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81–937 2014

THE INTERNAL REVENUE SERVICE AND SMALL 

BUSINESSES: ENSURING FAIR TREATMENT 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

JULY 17, 2013 

Small Business Committee Document Number 113–030 

Available via the GPO Website: www.fdsys.gov 

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Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

BLAINE LUETKEMER, Missouri 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JAIME HERRERA BEUTLER, Washington 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

DAVID SCHWEIKERT, Arizona 

KERRY BENTIVOLIO, Michigan 

CHRIS COLLINS, New York 

TOM RICE, South Carolina 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

YVETTE CLARKE, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRAD SCHNEIDER, Illinois 

RON BARBER, Arizona 

ANN McLANE KUSTER, New Hampshire 

PATRICK MURPHY, Florida 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Sam Graves ..................................................................................................... 1 

Hon. Nydia Vela ́zquez ............................................................................................. 2 

WITNESSES 

Hon. Daniel I. Werfel, Principal Deputy Commissioner, Internal Revenue 

Service, Washington, DC ..................................................................................... 3 

APPENDIX 

Prepared Statements: 

Hon. Daniel I. Werfel, Principal Deputy Commissioner, Internal Revenue 

Service, Washington, DC .............................................................................. 35 

Questions and Answers for the Record: 

Questions and Answers from Hon. Sam Graves to Hon. Werfel 41 

Questions and Answers from Hon. Blaine Luetkemeyer to Hon. Werfel 53 

Questions and Answers from Hon. Mick Mulvaney to Hon. Werfel 53 

Questions and Answers from Hon. Chris Collins to Hon. Werfel 66 

Questions and Answers from Hon. Tim Huelskamp to Hon. Werfel 72 

Questions and Answers from Hon. David Schweikert to Hon. Werfel 77 

Questions and Answers from Hon. Tom Rice to Hon. Werfel 78 

Questions and Answers from Hon. Donald Payne, Jr. to Hon. Werfel 83 

Questions and Answers from Hon. Yvette Clarke to Hon. Werfel 86 

Additional Material for the Record: 

Additional Questions and Answers from Hon. Sam Graves to Hon. 

Werfel ............................................................................................................. 88 

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(1) 

THE INTERNAL REVENUE SERVICE AND 

SMALL BUSINESSES: ENSURING FAIR 

TREATMENT 

WEDNESDAY, JULY 17, 2013 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 1:00 p.m., in Room 

2360, Rayburn House Office Building. Hon. Sam Graves [chairman 

of the Committee] presiding. 

Present: Representatives Graves, Chabot, King, Coffman, 

Luetkemeyer, Mulvaney, Tipton, Hanna, Huelskamp, Schweikert, 

Bentivolio, Collins, Rice, Vela ́zquez, Clarke, Hahn, Payne, Meng, 

Schneider, Chu, and Barber. 

Chairman GRAVES. Good afternoon, everyone. I would like to 

call this hearing to order. 

Under the House rules, one of the responsibilities of this Committee is the study and investigation of the problems of all types 

of businesses, including those concerning tax issues. Today we are 

carrying out that duty and we are very pleased to have Acting 

Commissioner of the Internal Revenue Service, Mr. Werfel, here 

with us. 

Small businesses are vital to job creation and innovation in the 

U.S. economy, accounting for over 60 percent of new net private 

sector jobs. At the same time, these businesses have fewer resources than large firms to deal with an increasingly complex maze 

of tax laws and regulations. 

Over the past few years, the IRS has increased the number of 

small businesses that it audits. This has been explained as a way 

for the IRS to close the ‘‘tax gap;’’ that is, the difference between 

what the IRS believes is owed and what taxpayers pay voluntarily 

on time. We certainly support taxpayers paying what is due, and 

most small business owners do pay their taxes. As the IRS Taxpayer Advocate has recommended, Congress should vastly simplify 

the tax code to increase tax compliance. 

In May, the Inspector General for Tax Administration issued a 

report that found the IRS had used inappropriate criteria to target 

certain conservative organizations that sought nonprofit status. 

Since that time, Congressional investigations have raised additional questions about the IRS’s improper targeting, and whether 

the IRS may have also improperly targeted the tax returns of small 

businesses for added scrutiny or audit. 

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We must ensure that all taxpayers, including small businesses, 

are treated fairly. In May, I sent a letter to Mr. Werfel requesting 

information about how the IRS selects and classifies small business 

taxpayers for closer review and audit, the number of small businesses it audits, and the cost, duration, and yield from all of those 

audits. Who decides which small businesses are selected? How is 

the criteria developed? When does it change? And last evening, 

after a month delay, I did receive a letter providing responses to 

some of those questions, and we hope to learn more of those answers today. 

As elected representatives, we must make sure that our government is accountable, and restore the American people’s faith in 

their leaders. 

And with that, I will now yield to Ranking Member Vela ́zquez 

for her opening statement. 

Ms. VELA ́ ZQUEZ. Thank you, Chairman Graves. 

One of the focuses of this committee is to ensure small businesses are given the tools to comply with regulations without increasing their costs. No place is this more true than when it comes 

to taxes. In the past, small businesses have told us that complexity 

and uncertainty create difficulty when filing tax returns. Many 

business owners worry that one simple mistake can lead to a costly 

and timely audit, and at a time when many businesses are striving 

to expand, every hour and dollar counts. Small firms spend up to 

66 percent more on tax compliance than their larger competitors 

and face constant changes to the tax code, creating further confusion and hindering job creation. They should not also have to face 

intense scrutiny from the IRS through business audits. Nevertheless, audits of small businesses, particularly pass-through companies, continue to rise. 

While the vast majority of small business taxpayers comply with 

tax laws, it seems they may be under increased scrutiny by the 

IRS, all because a few bad actors misreport their income. Seeing 

as our nation’s fiscal constraint are an ongoing priority, I understand that closing the 450 billion tax gap is critical to our longterm prosperity, but so are small businesses. Any effort to increase 

tax compliance must be done in a way that is responsible, fair, and 

not unduly burdensome to small firms. 

I am grateful that the IRS commissioner took time out of his 

schedule to testify before us today, but it is unfortunate we are 

turning a relevant topic into political theater. It is my hope we can 

move past the unsubstantiated belief that the IRS politically targeted certain small firms and instead have a productive discussion 

to ensure small businesses are not unfairly harmed by overzealous 

auditing. 

Today’s hearing will give us a better grasp of the amount and 

scope of small business audits since it is necessary to have an accurate picture of enforcement policies. I am looking forward to learning about the factors considered in deciding on an audit and about 

the average result. I believe this data is even more important right 

now as the agency seeks to be more efficient due to financial realities. 

We will also discuss whether the private costs and burdens of an 

audit are contemplated and thereby justified in light of potential 

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3 

revenue gains of an audit. This hearing will also allow us to examine what is being done to minimize this burden for small entities. 

Small firms should be able to look to the IRS for help in answering questions quickly and accurately. For this reason, it is vitally 

important that we encourage better taxpayer service. The agency’s 

move to increase staff levels in its Taxpayer Assistance Program is 

an important step in delivering these resources, and I am also 

pleased to see a greater emphasis on ACA education activities. 

With the proper tools, America’s small firms can sustain the economic growth currently underway by investing in their operations 

without fear of an onerous audit. 

With that I would like to thank Commissioner Werfel for being 

here today, and I yield back the balance of my time. 

Chairman GRAVES. Thank you. 

And our first witness, or obviously our only witness today, is 

Daniel Werfel, who is the acting commissioner of the Internal Revenue Service. Commissioner Werfel was appointed to lead the IRS 

in May of 2013 and prior to his appointment he held several positions with the Office of Management and Budget, including controller and the Department of Justice. Thank you for being here 

again and I look forward to your testimony. 

STATEMENT OF DANIEL I. WERFEL, PRINCIPAL DEPUTY COMMISSIONER, UNITED STATES INTERNAL REVENUE SERVICE 

Mr. WERFEL. Thank you, Chairman Graves, Ranking Member 

Vela ́zquez, and members of the Committee. Thank you for the opportunity to appear before you today to discuss tax matters affecting small businesses. 

The IRS takes seriously the need to provide excellent service to 

small business taxpayers. This service includes helping them understand and meet their tax obligations. Our assistance takes 

many forms. For example, to increase understanding of changes in 

tax law and in filing requirements, we sponsor meetings, symposiums, and seminars for small business owners and the tax practitioner community each year. We also provide virtual assistance 

through our website, IRS.gov, which contains a section devoted to 

small businesses. It has a wealth of videos, audio presentations, 

and seminars on a wide range of tax topics. Even as we work to 

ensure that our service to small businesses meet high standards, 

the IRS must also carry out a rigorous enforcement program. 

In fiscal year 2012, the IRS audited approximately 1.65 million 

returns, of which 21 percent were small business returns. The 2012 

small business audit rate equates to only 0.2 percent of all returns 

filed and 1.3 percent of all small business returns filed. In going 

about our work in the enforcement area, the IRS strives to ensure 

the taxpayers receive fair treatment. For instance, we recognize 

that individual taxpayers and businesses being audited may be 

dealing with financial hardships, and we have encouraged our employees to be flexible in these situations. 

One major example of our efforts in this regard is the Fresh 

Start Initiative. Under Fresh Start, we have added flexibility to our 

collection program in 2011 and 2012 to help taxpayers who are 

struggling financially. We are also focusing on reducing taxpayer 

burden through such efforts as simplifying forms and publications 

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and streamlining policies and procedures. For example, in January 

of this year, we announced a simplified method for claiming the 

Home Office Deduction. This new option will significantly reduce 

the paperwork and recordkeeping burden associated with calculating the deduction. 

Ensuring fair treatment also involves making sure taxpayers, including small business owners, have recourse in tax disputes with 

the IRS. We are taking action to raise taxpayers’ awareness of the 

tools at their disposal for resolving issues such as the Taxpayer Advocate Service. We need to be sure taxpayers know how to engage 

the Taxpayer Advocate Service when they feel they are being treated inappropriately or encounter excessive bureaucratic obstacles. It 

is important to note that all of our initiatives for assisting taxpayers depend on the IRS receiving adequate funding. It is imperative that we have the ability to continue reaching out to small business owners to provide the help they may need in meeting their tax 

obligations. 

Since fiscal year 2010, the IRS has absorbed cuts and appropriated funding that totaled nearly $1 billion or nearly 8 percent. 

This includes a reduction of $618 million as a result of sequestration this year. At the same time, we have made major strides in 

reducing costs and finding efficiencies in our operations. We estimate that we will have achieved $1 billion in budget savings and 

efficiencies between 2010 and 2013. But additional significant cuts 

to the IRS budget have the potential to weaken our ability to deliver our service and enforcement programs, including those dedicated to assisting small business owners. 

Before I conclude, I want to want to briefly mention the work we 

have been doing over the past several weeks to chart a new path 

forward for the IRS as these efforts are important to all taxpayers, 

including the small business community. We have initiated a robust action plan to address needed improvements that we believe 

will help restore and sustain the public’s trust in the IRS. The report we released last month describes a number of important findings, aggressive actions, and next steps for the IRS. The problems 

with the 501(c)4 application process that were uncovered by the 

Treasury Inspector General for Tax Administration have created 

significant concerns for individuals and taxpayers, and it is incumbent upon us to take swift action to fix the problems that occurred. 

We are also reviewing the full range of IRS operations, processes, 

and practices to focus on how we deliver our mission today and 

how we can make improvements in the future. And that way, we 

will better understand organizational risks wherever they exist in 

the IRS. The IRS is committed to correcting the problems that have 

occurred and to continuing the important work of the agency on behalf of the taxpayers. 

Mr. Chairman, Ranking Member Vela ́zquez, that concludes my 

statement. I will be happy to answer your questions. 

Chairman GRAVES. Thank you very much, Commissioner. You 

obviously do not have an easy job; that is for sure. 

The first question, real easy, has anyone in the IRS ever improperly targeted small businesses for additional scrutiny? 

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5 

Mr. WERFEL. I am not aware of improper targeting of small 

businesses. Let me explain the context of how I am answering that 

question because I think it is important. 

The TIGTA report that was released in May dealt in the area of 

501(c)4 review. That is a particular part of the law where the political activities of the entity under the law are relevant to their application for benefit. In this case, a tax exempt status. So the IRS, 

it is incumbent because it is in the law. We have to do an evaluation. Now, that evaluation involves assessing the degree to which 

the entity is involved in political campaign intervention. And in 

this case, as the IG reported, the way in which that was carried 

out was done inappropriately. 

But shifting over to small businesses, as a general matter, 

throughout our small business—throughout the tax code and 

throughout our implementation efforts under the small business, it 

is rare or virtually nonexistent that the political activity of an entity would be relevant in terms of any increased scrutiny that we 

would provide. So separating the two in terms of is there a risk 

that what was found in the IG report transfers over to small businesses, I have two responses to that. One is the risk of inappropriate political labels being used is extremely low because political 

activities are not relevant to the evaluation that we do. And second, as the report that we issued last month indicates, because of 

the importance of the findings in the IG report and because of the 

public concern about those findings which I think are very well justified, we are engaging in a process right now with each of our operating divisions, including our small business and self-employed 

division, to review the criteria by which small businesses or any 

taxpayers—but in this case small businesses—are selected for additional scrutiny. To do basically a fairness review, are we doing it 

exactly right or is there any evidence of any problems, we will surface them. So we are going through that review right now. 

Chairman GRAVES. And again, I am glad you are talking obviously to the folks below you. That is what I am worried about, is 

if you can be sure that they are not, without your knowing it or 

whatever the case may be, that they are not improperly targeting 

those small businesses. 

Mr. WERFEL. I think one of the things we do is we have procedures in place for how a small business or other taxpayer may be 

selected for an exam, and we review those procedures on an ongoing basis, and we are going to do a special review as a result of 

what happened in the IG report of those procedures and those protocols, to make sure they are fair in design. They also have to be 

fair in implementation and effective in implementation. But that is 

part of it. It is about training. It is about making sure the architecture of the protocols that we use to essentially select taxpayers for 

additional scrutiny, is that architecture fair, reasonable, effective? 

And is it being carried out fair, reasonably, and effective? And we 

are dedicated to making sure, and I think the IG report is a helpful 

reminder in some ways to make sure how important it is that we 

are diligent about that in all areas of the IRS. 

Chairman GRAVES. Well, and that is obviously what I am very 

interested in, too, is the process of how you select, or what goes 

into that criteria on how you select, small businesses for additional 

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6 

scrutiny. I know you cannot tell us what those triggers are or what 

those specific items are on a tax return, but my question is when 

a small business is identified for further scrutiny or a tax return 

is kicked out based on whatever trigger that is, well, what happens 

then? What is the next step in that process? 

Mr. WERFEL. Let me start with—make sure that everyone on 

the Committee understands that so much of the footprint of that 

work in terms of reviewing returns and selecting is automated and 

based on a computer application. And that is helpful in a certain 

regard because to the extent you can take some of the human element out of it, you create a better sense of objectivity about how 

things may be selected. 

And so we have this process. We call it discriminate function or 

in the halls of the IRS it is called DIF for short. And it basically 

establishes a set of scores that based on the information that is on 

a return, just what is on its face, it basically gets us a risk score 

for potential noncompliance. And the key is how do we structure 

and program the DIF for what returns may be selected? And that 

is informed based on ongoing literature and analytics around where 

we have tended to see noncompliance over time. And critical to that 

is something called the National Research Program, which is a 

broader, statistically based study of taxpayer compliance across the 

broad spectrum of the tax code. And based on those findings, which 

we get periodically, we learn, okay, this is an area that is growing 

the tax gap because we are having areas of noncompliance here 

and then we can translate that into our computer program and say 

if you see something similar—trend, pattern, behavior—then it 

should be flagged for a potential audit or exam. That does not 

mean the taxpayer necessarily did something that was noncompliant but we need some type of mechanism to make sure our resources are most effectively following where the risks may be and 

that is the process. So once that is flagged then it would go into 

our exam phase and we would initiate a process and it could be either a field exam or a correspondence exam. We have a great many 

number of more correspondence exams than field exams because 

the correspondence exams are less burdensome on the taxpayer, 

less burdensome on the individual. We found over time that by 

sending a letter to a taxpayer informing them of certain questions 

or flags we see in their tax return, that can be a very effective 

mechanism in terms of reconciling a difference that we want understood rather than going through and sending a team of IRS people 

out to a particular location. 

Chairman GRAVES. Well, sooner or later there is a subjective 

component to that. I mean, somebody has to make a decision on 

whether or not that business is going to be audited or given further 

scrutiny. Who does that? What division? 

Mr. WERFEL. So there is a process in place. You are right. It 

is a combination. We have structures in place that will enable us 

to target our resources to higher risk areas, and what we try to do 

is make sure that those structures are as objective as possible 

based on substantive analytics, based on an automated review of 

returns which is becoming much and much easier and more effective as e-file numbers increase. And so we are heading into, you 

know, we are in there but we are really in a modern era now where 

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we can get tax return information electronically. They come in and 

we can do automated reviews of them immediately. 

And where does the human element come in? It comes in in a 

couple of places. First of all, it is humans. It is IRS employees that 

are designing these protocols and programming the computer in 

terms of how it structures its risk. And then at some point when 

you determine a problem and you start to see that you have 

interacted with the taxpayer and you are starting to see how the 

information is arising between the problem we think may exist and 

the taxpayer’s reaction, then the human intervention comes in to 

make sure that we are managing this to a successful resolution. 

And to make sure the process has as much integrity as possible 

there has to be a series of reviews and checks and balances to 

make sure that the technology that we are using is fairly structured and architected and that the individuals carrying out on that 

technology are carrying out in a fair and effective way. And we 

have existing mechanisms in place to do those reviews. We have an 

inspector general as an example who, in this one case in 501(c)4, 

found a major problem and now obviously we have a lot of cleanup 

to do and fixes to do in that area, but that also, as part of a checks 

and balances, has led to us now reviewing all the various procedures that I just outlined. We are now doing special additional reviews to make sure that there is fairness in the entire lifecycle. 

Chairman GRAVES. Is there any other reason that you know of 

why a small business would be targeted other than some of the 

things you just told us? 

Mr. WERFEL. I really do not. I think if the program is working 

as designed and as intended—and I think there is always a risk 

of variation, there is always a combination of a mistake that could 

happen, and unfortunately, there have been cases within the IRS 

where someone acts inappropriately and there is underlying malfeasance or misconduct. Those are rare but they happen, and I am 

not aware of any of that happening with respect to the selection of 

a small business. But what I am suggesting is that we do not have 

any particular evidence at this time that the objective and analytical criteria that we put in place to review small businesses for potential increased scrutiny has any fundamental flaw that would 

lead one to the conclusion that there was unfair targeting. I do not 

have any evidence of that but the review that I have asked the new 

chief risk officer at IRS to carry out—and by the way, that new 

chief officer I hired away from the Government Accountability Office and he was a leader within GAO and has a lot of knowledge 

and experience in terms of understanding risk and how to review 

these types of activities—he is the one that is leading this review. 

And my commitment has been—it is to this Committee and to 

other Committees, we want to share the results of that review with 

Congress because when I go back to that audit report that we have 

referenced, one of the concerns that I have in looking backwards 

at this and seeing what happened and dissecting it is that there 

was not enough sharing of information with appropriate committees as these risks were emerging. And so I want to change that 

dynamic within the IRS so that not only are we more systemically 

evaluating our risks on an ongoing basis, but as we are learning 

information we are bringing it to the attention of the appropriate 

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8 

committees. Clearly, the review that we do within our small business and self-employment area is highly relevant to this Committee 

and I look forward to sharing the results of our reviews with you 

so you can kind of roll up your sleeves and help us make sure that 

we are doing things appropriately. 

Chairman GRAVES. Who is it that is doing that review? 

Mr. WERFEL. Well, we have, again, I have a chief risk officer 

named David Fisher. He was my first hire when I arrived at IRS 

on May 22nd. Previously, the IRS had not had a chief risk officer 

position, and based on what I was perceiving coming into the job 

as this situation, I felt it needed a chief risk officer. That individual 

is working with our various operating division heads. So in this 

case, for Small Business, he will work with Faris Fink and Ruth 

Perez, the commissioner and deputy commissioner for our Small 

Business operation. 

Chairman GRAVES. Well, we would like to continue to work 

with you on that process as it moves forward. 

Mr. WERFEL. Absolutely. 

Chairman GRAVES. Ms. Vela ́zquez. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

Commissioner Werfel, the Taxpayer Advocate recently conducted 

her own study of small business audits and that report identified 

geographies and industries where business owners are more likely 

to game the system. For instance, low compliance was correlated 

to taxpayers who have less trust in the government and belong to 

associations whose members had similar feelings. With that in 

mind, was there politically motivated targeting of small businesses 

through audits? 

Mr. WERFEL. Again, I do not believe—I certainly do not have 

any evidence of it, and I think part of the risk that created the 

problem with the IG report on 501(c)4 was that there was relevancy to the political activities that were going on and that created additional risk. We have to operate within that risk because 

that is the law. In this case, we did not manage that risk effectively and that is part of the findings. 

But to your point, to the extent—and that is why this is so important. To the extent that an individual or a small business or a 

large business has a lack of trust in the IRS, that does a lot of 

damage to our voluntary compliance tax system. So maintaining 

that trust is our bottom line, and right now we have some work 

to do but I would point out that one of the jobs I have in building 

that trust is making sure that the public, this Committee, and 

other committees understand the nature of the problem that we 

had in the tax-exempt organizations world and whether it was systemic throughout IRS. And as I have mentioned in my report, we 

do not have evidence that those types of issues with respect to the 

use of inappropriate political labels for screening is systemic 

throughout the IRS. There is no evidence of that but we are doing 

extra due diligence to look at potential other areas just to make 

sure that we are answering taxpayer questions. 

Ms. VELA ́ ZQUEZ. So let me ask you, does the IRS intend to use 

those findings as a blueprint for auditing specific types of businesses in certain locations around the country? 

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Mr. WERFEL. I do not think there is any—I would have to go 

back. I do not believe or have specific knowledge that some of the 

risk factors that would be placed into our audit selection programming would involve the type of criteria that you mentioned. I will 

go back, but I do not believe they do. I think it is more about we 

do research. We randomly select as part of a statistical study tax 

forms and we look at them and we conduct audits of them and we 

learn where there is underreporting. We learn where there is 

underreporting of income. We learn where there may be a lack of 

filing or something like that. And it could be things like confusion 

over how to fill out a schedule. There is a whole host of reasons 

why you might see a material difference between what should have 

been reported on a tax return and what is not. And we use that 

study. I do not believe we use kind of the feelings about the IRS 

in any way, shape, or form as a basis by which to audit. 

Ms. VELA ́ ZQUEZ. Thank you. 

Commissioner, the most recent Enforcement and Service Results 

report revealed that returns examined by the IRS of large firms 

has remained pretty steady over the last few years, even as more 

large corporate returns were filed. Yet, audits of small businesses 

have increased even though fewer returns were filed. Can you 

please explain why more attention is given to smaller firms rather 

than larger companies despite the fact that there was a reduction 

in the small corporate returns filed? 

Mr. WERFEL. So I think it is something that we will have to 

work with you on to understand those numbers because as I understand those numbers, and Mr. Chairman, we responded to your letter and I apologize for the delay in getting that response, but the 

statistics that we provided to this Committee in that response show 

a relatively stable audit coverage rate for small businesses over the 

last few years. We are holding essentially steady that the audit 

footprint is roughly 1.4 percent of all small business returns and 

roughly 0.2 percent. And that is true from fiscal year 2010, 2011, 

and 2012. There are slight increases or decreases in the numbers, 

but from a macro standpoint our audit footprint over small businesses has remained relatively constant. And so I want to learn 

more about the data and statistics that you are referring to that 

point to an increase. We do not have that same information. 

Ms. VELA ́ ZQUEZ. I just would like to see some reconciliation between your numbers and this report. 

Mr. WERFEL. Yes. I think we need to work through that, the 

numbers. And maybe the response that I provided to the chairman 

can be a first step in making sure that there is a consistent understanding of what the trend might be with respect to the audit coverage on small businesses. What I am reporting to you now, based 

on the best information I have available, is that that audit coverage footprint has remained relatively constant between 10, 11, 

and 12. When you get—— 

Ms. VELA ́ ZQUEZ. I guess you need to do a better job at putting 

that out there. 

Mr. WERFEL. That could be true. We may need to publicize 

that. To the extent we can, we can certainly work with—— 

Ms. VELA ́ ZQUEZ. Because otherwise you are going to be hammered constantly, and the constant comment is that the IRS goes 

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after small businesses because you need to close that gap. And that 

is what is out there. That is the perception. And time and again 

that is what people hear. 

Mr. WERFEL. I understand. 

Ms. VELA ́ ZQUEZ. As you may have already guessed, one of the 

most frequently asked questions from our nation’s employers is 

how the employer mandate will affect their business. Unfortunately, we cannot adequately address their concerns because the 

final rules have yet to be released. Can you provide any information as to when we can expect the final rule on the employer mandate so that employers can get some certainty? 

Mr. WERFEL. So the employer mandate, let me comment on 

that. 

First of all, part of the challenge and approach on the Affordable 

Care Act implementation from the IRS’s perspective, and I think 

from HHS’s perspective, is to have a back and forth with the business community in terms of the impact of this legal impact the 

ACA is going to have on them. So there are a lot of moving pieces 

with respect to our readiness for ACA implementation. We have 

systems that we need to deploy. We need to get our tax filing that 

are relevant to the ACA ready to go, and we are making good 

progress and are hitting all our milestones. 

But also, employers have to get ready as well. And so we have 

an ongoing dialogue with them. And based on that ongoing dialogue regarding what the law requires and based on that what we 

think employers are going to need to do to meet the statutory mandate, they reached back to us and said we have concerns about the 

start of this occurring in year one. And we made a judgment, or 

the Treasury Department made a judgment call that there was a 

need to have a transition period before those employer requirements would trigger. 

In terms of the regulations, there are a lot of different regulations so I want to make sure that I am answering which question— 

which regulation you are asking for, but I can get you—I can do 

it now or I can do it later—but I can get you information in terms 

of what the exact schedule is on any given ACA regulation. 

Ms. VELA ́ ZQUEZ. Thank you. 

Chairman GRAVES. Mr. Rice. 

Mr. RICE. Thank you, sir. 

Thank you, Mr. Werfel, for being here today. 

What is your history with the IRS? 

Mr. WERFEL. I am a career civil servant. I joined the government in 1997 and I am coming up on my 16 year anniversary in 

the government. My main interaction with the IRS, prior to joining 

the IRS in my current capacity, was I spent a large part of my career on financial management, and in particular, efforts to reduce 

fraud, error, and waste in the federal government. My prior position, which is a Senate-confirmed position of controller of OMB, 

that is one of the main things you do at OMB as the controller— 

you work on government-wide efforts to reduce fraud and error. So 

my main interaction with the IRS was around things like EITC improper payments and things like that. 

Mr. RICE. In your last job, you were managing a department or 

a bunch of people? 

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Mr. WERFEL. Yes. When I achieved my highest level within the 

Office of Management and Budget, let us say as of May of this 

year, I was managing somewhere between 100 and 150 people. 

Mr. RICE. And you achieved that in May of this year? 

Mr. WERFEL. Well, no, I started January of 2012, I think is 

when I started managing a larger footprint of people within OMB. 

Mr. RICE. How many people work for the IRS? 

Mr. WERFEL. Roughly 85,000. 

But I would point out, just based on your question, that one of 

the things about the position that I held within OMB is I had leadership responsibilities over the entire financial management community. I ran the day-to-day operations of the Chief Financial Officer’s Council and coordinated the activities of all CFO offices across 

government. And when you are doing things like implementing the 

Recovery Act or preparing for a potential government shutdown, 

the reality is the project management of that and the scope of what 

I was leading was large. Much larger than just—— 

Mr. RICE. You know, it seems to me—I do not know you. I have 

only met you today and I have seen you in testimony and other 

things, but you seem to be a very forthright and competent guy. 

But man, you have stepped into a big mess here. And I sure hope 

that you are a good manager because they need a good manager. 

This entity is completely out of control as far as I can tell. You 

have had your past commissioner just resign. You had two directors plead the fifth in the last month. You have had disclosures. 

You spent $50 million on conventions at some of the worst economic downturn in United States history in the last 80 years, and 

disclosures that the IRS cannot even tell us what they spent because their accounting records are not that good. And at a time 

when we are lambasting corporate executives for money they spend 

on conventions and denying their deductions and lambasting them 

for the mode of travel they take, and yet we are spending an average of $250,000 per convention at the IRS. So this entity is completely out of control as far as I can tell. 

Mr. WERFEL. Can I respond to that? 

Mr. RICE. Okay, go ahead and respond. 

Mr. WERFEL. I think one of the reflections that I have, having 

arrived at the IRS and coming up on my two month mark, is that 

it is complex. There is a mixture—— 

Mr. RICE. Well, yes, it is complex. How many employees? 

Mr. WERFEL. There is a mixture—there are very, very effective 

managers and leaders within the IRS. There are a lot of results 

that I can point to at the IRS that are extremely commendable and 

impressive that we need to build on. And I think it is worth noting—— 

Mr. RICE. My friend, when you have got three of your top people 

either resigning or pleading the Fifth to avoid criminal prosecution 

in the last month, this thing is completely out of control. And somebody, some strong manager is going to have to go in there and grab 

control or I do not know where we are headed with this thing. 

Let me ask you this. Do you think they are ready to add to their 

responsibilities significantly? Do you think they are ready to take 

on the administration of the Affordable Care Act? 

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Mr. WERFEL. I think what the IRS does is it carries out the 

laws that are passed and it more often than not—in fact, a great 

majority of the time does so effectively. When we make a mistake, 

it is very public and very significant and we take it seriously. We 

are going to be ready to implement the ACA. That I am convinced 

of based on everything I have seen in terms of the project plan, the 

schedule, the milestones we have hit. 

Mr. RICE. Let me reclaim my limited time. 

As a taxpayer and a CPA for 25 years, I can point to numerous 

examples where the IRS is absolutely unresponsive and incapable 

of handling the job that it already has. And then you add to this 

all these disclosures and confusions and scandals that have come 

out in the last three months, and I am really, really concerned 

about the IRS doing its existing job, much less taking on further 

responsibilities. Thank you very much. 

Mr. WERFEL. Okay. 

Chairman GRAVES. Ms. Hahn. 

Ms. HAHN. Thank you, Mr. Chairman. 

I just was going to follow up on the Affordable Care Act question. 

Clearly, the IRS has a huge role to play, but I even think before 

this law is rolled out and implemented, I think you have a role to 

play in reaching out to Americans, particularly small businesses. I 

hold small business workshops in my congressional district out of 

Los Angeles all the time, and I have done several specifically on 

the Affordable Care Act, what it means to small businesses, and 

when the tax issue comes up, you know, there is a lot of uncertainty, there is a lot of anxiety. I think there is a lot of misinformation out there, so I am happy to do my part to educate folks on the 

Affordable Care Act. 

But it is not just negative, right? There are some tax credits that 

are going to be very valuable to small businesses as this is rolled 

out. What are you all doing to partner with HHS, Small Business 

Administration, to help educate and possibly diffuse some of these 

misconceptions and anxiety that is out there, particularly as it relates to small businesses? I do not see you out there yet. 

Mr. WERFEL. Well, that is a good question. Certainly, let me 

distinguish between myself personally and the IRS team. The reason why I say that is because I was in Atlanta last week and I 

met—not only did I go and visit with the Wage and Investment employees in the Atlantic campus in the Atlantic region, but I also 

had the opportunity to meet with members of the public, members 

of the tax professional community, tax preparer community, university community. It was a diverse group. And one of the points 

that was raised to me, and it was raised in several different ways, 

was concerns about small business. And the reality is that in order 

for small businesses to maintain their competitive edge to be sustainable in today’s economy, they need an effective IRS that they 

can work with. And we did not get perfect scores from the small 

businesses that I met with, but they are extremely appreciative of 

the important role that we play and they are very concerned about, 

for example, our resources and the diminution of our resources and 

how that impacts their ability to do a bunch of things, not only contact someone at the IRS but also the way in which we modernize 

our forms and our files, et cetera. 

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So I have started that dialogue and I am finding it useful. And 

I think it is something useful that I can bring back to Congress, 

and in particular the Budget Committees, and explain that significant cuts to the IRS budget, certainly they impact the IRS but they 

also impact small businesses within all of your jurisdictions. 

In terms of the Small Business Division, they do a lot of outreach. I was very impressed with the number of symposiums and 

meetings, and whether they are done electronically or in-person, 

and obviously, the Affordable Care Act is on everyone’s mind right 

now because it is new and because it creates a different footprint 

of requirements. Their tax forms are going to start looking different 

in the coming years and obviously there are implications for them. 

So we are definitively committed to having an open dialogue with 

small businesses and large businesses for that matter about their 

responsibilities under the ACA. And if there are other suggestions 

you have—but I think if I walked you through the series of symposiums and forms and meetings you would find them overly impressive, but you would also see that we are somewhat constrained by 

our resources in terms of how much we can do. 

Ms. HAHN. I got it. But I do think it is important and I just 

have not seen any of these out in the Los Angeles area. 

Let me just quickly follow up on one more question. More and 

more businesses are shifting their operations onto computer and 

Internet platforms, from sales to accounting, invoices, inventory 

tracking, and other operations. So it is more important for the 

IRS’s e-platforms to work well. I know, again, sequestration, really, 

you guys have taken a big hit on that. But, and I know you face 

a lot of obstacles, but within the constraints that you have, what 

procedures are you considering to operate a more efficient tax administration system as it relates to our new emerging technologies? 

Mr. WERFEL. Well, I will tell you, I have a lot of budget meetings as the head of the IRS, and it is often about how are we going 

to apply a diminishing resource base to a growing set of responsibilities and requirements. 

Just to give you an example, there is a lot of concern out there 

from certain parts of our constituents in terms of the pace by which 

we are putting forms in an online way because it makes their life 

much easier if they can do things in a digital environment versus 

a paper environment. But we have resource constraints in terms of 

our ability to modernize those forms, and we have to make choices, 

like am I going to invest in modernizing this particular form or am 

I going to have more people at the call center so that we can improve our overall service numbers? Or am I going to keep the Taxpayer Assistance Centers open for a longer period of time so members of a local community can come in and get direct feedback on 

their tax questions? These are the types of issues that behind the 

scenes at the IRS we are grappling with. 

One part of the answer that I wanted to provide you is we try 

to make really smart decisions about these tradeoffs. So, for example, if we see a form that has usage rate of 12 percent versus a 

form that has a usage rate of 78 percent we are going to say, okay, 

well let us not digitize the 12 percent one even though there is a 

very loud community of concern if we do not, we are going to go 

with the 78 percent one. Those are the types of tradeoffs we are 

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making behind the scenes, but ultimately, taxpayers are concerned 

because they are not getting the full complement of modernization 

and service that they are hoping for. 

Ms. HAHN. Thank you. Thank you. I yield back. 

Chairman GRAVES. Mr. Collins. 

Mr. COLLINS. Thank you, Commissioner. 

I would like to maybe rock-n-roll through a little bit of this. I am 

chairing the Subcommittee on Health so I get more calls from 

small business on the Obamacare than anything else. 

But I would like to begin by just asking—if you could be quick 

and direct that would be good—do you do your own tax return? 

Mr. WERFEL. I do. 

Mr. COLLINS. Good. A lot of people do not. 

When we get to the 50 workers, there is a lot of confusion. Is it 

30 hours a week or 130 hours a month? 

Mr. WERFEL. So orient me back. You are talking about the 50 

FTE cutoff? 

Mr. COLLINS. We have 12 buckets. Each month we create a new 

bucket of whether or not, you know, how many FTEs we had in 

January, February, March, April, May. Then we add them up, divide by 12, and see if that averages 50 or more. And a lot of companies, to set the stage, are very worried about weeks. Monday 

through Wednesday are in one month; Thursday through Sunday 

are in another month; their payroll records are by week. So right 

now there are 12 buckets. Each month you have to do the calculation. And people are doing it right now because I should say the 

employer mandate has not been eliminated. The employer mandate 

is the law of this country and it goes into effect January 1. And 

if people are going to comply, they have to be complying in about 

five months. You may not enforce the penalty, but that does not 

mean the law has been delayed. Most of the companies I talked to 

want to—they do not want to be lawbreakers, so you need to be 

able to define for them how they are not lawbreakers whether or 

not you enforce the penalty. 

So for each bucket each month, is it 130 hours in the month as 

opposed—so if you worked 40 hours, 42, then 26, and 12, as long 

as it added up to less than 130? 

Mr. WERFEL. I apologize. I am not going to be able to speak 

specifically to the tech—I can certainly get you an answer to that 

question but the underlying technicalities of how you would evaluate your status of having 50 FTE versus 49 FTE in terms of whether your responsibilities trigger for the employer responsibilities, 

that is something I am going to have to get back to you on with 

more technicality. I just do not have that at my fingertips. 

Mr. COLLINS. So the acting commissioner of the IRS does not 

know the rules today which we are demanding small businesses 

adhere to and they are lined up at my office, whether it is a donut 

shop or a franchise, they are desperately wanting to comply with 

a law that takes place January 1; the fact that you are not enforcing it until a year from January 1, it is still the law, and I am certainly disappointed that you cannot answer something. That is one 

of the most fundamental basic questions I had to ask. 

But let me keep going here. 

Mr. WERFEL. Please. 

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Mr. COLLINS. If a company had a husband, a wife, and three 

kids under 26—so that is five full-time workers—is that one health 

plan they have to offer? Let us say they do not offer a health plan. 

Husband, wife, and three kids under the age of 26. Do they get penalized five times $2,000 or one family times $2,000? 

Mr. WERFEL. I mean, again, we are going to start to devolve 

into a situation where there is going to be a lot more facts that are 

going to need to be asked, and I am going to have particular subject matter expertise as the head of the IRS, the but the head of 

the IRS is not going to be the one doing those calculations and providing that legal and technical advice. So it is a question of how 

we use our resources effectively. You can go through the tax code 

in great detail and catch me in a lot of things that I am not going 

to know, especially being two months on the job, but my commitment here, what I am saying here as the acting commissioner and 

what I am very committed to you is making sure that your constituents or you, yourself, have the answers to those questions because I have professionals at the IRS who are ready, willing, and 

able to make sure that those answers are as crystal clear as possible. That is the commitment I can make as the head of IRS. 

Mr. COLLINS. What I would like to do after this is give you a 

very detailed list. 

Mr. WERFEL. Please. 

Mr. COLLINS. These are the exact questions the owners of the 

donut shops and small businesses, they are the exact questions 

they are asking because they want to comply with the law. They 

do not want to be lawbreakers. And it starts right now. I mean, 

here we are in July. This is the qualifying year, and today the IRS 

cannot tell them whether these employees qualify or not. How do 

you calculate a bonus? If I give someone a bonus, do I back that 

into so many hours because somebody has done well? W-2 wages, 

9.5 percent of W-2. What about 401(k) deductions? Where do they 

enter in? These folk want to comply with the law. We cannot get 

any answers out of your organization. So the fact that you are not 

going to enforce the penalty does not mean the law does not go into 

effect. 

And I know most people, if they are driving down the street and 

the speed limit is 45, they adhere to the speed limit. They do not 

go 100 miles an hour because somebody said the state police was 

not going to be there. So I am very concerned because the clock is 

moving. Come January 1, that starts the next year so I would like 

to follow up with these questions and hopefully in a very prompt 

manner you can get them back so I can answer the questions of 

my desperate small business owners. Thank you. 

Chairman GRAVES. Ms. Meng. 

Ms. MENG. Thank you, Mr. Chair and Mr. Werfel for being here. 

The fiscal year 2014 IRS budget request provides for an increase 

of over 7 percent for taxpayer services. I understand better taxpayer service and education leads to higher compliance rates. 

Could you explain if and how this increase in taxpayer service will 

be used to assist our small business taxpayers? 

Mr. WERFEL. Yes, certainly. 

The reality is, not to oversimplify but to provide you kind of the 

basic frame, the way we think about it, two of our core basic misSBREP-219 with DISTILLER

16 

sions are services and enforcement. And on the enforcement side, 

you know, we have a very robust analytic frame that shows that 

for every dollar that we spend on enforcement activities there is a 

very significant return on investment for that dollar. And so when 

we defund our enforcement activities, ultimately it means less receipts to the federal government and that has real deficit impact. 

In terms of our service levels, we invest in a whole variety of different ways to make sure that we are serving our taxpayers—small 

businesses in particular. Those involved, for example, our phone 

banks. One of the main ways in which people get answers to the 

questions and get peace of mind and a sense of what they need to 

do and cut down on the amount of time that they have to spend 

trying to figure out what the tax code means is calling up an IRS 

individual and getting them on the phone and working through the 

issues. And what our budgets are intended to reflect is we aim to 

meet certain levels of service metrics. We have metrics for everything, and our levels of service metrics are down. They are down 

significantly because of the inability of us to fund individuals and 

hire individuals to train them to be in our call centers to answer 

these questions. It also limits our ability to invest in web tools and 

other technologies so that a small business can say, well, I can either call or now the IRS has this new format on the web that 

makes my life a lot easier. This is great. Let me go on and access 

it. And when we defund the IRS we miss out on opportunities to 

help taxpayers navigate what I think we can all agree is a complex 

set of laws and regulations. 

And so when I am sitting here on other committees defending 

the president’s budget, I am not doing so I think without strong 

analytics that tie these increases to both return on investments for 

the taxpayers so that more receipts come into the federal government as appropriate and we have a better situation bottom line on 

our deficit and that we are financing and funding the right activities within the IRS to improve our service to small businesses, to 

families, to corporations, et cetera. And I think we could spend 

time, and I am happy to do so, in terms of how the specifics of the 

president’s 2014 budget, what that buys you in terms of improved 

service levels. But it is really about services and enforcement and 

there is a modernization element to all of it because as we improve 

services and enforcement, a lot of that is about investing in new 

technologies and make sure the IRS is along in the 21st century 

with other government entities and corporations. 

Ms. MENG. Thank you. I yield back. 

Chairman GRAVES. Mr. Bentivolio. 

Mr. BENTIVOLIO. Thank you very much, Mr. Chairman. 

Mr. Werfel—did I pronounce that correctly? 

Mr. WERFEL. You did. 

Mr. BENTIVOLIO. Thank you very much for being here today. 

You said you had 85,000 employees in the IRS, plus or minus 

roughly. 

Mr. WERFEL. There are part-time employees. There are contractors, but we usually rely on about 85,000 as a rough estimate. 

Mr. BENTIVOLIO. One of the prerequisites for becoming an IRS 

agent, if I am not mistaken, is you have to have a background in 

accounting. Is that correct? 

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Mr. WERFEL. I think it depends on what type of work you are 

going to do. 

Mr. BENTIVOLIO. But pretty much accounting. 

Mr. WERFEL. Accounting is an important part, yes. 

Mr. BENTIVOLIO. Could you tell me again what you said earlier 

today during the introduction on the sequester? 

Mr. WERFEL. Yes. 

Mr. BENTIVOLIO. How it affected the IRS? 

Mr. WERFEL. Yes. Under the Budget Control Act, between the 

sequester and something called the 0.2 percent rescission, it is 

about a little over 600 million. But just the sequester itself, $594 

million reduction in our budget authority for this year as a result 

of the sequester. 

Mr. BENTIVOLIO. And so how much is that in relation to your 

overall budget? 

Mr. WERFEL. It took our budget from 11.9 billion down to 11.2 

billion, both the sequester and the rescission. 

Mr. BENTIVOLIO. What percentage would that be? 

Mr. WERFEL. It is in and around 8 or 9 percent. 

Mr. BENTIVOLIO. Eight or 9 percent. People in my district have 

been taking cuts of 15–20 percent. In some cases, now they have 

to work part-time. That is the only job they can get because, well, 

the employer mandate, you can only have so many hours and then 

they have got to kick in a lot of money. Amazing. And you cannot 

find a 9 percent cut in the IRS budget when you are doing all these 

fancy conventions and videos? 

Mr. WERFEL. We found the cuts. We are operating on that 

lower base. It is a question of making sure we are transparent 

about what we are giving up by operating at that lower base. And 

ultimately, if the powers that be decide we should operate at that 

lower base that will happen, but I want to make sure that we are 

transparent with you and the American people about what tradeoffs are involved in operating at that lower budget level. 

Mr. BENTIVOLIO. And in regards to picking and choosing winners and losers conservative groups, so on and so forth, you said, 

if I am not mistaken, you do not believe that small businesses, or 

any business for that matter, is being singled out because of their 

political beliefs in any way, shape, or form. 

Mr. WERFEL. What I am suggesting is that other than the 

TIGTA report which shelved the 501(c)4 applications, I have no 

other evidence at my disposal. And I do not want to speculate, but 

I have no other evidence of similar type of targeting of other entities. But I have asked my chief risk officer to help coordinate a review across the IRS to look at that question so I can provide a 

more definitive answer. 

Mr. BENTIVOLIO. In that review, would you employ, let us say, 

cross-referencing somebody who donated to a political campaign 

from a FEC report to whether or not their small business was audited? 

Mr. WERFEL. Again, I would say if there are any types of flagging of a taxpayer for additional scrutiny that was based on political activity, I think that is something that we should be extremely 

concerned with. 

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Mr. BENTIVOLIO. What would raise the red flag—10 to 1? For 

every, you know, maybe 10 businesses because the employer or the 

owner of the business contributed to a campaign or was involved 

in some tea party group or something like that? 

Mr. WERFEL. A single instance of inappropriate behavior by the 

IRS should be flagged and addressed. I mean, we have situations 

in which we have employees that unfortunately at times—you 

know, it is 85,000 people, so we have TIGTA reports that demonstrate a situation of employee misconduct. TIGTA can write an 

entire report and spend a lot of resources about one instance of employee misconduct. That is important to us not only to enforce accountability for that individual and to be transparent about it, but 

also to make sure there is no other systemic behavior going on 

similar to that particular issue of misconduct. So we care about 

every incident. 

Mr. BENTIVOLIO. Okay. So you are going to check and crossreference? 

Mr. WERFEL. Well, what we are going to do—well, then you are 

getting into the feasibility about what we can do, and what we are 

going to do is a variety of different steps, including evaluating the 

architecture of our screeners, our filters, how things are flagged for 

additional scrutiny. We can evaluate that architecture. We can 

make sure that we are documenting it, updating it frequently, 

benchmarking it against other parts of the IRS and other ways of 

looking, doing checks and balances to make sure it is appropriate. 

There is a whole process that we can go through that I think reflects very strong management approaches in terms of how you 

mitigate risk and error in your operations. It is very difficult to 

eliminate risk and error, but I think high-functioning organizations 

work on very robust and sophisticated frameworks to understand 

their risks and errors and put in place compensating controls to 

mitigate them to appropriate levels. And that is what we are engaging with in the IRS right now. 

Mr. BENTIVOLIO. I see I am out of time. Thank you very much. 

Mr. WERFEL. Thank you. 

Chairman GRAVES. Mr. Barber. 

Mr. BARBER. Well, thank you, Mr. Chairman. And thanks to 

you and the ranking member for convening this important hearing. 

And thank you, acting commissioner, for being here. And I have to 

say thank you for taking on this really sweet opportunity you have 

been given. It is always good in my mind when someone is willing 

to step up in the middle of a crisis and say I am going to tackle 

it and try to get things done. I really have to say from what I have 

seen and heard today and what I have seen and heard you say in 

other hearings, I think you are very forthright, and I believe you 

are doing everything you can to restore public trust in the IRS. The 

citizens of this country have to trust their government. And what 

happened at the IRS, I think we would all agree, was egregious. 

The behavior undermined confidence and trust. It was wrong. It 

has been acknowledged that it was wrong and I believe you are 

doing what you can to restore trust and good management. And I 

appreciate the fact that you have hired someone to take a look at 

risk who will keep an eye on those things for you. 

SBREP-219 with DISTILLER

19 

I have a couple of questions because I think it has been asked 

and answered, the questions related to targeting, and I am not 

going to go over that same territory, but I have a couple of questions related to other matters that I think impact adversely or 

make things difficult for small businesses. 

For example, recent IT reports have indicated that there is a 

very high rate of IRS audits that lead to no significant increase in 

revenue. In fact, in 2011, 62 percent of S corps cases were closed 

with no recorded change in revenue, and yet these audits, as you 

can imagine, cost affected businesses a great deal of money and 

time. So what steps can you take in your position as acting commissioner to ensure that small businesses are not unnecessarily audited? I mean, there has to be a cost-benefit analysis here of the 

amount of investment we have in audits and the end result with 

62 percent cases closed without a recorded increase or change in 

revenue seems to me that there might be some overreaching here. 

So could you respond to how you might take another look at this? 

Mr. WERFEL. Yeah, absolutely. I think if you are going to evaluate your mechanisms to enforce compliance, you want to evaluate 

them across a series of different variables. One of the ones that we 

are obviously prioritizing right now is fairness and selection and I 

think that is appropriate given the IG report raised significant 

questions and it provides us and inspires us to want to look across 

the IRS and give taxpayers comfort that we are doing that review 

and sharing our findings and rooting out any potential areas of 

concern. 

But I think you also want to look at the effectiveness of your selection. And I mentioned earlier that we have ways of improving 

on a continuous basis our models for how we would select a taxpayer for audit. In a limited resource environment—this is very intuitive—in a limited resource environment, when you are trying to 

do your best and spend the taxpayer dollars as wisely as possible, 

you are going to try to target those dollars in a way that has the 

highest impact in terms of driving greater compliance. And if we 

see issues, whether it is identified by the inspector general, GAO, 

or internally we discover it, audits that we are doing are not resulting in any change or any additional revenue collected. And that is 

relevant data in terms of updating how you are going to do your 

selection going forward. So it is a continuous model of trying to 

make sure that we are as focused as we can on the areas of noncompliance because one of the goals here is to narrow the tax gap 

that we have because I think small businesses, they certainly do 

not want to be audited. They certainly do not want to be audited 

excessively. I completely understand that and we support that, but 

I think they also want to make sure that everyone is playing on 

the same fair ground and that if they are complying with the tax 

laws, which a vast, vast majority of them are voluntarily without 

ever having gotten audited, they want to make sure that the IRS 

is doing our part to make sure the other small businesses are being 

compliant as well on a voluntary basis. 

And so I think there is mutual interest in making sure that our 

models for how we select taxpayers for audit are effective, sophisticated, fair. And so I think we are on the same page in terms of improving not just the fairness but also the effectiveness of them. And 

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those TIGTA reports are relevant as we go back and relook at 

those models. 

Mr. BARBER. Just a quick follow-up on that. You talked about 

closing the tax gap, and I agree we need to do that. So the than 

auditing small businesses, which may produce limited results, what 

other measures can the IRS take to close the tax gap? 

Mr. WERFEL. Well, I mean, it is in large measure around a combination of enforcement activities. What we try to demonstrate 

each year as we are planning and showing Congress our budget 

and the American people our budget, you know, these are the types 

of enforcement activities that we would engage in. We can do 

things like increase our efforts on identity theft. We can increase 

our computer sophistication when a return comes in in terms of 

identifying a return that might have fraud in it or might have an 

understatement of their income leading to a higher refund than 

they were otherwise eligible for. 

But remember earlier when I was answering a particular question before I said there are two arms to this. There is enforcement 

and services. And services are important as well because effectively 

serving our taxpayers does two key things. It helps them navigate 

the complex tax code more effectively and allows them to be compliant, but it also builds trust to the sense that they are having a 

positive experience, they are getting the answers they need from 

the IRS, we are helping them navigate. It inspires that type of voluntary compliance framework to work more effectively. 

So again, when we talk about our budget and the investments 

that we make, my goal is to just make sure that there is a substantive discussion around the tradeoffs that are involved at our 

different budget levels. I understand we are in a tight budget environment, and I understand that small businesses around the country are tightening their belts. We have to tighten ours. There are 

ways in which we are. It is a public dialogue about those tradeoffs 

involved in our budget. 

Mr. BARBER. Thank you. And thank you, Mr. Chairman, for the 

additional time. 

Chairman GRAVES. Mr. Tipton. 

Mr. TIPTON. Thank you, Mr. Chairman. Thank you, Mr. Werfel, 

for taking the time to be here. 

You had commented in your oral testimony about being committed to good service, having knowledge of struggling taxpayers, 

and trying to be able to develop policies to be able to help them. 

You certainly understand that the IRS is not viewed as warm and 

cuddly and caring. You know, it gets back to actually paying these 

taxes. 

Mr. WERFEL. I understand that. I definitely understand that. 

Mr. TIPTON. You know, but you followed that up with needing 

adequate resources to be able to help those taxpayers. We actually 

calculated it out. Even with sequestration, it was 5.8 percent reduction. Can you assure this Committee, can you assure this Congress, 

and most importantly, can you assure the American people that 

you are not going to have any more Star War parodies; that you 

are not going to have any more line dances? And you had noted 

that you had gone through in part of your previous life in terms 

of looking out for waste, fraud, and abuse in government, what is 

SBREP-219 with DISTILLER

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being done to make sure that we really are spending those taxpayer dollars correctly? 

Mr. WERFEL. I am glad you asked that question. I have a couple of responses. 

First, when I arrived at the IRS, what I found is that while there 

are incidences out there—things like videos and the expensive conference in Anaheim—and videos are okay but we want to make 

sure that the videos are for the appropriate purpose and at the appropriate level of funding for those videos because we use videos 

to train our employees. It helps us cut down on travel. There can 

be a lot of value to videos. But we have to eliminate our extraneous 

expenditures. And what I found was a lot of procedures were put 

in place before I arrived. The IG report that came out on the Anaheim conference, the videos that are garnering some attention were 

made in some cases 2010, in some cases 2011. I am not excusing 

them, I am just saying what has the IRS done since then and 

where are we today? In July of 2013, what does our footprint look 

like? And we do not do conferences like we did in Anaheim anymore. That is a vestige of a past. We have new controls in place 

around video costs and content. Again, not excusing the prior activities, and there may be more that come out that occurred in 

2010, 2011 before these procedures were put in place. But what I 

can assure you is that strong, robust procedures have been put in 

place to constrain both conference spending and any spending of 

extraneous costs on videos, I cannot say we are at zero risk but we 

are at a significantly lower risk than we were previously. And that 

is part of the trust building with the American people, is demonstrating how we are cutting our costs in those areas. There are 

very impressive results in this area. 

Mr. TIPTON. But the bottom line, I guess, and I know you can 

understand this, what the American people’s frustration, my frustration is, when we look at the IRS, just saying, ‘‘Hey, we are going 

to correct the problem. We are sorry. It will not happen again,’’ and 

they move on down the road, do you apply those same standards 

to American taxpayers? 

Mr. WERFEL. Again, as I said, I am not excusing the behavior. 

I am just providing an explanation of what steps are taken when 

a problem occurs. There are varying different types of mistakes and 

we can talk about mistakes from the IG report that led to a change 

in leadership at five positions within the IRS from the commissioner down to the lowest senior executive within that managerial 

chain. They are all—— 

Mr. TIPTON. Maybe we ought to move maybe to the root of the 

problem really because when we look at it you noted with Mr. Collins you do your own taxes. Do you do TurboTax or do you do the 

long form? 

Mr. WERFEL. I do not want to give any favorite to anybody. I 

use a provider. I use a software. 

Mr. TIPTON. You use a provider for that. 

Do you know how many small businesses fill out their own tax 

returns and send them in? Is there any kind of data on that? 

Mr. WERFEL. I think small businesses are roughly about 80 percent professional preparers. 

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Mr. TIPTON. Eighty percent. How many pages are there in the 

tax code? 

Mr. WERFEL. Oh, gosh. 

Mr. TIPTON. Seventy thousand plus? Seventy thousand plus? 

Mr. WERFEL. Something like that. It is a very high number. 

Mr. TIPTON. If I call up the IRS today wanting to be able to pay 

my taxes, to be able to do it lawfully, will whoever answers that 

phone guarantee me that their answer is correct? 

Mr. WERFEL. That is not the way the process works. 

Mr. TIPTON. That is not the way the process works when we 

sign the tax return. So the IRS cannot figure it out. The IRS cannot guarantee us that they understand the policies that are in 

place, and yet we are trying to tell the American people you must 

obey the law. Does this not really call for legitimate tax reform to 

get a flatter, fairer, and simpler tax code and to reduce the number 

of employees that you would need to manage just by making it sensible for the American people to work with? 

Mr. WERFEL. I will answer that question. I have been asked 

that question numerous times. It is a very important and good 

question. Two things. One, as a general principle, the IRS administers whatever law Congress passes, and we rely on the Treasury 

Department to articulate—— 

Mr. TIPTON. That is not completely true though, is it, simply 

from the standpoint? Do you not issue rules and regulations that 

are not approved by Congress? It is your assumption that it meets 

the legislative directive? 

Mr. WERFEL. Right. 

Mr. TIPTON. But you do not come back and ask us if it meets 

the legislative directive. 

Mr. WERFEL. We get feedback if there is a concern about it but 

the reality is—I want to answer your original question. 

Mr. TIPTON. I will tell you, as a member of Congress, a lot of 

the frustration really is we give the feedback and it falls on deaf 

ears. It is kind of the assumption we are going to be here longer 

than you are and we are going to do it our own way. And that is 

the real frustration I think with a lot of the bureaucracies here in 

D.C. 

Mr. WERFEL. If that is the message you are getting that is unfortunate. We want to partner with Congress. These are not easy 

issues. As you mentioned, the tax code is complex. Our responsibility at the IRS is to do what we can to carry out those complexities in the most efficient and effective mechanism. Very often we 

are successful. There are situations in which we are not. Those situations are normally publicized and raised as significant concerns 

and it is all valid. 

I think we have the same objective. Our collective objective is to 

provide a fair and efficient and effective tax system for the American people. From IRS’s standpoint, we do deal with a lot of complexities. We want to partner with both the public and Congress 

and others in terms of how we can continuously improve. We have 

problems. I understand that. Whether it is the conferences or the 

IG report, what I am here to say is not to excuse them. I am here 

to provide transparency on the nature of the problem, what we are 

doing to try to fix it, how we are holding people accountable—we 

SBREP-219 with DISTILLER

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can certainly talk about that—how we are fixing it, and what are 

our future barriers right now. What barriers do we face right now 

to that goal of more effective tax administration? I just want to 

have a dialogue about that. And we are working on solutions at the 

IRS right now and we want to work with you on those solutions. 

Mr. TIPTON. Thank you, Mr. Chairman. Far past time. 

Chairman GRAVES. Ms. Chu. 

Ms. CHU. Thank you, Mr. Chair. 

We know that small firms, especially those that are already complying with the tax laws, fear an audit as they are expensive and 

time-consuming, and I know that the average amount of time an 

employee spends on a correspondence audit in 2008 was 1.6 hours 

while for a field exam was 46.4 hours. So that is quite a difference. 

Does the IRS estimate the audit costs for taxpayers? And how 

will you ensure that increased audits do not unnecessarily burden 

compliance small businesses? 

Mr. WERFEL. Well, we certainly look at—we certainly track the 

duration of an audit. I do not know whether we have an information mechanism that can give us detailed costs on an audit. I mean, 

we would want to be sensitive to the community in terms of not 

asking them for information that would increase their burden in 

terms of having them tracking their costs for complying with a particular audit. But I think the goal here is to achieve the right footprint. What is the optimal? The audit footprint that we maintain 

should have the right mixture of both correspondence and field. It 

should have the right mixture because the audits serve multiple 

purposes; right? They establish a base by which a voluntary compliance system is going to work more effectively because they deter 

bad behavior and incentivize good behavior. But they also, if they 

are driven effectively by the right risk algorithms and the right 

analytics, can really uncover a lot of money. And I think our revenue that we brought in from the IRS based on our enforcement 

activities exceeded $50 billion last year. So there are multiple benefits there and I think the goal is to evaluate the various policy tensions that are involved in structuring those and making sure that 

we are making the appropriate adjustments, whether it is to Congressman Barber’s question of making sure that if we are having 

fruitless audits, I mean, the shame of it would be if we did not 

learn from those fruitless audits and incorporate into our process 

going forward. And so that is the goal. These are some of the guiding principles that the IRS has. And again, there are a lot of imperfections but the objectives I think are the right objectives. And in 

many cases we are successful. 

Ms. CHU. Well, one of those big decisions for a small business 

is the classification of workers and it continues to be a daunting 

decision for many small employers as to whether to work as an employee or an independent contractor. As part of the Fresh Start Initiative, which helps taxpayers and businesses address their tax responsibilities, the Voluntary Classification Settlement Program was 

introduced. Can you describe this program and also tell us how 

successful this settlement program has been and what about the 

Fresh Start Initiative as a whole? 

Mr. WERFEL. That is a good question. One of the messages we 

have is about the IRS looking to work with taxpayers in a way to 

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help them navigate our system. But it is not just complying with 

every letter of the law. It is, are there changes that we can make 

and adjustments we can make to provide increased flexibility. So 

if something like they owe a debt to us and they are having trouble 

making up that debt, we have programs in place, like you mention, 

like the Fresh Start Initiative that can help kind of relevel—understand the financial hardships that a particular taxpayer might be 

having right now; adjusting, whether it is the payment schedule or 

the approach we take with that taxpayer. It is one of those 

things—and there is also, as you mention, voluntary reports that 

taxpayers can come in and provide us if they think they have a 

concern with their taxes. We open up our doors for them to talk 

about it. We create, to the best of our ability, a nonthreatening environment for them to come in and go over those issues. And we 

work with them collaboratively on a path forward that makes 

sense, that gives them peace of mind but also brings them closer 

into compliance. It is that type of work that I think is very critical. 

It demonstrates that the IRS is not in a place where if it is not— 

every I is not dotted and T is crossed exactly the way it is supposed 

to be that some kind of hammer comes down. It is demonstrating 

that there are avenues that you can take with the IRS to work 

through issues. And in particular, if there is an entity or an individual with financial hardship, we have programs in place that 

have proven successful over the years in providing whether it is a 

safe harbor or a new approach for taxpayers. They are very successful. They are very popular. I am concerned about their sustainability based on budget. It is another one of those areas where I 

would like to present a potential tradeoff depending on our budget 

levels. But I think you are raising an important point about our 

programs and our ability to work with taxpayers in this way. 

Ms. CHU. Thank you. I yield back. 

Chairman GRAVES. Mr. Schweikert. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

Mr. Commissioner, in some of the discussion you have had here 

today you have talked about noncompliance and triggers, what sets 

off inquiries. I would like to do something a little bit different in 

some of the questions. Let us paint a scenario and then see if you 

can help me work through it. 

I am a small business and all of a sudden I have a spike in business or a crash in my business or whatever it may be, so I have 

more money flowing into my bank accounts. Does the IRS in their 

data collection see that? 

Mr. WERFEL. Likely, no. I mean, we do not access private bank 

accounts. There could be situations—we have third-party reports, 

like a 1099. So we might see a change in their interest income. 

Mr. SCHWEIKERT. So you might see depending on the model of 

the business because most of what we would call small businesses 

are going to be pass-through type entities. So there might be K1s 

or other types of partnerships or interlocking—— 

Mr. WERFEL. The nature of the changing circumstance of a particular entity depends on existing mechanisms. So, for example, we 

get 1099 forms that report to us, you know, things like interest income and other things. So we might have insight, and that is all 

about trying to use third-party data sources. 

SBREP-219 with DISTILLER

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Mr. SCHWEIKERT. And you are heading already where I wish 

to go. I am trying to understand what data accumulation the IRS 

collects to decide that I have a noncompliance or I have something 

here I need to investigate or I have someone here I need to send 

a letter of inquiry or someone here I need to audit. How many layers of information collection are there out there? Are you collecting 

from private sources? Are you collecting through regulatory 

sources? How does the triggering mechanisms end up working to 

now saying this business, something different is happening. Let us 

go investigate them. 

Mr. WERFEL. I want to keep it general because, again, there are 

certain parts of our business operations that are confidential. 

Mr. SCHWEIKERT. And that is a different discussion whether 

they should be confidential in the government. 

Mr. WERFEL. But the answer to your question, again, it is one 

that might not be able to be effectively answered in two minutes. 

It varies. We might, you know, someone might come in with information, a tip, or something like that that we would use. That could 

be. But a large footprint of what happens is that the taxpayer will 

file their tax returns and then we get information after the filing 

is done through third-party sources. 

Mr. SCHWEIKERT. Walk me through that information because 

you spoke earlier that much of what happens is automated in the 

background. That sort of indemnifies bad acts from individuals. I 

am now trying to understand what—not necessarily bad acts but 

how much data accumulation is happening. 

Mr. WERFEL. I will do my best. 

Mr. SCHWEIKERT. And it is a fair question because we all live 

in the databasing of America, but for you, does that databasing 

trigger when my constituents get audited? 

Mr. WERFEL. Let me answer to the best of my ability and then 

I might want to bring in reinforcements to help me answer. 

Mr. SCHWEIKERT. Okay. 

Mr. WERFEL. And I am going to make the assumption that the 

tax return is filed electronically. But even if it is not it just takes 

a little bit more time as we process a paper return. But there is 

an upfront review of the tax return that is done—— 

Mr. SCHWEIKERT. It is automated? 

Mr. WERFEL. Most of it is automated. It picks up on math error. 

It picks up on different indicators of potential fraud or error. So 

that happens. 

Mr. SCHWEIKERT. And then it is bounced against—— 

Mr. WERFEL. Well, then what happens is it is flagged for potential—we might not process the return immediately. If we think 

there is identity theft we might hold it before we just all of a sudden process the refund. Different events would occur. That is based 

on a data entry. I am just trying to give you the difference because 

there are two points. There is data entry and then there is later. 

Mr. SCHWEIKERT. In my last 60 seconds, and I know this is 

really complicated, let us go from the other side. You have thirdparty vendors providing you data that all of a sudden this business 

has a much greater velocity of deposits, withdrawals, deposits, 

withdrawals. 

SBREP-219 with DISTILLER

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Mr. WERFEL. Yes, we can get that. That information does come 

in. 

Mr. SCHWEIKERT. So it is not about what they filed; it is we 

are picking up something else over here. 

Mr. WERFEL. Well, we will run a comparison. 

Mr. SCHWEIKERT. But does this set off a trigger to go look at 

their filing? 

Mr. WERFEL. It could. In other words, what happens is once the 

filing is done and we get all the 1099 or the third-party data in, 

we will basically run kind of an aggregate comparison. And where 

we see material anomalies between what was reported on the tax 

return versus this other information that maybe dictates that it 

was a materially higher revenue amount for the taxpayer than was 

put on their tax return, that could trigger, for example, a correspondence. They might get a letter and they might say we want 

you to look at this. 

Mr. SCHWEIKERT. Just because I am thinking about it, as we 

go through certain business cycles, you know, sometimes a business 

gets a contract they may not be making a lot of profit on it but that 

contract may have a lot of in and out, in and out through their 

bank accounts, through their vendors, through other mechanics. 

Mr. WERFEL. Yes. 

Mr. SCHWEIKERT. Does that trigger? 

Mr. WERFEL. I do not know. It would depend on the circumstances. In a very general matter, we would look for a material 

difference between what a 1099 is telling us about income going 

into a particular entity and what they reported on their tax form. 

If we see a material difference we will flag it and we will ask the 

taxpayer about it, whether it is through a field exam or a correspondence exam, it will depend on the situation. 

Mr. SCHWEIKERT. Thank you, Mr. Commissioner. Thank you 

for your patience, Mr. Chairman. 

Chairman GRAVES. We have a series of three votes. Would you 

be able to stay? 

Mr. WERFEL. Yes. Whatever you need. 

Chairman GRAVES. Okay. We will recess briefly and come right 

back and start with Mr. Payne when we get back. And please get 

back as quickly as possible. We are recessed. 

[Recess] 

Chairman GRAVES. We will go ahead and bring the hearing 

back to order, and we will start off with Mr. Luetkemeyer. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Mr. Werfel, on May 22nd we had Secretary Lew in front of us 

in the Financial Services Committee, and at that time I brought up 

to him an issue that was of concern to me with regards to the activities of the department within your agency that oversaw the— 

well, that Ms. Lerner was in charge of and oversaw the applications for tax exempt organizations. And in discussing those with 

him he said he was going to meet with you that following afternoon 

with your new job and give you directions on what he wanted to 

do and the situation you were in. One of the things I brought up 

to him at that meeting was that not only was it disclosed at that 

point that the IRS was unfairly targeting conservative groups—tax 

exempt conservative groups—but I wanted to make the point out 

SBREP-219 with DISTILLER

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to him that they were not enforcing the law against some liberal 

organizations. There was an instance that was brought up to me 

by a group within my state of some activities with regards to a particular group, and I spent three years working with Ms. Lerner to 

try and get an investigation of that group. Myself and the other 

group they are working with submitted over 3,000 documents to 

her and never received a single remark from her with regards to 

how the investigation was going, whether anything was done. And 

so Secretary Lew pledged to me that day that he would talk to you 

about that and have that be investigated and that be in the report, 

the 30-day report that you submitted. I did not see it in the report. 

Did he ask you to review that situation? 

Mr. WERFEL. I think one of the first things I would respond 

with is I have some restrictions in terms of what I can and cannot 

talk about with respect to an individual taxpayer because it seems 

that your question orients around an individual taxpayer. And 

delving into the specifics of the situation with that taxpayer would 

require a 6103 waiver or something like that. So I apologize. I do 

not know the answer to your question unless I can get more specifics. 

Mr. LUETKEMEYER. My question is did he ask you to investigate that situation? 

Mr. WERFEL. He asked me—maybe this is a good way of answering it—he asked me to broadly review a variety of different activities within the IRS to ensure fair enforcement. With respect to 

a particular activity, I do not have a recollection of him raising a 

particular taxpayer or a particular issue, but I have to go back and 

consult. 

Mr. LUETKEMEYER. Well, one of the concerns I have is that 

your report, the reports that you did over a 30-day period, does not 

indicate any sort of investigation or oversight or even a mention of 

looking at the fact that there may have been a lack of enforcement 

by the IRS with regards to other organizations. It would lead me 

to believe that there was not a follow-up or he did not ask the 

question. 

Mr. WERFEL. Let me respond in a couple of different ways. 

First of all, the 30-day report is a point in time. More work is needed and there is more evaluation that is underway. So to the extent 

that there is some topic or area that is not as robustly covered in 

the report that should be based on input from this Committee and 

others, that is something long overdue. That report was intended 

to set up a dialogue. 

Secondly, I would have to reengage with Mr. Lew to kind of remind ourselves of conversations we had two months ago. But as a 

general matter, because the issue involves a specific taxpayer, I 

may not be able to cover it in a public report. It may be something 

that I need to deal with, and unless you have a waiver from that 

taxpayer, it may be something that I cannot even articulate in specifics with you just based on what the law is, not because I do not 

want to help. 

Mr. LUETKEMEYER. Okay. Will you pledge to me today to investigate those folks if I send you a request? 

Mr. WERFEL. I will pledge to certainly look into it. Look into the 

matter. 

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Mr. LUETKEMEYER. And respond in a timely fashion? 

Mr. WERFEL. I will respond to the extent I can permitted by 

law. Yes. 

Mr. LUETKEMEYER. But again, what my suggestion may be is 

that it may be appropriate for the taxpayer to provide a waiver so 

that I can talk directly about the situation with a particular taxpayer to you, which is done. 

Mr. WERFEL. Well, they are not going to do that because they 

are of a different political ilk and so they are not going to be willing to do that. That is the problem is that they are being very punitive in the way they go about their activities. They are in direct 

violation of something you said a while ago to a degree in which 

they are engaged in political activities that are absolutely in violation of their 501(c)3, I believe. 

Mr. WERFEL. Let me make one point since you raised the question, if I could, and that is one of the things that was in my 30- 

day report but as circumstances evolve it merits more discussion 

and attention. And I think this has been publicly reported but the 

facts in this case as we review more documents and talk to more 

people is that there is a diversity across the political spectrum of 

entities that were, for example, included on these lookout lists that 

were screened for additional scrutiny. And the reason why I am 

raising it is just kind of in response to the question of to the extent 

there was activity by the IRS that leaned in one way, aggressive 

scrutiny towards one end of the political spectrum and another way 

less aggressive scrutiny, as the facts and circumstances emerge in 

this case, I just want to make sure it is clear that there is a diversity across the political spectrum of entities that had issues that 

are covered by that TIGTA repot. 

Mr. LUETKEMEYER. Well, the point I am trying to make, Mr. 

Werfel, is this. Ms. Lerner had a political bent. She obviously was 

trying to be punitive in the way she looked at the conservative 

groups. I am saying that there is another side to this that nobody 

has thought about, nobody has investigated, nobody has said anything about. And that is a fact that she did not enforce the law on 

the other side of the political spectrum and let them get away with 

stuff that did not provide fair treatment to all parties who were involved in this 501(c)3 exemption. That is the point I am trying to 

make is there needs to be a realization and acknowledgment to the 

fact that she, as a member of this organization, refused to investigate it and that has to be investigated. 

Mr. WERFEL. I am not aware of evidence that would support 

your conclusion. 

Mr. LUETKEMEYER. It is in the file. The IRS has got it. Over 

3,000 pages of documents. If you want me to send it again, I will 

be glad to do it. 

Mr. WERFEL. I am telling you I am not aware of the evidence 

that would support it. 

Mr. LUETKEMEYER. Okay. Are you willing to look into it then? 

Mr. WERFEL. Yes. I mean, one of my main objectives is to look 

into this entire situation. 

Mr. LUETKEMEYER. Okay. I am way over time. I will yield 

back but I think there is an important question that also needs to 

SBREP-219 with DISTILLER

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be asked today by somebody. Do you share your databases with 

anybody? 

Mr. WERFEL. We, under the law, we have certain legal responsibilities to share our data, for example, for the administration of 

tax purposes, yes, we share our data but we do so in a way that 

has an enormous number of safeguards. 

Mr. LUETKEMEYER. Could you share a list with the Committee 

of all the agencies, all the departments across government that you 

share your list with? And if anybody on the private sector, any 

third-parties get access to that information? 

Mr. WERFEL. I can. I can give you a head start on your answer, 

too, which is if you go to section 6103 there is a particular set of 

exceptions that dictate when the IRS can share information outside 

the IRS. 

Mr. LUETKEMEYER. Will you be willing, Mr. Werfel, to give us 

a list? 

Mr. WERFEL. Yes. 

Mr. LUETKEMEYER. Of every agency in state government and 

all the third-party contractors that collect data that you have access to and that you have sharing agreements with? 

Mr. WERFEL. We will do our best to provide you a comprehensive list. 

Mr. LUETKEMEYER. Okay. Thank you very much. 

Chairman GRAVES. Mr. Huelskamp. 

Mr. HUELSKAMP. Thank you, Mr. Chairman. I appreciate, Mr. 

Commissioner, for you being here today. I would like to cover a 

couple things that we have briefly discuss previously and want to 

know under what specific statutory authority was the employer 

mandate penalty delayed? 

Mr. WERFEL. I do not have the details on the legal analysis. 

The role of the IRS in that decision was to be consulted on the 

operational implications of this transitional relief period that the 

Treasury Department announced early in July. 

Mr. HUELSKAMP. And did the White House visit with you directly about that period? 

Mr. WERFEL. No. 

Mr. HUELSKAMP. And so how did you find out about it? 

Mr. WERFEL. It was a combination of two factors. One, the first 

step was that Treasury engaged IRS staff and consulted them on 

the, again, the administrative implications of a transitional relief 

period. And then I, in a subsequent meeting with the Treasury Department, learned that they were considering it. And again, the 

IRS footprint in this is what are the administrative implications? 

Mr. HUELSKAMP. In the follow up to that, in the proposal you 

talk about voluntarily complying. Obviously, the penalty has been 

suspended. The 4 in 2014 has been changed to 2015 but will there 

be any implications particularly for small businesses if they do not 

voluntarily comply? 

Mr. WERFEL. No. Again, the definition of small business is one 

that we have to make sure that we are clear on because if you have 

more than 50 FTE, then you have these employer reporting requirements and particular responsibilities. If you have less than 50 

FTE, the situation for you as an employer is very different. But 

there will be no penalty. We encourage voluntary reporting but no 

SBREP-219 with DISTILLER

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penalty for not reporting and no responsibility payment in the first 

year. 

Mr. HUELSKAMP. Will there be any implications in terms of 

your algorithms in terms of selection for audit if folks do not voluntarily comply? You can guarantee that will not be part of that. 

Mr. WERFEL. No, I will talk to the team about it and make sure 

but there is no intent to do that at all. 

Mr. HUELSKAMP. Well, speaking of determining who receives 

an audit, a few weeks ago it was noted that approximately 24,000 

refunds were sent to one address in Atlanta. 

Mr. WERFEL. Yes, I am aware of that situation. 

Mr. HUELSKAMP. How exactly does your algorithm ignore addresses? That does not show up? You do not compare addresses? 

That is not in the algorithm to determine whether or not we have 

some fraud going on? 

Mr. WERFEL. That is a very important question. And what happened there, I think there was illegally obtained taxpayer identification numbers and the way in which this individual or entity 

sought to defraud the government, they were able to orient those 

in a way that we did not pick up on it as quickly as we should 

have. We are learning from that experience but I agree. 

Mr. HUELSKAMP. Do you know how they missed it? I mean, 

this is not just—that is the one big instance. There are 154 different addresses that received more than 1,000 refunds to those addresses. So you do not take the address into account at all in the 

algorithm in determining who to audit? 

Mr. WERFEL. I think we do but I have to get back to you to answer the question why this particular fraud scheme alluded us. 

Mr. HUELSKAMP. And these folks that put this algorithm together or are investigating that, are they the same folk that will 

put together the Obamacare reporting system that will be implemented obviously for individuals beginning January 1st? 

Mr. WERFEL. Not exactly. But there will be some overlap between the work that is done in terms of our enforcement of ACA 

and those that would look at individuals. It depends on the nature 

of the ACA enforcement, but there will be some overlap. Yes. Because the way it works in the IRS is we set up by wage and investment deals with individuals, small businesses deal with small businesses, so I would have to go back and understand exactly how 

that Atlanta-based scheme played out and who was involved. But 

there could be some overlap. Yes. 

Mr. HUELSKAMP. Well, again, it was not just Atlanta. There 

were 153 other addresses. 

Mr. WERFEL. Yes. No, I understand. 

Mr. HUELSKAMP. And I want to make sure that we are clear 

on the IG report. 

I have very specific, a couple regulations that are very detrimental to small businesses. One is regulation by the IRS that will 

require businesses with non-audited financial statements to evaluate each and every expense over $100 to determine whether that 

item must be depreciated; that will kick in on January 1st. And the 

second one would require that any small business spending more 

than $100 to repair any buildings, unit, or property subject, every 

single expenditure over $100 up to nine different tests to determine 

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if the amount spent is an improvement. Now, that is a mouthful. 

I mean, that is your mouthful, not mine. 

But as an absolutely ridiculous example, if a small business 

owner, for example, would replace a toilet in a building at a cost 

of $400 under this guidance, they will be forced to depreciate that 

toilet over 39 years for a net deduction of $10 every year. Now, 

there are a couple of very specific regulations coming on January 

1st impacting small businesses. Can you explain the rationale behind these? 

Mr. WERFEL. No. What you described sounds nonsensical. I 

would like to look into it. 

Mr. HUELSKAMP. Okay. Can you provide a written response to 

the Committee? 

Mr. WERFEL. Yes. 

Mr. HUELSKAMP. Again, I believe one of these, perhaps both of 

them, were delayed for a year. And again, there is no specific, I do 

not believe, statutory authority, which is much different than the 

Obamacare penalty delay. But this is coming January 1st. I am 

hearing this from small businesses, and it is an absolute paperwork nightmare. I would appreciate very quick response. 

Mr. WERFEL. I appreciate you raising the question. 

Mr. HUELSKAMP. Because they are preparing for that. We are 

already, obviously, into the month of July and they have to start 

gathering this information to prepare for next January 1st. 

Mr. WERFEL. I appreciate you raising the concern. 

Mr. HUELSKAMP. I yield back, Mr. Chairman. Thank you. 

Chairman GRAVES. Mr. Mulvaney. 

Mr. MULVANEY. Thank you. 

Mr. Werfel, I am going to ask you a couple of questions about the 

revelations that came out of Senator Grassley’s office in the last 

couple of days. 

Mr. WERFEL. Yes. 

Mr. MULVANEY. Do you know the donors or candidates whose 

information was supposedly improperly scrutinized? 

Mr. WERFEL. I talked to my staff and I think my staff spoke 

to the inspector general shop, so we were able to learn that information. 

Mr. MULVANEY. Do you intend to tell those folk that their information was inappropriate? 

Mr. WERFEL. I think that is consistent with the appropriate 

process. 

Mr. MULVANEY. Have you all figured out yet, I think there is 

a report today saying that there were several instances where the 

disclosure may have been inadvertent, one where it was intentional 

and that that was conducted by a person who was not a member 

of your agency? 

Mr. WERFEL. We have been able to confirm that the one willful, 

unauthorized disclosure did not occur within the IRS. 

Mr. MULVANEY. How is it possible that somebody who is not 

within the IRS had access to that information to begin with? 

Mr. WERFEL. It is a good question. As I mentioned earlier, there 

are legal frameworks, programs, and policies in place in which the 

IRS will share taxpayer information with other federal agencies 

and with state agencies. In particular, for example, for the impleSBREP-219 with DISTILLER

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mentation of Medicaid. These are the way the programs work. We 

set up safeguards to ensure that those informations are not 

breached. 

Mr. MULVANEY. But you do not think it was a hacker? You 

think it was somebody who was—without telling me who it was because I do not want to know who it was because that is an ongoing 

investigation I take it. 

Mr. WERFEL. That is right. 

Mr. MULVANEY. It is somebody that was properly given the information; they improperly shared it beyond that? 

Mr. WERFEL. It could be one of a number of things but it may 

be that you have, let us say, hypothetically an individual in a state 

revenue office who did not have a need to know the information but 

accessed it anyway. Something like that. 

Mr. MULVANEY. Gotcha. 

Mr. WERFEL. Is what we are talking about. 

Mr. MULVANEY. In the cases where it was inadvertently scrutinized, do you know which members of your agency participated in 

that? 

Mr. WERFEL. I do not have the full details yet, but in any case 

in which the IG reports that situation to us, we look into it and 

we make sure that we are taking the appropriate procedures to 

make sure that such an inadvertent disclosure does not happen 

again. 

Mr. MULVANEY. Switch with me for a second to your Internet 

e-mail policy. According to the 2009 IRS employee handbook, your 

agency says the Fourth Amendment does not protect e-mails because Internet users do not have ‘‘a reasonable expectation of privacy in such communications.’’ Especially in light of the fact that 

your agency is going to be overseeing or implementing large portions of Obamacare, is it still the position of the IRS that it has 

the right to search, collect, and review Internet or e-mail data 

without a search warrant? 

Mr. WERFEL. I think there is a Supreme Court decision on this. 

Mr. MULVANEY. It is a Sixth Circuit case. It is not a Supreme 

Court case. 

I am not exactly sure. 

Mr. MULVANEY. Would you mind letting us know in writing as 

to what the policy is? 

Mr. WERFEL. I will. I will. 

Mr. MULVANEY. Thank you very much. 

If a small business owner who also happens to be either a participant in a conservative group or a donor to a conservative group 

or a donor to a conservative candidate has been audited in the last 

say 48 months and they are naturally suspicious as to whether or 

not they have been targeted improperly, what is the appropriate 

steps for them to take to answer that question to their satisfaction? 

Mr. WERFEL. I would offer two, and several are taking these 

steps. 

One, if they believe it was inappropriate, they can refer the matter to the Treasury Inspector General for Tax Administration. And 

I believe TIGTA is receiving those and doing the appropriate investigations. Or they can go to the National Taxpayer Advocate and 

raise the issue. Now, the National Taxpayer Advocate is more 

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aligned to—‘‘not that I necessarily feel I was treated inappropriately’’ but ‘‘I am having trouble with the bureaucracy.’’ So it really 

depends on the circumstance. But if the taxpayer believes that 

there was really wrongful conduct going on, they should refer the 

matter to the IG. If I find such an issue, I certainly would refer 

it to the IG and have them do the appropriate investigation. 

Mr. MULVANEY. So if a large donor to Mr. Huelskamp, for example, was audited for the first time in his history and is concerned that he has been targeted, you think the appropriate step 

is to call the inspector general? 

Mr. WERFEL. If the person has a basis to believe that there was 

something inappropriate going on, but just based on the fact pattern that you provided, it would be very difficult for the IRS to 

know. 

Mr. MULVANEY. How would they know if there is a basis? 

Mr. WERFEL. Well, it is a good question. But I would articulate, 

I mean, I think out of an abundance of caution, if they felt that 

they were being mistreated by the IRS, they should raise the issue. 

But I would also articulate that I am not sure the IRS would have 

that information, nor know how to influence the audit footprint. 

Mr. MULVANEY. Are you all worried and have talked about any 

potential legal liability that you may have to folks that have been 

targeted? 

Mr. WERFEL. We have several lawsuits pending as a result of 

the IG report that was issued in mid-May. 

Mr. MULVANEY. Have you budgeted for any losses related to 

that lawsuits? 

Mr. WERFEL. Well, the budgeting process around litigation loss 

in the government is somewhat complicated. There are judgment 

funds that are reserve funds that pay out for those things. So the 

answer to your question is I have to go back and look at how we 

are dealing with our litigation exposure. This would not be the first 

time we are under litigation and we have certain budgetary procedures in place. 

Mr. MULVANEY. That makes sense. And finally—and I appreciate the extra time, Mr. Chairman—I was a little bit surprised because, again, I never worked for the government—when Ms. Lerner 

was asked to resign several weeks ago, she declined and then she 

was placed on administrative leave, I believe, with pay. Okay, this 

is something that is completely foreign to those of us who came up 

in the private sector. Why was she not fired? 

Mr. WERFEL. So if I could, can I lift up the discussion? 

Mr. MULVANEY. Sure. 

Mr. WERFEL. Because the Privacy Act—— 

Mr. MULVANEY. Better than dragging it down. Yes, go ahead. 

Mr. WERFEL. I have to lift it up to more generalities because 

the Privacy Act would preclude me from commenting on a particular employee’s status with respect to a disciplinary action. 

Mr. MULVANEY. Understood. 

Mr. WERFEL. But let me say this. It is a good question, and I 

am glad you raised it. 

There are very specific laws and regulations in place that govern 

civil servant employment—how you hire them, how you pay them, 

how you potentially separate from the government from them, 

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whether it is retirement, buyout, or a disciplinary action leave. And 

what we do in the IRS and what I am making sure that we do is 

to the extent appropriate we will take the most aggressive possible 

action we can where we believe an individual can no longer hold 

a position of trust within this agency. And that is generally the 

steps we take. Now, there is a process, a due process that goes on 

and it was built to protect federal employees for a whole variety 

of different reasons, and there is probably a valid public policy debate we could have on those rules where if you have concerns that 

an individual can no longer hold the position of public trust within 

the government, the first step in that process is to place them on 

leave—it is paid leave—while you build the record and give them 

a chance to respond to that record about what the ultimate disposition of their employment should be. 

The rules and regulations are just set up that you default while 

that discovery is being done and while that due process is being 

done, the individual is paid. It would be a violation of the law for 

me in a situation where I felt that an individual could no longer 

hold the position of public trust to move to immediate termination. 

There are circumstances where you can do it but it has to do with 

criminal violations. 

Mr. MULVANEY. Just to wrap up and try to bring it back to Ms. 

Lerner, is that due process still ongoing or have you all made a determination as to whether or not she is able to stay with the organization within a position of trust? 

Mr. WERFEL. I cannot comment on that particular situation. I 

will say that as a general—— 

Mr. MULVANEY. You can tell me if it is still ongoing or finished, can you not, without telling me any of the details? 

Mr. WERFEL. No. I can tell you in a setting that is not public. 

I can share that information. 

Mr. MULVANEY. Is she still employed by the IRS? You can tell 

me that. 

Mr. WERFEL. Yes, she is still employed by the IRS. 

Mr. MULVANEY. Thank you, Mr. Chairman. I appreciate the 

additional time. 

Chairman GRAVES. Thank you very much. And with that I want 

to thank acting commissioner Werfel for being here today. We are 

going to continue to monitor the IRS and its treatment of small 

businesses. And I appreciate the fact that you designated Faris 

Fink as our point person and included us as a part of this review 

process that you are talking about. He is obviously the commissioner of Small Business and Self-employed Division and we want 

to interact with him. 

In addition, we are also going to have some questions. There will 

be Committee members on both sides of the aisle that will have 

questions and I want you to commit to respond to those in a timely 

manner and as quickly as possible and as fully as possible. 

With that, I would ask unanimous consent that members have 

five legislative days to submit statements and supporting materials 

for the record. 

Without objection, that is so ordered. And with that the hearing 

is adjourned. Thank you. 

[Whereupon, at 3:33 p.m., the Committee was adjourned.] 

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A P P E N D I X 

WRITTEN TESTIMONY OF 

DANIEL WERFEL 

PRINCIPAL DEPUTY COMMISSIONER 

INTERNAL REVENUE SERVICE 

BEFORE THE 

HOUSE SMALL BUSINESS COMMITTEE 

ON THE IRS AND SMALL BUSINESSES: ENSURING FAIR 

TREATMENT 

JULY 17, 2013 

Introduction 

Chairman Graves, Ranking Member Vela ́zquez and Members of 

the Committee, thank you for the opportunity to appear before you 

today to discuss tax matters affecting small businesses. 

The mission of the IRS in regard to small businesses, and indeed 

to all taxpayers, is to provide quality service by helping them understand and meet their tax responsibilities, and to enforce the law 

with integrity and fairness to all. 

The IRS takes seriously the need to provide excellent service to 

small business taxpayers. Small businesses and self-employed taxpayers in the U.S. are vital to our country as engines of economic 

growth, and the IRS needs to do its part to ensure that they can 

move full speed ahead and flourish. This assistance takes a number 

of forms to help taxpayers avoid unintentional errors in attempting 

to comply with the tax laws. Small businesses, from sole proprietors who file Form 1040 with a Schedule C to small corporations 

and partnerships, continually must face the task of familiarizing 

themselves with complex aspects of the tax code. Some of these 

provisions change from year to year, making it important for taxpayers to update their understanding each year. Assisting taxpayers with questions before they file their returns prevents inadvertent errors and reduces burdensome post-filing notices and 

other correspondence from the IRS. 

The IRS believes it is important to conduct outreach to small 

businesses on changes to the tax law and the latest in filing requirements. The operation of this outreach reflects the widespread 

use of tax professionals by small business owners. Because the vast 

majority of small businesses and self-employed individuals use professional return preparers, the IRS partners with thousands of industry and small business organizations, including minority-owned 

business associations, tax professional and payroll associations and 

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other government agencies to extend and amplify our outreach and 

education efforts. 

A major component of our outreach efforts involves the meetings, 

symposiums and seminars we sponsor for small business owners 

and the tax practitioner community each year. In FY 2012, the IRS 

held more than 2,000 of these events, which were attended by more 

than 163,000 business owners and tax professionals. 

Increasingly, the IRS is employing technology to reach small 

business owners and help them fulfill their tax obligations. Our 

website, IRS.gov, includes a section that is devoted to small businesses and contains a wealth of videos, audio presentations and 

webinars on a wide range of tax topics, such as employment taxes, 

electronic filing and retirement plans geared toward small business. 

We also assist business taxpayers by operating a special toll-free 

telephone line dedicated to small businesses, corporations, partnerships and trusts. Callers can get help with, for example, business 

returns or business accounts, employer identification numbers and 

federal tax deposit issues. A separate toll-free line for practitioners 

is staffed by IRS representatives specially trained to handle their 

questions and resolve their clients’ account-related issues. 

IRS-published products are also important resources for small 

business taxpayers. These include the Tax Calendars which provide 

highlights on tax topics, resources, instructions and important 

dates. Our electronic publication, e-News for Small Businesses, includes the latest IRS news releases and announcements. The quarterly SSA/IRS Reporter is a collaborative effort with the Social Security Administration that provides information on payroll taxes 

and other employee issues. 

IRS Enforcement Programs 

Even as we seek to ensure that our service to small businesses 

meets high standards, the IRS also must carry out a rigorous enforcement program. This includes administering a balanced examination program that helps ensure that taxpayers accurately report 

their income, deductions and credits. This also includes administering our collection program, which seeks to collect assessed tax 

liabilities. 

The IRS collected more than $50 billion in total enforcement revenue in Fiscal Year (FY) 2012, the third year in a row the enforcement revenue exceeded that level. The amount collected in 2012 

was actually lower than in 2011 and 2010, for a number of reasons. 

For example, the economic slowdown contributed to lower enforcement figures, as most enforcement dollars collected resulted from 

audits of returns for years during the slowdown. Another factor behind the FY 2012 numbers reflected changes in agency staffing and 

budget resources. After a nearly flat budget in FY 2011, the IRS’ 

FY 2012 budget was reduced by $305 million. This reduction affected the level of staffing available to deliver service and enforcement programs. Overall full-time staffing has declined by more 

than 8 percent over the last two years, and staffing for key enforceSBREP-219 with DISTILLER

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ment occupations fell nearly 6 percent in the past year. In 2013, 

the IRS absorbed an additional $618-million reduction in its budget 

due to sequestration, which will have further negative impacts on 

IRS performance, including performance in enforcement programs. 

In FY 2012, the IRS audited approximately 1.65 million returns, 

of which 21 percent were small business returns. For FY 2011 the 

percentage was 22 percent, and for FY 2010, 21 percent. This group 

includes filers of Schedule C and Schedule F, along with small corporations, S corporations and partnerships. The 2012 small business audit rate equates to only 0.2 percent of all returns filed, and 

1.3 percent of small business returns filed. 

In conducting its examination program, the IRS uses a variety of 

techniques to focus exam resources on the areas of greatest compliance risk. As returns are processed, a majority of them are scored 

by a computer program for compliance risk, with a higher score indicating a higher probability that a change will be recommended 

during an examination. While the computer score is the most frequent reason for selecting a return for examination, there are other 

reasons a return may be selected. These include the need to reconcile what is reported on a taxpayer’s return with third-party information provided on forms such as W-2s or 1099s. 

In addition, a small business may be randomly selected for audit 

under our National Research Program. The results from examinations conducted under this program are used for research purposes. 

The information gained from these audits helps us improve our 

audit selection criteria and update our estimates of the tax gap, 

which is the amount of taxes owed but not paid on time. 

The type of audit a taxpayer may undergo depends on the number and complexity of issues involved. A single issue questioned on 

a return will generally give rise to a correspondence audit, while 

multiple issues will likely result in a face-to-face exam. 

For all exams, the average additional tax recommended in FY 

2012 was $23,345. Within that total, the average additional tax 

recommended for self-employed individuals was $11,880 and for 

small corporations, $28,988. For all taxpayers, the average cost to 

the IRS of a correspondence exam in FY 2012 was $400, compared 

with $324 in FY 2010. The average cost of a field exam to the IRS 

in FY 2012 was $6,232, down from $7,248 in FY 2010. 

Ensuring Fair Treatment for Small Business Taxpayers 

In going about our work in the enforcement area, the IRS realizes that many small businesses face substantial economic challenges, even as the economy recovers. We have worked diligently 

to communicate to our employees the importance of recognizing 

that individual taxpayers and businesses being audited may be 

dealing with financial hardships, and we have encouraged our employees to be flexible in these situations. 

Increasing our employees’ flexibility allows them to respond appropriately to taxpayers with financial troubles. Even as our economy recovers, too many small business owners continue to struggle 

to make their payrolls, secure lines of credit, contribute to their 

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employees’ retirement plans and stay current with their taxes. For 

that reason, we will continue to make sure that our employees 

have the guidance and the discretion they need to assist small 

businesses with the service they need and deserve. 

One major example of our efforts to help individuals and small 

business owners in this regard is the Fresh Start initiative, which 

began in 2011. Under this initiative, we have increased flexibility 

in our collection program to help taxpayers who are struggling financially. For example, we made it easier for taxpayers to obtain 

lien withdrawals after paying back taxes owed, and allowed liens 

to be withdrawn when a taxpayer signs a Direct Debit Installment 

Agreement (DDIA). Another provision helps more small businesses 

get access to Installment Agreements if they sign up for a DDIA 

and have less than $25,000 in unpaid taxes. We also changed our 

rules for Offers in Compromise (OIC) so that more taxpayers could 

qualify for a streamlined OIC. 

We have continued to refine the Fresh Start initiative, and further increased flexibility in our collection program in 2012. This includes easing failure-to-pay penalties for unemployed taxpayers, 

and expanding our Allowable Living Expenses (ALE) standard. The 

standard is used to provide taxpayers a fair and consistent amount 

to live on while they repay tax debts. 

As part of our work to ensure fair treatment for small business 

taxpayers, we continue our focus on taxpayer burden reduction, 

through such efforts as simplifying forms and publications and 

streamlining policies and procedures. For example, as part of our 

effort to implement Executive Order 13610, ‘‘Identifying and Reducing Regulatory Burdens,’’ in January 2013 we announced a simplified method for claiming the home office deduction. This new option is expected to help owners of home-based businesses by significantly reducing the paperwork and recordkeeping burden associated with calculating the deduction for business use of a home. 

Another aspect of ensuring that small business owners receive 

fair treatment involves ensuring that they have recourse in tax disputes with the IRS. It is important to note that my plan of action 

for improving IRS operations, which I will describe in more detail 

later in my testimony, includes enhancing mechanisms for taxpayer recourse. The IRS does have the Taxpayer Advocate Service 

(TAS) to assist taxpayers having difficulty resolving issues with the 

IRS, but we concluded in our recent report that these mechanisms 

are not well understood by taxpayers and therefore are not being 

sufficiently leveraged. 

Therefore, we are taking action to raise taxpayers’ awareness of 

their rights and of the tools at their disposal for resolving issues, 

such as TAS. We need to be sure that all IRS employees are aware 

of their responsibilities with respect to ensuring taxpayers know 

their rights, and in particular, ensuring that taxpayers know how 

to engage TAS when they feel they are being treated inappropriately or are encountering excessive bureaucratic obstacles. The IRS 

leadership is committed to working with the National Taxpayer Advocate to evaluate the training provided to all IRS employees in 

this regard and modify it, as appropriate, to make necessary imSBREP-219 with DISTILLER

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provements to fill whatever gaps may exist in the current process 

or actual behavior. 

It is important to note that all of the outreach, education and 

burden-reduction initiatives I have described in my testimony depend on the IRS receiving adequate resources to fund them. It is 

imperative that we be able to continue to reach out to small business owners to help them file income and payroll taxes, understand 

tax law changes and seek help from us in cases of financial hardship. The IRS has absorbed significant cuts in our budget in the 

last few years, and we have made major strides in reducing costs 

and finding efficiencies in our operations. Additional significant 

cuts to the IRS budget have the potential to weaken our ability to 

deliver our service and enforcement programs, including those 

dedicated to assisting small business owners. 

Charting a Future Path for the IRS 

Before concluding my testimony, I want to give the Committee 

a brief overview of the work we have been doing over the past several weeks to chart a new path forward for the IRS, as these efforts 

are important to all taxpayers, including the small business community. We have initiated a robust action plan to address needed 

improvements that we believe will help restore and sustain the 

public’s trust in the IRS. 

The report we released last month describes a number of important findings, aggressive actions and next steps for the IRS. The 

problems with the 501(c)(4) application process that were uncovered by the Treasury Inspector General for Tax Administration 

(TIGTA) have created significant concerns for individual and business taxpayers, and it is incumbent upon us to take swift action 

to ensure accountability, fix the problems that occurred and thoroughly examine other aspects of IRS operations. 

Over the past month, an ongoing review of the events described 

in the TIGTA report has shed further light on the management 

failures that occurred within the IRS and the causes of those failures. There was insufficient action by IRS leaders to identify, prevent, address and disclose the problems that emerged with reviews 

of applications for tax-exempt status. Our report outlines management deficiencies and the steps that must be taken to correct them. 

Of note, there is no current evidence of the use of inappropriate 

screeners or other types of criteria in other IRA operations beyond 

those discussed in the TIGTA report. We recognize, however, that 

there is public concern over the criteria the IRS adopted to review 

applications for tax-exempt status, a concern shared by the Committee as expressed in its recent letter to the IRS. Because we realize that more needs to be done to evaluate our screening criteria 

and procedures, we are establishing a review process by which 

screening criteria and procedures across the IRS will be periodically assessed to safeguard against any risks of inappropriate criteria. 

We are also continuing to review the full range of IRS operations, 

processes and practices to focus on how we deliver our mission 

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today and how we can make improvements in the future. In that 

way, we will develop a better understanding of organizational risks 

wherever they exist in the IRS. We have a great deal of work 

ahead of us, and the IRS is committed not only to correcting the 

problems that have occurred, but also to continuing other important work of the agency. 

Conclusion 

Mr. Chairman, Ranking Member Vela ́zquez, thank you again for 

the opportunity to testify today on the IRS service and enforcement 

efforts in relation to small businesses. As we continue to chart a 

path forward for our agency and determine what improvements are 

needed in IRS operations, we will do everything possible to ensure 

that small businesses are treated fairly and given the assistance 

they need to comply with our nation’s tax laws. This concludes my 

statement, and I would be happy to answer your questions. 

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Insert offset folio 94 here 81937.054
95 

SBREP-219 with DISTILLER


Insert offset folio 95 here 81937.055
96 

Æ 

SBREP-219 with DISTILLER


Insert offset folio 96 here 81937.056