U.S. GOVERNMENT PUBLISHING OFFICE

36–708—PDF WASHINGTON : 2019

S. HRG. 115–628 

THE 2018 TAX FILING SEASON 

AND FUTURE IRS CHALLENGES 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

APRIL 12, 2018 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

ORRIN G. HATCH, Utah, Chairman 

CHUCK GRASSLEY, Iowa 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

ROB PORTMAN, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BILL CASSIDY, Louisiana 

RON WYDEN, Oregon 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

SHERROD BROWN, Ohio 

MICHAEL F. BENNET, Colorado 

ROBERT P. CASEY, JR., Pennsylvania 

MARK R. WARNER, Virginia 

CLAIRE MCCASKILL, Missouri 

SHELDON WHITEHOUSE, Rhode Island 

A. JAY KHOSLA, Staff Director 

JOSHUA SHEINKMAN, Democratic Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Wyden, Hon. Ron, a U.S. Senator from Oregon .................................................... 1 

Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman, Committee on 

Finance .................................................................................................................. 2 

ADMINISTRATION WITNESS 

Kautter, David J., Acting Commissioner, Internal Revenue Service; and Assistant Secretary for Tax Policy, Department of the Treasury, Washington, 

DC .......................................................................................................................... 4 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 2 

Prepared statement .......................................................................................... 11 

Kautter, David J.: 

Testimony .......................................................................................................... 4 

Prepared statement .......................................................................................... 12 

Responses to questions from committee members ......................................... 16 

Thune, Hon. John: 

‘‘The Wages of Tax Reform Are Going to America’s Workers,’’ by Kevin 

Hassett, The Wall Street Journal, April 18, 2018 ...................................... 44 

Wyden, Hon. Ron: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 45 

COMMUNICATIONS

Center for Fiscal Equity .......................................................................................... 47 

Desai, Anand ............................................................................................................ 48 

Electronic Privacy Information Center (EPIC) ...................................................... 49 

Goding, Susan .......................................................................................................... 51 

(III) 

(1) 

THE 2018 TAX FILING SEASON 

AND FUTURE IRS CHALLENGES 

THURSDAY, APRIL 12, 2018 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:15 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Orrin G. 

Hatch (chairman of the committee) presiding. 

Present: Senators Thune, Heller, Wyden, and Whitehouse. 

Also present: Republican staff: Chris Armstrong, Chief Oversight 

Counsel; and Alex Monie, Professional Staff Member. Democratic 

staff: Joshua Sheinkman, Staff Director; Tiffany Smith, Chief Tax 

Counsel; Adam Carasso, Senior Tax and Economic Advisor; and 

Sarah Schaefer, Tax Policy Advisor for Small Business and Passthroughs. 

The CHAIRMAN. The committee will come to order. 

We are going to start with my partner today, because he has to 

get back to the floor. And then I will give my statement after he 

finishes his. 

OPENING STATEMENT OF HON. RON WYDEN, 

A U.S. SENATOR FROM OREGON 

Senator WYDEN. Mr. Chairman, I just want to thank you for your 

courtesy. You always go to such great lengths to give me the opportunities to juggle a hectic schedule. And the majority leader, Senator McConnell, and I are getting ready to introduce our big agriculture bill in just a few minutes. So I appreciate having a chance 

to make this opening statement. And I will keep it brief, and then 

I will come right back after the majority leader and I are finished. 

The CHAIRMAN. Sure. 

Senator WYDEN. The annual hearing on tax filing typically inspires the level of enthusiasm most people bring to a prolonged root 

canal procedure. But this year, there are tax policy issues with serious consequences for millions of Americans. 

First, our small businesses are increasingly stuck in a bureaucratic twilight zone. There is rampant confusion about how the new 

tax law works, untested policies, sloppy legislative drafting, and 

outright mistakes in the law. 

On top of that, there is a Trump Cabinet turf battle that has 

added to the uncertainty and lengthened the time that small businesses are going to be in the dark about how the tax rules apply 

to them. 

2 

So here is the bottom line: estimated tax payments are due, but 

millions of small businesses do not know how to estimate what 

they owe. 

The owner of a restaurant known as a local landmark, the highly 

regarded mechanic whose expertise has built a loyal base of regular 

customers, the finish carpenter whose sought-after work is prized 

for its sturdiness and good looks, they are all mired in this tax code 

mystery zone while Trump officials go 12 rounds over who is going 

to get the final say on the regulations. 

I understand there has been news on this issue this morning. 

The fact is, deadlines for guidance from the administration are slipping. Tax experts are so unsure of the road ahead that they are advising small-business clients to bump up their estimated payments 

from last year just to be safe. 

Now, it is important that we understand that certainty was one 

of the most important selling points of the tax bill. There would be 

sure footing for businesses to focus on growing and hiring rather 

than deciphering a byzantine, outdated tax law. The magical 

growth effects were going to kick in right away; workers were going 

to see the big raises. 

The fact is, the reality looks awfully different. 

All of this confusion and delay, by the way, has created another 

golden opportunity for powerful lobbyists and special interests to 

creep in and twist the rules in their favor. They will be after more 

exclusive carve-outs and sweetheart deals, exactly the kind of favoritism that Americans want eliminated from our tax law. And 

the likelihood they will be able to exploit these tax loopholes is 

even greater than in the past because taxpayer audits have fallen 

to a 15-year low. And the audits of the high-income earners have 

dropped the most. 

I want to thank Acting Commissioner Kautter for joining the 

committee here today. I want to apologize to him for the bad manners. I will return as soon as we have gotten the bill introduced 

with the majority leader. 

As I said at the outset, I would wager that most Americans 

would think that a hearing on a tax filing season was about as 

sleep-inducing as it gets on Capitol Hill. 

But I do think this morning we have a chance to uncover important information about what is ahead for taxpayers this year, and 

going forward, as the law, according to the sponsors, was supposed 

to be implemented. 

Mr. Chairman, I want to again thank you for being so gracious. 

And I will return just as soon as we have finished our work with 

the majority leader. And I look forward to working with you on 

these issues and the rest of our agenda. 

The CHAIRMAN. Well, thank you, Senator. 

[The prepared statement of Senator Wyden appears in the appendix.] 

OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. 

SENATOR FROM UTAH, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. Good morning, and I want to welcome everybody 

to today’s hearing. This is indeed an exciting time. And I am grateful Acting Commissioner Kautter could be here today to talk with 

3 

us about the 2018 tax filing season, tax reform, and the challenges 

and opportunities before the IRS. 

As we all know, the IRS is the one agency in our Federal Government upon which virtually all other Federal activities depend. The 

reason for that is simple: the IRS collects the Federal revenue required to keep the government functioning. This is an important 

function in our government and a function where process really 

matters. Therefore, it is critical that the IRS collect the revenue 

under our new tax laws in a fair, efficient, and effective manner. 

When we drain the IRS of resources and handicap its ability to 

collect revenue, that is not merely a loss in revenue for the Federal 

Government, it also means that the Treasury must borrow more 

money, causing our country to go further into debt. That is because 

the Federal Government does not shrink when the IRS fails to collect taxes owed. 

Therefore, handicapping the IRS is also saddling future generations with billions of dollars of debt that they are going to have to 

repay, one way or another. 

But having said that, let me be clear: the IRS stands at a crossroads. On the one hand, the IRS has made marked improvements 

in recent years, including catching more identity fraud, preventing 

more fraudulent returns, and moving forward to implement the 

multitude of tax law changes that have occurred, including the 

most comprehensive tax reform in a generation. 

But on the other hand, it is an agency stuck in the past. It relies 

on software and core processing systems designed during the Kennedy administration. IRS employees routinely have to manually 

input return information into agency computers and often require 

taxpayers to send information via fax machine. 

Now, with that said, the IRS is staffed by many of the government’s most dedicated, hardest-working civilians, many of whom 

work in my home State, back in Ogden, UT, yet there are some bad 

apples who have hurt the service’s standing back here in Congress. 

Mismanagement, taxpayer abuse, and discrimination against certain taxpayers are all-too-recent memories for those of us who oversee the agency. Nonetheless, it is high time that we work together, 

as Republicans and Democrats, to help the IRS modernize itself to 

meet the challenges of the 21st century. 

We need to do this to promote bipartisanship, but also to keep 

the IRS accountable and moving on the right track to best serve 

hardworking American taxpayers. 

That is why, this week, I am watching the House Ways and 

Means Committee as they mark up legislation to reform several aspects of the IRS. I appreciate their efforts on that front. And I look 

forward to working with my good friend and colleague Senator 

Wyden as we explore legislative options here in the Senate. 

I am confident that we can find meaningful bipartisan solutions 

that will help the IRS perform its duties while still remaining 

clearly under congressional supervision. 

Acting Commissioner Kautter has been doing an admirable job 

leading the agency. On his watch, taxpayer and fraud prevention 

services have made noticeable gains and are truly great success 

stories. But it is time we get Mr. Kautter back to his other fulltime day job as the Assistant Secretary for Tax Policy. 

4 

As such, I am looking forward to the Finance Committee processing the nomination of Mr. Chuck Rettig, who has been nominated by the President to lead the IRS, as well as the nomination 

of Michael Desmond to be Chief Counsel of the IRS. As soon as the 

committee receives their paperwork, we will begin processing the 

nominations. 

So with that, today we have the pleasure of being joined by the 

Acting IRS Commissioner David J. Kautter, who was confirmed 

last year as the Assistant Secretary of Treasury for Tax Policy. 

And, Mr. Kautter, thank you for being here. We appreciate it. 

As one would hope, Mr. Kautter has extensive tax practitioner 

experience. In fact, he has been a tax practitioner for the past 44 

years. 

I empathize with you. You do not look that bad. [Laughter.] But 

that is a long time. 

Prior to his government service, Mr. Kautter came from RSM, 

where he worked as a partner starting in 2014. 

He has also taught numerous courses in tax law, including four 

as an executive-in-residence at the Kogod School of Business at 

American University. Prior to teaching, Mr. Kautter provided advice to clients ranging from individuals to small businesses to global multinational companies for 20 years at Ernst and Young. And 

during much of that time, he was the leading tax specialist for 

compensation and benefits. 

Mr. Kautter has also served in the government before, as tax legislative counsel to Senator Jack Danforth from 1979 to 1982, during which time he worked on the Economic Recovery Tax Act of 

1981. 

Mr. Kautter graduated with a bachelor’s degree from the University of Notre Dame and later received his juris doctor from Georgetown University. 

So, Mr. Kautter, please proceed with your statement, and we 

look forward to hearing from you. 

[The prepared statement of Chairman Hatch appears in the appendix.] 

STATEMENT OF DAVID J. KAUTTER, ACTING COMMISSIONER, 

INTERNAL REVENUE SERVICE; AND ASSISTANT SECRETARY 

FOR TAX POLICY, DEPARTMENT OF THE TREASURY, WASHINGTON, DC 

Mr. KAUTTER. Thank you, Mr. Chairman. 

Chairman Hatch, members of the committee, thank you for the 

opportunity to provide you with an update on the 2018 tax filing 

season and to discuss IRS operations, both current and in the future. 

With the tax deadline for individuals just 5 days away, I am 

pleased to report the filing season continues to go well. As of last 

Friday, the IRS had received more than 103 million individual tax 

returns, which is about two-thirds of all the returns we expect to 

receive. We have issued more than 75 million refunds so far for 

$226 billion. About 80 percent of all the returns filed so far claimed 

a refund, with the average refund totaling approximately $2,900. 

These numbers are consistent with those for 2017, with the number of returns received up from last year by about 150,000 at this 

5 

point. The number of returns filed electronically is up about 

440,000. And the average size of refunds is up $13. 

This year, the IRS faced two major challenges as it worked to deliver the filing season. The first was the need to begin implementing the Tax Cuts and Jobs Act. This new statute requires extensive work by the IRS this year and next to serve the needs of 

taxpayers and tax professionals. In fact, the IRS began implementation efforts shortly after the legislation was signed last December. 

The second major challenge was the need to implement taxrelated provisions of the Bipartisan Budget Act enacted in early 

February shortly after the filing season had started. This required 

us to reprogram our processing systems to handle the retroactive 

extension through December 31st of 2017 of more than 30 individual and business tax benefits that had expired at the end of 

2016. This was the first time the IRS had ever been required to 

implement retroactive tax extensions after the beginning of a filing 

season. 

This filing season was also the second in which the IRS delayed 

issuing tax refunds until February 15th for returns claiming the 

Earned Income Tax Credit or the Additional Child Tax Credit 

under a requirement established by the PATH Act. 

Like last year, this change slowed the overall pace of refunds 

early in the filing season, but that pace accelerated with the release of nearly $47 billion of EITC and Additional Child Tax Credit 

refunds shortly after February 15th. 

During the filing season and throughout the year, the IRS provides assistance to taxpayers to help them meet their tax obligations through a variety of channels. So far this year, for example, 

we have handled more than 20 million calls on our toll-free 

helpline, provided in-person assistance to more than 790,000 people 

who visited one of our Taxpayer Assistance Centers, and provided 

a wealth of tax information on our website, IRS.gov, which has 

been visited more than 335 million times. 

The IRS also supports about 11,000 Volunteer Income Tax Assistance and Tax Counseling for the Elderly sites around the country. These sites offer free tax preparation services for low-income 

taxpayers, older Americans, people with disabilities, and those with 

limited proficiency in English. So far this year, more than 2.6 million tax returns have been prepared at VITA and Tax Counseling 

for the Elderly sites. 

Another important program we support is Free File, which allows taxpayers earning $66,000 or less to prepare and e-file their 

taxes at no cost. Each year, more than 2.5 million tax returns are 

prepared using Free File. 

In regard to phone service, I am pleased to report that this filing 

season we are again seeing a strong level of service on our toll-free 

line, as we did in 2017. As of March 31st, our phone level of service 

was close to 80 percent, and we anticipate the average for the filing 

season as a whole will be about 80 percent. 

While all our service channels are important, we realize that taxpayers’ needs have been evolving, with more taxpayers conducting 

their business using digital tools at the time and place of their 

choosing. We are continuing our investments in improving the use 

6 

of online tools and offerings and modernizing the taxpayer experience. 

As we delivered the 2018 filing season, the IRS also made and 

continues to make important progress in implementing the Tax 

Cuts and Jobs Act. Our initial steps have included revising the 

withholding system to take into account various changes made by 

the statute. We started in January by issuing updated withholding 

tables for employers to use. Then at the end of February, we released an update to our withholding calculator on IRS.gov to help 

employees adjust their withholding amount based on their particular financial situation. 

Also in February, we issued a new Form W–4 to more fully reflect the law. 

Apart from our efforts on withholding, we have also begun issuing guidance. This includes several notices and other information 

to help corporations begin complying with the transition tax under 

new section 965. 

Another area where we are working to issue guidance as soon as 

possible involves the deep reduction in the corporate income tax 

rate to 21 percent. We realize the need for guidance is especially 

acute for fiscal year taxpayers, so we are making that a priority. 

Going forward, implementing tax reform will remain a priority 

for the IRS in 2018 and 2019. This effort touches on many of the 

issues of concern to the IRS as we move into the future, including 

providing adequate staffing to serve taxpayers and ensuring modern, secure IT systems to support our work for the Nation. 

In my previous testimony to this committee, I noted the IRS 

would need additional resources for fiscal 2018 and 2019 to ensure 

successful implementation of tax reform. We very much appreciate 

the additional $320 million that was approved by Congress recently 

as part of the omnibus budget bill. This funding ensures we can 

move forward with critical implementation activities in a timely 

manner, and we will be able to test our processing systems in the 

first quarter of fiscal 2019, shortly before the filing season. 

Finally, I should mention that yesterday Treasury and OMB 

reached agreement on a new framework for OMB review of certain 

tax regulations, which we believe meets the twin objectives of increasing economic analysis and review of tax rules while preserving 

timely tax guidance for taxpayers. 

Mr. Chairman and members of the committee, I would be happy 

to take your questions. Thank you. 

The CHAIRMAN. Well, thank you. We appreciate your report and 

appreciate the hard work that you are doing. 

[The prepared statement of Mr. Kautter appears in the appendix.] 

The CHAIRMAN. Let me begin with this. Last December, Congress 

passed the most historic tax reform legislation in a generation. 

Now, the lack of implementation of those reforms falls to the IRS 

and the Treasury Department. 

In February, the Treasury Department released its priority guidance plan, which listed 18 items under, quote, ‘‘initial implementation of the Tax Cuts and Jobs Act,’’ unquote. 

Acting Commissioner Kautter, can you provide the committee an 

update on how this process is going and whether there is a timeline 

7 

for these provisions? For instance, when should we expect new information on these matters and new guidance concerning passthrough deductions under section 199–A? 

Mr. KAUTTER. Yes, sir. Well, immediately upon enactment of the 

Tax Cuts and Jobs Act, we started to approach tax reform implementation in a disciplined, project-managed approach. We have 

built a roadmap of what needs to be done. We are constantly adjusting that roadmap. 

We have sought stakeholder input as part of the process. And we 

have mapped out at this point all the forms that need to be amended, all the instructions that need to be updated, and the publications that need to be changed. 

At this point, our estimate is that we will need to amend as 

many as 450 tax forms, instructions, and publications to fully implement the tax reform act. 

We expect to have new forms drafted by the end of April, for the 

most part. We expect to have most new instructions drafted by the 

end of May. And our plan is to release those forms and instructions 

over the summer for taxpayers and tax advisers to review and comment on. 

Also this month, we will begin programming our new systems. 

There are about 140 integrated, interrelated tax systems, programming systems that need to be updated. Probably three-fourths of 

the cost of tax reform implementation will be the cost of changing 

technology. We estimate about 19 percent of the cost will relate to 

guidance in terms of education of the taxpayers, education of the 

IRS workforce, outreach, and so forth. 

About 4 percent will relate to regulations and frequently asked 

questions. And another 4 percent is for the forms and the publications. 

So we are off to a good start. I am confident at this point that 

we have a good plan. We are executing the plan. I think the time 

line is aggressive. 

We do not really have a choice; we need to get this done. And 

we are focused—we are focused on it. 

I think you mentioned, Mr. Chairman, section 199–A. With respect to that, I would estimate that we will have some guidance out 

by summer, early summer hopefully. 

The CHAIRMAN. Okay. As you know, the House Ways and Means 

Committee recently approved IRS reform legislation. This committee is currently reviewing the legislation, and I will be working 

closely with Ranking Member Wyden and other members of this 

committee as we move forward with legislation here. 

Now, Acting Commissioner Kautter, you have been at the IRS for 

a short time, but you have been there long enough, it seems to me, 

and working on tax administration issues for your entire career, to 

make some suggestions to us here. 

In your opinion, what are some of the key legislative changes 

that we could help you with that would most improve the IRS’s 

performance? 

Mr. KAUTTER. Sure, Mr. Chairman. Well, I think the bill that 

was approved by the Ways and Means Committee yesterday is, by 

and large, a constructive piece of legislation. 

8 

I would propose three probably legislative changes. One thing I 

would do is require mandatory electronic filing of all business and 

information returns. 

I would require the IRS to establish online taxpayer accounts to 

move the IRS forward. It is on that road, but I would encourage 

the IRS to establish accounts online for all taxpayers. 

And I would codify the IRS mission with a focus on taxpayer 

service. After that, I think it becomes a matter of leadership, measurement, and accountability. 

For the most part, my personal view is that the IRS has at its 

access the tools that it needs, for the most part, to be a taxpayerresponsive, high-performing organization. 

But I think, first, it has to be clear that the highest priority for 

everyone in the IRS is to help taxpayers meet their obligations 

under the tax law. We have to acknowledge that enforcement is 

part of our responsibility, but I think we have to continuously message the responsibility to help taxpayers comply with the law. 

Secondly, I would put in place measurements that determine 

whether various parts of the IRS are facilitating compliance with 

the tax law. For example, right now we measure a level of service 

by how quickly telephone calls are answered. I think that is an important measurement, but I think it is too narrow. 

I think if we are going to measure taxpayer service, we should 

expand the measurements that we focus on to include service provided through Taxpayer Assistance Centers, Free File, returns prepared by the volunteer organizations, and so forth. 

Third, while I think enforcement is important, as I said, I think 

it needs to be viewed as part of a continuum, in that enforcement 

and taxpayer assistance are not mutually exclusive. 

Fourth—you have mentioned this already—I would adequately 

fund the IRS, but with oversight. I would focus on building out online accounts and services. 

Fifth, I would make sure there was accountability within the organization. 

And finally, the cardinal rule of organizational management is 

that structure follows strategy. So if strategy is greater focus on 

taxpayer assistance, I think the IRS needs to look at restructuring 

itself along lines that would facilitate greater taxpayer assistance. 

The CHAIRMAN. Well, thank you. 

Let me turn to Senator Whitehouse. 

Senator WHITEHOUSE. Thank you, Mr. Chairman. 

Commissioner Kautter, I stopped by today to renew the conversation that we had back in February. I asked you a number of questions then, and we have not had a response, so I would like to pursue them. 

We were talking about the IRS’s role in combating foreign election spending. As you know, one of the dominant vehicles for influence in American elections these days is the so-called 501(c)(4), 

which is an entity regulated by the IRS. 

And my questions to you had to do with what the IRS does to 

prevent foreign interests from laundering money through 501(c)(4)s 

and into our elections. 

Since February, we have learned a little bit more. In particular, 

thanks to Senator Wyden’s inquiries, we have learned that the NaVerDate Sep 11 2014 16:25 Jun 17, 2019 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 R:\DOCS\36708.000 TIM
9 

tional Rifle Association has accepted foreign donations. Now, the 

NRA claims that none of those donations goes towards political expenditures, but given the fungible nature of money, that is a questionable assertion at best. 

What the NRA told Senator Wyden is that ‘‘a review of our 

records has found no foreign donations in connection with a United 

States election.’’ That is the way they phrased it. It sounds a bit 

like a lawyered answer. 

So I would like to renew some questions and add some new ones. 

One is—and these can be questions for the record; I do not expect 

you to know this off the top of your head—has the IRS investigated 

or is it investigating this claim by the National Rifle Association 

that the Russian money did not go to its election efforts? 

Second, how does the IRS ensure that foreign money is not entering our political system through outside organizations, like LLCs 

and tax-exempt organizations? 

The 501(c)(4) organizations are required to disclose their donors 

to the IRS, but I am interested to know, first, what does the IRS 

do with that information? Does it forward it to FinCEN and other 

places? And second, what does it do when a potential shell corporation emerges as the donor? 

I made a sort of snarky remark in my last question to you about, 

what if it says ‘‘Russian Influence, LLC, a Delaware Corporation?’’ 

Presumably, somebody would want to look behind Russian Influence, LLC to see what it is up to. 

Now obviously, the Russians are not going to use such an obvious 

name, but the problem with shell corporations obscuring our ability 

to know who is influencing our elections is a real one. And I am 

interested in what the IRS does to probe through shell corporation 

information in dealing with politically active 501(c)(4)s. Do you coordinate with FinCEN? 

And also, I would like an overview of what resources you devote 

to policing the rules about 501(c)(4)s. 

Which takes me to a second but related question, which is that 

we see very often in the IRS filings entities that aver to you, under 

oath, that they are not spending any money at all in any effort to 

influence or attempt to influence State, Federal, municipal, or 

other elections. I think it is question 15 on the form, as I recall it— 

I do not have it in mind. And then they run over to the Federal 

Election Commission and disclose that they spent $17 million or 

$35 million on electioneering advertisements. 

It seems to me that that predicates at least an inquiry as to 

whether somebody is perhaps not telling the truth on one or the 

other of those Federal forms. And I would like to know what steps 

the IRS is taking to make sure that those questions are in fact 

being answered truthfully to the IRS. 

So I know that is putting a lot on your plate, but I am sincere 

about trying to get these questions answered. We have not had a 

response to the February questions. I hope you will treat this as 

a priority and make sure that we do get answers to what I think 

are fair and sensible questions, particularly in light of the election 

manipulations we have seen. 

10 

Mr. KAUTTER. Certainly, Senator. Those are fair questions. And 

we have been working on the response to your questions from the 

last hearing. 

It is accurate that the 501(c)(4) organizations are required to 

submit donor lists to the Internal Revenue Service. 

Our focus in auditing those organizations is primarily on whether they are engaged in excessive political campaign intervention. It 

has not been focused on the source of the funds that are contributed to those organizations. 

And we will look into—at this point, we are not sharing any information, to my knowledge, with FinCEN or other organizations. 

But I take your question seriously, and we will look into it, I promise. 

Senator WHITEHOUSE. Thank you. 

Mr. Chairman, if it does turn out, particularly given all of the 

interest in this issue that has emerged, that the IRS is not in fact 

looking behind shell corporations and seeing what are the potential 

avenues for foreign influence through 501(c)(4)s, I would like to 

work with you and other members of the committee to try to make 

sure that they understand that they do have that authority to test 

these propositions. 

And similarly, if they are looking at the extent to which the 

501(c)(4) is focused on political activity, then, particularly if they 

are taking a flat-out ‘‘no’’ at face value on the question when that 

flat-out ‘‘no’’ appears to be belied by disclosures to State and Federal election commissions, again, I think we ought to do what we 

can to make clear that the IRS has the authority to answer those 

questions and get back to us. 

So we will see how this turns out, but I may very well be turning 

to the chairman to make sure that the IRS has the right authority 

and we are getting the right answers. 

The CHAIRMAN. Well, thank you, Senator. We will certainly work 

with you and see if that can happen. 

We have had a vote over on the floor, but it has been quite a 

while since the vote. 

So, Mr. Kautter, I think what we will do is, we will keep the 

record open for Senators to ask you questions that you can answer 

in writing, if we can do that. 

Mr. KAUTTER. Yes, sir. 

The CHAIRMAN. I have a number of questions that I will submit 

to you. 

And with that, we will just recess this hearing until further notice. 

Mr. KAUTTER. Thank you, Mr. Chairman. 

The CHAIRMAN. Thanks so much. We appreciate you coming here 

today and appreciate your testimony here. 

Mr. KAUTTER. Yes, sir. Thank you. 

The CHAIRMAN. Thank you so much. 

With that, we will recess until further notice. 

[Whereupon, at 10:46 a.m., the hearing was concluded.] 

(11) 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH

WASHINGTON—Senate Finance Committee Chairman Orrin Hatch (R–Utah) today 

delivered the following opening statement at the Senate Finance Committee hearing 

entitled ‘‘The 2018 Tax Filing Season and Future IRS Challenges.’’ 

This is an exciting time, and I am grateful Acting Commissioner Kautter could 

be here today to talk with us about the 2018 tax filing season, tax reform, and the 

challenges and opportunities before the IRS. 

As we all know, the IRS is the one agency in our Federal Government upon which 

virtually all other Federal activities depend. 

The reason for that is simple: the IRS collects the Federal revenue required to 

keep the government functioning. This is an important function in our government, 

and a function where process really matters. 

Therefore, it is critical that the IRS collect the revenue under our new tax laws 

in a fair, efficient, and effective manner. When we drain the IRS of resources and 

handicap its ability to collect revenue, that isn’t merely a loss in revenue for the 

Federal Government, it also means that the Treasury must borrow more money, 

causing our country to go further into debt. 

That’s because the Federal Government doesn’t shrink when the IRS fails to collect taxes owed. 

Therefore, handicapping the IRS is also saddling future generations with billions 

of dollars of debt they will have to repay, one way or another. 

But having said that, let me be clear, the IRS stands at a crossroads. 

On the one hand, the IRS has made marked improvements in recent years. Including catching more identity fraud, preventing more fraudulent returns, and moving forward to implement the multitude of tax law changes that have occurred, including the most comprehensive tax reform in a generation. 

But on the other hand, it is an agency stuck in the past. It relies on software and 

core processing systems designed during the Kennedy administration. IRS employees routinely have to manually input return information into agency computers, and 

often require taxpayers to send information via fax machine. 

Now with that said, the IRS is staffed by many of the government’s most dedicated, hardest working civilians. Many of whom work in my home State, back in 

Ogden, UT. 

Yet, there are some bad apples who have hurt the service’s standing back here 

in Congress. 

Mismanagement, taxpayer abuse, and discrimination against certain taxpayers 

are all too recent memories for those of us who oversee the agency. 

Nonetheless, it’s high time that we work together, as Republicans and Democrats, 

to help the IRS modernize itself to meet the challenges of the 21st century. 

We need to do this to promote bipartisanship, but also to keep the IRS accountable and moving on the right track to best serve hard-working American taxpayers. 

12 

That is why, this week, I am watching the House Ways and Means Committee 

as they mark up legislation to reform several aspects of the IRS. I appreciate their 

efforts on that front. And I look forward to working with my good friend and colleague, Senator Wyden, as we explore legislative options here in the Senate. 

I am confident that we can find meaningful, bipartisan solutions that will help 

the IRS perform its duties while still remaining clearly under congressional supervision. 

Acting Commissioner Kautter has been doing an admirable job leading the agency. 

On his watch, taxpayer and fraud prevention services have made noticeable gains 

and are truly great success stories. But it’s time we get Mr. Kautter back to his 

other full-time day job as the Assistant Secretary for Tax Policy. 

As such, I am looking forward to the Finance Committee processing the nomination of Mr. Chuck Rettig, who has been nominated by the President to lead the IRS, 

as well as the nomination of Michael Desmond to be Chief Counsel of the IRS. As 

soon as the committee receives their paperwork, we will begin processing the nominations. 

PREPARED STATEMENT OF HON. DAVID J. KAUTTER, ACTING COMMISSIONER, INTER- NAL REVENUE SERVICE; AND ASSISTANT SECRETARY FOR TAX POLICY, DEPARTMENT

OF THE TREASURY

Chairman Hatch, Ranking Member Wyden, and members of the committee, thank 

you for the opportunity to provide you with an update on the 2018 tax filing season 

and discuss IRS operations. 

I am pleased to report that the 2018 filing season, which began on January 29th, 

has gone well in terms of tax return processing and the operation of our information 

technology systems. As of March 30th, the IRS received more than 94.1 million individual returns. We have issued more than 73.3 million refunds for more than $212.3 

billion. About 80 percent of returns filed so far claimed a refund, with the average 

refund totaling approximately $2,900. It is important to note that, although the tax 

filing deadline for individuals is only a few days away, the work of the filing season 

continues throughout the year, as IRS employees continue to process tax returns, 

including amended returns, and returns for which taxpayers had requested an extension beyond April 17th. 

While the IRS was working to deliver the filing season, we also had two policy 

implementations to deliver on. The first was the need to begin implementing the 

Tax Cuts and Jobs Act, which was the most sweeping change to tax law in more 

than 30 years. This new statute requires extensive work by the IRS this year and 

next to serve the needs of taxpayers and tax professionals. In fact, the IRS began 

implementation efforts shortly after the legislation was signed into law last December. 

The second major policy implementation was the tax-related provisions in the Bipartisan Budget Act enacted in early February, shortly after the filing season had 

started. The IRS began work immediately after passage of the legislation to reprogram its processing systems to handle more than 30 individual and business tax 

benefits that had expired at the end of 2016. This was the first time the IRS had 

ever been required to implement retroactive tax extensions this late in a filing season. 

Thanks to the extraordinary efforts of IRS employees and assistance from the Nation’s tax community, by late February we had completed system reprogramming for 

the three benefits that were most likely to be claimed on tax returns early in the 

filing season. We estimate that approximately 7 million taxpayers are eligible to 

claim those three benefits. They are: 

• The exclusion from gross income of discharge of qualified principal residence 

indebtedness; 

• The treatment of mortgage insurance premiums as qualified residence interest, generally claimed by low- and middle-income filers; and 

• The deduction for qualified tuition and related expenses. 

Since then, the IRS has completed reprogramming its systems and has updated 

forms and instructions to accommodate the other extender provisions in the BiparVerDate Sep 11 2014 16:25 Jun 17, 2019 Jkt 000000 PO 00000 Frm 00016 Fmt 6601 Sfmt 6621 R:\DOCS\36708.000 TIM
13 

tisan Budget Act. They include extensions for several energy-related tax incentives: 

a credit for nonbusiness energy property; the alternative motor vehicle credit; and 

credits for qualified plug-in electric drive motor vehicles and certain two-wheeled vehicles. 

This filing season was also the second in which the IRS held tax refunds until 

February 15th for returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) under a requirement established by the Protecting 

Americans from Tax Hikes (PATH) Act. Like last year, this change slowed the overall pace of refunds at the beginning of the filing season, but that pace accelerated 

once the IRS released 9.4 million EITC and ACTC refunds, totaling approximately 

$46.9 billion, shortly after February 15th. 

TAXPAYER ASSISTANCE EFFORTS

A critical component of the filing season involves the assistance the IRS provides 

to taxpayers, to help them fulfill their tax obligations as quickly and easily as possible. The IRS remains mindful of the need to do everything we can to deliver secure, high-quality assistance through every available channel, including online, in 

person, and over the phone. We continue to expand opportunities for taxpayers and 

their representatives to complete service and compliance interactions through their 

preferred channel. 

While all of our service channels are important, we realize that taxpayer needs 

have been evolving, with more taxpayers conducting their business using digital 

tools at the time and place of their choosing. We will continue our investments in 

improving the use of online tools and offerings and modernizing the taxpayer experience. 

The IRS provides a wealth of tax information on IRS.gov, which was visited more 

than 495 million times during fiscal year (FY) 2017, and more than 335 million 

times so far in FY 2018. The most heavily used part of our website is the ‘‘Where’s 

My Refund?’’ electronic tracking tool, which was used about 278 million times in FY 

2017, and more than 205 million times already this filing season. 

Over the last several years, the IRS has launched a number of digital applications 

to improve taxpayers’ interactions with the IRS. These include: 

• Get Transcript, which allows taxpayers to go online, verify their identity with 

strengthened security, and download a copy of their tax records from prior 

years. Taxpayers used this tool 15.5 million times in FY 2017 and 7.4 million 

times so far this fiscal year; 

• Online Payment Agreement, a secure, safe, and easy process taxpayers can 

use to set up a payment plan and pay their tax obligations over time. A total 

of 798,000 online agreements were set up in FY 2017, and 303,000 have been 

set up so far this fiscal year; and 

• Direct Pay, which provides taxpayers with a secure, free, quick, and easy online option for making tax payments. This tool was used 10.2 million times 

in FY 2017 and has been used 4.1 million times so far this fiscal year. 

Our work in this area also includes continuing the development, over time, of online accounts at the IRS where taxpayers can log in securely, obtain the information 

they need about their account and interact with the IRS as needed. 

In 2016, we took the first step toward a fully functional IRS online account with 

the launch of an application on IRS.gov that provides information to taxpayers who 

have straightforward balance inquiries. We followed that up with another feature 

that lets taxpayers see recent payments posted to their account. We anticipate the 

online account will remain a key point of contact between the IRS and taxpayers, 

and, subject to the availability of resources, we will add other features to this platform over time, as they are developed and tested with taxpayers and tax professionals. 

Another important service delivery channel continues to be our toll-free telephone 

line, which constitutes one of the world’s largest customer service phone operations. 

In FY 2017, the IRS received more than 52 million taxpayer calls, with more than 

40 percent, or about 23 million, handled by our customer service representatives. 

The rest were calls made to lines providing automated messages containing helpful 

tax information. 

14 

In regard to phone service, I’m pleased to report that during the 2018 filing season we are again seeing a strong level of service (LOS) on our toll-free lines, as we 

did in 2017. As of March 31st, our phone LOS was close to 80 percent, and we anticipate that the average for the 2018 filing season as a whole will be about 80 percent. Average LOS during the 2017 filing season was 75 percent, and 70 percent 

for the 2016 filing season. 

The IRS has also been successful in providing timely assistance to taxpayers who 

visit one of our Taxpayer Assistance Centers (TACs) around the country. This is the 

second year that all TACs are offering appointments in advance, a process that we 

have found dramatically cuts wait times for TAC visitors. As in 2017, we have had 

no reports of long lines during the 2018 filing season—clear evidence that the appointment process reduces burden on taxpayers who seek in-person assistance. 

We have also found this arrangement provides major advantages to taxpayers. 

First, when people call for an appointment, we can tell them what documents they 

need to bring with them, reducing the number of return trips. Second, the IRS employee making the appointment can often help taxpayers resolve their issue over the 

phone or refer them to the help they need, eliminating the need to visit a TAC. So 

far this year, about half of those who called for an appointment were able to resolve 

their issue without actually having to come in for an appointment. This is an important point, because TAC employees can now spend more time with those who do 

visit, as they tend to have more complex issues that cannot be resolved over the 

phone. 

The total number of taxpayers served at TACs this year through March 31st is 

more than 790,000, which includes nearly 52,000 who visited a TAC without an appointment. We encourage taxpayers to make appointments in advance, so they can 

be assured of quick and efficient service, but we are also doing whatever we can 

to serve taxpayers who show up without an appointment. 

SAFEGUARDING IRS SYSTEMS AND TAXPAYER DATA

Another important aspect of taxpayer service, during the filing season and 

throughout the year, involves the IRS’s efforts to protect IRS systems and taxpayers’ 

personal data from tax-related identity theft. Over the last several years, the IRS 

has made significant progress in this area. 

Much of that progress is the result of Security Summit initiatives that help safeguard the Nation’s taxpayers. In fact, the 2018 filing season was the third in which 

the IRS worked with its Security Summit partners to put in place many protections 

to help stop fraudulent returns from entering tax processing systems. 

I’m pleased to report recent statistics show there continues to be a substantial decline in several indicators of tax-related identity theft. That includes the number of 

taxpayers reporting to the IRS they are victims of identity theft; the number of tax 

returns with confirmed identity theft; and the number and amount of fraudulent refunds recovered by financial institutions. The following table shows the declines in 

these areas between 2015 and 2017. 

Table 1: Identity Theft Refund Protection by Activity and Dollar Amount, 

Calendar Years 2015–2017 

2015 2016 2017 

Percent 

Change 

(2015–2017) 

IRS Forms 14039, Identity Theft 

Affidavit 677,000 401,000 242,000 ¥65% 

Tax returns with confirmed identity theft 1,400,000 883,000 597,000 ¥57% 

Estimated dollar amount of 

revenue protected $8.7 billion $6.4 billion $6 billion ¥31% 

Fraudulent tax refunds recovered 

by financial industry 249,000 124,000 144,000 ¥42% 

15 

Table 1: Identity Theft Refund Protection by Activity and Dollar Amount, 

Calendar Years 2015–2017—Continued 

2015 2016 2017 

Percent 

Change 

(2015–2017) 

Estimated dollar value of recovered refunds $852 million $281 million $204 million ¥76% 

Source: IRS data 

Despite all the progress that has been made, we realize we cannot let up in the 

fight against tax-related identity theft. As we have strengthened our defenses, identity thieves are becoming more sophisticated, and attempting to obtain more detailed financial information to help them do a better job of impersonating legitimate 

taxpayers and file more realistic-looking tax returns to attempt to obtain fraudulent 

refunds. 

Cyber-thieves are targeting tax professionals, human resources departments, businesses, and other places with large amounts of sensitive financial information. For 

that reason, the IRS and its partners are not only continuing to improve our safeguards against fraudulent returns, but we also continue to encourage taxpayers, tax 

professionals, and businesses to do everything they can to protect their data and 

avoid becoming victims of the tax scams that continue to proliferate. 

TAX REFORM IMPLEMENTATION UPDATE

The IRS continues to make important progress in implementing the Tax Cuts and 

Jobs Act. As I noted when I testified to this committee in February, implementing 

the new tax law is one of the IRS’s highest priorities, and will be a major Servicewide effort for some time. This work touches on many major aspects of the tax system affecting both individual and business taxpayers. Our main goal is to ensure 

everyone can navigate and understand the changes made by the new law, and be 

able to file their returns in 2019 as quickly and easily as possible. 

Our Tax Reform Implementation Office (TRIO), which was set up in January, continues to coordinate our efforts. The TRIO is responsible for interacting with our 

business divisions and our Office of Chief Counsel to ensure a smooth roll-out of 

everything needed to implement the law. Where there is overlap in responsibilities, 

the TRIO will ensure IRS divisions collaborate to get the job done. The TRIO has 

a broad portfolio: it is responsible for identifying areas of impact, establishing and 

monitoring implementation action plans, ensuring communication with external and 

internal stakeholders, and making sure we address any risks that arise in our work. 

Regarding recent implementation activities, one critical area we identified early 

on was income tax withholding. The IRS moved quickly to begin revising the withholding system to take into account various changes made by the statute, such as 

increasing the standard deduction, removing personal exemptions, increasing the 

Child Tax Credit, limiting or discontinuing certain deductions, and changing the tax 

rates and brackets. This issue affects literally every taxpayer who receives a paycheck. 

We started in January by issuing updated withholding tables for employers to 

use. These tables were designed to produce the correct amount of tax withholding 

for taxpayers with simple tax situations. Then at the end of February, we released 

an update to our Withholding Calculator on IRS.gov, to help employees adjust their 

withholding amount based on their particular financial situation. This will be especially helpful for taxpayers with more complex tax situations. Through March 8th, 

the Withholding Calculator page on IRS.gov had been viewed more than 1.2 million 

times. 

Also in February, we issued a revised Form W–4, Employee’s Withholding Allowance Certificate, to more fully reflect the new law. This form takes into account 

such provisions as the changes in available itemized deductions, increases in the 

Child Tax Credit, the new dependent credit, and the repeal of dependent exemptions. 

The IRS is continuing efforts to encourage taxpayers to check their withholding, 

and do so as soon as possible. For example, in late March we conducted a ‘‘Paycheck 

Checkup’’ public awareness campaign to get the word out to taxpayers about what 

16 

they can do to make sure the correct amount of tax is being withheld from their 

pay. The activities during this special weeklong campaign included the release of 

an IRS YouTube video series and several online Tax Tips. These were designed to 

walk taxpayers through what they need to know about withholding, and help them 

navigate complex issues that might affect how much should be withheld from their 

pay. 

Another important area where the IRS has made significant early progress on tax 

reform implementation involves the guidance taxpayers and tax professionals need 

to understand and navigate the new law. This involves both formal guidance, such 

as regulations and notices, and so-called ‘‘soft’’ guidance, such as press releases and 

Frequently Asked Questions (FAQ) about tax topics. 

In February, the Treasury Department and the IRS provided an initial idea of 

where we are headed, with an update to the Priority Guidance Plan. As a first step, 

the revised plan contains 18 new guidance projects related to tax reform. There are 

many other areas of the law that will require additional guidance, given that, overall, there are 79 explicit grants of regulatory authority in the tax reform statute. 

While much of the guidance we are developing will take time, there were certain 

areas we needed to address quickly. In late December, we released initial guidance 

to help corporations begin complying with the transition tax imposed on untaxed 

foreign earnings of foreign subsidiaries of U.S. companies under new code section 

965, which became effective upon enactment of the new law. We followed that up 

with additional notices, and last month released a set of FAQs with information to 

assist taxpayers filing their 2017 tax returns, including how to report section 965 

income and how to report and pay the associated tax liability. 

Another area where we are working to issue guidance as soon as possible involves 

the deep reduction in the corporate income tax rate to 21 percent. We know there 

is much guidance needed in regard to this change, and there are several projects 

underway. We realize the need for guidance is especially acute for fiscal year filers, 

so we are making that a priority. 

Those are just a few of the actions the IRS has taken so far in its ongoing efforts 

to implement the new tax law. We are also continuing the work needed to create 

or revise approximately 450 forms and publications affected by tax reform. Work 

also continues on reprogramming about 140 information technology systems, with 

special focus on returns processing and compliance systems, to ensure those systems 

are ready for next year’s tax filing season. We are also developing the training that 

will be needed to familiarize our workforce with the new tax law and, in particular, 

ensure our customer service representatives can provide the most effective service 

possible to taxpayers when they have questions about the tax changes. 

In my previous testimony to this committee, I noted the IRS would need additional resources to ensure successful implementation of tax reform. We appreciate 

the additional $320 million approved by Congress as part of the omnibus appropriations bill for FY 2018. This funding ensures the IRS can move forward with critical 

implementation activities in a timely manner, and we will be transmitting updated 

implementation plans and 2-year cost estimates to Congress in the very near term. 

Chairman Hatch, Ranking Member Wyden, and members of the committee, that 

concludes my statement. I would be happy to take your questions. 

QUESTIONS SUBMITTED FOR THE RECORD TO DAVID J. KAUTTER

QUESTIONS SUBMITTED BY HON. ORRIN G. HATCH

Question. Perhaps one of the most difficult challenges the IRS faces is with information technology. Directly related to that challenge is the question of human capital. For instance, the IRS’s Individual Master File is its legacy tax processing system and is in many ways the backbone of the IRS’s information technology infrastructure. But that system, which is based on antiquated software, has only 17 developers whom the IRS considers to be subject matter experts. We have heard concerns that some of those employees will retire soon, and many of those remaining 

will be eligible for retirement within 4 years. Young IT experts aren’t necessarily 

eager to join the IRS to learn how to run antiquated systems. 

Almost 60 percent of the IRS’s workforce is over the age of 50, and there are not 

enough younger workers coming in to replace those who retire. 

17 

What can IRS do to attract younger skilled workers, and what can Congress do 

to help? 

Answer. The IRS recognizes that the current age distribution of its workforce 

poses a long-term risk to the organization, particularly in highly skilled, technical 

programs. As of May 2018, 32.2 percent of the IRS’s current permanent workforce 

will be eligible to retire by the end of fiscal year (FY) 2020. As you note, IRS’s 

human capital challenges include a limited number of subject matter experts in key 

information technology (IT) areas. Similar challenges exist in other technical and 

specialized fields. 

The IRS has taken several steps in recent years to mitigate this risk. It has expanded partnerships with colleges and universities and participated in job fairs to 

recruit new talent, with a focus on military veterans and IT disciplines such as cybersecurity. The IRS is establishing a centralized recruitment office to better coordinate and oversee these efforts. The IRS has also leveraged flexibilities under the 

Federal Pathways internship program and recent graduate hiring authorities to attract and retain new talent. In FY 2017, the IRS hired 307 Pathways interns and 

recent graduates. This includes 121 IT positions. Additionally, the IRS has increased use of the Student Volunteer Program and other unpaid third-party internships to help students explore IRS career opportunities. 

Congress can assist the IRS by reinstating the IRS’s streamlined critical pay authority (SCP), which provided the IRS some flexibility to recruit and retain highly 

skilled employees with specialized expertise, particularly in high-demand areas of 

information technology. Established under the Restructuring and Reform Act of 

1998, SCP allowed the IRS to hire up to 40 uniquely qualified experts for 4-year 

appointments to revitalize and enhance its workforce. The SCP authority allowed 

the IRS to hire top-caliber talent under an abbreviated timeline and at a salary 

more competitive with private industry. The IRS SCP authority expired in 2013, 

and the administration’s FY 2019 budget requests that Congress reinstate this authority through FY 2022. Reinstating the SCP authority would allow IRS to recruit 

and hire other highly specialized talent for critical positions to modernize, innovate, 

protect taxpayer data, and accomplish the IRS mission. 

Question. Access to telephone customer service has improved since it reached a 

low point in 2015. IRS has also redesigned its website, added online access to account information, and offered appointments to its walk-in locations serving taxpayers in person. 

What has IRS done to achieve these improved customer service results? 

Answer. Each year, we integrate IRS messaging, communication strategies, and 

outreach efforts. This approach allows us to effectively deliver information and guidance to the public about the services and resources available to help taxpayers and 

their representatives understand and comply with their tax obligations. In recent 

years, the IRS has employed two communication strategies that further focus our 

efforts to help taxpayers. First, to increase the number of taxpayers we serve, the 

IRS continues to educate our customers to the availability of self-help options on 

IRS.gov. 

Second, in the last two filing seasons, there have been important changes taxpayers needed to know before filing. In response, we implemented the Get Ready 

campaign in fall 2016 and 2017. The campaigns focused on helping taxpayers understand, before filing season, the changes that may affect processing their tax returns 

and issuing refunds. These messages were also incorporated in communications 

throughout filing season. The IRS is continuing to build on these best practices in 

preparation for the 2019 filing season. 

The IRS toll-free telephone line, which constitutes one of the world’s largest customer service phone operations, is critical to taxpayer service. Taxpayers calling this 

line first navigate through automated menus informing them how to get their questions answered by selecting from menu options of frequently asked topics, such as 

refund status, transcripts, tax reform law, individual and business tax topics, and 

how to find information on IRS.gov. 

In FY 2017, the IRS received more than 52 million taxpayer calls, with more than 

40 percent, or about 23 million, handled by IRS customer service representatives. 

The rest were calls made to lines providing automated messages containing helpful 

tax information. Through April for FY 2018, the IRS received more than 34 million 

taxpayer calls, with more than 40 percent, or about 14 million, handled by IRS customer service representatives. 

18 

Recognizing that taxpayers may have questions about the Tax Cuts and Jobs Act 

provisions, the IRS will now answer tax reform tax law questions year-round, not 

just in filing season. The IRS also decided to route calls to dedicated CSRs for topics 

such as Basic Tax Reform (Itemized Deductions, Tax Rates, Child Tax Credit, etc.), 

Roth Conversions, Tax Rollover Period for Plan Loan Offset Amounts, Qualified 

Business Income Deduction, Disaster Areas Relief for 2016, Casualty Loss, Moving 

Expenses Deduction, and Affordable Care Act. 

The IRS has also been successful in providing timely assistance to taxpayers who 

visit one of its Taxpayer Assistance Centers (TACs) around the country. This is the 

second year that all TACs are offering appointments in advance, a process that the 

IRS has found dramatically cuts wait times for TAC visitors. As in 2017, the IRS 

has had no reports of long lines during the 2018 filing season. 

The IRS has also found this arrangement provides advantages to the taxpayer. 

When taxpayers call for an appointment, the IRS employee making the appointment 

can often help the taxpayers resolve their issue over the phone or refer them to the 

resources they need, eliminating the need to visit a TAC. For those that need an 

appointment, we can tell them what documents they need to bring with them, reducing the number of return trips. About half of those who called for an appointment resolved their issue without actually having to come in for an appointment. 

In February 2018, the IRS implemented a new appointment scheduling tool which 

has further enhanced its ability to provide appointments. While the IRS encourages 

taxpayers to make appointments in advance, so they can be assured of quick and 

efficient service, it attempts to serve taxpayers who show up without an appointment. 

The IRS provides a wealth of tax information on IRS.gov. In late summer 2017, 

it launched a redesigned IRS.gov website. The refreshed design improves how taxpayers interact with the IRS online. While tax issues can often be complex, the 

IRS.gov transformation should make it easier for taxpayers to navigate both the IRS 

website and tax law. One of the most important changes was to make IRS.gov mobile friendly. This means the site will resize and adapt based on the screen size or 

the type of device used, including a smartphone, laptop, tablet, or desktop. 

The new IRS.gov also improved content organization, highlighting the important 

tasks taxpayers come to IRS.gov to complete. Several links at the top of the pages 

give users one-click access to help, news, content in other languages, and more. In 

addition to reorganizing content, IRS.gov now has drop-down menus on every 

IRS.gov page for those using a computer web browser. Each drop-down menu groups 

popular content options to eliminate scrolling—giving users quicker access to the information they need. We monitor how IRS.gov is performing, and user reactions, to 

better serve taxpayers and their representatives. 

The IRS has invested significant resources in developing a series of online tools 

and applications so that those who prefer to interact with the IRS online can do 

so easily and securely. The plan is to continue investments in online tools and offerings and modernizing the taxpayer experience. Here are several key online applications the IRS has developed in response to increased taxpayer demand for online 

services: 

• ‘‘Where’s My Refund?’’, an electronic tracking tool, is the most heavily used 

part of our website. Taxpayers used it about 278 million times in FY 2017, 

and already been used more than 275 million times this fiscal year. 

• Get Transcript, which allows taxpayers to go online, verify their identity with 

strengthened security, and download a copy of their tax records from prior 

years. Taxpayers used this tool 15.5 million times in FY 2017 and 9.6 million 

times so far in FY 2018. 

• Online Payment Agreement, a secure, safe, and easy process taxpayers can 

use to set up a payment plan and pay their tax obligations over time. A total 

of 798,000 online agreements were set up in FY 2017, and 571,000 have been 

set up so far this fiscal year. 

• Direct Pay, which provides taxpayers with a secure, free, quick and easy online option for making tax payments. This tool was used 10.2 million times 

in FY 2017 and has been used 6.6 million times this fiscal year. The IRS is 

also continuing the development of online accounts at the IRS where taxpayers can log in securely, obtain the information they need about their account and interact with the IRS as needed. 

19 

In 2016, the IRS took the first step toward a fully functional IRS online account 

with the launch of an application on IRS.gov that provides information to taxpayers 

who have straightforward balance inquiries. The IRS followed that up with another 

feature that lets taxpayers see recent payments posted to their account. 

Question. How will IRS achieve similar results during the 2019 filing season to 

help taxpayers understand new requirements resulting from the tax law changes? 

Answer. For filing season 2019, the IRS will continue the Get Ready campaign 

to provide the latest information to taxpayers. To reach as many people as possible, 

the IRS is using a variety of communications and outreach platforms. In January 

2018, it started with the release of the withholding tables. The IRS followed up with 

the Withholding Calculator launch in February. For March, the IRS created a special campaign, Paycheck Checkup week. 

The IRS will expand our communications through filing season 2019, adding information about other parts of the TCJA as guidance is issued. IRS outreach, communications, and customer-facing employees, as well as external partners, will be 

equipped with the same messaging to generate awareness and consistently encourage taxpayers to consider actions outlined on IRS.gov and Get Ready campaign. 

Based on anticipated volumes, IRS will ensure that a sufficient number of CSRs 

are available to answer taxpayer questions and that all CSRs and all assistors in 

our TACs are trained on the new tax law. In addition, IRS will answer tax reform 

tax law questions year-round, not just during filing season. 

The IRS will provide additional online tool enhancements as they are developed 

and tested with taxpayers and tax professionals. The IRS will continue to expand 

its outreach and communications effort through the summer and for the rest of 2018 

so that taxpayers are informed before the start of the 2019 filing season. A critical 

piece of the strategy is working with third parties to help them share this information. During this summer, the IRS will conduct sessions across the country, reaching 

taxpayers and tax professionals. Additionally, the IRS will again conduct its Nationwide Tax Forums for tax professionals in five cities around the country, where the 

new tax law will take center stage. 

Question. There’s been much discussion on the need for reforming and/or modernizing taxpayer services. However, at the same time, GAO recently noted that IRS’s 

core tax processing system is over 50 years old, relies on archaic software, and is 

highly risky. GAO also noted that there is not a solid plan with realistic costs and 

milestones to replace the core tax processing system. 

How is IRS balancing the need to reform and/or modernize taxpayer services 

while ensuring the critical internal systems supporting these taxpayer services are 

also appropriately modernized? 

Answer. Delivering new services and modernizing existing services provided to 

taxpayers are both dependent upon our ability to stabilize and enhance our existing 

IT infrastructure and operations. In implementing modern technology and methods, 

the IRS will simultaneously improve the taxpayer experience and effectively advance modernization of IT infrastructure and operations. As efforts to modernize 

continue, the IRS will upgrade the currency of existing hardware and software, increasing redundancy, eliminating single points of failure, and building an IT workforce with the requisite skills. Success will be based upon effectively leveraging all 

resources and available sources of funding. 

In several instances, modernizing services for taxpayers has included modernizing 

the internal systems supporting those services. One example in particular worth 

noting is the progress on the CADE 2 program to modernize the Individual Master 

File (IMF) core tax processing system. Through the CADE 2 program, the IRS has 

delivered significant improvements to taxpayer services, with faster refunds, notices, and broader, agency-wide availability of more current taxpayer information. 

Through CADE 2, the IRS is also addressing technical limitations imposed by the 

antiquated Assembly Language Code (ALC). 

While we have many successes in delivering both modernized taxpayer services 

and modernized systems and infrastructure, the IRS has a great deal of work ahead 

of us. Modernization is a continuous process, and the IRS is taking every opportunity to leverage all available resources—not just Business Systems Modernization 

(BSM)—to continue to make progress. The IRS is enhancing our strategic planning 

processes and changing its approach to better integrate scheduled systems upgrades 

while implementing legislative mandates and BSM initiatives into an overall modernization strategy. The IRS is confident that this holistic approach will accelerate 

20 

1Peter Elkind, ‘‘The Billion-Dollar Loophole,’’ ProPublica, December 20, 2017. 

modernization and ensure all investments are planned and executed according to 

the IRS Strategic Plan. 

Question. Recently, IRS officials have made public comments questioning the usefulness of the Form 990 Schedule B from organizations formed under IRC section 

501(c)(4) or (6), and acknowledging the risks that Schedule B filing poses to 

confidentiality. Given that this requirement, unlike that on organizations formed 

under IRS section 501(c)(3), comes from IRS and Treasury rulemaking rather than 

the IRS, will IRS be reconsidering the requirement that 501(c)(4) and (6) organizations file a Schedule B? 

Answer. On July 16, 2018, after careful review, the IRS and Department of the 

Treasury released Revenue Procedure 2018–38 limiting the requirement to file 

names and addresses on Schedule B to organizations described in section 501(c)(3) 

or section 527 of the Internal Revenue Code. 

QUESTIONS SUBMITTED BY HON. RON WYDEN

OFFICE OF TAX POLICY COMMENTS ON TAX RECONCILIATION

Question. During the consideration of the 2017 tax reconciliation bill, did the 

Office of Tax Policy or others at Treasury submit written comments to Congress? 

If so, and if such comments were not specifically submitted to the Senate Finance 

Committee Minority staff, please provide copies. 

Answer. The IRS Office of Congressional Affairs-Legislation Branch did not provide written comments to Congress on the Tax Cuts and Jobs Act during its consideration. 

CONSERVATION EASEMENT SYNDICATION

Question. Mr. Kautter, on March 29, 2017, I wrote to IRS Commissioner John 

Koskinen about the growth in abusive tax shelters involving the syndication of conservation easements. I asked the IRS to provide a report on the nature and scope 

of this problem. On July 13, 2017, the IRS provided a partial response that revealed 

participants in these syndication deals claimed deductions that were nine times the 

amount of their original investment. Subsequent preliminary responses indicate IRS 

may have lost billions of dollars to this tax shelter in hundreds of tax shelter transactions. 

The Treasury Department issued Notice 2017–10, identifying these syndication 

transactions as abusive tax shelters and requiring participants to disclose their involvement to the IRS. The notice was also intended to deter future deals, however, 

media reports suggest these deals are still taking place.1

Historically, when the Treasury Department and IRS issue a notice ‘‘listing’’ a certain transaction as an abusive tax shelter, the promotion and use of such schemes 

stops. Can you confirm whether this activity is continuing despite the notice? 

Answer. Current data suggests that the number of transactions has declined since 

the issuance of Notice 2017–10. The IRS, however, continues to receive additional 

disclosures, and it is still in the process of reviewing the disclosures received in 

2018. As of May 31, 2018, the IRS has processed 552 of the 2018 Forms 8886 for 

this transaction and 1,928 Forms 8918. While forms continue to be processed, the 

current ratio from the 310 2018 Forms 8886 filed that provided both an investment 

and deduction amount is 4.91. 

Question. Please describe whether the administration has taken enforcement actions against the promoters of these abusive shelters identified via Notice 2017–10. 

Answer. Approximately 40 of the top-tier pass-through entities (i.e., the entity 

where the contribution transaction occurred, generally TEFRA partnerships) have 

open enforcement activity. 

Question. Please describe whether the administration has developed plans to take 

any enforcement actions against the promoters of these abusive shelters identified 

via Notice 2017–10. 

Enforcement actions against illegal syndicated conservation easement tax shelter 

transactions have proven challenging and time-consuming for the IRS. For example, 

21 

2Tax Court Memorandum 2018–45. 

3 H.R. 1, an act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018. 

earlier this month the Tax Court issued a ruling disallowing tax write-offs from a 

sham conservation easement transaction that occurred more than a decade ago.2

While Notice 2017–10 may have extended the statute of limitations period for certain transitions, the time in which IRS can take enforcement actions on those tax 

shelter transactions grows shorter by the day. Please describe what actions IRS is 

taking to ensure that promoters of syndicated conservation easement tax shelter 

transactions are held accountable before the close of the statute of limitations. 

Answer. The IRS is determining its specific enforcement strategy, which will also 

address entities that failed to properly disclose pursuant to the notice. The information included in the disclosures, as well as experience with current inventory, shows 

the need for a varied approach for this issue. 

Question. Do you believe IRS currently has the tools needed to put an end to this 

abuse? Will Treasury propose regulatory or statutory changes to address these 

abuses if Notice 2017–10 and other tools are shown to be insufficient to curb the 

use of these tax shelters? 

Answer. Enforcement in this area requires the significant assistance of appraisers 

and resources. The IRS is working to address this issue and will evaluate the results from its enforcement strategy and work with Treasury if additional regulatory 

or statutory changes are needed to curb misuse of the syndicated conservation easements. 

Question. As Acting Commissioner, how high of a priority is it for IRS to stop this 

abuse? 

Answer. The IRS is committed to pursuing those transactions that are abusive. 

Question. Do you believe the transactions described in Notice 2017–10 are abusive 

on their face? 

Answer. Notice 2017–10 sets forth that a transaction that results in a charitable 

deduction that equals or exceeds an amount that is 21⁄2 times the amount of the 

investor’s investment is a tax avoidance transaction. 

Question. To what extent will IRS challenge the tax benefits of each and every 

transaction covered by Notice 2017–10? 

Answer. As stated above, IRS’s experience with current inventory shows the need 

for a varied approach for this issue. The IRS is determining its enforcement strategy. 

Question. As Assistant Secretary for Tax Policy, do you support Notice 2017–10? 

Answer. Yes. Notice 2017–10 alerts persons involved in syndicated conservation 

easement transactions that disclosure responsibilities may arise from their involvement in the transactions. The Internal Revenue Service uses these disclosures as 

a significant tool in carrying out its enforcement responsibilities. 

NEW TAXES ON TAX-EXEMPTS AND CHARITIES

Question. Mr. Kautter, the Republican tax bill 3 passed in December 2017 imposed 

nearly $10 billion in new taxes on charities and tax-exempt organizations. Many of 

these provisions were carelessly drafted, leaving charities and other tax-exempt organizations uncertain how the provisions will be implemented and how much tax 

they will have to pay. One of the most pressing sources of uncertainty is section 

13702 of the Republican tax bill, which requires tax-exempt entities to calculate unrelated business income tax (UBIT) separately for each trade or business. The provision, however, failed to make any attempt to define ‘‘trade or business,’’ causing 

significant confusion and uncertainty for charities and other tax-exempt organizations across the Nation. 

Earlier this week the American Institute of Certified Public Accountants (AICPA) 

sent a letter to congressional leaders stating that section 13702 of the Republican 

tax bill would be difficult or impossible to comply with without significant regulatory guidance from Treasury. The letter states: ‘‘The burden of new section 

512(a)(6) on tax-exempt organizations is substantial, and nearly all tax-exempt organizations are affected.’’ This issue is further complicated by the fact that the provision went into effect January 1, 2018, just days after it became law. Charities and 

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other tax-exempt entities are in the process of making 2018 estimated tax payments, and are left guessing how to calculate the new tax. 

Did Treasury or IRS know that this provision as drafted would cause uncertainty 

to charities and other tax exempt entities without further regulatory guidance? 

Answer. The Department of Treasury was in communication with Congress 

throughout the legislative process for H.R. 1 and is working diligently to implement 

the legislation. The Department of Treasury and the IRS appreciate the need for 

guidance that clarifies outstanding issues relating to newly enacted section 

512(a)(6). The Second Quarter Update to the 2017–2018 Priority Guidance Plan includes guidance on the computation of unrelated business taxable income for separate trades or businesses. This guidance is one of the IRS’s top priorities. 

Question. Did Treasury or IRS believe at the time of the Republican tax bill’s passage that they would be able to issue regulations fully clarifying this issue before 

the provision went into effect on January 1, 2018? 

Answer. The Department of Treasury was in communication with Congress 

throughout the legislative process for H.R. 1 and is working diligently to implement 

the legislation. 

Question. Did Treasury or IRS believe at the time of the Republican tax bill’s passage that they would be able to issue regulations fully clarifying this issue before 

the first 2018 quarterly estimated tax payment was due? 

Answer. The Department of Treasury was in communication with Congress 

throughout the legislative process for H.R. 1 and is working diligently to implement 

the legislation. 

Question. Did Treasury or IRS communicate to the chairmen of the Senate Finance Committee or Ways and Means Committee (or their staffs) that this provision 

as drafted could cause uncertainty to charities and other tax exempt entities? 

Answer. The Department of Treasury was in communication with Congress 

throughout the legislative process for H.R. 1 and is working diligently to implement 

the legislation. 

Question. If yes, did Treasury or IRS suggest modified statutory language to further clarify the provision? Was any proposed language adopted in the final legislation? 

If no, why did Treasury not communicate to Congress any concerns over the uncertainty this provision would cause? 

Answer. See above. 

MINIMUM STANDARDS FOR PAID TAX RETURN PREPARERS

Question. We continue to hear reports of unscrupulous tax return preparers preying on vulnerable taxpayers and pocketing the money. This is why Senator Cardin 

and I introduced legislation to allow the IRS to require minimum standards for paid 

return preparers. Since the 1970s, Oregon has had minimum standards in place for 

tax preparers since the 1970s, and when GAO looked at the program, it found that 

returns filed by Oregon paid preparers were 72 percent more likely to be accurate 

than comparable returns filed in another State. Consequently, GAO has been recommending for years that the IRS set minimum requirements for paid preparers. 

Mr. Kautter, do you still see preparers taking advantage of taxpayers as a problem? 

Answer. Yes, there are still preparers taking advantage of taxpayers. Whether the 

preparer is unscrupulous or just underprepared the outcome for the taxpayer and 

tax administration is much the same—a lack of compliance with tax obligations. To 

improve overall tax compliance, the IRS continues to support minimum standards 

for tax return preparers, as this will improve preparer competency and return preparation accuracy. 

Question. Do you support legislation that would require minimum standards for 

paid preparers to protect taxpayers, such as was proposed in the President’s budget? 

Answer. Yes. Such legislation would enable the IRS to ensure that all preparers 

have a basic level of competency and integrity. Additionally, greater oversight for 

return preparers would help the IRS identify unscrupulous preparers and develop 

more effective compliance and enforcement strategies. 

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CYBER-ATTACKS ON IRS SYSTEMS

Question. Your predecessor, Commissioner Koskinen, testified before the Finance 

Committee in April 2016 that IRS computers ‘‘withstand more than 1 million malicious attempts to access them each day.’’ 

Mr. Kautter, can you confirm for the committee whether the rate of cyber-attacks 

on IRS systems has increased to 2.5 million per day, as reported in Politico on April 

10, 2018, and whether taxpayer data or IRS operations are at risk? 

Answer. The IRS observes and mitigates more than 2.5 million unauthorized access attempts per day (>1 billion per annum), including denial-of-service attacks, 

unsuccessful intrusion attempts, probes or scans, and other unauthorized connectivity attempts. To date, the multi-layered defenses the IRS has in place have been 

extraordinarily effective in most cases. The bulk of these attempts have, presented 

minimal risk of exposure of taxpayer data and IRS operations. 

Question. What is the IRS doing to combat these attacks? 

Answer. The IRS continues to leverage congressionally provided funds to implement a multi-layered defense strategy. To date, the strategy has been successful, 

but the IRS is mindful that bad actors’ evolving tactics mandate continual investment in defense. 

The IRS has established 24 x 7 x 365 incident response capability with teams that 

perform around-the-clock intrusion and fraud analytics to identify, respond to, and 

mitigate emerging threats or fraudulent access/transactions. These employees are 

highly skilled across the realms of intrusion analysis, fraud analytics, and data analytics in general, with a very diverse skillset across the spectrum of cybersecurity. 

The IRS leverages myriad integrated technologies and processes to provide 

proactive mitigation, timely detection, and rapid containment/response to identified 

cyber-threats. Collectively, the IRS’s enterprise security stack delivers safeguards 

and monitoring across disparate threat vectors ranging from publicly accessible applications to endpoint devices. A snapshot of the enterprise security stack consists 

of the following: 

• Perimeter-based security infrastructure, which is comprised of firewalls, intrusion detection/prevention sensors, internet proxy and email gateway content filtering, and Einstein 3 Accelerated. Collectively, these infrastructure 

components enforce traffic policy to permit connectivity that is explicitly authorized, while prohibiting all other connectivity. 

• IRS’s Publicly Accessible Internet websites, which have dedicated security 

protections in place to authenticate users in a manner commensurate with 

the data being accessed, traffic shaping and web application firewalls to ensure accesses are compliant with protocol standards, and denial of service protections to mitigate excessive volume-based target attacks. 

• Endpoint Protections, which serve as an additional line of defense through 

standardized common operating environments, antivirus and firewall to prevent split tunneling, patch/vulnerability analysis and remediation, software 

license metering and endpoint health monitoring to ensure applicable endpoint agents are operational and current. 

• Analytics and monitoring, which occur across the enterprise security stack 

using the big data ecosystem to provide normalization, aggregation, and correlation of datasets. Analysts can interrogate the data to answer specific 

questions and/or glean new insights or trends from the data. 

Question. What can Congress do to assist? 

Answer. Congress can assist by funding the requests for cybersecurity initiatives 

in the 2019 budget. Approval of streamlined critical pay for technology positions is 

one of the most impactful steps Congress could take. 

FAILURE OF IRS E-FILE ON TAX DAY

Question. Mr. Kautter, we would like to get a full accounting of the circumstances 

behind the failure of IRS systems to accept electronically filed returns that occurred 

early in the morning on April 17th. The outage lasted 11 hours, with few details 

provided in the interim to the public and no direction given to taxpayers needing 

to file their returns. 

24 

As part of this accounting, can you tell us whether it is correct that this was simply a glitch in a piece of IRS hardware and not the result of interactions with any 

third parties? Is it correct that no taxpayer data was lost or compromised in any 

way? Has the backlog of transmitted-but-not-accepted returns since been processed 

by IRS? What specific processes have been put in place to ensure this type of outage 

will not happen again, especially on one of the busiest days of the tax filing season? 

Answer. Addressing your specific questions first: 

• As described in greater detail below, a firmware bug caused the mainframe 

to fail on Tax Day. The outage did not result from third-party actions. 

• The IRS did not lose or compromise any taxpayer data as a result of this outage. 

• The IRS processed the backlog within 24 hours of restoring the mainframe. 

• IBM and IRS deployed a script to find and automatically correct this storage 

array problem should it recur. 

Details and background: 

The circumstances around the failure of IRS systems on April 17th are as follows. 

At approximately 2:57 a.m. EST on April 17, 2018, the IRS’s core tax processing 

mainframe system used its automated ‘‘call home’’ capability to send an ‘‘alert’’ to 

the vendor, IBM, when it detected a deadlock condition after a warm start (system 

reboot initiated by the operating system). It sent a second automated alert to IBM 

at 4:45 a.m. EST. Meanwhile, at 2:24 a.m. EST, IRS’s Information Technology Operations Command Center (ITOC) began receiving system-generated messaging and 

invoked our established processes to troubleshoot the problem. By 3:30 a.m. EST, 

IRS ITOC had detected problems with several systems and submitted a work ticket. 

By 5:15 a.m. EST, IRS ITOC was in communication with the vendors (IBM and 

Unisys), and technical assessments had begun. Extensive troubleshooting and system diagnostics testing by a joint IRS, IBM, and Unisys team revealed an extremely 

rare hardware failure caused by a firmware bug on the storage array (a subsystem 

component of the mainframe). A unique set of workload and timing conditions prevented deletion of data from the read cache (temporary memory), causing the cache 

to fill up. As a result, the system was unable to service any new requests for read 

or write cache, resulting in a deadlock condition that halted mainframe processing. 

IBM product engineers cleared the deadlock condition on the storage array and 

then deployed a prevention script (temporary hardware instructions) to automatically run if any deadlock conditions were to occur again. By mid-afternoon on April 

17, 2018, the mainframe was fully operational and, shortly thereafter, tax and payment processing resumed. Within 24 hours, the IRS had fully recovered and was 

current with processing, with no data corruption, data loss, or system breaches associated with this event. There have been no further occurrences of the deadlock condition. 

While the IRS cannot guarantee that a rare hardware outage will never happen 

again, it has spent significant time assessing how we could reduce the effects of a 

similar failure. The IRS has worked with its vendors to improve the incident response and notification process. The IRS is also exploring options for increasing 

availability of mainframe systems. In accordance with our most recent IT Vision, 

the IRS is actively exploring solutions that will provide onsite resiliency to enable 

High Service Availability for our systems. The IRS is also considering ways to accept electronically-filed tax returns and payments independent of the mainframe 

systems to minimize risk should another mainframe interruption occur. Because the 

current backup system for an event of this magnitude requires considerable time to 

become operational, the IRS needs to invest in more failover options to increase 

mainframe systems availability. 

Question. And what new procedures will IRS implement (including postings on social media) to ensure that taxpayers and government officials are kept abreast of 

developments and given the timely direction they need to file their tax returns and 

comply with tax laws? 

Answer. The IRS released a variety of public messaging on April 17, 2018, informing taxpayers of the outage and providing direction on how taxpayers should file 

their tax returns. 

This included a widely circulated mid-morning press statement and televised comments from the Acting Commissioner during the House Oversight and Government 

Reform Committee hearing. IRS issued a Quick Alert at 8.48 a.m. By mid-morning 

25 

April 17th, the IRS had also sent e-filing software providers the following message: 

‘‘Currently, a number of IRS systems are experiencing technical difficulties. The IRS 

is looking into the issue and will provide updates as soon as possible. Taxpayers 

should continue filing their tax returns as they normally would.’’ The IRS added 

outage messages to affected tools on IRS.gov. On IRS telephones, the IRS instructed 

our toll-free representatives how to respond to questions from callers. In addition, 

the IRS issued internal alerts under our Servicewide Electronic Research Program 

on both April 17th and 18th to internal audiences, which includes IRS Accounts 

Management and Field Assistance personnel, with messaging similar to the public 

messaging. 

During the afternoon on April 17th, the IRS began to publicize the filing deadline 

extension until midnight on Wednesday, April 18, 2018. This message was shared 

as quickly as possible. The IRS shared the announcement of the extension widely 

through a national news release, on IRS.gov, on Twitter, and through the news 

media and national tax association and partner groups, to ensure wide awareness 

of the additional day to file. 

The IRS is looking for ways to focus additional attention on these sorts of issues 

should they occur in the future, including higher profile messaging on the front page 

of IRS.gov and wider use of social media. 

529 PLANS

Question. As you know, the new tax law expanded IRC section 529 plans to allow 

for qualified distributions from these plans for K–12 education expenses. These distributions can be made directly to the school, the student or the parent and are limited to $10,000 per student per year. I am concerned that current practices do not 

allow for proper oversight of this expansion. 

As you are aware, 529 plans are required to provide taxpayers receiving distributions and the IRS a Form 1099–Q recording the amount distributed from the plan 

that year. Qualifying colleges and universities are required to provide a Form 1098T 

to both the taxpayer and the IRS which report the expenses that were paid to the 

respective institution by the taxpayer for that year. This data is not collected or included on the annual Form 1040. Instead, taxpayers are only required to self-report 

to the IRS on Form 1040 when there are non-qualified distributions or distributions 

in excess of qualified expenses. 

How many individual tax returns were flagged and/or caught on audit each year 

for the past 3 years for reporting violations of 529 plan contribution rules? Please 

also provide the dollar amounts of these violations? 

Answer. The IRS is unable to provide this information, as its systems do not capture this information. Such income would be reported on Form 1040 as ‘‘Other Income,’’ which may include other types of income. 

Question. Does the IRS match or track the 1098–T or 1099–Q information with 

the information that is filed by the corresponding taxpayer or is this only manually 

matched if the taxpayer is audited? 

Answer. The IRS currently matches both Forms 1098–T received from qualifying 

colleges and universities and Form 1099–Q from either a 529 or 530 education plan. 

Question. With the expansion to K–12 education expenses, how does the IRS intend to ensure that taxpayers are not taking distributions in excess of $10,000 per 

student per year? Similarly, how does the IRS intend to ensure that multiple taxpayers are not claiming the same student? For example, parents and grandparents 

both claiming the same child up to the maximum amount of $10,000 would be 

claiming $20,000 in qualified distributions. 

Answer. The IRS is currently considering options to address the additional compliance issues generated by the expansion of qualified expenses to K–12 education and 

the associated limitations. The ability of multiple taxpayers to claim tax-free distributions relating to the same beneficiary existed under the prior law. 

Question. How does the IRS intend to determine the qualifying expenses for K– 

12 educational institutions for matching purposes since these institutions do not file 

a 1098–T with the IRS or the taxpayer? 

Answer. Form 1098–T is filed under the authority of IRC section 6050S. The 

filing of this form does not apply to IRC 529 under either prior or present law. Because the IRS will not have the information on Form 1098–T available, it deterVerDate Sep 11 2014 16:25 Jun 17, 2019 Jkt 000000 PO 00000 Frm 00029 Fmt 6601 Sfmt 6621 R:\DOCS\36708.000 TIM
26 

mines qualifying expenses through a manual process if the return is audited and 

the issue warrants examination. 

Question. Many States that provide State income tax deductions are claiming that 

their State laws must be modified to come into compliance with the Federal law so 

their taxpayers will be able to continue to contribute to the same 529 plan. For example, a State has defined eligible 529 contributions to their plan to ‘‘colleges or 

universities’’ without a reference to IRC section 529 so the change in IRC section 

529 for eligible expenses is not controlling. In these cases, can the IRS provide guidance that States do not have to participate in 529 plans and that the changes to 

529 plan rules as contained in H.R. 1 are not mandatory on the States. In other 

words, States do not have to change their laws so their citizens can continue to contribute to their 529 plans as they were able before the change in law. 

Answer. Public Law 115–097 expanded the definition of ‘‘qualified higher education expense’’ for IRC section 529 to include tuition expenses at or below the 

$10,000 tax-year ceiling for K–12 schools. This expanded definition is applicable for 

Federal income tax purposes regardless of how States elect to manage their 529 

plans. A State’s decision to participate in 529 plans or the deductibility of contributions to such plans will not impact the qualification of distributions for Federal tax 

purposes. The law did not modify the allowable contributions to 529 plans or related 

deductions provided by the States. Additionally, on July 30, 2018, The Internal Revenue Service and Department of the Treasury announced their intent to issue regulations on three recent tax law changes affecting popular 529 education savings 

plans. 

Question. Are there any recommendations forthcoming from IRS for changes in 

law or technical corrections to ensure that taxpayers are compliant with the rules 

for the new expansion for K–12 expenses? 

Answer. Not at this time. 

QUESTIONS SUBMITTED BY HON. JOHN THUNE

Question. One of the biggest issues facing South Dakotans when it comes to their 

Federal taxes has been the problem of tax-related identity theft. This not only affects those who have their identity stolen, but also those who find their refund delayed while the IRS verifies their identity. I was pleased to see the IRS’s new partnership with the Federal Trade Commission to provide taxpayers with an online 

portal to report instances of tax-related identity theft. 

Can you give us an update on the IRS’s efforts to improve its defenses and help 

taxpayers fight ID theft? 

Answer. Refund fraud caused by identity theft (IDT) is one of the biggest challenges facing the IRS today, and the harm it inflicts on innocent taxpayers is a 

problem the IRS takes very seriously. The IRS has a comprehensive strategy focusing on preventing refund fraud, investigating these crimes, and assisting taxpayers 

victimized by tax-related IDT. Through the Security Summit, an unprecedented 

partnership between the IRS, the software industry, and the States, the IRS continues a unified battle against identity theft and works on collaborative solutions 

to combat stolen IDT refund fraud. IRS data shows significant improvements as 

fewer identity theft returns entered the tax system, fewer fraudulent refunds were 

issued, and fewer taxpayers were reporting themselves as victims of identity theft. 

The number of taxpayers reporting to the IRS that they are victims of identity theft 

continues to decline, it’s fallen nearly 65 percent between 2015 and 2017. Also, during the 2015–2017 period, the number of confirmed identity theft tax returns fell 

by 57 percent with more than $20 billion in taxpayer refunds being protected. 

As identity thieves evolve to become more sophisticated, the IRS has tightened 

its security in response to the increased threat. The IRS is making it harder for 

identity thieves to successfully masquerade as taxpayers and file fraudulent refund 

claims on behalf of these taxpayers. The IRS and partners recognize that large data 

breaches of personally identifiable information (PII) are difficult and frustrating for 

the victims and financial ecosystem. Large-scale data breaches are a reminder of the 

value of data for fraudulent purposes and identity theft. Over the last several years, 

the IRS IDT fraud filtering processes have remained effective even in situations of 

large losses of PII. 

The IRS continues to endeavor to strike the necessary balance between preventing 

identity theft and ensuring that legitimate refunds are released quickly. The IRS 

27 

implemented strategic initiatives to assist tax preparers with authenticating their 

clients who have been victims of a data breach, as well as identifying refunds that 

can be released quickly, based on specific criteria. To stop fraudulent refunds from 

being paid, the IRS continually conducts analyses and looks for ways to improve and 

fine tune identity theft and fraud detection filters, as well as reduce the false detection rate. If the filter’s selection criteria result in lower accuracy or performance, 

they may be revised or retired to minimize taxpayer burden. 

The IRS uses several primary tools to combat tax-related identity theft and fraud. 

This includes tools specific to addressing taxpayers who have been victims of a data 

loss of Federal tax information (FTI). Data losses involving FTI can be used to file 

returns that appear to be coming from the true taxpayer. IRS models and filters 

continue to be modified to address the level of sophistication used to file these 

fraudulent returns. The IRS has implemented the use of Dynamic Selection Lists, 

allowing the IRS to monitor specific accounts of taxpayers who have been victims 

of an FTI data beach when the data compromised would have a direct impact on 

Federal tax administration. In doing so, the IRS is able to identify these suspicious 

returns more effectively, resulting in better protection for taxpayers’ Federal tax accounts and increased revenue protection. 

In addition, there are multiple points in the return processing lifecycle to identify, 

prevent, and assist possible IDT victims: pre-filing, at filing, and post-filing. 

To prevent IDT returns from ever coming in the door (pre-filing), the IRS worked 

with tax software providers to improve the procedures that their new and returning 

customers must use to identify themselves. This minimizes the chance that the taxpayer’s software provider’s account can be taken over by identity thieves. This additional security is one of the most visible signs of increased protection to taxpayers 

because they will notice password requirements and other website security features. 

To prevent taxpayers impacted by tax-related identity theft from becoming a repeat victim, the IRS issues an Identity Protection Personal Identification Number 

(IP PIN). The IP PIN authenticates the return received as belonging to the taxpayer. 

The IRS has also implemented a variety of mechanisms to prevent criminals from 

using a deceased individual’s identity information to perpetrate fraud. The IRS routinely locks the accounts of deceased taxpayers and have locked more than 30 million accounts so far. 

In addition, IRS has taken the following actions to prevent fraud and enhance cybersecurity: 

• Sponsored the first Bureau-led Cybersecurity Community of Practice forum to 

enhance information sharing of Cybersecurity best practices. This led to two 

additional forums sponsored subsequently by the Mint and the Alcohol and 

Tobacco Tax and Trade Bureau. 

• Established Identity Theft Tax Refund Fraud Information Sharing and Analysis Center (ISAC) that provides a public-private partnership for participants 

to collaborate and share information; to detect and deter identity theft tax refund fraud; and to protect taxpayers. 

• Implemented network protection capability that blocked transmission of over 

196,000 un-encrypted emails from leaving the IRS network, preventing the 

possible disclosure of sensitive data such as social security numbers and passwords. 

• Implemented and leveraged multiple cybersecurity threat countermeasures to 

prevent malware from being accessed or installed within infrastructure assets. 

• Expanded the Integrated Enterprise Portal (IEP) environment security protections and tools that significantly improved the detection and remediation 

of attempted external attacks aimed at IRS.gov via automated scripts, bots, 

and suspicious and malicious Internet Protocol addresses. The layered security tools protect taxpayer facing applications at the earliest entry point of the 

IRS infrastructure, which is the edge of the security and portal environment. 

• Implemented advanced analytics and fraud detection capabilities within the 

IRS IEP and eAuthentication environments to better protect access to the Get 

Transcript application. 

28 

• Enhanced monitoring and analytic capabilities through investments in infrastructure, tools, and development expertise to accelerate continuous data 

monitoring. 

Question. Are there statutory changes that Congress needs to make to help you 

in those efforts to protect American’s tax data and minimize the risk of tax-related 

identity theft? 

Answer. The IRS appreciates the recent action of Congress enacting legislation requiring the accelerated filing dates for certain information returns. 

Currently, under Internal Revenue Code sections 6011(e) and 6724, taxpayers 

that file 250 or more information returns, including Forms W–2, must file them 

electronically. The IRS uses this external third-party information, plus internal historical taxpayer filing data, business rules, and sophisticated algorithms, to identify 

potentially improper and erroneous refund claims, including tax-related identity 

theft. 

Question. The PATH Act required that the IRS delay refunds until February 15th 

for returns that claim the Earned Income Tax Credit or the refundable Child Tax 

Credit in order to reduce fraud and improper payments. Additionally, the PATH Act 

required employers to file their copies of Forms W–2, W–3 and 1099–MISC for nonemployee compensation by January 31st, rather than the end of February (or March 

if filing electronically) under prior law. 

With 2018 being the second year that the refund delay has been in place, can you 

share with the committee any assessments of these new requirements and your efforts to reduce fraud and improper payments with respect to the EITC and refundable Child Tax Credit more broadly? 

Answer. The earlier availability of Form W–2 data enhances the IRS’s defenses 

against identity theft and refund fraud. The IRS conducted systemic verification of 

information reported on taxpayers’ returns against third party information reporting 

earlier, before issuing refunds. In addition, the IRS utilizes the earlier Form 1099– 

MISC for non-employee compensation information as a variable in the filtering process. 

This filing season, the IRS leveraged both the Return Review Program (RRP), and 

the PATH Act refund hold to automate and expand the selection of potentially 

fraudulent returns. Through February 15th, the IRS identified approximately 

312,000 returns claiming Earned Income Tax Credit (EITC) and Additional Child 

Tax Credit (ACTC) with potential issues with overstated income or withholding. 

Some employers may obtain short 30-day extensions based on certain exigencies and 

submit their information returns after the January 31st due date. If the information 

comes in later and the return information is verified, the refund will be released. 

About 3.5 percent of EITC related refunds were held for additional pre-refund 

compliance review by the Income Verification Program. Additional returns could 

also be selected for identity theft and pre-refund audit. 

Other strategies to reduce improper payments with respect to refundable tax credits include education, outreach, and compliance efforts. The IRS is exploring enhancements and improvements to our enforcement efforts, while balancing taxpayer 

burden. For example, the IRS created a Refundable Credit Operational Strategy, 

which documents existing refundable credit efforts and identifies potential new activities that could reduce improper payments. The IRS also hosted an EITC summit 

in June 2016, and a follow-up summit in September 2017. These summits provided 

us a wide variety of stakeholder perspectives on improving compliance. 

Administering EITC represents a significant challenge for the IRS due to the nature of tax credits and the lack of available information to verify certain aspects of 

taxpayer eligibility at the time a return is filed. Many factors continue to serve as 

barriers to reducing overclaims in the EITC program. These include no single comprehensive government database or third-party data source that we can use to 

confirm all EITC eligibility requirements, complexity of the tax law; and declining 

IRS resources. These factors need to be addressed through legislative changes including error authority so an examination is not required to adjust EITC. 

As detailed earlier, while the PATH Act provisions helped to reduce refund fraud 

with respect to refundable credits, further statutory authority is needed including 

correctable error authority to address issues at the time of filing and increasing the 

IRS’s oversight authority over paid tax return preparers. The administration has 

proposed both in its FY 2019 budget. 

29 

How has the earlier availability of Forms W–2, W–3 and 1099–MISC for nonemployee compensation enabled the IRS to improve its matching of tax data to reduce fraud and improper payments? Are there any specific results you can share 

with the committee? 

Answer. See previous question. 

Question. Are other statutory changes needed to help the agency stop improper 

refunds before they go out the door? 

Answer. As detailed earlier, the IRS does not currently have correctable error authority to adjust erroneously claimed EITC based on the income discrepancies reported to the IRS. In addition, the IRS cannot address claims for the American Opportunity Tax Credit (AOTC) where a student has been claimed for more than the 

4-year limit, has attended an ineligible institution, or did not attend at least halftime. Therefore, the IRS addresses these errors through audits, which require 

significant time and resources. The administration has proposed to increase IRS’s 

authority to correct certain errors before refunds are issued. 

The IRS appreciates Congress’s enactment of legislation requiring accelerated 

filing dates for information returns. 

Currently, under Internal Revenue Code sections 6011(e) and 6724, taxpayers 

that file 250 or more information returns, including Forms W–2, must file them 

electronically. The IRS uses this external third-party information, plus internal historical taxpayer filing data, business rules, and sophisticated algorithms, to identify 

potentially improper and erroneous refund claims. 

In addition, increasing the authority to regulate paid tax return preparers, would 

help stop improper payments. Many taxpayers who claim these credits use professional tax preparers. If the IRS had the authority to ensure that paid preparers had 

certain minimal qualifications, that would improve the quality of returns that those 

preparers submit and thus, lower the number of errors that the IRS has to address 

in processing returns. The administration included a proposal in its FY 2019 budget. 

QUESTIONS SUBMITTED BY HON. BILL NELSON

Question. As you know, in the wake of the hurricanes last year, the IRS delayed 

a number of reporting and filing deadlines. On behalf of Florida taxpayers, I want 

to thank the IRS for that relief. However, in response to a letter I sent the IRS following Hurricane Irma, the IRS said it could not halt its private debt collection program—which the National Taxpayer Advocate says often comes down hardest on 

low-income people already facing significant hardship. 

Please explain why the IRS could not suspend its private debt collection program 

across the board for taxpayers in Federally declared disaster areas. 

Answer. The IRS determines the debt collection relief to be granted based on an 

assessment of the impacted area. For catastrophic disasters that affect entire 

States/territories, the relief granted includes suspending collection activity for a 

specified period of time in the designated disaster area, including initiating contact 

with the taxpayer. The IRS marks the accounts of taxpayers with the type of relief 

granted based on the last filed return showing an address in the designated disaster 

area. 

The IRS granted relief from collection activity following Hurricane Irma in Florida 

from September 4, 2017 to January 31, 2018 and in Puerto Rico and U.S. Virgin 

Islands from September 5, 2017 to January 31, 2018. On September 12, 2017, the 

IRS notified the public of expanded relief to any area designated by FEMA as 

qualifying for either individual assistance or public assistance in all 67 counties in 

Florida, https://www.irs.gov/newsroom/tax-relief-for-victims-of-hurricane-irma-inflorida. 

The issued notice provides that: ‘‘Affected taxpayers who are contacted by the IRS 

on a collection or examination matter should explain how the disaster impacts them 

so that the IRS can provide appropriate consideration to their case.’’ The private 

debt collection agencies are required to follow similar procedures to those that the 

IRS follows for debt collection. Thus, the private debt collection agencies were required to suspend all contact with taxpayers, cease all collection activity, and return 

the case to the IRS if a taxpayer requests relief verbally or in writing. The IRS 

alerts taxpayers through our press releases, postings on IRS.gov, and published 

guidance. 

30 

Question. I understand that the number of tax-related identity theft cases has declined in recent years, but criminals now have more information on us than ever 

before—with all the data breaches and privacy lapses that’s occurred in recent 

years. 

What do you plan to do to stay on top of this crime and protect Americans from 

identity theft abuse or other scams, as criminals become increasingly sophisticated? 

Answer. Refund fraud caused by Identity Theft (IDT) is one of the biggest challenges facing the IRS today, and the harm it inflicts on innocent taxpayers is a 

problem the IRS takes very seriously. To resolve IDT cases faster, the IRS centralized its IDT victim assistance policy, oversight, and campus case work under its new 

Identity Theft Victim Assistance organization. Benefits to this centralized approach 

include managing work using a common inventory system, reducing hand-offs between functions, improved case processing through streamlined, consistent procedures, and improved communication. In addition, the IRS resolves IDT cases faster 

using the toll-free hotline for IDT victims. All customer service representatives 

staffing this line are trained IDT specialists who can review the taxpayer’s case file 

and respond to the IDT victim’s call any time during business hours. For most 

cases, the average time to resolve a case is now less than 120 days. For more complex cases it can take up to 180 days to resolve. This is substantially less than a 

few years ago, when cases could take over 300 days to resolve. 

In addition, IRS has taken the following actions to prevent fraud and enhance cybersecurity: 

• Sponsored the first Bureau-led Cybersecurity Community of Practice forum to 

enhance information sharing of Cybersecurity best practices. This led to two 

additional forums sponsored subsequently by the Mint and the Alcohol and 

Tobacco Tax and Trade Bureau. 

• Established Identity Theft Tax Refund Fraud Information Sharing and Analysis Center (ISAC) that provides a public-private partnership for participants 

to collaborate and share information; to detect and deter identity theft tax refund fraud; and to protect taxpayers. 

• Implemented network protection capability that blocked transmission of over 

196,000 un-encrypted emails from leaving the IRS network, preventing the 

possible disclosure of sensitive data such as social security numbers and passwords. 

• Implemented and leveraged multiple cybersecurity threat countermeasures to 

prevent malware from being accessed or installed within infrastructure assets. 

• Expanded the Integrated Enterprise Portal (IEP) environment security protections and tools that significantly improved the detection and remediation 

of attempted external attacks aimed at IRS.gov via automated scripts, bots, 

and suspicious and malicious Internet Protocol addresses. The layered security tools protect taxpayer facing applications at the earliest entry point of the 

IRS infrastructure, which is the edge security and portal environment. 

• Implemented advanced analytics and fraud detection capabilities within the 

IRS IEP and eAuthentication environments to better protect access to the Get 

Transcript application. 

• Enhanced monitoring and analytic capabilities through investments in infrastructure, tools, and development expertise to accelerate continuous data 

monitoring. 

Question. Last year, I introduced the Identity Theft and Tax Fraud Prevention 

Act (S. 606), which grants the Treasury Department authority to oversee paid tax 

preparers, among other reforms to protect taxpayers from tax-related identity theft. 

Unfortunately, the paid tax preparer provision is considered controversial by some 

members of Congress. The provision, Section 115 of the bill, provides the following: 

SEC. 115. MINIMUM STANDARDS FOR PROFESSIONAL TAX PREPARERS. 

(a) IN GENERAL.—Subsection (a) of section 330 of title 31, United States Code, 

is amended— 

(1) by striking paragraph (1) and inserting the following: 

‘‘(1) establish minimum standards regulating— 

‘‘(A) the practice of representatives of persons before the Department of the 

Treasury; and 

31 

‘‘(B) the practice of tax return preparers; and’’, and 

(2) in paragraph (2)— 

(A) by inserting ‘‘or tax return preparer’’ after ‘‘representative’’ each place 

it appears, and 

(B) by inserting ‘‘or in preparing their tax returns, claims for refund, or documents in connection with tax returns or claims for refund’’ after ‘‘cases’’ in subparagraph (D). 

(b) AUTHORITY TO SANCTION REGULATED TAX RETURN PREPARERS.—Subsection 

(b) of section 330 of title 31, United States Code, is amended— 

(1) by striking ‘‘before the Department’’, 

(2) by inserting ‘‘or tax return preparer’’ after ‘‘representative’’ each place it 

appears, and 

(3) in paragraph (4), by striking ‘‘misleads or threatens’’ and all that follows 

and inserting ‘‘misleads or threatens— 

‘‘(A) any person being represented or any prospective person being represented; or 

‘‘(B) any person or prospective person whose tax return, claim for refund, 

or document in connection with a tax return or claim for refund, is being or may 

be prepared.’’. 

(c) TAX RETURN PREPARER DEFINED.—Section 330 of title 31, United States 

Code, is amended by adding at the end the following new subsection: 

‘‘(e) TAX RETURN PREPARER.—For purposes of this section— 

‘‘(1) IN GENERAL—The term ‘tax return preparer’ has the meaning given such 

term under section 7701(a)(36) of the Internal Revenue Code of 1986. 

‘‘(2) TAX RETURN—The term ‘tax return’ has the meaning given to the term 

‘return’ under section 6696(e)(1) of the Internal Revenue Code of 1986. 

‘‘(3) CLAIM FOR REFUND—The term ‘claim for refund’ has the meaning given 

such term under section 6696(e)(2) of such Code.’’. 

Does the administration oppose this provision? If so, please explain why and provide suggested changes to address any concerns you may have about the provision. 

Answer. The administration’s FY 2019 budget includes a similar proposal to regulate paid tax return preparers. The above provision achieves the objective in the administration’s proposal. 

Question. How will you work to ensure Public Law 115–97 (TCJA) will not provide 

a tax benefit to companies that outsource U.S. jobs? 

Answer. The tax policies advanced in TCJA, including a reduction of the corporate 

tax rate and modernizing our international system of taxation, will place U.S. companies in a more competitive position with their foreign counterparts, and encourage 

investment, repatriation of funds, and job growth in the United States. 

QUESTIONS SUBMITTED BY HON. MICHAEL F. BENNET

Question. Mr. Kautter, you and the IRS have a tall task ahead of you to implement the recently enacted tax legislation. I am very concerned that some of the provisions add significant complexity and uncertainty in ways that could lead both to 

an inability for businesses to invest until they understand the rules as well as 

significant revenue losses from gaming the system. 

Do you have sufficient resources and authority to implement the tax legislation? 

Answer. The IRS sincerely appreciates the funds, along with the multi-year authority and the flexibility to spread the funds between its appropriations, that Congress provided the IRS to implement TCJA. Based on the IRS’s initial analysis of 

the provisions and the associated requirements, the initial $320 million allocation, 

along with the requested $77 million in FY 2019, are sufficient for FY 2018 and 

FY 2019. 

Question. How much additional funding do you think you will need? 

Answer. At this time, this funding ($397 million) is sufficient. 

Question. What additional authorities would be helpful? 

Answer. Streamlined critical pay authority. The IRS Restructuring and Reform 

Act of 1998 increased the IRS’s ability to recruit and retain a small number of key 

executive-level staff by providing the agency with streamlined critical pay authority. 

This allowed the IRS, with approval from Treasury, to move quickly to hire wellqualified individuals to fill positions deemed critical to the agency’s success that reVerDate Sep 11 2014 16:25 Jun 17, 2019 Jkt 000000 PO 00000 Frm 00035 Fmt 6601 Sfmt 6621 R:\DOCS\36708.000 TIM
32 

quired expertise of an extremely high level in an administrative, technical, or professional field. Executives hired under this authority included the former Chief Information Officer, a senior cybersecurity expert, the system architect, the director 

of the online systems development team, and other senior IT executives. This authority expired at the end of FY 2013. The last appointment made under streamlined critical pay authority expired on September 29, 2017. Without this authority, 

the IRS continues to face challenges recruiting and retaining top-level talent, especially IT professionals who can help modernize its IT systems and protect taxpayer 

data from cyberattacks. The administration’s FY 2019 budget proposes reinstating 

this authority through FY 2022. 

Question. When do you think businesses will have the clarity they need to fully 

understand the implications of the tax law on their investing and hiring decisions? 

Can you give me a timeline on when you expect to be halfway done, 80 percent of 

the way done, 100 percent done? 

Answer. The Department of the Treasury and the IRS appreciate the need for 

guidance that helps businesses determine the implications of the tax law on their 

investing and hiring decisions. We are working to provide guidance on these provisions as expeditiously as possible so that that taxpayers and tax practitioners may 

be aware of the changes in the new law and plan accordingly. The Second Quarter 

Update to the 2017–2018 Priority Guidance Plan contains specific timelines for the 

issuance of key guidance. Our goal is to issue guidance in at least proposed form 

on the most significant provisions of the tax reform bill by the end of this calendar 

year (2018). 

Question. We are already being made aware of the ways that firms will game the 

pass-through deduction. Unfortunately, this was entirely predictable when the legislation was jammed through the Senate without a single hearing or significant debate on massively important provisions like the pass-through deduction. Even with 

that hasty consideration, academics wrote up dozens of ways this provision and others would be gamed. 

Can you tell me what you are doing to prevent ‘‘cracking and packing,’’ where lawyers, doctors, and other high-income professionals who are not supposed to receive 

the deduction are shifting all of their profits into a separate entity that is eligible 

for the deduction? 

Answer. The Department of Treasury and the IRS appreciate the need for guidance that clarifies outstanding issues relating to newly enacted section 199A. Proposed regulations under section 199A were released on August 8, 2018. The proposed regulations address ‘‘crack and pack’’ and propose a rule to prevent such 

strategies. 

Question. Would you say that the pass-through deduction simplifies the tax code 

or makes it more complicated? 

Answer. The IRS recognizes that all changes in law, including new tax provisions, 

involve a learning curve for those affected. The IRS and Department of Treasury 

are creating resources to assist taxpayers and tax practitioners in properly computing this deduction. In addition to the published guidance previously mentioned, 

the IRS is working on various communications, including revisions to forms, instructions and publications. Additionally, the IRS issued a Q&A along with the proposed 

regulations. 

Question. As someone who has done a lot of tax planning yourself, do you think 

the pass-through deduction will reduce or increase tax planning activity? 

Answer. As previously mentioned, all changes in law require some learning on the 

part of those affected. The Department of Treasury and the IRS are aware that taxpayers and tax practitioners are reviewing the new tax law provisions, reviewing 

their immediate impact and planning for the future. The IRS is working to provide 

guidance on these provisions as expeditiously as possible so that that taxpayers and 

tax practitioners may be aware of the changes in the new law and plan accordingly. 

Additionally, the proposed regulations mentioned above propose anti-abuse guidance 

to make certain that the rules are used appropriately. 

QUESTIONS SUBMITTED BY HON. SHERROD BROWN

Question. The House of Representatives has passed the VITA Permanence Act, 

which would allow the IRS to fund the Volunteer Income Tax Assistance (VITA) proVerDate Sep 11 2014 16:25 Jun 17, 2019 Jkt 000000 PO 00000 Frm 00036 Fmt 6601 Sfmt 6621 R:\DOCS\36708.000 TIM
33 

gram with up to $30 million using its own discretionary funds. According to the 

Congressional Research Service, the IRS collects about $1 billion in miscellaneous 

fees that it can use however it wants. 

What is the process by which the IRS decides how to direct those resources? 

Answer. Congress establishes the funding level for VITA in the annual appropriation for Taxpayer Services. For example, $15 million of the $2.507 billion appropriated for Taxpayer Services in FY 2018 (Pub. L. 115–141) was designated for 

VITA grants, compared to $12 million in FY 2015 (Pub. L. 113–235). 

The IRS collects on average $350 million in user fees annually and uses the budget authority from these fees to address high-priority business requirements including new legislation and preparations for the upcoming filing season, including taxpayer service activities. Over the last several years, the majority of the user fees 

have been allocated to critical IT operations necessary to implement and enforce legislative mandates, including the Patient Protection and Affordable Care Act, Foreign 

Account Tax Compliance Act, Trade Preferences Extension Act, and Achieving a 

Better Life Experience Act. 

Question. If the VITA Permanence Act becomes law, will you work with my office 

to ensure this program has the funding it needs to carry out its services? 

Answer. If the VITA Permanence Act becomes law, the IRS will work with the 

VITA partners to provide services to taxpayers. 

Question. On the issue of Private Debt Collectors, according to the Taxpayer Advocate, 28 percent of taxpayers who have had their debts assigned to private collectors 

have incomes below $20,000, and 44 percent have incomes below 250 percent of the 

Federal poverty level. The Taxpayer Advocate says you have legal authority to prevent collection on low-income taxpayers. Is that true, and if so, what steps is the 

IRS taking to shield low-income taxpayers from these collection efforts? 

Answer. The Fixing America’s Surface Transportation (FAST) Act, enacted in December 2015, requires the IRS to enter into qualified collection contracts for the collection of inactive tax receivables. The law is very specific about the types of cases 

that are excluded from the program. Accounts the IRS identifies as ‘‘currently not 

collectible’’ are not assigned to Private Collection Agencies (PCAs). 

Excluding cases where the income reported on the tax return is below 250 percent 

of the Federal Poverty Level fails to consider that the taxpayer may have assets 

and, thus have an ability to pay. For this reason, the IRS has not excluded these 

cases from being assigned to a PCA. 

Question. How are debt collectors instructed to prioritize collection? For instance, 

why are debt collectors targeting low-income individuals when underreported business income accounts for about twice the percentage of the tax gap as non-business 

income? 

Answer. Section 32102 of the Fixing America’s Surface Transportation Act (FAST 

Act) requires the IRS to use private collection agencies (PCAs) for the collection of 

outstanding inactive Federal tax debts. Under the FAST Act, IRS is required to assign accounts to PCAs where taxpayers owe money but the IRS is no longer actively 

working the accounts. 

Under the FAST Act, the IRS cannot assign accounts to PCAs involving taxpayers 

who are: deceased; under the age of 18; in designated combat zones; victims of taxrelated identity theft; currently under examination, litigation, criminal investigation, or levy; subject to pending or active offers in compromise; subject to an installment agreement; subject to a right of appeal; classified as innocent spouse case; and 

in presidentially declared disaster areas and requesting relief from collection. 

PCAs are required to work the accounts as they are assigned to them. PCAs do 

not know the reason why the taxpayer has outstanding Federal tax debts. For example, the tax debt may be the result of the taxpayer filing a return but not paying 

the tax at the time of filing. The tax debt may be the result of a compliance action. 

PCAs only know the amount of the unpaid debt, the tax year, and information about 

the taxpayer. 

The PCAs offer payment arrangements to taxpayers in a manner consistent with 

IRS installment agreement procedures for similarly situated taxpayers who call the 

IRS. As is the practice within the IRS, a taxpayer’s proposal to pay is accepted without questioning the ability to pay if the case meets certain criteria. 

34 

If a taxpayer reports an inability to pay in full or through a payment arrangement 

for any reason, IRS procedures require the PCA to return the account to the IRS. 

Question. On the issue of taxpayer service, according to the Taxpayer Advocate, 

the IRS is answering only 60 percent of taxpayer phone calls during this year’s 

filing season, and is not answering questions after the filing deadline. From a funding perspective, what does Congress need to provide your agency so that taxpayers 

can have prompt, in-person help navigating the tax code? 

Answer. The IRS achieved an 80-percent level of service on its phones during the 

2018 filing season and projects achieving 75 percent for the full year. The resources 

requested for tax reform implementation will help ensure that the IRS can provide 

prompt help to taxpayers navigating the changes to the tax code during filing season 2019. In addition, Customer Service Representatives will be answering tax 

reform-related questions from taxpayers and representatives all year, rather than 

just in filing season. 

QUESTIONS SUBMITTED BY HON. DEAN HELLER

Question. The Tax Cuts and Jobs Act represents a meaningful simplification and 

modernization of our outdated tax code. However, much work remains to be done 

to review existing and outdated regulations to ensure they do not place undue compliance burdens on individuals and businesses. One unduly burdensome regulation 

that still needlessly harms Nevadans is the current $1,200 slot jackpot reporting 

threshold, which has been in place for approximately 40 years. Accounting for 

inflation, that number should be more than four times higher today—roughly 

$5,000. Unfortunately, however, the threshold amount has remained static and, as 

a result, continues to impact many more of my constituents than was originally intended. 

Are you willing to consider updating the current slot jackpot reporting threshold 

to reflect 4 decades of inflation? 

Answer. As you know, the current $1,200 threshold for reporting winnings from 

slot machine play was set in regulations published in 1977, despite the fact that section 6041 of the Internal Revenue Code, the operative statute, provided in 1977 (and 

currently provides) that, generally, a payment of income of $600 or more made in 

the course of a trade or business is subject to information reporting. When the IRS 

published proposed regulations in 2015 to update the regulations for information reporting for bingo, keno, and slots, it asked for public comments regarding the feasibility of reducing the reporting thresholds to $600 at a future time. The IRS received numerous comments in response to this request. Almost all of the comments 

recommended against lowering the thresholds, and many recommended raising the 

thresholds. None of the comments, however, provided information that could be used 

as a basis for raising the threshold or determining what a higher threshold should 

be. As there has not been congressional action on these thresholds in over 40 years 

and we have no basis on which to determine what a new threshold should be, the 

IRS finalized these regulations in 2016, retained the status quo, and did not change 

the reporting thresholds. Notably, the final regulations provide an optional aggregate reporting method and simplified payee identification requirements, both of 

which lessen the information reporting burden for the industry. 

Question. I have long been a champion of policies that promote the development 

of alternative energy technologies like solar and geothermal, and I was instrumental 

in securing the enhanced solar investment tax credit (ITC) last Congress. However, 

while this provision was signed into law nearly 3 years ago, stakeholders in my 

home State of Nevada and across the country are still waiting to receive guidance 

on the qualification standard and phasedown. When can we expect to receive this 

guidance on the solar ITC? 

Answer. The IRS issued guidance on the solar tax credit (Notice 2018–59) in June 

2018. 

QUESTIONS SUBMITTED BY HON. SHELDON WHITEHOUSE

Question. At the hearing, we discussed the IRS’s role in combating foreign election 

spending. I asked about what the IRS does to prevent foreign nationals from laundering money through opaque LLCs or 501(c)(4) organizations and into our elections. 

35 

Thanks to Senator Wyden’s inquires, we have learned that the National Rifle Association (NRA) accepts foreign donations, although the NRA claims that none of 

those donations go toward political expenditures. The NRA told Senator Wyden 

‘‘Our review of our records has found no foreign donations in connection with a 

United States election, either directly or through a conduit.’’ Has the IRS investigated or is it investigating this claim? 

Answer. As a general rule, section 6103 of the Internal Revenue Code (IRC) precludes the disclosure of whether the IRS investigated or will be investigating a particular taxpayer’s conduct under the Internal Revenue laws. 

Question. Section 501(c)(4) organizations are required to disclose their donors to 

the IRS. What does the IRS do with that information? 

Answer. Treasury regulations require section 501(c)(4) organizations to include 

Schedule B, Schedule of Contributors, with annual information returns on Forms 

990/990–EZ. This regulation also authorizes the Commissioner to grant relief from 

those requirements. On July 16, 2018, the Commissioner exercised his discretion 

with the publication of Revenue Procedure 2018–38 limiting the requirement to file 

names and addresses on Schedule B to organizations described in section 501(c)(3) 

or section 527 of the Internal Revenue Code. These organizations must continue to 

collect and keep this information in their books and records and to make it available 

to the IRS upon request, when needed for compliance purposes. 

Question. What does the IRS do when a potential shell corporation is listed as a 

donor to a 501(c)(4)? 

Answer. The IRS maintains or obtains information for use, as needed, in compliance matters. The Federal tax consequence of the characteristics of any corporate 

donor would depend on the facts and circumstances of the particular case. 

Question. What resources do you devote to policing the rules about 501(c)(4)s? 

Answer. The IRS administers and enforces the tax laws as in effect. The TE/GE 

FY 2018 Work Plan, dated September 28, 2017, sets forth the Exempt Organizations 

Division’s FY 2017 accomplishments and its plan for FY 2018 to continue to be an 

organization whose key elements are ‘‘efficiency, effectiveness, and transparency.’’ 

Question. Question 15 of IRS Form 1024, the application for recognition of tax exemption, asks: ‘‘Has the organization spent or does it plan to spend any money attempting to influence the selection, nomination, election, or appointment of any person to any Federal, State, or local public office or to an office in a political organization?’’ Tax-exempt organizations are also required to report political activity annually on Form 990. Both forms are signed under penalty of perjury, 26 U.S.C. § 7206. 

What is the process by which the IRS would initiate and pursue a false statements investigation under 26 U.S.C. § 7206? 

Answer. The IRS follows processes set forth in the Internal Revenue Manual 

(IRM) to initiate a criminal investigation. See IRM 9.4.1, Investigation Initiation 

(March 2, 2008); IRM 25.1, Fraud Handbook; IRM 9.1.3.3.7.1, 26 U.S.C. § 7206(1) 

(False or Fraudulent Return, Statement, or Other Document Made Under Penalty 

of Perjury)—Elements of the Offense (May 15, 2008). 

Question. Does the IRS review public FEC filings to see if organizations are reporting conflicting data regarding political spending? 

Answer. Depending on the facts of any particular case, the IRS considers information that is necessary to determine if an organization meets the applicable requirements for tax exemption. 

Question. If an organization says on a 1024 or 990 form that it has not engaged 

in any political activity or that it has no plans to, and you subsequently find out 

that it has engaged in political activity, is that sufficient to initiate a § 7206 investigation? 

Answer. Evidence that a filer made a statement ‘‘which he does not believe to be 

true and correct as to every material matter’’ may lead to a § 7206 investigation. 

If an IRS function identifies a potential violation of § 7206, it follows established 

procedures to refer the case to IRS’s Criminal Investigation Division. See Internal 

Revenue Manual 4.75.35.6, Criminal Referrals (August 19, 2016). 

Question. Where there is an obviously false statement regarding political activity 

on a Form 1024 or 990, how does the IRS determine whether that statement rises 

to the level of materiality required under 26 U.S.C. § 7206? 

36 

Answer. In the given circumstances, the IRS reviews evidence whether a filer 

made a statement ‘‘which he does not believe to be true and correct as to every material matter.’’ 

Question. Do you think there is something wrong where a group may be reporting 

millions of dollars in spending to the FEC, but zero to the IRS? 

Answer. IRS administers and enforces the provisions of the Internal Revenue 

Code (IRC). The IRC and rules thereunder require information to be reported to the 

IRS on Form 1024 (now Form 1024–A) and Form 990 as necessary to determine 

whether an organization meets the applicable requirements. IRS is unable to 

confirm that Federal tax reporting requirements are the same as the reporting requirements of other agencies. 

Question. Does the absence of bright-line rules for political spending by 501(c)(4) 

groups make prosecutions more difficult? 

Answer. The IRS administers and enforces, and taxpayers are required to comply 

with, the tax laws as in effect. Section 501(c)(4) provides exemption, in part, for 

‘‘[c]ivic leagues or organizations not organized for profit but operated exclusively for 

the promotion of social welfare.’’ An organization ‘‘is operated exclusively for the 

promotion of social welfare if it is primarily engaged in promoting in some way the 

common good and general welfare of the people of the community’’ (Treas. Reg. 

§ 1.501(c)(4)–1(a)(2)(i)). The promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office (political campaign intervention, or ‘‘PCI’’) 

(Treas. Reg. § 1.501(c)(4)–1(a)(2)(ii)). Although engagement in PCI is not prohibited 

for these organizations, the primary activities of organizations described in section 

501(c)(4) must be the promotion of social welfare. 

In addition, section 501(c)(4) organizations that engage in PCI may be subject to 

tax under section 527(f) on their exempt function expenditures. Whether an organization is engaged in PCI depends upon all the facts and circumstances of each case. 

Applicable rules contain examples illustrating facts and circumstances considered in 

determining whether activities are PCI. See, e.g., Rev. Rul. 2004–6; Rev. Rul. 2007– 

41. The analysis reflected in these revenue rulings for determining whether an organization has engaged in PCI, or has expended funds for a section 527 exempt 

function, is fact-intensive. Generally, criminal prosecutions require proving willful 

evasion of the tax laws. 

Question. Do you think there should be a bright-line rule? 

Answer. The IRS will administer any statutory direction on this matter. 

QUESTIONS SUBMITTED BY HON. MARIA CANTWELL

IRS FUNDING/CUSTOMER SERVICE

Question. In FY 2019, the administration requested $2.24 billion in the budget for 

taxpayer services—a cut of $215 million. 

What steps can the IRS take to the same level of customer service to taxpayers 

at a time of increased complexity, especially for pass through businesses, as a result 

of the 2017 tax bill? 

Answer. The FY 2019 budget request was prepared prior to the enactment of 

TCJA and did not take into account the $397 million the administration subsequently requested in FY 2018 for implementation and service requirements through 

FY 2019. The IRS plans to hire the necessary number of Customer Service Representatives (CSRs) to address the expected increase in call volume during filing 

season 2019. IRS is now answering tax reform tax law questions year-round, including questions on the new Qualified Business Income Deduction for pass-through 

businesses. IRS and the Department of the Treasury issued proposed regulations in 

August 2018, along with accompanying materials, to help businesses understand the 

new pass-through deduction changes. 

Question. About 60 percent of customer service calls are handled by automated 

responses. The IRS also provides in person assistance at Taxpayer Assistance Centers (TAC’s). For taxpayers who wish to talk to an IRS employee in 2019 during 

the next filing season, is there any plan to expand the network of TAC’s so that 

taxpayers will have the resources and access to information they need to file their 

taxes under the new law? 

37 

Answer. The IRS continues to evaluate the needs and options for delivering services to taxpayers. We routinely review face-to-face Taxpayer Assistance Center 

(TAC) locations. During these reviews, we analyze taxpayer access to face-to-face 

service in the community and determine how to effectively meet taxpayer demand 

and preferences for service. 

We also offer virtual face-to-face services where taxpayers interact with live 

assistor remotely via high-resolution video capabilities at partner locations. So far, 

this calendar year, nine Virtual Service Delivery (VSD) systems were installed at 

community partners, for a total of 39 locations around the country. These include 

two new VSD partner locations where face-to-face taxpayer services were not previously available in the community. The IRS has identified additional VSD locations 

and is planning and preparing for the installation. 

Seniors and low to moderate-income taxpayers can get free help with return preparation through the Volunteer Income Tax Assistance (VITA) and Tax Counseling 

for the Elderly (TCE) programs during the filing season. At over 11,500 sites, taxpayers may obtain free face-to-face help preparing their tax returns. These programs provide services to primarily low to moderate income taxpayers, senior citizens, persons with disabilities, those with limited English proficiency, those located 

in rural locations, and Native Americans. TCE offers free tax preparation for all taxpayers, particularly those who are 60 years of age and older, specializing in questions about pensions and retirement-related issues unique to seniors. 

IRS PRIVATE DEBT COLLECTORS

Question. Debt collectors were mostly targeting lower-income taxpayers, including 

some who are receiving Social Security Disability Insurance (SSDI)—these people 

are not supposed to be part of the program. The report also noted that of the 4,100 

taxpayers who made payments after their debts were assigned to private collectors, 

1,100, or 28 percent, had incomes below $20,000. 

What steps can the IRS take to ensure that taxpayers who also receive Social Security Disability Insurance (SSDI) are not targeted by private debt collection? 

Answer. The Fixing America’s Surface Transportation (FAST) Act, enacted in December 2015, requires the IRS to enter into qualified collection contracts for the collection of inactive tax receivables. The law is very specific about the types of cases 

that are excluded from the program. Accounts the IRS identifies as ‘‘currently not 

collectible’’ are not assigned to Private Collection Agencies (PCAs). Although the 

statute does not exclude from the program those taxpayers receiving Social Security 

Disability Income (SSDI) or Supplemental Security Income (SSI), the PCA will return any account to the IRS when, during discussion with taxpayers, they give any 

indication of receipt of SSDI or SSI, or when the taxpayer, for any reason, States 

they are unable to pay. As of January 25, 2018, the PCAs returned 2,109 accounts 

because the taxpayer self-reported receipt of SSDI or SSI. 

The IRS provides oversight of the PCAs’ taxpayer interactions, contractual compliance, and adherence to policies and procedures. Overall, the PCAs are performing 

at a 98.5 percent accuracy rate. The IRS will continue to provide this oversight and 

consider improvement opportunities to address any concerns if they arise. 

CYBERSECURITY AND IDENTITY THEFT

Question. Can you describe the steps you are taking to prevent tax return fraud 

and assist the taxpayers who are tax identity theft victims while the customer service budget at the IRS is being cut? 

Answer. Refund fraud caused by Identity Theft (IDT) is one of the biggest challenges facing the IRS today, and the harm it inflicts on innocent taxpayers is a 

problem the IRS takes very seriously. To resolve IDT cases faster, the IRS centralized its IDT victim assistance policy, oversight, and campus case work under the 

new Identity Theft Victim Assistance organization. Benefits to this centralized approach include managing work using a common inventory system, reducing handoffs between functions, improved case processing through streamlined, consistent 

procedures, and improved communication. 

In addition, the IRS resolves IDT cases faster using its toll-free hotline for IDT 

victims. All customer service representatives staffing this line, are trained IDT specialists who can review the taxpayer’s case file and respond to the IDT victim’s call 

anytime during business hours. For most cases, the average time to resolve a case 

is now less than 120 days. For more complex cases it can take up to 180 days. This 

38 

is substantially less than a few years ago, when cases could take more than 300 

days to resolve. 

To prevent taxpayers impacted by tax-related identity theft from becoming a repeat victim, we issue an Identity Protection Personal Identification Number (IP 

PIN). If an attempt is made to e-file a return without entering the IP PIN or if an 

incorrect IP PIN is entered, the return is rejected until the correct IP PIN is entered. 

Question. What additional resources do you need to protect those systems and 

keep our taxpayer account information secure? 

Answer. The 2019 President’s budget included a program integrity cap adjustment 

proposal that includes funding for automating online fraud prevention capability to 

deliver actionable intelligence in near real time. The IRS also needs funding and 

flexibility to hire additional IT specialists skilled in data analytics/science and interrogating voluminous data, and additional cyber security specialists and the 2019 

budget also included a request to extend the streamlined critical pay authority program. 

Question. What is the IRS doing specifically to help small businesses to prevent 

them from falling victim and mitigating any impact if their business identity becomes compromised? 

Answer. The IRS has increased business identity theft protections by expanding 

the upfront filtering and modeling to identify potential identity theft in business returns. In addition, the IRS continues to take a variety of steps to help make small 

businesses aware of the threat from identity theft. This has been a key component 

of the Security Summit external outreach and communications effort. The Security 

Summit is a partnership between the IRS, State tax administrators, and the private 

sector tax community and tax professionals, to battle tax-related identity theft. The 

IRS Security summit brings Federal, State, and tax preparation industry together 

to work together to eliminate tax refund fraud. 

Here are some examples of our communications-related work touching on small 

businesses and identity theft: 

Small Business Week 2018. During national Small Business Week in May, the 

IRS issued a series of news releases aimed at small businesses, including the following May 3rd news release: IRS urges small businesses: Protect IT systems from 

identity theft. The release links to a variety of resources, including: Has your business become the victim of a data security breach? 

e-News for Small Business. e-News for Small Business is an IRS electronic 

newsletter distributed regularly to more than 300,000 subscribers. This year, the 

newsletter has included several security-related articles to help raise awareness 

among small businesses about identity theft and related issues. 

Protect Your Clients, Protect Yourself. The ongoing Protect Your Clients, Protect Yourself campaign has helped educate the small business community about 

identity theft and what to do in the event a business identity or its information is 

compromised. An outgrowth of the Security Summit, the campaign launched in 2016 

with a series of news releases and tax tips. The campaign initially focused on tax 

professionals, but has resources helpful to all small businesses. 

Don’t Take the Bait. As part of the Security Summit effort, the IRS, State tax 

agencies and the tax industry sponsored an educational series during summer 2017 

called Don’t Take the Bait. The series, part of the ‘‘Protect Your Clients, Protect 

Yourself ’’ campaign, raised awareness of the critical need for tax professionals—as 

well as small business and taxpayers—to increase their computer security and be 

cautious when reviewing their inbox—specifically with regard to successful email 

scams, dubbed ‘‘spear phishing,’’ that impersonate friends, customers, or companies. 

At the beginning of the 2017 holiday shopping season, the IRS and its Security 

Summit partners conducted National Tax Security Awareness Week with a series 

of 10 news releases and tax tips to encourage both individual and business taxpayers to take steps to protect their tax data and identities in advance of the 2018 

filing season. This work with State and private-sector partners, local consumer 

groups, law-enforcement agencies, and other government groups led to 32 different 

events across the country, more than 50 local television stories and coast-to-coast 

media attention. Twenty-four State revenue departments participated in the effort. 

39 

Question. Has there been an effort to bring small businesses into this, as they 

have a much harder time recovering if their identity is stolen or their credit is compromised? 

Answer. Security Summit initiatives have focused on protecting all taxpayers, including small businesses, from identity theft. As stated above, outreach and educational efforts have focused on making all businesses, including small businesses 

aware of the potential threat of identity theft and steps businesses should take to 

protect themselves. The IRS, however, has conducted extensive outreach to make all 

businesses aware of the potential threat of identity theft. For example, the IRS 

issued a Newswire article on December 1, 2017 (Issue Number IR–2017–198), as 

part of the outreach communication efforts specifically focused on small businesses. 

The IRS has also addressed protecting clients at the Nationwide Tax Forums. 

Question. Have you brought business credit reporting agencies into the working 

groups to identity the right data points to help protect businesses in real or near 

real time? 

Answer. Business credit reporting agencies are not currently participants in the 

Security Summit working groups. The IRS, however, worked with industry, States, 

and financial institutions to identify characteristics or elements of business returns 

that would be helpful in the identification of identity theft. In addition, the IRS established a payroll sub-working group to engage payroll companies in the fight 

against identity theft. 

SOLAR INVESTMENT TAX CREDIT

Question. In December 2015, Congress passed The Protecting Americans from Tax 

Hikes (PATH) Act of 2015, which extended the tax credits for wind and solar production. The bill also made changes regarding the placed in service definitions so 

that investors can start earning the credit when construction begins. The IRS has 

provided guidance for wind energy facilities PTC in June 2016. The solar energy facilities ITC has not yet received any guidance from the IRS 

The Protecting Americans from Tax Hikes (PATH) Act was enacted in 2015 and 

included a provision to extend and phase out the wind production tax credit (wind 

PTC) and the solar investment tax credit (solar ITC) and to change the qualification 

for to the solar ITC to the start of construction. 

The wind PTC received its guidance in 2016. 

Businesses need certainty and clarity. Solar companies are bidding on projects 

now and need to know how the changes from the PATH Act would apply. Guidance 

is needed from the IRS to provide that certainty and clarity. 

Given that it has been 21⁄2 years since the provision for the solar ITC was enacted, will this guidance be issued shortly? 

Answer. Guidance on the solar tax credit was issued in June 2018 ((Notice 2018– 

59). 

QUESTIONS SUBMITTED BY HON. ROBERT P. CASEY, JR. 

Question. Taxpayer Assistance Centers, which operate across Pennsylvania and 

across the country, are a critical service provided by the IRS. I note that TACs now 

operate by appointment. This is a recent change, and my staff has heard of individuals being turned away from TACs for lack of an appointment. In States like mine, 

taxpayers may drive quite a distance to go to a center to receive tax assistance. 

What kind of procedures do you have in place for individuals who show up without an appointment? 

Answer. Whenever possible, the IRS attempts to accommodate and serve all taxpayers that come into a TAC without an appointment, if there is capacity between 

scheduled appointments. The IRS also serves individuals by exception in cases of 

hardship, including senior citizens or those who have traveled long distances. For 

fiscal year 2018 through April 30th, TACs served more than 1.6 million customers, 

of which more than 6 percent were served without an appointment. Taxpayers do 

not need an appointment to make a payment by check or money order, drop off a 

current year tax return, and get forms. 

40 

Question. Do you have special procedures for seniors or other individuals who may 

have difficulty coming back to a TAC at a later date? 

Answer. See previous question. 

Question. In your testimony, you said the total number of taxpayers served at 

TACs this year through March 31st was 790,000, of which about 6 percent visited 

a TAC without an appointment. Please provide State-by-State data both for total 

taxpayers served by TACs and also those served by TACs without an appointment. 

Please also provide data on the number of taxpayers served prior to the requirement 

for an appointment, as well as data on how many taxpayers were turned away from 

a TAC this year because they lacked an appointment? 

Answer. The chart below shows the total number of taxpayers served face-to-face 

at TACs by State, DC, and Puerto Rico for fiscal years 2015–2017. 

State FY 2015 FY 2016 FY 2017 

Alaska 23,000 18,700 9,800 

Alabama 114,700 86,500 58,700 

Arkansas 40,200 38,000 23,900 

Arizona 143,200 129,100 68,900 

California 702,800 540,900 409,900 

Colorado 62,000 53,500 40,500 

Connecticut 69,900 55,700 44,100 

District of Columbia 30,000 23,300 20,900 

Delaware 23,700 20,900 11,400 

Florida 387,100 313,300 277,000 

GA 201,400 177,000 139,400 

Hawaii 29,500 11,600 6,900 

Iowa 35,700 24,900 16,500 

Idaho 27,500 22,900 15,900 

Illinois 170,900 139,800 108,600 

Indiana 97,400 82,300 53,800 

Kansas 30,900 24,100 19,200 

Kentucky 51,500 37,000 29,300 

Louisiana 124,800 93,900 66,300 

Massachusetts 67,000 59,700 40,700 

Maryland 119,100 87,500 60,700 

Maine 38,000 32,500 18,000 

Michigan 71,800 59,300 39,300 

Minnsota 62,300 51,000 34,600 

Missouri 135,900 108,000 54,700 

Mississippi 60,700 49,800 32,100 

41 

State FY 2015 FY 2016 FY 2017 

Montana 31,700 24,400 11,100 

North Carolina 121,700 96,400 95,000 

North Dakota 29,900 27,500 18,400 

Nebraska 37,500 35,200 21,800 

New Hampshire 25,600 21,000 12,300 

New Jersey 169,200 146,000 106,300 

New Mexico 62,200 36,300 18,700 

Nevada 78,000 53,100 31,200 

New York 343,600 286,500 214,800 

Ohio 105,900 106,400 76,300 

Oklahoma 54,300 58,500 35,900 

Oregon 74,100 63,300 59,200 

Pennsylvania 149,900 123,100 93,700 

Puerto Rico 62,700 63,900 52,900 

Rhode Island 25,200 16,400 12,800 

South Carolina 74,500 59,400 44,900 

South Dakota 18,400 14,500 10,900 

Tennessee 107,200 84,200 62,200 

Texas 525,700 439,000 327,300 

Utah 49,100 36,600 24,700 

Virginia 114,200 86,100 52,600 

Vermont 6,780 4,180 3,240 

Washington 141,500 114,000 77,900 

Wisconsin 50,300 41,900 33,100 

West Virginia 34,300 28,900 16,700 

Wyoming 19,900 19,000 11,000 

Total 5,434,380 4,426,980 3,226,040 

The chart below shows total number of taxpayers served face-to-face at TACs with 

and without an appointment and total number of taxpayers served face-to-face at 

TACs without an appointment by State, DC, and Puerto Rico for fiscal year 2018 

from October 1, 2017 to April 30, 2018. 

42 

State 

Taxpayers served 

face-to-face at TACs 

with and without an 

appointment 

Taxpayers served 

face-to-face at 

TACs without an 

appointment 

Alaska 5,780 1,380 

Alabama 30,800 2,560 

Arkansas 10,100 1,880 

Arizona 40,900 4,140 

California 230,500 15,100 

Colorado 21,600 1,000 

Connecticut 23,700 1,560 

District of Columbia 12,100 270 

Delaware 5,120 410 

Florida 144,600 9,130 

Georgia 72,900 6,070 

Hawaii 4,220 100 

Iowa 8,730 920 

Idaho 7,640 750 

Illinois 59,200 1,520 

Indiana 24,100 3,400 

Kansas 10,400 1,650 

Kentucky 15,100 1,040 

Louisiana 25,800 3,330 

Massachusetts 19,000 1,860 

Maryland 30,800 1,310 

Maine 9,100 990 

Michigan 19,800 1,310 

Minnesota 17,200 1,650 

Missouri 23,400 860 

Mississippi 13,800 2,280 

Montana 6,380 580 

North Carolina 48,200 3,760 

North Dakota 10,900 650 

Nebraska 11,100 1,140 

New Hampshire 6,750 1,390 

New Jersey 52,200 2,520 

43 

State 

Taxpayers served 

face-to-face at TACs 

with and without an 

appointment 

Taxpayers served 

face-to-face at 

TACs without an 

appointment 

New Mexico 9,700 110 

Nevada 16,800 170 

New York 96,700 5,030 

Ohio 40,700 4,420 

Oklahoma 17,800 2,820 

Oregon 32,600 3,270 

Pennsylvania 43,600 4,210 

Puerto Rico 25,200 1,080 

Rhode Island 6,350 300 

South Carolina 27,100 2,580 

South Dakota 5,870 540 

Tennessee 32,800 1,650 

Texas 172,100 10,180 

Utah 12,700 550 

Virginia 18,800 1,040 

Vermont 2,180 180 

Washington 43,000 1,820 

Wisconsin 16,400 480 

West Virginia 8,400 650 

Wyoming 4,700 820 

Total 1,655,420 118,410 

Before requiring an appointment, in FY 2015 a total of 5.4 million taxpayers were 

served face-to-face at TACs. The IRS does not have data of how many taxpayers 

may have been unable to obtain service at a TAC because they lacked an appointment. This is difficult information to capture as some taxpayers choose not to wait; 

some find assistance through other channels such as IRS.gov or toll-free telephone 

lines; and some obtain their answer through information sources provided at the 

TAC. 

Question. This committee has discussed cybersecurity and tax-related ID theft 

prevention quite a bit in the last few years. This threat is even more pronounced 

with the massive Equifax data breach last year. 

Can you discuss investments you’ve made to better protect taxpayers’ personal information? 

Answer. The IRS has made significant investments in predictive analytics, 

forensics, and monitoring capabilities. The IRS has developed indicators/models to 

detect and/or prevent fraudulent activity in online applications. The IRS conducts 

in-depth analysis of anomalous behavior of online applications and coordinate our 

findings for appropriate and timely response. Going forward, the IRS will enhance 

these capabilities with investments in next generation advanced analytics, to generate actionable threat intelligence in near real-time. 

44 

SUBMITTED BY HON. JOHN THUNE

From The Wall Street Journal 

THE WAGES OF TAX REFORM ARE GOING TO AMERICA’S WORKERS

In a dynamic, competitive economy, what’s good for companies is good for their employees. 

By Kevin Hassett 

April 18, 2018 

In a dynamic, competitive economy, the relationship between companies and their 

employees is symbiotic, not antagonistic. Research by economists Alan Krueger and 

Lawrence Summers, both of whom served in the Obama administration, shows that 

more-profitable employers pay higher wages. Any company that attempts to pay a 

worker less than he is worth will quickly lose that worker to a competitor. Thus, 

firms that want to thrive must invest in their plants and workers. 

When profits go up, capital investment goes up, and wages follow. That’s the reason 

we estimated, based on what has happened around the world, that households will 

get an average $4,000 wage increase from corporate tax reform, once its changes are 

fully implemented and swoosh through the nation’s economic engine. 

Naysayers have been invested in the law’s failure from day one. But the data are 

already proving them wrong. An increase in the return to investment should drive 

investment and profits up, increase productivity and wages, and ultimately boost 

economic growth. Here’s what we’ve seen so far this year: 

• More investment. The President’s promise to lower corporate taxes and reduce 

red tape has led to a surge in American business investment. Real private nonresidential fixed investment increased 6.3 percent during the fourth quarter of 

2017, according to data from the Bureau of Economic Analysis. Equipment investment rose 8.9 percent, thanks largely to the tax law’s allowance for full expensing of equipment investment retroactively to September 2017. In March 

2018, the Morgan Stanley Composite Capital Expenditure Plans Index reached 

its highest level since it began tracking in 2006. 

• Greater productivity. Capital investment raises capital per worker and thus 

labor productivity. Here again, the early signs are positive. For perspective, real 

private nonresidential fixed investment was anemic at the end of the Obama 

administration: On a year-over-year basis, it fell 0.6 percent in 2016. As a result, during the post-recession expansion under President Obama (2010–16), the 

moving 4-year average contribution that capital made to labor productivity 

growth in the private sector turned negative for the first time in history. But 

boosted by a strong finish to the year, capital added 0.3 percentage point to productivity growth in 2017—and will add more in 2018 if the Morgan Stanley 

index is correct. 

• Pay raises. The average increase in wages from the year-earlier period for January through March 2018 is the highest for any 3-month period since mid-2009. 

A flurry of corporate announcements provide further evidence of tax reform’s 

positive impact on wages. 

As of April 8th, nearly 500 American employers have announced bonuses or pay increases, affecting more than 5.5 million American workers, as a result of the TCJA. 

Walmart, the largest private employer in the country, has announced a $2-an-hour 

increase in the starting wage of new workers and $1-an-hour rise in its base wage 

for employees of more than 6 months. For someone working 40 hours a week, that 

is up to $3,040 per year in additional pay. 

Other employers have done the same, including BB&T Bank, where full-time workers earning the bank’s minimum wage will see a $6,000 increase in their annual 

income. Companies that have announced new bonus plans have lifted compensation 

by an average of $1,150. Ten firms have also announced minimum-wage hikes that 

imply annual income gains of at least $4,000 for full-time workers. 

• Faster growth. Forecasters around the world are now predicting this growth can 

be sustained. The Organization for Economic Cooperation and Development has 

boosted its forecasts for real U.S. economic growth in 2018 and 2019 to nearly 

3% to reflect the impact of the TCJA. The Congressional Budget Office also increased its growth projection for this year and next by an average of 1 percentage point relative to its last forecast before the tax bill was passed. 

45 

With the political battle over passage behind us, economists are again focusing on 

the data. All indications are that the tax bill delivered a much-needed boost to 

capital-starved American workers, and wages are doing what economics says they 

should when companies invest aggressively in more and better machines and share 

profits with workers. Perhaps it is a time to put aside the archaic notion that the 

conflict between capital and labor is the central story of our society. In a modern 

competitive economy, workers do well when their employers do. 

Mr. Hassett is chairman of the White House Council of Economic Advisers. 

PREPARED STATEMENT OF HON. RON WYDEN, 

A U.S. SENATOR FROM OREGON

The annual hearing on tax filing season typically inspires the level of enthusiasm 

most people bring to a prolonged root canal procedure. But this year, there are big 

tax policy issues with serious consequences facing millions of Americans. 

First, small businesses are increasingly stuck in a bureaucratic twilight zone. 

There is rampant confusion about how the new tax law works—untested policies, 

sloppy legislative drafting, and outright mistakes in the law. On top of that, a 

Trump Cabinet turf battle has been adding to the uncertainty and lengthening the 

time that small businesses are going to be in the dark about how the tax rules apply 

to them. 

So here’s the bottom line. Estimated tax payments are due, but millions of small 

businesses don’t know how to estimate what they owe. 

The owner of a restaurant known as a local landmark, the highly regarded mechanic whose expertise has built a loyal base of regular customers, the finish carpenter whose sought-after work is prized for its sturdiness and good looks—they’ve 

all been mired in this tax code mystery zone while Trump officials go 12 rounds over 

who’s going to get final say on regulations. I understand there’s been news on this 

issue this morning. But the fact is, deadlines for guidance from the administration 

are slipping. Tax experts are so unsure of the road ahead, they’re advising small 

business clients to bump up their estimated payments from last year just to be safe. 

Let’s not forget that certainty was one of the key selling points of the tax bill— 

sure footing for businesses to focus on growing and hiring rather than deciphering 

a byzantine, outdated tax system. The magical growth effects were going to kick in 

right away, and workers were going to see big raises. The reality of the law looks 

awfully different. 

All this confusion and delay create yet another golden opportunity for powerful 

lobbyists and special interests to creep in and twist the rules in their favor. They’ll 

be after even more exclusive carve-outs and sweetheart deals—exactly the kind of 

favoritism that Americans want eliminated from our tax laws. 

And the likelihood they’ll be able to exploit these tax loopholes is even greater 

than in the past, because taxpayer audits have fallen to a 15-year low, with audits 

of high-income earners dropping the most. 

I want to thank Acting Commissioner Kautter for joining the committee here 

today. As I said at the outset, I’d wager that most Americans would expect a hearing on tax filing season to be about as sleep-inducing as it gets on Capitol Hill. But 

I hope we’re able to uncover some important information about what’s ahead for taxpayers this year and going forward as the Trump tax law is implemented. 

(47) 

COMMUNICATIONS

CENTER FOR FISCAL EQUITY

14448 Parkvale Road 

Rockville, MD 20853 

Chairman Hatch and Ranking Member Wyden, thank you for the opportunity to 

comment on this year’s tax filing season and future IRS challenges. This tax season 

will be much like last year’s, as the new tax bill is not effective for that year’s income. For most people, next year will be much the same as last year, although many 

will no longer itemize, but they will also lose exemptions. For those who use tax 

preparers or preparation software, there will be little difference. 

Some enjoy their civic duty to file taxes, but those who use preparers probably do 

not, which is most people. The rich will likely use accountants who have other 

money management duties and who, like the IRS employees, must figure out the 

new tax rules on pass-through income. For some, these rules equalize the treatment 

of ownership income between corporate and non-corporate firms, to others this is 

just another give away to donors. For all businesses, the ending of corporate income 

taxation and its replacement with a value-added tax and/or a net business receipts/ 

subtraction VAT would have been so much easier, save for the resistance of Chairman Hatch. 

The reality is that an implicit hidden value-added tax is already in force. It is the 

tax withheld by employers for the income and payroll taxes of their labor force. A 

VAT simply makes these taxes visible while an NBRT makes them more manageable, allowing employers to adjust pay more easily for larger families, pay for health 

care or insurance and fund public and non-public schools for dependents and college 

or technical training for workers, as well as retirement plans that give employees 

a stake and a say in the firm and a more secure retirement. 

As you see, we still firmly believe that it is the tax code more than the IRS that 

needs reform, and that what the IRS needs most is an adequate budget, although 

that budget will decline under our recommended reforms. By now, you are very familiar with our usual submission. 

• A Value-Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure every 

American pays something. 

• Personal income surtaxes on joint and widowed filers with net annual incomes 

of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other 

international spending, with graduated rates between 5% and 25%. 

• Employee contributions to Old-Age and Survivors Insurance (OASI) with a 

lower income cap, which allows for lower payment levels to wealthier retirees 

without making bend points more progressive. 

• A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support, health care and 

the private delivery of governmental services, to fund entitlement spending and 

replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income 

taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 

60. 

The collection of the employee contribution to Social Security will be exactly as 

it is now. Like proposals for a Fair Tax, the Value-Added Tax and NBRT/SubtracVerDate Sep 11 2014 16:25 Jun 17, 2019 Jkt 000000 PO 00000 Frm 00051 Fmt 6601 Sfmt 6621 R:\DOCS\36708.000 TIM
48 

tion VAT will be collected by the states. If the basic structure of reform is adopted 

in the states, the biggest change will be the need for a common base between federal 

and state consumption taxes. 

Shifting from retail sales taxes and gross receipts taxes to value-added taxes and 

VAT-like net business receipts taxes will change the nature of most state taxation, 

while enabling ease of collection of taxes on online sales, since taxes would be levied 

at every stage of the production process. The IRS will assist states in this process, 

which will likely take the form of some federal-state compact commission to draft 

and approve the transitional rules. 

If a common base agreement can be negotiated for these taxes, state treasurers can 

collect both their own taxes and the federal taxes, as well as analytical information 

on tax credit usage, which can then be shared with the U.S. Internal Revenue Service in order to track income accruing to payers of the federal high-income surtax, 

as well as to recipients of the federal child tax credit, which would be paid to employees with wages under the NERT and then verified by a mailing from both the 

employer and the Internal Revenue Service, with employees verifying that their employees paid every dollar to them reported as a credit. 

There will likely be problems to resolve in our proposed system, where the states 

collect the Value-Added Tax and the Net Business Receipts Tax and forward the 

money and records to the Internal Revenue Service. This will not impact most taxpayers, since once they have bought a product, no further action is necessary. 

The IRS will likely supplement state-based auditing with reviews of their own, but 

this is a small price to pay for a reform that will reduce the income tax payment 

and audit workload by at least 80%. Indeed, income tax simplification (through the 

elimination of all but a few deductions), will further eliminate the workload generated by remaining income tax payers. As you see, this is a much bigger change 

than reform around the edges. 

Employees with children will need to annually verify the information provided by 

employers and, if they received less than was reported to the government, notify the 

IRS who will send a refund and collect the difference from the employer. This may 

trigger a dispute, but likely most employers will simply pay if there was an error. 

Fraud is another matter, which is criminal not a dispute to be settled. Other disputes may involve parents double-dipping on two jobs or two earners, but these will 

likely work out a payment plan or contact their divorce lawyers to negotiate who 

pays. 

Whenever an employee or an heir is paid interest, a dividend, a capital gain or an 

heir sells an inherited asset, information will be transmitted to the IRS, as well as 

sales to a qualified Employee Stock Ownership Program (untaxed) and aggregated 

by Social Security Number. Verification will be accomplished to make sure that tax 

avoidance does not occur through use of multiple SSNs. 

Individuals making over $50,000 per year and joint filers making over $100,000 will 

have their information stored to compare to tax filings, unless the Congress authorizes an automatic filing system where all income surtax payers will receive notification when all data should have arrived and what their refund or payment will be 

once they correct the information or certify it is correct already. Banking information should be on file, so authorization for payment, either at once or installments 

should be easy. Very little IRS administration will be required to do this. Indeed, 

data management and mailing could be contracted out. All IRS employees could fit 

in a bathtub with room for Grover Norquist. 

Thank you for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff. 

LETTER SUBMITTED BY ANAND DESAI

Members and staff of the Senate Committee on Finance: 

Thank you for the April 12, 2018 hearing on ‘‘The 2018 Tax Filing Season and 

Future IRS Challenges’’ and the opportunity to contribute my opinions to the record. 

I share these opinions solely in my personal capacity, as a citizen. 

Two recent Inspector General reports show a big gap between the law the IRS 

explains and the standards that the IRS ultimately enforces in large, complex cases. 

‘‘Barriers Exist to Properly Evaluating Transfer Pricing Issues,’’ which the first 

highlights. (Transfer pricing is generally about economic allocations of a business’s 

49 

1 ‘‘The 2018 Tax Filing Season and Future IRS Challenges,’’ hearing before the Senate Committee on Finance, 115th Congress, https://www.finance.senate.gov/hearings/the-2018-tax-filing-season-and-future-irs-challenges (April 12, 2018). 2 EPIC v. IRS, No. 17–5225 (D.C. Cir. appeal docketed October 4, 2017). 

income between the United States and foreign countries, often tax havens.) In a 

year, $10.5 billion in audit tax adjustments for cases involving this ‘‘most prevalent 

international tax issue representing the greatest tax compliance risk facing the 

[Large Business and International division]’’ entered IRS Appeals, its structured, 

detached settlement forum just short of court. Two billion dollars came through as 

‘‘final’’ and $321 million ‘‘posted to taxpayer accounts.’’ Three cents on the dollar. 

But why? 

‘‘Better Documentation is Required to Support Office of Appeals’ Decisions in 

International Cases,’’ the next puts mildly. In over two-thirds of the multi-milliondollar cases sampled, ‘‘Appeals did not weigh the relative strengths and weaknesses 

of both the taxpayers and the Government’s position as required by IRS guidance.’’ 

Appeals also accepted unsupported claims that taxpayers had failed to support during audits, and did not address IRS Counsel opinions that did support Exam’s positions. 

The tax code and its interpretation and application could be part of the problem 

too, of course. But statutes, regulations, court decisions and even staff levels benefit 

from regular and robust debate and review. Meanwhile, broad nondisclosure of settlement practice, including ‘‘efforts to settle similar cases at similar rates,’’ risks the 

‘‘development of a body of ‘secret law’ known only to a few members of the tax profession.’’ The Joint Committee explained that mandatory summary reporting of 

issues and methods—one alternative to releasing edited individual rulings—helps 

prevent businesses’ advance pricing agreements with the IRS. (See JCS–2–01.) 

When a taxpayer calls the IRS for advice, it’s nice if they pick right up. But it’s 

vital that the IRS apply that advice—compromised only sparingly and accountably— 

across the board, so one can trust that following it really does mean paying one’s 

fair share toward funding effective, dependable government. Recurring and comprehensive independently led reporting on the IRS’s key enforcement challenges and 

efforts to fix them, like the Taxpayer Advocate’s work on particular taxpayers’ difficulties that the ‘‘Taxpayer First Act’’ reform bill embraces, would be a great step. 

Sincerely, 

Anand Desai 

ELECTRONIC PRIVACY INFORMATION CENTER (EPIC) 

1718 Connecticut Avenue, NW, Suite 200 

Washington, DC 20009 

Ph. 202–483–1140 

Fax 202–483–1248 

https://epic.org 

April 12, 2018 

Senator Orrin Hatch, Chairman 

Senator Ron Wyden, Ranking Member 

U.S. Senate 

Committee on Finance 

219 Dirksen Senate Office Building 

Washington, DC 20515 

RE: ‘‘The 2018 Tax Filing Season and Future IRS Challenges,’’ April 12, 2018 

Dear Chairman Hatch and Ranking Member Wyden: 

We write to you regarding the hearing on ‘‘The 2018 Tax Filing Season and Future IRS Challenges’’ 1 to bring your attention to EPIC v. IRS, a Freedom of Information Act case to obtain the tax records of President Trump.2

As you are aware, candidates for the Presidency have routinely released tax 

record information to the American public. Mr. Trump broke with that tradition 

even though he pledged to make this information publicly available. That fact combined with legitimate questions about the President’s financial relations with a forVerDate Sep 11 2014 16:25 Jun 17, 2019 Jkt 000000 PO 00000 Frm 00053 Fmt 6601 Sfmt 6621 R:\DOCS\36708.000 TIM
50 

3The Electronic Privacy Information Center (‘‘EPIC’’) is a nonpartisan research center established in 1994 to focus public attention on emerging privacy and civil liberties issues, https:// 

epic.org/epic/about.html. EPIC is also a leading advocate for civil liberties and democratic values in the information age. In response to the finding of the intelligence community that the 

Russian Government interfered with the 2016 Presidential election, EPIC launched a new 

project on democracy and cybersecurity: EPIC, Democracy and Cybersecurity, https://epic.org/ 

democracy/. 4Press release, EPIC, ‘‘EPIC v. IRS: A Freedom of Information Act Lawsuit to Obtain the Tax 

Returns of Donald J. Trump’’ (April 15, 2017), https://epic.org/foia/irs/trump-taxes/EPIC-vIRS-Press-Release-Apr-2017.pdf; EPIC v. IRS, 261 F. Supp. 3d (D.D.C. 2017). 5 26 U.S.C. § 6103(k)(3). 

6FOIA request from EPIC to IRS (February 16, 2017), https://epic.org/foia/irs/trump-taxes/ 

EPIC-17-02-16-IRS-FOIA-20170216-Request.pdf. 7 ‘‘Confidentiality of Tax Return Information,’’ hearing before the Committee on Ways and 

Means, 94th Congress, 22–23 (1976) (statement of Donald C. Alexander, Commissioner of Internal Revenue). 8 26 U.S.C. § 6103(k)(3). 

9Final remarks by Margaret Milner Richardson, Commissioner of Internal Revenue, Fed. B.A. 

Sec. Tax’n Rep., Spring 1997, at 6, 9. 10 Internal Revenue Service, ‘‘Disclosure Report for Public Inspection Pursuant to Internal 

Revenue Code Section 6103(p)(3)(C) for Calendar Year 2000,’’ at 3 (2001). 11 127 Cong. Rec. 22,510 (1981). 12 EPIC v. IRS, 261 F. Supp. 3d 1, 4 (D.D.C. 2017). 

eign government that sought to influence the outcome of the 2016 Presidential election provided the basis for EPIC’s FOIA case to the IRS.3

On April 15, 2017, EPIC filed a Freedom of Information Act lawsuit against the 

IRS to enable the public release of President Trump’s tax records.4 As EPIC stated 

in the original FOIA request to the agency: 

At no time in American history has a stronger claim been presented to the 

IRS for the public release of tax records to ‘‘correct misstatements of fact.’’ 5

If the Freedom of Information Act means anything, it means that the American public has the right to know whether records exist in a federal agency 

which reveal that the U.S. President has financial dealings with a foreign 

adversary.6

There is a key provision in the Internal Revenue Code that permits the release 

of tax records in certain circumstances to correct misstatements of fact. This provision, 26 U.S.C. § 6103(k)(3), was enacted to ensure the ‘‘integrity and fairness [of 

the IRS] in administering the tax laws’’ in the aftermath of the Watergate scandal 

and related misuses of tax information by the Nixon White House.7 It allows the 

IRS to release tax records ‘‘with respect to any specific taxpayer to the extent necessary for tax administration purposes to correct a misstatement of fact.’’ 8 Former 

IRS Commissioner Margaret Milner Richardson stated that § 6103(k)(3) ‘‘permits the 

IRS to disclose tax return information to correct misstatements of fact without a 

waiver from the taxpayer.’’ 9 In other words: the IRS does not need a waiver from 

President Trump to release his tax returns. 

The IRS has used this disclosure power before. In 2000, the IRS used its 

§ 6103(k)(3) authority to make ten separate disclosures of tax information.10 Indeed, 

as Senator Grassley has observed, § 6103(k)(3) dictates that certain ‘‘type[s] of factual misstatements should trigger disclosure of return information’’ depending on 

the ‘‘consequences of these misstatements’’ and ‘‘their degree of seriousness.’’ 11

There has never been a more compelling request presented to the IRS than the 

request from EPIC to obtain the tax records of President Donald J. Trump. Many 

individuals, including the President, have published conflicting statements of fact 

about the contents of Donald J. Trump’s tax returns and the extent of his business 

dealings with the Russian Government. Following the election, President Trump 

tweeted on January 11, 2017: ‘‘Russia has never tried to use leverage over me. I 

HAVE NOTHING TO DO WITH RUSSIA—NO DEALS, NO LOANS, NO NOTHING!’’ 12 However, family members, public figures, and news organizations have 

squarely disputed the President’s denials of Russian financial ties, including Donald 

Trump, Jr., Eric Trump, Senator Chris Murphy, The New York Times, The Washington Post, and CBS News. 

The IRS has the authority to release the President’s tax returns with the approval 

of the Joint Committee on Taxation. We urge the Senate Finance Committee to support this release. The public has a right to review the tax returns of President 

Trump and to know about the extent of Russian interference with the 2016 Presidential election. 

51 

We ask that this statement be entered in the hearing record. EPIC looks forward 

to working with the Committee on these issues of vital importance to the American 

public. 

Sincerely, 

Marc Rotenberg Caitriona Fitzgerald 

EPIC President EPIC Policy Director 

John Davisson Christine Bannan 

EPIC Counsel EPIC Policy Fellow 

LETTER SUBMITTED BY SUSAN GODING

April 20, 2018 

U.S. Senate 

Committee on Finance 

Dirksen Senate Office Bldg. 

Washington, DC 20510–6200 

RE: ‘‘The 2018 Tax Filing Season and Future IRS Challenges,’’ April 12, 2018 

Honorable Members of the Senate Committee on Finance: 

In November 2016 my husband and I mailed to the IRS an amended 2015 return. 

In the return we had adjusted the depreciation of a new building on a farm we own. 

The following has been our experience with IRS since then. 

We never received any acknowledgement from the IRS that the amendment had 

been received. Twice we contacted them and were told to check the IRS website. 

There was no answer there. Our CPA also checked on the status of our amended 

return and received no answer other than to check back. This was in late April 

2017. 

During the summer of 2017, I stopped at the IRS office in the Zorinsky Building 

in Omaha. The IRS customer service representative said the IRS mails a letter to 

acknowledge its receipt of an amendment, and follows up with a monthly letter providing its status. We never received anything of this nature from the IRS, nor had 

our CPA. 

Finally, on September 14, 2017, our CPA was able to speak to an IRS person, Mr. 

Karmin (employee #100084316). Mr. Karmin said our amended return was ‘‘stuck 

and buried’’ someplace. Mr. Karmin did send an internal inquiry. He also said the 

IRS should have done this earlier when we or our CPA had made contact. This 

shows lack of proper training, follow-through, and organization methods of IRS staff. 

On October 13, 2017, we received IRS Letter 2205 that said our 2015 return had 

been selected for an examination. The letter stated we had to call the IRS by October 23rd. After the IRS had 12 months it gave us 10 days. We perceived this to be 

retaliatory and aggravating. 

On October 16, 2017, we receive a letter from Chris Wagner, an IRS representative/ 

agent in Omaha, asking us to confirm an appointment to meet him on October 23rd, 

and for us to have additional items for the IRS review. On October 19, 2017, we 

received notice that Mr. Wagner had been out sick, but that he believed he had all 

the paperwork needed to finish our 2015 tax examination. 

On October 23, 2017, I met Mr. Wagner at the IRS office in Omaha. We discussed 

our activities on the farm and the intent and purpose of the recently built farm shed 

on our property. Following our meeting, I emailed him additional information he’d 

requested. The next day additional emails were sent between us to clarify information and statements he’d questioned. 

On November 13, 2017, our CPA received information from us to discuss with Mr. 

Wagner. Our CPA said he called Mr. Wagner three times and left messages before 

Mr. Wagner responded. 

On November 14, 2017, our CPA received a call from Mr. Wagner to clarify things. 

Our CPA requested a few more items from us and commented that this examination 

did not appear to be handled in a very professional manner. 

On November 27, 2017, we received an email from our CPA telling us Mr. Wagner 

had missed a 9 a.m. appointment to meet him that day. Mr. Wagner said he’d forgotten about it. The meeting had to be rescheduled for later that day at 2 p.m. 

52 

On November 29, 2017, we received IRS form 4564, requesting additional information and notice that on December 8th Mr. Wagner wanted an onsite inspection to 

see the farm shed and property. 

On December 8, 2017, my husband and I each took annual leave from our jobs to 

meet Mr. Wagner at our farm. The inspection took about an hour. At that time Mr. 

Wagner said we had met the 500- and 100-hour tests for being actively engaged in 

our farm’s day-to-day operations and management. Mr. Wagner also stated that his 

supervisor was Darcy Smith. We bring this up because several times in his discussions with us and our CPA, Mr. Wagner had said he could not make the decisions 

but would have to check with his supervisor. This was the first time he told us who 

that was. She had not been present at any meetings, nor had she corresponded with 

us. At this time, Mr. Wagner also said he would have the results of the 2015 examination sent to us in January 2018. 

As of February 12, 2018, there still was no report from IRS. We did receive IRS 

letter 2205a from Mr. Wagner with notification that our 2016 return was selected 

to be examined and included another list of what we needed to provide. 

On February 14, 2018, our CPA contacted Mr. Wagner. Mr. Wagner told him that 

a report from IRS should be in the mail tomorrow (February 15th) that would address the 2015 tax filing examination. 

On February 17, 2018, no letter from IRS had been received regarding the 2015 examination. Our CPA coordinated with Mr. Wagner date of delivery information that 

had been requested of us for the 2016 examination. My husband was out of town 

on business. 

On February 27, 2018, our CPA confirmed with Mr. Wagner the delayed delivery 

of our information. Mr. Wagner also said he had ‘‘misspoken’’ about when the IRS 

letter regarding 2015 examination would be sent to us. But Mr. Wagner then stated 

that a letter would be forthcoming. 

As of April 18, 2018, almost 2 months later, there is no letter from IRS regarding 

either 2015 or 2016 examinations. There are no conclusions. There is no communication from IRS as to when we might expect the matter to be closed. Does Mr. Wagner 

still work there? 

The IRS has had our 2015 amended return for 18 months and has repeatedly given 

us time frames they have failed to meet, and there has been no explanation. This 

should have been a simple audit. Shouldn’t there be a trained and competent IRS 

agent who is familiar with farms and farming on staff in Nebraska? It has been a 

very unprofessional and unrespectful manner in which the IRS has operated. There 

was no response for 12 months after the IRS had received the amendment. There 

were constant and unaddressed IRS delays. What is the status of our 2015 amendment and the additional 2016 return examinations? When will we know? Who at 

the IRS is responsible or accountable for how these examinations have been handled? Is there anyone in charge? Is there an organized system? 

Repeatedly hearing Mr. Wagner say, ‘‘Let me check with my supervisor’’ makes us 

wonder why Mr. Wagner is there and why the supervisor isn’t present or available 

in this process? Doesn’t Mr. Wagner have the knowledge or tools to do these examinations? Mr. Wagner said he’d been with the IRS for 5 years. It has been our experience with the IRS that it is understaffed and lacks necessary training. Hiring practices are weak. 

The IRS needs more funding and better leadership to do its job. The lack of professional and efficient management and poor hiring practices and training make it a 

costly organization. 

Sincerely yours, 

Susan Goding 

cc: U.S. Senator Deb Fisher (Nebraska) 

U.S. Senator Ben Sasse (Nebraska) 

Mr. Dan Dudley, CPA (O’Donnell, Ficenec, Wills, and Ferdig, LLP, Omaha, NE) 

Æ