aggressively pursued and punished to the fullest extent of the law but these efforts should not be confused with policies such as the ability of u s businesses doing business overseas to defer tax on foreign profits a long standing principle of sound tax policy that puts our business our businesses on a more even playing field with foreign competitors my previous conversations commissioner with you give me great confidence that you appreciate that distinction and i'm  heartened by that although as i read your testimony there were a couple areas that gave me some concern that i would like to pursue as we get into questioning so i certainly look forward to your testimony today discussing these issues again mr chairman thank you  statement will be included in the record welcome chairman lewis ranking member bustani members of the subcommittee i want to thank you for the opportunity to testify here today and i want to thank the subcommittee for all the support that it's given the agency i'm very proud to be here today to talk to you about the dedicated work of employees around the country as they delivered a successful yet difficult filing season i also want to talk to you about the president's two thousand and ten budget request among the highlights of this year's filing season was record filing as well as an increase in the average value of a refund by fourteen per cent which was good news for taxpayers in this difficult economic time mr chairman i also want to take this opportunity knitty to announce today that by the end of the year i plan to deliver to the president and the treasury secretary a comprehensive set of recommendations on how to better leverage the tax return preparer community to increase taxpayer compliance and ensure high ethical standards of conduct for paid tax return preparers today over eighty percent of taxpayers use either a tax return preparer or third party software to complete their returns this is a transformational shift in tax administration the first part of the review that i plan to undertake will involve fact finding and receiving input from a large and diverse constituent community i know that this has been an issue of great interest to the subcommittee i look forward to hearing your thoughts on the matter and keeping you apprised as we have this dialogue paying taxes is one of the largest financial transactions that individual americans have each year and we need to make sure that the professionals who serve them are ethical and ensure that the right amount of tax is paid let me turn to the economy the i r s is acutely aware of the many financial problems facing individual american businesses and nonprofit organizations and i'm very committed to striking the right balance between collecting the revenue to fund the government and using all of the tools at our disposal to work with taxpayers who are in difficult financial circumstances the i r s this year continued to help boost the economy by executing the provisions the tax provisions of the american recovery reinvestment act we acted in record time after congress pass president signed legislation to boost working americans paycheck and were continued to focus on outreach efforts to make sure that taxpayers get every credit every deduction and every exclusion that they qualify for mr chairman in the past year the i r s has demonstrated its ability to be agile and respond to quickly changing situations the two thousand and ten budget that was submitted by the president will help build the strategic foundation for us to continue moving forward my belief is that the i r s needs to excel at both service and enforcement to meet its mission it is not an either or proposition and the budget helps us focus on it includes a robust portfolio of enforcement initiatives including a focus on international enforcement that the president treasury secretary and i on may fourth two thousand and nine i've made international issues a top priority for my ten year and we're going to have an on bet unprecedented focus and investment in international issues the budget also allows us to continue to evolve and improve with service delivery which is fundamental to collecting the right amount of taxes and funding the government let me turn to the modernization of our core account payer database we've consistently delivered on our commitment over the last several years this year we've adopted a much more focused strategy that's going to allow us to complete the tax payer database conversion on an accelerated time frame which is in a mansion aliment for our service and enforcement activities and finally mr chairman let me just encourage the committee support for the legislative proposals in the present budget let me highlight three of them first there's a suite of proposals to curb international tax evasion which are very important to the i r s a proposal to require tax return preparers to have a certain volume of tax return filing to file electronically and third is the proposal that you and the ranking member have put forth in legislation which is to eliminate the twenty percent down payment to receive an offer in compromise an offer in compromise is a very important tool for us to work with taxpayers who can't meet their tax obligations these three provisions the entire budget will be very helpful as we pursue our strategy of having a modern day continuously improves and excels at both service and in force again thank you for the opportunity to testify and i'm happy to answer any questions mr commissioner thank you so much for your testimony we appreciate your testimony you willing to come here this morning and  great question one we're focused on any time attack they're called the i r s and doesn't get right through i'm not happy let me give you a couple statistics in two thousand between january and may we received forty eight million calls i'm sorry in two thousand and seven in two thousand and eight we received sixty four million calls during that time period in two thousand and nine we received seventy four million calls during that time period that was a result of economic stimulus payments going out last year cleaning those up this year and reconciling accounts this year and the american recovery and reinvestment act coming in this year and so the i r s has been called on to have an unprecedented amount of activities the level of service dropped it especially dropped during a couple of weeks which is normal like any big enterprise we need to balance all of our resources and one of the things we're quite focused on while our phones get a lot of attention between phones and paper so we don't want people waiting a long time if they've written we don't want people waiting a long time on the phone our level of service was lower than we'd like we've done a couple of things one is we're pushing more people to the web five million of those calls were people trying to find out their adjusted gross income by next year you'll be able to find that out on the web we've changed our telephone scripts to try to move and process people more quickly we also added an estimated wait time to your call so if you call you'll know how long it takes and you can hang up and call back at a less busy time so some of those hang ups while they show up in our level of service going down aren't necessarily a bad thing because they move people to non peak hours and people don't waste their time for ten minutes before they figure out that they actually can't wait any longer and so those are some of the we're doing we're going to keep closely monitoring those and we're going to try to transactions congress passed a law that made a strict liability penalty if you don't report one of those transactions the idea was to have some of the most egregious tax behavior have high penalty work quite well aware that there have been people caught up in this who the law wasn't intended for and we are focused on that right now we don't have the discretion to waive those penalties but i would like to work with congress to try to make this reasonable so we have a little more discretion and in these areas if people like small businesses you mentioned get caught get into the check the box provision again do you agree that we ought to have a clear line of distinction between dealing with evasion and legitimate tax policy and let me tell you how i think about this i think there are two distinct sets of issues that the i r s spends time on and worry about one is very clear u s taxpayers hiding assets so overseas illegally not paying taxes for those people we have an aggressive agenda we're going to find them and we're going to prosecute them and and pursue them and we're there's a lot of very public cases out there the second issue is with multinational business is a very different and distinct issue there is plenty of legitimate tax planning and there's a lot of people trying to be competitive trying to construct business transactions that also have a tax benefit and people who stay within the lines of the law we have no issue with i also think there's large corporations that use the complexity of global capital markets and the complexities of the tax code to push the envelope beyond what we think is legal and we have one of the pieces in the current legislature in the president's budget is to give us money for offshore tax evasion but it's also to give us a comment lawyers agents who are well trained to make sure we can continue  shola great to have yours thank you for taking the time i very encouraged by your comments today and your announcement that you will be doing more to examine the whole issue of pay tax preparers this is something i've been concerned about quite some time i will be reintroducing legislation soon that deals with the issue of pay tax preparers and i'd like to see if i can ask a few questions understanding that you are now in the process of talking collecting information and perhaps not having final answers i would like to see if i can get from you some of your opinions on some of these issues but more importantly some some of the facts that drove you to this decision in this announcement to move forward in examining the whole tax preparer community first you mentioned that eighty percent of americans use either a paid tax repair or some third party software to try to file their tax returns my understanding is that on top of that statistic some sixty percent of americans rely on pay tax preparers lucidly to do this and so well over half of american taxpayers go to someone else and pay that individual or company to get their tax filings into the i r s and get them in accurately the concern i have and the reason i've taken this issue on for quite some time is that we find that in too many cases there are errors even in these filings by people who have paid tax in paris to prepare their returns for them and what we're finding is that we have all sorts of people who are being paid to do tax preparation many are certified public accountants many are attorneys with experience in tax law many are individuals who worked in the field of tax policy and law for quite some i'm whether through the i r s or otherwise but there's no clear standard nationally that says what you have to do and and do to prepare to become a tax preparer you could open a shop tomorrow without a little trouble  you and i don't know how many text there is there are right now in america that correct that's correct and so i know that there's been talk of requiring all taxpayers who are paid to register so at least you can tell us the number of tax that are that are out there and begin to track their work but that seems to only deal with the problem once it's already occurred if you're only going to register them then you find out that some are doing good work and americans are to do something to make sure there's a level of competency in these tax payers so that when you pay good money to do your your civic duty of paying your taxes you don't have to find out the i r s can come after you because you did it wrong and it's very tough i suspect to go after that taxpayer afterwards to take care of your penalty your fine your late fees and all the rest and so what if you comment on this notion of going farther than just asking tax preparers pay tax to register with the government to the i r s but also to ask for some global of competency of anyone who wishes to hold himself out as being a professional tax preparer yeah i think  a couple things clearly with prepares and software providers being engaged with the eighty percent of americans plot is very people who sit down like the old image that people have gone out to ten forty anymore  they need to be part of the overall tax administration system for two reasons one is they're part of making sure we have compliance and collect the right amount of taxes and two is as i  mentioned paying your taxes is one of the largest financial transactions that american citizens in american taxpayers have each year and we need to make sure that people are apical they're well trained they're giving good service but to make sure we collect the right amount of money and that people are being treated the commissioner how do you make sure that the well trained well so what i've just announced is i will tell you exactly my thoughts on that by the end of this year and i will submit it in writing to the treasury secretary and the president i want to enter this with an open mind i'm a big believer in transparent and open dialogue when the government gets involved in a big question like this it's going to affect a lot of people and so we're going to hold some open meetings with prepared with consumer advocates with tax payers with any affected constituency we're going to be looking forward to having discussions with congress and for me everything is on the table with this everything from education to services we provide to strict enforcement we have to all of the regulatory issues that you discussed mr commissioner thank you very much times and i want to hopefully we can totally resolve it the i r s is seeking to a want to apply a treasury regulation which would redefine what normal retirement age means to purpose for purposes of examining pensions serious business this regulation will have significant adverse effect on public service employees cops and firefighters throughout the united states i understand the new regulations relate that plans must specifically define normal retirement news we want to resolve this once and for all typical public safety pension plans are designed around years of service and not an arbitrary age due to the physical and mental strain of the job on the i r s regulation does not take into account the reasons why this retirement system is established as it is i would like to see governmental plans completely excluded from the normal retirement age regulation here's my question would you be willing or able to provide a formal opinion stating that government pension plans are exempt from the normal retirement you know i'm going to have to have conversations with obviously our attorneys on this and and the treasury department but the sentiments you have a round pensions being important for public employees firemen policemen people have special stress on the job i'm very sympathetic to i'd ask them not to be able to make any commitments here but i certainly will work with your office on it look at it and  commitment we're talking about a very different classification of workers particularly talk about police and fire you're talking about not only the stress of the job but you're talking about losing a lot of people that we need particularly at this time and i would ask us to move this to move as quickly as possible to get a final opinion on this affects every career firefighter and every just about every police officer in the united states of america i would ask for your indulgence on that second question is i'm glad to see your testimony that you highlight the new car purchase deduction you know we sent so much money to the big three we did not ask ourselves the question some of us did on both sides of the aisle what good is it if we provide dollars to keep them afloat and we don't sell any cars well that is exactly what this is the result of a lot of the dealers having to shut down it could have been avoidable we had legislation to do that as well as the earned income tax credit which we've all been many of us have been strong advocates of for a number of years you've stated that and i'm quoting you there are a series of massive outreach the i r s wants to make sure that taxpayers are aware of every credit deduction and exclusion for which they qualify including several new benefits this year we even use the word publicize and i don't know how you're publicizing what's happening in the automobile as the industry to get cars to help the process of selling money yeah you mentioned we're very focused on the education an outreach component of our mission we've got i won't bore you with all the programs but we run special events we members of congress we do a lot of media both in english and spanish we have a variety of mailings we have a very large web presence we have one of the most trafficked business non individual web site in the world and with the recovery act the president taft every agency to be very aggressive about outreach if my memory serves me correctly the president actually announced the new car art and we try to both of it both of them we spend a lot of time and read source is trying to execute that part of our mission because as i think the chairman and ranking member said if we can get people to do right first place that's the best way to d dealers the the level of income is between forty eight fifty five thousand dollars you're talking about a lot of people talking about a lot of people but put out to pasture and i think whatever we can do to accelerate this to find that the president made the statement that's got the bully pulpit but the fact is that the i r s must be a partner in the publicity must be something that gets down to the average person so that they know that this is real and we should be working with the dealers to help them we did such a great job didn't we are working with the big three let's deal with the dealers  economic recovery panel led by paul volcker to look at a variety of issues including burden simplification and we're engaged with that panel do you have an idea how large the underground economy i do not etting the money we have it have had what i think has been a successful honing and refining of our collection program the way that we  measure tax debt that's collectible we have data on the books for ten years private sector companies write off a lot of debt but if you look at our inventory of potentially collectible debt was  partners that in generally we reach out to for people who got a tax but then also for housing credit for and then we've been working with specifically different groups that we usually don't work with to advertise those kinds of if we partner hud for instance who has their networks and their outreach programs all the different housing groups and they're working side by side with us to penetrate that market we partnered with education to do outreach there and so we've tried to go through our traditional issues but we've been very focused i will tell you as an agency had you know the vice president was tasked with overseeing this everyone has deadlines around it it's all very transparent when we're putting out guidance for what most of all of our guidance is i come from you know capital markets regulation failed before that and now looking at the tax system and one of the one of the issues we have in this country that everyone is wrestling with is how do you deal with sovereign laws and sovereign authority in a global world and how do you do when you cross these techniques are emerging and we're getting more resources this year's budget hopefully next year's budget the two thousand budget of the hill and so it's going to be an area that we're going to keep focused on and try to get in front of have diminished quite a bit recently in light of the current economic situation is there a reason or is this an anomaly or a one i they have been going down over the last several years  it's something i'm quite concerned about two things that i think are important one is in the president's budget and in from the chairman of the ranking member and other members of the committee there's a recommendation that we eliminate the twenty percent down payment requirement which i will say i think will help that we're also reviewing internally how we make sure we get the word out because i'm very focused and everyone in our agency is very focused and understands we're big service organization but we're also enforcement organization not everyone in america understands the service component you know they fire the return and we want to make sure people know that if they reach out to us and they're having a hard time and we can work with them and so we're doing an internal review and if legislative change i think would be important what was the reason why there's been kind of a drop off in offers and compromise we don't know but i suspect one of the reasons is the law that went into place several years ago that required you to put a twenty percent down payment for your offer and compromise and so you know this is usually people who don't have the money to pay their full tax that they may not have the full money to put twenty percent down when they don't even know th extrapolated data from eighty three eighty and so it's not based on real updated data we've been given more money to actually update that research we're given in the path we're giving it now our goal is to get a multi year  get to regular updates recognizing that it's always going to be imperfect we're shooting in right now working hard on escorts and which are especially old and we're hoping to get those out you know in  not too distant future i assume that your review of this is going to be able to identify what might be more achievable as far as going after some of the tax gap revenues that we're losing right now yeah i mean i think a lot of focus on the tax gap i'm concerned about the tax gap  some of the tax gap numbers that are we know that you know where there's no information reporting is where there's lower compliance down in the fifty percent range where there's a lot of information reporting like a w two and withholding you're up in the ninety nine percent range and so it's somewhat imprecise because i mean by definition attack gap is money not coming in you don't know exactly where it is and what the motivation is a whole bunch of proposals committee was supportive of having credit card reporting and basis reporting there's some proposals in the president's budget around having international focus some reporting on businesses and so i think we already have a whole bunch of strategies that are good to go after any and yes but the research will help us question on the withholding tables on making work pay and my understanding that for married couples a credit solicitous six hundred bucks but is a maximum on for a married couple eight hundred dollars for mine missing something here in the withholding tables yeah i mean the withholding tables are estimates and guide if you are married you might have one person working or two people working you might be might be able to get four hundred or eight hundred depending who's working in the household and so by definition these things don't withholding table isn't going to take into account every every every single taxpayer situation  my understanding is the treasury department economist who put together the tables tried to come up with an average which would work for the most people recognizing it's not going to work for everybody does occur confusion withholding tables every year ross and thank you mr chairman thank you commissioner we just two quick areas one is could you give me a general sense based on your conversation earlier with some of the other members about your view on the free file alliance and how that sort of how that interplays what other plans you know the president during his campaign talked i think it was pretty explicitly about getting right now and if you're i guess the question is if you're having a hard time answering the phones and answering the mail and you've got a complicated job that medically is it any time to  bringing in tax preparation in house so to speak can you give me your your general sense of that yeah i mean my general sense is this is you know i'd like the tax code to be simpler first so been a very good partnership we've had over the years that is allowed low air income people to file their tax returns for free online it was developed at a time where the internet hadn't been as developed and expectations of consumers broadly we're probably not that they could get online and do something quick and for free a lot of members of the free file alliance actually this year for the first time  allowing free electronic filing even when you purchase their software and so i think is a rapidly evolving area i think any time you're talking about electronic filing software preparation the internet it changes every year but the expectations of the american people change every year as well as the ability of both government and the private sector to deliver and so in a good program i think all of our programs around electronic filing are going to evolve this year you might have seen last year we had about fifty eight percent of individuals filed electronically this year to date about sixty eight percent have all the people who have extensions usually come because they're more complex returns but it's still clearly going to be above the fifty eight percent so that keeps growing so i think it's just going to be an ongoing conversation that we're going to have and we as the government need to keep up with the times that means we're going to be doing something certain things w be doing certain things with the private sector and and keep moving i would just encourage a lot of private sector involvement it seems like there's been a good history there so that i'm sure in the in the stew as you're making your decision switching gears quickly  and this has to go with the administration's request for additional and forstmann funding really targeted towards small business entrepreneurs can you speak to that you know folks in my area  you know there's a if there's a legitimate here we have the secretary of the treasury that came in and and admitted that it was so complicated that he had a difficult time discerning a tax liability is this really where the emphasis should be going right now at a time when we're in real turmoil from an economic point of view to really be focusing in from a targeting point of view at small business and entrepreneurs and you get your sense in terms of emphasis yeah i mean my  priority areas for coverage and compliance which isn't always the same as unfortunately sometimes you find issues when we find issues we try to work through with people hopefully a lot of people make you know burns mistake  my priority areas are high net worth individuals large corporations international and then some of the flow through entities which are much more difficult for us those are areas where there's been you know where we find bigger issues with tax sometimes i don't think we have a specific coverage target an increase around small business you know we recognize i recognize i tell you i've been in conversation of the administration that small businesses are engines of growth in this country that entrepreneurship is very important in this country what i would say is where there's not a lot of information reporting is one area where we're focused on there sometimes we get at ten ninety nine from a bank and sometimes it's attached to a schedule which is part of a return and we're going to be able to increase our ability to pure my guess is probably not but you know i think of it is the prerogative of the ways and means committee and finance committee that now wasn't that an intelligent answer but let me ask you this is a follow up as if you were charged by the congress who after all you know with the number of employees that you have in the vast experience of looking at a tax code that i've certainly some could you describe as a gordian knot would not a number of people who have been in that very noble public service have ideas about where they think changes could be made sure and if you are charged how long do you think a study like that would take you  quailing swap derivative what i would say is inconsistent treatment in the today all it's been put together and for different reasons and around competitiveness sixty trillion dollars in trades that happen in an over the counter unregulated area that this might at least the interest of the i r s or the administration or anyone concerned about the revenue loss there and then appropriate regulatory steps that should be taken in this area do you have any opinion on that you know my only opinion is i know that treasury's but forward proposals around  derivatives regulation being debated in congress in the senate clearly you know this is an area that has the attention of leaders in the country with regard to the american recovery and reinvestment act  outreach campaign to make sure on this issue could you elaborate what efforts are being made to make sure that people won't get sticker shock so to speak when they find out that they've been the benefactor of make changed that on the tables we've worked directly with pension organizations we've been working with organizations such as the a a r p to do outreach to individuals to make sure they make any changes to their withholding as and education brings in the right amount to prepare that we're doing and so i'm actually quite focused on making sure that service technology and in force men are all seen as part of funding atlanta these are all estimates because it wouldn't have until two thousand and eleven in and over we actually are in the process of it and we try to give employees advance notice we try to give them reassignment preferences we try to allow people who want to retire early to swap with people who want to stay longer our experience doing that in philadelphia in memphis is very few people at the end of the day actually have to be raft that we go the extra mile and try to work with them because i personally believe we have a obligation to people who've been with us a long time that if we're trying to have an obligation to the american people to try to run efficient operations and as more electronic filing comes in not not waste money but the same time we have personal obligations to people who've been dedicated to the government to help find them another job and in atlanta the number of permanent employees that could be affected not ones we have some people  we brought on just for a contract and they knew exactly you know that this was a one year temporary deal with the number of permanent could be up to a thousand for those people we're going to make sure we stretch and bend and find other work when we have opportunities to make new investments we're going to try you know as long as it makes business sense to put it in in a place where there's potential layoffs so and over for instance we've opened committed to opening another a you our site which is where we match information returns against actual tax returns and you know i want to just tell you i believe we have an obligation to people to do everything we can to work with them i've instructed my staff who runs the division that is going to have to work on the ramp down but if there's any place to be flexible and creative that's here and we're going to have an eye towards if there's more work to be done trying to have a day or so we can pick up other employees appreciate your concern and feeling alon wide open yet there's going to be a very open transparent and i have no preconceived notions and we're going to try to open the door to your the tax gap if the estimate for the two thousand one tax gap is anywhere near accurate we have no way of knowing but if it were if it is in fact or was in fact something in the order of three hundred forty five billion dollars of collected taxes over the last eight years we could have collected enough money to not only cover this massive deficit that we keep for two thousand and nine but probably enough to cover most of the deficit from the last several years  so it adds up to quite a bit of money and i know that your agency is going to come up with a new estimate for the tax gap to update the numbers since it's the two thousand and one numbers obviously very old we thought we were going to receive something soon if not already on this tax gap number and i'm wondering if you can tell me when can this committee expect to hear from you and your agency the work you've done to estimate the size of the tax gap between what we should collect and what we actually quite yeah so a couple things one is as i mentioned before when your colleagues the these are real estimates there's not i mean two thousand one happens to be the year that we looked at but a lot of these are extrapolated from one thousand nine hundred numbers it's very hard to get your hand around it too is i think it's important that you know members of congress kno this isn't just free money they can go and get grabbed not to close the deficit it is money that is going to take multi year work the best way to go after the tax gap is going to be information reporting we don't have a big tax gap with wage earners in this country where we get their information they file their return if there's any problem we just send him a letter and we get it closed off and actually withholding it at the source and so the whole bunch of proposals that are in here our goal is to have annual tax gap update we're trying to roll through the different segments the ones that we're most focused on right now are ask corporations and the corporations and hope to get out in the not too distant future and mr and i'll end with this last question or it's more common i want to pick up on something the commissioner just said the issue of the tax gap really doesn't relate to salaried workers who get a paycheck week in week out because that income is reported in a fairly aggressive and accurate way on a constant basis you get your paycheck taxes are deducted based on how many  exemptions you claim and so forth and so most wage earners don't don't do the type of tax evasion or innocent filing mistakes that would lead to this massive tax gap of several hundred billions of dollars as you said it's the fact that we don't have information from others that should be paid taxes that causes us not to be able to collect enough from those who have earn income and haven't paid it the point that i'm trying to make here is that most americans who work for a living making a salary or a wage aren't the folks who are trying to of aid paying taxes or making mistakes paying your taxes it's folks who don't have the constant documentation required in pick to pay the taxes that are leading to this problem i won't say they're causing it because a lot of folks are innocently  not filing correct information or inadequate information on what they should be paying but it's clearly the case that we need to have a better way of tracking those who don't have a regular paycheck within their scope of income generation so we can figure out how it is that we can get every american to be his or her fair share of taxes so that we can have every merican who is due to not pay more than necessary to make up for the gap created by those who are shirking their responsibility to pay their fair share so i think it's important idea had worked all his life in road construction and in agriculture picking crops got paid to a check he never got to take a deduction for his line sure and he liked that but he always got taxes and i think it's important that those who work get a paycheck know that they're not going to be paid higher taxes because there's somebody who's able to write off that  testimony i would like to turn for the record from congressman levin and congressman thompson mr commissioner i would like to thank you for being here today for your testimony