[Senate Hearing 114-181]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
YEAR 2016
----------
TUESDAY, MARCH 3, 2015
U.S. Senate,
Subcommittee of the Committee on Appropriations,
Washington, DC.
The subcommittee met at 2:35 p.m., in room SD-124, Dirksen
Senate Office Building, Hon. John Boozman (chairman) presiding.
Present: Senators Boozman, Moran, Coons, and Mikulski.
DEPARTMENT OF THE TREASURY
Office of the Secretary
STATEMENT OF HON. JACOB LEW, SECRETARY
opening statement of senator john boozman
Senator Boozman. The Subcommittee on Financial Services and
General Government will come to order.
Good afternoon. The subcommittee, as I said, will come to
order. Today marks the first hearing of the Financial Services
and General Government Subcommittee for the 114th Congress.
This is also my first hearing as subcommittee chairman, and I
am pleased to serve alongside the new ranking member, my good
friend Senator Coons.
I would also like to acknowledge the other members of our
subcommittee--Senator Moran, Senator Lankford, and Senator
Durbin. Although our subcommittee is small, the number of
agencies we fund is large, and their impact on our economy is
significant. I am confident that our members are up to the task
before us.
As we begin this important hearing to review the budget
request of the Department of the Treasury and the Internal
Revenue Service, we welcome our witnesses, Secretary Jacob Lew,
Commissioner John Koskinen--Koskinen. I will bet I am not the
first one that struggled with that a little bit. Boozman?
Boozman?
Voice. It took me 4 years to learn it. So you got more
time.
Senator Boozman. Very good. And the Treasury Inspector
General for Tax Administration, J. Russell George.
Thank you for being here. We look forward to your
testimony.
As members of this subcommittee, we have a tremendous
responsibility to ensure the hard-earned tax dollars from
millions of Americans are spent appropriately. Unfortunately,
the President has put forth a budget that is out of touch with
the needs and concerns of hard-working taxpayers. In his budget
for fiscal year 2016, the President proposes to create $2.1
trillion in new taxes, increase spending by 65 percent, and add
$8.5 trillion to the debt over the next 10 years.
While hard-working Arkansans have been forced to cut their
spending significantly in the last few years, the President has
been unwilling to do the same in Washington. Our country is in
need of serious budgeting. All too often, Washington loses
sight of the fact that every dollar the Government spends comes
out of the pocket of the taxpayer and is one less dollar that a
taxpayer could spend to provide for their family, grow their
businesses, or help their neighbor.
As members of this subcommittee, we have a responsibility
to ensure that decisions about Federal funding are made with
those taxpayers in mind. Nowhere is the need for oversight more
apparent than in the agencies before us today.
When the Internal Revenue Service (IRS) takes actions that
breach the trust of the American people, it undermines
taxpayers' faith in the impartiality of the agency. This self-
inflicted damage harms the credibility that is essential for
our voluntary compliance system to function.
Americans have lost faith in the institution, and you have
a responsibility to regain their trust. We have all heard too
often that investigations into these issues are distracting and
that everyone should move on. Unfortunately, to taxpayers,
these responses appear to reflect a continued lack of
accountability and a lack of leadership.
To repair that damage, there has to be fundamental change
in the agency's culture, and that change must begin with
complete transparency and acceptance of responsibility. And
unfortunately, there is continued evidence of a culture that is
simply out of touch with taxpayers.
For example, hiring employees with past performance or
conduct issues undermines the public trust in tax
administration. Additionally, it weakens the public's
confidence in the IRS's ability to safeguard taxpayers' rights
and privacy.
Making bonuses a priority does not help the IRS regain the
trust of taxpayers or raise confidence that the agency will
enforce tax laws impartially without regard to an individual's
exercise of their constitutional rights.
As was the case in the previous fiscal year, in 2015, one
of the IRS's first actions after the enactment of their
appropriations bill was to announce they would pay out $67
million in awards to employees. Once again, IRS management
seems to have forgotten that their most important customers
aren't their own employees. They are the American people.
It is disappointing to see that the IRS budget request is
again unrealistic. The President's request for the IRS for
fiscal year 2016 is almost $12.9 billion, a $2 billion
increase.
Under the Budget Control Act, the discretionary spending
caps for fiscal year 2016 limit nondefense spending to $493
billion. This represents an increase of $1.1 billion over the
fiscal year 2015 level for nondefense departments and agencies.
Yet for fiscal year 2016, the IRS has increased, has
requested--I am sorry. Yet for fiscal year 2016, the IRS has
requested a base increase that is higher than the total
increase available for all nondefense discretionary spending.
Also troubling is the request for an additional $667 million
above the limit on spending set by current law.
Treasury and the IRS are fully aware that such cap
adjustments were not included in the Budget Control Act of
2011. No cap adjustment for the IRS has been authorized since
then.
Given this fact, submitting an unrealistic request simply
sets unreasonable expectations. This is even more troubling
when funding for critical work--for example, to protect
taxpayers in the future from the trauma of identity theft--is
left to be funded through a cap adjustment.
The American people want a government that works for them,
not against them. They want us to curb Washington's wasteful
spending habits; make the Government more efficient, effective,
and accountable; and pursue policies that create economic
opportunities for everyone.
These are the priorities of the American people. They will
be reflected in the critical oversight we conduct as we
consider the fiscal year 2016 budget request for all of the
agencies within our jurisdiction.
And with that, I yield back and turn to Senator Coons.
statement of senator christopher a. coons
Senator Coons. Thank you, Mr. Chairman.
Thank you for bringing us together today. I look forward to
working with you, and I hope that with new blood, new energy,
and a new approach, we might build a strong partnership on the
subcommittee.
I would like to welcome our witnesses. Secretary Lew,
Commissioner Koskinen, and Inspector General George, I look
forward to your testimony. You have important and difficult
jobs under challenging scenarios, and I just want to thank you
for your service at the outset.
Responsible stewardship of taxpayers' hard-earned money is
among the most important obligations we have in public service.
As members of the Appropriations Committee, it is important we
work diligently and together to uphold the trust our
constituents put in us. I recognize there will be areas where
we disagree, but it is my sincere hope we can approach our work
with the seriousness it deserves.
Today, we consider the budget for the Treasury Department,
an agency central to our Government's stability and our
Nation's fiscal health. I welcome the chance to examine
Treasury's budget request and have what I hope will be a frank
discussion about what is required to fulfill your
responsibilities.
Now I am eager to learn how Treasury has adapted to budget
constraints and how you will deal with resource competition and
competing demands. Much of Treasury's budget goes to the IRS,
but there are a number of important bureaus and functions I
look forward to hearing about.
Three in particular, I am pleased the President requested
strengthening the Community Development Financial Institutions
Fund, the CDFI Bond Guarantee Program, and the State Small
Business Credit Initiative. I believe programs like these can
provide access to capital for small businesses around the
country and help them to grow jobs and support affordable
housing and develop communities. I look forward to talking more
about those.
I do have concerns about the Department's proposal to cut
funding for the Office of Terrorism and Financial Intelligence,
given pressing issues and the sanctions enforcement against
Iran and Russia. I look forward to hearing your thoughts on
that topic.
No Government agency is more visible to the American people
than the Internal Revenue Service. It collects the revenues
that fund 95 percent of our Federal Government, and each year,
more than 80,000 public servants at the IRS make hundreds of
millions of contacts with taxpayers as the face of Government
to more Americans than any other agency.
It is my hope, as the National Taxpayer Advocate has
suggested, that the IRS could be best described as the accounts
receivable department of our Government, and not by less
positive monikers. For fiscal year 2016, the President's budget
requests an 18 percent funding increase for the IRS.
On this point, I think it is valuable that we reflect on
the fact that while there is, I think, a broad bipartisan
dislike of paying taxes, we shouldn't cut off our nose to spite
our face. The more we cut IRS funding, the harder it becomes
for the agency to respond to the needs of taxpayers, to
investigate tax fraud or abuse.
I hear from Delawareans who are frustrated when their calls
go unanswered or it takes an interminably long time to connect
and get responsible answers to questions. I am sure many other
Senate offices have the same experience.
Every dollar cut from the IRS budget results in $7 fewer
revenue collected, by one estimation by former IRS Commissioner
Douglas. That was a 2011 estimate.
So we have a lot to discuss today, ways that we can improve
the functioning and operation of the IRS, its responsiveness
and engagement, ways that we can improve the functioning and
operation of the Treasury Department.
The fiscal year 2016 funding forecast is not encouraging,
as significant budgetary constraints do remain in place, and I
look forward to hearing Secretary Lew and Commissioner
Koskinen's perspectives on what is required to deliver top-
notch service to taxpayers and to enforce our laws with
integrity and fairness.
prepared statement
I look forward to working with you, Chairman Boozman, and
to having an open exchange of ideas as our hearings progress.
Thank you.
[The statement follows:]
Prepared Statement of Senator Christopher A. Coons
Thank you, Mr. Chairman, for bringing us together today. I'm
looking forward to working together with you and hope that with new
blood, new energy, and new enthusiasm we can build a strong partnership
on this subcommittee.
I'd like to welcome our witnesses, Secretary Lew, Commissioner
Koskinen, and Inspector General George. You have incredibly difficult
and important jobs under challenging scenarios, so I am thankful for
your service and appreciate you joining us here today.
Responsible stewardship of taxpayers' hard earned money is among
the most important obligations we have in public service. And as
members of the Appropriations Committee it is critical that we work
diligently, together, to uphold the trust our constituents have put in
us. Of course, I recognize there will be areas where we disagree, but
it is my sincere hope that we can approach our work with the
seriousness and humility it deserves.
Today, on this subcommittee, we consider the budget for the
Treasury Department, an agency that is central to our Government's
stability and our Nation's fiscal health.
I welcome today's opportunity to examine the Treasury Department's
budget request and have what I hope will be a frank discussion about
where the Department is today, where it needs to be, and how we can
work together to help Treasury fulfill its vital and broad
responsibilities.
At a time of constrained budgets, I am eager to learn from our
witnesses about how Treasury has adapted. I know that a gap has
remained in recent years between what the Department has requested and
how much funding it has received. If that persists, what will be the
impact on Treasury's ability to carry out its important missions? How
will Treasury prioritize scarce resources amid competing demands?
I'd encourage our witnesses to use today's public forum as an
opportunity to clearly articulate their most compelling case for what
they need and why.
It's critical that we gain a deeper understanding and appreciation
for how funding and management decisions will affect Treasury's
operations in the next year and in the years to come.
Now, while most of the Treasury Department's funding will go to the
IRS, the Department includes a number of other bureaus and offices that
carry out a wide array of important activities, from forecasting
economic indicators and managing the Federal Government's spending, to
combatting money laundering and fighting financial crimes.
There are three programs in particular, for which I'm pleased the
President has requested increased funding or strengthening--the
Community Development Financial Institutions fund, CDFI bond guarantee
program, and the State Small Business Credit Initiative. Programs like
these provide access to capital for small businesses around the
country. They help businesses create jobs, build affordable housing,
develop our communities, and grow our economy, especially in
economically distressed neighborhoods.
I do have concerns, however, about the Department's proposal to cut
funding for the Office of Terrorism and Financial Intelligence, which
has the critical responsibility of enforcing economic sanctions. At a
time when sanctions regimes with Iran and Russia are at the forefront
of our foreign policy, it's crucial that we track and halt the
financing of terrorist groups like ISIL, we need to ensure we devote to
the office adequate funding. I will be interested to hear from the
witnesses how the requested level of funding will support this office
and its mission.
Now, there is of course no Government agency that is more visible
to the American people, than the Internal Revenue Service. The IRS
collects the revenues that fund more than 95 percent of our Federal
Government's operations, public services, and programs. Each year, the
more than 80,000 public servants at the IRS make hundreds of millions
of contacts with American taxpayers and businesses. As the face of
Government to more American citizens than any other agency, it is apt
that the National Taxpayer Advocate has described the IRS as the
``Accounts Receivable Department'' of our Government.
For fiscal year 2016, the President's budget requests an 18 percent
funding increase, which would fund the IRS at a total of $12.93
billion. On this point I'd like to make an important observation. It
won't be lost on anyone here that this is a fairly substantial funding
increase--one that asks for an adjustment on previous budget caps. But
what we need to remember is that in our dislike of paying taxes--which
is a bipartisan dislike--we shouldn't cut off our nose to spite our
face. The more we cut IRS funding, the harder it becomes for the agency
is to respond swiftly to the needs of taxpayers or investigate tax
fraud or abuse.
My office often hears from Delawareans who are frustrated when
their calls to the IRS go unanswered or it takes a long time to connect
with an official at the IRS. I would imagine many Senate offices hear
from constituents with similar concerns. Nationally, less than half of
the callers to the IRS actually reach someone on the other end, and
those who do have to wait an average of more than half an hour. And as
former IRS Commissioner Douglas Shulman stated in 2011, every dollar
that is cut from the IRS budget results in seven fewer dollars of
revenue collected. So I'd remind us all that funding the IRS at the
levels it needs does not lead to a more intrusive government or higher
taxes--it leads to a less wasteful, less responsive government.
We have a lot to discuss today, and some important ground to cover.
The fiscal 2016 funding forecast is not encouraging as budgetary
constraints remain in place. It will be helpful to hear Secretary Lew
and Commissioner Koskinen's perspectives on what is required to deliver
top notch service to taxpayers and to enforce our tax laws with
integrity and fairness to all. I know Delawareans expect no less.
I look forward to working with you, Chairman Boozman, and to having
an open exchange of ideas as our fiscal 2016 process continues. Thank
you.
Senator Boozman. Thank you, Senator Coons.
And now we turn to Secretary Lew and look forward to his
testimony.
SUMMARY STATEMENT OF HON. JACOB LEW
Secretary Lew. Thank you, Chairman Boozman, Ranking Member
Coons, members of the subcommittee. It is a pleasure to be here
to discuss the Treasury's budget.
As we meet here today, our economy and our country have
made considerable progress that we can all take pride in. By
almost every metric--from job creation, economic growth, and
deficit reduction to manufacturing, exports, and energy
independence--America has come a long way.
The fact is, in 2014, we saw the best year of job growth
since the 1990s, and over the past 5 years, America's
businesses have created nearly 12 million new jobs, the longest
stretch of sustained private sector job growth in our Nation's
history.
Our economy continues to expand, with healthy growth in
2014 and forecasts projecting above-trend growth for this year.
We continue to outperform our trading partners, many of which
are still struggling to recover from the global economic
crisis.
American exports set another record last year for goods and
services sold overseas, and this record was largely driven by
small businesses. Our deficit, which has fallen by almost
three-quarters, is forecast to decline even further in the next
fiscal year. These achievements underscore America's enduring
economic strength, and we can keep this progress going with the
right policies and with bipartisan cooperation.
The President's budget is a blueprint for Washington to
work together, and it not only lays out a path to find common
ground, it puts forward sensible solutions to make sure every
American who works hard has a chance to get ahead.
This budget knocks down barriers for working families so
things like child care, mortgage payments, and a college
education are more affordable. It modernizes our job training
system, fuels research and development, and repairs our roads,
bridges, and ports so more companies will invest, locate, and
hire in the United States. It reforms our tax system so we can
eliminate special interest loopholes, strengthen the middle
class, and level the playing field for business.
The bipartisan Budget Act of 2013 reversed a portion of
sequestration and allowed for higher investments in 2014 and
2015, but it did nothing to alleviate sequestration in 2016.
Sequestration imposed arbitrary spending cuts that are bad for
our economy and for our security.
These across-the-board cuts were never intended to go into
effect. Rather, they were purposely unpalatable to create
pressure to pass balanced, responsible deficit reduction.
Congress should act to provide acceptable funding to meet our
domestic and national security requirements.
As part of the President's approach, Treasury's budget will
allow the department to carry out its vast responsibilities
efficiently and effectively. Treasury is instrumental in
helping shape and implement the President's economic policies,
and today's request will allow the department to promote
economic prosperity, fiscal responsibility, and a resilient
financial system even as it addresses our national security
objectives and bolsters stability at home and abroad.
The Treasury Department touches the lives of virtually
every American through our work to responsibly manage the
Government's finances, streamline and reform the tax system,
fuel lending to small businesses, spur economic development in
struggling communities, advance our strategic interests, make
Social Security payments, and produce our Nation's currency.
Since President Obama took office, the Treasury Department
has had to marshal its resources to confront deep domestic and
global challenges, and we have consistently met our obligations
efficiently and at the lowest cost to taxpayers. This budget
request continues to achieve savings and fund vital programs
alongside strategies that will make the Department more
effective.
The primary area where we are requesting additional
resources is in the Internal Revenue Service. Funding for the
IRS has been cut dramatically over the past 5 years. These cuts
amount to a total of $1.2 billion, or 10 percent of the
agency's budget.
As a result, taxpayers now face longer and unacceptable
wait times on the phone, and it takes the IRS longer to respond
to taxpayer correspondence. A sustained deterioration in
taxpayer service, combined with reduced enforcement activity,
presents serious long-term risks for the U.S. tax system, which
is based on voluntary compliance.
The Treasury budget request restores funding to the IRS so
it can provide an acceptable level of customer service that the
American taxpayers deserve, as well as continued modernization
to meet legislative mandates set by Congress. These funds will
help the IRS to update antiquated computer systems and protect
taxpayer information.
In addition, we are seeking an adjustment of the program
integrity cap to allow the IRS to invest in enforcement
initiatives, investments that will generate a sizable return.
To be specific, it will yield $60 billion in additional revenue
at a cost of $19 billion, meaning it will reduce the deficit by
$41 billion over the next 10 years.
This budget also includes additional funding so Treasury
can meet its obligations under the Digital Accountability and
Transparency Act and provide Americans with the most accurate
information about Government spending. On top of that, we are
requesting a reauthorization of programs that have proven
results.
For instance, the budget proposes an extension of the
Community Development Financial Institution Fund's Bond
Guarantee Program, which unlocks long-term financing for
financial institutions in underserved communities. It proposes
a new investment in the State Small Business Credit Initiative,
which leverages private lending to strengthen small businesses
nationwide.
PREPARED STATEMENT
In closing, I want to thank the talented team of public
servants at the Treasury Department. They are dedicated to the
work of the Department and committed to the American people. I
am proud to represent them here today, and on behalf of these
hard-working men and women, I want to say how much we
appreciate the support of this committee.
Thank you, and I look forward to answering any questions
that you have.
[The statement follows:]
Prepared Statement of Hon. Jacob J. Lew
Chairman Boozman, Ranking Member Coons, members of the
subcommittee, thank you for giving me the opportunity to appear before
you today to discuss Treasury's fiscal year 2016 budget.
As we meet here this morning, our economy and our country have made
considerable progress that we can all take pride in. By almost every
metric--from job creation, economic growth, and deficit reduction to
manufacturing, exports, and energy independence--America has come a
long way. The fact is, in 2014, we saw the best year of job growth
since the 1990s, and over the past 5 years, America's businesses have
created nearly 12 million new jobs--the longest stretch of sustained
private sector job growth in our Nation's history. Our economy
continues to expand, with healthy growth in 2014 and forecasts
projecting above-trend growth for this year. We continue to outperform
our trading partners, many of which are still struggling to recover
from the global economic crisis. American exports set another record
last year for goods and services sold overseas, and this record was
largely driven by small businesses. And our deficit, which has fallen
by almost three-quarters, is forecast to decline even further in the
next fiscal year.
These achievements underscore America's enduring economic strength,
and the continued progress we can make with the right policies and
bipartisan cooperation. The President's budget is a blueprint for
Washington to work together. It not only lays out a path to find common
ground, it puts forward sensible solutions to make sure every American
who works hard has a chance to get ahead.
This budget knocks down barriers for working families so things
like child care, mortgage payments, and a college education are more
affordable. It modernizes our job training system, fuels research and
development, and repairs our roads, bridges, and ports so more
companies will invest, locate, and hire in the United States. And it
reforms our tax system so we can eliminate special-interest loopholes,
strengthen the middle class, and level the playing field for
businesses.
At the end of 2013, policymakers came together on a bipartisan
basis to partially reverse sequestration and to pay for higher
discretionary funding levels with long-term reforms. We have seen the
positive consequences of that bipartisan agreement for our ability to
invest in areas ranging from research and manufacturing to
strengthening our military. We have also seen the positive consequences
for the economy, with an end to mindless austerity and manufactured
crises contributing to the fastest job growth since the late 1990s. The
President's budget builds on this progress by reversing sequestration,
paid for with a balanced mix of commonsense spending cuts and tax
loophole closers, while also proposing additional deficit reduction
that would put debt on a downward path as a share of the economy.
Meanwhile, the President has made clear that he will not accept a
budget that reverses our progress by locking in sequestration going
forward. Locking in sequestration would bring real defense and non-
defense funding to the lowest levels in a decade. As the Joint Chiefs
and others have outlined, that would damage our national security,
ultimately resulting in a military that is too small and equipment that
is too old to fully implement the defense strategy. It would also
damage our economy, preventing us from making pro-growth investments in
areas ranging from basic research to early childhood education and our
Nation's infrastructure. As the President has stated, he will not
accept a budget that severs the vital link between our national and
economic security, both of which are important to the Nation's safety,
international standing, and long-term prosperity.
As part of the President's approach, Treasury's budget request will
allow the department to carry out its vast responsibilities efficiently
and effectively. Treasury plays a key role in shaping and implementing
the President's economic policies. Today's request will allow the
department to promote economic prosperity, fiscal responsibility, and a
resilient financial system even as it advances our national security
objectives and bolsters stability at home and abroad. The Treasury
Department touches the lives of nearly every American through our work
to responsibly manage the Government's finances, streamline and reform
the tax system, fuel lending to small businesses, spur economic
development in struggling communities, advance our strategic interests,
make Social Security payments, and produce and modernize our Nation's
currency.
Since President Obama took office, the Treasury Department has had
to marshal its resources to confront deep domestic and global
challenges, and we have consistently met our obligations efficiently
and at the lowest cost to the taxpayer. Treasury's fiscal year 2016
budget continues to achieve savings and fund vital programs alongside
strategies that will make the department more effective. The request
includes strategic investments in improved taxpayer services,
enforcement, and technology at the Internal Revenue Service (IRS);
funding for select high priorities such as implementing the Digital
Accountability and Transparency Act of 2014; and increasing the
availability of healthy food options for low-income communities via the
Healthy Food Financing Initiative.
investing in a high-performing internal revenue service
Despite the IRS's critical role of collecting more than 90 percent
of the Federal revenue, Congress has continually reduced funding for
the agency over the last 5 years by a total of $1.2 billion or 10
percent. A sustained deterioration in taxpayer services combined with
reduced enforcement activity could create serious long-term risk for
the U.S. tax system, which is based on voluntary compliance.
The fiscal year 2016 Treasury budget includes a $1.3 billion
increase within the discretionary caps to begin restoring taxpayer
services to acceptable levels. Funds are also included to continue
major IT projects, which aim to protect taxpayer information, modernize
antiquated systems, continue development of a state-of-the-art online
taxpayer experience, and build efficiencies throughout the agency.
Finally, funds are included for initiatives that are critical to full
and effective IRS implementation of legislative mandates including the
Affordable Care Act and the Foreign Account Tax Compliance Act.
In addition, the budget includes $667 million--financed by a
proposed program integrity cap adjustment for enforcement initiatives--
that provide a high return on investment. This proposed cap adjustment
funds strategic investments that will help close the tax gap and return
$6 for every dollar invested, once fully implemented in fiscal year
2018. This multi-year effort is expected to generate $60 billion in
additional enforcement revenue at a cost of $19 billion, thereby
reducing the deficit by $41 billion over the next 10 years.
Treasury's request includes substantial investments to help
strengthen taxpayer services and to adequately fund tax enforcement to
make sure all taxpayers play by the same rules.
increasing transparency in federal financial management
The Treasury budget also includes funding for efforts to increase
transparency and accountability in Federal financial management and to
implement the Digital Accountability and Transparency Act of 2014 (DATA
Act). The DATA Act requires additional Federal spending data to appear
on USAspending.gov as well as the establishment of government-wide
financial data standards for any Federal funds made available to or
expended by Federal agencies and entities receiving these funds.
strengthening the economy and creating job opportunities
The Treasury budget request makes key investments that will help
spur economic growth and job creation and increase financial access and
capability for local communities and small businesses, while boosting
confidence in the safety and soundness of the U.S. financial system.
Our request includes $233.5 million for the Community Development
Financial Institutions (CDFI) Fund, which promotes economic development
investments in low-income communities. The budget proposes to extend
the CDFI Bond Guarantee program through fiscal year 2017, to provide a
source of long-term capital to financial institutions that support
lending in underserved communities. Of the total request, $35 million
for the Healthy Food Financing Initiative will support the growth of
businesses that improve the availability of affordable, healthy food
options in low-income communities.
The Treasury budget also supports small business growth through
reauthorization of the State Small Business Credit Initiative (SSBCI).
From fiscal year 2011 to fiscal year 2013, SSBCI programs in all 50
States supported over $4.1 billion in loans and investments to 8,500
small businesses across the country--creating or saving more than
95,000 American jobs. To continue our support for State economic
development agencies' work to boost lending to small businesses, the
budget proposes a new investment of $1.5 billion for SSBCI. This
additional funding would be awarded in two allocations, with $1 billion
awarded on a competitive basis to States best able to target local
market needs, promote inclusion, attract private capital for start-up
and scale-up businesses, strengthen regional entrepreneurial
ecosystems, and evaluate results. An additional $500 million will be
allocated to States according to a need-based formula. A new
authorization of the SSBCI program will keep local economic development
efforts strong and allow States to continue to support small
businesses, job creation, and leverage greater levels of private
lending and investments.
Treasury also proposes an authorization of $300 million for Pay for
Success projects that demonstrate measurable outcomes, resulting in
greater Federal savings and programmatic efficiency.
protecting national security interests and preventing illicit use of
the financial system
Treasury's financial intelligence, sanctions policy, and
enforcement activities play a significant role in protecting our
financial system from threats to our national security.
The budget proposes $109.3 million for the Office of Terrorism and
Financial Intelligence (TFI) to oversee and marshal Treasury's
intelligence, enforcement, and economic sanctions functions in support
of U.S. national security policies and interests. Our funding request
reflects Treasury's continued efforts to combat rogue nations,
terrorist facilitators, money laundering, drug trafficking, and other
crime as well as other threats to our Nation's security. These efforts
include disrupting the Islamic State of Iraq and the Levant's (ISIL)
finances, enforcing sanctions against Iran, implementing sanctions
against Russia in support of Ukraine's stability, and enhancing global
financial transparency.
Treasury's request also includes $113 million for the Financial
Crimes Enforcement Network (FinCEN) to support Treasury's efforts to
safeguard the financial system from illicit use, combat money
laundering, and support national security interests through the
collection, analysis, and dissemination of financial intelligence and
strategic use of financial authorities.
supporting international assistance programs
Finally, while not under this subcommittee's jurisdiction, I also
want to note that Treasury's request on its International Programs aims
to promote our national security, open new markets for U.S. exporters,
and address global challenges such as food insecurity, the environment,
and poverty. Treasury proposes to increase the U.S. quota in the
International Monetary Fund (IMF) and simultaneously reduce, by an
equal amount, U.S. participation in the IMF's New Arrangements to
Borrow. The administration believes that a strong and well-resourced
IMF is in the U.S. vital interests. Our priority has been and remains
to secure congressional support as soon as possible to implement the
2010 reforms. The immediate ratification of these reforms is essential
to modernizing the IMF's governance and bolstering its ability to
respond to urgent international crises--and will preserve the United
States' influence in the institution without increasing our financial
commitment. Failure to ratify will hurt our national security both
today and in the future.
furthering wall street reform, consumer protection and financial
stability
Reforms like increased capital standards and limits on excessively
risky practices, among others, are transforming the way Wall Street
operates, strengthening our financial system and making it more
resilient. In the coming year, Treasury will continue to work with the
Federal agencies to finalize efforts in areas such as compensation
reform. Likewise, through the Financial Stability Oversight Council, we
will continue to work across the member agencies to assess risks to
financial stability and work to mitigate them where needed. Going
forward, we must remain vigilant to potential new threats to the
stability of the financial system, constantly monitoring how risks
change and evolve.
conclusion
The fiscal year 2016 Treasury budget reflects key investments
needed to create economic and job opportunities, protect our national
security interests, and the integrity of the financial system, and
manage and reform the U.S. Government's Federal financial management
and tax systems.
The Treasury budget plays an important role in the President's
budget, which aims to bring middle class economics into the 21st
Century. It is carefully designed to make our economy stronger while
maintaining a responsible fiscal course. What is more, it is an
opportunity for bipartisan cooperation to achieve meaningful reform
that will help hard-working Americans share in our economic gains.
In closing, I want to thank the talented team of public servants at
the Treasury Department. They are dedicated to the work of the
department and committed to the American people. I am proud to
represent them here today, and on behalf of these hard-working men and
women, I want to say how much we appreciate the support of this
subcommittee.
Thank you, and I look forward to answering any questions that you
have.
Senator Boozman. Thank you very much, Mr. Secretary.
At this time, we will proceed to our questioning, where
each Senator will have 7 minutes per round. If there is
sufficient interest from our members for additional rounds of
questions today, we will try to accommodate them.
I read your testimony and appreciate it. In there, you
mentioned the need for finding common ground, and I think you
mention infrastructure, you know, things like that, which,
again, I would agree on totally and very much support
infrastructure. Now we have different viewpoints as to how you
get the dollars to get that done, and that is a sticking point.
But the other thing is, and let me do this in the form of a
question, it concerns our community bankers. I feel like the
backbone of America is small business, but the backbone of
small business is community banks. And a number of community
bankers and credit unions have expressed concerns about the
cost of complying with what they feel like are onerous
regulatory burdens.
Community banks are the backbone of small business, as I
said and, again, the backbone of our--which are also the
backbone of our communities. Harvard University researchers
released a report in February about the plight of community
banks in the United States and how poor regulatory coordination
and inappropriately designed regulations are stifling community
banks.
This is of particular concern to States like Arkansas,
where there are 96 towns with only one physical banking
location, and two-thirds of these communities have less than
1,000 residents. What do you propose, what is the
administration doing to ease the burdens and compliance cost
facing community banks?
Secretary Lew. Mr. Chairman, we very much share with you
the view that community banks not only play an important part
in our communities, but in the fabric of our national economy.
I think if you look at the design of many of the laws and the
rules, you will see that there are standards that reflect the
differences between smaller and larger financial institutions.
There are exemptions in many cases for smaller institutions,
and there are bars that are easier to clear for smaller
institutions that do not present the same level of financial
risk.
I know the regulators, as they look at the discretion that
they have, are always looking for whether there is flexibility
and whether or not there is a risk they need to be concerned
about. They have consistently made judgments to have the burden
on smaller financial institutions reflect the, in general,
lower level of risk.
But I do think we have to be careful to remember the
purposes of financial reform. The purpose of financial reform
was to make sure we never again face the kind of economic
crisis that we had in 2008. I think the standards that we use
have to be mindful of the fact that the architecture that was
put in place was designed to prevent the taking of risks that
could add up to a risk to the country.
The relatively easier standards for smaller institutions I
think is appropriate, but I do think the oversight that we have
now is more appropriate than where we were in 2008, when,
frankly, we had a lapse in our ability to see risks developing
and to respond in a way to protect the U.S. economy. So I think
financial reform, both the legislation and the rules have been
quite effective at making our financial system safer and
sounder, and we have tried to do it in a way that is mindful of
the burdens on smaller banks and smaller communities.
Senator Boozman. I guess my concern is, is that when you
get out and you visit and you go to various institutions like
this, if you go to these 96 towns, you know, small towns with
one bank and then other towns with a few banks, again, it is
universal. You know, they feel like that things have changed
dramatically.
And I would argue that these types of community banks just
didn't have anything at all to do with the meltdown that we
experienced several years ago. So I really wish that you would
look at that. It is something that we are looking at. We are
having kind of a one size fits all, and again, I think the
idea, like I said, that these banks are somehow responsible for
that, I simply don't agree with.
Recent cybersecurity reports revealed that a cyber criminal
ring from Russia, China, Ukraine, and other parts of Europe has
stolen $1 billion from up to 100 banks and e-payment systems in
our countries around the world, including the United States,
since 2013. So cybersecurity is a huge thing that we are very,
very concerned about.
In your opinion, is America's personal and financial
information at banks safe from cyber attacks?
Secretary Lew. Senator, I think cybersecurity is an
enormously important and difficult issue, and it is one that I
know I worry about every day. And when I talk to CEOs of
financial institutions, retail businesses, they worry about
every day.
I think that we are doing an awful lot that is the right
kind of defense against cyber attack. But the cyber criminals
are always honing their attacks, and we cannot think that we
can get ahead of them. You know, our challenge is going to be
to keep up with them, to make sure that we have good practices
in place to detect attacks so that we have the ability to
respond when there are attacks and to share information so that
best practices can be available throughout the system.
We have legislation pending that the President has proposed
which we think would go a long way towards providing the
ability to share information, which we think would make the
system safer. I think the financial sector is probably in a
better position now than other sectors are, but I do not think
anyone can sit back and rest comfortably.
Mr. Chairman, I cannot help but notice that the ranking
member of the committee came in while I have been responding to
your question. I hope I can take just a moment to welcome her
and thank her for her service and wish her well.
Senator Mikulski. Thank you. I will have more to say in a
minute.
But I am here for 2 years, Jack. So we are going over these
line items. Look forward to working with you, and even
particularly with all of the issues. So we will talk in a
minute.
Senator Boozman. Thank you.
Very quickly and very shortly--I am running over my time--
but I am encouraged by recent steps to reform the U.S.-Cuba
relationship. Boosting our commercial ties would have
significant benefits for both of our economies.
My home State of Arkansas exported nearly $34 million in
goods to Cuba in 2004 before payment restrictions were
tightened in 2005. Earlier this year, researchers at the
University of Arkansas estimated expanded trade and travel to
Cuba would bring an additional $50 million in economic gains to
Arkansas.
What is being done to ease payment restrictions, and how
will this impact U.S. agriculture exports to Cuba?
Secretary Lew. Mr. Chairman, the actions that the President
announced just a few months ago regarding easing of some of our
sanctions against Cuba we think will help U.S. businesses. But
mostly, we think it will help advance the kind of positive
change in Cuba, which could be positive in terms of making a
difference where the old policies were not. We have tried to
make it easier for the kinds of transactions that have been
frustrating for American agriculture to go forward, consistent
with the legal restrictions that remain in place.
I think that there are opportunities for Americans in
agriculture and other sectors to do business in Cuba, but I
think the bigger story in terms of U.S.-Cuba relations is it is
a chance for Cuba to be more exposed to U.S. values and U.S.
ways of doing business and U.S. freedoms in a way that will be
more effective at pushing back on the practices of Cuba that
still need to change, than the old policies, which were both
not productive in terms of changing Cuba and hurting U.S.
interests.
Senator Boozman. Senator Coons.
Senator Coons. Thank you. Thank you, Chairman Boozman.
Thank you, Secretary Lew, for your testimony.
On the theme that Chairman Boozman started with about
access to capital in small towns and how community banks can
make a significant difference, just describe briefly, if you
would, how the Community Development Financial Institutions
Fund is used to help rebuild distressed neighborhoods and
support small businesses and what the CDFI Bond Guarantee
Program, if it were to ramp up to $1 billion, might be able to
do and how they might play a constructive role in providing
access to capital in small communities, first.
Second, Senator Boozman asked about the burden, the
regulatory burden on smaller banks. I have heard from a number
of folks from the financial community who believe that once
banks obtain more than $50 billion in assets, they suddenly
become subject to all the regulatory oversight of the mega
banks.
And while I am a strong supporter of the steps taken in
Dodd-Frank to prevent future crises, I wonder if that is really
quite accurate or whether there is a step series where you sort
of steadily ratchet up regulations in accordance with growing
size and would welcome your insights into that point as well.
Secretary Lew. Thank you, Senator.
CDFI, I think, has been an enormously effective program,
both because of what it does directly and because of the
institution-building role it plays in the communities it
serves. Just looking at the raw numbers, in 2014, we made $146
million in awards, and it produced 50,000 new jobs, almost
10,000 businesses were financed.
In the communities where they are present, there is a
financial institution that local businesses can go to. So in
places where community banks were not able to have a foothold,
it has created access to the benefits of what community banks
offer.
The CDFI Bond Guarantee Program addresses one of the
fundamental challenges in revitalizing communities. In many
low-income and underserved communities, access to long-term,
fixed-rate financing is just hard to find or impossible to
find. The guarantee program to date has guaranteed $525 billion
in bonds through the program to help CDFIs provide financing
needs for the community.
So I think it is a very well-leveraged and successful
program, which is why we have proposed the reauthorization
again.
And Senator, with regard to the threshold question that you
asked about, I think you are totally correct. It is not a hard
line where everything happens to an institution if they pass
the $50 billion threshold. There are many requirements from
which institutions remain exempt. There are other cases in
which there are standards that are modified to reflect the
lower level of risk.
With that said, and as I said to the chairman, we remain
very much focused on what can we do to make that burden even
less without creating risks to the kind of general architecture
of financial security. It is an area that I know all the
regulators are focused on and we are focused on at Treasury.
Senator Coons. Well, good. Because I share that concern,
that we find ways to provide better access to capital, more
lending at the community banking level, without increasing risk
to the financial system as a whole and without making basic
changes to what I think are important safety and soundness
protections.
Let me just briefly ask you about sanctions. I made
reference in my opening statement. In a hearing in the last
Congress, Senator Mikulski was--Vice Chairman Mikulski was
central in advocating for a significant increase to make sure
that we have got the resources in the Office of Terrorism and
Financial Intelligence.
I was struck, given the ongoing issues with Russia in the
Ukraine, with Syria, and in particular with Iran, that the
budget proposes a reduction. Why does it propose to cut funds
for this office, knowing there are these significant threats?
Do you believe it is over resourced? And given the real
potential that we may return to enforcing sanctions against
Iran, do we have the resources that this office needs?
Secretary Lew. Senator, I think the work that our Office of
Terrorism and Financial Intelligence does is enormously
important, and the sanctions programs we administer have added
to this President's and all future Presidents' arsenal of tools
that are extraordinarily effective and powerful, and I must say
that when I think of how much time I spend working in this
area, it is a bit of a surprise to me how much of my time goes
into this because of the world we live in today.
As far as resources go, we requested the resource level as
a floor, not as a ceiling. And we proposed putting it in the
departmental offices so that we would have a little bit more
flexibility. There were some one-time expenditures last year
that may or may not recur.
As far as the Iran sanctions go, we have not lessened our
level of activity on Iran sanctions. So we are fully funded on
Iran sanctions, and the Russia sanctions were a new start this
year. I do not think we missed a beat in terms of any of the
other sanction programs we administer, and we came up to speed
very quickly when there was a need for Russia sanctions.
I am very proud of our team for having mastered the
intricacies of both Russia's financial institutions, its
interconnection to the global financial system, and how we
could use targeted and really surgical sanctions to put the
maximum pressure on the targets of the sanctions with the
minimal spillover to Europe and the rest of the world.
So I think we have funded it at the right level. But it is
a floor, not a ceiling, and you know, we appreciate the support
that this committee has given for this very important function.
Senator Coons. I think, just speaking for myself, this is
an area I intend to follow closely. And I want to be
continually reassured you have more than adequate resources for
the fight.
Two quick questions in closing, if I might. Just your IT
investments, which are significant, relative to the total
increase requested and DATA Act implementation. I share the
chairman's concerns about cybersecurity. These two strike me as
ways that you can modernize and strengthen your IT systems and
the transparency of your budget.
And then last, I have a question about master limited
partnerships (MLPs). So if you would briefly talk about your IT
investments?
Secretary Lew. Yes, I agree. I think the investment in the
DATA Act is extremely important. We worked with Congress on the
development of that legislation. We are eager to implement it
well. I do not think we can implement it without resources. We
cannot implement it as well as we should without the resources
to do it properly.
I do think it helps to safeguard our systems to invest in
cybersecurity by having better systems to begin with, and as
you know, many of our systems are quite old.
Senator Coons. I was struck that the budget proposes
eliminating master limited partnerships as a structure. As you
know, I have long been an advocate on a bipartisan basis for
instead opening them to renewable energy. I think it is a
technology-neutral, politically feasible way to provide long-
term financing support for renewable energy.
I wondered if you had a comment?
Secretary Lew. Senator, it is an area that I would be happy
to follow up with you on. Our proposal--obviously, we have many
proposals to promote renewable energy, both in terms of
financing and research and development. With regard to master
limited partnerships, we have had concerns over the years, and
I would look forward to discussing it with you.
Senator Coons. Thank you, Mr. Chairman.
Senator Boozman. The Senator from Kansas is recognized.
Senator Moran. Mr. Chairman, thank you very much.
Mr. Secretary, welcome. Before asking any questions, since
I last saw the Senator from Maryland, she has announced her
intentions not to seek reelection, and I just wanted to use
this as an opportunity to thank her for her service. I have
enjoyed your tenure as Chairwoman of the Appropriations
Committee and appreciate the tenacity with which you have
tackled our spending and the continual attempt to get us in the
appropriations process back to regular order.
So thank you very much and appreciate the way you have
treated me for the last several years.
Mr. Secretary, I think three relatively quick questions. As
I was walking in, I was told that the chairman was questioning
you about community banking regulations. I would add my voice
to that issue.
My understanding is that your response was something along
the lines that community banks are better regulated today than
they previously were. I would indicate that I don't think that
is the case. I think community banks have been caught up in a
broader regulatory scheme than they deserve to be in. The
consequences are significant to the economy.
In a State like mine in which community banks provide
necessary capital to a growing business, to a start-up, the
relationship banking is very important. And the example that I
use that has become so annoying to me and so devastating is
that many of my community banks have made the decision no
longer to make home loans, home mortgage loans to individuals
who want to buy a home in their hometown where the bank is
located because of the significant regulatory environment which
they now operate in.
I doubt that Dodd-Frank intended consequence was to reduce
the availability of mortgage credit in a town of several
thousand people, but that has been the end result. It is not
only the regulatory environment, but also the consequences if
there is a failure by the bank to cross every T and dot every
I.
And the reason that it is necessary for me to bring this
kind of issue to you is that so many of the regulators are not
subject to appropriations. Therefore, in this setting, you are
our one opportunity to express concern about things that are
happening certainly within the Treasury Department, but broader
in the bank regulatory environment that those banks face.
Secretary Lew. Senator, I understand the concern about
community banks and share the concern because I agree with all
of you who have expressed the view that community banks are an
enormously important part of the fabric of our economic system
in our communities. I do think, as we were discussing a few
moments ago, what happens at the cut-off points is not quite as
dramatic as sometimes it is described because there are
different rules for smaller institutions.
With specific regard to the housing issue you mentioned, I
know that some of the regulators are reviewing some of the
rules that have been of concern to community banks. I do not
think the intention was to stop the lending that you described.
It was intended to put burdens on lenders to know their
clients better and to offer different kinds of products, but it
was not to shut down the lending. I know that things like
looking at put-back risk, regulators have been trying to take
some of that unknown out of the system by being clear what
would and would not be considered an actionable kind of error.
So I think the regulators are attuned to it. Obviously,
most of this is not directly in the jurisdiction of Treasury,
but I am very much concerned, both as Chair of the Financial
Stability Oversight Council (FSOC), but also as someone who
cares deeply about the health of our banking and financial
system and would look forward to working with you. But I do
think we have to be careful not to undo the architecture that
has made our system so much safer than it was in 2008.
Senator Moran. Is there anyone that answers to you at the
Treasury Department that would be a good person for us to talk
to about this issue?
Secretary Lew. Yes. We have an Office of Domestic Finance,
and we have people who work on these banking issues, and I am
happy to have them be in contact with your staff.
Senator Moran. I appreciate that. Thank you.
And part of the review that is underway is a Government
Performance and Results Act (GPRA) in which banking regulations
are now being considered on a periodic review, and I would
welcome a report back as to how that process is going and
whether we are headed in a direction that would eliminate or
modify existing rules and regulations as they affect----
Secretary Lew. Senator, I am very much focused on that.
When I was the Office of Management and Budget (OMB) Director,
we did a look-back of rules across the Federal Government, and
we didn't have the ability to reach into the independent
regulatory agencies. So I am now pleased to see this process
underway where independent regulatory agencies are doing the
same thing.
I know from the conversations I had that the heads of these
agencies are very focused on it. They are participating in
regional hearings, and I think it will be very interesting to
see what they come back with.
Senator Moran. I am pleased by your smile to the question,
and I am pleased by your interest in this topic. And the OMB, I
wasn't sure that you would know about this process, but I guess
you would know that, hopefully as Treasury Secretary, but also
certainly as Director of OMB.
Let me ask a question. This Congress passed last year, last
session, the Tribal General Welfare Exclusion Act. What was
going on was IRS activity on Native American lands involving
their activities.
That legislation requires that a tribal advisory committee
be established to advise you on matters related to taxation of
Indians and establishing a training and educational system for
the IRS field agents. It seems to me that the Treasury
Department is going out of its way to not have Native Americans
on the advisory committee. Would you dispel me of that belief?
Secretary Lew. Well, I am not sure where that notion comes
from. We filed the charter for the Treasury Tribal Advisory
Committee, and we have issued a call for nominations for the
three members to be appointed by the Treasury Secretary. We
have expressly contacted tribal leaders for their nominations,
and the deadline for the nomination applications is April 28.
So we are still very much in the process of reviewing
candidates.
Senator Moran. Do you have any belief that tribal leaders
should or should not be involved in that as members of that
advisory committee?
Secretary Lew. You know, I do not start out with a
preconceived notion. I think we should review the applicants
that come in and look for the most qualified and strongest
candidates.
Senator Moran. That is a good answer, and I would suggest
that tribal leaders--at least in part of that make-up of that
advisory committee, tribal leaders would be a significant and
important component in providing you and the Treasury
Department, the IRS, advice.
Secretary Lew. I must say I did have a meeting with tribal
leaders several months ago, and it was a good exchange, and I
think the feedback I got was that they welcome the interaction
with the Treasury Department, and we will continue to stay very
much working with them.
Senator Moran. Thank you.
Do you want me to stay on time? Okay.
Senator Boozman. The Senator from Maryland.
Senator Mikulski. Thank you, Mr. Chairman and my
colleagues, for your kind words.
And Secretary Lew, I could thank you for your service. We
have been together a really long, long time.
Secretary Lew. A long time.
Senator Mikulski. Yes. Back when we were discussing
earmarks in the old VA-HUD bill. So, again, thank you for your
words and also for your own service.
I want to reiterate some questions about community banks
that I see as a common theme here among all of our colleagues
on both sides of the aisle. And perhaps, Mr. Chairman, it is
going to require maybe a meeting with this Domestic Finance.
Maybe not a hearing, but a conversation.
So, Mr. Lew, let me get to my questions. I am concerned
that, one, the shrinking number of community banks. And number
two, I am also concerned about the shrinking number of
minority-owned community banks that have demonstrated solvency
and stability. But I know since even the last year, we have
gone from 47 to the number in their 20s.
So I think these are issues we need to really be looking
at. We could talk about the merits of a community bank, as
compared to being, you know, a regional or franchise banking in
our community.
Well, let me get you to my question. One of which is where
the very rules of Government are interfering with banks being
able to get back on their feet. A specific question that I have
is that there is a community bank in Maryland that needs the
approval from the Federal Reserve Bank of Richmond in order to
buy back what they had gotten in the Troubled Asset Relief
Program (TARP).
They are told that they can't buy it back, but it could
make it ripe for a hedge fund to come along and buy the bank.
Well, they have got the money to buy it back. They have been
prudent, and I don't want to get into individual cases. But it
is where the very rules of Government seem to be either
torpedoing or derailing community banks to move out of the
recession and get their own solvency, which we are absolutely
committed to, and so on.
Do you have any thoughts about what Treasury is telling
people about buying back preferred stock and the regulators
kind of might view on actions on this?
Secretary Lew. Senator, from a Treasury perspective, we
obviously have been working our way through the TARP assets,
trying to resolve them so that we can recover taxpayer
investments fully wherever possible. We have worked with
community institutions and have no objection when community
institutions are able to do that.
I am not sure of what the regulatory issue is, what you are
describing, but I would be happy to look into it. We obviously
do not have any authority over the Fed decisions. But I will--
--
Senator Mikulski. No, but one of the things is how the Fed
really does have to coordinate with Treasury.
Secretary Lew. Yes.
Senator Mikulski. I would like to get you a formal letter
on this.
Secretary Lew. Sure.
Senator Mikulski. So that you could review----
Secretary Lew. I would be happy to look into it.
Senator Mikulski [continuing]. And be aware of it.
Two other points that are very specific to the Maryland-DC
area, just to bring to your attention and ask you to look into
them, and then I have a pretty big question. One of which is
that the retired DC firefighters have called my office, as
along with Eleanor Holmes Norton, that there is an accounting--
an old accounting error was discovered, and several retirees
are getting notifications that their benefits might be reduced.
These are the pensions that you are responsible for. So I
would like to get you a letter on that and a letter from
Eleanor Holmes Norton. You know, that is the last that they
need. I am not asking for a response there.
The other is the Treasury I know is merging Financial
Management Service with the Bureau of Public Debt. The
Financial Management Service is in Hyattsville. I was able to
negotiate a 5-year delay with Treasury in terms of this move,
but we hear that there are employees at Treasury so grouchy
about what I did to protect those people so that we could sort
this out that they are being demoted, intimidated, and pushed
out.
Could you take a look at that?
Secretary Lew. I will take a look at it. It obviously would
be unacceptable if that were true. I think the merger has been
effective, but there should be no--no kind of treatment like
you have described.
Senator Mikulski. Well, you know, they were looking for $8
an hour accountants in West Virginia. I don't think any
accountant is $8 an hour, but I am not going to get into the
legacies of Bob Byrd. I can assure you I am going to have as
many legacies of Barbara Mikulski as I can.
Now the other is a larger question for my colleagues. You
and I have lived through two appropriations together when I was
the chair, now the vice chair. Could you tell me the impact of
crisis-driven appropriations, with last-minute agreements
through an omnibus? Very well organized. I have nothing but
excellent words to say about my colleagues and, of course,
Congressman Hal Rogers.
But it was a hell of a time, and I wonder, as you as the
Secretary of the Treasury, our domestic economy and our global
economy, what is the impact of crisis-driven appropriations,
just what I would like to raise and just as colleague Moran has
raised about getting back to regular order?
Secretary Lew. Well, Senator, I think that is an
extraordinarily important question, and I commend you for the
work you did last year to put together an omnibus appropriation
bill with funding levels that were designed to meet current
needs, which is so important in terms of having our system
maintain its responsiveness and its agility. Continuing
resolutions do not have that ability.
I think when you look at the deadline-driven, crisis-driven
funding decisions that have been made over the last number of
years, it has caused substantial anxiety not just in the United
States, but around the world. I think that when one looks at
the business investment environment, it is psychology.
Psychology is about confidence.
The sense that Government is behaving in the way that a
reasonable set of institutions should behave adds to
confidence. The sense that we are hurtling off of a cliff
destroys that sense of confidence.
I detected considerable improvement in both the United
States and internationally in confidence in the U.S. as a
system and its economy since we have seen a return to something
that approaches regular order. I think maintaining regular
order is extraordinarily important to keeping the recovery we
have going and having the investment decisions that depend on
people thinking will things be going in the right direction in
a year, 2 years, 3 years? Not just in a week, a month, or for
maybe part of this year.
I applaud the efforts that you went through to put an
omnibus together. If Congress can meet the requirements to fund
the Government, to make sure that our debt does not become an
issue of anxiety again, that would be very important.
Senator Mikulski. Mr. Chairman, I know my time is up, but I
have got more late-breaking news. This is good news. The Senate
version of the Homeland Security bill cleared the House 257 to
167. It is on its way to the President.
So that means that we--on the Appropriations Committee, we
now have passed 12 bills, and we have completed now today our
fiscal year 2015 work.
Secretary Lew. Congratulations.
Senator Boozman. Thank you, Mr. Secretary, for being here.
We appreciate you coming and testifying, and I think that we
got some really valuable information.
We will follow up with additional questions for the record
that our members may have in the future. We would appreciate
your timely responses, as always.
Senator Boozman. In order to move through the witnesses
today, would the next panel----
Secretary Lew. Thank you very much, Mr. Chairman.
Senator Boozman. So thank you again for being here.
Commissioner Koskinen, I now invite you to present your
testimony on behalf of the Internal Revenue Service.
INTERNAL REVENUE SERVICE
STATEMENT OF HON. JOHN KOSKINEN, COMMISSIONER
Mr. Koskinen. Chairman Boozman, Ranking Member Coons, and
members of the subcommittee, thank you for the opportunity to
discuss the IRS budget and current operations.
BUDGET REDUCTIONS
I remain deeply concerned that the significant reductions
in our budget over the last 5 years are undermining the
agency's ability to continue to deliver on its mission both
this filing season and in the future. As you know, IRS funding
has been reduced by $1.2 billion over the last 5 years,
dropping to $10.9 billion for fiscal year 2015.
At the same time, the number of taxpayers has increased by
over 7 million, and the IRS has been given significant
additional responsibilities. These include implementation of
the Foreign Account Tax Compliance Act and the Affordable Care
Act.
The disconnect between our funding levels and our
responsibilities is illustrated in some way by the fact that
just 3 days after cutting our budget by about $350 million,
Congress passed legislation requiring the IRS to design and
implement two new programs by July 1. Implementation of the
ABLE Act and the certification requirement for professional
employer organizations is occurring while we are in the middle
of our most complicated filing season in years.
In discussing our need for adequate funding, I understand
we have an obligation to be careful stewards of the taxpayer
dollars we receive, and we must be as efficient as possible.
The IRS has, in fact, made considerable efforts for several
years to find efficiencies in our operations, both in regard to
personnel and nonlabor spending. Through cuts in office space,
contracts, printings, and mailings, we are saving over $200
million a year.
FILING SEASON
We have also made significant progress over the past few
years in moving millions of taxpayer inquiries from our call
centers and walk-in sites to our significantly updated and
improved Web site. Already this filing season, there have been
more than 150 million visits to IRS.gov and more than 2.7
million visits to the section devoted to the Affordable Care
Act.
We have had over 125 million hits on our ``Where's My
Refund?'' site, the electronic tracking tool on IRS.gov. Also,
more than 11 million copies of previously filed tax information
have been obtained online with our ``Get Transcript''
application. In the past, all of these inquiries would have
inundated our phone lines and resulted in even longer lines at
our walk-in sites.
I would also emphasize that we have taken seriously issues
raised about inappropriate actions and activities in the past
by making necessary changes and improvements in our policies
and procedures to ensure that these situations do not recur. We
have cut conference spending by 80 percent. We have established
review boards for video productions and training expenses. We
have ensured that those who willfully fail to meet their tax
obligations are not eligible for performance awards.
We are reviewing our hiring process to ensure, to the
extent possible by law, that former employees with serious
prior conduct issues are not rehired. We now require that all
contractors maintain the same high standards for tax compliance
as our employees, and we have implemented the recommendations
of the Inspector General with regard to the serious management
failures surrounding the review of applications by
organizations seeking to achieve social welfare status.
But there is a limit to how much we can do in finding cost
effectiveness. This year, we reached the point of having to
make very critical performance tradeoffs. There was simply no
way around the severity of the budget cuts without taking
difficult steps, which have had negative impacts on service,
enforcement, and information technology.
The funding cuts have also limited our ability to work
toward giving taxpayers a more complete online filing
experience. Taxpayers, in our view, ought to have the same
level of service from the IRS that they have now from their
financial institutions, whether it is a bank, mortgage company,
or brokerage firm.
BUDGET REQUEST
The President's fiscal year 2016 budget request for the
IRS, which totals $12.9 billion, would help the agency move
ahead in all of these critical areas. For example, we would be
able to bring our phone level of service up from the current 43
percent to 80 percent. We would also significantly increase
enforcement and collection activities, generating over $2
billion more in increased Government revenues every year, and
we would be able to take steps toward building a more modern
interface between the agency and taxpayers.
I understand and appreciate the concerns raised over the
past few years about activities of the agency, but I took this
job 15 months ago because I also understand the critical role
the IRS plays in the lives of taxpayers and in the collection
of the revenues that fund the Government.
PREPARED STATEMENT
I know I speak for the thousands of professional,
experienced, and dedicated employees of the agency when I say
that we are committed to working with you and the other members
of Congress to lead the agency effectively and appropriately
into the future. But we need your help and support if we are
going to be successful.
This concludes my statement, and I would be happy to take
your questions.
[The statement follows:]
Prepared Statement of Hon. John A. Koskinen
introduction
Chairman Boozman, Ranking Member Coons, and members of the
subcommittee, thank you for the opportunity to appear before you today
to discuss the Internal Revenue Service (IRS) budget and current
operations.
After 15 months as IRS Commissioner, it remains an honor for me to
lead this great institution. My respect for the agency's role and
admiration for its workforce continue to grow. I'm pleased to report
that the 2015 tax filing season opened on schedule on January 20th, and
is going well so far.
Opening the current filing season on schedule was a major
accomplishment, given the challenges we faced. I attribute this
achievement to the dedication, commitment and expertise of the IRS
workforce. Along with normal filing season preparations, there was a
significant amount of extra work to get ready for tax changes relating
to the Affordable Care Act (ACA) and the Foreign Account Tax Compliance
Act (FATCA). We also had to update our systems to reflect the passage
of the tax extender legislation in December.
Even with the demonstrated capacity of our workforce to meet these
challenges to successfully open filing season on time, I remain deeply
concerned that the significant reductions in the IRS budget will
degrade the agency's ability to continue to deliver on its mission
during filing season and beyond. In fact, one of my highest priorities
since becoming Commissioner has been to advise Congress about the
ramifications of continued substantial cuts to our funding, and that is
what I will focus on in my testimony today.
IRS funding has been reduced $1.2 billion over the last 5 years,
dropping to $10.9 billion in fiscal year 2015. That level is $346
million below the enacted level for fiscal year 2014. But the total
reduction from fiscal year 2014 is actually closer to $600 million when
accounting for nearly $250 million in mandatory costs and inflation.
The IRS is now at its lowest level of funding since fiscal year
2008. When inflation is taken into account, the current funding level
is comparable to that of 1998. Since then, however, the number of
individual and business tax filers has increased by more than 30
million, or 23 percent, along with an increase in the number of
legislative mandates that the IRS is required to implement.
impact of budget cuts on fiscal year 2015 operations
There is simply no way around the severity of the budget cuts
without taking some difficult steps. Essentially, we are at the point
of having to make very critical performance tradeoffs. I recently
worked with IRS senior leadership to determine how to allocate our
limited resources based on our final fiscal year 2015 budget numbers.
We reviewed our operations to determine where we could make cuts that
would have the smallest possible impact on taxpayers and tax
administration. In making these decisions, we strove to maintain a
balanced and fair approach, keeping in mind the needs of both service
and enforcement, to avoid overly harming one part of our mission in the
attempt to maintain another.
Let me now describe for this subcommittee the difficult decisions
we made to absorb the latest round of budget cuts, and the impact of
those decisions.
--Delays to critical information technology (IT) investments of more
than $200 million.--We anticipate that these delays will reduce
taxpayer service and cost-efficiency efforts, as well as reduce
outside contractor support for critical IT projects. For
example, we are being forced to delay replacement of aging IT
systems. While we have made some progress in modernizing these
systems, more than 50 applications are still in need of
replacement. Delays to our IT investment harm our ability to
protect taxpayer data; combat tax fraud and schemes; address
non-compliance that contributes to the tax gap; and fight
against cyber-attacks. In addition, we will not be able to
invest upfront money to develop future capabilities, such as
improved Web services that would enable taxpayers to more
easily obtain information and improve their interaction with
the IRS.
--Enforcement cuts of more than $160 million.--We estimate the agency
will lose through attrition about 1,800 key enforcement
personnel during fiscal year 2015 that we will not be able to
replace. We anticipate the outcome will be fewer audits and
fewer resources focused on collection. We estimate that as a
result of these enforcement cuts the Government will lose at
least $2 billion in revenue. In addition to this loss, the
curtailment of enforcement programs is extremely troublesome
because these programs help create a deterrent effect that is
the key to preserving high levels of voluntary compliance and
maintaining the integrity of the Nation's tax system.
--Reductions in staffing during filing season totaling more than $180
million.--Normally, the IRS uses employee overtime and
temporary staff to provide the extra resources needed during
the busy filing season. However, the IRS will be reducing
overtime and seasonal staff hours during fiscal year 2015. We
anticipate that these cuts will result in delays in refunds for
some taxpayers. People who file paper tax returns could wait an
extra week--or possibly longer--to see their refund. Taxpayers
with errors or questions on their returns that require
additional manual review will also face delays in getting their
refunds. It is also expected that taxpayers will have to wait
longer to get answers to their questions from the IRS.
Responses to written correspondence will take longer, and
taxpayers will have more difficulty getting through to the IRS
on the phone and in person. Our phone level of service (LOS)
was at 54 percent at the start of the current filing season. As
we have gotten further into the filing season, LOS has
continued to deteriorate, dropping below 50 percent. This means
that fewer than half of the people who try to reach the IRS by
phone, will end up getting through. That is significantly below
the fiscal year 2014 average of 64 percent, which was itself
below desired levels. Those who do reach the IRS are facing
extended wait times that are unacceptable to all of us.
--Continuing the agency hiring freeze.--The IRS is extending the
exception-only hiring freeze that began in fiscal year 2011
through fiscal year 2015. As a result, and assuming normal
attrition rates, the IRS expects to lose approximately 3,000
additional full-time employees in fiscal year 2015. That would
bring the total reduction in full-time staffing since fiscal
year 2010 to over 16,000. This reduction in staffing will have
continued negative impacts on taxpayer service and enforcement
as noted above.
Even with all of these reductions, the IRS still faces a
significant budget shortfall for fiscal year 2015. We have taken and
continue to take steps to try to close this gap. As stated in the past,
one of our concerns has been the possibility of a shutdown of IRS
operations for 2 days later this fiscal year, which would involve
furloughing employees on those days. If this does become necessary, our
goal will be to minimize disruption to taxpayers, employees, and our
operations. We have made it clear we would do the best we can to avoid
taking this drastic action. We have been monitoring the situation on a
regular basis, and at this point we are hopeful we can avoid a shutdown
of the agency this fiscal year.
In discussing the agency's budget, it is important to point out
that the IRS has been working and continues to work to find savings and
efficiencies wherever possible, so as to absorb the reductions to our
funding that have occurred since fiscal year 2010. This has not been
easy, because labor costs are by far the largest portion of the IRS
budget. In fact, approximately 75 percent of our budget represents
staffing, which is critical to providing adequate levels of taxpayer
service and maintaining robust compliance programs. Moreover, it is not
possible to shift enforcement personnel into service jobs, or vice
versa, without providing them with substantial training, which, of
course, is resource-intensive. Nonetheless, the IRS has for several
years made considerable effort to find efficiencies in our operations.
For example, the IRS has implemented significant reductions in its non-
labor spending.
The agency reduced annual travel and training expenditures by $248
million, or 74 percent, between fiscal year 2010 and 2014. Any such
expenses of $50,000 or more must be reviewed and approved personally by
me and then by the Treasury Department. Therefore, at this point, I am
satisfied that there are no excesses in these areas, and that there
have been none for quite some time.
Additionally, in an effort to promote more efficient use of the
Federal Government's real estate assets and to generate savings, in
2012 the agency began a sweeping office space and rent reduction
initiative. We estimate that these measures have reduced rent costs by
more than $47 million each year and reduced total IRS office space by
more than 1.8 million square feet.
We will continue our efforts to find savings and efficiencies
wherever we can. For example, we continue to evaluate our space needs,
and under the processes we now have in place, each time a lease comes
up for renewal we carefully consider whether to renew it. In fact, a
few weeks ago the agency cancelled a lease in New York City, which will
save us about $4.5 million in fiscal year 2015, and $15 million over
the life of that lease. We will continue to review all upcoming real
estate transactions to make sure we are as cost effective as possible.
But there is a limit to how much we can do in the area of finding
cost efficiencies. And as I said in my testimony to the Appropriations
Committees almost 1 year ago, the cuts to the IRS are so significant
that efficiencies alone cannot make up the difference.
the administration's fiscal year 2016 budget request
The President's fiscal year 2016 budget provides $12.93 billion for
the IRS. This amount includes $12.3 billion in base discretionary
resources, an increase of $1.3 billion from fiscal year 2015, allowing
us to make strategic investments to continue modernizing our systems,
improving service to taxpayers, and reduce the deficit through more
effective enforcement and administration of tax laws. The budget also
proposes a $667 million program integrity cap adjustment to support
program integrity efforts aimed at restoring enforcement of current tax
laws to acceptable levels and to help reduce the tax gap. This multi-
year effort is expected to generate $60 billion in additional revenue
over the next 10 years at a cost of $19 billion over that 10 year
period, thereby reducing the deficit by $41 billion.
It is fair to ask what value the American taxpayer would receive
for this increase in funding requested by the President. Let me detail
for you several notable examples of how the IRS intends to spend these
additional funds:
Improve taxpayer service: $301.5 million.--This additional funding
will allow the IRS to meet the expected increase in demand for taxpayer
services in fiscal year 2016, through the hiring of approximately 3,000
additional staff to increase the telephone level of service to an
acceptable level of 80 percent. Resources are also needed to meet the
increased demand for taxpayer face-to-face assistance resulting from
ACA implementation; expand staffing to assist with managing the ACA
submission processing workload; and provide advanced technology to
electronically receive amended returns.
Leverage new technologies to advance the IRS mission and enhance
service options for taxpayers: $107.8 million.--This additional funding
combines two programs that leverage new technologies, one of which
($91.6 million) will assist the IRS in advancing its mission generally
and another ($16.2 million) that will enhance service options. Together
the programs will provide the foundation for the IRS to develop, over
several years, an IT-based strategy that will help improve the online
filing experience for taxpayers. The strategy will focus on enhancing
the filing experience by understanding taxpayers' service channel
preferences. By creating new digital capabilities and reducing the
burden on taxpayers, the strategy will allow for earlier and more
efficient engagement between the IRS and taxpayers. This initiative
will improve the speed and convenience of interacting with the IRS. The
funding will be used to implement a new Enterprise Case Management
(ECM) solution for performing standard case management functions across
the IRS, which will allow us to operate more efficiently; expand the
capabilities of the existing Customer Account Data Engine (CADE 2)
database; provide secure digital communications between taxpayers and
the IRS; and continue development of the fraud detection, resolution,
and prevention Return Review Program (RRP).
Improve upfront identification and resolution of identity theft
returns: $18.9 million.--This additional funding will strengthen the
integrity of the tax system by improving the IRS' ability to detect and
prevent improper refunds. Resources will allow the IRS to expand
programs to prevent identity theft-related refund fraud, protect
taxpayer identities and assist victims of identity theft.
Implement ACA: $490.4 million.--This additional funding, the
majority of which is for required information technology upgrades, will
allow the IRS to increase efforts to ensure compliance with a number of
tax-related provisions of the ACA, including the premium tax credit and
individual shared responsibility provision. The funding will provide
enhanced technology infrastructure and applications support, and allow
necessary, major modifications to existing IRS tax administration
systems. A portion of the funding also addresses new audit requirements
related to the employer shared responsibility provision.
Implement FATCA: $71.0 million.--With this additional funding, the
IRS will invest in advanced technology to allow the agency to continue
implementing FATCA, which in turn will provide more information to us
on offshore accounts of U.S. citizens. FATCA includes new reporting and
withholding requirements for foreign financial institutions. In order
to properly process and analyze the data we receive as a result of
these new requirements, the IRS will need to build new technology
systems and modify existing systems. This initiative provides funding
for enforcement staff to implement FATCA's new reporting and disclosure
requirements, and thus will allow the IRS to address foreign
withholding compliance and expand coverage of international tax return
filings. As a result of these activities, we project additional annual
enforcement revenue of $155.1 million once new hires reach full
potential in fiscal year 2018, an ROI of $2.3 to $1.
Sustain critical IT infrastructure: $188.5 million.--This
initiative will restore resources for mainframes, servers, laptops,
network devices, and communication equipment to keep IT infrastructure
(hardware and software) current for existing and newly developed IRS IT
systems. The IRS' IT division provides technology services and
solutions that drive effective tax administration, improve service,
modernize systems, and ensure the security and resiliency of IRS
information systems and data. With this funding, the IRS will be able
to enhance systems security to help anticipate and protect against
evolving threats; increase reliability of enterprise infrastructures to
support increased electronic filing; increase the use of cloud and
virtual environments; and expand the use of the next generation of
advanced telecommunication technologies.
Program integrity enforcement and compliance increases.--Enactment
of the program integrity cap adjustment proposal would facilitate
funding for high return on investment (ROI) revenue-producing
enforcement and compliance initiatives, including the following:
--Prevent refund fraud and identity theft: $82.2 million.--This
additional funding will provide for additional staffing and
investments in advanced technologies needed to handle the
increased workload associated with identity theft and refund
fraud. Specifically, the funding will help the agency improve
upfront identification and resolution of identity theft;
address the backlog of identity theft cases associated with
pre-refund and post-refund compliance activities; recover
erroneous refunds due to fraud; prevent prisoner tax refund
fraud; stop refund fraud by limiting the number of refunds that
can be sent to a single bank account; continue the expansion of
the specialized Criminal Investigation (CI) Identity Theft
Clearinghouse that processes identity theft leads; and invest
in information technology projects to reduce identity theft and
stop fraudulent tax refunds before they are paid. We project
that investment in these activities will protect nearly $1
billion in revenue once the new hires carrying out these
activities reach full potential in fiscal year 2018, a return
on investment (ROI) of $13.2 to $1.
--Address offshore tax evasion: $40.7 million.--This additional
funding will allow us to expand our efforts to identify and
pursue U.S. taxpayers with undisclosed offshore accounts.
Funding will allow the IRS to: promote voluntary compliance
with U.S. laws through strategic enforcement actions directed
at identifying U.S. taxpayers involved in abusive offshore tax
schemes through banks, other financial institutions and third
party structures; expand information gathering and data
analysis to identify promoters or facilitators of abusive
offshore schemes; and expand the pursuit of international tax
and financial crimes as well as grow the IRS attache presence.
We estimate these activities will produce additional, direct
annual enforcement revenue of approximately $159.6 million once
the new hires carrying out these activities reach full
potential in fiscal year 2018. That is an ROI of $3.7 to $1.
--Increase audit coverage: $161.8 million.--This additional funding
will allow the IRS to hire additional personnel to improve our
examination efforts in regard to individuals. Tight budget
constraints have eroded the examination staff available to
conduct audits, causing the individual audit coverage rate to
decline below 0.9 percent. Reduced coverage causes increased
risk to the integrity of the voluntary compliance system. The
funding will help the agency begin the multiyear process of
reversing that trend, by providing additional field employees.
The funding will also allow the agency to increase individual
and business document matching programs to identify and reduce
income misreporting. These activities are expected annually to
produce additional enforcement revenue of approximately $1.3
billion once the new hires reach full potential in fiscal year
2018, an ROI of $8 to $1.
--Improve audit coverage of large partnerships: $16.2 million.--This
additional funding will allow the IRS to increase the number of
agents with specialized knowledge in partnership law,
strengthen enforcement activities relating to flow-through
entities, and improve compliance by enhancing IRS processes and
procedures with respect to Tax Equity and Fiscal Responsibility
Act (TEFRA) partnerships. As a result, we expect to produce
additional annual enforcement revenue of approximately $129.1
million once the new hires reach full potential in fiscal year
2018, an ROI of $7.6 to $1.
--Enhance collection coverage: $122.8 million.--This additional
funding will help the IRS work its collection inventory and
bring taxpayers who fail to pay their tax debts into
compliance. IRS will address growing collection case
inventories and call volumes that have resulted from reduced
staffing levels in recent years; increase coverage of the
growing number of employment tax collection cases with respect
to business taxpayers; provide resources to reach out to
taxpayers earlier in the collection process; help taxpayers
experiencing economic hardship resolve their liabilities
through the Offers in Compromise (OIC) program; and improve the
capability to identify nonfilers of business returns. As a
result of these activities, we project additional annual,
direct enforcement revenue of approximately $1.2 billion once
new hires reach full potential in fiscal year 2018, an ROI of
$9.0 to $1.
--Improve efforts in the tax-exempt sector: $23.5 million.--This
additional funding will help the IRS to build and maintain
public trust by: anticipating and addressing the tax-exempt
sector's needs; encouraging voluntary compliance; and
effectively enforcing the law to ensure compliance. The IRS
will be able to accomplish the following: enhance the
streamlined application process for exempt organizations
seeking tax-exempt status; protect participants in retirement
plans and their assets, which total more than $23 trillion;
provide voluntary correction opportunities related to
employment taxes and retirement plans; improve service and
compliance by integrating three separate determination
application systems into one end-to-end system; and focus
resources on areas with the greatest risk, so that resources in
the Tax Exempt and Government Entities arena are developed and
deployed appropriately.
--Pursue employment tax and abusive tax schemes: $17.2 million.--This
additional funding will improve our efforts in the core
enforcement areas of corporate fraud, employment tax, and
abusive tax schemes, which will increase the number of
convictions and assessments of unpaid tax. A portion of the
funding will be used to acquire computer software that will
enable the IRS to detect corporate fraud and abuse. With this
software tool, the IRS will be able to identify schemes by
linking together multiple potentially fraudulent returns or
information items. These resources will improve the sharing of
information among the agency's operating divisions, and expand
the IRS' capability to identify significant tax cases.
--Consolidate and modernize IRS facilities: $85.5 million.--This
initiative will provide space renovation resources needed to
alter and reduce office space throughout the IRS inventory and
realize an estimated annual rent savings of $23 million. The
IRS plans to reinvest the rent savings from this initiative to
fund rent increases for the remaining buildings and for other
new space reduction projects. Space reductions and
consolidation strategies include reducing workstation size in
accordance with revised National Workplace Standards; workspace
sharing for frequent teleworkers and employees who work outside
of their assigned post of duty more than 80 hours per month;
realignment of occupied workspace; and consolidation of vacant
workspace.
--Improve IRS financial accounting systems: $12.2 million.--This
additional funding will help the IRS with more timely and
accurate reporting of data on the revenue we collect. The
funding will also be used to make necessary system and
programming changes to comply with various Federal mandates,
and to stay current with internal changes made to IRS's tax
processing systems for tax administration that also affect
financial reporting.
Along with the funding request, we are also asking for Congress's
help legislatively. In that regard, let me highlight several important
legislative proposals in the President's fiscal year 2016 budget that
would help to narrow the tax gap and reduce erroneous and fraudulent
refunds, including fraud resulting from identity theft. Overall, the
legislative proposals to strengthen tax administration, improve
compliance by business, and expand information reporting would increase
revenue by $84 billion over the next 10 years, of which $60 billion
would come from enacting program integrity cap adjustments.
--Acceleration of information return filing due dates.--Under current
law, most information returns, including Forms 1099 and 1098,
must be filed with the IRS by February 28 of the year following
the year for which the information is being reported, while
Form W-2 must be filed with the Social Security Administration
(SSA) by the last day of February. The due date for filing
information returns with the IRS or SSA is generally extended
until March 31 if the returns are filed electronically. The
budget proposal would require these information returns to be
filed earlier, which would assist the IRS in identifying
fraudulent returns and reduce refund fraud, including fraud
related to identity theft.
--Correctible error authority.--The IRS has authority in limited
circumstances to identify certain computation errors or other
irregularities on returns and automatically adjust the return
for a taxpayer, commonly known as ``math error authority.'' At
various times, Congress has expanded this limited authority on
a case-by-case basis to cover specific, newly enacted tax code
amendments. The IRS would be able to significantly improve tax
administration--including reducing improper payments and
cutting down on the need for costly audits--if Congress were to
enact the budget proposal to replace the existing specific
grants of this authority with more general authority covering
computation errors and incorrect use of IRS tables. Congress
could also help in this regard by creating a new category of
``correctible errors,'' allowing the IRS to fix errors in
several specific situations, such as when a taxpayer's
information does not match the data in certain government
databases.
--Authority to regulate tax return preparers.--The budget proposal
would provide the agency with explicit authority to regulate
all paid tax return preparers. The regulation of all paid tax
return preparers, in conjunction with diligent enforcement,
would help promote high quality services from tax return
preparers, improve voluntary compliance, and foster taxpayer
confidence in the fairness of the tax system.
--Preparer penalty.--Under current law, the penalty imposed on
preparers for understatement of tax on a Federal return due to
an unreasonable position taken on the return is the greater of
$1,000 or 50 percent of the income derived by the preparer from
preparation of the return. A separate penalty can be imposed if
the understatement is due to the preparer's willful or reckless
conduct. That penalty is the greater of $5,000 or 50 percent of
the income derived by the preparer from preparation of the
return. The administration's proposal would increase the
penalty in cases of willful or reckless misconduct to the
greater of $5,000 or 75 percent of the income derived by the
preparer (instead of 50 percent). This proposal is necessary
because in many cases, 50 percent of income derived by the
preparer is far greater than the fixed dollar penalties
imposed, so that, under the present penalty regime, preparers
who engaged in reckless or willful conduct would end up paying
the same dollar penalty as preparers whose conduct did not rise
to that level.
--Due diligence.--Return preparers who prepare tax returns on which
the Earned Income Tax Credit (EITC) is claimed must meet
certain due diligence requirements. In addition to asking
questions designed to determine eligibility, the preparer must
complete a due diligence checklist (Form 8867) for each
taxpayer, which is filed with the taxpayer's return. The
administration's proposal would extend the due diligence
requirements to all Federal income tax returns claiming the
Child Tax Credit (CTC) and the Additional Child Tax Credit. The
existing checklist would be modified to take into account
differences between the EITC and CTC.
There are a number of other legislative proposals in the
administration's fiscal year 2016 budget request that would
specifically assist the IRS in its efforts to combat identity theft.
They include the following:
--Providing Treasury and the IRS with authority to require or permit
employers to mask a portion of an employee's Social Security
Number (SSN) on W-2s, an additional tool that would make it
more difficult for identity thieves to steal SSNs;
--Adding tax-related offenses to the list of crimes in the Aggravated
Identity Theft Statute, which would subject criminals convicted
of tax-related identity theft crimes to longer sentences than
those that apply under current law; and
--Adding a $5,000 civil penalty to the Internal Revenue Code for tax-
related identity theft cases, to provide an additional
enforcement tool that could be used in conjunction with
criminal prosecutions.
In discussing legislative proposals in the President's fiscal year
2016 budget, it is also important to mention streamlined critical pay
authority. The IRS Restructuring and Reform Act of 1998 increased the
IRS' ability to recruit and retain a handful of key executive-level
staff by providing the agency with streamlined critical pay authority.
This allowed the IRS, with approval from Treasury, to hire well-
qualified individuals to fill positions deemed critical to the agency's
success, and that required expertise of an extremely high level in an
administrative, technical or professional field. This authority expired
at the end of fiscal year 2013, and the President's fiscal year 2016
budget proposes reinstating it. We greatly appreciate the action taken
last year by the Senate Appropriations Committee to renew streamlined
critical pay, the absence of which has created major challenges for us.
The agency has already lost or will soon lose several senior
experts in areas such as international tax, IT cyber security, online
services and analytics support. Streamlined critical pay authority is
an invaluable tool in our effort to replace them with people of the
same high caliber expertise. It is my hope that this critical program,
which ran effectively for 14 years before it expired, will be
reinstated. Again, I appreciate the Appropriations Committee's support
for streamlined critical pay authority, and hope that support will be
forthcoming again this year.
critical need to further modernize it systems
In looking to the future, we believe that it is not an option to
stay at our current level of funding, given the extent to which both
taxpayer service and enforcement will suffer as a result. It is
especially troubling to me that these cuts prevent us from fully
improving and modernizing our IT infrastructure and operations support.
This hurts taxpayers and the entire tax community.
Earlier in this testimony I described some examples of IT projects
that must be deferred as a result of budget reductions in fiscal year
2015. But the problem is much broader. We are operating with antiquated
systems that are increasingly at risk, as we continue to fall behind in
upgrading both hardware infrastructure and software. Despite more than
a decade of upgrades to the agency's core business systems, we still
have very old technology running alongside our more modern systems.
This compromises the stability and reliability of our information
systems, and leaves us open to more system failures and potential
security breaches.
In regard to software, we still have applications that were running
when John F. Kennedy was President. Also, we continue to use a decades-
old programming language that was already considered outdated back when
I served as chairman of the President's Council on Year 2000
Conversion, and it is extremely difficult to find IT experts who are
versed in this language. I give our IT employees a tremendous amount of
credit, as keeping things going in the face of these challenges is
really a major accomplishment.
It is important to point out that the IRS is the world's largest
financial accounting institution, and that is a tremendously risky
operation to run with outdated equipment and applications. Our
situation is analogous to driving a Model T automobile that has
satellite radio and the latest GPS system. Even with all the bells and
whistles, it is still a Model T. Our core IT systems are not
sustainable without significant further investment over the next few
years, and I look forward to working with you on this in the future.
The concerns I have about the IRS' IT funding level relate not only
to the negative impact these cuts have on the present operations of the
agency, but also the impact on our ability to advance the agency into
the future and provide a more up-to-date and efficient tax filing
process for the taxpaying public.
The experience that taxpayers have with the IRS should give them
confidence in knowing they can take care of their tax obligations in a
fast, secure, transparent, and consistent manner. This is not an
unrealistic goal. We're not trying to go to the moon. We're simply
saying that people should expect the same level of service when dealing
with the IRS as they have now from their financial institution, whether
it's a bank, brokerage, or mortgage company.
To the extent possible within our budget constraints, the IRS has
already made some significant improvements in its technology to better
serve taxpayers. For example, one of the most popular features on
IRS.gov is the ``Where's My Refund?'' electronic tracking tool, which
reduces phone traffic the IRS receives regarding questions about
refunds. Taxpayers have already used this tool more than 125 million
times so far this year.
Another good example is IRS Direct Pay, which provides taxpayers
with a secure, free, quick, and easy online option for making tax
payments, thereby reducing the need for the IRS to process payments by
check. Still another example is Get Transcript, a secure online system
that allows taxpayers to view and print a record of their IRS account
in a matter of minutes, which saves taxpayers time and reduces IRS
resources needed to process paper requests for transcripts.
While these are important steps forward, more needs to be done. We
have begun to ask ourselves what the online filing experience ought to
look like 3 to 5 years down the road, and what it would take to make
that a reality. In the future, most things that taxpayers do to fulfill
their tax obligations could be done virtually, and there would be much
less need for in-person help or for calling the IRS. The idea is that
taxpayers would have an account at the IRS where they could log in
securely, get all of the information about their account, and interact
with the IRS as needed.
Improving service to taxpayers in this way can also help us on the
compliance side of the equation. In this future state, the IRS could
identify problems in tax returns shortly after a return is filed, and
interact with taxpayers as soon as possible. That way, those issues
could be corrected while tax records are available without costly
follow-up contact or labor-intensive audits.
While the President's fiscal year 2016 budget makes important
investments in IT to help build this approach, it is not an approach
that we will be ready to fully implement within the next year. We want
to make it a reality in the future, some years from now. Of course, how
quickly we can deliver on this vision will depend on future levels of
agency funding.
conclusion
Chairman Boozman, Ranking Member Coons, and members of the
subcommittee, thank you again for the opportunity to discuss the IRS
budget and current operations. Given the impacts we are already seeing
on our ability to deliver on our mission, I believe it is vital that we
find a solution to our budget problem, so that the IRS can be put on a
path to a more stable and predictable level of funding. I look forward
to working with Congress to do just that. This concludes my statement,
and I would be happy to take your questions.
Senator Boozman. What I would like to do is go ahead and go
to you, Senator.
Senator Mikulski. Go ahead, and then if I could--you go
ahead, and then I will come in.
Senator Boozman. Okay. Thank you very much.
Thank you again for being here today, and I appreciate your
testimony.
IRS ACCOUNTABILITY
The problem is, is lack of confidence, and we can go all
through these things. But IRS targeting, hiring people that had
left, rehiring people that had left with bad records. Some of
them actually having marked on their file ``don't hire.''
Tax refunds for prisoners, 25 percent earned income tax
credit fraud. The IG, no safeguards--or not no safeguards, but
not enough safeguards on sensitive information. One employee
taking home over $1 million--over a million not dollars, a
million records, and the list goes on and on.
Whistleblower programs in shambles. Cybersecurity,
licensures wasting billions of dollars, bonuses to people for
poor performance records, taking of bank accounts from people
with little evidence of wrongdoing, still having tax entities
that are waiting for tax deductions for literally years. And
still no execution plan on how to implement the ACA that we
have been aware of.
So, again, the problem is, is accountability and getting
some confidence back. So in your budget request, you are asking
for almost $12.9 billion for the IRS. Even without the request
for $667 million above current spending limits, you are still
asking for a $1.3 billion increase.
For comparison under the Budget Control Act, total
nondefense discretionary spending for the entire Federal
Government will increase by only $1.1 billion. Given current
budget constraints and past history, is it clear--it is clear
that this request favors hope over reality.
The question is, are you developing contingency plans on
how to carry out your mission based on a more realistic budget
expectation?
Mr. Koskinen. Well, first, I would note that the difference
between the IRS and the other agencies is if you give us money,
we give you more money back. So that in terms of deficit
reduction, which is a critical issue going forward, it is
counterproductive when the more the budget and support for the
IRS get cut, the greater the difficulty we have in collecting
revenues.
But I do take the point, and we are continuing to assume
that one of the options going into the future is that we will,
in fact, stay at the flat level. In fact, that was our
assumption going into 2015 when we ended up with a budget cut
of $350 million, the only major agency in the Government with a
cut.
And in fact, we are the only major agency in the Government
that was not restored to the presequester level. So combined
together with the cut, we have, in effect, had the impact of
two sequesters while everyone else is waiting to see what
happens with the next sequester.
So as I have told OMB, we are two sequesters ahead of
everybody else, and so, to that extent, we already have had to
deal with a very difficult reality----
Senator Boozman. Very good. Thank you.
Mr. Koskinen. So we are--we are prepared. All I can tell
you, last year when I testified, I said if we did not get the
increase in funding requested for customer service, for
example, the customer service level was going to drop below 50
percent, and it has done that.
To the extent that we do not get additional funding for
enforcement, I can tell you that the enforcement revenues
available to the Government are going to decrease by six to
eight times more than the cut in the budget.
But we are prepared. As I have always said, we will play
the hand that is dealt to us. Whatever decisions you make, we
will abide with them. I will tell you that there are great
threats to taxpayer service, tax enforcement, and information
technology.
Cybersecurity has been a critical issue for us. We get
attacked 145 million times a year. There is no database that is
more attractive than our database, and yet we are dealing with
less and less support for our IT system than we think is
appropriate.
So we will deal with whatever you give us, but I can tell
you that we are significantly underfunded at this point
already.
Senator Boozman. Right. How much money did you waste in
licensure?
Mr. Koskinen. In where?
Senator Boozman. In licensure last year.
Mr. Koskinen. In licensure?
Senator Boozman. Yes.
Mr. Koskinen. I don't know if we wasted any money in
licensure. I don't know. In what sense? You mean in terms of IT
licensure?
Senator Boozman. Yes.
Mr. Koskinen. There is an IT report that we had
disagreement with in terms of use of licenses for software as
to whether, in fact, we had lost money on those software
licenses by not using them, and it was an issue of how you
measured it. But we have taken actions to make sure, because I
am a big supporter of IGs, that when they raise an issue like
that, we deal with it.
Senator Boozman. Right. And we will visit with the IG about
that.
IMMIGRATION
But during a hearing last month, Senator Grassley asked you
about the tax consequences of the President's unilateral
actions on immigration and whether it would allow individuals
to claim billions of dollars in tax benefits for unauthorized
work.
Your follow-up letter to him last week that individuals may
claim up to 3 years of refunds on income even if they were
working off the books or never paid taxes is truly startling.
Why are you allowing individuals who cheated by not paying any
taxes to now claim a refund that will be financed by hard-
working Americans who have been paying taxes all along?
Mr. Koskinen. It has to be clear that you are eligible for
the earned income tax credit only if you had earnings and
earnings that meet the requirements of the statute. We have
700,000 undocumented residents who pay taxes every year. They
use what is called an Individual Taxpayer Identification Number
(ITIN), which is an identification number for them. They are
paying even though they are undocumented, and they are already
paying into the system.
Anyone who now under the President's program is provided a
Social Security number would be eligible to file an amended
return. But they have to then demonstrate that they actually
had earnings, and they have had to pay taxes on those earnings
or rather at least file a return. And only then would they be
eligible.
A single employee at the low end of the scale without a
family is eligible to a little less than $600 a year in the
earned income tax credit. So you have to have worked in those 3
years. If you file an amended return, you have to provide the
evidence and the documentation that you worked. You have to
file taxes on what you earned to be eligible, in fact, for any
kind of an earned income tax credit payment.
Senator Boozman. So the statement then that individuals may
claim up to 3 years of refunds on income even if they were
working off the books or never paid taxes is not true?
Mr. Koskinen. No. If they want to file an amended return,
they have to file for the income they earned. As I noted, there
are 700,000 undocumented residents filing taxes every year with
us.
So to qualify for the earned income tax credit, you have to
have worked. And if you file a return, you have to provide us
the documentation that showed you actually had earnings that
year. You will file taxes on those earnings, and it will be
factored into then what, if any, earned income tax credit you
are entitled to. There is not an automatic payment.
Senator Boozman. The Senator from Maryland.
Senator Mikulski. Thank you, Mr. Chairman.
And thank you, Mr. Koskinen.
First of all, I really appreciate that someone of your
caliber has decided to continue a life of public service and to
do it at IRS. The IRS has taken a beating, both in the budget,
by Members of Congress. We have demonized the men and women who
work there, and then we underfund it and give them an
impossible job. And when they can't do the impossible, we
punish them by giving them even less money. So the impossible
goes to the catastrophic.
So I really want to appreciate you just showing up every
day and trying to run this ship. I really do think the
President's budget, if not--if we don't fund at the least the
full close to $13 billion, we are talking about the need to add
more money in taxpayer service, beefing up enforcement,
strengthening operations, and looking at these new
technologies.
EMPLOYEE AND FUNDING LEVELS
So let me get to my question, which goes to service. I am
concerned that by giving you less money, we end up with more
fraud and abuse. So tell me how many people have been--what is
the staff level reduction since 2010?
Mr. Koskinen. Since 2010, we have lost 13,000 employees. We
estimate we will lose another 3,000 at the end of fiscal year
2015. So we will be down a total of an estimated 16,000
employees.
Senator Mikulski. Sixteen thousand employees in 4 years?
Mr. Koskinen. Five years, since 2010.
Senator Mikulski. Five years. And then, having looked at
that, I understand from the Taxpayer Advocate that for every
dollar spent on tax enforcement, we get $6 back. But I am
concerned about the fraud issues, as I know you are. We have
talked about it.
Mr. Koskinen. Right.
Senator Mikulski. You know, the guys in prison who come up
with dummy accounts. This recent thing with TurboTax. The--we
could go through one fraudulent thing after another. What is
the impact of shrinking amount of money, both in the area of
enforcement and then the investigation staff and all that you
have?
Mr. Koskinen. Well, it cuts across the board because we
have no choice but to cut across the board. Three-quarters of
our budget is people. So as we have fewer people, we have to
have fewer people everywhere.
We have tried to support and maintain the number of people
helping taxpayers who have been victims of fraud, but the
underfunding of our information technology means we have made
less progress in the development of our filters and our system
capable of dealing with the influx of those returns. We have
5,000 fewer revenue agents, officers, and criminal
investigators.
So while, again, an increasing percentage of our criminal
investigation work is focused on tracking down identity thieves
and those responsible for refund fraud, there is a limit to
what our revenue agents can do. There is a limit to what our
criminal investigators can do.
There is a reference to the earned income tax credit, a
problem I am very greatly concerned about, and as noted in my
testimony, we need help from Congress in terms of legislative
fixes. But there, again, we have a limited number of people to
do audits in that area as well.
Senator Mikulski. Well, with this double sequester and the
reductions that we have--Congress has forced upon you, are you
having a hard time recruiting people?
Mr. Koskinen. Well, at this point, we have some difficulty.
Our only way to get through this year is that, except for
emergencies, we are not hiring anybody. So when people leave--
--
Senator Mikulski. So do you have a freeze?
Mr. Koskinen. We have a freeze, total freeze. I said we
have taken 10 percent of what we would save with a total freeze
for emergencies because it makes no sense, obviously, when
division heads or senior managers leave not to replace them.
But as a general matter, we are basically not replacing anyone
when they leave.
Senator Mikulski. Well, and when you have a freeze and
people leave, like in the enforcement area, the investigation
area, do you replace them?
Mr. Koskinen. No.
Senator Mikulski. So it is not only a freeze, but it is a
freeze on replacement?
Mr. Koskinen. It is a freeze on replacement--so we are
having----
Senator Mikulski. It is not only that you don't hire more--
--
Mr. Koskinen. The way we are going to lose 3,000 people
this year is by simply not replacing those who leave. We have
1,000 people right now who have applications in to retire. They
will retire in the near-term future. They won't be replaced.
That is a significant amount of experience going out the door
that won't be replaced.
My concern in the long run is we are going to have an
employee base that has a kind of baby bust in the middle of it
because we have been replacing only one in every five over the
last 2 years. So as you look out into the future, there is
going to be a time at which we are going to have a gap in our
experience level. And 3 to 5 years from now, that is going to
start to be a serious problem for the agency, no matter what we
do now.
PAYROLL PROVIDER FRAUD
Senator Mikulski. Well, let me go to the impact. I don't
know--I want to raise an issue related to helping victims of
the payroll provider fraud problem.
I have many constituents who were victims of a crime
related to a company called AccuPay. And as you know, when they
hire a company, a small business, whether it was a brew pub or
a home improvement agency, they hire someone to do their books.
I mean, that is the way they talk about it.
And then this company, AccuPay, took their money that they
gave them to pay the taxes, didn't pay IRS, and then kind of
disappeared. I got into it. I have been trying to get it
straight. And what I find is that approximately 500 to 600
businesses were scammed in my State.
The IRS has only offered 54 offers in compromise to these
businesses. Remember, they paid the company, who didn't pay
IRS. So IRS comes back and goes after the brew pub, the home
improvement, the beauty shop. You know, this is the kind of--
when we say small business, it is that really Main Street,
strip mall type business.
And I put in legislation that requires IRS to do more, but
they haven't. They just haven't follow my laws. I mean,
followed my laws, and it has even become an issue with the
National Taxpayer Advocate and for the Most Serious Problem
(MSP) Number 21.
The IRS does not comply with the law regarding victims of
payroll service provider failure. Can you help me out with
this, and can you help them out?
Mr. Koskinen. Yes. We now have a new requirement that is a
very thoughtful, sensible one in that every time a tax
preparer, an intermediary payroll provider, makes any change in
the taxpayer's residence, we will actually notify the
constituents that their payroll provider has changed their
address.
We also, again within the constraints of personnel, are
trying not only in this area but across the board. Whenever
anyone misses an estimated tax payment, rather than waiting
until the end of the year and then chase people, we are going
to try to more affirmatively reach out and identify when
payments are not made on a quarterly basis so that we can catch
these problems earlier.
Part of the problem with AccuPay was nobody had actually
known there was a problem until well after the end of the year.
So now what we are going to try to do with, again, with limited
resources, to the extent we can, identify where we are not
getting the quarterly payments of employee taxes that we should
be getting and both notify the payers as well as the
intermediaries.
Senator Mikulski. That is the solution. But can I ask you
to really look into what the Taxpayer Advocate says that they
are not complying with the law. Your agency is not implementing
the law.
Mr. Koskinen. I will be delighted to look into that. As I
said, I know we are now in the process of notifying people when
there are address changes to make sure that people know about
that.
Senator Mikulski. No, I got that. But----
Mr. Koskinen. I will be happy to talk to the Taxpayer
Advocate. I meet with her regularly and will ensure that we do
that.
Senator Mikulski. Yes.
Mr. Koskinen. In fact, I have asked her last year and this
year as well to take her 23 most significant challenges that
she lists every year and to give me the list of those we could
implement without having to spend more money. Last year, she
gave me that list, and we implemented most of them, including
the Taxpayer Bill of Rights. And I have made the same offer to
her this year.
I have told her, I said, ``Nina, if you will give me your
list of things that we should do, the things we could do
without any expenditure of money, which we obviously don't
have, we will make a serious effort to do those things.'' And
this would be one of those.
Senator Mikulski. Thank you.
Do you want to take this over? We will give it to you right
now.
Senator Boozman. Thank you.
Senator Mikulski. Thank you.
Senator Boozman. Thank you, Senator. I think you brought up
an excellent point.
The Senator from Kansas.
VETERANS ORGANIZATIONS
Senator Moran. Mr. Chairman, thank you very much.
Commissioner, a couple of topics. First of all, dealing
with veterans. My understanding is that the American Legion,
the National American Legion has been required by the IRS to
provide tax identification numbers from every post across the
country when they file their return, and that, they are
incapable of doing.
Their charter indicates that they are not a parent
organization for various American Legion posts across the
country, and they have been trying to sort this out with the
IRS without any success. A number of letters and requests have
been made to the IRS, and if you could bring me up to date on
this topic?
And then I would also say that I met with you or your
predecessor back in 2013 in which the topic was American Legion
posts across the country were being required to provide the DD-
214, the service-connected discharge document for every veteran
that was a member of their post. And my understanding was that
practice was coming to a conclusion, that the IRS had concluded
that wasn't a beneficial use of their limited resources.
I just, in fact, before I walked in this hearing, came from
a meeting with VFW members who indicate that that circumstance
is again occurring across the country, that VFW posts now, like
American Legion posts, are being required to provide the DD-214
for every post member, which is something very difficult, if
not impossible, to accomplish. That is the issue that arose in
2013 that I was assured had come to an end.
And then, more recently, the American Legion being told
they must provide the tax-exempt status documentation from
every post across the country, which they are incapable of
doing, but also have been unable to receive a response to their
inquiry from the IRS.
Mr. Koskinen. I am happy to assume responsibility for
everything the IRS does, even before I got there at the end of
2013. So whatever the discussions were in 2013, obviously, I am
not privy to them.
I thought we had resolved the issue on the DD-214. If your
staff would get us the background information, we would be
delighted to make sure.
Obviously, our challenge is, again with our limited
resources and the limited resources of the tax-exempt
organizations, is to try to ensure, to the extent we can and
they can, that they are operating within the realm of their
charters and their exemption. And that involves for veterans
organizations confirmation that they are basically dealing with
veterans and not expanding their operations to include
nonveterans.
But I take the point, and I thought we had taken the point
in the past that this has to be done in a reasonable way. We
can't be layering impossible burdens on top of people.
So if you will get me the details about that, I would be
happy to both look into it and get back to you promptly.
Senator Moran. Does the second and larger aspect of
American Legion, the national posts, the National American
Legion being required to provide information from every post
across the country to the IRS, which is a different issue than
the one you and I just described, do you know anything about
that topic?
Mr. Koskinen. I have not heard that problem. To the extent
that they are not in control and don't charter and don't
establish posts across the country, obviously, and don't have
the records, that wouldn't make much sense either. Again, the
Employer Identification Number (EIN) issue is primarily for
payroll taxes and withholding and employee taxes.
But again, I would be happy to look at both those issues
for you and let you know the status of them and get back to you
quickly.
Senator Moran. Commissioner, based upon your tone and
words, your response, my assumption is this appears to be
something that ought to be able to be resolved quickly and
satisfactorily toward veteran service organizations?
Mr. Koskinen. Yes. Again, I am not an expert at where we
are in that and the details of it. But our goal in a lot of
these areas is primarily to try to make it easy for people to
establish that they are still operating, serving--within their
charters and serving the people they were meant to. But we
ought to be able to figure out how to do that with them in a
way that works out efficiently.
Senator Moran. I was surprised because, again, as I say, I
think in 2013 I think it was your predecessor, the Acting
Commissioner, assured me that this practice was coming to a
conclusion. I hadn't heard about it at the local level until,
as I say, this meeting right before.
I said, ``I got to go question the IRS Commissioner,'' and
immediately, they had a request. And this apparently is three
VFW posts in New York State.
Mr. Koskinen. I would be happy to look into it. If Acting
Commissioner Werfel said the process was coming to an end, it
should have come to an end.
Senator Moran. All right.
Mr. Koskinen. If there are residual elements out there, I
would be delighted to look into them.
Senator Moran. Thank you very much.
TRIBAL ORGANIZATIONS
Then in regard to a similar question that I asked Secretary
Lew on this legislation that Congress passed, the Tribal
General Welfare Exclusion Act, the law stipulates that all
audits related to benefits under the general welfare exclusion
should be suspended until tribal advisory committees are
established and the IRS field agents are properly trained and
educated in Federal law and how it relates to sovereign
tribal--I am sorry, sovereign Indian tribes.
What this issue is, and maybe you are familiar with it?
Mr. Koskinen. I am familiar.
Senator Moran. You are? All right.
Mr. Koskinen. And I met with the tribal leaders late last
fall when they were here in Washington. It may have been the
first time an IRS Commissioner had done that.
Senator Moran. Well, thank you for doing that. I think the
concern that exists is that the IRS audits continue, even
though the tribes believe that the issues that are being
audited are related to the general welfare exclusion. And so,
my question to you is can you provide me with the standards
being used to determine whether an audit relates to the general
welfare exclusion and confirmation that deference is being
provided to the tribal governments based upon that exclusion?
Mr. Koskinen. I will be delighted to get you that
information. My understanding was that had been made clear,
that the general welfare exclusion applied, and that we would
honor that. But again, I am delighted to be able to go back,
check on that, and get back to you quickly.
So, again, if your staff could just let us know the details
of where they are hearing that from, again, I can't talk about
an individual case, but clearly, that was our understanding
when I met with the tribal leaders that we were going to try to
have a better working relationship, understand the significance
of their sovereignty, and make sure that our people, as you
note, were properly trained and respectful of that sovereignty.
Senator Moran. Do you have an idea of how many audits have
been suspended as a result of this requirement of the Exclusion
Act?
Mr. Koskinen. I do not.
Senator Moran. Okay.
Mr. Koskinen. But I cannot believe there are----
Senator Moran. And I guess I would ask another question is
as you provide me information, in addition to how many audits
have been put on hold, suspended as a result of awaiting the
training and the appointment of the advisory committees, I
would ask that if there is a tribe that believes that they--
that the audit is improper, how do they appeal the decision
that they are being audited?
They, in their conversations with me, seemed to have no
recourse. The IRS is here. They shouldn't be auditing us, but
we don't know what to do about it.
So if you could respond----
Mr. Koskinen. I would be delighted to do that. Every
taxpayer has a right to our appellate process, which is totally
independent of our compliance process. But if you will include
that in your inquiry, we will be delighted to get them the
roadmap as to what they should be doing to make sure they feel
they have an appropriate way to raise their concerns.
Senator Moran. Thank you for responding to both my Native
American as well as my veteran questions. Thank you.
Mr. Koskinen. Delighted.
Senator Boozman. Senator Coons.
Senator Coons. Thank you, Chairman Boozman.
And I would associate myself with Senator Moran's expressed
concerns about the veteran issues in particular, would
appreciate follow-up on that.
And although she has departed, I joined the Appropriations
Committee in no small part because of the fervor and the
passion and the commitment that the chair and now vice chair,
Senator Mikulski, demonstrated towards returning us to regular
order, and her very effective leadership in that will be sorely
missed at the end of these 2 years.
IDENTITY THEFT
You identified service and enforcement and IT as sort of
three core themes where you think funding shortfalls have
caused real challenges for IRS and taxpayers, and I want to
touch on a few of those. Take to the Treasury Inspector General
for Tax Administration identified security for taxpayer data as
its number-one priority challenge for you this year, and I
assume that is not unrelated to your IT investments.
Let me talk, if I could, for a moment about identity theft
and combating refund fraud. Your estimate was you paid out $5.8
billion in identity theft refunds in tax year 2013. Just tell
me a little bit more about your strategy for dealing with
refund fraud and identity theft.
Is it comprehensive enough and aggressive enough to keep
pace with fraudsters who keep finding more and more
sophisticated ways either to hack in and access or to take
advantage of different schemes? And what measures would help
the IRS better detect fraud and halt fraud schemes before they
get out of hand?
Mr. Koskinen. Right. It has been historically a growing
problem. It exploded in the 2010 to 2012 timeframe and
overwhelmed law enforcement as well as the IRS. We have made
significant progress, but to some extent, the point you raise
is the important one to know. That, as I have said, we have
gotten over 2,000 convictions of people going to jail for an
average of 40 months or higher. And we have gotten a lot of the
individuals, including prisoners, identified and prosecuted.
But what we are finding, not surprisingly, because it is
consistent across all the cyber areas, is that we are
increasingly dealing with organized crime syndicates here and
around the world. We are dealing with people not filing just
one return at a time, but people filing 500 returns at a time.
People who are reverse engineering our filters, trying to
figure out what gets through, and adjusting accordingly as they
go.
So we have continued over the last 3 or 4 years to increase
our investigations and prosecutions on the one hand, while
increasing the level of sophistication of our filters on the
other. Last year, we stopped approximately 5 million refunds
before they went out because of suspicions about identity theft
and refund fraud. Unfortunately, we estimate that 300,000 to
500,000 taxpayers will have their identity stolen, and refund
fraud as a result of that, as we go forward.
We have doubled, even with the resource constraints, the
number of people helping taxpayers. We have got over 3,000
people focused on working with taxpayers with identity theft.
It used to take us a year. Now our goal is to get them resolved
in less than 120 days.
Part of our challenge with the funding is while this is a
high priority, there is a limit to all of the priorities we
have. So we have been slower at developing more sophisticated
fraud filters and detection devices than we would like to have
been, but we are making progress.
This year, we are stopping more returns at the front end
before they are processed than we did last year as a result of
the improvements. But if we had the funding we are suggesting
for next year, we would actually be able to get to a point
where we would be even more effective.
In terms of additional tools, across the board, if we got
W-2 information returns earlier, it would help us
significantly. We also are working on legislation requirements
that if we could get, in effect, unique identifiers to every W-
2, which would be easy enough to do, we would be able to
identify legitimate W-2s.
There is a move afoot by criminals to form false
corporations, get false EINs, and file false W-2s, for which
they would then file a return against those. So both those
legislative fixes would be significantly important for us.
Senator Coons. Well, thank you for the input.
Let me just raise with you the Taxpayer Advocate, in terms
of dealing with those who have been victims of identity fraud,
has advocated an approach that would assign a single account
representative to tax-related identity theft of victims to help
them navigate the case rather than be frustrated by having
several different IRS employees handle it.
Is that something you are intending to implement? What is
the direction on that?
Mr. Koskinen. Well, we have done what we think is the
appropriate response to that over the last couple years. That
is, and we are just completing it now, is move all of the
refund fraud activity into a single location. It used to be
spread throughout the agency. So there is, in fact, a single
point of contact working these issues.
The Taxpayer Advocate's suggestion is then we have an
individual employee who is assigned to each of the 300,000 to
500,000 taxpayers, working their way through. We disagree with
that only in the sense if you think of your experience dealing
with call centers anywhere else, whether you call Amazon or a
bank or someone else, when you get assistance, you get a case
number. You get help. But the next time you call back, you
don't ask for Joan or Susan because Joan or Susan may be on
vacation. They may be talking to somebody else. They may be out
of the office.
What you want to be able to do is call back in and make
sure that when you call back in to the single point of contact,
they know who you are. You don't have to start all over again.
In the past, many taxpayers have had that experience. They
got moved from one part of the agency to another. They had to
start all over again. We don't think----
Senator Coons. Let me ask----
Mr. Koskinen. Besides not being cost-effective, we don't
think if you had to track down your single appointed IRS
employee that that is a help.
TAXPAYER SERVICE
Senator Coons. Commissioner, in the time I have got left,
just service levels is a significant concern to me. My
impression is that roughly a decade ago, the IRS answered 87
percent of calls in a wait time of 2\1/2\ minutes.
Your projection, given the significant reduction in your
workforce, for this taxpaying season is that less than half the
callers seeking advice and assistance, answers to tax questions
will ever succeed in having their calls answered, and there is
an average wait time of 33 minutes.
What do you think would be an acceptable level of service
for taxpayers calling the toll-free line trying to get a
question answered? What dollar amount of increased funding
would be required to return you to your 2004 service level? And
what is the consequences--revenue consequences, social
consequences--of having those who are trying to figure out how
to comply voluntarily unable to get their questions answered?
Mr. Koskinen. In the budget, we identify if we had $380
million applicable in that area, we would be able to bring our
TAC level of service to 80 percent. We actually think that 85
percent, 87 percent is the ultimate right number. You don't
want to be at 100 percent because then you've got a lot of
people just sitting around waiting for the calls.
But the waiting time ought to be less than 5 minutes. You
ought to be able to call, be comfortable you are going to get a
live assister in less than 5 minutes.
The impact that we are concerned about, that I am
personally concerned about, is we focus on how much money we
collect with our activities and you get six or eight times as
much as the cost. But enforcement revenues on the one hand and
activities around taxpayer service on the other, trying to help
people figure out what they owe and how to pay it, are two
sides of the compliance coin. And the number I am concerned
about is that we collect $3 trillion a year in a voluntary
compliance system.
If the compliance rate goes down by 1 percent, either
because people think the chances of getting caught are down or
because they can't find out the right information or they just
get aggravated with us, a 1 percent decline in the compliance
rate costs the Government $30 billion annually. On the 10-year
window we are looking at, it is $300 billion, besides the fact
that it is not an on/off switch.
That goes to the chairman's concern, which I have as well,
and if people lose confidence in the agency, if they lose
confidence in the fairness of the system, the risk to us is not
that our collections will go down, although they will, the real
risk is what happens to the overall compliance rate? What
happens to that $3 trillion number?
And I am concerned about it. The people most concerned
about our taxpayer level of service are our employees because
they view the service the taxpayers ought to get, they are
committed to. And as I go around the country, I have talked to
13,000 individual IRS employees, and the biggest concern I have
is not that they are overworked. The biggest concern I hear
from them is there aren't enough people to be able to provide
the services to taxpayers that they think is important.
Senator Coons. Thank you, Commissioner.
I have additional questions, but I will submit them for the
record. Thank you, Commissioner.
Senator Boozman. Thank you for your testimony today,
Commissioner. I know you have got a big job, and we really look
forward to working with you in an effort to serve and protect
the American taxpayer. So thank you for appearing here today.
At this time, I would like to call forward Inspector
General George to present his testimony.
Thank you.
Mr. Koskinen. Thank you, Mr. Chairman.
Senator Boozman. Inspector General, please proceed.
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
DEPARTMENT OF THE TREASURY
STATEMENT OF HON. J. RUSSELL GEORGE, INSPECTOR GENERAL
Mr. George. Thank you. Mr. Chairman, Ranking Member Coons,
thank you for the opportunity to appear today.
In my testimony, I will address the Internal Revenue
Service's fiscal year 2016 budget request and specific areas
where it could perform its mission more effectively. I will
also address the fiscal year 2016 budget request for TIGTA, the
Treasury Inspector General for Tax Administration.
The proposed IRS budget requests appropriated resources of
$12.9 billion. This is an increase of $2 billion from fiscal
year 2015 enacted levels. This proposed increase is intended to
improve taxpayer service levels and enforcement efforts. It
also provides for critical information technology changes
related to the Affordable Care Act and other requirements to
sustain information technology infrastructure.
We have reported that a trend of lower budgets and reduced
staffing has affected the IRS's ability to deliver its priority
program areas, including customer service and enforcement. At
the same time, it has increased responsibilities of
implementing certain provisions of the Affordable Care Act.
The IRS also continues to dedicate significant resources to
detect and review potential identity theft tax returns and
assist victims. IRS employees who work the majority of identity
theft cases are telephone assisters who also respond to
taxpayers' calls to the IRS's toll-free telephone lines.
This has contributed to the IRS's inability to timely
resolve victims' cases, as well as the continued decline in its
ability to timely respond to taxpayers' written correspondence.
As of February 14, 2015, the average wait time for the IRS to
answer a call was 28 minutes, the level of service was only 43
percent, and its over-age correspondence inventory was 1.3
million.
While the IRS faces many resource challenges, TIGTA has
recently reported on several areas where the IRS can operate
more effectively. For example, we believe the IRS could save
about $17 million per year if it allowed taxpayers to
electronically file amended tax returns, rather than only
allowing paper returns.
This would also enable the IRS to use the same validation
processes that it utilizes to verify originally filed tax
returns. TIGTA estimates that this could prevent the issuance
of more than $2.1 billion in potentially erroneous refunds over
the next 5 years.
The IRS could also make more informed business decisions
when determining how to use its limited resources. For example,
the IRS eliminated or reduced services at taxpayer assistance
centers. Although the IRS stated that the services eliminated
or reduced were in part the result of the IRS's anticipated
budget cuts, the IRS plans did not show to what extent the
services cut would lower costs. Moreover, it later had to
reverse certain decisions.
TIGTA also found that the IRS's field work collection
process is not designed to ensure that cases with the highest
collection potential are identified. Additionally, changing the
law to require third parties to file information returns
earlier would provide the IRS the opportunity to use the
information contained on these forms to verify tax returns at
the time they are processed rather than after refunds are
issued.
However, even if the third-party information returns are
received more timely, the IRS still needs certain authorities
to more efficiently and effectively use this data. Generally,
the IRS must audit any tax return it identifies with a
questionable claim before the claim can be adjusted or denied,
even if the IRS has reliable data that indicates the claim is
erroneous.
The Department of the Treasury has included a legislative
proposal as part of the IRS's budget request since fiscal year
2013 to obtain correctable error authority, which would permit
the IRS to systematically deny all tax claims for which the IRS
has reliable data showing the claim is erroneous.
TIGTA estimates that this authority, along with the
expanded use of the National Directory of New Hires, part of
the Department of Health and Human Services, could have
prevented the issuance of more than $1.7 billion in
questionable earned income tax credit claims in tax year 2012.
TIGTA's fiscal year 2016 proposed budget requests
appropriated resources of $167 million, an increase of 5.7
percent compared to the fiscal year 2015 enacted budget.
TIGTA's budget priorities include mitigating risks associated
with tax refund fraud and identity theft, monitoring the IRS's
implementation of the Affordable Care Act and other tax law
changes, and assessing the IRS's efforts to improve tax
compliance involving foreign financial assets and offshore
accounts.
PREPARED STATEMENT
In addition, investigating allegations of serious
misconduct and criminal activity by IRS employees, ensuring IRS
employees are safe, and IRS facilities, data, and
infrastructure are secure and not impeded by threats of
violence, and protecting the IRS against external attempts to
corrupt or otherwise interfere with tax administration will
continue to take priority.
Chairman Boozman, Ranking Member Coons, and members of the
subcommittee, thank you for the opportunity to share my views.
I am happy to take your questions.
[The statement follows:]
Prepared Statement of Hon. J. Russell George
Chairman Boozman, Ranking Member Coons, and members of the
subcommittee, thank you for the opportunity to testify on the Internal
Revenue Service's (IRS) fiscal year \1\ 2016 budget request, our recent
work related to the most significant challenges currently facing the
IRS, and the Treasury Inspector General for Tax Administration's
(TIGTA) fiscal year 2016 budget request.
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\1\ The Federal Government's fiscal year begins on October 1 and
ends on September 30.
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The Treasury Inspector General for Tax Administration, also known
as ``TIGTA,'' is statutorily mandated to provide independent audit and
investigative services necessary to improve the economy, efficiency,
and effectiveness of the IRS, including the IRS Chief Counsel and the
IRS Oversight Board. TIGTA's oversight activities are designed to
identify high-risk systemic inefficiencies in IRS operations and to
investigate exploited weaknesses in tax administration. TIGTA's role is
critical in that we provide the American taxpayer with assurance that
the approximately 91,000 \2\ IRS employees, who collected over $3.1
trillion in tax revenue, processed over 242 million tax returns and
other forms, and issued $374 billion in tax refunds \3\ during fiscal
year 2014, perform their duties in an effective and efficient manner
while minimizing the risks of waste, fraud, or abuse.
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\2\ Total IRS staffing as of January 24, 2015. Included in the
total are approximately 19,000 seasonal and part-time employees.
\3\ IRS, Management's Discussion & Analysis, Fiscal Year 2014, page
2.
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overview of the irs's fiscal year 2016 budget request
The IRS is the largest component of the Department of the Treasury
and has primary responsibility for administering the Federal tax
system. The IRS's budget request supports the Department of the
Treasury's Strategic Goal of fairly and effectively reforming and
modernizing Federal financial management, accounting and tax systems
and the Department of the Treasury Agency Priority Goal of increasing
self-service and electronic service options for taxpayers.
The IRS Strategic Plan for fiscal year 2014-2017 provides a central
direction for the agency and guides program and budget decisions. The
IRS's strategic goals are to: (1) deliver high quality and timely
service to reduce taxpayer burden and encourage voluntary compliance,
and (2) effectively enforce the law to ensure compliance with tax
responsibilities and combat fraud. To achieve these goals, the proposed
fiscal year 2016 IRS budget requests appropriated resources of
approximately $12.9 billion.\4\ The total appropriation amount is an
increase of $2 billion, or approximately 18 percent more than the
fiscal year 2015 enacted level of approximately $10.9 billion. This
increase is illustrated in Table 1. The budget request includes a net
staffing increase of 9,245 Full-Time Equivalents (FTE) \5\ for a total
of approximately 90,524 appropriated FTEs.
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\4\ The fiscal year 2016 budget request also includes approximately
$127 million from reimbursable programs, $33 million from non-
reimbursable programs, $450 million from user fees, $386 million in
available unobligated funds from prior years, and a transfer of $5
million to the Alcohol and Tobacco Tax and Trade Bureau for a total
amount of $13.9 billion in available resources.
\5\ A measure of labor hours in which one FTE is equal to 8 hours
multiplied by the number of compensable days in a particular fiscal
year.
TABLE 1--IRS FISCAL YEAR 2016 BUDGET REQUEST INCREASE OVER FISCAL YEAR 2015 ENACTED BUDGET
[In thousands]
----------------------------------------------------------------------------------------------------------------
Fiscal year Fiscal year
Appropriations account 2015 enacted 2016 request $ change % change
----------------------------------------------------------------------------------------------------------------
Taxpayer Services....................................... $2,156,554 $2,408,803 $252,249 11.7
Enforcement............................................. 4,860,000 5,399,832 539,832 11.1
Operations Support...................................... 3,638,446 4,743,258 1,104,812 30.4
Business Systems Modernization.......................... 290,000 379,178 89,178 30.8
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Total Appropriated Resources...................... 10,945,000 12,931,071 1,986,071 18.2
----------------------------------------------------------------------------------------------------------------
Source: Treasury Inspector General for Tax Administration's analysis of the IRS's Fiscal Year 2016 Budget
Request, Operating Level Tables.
The three largest appropriation accounts are Taxpayer Services,
Enforcement, and Operations Support. The Taxpayer Services account
provides funding for programs that focus on helping taxpayers
understand and meet their tax obligations, while the Enforcement
account supports the IRS's examination and collection efforts. The
Operations Support account provides funding for functions that are
essential to the overall operation of the IRS, such as infrastructure
and information services. Finally, the Business Systems Modernization
account provides funding for the development of new tax administration
systems and investments in electronic filing.
As shown in Table 1, the Operations Support budget request for
fiscal year 2016 increased by over 30 percent or $1.1 billion and 1,820
FTE compared to fiscal year 2015. The three largest components driving
this increase are as follows:
--$495 million (975 FTE) for Information Technology changes related
to the Affordable Care Act and other requirements to sustain
critical information technology infrastructure;
--$118 million (164 FTE) for improved taxpayer service and return
processing, including efforts to address the projected growth
in demand for traditional taxpayer services as well as to
improve taxpayer assistance;
--$85 million (74 FTE) for consolidating and modernizing IRS
facilities, including reducing office space to realize an
estimated annual rent savings of $23 million.
reductions in the irs's fiscal year 2015 budget
The IRS's appropriated funding was reduced by $346 million over the
last year, from $11.3 billion in the fiscal year 2014 enacted budget to
$10.9 billion in fiscal year 2015. To address this, the IRS reduced
planned spending in a variety of key areas for fiscal year 2015. The
areas with the largest cuts are total personnel compensation ($142
million), equipment ($65 million), communication and utilities ($55
million), and operation and maintenance of equipment ($42 million). The
IRS also reduced overall net spending on services by $40 million.\6\
Finally, the IRS had an exception-only hiring freeze in place during
fiscal year 2014 which also remains in place in fiscal year 2015.
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\6\ The overall net reduction in services includes a decrease of
$100.2 million in other services from non-Federal sources and an
increase of $60.3 million in advisory and assistance services.
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Even with these reductions, the IRS Commissioner testified on
February 3, 2015 \7\ that the IRS still faces a significant budget
shortfall for fiscal year 2015. As a result, the IRS is planning for
the possibility of a shutdown of IRS operations for two days later this
fiscal year, which will involve furloughing employees on those days.
The IRS Commissioner also testified that these budget cuts will have
negative impacts on taxpayer service and enforcement. For example, the
Commissioner stated the IRS will delay replacement of aging information
technology systems, increasing the risk of downtime and negatively
affecting taxpayer service. In addition, the Commissioner indicated
reduced staffing will result in decreased audits and collection
activities, as well as delays in customer service during the 2015
filing season.
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\7\ Written Testimony of John A. Koskinen, Commissioner of the IRS,
before the Senate Finance Committee, dated February 3, 2015.
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challenges facing the irs
Achieving program efficiencies and cost savings is imperative, as
the IRS must continue to carry out its mission with a significantly
reduced budget. TIGTA reported that implementation of the mandated
sequestration,\8\ coupled with a trend of lower budgets, reduced
staffing, and the loss of supplementary funding for the implementation
of the Patient Protection and Affordable Care Act of 2010 and the
Health Care and Education Reconciliation Act of 2010 (collectively
referred to as the Affordable Care Act or ACA) \9\ affected the IRS's
ability to deliver its priority program areas, including customer
service and enforcement activities.\10\
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\8\ Sequestration involves automatic spending cuts of approximately
$1 trillion across the Federal Government that took effect on March 1,
2013.
\9\ Public Law No. 111-148, 124 Stat. 119 (2010) (codified as
amended in scattered sections of Internal Revenue Code and 42 U.S.C.),
as amended by the Heath Care and Education Reconciliation Act of 2010,
Public Law No. 111-152, 124 Stat. 1029.
\10\ TIGTA, Ref. No. 2014-10-025, Implementation of fiscal year
2013 Sequestration Budget Reductions (June 2014).
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For example, the IRS's toll-free Level of Service \11\ decreased
from 68 percent in fiscal year 2012 to 61 percent in fiscal year 2013.
As of February 14, 2015, more than 26 million taxpayers contacted the
IRS during the 2015 Filing Season by calling various Accounts
Management toll-free telephone assistance lines \12\ seeking help to
understand the tax law and meet their tax obligations. The IRS answered
more than 9.3 million calls through automated scripts and more than 2.6
million calls by an IRS assistor. The Average Speed of Answer for an
IRS assistor-answered telephone call was 28 minutes. As of February 14,
2015, the IRS reported a 43 percent Level of Service for calls answered
by an assistor. In addition, as of February 14, 2015, the over-age
correspondence inventory totaled more than 1.3 million.
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\11\ The primary measure of service to taxpayers. It is the
relative success rate of taxpayers who call for live assistance on the
IRS's toll-free telephone lines.
\12\ The IRS refers to the suite of 29 telephone lines to which
taxpayers can make calls as ``Customer Account Services Toll-Free.''
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Key examination and collection statistics also declined.
Examinations of individual tax returns decreased approximately 5
percent from fiscal year 2012 to fiscal year 2013. In addition,
collection activities initiated by the IRS, such as liens, levies, and
property seizures, decreased approximately 33 percent during the same
period. Our analysis of select customer service and enforcement
statistics indicates that the downward trend in these areas may
continue.
For example, budget cuts have resulted in significant declines in
the IRS collection program.\13\ From fiscal year 2010 to fiscal year
2014, the budgets for the Automated Collection System (ACS) \14\
operations and Field Collection were reduced by over $269 million. ACS
staffing has been reduced by 24 percent since fiscal year 2011, and the
number of revenue officers has decreased 24 percent since fiscal year
2011. As a result, in fiscal year 2014 revenue officers closed 34
percent fewer cases and collected $222 million less than in fiscal year
2011. ACS contact representatives answered 25 percent fewer calls in
fiscal year 2014 than in fiscal year 2011 and collected $224 million
less in fiscal year 2014 than in fiscal year 2011.
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\13\ TIGTA, Audit No. 201330013, Budget Cuts Resulted in
Significant Declines in Key Resources and Unfavorable Trends in
Collection Program Performance, report planned for April 2015.
\14\ The Automated Collection System consists of 15 call sites with
contact representatives to engage taxpayers and their representatives
on resolving unpaid tax debts. Field Collection consists of over 400
offices across the country through which revenue officers contact
taxpayers in person to resolve tax debts and secure unfiled returns.
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At the same time the IRS is operating with a reduced budget, it
continues to shoulder increased responsibilities as it implements and
administers provisions of the Affordable Care Act. This filing season
represents the first time taxpayers must report on their tax returns
whether they and their dependents maintained minimum essential
healthcare insurance coverage or face a tax penalty for not maintaining
this coverage. The IRS must also ensure that the more than 6 million
individuals who purchased insurance from a Health Care Exchange \15\
accurately reconcile on their tax returns advance payments of the
Premium Tax Credit (PTC) \16\ they may have received.
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\15\ Exchanges are intended to allow eligible individuals to obtain
health insurance, and all Exchanges, whether State-based or established
and operated by the Federal Government, are required to perform certain
functions.
\16\ A refundable tax credit to assist individuals and families in
purchasing health insurance coverage through an Affordable Insurance
Exchange.
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Since enactment of the Affordable Care Act, these responsibilities
have required the IRS to develop new information technology, modify
existing computer systems, and establish new or revised filing,
reporting, and compliance processes and procedures. The IRS's fiscal
year 2016 budget request includes $490 million to fund 2,539 FTEs for
continued efforts related to the implementation of ACA. The largest
components of this increase are $306 million to implement information
technology changes to deliver ACA tax credits; $101 million to improve
taxpayer service and return processing; and $67 million to address the
impact of new ACA statutory requirements.
In addition, the IRS continues to dedicate significant resources to
detect and review potential identity theft tax returns as well as to
assist victims. Resources have not been sufficient for the IRS to work
identity theft cases dealing with refund fraud, which continues to be a
concern. IRS employees who work the majority of identity theft cases
are telephone assistors who also respond to taxpayers' calls to the
IRS's toll-free telephone lines. This has contributed to the IRS's
inability to timely resolve victims' cases as well as the continued
decline in its ability to respond to taxpayers' written correspondence.
The allocation of limited resources requires difficult decisions, with
a focus on balancing taxpayer assistance on the toll-free telephone
lines during the filing season with other various priority programs,
such as identity theft and aged work.
For example, the IRS previously reallocated ACS staff, who attempt
to collect taxes through telephone contact with taxpayers, to work the
growing inventory of identity theft cases. The combination of fewer
resources and the need to continue answering telephone calls has
contributed to trends that have been unfavorable to several ACS
business results over the past 4 years. Specifically, we determined
that inventory is growing because new inventory is outpacing case
closures; cases in inventory are aging because inventory is taking
longer to close; revenue declined while more cases were closed as
uncollectible; and fewer enforcement actions (liens and levies) were
taken.\17\
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\17\ TIGTA, Ref. No. 2014-30-080, Declining Resources Have
Contributed to Unfavorable Trends in Several Key Automated Collection
System Business Results (Sep. 2014).
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During the past several years, the IRS has continued to take steps
to more effectively detect and prevent the issuance of fraudulent
refunds resulting from identity theft tax return filings. The IRS
reported that in Filing Season 2013, its efforts prevented between $22
billion and $24 billion in identity theft tax refunds from being
issued.\18\ This is a result of the IRS's continued enhancement of
filters used to detect tax returns with a high likelihood of involving
identity theft at the time the returns are processed. For example, the
IRS used 11 filters in Processing Year (PY) 2012 to identify tax
returns with a high likelihood of involving identity theft, compared to
114 filters used in PY 2014. The use of these filters assists the IRS
in more effectively allocating its resources to address identity theft
tax refund fraud.
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\18\ IRS Identity Theft Taxonomy, dated September 15, 2014, page 1.
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The IRS has also taken steps to more effectively prevent the filing
of identity theft tax returns by locking the tax accounts of deceased
individuals to prevent others from filing a tax return using their name
and Social Security Number. The IRS has locked approximately 26.3
million taxpayer accounts between January 2011 and December 31, 2014.
In addition, the IRS issues an Identity Protection Personal
Identification Number (IP PIN) to any taxpayer who is a confirmed
victim of identity theft or who has reported to the IRS that he or she
could be at risk of identity theft. Once the IRS confirms the identity
of a victim or ``at-risk'' taxpayer, the IRS will issue the taxpayer an
IP PIN for use by the taxpayer when filing his or her tax return. The
presence of a valid IP PIN on the tax return tells the IRS that the
rightful taxpayer filed the tax return, thus reducing the need for the
IRS to screen the tax return for potential identity theft. The IRS has
issued more than 1.5 million IP PINs for PY 2015.
Despite these improvements, the IRS recognizes that new identity
theft patterns are constantly evolving and, as such, it needs to adapt
its detection and prevention processes. The IRS's own analysis
estimates that identity thieves were successful in receiving over $5
billion in fraudulent tax refunds in Filing Season 2013. This will
require the continued expenditure of resources that could otherwise be
used to respond to taxpayer telephone calls, answer correspondence, and
resolve discrepancies on tax returns.
In addition, TIGTA reported that not all eligible individuals are
receiving an IP PIN and victims continue to experience delays and
errors in receiving refunds. Specifically, we reported that the IRS did
not provide an IP PIN to 557,265 eligible taxpayers for PY 2013.\19\
Excluding eligible taxpayers from the IP PIN program will delay IRS
processing of their tax returns and receipt of their tax refund. We
also reported that the IRS continues to make errors on the tax accounts
of victims of identity theft.\20\ These errors further delayed refunds
issued to taxpayers and required the IRS to reopen cases and expend
limited resources to resolve the errors.
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\19\ TIGTA, Ref. No. 2014-40-086, Identity Protection Personal
Identification Numbers Are Not Provided to All Eligible Taxpayers (Sep.
2014).
\20\ TIGTA, Audit No. 201340036, Identity Theft Victim Assistance--
Follow-Up, report planned for March 2015.
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Another challenging area is the ongoing IRS impersonation scam.
Between October 2013 and January 31, 2015, TIGTA has logged
approximately 300,000 contacts from taxpayers who reported that they
received telephone calls from individuals claiming to be IRS employees.
The impersonators told the victims that they owed additional tax and,
if the tax was not immediately paid, they would be arrested, lose their
driver's licenses, or face other consequences. As of January 31, 2015,
more than 3,000 victims have reported an aggregate loss in excess of
$15 million dollars. While TIGTA investigates these complaints, we have
worked closely with the IRS, the Federal Trade Commission and local
media outlets to publish press releases, warnings, and other public
awareness announcements in order to warn taxpayers of the scam. The
sheer volume of contacts from concerned taxpayers is an additional
strain on IRS resources.
The IRS must continue to identify and implement innovative and
cost-saving strategies to accomplish its mission of providing America's
taxpayers with top-quality service by helping them understand and meet
their tax responsibilities and enforce the law with integrity and
fairness.
effectiveness and efficiency of the irs
While the IRS faces many challenges, TIGTA has recently reported on
several other areas where the IRS can achieve cost savings, more
efficiently use its limited resources, and make more informed business
decisions. In addition, timelier reporting of third-party data and
additional authority would assist the IRS in improving tax
administration.
Opportunities Exist for Additional Cost Savings
In August 2012, TIGTA reported that the IRS can achieve additional
cost savings by better managing its real property costs. TIGTA reported
that the IRS completed 17 space consolidation and relocation projects
from October 2010 through December 2011, which the IRS estimated would
result in $2.8 million of realized rent savings in fiscal year 2012.
However, we reported that the IRS continues to incur rental costs for
more workstations than required. TIGTA estimated that if the employees
the IRS allows to routinely telework on a full- or part-time basis
shared their workstations on days they were not in the office, 10,244
workstations could potentially be eliminated. The sharing of these
workstations could allow the IRS to reduce its long-term office space
needs by almost one million square feet, resulting in potential rental
savings of approximately $111 million over 5 years. The IRS agreed with
our recommendations and indicated it would revise interim and long-
range portfolio strategies for future space needs at sites to include
workstation sharing as appropriate.\21\
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\21\ TIGTA, Ref. No. 2012-10-100, Significant Additional Real
Estate Cost Savings Can Be Achieved by Implementing a Telework
Workstation Sharing Strategy (Aug. 2012).
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In September 2014, TIGTA also reported that potential cost savings
could be achieved from expanded electronic filing of business
returns.\22\ IRS efforts have resulted in considerable growth in the
electronic filing of individual tax returns, which stood at an 81
percent rate in PY 2012. In comparison, the electronic filing rate of
business tax returns in Tax Year (TY) 2012 was 41 percent. Employment
tax returns provide the most significant opportunity for growth in
business electronic filing. For TY 2012, more than 21.1 million (71
percent) employment tax returns were paper-filed. The Electronic
Federal Tax Payment System (EFTPS) has been used in the past to
facilitate the e-filing of employment tax returns for Federal agencies.
TIGTA recommended that the IRS consider this option for business
taxpayers. Providing businesses the ability to electronically file
their tax returns concurrently with payment of their tax due on the
same system could provide one-stop service which would benefit business
filers.
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\22\ TIGTA, Ref. No. 2014-40-084, A Service-Wide Strategy Is Needed
to Increase Business Tax Return Electronic Filing (Sep. 2014).
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The IRS did not agree to implement this recommendation and offered
as an explanation that the Modernized e-File system has been
established as the system for receiving employment tax returns
electronically. This system provides taxpayers with the ability to
remit tax payments when submitting their returns. Notwithstanding this
explanation, the implementation of this system has not resulted in a
significant increase in the e-filing rate for these tax returns.
Moreover, this system does not accept quarterly employment tax
deposits.
In September 2014, TIGTA reported that the IRS does not effectively
manage server software licenses and is not adhering to Federal
requirements and industry best practices. Until the IRS addresses these
issues, it will continue to incur increased risks in managing software
licenses. TIGTA estimates that the inadequate management of server
software licenses potentially costs the Government between $81 million
and $114 million, based on amounts spent for licenses and annual
license maintenance that were not being used.\23\ While the IRS agreed
with our recommendation to improve the management of server software
licenses, it believes it has subsequently mitigated some of these
issues.
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\23\ TIGTA, Ref. No. 2014-20-042, The Internal Revenue Service
Should Improve Server Software Asset Management and Reduce Costs (Sep.
2014).
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Finally, TIGTA estimates that the IRS may have issued more than
$439 million in potentially erroneous tax refunds claimed on 187,421
amended returns in fiscal year 2012. Currently, amended tax returns can
only be filed on paper and are manually processed. TIGTA's review of a
statistical sample of 259 amended tax returns identified 44 tax returns
(17 percent) with questionable claims. TIGTA reported that the
processes the IRS uses to verify originally filed tax returns would
have identified most of the 44 questionable amended returns TIGTA
identified as needing additional scrutiny before the refund was paid.
TIGTA forecasts using these same processes could prevent the issuance
of more than $2.1 billion in erroneous refunds associated with amended
tax returns over the next 5 years. In addition, TIGTA reported that the
IRS could have potentially saved $17 million in fiscal year 2012 if it
allowed taxpayers to electronically file amended tax returns.\24\ The
IRS agreed with TIGTA's recommendation to expand electronic filing of
amended tax returns.
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\24\ TIGTA, Ref. No. 2014-40-028, Amended Tax Return Filing and
Processing Needs to Be Modernized to Reduce Erroneous Refunds,
Processing Costs, and Taxpayer Burden (Apr. 2014).
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The IRS Could Take Actions to More Efficiently Use Its Limited
Resources
TIGTA has identified other opportunities for the IRS to more
efficiently use its available resources. For example, TIGTA identified
potential improvements in the efficiency of the ACS.\25\ The ACS plays
an integral role in the IRS's efforts to collect unpaid taxes and
secure unfiled tax returns. ACS employees are responsible for
collecting unpaid taxes and securing tax returns from delinquent
taxpayers who have not complied with previous notices. The number of
ACS contact representatives in fiscal year 2013 was 39 percent less
than in fiscal year 2010 due either to attrition or reassignment, and
these resources are needed to answer incoming telephone calls and work
identity theft cases. This resulted in fewer resources available to
devote to the collection of unpaid taxes. However, the IRS's overall
collection inventory practices were not changed to reflect the reduced
workforce and, as a result, new inventory continued to be sent to the
ACS without interruption, even though inventory was infrequently
worked. This has had a substantial impact on the amount of Federal
taxes that remain uncollected.
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\25\ TIGTA, Ref. No. 2014-30-080, Declining Resources Have
Contributed to Unfavorable Trends in Several Key Automated Collection
System Business Results (Sep. 2014).
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The IRS agreed with our recommendations to re-examine the ACS's
role in the collection workflow process, including inventory delivery
to the ACS as well as case retention criteria, and to align ACS
resources accordingly. In addition, the IRS also agreed to establish
performance metrics for ACS call data to measure the impact that
answering taxpayer calls has on compliance business results. Capturing
these data could allow ACS management to assess the impact of
prioritizing call handling versus working inventory and of limiting
enforcement actions in order to reduce the volume of incoming calls to
the ACS.
TIGTA also found that the IRS's fieldwork collection process is not
designed to ensure that cases with the highest collection potential are
identified, selected, and assigned to be worked.\26\ Although the IRS
has begun some initiatives intended to improve the workload selection
process, TIGTA believes further action is warranted.\27\ With
significant growth in delinquent accounts and a reduction in the number
of employees, it is essential that the field inventory selection
process identifies the cases that have the highest risk and potential
for collection.
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\26\ The IRS's Collection function has the primary responsibility
for collecting delinquent taxes and tax returns while ensuring that
taxpayer rights are protected.
\27\ TIGTA, Ref. No. 2014-30-068, Field Collection Could Work Cases
With Better Collection Potential (Sep. 2014).
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TIGTA is currently following up on our recommendations regarding
inappropriate criteria the IRS used to identify organizations applying
for tax-exempt status for review in the area of political campaign
intervention. TIGTA has determined that the IRS has taken significant
actions to (1) eliminate the selection of potential political cases
based on names and policy positions, (2) expedite processing of
Internal Revenue Code Section 501(c)(4) social welfare applications,
and (3) eliminate unnecessary information requests.\28\
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\28\ TIGTA, Audit Number 201410009, Status of Actions Taken to
Improve the Processing of Tax-Exempt Applications Involving Political
Campaign Intervention, report planned for April 2015.
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Better Processes and Information Would Assist the IRS in Making
Informed Decisions
TIGTA has also identified areas in which the IRS could make more
informed business decisions when determining how to use its limited
resources. For example, the IRS eliminated or reduced services at
Taxpayer Assistance Centers, or TACs. This move was completed to
balance taxpayer demand for services with the IRS's anticipated budget
cuts, redirect taxpayers to online services, enable assistors to
dedicate more time to answer tax account-related inquiries, and offer
other services at the TACs, such as identity theft services and
acceptance of payments. Although the IRS stated that the services
eliminated or reduced were, in part, the result of the IRS's
anticipated budget cuts, TIGTA reported that the IRS's plans did not
show to what extent the service cuts would lower the costs.
The services the IRS reduced or eliminated at the TACs include
preparation of tax returns, refund inquiries, transcript requests, and
assistance with tax law questions.\29\ These services were reduced or
eliminated without evaluating the burden that the changes would have on
the low-income, elderly, and limited-English-proficient taxpayers who
seek face-to-face service. For example, management decided to stop
providing tax transcripts at the TACs, informing customers that they
should use its online application ``Get Transcript.'' However, this
decision was made with no analysis of the anticipated increase in
traffic to this online application to ensure that it could meet the
increased demand. In February 2014, IRS management modified its plan to
stop providing transcripts at the TACs, based on concerns about the
expected volume of online requests for transcripts as well as concerns
raised regarding the launch of another Federal Government Web site.
Management subsequently changed its position, alerting assistors at the
TACs to encourage taxpayers to use the ``Get Transcript'' application
but also indicated it will not turn away taxpayers who request
transcripts.
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\29\ TIGTA, Ref. No. 2014-40-038, Processes to Determine Optimal
Face-to-Face Taxpayer Services, Locations, and Virtual Services Have
Not Been Established (June 2014).
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Furthermore, we reported that a process has not been developed to
expand Virtual Service Delivery, which integrates video and audio
technology to allow taxpayers to see and hear an assistor located at
remote locations. Taxpayers can use this technology to obtain many of
the services available at the TACs. The IRS's stated goals for Virtual
Service Delivery are to enhance the use of IRS resources, optimize
staffing, and balance its workload. We recommended that the IRS
establish a process to identify the best locations for virtual face-to-
face services. However, the IRS did not agree to follow through on this
recommendation because, in its view, it has established a process to
identify the best locations for virtual face-to-face services. However,
we believe that the IRS's geographic coverage methodology does not
identify optimal underserved areas across the country that would
benefit the most from Virtual Service Delivery expansion.
TIGTA also found that the IRS's use of cost/benefit information in
managing its enforcement resources could be significantly improved.\30\
The allocation of enforcement resources represents an increasingly
complex challenge for the IRS in light of significant reductions in its
budget. Return on investment (ROI) information, including both
estimated ROI for new enforcement initiatives and cost/benefit
calculations based on actual program results and costs, is an important
tool available to assist IRS senior executives in managing enforcement
resources. Although cost/benefit information is considered in making
resource allocation decisions, the IRS does not document how or to what
extent it uses the information and has no policies or procedures to
guide this process. TIGTA also found that the IRS continues to be
unable to measure actual revenue from new enforcement initiatives
funded in prior years.
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\30\ TIGTA, Ref. No. 2013-10-104, The Use of Return on Investment
Information in Managing Tax Enforcement Resources Could Be Improved
(Sep. 2013).
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We also determined that the IRS's processes do not ensure that
corporations accurately claim carryforward general business
credits.\31\ During PY 2013, corporate filers claimed more than $93
billion in general business credits. These credits offset taxes owed by
more than $21 billion. TIGTA identified 3,285 e-filed Forms 1120, U.S.
Corporation Income Tax Return, filed in PY 2013 on which corporations
claimed potentially erroneous carryforward credits totaling more than
$2.7 billion. We recommended the IRS develop processes to address the
deficiencies identified in our report. The IRS does not plan to
implement this recommendation due to lack of information technology
resources and competing priorities.
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\31\ The general business credit is offered as an incentive for a
business to engage in certain kinds of activities considered beneficial
to the economy or the public at large and is used to reduce a
corporation's regular tax liability. A carryforward is the amount of
the general business credit that is unused because of the tax liability
limit for claiming the credit.
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In addition, TIGTA recently reported that the IRS hired some former
employees with prior substantiated conduct or performance issues.\32\
The practice of rehiring former employees with known conduct and
performance issues presents increased risk to the IRS and taxpayers.
For example, TIGTA found that nearly 20 percent of the rehired former
employees TIGTA sampled who had prior substantiated or unresolved
conduct or performance issues also had new conduct or performance
issues after being rehired. This is significant because the time spent
by IRS managers addressing performance and conduct issues is time taken
away from serving taxpayers and enforcing the law.
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\32\ TIGTA, Ref. No. 2015-10-006, Additional Consideration of Prior
Conduct and Performance Issues Is Needed When Hiring Former Employees
(Dec. 2014).
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The IRS is also dedicating significant resources toward addressing
what it believes to be the most significant risks to compliance, such
as the challenge presented by taxpayers' increasing use of flow-through
entities, such as partnerships.\33\ In the IRS's 2014-2017 Strategic
Plan,\34\ one of its stated goals is to ensure compliance with tax
responsibilities and to combat fraud, and one of its stated measures of
success is an increase in voluntary compliance by 3 percent from 83
percent to 86 percent by 2017.
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\33\ Between 2008 and 2012, the number of business partnership
filings increased by 21 percent.
\34\ IRS Strategic Plan Fiscal Year 2014-2017.
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TIGTA continues to audit the efficiency and effectiveness of the
IRS's efforts to reduce the Tax Gap \35\ and improve voluntary tax
compliance. In the area of partnership compliance, for example, the IRS
initiated its Partnership Strategy in July 2012 to improve the
partnership audit process in light of the significant increase in
partnership filings and complexities associated with auditing
partnership returns. TIGTA recently completed a review of the
partnership audit program and found that the IRS has no effective way
to assess the productivity of its partnership audits since many complex
partnerships have multiple layers of flow-through entities.\36\ In
order to track partnership audits, the IRS uses a decade's old system
that is unable to provide information on the total amount of taxes that
are ultimately assessed to the taxable partners as a result of
adjustments made to the partnership returns. Therefore, the IRS is
unable to assess the full impact of its partnership compliance
activities.
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\35\ The Tax Gap is the difference between what all taxpayers owe
and what they pay. The IRS estimated the net tax gap (after factoring
in forced collections) to be approximately $385 billion annually.
\36\ TIGTA, Audit No. 201430027, Additional Improvements Are Needed
to Measure the Success and Productivity of the Partnership Audit
Process, report planned for March 2015.
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The IRS agrees that this is a significant problem but asserts that
a new information technology system is the only means to obtain the
necessary information on the productivity of its partnership compliance
program. Until such time as the IRS upgrades its systems, TIGTA
believes the IRS could make better use of the significant research
capacity within the IRS to address this formidable tax compliance
challenge. Although the IRS has requested over $16 million as part of
its fiscal year 2016 budget request to increase the number of agents
with specialized experience in auditing large partnerships, it has not
taken the steps to improve the tracking of the results of its
partnership audits so that it can make the best use of its resources
devoted to this area.
More Timely Third-Party Reporting and Correctable Error Authority
Each year, the IRS receives information returns filed by third
parties such as employers and educational institutions. These returns
provide the IRS the information needed to verify taxpayers' claims for
benefits such as the Earned Income Tax Credit (EITC) and the American
Opportunity Tax Credit (AOTC). However, information returns are
generally not filed with the IRS until after most taxpayers file their
annual tax returns. As a result, the IRS cannot use the information
contained on these information returns to verify tax returns until
after those tax returns are processed and refunds are issued.
For example, the IRS estimates that in fiscal year 2013, 30 percent
of (or $4.35 billion) in improper EITC payments resulted from
verification errors associated with the IRS's inability to identify
taxpayers who misreport their income to erroneously claim the EITC.
TIGTA's review of TY 2012 tax returns identified more than $1.7 billion
in potentially erroneous EITC claims on tax returns for which no third-
party Forms W-2, Wage and Tax Statement, supporting the wages reported
had been received by the IRS. However, the IRS does not have the Forms
W-2 information at the time most of these tax returns are processed.
Employers who file paper Forms W-2 are not required to file these forms
until February of each year. Employers who e-file Forms W-2 have until
the end of March each year to file.
TIGTA also estimates that the IRS issued more than $3.2 billion in
potentially erroneous education credits in TY 2012 for students for
whom the IRS did not receive a Form 1098-T, Tuition Statement, from a
postsecondary educational institution.\37\ Educational institutions are
required to provide a Form 1098-T to students who attend their
institution and file a copy of Form 1098-T with the IRS. The Form 1098-
T provides the name and Employer Identification Number of the
institution, the name and Taxpayer Identification Number of the student
who attended, and information on whether the student attended half-time
or was a graduate student. However, these forms are not available at
the time the tax returns are filed. Consequently, the IRS is not able
to use this information to identify potentially erroneous claims when
tax returns are processed. As with the Form W-2, Forms 1098-T generally
do not have to be filed with the IRS until the end of March each year.
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\37\ TIGTA, Audit Number 201440015, Billions of Dollars in
Potentially Erroneous Education Credits Continue to be Claimed for
Ineligible Students and Institutions, report planned for March 2015.
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Requiring third parties such as employers and educational
institutions to file information returns earlier will provide the IRS
with the opportunity to use the information contained on these forms to
verify tax returns at the time they are processed rather than after
refunds are issued. This could significantly improve the IRS's ability
to prevent the issuance of billions of dollars in erroneous tax
benefits, including the EITC and education credits.
However, even if the third-party information returns are received
more timely, the IRS still needs certain authorities to more
efficiently and effectively use these data to address taxpayer
noncompliance. Generally, the IRS must audit any tax return it
identifies with a questionable claim before the claim can be adjusted
or denied, even if the IRS has reliable data that indicate the claim is
erroneous. However, the number of tax returns the IRS can audit is
limited to available resources and the need to provide a balanced
enforcement program among all taxpayer segments.
The IRS does have math error authority \38\ to systemically address
erroneous claims that contain mathematical or clerical errors or EITC
claims with an invalid qualifying child's Social Security Number. The
IRS estimates that it costs $1.50 to resolve an EITC claim using math
error authority, compared to $278 to conduct a pre-refund audit.
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\38\ Under current law, the IRS can adjust tax returns on which the
taxpayer has made a math error utilizing summary assessment procedures.
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However, the majority of erroneous claims that the IRS identifies
do not contain the types of errors for which it has math error
authority. For example, in TY 2011, the IRS identified approximately
6.6 million potentially erroneous EITC claims totaling approximately
$21.6 billion that it could not address using existing math error
authority. In addition, the number of potentially erroneous EITC claims
that the IRS can audit is further reduced by its need to allocate its
limited resources among the various areas of taxpayer noncompliance to
provide a balanced tax enforcement program. As a result, billions of
dollars in potentially erroneous EITC claims go unaddressed each year.
The Department of the Treasury has included a legislative proposal
to obtain correctable error authority as part of the IRS's budget
requests each year since fiscal year 2013, which would permit the IRS
to disallow tax benefit claims when Government data sources do not
support information on the tax return, or when taxpayers have failed to
include required documentation with their tax return or exceeded the
lifetime limit for claiming a deduction or credit. This authority would
enable the IRS to systemically deny all tax claims for which the IRS
has reliable data showing the claim is erroneous. The data available
for IRS use in verifying tax returns go beyond that which is provided
to the IRS on information returns such as the Form W-2.
For example, the Affordable Care Act requires Health Care Exchanges
to provide data to the IRS on a monthly basis for each individual
enrolled in the Exchange who purchased a qualified health insurance
plan, including the amount of advance Premium Tax Credits (PTC)
received. The Department of Health and Human Services estimates more
than 6 million individuals purchased insurance through an Exchange in
Calendar Year 2014. The Exchange data are available at the time tax
returns are processed and can be used to ensure taxpayers have
purchased insurance through an Exchange as required and have properly
reconciled advance PTC payments on their tax returns before refunds are
paid. However, the IRS was not given the authority to use the Exchange
data to systemically disallow a PTC claim for which the data show the
claim is erroneous. As a result, the IRS must audit these tax returns.
The IRS has authority to use the Department of Health and Human
Services National Directory of New Hires (NDNH) which contains wage
information to verify EITC claims. However, the IRS does not have the
authority to systemically disallow an EITC claim that is not supported
by NDNH data. Therefore, the IRS must audit the EITC claims it
identifies for which NDNH data indicate the income reported is
potentially erroneous. TIGTA estimates the use of correctable error
authority along with expanded use of the NDNH could have potentially
prevented the issuance of the more than $1.7 billion in questionable
EITC claims in TY 2012 for which the IRS had no Form W-2 from an
employer. TIGTA forecasted that these processes could prevent the
issuance of more than $8.5 billion in potentially erroneous EITC claims
over the next 5 years.
A similar issue also exists with education credits. To qualify for
an education credit, students must attend a postsecondary educational
institution that is certified by the Department of Education to receive
Federal student aid funding. The Department of Education Postsecondary
Education Participants System (PEPS) database includes all educational
institutions certified to receive Federal student aid funding. TIGTA's
comparison of TY 2012 tax returns with the Department of Education PEPS
database identified more than 1.6 million taxpayers who received
education credits totaling approximately $2.5 billion for students who
attended institutions that are not certified to receive Federal student
aid funding. As with the EITC, the IRS must audit these tax returns
before the erroneous claim can be denied.\39\
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\39\ TIGTA, Audit Number 201440015, Billions of Dollars in
Potentially Erroneous Education Credits Continue to be Claimed for
Ineligible Students and Institutions, report planned for March 2015.
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Despite the IRS's numerous efforts, it is unlikely that it will
achieve any significant reduction in erroneous payments without more
timely access to third-party information and the ability to
systemically deny erroneous claims at the time a tax return is
processed. Given the scope of the improper payments that the IRS
reports each year, in addition to the improper payments that remain
unreported, changes in existing compliance methods could have a
significant financial impact by enabling the IRS to more efficiently
and effectively address this problem.
tigta budget request for fiscal year 2016
As requested by the subcommittee, I will now provide information on
our budget request for fiscal year 2016.
TIGTA's fiscal year 2016 proposed budget requests appropriated
resources of $167,275,000, an increase of 5.7 percent from the fiscal
year 2015 enacted budget. TIGTA will continue to focus on its mission
of ensuring an effective and efficient tax administration. The fiscal
year 2016 budget resources include funding to support TIGTA's critical
audit, investigative, and inspection and evaluation priorities, while
still maintaining a culture that continually seeks to identify
opportunities to achieve efficiencies and cost savings.
During fiscal year 2014, TIGTA's combined audit and investigative
efforts have recovered, protected, and identified monetary benefits
totaling $16.6 billion,\40\ including cost savings, increased revenue,
revenue protection,\41\ and court-ordered settlements in criminal
investigations, and have affected approximately 3.6 million taxpayer
accounts. Based on TIGTA's fiscal year 2014 budget of $156.4 million,
this represents a return on investment of $106-to-$1.
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\40\ This figure includes dollars potentially compromised by
bribery; dollar amount of tax liability for taxpayers who threaten and/
or assault IRS employees; dollar value of resources protected against
malicious loss; dollar amount of embezzlement or taxpayer remittance
theft; dollar value of Government property recovered; dollar value of
court ordered criminal and civil penalties, fines, and restitution; and
dollar value of seizures, forfeitures, and recoveries from contract
fraud.
\41\ Recommendations made by TIGTA to ensure the accuracy of the
total tax, penalties, and interest paid to the Federal Government.
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TIGTA's Audit Priorities
TIGTA's audit priorities include mitigating risks associated with
tax refund fraud and identity theft, monitoring the IRS's
implementation of the Affordable Care Act and other tax law changes,
and assessing the IRS's efforts to improve tax compliance involving
foreign financial assets and offshore accounts.
Recent audit work has shown that the IRS could develop or improve
processes that will increase its ability to detect and prevent the
issuance of fraudulent tax refunds resulting from identity theft. In
addition, TIGTA has concerns about the security of tax data provided to
the Exchanges and is also concerned that the potential for refund fraud
and related schemes could increase as a result of processing ACA
Premium Tax Credits.
Several key ACA provisions became effective in fiscal year 2015,
and the IRS must ensure that the tax administration system is able to
fully implement these provisions. Consequently, TIGTA has implemented a
multi-year audit strategy to assess the IRS's implementation of the
ACA. This strategy includes coordination with other agencies, including
the Department of Health and Human Services Office of Inspector
General. TIGTA is conducting or planning to initiate 10 ACA-related
audits during fiscal year 2015.
The tax compliance of business and individual taxpayers involved in
international transactions remains a significant concern for the IRS.
Complex transfer pricing issues and identifying U.S. taxpayers with
hidden foreign assets and accounts continue to demand additional IRS
resources. TIGTA will continue to perform audit work to assess the
IRS's compliance with provisions of the Foreign Account Tax Compliance
Act \42\ and its efforts to improve tax compliance involving foreign
financial assets and offshore accounts.
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\42\ Public Law No. 111-147, Subtitle A, 124 Stat 97
(2010)(codified in scattered sections of 26 U.S.C.).
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TIGTA's Investigative Priorities
TIGTA's investigative priorities include investigating allegations
of serious misconduct and criminal activity by IRS employees; ensuring
that IRS employees are safe and IRS facilities, data and infrastructure
are secure and not impeded by threats of violence; and protecting the
IRS against external attempts to corrupt or otherwise interfere with
tax administration.
IRS employees are entrusted with the sensitive personal and
financial information of taxpayers. It is particularly troubling when
IRS employees misuse their positions in furtherance of identity theft
and other fraud schemes. TIGTA will continue to proactively review the
activities of IRS employees who access taxpayer accounts for any
indication of unauthorized accesses that may be part of a larger fraud
scheme and conduct investigations into suspected wrongdoing.
For TIGTA's investigators, our experience has shown that the IRS's
expanded role under the ACA may spark a new wave of animosity directed
toward IRS employees that could result in threats of violence or the
actual assault of IRS employees and attacks on IRS facilities. For
example, TIGTA has investigated threats made by taxpayers to IRS
employees as a result of the IRS offsetting their Federal tax refunds
for the repayment of student loans or court-ordered child support
payments. As ACA provisions start to take effect, additional resources
will be dedicated to investigating related threats.
Shortly after the Supreme Court upheld the constitutionality of the
ACA, the media reported that criminals impersonated a Federal agency in
an attempt to fraudulently obtain personally identifiable information
from unsuspecting taxpayers. Criminals could use such sensitive
information to further their identity theft schemes and other crimes
under the guise that the information was required for ACA compliance.
Based upon our experience investigating this type of criminal activity,
TIGTA anticipates a significant increase in the number of ACA-related
impersonation attempts as the IRS begins its role in ACA compliance
activity.
Between fiscal years 2011 and 2014, TIGTA processed over 10,240
threat-related complaints and conducted over 4,990 investigations of
threats made against IRS employees. TIGTA will continue to aggressively
investigate individuals who threaten the safety and security of the IRS
and its employees.
As mentioned earlier, the TIGTA Hotline has received over 300,000
reports from taxpayers victimized by individuals impersonating IRS
employees in an effort to defraud them. As of January 31, 2015, more
than 3,000 victims have reported an aggregate loss in excess of $15
million dollars. TIGTA will continue to investigate these crimes
against taxpayers and alert the public to this scam to ensure that
innocent taxpayers are not harmed by these criminals.
We at TIGTA are committed to our mission of ensuring an effective
and efficient tax administration system and preventing, detecting, and
deterring waste, fraud, and abuse. As such, we plan to provide
continuing audit coverage of the IRS's efforts to operate efficiently
and effectively and investigate any instances of IRS employee
misconduct or fraud in IRS operations.
Chairman Boozman, Ranking Member Coons, and members of the
subcommittee, thank you for the opportunity to share my views.
Senator Boozman. Thank you very much.
I know that Senator Coons has a classified briefing that he
is supposed to be at. So we will go to him on this round.
Senator Coons. That is very kind of you. Thank you,
Chairman.
And I will try to be brief, if I might.
Mr. George, TIGTA identified security of taxpayer data as
the number-one management challenge facing the IRS. What are
your key concerns about the adequacy of their information
security, and how responsive has the IRS been to your
recommendations to bolster its systems? And what would you
recommend they make their top priority in terms of responding
to this concern?
Mr. George. They have been responsive, Senator. The new
Commissioner and I have had a long-term relationship, meaning
we have worked together in various capacities. He listens to
the concerns that we provide. They don't agree with 100 percent
of them, but they agree with enough so that I feel secure or
confident at least that some of the issues that we identify are
addressed.
I think it is very important to note, as the Commissioner
noted, they are under attack on a daily basis hundreds of
times. Fortunately, we have not yet detected any breaches to
the tax system that would undermine it, which obviously would
be devastating to this Nation. So, in that sense, we feel
confident.
Three, limited resources and their having to make difficult
choices as to what to focus on is going to put some of what I
just said to you possibly at risk or make it completely
inaccurate, depending upon what happens day to day. So----
Senator Coons. Given the response to your concerns,
criticisms, suggestions, what level of confidence do you have
that increased investment, increased available resources in
this area might actually result in a significant increase in
the security of this vital data?
Mr. George. There is no question if they had additional
resources to devote to this, it would enhance my confidence
that it would be more secure, sir.
Senator Coons. You identified implementing the ACA as the
number-two management challenge, and I just wondered what your
chief concerns are about the capacity of the IRS to meet their
responsibilities both for implementing rule writing and
administering the new responsibilities, and what
recommendations have you offered IRS on how to improve their
responsiveness here?
Mr. George. At the request of Congress, we are now in the
process of working both with the Inspector General of the
Department of Health and Human Services, as well as with my
people on this very important issue, sir. This is unprecedented
territory for the Internal Revenue Service, and so at this
stage, I am not in a position to give you a definitive answer.
All I can say is that we are monitoring it, and we will be
reporting out information in the very near future.
Senator Coons. And last, because I don't want to impose too
much on the chairman's kindness, the tax gap is estimated at
about $450 billion. That is about a 17 percent noncompliance
rate, which is really striking. What are your views on the
adequacies of the IRS's strategy to narrow the gap, and what
are the impediments that most need to be dealt with to attack
this or to deal with this, given the declining resources
available to the IRS?
Mr. George. First of all, we believe that that figure,
which is an IRS-produced figure, is actually understating the
problem. We believe that the international aspect of the tax
gap is not adequately included in that figure, and there is no
question that some of the many recommendations that we made in
this area and will continue to make include third-party
reporting.
There is a figure or a few figures, and I beg your
indulgence because it is so important that I think people
understand that, and this is according to the Internal Revenue
Service, there is such a high correlation between tax
compliance and third-party information reporting and
withholding of taxes.
The IRS estimates individuals whose wages are subject to
withholding report 99 percent of their wages. Self-employed
individuals who operate nonfarm businesses are estimated to
report only 68 percent of their income for tax purposes. But
the most striking figure, sir, is self-employed individuals
operating on a cash basis are estimated to report just 19
percent of their income.
So there is no question this is a tax policy question. If
everyone were required to fill out a form when someone cut
their lawn or painted their home, this third-party reporting
would help increase the amount of money that is reported as
tax--as income, rather, and ultimately taxes paid to the
Federal Government. But this is just one aspect of, what can be
done to address the tax gap.
Senator Coons. Well, thank you, and I look forward to
working with you this year and in the future to make sure that
your recommendations are being responded to appropriately by
the IRS.
Mr. Chairman, I was going to ask consent. There was a
statement received, I understand, by the subcommittee from the
president of the National Treasury Employees Union, just that
that be made a part of the record.
Senator Boozman. Sure. Without objection.
[The statement follows:]
Prepared Statement of the National Treasury Employees Union
Chairman Boozman, Ranking Member Coons and distinguished members of
the subcommittee, I would like to thank you for allowing me to provide
comments on the Internal Revenue Service (IRS) budget request for
fiscal year 2016. As president of the National Treasury Employees Union
(NTEU), I have the honor of representing over 150,000 Federal workers
in 31 agencies, including the men and women at the IRS.
Mr. Chairman, despite the critical role that the IRS plays in
helping taxpayers meet their tax obligations and generating revenue to
fund the Federal Government, the IRS' ability to continue doing so has
been severely challenged due to funding reductions in recent years.
Since fiscal year 2010, IRS funding has been cut by almost $1.2
billion, or 17 percent after adjusting for inflation. The funding
reductions have forced the IRS to operate under an exception-only
hiring freeze since December 2010, and will have forced the Service to
reduce the total number of full-time, permanent employees by 17,000 by
the end of the fiscal year. In particular, the number of employees
assigned to answer telephone calls from taxpayers fell from 9,400 in
2010 to 6,900 in 2014, a 26 percent drop. And despite the critical role
they play in maximizing taxpayer compliance and generating revenue, the
total number of Revenue Officers and Revenue Agents was down more than
3,600 at the end of fiscal year 2013, and without additional resources,
the IRS has warned it will lose another 1,800 enforcement personnel
through attrition by the end of fiscal year 2015. The lack of
sufficient staffing has strained IRS' capacity to carry out its
important taxpayer service and enforcement missions.
The drastic cuts to IRS' budget come at a time when the IRS
workforce is already facing a dramatically increasing workload with
staffing levels down by 13,000 since 2010, and more than 26 percent
below what they were just 18 years ago. In 1995, the IRS had a staff of
114,064 to administer tax laws and process 205 million tax returns. By
the close of 2013, staffing had fallen to 83,613 to administer a more
complicated tax code and process 242 million much more complex tax
returns and other forms. The IRS predicts it will lose another 4,000
full-time employees by the end of fiscal year 2015.
internal revenue service fiscal year 2016 budget request
NTEU was pleased to see that the administration's budget request
for the IRS would provide the agency with a total of $12.9 billion in
funding for fiscal year 2016, including $12.3 billion in base funding
and $667 million via a program integrity cap adjustment. The $12.9
billion in funding would represent an increase of more than $1.9
billion over the current fiscal year 2015 level, which would help
restore funding for important taxpayer service and enforcement
activities that have been slashed in recent years. These funding
reductions have adversely impacted IRS' ability to meet its mission,
and without action by Congress, IRS' ability to serve taxpayers and
enforce our Nation's tax laws will continue to erode.
I would also note that in previous years, NTEU has supported the
budget recommendations proposed by the IRS Oversight Board which have
generally called for additional resources above that requested by the
administration. For fiscal year 2016, the Oversight Board has
recommended $13.5 billion in funding for the IRS. While we have not
seen the specific details of the Board's proposal, we would be inclined
to support providing additional funding for the IRS above the
administration's request and look forward to reviewing the Board's
recommendation.
taxpayer services
Providing quality taxpayer service is a critical component of the
IRS' efforts to help the taxpaying public understand their tax
obligations while making it easier to participate in the tax system.
Unfortunately, the IRS' ability to provide excellent taxpayer service
has been severely challenged due to reduced funding in recent years and
the cuts mandated by sequestration. Without additional resources,
further degradation in taxpayer services will occur, jeopardizing our
voluntary compliance system.
Impact of Inadequate Funding on Taxpayer Services
In the past few years, many experts in the tax community, including
the National Taxpayer Advocate, IRS Oversight Board and the IRS
Advisory Council have all warned of the dangers of underfunding the IRS
and the adverse impact it has had on taxpayer service.
In January, the National Taxpayer Advocate, Nina Olson, released
her 2014 Annual Report to Congress which identifies the decline in IRS
taxpayer services due to reduced funding as the #1 most serious problem
facing taxpayers. The report describes in detail the severe reduction
to taxpayer services caused by repeated cuts to the IRS budget. Among
the report findings are:
--In fiscal year 2015, the IRS predicts that it will be able to
answer less than 50 percent of calls from taxpayers seeking
assistance--down from 87 percent in fiscal year 2004.
--Taxpayers who do manage to get through are expected to wait on hold
for 30 minutes on average, up from 2.6 minutes in fiscal year
2004.
--During the upcoming filing season, the IRS will not answer any tax-
law questions except ``basic'' ones. After the filing season,
the IRS will not answer any tax-law questions at all, leaving
the roughly 15 million taxpayers who file later in the year
unable to get answers to their questions by calling or visiting
IRS offices.
--The IRS historically has prepared tax returns for taxpayers seeking
its help, particularly for low income, elderly, and disabled
taxpayers. Eleven years ago, it prepared some 476,000 returns.
That number declined significantly over the past decade, and
last year the IRS announced it will no longer prepare returns
at all.
--The IRS has also said the funding reductions could result in delays
in refunds for some taxpayers. Those taxpayers who file paper
returns could wait an extra week or longer to see their refund.
Taxpayers with errors or questions on their returns that
require additional manual review will also face delays.
Mr. Chairman, it is evident that funding reductions in recent years
have seriously eroded the IRS' ability to provide taxpayers with the
services they need. Without the additional funding proposed in the
administration's budget request, taxpayers will continue experiencing a
degradation of services, including longer wait times to receive
assistance over the telephone, increasing correspondence inventories,
including letters from taxpayers seeking to resolve issues with taxes
due or looking to set up payment plans.
That is why we strongly support the President's request of $2.4
billion in funding for taxpayer services in fiscal year 2016, a $252
million increase over the current level. We believe this increase will
allow the IRS to restore customer service levels to meet rising
taxpayer demand and help taxpayers understand their obligations,
correctly file their returns, and pay taxes due in a timely manner.
Enforcement
Mr. Chairman, the funding reductions to the IRS budget in recent
years have also negatively impacted its ability to maximize taxpayer
compliance, prevent tax evasion and reduce the deficit.
Impact on Voluntary Compliance and Tax Gap
NTEU strongly believes our system of voluntary tax compliance is
most effective when the IRS is able to assist those trying to meet
their obligations under the law. In particular, by assisting taxpayers
with their tax questions before they file their returns, the IRS can
help prevent inadvertent noncompliance and reduce burdensome post-
filing actions, such as audits and penalties.
Unfortunately, as noted previously, funding reductions have
resulted in the inability of millions of taxpayers to get answers from
IRS call centers and at taxpayer assistance centers (TACs), which
lessens their ability to meet their tax obligations.
The National Taxpayer Advocate has previously warned that limited
resources were impeding IRS' ability to conduct education and outreach
to taxpayers, including small businesses, which is critical to ensuring
they are able to understand and comply with their tax obligations. For
example, she has repeatedly warned staffing levels at TACs across the
country are woefully inadequate, with taxpayers lining up to enter IRS
offices well before those offices were even open and with some people
being turned away.
Inadequate staffing and the lack of availability of services at
TACs has long been a problem at the IRS and disproportionately impacts
the most vulnerable in our population who use TACs most often,
including non-English speaking taxpayers, the elderly and low income
individuals and families, who often need additional assistance in
understanding and meeting their tax responsibilities. If these
taxpayers are not provided the assistance they need to understand their
tax obligations, they may inadvertently file an incorrect return which
could necessitate the need for IRS to undertake post-filing actions
that are costly and burdensome to both the taxpayer and the IRS.
Incorrect filings could also result in taxpayers paying less than
they owe, further hampering efforts to close the tax gap, which is the
amount of tax owed by taxpayers that is not paid on time.
The adverse impact on IRS' capacity to collect revenue critical to
reducing the Federal deficit is clear. In fiscal year 2014, on a budget
of $11.2 billion, the IRS collected $3.1 trillion, roughly 93 percent
of Federal Government receipts. According to the IRS, every dollar
invested in IRS enforcement programs generates roughly $7 in return,
but reduced funding for enforcement programs in recent years has led to
a steady decline in enforcement revenue since fiscal year 2007. In
fiscal year 2014, IRS enforcement activities brought in $57.1 billion,
down more than $2 billion from the $59.2 billion in fiscal year 2007.
The $345 million reduction to IRS' budget for fiscal year 2015 will
further reduce IRS' ability to collect revenue and would result in the
loss of billions in revenue in fiscal year 2015 alone. That lost
revenue could otherwise be invested in critical Government programs or
be used to reduce the Federal deficit.
The IRS has warned that enforcement staffing will continue to be a
significant concern under the fiscal year 2015 funding level and has
cautioned that under this insufficient level of funding, the IRS will
lose another 1,800 enforcement personnel in fiscal year 2015. The
impact of the reduced staffing in enforcement will result in in at
least 46,000 fewer individual and business audit closures and more than
280,000 fewer Automated Collection System and Field Collection case
closures.
That is why NTEU was happy to see the administration's budget
request would provide a $539 million increase in funding for IRS tax
enforcement above the current level. This increase includes a program
integrity cap adjustment which provides critical funding designed to
protect revenue by identifying fraud and preventing issuance of
questionable refunds, including tax-related identity theft, addressing
offshore noncompliance, and improving collection coverage rates.
According to the administration, the additional funding provided via
the cap adjustment is expected to generate $2.8 billion in additional
annual enforcement revenue, resulting in a return on investment (ROI)
of more than 6 to 1, once new hires reach full potential in fiscal year
2018. This estimate does not account for the deterrent effect of IRS
enforcement programs, estimated to be at least three times larger than
the direct revenue impact.
conclusion
Chairman Boozman, Ranking Member Coons and members of the
subcommittee, thank you for the opportunity to provide NTEU's views on
the administration's fiscal year 2016 budget request for the IRS. NTEU
believes that only by restoring critical funding for effective
enforcement and taxpayer service programs can the IRS provide America's
taxpayers with quality service while maximizing revenue collection that
is critical to reducing the Federal deficit.
[This statement was submitted by Colleen M. Kelley, National
President.]
Senator Coons. And let me thank you very much for your
forbearance, allowing me to get to this classified briefing.
Senator Boozman. Good luck in your meeting.
Senator Coons. Thank you very much.
And thank you for your testimony.
Senator Boozman. Hopefully, you will learn a little.
Senator Coons. I hope.
Senator Boozman. Thank you very much, Mr. George, for being
here.
Mr. George. Certainly, sir.
Senator Boozman. The earned income tax credit has
previously been declared a high-risk program by OMB. The IRS
estimates that 24 percent of all payments made in fiscal year
2013, or $14.5 billion, were paid in error.
In addition, the IRS estimates that it has paid between
$124 billion and $148 billion in improper EITC payments, earned
income tax payments, in fiscal years 2003 to 2013. The IRS has
developed a strategy in an attempt to reduce the improper
payments that focuses on early intervention to ensure that
individuals claiming the credit are in compliance with the
earned income tax credit rules.
However, despite those efforts, the estimated improper
payment rate has remained relatively unchanged since fiscal
year 2003, and the amount of tax credit claims paid in error
has literally grown. I guess the question is the IRS noted that
it cannot fully address the earned income tax credit
noncompliance by simply auditing returns and must pursue
alternatives to traditional compliance efforts.
Have you made any recommendations to the IRS as to how to
combat the problem?
PREPARED STATEMENT
Mr. George. We have, sir. And you know, what I would like
to do at this point is allow or seek permission to include a
report that we have conducted on the earned income tax credit
into the record.
Senator Boozman. Without objection.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
This report presents the results of our review to assess the
Internal Revenue Service's efforts to identify and address the root
causes of erroneous Earned Income Tax Credit and Additional Child Tax
Credit payments. This audit is included in our Fiscal Year 2014 Annual
Audit Plan and addresses the major management challenge of Fraudulent
Claims and Improper Payments.
Management's complete response to the draft report is included in
Appendix IX.
Copies of this report are also being sent to the Internal Revenue
Service managers affected by the report recommendations. Please contact
me if you have questions or Russell Martin, Acting Assistant Inspector
General for Audit (Returns Processing and Account Services).
HIGHLIGHTS
Final Report issued on September 29, 2014
Highlights of Reference Number: 2014-40-093 to the Internal Revenue
Service Commissioner for the Wage and Investment Division.
impact on taxpayers
The Earned Income Tax Credit (EITC) and Additional Child Tax Credit
(ACTC) are refundable credits designed to help low-income individuals
reduce their tax burden. The IRS estimated that it paid $63 billion in
refundable EITCs and $26.6 billion in refundable ACTCs for Tax Year
2012. The IRS also estimated that 24 percent of all EITC payments made
in Fiscal Year 2013, or $14.5 billion, were paid in error.
why tigta did the audit
This audit was initiated because the IRS is required to identify
and take actions to address the root causes of improper payments in
Federal programs identified as being at high risk for improper
payments. The only IRS program identified as a high risk is the EITC.
The overall objective of this review was to assess the IRS's efforts to
identify and address the root causes of erroneous EITC and ACTC
payments.
what tigta found
Processes have been developed to identify improper EITC payments
and their root causes. However, the IRS has not developed processes to
quantify or identify the root causes of improper ACTC payments.
The IRS has continually rated the risk of improper ACTC payments as
low. However, TIGTA's assessment of the potential for ACTC improper
payments indicates the ACTC improper payment rate is similar to that of
the EITC. Using IRS data, TIGTA estimates the potential ACTC improper
payment rate for Fiscal Year 2013 is between 25.2 percent and 30.5
percent, with potential ACTC improper payments totaling between $5.9
billion and $7.1 billion. In addition, IRS enforcement data show the
root causes of improper ACTC payments are similar to those of the EITC.
Significant changes in IRS compliance processes would be necessary
to make any significant reduction in improper payments. Expanded
authority to make corrections to tax returns when data obtained from
the Department of Health and Human Services indicate the taxpayer's
refundable credit claims are not valid would help reduce improper
payments. TIGTA estimates such authority could have potentially allowed
the IRS to prevent more than $1.7 billion in questionable EITC payments
in Tax Year 2012.
what tigta recommended
TIGTA recommended that the IRS ensure that the results of the ACTC
Improper Payment Risk Assessment accurately reflect the high risk
associated with ACTC payments, identify the root causes of the improper
ACTC payments, and establish a plan to reduce erroneous payments.
Furthermore, if correctable error authority is granted, the IRS should
contract with the Department of Health and Human Services to obtain the
complete National Directory of New Hires database.
In addition, the IRS should work with the Assistant Secretary of
the Treasury for Tax Policy to consider a legislative proposal to
obtain expanded National Directory of New Hires database authority to
systemically verify claims for other income-based refundable credits
(e.g., the ACTC).
The IRS agreed with our recommendation to pursue expanded National
Directory of New Hire authority. The IRS did not agree with our other
recommendations. TIGTA's concerns with the IRS's response to the
recommendations are noted in the report.
ABBREVIATIONS
ACTC Additional Child Tax Credit
CTC Child Tax Credit
DDV Due Diligence Visit
EITC Earned Income Tax Credit
HHS Department of Health and Human
Services
IPERA Improper Payments Elimination and
Recovery Act
IPERIA Improper Payments Elimination and
Recovery Improvement Act
IPIA Improper Payments Information Act
IRS Internal Revenue Service
NDNH National Directory of New Hires
NRP National Research Program
OMB Office of Management and Budget
SSN Social Security Number
TIGTA Treasury Inspector General for Tax
Administration
BACKGROUND
Refundable credits are designed to help low-income individuals
reduce their tax burden or to provide incentives for other activities.
The number of these credits has varied over time because some credits
are available for a limited period that is set by law. The Internal
Revenue Service (IRS) reported that the amount of refundable tax
credits claimed by taxpayers has grown from approximately $9.4 billion
in fiscal year \1\ 1993 to more than $104 billion in fiscal year 2013.
The two largest refundable credits designed to help low-income
individuals are the Earned Income Tax Credit (EITC) and Additional
Child Tax Credit (ACTC). The EITC is used to offset the impact of
Social Security taxes on low-income families and to encourage them to
seek employment. The ACTC is used to adjust the individual income tax
structure to reflect a family's reduced ability to pay taxes as family
size increases. The EITC and the ACTC combined have increased almost 40
percent from Tax Year \2\ 2007 to Tax Year 2012. The IRS estimated that
it paid $47.5 billion in refundable EITCs and $16.4 billion in
refundable ACTCs for Tax Year 2007 compared to $63 billion and $26.6
billion, respectively, for Tax Year 2012.
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\1\ Any yearly accounting period, regardless of its relationship to
a calendar year. The Federal Government's fiscal year begins on October
1 and ends on September 30.
\2\ A 12-month accounting period for keeping records on income and
expenses used as the basis for calculating the annual taxes due. For
most individual taxpayers, the tax year is synonymous with the calendar
year.
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The EITC
Congress created the EITC in 1975. Since then, the EITC has been
modified a number of times to help improve the administration of the
credit and to make the law less complex. For example, the initial
eligibility requirements were revised to make taxpayers ineligible to
receive the credit when the taxpayer has a Social Security Number (SSN)
that is not valid for employment.\3\ Congress also implemented a
uniform definition of a qualifying child that applied to most child-
related tax provisions. Most recently, the EITC was expanded to provide
for a temporary increase in the EITC and expansion of the credit for
workers with three or more qualifying children.
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\3\ Non-U.S. citizens who do not have an employment authorization
must prove a valid nonwork reason for requesting an SSN in order to
receive one, generally for obtaining Government benefits (Federal,
State, or local) to which the individual is entitled.
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Taxpayers use Form 1040 (Schedule EIC), Earned Income Credit, to
report the EITC qualifying child information. Taxpayers must meet
specific criteria to qualify for the EITC that includes having a valid
SSN. Additional criteria apply for those taxpayers who have qualifying
children, including certain age, relationship, and residency tests. The
resulting amount of the EITC a taxpayer can receive is based on the
taxpayer's earned income and the number of qualifying children.
Appendix V lists the rules taxpayers must meet to qualify for the EITC.
The ACTC
The Child Tax Credit (CTC) and the ACTC (the refundable portion of
the CTC) were enacted by the Taxpayer Relief Act of 1997.\4\ Congress
believed that a tax credit for families with dependent children would
reduce the individual income tax burden for families, better recognize
the financial responsibilities of raising dependent children, and
promote family values. To qualify for the CTC, a taxpayer must have a
qualifying child.\5\ Taxpayers use Schedule 8812, Child Tax Credit, to
compute the ACTC and document whether the children claimed on the tax
return who have an Individual Taxpayer Identification Number \6\ meet
the qualifying eligibility tests of substantial presence in the United
States. The amount of the ACTC a taxpayer may receive, if any, is
dependent on the total amount of the taxpayer's CTC and the taxpayer's
earned income.
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\4\ Public Law No. 105-34, 111 Stat. 788.
\5\ A qualifying child for purposes of the CTC is a child who must
be claimed as a dependent on your tax return and meets other specific
eligibility tests, such as relationship, age, filing status, and
support. See Appendix VI for qualifying criteria.
\6\ An Individual Taxpayer Identification Number is an IRS-issued
identification number available to individuals who are required to have
a Taxpayer Identification Number for tax purposes but who do not have
and are not eligible to obtain an SSN because they are not authorized
to work in the United States.
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The CTC can reduce an individual's taxes owed by as much as $1,000
for each qualifying child.\7\ Because the CTC is nonrefundable, the
amount that can be claimed is limited to an individual's reported tax
liability. The ACTC is the refundable portion of the CTC and is
provided to qualifying individuals even if no income tax is withheld or
paid; that is, the credit can exceed the tax liability. Appendix VI
lists the basic eligibility and qualifying child requirements for the
CTC and the ACTC.
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\7\ The CTC amount has been $1,000 since Tax Year 2003.
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Like the EITC, Congress has changed the CTC and the ACTC several
times since they were enacted in Calendar Year 1997. These changes
allowed more families to be eligible for the ACTC. For example, the
American Recovery and Reinvestment Act of 2009 \8\ reduced the minimum
earned income amount used to figure the ACTC to $3,000.\9\ Reducing the
amount to $3,000 expanded the number of taxpayers who could then
qualify for the ACTC as well as increased the amount of the ACTC they
could receive. The $3,000 minimum earned income amount has been
extended by law through Tax Year 2017.
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\8\ Public Law No. 111-5, 123 Stat. 115.
\9\ Taxpayers must deduct the minimum earned income amount from
their earned income before applying the percentage allowed to figure
the refundable ACTC.
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Improper payments of refundable credits
The Office of Management and Budget (OMB) defines an improper
payment as any payment that should not have been made, was made in an
incorrect amount, or was made to an ineligible recipient. Various ways
have been put forth to identify, measure, and reduce Federal improper
payments, including laws specifically addressing improper payments, an
Executive order, and guidance by certain oversight agencies such as the
OMB. In addition, agency Inspectors General serve a role by evaluating
agency information related to improper payments. For example:
--The Improper Payments Information Act (IPIA) of 2002 \10\ requires
Federal agencies, including the IRS, to estimate the amount of
improper payments and report to Congress annually on the causes
of and the steps taken to reduce improper payments.
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\10\ Public Law No. 107-300, 116 Stat. 2350.
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--The Improper Payments Elimination and Recovery Act (IPERA) of
2010,\11\ enacted on July 22, 2010, amended the IPIA by
strengthening agency reporting requirements and redefining
``significant improper payments.'' Significant is defined as
gross annual improper payments, i.e., the total amount of
overpayments plus underpayments, made in the program during the
fiscal year reported that exceeded (a) both 2.5 percent of
program outlays and $10 million of all program or activity
payments or (b) $100 million.
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\11\ Public Law No. 111-204, 124 Stat. 2224.
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--Executive Order 13520, Reducing Improper Payments and Eliminating
Waste in Federal Programs, signed by the President on November
20, 2009, further increases Federal agencies' accountability
for reducing improper payments while continuing to ensure that
Federal programs serve and provide access to their intended
beneficiaries.
--The Improper Payments Elimination and Recovery Improvement Act
(IPERIA) of 2012,\12\ enacted in January 2013, further expanded
agency improper payment requirements to foster greater agency
accountability. The IPERIA requires the OMB to designate the
programs with the most egregious cases of improper payments as
high-priority and requires agencies to develop additional or
supplemental measures for tracking progress in reducing
improper payments in these programs.
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\12\ Public Law No. 112-248.
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The OMB's improper payment reporting guidance \13\ requires
agencies that identify programs with a high risk of improper payments
to report root causes of these errors using the following three
categories:
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\13\ OMB Circular A-123, Requirements for Effective Measurement and
Remediation of Improper Payments, Part III to Appendix C (Mar. 22,
2010).
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--Documentation and Administrative Errors.--Errors caused by the
absence of supporting documentation necessary to verify the
accuracy of a payment or errors caused by incorrect inputting,
classifying, or processing of applications or payments by a
relevant Federal agency, State agency, or third party who is
not the beneficiary.
--Authentication and Medical Necessity Errors.--Errors caused by an
inability to authenticate eligibility criteria through third-
party databases or other resources because no databases or
other resources exist, or providing a service that was not
medically necessary given the patient's condition.
--Verification Errors.--Errors caused by the failure or inability to
verify recipient information, including earnings, income,
assets, or work status, even though verifying information does
exist in third-party databases or other resources (in this
situation, as contrasted with ``authentication'' errors, the
``inability'' to verify may arise due to legal or other
restrictions that effectively deny access to an existing
database or resource), or errors due to beneficiaries failing
to report correct information to an agency.
For fiscal year 2011 reporting and beyond, agencies with programs
that are susceptible to significant improper payments under the IPIA
are required to report information on the three categories of errors
annually in their Performance and Accountability Report or Agency
Financial Report. Furthermore, both the IPERA and Executive Order 13520
require the Treasury Inspector General for Tax Administration (TIGTA)
to annually review the IRS's compliance with improper payment
assessment and reporting requirements.
The process to identify IRS programs for improper payment risk
assessment
The Department of the Treasury identifies the programs that the IRS
must assess for the risk of improper payments. The IRS used the
Improper Payments Elimination and Recovery Risk Assessment
Questionnaire for fiscal year 2013 (the Questionnaire) and related
guidance provided by the Department of the Treasury to assess the level
of risk for each identified program. The Questionnaire computes a risk
score for each program based on the IRS's response to the questions
contained in the Questionnaire. The risk score determines whether there
is a low, medium, or high risk of improper payments in a program. The
Department of the Treasury establishes the level of risk for improper
payments in a program based on the risk score ranges and considers
programs with a risk score of 0 to 11 as low risk, 12 to 28 as medium
risk, and 29 and greater as high risk.
The IRS is required to forward the results and documentation for
all risk assessments to the Department of the Treasury. For any program
identified as having a high risk for improper payments, the IRS must
provide the following information to the Department of the Treasury for
inclusion in the Department's annual Agency Financial Report:
--The rate and amount of improper payments.
--The root causes of the improper payments.
--Actions taken to address the root causes.
--Annual improper payment reduction targets.
--A discussion of any limitations to the IRS's ability to reduce
improper payments.
The EITC has previously been declared a high-risk program by the
OMB and as such the annual Improper Payments Elimination and Recovery
Risk Assessment Questionnaire is not required to be prepared for this
program. The EITC is currently the only IRS program identified as
having a high risk for improper payments for the purposes of the IPERA
and the only program with information included in the Agency Financial
Report. The IRS estimates that 24 percent of all EITC payments made in
fiscal year 2013, or $14.5 billion, were paid in error.\14\ In
addition, the IRS estimates that it paid between $124 billion and $148
billion in improper EITC payments in fiscal years 2003 through 2013.
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\14\ The estimated EITC improper payment range for fiscal year 2013
was from 22 to 26 percent and from $13.3 billion to $15.6 billion.
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This review was performed at IRS National Headquarters Office of
Research, Analysis, and Statistics in Washington, DC, and in the Office
of Return Integrity and Correspondence Services in Atlanta, Georgia,
during the period May 2013 through July 2014. We conducted this
performance audit 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
objective. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objective.
Detailed information on our audit objective, scope, and methodology is
presented in Appendix I. Major contributors to the report are listed in
Appendix II.
RESULTS OF REVIEW
Processes Have Been Developed to Identify Root Causes of Improper
Earned Income Tax Credit Payments
The IRS has determined that EITC improper payments primarily result
from two root causes--authentication and verification. Authentication
errors include errors associated with the IRS's inability to
authenticate qualifying child requirements, taxpayers' filing status,
and EITC claims associated with complex or nontraditional living
situations. Verification errors relate to the IRS's inability to
identify individuals improperly reporting income to erroneously claim
an EITC amount to which they are not entitled. Verification errors
include underreporting and overreporting of income by wage earners as
well as taxpayers who report they are self-employed. For fiscal year
2013, the IRS estimates that 70 percent, or $10.15 billion, in improper
EITC payments resulted from authentication errors and the remaining 30
percent, or $4.35 billion, resulted from verification errors.
The IRS uses the following methods to identify the root causes of
EITC improper payments:
--National Research Program (NRP).--The NRP Individual Income Tax
Reporting Compliance Study, also known as the NRP 1040 Study,
is performed annually and involves the IRS examining a
statistically representative sample of tax returns. The NRP
allows the IRS to estimate taxpayers' compliance with the EITC
and to estimate the improper payment rate each year. The NRP is
designed to ensure consistency, uniformity, and thoroughness in
the examination process in order to ensure a reasonable chance
to uncover the noncompliance that is actually present on a
return. Complete and accurate examination results are the
foundation of good estimates.
--Compliance Studies.--The IRS conducted a series of studies in the
1990s to better understand compliance issues specific to the
EITC and to aid EITC administration. These studies culminated
in the IRS report Compliance Estimates for Earned Income Tax
Credit Claimed on 1999 Returns (referred to as the 1999
Compliance Study).\15\ In addition to providing estimates of
EITC overclaims, this report was used to develop strategies to
improve the administration of the credit. Since its release,
the 1999 Compliance Study has been the authoritative source on
the nature of EITC compliance. The IRS recently updated the
1999 Compliance Study using data from the NRP for Tax Years
2006 through 2008. The study results provide information about
overall compliance of taxpayers claiming the EITC with specific
emphasis on the nature of errors made. The IRS plans to use the
updated study data to further explore and understand the nature
of the errors and formulate future actions to address
noncompliance.
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\15\ Dated Feb. 28, 2002.
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In response to the IRS's identification of root causes of EITC
improper payments, it has developed a strategy in an attempt to reduce
EITC improper payments. This strategy focuses on early intervention to
ensure that individuals claiming the credit are in compliance with the
EITC rules. The IRS's strategy includes: \16\
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\16\ See Appendices VII and VIII for more details.
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--Education and outreach.--Programs designed to educate taxpayers and
tax return preparers on the legal requirements for EITC
eligibility so they can apply the law accurately. For example,
the IRS hosts annual EITC Awareness Days to market the EITC to
lower income taxpayers and the Nationwide Tax Forum EITC
Training for tax return preparers on EITC due diligence
requirements and qualifying child requirements.
--Enforcement actions.--Programs intended to contribute to the
broader strategy of identifying errors as early in the process
as possible, which include math error authority, an automated
process to match reported income to third-party documents, and
audits.
--Paid tax return preparer compliance initiative.--An EITC paid
preparer strategy that focuses on tax return preparers who are
not compliant with the EITC due diligence requirements. The
EITC due diligence requirements are intended to assist tax
return preparers in accurately determining their clients'
eligibility for the EITC and require that preparers maintain
proof that they complied with the due diligence requirements.
--Legislative proposals.--The IRS has proposed legislative changes to
enable it to put into place processes and programs that are
needed to enable it to do its job more effectively and to
address the root causes of EITC improper payments.
According to the IRS, the above efforts reached more than 1.8
million taxpayers and 10,000 tax return preparers and identified and
protected almost $4 billion in erroneous EITC claims during fiscal year
2013.\17\ However, despite the IRS's efforts, the estimated EITC
improper payment rate has remained relatively unchanged since fiscal
year 2003 (the first year the IRS was required to report estimates of
these payments to Congress), and the amount of EITC claims paid in
error has grown. The IRS estimates that improper EITC payments totaled
from $9.5 billion to $11.5 billion in fiscal year 2003 \18\ and from
$13.3 billion to $15.6 billion in fiscal year 2013.\19\ The IRS
estimates the total EITC paid in error over these 11 years is between
$124 billion and $148 billion.
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\17\ See Appendices VII and VIII for detailed results of the
various IRS programs to address EITC improper payments.
\18\ EITC improper payment estimates obtained from the Department
of the Treasury Performance and Accountability Report for fiscal year
2003.
\19\ EITC improper payments estimates obtained from the Department
of the Treasury fiscal year 2013 Agency Financial Report.
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As previously discussed, the IRS has processes to identify the
causes of improper EITC payments and to identify erroneous EITC
payments. However, the IRS does not have the resources nor does it have
alternative compliance tools needed to adequately address the erroneous
EITC payments identified. As we have previously reported, the IRS will
be unable to make any significant reduction in erroneous payments. In
the IRS's April 2014 \20\ report to TIGTA on its efforts to reduce
erroneous EITC payments, IRS management acknowledged the limitations
faced in significantly reducing noncompliance using the traditional
process of auditing tax returns. The IRS noted that it cannot fully
address EITC noncompliance by simply auditing returns and must pursue
alternatives to traditional compliance efforts.
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\20\ IRS, Report on Earned Income Tax Credit (EITC) Improper
Payments Executive Order 13520: Reducing Improper Payments (April 15,
2014).
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Annual Risk Assessments Do Not Accurately Reflect the Risk Associated
With Additional Child Tax Credit Improper Payments
Each year since fiscal year 2011, the IRS has continually rated the
risk of improper payments associated with the ACTC as low. However, our
review of the IRS's own enforcement data indicates that the ACTC
improper payment rate is similar to that of the EITC. We estimate that
the ACTC improper payment rate for fiscal year 2013 is between 25.2
percent and 30.5 percent, with potential ACTC improper payments
totaling between $5.9 billion and $7.1 billion.
The Department of the Treasury has selected the ACTC as one of the
revenue program funds \21\ for which the IRS must perform a risk
assessment to assess the level of improper payment risk. The Department
of the Treasury selected the ACTC based on its materiality to the IRS's
financial statements. On March 20, 2014, the OMB issued supplemental
improper payment guidance to the Department of the Treasury clarifying
the requirement for annual risk assessments of all refundable tax
credits. Although the IRS has conducted the annual risk assessment of
the ACTC as required by the Department of the Treasury, the methodology
that the IRS uses to conduct the risk assessment continues to provide
an inaccurate assessment of the risk of ACTC improper payments.
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\21\ The IRS's custodial activity includes revenues collected and
refunds disbursed. However, in this report the general term ``revenue''
is used in place of ``custodial.'' The revenue program funds for which
the IRS performed risk assessments generally represent specific
individual tax credits or refund payments.
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To determine the potential risk of ACTC improper payments, we used
the same data sources and methodologies to the extent possible that the
IRS uses to estimate the EITC improper payment rate to compute an
estimate of the potential ACTC improper payment rate. For example, we
used the results of the IRS's NRP 1040 Study for Tax Year 2009, which
is the same study the IRS used to estimate the fiscal year 2013 EITC
improper payment rate. The IRS was unable to provide an estimate of the
amount of ACTC overclaims recovered through compliance programs for Tax
Year 2009; therefore, we used the same ratio of overclaims recovered to
improper payments that the IRS used to compute its fiscal year 2013
EITC improper payment rate.\22\ Finally, we computed the estimated
amount of potential ACTC improper payments by applying our estimate of
the potential ACTC improper payment rate to the OMB budget estimates
that are consistent with the budget estimates used by the IRS to
compute fiscal year 2013 EITC improper payments. Figure 1 shows the
methodology we used to estimate the potential ACTC improper payment
rate for fiscal year 2013.
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\22\ The IRS ratio of EITC overclaims recovered to EITC improper
payments for fiscal year 2013 was 13.5 percent.
Figure 1: Methodology Used to Compute the Potential ACTC Improper
Payment Rate for Fiscal Year 2013
------------------------------------------------------------------------
------------------------------------------------------------------------
Potential ACTC ACTC Improper Payments--ACTC
Improper Overclaims Recovered
Payment Rate = ------------------------------
-----------------------
Total ACTC Claims
------------------------------------------------------------------------
ACTC Improper Payments.--The amount of the difference between the amount
of the ACTC claimed by the taxpayer on his or her tax return and the
amount the taxpayer should have claimed based on NRP results for Tax
Year 2009. This amount includes ACTC overclaims and ACTC underpayments.
This amount totaled $8.07 billion.
------------------------------------------------------------------------
ACTC Overclaims Recovered.--The amount of ACTC overclaims that the IRS
prevents from being paid through activities such as math error
processing and prerefund examinations or recovers after being paid
through Automated Underreporter document matching and post-refund
examinations. This amount was estimated by applying the ratio of EITC
overclaims recovered to EITC improper payments from the IRS's Fiscal
Year 2013 EITC improper payment rate calculation. Using the EITC
overclaims recovered ratio of 13.5 percent, we estimated the ACTC
overclaims recovered to total $1.09 billion.
------------------------------------------------------------------------
Total ACTC Claims.--The amount of the ACTC claimed on all tax returns
based on the NRP results for Tax Year 2009. This amount totaled $25.03
billion.
------------------------------------------------------------------------
Potential ACTC Estimated ACTC Claims
Improper Potential ACTC Improper
Payment Dollars = Payment Rate
------------------------------------------------------------------------
Source: TIGTA analysis of Tax Year 2009 1040 NRP ACTC data and the IRS's
calculation of the Fiscal Year 2013 EITC improper payment rate.
The IPERA defines a program as having significant improper payments
when improper payments exceed both 2.5 percent of program outlays and
$10 million of all program or activity payments made during the fiscal
year reported or $100 million at any percent of program outlays.
Audit results indicate a high degree of noncompliance with ACTC
eligibility requirements
The IRS's rating of the ACTC as low risk for significant improper
payments is contrary to its own enforcement data, which show that in
fiscal year 2013 the IRS adjusted \23\ over $347 million of ACTC claims
on returns also claiming the EITC. Our review of EITC closed audit data
found that there is a close relationship between taxpayers' compliance
with the EITC and the ACTC. According to the IRS, 283,806 (59 percent)
of the 482,468 tax returns it audited in fiscal year 2013 with an EITC
claim also included an adjustment record for the ACTC. Figure 2 shows
the results of the IRS's EITC audits.
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\23\ The ACTC can be adjusted if it was not claimed or if it was
claimed incorrectly on the taxpayer's tax return.
Figure 2: Results of EITC Audits of Tax Returns That Also Include an
ACTC Adjustment--Fiscal Year 2013
------------------------------------------------------------------------
Percentage
Audit Disposition Number of ACTC Dollars of Returns
Returns Adjusted Adjusted
------------------------------------------------------------------------
EITC/ACTC Tax Returns Audited. 283,806 $347,844,351 100%
ACTC Disallowed \24\...... 279,306 $350,324,178 98.41%
Additional ACTC Allowed... 2,916 ($2,479,827) 1.03%
No Change................. 1,584 0 0.56%
------------------------------------------------------------------------
Source: IRS Examination Operational Automated Database.\25\
When we provided our estimate of the potential ACTC improper
payment rate to IRS management as well as our concern that the risk
assessment process did not accurately reflect the risk associated with
ACTC payments, the IRS raised the following concerns related to our
estimate. We do not agree with the IRS's conclusions. We respond to
each concern below.
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\24\ Includes full disallowance of 269,561 returns for a total of
$342,622,748 and partial disallowance of 9,745 returns for a total of
$7,701,430
\25\ Provided by the IRS on February 27, 2014.
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--An assessment of the ACTC improper payment rate must also include
an assessment of the validity of the CTC.
In March 2014, the OMB issued improper payment guidance to the
IRS clarifying that all refundable credits are subject to IPERA
requirements as they represent an additional outlay of funds by the
Government. The CTC is a nonrefundable credit that reduces an
individual's tax liability and represents an offset of excess taxes
that were already paid to the Government and therefore does not result
in an additional budget outlay. The ACTC is a refundable tax credit and
therefore represents an additional expense or outlay to the Government
because it is paid in excess of a taxpayer's net tax liability. As a
result, it is appropriate per OMB guidance to consider only the
refundable ACTC for purposes of assessing the risk of improper payments
and estimating the improper payment rate.
--The NRP 1040 Study was not designed to meet IPERA precision
requirements for computing an ACTC improper payment rate.
Our estimate of the potential ACTC improper payment rate was
computed to show that the IRS's improper payment risk assessment
process should have ranked the ACTC Program as a high risk instead of
low risk. We agree that the NRP 1040 Study was not designed to meet
IPERA precision requirements. However, the 2,041 ACTC claims that the
IRS audited as part of the NRP 1040 Study were selected by the IRS as
part of a statistically valid sample of all Forms 1040, U.S. Individual
Income Tax Return. As such, these tax returns are representative of the
general tax return population for Tax Year 2009.
--The potential ACTC improper payment rate does not account for
recovered revenue.
Our ACTC improper payment rate does account for recovered
revenue. As we previously mentioned, the IRS was unable to provide us
the data for the ACTC for Tax Year 2009. As such, we estimated the ACTC
overclaims recovered using the same ratio of overclaims recovered to
improper payments that the IRS used to compute the fiscal year 2013
EITC improper payment rate. Therefore, our calculation of the potential
ACTC improper payment rate is consistent with the IRS's calculation of
the EITC improper payment rate.
Prior audits raise concerns with the reliability of the IRS's improper
payment risk assessment process
In January 2013, TIGTA reported that the IPERA risk assessment
process did not provide a reliable assessment of improper payment risk
for IRS revenue program funds.\26\ Specifically, we concluded that the
risk assessments were not performed in compliance with Department of
the Treasury guidelines and that the Questionnaire did not effectively
address risks associated with tax refund payments.
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\26\ TIGTA, Ref. No. 2013-40-015, Improper Payments Elimination and
Recovery Act Risk Assessments of Revenue Programs Are Unreliable (Jan.
2013).
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In response to our audit recommendations, the IRS met with the
Department of the Treasury to revise the risk assessment Questionnaire
for revenue funds. In addition, the IRS Office of the Chief Financial
Officer established guidelines for retaining risk assessment
documentation and worked with the business unit executives to ensure
that the appropriate subject matter experts were identified and
participated in the review process.
In March 2014, we reported \27\ that the IRS performed risk
assessments for each of the 25 program fund groups identified by the
Department of the Treasury for review for fiscal year 2013--six
administrative program funds and 19 revenue program funds.\28\ However,
we again concluded that the process still may not provide a valid
assessment of improper payments in tax administration because the EITC
remains the only revenue program fund to be considered a high risk for
improper payments despite numerous indicators that other refundable tax
credits, e.g., the ACTC, also potentially result in significant
improper payments.
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\27\ TIGTA, Ref. No. 2014-40-027, The Internal Revenue Service
fiscal year 2013 Improper Payment Reporting Continues to Not Comply
With the Improper Payments Elimination and Recovery Act (Mar. 2014).
\28\ The EITC Program has been declared a high-risk program for
improper payments by the OMB; therefore, no formal risk assessment is
required for it.
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Recommendation
Recommendation 1: The Commissioner, Wage and Investment Division,
should ensure that the results of the ACTC Improper Payment Risk
Assessment accurately reflect the high risk associated with ACTC
payments and provide a reliable estimate of improper payments.
Completion of the ACTC Improper Payment Risk Assessment should include
an evaluation of available NRP and enforcement data when determining
the overall risk of improper payments.
Management's Response: The IRS disagreed with this
recommendation. IRS management stated that the Improper Payment
Risk Assessment is completed for the ACTC following the
guidance of the Department of Treasury and the OMB. The IRS
stated that the assessment questionnaire and scoring
methodology reflect operational risks associated with
administration of the credit. The IRS already considers
enforcement data and overall risks associated with
administration of the ACTC by its inclusion in the Tax Gap
estimate.
Office of Audit Comment: As we have repeatedly reported, the
risk assessment process performed by the IRS does not provide a
reliable assessment of improper payments. The IRS has
previously acknowledged this in its response to a prior review.
Moreover, the IRS's own enforcement data clearly contradicts
the IRS conclusion that the risk of ACTC improper payments is
low.
Data Show Root Causes of Additional Child Tax Credit Improper Payments
Are Similar to Those of the Earned Income Tax Credit
The IRS indicated that it does not have the same level of detail
regarding the source of ACTC errors as it does for EITC claims. The IRS
noted that for the NRP EITC audits, all aspects related to the credit
are verified as part of the audit. As a result, the IRS has very
detailed information about the condition that caused the EITC claim to
be in error. Although the IRS has not developed a strategy to identify
the root causes of ACTC improper payments, we believe it has
information that indicates that the root causes are similar to those of
the EITC. As discussed previously, 283,806 (59 percent) of the 482,468
EITC tax returns the IRS audited in Fiscal Year 2013 also included an
adjustment record for the ACTC. The IRS adjusted the ACTC on 282,222
(99.4 percent) of these 283,806 EITC returns.
The correlation between causes of EITC and ACTC improper payments
results from the commonality in many of the eligibility requirements.
Figure 3 is a comparison of the eligibility requirements for the EITC
and the ACTC.
Figure 3: Comparison of the Eligibility Requirements for the EITC and the ACTC for Tax Year 2013
----------------------------------------------------------------------------------------------------------------
Eligibility Test The EITC The ACTC
----------------------------------------------------------------------------------------------------------------
Relationship........................... Son, daughter, stepchild, foster child, or a Same
descendant of any of them (for example,
your grandchild).
Brother, sister, half-brother, half-sister,
stepbrother, stepsister, or a descendant of
any of them (for example, your niece or
nephew).
Adopted child. An adopted child is always
treated as your own child. The term
``adopted child'' includes a child who was
lawfully placed with you for legal
adoption.
----------------------------------------------------------------------------------------------------------------
Joint Return........................... The child does not file a joint return for Same
the year (or files jointly to claim a
refund).
----------------------------------------------------------------------------------------------------------------
Age.................................... A qualifying child must be: A qualifying child must
--Under age 19 at the end of Tax Year 2013 be:
and younger than you (or your spouse, if --Under age 17 at the
filing jointly); end of the tax year.
--Under age 24 at the end of Tax Year
2013, a student, and younger than you (or
your spouse, if filing jointly); or
--Permanently and totally disabled at any
time during 2013, regardless of age.
----------------------------------------------------------------------------------------------------------------
Residency \29\......................... The child must have lived with the claimant The child must have lived
in the United States for more than half of with claimant for more
the year. than half of the
year.\30\
----------------------------------------------------------------------------------------------------------------
Qualifying Child Required? No Yes
----------------------------------------------------------------------------------------------------------------
SSN Required?.......................... Yes No--The IRS allows
Individuals issued an
Individual Taxpayer
Identification Number to
receive the ACTC.
----------------------------------------------------------------------------------------------------------------
Source: IRS Publication 972, Child Tax Credit, and IRS Publication 596, Earned Income Credit (EIC), for use in
preparing Tax Year 2013 Returns.
Recommendation
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\29\ Exceptions apply.
\30\ There are some exceptions to the residence test, which can be
found in IRS Publication 972.
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Recommendation 2: The Commissioner, Wage and Investment Division,
should, as required by the IPERA, identify the root causes of the
improper ACTC payments, determine if tools and/or resources are
available to address erroneous ACTC payments, and establish a plan to
reduce the erroneous payments and then meet that plan.
Management's Response: The IRS disagreed with this
recommendation and stated that the OMB acknowledges that it
already conducts analysis of the Tax Gap that incorporates
these credits. According to the IRS, refundable tax credit
noncompliance is included in the Tax Gap estimate and in the
assessment and regular updating of its compliance strategies.
The IRS considers available tools, resources, and alternative
treatment options when preparing and updating compliance
strategies. The IRS stated that reduction of erroneous payments
is a primary goal of those activities.
Office of Audit Comment: Because of the substantial number
and amount of ACTC improper payments, excluding this credit
from the IRS's assessment results in a substantial
understatement of improper payments. We estimate this
understatement to be in the range of $5.9 billion to $7.1
billion. If the IRS includes improper payments in its Tax Gap
study, it should be clear on what portion of the Tax Gap is due
to improper payments. Furthermore, the IRS advised us that the
Tax Year 2006 Tax Gap estimation methodology did not estimate
the number or amount of disallowed ACTC claims. Instead, it
provides an aggregate estimate for the net misreported amount
for all tax credits. As such, it cannot ensure that its Tax Gap
strategy accurately identifies and addresses the causes of ACTC
improper payments as required by the IPERA. The IPERA requires
agencies to identify the root causes for improper payments for
all programs for which improper payments exceed both 2.5
percent of program outlays and $10 million of all program or
activity payments made during the fiscal year reported or $100
million.
New Compliance Processes Are Needed to Make Any Significant Reduction
in Improper Payments
As we have previously reported,\31\ the IRS continues to report
significant improper EITC payments each year. For example, $13.3
billion to $15.6 billion in erroneous EITC payments were estimated to
have been paid in fiscal year 2013. Compliance resources are limited,
and additional alternatives to traditional compliance methods have not
been developed. Consequently, the IRS does not address the majority of
potentially erroneous EITC claims. This is despite the fact that the
IRS has processes that successfully identify billions of dollars in
potentially erroneous EITC payments. For example, the IRS identified
more than 6.6 million potentially erroneous EITC claims totaling
approximately $21.6 billion for Tax Year 2011. *****2*****.
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\31\ TIGTA, Ref. No. 2014-40-027, The Internal Revenue Service
fiscal year 2013 Improper Payment Reporting Continues to Not Comply
With the Improper Payments Elimination and Recovery Act (Mar. 2014).
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In addition to limited compliance resources and the reliance on
traditional compliance methods, statutory requirements further limit
the IRS's ability to ensure that EITC claims are valid before they are
paid. The Internal Revenue Code requires the IRS to process tax returns
and pay any related tax refunds within 45 calendar days of receipt of
the tax return or the tax return due date, whichever is later. Because
of this requirement, the IRS cannot conduct extensive eligibility
checks similar to those that occur with other Federal programs that
typically certify eligibility prior to the issuance of payments or
benefits.
Some actions have been taken to address recommendations made in a prior
TIGTA report
In our fiscal year 2009 report,\32\ we recommended the IRS conduct
a study to identify alternative processes that will expand its ability
to effectively and efficiently address erroneous EITC claims for which
data show that the taxpayer does not meet the EITC qualifying child
relationship and/or residency tests. We also recommended that the IRS
work with the Assistant Secretary of the Treasury for Tax Policy to
obtain the authority necessary to implement alternative processes to
adjust erroneous EITC claims for which data show that the taxpayer does
not meet the EITC qualifying child relationship and/or residency tests.
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\32\ TIGTA, Ref. No. 2009-40-024, The Earned Income Tax Credit
Program Has Made Advances; However, Alternatives to Traditional
Compliance Methods Are Needed to Stop Billions of Dollars in Erroneous
Payments (Dec. 2008).
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In response to our recommendations, the IRS analyzed the
information included in the Federal Case Registry \33\ and found that,
although the information in the registry provides information as to a
child's custodial/noncustodial parent, the database cannot be solely
relied upon to systemically adjust a potentially erroneous EITC claim.
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\33\ The Federal Case Registry is a national database that aids the
administration and enforcement of child support laws. It consists of
records that identify children, custodial parties, noncustodial
parents, and putative (assumed) parents along with other relevant
information.
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Math error authority is not sufficient to effectively address erroneous
EITC claims
The IRS, in conjunction with the Assistant Secretary of the
Treasury for Tax Policy, has requested additional authority (hereafter
referred to as correctable error authority) to systemically disallow a
tax claim, including the EITC, when information contained in reliable
Government data sources does not support the claim. According to the
IRS, reliable Government data sources include information obtained from
the Social Security Administration, the Department of Health and Human
Services (HHS), the Federal Bureau of Prisons, and the States'
Departments of Corrections. The IRS requested correctable error
authority as part of its fiscal year 2015 budget submission. However,
as of May 2014, the IRS has not been provided any additional authority
or tools to expand its ability to prevent the issuance of improper EITC
payments.
Currently, under the Internal Revenue Code, the IRS can use its
math error authority to address erroneous EITC claims by systemically
correcting mathematical or clerical errors on EITC claims, such as
correcting entries made on the wrong line on the tax return or
mathematical errors in computing income or the EITC. In addition, the
IRS can use math error authority to adjust an EITC claim if a
qualifying child's SSN is not valid. However, the majority of
potentially erroneous EITC claims the IRS identifies do not contain the
types of errors for which it has math error authority. For example, the
IRS identified approximately 6.6 million potentially erroneous EITC
claims totaling approximately $21.6 billion in Tax Year 2011 for which
it does not have math error authority. In Tax Year 2011, the IRS used
math error authority to identify and systemically correct only 270,492
(.009 or less than 1 percent) \34\ of more than 27.4 million EITC
claims. The 270,492 returns claimed the EITC totaling $314 million.
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\34\ An additional 59,024 EITC claimants received approximately $21
million more in EITCs than claimed.
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While the IRS has the authority to audit potentially erroneous EITC
claims for which it does not have math error authority, doing so is
more costly than the math error process. The IRS estimates that it
costs $1.50 to resolve an erroneous EITC claim using math error
authority compared to $278 to conduct a prerefund audit.\35\ In
addition, the number of potentially erroneous EITC claims the IRS can
audit is further reduced by its need to allocate its limited resources
among the various segments of taxpayer noncompliance to provide a
balanced tax enforcement program. As a result, billions of dollars in
potentially erroneous EITC claims go unaddressed each year.
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\35\ Cost to use math error authority as of June 25, 2014, as
provided by the IRS. The IRS provided the cost of a prerefund audit
based on fiscal year 2010 financial data, which are the most current
estimate available.
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National Directory of New Hires Wage and Employment Data Along With
Correctable Error Authority Could Significantly Reduce Improper
Payments
Significant changes in IRS compliance processes would be necessary
to reduce improper payments. Expanded authority to make corrections to
tax returns when data obtained from the HHS indicate the taxpayer's
refundable credit claims are not valid would significantly reduce
improper payments. For example, the information could be used at the
time tax returns are filed to identify those individuals who claim the
EITC based on wages that do not appear to be valid. For example, our
review of Tax Year 2012 tax returns identified more than $1.7 billion
in potentially erroneous EITC claimed on tax returns with no third-
party Forms W-2, Wage and Tax Statement, received by the IRS supporting
the wages reported. As we have noted previously, the IRS estimates that
verification errors, i.e., underreporting and overreporting of income
by wage earners, account for 30 percent, or $4.35 billion, of EITC
improper payments.
The IRS is granted the authority to use the National Directory of
New Hires (NDNH) to verify EITC claims. However, the IRS does not have
the authority to systemically disallow an EITC claim that is not
supported by NDNH data (*****2*****). Therefore, the IRS must audit the
EITC claims it identifies for which NDNH data indicate the income
reported is potentially erroneous. The number of EITC claims the IRS
can audit is limited to available resources and the need to provide a
balanced enforcement program. As such, the IRS's use of the NDNH to
identify potentially erroneous EITC claims is limited to only those
EITC claims it has the resources to address. The IRS does not have the
authority to use the NDNH to verify any other refundable credit.
The Social Security Act, 42 U.S.C. Section 653(i)(3), grants
authority to the Secretary of the Treasury to use the HHS NDNH to
verify an individual's claim of employment with regard to the EITC. The
Act states:
The Secretary of the Treasury shall have access to the
information in the National Directory of New Hires for purposes
of administering section 32 of the Internal Revenue Code of
1986, or the advance payment of the earned income tax credit
under section 3507 of such Code, and verifying a claim with
respect to employment in a tax return.
The NDNH is a national database of wage and employment information.
The NDNH file contains the following information:
--New Hire (W-4) File: The New Hire File contains information on all
newly hired employees reported by employers to each State
Directory of New Hires. Federal agencies report directly to the
NDNH.
--Quarterly Wage (QW) File: The Quarterly Wage File contains
quarterly wage information on individual employees from the
records of State workforce agencies and Federal agencies.
--Unemployment Insurance (UI) File: The Unemployment Insurance File
contains unemployment insurance information on individuals who
have received or applied for unemployment benefits as reported
by State workforce agencies.
Analysis identified more than $1.7 billion in potentially erroneous
EITC claimed on tax returns with no Forms W-2 to support wages
Because of its current processes for using the NDNH, the IRS was
only able to resolve approximately $20 million in potentially erroneous
EITC claims on 3,728 tax returns between January and June 2013.
However, the NDNH could be used to identify and resolve many more
claims. Our analysis of the 26.7 million EITC claims received by the
IRS for Tax Year 2012 identified approximately 23.6 million (88
percent) tax returns with EITC claims totaling more than $53.8 billion
for which the taxpayer claimed wages as the source income to support
the EITC. Of the 23.6 million tax returns with wages reported, we
identified 676,992 (3 percent) tax returns for which third-party Forms
W-2 were not sent to the IRS by the employer for either the taxpayer
and/or spouse listed on the tax return.\36\ These 676,992 tax returns
claimed EITCs totaling more than $1.7 billion. We forecast the IRS
could prevent the payment of more than $8.5 billion in questionable
EITC claims over the next 5 years.\37\
---------------------------------------------------------------------------
\36\ Some of the tax returns we identified could also be the result
of employer errors or employer nonreporting.
\37\ See Appendix IV. The 5-year forecast is based on multiplying
the base year by five and assumes, among other considerations, that
economic conditions and tax laws do not change.
---------------------------------------------------------------------------
The IRS initially found the NDNH data to be valuable in identifying
tax returns for which the income used to claim the EITC was potentially
fraudulent. However, the IRS believes it is no longer cost beneficial
to continue to use the NDNH to verify EITC claims. As such, it has
decided not to renew the contract to use NDNH data with the HHS for
fiscal year 2015. The IRS's decision to discontinue the NDNH contract
is based on two primary factors:
--Improvements in the IRS's fraud detection filters to incorporate
the characteristics of EITC claims the NDNH helps identify have
increased the IRS's ability to more accurately detect EITC
claims that appear to be based on potentially fraudulent
income.
--The use of the NDNH does not result in a significant resource
savings because the IRS must continue to incur additional
resource costs to verify the income and subsequently audit EITC
claims even when NDNH data indicate the claim is erroneous. For
example, the average cost to obtain NDNH data is more than $1.6
million per fiscal year. During the period January 1, 2013,
through June 30, 2013,\38\ the IRS submitted NDNH data requests
for 136,175 EITC claims totaling more than $787 million.
However, the IRS was only able to close 3,728 (2.7 percent)
claims totaling more than $20 million based exclusively on NDNH
data. The remaining 132,447 (97.3 percent) EITC claims required
the IRS to use additional resources other than NDNH data to
verify the claim and close the case because either the NDNH
contained no data for the taxpayer or the data were not
sufficient to verify the amount of income claimed.
---------------------------------------------------------------------------
\38\ The IRS obtains NDNH data for EITC claims filed between
January and June each year. After this period, the IRS has access to
income information documents filed by third parties, including
employers, for use in verifying income.
---------------------------------------------------------------------------
The NDNH data have the potential to significantly reduce EITC improper
payments
The IRS can use NDNH data during the processing of tax returns to
significantly increase its ability to identify potentially erroneous
EITC claims on tax returns with unsupported wages. However, to realize
the full potential of NDNH data, the IRS needs to:
--Obtain the authority to systemically disallow EITC claims for which
NDNH data do not support the claim. Through legislative
proposals, the IRS has requested correctable error authority to
deny taxpayers' claims without conducting an audit when
reliable Government data sources do not support information on
the tax return. However, the IRS has not yet been granted this
authority.
--Modify the processes it uses to obtain and use NDNH data. The IRS
process to obtain NDNH data is a transactional manual process
and is limited to the verification of only electronically filed
tax returns with an EITC claim. If it obtained a copy of the
complete NDNH database, the IRS could systemically verify all
EITC claims to the NDNH.
Figure 4 provides a comparison of the IRS's current transactional-
based processes to use the NDNH to identify a potentially erroneous
EITC claim compared to the systemic processes that could be implemented
if the IRS obtained a copy of the NDNH database.
Figure 4: Comparison of Existing NDNH Processes to Identify Potentially
Erroneous EITC Claims to a Systemic NDNH Process
------------------------------------------------------------------------
Potential Systemic NDNH Processes
Existing NDNH Processes to Identify to Identify Potentially Erroneous
Potentially Erroneous EITC Claims EITC Claims
------------------------------------------------------------------------
The IRS evaluates EITC claims for The IRS evaluates all EITC claims
potential fraud using established regardless of fraud potential.
fraud filters.
------------------------------------------------------------------------
EITC claims with specified The IRS systemically matches all
characteristics are suspended from EITC claims for which income
processing and NDNH data are reported is wages to an NDNH file
requested from the HHS for the the IRS obtains from the HHS to
taxpayer. verify the taxpayer's claim of
employment.
------------------------------------------------------------------------
The IRS evaluates the NDNH data and The IRS identifies those EITC
determines the income claimed is claims for which the NDNH
potentially erroneous. indicates the taxpayer was not
employed during the tax year.
------------------------------------------------------------------------
The IRS conducts additional The IRS systemically disallows the
analysis to verify the amount of EITC claim on the basis that the
income claimed. claim is unsubstantiated.
------------------------------------------------------------------------
The IRS audits the EITC claim on Taxpayer is sent a notice detailing
those tax returns for which the adjustment made to the tax return
income claimed is determined to be and is provided with a telephone
erroneous. number and mailing address to
contact the IRS if he or she
questions the validity of the
adjustment.
------------------------------------------------------------------------
Source: Existing processes provided by the IRS. Potential systemic
processes are a hypothetical example of how the IRS could use the NDNH
if correctable error authority was provided.
Receiving a copy of NDNH data rather than using a transaction-based
process may result in a lower cost to the IRS. The cost to obtain NDNH
data under the current information sharing agreement with the HHS
includes a set user fee and an additional transactional-based
component. As such, the cost to obtain NDNH data increases as the
number of data requests sent to the HHS increases. The cost to obtain
NDNH data under this current information sharing agreement averaged
more than $1.6 million a year for fiscal years 2010 through 2013. By
receiving a complete copy of NDNH data, the IRS can eliminate the
transactional cost associated with the existing agreement. Because the
IRS has not pursued this option, the potential cost savings of doing so
is unknown.
It should be noted that the IRS has processes in place for
taxpayers to dispute systemic adjustments. For example, our review of
this process in July 2011 \39\ found that when the IRS makes math error
adjustments to a taxpayer's tax return, it sends a notice, generally a
Computer Paragraph 11 Notice (Balance Due (Over $5.00)) or a Computer
Paragraph 12 Notice (Overpayment of $1.00 or More), to the taxpayer
explaining the error(s) identified and the amount of any resulting
adjustment(s). The math error notice includes an account statement
showing how the changes affected the tax return and showing the
corrected tax return information compared to what was reported on the
original tax return. In addition, the math error notice provides both a
telephone number and mailing address for the taxpayer to contact the
IRS if he or she questions the validity of the adjustments.
---------------------------------------------------------------------------
\39\ TIGTA, Ref. No. 2011-40-059, Some Taxpayer Responses to Math
Error Adjustments Were Not Worked Timely and Accurately (Jul. 2011).
---------------------------------------------------------------------------
Taxpayers who question the validity of the adjustments are given 60
calendar days from the date of the notice to respond to the IRS
disputing the validity of the adjustments made to their tax returns.
During this 60-day period, the IRS will place a freeze on the
taxpayer's account to prevent the issuance of the portion of the refund
associated with the error(s) identified or prevent the initiation of
collection action resulting from any balance due. Once a math error
adjustment is made, any subsequent action depends on the response from
the taxpayer and can include:
--Agreed Response: The taxpayer agrees with the math error
adjustments made to his or her tax return. This includes
taxpayers who do not respond to the IRS notice. The IRS removes
the freeze from the taxpayer's account, which will then release
any refund or initiate collection of a balance due of taxes.
--Substantiated Response: The taxpayer disagrees with the math error
adjustments and either provides the IRS with written
correspondence/documentation or information via telephone
contact supporting his or her disagreement. The IRS agrees with
the taxpayer based on the information provided and reverses the
math error adjustments. The IRS removes the freeze from the
taxpayer's account, which will release any refund or initiate
collection of a balance due of taxes.
--Unsubstantiated Response: The taxpayer disagrees with the math
error adjustments. However, the taxpayer does not provide
adequate support for his or her disagreement. Generally, the
IRS reverses the math error adjustments and places an
examination freeze on the taxpayer's account resulting in his
or her tax return being referred to the Examination function
for further review.
Recommendations
If the IRS is granted correctable error authority, the
Commissioner, Wage and Investment Division, should:
Recommendation 3: Contract with the HHS to obtain a complete copy
of the NDNH database for use during tax return processing to
systemically identify unsupported wages reported on tax returns to
erroneously claim the EITC.
Management's Response: The IRS disagreed with this
recommendation. The IRS stated that the cost of obtaining the
limited NDNH is significant and, under current limitations on
the IRS's use of the data, the IRS does not consider it to be a
cost-beneficial tool. The IRS also disagreed with our outcome
measure of $1.7 billion in potential cost savings, stating that
the outcome is contingent on the IRS receiving expanded
legislative authority and that its review of data from the
recent EITC Compliance Study covering Tax Years 2006 through
2008 found that a significant portion of EITC claims on returns
with reported wages and no Form W-2 were accurate or disallowed
for reasons other than misreported income.
Office of Audit Comment: The IRS's disagreement is not
consistent with its response to Recommendation 4 of this report
in which the IRS states that it is pursuing expanded NDNH
authority for use of the entire NDNH database as well as
correctable error authority. Moreover, the EITC Compliance
Study to which the IRS refers above excludes many EITC claims,
such as fraudulent claims. Our analysis includes all EITC
claims for which wages were reported and a Form W-2 was not
filed by an employer for either the taxpayer or the taxpayer's
spouse.
Legislative Recommendation
Recommendation 4: Work with the Assistant Secretary of the Treasury
for Tax Policy to consider a legislative proposal to obtain expanded
NDNH authority to systemically verify claims for other income-based
refundable credits (e.g., the ACTC) based on NDNH employment data.
Management's Response: The IRS agreed with this
recommendation. The IRS stated that the General Explanations of
the Administration's Fiscal Year 2015 Revenue Proposals
presents a legislative request for expanded use of the NDNH
database. The IRS's proposal would amend the Social Security
Act to expand IRS access to NDNH data for general tax
administration purposes, including data matching and
verification of taxpayer claims during return processing. The
IRS believes this proposal addresses the recommendation.
APPENDIX I
Detailed Objective, Scope, and Methodology
Our overall objective was to assess the IRS's efforts to identify
and address the root causes of erroneous EITC and ACTC payments. To
accomplish our objective, we:
I. Determined what actions the IRS has taken to identify the root
causes of improper payments for the EITC and the ACTC and the results
of its efforts.
A. Contacted the Office of Research, Analysis, and Statistics
and the Office of Return Integrity and Correspondence Services
to obtain copies of refundable credit studies conducted from
Tax Year \1\ 2008 to the present, including any NRP Compliance
Studies for the past 5 years.
---------------------------------------------------------------------------
\1\ A 12-month accounting period for keeping records on income and
expenses used as the basis for calculating the annual taxes due. For
most individual taxpayers, the tax year is synonymous with the calendar
year.
---------------------------------------------------------------------------
B. Reviewed reports provided by the IRS to determine if root
causes for EITC and ACTC improper payments were identified. We
evaluated the root causes identified by the IRS to determine if
causes identified were actually root causes or just symptoms of
root causes.
C. Reviewed the Department of the Treasury's Agency Financial
Reports for fiscal years \2\ 2012 and 2013 to identify changes
made between the two reports, and determined if the causes the
IRS identified for EITC improper payments are the same as
reported in the Executive Order and other studies.
---------------------------------------------------------------------------
\2\ Any yearly accounting period, regardless of its relationship to
a calendar year. The Federal Government's fiscal year begins on October
1 and ends on September 30.
---------------------------------------------------------------------------
D. Reviewed data available on the IRS Office of Research,
Analysis, and Statistics NRP and Compliance Data Warehouse Web
sites to obtain guidance on conducting the annual NRP review,
information available on the NRP methodology, format of the NRP
electronic audit case files, and instructions to obtain direct
access to NRP review data or how to obtain a data extract of
the NRP review data.
E. Determined information, if any, the Office of Return
Integrity and Correspondence Services uses and actions taken
based on the data obtained in Steps I.B, I.C, and I.D above to
identify the causes of taxpayer noncompliance with the EITC and
the ACTC. Specifically, we:
1. Discussed what efforts have been taken to identify
root causes of improper payments for the EITC and the
ACTC or refundable credits in general and any reasons
why efforts have not been made to identify root causes.
2. Obtained and reviewed copies of relevant
documentation to include methodology, procedures, and
reports unavailable on the Web sites.
F. Obtained access to NRP data through a TIGTA Strategic Data
Services Division extract request and performed analysis of the
types of information available to identify the reasons the EITC
and the ACTC were denied and to verify the IRS's assessment of
the root causes for improper payments.
II. Determined what actions the IRS has taken to address the
identified root causes for EITC and ACTC improper claims.
A. Reviewed the results of TIGTA and Government Accountability
Office reports related to the EITC and the ACTC issued over the
past 5 years to determine any IRS efforts to identify root
causes or if any root causes were identified by TIGTA or the
Government Accountability Office.
B. Reviewed the IRS's study results of the feasibility of
using the Federal Case Registry dated October 2011 to identify
potentially erroneous EITC claims.
C. Reviewed IRS guidance to determine what policies and
procedures the IRS has in place to address the identified root
causes.
D. Interviewed IRS personnel for current and planned efforts
to address the identified root causes. Based on the IRS's
input, we researched current initiatives, determined if EITC
claims are analyzed for income misreporting to include
overreported and underreported income, and determined if the
IRS's initiatives present new alternatives or rely on
traditional compliance efforts.
1. Identified math error authorizations and determined
if the IRS has presented any additional requests for
tax policy changes.
2. To determine how the IRS is using the NDNH, we met
with the HHS and the IRS to determine if the IRS has
restricted NDNH access and the amount the IRS pays for
access to the NDNH. We obtained and reviewed a copy of
the Memo of Understanding that the IRS has with the HHS
for use of the NDNH. We also reviewed the IRS's current
periodic report submitted to the HHS on the
effectiveness of the NDNH in identifying potentially
false EITC claims.
E. Analyzed what action the IRS has taken to measure the
impact of any actions taken, assessed the challenges the IRS
faces in addressing the root causes identified, and determined
if the IRS's efforts to address noncompliance are appropriate
to address the identified root causes.
III. Determined if there are root causes for EITC or ACTC improper
payments that the IRS has not identified.
A. Reviewed legislation and IRS guidance to determine the EITC
and ACTC eligibility requirements.
B. Conducted tests to identify additional root causes for
improper refundable credits.
1. Analyzed applicable Taxpayer Notice Code volumes
for Tax Year 2011 returns.
2. Requested the Dependent Database \3\ rule break
volumes for Tax Year 2011.
---------------------------------------------------------------------------
\3\ The Dependent Database is a risk-based audit selection tool
used by the IRS to identify tax returns for audit. The Dependent
Database scoring system uses business rules to identify EITC
noncompliance at the point of filing through use of internal and
external data elements.
---------------------------------------------------------------------------
C. Evaluated potential fraud.
1. Identified Tax Year 2012 returns claiming the EITC
and wages on the Individual Return Transaction File and
matched to the Individual Master File \4\ to identify
those individuals who actually received the credit.
---------------------------------------------------------------------------
\4\ The IRS database that maintains transactions or records of
individual tax accounts.
---------------------------------------------------------------------------
2. Matched the tax returns identified in Step III.C.1
to the Tax Year 2012 Form W-2 File to identify returns
for which the wages claimed on the tax return are not
supported by a third-party Form W-2. We quantified the
number of returns and amount of the EITC claimed on tax
returns for which the wages are not supported.
IV. Determined an ACTC improper payment rate. Using data from the IRS
NRP 1040 Study for Tax Year 2009 and the OMB budget reports used by the
IRS to estimate EITC improper payments, we computed the potential ACTC
improper payment rate and dollars for fiscal year 2013. To the extent
possible, we used the same methodology the IRS uses to estimate the
EITC improper payment rate and dollars to compute the potential ACTC
improper payment rate. The potential ACTC improper payment rate was
computed with the assistance of the TIGTA contract statistician.
Data validation methodology
During this review, we relied on data extracted from the IRS's
Individual Master File for Tax Year 2012, Individual Returns
Transaction File for Processing Year \5\ 2013, and the Form W-2 File
for Tax Year 2012 located on the TIGTA Data Center Warehouse. We also
relied on a data extract of Tax Year 2012 Forms 1099-R, Distributions
From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc.,\6\ from the IRS's Information Returns
Processing database and a data extract of Tax Year 2008 EITC NRP data
from the IRS's Compliance Data Warehouse that was provided by the TIGTA
Office of Investigations' Strategic Data Services Division.
Additionally, we used Tax Year 2009 1040 NRP data that were provided by
the IRS's NRP staff. We were able to verify a random sample of each
data set to the IRS's Integrated Data Retrieval System. As a result of
our testing, we determined the data used in our review were
sufficiently reliable.
---------------------------------------------------------------------------
\5\ The calendar year in which the tax return or document is
processed by the IRS.
\6\ We specifically requested information on Form 1099-R with a
Distribution Code 3 for disability income.
---------------------------------------------------------------------------
Internal controls methodology
Internal controls relate to management's plans, methods, and
procedures used to meet their mission, goals, and objectives. Internal
controls include the processes and procedures for planning, organizing,
directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance. We
determined that the following internal controls were relevant to our
audit objective: controls in place to identify and address the root
causes of erroneous EITC and ACTC payments. We evaluated these controls
by interviewing management, reviewing policies and procedures, and
reviewing the process used to identify root causes and any initiatives
taken to address root causes identified.
APPENDIX II
Major Contributors to This Report
Russell P. Martin, Acting Assistant Inspector General for Audit
(Returns Processing and Account Services)
Deann L. Baiza, Director
Sharla J. Robinson, Audit Manager
Roy E. Thompson, Audit Manager
Sandra L. Hinton, Lead Auditor
Linda L. Bryant, Senior Auditor
W. George Burleigh, Senior Auditor
Jennie G. Choo, Senior Auditor
Johnathan D. Elder, Auditor
Nathan J. Smith, Auditor
James M. Allen, Information Technology Specialist
Kevin O'Gallagher, Information Technology Specialist
APPENDIX III
Report Distribution List
Assistant Secretary of the Treasury for Tax Policy
Commissioner C
Office of the Commissioner--Attn: Chief of Staff C
Deputy Commissioner for Operations Support OS
Deputy Commissioner for Services and Enforcement SE
Chief Counsel CC
Director, Office of Research, Analysis and Statistics RAS
Deputy Commissioner, Wage and Investment Division SE:W
Director, Customer Account Services, Wage and Investment Division
SE:W:CAS
Director, Return Integrity and Correspondence Services, Wage and
Investment Division
SE:W:RICS
Director, Submission Processing, Wage and Investment Division
SE:W:CAS:SP
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
National Taxpayer Advocate TA
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaisons:
Chief, Program Evaluation and Improvement, Wage and
Investment Division
SE:W:S:PEI
Director, Communications and Liaison, National Taxpayer
Advocate TA:CL
APPENDIX IV
Outcome Measure
This appendix presents detailed information on the measurable
impact that our recommended corrective actions will have on tax
administration. This benefit will be incorporated into our Semiannual
Report to Congress.
Type and Value of Outcome Measure:
-- Funds Put to Better Use--Potential; $1,712,725,533 in questionable
EITC claims paid on 676,992 Tax Year \1\ 2012 tax returns;
$8,563,627,665 \2\ in questionable EITC claims issued over 5 years.
This outcome is potential because it depends on whether the IRS is
granted correctable error authority and obtains the complete NDNH
database to verify these claims.\3\
---------------------------------------------------------------------------
\1\ A 12-month accounting period for keeping records on income and
expenses used as the basis for calculating the annual taxes due. For
most individual taxpayers, the tax year is synonymous with the calendar
year.
\2\ The 5-year forecast for potential funds put to better use is
based on multiplying the base year by five and assumes, among other
considerations, that economic conditions and tax laws do not change.
\3\ The amount may also be affected by employer reporting errors or
employer nonreporting.
---------------------------------------------------------------------------
Methodology Used to Measure the Reported Benefit:
We conducted computer analysis of the Tax Year 2012 Individual
Master File to identify 26,715,006 tax returns that received EITC
totaling $61,989,202,110.\4\ Of the 26,715,006 tax returns,
approximately 23,571,365 (88 percent) included EITCs totaling
$53,773,385,436 for which the taxpayers claimed wages on Line 7 of
their Form 1040 as the source of EITC supporting income.
---------------------------------------------------------------------------
\4\ Our analysis did not include taxpayers who had an EITC reversed
on their account.
---------------------------------------------------------------------------
We matched the 23,571,365 tax returns to the IRS's Form W-2 File on
the TIGTA Data Center Warehouse for Tax Year 2012 using both the
primary and secondary SSNs to determine if a Form W-2 was on file that
would support the wages being claimed on Line 7 of the Form 1040.\5\ Of
the 23,571,365 tax returns with wages reported, we identified 676,992
(3 percent) tax returns for which third-party Forms W-2 were not sent
to the IRS by the employer for either the taxpayer and/or spouse listed
on the tax return.\6\ These 676,992 tax returns received EITC totaling
$1,712,725,533. We forecast that the IRS could prevent the issuance of
$8,563,627,665 in questionable EITC claims over the next 5 years
($1,712,725,533 5).
---------------------------------------------------------------------------
\5\ We removed tax returns on which disability payments were
reported on the Form 1040, Line 7--Wages which were supported by Forms
1099-R, Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc., with a Distribution
Code 3 for disability income.
\6\ Some of the tax returns we identified could also be the result
of nonreporting of income and withholding by the employer.
---------------------------------------------------------------------------
This outcome is achievable if: (1) the IRS is granted expanded
legislative authority to systemically disallow EITC claims based on
NDNH employment results and (2) the IRS obtains an entire copy of the
NDNH database for use during tax return processing to systemically
identify unsupported wages reported on tax returns to erroneously claim
the EITC.
The actual amount of questionable EITC claims the IRS will identify
and prevent is dependent on the actions the IRS takes to obtain needed
authority and access to NDNH data and will not be known until such
authority and data use are implemented.
APPENDIX V
Earned Income Tax Credit Eligibility Rules
Taxpayers claiming the EITC must meet specific criteria to qualify
for the credit. Additional criteria apply for those taxpayers who have
qualifying children. Figure 1 lists the basic EITC eligibility
requirements. Figure 2 shows the additional eligibility tests of age,
relationship, residency, and joint return requirements that must be met
by taxpayers claiming the EITC with a qualifying child. The maximum
EITC available for Tax Year 2013 ranges from $487 for taxpayers with no
qualifying children to $6,044 with three or more qualifying children.
Figure 1: Basic EITC Eligibility Requirements
------------------------------------------------------------------------
Second, you must meet all the
rules in one of these columns,
whichever applies Third, you
First, you must meet ---------------------------------- must meet the
all the rules in this Rules if you Rules if you do rule in this
column have a not have a column
qualifying qualifying
child child
------------------------------------------------------------------------
1. Your adjusted gross 8. Your child 11. You must be 15. Your
income must be less must meet the at least age earned income
than: relationship, 25 but under must be less
--$46,227 ($51,567 age, age 65. than:
for married filing residency, and 12. You cannot --$46,227
jointly) if you have joint return be the ($51,567 for
three or more tests. dependent of married
qualifying children, 9. Your another filing
--$43,038 ($48,378 qualifying person. jointly) if
for married filing child cannot 13. You cannot you have
jointly) if you have be used by be a three or more
two qualifying more than one qualifying qualifying
children, person to child of children,
--$37,870 ($43,210 claim the another --$43,038
for married filing EITC. person. ($48,378 for
jointly) if you have 10. You cannot 14. You must married
one qualifying child, be a have lived in filing
or qualifying the United jointly) if
--$14,340 ($19,680 child of States more you have two
for married filing another than half of qualifying
jointly) if you do person. the year. children,
not have a qualifying --$37,870
child. ($43,210 for
2. You must have a married
valid SSN. filing
3. Your filing status jointly) if
cannot be married you have one
filing separately. qualifying
4. You must be a U.S. child, or
citizen or resident --$14,340
alien all year. ($19,680 for
5. You cannot file married
Form 2555, Foreign filing
Earned Income, or jointly) if
Form 2555-EZ, Foreign you do not
Earned Income have a
Inclusion (relating qualifying
to foreign earned child.
income).
6. You must have
earned income.
7. Your investment
income must be $3,300
or less.
------------------------------------------------------------------------
Source: IRS Publication 596, Earned Income Credit (EIC), for use in
preparing 2013 Returns.
Figure 2: Additional EITC Eligibility Tests of Age, Relationship,
Residency, and Joint Return Requirements
------------------------------------------------------------------------
Eligibility Test Qualifying Child Criteria
------------------------------------------------------------------------
Relationship........................... Must meet one of the following
relationship tests:
--Son, daughter, stepchild,
foster child, or a descendant
of any of them (for example,
your grandchild), or
--Brother, sister, half-
brother, half-sister,
stepbrother, stepsister, or a
descendant of any of them (for
example, your niece or
nephew).
Adopted child. An adopted child
is always treated as your own
child. The term ``adopted
child'' includes a child who
was lawfully placed with you
for legal adoption.
------------------------------------------------------------------------
Age.................................... Must meet one of the following
age tests:
--Under age 19 at the end of
Tax Year 2013 and younger than
you (or your spouse, if filing
jointly),
--Under age 24 at the end of
Tax Year 2013, a student, and
younger than you (or your
spouse, if filing jointly), or
--Permanently and totally
disabled at any time during
Tax Year 2013, regardless of
age.
------------------------------------------------------------------------
Residency.............................. Your child must have lived with
you in the United States for
more than half of Tax Year
2013.
------------------------------------------------------------------------
Joint Return........................... The child cannot file a joint
return for the year.
Exception: An exception to the
joint return test applies if
your child and his or her
spouse file a joint return
only to claim a refund of
income tax withheld or
estimated tax paid.
------------------------------------------------------------------------
Source: IRS Publication 596.
APPENDIX VI
Qualifying Child Criteria for the Child Tax Credit or the Additional
Child Tax Credit
The CTC can reduce an individual's taxes owed by as much as $1,000
for each qualifying child. For Tax Year 2013, the ACTC is equal to the
lesser of the CTC that was not allowed or 15 percent of earned income
that is more than $3,000.\1\ Figure 1 shows the seven eligibility tests
a child must meet to qualify for the CTC or the ACTC.
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\1\ Tax-exempt combat pay is included as earned income when
calculating the ACTC.
\2\ A U.S. national is an individual who, although not a U.S.
citizen, owes his or her allegiance to the United States. U.S.
nationals include American Samoans and Northern Mariana Islanders who
chose to become U.S. nationals instead of U.S. citizens.
\3\ Publication 519, U.S. Tax Guide for Aliens, states that an
individual will be considered a U.S. resident for tax purposes if they
meet the substantial presence test for the calendar year. To meet this
test, the individual must be physically present in the United States on
at least 31 calendar days during the current year and 183 calendar days
during the three-year period that includes the current year and the 2
years immediately before.
\4\ There are some exceptions to the residence test, which can be
found in IRS Publication 972.
------------------------------------------------------------------------
Eligibility Test Qualifying Criteria
------------------------------------------------------------------------
Age.................................... A qualifying child must be
under age 17 at the end of the
tax year.
------------------------------------------------------------------------
Relationship........................... The child must be the
taxpayer's son, daughter,
stepchild, foster child,
brother, sister, stepbrother,
stepsister, or a descendant of
any of them (for example, a
grandchild, niece, or nephew)
and an adopted child (includes
a child lawfully placed for
legal adoption).
------------------------------------------------------------------------
Support................................ The child must not have
provided more than one-half of
their own support for the tax
year.
------------------------------------------------------------------------
Dependent.............................. The taxpayer must claim the
child as a dependent on the
Federal tax return.
------------------------------------------------------------------------
Citizenship............................ The child must be a U.S.
citizen, U.S. national,\2\ or
U.S. resident alien.\3\
------------------------------------------------------------------------
Joint Return........................... The child does not file a joint
return for the year (or files
joint to claim a refund).
------------------------------------------------------------------------
Residence.............................. The child must have lived with
claimant for more than one-
half of the year.\4\
------------------------------------------------------------------------
Source: IRS Publication 972, Child Tax Credit, for use in preparing 2013
returns.
Limitations: The CTC is limited if modified adjusted gross income
is above a certain amount (which varies depending on the taxpayer's
filing status).\5\ In addition, the CTC is generally limited by the
amount of the income tax owed as well as any alternative minimum tax
owed.
---------------------------------------------------------------------------
\5\ For married taxpayers filing a joint return, the phase-out
begins at $110,000. For married taxpayers filing a separate return, it
begins at $55,000. For all other taxpayers, the phase-out begins at
$75,000.
---------------------------------------------------------------------------
APPENDIX VII
Efforts to Address the Root Causes of Earned Income Tax Credit Improper
Payments
The IRS has several programs to address the root causes of EITC
improper payments. The IRS considers these programs as part of its
overall strategy to ensure compliance with the rules. Many of these
programs are aimed at identifying and preventing erroneous payments
once a tax return is filed rather than correcting the underlying reason
that the error is occurring.
Outreach and Education.--Programs designed to educate taxpayers and
tax return preparers on the legal requirements for EITC eligibility so
they can apply the law accurately.
--Annual EITC Marketing Campaign.--This campaign, which includes the
EITC Awareness Day, targets underserved populations and
includes print and media tours.
--EITC Due Diligence Training Modules.--A Web-based initiative in
which tax return preparers can earn a certificate of
completion.
--Nationwide Tax Forum EITC Training.--Annual seminars that educate
tax return preparers on EITC due diligence requirements and
qualifying child requirements.
--External Stakeholders.--The IRS works with external stakeholders
including the tax return preparer community to share
information regarding the EITC in an effort to identify trends
and improve compliance.
Enforcement.--Programs intended to contribute to the broader
strategy of identifying errors as early in the process as possible. The
IRS's prevention activity focuses on three main areas:
--Audits.--The IRS identifies returns for examination usually before
the refund is released. Because of the refundable nature of the
credit, the high error rate, and the high dollar amount
associated with the credit, returns with EITC claims are twice
as likely to be audited as other individual taxpayer returns.
According to the IRS, 70 percent of the examinations the IRS
conducts each year are prerefund examinations in which the IRS
determines the validity of the EITC claim before the EITC
refund is issued. The remaining 30 percent of the examinations
are conducted post refund.
--Math Error.--An automated process performed while tax returns are
being processed and before refunds are sent to taxpayers in
which the IRS identifies math or other irregularities and
automatically prepares an adjusted return for a taxpayer filing
on paper and generally rejects electronic returns. The IRS
currently has limited legislative authority to use this
process.
--Document Matching.--The IRS matches income claimed on tax returns
to income reported by employers and other third parties to
identify discrepancies that involve instances in which EITC
claimants underreport income.
Figure 1 shows the main EITC compliance activities and the
resulting total revenue protected for fiscal years \1\ 2008 through
2014.
---------------------------------------------------------------------------
\1\ Any yearly accounting period, regardless of its relationship to
a calendar year. The Federal Government's fiscal year begins on October
1 and ends on September 30.
Figure 1: EITC Compliance Activities and Total Revenue Protected (Dollars in Billions) for Fiscal Years 2008 Through 2014
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Years
Compliance Activity Year Year Year Fiscal Year Year Year 2008-2014
2008 2009 2010 Year 2011 2012 \2\ 2013 \3\ 2014 \4\ Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Examination Closures............................................... 503,755 508,180 473,999 483,574 487,408 483,139 483,000 3,423,055
Math Error Notices \5\............................................. 432,797 355,416 341,824 293,450 270,492 240,000 210,000 2,143,979
Document Matching.................................................. 727,916 688,087 904,920 1,178,129 985,172 906,994 907,000 6,298,218
Amended Returns \6\................................................ 32,473 25,395 19,347 14,317 13,284 8,129 8,000 120,945
------------------------------------------------------------------------------------
Total Revenue Protected (in Billions)............................ $ 3.74 $ 3.79 $ 3.87 $ 3.75 $ 3.95 $ 3.84 $ 3.69 $ 26.63
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: The Department of the Treasury's Agency Financial Report for Fiscal Year 2013.
---------------------------------------------------------------------------
\2\ Restated actual.
\3\ Preliminary estimates.
\4\ Estimated based on fiscal year 2013 preliminary data.
\5\ The EITC withheld from the claimant; includes decreases in the
amount of the EITC claimed as well as disallowance of the full EITC
claim.
\6\ Amended returns are a subset of Examination Closures.
---------------------------------------------------------------------------
APPENDIX VIII
Earned Income Tax Credit Tax Return Preparer Strategy
As part of its efforts to address EITC improper payments, the IRS
developed an EITC paid preparer strategy that focuses on tax return
preparers who are not compliant with the EITC due diligence
requirements. Figure 1 provides results of this strategy for Fiscal
Year 2013.
Figure 1: Results of the EITC Tax Return Preparer Strategy for Fiscal Year 2013
----------------------------------------------------------------------------------------------------------------
Penalties EITC Revenue
Treatment Description Program Results Proposed (in Protected (in
millions) millions)
----------------------------------------------------------------------------------------------------------------
Due Diligence Visit (DDV)\1\.... Prefiling season DDVs 540 visits ............. ..............
86 percent penalty $14.9 $43.8
rate
-------------------------------------------------------------------------------
Filing season DDVs 300 visits ............. ..............
81 percent penalty Almost $2.9 $7.5
rate
-------------------------------------------------------------------------------
Filing season follow-up 27 visits More Than ..............
DDVs \2\ 67 percent penalty $200,000 Not Measured
rate \3\
----------------------------------------------------------------------------------------------------------------
Knock and Talk Visit............ Visits made by auditors ................... ............. ..............
and Criminal ................... ............. ..............
Investigation agents to 105 visits None \4\ $10.0
educate EITC preparers on
EITC laws and due
diligence requirements.
----------------------------------------------------------------------------------------------------------------
EITC Due Diligence Injunction... Court action to prevent ................... ............. ..............
egregious preparers from 4 injunctions $0 $15.4
filing future returns.
----------------------------------------------------------------------------------------------------------------
DDV Warning Letter.............. Prefiling season letters ................... ............. ..............
to advise preparers of 9,453 letters $0 $275.1
EITC due diligence
problems.
-------------------------------------------------------------------------------
Filing season letters to ................... ............. ..............
advise preparers of 1,781 letters $0 $16.9
continuing EITC due
diligence problems.
----------------------------------------------------------------------------------------------------------------
Source: The Internal Revenue Service Filing Season 2013 EITC Real Time Return Preparer Initial Finding and
Fiscal Year 2013 Executive Order Report.
\1\ Field examiners audit EITC preparers to verify that they are
meeting their due diligence requirements and assert penalties as
warranted.
\2\ A filing season follow-up DDV is for continuing noncompliant
preparers who received an educational visit.
\3\ Insufficient sample size.
\4\ Integrated approach for educational purposes.
---------------------------------------------------------------------------
APPENDIX IX
Management's Response to the Draft Report
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Thank you for the opportunity to review and respond to the subject
draft report on the challenges of administering the Earned Income Tax
Credit (EITC), the Child Tax Credit (CTC), and the Additional Child Tax
Credit (ACTC) through traditional tax compliance processes and
treatments. To detect and stop potentially fraudulent claims for the
credits and to improve taxpayer compliance with the provisions of the
Tax Code authorizing them, we continue to explore alternative
strategies to supplement the traditional tax administration authority
provided to us and to maximize the use of limited compliance resources.
We agree with the Treasury Inspector General for Tax Administration
(TIGTA) that new and innnovative processes are needed to achieve
significant reductions in the amount of improper payments. The tax
system, as established by the Internal Revenue Code (the Code) is based
on the premise that taxpayers will voluntarily comply with its
provisions in self-reporting their tax liabilities. The administrative
provisions of the Code allow for the examination of tax returns to
assess the accuracy of reported liabilities and to serve as an
incentive for voluntary compliance. This balancing control, however, is
subject to the constraints of limited resources and statutory
provisions that assure taxpayers of their rights for the review of
assessments of additional tax, or denials of credits by the U.S. Tax
Court before the assessments or denials occur. Since February 2005 \1\,
the IRS has submitted legislative proposals that would permit expanded
access and use of the National Directory of New Hires database, as
recommended by the TIGTA in this report. With the March 2014 release of
the administration's Fiscal Year 2015 revenue proposals \2\, the IRS
has submitted legislative proposals for supplemental authority that
would provide for correctable error authority, similar to math error
authority, in situations when information provided by taxpayers does
not match the information contained in government databases. The IRS
also requested acceleration of the filing dates of information returns
to make the information available to the IRS earlier, the authority to
regulate return preparers, increases in return preparer penalties for
willful or reckless misconduct, and extending due diligence
requirements to include the EITC, CTC, and ACTC.
---------------------------------------------------------------------------
\1\ General Explanations of the Administrative's Fiscal Year 2006
Revenue Proposals, 132, February 2005, http://www.treasury.gov/
resource-center/tax-policy/Documents/General-Explanations-FY2006.pdf.
\2\ General Explanations of the Administration's Fiscal Year 2015
Revenue Proposals, March 2014, 229230, 245-246, http://
www.treasury.gov/resource-center/tax-policy/Documents/General-
Explanations-FY2015.pdf.
---------------------------------------------------------------------------
Considering the unique attributes of refundable credits claimed and
payable through the tax system, the IRS has prepared annual risk
assessments under the Improper Payments Elimination and Recovery
Improvement Act of 2012 (IPERIA) for the specific outlays identified by
the Office of Management and Budget (OMB), under guidance provided by
the Department of the Treasury. Additional guidance provided by the OMB
recognizes Treasury's assertion that there is significant complexity
and difficulty in separately reporting the refunded amount of each
credit claimed and paid through the tax system. The OMB further
acknowledges that the IRS already conducts analysis of the tax gap that
incorporates these credits. Refundable tax credit non-compliance is
included in the tax gap estimate, and in the assessment and regular
updating of our compliance strategies.
Since 2005, the IRS has been reporting separate estimates for the
EITC because this program was determined to be high risk under the
Improper Payments Information Act, a predecessor to IPERIA. All
overclaims of refunds, including refundable credits, are included in
the IRS tax gap estimate. The IRS' overall compliance strategy includes
efforts to reduce the EITC error rates separately, but also takes into
account efforts to improve compliance overall, including refundable
credits claimed on the tax return. The OMB confirmed in March 2014 that
this is permissible so long as the IRS explains in its Annual Financial
Report why there is no further break out. This OMB agreement is based
on the recognition of how tax returns are administered, including
refundable credits, as being integral to the IRS assessment of
compliance with tax reporting requirements. This allows for the
appropriate resource focus within the IRS compliance strategy, since
the largest component of the tax gap falls outside of traditional
refundable tax credit payments. If the IRS compliance strategy required
IPERIA reporting and compliance standards for all refundable tax
credits, the IRS would need to divert a disproportionate amount of
compliance resources to satisfy those requirements
Refundable tax credits differ from other Federal outlays, such as
Federal vendor or grant payments, in that the potential outlay can be
fully or partially absorbed by taxpayers' tax liabilities, and can be
combined with other refundable and/or non-refundable tax credits in
arriving at the net tax due or overpayment to be refunded. Some
refundable tax credits, such as income tax withheld from wages, Federal
tax deposits, and estimated tax payments, are recorded as reductions of
receipts rather than as outlays.\3\ Refundable tax credits are reported
as outlays when they exceed the tax liability and are a part of the
refund. When refunds are due; the IRS issues a single payment for the
net refund amount.
---------------------------------------------------------------------------
\3\ OMB Circular A-11 Section 20.10.
---------------------------------------------------------------------------
Another important difference between refundable tax credits and
other Federal outlays subject to the IPERIA is that taxpayers self-
certify their eligibility for the applicable credits through the act of
filing a tax return. Amounts reported on tax returns or required tax
forms are based on voluntary compliance and are signed by taxpayers
under penalty of perjury, attesting that the information provided is
complete and accurate. The IRS is legally obligated \4\ to refund
amounts collected from taxpayers and refundable tax credits Congress
has authorized qualifying taxpayers to claim in excess of the
taxpayer's income tax liability within 45 days of processing a
taxpayer's request. Otherwise, IRS must pay interest to the taxpayer.
This contrasts with other contractual or benefit payments where the
eligibility for payment and the accuracy of the amount to be paid are
reviewed and approved prior to disbursement of the funds.
---------------------------------------------------------------------------
\4\ 31 U.S.C. Sec. 1324.
---------------------------------------------------------------------------
The IRS has compliance processes in place to identify questionable
refunds and stop their issuance. To the extent permitted by law, the
IRS uses other government data sources to identify questionable claims
for refundable tax credits and address them appropriately. For claims
of EITC, CTC, and ACTC, refunds are stopped and the returns are
referred to the IRS Examination functions for review. Examiners will
contact taxpayers to request documentation to support their claims for
the credit(s) and, when taxpayers are found to be ineligible, the
examiners will make the requisite adjustments to the return to
eliminate the unallowable credit. Claims disallowed by these pre-refund
examinations are not improper payments because the refunds were not
issued.
In addition to performing examinations of questionable claims,
approximately 70 percent of which are performed before the refund is
issued, soft notices are used to alert taxpayers to questionable items
and encourage improved future compliance. Several fraud detection
filters are in place specifically to help detect issues with claims for
the EITC, CTC, and ACTC. Last year, the IRS detected specific patterns
indicating potential fraud in returns with Individual Taxpayer
Identification Numbers and developed filters during the filing season
to stop those refunds from being issued.
Approximately 57 percent of returns claiming the EITC are prepared
by tax return preparers, and we are supplementing our traditional
return preparer initiatives with strategic programs intended to improve
compliance with the EITC and other refundable credit provisions.
Compliance and warning notices are sent before and during the filing
season to preparers who prepare large numbers of returns claiming the
EITC to educate them on their responsibilities and the consequences of
non-compliance. Preparer audits are performed by field examiners to
ensure preparers are complying with EITC due diligence rules. We are
also using data analytics to identify tax return preparers with a
history of submitting incorrect or potentially fraudulent tax returns
falsely claiming the EITC and related tax credits. Intervention methods
used to address these preparers include letters, telephone calls, and
site visits, both before and during the filing season, to allow the
preparers to immediately adjust their practices. During its pilot year
in 2012, this process reduced improper EITC payments by an estimated
$198 million. The program was expanded in 2013 and is estimated to have
prevented another $590 million in improper payments.
We disagree with the TIGTA's potential outcome measure estimate of
$1.7 billion as funds put to better use for two reasons. First, as
noted in the report, the outcome cannot be achieved without changes to
existing legislation; an action that is beyond the control of the IRS.
Second, our review of data from the recent EITC Compliance Study,
covering Tax Years 2006 through 2008, found that a significant portion
of EITC claims on returns without a Form W-2, Wage and Tax Statement,
sent to the IRS and with wages reported on the return were either
accurate or disallowed for reasons other than misreported wages.
Attached is our response to your recommendations. If you have any
questions, please contact me, or a member of your staff may contact
Jodi L. Patterson, Director, Return Integrity and Correspondence
Services, Wage and Investment Division, at (404) 338-8961.
Attachment
ATTACHMENT
Recommendation
Recommendation 1: The Commissioner, Wage and Investment Division,
should ensure that the results of the ACTC Improper Payment Risk
Assessment accurately reflect the high risk associated with ACTC
payments and provide a reliable estimate of improper payments.
Completion of the ACTC Improper Payment Risk Assessment should include
an evaluation of available NRP and enforcement data when determining
the overall risk of improper payments.
Corrective Action: We disagree with this recommendation. The
Improper Payment Risk Assessment is completed for the Additional Child
Tax Credit (ACTC) following the guidance of the Department of Treasury
and the Office of Management and Budget (OMB). The assessment
questionnaire and scoring methodology reflect operational risks
associated with administration of the credit. Enforcement data and
overall risks associated with administration of the ACTC are already
considered by its inclusion in the tax gap estimate.
Implementation Date: N/A
Responsible Official: N/A
Corrective Action Monitoring Plan: N/A
Recommendation
Recommendation 2: The Commissioner, Wage and Investment Division
should, as required by the IPERA, identify the root causes of the
improper ACTC payments, determine if tools and/or resources are
available to address erroneous ACTC payments, and establish a plan to
reduce the erroneous payments and then meet that plan.
Corrective Action: We disagree with this recommendation. The OMB
acknowledges that IRS already conducts analysis of the tax gap that
incorporates these credits. Refundable tax credit non-compliance is
included in the tax gap estimate and in the assessment and regular
updating of our compliance strategies, The IRS considers available
tools, resources, and alternative treatment options when preparing and
updating compliance strategies. The reduction of erroneous payments is
a primary goal of those activities.
Implementation Date: N/A
Responsible Official: N/A
Corrective Action Monitoring Plan: N/A
Recommendations
If the IRS is granted correctable error authority, the
Commissioner, Wage and Investment Division, should:
Recommendation 3: Contract with the HHS to obtain a complete copy
of the NDNH database for use during tax return processing to
systemically identify unsupported wages reported on tax returns to
erroneously claim the EITC.
Corrective Action: We disagree with this recommendation. The
limited National Directory of New Hires (NDNH) data is used now in our
filters when third party wage information is not yet available to the
IRS on the Information Returns Master File (IRMF). An analysis was
performed to determine the extent to which the NDNH data is beneficial
in processing claims for the EITC. The analysis revealed that the data
was being used on only a small percentage of the claims filed, and that
volume is decreasing each year as wage information is posted earlier to
the IRMF. The cost of obtaining the limited NDNH is significant and,
under current limitations on our use of the data, we do not consider it
to be a cost beneficial tool. However, as we respond to the
recommendation below, we agree and are pursuing legislative authority
to expand our access to and authority for use of the entire NDNH
database which will be useful for identifying noncompliance, identity
theft, and refund fraud.
Implementation Date: N/A
Responsible Official: N/A
Corrective Action Monitoring Plan: N/A
Legislative Recommendation
Recommendation 4: Work with the Assistant Secretary of the Treasury
for Tax Policy to consider a legislative proposal to obtain expanded
NDNH authority to systemically verify claims for other income-based
refundable credits (e.g. ACTC) based on NDNH employment data.
Corrective Action: We agree with this recommendation. The General
Explanations of the Administration's Fiscal Year 2015 Revenue Proposals
presents a legislative request for expanded use of the NDNH database.
The proposal would amend the Social Security Act to expand IRS access
to NDNH data for general tax administration purposes, including data
matching and verification of taxpayer claims during return processing.
We believe this proposal addresses the recommendation.
Implementation Date: Implemented
Responsible Official: Director, Return Integrity and Correspondence
Services, Wage and Investment Division
Corrective Action Monitoring Plan: We will monitor this corrective
action as part of our internal management control system.
Mr. George. But suffice it to say, as a refundable credit,
all refundable credits that the IRS issues are so difficult to
manage because once the money is out of the door, it is so much
more expensive for the IRS to reclaim it, recoup it. It is they
have to make a cost-benefit analysis as to whether or not it is
worth doing.
Now there are ways that the IRS could address this, which
we have recommended in the past, and that included, you know,
earlier reporting of earnings under--per the W-2 form. So,
again, the earlier the IRS has information on what people are
paid, the earlier they can address problems that they
ultimately find.
But this is in conjunction with the request that the
Treasury Department as well as recommendations that we have
made and the IRS has made for what is known as correctable
error authority. So, for example, once the tax filing season
begins, which, in effect, is the second or third week in
January, depending on the year, people can file their tax
return and seek a refund.
The IRS is not required to receive from the payee, the
employer or whomever, for another 3 months, sometime in March,
that same information on that individual. Now if the individual
claims a different amount than what the employer claims, that
individual could receive more money and then receive a
refundable credit, whether it is the EITC or the additional
child tax credit or an education credit, what have you.
Now if the IRS had what is known as correctable error
authority, it does not have to necessarily wait until again, as
I pointed out in my opening statement, that all of the
information is in hand and what have you. They could
automatically hold off paying that refund and making the
corrections themselves. And of course, the taxpayer would still
have the right to contest the IRS's decision if they believe it
is inaccurate, but so it is a symbiotic relationship in terms
of legislation that the IRS and the Department of the Treasury
is seeking.
So there are ways to address this, but it is obviously a
very delicate area for all involved.
Senator Boozman. I guess the frustration is this is an area
where throwing money at it is not--won't help in the sense of,
you know, making it more--we have a program that is in error 24
percent of the time, which is, you know, certainly
unacceptable.
In the past, TIGTA has identified refund fraud committed by
prisoners that is a significant problem for tax administration.
Just last fall, a report noted that refund fraud associated
with prisoner Social Security numbers remains a serious
problem.
The number of fraudulent tax returns filed using a
prisoner's Social Security number that were identified by the
IRS increased from more than 37,000 tax returns in calendar
year 2007 to more than 137,000 tax returns in calendar year
2012. The refunds claimed on these tax returned increased from
$166 million to $1 billion.
I understand that Treasury has the authority to share
information with the Federal Bureau of Prisons and State
Departments of Corrections to help determine if prisoners may
have filed or helped the filing of a fraudulent return. Would
you please give us an update on the effectiveness of the IRS
efforts to reduce these improper payments to prisoners?
Mr. George. Yes, and thank you for posing this question,
Mr. Chairman. Because I have to admit, this is one of the areas
where I am most disappointed. Because this was one of the first
subjects that I testified before Congress on almost a decade
ago about the problem that existed and that has since just
continued to grow.
Congress did empower the IRS to take actions to address
this by forming agreements with various States and Federal
penitentiary or correctional organizations. And they have--they
did at some point take positive steps to doing so. Some of
those expired. Others, again, just fell by the wayside.
But this is a multi-billion dollar problem. It is still
going on. And a lot of these individuals have so much time on
their hands and, in all candor, really have nothing left to
lose that they are not going to stop.
And until something more tangible is done, meaning further
prosecutions or more authority or, in all candor, the IRS
somehow feeling the pinch if they don't take action with
signing up what data information sharing programs and the like
with States, this problem will continue to grow and
metastasize.
Senator Boozman. I read the IG report, you know, talking
about this, and one of the recommendations was I think there
was 300 and some odd prisoners that they had identified to--you
know, to essentially give that information--to make it such
that that group that they had, you know, that they could fix it
where they couldn't do it, and they refused to do that. Is that
correct?
Mr. George. I don't know whether they refused to do it. But
again, at one point, they did not have the authority to do it.
And so, and I am not sure what you are describing predates the
authority that Congress did ultimately provide or not. But I
can get back to you with clarity.
Senator Boozman. It is fine. Again, it is just a
frustration, you know, among the many things that we talked
about.
One last question, and then we will let you go. I know that
you have got lots of stuff to do. TIGTA has identified
significant concerns about fraudulent claims to premium tax
credits and security of Federal tax data as the IRS provides
data to health exchanges. The IRS will also have to administer
penalties related to the individual mandate and try and seek
collection of premium tax credits provided to ineligible
taxpayers and collection of overpayments of tax credits.
According to your audits, the IRS continues to report that
more than 20 percent--we talked about this--of the earned
income tax credit is a problem, issued improperly. Again, $15
billion, and $13 billion to $15 billion in 2013 in improper
payments, as we discussed earlier.
Do you believe that there is the potential for similar
problems with implementation of the premium tax credit?
Mr. George. Most definitely, sir. And--and it starts from
the outset. The bottom line is if someone is able to provide
fraudulent information at the outset, when they first apply for
this credit, that starts the ball rolling downhill.
Now to its credit, the IRS has established some filters in
their system to try to weed these out. And so, I hope the
magnitude of the problem isn't anything like the other--well,
the refundable credits we referred to earlier. But we are--
TIGTA is in the process now of evaluating this very issue to
see whether the IRS has adequate processes, both in formation
and ultimately in effect because this could be a budget buster,
sir.
Senator Boozman. Very much. Thank you so much for your
testimony today. Thank you for being here. We really do
appreciate it. Appreciate your hard work.
As again, all of the witnesses that have testified, I know
that everybody is doing their best to work in a very difficult
situation, again trying to restore confidence in the agency.
I want to thank again the other two witnesses for being
here. Appreciate hearing from these individuals with the
Treasury Department, the IRS, the IG's office, and having the
opportunity to explore a number of important and very timely
issues.
Today's discussion will be helpful as we move forward with
our work on the fiscal year 2016 funding and especially in
light of the answer to the last question about getting these
things straight on the front end, or we are going to have real
problems and not let history repeat itself.
PREPARED STATEMENTS
At this time, I ask unanimous consent that a statement by
the Taxpayer Advocate, Nina Olson, be included in the hearing
record.
I ask unanimous consent that a report prepared for the
subcommittee by the Government Accountability Office (GAO) and
the IRS fiscal year 2016 budget request and the 2015 filing
season also be included in the record.
As there is no objection, they will be included.
[The statements follow:]
Prepared Statement of Nina E. Olson, National Taxpayer Advocate
Chairman Boozman, Ranking Member Coons, and distinguished members
of this subcommittee:
Thank you for inviting me to submit this statement regarding the
proposed budget of the Internal Revenue Service for fiscal year
2016.\1\
---------------------------------------------------------------------------
\1\ The views expressed herein are solely those of the National
Taxpayer Advocate. The National Taxpayer Advocate is appointed by the
Secretary of the Treasury and reports to the Commissioner of Internal
Revenue. However, the National Taxpayer Advocate presents an
independent taxpayer perspective that does not necessarily reflect the
position of the IRS, the Treasury Department, or the Office of
Management and Budget. Congressional testimony requested from the
National Taxpayer Advocate is not submitted to the IRS, the Treasury
Department, or the Office of Management and Budget for prior approval.
However, we have provided courtesy copies of this statement to both the
IRS and the Treasury Department in advance of this hearing.
---------------------------------------------------------------------------
In my 2014 Annual Report to Congress, I designated inadequate
taxpayer service as the #1 most serious problem for our Nation's
taxpayers. This year, taxpayers are receiving the worst levels of
taxpayer service since at least 2001, when the IRS implemented its
current performance measures.
I do not think it is hyperbolic to say we are facing a crisis in
taxpayer service. Many metrics bear this out, but to cite the most
obvious: From January 1 through February 21, the IRS answered only 40
percent of the calls it received from taxpayers seeking to speak with a
customer service representative, and those who managed to get through
waited on hold for an average of about 26 minutes.\2\ By comparison, 76
percent of taxpayers got through and waited on hold an average of about
11 minutes during the same period last year.\3\
---------------------------------------------------------------------------
\2\ IRS Joint Operations Center, Snapshot Reports: Enterprise
Snapshot (week ending Feb. 21, 2015).
\3\ Id.
---------------------------------------------------------------------------
The proposition that the Government should provide taxpayers with
high quality service may seem obvious, but it is worth considering why
taxpayer service is so important. In my view, there are two related but
independent reasons.
First, good service is, very simply, the right thing for the
Government to provide for its taxpayers. The requirement to file a
return and pay taxes is generally the most significant burden a
government imposes on its citizens. The Government therefore has a duty
to make compliance as simple and painless as possible.
Second, it is in the Government's self-interest to facilitate
voluntary compliance, because voluntary compliance is far more cost-
effective than enforced compliance. For context, more than 98 percent
of all tax revenue collected by the Government is paid voluntarily and
timely. Less than 2 percent is collected through enforcement action.\4\
If the IRS were to collect 10 percent less in enforcement revenue, tax
revenue would decline by less than $6 billion. If voluntary tax
payments were to drop by 10 percent, tax revenue would decline by more
than $300 billion.
---------------------------------------------------------------------------
\4\ In fiscal year 2014, the IRS collected total tax revenue of
about $3.1 trillion. Of that amount, it collected $57.1 billion through
enforcement actions. Government Accountability Office (GAO), GAO-15-
173, Financial Audit: IRS's Fiscal Years 2014 and 2013 Financial
Statements 29 (Nov. 2014), at http://www.gao.gov/assets/670/666863.pdf.
There are three factors that explain why the IRS is unable to meet
---------------------------------------------------------------------------
taxpayer needs:
1. Tax-Law Complexity. The complexity of the tax code as it stands
today is overwhelming, making compliance difficult for taxpayers and
enforcement difficult for the IRS. With a simpler tax code, taxpayers
would not need as much help complying, and the IRS could deliver on its
revenue-collection mission with a smaller budget. For purposes of this
hearing, I will not discuss tax reform in detail, but I continue to
believe it should be a top priority.\5\
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\5\ I have written and testified extensively about the need for
comprehensive tax reform. See National Taxpayer Advocate 2012 Annual
Report to Congress 3-23 (Most Serious Problem: The Complexity of the
Tax Code); Testimony of Nina E. Olson, National Taxpayer Advocate, at
Hearing on Fundamental Tax Reform Before H. Comm. On Ways and Means,
112th Cong. (2011), at http://waysandmeans.house.gov/calendar/
eventsingle.aspx?EventID=219701; National Taxpayer Advocate 2010 Annual
Report to Congress 3-14 (Most Serious Problem: The Time for Tax Reform
Is Now); National Taxpayer Advocate 2010 Annual Report to Congress 365-
372 (Legislative Recommendation: Enact Tax Reform Now); National
Taxpayer Advocate 2005 Annual Report to Congress 375-380 (Key
Legislative Recommendation: A Taxpayer-Centric Approach to Tax Reform);
Presentation of Nina E. Olson, National Taxpayer Advocate, at Public
Meeting of the President's Advisory Panel on Federal Tax Reform (Mar.
3, 2005) at http://www.taxreformpanel.gov/meetings/meeting-
03032005.shtml. Over the past decade, the National Taxpayer Advocate's
annual reports have contained dozens of additional proposals to
simplify particular sections or areas of the tax code.
---------------------------------------------------------------------------
2. Resource Constraints and Increasing Workload. Because of a
combination of sequestration and concerns about IRS management
practices, Congress has been cutting the IRS's budget, and IRS funding
now stands about 17 percent lower on an inflation-adjusted basis than
in fiscal year 2010. At the same time, the IRS's workload has been
increasing in recent years due to a variety of factors, including
implementation of basis reporting and merchant-card reporting laws, the
Patient Protection and Affordable Care Act, and the Foreign Account Tax
Compliance Act. In short, the combination of more work and reduced
resources has produced declining performance.
3. Questionable Resource-Allocation Decisions. While I believe the
IRS requires more funding, I also believe it is incumbent on the IRS to
spend the resources it has as effectively and efficiently as possible.
The IRS must be able to demonstrate that it is making responsible
decisions in allocating its existing resources; that it is basing these
decisions on research data that is comprehensive, not just on what is
convenient for the IRS; and that it has a strategic and creative vision
for the future--one that considers the needs of taxpayers even as it
tries to go about doing its work efficiently. For example, the IRS has
substantially stopped providing answers to tax-law questions by phone
and in its walk-in offices. It decided to answer only ``simple''
questions during the filing season and to answer no questions at all
after the filing season, despite the fact that about 15 million
taxpayers obtain proper extensions or otherwise file later in the year.
One would think that answering tax-law questions would be viewed as a
core function the Federal tax agency should perform, yet I do not
believe the IRS undertook a comprehensive analysis comparing the cost
savings associated with curtailing answers to tax-law questions against
other ways of achieving equivalent savings.
Overall, I believe the solution to the crisis in taxpayer service
is a combination of more funding and better resource-allocation
decisions in the near term and comprehensive tax reform over the longer
term.
In my testimony today, I will elaborate on the following key
points:
1. The IRS is currently failing to meet taxpayer needs, which
erodes taxpayer trust in the system and undermines voluntary
compliance.
2. The IRS is making resource-allocation decisions without hard
data to show that its decisions are the best ones to drive voluntary
compliance and collect revenue in an effective and efficient manner.
3. Understanding the taxpayer base is key to providing effective
taxpayer service and to maintaining and enhancing voluntary compliance.
4. IRS compliance initiatives are often based on outdated or
unproven assumptions and can generate significant volumes of rework for
the IRS and tremendous burden for taxpayers.
5. The IRS is undertaking a review of its approach to tax
compliance and service delivery, but greater transparency and
Congressional oversight would improve taxpayers' confidence and trust
in the tax system.
6. The IRS requires funding to acquire modern IT systems,
particularly case management systems, in order to meet taxpayer needs
and improve productivity.
I. The IRS Is Currently Failing to Meet Taxpayer Needs, Which Erodes
Taxpayer Trust in the System and Undermines Voluntary
Compliance.
The tax code as it stands today is overwhelming in its complexity
and thus poses a significant compliance barrier for taxpayers. Large
numbers of taxpayers contact the IRS for assistance. In addition to
publishing forms and instructions, the IRS now typically receives more
than 100 million telephone calls,\6\ 10 million letters,\7\ and five
million visits from taxpayers each year.\8\
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\6\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
Snapshot (final week of each fiscal year for fiscal year 2008 through
fiscal year 2014).
\7\ IRS, Joint Operations Center, Adjustments Inventory Reports:
July-September Fiscal Year Comparison (Fiscal Year 2008 through Fiscal
Year 2014).
\8\ IRS Wage & Investment Division, Business Performance Review 7
(4th Quarter--Fiscal Year 2014, Nov. 6, 2014).
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The IRS reached its high-water mark in providing taxpayer service
in fiscal year 2004, when it answered 87 percent of the calls it
received from taxpayers seeking to speak with an assistor and hold
times averaged 2.5 minutes; \9\ it responded to a wide range of tax-law
questions from taxpayers both on its toll-free lines and in its roughly
400 walk-in sites; it prepared nearly 500,000 tax returns for taxpayers
who requested help, particularly low income, elderly, and disabled
taxpayers; \10\ and it maintained a robust outreach and education
program, estimating that its outreach efforts touched 72 million
taxpayers.\11\
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\9\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
Snapshot (Sept. 30, 2004).
\10\ This data was provided to TAS by the IRS Wage & Investment
Division in connection with the National Taxpayer Advocate 2007 Annual
Report to Congress 162-182 (Most Serious Problem: Service at Taxpayer
Assistance Centers). TAS does not have data on tax-law questions asked
outside the filing season for more recent years.
\11\ IRS Data Book, Fiscal Year 2004, Table 23.
By comparison, the IRS's service expectations for fiscal year 2015
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are as follows:
--The IRS is unlikely to answer even 50 percent of the telephone
calls it receives.\12\
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\12\ Email from Commissioner Koskinen to All Employees, Fiscal Year
2015 Funding (Dec. 17, 2014).
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--For taxpayers who manage to get through, wait times are expected to
be at least 30 minutes on average \13\ and will run
considerably longer during peak periods.
---------------------------------------------------------------------------
\13\ Id.
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--The IRS will answer far fewer tax-law questions than it used to.
During the filing season, it will not answer any questions
except ``basic'' ones. After the filing season, it will not
answer any tax-law questions at all, leaving the roughly 15
million taxpayers who file later in the year unable to get any
answers to their questions by calling or visiting IRS
offices.\14\
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\14\ IRS, e-News for Tax Professionals--Issue Number 2013-49, Item
4, Some IRS Assistance and Taxpayer Services Shift to Automated
Resources (Dec. 20, 2013), available at http://www.irs.gov/uac/Some-
IRS-Assistance-and-Taxpayer-Services-Shift-to-Automated-Resources.
These restrictions were implemented in 2014.
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--The IRS has eliminated return preparation.\15\
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\15\ Id.
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--The IRS has reduced its training funds by 83 percent since fiscal
year 2010, leaving employees less equipped to do their jobs
properly.\16\
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\16\ IRS Chief Financial Officer, Corporate Budget.
The following chart shows the IRS's performance in handling
telephone calls from January 1--February 14, 2015, and the comparable
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period during 2014:
IRS Telephone Performance--Jan. 1-Feb. 21, 2015 \17\
---------------------------------------------------------------------------
\17\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
Snapshot (week ending Feb. 14, 2015).
JANUARY 1, 2015-FEBRUARY 21, 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
2014 2015 2014 to 2015 Change
-----------------------------------------------------------------------------------------------------------------
Net Net
Attempts Attempts
Line (includes Assistor Customer Avg Speed (includes Assistor Customer Avg Speed LOS Change ASA
calls Calls Service of Answer calls Calls Service of Answer (Percentage Change
answered by Answered Rep LOS (Minutes) answered by Answered Rep LOS (Minutes) Point) (Minutes)
automation) automation)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Accounts Management................... 22,044,858 4,594,021 76% 11 20,570,926 3,131,536 40% 26 -36% 15
Individual Income Tax Line TAX-1040... 3,046,235 819,409 83% 9 3,986,631 498,914 26% 22 -57% 13
Refund Hotline (1954)................. 10,241,288 33,499 52% 8 6,947,594 26,008 33% 23 -19% 15
W&I Individual Customer Response Line. 819,733 312,061 74% 9 910,023 179,356 34% 23 -40% 14
NTA (4778)............................ 86,146 36,023 58% 10 143,049 36,281 34% 27 -24% 18
Practitioner Priority Line (PPS)...... 268,689 166,960 73% 21 257,793 99,570 45% 56 -28% 35
--------------------------------------------------------------------------------------------------------------------------------------------------------
The official measure of IRS telephone performance is based on calls
made to the ``Accounts Management'' telephone lines. So far this year,
the IRS has answered only 40 percent of calls from taxpayers seeking to
speak with a telephone assistor, and wait times for those who got
through averaged 26 minutes.\18\ That is an extraordinary decline from
last year, when the IRS answered about 76 percent of its calls, with an
average wait time of 11 minutes for the comparable period. The other
rows on the chart show important telephone lines that are subsets of
the Accounts Management total.
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\18\ The percentage of calls answered from taxpayers seeking to
speak with a customer service representative is referred to as the
Customer Service Representative Level of Service, which is abbreviated
as ``Customer Service Rep LOS'' on the above chart. The wait time for
callers who get through to a customer service representative is
referred to as the Average Speed of Answer, which is abbreviated as
``Avg Speed of Answer (Minutes)'' on the above chart. In both cases, we
have rounded to the nearest whole numbers, but the LOS change and ASA
change columns were computed using decimals and therefore do not all
total exactly.
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As the filing season has kicked into higher gear, the IRS's
telephone performance has dropped below the year-to-date average. For
the week ending February 7, the IRS answered 34 percent of its
calls.\19\ For the week ending February 14, it answered 36 percent.\20\
And for the week ending February 21, it answered 31 percent.\21\
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\19\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
Snapshot (week ending Feb. 7, 2015).
\20\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
Snapshot (week ending Feb. 14, 2015).
\21\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
Snapshot (week ending Feb. 21, 2015).
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The IRS's ability to timely process taxpayer correspondence has
also been declining. The following chart shows open inventory levels
and the percentage of the inventory that was not handled within
established timeframes for two key programs run by the Accounts
Management function:
IRS Correspondence Performance--Jan. 1-Feb. 21, 2015 \22\
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\22\ IRS, Customer Account Services Accounts Management Paper
Inventory Reports, Inventory Age Report--All Programs (week ending Feb.
21, 2015).
ACCOUNTS MANAGEMENT CORRESPONDENCE INVENTORIESP(WEEKS ENDING 02/22/2014 AND 02/21/2015)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2014 2015 2014 to 2015 Change
------------------------------------------------------------------------------------
Overage
Key AM Programs Percentage Percentage Overage Change
Total Overage Overage Total Overage Overage Change (Percentage
Point)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Individual Taxpayer Correspondence................................. 177,504 82,083 46% 247,699 162,141 65% 80,058 19%
Amended Return/Duplicate Filing.................................... 126,901 65,833 52% 158,618 107,419 68% 41,586 16%
--------------------------------------------------------------------------------------------------------------------------------------------------------
In both programs, at least 65 percent of the inventories are
overage (i.e., have not been handled within established timeframes),
which represents a substantial increase over last year's already-high
levels. These lengthy backlogs in processing taxpayer correspondence
often lead to adverse taxpayer impact. For a taxpayer who owes
additional tax, interest charges and penalties generally will continue
to accrue. For a taxpayer who has overpaid, a delay in processing
correspondence may translate into a delay in receiving a refund.
Overall, the decline in the IRS's taxpayer service levels results
from a combination of more work and reduced resources. On the workload
side, the IRS is receiving 11 percent more returns from
individuals,\23\ 18 percent more returns from business entities,\24\
and 70 percent more telephone calls (through fiscal year 2013) than a
decade ago.\25\ Implementation of the Patient Protection and Affordable
Care Act \26\ during the current filing season will add considerable
new work.
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\23\ See IRS Data Books, Table 2 (showing return totals for fiscal
year 2005 through fiscal year 2013). Data for fiscal year 2014 are
projections made by the IRS Office of Research, Analysis, and
Statistics; see IRS Publication 6292, FYReturn Projections for the
United States 2014-2021, at 4 (Fall 2014).
\24\ Id.
\25\ The majority of the additional calls were handled by
automation. The increase in calls seeking to speak with a customer
service representative was 23 percent. See IRS, Joint Operations
Center, Snapshot Reports: Enterprise Snapshot (final week of fiscal
years 2005 and 2013) (indicating that the number of calls seeking to
reach a representative on the Account Management telephone lines
increased from about 40.4 million to about 49.8 million). The
percentage increase in calls seeking to reach an assistor likely would
have been considerably higher absent IRS policies that have
increasingly restricted personal service options.
\26\ Public Law No. 111-148, 124 Stat. 119 (2010).
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On the funding side, the IRS's budget has been reduced by about 17
percent in inflation-adjusted terms since fiscal year 2010.\27\ As a
consequence, the IRS has already cut its workforce by nearly 12,000
employees,\28\ and projects it will have to cut several thousand
additional positions during fiscal year 2015.\29\
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\27\ In fiscal year 2010, the agency's appropriated budget stood at
$12.1 billion. In fiscal year 2015, its budget was set at $10.9
billion, a reduction of about 9.9 percent. Inflation over the same
period is estimated at about 9.4 percent. Adjusting for the interactive
effects of these cuts and the impact of the Federal pay freeze, we
estimate the inflation-adjusted reduction in funding was about 17
percent.
\28\ IRS Chief Financial Officer, Corporate Budget. This reduction
represents actual full-time equivalent employees realized through
appropriated dollars.
\29\ Email from Commissioner Koskinen to All Employees, Fiscal Year
2015 Funding (Dec. 17, 2014). The IRS anticipates it can make these
reductions through attrition.
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I believe the IRS, like any agency, can operate more effectively
and efficiently in certain areas. However, I do not see any substitute
for sufficient personnel if the IRS is to provide high-quality taxpayer
service. The only way the IRS can assist the tens of millions of
taxpayers seeking to speak with an IRS employee is to have enough
employees to answer their calls. The only way the IRS can timely
process millions of taxpayer letters is to have enough employees to
read the letters and act on them. And the only way the IRS can meet the
needs of the millions of taxpayers who visit its walk-in sites is to
have enough employees to staff them.
I believe that Congress and the IRS have a shared responsibility to
ensure that the taxpayers who pay our Nation's bills receive the
assistance they need when they seek to meet their tax obligations. As I
wrote in my recent report, I do not think it is acceptable for the
Government to tell millions of taxpayers who seek help each year, in
essence, ``We're sorry. You're on your own.''
Recommendations
I recommend that Congress:
--Over the short term, carefully monitor taxpayer service trends and
ensure that the IRS receives the oversight and funding it
requires to meet the needs of U.S. taxpayers.
--Over the longer term, enact comprehensive tax reform to reduce the
complexity of the Internal Revenue Code and reduce compliance
burdens on taxpayers and the IRS alike.
II. The IRS Is Making Resource-Allocation Decisions Without Hard Data
to Show That Its Decisions Are the Best Ones to Drive Voluntary
Compliance and Collect Revenue in an Effective and Efficient
Manner.
While I believe the IRS requires more funding, I also believe it is
incumbent on the IRS to spend the resources it has as effectively and
efficiently as possible. Doing so is always important, but in light of
Congress's concerns about IRS management decisions, it is particularly
important now for the IRS to demonstrate that it is a good steward of
the funding it is given. Funding reductions, even significant ones, do
not provide a blanket justification for service reductions. Reductions
in service always should be made with the goal of minimizing the impact
on taxpayers and performance. The IRS has had to make difficult choices
and it is trying hard, but I am not convinced it is making the right
choices for taxpayers or for itself. I question the decisions to
substantially stop providing answers to tax-law questions by phone or
in its walk-in offices. One would think that answering tax-law
questions would be seen as a core function the Federal tax agency
should perform, and I do not believe the IRS undertook a comprehensive
analysis, comparing the cost savings associated with curtailing answers
to tax-law questions, against other ways of achieving equivalent
savings.
Another concern is the IRS's decision to cut back the availability
of the forms and publications taxpayers require to prepare their
returns. Not only has the IRS reduced the number and types of forms,
instructions, and publications that it will print and distribute this
year, but it is delaying the delivery of those documents to its
Taxpayer Assistance Centers (TACs) and its Tax Form Outlet Partners
(TFOPs), including libraries and post offices. Forms will not be
available at these sites until February 28, almost halfway through the
filing season.\30\ Moreover, the IRS ordered fewer forms this year than
in previous years and decided not to stock Form 1040EZ in its own walk-
in sites. Once a TAC or TFOP runs out of forms or publications, it
cannot order more.
---------------------------------------------------------------------------
\30\ IRS, Talking Points About IRS Forms Availability (Feb. 10,
2015).
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In an alert to all employees on February 10, 2015, the IRS
acknowledged that these changes have ``created questions and concerns
from taxpayers.'' \31\ The IRS has advised its employees that they
should not give out the 1-800 number for ordering tax forms and
publications unless the taxpayer affirmatively states that he or she
does not have a computer or Internet access or otherwise presses the
IRS employee about ordering by telephone.\32\
---------------------------------------------------------------------------
\31\ Id.
\32\ IRS SERP Alert 15A0052, Forms and Pubs in Taxpayer Assistance
Centers (revised Feb. 10, 2015).
---------------------------------------------------------------------------
The IRS has also decided to cease widespread distribution of
Publication 17, Your Federal Income Tax for Individuals, which
consolidates information about individual tax issues into one helpful
document. The IRS based this decision on the fact that taxpayers could
obtain Publication 17 content through other publications,\33\ thus
imposing on taxpayers the burden of locating information dispersed
throughout multiple publications and instructions. Each TFOP will
receive one copy of Publication 17; taxpayers will have to pay to make
photocopies. The IRS has advised its employees that when asked about
Publication 17, they are not to tell the taxpayer about limitations on
availability but instead remind the taxpayer that he or she can access
the publication online or through the Government Publishing Office
(GPO). Taxpayers can attempt to purchase Publication 17 for $23 from
the GPO, but there is no guarantee of success. When a TAS employee
recently placed an order for Publication 17 through the GPO, she
received a postcard advising her that her order was cancelled and her
check would be returned. As best we can tell, the IRS did not order
sufficient copies to meet the demand of taxpayers willing to pay $23
for help in complying with the tax laws.
---------------------------------------------------------------------------
\33\ IRS SERP Alert 15A0052, Forms and Pubs in Taxpayer Assistance
Centers (revised Feb. 10, 2015).
---------------------------------------------------------------------------
The reductions in service on the phones go beyond taxpayers trying
to call in. Tax professionals who are acting on behalf of clients in
attempting to resolve problems with the IRS are reporting long wait
times on the Practitioner Priority Service (PPS) hotline. In recent
weeks, practitioners have reported to the National Taxpayer Advocate
about hold times of up to 6 hours. One practitioner reported she used
her office phone to dial the PPS hotline first thing in the morning so
she could get in the queue, and conducted other client business on her
cell phone while waiting on hold. Once she got through to the IRS and
completed her business for that taxpayer, she would immediately re-dial
the PPS hotline to get in the queue for her next case. Another
practitioner, who had information prepared to resolve issues for six
different taxpayers, reported reaching a live assistor and being told
she would have to hang up and call back after the first two cases were
resolved because the call had exceeded the permitted time.
Taxpayers (and practitioners) call and write the IRS not only to
get answers to tax-law questions, refund status, or transcripts, but
also to request penalty abatements, respond to math error notices, and
make payment arrangements. The IRS faces an impossible choice in
deciding which of these services is more important than the others--all
are essential and necessary for a tax system based on self-assessment
and reliant on voluntary compliance. An erosion of any of these
services impairs taxpayers' ability to comply with the tax laws. The
current state of affairs also violates essential taxpayer rights,
including the right to be informed, the right to quality to service,
the right to pay no more than the correct amount of tax, the right to
challenge the IRS's position and be heard, and the right to a fair and
just tax system.
The IRS's Rationale and Methodology for Making Specific Cuts in
Taxpayer Service Are Unclear.
It is difficult to ascertain exactly how the IRS made its resource-
allocation decisions with respect to taxpayer service or on what data
it relied. For years, the IRS had been reducing taxpayer services in
its TACs, including the availability of return preparation for low
income, disabled, elderly, and limited English proficiency taxpayers.
Having made it harder and harder for taxpayers to obtain these
services, it is disingenuous for the IRS to cite the declining
utilization of tax return preparation assistance as a justification for
cutting these services outright. The deliberate downward trend became a
self-fulfilling proposition.
Unfortunately, the measures stakeholders often apply to the IRS do
not acknowledge the importance of service delivery. The typical focus
is on reducing the tax gap through enforcement efforts, or improving
efficiency as measured by return on investment (ROI). These are, of
course, measures of fundamental importance, but they tell us nothing
about the level of service the IRS is providing to taxpayers, nor do
they tell us anything about the taxpayer's experience from the
taxpayer's perspective. In fact, a focus on these measures to the
exclusion of a meaningful set of service delivery measures ensures that
the IRS will not provide a reasonable level of service to taxpayers.
Given budget constraints, the IRS's service activities inevitably
compete with its enforcement programs for funding. It is relatively
easy to measure the ROI of enforcement programs--just track the dollars
collected attributable to an audit or a wage levy, as compared to the
various costs (including employee time) associated with that audit or
levy. By contrast, while research shows that taxpayer service
contributes to voluntary compliance,\34\ measuring the impact of
service on compliance (i.e., the ROI of IRS services) is at best very
difficult, and should not be the basis for funding IRS service
delivery. If we acknowledge that quality taxpayer service is an
integral component of the IRS's mission, then funding for the Taxpayer
Services account should be based on service measures and set at a level
that ensures the IRS will be able to provide an adequate level of
service to the Nation's taxpayers.
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\34\ The classic economic model of compliance--that compliance
depends upon the risk (or perception of risk) of being caught and the
cost (punishment) if caught--does not adequately explain our high
compliance rate in the tax system. Research shows that other factors,
such as taxpayers' attitudes about government and their perception that
they are being treated fairly by the tax system, also influence
taxpayer compliance decisions. Many researchers refer to these factors
collectively as ``tax morale.'' For an introduction to the concept of
tax morale, see National Taxpayer Advocate 2007 Annual Report to
Congress vol. 2, 138-182 (Normative and Cognitive Aspects of Tax
Compliance: Literature Review and Recommendations for the IRS Regarding
Individual Taxpayers).
---------------------------------------------------------------------------
The IRS Needs Better Taxpayer Service Measures that Incorporate Both
the Government and Taxpayer Perspectives.
The IRS should develop and publish a comprehensive suite of service
measures that can serve as the basis for funding decisions, while
holding the IRS accountable for efficient service delivery.
I have elsewhere offered detailed guidelines for the creation of a
portfolio of measures that would enable both the IRS and external
stakeholders to evaluate the effectiveness of IRS service delivery.\35\
These measures would also enable the IRS to identify performance gaps
that could guide the creation of performance improvement goals. A
principal feature of this proposed framework is the inclusion of the
following types of measures for each of the IRS's service delivery
channels (i.e., telephone, face-to-face, online, and correspondence):
---------------------------------------------------------------------------
\35\ See IRS Pub. 4701, Annual Report to Congress: Progress on the
Implementation of the Taxpayer Assistance Blueprint (April 2009 to
September 2010) 54-57.
---------------------------------------------------------------------------
--Access--level of service, wait time (including, where applicable,
time waiting for service and time waiting for a response).
--Customer satisfaction.
--Accuracy.
--Issue resolution (i.e., did the IRS completely resolve the
taxpayer's problem(s)?).
The IRS currently provides a level of service measure for telephone
service, but it does not provide comparable access measures for other
channels: Internet, correspondence, and walk-in assistance.
Stakeholders are also keenly interested in how well the IRS is
delivering each of its major services (e.g., return preparation, refund
inquiries, tax law inquiries). I have recommended that the IRS report
select service delivery measures for each of its major service
activities: \36\
---------------------------------------------------------------------------
\36\ Id.
---------------------------------------------------------------------------
--Taxpayer awareness of the availability of the various service types
by channel.
--Customer satisfaction with each service type by channel.
--Issue resolution for each service type by channel.
--Access for limited English proficiency and disabled taxpayers for
each service type by channel.
--Number of returns prepared by Taxpayer Assistance Centers and by
the Volunteer Income Tax Assistance (VITA) and Tax Counseling
for the Elderly (TCE) programs.
Implementation of the Service Priorities Initiative Will Provide a
Clear Rationale for Taxpayer Service Budgetary Allocation
Decisions.
In response to my concerns about the erosion of taxpayer service
delivery, the Wage & Investment (W&I) Division and TAS are
collaborating on the development of a ranking methodology for the major
taxpayer service activities offered by W&I. The new methodology will
take taxpayer needs and preferences into account while balancing them
against the IRS's need to conserve limited resources, thus enabling the
IRS to make resource allocation decisions that will optimize the
delivery of taxpayer service activities given resource constraints.\37\
Congress will also be able to use the results of this methodology to
determine whether it is adequately funding core taxpayer service
activities.
---------------------------------------------------------------------------
\37\ We use the word ``optimize'' to mean that the ranking
methodology will provide the IRS with a rigorous way to select the
combination of competing taxpayer service initiatives that maximizes
the ``value'' of service delivery given available resources.
---------------------------------------------------------------------------
The methodology measures ``value'' by using separate sets of
criteria for taxpayers and the IRS. This is necessary because taxpayers
and the IRS have different priorities. The IRS is concerned with
conserving resources, especially in a tight budget environment.
Taxpayers need services that will enable them to understand their tax
obligations, prepare their returns, and resolve problems without undue
burden. Frequently, these needs are best met by personal services that
are more costly to the IRS than automated services, such as Internet-
based services.
Limitations imposed by the lack of available data have delayed this
initiative, and it is unclear whether the IRS will devote the resources
necessary to complete development of the methodology. In the absence of
this or a similar methodology, the IRS will continue to make difficult
resource-allocation decisions based on limited data and gut instinct
rather than through comprehensive analytic rigor.
Recommendations
I recommend that Congress:
--Encourage the IRS to continue the work it has done to date on
developing a meaningful portfolio of to develop a more
comprehensive suite of performance measures in the area of
taxpayer service, consistent with the guidelines I have
recommended.
--Encourage the IRS to complete the ranking process for the Service
Priorities Project with newly available tax year 2013 data and
identify all steps needed to fully populate and implement the
ranking tool.
Effective measures will help the IRS determine where it needs to
improve and will assist the Appropriations Committees in determining
where the IRS requires additional resources.
III. Understanding the Taxpayer Base is Key to Providing Effective
Taxpayer Service and to Maintaining and Enhancing Voluntary
Compliance.
In order to provide taxpayer service in an effective and efficient
manner, the IRS needs to understand its taxpayer base. While in the
current budget environment it may be tempting to migrate taxpayer
service toward low-cost self-assistance options, such efforts may
ultimately be a wasted and costly effort if the IRS does not properly
address taxpayers' actual service needs.
Comprehensive Studies Demonstrate that Low Income and Other Vulnerable
Taxpayer Populations Need Person-to-Person Assistance to Comply
With Their Federal Tax Obligations.
To adequately address these needs and, as a result, maximize
voluntary compliance, the IRS should take into consideration the
following data points:
--In 2013, nearly 133 million people had incomes below 250 percent of
the Federal poverty level (FPL), which Congress has determined
to be the income level at which taxpayers are eligible for
assistance from Low Income Taxpayer Clinics (LITCs).\38\ This
is an increase of almost 16 million people since 2007.
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\38\ At least 90 percent of the taxpayers represented by an LITC
must have incomes that do not exceed 250 percent of the FPL. See IRC
Sec. 7526(b)(1)(B)(i). The U.S. Department of Health and Human Services
publishes yearly poverty guidelines in the Federal Register each year,
which are used to establish the 250 percent FPL thresholds. For the
2015 FPL thresholds, see 80 F.R. 3236 (Jan. 22, 2015).
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--The percentage of persons below the 250 percent FPL threshold rose
from 39.2 percent to 42.5 percent between 2007 and 2013.\39\
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\39\ U.S. Census Bureau, Current Population Survey, Annual Social
and Economic Supplement, Age and Sex of All People, Family Members and
Unrelated Individuals Iterated by Income-to-Poverty Ratio and Race,
Below 250 percent of Poverty (2013 and 2007 poverty data, available at
http://www.census.gov/hhes/www/poverty/data/incpovhlth/2013/index.html.
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--For tax year 2013, more than 63 million tax returns, or about 45
percent of the tax returns filed, reported incomes below 250
percent of the FPL.\40\
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\40\ IRS Compliance Data Warehouse, Individual Returns Transaction
File (Tax Year 2013) (computation based on ``total positive income''
for income and number of exemptions for household size and includes
returns filed through Oct. 2014 and based on 250 percent of HHS poverty
levels for 2013).
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In 2014, the Taxpayer Advocate Service, as the organization that
oversees and administers the LITC program for the IRS, commissioned a
survey by Russell Research to better understand the needs and
circumstances of taxpayers eligible to use the clinics.\41\ The program
provides representation to low income individuals who need help
resolving tax problems with the IRS. The ``LITC-eligibles'' survey had
the following pertinent findings:
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\41\ This Random Digit Dialed (RDD) telephone survey utilized both
cell phone numbers and landline numbers to reach participants. This
approach was used to make sure all groups of the LITC-eligibles were
represented in the survey. The survey included more than 1,100
individuals and gathered information on eligible taxpayers' awareness
and use of LITC services, the types of issues for which they would
consider using clinic services, and other items including demographic
information. See National Taxpayer Advocate 2014 Annual Report to
Congress vol. 2, 1-26 (Research Study: Low Income Taxpayer Clinic
Program: A Look at Those Eligible to Seek Help from the Clinics).
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--A significant percentage (approximately 9 percent) of LITC-
eligibles has less than a high school education. Almost 30
percent of Spanish-speaking LITC-eligibles had only an
elementary school education.
--Fifteen percent of LITC-eligibles reported receiving notices from
the IRS. In response, 55 percent called the IRS, 29 percent
replied by letter, 24 percent contacted their preparers, and
nearly 20 percent did nothing. (More than one response was
allowed in the survey).
--A majority of all LITC-eligibles used return preparers, as did
approximately 75 percent of Spanish-speaking eligibles.
However, a significant percentage of these preparers did not
satisfy the very basic statutory requirements established for
commercial tax return preparation under IRC Sec. 6695(a) and
(b).\42\ More than 15 percent of the time, for example, the
preparer either did not sign the return or did not give the
taxpayer a copy. This percentage rose to more than 30 percent
of Spanish-speaking eligibles.
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\42\ IRC Sec. 6695(a) imposes a penalty on a tax return preparer
for failure to provide a copy of the return to the taxpayer, unless the
failure is due to reasonable cause and not to willful neglect. IRC
Sec. 6695(b) imposes a penalty on a tax return preparer for failure to
sign a return when required by regulation to do so, unless the failure
is due to reasonable cause and not to willful neglect.
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In addition, the Pew Research Center conducted several surveys to
determine the percentage of adult individuals who are offline (not
using the Internet or email). The following shows the categories of
individuals found by the surveys to have the highest offline rates in
2013: \43\
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\43\ Pew Research Center's Internet & American Life Project, Who's
Not Online and Why? (Sept. 2013) (Phone survey conducted in 2013); see
also Pew Research Center, Older Adults and Technology Use: Adoption is
Increasing, but Many Seniors Remain Isolated from Digital Life (April
2014) (Phone survey conducted in 2013); Pew Research Center's Internet
Project July 18 to September 30 Tracking Survey, African Americans and
Technology Use: A Demographic Portrait (Jan. 2014).
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--Senior citizens (aged 65+): 44 percent offline;
--Adults with less than a high school education: 41 percent offline;
--Adults with high school diploma: 22 percent offline;
--Living in households earning less than $30,000 per year: 24 percent
offline;
--Living in rural areas: 20 percent offline;
--Hispanics: 24 percent offline; and
--African Americans: 20 percent offline (rising to 25 percent offline
if household income is less than $30,000 and to 37 percent for
those with no high school diploma).
Finally, a 2014 online survey by Forrester Research found
interesting data about the use of certain devices to conduct some
transactions online. While this study was conducted online and thus
excluded responses from individuals who were offline or had limited
online capabilities, there were some noteworthy findings: \44\
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\44\ Because this survey was conducted online, the reported usage
rates may be higher than for the general population. Forrester, North
American Consumer Technographics Online Benchmark Survey, Part 2
(2014).
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--On average, only 19 percent of adults search for government
services and policies with a personal computer or laptop. This
rate drops to 11 percent when using personal tablets and to 4
percent when using a mobile phone.
--With very few exceptions, the lower income brackets used all the
devices to conduct online financial transactions less
frequently than the national average.
--On average, 21 percent of adults use their mobile phones to check
financial statements. Only 13 percent use their mobile phones
to pay bills or transfer money between accounts.
I believe the LITC-eligibles survey and the Pew and Forrester
findings support the need for the IRS to design a taxpayer service
strategy based on the actual needs of the taxpayer population rather
than focusing on short-term resource savings. For example, while online
self-help tools address the needs of many taxpayers in a low-cost
manner, the IRS is harming those offline taxpayers when it
significantly decreases the provision of face-to-face and person-to-
person telephone services. In addition, the LITC-eligibles survey
findings raise questions about the appropriateness of relying on
preparers as intermediaries for the low income population, especially
the Spanish-speaking population within this category, and particularly
with respect to the unregulated return preparer population.
The Lack of a Geographic Presence of Key IRS Personnel, Including
Appeals Personnel, Limits the Effectiveness of IRS Taxpayer
Service and Compliance Initiatives.
The Internal Revenue Service Restructuring and Reform Act of 1998
(RRA 98) required the IRS to replace its geographic-based structure
with organizational units serving groups of taxpayers with similar
needs.\45\ While the new taxpayer-based structure has produced some
benefits, the elimination of a functional geographic presence, with IRS
employees understanding the needs and circumstances of a specific
geographic economy, may harm taxpayers and erode compliance.
Maintaining a local presence in both service and enforcement operations
is important because such presence enables the IRS to:
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\45\ Internal Revenue Service Restructuring and Reform Act of 1998
(RRA 98), Public Law No. 105-206, Sec. Sec. 1001(a)(1)-(3), 112 Stat.
685, 689 (1998).
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--Better understand local economic, social, and cultural conditions
and tailor initiatives accordingly to maximize voluntary
compliance;
--Identify local variations of nationwide compliance problems;
--Identify and address significant local compliance problems that are
unique to a particular region and do not show up nationwide;
and
--Put a local, human face on the IRS organization through the
presence of employees who live in the communities and interact
with taxpayers on a day-to-day basis.
When designing an outreach campaign, the IRS should give
significant attention to local culture and how different messages will
be received across geographic lines. Instead, IRS localized outreach
and education have all but disappeared, and front-line local compliance
personnel have been significantly reduced. For example:
--The Small Business/Self-Employed Division (SB/SE), which serves
approximately 65 million taxpayers, has no outreach and
education employees in 13 States, plus the District of
Columbia.\46\
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\46\ IRS, Individual Returns Transaction File, IRS Compliance Data
Warehouse (Tax Year 2013 returns filed through Oct. 2014); IRS Human
Resources Reporting Center, Report of SB/SE Job Series 0526,
Stakeholder Liaison Field Employees as of November 1, 2014 (Nov. 19,
2014). The 13 States are Alaska, Delaware, Hawaii, Kentucky,
Mississippi, Montana, North Dakota, Nebraska, New Hampshire, South
Dakota, Vermont, West Virginia, and Wyoming.
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--The W&I Division, which is responsible for helping approximately
126 million individuals understand and comply with their tax
obligations, devotes only about 6 percent of its outreach and
education budget to activities that involve face-to-face
contact with taxpayers.\47\
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\47\ See National Taxpayer Advocate 2012 Annual Report to Congress
319-333 (Most Serious Problem: The IRS Is Substantially Reducing Both
the Amount and Scope of Its Direct Education and Outreach to Taxpayers
and Does Not Measure the Effectiveness of Its Remaining Outreach
Activities, Thereby Risking Increased Noncompliance). The 6 percent
figure was as of fiscal year 2011. Due to recent budget reductions, the
percentage now may be lower.
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--IRS personnel in densely-populated Manhattan have decreased by 34
percent between 2001 and 2014, although filings of Forms 1040,
1120, 1120S, and 1065 increased by almost 14 percent in
Manhattan between tax years (TY) 2000 and 2013.\48\
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\48\ IRS Compliance Data Warehouse, Individual Returns Transaction
File and Business Returns Transaction File (Tax Years 2000, 2007, and
2013).
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--In sparsely-populated Wyoming, total tax filings increased by 22
percent between TYs 2001 and 2013, while IRS staffing dropped
by more than 50 percent.\49\
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\49\ Filing data from IRS Databooks for 2001, 2008, 2013, rounded
to the nearest thousand. Filing data for 2014 will not be available
until March 2015.
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Almost one quarter of the States (12 out of 50) have no permanent
presence by the IRS Office of Appeals, and this number of States
lacking a permanent field office has increased by 33 percent, from 9 to
12, since 2011.\50\
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\50\ National Taxpayer Advocate 2014 Annual Report to Congress 46;
IRS, Human Resources Reporting Center. The following States lack both
Appeals Officers and Settlement Officers: Alaska, Arkansas, Delaware,
Idaho, Kansas, Montana, North Dakota, New Mexico, Rhode Island, South
Dakota, Vermont, and Wyoming. The following States have at least one
Appeals Officer but no Settlement Officer (to handle appeals on
collection matters): Hawaii, Iowa, Maine, and West Virginia. The
territory of Puerto Rico has also lacked a permanent Appeals office
during this time.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Not only are States without an Appeals post of duty increasing, but
the number of Appeals Officers and Settlement Officers located in
existing field offices has diminished. Between the summer of 2010 and
the summer of 2014, these Appeals personnel, who also comprise the
group capable of traveling to states without a permanent field office
(referred to as ``riding circuit''), have dropped by approximately 27
percent, from 817 to 593.\51\ Unsurprisingly, the overall number of
Appeals cases closed via circuit riding likewise has progressively
fallen in each of the last 4 years.\52\
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\51\ National Taxpayer Advocate 2014 Annual Report to Congress 49;
see user data from on-rolls listing, comparing personnel data from Aug.
23, 2010 with personnel data from Aug. 23, 2014.
\52\ Id. at 50; Appeals response to TAS information request (Aug.
5, 2014).
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Even where geographic coverage eventually is achieved through
circuit riding, taxpayers are disadvantaged. Circuit riding Appeals
cases often take an additional 6 months or more to resolve and have
significantly lower levels of agreement than face-to-face Appeals cases
conducted in field offices.\53\ Congress desired better for taxpayers,
and more from the IRS, when it passed RRA 98 Sec. 3465(b) to require
that an Appeals Officer be ``regularly available'' within each
State.\54\
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\53\ National Taxpayer Advocate 2014 Annual Report to Congress 52,
Figures 3 and 4.
\54\ Public Law No. 105-206, Sec. 3465(b), 112 Stat. 685, 768
(1998).
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Recommendations
I recommend that Congress direct the IRS to:
--Re-staff local outreach and education positions to achieve an
actual presence in every State, the District of Columbia, and
Puerto Rico.
--Provide face-to-face service with mobile vans and satellite offices
in each State.
--Expand Appeals duty locations in a way that ensures that at least
one Appeals Officer and one Settlement Officer are permanently
stationed within every State, the District of Columbia, and
Puerto Rico.
--Reinvigorate local compliance initiatives by increasing local
staffing and research in outreach and education, Exam,
Collection, and Appeals.
The Elimination of Face-to-Face Services Abroad Increases Compliance
Challenges for International Taxpayers and Erodes Trust in the
Fairness of the U.S. Tax System.
Despite the growth of the international taxpayer base, the IRS has
announced plans to eliminate all IRS tax attache posts abroad, citing
the multi-year decrease in funding.\55\ As a result, over 7.5 million
U.S. taxpayers living abroad,\56\ over 300,000 U.S. military personnel
and their families,\57\ and hundreds of thousands of students and
foreign taxpayers with U.S. tax obligations \58\ who benefitted from
the Taxpayer Assistance Centers overseas are left with the options of
obtaining all their information from IRS.gov pages or calling the IRS
telephone number in the United States with only about a 50 percent
chance of reaching a live assistor after 30 minutes or more of wait
time --and having to pay country-to-country long-distance charges for
the call.\59\ The elimination of overseas posts could not come at a
worse time as taxpayers abroad are facing unique challenges complying
with their obligations under the Foreign Account Tax Compliance Act
(FATCA),\60\ the Foreign Bank and Financial Accounts (FBAR) reporting
requirements,\61\ and the Affordable Care Act (ACA).\62\ The inability
of international taxpayers to access IRS services from abroad
contributes to growing confusion and frustration about U.S. tax
administration and undermines voluntary compliance.
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\55\ On November 30, 2014, the IRS closed its Beijing office.
Memorandum from Acting Deputy Commissioner, International (LB&I),
Beijing Post Closure (Oct. 16, 2014). The IRS has also announced the
closure of the remaining attache offices in U.S. Embassies in London
and Paris, and the consulate in Frankfurt. Memorandum from Deputy
Commissioner, International (LB&I), Post Closures of Frankfurt, London
and Paris (transmitted on Feb. 18, 2015). The IRS has stated the
closures will save about $4 million a year. See David Kocieniewski, IRS
Will Shut Last Overseas Taxpayer-Assistance Centers, Bloomberg (Jan.
14, 2015).
\56\ The Department of State estimates that 7.6 million U.S.
citizens live abroad and more than 70 million U.S. citizens travel
abroad annually. U.S. Department of State, Bureau of Consular Affairs
(May 2014), available at http://travel.state.gov/content/dam/travel/
CA%20Fact%20Sheet%202014.pdf (last visited on Jan. 19, 2015). The
number of U.S. citizens overseas increased by more than 50 percent in
just 5 years. National Taxpayer Advocate 2013 Annual Report to Congress
205-213 (Most Serious Problem: International Taxpayer Service: The IRS
is Taking Important Steps to Improve International Taxpayer Service
Initiatives, but Sustained Effort will be Required to Maintain Recent
Gains).
\57\ U.S. Department of Defense, Active Duty Military Personnel,
Strength by Regional Area and by Country (Mar. 31, 2011).
\58\ National Taxpayer Advocate 2011 Annual Report to Congress 129-
272. Since 2011, the National Taxpayer Advocate has recommended
establishing international LTA offices at the IRS's four tax attache
offices abroad. See also National Taxpayer Advocate 2013 Annual Report
to Congress 213.
\59\ See IRS, Contact My Local Office Internationally, available at
http://www.irs.gov/uac/Contact-My-Local-Office-Internationally. See
also National Taxpayer Advocate 2013 Annual Report to Congress 205-213
(Most Serious Problem: International Taxpayer Service: The IRS Is
Taking Important Steps to Improve International Taxpayer Service
Initiatives, but Sustained Effort will be Required to Maintain Recent
Gains).
\60\ FATCA was enacted as part of the Hiring Incentives to Restore
Employment Act, Public Law No. 111-147, Sec. Sec. 501(a), 511(a), 124
Stat, 71, 97, 109 (2010) (adding Internal Revenue Code (IRC)
Sec. Sec. 1471-1474 & 6038D). See also National Taxpayer Advocate 2013
Annual Report to Congress 238-248 (Most Serious Problem: Reporting
Requirements: The Foreign Account Tax Compliance Act Has the Potential
to be Burdensome, Overly Broad, and Detrimental to Taxpayer Rights).
\61\ See 31 U.S.C. Sec. Sec. 5314, 5321; 31 C.F.R.
Sec. Sec. 1010.350, 1010.306(c); FinCEN Form 114, Report of Foreign
Bank and Financial Accounts (FBAR), available at http://www.fincen.gov/
forms/bsa_forms. See also National Taxpayer Advocate 2014 Annual Report
to Congress 79-93 (Most Serious Problem: Offshore Voluntary Disclosure
(OVD): The OVD Programs Initially Undermined the Law and Still Violate
Taxpayer Rights).
\62\ The Patient Protection and Affordable Care Act of 2010 (ACA),
Public Law No. 111-148, 124 Stat. 119 (2010) (codified as amended in
scattered sections of the U.S. Code), as amended by the Health Care and
Education Reconciliation Act of 2010, Public Law No. 111-152, 124 Stat.
1029 (2010).
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In addition to keeping the remaining four IRS tax attache offices
open, it would be helpful to establish international Local Taxpayer
Advocate (LTA) offices abroad. TAS is statutorily required to assist
taxpayers in resolving their problems with the IRS, to identify areas
in which taxpayers are experiencing systemic problems with the IRS, and
to the extent possible, to propose changes in the administrative
practices of the IRS to mitigate the problems identified.\63\ TAS is
the only IRS function exclusively devoted to resolving taxpayer
problems with the IRS.\64\ The provision of basic service to taxpayers
abroad would promote the taxpayer rights to be informed, to quality
service, and to a fair and just tax system, as described in the
Taxpayer Bill of Rights (TBOR) adopted by the IRS.\65\ Establishing
Local Taxpayer Advocate offices abroad would ensure that the IRS's
international policies, processes, and procedures protect the rights
granted to taxpayers by the TBOR and encourage future compliance by
taxpayers dealing with the complexity and procedural burden of the
international tax rules.
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\63\ IRC Sec. 7803(c)(2)(A)(i)-(iii).
\64\ See generally IRC Sec. Sec. 7803; 7811. See also IRS Pub. 1,
Your Rights as a Taxpayer. The law requires that there be at least one
LTA for each State. See IRC Sec. 7803(c)(2)(D)(i)(I). International
taxpayers cannot access TAS or IRS personnel toll-free from abroad.
\65\ IRS, Taxpayer Bill of Rights, at http://www.irs.gov/Taxpayer-
Bill-of-Rights.
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Recommendations
I recommend that Congress:
--Require the IRS to retain and provide funding for its four tax
attache offices abroad.
--Provide funding for and require the IRS to establish Local Taxpayer
Advocates in each of those cities.
IV. IRS Compliance Initiatives Are Often Based on Outdated or Unproven
Assumptions and Can Generate Significant Volumes of Rework for
the IRS and Tremendous Burden for Taxpayers.
There is general agreement that the IRS is supposed to collect the
correct amount of tax. This implies that the IRS has a responsibility
to ensure that taxpayers do not pay more taxes than they owe. Further,
there is general recognition that the IRS must weigh the burden it
imposes on taxpayers against its mission to collect the taxes owed. Few
believe, for example, that it would be acceptable for the IRS to
conduct extensive audits of every taxpayer every year. Besides being
far too intrusive, such an approach would place an unreasonable
financial burden on the vast majority of honest taxpayers.
The U.S. tax system is based on self-assessment, but the tax laws
are complicated and become more so each year. Computing the correct
amount of tax poses a daunting challenge for many taxpayers, and they
frequently require assistance, which some can readily afford but
millions cannot. For these taxpayers, paying for tax assistance creates
a significant financial burden.
Millions of low and middle income taxpayers are ``touched''
annually by IRS programs that propose additional assessments, such as
correspondence audits and our math error and automated underreporter
(AUR) programs. Other programs hold refunds that IRS filters have
identified as questionable or potentially fraudulent. These proposed
additional assessments and refund holds are not always correct, but
taxpayers frequently need help understanding IRS notices and other
communications in order to challenge IRS positions.
In some programs, the IRS fails to use data available internally to
resolve return discrepancies without contacting the taxpayer, and it
thereby burdens hundreds of thousands of taxpayers a year
unnecessarily. In other programs, the IRS's reliance on outdated data,
processes, or assumptions, and its failure to evaluate the results of
its programs from the perspective of taxpayers as well as dollars
collected, leads to significant delays, increased phone calls and
correspondence, and ineffective compliance policies.
In this section, I provide examples of programs in which I believe
the IRS can utilize its resources more effectively and efficiently.
These examples include: (1) math error processes; (2) identity theft;
(3) the automated substitute for return program; (4) early intervention
in collection cases; and (5) audit selection.
IRS Math Error Processes Create Significant IRS Rework and Unnecessary
Taxpayer Burden.
In my 2011 Annual Report to Congress, TAS reported on a research
study that reviewed IRS accuracy with respect to math error adjustments
related to dependents claimed on Forms 1040. For tax year 2009, nearly
300,000 returns contained errors with dependent taxpayer identification
numbers (TINs). During math error processing, the IRS disallowed over
$200 million of credits claimed on these returns, but it subsequently
reversed at least part of its dependent TIN math errors on 55 percent
of them. Ultimately, about 150,000 taxpayers had their refunds
restored. On average, the IRS allowed nearly $2,000 per return after
the initial disallowance, with a delay of nearly 3 months.\66\
Furthermore, analysis of a sample of taxpayers who did not contest
these assessments showed that about 40,000 taxpayers were denied
refunds they were probably entitled to receive.\67\
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\66\ The total restored to taxpayers was about $292 million. This
amount exceeds the amount of credits that were initially disallowed,
because it includes both restored credits and related tax reductions
(e.g., taxpayers received the benefit of exemptions that were initially
disallowed when the credits were disallowed). See National Taxpayer
Advocate 2011 Annual Report to Congress vol. 2, 116-20 (Math Errors
Committed on Individual Tax Returns--A Review of Math Errors Issued on
Claimed Dependents).
\67\ Id.
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In this example, the IRS not only imposed significant burden and
caused anxiety for these taxpayers, but it created significant rework
for itself. TAS research identified about 55 percent of the abated math
errors that could have been resolved if the IRS had used internally
available data.\68\ Thus, a modest investment of time to research IRS
databases prior to issuing math error assessments would have eliminated
the need to send out about 28 percent of the math error notices, the
related phone calls and correspondence from taxpayers, and the employee
time spent abating the assessments and processing later refunds.
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\68\ Id. at 119.
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Recommendation
I recommend that Congress:
--Ensure the IRS reviews its math error processes to identify
opportunities to resolve apparent discrepancies with internally
and externally available data before issuing math error notices
to taxpayers.
Despite Improvement, IRS Identity Theft Processes Continue to Burden
Victims and Drive Multiple Contacts and Incomplete Case
Resolution.
In my 2014 Annual Report to Congress, I included the results of a
case review conducted by the Taxpayer Advocate Service that analyzed a
statistically significant sample of identity theft (IDT) cases closed
by the IRS. The results from this review not only confirmed my
suspicion that IDT cases are complex--requiring the victim to interact
with multiple IRS assistors--but also revealed glaring inefficiencies
in current IRS procedures. For example:
--Overall, about two-thirds (67 percent) of all IDT cases reviewed in
our sample were either (1) worked in more than one function or
(2) reassigned to another assistor within a function.\69\
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\69\ For a detailed discussion of this study, see National Taxpayer
Advocate 2014 Annual Report to Congress vol. 2, at 43 (Identity Theft
Case Report: A Statistical Analysis of Identity Theft Cases Closed in
June 2014).
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--When a case is transferred or reassigned, it delays resolution and
adds to the frustration experienced by the victim. We found
that 42 percent of the cases analyzed in our sample had periods
of inactivity (i.e., times when no work was performed on the
case for more than 30 days).
--For those cases with periods of inactivity, the average period of
inactivity was 78 days.
For complex IDT cases that require the victim to deal with multiple
IRS functions, I have recommended that the IRS designate a sole contact
person with whom the victim can interact for the duration of the case.
I believe that this approach not only will put the victim more at ease,
but it will also reduce instances where IDT cases fall through the
cracks, require more work, and add to cycle time.
Another finding from this IDT case review was that the IRS's global
account review procedures are ineffective. Before an IDT case is
closed, the IRS completes an account review to ensure that all related
issues have been fully addressed. Yet in 22 percent of the cases in our
sample, the IRS had closed an IDT case without taking the appropriate
steps to fully resolve the victim's account. In these closed IDT cases,
there remained unaddressed account issues--for example, a victim had
not yet received a refund or the IRS failed to update the victim's
address to receive an Identity Protection personal identification
number. Projecting this error rate to the population of nearly 270,000
identity theft returns of this type closed in fiscal year 2014 suggests
that almost 60,000 taxpayers would face additional burden because the
IRS prematurely closed their cases. Clearly, the global account review
process is not working as it should, which leads to rework when the
taxpayer contacts the IRS again to address the lingering IDT-related
issues.
Recommendations
I recommend that Congress:
--Require the IRS to conduct comprehensive global account reviews
upon receipt of an IDT case to determine whether the case
involves multiple issues or years.
--Assign IDT victims with multiple issues to a sole IRS contact
person who will interact with them throughout the pendency of
the case and oversee its resolution, regardless of how many
different IRS functions need to be involved behind the scenes.
--Conduct a comprehensive global account review prior to closing an
IDT case to ensure all issues and years relating to IDT have
been fully resolved.
The Automated Substitute For Return (ASFR) Program Artificially
Inflates Accounts Receivables, Produces Questionable Business
Results, and Needlessly Increases the Demand on IRS Collection
Resources, While Creating Unnecessary Burden on Taxpayers.
The Automated Substitute for Return (ASFR) program is the key
program used by the IRS to address the ``non-filer'' population--those
taxpayers who have not filed tax returns but appear to have incurred a
tax liability. The ASFR program matches third-party information returns
and other data, including Forms W-2 and Forms 1099 for Miscellaneous,
Brokerage, Interest, Dividend, and Cancellation of Debt income, to
determine whether a taxpayer who has not filed a return has a filing
requirement based on the income reported. Because the ASFR program
generally treats the taxpayers as single (or married filing separately
where there is evidence the taxpayer is married) with no dependents,
and only allows a standard deduction (even where there is a larger
mortgage interest statement on file with the IRS), these ``substitutes
for returns'' almost always overstate the person's tax liability. The
rationale is that when the taxpayer sees the liability proposed by the
IRS, the taxpayer will file a correct return.
The IRS always has more information on taxpayers than it has
resources to handle, so it is very important that the IRS utilize that
information in a way that drives compliance and does not generate
unnecessary work for itself and taxpayers. Unfortunately, just the
opposite is happening in the ASFR program.
In practice, as I discussed in my 2011 and 2012 Annual Reports to
Congress, most taxpayers do not respond to proposed ASFR assessments
with voluntarily filed returns, nor are these assessments paid early in
the collection notice process.\70\ Consequently, most become delinquent
collection accounts. In fiscal year 2014, the IRS collected (through
both refund offsets and enforcement actions) approximately $934 million
in delinquent ASFR assessments. However, the IRS abated more than $2
billion of these assessments, and it reported another $5.3 billion as
Currently Not Collectible (CNC).\71\ That is, in fiscal year 2014, the
IRS abated or CNC'd almost eight times the amount of ASFR dollars it
actually collected.
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\70\ For more detailed discussions of the National Taxpayer
Advocate's concerns and recommendations regarding the ASFR program, see
National Taxpayer Advocate 2011 Annual Report to Congress 93-108 (Most
Serious Problem: Automated ``Enforcement Assessments'' Gone Wild: IRS
Efforts to Address the Non-Filer Population Have Produced Questionable
Business Results for the IRS, While Creating Serious Burden for Many
Taxpayers); National Taxpayer Advocate 2012 Annual Report to Congress
456-461 (Status Update: The IRS's Reliance on Automated ``Enforcement
Assessments'' Has Declined Significantly, but Concerns Remain).
\71\ IRS, Collection Activity Report, NO-5000-242, Type Assessment
Report (Sept. 2014).
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Each time a taxpayer calls the IRS to request an abatement or be
put into CNC status, an employee has to work the case. (Sometimes more
than one employee must get involved, because TAS receives its fair
share of these cases.) Someone has to open the taxpayer's
correspondence and read the letter objecting to the assessment. Someone
then must make the necessary adjustments to the taxpayer's account. I
believe it would be a far more efficient use of resources to better
identify the correct ASFR cases up front. Similarly, I believe that by
placing more emphasis on personal contacts during the proposed
assessment process, the IRS would significantly reduce the
``downstream'' costs it currently incurs to adjust these accounts.
ASFR is an example of a program I would immediately halt in its
present form.\72\ Although the IRS has substantially scaled back the
number of new ASFR assessments since I first reported on it in 2011,
recent business results do not indicate that the reduced volumes of
ASFR assessments have been the result of productive program changes
(i.e., in fiscal year 2014, 58 percent of the closed ASFR accounts were
reported as CNC and more than $2 billion was abated).\73\ I am
concerned that the reduction in ASFR assessments has been driven
primarily by a lack of resources and reflects a trend that would be
reversed in the future if more resources become available. That would
be an unfortunate development, because even at current activity levels,
further investments in the ASFR program would not appear to be a
prudent use of resources. For the rest of the fiscal year, I would only
use ASFR authority for those returns where there is an extremely high
level of unreported income. I would simultaneously assign five or six
employees (including IRS Research staff and a TAS representative) to
examine the case selection rules and samples of past inventory to
determine how better to screen cases for true nonfiling and design an
assessment process that will result in more collected revenue and fewer
abatements.
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\72\ Placing a temporary pause on this program will not impair the
Government's ability to assess tax against these taxpayers in the
future, because there is no time limit for assessing tax where a return
has not been filed.
\73\ IRS, Collection Activity Report, NO-5000-242, Type Assessment
Report (Sept. 2014).
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There is no doubt the IRS must devote resources to combat non-
filing, and it may turn out that aspects of the ASFR program are
effective. But the high rate of abatements and the large percentage of
cases placed into CNC status indicate there are significant
opportunities to achieve efficiencies and a higher return-on-investment
if the IRS can refine its case-selection criteria to weed out the
unproductive cases.
Recommendation
I recommend that Congress:
--Encourage the IRS to use this fiscal year to take a pause,
scrutinize some programs, and improve them from the perspective
of IRS rework, taxpayer burden, and promoting voluntary
taxpayer compliance.
The Taxpayer Delinquent Account Collectibility Curve Can Provide a
Roadmap for How to Prioritize the Collection of Tax Debts.
A Taxpayer Delinquency Account (TDA) is a case assigned to or
awaiting assignment to Collection personnel. In past Annual Reports to
Congress, I have noted that many of the TDAs in the IRS Automated
Collection Branch and the Collection Field function are delinquencies
that have existed for several years. The following statistics highlight
the age of the IRS TDA inventory: \74\
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\74\ IRS Collection Activity Report 5000-2 (Oct. 3, 2014).
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--Overall, 53 percent of the IRS Individual Master File (IMF) TDA
inventory has been in the IRS function assigned to handle the
delinquency for at least 10 months (the delinquency may have
been in TDA status much longer).
--More than 70 percent of the IMF TDAs in IRS inventory at the end of
2014 are Tax Year 2010 and prior liabilities (i.e., they are at
least 4 years old).
--More than 20 percent of the TDAs have less than 4 years remaining
on the collection statute, meaning that the delinquency has
existed for more than 6 years.
TAS Research examined the Individual Master File (IMF) Accounts
Receivable Dollar Inventory (ARDI) to determine how dollars collected
fluctuate as time elapses. We looked at delinquencies that originated
in each of 6 years (2005 to 2010) and analyzed those delinquencies for
the next 3 years. This analysis showed the following:
--Dollars collected decrease by over 50 percent from the first year
to the second year and an additional 30 percent from the second
year to the third year. In other words, collections are over
twice as much during the first year as in the following year
and over three times the collections in the third year.
--Even within that first year, collections decreased by about one-
third after every three-month period elapsed.
--Not only do raw collections decrease, but the percent of the
balance due collected declines as time progresses, with only
about 8 percent collected in the third year.
--Meanwhile, although the balance of tax due continues to decrease
slightly, the amount of assessed and accrued penalties and
interest continue to rise.
Budgetary constraints will make the efficient collection of
delinquencies paramount. The IRS should use data on the practical
delinquency collection ``window'' to form the basis for its Collection
policies. Good information on the time available to effectively collect
various delinquencies will assist the IRS in determining what
liabilities should be collected first and whether it makes sense to
focus on collection of smaller, more current liabilities rather than
older, larger liabilities. Furthermore, this research may provide
significant insights into which delinquencies are placed in the
Collection TDA queue and which delinquencies are shelved. Finally, the
collection curve can help demonstrate which delinquencies are able to
be resolved early through collection alternatives rather than being
left to fester until they become essentially unresolvable.
Recommendation
I recommend that Congress:
--Direct the IRS to revise its collection strategy to acknowledge and
address the findings of the collectability curve data.
Specifically, the IRS should (1) provide timely, effective
interventions for emerging collection problems; (2) place more
emphasis on case resolutions during the initial contacts with
taxpayers; and (3) offer reasonable payment alternatives, such
as installment agreements and offers in compromise, much
earlier in the collection process.
Incorporating an Understanding of Taxpayer Behavior into IRS Audit
Selection Will Increase the Effectiveness of Audits.
In addition to rebuilding trust through taxpayer service, the IRS
can foster trust through its audit selection techniques if the IRS:
--Engages in social science and behavior research to better
understand taxpayer behavior and the causes of tax
noncompliance; and
--Designs compliance initiatives, including audit selection, in light
of its research findings.
The IRS recognizes the importance of a more holistic approach to
compliance, but it has not carried out the necessary research.\75\ It
continues to base compliance initiatives primarily, if not exclusively,
on tax data such as returns and third-party information reports.
Proceeding on the basis of social science research findings would
instead allow the IRS to adopt the least intrusive enforcement measure
necessary in light of known taxpayer behaviors and motivators, thereby
protecting taxpayers' right to privacy. It would also allow the IRS to
take into account taxpayers' facts and circumstances, thereby
protecting their right to a fair and just tax system. Demonstrating
that the IRS selects returns for audit in the light of relevant
research and in ways that enhance taxpayer rights would help rebuild
trust in the IRS.
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\75\ As the IRS fiscal year 2015 Budget Request notes: ``Social
science research reveals that the traditional deterrence theory, fear
of detection and/or punishment, contributes a portion to actual
compliance rates. Recent studies indicate that social norms, personal
values, and attitudes may have a large impact on compliance decisions.
Market segmentation approaches--behavioral, psychographic, and
attitudinal, are widely used in commercial marketing to develop,
design, and position products and services towards the right customer
base. The knowledge gained from both social science and marketing
research can assist the IRS with appropriate identification and
alignment to the proper taxpayer.'' Internal Revenue Service Fiscal
Year 2015 Budget Request, Congressional Budget Submission 187,
available at http://www.treasury.gov/about/budget-performance/CJ15/
10.%20-%2015.%20IRS%20CJ.pdf.
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Other tax authorities, such as the United Kingdom (UK), have made
more progress in incorporating research into audit selection processes.
In 2012, for example, the UK tax authority's external research program
examined why small and medium-sized businesses enter and operate in the
hidden economy, identified six hidden economy ``typologies,'' and
provided insights about how to reach each group and advice on what
messages to avoid for each group.\76\ The UK also seeks to prevent tax
noncompliance in ways that involve the tax authority only indirectly,
for example by working with private industry regulators to make tax
compliance a condition of retaining an operating license.\77\
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\76\ HM Revenue & Customs, Business Customer & Strategy,
Behavioural Evidence & Insight Team, Understanding key problems for
SMEs: Hidden Economy Levers, Ghosts and Moonlighters: Identifying
effective levers to reduce entrants into, and encourage SMEs out of the
Hidden Economy (May 2012), available at https://www.gov.uk/government/
uploads/system/uploads/attachment_data/file/344827/report208.pdf.
\77\ See Security Industry Authority (SIA), Approval Conditions,
available at http://www.sia.homeoffice.gov.uk/Pages/business-
conditions.aspx.
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Recommendations
I recommend that Congress direct the IRS to:
--Incorporate applied and behavioral research into all of its
compliance initiatives.
--Fund or activate compliance initiatives only pursuant to an overall
strategy that establishes how the IRS will use education,
outreach, partners, assistance, non-invasive compliance
touches, and enforcement touches to increase compliance and how
it will test the initiative, measure its success, and adjust to
continuing research findings and trends.
V. The IRS Is Undertaking a Review of Its Approach to Tax Compliance
and Service Delivery, But Greater Transparency and
Congressional Oversight Would Improve Taxpayers' Confidence and
Trust in the Tax System.
The best way for Congress to hold the IRS accountable for how it
allocates resources and makes decisions is through active, consistent
oversight of the agency. After Congress passed the IRS Restructuring
and Reform Act of 1998, it held annual joint hearings to review, among
other things, the IRS's progress in meeting its objectives and
improving taxpayer service and compliance.\78\ Each hearing was
conducted jointly by majority and minority members of the House
Committees on Ways and Means, Appropriations, and Government Reform and
Oversight and the Senate Committees on Finance, Appropriations, and
Governmental Affairs. However, the hearings were discontinued because
the legislation only required them to be held for 5 years.
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\78\ See Public Law No. 105-206, Sec. 4001, 112 Stat. 685, 783
(1998). The statute refers to a ``joint review [to] be held at the call
of the Chairman of the Joint Committee.'' The legislative history,
however, makes clear that there was to be ``one annual joint hearing''
before June 1 of each of the succeeding five calendar years. H.R. Rep.
No. 105-599, at 328 (1998) (Conf. Rep.).
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I believe it would be helpful for Congress to resume these joint
oversight hearings --not just on the issue du jour, but on the routine
work the IRS does. Focusing on current tax administration challenges,
these hearings could address issues such as how the IRS is making
decisions related to taxpayer service, whether the IRS is effectively
using existing resources to collect past due liabilities, whether the
IRS's administration of penalties promotes voluntary compliance, and
whether IRS employees have appropriate training to deal with diverse
taxpayer populations. The hearings would provide a useful vehicle for
multiple committees of Congress to review the IRS's progress, examine
whether the IRS is meeting the needs of particular taxpayer segments
and protecting taxpayer rights, gain a better understanding of
potential problem areas, and help the IRS by passing legislation or
providing additional funding where the IRS can demonstrate sufficient
need.
The IRS is currently developing its Concept of Operations (CONOPS)
for the type of tax administration it wants to transform itself into
over the next few years. Thus, now is the appropriate time for Congress
to conduct oversight to ensure that the IRS is creating a plan that not
only works for itself, but also for taxpayers--the full diversity of
our taxpayer base. Conducted in a respectful way, in full recognition
of the important service the IRS provides to this Nation and the
serious challenges its employees face every day in fulfilling the IRS
mission, the hearings can help restore trust and foster a shared sense
of purpose between the IRS and Congress, and thus enhance the
confidence of taxpayers as well.
Recommendation
I recommend that Congress:
--Reinstate joint oversight hearings to review the IRS's progress in
meeting its objectives and improving taxpayer service,
enforcing the tax laws, and promoting voluntary compliance.
VI. The IRS Requires Funding to Acquire Modern IT Systems,
Particularly Case Management Systems, in Order to Meet Taxpayer
Needs and Improve Productivity.
I have outlined in the preceding sections several areas in which I
believe the IRS can achieve greater effectiveness and productivity by
analyzing its current processes and reassessing its preconceived
notions about what influences compliance behavior. While these
improvements mostly require an investment of time and creativity, in
other areas of tax administration there must also be an investment of
funding to permit real improvements and productivity gains. The need
for this type of investment is most pressing in the area of information
technology and, in particular, for case management systems.
I use the term ``case management'' in a comprehensive sense to
refer to electronic recordkeeping systems the IRS uses to keep track of
information about interactions with respect to taxpayers' tax returns
or other tax-related matters. These systems include case records for
audits and collection matters for individuals and large, medium-size,
and small businesses, exempt organization determinations, whistleblower
claims, automated substitute for returns (discussed above), the
automated underreporter (AUR) program, criminal investigations, and the
Taxpayer Advocate Service.
Today, the IRS has approximately 80 case management systems. Few of
these systems talk with one another. None provide a virtual substitute
for the paper case file (i.e., there are reams of paper supplementing
whatever records are included in the electronic system). The IRS's
current case management system structure requires employees to retrieve
data from many systems manually, maintain both paper and electronic
records, transcribe or otherwise import information from paper and
other systems into their own case management systems, and ship, mail,
or fax hundreds of thousands, if not millions, of documents annually
for management approval or quality review.
Within my own organization, the wastefulness of these processes is
apparent in how TAS employees must conduct and record their work.
Taxpayers who come to TAS for assistance all have a ``significant
hardship'' as a result of the way the Internal Revenue laws are being
administered. That is, their cases are among the most urgent in the
IRS. TAS employees must access many of the specialized IRS case
management systems to do their jobs, including the Automated Lien
System, Account Management Services, Automated Offer in Compromise,
Correspondence Exam Automation Services, Correspondence Imaging
Services, Employee User Portal, Integrated Automation Technologies,
Integrated Collection System, Online Retrieval System, Return Request
Display, Remittance Transaction Research, and Treasury Check
Information System.
None of this access is automated. That is, the employee must log in
to the specific system each time he or she needs access to files. In
some instances, because the IRS does not have enough licenses for a
particular system, the TAS employee must request system information
from a designated TAS liaison who has access to that system, thus
involving two people in the simple act of obtaining taxpayer
information. In other instances, TAS does not have access to a system,
and the TAS employee must send a request (known as an ``Operations
Assistance Request'' or OAR) to the related IRS function to retrieve
and send us the information. All of these actions involve significant
manual and clerical work, cause time delays in case resolution that can
harm taxpayers, and waste valuable employee time (which is TAS's and
the IRS's greatest resource).
It is this state of affairs that led TAS leadership several years
ago to design a replacement for our current case management system, the
Taxpayer Advocate Management Information System, or TAMIS. TAMIS is a
version of the original case management system created in the 1980's
for TAS's predecessor, the Problem Resolution Program. Thus, TAS
decided to develop a system that would integrate into a single
environment all of the systems TAS employees use on a regular basis.
This new system is called the Taxpayer Advocate Service Integrated
System, or TASIS. One of the principal components of TASIS is a new
case management system, which will replace TAMIS. The Senate
Appropriations Committee has included TASIS on its list of six ``major
information technology project activities'' about which it directed the
IRS to submit quarterly status reports.\79\
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\79\ See S. Rep. No. 113-80, at 34 (2013) (committee report
relating to IRS fiscal year 2014 appropriation). The draft committee
report relating to the IRS fiscal year 2015 appropriation also
contained this provision, but the full committee did not vote on the
fiscal year 2015 funding bill so the draft report was not adopted.
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We designed TASIS from the ground up. With respect to the case
management aspect of TASIS, we asked our case advocates, intake
advocates, and their managers what drove them crazy about the current
system, and what tools and capabilities they would like to have in a
new system. We asked them to think about all the manual tasks they have
to perform in a day that waste their time. Based on those submissions,
and my own ``wish list'' of items, we developed over 4,000 business
requirements for our new case management system. These requirements
formed the basis of TASIS Release 1 and 2. Here are some of the things
the new case management system will include:
--Fully virtual case files, in which all documentation (whether IRS
or taxpayer-generated) will be scanned or received digitally
into an electronic case file.
--Electronic access to almost all other IRS case-management systems
so that automatic retrieval of taxpayer information is
programmed into the system and TAS employees will no longer
have to obtain and import the information manually.
--Electronic submission and tracking of OARs (including receipt,
acknowledgement, assignment, and response), whereby TAS sends
requests, with supporting documentation, to IRS functions to
take actions on cases, thereby eliminating delays and time-
wasting manual tracking.
--Full access to all virtual case information for purposes of
management and quality review, eliminating the delay and cost
associated with transporting files.
--Taxpayer ability to submit Form 911, Request for Taxpayer Advocate
Service Assistance, electronically.
--Taxpayer ability to submit documentation electronically.
--TAS and taxpayer ability to communicate digitally, through email
and text messages, including both substantive case information
and reminder notices that help move the case along timely.
--Taxpayer (and representative) ability to electronically check the
status of a case in TAS and what actions have been taken or are
underway.
--An electronic case assignment system that matches, in real time,
the complexity and direct time associated with the case with
the skills and available direct time associated with each case
advocate in any given office, taking into account an employee's
unavailability because of annual leave, sick leave,
administrative leave for training, or on-the-job instruction.
This approach eliminates delays in case assignment and
minimizes the need to transfer cases.
As this short list of functions demonstrates, TASIS will
significantly increase the productivity of TAS case advocates because
they will no longer spend their valuable time tracking down paper
documents and inputting information on multiple systems. Moreover,
taxpayers will be able to communicate more quickly with us and
electronically (and quickly) send us information and documents that are
key to their cases. This functionality will enable our case advocates
to spend their time advocating for taxpayers, rather than performing
manual input and tracking of documents and IRS actions.
Because TAS has a working knowledge of almost all the other IRS
case management systems, we designed our new system to serve as the
basic unit upon which other IRS divisions could add modules and
functionality to meet their specific needs. Thus, the time, planning,
development, and programming that TAS and IRS Information Technology
(IT) have invested in TASIS will benefit all of the IRS.
Unfortunately, because of the demands on the IRS IT function, all
IT activity on TASIS has come to a halt.\80\ To date, about $20 million
has been invested in TASIS Release 1, and about two-thirds of the
programming is complete. We are ready to begin the final programming as
soon as funds are available. It is estimated that $12 million will be
needed to complete Release 1 programming, testing, and launch, with
another $4 million for operation and maintenance. At this time, despite
the demonstrated savings of TASIS and its benefits for all of the IRS,
no funds are allocated to TASIS.\81\
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\80\ The case management component of TASIS was originally
scheduled to ``go live'' in December 2014. However, on March 1, 2014,
the IRS placed a moratorium on all programming (with limited
exceptions) not impacting the 2015 filing season or implementation of
the Affordable Care Act and FATCA.
\81\ In the meantime, TAMIS, the legacy TAS case management system,
is woefully inadequate for the work TAS does. Because there is no
resumption or completion date for TASIS Release 1, TAS staff is
exploring what can be done to shore up TAMIS in order to meet our 21st
century business needs. But this is throwing good money and time after
bad, since TAMIS will be unsupported and obsolete in a few years.
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I believe that the design and implementation of TASIS is critical
not only for TAS but to the IRS's ability to move forward and begin to
harness the savings and burden reduction that a sophisticated case
management system promises. For that to happen, the IRS requires
sufficient IT funding to invest in new systems that have great promise.
TASIS is one such program.
VII. Conclusion
The Federal Government is currently failing badly to meet the
service needs of its taxpayers. To address this problem, the IRS will
need more resources to answer taxpayer telephone calls, process and
respond to taxpayer correspondence, and assist taxpayers who seek
assistance in its walk-in sites. The IRS can also take steps to improve
its resource-allocation decisions and achieve greater efficiencies.
To be blunt, several incidents over the last few years have reduced
the confidence of many Members of Congress in the leadership of the
IRS. The IRS has undergone several leadership changes since that time,
and I believe it is critical that Congress and the IRS now work
together to find a better way forward. The IRS must take steps to
rebuild congressional trust and Congress must respond by providing the
IRS with the funding it needs to do its important work of helping
taxpayers meet their tax obligations and collecting the revenue on
which the rest of Government depends. In this testimony, I have tried
to offer some recommendations to help in this regard.
______
Prepared Statement of the Government Accountability Office
February 27, 2015.
Hon. Orrin Hatch, Chairman,
Hon. Ron Wyden, Ranking Member,
Committee on Finance, U.S. Senate, Washington, DC.
Hon. John Boozman, Chairman,
Hon. Christopher A. Coons, Ranking Member,
Subcommittee on Financial Services and General Government, Committee on
Appropriations, U.S. Senate, Washington, DC.
Hon. Charles W. Boustany, Jr. Chairman,
Subcommittee on Human Resources, Committee on Ways and Means, House of
Representatives, Washington, DC.
Hon. Peter Roskam, Chairman,
Hon. John Lewis, Ranking Member,
Subcommittee on Oversight, Committee on Ways and Means, House of
Representatives, Washington, DC.
internal revenue service: observations on irs's operations, planning,
and resources
This letter transmits briefing slides in response to your requests
for information based on our ongoing reviews of the fiscal year 2016
budget request for the Internal Revenue Service (IRS) and the 2015 tax
filing season. See the enclosed briefing slides which include the
information used to brief your staff in February 2015.
Our briefing objectives were to describe (1) trends in IRS's budget
and operations for fiscal years 2009 through 2015, including the 2015
filing season to date; (2) key aspects of the President's fiscal year
2016 budget request for IRS; and (3) IRS's actions to strategically
manage operations.
To describe trends in IRS's budget and operations, we reviewed the
President's budget requests and IRS's congressional justifications for
fiscal years 2009 through 2016, reviewed IRS filing season performance
data, and interviewed IRS officials on performance and challenges. To
describe key aspects of the fiscal year 2016 budget request, we
reviewed budget proposals and interviewed IRS officials. To analyze
IRS's actions to strategically manage operations, we reviewed planning
documents and interviewed IRS officials. We also reviewed prior GAO
work that recommended improvements to IRS's strategic management, and
we interviewed IRS officials about the status of recommendations. To
assess the reliability of IRS's filing season performance data, we
interviewed knowledgeable officials about computer systems and data
limitations. To assess the reliability of budget numbers presented in
the congressional justification, we compared the numbers to those
presented in the President's budget. We determined that the data
presented in this report were sufficiently reliable for our purposes.
We conducted this performance audit from January 2015 to February
2015 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.
In summary, we found the following:
--IRS's fiscal year 2015 appropriation ($10.9 billion) and staffing
levels (81,279 full-time equivalents, or FTE) continue a
decline that has occurred over several years and are now below
fiscal year 2009 levels. Since fiscal year 2010, IRS's annual
appropriation has declined by $1.2 billion, and staffing has
fallen by about 11,000 FTEs since fiscal year 2009, while the
agency's workload has increased for reasons such as a surge in
identity theft-related refund fraud and the implementation of
key provisions of the Patient Protection and Affordable Care
Act (PPACA). In response to budget cuts, IRS has taken steps to
reduce staffing costs including extending a hiring freeze and
limiting seasonal employment. According to the Commissioner of
Internal Revenue, IRS may also furlough employees for 2 days
later in the fiscal year. IRS is concerned about filing season
performance, and anticipates it may face some challenges
processing returns that claim the Premium Tax Credit--an
advanceable, refundable tax credit designed to help eligible
individuals and families with low or moderate income afford
health insurance purchased through the Health Insurance
Marketplace. As a result, IRS expects that some refunds may be
delayed. IRS also projects significant declines in telephone
level of service--only 38 percent of taxpayers who seek help
from a live assistor will receive it and wait times will
average almost 1 hour. IRS cites resource constraints and
increased call volume as primary factors contributing to the
decline in telephone performance.
--IRS's fiscal year 2016 budget request is $12.9 billion. This amount
is almost $2 billion (18 percent) more than IRS's fiscal year
2015 appropriation, and $667 million above the discretionary
spending cap. About half of the requested increase is for
operations support. The largest requested FTE increase is about
4,000 FTEs for enforcement. The budget request includes $490
million and 2,539 FTEs to implement PPACA.
--Additional funding is not the only solution to performance declines
across IRS. Although resources are constrained, IRS has some
flexibility in how it allocates resources to ensure that
limited resources are utilized as effectively as possible. This
environment of constrained resources also highlights the
importance of strategically managing operations to make tough
choices about which services to continue providing and which
services to cut. IRS has begun to plan more strategically. For
example, in 2014 the agency established the Planning,
Programming and Audit Oversight office to improve coordination
of resource decisionmaking and long-term strategic planning.
This was, in part, a response to our June 2014 recommendation
that IRS develop a long-term strategy to address operations
amidst an uncertain budget environment. Further, IRS is
developing a 6-year initiative to better understand how
taxpayers want to interact with the agency. The initiative's
overall goal is to provide taxpayers with secure self-service
options and to improve taxpayer service. We have previously
recommended additional actions IRS could take to improve
operations, plan more strategically, and improve revenue
collection. These recommendations included that IRS develop a
long-term strategy to improve Web services provided to
taxpayers. As of February 2015, IRS officials reported that the
agency does not have a separate online services strategy.
Rather, this strategy is a key component of IRS's Service on
Demand strategy, which aims to deliver service improvements
across different taxpayer interactions such as individual
account assistance, refunds, identity theft, and billings and
payments.
agency comments
On February 20, 2015, IRS provided technical comments on our
findings, which we have incorporated where appropriate.
As arranged with your offices, unless you publically announce the
contents of this report earlier, we plan no further distribution until
4 days after the date of this report. At that time, we will send copies
of this report to the Chairman and ranking members of other Senate and
House committees and subcommittees that have appropriation,
authorization, and oversight responsibilities for IRS. We will also
send copies to the Commissioner of Internal Revenue, the Secretary of
the Treasury, and other interested parties. The report is available at
no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me at (202) 512-9110 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 members who made major
contributions to this report were Joanna Stamatiades, Assistant
Director; Libby Mixon, Assistant Director; Theodore Alexander; Jeff
Arkin; Amy Bowser; James Cook; John Dicken; Mary Evans; Shannon
Finnegan; Charles Fox; Robert Gebhart; Melissa King; Kirsten Lauber;
Paul Middleton; Susan E. Murphy; Edward Nannenhorn; Sherice Nelson;
Sabine Paul; Ellen Rominger; Mark Ryan; Erinn L. Sauer; Cynthia
Saunders; Erin Saunders Rath; and James White.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
James R. McTigue, Jr.
Director, Tax Issues
Strategic Issues
Enclosure--1
ENCLOSURE: BRIEFING SLIDES
Internal Revenue Service: Observations on IRS's Operations, Planning,
and Resources
Prepared for Congressional Requesters
February 2015
objectives
Our objectives are to provide preliminary information on the
President's fiscal year 2016 budget request for the Internal Revenue
Service (IRS) and on IRS's 2015 filing season performance. This
briefing describes:
--trends in IRS's budget and operations, focusing on fiscal years
2009 to 2015, including the 2015 filing season to date;
--key aspects of the President's fiscal year 2016 budget request for
IRS; and
--IRS's actions to strategically manage operations.
scope and methodology
--To describe trends in IRS's budget and operations, we reviewed the
President's budget requests and IRS's congressional
justifications for fiscal years 2009 through 2016; reviewed IRS
filing season performance data; and interviewed officials on
filing season performance and challenges.
--To describe key aspects of the fiscal year 2016 budget request, we
focused on budget proposals for funding, staffing, new
initiatives, return on investment estimates for enforcement
initiatives, and legislative proposals related to our prior
work.
--To describe IRS's actions to strategically manage operations, we
reviewed planning documents and interviewed IRS officials in
the Planning, Programming and Audit Oversight (PPAO) office. We
also reviewed our prior work that recommended improvements to
IRS's strategic management and interviewed IRS officials about
the status of those recommendations.
--For each objective, we interviewed IRS budget and operations
management officials. We interviewed IRS officials and
determined that the data presented in this report were
sufficiently reliable for our purposes.
results in brief
--IRS's fiscal year 2015 appropriation ($10.9 billion) and staffing
levels (81,279 full-time equivalents) continue a decline that
has occurred over recent years and are now below fiscal year
2009 levels.
--This filing season, IRS expects to face some challenges
processing returns that include the Premium Tax Credit
(PTC) claim under the Patient Protection and Affordable
Care Act (PPACA); this could cause delays in some refunds.
IRS projects its telephone level of service (LOS)
performance (the percentage of callers seeking live
assistance and receiving it) will be about 38 percent and
wait times will average about an hour. Finally, identity
theft-related refund fraud remains an ongoing challenge.
--For fiscal year 2016, IRS requested $12.9 billion in
appropriations, an increase of about $2 billion over fiscal
year 2015. This level of funding would support staffing of
about 91,000 full-time equivalents (FTEs), an increase of about
11 percent.
--IRS has begun to plan more strategically. For example, in 2014 IRS
established the Planning, Programming and Audit Oversight
(PPAO) office to better coordinate strategic long-term
planning. This was, in part, a response to our prior
recommendation that IRS develop a long-term strategy to address
operations amidst an uncertain budget environment. IRS is also
developing a 6-year strategy to better meet taxpayers' needs
and preferences for interacting with the IRS. The strategy's
overall goal is to provide secure self-service options for
taxpayers and to improve taxpayer service.
OBJECTIVE 1
Funding Trends: IRS's Fiscal Year 2015 Appropriations are Near the
Fiscal Year 2000 Level After Adjusting for Inflation
Figure 1: IRS Appropriations Nominal and Inflation Adjusted (2014
Dollars), From Fiscal Year 2000 Through Fiscal Year 2015
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: GAO analysis of Congressional Research Service reports for
fiscal years 2000 through 2004, Internal Revenue Service congressional
justifications for fiscal years 2005 through 2014, and Consolidated and
Further Continuing Appropriations Act, 2015, Public Law No. 113-235
(Dec. 16, 2014). GAO-15-420R
Note: Inflation adjustments were made using Bureau of Economic
Analysis data and CBO projections of the fiscal year chain weighted GDP
price index.
OBJECTIVE 1
Funding Trends: IRS's Total Funding Declined to Fiscal Year 2009 Level
Figure 2: IRS Funding, Fiscal Years 2009 Through 2015
[Dollars in Millions]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Fiscal Year
Source: Congressional justifications for IRS, fiscal years 2011
through 2016. GAO-15-420R
Notes: Total budgetary resources includes funds such as user fees
and reimbursables. Dollars are nominal and not adjusted for inflation.
See appendix I for additional detail.
OBJECTIVE 1
Funding Trends: IRS Total FTEs Reduced by 11,166 (12 Percent) Since
Fiscal Year 2009
Figure 3: IRS Full-Time Equivalents (FTE), Fiscal Years 2009 Through
2014 Actual and Fiscal Year 2015 Enacted
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Fiscal Year
Source: Congressional justifications for IRS, fiscal years 2011
through 2016. GAO-15-420R
Notes: Total actual and total enacted full-time equivalents include
FTEs funded with other budgetary resources, such as user fees. See
appendix II for additional detail.
Funding Trends: Budget Reductions Realized Through Multiple Efforts
Figure 4: IRS Savings, Reductions, and Efficiencies, Fiscal Years 2010
Through 2013
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Congressional justifications for IRS, fiscal years 2012
through 2015. GAO-15-420R
OBJECTIVE 1
Funding Trends: IRS Plans to Further Reduce Staffing Costs in Fiscal
Year 2015
For fiscal year 2015, IRS is reviewing travel, training and
contracting for further cuts, but the agency has determined it will
need to cut labor costs, which account for about 76 percent of its
budget.
In response to the budget cuts, IRS has taken action to reduce
staffing costs and other expenses through the following efforts:
--extending its hiring freeze through fiscal year 2015 and reducing
staffing through attrition;
--eliminating most overtime taken by IRS staff;
--planning to limit the number of months it uses seasonal staff for
answering telephones and responding to correspondence during
and after the 2015 filing season; and
--considering whether to furlough all IRS employees for 2 days later
in the fiscal year.
Workload Trends: IRS Increased FTEs Working on Refund Fraud and
Identity Theft (IDT) Issues
--IRS increased FTEs allocated towards refund fraud (including IDT)
from 1,018 in fiscal year 2011 to 3,993 in fiscal year 2014 (an
increase of about 292 percent).
--IRS estimated that $30 billion in IDT refund fraud was attempted in
filing season 2013, with about $24.2 billion (81 percent)
prevented or recovered and $5.8 billion (19 percent) paid.\1\
The full extent is unknown.
Figure 5: Estimated Identity Theft-Related Refund Fraud in Filing
Season 2013
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: GAO analysis of IRS data. GAO-15-420R
--IRS has taken important steps to prevent IDT refund fraud,
including instituting IDT filters. However, IDT refund fraud
takes advantage of IRS's ``look-back'' compliance model. Under
this model, rather than holding refunds until completing all
compliance checks, IRS issues refunds after conducting selected
reviews.
---------------------------------------------------------------------------
\1\ See GAO, Identity Theft and Tax Fraud: Enhanced Authentication
Could Combat Refund Fraud, but IRS Lacks an Estimate of Costs, Benefits
and Risks, GAO-15-119 (Washington, D.C.: Jan. 20, 2015).
---------------------------------------------------------------------------
OBJECTIVE 1
Workload Trends: IRS Increased FTEs to Implement PPACA With Funds From
Multiple Accounts
TABLE 1: PATIENT PROTECTION AND AFFORDABLE CARE ACT SPENDING BY ACCOUNT, FISCAL YEARS 2010 TO 2015
[Dollars in Millions]
----------------------------------------------------------------------------------------------------------------
Fiscal years
Appropriations account -------------------------------------------- Total
2010 2011 2012 2013 2014
----------------------------------------------------------------------------------------------------------------
Department of Health and Human Services, Health Insurance $20.7 $168.2 $299.2 ....... $49.9 $538.0
Reform Implementation Fund...............................
Taxpayer Services......................................... ...... ....... ....... 4.3 12.1 16.4
Enforcement............................................... ...... ....... ....... 19.3 16.6 35.9
Operations Support........................................ ...... ....... ....... 190.7 122.3 313.0
User Fees................................................. ...... ....... ....... 69.7 185.7 255.4
-----------------------------------------------------
Total............................................... $20.7 $168.2 $299.2 $284.0 $386.6 $1,158.7
----------------------------------------------------------------------------------------------------------------
Source: IRS. GAO-15-420R
IRS increased FTEs dedicated to PPACA from approximately 30 in
fiscal year 2010 to over 1,200 in fiscal year 2015.
Workload Trends: Return Examination and Collection Coverage Measures
Show Decline
Figure 6: IRS Exam and Collection Coverage Measures, Fiscal Years 2009
Through 2014 Actual and Fiscal Year 2015 and 2016 Targets
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: GAO analysis of the congressional budget justification for
IRS, fiscal year 2016. GAO-15-420R
OBJECTIVE 1
Filing Season Trends: IRS Anticipates Challenges With Returns That
Include Premium Tax Credit (PTC) Claims
--As of February 6, IRS has processed about 27 million individual
income tax returns and 20 million refunds totaling $66 billion
have been issued.
--Some States discovered attempts to file fraudulent tax returns and
stopped accepting or processing returns, but IRS officials said
Federal returns were not affected.
--IRS officials reported they have not processed many returns
claiming the PTC,\2\ reporting information required by the
Foreign Account Tax Compliance Act (FATCA), or involving the
previously expired provisions which Congress renewed at the end
of 2014, such as the deduction of mortgage insurance premiums.
---------------------------------------------------------------------------
\2\ The PTC is an advanceable, refundable tax credit designed to
help eligible individuals and families with low or moderate income
afford health insurance purchased through the Health Insurance
Marketplace.
---------------------------------------------------------------------------
--However, IRS officials anticipate challenges with returns that
include PTC claims because (1) IRS must reconcile PTC amounts
reported by the taxpayer with information reported by
marketplaces, and (2) for those taxpayers who received an
advance payment of the credit based on the income reported at
time of enrollment, IRS must reconcile the income reported at
enrollment with income claimed on the tax return, which may
result in differences that affect the amount of the taxpayer's
refund.
--Third parties (i.e., the marketplaces) had until February 2 to
provide taxpayers with Form 1095-A, Health Insurance
Marketplace Statement, which taxpayers need to compute the
amount of their PTC.
--In addition, IRS does not yet have complete marketplace data from
all 50 States and the District of Columbia to proceed with pre-
refund matching for PTC claims. As a result, IRS is holding
some returns pending receipt of these data.
--IRS does not have Math Error Authority (to quickly correct errors
without the need for an audit) specifically for PTC claims. In
February 2010, we suggested that Congress provide IRS with
broader authority to correct errors.\3\ Treasury has also
proposed that Congress provide IRS with this authority. Without
this authority, IRS must write to the taxpayer to resolve
discrepancies, which delays any potential refund. Congress has
not taken action on this suggestion.
---------------------------------------------------------------------------
\3\ See GAO, Recovery Act: IRS Quickly Implemented Tax Provisions,
but Reporting and Enforcement Improvements Are Needed, GAO-10-349
(Washington, D.C.: February 10, 2010).
---------------------------------------------------------------------------
Filing Season Trends: IRS Expects Telephone Service to Decline Based on
Resource Limitations and Increased Demand for Assistors
--In fiscal year 2015, IRS received approximately the same
appropriated funding for taxpayer services as it did in fiscal
year 2014. However, IRS is confronted with absorbing other
costs that typically occur on an annual basis, such as salary
adjustments and increases for inflation.
--IRS expects demand for assistors to increase about 20 percent from
fiscal year 2014 (from 39.9 to 48 million) in part due to
PPACA-related questions, and expects assistors to answer about
27 percent fewer calls (from about 23.1 to 16.8 million).
--IRS is shifting additional staff to work correspondence earlier in
the filing season than in the past. Since IRS uses the same
staff to work correspondence and answer telephones, this shift
contributed to the expected decrease in telephone level of
service (LOS). Further, IRS provides limited interactive
services for taxpayers on its Web site. Therefore, taxpayers
with questions about their accounts who do not successfully
receive service from the Web site or an IRS assistor on the
phone may have little choice but to send correspondence to IRS
or visit a walk-in site, potentially increasing IRS's costs.
OBJECTIVE 1
Filing Season Trends: IRS Projects Significant Declines in Telephone
Service and Average Wait Times of Almost an Hour
Figure 7: IRS Telephone Level of Service and Average Telephone Wait
Times, Fiscal Years 2009 Through 2014 and Fiscal Year 2015 Forecast
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: GAO analysis of IRS data. GAO-15-420R
Filing Season Trends: IDT Calls During the Filing Season Have Increased
Significantly in Recent Years
Figure 8: IRS Identity Theft Call Volume and Performance from January 1
Through Late March or Early April, 2009 Through 2014 Filing Seasons
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: GAO analysis of IRS data. GAO-15-420R
Note: Dates are cumulative for IRS from January 1 of each year to
April 4, 2009; April 3, 2010; April 2, 2011; March 31, 2012; March 30,
2013 and March 29, 2014.
OBJECTIVE 1
Filing Season Trends: Overage Correspondence Has Almost Doubled Since
Fiscal Year 2009
Figure 9: IRS Taxpayer Correspondence Performance, Fiscal Years 2009
through 2014
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: GAO analysis of IRS data. GAO-15-420R
Note: Aggregate data are from two IRS units that jointly handle
taxpayer correspondence. The same employees that provide telephone
service are also responsible for responding to correspondence. Data
cover equivalent periods for each fiscal year with slight variation in
the exact dates depending on the year and data source.
OBJECTIVE 2
Fiscal Year 2016 Budget Request: The Largest Requested Increase is $1.1
Billion for Operations Support
Figure 10: Fiscal Year 2015 Funding for IRS Compared to Fiscal Year
2016 Request (Dollars in Millions)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: GAO analysis of the congressional budget justification for
IRS, fiscal year 2016. GAO-15-420R
Note: Other budgetary resources includes FTEs funded with user fees
and reimbursables.
Fiscal Year 2016 Budget Request: The Largest FTE Increase is About
4,000 for Enforcement
Figure 11: Fiscal Year 2015 Enacted Full-Time Equivalents Compared to
Fiscal Year 2016 Request
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: GAO analysis of the congressional budget justification for
IRS, fiscal year 2016. GAO-15-420R
Note: Other budgetary resources includes FTEs funded with user fees
and reimbursables.
OBJECTIVE 2
Fiscal Year 2016 Budget Request: Request is 18 Percent ($2 Billion)
Above the Fiscal Year 2015 Appropriation and $667 Million Above the
Discretionary Spending Cap
Figure 12: Breakdown of IRS Fiscal Year 2016 Requested Increase
(Dollars in Millions)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: GAO analysis of IRS data. GAO-15-420R
Note: The scale begins at $7,000 million.
OBJECTIVE 2
Fiscal Year 2016 Budget Request: IRS Proposed 14 Enforcement
Initiatives
TABLE 2: FUNDING REQUESTED FOR ENFORCEMENT INITIATIVES
[Dollars In Millions]
----------------------------------------------------------------------------------------------------------------
Fiscal year 2016 funding requested, by
appropriations account
------------------------------------------------------
Description of requested budget increase Business Total \a\
Taxpayer Enforcement Operations Systems
services support Modernization
----------------------------------------------------------------------------------------------------------------
New enforcement initiatives below the cap..... $0.1 $107 $66 ............. $172
----------------------------------------------------------------------------------------------------------------
Implement Foreign Account Tax Compliance .......... 34 37 ............. 71
Act......................................
Address Impact of Affordable Care Act 0.1 45 22 ............. 67
Statutory Requirements...................
Implement Merchant Card and Basis Matching .......... 28 6 ............. 34
----------------------------------------------------------------------------------------------------------------
New enforcement initiatives above the cap..... .......... 352 203 ............. 555
----------------------------------------------------------------------------------------------------------------
Prevent Identity Theft and Refund Fraud... .......... 48 34 ............. 82
Increase Audit Coverage................... .......... 97 64 ............. 162
Improve Audit Coverage of Large .......... 14 3 ............. 16
Partnerships.............................
Address International and Offshore .......... 35 5 ............. 41
Compliance Issues........................
Enhance Collection Coverage............... .......... 83 40 ............. 123
Leverage Data to Improve Case Selection... .......... 5 34 ............. 39
Address Compliance Risks in the Tax-Exempt .......... 16 8 ............. 23
Sector...................................
Pursue Employment Tax and Abusive Tax .......... 9 9 ............. 17
Schemes..................................
Enhance Investigations of Transnational .......... 37 5 ............. 43
Organized Crime..........................
Ensure Ethical Standards of Conduct for .......... 3 .9 ............. 4
Practitioners............................
Transfer to TTB for High-Return on .......... 5 ........... ............. 5
Investment (ROI) Tax Enforcement
Activities...............................
----------------------------------------------------------------------------------------------------------------
New non-enforcement initiatives............... 218 ............ 754 88 1,060
----------------------------------------------------------------------------------------------------------------
Changes to base............................... 34 81 82 1 198
-----------------------------------------------=================================================================
Total requested increase in $252 $540 $1,105 $89 $1,986
appropriations.........................
----------------------------------------------------------------------------------------------------------------
Source: Congressional budget justification for IRS, fiscal year 2016.
Note: \a\ Numbers may not add due to rounding.
OBJECTIVE 2
Fiscal Year 2016 Budget Request: IRS Proposed 12 Non-Enforcement
Initiatives
TABLE 3: FUNDING REQUESTED FOR NON-ENFORCEMENT INITIATIVES
[Dollars In Millions]
----------------------------------------------------------------------------------------------------------------
Fiscal year 2016 funding requested, by
appropriations account
------------------------------------------------------
Description of requested budget increase Business Total \a\
Taxpayer Enforcement Operations Systems
services support Modernization
----------------------------------------------------------------------------------------------------------------
New non-enforcement initiatives below the cap. $218 ............ $642 $88 $948
----------------------------------------------------------------------------------------------------------------
Improve Taxpayer Services................. 183 ............ 118 ............. 302
Leverage New Technologies to Advance the .......... ............ 4 88 92
IRS Mission..............................
Implement Information Technology Changes .......... ............ 306 ............. 306
to Deliver Tax Credits and Other
Requirements.............................
Improve Upfront Identification and 16 ............ 3 ............. 19
Resolution of Identity Theft Returns.....
Sustain Critical Information Technology .......... ............ 189 ............. 189
Infrastructure...........................
Enhance Service Options for Taxpayers..... 14 ............ 2 ............. 16
Restore Staffing for Essential Support .......... ............ 20 ............. 20
Programs.................................
Increase Service for Low-Income Taxpayers 5 ............ .6 ............. 6
and Taxpayers in Need of Hardship Relief.
----------------------------------------------------------------------------------------------------------------
New non-enforcement initiatives above the cap. .......... ............ 111 ............. 111
----------------------------------------------------------------------------------------------------------------
Consolidate and Modernize IRS Facilities.. .......... ............ 85 ............. 85
Maintain Integrity of Revenue Financial .......... ............ 12 ............. 12
Systems..................................
Implement Agency Wide Shared Services .......... ............ 11 ............. 11
Priorities...............................
Implement Federal Investigative Standards. .......... ............ 3 ............. 3
----------------------------------------------------------------------------------------------------------------
New enforcement initiatives............... 0.1 459 269 ............. 728
----------------------------------------------------------------------------------------------------------------
Changes to base............................... 34 81 82 1 198
-----------------------------------------------=================================================================
Total requested increase in $252 $540 $1,105 $89 $1,986
appropriations.........................
----------------------------------------------------------------------------------------------------------------
Source: Congressional budget justification for IRS, fiscal year 2016.
Note: \a\ Numbers may not add due to rounding.
OBJECTIVE 2
Fiscal Year 2016 Budget Request: Four Enforcement Initiatives Expected
to Produce Revenue Are Under the Discretionary Spending Cap
Figure 13: Estimated Return on Investment for Proposed Enforcement
Initiatives Below Discretionary Spending Cap
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: GAO analysis of congressional budget justification for IRS,
fiscal year 2016. GAO-15-420R
Fiscal Year 2016 Budget Request: Eight Enforcement Initiatives With
Expected Return on Investment are Above the Discretionary Spending Cap
Figure 14: Estimated Return on Investment for Proposed Enforcement
Initiatives Above Discretionary Spending Cap
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: GAO analysis of congressional budget justification for IRS,
fiscal year 2016. GAO-15-420R
OBJECTIVE 2
Fiscal Year 2016 Budget Request: $3.2 Billion Requested for Information
Technology
Of the $3.2 billion requested,
--$2.3 billion is planned to fund 20 major IT investments.\4\ The
requested funding for major IT investments would come from
multiple sources, as shown in the figure to the right.
--This includes $24 million for Web Applications, a major IT
investment initiated in fiscal year 2015 to meet continued
growth in demand for customer service from taxpayers across
all channels.
--$976 million is planned to fund non-major IT investments.
Figure 15: Major IT Investments by Funding Source
(Dollars in Millions)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
\4\ According to IRS, major investments are defined by Treasury as
those that cost $10 million in either the current year or budget year,
or $50 million over the 5-year period extending from the prior year
through budget year +2.
---------------------------------------------------------------------------
OBJECTIVE 2
Fiscal Year 2016 Budget Request: $490 Million and 2,539 FTEs Proposed
to Implement PPACA in Fiscal Year 2016
TABLE 4: FISCAL YEAR 2016 PATIENT PROTECTION AND AFFORDABLE CARE ACT (PPACA) BUDGET REQUEST
[Dollars in Millions]
----------------------------------------------------------------------------------------------------------------
Taxpayer Enforcement Operations Total
services ------------------ support -----------------
Initiatives ------------------ ------------------
Dollars FTEs Dollars FTEs Dollars FTEs Dollars FTEs
----------------------------------------------------------------------------------------------------------------
Expand telecom infrastructure to handle ....... ....... ....... ....... $16.0 ....... $16.0 .......
increased demand.......................
Improve taxpayer services............... $78.3 1,231 ....... ....... $23.2 7 $101.5 1,238
Address impact of PPACA statutory $0.1 1 $44.8 432 $22.3 50 $67.2 483
requirements...........................
Implement information technology changes ....... ....... ....... ....... $305.6 818 $305.6 818
to deliver tax credits and other
requirements...........................
-----------------------------------------------------------------------
Total fiscal year 2016 PPACA $78.5 1,232 $44.8 432 $367.1 875 $490.4 2,539
budget request...................
----------------------------------------------------------------------------------------------------------------
Legend: FTE = Full time equivalent.
Source: Congressional budget justification for IRS, fiscal year 2016. GAO-15-420R
Note: Some numbers do not add due to rounding.
Fiscal Year 2016 Budget Request: Selected GAO Analyses Related to
Legislative Proposals
TABLE 5: SELECTED LEGISLATIVE PROPOSALS RELATED TO PRIOR GAO WORK
[Dollars in Millions]
----------------------------------------------------------------------------------------------------------------
Projected
Selected IRS legislative proposals related revenues over 10 Projected costs
to prior GAO work years (in over 3 years (in Related GAO reports
millions) millions)
----------------------------------------------------------------------------------------------------------------
Modify reporting of tuition expenses and $618 $0.2 GAO-10-225
scholarships of Form 1098-T, Tuition
Statement..................................
Authorize the Department of Treasury to \a\ 10 11.2 GAO-05-491
require additional information to be
included in electronically filed Form 5500
annual reports and electronic filing of
certain other employee benefit plan reports
Increase certainty with respect to worker 10,170 1.9 GAO-09-717
classification.............................
Require taxpayers who prepare their returns \a\ 10 14.6 GAO-12-33
electronically, but file their returns on
paper, to print their returns with a
scannablePcode.............................
Allow IRS to absorb credit and debit card 20 9.6 GAO-10-11
processing fees for certain tax payments...
Provide IRS with greater flexibility to 639 1.4 GAO-15-163, GAO-11-481, GAO-
address correctable errors................. 10-349
Improve whistleblower program............... Negligible 0 GAO-11-683
revenue effect
Explicitly provide that the Department of 427 Not available GAO-14-467T, GAO-08-781
Treasury and IRS have authority to regulate
all paid return preparers..................
Rationalize tax return filing due dates so 1630 1.0 GAO-13-515
they are staggered.........................
Combat tax-related identity theft........... Negligible 2.7 GAO-15-119, GAO-14-633, GAO-
revenue effect 13-132T
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis based on congressional budget justification for IRS, fiscal year 2016 and Department of the
Treasury, General Explanations of the Administration's fiscal year 2016 Revenue Proposals (Washington, D.C.:
February 2015).
Note: \a\ Department of Treasury includes this legislative proposal under ``Enhance Electronic Filing of
Returns'' and provides a single projected revenue for this proposal, as well as several others.
OBJECTIVE 3
Strategic Management: IRS Created a New Office in 2014 to Better
Coordinate Strategic Long-Term Planning Decisions
--Responding in part to a June 2014 GAO recommendation,\5\ IRS
established the Planning, Programming, and Audit Oversight
office (PPAO) in 2014 to improve coordination of (1) current
and completed audits, and (2) resource decisionmaking and
strategic planning.
--PPAO is to facilitate coordination among business units and
operating divisions to improve resource allocation and
planning.
--PPAO is to drive long-term planning for resource allocation to be
seen first in the fiscal year 2017 budget.
--The new strategic approach is to include consideration of short-
term trade-offs with long-term investments, allocation of
finite resources, and post-evaluation of investments.
---------------------------------------------------------------------------
\5\ See GAO, IRS 2015 Budget: Long-Term Strategy and Return on
Investment Data Needed to Better Manage Budget Uncertainty and Set
Priorities, GAO-14-605 (Washington, D.C.: June 12, 2014), in which we
recommended that IRS develop a long-term strategy to address operations
amidst an uncertain budget environment.
---------------------------------------------------------------------------
Strategic Management: IRS is Implementing Taxpayer Service Initiatives
for the 2015 Filing Season
IRS is implementing service initiatives, with the goal of serving
the maximum number of taxpayers possible more effectively and
efficiently, by
--redesigning notices, in part to inform taxpayers about online
resources and self service tools as an alternative to calling
or writing to IRS;
--expanding use of IRS's Oral Statement Authority tool to accept
verbal requests for penalty relief; and
--directing qualified taxpayers to apply and set up installment
payment agreements online or through self-service kiosks
instead of calling or visiting IRS.
We previously reported that shifting taxpayers to self-service
tools reduces the need for taxpayers to speak with IRS assistors, which
in turn reduces IRS's costs while improving taxpayer services.\6\
---------------------------------------------------------------------------
\6\ See GAO, Tax Filing Season: 2014 Performance Highlights the
Need to Better Manage Taxpayer Service and Future Risks, GAO-15-163
(Washington, D.C.: Dec. 16, 2014).
---------------------------------------------------------------------------
Strategic Management: IRS's Service on Demand Initiative is Intended to
Improve Taxpayer Experience
--IRS is developing a 6-year strategy known as Service on Demand,
which is intended to better meet taxpayers' needs and
preferences for interacting with the IRS. The overall goal is
to provide secure self-service options for taxpayers and to
improve taxpayer service.
--IRS has ranked 71 projects that are designed to improve taxpayer
services and is exploring how to implement the top 20, which
are grouped into 6 programs:
--developing an online account,
--streamlining digital self-service options,
--expanding third party services,
--analyzing taxpayer behaviors to reduce errors,
--accepting mobile payments, and
--upgrading all IRS forms, publications, and instructions to a Web-
friendly format written in plain language.
--In fiscal year 2015, IRS anticipates piloting an online Web-based
secure communications portal that is expected to improve
taxpayer services, for example, by enabling IRS and taxpayers
to communicate by sending both one-way and two-way secure
messages.
Strategic Management: Open GAO Recommendations Highlight Opportunities
for IRS to Improve Operations, Manage More Strategically, and Improve
Revenue Collection
For example:
--IRS 2015 Budget (GAO-14-605)
--Develop a long-term strategy to address operations amidst an
uncertain budget environment
--Calculate actual return on investment for implemented initiatives
and use that information to inform resource allocation
decisions
--IRS Web site (GAO-13-435)
--Develop a long-term strategy to improve Web services to
taxpayers, including business cases for new services to
prioritize projects
--Large Partnerships (GAO-14-732)
--Multiple recommendations to improve overall audit efficiency
--Correspondence Audits (GAO-14-479)
--Recommendations to establish formal program objectives and ensure
that the program measures reflect those objectives
Concluding Observations
IRS has absorbed $1.2 billion in cuts to its annual appropriation
since fiscal year 2010. Meanwhile, the agency has assumed additional
responsibilities related to identify theft refund fraud and the
implementation ofPPACA. A reduced budget and increased workload has
contributed to performance declines across the agency, including
serious concerns about service to taxpayers during filing season.
However, additional funding is not the only solution. Although
resources are constrained, IRS has some flexibility in how it allocates
resources to ensure that limited resources are utilized as effectively
as possible. This environment of constrained resources also highlights
the importance of strategically managing operations to make tough
choices about which services to continue providing and which services
to cut. IRS established its PPAO office in 2014 to improve coordination
and long-term planning, in part based on our recommendation. We have
other open recommendations and suggestions for Congress that, if fully
implemented, would help IRS strategically manage operations and
generate additional revenue.
APPENDIX I
Dollars by Appropriations Account, Fiscal Years 2009 to 2016
TABLE 6: FISCAL YEARS 2009 THROUGH 2015 ENACTED AND FISCAL YEAR 2016 BUDGET REQUEST FOR IRS
[Dollars in Millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Dollar Percent
change change
fiscal fiscal
Fiscal Fiscal Fiscal Fiscal Fiscal year Fiscal Fiscal Fiscal year 2015 year 2015
Appropriations account year year year year 2013 year year year 2016 enacted enacted
2009 2010 2011 2012 enacted \a\ 2014 2015 requested compared compared
enacted enacted enacted enacted enacted enacted to fiscal to fiscal
year 2016 year 2016
requested requested
--------------------------------------------------------------------------------------------------------------------------------------------------------
Enforcement................................... $5,117 $5,504 $5,493 $5,299 $4,949 $5,022 $4,860 $5,400 $540 11.11
Operations support............................ 3,867 4,084 4,057 3,947 3,801 3,799 3,638 4,743 1,105 30.36
Taxpayer services............................. 2,293 2,279 2,293 2,240 2,136 2,157 2,157 2,409 252 11.70
Business Systems Modernization................ 230 264 263 330 313 313 290 379 89 30.75
Health Insurance Tax Credit Administration 15 16 15 0 0 0 0 0 ......... .........
(HITCA)\b\...................................
---------------------------------------------------------------------------------------------------------
Subtotal................................ 11,523 12,146 12,122 11,817 11,199 11,291 10,945 12,931 1,986 18.15
Other resources, such as user fees............ 390 539 655 695 855 815 1,031 991 -40 -3.86
---------------------------------------------------------------------------------------------------------
Total funding available for obligations. $11,913 $12,686 $12,777 $12,512 $12,053 $12,106 $11,976 $13,922 $1,946 16.25
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional budget justifications for IRS, fiscal years 2011 through 2016. GAO-15-420R
Notes: Dollars are nominal and not adjusted for inflation, and numbers may not add due to rounding.
\a\ Fiscal year 2013 enacted represents the operating level after applying across-the-board rescission and reductions required by sequestration.
\b\ In fiscal year 2012 and thereafter, amounts appropriated for HITCA, which had been a separate account, were moved to the Taxpayer Services
appropriation.
APPENDIX II
Staffing by Appropriations Account, Fiscal Years 2009 Through 2016
TABLE 7: FISCAL YEARS 2009 THROUGH 2014 ACTUAL, 2015 ENACTED, AND 2016 REQUESTED FULL-TIME EQUIVALENTS
--------------------------------------------------------------------------------------------------------------------------------------------------------
FTE Percent
change change
fiscal fiscal
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal year 2015 year 2015
Appropriations account year year year year year year year year 2016 enacted enacted
2009 2010 2011 2012 2013 2014 2015 requested compared compared
actual actual actual actual actual actual enacted to Fiscal to fiscal
year 2016 year 2016
requested requested
--------------------------------------------------------------------------------------------------------------------------------------------------------
Enforcement...................................... 47,361 50,400 49,920 47,189 44,174 42,119 40,564 44,800 4,236 10.4
Operations support............................... 12,101 12,262 12,103 11,499 11,610 11,652 12,043 13,863 1,820 15.1
Taxpayer services................................ 32,422 31,607 31,574 30,236 29,646 28,535 28,274 31,285 3,011 10.7
Business Systems Modernization................... 322 337 309 562 451 337 398 576 178 44.7
Health Insurance Tax Credit Administration 10 12 0 0 0 0 0 0 0 0
(HITCA) \a\.....................................
------------------------------------------------------------------------------------------------------
Subtotal................................... 92,216 94,618 93,906 89,486 85,881 82,643 81,279 90,524 9,245 11.4
Other resources, such as user fees............... 1,153 752 1,003 2,185 1,884 2,118 924 962 38 4.1
------------------------------------------------------------------------------------------------------
Total...................................... 93,369 95,370 94,909 91,671 87,765 84,761 82,203 91,486 9,283 11.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional budget justifications for IRS, fiscal years 2011 through 2016. GAO-15-420R
Note: \a\ The administrative resources for HITCA were moved to the Taxpayer Services appropriation.
ADDITIONAL COMMITTEE QUESTIONS
[The following questions were not asked at the hearing, but
were submitted to the Departments for response subsequent to
the hearing:]
Questions Submitted to Hon. Jacob J. Lew
Questions Submitted by Senator John Boozman
tribal general welfare exclusion act
Question. Last year, Congress unanimously passed the Tribal General
Welfare Exclusion Act (GWE). As the lead sponsor in the Senate, I'm
intent to see that the law is implemented as Congress intended.
--Secretary Lew, this Act establishes a Tribal Advisory Committee
that will advise you on matter relating to the taxation of
Indians and establish training and education for IRS field
agents. Will you commit to appointing tribal leaders to the
Tribal Advisory Committee established by this law?
--The GWE requires consultation with tribes to better understand
tribal sovereignty and the roles of tribal nations in providing
general welfare benefits. Will you detail for me the efforts to
fulfill these consultations at both the national and regional
levels?
Answer. Treasury has sought the recommendations of tribal leaders--
without placing any restrictions on their choices. After filing the
charter, we contacted tribal leaders on February 19, 2015 for their
nominations to the Tribal Advisory Committee. We will be reviewing the
nominations and applications for the best candidates.
The Department looks forward to working closely with the Tribal
Advisory Committee, once formed, on consultation. As part of Treasury's
ongoing consultation efforts, I met with tribal leaders in December. In
addition, on December 3, 2014, in response to requests from Indian
Country, Treasury released an interim Tribal Consultation Policy and
requested comment on that interim policy.
Question. The law also stipulates all audits that relate to
benefits under the general welfare exclusion should be suspended until
the Tribal Advisory Committee is established and IRS field agents are
properly trained and educated in Federal law and how it relates to
sovereign Indian tribes.
--Would you provide for me a description of the standards being used
to determine whether an audit relates to the GWE and
confirmation that deference is being provided to tribal
governments?
--What recourse do tribes have if they believe an audit has not been
properly suspended?
--And finally, would you provide us with an overview and approximate
number of audits or examinations the IRS has suspended pursuant
to this Act and how many have NOT been suspended in cases where
tribes asserted the audit relates to the exclusion?
Answer. It is our understanding that all relevant audit issues have
either been closed or suspended. However, the application of the
relevant standards to a particular audit or examination is a matter for
the IRS to determine.
community development financial institutions (cdfi) program awards to
rural areas
Question. The CDFI program is intended to serve low-income
communities in both urban and rural States. However, the awards
continue to be skewed towards urban States. Since the program's
creation in 1994, entities based in New York have received $270
million. California entities have received $250 million. Illinois
entities have received $150 million. Meanwhile, entities located in
Arkansas and Oklahoma have only received $23 million. Delaware entities
have received less than $9 million, and Kansas entities have received
less than $5 million.
--Is the Treasury Department making any changes to the CDFI program
to expand participation of organizations located in rural
States?
--What outreach is the CDFI Fund doing to expand participation among
entities based in low-income communities that have been
neglected by the CDFI Program?
--What is the CDFI Fund doing to direct technical assistance grants
and the CDFI Capacity Building Initiative to rural States that
have received significantly fewer awards than urban States?
Answer. The CDFI Program is competitive and awards are merit-based.
Awards are made to institutions with the highest capacity to leverage
and deploy the award funds. Currently, there are 79 CDFIs in
California, 70 in New York, 33 in Illinois, 13 in Oklahoma, eight in
Arkansas, four in Delaware and three in Kansas. But many CDFIs have a
national footprint and invest in non-metropolitan areas as well as
metropolitan areas. Per CDFI Program regulations, the CDFI Fund follows
OMB's definition of metropolitan \1\; CDFI Fund data show that from
fiscal year fiscal year 2003 through fiscal year 2012, 25 percent or 1
of every 4 reported transactions, and 20 percent or $1 of every $5
transaction dollars were invested in non-metropolitan areas. This is
higher than the 16 percent of the U.S. population that live in non-
metropolitan areas per the latest U.S. Census data.
---------------------------------------------------------------------------
\1\ 44 U.S.C. 3504(e) and 31 U.S.C. 1104(d) and Executive Order
10253 (3 CFR, 1949-1953 Comp., p. 758), as amended.
---------------------------------------------------------------------------
Further, the CDFI Fund created the Small and Emerging CDFI
Assistance (SECA) category under the CDFI Program to enable smaller
CDFIs--which are often located in non-metropolitan areas--to better
compete for awards. In fiscal year 2014, almost 27 percent of all
Financial Assistance awards made under the CDFI Program went to
certified CDFIs primarily serving non-metropolitan communities and over
90 percent of awards made under the Native American CDFI Assistance
Program (NACA Program) went to CDFIs primarily serving non-metropolitan
communities.
The CDFI Fund hosts application workshops before every CDFI Program
round and produces an array of Webinars to explain the application
process for the public. In addition, the CDFI Fund plans to launch an
Innovation Challenge later this year to finance the development of a
method, model, tool, or product that the CDFI industry can use to build
CDFI capacity to expand or increase investments in underserved areas.
The Innovation Challenge will enable the CDFI Fund to support local
efforts to expand CDFI coverage, including rural communities, and
provide complementary support to the training and technical assistance
occurring under the CDFI Fund's Capacity Building Initiative.
The CDFI Fund's programs are merit-based and awards are made to
institutions with the highest capacity to leverage and deploy the award
funds. They are not based on a State population-based formula like some
other Federal programs. While the CDFI Fund does not have the authority
to direct funding to non-metropolitan areas, we are actively taking
steps to encourage CDFIs that serve non-metropolitan areas to apply to
our programs.
Technical Assistance awards build the capacity of nascent CDFIs to
become certified and scale up smaller certified CDFIs, many of which
are located in non-metropolitan areas. Over 18 percent of Technical
Assistance awards under the CDFI Program went to organizations
primarily serving non-metropolitan areas in the fiscal year 2014 CDFI
Program funding round, and over 93 percent of Technical Assistance
awards under the NACA Program went to organizations primarily operating
in non-metropolitan communities.
The CDFI Fund continues to work diligently to encourage investments
in rural communities. For example, the CDFI Fund's Capacity Building
Initiative has two recent training series directed towards building the
capacity of CDFIs to serve non-metropolitan areas--the Expanding
Coverage in Underserved Areas series and the Building Native CDFIs'
Sustainability and Impact series.
financial stability oversight council
Question. Financial Stability Oversight Council (FSOC) decisions
have the potential to exert broad influence over our financial markets
and the economy, yet deliberations are often held behind closed doors
with limited transparency.
At the principal level, the SEC and the Commodity Futures Trading
Commission (CFTC) are only represented by their respective chairs at
FSOC meetings. Conversely, the Federal Reserve is typically represented
by its chairperson, the New York Federal Reserve President, and Fed
Governor Daniel Tarullo.
Senate-confirmed commissioners are prevented from being present to
offer their regulatory expertise, including when the Council considers
reforms to areas where their agency serves as the primary regulator.
--Why are non-chair commissioners at member agencies of the Council
prohibited from attending FSOC meetings and deliberations?
--Given the number of bank regulators that participate in FSOC
meetings compared to capital markets regulators, what is the
Council doing to ensure FSOC decisions are not unnecessarily
imposing a bank-regulatory construct on our capital markets?
--Would you be supportive of allowing Senate-confirmed commissioners
at FSOC member agencies to attend FSOC meetings as non-
participating guests in all meetings and deliberations?
Answer. By statute, the Council is a body of 15 specific members.
Aside from public meetings, attendance at Council meetings is generally
limited to Council members designated by statute plus one additional
individual from their agencies. Our practice is to defer to individual
Council members as to who accompanies them to meetings. Generally,
Council members have chosen members of their staffs as their ``plus
one.''
Before the creation of the Council, no agency had responsibility
for identifying and responding to potential risks to financial
stability. Based on the lessons from the financial crisis, the Council
was established by the Dodd-Frank Act with a clear statutory mission to
identify risks to the financial stability of the United States, to
promote market discipline, and to respond to emerging threats to the
stability of the U.S. financial system. When the Council identifies
potential risks within the existing jurisdiction of a regulator, the
regulator is often best positioned to take action to mitigate those
risks, and the Council works closely with all the Federal financial
regulators. At the same time, the Council has the unique statutory
responsibility under the Dodd-Frank Act to look across the financial
system and to prevent risks to financial stability from slipping
through the cracks. The participation on the Council by regulators of
diverse parts of the financial system strengthens the Council and helps
ensure that risks do not slip through the cracks.
With respect to the Council's evaluations of nonbank financial
companies for potential designation, members with expertise relevant to
a particular company often provide important insights, and they work
together with other Council members to reach decisions regarding
designations. As the GAO found in its recent report on the designations
process, all of the voting and non-voting members of the Council can
participate in the evaluation of all nonbank financial companies. The
report also highlights that member agency staff who contributed to
company evaluations held various positions and contributed a range of
expertise, including from the primary regulators, and that member
agency officials generally indicated that their agency's expertise was
well utilized. Analytical teams composed of staff of Council members
and member agencies work closely with each company under review. These
analyses are guided by the Council's Deputies Committee and Nonbank
Financial Company Designations Committee, both of which include
representatives of all the Council members. Ultimately, proposed and
final designations are made by the affirmative vote of at least two-
thirds of the voting members of the Council then serving.
terrorism and financial intelligence (tfi) funding
Question. TFI plays a key national security role in administering
and enforcing sanctions. The fiscal year 2016 budget proposes a
reduction for TFI from $112.5 million to $109.6 million.
--In light of recent actions by Russia and the approaching deadline
for Iran negotiations, are you able to assure the Committee
that TFI has the resources necessary to carry out its mission
effectively?
Answer. Yes, TFI has adequate resources to carry out its mission
effectively, particularly in the areas of the Russia/Ukraine crisis and
the approaching deadline for negotiations with Iran. TFI's workforce
and varied skill sets enables the office to quickly redeploy existing
assets and resources to meet new and unexpected crises.
Question. Should we be concerned that your enforcement capability
may be impacted by your funding?
Answer. TFI's funding is adequate to meet our enforcement
requirements capabilities. TFI has developed an agile workforce of
flexible skill sets capable of addressing new and emerging issues or
areas of concern with minimal disruption. We employ several methods
(working/targeting groups, etc.) to address new and rising issues while
ensuring current projects and efforts are not significantly impacted or
fall by the wayside.
Question. Will the allocation of any administrative or shared
services costs to TFI change in fiscal year 2015 compared to fiscal
year 2014?
Answer. The fiscal year 2015 enacted appropriation provided $112.5
million for Office of Terrorism and Financial Intelligence (TFI)
operations, of which not to exceed $27.0 million was provided for
administrative expenses. The fiscal year 2014 enacted appropriation
provided $102.0 million for TFI, of which not to exceed $26.0 million
was provided for administrative expenses. The increase provided in
appropriations is adequate to support the administrative support and
shared services costs.
Question. Does funding TFI through a separate appropriations
account affect the allocation of these costs?
Answer. While the funding of TFI through a separate appropriations
account does not affect the allocation of the overhead administrative/
shared services costs, it does complicate the central management,
financial oversight, and increase the complexity of executing the
budget. The administrative support provided to TFI continues to be
provided by the same offices funded within the DO Salaries and Expenses
(DO SE) 0101 appropriation. With the establishment of TFI as a separate
appropriations account in fiscal year 2015, all TFI-related program and
administrative costs that had obligated and expensed (disbursed)
against the DO SE 0101 appropriation at the beginning of fiscal year
2015 had to be moved within the accounting system to the TFI SE 1804
appropriation. These costs affected include the salaries for all TFI
personnel, travel, supplies, and contracts awarded, in addition to the
associated administrative support costs, prior enactment of the fiscal
year 2015 appropriation on December 16, 2014.As of May 11 there is
residual clean-up work still being done to move the obligations and
expenses from the 0101 appropriation to the TFI SE appropriation; most
of these costs are travel related and the corrections in the accounting
system must be done based on the individual travel order.
______
Question Submitted by Senator Christopher A. Coons
Question. There are currently issues that have been brought to my
attention involving State level policies that modify the traditional
``net metering'' agreements between utilities and residential customers
that generate electricity from solar panels affixed to rooftops.
Several new State level policies require that electric utilities
purchase all electricity generated by residential solar customers, but
not necessarily at the applicable retail rate. Correspondingly, the
utility sells, at the applicable retail rate, all electricity that the
homeowner consumes. This includes any electricity actually produced by
the homeowner's solar panels. These arrangements are commonly referred
to as Value of Solar Tariffs, or VOSTs. It is my understanding that
there is uncertainty surrounding the tax consequences for a homeowner
that participates in a VOST arrangement. Specifically, I would like to
understand whether a homeowner who participates in a VOST arrangement
(1) is eligible to claim the Federal tax credit under Section 25D of
the Tax Code and (2) must treat VOST payments as Federal taxable
income.
Answer. Generally, the tax treatment of an arrangement such as the
one you describe will depend on the specific facts and terms of the
arrangement between the homeowner and the public utility. The IRS is
aware that taxpayers have questions about the treatment of VOSTs for
Federal income tax purposes and is currently looking at these issues.
The IRS is considering whether published guidance would be useful in
helping taxpayers apply the law to particular factual situations.
Before issuing any such guidance, the IRS likely will request comments
from the public on common fact patterns involved in these arrangements
along with how these arrangements should be treated for Federal income
tax purposes.
______
Questions Submitted by Senator Jerry Moran
Question. Through the Financial Stability Board and Federal
Insurance Office (FIO), your Department has had extensive engagement in
the International Association of Insurance Supervisors (IAIS) process
of developing capital rules for insurance companies on an international
basis. As you know, the U.S. insurance regulatory regime is quite
different than that of Europe--and our State-based system is not going
away any time soon. Have you conducted any analysis of the potential
impacts of IAIS standards on the U.S. domestic insurance industry--in
terms of financial, rate-setting, legal, and accounting regimes U.S.
companies now U.S. confront--as well as the impacts that could be felt
by policyholders and consumers? If this analysis has not been
conducted, do you feel that this information would be necessary before
developing international capital standards? If you have conducted this
analysis, would you please share this information with the committee?
Answer. The work on a comprehensive supervisory framework for
internationally active insurance groups (IAIGs) has been ongoing since
2009 and is shaped by the input of the U.S. Federal and State
participants. As part of these discussions, Treasury agrees that any
capital standards for insurers should be based on insurance business
models and risk metrics. In addition, prior to implementation, the
international capital standards will be tested directly with U.S.-based
insurers and, more broadly, the marketplace. The testing and the study
will allow for the implementation of international standards that
account for the impact in the United States. Additionally, work on the
ICS should proceed incrementally toward milestones that are realistic,
achievable, and that are fact-driven and consensus-driven.
As has always been true in the insurance sector, international
standards are not self-executing. U.S. State or Federal authorities may
impose a standard or requirement on a U.S. insurance organization. In
the case of the United States, for firms that operate as part of a bank
or savings and loan holding company or nonbank financial company
designated by the Financial Stability Oversight Council (FSOC), the
Federal Reserve has the authority to implement the standard. For firms
not subject to oversight by the Federal Reserve, the State insurance
regulators would have authority to implement the standard.
Question. Describe the role of your department/agency's Chief
Information Officer (CIO) in the development and oversight of the
information technology (IT) budget for your department/agency. How is
the CIO involved in the decision to make an IT investment, determine
its scope, oversee its contract, and oversee continued operation and
maintenance?
Answer. The role of the Treasury CIO in development and oversight
of the IT budget relies heavily on Treasury bureau level data on IT
investments; this data focuses on major investments. In terms of IT
budget data, Treasury does not have a single, stand-alone budget
account to request funds to support all of the Department's IT
investments. Each Treasury bureau is responsible for identifying and
requesting funds to support their IT investments, which can be found in
the bureau program budgets or in component specific IT budgets.
Given that context, the Treasury CIO's current role is as follows:
--Through reviews conducted by the Assistant Secretary for Management
(ASM), the Treasury CIO is directly involved in proposing
bottom-up budgets, resource levels, and scope of all
investments funded by Departmental Offices (DO) IT budgets and
DO's managed funds within the Treasury Franchise Fund for
shared IT services. Decisions on levels of budget and resources
dedicated to DO IT under these funding mechanisms are made by
the ASM as directed by the Secretary. For major and non-major
investments, the Treasury CIO conducts both oversight and
execution of contracts, operations, and maintenance.
--Conducts an annual review with each bureau CIO to review their
proposed IT portfolio to be submitted in conjunction with their
organization's budget request. Provides recommendations
directly to the bureau CIO and, as warranted, provides
recommendations to Treasury's Budget Director. For major
investments, the Treasury CIO conducts oversight activities
such as monthly reviews to identify opportunities to improve
investment performance.
--Through reviews conducted by the ASM as part of the annual budget
process, the Treasury CIO is asked for comment on submissions
by program offices across all appropriated Treasury programs on
their specific budget requests (above guidance requests)
related to IT.
Question. Describe the existing authorities, organizational
structure, and reporting relationship of the Chief Information Officer.
Note and explain any variance from that prescribed in the newly-enacted
Federal Information Technology and Acquisition Reform Act of 2014
(FITARA, Public Law 113-291) for the above.
Answer. As per Treasury Order 102-10 (dated January 13, 1999) the
Deputy Assistant Secretary for Information Systems is designated as the
Chief Information Officer. The CIO reports to Treasury's Assistant
Secretary for Management (ASM). The responsibilities of the position
include:
--The general responsibilities and the duties specified in sections
5125(b) and (c) of the Clinger-Cohen Act of 1996 (40 U.S.C.
1425 (b) and (c));
--The responsibilities of the Department under chapter 35 of title
44, U.S.C., titled ``Coordination of Federal Information
Policy;'' and
--The Chief Information Officer management responsibilities
designated in Executive Order 13011, dated July 16, 1996.
Order 102-10 provides that the CIO shall have direct access to the
Secretary.
In anticipation of formal guidance to be released from OMB on the
implementation of FITARA, the Treasury Department is currently
evaluating its existing policies and the role of the CIO within the
Department.
Question. What formal or informal mechanisms exist in your
department/agency to ensure coordination and alignment within the CXO
community (i.e., the Chief Information Officer, the Chief Acquisition
Officer, the Chief Finance Officer, the Chief Human Capital Officer,
and so on)?
Answer. The Department of the Treasury has had some level of
coordination and alignment within the Department's CXO community in
place since fiscal year 2012. In 2011, a series of Department-wide
performance elements were included in the performance plans of the
bureau CXOs. For Treasury this includes the Chief Financial Officer,
Chief Information Officer (CIO), Human Resources Officer, Senior
Procurement Official, and the Equal Employment Opportunity (EEO)
Officer. The purpose of prescribing performance elements was to promote
greater uniformity across the bureaus and strengthen alignment with
Department-wide goals. Fiscal year 2012 results were very good and
additional improvements were made for fiscal year 2013.
For fiscal year 2015, all CXO Commitments are linked to Strategic
Goal 5 of the Treasury Strategic Plan (fiscal year 2014-fiscal year
2017) and one or more of the objectives below:
Strategic Goal 5:
Create a 21st century approach to government by improving
efficiency, effectiveness and customer interaction.
--Objective 5.1: Increase workforce engagement, performance, and
diversity by instilling excellence, innovation, and
inclusion in Treasury's organizational culture and business
practices.
--Objective 5.2: Support effective, data-driven decisionmaking and
encourage transparency through intelligent gathering,
analysis, sharing, use and dissemination of information.
--Objective 5.3: Promote efficient use of resources through shared
services, strategic sourcing, streamlined business
processes, and accountability.
--Objective 5.4: Create a culture of service through relentless
pursuit of customer value.
Most of the Department's CXO commitments in fiscal year 2015 are
substantially similar to those developed in the past. However, the CIO
commitment was revised to reflect a new visioning and strategic
planning process.
Question. According to the Office of Personnel Management, 46
percent of the more than 80,000 Federal IT workers are 50 years of age
or older, and more than 10 percent are 60 or older. Just 4 percent of
the Federal IT workforce is under 30 years of age. Does your
department/agency have such demographic imbalances? How is it
addressing them?
Answer. Yes, and this creates the risk that too many essential
employees might retire at the same time without sufficiently trained
employees in place to succeed them. The consequences of a demographic
shift of information technology (IT) workers, specifically the risk
that too many essential employees could retire simultaneously without
sufficiently trained employees to succeed them, has been a longstanding
concern for the Department of the Treasury. As part of Treasury's
benchmarking efforts related to PortfolioStat and the President's
Management Agenda (PMA), Treasury provided an analysis to OMB on the IT
workforce demographic for Treasury's 2210 series workers (a subset of
Treasury's IT workforce). Items of interest among the findings include:
--The average age of the IT workforce at the Department of the
Treasury \2\ is 50.
\2\ Consisting of IT employees working across both Departmental
Offices and Treasury's Bureaus.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total
2200 Under % of % of 65 and
Year Series 20 20-29 30-39 hires hires 40-49 50-59 60-64 over
Hires under 30 under 40
--------------------------------------------------------------------------------------------------------------------------------------------------------
2014................................................... 383 0 19 101 5.0% 31% 146 97 18 2
2013................................................... 381 0 33 111 8.7% 38% 132 85 14 0
2012................................................... 333 0 23 90 6.9% 34% 128 75 15 0
2011................................................... 655 0 38 166 5.8% 31% 261 151 31 8
2010................................................... 256 1 51 68 20.3% 47% 89 39 6 0
2009................................................... 186 0 34 64 18.3% 53% 57 23 6 0
2008................................................... 312 0 57 81 18.3% 44% 108 56 10 0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current mitigations include fostering increased utilization of
existing Pathways and fellowship programs. Examples include recruiting
through the Scholarship for Service program under the Federal Cyber
Service (FCS) Training and Education Initiative for appointments under
the Federal Pathways program. The Departmental Offices fiscal year 2016
budget includes a request to develop a Digital Service Team similar to
the Federal Digital Service Team. The Digital Service Team will bring
the private sector's best practices in the disciplines of design,
software engineering, and product management to bear on the agency's
most important services. The hope is this effort will also help
catalyze further changes to Treasury's IT staffing demographic.
To address the identified concern, Treasury is pursuing additional
use of available hiring flexibilities, including the Pathways Program
and the recently authorized government-wide excepted service hiring
authority for Smarter IT Delivery. However, due to budget
considerations, Treasury bureaus have been finding it difficult to fund
positions, and to fund compensation and recruitment incentive
flexibilities.
Question. How much of the department/agency's budget goes to
Demonstration, Modernization, and Enhancement of IT systems as opposed
to supporting existing and ongoing programs and infrastructure? How has
this changed in the last 5 years?
Answer. Since 2011 the percentage of Treasury's overall IT budget
spent on Development, Modernization and Enhancement (DME) has increased
from 18.37 percent to 20.58 percent in 2016, as included in the fiscal
year 2016 budget. These statistics are based on Treasury's fiscal year
2013 and fiscal year 2016 budget submissions.
Extracts from Treasury's 4.1 tables for the aforementioned 2 years
include the following:
TREASURY 4.1 TABLE
[Values in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
PY 2011 Funding (Actuals) BY 2016 Funding (Requested)
------------------------------------------------------------------------------------
DME O&M Total % DME DME O&M Total % DME
--------------------------------------------------------------------------------------------------------------------------------------------------------
IT Total........................................................... 625.211 2752.869 3402.831 18.37% 932.683 3568.505 4531.033 20.58%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Question. What are the 10 highest priority IT investment projects
that are under development in your department/agency? Of these, which
ones are being developed using an ``agile'' or incremental approach,
such as delivering working functionality in smaller increments and
completing initial deployment to end-users in short, 6-month
timeframes?
Answer. Rapid Delivery Methods (RDM) have been in use within
Treasury since 2012 to help foster the faster and more responsive
delivery of IT development efforts across a broad spectrum of projects.
Applying RDM is fostering an agile development environment allowing IT
to respond to changing business needs while improving employee
satisfaction and accountability through streamlined processes.
The following are Treasury's 10 highest priority IT investments
that have development efforts in fiscal year 2015:
------------------------------------------------------------------------
Currently using Rapid
Investments Delivery Method/AGILE/
Iterative
------------------------------------------------------------------------
IRS--Foreign Account Tax Compliance Act-- Yes
FATCA.
IRS--Customer Account Data Engine 2 TS2 Yes
(CADE 2).
IRS--Modernized e-File--MeF (Next Release) Yes
IRS--Affordable Care Act (ACA)............ Yes
Fiscal Service--Retail Security Services Yes
(RSS/MyRA).
Fiscal Service--USASpending............... Yes
Fiscal Service--Wholesale Securities Yes
Services (WSS/TAAPS).
Fiscal Service--Central Accounting and Yes
Reporting System (CARS).
Fiscal Service--Electronic Federal Tax Yes
Payment System (EFTPS).
CDFI--Award Management Information System. Yes
------------------------------------------------------------------------
Question. To ensure that steady State investments continue to meet
agency needs, OMB has a longstanding policy for agencies to annually
review, evaluate, and report on their legacy IT infrastructure through
Operational Assessments. What Operational Assessments have you
conducted and what were the results?
Answer. An operational analysis was conducted by the bureaus for
the following IT investments in fiscal year 2014:
------------------------------------------------------------------------
Operational
Investment Bureau Analysis Results
------------------------------------------------------------------------
Affordable Care Act IRS............... Re-Invest--Both
Administration. (Modernization
and Enhancement)
Account Management Services IRS............... Re-Invest--Both
(AMS). (Modernization
and Enhancement)
e-Services...................... IRS............... Re-Invest--Both
(Modernization
and Enhancement)
Integrated Customer IRS............... Re-Invest--Both
Communication Environment (Modernization
(ICCE). and Enhancement)
Integrated Data Retrieval System IRS............... Re-Invest--Both
(IDRS). (Modernization
and Enhancement)
Integrated Financial System/CORE IRS............... Re-Invest--Both
Financial System (IFS). (Modernization
and Enhancement)
Individual Master File (IMF).... IRS............... Re-Invest--Both
(Modernization
and Enhancement)
Information Reporting and IRS............... Re-Invest--Both
Document Matching (IRDM). (Modernization
and Enhancement)
Integrated Submission and IRS............... Re-Invest--Both
Remittance Processing System (Modernization
(ISRP). and Enhancement)
Service Center Recognition/Image IRS............... Re-Invest--Both
Processing System (SCRIPS). (Modernization
and Enhancement)
Customer Account Data Engine 2 IRS............... Continue As-Is
(CADE 2).
Electronic Fraud Detection IRS............... Re-Invest--Both
System (EFDS). (Modernization
and Enhancement)
Modernized e-File (MeF)......... IRS............... Continue As-Is
IRS.GOV--Portal Environment..... IRS............... Re-Invest--Both
(Modernization
and Enhancement)
Automated Standard Application Fiscal Service.... Continue As-Is
for Payments (ASAP).
Central Accounting and Reporting Fiscal Service.... Re-Invest--
System. Modernize
Debit Gateway................... Fiscal Service.... Continue As-Is
Deposit and Data Management Fiscal Service.... Continue As-Is
(DDM).
Do Not Pay (DNP) (previous name Fiscal Service.... Re-Invest--Enhance
GOVerify Business Center
(GVBC)).
EFTPS (Electronic Federal Tax Fiscal Service.... Re-Invest--Enhance
Payment System).
FedDebt......................... Fiscal Service.... Continue As-Is
Franchise Financial and Fiscal Service.... Continue As-Is
Administrative Services (FFAS).
International Treasury Services Fiscal Service.... Continue As-Is
(ITS.gov).
Invoice Processing Platform..... Fiscal Service.... Re-Invest--Enhance
Over the Counter Channel Fiscal Service.... Continue As-Is
Application (OTCnet).
Pay.gov......................... Fiscal Service.... Continue As-Is
Payment Application Fiscal Service.... Re-Invest--Both
Modernization (PAM). (Modernization
and Enhancement)
Retail Securities Services (RSS) Fiscal Service.... Continue As-Is
Summary Debt Accounting Services Fiscal Service.... Continue As-Is
(SDAS).
Wholesale Securities Services Fiscal Service.... Re-Invest--Enhance
(WSS).
BSA IT Modernization............ FinCEN............ Re-Invest--Enhance
------------------------------------------------------------------------
Question. What are the 10 oldest IT systems or infrastructures in
your department/agency? How old are they? Would it be cost-effective to
replace them with newer IT investments?
Answer. The oldest systems at Treasury were built in the 1960's.
This does not mean Treasury has not made changes to these systems since
then. As Treasury's annual budget allows, Treasury takes the
opportunity to upgrade the hardware and software to the current
release. However, some of the core system components exist on older
technology. The strategy has been, and will continue to be, to migrate
off these systems/components in a methodical manner. Because of system
interdependencies, it is often not as simple as replacing an entire
system with another. Often, components are replaced using a risk based
approach where more fragile and frequently failing components are
replaced first. Other more robust components are left in place to
maximize return on investment. Treasury always looks for opportunities
to introduce these changes without impacting the core mission or
incurring unnecessary costs.
Question. How does your department/agency's IT governance process
allow for your department/agency to terminate or ``off ramp'' IT
investments that are critically over budget, over schedule, or failing
to meet performance goals? Similarly, how does your department/agency's
IT governance process allow for your department/agency to replace or
``on-ramp'' new solutions after terminating a failing IT investment?
Answer. Within the Department, the Capital Planning and Investment
Control (CPIC) office has the oversight responsibility for preparing
and publishing a monthly performance report of the Treasury's IT
Portfolio status on the Federal IT Dashboard, which is hosted by the
Office of Management and Budget (OMB). The bureaus' Chief Information
Officer and supporting CPIC staff are responsible for timely, accurate
and complete updates to the monthly performance report for their
investments. The same monthly data submission to OMB is hosted by
Treasury, Information Technology Strategy and Technology Management,
Performance Measurement and Governance.
There are three primary dates that drive the monthly reporting
cycle:
1. Bureaus must update project execution data and operational
performance for each major investment by the 15th of each month. Cost
and schedule variances are analyzed, along with operational metrics and
project risks, and a bureau-level view of the monthly variance report
can be prepared at the bureau level.
2. The monthly updates are consolidated at the Departmental level
and presented to the Treasury CIO near the 25th of each month.
3. The Department's monthly submission is due to OMB by the last
day of each month. Treasury's Monthly Variance Report, complete with
portfolio variance analysis, investment summaries, and trend analysis
is published for the Assistant Secretary for Management, bureau heads
and posted on the CPIC Web site.
One of the avenues through which new investments can be ``on-
ramped'' after an existing investment has been terminated, is through
Treasury's Operational Assessment (OA) process.
Question. What IT projects has your department/agency
decommissioned in the last year? What are your department/agency's
plans to decommission IT projects this year?
Answer. The IT projects decommissioned in the last year (fiscal
year 2014) include the following:
------------------------------------------------------------------------
Bureau Business Application Name
------------------------------------------------------------------------
IRS....................................... Information Return Document
Matching Case Management
(IRDMCM)
IRS....................................... Integrated Production Model
Departmental Offices...................... DTS decommission
Departmental Offices...................... Alpha decommission
Fiscal Service............................ Summary Debt Accounting
System (SDAS)
OCC....................................... ADD Request Tracking System
(Retired)
OCC....................................... BankNet Application Request
Queue (Retired)
OCC....................................... BankNet Viewer (Retired)
OCC....................................... BERT (Bank Expert)
OCC....................................... Compensation & Benefits
Board
OCC....................................... Historical OCCNet Operating
Committee Database
(Retired)
OCC....................................... Large Banks Library
OCC....................................... Library Information Request
Form (Retired)
OCC....................................... News/Joint Release Template
(DocPub) (Document
Publishing Pilot) (Retired)
OCC....................................... Notice Board System
(Retired)
OCC....................................... OCC Publication Plans
OCC....................................... Printed Publications Order
Form (Retired)
OCC....................................... Security/Authorize
OCC....................................... Trouble Ticket Dashboard
Front End
------------------------------------------------------------------------
The Department plans to decommission the following IT projects in
fiscal year 2015:
------------------------------------------------------------------------
Bureau Business Application Name
------------------------------------------------------------------------
Fiscal Service............................ Deposit and Data Management
(DDM)
Fiscal Service............................ Retail Security Services
(RSS)
Fiscal Service............................ Centralized Accounting and
Reporting System (CARS)
------------------------------------------------------------------------
Question. The newly-enacted Federal Information Technology and
Acquisition Reform Act of 2014 (FITARA, Public Law 113-291) directs
CIOs to conduct annual reviews of their agency/department's IT
portfolio. Please describe your agency/department's efforts to identify
and reduce wasteful, low-value or duplicative information technology
(IT) investments as part of these portfolio reviews.
Answer. The Treasury Capital Planning and Investment Control Office
conducts monthly reviews of Treasury IT investments. (Please see
response to Question 2 for a description of the Treasury monthly and
annual processes). These reviews inform the Treasury CIO about the
cost, schedule, and performance variances of each major investment in
the Treasury IT portfolio. Based on these monthly reviews, investment
managers for poorly-performing investments must explain reasons for
variances and their planned corrective action.
Currently each Treasury bureau CIO has the responsibility for
performing the capital planning and investment control selection
process that reviews all IT investments annually and determines the
composition of their IT investment portfolio. As OMB develops final
guidance for implementing FITARA, the Department will implement new
policies which we believe will maximize efficiencies in IT spending,
consolidate investments where appropriate, and reduce and eliminate
lower priority investments as feasible.
Treasury has a long history of being a shared services provider
offering essential services (both business and technical) to
constituencies both within and external to our Department. These shared
services are funded through the Treasury Franchise Fund which achieves
cost savings, promotes economies of scale, and increases productivity
and efficiency in the use of resources by providing centralized
services. Some key examples of the shared services Treasury offers
include:
--HR Connect is one of the six Federal Office of Personnel Management
Human Resource Lines of Business providing HR-related services
in the Federal Government.
--The Administrative Resource Center (ARC), within the Bureau of the
Fiscal Service, has been in operation since 1996 and is
recognized across government as a leader in multiple service
lines. ARC provides a full range of administrative services for
various Federal agencies to include:
--Financial Management
--Internet-based procurement
--Travel services
--Information Technology
--Human Resources Management
--Investment Portfolio Management
--The Treasury Network (TNet) provides a secure enterprise data
network that connects authorized domestic and international
government facilities across the United States, the U.S.
Territories, and at select U.S. Embassies via the State
Department's network.
--Treasury's Public Key Infrastructure (PKI) is a cooperative effort
between OCIO and the Bureau of the Fiscal Service (formerly the
Bureau of the Public Debt) for the issuance of digital
certificates to enable secure communications between agencies
and customers transacting business, and for identity proofing
of individuals. Treasury's PKI is well known throughout the
Federal Government, and is extended to its trading partners and
other government organizations that conduct business with the
Department in a secure manner.
--The Invoice Processing Platform (IPP) provides a centralized
electronic invoicing and payment information portal accessible
to all participants in Federal payment transactions: agencies,
payment recipients, and Bureau of the Fiscal Service.
--The Department's Do Not Pay Business Center is designed to give
paying agencies access to the critical information needed to
identify, reduce, and prevent improper payments. This program
was initiated as part of a June 18, 2010, Presidential
Memorandum directing agencies to review current pre-payment and
pre-award procedures to ensure that a thorough review of
available databases, with relevant information on eligibility,
occurs before Federal funds are disbursed.
Question. In 2011, the Office of Management and Budget (OMB) issued
a ``Cloud First'' policy that required agency Chief Information
Officers to implement a cloud-based service whenever there was a
secure, reliable, and cost-effective option. How many of the agency/
department's IT investments are cloud-based services (Infrastructure as
a Service, Platform as a Service, Software as a Service, etc.)? What
percentage of the agency/department's overall IT investments are cloud-
based services? How has this changed since 2011?
Answer. Treasury is unable to compare this percentage to fiscal
year 2011, as there is no fiscal year 2011 data on cloud usage. OMB
only began asking for investment-level cloud data in the fiscal year
2015 budget year. Government-wide guidance on measuring the extent and
impact of cloud computing continues to mature, making year-to-year
comparisons difficult.
With the launch of a new Treasury.gov platform in 2011, Treasury
was one of the first civilian agencies to leverage commercial cloud
based offerings to host its public Web presence. Treasury was also one
of the early collaborators with the National Institute of Standards and
Technology (NIST), General Services Administration, and other agencies
on the formal definition of cloud computing.
As one of the early adopters of commercial cloud services, Treasury
is also aware of the challenges of moving Federal IT infrastructure
into the cloud. A significant portion of Treasury data is comprised of
PII and financial data. Treasury looks forward to FedRAMP's continued
expansion of the number of commercial cloud providers able to meet the
government's security requirements.
That aside, Treasury has regularly sought out services to improve
efficiency, increase utilization and decrease time to market. The
Department maintains an active portfolio of shared service programs
that service organizations throughout government. Further, across
Treasury, IT organizations have instituted virtualization and usage
based cost models that allow IT organizations to more effectively
follow the best practices established by commercial cloud providers.
Using the narrow definition found in the National Institute of
Standards and Technology standard (special publication 800-145), 3.7
percent of Treasury's current IT investments are ``cloud based'' (11
out of 298 investments). Many other investments use other forms of
shared and/or virtualized infrastructure.
Question. Provide short summaries of three recent IT program
successes--projects that were delivered on time, within budget, and
delivered the promised functionality and benefits to the end user. How
does your department/agency define ``success'' in IT program
management? What ``best practices'' have emerged and been adopted from
these recent IT program successes? What have proven to be the most
significant barriers encountered to more common or frequent IT program
successes?
Answer. The following provides short summaries of three recent
Department IT program successes. The Treasury CIO evaluates the
performance of major investments every month. Ratings of 4-5 reflect
successfully operating investments on the basis of:
--Cost and Schedule Baseline Management: Cost and schedule within 10
percent threshold and trends are neutral or positive.
--Project Risk Management: Low impact and low probability with/or
without a mitigation plan.
--Performance Measures Management: Measures with quantifiable
description that provide baselines, targets, and actual
results; reporting accuracy is within tolerance.
The following Treasury IT programs all have CIO ratings of ``5'':
--The Bank Secrecy Act (BSA) Information Technology (IT)
Modernization Program: The Financial Crimes Enforcement Network
(FinCEN) transformed its IT capabilities through the innovative
use of technology and data standards to provide mission
critical support to the bureau's broad user base, which
includes law enforcement and regulatory customers that access
and analyze financial data to detect and deter financial
crimes. The Program established FinCEN as the ``authoritative
source'' for all BSA data with 11+ years (approximately 190
million records) of data readily available to all stakeholders:
--An enterprise-wide, information management framework that equips
over 10,000 authorized users from approximately 350
agencies with access to BSA financial data and advanced
analytic decisionmaking abilities performing over 1,000,000
queries per year.
--A more streamlined data collection and filing process aimed at
60,000 regulated entities (Banks, Money Service Businesses,
etc.) and over 500,000 individual foreign bank account
holders to electronically file reports in support of the
Department's ``paperless'' initiative, with FinCEN now
averaging 96 percent electronically-filed BSA reports.
--Advanced analytics and modeling capabilities for financial crime
detection. With regard to IT program management, FinCEN
defines success as the completion of the agreed upon scope
of Program capabilities within the allocated timeframe and
budgeted costs.
--Customer Account Data Engine 2 (CADE 2) Program: The Internal
Revenue Service (IRS) revamped the way it does business by
providing a data-centric solution that provides daily
processing of taxpayer accounts.
--In January 2012, CADE 2's Transition State 1 (TS 1) began to
deliver daily tax return processing--enabling faster
refunds to taxpayers, more timely account updates, and
faster issuance of taxpayer notices. The Service also began
deployment of the CADE 2 database--a single centralized
relational database of trusted data for individual taxpayer
accounts--to improve service to taxpayers and enhance IRS
tax administration. CADE 2 Transition State 2 (TS2) is
focused on delivering early results.
--On July 29, 2013, the TS2 team took the first step in addressing
the longstanding Financial Material Weakness by delivering
the first TS2 project--the 2013 Mid-Year Release of the
Integrated Data Retrieval System Penalty & Interest
project. A full rollout of the Penalty & Interest Common
Code Base was deployed on January 2, 2014.
--In January 2015, the IRS deployed Penalty and Interest Filing
Season 2015 code changes for the Individual Master File
(IMF), Business Master File (BMF) and Integrated Data
Retrieval System (IDRS) investments into production, and
addressed both TS2 common code break-fixes and operations
and maintenance work.
--Electronic Federal Tax Payment System (EFTPS): The Bureau of the
Fiscal Service (Fiscal Service) administers the world's largest
government funds collections systems through a network of more
than 10,000 financial institutions. The EFTPS provides
businesses and individuals with a free service for making tax
payments to the U.S. Federal Government and collects over $2
trillion per year. The EFTPS includes the following key
services:
--EFTPS.gov--used by both businesses and individuals to make tax
payments.
--IRS Direct Pay--a citizen focused, mobile accessible Web site,
IRS Direct Pay assists individuals with making tax payments
online.
--EFTPS Contact Center--a world class call center staffed to assist
tax payers with questions and enable tax payments.
--Bulk and Batch tax collection--provides integration with tax
professionals, payroll providers, and large tax collection
entities.
In late July, 2014, ForeSee was utilized to measure tax payers'
satisfaction with using EFTPS Online. The survey measures a customer's
overall experience based on ``Look and Feel'', Navigation, Language
(how clearly information is communicated on the site), Site
Performance, Task/Transaction completion, and overall Satisfaction.
Each measure is scored from 1-10, with an average score over 8 being
considered strong performance. All measures for EFTPS are well over 8
with customer satisfaction averaging 8.6. This makes EFTPS one of the
highest performing Federal Web sites.
The EFTPS investment consistently performs at the highest levels in
terms of project management, scope management, cost and schedule
baseline management, risk management, and demonstrating successful
operational performance. EFTPS has delivered above 90 percent accuracy
on cost, schedule, and operational performance results for the past 18
months.
Best Practices:
Several key best practices stand out from the three successful
investments, with each practice sustained over several years.
--Sustained funding--Investments seeking to implement major changes
in technology must have access to predictable funding levels in
order to plan and execute against schedule. Lacking reliable
funding levels, projects are prone to constant schedule changes
and reassignment of resources--which further contribute to
project instability.
--Strong, technical program management--With sustained funding and
resource stability, program managers have the ability to build
and lead strong teams, maintain accurate data on all elements
of investment performance, and deliver against funding
commitments.
--Engaged oversight--Whether it at by Congress or OMB, agency or
component level CIOs, with GAO or IG reports, oversight is
vital. Oversight establishes demands for transparency and
accountability that are critical to proper stewardship of
government resources.
Significant Barrier:
--GAO has already published many reports on the impact of
unpredictable funding levels on the IRS. Congress should
consider that the success experienced in CADE2 is subject to
risk as already reported in the IRS 2015 Q1 IT Investment
Report.
Question. In 2014, GAO examined efforts in the Federal Government
to manage software licenses and offered several important findings and
recommendations. Department of the Treasury has an estimated IT Budget
of $3.7 billion for fiscal year 2015. The largest component of the
Treasury Department is the IRS, whose Inspector General reported in
2013 that the agency failed to centralize management of its software
licenses or to use proven best practices and technology to track,
manage, and optimize those licenses. In addition, the Department of the
Treasury has not established a Department-wide comprehensive process
for managing its software licenses. According to industry averages,
agencies that do not proactively implement software license management
and optimization best practices are likely overspending on software by
as much as 25 percent. The GAO offered six recommendations to improve
effective management of software licenses. Has the Department adopted
any of these recommendations? Please describe what efforts the
Department of Treasury has made to improve the software license
management practices.
Answer. GAO's findings primarily focus on the development of a
centralized ``system'' for storing, tracking and managing Treasury's
software license assets. In this vein, Treasury is continuing to work
with the Department of Homeland Security on the implementation of the
Continuous Diagnostics and Mitigation program. Once these capabilities
are implemented, Treasury will work with its constituent bureaus to
develop common procedures, policies and capabilities for auditing and
tracking software inventories. Treasury's Office of the CIO (OCIO) is
also currently working with Treasury's Office of Privacy, Transparency
and Records to revise Treasury Directive (TD 85-02) to establish a
policy for authorized software. Additionally, to assist with
consolidating requirements across the Treasury enterprise for multiple
types of commodity software, hardware and IT services, Treasury's OCIO,
in conjunction with the Senior Procurement Executive, launched an
Integrated Project Team (IPT). The IPT believes it can meet the intent
of the GAO recommendations through enterprise-wide strategic sourcing
and facilitating communication between key IT hardware and software
vendors and Treasury Bureaus/Offices. These steps alone will contribute
to Department-wide cost savings and/or cost avoidance by identifying
and eliminating the duplication of procurement and contract
administration activities for IT products and services.
______
Questions Submitted by Senator James Lankford
Question. In your testimony, you highlight the fact that our
deficit has fallen by almost 75 percent since its peak in the same
narrative as you tout our Nation's job creation and economic growth
data. Yet, you advocate for increased deficit spending in fiscal year
2016 over current law, stating that breaking the budget caps is vital
to our national and economic security. Moreover, the President's budget
calls for an additional $5.7 trillion in debt over the next decade--
despite proposing $2.1 trillion in tax increases.
Does the administration believe that reducing our annual deficits
is akin to strong job creation and economic growth or does reducing our
deficits damage our economy and threaten our long-term prosperity?
Answer. The administration believes that the effects of deficit
reduction on job creation and economic growth depend on several
factors, including: (1) how deficits are reduced, (2) whether the
reduction is seen as permanent or temporary, and (3) whether the
economy is near full employment.
There is widespread agreement among mainstream economists that the
countercyclical fiscal support put in place in the wake of the
financial crisis prevented the United States economy from experiencing
an even deeper recession than it did. Deficits have shrunk since then,
but imposing excessive fiscal austerity on the economy at this point
would require us to forgo investments that are needed to accelerate
growth and expand opportunity. The President's budget allows for such
investments while also putting the Nation on a sustainable fiscal path.
Question. The Congressional Budget Office (CBO) warned about the
impacts that excessive borrowing will have on the economy, noting that
``because Federal borrowing reduces national saving over time, the
Nation's capital stock would ultimately be smaller and productivity and
total wages would be lower than they would be if the debt was
smaller.''
Do you agree with the assessment that relatively higher Federal
borrowing levels ultimately reduces productivity and wages?
Answer. The deficit has fallen from $1.4 trillion in fiscal year
2009 to less than $500 billion in fiscal year 2014. Last year's deficit
represented 2.8 percent of GDP, a drop of 7.0 percentage points from
the fiscal year 2009 peak of 9.8 percent of GDP, as a result of both
explicit policy actions, including a ratio of spending cuts to new
revenues that is more than 2.5 to 1, and improvement to the economy
over the last 5 years. In addition to making progress on deficit
reduction, the administration has focused on targeted investments, such
as infrastructure, job training, and education, to support our
economy's recovery. As of June 2015, the economy has achieved 52
consecutive months of job growth and added 9.7 million private sector
jobs, the longest stretch of consecutive months of job growth since the
Bureau of Labor Statistics began collecting data in 1939.
Near full employment, increased borrowing can crowd out private
investment and reduce productivity and wages, depending on the relative
productive value of the private use of borrowing versus public use.
Accordingly, the administration's fiscal year 2016 budget proposals
would reduce the Federal deficit from fiscal year 2016-2025 by an
additional $1.2 trillion (0.5 percent of GDP), as estimated by the
Congressional Budget Office.
Question. Budgetary caps on discretionary spending are not going to
solve our Nation's long-term fiscal problems. However, it's important
to remember the original intent of the sequester caps in the Budget
Control Act was to force consensus to achieve structural fixes to our
Nation's budget problem. While the administration has previously
proposed to use chain CPI as a means to deal with some of the projected
growth in our Nation's entitlement programs, the fiscal year 2016
budget proposal does not propose any substantive entitlement reforms.
Is it the administration's view that our entitlement programs are
sustainable in long-term and are not in need of any changes?
Answer. The administration takes the financial sustainability of
our entitlement programs very seriously. That is one reason why the
administration remains committed to the Affordable Care Act. In 2009,
75-year projected unfunded obligations for Medicare and Social Security
totaled 5.6 percent of GDP. In 2014, that share was down to 3.9
percent, a 30 percent reduction, largely due to the Affordable Care
Act. While there remain long-run challenges to the financial
sustainability of our entitlement programs, we have made excellent
progress in this administration. We look forward to working with you
and others in going further.
Question. The budget requests a $1.5 billion allocation for the
State Small Business Credit Initiative (SSBCI). The SSBCI supports
``State capital access programs, collateral support programs, loan
participation programs, loan guarantee programs, and venture capital
programs.'' The Federal Government has an entire agency, the Small
Business Administration, dedicated to small business financial support,
including capital access and loan guarantees for small businesses.
Can you explain what is unique about the eligible activities of
Treasury's SSBCI that are not adequately handled by programs
administered by the SBA? What advantages does the SSBCI have over SBA
capital access and loan guarantee programs?
Answer. SBA loan guarantee programs and the Small Business
Investment Company (SBIC) program are typically administered federally
and directly through financial intermediaries with little to no
interaction with State or local governments. By contrast, SSBCI was
designed with flexibility for State and local governments to fund
programs that best target local small business needs. These programs
take a wide variety of forms and are typically designed to be
complementary to SBA programs rather than redundant. This is because
SSBCI also provides States incentives to deploy funding in support of
small business financing expeditiously and efficiently \3\ meaning
States also have an incentive to design programs that do not compete
with SBA programs for small businesses seeking credit.
---------------------------------------------------------------------------
\3\ SSBCI funds are disbursed in three increments and Participating
States must expend, obligate, or transfer at least 80 percent of a
disbursement before qualifying for the next disbursement. In addition,
this must be completed within the 7-year program authorization.
---------------------------------------------------------------------------
State credit support programs have been active in their various
forms for decades, co-exiting with SBA programs, but have struggled to
maintain funding through State fiscal cycles. Extending SSBCI would
give these programs a consistent source of funds and local leaders
would have the resources they need to support economic development in
their communities. Below are some of the ways State credit support
programs complement SBA:
--The ability to support loans to non-profits. Non-profit
organizations provide crucial human services and create jobs.
However they often face challenges securing financing because,
by definition, they tend not to build strong balance sheets
through retained earnings. SSBCI allows States to enroll loans
to non-profits in credit support programs. For example:
--The New Mexico Finance Authority (NMFA) provided a $241,000
subordinate loan participation enabling a bank to extend a
$1.6 million loan to purchase and renovate the new Greater
Albuquerque Habitat for Humanity headquarters and Habitat
Restore.\4\
---------------------------------------------------------------------------
\4\ SSBCI Quarterly Report as of September 30, 2014.
---------------------------------------------------------------------------
--The Virginia Small Business Financing Authority used its Cash
Collateral Program to support a loan to It's About Time, a
social service provider for individuals with intellectual
disabilities. As a result of the transaction, the
organization upgraded and doubled the size of its facility.
The company employs 76 people and will add 18 to 20 jobs as
a result of the expansion.\5\
---------------------------------------------------------------------------
\5\ SSBCI Quarterly Report as of December 31, 2014
--Many small banks don't participate in SBA programs. Some small
banks do not do a high enough volume of loans to justify the
administrative cost of managing an SBA lending operation. State
credit support programs offer an alternative to community banks
that would like to be able to support underserved borrowers.
--Capital Access Programs (CAPs) effectively support small dollar
loans. CAPs provide a loss reserve on a portfolio of loans at
each participating lending institution. The State matches
contributions to the loss reserve by the borrower and the bank.
While SBA does have other programs targeting small dollar
transactions, it does not operate CAPs as defined in the Small
Business Jobs Act of 2010. Through 2014, approximately 90
percent of all SSBCI CAP loans were for less than $100,000 and
many were as low as a few thousand dollars.
--All banks, credit unions, and Community Development Financial
Institutions (CDFIs) are eligible to enroll loans in SSBCI
programs subject to review by the States. The flexibility to
support CDFI loans allows SSBCI to reach businesses in
underserved communities. Approximately 41 percent of all
transactions supported by SSBCI since 2011 have been to
businesses located in low- or moderate-income communities.
States also use SSBCI funds to support investment in small
businesses. The State-sponsored investment programs funded by SSBCI are
different in kind from the SBA's SBIC program in that they generally
target earlier stage businesses with equity investment or flexible debt
instruments. The SBIC program requires current interest payments
limiting small businesses recipients to companies mature enough to
service debt. A more patient source of capital is necessary to launch
and grown new businesses.
Oklahoma directed its entire SSBCI allocation to an investment
program administered by i2E, a private, non-profit corporation that
helps entrepreneurs, companies, inventors and researchers turn their
innovations into high growth business opportunities for Oklahoma. For
example, using SSBCI funds, i2E invested in Oklahoma City-based Selexys
Pharmaceuticals, which is developing a treatment for Sickle Cell
Disease, and WeGoLook, also based in Oklahoma City, that provides site
inspection services. i2E's investments in these companies were
catalytic given the scarcity of co-investment partners in Oklahoma.
Thirty-seven other States directed some portion of their SSBCI
program to programs supporting high-growth potential early-stage
companies. State economic developers see these programs as part of a
long-term strategy to retain talent and technology in State and grow
local businesses with the potential to create high-wage jobs.
In these ways, SSBCI can also be seen as creating a State-led
laboratory for the development of and improvement of small business
finance support. The SBA programs work very well for a large population
of business borrowers, but States are experimenting with ways to reach
businesses outside of the SBA universe. Extending SSBCI will build on
the momentum of the program's first round of funding and strengthen the
Federal Government's relationships with State economic development
agencies which are highly responsive to capital needs in local markets.
Question. The fiscal year 2016 budget request for Community
Development Financial Institutions (CDFIs) is $233.5 million. Part of
the CDFI's responsibility is to receive and dole out the allocations
provided under the New Markets Tax Credit (NMTC) program. The NMTC is
supposed to ``encourage investors to make investments in impoverished,
low-income communities that traditionally lack access to capital.''
However, according to the Congressional Research Service (CRS), ``as a
result of the definition of qualified LICs, virtually all of the
country's census tracts are potentially eligible for the NMTC.''
Moreover, there have been numerous examples of NMTC financing for
frivolous projects outside of low-income census tracks, including the
expansion of the world's largest aquarium in Atlanta.
--Is the New Markets Tax Credit program appropriately tailored to
meet its purpose of serving impoverished communities, despite
the fact that ``virtually all of the country's census tracts
are potentially eligible'' for the credit?
--Is subsidizing the expansion of an aquarium in Atlanta an
appropriate use of NMTC resources?
Answer. Nationally, 40.8 percent of all 74,000 census tracts are
eligible for the NMTC Program. The New Markets Tax Credit Program
requires that all investment be made in low-income census tracts. To
qualify for the program, a community must have a poverty rate of at
least 20 percent or median family income of 80 percent or less.
Further, the NMTC Program gives competitive preference for transactions
located in highly distressed communities, defined as a poverty rate of
30 percent or greater; median income of 60 percent or less; or an
unemployment rate of 1.5 times the national average. Seventy-five
percent of NMTC transactions are located in highly distressed census
tracts.
The Atlanta Aquarium is located in a census tract with a poverty
rate of 46.6 percent based on the U.S. Census' 2006-2010 American
Community Survey 5-year estimates, qualifying it as a highly distressed
census tract. In addition, this project brought revitalization to the
community by creating 756 jobs, of which 473 are permanent, including
many entry-level positions, among other benefits.
Museums comprise a small percentage of the overall NMTC portfolio--
less than 5 percent. But the profile of the community--high poverty
rates and severe economic distress--is precisely what the NMTC was
intended to target. Museums and cultural amenities are often a small
but very important part of a comprehensive revitalization plan for many
urban and rural communities. In addition to the jobs, investment, and
foot traffic they bring to local small businesses, these organizations'
programming, education, and outreach efforts deliver intangible
benefits to the surrounding low income community.
______
Questions Submitted by Senator Richard J. Durbin
Question. I applaud the action taken by the administration last
September to reduce the economic benefits associated with corporate
inversions by issuing temporary regulations under Section 7874 of the
Internal Revenue Code.
Is Treasury considering additional rules changes that would
eliminate incentives for corporations to avoid paying U.S. taxes by
inverting? Specifically, would Treasury consider rules to prevent
abusive earnings stripping practices, perhaps using authority under
Section 385 of the Internal Revenue Code? Does Treasury have authority
to prevent corporations from structuring an inversion in a way to
shield shareholders from gain recognition, as is reportedly being done
in the Burger King-Tim Horton's merger?
Answer. The Treasury Department and the IRS expect to issue
additional guidance to further limit inversion transactions that are
contrary to the purposes of section 7874 and the benefits of post-
inversion tax avoidance transactions. In particular, the Treasury
Department and the IRS are considering guidance to address strategies
that avoid U.S. tax on U.S. operations by shifting or ``stripping''
U.S.-source earnings to lower-tax jurisdictions, including through
intercompany debt and have requested comments on this topic.
Moreover, Treasury is aware that certain structures are being used
to shield shareholders from gain recognition in the context of
inversion transactions. We addressed certain structures in Notice 2014-
52, as well as earlier in 2014 in Notice 2014-32 (which, among other
things, limited the ability of shareholders to avoid gain through the
use of so-called Killer B structures). We continue to consider what
additional steps we may take.
However, there are limits to what Treasury can do without
legislative action by Congress. As we have consistently said, business
tax reform that contains specific anti-inversion legislation is the
most effective way to fully address these transactions.
Question. A government-wide ban on inverted corporations receiving
Government contracts has been included in appropriations bills since
2008, preventing a company from profiting from doing business with the
Government while avoiding paying U.S. taxes by inverting. However, a
Bloomberg article from July 8, 2014, ``Tax Runaways Win Billions in
U.S. Contracts Despite Bans,'' outlines several cases where inverted
companies continue to receive Government contracts.
How can Treasury and the IRS better work with other Federal
agencies to ensure companies that have inverted do not receive Federal
Government contracts?
Answer. The President's fiscal year 2016 budget proposal contains a
proposal, ``Limit the Ability of Domestic Entities to Expatriate,''
that would (among other things) provide the Internal Revenue Service
with authority to share tax return information with Federal agencies
for the purpose of administering an agency's anti-inversion rules.
Federal agencies receiving this information would be subject to the
safeguarding and recordkeeping requirements under section 6103.
Unfortunately, information sharing alone will not fully address the
problem. This is because the anti-inversion statutes applicable to
other agencies in administering contract prohibitions generally are not
same as the anti-inversion provision included in the Internal Revenue
Code (section 7874). Furthermore, the regulations and guidance issued
by the Treasury under section 7874 (for example, Notice 2014-52)
generally are not applicable for purposes of applying other anti-
inversion statutes. Improvements in this area result if consideration
would be given to defining an inversion transaction by reference to
section 7874 of the Internal Revenue Code in drafting future
legislation related to banning Government contracts for inverted
companies.
______
Questions Submitted to Hon. John Koskinen
Questions Submitted by Senator John Boozman
information technology security
Question. The IRS is responsible for safeguarding a vast amount of
sensitive financial and personal data, processing returns that contain
confidential information for over 100 million taxpayers. The agency
needs to protect taxpayer information from misuse, improper disclosure,
or destruction. This responsibility is even more complex given the vast
amount of date being sent and exchanged as part of the Affordable Care
Act.
TIGTA has consistently ranked protection of taxpayer data as one of
the highest priority challenges facing the IRS. In addition, GAO noted
that although the IRS is making progress in addressing information
security, weaknesses remain that could affect the confidentiality,
integrity, and availability of financial and sensitive taxpayer data.
TIGTA's fiscal year 2014 Federal Information Security Management
Act report identified four security program areas which were not fully
effective due to one or more Department of Homeland Security (DHS)
guideline program attributes that were not met. The TIGTA noted that
the IRS had not yet implemented its Information Security Continuous
Monitoring strategy, and that the IRS did not always report incidents
involving Personally Identifiable Information to the U.S. Computer
Emergency Response Team (US-CERT) within established timeframes. The
report also noted that the IRS had not yet fully implemented a process
for identifying and tracking contractors who are required to complete
specialized training, and had not fully implemented unique user
identification and authentication that complies with Homeland Security
Presidential Directive-12 (HSPD-12).
In that report, the TIGTA noted that until the IRS takes steps to
improve its security program deficiencies and fully implements all 11
security program areas required by the FISMA, taxpayer data will remain
vulnerable to inappropriate use, modification, or disclosure, possibly
without being detected.
Would you please update the subcommittee with specific information
on the status of the IRS' progress on addressing these deficiencies?
Answer. The security and privacy of taxpayer information and the
integrity of the IRS's systems continues to be sound, and the IRS
remains committed to the ongoing programs to manage the security risks
in the IT infrastructure as required by the Federal Information
Security Management Act, National Institute of Standards and Technology
guidance, and other appropriate standards. The IRS continues to improve
its Cybersecurity Program focusing on managing information security
risk on a continuous basis; monitoring the security controls in IRS
information systems and the environments in which those systems operate
on an ongoing basis; and maintaining ongoing awareness of information
security.
As responses to the TIGTA audits mentioned above, the following
actions are occurring as resources allow:
--The Department of the Treasury (Treasury) recently published the
Enterprise level approach for Information Security Continuous
Monitoring (ISCM) in February 2015 to ensure standardization
across the Bureaus. The IRS is currently aligning its practices
and methodologies to enable ongoing authorizations to improve
the IRS's security posture through informed risk management
decisionmaking.
--The IRS understands the importance of timely reaction, including
reporting to Treasury/US-CERT, and makes every effort to report
expeditiously. The IRS implemented enhancements to its incident
reporting system interface during late 2014. These enhancements
streamlined the process by which IRS employees report both IT
and paper-based inadvertent disclosures and allows for an
accelerated processing of received incidents within the
Incident Response program. Combined with ongoing Service-wide
training on data protection and employee reporting
responsibilities, these enhancements will ensure continued
timeliness, compliant with OMB standards for incident
reporting, response, and notification.
--The IRS has updated its contractual obligations to ensure the
requirement for completing specialized training is documented
in all IT contracts and is in the process of developing the
ability to track contractors completing specialized security
training. The IRS anticipates maturing the tracking and
accountability progress during the summer of 2015.
--While progress has been hampered by declining budget, the IRS
continues in its efforts to comply with HSPD-12. Currently
62.64 percent of IRS's employees are using the HSPD-12 smart
card for network and remote access. The IRS expects to have
largely completed its efforts to comply with this portion of
HSPD 12 by the end of fiscal year 2015.
prisoner fraud
Question. In the past TIGTA has identified refund fraud committed
by prisoners as a significant problem for tax administration. Just last
fall a report noted that refund fraud associated with prisoner Social
Security Numbers remains a serious problem. The number of fraudulent
tax returns filed using a prisoner's Social Security Number that were
identified by the IRS increased from more than 37,000 tax returns in
calendar year 2007 to more than 137,000 tax returns in calendar year
2012. The refunds claimed on these tax returns increased from $166
million to $1 billion.
According to TIGTA, Treasury has the authority to share information
with the Federal Bureau of Prisons and State Departments of Corrections
to help determine if prisoners may have filed or help the filing of a
fraudulent return.
Has the IRS shared fraudulent prisoner tax return information with
Federal or State prison officials?
Answer. The Internal Revenue Code (IRC) 6116 requires the Bureau of
Prisons (BOP) and Departments of Corrections (DOCs) to provide the IRS
with certain information about all incarcerated individuals on an
annual basis. Under section 6116, the IRS receives information from the
BOP, all 50 States, and the District of Columbia. With this data, the
IRS builds a ``prisoner file'' which is the cornerstone of our efforts
to prevent the issuance of fraudulent refunds to individuals filing
false tax returns using prisoner Social Security Numbers (SSNs). The
IRS processing systems use this prisoner file to identify returns filed
under prisoner SSNs and to identify potential fraud and other
compliance issues that may arise when an individual is incarcerated.
The IRS continues to use this data and work with the corrections
agencies to improve the quality and reliability of the data they
provide to us each year.
The IRS continues to work with the BOP and the Departments of
Corrections (DOCs) to secure Memoranda of Understanding (MOU) to
authorize the IRS to disclose prisoner tax return information under IRC
6103(k)(10). This information would allow Federal and State prison
officials to take actions against prisoners who commit refund fraud.
As of March 23, 2015, the IRS has completed MOUs with 7 State
correctional authorities (Mississippi, South Carolina, Illinois,
Vermont, North Dakota, Colorado, and Wyoming); 13 State DOCs have
declined to participate. We continue to work the issues and concerns of
the remaining State agencies and the BOP. The IRS remains committed to
addressing agencies' concerns related to enrolling in this program so
they may begin receiving inmate tax return information from the IRS.
In addition, we are working with the Social Security Administration
(SSA) to allow the IRS access to the SSA database of prisoners under
authority provided in the Bipartisan Budget Act of 2013. The SSA
receives prisoner information directly from a number of correction
agencies, including local jails. But until December 2013, the SSA did
not have the authority to share the data with the IRS for tax
administration purposes. This information from the SSA could
significantly expand the number of records in the IRS prisoner file.
The IRS continues to inform the Federal and State prison officials
about the ``Blue Bag'' program, an important IRS program aimed at
detecting prisoner tax fraud. Through the Blue Bag program, prisons
send prisoner tax forms, correspondence, and other tax-related
documents to a special IRS address for additional review. IRS analysts
review the prisoner tax returns and correspondence to take appropriate
actions.
Question. Please provide the subcommittee with the most recent
annual prisoner fraud report to Congress.
Answer. The Calendar Year (CY) 2012 and 2013 reports are attached.
[Clerk's note: The Calendar Year 2012 and 2013 reports are included
as an appendix at the end of the hearing transcript.]
Question. Has the Commissioner, Wage and Investment Division,
established a Memoranda of Understanding with the Federal Bureau of
Prisons and all State Departments of Corrections?
Answer. The IRS receives data from the BOP and State DOCs. This
data allows the IRS to detect fraudulent returns filed with prisoner
SSNs. The IRS continues to work with the BOP and DOCs to establish a
Memorandum of Understanding (MOU) to authorize the IRS to disclose
prisoner tax return information under IRC 6103 (k)(10). This
information would allow Federal and state prison officials to take
action against prisoners who commit refund fraud.
As of March 23, 2015, the IRS has completed MOUs with seven state
correctional authorities (Mississippi, South Carolina, Illinois,
Vermont, North Dakota, Colorado, and Wyoming); 13 State DOCs have
declined to participate. We continue to work the issues and concerns of
the remaining State agencies and the BOP. The IRS remains committed to
addressing agencies' concerns related to enrolling in this program so
they may begin receiving inmate tax return information from the IRS.
Question. Has the IRS developed processes to identify tax returns
filed that have the same characteristics of confirmed fraudulent
prisoner tax returns? If no why not?
Answer. The IRS has developed a methodology to identify returns
filed with prisoner SSNs that meet certain characteristics. In
addition, we are able to prevent prisoner fraud by identifying claims
for refunds filed using a prisoner's SSN. These returns receive
increased scrutiny.
Question. Has the IRS determined whether these tax returns should
be included in the annual report to Congress?
Answer. Yes, we report all known false and fraudulent returns filed
under the SSN of a prisoner in the annual report to Congress.
Question. Has the IRS ensured that all tax returns that are filed
using a prisoner Social Security Number are assigned a prisoner
indicator?
Answer. A prison indicator is assigned on returns filed under SSNs
of prisoners that meet our Electronic Fraud Detection System (EFDS)
data mining rule and are requesting a refund. We monitor this indicator
as part of our internal management system.
The fraud filters identify tax returns claiming refunds and select
returns in which the primary (primary and/or secondary on a joint
return) Social Security Number matches the annual prisoner file.
Returns with prisoner SSNs are reviewed by IRS tax examiners to verify
the income and withholding amounts reported on a return, and the
refundable credits claimed on the return. If items cannot be verified,
the refund claim is denied.
As a result:
--The number of fraudulent tax returns filed using a prisoner's SSN
(identified by the IRS) decreased from over 137,000 tax returns
in calendar year (CY) 2012 to less than 56,000 tax returns in
CY 2014 (preliminary findings);
--Refunds claimed on these tax returns increased from $1 billion in
CY 2012 to $1.8 billion in CY 2014 (preliminary findings);
--IRS stopped $1.8 billion in fraudulent refunds in CY 2014, up from
$936 million in CY 2012 (preliminary findings).
Question. Has the IRS identified and addressed the cause of the
cases TIGTA found that were not identified with a prisoner indicator?
Answer. We have made programing changes for filing season 2015.
These tax returns are now sent through the filters specific to the
prisoner filed tax returns, and receive one of the prisoner indicators.
Question. According to the TIGTA, a computer programming error
resulted in the IRS not assigning a prisoner indicator to 3,139 tax
returns TIGTA identified. Without the proper assignment of a prisoner
indicator, the tax returns are not sent through those fraud detection
filters specific to a prisoner-filed tax return.
Has the IRS corrected this error?
Answer. Please see the previous response.
performance awards
Question. This year, you made the decision to spend almost $67
million in fiscal year 2015 funds to pay out performance awards to
employees, managers and executives for fiscal year 2014. The previous
commissioner had made the decision to suspend awards because of funding
pressures and the need to fund more critical priorities.
Previously you have stated ``Some may ask if the award money would
be better spent in other ways. Following my visits with employees in
recent weeks, I believe the answer is clear: This money is best spent
on our existing employees.'' Would you please explain why these awards
took priority over funding other mission critical activity, such as
taxpayer services?
Answer. The IRS senior leadership uses a deliberate decisionmaking
process to determine priorities based on a variety of factors,
including whether it is statutorily mandated or discretionary. The
Service then allocates available appropriated resources against those
requirements. We then determine the unfunded mission critical
requirements and identify what additional resources are available from
other sources, such as user fees or reimbursable services, and allocate
those resources against the Servicewide requirement.
As part of our ongoing investment in our workforce, the IRS will
continue to recognize qualifying employees who do exceptional work. It
is also important to point out that the IRS recently achieved
significant cost savings in this area. As a result of negotiations with
the National Treasury Employees Union (NTEU) concluded last year, the
overall pool for awards was reduced to about 1 percent of the employee
salary base, which is about $42 million less than the 1.75 percent
provided in previous years.
The IRS has a contractual obligation with the Union to pay awards,
and in the interest of fairness, applied the same treatment to its non-
Union employees. Beyond our contractual obligations, one of the
agency's highest priorities is its people. Rewarding high-performing
employees is a vital investment for the Nation's tax system and the
IRS. Since fiscal year 2010, the IRS has 13,000 fewer employees, but is
still processing tax returns and refunds during the filing season and
running a tax system with new mandates, all the while ensuring the
Nation collects nearly $3 trillion in revenue to fund everything from
defense to social programs. Performance awards are a good investment
that pays off--and they reflect the hard work the staff does on a daily
basis for the Nation.
awards to employees with misconduct
Question. Previously TIGTA did a review of IRS performance
awards.That review found that more than 2,800 employees with recent
substantiated conduct issues resulting in disciplinary action received
more than $2.8 million in monetary awards, more than 27,000 hours in
time-off awards, and 175 quality step increases. Among these, more than
1,100 IRS employees with Federal tax compliance problems received more
than $1 million in cash awards, more than 10,000 hours in time-off
awards, and 69 quality step increases within a year after the IRS
substantiated their tax compliance problem.
According to the review, with few exceptions, the IRS does not
consider tax compliance or other misconduct when issuing performance
awards or most other types of awards. The IRS code makes mandatory the
removal of IRS employees who are found to have intentionally committed
certain acts of misconduct, including willful failure to pay Federal
taxes. According to TIGTA, providing awards to employees with conduct
issues, especially those who fail to pay Federal taxes, appears to be
in conflict with the law.
Given the serious need to restore the credibility of the IRS, does
management consider conduct issues resulting in disciplinary actions,
especially the nonpayment of taxes, before giving out all types of
awards?
Answer. Effective for the 2014 performance awards the IRS
implemented measures to ensure that any IRS employee who violates
Section 1203(b) of the IRS Restructuring and Reform Act of 1998 is
ineligible to receive a performance award. Section 1203(b) addresses
certain employee misconduct, including the willful failure to file
taxes, the understatement of Federal tax liability, and threatening
taxpayers.
No IRS employee will be eligible for a discretionary or performance
award (including bilingual awards and discretionary pay adjustments,
such as Quality Step Increases (QSIs), and manager performance-based
increases), if a final agency decision is made that the employee
violated Section 1203(b). The ineligibility determination will apply to
the fiscal year in which the final agency decision is made. In
addition, employees who are suspended for more than 14 days as a result
of any misconduct are ineligible for QSI's. When deciding whether to
deny a performance award to a bargaining unit employee, who is
otherwise eligible, the IRS must adhere to the terms of the 2012
National Agreement II between the IRS and the National Treasury
Employees Union.
Question. Did any of the awards recently paid out go to employees
with conduct issues or unpaid taxes?
Answer. As stated above, employees found in violation of Section
1203(b) were ineligible for 2014 performance awards, which the IRS paid
on March 19, 2015.
Question. Did any of the awards go out to employees subject to
ongoing investigations relating to the targeting of taxpayers?
Answer. To the IRS's knowledge, four congressional committees,
TIGTA and the Department of Justice have been involved in
investigations concerning alleged targeting of taxpayers. Thus far,
none of these investigating committees or agencies has identified to
the IRS specific current employees who are subjects or targets of any
pending investigations.
If you have questions about specific individuals, you can contact
the IRS, or have your staff contact the IRS. However, please note the
Privacy Act (5 U.S.C. Section 552a) precludes the IRS from responding
to questions about particular employees in a public setting or
communication.
Question. Would you tell us whether employees have actually been
removed because of misconduct?
Answer. Employees may be removed for reasons other than misconduct,
however, between October 1, 2012, and March 20, 2015, a total of 854
employees were removed because of various types of misconduct either
during or after their probationary periods.
------------------------------------------------------------------------
Number of Employees
Fiscal Year Removed
------------------------------------------------------------------------
2012.......................................... 302
2013.......................................... 248
2014.......................................... 245
2015*......................................... 59
-------------------------
Total................................... 854
------------------------------------------------------------------------
* Total removed between Oct. 1, 2014, and March 20, 2015.
Question. Would discriminating against a taxpayer be considered
misconduct?
Answer. Discriminating against a taxpayer is misconduct and a
violation of Section 1203(b). An employee can be removed after a final
administrative or judicial determination of a violation of this
statute.
Section 1203(b) specifically covers discrimination-related acts or
omissions, such as:
--Violating a taxpayer's or taxpayer's representative's:
--(A) Rights under the U.S. Constitution, or
--(B) Civil right established under:
-- (i) Title VI or VII of the Civil Rights Act of 1964;
-- (ii) Title IX of the Education Amendments of 1972;
-- (iii) the Age Discrimination in Employment Act of 1967;
-- (iv) the Age Discrimination Act of 1975;
-- (v) Section 501 and 504 of the Rehabilitation Act of 1973; or,
-- (vi) Title I of the Americans with Disabilities Act of 1990;
--Falsifying or destroying documents to conceal mistakes made by an
IRS employee with regard to a matter involving a taxpayer or
taxpayer representative;
--Violating the Internal Revenue Code of 1986, Treasury regulations
or policies of the Internal Revenue Service, including Internal
Revenue Manual, for the purpose of retaliating against, or
harassing, a taxpayer or taxpayer's representative; and
--Threatening to audit a taxpayer for purpose of extracting personal
gain or benefit.
hiring employees with past misconduct
Question. A TIGTA report issued in December of last year found that
between January 2010 and September 2013, IRS records show that the IRS
hired more than 7,000 former employees (78 percent were temporary or
seasonal positions).
It is troubling to learn that in this process the IRS rehired
hundreds of former employees with performance or conduct issues
including willful failure to file their Federal tax returns,
unauthorized access to taxpayer information, leave abuse, falsification
of official forms, unacceptable performance, misuse of IRS property,
and off-duty misconduct. The report also found that many employees
hired with prior substantiated or unresolved conduct or performance
issues had new conduct or performance issues.
I understand that IRS wanted to consult with Legal Service to
determine if consideration of prior conduct and performance issues
violates Federal regulations.
Doesn't common sense tell you that the IRS should consider a
potential employee's previous track record with the agency before
hiring them again?
Answer. Yes; therefore, the IRS considers prior conduct and
performance issues before rehiring a former employee, and believes it
has sufficient legal basis to do so at any time during the hiring
process.
erroneous tax forms for healthcare.gov users
Question. According to a disclosure from the Centers for Medicare
and Medicaid services on February 20, the IRS provided erroneous tax
information to 800,000 Americans who enrolled in insurance policies
through Healthcare.gov.
This is yet another example of the administration's failed
implementation of the healthcare law and the confusion and frustrations
countless Americans have experienced. These latest problems could be
particularly painful for low-income families who were counting on
receiving a tax refund and must now wait weeks before filing their
taxes.
When did the IRS first discover that these forms had been
incorrectly issued? And when did you personally learn there was a
problem?
Answer. As CMS is the provider of these forms, any questions you
have concerning how and where the error occurred, the timing of the
error, which consumers were affected, and the extent to which they were
affected should be directed to CMS. On February 8th, CMS alerted IRS
staff there was an issue with the second lowest cost Silver plan
(SLCSP) contained on some Forms 1095-A that CMS provided to consumers
and IRS staff alerted the Commissioner the following day. It was not
until the afternoon of February 17th that CMS informed the IRS of the
known magnitude of the issue, i.e. that over 800,000 Forms 1095-A were
affected.
erroneous tax forms
Question. Last week, the IRS announced that it would not pursue
collection of additional taxes from any of the 50,000 taxpayers who
already filed their taxes using the incorrect forms. IRS officials
stated some of the mistakes favor the Government and some favor the
taxpayer, making it basically a wash.
What authority do you have to suspend enforcement? And what is the
citation in the Internal Revenue Code upon which you are relying to
suspend enforcement in this situation?
Answer. The Secretary and the Commissioner have the authority under
several sections of the Internal Revenue Code, including but not
limited to sections 6404 and 7803, not to pursue the collection of
unpaid taxes in certain circumstances, such as when the administration
and collection costs involved would not warrant collection of the
amounts due.
Question. Would overpayment or underpayment this year affect their
returns for next year?
Answer. No. The amount of tax reported for 2014 will not affect the
amount of tax for 2015.
Question. How many IRS employees are working to address these
errors and what will be the total cost to the IRS to resolve this
situation?
Answer. As the provider of these forms, any questions you have
concerning the cost to provide corrected forms should be directed to
CMS. The IRS accepts roughly billions of information returns every year
and is very accustomed to receiving corrected information returns in
the normal course of operations.
Question. California recently announced it sent incorrect tax forms
to 100,000 households that received Federal premium subsidies on its
State exchange.
Is the IRS planning to allow California residents who underpaid
Federal taxes to be off the hook?
Answer. On March, 20, 2015, Treasury announced relief for tax
filers who enrolled through a State-based Marketplace. That relief was
similar to the relief it had announced for individuals who enrolled in
federally facilitated Marketplace qualifying coverage, received an
incorrect Form 1095-A, and filed his or her tax return based on that
form.
aca costs
Question. According to GAO, from 2010 to 2014, the IRS has already
spent $1.1 billion on implementation of the Affordable Care Act. Your
fiscal year 2015 budget requested $451 million for ACA and you've
requested another $490 million in fiscal year 2016, to be supplemented
with user fees and other resources. The passage of the ACA has had a
significant impact on the IRS.
Does the IRS have a comprehensive multi-year strategic plan for
implementing its significant responsibilities under the Affordable Care
Act?
Answer. The IRS's 2014-2017 Strategic Plan (http://www.irs.gov/pub/
irs-pdf/p3744.pdf) provides for the implementation of the tax
provisions of the ACA in a timely and straightforward manner, including
significant IT development and systems modifications. Different tax
provisions of the ACA are administered by different Business Operating
Divisions at the IRS. For example, the insurance provider fee under
section 9010 of the ACA is administered by the Large Business and
International Division, while the premium tax credit is administered by
the Wage and Investment Division. These divisions have already
implemented most of the nearly 50 tax provisions of the ACA. The 2014
Internal Revenue Service Data Book (http://www.irs.gov/pub/irs-soi/
14databk.pdf, pages 71-72) contains a summary of the provisions
implemented through 2014. The schedule of the significant remaining
provisions to be implemented is as follows:
--2015.--Accept and validate new voluntary ACA Information Returns
(employer and provider reporting) (IRC sections 6055 and 6056);
--2016.--Expand intake and validation for paper and electronic
submissions of mandatory ACA Information Returns (employer and
provider reporting) (IRC sections 6055 and 6056);
--2016.--Enforcement of employer shared responsibility provision (IRC
section 4980H); and
--2018.--Implementation of Excise Tax on High-Cost Health Plans (IRC
section 4980I).
Question. Will you provide the subcommittee with a copy of that
plan including expected milestones and a detailed breakdown of the
source of these funds that will be used to implement the plan, how
funds have been spent so far, and an estimate of on-going costs of the
implementation?
Answer. Please see the previous response for links to the IRS's
Strategic Plan. Below is a table showing amounts spent to date on each
provision, as well as the projected funding for fiscal year 2015 and
request for fiscal year 2016.
ACA ACTUALS BY FUNCTION
FISCAL YEAR 2010-FISCAL YEAR 2012
----------------------------------------------------------------------------------------------------------------
Taxpayer Services Enforcement Operations Support Total
---------------------------------------------------------------------------------
$000 FTE $000 FTE $000 FTE $000 FTE
----------------------------------------------------------------------------------------------------------------
Fiscal Year 2010:
Administer New Fees on ........ ........ 345 1 ......... ........ 345 1
Drug Manufacturers and
Health Insurers..........
Strengthen Oversight of 5 ........ 407 3 2 ........ 414 3
Exempt Hospitals.........
Promoting Compliance with 130 1 674 4 22 ........ 826 5
Other New Provisions.....
Program Management........ ........ ........ ........ ........ 122 ........ 122 0
Support of Implementation 4 ........ 2,356 14 ......... ........ 2,360 14
& Taxpayer Issues (e.g.
Counsel, Appeals)........
Customer Service Support 1,209 9 61 1 29 ........ 1,299 10
(Outreach, Phones & Other
Support).................
Information Technology, ........ ........ ........ ........ 15,340 ........ 15,340 0
Operations & Support &
Infrastructure/Deliver
New Tax Credits &
Individual Coverage
Requirement..............
---------------------------------------------------------------------------------
Fiscal Year 2010 Total $1,348 10 $3,843 23 $15,515 0 $20,706 33
Fiscal Year 2011:
Administer New Fees on 0 ........ 667 4 ......... ........ 667 4
Drug Manufacturers and
Health Insurers..........
Strengthen Oversight of 39 ........ 4,476 39 10 ........ 4,525 39
Exempt Hospitals.........
Promoting Compliance with 373 ........ 11,160 89 109 1 11,642 90
Other New Provisions.....
Program Management........ 0 ........ 35 1 8,331 41 8,366 42
Support of Implementation 96 1 4,913 30 ......... ........ 5,009 31
& Taxpayer Issues (e.g.
Counsel, Appeals)........
Customer Service Support 3,359 42 2,563 34 97 1 6,019 77
(Outreach, Phones & Other
Support).................
Information Technology, 0 ........ 0 ........ 131,928 294 131,928 294
Operations & Support &
Infrastructure/Deliver
New Tax Credits &
Individual Coverage
Requirement..............
---------------------------------------------------------------------------------
Fiscal Year 2011 Total $3,867 43 $23,814 197 $140,475 337 $168,156 577
Fiscal Year 2012:
Administer New Fees on ........ ........ 1,136 8 ......... ........ 1,136 8
Drug Manufacturers and
Health Insurers..........
Strengthen Oversight of 168 1 3,859 34 2 ........ 4,029 35
Exempt Hospitals.........
Promoting Compliance with 258 2 8,035 65 ......... ........ 8,293 67
Other New Provisions.....
Program Management........ 6 ........ 105 0 17,798 49 17,909 49
Support of Implementation 16 ........ 5,158 37 ......... ........ 5,174 37
& Taxpayer Issues (e.g.
Counsel, Appeals)........
Customer Service Support 2,291 32 2,354 32 66 ........ 4,711 64
(Outreach, Phones & Other
Support).................
Information Technology, ........ ........ ........ ........ 257,961 407 257,961 407
Operations & Support &
Infrastructure/Deliver
New Tax Credits &
Individual Coverage
Requirement..............
---------------------------------------------------------------------------------
Fiscal Year 2012 Total $2,739 35 $20,647 176 $275,827 456 $299,213 667
=================================================================================
Total Fiscal Year 2010-2012... $7,954 88 $48,304 396 $431,817 793 $488,075 1,277
----------------------------------------------------------------------------------------------------------------
ACA ACTUALS BY ACCOUNT
FISCAL YEAR 2013 AND FISCAL YEAR 2014 WITH FISCAL YEAR 2015 PROJECTION
----------------------------------------------------------------------------------------------------------------
Taxpayer Services Enforcement Operations Support Total
----------------------------------------------------------------------------------
$000 FTE $000 FTE $000 FTE $000 FTE
----------------------------------------------------------------------------------------------------------------
Fiscal Year 2013:
Administer New Fees on ......... ........ 1,509 10 ......... ........ 1,509 10
Drug Manufacturers and
Health lnsurers.........
Promoting Compliance With 211 1 9,036 71 112 1 9,359 73
Other New Provisions....
Strengthen Oversight of 34 ........ 3,464 30 29 ........ 3,527 30
Exempt Hospitals........
Administer Adoption ......... ........ 241 3 ......... ........ 241 3
Credit..................
Support of lmplementation 46 ........ 5,020 32 ......... ........ 5,066 32
& Taxpayer Issues
(Counsel, Appeals & TAS)
Applications Development/ ......... ........ ........ ........ 248,694 446 248,694 446
Systems Software
Contracts Systems
Testing & Delivery......
Program Management, 225 2 38 ........ 11,556 58 11,819 60
Business Design and
Specifications and
Oversight of Data
Sharing of Federal Tax
Information.............
Customer Service Assist 3,752 47 ........ ........ ......... ........ 3,752 47
Taxpayers...............
----------------------------------------------------------------------------------
Fiscal Year 2013 $4,268 50 $19,308 146 $260,391 505 $283,967 701
Total...............
Fiscal Year 2014:
Administer New Fees on ......... ........ 2,133 14 ......... ........ 2,133 14
Drug Manufacturers and
Health lnsurers.........
Promoting Compliance With 396 2 6,581 46 194 1 7,171 49
Other New Provisions....
Strengthen Oversight of 3 1 2,829 25 25 0 2,857 26
Exempt Hospitals........
Assist Taxpayers 11,477 164 1,039 10 803 6 13,319 180
Understanding ACA lssues
Support of Implementation 521 4 3,979 24 ......... ........ 4,500 28
& Taxpayer Issues
(Counsel, Appeals & TAS)
Applications Development ......... ........ ........ ........ 341,352 628 341,352 628
Systems Software
Contracts Systems
Testing & Delivery......
Program Management, -258 ........ 4 ........ 15,489 51 15,235 51
Business Design and
Specifications and
Oversight of Data
Sharing of Federal Tax
Information.............
----------------------------------------------------------------------------------
Fiscal Year 2014 $12,139 171 $16,565 119 $357,863 686 $386,567 976
Total...............
Fiscal Year 2015 Projection:
Administer New Fees on ......... ........ 2,337 15 ......... ........ 2,337 15
Drug Manufacturers and
Health lnsurers.........
Promoting Compliance With 1,213 9 5,930 45 243 2 7,386 56
Other New Provisions....
Strengthen Oversight of 290 2 2,834 24 11 ........ 3,135 26
Exempt Hospitals........
Assist Taxpayers 110,091 1,628 5,671 84 1,284 10 117,046 1,722
Understanding ACA lssues
Support of Implementation 16,433 164 3,809 22 ......... ........ 20,242 186
& Taxpayer Issues
(Counsel, Appeals & TAS)
Applications Development ......... ........ ........ ........ 369,591 767 369,591 767
Systems Software
Contracts Systems
Testing & Delivery......
Program Management, ......... ........ ........ ........ 13,867 56 13,867 56
Business Design and
Specifications and
Oversight of Data
Sharing of Federal Tax
Information.............
----------------------------------------------------------------------------------
Fiscal Year 2015 $128,027 1,803 $20,581 190 $384,996 835 $533,604 2,828
Projection Total....
----------------------------------------------------------------------------------------------------------------
For fiscal year 2016, the President's budget request includes
$490.4 million for implementation of the Affordable Care Act. Those
funding requirements are further explained in the chart below:
FISCAL YEAR 2016 AFFORDABLE CARE ACT (ACA)
[Dollars in thousands]
----------------------------------------------------------------------------------------------------------------
Taxpayer Services Enforcement Operations Support Total
---------------------------------------------------------------------------------
$000 FTE $000 FTE $000 FTE $000 FTE
----------------------------------------------------------------------------------------------------------------
Fiscal Year 2015 Enacted:
Reinvestment:
Expand Telecom ........ ........ ........ ........ 16,025 ........ 16,025 ........
Infrastructure to
Handle Increased
Demand...............
---------------------------------------------------------------------------------
Subtotal Fiscal ........ ........ ........ ........ $16,025 ........ $16,025 ........
Year 2016 Changes
to Base..........
Fiscal Year 2016 ACA Program
Increases:
Improve Taxpayer Services. 78,343 1,231 ........ ........ 23,154 7 101,497 1,238
Address Impact of 108 1 44,775 432 22,323 50 67,206 483
Affordable Care Act (ACA)
Statutory Requirements...
Implement Information ........ ........ ........ ........ 305,645 818 305,645 818
Technology (IT) Changes
to Deliver Tax Credits
and Other Requirements...
---------------------------------------------------------------------------------
Subtotal Fiscal Year $78,451 1,232 $44,775 432 $351,122 875 $474,348 2,539
2016 ACA Program
Increases............
---------------------------------------------------------------------------------
Total Fiscal Year 2016 ACA $78,451 1,232 $44,775 432 $367,147 875 $490,373 2,539
Budget Request...............
----------------------------------------------------------------------------------------------------------------
Question. Will you also provide us with specific information on the
impact of ACA implementation on the IRS's ability to carry out its core
mission responsibilities?
Answer. The tax provisions of ACA are a core activity of the
Service, like all other tax administration. The IRS does not consider
customer service and enforcement and implementation of the ACA distinct
priorities. No funds have been appropriated to the IRS for ACA
implementation, including the increased demand for customer service and
enforcement as a result of the legislative changes. To help fund
implementation, the IRS has relied on a mix of base appropriations and
external sources, including the Health Insurance Reform Implementation
Fund and user fee collections. As we move forward, the President's
budget outlines the investments that would ensure IRS is able to
successfully deliver its core mission. The IRS will continue to balance
its requirements and funding availability to ensure accomplishment of
mission critical requirements. The IRS will continue to review and
evaluate all risks, plan to mitigate those risks, and manage residual
risk to implement all legislative requirements while reducing the
burden on the taxpaying public and its staff. Approving the President's
budget would greatly enhance the ability to do this. Funding below this
request will, for example, delay critical IT upgrades for aged hardware
and other infrastructure assets, with 52 percent approaching end-of-
life in fiscal year 2016; delay upgrades for operating systems and
middleware that support our current production environment, many of
which are slipping to 3 and 4 versions behind current; delay roll-out
of our converged networks initiative for more efficient and cost-
effective voice and data system consolidation and hinder the IRS's
efforts to move to a CloudFirst technology platform and reap
efficiencies by moving toward this new platform.
aca implementation
Question. The TIGTA has identified significant concerns about
potential fraudulent claims related to premium tax credits and the
security of Federal tax data as the IRS provides data to health
exchanges. The IRS is also administering penalties related to the
individual mandate and may be trying to seek collection of premium tax
credits provided to ineligible taxpayers and collection of overpayments
of tax credits.
The IRS continues to report that more than 20 percent of Earned
Income Tax Credit (EITC) payments are issued improperly each year. How
is the IRS ensuring that implementation of the premium tax credit isn't
being plagued with the same problems?
Answer. An individual is not entitled to the premium tax credit
unless the individual was enrolled in qualifying Marketplace coverage
for at least 1 month during the year. At the time the individual files
his or her income tax return, the IRS has data from the Marketplaces
indicating whether the person had qualifying Marketplace coverage, who
in the family was covered, amount of premiums paid and whether the
individual received advance payments of the premium tax credit. Thus,
unlike the EITC, the IRS has probative third party information at the
time the return is filed that will be used to minimize the likelihood
that a fraudulent claim for credit will be successful. In addition, the
IRS has other fraud filters and tools to detect and deter taxpayers
from filing fraudulent tax returns.
Question. How is the IRS planning to seek collection of premium tax
credits provided to ineligible taxpayers and collection of overpayments
of tax credits?
Answer. As indicated in the previous response, the IRS has third
party information from the Marketplaces that can be used to determine
whether or not an individual is entitled to the premium tax credit.
Before the IRS processes claims for premium tax credit, it may
correspond with taxpayers if additional information is required. If
necessary the IRS will use its normal collection processes to recover
erroneous payments of the premium tax credit. Erroneous premium tax
credit payments can be recovered through future refund offsets.
user fees
Question. The IRS collects a long list of fees it charges for
services provided to taxpayers. Those fees are then used to supplement
appropriations made to the IRS. To use the funds, the IRS simply has to
submit a user fee spend plan with justification to OMB. The fiscal year
2016 budget anticipates $450 million in user fees. In fiscal year 2015,
the IRS anticipates $480 million in fees and plans to spend $384
million on Operations Support, which includes $220 million on ACA
information technology needs. The IRS is on track to spend over $475
million in user fees on ACA from fiscal year 2013 through fiscal year
2015.
Please provide the subcommittee with specific information as to how
you decide how to allocate those fees? Why did you decide to spend $220
million on ACA implementation in fiscal year 2015 but only $45 million
on Taxpayer Services?
Answer. The IRS's senior leadership uses a deliberate
decisionmaking process to determine priorities based on a variety of
factors, including whether it is statutorily mandated or discretionary.
The Service then allocates available appropriated resources against
those requirements. We then determine the unfunded mission critical
requirements and identify what additional resources are available from
other sources, such as user fees or reimbursable services, and allocate
those resources against the Servicewide requirement.
The IRS determines the distribution of user fees based on a
detailed review of agency-wide requirements and the total IRS funding
availability in a given year. The fiscal year 2015 budget reduction
necessitated a series of difficult decisions. These decisions included
developing and implementing a user fee spend plan that will allow the
Service to fund mission critical requirements, including unfunded
legislative mandates, IT operations and maintenance, life cycle
replacement, modernization, and improving online and toll-free customer
services.
identity theft
Question. Identity theft tax refund fraud is a persistent, evolving
threat which has a significant impact on tax administration. According
to GAO, the IRS estimates it paid $5.2 billion in fraudulent identity
theft refunds in filing season 2013, while preventing $24.2 billion
(based on what it could detect).
According to GAO, IRS does not know the full extent of the
occurrence of identity theft. Officials said that they count the refund
fraud cases that IRS identifies but that they do not estimate the
number of identity theft cases that go undetected. Unless IRS pursues a
criminal investigation, IRS generally does not know the real identity
of the thieves or whether a fraudulent return is an individual attempt
or part of a broader scheme.
IRS officials have also told GAO that the agency does not
systematically track characteristics of known identity theft returns,
including the type of return preparation (e.g., paid preparer or
software), whether the return is filed electronically or on paper, or
how the individual claimed a refund (e.g., check, direct deposit, or
debit card).
Given the enormity of this problem and the impact on innocent
taxpayers, how is the IRS working with other agencies to leverage
resources and coordinate efforts to address a problem which is growing
exponentially?
Answer. The IRS has a comprehensive and aggressive identity theft
strategy focused on preventing refund fraud, investigating these
crimes, and assisting taxpayers victimized by identity thieves. In
calendar year 2014 alone, our efforts have suspended or rejected 5.6
million suspicious returns. We stopped 1.8 million confirmed identity
theft returns, totaling in $10.8 billion refunds stopped. Additionally,
we stopped $5 billion worth of refunds for other types of fraud,
totaling $15.8 billion of confirmed fraudulent refunds protected.
During this time we also worked with victims of identity theft to
resolve and close more than 826,000 cases. Effectively combating
identity theft is costly. In fiscal year 2014, for example, the IRS
spent more than $380 million combating identity theft and assisting
innocent victims, but this effort needs to be expanded. The fiscal year
2016 President's budget requests an additional $101 million to continue
and expand this important work.
The IRS works with many agencies and organizations to leverage
resources to combat identity theft refund fraud. For example, on March
19, 2015, the IRS convened a meeting with leading tax-preparation
firms, payroll and tax refund processors, and State tax administrators
in order to combat the growing threat of tax refund fraud. Participants
in the meeting included the CEOs of Intuit, H&R Block, Jackson Hewitt,
Liberty Tax, CCH, and Green Dot unit TPG, among others. Also present
were a representative of ADP; members and staff of the Federation of
Tax Administrators, a group of State tax officials; and Council for
Electronic Revenue Communication Advancement (CERCA), which provide a
forum and a liaison between the IRS and the tax software industry. The
participants agreed to set up three working groups to create a list of
solutions that could be acted on immediately in time for the 2016
filing season, as well as some longer-term changes. The groups will
focus on taxpayer authentication; fraud schemes; and information
sharing among private industry, State administrators and the IRS. Each
will have representatives from the IRS, State agencies and private
industry. The three working groups had their kick-off meeting on April
2, 2015.
Another example of working with other agencies is the State Fraud
Referrals initiative. This program encourages States to share their tax
fraud data with the IRS in order to combat ID theft and fraud. In
November 2013, the IRS initiated testing of the State Fraud Referral
project which proved to further deter tax fraud. This project was
implemented in calendar year 2014. The State Fraud Referral project
leverages State tax agencies as an additional source of fraud data.
Currently 34 States have signed agreements to participate. The IRS has
been working with State revenue agencies to provide fraudulent State
tax data to the IRS and continues to work with the remaining States to
receive suspicious filer information. From January through March 13,
2015, the IRS has received referrals from 15 States:
--Current referrals: 74,740
--Total number of filed returns based on these referrals: 28,643
--Stopped a total of 5,157 returns with over $26.5 million in refunds
claimed
--Of the 5,157 returns, 4,981, were identified by IRS filters for
over $25.5 million in refunds stopped
IRS Criminal Investigation (CI) investigates tax-related crimes
such as identity theft fraud and recommends prosecution to the
Department of Justice. The number of identity theft investigations
initiated by CI increased from less than 300 in fiscal year 2011 to
1,063 in fiscal year 2014. Indictments in fiscal year 2014 increased to
896 while 748 convicted thieves were sentenced to an average prison
sentence of 43 months.
To leverage shrinking resources and remain effective in combating
identity theft crimes, CI partners with other IRS Operating Divisions,
numerous Federal and local law enforcement agencies, as well as the
private sector. For example, CI participates in many task forces and
working groups to find and investigate identity thieves. CI administers
a Law Enforcement Assistance Program designed to allow local law
enforcement to access return and return information with an identity
theft victim's consent and these cases are prosecuted in State courts
which reduce the burden on Federal court resources. CI also works with
private sector partners to increase awareness and establish
communications for reporting data breaches impacting tax identity
theft.
In addition, CI uses information and trends identified during
ongoing investigations to assist in developing analytics which it
devotes to identify and prevent further losses to the Treasury. Lists
of victim identities recovered in the field are shared to assist in
protecting taxpayers from further victimization, which reduces the
burden on all Federal resources.
The IRS also continues to collaborate with the software and
financial institution industries to identify patterns, trends and
schemes that impact refund returns. IRS also has initiated additional
collaboration with the Bureau of the Fiscal Service on multiple direct
deposits and payments shared between government agencies in the
development of the new Payment Processing System (PPS). The PPS system
is expected to be online in September 2016.
We agree that more could and should be done to battle identity
theft and refund fraud, but the current budget situation has severely
hampered our ability to effectively deal with this problem. The IRS is
committed to doing all that we can to prevent the payment of fraudulent
refunds, pursue the perpetrators, and assist victims to resolve their
issues as quickly and efficiently as possible.
Question. Why are the funds requested to address to prevent future
identify theft cases included in a program integrity cap adjustment
rather than the IRS base budget?
Answer. Identity theft is a Service-wide effort and funds are
requested in both the base request and as part of the Program Integrity
Cap adjustment request. Those components, which are expected to yield a
high return-on-investment (stopping identity thieves and mitigating
identity theft), are requested in the cap adjustment, while those
components which assist victims of identity theft are included in the
base request. Both requests are equally important, regardless of which
part of the budget they appear.
irs bank account seizure of small businesses
Question. A number of alarming stories about the civil forfeiture
practices at the IRS has raised concerns about your practice of seizing
bank accounts of small businesses that routinely make bank deposits
just under $10,000 and never charging them with a crime.
In many cases, small business owners are forced to go months if not
years without access to working capital for their businesses.
In testimony before the House Ways and Means Committee on February
11, 2015, a representative of the Institute for Justice stated that the
IRS seized more than $242 million between 2005 and 2012 from Americans
suspected of hiding transactions below $10,000, yet more than half of
that amount was not ultimately forfeited by the IRS.
Do you agree with these statistics? And are you concerned that the
IRS seized substantial amounts of money that it ultimately could not
justify keeping?
Answer. The IRS Criminal Investigation (CI) division provided the
Institute for Justice with seizure and forfeiture data captured in our
asset forfeiture tracking system from October 2004 to December 2013. We
agree that while the raw data is accurate, it is also incomplete. A
number of open cases had not yet been resolved (forfeiture perfected)
by December 31, 2013, thus giving a false impression that the
Government had not prevailed in many of the seizures that were
reported. Also, the Institute excluded seizure/forfeiture data from the
U.S. Territories, which was incorporated in our FOIA response.
CI does not believe that the IRS seized substantial amounts of
money that it ultimately could not justify keeping. The Institute for
Justice interpreted the difference between the value of assets at the
time of seizure and the value of assets at the time of forfeiture as an
indication that probable cause for the seizures was lacking. However,
there may be a number of reasons that explain the lower asset value at
the time of forfeiture which have nothing to do with the merits of the
initial seizure. For example, the raw data contains seizures which
relate to open investigations in which the assets have not yet been
forfeited, or a portion of the seized asset may have been returned to
the owner as part of a negotiated settlement which is not uncommon in
judicial proceedings. The Institute of Justice made conclusions based
on assumptions from incomplete raw data.
Question. Under the new IRS policy governing civil asset
forfeitures, do you expect a higher percentage of the seized funds to
ultimately be forfeited rather than returned to innocent taxpayers?
Answer. IRS Criminal Investigation changed its policy regarding
``legal source'' structuring seizures occurring on or after October 17,
2014. Under this policy, the IRS will not pursue the seizure and
forfeiture of funds associated solely with ``legal source'' structuring
cases unless (1) there are exceptional circumstances justifying the
seizure and forfeiture and (2) the case has been approved at the
Director of Field Operations, a Headquarters level executive. Under the
new policy there will be no ``legal source'' structuring seizures
unless there are exceptional circumstances, which will be rare.
proposed 501(c)(4) regulations
Question. The IRS received over 150,000 comments in response to
proposed regulations it issued in November of 2013 on the rules
governing the political activities of 501(c)(4) social welfare
organizations.
As a result, the IRS announced that it will repropose the
regulations, after taking the comments into account, and will not hold
a public hearing on the new rules until they are reproposed.
When does the IRS plan to issue new revised proposed regulations?
Does the IRS intend to hold a public hearing on new proposed rules?
Given the unfair treatment of taxpayers based on the exercise of
their constitutional rights, what steps is the IRS taking to ensure the
new rules won't target the first amendment rights of these same grass-
roots groups?
Answer. Proposed regulations under Sec. 501(c) relating to
political campaign intervention are on the 2014-2015 Priority Guidance
Plan released by Treasury and the IRS in August 2014. The Priority
Guidance Plan represents projects on which Treasury and the IRS intend
to work during the plan year. Although the current plan year ends on
June 30th, the Priority Guidance Plan does not place any deadline on
completion of projects. The IRS continues to work expeditiously on
drafting new proposed regulations under Sec. 501(c), with the goal of
providing clearer guidelines regarding political campaign intervention
both for the IRS employees who administer the laws and for
organizations that have or seek tax-exempt status. The public input the
IRS received on the November 2013 proposed regulations has greatly
informed the drafting process. Consistent with the IRS's normal
procedure, there will be an opportunity for the public to submit
written comments on new proposed regulations. In addition, Treasury and
the IRS plan to hold a public hearing after new proposed regulations
are issued, and, consistent with the IRS's normal procedure, a notice
of public hearing will be published in the Federal Register [] in
advance of the scheduled hearing date.
______
Questions Submitted by Senator Christopher A. Coons
clarity in rules for tax-exempt status
Question. Commissioner Koskinen, I support the need to make
meaningful changes to ensure that the rules to qualify for tax-exempt
status are abundantly clear. We need a bright-line test to replace the
guidance that has led to over a half a century of confusion and
inconsistent application. I understand the IRS is currently developing
a revised proposal to bring long-needed clarity to the determination of
eligibility for tax-exempt status of social welfare groups.
What are the current plans and timetable for issuing a revised
proposal for tax-exempt status rules?
What opportunities will be made available for soliciting public
input?
Until the rules are changed, what test or criteria is the IRS
currently using to evaluate applicants for tax-exempt status as social
welfare groups?
Answer. Proposed regulations under Sec. 501(c) relating to
political campaign intervention are on the 2014-2015 Priority Guidance
Plan jointly released by the Department of the Treasury (Treasury) and
the IRS in August 2014. The Priority Guidance Plan represents projects
on which Treasury and the IRS intend to work during the plan year.
Although the current plan year ends on June 30th, the Priority Guidance
Plan does not place any deadline on completion of projects. The IRS
continues to work expeditiously on drafting new proposed regulations
under Sec. 501(c), with the goal of providing clearer guidelines
regarding political campaign intervention both for the IRS employees
who administer the laws and for organizations that have or seek tax-
exempt status. The public input received on the November 2013 proposed
regulations has greatly informed the drafting process. Consistent with
the IRS's normal procedure there will be an opportunity for the public
to submit written comments on new proposed regulations. In addition,
Treasury and the IRS plan to hold a public hearing after the new
proposed regulations are issued, and, consistent with the IRS's normal
procedure, a notice of public hearing will be published in the Federal
Register in advance of the scheduled hearing date.Final regulations
would be published only after taking into consideration public comments
received on the proposed regulation. Until final regulations are
issued, whether an organization qualifies for tax exempt status under
Sec. 501(c)(4) is determined under the current regulations.
Accordingly, the IRS will consider whether, based on all the facts and
circumstances, the organization primarily engages in activities that
promote social welfare.
enhanced online services options
Question. The IRS's fiscal year budget request seeks $16.2 million
to support development of a customer-centric ``Service on Demand''
strategy to improve the taxpayer experience. Investments would create
digital capabilities to make taxpayer interactions with the IRS quicker
and more convenient. The GAO has also identified some opportunities for
the IRS to potentially realize hundreds of millions of dollars in cost
savings and increased revenues, including enhancing online and
interactive Web services to improve service to taxpayers and encourage
greater tax law compliance.
Please elaborate on this proposal and your vision. Is it your view
that advancements to IRS online services would improve service to
taxpayers and encourage greater tax law compliance? How?
Answer. American consumers have grown accustomed to instant digital
exchanges with their banks and other financial institutions. We believe
that delivering top quality service to America's taxpayers requires us
to catch up with those expectations to operate seamlessly in a digital
and global environment. Our proposal would make tax accounts work much
like bank accounts, thereby simplifying compliance and making tax
administration more sustainable. This budget item is the initial
funding required to begin to improve service and promote compliance by
providing taxpayers with virtual assistance and online self-service
tools to communicate with the IRS, identify issues, resolve errors, and
receive on-demand digital access to tax law, and account information,
helping taxpayers to voluntarily comply.
Virtual assistance and digital self-service tools could help
taxpayers quickly identify issues and resolve errors, and taxpayers who
are trying to comply but who have overlooked a payment or an item on
their return could avoid being trapped in a long, cumbersome paper-
trail just to fix a mistake or resolve an uncontentious issue. With
faster error resolution, we could identify issues at the same time that
we identify math errors, fraud and identity theft, and we would
communicate them up-front, so that the majority of taxpayers could
resolve even complex compliance issues sooner, without incurring
unnecessary interest costs. In addition, versatile communications
channels would allow taxpayers to reach the IRS through their mobile
smart-phone, laptop computer, or a self-service kiosk, which would
empower them to take more active control of their tax account. These
advancements will leverage capabilities built and proven in the private
sector.
Question. The IRS's approach to the future supports all taxpayers--
individuals, corporations, partnerships, and other for-profit and non-
profit businesses. What impediments currently prevent the IRS from
doing more to improve online services for taxpayers? What resources
would be required for the IRS to do more in this area?
Answer. The fiscal year 2016 President's budget includes $18
million for information technology upgrades and new capabilities to
Enhance Service Options for Taxpayers, an additional $5.5 million above
the fiscal year 2015 level in Business Systems Modernization (BSM)
funding, to start moving the Service toward a more digitally focused
customer service strategy. These resources will enable the IRS to
define a long-term vision and deliver new online service tools and
technologies to begin the transition to a digital operating
environment. However, transitioning to a digital environment will be a
multi-year process requiring IT investments in key building blocks such
as identity authentication to protect taxpayer information, integrated
case management to ensure a seamless taxpayer experience, and data
analytics to continuously improve effectiveness.
implementing the affordable care act
Question. The Affordable Care Act (ACA) represents the largest set
of tax law changes in more than 20 years, with more than 40 provisions
that amend the tax laws. The IRS has significant responsibilities in
implementing and administering the ACA, including taxpayer education
and outreach, deliverance of tax credits, and development of new IT
infrastructure to support all of these areas.
What challenges is the IRS facing as it implements and administers
the ACA?
Answer. Since the ACA is a legislative mandate, the IRS is doing
everything possible to sufficiently fund its implementation. The tax
provisions of the ACA are a core activity of the Service, like all
other tax administration. The IRS does not consider customer service
and enforcement and implementation of the ACA distinct priorities. No
funds have been appropriated to the IRS for ACA implementation,
including the increased demand for customer service and enforcement as
a result of ACA. To help fund implementation, the IRS has relied on a
mix of base appropriations and external sources, including the Health
Insurance Reform Implementation Fund and user fee collections. As we
move forward, the President's budget outlines the investments that
would ensure IRS is able to successfully deliver its core mission.
Question. The $452 million dollars the IRS requested in fiscal year
2015 specifically for ACA activities was not enacted. What funding
level are you budgeting for ACA work this year in the absence of
receiving the increased dedicated funds?
Answer. As noted, no funds have been appropriated to the IRS for
ACA implementation, including the increased demand for customer service
and enforcement as a result of ACA. The table below outlines the fiscal
year 2015 projected funding level by use.
----------------------------------------------------------------------------------------------------------------
Taxpayer Services Enforcement Operations Support Total
----------------------------------------------------------------------------------
$000 FTE $000 FTE $000 FTE $000 FTE
----------------------------------------------------------------------------------------------------------------
Fiscal Year 2015 Projection:
Administer New Fees on ......... ........ 2,337 15 ......... ........ 2,337 15
Drug Manufacturers and
Health lnsurers.........
Promoting Compliance With 1,213 9 5,930 45 243 2 7,386 56
Other New Provisions....
Strengthen Oversight of 290 2 2,834 24 11 ........ 3,135 26
Exempt Hospitals........
Assist Taxpayers 110,091 1,628 5,671 84 1,284 10 117,046 1,722
Understanding ACA lssues
Support of Implementation 16,433 164 3,809 22 ......... ........ 20,242 186
& Taxpayer Issues
(Counsel, Appeals & TAS)
Applications Development ......... ........ ........ ........ 369,591 767 369,591 767
Systems Software
Contracts Systems
Testing & Delivery......
Program Management, ......... ........ ........ ........ 13,867 56 13,867 56
Business Design and
Specifications and
Oversight of Data
Sharing of Federal Tax
Information.............
----------------------------------------------------------------------------------
Fiscal Year 2015 $128,027 1,803 $20,581 190 $384,996 835 $533,604 2,828
Projection Total....
----------------------------------------------------------------------------------------------------------------
Question. How will the IRS's budget request for 2016 for $490.4
million support successful fulfillment of IRS's responsibilities in
administering the requirements of the ACA?
Answer. The IRS's fiscal year 2016 budget request will allow us to:
--Meet the projected increased taxpayer demand for toll-free and
face-to-face assistance and outreach resulting from ACA
implementation and improve the effectiveness and efficiency of
service responses;
--Expand staffing to assist with managing the ACA submission
processing workload and provide advanced technology to
electronically receive amended returns;
--Conduct compliance around the premium tax credit, process
individual exemptions from health insurance coverage
requirements, and assess individual responsibility payments;
--Process new information reporting for certain employers and health
insurance providers;
--Send ACA compliance-related notices to taxpayers;
--Implement new technology and modify existing systems to be able to
calculate and assess Employer Shared Responsibility Payments;
--Maintain and expand repositories that store data about household-
level income to help determine eligibility for and
reconciliation of the premium tax credit;
--Administer fees on drug manufacturers and health insurers; and
--Strengthen oversight of tax exempt hospital organizations,
including refining the community benefit reviews and leveraging
this data to conduct examination.
Question. How does the IRS plan to continue to implement
legislative requirements, such as the ACA and the Foreign Account and
Tax Compliance Act (FATCA) also enacted in 2010, if additional funding
is not received?
Answer. The IRS senior leadership uses a deliberate decisionmaking
process to determine priorities based on a variety of factors,
including whether it is statutorily mandated or discretionary.The IRS
then allocates available appropriated resources against those
requirements. We then determine the unfunded mission critical
requirements and identify what additional resources are available from
other sources, such as user fees or reimbursable services, and allocate
those resources against the Servicewide requirement. For any given
fiscal year, the IRS faces challenges when it does not receive the
requested funding. With the IRS's responsibilities to administer all of
the tax laws, including implementing the tax provisions of the ACA and
FATCA, the IRS must balance its responsibilities to provide services to
taxpayers, follow up on potential non-compliance, and invest for the
future in information technology and workforce development.
Question. From what core activities will resources be diverted away
in order for IRS to address the ACA and FATCA requirements?
Answer. The tax provisions of ACA and FATCA are a core activity of
the IRS, like all other tax administration. The IRS does not consider
customer service and enforcement and implementation of the ACA and
FATCA distinct priorities. No funds have been appropriated to the IRS
for ACA and FATCA implementation, including the increased demand for
customer service and enforcement as a result of the legislative
changes. To help fund implementation, the IRS has relied on a mix of
base appropriations and external sources, including the Health
Insurance Reform Implementation Fund and user fee collections. As we
move forward, the President's budget outlines the investments that
would ensure IRS is able to successfully deliver its core mission. The
IRS will continue to balance its requirements and funding availability
to ensure accomplishment of mission critical requirements. The IRS will
continue to review and evaluate all risks, plan to mitigate those
risks, and manage residual risk to implement all legislative
requirements while reducing the burden on the taxpaying public and its
staff. Approving the President's budget would greatly enhance the
ability to do this. Funding below this request will, for example, delay
critical IT upgrades for upgrades for aged hardware and other
infrastructure assets, with 52 percent approaching end-of-life in
fiscal year 2016; delay upgrades for operating systems and middleware
that support our current production environment, many of which are
slipping to 3 and 4 versions behind current; delay roll-out of our
converged networks initiative for more efficient and cost-effective
voice and data system consolidation and hinder the IRS's efforts to
move to a CloudFirst technology platform and reap efficiencies by
moving toward this new platform.
error rates and taxpayer education
Question. Does the IRS track and evaluate the extent to which
particular aspects of the forms, instructions, or Tax Code provisions
tend to generate a significant amount of taxpayer confusion or produce
inadvertent unintentional errors in filed returns?
Answer. Please see answer below.
Question. When the IRS identifies an item or issue that appears to
be causing routine or systemic problems, what do you do in response?
Answer. The IRS updates and enhances forms, instructions and
publications annually to reflect tax changes. We also provide
worksheets, tips and other information to make it easier for taxpayers
to meet their tax filing obligation and reduce errors. Each year, we
include in many publications and instructions a ``What's New'' section
that summarizes important tax changes that took effect. For tax year
2014, for example, these topics included expired tax benefits, the
Health Care Premium Tax Credit, the personal exemption amount increased
for certain taxpayers, and more. In addition, we offer a wide variety
of resources to assist taxpayers such as IRS Tax Tips, calculators, IRS
``Services Guide'' (e.g. how to get help with general tax law
information, getting a transcript or copy of a return, finding a
qualified tax professional, finding information about the Health Care
Law, etc.).
Each year, the IRS also tells taxpayers how to avoid common tax-
filing errors including:
1. Wrong or missing Social Security Numbers.--Be sure you enter
all SSNs on your tax return exactly as they are on the Social Security
cards.
2. Wrong names.--Be sure you spell the names of everyone on your
tax return exactly as they are on their Social Security cards.
3. Filing status errors.--Some people use the wrong filing status,
such as Head of Household instead of Single. The Interactive Tax
Assistant on IRS.gov can help you choose the right status. If you e-
file, the tax software helps you choose.
4. Math mistakes.--Double-check your math. For example, be careful
when you add or subtract or figure items on a form or worksheet. Tax
preparation software does all the math for e-filers.
5. Errors in figuring credits or deductions.--Many filers make
mistakes figuring their Earned Income Tax Credit, Child and Dependent
Care Credit, and the standard deduction. If you're not e-filing, follow
the instructions carefully when figuring credits and deductions. For
example, if you're age 65 or older or blind, be sure you claim the
correct, higher standard deduction.
6. Wrong bank account numbers.--You should choose to get your
refund by direct deposit. Be sure to use the right routing and account
numbers on your return. The fastest and safest way to get your tax
refund is to combine e-file with direct deposit.
7. Forms not signed.--An unsigned tax return is like an unsigned
check--it's not valid. Both spouses must sign a joint return.
8. Electronic filing PIN errors.--When you e-file, you sign your
return electronically with a Personal Identification Number. If you
know last year's e-file PIN, you can use that number. If you don't know
it, enter the Adjusted Gross Income from the 2013 tax return you
originally filed with the IRS. Do not use the AGI amount from an
amended return or a return the IRS corrected.
Filing electronically vastly reduces tax return errors as the tax
preparation software does the calculations, flags common errors and
prompts taxpayers for missing information. Whether self-prepared by the
taxpayer or prepared by a paid preparer, the best way to avoid errors
is to use tax preparation software. For Processing Year 2015 (through
week ending March 27, 2015) the error rate for individual paper tax
returns was 28.01 percent versus only 4.30 percent for e-filed
individual tax returns. IRS e-file is the most accurate way to file a
tax return.
When the IRS identifies certain mathematical or clerical errors, or
other specific irregularities on returns during processing, we can
automatically adjust the return for the taxpayer. At various times,
Congress has expanded this math error authority on a case-by-case
basis. The IRS would be able to significantly improve tax
administration--including reducing improper payments and cutting down
on the need for costly audits--if Congress were to enact the Budget
proposal Provide the IRS with Greater Flexibility to Address
Correctible Errors, to replace the existing specific grants of this
authority with more general authority covering computation errors and
incorrect use of IRS tables. Congress could also help in this regard by
creating a new category of ``correctible errors,'' allowing the IRS to
fix errors in several specific situations, such as when a taxpayer's
information does not match the data in certain Government databases.
Question. Are there particular tax credits that typically
experience high error rates? What remedial actions do you recommend to
reduce error rates?
Answer. One challenge in processing the millions of tax returns
each year is that certain tax credits are more likely to have erroneous
claims, as well as fraudulent claims and schemes. The IRS continues to
improve the ways we detect errors and help taxpayers avoid making
common mistakes.
One example is the Earned Income Tax Credit (EITC). We remind
taxpayers of common EITC errors, including:
--Claiming a child who does not meet these qualifying child tests:
relationship, age, and residency
--More than one person claiming the same child
--Filing as single or head of household when married
--Over- or under-reporting of income or expenses
These errors are caused by the complexity of the Tax Code. On
IRS.gov, we provide EITC information and tools to assist taxpayers and
help them avoid inadvertent or unintentional errors (http://
www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit).
Another example is the Child Tax credit. To help a taxpayer
determine if the various criteria regarding the qualifying child are
met, the IRS developed Schedule 8812 (Child Tax Credit). We also
provide taxpayers with frequently asked questions such as:
--Can a noncustodial parent claim the child tax credit for his or her
child?
--Can I claim both the child tax credit and the child and dependent
care credit?
--Can I claim the child tax credit for a child who has an individual
tax identification number (ITIN) rather than a Social Security
number?
We also help taxpayers to avoid errors when claiming the American
Opportunity Tax Credit and the Lifetime Learning Credit. We remind
taxpayers of these common errors made when claiming education credits:
--Students listed as a dependent or spouse on another tax return
--Students who don't have a Form 1098-T showing they attended an
eligible educational institution
--Students who are not paying qualified education expenses
--Claiming the credit for a student not attending a college or other
institute of higher education
irs management and performance challenges for fiscal year 2015
Question. Each year, the Treasury Inspector General for Tax
Administration (TIGTA) evaluates IRS programs, operations, and
management functions to identify the areas of highest vulnerabilities
to the Nation's tax system. On October 15, 2014, TIGTA issued its
assessment enumerating the top ten management challenges. The #1
priority challenge cited by TIGTA for this year is security for
taxpayer data and IRS employees.
The IRS relies extensively on its computer systems to support both
its financial and mission--related operations. Effective information
systems security is essential to ensure that data are protected against
inadvertent or deliberate misuse, improper disclosure or destruction,
and that computer operations supporting tax administration are secured
against disruption or compromise.
Computer security has been problematic for the IRS since 1997. In
April 2014, GAO reported that the IRS is making progress in addressing
information security control weaknesses; however, the GAO noted that
weaknesses remain that could affect the confidentiality, integrity, and
availability of financial and sensitive taxpayer data.
Mr. Koskinen, what are your perspectives on TIGTA's identification
of the most challenging management concerns?
Answer. The IRS understands and honors the trust given to it by
American taxpayers to safeguard their personal and private information.
As part of that trust, the IRS realizes the importance of cybersecurity
as a primary component of its information technology infrastructure.
The IRS has been storing taxpayer data in digital form since 1970 and
has a strong culture of placing a high-level of importance on
protecting this data. Currently, the IRS takes a very aggressive
approach in protecting taxpayer data by restricting Internet access;
encryption of taxpayer data for any transmission externally; content
filtering and strict firewall policies, and network security
monitoring.
The IRS feels confident its systems demonstrate high resistance to
the normal daily cyber-attacks seen across Government; however, there
are no absolutes and, as with nearly all such current commercial cyber-
defenses, it is very difficult to defend against sophisticated
technologies as seen in recent state-sponsored attacks. While the IRS
has a long history of successfully defending against attempts to steal
taxpayer data, constant vigilance is needed. The IRS continues to
divert scarce resources to cybersecurity, but with 5 years of
decreasing appropriations, it is currently much more challenging for
the IRS to continuously stay ahead of evolving threats to its
cybersecurity.
The IRS is currently trying to move to a more robust interactive
Web-based means of interacting with taxpayers. The American people have
grown accustomed to instant financial exchanges with lenders, brokers,
and banks. The IRS believes that delivering top quality service to
America's taxpayers requires catching up to those expectations to
operate seamlessly but securely in a digital and global environment.
This change will significantly increase cybersecurity risks, requiring
more resilience and protection of data.
Question. How does IRS leadership under your helm integrate
findings and recommendations for corrective action suggested by GAO and
TIGTA audits into strategic management decisionmaking and budget
planning processes?
Answer. Each year GAO and TIGTA collectively issue dozens of
recommendations from numerous audits. Those recommendations vary widely
in scope and impact, and the IRS carefully considers each in the
context of business processes and the IRS's ability to implement them.
Where recommendations are minimally complex or relatively
straightforward, such as those suggesting a change to the Internal
Revenue Manual or an adjustment to the policy or processes that is
limited in scale, has a minimal strategic impact, and requires few
resources to implement, changes can be made with the approval of the
appropriate official(s) and without significant consideration during
the strategic planning and budgeting process.
Some recommendations, however, are more expansive in nature and
require a significant investment of resources to accomplish. These
recommendations necessitate the IRS carefully consider the suggestion
in the context of existing business processes and investment plans, and
assess the benefit of implementing the recommendation versus the
opportunity cost of doing so. When considering these recommendations,
the IRS evaluates them just as it does other investment needs, based on
the vision of the IRS delineated in the 2014-2017 Strategic Plan--that
being of an organization providing an advanced taxpayer experience
leveraging a robust digital environment, a condensed enforcement cycle,
and data-driven taxpayer service and enforcement efforts. Within this
context, the IRS' strategic planning and budgeting process provides for
the identification of all strategic investment needs, subsequent
analyses assessing initiative scope, impact and the potential benefit
of each, and a decisionmaking process that allows us to determine the
highest priorities to pursue using the resources the agency is
allotted.
Questions Submitted by Senator Jerry Moran
Question. Describe the role of your department/agency's Chief
Information Officer (CIO) in the development and oversight of the IT
budget for your department/agency. How is the CIO involved in the
decision to make an IT investment, determine its scope, oversee its
contract, and oversee continued operation and maintenance?
Answer. The IRS Chief Technology Officer (CTO)/Chief Information
Officer (CIO) has the authority to govern all areas related to
information resources and technology management. The CTO/CIO has
management and oversight responsibility for both the IT organizational
functions and the evaluation, selection and management of vendors,
ensuring that the goods and services received not only align with, but
can help drive forward, the critical operational and information
technology (IT) priorities of the business strategy. This
responsibility combines a thorough knowledge of the Federal acquisition
system and a deep understanding of the dynamic commercial IT
marketplace. The Vendor Management Organization (VMO), which is under
the authority of the CTO/CIO, is solely focused on this activity and
has a straightforward mission--to maximize IT investments. This is
accomplished by developing a set of repeatable, sustainable processes
with goals that focus on:
--Achieving greater transparency around organizational structures,
roles, and responsibilities to ensure accountability and limit
``surprises'';
--Committing more time and energy to limit supplier advantage, e.g.,
through competitive bidding processes, market research on
rates, and internal staff training;
--Cultivating existing vendor relationships that drive value by
effectively managing the vendor throughout the contract
lifecycle, from sourcing and selecting the vendor, to
establishing contracts, purchasing and managing payments;
--Maintaining focus on value delivery by making sure that the
benefits promised are the beginning of a project or investment
are delivered, and;
--Managing spending to enable repeatable savings opportunities.
The CTO/CIO also has a well-established IT Governance structure to
align IT with business strategy and to ensure that investments stay on
track to achieve the IRS's strategies and goals, with measures to
monitor performance. The Infrastructure Executive Steering Committee
(IESC) within the CTO/CIO organization, for example, ensures that
project objectives are met, risks are managed appropriately, and the
expenditure of IRS resources is fiscally sound. The CTO/CIO has also
established an Enterprise Software Governance Board (ESGB) to develop a
standardized approach to software acquisition management practices. An
ESGB working group is also in place to gather and document existing
software acquisition processes, document a proposed software lifecycle,
gather software usage metrics, and evaluate and recommend a software
asset/license management tool, all of which will identify installed
software products, match products to licenses and confirm compliance
status of those products. This governance ensures that all
stakeholders' interests are taken into account and that processes
provide measurable results.
Question. Describe the existing authorities, organizational
structure, and reporting relationship of the Chief Information Officer.
Note and explain any variance from that prescribed in the newly-enacted
Federal Information Technology and Acquisition Reform Act of 2014
(FITARA, Public Law 113-291) for the above.
Answer. Pursuant to Delegation Order 2-1 (formerly DO-261, Rev. 1),
Internal Revenue Manual Section 1.2.41.2 (08-17-2000), the IRS
Commissioner gives the IRS CTO/CIO authority to govern all areas
related to information resources and technology management. It gives
the CTO/CIO authority to perform those functions the Commissioner is
authorized to perform having Servicewide effect and relating to, or
concerning, the acquisition of information technology (IT) and the
management of information resources, other than the duties delegated to
the Director of Procurement.
While the CTO/CIO is accountable to the Commissioner under DO 2-1
to lead the IT organization and govern its resources and technology
management, the CTO/CIO also has line reporting to the Deputy
Commissioner for Operations Support, along with the Chief Officers,
i.e., Chief Financial Officer; Human Capital Officer; Chief, Agency-
wide Shared Services; and Director, Privacy, Governmental Liaison and
Disclosure. This structure enables collaboration and alignment among
the Chief Officers in building a strategic foundation for
organizational excellence. This strategic foundation is critical in
delivering the IRS's objectives and goals outlined in the IRS strategic
plan.
As the Treasury Department implements FITARA, the IRS CIO/CTO will
continue to exercise responsibility and authority over the IRS
portfolio, but will work in a much closer relationship with the
Department CIO. For example, the IRS CIO shall immediately ensure
information reported on the IT Dashboard accurately reflects all
current status maintained internally at the IRS. Further, under the
leadership of Treasury CIO, the IRS CIO/CTO shall identify and
implement common enterprise IT services (e.g., infrastructure, cyber),
common architecture standards and federated governance opportunities to
improve the efficiency and effectiveness of all the organizations
operating within the Treasury Department.
Following are charts that show organizational structure:
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Question. What formal or informal mechanisms exist in your
department/agency to ensure coordination and alignment within the CXO
community (i.e., the Chief Information Officer, the Chief Acquisition
Officer, the Chief Finance Officer, the Chief Human Capital Officer,
and so on)?
Answer. The IRS has structures in place on several levels to create
opportunities for collaborative decisionmaking, to increase
information-sharing across organizational elements, and to ensure
alignment within the CXO community.
The IRS holds an agency-wide Senior Executive Team (SET) meeting
monthly, chaired by the IRS Commissioner, and including the Deputy
Commissioner for Services and Enforcement (DCSE), Deputy Commissioner
for Operations Support (DCOS), and Functional Operating Division Chiefs
and their deputies, to include the entire CXO community. The design of
the SET meetings ensures top-level strategies and policies are driven
down into the organization with consistency, and to enable coordination
and alignment on enterprise and cross-organizational initiatives,
risks, and current events facing the agency.
The DCOS also meets each week with his or her direct reports, which
includes CXO community chiefs. The DCOS conducts these meetings to
build a collaborative community of leaders under the DCOS to ensure
coordination and alignment as a strategic foundation for organizational
excellence and in delivering on the objectives and goals outlined in
the IRS strategic plan. Cross-organizational strategies and priority
initiatives are discussed; organizational risks, impacts and mitigation
strategies are brought to the table for discussion; administrative
requirements and recent items of significance are shared; and general
updates on current events are brought to light during these meetings.
DCOS also holds working sessions with the CXO community. The DCOS
designs these sessions to build and gain alignment on various themes/
strategies that require concerted time, deeper thinking and cross-
coordination among the team members. Subject matter discussed in these
types of meetings is usually specialized and high priority with
potentially large impacts on the CXO community and the entire Service.
DCOS conducts quarterly Business Performance Reviews (BPRs) with
each of the individual organizations within the CXO community.
Representatives from other CXO offices also attend to facilitate
information-sharing across the lines of business. The BPRs enable the
DCOS to get a comprehensive update on high-priority programs and
initiatives, to review program results and performance measures, and to
drive down guidance and preferences in managing various aspects of the
programs. Action items are noted in BPRs and implemented with follow-up
reporting at subsequent meetings.
Question. According to the Office of Personnel Management, 46
percent of the more than 80,000 Federal IT workers are 50 years of age
or older, and more than 10 percent are 60 or older. Just 4 percent of
the Federal IT workforce is under 30 years of age. Does your
department/agency have such demographic imbalances? How is it
addressing them?
Answer. The IRS Information Technology organization performs
extensive ongoing workforce analysis and data production to assist in
workforce planning. Over 5344 of the 7218 total IRS IT workers are over
age 50 (74 percent) and only 112 of the 7218 (or 2 percent) are under
30 years of age. These levels reflect a higher percentage of older IT
employees at the IRS, and lower percentage of younger employees than
OPM's analysis of the overall Federal IT workforce. Current budget
conditions and the hiring freeze in place since 2011 have challenged
the IRS to recruit a diverse workforce; therefore, the workforce will
continue to age and worse this demographic problem.
Question. How much of the department/agency's budget goes to
Demonstration, Modernization, and Enhancement of IT systems as opposed
to supporting existing and ongoing programs and infrastructure? How has
this changed in the last 5 years?
Answer. In 2012, the IRS spent 27 percent of its IT budget on
Development, Modernization and Enhancement (DME). DME spending between
2012 and 2015 has remaining relatively constant, averaging 27 percent
primarily due to development for new programs like the Affordable Care
Act and the Foreign Account Tax Compliance Act. The constancy occurred
during a period of decreases in the IT appropriated budget.
Unfortunately, keeping DME constant in a declining budget environment
occurs at the expense of investment in refreshing equipment and systems
to address the IRS's aging IT Infrastructure. The fiscal year 2016
budget request seeks to obtain funds to help refresh the aging IT
infrastructure, which would increase the proportion of the budget spent
on existing and ongoing programs and infrastructure (O&M).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Question. What are the 10 highest priority IT investment projects
that are under development in your department/agency? Of these, which
ones are being developed using an ``agile'' or incremental approach,
such as delivering working functionality in smaller increments and
completing initial deployment to end-users in short, 6-month
timeframes?
Answer. The IRS IT is currently implementing Rapid Delivery Methods
(RDM) to realize faster, better, and less expensive delivery of
development efforts across a broad spectrum of projects. Applying RDM
is fostering an agile development environment allowing IT to respond to
changing business needs while improving employee satisfaction and
accountability through streamlined processes. This enterprise RDM
effort is being implemented in waves. With each new wave, more project
teams are supporting IT as the agency goes deeper into agile execution,
use of state-of-the-art development tools, continuous integration and
test automation, and development of more mature knowledge bases and
artifacts (Play books, Wiki, Community of Practice). The following
shows the IRS IT's priorities that are in development in fiscal year
2015, showing status in use of Rapid Delivery Methods:
------------------------------------------------------------------------
Currently using Rapid Delivery
Projects Methods?
------------------------------------------------------------------------
Foreign Account Tax Compliance Act-- Yes
FATCA
------------------------------------------------------------------------
The FATCA legislation enhances the Service's ability to identify and
monitor US income movement in Foreign Financial Institutions,
ultimately improving international tax administration efforts.
------------------------------------------------------------------------
Customer Account Data Engine 2 TS2 Yes
(CADE 2)
------------------------------------------------------------------------
CADE 2 Transition State 2 (TS2) is the next step toward IRS's data-
centric vision. In TS2 IRS will make system enhancements to address
IRS's longstanding Unpaid Assessments Financial Material Weakness for
individual taxpayer accounts, rewrite its core taxpayer account
processing applications in modern programming languages, and establish
CADE 2 as the authoritative source for individual taxpayer account
data. TS2 will provide on-demand access to updated taxpayer account
information, enabling faster issue resolution and additional self-
service options for taxpayers.
------------------------------------------------------------------------
Modernized e-File--MeF (Next Yes
Release)
------------------------------------------------------------------------
MeF next release will complete the migration and implementation of MeF
element names from nonstandard XML to XML standard compliancy. Begin to
define requirements for the implementation of Form 1040NR (US
Nonresident Alien Income Tax Return) and Form 1040NR-EZ ( US Income Tax
Return for Certain Nonresident Aliens With No Dependents) along with 11
supporting forms and schedules and 2 new interfaces.
------------------------------------------------------------------------
Affordable Care Act (ACA) Yes
------------------------------------------------------------------------
ACA IT activity encompasses the planning, development, and
implementation of IT systems needed to support IRS' tax administration
responsibilities associated with key provisions of the Affordable Care
Act legislation. The work is organized into Releases that deploy
functionality to meet key legislative dates. Each release encompasses
multiple projects that need to be delivered at a specific point in
time. Currently IT is delivering functionality to address work to
support the Health Insurance Marketplaces and tax compliance
activities, as well as annual updates for non-Marketplace provisions in
the law.
------------------------------------------------------------------------
Web Applications Yes
------------------------------------------------------------------------
Web Applications will transition the IRS to the future digital
government by providing an enhanced taxpayer experience, a broad range
of self-service and innovative options that will enable taxpayers to
securely access their accounts through multiple digital channels (e.g.,
mobile, Web). Taxpayers will be able to obtain historical tax return
data, submit online payments, and receive status updates (e.g., return
status).
------------------------------------------------------------------------
Enterprise Case Management Yes (planned)
------------------------------------------------------------------------
The Enterprise Case Management system will provide an enterprise-wide
solution that uses Commercial Off-the Shelf (COTS) products, common
services and custom code to perform case management functions on a
standard infrastructure platform.
------------------------------------------------------------------------
Information Returns/Document Yes
Matching (IRDM)
Tech Demos
------------------------------------------------------------------------
IRDM improves business taxpayer compliance through the identification of
potential underreporters by using technology to match business tax
return filings to third-party information returns that focus on
merchant card payments and securities basis reporting. Increased
compliance reduces the tax gap.
------------------------------------------------------------------------
Return Review Program (RRP) No
------------------------------------------------------------------------
RRP enhances IRS capabilities to detect, resolve and prevent criminal
and civil non-compliance by advancing IRS effectiveness in detecting,
addressing, and preventing tax refund fraud. Through the application of
predictive fraud and non-compliance detection models the program will
seek out subtle data patterns to determine reliability of return data,
including filer's identity.
------------------------------------------------------------------------
E-authentication No
------------------------------------------------------------------------
E-authentication provides the common service framework to proof/register
individual identities and provide/validate credentials for electronic
access to IRS systems, applications and data repositories. This
capability enables the public the convenience of using a single
credential, via the Internet, to access a wide range of IRS
applications and services.
------------------------------------------------------------------------
Infrastructure Currency/Refresh N/A
------------------------------------------------------------------------
Infrastructure currency investments increase the long-term
sustainability of the IT enterprise through technology refreshment and
innovation to mitigate the risk of systems failure during the filing
season and to meet the industry standards required for the new IT
system design requirements for modernization projects. Examples of
infrastructure currency projects include critical refreshment of our
end user IT assets through a Customer Pain Points initiative, migration
of the our servers from Windows 2008 to 2012, and the implementation of
a unified communication platform, Network Convergence, that combines
voice, video and data onto a common network.
------------------------------------------------------------------------
Question. To ensure that steady state investments continue to meet
agency needs, OMB has a longstanding policy for agencies to annually
review, evaluate, and report on their legacy IT infrastructure through
Operational Assessments. What Operational Assessments have you
conducted and what were the results?
Answer. The IRS has completed Operational Analysis (OAs) annually
(since 2010) on purely steady-state major IT investments and the
steady-state portion(s) of mixed-lifecycle major IT investments. The
IRS shares the results internally through the IT chain of command and
then forwarded to Treasury. The IRS has conducted 82 OAs from fiscal
year 2010 to fiscal year 2013; 5 of 7 (71 percent) assessment areas had
overall mean scores in the green range (normal)--Cost, Schedule,
Performance, Stakeholder Satisfaction, and Business Results. However,
two assessment areas slipped from green into the yellow range in 2013--
Stakeholder Satisfaction and Business Results. Two of seven (29
percent) assessment areas had overall mean scores within the yellow
range (needs of attention)--Risk and Innovation. Risk ratings improved
significantly in 2013, which the agency attributed to increased
coaching support. Innovation is the newest assessment area in need of
attention. The agency conducted OAs on 17 major investments for fiscal
year 2014, the results of which should be available later this spring.
Question. What are the 10 oldest IT systems or infrastructures in
your department/agency? How old are they? Would it be cost-effective to
replace them with newer IT investments?
Answer. The oldest systems are those the IRS built in the 1960s.
This fact does not mean the IRS has made no changes since then. As the
budget allows, the IRS takes the opportunity to upgrade the hardware
and upgrade to the newest software release. However, the core
components and logic still exist on older programming languages. The
strategy has been and will continue to be to migrate off these systems
in a methodical manner. Because of system interdependencies, it is
often not as simple as replacing one system with another. The agency
must understand the chain effect and replace systems in the entire
chain or modify the business process to ensure nothing breaks. The IRS
always looks for opportunities to introduce these changes without
impacting the core mission.
Operating and maintaining these antiquated systems that date back
to the JFK era is very expensive and adds significant risk. These
systems are not nimble. We have few people at the IRS who have the
knowledge and skills to make needed programming changes year after
year, and they simply will not support new services expected by the
21st century taxpayer.
There is also a host of aging components in our base infrastructure
that need refreshing to keep our environments current for existing and
newly developed IT systems. Refreshment of our aging mainframes,
servers, laptops, network devices and communications equipment will
reduce operations and maintenance costs and risks associated with
components that no longer operate reliably or need additional
capability that is not available through an upgrade; that are being
retired because of non-support; and that are unable to support the
latest release of software, growth of current application demand or
meet the latest Federal security configuration standards
Question. How does your department/agency's IT governance process
allow for your department/agency to terminate or ``off ramp'' IT
investments that are critically over budget, over schedule, or failing
to meet performance goals? Similarly, how does your department/agency's
IT governance process allow for your department/agency to replace or
``on-ramp'' new solutions after terminating a failing IT investment?
Answer. The IRS leverages its Capital Planning and Investment
Control process to terminate troubled IT investments (or their
component projects and activities) that are no longer forecast to
deliver within acceptable cost or time constraints, and to initiate new
investments to meet the business needs.
As part of the Pre-Select phase of the process, the Commissioner
sets the strategic direction and the Senior Executive Team (SET). The
SET includes the Deputy Commissioners, CTO/CIO, CFO and all the
business operating division commissioners and is the executive-level
decisionmaking body for pre-selection, selection, and reselection of
information systems and technology capital investments. Activities in
this phase include identification and assessment of the mission-based
business need for proposed or ongoing IT investments, and/or
eliminating proposals (in the concept phase of development) that fail
to meet minimal acceptance criteria.
The IRS designed the Select phase to select proposals for funding
consideration that are critical to supporting the Treasury and IRS
missions and strategic objectives, and are technically viable and
financially sound. As an activity within this phase, on-going projects
that are no longer viable are either terminated (``off ramped''), or
paused, pending reassessment. The SET's approved fiscal year portfolio
codifies the re-selection and de-selection (off ramping) of any
investment. In past years, the Technology Investment Review Board
(TIRB) served this enterprise approval authority role, however the IRS
is enhancing its IT governance process to ensure alignment with the
Commissioner's enterprise governance framework and the changing Federal
Capital Programming policies. The Executive Review Team (ERT), which is
the executive body responsible for conducting the preliminary review
and evaluation of the IT investment proposals based on alignment to
strategic priorities, business value, return on investment, risk,
dependencies, business alternatives, business benefits, and performance
measures, supports the SET. The ERT develops and submits an IT
investment portfolio recommendation to the SET.
The IRS conducts monthly reviews of cost/schedule/performance data
versus planned data in support of the Control phase to determine if
investments are on track, or if the IRS needs to take corrective
actions. Monthly meetings with Treasury are held to review any
significant variances and address any corrective actions.
In the Evaluate phase of the investment lifecycle, the IRS conducts
an annual Operational Analyses on its major IT investments that have
been in operations and maintenance for at least 12 months. The IRS
provides the results to Treasury, and IT and Business executives. The
IRS utilizes the results to decide to keep/maintain the current
investment and to inform future investment decisions (lessons learned).
Question. What IT projects has your department/agency
decommissioned in the last year? What are your department/agency's
plans to decommission IT projects this year?
Answer. The IT portfolio really has three parts: run, mature and
transform. The ``run'' portion relates to sustaining operations with a
focus on maintaining the current infrastructure and systems to support
the core mission of tax adjudication. The ``mature'' portion is all
around enhancing the current environment to advance the IRS's world
class and data-centric vision. The ``transform'' portion focuses on
modifying the framework to meet the new challenges of a digital age. A
staple in each part includes finding ways to become more efficient.
Efficiency can take multiple forms like automating previously manual
tasks, putting in enhancements that streamline operations, business re-
engineering that eliminates steps and systems or reducing redundancy in
the portfolio. Regarding the latter, the IRS has a risk based approach
to the portfolio that uses factors like age of infrastructure, number
of users, count of trouble tickets against system, types of changes,
etc. to inform where to reduce the portfolio. The agency has stopped
further work on Information Return Document Matching Case Management
(IRDMCM) as it understood the project was going down a different path
than the enterprise approach. Additionally, the IRS has turned off an
older version of the data warehouse, the Integrated Production Model.
As the workforce shrinks, the IRS must continue to look at
opportunities to simplify its portfolio. The IRS has a significant case
management initiative where it is looking to collapse dozens of
applications into a small handful of reusable services. This effort
will be a multiple year project, but the expected outcome is to
decommission systems along the way.
Question. The newly-enacted Federal Information Technology and
Acquisition Reform Act of 2014 (FITARA, Public Law 113-291) directs
CIOs to conduct annual reviews of their agency/department's IT
portfolio. Please describe your agency/department's efforts to identify
and reduce wasteful, low-value or duplicative information technology
(IT) investments as part of these portfolio reviews.
Answer. The IRS's Operational Analysis (OA) process is applied, per
the Capital Programming Guide (a supplement to Office of Management and
Budget (OMB) Circular A-11) to major investments that have been in
operations and maintenance (O&M) for at least 12 months. The objective
of the OA process is to be able to make one of the following
recommendations:
--The investment should remain in steady state for the foreseeable
future, because it is performing as expected;
--In order to ensure continued investment viability, the investment
team should commence planning for Development/Modernization/
Enhancement (DME); or
--The investment should be considered as a candidate for
decommissioning and replaced because it is not meeting its
performance goals as identified within the scope of the
operational analysis.
The IR uses the outputs of the process to support key
decisionmaking, inform internal and external stakeholders, and provide
critical feedback to the select, control and evaluate phases of the IRS
Capital Planning and Investment Control (CPIC) process.
Question. In 2011, the Office of Management and Budget (OMB) issued
a ``Cloud First'' policy that required agency Chief Information
Officers to implement a cloud-based service whenever there was a
secure, reliable, and cost-effective option. How many of the agency/
department's IT investments are cloud-based services (Infrastructure as
a Service, Platform as a Service, Software as a Service, etc.)? What
percentage of the agency/department's overall IT investments are cloud-
based services? How has this changed since 2011?
Answer. The IRS embraces every opportunity to be a leader in
government. The pace in which it can embrace new practices,
technologies, and tools must be balanced against the existing funding
and resource capacities.
In the spirit of Cloud First, the IRS has made significant
investments in cloud technologies since 2011. For example, the IRS now
embraces an internal cloud concept with infrastructure-as-a-service
virtualization. The principle of elasticity is gained in this service
by being able to increase hardware for critical filing season needs and
reallocating hardware to other purposes outside of filing season. In
addition, IRS.gov is now using a private cloud for all non-personally
identifiable information (PII), with benefits such as auto scaling of
its computer and storage infrastructure to address peaks in usage of
popular IRS.gov offerings such as ``Where's my Refund.'' The IRS has
also used the Federal Risk and Authorization Management Program
(FedRAMP) approved public cloud offerings for several tests, including
performance testing of end-to-end filing season systems and scaling of
new applications. Although it is difficult to say what percentage of
the IRS's investments are cloud based services (e.g.one could argue the
entire ecosystem is a private cloud), the IRS continues to leverage
cloud offerings where it makes the best sense according to a project's
lifecycle, type of data and privacy considerations, and integration
with existing IRS applications.
Question. Please provide short summaries of three recent IT program
successes--projects that were delivered on time, within budget, and
delivered the promised functionality and benefits to the end user. How
does your department/agency define ``success'' in IT program
management? What ``best practices'' have emerged and been adopted from
these recent IT program successes? What have proven to be the most
significant barriers encountered to more common or frequent IT program
successes?
Answer.--
Project #1: Customer Account Data Engine 2 (CADE 2) Penalty and
Interest Project
On October 1, 2009, the IRS Commissioner formally launched the
Customer Account Data Engine 2 (CADE 2) program to take advantage of
new technology and revamp the way the IRS does business by providing a
data-centric solution that provides daily processing of taxpayer
accounts. In January 2012, the decades-long rhythm fundamentally
shifted when CADE 2's Transition State 1 (TS 1) began to deliver daily
tax return processing--enabling faster refunds to taxpayers, more
timely account updates, and faster issuance of taxpayer notices. The
Service also began deployment of the CADE 2 database--a single
centralized relational database of trusted data for individual taxpayer
accounts--to improve service to taxpayers and enhance IRS tax
administration.
CADE 2 Transition State 2 (TS2) is focused on delivering early
results. On July 29, 2013, the TS2 team took the first step in
addressing the longstanding Financial Material Weakness by delivering
the first TS2 project--the 2013 Mid-Year Release of the Integrated Data
Retrieval System (IDRS) Penalty & Interest (P&I) project. A full
rollout of the Penalty & Interest Common Code Base was deployed on
January 2, 2014. Penalty and Interest ensures all major IRS
applications compute penalty and interest in the same way using the
same algorithm. P&I is now calculating penalty and interest on
individual and business accounts for taxes that are not received by the
due date consistently across all master files (Business Master Files
and Individual Master Files) and IDRS--and it provides service
improvements for taxpayers such as more accurate notices and enhanced
service in helping taxpayers meet their tax obligation. The solution
uses the existing master file common code modules as baselines and
incorporates additional requirements for IDRS.
Since 1996, the Individual Master File (IMF) and Business Master
File (BMF), the authoritative sources for taxpayer account data, have
been using common code modules written in C programming language to
calculate penalty and interest on unpaid balances. On the other hand,
the Integrated Data Retrieval System (IDRS), the primary system used by
48,000 IRS customer facing representatives to collect unpaid taxpayer
account balances and manage unresolved cases, uses COBOL programming
language to do its calculations. The differences in the two programming
platforms in calculating penalty and interest causes discrepancies,
which the Government Accountability Office (GAO) deemed a financial
material weakness in IRS's tax processing systems. Hundreds of annual
legislative tax code changes and updates to the Master File Files and
IDRS systems at the request of the IRS's business partners have
exacerbated these discrepancies over the years.
In January 2015, the IRS deployed Penalty and Interest (P&I) Filing
Season 2015 code changes for the IMF, BMF and IDRS into production, and
addressed both TS2 common code break-fixes and operations and
maintenance work. The team also submitted 26 Unified Work Requests
(UWRs) as candidates for development in upcoming P&I releases.
Project #2: Foreign Account Tax Compliance Act (FATCA)
The IRS deployed the Foreign Account Tax Compliance Act (FATCA)
Release 2.0 on January 12, 2015, enabling registered Foreign Financial
Institutions (FFIs) and Host Country Tax Authorities (HCTAs) to send
Form 8966 electronically to the IRS via the International Data Exchange
Service (IDES). The 8966 data contains foreign account holdings of U.S.
taxpayers for Filing Season 2014 and will be stored in the
International Compliance Management Model (ICMM).
FATCA Release 2.0 was funded in March 2014--and in the span of 10
months--deployed brand new infrastructure and capabilities and an
interface with IDES. IDES represents a huge triumph for the IRS. It is
the first system that allows the international exchange of tax data
through the XML schema which has been accepted across the globe.
FATCA Release 2.0 represents the combined efforts of the IRS FATCA
Program Management Office (PMO), Large Business & International
collaborators, IT delivery partners, and other stakeholders from across
the Service. The IRS deployed FATCA Release 2.0 on time and delivered
the required IT functionality in compliance with legislative mandates.
Moreover, FATCA Release 2.0 was a tremendous success for the program in
the face of significant resource constraints, compressed delivery
timelines, technical complexity, and shifting requirements.
While FFIs have been able to register with the IRS and receive a
Global Intermediary Identification Number (GIIN) since December 2013,
FATCA Release 2.0 deployment on January 12, 2015 enables registered
FFIs and HCTAs to send Form 8966 to the IRS via IDES. This
functionality will enable reporting on the foreign account holdings of
U.S. taxpayers for Filing Season 2015, and that data will be stored in
the ICMM system for future refund and compliance activities.
Underreporting accounts for over 80 percent of the overall tax gap,
with an estimated $100 billion of tax revenues lost each year due to
offshore tax avoidance activities. FATCA's goal is to identify U.S.
taxpayers who attempt to shield and divert assets by depositing funds
in foreign accounts thus reducing the burden on compliant taxpayers.
Moreover, FATCA supports the IRS's efforts to ensure taxpayers with
income abroad and at home receive fair and equitable treatment and pay
the taxes they owe.
The FATCA PMO established channels and processes to ensure close
coordination and ongoing communication with FATCA business and IT
delivery partners (e.g., Governance Board, Advisory Board, town hall
and integration meetings, integrated production team meetings,
requirements working sessions, risk meetings, SharePoint tools/
resources, FATCA Fast Facts newsletter, etc.). These efforts were
instrumental in achieving a comprehensive understanding of business
requirements, building shared ownership in program successes, promoting
a mutual understanding of the risks/challenges, and identifying
mitigation strategies to address those challenges.
Project #3: Modernized e-File (MeF)
Modernized e-File (MeF) is a mixed life-cycle investment that is
the primary system to receive and process all tax returns submitted
electronically. MeF provides extensive error checking, data validation,
and acceptance or rejection acknowledgements to ensure successful
processing of returns by downstream tax systems. MeF Release 9.5
focused on the Affordable Care Act (ACA) verification service
interface, the Foreign Account Tax Compliance Act (FATCA) extensible
markup language phase 2 standardization, legislative mandates, and
operations and maintenance.
MeF is a major application sponsored by Wage & Investment and eFile
Services (formerly Electronic Tax Administration). The IRS initially
deployed MeF deployed in 2002 and it provides the following
functionality:
--Improved customer service to taxpayers by providing a framework for
modernizing the way tax returns are electronically filed and
processed;
--Operational efficiencies through the receipt of electronic returns
and supporting documentation through receipt, acceptance, and
faster acknowledgement; and
--Timely, consistent, and reliable information for external
stakeholders participating in e-filing.
MeF success is defined by delivering services or capabilities that
achieve the end user requirements and needs along with efficient and
effective supportability. MeF has been able to leverage lessons learned
from previous releases to improve its ability to deliver within scope,
on time, and within budget. Additionally, during Release 9.5 the MeF
Program Management Office (PMO) created a dependency swim lane chart
that allowed the program to improve its ability to track and report
dependencies with external projects and organizations. One of the most
significant barriers has been related to working with new legislative
programs that were unfamiliar with internal IRS processes which ensure
that dependencies related to other IRS projects are captured and
tracked.
______
Questions Submitted by Senator James Lankford
Question. In February, a Federal district court judge found that
the President's executive action on immigration violated the
Administrative Procedure Act and enjoined implementation.
Is the IRS complying with the injunction?
If the injunction has not been lifted or if the appeals process has
not been exhausted by April 15, will those living here illegally be
allowed to file back taxes and claim the tax credits?
Answer. The IRS does not believe that the creation of Deferred
Action for Parents of Americans (DAPA) or the expansion of Deferred
Action for Childhood Arrivals (DACA) (if implemented by Department of
Homeland Security U.S. Citizenship and Immigration Services (DHS
USCIS)) creates new tax administration responsibilities for the IRS.
The executive actions do not generate any new filing requirements under
the tax law. The executive actions also do not increase IRS compliance
responsibilities in relation to program implementation because
applicants are not required to show proof of Federal income taxes paid
when applying to either program. The injunction does not affect tax law
or IRS processes.
Individuals working in the United States, including those who
ultimately receive deferred action, are expected to comply with tax
requirements and U.S. tax laws. Under the Internal Revenue Code, an
individual who works in the United States regardless of legal status,
and who meets the requirements to file a Federal income tax return,
must file a return. All returns that claim refundable tax credits will
be subject to the same rigorous compliance programs developed to reduce
improper payments resulting from erroneous refundable credit claims
generally. The same audit and collection activities, as well as
criminal and civil enforcement mechanisms, will continue to apply to
these claims, subject to budget constraints.
Question. GAO has identified the enforcement of tax laws as a high
risk area since its inaugural report in 1990. The IRS estimates it paid
$5.2 billion in fraudulent identity theft (IDT) refunds in 2013 and it
has been reported that IDT refunds could rise to more than $20 billion
annually in the next few years.
What steps has the IRS taken to combat W-2 filings? What can
Congress do to make sure you have the tools to prevent the projected
increase in IDT refunds from skyrocketing into the future?
Answer. As noted in the GAO report, the IRS recovered or prevented
the issuance of $24.2 billion of the estimated attempted refund fraud
in Processing Year 2014, in part, by re-directing both funds and
resources from traditional tax compliance activities. However, identity
theft refund fraud continues to be an emerging and evolving issue.
Investing in new technology and techniques is critical to stopping and
preventing identity theft and refund fraud. For the IRS to continue
making progress, without degrading tax compliance, adequate resources
are critical to the mission. A major obstacle to more effectively
combatting identity theft and refund fraud is the current budget
situation.
Effectively combating identity theft is costly. In fiscal year
2014, for example, the IRS spent more than $380 million combating
identity theft and assisting innocent victims, but this effort needs to
be expanded. The fiscal year 2016 President's budget requests an
additional $101 million to continue and expand this important work.
The IRS efforts to combat identity theft are ongoing. Our
commitment to preventing refund fraud, investigating these crimes, and
assisting taxpayers victimized by identity theft is a top priority. We
have made significant progress in this area. In calendar year 2014
alone, our efforts have suspended or rejected 5.6 million suspicious
returns. We stopped 1.8 million confirmed identity theft returns,
totaling $10.8 billion in refunds stopped. Additionally, we stopped $5
billion worth of refunds for other types of fraud, totaling $15.8
billion of confirmed fraudulent refunds protected.
The IRS's fraud detection/revenue protection activities address
millions of questionable returns each year. All refund returns flow
through the Electronic Fraud Detection System (EFDS) and Dependent
Database (DDb) which contain complex fraud models and filters developed
from historical fraud characteristics used to identify questionable
income, withholding, refundable credits and/or taxpayer identity. In
addition to these systemic fraud checks, we perform analysis and pull
into inventory for review returns with similar characteristics that
indicate refund schemes. These fraud prevention efforts occur all year
long. In January 2013, we implemented a new program which allows
financial institutions to reject questionable refunds when the name/TIN
listed on the Department of Treasury Automated Clearing House (ACH)
file for the tax refund does not match the account holder information.
In addition, the IRS implemented the following improvements to
further combat fraud in fiscal year 2015:
--We began limiting the number of direct deposit refunds that can be
made to a single account to three (3) and additional refunds
are issued by paper check or are stopped for further review.
This change is expected to deter fraud and identity theft.
--We began receiving Device ID information to identify potential
identity theft or fraud. The Device ID is the unique serial
number of the device (for example, Computer, Smart Phone or
Tablet) which is transmitted when e-filing. The unique ID will
be transmitted as part of the electronically filed return via
our existing transmission process and will enable the IRS to
easily associate fraudulent returns that are filed from the
same device.
--For the 2015 filing season, we also increased the number of
identity theft filters over the previous filing season and
utilized dynamic lists to update filters based upon current
schemes, historical characteristics and/or patterns.
A major IRS project under development that will assist with pre-
refund fraud detection, income verification and taxpayer authentication
is the Return Review Program (RRP). This application will replace the
EFDS, enhancing many aspects of IRS compliance activity. RRP will
perform historical filing analysis and use improved complex programming
to review all returns for fraud potential enhancing IRS' ability to
identify and treat fraud and identity theft filings.
Congress can help the IRS in several ways to provide us the tools
and resources to continue making progress combating identity theft and
refund fraud but without degrading traditional tax compliance efforts.
For example, the enactment of a number of the administration's
legislative proposals contained in the General Explanations of the
Administration's fiscal year 2016 Revenue Proposals (the Green Book)
would further enhance IRS efforts to reduce refund fraud and identity
theft including:
--Accelerate Information Return Income Reporting: Requiring
information returns other than Forms 1099-B, Proceeds from
Broker and Barter Exchange Transactions, to be filed with the
IRS (or SSA, in the case of Form W-2) by January 31. Forms
1099-B would have to be filed with the IRS by February 15. The
proposal would also eliminate the extended due date for
electronically filed information returns. This legislative
proposal, if enacted, would give us the ability to verify the
amount of withholding taxpayers claim before refunds are paid
out.
--Correctable Error Authority: The IRS has authority in limited
circumstances to identify certain computation or other
irregularities on returns and automatically adjust the return
for a taxpayer, colloquially known as ``math error authority.''
At various times, Congress has expanded this limited authority
on a case-by-case basis to cover specific, newly enacted Code
amendments. The IRS would be able to significantly improve tax
administration--including reducing improper payments and
cutting down on the need for costly audits--if Congress were to
enact the budget proposal to replace the existing specific
grants of this authority with more general authority covering
computation errors and incorrect use of IRS tables. Congress
could also help in this regard by creating a new category of
``correctible errors,'' allowing the IRS to fix errors in
several specific situations, such as when a taxpayer's
information does not match the data in certain government
databases.
--Authority To Regulate Return Preparers: In the wake of court
decisions striking down the IRS' authority to regulate
unenrolled and unlicensed paid tax return preparers, Congress
should enact the budget proposal to provide the agency with
explicit authority to regulate all paid preparers. The
regulation of all paid preparers, in conjunction with diligent
enforcement, would help promote high quality services from tax
return preparers, improve voluntary compliance, and foster
taxpayer confidence in the fairness of the tax system.
--Expanded Access to Directory of New Hires: Under current law, the
IRS is permitted to access the Department of Health and Human
Services' National Directory of New Hires only for purposes of
enforcing the Earned Income Tax Credit and verifying employment
reported on a tax return. The proposal would allow IRS access
to the directory for individual income tax administration
purposes that include data matching, verification of taxpayer
claims during return processing, preparation of substitute
returns for non-compliant taxpayers, and identification of levy
sources.
There are a number of other legislative proposals in the
administration's fiscal year 2016 budget request that would also assist
the IRS in its efforts to combat identity theft, including: giving the
Department of Treasury (Treasury) and the IRS authority to require or
permit employers to mask a portion of an employee's Social Security
Number (SSN) on W-2s, which would make it more difficult for identity
thieves to steal SSNs; adding tax-related offenses to the list of
crimes in the Aggravated Identity Theft Statute, which would subject
criminals convicted of tax-related identity theft crimes to longer
sentences than those that apply under current law; and adding a $5,000
civil penalty to the Internal Revenue Code for tax-related identity
theft cases, to provide an additional enforcement tool that could be
used in conjunction with criminal prosecutions.
Another way is fully funding the IRS. IRS funding for fiscal year
2015 is $10.9 billion, which is significantly less than fiscal year
2014 budget of $11.3 billion or the fiscal year 2010 budget of $12.1
billion. Along with shrinking budgets is a diminished work force. The
IRS fiscal year 2014 full-time equivalent (FTE) realization was more
than 11,500 employees less in comparison with those of fiscal year
2010. And for fiscal year 2015, we anticipate further staffing
reductions for a total reduction of over 13,000 employees since fiscal
year 2010.
Maintaining adequate staffing levels is an increasingly difficult
challenge at current funding levels and critical work on developing new
identity theft prevention tools has been delayed. Examples of new
information technology capabilities that could not be implemented in
fiscal year 2014 due to lack of funding included: adding steps to the
e-file PIN phone and Web applications to prevent identity thieves from
obtaining e-file PINS, and developing an IRS Web site for taxpayers
victimized by identity theft to validate their identities using third-
party data. Continued funding limitations will negatively affect
critical work on developing new identity theft prevention tools, such
as the Return Review Program (RRP). The solution to address these
challenges begins with fully funding the IRS.
Question. How could the acceleration of W-2 deadlines help combat
IDT refunds? When do you expect the ongoing cost-benefit analysis on W-
2 acceleration to be publically released?
Answer. To effectively stop identity theft refund fraud, the IRS
must evaluate innovative approaches to supplement conventional
measures. Information returns (forms such as Forms W-2 and 1099)
submitted by third parties provide authoritative source data that can
serve an important role in preventing tax return-based identity theft
and fraud. A delay in receiving information returns makes return
verification more difficult. The ability to use information documents,
submitted by third-party payers to verify suspicious tax returns at the
time of filing, before refunds are issued, would give the IRS the
ability to stop more refund fraud.
Under current law, Forms W-2 must be filed with the Social Security
Administration (SSA) by the last day of February, or by March 31 if
filed electronically. Currently, the IRS screens returns for fraud and
identity theft at multiple points in the processing life cycle and
addresses the lag time in receiving third-party information reporting
by using filters and compliance checks to identify potential identity
theft and fraud. If any is detected, the IRS holds suspect refunds
until the amounts claimed can be validated. When necessary, the IRS
contacts employers to verify questionable return information. As the
identity theft program evolved, the IRS leveraged the identity theft
indicators on taxpayers' accounts to place additional proactive tools
that identify fraudulent returns when they are filed and accelerate the
use of information returns received to identify questionable returns
earlier.
Accelerating information return filing due dates would greatly
enhance the IRS's ability to verify suspicious returns earlier in the
process and help us do a better job of stopping improper payments. The
IRS convened a working group of internal stakeholders and subject
matter experts to identify the costs and benefits of accelerating Form
W-2 deadlines.
Question. You have requested authority to reduce the current, 250-
return threshold for employers electronically filing information
returns.
How has the utilization of electronic filings succeeded in creating
costs savings thus far?
Answer. Electronic filing supports the broader goals of improving
IRS service to taxpayers, enhancing compliance, and modernizing tax
administration. Expanding electronic filing will help provide tax
return information in a more uniform electronic form, which will
enhance the ability of the IRS to more productively focus its audit
activities. This can reduce burdens on businesses where the need for an
audit can be avoided. Overall, increased electronic filing of returns
may improve satisfaction and confidence in the filing process.
It costs the IRS $3.54 to process a paper 1040 versus only 18 cents
to process the 1040 electronically. With the increase in electronic
filing, the IRS has realized savings in multiple areas including
reducing the number of sites processing incoming returns from 10 to 5.
Question. What are the estimated cost savings that can be achieved
by lowering the threshold to 5 or 10 filings?
Answer. Your question references the administration's legislative
proposal ``Enhance Electronic Filing of Returns'' which is included in
the Green Book. Congress can help us further enhance our efforts to
reduce costs and increase accuracy by enacting this proposed
legislation.
The proposal requests that regulatory authority be expanded to
allow reduction of the 250-return threshold in the case of information
returns such as Forms 1042-S, 1099, 1098, 1096, 5498, 8805, 8955-SSA,
and 8966. Any new regulations would be required to balance the benefits
of electronic filing against any burden that might be imposed on
taxpayers, and implementation would take place incrementally to afford
adequate time for transition to electronic filing. Taxpayers would be
able to request waivers of this requirement if they cannot meet the
requirement due to technological constraints, if compliance with the
requirement would result in undue financial burden, or as otherwise
specified in regulations.
If legislation was enacted, and the e-file threshold for
information returns was lowered from 250 to 5, we estimate
approximately 38 million more information returns that are currently
filed on paper would be submitted electronically. This change in paper
receipts would result in an opportunity to reinvest approximately $16
million annually.
In addition to receiving more information returns electronically,
earlier receipt of information returns would enable the IRS to prevent
more identity theft and fraud. Another fiscal year 2016 legislative
proposal would require information returns to be filed with the IRS (or
SSA, in the case of Form W-2) by January 31. The exception is Form
1099-B, Proceeds from Broker and Barter Exchange Transactions, which
would have to be filed with the IRS by February 15. The proposal would
also eliminate the extended due date for electronically filed
information returns. If enacted, this proposal would further enhance
IRS efforts to reduce refund fraud and identity theft.
Question. Billions of dollars are wasted every year because the IRS
has little ability to monitor overpayments or prevent EITC payments to
ineligible recipients. In the last decade, 21 to 29 percent of all EITC
payments were erroneously awarded each year, including between $13.3
and $15.6 billion in fiscal year 2013. A GAO audit of improper payments
found much of the waste is preventable, attributing EITC's unacceptable
error rate to a number of factors including, ``complexity of the tax
law, structure of the program, confusion among eligible claimants, high
turnover of eligible claimants, and unscrupulous return preparers.''
Your testimony mentions preparer penalties and due diligence
requirements to help mitigate the overpayment problems.
Can you go into more specifics on what these initiatives entail?
Answer. The IRS improper payment strategy is to intervene early to
ensure compliance with the rules and regulations. We address improper
payments through our compliance programs for both preparers and
taxpayers, as well as through extensive outreach and education.
Results of our fiscal year 2014 actions include:
--Detected and stopped 645,813 fraudulent returns through fraud
detection filters from being processed, preventing nearly $3.2
billion in improper EITC payments;
--Protected another $3.2 billion in revenue through the following
compliance activities:
--435,638 audits
--1,053,304 misreported income cases
--210,000 math error adjustments
--Completed a new error rate estimate based on the EITC component of
the Tax Year 2010 National Research Plan (NRP) study that meets
IPIA standards for measuring and reporting on improper
payments;
--Completed the fiscal year 2015 action plan to reduce improper
payments and a root cause analysis based on NRP and compliance
study data;
--Continued to analyze the most recent compliance study and NRP data
to inform our compliance strategy and update EITC
administration where feasible;
--Imposed over 4,774 2-year bans and 102 10-year bans on taxpayers
from claiming the EITC in cases where the IRS determined during
an EITC audit that the taxpayer intentionally disregarded the
rules and regulations or committed fraud;
--Alerted approximately 97,000 taxpayers that a qualifying child for
the EITC claimed on their returns had also been claimed by
another person; and
--Stopped fraudulent EITC refund claims through our Criminal
Investigation (CI) division indictments
--285 EITC Questionable Refund Program (QRP) scheme indictments
with 262 convictions
--108 EITC Return Preparer indictments with 83 convictions.
Return Preparer Programs
Paid return preparers assisted in the preparation of 55 percent of
all EITC claims in tax year 2013. Because evidence suggests that
unscrupulous preparers and preparers not exercising due diligence
contribute to overall improper EITC claims, the IRS has expanded its
efforts to address preparers in recent years.
The IRS continues to have an EITC-focused paid return preparer
initiative. This effort includes continued outreach and compliance
actions to address preparer EITC due diligence noncompliance using
existing treatments and continued testing of new preparer treatments
and approaches. The objective is to reduce the risk of EITC erroneous
refunds by focusing efforts on noncompliant return preparers before and
early in the filing season.
In fiscal year 2014, the IRS expanded the EITC Return Preparer
Strategy to include over 18,000 non-compliant taxpayers. Corrective
actions taken prior to the filing season to address noncompliance
included pre-filing season letters, educational visits, prior year
client return audits, and preparer due diligence audits. The filing
season corrective actions included letters, phone calls, client return
audits, and preparer due diligence audits. For example:
--Pre-Filing Season and Filing Season Notices: The IRS sends
compliance and warning notices to preparers to educate them on
their due diligence responsibilities and the consequences of
noncompliance.
--Due Diligence Visits (DDVs): Field examiners audit EITC preparers
to verify they are meeting their due diligence requirements and
assess penalties as warranted. In fiscal year 2014 examiners
completed 411 pre-filing season DDVs with a penalty rate of 84
percent and over $22 million in proposed penalties, 296 filing
season DDVs with a penalty rate of 80 percent and over $3.5
million in penalties, and almost $300,000 on 21 filing season
DDVs as a follow-up for continuing noncompliant preparers who
received an educational visit.
--Knock and Talk Visits: This integrated approach consists of
Criminal Investigation (CI) agents and examiners visiting EITC
preparers to educate them on EITC laws and due diligence
requirements. During fiscal year 2014, 96 Knock and Talk Visits
were conducted.
--EITC Due Diligence Injunctions: This initiative utilizes the
results of previous IRS compliance actions to enable an
efficient injunction process to prevent egregious preparers
from filing future returns. For fiscal year 2014, the IRS,
working with the Department of Justice, obtained four civil
injunctions with a revenue impact of $14.5 million.
--Undercover Shopping: The IRS continues its efforts around EITC paid
preparers, including undercover shopping by CI agents and
preparer investigations.
Fiscal year 2014 was the third year that preparers were subject to
the increased IRC Sec. 6695(g) penalty that increased from $100 to $500
and were required to comply with the expanded Treasury Regulations
Sec. 1.6695-2. As part of their due diligence, these regulations
require paid preparers to attach Form 8867 (the EITC due diligence
checklist), previously retained in their records, to their clients'
returns and require preparers to retain client records on which they
had relied to make an EITC eligibility determination.
The IRS sends Letter 1125, Transmittal of Examination Report,
proposing due diligence penalties on noncompliant return preparers who
fail to attach or submit the Form 8867 to their clients' EITC returns.
--For tax year 2012, the IRS issued Letter 1125 to 774 noncompliant
EITC return preparers proposing over $13 million in due
diligence penalties.
--For tax year 2013, the IRS issued 225 letters proposing almost $2.9
million in due diligence penalties.
Return preparers have 30 days from the issuance of the letters to
respond and request an Appeals hearing.
We continue to conduct outreach and education activities to EITC
return preparers regarding EITC due diligence requirements. Over 13,600
preparers received a certificate of completion for the English and
Spanish interactive EITC Due Diligence Training modules. At the 2014
Nationwide Tax Forums, more than 4,150 preparers attended the EITC due
diligence presentation and 5,486 attended the child-related tax
benefits presentation.
Question. What other steps can IRS and Congress take to prevent 25
percent overpayment rates?
Answer. Congress can help us further enhance our efforts to reduce
EITC improper payments by enacting the following legislative proposals:
--Correctable Error Authority (CEA): The proposal would remove the
existing specific grants of math error authority, and provide
that ``math error authority'' will refer only to computational
errors and the incorrect use of any table provided by the IRS.
In addition, the proposal would add a new category of
``correctable errors.'' Under this new category, Treasury would
have regulatory authority to permit the IRS to correct errors
in cases where (1) the information provided by the taxpayer
does not match the information contained in government
databases, (2) the taxpayer has exceeded the lifetime limit for
claiming a deduction or credit, or (3) the taxpayer has failed
to include with his or her return documentation that is
required by statute. The proposal would be effective on the
date of enactment. However, the IRS' current grant of math
error authority would continue to apply until Treasury and the
IRS issue final regulations addressing correctable errors.
The IRS detects far more potential non-compliance using
filters than it can pursue given limited examination resources.
If enacted, correctible error authority, combined with
resources to develop and perfect new data sets and compliance
filters, could potentially allow the IRS to prevent billions
more in EITC improper payments than it does today.
--Accelerated Information Return Income Reporting: Under current law,
most information returns, including Forms 1099 and 1098, must
be filed with the IRS by February 28 of the year following the
year for which the information is being reported, while Form W-
2 must be filed with the SSA by the last day of February. The
due date for filing information returns with the IRS or the SSA
is generally extended until March 31 if the returns are filed
electronically. The administration's proposal would require
information returns to be filed with the IRS (or the SSA, in
the case of Form W-2) by January 31, except that Form 1099-B
would have to be filed with the IRS by February 15. The
proposal would also eliminate the extended due date for
electronically filed returns.
--Authority To Regulate Return Preparers: In the wake of court
decisions striking down the IRS' authority to regulate
unenrolled and unlicensed paid tax return preparers, Congress
should enact the budget proposal to provide the agency with
explicit authority to regulate all paid preparers. The
regulation of all paid preparers, in conjunction with diligent
enforcement, would help promote high quality services from tax
return preparers, improve voluntary compliance, and foster
taxpayer confidence in the fairness of the tax system.
--Due Diligence: Return preparers who prepare tax returns on which
the EITC is claimed must meet certain due diligence
requirements to ensure their clients are in fact eligible to
receive this credit. In addition to asking questions designed
to determine eligibility, the preparer must complete a due
diligence checklist (Form 8867) for each client and file the
checklist with the client's return. The administration's
proposal would extend these additional due diligence
requirements to all Federal income tax returns claiming the CTC
and the ACTC. The existing checklist would be modified to take
into account differences between the EITC and CTC.
Question. The President's recent actions on immigration and the IRS
confirmed that those that get Social Security Numbers will be able to
file retroactively to gain EITC refunds for three back years.
Do you anticipate that the EITC fraud rates will rise or fall with
this new influx? What is the anticipated amount of additional EITC
payments resulting from the immigration action? How does the IRS plan
to evaluate fraud associated with the influx?
Answer. The IRS does not believe that the creation of DAPA or the
expansion of DACA (if implemented by DHS USCIS) creates new tax
administration responsibilities for the IRS. The executive actions do
not generate any new filing requirements under the tax law. The
executive actions also do not increase IRS compliance responsibilities
in relation to program implementation because applicants are not
required to show proof of Federal income taxes paid when applying to
either program.
A taxpayer may claim the EITC for a taxable year using an SSN
acquired in a later taxable year (subject to refund limitations under
section 6511 of the Internal Revenue Code). Section 32 of the Code
requires an SSN on the return, but a taxpayer claiming the EITC is not
required to have an SSN before the close of the year for which the EITC
is claimed. There is no requirement for individuals who claim
refundable credits to identify themselves, at filing, as having
received a deferred action or employment authorization under these
programs.
In working to ensure compliance with EITC rules, the IRS uses
third-party data to verify that individuals claiming the EITC meet the
requirement that they are a U.S. citizen or resident alien. Applicants
must supply valid SSNs on their tax returns in order for the EITC claim
to be processed. The IRS uses the SSA database to check that
individuals claiming the EITC have provided valid SSNs for themselves
and any qualifying children.
Participants in the existing DACA program who claim refundable tax
credits will be subject to the same rigorous compliance programs
developed to reduce improper payments resulting from erroneous
refundable credit claims generally. The same audit and collection
activities, as well as criminal and civil enforcement mechanisms, will
continue to apply to these claims, subject to budget constraints.
The IRS will continue to take actions to reduce improper payments
as they relate to refundable credits.
Question. A glitch in the healthcare.gov Web site used the wrong
year's data for subsidy calculations that caused 800,000 taxpayers to
receive erroneous tax forms for their subsidy. The administration
announced that it will not require the 50,000 taxpayers who filed
returns based on inaccurate subsidy data, although taxpayers who are
owed a larger subsidy can file an amended return.
What are the estimated total costs for this glitch through both the
overpayments to the 50,000 taxpayers who had already filed and the
administrative costs to resend the correct subsidy data?
Answer. The IRS believes any overpayments to taxpayers who had
already filed their income tax returns using Forms 1095-A that
contained the incorrect second lowest cost silver plan are relatively
small--smaller than the administration and collection costs that would
be involved in processing an amended return or determining the correct
amount and collecting it. As the provider of the forms, any questions
you have concerning the cost of resending corrected forms should be
directed to CMS.
______
Questions Submitted by Senator Richard J. Durbin
Question. Americans now hold more than $1.2 trillion in student
loan debt, which has become the largest household debt following
mortgage debt, even surpassing credit card debt. Student loan balances
have tripled over the past decade, forcing many to delay important
financial steps like buying a home, starting a business, and saving for
retirement. Most unfortunately, delinquencies are on the rise as many
struggle to repay student loan debt. Understanding these trends, it is
critical borrowers have options to successfully repay.
Income-driven repayment options give Federal student loan borrowers
the opportunity to include income in monthly payment calculations,
which prove helpful for the millions of students whose debt far exceeds
their income. These repayment plans help give borrowers a more
affordable monthly payment, enabling them to stay current on their
loans.
Currently, Federal student loan borrowers wishing to continue
enrollment in income-driven repayment plans must submit tax returns to
provide income information on an annual basis, regardless of any change
in income. If a borrower fails to do so--which many do--then his or her
monthly payments default to higher amounts which in many cases is
unaffordable, leading them to delinquency or default.
The IRS in previous years has allowed borrowers in income-
contingent repayment to give multi-year advance consent to share the
relevant income information required to continue participation in the
program. Many have suggested reinstating this option would ensure
borrowers in income-driven plans can manage their monthly loan
payments, preventing delinquency and default. Further, it would reduce
the paperwork burden on the IRS, borrowers, and servicers.
Has the IRS considered reinstating multi-year consent to share
income information for Federal student loan borrowers enrolled in
income-driven repayment plans? If so, what opportunities or barriers
exist to doing so?
Answer. There is no statutory or regulatory prohibition to a multi-
year consent, so long as the taxpayer may revoke it. However, the
instructions to Form 8821, ``Tax Information Authorization,'' and Form
2848, ``Power of Attorney and Declaration of Representative,'' indicate
the period of consent may not extend for more than 3 years going
forward. This language reflects strong legal and policy concerns over
``stale'' consents. In addition, IRS' systems are only programmed for
the 3-year rule.
In previous years, the multi-year consents to share tax return
information with the Department of Education (DOE) had to be submitted
to the IRS on paper. This format is still required as the IRS does not
have the capability to accept these consents electronically. Based on
discussions with DOE, it is the IRS's understanding DOE does not want
to obtain paper consents from students, but wants to be able to obtain
and allow students to file these consents electronically. Currently,
the IRS's limited IT resources are required to implement unfunded
legislative mandates, i.e., ACA, FATCA, ABLE accounts, and Certified
Professional Employment Organizations, and are not available to develop
a system for accepting consent forms electronically. Also, an
alternative to using multi-year consents for income-driven repayment
plans currently exists: the IRS has modernized its transcript delivery
options to provide taxpayers with an easy and automated option for
requesting their tax information. A taxpayer can submit a request
online at www.irs.gov to receive an online copy of his or her tax
account transactions, line-by-line tax return information or wage and
income reported to us for a specific tax year. The student may then
share this information with DOE to enroll in an income-drive repayment
plan.
Question. Last month, GAO highlighted estimates by the IRS which
showed $5.8 billion was paid out last year on fraudulent tax returns. I
commend the IRS for working within its challenging budget and
dedicating resources to combat this criminal problem, which also led to
recovering or preventing $24.2 billion from being paid to tax frauds
last year.
At the same time, the IRS can and should do better--this problem
cannot be eliminated without strong resources for enforcement, such as
technology, research, and personnel.
Can you explain how investing in preventing identity theft and tax
fraud would benefit the Federal Government and taxpayers and what would
happen should the agency not have the ability to do so? What
improvements would be made if the IRS had additional resources to
address the $5.8 billion paid out last year on fraudulent tax returns,
as well as identify other fraudulent tax returns not currently
identifiable?
Answer. As noted in the GAO report, the IRS recovered or prevented
the issuance of $24.2 billion of the estimated attempted refund fraud
in processing year 2014, in part, by re-directing some funding and
resources from traditional tax compliance activities. But identity
theft refund fraud is an emerging and evolving issue. Continually
investing in new technology and techniques is critical to stopping and
preventing identity theft and refund fraud. For the IRS to continue
making progress, without degrading traditional tax compliance efforts,
adequate resources are critical to the mission. A major obstacle to
more effectively combatting identity theft and refund fraud is the
current budget situation.
In the National Taxpayer Advocate's 2014 Annual Report to Congress
she writes ``The IRS's ability to meet taxpayer needs has been
deteriorating for the past decade as the agency's workload has
increased and its budget has declined.'' \1\
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\1\ Taxpayer Advocate Service--2014 Annual Report to Congress--
Volume One page 5.
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The IRS funding for fiscal year 2015 is $10.9 billion, which is
significantly less than fiscal year 2014 budget of $11.2 billion or the
fiscal year 2010 budget of $12.1 billion. Along with shrinking budgets
is a diminished work force. The IRS fiscal year 2014 full-time
equivalent (FTE) realization was more than 11,500 employees less in
comparison with those of fiscal year 2010. And for fiscal year 2015, we
anticipate further staffing reductions for a total reduction of over
13,000 employees since fiscal year 2010.
Maintaining adequate staffing levels is an increasingly difficult
challenge at current funding levels and critical work on developing new
identity theft prevention tools has been delayed.
Identity theft refund fraud is an evolving issue. Ongoing
investment in new technology and techniques is critical to stopping and
preventing identity theft and refund fraud. For the IRS to continue
making progress and without degrading traditional tax compliance
efforts, adequate resources are critical to the mission.
The solution to address these challenges begins with fully funding
the IRS.
Question. A recent front-page New York Times article, ``Some Owners
of Private Colleges Turn a Tidy Profit by Going Nonprofit,'' raised
concerns about the way in which some for-profit colleges have converted
to non-profit status. This may be a growing trend in the industry.
Are you aware of the circumstances surrounding these transactions,
especially where they appear in reports to have been structured in a
way that enriches the schools' owners and abuses the non-profit
structure through questionable self-dealing? Please provide an
assessment of such transactions to date.
Answer. Section 6103 of the Internal Revenue Code (``Code'')
prohibits the disclosure of information about specific taxpayers unless
a Code provision authorizes such a disclosure. Therefore, the IRS
cannot comment about the circumstances, or provide an assessment of,
any particular transactions. As a general matter, an organization will
not qualify under section 501(c)(3) unless ``no part of [its] net
earnings . . . inures to the benefit of any private shareholder or
individual.'' This prohibition on inurement is implicated when there
are transactions between the exempt organization and an individual who
is an insider. Generally, an insider is a person who is in a position
to exercise control or influence over the organization and would
generally include, but is not necessarily limited to, an organization's
founders, trustees, directors, officers, and key employees.
There is nothing in section 501(c)(3) to prohibit dealings between
a charitable organization and its insiders (those in controlling
positions) as long as those dealings are at arm's length, in good
faith, and reasonable. For example, if an organization pays a
reasonable compensation to its founder for services rendered, that is
not inurement. However, when the interests of the charity are
sacrificed to the private interests of the founder or another insider,
exemption may be jeopardized.
The courts have broadly construed the term ``net earnings'' as used
in the prohibition on inurement to include more than gross receipts
minus disbursements as shown on the organization's books and records.
Examples of inurement include: excessive compensation (see Church of
Scientology, 823 F.2d 1310 (9th Cir. 1987)); interest-free, unsecured
loans and payment of personal expenses (see John Marshall Law School v.
U.S., 228 Ct. Cl. 902 (1981)); excessive rents and improvements made on
real estate owned by insiders (see Texas Trade School v. Commissioner,
272 F.2d 168 (5th Cir. 1959)); reports and surveys furnished to members
(see General Contractors' Ass'n v. U.S., 202 F.2d 633 (7th Cir. 1953));
and, services to members (see Chattanooga Auto Club v. Commissioner,
182 F.2d 551 (6th Cir. 1950)).
Additionally, under section 4958, an excise tax is imposed on
disqualified persons who engage in excess benefit transactions with the
charitable organization. A disqualified person is any person in a
position to exercise substantial influence over the affairs of the
organization and also includes family members of the disqualified
person and entities controlled by the disqualified person (owning more
than 35 percent voting power). An excess benefit transaction is ``any
transaction in which an economic benefit is provided by an applicable
tax-exempt organization directly or indirectly to or for the use of any
disqualified person if the value of the economic benefit provided
exceeds the value of the consideration (including the performance of
services) received for providing such benefit'' (IRC Sec. 4958(c)(1)).
The legislative history of section 4958 provides that the section 4958
excise tax may be imposed in lieu of (or in addition to) revocation of
an organization's tax-exempt status.
As described above, executive compensation may implicate both
inurement and excess benefit transaction rules. The final report,
Colleges and Universities Compliance Project, describes what the IRS
learned about the amounts of compensation paid by colleges and
universities that were examined, the process by which compensation
amounts were determined, and whether those amounts were reasonable. For
top management officials in both public and private colleges that were
examined, the average total compensation was a little over $600,000 and
the median total compensation was about $500,000. It should be noted
the schools selected for examination did not represent a statistical
sample of all colleges and universities, which means the results are
not attributable to all colleges and universities, only to the schools
examined. As a result of the issues identified in the report, the IRS
is seeking to ensure, through education and examinations, that tax-
exempt organizations are aware of the importance of using appropriate
comparability data when setting compensation.
Finally, the IRS maintains an ongoing examination program to ensure
exempt organizations continue to meet the requirements for tax-exempt
status. When the IRS receives information about an organization that
raises questions about its continued exempt status or compliance with
the tax laws, it reviews it to determine if it warrants an examination
or other action.
______
Questions Submitted to Hon. J. Russell George
Questions Submitted by Senator John Boozman
information technology security
Question. The IRS is responsible for safeguarding a vast amount of
sensitive financial and personal data, processing returns that contain
confidential information for over 100 million taxpayers. The agency
needs to protect taxpayer information from misuse, improper disclosure,
or destruction. This responsibility is even more complex given the vast
amount of data being sent and exchanged as part of the Affordable Care
Act.
TIGTA has consistently ranked protection of taxpayer data as one of
the highest priority challenges facing the IRS. In addition, GAO noted
that although the IRS is making progress in addressing information
security, weaknesses remain that could affect the confidentiality,
integrity, and availability of financial and sensitive taxpayer data.
In your fiscal year 2014 Federal Information Security Management
Act report you identified four security program areas which were not
fully effective due to one or more Department of Homeland Security
(DHS) guideline program attributes that were not met. You noted that
the IRS had not yet implemented its Information Security Continuous
Monitoring strategy, and that the IRS did not always report incidents
involving Personally Identifiable Information to the U.S. Computer
Emergency Response Team (US-CERT) within established timeframes. The
report also noted that the IRS had not yet fully implemented a process
for identifying and tracking contractors who are required to complete
specialized training, and had not fully implemented unique user
identification and authentication that complies with Homeland Security
Presidential Directive-12 (HSPD-12).
In that report your office noted that until the IRS takes steps to
improve its security program deficiencies and fully implements all 11
security program areas required by the FISMA, taxpayer data will remain
vulnerable to inappropriate use, modification, or disclosure, possibly
without being detected.
Would you please update the subcommittee with specific information
on the status of the IRS' progress on addressing these deficiencies?
Answer. We plan to begin an assessment of the Federal Information
Security Management Act (FISMA) for fiscal year 2015 later this year,
with a final report scheduled for issuance in September 2015. As in
previous years, we will evaluate the progress being made on the
security program areas required by the FISMA. For fiscal year 2015, one
security area, Security Capital Planning, has been dropped for this
year's FISMA assessment by the Office of Management and Budget and the
Department of Homeland Security. When we complete this year's FISMA
audit, we would be happy to share our assessment of the IRS's progress
to better protect taxpayer information in the context of the 10
security program areas.
payments to prisoners
Question. In the past TIGTA has identified refund fraud committed
by prisoners as a significant problem for tax administration. Just last
fall a report noted that refund fraud associated with prisoner Social
Security Numbers remains a serious problem. The number of fraudulent
tax returns filed using a prisoner's Social Security Number that were
identified by the IRS increased from more than 37,000 tax returns in
calendar year 2007 to more than 137,000 tax returns in calendar year
2012. The refunds claimed on these tax returns increased from $166
million to $1 billion.
I understand that Treasury has the authority to share information
with the Federal Bureau of Prisons and State Departments of Corrections
to help determine if prisoners may have filed or help the filing of a
fraudulent return.
Would you please give us an update on the effectiveness of the IRS'
efforts to reduce these improper payments to prisoners, specifically:
Has the IRS shared fraudulent prisoner tax return information with
Federal or State prison officials? Has the Commissioner, Wage and
Investment Division, established a Memoranda of Understanding with the
Federal Bureau of Prisons and all State Departments of Corrections?
Answer. As of March 24, 2015, the IRS has still not shared any
fraudulent prisoner tax return information with Federal or State prison
officials. In addition, the IRS indicated that as of March 24, 2015, it
has not completed a Memorandum of Understanding with the Federal Bureau
of Prisons. The IRS has completed Memoranda of Understanding with seven
State Departments of Corrections. Thirteen State Departments of
Corrections have elected not to participate in this program.
Question. Has the IRS developed processes to identify tax returns
filed that have the same characteristics of confirmed fraudulent
prisoner tax returns? If no, why not? Has the IRS determined whether
these tax returns should be included in the annual report to Congress?
Answer. The IRS has not developed processes to identify tax returns
filed that have the same characteristics of confirmed fraudulent
prisoner tax returns.
We recommended that the IRS develop processes to identify tax
returns filed that have the same characteristics as confirmed
fraudulent prisoner tax returns, including those fraudulent tax returns
identified as part of the IRS's other fraud detection programs, and
determine whether these tax returns should be included in the annual
report to Congress. However, the IRS disagreed with our recommendation,
stating that the methodology used in the annual report to Congress is
consistent with the methodology used in reports of previous years. The
IRS stated that it reports all known false and fraudulent returns filed
by prisoners as required by the statute. We remain concerned that the
IRS's annual report only includes false and fraudulent tax returns
filed using the Social Security Number (SSN) of a prisoner. The report
does not include, as required, information related to the filing of
false and fraudulent tax returns by prisoners. The characteristics that
we provided in our report were used to show information that could be
used by the IRS to better determine the possible extent of the filing
of false or fraudulent tax returns by Federal and State prisoners that
is not included in the IRS's annual reports to Congress.
Question. Has the IRS ensured that all tax returns that are filed
using a prisoner Social Security Number are assigned a prisoner
indicator? Has the IRS identified and addressed the cause of the cases
TIGTA found that were not identified with a prisoner indicator?
Answer. No, the IRS is not ensuring that all tax returns that are
filed using a prisoner SSN are assigned a prisoner indicator. In
September 2014, we reported that our analysis of tax returns filed
during Calendar Year 2013 identified 43,030 tax returns that were filed
using a prisoner SSN that were not assigned a prisoner indicator and
recommended that the IRS ensure all tax returns filed using a prisoner
SSN are assigned a prisoner indicator. The IRS agreed with this
recommendation to the extent that it agrees that all accounts for which
a tax return is filed using a prisoner SSN should be identified. The
IRS stated that the Master File displays that information for all
prisoner accounts to alert IRS employees addressing other issues
related to the tax return or to that account. The IRS disagreed that an
indicator should be assigned to returns for Electronic Fraud Detection
System (EFDS) screening when a refund is not being claimed.
As we noted in our report, the IRS incorrectly stated that the
Master File could be used by IRS employees to identify tax returns
filed using a prisoner SSN. Our research of the specific returns we
identified found that not all of them were identified on the Master
File. As we previously reported, we believe the IRS should assign a
prisoner indicator to all prisoner tax returns. The assignment of a
prisoner indicator is an automated process requiring the IRS to expend
no additional resources to ensure that tax returns with a prisoner SSN
are consistently assigned.
Question. According to a TIGTA report, a computer programming error
resulted in the IRS not assigning a prisoner indicator to 3,139 tax
returns TIGTA identified. Without the proper assignment of a prisoner
indicator, the tax returns are not sent through those fraud detection
filters specific to a prisoner-filed tax return. Has the IRS corrected
this error?
Answer. No, the IRS has not corrected the error that resulted in
our identification of 3,139 tax returns without a prisoner indicator
assigned. In our September 2014 report, we recommended that the IRS
correct the computer programming errors that resulted in not assigning
a prisoner indicator to these 3,139 tax returns. The IRS disagreed with
our recommendation, stating that the condition that caused the 3,139
returns not to receive prisoner indicators by the EFDS is a systemic
limitation caused by unperfected entity data included in the return
record that is delivered to the EFDS. According to the IRS, the
condition affected approximately 3 percent of transcribed paper
returns. The IRS stated other processing systems validate and perfect
the data before the return information posts to the Master File, and
the returns are still processed through the EFDS to screen them and
assign a data mining score to assess fraud potential. We agree these
tax returns are still screened for fraud through the EFDS; however,
these tax returns will not be screened using the filters specific to
prisoner fraud unless the return is assigned a prisoner indicator.
e-filing
Question. In the past TIGTA has noted that IRS E-Services need to
improve cyber-security for the IRS Registered User Portal used for
electronic filing of tax returns.
Has the IRS made sufficient progress in securing this gateway into
the IRS system?
Answer. Yes, the IRS has made some progress in this area. We are
available to brief the committee in person to provide further
information on this issue.
audits
Question. As we have discussed, there are ongoing investigations
related to IRS treatment of certain groups when they applied for tax-
exempt status. These activities, and the TIGTA investigation, were
revealed to the press 2 days after this subcommittee's hearing with the
IRS. A hearing at which there was no indication of the disclosure to
come.
Since that time, there were more TIGTA reports relating to
excessive spending on travel by IRS executives, as well as excessive
and questionable spending on conferences.
Given that experience, we need to ask you, is TIGTA engaged in any
other audits related to serious mismanagement issues at the IRS?
Answer. We have ongoing audits that have identified areas in which
IRS management can improve its processes. Examples of upcoming reports
in the near future include:
--Awarding of contracts and new work on existing contracts through
modifications to contractors (corporations) with Federal tax
debt;
--Retaining employees with a history of willful violations of tax law
without sufficient documentation of the basis for the decision.
For those issues we believe will be of interest to the Congress, we
offer briefings to congressional committees before the reports are
released.
missing emails
Question. In testimony before the House last week, I understand
your office provided some new information on the investigation you are
conducting into the disappearance of certain emails associated with the
targeting of tea party groups for special scrutiny.
According to reports, your investigators have found hundreds of
backup tapes, hard drives from email services, and over 32,000 unique
emails that the IRS told Congress could not be retrieved.
The subcommittee understands this is an ongoing investigation but
would you please give us an update on this matter as is appropriate?
Answer. We have made significant progress in the investigation to
date. As we currently understand the facts and evidence in hand, we
will be able to complete our investigative work after we complete our
review of the newly discovered e-mails we obtained from the back-up
tapes and conduct necessary additional follow up interviews. We are
also finalizing our examination of Microsoft Exchange Server hard
drives to determine if any additional e-mails can be obtained from that
source.
Question. Would you give us any projected timeline you may have for
concluding your work?
Answer. Barring any unforeseen complications, and based on
obtaining the results from the examination of the Microsoft Exchange
Server hard drives, we will complete the investigation in the near
future.
irs challenges
Question. IRS faces funding challenges as do many Federal agencies.
The GAO noted in their review of the IRS budget request that additional
funding is not the only solution. GAO noted that it has recommendations
on IRS's operations that may help it achieve efficiencies over time,
such as developing a long-term plan to improve web services.
Are there any particular recommendations TIGTA can provide to help
improve IRS services without additional funding or through redeployment
of existing resources?
Answer. Achieving program efficiencies and cost savings is
imperative, as the IRS must continue to carry out its mission with a
significantly reduced budget. TIGTA has recently reported on several
areas where the IRS can achieve cost savings, more efficiently use its
limited resources, and make more informed business decisions. For
example, we reported that the IRS continues to incur rental costs for
more workstations than required. TIGTA estimated that if the employees
the IRS allows to routinely telework on a full- or part-time basis
shared their workstations on days they were not in the office, over
10,000 workstations could potentially be eliminated. The sharing of
these workstations could allow the IRS to reduce its long-term office
space needs by almost 1 million square feet, resulting in potential
rental savings of approximately $111 million over 5 years. We also
reported that potential cost savings could be achieved from expanded
electronic filing of business returns. Providing businesses the ability
to electronically file their tax returns concurrently with payment of
their tax due on the same system could provide one-stop service which
would benefit business filers.
In addition, we reported that the IRS could have potentially saved
$17 million in fiscal year 2012 if it allowed taxpayers to
electronically file amended tax returns rather than require these types
of returns to be only filed on paper. By electronically filing these
returns, the IRS could use the same processes it uses to verify
originally filed tax returns. TIGTA forecasts using these same
processes could prevent the issuance of more than $2.1 billion in
erroneous refunds associated with amended tax returns over the next 5
years.
TIGTA has also identified other opportunities for the IRS to more
efficiently use its available resources. For example, TIGTA identified
potential improvements in the efficiency of the Automated Collection
System (ACS). We found the IRS's overall collection inventory practices
were not changed to reflect the reduced ACS workforce and, as a result,
new inventory continued to be sent to the ACS without interruption,
even though inventory was infrequently worked. This has had a
substantial impact on the amount of Federal taxes that remain
uncollected. TIGTA also found that the IRS's fieldwork collection
process is not designed to ensure that cases with the highest
collection potential are identified, selected, and assigned to be
worked. With significant growth in delinquent accounts and a reduction
in the number of employees, it is essential that the field inventory
selection process identifies the cases that have the highest risk and
potential for collection.
We have also reported that a process has not been developed to
expand Virtual Service Delivery, which integrates video and audio
technology to allow taxpayers to see and hear an assistor located at
remote locations. Taxpayers can use this technology to obtain many of
the services available at the Taxpayer Assistance Centers. We
recommended that the IRS establish a process to identify the best
locations for virtual face-to-face services.
In addition, timelier reporting of third-party data and additional
authority would assist the IRS in improving tax administration. Each
year, the IRS receives information returns filed by third parties such
as employers and educational institutions. These returns provide the
IRS the information needed to verify taxpayers' claims for benefits
such as the Earned Income Tax Credit (EITC) and the American
Opportunity Tax Credit (AOTC). However, information returns are
generally not filed with the IRS until after most taxpayers file their
annual tax returns. As a result, the IRS cannot use the information
contained on these information returns to verify tax returns until
after those tax returns are processed and refunds are issued. Requiring
third parties such as employers and educational institutions to file
information returns earlier would provide the IRS with the opportunity
to use the information contained on these forms to verify tax returns
at the time they are processed rather than after refunds are issued.
This could significantly improve the IRS's ability to prevent the
issuance of billions of dollars in erroneous tax benefits, including
the EITC and education credits.
death by delay
Question. As you noted in your 2013 report, the IRS had improperly
targeted conservative and tea party groups' applications for nonprofit
status, asking repeated intrusive questions and delaying their
applications well beyond a reasonable time. Some of those groups are
still waiting, with their applications now pending for years.
Do you agree that organizations deserve to have a determination
made in a timely manner?
Answer. TIGTA believes that organizations deserve timely responses
to applications for tax-exempt status.
Question. How long were some organization's tax-exempt applications
pending before the IRS made a decision?
Answer. TIGTA will be issuing a report in the near future following
up on the recommendations we made in our 2013 report. As part of this
new report, we discuss the current status of the 160 cases noted in our
prior report that were open from 206 to 1,138 calendar days as of
December 17, 2012. With the exception of those cases involving
litigation, proposed denials, or appeals, these applications have now
been closed. Based on our review of IRS records, a small number of
cases were closed within 1 year. For those cases that were closed,
Figure 1 shows the length of time the cases were open.
FIGURE 1: TOTAL LENGTH OF TIME CASES WERE OPEN
------------------------------------------------------------------------
Range of Elapsed Days From Postmark Date
to Closing Date Percentage
------------------------------------------------------------------------
Up to 1 year.............................. 3 percent
More than 1 year to 2 years............... 40 percent
More than 2 years to 3 years.............. 42 percent
More than 3 years to 4 years.............. 13 percent
More than 4 years to 6 years.............. 2 percent
------------------------------------------------------------------------
SUBCOMMITTEE RECESS
Senator Boozman. And with that, I adjourn the meeting.
[Whereupon, at 4:24 p.m., Tuesday, March 3, the
subcommittee was recessed, to reconvene subject to the call of
the Chair.]
APPENDIX
[Clerk's note: The following material was submitted by the
Internal Revenue Service to be included in the hearing record
at the request of Senator John Boozman.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Appendix C
Inmate Tax Fraud Prevention Act of 2008
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Appendix D
Homebuyer Assistance and Improvement Act of 2010
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Appendix E
Section 502 of the United States - Korea Free Trade Agreement
Implementation Act
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Appendix F
Section 209 of the American Taxpayer Relief Act of 2012
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Appendix G
Section 204 of the Bipartisan Budget Act of 2013
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Appendix C
Inmate Tax Fraud Prevention Act of 2008
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Appendix D
The 2010 Amendment to the Inmate Tax Fraud Prevention Act of 2008
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Appendix E
Section 502 of the United States - Korea Free Trade Agreement
Implementation Act
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Appendix F
Section 209 of the American Taxpayer Relief Act of 2012
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Appendix G
Section 204 of the Bipartisan Budget Act of 2013
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]