but the staff are working hard--and that effort is much 
appreciated. I'm looking forward to our discussion with Commissioner 
Rettig today.

                                 ______
                                 

             United States Government Accountability Office

_______________________________________________________________________

                   Report to Congressional Committees

October 2021

 Information Technology: Cost and Schedule Performance of Selected IRS 
                              Investments

GAO-22-104387

Why GAO Did This Study

IRS relies extensively on IT investments to annually collect more than 
$3.5 trillion in taxes, distribute more than $450 billion in refunds, 
and carry out its mission of providing service to America's taxpayers 
in meeting their tax obligations. For Fiscal Year 2020, the agency 
reported spending approximately $2.8 billion for these investments.

The Joint Explanatory Statement accompanying the Financial Services and 
General Government Appropriations Act, 2020 included a provision for 
GAO to annually review the status of IRS's IT investments. GAO's 
specific objectives were to (1) summarize IRS's reported performance 
for selected IT investments, including CADE 2; (2) identify IRS's 
reported progress in implementing its 2019 IT modernization plan; and 
(3) identify the IT-related actions IRS has taken to maximize telework 
and operate during the COVID-19 pandemic, and any impacts of those 
actions.

GAO obtained IRS's reported performance information for a 
nonprobability sample of five investments, and compared performance to 
agency targets. GAO also compared modernization activities that IRS 
reported completing to those identified in the agency's 2019 IT 
modernization plan. Further, GAO reviewed agency documentation to 
identify reported IT actions taken to continue to operate during the 
pandemic and reported associated impacts. GAO also interviewed 
cognizant IRS officials.

What GAO Found

The Internal Revenue Service (IRS) reported that the five investments 
GAO reviewed met most of the performance goals set by the agency for 
Fiscal Years 2019 and 2020. Specifically, IRS reported that most of the 
three investments in development were within 10 percent of performance 
goals, a variance the Office of Management and Budget considers not to 
be significant. An exception was the Customer Account Data Engine 
(CADE) 2, a program intended to modernize tax processing, that 
reportedly spent about 15 percent less than budgeted for 2020. For the 
two investments in operations and maintenance, IRS reported that for 
Fiscal Years 2019 and 2020 one investment met all five operational 
performance goals established by the agency, while the other met three 
of five goals in Fiscal Year 2019 and four of five in Fiscal Year 2020.

While CADE 2 had lower reported costs than expected for 2020 and was 
within 10 percent of schedule goals for 2019 and 2020, its longer term 
performance and outlook are troubling. IRS began developing CADE 2 in 
2009 to replace its 60-year-old Individual Master File (IMF)--IRS's 
authoritative data source for individual tax account data. Since 2009, 
IRS has revised the program's cost, schedule, and scope goals on 
numerous occasions, including seven times between 2016 and 2019. 
Accordingly, a key major program milestone for replacing selected IMF 
functions, known as transition state 2, has slipped 9 years--from 2014 
to 2023. Further, CADE 2 is now expected to replace core functions of 
IMF, rather than the entire system. The CADE 2 delays and IRS's 
continued use of IMF are troubling given, that IMF (1) is one of the 
oldest systems in the Federal Government; (2) has software written in 
an archaic language that IRS stated is no longer taught in school; and 
(3) is supported by a workforce with specialized skills that are 
increasingly harder to find. In June 2021, IRS reported that it planned 
to replace and fully retire IMF by 2030. Accordingly, IRS will continue 
to face IMF challenges for several more years.

For its agency-wide modernization plan, IRS reported completing most of 
its activities intended for Fiscal Years 2019 and 2020 within cost and 
on or ahead of schedule. The updated plan identified 59 activities for 
completion in Fiscal Years 2019 and 2020. IRS reported that, by the end 
of Fiscal Year 2020, it had completed 54 of the 59 activities early or 
on schedule and the remaining five activities 3 to 7 months later than 
initially planned. Regarding cost, IRS reported that it spent $9 
million less than the $300 million planned for Fiscal Year 2019 and 
$19.9 million less than the $271 million planned for Fiscal Year 2020.

To respond to the pandemic, IRS took a number of information technology 
(IT)-
related actions to maximize telework capabilities for its employees, 
including deploying IT equipment, such as laptops, and upgrading its 
network infrastructure bandwidth. For Fiscal Year 2020, IRS spent $104 
million for these actions from emergency appropriations included in 
pandemic-related legislation. According to IRS officials, the long-term 
impact of sustaining an increased level of telework on the budget had 
not been determined. In contrast, IRS said the actions to maximize 
telework capabilities delayed plans for IT modernization and 
operations. For example, IRS reported that staffing resources initially 
allocated for CADE 2 had been reassigned to support COVID-19 
responsibilities, resulting in a 7-month delay in the scheduled 
completion of key development activities.
_______________________________________________________________________

October 19, 2021

The Honorable Chris Van Hollen
Chairman
The Honorable Cindy Hyde-Smith
Ranking Member
Subcommittee on Financial Services and General Government
Committee on Appropriations
U.S. Senate

The Honorable Michael B. Quigley
Chairman
The Honorable Steve Womack
Ranking Member
Subcommittee on Financial Services and General Government
Committee on Appropriations
U.S. House of Representatives

The Internal Revenue Service (IRS) relies extensively on information 
technology (IT) systems to annually collect more than $3.5 trillion in 
taxes, distribute more than $450 billion in refunds, and carry out its 
mission of providing service to America's taxpayers in meeting their 
tax obligations. For Fiscal Year 2020, the agency reported spending 
approximately $2.8 billion for its IT investments.\1\
---------------------------------------------------------------------------
    \1\ This amount does not include the $104 million from COVID-19-
related appropriations that IRS reported spending on IT-related actions 
it took to continue to operate during the pandemic. This spending is 
detailed later in this report.

In April 2019, IRS issued a plan to guide its IT modernization efforts 
through Fiscal Year 2024.\2\ This plan defined four major categories of 
work that IRS considered necessary to transform the agency's technology 
and deliver a modernized taxpayer experience in support of its mission: 
(1) taxpayer experience, (2) core taxpayer services and enforcement, 
(3) modernized IRS operations, and (4) cybersecurity and data 
protection.
---------------------------------------------------------------------------
    \2\ Internal Revenue Service, IRS Integrated Modernization Plan 
Business Plan (Washington, DC: April 2019).

Further, in response to the Coronavirus Disease 2019 (COVID-19) 
pandemic, starting in March 2020, IRS, like other Federal agencies, 
took actions to ensure its employees' safety while continuing to meet 
its mission. In March 2021, we issued our annual report on IRS's filing 
season performance. In the report, we identified steps the agency took 
to manage disruptions to the 2020 filing season due to COVID-19.\3\
---------------------------------------------------------------------------
    \3\ GAO, Tax Filing: Actions Needed to Address Processing Delays 
and Risks to the 2021 Filing Season, GAO-21-251 (Washington, DC: March 
1, 2021). We also regularly issue government-wide reports on the 
Federal response to COVID-19, including IRS's response. For the latest 
report, see GAO, 9 GAO-21-551 (Washington, DC: July 19, 2021).

The Joint Explanatory Statement accompanying the Financial Services and 
General Government Appropriations Act, 2020 \4\ includes a provision 
for us to annually review the status of IRS's IT investments. Our 
objectives for this review were to (1) summarize the agency's reported 
performance for selected IT investments, including the Customer Account 
Data Engine (CADE) 2; (2) determine IRS's progress in implementing its 
2019 IT modernization plan; and (3) identify the IT-related actions the 
agency has taken to maximize telework during the COVID-19 pandemic, and 
the reported impacts of the actions on the agency's IT budget and 
plans.
---------------------------------------------------------------------------
    \4\ Joint Explanatory Statement accompanying the Consolidated 
Appropriations Act, 2020, Pub. L. No. 116-93, 133 Stat. 2317 (December 
20, 2019). In communication with committee staff, we agreed to focus on 
the three objectives detailed in this report.

For the first objective, we identified a nonprobability sample of five 
out of IRS's 133 IT investments. We selected the sample from among 
those investments that IRS identified as mission-critical and with the 
highest levels of funding for Fiscal Years 2019 and 2020. Specifically, 
we selected three investments in development--Enterprise Case 
Management (ECM), CADE 2, and Web Applications (WebApps)--and two 
investments in operations and maintenance--Individual Master File (IMF) 
---------------------------------------------------------------------------
and End User Systems and Services (EUSS).

For the investments in development, we compared planned cost, schedule, 
and scope data to actual cost, schedule, and scope data for Fiscal 
Years 2019 and 2020, using performance data from the Investment 
Performance Tool--IRS's system for tracking investment performance--and 
supporting documentation. The Office of Management and Budget's (OMB) 
and IRS's standards for reporting on investment performance consider 
variances within 10 percent of goals not to be significant.

To assess the reliability of the Investment Performance Tool data for 
the selected investments in development, we, among other things, 
interviewed IRS IT organization officials responsible for overseeing 
the use of the tool to confirm our understanding of the data. We also 
reviewed the data to verify that it included all the projects 
supporting the investments for the 8 quarters in the scope of our 
review. We followed up with IT program officials to discuss detected 
anomalies. We determined that the data were sufficiently reliable for 
our purposes.

For the CADE 2 investment, we also reviewed prior GAO reports; IRS's 
quarterly IT reports to Congress on the agency's IT modernization 
progress; and relevant documents, including the modernization plan for 
IMF for which CADE 2 is a key component.

For the selected investments in operations and maintenance, we compared 
operational performance measures found in the agency's monthly 
investment performance reports to agency operational performance 
metrics for Fiscal Years 2019 and 2020. We also reviewed IRS's 
operational analyses--internal qualitative assessments of performance 
required by OMB--for the two selected investments to determine whether 
they addressed key factors specified in OMB's capital programming 
guidance. These factors included, for example, analyzing how well the 
investments contribute to achieving the organization's strategic goals 
and determining the extent to which the investments support customer 
processes, as designed. We rated each factor as addressed if the 
operational analysis fully addressed the factor; or partially addressed 
if the operational analysis addressed some, but not all, of the factor.

For the second objective, we compared IRS's reported actual costs and 
schedules for the IT modernization activities completed in Fiscal Years 
2019 and 2020 to the planned costs and schedules for these activities. 
We also reviewed documentation, such as IRS's quarterly IT reports to 
Congress, and interviewed IT organization \5\ officials, to understand 
variances between actual and planned performance.
---------------------------------------------------------------------------
    \5\ IRS's IT organization is led by the Chief Information Officer 
and includes several subordinate offices.

In addition, we selected a nongeneralizable random sample of 
modernization activities to verify that they were completed. 
Specifically, we randomly selected one activity from each of the four 
modernization categories outlined in the agency's plan for Fiscal Years 
2019 and 2020. This resulted in our selection of eight of 59 
activities. To verify completion of the selected activities, we 
reviewed supporting documentation and interviewed IRS IT organization 
---------------------------------------------------------------------------
officials.

To address the third objective, we obtained, analyzed, and summarized 
relevant documentation, including weekly impact summary reports 
prepared by Associate Chief Information Officers in IRS's Information 
Technology organization; IRS's COVID-19 spending plan; and the 
inventory of IT equipment and services that the agency purchased to 
transition its workforce to maximum telework. We also interviewed 
officials from IRS's Information Technology organization who are 
responsible for purchasing and deploying the equipment.

We also reviewed instructions for reporting information in the COVID-19 
weekly impact summary reports. Further, we corroborated the accuracy of 
the information in the COVID-19 spending plan with IRS budget 
officials. We determined that the data were sufficiently reliable for 
purposes of summarizing what IRS reported. A detailed discussion of our 
objectives, scope, and methodology can be found in appendix I.

We conducted this performance audit from June 2020 to October 2021 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives.

Background

The mission of IRS, a bureau within the Department of the Treasury, is 
to provide America's taxpayers top quality service by helping them 
understand and meet their tax responsibilities and enforce the law with 
integrity and fairness to all. In carrying out its mission, IRS 
annually collects more than $3.5 trillion in taxes from millions of 
individual taxpayers and numerous other types of taxpayers. It also 
manages the distribution of more than $450 billion in refunds.

In response to the COVID-19 pandemic, IRS, like many other agencies, 
had to take actions to ensure its employees' safety and health, while 
also ensuring the continuity of its mission-essential functions. In 
March 2020, Congress and the President enacted the Coronavirus Aid, 
Relief, and Economic Security (CARES) Act, which directed IRS to assist 
individuals, families, and households in alleviating the financial 
hardships they were facing through the disbursement of economic impact 
payments.\6\ In addition, the CARES Act provided the agency with the 
funding needed to take actions to continue to operate during the 
pandemic and perform its new responsibilities.
---------------------------------------------------------------------------
    \6\ Pub. L. No. 116-136, Sec. 2201(a), 134 Stat. 281,336-37 
(codified at 26 U.S.C. Sec. 6428) (March 27, 2020).

In March 2020, Congress and the President also enacted the Families 
First Coronavirus Response Act, which provided additional funding to 
IRS to continue to operate during the pandemic.\7\ Further, in December 
2020, Congress and the President enacted the Consolidated 
Appropriations Act, 2021, which authorized IRS to issue a second round 
of direct payments to individuals to help address financial stress due 
to the pandemic.\8\ Finally, in March 2021, Congress and the President 
enacted the American Rescue Plan Act, which provided $1.5 billion to 
the agency to continue to develop ``integrated, modernized, and secure 
systems.''\9\
---------------------------------------------------------------------------
    \7\ Pub. L. No. 116-127, title III, 134 Stat. 178, 181 (March 18, 
2020).
    \8\ Pub. L. No. 116-260, div. N, Sec. 272(a), 134 Stat. 1182, 1965-
1971 (2020), classified at 26 U.S.C. Sec. 6428A. These payments are an 
advance refund for a tax year 2020 tax credit.
    \9\ American Rescue Plan Act of 2021, Pub. L. No. 117-2, Title IX, 
Subtitle G, Sec. 9601, 135 Stat. 4, 144 (March 11, 2021).
---------------------------------------------------------------------------
IRS Relies on IT to Carry Out Its Mission and Responsibilities
As previously mentioned, IT plays a critical role in enabling IRS to 
carry out its mission and responsibilities. According to the agency, it 
expended approximately $2.8 billion on IT investments during Fiscal 
Year 2020: $605 million for development, modernization, and 
enhancement, and $2.2 billion for operations and maintenance.

Included in these expenditures are the five investments selected for 
our review--all of which IRS describes as critical to the agency's 
mission.

Three of the five investments were primarily in the development phase 
during Fiscal Years 2019 and 2020:

      CADE 2, which IRS began developing in 2009, is intended to 
replace core functions of IMF--IRS's authoritative data source for 
individual tax account data--which accounts for a large portion of the 
tax processing activities. CADE 2 data are also expected to be made 
available for access by downstream systems, such as the Integrated Data 
Retrieval System, for online transaction processing by IRS customer 
service representatives. We provide more details on this investment 
later in the report.

      ECM, which IRS began developing in 2015, is intended to provide 
an enterprise solution for performing case management across the 
agency's business units. According to the agency, its current case 
management systems provide limited visibility into case management 
practices among programs, and cause process redundancies as well as 
multiple handoffs that can lead to, among other things, increased 
risks. ECM is expected to address these limitations.

       In June 2018, we reported that, after 18 months of working with 
a contractor, IRS had paused all development activities for the 
investment because the product that was being delivered did not meet 
the agency's needs.\10\ Specifically, the contractor's solution was not 
sufficiently automated to be scalable across the agency.
---------------------------------------------------------------------------
    \10\ GAO, Information Technology, IRS Needs to Take Additional 
Actions to Address Significant Risks to Tax Processing, GAO-18-298 
(Washington, DC: June 28, 2018).

       IRS subsequently established a new effort to acquire a product 
that would be aligned with its business needs. In April 2020, it 
acquired the product and began an incremental implementation.\11\ The 
agency reported completing the first release of the implementation--the 
delivery of the case management solution to one business organization--
in December 2020.
---------------------------------------------------------------------------
    \11\ IRS uses an agile approach to implement modernization 
activities.

       IRS reported completing the second release--the delivery of the 
solution to one other business organization and the initiation of work 
with three additional business organizations--in May 2021. The agency 
expects the third release--the delivery of data services to allow users 
to access individual taxpayer data, and additional case management 
functionality to enable further business migration to ECM--to be 
---------------------------------------------------------------------------
completed in December 2021.

       IRS reported spending $66 million on the investment in Fiscal 
Year 2020. As of July 2021, the agency had spent $229 million on the 
lifecycle of this investment and had rebaselined it--meaning that it 
had revised cost, schedule, or scope goals--three times.

      WebApps, which the agency began developing in 2015, is intended 
to establish an online account for individual taxpayers that links the 
taxpayer to various IRS services. For example, WebApps is intended to 
allow taxpayers to check their account balances and payment histories, 
and resolve a variety of tax issues using IRS's website or mobile 
application. The agency reported that it expects to complete the online 
installment agreements--which would allow users to create a short-term 
payment plan--in WebApps by September 2021. The agency reported 
spending $32 million on the investment in Fiscal Year 2020. As of 
December 2020, IRS had spent $181 million on the lifecycle of the 
investment.

The two other investments selected for our review were in the 
operations and maintenance phase during Fiscal Years 2019 and 2020:\12\
---------------------------------------------------------------------------
    \12\ IRS allocated funding to both development and operations and 
maintenance activities for EUSS and for IMF in Fiscal Years 2019 and 
2020. However, over 50 percent of the funding was allocated to 
operation and maintenance activities for both investments during this 
time period.

      EUSS, which IRS began operating in 2002, provides desktops, 
laptops, mobile devices, software, incident management services, and 
asset management services to end users in the agency. IRS reported 
spending $268 million on development and operations and maintenance for 
this investment in Fiscal Year 2020; it reported spending $2 billion on 
---------------------------------------------------------------------------
the lifecycle of the investment through September 2020.

      IMF, which began operating in 1970, is IRS's system for 
processing individual taxpayer account data. The agency uses this 
system to update accounts, assess taxes, and generate refunds, as 
required, during each tax filing period. Virtually all of IRS's 
information system applications and processes depend on output, 
directly or indirectly, from this data source; and IMF was used as a 
key system for determining eligibility for making the economic impact 
payments to individuals. IRS uses assembly language code \13\ and 
Common Business Oriented Language (COBOL) \14\--languages that were 
developed in the late 1950s and early 1960s--to program this system, 
which it began developing in the late 1960s. The agency reported 
spending $14 million on operations and maintenance for IMF in Fiscal 
Year 2020 and a total of $189 million on the investment through August 
2020.
---------------------------------------------------------------------------
    \13\ Assembly language code is a low-level computer language 
initially used in the 1950s. Programs written in assembly language are 
conservative of machine resources and quite fast; however, they are 
much more difficult to write and maintain than other languages. 
Programs written in assembly language may only run on the type of 
computer for which they were originally developed.
    \14\ COBOL, which was introduced in 1959, became the first widely 
used, high-level programming language for business applications. The 
Gartner Group, a leading IT research and advisory company, has reported 
that organizations using COBOL should consider replacing the language, 
as procurement and operating costs are expected to steadily rise, and 
because there is a decrease in people available with the proper skill 
sets to support the language.

To guide its future direction, in April 2019, IRS issued a plan for its 
IT modernization efforts through Fiscal Year 2024.\15\ This plan 
defined four major categories \16\ of work, which IRS considered 
necessary to transform the agency's technology and deliver a modernized 
taxpayer experience in support of its mission. The categories were 
taxpayer experience, core taxpayer services and enforcement, modernized 
IRS operations, and cybersecurity and data protection.
---------------------------------------------------------------------------
    \15\ Internal Revenue Service, IRS Integrated Modernization Plan 
Business Plan (Washington, DC. April 2019).
    \16\ IRS refers to these major categories of work as pillars.

In addition, the plan defined two phases for completing the work: the 
first phase was scheduled to occur between Fiscal Years 2019 and 2021, 
and the second phase was scheduled to occur between Fiscal Years 2022 
and 2024. The agency noted that successful implementation of the plan 
depended on obtaining certain hiring flexibilities and required 
---------------------------------------------------------------------------
multiyear funding at predictable levels.

IRS reports quarterly to the Congress and other stakeholders on its 
progress in implementing the modernization plan, as mandated in the 
Joint Explanatory Statement. These quarterly reports summarize 
accomplishments for the past quarter and identify plans, including 
associated costs and schedules for the upcoming quarter. Further, the 
agency issues a publicly available annual status report and, in 
February 2021, issued its second such report.
GAO Has Reported on Opportunities for IRS to Improve the Management of 
        Its IT Investments
For several years, we have reported on the performance of IRS's IT 
investments and identified opportunities for improving the management 
of these investments. For example,

      In May 2016, we reported on legacy IT systems across the Federal 
Government. We noted that these systems were becoming increasingly 
obsolete and that many of them used outdated software languages and 
hardware parts that were unsupported by the vendor.\17\ We stressed the 
need for agencies to move to more modern, maintainable languages, as 
appropriate and feasible. As part of that work, we highlighted the 
Department of the Treasury's use of assembly language code and COBOL to 
program its legacy systems.\18\ We also reported that IMF was over 50 
years old and that, although IRS was working to modernize it, the 
agency did not have a time frame for completing the modernization or 
replacement. Thus, we recommended that the Secretary of the Treasury 
direct the Chief Information Officer to identify and plan to modernize 
or replace IRS's legacy systems. In June 2021, IRS issued a high-level 
IMF retirement plan that included the scope of the work, the approach, 
dependencies and risks, and cost and timeline estimates.\19\ According 
to the plan, IRS estimates that it will retire IMF in 2030.
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    \17\ GAO, Information Technology: Federal Agencies Need to Address 
Aging Legacy Systems, GAO-16-468 (Washington, DC: May 25, 2016).
    \18\ While COBOL was developed in the late 50s and early 60s, IRS 
has been regularly updating the version it uses. Nevertheless, 
according to IRS, modernizing its systems would assist with providing 
the instant data access and real-time updates to the systems that are 
needed to provide better across-the-board service in a cost-effective 
manner.
    \19\ IRS, Information Technology, Individual Master File 
Modernization (June 2021).

      In June 2016, we reported that IRS had developed IT investment 
priorities which supported two types of activities--operations and 
maintenance and modernization.\20\ We noted that the agency had not 
fully documented the process for allocating funding to its operations 
activities or developed a structured process for allocating funding to 
its modernization activities. We recommended that IRS develop and 
document these processes.
---------------------------------------------------------------------------
    \20\ GAO, Information Technology: IRS Needs to Improve Its 
Processes for Prioritizing and Reporting Performance of Investments, 
GAO-16-545 (Washington, DC: June 29, 2016).

       In response to our recommendation, IRS documented its process 
for prioritizing its operations activities in March 2017. Further, in 
October 2020, the agency provided documentation of a process for 
prioritizing its modernization activities that it had developed and 
begun implementing. According to IRS IT organization officials, this 
process for prioritizing modernization efforts is expected to be fully 
implemented for the Fiscal Year 2022 budget cycle, to coincide with the 
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start of a new phase of modernization efforts.

      In June 2018, we reviewed the performance of selected IRS 
investments, the extent to which IRS had identified and taken steps to 
address the risks associated with three mission critical legacy 
systems--IMF, Integrated Data Retrieval System, and Mainframes and 
Servers Services and Support--and the agency's implementation of key IT 
workforce planning practices.\21\ We reported, among other things, that 
these legacy systems were facing significant risks due to their 
reliance on legacy programming languages, outdated hardware, and a 
shortage of human resources with critical skills needed to maintain the 
systems. In addition, the agency had not fully implemented key risk 
management practices to effectively mitigate those risks.
---------------------------------------------------------------------------
    \21\ GAO, Information Technology: IRS Needs to Take Additional 
Actions to Address Significant Risks to Tax Processing, GAO-18-298 
(Washington, DC: June 28, 2018).

       As a result of these and other findings in our report, we made 
21 recommendations to IRS. The agency did not agree or disagree with 
the recommendations, but said it would provide a plan for addressing 
each recommendation. As of May 2021, IRS had updated its risk 
management process to include preparing, analyzing, and controlling 
risk. Further, the agency had implemented 18 recommendations, including 
updating its risk management plan for the Mainframe Servers and Support 
System to account for identifying risk, and had taken steps to address 
the others. A detailed summary on the status of IRS's efforts to 
address the recommendations is included in appendix II.

 IRS Reported That Selected Investments Met Most Performance Goals but 
                    Key Effort Had Significant Delays and Cost 
                    Increases

IRS reported that the five investments we reviewed had met most of the 
performance goals set by the agency and the performance reporting 
requirements established by OMB for Fiscal Years 2019 and 2020. 
Specifically, the agency reported that the three selected investments 
in development were mostly within 10 percent, of performance goals for 
Fiscal Years 2019 and 2020, a variance OMB and IRS consider not to be 
significant.\22\ An exception was CADE 2 that reportedly spent about 15 
percent less than budgeted for 2020. In addition, for the two 
investments in operations and maintenance, the agency performed 
operational analyses that addressed nearly all OMB requirements for 
Fiscal Years 2019 and 2020. Further, the agency reported that, in 
Fiscal Years 2019 and 2020, one of the investments met all five 
operational performance targets established by the agency; the other 
investment met three out of five targets in Fiscal Year 2019 and four 
out of six targets in Fiscal Year 2020.
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    \22\ For purposes of this reporting, variances within 10 percent 
were considered not to be significant. Consistent with OMB guidance, 
IRS considers cost and schedule variances within this threshold not to 
be significant.

While CADE 2 had lower expected costs for 2020 and was within schedule 
parameters for 2019 and 2020, IRS had changed its plans for the 
investment several times. This has led to a key schedule milestone for 
replacing selected IMF functions, known as transition state 2, being 
delayed 9 years--from 2014 to 2023. Overall, IRS now reports that CADE 
2 development will not be completed until 2030. In addition, 
development costs to date are about four times higher than originally 
planned.
IRS Reported That Selected Investments in Development Were Mostly 
        Within 10 Percent of Performance Goals
For the selected investments in development (ECM, CADE 2, and WebApps), 
IRS reported cost, schedule, and scope performance information on a 
quarterly basis for Fiscal Years 2019 and 2020.\23\ According to the 
agency, with the exception of CADE 2, which experienced a significant 
budget underrun in Fiscal Year 2020, the three investments were within 
10 percent of cost, schedule and scope goals for these years. Table 1 
summarizes the performance of the ECM, CADE 2, and WebApps investments 
for Fiscal Years 2019 and 2020.
---------------------------------------------------------------------------
    \23\ While IRS uses earned value management type information from 
its Investment Performance Tool to track the performance of its 
investments in development, it does not consider the tool containing 
this information to be a formal earned value management system. As a 
result, we did not evaluate the extent to which the tool was compliant 
with the American National Standards Institute's guidelines for an 
Earned Value Management System.


 Table 1: Reported Performance of Enterprise Case Management (ECM), Customer Account Data Engine 2 (CADE 2), and
                     Web Applications (WebApps) Investments During Fiscal Year 2019 and 2020
----------------------------------------------------------------------------------------------------------------
                                             Total budgeted   Total actual                            Percent of
                                     Fiscal   cost of work    cost of work      Cost      Schedule     planned
          Investment name             year   performed  (in  performed  (in   variance   variance a     scope
                                                millions)       millions)                            delivered a
----------------------------------------------------------------------------------------------------------------
ECM                                    2019          $19.26          $19.26         0%        -1.8%          98%
                                   -----------------------------------------------------------------------------
                                       2020          $30.44          $30.44         0%        -2.2%        97.8%
----------------------------------------------------------------------------------------------------------------
CADE 2                                 2019          $51.87          $51.84      -0.1%         2.1%       102.1%
                                   -----------------------------------------------------------------------------
                                       2020          $82.26          $70.22     -14.6%        -0.1%        99.9%
----------------------------------------------------------------------------------------------------------------
WebApps                                2019          $28.38          $26.48      -6.7%           0%       100.0%
                                   -----------------------------------------------------------------------------
                                       2020          $23.73          $21.81      -8.1%           0%       100.0%
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of Internal Revenue Service data. | GAO-22-104387.
 
Note: For purposes of this reporting, variances within 10 percent were not considered significant. In addition,
  positive variances represent overruns and negative variances represent underruns.
 
a Based on the ratio of earned value to planned value at the investment level.


Regarding ECM, IRS reported that it was on budget, had a 1.8-percent 
schedule overrun, and delivered 98 percent of planned scope for Fiscal 
Year 2019. For Fiscal Year 2020, the agency reported results similar to 
those for Fiscal Year 2019. Specifically, IRS reported that ECM was on 
budget, had a 2.2 percent schedule overrun, and delivered 97.8 percent 
of planned scope.

For CADE 2, IRS reported that it spent about 0.1 percent less than 
budgeted for the amount of work performed (about $32,000 less), was 2.1 
percent ahead of schedule, and delivered about 102 percent of planned 
scope in Fiscal Year 2019. For Fiscal Year 2020, the agency reported 
that CADE 2 was under budget by about 15 percent (about $12 million), 
was 0.1 percent behind schedule, and delivered 99.9 percent of the 
planned scope. CADE 2 program officials reported that the significant 
budget underrun in Fiscal Year 2020 was due to requiring fewer people 
than initially planned for the Individual Tax Processing Engine 
project.

In addition, in its fourth quarter Fiscal Year 2020 IT quarterly report 
to Congress, IRS reported that staffing resources were pulled from CADE 
2 to support the 2020 filing season, COVID-19 responsibilities, and 
maintenance activities to ensure readiness for the 2021 tax filing 
season. The agency further reported that this reallocation of resources 
led to a slight underspend for the fourth quarter and is expected to 
result in a 7-month delay in the completion of Transition State 2 
development activities--from September 2022 to April 2023.

However, while IRS reported the reallocation of resources and the 
resulting schedule impact in the fourth quarter Fiscal Year 2020 report 
to Congress, it did not include a history of baseline changes or other 
information that would provide a long-term view of CADE 2's 
performance.

We shared this observation with IRS, and, in response, the agency began 
including a history of program baseline changes in its quarterly 
reports, beginning with the second quarter Fiscal Year 2021 report. In 
July 2021, IRS IT officials stated they plan to continue to include 
this history in future reports. By including this transparency in its 
quarterly reports, IRS is providing greater assurance that Congress and 
stakeholders have more complete information to support their oversight 
of the agency's investments.

Regarding WebApps, the agency reported that it was under budget by 
about 7 percent (about $1.9 million) with no variances in schedule or 
planned scope in Fiscal Year 2019. WebApps program officials attributed 
the cost variance to spending less money than planned because their 
appropriation was delayed and lower than anticipated.

In Fiscal Year 2020, IRS reported similar results, with the WebApps 
investment spending about 8 percent (about $1.9 million) less than 
budgeted, and with no variances in schedule or scope. Similar to Fiscal 
Year 2020, WebApps program officials attributed the budget variance to 
having less to spend because the agency's appropriation was delayed and 
lower than anticipated. Nevertheless, in Fiscal Year 2020, IRS reported 
that it completed additional activities as part of this investment that 
related to COVID-19, including the development of a ``Where's My 
Stimulus Check?'' application.
 IRS Reported That the Selected Investments in Operations and 
        Maintenance Met Most OMB Performance Requirements
OMB's Fiscal Year 2020 Capital Programming guidance states that 
agencies should conduct an operational analysis for each investment in 
operations and maintenance that addresses six factors.\24\ These 
factors are (1) the extent to which the investment supports customer 
processes as designed; (2) how well the investment contributes to 
achieving the organization's strategic goals; (3) a comparison of 
current performance with a pre-established cost baseline; (4) 
alternative methods for achieving the same mission needs and strategic 
goals; (5) greater (i.e., increased) utilization of technology or 
consolidation of investments to better meet organizational goals; and 
(6) annual performance of operational analyses.
---------------------------------------------------------------------------
    \24\ Office of Management and Budget, Capital Programming Guide V 
3.1: Supplement to Office of Management and Budget Circular A-11, 
Planning, Budgeting, and Acquisition of Capital Assets (Washington, DC: 
2020).

Further, OMB's Fiscal Year 2020 Capital Planning guidance states that 
the ongoing performance of operational investments should be monitored 
to demonstrate that the investments are meeting the needs of the agency 
and delivering expected value, and/or that the modernized and replaced 
systems are consistent with the agency's enterprise architecture.\25\ 
To achieve these goals, OMB requires agencies to define and publicly 
report on five operational performance metrics specific to each major 
IT investment, as well as planned and actual performance against these 
metrics. According to OMB, these metrics should address three broad 
areas: customer satisfaction, financial performance, and strategic and 
business results.
---------------------------------------------------------------------------
    \25\ Office of Management and Budget, FY 2020 IT Budget--Capital 
Planning Guidance (Washington, DC: June 2018).

IRS conducted operational analyses for the two investments in 
operations and maintenance, EUSS and IMF, for Fiscal Years 2019 and 
2020. The operational analyses for EUSS fully addressed all six OMB 
factors for Fiscal Years 2019 and 2020. For example, the operational 
---------------------------------------------------------------------------
analyses addressed the factors associated with:

      Utilizing technology or consolidation of the investment to 
better meet organizational goals. For example, the Fiscal Year 2019 
operational analysis stated that IRS implemented a capability to deploy 
Windows and perform system upgrades remotely. In addition, the Fiscal 
Year 2020 operational analysis stated that IRS developed a robotics 
process automation tool to facilitate the interaction between service 
desk specialists and employees with account lockout issues--the most 
common issue requiring service desk assistance. According to the 
operational analysis, the tool reduced the amount of time it takes 
specialists to unlock accounts from 22 minutes to under 7 minutes.

      Providing a comparison between planned and actual costs for both 
Fiscal Years 2019 and 2020 by addressing planned and actual costs in 
the operational analysis.

The operational analyses for IMF, in both Fiscal Years 2019 and 2020, 
fully addressed five of the six factors and partially addressed the one 
other factor. For example, the operational analyses addressed the 
factors associated with:

      Supporting customer processes, as designed, by including 
performance goals related to customer satisfaction, specifically 
identifying a target goal of zero errors that cause the program to 
crash per month, and achieving the goal for Fiscal Years 2019 and 2020.

      Researching alternative methods of achieving the same mission 
needs and strategic goals and aligning available resources with the 
investment annually.

The operational analyses partially addressed the factor associated with 
greater utilization of technology or consolidation of investments to 
better meet organizational goals. The analyses stated that IRS used new 
technology to implement processing improvements via a more robust 
testing approach in order to reduce coding defects.

However, while the analyses noted that IMF is being replaced with a 
more modern system, the analyses did not reflect IRS's modernization 
progress to date and the associated challenges--a shortcoming we 
identified in our review of the agency's 2016 operational analysis for 
IMF and reported on in June 2018.\26\ We stressed that this omission 
was concerning given the risk exposure created by the agency's 
continued use of the legacy assembly language code. Consequently, we 
recommended that IRS ensure the operational analysis for IMF fully 
addresses greater utilization of technology or consolidation of 
investments to better meet organizational goals.
---------------------------------------------------------------------------
    \26\ GAO-18-298.

IRS provided its Fiscal Year 2020 operational analysis for CADE 2, 
which addressed the agency's progress in modernizing components of IMF 
and associated challenges. However, given that this information was not 
included in the IMF operational analysis, the agency may not have had 
the critical information it needed to inform the decisions about IMF. 
We plan to continue monitoring the agency's efforts to update its 
operational analysis to include progress on modernizing IMF and the 
---------------------------------------------------------------------------
associated challenges.

Further, as mentioned earlier, OMB requires agencies to define and 
publicly report on five operational performance metrics specific to 
each major IT investment, as well as planned and actual performance 
against these metrics. The metrics are to focus on the three broad 
areas of customer satisfaction, financial performance, and strategic 
and business results.

IRS defined operational performance metrics for EUSS and IMF, as 
required by OMB. For EUSS in both Fiscal Years 2019 and 2020, the 
metrics were:

      Timeliness of service call resolution;

      Percentage of IT interactions closed at the first level of 
support;

      Percentage of properly configured workstations passing baseline 
security scans;

      Amount of time it takes a customer service representative to 
complete a service call; and

      Amount of time IRS employees wait before reaching telephone 
support.

For IMF, in Fiscal Year 2019, one of the metrics was interest paid on 
taxpayer refunds per million. However, in May 2019, IRS changed this 
metric to the amount of application changes made to address coding 
errors. The four other metrics that were used in both Fiscal Years 2019 
and 2020 were:

      Amount of errors causing the application to stop running;

      Percent of scheduled system availability;

      Amount of issues that cannot be resolved during a Service Desk 
call excluding outages; and

      Percent of completed planned processing schedule to meet refund, 
notice, and online access deadlines.

The agency reported that the operational performance of EUSS improved 
from Fiscal Year 2019 to Fiscal Year 2020. Specifically, in Fiscal Year 
2019, EUSS did not meet its performance target for percentage of 
properly configured workstations passing baseline security scans; 
however, in Fiscal Year 2020, EUSS met this performance target. For the 
other targets, EUSS met three of the five operational performance 
targets in Fiscal Year 2019 and met four of the five targets in Fiscal 
Year 2020. IMF met all of its operational performance targets for both 
Fiscal Years 2019 and 2020.\27\
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    \27\ For Fiscal Year 2019, IRS had six operational performance 
metrics for IMF. It used one operational performance metric for part of 
the year and another metric for the rest of the year.

Table 2 identifies the two investments' operational performance 
metrics, and whether or not each performance target was met during 
Fiscal Years 2019 and 2020. The table is followed by a discussion of 
---------------------------------------------------------------------------
the performance target shortfalls for these investments.


Table 2: End User Systems and Services (EUSS) and Individual Master File
 (IMF) Performance Metrics, Their Descriptions, and Whether Operational
      Performance Metrics Were Met for Fiscal Years 2019 and 2020a
------------------------------------------------------------------------
                                               Whether        Whether
                                             performance    performance
                 Operational     Focus of     target was     target was
  Investment     performance      metric       met for        met for
                   metric                    Fiscal Year    Fiscal Year
                                                 2019           2020
------------------------------------------------------------------------
EUSS           Timeliness of   Customer                   
                service call    satisfacti
                resolution      on
              ----------------------------------------------------------
               Percentage of   Financial                  
                information     performanc
                technology      e
                interactions
                closed at the
                first level
                of support
              ----------------------------------------------------------
               Percentage of   Strategic                   
                properly        and
                configured      business
                workstations    results
                passing
                baseline
                security
                scans
              ----------------------------------------------------------
               Amount of time  Strategic                  
                it takes a      and
                customer        business
                service         results
                representativ
                e to complete
                a service
                call
              ----------------------------------------------------------
               Amount of time  Strategic
                IRS employees   and
                wait before     business
                reaching        results
                telephone
                support
------------------------------------------------------------------------
IMF            Interest paid   Customer      b            N/A
                on taxpayer     satisfacti
                refunds per     on
                million
              ----------------------------------------------------------
               Amount of       Strategic     c            
                application     and
                changes made    business
                to address      results
                coding errors
              ----------------------------------------------------------
               Amount of       Customer                   
                errors          satisfacti
                causing the     on
                application
                to stop
                running
              ----------------------------------------------------------
               Percent of      Financial                  
                scheduled       performanc
                system          e
                availability
              ----------------------------------------------------------
               Amount of       Strategic                  
                issues that     and
                cannot be       business
                resolved        results
                during a
                Service Desk
                call
                excluding
                outages
              ----------------------------------------------------------
               Percent of      Strategic                  
                completed       and
                planned         business
                processing      results
                schedule to
                meet refund,
                notice, and
                online access
                deadlines
------------------------------------------------------------------------
Legend:  performance target met;  performance target not met; N/A: not
  applicable because metric changed in 2019.
 
Source: GAO analysis of IRS data. | GAO-22-104387.
 
a The EUSS and IMF metrics are for IRS employees.
b IRS only used this metric for part of Fiscal Year 2019.
c IRS used this metric from May 2019 to September 2020.


The EUSS investment did not meet its target for the percentage of 
properly configured workstations passing baseline security scans for 
Fiscal Year 2019. The agency reported that this was due to switching 
from Windows 7 to Windows 10 and a problem with IRS's compliance tool. 
Specifically, the agency said the compliance tool was not configured 
for Windows 10. According to User and Network Services officials, the 
issue was resolved when the agency configured its compliance tool to 
Windows 10.

In addition, in Fiscal Years 2019 and 2020, IRS did not meet the target 
for the amount of time its employees waited before reaching telephone 
support for EUSS. The agency reported that this was due to problems 
with its network and servers, ongoing software upgrades, a lack of 
resources due to attrition, and an increased number of teleworkers as a 
result of COVID-19.

User and Network Services officials said the agency's IT team 
consistently works on network, server, and software upgrade issues as 
they arise. In response to not meeting the target for EUSS telephone 
support, these officials stated that they had developed a process in 
which software releases were deployed to a pilot portion of 
workstations and then monitored to determine their impact before 
releasing new software to the rest of the agency's workstations.

We also asked IRS about actions the agency had taken to address the 
attrition of telephone support staff since this factor had contributed 
to the agency not meeting its target in prior years.\28\ In response, 
the User and Network Services officials stated that IRS had received 
funding and authority to hire additional staff and additional 
contractor support in Fiscal Years 2019 and 2020; however, funding was 
not sufficient to get ahead of losses due to attrition, including 
retirements, and promotions to other parts of the agency. The officials 
added that they were continuing to elevate the understaffing issue to 
IRS's hiring authority while also pursuing options for assistance that 
do not require live telephone support. These options include 
encouraging users to use IT self-service options and an automated 
assistance function that the agency deployed in July 2019.\29\
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    \28\ In June 2018, we reported that IRS did not meet its target for 
the amount of time the agencies' employees wait to receive telephone 
support for 6 out of the 18 months we reviewed due to the attrition of 
telephone support staff and the agency's inability to hire additional 
support staff. See GAO-18-298.
    \29\ IRS's automated assistance is a chatbot that is designed to 
answer questions and help IRS employees resolve technical difficulties.
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 CADE 2 Development Has Taken Much Longer and Cost Significantly More 
        Than Originally Planned
IRS began developing CADE 2 in 2009 to replace IMF. To limit risk and 
demonstrate incremental progress toward modernization, the agency 
planned to deliver the investment in three phases, called transition 
states. Table 3 shows the initial target completion dates and key 
characteristics for transition state 1, transition state 2, and the 
target state that we reported on in March 2011.\30\
---------------------------------------------------------------------------
    \30\ GAO, Taxpayer Account Strategy: IRS Should Finish Defining 
Benefits and Improve Cost Estimates, GAO-11-168 (Washington, DC: March 
24, 2011).


Table 3: Initial Planned Completion Dates and Key Characteristics of the
         Customer Account Data Engine (CADE) 2 Transition States
------------------------------------------------------------------------
   Transition states and       Key characteristics of CADE 2 transition
      completion dates                          states
------------------------------------------------------------------------
Transition state 1           Dual systems--Individual Master File (IMF)
                              and CADE
 
January 2012                 1. Daily batch processing of individual
                              taxpayer returns provided by modifying IMF
                              to run on a daily, rather than weekly,
                              basis
                             2. Comprehensive database established for
                              housing all individual taxpayer accounts
                              and loaded with data from CADE and IMF
                             3. Database provides timelier updates of
                              taxpayer information for use by IRS
                              employees for compliance and customer
                              service
------------------------------------------------------------------------
Transition state 2           Single system--CADE
 
January 2014                 1. Target technology (single processing
                              system; IMF retired)
                             2. High-priority downstream service and
                              compliance applications modified to take
                              advantage of the new database
                             3. Key financial material weaknesses and
                              applications addressed
------------------------------------------------------------------------
Target state                 Single system--CADE
 
TBD                          1. Complete the transition of applications
                              that use the target database so downstream
                              systems fully leverage the database
                             2. Address all financial and security
                              material weaknesses identified at the
                              inception of the program
                             3. Eliminate transitional components that
                              were required during the transition states
------------------------------------------------------------------------
Source: GAO analysis of IRS data. | GAO-22-104387.


IRS also initially reported preliminary estimated life cycle cost 
estimates for transition state 1 and transition state 2 of about $1.3 
billion through 2024, including about $377 million for development and 
$922 million for operations and maintenance.

We previously reported that IRS completed all the work it had 
originally planned for transition state 1 in July 2014, 2 years later 
than originally planned.\31\ Through this phase, the agency modified 
the IMF processing cycle to allow for daily (rather than weekly) 
processing and posting of taxpayer returns. According to IRS, this 
enabled faster refunds to taxpayers, among other things. In addition, 
IRS established the database intended to serve as the authoritative 
source for all individual taxpayer data. IRS officials recently told us 
that they had used the CADE 2 database to meet their responsibilities 
for making advanced child tax credit payments to eligible taxpayers.
---------------------------------------------------------------------------
    \31\ GAO, Information Technology: Management Needs to Address 
Reporting of IRS Investments' Cost, Schedule, and Scope Information, 
GAO-15-297 (Washington, DC: February 25, 2015). We reported that while 
IRS reported the completion of transition state 1 in November 2012, 
this transition state was completed ``conditionally,'' meaning that the 
investment was approved to proceed to the next phase with outstanding 
issues remaining to be addressed. These outstanding issues were 
addressed by July 2014.

IRS has taken much longer than originally planned to develop transition 
state 2. It now expects that it will complete development activities in 
April 2023, 9 years later than originally planned. We previously 
reported that due to significant budget cuts and a shortage of skilled 
staff, the transition state's release plan was revised three times 
between 2016 and 2017.\32\ In addition, in May 2019, IRS's Chief 
Information Officer stated that the agency recognized that the scope 
for CADE 2 was too broad and complex. As a result, IRS decided to de-
scope several of CADE 2's projects to focus solely on modernizing parts 
of IMF--which accounts for a large portion of tax processing 
activities--rather than retire IMF.\33\ As of July 2021, the agency was 
focused on re-engineering the core components of the IMF using a hybrid 
of Agile and waterfall software development approaches.
---------------------------------------------------------------------------
    \32\ GAO, Information Technology: Key Attributes of Essential 
Federal Mission-Critical Acquisitions, GAO-20-249SP (Washington, DC: 
September 8, 2020).
    \33\ GAO-20-249SP.

IRS initiated planning efforts for the target state in the second 
quarter of Fiscal Year 2021. As of July 2021, IRS estimated that it 
would complete it in 2030.\34\
---------------------------------------------------------------------------
    \34\ IRS, Information Technology, Individual Master File 
Modernization (June 2021).

Figure 1 shows the current and initial planned schedule for the three 
---------------------------------------------------------------------------
transition states.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


.epsRegarding costs, IRS reported that it had spent $1.47 billion on 
the development for CADE 2 through September 2020, nearly four times 
the amount it had estimated it would spend to develop transition states 
1 and 2. In addition, the agency reported that it had spent 
approximately $72 million for operations and maintenance though 
September 2020.

We reported that overall IRS had revised or rebaselined its cost, 
schedule, and scope goals on numerous occasions, including seven times 
between 2016 and 2019.\35\
---------------------------------------------------------------------------
    \35\ We have previously reported that agencies may modify a 
project's cost, schedule, or performance goals ( baseline) to reflect 
changing development circumstances. We have also reported that these 
changes--called a rebaselining--can be done for valid reasons, but can 
also be used to mask cost overruns and schedule delays. See GAO, 
Information Technology: Agencies Need to Establish Comprehensive 
Policies to Address Changes to Projects' Cost, Schedule, and 
Performance Goals, GAO-08-925 (Washington, DC: July 31, 2008).

The CADE 2 delays and IRS's continued use of IMF are troubling given 
that IMF (1) is one of the oldest systems in the Federal Government, 
(2) has software written in an archaic language that IRS stated is no 
longer taught in school, and (3) is supported by a workforce with 
specialized skills that are increasingly harder to find. In addition, 
IRS has reported that a more modern system would provide the foundation 
for real-time digital taxpayer interactions, agile responses to 
legislative changes, and rapid access to data for enhanced customer 
---------------------------------------------------------------------------
service, compliance, and fraud detection services.

As mentioned earlier in this report, in May 2016,\36\ we reported on 
legacy IT systems across the Federal Government, including IMF. As part 
of that work, we highlighted the Department of the Treasury's use of 
assembly language code and COBOL to program its legacy systems.\37\ We 
also reported that IMF was over 50 years old and that, although IRS was 
working to modernize it, the agency did not have a time frame for 
completing the modernization or replacement. Thus, we recommended that 
the Secretary of the Treasury direct the Chief Information Officer to 
identify and plan to modernize or replace IRS's legacy systems such as 
IMF.
---------------------------------------------------------------------------
    \36\ GAO-16-468.
    \37\ While COBOL was developed in the late 50s and early 60s, IRS 
has been regularly updating the version it uses. Nevertheless, 
according to IRS, modernizing its systems would assist with providing 
the instant data access and real-time updates to the systems that are 
needed to provide better across-the-board service in a cost-effective 
manner.

In June 2021, IRS reported that it planned to replace and fully retire 
IMF by 2030 through a combination of CADE 2 and other modern 
components. Specifically, the agency issued a high-level IMF retirement 
plan that included the scope of the work; the approach, dependencies, 
and risks; and cost and timeline estimates.\38\ In addition, IRS IT 
officials, including the Chief Information Officer, recently reported 
that they plan to use part of the $1.4 billion appropriated for their 
IT budget through the American Rescue Plan Act to accelerate several 
programs, including CADE 2 and IMF retirement plans. They added that 
they were in the process of developing more detailed plans associated 
with the replacement and retirement of IMF.
---------------------------------------------------------------------------
    \38\ IRS, Information Technology, Individual Master File 
Modernization (June 2021).

While IRS now has a high-level plan for retiring IMF, a 2030 milestone 
for full replacement means that for many years it will still have to 
contend with the numerous challenges associated with the system's age 
and reliance on an old programming language. Further, given the past 
significant delays and other challenges in developing CADE 2 and the 
substantial work ahead, consistent high-level management attention is 
warranted.

 IRS Reported Completing Most of Its 2019 IT Modernization Plan 
                    Activities Within Schedule and Cost Estimates

In the IRS Integrated Business Modernization Plan, referred to as the 
IT modernization plan that IRS issued in April 2019, the agency 
identified 65 activities supporting 13 programs and initiatives and 
four categories of work that it planned to complete in Fiscal Years 
2019 and 2020. These activities included developing online installment 
agreements to allow taxpayers to view the status of their payment plans 
within their IRS online accounts. The activities also included 
completing a major acquisition for the technical solution to enable the 
agency to consolidate its many case management systems. IRS estimated 
that completing these activities would cost approximately $300 million 
and $271 million, respectively, for Fiscal Years 2019 and 2020.

IRS subsequently made changes to its modernization plan, which it noted 
in its Fiscal Years 2019 and 2020 quarterly reports to Congress. 
Specifically, the agency added eight planned activities, including 
providing a callback option to taxpayers calling the toll-free 
assistance line by the second quarter of Fiscal Year 2020, developing a 
3-year plan for moving applications to the cloud by the fourth quarter 
of Fiscal Year 2020, and achieving several milestones for converting 
code to a modern programming language as part of the CADE 2 Individual 
Tax Processing Engine project. According to the agency's annual Fiscal 
Year 2020 Key Insights report,\39\ the activities were added mostly due 
to technology advances and evolving customer expectations and needs.
---------------------------------------------------------------------------
    \39\ IRS's 2020 Key Insights report, issued in February 2021, 
provides a status of modernization activities completed in Fiscal Year 
2020 and those planned for Fiscal Year 2021.

In addition, IRS removed four activities and paused 10 other 
activities, resulting in an updated list of 59 activities planned for 
completion in Fiscal Years 2019 and 2020. For example, IRS eliminated 
the modernization activities it had planned for Fiscal Year 2020 for 
the Return Review Program.\40\
---------------------------------------------------------------------------
    \40\ IRS IT officials told us that they subsequently decided to use 
operations and maintenance funding for these Return Review Program 
activities.

Further, the agency paused seven out of 12 of the activities associated 
with the Next Generation Infrastructure modernization initiatives that 
it had planned for the same year. According to the agency's IT 
officials, including the Chief Information Officer, and as noted in the 
agency's quarterly reports to Congress, IRS removed or paused these 
activities due to funding constraints. In April 2021, the officials 
stated that the agency's decision to resume the activities in Fiscal 
---------------------------------------------------------------------------
Year 2021 would depend on whether it received additional funding.

Table 4 provides a breakdown of the number of initial and revised 
planned modernization activities by category and program/initiative.


    Table 4: The Internal Revenue Service's (IRS) Planned and Revised
  Modernization Activities by Program/Initiative and Work Category for
                       Fiscal Years 2019 and 2020
------------------------------------------------------------------------
                                          Number of
                                           planned       Revised number
  Work category   Program/initiative    activities in      of planned
                                        modernization      activities
                                            plan
------------------------------------------------------------------------
1. Taxpayer       WebApps                            3                 4
 Pexperience
                 -------------------------------------------------------
                  Taxpayer Digital                   1                 0
                   Communications
                   Outbound
                   Notifications
                 -------------------------------------------------------
                  Live Assistance                    3                 4
------------------------------------------------------------------------
2. Core taxpayer  Customer Account                   3                 7
 services and      Data Engine 2
 Penforcement      transition state
                   2
                 -------------------------------------------------------
                  Enterprise Case                    3                 3
                   Management
                 -------------------------------------------------------
                  Return Review                      4                 1
                   Program
------------------------------------------------------------------------
3. Modernized     Robotics Process                   4                 4
 IRS operations    Automation
                 -------------------------------------------------------
                  API Implementation                 3                 2
                 -------------------------------------------------------
                  Cloud Execution                    5                 5
                 -------------------------------------------------------
                  Next Generation                   16                 9
                   Infrastructure
------------------------------------------------------------------------
4. Cybersecurity  Vulnerability and                  8                 8
 and data          Threat Management
 protection
                 -------------------------------------------------------
                  Identity and                       3                 3
                   Access Management
                 -------------------------------------------------------
                  Security                           9                 9
                   Operations and
                   Management
                 -------------------------------------------------------
                                                    65                59
------------------------------------------------------------------------
Source: GAO analysis of IRS's Integrated Modernization Business Plan and
  progress reports. | GAO-22-104387.


IRS reported that, by the end of Fiscal Year 2020, it had completed 
most of the 59 IT modernization activities associated with its revised 
plans for Fiscal Years 2019 and 2020 early or on schedule and within 
cost. Specifically, the agency reported that it had completed 54 of 59 
activities early or on schedule.

Of eight modernization activities that we selected for review (from 
IRS's revised list of 59 activities), we verified that the agency had 
completed all of them.\41\ Table 5 lists these eight activities and the 
programs or initiatives they support.
---------------------------------------------------------------------------
    \41\ For our sample, we selected one activity from each of the four 
categories of work for both Fiscal Years 2019 and 2020, resulting in 
eight activities.


Table 5: Activities That the Internal Revenue Service (IRS) Completed in
              Fiscal Years 2019 and 2020 That GAO Verified
------------------------------------------------------------------------
  Program or initiative                       Activity
------------------------------------------------------------------------
Live Assistance Customer   Added four additional taxpayer applications
 Callback
                          ----------------------------------------------
                           Expanded toll-free capacity
------------------------------------------------------------------------
Customer Account Data      Deployed modern code for the internal
 Engine 2                   balancing and control component for
                            Individual Master File testing
------------------------------------------------------------------------
Enterprise Case            Delivered sequencing strategy and release
 Management (ECM)           plan to support the delivery of future ECM
                            releases for Fiscal Year 2021 and beyond
------------------------------------------------------------------------
Next Generation            Deployed continuous integration/continuous
 Infrastructure             delivery to software upgrades and code
                            changes rapidly and reliably
                          ----------------------------------------------
                           Deployed additional standard stack components
                            a
------------------------------------------------------------------------
Security Operations and    Deployed cyber architecture and cyber cloud
 Management                 strategy, and migration plan
------------------------------------------------------------------------
Vulnerability and Threat   Enhanced security testing and process
 Management                 automation to fully integrate security in
                            system deliver as early as possible
------------------------------------------------------------------------
Source: GAO analysis of IRS's modernization activities. | GAO-22-104387.
 
a A technology stack is a set of software components that compose a
  platform for running an application.


Regarding the activities completed late, IRS reported that it completed 
the remaining five of 59 activities 3 to 7 months later than initially 
planned. Table 6 provides the planned and actual completion dates for 
the activities that the agency completed late.


  Table 6: The Internal Revenue Service's (IRS) Planned Modernization Activities for Fiscal Years 2019 and 2020
                                            That Were Completed Late
----------------------------------------------------------------------------------------------------------------
                                                            Planned completion   Actual completion    Number of
              Activity                    Initiative               date                 date         months late
----------------------------------------------------------------------------------------------------------------
Procure Enterprise Case Management   ECM                   September 2019       April 2020                     7
 (ECM) solution
----------------------------------------------------------------------------------------------------------------
Deploy initial network monitoring--  Identity and Access   December 2019        April 2020                     4
 Continuous Diagnostics and           Management
 Mitigation Phase 1
----------------------------------------------------------------------------------------------------------------
View scheduled and pending payments  WebApps               June 2020            September 2020                 3
----------------------------------------------------------------------------------------------------------------
Procure and deliver cloud computing  Cloud Execution       June 2020            September 2020                 3
 services required to deploy ECM
----------------------------------------------------------------------------------------------------------------
Measurable progress toward           Customer Account      December 2019        March 2020                     3
 converting code with a target of     Data Engine 2
 31 percent                           transition state 2
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of IRS's Integrated Modernization Business Plan and progress reports. | GAO-22-104387.


According to IRS's quarterly IT reports to Congress, the late 
completion of the majority of these activities was primarily due to 
delays in the agency obtaining the necessary funding. For the Procure 
Enterprise Case Management Solution capability, the agency reported 
that the delay was due to taking corrective action in response to a 
vendor's bid protest of IRS's contract award determination at the end 
of Fiscal Year 2019.

Regarding the cost to complete the 59 modernization activities, IRS 
reported that, for Fiscal Years 2019 and 2020, respectively, it had 
spent less than the $300 million and the $271 million that it projected 
to spend in its modernization plan. Specifically, for Fiscal Year 2019, 
the agency reported that it spent $291 million on modernization, or $9 
million less than the $300 million it had planned. For Fiscal Year 
2020, the agency reported that it spent $251.3 million on 
modernization, or $19.9 million less than its planned budget of $271.2 
million. According to the agency, this was due to IRS receiving less 
funding than requested, the lapse in appropriations in Fiscal Year 
2019, and the late passage of the Fiscal Year 2020 budget.

Looking to the future, as of April 2021, IRS had 31 modernization 
activities planned for completion through the remainder of Fiscal Year 
2021. These included several activities supporting the WebApps, CADE 2, 
ECM, and cloud execution initiatives. According to the IT modernization 
officials, the activities associated with the Next Generation 
Infrastructure program that the agency paused, as well as the Robotics 
Process Automation and the Live Assistance programs were removed 
altogether from the modernization plan, as part of the replanning 
undertaken to align with the appropriation received. However, in June 
2021, the IT modernization officials added that they planned to use 
part of the $1.4 billion that was appropriated for IT through the 
American Rescue Plan Act to accelerate several programs. The officials 
stated that they had developed high-level plans to use the funds and 
were working on developing more detailed plans.

 IRS Took Actions to Maintain Operations During the COVID-19 Pandemic

IRS took several IT-related actions to maximize telework capabilities 
for its employees and continue to operate during the COVID-19 pandemic. 
These actions included procuring IT equipment to continue to support 
agency operations and upgrading its infrastructure bandwidth. According 
to the responsible officials in the agency's IT organization, the 
actions taken were not funded from IRS's IT budget for Fiscal Year 
2020; however, the actions contributed to delays in the agency's plans 
for IT modernization and operations.\42\
---------------------------------------------------------------------------
    \42\ In March 2021, we issued a report on IRS's performance during 
the 2020 filing season which described changes IRS made to its 
operations and services due to the pandemic. See GAO, Tax Filing: 
Actions Needed to Address Processing Delays and Risks to the 2021 
Filing Season, GAO-21-251 (Washington, DC: March 1, 2021). We also 
regularly issue government-wide reports on the Federal response to 
COVID-19, including IRS's response. For the latest report, see GAO, 
COVID-19: Continued Attention Needed to Enhance Federal Preparedness, 
Response, Service Delivery, and Program Integrity, GAO-21-551 
(Washington, DC: July 19, 2021). Our 
government-wide reports issued quarterly and are available on our 
website at https://www.gao.gov/coronavirus.
---------------------------------------------------------------------------
 IRS Procured Equipment and Upgraded Its IT Infrastructure to Maintain 
        Operations
To maximize telework and operate during the COVID-19 pandemic, IRS 
accelerated its plans to procure IT equipment and upgraded its IT 
infrastructure. The agency estimated that, of the $104 million it 
received from the CARES Act and Families First Coronavirus Response 
Act,\43\ it spent approximately $53 million to cover the costs 
associated with procuring the equipment and making the infrastructure 
upgrades needed to transition the agency to maximum telework. Of the 
$53 million, the agency estimated that it spent approximately $23 
million on procuring IT equipment and approximately $30 million on 
upgrading its infrastructure.
---------------------------------------------------------------------------
    \43\ IRS received $89 million in funding from the CARES Act and $15 
million from the Families First Coronavirus Response Act to continue to 
operate during the pandemic.

Procuring IT equipment. IRS took steps to accelerate the procurement 
and distribution of necessary equipment, such as laptops and headsets, 
to transition employees to maximum telework and continue to operate 
during the pandemic. Prior to the pandemic, the agency had developed a 
3-year plan to replace its desktop computers with laptops in order to 
support business operations and prepare its employees to work in a 
telework environment. IRS's Enterprise Customer Service Representative 
Telework Phased Implementation Plan stated that the agency had expected 
to replace over 16,000 of its existing desktops with a new inventory of 
laptops by February 2021.\44\
---------------------------------------------------------------------------
    \44\ IRS, Information Technology, Contact Center Support Division, 
Enterprise Customer Service Representative Telework Phased 
Implementation Plan (September 5, 2019).

In response to the pandemic, the agency accelerated its plans and 
redirected its new laptop inventory intended for general replacements 
to employees who were not originally set up for telework. These 
employees included the agency's customer service representatives.\45\ 
User and Network Services officials stated that these employees were 
mission critical personnel who needed to immediately begin teleworking 
in order to continue providing services to taxpayers.
---------------------------------------------------------------------------
    \45\ Customer service representatives provide administrative and 
technical assistance to individual taxpayers and businesses primarily 
over the phone.

By redirecting its inventory, the User and Network Services officials 
said IRS was able to distribute laptops to about 14,000 of the agency's 
customer service representatives between March 2020 and May 2020. Table 
7 provides details on the approximately $23 million that IRS spent in 
Fiscal Year 2020 on procuring IT equipment that was used to maximize 
---------------------------------------------------------------------------
telework and operate during the COVID-19 pandemic.


  Table 7: Information Technology Equipment and Costs That the Internal
 Revenue Service Spent to Operate During the COVID-19 Pandemic in Fiscal
                                Year 2020
                          Dollars in thousands
------------------------------------------------------------------------
                                                                  Cost
------------------------------------------------------------------------
Headsets and adapters                                               $962
------------------------------------------------------------------------
Shoulder/rolling bags                                                898
------------------------------------------------------------------------
Monitors                                                           2,300
------------------------------------------------------------------------
Printers                                                           1,614
------------------------------------------------------------------------
Laptop bundles                                                    17,249
------------------------------------------------------------------------
Shipping and delivery                                                250
------------------------------------------------------------------------
Total                                                            $23,273
------------------------------------------------------------------------
Source: Internal Revenue Service reported data. | GAO-22-104387.


Upgrading IT infrastructure. In addition to equipment, in order to work 
remotely, employees needed to be able to access IRS's network from 
their approved telework locations and request access through the 
agency's Enterprise Remote Access Program. Due to the pandemic, User 
and Network Services officials expected the number of employees 
accessing the network to increase significantly, as the majority of the 
workforce was given telework flexibilities.

To support the significant increase in employees connecting and 
accessing its systems remotely, the agency added additional capacity to 
its Common Communications Gateway infrastructure and purchased 
additional Enterprise Remote Access Program provisioning licenses. In 
doing so, IRS upgraded the bandwidth capacity of its network 
infrastructure from 2 gigabytes \46\ to 10 gigabytes in two planned 
phases. In the first phase, the agency increased the bandwidth from 2 
gigabytes to 4 gigabytes. In the second phase, it increased the 
bandwidth to 10 gigabytes.
---------------------------------------------------------------------------
    \46\ A gigabyte is a measurement of data storage capacity that 
represents the total volume of data sent and/or received by the end 
user over a period of time.

According to User and Network Services officials, they gradually 
increased the infrastructure bandwidth over time as a means to avoid 
overloading the network, as well as to monitor the performance of the 
upgrade. In addition to increasing bandwidth, the officials stated that 
they made the decision to build the network infrastructure across three 
site locations to ensure the continuation of essential services in the 
---------------------------------------------------------------------------
event of an emergency or disruption.

IRS also increased its toll-free call service by adding callback lines 
and additional functionality for taxpayers needing to obtain tax 
information related to economic impact payment checks or the status of 
their filing requirements. Additionally, to ensure business continuity, 
the agency coupled its IT field support technicians with its service 
desk operations to provide technical assistance and support to 
employees who were new to the telework environment.

Table 8 provides further information on the approximately $30 million 
IRS spent on upgrading its infrastructure for COVID-19 between March 
and May 2020.


Table 8: Infrastructure Upgrades and Costs That Internal Revenue Service
           Incurred During COVID-19 Between March and May 2020
                          Dollars in thousands
------------------------------------------------------------------------
                                                                  Cost
------------------------------------------------------------------------
Network/remote access                                            $13,583
------------------------------------------------------------------------
Video/audio conferencing and webcast services                     10,989
------------------------------------------------------------------------
Contract recording centralization                                  2,600
------------------------------------------------------------------------
Infrastructure/telecommunication                                   2,939
------------------------------------------------------------------------
Total                                                            $30,111
------------------------------------------------------------------------
Source: Internal Revenue Service reported data. | GAO-22-104387.

IRS Reported That Actions Taken Delayed Modernization Plans
According to IRS, as of April 2021, the transition to maximum telework 
had not impacted the agency's IT budget for Fiscal Year 2020. Officials 
in the agency's IT organization stated that the actions IRS took to 
transition to maximum telework in Fiscal Year 2020 were all funded by 
appropriations from the Families First Coronavirus Response Act and the 
CARES Act. However, the officials added that the agency had not yet 
determined the long-term impact of sustaining an increased level of 
telework on the IT budget.

On the other hand, the IT organization reported that the transition to 
maximum telework had impacted the agency's plans for IT operations and 
modernization activities. Specifically, between May and July 2020, the 
Chief Information Officer established a mechanism for the deputy and 
associate chief information officers to report impacts on ongoing and 
planned work due to the COVID-19 pandemic on a weekly basis.\47\ The 
weekly reports identified issues, such as delays and risks to programs 
and initiatives, and their effects on the agency's IT programs and 
initiatives for the Fiscal Year 2021 filing season and nonfiling season 
activities. Among the issues identified in the reports were a delayed 
infrastructure refresh due to hardware supply chain back orders and 
delays of procurement activities because staff were reassigned to 
accelerate the move to maximum telework.
---------------------------------------------------------------------------
    \47\ The documented weekly impact reports were discontinued after 
July 2020, though Associate Chief Information Officers and Deputies 
were instructed to report issues in their meetings with the Chief 
Information Officer.

In addition, as mentioned earlier in this report, in its quarterly 
status IT investment reports to Congress, IRS reported that resources 
initially allocated to the CADE 2 modernization program for the fourth 
quarter of Fiscal Year 2020 had been reassigned to support COVID-19 
responsibilities. This resulted in a 7-month schedule delay in the 
completion of development activities for CADE 2's transition state 2, 
which, as previously mentioned, has been delayed several times since 
IRS initiated the program in 2009.

Agency Comments and Our Evaluation

IRS provided comments on a draft of this report. In its comments, which 
are reproduced in appendix III, IRS offered its views on IMF, CADE 2, 
and the agency's progress in implementing the 2019 modernization plan. 
IRS also discussed actions it took to maximize telework capabilities 
and provide the agency's workforce with the equipment needed to 
telework at the onset of the COVID-19 pandemic. Further, the agency 
commented on its progress in implementing our 2018 recommendations 
related to selected IT investments.

Regarding IMF, IRS called it one of the most critical systems in the 
Federal Government and stated that, despite the system's limitations, 
IMF continues to perform and enable the agency to implement statutory 
mandates. However, as we note in our report, IRS has acknowledged that 
a more modern system would provide the foundation for real-time digital 
taxpayer interactions; agile responses to legislative changes; and 
rapid access to data for enhanced customer service and compliance, 
among other things.

IRS also noted that IMF's modernization plan involves systems and 
functions beyond CADE 2, and that the plan positions the agency to 
incrementally deliver benefits for the next 10 years. Nevertheless, as 
we state in this report, a 2030 milestone for the full retirement of 
IMF means that, for many years, the agency will have to contend with 
the numerous challenges associated with this system's age and reliance 
on an old programming language.

Commenting on CADE 2, IRS stated that the program had made good 
progress in modernizing some of the most complicated portions of IMF 
and remained within acceptable schedule parameters for Fiscal Years 
2019 and 2020. As we discuss in our report, despite this progress, CADE 
2's delays and continued use of IMF are troubling. The agency has 
previously reported that IMF: (1) is one of the oldest systems in the 
Federal Government, (2) has software written in an archaic language 
that is no longer taught in school; and (3) is supported by a workforce 
with specialized skills that are increasingly harder to find.

Further, since 2009, IRS has revised the CADE 2 program's cost, 
schedule, and scope goals on numerous occasions, including seven times 
between 2016 and 2019. Accordingly, a key major program milestone for 
replacing selected IMF functions, known as transition state 2, has 
slipped 9 years--from 2014 to 2023. In addition, CADE 2 is now expected 
to only replace core functions of IMF, rather than the entire system, 
as was originally planned. While we acknowledge IRS's progress on CADE 
2 in the years we reviewed, given the past significant delays and other 
challenges in developing CADE 2, as well as the substantial work ahead, 
consistent high-level management attention is warranted.

IRS also highlighted several modernization activities it had completed 
in Fiscal Years 2019 and 2020. These activities included expanding the 
availability of the customer callback feature, digital services for 
taxpayers, and activities to reduce cybersecurity vulnerabilities and 
manage potential threats.

IRS further noted the IT-related actions it took to provide the 
equipment and infrastructure upgrades needed to transition the agency 
to maximum telework at the onset of the COVID-19 pandemic. These are 
consistent with the actions we identified in our report.

Finally, IRS stated that it had addressed 17 of 21 recommendations 
included in our 2018 report on selected agency investments. At the end 
of our review, IRS also provided evidence of actions it had taken to 
address two of the remaining four recommendations. We reviewed the 
evidence and determined that the agency had implemented one of the 
recommendations, bringing the total number of implemented 
recommendations to 18 of the 21. We adjusted our summary of actions 
taken in appendix II of this report accordingly.

We are sending copies of this report to interested congressional 
committees, the Commissioner of IRS, and other interested parties. In 
addition, this report will be available at no charge on the GAO website 
at http://www.gao.gov.

Should you or your staffs have any questions on information discussed 
in this report, please contact me at (214) 777-5719 or 
[email protected]. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. GAO staff who made major contributions to this report are 
listed in appendix IV.

David B. Hinchman
Director, Information Technology and Cybersecurity

Appendix I: Objectives, Scope, and Methodology

Our objectives were to (1) summarize the Internal Revenue Service's 
(IRS) reported performance for selected information technology (IT) 
investments, including the Customer Account Data Engine (CADE) 2; (2) 
determine IRS's progress in implementing its 2019 IT modernization 
plan; and (3) identify the actions IRS has taken to maximize telework 
during the COVID-19 pandemic, and the reported impacts of the actions 
on the agency's IT budget and plans.

To select investments for our first objective, we identified a 
nonprobability sample of five investments out of 133 based on the 
following factors: (1) investments that IRS rated as being mission 
critical; and (2) investments with the highest levels of funding for 
Fiscal Years 2019, 2020, and 2021, as reported on the Federal IT 
Dashboard.\1\ We selected five investments in different life cycle 
phases--three investments in the development phase and two investments 
in the operations and maintenance phase. The investments that were 
primarily in development were CADE 2, Enterprise Case Management (ECM), 
and Web Applications. The investments primarily in the operations and 
maintenance phase were the End User Systems and Services and Individual 
Master File (IMF).
---------------------------------------------------------------------------
    \1\ The Federal IT Dashboard is a public website deployed by the 
Office of Management and Budget with information on the performance of 
Federal agencies' IT investments.

For the investments in development, we compiled and analyzed quarterly 
reports from the Investment Performance Tool--IRS's internal system for 
tracking investment performance--showing planned versus actual cost, 
schedule, and scope for work the agency was performing on these 
investments during Fiscal Years 2019 and 2020. We also interviewed IRS 
IT program officials to understand variances between planned and actual 
---------------------------------------------------------------------------
performance.

To assess the reliability of the performance data for the investments 
in development, we confirmed our understanding of the processes used to 
generate the data by reviewing the processes defined in IRS's August 
2020 Investment Performance Tool User Guide and confirmed their use 
with project management officials. We also reviewed the data to verify 
that it included all the projects supporting the investments for the 
eight quarters in the scope of our review. Further, we followed up with 
these officials to discuss detected anomalies we found in the 
performance data. Finally, IRS's Integrated Financial System is the 
source of the financial data in the Investment Performance Tool, and 
our prior audits of the agency's internal controls over financial 
reporting found that there were no internal control issues that would 
prevent us from relying on the data in the system. We determined these 
data were sufficiently reliable for purposes of summarizing what IRS 
reported.

For the CADE 2 program, we also reviewed prior GAO reports, IRS's 
quarterly IT reports to Congress on the agency's IT modernization 
progress, and relevant documents, including the modernization plan for 
IMF for which CADE 2 is a key component. From this documentation, we 
determined any revisions to these plans, and the functionality 
delivered.

For the investments in operations and maintenance, to determine if the 
operational performance metrics were met for Fiscal Years 2019 and 
2020, we compared the average of the actual monthly operational 
performance measures found in the agency's monthly investment 
performance reports for each year to the performance target for the 
year. Further, we determined the extent to which an operational 
analysis was performed in accordance with relevant Office of Management 
and Budget (OMB) guidance.\2\ To do so, we obtained operational 
analyses for Fiscal Years 2019 and 2020 and compared the analyses to 
requirements specified in OMB's Fiscal Year 2020 capital programming 
guidance. We rated each requirement as addressed if the operational 
analysis fully addressed the requirement; or partially addressed if the 
operational analysis addressed some, but not all, of the requirement.
---------------------------------------------------------------------------
    \2\ Office of Management and Budget, Capital Programming Guide V 
3.1: Supplement to Circular A-11, Planning, Budgeting, and Acquisition 
of Capital Assets (Washington, DC: December 2020).

For the second objective, we compared the activities IRS reported that 
it completed for Fiscal Years 2019 and 2020 in quarterly IT summary 
reports to Congress and an annual status report to the Department of 
the Treasury, along with their associated schedule and costs, to the 
activities identified in the 2019 modernization plan. For additional 
cost analysis, we compared actual costs and schedules for the IT 
modernization activities completed in Fiscal Years 2019 and 2020 to the 
planned costs and schedules for these activities found in the agency's 
quarterly IT summary reports to Congress and an annual status report. 
We also reviewed documentation and interviewed IRS IT organization 
officials to understand variances between planned and actual 
---------------------------------------------------------------------------
performance.

To supplement our analysis of the agency's reported data, we verified 
the completion of a nongeneralizable random sample of modernization 
activities. To do so, we randomly selected one activity from each of 
the four modernization categories outlined in the agency's plan for 
Fiscal Years 2019 and 2020. This resulted in our selection of 8 of 59 
activities. We confirmed that the eight selected activities were 
completed by reviewing supporting documentation and interviewing IRS IT 
program officials. The activities we selected were:

      Live Assistance Customer Callback: four additional taxpayer 
applications.

      Live Assistance Customer Callback: expanded toll-free capacity.

      CADE 2: deployed modern code for the internal balancing and 
control component for IMF testing.

      ECM: delivered sequencing strategy and release plan to support 
the delivery of future ECM releases for Fiscal Year 2021 and beyond.

      Next Generation Infrastructure: deployed continuous integration/
continuous delivery to software upgrades and code changes rapidly and 
reliably.

      Next Generation Infrastructure: deployed additional standard 
stack components.\3\
---------------------------------------------------------------------------
    \3\ A technology stack is a set of software components that compose 
a platform for running an application.

      Security Operations and Management: deployed cyber architecture 
---------------------------------------------------------------------------
and cyber cloud strategy, and migration plan.

      Vulnerability and Threat Management: Enhanced security testing 
and process automation to fully integrate security in system delivery 
as early as possible.

For these eight activities, we reviewed project documentation that IRS 
provided, including a solutions concept of operations document for the 
live assistance customer callback feature, systems testing documents, a 
Cybersecurity Modernization Plan status report, and various other 
status reports.

For the third objective, we obtained, analyzed, and summarized relevant 
documentation, including weekly impact summary reports, a COVID-19 
spending plan, and an inventory of IT equipment and services the agency 
reported that it purchased to transition its workforce to maximum 
telework. We supplemented our document reviews with interviews of 
cognizant IRS officials from the IT organization's User and Network 
Services group.

We also reviewed instructions for Associate Chief Information Officers 
reporting information in the COVID-19 weekly impact summary reports. We 
corroborated the accuracy of the information in the COVID-19 spending 
plan with IRS budget officials. We determined that the data were 
sufficiently reliable for purposes of summarizing what IRS reported.

As part of our work, we also determined the status of actions taken to 
address each of 21 prior recommendations we made in our 2018 review of 
IRS's IT investments to improve operational analyses and fully 
implement risk management practices for selected investments, and 
implement IT workforce planning practices. To do so, we asked relevant 
agency IT organization officials about actions taken or planned to 
address each recommendation, and obtained and analyzed evidence to 
substantiate their claims. We assessed a recommendation as being fully 
addressed if IRS provided evidence that it completely addressed all 
elements of our recommendation; partially addressed if IRS provided 
evidence that it addressed some, but not all, of our recommendation; 
and not addressed if IRS did not provide any evidence that it addressed 
our recommendation.

We conducted this performance audit from June 2020 to October 2021 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives.

Appendix II: Status of IRS's Efforts to Implement 2018 GAO 
                    Recommendations on Selected IT Investments

In June 2018, we reported on the performance of selected IRS IT 
investments; the risks that selected legacy investments faced; and the 
need for the agency to implement key IT workforce planning 
practices.\1\ We made 21 recommendations in that report and, as of 
September 2021, IRS has fully implemented 18 of these recommendations. 
Table 9 summarizes our assessment of IRS's efforts to implement the 
recommendations included in the report.
---------------------------------------------------------------------------
    \1\ GAO, Information Technology: IRS Needs to Take Additional 
Actions to Address Significant Risks to Tax Processing, GAO-18-298 
(Washington, DC: June 28, 2018).


   Table 9: Status of the Internal Revenue Service's (IRS) Efforts to
 Implement Recommendations on Operational Analyses and Risk Management,
                          as of September 2021
------------------------------------------------------------------------
        Recommendation           Status               Summary
------------------------------------------------------------------------
1. The Commissioner of the IRS  w         IRS provided its Fiscal Year
 should ensure the operational             2019 and 2020 operational
 analysis for Individual                   analyses; however, it did not
 Master File (IMF) fully                   reflect the agency's progress
 addresses greater utilization             in modernizing IMF and
 of technology or                          associated challenges.
 consolidation of investments              Instead, IRS provided its
 to better meet organizational             Customer Account Data Engine
 goals.                                    2 Fiscal Year 2020
                                           operational analysis which
                                           addressed IMF's progress in
                                           modernization and associated
                                           challenges. However, given
                                           that the information on
                                           modernization and challenges
                                           was not in the IMF
                                           operational analyses,
                                           decision-makers may not have
                                           the critical information they
                                           need to inform their
                                           decisions about IMF.
------------------------------------------------------------------------
2. The Commissioner of the IRS           In June 2020, IRS provided its
 should ensure the operational             Fiscal Year 2019 operational
 analysis for the Integrated               analysis which addressed the
 Data Retrieval System (IDRS)              extent to which investments
 addresses the extent to which             support customer processes as
 the investments support                   designed and how well the
 customer processes as                     investment was delivering the
 designed, and how well the                goods or services it was
 investments are delivering                designed to deliver.
 the goods or services they
 were designed to deliver.
------------------------------------------------------------------------
3. The Commissioner of the IRS  w         IRS provided its Fiscal Year
 should ensure the operational             2020 operational analysis
 analysis for the                          that addressed how the
 Telecommunications Systems                investment supports services
 and Support (TSS) addresses               such as video conferencing,
 the extent to which the                   enterprise voice, and fax
 investments support customer              services. However, the
 processes as designed, and                information was not included
 how well the investments are              as part of the specific
 delivering the goods or                   metric. We will therefore
 services they were designed               continue to monitor the
 to deliver.                               operational analysis on how
                                           the investment supports
                                           services.
------------------------------------------------------------------------
4. The Commissioner of the IRS           In February 2021, IRS provided
 should ensure the operational             its Fiscal Year 2020
 analysis for TSS includes a               operational analysis report
 comparison of current                     which demonstrated that IRS
 performance with a pre-                   had compared current
 established cost baseline.                performance with a pre-
                                           established cost baseline,
                                           and accounted for user fees
                                           and multiyear costs.
------------------------------------------------------------------------
5. The Commissioner of the IRS           In December 2020, IRS provided
 should ensure the operational             its Fiscal Year 2020
 analysis for End User Systems             operational analysis, which
 and Services includes a                   addressed the comparison of
 comparison of current                     current performance with a
 performance with a pre-                   pre-established cost
 established cost baseline.                baseline.
------------------------------------------------------------------------
6. The Commissioner of the IRS           In August 2019, IRS provided
 should ensure the operational             its Fiscal Year 2018
 analysis for the Mainframes               operational analysis that
 and Servers Services and                  addressed alternative methods
 Support addresses alternative             of achieving the same mission
 methods of achieving the same             needs and strategic goals.
 mission needs and strategic
 goals.
------------------------------------------------------------------------
7. The Commissioner of the IRS           In December 2019, IRS provided
 should fully implement the                its updated IT Risk
 risk management key practice              Management Program plan which
 associated with preparing for             addressed key practices
 risk management for the IMF               associated with preparing for
 investment.                               risk management for the IMF
                                           investment.
------------------------------------------------------------------------
8. The Commissioner of the IRS           In December 2019, IRS provided
 should fully implement the                updated policy documentation
 risk management key practice              that addressed its risk
 associated with analyzing                 management policy associated
 risk for the IMF investment.              with analyzing risk. In
                                           addition, in May 2021, IRS
                                           provided evidence that it
                                           analyzes risk for the IMF
                                           investment. Specifically, the
                                           agency provided examples of
                                           the risk statement and
                                           analysis that are included in
                                           its Item Tracking Reporting
                                           and Control tool.
------------------------------------------------------------------------
9. The Commissioner of the IRS           In December 2019, IRS provided
 should fully implement the                its risk profile which
 risk management key practice              addressed key practices
 for prioritizing risk for the             associated with prioritizing
 IMF investment.                           risk for the IMF investment.
                                           Specifically, IRS provided,
                                           among other things, risk
                                           registry reports. These
                                           reports identified IRS's
                                           implementation of the risk
                                           management practice for
                                           prioritizing risk for IMF.
------------------------------------------------------------------------
10. The Commissioner of the              In December 2019, IRS provided
 IRS should fully implement                updated policy documentation
 the risk management key                   that addressed the agency's
 practice associated with                  risk management policy
 mitigating risk for the IMF               associated with mitigating
 investment.                               risk. Further, in May 2021,
                                           IRS provided its risk review
                                           registry that identified risk
                                           for IMF and alternative
                                           courses of action to take
                                           (mitigation plans) if risks
                                           statements are impacted.
------------------------------------------------------------------------
11. The Commissioner of the              In December 2019, IRS provided
 IRS should fully implement                updated policy documentation
 the risk management key                   that addressed the agency's
 practice associated with                  risk management policy
 monitoring, reporting, and                associated with monitoring,
 controlling risk for the IMF              reporting, and controlling
 investment.                               risk. In addition, in
                                           February 2021, IRS provided,
                                           among other things,
                                           governance board meeting
                                           minutes and its annual
                                           operational analyses review
                                           of risk management to
                                           demonstrate that it has
                                           implemented its policy for
                                           risk management.
------------------------------------------------------------------------
12. The Commissioner of the              In December 2019, IRS provided
 IRS should fully implement                its updated IT Risk
 the risk management key                   Management Program plan,
 practice associated with                  which addressed key practices
 preparing for risk management             associated with preparing for
 for the IDRS investment.                  risk management for the IDRS
                                           investment. In addition, in
                                           February 2021, IRS provided
                                           its Risk Issue and Action
                                           Item Management Process
                                           transmittal, which described
                                           the risk management
                                           requirements for all IRS IT
                                           investments, including IDRS.
------------------------------------------------------------------------
13. The Commissioner of the              In December 2019, IRS provided
 IRS should fully implement                its updated IT Risk
 the risk management key                   Management plan that
 practice associated with                  addressed the agency's risk
 analyzing risk for the IDRS               management policy associated
 investment.                               with analyzing risk for the
                                           IDRS investment. IRS also
                                           provided a risk register for
                                           IDRS showing that it analyzed
                                           both inherent and residual
                                           risks for the investment.
------------------------------------------------------------------------
14. The Commissioner of the              In December 2019, IRS provided
 IRS should fully implement                its Risk and Issue Management
 the risk management key                   plan which identified the key
 practice associated with                  practices associated with
 mitigating risk for the IDRS              mitigating risk. Further, in
 investment.                               May 2021, IRS provided its
                                           risk review registry that
                                           identified risk for IDRS and
                                           alternative courses of action
                                           to take (mitigation plans) if
                                           risks statements are
                                           impacted.
------------------------------------------------------------------------
15. The Commissioner of the              IRS provided its Risk
 IRS should fully implement                Management Program plan which
 the risk management key                   identified the key practices
 practice associated with                  associated with monitoring,
 monitoring, reporting, and                reporting, and controlling
 controlling risk for the IDRS             risk. In addition, in
 investment.                               February 2021, IRS provided,
                                           among other things,
                                           governance board meeting
                                           minutes and annual
                                           operational analysis reviews
                                           of risk management to
                                           identify that it has
                                           implemented its policy for
                                           risk management.
------------------------------------------------------------------------
16. The Commissioner of the              In February 2021, IRS provided
 IRS should fully implement                its updated IT Risk
 the risk management key                   Management Program plan which
 practice associated with                  addressed key practices
 preparing for risk management             associated with preparing for
 for the Mainframes and                    risk management for the MSSS
 Servers Services and Support              investment.
 (MSSS) investment.
------------------------------------------------------------------------
17. The Commissioner of the              In January 2020, IRS provided
 IRS should fully implement                an updated MSSS risk log
 the risk management key                   which identified risks for
 practice associated with                  the investment, including
 identifying risk for the MSSS             human resource risks and
 investment.                               staff shortages.
------------------------------------------------------------------------
18. The Commissioner of the              In December 2019, IRS provided
 IRS should fully implement                updated policy documentation
 the risk management key                   that addressed the agency's
 practice associated with                  risk management policy
 analyzing risk for the MSSS               associated with analyzing
 investment.                               risk. In addition, in May
                                           2021, IRS provided evidence
                                           that it analyzes residual
                                           risk for the IMF investment.
                                           Specifically, the agency
                                           provided examples of the risk
                                           statement and analysis that
                                           are included in its Item
                                           Tracking Reporting and
                                           Control tool.
------------------------------------------------------------------------
19. The Commissioner of the              In December 2019, IRS provided
 IRS should fully implement                updated policy documentation
 the risk management key                   that addresses the agency's
 practice associated with                  risk management policy
 mitigating risk for the MSSS              associated with mitigating
 investment.                               risk. In addition, in January
                                           2020, the agency began
                                           identifying a period of
                                           performance for its risks by
                                           providing Risk Reports which
                                           identified that each risk has
                                           a ``submit date,'' a
                                           ``probable impact date,'' and
                                           a ``projected completion
                                           date.''
------------------------------------------------------------------------
20. The Commissioner of the              In December 2019, IRS provided
 IRS should fully implement                updated policy documentation
 the risk management key                   that addresses the agency's
 practice associated with                  risk management policy
 monitoring, reporting, and                associated with monitoring,
 controlling risk for the MSSS             reporting, and controlling
 investment.                               risk. In addition, in
                                           February 2021, IRS provided
                                           among other things,
                                           governance board meeting
                                           minutes and its annual
                                           operational analyses review
                                           of risk management to
                                           identify that it has
                                           implemented its policy for
                                           risk management.
------------------------------------------------------------------------
21. The Commissioner of the     w         In March 2021, IRS provided
 IRS should fully implement IT             its draft IT Workforce
 workforce planning practices,             Strategy, which identifies
 including the following                   objectives that the agency
 actions: (1) setting the                  plans to achieve, such as, a
 strategic direction for                   diverse, flexible and engaged
 workforce planning; (2)                   workforce. IRS also developed
 analyzing the workforce to                an implementation plan to
 identify skill gaps; (3)                  operationalize the IT
 developing strategies and                 Workforce Strategy, which
 implementing activities to                described key efforts
 address skill gaps; and (4)               supporting each objective,
 monitoring and reporting on               along with benefits and
 progress in addressing skill              measurable outcomes. However,
 gaps.                                     IRS did not provide a date
                                           for when it plans to finalize
                                           the strategy. In addition,
                                           IRS did not provide evidence
                                           that it had implemented the
                                           key efforts identified in the
                                           implementation plan
------------------------------------------------------------------------
Legend:  -- recommendation fully implemented, w -- recommendation
  partially implemented,  -- recommendation not implemented.
 
Source: GAO analysis of Internal Revenue Service data. | GAO-22-104387.
 
Note: Recommendations from GAO-18-298.

 Appendix III: Comments From the Department of the Treasury Internal 
                    Revenue Service

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                             Communications

                              ----------                              


                        American Citizens Abroad
American Citizens Abroad, Inc, and its sister organization, American 
Citizens Abroad Global Foundation hereby submit our Statement for the 
record.

American Citizens Abroad, Inc. (ACA) is a leading advocacy organization 
representing Americans living and working overseas. Headquartered in 
Washington, DC, ACA is nonpartisan, non-profit (section 501 (c)(4)), 
with a 40-plus-year history of advocating on behalf of the community of 
Americans living and working overseas. Alongside ACA is its sister 
charitable (section 501(c)(3)) research and educational organization, 
American Citizens Abroad Global Foundation (ACAGF).

In testimony presented to the Senate Finance Committee hearing of April 
7, 2022, on the IRS, the President's 2023 Budget and the 2022 tax 
season, IRS Commissioner Rettig discussed the customer service 
challenges posed by resource constraints and paper filing. An 
overwhelming proportion of non-resident taxpayers file paper tax 
returns due to the inaccessibility of IRS online accounts and free 
filing, $2.2 billion in new funding for the IRS and focused efforts by 
staff to eliminate the backlog of paper filings have helped to reduce 
the to-be-processed 2021 paper tax returns to 2.7 million. Those will 
need to be processed before the IRS can turn its attention to 2022 
paper filings, which currently number 2.3 million. It is astonishing 
that in 2022, processing of paper returns still requires manual 
transcription. Indications by Commissioner Rettig that the IRS received 
funding in the March spending package for scanning technology using a 
2D barcode were undermined by his non-specific comments that challenges 
to the implementation of that technology remain.

Commissioner Rettig acknowledged that it is unacceptable for the IRS to 
remain paper-based in a digital world. However, until online accounts 
are available to U.S. citizens abroad, those without the resources to 
hire professional tax return preparers will be forced to file the paper 
returns that accumulate in those backlogs. Identity verification using 
the ID.me website and data security concerns remain obstacles for 
creating an IRS online account forU.S. citizens abroad.

Perhaps the most astonishing IRS customer service failure is the 11% 
response rate to taxpayer calls to the IRS help line, which 
Commissioner Rettig testified reached 1,500 calls per second in the 
2021 tax filing season. IRS help line inaccessibility is compounded for 
non-resident filers: the help line cannot be dialed from some foreign 
countries; the calls are not toll-free; lengthy wait times are 
frustrating as well as expensive; and customer service representatives 
frequently lack the technical expertise to address problems common to 
non-resident filers.

During the hearing Senator Thune made this comment regarding the 
challenges the IRS has in meeting the customer service needs of all 
U.S. citizen taxpayers:

        The timely processing of returns and the ability to speak to an 
        IRS representative are cornerstones to good tax administration. 
        Many taxpayers are trying in good faith to comply with tax 
        laws, and they deserve a responsive IRS. It is critical . . . 
        to establish the trust of the American people and having a 
        responsive tax collection service is key to that.

Of course, non-resident taxpayers, who present special complications 
for the IRS, deserve no less. The U.S. can continue to struggle to meet 
the needs of the Americans abroad community or consider a change to the 
treatment of this taxpayer cohort.

TAXATION AND AMERICANS ABROAD

The Taxpayer First Act has identified U.S. citizens living and working 
overseas as an underserved community and the IRS is working to create 
systems and provide support to these taxpayers. This cannot come fast 
enough for the estimated 3.9 million U.S. citizens living and working 
abroad.\1\ Tax filing for U.S. citizens living and working outside the 
U.S. is complex, costly and confusing, results in onerous taxation of 
foreign investments considered Passive Foreign Investment Company 
(PFICs), involves duplicate reporting regimes like the Foreign Account 
Tax Compliance Act (FATCA) Form 8938 and the Financial Bank Account 
Report (FBAR) (FinCEN Form 114), is unfair with regard to the 
application of certain tax credits for non-residents (Child Tax Credit 
and Earned Income Credit), exposes filers to double taxation with the 
Net Investment Income Tax (NIIT), and involves wading through many 
regulations that overlap with U.S. corporate international tax.
---------------------------------------------------------------------------
    \1\ ACA and District Economics Group estimate that the total number 
of Americans abroad at present, excluding members of the military and 
other government employees and contractors, is approximately 3.9 
million individuals.

This is just a sampling of the problems on the individual side of 
reporting, not taking into consideration the filing requirements for 
small business operations run by U.S. citizens overseas that need to 
deal with the Transition Tax and Global Intangible Low-Taxed Income 
(GILTI) regimes (and are denied access to programs available for small 
businesses through the U.S. tax code such as the Employee Retention Tax 
Credit and Paycheck Protection Program which were discussed by Senator 
Cardin).

RESIDENCE-BASED TAXATION

ACA has throughout its 40-plus year history advocated for the adoption 
of 
residence-based taxation (RBT) and has produced key documents and 
research that support the move to RBT, which can be made revenue 
neutral and tight against abuse. ACA was the first organization to 
develop a side-by-side analysis that indicates where in the current tax 
code changes could be made in a move to a system of taxation based on 
residence (excludes from U.S. taxation foreign earned income). ACA has 
fielded two research projects on the subject with District Economics 
Group (DEG), a Washington, DC-based economic consulting firm--one in 
2017 and one in 2022 that provide valuable information on the income, 
assets and taxation of U.S. citizens living and working overseas. This 
data, one of a kind, supports our position that RBT can be adopted, and 
no one will be any worse off, the U.S. Treasury would not lose revenue 
and the provisions would be protected against tax abuse.

CONGRESSIONAL HEARINGS ON TAXATION AND AMERICANS ABROAD

It is time for this research work, along with documents and testimony 
from ACA and other stakeholders, to be put on record with the Senate 
Finance Committee with hearings. There are currently three pieces of 
legislation introduced in Congress that address some of the tax 
compliance problems of U.S. citizens overseas; H.R. 5800 (The 
Commission on Americans Living Abroad Act) and H.R. 5799 (The Overseas 
Americans Financial Access Act) both introduced by Congresswoman 
Carolyn Maloney, and H.R. 6057 (The Tax Simplification for Americans 
Abroad Act), introduced by Congressman Donald Beyer. These legislators 
have asked Chairman Neal to address the tax and compliance issues of 
U.S. citizens living and working overseas, and ACA echoes this call to 
action for the Senate Finance Committee.

Never in the history of the U.S. Congress have hearings been held to 
address the specific issues facing U.S. citizens living and working 
abroad, not only tax issues but other concerns related to Social 
Security, Medicare, voting and representation. The Americans Abroad 
Caucus with Co-Chairs Carolyn Maloney, Dina Titus, and Maria Elvira 
Salazar are hearing from constituents in their districts about the 
growing concerns of citizens who chose to live and work overseas. If 
U.S. citizens are to engage in a global economic marketplace, they need 
the tools to help them compete for jobs and have full access to 
financial and banking services. Some U.S. laws, such as FATCA, are 
hampering this and the Committee needs to hear and understand these 
issues and problems, in order that proposals, such as the adoption of 
residence-based taxation, can be carefully examined.

The concerns over how paper return backlogs, taxpayer help line 
accessibility, under-resourcing at the IRS, and the technological 
issues with IRS systems affect U.S. citizens living and working 
overseas, as well as how the current citizenship-based tax regime 
affects these citizens, are all reasons why the Senate Finance 
Committee needs to hold hearings on the tax and compliance issues of 
U.S. citizens overseas and consider legislation such as residence-based 
taxation to alleviate the problems.

ACA would like to thank the Senate Finance Committee for the 
opportunity to submit this testimony and commentary. For more 
information, please visit the ACA website www.americansabroad.org or 
telephone +1 202-322-8441 and/or email 
[email protected].

                                 ______
                                 
                    Letter Submitted by Amy Balcerak
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

I am an American who spent the first 30+ years of my life living in the 
U.S., primarily in Indiana, where I am still registered to vote. For 
the past 10 years, I've been living in Switzerland. My husband's job, 
as well as a sense of adventure brought us here.

My financial life is entirely in Switzerland, and my income is subject 
to full taxation under the laws of Switzerland. I try very hard to 
fulfill the requirements of the U.S. tax system in addition to the tax 
requirements in Switzerland. The reality, though, is that the U.S. 
requirements (especially the myriad of required informational filings) 
get increasingly burdensome every year, and the compliance costs for 
knowledgeable tax preparers are egregious. My federal U.S. tax return 
for tax year 2021 was 88 pages long, and we have no income or property 
in the U.S.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
country of residence.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.

      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.

      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.

      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson explain that the failure of 
the IRS to provide access to the following services, individually and 
collectively, constitute violations of the Taxpayer Bill of Rights:

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report (released in July of 2015), it was 
stated that:
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

      Double taxation--due to misalignment of tax systems--that cannot 
be mitigated using the Foreign Earned Income Exclusion, Foreign Tax 
Credit, or existing Tax Treaties.
      Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.
      Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.
      Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.
      Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.
      A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.

Thank you for your attention to this matter.

Amy Balcerak

                                 ______
                                 
                 Letter Submitted by Reginald Callaway
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

I am from the state of Hawai'i and have not lived there for many years 
and I have always paid my state taxes. I also vote there. I presently 
live in New Zealand where I have lived for many years. New Zealand is 
home for me.

My financial life is entirely in New Zealand, and my income is subject 
to full taxation under the laws of New Zealand. I try very hard to 
fulfill the requirements of the U.S. tax system in addition to the tax 
requirements in New Zealand. The reality, though, is that the U.S. 
requirements (especially the myriad of required informational filings) 
get increasingly burdensome every year, and the compliance costs for 
knowledgeable tax preparers are egregious.

The extraterritorial application of the U.S. Federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey \1\ of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.
---------------------------------------------------------------------------
    \1\ http://seatnow.org/survey_report_intro_page/.

This reflects the burden non-residents face due to complex information 
reporting requirements related to ordinary banking, investment and 
pension products which are ``foreign'' to the United States but just a 
part of living an ordinary financial life in one's country of 
---------------------------------------------------------------------------
residence.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed, the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson \2\ explain that the failure 
of the IRS to provide access to the following services, individually 
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
    \2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial 
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low-income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report \3\ (released in July of 2015), it 
was stated that:
---------------------------------------------------------------------------
    \3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
Despite numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.
    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.
    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.
    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.
    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.
    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.

Thank you for your attention to this matter.

Reginald Callaway

                                 ______
                                 
                        Center for Fiscal Equity

                      14448 Parkvale Road, Suite 6

                          Rockville, MD 20853

                      [email protected]

                      Statement of Michael Bindner

Chairman Wyden and Ranking Crapo, thank you for the opportunity to 
address this issue. My comments are in the form of questions, which I 
previously submitted to the House Ways and Means Subcommittee on 
Oversight on two occasions, including one with Mr. Rettig and one with 
Erin Collins, the new Taxpayer Advocate. Feel free to pass along our 
Tax Reform plan to the witness so that you may ask him for comments 
(especially regarding using a subtraction VAT to distribute the Child 
Tax Credit to workers and their families).

I urge you to submit a written question (or one during the hearing) 
about the advisability of using support contractors--both for the 
hotline and for audit services. There are many qualified revenue agents 
working in the private sector who are up to this task, as well as top 
flight federal customer service providers to handle simple questions 
and arrange follow-up calls with revenue agents.

We are sure you already have questions on how Build Back Better can 
help the IRS meet these challenges as well. This is especially true 
regarding the suspension of payments refundable child tax credits to 
parents. Hopefully she will not have to handle inquiries for long from 
distressed families.

The Child Tax Credit should be the focus of BBB, as well as childcare 
and sick leave. While other matters are certainly important, they 
realistically will have to wait for a larger Senate majority. In the 
interim, it should be shouted from the housetops that the CTC is anti-
abortion legislation. The Catholic Bishops must be urged in the 
strongest possible language to assure that increasing the CTC be scored 
as a must-pass pro-life vote.

As we have said before, to end the ``stink of welfare'' that Senator 
Manchin so objects to, CTC payments should be included with wages for 
all employees--not just those with three or more children. They should 
also be distributed through other federal and state assistance 
programs--some of which can be reduced to do so.

For middle-income taxpayers whose increased credits are less than their 
annual tax obligation, a simple change in withholding tables is 
adequate. Procedures are already in place to deliver refundable credits 
to larger families. For the coming year, they merely need to be 
expanded to all families with children.

Employers can work with their bankers to increase funds for payroll 
throughout the year while requiring less money for their quarterly tax 
payments (or estimated taxes) to the IRS. The main issue is working out 
those situations where employers owe less than they pay out. This is 
especially true for labor intensive industries and even more so for low 
wage employers.

A higher minimum wage would make negative quarterly tax bills less 
likely. Indeed, no one should have to subsist mainly on their child tax 
payments.

Please ask, either orally or in written form, how such a CTC proposal 
might work and how it would make things easier for taxpayers whose 
returns would be simpler--with fewer having to file at all.

We have attached the latest version of our tax reform plan, with a 
separate attachment on how implementation of this plan would affect IRS 
manpower. The answer is that the change would be drastic. It would also 
allow the Committee to focus more on how social welfare is being 
delivered in general, as well as eliminating current roadblocks to 
promptly filing for Social Security Disability Income.

Thank you, again, for the opportunity to add our comments to the 
debate. Please contact us if we can be of any assistance or contribute 
direct testimony.

Attachment One--Tax Reform, Center for Fiscal Equity, December 7, 2021

Individual payroll taxes. Employee payroll tax of 7.2% for Old-Age and 
Survivors Insurance. Funds now collected as a matching premium to a 
consumption tax based contribution credited at an equal dollar rate for 
all workers qualified within a quarter. An employer-paid subtraction 
value-added tax would be used if offsets to private accounts are 
included. Without such accounts, the invoice value-added tax would 
collect these funds. No payroll tax would be collected from employees 
if all contributions are credited on an equal dollar basis. If employee 
taxes are retained, the ceiling would be lowered to $100,000 to reduce 
benefits paid to wealthier individuals and a $16,000 floor should be 
established so that Earned Income Tax Credits are no longer needed. 
Subsidies for single workers should be abandoned in favor of radically 
higher minimum wages. If a $10 minimum wage is passed, the employee 
contribution floor would increase to $20,000.

Wage Surtaxes. Individual income taxes on salaries, which exclude 
business taxes, above an individual standard deduction of $100,000 per 
year, will range from 7.2% to 57.6%. This tax will fund net interest on 
the debt (which will no longer be rolled over into new borrowing), 
redemption of the Social Security Trust Fund, strategic, sea and non-
continental U.S. military deployments, veterans' health benefits as the 
result of battlefield injuries, including mental health and addiction 
and eventual debt reduction.

Our proposed brackets have been increased from $85,000 to $100,000 
because this is the income level at the top of the 80% of tax paying 
households who earn the bottom third of adjusted gross income. Earners 
above this level are considered middle class. Likewise, the top 1% of 
income earners are at the $500,000 level, which will be used as the 
start of the highest rate.

Asset Value-Added Tax (A-VAT). A replacement for capital gains taxes, 
dividend taxes, and the estate tax. It will apply to asset sales, 
dividend distributions, exercised options, rental income, inherited and 
gifted assets and the profits from short sales. Tax payments for option 
exercises, IPOs, inherited, gifted and donated assets will be marked to 
market, with prior tax payments for that asset eliminated so that the 
seller gets no benefit from them. In this perspective, it is the 
owner's increase in value that is taxed. As with any sale of liquid or 
real assets, sales to a qualified broad-based Employee Stock Ownership 
Plan will be tax free. These taxes will fund the same spending items as 
income or S-VAT surtaxes.

This tax will end Tax Gap issues owed by high income individuals. A 26% 
rate is between the GOP 23.8% rate (including ACA-SM surtax) and the 
Democratic 28.8% rate as proposed in the Build Back Better Act. It's 
time to quit playing football with tax rates to attract side bets. A 
single rate also stops gaming forms of ownership. Lower rates are not 
as regressive as they seem. Only the wealthy have capital gains in any 
significant amount. The de facto rate for everyone else is zero. For 
now, however, a 28.8% rate is assumed if reform is enacted by a 
Democratic majority in both Houses.

Subtraction Value-Added Tax (S-VAT). These are employer paid Net 
Business Receipts Taxes. S-VAT is a vehicle for tax benefits, including

      Health insurance or direct care, including veterans' health care 
for non-
battlefield injuries and long term care.
      Employer paid educational costs in lieu of taxes are provided as 
either 
employee-directed contributions to the public or private unionized 
school of their choice or direct tuition payments for employee children 
or for workers (including ESL and remedial skills). Wages will be paid 
to students to meet opportunity costs.
      Most importantly, a refundable child tax credit at median income 
levels (with inflation adjustments) distributed with pay.

Subsistence-level benefits force the poor into servile labor. Wages and 
benefits must be high enough to provide justice and human dignity. This 
allows the ending of state administered subsidy programs and 
discourages abortions, and as such enactment must be scored as a must 
pass in voting rankings by pro-life organizations (and feminist 
organizations as well). To assure child subsidies are distributed, S-
VAT will not be border adjustable.

The S-VAT is also used for personal accounts in Social Security, 
provided that these accounts are insured through an insurance fund for 
all such accounts, that accounts go toward employee ownership rather 
than for a subsidy for the investment industry. Both employers and 
employees must consent to a shift to these accounts, which will occur 
if corporate democracy in existing ESOPs is given a thorough test. So 
far it has not. S-VAT funded retirement accounts will be equal-dollar 
credited for every worker. They also have the advantage of drawing on 
both payroll and profit, making it less regressive.

A multi-tier S-VAT could replace income surtaxes in the same range. 
Some will use corporations to avoid these taxes, but that corporation 
would then pay all invoice and subtraction VAT payments (which would 
distribute tax benefits. Distributions from such corporations will be 
considered salary, not dividends.

Invoice Value-Added Tax (I-VAT). Border adjustable taxes will appear on 
purchase invoices. The rate varies according to what is being financed. 
If Medicare for All does not contain offsets for employers who fund 
their own medical personnel or for personal retirement accounts, both 
of which would otherwise be funded by an S-VAT, then they would be 
funded by the I-VAT to take advantage of border adjustability. I-VAT 
also forces everyone, from the working poor to the beneficiaries of 
inherited wealth, to pay taxes and share in the cost of government. 
Enactment of both the A-VAT and I-VAT ends the need for capital gains 
and inheritance taxes (apart from any initial payout). This tax would 
take care of the low-income Tax Gap.

I-VAT will fund domestic discretionary spending, equal dollar employer 
OASI contributions, and non-nuclear, non-deployed military spending, 
possibly on a regional basis. Regional I-VAT would both require a 
constitutional amendment to change the requirement that all excises be 
national and to discourage unnecessary spending, especially when 
allocated for electoral reasons rather than program needs. The latter 
could also be funded by the asset VAT (decreasing the rate by from 
19.5% to 13%).

As part of enactment, gross wages will be reduced to take into account 
the shift to S-VAT and I-VAT, however net income will be increased by 
the same percentage as the I-VAT. Adoption of S-VAT and I-VAT will 
replace pass-through and proprietary business and corporate income 
taxes.

Carbon Added Tax (C-AT). A Carbon tax with receipt visibility, which 
allows comparison shopping based on carbon content, even if it means a 
more expensive item with lower carbon is purchased. C-AT would also 
replace fuel taxes. It will fund transportation costs, including mass 
transit, and research into alternative fuels (including fusion). This 
tax would not be border adjustable unless it is in other nations, 
however in this case the imposition of this tax at the border will be 
noted, with the U.S. tax applied to the overseas base.

Tax Reform Summary

This plan can be summarized as a list of specific actions:

1.  Increase the standard deduction to workers making salaried income 
of $35,000 and over, shifting business filing to a separate tax on 
employers and eliminating all credits and deductions--starting at 7.2%, 
going up to 28.8%, in $50,000 brackets.

2.  Shift special rate taxes on capital income and gains from the 
income tax to an asset VAT. Expand the exclusion for sales to an ESOP 
to cooperatives and include sales of common and preferred stock. Mark 
option exercise and the first sale after inheritance, gift or donation 
to market.

3.  Employers distribute the child tax credit with wages as an offset 
to their quarterly tax filing (ending annual filings).

4.  Employers collect and pay lower tier income taxes, starting at 
$100,000 at 7.2%, with an increase to 14.4% for all salary payments 
over $150,000 going up 7.2% for every $50,000--up to $250,000.

5.  Shift payment of HI, DI, SM (ACA) payroll taxes to employers, 
remove caps on employer payroll taxes and credit them to workers on an 
equal dollar basis.

6.  Employer paid taxes could as easily be called a subtraction VAT, 
abolishing corporate income taxes. These should not be zero rated at 
the border.

7.  Expand current state/federal intergovernmental subtraction VAT to a 
full GST with limited exclusions (food would be taxed) and add a 
federal portion, which would also be collected by the states. Make 
these taxes zero rated at the border. Rate should be 19.5% and replace 
employer OASI contributions. Credit workers on an equal dollar basis.

8.  Change employee OASI of 7.2% from $18,000 ($20,000 for $10 minimum 
wage) to $100,000 income are optional taxes for Old-Age and Survivors 
Insurance.

Attachment Two--Tax Administration, Treasury Budget, February 12, 2020

Shifting to a single system for all business taxation, particularly 
enacting invoice value-added taxes to collect revenue and employer-
based subtraction value-added taxes to distribute benefits to workers 
will end the need for filing for most, if not all, households. Any 
remaining high salary surtax would be free of any deductions and 
credits and could as easily be collected by enacting higher tiers to a 
subtraction VAT.

Subtraction VAT collection will closely duplicate the collection of 
payroll and income taxes--as well as employment taxes--but without 
households having to file an annual reconciliation except to verify the 
number of dependents receiving benefits.

Tax reform will simplify tax administration on all levels. Firms will 
submit electronic receipts for I-VAT and Carbon Added Tax (C-AT) 
credit, leaving a compliance trail. S-VAT payments to providers, wages 
and child credits to verify that what is paid and what is claimed match 
and that children are not double credited from separate employers.

A-VAT transactions are recorded by brokers, employers for option 
exercise and closing agents for real property. With ADP, reporting 
burdens are equal to those in any VAT system for I-VAT and A-VAT and 
current payroll and income tax reporting by employers.

Employees with children will annually verify information provided by 
employers and IRS, responding by a postcard if reports do not match, 
triggering collection actions. The cliche will thus be made real.

High-salary employees who use corporations to reduce salary surtax and 
pay I-VAT and S-VAT for personal staff. Distributions from such 
corporations to owners are considered salary, not dividends.

Transaction based A-VAT payments end the complexity and tax avoidance 
experienced with income tax collection. Tax units with income under 
$84,000 or only one employer need not file high salary surtax returns. 
Separate gift and inheritance tax returns will no longer be required.

State governments will collect federal and state I-VAT, C-AT, S-VAT 
payments, audit collection systems, real property A-VAT and conduct 
enforcement actions. IRS collects individual payroll and salary surtax 
payments, performs electronic data matching and receive payments and 
ADP data from states. SEC collects A-VAT receipts.

I-VAT gives all citizens the responsibility to fund the government. C-
AT invoices encourage lower carbon consumption, mass transit, research 
and infrastructure development. A-VAT taxation will slow market 
volatility and encourage employee ownership, while preserving family 
businesses and farms. Very little IRS Administration will be required 
once reform is fully implemented. All IRS employees could fit in a 
bathtub with room for Grover Norquist.

                                 ______
                                 
                Letter Submitted by James Webster Coates
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

I am a United States citizen, registered to vote in the 3rd 
Congressional District of Pennsylvania. I moved to Japan in 2001 
immediately after graduating from college, and have been living and 
working here ever since. My financial life is entirely in Japan since 
I've never worked in the U.S. or lived there as an adult. I am a tax 
resident of Japan, and my worldwide income is subject to full taxation 
under the laws of Japan.

I am employed as a compliance officer for a financial institution, so I 
have a high attention to detail around my own personal tax compliance 
matters and try very hard to fulfill the requirements of the U.S. tax 
system in addition to the tax requirements in my country of residence. 
The reality, though, is that the U.S. requirements (especially the 
myriad of required informational filings) get increasingly burdensome 
every year, and the compliance costs for knowledgeable tax preparers 
are egregious. I rarely actually owe much tax to the United States, but 
my annual accounting fees have frequently been higher than the ultimate 
amount of my U.S. Federal tax liability.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey \1\ of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.
---------------------------------------------------------------------------
    \1\ http://seatnow.org/survey_report_intro_page/.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
---------------------------------------------------------------------------
country of residence.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson \2\ explain that the failure 
of the IRS to provide access to the following services, individually 
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
    \2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial 
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report \3\ (released in July of 2015), it 
was stated that:
---------------------------------------------------------------------------
    \3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.

    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.

    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.

    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.

    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.

    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. The definition of 
``individual'' in Treasury Regulation, 26 Section 1.1-1 should be 
modified to include only ``residents.'' U.S. citizens who are tax 
residents of other countries would continue to be liable to pay U.S. 
Federal income tax on any income which is effectively connected with 
the United States, as all non-resident aliens do, by using Form 1040-NR 
instead of Form 1040.

The tax compliance industry of lawyers and accountants will hate my 
suggestions because they would remove red tape which drives inordinate 
amounts of revenue to their industry. But the reality is that by 
solving these issues for ordinary U.S. citizens who live in other 
countries, the United States would sacrifice a relatively small amount 
of tax revenue, while freeing up IRS resources to focus on other larger 
priorities.

Thank you for your attention to this matter.

James Webster Coates
Tokyo, Japan

                                 ______
                                 
                  Letter Submitted by Geoffrey Connor
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

I am an American citizen registered to vote in the state of Wisconsin 
and am a permanent resident of Australia and have been living here 
continuously since August of 2019. My wife, Joanne, is a dual 
Australian/American citizen. We have been married since 1996 and moved 
to Australia when I retired in order to be closer to Joanne's family, 
especially her elderly parents.

My financial life is entirely in Australia, and my income is subject to 
full taxation under the laws of Australia. I try very hard to fulfill 
the requirements of the U.S. tax system in addition to the tax 
requirements in Australia. The reality, though, is that the U.S. 
requirements (especially the myriad of required informational filings) 
get increasingly burdensome every year, and the compliance costs for 
knowledgeable tax preparers are egregious.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey \1\ of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.
---------------------------------------------------------------------------
    \1\ http://seatnow.org/survey_report_intro_page/.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
---------------------------------------------------------------------------
country of residence.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      the right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal. 

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson \2\ explain that the failure 
of the IRS to provide access to the following services, individually 
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
    \2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial 
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report \3\ (released in July of 2015), it 
was stated that:
---------------------------------------------------------------------------
    \3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.

    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.

    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.

    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.

    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.

    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.
Thank you for your attention to this matter.

Sincerely,
Geoffrey Connor

                                 ______
                                 
                            Democrats Abroad

                             P.O. Box 15130

                          Washington, DC 20003

                             (202) 733-6790

                             April 6, 2022

The Honorable Ron Wyden             The Honorable Mike Crapo
Chairman                            Ranking Member
U.S. Senate                         United States Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510                Washington, DC 20510

Re: Hearing with IRS Commissioner Rettig on the IRS, the President's 
Fiscal Year 2023 Budget, and the 2022 Filing Season

Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

In light of the enormous challenges facing the Internal Revenue Service 
(IRS), we greatly appreciate you holding this important hearing. There 
are an estimated nine million American citizens residing outside the 
United States,\1\ the overwhelming majority of whom are working or 
middle class.\2\
---------------------------------------------------------------------------
    \1\ The U.S. Department of State's Bureau of Consular Affairs. 
(2020, January). Consular Affairs By The Numbers. Retrieved April 5, 
2022, from https://travel.state.gov/content/dam/travel/CA-By-the-
Number-2020.pdf.
    \2\ Democrats Abroad. (2019, March 1). Tax filing from abroad--2019 
Research on Non-
Residents and U.S. Taxation. Page 4. Retrieved April 5, 2022, from 
https://democratsabroad.
atlassian.net/wiki/download/attachments/4257416635/
Tax%20filing%20from%20abroad%20-%202019%20Research%20on%20Non-
Residents%20and%20US%20Taxation.pdf?api=v2.

In the context of the 2023 Budget ``Green Book'', our comment makes a 
number of recommendations that would alleviate unintended tax-filing 
and financial-access problems that Americans abroad face as a result of 
the current system of extraterritorial taxation (i.e., Citizenship-
Based Taxation). The U.S., Eritrea, and North Korea are the only 
---------------------------------------------------------------------------
countries using such a system.

Going beyond the Green Book, we urge the Senate Finance Committee to 
hold a hearing specifically to examine the unintended consequences of 
the current tax code on non-resident citizens and consider changing 
this system. We would welcome engagement with individual Committee 
Members to discuss opportunities to introduce reforms.

Green Book Recommendations

The Department of the Treasury's Fiscal Year 2023 proposals make a 
number of recommendations that are likely to impact Americans Abroad. 
In particular, they are:

      Raising the Corporate Tax Rate to 28 Percent, Page 2.
      Address Compliance in Connection with Tax Responsibilities of 
Expatriates, Page 87.
      Simplify Foreign Exchange Gain or Loss Rules and Exchange Rate 
Rules for Individuals, Page 90.
      Provide for Information Reporting by Certain Financial 
Institutions and Digital Asset Brokers for Purposes of Exchange of 
Information, Page 97.

Our commentary and recommendations on each proposal are as follows:
Raising the Corporate Tax Rate to 28 Percent
Commentary: How Americans Abroad are impacted by the change:
      Non-resident U.S. citizens who operate small businesses in their 
country of residence are subject to the GILTI tax on undistributed 
earnings unless they qualify for a high-tax exemption depending on tax 
rates in their country of residence. At the current 21% rate, income 
taxed at 18.9% or more is excluded from U.S. taxation. At a corporate 
rate of 28% the foreign tax rate would need to be as high as 25.2% to 
qualify for the exclusion.
Our Recommendation:
      GILTI was designed to encourage large multinational corporations 
to move their operations back to the U.S., but this is not an option 
for small-business owners who reside outside the U.S., and they can 
seldom afford the accounting support which is required for compliance. 
U.S. citizens not residing in the United States should be exempted from 
GILTI.

 Addressing Compliance in Connection with Tax Responsibilities of 
                    Expatriates

Major Changes:
      Adjustments to the statute of limitations ensure compliance and 
administrability.
      The Secretary of the Treasury will be granted limited authority 
to relieve certain dual citizens from Covered Expatriate tax 
obligations.

Commentary:
      We encourage lawmakers to read the motivation for this proposal 
that the Treasury provides on Page 88; it identifies the excessive 
compliance burden that the U.S. extraterritorial tax regime places on 
lower- and middle-income individuals, the pervasive financial-access 
issues, and the limited value to the IRS.
      We note that denial of financial services and excessive 
compliance burdens are problems that broadly affect all Americans 
residing abroad, not just those with minimal U.S. ties.
      We note that bank account closures and refusals are not limited 
to only those without SSNs/TINs. In some cases, foreign financial 
institutions demand to see a ``Certificate of Loss of Nationality'' for 
any U.S.-born individual, available only after someone expatriates. 
Such financial institutions deny or close accounts based solely on U.S. 
Tax Residency.
      While we are supportive of relief for those with minimal U.S. 
ties, we are dismayed to see that there appears to be greater support 
for facilitating renunciation of American citizenship than there is for 
addressing the problems that force individuals into such an action.

Our Recommendations:
      We support the enactment of H.R. 5799 The Overseas Americans 
Financial Access Act as a way to address the denial of service faced by 
non-resident citizens.
      To address financial access issues, we would encourage the 
adoption of a strengthened ``Non-Discrimination Clause''.

 Simplify Foreign Exchange Gain or Loss Rules and Exchange Rate Rules 
                    for Individuals

Major Changes:
      Annual average exchange rates, rather than spot exchange rates, 
become an option for tax calculations.
      Exemption from foreign currency gain is increased from $200 to 
$500.
      Foreign currency losses become deductible against any gain on 
the sale of the residence.

Commentary:
      Tracking and reporting of foreign currency gain is unworkable 
for individuals whose entire financial life revolves around a foreign 
currency; a meager and non-indexed increase in the personal exemption 
limit is insufficient in this regard.
      Making foreign-currency losses deductible against capital gains 
on a house appears more beneficial to property investors rather than to 
middle-class citizens living abroad. It does little to address problems 
related to ``phantom currency savings'' on mortgages that occur when a 
currency decreases in value (simultaneously reducing any capital gain).
      There is significant double taxation that occurs in cases of 
misalignment between countries with a ``stamp duty'' (tax paid by the 
buyer at purchase) and the United States, where tax is paid by the 
seller at time of sale. Relief is also desperately needed in this area.

Our Recommendations:
      Individuals residing outside the United States should be 
exempted from taxation of foreign-currency gains related to the 
currency of the country in which they reside.
      Exemption of primary residence and mortgage on primary residence 
from Foreign Exchange Gain/Loss: Capital-gain calculations should 
permit the use of an exchange rate based on the day the house was 
purchased, eliminating phantom currency gains & losses.

 Provide for Information Reporting by Certain Financial Institutions 
                    and Digital Asset Brokers for Purposes of Exchange 
                    of Information

Major Changes:
      U.S. financial institutions would require FATCA account 
reporting at U.S. financial institutions for any ``foreign persons.''

Commentary:
      We urge caution when implementing this proposal, noting the 
severe financial-access issues caused by FATCA and the reliance of 
overseas Americans on U.S. financial institutions (due to FATCA and 
anti-offshoring provisions of the Internal Revenue Code).
      If FATCA's scope of reporting is expanded to U.S. banks, it is 
both timely and necessary to address financial-access issues stemming 
from this reporting requirement.
      When FATCA was implemented in Europe, Americans abroad were 
locked out from banking--unable to open or maintain a bank account in 
their country of residence and faced with difficulty opening or 
maintaining a bank account in the U.S. Without financial access 
protections, our concern is that a similar wave of account closures and 
refusals could occur in the U.S.

Our Recommendations:
      To protect U.S. Citizens' access to U.S. services, all U.S. Tax 
Residents must have equal access to financial services and products; a 
foreign address cannot be valid grounds for refusal or reduction in 
services.
      To protect U.S. Citizens' access to financial services in the 
countries in which they live; being a U.S. Citizen or U.S. Tax Resident 
cannot be valid grounds for refusal or reduction in services.

Conclusion

Our recommendations are in response to the changes proposed by the 
Treasury in the 2023 ``Green Book'' and would be aligned with any 
legislative changes made in response to those proposals.

We strongly believe that more fundamental reforms are also necessary to 
address the underlying issues facing Americans abroad, namely:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion (FEIE), 
Foreign Tax Credit (FTC), or existing Tax Treaties.
    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.
    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.
    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.
    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.
    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

Americans residing abroad have been effectively barred from saving for 
retirement, starting a small business, taking title to real estate, or 
sharing finances with their spouse. The devastating consequences result 
in inability to retire, forced closure of small businesses, divorce 
from non-American spouses, and even suicide. This is on top of the 
inordinate stress, cost, and time involved just in understanding and 
meeting the complex reporting requirements of the U.S. tax code.

The current IRS definition of ``tax residency'' includes the obligation 
to report worldwide income (including non-U.S. source income), even of 
Americans who are tax residents of other countries. This requires the 
IRS to do the impossible: to administer both a domestic tax system for 
U.S. residents (including source taxation for non-resident aliens) and 
also an extraterritorial system interacting uniquely with the tax codes 
of other countries.

Administering this extraterritorial tax system has become an 
overwhelming task, both procedurally and substantively. The IRS cannot 
remotely serve Americans in the more than 100 foreign countries where 
they live, let alone in the languages they speak. Nor can the IRS know 
how U.S. laws apply to the local financial services, small business 
structures, and retirement savings plans that are common in those 
countries.

The IRS itself has identified ``international taxpayers'' as an 
underserved community.\3\ The level of service currently provided by 
the IRS to Americans inside and outside the country is highly unequal. 
For those abroad, IRS agents are insufficiently trained to respond to 
the common issues faced.
---------------------------------------------------------------------------
    \3\ IRS. (2021, January). Taxpayer First Act Report to Congress. 
Retrieved April 5, 2022, from https://www.irs.gov/pub/irs-pdf/
p5426.pdf?mc--cid=95523e3176&mc--eid=[942e2d2064].

Americans abroad have pleaded for relief for over a decade, with no 
meaningful response from Congress or the Treasury Department. It is 
time for Congress to cease the imposition of filing requirements for 
---------------------------------------------------------------------------
the non-U.S. source income of non-residents.

Cost/benefit analysis of such a transition from citizenship-based to 
residence-based taxation should include consideration of what would be 
required for the IRS to provide fair and equitable support to non-
resident filers under the current system. We believe that transitioning 
to residence-based taxation would:

      Substantially improve the well-being of Americans abroad;
      Improve the administrability of the Internal Revenue Code and 
facilitate greater tax compliance; and
      Reduce strain on an Internal Revenue Service that has expressed 
that the burden associated with servicing Americans abroad is 
disproportionate to the minuscule tax revenue raised.

We plan to release updated research on Americans abroad and their tax 
situations this summer. We will share our results and analysis with the 
Committee and encourage you to review it then.

Thank you for the opportunity to provide this testimony.

Please do not hesitate to contact Rebecca Lammers of our Taxation Task 
Force on [email protected] with any questions about the 
information and recommendations provided.

Sincerely,
Candice Kerestan                    Rebecca Lammers
International Chair                 Chair, Taxation Task Force
[email protected]           [email protected]

                                 ______
                                 
                    Letter Submitted by Brent Foster
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

I am a U.S. citizen who grew up in southern California. When I was 18 
years old in 1998, I moved to Germany to study and when studying I 
founded a family here in Germany. Since then I have been living here.

My financial life is entirely in Germany, and my income is subject to 
full taxation under the laws of Germany. I try very hard to fulfill the 
requirements of the U.S. tax system in addition to the tax requirements 
in Germany. The reality, though, is that the U.S. requirements 
(especially the myriad of required informational filings) get 
increasingly burdensome every year, and the compliance costs for 
knowledgeable tax preparers are egregious.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
country of residence.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know howU.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson explain that the failure of 
the IRS to provide access to the following services, individually and 
collectively, constitute violations of the Taxpayer Bill of Rights:

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report (released in July of 2015), it was 
stated that:
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co- chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.

    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.

    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.

    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty 
inmeeting filing obligations due to the lack of a Social Security 
Number for their spouse.

    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
ownedby Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.

    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

    7.  the inability to do normal business proceedings with foreign 
banks and financial institutions due to the strict and unprecedented 
reporting requirements imposed on U.S. citizens living abroad.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed and undeveloped nation on the 
planet and move to a residence-based taxation system for individuals. 
U.S. citizens who are tax residents of other countries would continue 
to be liable to pay U.S. Federal income tax on any income which is 
effectively connected with the United States, as all non-resident 
aliens do, by using Form 1040-NR instead of Form 1040.

Thank you for your attention to this matter.

                                 ______
                                 
                Letter Submitted by Robert M. Gerretsen
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

I was born in New York in 1957. My Dutch parents (who worked in the 
U.S. temporarily) went back to the Netherlands when I was 20 months 
old. My only English words were ``Daddy'' and ``Mammy'' when I left the 
U.S. I never studied or worked in the U.S. I do not have any family, 
friends or assets in the U.S.

Only 5 years ago I found out about CBT, caused by FATCA. My bank asked 
me for a SSN or CLN. I never had a U.S. passport, never had a SSN and 
do not have the money for a CLN procedure. My Dutch bank will close my 
bank account in September this year because of the FATCA ruling. From 
that moment I will not be able to receive any income or pay any 
account. Without a bank account I will not be able to take care of my 
dear family anymore. . . .

My financial life is entirely in the Netherlands for more than 63 years 
and my income and assets are subject to full taxation under the TAX 
laws of the Netherlands. I do not understand at all why I should also 
pay TAX to the U.S. a country I have no ties with and have never got 
any services from.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey \1\ of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.
---------------------------------------------------------------------------
    \1\ http://seatnow.org/survey_report_intro_page/.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
---------------------------------------------------------------------------
country of residence.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson \2\ explain that the failure 
of the IRS to provide access to the following services, individually 
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
    \2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial 
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report \3\ (released in July of 2015), it 
was stated that:
---------------------------------------------------------------------------
    \3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.

    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.

    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.

    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.

    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.

    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.

Thank you for your attention to this matter.

Kind regards,

Rob Gerretsen
The Netherlands

                                 ______
                                 
             Letter Submitted by Melvyn and Judith Goldberg
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

We are registered in the State of Pennsylvania. We reside in Canada 
because of the proximity of our children and grandchildren. We have 
resided in Canada for 14 years.

My financial life is entirely in Canada, and my income is subject to 
full taxation under the laws of Canada. I try very hard to fulfill the 
requirements of the U.S. tax system in addition to the tax requirements 
in Canada. The reality, though, is that the U.S. requirements 
(especially the myriad of required informational filings) get 
increasingly burdensome every year, and the compliance costs for 
knowledgeable tax preparers are egregious.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
country of residence.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson explain that the failure of 
the IRS to provide access to the following services, individually and 
collectively, constitute violations of the Taxpayer Bill of Rights:

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from citizenship-based taxation to a 
residence-based system of taxation should include an assessment of the 
investments which would be required to enhance the capabilities of the 
IRS to provide fair and equitable support to non-resident taxpayers 
under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report (released in July of2015), it was 
stated that:
            F Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of nun1erous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness. The 
combination of U.S. citizenship-based taxation and FATCA is destroying 
the lives of U.S. citizens living outside the United States who are 
bona fide residents (and tax residents) of other countries. Issues 
causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.

    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.

    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.

    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.

    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.

    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a bearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.

Thank you for your attention to this matter.

                                 ______
                                 
                Letter Submitted by Paula Hemdal, Ph.D.
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

I am an American who has lived abroad, in Belgium, for over 25 years 
and conscientiously file my U.S. Income tax forms every year, in 
addition to my Belgium tax forms. The reality is, that the U.S. 
requirements for citizens living outside of the U.S. get increasingly 
burdensome every year, and the compliance costs for knowledgeable tax 
preparers are egregious. Due to the high taxes in Belgium, the highest 
amount I ever owed the U.S. Government in my 25 years of living in 
Belgium has been $5,422 and that was only because I had worked more for 
several weeks in the United States that year and, as I was told by 
Deloitte, who was preparing my taxes, that I was also being taxed on my 
company car as a ``perk'' (which wasn't even used in the U.S.). Whether 
that was the true reason or not, my more usual amount owed to the U.S. 
is zero. Zero taxes to pay each year (because of the Belgium-U.S. tax 
treaty and because I pay a lot of tax in Belgium) yet I must pay a 
professional tax preparer each year and cannot file, like other U.S. 
citizens, using e-filing myself (my 4 digit zip code prevents me from 
doing this--believe me, I tried).

I am living proof that the extraterritorial application of the U.S. 
federal income tax system is a painful issue for me and for the 9 
million U.S. citizens who reside outside the United States. In a survey 
\1\ of 1,564 overseas resident citizens conducted by Stop 
Extraterritorial American Taxation (``SEAT''), an independent, non-
partisan not-for-profit association, 46% of participants agreed with 
the statement ``I pay significant fees for preparation of U.S. tax 
return but owe nothing in U.S. taxes,'' with 41% of those who engaged a 
professional preparer paying more than $1,000 in fees. That is me!
---------------------------------------------------------------------------
    \1\ http://seatnow.org/survey_report_intro_page/.

But it isn't simply the tax filing that is burdensome. More and more 
complications arise for U.S. citizens living in Europe every day. The 
combination of U.S. citizenship taxation and FATCA (as well as the EU 
MiFID) is destroying my ability to save for my retirement using the 
tools typical for U.S. citizens living in the United States: 401K, IRA 
and even Mutual Funds. And the Banks in Europe are refusing to allow 
U.S. citizens to use their retirement tools because of the long arms 
---------------------------------------------------------------------------
requirements of FATCA reporting.

I have always been a proud American, which is why, without even 
thinking, I passed on my U.S. citizenship to my children while living 
in Belgium. In hindsight, I believe this was a mistake. As Belgium is 
the country they were raised, they have chosen to stay there. Little 
did I realize that I by giving them American citizenship, I was in 
fact, gifting them a whole slew of financial difficulties.

Here is what I have gifted my children:

      Onerous tax reporting requirements: Filing to 2 tax authorities 
every year despite never working in the United States and even though 
the EU income tax is higher, meaning none or very minimal tax is ever 
owed to the United States (but only if you understand how to complete 
the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credits and 
to do this, you have to hire a professional help from tax experts). 
This means between 300 and upwards of 6,000 euros to pay every year for 
specialist tax advisors that understand both the U.S. tax laws and the 
European country tax laws. Additionally, the usual time to receive all 
the tax statements in many European countries (such as Belgium) is 
often more than a year after the tax year (whereas in the U.S., it is 
4.5 months), making it quite stressful to comply with even the 
extension of the U.S. tax filing timelines (October).

      No opportunity to save for their own retirement: Since they are 
not in the U.S., they are unable to take advantage of any pre-tax 
Individual Retirement Account or 401K. Furthermore, many of the 
European company-sponsored pension plans are only minimal: In Europe 
they use a 3-pillar system for retirement: Social Security, company 
pension, but the biggest pillar is often private investment. However, 
the EU banks will not allow U.S. citizens, even if they are also an EU 
citizen, to participate in any retirement scheme (for example, branch 
21 pension savings insurance, in Belgium). Thus, the only way they can 
save for their third pillar is through bank savings accounts (which is 
a 0% interest) and which is not the way to save for the future, keeping 
them at a distinct disadvantage compared to U.S. or EU counterparts 
that do not have dual citizenship.

      No opportunity to invest in European ETFs since they are 
punitively taxed by the U.S. authorities. The favored long-term 
investment strategies and pensions in the EU are often Passive Foreign 
Investment Companies (PFICs), which are taxed more severely by the U.S. 
tax authorities than other assets and more difficult to report to the 
IRS. This also means that unless they lie about their U.S. citizenship, 
they are not able to use online trading systems (Schwab, Vanguard, 
International Brokers, to name a few) to purchase safe mutual funds or 
ETFs. (They can still purchase individual stocks, but this is a very 
risky endeavor when starting to invest). This is because Americans 
living in Europe are no longer able to take advantage of their U.S. 
citizenship to purchase U.S.-based Exchange Traded Funds (ETFs), 
because of the Markets in Financial Instruments Directive (MiFID) rules 
that require to all U.S. investments to produce a Key Information 
Document or KID for EU-domiciled retail investors. So far, no U.S.-
based ETFs have produced KIDs.

      Difficulty finding banks (and mortgages) if you are a U.S. 
citizen living in Europe because may banks and investment/financial 
service companies are no longer accepting Americans as clients due to 
the FATCA legislation. EU banks that fail to follow FATCA potentially 
face significant penalties; thus, many EU banks have decided that it is 
more cost-efficient for them to avoid having any American clients at 
all. And, because they are not a resident of the United States (no U.S. 
address), they do not have the right to have a bank account in the U.S. 
or to open an U.S. investment.

      Beyond reasonable requirements for U.S. citizens living abroad: 
Since 1970, U.S. citizens living abroad have been obligated to file a 
Foreign Bank Account Report (FBAR) each year, for all non-U.S. 
(``foreign'') bank or other accounts that they have in which the 
balance has exceeded $10,000 during the year. All foreign accounts are 
reportable, even those with zero balances, if the aggregate total in 
all accounts exceeds $10,000 and the maximum amount held in any of 
these accounts must be reported--even if it was a transfer from one 
account to another, even if only for a day. And, even if held jointly 
with a partner who is European and has no U.S. reporting obligations.

In conclusion, my daughters, as proud U.S. citizens born and raised and 
still living in Belgium, are being denied bank accounts and investment 
opportunities only because of their U.S. citizenship and the compliance 
burden FATCA. My daughters will find it impossible to properly manage 
their financial livelihood and retirement planning because of the 
effects of U.S. citizenship taxation and FATCA. And as for me: I am 
nearing retirement age and truly have no idea what is in store for me 
when I begin taking U.S. social security and withdrawals from my 401K 
(from when I lived and worked in the U.S.) and how that will be taxed 
by both the U.S. and Belgium.

Please consider this as a real-life example of what is happening to me, 
but more importantly, to the future: my children. Consider a change to 
the system for those living permanently outside of the U.S. but who do 
not want to give up their citizenship, which is a part of their 
identity.

If you decide not to consider the burden this has on U.S. citizens 
living permanently abroad, you can also look at this problem from the 
viewpoint of good ole' Uncle Sam and the fact that the uniquely 
American definition of ``tax residency'' includes the imposition of 
taxation on the worldwide (including non-U.S. source) income of persons 
who are tax residents of other countries. This system requires the IRS 
to do the impossible: to administer not only a domestic tax system for 
U.S. residents and a system of source taxation for non-resident aliens, 
but also an extraterritorial one whose details are defined by unique 
interactions with the tax codes of other countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed, the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson \2\ explain that the failure 
of the IRS to provide access to the following services, individually 
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
    \2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial 
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report \3\ (released in July of 2015), it 
was stated that:
---------------------------------------------------------------------------
    \3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.
    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.
    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.
    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.
    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.
    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.

Thank you for your attention to this matter. Please feel free to 
contact me if you would like to discuss my situation in more detail.

Kind regards,

Paula Hemdal, Ph.D.

                                 ______
                                 
                    Letter Submitted by John Holmes
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

My wife and I are dual citizens of Australia and the U.S., having been 
born in Australia. I worked and raised a family for 23 years in Florida 
through 2015. Our motivation for moving back to Australia is to provide 
care and assistance to parents in their 8th and 9th decades. We 
continue to actively vote in Pinellas County in state and federal 
elections. We are not affiliated with any party. We previously held 
property in Florida which we since have sold and have fully complied 
with U.S. tax law filing returns every year and paying applicable taxes 
related to U.S. holdings. We now have only 401k retirement accounts.

My financial life is entirely in Australia and my income is subject to 
full taxation under the laws of Australia. I try very hard to fulfill 
the requirements of the U.S. tax system in addition to the tax 
requirements in Australia. The reality, though, is that the U.S. 
requirements (especially the myriad of required informational filings) 
get increasingly burdensome every year, and the compliance costs for 
knowledgeable tax preparers are egregious. This results in me being 
forced to pay over $1200+ in accounting fees every year to complete 
forms with no tax being due. Not to mention the tax years do not 
coincide creating an extra burden.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey \1\ of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.
---------------------------------------------------------------------------
    \1\ http://seatnow.org/survey_report_intro_page/.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
---------------------------------------------------------------------------
country of residence.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson \2\ explain that the failure 
of the IRS to provide access to the following services, individually 
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
    \2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial 
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report \3\ (released in July of 2015), it 
was stated that:
---------------------------------------------------------------------------
    \3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.

    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.

    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.

    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.

    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.

    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

    7.  More specifically in my case the contributions to 
superannuation--a version of 401K is considered as income so it is 
taxed by both Australia and the U.S.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.

Thank you for your attention to this matter.

Sincerely,

John Holmes

                                 ______
                                 
               Letter Submitted by Lynn Frances Levenson
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

I was born in New York, NY in 1947 from Alvin Levenson, who was a U.S. 
Navy pilot on the USS Yorktown and Marjorie Murphy. I spent my younger 
years in school in West Hempstead Long Island and worked in New York 
City.

At the age of twenty-two I got married to an Italian citizen and 
transferred to Italy, where he was and we still are living. I returned 
to the States to see my parents and family during brief holidays. I 
have no property or financial interest in the USA at all. I have not 
worked in Italy outside the family and was never involved in any 
activity procuring me any monetary income. My husband who is only an 
Italian citizen, now retired as one of the former directors of the 
civil air traffic services, provides for the income of the family. The 
Italian citizenship was granted to me because of the marriage. I have 
dual citizenship since 1971 and am a permanent resident of Italy since 
the same year. My husband allowed my name as well in all his bank 
accounts hence making me eligible for FATCA and FBAR. All my husband's 
income and bank accounts are subject to Italian taxation. Because of 
FATCA and FBAR I have to spend his moneys for the lawyer and accountant 
taking care of my reports to IRS, to report his property already taxed 
in Italy, to the USA IRS. To find qualified lawyers in U.S. tax laws is 
a very, very difficult operation and a very, very expensive one, as 
well, while all responsibilities continue to lay on the tax payer only. 
Should my husband die before me I would be allowed to receive a 
percentage of his pension, making me an earner of already taxed money, 
to be reported and possibly taxed again because of my U.S. citizenship. 
The house my husband bought with his Italian income, sharing that 
property with me, would be subject to IRS taxation. On top of all the 
already proposed disturbing issues I wish to mention that You are 
proposed with the case of U.S. males living, earning and married to 
foreign, outside USA. I am proposing to you my case of an American 
woman married to a foreigner and living outside the USA with no income 
from my interest in working activities or financial investments still 
subject to taxation FATCA and FBARS.

My financial life is entirely in Italy, and my income is subject to 
full taxation under the laws of Italy. I try very hard to fulfill the 
requirements of the U.S. tax system in addition to the tax requirements 
in Italy. The reality, though, is that the U.S. requirements 
(especially the myriad of required informational filings) get 
increasingly burdensome every year, and the compliance costs for 
knowledgeable tax preparers are egregious.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey \1\ of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.
---------------------------------------------------------------------------
    \1\ http://seatnow.org/survey_report_intro_page/.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
---------------------------------------------------------------------------
country of residence.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson \2\ explain that the failure 
of the IRS to provide access to the following services, individually 
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
    \2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial 
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations oftax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non 
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report \3\ (released in July of 2015), it 
was stated that:
---------------------------------------------------------------------------
    \3\ https://www.finance.senate.gov/imo/media/doc/
The%20lnternational%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions mode to the internotionol working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-choirs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.

    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.

    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.

    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.

    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.

    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.

Thank you for your attention to this matter.

Lynn Frances Levenson

                                 ______
                                 
                  Letter Submitted by Stephen Matthew
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

I am a proud American citizen, registered to vote in Connecticut, 
expatriated in The Netherlands since 1978. I came originally to The 
Netherlands to play semi-
professional baseball in the Amsterdam area. Eventually I met my wife 
of over 40 years and was able to secure a job with an American company 
located here (a part of GE Capital) which I recently retired from after 
40 years of service. We have 2 adult aged children that had dual 
nationality despite only living in The Netherlands.

My financial life is entirely in The Netherlands, and my income is 
subject to full taxation under the laws of The Netherlands. I try very 
hard to fulfill the requirements of the U.S. tax system in addition to 
the tax requirements in The Netherlands. The reality, though, is that 
the U.S. requirements (especially the myriad of required informational 
filings) get increasingly burdensome every year, and the compliance 
costs for knowledgeable tax preparers are egregious.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey \1\ of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.
---------------------------------------------------------------------------
    \1\ http://seatnow.org/survey_report_intro_page/.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
---------------------------------------------------------------------------
country of residence.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson \2\ explain that the failure 
of the IRS to provide access to the following services, individually 
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
    \2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial 
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report \3\ (released in July of 2015), it 
was stated that:
---------------------------------------------------------------------------
    \3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.

    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.

    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.

    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.

    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.

    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.

Thank you for your attention to this matter.

Humbly yours,

Stephen Matthew

                                 ______
                                 
                 Letter Submitted by C. Chase McCarthy
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

I'm American. Born in TN, raised in CA, educated in NJ and currently 
registered to vote there. My wife is Spanish. We lived in Germany and 
Spain for more than 14 years and plan to return there soon for 
retirement. We had financial interests in Spain that we had to divest 
because the taxation, FBAR laws are excessive and onerous for honest 
citizens. We would like to plan more for our retirement with 
investments in Spain but that is not feasible to any degree with the 
current tax laws in place.

My financial life is CURRENTLY split between income in the U.S. and 
Spain. We've had to change so many things in our lives including where 
we live because of the draconian tax measures taken by the U.S. While I 
would like to live in Spain, my country's tax laws prevent me from 
doing so in realistic terms that I cannot afford a combined dual tax 
rate given the minimal credit provided to citizens currently--
disregarding the substantial administrative costs of living abroad for 
both myself and our bank in Spain. The reality is that the U.S. 
requirements (especially the myriad of required informational filings) 
get increasingly burdensome every year, and the compliance costs for 
knowledgeable tax preparers are egregious.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey \1\ of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.
---------------------------------------------------------------------------
    \1\ http://seatnow.org/survey_report_intro_page/.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
---------------------------------------------------------------------------
country of residence.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson \2\ explain that the failure 
of the IRS to provide access to the following services, individually 
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
    \2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial 
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report \3\ (released in July of 2015), it 
was stated that:
---------------------------------------------------------------------------
    \3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.

    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.

    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.

    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.

    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.

    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.

Thank you for your attention to this matter.

                                 ______
                                 
                        National Taxpayers Union

                      122 C Street, NW, Suite 650

                          Washington, DC 20001

                         Phone: (703) 683-5700

                          Fax: (703) 683-5722

                          https://www.ntu.org/

The Honorable Ron Wyden             The Honorable Mike Crapo
Chair                               Ranking Member
U.S. Senate                         U.S. Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510                Washington, DC 20510

Dear Chair Wyden, Ranking Member Crapo, and Members of the Committee:

On behalf of National Taxpayers Union (NTU), the nation's oldest 
taxpayer advocacy organization, we write in regards to your hearing 
with IRS Commissioner Rettig on the agency's fiscal year (FY) 2023 
budget request. NTU and its research arm NTU Foundation have been 
actively engaged on IRS budget and reform matters since our founding in 
1969, and our experts and advocates have been especially involved of 
late in the challenges facing the agency during the 2022 tax filing 
season.

In recent years, NTU and NTU Foundation have often weighed in on 
efforts to increase the IRS budget. While we continue to believe that 
it would be a serious mistake to provide the agency $80 billion over 10 
years almost exclusively for enforcement purposes--and that such a 
proposal would represent a nearly blank check to an agency with serious 
structural flaws and long-term challenges--we have expressed our 
support for Congressional efforts aimed at improving customer service 
and modernizing the agency's infrastructure. We believe that resources 
properly directed to these ends should aim to be fully offset by 
spending reductions elsewhere in the federal budget, and we believe 
that any IRS budget increases should come with solidly-grounded 
guardrails, robust Congressional oversight, and strong taxpayer rights 
and privacy protections.

The IRS FY 2023 Budget Request

As you well know, the agency's FY 2023 budget request would increase 
spending by $1.5 billion, or 11.9 percent, above FY 2022 enacted 
levels.\1\ The Taxpayer Service Account would see the largest increase 
under the budget proposal: $904 million or 32.5 percent above FY 2022 
enacted levels. The Enforcement Account would see an $834 million 
increase, or 15.3 percent above enacted levels. The Business Systems 
Modernization Account would see a $35 million, or 12.7 percent 
increase, over FY 2022 enacted levels.
---------------------------------------------------------------------------
    \1\ For more, see: Office of Management and Budget. ``Internal 
Revenue Service.'' March 2022. Retrieved from: https://
www.whitehouse.gov/wp-content/uploads/2022/03/tre_fy2023.pdf#page
=40 (Accessed April 5, 2022.); Congress.gov. (Introduced April 13, 
2021.) ``H.R. 2471--Consolidated Appropriations Act, 2022.'' Retrieved 
from: https://www.congress.gov/bill/117th-congress/house-bill/2471/text 
(Accessed April 5, 2022.)

NTU and NTU Foundation are still evaluating the agency's full FY 2023 
budget request, and we look forward to hearing from Commissioner 
Retting at the Committee's April 7th budget hearing. However, we urge 
the IRS and the Committee to explore reforms that (1) advance taxpayer 
rights and privacy, (2) improve customer service at the agency, (3) 
modernize the IRS, and (4) help the agency enforce the nation's tax 
laws while fully respecting taxpayer rights and due process.

Protecting Taxpayer Rights and Privacy

Taxpayer rights--including the right to due process and the right to 
relief when the agency makes an error that affects the taxpayer--are of 
the utmost importance and have traditionally enjoyed bipartisan support 
on Capitol Hill. However, between concerns about the agency's proposed 
(but since canceled) use of facial recognition technology, and the 
ProPublica breach of sensitive tax data, it is clear the agency is not 
as prepared to protect taxpayer privacy and safeguard taxpayer rights 
as the nation's taxpayers should expect. The following recommendations 
may, over the long run, right the ship at the IRS.

      Pass Additional Taxpayer Protections Through a New Taxpayer Bill 
of Rights (TBOR): NTU has endorsed legislation from Sen. John Cornyn 
(R-TX), the Small Business Taxpayer Bill of Rights, which would create 
an alternative dispute resolution program for audits, give the IRS 
greater latitude to release levies that cause financial hardship, and 
strengthen safeguards against taxpayer abuses by IRS officers and 
agents, among other commendable provisions.\2\ These and similar 
reforms should receive bipartisan support in Congress, either as part 
of the appropriations process or as standalone legislation.
---------------------------------------------------------------------------
    \2\ Sepp, Pete; and Lautz, Andrew. ``Senate Bill Would Provide 
Small Business Taxpayers With New Rights.'' NTU, May 17, 2021. 
Retrieved from: https://www.ntu.org/publications/detail/senate-bill-
would-provide-small-business-taxpayers-with-new-rights.
---------------------------------------------------------------------------
      Safeguard Taxpayer Privacy From Unauthorized Attempts to Access 
Data: Targeted budget increases that improve the agency's information 
technology (IT) infrastructure and data security could prevent harmful 
and embarrassing data breaches like the ProPublica series on high-
income filers' tax returns. As NTU Foundation has noted, ``A 2020 
report by the Treasury Inspector General for Tax Administration looked 
at 67 requests for taxpayer data that should have been monitored for 
unauthorized access. Of these, just 6 received adequate scrutiny--30 
received inaccurate and incomplete audit trails, and 31 received no 
audit trails at all.''\3\
---------------------------------------------------------------------------
    \3\ Wilford, Andrew; Sepp, Pete; and Bishop-Henchman, Joe. 
``Taxpayers Desperately Need Help with Disastrous Filing Season.'' NTU 
Foundation, February 17, 2022. Retrieved from: https://www.ntu.org/
foundation/detail/taxpayers-desperately-need-help-with-disastrous-
filing-season.
---------------------------------------------------------------------------
      Require the Agency to Reduce its Response Time for Resolving ID 
Theft Claims: The agency is currently taking nearly a year to resolve 
identity theft claims, a significant increase from their average 
response time ``due to extenuating circumstances.''\4\ However, outside 
of extenuating circumstances, the agency's average response time is 120 
days. Taking 4 months to a year to respond to identity theft claims is 
unacceptable, and the agency should work with Congress to reduce the 
average response time to identity theft claims. If this requires a 
targeted funding increase, so that the agency may hire more personnel 
to respond to identity theft claims, Congress should carefully consider 
such a request.
---------------------------------------------------------------------------
    \4\ Internal Revenue Service. ``IRS Operations During COVID-19: 
Mission-critical functions continue.'' Updated March 18, 2022. 
Retrieved from: https://www.irs.gov/newsroom/irs-operations-during-
covid-19-mission-critical-functions-continue (Accessed April 6, 2022.)
---------------------------------------------------------------------------
      Evaluate and Remediate Problems with Current Taxpayer Rights 
Laws. Both practitioners and the taxpayers they represent have raised 
concerns that the Independent Office of Appeals created by the Taxpayer 
First Act of 2019 is under-resourced, and that agency guidance released 
subsequent to the law's enactment may be limiting taxpayer access to 
this critical avenue of redress. At the same time, the tripartite 
accountability structure of the National Taxpayer Advocate, Treasury 
Inspector General for Tax Administration, and IRS Oversight Board has 
been tottering because the latter element has not had a quorum to 
function for many years. These are but two examples where Congress 
needs to step in and affirm or even strengthen its intent to provide 
more safeguards for taxpayers.

Improving Customer Service at the Agency

One area of the IRS budget where additional funding may be required is 
customer service. Taxpayers currently experience long wait times to 
reach an IRS agent with questions or concerns about their tax return, 
if they can even reach a real agency representative at all. While some 
IRS customer service struggles are no doubt tied to the agency's slow 
pace at modernization and its resource constraints, some are unique to 
this tax filing season and the challenges of the COVID-19 pandemic. 
Congress can step in with several reforms, outlined below. In some 
cases, emergency funding directed at the agency's short-term obstacles 
may be necessary.

      Expand Funding for Taxpayer Services: Narrowly tailored funding 
increases--targeted at, for example, hiring more customer service 
representatives to answer taxpayer questions or hiring more agents to 
reduce the agency's return backlog--could benefit both taxpayers and 
the agency as they face a difficult 2022 filing season. NTU Foundation 
noted in February, ``[p]roviding the agency with emergency funding 
earmarked for the taxpayer services account would at least reduce the 
problems that taxpayers are likely to face over the coming months.''\5\
---------------------------------------------------------------------------
    \5\ Wilford, Andrew; Sepp, Pete; and Bishop-Henchman, Joe. 
``Taxpayers Desperately Need Help with Disastrous Filing Season.'' NTU 
Foundation, February 17, 2022. Retrieved from: https://www.ntu.org/
foundation/detail/taxpayers-desperately-need-help-with-disastrous-
filing-season.
---------------------------------------------------------------------------
      Ensure That Taxpayers Are Not Punished for IRS Delays: NTU and 
NTU Foundation have been leaders in demanding the IRS and/or Congress 
provide taxpayers with immediate relief for delays that are no fault of 
their own. A bipartisan group of lawmakers have made similar demands, 
indicating support across the ideological spectrum for immediate 
taxpayer relief this filing season. Lawmakers' demands have included 
``that the IRS halt late fees and penalties for taxpayers who have paid 
70 percent of assessed tax liability and have pending penalty abatement 
requests waiting to be processed. [Demands also include] halting 
automated collections until three months after the end of this tax 
season, and temporarily speeding up the reasonable cause penalty 
abatement process by eliminating the need for written 
correspondence.''\6\
---------------------------------------------------------------------------
    \6\ Ibid.
---------------------------------------------------------------------------
      Provide a Legislative Fix to ``One Day Late'' Dispute: One area 
where Congress can step in is for taxpayers who have been harmed by the 
current IRS position that ``any taxpayer who fails to file an appeal 
within 30 days forfeits all rights to go to Tax Court.'' As NTU 
Foundation has written, ``The IRS concedes that 26 U.S.C. 
Sec. 6330(d)(1) allows taxpayers to go to Tax Court, but they argue 
that a parenthetical reference to `such matter' instead of `such 
determination' means that Congress intended to forbid judges from 
granting equitable relief to taxpayers who miss the deadline. This 
harsh reading is at odds with the rest of the 1998 law, with common law 
equitable doctrines, and other provisions in the same statute.''\7\ 
Congress could clarify the statute so that judges may grant relief to 
taxpayers who miss the deadline.
---------------------------------------------------------------------------
    \7\ Ibid.
---------------------------------------------------------------------------
      Apply a Consistent Mailbox Rule Deadline to Electronically 
Submitted Payments: According to NTU Foundation, ``Taxpayers who mail 
checks to the IRS can utilize the `mailbox rule' of 26 U.S.C. 
Sec. 7502, which treats paper payments as timely if mailed with a 
postmark before the deadline. By contrast, the Treasury Department's 
Electronic Federal Tax Payment System (EFTPS) states that electronic 
payments must be made by 8:00 PM Eastern Time the day before the 
deadline in order to be timely.''\8\ These uneven rules effectively 
punish taxpayers trying to file electronically, and Congress should 
amend the law to equalize the electronic filing rules with the current 
``mailbox rule'' for paper returns.
---------------------------------------------------------------------------
    \8\ Ibid.
---------------------------------------------------------------------------
      Increase Interest Rate for Delayed Refunds: NTU Foundation's 
February paper also recommended increasing the three-percent interest 
rate on tax refunds, amid significant IRS processing delays and 
historic levels of inflation that exceed three percent.\9\
---------------------------------------------------------------------------
    \9\ Ibid.
---------------------------------------------------------------------------
      Raise the 1099-K Reporting Threshold: NTU Foundation has written 
extensively on the need for Congress to raise the reporting threshold 
for 1099-K forms, which Congress recently changed from 200 transactions 
and $20,000 on web platforms to just $600. The new $600 threshold is a 
burden to online sales platforms, digital economy apps, and millions of 
workers across the country. While NTU would prefer that Congress revert 
to the $20,000 and 200 transaction thresholds, there are bipartisan 
proposals to raise the threshold above the current $600 level, 
including to $5,000.\10\
---------------------------------------------------------------------------
    \10\ Yepez, Will. ``Bipartisan Focus on 1099-K Reporting Issue Will 
Hopefully Lead to Taxpayer Relief.'' NTU, March 18, 2022. Retrieved 
from: https://www.ntu.org/publications/detail/bipartisan-focus-on-1099-
k-reporting-issue-will-hopefully-lead-to-taxpayer-relief.
---------------------------------------------------------------------------

Modernizing the IRS

As NTU Foundation wrote in February of this year, IRS technology and 
infrastructure are in many cases woefully inadequate and outdated.\11\ 
NTU and NTU Foundation have compiled numerous recommendations to hasten 
the pace of the agency's modernization efforts. We recognize that 
narrowly-tailored funding increases, relative to the agency's current 
baseline, may be necessary to facilitate more rapid modernization. 
However, if expanding IRS electronic filing options, for example, or 
updating years- or sometimes decades-old infrastructure improves the 
agency's ability to answer taxpayer questions and deliver tax refunds, 
the benefits of such targeted funding increases may outweigh the short-
term costs to taxpayers.
---------------------------------------------------------------------------
    \11\ Ibid.

      Promote Increased Digitization of Tax Filing and Processing: As 
NTU Foundation wrote in February, ``A good number of . . . paper 
filings occur because the IRS does not accept certain forms in digital 
format. Even among those that have been recently converted, some are 
still manually processed, such as Form 1040-X, or amended individual 
returns. If the IRS had the capability to automatically process the 3.6 
million Forms 1040-X it received in 2021, it would significantly cut 
down on processing delays.''\12\ Congress and the agency should 
prioritize electronic filing and processing for all or nearly all tax 
forms.
---------------------------------------------------------------------------
    \12\ Ibid.
---------------------------------------------------------------------------
      Promote Improved Digital Communications Tools: NTU Foundation 
also recommended in February that the IRS ``expand the use of virtual 
assistants'' and increase the use of ``existing secure digital 
communications tools'' that allow taxpayers to contact the agency 
through email, text chat, and digital attachment uploads. Such efforts 
could reduce the amount of phone calls taxpayers make to the agency, 
reducing wait times for those taxpayers, resolving their questions or 
concerns faster, and putting less of a burden on the agency's workforce 
in the process.

Enforcing the Nation's Tax Laws

NTU remains strongly opposed to efforts to send the IRS $80 billion 
largely for enforcement purposes. The agency is ill-equipped to handle 
its basic customer service, processing, and data security 
responsibilities, much less an $80 billion bucket of cash aimed at 
generating revenue to pay for a variety of new federal spending 
programs. However, the tax gap remains a relevant concern for the 
agency and for taxpayers, and both Congress and the IRS should explore 
measures to reduce the tax gap that nonetheless respect taxpayer rights 
and privacy. NTU outlines a few possible paths forward below. We would 
remind lawmakers that the IRS's mission statement, which was given a 
great deal of forethought in its development some 25 years ago, is to 
``provide America's taxpayers top quality service by helping them 
understand and meet their tax responsibilities and by applying the tax 
law with integrity and fairness to all.'' Fulfilling this mission first 
can actually help, not hinder, the IRS's functions of law enforcement, 
which continue to rely heavily on voluntary compliance. Above all, the 
agency should move slowly on reducing the tax gap--starting with more 
up-to-date estimates of the current tax gap--and Congress should not 
see tax gap reduction as consequence-free revenue to pay for new or 
expanded government programs.

      Demand an Updated Study From the IRS on the Tax Gap: The last 
tax gap estimate from the IRS, completed nearly 3 years ago, covers tax 
years 2011-2013--9 to 11 years ago. Though the IRS is reportedly 
working on a 2022 study for tax years 2014 through 2016, and though 
data lag continues to be an issue in providing up-to-date estimates of 
the tax gap, Congress should require a more robust analysis from the 
IRS of the present-day tax-gap estimated using new IRS methodologies 
referenced by an official in 2021 testimony to the Senate Finance 
Committee.\13\
---------------------------------------------------------------------------
    \13\ Senate Committee on Finance. ``Written Testimony of Internal 
Revenue Service Before the Senate Finance Committee Subcommittee on 
Taxation and IRS Oversight on the Tax Gap.'' May 11, 2021. Retrieved 
from: https://www.finance.senate.gov/imo/media/doc/2021%20ODonnell
%20Johnson%20Tax%20Gap%20Written%20Testimony%20SFC%20051121.pdf 
(Accessed April 6, 2022.)
---------------------------------------------------------------------------
      Require an IRS Plan for Reducing the Tax Gap for Nonfarm 
Proprietor Income: According to the most recent IRS study of the tax 
gap, the single largest component of the gap is underreporting of non-
farm proprietor income--a total of $68 billion, or more than 15 percent 
of the estimated gross tax gap.\14\ The agency should have a detailed 
plan for reducing this gap in particular.\15\ That action plan should 
include steps to protect the due process rights of small businesses who 
report income on individual returns (so-called ``pass-through 
income''). Another useful element of such a plan would be to compare 
the cost-effectiveness of alternative strategies for closing this gap. 
For example, would creation of an administrative quadrennial 
simplification process for tax law affecting small business, along with 
more resources to promulgate advance guidance, yield better compliance 
(and revenue) than relying more heavily on examinations and 
investigations? Such research is not beyond the capabilities of IRS 
technical experts.
---------------------------------------------------------------------------
    \14\ Internal Revenue Service. ``Federal Tax Compliance Research: 
Tax Gap Estimates for Tax Years 2011-2013.'' September 2019. Retrieved 
from: https://www.irs.gov/pub/irs-pdf/p1415.
pdf (Accessed April 6, 2022.)
    \15\ For more, see: Sepp, Pete; and Lautz, Andrew. ``Senate Bill 
Would Provide Small Business Taxpayers With New Rights.'' NTU, May 17, 
2021. Retrieved from: https://www.ntu.org/publications/detail/senate-
bill-would-provide-small-business-taxpayers-with-new-rights.

In conclusion, the IRS faces significant short-term challenges with the 
2022 tax filing season, and long-term challenges related to the 
agency's structural flaws and outdated infrastructure. A pot of cash 
for tax law enforcement will not improve customer service and data 
security at the agency, nor are we convinced that the agency's FY 2023 
budget request meets all of the above challenges outlined by NTU, NTU 
Foundation, and other stakeholders in the taxpayer advocate community. 
Congress should carefully consider requests from the agency to increase 
budgets in various accounts, but should also insist that any budget 
increases are fully offset and come with robust reforms aimed at 
solving the agency's long-term struggles. We appreciate your 
consideration of our recommendations, and should you have any questions 
---------------------------------------------------------------------------
we are at your service.

Sincerely,

Pete Sepp,
President

Andrew Lautz
Director of Federal Policy

                                 ______
                                 
                   Professional Managers Association

                 700 12th St., NW, Suite 700, PMB 95968

                          Washington, DC 20005

                      https://www.promanager.org/

                            o: 202-793-6262

                            f: 888-396-6975

April 21, 2022

Hon. Ron Wyden                      Hon. Mike Crapo
Chairman                            Ranking Member
U.S. Senate                         U.S. Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Bldg.     219 Dirksen Senate Office Bldg.
Washington DC, 20510                Washington DC, 20510

Re: Written Comments for April 7, 2022, Hearing on ``The IRS, the 
President's Fiscal Year 2023 Budget, and the 2022 Filing Season''

Dear Chair Wyden and Ranking Member Crapo:

On behalf of the Professional Managers Association (PMA)--the non-
profit professional association that has, since 1981, represented 
professional managers, management officials, and non-bargaining unit 
employees at the Internal Revenue Service (IRS)--I write to urge the 
Committee to support robust and timely appropriations for the IRS.

PMA vehemently supports the White House's request for a $14.1 billion 
in funding for the Service with $310 million dedicated for systems 
modernization. When Congress allocated $12.6 billion for the IRS in FY 
2022, PMA applauded the historic investment in the IRS and the 
bipartisan recognition of the IRS's financial constraints. However, we 
also level set expectations: At $12.6 billion in funding, the IRS is 
still nearly $4 billion below its 2011 peak of $16.4 billion,\1\ when 
accounting for inflation.
---------------------------------------------------------------------------
    \1\ https://www.irs.gov/statistics/irs-budget-and-workforce.

Ranking Member Crapo is correct to point out that the IRS, despite 
funding, has failed to modernize its technology systems in a meaningful 
way. However, the culprit for this inefficiency is closer to home than 
---------------------------------------------------------------------------
the Senator assumes.

The IRS cannot modernize under the current broken appropriations 
process. Congress passed three continuing resolutions prior to passing 
FY 2022 appropriations, passed the measures five months late, and 
Congress is now scheduled to appropriate FY 2023 funds in just 6 
months. The IRS cannot enact long-term plans to modernize its IT system 
when it is unsure what funding it will have in six months.

The constant inability of Congress to fund the government adequately 
and on time has widespread ramifications on long-term planning, mission 
delivery, and taxpayer services. Each year when Congress delays 
appropriations, the IRS is placed in a continuing resolution state 
where the Service is deeply cautious and limited in its spending. The 
IRS also cannot conduct robust hiring, onboarding, and training while 
on a continuing resolution. This makes employees less equipped to 
handle the tax season and leads to more frustrations for taxpayers.

Most recently, this Committee expressed frustration that the IRS has 
not yet fully spent the $1 billion allocated in the American Rescue 
Plan Act (ARPA). As the National Taxpayer Advocate Erin Collins 
explained, this discrepancy boils down to the consistency of funding. 
Each time Congress fails to pass appropriations, the IRS must 
cautiously couch funding to ensure it can continue functioning if 
additional funding does not materialize. Congress's inability to pass 
consistent and timely appropriations makes long term planning, and 
execution of those plans, impossible.

For example, when Congress passed ARPA, it passed IRC Section 6428B. 
The provision says: ``$1,464,500,000 to remain available until 
September 30, 2023 for necessary expenses for the Internal Revenue 
Service for the administration of the advance payments, the provision 
of taxpayer assistance, and the furtherance of integrated, modernized, 
and secure Internal Revenue Service systems, of which up to $20,000,000 
is available for premium pay for services related to the development of 
information technology as determined by the Commissioner of the 
Internal Revenue occurring between January 1, 2020 and December 31, 
2022, and all of which shall supplement and not supplant any other 
appropriations that may be available for this purpose.''

In prior years, the IRS had to raid its personnel budget to fund IT 
overages, and it seems likely the IRS is spending these funds 
cautiously because other modernization dollars might not materialize 
and, if they do not, the IRS will need the $1 billion for ``the 
furtherance of integrated, modernized, and secure Internal Revenue 
Service systems'' which, again, they have all the way until 2023 to 
spend.

In our view, the IRS is being responsible--it spent a third or so in 
FY21, perhaps it will spend a third or so this year rather than raid 
personnel budgets and leave the balance for FY23. The IRS is not hiding 
this money in a rainy-day fund--Congress specifically authorized the 
agency to hold the money. To its credit, the IRS is currently deploying 
those funds to help mitigate its historic backlog. We are proud of the 
agency for making more than 2,500 job offers in the past month.

PMA ultimately agrees that the IRS must have robust plans for 
onboarding new employees, addressing the backlog, and modernizing the 
IT systems. But Congress's failure to pass timely and robust 
appropriations stifles all these plans.

Further, the Committee's focus on 2D bar-code scanning, while helpful, 
is misplaced. It is true the IRS's IT must be updated and 2D barcode 
scanning would be an element of that modernization. But it is a drop in 
the ocean. Most of the IRS's paper ``kryptonite'' will not be 
alleviated by 2D scanning, especially considering our outdated computer 
system will not likely integrate with most modern scanners. This also 
assumes that the agency's paper burden is primarily original tax 
returns--tax returns are the smallest component of the IRS's service-
wide paper inventory. The IRS needs real investment and real long-term 
solutions, not band aids or a piecemeal approach.

For these reasons, PMA support multi-year funding dedicated to IRS 
technology modernization. All IRS technology needs a facelift, not just 
our scanning systems. The IRS is the largest revenue source for the 
federal government--simply put, we fund freedom. Yet, the IRS's aging 
IT infrastructure does not reflect the IRS's critical role in our 
nation.

There is not a single federal lawmaker who has been working for 61 
years--there should not be an IT system that has been working for that 
long without modernization. Our nation should not rely on technology 
that predates Hawaii statehood, the Berlin Wall, and the Space Needle. 
Dedicated, multi-year funding for IT modernization would allow the 
Service to take consistent steps toward improvement isolated from 
Congress's annual appropriations panic.

Only with consistent, robust, and timely funding can the IRS truly 
improve the quality of taxpayer services for all Americans; therefore, 
we urge the Committee to support our call for dedicated, multi-year 
funding for IRS technology.

Thank you for your consideration of PMA's perspective. Please contact 
PMA Washington Representative Natalia Castro 
([email protected]) if we can be of further assistance on these 
matters or provide addition insights on the issues facing the IRS.

            Sincerely,

            Chad Hooper
            Executive Director

                                 ______
                                 
                   Letter Submitted by Keiko I. Pulin
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

I am an American citizen and am a registered voter in the County of 
Orange in the State of California where I had lived most of my life. I 
moved to New Zealand in 2014 for love; my love is a retired New 
Zealander and he and I live in Auckland where we recently moved to a 
retirement community. I received my New Zealand Permanent Resident Visa 
in 2018.

I am a New Zealand Tax Resident and my income is subject to full 
taxation under the laws of New Zealand. I try very hard to fulfill the 
requirements of the U.S. tax system in addition to the tax requirements 
in New Zealand. The reality, though, is that the U.S. requirements 
(especially the myriad of required informational filings) get 
increasingly burdensome every year, and the compliance costs for 
knowledgeable tax preparers are egregious. I am tax compliant but still 
have painful issues because of complex requirements. I pay over $2,500 
in fees for my U.S. tax preparer and an additional $2,700-plus for my 
New Zealand tax accountant.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey \1\ of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of tax return but owe nothing in U.S. taxes,'' with 41% of 
those who engaged a professional preparer paying more than $1,000 in 
fees.
---------------------------------------------------------------------------
    \1\ http://seatnow.org/survey_report_intro_page/.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
---------------------------------------------------------------------------
country of residence.

The uniquely American definition of ``tax residency''' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson \2\ explain that the failure 
of the IRS to provide access to the following services, individually 
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
    \2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial 
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail (which usually takes 7 to 8 weeks 
and longer).
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report \3\ (released in July of 2015), it 
was stated that:
---------------------------------------------------------------------------
    \3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.

            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.

    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.

    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.

    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.

    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.

    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.

Thank you for your attention to this matter.

Keiko I. Pulin

                                 ______
                                 
                    Letter Submitted by Amy Purcell
U.S. Senate
Committee on Finance

To whom it may concern,

I am writing to request that USA adopt resident-based taxation. I feel 
it is necessary abolish the unfair tax and reporting burdens to which 
USA citizens abroad are subject. I am a USA citizen abroad. I live in 
Australia, where I was born. I have never lived in USA. My USA 
citizenship is due to my American mother. I earn no USA income and own 
no USA assets. I feel that these requirements are burdensome and 
unfair. I would gratefully appreciate your assistance in this matter 
please.

I have been advised that these regulations have been applied to 
everyone, irrespective of economic status or geographic location in 
order to ensure that USA has the opportunity to catch tax cheats. As I 
am sure you are aware, the majority of people are average income 
earners with no opportunity or incentive to cheat tax. Also, the 
majority of people lack the financial sophistication to earn income in 
multiple countries. Accordingly, I feel these regulations are punishing 
the majority of people for the crimes of a few. Applying tax and 
reporting laws to every USA citizen in the world is an over-reaction. 
There would be methods of catching tax cheats without the need to 
resort to such extreme measures. Please consider that this system is 
not catching tax cheats anyway, but it is simply hurting innocent 
people. This is not a good representation of America on an 
international level.

I feel that paying any tax to USA government offers me no benefit since 
I do not live in America. Dual citizens and expats are already paying 
tax in the countries we live in. The services we use are provided by 
the countries we live in, so it is fair we should pay to the countries 
we live in. It is not fair for us to file taxes or to pay taxes to USA 
when we are not currently benefitting from the services provided by 
USA.

I acknowledge that there are foreign income tax concessions. These 
often reduce and even eliminate an American tax liability. However, the 
paperwork involved in this is excessive and time consuming. There is 
also the obvious risk that if I make a mistake on my USA tax statement, 
this could cost me a significant amount of money.

To prevent the risk of expensive mistakes on a tax return, it is 
necessary to hire a tax specialist. However, this is very expensive. On 
average, the price will amount to $650 Australian dollars per year 
filed. This equates to USD$480 per year. This expense is exorbitant for 
an average person, especially when trying to be compliant with law of a 
country we don't live in and don't earn in.

I was shocked to learn that the IRS can tax me on the sale of my 
primary residence here in Australia. I pay for this home out of my 
Australian money which I earn from my Australian job. The services 
provided to that home are provided by Australian governments. It is 
important to note that in Australia, the sale of a primary residence is 
exempt from capital gains tax. While this means that there is no 
obvious risk of double taxation on the capital gain, I still see no 
reason why USA has a right to tax the capital gain, even though I am a 
USA citizen. America has no role in my primary residence and therefore 
should not have the right to tax the capital gain, even though I am a 
USA citizen.

I have also been told that my Australian retirement fund is subject to 
USA tax. In Australia, retirement funds are mandatory. Each time we are 
paid by our employer, our employer deposits part of our pay into a 
retirement fund on our behalf. This is so that we have money to live on 
when we retire. Of course, the money deposited into these retirements 
fund are Australian as it is earned from our Australian jobs. Yet, when 
we retire and withdraw the money to live off, the USA taxes this money. 
USA citizens residing in Australia may end up in poverty in senior 
years because of this as Australian government is phasing out the aged 
pension. I consider the practice of taxing our retirement funds to be 
unfair and uncompassionate.

The Foreign Account Tax Compliance Act (FATCA) has caused great 
difficulty to USA citizens abroad. While I acknowledge that FATCA was 
introduced to prevent USA citizens from avoiding tax by utilizing 
foreign bank accounts, the outcome of this law has been terrible. Many 
USA citizens around the world have been prevented from accessing 
banking services in their country of residence because those banks are 
unwilling to comply with USA's reporting requirement. Accordingly, 
these banks purge themselves of USA clients, thereby leaving the USA 
citizens without access to banking services.

The Foreign Bank Account Reporting (FBAR) also needs to be repealed. 
This requirement is time-consuming and the potential penalties for an 
error or missed FBAR are astronomical. As this reporting requirement 
requires us to state the bank details and not the source of income, 
this process is note helpful to IRS in determining whether the citizen 
abroad may be a tax cheat. The threat of fines ranging between 
USD$10,000 and half the value of the account are a great cause of 
stress to citizens abroad. Also, as stated, the money in our accounts 
is not American in origin anyway. Therefore, I consider that our bank 
accounts are not the business of the USA government and the fines are 
unconscionable.

It has been suggested to me that I consider renouncing my USA 
citizenship if I find the tax obligation to be too onerous. However, it 
is a condition that any tax obligation be complete prior to renouncing 
a USA citizenship. Outstanding fines on income and assets originated 
from our country of residence could prevent successful renunciation. 
Additionally, there is a substantial fee of $2,350 to renounce USA 
citizenship. This fee is not affordable to the average person. 
Considering the renunciation often occurs as a result of unfair tax 
expenses, this $2,350 fee can cause financial distress to an average 
person. Nevertheless, it is noted that the number of renunciations has 
increased significantly since the introduction of FATCA. Removing 
citizenship taxation and FATCA would be significantly reduce the number 
of renunciations of USA citizenship.

As I stated earlier, as a USA citizen abroad, I have no representation 
in USA government. Yet, I am bound by whatever decisions the USA 
government imposes upon me. I have often heard it said that in USA, 
there is a culture of no taxation without representation. Since it is 
not possible to provide USA citizens abroad with representation, I feel 
it is necessary to cancel the taxation obligation in order to comply 
with this requirement.

You will certainly be disappointed to learn that the tax and reporting 
requirements have created tensions between USA homeland citizens and 
USA citizens abroad on social media platforms. Many arguments have 
occurred on social media over this issue as homeland citizens and 
representatives of USA government have attempted to persuade citizens 
abroad to adopt a more positive attitude towards citizenship-based 
taxation as well as voting in USA elections. A number of citizens 
abroad, myself included, have stated in these threads that we see no 
value in voting or participating in civic life in USA when we feel so 
used by USA government. Obviously, this in turn as the effect of 
insulting homeland citizens and representatives. Therefore, the policy 
of taxing citizens abroad is clearly responsible for the perceived lack 
of value in USA citizenship.

I have been told that the citizenship-based approach to taxation rules 
adopted by USA is also only used in Eritrea. Every other country uses a 
resident-based approach to taxation. I consider a resident-based 
approach to taxation to me more equitable as it imposes the financial 
liability as well as the paperwork on those who live there and benefit 
from the services. I feel that USA should consider using a resident-
based approach to taxation.

I would appreciate it if you would please assist in the removal of this 
onerous obligation upon citizens abroad.

Kind Regards,

Amy Purcell

                                 ______
                                 
              Letter Submitted by Elizabeth Ruh, EA et al.
April 8, 2022

U.S. Senate
Committee on Finance

Dear Senators:

We are writing today in a desperate hope that someone will listen to 
us. We are practitioners, many of us small mom and pop operations just 
trying to make an honest living. We are trying to help our fellow 
Americans stay compliant with our voluntary tax system. We are 
exhausted and are in desperate need of your assistance for our 
profession to survive.

Since the pandemic we have been working non stop to keep up with the 
changes, assist the public with learning, applying for and honestly 
obtaining all the various options for COVID Relief. We were learning on 
the fly. Making assumptions (conservative) while we waited on guidance. 
We have weathered mid-season tax law changes that affected returns we 
already filed. Meaning we had to touch completed files all over again 
during our busiest part of the filing season. We have survived shut 
downs. We have been trying for years to get clients refunds released or 
unnecessary letters to be resolved. We are exhausted.

We thought this year would be better. It is not. It seems every single 
return we touch is more complicated than ever. Exploding cryptocurrency 
investors, K2/K3 issues, advanced child tax credit issues, stimulus 
issues. Our clients are exhausted. They are weary of all our questions 
and document requests. They fight us every step of the way because they 
do not understand why this is so hard now. Our administrative staff is 
beat down by the new customer service culture we are experiencing. The 
general public has no idea how complicated taxes have become and they 
are mad we cannot keep up like we used to.

We are exhausted. We want quality of life returned to us. Our filing 
season is now compressed to about three weeks with brokerage statements 
often having until March 15th to be finalized. We are unable to work 
enough hours to get it all done, let alone get it all done well. The 
public does not understand this, and we are taking beatings.

We fully support the IRS receiving all the funding it needs to correct 
their problems, modernize its technology and improve customer service. 
We are leery that the IRS will have success finding more people to 
hire, as is the experience of the rest of the country also trying to 
hire.

Our one main request at this time is that the filing season be 
permanently extended to July 15th or even October 15th. We are wasting 
time filing and trying to calculate extensions when with just a few 
more months available to us we could have just filed the return.

We are exhausted. We need your help to keep this tax system 
functioning.

    Sincerely,

Elizabeth Ruh, EA                   Charles Streig, CPA
Personal Financial Services, LLC

Matthew J. Cordes, EA               Joe Kristan

Scott T Rediger, CPA                Logan Graf, CPA

Chase Helms, EA                     Alicyn McLeod, CPA, Atlanta Tax LLC

Mark Burch, EA                      Andrew Carroll, CPA

Matt Metras, EA                     Scott Sanchez, S&S Accounting, LLC

Denise C Yelvington, CPA, Sheffield 
Advisors                            Katherine Graci

Franklin Bryant, EA                 Adam Markowitz, EA, Howard L 
                                    Markowitz PA CPA

Andra Zachow, Ingalls Associates PA 
CPAs                                Jason Staats

Olivia Henley, EA

                                 ______
                                 
                    Letter Submitted by Linda Scurr
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

I came to live in England from Florida, 30 years ago, after marrying my 
husband, who is English. While I enjoy visiting the U.S. to see family 
and friends, my life is here, and I will most likely never go back to 
the U.S. to reside.

As a result, my financial life is entirely in England, and my income is 
subject to full taxation under English laws. I try very hard to fulfill 
the requirements of the U.S. tax system in addition to the tax 
requirements of England. The reality, though, is that the U.S. 
requirements (especially the myriad of required informational filings) 
get increasingly burdensome every year, and the compliance costs for 
knowledgeable tax preparers are egregious. I usually spend at least 
$500 per year to get my tax return prepared and I can't understand why 
this burden is considered to be acceptable.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey \1\ of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.
---------------------------------------------------------------------------
    \1\ http://seatnow.org/survey_report_intro_page/.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
country of residence. I have an investment trust, for example, to help 
save for my retirement, but have been forced to pay taxes on it to the 
---------------------------------------------------------------------------
U.S. because it is a ``foreign'' company.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal. 

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson \2\ explain that the failure 
of the IRS to provide access to the following services, individually 
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
    \2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial 
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report \3\ (released in July of 2015), it 
was stated that:
---------------------------------------------------------------------------
    \3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.

    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.

    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.

    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.

    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.

    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.

Thank you for your attention to this matter.

Mrs Linda Scurr

                                 ______
                                 
             Stop Extraterritorial American Taxation (SEAT)

                          3 impasse Beausejour

                         78600 Le Mesnil le Roi

                                 France

                            [email protected]

                         http://www.seatnow.org

 April 14, 2022

Please accept this as our submission with respect to the subject of the 
April 7, 2022 Senate Finance Committee Hearing: ``The IRS, the 
President's Fiscal Year 2023 Budget, and the 2022 Filing Season.''

The United States is the only developed nation to impose its tax code 
on all citizens, regardless of where they live, using the same rules 
for both domestic and international taxpayers. Most other countries 
assert the right to tax the worldwide income of residents, but not of 
non-resident citizens. The U.S. taxes the worldwide income of both 
residents (regardless of citizenship) and non-resident citizens. 
Because the Internal Revenue Code has many special and punitive rules 
for ``foreign'' income, assets, and investments, this means that U.S. 
tax rules have a significant impact on the ability of Americans 
overseas to plan for retirement, invest, run small businesses, and have 
bank accounts in the countries where they live. While SEAT strongly 
advocates for a move to taxation based on residence rather than 
citizenship (as widely practiced in the rest of the world), if 
citizenship-based taxation is to continue, it is incumbent on Congress 
to carefully consider the impact of new legislation on this subset of 
American citizens.

The Biden Green Book for fiscal year 2023, released on March 28, 2022, 
contains a number of proposals to both increase tax rates and increase 
the tax base by increasing the number of activities that are taxable 
events. Generally, the proposals include a number of provisions to 
create and enhance taxation on both income from capital and capital 
itself. Significantly the Green Book does not suggest a move away from 
U.S. citizenship taxation toward resident taxation as embraced by the 
rest of the world. In their totality, the proposals (particularly those 
that create income realization events when a gift is made) suggest a 
worsening of the situation for Americans abroad. That said, one 
proposal ``might'' (depending on Treasury) allow for the relaxation for 
the 877A Exit Tax rules, for a narrow group of Americans abroad under 
certain circumstances.

We would like to highlight six proposals in the Green Book that could 
have a disproportionate effect on Americans abroad:

    1.  Raising The Corporate Tax Rate To 28 percent--Creating Subpart 
F Income and Making More Americans Abroad GILTI--Page 2.
    2.  Reducing Phantom Gains and Losses: Simplify Foreign Exchange 
Rate and Loss Rules for Individuals and Exchange Rate Rules for 
Individuals--Page 90.
    3.  Strengthening FATCA: Provide for Information Reporting by 
Certain Financial Institutions and Digital Asset Brokers for the 
Exchange Of information--Page 97.
    4.  Expatriation--The Stick: Extend the Statute of Limitations for 
Auditing Expatriates to Three Years from The Date from Which 8854 
Should Have Been Filed (Possibly Forever)--Page 87.
    5.  Expatriation--The Carrot: Exempting Certain Dual Citizen 
Expatriates from The Exit Tax--Page 87.
    6.  Reform the Taxation of Capital Income--Page 30.

1. Raising the Corporate Tax Rate to 28%

The Internal Revenue Code is a complex machine with many interdependent 
moving parts. Even a change as conceptually simple as raising the 
corporate tax rate can cause unforeseen problems due to interactions 
within the tax code. Raising the corporate tax rate will adversely 
affect Americans abroad with corporations. Unlike Americans living 
inside the U.S., when Americans abroad own a small business 
corporation, that corporation is likely to be ``foreign'' and therefore 
considered a Controlled Foreign Corporation (CFC) under rules found in 
951 to 965 of the Internal Revenue Code. Increasing the U.S. corporate 
tax rate will affect the ability of American entrepreneurs abroad to 
avoid double taxation through exclusions to both Subpart F income and 
GILTI based on the ratio of the effective corporate tax rate paid where 
they live and the U.S. corporate tax rate. Furthermore, as noted in the 
Green Book, increasing the corporate tax rate has the effect of 
increasing GILTI. GILTI and the CFC rules, applied to small businesses 
run by individual Americans abroad, constitute an additional cost that 
their local competitors do not bear and therefore erode the competitive 
position of these entrepreneurs solely because they are American 
citizens.

2. Reducing Phantom Gains and Losses

All American citizens are tethered to the U.S. dollar as their 
functional currency. Yet they live their lives in the currency of the 
country where they reside. Every taxable transaction that takes place 
in that foreign currency must be converted to the U.S. dollar to 
determine its U.S. tax impact. Many Americans abroad have experienced 
the pain of having to pay tax on phantom capital gains. Where an 
American abroad has a mortgage on their principal residence, these 
rules operate separately on the mortgage and the value of the home, 
guaranteeing that there will be a currency gain on one leg of the 
position and a loss on the other. However, to add insult to injury, 
with respect to personal use real estate, the gains are taxable, but 
the losses are not deductible. This peculiar form of the American 
nightmare is found in Internal Revenue Code 988. The proposal to allow 
currency losses on a mortgage to the extent of gain realized on the 
home solves half of this problem. The other side of the transaction 
should be recognized as well by exempting currency gains on the 
mortgage to the extent of losses on the home.

3. Strengthening FATCA

The Green Book recognizes:

    1.  The importance of information exchange; and
    2.  The fact that the U.S. is not meeting its exchange obligations 
under the FATCA IGAs.

This proposal is an attempt to strengthen FATCA (which is why it is of 
interest to individuals) by requiring the U.S. to meet its obligations 
under the FATCA IGAs. The current lack of reciprocity has made the U.S. 
one of the biggest tax havens for non-Americans. But FATCA has an ugly 
side as well. Across Europe it has caused financial institutions to 
deny or limit bank accounts to U.S. citizens residing abroad. As 
regularly suggested by the Taxpayer Advocate, Treasury should use the 
discretion granted by Congress to exempt from FATCA reporting (by both 
FFIs and individuals) accounts held by individuals resident in the 
country or economic zone where the account is located. Americans abroad 
are not evading U.S. taxes by having their wages deposited in a bank 
account where they live.

 4. Expatriation: Extend the Statute of Limitations for Auditing Form 
                    8854

Apparently, there are ``expatriates'' who fail to file Form 8854. This 
change would allow for IRS audits of expatriates who fail to file Form 
8854 for up to three years from the date Form 8854 is filed, thus 
leaving the statute of limitations open if the form is not filed. It 
would be interesting to know whether this proposal is intended to be 
retrospective. This change would definitely encourage more people to 
avail themselves of the provisions in the 2019 ``Relief Procedures For 
Former Citizens''.

 5. Expatriation: Exempting Certain Dual Citizen Expatriates from the 
                    Exit Tax

``Expatriation'' is defined as either ``relinquishing U.S. 
citizenship'' or ``Ceasing to be a Permanent Resident''. The Internal 
Revenue Code defines the tax consequences of ``expatriation'' in 877A 
(which for the definitions of ``covered expatriate'' and ``long term 
resident'' reference 877(a)(2) and 877(e)(2) respectively). The 877A 
Exit Tax rules are harsh and extremely punitive as applied to U.S. 
citizens living outside the United States who have little connection to 
the United States.

Actually, the idea of the United States imposing worldwide taxation on 
individuals with no residential connection to the United States is 
absurd. Many of them don't know they are considered to be U.S. 
citizens. Others learn they are U.S. citizens because they are 
identified by a bank pursuant to the FATCA IGAs. A significant 
percentage don't speak English. It is entirely reasonable that these 
individuals should NOT be subjected to any aspect of U.S. worldwide 
taxation, including the 877A Exit Tax. Furthermore, the Green Book 
frankly admits that there is significant noncompliance with filing Form 
8854. Therefore, in a remarkable and unusual instance of common sense, 
the Green Book proposes an exemption from the Exit Tax rules for 
certain ``dual citizens'' (whether dual citizens at birth or not). . . 
 

Query: Is this an admission from the Biden administration that for the 
purposes of U.S. taxation there really is a difference between U.S. 
citizens who live within the United States and those who live without 
the United States? Could this possibly be treated as a ``crack in the 
wall''--of that most American tradition--the notion that it should 
impose worldwide taxation on individuals with no residential connection 
to the United States?

Conclusion: This proposal would appear to grant Treasury the authority 
(whether by formal regulation or informal notice) to exempt certain 
dual citizens from the 877A Exit Tax rules. In other words, they can 
renounce and simply be done with the USA once and for all. This 
proposal is clearly in the interest of the United States of America (it 
is generating a lot of bad will over this issue), the IRS (clearly the 
biggest victim of U.S. citizenship-based taxation) and the individuals 
impacted (who are being taxed on non-U.S. income while they are tax 
residents of another country). What's not to like?

The real problem is the continued existence of U.S. citizenship-based 
taxation. The time has come to ``Stop Extraterritorial American 
Taxation.''

That said, this proposal would provide relief for the individuals who 
are most unjustly treated under an extremely unjust tax system. If 
adopted, this would become one more example of what SEAT members John 
Richardson, Dr. Karen Alpert, and Dr. Laura Snyder have previously 
proposed as ``A Simple Regulatory Fix For 
Citizenship-based Taxation.''

6. Reform the Taxation of Capital Income

One of the proposals here is to treat transfers of appreciated property 
by gift or on death as realization events for the purpose of taxing the 
capital gain.

For Americans abroad the impact of treating gifts as income realization 
events is (at least) two-fold:

First, Americans abroad may be subject to a U.S. income recognition 
event where there may be no corresponding income recognition event in 
the country where they reside. This is because the United States might 
be imposing tax where there was no actual income realization. The 
country of residence may impose taxation only where there is the 
realization of income. To the extent that this creates a U.S. tax event 
without a corresponding realization event in the other country, the 
proposed taxation on gifts would be similar to the effect of the 
Subpart F, GILTI, Transition Tax and 877A Exit Tax rules. All of these 
are examples where there is a U.S. income realization event with no 
corresponding taxable event in the country of residence.

Second, the Green Book proposes an exemption for gifts made to U.S. 
citizen spouses but NOT to spouses who are not U.S. citizens! This 
continues the U.S. tradition of imposing punitive tax consequences on 
those U.S. citizens who marry non-citizens.

Finally, as goes the complexity of U.S. taxation so goes the difficulty 
of continuing the U.S. extraterritorial tax regime! The proposed 
treatment of gifts as income realization events would be one more step 
in a process of making it impossible for Americans abroad to survive 
under both the tax system of their country of residence and the U.S. 
tax system.

It is time for the United States to abolish citizenship taxation--the 
imposition of U.S. worldwide taxation on people who live in and are tax 
residents of other countries. Instead, the U.S. should join the world 
in adopting residence taxation.

Thank you for your attention to these matters.

Respectfully submitted by:

Stop Extraterritorial American Taxation (SEAT) Board Members 
(info@seatnow.
org):

Dr. Laura Snyder (President)

Dr. Karen Alpert

Suzanne Herman

David Johnstone

Keith Redmond

John Richardson

                                 ______
                                 
             Stop Extraterritorial American Taxation (SEAT)

                          3 impasse Beausejour

                         78600 Le Mesnil le Roi

                                 France

                            [email protected]

                         http://www.seatnow.org

April 14, 2022

Please accept this as our second submission with respect to the subject 
of the April 7, 2022 Senate Finance Committee Hearing: ``The IRS, the 
President's Fiscal Year 2023 Budget, and the 2022 Filing Season.''

The United States is the only developed nation to impose its tax code 
on all citizens, regardless of where they live, using the same rules 
for both domestic and international taxpayers. Most other countries 
assert the right to tax the worldwide income of residents, but not of 
non-resident citizens. The U.S. taxes the worldwide income of both 
residents (regardless of citizenship) and non-resident citizens. 
Because the Internal Revenue Code has many special and punitive rules 
for ``foreign'' income, assets, and investments, this means that U.S. 
tax rules have a very different impact on overseas Americans than on 
their U.S.-resident counterparts. Compliance issues are particularly 
difficult for those with no access to IRS in-person assistance while 
facing complex international information reporting requirements. While 
SEAT strongly advocates for a move to taxation based on residence only 
(as widely practiced in the rest of the world) rather than including 
citizenship as a criterion for taxing worldwide income, if citizenship-
based taxation is to continue, it is incumbent on Congress to carefully 
consider the impact of new legislation on this subset of American 
citizens.

In this submission we would like to focus on four aspects of 
Commissioner Rettig's testimony at the hearing:

    1.  Customer Service Backlog and Paper Returns.
    2.  Identity verification and Online accounts.
    3.  In person assistance.
    4.  Disaster Relief and Advance Child Tax Credits.

Many of the points made are not new. We refer the committee to 
``Mission Impossible: Extraterritorial Taxation and the IRS,'' by Laura 
Snyder, Karen Alpert, and John Richardson (Tax Notes Federal, Volume 
170, March 22, 2021).

1. Customer Service Backlog and Paper Returns

Americans abroad are much more likely to file paper returns rather than 
e-filing. One of the main drivers of this trend is that Americans 
abroad are more likely to be married to non-resident aliens, and most 
tax preparation software does not deal well with the situation where an 
NRA spouse does not have a U.S. Social Security number. The IRS should 
ensure that all free-file providers will allow e-filing of a Married 
Filing Separate return where the spouse is an NRA without a social 
security number.

When an American abroad has an issue with their tax return, they often 
have difficulty getting appropriate assistance from the IRS. Most IRS 
service agents are not trained in the issues that frequently arise on 
an international return, such as non-U.S. retirement savings, non-U.S. 
business or trust structures, and the treatment of non-U.S. government 
assistance or welfare payments. When contacting overseas taxpayers, the 
IRS uses postal mail, which has recently experienced severe delays due 
to the pandemic. Even before the pandemic, taxpayers were reporting 
that they were receiving IRS correspondence months after it had been 
mailed. Add to that the abysmal record of the IRS in answering taxpayer 
phone enquiries, and the service level experienced by Americans abroad 
is well below the poor level of service experienced domestically.

Finally, the persistence of the IRS in sending paper checks for refunds 
to overseas taxpayers is causing particular difficulty. For those 
without a U.S. bank account, cashing a U.S. check can be prohibitively 
expensive, if it is even possible. Much of the rest of the world has 
discontinued the use of paper checks, and in some countries, 
individuals report that they are unable to find a bank that is willing 
to accept a U.S. check at all.

2. Identity verification and online accounts

Many Americans abroad report difficulty in accessing their IRS accounts 
online, often due to the requirement of using a U.S. phone number for 
verification. If the IRS is to be expected to administer a truly 
international tax system to provide the minimum level of service for 
Americans abroad, they must find a way to verify identity that does not 
rely on having a U.S. presence.

3. In person assistance

In his testimony, Commissioner Rettig noted that the IRS provides many 
opportunities for taxpayers to receive free in-person assistance at IRS 
Taxpayer Assistance Centers or through the Volunteer Income Tax 
Assistance program. All of these programs are available only to 
taxpayers currently living inside the U.S. If the U.S. is to continue 
its practice of taxing non-resident citizens, those U.S. taxpayers 
residing outside of the U.S. deserve the same level of taxpayer 
support. In the 1980s the IRS had 15 overseas posts in consulates 
around the world. These were progressively closed until the last four 
closed in 2014 and 2015. The only way for international taxpayers to 
access in-person support in an accessible location is to pay for 
assistance from a U.S. tax professional. This fee is incurred 
regardless of whether any U.S. tax is owed (and about 55 percent of 
returns filed from overseas show no tax owed). Americans overseas are 
not the wealthy tax dodgers of popular myth. They include people from 
all walks of life, homemakers, minimum wage workers, and middle-class 
families in addition to a small number of high net worth individuals. 
For some, the compliance cost of meeting their U.S. tax obligations is 
excessively expensive, especially when compared with their minimal (or 
zero) U.S. tax liability.

4. Disaster Relief

While the last three point dealt with IRS service issues, this final 
issue addresses inequities in the tax code that would require 
Congressional action to correct. By basing jurisdiction to tax on both 
citizenship and residence, the U.S. has taxpayers who live in all 
countries of the world. When tax breaks or relief is based on physical 
presence in the U.S., those U.S. taxpayers residing outside of the U.S. 
are specifically denied the tax breaks or relief allowed to similarly 
situated taxpayers resident inside the U.S. How can such a tax system 
be ``fair and just''?\1\
---------------------------------------------------------------------------
    \1\ The right to a ``fair and just tax system'' is included in the 
Taxpayer Bill of Rights in IRC Sec. 7803(a)(3)(J).

Currently, any taxpayer affected by a federally declared natural 
disaster is eligible for extensions to file or pay taxes and the 
ability to claim disaster-related casualty losses. By definition, this 
applies only to disasters that occur inside the United States. However, 
U.S. taxpayers residing outside of the U.S. may be affected by 
disasters that are just as terrible as those eligible for U.S. tax 
relief. By limiting disaster losses to losses incurred in a federally 
declared disaster zone, Congress is effectively saying that the 
Australian Black Summer bushfires in 2019-20 are less worthy of relief 
than the California wildfires in 2017 and 2018; and that the victims of 
the earthquake that hit Haiti in January 2010 are less worthy of relief 
than victims of Hurricane Katrina. While there will be fewer U.S. 
taxpayers affected by non-U.S. disasters, their pain and financial 
suffering is no less. Equal treatment requires that non-resident 
taxpayers be afforded similar treatment when faced with surviving a 
---------------------------------------------------------------------------
natural disaster.

Similarly, the Advance Child Tax Credits available in 2021 were 
available only for children residing inside the U.S. There were 
American citizen children living outside the U.S. who were just as 
severely impacted by the pandemic and resulting economic disruption. 
These children, however, were generally forced to wait until their 
parents were able to file their 2021 tax return before receiving the 
Child Credits provided by Congress.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

Thank you for your attention to these matters.

Respectfully submitted by:

Stop Extraterritorial American Taxation (SEAT) Board Members 
(info@seatnow.
org):

Dr. Laura Snyder (President)

Dr. Karen Alpert

Suzanne Herman

David Johnstone

Keith Redmond

John Richardson

                                 ______
                                 
                 Letter Submitted by Steven Clark Seeds
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

I moved with my family, aged 14, to Canada in 1968; my father was 
transferred by his employer, Crown Zellerbach Corp. I finished school 
and university in Canada and was granted a Canadian passport, travelled 
for nearly a year and arrived in the UK in 1977, where I've lived and 
worked ever since. As an American by birth, I was required to get a 
U.S. passport in the mid-2000s. I spent nearly $10,000 establishing 
``compliance'' re U.S. tax, and now regularly spend a considerable 
sum--and many hours--preparing and paying for an international tax 
accountant to file yearly with the IRS on my behalf.

I have the vote in the UK, and I registered to vote in the last state 
in which I was resident (Louisiana) in 2021. I never will earn enough--
and have never in the past earned enough--to pay any U.S. income tax 
whatsoever. I am not at all happy about renouncing my U.S. citizenship, 
which is not only hugely expensive and time-
consuming (with a very long waiting list in the UK)--but primarily 
because I am a proud American.

My financial life is entirely in the UK, and my income is subject to 
full taxation under the laws of the UK. I try very hard indeed to 
fulfill the requirements of the U.S. tax system in addition to the tax 
requirements in here in the UK. The reality, though, is that the U.S. 
requirements (especially the myriad of required informational filings) 
get increasingly burdensome every year, and the compliance costs for 
knowledgeable tax preparers are egregious.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
country of residence.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson explain that the failure of 
the IRS to provide access to the following services, individually and 
collectively, constitute violations of the Taxpayer Bill of Rights:

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report (released in July of 2015), it was 
stated that:
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.

    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.

    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.

    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.

    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.

    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.

Thank you for your attention to this matter.

Yours most sincerely

Steven Clark Seeds

                                 ______
                                 
                   Letter Submitted by Ronald Walther
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

In 1975, after an employee relocation of my father ended, my German 
parents decided to return home. I was a child at that time but born in 
the A. The family has remained in Germany since then. Due to my German 
father I also have German citizenship.

Forty-seven years later it turns out, that the USA sees returning home 
of a family as a kind of wrongdoing of anyone who had the misfortune to 
be born at the wrong place (in my case the USA). The USA sees anyone 
born on it's territory but not residing in the U.S. as a sort of ``tax 
cheat'' to be hit by sanctions, no matter if this was ever intended or 
not.

What are these sanctions in detail?
    -  The necessity to file a U.S. federal tax declaration in a for me 
foreign language (in my case English) under highly complex rules (more 
than 400 pages instructions) without any help in a for the taxpayer 
usable form (no written German instructions available). This results in 
very high costs for specialized tax advice for 0 (zero) tax due. (To 
avoid misunderstandings: I pay plenty of German taxes on my income.)
    -  The necessity to declare all ``accounts'' under a procedure that 
was intended to catch high profile criminals (FBAR) under the threat of 
economical destruction for even the smallest mistakes. Also here: no 
written German information available.
    -  To be hit by sanctions by the finance industry because this 
industry is sanctioned themself for having me as customer due to costly 
but useless FATCA reporting.
    -  To accept to remain an employee for my lifetime, because highly 
complex (and thus very expensive) U.S. tax reporting for business 
owners would immediately choke off all attempts to start and continue 
an own business in the country I live in. One can call this a lifetime 
occupational ban.
    -  To be entirely and constantly ignored by any political party in 
the USA. It feels like being a second-class citizen.

My financial life is entirely in Germany, and my income is subject to 
full taxation under the laws of Germany. I try very hard to fulfill the 
requirements of the U.S. tax system in addition to the tax requirements 
in Germany. The reality, though, is that the U.S. requirements 
(especially the myriad of required informational filings) get 
increasingly burdensome every year, and the compliance costs for 
knowledgeable tax preparers are egregious.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey \1\ of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.
---------------------------------------------------------------------------
    \1\ http://seatnow.org/survey_report_intro_page/.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
---------------------------------------------------------------------------
country of residence.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      The right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      The right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      The right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      The right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson \2\ explain that the failure 
of the IRS to provide access to the following services, individually 
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
    \2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial 
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report \3\ (released in July of 2015), it 
was stated that:
---------------------------------------------------------------------------
    \3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.

    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.

    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.

    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.

    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.

    6.  A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals. U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.

Thank you for your attention to this matter.

Ronald Walther

                                 ______
                                 
             Letter Submitted by Edward Francis Wundheiler
Dear Chairman Wyden, Ranking Member Crapo, and Members of the 
Committee:

I am an accidental American born and raised overseas. My father was 
holocaust survivor who immigrated to United States, joined the Army, 
fought in Korean War, became a veteran and had to move overseas. We 
ended up living our entire life in Brazil. However, I am a registered 
voter in New York State where I have family ties.

My financial life is entirely in Brazil, and my income is subject to 
full taxation under the laws of Brazil which is already a tax nightmare 
well know globally. I try very hard to fulfill the requirements of the 
U.S. tax system in addition to the tax requirements in Brazil. The 
reality, though, is that the U.S. requirements (especially the myriad 
of required informational filings) get increasingly burdensome every 
year, and the compliance costs for knowledgeable tax preparers are 
egregious.

The extraterritorial application of the U.S. federal income tax system 
is a painful issue for the 9 million U.S. citizens who reside outside 
the United States. In a survey \1\ of 1,564 overseas resident citizens 
conducted by Stop Extraterritorial American Taxation (``SEAT''), an 
independent, non-partisan not-for-profit association, 46% of 
participants agreed with the statement ``I pay significant fees for 
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with 
41% of those who engaged a professional preparer paying more than 
$1,000 in fees.
---------------------------------------------------------------------------
    \1\ http://seatnow.org/survey_report_intro_page/.

This is a reflection of the burden non-residents face due to complex 
information reporting requirements related to ordinary banking, 
investment and pension products which are ``foreign'' to the United 
States but just a part of living an ordinary financial life in one's 
---------------------------------------------------------------------------
country of residence.

The uniquely American definition of ``tax residency'' includes the 
imposition of taxation on the worldwide (including non-U.S. source) 
income of persons who are tax residents of other countries. This system 
requires the IRS to do the impossible: to administer not only a 
domestic tax system for U.S. residents and a system of source taxation 
for non-resident aliens, but also an extraterritorial one whose details 
are defined by unique interactions with the tax codes of other 
countries in the world.

Administering an extraterritorial tax system has become an overwhelming 
task, both procedurally and substantively. The IRS cannot remotely 
serve U.S. tax residents in the more than 100 countries in the world 
where they live, let alone in the languages that they speak. Nor can 
the IRS know how U.S. laws apply to the local financial services, small 
business structures, and retirement savings plans that are common in 
all those other countries.

Indeed the IRS itself has identified ``international taxpayers'' as a 
community which is underserved by the IRS. Although the IRS's 
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens 
Abroad,'' is helpful, it does not adequately enable non-resident 
taxpayers to understand their U.S. tax obligations in the context of 
the financial systems of the countries in which they live. Since IRS 
guidance is not sufficient for non-resident taxpayers to accurately 
understand how the U.S. tax system applies to them, they require the 
support of professional tax service providers, which is unaffordable 
for many.

The IRS's inability to provide non-resident taxpayers with essential 
services violates several aspects of the Taxpayer Bill of Rights, 
including the following:

      the right to be informed, including the right to know what to do 
to comply with tax laws and the right to receive clear explanations.
      the right to quality service, including the right to receive 
prompt service and clear and easily understandable communications from 
the IRS.
      the right to pay no more than the correct amount of tax, 
including the right to have the IRS apply all tax payments properly.
      the right to a fair and just tax system, including the right to 
expect the tax system to consider facts and circumstances that might 
affect taxpayers' underlying liabilities and ability to timely provide 
information.

In order for the IRS to fairly administer the system of 
extraterritorial taxation which the United States currently imposes, 
the IRS must provide equal levels of service to both taxpayers resident 
in the United States and non-resident U.S. citizens. The level of 
service currently provided by the IRS is highly unequal.

In a paper entitled, ``Mission Impossible: Extraterritorial Taxation 
and the IRS'' published in the Tax Notes Federal journal, authors Laura 
Snyder, Karen Alpert and John Richardson \2\ explain that the failure 
of the IRS to provide access to the following services, individually 
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
    \2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial 
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.

      In-person assistance.
      Toll-free telephoning.
      Knowledgeable IRS agents.
      Online accounts.
      E-filing.
      Timely delivery of postal mail.
      Use of other languages.
      Explanations of tax obligations.
      Making payments to the IRS.
      Receiving payments from the IRS.
      Third-party assistance.
      Low income taxpayer clinic.
      IRS internal organization.

According to Snyder, et al., these failures when considered as a whole, 
``manifest a systemic pattern of discriminatory treatment of 
international taxpayers as compared with domestic taxpayers. The 
collective failures are evidence that the IRS is either unable or 
unwilling to administer an extraterritorial tax system.''

With limited ability to interface with non-resident taxpayers, the IRS 
has shut itself off from taxpayers, and as a result is unable to 
determine whether the taxpayer is providing accurate information, 
unless the IRS selects his or her return for audit. For their part, 
Americans living abroad are subject to potentially devastating 
penalties for failure to file a variety of documents accurately, even 
for inadvertent non-compliance. According to the SEAT survey, 80% 
``experience personal stress in relation to U.S. taxation,'' a large 
part of which is due to the constant sense of fear because of the 
excessive penalties that could be applied for making an honest mistake 
in tax compliance. The inability of the IRS to address their questions 
makes it more likely that filers will get it wrong. As a result, the 
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic 
citizens.

The IRS should take immediate steps to address the many valid concerns 
that have been raised by Americans abroad. If the IRS is unwilling or 
unable to administer a system of extraterritorial taxation, then it is 
time for Congress to take action to cease the imposition of tax on the 
non-U.S. source income of non-residents. The cost-benefit analysis of 
the impact of a transition from 
citizenship-based taxation to a residence-based system of taxation 
should include an assessment of the investments which would be required 
to enhance the capabilities of the IRS to provide fair and equitable 
support to non-resident taxpayers under the current system.

The practice of imposing U.S. worldwide taxation on individuals, who 
are tax residents of other countries, because of their citizenship is a 
uniquely American practice. In 2015, the Senate Finance Committee 
embarked on an extensive study of the U.S. international taxation. On 
the last page of the 82-page report \3\ (released in July of 2015), it 
was stated that:
---------------------------------------------------------------------------
    \3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
            F. Overseas Americans
        According to working group submissions, there are currently 7.6 
        million American citizens living outside of the United States. 
        Of the 347 submissions made to the international working group, 
        nearly three-quarters dealt with the international taxation of 
        individuals, mainly focusing on citizenship-based taxation, the 
        Foreign Account Tax Compliance Act (FATCA), and the Report of 
        Foreign Bank and Financial Accounts (FBAR).

        While the co-chairs were not able to produce a comprehensive 
        plan to overhaul the taxation of individual Americans living 
        overseas within the time-constraints placed on the working 
        group, the co-chairs urge the Chairman and Ranking Member to 
        carefully consider the concerns articulated in the submissions 
        moving forward.

It is now 2022 and there has been no consideration of the taxation of 
U.S. citizens who live outside the United States as tax residents of 
other countries. Notably, in the Spring of 2021, the Senate Finance 
Committee conducted numerous hearings about international tax issues. 
In spite of numerous submissions by impacted individuals and advocacy 
groups, the issues of Americans abroad were not considered. No one 
representing Americans abroad was invited to be a witness.

The combination of U.S. citizenship-based taxation and FATCA is 
destroying the lives of U.S. citizens living outside the United States 
who are bona fide residents (and tax residents) of other countries. 
Issues causing a particularly devastating impact include:

    1.  Double taxation--due to misalignment of tax systems--that 
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign 
Tax Credit, or existing Tax Treaties.

    2.  Disproportionately high tax-preparation costs and excessive 
compliance risks associated with information reporting required for 
financial assets held in a U.S. citizen's country of residence, which 
harms ordinary Americans who are unable to afford sophisticated tax 
preparers, which (as noted) can be prohibitively expensive even if no 
tax is owed.

    3.  Excessively large and regressive penalties related to 
information reporting errors that far exceed taxes owed or balances of 
accounts concerned and individuals' ability to pay.

    4.  Americans abroad with a non-U.S. citizen spouse facing 
discriminatory treatment in the tax code and greater difficulty in 
meeting filing obligations due to the lack of a Social Security Number 
for their spouse.

    5.  Corporate tax rules intended to apply to overseas subsidiaries 
of multinational corporations that are applied to small businesses 
owned by Americans residing abroad, resulting in unreasonably high 
compliance costs and punitive taxation of undistributed income.

    6.   A lack of access to necessary financial products and services 
caused by a mix of burdensome reporting obligations and punitive 
treatment of local products in the U.S. tax code.

I urge the Senate Finance Committee to hold a hearing focused on the 
difficulties U.S. citizens who reside outside the United States are 
facing in navigating the increasingly complex extraterritorial tax 
compliance regime that the U.S. imposes on its non-resident citizens. 
These issues are not well known or understood, but they are a 
tremendous burden on millions of ordinary people who happen to live 
overseas.

The best solution to this problem is for the U.S. to come into 
alignment with every other developed nation on the planet and move to a 
residence-based taxation system for individuals.  U.S. citizens who are 
tax residents of other countries would continue to be liable to pay 
U.S. Federal income tax on any income which is effectively connected 
with the United States, as all non-resident aliens do, by using Form 
1040-NR instead of Form 1040.

Thank you for your attention to this matter.

                                 [all]