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87–414—PDF 2013

S. HRG. 113–234 

TAX FRAUD AND TAX ID THEFT: 

MOVING FORWARD WITH SOLUTIONS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

APRIL 16, 2013 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

SHERROD BROWN, Ohio 

MICHAEL F. BENNET, Colorado 

ROBERT P. CASEY, Jr., Pennsylvania 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

ROB PORTMAN, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

AMBER COTTLE, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 1 

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 4 

WITNESSES 

Miller, Steven T., Acting Commissioner, Internal Revenue Service, Washington, DC ............................................................................................................. 6 

Porter, Jeffrey A., chair of the Tax Executive Committee, American Institute 

of Certified Public Accountants, and founder, Porter and Associates, Huntington, WV ........................................................................................................... 7 

Olson, Nina E., National Taxpayer Advocate, Internal Revenue Service, 

Washington, DC ................................................................................................... 9 

LaCanfora, Marianna, Acting Deputy Commissioner, Retirement and Disability Policy, Social Security Administration, Washington, DC ..................... 11 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

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

Prepared statement .......................................................................................... 29 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 4 

Prepared statement .......................................................................................... 32 

LaCanfora, Marianna: 

Testimony .......................................................................................................... 11 

Prepared statement .......................................................................................... 34 

Miller, Steven T.: 

Testimony .......................................................................................................... 6 

Prepared statement .......................................................................................... 41 

Responses to questions from committee members ......................................... 51 

Olson, Nina E.: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 62 

Porter, Jeffrey A.: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 91 

Responses to questions from committee members ......................................... 104 

Wyden, Hon. Ron: 

Internal Revenue Service Office of Chief Counsel memorandum, dated 

July 8, 2011 ................................................................................................... 109 

COMMUNICATIONS

Consumers for Paper Options ................................................................................. 117 

International Association of Jewish Genealogical Societies (IAJGS) .................. 122 

LifeLock Inc. ............................................................................................................. 129 

National Conference of Insurance Legislators (NCOIL) ....................................... 132 

Records Preservation and Access Committee (RPAC) .......................................... 138 

Ryesky, Kenneth H. ................................................................................................. 146 

Visa Inc. .................................................................................................................... 150 

(III) 

(1) 

TAX FRAUD AND TAX ID THEFT: 

MOVING FORWARD WITH SOLUTIONS 

TUESDAY, APRIL 16, 2013 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 10:06 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Wyden, Nelson, Cardin, Hatch, Grassley, 

Thune, and Isakson. 

Also present: Democratic Staff: Amber Cottle, Staff Director; Mac 

Campbell, General Counsel; Lily Batchelder, Chief Tax Counsel; 

Ann Cammack, Tax Counsel; Tiffany Smith, Tax Counsel; and Tom 

Klouda, Professional Staff Member, Social Security. Republican 

Staff: Chris Campbell, Staff Director; Shawn Novak, Senior Accountant and Tax Counsel; and Jim Lyons, Tax Counsel. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will come to order. 

Before we begin, I think I can speak for every member of this 

committee in saying our thoughts and prayers are with the victims 

of the Boston Marathon bombing and with the families of all those 

impacted by that horrible tragedy. 

We are also grateful for the brave first responders on the scene 

who undoubtedly saved countless lives. Acts of violence such as this 

clearly are not tolerated in our country, and all of us will work together to make sure the perpetrators are brought to justice, while 

we offer our condolences and sympathy to those who are more directly affected. 

The Czech writer and politician Vaclav Havel once said, ‘‘I have 

preserved my identity, put its credibility to the test, and defended 

my dignity. What good this will bring to the world, I do not know. 

But for me it is good.’’ 

Our identity represents who we are. It represents our morals, 

our culture, our sense of worth. It represents, as Havel said, our 

credibility and our dignity. When stolen from us, it can have devastating consequences. Identity theft is a serious problem. It is 

growing at epidemic proportions, especially tax-related identity 

theft. 

According to the IRS Taxpayer Advocate, tax-related identity 

theft jumped more than 650 percent between 2008 and 2012. Last 

year alone there were 1.8 million incidents of identity theft and 

2 

fraudulent refunds. One of the latest victims is Kipp Saile, a 48- 

year-old horseback outfitter in Pray, MT, a tiny town just outside 

Yellowstone National Park. 

Like many Montana communities, everyone in Pray knows their 

neighbor. Doors are left unlocked, and the only threat of crime involves the possibility of a bear stealing your catch from the Yellowstone River. It is the last place you would expect to find a case of 

identity theft. 

Yet earlier this year, Kipp was in the process of refinancing his 

home when he got a call from his tax preparer. There was a serious 

problem, he said. When the preparer tried to submit Kipp’s tax return to complete his refinancing, it was rejected by the IRS. 

According to IRS records, Kipp had moved more than 2,000 miles 

to Maryland, taken up a new wife, and no longer cared for his kids. 

In reality, of course, Kipp lived on his 10 acres in Pray with his 

wife of 11 years, Heidi, and their three children. Someone had stolen Kipp’s identity and filed a false tax return using his Social Security number. 

That is where the nightmare began. Kipp has since been forced 

to spend every day trying to repair the damage to his name and 

credit. Needless to say, it has been a stressful experience. It has 

cost Kipp many a sleepless night and quite a bit of money. The refinance has been put on hold, costing him an additional $500 a 

month he would have saved with the lower mortgage. 

Instead of helping Kipp clear up this mess, the IRS has made a 

bad situation even worse. Kipp has been told twice by IRS employees that he was not defrauded, the U.S. Government was. At least 

one IRS employee hung up on Kipp, cut him off, and was rude. He 

hung up on Kipp while he was trying to make his case. 

I find that outrageous, and I will not stand for a Montanan, or 

any American taxpayer, to be treated with that kind of disrespect 

by an IRS employee or any agency employee, employees who are 

supposed to be serving the public. 

I am going to say this very clearly, Mr. Miller: never forget that 

you and everyone else at the IRS work for Kipp Saile and all American taxpayers. Your job is to serve them. They are the employers; 

you are the employees. I certainly hope this was an isolated incident and does not reflect the type of service provided by the IRS. 

But there is no excuse for even one rude employee like this, and 

I intend to find out what you are doing to make sure this type of 

behavior is not repeated. 

It is critical that the IRS be ready and equipped to handle cases 

like Kipp’s because they are increasingly common. We have all seen 

the stories in the newspapers and on TV about ID theft. Just last 

week, USA Today highlighted some of the most egregious examples 

of tax ID fraud, like a case where one address in Michigan was 

used to file 2,137 tax returns. There was another case where a single bank account was used to receive 590 direct deposit refunds 

from the IRS, totaling more than $900,000. 

In recent congressional testimony, the IRS reported that they 

had identified more than 900,000 fraudulent returns and stopped 

more than $6.5 billion in fraudulent refunds in 2011, but that was 

only the tip of the iceberg. 

3 

The Treasury Inspector General for Tax Administration recently 

reported that another 1.5 million fraudulent returns went undetected in 2011, potentially allowing $5.2 billion in refunds to be 

paid. The IG estimated that if tax identity theft were not addressed, it could cost the IRS $21 billion in fraudulent refunds over 

the next 5 years. 

Enough is enough. It is time to act. Three weeks ago, members 

of this committee were briefed on tax reform options that included 

proposals to help combat tax fraud and tax ID theft. Senator Nelson, joined by Senators Cardin, Schumer, and Feinstein, introduced 

comprehensive tax fraud legislation last week. I commend them for 

that. I am pleased that the administration has included several significant tax fraud prevention proposals in its fiscal year 2014 

budget. 

This includes limiting access to death records and omitting Social 

Security numbers on wage statements, but there is still much more 

that can be done. We know tax fraudsters have easy access to taxpayers’ Social Security numbers through online databases, hospitals, and other businesses that store personal information. We 

need tougher controls on access to private information, but it needs 

to be done efficiently without adding more paperwork to the process. 

We know that fraud is easier to detect when the IRS can match 

a W–2 filed by an employer to a tax return before issuing a refund. 

Right now that is not happening. We need to cut through the red 

tape and ensure this information gets to the IRS quickly. 

We also know that too often it can be the tax return preparers 

themselves who are the identity thieves. Proper oversight by the 

IRS can help prevent this, but we face obstacles. The IRS was 

handed a major setback recently when the Federal court ruled 

against their authority to regulate some tax return preparers. The 

case Loving v. IRS is ongoing, and I am hopeful that the IRS will 

succeed on appeal, otherwise taxpayers will not be able to know if 

they are using a reliable return preparer. 

I will be asking for an update on the status of this. We need to 

consider whether legislation is necessary to protect taxpayers from 

fraudulent preparers. This committee outlined several ideas recently to reimpose tax preparer regulations, and I encourage you 

to look at those ideas as part of our tax reform option papers. 

I also want to hear today how the IRS is utilizing the tools they 

already have. USA Today recently stated that the IRS is ‘‘losing 

the identity theft fight’’ and criticized the IRS for taking too long 

to resolve fraud cases. According to the National Taxpayer Advocate, it takes an average of more than 180 days to close cases. That 

is unacceptable. The IRS needs to step it up and improve the way 

it handles tax ID theft once cases are identified. 

Victims of ID theft, people like Kipp Saile, are forced to put their 

lives on hold while their cases languish in red tape. IRS needs to 

speed up prosecution through better communication with Federal, 

State, and local law enforcement, and this committee is committed 

to protecting the American taxpayer. I am hopeful that we will be 

able to work together to move forward with legislation to stop tax 

ID theft. 

4 

* For more information, see also, ‘‘Present Law and Background Information Related to Selected Tax Procedure and Administration Issues,’’ Joint Committee on Taxation staff report, 

April 15, 2013 (JCX–9–13), https://www.jct.gov/publications.html?func=startdown&id=4515. 

We owe that to Kipp Saile and all the victims of identity theft, 

and to all American taxpayers who pay their bills properly and on 

time and are obviously quite put out when too many others do 

not.* 

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

The CHAIRMAN. Senator Hatch? 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Well, thank you, Mr. Chairman. I agree with 

your statement. Before I begin, I just want to say that my prayers 

go out to the city of Boston, especially for the families of those who 

lost their lives and have been very seriously hurt and injured. I 

wish everyone who was impacted by this tragedy a very swift and 

peaceful recovery, to the extent that that can happen. 

I also want to thank you, Mr. Chairman, for holding this important hearing. Each year the Finance Committee holds a hearing 

around the end of the tax filing season. In the past, these hearings 

have provided unique insight into the issues faced by the American 

taxpayers, as well as some of the overall problems we have with 

our Nation’s tax system. The chairman has announced some of 

them. 

The subject of this year’s hearing is the rapidly growing crime of 

tax fraud by identity theft. This is a serious matter and deserves 

our careful attention. Two of my colleagues, Senator Nelson and 

Senator Crapo, should be commended for their efforts in this area. 

Their subcommittee, the Subcommittee on Fiscal Responsibility 

and Economic Growth, has held two hearings on this topic over the 

last 2 years. 

In addition, this was an important topic of conversation at last 

year’s tax filing season before the full committee. I share the concerns of many throughout our country regarding tax fraud by identity theft. From 2010 to 2011, the number of these crimes nearly 

tripled, going from about 440,000 to 1.1 million. 

Two senior members of my Finance Committee staff know this 

issue very well, as they have been victims of tax fraud by identity 

theft. In both cases, criminals obtained their Social Security numbers, filed fraudulent returns, and collected refunds. 

For both staffers, this began a nightmarish scenario in which 

they had to spend days on the phone and filling out paperwork just 

to be able to file their own tax return. In the end, they have to live 

with the fact that their Social Security numbers are out there, and 

they can only hope that they are not used to commit another fraud. 

So I want to thank our four witnesses for coming to talk to us 

today about this troubling issue, and I assure you we are listening 

very carefully. 

When it comes to dealing with tax fraud and identity theft, I understand that the IRS has adopted a 3-pronged approach. The first 

prong is prevention, which means stopping this type of tax fraud 

5 

from being successful in the first place. Clearly, given the prevalence of this crime, much more work needs to be done in this area. 

The second prong is providing taxpayer services for those who 

have been the victims of identity theft. This is a significant focus 

of the IRS, but it appears that the agency is falling woefully short 

in some instances. For example, an audit by the Treasury Inspector 

General for Tax Administration sampled 17 different identity theft 

cases and found that the average time it took for these cases to be 

resolved was 414 days. Now, that is simply too long a wait for taxpayers who have been the victims of identity theft, and I am hoping that we can discuss ways to cut that wait time down during 

today’s hearing. 

The third prong of the IRS’s approach is catching and convicting 

the criminals who have committed these crimes. This is a critically 

important step. If we can step up enforcement, many would-be 

criminals would likely decide that it is not worth the risk to commit these crimes. I think we ought to have very stiff penalties in 

these cases, and, frankly, they ought to be enforced. 

I am interested in hearing more about the IRS’s efforts to follow 

this 3-pronged approach, what successes they have had, and what 

challenges they are still facing. I particularly enjoyed meeting with 

you, Mr. Miller, yesterday. It was a good meeting. That is why I 

am glad that we have you top IRS people with us here today. Acting Commissioner Steve Miller, we are grateful that you are here 

today. I know that you are taking this seriously. 

In addition, I want to know what other steps could be taken to 

prevent these crimes, assist the victims, and improve enforcement. 

I believe all of our witnesses here today will be able to address 

some of these questions. While tax fraud identity theft is the major 

focus of this hearing, we will also discuss general issues associated 

with the tax filing season. 

This year, as with every year, taxpayers face a number of issues 

and obstacles as they try to file their returns. We clearly need to 

do better in providing assistance during what can be a very difficult time for many of our citizens. 

For example, at last year’s hearing I noted that the IRS’s goal 

of answering 61 percent of taxpayers’ service calls was unacceptable. I am glad to see this year that the IRS set a significantly 

higher goal. That said, I still think more can be done to improve 

taxpayer service. 

I hope we can have a full and informative discussion of these 

issues during today’s hearing. Once again, I want to thank the distinguished Senator from Florida and others for the work that they 

have been doing in this area, and I want to welcome our witnesses. 

Mr. Chairman, I look forward to this very important hearing, 

and we appreciate you folks being here with us today. 

The CHAIRMAN. Thank you, Senator. 

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

The CHAIRMAN. I would like to introduce our four witnesses. 

First is Mr. Steven Miller. Mr. Miller is Acting Commissioner of 

the IRS. Next to Mr. Miller is Ms. Nina Olson, the National Taxpayer Advocate. The third witness is Mr. Jeffrey Porter, who is sitting next to Mr. Miller. He is chair of the Tax Executive Committee 

6 

for the American Institute of Certified Public Accountants. Finally, 

we have Ms. Marianna LaCanfora, Acting Deputy Commissioner of 

Retirement and Disability Policy for the Social Security Administration. Did I pronounce your name correctly? 

Ms. LACANFORA. Yes. Thank you. 

The CHAIRMAN. Thank you. 

Mr. Miller, you are first. You know the drill. Speak for about 5 

minutes. Your statements will be in the record. 

STATEMENT OF STEVEN T. MILLER, ACTING COMMISSIONER, 

INTERNAL REVENUE SERVICE, WASHINGTON, DC 

Mr. MILLER. Thank you, Chairman Baucus, Ranking Member 

Hatch, members of the committee. Thanks for the opportunity to 

update you today. Obviously, Chairman Baucus, the treatment that 

Mr. Saile got was not acceptable and not up to what we hope are 

our standards, and we will look into that. 

The CHAIRMAN. I appreciate that. Thank you. 

Mr. MILLER. While I will spend most of my time today discussing 

the future, I first want to touch on where we are. The agency has 

more than 3,000 employees working on identity theft. Last year, we 

stopped $20 billion in fraud. You had talked about 2011. In 2012, 

$20 billion in fraud before it went out, up from that $6 billion the 

year before. Our ability to stop bad refunds has improved this year 

as well. 

In addition, the number of criminal investigations continues to 

rise, with more than 800 so far this year. Finally, we are making 

progress on getting victims their refunds. It is still slow, Mr. Chairman, but we are making progress. We have closed more than 

200,000 of these cases since the beginning of this calendar year, 

and for the first time, over the last couple of months, we are closing 

more than we are getting in. So, our inventory is getting under 

control. 

All this is not without cost. We spent almost $330 million out of 

our declining budget on these matters in 2012, so in my mind we 

are better, but our work is not done. We need to get better still. 

What I would like to do now is walk through where we need to 

be to take the next major step in fighting identity theft. The barriers to get there include the proliferation in the theft and availability of SSNs, the sheer volume and complexity of the cases before us, available IRS resources—and in particular resources for 

technology updates—as well as third-party information reporting, 

and our own business processes. We have started work in several 

of these areas, but much more remains to be done. 

Here is where we need to be in the future. To illustrate, let us 

follow how my return would move through our system. First, at the 

time of filing before the return enters our system, I should have to 

authenticate who I am in a robust manner, even before it gets in 

to the IRS. This should happen regardless of how I file. The issue 

is how to do this. Do we, for example, use out-of-wallet questions, 

personal information that is known to me but is tough for an identity thief to steal or track down? 

After authentication and as my return enters the system, the 

IRS has to employ a set of flexible filters and tools that allow a 

more informed decision on whether to issue a refund. That decision 

7 

must be based on a wider array of information than is available to 

us today. 

Here, let us talk about intelligent matching. First, the IRS needs 

to validate that I am who I say I am. We need to do this by using 

all the data in our systems, as well as other data that is not currently available to us, on a timely basis, at least. 

So, for example, we need to look at my return and ask, do I look 

like the same Steve Miller who has filed in the past? Do I live in 

the same place, work at the same place, have the same family, et 

cetera? Is the information on my return consistent with other data 

we are receiving? So some of the data needed is historical, and 

some is current third-party data. 

Historical data we may have already, though it may not always 

be available to us on a timely basis. But in this future state, we 

also need to at least have some third-party data to validate both 

my identity and other items on my return. 

In this world, the IRS may have my W–2, certain 1099s, et 

cetera, at the time the IRS makes the determination of whether a 

refund is due to me and whether the amount claimed is correct. 

Issues to discuss here include the need for improved technology, 

the timing of data receipt, burden on reporting entities, and the 

need for some taxpayers to have a fast refund. 

Next in the future vision is how we deal with victims. Here, we 

need better coordination internally, and, more importantly, we 

need a better solution for those like Mr. Saile, who is the second 

one to file with us. Right now, second filers are forced to submit 

a paper return, and they face a long wait. 

We need to get to a point where we take that second filer in electronically and we prove the identity more efficiently, and we need 

to have an improved system to issue an Identity Protection PIN, 

which we could talk about. The key issue again here is technology. 

Existing technology does not get us there. 

There are other areas to discuss and many important, farreaching questions that merit discussion about the future and 

shape of tax administration. These questions should be considered 

not just inside the IRS, but with the tax community, law enforcement, as well as you in Congress and taxpayers. 

As I describe for you a preferred future for fighting identity theft, 

please recognize that improvements are neither immediate nor are 

they possible without resources. I will ask for your support for the 

2014 budget which includes additional funding on this issue, as 

well as several important proposals on identity theft. 

Thanks again for the opportunity to be present. 

The CHAIRMAN. You bet. Thanks, Mr. Miller. 

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

The CHAIRMAN. Mr. Porter, you are next. 

STATEMENT OF JEFFREY A. PORTER, CHAIR OF THE TAX EXECUTIVE COMMITTEE, AMERICAN INSTITUTE OF CERTIFIED 

PUBLIC ACCOUNTANTS, AND FOUNDER, PORTER AND ASSOCIATES, HUNTINGTON, WV 

Mr. PORTER. Good morning, Chairman Baucus, Ranking Member 

Hatch, and members of the committee. My name is Jeffrey Porter, 

and I am the chair of the American Institute of CPAs Tax ExecuVerDate Nov 24 2008 19:45 Apr 08, 2014 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 R:\DOCS\87414.000 TIMD
8 

tive Committee and a sole practitioner at Porter and Associates in 

Huntington, WV. On behalf of the AICPA, I am pleased to have the 

opportunity to testify today. 

An important issue of concern for our members is identity theft. 

In mitigation of this issue, the AICPA appreciates the IRS’s recent 

issuance of proposed regulations which authorize filers of certain 

information returns to truncate a taxpayer’s identifying number. 

However, unfortunately there are some statutory limits placed 

upon the Service’s ability to expand their truncation initiative. For 

example, employers are required to provide employees a W–2 with 

their full Social Security number. We urge Congress to permit 

truncation of Social Security numbers on all copies of W–2s other 

than those filed with the Social Security Administration. We also 

urge Congress to consider expansive legislation to allow truncation 

of Social Security numbers on all types of tax forms and returns 

provided to a taxpayer, employee, or other recipient. 

Now I would like to share our feedback on this year’s tax filing 

season. Overall, it was an extremely challenging and compressed 

filing season due to the late enactment of legislation and the resulting delay in the release of 31 tax forms. 

Since the IRS could not accept tax returns that included certain 

forms until February or early March, our members essentially lost 

the first half of their filing season. Nevertheless, we believe the 

IRS did an outstanding job under difficult circumstances. They 

maintained an open dialogue with stakeholders and were responsive to our concerns. 

Earlier this year, we submitted a letter to Acting Commissioner 

Miller on the delayed release of forms. Within days, the IRS issued 

a notice which provided critical relief requested from late payment 

penalties. 

Unfortunately, the filing season was also a challenge due to the 

late issuance of corrected 1099s. Generally, a 1099 must be furnished to taxpayers by February 15th; however, brokerage firms 

can amend a 1099 at any time. Over the last few years, we have 

noticed more brokerage firms issuing corrected 1099s, sometimes 

issuing multiple corrected forms on the same account. These forms 

create anxiety, confusion, and, for some taxpayers, an increase in 

tax preparation fees. 

As a result, many taxpayers now have a tendency to wait until 

they have received their anticipated corrected 1099s before providing records to the CPA. In order to streamline the tax return reporting process for both the government and taxpayers and to minimize the need for amended tax returns, we suggest you consider 

legislation that would permit taxpayers to report de minimus 

changes in their income from a corrected 1099 in the year of receipt. 

Another area of interest for our profession is the IRS’s tax return 

preparer program. The AICPA has always been a steadfast supporter of the Service’s goals of enhancing compliance and elevating 

ethical conduct. We generally support their program, including the 

registration of paid tax return preparers and the issuance of preparer tax identification numbers; the expansion of Circular 230 

over all paid preparers; the creation of a basic continuing education 

and competence program geared towards the unenrolled preparer 

9 

community; and the IRS’s mitigation of any taxpayer confusion regarding the qualifications of different paid preparers. 

Another important issue is the reform of penalties. Because the 

success of our system depends upon voluntary compliance, penalty 

provisions should be carefully crafted by Congress and sensibly administered by the Service to ensure that penalties deter bad conduct without deterring good conduct or punishing the innocent. 

Targeted, proportionate penalties that clearly articulate standards of behavior and are administered in an even-handed and reasonable manner encourage voluntarily compliance with the tax 

laws. 

On the other hand, over-broad, vaguely defined, and disproportionate penalties, particularly those administered as part of a system that automatically imposes penalties or that otherwise fails to 

provide basic due process safeguards, creates a perception of unfairness that is likely to discourage voluntary compliance. 

Finally, we appreciate the committee’s important consideration of 

tax reform and potential solutions. We have consistently supported 

tax reform simplification efforts, because we are convinced that 

such actions will reduce taxpayers’ compliance costs, encourage voluntary compliance, and facilitate enforcement actions. 

To name a few, we support the repeal of the Alternative Minimum Tax, the harmonization of education incentives, the enactment of consistent definitions in the code, the repeal of unused provisions, and the simplification of the kiddie tax rules. We also believe in the simplification and harmonization of retirement planning vehicles. We have more extensive thoughts on tax reform, tax 

reform due dates, and information reporting in the written comments submitted to this committee. 

Thank you again for the opportunity to testify. I will be pleased 

to answer any questions you may have. 

The CHAIRMAN. Thank you, Mr. Porter. I presume you submitted 

all those recommendations for simplification and changes to this 

committee as we work on tax reform. 

Mr. PORTER. Yes, sir. 

The CHAIRMAN. We need lots of help, frankly, to make sure we 

do it right. All right. Thank you. 

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

The CHAIRMAN. Ms. Olson? 

STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER 

ADVOCATE, INTERNAL REVENUE SERVICE, WASHINGTON, DC 

Ms. OLSON. Chairman Baucus, Ranking Member Hatch, and 

members of the committee, thank you for inviting me to testify 

today about tax-related identity theft. Before I begin, I want to 

commend you for the excellent tax reform options paper the committee staff compiled last month and urge you to move forward 

with comprehensive tax reform and a taxpayer bill of rights. 

I also want to make you aware of my concern that cuts to the 

IRS budget since 2010, including but not limited to sequestration, 

are impairing the IRS’s ability to serve taxpayers and are selfdefeating as a deficit-reduction measure. Almost surely the reduction in revenue collection will ultimately exceed the short-term 

budget savings. 

10 

On the subject of identity theft, let me start by emphasizing the 

most important impact for most victims: delayed refunds. Apart 

from the time and obvious frustration involved in having to prove 

one’s own identity, a taxpayer generally will not receive his or her 

refund until the case is fully resolved. 

So far this filing season, 84 percent of all individual returns processed have resulted in refunds, and the average refund amount has 

been nearly $2,800, so longer case resolution times often translate 

into financial inconvenience, or even hardship. Some identity theft 

victims also experience consequences when other Federal agencies 

or private businesses rely on IRS data. 

For example, the IRS generally will not release account transcripts while an identity theft case is pending, so students applying 

for financial aid and homeowners applying for a mortgage or refinancing may face additional obstacles. That is why prompt case 

resolution is so important. 

Yet, cases are not being resolved promptly, nor do taxpayers 

have a single point of contact to work with, nor does the IRS even 

have a reliable way of measuring service-wide cycle time on identity theft cases. 

The IRS recently created 21 separate specialized units to handle 

different types of identity theft problems, which may be helpful, 

but, when a case involves multiple issues, one IRS entity should 

oversee the case to make sure the problems are handled in a coordinated manner. The IRS seems to believe that relatively few 

cases require involvement by multiple functions. I disagree. Within 

the Taxpayer Advocate Service, 94 percent of our identity theft 

cases have multiple issues. 

Similarly, TIGTA reviewed a judgmental sample of 17 identity 

theft cases for an audit conducted last year and found that the IRS 

had opened 58 cases separately to resolve these victims’ accounts, 

an average of nearly three and a half cases per victim. The average 

cycle time for those cases was well over a year. 

IRS data suggests its workload continues to grow at a rapid clip. 

The IRS had more than 1.25 million identity theft cases in inventory at the end of February, more than 5 times as much as a year 

ago when the volume was less than 235,000 cases. After years of 

so-called IRS reengineering efforts, victims are still experiencing 

unacceptable delays. 

From an administrative standpoint, there are several steps the 

IRS can take to improve victim assistance. The IRS should create 

a strong centralized unit so ID theft victims with multiple issues 

do not have to deal with multiple functions to get complex problems resolved. The IRS should analyze its procedures to identify 

ways to reduce cycle time. 

The Taxpayer Advocate Service generally is able to resolve identity theft cases in about 3 months, and there is no reason why the 

IRS should need from 6 months to over a year to do so. The IRS 

should do a better job of keeping victims informed of the status of 

their cases while they are in progress, and promptly issue refunds 

when it has identified the correct taxpayer, instead of waiting until 

case closing. 

From a congressional standpoint, I believe several steps could 

make a difference. First, I recommend that Congress consider what 

11 

needs to be done to enable the IRS to receive and process information returns, like forms W–2, before it processes income tax returns 

and issues refunds. If the wage and withholding on a tax return 

had to match the numbers filed by employers on forms W–2, identity thieves would have a much harder time. 

Second, I recommend that Congress restrict access to the Death 

Master File which provides a means of access to taxpayeridentifying information that can further tax fraud. Third, I recommend that you enact restrictions on the use and disclosure of 

taxpayer return information shared by the IRS with State and local 

law enforcement authorities. 

Finally, I have long advocated for the regulation of Federal tax 

preparers for many reasons, one of which is that it will reduce the 

incidents of fraud. If the Court of Appeals for the D.C. Circuit ultimately invalidates the Treasury’s preparer regulations, I encourage 

this committee to do what it has done on two previous occasions 

and approve legislation explicitly authorizing the IRS to regulate 

in this area. 

I appreciate the opportunity to testify today and would be happy 

to answer your questions. 

The CHAIRMAN. Thank you, Ms. Olson. 

[The prepared statement of Ms. Olson appears in the appendix.] 

The CHAIRMAN. Ms. LaCanfora? 

STATEMENT OF MARIANNA LaCANFORA, ACTING DEPUTY 

COMMISSIONER, RETIREMENT AND DISABILITY POLICY, SOCIAL SECURITY ADMINISTRATION, WASHINGTON, DC 

Ms. LACANFORA. Chairman Baucus, Ranking Member Hatch, and 

members of the committee, thank you for inviting me to this important hearing on tax fraud, tax ID theft, and tax reform. I will discuss the death information that we maintain to administer Social 

Security programs and our role in the wage reporting process. 

I am Marianna LaCanfora, the Social Security Administration’s 

Acting Deputy Commissioner for Retirement and Disability Policy. 

At Social Security, we are responsible for administering some of 

the Nation’s most important and most successful programs. We 

take great pride in helping the American people obtain the benefits 

to which they are entitled. We are also committed to protecting the 

sensitive data that we collect and maintain. 

The President’s fiscal year 2014 budget includes four SSA-related 

legislative proposals that would enhance our ability to combat 

fraud, curb improper payments, and improve our wage reporting 

process. 

I would like to briefly explain the history behind one of these legislative proposals, which would restrict access to the Death Master 

File, or the DMF. Since Social Security began in the 1930s, we 

have collected death information from funeral homes, States, and 

other sources to timely stop paying beneficiaries who have died. 

Each year, we receive about 2.5 million reports of death. When we 

receive this information, we update our records, stop benefits as 

appropriate, and, in some cases, start paying benefits to surviving 

spouses and young children. 

People eventually became aware of our collection of death 

records. In 1978, Ronald Perholtz filed a lawsuit under the FreeVerDate Nov 24 2008 19:45 Apr 08, 2014 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 R:\DOCS\87414.000 TIMD
12 

dom of Information Act, or FOIA, to gain access to the death 

records in our files. The Department of Justice advised us that we 

could not withhold the data requested under FOIA. 

As a result, we entered into a court-approved consent decree requiring us to disclose death records regularly. In time, because we 

began to receive more and more requests for death information, we 

contracted with the Department of Commerce’s National Technical 

Information Service to distribute the Death Master File. 

Recent media reports have stated that criminals use the DMF information to perpetrate tax fraud. While death data can be a very 

valuable tool to prevent fraud, we must strike a balance that allows legitimate uses of the data while also preventing misuse. That 

is why we believe the law should be changed to stop wrongdoers 

from obtaining our death information. 

The legislative proposal would delay the release of a deceased individual’s information on the DMF for 3 years after he or she dies. 

Only private entities that the Commissioner certifies as having a 

legitimate need for the information would receive the DMF immediately. 

At the same time, the proposal would expand Federal agencies’ 

access to death information for additional purposes, such as law enforcement and reducing improper government payments. We look 

forward to working with Congress on this legislation. This budget 

includes another proposal that would permit us to share our prisoner information to help other agencies reduce improper payments. 

I would like to briefly touch upon the wage reporting process. We 

collect wage reports to ensure that workers receive Social Security 

credit for their work. We also use this information to calculate benefit amounts. On a daily basis, we provide it to the IRS for tax administration. 

The President’s fiscal year 2014 budget includes two proposals 

that would enhance the wage reporting process while also helping 

to prevent fraud and error. One proposal would require more employers to file electronic wage reports, which are far more accurate 

than paper. The second proposal would restructure the Federal 

wage reporting process by requiring employers to report wages 

quarterly rather than annually. Increasing the frequency and timeliness of wage reporting would enhance the ability to detect fraud 

and curb improper payments. 

Again, thank you for the opportunity to describe our efforts in 

this area. I would be happy to answer any questions you may have. 

The CHAIRMAN. Thank you, Ms. LaCanfora. 

[The prepared statement of Ms. LaCanfora appears in the appendix.] 

The CHAIRMAN. I have two questions, really. First is, with a 3- 

year delay in releasing the deceased Social Security numbers, can’t 

the IRS have access to that information and match any refund requests or returns filed with the IRS against those to find out 

whether that person is actually alive? Maybe you, Mr. Miller, can 

answer that question. 

Mr. MILLER. So, we do receive the Death Master File currently. 

We do mark accounts in two ways. Those who have recently 

passed, their estate has to file a tax return with us, so they have 

a filing requirement. We cannot simply lock that account. 

13 

We do tag it so that we can judge whether it is a proper estate 

tax return or not, and we capture quite a few of those in our filters. 

With respect to those who have passed more than a couple of years 

ago, we do lock down their account so that people cannot use those. 

We have locked down more than 11 million of those accounts. 

The CHAIRMAN. So how confident are you that people are not ripping taxpayers off by fraudulently using these Social Security numbers, that is, numbers of people who are deceased? How confident 

are you that there is not much leakage there anymore? 

Mr. MILLER. I am quite sure there is some leakage, Senator. 

The CHAIRMAN. Where would it be? What is the flaw? Where are 

the cracks in the system? 

Mr. MILLER. So—and I would open it to my colleague from SSA 

as well—the system is only as good as the reporting to SSA is, and 

only as timely as the reporting to SSA is. These are not necessarily 

all coming from the DMF. People are stealing from funeral homes, 

from hospitals, so they may be utilizing those numbers in advance 

of our ability to load them in our system. 

The CHAIRMAN. What about those other sources; what are you 

doing about that: funeral homes, hospitals, et cetera? 

Mr. MILLER. So, we do not have the authority or the capabilities 

to police the use of Socials. All we can do is try to educate. 

The CHAIRMAN. If you had the authority, how important would 

that be to your enforcement? 

Mr. MILLER. I do not know whether that would be the IRS that 

should have that authority or whether others should have that authority. It is clearly a gap in the system. Someone needs to educate 

and make clear that these Socials need to be protected. We are trying to do that, and we are also trying, as you heard, in terms of 

the administration’s proposal, to try to get fewer of those SSNs 

floating around in the system. 

The CHAIRMAN. I would be interested in your reaction, and 

maybe others on the panel in my limited amount of time, to doing 

electronic filing. California is setting up a pilot program, as I understand it, where the State just sends you your return, and it is 

all filled out for you. I am trying to find some ways to use electronic systems to create more efficiency. So, if you could just comment a little bit on what we could do there. 

Mr. MILLER. I think, if I am understanding the question, Mr. 

Chairman, we are talking about California’s—what is called the 

Ready Return, or something of that nature. 

The CHAIRMAN. Yes. Right. 

Mr. MILLER. You would have to talk to California about how well 

it is doing. My understanding is it works, but for a limited number 

of individuals. We have actually worked with the software community, and they are partners in doing this. I am not sure that that 

is an answer to identity theft. Whether we want to go that way or 

not is a different question in terms of burden on the taxpayer, but 

I am not sure at all that that is going to be—— 

The CHAIRMAN. Just off the top of your heard reaction, is that 

something worth pursuing, the Ready Return approach? 

Mr. MILLER. Depending on where it would be in line of my priorities, Mr. Chairman, but it is not at the top of my priorities, no. 

The CHAIRMAN. And why not? 

14 

Mr. MILLER. Because we have quite a few other things on our 

plate right now. 

The CHAIRMAN. Yes. Others? Is there potential? Let me ask Mr. 

Porter, Ms. Olson. 

Ms. OLSON. Well, in my annual report, what we recommended for 

enforcement reasons is that the IRS needs to get W–2 and 1099 

data very early so it can do some of the protections for identity 

theft and fraud, and then, once we have that data, we should make 

that available to taxpayers so that they can download it into the 

software programs that they are purchasing or that they can give 

it to their preparers so we do not miss a 1099 or a W–2 somewhere. 

Or we recommend that the IRS create a return itself whereby taxpayers could download that information. For a small category of 

taxpayers, that return would be it, because they only have W–2 information. 

The CHAIRMAN. Right. Right. My time is expiring. 

Ms. OLSON. But for many others—— 

The CHAIRMAN. My time is expiring. But, Mr. Miller, very briefly, 

what are your number-one and your number-two priorities? 

Mr. MILLER. My number-one priority just finished up last night. 

The CHAIRMAN. Well, that is history then. What is it now? 

[Laughter.] 

Mr. MILLER. Making sure those returns finish their winding 

through and people get their refunds, Mr. Chairman. That is number one. 

Number two is the other legislative things we have in front of 

us, including the foreign account work we have, the health care act 

work that we have, and identity theft. Those are all in the same 

category. 

The CHAIRMAN. All right. Thank you. Thank you. 

Senator Hatch? 

Senator HATCH. Thank you, Mr. Chairman. 

Ms. Olson, if a criminal has the taxpayer’s name and Social Security number, it may be enough to file a fraudulent return seeking 

a refund. Now, identity theft victims now receive an additional 

layer of security to prevent the fraud from happening to them 

again. Would adding a similar, additional layer of security for all 

taxpayers be an effective way to prevent tax fraud related to identity theft? 

Ms. OLSON. I think that that is something worth looking into. 

People who e-file already have to answer certain questions, information off the last year’s return. What Acting Commissioner Miller 

was talking about, some of these out-of-wallet questions, things 

that we are familiar with—what was the name of your elementary 

school, your first pet, et cetera—are getting more accepted in doing 

business and may be easier for taxpayers to answer. 

I would also make a comment about something Mr. Miller referred to earlier about funeral homes and hospitals. I often wonder 

why they need Social Security numbers in the first place, why 

those numbers are available to these entities. Why are they asking 

for them? I think that that is something worth looking at, the proliferation of people asking for Social Security numbers where there 

is no overriding tax need, for example, for giving that information. 

Senator HATCH. All right. Thank you. 

15 

Mr. Miller, are refundable tax credits an element of the income 

tax system that make it easier for criminals to obtain fraudulent 

refunds, and are they more susceptible to fraud than nonrefundable credits? 

Mr. MILLER. I do not think we can crowd all refundable credits 

into one pile, Senator. I think that it is clear that where a refundable credit represents a large hunk of money, that that becomes a 

target, a natural target for thieves. 

That would be true of any credit, but especially of a refundable 

credit where there is no natural break on its utility. It really depends on the nature of what information we have to validate that 

credit at the time. I think that is more important than whether it 

is refundable or not. 

Senator HATCH. Well, as you know, some have advocated a return to more paper filing as a way to combat tax fraud through 

identity theft. However, would going to more paper tax return filings really reduce this crime? 

Mr. MILLER. We do not think so, Senator. First, we still see a 

goodly amount of fraudulent returns coming in on paper. Second, 

whether they come in on paper or whether they come in electronically, those returns and that information are going through the 

same system. 

So what we would have is a delta between something that costs us about 17 cents to process, that is an electronic return, and $3- 

plus for a paper return for, in our mind, not necessarily much benefit in terms of cutting down on fraud. 

Senator HATCH. I see. 

Mr. Porter, as a longtime professional tax practitioner, you have 

undoubtedly dealt with many cases where the IRS has assessed 

penalties. Penalties can be waived in some cases where the taxpayer can demonstrate ‘‘reasonable cause.’’ Do existing reasonable 

cause exceptions adequately protect both taxpayers and the government, and where is there room for improvement in this area? 

Mr. PORTER. Well, we have concerns about areas where there is 

not reasonable cause, where the reasonable cause exception is not 

allowed. So that is one area we are concerned about. Our concerns 

in the area where there are reasonable cause exceptions deals with 

really the subjectivity with which the rules are applied. As we all 

know, the tax code is extremely complex, and taxpayers many 

times will make foot faults that are unintentional, so we just believe that the subjectivity issue of how we decide whether they are 

or are not abated is the issue. 

Senator HATCH. All right. 

This is for all three of you. The IRS’s planned regulation of paid 

tax return preparers is currently on hold. The IRS lost on its appeal in a recent District Court case that ruled that the IRS does 

not have the authority to regulate tax return preparers. 

How important is the IRS’s ability to regulate tax return preparers in the battle to combat tax fraud, tax refund fraud for instance? 

Mr. MILLER. If I could start out, Senator. We think it is remarkably important. First, we have worked with the Department of Justice, and we are appealing the District Court case. We hope to get 

an answer this calendar year. Yes, we think it is vital. We think 

16 

it is vital to our ability to allow the public some confidence that the 

return preparer whom they are selecting meets certain basic competencies. So, we find it very important. 

Senator HATCH. Mr. Porter? 

Mr. PORTER. We have consistently supported the IRS and their 

program to register tax return preparers and provide ID numbers, 

and the expansion of Circular 230. We agree that we think it provides the taxpayer a level of confidence to know their preparer has 

at least a basic level of competence, and it allows the IRS the ability to track preparers and to see the type of returns that they are 

preparing and potentially be able to spot fraud issues early on. 

Senator HATCH. All right. Ms. Olson? 

Ms. OLSON. I personally have over 50 taxpayer assistance orders 

sitting on my desk that are in the process of being issued to Mr. 

Miller over there on my right, where the taxpayers have been the 

victims of preparer fraud. 

The preparers have taken their identity or filed unauthorized returns and had the refunds of significant amounts of money—as 

much as $5,000—deposited into their personal accounts. We are 

dealing right now with the fall-out of the legitimate taxpayer trying 

to file a second return, a real return, and getting their refund back 

from us. 

When I see return preparers in massage parlors and return preparers in dog grooming locations, I am not saying that they should 

be shut down, but I am saying that they should be required to 

demonstrate their competency to prepare returns. That is the environment that we have today, absent this regulation, that folks are 

just hanging up their shingle without any qualifications whatsoever. 

Senator HATCH [presiding]. All right. Thank you all. 

Senator Grassley? 

Senator GRASSLEY. Yes. Mr. Miller, recent reports indicate that 

the IRS has taken a position that it can access taxpayer e-mails 

without warrant under the Electronic Communications Privacy Act. 

While that law does allow Federal agencies to obtain electronic 

communications from a remote computing service without a search 

warrant, provided that they are older than 180 days, this position 

is contrary to the 6th Circuit decision in Warshak. In that case, the court held that the search warrant is necessary 

to obtain any content of an e-mail, regardless of age. It is my understanding that the Department of Justice has extended this policy to all circuits. So my question is, why is the IRS taking a more 

aggressive posture under that law than the Justice Department 

has applied for all agencies, or applied to all circuits? 

Mr. MILLER. Well, Senator Grassley, the short answer is, we are 

not taking that position. We follow Warshak. In the criminal context, we seek a search warrant in advance of going to an ISP, 

Internet Service Provider, for e-mail content. On the civil side, we 

do not have a policy that has us going to them anyway. We are 

going to clarify that in our procedures. We think that is currently 

the case in any event, but, in short, we are following Warshak. Senator GRASSLEY. Well then, I think I can go on to my next subject. Well, maybe one other follow-up. Is the same standard going 

to be applied to civil and criminal investigations? 

17 

Mr. MILLER. My understanding—and you are not talking to a 

criminal lawyer here—is, we cannot get a search warrant in a civil 

matter, only in a criminal matter, so we would not be going to the 

ISP for content of e-mails on the civil side. So it is in conformity 

with the statute, and it is in conformity with the 6th Circuit opinion in Warshak. 

Senator GRASSLEY. All right. 

Would this apply also to Facebook and Twitter? 

Mr. MILLER. You are probably moving out of my range of ability 

to answer. I will come back to you on that. 

Senator GRASSLEY. All right. Well then, why don’t you respond 

to that in writing? 

Let me go on to my next and last issue, again to you. You probably know that, a few months ago, I sent a letter to you expressing 

my concern about the proposed whistle-blower regulations. Chief 

among these were that they will hamstring the program by limiting awards and discouraging knowledgeable insiders from coming 

forward. 

Last week, the IRS held a hearing on proposed regulations. A 

number of whistle-blowers and attorneys made their concerns with 

the proposed regulations loud and clear. If the whistle-blower program is going to be as effective and successful as it can be, the 

final regulations ought to address those concerns. 

Unfortunately, it appears that the concerns expressed by me and 

others may be falling on deaf ears, because, at last week’s IRS 

hearing, a whistle-blower attorney asked those attending to raise 

their hands if they thought the proposed regulations would encourage future IRS whistle-blowers to come forward. 

It is my understanding that the only persons to raise their hands 

were the IRS panel members. It is difficult for me to understand 

how anyone, particularly anyone with knowledge of the concerns 

expressed by me and others, would not raise their hand. 

So do you agree that the IRS panel members are correct, that the 

proposed regulations will actually encourage whistle-blowers to 

come forward? I would like to have an explanation of why or why 

not. 

Mr. MILLER. Let me do a few things here, Senator. First—and I 

hope you know this—I am supportive, and the Service is trying to 

be more supportive, of the whistle-blower community, with continued contact and discussion with them, of getting information in 

from them, because there are blind spots for us in reporting. So, 

in the offshore area and other areas like that, they are vital. We 

are trying to do what we can. I would say the proposed regulations 

are just that: they are proposed. 

We are talking to people about what changes are necessary, what 

changes can be made. I think we would also welcome a chance to 

discuss with you what we can do, what we cannot do, and what 

might require legislation. So that is sort of where we are. 

To the extent we can make whistle-blowers more comfortable and 

communicate with them more along the way, I think that is a positive. There are a couple of provisions in the administration’s 2014 

bill that you may know about that are going to help here. One of 

them will allow us to release more information, I think, to the 

18 

whistle-blower towards the end of the process. That also has the 

detail of requiring them to treat it as 6103 information. 

The other piece that you may be aware of and that you have 

pushed for, Senator, is to have the False Claims Act reprisal rules 

put into title 26 as well. So I would welcome a conversation, a continued conversation on this, and we are still working on it. 

Senator GRASSLEY. I welcome that conversation, because I think 

it is a situation that is similar to the False Claims Act that you 

just talked about, which has brought in $33 billion to the Federal 

Treasury since 1986. I did not anticipate that would ever happen. 

I think we have more of a gold mine here if we start listening 

to these whistle-blowers. I think we have already seen benefits potentially of at least $600 or $700 million, and probably billions of 

dollars out there that have already been identified. So I will submit 

some other questions along this line, but I do welcome your talking 

to me. 

I yield the floor. 

Senator HATCH. Thank you. 

Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. 

Mr. Miller, on this privacy issue, I want to be clear on it, because 

this has triggered enormous concern. Are you saying that the agency has not obtained electronic communications without a warrant? 

That is a ‘‘yes’’ or ‘‘no’’ answer. 

Mr. MILLER. I am sorry, you are going to have to repeat that one. 

Senator WYDEN. Has the agency obtained electronic communications without a warrant, yes or no? 

Mr. MILLER. Not to my knowledge. 

Senator WYDEN. All right. 

Now, your lawyers say that you can. Mr. Chairman, I would ask 

unanimous consent to put into the record a memo outlining why 

the IRS lawyers have taken the view that Americans’ e-mail, Facebook messages, and Twitter communications which are older than 

180 days can be obtained by the IRS without a warrant. 

Senator HATCH. Without objection. 

[The information appears in the appendix on p. 109.] 

Senator WYDEN. Thank you, Mr. Chairman. 

You indicated, Mr. Miller, to Senator Grassley that you would go 

back and look at this. When will we actually get a public statement 

that the agency will not seek to obtain electronic communications 

without a warrant? When would we get that actual public statement? 

Mr. MILLER. I think the point I had was that the raising of the 

issue of Facebook and Twitter—you have that statement from me 

today, earlier today, Senator Wyden. We are not doing it. What I 

have said is, in the criminal context, we use search warrants, and 

we are not going to the ISPs in the civil context for content e-mail, 

with or without warrant, because we cannot get a warrant in that 

context in any event. 

I will say that there is certain public information out there on 

Facebook, on Twitter. This is why I sort of want to be more 

nuanced in the discussion. There is certain public information that 

we might look at in terms of a collection action, in terms of an examination. That is a different sort of situation, and I would be glad 

19 

to come back and sort of work through that for you. But that is 

public information, not private information. 

Senator WYDEN. The public has recently learned, Mr. Miller, that 

the IRS legal counsel believes that Americans enjoy no general privacy to their online communications that are older than 180 days. 

That is why people are so troubled. So you have said, and it is certainly helpful to hear that today, that this has not been done in 

the past. I think it is very important that the agency clarify its policy with respect to the privacy rights of Americans and do it 

promptly. 

Mr. MILLER. And we intend to do that. 

Senator WYDEN. When will you do that? 

Mr. MILLER. I would hope to have that done—I do not have a 

date, but it is—— 

Senator WYDEN. Can you commit today to have this done within 

30 days, that the agency will clarify—— 

Mr. MILLER. I will use my best effort, Senator. I think we can 

do that, yes. 

Senator WYDEN. All right. 

Ms. Olson, what is your reaction to this question about the IRS’s 

position with respect to the privacy of tax information? I mean, we 

are always trying to find ways to boost tax compliance. Here we 

have—and I put it in the record—the general counsel of the IRS 

saying that Americans enjoy no general privacy to their online communications that are older than 180 days. That is not something 

that was made up by some whistle-blower, that was from the IRS 

general counsel. 

My sense is, the two issues are going to be related: taxpayer compliance and the privacy of Americans’ tax information. Section 6103 

of the Internal Revenue Code was written by the Congress to ensure that taxpayers’ tax information is private. What is your sense 

about memos like this, the one that I just quoted from, undermining the expectation that Americans have in section 6103? 

Ms. OLSON. Well, regrettably that memo was not shared with me 

prior to it being made public, nor was it circulated for my comments. My experience with memos such as that is, when they are 

actually circulated and people within the IRS, such as my office 

and myself, have an opportunity to raise concerns about them, that 

you get a much better quality work product, and it might have 

looked different had the voice of the taxpayer had an opportunity 

to comment on that. 

I think that it is vitally important to people’s willingness to comply with the laws that they feel like they are being treated fairly 

by the tax administration, just as the tax administration is asking 

them to behave properly with their tax filing obligations. 

Not having a full and robust discussion internally is one sure 

way of coming out with guidance such as that, so that then it needs 

to be said, ‘‘We are not going to follow that.’’ I just have to say that 

the Chief Counsel often issues memos in answer to very narrow 

questions, and, when you have a greater discussion, you are able 

to place that in context and get a better product. 

Senator WYDEN. My time is up, Mr. Chairman. I would just note 

that, as a general rule, having worked with Ms. Olson over the 

years, the public is better protected when Ms. Olson is consulted. 

20 

I think that we have learned that again, and I hope, Mr. Miller, 

that that lesson is one of the take-aways of this discussion. Thank 

you. 

Senator HATCH. Thank you, Senator. 

Before we turn to Senator Nelson, let me just ask you, Mr. Miller, what are the criminal penalties for a person who commits identity fraud with regard to the IRS; do you know? 

Mr. MILLER. I am probably the wrong one to address that question to. 

Senator HATCH. Does anybody know there on the panel? 

Mr. MILLER. I will say there are two things that are being proposed as part of the 2014 budget that you all should be thinking 

about. One is, a specific penalty on the civil side of $5,000 for each 

filing of a false return by reason of identity theft. That would be 

new. There is also an additional 2-year sentencing guideline that 

would be brought to bear, or possibly brought to bear. In a tax case 

where there is an aggregated identity theft rule on the books that 

does not apply to tax cases, this would put that in. 

Senator HATCH. Sure. If you would, I would like to have you 

folks make recommendations of what type of a criminal penalty 

there should be for people who engage in these type of practices. 

I think it ought to be pretty stiff, myself. 

Ms. OLSON. Sir, there is, for preparers in particular, a criminal 

penalty if they use or disclose taxpayer information without the 

taxpayer’s consent. So, when you have a preparer who is using that 

information to file a return that the taxpayer did not authorize, I 

think we do have some tools. We have not used that authority, to 

my knowledge. 

Senator HATCH. I am more interested in the actual tax fraud 

that is being perpetrated. 

Senator Nelson, you are next. I apologize for interrupting. 

Senator NELSON. First of all, I have been heartened by the commentary that we have heard from the witnesses with regard to either the overall impact of the legislation that we have filed or the 

parts of it they have testified to. 

I would like to pursue just a couple of comments here that will 

further, I think, give credence to the need for this legislation. I 

would appreciate, to the chairman and the ranking member, if you 

all would seriously consider moving this legislation. I think the testimony today has brought out parts of it. 

I want to thank Mr. Miller. For example, for some reason we 

have seen a concentration of this fraud in Tampa and Miami. Senator Isakson came in. There has been a concentration in Georgia 

as well as Florida, of taking identities and filing false returns and 

getting a refund. This has such an impact, and we have had a 

hearing before in this committee a couple of years ago. I just recently had another hearing in my capacity as chairman of the 

Aging Committee. 

What happened in Tampa is that street crime has suddenly 

dropped because the criminals are using a laptop instead of a crowbar. The drug traffic on the corners has diminished because they 

found a new way that is a lot easier and a lot less risky to get 

somebody’s money. In this case, it is the United States taxpayers’ 

money. 

21 

Mr. Miller, you said you had spent something like $330 million 

going after ID theft, but you said you had prevented $20 billion of 

theft. That is a pretty good return on your investment. At the same 

time, there is still, according to your figures, $5.2 billion that is lost 

to the taxpayer. So I would be curious, Mr. Miller. Why do you 

think it is happening in concentrated places like Tampa and 

Miami? 

Mr. MILLER. I do not know that, but where it seems to work, people begin to use it. We really have not gotten behind that. We really do not understand why. It did, in fact—Florida was the beginning of this. You are absolutely right: you still are suffering the 

greatest amount of this in those two areas. 

Senator NELSON. Well, I want to thank you. Working real-time 

with the local police—here is a good example of government working. They cannot share information. That is prohibited. But we 

worked it out where, with the victim, the taxpayer giving their consent, that they, the IRS, could share the tax information with the 

local law enforcement so that it would help them bolster their ability to go after the bad guy. 

Now, another way, Mr. Chairman, that they get around this is 

that they have the tax return money come to a pre-paid debit card, 

and then there is no identifying information so that the police can 

go after the bad guy. What do you think about that, Mr. Miller? 

Mr. MILLER. I do very much appreciate your comments on our 

improved work with local law enforcement. We did not start out 

doing as good a job as we needed to there, and, with your help and 

the help of Florida authorities, I think we are doing much better. 

On debit cards, they were proliferating. I am not sure where they 

are today. There have been some changes in the rules about, know 

your customer and the application of those rules to debit cards. We 

may see a different result now than we did earlier, but it is something we should be talking about. 

Senator NELSON. Well, each one of the people, including Ms. 

LaCanfora from Social Security, has pointed out the problems. 

Now, they are constrained because they can only do so much with 

Social Security numbers. But we know it is a problem on the Death 

Master File. We need to delay the publication. 

As she said, the Commissioner of Social Security can go in and 

make available to legitimate interests, like life insurance companies, the Social Security numbers, but stop publishing them on the 

Internet. Otherwise, it is like shooting fish in a barrel. If you have 

the number, somebody is going to go and file a false return. So, Mr. 

Chairman, with the utmost of urgency on the day after tax day, I 

would urge you and Senator Hatch to get this legislation moving. 

Thank you. 

Senator HATCH. Would the Senator yield? 

Senator NELSON. Of course. 

Senator HATCH. I would like to be on his bill with him. We understand there is an Ancestry.com problem that we need to resolve. 

If we can resolve that, I think I would go on the bill with you. 

Senator NELSON. Of course. 

Senator HATCH. And I would like to support it and push it. 

Senator NELSON. And it is legitimate users. 

22 

Senator HATCH. But you only add 2 years’ criminal penalty on 

to the current penalty. Do you know what the current penalty is? 

Senator NELSON. Oh yes, sir. The current penalty is only 3 years. 

The bill takes it up to 5 years. The current fine is only $100,000. 

The bill takes it up to $250,000. 

Senator HATCH. Well, I think the criminal penalties ought to be 

higher than that so that people realize there is a substantial penalty for doing this type of stuff to their fellow citizens. I just want 

to commend the Senator for working on this. I would like to be on 

it. Let us work out that Ancestry.com thing so that it works, and 

I will be happy to work with you. 

Senator NELSON. Of course. 

The CHAIRMAN. Thank you, Senator. 

Senator NELSON. Thank you. 

The CHAIRMAN. Senator Cardin? 

Senator CARDIN. Thank you, Mr. Chairman. I thank our witnesses. 

On a regular basis, I talk to my staff people who handle case 

work to see what they are spending most of their time on. Identity 

theft is a major issue in my Senate office, and I would say probably 

in every Senate office. It is a growing problem. The number of people affected by identity theft, including the IRS issues that we are 

talking about today, is increasing, and the cases are becoming more 

complicated. 

People are waiting to get refunds who thought their refunds 

would come in, and it is taking a longer time. The number of people who have been compromised is increasing. So, Senator Nelson, 

I want to thank you for your leadership on this. I am proud to be 

a co-sponsor of your bill. You deal with some of the core issues to 

prevent identity theft, and the careless use of Social Security numbers as an identifier clearly has to change. 

I am reminded that, today, I believe the instruction from the IRS 

is to put your Social Security number on your check, on your returns. I do not know why you need that. That check, after it is— 

who knows where it is going to be seen or used? It just adds another area of abuse. So I would just urge us to follow Senator Nelson’s leadership to minimize the use of the Social Security number 

much more than we use it today. 

I also applaud Senator Nelson for recognizing that we have to 

work together, the local law enforcement with IRS and Federal authorities, in a much more efficient way to deal with this issue. Our 

number-one objective is to prevent identity theft. Obviously, once 

it has occurred, our responsibility is to make sure that those who 

have been victimized are treated fairly, including getting access to 

their refunds in a timely way. 

As Senator Hatch has pointed out, those who have committed the 

crime need to be held accountable for their actions so they understand that we will not tolerate this type of crime, which I believe 

is the fastest-growing crime in America today. 

So let me ask, particularly Mr. Miller and Ms. Olson, a question. 

Any one of you can respond. Basically, what resources do we need 

in order to accomplish this objective? We talk about tight budgets. 

What do we need? 

23 

A second issue I hope you would address is that we all are very 

proud that refunds are sent very promptly by the IRS to those who 

have refunds due. But if it is sent to the wrong person, you are not 

helping that individual at all. Should we be considering greater 

audit or greater scrutiny of a tax return as to where the checks are 

being mailed, or I guess where they are being transmitted, to make 

sure that we—is there something we can do that maybe will delay 

the refunds by a day or two, or three or four, but cut down the 

number of checks that are being sent to wrong accounts on a fraudulent basis? 

Mr. MILLER. So let me start in the response. In particular, I will 

start with the budget. Thank you for asking the question, sir. The 

IRS, in the last 2 years, is down about $1 billion, 8 to 10 percent, 

including the $600-million cut we took in sequestration. As I mentioned, we are spending about $330 million in identity theft at this 

point. It is clear we do need more resources. We need technology 

dollars, and we need additional employee dollars as well. The 2014 budget that has come up here has both. It has $100 

million for identity theft and 800 FTE, full time equivalencies, as 

well as some other dollars in the IT area. That is a start. It is not 

by any means, as you can tell, a full reimbursement of what we are 

doing, but that is a start. We do need resources, there is no question about it. 

Again, I have said this before. I would say if you had a dollar 

to give me and there was a choice between giving that dollar for 

an employee or giving it to me for IT improvements, I would take 

it for IT improvements because, ultimately, that is what we need 

here, to be better at processing these returns, at matching the information. 

Moving to your second area on refund speed, I think it is a discussion we should have. We should have that, whether it is the 

ability to get W–2s earlier, 1099s earlier, which we are trying to 

do, but let us face facts. The answer here is that the IRS has as 

much information as we possibly can at the time we make the decision about issuing a refund. So, I think there are discussion points 

we ought to have around that. 

We also should have discussion points around the other issue you 

raise, which is, whether it is a debit card or whether it is a direct 

deposit, there are currently rules elsewhere as to what level of diligence needs to be had between those making the payment into that 

account and those maintaining the account as to the identity, and 

do those identities match. That is a discussion that I would welcome, but it is not an IRS discussion. It is not what we regulate. 

But that is an area fertile for discussion. 

Ms. OLSON. If I may. I am aware of the time, but if I may make 

some comments here. I do believe I named the funding of the IRS 

a most serious problem for taxpayers, and I think, on the taxpayer 

service side, which is where identity theft falls, that we are very 

much suffering. I do believe that there is a lot that can be done 

with the internal procedures right now that would improve service 

to the taxpayers. 

I think that the larger discussion is this whole refund culture. 

We have started sort of raising that as an issue. Many other tax 

administrations in the world actually do not issue refunds until the 

24 

filing season is over and they have an opportunity to compare the 

data that they get in with the returns that they are getting. 

That does not just go to identity theft, but all sorts of just mere 

errors on the returns that they have an opportunity to correct, and 

then they issue the refunds a month after the filing season is over. 

I think that is part of the serious discussion we need to have. 

With respect to validating the accounts, it used to be 15 years 

ago that the IRS would get bank information, and the banks would 

actually verify whether the name on the account matched the name 

of the check that it was going into. I think direct deposit sort of 

made that more difficult. 

We have gotten various answers about what banking law permits 

and what it does not, so I think that is something that would be 

a good subject of study for this committee and other committees as 

to whether there is a conflict in the law that would prohibit us 

from being able to do that kind of verification process. 

Senator CARDIN. Thank you, Mr. Chairman. 

The CHAIRMAN. Mr. Miller, what are you doing about employee 

sensitivity training? You know, that example. Clearly it is unacceptable that IRS employees hang up on the Kipp Sailes of the 

world. 

Mr. MILLER. It is. It is. It is no way for us to behave. We have 

trained people. We do train people. We train our CSRs. In fact, we 

have trained probably 37,000 folks on how to deal with an identity 

theft situation and to recognize that it is happening, to be sensitive 

to the folks on the phone who have been victimized. We are trying. 

We are trying. I think we do well. There are obviously instances 

where we fail, and we need to work at getting better at that. 

The CHAIRMAN. I mean, it really is not difficult at all. Just, anybody who answers the phone has to keep his or her head screwed 

on straight and remember that they are there to serve the person 

calling. 

Mr. MILLER. Agreed. 

The CHAIRMAN. It is not hard. It is pretty simple. I have staff 

just in my office who take a lot of telephone calls from a lot of people. I marvel at how well they handle all these telephone calls. Do 

you take calls yourself? 

Mr. MILLER. I do take some calls, yes. 

The CHAIRMAN. Why don’t you go over and sit in one of those offices for a day so they can watch what a good job you do? 

Mr. MILLER. I have sat with CSRs, the people who take the 

phone calls. It is not an easy job, Senator. It is something that they 

do very well. But there are going to be instances, unfortunately, 

with 12,000 to 15,000 people, where you have slip-ups and you 

have failures, and we have to get after those, there is no question. 

The CHAIRMAN. When you hire people, they go through training? 

Mr. MILLER. They absolutely do. 

The CHAIRMAN. Before they get hired? 

Mr. MILLER. Well, not before they get hired. 

The CHAIRMAN. I am asking, before they get hired. 

Mr. MILLER. Do they get training before they get hired? 

The CHAIRMAN. No, no, no, no, no. I am just saying, when people 

apply, do you look at these qualities in an applicant before you decide whether or not to hire them? 

25 

Mr. MILLER. We do try to assess whether they are the type of 

person who could be on the phone and will keep their cool. 

The CHAIRMAN. It is better to hire uppers than downers. 

Mr. MILLER. Yes. That is why I will never be on the phone. 

The CHAIRMAN. You hire uppers, people who are positive, upbeat, 

they are going to be good employees and they are more likely to 

treat taxpayers appropriately than if you hire a downer, who is 

more likely to treat them inappropriately. 

Mr. MILLER. Right. 

The CHAIRMAN. So what do you think, Ms. Olson? What can be 

done to increase more appropriate IRS employee response to taxpayers who are calling in, appropriately upset that someone has 

stolen their ID, and appropriately upset if the Service is not helping them, if the Service thinks, oh, that is not your problem, it is 

the Service’s problem? 

Ms. OLSON. I think that it is very difficult when you receive lots 

of calls in a day to remember that the taxpayer is a human being 

and not a widget or a case. I think in my own organization what 

we try to remind my employees of on a regular basis is just that. 

And the kind of training that we have been trying to do, both in 

the domestic violence area, where you are working with victims of 

domestic violence, and moving into the area of identity theft or 

even just people in economic extremes, is to make employees understand, even if people are angry with you, that it is not personal 

and that there are ways of ramping down and dialing down the 

conversation and the emotions. Saying ‘‘you are not a victim’’ is not 

one of those ways. 

So I really think it goes to the nature of training, and it is not 

a one-time thing; you have to reinforce that message to your employees. You also have to give them a chance to de-brief and to deal 

with their own stress, because I cannot emphasize enough how difficult it is to be on the phones and listen to people’s cases, and it 

is very easy to try to steel yourself against that pressure. 

So, as a manager, I think constantly of how to keep my own employees’ morale up even as I am trying to encourage them to listen 

to the taxpayer, not take it personally, and be empathetic. I cannot 

emphasize enough that last word. 

The CHAIRMAN. I am sure it helps for employees to rotate so they 

are not sitting in that same place all the time. I mean, for short 

periods, go off and do something else and then come back again, 

get refreshed. 

Mr. MILLER. I could not agree more. Our difficulty is the number 

of people we have on the phone and the level of service we try to 

apply and get to. It is very difficult. 

In a better world, I would be taking people off and letting them 

work paper to decompress. That is not the world of our filing season right now, sir. We do not have the bodies to be able to do that 

and provide the level of service that is necessary for the American 

people during tax filing season. So, in particular, this time period 

is difficult. 

The CHAIRMAN. Do you have any goals, benchmarks, that are 

quantified as to a certain date you would like to see refund waiting 

lists shortened, or a certain number of days, and the same with ID 

theft, get it cut down to a certain number of taxpayers whose idenVerDate Nov 24 2008 19:45 Apr 08, 2014 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 R:\DOCS\87414.000 TIMD
26 

tities are stolen? Are you working down to approaching zero on the 

last category? 

Mr. MILLER. We track virtually everything we do, Senator. We 

certainly do track the efficiency we have. Our difficulty with identity theft is what we need to do is, I agree, get our cycle time down 

to what is much more reasonable than it is right now. We are getting there. We are closing, again, more cases than we are getting, 

and that is pretty key. 

The CHAIRMAN. But do you have a number? What is it now? 

What is the cycle time now? 

Mr. MILLER. The cycle time is around 180 days. 

The CHAIRMAN. Are you trying to get it down to 120? 

Mr. MILLER. I would like to get it down to 90. 

The CHAIRMAN. I know you would. But you have to get to 120 

before you can get to 90. Do you have a date by which you are 

going to get to 120, another date when you get to 90, another date 

when you get to 60, another date when you get down to 30? 

Mr. MILLER. I do not think I am going to get to 30. One will always have these cases, unfortunately, I believe. 

The CHAIRMAN. I am just asking, do you have standards? I mean, 

do you have numbers that you are aspiring to? 

Mr. MILLER. I am aspiring to 90 days by the end of this calendar 

year. 

The CHAIRMAN. Ninety days at the end of this calendar year? 

Mr. MILLER. Yes. But that is aspirational, and it depends on the 

number of cases we get in. 

The CHAIRMAN. All right. Let us do it this way. It is 180 today? 

Mr. MILLER. Roughly. 

The CHAIRMAN. So you want to cut it in half by the end of the 

year? 

Mr. MILLER. Yes. 

The CHAIRMAN. And this is April. So let us do a little midway 

test the 1st of September to see where you are, and let us know. 

Mr. MILLER. All right. 

The CHAIRMAN. All right. Thanks. 

Senator Thune? 

Senator THUNE. Mr. Chairman, thank you. I want to thank Commissioner Miller for the penalty relief that you are providing to filers who have been impacted by storms in the south and the Midwest over the past few days. 

I can speak from personal experience. In South Dakota, we have 

had a lot of people without power in our largest community in our 

State and a few other places, and a lot of damage from recent 

storms. So, we appreciate your willingness to work with us. I do 

not know what that extension is going to be, and we look forward 

to working with you to try to address as best we can the need that 

people will have to perhaps have a little bit of additional time to 

get their returns filed. 

Let me, if I might, come back to the issue of fraud and ask this 

question, because I think there are a lot of Americans who would 

be surprised to know that the IRS does not currently match W–2 

information against information reported on tax returns so as to 

prevent the identity theft-related fraud. 

27 

So I am wondering maybe if you can explain why this is the case 

and what, if anything, the IRS is doing to fix the problem. My understanding is that using W–2 information before a tax refund is 

issued is one of the recommendations that has been made by the 

National Taxpayer Advocate, so why is a match-up not done? 

Mr. MILLER. The W–2 comes to Social Security, they do a bit of 

transcription—and my colleague from Social Security can speak to 

this—then it comes to us rather quickly. We actually have moved 

it up, and we are doing some matching, but we are not doing 

matching as of the 1st of February, which would be when we would 

first begin to make those decisions on refunds. We are doing it a 

little later in the year. So we are getting better at it. 

There is a discussion in the President’s budget about going quarterly for wage information or, in our case, we also have a test going 

on of some State wage data, and we can use that because that is 

earlier also. So there are other ways to do this. The fact of not having the W–2s is a function of when they come in to the government, 

and that is a question of burden on both large and small employers. 

Second, when we have to start the filing season, that is a question of how fast people want their refunds. Those are pretty big discussion points that we ought to have as we decide where to go here. 

Senator THUNE. Ms. Olson, that was a recommendation from the 

Taxpayer Advocate. Do you want to add anything to that? 

Ms. OLSON. Well, we really think that there needs to be a review 

of the requirements, the due dates, given 21st-century technology 

of e-filing and availability of data, and can that be moved up so Social Security and the IRS get the information. We have always 

wondered why it is that the IRS does not get the information first, 

and we have proposed a pilot for the IRS, which does its own scrubbing of numbers, to determine if it is as good as Social Security in 

identifying any errors in the data so we do not need to wait that 

time. 

But I think the real thing is, you have to look at the dates, the 

due dates, of the start of the filing season and the due dates of the 

1099 and W–2 information. How soon can you get a reasonable 

amount, the bulk of these W–2s in, so that you would have them 

available to match with the returns? 

I think you have to pull in the 1099s on the interest and dividends, because people make little mistakes on that, and it would 

be great to get them up front rather than dealing with them after 

the fact for filing. That is more a taxpayer service benefit, but, if 

you are doing one, you might as well do the other. 

Senator THUNE. All right. Thanks. 

Ms. LaCanfora, this is a little bit off of this particular subject, 

but I wanted to just ask this question because I posed this question 

to your predecessor, or I should say I raised the question, I think, 

before with the Commissioner. But it has to do with last year’s annual report on the financial status of Social Security by the trustees of that program. 

We obviously know the challenge that the program faces in the 

long term, but it indicated that you are going to have the Social 

Security trust fund exhausted by 2033, and the Disability Insurance trust fund facing bankruptcy by year 2016. So you have the 

28 

issue of significant benefit cuts perhaps happening automatically 

for beneficiaries. 

That is why this issue, I think, bears on that other one, and that 

is why I think it is so concerning, the reports of fraud in the SSDI 

program. The Wall Street Journal had reported on some potentially 

fraudulent practices on the part of law firms such as Binder and 

Binder, representing claimants for disability benefits before the Social Security Administration, particularly in the appeals process 

where administrative law judges adjudicate claims. 

I guess I am curious as to what actions the Social Security Administration has taken to address allegations about this law firm 

and their material representations to the Social Security Administration, and how are you prioritizing the Social Security Administration’s program integrity functions within your existing budget to 

ensure that there is a proper response to fraud claims in the SSDI 

program. 

Ms. LACANFORA. A lot of questions there. First, let me just make 

one comment about the prior discussion with Ms. Olson about the 

time it takes us to process wage reports. I just wanted to say that, 

if an employer files a wage report electronically with the Social Security Administration, we turn that around to the IRS within 24 

hours, generally speaking, so there really is no delay. That has improved significantly over the past 10 years. I just wanted to put 

that out there for the record. 

With regard to the Social Security Disability Insurance program, 

there are a lot of things we could talk about there, probably the 

subject of a whole series of other hearings. But I will say, with respect to any suspicious or fraudulent activity, we have many mechanisms in place to try to combat fraud. I will mention just a couple. 

One is our Cooperative Disability Investigation Units, which are 

units around the country in which we partner with both the Inspector General and local law enforcement to investigate any allegations of fraud and abuse. We do thorough investigations in collaboration with local law enforcement. 

In addition to that, we have the mechanism, of course, of our 

own Inspector General. Our employees around the country, who 

deal with benefit applications every day, have the ability to refer 

any suspicious activity to the Inspector General. We believe that 

with all of the mechanisms we have in place, the fraud in the program is still extremely low. We put it at less than one-half of 1 percent of all claimants who file benefit claims with us. 

Senator THUNE. How about specifically the allegations about this 

law firm and their material representations to the Social Security 

Administration? 

Ms. LACANFORA. From our perspective, we have not substantiated any harm, abuse, or misuse with respect to that law firm. 

Senator THUNE. All right. Well, there has been a significant 

amount of reporting to the contrary, but I appreciate your looking 

into it and hope you will continue to stay on top of it. Thank you. 

Thank you, Mr. Chairman. Mr. Chairman? There is nobody here. 

[Laughter.] 

All right. Well, I guess this hearing is adjourned. Thanks. 

[Whereupon, at 11:35 a.m., the hearing was concluded.] 

(29) 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD


87414001.eps
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87414.002

Instead of helping Kipp clear up this mess, the IRS has made a bad situation even worse. Kipp has been 

told twice by IRS employees that he wasn't defrauded - the U.S. government was. And at least one IRS 

employee hung up on Kipp while he was trying to make his case. 

It's outrageous. I won't stand for a Montanan, or any American taxpayer, to be treated with that kind of 

disrespect by an agency that is supposed to serve them. 

I'm going to say this very clearly Mr. Miller: Never forget that you and everyone else at the IRS work for 

Kipp Saile, and all American taxpayers. Your job is to serve them. I certainly hope this was an isolated 

incident that does not reflect the type of service prOVided by the IRS. 

But there is no excuse for even one rude employee like this, and I intend to find out what you're doing 

to make sure this type of behavior is not repeated. It's critical that the IRS is ready and equipped to 

handle cases like Kipp's, because they are increasingly common. 

We've all seen the stories in the newspapers and on TV about 10 theft. Just last week, USA Today 

highlighted some of the most egregious examples of tax 10 fraud, like a case where one address in 

Michigan was used to file 2,137 tax returns. And there was another case where a single bank account 

was used to receive 590 direct-deposit refunds from the IRS totaling more than $900,000. 

In recent Congressional testimony, the IRS reported they had identified more than 900,000 fraudulent 

returns and stopped more than $6.5 billion in fraudulent refunds in 2011. But that was only the tip of 

the iceberg. 

The Treasury Inspector General for Tax Administration recently reported that another 1.5 million 

fraudulent returns went undetected in 2011, potentially allowing $5.2 billion in refunds to be paid. The 

IG estimated that if tax identity theft were not addressed, it could cost the IRS $21 billion in fraudulent 

refunds over the next five years. 

Enough is enough. It is time to act. Three weeks ago, members of this committee were briefed on tax 

reform options that included proposals to help combat tax fraud and tax 10 theft. Senator Nelson, 

joined by Senators Cardin, Schumer and Feinstein, introduced comprehensive tax fraud legislation last 

week. 

I am pleased that the Administration has included several significant tax fraud prevention proposals in 

its fiscal year 2014 budget. This includes limiting access to death records and omitting Social Security 

numbers on wage statements. 

But there is still much more that can be done. We know tax fraudsters have easy access to taxpayers' 

Social Security numbers through online databases, hospitals and other businesses that store personal 

information. We need tougher controls on access to private information, but it needs to be done 

efficiently without adding more paperwork to the process. 

We know that fraud is easier to detect when the IRS can match a W-2 filed by an employer to a tax 

return before issuing a refund. Right now, that is not happening. We need to cut through the red tape 

and ensure this information gets to the IRS quickly. 
31 


87414.003

We also know that too often it can be the tax return preparers themselves who are the identity 

thieves. Proper oversight by the IRS can help prevent this. But we still face obstacles. 

The IRS was handed a major setback recently when a federal court ruled against their authority to 

regulate tax return preparers. The case, loving v. IRS, is ongoing, and I am hopeful that the IRS will 

succeed on appeal. I will be asking for an update on the status of that case in a moment. We need to 

consider whether additional legislation is necessary to specifically protect taxpayers from fraudulent 

preparers. 

This committee outlined several ideas recently to re-impose tax preparer regulations. I encourage you 

to look at those ideas that are part of our tax reform option papers. 

I also want to hear today how the IRS is utilizing the tools they already have. USA Today recently stated 

the IRS is "losing the identity theft fight" and criticized the IRS for taking too long to resolve fraud cases. 

According to the National Taxpayer Advocate it takes, on average, more than 180 days to close 

cases. That is unacceptable. The IRS needs to step it up and improve the way it handles tax ID theft 

once cases are identified. 

Victims of ID theft - people like Kipp Saile -are forced to put their lives on hold while their cases 

languish in red tape. 

The IRS needs to speed up prosecution through better communication with federal, state and local law 

enforcement. 

This committee is committed to protecting the American taxpayer. I am hopeful that we will be able to 

work together to move forward with legislation to stop tax ID theft. We owe that to Kipp Saile and all 

the victims of identity theft. 

### 
32 


87414.004

STATEMENT OF HON. ORRIN G. HATCH, RANKING MEMBER 

U.S. SENATE COMMITTEE ON FINANCE HEARING OF APRIL 16, 2013 

TAX FRAUD AND TAX 10 THEFT: MOVING FORWARD WITH SOLUTIONS 

WASHINGTON - U.S. Senator Orrin Hatch (R-Utah), Ranking Member of the Senate Finance 

Committee, delivered the following opening statement at a committee hearing examining 

effective solutions to address tax fraud and identity theft in the nation: 

Each year, the Finance Committee holds a hearing around the end of the tax filing 

season. In the past, these hearings have provided unique insight into the issues faced by 

American taxpayers as well as some of the overall problems we have with our notion's tax 

system. 

The subject of this year's hearing is the rapidly-growing crime of tax fraud by identity 

theft. This is a serious matter that deserves our careful attention. 

Two of my colleagues - Senator Nelson and Senator Crapo - should be commended for 

their efforts in this area. Their subcommittee - the Subcommittee on Fiscal Responsibility and 

Economic Growth - has held two hearings on this topic over the last two years. 

In addition, this was an important topic of discussion at last year's tax-filing season 

hearing before the full committee. 

I share the concerns of many throughout our country regarding tax fraud by identity 

theft. From 2010 to 2011, the number of these crimes nearly tripled, going from about 440,000 

to over 1.1 million. 

Two senior members of my Finance Committee staff know this issue very, very well as 

they have been the victims of tax fraud by identity theft. In both cases, criminals obtained their 

Social Security numbers, filed fraudulent returns, and collected refunds. 

For both staffers, this began a nightmarish scenario in which they had to spend days on 

the phone and filling out paperwork just to be able to file their own tax return. And, in the end, 

they have to live with the fact that their Social Security numbers are out there and they can only 

hope that they aren't used to commit another fraud. 

So, I want to thank our four witnesses for coming to talk to us about this troubling issue, 

and I assure you we are listening very carefully. 

When it comes to dealing with tax fraud identity theft, I understand that the IRS has 

adopted a three-pronged approach. 

The first prong is prevention, which means stopping this type of tax fraud from being 

successful in the first place. Clearly, given the prevalence of this crime, much more work needs 

to be done in this area. 
33 


87414.005

The second prong is providing taxpayer services for those who have been the victims of 

identity theft. This is a significant focus of the IRS, but it appears that the agency is falling 

woefully short in same instances. 

For example, an audit by the Treasury Inspector General for Tax Administration sampled 

17 different identity theft cases and found that the average time it took for these cases to be 

resolved was 414 days, 

That is simply too lang a wait for taxpayers who have been the victims of identity theft. 

I'm hoping we can discuss ways to cut that wait time down during today's hearing. 

The third prong of the IRS's approach is catching and convicting the criminals who have 

committed these crimes. This is a critically important step. If we can step up enforcement, 

many would-be criminals would likely decide that it's not worth the risk to commit these crimes. 

I am interested in hearing more about the IRS's efforts to follow this three-pronged 

approach, what successes they've had and what challenges they're still facing. That's why I'm 

glad that we have the top IRS official, Acting Commissioner Steve Miller, here with us today. 

In addition, I want to know what other steps could be taken to prevent these crimes, 

assist the victims, and improve enforcement. I believe all of our witnesses here today will be 

able to address some of these questions. 

While tax fraud identity theft is the major focus of this hearing, we'll also discuss general 

issues associated with the tax-filing season. 

This year, as with every year, taxpayers face a number of issues and obstacles as they try 

to file their returns. We need to do better in providing assistance during what can be a very 

difficult time for many af our citizens. 

For example, at last year's hearing, I noted that the IRS's goal of answering 61 percent of 

taxpayers'service calls was unacceptable. 'am glad to see this year that the IRS set a 

significantly higher goal. That said, I still think more can be done to improve taxpayer service. 

'hope we can have a full and informative discussion of these issues during today's 

hearing. Once again, , want to welcome our witnesses. Mr. Chairman, 'look forward to this 

very important hearing. 

### 
34 


87414.006

HEARING BEFORE THE 

COMMITTEE ON FINANCE, 

U.S. SENATE 

ON 

TAX FRAUD, TAX ID THEFT AND TAX REFORM: 

MOVING FORWARD WITH SOLUTIONS 

APRIL 16,2013 

STATEMENT OF 

MARIANNA LACANFORA 

ACTING DEPUTY COMMISSIONER FOR RETIREMENT AND 

DISABILITY POLICY 

SOCIAL SECURITY ADMINISTRA nON 
35 


87414.007

Statement of Marianna LaCanfora, 

Acting Deputy Commissioner 

for Retirement and Disability Policy, 

Social Security Administration 

before the Senate Finance Committee 

April 16, 2013 

Chairman Baucus, Ranking Member Hatch, and Members of the Committee: 

Thank you for inviting me to this important hearing on Tax Fraud, Tax ID Theft, and Tax 

Reform. I will discuss the death information that we maintain to administer our programs, and 

our collection, use, and safeguarding of wage information. I am Marianna LaCanfora, the Social 

Security Administration's (SSA's) Acting Deputy Commissioner for Retirement and Disability 

Policy. 

Let me begin by saying that we agree wholeheartedly that the Federal government must do 

everything it can to combat fraud and curb improper payments. In addition to discussing death 

information and wage reporting, I will also describe four legislative proposals in the President's 

budget that, if enacted, would enhance the Federal government's ability to combat fraud and curb 

improper payments. 

Program Overview 

We administer the Old-Age, Survivors, and Disability Insurance (OASDI) program, commonly 

referred to as "Social Security," which protects insured persons and their families against loss of 

earnings due to retirement, death, and disability. Workers, their employers, and self-employed 

persons finance Social Security through payroll taxes. We also administer the Supplemental 

Security Income program, funded by general revenues, which provides cash assistance to aged, 

blind, and disabled persons with very limited means. 

In addition to administering these programs, we handle lesser-known but critical services that 

bring millions of people to our field offices or prompt them to call us each year. For example, 

we help administer the Medicare low-income subsidy program and verify information for other 

Federal and State programs. 

The responsibilities with which we have been entrusted are significant. In fiscal year (FY) 2012, 

we: 

• Paid over $800 billion to almost 65 million beneficiaries and recipients; 

• Handled over 56 million transactions on our National 800 Number Network; 

• Received over 65 million calls to field offices nationwide; 

• Served about 45 million visitors in over 1,200 field offices nationwide; 

• Completed over 8 million claims for benefits and 820,000 hearing dispositions; 

• Handled almost 25 million changes to beneficiary records; 

• Issued about 17 million new and replacement Social Security cards; 
36 


87414.008

• Posted over 245 million wage reports; 

• Handled over 15,000 disability cases in Federal District Courts; 

• Completed over 443,000 full medical continuing disability reviews (CDR); and 

• Completed over 2.6 million non-medical redeterminations of SSI eligibility. 

Few government agencies touch as many people as we do. The programs we administer provide 

a financial safety net for millions of Americans, and many consider them the most successful 

large-scale Federal programs in our Nation's history. We have demonstrated throughout the 

years that we are effective stewards of program dollars and administrative resources. Moreover, 

we take great pride in securing the sensitive data and personal information that we maintain to 

administer our programs. 

Collecting Death Information to Administer Our Programs and the History of the Death Master 

File 

Currently, we administer benefit payments to over 61 million beneficiaries and recipients. We 

collect death information so that we can timely stop paying beneficiaries who have died and pay 

benefits to survivors of insured persons. Each year, we receive about 2.5 million reports of death 

primarily from family members, funeral homes, financial institutions, and States. When we 

receive information about an individual, we update our records, including the Numident file. l 

Over time, individuals and entities became aware that we were gathering this high-value 

information. In 1978, Ronald Perholtz filed a lawsuit against us under the Freedom of 

Information Act (FOIA) to gain access to the death information in our files. In 1980, we entered 

into a court-approved consent decree that required-and stilJ requires-the agency to release to 

Mr. Perholtz death information maintained by the agency. The Department of Justice advised us 

that Congress had not provided an exemption to the FOIA or the Privacy Act that would permit 

us to withhold the data requested by Mr. Perholtz. 

In 1983, Congress added subsection (r) to section 205 of the Social Security Act to require us to 

collect death information from States to update our program records. This subsection also 

describes the circumstances under which certain government agencies may receive such 

information from us. In addition, it specifies that the death information we receive from States is 

otherwise exempt from disclosure under the FOJA and the Privacy Act. However, the 1983 

amendment did not exempt from disclosure death information that we obtain from sources other 

than the States. 

Following the consent decree in the Perholtz litigation, we began to receive additional requests 

for the same death information that we were providing to Mr. Perholtz. Because we had no legal 

basis to withhold that death information, we created a file that we could make available to 

requesters. The file-now commonly known as the public Death Master File (DMF)-contains 

the non-State death information we maintain to administer our programs. 

I The Numident contains identifYing information associated with a Social Security Number, including a death 

indicator and parents' names. 
37 


87414.009

Since 1992, due to the growing number of individuals and entities seeking the DMF, we have 

provided the file to the Department of Commerce's National Technical Information Service 

(NTIS) to distribute. We chose NTIS because it functions as a national clearinghouse for a wide 

array of Govemment data. NTIS's customers include life insurance companies, State agencies, 

schools, researchers, genealogical services, and financial institutions that, like us, need death 

information to stop paying benefits to deceased individuals and pay benefits to survivors of 

insured persons. 

Over the years, we have made use of technology to more efficiently administer our programs, 

including the timely and accurate collection of death information. Since 2002, we have worked 

with States to increase the use of Electronic Death Registration (EDR). EDR automates our 

receipt of death information and is highly accurate because the States first verify the name and 

Social Security Number of deceased individuals against our records before they issue a death 

certificate or actually transmit the death report to us. Currently 32 states, the City of New York, 

and the District of Columbia participate in EDR. The death information we collect through EDR 

is State information, which we do not disclose to the public. (The President's FY 2014 Budget 

includes an increase of $22 million in Public Health Service Evaluation transfers for the Vital 

Statistics System supported within the Centers for Disease Control and Prevention (CDC). This 

increase will allow CDC to gradually phase in electronic death records in the 21 remaining 

jurisdictions over four years.) 

Today, under section 205(r), we provide an electronic file to Federal benefit-paying agencies 

containing all of our death information on a regular basis, including the death information we 

receive from the States. The Centers for Medicare & Medicaid Services, the Department of 

Defense, and IRS are among the many agencies that receive this data. In addition, we provide 

death information to State agencies administering federally-funded programs. Like us, these 

benefit paying agencies need death information to ensure accuracy of their benefit payments and 

prevent fraud, waste, and abuse. In addition, we send certain agencies, including the IRS, a 

weekly update to the electronic file of all of our death records. 

Legislation to Limit Access to Death Information and to Use Death Information to Combat Fraud 

and Curb Improper Payments 

Just as access to accurate death information helps agencies to combat fraud and reduce improper 

payments, we understand that the public availability of death information could contribute to 

fraud perpetrated by criminals. We believe that this information should no longer be accessible 

to those entities or individuals who might misuse it. At the same time, we are mindful that many 

institutions, such as financial institutions, legitimately need our publicly available death 

information to combat private sector fraud. As J said earlier, we currently do not have a legal 

basis to withhold non-State death information under FOIA. Even if we could withhold death 

information, FOJA does not allow us to withhold death information from certain entities while 

making it available to others who legitimately need it. Only Congress can strike the proper 

balance between restricting access to death information and making it available to those entities 

that legitimately need the information to combat fraud. 

Over the past year we have worked closely with an inter-agency group, led by the Office of 

Management and Budget, to develop a legislative proposal that would strike that balance. J am 
38 


87414.010

pleased to report that the President's FY 2014 Budget includes a legislative proposal that would 

restrict access to the public DMF. Specifically, the proposal would delay the release ofa 

deceased individual's information on the public DMF for 3 years after he or she dies. This 

would significantly reduce the ability of criminals to use death information to commit tax fraud. 

Only private entities that the Commissioner certifies as having a legitimate need for the 

information-and sufficient protections in place to safeguard the information-would be 

permitted to receive the public DMF. 

At the same time, our proposal would allow additional Federal agencies to access our death 

information-including State death information-to combat fraud and curb improper payments. 

Under our proposal, we would be permitted to share our entire death file with Federal agencies 

for the purposes of public health or safety, law enforcement, tax administration, health oversight, 

debt collection, payment certification, disbursement of payments, and for the prevention, 

identification, or recoupment of improper or erroneous payments. We look forward to working 

with Congress, the Administration, and other parties to refine this legislation. 

Additional Efforts to Combat Fraud 

A number of Federal agencies are working individually and cooperatively to help assure that 

their programs do not create opportunities for fraud. For instance, we support Treasury's new 

Do Not Pay initiative that will help administrators of federally-funded programs reduce improper 

payments. The Do Not Pay initiative will provide a one-stop shop that will allow these agencies 

to check various databases, including death information, to identify ineligible recipients and 

prevent fraud and errors before making payments or awards. 

Additionally, the President's FY 2014 Budget also includes a legislative proposal that would 

remove some restrictions on our ability to share the information that we maintain on prisoners, 

and expand the data that correctional facilities are required to provide us to include the prisoner's 

release date. Under this proposal, our prisoner information would become part of the Do Not 

Pay program, which would make it available to other agencies to help detect and prevent 

improper payments in a wide array of government programs. 

Wage Reporting 

Employers are required to file annual reports of their employees' earnings with us. We use this 

information to ensure that we properly credit employees with the wages they have earned. 

Before the mid-1970s, employers were required to report wage information to IRS and SSA on a 

quarterly basis. However, legislation enacted in 1976 (P.L. 94-202) changed wage reporting to 

an annual process. Additionally, that legislation required SSA and IRS to develop a single 

consolidated annual wage report process. Shortly after enactment of that legislation, SSA 

undertook the responsibility of collecting all wage information through the W-2, Wage and Tax 

Statement and timely sending that information to the IRS. In return, IRS collects selfemployment income and shares the data with us. We use the individual's name and SSN to 

record his or her earnings. 
39 


87414.011

Employers that file paper W-2s are required to submit their reports to us by February 28 

following the end of the tax year. Employers who file reports electronically have until March 31 

to file. We process the wage data, and use it to maintain earnings information on every worker 

for SSA program purposes. On a daily basis, we provide it to IRS for tax administration 

purposes. 

Over the past 10 years, the number of wage reports ranged from a low of220 million to a high of 

almost 250 million. The number of employers making reports ranged from 6.3 to 6.7 million 

annually. We encourage electronic wage reporting because it is more accurate, and we work 

with the employer community to educate them on its advantages. More and more employers 

submit their wage reports electronically; in fact, employers filed about 87 percent of W -2s 

electronically in Calendar Year 2012 -- up from less than 10 percent in 1999. 

Legislative Proposals to Enhance the Wage Reporting Process 

The President's FY 2014 Budget includes two proposals that we believe would enhance the wage 

reporting process while also helping to prevent fraud. One proposal would gradually reduce the 

electronic wage reporting threshold from 250 to 50 employees. Reducing the threshold to 50 

would increase the percentage of electronic filing to approximately 90 percent of all W -2s. This 

will enable us to take better advantage of automation, reduce the work effort required to process 

paper forms, reduce errors caused by manual processing, and speed the process of correctly 

posting wages. 

The second proposal would restructure the Federal wage reporting process by requiring 

employers to report wages quarterly rather than annually. Increasing the frequency and 

timeliness of wage reporting would enhance our ability to detect fraud and curb improper 

payments in our programs. We recognize that a return to quarterly reporting may be perceived 

as imposing a burden on businesses, especially small businesses. The Administration is 

committed to working with the business community to minimize any burden and alleviate any 

concerns. 

Other Initiatives to Enhance Wage Reporting 

In addition to the President's FY 2014 Budget proposals, we have some initiatives underway that 

will help make the wage reporting process more accurate and efficient, thereby providing us with 

greater capacity. By redesigning our earnings reporting system we will be able to take greater 

advantage of automation that will result in improved accuracy and faster processing of the everincreasing number of electronic wage reports. 

Also, we are working to greatly reduce paper wage reports, which are error-prone and expensive 

to process. In FY 2012, we implemented enhancements to our electronic wage report (EWR) 

filing tool to make it more user-friendly for small business. And the number of registered EWR 

users has increased from 500,000 in tax year 2009 to over 734,000 in tax year 2012. Through a 

variety of marketing tools and outreach, we encourage employers to file electronic W -2s through 

our Business Services Online. 
40 


87414.012

Conclusion 

We appreciate Congress' interest in working with us to protect our fellow Americans. We are 

committed to continuing to share death information with our Federal partners and appreciate that 

there are other parties that, with vigilant oversight, have reasonable and responsible purposes for 

obtaining death data. We stand ready to assist Congress and the Administration to take steps to 

combat fraud and improve wage reporting. 
41 


87414.013

WRITTEN TESTIMONY OF 

STEVEN T. MILLER 

ACTING COMMISSIONER 

INTERNAL REVENUE SERVICE 

BEFORE THE 

SENATE FINANCE COMMITTEE 

ON TAX FRAUD AND TAX IDENTITY THEFT: MOVING FORWARD WITH 

SOLUTIONS 

APRIL 16, 2013 

INTRODUCTION AND SUMMARY 

Chairman Baucus, Ranking Member Hatch and members of the Committee, thank you 

for the opportunity to update you on the actions we are taking at the IRS to combat 

refund fraud and help victims of identity theft. 

Refund fraud caused by identity theft is one of the biggest challenges facing the IRS 

today, and the harm it inflicts on innocent taxpayers is a problem we take very seriously. 

The IRS has a comprehensive identity theft strategy focusing on preventing refund 

fraud, investigating these crimes and assisting taxpayers victimized by identity theft. 

The agency's work on identity theft and refund fraud continues to grow, touching nearly 

every part of the organization. For the 2013 filing season, the IRS has expanded these 

efforts to better protect taxpayers and help victims. More than 3,000 IRS employees are 

currently working on identity theft - more than double the number at the start of the 

previous filing season. We have also trained 35,000 employees who work with 

taxpayers to recognize identity theft and help victims. Since the beginning of 2013, the 

IRS has worked with victims to resolve more than 200,000 cases. 

Our fraud detection efforts have increased as well. We expanded the number and 

quality of our identity theft screening filters, and we have suspended or rejected more 

than 2 million suspicious returns so far this filing season. The number of identity theft 

investigations by our Criminal Investigation (CI) division continues to rise, with more 

than 800 investigations opened so far this fiscal year. A more detailed description of all 

of our initiatives can be found later in the testimony. 

Barriers to further progress do exist, however. One is the sheer volume and complexity 

of these crimes, as identity thieves continue creating new ways of stealing personal 

information and using it for their gain. Another is the need to further upgrade our 

technology in order to implement improvements such as more sophisticated filters and 

better taxpayer authentication procedures. 

Yet another barrier to further progress is the difficult budget environment. The work we 

are already doing on refund fraud and identity theft involves a difficult balance of 

resources and staffing at a time when our budget has been reduced by $1 billion over 

the last two years. We will continue to dedicate staff to resolving identity theft cases, 
42 


87414.014

even at the cost of having fewer people on our toll-free taxpayer service line or on our 

automated collection program that help us collect past due taxes, 

As I describe for you in gfeater detail our efforts to combat fraud, I urge you to 

remember that the improvements the IRS is making would not be possible without the 

additional resources we have directed toward these programs, Even in this challenging 

budget environment, we have substantially increased our resources devoted to both 

preventing fraud and serving victims, The IRS spent roughly $328 million on refund 

fraud and identity theft efforts in FY 2012, 

The Administration's Fiscal Year (FY) 2014 Budget request provides $101 million to 

support IRS efforts to prevent identity theft-related refund fraud, protect taxpayers' 

identities, and assist victims of identity theft, and enhance the revenue protection 

strategy implemented in FY 2013, The funding level proposed will permit the hiring of 

more than 800 additional full-time employees dedicated to identity theft work, The 

administration's budget request also provides $18,3 million.to support continued 

implementation of the Return Preparer Program, the goal of which is to increase 

competency levels of tax return preparers, This program complements the IRS' efforts 

on refund fraud and identity theft, given that these crimes often involve individuals who 

prepare tax returns on behalf of others to obtain fraudulent refunds, 

The budget request also includes several important proposals needed to help us 

improve our efforts to stop refund fraud caused by identity theft, The Administration 

proposes to: 

• Expand IRS access to information in the National Directory of New Hires for 

general tax administration purposes, including data matching and verification of 

taxpayer claims during processing; 

• Restrict access to the Death Master File (DMF) to those users who legitimately 

need the information for fraud prevention purposes and to delay the release of 

the DMF for three years to all other users, This change would make it more 

difficult for identity thieves to obtain identifying information of deceased persons 

in order to file fraudulent returns; 

• Grant the IRS the authority to require or permit truncated social security numbers 

on W-2 forms that employers send to employees, to reduce the risk that the 

information could be stolen from a paper payee statement by identity thieves; 

• Add a $5,000 civil penalty to the Internal Revenue Code for tax-related identity 

theft; and 

• Add the tax-related offenses in Title 18 and the criminal tax offenses in Title 26 to 

the list of predicate offenses contained in the Aggravated Identity Theft Statute 

under federal law, 
43 


87414.015

STOPPING THE REFUND AT THE DOOR - ENHANCED RETURN PROCESSING 

During FY 2012, the IRS protected $20 billion of fraudulent refunds, including those 

related to identity theft, compared with $14 billion in 2011. The IRS stopped 5 million 

suspicious returns in 2012 - up from 3 million suspicious returns stopped in 2011. Of 

the 2 million suspicious returns suspended or rejected so far this filing season, more 

than 400,000 were rejected at the point of filing, even before they entered IRS 

processing systems. The remaining returns generally require further review to 

determine whether the filer is legitimate. Because these returns require time to review, 

most are still in open inventory at this time. To date, we have stopped more than 

350,000 refunds determined to be fraudulent, worth more than $2.5 billion. The IRS is 

committed to improving its multicfaceted approach to blocking these fraudulent refund 

claims, and we strive to operate in such a way that false returns are screened out at the 

earliest possible stage. 

The IRS screens returns for fraud at multiple stages in the proceSSing life-cycle. In 

2008, we began plaCing an indicator on the accounts of taxpayers who have 

experienced identity theft. These indicators initially served two primary purposes: to 

speed up account reconciliation for the legitimate taxpayer, and to reduce the likelihood 

that a taxpayer's information could be used for a fraudulent refund claim in subsequent 

years. As our identity theft indicator program has developed, we have leveraged it to put 

in place additional proactive tools that identify fraudulent returns at the point of filing. 

In 2011, we launched a pilot program to test the Identity Protection Personal 

Identification Number (lP PIN). The IP PIN is a unique identifier that authenticates a 

return filer as the legitimate taxpayer at the time the return is filed. For filing season 

2012, the IRS issued IP PINs to approximately 250,000 taxpayers who had identity theft 

markers on their tax accounts. We verified the presence of this IP PIN at the time of 

filing, and rejected returns associated with a taxpayer's account where an IP PIN had 

been assigned but was missing. For the 2013 filing season, we enhanced our 

programming to increase efficiency, and expanded the IP PIN program to more than 

770,000 taxpayers. 

Over the last two fiscal years we have made numerous improvements in catching fraud 

before refunds are issued: 

• We implemented new identity theft screening filters to improve our ability to spot 

false returns before we process them and issue refunds. For example, we 

designed and launched new filters that flag returns if certain characteristics are 

detected. While the development of effective filters is complex given the dynamic 

lives of legitimate taxpayers, these filters enable us to identify fraudulent returns 

even where a taxpayer's information has not been previously used for filing by an 

identity thief. These new filters specific to identity theft built on our overall refund 

fraud detection program, which already identified a significant number of identity 

theft cases besides those identified by the new filters. We have added even more 

identity theft filters for the 2013 filing season, including filters that target multiple 

refunds into a single bank account or to a single address. 
44 


87414.016

• We have accelerated the use of information returns in order to identify 

mismatches earlier. Moving this matching process forward in time has enhanced 

our ability to identify fraudulent tax returns before we process them. We are 

accelerating more types of information return data in 2013. 

• We have implemented a variety of mechanisms to stop the growing use by 

criminals of deceased individuals' identity information to perpetrate fraud. Once 

we confirm the fraud, we lock the accounts of these individuals so that no further 

misuse will occur. We also routinely lock accounts of deceased taxpayers once 

they no longer have a filing requirement. To date, we have locked more than 9 

million accounts. As noted above, the Administration is proposing a legislative 

change to the practice of routine release of the Death Master File. 

• We have developed procedures for handling information about identity theft 

victims received from law enforcement officials, who discover this information in 

the course of investigating identity theft schemes or other criminal activity. This 

data is extremely valuable. It can be used to flag taxpayer accounts and help us 

block returns filed by identity thieves who attempt to use the personal information 

of those taxpayers to file a fraudulent return. Our Criminal Investigation (CI) 

Division will use this data to identify links between criminal schemes, and will 

share this information when appropriate to ensure that victims' accounts are 

adjusted and protected from future identity fraud. 

• We expanded the use of our list of prisoners to better stop the processing of 

problematic returns. In FY 2012, we stopped over 220,000 fraudulent returns 

filed by prisoners. This represents over $2.5 billion in refunds stopped, a more 

than 10 percent increase over FY 2011. The IRS has collaborated with the 

Bureau of Prisons and states that choose to partner with us to help identify 

prisoners who may be engaged in tax fraud, and we received additional help in 

2011 with the passage of the United States-Korea Free Trade Agreement 

Implementation Act, which included language requiring federal and state prisons 

to provide information on the current prison population. Although the authority 

allowing us to share return information with prisons expired at the end of 2011, it 

was renewed and made permanent in the American Taxpayer Relief Act enacted 

earlier this year. In addition, the Social Security Administration is proposing 

reforms to use its prisoner data that will further help IRS reduce improper 

payments. 

• We are collaborating with software developers, banks, and other industries to 

determine how we can better partner to address identity theft and prevent federal 

monies from reaching the hands of identity thieves. For example, we established 

a cooperative agreement with more than 100 financial institutions to reject 

questionable deposits. The IRS also established relationships with 

representatives of the prepaid access card industry, which has security protocols 

designed to detect and prevent fraudulent use of the cards. In many cases, 
45 


87414.017

these companies may have the ability to identify potentially fraudulent tax refunds 

and freeze or cancel the cards. 

The IRS will continue to strengthen our efforts to catch identity theft and other fraud 

before erroneous refunds are issued. We will continue refining our filters aimed at 

detecting and preventing the processing of fraudulent returns, and develop new 

methodologies as needed. Additionally, we are considering new technologies for 

authenticating the identities of taxpayers at the time of filing as a future means of 

precluding tax-related identity theft. 

ASSISTING TAXPAYERS. 

Improving our Processes 

The IRS understands that identity theft is a frustrating, complex process for victims. 

While identity thieves steal information from sources outside the tax system, the IRS is 

often the first to inform a victim that identity theft has occurred. We realize the 

importance of resolving cases involving identity theft quickly and efficiently, allowing 

taxpayers victimized by identity theft to receive their refunds as soon as possible and 

preventing adverse enforcement actions from being taken against them.To that end, we 

continue to develop and implement new procedures to improve the service provided to 

identity theft victims. 

During FY 2012, the IRS reengineered our identity theft process to close cases more 

efficiently and accurately and to find ways to reduce customer burden. As a result, we 

have made a number of programming and procedural enhancements, enabling us to 

move faster to identify accounts with a high potential for identity theft. Cases generated 

as a result are reassigned for review more quickly than in the past. Other procedural 

enhancements are helping us to reduce delays in releasing refunds to the legitimate filer 

in cases where duplicate returns are filed. 

In the first three months of 2013, the IRS worked with victims to resolve and close more 

than 200,000 cases. This is in addition to the expansion of the IP PIN program 

mentioned above. The IRS has dedicated more employees to resolve victim cases. 

These are extremely complex cases to resolve, frequently touching on multiple issues 

and multiple tax years. Cases of resolving identity can be complicated by the thieves 

themselves calling in. The IRS is working hard to streamline its internal processes, but 

much more work remains. A typical case can take about 180 days to resolve; however, 

we are actively working to reduce this inventory to shorten that time period. 

We are also continually improving the way we track and report on the status of identity 

theft cases, which we believe will lead to quicker case resolution and provide innocent 

taxpayers with the most current account information and status of their refunds. 

Additionally, better tracking and reporting means that we can spot - and correct any 

flaws in the system more quickly. 
46 


87414.018

Employee Training 

The IRS runs one of the largest phone centers in the world, and we are dedicated to 

providing quality service with a high degree of accuracy to every taxpayer who contacts 

us. We realize, however, that taxpayers who contact us with identity theft problems 

present unique challenges to our telephone representatives, and we are committed to 

providing our assistors with the information they need to ensure these taxpayers receive 

quality, courteous service. As part of this effort, we conducted a thorough review in 

2011 of the training we provide our employees to make sure that they have the tools 

they need to respond appropriately to those who have been victimized by identity theft. 

As a result of this review, we provided our telephone assistors with updated training this 

past filing season to ensure they better understand the serious financial problems of 

identity theft victims and maintain the proper level of sensitivity when speaking with 

victims. Additionally, we broadened the scope of our training beyond telephone 

assistors to cover all IRS employees who might interact with identity theft victims. We 

developed a new training course that includes sensitivity training as well as training on 

the proper tools and techniques to use when handling identity theft cases. In all, 35,000 

IRS employees have received this training. 

Taxpayer Outreach and Education 

The IRS continues to undertake outreach initiatives to provide taxpayers, return 

preparers, and other stakeholders with the information they need to prevent tax-related 

identity theft and, when identity theft does occur, to resolve issues as quickly and 

efficiently as possible. As part of our outreach efforts, we overhauled and updated the 

identity protection training provided to tax practitioners at our annual Nationwide Tax 

Forums in 2011 and again in 2012. These annual events, held in several cities around 

the country, draw more than 16,000 practitioners, who attend to learn about key tax 

laws and issues. In addition, we met with practitioners to discuss the IP PIN program, 

the expansion of the program, and the modified procedures, forms, and notices 

associated with the program. We are also working closely with software developers to 

ensure that instructions regarding the use of an IP PIN are included in their products. 

We have a far-reaching communications effort that uses both traditional and social 

media channels to relay information on identity protection issues. As part of this effort, 

we have produced new identity theft awareness videos for the IRS YouTube channel in 

English, Spanish, and American Sign Language, and we distributed identity protection 

information through IRS Twitter feeds and podcasts. We continue to update the identity 

theft information provided on the IRS.gov website. This includes emerging trends in 

identity theft along with fraud schemes, phishing sites, and prevention strategies. We 

also added a direct link to our Identity Theft page, to make it easier for taxpayers who 

visit IRS.gov to locate this information. We have issued a number of news releases and 

tax tips to help taxpayers and to highlight our continuing enforcement efforts. We plan 
47 


87414.019

to continue this sweeping communication effort in the upcoming filing season and 

beyond. 

CRIMINAL INVESTIGATION WORK 

The investigative work done by CI is a major component of our efforts to combat taxrelated identity theft. CI investigates and detects tax and other financial fraud, including 

fraud related to identity theft, and coordinates with other IRS divisions to ensure that 

false refunds involving identity theft are addressed quickly and that the IRS accounts of 

identity theft victims are marked to help prevent future problems. CI recommends 

prosecution of refund fraud cases, including cases involving identity theft, to the 

Department of Justice. 

In response to the growing threat that identity theft poses to tax administration, IRS 

established the Identity Theft Clearinghouse (ITC), a specialized unit within Cl that 

became operational in 2012, to work on identity theft leads. The ITC receives all refund 

fraud-related identity theft leads from CI field offices. The lTC's primary responsibility is 

to develop and refer identity theft schemes to the field offices, facilitate discussions . 

between field offices with multi-jurisdictional issues, and provide support to ongoing 

criminal investigations involving identity theft. 

Investigations of tax fraud related to identity theft have increased significantly over the 

past three fiscal years. In FY 2012, CI initiated 900 investigations involving identity theft, 

which is more than triple the number of investigations in FY 2011. Indictments in 

identity-theft related cases also increased significantly, totaling nearly 500 in FY 2012, 

with 223 individuals sentenced and an average time to be served of 48 months. This 

compares with 165 indictments, 80 individuals sentenced, and a 44-month average 

sentence in FY 2011. Additionally, the direct investigative time spent by Cion identity 

theft cases has increased by 129 percent in FY 2012 over FY 2011. 

This trend is continuing in FY 2013. Already through April 9, 2013, more than 800 

criminal identity theft investigations have been opened. Indictments in identity theftrelated cases total 607, with 197 individuals sentenced and an average time to be 

served of 44 months. 

In collaboration with the Department of Justice's Tax Division (DOJ-Tax) and local U.S. 

Attorneys' offices, the IRS conducted a highly successful coordinated identity theft 

enforcement sweep in January 2013. This nationwide effort against 389 identity theft 

suspects led to 734 enforcement actions, including 189 indictments, informations and 

complaints, and 109 arrests. Around the time of the sweep, IRS auditors and 

investigators conducted compliance visits to 197 money service businesses in a variety 

of locations across the country to help ensure that these businesses were not facilitating 

refund fraud and identity theft. 
48 


87414.020

Our collaborative efforts extend to other federal agencies as well. For example, the IRS 

has worked with the U.S. Postal Inspection Service (Postal) to provide training updates 

on how to handle refund checks and prepaid access cards diverted as part of Postal's 

fraud detection process. We also issued updated guidance to other federal law 

enforcement agencies, including the Secret Service and the Federal Bureau of 

Investigation, on available methods for returning stolen refund amounts to the 

Department of the Treasury. 

The IRS continues to seek out additional methods to combat the proliferation of taxrelated identity theft. In July 2012, the IRS expanded the number of charges that special 

agents investigate when identity theft matters arise in the context of fraudulent returns. 

The additional charges include: Forging Endorsements on Treasury Checks; Theft of 

Public Money; Fraud in Connection with Access Devices; Mail Fraud; and Wire Fraud. 

Aiding in the fight against identity theft, in September 2012, DOJ-Tax issued Directive 

144, Stolen Identity Refund Fraud (SIRF), to provide federal law enforcement officials 

with the ability to timely address a subset of identity theft cases. This directive 

specifically focuses on identity theft in the context of fraudulent tax refunds and provides 

for streamlined initiation of these investigations and prosecutions. CI subsequently 

responded by streamlining investigative and review processes to capitalize on these 

historic changes and will continue to move expeditiously on SIRF investigations. 

State and local law enforcement agencies also playa critical role in fighting identity 

theft. CI regularly collaborates with these agencies, and this effort will only increase in 

the future. Overthe past several years, CI has established or participated in at least 35 

task forces and working groups around the country in an effort to leverage the 

resources and expertise of various law enforcement agencies to address identity theftrelated crimes. 

The IRS also has been working to assist state and local law enforcement agencies in 

the efforts they are making to fight identity theft-related refund fraud. One way we have 

done this is by developing the Identity Theft Victim Disclosure Waiver Process, which 

was launched in Florida in April 2012. 

This program provides for the disclosure of federal tax returns and return information 

associated with the accounts of known and suspected victims of identity theft with the 

express written consent of those victims. Prior to disclosing any tax information, victims 

are required to sign a waiver authorizing the release of information to the deSignated 

state or local law enforcement official pursuing the investigation. To date the IRS has 

received more than 1,560 waiver requests from more than 100 state and local law 

enforcement agencies in the nine states that have been participating in the pilot. On 

March 28,2013, the IRS announced that this program has been expanded to aI/ 50 

states. 

Some of the IRS' recent successes involving identity theft include the fol/owing cases in 

which sentences were handed down over the last several months: 
49 


87414.021

• On April 3, 2013, a Florida man was sentenced to 70 months in prison and three 

years of supervised release for his participation in a $3.3 million identity theft 

scheme that resulted in charges of conspiracy to file fraudulent claims and 

aggravated identity theft. Some of the personal information used by this 

individual was stolen from a community college's financial aid office. 

• On March 22, 2013, a New York man was sentenced to 41 months in prison on 

charges that included identity theft and impersonating an IRS employee and a 

New York State Department of Labor official. This individual fraudulently obtained 

tax refunds by stealing taxpayers' personal information or tricking them into 

disclosing the information to him. 

• On March 18, 2013, a California man was sentenced to 54 months in prison and 

ordered to pay more than $1.3 million to the IRS in connection with a scheme 

involving the filing of false tax returns. The individual and his associates used thenames and social security numbers of residents of Puerto Rico to file more than 

1 ,000 false returns seeking refunds based on the earned income tax credit. This 

individual also used false out-of-state driver's licenses to set up private 

mailboxes to receive the refund checks. 

• On March 7, 2013, a Florida man was sentenced to 192 months in prison, three 

year of supervised release, and ordered to pay more than $100,000 in restitution 

to the IRS on charges of access device fraud and aggravated identity theft. The 

individual was found to have in his possession 28 pre-paid debit cards loaded 

with $117,000 in tax refunds. 

• On February 22,2013, a Florida man was sentenced to 159 months in prison 

and three years of supervised release on charges of access device fraud and 

aggravated identity theft. By searching an online database, this individual 

obtained the social security numbers of more than 23,000 people whose birth 

dates he had already obtained. He provided this information to associates who 

filed fraudulent returns. 

• On February 8, 2013, an Alabama woman was sentenced to 65 months in prison 

on charges including aggravated identity theft and fraud in connection with 

computers. While working at a medical center records office, this individual stole 

more than 800 names, social security numbers and other personal information 

from current and former patients, and then sold the information to another person 

who used the information to file false tax returns. 

• On October 1,2012, two North Carolina men were sentenced to a total of 155 

months in prison and ordered to pay a total of $466,153 in restitution for their 

involvement in an identity theft scheme. The individuals broke into a tax 

preparation office, stealing over 300 files containing the personal information of 

tax clients. Using this information, the individuals filed returns in the names of 
50 


87414.022

the clients and directed the tax refunds to either debit cards that were mailed to 

addresses they controlled or to bank accounts that were opened using fraudulent 

and unauthorized information. 

• On September 21, 2012, an Arizona woman was sentenced to 36 months in 

prison and ordered to pay $386,938 in restitution on charges related to her 

involvement in a conspiracy to commit identity theft. The defendant utilized 

stolen identities to file 180 tax returns to falsely claim more than $1,000,000 in 

tax refunds. The defendant concealed the fraud by filing the tax returns 

electronically using the unsecured wireless networks of neighbors, directing the 

refunds to prepaid debit card accounts obtained using false identities, and 

recruiting friends and associates to receive the prepaid debit cards by mail at 

various addresses. 

CONCLUSION 

Mr. Chairman, thank you again for the opportunity to update you on the steps that the 

IRS is taking to prevent identity theft and to assist taxpayers who are victims of this 

crime. Fighting identity theft will be an ongoing battle for the IRS, and one where we will 

not let up. Our work here is critical. We cannot be lax either in stopping fraud or in 

assisting taxpayers who have had their identities stolen. Although we cannot stop all 

identity theft, our efforts thus far have provided a solid foundation upon which we will 

continue to build and improve. We have to act aggressively because we have a 

responsibility to preserve the public's faith in the essential fairness and integrity of our 

tax system. I would be happy to answer any questions that you may have. 
51 


87414.023

Questions for the Record 

''Tax Fraud, Tax 10 Theft and Tax Reform: Moving Forward With Solutions" 

Questions for Steven T. Miller 

Hearing Date: April 16, 2013 

Questions from Senator Robert P. Casey. Jr. 

1. Law enforcement officials in Pennsylvania have been outspoken about the size of the identity 

theft /tax fraud problem. According to one Pennsylvania District Attorney, tax fraud is the single 

most profitable crime in his jurisdiction. This problem is exacerbated by his inability to go after 

these criminals. You have heard these frustrations from others, including other members of this 

Committee. To address these concerns, the IRS has initiated an information-sharing pilot 

program. Can you speak to the success of this program to date? Also, what more needs to be 

done to address the problem? As this Committee looks to work on legislation what can we do 

to enhance the tools at your disposal? 

Response 

Success of the Program to date: 

ENFORCEMENT - VICTIM WAIVER DISCLOSURE PROGRAM 

Overview: 

Local law enforcement and other federal agencies playa critical role in combating identity theft. 

As part of this collaborative effort, the IRS developed the Identity Theft Victim Disclosure Waiver 

Process, which was launched as a pilot in Florida in April 2012. This program provides for the 

disclosure of federal tax return information associated with the accounts of known and 

suspected victims of tax-related identity theft with the express written consent of those victims. 

Prior to disclosing any tax information, victims must sign a waiver (Form 8821-A) authorizing the 

release of information to the designated state or local law enforcement official pursuing the 

investigation. 

Based upon increased interest from other areas of the country, the program was expanded to 

include the States of Alabama, California, Georgia, New Jersey, New York, Oklahoma, 

Pennsylvania and Texas, in October 2012. At the end of March 2013, the program was 

expanded to include all 50 states. IRS Criminal Investigation employees In the newly expanded 

areas are currently involved in a variety of outreach and trainings efforts. Since the program's 

inception, the IRS has received over 1,950 waivers authorizing the disclosure of returns and 

related information to 133 participating law enforcement agencies. 
52 


87414.024

Successful Prosecutions: 

The following examples highlight some of the successful prosecutions by state and local 

authorities that have occurred as a direct result of the return information provided in response 

to this program; 

• Demetrius Lewis was arrested by the Florida Department of Law Enforcement (FDlE) in 

connection with tax-related identity theft activity on September 12, 2012. The matter 

involved significant press coverage associated with the Identity Theft Victim Disclosure 

Waiver Process Program in the greater Tampa area. Lewis is currently awaiting trial in 

connection with 9 counts of identity theft. Upon discovering refund checks were 

deposited into bank accounts controlled by Lewis, FDLE was the first agency to seek 

assistance in identifying victims and actively pursued the use of Forms 8821-Ato obtain 

return and return information that was utilized in support of state charges against 

Lewis. 

• Bobby Arrington was one of nineteen individuals arrested by the Polk County Florida 

Sherriff's Department's Operation Stop the Drop prior to the ID Theft Waiver Disclosure 

Program being authorized. Forms 8821-A were subsequently used to assist the 

prosecution. Arrington was charged with 23 counts of identity theft. The investigation 

revealed that Arrington obtained refunds totaling $7,398 in connection with 8 Identity 

theft returns. Arrington was also sentenced to serve 5 years followed by probation. 

• In February 2013, the Manhattan District Attorney's Office sought IRS's assistance with 

the prosecution of Peter Murmylyuk. Murmylyuk was associated with a tax-related 

identity theft matter involving over 125 returns and almost $500,000 in lost refunds. 

Murmylyuk was indicted several months prior to the Identity Theft Victim Disclosure 

Waiver Process Program being expanded to the State of New York and was originally set 

for trial on February 25,2013. As a result the IRS was able to provide the DA's Offices 

with associated returns and refund payment information. On April 15, Murmylyuk 

entered a guilty plea and is currently awaiting sentencing, which carries a recommended 

range of 3 to 9 years. 

What more can be done? 

The improvements the IRS Is making would not be possible without the additional resources we 

have directed toward these programs. Even in this challenging budget environment, we have 

substantially increased our resources devoted to both preventing fraud and serving victims. 

The Administration's Fiscal Year (FY) 2014 Budget request provides $101 million to support IRS 

efforts to prevent identity theft-related refund fraud, protect taxpayers' identities, assist victims 

of identity theft, and enhance the revenue protection strategy implemented in FY 2013. The 

funding level proposed will permit the hiring of more than 800 additional full-time employees 

dedicated to identity theft work. The Administration's budget request also provides $18.3 

million to deliver high-priority, preparer related enforcement activities to improve taxpayer 

compliance and ensure the accuracy of returns filed by tax professionals. This program 

complements the IRS' efforts on refund fraud and identity theft, given that these crimes often 

involve individuals who prepare tax returns on behalf of others to obtain fraudulent refunds. 
53 


87414.025

In addition, the budget request includes several important proposals needed to help us improve 

our efforts to stop refund fraud caused by identity theft. The Administration proposes to: 

1. Expand IRS access to information in the National Directory of New Hires for general tax 

administration purposes, including data matching and verification of taxpayer claims during 

processing; 

2. Restrict access to the Death Master File (DMF) to those users who legitimately need the 

information for fraud prevention purposes and to delay the release of the DMF for three 

years to all other users. This change would make it more difficult for identity thieves to 

obtain identifying information of deceased persons in order to file fraudulent returns; 

3. Grant the IRS the authority to require or permit truncated social security numbers on W-2 

forms that employers send to employees, to reduce the risk that the information could be 

stolen from a paper payee statement by identity thieves; 

4. Add a $5,000 civil penalty to the Internal Revenue Code for tax-related identity theft; and 

5. Add the tax-related offenses in Title 18 and the criminal tax offenses in Title 26 to the list of 

predicate offenses contained in the Aggravated Identity Theft Statute under federal law. A 

conviction for aggravated identity theft adds two years to the sentence imposed for the 

underlying felony. 

2. The same DA, John Adams from Berks County, PA, recently shared an example. According to the 

DA, his detectives recently spent about 40 hours investigating a claim. Their efforts led them to 

an IP address in Canada. At that point, they could do little more than refer the case back to the 

IRS. It is his feeling that, "this incident again exemplified that we cannot arrest our way out of 

this problem." In the face of his challenges, his questions are: "What steps are being taken to 

increase verification of W-2's, identities, IP addresses, and social security numbers to prevent 

tax fraud from occurring in the first place?" 

Response 

The IRS is placing a heightened emphasis on the prevention and detection of identity theft and 

refund fraud on returns submitted to the IRS. We have implemented, and continue to refine, 

our business processes to improve identification and prevention of tax fraud. 

The Electronic Fraud Detection System (EFDS) identifies potential fraudulent returns. This 

system relies on data mining scores, fraud models and algorithms to determine the likelihood of 

fraud. As part of this process, we also look for similar attributes or characteristics such as a 

primary address that has been used multiple times on different returns or an IP address that is 

consistently used in the filing of fictitious claims. 

The IRS uses a process of income verification in its risk assessment of whether a return is 

fraudulent. We have accelerated the use of information returns (e.g., Forms W-2.) in order to 
54 


87414.026

identify mismatches earlier. Moving this matching process forward in time has enhanced our 

ability to identify fraudulent tax returns before we process them. 

In addition to EFDS, the IRS built identity theft screening filters to improve our ability to spot 

false returns before we process them and issue refunds. For example, we designed and 

launched new filters that flag clusters of returns if certain characteristics are detected such as 

multiple refunds into a single bank account or to a single' address. While the development of 

effective filters is complex given the dynamic lives of legitimate taxpayers, these filters enable us 

to identify fraudulent returns even where a taxpayer's information has not been previously used 

for filing by an identity thief. 

One of our primary strategies to assist past victims of identity theft and prevent further 

fraudulent filings is the creation of an Identity Protection Personal Identification Number (IP 

PIN). The IP PIN program began in 2011 and has since been expanded and enhanced to protect 

victims of identity theft by creating an additional layer of security by requiring the IP PIN when 

filing a tax return. The IP PIN allows the IRS to more effectively identify fraudulent returns, 

while at the same time, validate that the return filed is the legitimate taxpayer's return. For the 

2013 filing season, we issued more than 770,000 IP PINs and have improved processing of 

returns filed with an IP PIN. Additionally, the replacement IP PIN process (for taxpayers who 

lose or misplace their originallP PIN) has been significantly streamlined to provide better 

service. Taxpayers are asked to validate their identities by answering a series of questions for 

disclosure level authentication and if validated, they receive the replacement IP PIN at the pOint 

of contact. 

Beginning in 2008, we implemented the use of identity theft markers which are placed on a 

taxpayer's account to identify an identity theft incident. These markers are used to distinguish 

legitimate returns from fraudulent returns and prevent victims from facing the same problems 

every year. The markers provide additional protection from identity thieves by systemically 

evaluating taxpayers' future returns to check for inconsistencies and discrepancies that indicate 

potential fraudulent filing. 

We are also attempting to prevent the growing misuse of decedents' social security numbers by 

detecting and stopping potentially fraudulent returns. We are coding the accounts of deceased 

taxpayers who were previously victimized and where there is no longer a future filing 

requirement. This coding "locks" a taxpayer's account, preventing the acceptance of potentially 

fraudulent returns. In addition, the PreSident's Budget for FY2014 includes a legislative proposal 

that would restrict immediate access to the list of deceased individuals' SSNs known as the 

Death Master File (DMF) maintained by the Social Security Administration to those users who 

legitimately need the information for fraud prevention purposes and would delay the release of 

the DMF for three years to all other users. 

Additionally, the IRS is reducing the use of SSNs on our systems, forms, notices, and letters to 

protect taxpayers from identity theft. Also, as mentioned in response to question #1, the 

Administration's FY2014 Budget includes a legislative proposal to grant the IRS authority to 

require or permit truncated social security numbers on W-2 forms that employers send to 

employees, to reduce the risk that the information could be stolen from a paper payee 

statement by identity thieves. 
55 


87414.027

To address tax refund fraud associated specifically with direct deposit to prepaid and other 

forms of debit and bank accounts, the IRS and Treasury's Financial Management Service (FMS) 

have collaborated with NACHA, the Electronic Payments Association, to develop an opt-in 

program for interested financial institutions to enable them to return ACH direct tax refund 

deposits if they suspect the transfers were based on fraudulent returns. The IRS Refund Return 

Opt-In Program will help the IRS examine the validity of refunds already issued and stop 

payment on or recover invalid refunds; build better pre-refund filters; and prevent future 

fraudulent refunds. 

3. St. Luke's is a major healthcare provider in the Lehigh Valley. Recently, they expanded, adding a 

second location, which was established as a separate entity. St. Luke's submitted a SOl(c)(3) 

application for this location in in February 2012. They are still waiting. Part of the reason for the 

delay is the SOl(r) requirements under the Affordable Care Act, which adds requirements to 

hospitals applying for SOl(cj(3) designations. However, these rules have not been finalized. 

Given thiS, why are Pennsylvania hospitals being held to SOl(r) requirements in 2013, prior to 

the full implementation of the Affordable Care Act next year? 

Response 

Section 9007 ofthe Affordable Care Act (ACA) added section 501(r) to the Code which imposes 

additional requirements that hospital organizations must meet in order to be described in 

Internal Revenue Code section SOl(c)(3). With the exception of the Community Health Needs 

Assessment requirement, these additional requirements apply to taxable years beginning after 

the date of enactment of the ACA (March 23, 2010). The Community Health Needs Assessment 

requirement became effective for taxable years beginning after March 23, 2012. The ACA did 

not otherwise affect the existing substantive standards for tax exemption under section 

SOl(c)(3). 

The processing of an application for recognition as a tax-exempt organization often involves the 

review of complex issues. With regard to the specifiC organization mentioned in your question, 

its application for recognition as a SOl(cj(3) organization was approved by letter dated April 26, 

2013. 
56 


87414.028

Questions from Senator Charles E. Grasslev 

1. At the hearing I asked you about the IRS's policy in accessing the electronic communication of 

taxpayers, such as emails. You indicated the IRS adheres to the 6th Circuit's decision in U.S. v. 

Warshak. However, as was discussed, recent press reports and internal documents indicate 

otherwise. Please describe current procedures and how they differ from the standards under 

ECPA, if at all. In addition, please provide any relevant supporting documents, such as internal 

manuals, that indicate this is in fact IRS's policy. 

Response 

In certain limited circumstances, the IRS will seek to obtain the content of email 

communications from Internet Service Providers (lSPs) during the course of active criminal 

investigations. hi such cases, the IRS will obtain search warrants with the assistance ofthe 

Department of Justice, consistent with all applicable federal laws and regulations. The current 

policy of the IRS is not to seek the content of email communications from ISPs in civil matters. 

Policy Statement 4-120 was signed in May 2013, making it clear that the IRS will follow the 

holding in United States v. Warshak in all judicial circuits. This policy statement is available on 

irs.gov and will also be available in the Internal Revenue Manual. The IRS will continue to review 

this issue and policies and guidance to update them as necessary. 

2. Do the same procedures apply to all forms of electronic communication, including, but not 

limited to, text messages and private messages sent through social media, such as Facebook and 

Twitter? If not, please explain the differences and any reasons supporting the different 

treatment. 

Response 

We are reviewing this issue, including the application of our policies and procedures to different 

forms of communication through social media, and will update our policies and guidance as 

appropriate. 

3. Are there any circumstances that exist in which the IRS takes the position it can access private 

electronic communication without a warrant? Please explain. 

Response 

There are specific situations in ongoing examinations or investigations, outside the context of 

the Electronic Communications Privacy Act and the Stored Communications Act, in which the IRS 

can and does request the content of emails directly from the author or the recipient of the email 

communication. For example, in individual examinations, the IRS may request that taxpayers 

under examination provide their own supporting information, which may include electronic 

records, such as emails. In addition, IRS examinations sometimes lead to civil litigation. In those 

circumstances, the federal court discovery rules specifically provide that parties may seek 
57 


87414.029

electronic records. In both situations, the taxpayer is aware of the information request, has all 

the rights and protections afforded under the law, and may challenge any such request in court. 

4. Please explain why, if your policy is the IRS needs a warrant to access private email or electronic 

communications, the Internal Revenue Service Manual has not been updated and the existence 

of the 2011 Chief Counsel Memorandum that Indicates otherwise, 

Response 

We are currently in the process of reviewing and updating our guidance. 

5. When can the public expect the IRS to update Its internal and public manuals to provide clarity 

for when a taxpayer's electronic communication can be accessed? Once the relevant manuals 

and material has been updated, will you ensure that copies are provided to me and my staff? 

Response 

Policy Statement 4-120 was signed in May 2013, making it clear that the IRS will follow the 

holding in United States v. Warshak in all judicial circuits. The policy statement is available on 

irs.gov and will also be available in the Internal Revenue Manual. The IRS is currently reviewing 

its policies and guidance to update them to ensure conformity with this policy statement. We 

will provide you and your staff copies of the relevant Internal Revenue Manual updates. 

6. In response to Senator Wyden, you said to the best of your knowledge the IRS has never 

accessed a taxpayers email without warrant, After conferring with appropriate IRS personnel 

and reviewing any and all relevant documents, can you confirm the IRS has never accessed any 

taxpayer's electronic communication without a warrant? Please indicate in how many instances, 

if any, that the IRS obtained electronic communication without a warrant. 

Response 

IRS senior executive leadership recently learned of a few instances in which the IRS sought to 

obtain the content of email communications from an ISP by issuing a civil summons. Those 

summonses were withdrawn. 

7. You indicated at the hearing that the IRS will look at social media profiles, such as Facebook and 

Twitter, because you take the view that the profiles are public, not private. Please explain what 

sort of standard exists before the IRS will start combing these sites to dig up information on a 

taxpayer? What, if any, limit exists? 
58 


87414.030

Response 

The IRS does not select taxpayers for examination based on searches of social media sites. 

Taxpayers are selected for examination based on the information contained on the individuals' 

tax returns and, in some instances, through information we receive from third parties. The IRS is 

considering what limitations, if any, should be placed on the use of publicly available social 

media information in an ongoing examination or collection action. If we adopt new internal 

procedures, we would make them public. The IRS is not considering the use of non-public 

information (such as private online social media profiles) in these actions. 

8. A concern I hear from whistleblowers over and over again is that there is a lack of 

communication from the IRS. At the hearing you indicated the IRS is trying to be more 

supportive of whistle blowers through continued contact and communication. Could you please 

provide examples of recent steps that have been taken to increase contact and communication 

with whistleblowers? 

Response 

Presently, the IRS has no authority under section 6103 to respond to requests for the status of 

IRS action, or for information about the scope of issues being addressed in an audit. The 

President's Budget for FY2014 includes a legislative proposal that would extend existing criminal 

sanctions for improper disclosure of taxpayer information to include disclosures by 

whistleblowers and their representatives of information provided to them as part of an award 

determination administrative proceeding. Congressional consideration of this proposal would 

provide an opportunity to address the merits of expanding the scope of permissible disclosures 

and the balance between whistleblower and taxpayer interests. 

In an effort to increase communication with whistleblowers, in the proposed regulations issued 

for comment on December 18, 2012, there is a proposal to provide additional communications 

after an examination is complete and proceeds are collected. In cases where an award may be 

payable under 7623(b), the award determination administrative proceeding would start at the 

point when there are collected proceeds from which an award may be payable. In cases where 

an award is not payable under 7623(b), or where a payment will be made under 7623(a), a 

limited administrative proceeding would permit the Whistleblower Office to provide some 

information about the reason for denying the claim, or the factors that were considered in 

determining the award under 7623(a). The IRS is evaluating comments on these and other 

issues addressed in the proposed regulations. The increased use of debriefings noted in 

response to question 9 is the prinCipal step that can be taken to increase communication with a 

whistleblower. 

9. In the Memorandum you Issued in June of 2012, you called for a debriefing of whistle blowers to 

be the rule, not the exception. Since the issuance of this Memorandum, has there been any 

evaluation of whether this policy is being followed? Please provide any information you can 

share that would demonstrate that debriefings have become the rule, not the exception. 
59 


87414.031

Response 

The number of debriefings conducted from July 1, 2012 through April 25, 2013 has more than 

doubled over the number conducted from July 1, 2011 through April 25, 2012 (84 vs. 37). 

10. Your June 2012 Memorandum also indicated a contract for services could be entered into with 

whistleblowers to obtain their insights and expertise into complex technical or factual issues. 

How many contracts for services have been entered into with whistleblowers? Why is this tool 

not being put to use as called for in your Memorandum? 

Response 

To date, no contracts for services have been entered into with whistleblowers. The 

implementing regulations require that the contract for services be used only when the IRS 

concludes that it needs assistance. The identification of need is a "bottom-up" process, based 

on developments during an audit. 
60 


87414.032

Questions from Senator Patrick J. Toomey 

1. Both the IRS and the Social Security Administration have taken important steps in preventing 

and prosecuting tax fraud in recent years. However, more work needs to be done. At a time of 

massive deficits, tax fraud costs the federal government billions in lost revenue and undermines 

the integrity of our tax system. What additional steps are being taken to increase verification of 

W2's, taxpayer identities, IP addresses, and social security numbers to prevent tax fraud from 

occurring in the first place? 

Response 

The IRS is placing a heightened emphasis on the prevention and detection of identity theft and 

refund fraud on returns submitted to the IRS. We have implemented, and continue to refine, 

our business processes to improve identification and prevention of tax fraud. 

The Electronic Fraud Detection System (EFDS) identifies potential fraudulent returns. This 

system relies on data mining scores, fraud models and algorithms to determine the likelihood of 

fraud. As part of this process, we also look for similar attributes or characteristics such as a 

primary address that has been used multiple times on different returns or an IP address that is 

consistently used in the filing of fictitious claims. 

The IRS uses a process of income verification in its risk assessment of whether a return is 

fraudulent. We have accelerated the use of information returns (e.g., Forms W·2) in order to 

identify mismatches earlier. Moving this matching process forward in time has enhanced our 

ability to identify fraudulent tax returns before we process them. 

In addition to EFDS, the IRS built identity theft screening filters to improve our ability to spot 

false returns before we process them and issue refunds. For example, we designed and 

launched new filters that flag "risk populations" or clusters of returns if certain characteristics 

are detected such as multiple refunds into a single bank account or to a single address. While 

the development of effective filters is complex given the dynamic lives of legitimate taxpayers, 

these filters enable us to identify fraudulent returns even where a taxpayer's information has 

not been previously used for filing by an identity thief. 

One of our primary strategies to assist past victims of identity theft and prevent further 

fraudulent filings is the creation of an Identity Protection Personal Identification Number (lP 

PIN). The IP PIN program began in 2011 and has since been expanded and enhanced to protect 

victims of identity theft by creating an additional layer of security by requiring the IP PIN when 

filing a tax return. The IP PIN allows the IRS to more effectively identify fraudulent returns, 

while at the same time, validate that the return filed is the legitimate taxpayer's return. For the 

2013 filing season, we issued more than 770,000 IP PINs and have improved processing of 

returns filed with an IP PIN. Additionally, the replacement IP PIN process (for taxpayers who 

lose or misplace their originallP PIN) has been significantly streamlined to provide better 

service. Taxpayers are asked to validate their identities by answering a series of questions for 

disclosure level authentication and if validated, they receive the replacement IP PIN at the point 

of contact. 
61 


87414.033

Beginning in 2008, we implemented the use of identity theft markers which are placed on a 

taxpayer's account to identify an identity theft incident. These markers are used to distinguish 

legitimate returns from fraudulent returns and prevent victims from facing the same problems 

every year. The markers provide additional protection from identity thieves by systemically 

evaluating taxpayers' future returns to check for inconsistencies and discrepancies that indicate 

potential fraudulent filing. 

We are also attempting to prevent the growing misuse of decedents' social security numbers by 

detecting and stopping potentially fraudulent returns. We are coding the accounts of deceased 

taxpayers who were previously victimized and where there is no longer a future filing 

requirement. This coding "locks" a taxpayer's account, preventing the acceptance of potentially 

fraudulent returns. In addition, the President's Budget for FY2014 includes a legislative proposal 

that would restrict immediate access to the list of deceased individuals' SSNs known as the 

Death Master File (DMF) maintained by the Social Security Administration to those users who 

legitimately need the information for fraud prevention purposes and would delay the release of 

the DMF for three years to all other users. 

Additionally, the IRS is reducing the use of SSNs on our systems, forms, notices, and letters to 

protect taxpayers from identity theft. Also, as mentioned in response to question #1, the 

Administration's FY2014 Budget includes a legislative proposal to grant the IRS authority to 

require or permit truncated social security numbers on W-2 forms that employers send to 

employees, to reduce the risk that the information could be stolen from a paper payee 

statement by identity thieves. 

To address tax refund fraud associated specifically with direct deposit to prepaid and other 

forms of debit and bank accounts, the IRS and Treasury's Financial Management Service (FMS) 

have collaborated with NACHA, the Electronic Payments Association, to develop an opt-in 

program for interested financial institutions to enable them to return ACH direct tax refund 

deposits if they suspect the transfers were based on fraudulent returns. The IRS Refund Return 

Opt-In Program will help the IRS examine the validity of refunds already issued and stop 

payment on or recover invalid refunds; build better pre-refund filters; and prevent future 

fraudulent refunds. 
62 


87414.034

WRITTEN STATEMENT OF 

NINA E. OLSON 

NATIONAL TAXPAYER ADVOCATE 

HEARING ON 

"TAX FRAUD, TAX ID THEFT AND TAX REFORM: 

MOVING FORWARD WITH SOLUTIONS" 

BEFORE THE 

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

APRlL 16, 2013 
63 


87414.035

TABLE OF CONTENTS 

I. Tax Reform and Taxpayer Rights Legislation Are Overriding Priorities for 

Taxpayers and Tax Administration ....................................................................... 4 

II. Recent Budget Cuts Are Impairing the IRS's Ability to Serve Taxpayers and 

Collect Tax ............................................................................................................ 6 

III. Despite Significant Changes to the IRS's Approach to Assisting Identity Theft 

Victims, the IRS Remains Inundated with Identity Theft Cases and Victim 

Assistance Is Taking Too Long ........................................................................... 11 

IV. To Reduce Taxpayer Burden and Cut Down on Tax Fraud, the IRS Should Be 

Empowered to Process Information Reporting Documents Like Forms W-2 

Before Processing Tax Returns and Issuing Refunds ........................................ 16 

V. Restricting Access to the Death Master File Would Eliminate a Source of 

Personal Data that Identity Thieves May Utilize to Commit Tax Fraud ............... 20 

VI. State and Local Law Enforcement Agencies Should Be Restricted from Redisclosing Taxpayer Data Obtained from the IRS ............................................... 21 

VII. Taxpayers Are More Vulnerable to Incompetent and Unscrupulous Return 

Preparers Because of the Recent Loving Decision, and if the Decision Is Not 

Overturned by the Court of Appeals, Congress Should Act Quickly to Authorize 

the IRS to Reinstate Its Rules Designed to Protect Taxpayers by Improving 

Standards in the Tax Return Preparation Industry .............................................. 23 

VIII. Conclusion .......................................................................................................... 26 
64 


87414.036

Chairman Baucus, Ranking Member Hatch, and distinguished Members of the 

Committee: 

Thank you for inviting me to testify today about the 2013 tax filing season and to 

present a taxpayer perspective on several priority issues in tax administration. 1 As 

requested, I will focus much of my statement on tax fraud and identity theft, and I will 

also discuss the two overriding concems in tax administration today - the need for 

comprehensive tax simplification and the effects of recent cuts to the IRS budget on 

taxpayer service and revenue collection. In this statement, I will make the following 

points: 

1. The tax reform options paper developed by the staff of this committee last 

month constitutes, in my view, an excellent starting point for improving the 

tax system. It has been 27 years since Congress last enacted 

comprehensive tax reform,2 and it has been 15 years since Congress last 

passed major taxpayer r~hts legislation.3 There is a significant need for 

legislation in both areas. 

2. Significant reductions in the IRS's budget since 2010 are harming 

taxpayers and undermining the IRS's ability to raise the revenues on which 

the rest of government depends.5 For calendar year 2013 (through March 

30), the IRS has been unable to answer three out of every ten calls it 

receives from taxpayers see~ing to speak with a telephone assister, and 

taxpayers lucky enough to get through have had to wait more than 13 

1 The views expressed herein are solely those of the National Taxpayer Advocate. The National 

Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of 

Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer 

perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the 

Office of Management and Budget. Congressional testimony requested from the National Taxpayer 

Advocate is not submitted to the IRS, the Treasury Department, or the Office of Management and 

Budget for prior approval. However, we have provided courtesy copies of this statement to both the 

IRS and the Treasury Department in advance of this hearing. 

2 Pub. L. No. 99-514, Tax Reform Act of 1986 (Oct. 22, 1986). 

3 Pub. L. No. 105-206, Internal Revenue Service Restructuring and Reform Act of 1998 (July 22, 

1998). 

4 For a detailed discussion of the burdens of tax code complexity and recommendations for 

simplification, see National Taxpayer Advocate 2012 Annual Report to Congress 3-23 (Most Serious 

Problem: The Complexity of the Tax Code). For a detailed discussion about the need for taxpayer 

rights legislation, see National Taxpayer Advocate 2011 Annual Report to Congress 493-518 

(Legislative Recommendation: Enact the Recommendations of the National Taxpayer Advocate to 

Protect Taxpayer Rights). 

sin our most recent report, I designated the inadequacy of funding for the IRS as one of the most 

serious problems facing taxpayers. See National Taxpayer Advocate 2012 Annual Report to 

Congress 34-41 (Most Serious Problem: The IRS Is Significantly Underfunded to Serve Taxpayers 

and Col/ect Tax). 
65 


87414.037

minutes on hold.s Froma taxpayer perspective, this state of affairs is 

unacceptable. Moreover, it is self-defeating to apply across-the-board 

budget cuts to the IRS as a means to reduce the budget deficit, because 

the IRS collects substantially more than one dollar in federal revenue for 

each dollar it receives in appropriated funds. I recognize that this 

Committee does not have jurisdiction over the budget, but since you 

oversee the IRS and understand these issues well, I encourage you to 

work with your colleagues on the Appropriations Committee to ensure that 

the agency is adequately funded to do its job. 

3. Tax-related identity theft continues to impose significant burdens on 

taxpayers and the IRS. While the IRS is taking the problem very seriously 

and has made some meaningful improvements in its processes, I remain 

deeply concerned that victims often have to wait in excess of six months to 

have their cases resolved and receive their refunds, and the IRS has yet to 

implement an effective program for overseeing cases with multiple issues 

that require coordination among functions, thereby allowing too many 

victims to fall between the cracks of IRS bureaucracy? 

4. I recommend that Congress, Treasury, and the IRS develop a long-term 

plan to enable the IRS to process information returns, particularly 

Forms W-2, before it processes tax returns and issues refunds. Front-end 

data verification would go a long way toward eliminating tax fraud and 

identity theft and could substantially reduce taxpayer burden. I originally 

recommended these measures in my 2009 Annual Report to Congress,S 

and the IRS has since taken some steps to move forward. One obvious 

requirement will be for Congress to move up the statutory deadlines by 

which employers and other payors of income must file information reporting 

documents with the government. Some significant issues, including 

taxpayer rights concerns, remain to be studied and overcome, but I believe 

the benefits of front-end data verification justify making this a near-term 

priority. 

5. I recommend that Congress take steps to restrict immediate public access 

to the Death Master File (DMF). The DMF is one source of information that 

identity thieves use to victimize taxpayers. Several proposals have been 

6 IRS, Joint Operations Center, Snapshot Reports: Enterprise Snapshot (week ending March 30, 

2013). The IRS's "Level of Service" is computed based on calls received on the Accounts 

Management phones lines. 

7 For a detailed discussion of tax-related identity theft, see National Taxpayer Advocate 2012 Annual 

Report to Congress 42-67 (Most Serious Problem: The IRS Has Failed to Provide Effective and Timely 

Assistance to Victims of Identity Theft). 

6 National Taxpayer Advocate 2009 Annual Report to Congress 338-345 (Legislative 

Recommendation: Direct the Treasury Department to Develop a Plan to Reverse the "Pay Refunds 

First, Verify Eligibility Later" Approach to Tax Return Processing). 

2 
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87414.038

made that would allow DMF data to be made available to entities that have 

a legitimate business need for the information while curtailing general 

public access for several years. 9 

6. As part of the law enforcement response to tax-related identity theft, the 

IRS has embarked on a program of sharing taxpayer return information 

with state and local authorities to facilitate prosecutions. While this 

information-sharing program has certain benefits, I am deeply concerned 

that the Internal Revenue Code (IRC) § 6103 rules that require IRS 

employees to keep taxpayer return information confidential do not apply to 

state and local authorities. With hundreds of smaller municipal 

governments now receiving tax return information, it is only a matter of time 

before one or more local officials - who unlike IRS employees do not 

receive regular training about the importance of protecting this 

information - use tax return information carelessly or inappropriately. I 

have raised this concern with the IRS, and its position seems to be that 

there is no problem because it only releases tax return information if a 

taxpayer executes a consent form. While it is true that the IRS is releasing 

return information only when taxpayers sign consent forms, my position is 

that most taxpayers are not experts on confidentiality waivers and may 

assume that state and local law enforcement authorities have the same 

legal obligations as IRS employees to keep their tax information 

confidential. It is critical that safeguards be put in place immediately to 

prohibit law enforcement authorities who receive tax return information for 

a specified purpose from using or re-disclosing that information for any 

other purpose without additional taxpayer consent. 

7. Since 2002, I have recommended that tax return preparers be required to 

register with the IRS, pass a basic competency test, and take continuing 

education courses in order to im~rove industry standards and protect 

taxpayers from preparer errors. 1 In 2010, the IRS began to implement 

such a program, but a U.S. District Court recently held that the IRS lacks 

the legal authoritY to do SO.11 The Justice Department has appealed the 

case to the U.S. Court of Appeals for the District of Columbia, and there is 

a reasonable chance the D.C. Circuit will reverse the lower court decision. 

If it does not, however, I recommend that Congress move quickly to grant 

9 National Taxpayer Advocate 2011 Annual Report to Congress 519-523 (Legislative 

Recommendation: Restrict Access to the Death Master File); Department of the Treasury, General 

Explanations of the Administration's Fiscal Year 2014 Revenue Proposals 203 (Apr. 2013); Identity 

Theft and Tax Fraud Prevention Act of 2013, S. 676, 113'h Congo § 8 (2013). 

10 See National Taxpayer Advocate 2011 Annual Report to Congress 427-436 (Status Update: The 

IRS Has Made Significant Progress in Developing and Implementing a System to Register and Test 

Return Preparers); see also National Taxpayer Advocate 2002 Annual Report to Congress 216-230 

(Legislative Recommendation: Regulation of Federal Tax Return Preparers). 

11 Loving V. IRS, 111 A.F.T.R.2d (RIA) 589 (D.D.C. Jan. 18,2013). 

3 
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87414.039

the IRS the authority to reinstate the program. This committee has twice 

approved legislation along these lines - once under Chairman Baucus 12 

and before that under former Chairman Grassley.13 The program enjoys 

broad support from most preparer organizations and consumer groups, 

and should be relatively non-controversial. 

I. Tax Reform and Taxpayer Rights Legislation Are Overriding Priorities for 

Taxpayers and Tax Administration. 

As this Committee knows, I have repeatedly designated the complexity of the Internal 

Revenue Code as the #1 most serious problem facing taxpayers. 14 The existing 

code, by our count, has reached nearly four million words and imposes 

unconscionable burden on taxpayers. Our analysis of IRS data indicates that 

individuals and businesses spend about 6.1 billion hours a year complying with taxfiling requirements. If tax compliance were an industry, it would be one of the largest 

in the United States. To consume 6.1 billion hours, the "tax industry" requires the 

equivalent of more than three million full-time workers. 

I recognize that there are substantial political differences over the appropriate level of 

taxation and that those differences ultimately will need to be resolved. However, I 

believe the prospects for comprehensive structural tax reform can be improved if the 

tax-writing committees begin by trying to simplify the eXisting tax code and achieve 

agreement to the extent possible. Decisions about the level of taxation and tax rates 

could then be deferred to the end of the process. 

I have recommended that tax reform be approached in a manner similar to zerobased budgeting. For purposes of discussion, the starting assumption would be that 

all tax expenditures will be eliminated. A tax break would then be retained only if a 

majority of Members are persuaded that the benefits of that break outweigh the 

complexity and burden it creates. In performing this analysis, we should look at each 

provision in the code and ask questions like: 

• Does this government incentive make sense?; 

• If it does, is it better administered through the tax code or as a direct spending 

program?; and 

12 S. 1321 (incorporating S. 832) (109111 Cong.). 

13 H.R. 1528 (incorporating S. 882) (108111 Cong.). 

14 See, most recently. National Taxpayer Advocate 2012 Annual Report to Congress 3-23 (Most 

Serious Problem: The Complexity of the Tax Code). 

4 
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87414.040

• If yes, can it be administered without imposing unreasonable burdens on 

taxpayers or the IRS? 

Then Congress can separately consider how much revenue it wants to raise, and it 

can marry up this optimally-designed tax system with its revenue decisions by setting 

tax rates accordingly. 

Because this hearing is focused on IRS issues, I will not discuss tax reform in detail 

in this testimony. For those interested, our recommendations are described more 

fully in the National Taxpayer Advocate's 2012 Annual Report to Congress. 

I do want to take a moment to commend the committee for the comprehensive tax 

reform options paper it released on March 21. Among tax reform proposals I have 

seen over the years, this options paper is unusual in that it focuses heavily on the 

IRS and tax administration. In my view, that makes good sense because the filing of 

a tax return with the IRS is where the rubber meets the road for taxpayers, and if the 

filing process for taxpayers can be simplified, that will go a long way toward reducing 

taxpayer burden. 

I also want to take note that the options paper includes a mention of updating 

taxpayer rights legislation. Congress passed significant taxpayer rights legislation in 

1988, 1996, and 1998. In fact, two members of this committee - Senator Portman 

and Senator Cardin - were lead sponsors of the IRS Restructuring and Reform Act of 

1998 when they served in the House of Representatives. However, 15 years have 

now elapsed since we have had major taxpayer rights legislation. Our laws have not 

kept pace with our notions of procedural fairness in 21 st century tax administration, 

particularly given our tax system's expanded and diverse taxpayer base and duties. 

I have recommended grouping the many discrete taxpayer rights embedded in the 

Internal Revenue Code into ten broad categories, modeled on the U.S. Constitution's 

Bill of Rights, to help make existing rights clearer and help taxpayers better 

understand them. 

In my view, taxpayers and tax administration would benefit from an explicit statement 

of what taxpayers have a right to expect from their govemment and what the 

government has a right to expect from its taxpayers. The categories I have 

suggested are as follows: 

10 Taxpayer Rights. I have recommended that Congress organize taxpayer rights 

under the following ten broad principles: (1) right to be informed; (2) right to be 

assisted; (3) right to be heard; (4) right to pay no more than the correct amount of tax; 

(5) right of appeal; (6) right to certainty; (7) right to privacy; (8) right to confidentiality; 

(9) right to representation; and (10) right to a fair and just tax system. 

5 
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87414.041

5 Taxpayer Responsibilities. To help taxpayers understand what the law requires 

of them, I have also recommended that Congress organize taxpayer responsibilities 

under the following five principles: (1) obligation to be honest; (2) obligation to be 

cooperative; (3) obligation to provide accurate information and documents on time; 

(4) obligation to keep records; and (5) obligation to pay taxes on time. 

In addition, we have made other legislative recommendations in recent years to 

strengthen taxpayer rights. Most are technical and relatively noncontroversial but will 

bring real benefits to taxpayers. I encourage the committee to move forward with 

taxpayer rights legislation this year. 

II. Recent Budget Cuts Are Impairing the IRS's Ability to Serve Taxpayers 

and Collect Tax. 

In my 2012 Annual Report to Congress, I warned that the significant and chronic 

underfunding of the IRS poses a major long-term risk to tax administration. 15 

Over the past two years, Congress has cut the IRS's budget by nearly $1 billion, or 

almost eight percent. This includes more than $600 million in cuts in fiscal year (FY) 

2013 because of sequestration and the rescission, which the IRS is struggling to 

absorb.16 

Because of budget cuts, the IRS's full-time, permanent workforce was cut from about 

86,000 to 79,000 employees from FY 2010 to FY 2012, a reduction of 8 percent17 

By the end of FY 2012, the IRS had also cut its training budget compared with 

FY 2010 from about $168 million to about $63 million, a reduction of 62 percent,18 

and significant additional cuts are being made in FY 2013. The IRS has publicly 

estimated that the reduction in its training spending by the end of FY 2013 will be 

83 percent.19 As a result, the IRS has many fewer employees than it had just two 

years ago, and those employees - particularly newer ones - often are not receiving 

15 National Taxpayer Advocate 2012 Annual Report to Congress 34-41 (Most Serious Problem: The 

IRS is Significantly Underfunded to Serve Taxpayer and Collect Tax); see also National Taxpayer 

AdVocate 2011 Annual Report to Congress 3-27 (Most Serious Problem: The IRS Is Not Adequately 

Funded to Serve Taxpayers and Col/ect Taxes). 

16 See Hearing Before Subcomm. on Financial Services and General Government of H. Comm. on 

Appropriations, 113th Congo (2013) (statement of Steven T. Miller, Acting Commissioner of Internal 

Revenue), at http://appropriations.house.gov/uploadedfiles/hhrg-113-ap23-wstate-millers20130409.pdf. 

17 IRS Integrated Financial System, Commitments, Obligations, Expenditures & Disbursements report. 

These figures track employees in "pay status' and exclude employees who were on Leave Without 

Payor related statuses. 

18 IRS Integrated Financial System, Commitments, Obligations, Expenditures & Disbursements report. 

'" IRS Fact Sheet, FS-2013-05, IRS Achieves $1 Billion in Cost Savings and Efficiencies (April 2013), 

at http://www.irs.gov!uacIiRS-Achieves-$l-Biflion-in-Cost-Savings-and-Efficiencies (last visited 

April 12, 2013). 

6 
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87414.042

the training they require to do their jobs well or assist taxpayers adequately, 

particularly with complex or atypical issues. 

A. Taxpayer Services: Reduced Funding Means Taxpayer Needs Are Not 

Being Met. 

I am concerned that the IRS is not receiving sufficient funds to meet the basic needs 

of taxpayers seeking to comply with the law. In each of the last two fiscal years, the 

IRS has received more than 115 million calls, a staggering volume that the IRS 

cannot come close to fully handling.2o Last year, the IRS answered only about 68 

percent of calls from taxpayers seeking to speak with a telephone assistor, and those 

who got through had to wait on hold .for an average of nearly 17 minutes.21 That level 

of service represents a sharp drop-off in performance compared with the IRS's highwater mark in FY 2004, when it answered 87 percent of its calls and the average hold 

time was just over 2% minutes.22 

The IRS's ability to timely process taxpayer correspondence has also diminished in 

recent years. Last year, the IRS received more than ten million letters from 

taxpayers responding to IRS adjustment notices.23 Comparing the final week of 

FY 2012 with the final week of FY 2004, the backlog of correspondence in the tax 

adjustments inventory increased by 188 percent (from 357,151 to 1,028,539 

pieces), and the percentage classified as "overage" jumped by 316 percent (from 

11.5 percent to 47.8 percent).24 

The impact of reduced taxpayer service is felt on the compliance Side as well. Few 

individuals or businesses enjoy receiving a notice informing them that the IRS is 

reviewing their tax return or taking action to collect an outstanding tax liability. When 

that happens, however, it is essential that the taxpayer be able to talk to an IRS 

employee - whether to clarify what the notice says, present documentation to support 

the return position, or demonstrate that collection action would impose financial 

hardship and should not be taken. Among the consequences of budget cuts: 

20 IRS, Joint Operations Center, Snapshot Reports: Enterprise Snapshot (weeks ending Sept. 30, 

2011 and Sept. 30, 2012): see Most Serious Problem, The IRS Telephone and Correspondence 

SeNices Have Deteriorated Over the Last Decade and Must Improve to Meet Taxpayer Needs). 

21 IRS, Joint Operations Center, Snapshot Reports: Enterprise Snapshot (week ending Sept. 30, 

2012). The Accounts Management phones lines (previously known as the Customer Account 

Services phone lines) receive the Significant majority of taxpayer calls. However, taxpayer calls to 

compliance phone lines and certain other categories of calls are excluded from this total. 

22 IRS, Joint Operations Center, Snapshot Reports: Enterprise Snapshot (week ending Sept. 30, 

2004). 

23 See, e.g., IRS, Joint Operations Center, CAS Accounts Management Paper Inventory Reports: 

FY12 July-September Fiscal Year Comparison. 

24 Compare IRS, Joint Operations Center, Weekly Enterprise Adjustments Inventory Report (week 

ending Sept. 29, 2012) with IRS, Joint Operations Center, Weekly Enterprise Adjustments Inventory 

Report (week ending Sept. 25, 2004). 

7 
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87414.043

• Taxpayers who submit documentation at the request of the IRS often wait 

extended periods for the IRS to respond;25 

• Taxpayers are sometimes denied tax benefits because the IRS narrowly 

defines the types of supporting documentation it will accept and does not have 

the bandwidth to consider alternative forms of documentation;26 and 

• Centralization of some IRS functions means the loss of employees who 

understand local conditions.27 

Another impact of shrinking IRS budgets is pressure to make greater use of 

automated processes. While automating certain routine tasks frees employees to 

focus on higher value activities, I am deeply concerned that automated "tools" are 

replacing employee judgment and in some cases failing to achieve the intended 

goal. 28 Taxpayers subject to enforcement action must wait longer to speak to an 

employee or have an employee read their letters, and they face additional burden 

when automation resolves their cases improperly. 

B. Revenue Collection: Reduced Funding Means Reduced Revenue 

Collection and a Larger Budget Deficit. 

Cutting the IRS budget also makes little sense from a revenue standpoint. In 

FY 2012, the IRS collected about $2.52 trillion29 on a budget of about $11.8 billion. 3o 

That translates to an average return-on-investment (ROI) of about 214:1. The 

25 See National Taxpayer Advocate 2010 Annual Report to Congress 235·249 (Most Serious Problem: 

The IRS Does Not Process Vital Taxpayer Responses Timely). 

26 See National Taxpayer Advocate 2012 Annual Report to Congress, vol. 2, at 71-104 (Study of Tax 

Court Cases in Which the IRS Conceded the Taxpayer Was Entitled to Earned Income Tax Credit 

(EITC). 

27 See National Taxpayer Advocate 2008 Annual Report to Congress 260·273 (Most Serious Problem: 

The Impact of IRS Centralization on Tax Administration). 

26 The Automated Substitute for Return program is an example of how an automated approach to 

enforcement creates downstream costs for the IRS. See National Taxpayer Advocate 2011 Annual 

Report to Congress 93-108 (Most Serious Problem: Automated "Enforcement Assessments" Gone 

Wild: IRS Efforts to Address the Non-Filer Population Have Produced Questionable Business Results 

for the IRS, While Creating Serious Burden for Many Taxpayers); see also National Taxpayer 

Advocate 2012 Annual Report to Congress, vol. 2. at 63-90 (An Analysis of the IRS Examination 

Strategy: Suggestions to Maximize Compliance, Improve Credibility, and Respect Taxpayer Rights). 

which notes that automation is leading to fewer personal contacts with taxpayers and lack of 

awareness among taxpayers that they are facing an enforcement action. 

29 Government Accountability Office (GAO). GAO-13-120. Financial Audit: IRS's Fiscal Years 2012 

and 2011 Financial Statements 65 (Nov. 2012), at http://www.gao.gov/assets/650/649881.pdf. 

30 Department of the Treasury, FY 2013 Budget in Brief, at http://www.treasurv.gov/aboutibudgetperforrnance/budget-in-brief/DocumentsI11. %20 IRS 508%20· %20passed. pdf. 

8 
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87414.044

marginal ROI of additional spending will not be nearly so large, but virtually everyone 

who has studied the IRS budget has concluded that the ROI of additional funding is 

positive. In 2011, former Commissioner Shulman estimated in a letter to Congress 

that proposed cuts to the IRS bUd~et would result in reduced revenue collection of 

seven times as much as the cuts. 1 

Cutting the IRS budget therefore means fewer dollars to put toward deficit reduction, 

fewer dollars for military funding, fewer dollars for our intelligence services and 

embassy protection, fewer dollars for social programs, fewer dollars for infrastructure 

renewal, fewer dollars for medical research - in short, fewer dollars for all the things 

we believe as a nation we should provide for our citizens. It means real harm to real 

people. 

If the Chief Executive Officer of a Fortune 500 company were told that each dollar 

allocated to his company's Accounts Receivable Department would generate seven 

dollars in return, it is difficult to see how the CEO would keep his job if he chose not 

to provide the department with the resources it needed to collect its receivables. Yet 

that is exactly what has been happening with respect to IRS funding for years, and 

there has been little effort to fix this obvious problem. 

Because subjecting the IRS to across-the-board cuts designed to reduce the budget 

deficit has the opposite effect of increasing the deficit, I encourage the Finance 

Committee to enter into a dialogue with Members of the Appropriations and Budget 

committees to try to come up with a new approach to funding the IRS that gives it 

sufficient resources to meet taxpayer needs and collect federal revenue. 

C. If a "Program Integrity Cap Adjustment" Mechanism Is Used, It Should 

Encompass Taxpayer Service Activities as Well as Enforcement. 

In an effort to address these funding challenges, several Appropriations acts in 

recent years have given the IRS additional funding using a mechanism known as a 

"program integrity cap adjustment." Under this mechanism, new funding 

appropriated for IRS enforcement programs generally does not count against 

otherwise applicable spending ceilings provided: 

1. The IRS's existing enforcement base is fully funded; and 

2. A determination is made that the proposed additional expenditures will 

generate an ROI of greater than 1:1 (i.e., the additional expenditures will 

increase federal revenue on a net basis). 

31 Letter from Douglas H. Shulman, Commissioner of Intemal Revenue, to the chairmen and ranking 

members of the House Committee on Ways and Means (and its Subcommittee on Oversight) and the 

Senate Committee on Finance (Oct. 17, 2011), at 

http://democrats.waysandmeans.house.govfsitesfdemocrats.waysandmeans.house.govffilesfmediafpd 

ff112/Rep Lewis IRS Letter. pdf. In addition to generating direct revenue, IRS compliance actions 

produce indirect revenue gains. Studies show that taxpayers who might otherwise be tempted to bend 

the rules report their income more accurately as the likelihood of an audit increases. 

9 
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87414.045

The Administration's budget proposal released last week recommends a change to 

the Balanced Budget and Emergency Deficit Control Act of 1985 to provide 

program integrity cap adjustments for the next 10 years.32 While this cap 

adjustment mechanism may provide an easier path to providing the IRS with more 

resources than a fundamental change in IRS funding rules, I am concerned that 

taxpayer service activities have been excluded from this enhanced funding 

mechanism in the past. The rationale has been that the IRS is able to measure the 

direct ROI of its enforcement activities - i.e., it can compute to the dollar the 

amounts collected by its Examination, Collection, and document-matching 

functions - but is unable to quantify the ROI of taxpayer services. Thus, it is not 

currently possible to document whether or to what extent its taxpayer services 

generate an ROI greater than 1: 1. 

Creating a mechanism that allows more funding for enforcement actions while 

excluding taxpayer service activities like outreach and education would be a 

mistake for two reasons. First, common sense tells us that taxpayer services are a 

Significant driver of tax compliance and generate a very high ROI. Publishing tax 

forms and instructions, conducting outreach and education to taxpayers, tax 

preparers, and tax software manufacturers, and otherwise administering the tax 

filing season are absolute prerequisites for tax compliance. In general, the ROI of 

these service activities is probably greater than the ROI of enforcement actions, 

and as we document in this report, the IRS could do a lot to improve its taxpayer 

services if it received additional funding for that purpose. 

Second, an enforcement-only cap adjustment will inherently push the IRS to 

become more of a hard-core enforcement agency. It should be emphasized that in 

FY 2011, direct enforcement revenue amounted to onl~ $50.2 billion33 or 

two percent of total IRS tax collections of $2.52 trillion. 4 The remaining 98 percent 

resulted from voluntary front-end tax compliance. If cap adjustments are applied 

solely to bolster enforcement funding, the relative allocation of the IRS budget 

between enforcement and taxpayer service will shift over time in a direction that 

causes taxpayers to fear the IRS more and voluntarily cooperate less. In our effort 

to enforce the laws against noncompliant taxpayers, we must take care to avoid 

steps that may alienate compliant taxpayers and thereby jeopardize the existing tax 

base. 

If program integrity cap adjustments are used, I recommend that compliance 

measures be defined more broadly, so that they include both an enforcement 

32 See Department of the Treasury, General Explanations of the Administration's Fiscal Year 2014 

Revenue Proposals 187 (April 2013). 

33 IRS, Fiscal Year 2012 Enforcement and Service Results, at http://www.irs.gov/pub/irsnews/FY%202012%20enforcement%20and%20service%20results-%20Media.pdf. 

34 GAO, GAO-13-120, Financial Audit: IRS's Fiscal Years 2012 and 2011 Financiaf Statements 65 

(Nov. 2012), at http://www.gao.gov/assets/650/649881.pdf. 

10 
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87414.046

component and a service component. Because the projected ROI of many 

enforcement programs is high, a more broadly constructed initiative could still 

produce a demonstrable ROI of greater than 1: 1, even if it contained service 

components with ROls that are unquantifiable. 35 

III. Despite Significant Changes to the IRS's Approach to Assisting Identity 

Theft Victims, the IRS Remains Inundated with Identity Theft Cases and 

Victim Assistance Is Taking Too Long. 

As I have written in my Annual Reports to Congress since 2004, tax-related identity 

theft is a serious problem - for its victims, for the IRS and, when Treasury funds are 

improperly paid to the perpetrators, for all taxpayers. 36 In general, tax-related identity 

theft occurs when an individual intentionally uses the SSN of another person to file a 

false tax return for the purpose of obtaining an unauthorized refund. 37 

For victims, the consequences can be significant. Apart from the time and frustration 

involved in dealing with the IRS to prove one's own identity, taxpayers generally do 

not receive their refunds until the case is resolved. So far this filing season, 

84 percent of all returns processed have resulted in refunds, and the average refund 

35 In our past annual reports, we have written about local compliance initiatives the IRS has 

undertaken that include integrated enforcement and outreach and education components. See, e.g., 

National Taxpayer Advocate 2008 Annual Report to Congress 176-192 (Most Serious Problem: Local 

Compliance Initiatives Have Great Potential but Face Significant Challenges). One example: In the 

early 1990s, the IRS launched an initiative designed to address noncompliance by fishermen in Alaska 

that resulted from confusion as well as community norms and attitudes. The IRS combined steppedup enforcement activities with an extensive outreach and education campaign in remote fishing 

villages and on fishing vessels that included assisting with tax retum preparation and training local 

volunteers to assist taxpayers. By the end of the initiative, the number of nonfilers among the target 

population declined by 30 percent. Id. at 177-178. 

36 See National Taxpayer Advocate 2012 Annual Report to Congress 42-67 (Most Serious Problem: 

The IRS Has Failed to Provide Effective and Timely Assistance to Victims of Identity Theft); National 

Taxpayer Advocate 2011 Annual Report to Congress 48-73 (Most Serious Problem: Tax-Related 

Identity Theft Continues to Impose Significant Burdens on Taxpayers and the IRS); National Taxpayer 

Advocate 2009 Annual Report to Congress 307-317 (Status Update: IRS's Identity Theft Procedures 

Require Fine-Tuning); National Taxpayer Advocate 2008 Annual Report to Congress 79-94 (Most 

Serious Problem: IRS Process Improvements to Assist Victims of Identity Theft); National Taxpayer 

Advocate 2007 Annual Report to Congress 96-115 (Most Serious Problem: Identity Theft Procedures); 

National Taxpayer Advocate 2005 Annual Report to Congress 180-191 (Most Serious Problem: 

Identity Theft); National Taxpayer Advocate 2004 Annual Report to Congress 133-136 (Most Serious 

Problem: Inconsistent Campus Procedures). 

37 We refer to this type of tax-related identity theft as "refund-related" identity theft. In "employmentrelated" identity theft, an individual files a tax return using his or her own taxpayer identifying number 

(usually an Individual Taxpayer Identification Number, or "ITIN"), but uses another individual's SSN in 

order to obtain employment, and consequently. the wages are reported to the IRS under the SSN. 

Unlike in 1993, when I first represented a client in an identity theft case, the IRS now has procedures 

in place to minimize the tax administration impact to the victim in these employment-related identity 

theft situations. Accordingly. I will focus on refund-related identity theft in this testimony. 

11 
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87414.047

amount has been nearly $2,800.38 For low income taxpayers who qualify for the 

Earned Income Tax Credit, a tax refund may amount to 25 percent or more of their 

annual income. There is little doubt that longer case resolution times can translate to 

financial inconvenience and sometimes financial hardship. That is why prompt case 

resolution is so important. 

In FY 2013, the IRS changed its strategy for aSSisting identity theft victims, adopting 

a specialized approach under which each department (or "function") that deals with 

identity theft created a dedicated group of employees to work on those issues. There 

clearly are benefits in assigning identity theft cases to a small group of speciallytrained employees so they can quickly become experts in resolving these types of 

cases. 

But there is another important factor that the IRS is not adequately addressing. 

Because identity theft cases are often very complex, they require adjustments by 

multiple functions. 39 The IRS has developed a "transfer matrix" outlining situations in 

which a case must be routed from one specialized function to another. The IRS 

believes that these occurrences are minimal. I disagree. Based on TAS's 

experience with identity theft cases over the years, I believe that transfers among 

functions are much more common. The vast majority of identity theft cases worked 

by TAS involve multiple issues,4o as the chart below illustrates. 

3B IRS, Filing Season Statistics for Week Ending April 5, 2013, at 

http://www.irs.govfuacfNewsroomfFiling-Season-Statistics-for-Week-Ending-April-5-2013. 

39 An IRS task force found that up to 28 different functions may touch an identity theft case. IRS, 

Identity Theft Assessment and Action Group (IT AAG) Future State Vision and Supporting 

Recommendations 7 (Oct. 11, 2011). 

40 When TAS opens a case, it assigns a primary issue code based on the most significant issue, policy 

or process within the IRS that needs to be resolved. When a TAS case has multiple issues to resolve, 

a secondary issue code will be assigned. See IRM 13.1.16.13.1.1 (Feb. 1,2011). 

12 
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87414.048

100%1 

80% I 

60% I 

40%1 

20% -I 

Percent of TAS Stolen Identity Cases 

with Multiple Issue Codes 

94% 

~----------~~~2% 

72% 

0%+1--------~--------~--------~ FY 2011 FY 2012 FY 2013 (thru Feb) 

To facilitate the transfer of such cases from one function to another, I have long 

advocated for the creation of a "traffic cop" to guide the case through the 

bureaucracy and serve as the single point of contact with the victim. Without this 

traffic cop, there is higher risk that cases requiring involvement of multiple functions 

will get "stuck" or lost in the process. 

In May 2012, the Treasury Inspector General for Tax Administration (TIGTA) issued 

an audit report on IRS identity theft victim assistance.41 TIGTA selected a 

judgmental sample of 17 identity theft cases, and its findings corroborate my position 

that identity theft cases are complex and vulnerable to getting lost in the IRS shuffle. 

TIGTA found that the IRS had opened 58 separate cases to resolve the accounts of 

those 17 identity theft victims - an average of nearly three and a half cases per 

victim.42 The average cycle time for those cases was 414 days, which included an 

average of 86 days of inactivity.43 By assigning ownership of an identity theft case to 

a traffic cop. the IRS can ensure that the case gets moved forward in the most 

efficient manner and reduce taxpayer frustration. 

I have repeatedly proposed that the Identity Protection Specialized Unit or "IPSU," 

the centralized IRS organization established in 2008 to assist identity theft victims, 

could be utilized to fulfill this traffic cop role. After initial resistance, the leadership of 

the IRS Wage & Investment Division recently assured me that the IPSU will monitor 

all identity theft cases that require involvement of more than one function. For 

example, if a case requires the Accounts Management function to adjust the 

taxpayer's account, but also requires Collection to take some action, the IPSU will 

41 See TIGTA, Ref. No. 2012-40-050, Most Taxpayers Whose Identities Have Been Stolen to Commit 

Refund Fraud Do Not Receive Quality Customer Service (May 3, 2012). 

42 See id. 

43 See id. 

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87414.049

ensure that the case gets routed to the appropriate place in the agreed-upon time. 

Furthermore, I was told that the IPSU will conduct an initial global account review 

upon receipt of the case to identify potential issues and then a final account review 

prior to case closure to determine whether all issues have been addressed. While I 

am pleased with this recent development, we will continue to track the IRS's 

implementation of these procedures. I have been recommending these changes for 

over five years, and it is high.time that the IRS provide identity theft victims with the 

level of assistance they deserve. 44 

From an identity theft prevention perspective, the IRS has developed a multi-faceted 

approach to detecting tax returns filed by identity thieves and preventing such 

associated refunds from being processed. For example, the IRS utilizes a series of 

identity theft filters designed to detect potentially fraudulent returns, and each year it 

adjusts the filters as the IRS learns more about how the thieves operate. Through 

February 2013, the IRS stopped more than 360,000 tax returns by using these filters, 

an increase of more than 150 percent from the same period in 2012. 45 

The IRS also works cooperatively with banks and other financial institutions to thwart 

attempts by identity thieves to defraud the government. The IRS has a process by 

which private sector businesses, which often have developed their own algorithms to 

detect fraud, alert the IRS of suspicious transactions. The IRS will then investigate 

the taxpayers involved, and if it verifies fraudulent activity, will recoup the funds from 

the financial institution. Through this "external leads" program, the IRS has been 

able to recover over $109 million from over 30,000 accounts this year.46 

Yet despite the revamped identity theft victim assistance procedures, more stringent 

filters, and improved cooperation with the private sector, the volume of identity theft 

returns continues to grow at an alarming rate. The IRS had more than 1.25 million 

identity theft cases in inventory as of the end of February 2013, a sharp increase 

from a year ago, when the volume was less than 235,000 cases.47 With the average 

cycle time for the IRS to resolve identity theft cases exceeding six months last year,48 

I am concerned that its cycle time will skyrocket in the coming year as it struggles to 

keep up with its burgeoning inventory of cases. 

44 See National Taxpayer Advocate 2007 Annual Report to Congress 115 ('The IRS should develop a 

dedicated, centralized unit to handle all identity theft cases"); National Taxpayer Advocate 2008 

Annual Report to Congress 94 ('Provide global account review and account monitoring (if necessary) 

for all identity theft victims"). 

<5 IRS Identity Theft Advisory CounCil, Identity Theft Status Update (Mar. 28, 2013); IRS Identity Theft 

Advisory Council, Identity Theft Status Update (Mar. 7, 2012). 

46 IRS Identity Theft Advisory Council, Identity Theft Status Update (Mar. 28, 2013). 

47 IRS Identity Theft Advisory CounCil, Identity Theft Status Update (Mar. 28, 2013); IRS Identity Theft 

Advisory Council, Identity Theft Status Update (Mar. 7, 2012). 

48 See National Taxpayer Advocate 2012 Annual Report to Congress 50. 

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87414.050

When a taxpayer whose account has been marked with an identity theft indicator fails 

a series of filters designed to safeguard the account (called "business rules" in IRS 

parlance), or if a taxpayer who was issued an Identity Protection Personal 

Identification Number (IP PIN) did not use a valid IP PIN when filing the return, the 

return will be marked "unpostable" - meaning it will not be processed. So far in this 

filing season, the IRS has marked 182,181 returns as unpostable, an increase of 345 

percent over the same period in 2012.49 If a taxpayer files a legitimate return that 

was erroneously marked unpostable, processing is delayed an average of 28 days, 

an increase of over 50 percent from last year.50 Preliminary analysis suggests that 

an astonishing 89 percent of tax returns flagged as unpostable are eventually 

deemed legitimate. 51 

I am worried about the exceptionally high rate of legitimate returns becoming 

ensnared in the business rules. I am interested in working with the IRS to try to 

determine the cause of the spike in unpostable returns this year. It is not acceptable 

for so many legitimate taxpayers to be harmed by having their returns initially 

rejected and delayed nearly a month. 

I have often said that TAS's case receipts are a barometer of the effectiveness of the 

IRS's procedures. From FY 2011 to FY 2012, TAS stolen identity cases rose by 

61 percent,52 and they have continued to trend upward this year. TAS received 

26,354 identity theft cases during the first two quarters of FY 2013, a 66 percent 

increase over the same period in FY 2012 and a 157 percent increase from FY 

2011.53 

49 The IRS is screening for more criteria that create unpostable returns in 2013 than in 2012. See IRS, 

GUF Reports 5540 and 5570. 

50 Average days to resolution for closed cases was combined with average days open or currently 

unresolved open cases. See IRS, GUF Reports 5540 and 5570. 

51 IRS, GUF Reports 5540 and 5570. 

52 Data obtained from BPMS reports on October 3,2012, showing TAS received 34,006 identity theft 

cases as of September 30,2011, and 54,748 cases as of September 30,2012. 

53 Taxpayer Advocate Management Information System (TAM/S) (Apr. 1, 2012; Apr. 1, 2011). 

15 
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87414.051

30,000 

25,000 

20,000 

15,000 

10,000 

5,000 

o 

TAS Identity Theft Receipts 

FY 2011 - FY 2013 (thru March) 

FY 2011 thru March FY 2012 thru March FY 2013 thru March 

The growth in T AS's identity theft casework reflects both the increase in identity theft 

incidents and the IRS's inability to address the victims' tax issues promptly. 

IV. To Reduce Taxpayer Burden and Cut Down on Tax Fraud, the IRS Should 

Be Empowered to Process Information Reporting Documents Like Forms 

W-2 Before Processing Tax Returns and Issuing Refunds. 

I have repeatedly recommended that the IRS develop a long-term plan to accelerate 

third-party reporting so it could match third-party data before processing tax returns 

and releasing associated tax refunds. Upfront matching would reduce the incidence 

of tax fraud, identity theft, and inadvertent errors while also providing significant 

taxpayer service. In particular, enabling the IRS to receive and process Forms W-2, 

Wage and Tax Statement, before releasing refunds would be an important step to 

deter perpetrators from committing tax fraud and identity theft. Finally, providing 

taxpayers and their representatives with direct electronic access to third-party data 

before return filing deadlines would alleviate taxpayers' burden and reduce the 

downstream consequences of inadvertent noncompliance. 

The acceleration of third-party reporting in general would serve to increase tax 

compliance. Approximately 97 percent of taxpayers receive at least one information 

return. Traditionally, the IRS has not matched this data with the items reported on 

the taxpayers' tax returns until long after the filing season. 54 In 2010, the IRS closed 

4.3 million cases in which it identified a discrepancy between the taxpayer's return 

and third-party information, leading to $7.2 billion in additional assessments. 55 The 

54 IRS, PowerPoint, Real Time Tax System Initiative, Public Meeting 2 (Dec. 8, 2011), at 

http://www.irs.gov/pub/irs-utllrtts deck. pdf (last visited April 8, 2013). 

551d. 

16 
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87414.052

real volume of mismatches is significantly larger, because this data only reflects 

mismatches large enough for the IRS to work, and does not include others below the 

IRS's established thresholds. For perspective, the IRS identified almost 23.8 million 

mismatches on tax year (TY) 2010 returns, but only worked about 5.3 million cases 

(22 percent). 56 

There is broad agreement that accelerated information reporting is necessary to 

increase compliance and improve taxpayer service. In my 2009,2011, and 2012 

annual reports, I wrote about the benefits of accelerated third-party information 

reporting to both taxpayers and tax administration.57 In its response to the 2012 

analysis, the IRS acknowledged that it had taken early steps toward the development 

of a real-time tax system (RTTS) with the ultimate goal of reducing taxpayer burden 

and increasing compliance. 58 In addition, the IRS solicited comments from a diverse 

group of stakeholders at two public meetings. While the participants expressed 

concerns about how the IRS would achieve this system, there was consensus that 

the goal of the initiative would serve both taxpayers and tax administration. 59 

In general, the goal of an RTTS is to enable the IRS to match information during the 

filing season and prior to releasing the associated refunds.6o If the IRS identified 

mismatches before releasing refunds, both taxpayers and the government would 

avoid the subsequent consequences of assessments.61 

An RTTS would substantially reduce taxpayer burden in several ways: 

56 IRS response to TAS information request (Oct. 17,2012). 

57 National Taxpayer Advocate 2009 Annual Report to Congress 338-345; National Taxpayer 

Advocate 2011 Annual Report to Congress 284-295; National Taxpayer Advocate 2012 Annual Report 

to Congress 180-191. 

58 National Taxpayer Advocate 2012 Annual Report to Congress 190. 

59 During the meeting held on December 8, 2011, the IRS heard statements from the members of 

three panels: (1) tax practitioners, (2) federal and state government representatives, and (3) taxpayer 

and consumer advocates. During the second meeting, which was held on January 25,2012, the IRS 

solicited comments from four panels conSisting of (1) payrolllW-2 filers, (2) Form 1099 issuers, (3) 

software providers, and (4) state revenue agencies. For written and oral statements of panelists at the 

two RTTS public meetings, see http://www.irs.govlTax-Professionals/Real-Time-Tax-Initiative (last 

visited April 8, 2013). 

60 IRS, PowerPoint, Real Time Tax System Initiative, Public Meeting 2 (Dec. 8, 2011), at 

http://www.irs.gov/publirs-utlirtts deck. pdf (last visited April 8, 2013). 

61 When the IRS's Automated Underreporter (AUR) system identifies a mismatch between items 

reported on the taxpayer's return and information reports, it generates a CP 2000 notice to be mailed 

to the taxpayer. In TY 2010, the IRS mailed 3,823,766 of these notices to taxpayers, and the 

estimated response rate was 45 percent. These numbers have declined from 4,546,817 notices in 

TY 2009 (with an estimated response rate of 60 percent) and 4,788,360 notices in TY 2008 (with an 

estimated response rate of 57 percent). IRS response to TAS information request (Oct. 17, 2012) 

(data through Oct. 16,2012). 

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87414.053

• Taxpayers would be better equipped to answer questions about an underlying 

economic transaction if the IRS identified the mismatch within months rather 

than a year or more after the fact. 

• Matching data before the IRS releases refunds would prevent taxpayers from 

facing IRS collection actions long after they have spent the refunds. 

• Taxpayers would save money by avoiding the long-term accrual of penalties 

and interest on unintentionally omitted or under-reported items. 

• Upfront matching would reduce taxpayers' vulnerability to identity-theft related 

refund fraud.62 

• Giving taxpayers access to third-party data before the return filing deadline 

would help them prepare returns and prevent inadvertent omissions and 

understatements. 

In addition, the government would benefit from the revenue protection aspect of 

upfront matching. A real-time tax system would allow the IRS to protect revenue by 

resolving mismatches at the outset and preventing the release of erroneous refunds. 

This system would deter fraud by stopping the refund associated with an upfront 

mismatch. Further, the IRS would devote fewer resources to compliance and 

collection activities on basic omission and understatement cases, and could use the 

savings to resolve more complex issues. 53 

Legislative action may be necessary to accelerate third-party reporting deadlines, 

tighten e-file mandates, and enable the IRS to receive Form W-2 data at the same 

time taxpayers receive the forms from their employers.54 In this regard, I encourage 

Congress to consider the following issues: 

62 IRS, PowerPoint, Real Time Tax System Initiative, Public Meeting 2 (Dec. 8, 2011), at 

http://www.irs.gov/pub/irs-utllrtts deck.pdf (last visited April 8, 2013). For more information on identitytheft refund fraud, see National Taxpayer Advocate 2012 Annual Report to Congress 42-67 (Most 

Serious Problem: The IRS Has Failed to Provide Effective and Timely Assistance to Victims of Identity 

Theft). 

63 IRS, PowerPoint, Real Time Tax System Initiative 1, PubliC Meeting (Dec. 8,2011), at 

http://www.irs.gov/file source/pub/irs-utl/rtls deck. pdf (last visited April 8, 2013). 

64 If certain data fields on an information retum require more time to complete than others due to 

complexity or record-keeping issues, it may be necessary to bifurcate the information reporting 

deadlines. For example, if employers need more time to report pension benefit calculations, the IRS 

could require earlier reporting of the basic Form W-2 data such as wages and withholdings and allow 

employers more time to file a supplemental earnings statement with the more complicated items later. 

Taxpayers and the IRS would receive the information they need for return filing early in the filing 

season and the IRS would receive the other, more complex information soon enough for compliance 

purposes. This bifurcation may be relevant for the upcoming reporting requirements under the 

Affordable Care Act that may be critical for return filing. See National Taxpayer Advocate 2009 Annual 

Report to Congress 338-345; United States Government Accountability Office, GAO-11-747T, Hearing 

18 
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87414.054

• When the IRS identifies a mismatch between third-party data and tax return 

information, it is unclear what type of compliance contact the IRS would make 

during the filing season. In developing procedures, the extent of taxpayer 

burden must be a significant consideration. The extent of taxpayer burden 

would depend largely on the accuracy of the third-party data and on the level 

of staffing allocated to problem resolution when mismatches occur. 

• Moving up the deadlines for employers and payors of income to submit Forms 

W-2 and other information returns to the government would be necessary, but 

earlier deadlines could also be burdensome for some filers. The IRS should 

continue to consult with these stakeholders to determine the best way to 

accomplish a real-time tax system.55 

• Even if the reporting deadline is moved up, the IRS would still need time to 

process the Forms W-2 and the other information returns it receives. 

Therefore, consideration should be given to moving back the date for issuing 

tax refunds by a month or two to allow the IRS sufficient time to perform 

document matching and verify the accuracy of refunds claimed on filed 

returns. 

• I would strongly caution against the expansion of math error authority to cover 

mismatched third-party data. I have written extensively about my concerns on 

this subject,66 and these concerns were also expressed by others during the 

taxpayer and consumer advocate panel at the first RTTS public meeting.57 

• As part of this initiative, I believe the IRS should provide taxpayers with 

electronic access to a real-time transcript of data received by the IRS to help 

them prepare their returns and avoid inadvertent omissions. The IRS would 

. drive compliance rates even higher by providing a way for taxpayers to 

download the third-party data directly into their return preparation software and 

by developing an IRS-provided partially pre-populated return option. Thus, 

taxpayers should have the choice of one of the following ways to access third 

party data in preparing a tax return: (1) view and print out the third-party data 

to assist in return preparation, (2) download the data into commercial return 

before the Committee on Finance, U.S. Senate on Tax Gap: Complexity and Taxpayer Compliance 

14-17 (statement of Michael Brostek, Director, Tax Issues, StrategiC Issues, June 28, 2011). 

65 See IRS Public Hearing, Proposed Real-Time Tax System, Comments from the National Payroll 

Reporting Consortium (Jan. 25, 2012). 

66 See National Taxpayer Advocate 2011 Annual Report to Congress 74-92; National Taxpayer 

Advocate 2012 Annual Report to Congress 180-191. 

67 IRS, Transcript of the Public Meeting on Real Time Tax System Initiative 92-94 (Dec. 8, 2011), al 

htlp:/Iwww.irs.govlTax-Professionals/December-8.-2011-Meetin9 (last visited April 8, 2013). 

19 
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87414.055

preparation software, or (3) pre-populate the data into an IRS-provided basic 

electronic tax form. 58 

V. Restricting Access to the Death Master File Would Eliminate a Source of 

Personal Data that Identity Thieves May Utilize to Commit Tax Fraud. 

Among the proposals included in the tax reform options paper released by this 

committee last month was a proposal to limit access to personal identifying 

information, such as the Death Master File. The DMF is a list of recently deceased 

individuals that includes their full names, SSNs, dates of birth, dates of death, and 

the county, state, and ZIP code of the last address on record.69 I have recommended 

that Congress pass legislation to clarify that public access to the DMF can and 

should be limited.7o 

The public availability of the DMF facilitates tax-related identity theft in a variety of 

ways. For example, a parent generally is entitled to claim a deceased minor child as 

a dependent on the tax return that covers the child's year of death. If an identity thief 

obtains information about the child from the DMF and uses it to claim the dependent 

on a fraudulent return before the parent (the legitimate taxpayer) files, the IRS will 

stop the second (legitimate taxpayer's) return and freeze the refund. The legitimate 

taxpayer then may face an extended delay in obtaining the refund, potentially 

causing an economic hardship, and will bear the emotional burden of persuading the 

IRS that the deceased child was really his or hers. 

Legislation could relieve survivors of this burden by restricting access to the DMF to 

those with a legitimate business purpose, or by simply delaying release of the 

information for several years. Proposals introduced in recent years in both houses of 

Congress would limit access to the DMF.71 

I recognize the practical difficulties of passing legislation, and am concerned that 

taxpayers will continue to be harmed if DMF information remains available without 

restriction. As I discussed in depth in prior testimonY,1 believe that the Social 

Security Administration (SSA) has the legal authority to place limits on the disclosure 

of DMF information administratively, given the changes in the factual and legal 

landscape that have taken place over the past three decades.72 Therefore, if 

66 See National Taxpayer Advocate 2012 Annual Report to Congress 189. 

69 See Office of the Inspector General, SSA, Ref. No. A-06-08-18042, Personally Identifiable 

Information Made Available to the General Public via the Death Master File (June 2008). 

70 See National Taxpayer Advocate 2011 Annual Report to Congress 519-523 (Legislative 

Recommendation: Restrict Access to the Death Master File). 

71 See S. 676. Identity Theft and Tax Fraud Prevention Act, 113th Congo (sponsored by Sen. Bill 

Nelson); H.R. 3475. Keeping IDs Safe Act of 2011, 112th Congo (sponsored by Rep. Sam Johnson). 

72 For a detailed discussion regarding the application of the Freedom of Information Act to the DMF, 

see Identity Theft and Income Tax Preparation Fraud, Hearing Before Subcomm. on Crime. Terrorism, 

20 
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87414.056

legislation is not forthcoming, I urge the SSA to reconsider its contrary legal analysis 

and take steps to restrict access to the DMF. 

VI. State and Local Law Enforcement Agencies Should Be Restricted from 

Re-disclosing Taxpayer Data Obtained from the IRS. 

Taxpayers have the right to expect that any information they provide to the IRS will 

be kept confidential unless authorized by the taxpayer or other provision of law. The 

Internal Revenue Code contains significant protections for the confidentiality of 

returns and return information. 

IRC § 6103 generally provides that returns and return information shall be confidential 

and then delineates a number of exceptions to this general rule. Section 6103(i)(2) 

authorizes the disclosure of return information in response to requests from federal law 

enforcement agencies for use in criminal investigations. There is no corresponding 

exception in IRC § 6103 that allows for the release of identity theft information to state or 

local agencies.73 However, IRC § 6103(c) provides that a taxpayer may consent to 

disclosure of returns and return information to any person deSignated by the taxpayer. 

The tax reform options paper issued by this Committee last month included a 

proposal for the IRS to "improve information sharing with federal, state, and local law 

enforcement" as a means of combatting identity theft. 74 I support this proposal for 

the IRS to responsibly share information pertaining to identity thieves. I note that the 

IRS has, in fact, implemented a program facilitating consent-based sharing of identity 

theft information with state and local law enforcement agencies.75 This program, 

initially started as a pilot in the state of Florida but now expanded to all 50 states and 

the District of Columbia,76 is an effective way for local law enforcement agencies to 

work with the IRS to pursue identity thieves. I believe this approach strikes an 

and Homeland Security of H. Comm. on the Judiciary, 112'" Congo (June 28, 2012) (statement of Nina 

E. Olson, National Taxpayer Advocate). 

73 Note, however, that certain disclosures to state law enforcement agencies are permissible. See IRC 

§ 6103(i)(3)(B)(i) (disclosure of return information, including taxpayer return information, can be made 

to the extent necessary to advise appropriate officers or employees of any state law enforcement 

agency of the imminent danger of death or physical injury to any individual; such disclosure cannot be 

made to local law enforcement agencies). While identity theft may cause emotional and economic 

injury, the typical identity theft situation does not pose an imminent danger of death or physical injury. 

In addition, state tax agencies routinely receive federal tax return information under IRC § 61 03(d), but 

only for purposes of State tax enforcement. 

74 See Senate Finance Committee, Simplifying the Tax System for Families and Business (Mar. 21, 

2013). 

75 See IRS Identity Theft Advisory Council, Identity Theft Status Update (Mar. 28, 2013). 

76 IR-2013-34, IRS Expands Law Enforcement Assistance Program on Identity Theft to 50 States; 

Victim Assistance and Criminal Investigations Grow (March 28, 2013), at 

http://www.irs.gov/uac/NewsroomIlRS-Expands-Law-Enforcement-Assistance-Program-on-IdentitvTheft-to-50-States. 

21 
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87414.057

appropriate balance - protecting taxpayer return information while simultaneously 

giving state and local law enforcement authorities more information to help them 

investigate and combat identity theft. 

However, I am concerned that once the information is in the hands of state and local 

law enforcement agencies, there is no prohibition in the tax code against 

redisclosure. With hundreds of smaller municipal governments now receiving tax 

return information, it is only a matter of time before a local official (who may not have 

received regular training about the importance of protecting taxpayer return 

information, as IRS employees do) rediscloses such information, either inadvertently 

or willfully. I have raised this concern with the IRS, and its position seems to be that 

there is no problem because it only releases tax return information if a taxpayer 

executes a consent form. My position is that most taxpayers are not experts on 

confidentiality waivers and may assume that state and local authorities have the 

same legal obligations as IRS employees to keep their tax information confidential. It 

is critical that safeguards be put in place immediately to prohibit law enforcement 

authorities who receive tax return information for a speCified purpose from redisclosing that information for any other purpose without additional taxpayer consent. 

I have suggested that the IRS require state and local law enforcement agencies to 

sign an agreement that would restrict them from using IRS information for any 

purpose unrelated to the investigation or prosecution of the identity thief. In my initial 

meeting with senior IRS officials at which we discussed this disclosure initiative, I 

raised my concerns about protecting taxpayer information and discussed requiring a 

memorandum of understanding (MOUf with state and loeal agencies that wish to 

participate in the disclosure program.7 Despite this initial conversation, I have 

recently been informed that the IRS believes such an approach would be 

administratively unfeasible, as more than a hundred state and local law enforcement 

agencies now participate in the program. If state and local agencies do not wish to 

agree to such restrictions on redisclosure, I believe the IRS has an obligation to 

taxpayers to refrain from sharing this information. 

If the IRS continues to refuse to require that state and loeallaw enforcement 

agencies enter into MOUs that explicitly prohibit the use or re-disclosure of taxpayer 

information for unrelated purposes, I recommend that Congress consider modifying 

IRC § 6103(c) to explicitly limit the use of tax return information to the purpose 

agreed upon by the taxpayer (i.e., to allow state or local law enforcement agencies to 

use the information solely to enforce state or local laws) and to prohibit the 

redisclosure of such information.78 Indeed, such legislation may be more effective 

than a contract-based approach to limiting redisclosure. 

77 See IRS, IRS Identity Theft Future State Report 34 (Oct. 11,2011) (implementation step included 

"obtain an agreement for sharing identified data and address disclosure"). 

78 See National Taxpayer Advocate 2011 Annual Report to Congress 505. 

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87414.058

VII. Taxpayers Are More Vulnerable to Incompetent and Unscrupulous 

Return Preparers Because of the Recent Loving Decision, and if the 

Decision Is Not Overturned by the Court of Appeals, Congress Should 

Act Quickly to Authorize the IRS to Reinstate Its Rules Designed to 

Protect Taxpayers by Improving Standards in the Tax Return Preparation 

Industry. 

Since 2002, I have advocated for the regulation of return preparers. I recommended: 

• A program to register, test, and certify preparers; 

• Increased penalties, and improved due diligence requirements; 

• A comprehensive advertising and taxpayer education campaign focused on 

how to choose a competent preparer and the requirement for paid preparers to 

o sign the tax return and 

o provide a copy of the return to the taxpayer; 79 

In January 2010, the IRS published a study of federal tax return preparers which in 

most important respects reflected our recommendations.8o Subsequently, the IRS 

issued regulations requiring that all preparers register with the IRS by obtaining a 

preparer tax identification number (PTIN). The IRS also required that certain 

preparers meet testing and continuing education requirements. 81 Implementation 

began with the 2011 filing season, when the IRS required paid return preparers to 

obtain PTINs.82 The continuing education requirement began during the 2012 

calendar year. The IRS launched the registered tax return preparer competency test 

in November 2011 with a deadline to take the test by December 31, 2013. 83 

79 See National Taxpayer Advocate 2009 Annual Report to Congress 41-69; National Taxpayer 

Advocate 2008 Annual Report to Congress 503-512; National Taxpayer Advocate 2006 Annual Report 

to Congress 197-221; National Taxpayer Advocate 2005 Annual Report to Congress 223-237; 

National Taxpayer Advocate 2004 Annual Report to Congress 67-88; National Taxpayer Advocate 

2003 Annual Report to Congress 270-301; National Taxpayer Advocate 2002 Annual Report to 

Congress 216-230; Fraud in Income Tax Retum Preparation: Hearing Before the Subcomm. on 

Oversight of the H. Comm. on Ways and Means, 109th Congo (2005) (statement of Nina E. Olson, 

National Taxpayer Advocate). 

80 IRS Pub. 4832, Retum Preparer Review (Dec. 2009). 

81 Treas. Reg. § 1.6109-2(d); 31 C.F.R. § 10.2 et seq. 

62 See IRS News Release, IR-2010-106,IRS Begins Notifying Tax Return Preparers on PTiN 

Renewals (Oct. 25, 2010). 

63 See IRS News Release, IR-2011-111, IRS Moves to Next Phase of Return Preparer Initiative; New 

Competency Test to Begin (Nov. 22, 2011). . 

23 
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In January 2013, however, a U.S. district court judge in Loving v. Internal Revenue 

Service disagreed with the IRS's view that it has the authority to implement these 

requirements on its own, and it invalidated the testing and continuing education 

requirements. 84 The Department of Justice has appealed the district court's decision 

to the U.S. Court of Appeals for the District of Columbia. 85 

Regardless of the legal aspects of the Loving case, my main focus is the retention of 

minimum standards for return preparation. If the Court of Appeals reverses the 

district court's ruling in Loving, the IRS would reinstate the rules requiring certain 

preparers to take a competency exam and complete continuing education credits. If 

the district court ruling stands, I urge members of Congress to move quickly to 

protect taxpayers by granting the I RS the authority to reinstate the program it was in 

the process of implementing. 

The rationale for IRS oversight is clear. Because preparers playa critical role in tax 

administration, it is essential that the IRS ensure preparers are competent, visible, 

and accountable. Without meaningful IRS oversight, anyone can hang out a shingle 

as a "tax return preparer" with no knowledge or experience required. The Taxpayer 

Advocate Service has witnessed widespread problems in the tax return preparation 

industry. We recently have seen many misconduct cases in which the preparer has 

altered return information without the client's knowledge or consent in an attempt to 

obtain improperly inflated refunds or divert refunds for their personal benefit. 86 In 

addition, problems with return accuracy and ethical standards were substantiated by 

a series of "shopping visits" GAO and TIGTA conducted, where auditors posed as 

taxpayers and visited tax return preparation businesses. 87 I believe the IRS needs to 

set minimum standards as a consumer protection measure. 88 Such standards also 

would improve professionalism and reduce preparer-facilitated noncompliance.89 

84 Loving v. I.R.S., 111 A.F.T.R.2d (RIA) 589 (D. D.C. Jan. 18,2013). The government filed a motion to 

suspend the injunction pending appeal. The U.S. District Court for the District of Columbia denied the 

motion but modified the terms of the injunction. See Loving, 111 A.F.T.R.2d (RIA) 702 (D. D.C. Feb. 1, 

2013). On February 25,2013, the government filed a motion for a stay pending appeal. On March 27, 

2013, the U.S. District Court for the District of Columbia denied the motion for stay. 

a5 See Government Files Brief in D.C. Circuit Court in Return Preparer Oversight Case, Tax Notes 

Today, 2013 TNT 62-20 (Apr. 3, 2013): Loving v. IRS, No. 1:12-cv-00385 (D.D.C. 2013) (USCA Case 

No. 13-5061). 

86 For a more detailed description of return preparer misconduct and IRS procedures to assist victims 

of the misconduct, see National Taxpayer Advocate 2012 Annual Report to Congress 68-94 (Most 

Serious Problem: The IRS Harms Victims of Return Preparer Misconduct by Failing to Resolve Their 

Accounts Fully). 

87 Government Accountability Office, GAO-06-563T, Paid Tax Return Preparers: In a Limited Study, 

Chain Preparers Made Serious Errors 2 (Apr. 4, 2006) (statement of Michael Brostek, Director -

Strategic Issues, Before the Committee on Finance, U.S. Senate); Treasury Inspector General for Tax 

Administration, Ref. No. 2008-40-171, Most Tax Returns Prepared by a Limited Sample of Unenrolled 

Preparers Contained Significant Errors (Sept. 3, 2008). 

ae See, e.g., Brief Amici Curiae of Former Commissioners of Internal Revenue in Support of 

Defendants-Appellants, Loving v. I.R.S., No. 13-5061 at 14 (D.C. Cir. April 5, 2013) ("[I]njunctive relief 

is available only once the bad acts have occurred and ... barring bad tax return preparers from striking 

24 
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87414.060

Preparer oversight has received widespread support from stakeholders and members 

of Congress. so any associated legislation should be relatively non-controversial to 

enact. This Committee has twice approved legislation to regulate federal tax return 

preparers - once under Chairman Baucus90 and once under former Chairman 

Grassley.91 The full Senate also once approved similar legislation. 92 In 2005. the 

House Ways and Means Subcommittee on Oversight held a hearing at which 

representatives of five outside organizations testified in support of regulating return 

preparers.93 More recently. several bills included proposals to regulate preparers -

S. 1219. the Taxpayer Protection and Assistance Act of 2007; H.R. 5716, the 

Taxpayer Bill of Rights Act of 2008; and S. 3215, the Taxpayer Bill of Rights 

of 2010. 94 Each of these proposals included provisions requiring preparers to have 

knowledge and skills to prepare accurate returns. 

In the meantime, until either the courts or Congress reinstates the IRS's authority to 

require preparers to demonstrate minimum competence to prepare tax returns, 

taxpayers remain vulnerable to incompetent or unscrupulous preparers. Accordingly, 

the Taxpayer Advocate Service is working to ensure that taxpayers are vigilant when 

they hire an individual or firm to prepare their returns. Specifically, our 

communications suggest that taxpayers proactively protect themselves by taking the 

following steps:95 

again is wholly consistent with the Treasury Department's authority to regulate commercial tax return 

preparers in ways reasonably designed to prevent these bad acts from happening in the first 

instance."}. 

89 By statute, the IRS cannot require attomeys and accountants to pass the competency exam or 

satisfy continuing education requirements to pre parer returns. See 5 U.S.C §§ 500(b) & (c) (granting 

attorneys and certified public accountants the authority to represent clients before federal agencies 

upon submitting a written declaration stating qualifications). 

90 S. 1321 (incorporating S. 832) (1091h Cong.). 

91 H.R. 1528 (incorporating S. 882) (1081tl Cong.). 

921d. 

93 The organizations testifying in support of return preparer regulation were the American Bar 

Association, the American Institute of Certified Public Accountants, the National Association of 

Enrolled Agents, the National Society of Accountants, and the National Association of Tax 

Professionals. See Fraud in Income Tax Return Preparation: Hearing Before the Subcomm. on 

Oversight of the H. Comm. on Ways & Means, 1091tl Congo (2005). 

94 S. 1219, § 4, 11 Olh Congo (2007); H.R. 5716, § 4, 110'" Congo (2008); S. 3215, §202. 1111h Congo 

(2010). 

95 See IRS Pub. 5074, Protect Your Refund Poster (distributed by the Taxpayer Advocate Service to 

all Taxpayer Assistance Centers, Low Income Taxpayer Clinics, and Local Taxpayer Advocate 

offices). See additional communications at http://www.taxpayeradvocate.irs.govlTaxProfessionalslT ax-Preparer-Regulation (last visited April 9, 2013); 

http://www.taxpayeradvocate.irs.govllndividuals/Choosing-A-Tax-Preparer (last visited April g, 2013). 

25 
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• Ask the preparer directly about his or her qualifications and experience level in 

preparing tax returns. The taxpayer should feel confident that the preparer 

possesses sufficient knowledge of relevant tax law - not merely completion of 

return preparation software training. 

• Make sure the preparer signs the return and fills in his or her Preparer Tax 

Identification Number where indicated on the tax return. 

• Obtain from the preparer a copy of the signed and filed return and keep the 

copy in the event there is a problem with the return. 

In addition, consistent with my longstanding position that the IRS should mount a 

comprehensive taxpayer awareness campaign, I believe it is more important than 

ever that the IRS increase its outreach and education about choosing a preparer, 

with particular emphasis on the populations at most risk, such as low income 

taxpayers and the elderly. 

VIII. Conclusion 

Shrinking budgets and rising identity theft cases, among other things, are posing 

significant challenges for the IRS. But there are many opportunities for substantial 

improvement in tax administration, and in my testimony, I have tried to identify a 

number of positive steps Congress can take to make the most of these opportunities. 

Specifically, I recommend that Congress: 

• Simplify the tax code to reduce burden on taxpayers and the IRS. 

• Enact a Taxpayer Bill of Rights so taxpayers better understand their rights and 

responsibilities in dealing with the IRS. 

• Work to change the rules that govern funding decisions about the IRS budget, 

because more IRS funding means better taxpayer service and more revenue 

(assuming the funds are well spent). 

• Improve the filing season by giving the IRS access to third-party reports like 

Forms W-2 and 1099 before it processes tax returns and issues refunds, 

which has the potential to improve the taxpayer experience, improve tax 

compliance, and make a big dent in identity theft. 

• Restrict access to the DMF so the surviving relatives of decedents are less 

susceptible to identity theft problems. 

26 
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• Require that state and local law enforcement agencies that receive taxpayer 

return information to pursue identity theft crimes keep the information 

confidential and use it solely for its intended purpose. 

• Finally, grant the IRS the authority to continue to implement its well-designed 

initiative to improve standards in the tax preparation industry if the U.S. Court 

of Appeals for the District of Columbia ultimately concludes that the IRS does 

not now have that authority. 

27 
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87414.063

WRITTEN TESTIMONY OF JEFFREY A. PORTER 

ON BEHALF OF THE 

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 

UNITED STATES SENATE 

COMMITTEE ON FINANCE 

PUBLIC HEARING ON 

TAX FRAUD, TAX ID THEFT AND TAX REFORM: MOVING FORWARD WITH SOLUTIONS 

APRIL 16, 2013 
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Good morning Chairman Baucus, Ranking Member Hatch and Members of the Committee. My name is 

Jeffrey A. Porter, Chair of the American Institute of Certified Public Accountants (AICPA) Tax Executive 

Committee. I am a sole practitioner at Porter & Associates, CPAs, a local firm in Huntington, West Virginia, 

which concentrates in providing tax planning and business advisory services for local businesses and high 

net worth individuals. On behalf of the AICPA, I am pleased to have the opportunity to testify today at your 

hearing on tax fraud, tax identity theft and tax reform. 

The AICPA is the world's largest member association representing the accounting profession with nearly 

386,000 members in 128 countries and a 125-year heritage of serving the public interest. Our members 

advise clients on federal, state and international tax matters and prepare income and other tax returns for 

millions of Americans. Our members provide services to individuals, not-for-profit organizations, small and 

medium-sized businesses, as well as America's largest businesses. 

Identity Theft 

One of the most important topics for our members this year and a primary focus for today's hearing is 

identity theft. With the dramatic upturn in identity theft cases, there are a number of actions CP As and other 

tax professionals can take up-front to inform clients regarding the threat posed by tax identity theft. For 

example, as a trusted advisor, tax return preparers can inform their clients that if they receive an e-mail or 

other communication that looks unusual that: (I) the Internal Revenue Service (IRS or "Service") never uses 

e-mail or social media to contact taxpayers directly; and (2) the IRS provides numerous ways for taxpayers 

to identify possible identity theft and telephone numbers to report it. However, some actions that tax 

professionals believe would reduce the threat of identity theft would require legislative or regulatory 

changes. 

The AICPA applauds the IRS's issuance of REG-148873-09. IRS Truncated Taxpayer Identification 

Numbers (TTlNs). The proposed regulations implement the pilot program announced in Notices 2009-93 

and 2011-38, which authorize filers of certain information returns to voluntarily truncate an individual 

payee's nine digit identifying number on specified paper payee statements furnished for calendar years 2009-

2012. 

We believe the proposed regulations are a positive step towards protecting the privacy and security of 

personal information. Over the last few years, we urged the IRS to make the taxpayer identification number 

truncation initiative permanent, as opposed to remaining a pilot program.' We appreciate that the proposed 

regulations: (I) make the truncation program permanent; and (2) extend the scope of the IRS truncation 

program to permit filers to furnish payee statements electronically. However, we support an extension of the 

truncation program to permit the use of truncated social security numbers (SSN) on all types of tax forms 

and returns provided to a taxpayer, employee or other recipient. Unfortunately, as described in more detail 

below, there may be current statutory or other limits placed upon the IRS's ability to expand the truncation 

initiative. 

I The AICPA most recently submitted comments on truncated taxpayer identification numbers to the Internal Revenue Service on 

February 20, 2013. 
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Under section 301.6109-4 of the proposed regulations, an IRS TTIN is defined as an "individual's SSN, IRS 

individual taxpayer identification number (!TIN), or IRS adoption taxpayer identification number (A TIN) 

that is truncated by replacing the first five digits of the nine-digit number with Xs or asterisks." However, 

the preamble of REG-I 44873-09 expressly states that the IRS's ability to extend the truncation program to a 

greater number of payee statements by regulation is limited by statute. Thus, the proposed regulations do not 

extend truncation of taxpayer identification numbers beyond certain types of information returns already 

permitted under the pilot program. 

We understand that limitations exist currently with regards to truncation on a Form W-2, Wage and Tax 

Statement. Under Internal Revenue Code (IRC or "Code") section 6051(a)(2),2 employers are required to 

provide employees a written statement (i.e., Form W-2) with certain information including the employee's 

SSN. We urge Congress to consider a legislative proposal to change the section 6051 reporting requirement 

to permit truncation of employee SSNs on all copies other than the copy filed with the U.S. Social Security 

Administration (SSA). 

In the General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals, a revision to 

section 6051 is proposed to require employers to include an "identifying number" for each employee, rather 

than an employee's SSN, on a Form W-2. We generally support this concept, but strongly believe there is a 

need for more extensive legislation to extend the use of truncated SSNs to all types of tax forms and returns 

provided to a taxpayer, employee or other recipient. For example, tax preparers are required to obtain a 

Form 8879, IRS E:/ile Signature Authorization, from their clients in order to e-file their tax returns. This 

form is not submitted to the IRS, but merely retained in the tax preparer's records. However, the tax 

preparer must list a client's full social security number on the form and send the document to the client for 

signature. Then, the client will sign the form and return it to their tax preparer often through the U.S. mail or 

by scanning the document and submitting it via e-mail. Either process makes the client's SSN susceptible to 

theft. Because the form is not submitted to the IRS, or any agency for that matter, we do not believe aSSN 

should be required on the form. 

Clearly, the need for this expansive legislation is supported by the growing concern over identity theft in 

general and the growth in the number of such cases being handled by the IRS. This important change to the 

current law will not solve all of our country's growing problems with identity theft; however, it will likely 

help tax practitioners from inadvertently providing criminals access to clients' identification numbers merely 

by sending their clients completed IRS forms. 

Finally, the AICPA supr0rts civil penalties for tax-related identity theft, including penalties on fraudulent tax 

preparers] In the 112' Congress, Representative Erik Paulsen introduced H.R, 5630, Fighting Tax Fraud 

Act of2012, which would have amended section 6694 subsections (c), (d), (e) and (I) to provide an increased 

penalty in certain cases of a fraudulent understatement of a taxpayer's liability by a tax return preparer. This 

bill was in response to the National Taxpayer Advocate's 2011 Annual Report to Congress (pages 558-561), 

which noted a small number of tax return preparers defraud taxpayers and the IRS by altering the taxpayers' 

returns without their knowledge. In many cases, preparers claimed increased refunds - that the taxpayers 

2 All references in this letter to the Internal Revenue Code are to the Internal Revenue Code of 1986, as amended, 

3 The AICPA submitted comments to the House Committee on Ways and Means Chairman and Ranking Member on July 16, 

2012. 
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were not entitled to receive - in order to pocket the extra money themselves. The AICPA fully supports 

efforts, such as H.R. 5630, to deter such outrageously unethical behavior. More recently, the Administration 

has proposed a similar provision which would assess a civil penalty in the amount of $5,000 on an individual 

who files a fraudulent tax return in tax identity theft cases' 

Tax Filing Season 

Before addressing the other issues identified for this hearing, I would like to share our feedback on this 

year's tax filing season, as I know that the Committee generally seeks feedback immediately after the April 

15th filing deadline. Overall, it was an extremely challenging and compressed tax season for both the IRS 

and tax practitioners. 

We appreciate the tremendous challenges the IRS faces in administering the tax filing season each year, 

which includes the timely release of forms, the testing of systems, and responding to taxpayer inquiries. 

However, when the IRS experiences a significantly challenging filing season like this one, the challenge is 

not limited to the government. The adverse impact extends to taxpayers and tax return preparers who face 

additional burdens attributable to the disruption to normal and efficient work streams and planning. In this 

context, our members and their clients faced a very compressed and difficult filing season this year due to the 

late (January 2) enactment of tax legislation and the resulting delay in the release of 31 tax forms. 

Since the IRS could not accept tax returns that included certain forms until February or early March, our 

members essentially lost the first half of filing season. The release of forms at such a late date also 

necessitated the filing of more extensions of time for filing tax returns on behalf of their clients; however, 

extensions do not completely solve the problem. Tax preparers still needed to perform the necessary 

preliminary work to calculate the amount of the tax payment due with the extension. The late enactment of 

the law that caused these forms delays was disruptive to accounting firms' internal procedures, causing many 

firms to first conduct this initial review process involving the extension now, and then a second preparation 

and review process later to ensure proper completion of the tax return. 

The delay in the release of forms also caused significant anxiety for taxpayers. In my own practice, I had 

over 50 tax returns substantially completed and waiting for the IRS to release one or more forms. Many of 

these taxpayers were anxious to file their tax returns, calling me on a weekly and sometimes daily basis to 

obtain an update on their returns. The delay created an aura of confusion, particularly for my elderly clients, 

and sometimes required additional efforts by them. Many of my clients needed to come back to my office to 

pick up a completed copy of their tax return; other clients needed to make an additional trip to sign the Form 

8879, IRS E-file Signature Authorization. 

Nevertheless, we believe the IRS did an outstanding job under the difficult circumstances. The IRS 

maintained an open dialogue with stakeholders during the entire filing season and we applaud their 

responsiveness to our concerns. On February 15, 2013, the AICPA submitted a letter to Acting 

Commissioner Steve Miller regarding the delayed release in forms. Within days, the IRS issued Notice 

4 Department of the Treasury, General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals. page 212. 
95 


87414.067

2013-24 in response to our concerns, which provided the appropriate relief requested from late-payment 

penalties assessed under IRC section 6651 (a)(2). 

Unfortunately, in addition to the late release of IRS forms, the filing season was a tremendous challenge to 

practitioners due to the late issuance of corrected Forms 1099-B, Proceeds from Broker and Barter 

Exchange Transactions, and amended Forms 1099-DIV, Dividends and Distributions, by an increasing 

number of brokerage firms. A copy of Forms 1099-B and 1099-DIV (hereinafter referred to as "Form 

1099") must be furnished to taxpayers by February 15, 2013.5 However, brokerage firms can amend a Form 

1099 at any time. In fact, one of the largest brokerage firms issued corrected Forms 1099 on April 2nd of this 

year. I was first notified about this brokerage firm's late corrected Form 1099 on April 4th when I began 

receiving calls from clients - merely eleven days prior to the initial filing due date - asking me to amend 

their individual income tax returns that had already been prepared and filed. Although an amended Form 

1040 can be filed after April 15th, clients wanted to either make certain they did not owe any late payment 

penalties or obtain their refund as soon as possible. Taxpayers were also anxious to get this year's tax return 

"behind them" without extensions, if possible. 

Over the last few years, we have noticed more and more brokerage firms issuing corrected Forms 1099, 

sometimes issuing multiple corrected forms on the same account. While we understand that the brokerage 

firms face many challenges to meet reporting requirements in a timely fashion after close of the calendar 

year, corrected forms create anxiety, confusion and for some taxpayers, an increase in tax preparation fees. 

Taxpayers are willing to file an amended return if necessary, but strongly prefer to file only once. As a 

result, many taxpayers (including a lot of my clients) now have a tendency to wait until they have received 

their annually-anticipated corrected Forms 1099 before bringing their tax records to their CPA. For example, 

last year I prepared an individual income tax return for one of my elderly clients on February 12'h, and had to 

amend the return in April due to an amended Form 1099. This year, he did not want to send me his tax 

information in February because he was concerned about possibly receiving a corrected Form 1099. The 

client's prediction, or educated guess, was correct, and he received several corrected Forms 1099. He 

eventually brought me his tax information, and I prepared his individual income tax return this year on April 

3'd - nearly two months after the date when I had prepared it in the past. Such compression in the tax filing 

season is becoming a reality more and more for tax practitioners each year. According to IRS statistics, 

returns prepared by tax professionals through March 15,2013 had decreased by 8.1 percent from the 2012 

filing season.6 

We believe there is a solution to the growing problem of corrected Forms 1099. We suggest you consider 

legislation that would permit taxpayers to report de minimis changes in their income from a corrected Form 

1099 or amended Schedule K-I (from a partnership, trust, or S Corporation) in the year of receipt of the 

amended form. For example, if ordinary dividends of $200 are reported on my client's tax return for 2012, 

the client should not need to file an amended tax return if the client receives a corrected Form 1099 showing 

$210 of dividends. Such a process is inefficient for taxpayers, tax preparers and the government. 

j IRe section 604S(b). 

{, IRS Filing Season Statistics for Week Ending March 15, 2013. available at http://www irs,gov/uaclNewsroorn/Fi1ing~SeasonStatistics-for-Week -Ending-March-IS-20 13. 
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87414.068

The IRS could provide a simple one-page fonn allowing taxpayers to report the amount shown on the 

taxpayer's original return and the amount reported on a corrected or amended fonn. The differential would 

be included on the taxpayer's current year return (Le., if a taxpayer receives a corrected Fonn 1099 in April 

2013 for the 2012 or prior tax year, the taxpayer would report the difference on the taxpayer's 2013 income 

tax return). Because the change in income would be attributable to a corrected or amended fonn (as opposed 

to taxpayer error), good faith would automatically be presumed and late-payment penalties should not be 

assessed. Taxpayers would also have the option of filing an amended return. 

The AICPA proposes this flexibility to streamline the tax return reporting process for both the government 

and taxpayers. The preparation, filing, processing and examining of amended returns is costly to everyone. 

This recommendation would make the entire process more efficient. 

Preparer Registration 

Another important item included in the topics for today's hearing is tax reform - which includes an issue of 

particular interest to our members - the regulation of tax return preparers. Obviously, clarity in this 

environment is necessary due to the pending judicial situation. The AICPA has always been a steadfast 

supporter of the IRS's overall goals of enhancing compliance and elevating ethical conduct. Ensuring that 

tax preparers are competent and ethical is critical to maintaining taxpayer confidence in our tax system. 

Indeed, these goals are consistent with AICPA's own Code of Conduct and enforceable tax ethical standards. 

We believe the IRS should be commended for its efforts in the implementation of their return preparer 

program. Specifically, the IRS devoted an unprecedented amount of time to listening to stakeholder 

concerns and suggestions regarding the program, and made numerous changes and adjustments. We believe 

some of those changes confirm the Service's recognition of the inherent regulatory regime within which 

CPAs and other Circular 230 legacy practitioners already practice, as well as the fact that CPA finns must 

stand, as a matter of licensure, behind the work perfonned by the members and employees of the finn. We 

believe these changes appropriately focused the program on the "unenroIled" preparer community that was 

implicated in the U.S. Government Accountability Office (GAO) and U.S. Treasury Inspector General for 

Tax Administration (TIGTA) compliance studies cited in the IRS's preparer regulation report. 

The AICPA generally supports the IRS tax return preparer program. Specifically, we support: 

Registering paid tax return preparers and the issuance of unique preparer tax identification numbers. 

Registration will allow the accumulation of important data on specific preparers, as well as classes of 

preparers in a way that will allow the IRS to tailor compliance and education programs in the most 

efficient manner. 

Expanding the ethical umbrella of Circular 230 over all paid income tax preparers. "Unenrolled" 

preparers had previously not been subjected to the ethical guidance of Circular 230 nor its sanctions 

for improper conduct. 

Creating a continuing education and competence construct geared towards the "unenrolled" preparer 

community who prepare Fonn 1040 series returns. Including a focus on the basics is the correct 

remedial approach for the "unenrolled" preparer community that was, again, implicated in the GAO 

and TlGTA compliance studies. 
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Recognizing the potential for taxpayer confusion regarding the relative qualifications of different 

paid preparers through the issuance of Notice 2011-45, which constrains "registered tax return 

preparers" from misleading advertising and solicitation and will require these preparers to use the 

following statement in ads: 'The IRS does not endorse any particular individual tax return preparer. 

For more information on tax return preparers go to IRS.gov. '" We also believe that any public-facing 

IRS sources concerning preparers should contain sufficient information that taxpayers will need to 

make appropriate choices concerning the selection of a tax adviser. IRS mitigation of any taxpayer 

confusion regarding relative qualifications should be a critical and ongoing component of any 

program. 

We will continue to provide feedback on the work the IRS undertakes with regard to its tax preparer program 

as we share the Service's interest in improving tax administration and protecting the taxpaying public. 

Penalty Reform 

Another important item for inclusion in today's tax reform discussions is the reform of penalties. The 

success of our tax system depends on voluntary compliance with the tax laws. "Civil tax penalties should 

exist for the purpose of encouraging voluntary compliance and not for other purposes, such as the raising of 

revenue."? Twenty-four years ago, Congress enacted the Improved Penalty and Compliance Tax Act of 1989 

(IMPACT), 8 which overhauled the then-existing civil tax penalty regime and reiterated that the core goal of 

penalties is to encourage voluntary compliance. Unfortunately, in the 24 years since IMPACT, numerous 

penalty provisions have been enacted that are not directed toward, and do not achieve, the core goal of 

encouraging voluntary compliance. In part, this occurrence likely is due to the government's understandable 

interest in combating tax shelters. However, this loss of direction also has resulted from ad hoc efforts to 

craft penalties and an increase in the use of penalties, rather than altering the actual tax laws, to drive 

taxpayer behavior. The use of penalties to "raise revenue" contributes to this loss of direction. 

Civil tax penalties should be fair, above all else. Penalty provisions should be carefully crafted by Congress 

and sensibly administered by the IRS to ensure that penalties deter bad conduct without deterring good 

conduct or punishing the innocent (i.e., unintentional errors). Targeted, proportionate penalties that clearly 

articulate standards of behavior and that are administered in an even-handed and reasonable manner 

encourage voluntary compliance with the tax laws. On the other hand, overbroad, vaguely-defined, and 

disproportionate penalties, particularly those administered as part of a system that automatically imposes 

penalties or that otherwise fails to provide basic due process safeguards, create an atmosphere of 

arbitrariness and unfairness that are likely to discourage voluntary compliance. 

Earlier this year, the AICPA developed legislative suggestions and updated a Report on Civil Tax Penalties: 

The Need {Or Re{Orm (AICPA Report) to express our concerns about the current state of civil tax penalties 

and to offer suggestions for improvement. Specifically, the AICPA Report addresses the following issues: 

The trend away from voluntary compliance as the primary purpose of civil tax penalties; 

7 Commissioner's Executive Task Force on Civil Penalties, Internal Revenue Service. Report on Civil Tax Penalties, p,l (February 

21, 1989), available at 89 TNT 45-36, Doc 89-1586. 

g P.L. 101-239, 101" Cong., I" Sess. (1989). 
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The lack of clear standards in some penalties; 

The fact that some penalties are disproportionate both in amount and severity; 

The fact that some penalties are overbroad, deter remedial and other good conduct, and punish 

innocent conduct; 

The trend toward strict liability; 

An erosion of basic procedural due process; 

Inconsistencies between penalty standards and the role of tax professionals; 

The increase in the automated assessment of penalties that can lead to unwarranted assessments; 

The need for better coordination and oversight of penalty administration; 

The bias in favor of asserting penalties; 

The need to improve IRS guidance and training; and 

The need for the IRS to increase its efforts to educate taxpayers and tax professionals. 

The AICPA provides its thoughts in this area with an eye toward improving overall tax policy and 

administration. To that end, we strongly encourage an inclusive and transparent framework for approaching 

this difficult task, similar to the collaborative efforts that culminated in IMPACT. We urge Congress to 

work with taxpayers, practitioners, professional organizations and other stakeholders in developing a 

systematic and thoughtful approach to civil tax penalty reform and penalty administration. 9 

Information Reporting 

Another important area to discuss in addressing the administration of the tax laws is information reporting. 

The Code includes several requirements for payors to issue information reports to taxpayers who have 

received some form of taxable income. For example, section 6041, Information at Source, requires persons 

engaged in business to issue a Form 1099 to others who they have paid at least $600 of "rent, salaries, wages, 

premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, 

profits, and income" during the year (unless some other reporting rule applies). Some provisions, such as 

section 6050W, Returns Relating to Payments made in Settlement of Payment Card and Third Party Network 

Transactions, require certain third parties to issue information reports. For example, under section 6050W, 

processors of debit and credit card transactions are required to issue information reports (Form 1099-K, 

Payment Card and Third Party Network Transactions) to merchants. 

As noted by the GAO, "taxpayers are much more likely to report their income accurately when the income is 

also reported to the IRS by a third party. By matching information received from third-party payors to 

amounts payees report on their tax returns, the IRS can detect income underreporting, including the failure to 

file a tax return,"10 

In considering any potential modifications to Form 1 099 or similar reporting, we think the Committee may 

want to review the following factors in deciding how to address the effectiveness of information reporting: 

9 See the AICPA tax penalties legislative proposals, submitted to Congress in April 2013, included in the submission with the 

April 20!3 updated AICPA Report on Civil Tax Penalties. 

10 GAO, 2012 Annual Report: Opportunities to Reduce Duplication, Overlap and Fragmentation, Achieve Savings, and Enhance 

Revenue, GAO-12-342SP (Feb. 2012), pages 285-286; available at http://gao.gov/assets/590!588818.pdf. 
99 


87414.071

Provide exceptions for the issuance of Fonn 1099 to publicly-traded corporations; 

Simplify the Form 1099 issuance process for small businesses and landlords, such as considering 

whether it is feasible for the IRS to create a website where the data can be entered and the Fonn 1099 

generated and mailed by the IRS to the payee; and 

Maintain the $600 threshold for filing infonnation reports (Fonns 1099). While there may be some 

interest in adjusting the dollar amount to account for the effects of inflation since section 6041 was 

enacted, given that the purpose of section 6041 is to improve compliance, the dollar amount should 

not be increased. 

The AICPA also recommends further study and review of the efficacy of section 6050W, which pertains to 

returns relating to payments made in settlement of payment card and third party network transactions. It 

requires information reporting by payment settlement entities which process credit and debit cards for 

merchants. It also re~uires the reporting of transactions using third party networks (such as Paypal) unless 

they are de minimis. I Alternatives should be explored for finding businesses that might not be reporting 

sales, such as, those selling through third-party websites. Alternatives may also include infonnation sharing 

with states and IRS examinations (correspondence and office) of individuals who sell goods or provide 

services via the web. 

The AICPA recommends addressing sources of the tax gap through the consideration of infonnation 

reporting options. As noted on the IRS Tax Gap map, the most significant way to reduce the tax gap would 

be to reduce its largest piece - underreporting of business income. The GAO has offered several 

suggestions, including ones dealing with expanded infonnation reporting. 

New infonnation reporting requirements to help reduce this portion of the tax gap was also generated by the 

National Taxpayer Advocate in the 2012 annual report to Congress. This report includes the results of an 

independent survey to identify factors that influence voluntary compliance by small businesses. Taxpayers 

in the high compliance group had greater trust in the government and were likely to rely on preparers. Those 

taxpayers in the low compliance group tended to be suspicious of government, view the tax system as unfair, 

and were less likely to follow the advice of their preparer. Both compliance groups viewed the tax system as 

complex and cheating as wrong." This additional information should be considered along with information 

from the IRS, GAO and others to develop administrative and legislative proposals to reduce the largest 

portion of the tax gap. 

We believe infonnation reporting can assist voluntary compliance by providing summary infonnation to 

taxpayers for reporting on their tax returns. Accordingly, the AICPA recommends the following measures 

for the Committee's consideration in addressing the tax gap: 

Ii Per section 6050W(e), a third party network transaction is de minimis if the potential amount to report is $20,000 or less and the 

number of transactions does not exceed 200. 

12 National Taxpayer Advocate', 2012 Annual Report to Congress, Vol. 2, Factors Influencing Voluntary Compliance by Small 

Businesses: Preliminary Survey Results; available at http://www,taxpayeradvocate.irs.gov/userfiles/file/Full-ReportlResearchStudies-factors-Influencing-Voluntary-Compliance-by-Small-Businesses-Preliminary-Survey-Results.pdf 
100 


87414.072

• Simplification: The AICPA agrees with GAO's observation that simplification of the tax system can 

reduce the tax gap. The complexity of the federal tax system often leads to unintentional errors and 

disrespect for the system. 

Expanded math error autharity: The AICPA conceptually agrees with the GAO's suggestion that the 

IRS be granted greater "math error authority" to enable it to address more mistakes prior to issuance 

of a refund." The National Taxpayer Advocate has pointed out, though, that expanded math error 

authority might harm taxpayer rights in some instances." The IRS should be asked for specific 

proposals where math error authority could be broadened while still protecting taxpayer rights. 

Regulating paid return pre parers: The 2013 GAO report notes that in generating "approximately 60 

percent of all tax returns filed, paid preparers have an enormous impact on IRS's ability to administer 

tax laws effectively." They also note that the program has been limited by the District Court's 

decision in January 2013 (Loving v. IRS (D.D.C. 1118/13))." Our specific recommendations are 

provided in this testimony under the heading "Preparer Registration." 

Due Dates of Tax Returns 

In addressing tax reform and the administration of the Code, we also appreciate the Committee's 

consideration of tax return due dates. The AICPA supports S. 420, Tax Return Due Date Simplification and 

Modernization Act of 2013, introduced by Senators Enzi and Tester on February 28, 2013. This tax return 

due date simplification proposal has bipartisan House support and is included in H.R. 90 I as well as Title II, 

Subtitle B, Part 2 of the House Ways and Means Committee Chairman Camp's Small Business Tax Reform 

Discussion Draft. 

Tax return due dates have been a concern for the AICPA for several years. Under the current system, the 

statutory due date for partnerships to file a tax return is the same day as for trusts, many estates, and 

individuals, and one month after the due date for corporations. As a result of these due dates, it is almost 

impossible for taxpayers and practitioners to file a timely, accurate return on the original due date if they 

have investments in partnerships. 

Taxpayers and preparers have long struggled because Schedules K-J often arrive months after the original 

due date of their or their clients' returns. Late Schedules K-J make it difficult, if not impossible, to file a 

timely, accurate return. Many owners in a partnership are often forced to seek extensions; a matter further 

complicated by the fact that partnerships sometimes also seek extensions. 

S. 420 would allow for a more logical and chronologically-correct flow of information regarding due dates of 

returns. Data from flow-through entities would be filed before the individuals and corporations that are 

invested in the flow-through entities. The bill also simplifies and better aligns other types of tax return and 

information return reporting due dates. These changes will increase the accuracy of tax returns and reduce 

the need for extended or amended corporate and individual income tax returns, resolving many of the current 

due date problems. The bill also helps reduce the compression of filing season for practitioners preparing 

" Supra, pages 231·232. 

14 'Sational '~payer Advocate's 2011 Annual Report to Con~'i, Vol. 2, pages 74-92. 

15 Supra, page 231. 
101 


87414.073

individual income tax returns a serious problem noted earlier in our testimony - while holding the amount 

of tax liability constant for all taxpayers, 

Tax Reform 

The AICPA strongly supports the leadership taken by the Committee in studying tax reform and potential 

solutions, The proliferation of new income tax provisions since the 1986 tax reform effort has led to 

complex compliance hurdles for taxpayers, administrative complexity, and enforcement challenges for the 

IRS, According to the National Taxpayer Advocate's 2012 Annual Report to Congress, "individuals and 

businesses spend about 6,1 billion hours a year complying with the filing requirements of the Internal 

Revenue Code," 16 It also noted "the costs of complying with the individual and corporate income tax 

requirements for 2010 amounted to $168 billion or a staggering 15 percent of aggregate income tax 

receipts,,,17 We have consistently supported tax reform simplification efforts because we are convinced such 

actions will significantly reduce taxpayers' compliance costs, encourage voluntary compliance through an 

understanding of the rules, and facilitate enforcement actions, 

On behalf of the profession, the AICPA is committed to assisting this Committee and Congress in the 

development and passage of tax reform proposals which focus on simplifying the tax system for families and 

businesses, including the following proposals to improve the administrability of the tax law: 

Repeal of the alternative minimum tax (AMT), AMT is one of the tax law's most complex 

components, AMT adjustments and preferences require taxpayers to make a second, separate 

computation of their income, expenses, allowable deductions and credits, 

Harmonization and simplification of education incentives, The Code contains at least 14 complex 

incentives to encourage saving for and spending on education, Requirements, eligibility rules, 

definitions, and income phase-outs vary from incentive to incentive, 

Enactment of consistent definitions. There are several terms that have multiple and inconsistent 

definitions in the Code (e.g., "Modified Adjusted Gross Income") which leads to confusion. 

Definitions should be consistent where the same term is used, 

Simplification of the "Kiddie Tax" rules, The Code taxes a portion of the unearned income of 

children under the age of 18 and full-time students under the age of 24 at the parents' marginal tax 

rate, rather than at the child's lower rate. The complexity of these provisions creates a number of 

challenges and the rules should be simplified, 

Simplification and harmonization of retirement plan options, The Code provides for more than a 

dozen tax-favored employer-sponsored retirement planning vehicles, each subject to different rules 

pertaining to plan documents, eligibility, contribution limits, tax treatment of contributions and 

distributions, the availability of loans, portability, nondiscrimination, reporting and disclosure, These 

provisions should be revised so they are simpler, more readily understood, easier to comply with and 

administer, and more effective in enabling taxpayers to accumulate significant retirement assets, 

Repeal of unused provisions ("Deadwood"). There are numerous tax provisions which are obsolete 

or unimportant and rarely used, Repeal of these provisions would simplify the Code, 

16 '\lational Taxgayer Advocate's 2012 Annual Report to Congress, Volume 1, MSP #1 HThe Complexity of the Tax Code," 

" ld 
102 


87414.074

We are available and happy to meet with you to discuss the above recommendations. We strongly 

support the Committee undertaking a comprehensive consideration of tax reform. In this process, we 

recommend you consider our Compendium of Legislative Proposals which is an aggregation of over 

twenty provisions in the Code that need attention and are technical in nature. We also urge this 

Committee to review the AICPA's Tax Policy Concept Statement #1: Guiding Principles for Good Tax 

Policy to assist you in identifying problems in the Code as well as to test any new proposals against the 

principles of good tax policy. 

The IRS Budget 

Finally, in the Committee's review of tax fraud, identity theft and tax reform, we urge you to address the 

important issue of the IRS budget. We have long advocated for funding levels for the IRS that would allow 

the Service to efficiently and effectively administer the tax laws and collect taxes. Giving the Service the 

resources necessary to properly process tax returns and enforce the tax laws is vital to maintaining our 

voluntary compliance tax system. 

The AICPA continues to express our strong support for the adequate funding of the IRS's fiscal year 2014 

budget. Unfortunately, the IRS's budget has been severely challenged in recent years. The IRS received an 

overall budget allocation of $11.8 billion in fiscal 2012, down from $12.1 billion for fiscal 2011. The 

challenge for the Service is even more dramatic as the $5.3 billion enforcement budget that the Service 

received for fiscal 2012, was reduced by approximately $200 million from the prior year.18 These statistics 

are further highlighted by the reduction in IRS employment levels to 98,000 for fiscal 2012 from 104,000 in 

the prior year. 

The AICPA expects that the Service would identify responsible ways to allocate any additional resources it 

receives; and that Congress, through its oversight responsibilities, would ensure that those resources are 

properly utilized. Unfortunately, the budget process has become much more complicated for federal 

agencies in general and especially challenging for the IRS. In this context, National Taxpayer Advocate 

Nina Olson stated in 2011 that the most serious challenge facing American taxpayers is the combination of 

the IRS's expanding workload and the agency's limited resources to handle that workload. 19 Ms. Olson 

points out that the Service's role has expanded from one concentrated on tax collection to one focused on 

distributing benefits to a variety of individuals and businesses. We agree with Ms. Olson and suggest that 

Congress also consider the IRS's need to administer an increasing number of aspects of health care reform 

when addressing the agency's budget for fiscal year 2014. 

The AICPA believes that the Service should be provided with the proper resources to fund its mission, which 

will in turn empower the Service (0 fulfill its customer service and enforcement responsibilities. Any 

increase in enforcement funding must be balanced with positive responses to the taxpaying public as 

customers, a balancing act that has become even more challenging for the Service when faced with the 

current era of "mission creep" beyond its core tax administration functions. As we have stated in the past, all 

)8 Department of Treasury, FY 2013 Budget in Brief, at http://www,treasury.gov/aboutibudget~performance/budget-inbriePDoeumentsl! 1. %20JRS 508%20-%20passed.pdf. 

j9 :"Jatio!illL1J.Kpayer Advocate's 20]1 Aniwa! RellQr1.1o Congress, Volume t, MSP #1 "The IRS is Not Adequately Funded to 

Serve Taxpayers and Collect Taxes," 
103 


87414.075

taxpayers must have access to resources that enable them to fulfill their tax responsibilities, and adequate 

IRS budgetary funding must be provided to ensure this access. 

* * * * * 

The AlCPA appreciates this opportunity to testify and we urge this Committee to consider our suggestions as 

Congress decides how to address the issues of tax fraud, tax identity theft and tax reform. 
104 


87414.076

May 29, 2013 

The Honorable Max Baucus 

Chairman 

Committee on Finance 

Unites States Senate 

219 Dirksen Senate Office Building 

Washington, DC 20510-6200 

The Honorable Robert P. Casey, Jr. 

Committee Member 

Committee on Finance 

Unites States Senate 

219 Dirksen Senate Office Building 

Washington, DC 20510-6200 

American lnstitute of ePAs 

1455 Pennsylvania Avenue, NW 

Washington, DC 20004·1081 

Re: Public Hearing on Tax Fraud, Tax ID Theft and Tax Reform: Moving Forward with 

Solutions 

Dear Chairman Baucus and Senator Casey: 

Thank you again for the opportunity to testify before the U.S. Senate Committee on Finance 

during the April 16, 2013 hearing on the topics of tax fraud, tax identity (ID) theft, and tax 

reform. 

In order to complete the record of the hearing, you requested a response to one question. 

Accordingly, I respectfully submit the following response: 

Question: Your testimony includes recommendations for tax reform, including a 

snggestion that we simplify our education tax incentives. You point out that requirements, 

eligibility rules, definitions, and income phase-outs vary from incentive to ineentive. Can 

you elaborate on these points? What would you replace these incentives with? 

The American Institute of Certified Public Accountants (AICPA) supports Congress's laws and 

programs that provide education tax incentives to encourage Americans to seek higher education. 

However, we recommend several reforms, which would allow the Committee to create 

simplified education tax incentives to assist taxpayers in understanding the rules and comply 

with them in a cost-efficient manner. Such simplification would also improve the transparency 

and visibility of such tax provisions and allow the monitoring of compliance with the provisions. 

Simplification of the education-related tax provisions would increase the benefits going to the 

targeted taxpayers, and lower the cost of administering the tax system. 

T: 202.737.6600 I F 202.638.4512 Jiepa,org 
105 


87414.077

The Honorable Max Baucus 

The Honorable Robert P. Casey, Jr. 

May 29, 2013 

Page 20f5 

Proposal: Harmonize and Simplify Education-related Tax Provisions 

Present Law 

Included in the Internal Revenue Code (IRC or "Code") are education incentives that may be 

divided into two general categories: (1) those that are intended to help taxpayers meet current 

higher education expenses and (2) those that encourage taxpayers to save for future higher 

education expenses. 

The first category includes provisions that may be divided into three main subcategories: (1) 

exclusions from taxable income such as scholarships (section 117), employer-provided education 

assistance (section 127) and working-condition fringe benefits (section 132); (2) individual 

deductions, including the student loan interest deduction (section 221) and the tuition and fees 

deduction (section 222); and (3) individual credits, including the American Opportunity Tax 

Credit (previously the Hope Credit) and Lifetime Learning Credit (section 25A). 

The second category, intended to fund future education, includes educational savings bonds 

(section 135), qualified tuition programs (section 529), and Coverdell Education Savings 

Accounts (section 530). 

The various provisions contain numerous and differing eligibility rules for the provisions. 

Description ofProposai 

Tax benefits for higher education should be simplified and harmonized. I Specifically, we 

recommend the following provisions: 

1. Replace tax incentives (i.e., Hope Credit, American Opportunity Tax Credit, Lifetime 

Learning Credit and the tuition and fees deduction) intended to help taxpayers meet current 

higher education expenses with one new or revised credit, and provide for an appropriate 

transition period. Combining features of these into one credit would simplify the tax benefits 

and remove duplicative provisions relating to higher education expenses. 

a. The credit should be on a "per student" rather than a "per taxpayer" basis, to assure every 

student is eligible regardless of family size. 

b. The credit should be available for any year of post-secondary education, including 

graduate-level and professional degree courses. 

c. The credit should be available only to students who are enrolled in a degree, certificate, 

or other program leading to a recognized educational credential at an institution of higher 

1 The AICPA submitted testimony to the Senate Finance Committee hearing on Education Tax Incentives and Tax 

Reform on July 25, 2012. 
106 


87414.078

The Honorable Max Baucus 

The Honorable Robert P. Casey, Jr. 

May 29, 2013 

Page 3 of 5 

education and are carrying at least V2 the normal full-time work load for the course of 

study the student is pursuing. 

d. The tax return reporting requirement should continue including the social security 

number (SSN) of the student associated with the expenses claimed with respect to the 

credit taken for the tax year. Accordingly, amounts claimed over time could be tracked 

by the student's SSN. These changes may result in improved compliance and 

enforcement. 

e. The credit should be 100 percent refundable and phased out for high-income taxpayers. 

The phase-out limitations should be consistent with any other education-related incentive. 

f. The credit should be claimed on the parent's return as long as the child is a qualifying 

dependent of the parent. 

2. Create a uniform definition of "qualified higher education expenses" (QHEE) for all 

education-related tax provisions. Specifically, QHEE should include tuition, books, fees, 

suppJies and equipment. Also, the terms "special needs services" and "special needs 

beneficiary" should be clearly defined. 

3. If it is determined that phase-outs are necessary, coordinate the phase-out amounts for the 

student loan interest deduction and the educational savings bonds and Coverdell Education 

Savings Accounts exclusions with the new or revised tax credit intended to help taxpayers meet 

current higher education expenses. All education-related tax provisions should have the same 

Adjusted Gross Income (AGI) limitations. The concern for excessively high marginal rates 

resulting from coordinating phase-out provisions should be alleviated by substituting one credit 

for the several benefits that exist today. In addition, any remaining concerns could be addressed 

by widening the phase-out range, which would still permit coordination that could simplify 

matters for taxpayers and improve their understanding of eligibility. 

For many taxpayers, analysis and application of the intended incentives are too cumbersome 

compared with the benefits received. The Government Accountability Office (GAO) analyzed 

2009 data for tax returns with information on education expenses and found that about 14 

percent of filers (1.5 million of nearly II million eligible taxpayers) failed to claim a credit or 

deduction in which they were eligible. On average, these filers lost a tax benefit of $466 (GAO 

12-560 Report to the Senate Finance Committee). Further, according to GAO research, although 

the number of taxpayers using the educational tax credits is growing quickly, the complexity of 

the tax provisions prevents hundreds of thousands of taxpayers from claiming tax benefits to 

which they are entitled or which would be most advantageous to them. Finally, there is 

evidence that the regressive nature of the provisions prevents low-income taxpayers from getting 

the tax benefit that Congress envisioned. 

The complexity and interaction among the various provisions is a recurring theme. At the Spring 

2008 House Ways and Means hearing on higher education tax incentives, Karen Gilbreath 
107 


87414.079

The Honorable Max Baucus 

The Honorable Robert P. Casey, Jr. 

May 29, 2013 

Page 4 of 5 

Sowell, Treasury's deputy assistant secretary for tax policy, commented that "with more than ten 

million families claiming tax benefits to help finance higher education each year, Congress must 

ensure that these benefits work as intended" and that "the complexity of the education tax 

incentives increases record-keeping and reporting burden on taxpayers and makes it difficult for 

the IRS to monitor compliance." 

For example, eligibility for one of the two education credits depends on numerous factors, 

including the academic year in which the child is in school, the timing of tuition payments, the 

nature and timing of other eligible expenditures, and the adjusted gross income level of the 

parents (or possibly the student). In a given year, a parent also may be entitled to different 

credits for different children. while in subsequent years credits may be available for one child but 

not another. Further complicating the statutory scheme, the Code precludes use of the Lifetime 

or Hope (American Opportunity Tax) Credit if the child also receives tax benefits from education 

savings accounts. Although the child can elect out of such benefits, this decision also entails 

additional analysis. 

An additional complicating factor is the phase-out of eligibility based on various AGI levels in 

six of the provisions. This requires taxpayers to make numerous calculations to determine 

eligibility for the various incentives. Since there are many individual tests that must be satisfied 

for each benefit, taxpayers may inadvertently lose the benefits of a particular incentive because 

they either do not understand the provision or because they pay tuition or other qualifying 

expenses during the wrong tax year. 

In addition to the complexity described above, there is evidence that erroneous application of 

education credits is making a significant contribution to the 'Tax Gap." A report issued by the 

Treasury Inspector General for Tax Administration (TIGTA) in 2011 states that education credits 

of approximately $3.2 billion ($1.6 billion in refundable credits and $1.6 billion in nonrefundable 

credits) appear to be erroneous.2 Over four years, erroneous education credits could potentially 

reach $12.8 billion3 

In terms of tax policy, the numerous tax incentives to assist with college expenses are not the 

only way the federal government provides assistance to college students and their families. 

Through the Department of Education, the federal government assists low-income individuals 

through various scholarship and grant programs. We encourage Congress to consider all of these 

programs together to determine if the desired goals are being met in an effective and efficient 

manner. The current tax provisions do not always meet the goal of helping low to middle-income 

families with college expenses. Consideration should be given to where assistance can best be 

provided through the tax law (such as incentives to save for future college expenses) versus grant 

and scholarship programs while the student is in college (where assistance is needed at the start 

of the school year rather than when the tax return is filed). Consideration should also be given to 

1 Treasury Inspector General for Tax Administration Report 2011-41-083. Billions of Dollars in Education Credits 

Appear to Be Erroneous (September 16, 2011). 

'Id. 
108 


87414.080

The Honorable Max Baucus 

The Honorable Robert P. Casey, Jr. 

May 29, 2013 

Page 5 of 5 

identifying the targeted income group to whom the federal government should be providing 

financial assistance for higher education expenses. When assessing whether this goal is met, aid 

distributed through scholarships, grants or tax provisions should be considered. 

Conclusion/Recommendation 

Education-related tax provisions should be simplified by the Committee, as suggested above, 

such that taxpayers can better understand the rules and can both claim and comply with them in a 

cost-efficient manner. Such simplification would also improve the transparency and visibility of 

such tax provisions and allow the monitoring of compliance with the provisions. Simplification 

of the education-related tax provisions would increase the benefits going to the targeted 

taxpayers, and lower the cost of administering the tax system. 

* * * * * 

The AICPA is the world's largest membership association representing the accounting 

profession, with nearly 386,000 members in 128 countries and a I 25-year heritage of serving the 

public interest. Our members advise clients on federal, state and international tax matters and 

prepare income and other tax returns for millions of Americans. Our members provide services 

to individuals, not-for-profit organizations, small and medium-sized businesses, as well as 

America's largest businesses. 

Thank you for considering our views on this very important topic. If you have any questions or 

would like to discuss this issue or our recommendations, please contact me at (304) 522-2553 or 

jporter@portcrcpa.com; or Melissa Labant, AICPA Director of Taxation, at (202) 434-9234 or 

mlabant@aicpa.org. 

Sincerely, 

9*~ Jeffrey A. Porter, CPA 

Chair, AICPA Tax Executive Committee 

cc: Christopher Arneson 
109 


87414.081

SUBMITTED BY SENATOR WYDEN 

Office of Chief Counsel 

Internal Revenue Service 

memorandum 

Number: 201141017 

Release Date: 10/14/2011 

CC:PA:07 

POSTS-110431-11 

UILC: 7602.03-00 

date: July 08, 2011 

to: Associate Area Counsel (Newark, Group 1) 

(Small Business/Self-Employed) 

from: William V. Spatz, 

Senior Counsel, Branch 6 

(Procedure & Administration) 

subject: Summons Inquiry Regarding the Stored Communications Act 

(18 U.S.C. §§ 2701-2711) 

This Chief Counsel Advice responds to your request for assistance. This advice may 

not be used or cited as precedent. 

1. Should the Service's administrative summons seeking from an Internet service 

provider (ISP) the contents of a customer's e-mails that are less than 180 days old,--

i.e., the summons requests all e-mails from a specified date through the date of the 

ISP's compliance with the summons - be withdrawn as inconsistent with the Stored 

Communications Act (18 U.S.C. §§ 2701-2711)? 

2. Would it be sensible under the circumstances - in which the ISP is headquartered in 

the Ninth Circuit and the revenue officer is interested primarily in obtaining very recent 

leads to the taxpayer's potential assets from the contents of the e-mails at issue - for 

the Service to reissue a modified administrative summons on the ISP for the contents of 

the customer's e-mails that are more than 180 days old, i.e., from a specified date until 

another specified date that is more than 180 days before the issue date of the new 

summons? 

3. May the revenue officer issue a modified administrative summons to the ISP for the 

non-content information for electronic communications services specified in 18 U.S.C. 
110 


87414.082

§ 2703(c)(2) for the customer <JuL., name, address, length and type of service, and 

means of payment), as referred to in IRM Exhibit 5.20.4-10 (rev. 7-20-2010)? 

CONCLUSIONS 

1. Yes, the summons the Service issued to the ISP should be withdrawn for violating 

the SCA. In particular, the summons requests from a provider of electronic 

communication services (the ISP) the contents of electronic communications (including 

all e-mails) for an ISP customer that have been in electronic storage by the ISP for the 

180 days preceding the Service's issuance of the administrative summons and 

prospectively, after the date of issuance until the date the ISP complies with the 

summons, in violation of 18 U.S.C. § 2703(a). This section of the SeA provides, in 

pertinent part, that a governmental entity may require an ISP or other provider of 

electronic communications services to disclose the contents of an electronic 

communication the ISP has maintained in electronic storage for 180 days or less, only 

pursuant to a warrant issued under the procedures described in the Federal Rules of 

Criminal Procedure by a court of competent jurisdiction. The procedures described in 

Federal Rule of Criminal Procedure 41 for a warrant to seek electronically stored 

information were not followed by the revenue officer in this case; further, the revenue 

officer would not be eligible to seek a warrant for the civil (as opposed to criminal) tax 

law provisions he is engaged in seeking to enforce in this case. 

2. No, as a practical matter it would not be sensible for the revenue officer in this case 

to reissue a modified administrative summons to the ISP, seeking only the contents of 

the ISP customer's e-mails from a date certain until another specified date that is more 

than 180 days before the issue date of the new summons. The SCA, 18 U.S.C. 

§ 2703(a)-(b), does permit a governmental entity to require an ISP to produce the 

contents of an ISP customer's electronic communications that have been in electronic 

storage for more than 180 days in response to an administrative subpoena (including an 

IRS summons). In such cases, the governmental entity must either provide prior notice 

of the administrative subpoena to the customer, or the governmental entity may provide 

the customer with "delayed notice" of the subpoena if the conditions and procedures 

described in 18 U.S.C. § 2705 for such delayed notice to the customer are followed, 

including a required written certification by a supervisory official. In a recent case, the 

Sixth Circuit opined that the SCA provisions which allow a governmental entity to 

require an ISP to produce the contents of a customer's e-mails which are more than 180 

days old without a properly authorized warrant, upon a showing of probable cause, 

violated the Fourth Amendment (as an unreasonable search and seizure) and were 

unconstitutional. United States v. Warshak, 631 F.3d 266,288 (6th Cir. 2010), reh'g and 

reh'g en banc denied, 2011 U.S. App. LEXIS 5007 (6th Cir. March 7,2011).1 The ISP in 

1 The Sixth Circuit went on to hold that the Government relied in "good faith" in Warshak upon the 

provisions at issue of the SCA - allowing the Government to obtain the contents of the e-mails at issue 

via a subpoena or via a court order requiring a reasonable showing of relevance and materiality to an 

ongoing criminal investigation (rather than "probable cause") - so the court declined to apply the 

"exclusionary rule" to the evidence the Government obtained via the subpoena and court order under 

SCA procedures. Warshak. at 288-292. Consequently, the petitions for rehearing!l!l...!ll!.!JQ that were filed 
111 


87414.083

the present case is headquartered within the Ninth Circuit, rather than the Sixth Circuit, 

but the ISP has advised Counsel that it does not intend to comply voluntarily with the 

summons. The Ninth Circuit has not yet addressed the constitutionality of the provision 

of the SCA that the Sixth Circuit opined was unconstitutional, but the Ninth Circuit has 

previously opined that the contents of certain electronic messages were protected by 

the Fourth Amendment, and it has discussed possible constitutional distinctions 

between the contents of electronic communications and the non-content information 

associated with a customer's use of electronic communications. In short, we do not 

believe there is any reasonable possibility that the Service will be able to obtain the 

contents of this customer's e-mails that are more than 180 days old through a modified 

summons upon this ISP without protracted litigation, if at all. Moreover, the revenue 

officer has indicated that he is primarily interested in this case in the opportunity to look 

for the most recent potential collection leads in the customer's e-mails. The most recent 

e-mails the SCA permits the Service to seek via an administrative summons would 

surely contain only "stale" leads by the time any protracted litigation with the ISP (and 

any intervenors and likely amici)2 could practically be concluded. 

3. Yes, the current controversy concerning the constitutionality under the Fourth 

Amendment of the SCA permitting governmental entities to obtain the "content" of more 

than 180-day old customer e-mails and other electronic communications from an ISP by 

means short of a court-approved warrant, upon a showing of "probable cause," should 

not affect the Service's ability to continue to use an administrative summons to obtain 

from an ISP the non-content records concerning a customer's electronic communication 

services, which are described in 18 U.S.C. § 2703(c)(2). A model summons attachment 

that requests this non-content information from an ISP was contained in the July 2010 

version of IRM Exhibit 5.20.4.-10, which is currently being republished in IRM chapter 

25.5.2. The Ninth Circuit and other courts have recognized that a warrant is not 

required by the Constitution for a government entity to require an electronic 

communications provider to produce a customer's non-content information regarding an 

electronic communication. See United States v. Forrester, 512 F.3d 500, 509-513 (9th 

Cir.), cert. denied sub. nom., 129 S.C!. 249 (2008) (the Government's use of a courtapproved computer surveillance analogue to a pen register for telephone calls, 

disclosing the "to" and "from" addresses for a customer's e-mail messages, was not a 

"search" for Fourth Amendment purposes); United States v. Bynum, 604 F.3d 161, 164 

(4th Cir.), cert. denied, 130 S.C!. 3442 (2010) (a customer's subscriber information 

provided to an ISP is not protected by a Fourth Amendment privacy expectation); In re 

§ 2703(d) Order, 2011 U.S. Dis!. LEXIS 25322 (E.D. Va. March 11, 2011) (the Wikileaks 

Twitter Order case). Pursuant to 18 U.S.C. § 2703(c)(2)(F), the Service may continue 

to use an administrative summons upon an ISP (with no "notice" to the affected 

customer) to request, inter alia, the "means and source of payment" for the ISP's 

with the Sixth Circuit in January 2011 were filed only by defendants Warshak and his mother; the United 

States did not file a petition for rehearing of the Sixth Circuit's 2010 decision in Warshak. 

2 The Electronic Frontier Foundation, a privacy advocacy group, partiCipated in an amicus role at some 

stages of the Warshak case, and has done so in other cases involving these SCA issues. 
112 


87414.084

electronic communication services to the customer, "including any credit card or bank 

account number." Through follow-up requests based on this ISP customer payment 

information, if sought in a new summons, the revenue officer may indirectly obtain some 

of the potential collection asset leads he is interested in pursuing further in this case, 

BACKGROUND 

The Service is seeking to collect more than a quarter million dollars assessed against 

an apparent shell entity taxpayer which received large tax refunds, arising from 

improperly claimed tax credits, The revenue officer is seeking to identify sources from 

which collection may be made, including from the assets of a suspected alter ego of the 

taxpayer. To learn more about the suspected alter ego's finances, specifically to whom 

and where the suspected alter ego may have transferred funds, the revenue officer 

served a summons upon an ISP headquartered within the Ninth Circuit. The summons 

requests the contents of the suspected alter ego's electronic messages and other 

communications for a period exceeding two years, through the date of the ISP's 

compliance with the summons, The revenue officer indicates is particularly 

interested in receiving the most recent e-mails, those the suspected alter ego sent or 

received within the last 180 days before the ISP complies with the summons, In 

response to the summons, the ISP first sent the revenue officer a letter, informing him of 

some of the relevant SCA limitations contained in 18 U,S,C, §§ 2703(a)-(b) and 2705, 

In a subsequent conversation, a representative of the ISP informed Counsel that the 

ISP would not voluntarily comply with the summons, in large part due to the recent 

Warshak decision by the Sixth Circuit. You requested our advice on how to proceed 

with respect to the summons, 

ADDITIONAL DISCUSSION 

Steven Warshak, an owner/operator of small businesses, was convicted in 2008 for 

fraud and money laundering in connection with the false marketing of Enzyte, His 

criminal conduct involved a series of advertisements on television and the Internet. It 

also included his practice of enrolling persons who responded to the advertisements in 

auto-ship programs for Enzyte without their consent, and his practice of misrepresenting 

his businesses' chargeback records for unsatisfied customers to various merchant 

banks that had agreed to process the credit card payments received by the Warshak 

businesses, In 2004, the Government first formally requested that one of Warshak's 

ISPs prospectively preserve the contents of any e-mails to and from Warshak's e-mail 

account to prevent them from being automatically deleted (via Post Office Protocol) 

from the ISP's server after Warshak downloaded the messages, Next, in 2005 the 

Government issued a subpoena to the ISP, pursuant to 18 U,S,C, § 2703(b)(1)(B)(i), 

requiring the ISP to turn over the content of some of the e-mails that it had begun 

preserving the previous year. Several months later in 2005, the Government obtained a 

further ex parte court order, pursuant to 18 U,S,C, § 2703(b)(1)(B)(ii), requiring the ISP 

to surrender the contents of additional e-mails preserved from Warshak's account. In 

all, the Government compelled the ISP to reveal the contents of approximately 27,000 
113 


87414.085

e-mails. Warshak did not receive notice of either the subpoena or the order until more 

than a year later. Warshak, at 283. 

The Sixth Circuit began with the proposition that a Fourth Amendment "search" occurs 

when the Government infringes upon "an expectation of privacy that society is prepared 

to consider reasonable." The court said this standard breaks down further into two 

discrete inquiries, first whether the target of the investigation has manifested a 

subjective expectation of privacy in the object of the challenged search, and second 

whether society is willing to recognize that expectation as reasonable. The Sixth Circuit 

found that Warshak plainly manifested a subjective expectation that his e-mails would 

be shielded from outside scrutiny. The court found that answering whether society was 

willing to recognize an expectation of privacy in the contents of e-mails as reasonable 

was of great importance because of "the prominent role that email has assumed in 

modern communication" and because "the Fourth Amendment must keep pace with the 

inexorable march of technological progress, or its guarantees will wither and perish." 

The Sixth Circuit looked first for guidance to the case of Katz v. United States, 389 U.S. 

347 (1967), where Government agents had affixed an electronic listening device to the 

exterior of a public phone booth and had used the device to intercept and record several 

phone conversations. In Katz, the Supreme Court found that this electronic interception 

of the contents of a conversation constituted a "search" under the Fourth Amendment, 

notwithstanding the fact that the telephone company (a third party) had the capacity to 

monitor and record the calls for its own business reasons. The Sixth Circuit further 

observed that the contents of letters receive similar Fourth Amendment protection, 

despite the fact that sealed letters are handed over to perhaps dozens of mail carriers, 

anyone of whom could tear open the envelopes that separate the private words from 

the world outside. Warshak, at 284-5. 

In further support of the proposition that the contents of e-mails deserve the same 

societal protection from a warrantless search as the contents of traditional paper mail or 

a telephone conversation, the Sixth Circuit cited to portions of the Ninth Circuit's 2008 

Forrester decision, which had found the non-content portions of e-mail messages UUL. 

the senders and receivers) were unprotected by the Fourth Amendment, and different in 

character from the "contents" of the e-mails (which had not been obtained without a 

warrant in that case). Warshak, at 286; Forrester, at 509-10 (importantly, the Supreme 

Court in the pen register case of Smith v. Maryland, 442 U.S. 735 (1979), distinguished 

pen registers from more intrusive surveillance techniques on the ground that pen 

registers do not acquire the "contents" of communications, but rather only the 

addressing information associated with phone calls). The Sixth Circuit also relied upon 

findings from a Ninth Circuit case that was reversed by the Supreme Court. 

Significantly, the Supreme Court did not adopt those findings; instead, it chose to 

assume them arguendo or comment on without deciding their merits. Warshak, at 286; 

City of Ontario v. Quon, 130 S.C!. 2619, 2629-30 (2010), rev'g, Quon v. Arch Wireless 

Operating Co., 529 F.3d 892 (9th Cir. 2008) (explicitly assuming only arguendo that 

Quon had a reasonable expectation of privacy in the text messages sent on the pager 

provided to him by the city, and observing that the 'judiciary risks error by elaborating 
114 


87414.086

too fully on the Fourth Amendment implications of emerging technology before its role in 

society has become clear"). 

In Warshak, at 288-9, the Sixth Circuit ultimately held and announced the intended 

application of its decision as follows: 

The govemment may not compel a commerciallSP to turn over the contents of a 

subscriber's em ails without first obtaining a warrant based on probable cause. 

Therefore, because they did not obtain a warrant, the government agents 

violated the Fourth Amendment when they obtained the contents of Warshak's 

emails. Moreover, to the extent that the SCA purports to permit the government 

to obtain such emails warrantlessly, the SCA is unconstitutional. ... However, we 

disagree that the SCA is so conspicuously unconstitutional as to preclude goodfaith reliance ..... it was not plain or obvious that the SCA was unconstitutional, 

and it was therefore reasonable for the government to rely upon the SCA in 

seeking to obtain the contents ofWarshak's emails .... Of course, after today's 

decision, the good-faith calculus has changed, and a reasonable officer may no 

longer assume that the Constitution permits warrantless searches of private emails. 

Since Warshak was decided, commentators and Government officials have observed 

that "the decision is only binding within the four states comprising the Sixth Circuit." 

Commentator Casey Perry opined that "it remains unclear how the rest of the nation will 

treat the Warshak decision," and "the good faith exception would continue to exist in 

each circuit until a similar case is heard and decided. ,,3 And in his April 6, 2011 

testimony before the Senate Judiciary Committee, Cameron F. Kerry, General Counsel, 

U.S. Department of Commerce, stated: 

Warshak is the law only in the Sixth Circuit, and the U.S. government is 

determining whether to seek Supreme Court review [and] [u]ntil such time 

as the Court squarely addresses the issue, the law as to what protection 

the Fourth Amendment affords to the messages and other customer 

content transmitted and stored electronically will be unsettled. 4 

At the same hearing before the Senate Judiciary Committee, Associate Deputy Attorney 

General James A. Baker cautioned legislators to consider carefully whether the existing 

SCA or the Sixth Circuit's Warshak opinion strikes the correct balance about the privacy 

interests that society is willing to recognize as reasonable, explaining: 

3 U.S. v. Warshak: Will Fourth Amendment Protection be Delivered to Your Inbox?, 12 N.C. J.L. & Tech. 

345,365-6 (2011). 

4 The Electronic Communications Privacy Act: Government Perspectives on Protecting Privacy in the 

Digital Age: Before the Sen. Judiciary Comm., Apr. 6, 2011, available at 

hllp:lljudiciary .senate.gov/hearings/hearing.cfm?id=e655fge280ge54 76862f735da 16a 19ge, page 1 0 

(Testimony of Cameron F. Kerry, General Counsel, U.S. Dept. of Commerce). 
115 


87414.087

First, current law allows for the acquisition of certain stored communications 

using a subpoena where the account holder receives prior notice. This procedure 

is similar to that for paper records. If a person stores documents in her home, the 

government may use a subpoena to compel production of those documents. 

Congress should consider carefully whether it is appropriate to afford a higher 

evidentiary standard for compelled production of electronically-stored records 

than paper records. 

Second, it is important to note that not all federal agencies have authority to 

obtain search warrants. For example, the Securities and Exchange Commission 

(SEC) and Federal Trade Commission (FTC) conduct investigations in which 

they need access to information stored as the content of email. Although those 

entities have authority to issue subpoenas, they lack the ability to obtain search 

warrants. Raising the standard for obtaining stored email or other stored 

communications to a search warrant could substantially impair their 

investigations. 

Third, Congress should recognize the collateral consequences to criminal law 

enforcement and the national security of the United States if ECPA were to 

provide only one means - a probable cause warrant - for compelling disclosure 

of all stored content. For example, in order to obtain a search warrant for a 

particular email account, law enforcement has to establish probable cause to 

believe that evidence will be found in that particular account. In some cases, this 

link can be hard to establish. In one recent case, for example, law enforcement 

officers knew that a child exploitation subject had used one account to send and 

receive child pornography, and officers discovered that he had another email 

account, but they lacked evidence about his use of the second account. 

Thus, Congress should consider carefully the adverse impact on criminal as well 

as national security investigations if a probable cause warrant were the only 

means to obtain such stored communications. 

Please call me if you have any further questions. 
(117) 

COMMUNICATIONS


87414088.eps
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87414.089

Mr. Chairman and members of the Committee, Consumers for Paper Options is an organization 

originally founded by businesses in the paper-based communications industry which has grown 

to include and work with concerned Americans, consumer organizations, seniors' groups, and all 

citizens who want govemment at all levels to make wise decisions regarding citizen access to 

information and services. 

According to the latest US Census, some 30 percent of American households do not have 

internet service at home and some 45 percent of seniors don't own a computer. When the federal 

government adopts policies that limit access to paper-based versions of important information 

and services, it does so in complete disregard to the interests of millions of Americans who have 

not yet adapted to the digital age. 

The shift to electronic tax filing has led to rampant identify theft perpetrated primarily on senior 

citizens, and it is undoubtedly putting millions more at risk with each passing year. Thieves are 

miles ahead of the security efforts of the IRS and other government agencies; they are 

systematically taking advantage of the shift to electronic tax filing and direct-deposited refunds 

to file fraudulent tax returns at the expense of both victimized seniors and the American people. 

Until the IRS can develop sound solutions to prevent this epidemic of identity theft, electronic 

methods should not be the agency's primary means of tax collection and refund distribution, nor 

should citizens be forced into electronic filing against their wishes. 

Identity Theft has Increased with the IRS' Dependence on Electronic Tax-Filing. 

The IRS admits that identity theft is the number one tax scam for 2013, but the rise of tax-related 

identity theft is not new. It has been increasing in relation to the IRS' growing dependence on 

electronic tax-filing and the direct-depositing of refunds, which includes the use of pre-paid debit 

cards. 

Last year, the Treasury Inspector General for Tax Administration reported that the IRS failed to 

identify 1.5 million fraudulent returns related to tax year 2010 (which were processed during the 

2011 tax season) - sending out $5.2 billion in refunds to thieves. In giving this "conservative 

estimate," the Inspector General then noted that the report did not include instances where the 

IRS itself had determined that the return was fraudulent after sending the refund - it only 

chronicled undetected tax fraud. And since then, the problem has only worsened. More recently, 

the IRS reported that identify theft nearly tripled between 2010 and 2011, and as of December 

2012, the IRS had identified nearly 1.8 million incidents of tax-related identity theft during 

calendar year 2012 alone. 

With no end in sight, the Inspector General said last year that this identity theft could cost 

taxpayers $21 billion over the next five years - swamping any supposed gains from the IRS' 

paperless initiatives. Even more troubling, the IRS admits that the problem of identity theft is 

"significantly greater than the amount the IRS detects and prevents," so the actual impact is 

likely to be much worse. 
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87414.090

Electronic tax-filing and the direct deposit of tax refunds have undoubtedly contributed to the 

epidemic of tax fraud being perpetrated in our country. Of the aforementioned 1.5 million 

undetected fraudulent returns processed during the 2011 tax season, 1.4 million, or 91 percent, 

were e-filed. Further, the IRS direct deposit program has made it far easier for thieves to steal 

funds related to these fraudulent returns. Of those 1.5 million undetected fraudulent returns 

processed during the 2011 filing season, 1.2 million (or 82 percent) utilized direct deposit (which 

includes the use of pre-paid debit cards) to obtain fraudulent refunds. 

There is no better proof that electronic tax-filing and refund collection has played a central role 

in our nation's skyrocketing tax fraud. Debit cards are not a secure means ofrefund collection. 

They are untraceable, and can be collected and used without proper identification. As for funds 

received electronically via direct deposit, the IRS does not even mandate basic safeguards 

requiring the name on the bank account to match the name on the tax return. 

While cashing a paper check involves protections to ensure that the funds are being received by 

the correct person, electronic tax-filing has empowered thieves across the country. There is no 

accountability at the IRS, and certainly no credible effort to prevent electronic tax-filing from 

resulting in the epidemic of fraud we are experiencing today. 

Seniors Are the Most Likely Victims of Tax Fraud. 

Seniors are disproportionately affected by tax fraud, and a prime reason is the prevalence of 

electronic tax-filing and refund-collection that is exposing elderly Americans - many of whom 

have little or no knowledge of technology or the way electronic filing works to cybercrime. 

While cybersecurity is a top concern for many American citizens, both young and old, it is a fact 

that senior citizens are often prime targets for cybercrime. For instance, Florida - a state with the 

highest percentage of elderly citizens has the highest rate of identity theft in the nation. Nine of 

the 10 U.S. cities hit hardest by tax fraud are in Florida. The Miami area is the nation's number 

one location for this crime, with 35,914 cases of tax-related identity theft reported in 2012 and 

the highest per capita rate of complaints: 645 per 100,000 residents. 

Seniors are particularly susceptible to fraud because many are uncomfortable in the digital world 

or simply unprepared for its consequences. Forty-five percent of seniors do not own a computer 

- indicating that they might not grasp the ease in which someone's personal information can be 

used for fraud. For this reason, thieves have been systematically targeting seniors across the 

country. Many telephone elderly Americans and tell them they are the recipients of cash prize 

and that they need to divulge their Social Security numbers or banking information in order to 

receive the winnings. And because electronic tax-filing does not involve the reliable security 

features of traditional filing, these thieves are able to easily file fraudulent returns using stolen 

information. 

Just look at the Social Security Administration, which has been ignoring the preferences of 

millions of seniors by continuing its efforts to switch them to electronic-only federal benefits. 

Since this effort began, the Inspector General for the Social Security Administration has reported 
120 


87414.091

a stark increase in fraud perpetrated primarily on elderly beneficiaries. In most cases, criminals 

obtained sensitive personal information and were able to redirect the victims' direct-deposited 

benefits to a fraudulent account. According to the Inspector General, a staggering 19,000 reports 

of this type of fraud were filed over a six -week period in 2012, and the office continues to 

receive an average of 50 reports each day. The U.S. Treasury's efforts to embrace electronic 

payments both in the IRS and Social Security Administration - are clearly putting seniors in 

the crosshairs of cybercrime. 

Moreover, elderly beneficiaries who still file taxes and receive debit card refunds face even more 

risk. Unlike paper checks, debit cards can be seized and used without sufficient identity 

verification. Thieves have already exploited this reality across the country by taking advantage of 

people who receive tax returns in the form of similar debit cards. Thieves can simply target 

senior citizens in their home by lifting the debit cards right from their mailboxes. Further, postal 

workers have even been targeted - and one was even murdered - by thieves seeking a mail truck 

full of debit cards and master keys to mailboxes at assisted living centers and apartment 

complexes. 

The IRS Also Burdens Seniors by No Longer Sending Paper Tax Forms. 

In addition to the cybersecurity risks that electronic tax-filing creates for seniors, the IRS 

electronic filing effort is also creating hardship for seniors who wish to file their taxes on paper. 

The IRS no longer mail tax forms to U.S. taxpayers. This policy overlooks the 30 million 

Americans who still file their tax returns by mail. While the new policy makes sense for 

taxpayers already filing electronic returns, citizens who don't have access to computers (45 

percent of all seniors), or the skills to use them, face a challenge. 

The IRS has said that the tax forms are available at many post offices and public libraries, yet 

Consumers for Paper Options receives complaints from seniors that this is not always true. We 

have talked with seniors who make repeated unsuccessful trips to these facilities in search of tax 

documents. The paperless policy also makes it difficult for citizens in rural areas who have no 

access to the Internet and are miles from nearby post offices and libraries. 

The IRS should reverse its decision and continue to supply tax forms and instructions to senior 

citizens and others who need or want them. With the number of e-filers growing each year, the 

pool of paper filers will no doubt shrink with time. Until then, however, the federal government 

should not deny this important service to senior citizens and low-income individuals who cannot 

e-file, or to taxpayers with legitimate concerns about identity theft. 

Conclusion: Electronic Tax-Filing Puts Seniors and Other Americans at Risk. 

The simple truth is that the electronic tax-filing system is not secure, yet a primary goal of the 

IRS is to completely transition the American people to e-filing. As the experiences of millions of 

identity theft victims demonstrate, the IRS is not equipped for secure electronic tax-filing, and 

thieves are using this fact to their advantage. 
121 


87414.092

The IRS policy of electronic tax-filing and direct-deposited refunds is empowering thieves to rob 

vulnerable citizens of their identities and forcing taxpayers to make up the difference. 

Before the IRS takes further steps to encourage electronic filing and the direct deposit of returns, 

it must dramatically improve the safeguards in place to protect citizens from fraudulent behavior. 

In the meantime, it should not discourage paper-based tax filing, nor should it put roadblocks in 

place that discourage paper-based filings. 

Consumers for Paper Options encourages this Committee to continue efforts to protect 

Americans from tax-related identity theft. You should insist that the IRS provide continued 

access for paper-filing and reinstate the mailing of paper tax forms - while the agency also works 

to secure the identity of law-abiding taxpayers who are being exposed to criminal fraud. 
122 


87414.093

International Association of 

Jewish Genealogical Societies (IAJGS) 

6052 Hackers Lane Agoura Hills, CA 91301 

818-889-6616 tel 818-991-8400 fax 

www.iajgs.org 

STATEMENT FOR THE RECORD, SENATE COMMITTEE ON FINANCE WRITTEN 

COMMENTS ON PROVISIONS RELATING TO TAX FRAUD AND IDENTITY THEFT AND 

THE SOCIAl. SECURITY ADMINISTRATION'S DEATH MASTER FILE, ALSO KNOWN 

COMMERCIAL.I. Y AS THE SOCIAL SECURITY DEATH INDEX. 

I, INTRODUCTION: 

The Senate Committee on Finance, held a Hearing on 16 April 2013 entitled: 

''TAX FRAUD AND TAX 10 THEFT: MOVING FORWARD WITH SOLUTIONS". 

The public may submit statements within two weeks of the hearing and this statement fulfills 

that opportunity on behalf of the International Association of Jewish Genealogical Societies 

(IAJGS). 

II, IAJGS BACKGROUND & CONTACT INFORMATION: 

The International Association of Jewish Genealogical Societies is the umbrella organization of 

72 Jewish genealogical societies and Jewish historical societies worldwide whose 

approximately 10,000 members are actively researching their Jewish roots. In 2013, we are 

holding our 33"" consecutive annuallntemational Conference on Jewish Genealogy 

(www.iajgs,org). We want to ensure that our members will be allowed continued and maximum 

access to these vital records. 

The IAJGS and its predecessor organization were formed in 1988 to provide a common voice 

for issues of significance to its members and to advance our genealogical avocation. One of our 

primary objectives is to promote public access to genealogically relevant records. 

Contact Information: 

IAJGS official mailing address is: 

IAJGS 

PO Box 3624 

Cherry Hill, NJ OS034"0556 

For purposes of this statement please use the following contact information: 

Jan Meisels Allen, 

Vice President, IAJGS 

6052 Hackers Lane 

Agoura Hills, CA 91301 (81S) 889·6616 tell (SiS) 991-8400 fax (call before submitting a fax) 

E·mail: vicepresident@iajgs.org 

Oflicm Michael Ooldstcin. JctUlut1I!1'n.I~rnel. PWidsmt@igi8*Oeg 

1M Mei.el, Aile •• Agou", Hills. CA. USA. Vi"'Wre.'idcnt®i.i~' O!'& 

loci Spector. ChelT)' Hill. NJ. USA. Smytm@iuip Org 

Poul Silvet!tOtle. New York, NY, USA, TrqasurcMHails ors Immediate Past President Anne F,der I,.c.;; HOftotulu, HI. USA. Anne@iajm!: org 

DirscJors-ai~large 

Nolan Altman. O ... n,id .. NY. USA. 

000101 Horowitt. KfBr Saba. 1 .... 1. Kahlil. Mohr, Sountiful, iJT. USA. 

Mark Nicholl., BdS"""'" Middle,,,,,. UK 

JOy Saso. Newton C.n ..... MA, USA 

J"".y. Sullin •• CIlrI,bod, CA, USA, 

Ngluo@iniasm)1 Qanie!®i8;1J~ org 

Kablile@iaiil'llli 

Mnrk@iajp org 

~ 

JBckye@iaigs;or; 
123 


87414.094

Thank you for the opportunity to present the IAJGS concerns regarding the Committee's discussion on 

the reduction of public access to the eommerelal version of the Death Master File (DMF), the Soeial 

Security Death Index (5801). For the purposes of this statement, we will be addressing access to the 

SSDI rather than the DMF, as the SSDI is the version that genealogists are permitted to access. 

We were disappointed that the genealogical community was not invited to participate at the April 16 

hearing and hope that when bill-speclflc hearings affecting access to the DMFfSSDI are scheduled, 

forensic genealogists will be invited to testify. IAJGS suggests that you Invite representatives from the 

Council for the Advancement of Forensic Genealogy [CAFGJ 

rhttp://www.forensicgenealogists.comlindex.htmIJ to discuss why genealogists are an important 

stakeholder in the proposed legislation. The Association of Professional Genealogists (APG) includes 

on their website listings of specialties including 'forensic· 

Ihttp://www.apgen.org/directorylsearch.html?type=specialty&new search=true J therefore, you may 

wish to invite them as well for a forensic genealogist. 

It is ironic that a system that is used to prevent identity theft by permitting employers, financial 

organizations, insurance companies, pension funds, and others the ability to check names against 

those deceased as reported on the Death Master File, [http://www.ntis,goll/products/ssa-dmf.aspx] is 

now being considered--inappropriately-as an instrument of identity theft. 

Included in Chairman Baucus's opening remarks were examples of living persons who have been 

victims of identity theft-a testament that the DMF/SSDI did NOT provide the information for their 

having their identity stolen and the ensuing nightmare that these individuals endured. Unfortunately, 

there are many such instances that have been documented-that living persons are victims of such a 

scourge. Denying access to genealogists to the DMF/SSDI will not prevent such occurrences. 

We support the Committee's intent to protect the residents of the United States from improoar usage of 

their oarsonal information, and to protect them from identity theft. However, rarely has it been 

documented that an indillidual's identity is violated by access to vital records or the SSDI. Rather, Ihe 

violations occur due to computer breaches from government and private enterprises. A 2009 study 

stated "in the last five years, approximately 500 million records containing personal identifying 

information of United States residents stored in government and corporate databases was [sic] either 

lost or stolen"'. Many of these computer breaches have been well documented in the press.2

• 

Genealogical Community Positions on Aooess to the Social Security Death Index 

While we advocate all genealogists should have immediate access to the SSDI, we would 

support the two year delay in access-and If necessary the third year-that National Taxpayer 

Advocate Nina Olson advocated during previous testimonies. 

This support is with the caveat that certain genealogists are to be eligible for certification for immediate 

access. These genealogists include: forensic genealogists, heir researchers, and those researching 

individual genetically inherited diseases. Examples of those who need immediate access to the SSDI 

include: 

• Genealogists who work in the field of forensic genealogy, 

1. Helping the military in the repatriation of the remains of servicepersons lost in previous military 

conflicts by identifying and locating their living relatives, 

2. Helping county coroners by identifying the relatives of unclaimed persons. 

• Heir genealogists assist attorneys who need to find missing heirs to settle estate 

cases. 

• Genealogists who are researching a genetically inherited disease in their family where time is of 

the essence in locating extended family members who may have 
124 


87414.095

inherited a gene and need to be tested and treated as quickly as possible. 

We recommend that those genealogists with government or legal contracts doing work as forensic 

genealogists or heir researchers and other certified or accredited genealogists be certified for 

immediate access. Genealogists who are already certified by the Board for Certification of 

Genealogists (BCG) or the International Commission for the Accreditation of Professional Genealogists 

(ICAP-GEN) should be immediately certified by the Department of Commerce-which is the 

government department mentioned responsible to certify in several bills addressing access to the 

OMF/SSDI. 

Supporting Information for the Aforementioned Genealogical Community Position 

• Genealogists Are Not the Cause of Identity Theft. 

Thieves are the cause of Identity theft. Financial institutions and govemment agencies have been 

hacked into numerous times and that has been documented 1.2 • If we accept the continued use of 

computerl%ed data, and the continued likelihood of hacking occurring to any given database at any 

time, then we must also accept that, occasionally, misuse of data will Oocur. It is not reasonable, 

Constitutional, or in the Nation's interests, to remove public documents from public access. 

Removal of the SSDI from public access would not necessarily reduce the problem of fraudulent use of 

a Social Security number. As it will no longer be available as a reference check to many who use it as 

an identity theft deterrent, it may well increase identity theft. 

For those whose deceased children whose Social Security numbers were fraudulently used and as 

parents and grandparents there is nothing that we can adequately express to parents of deceased 

children about their grief over the agonizing loss of their children. But there is no proof that they 

obtained the Social Seourity numbers from the DMF/SSDI rather than someone in an institution or 

Office that had access to those numbers using them fraudulently. Unfortunately, medical identity theft, 

whereby medical employees have been found to steal patient's identifioation has become a growing 

business.3 

For a real solution to this problem, see below "IRS Needs to be More Proactive." 

• Interest in Family History/Genealogy 

Millions of Americans are interested in their family history; The Harris Interactive Poll taken in March 

2012, found that four in 5 Americans have an interest in learning about their family history. The 2011 

Poll also reported 75% of Americans believe it is important to pass along their family's lineage to the 

next generation.' Genealogists doing U.S. research located both in and outside the United States rely 

on the Social Security Death Index. 

• Compassionate Genealogy 

This has several components: 

Working with COroners to Identify Deceased's Next of Kin 

People are going to tneir graves with no family to claim them. Medical examiners and coroners' 

offices-frequently overstretched with burgeoning caseloads-need help in finding next of kin of the 

deceased. rne deceased's identities are known; it's their next of kin that are unknown in these cases. 

Over 400 genealogists are now offering their volunteer services to help locate the next of kin for 

unclaimed persons. The identities of these people are known, but the government agencies are not 
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always able to find the families, so they are literally unclaimed. It is a national problem with which 

coroners must cope. See unclaimedperson!$.org 

Working with the Military 

There are literally tens of thousands of United States Veterans' remains left unclaimed throughout the 

Nation. Sometimes decades pass while these remains are waiting to be identrfied as Veterans and 

given a proper military burial. Genealogists work with the military to locate relatives of soldiers who are 

still unacoounted for from past conflicts. By finding relatives, the military can identify soldiers using 

DNA, and notify the next of kin so the family can make burial decisions. While using DNA, the 

genealogists also need SSNs to help assure they are finding the correct person's family". 

o Family Medical History 

Genealogists use the Social Security Numbers (SSNs) to appropriately identify records of people when 

tracing family medical history, especially if the person has a common name: Sara Cohen, Tom 

Jones, Jose Martinez, Mary Smith etc. During a 2012 House Ways and Means Subcommittee hearing 

on SOCial Security, the representative of the Consumer Data Industry AsSOciation (COlA), mentioned 

COlA had conducted a study and found some people with common names, i.e. Smith, also had the 

same last four digits on their Social Security number, validating why the complete Social Security 

number is necessary. 

Genealogy assists researchers in tracing family medical problems that are passed on from generation 

to generation. Information inclUded in birth, marriage, and death records is critical to reconstructing 

families and traCing genetically inherited attributes in current family members. The SSN is essential to 

make certain that one is researching the correct person. Increasing numbers of physicians are 

requesting that their patients provide a 'medical family tree" in order to more quickly identify conditions 

common within the familys. Information on three generations is the suggested minimum. The US 

Surgeon General includes preparing a family medical history as part of the American Family Health 

Initiative? 

There are many genetically inherited diseases, but for the purposes of this statement, we will mention 

the BReAI and BRCA2 genes' mutations and breast and ovarian cancer. The following information is 

from the National Cancer Institute '. 

'A woman's risk of developing breast and/or ovarian cancer is greatly increased if she 

inherits a deleterious (harmful) BRCA 1 or BRCA2 mutation. Men with these mutations 

also have an increased risk of breast cancer. Both men and women who have harmfUl 

BRCA1 or BRCA2 mutations may be at increased risk of other cancers. 

The likelihood that a breast and/or ovarian cancer is associated with a harmful mutation 

in BRCAt or BRCA2 is highest in families with a history of multiple cases of breast 

cancer, cases of both breast and ovarian cancer, one or more family members with two 

primary cancers (original tumors that develop at different sites in the body), or an 

Ashkenazi (Central and Eastern European) Jewish background. 

Regardless, women who have a relative with a harmful BRCA1 or BRCA2 mutation and 

women who appear to be at increased risk of breast and/or ovarian cancer because of 
126 


87414.097

their family history [emphasiS added] should consider genetiC counseling to leam more 

about their potential risks and about BRCA 1 and BRCA2 genetic tests. 

The likelihood of a harmful mutation in BRCA1 or BRCA2 Is increased with 

eertain familial patterns of eaneer [emphasiS added]. These pattems include the 

following: 

For women of Ashkenazi Jewish descent: 

any first-degree relative diagnosed with breast or ovarian cancer; 

and 

two second-degree relatives on the same side of the family 

diagnosed with breast or ovarian cancer .• 

This form of breast cancer is something not unique to Ashkenazi Jews. as studies have demonstrated 

that this has also been found in the Hispanic communities in New Mexico and Colorado--who did not 

know they were descended from Sephardic Jews who had hidden their Jewish identity to survive the 

Inquisition in the 15th century. This is described in Jon Enline's Abraham's Children: Race, Identity and 

the DNA of the Chosen People, by the Smithsonian in their article, The Secret Jews of San Luis Valley, 

and The Wandering Gene and the Indian Princess: Race, Religion, and DNAo 

People who have had members of their families diagnosed with breast cancer need to know whether 

past family members may have also died from this disease, in order to determine if it is inherited. Both 

current and future generations need to have this information in order to make decisions about whether 

to prophylactioally remove both breasts and ovaries (whioh can mean the difference between early 

detection and treatment versus possible early death), This is something both men and women need 10 

be able to research-as either can be carrying the gene mutation. The SSDI is iii critical tool in assuring 

researchers that the records they have located on possible ancestors are indeed the correct persons, 

especially when they have a common name. 

We use this as only one example of inherited diseases that require the ability to research ancestry 

using a SSN-regardless of ethnicity. 

• Genealogy as a Profession 

While there are millions of people who actively study and research their family history as an avocation, 

there are many others who earn their livelihoods as professional genealogists. Professional 

genealogists use the SSDI to (1) help track heirs to estates, (2) find title to real property, (3) find 

witnesses to wills that need to be proved, (4) work on the repatriation projects [see Working with the 

Military], (5) track works of art-including stolen art-and repatriation of looted art work during the 

Nazi era of World War II, and (6) assist in determining the status of Native American tribes and tribal 

members to prove-or disprove-that they are entitled to share in Tribal casino revenues, 

• IRS Needs to Be More Proactive 

If the IRS were to routinely run Social Security numbers included in tax returns against the death index, 

they might avoid giVing refunds to deceased individuals. 
127 


87414.098

'Operation Rainmaker' (also known as Operation TurboTax), was a tax fraud operation In the Tampa 

Bay area. Law enforcement interviews speCified that the IRS, while cooperating with other law 

enforcement officers, is not authorized to share information with local law enforcement departments, 

hampering efforts to protect their citizens. It was mentioned during the Aprli16 hearing, that with the 

aggrieved party's permission, the IRS is now permitting sharing of information with law enforcement 

agencies. If the federal government Is serious about addressing identity theft that uses a person's 

Social Security number, then the IRS needs to be given legislative authority to share information with 

local, county and state law enforcement organizations. It was also stated that filing tax refunds for 

under $10,000 will not get any attention, "Operation Rainmaker' found the average tax fraud was about 

$9,500, below the $10,000 threshold'". This is another practice that the Congress needs to review, as 

the criminals who are perpetrating this fraud know they will be undetected I 

The IRS needs to amend their practice when the filing involves a deceased child, to require some 

verification to determine which is a valid filing. Today when a child is born in the United States an 

application is made for a Social Security number shortly after birth, and the 5S-5 application has both 

parents' names included on the application. The IRS could do a name-match to determine if the 

parents filing for the refund on a deceased child were the same as those on the 8S-5 application. 

Support For Efforts to Cease Identity Theft 

• If income tax returns were electronically compared to the Master Death File, matching cases 

could be flagged for special proceSSing, and the person attempting to create a tax fraud could 

be stopped before the fraud occurs. 

• A parent's social security number should be required when filing a tax return for any minor. It is 

an extremely rare occurrence that a minor child would not be listed as a dependent on the 

parent or guardian's tax filing. If the minor dies, the IRS could have a procedure to flag any 

filings without the parent's social security number, again preventing the fraUd. The National 

Taxpayer Advocate's Report to Congress for 2012 specifically highlights the benefits of the IRS 

issued Identity Protection PINs and encoura~es that program expansion and timeliness of 

providing PINs to the victims of identity theft 'and in its 2011 report suggested that taxpayers 

should be allowed to turn off their ability to file tax returns electronically. Any family that suffers 

a death could elect to turn off the electronic filing ability. 

• Criminal penalty statutes for those who fraudulently use Social Security Numbers, including, but 

not restricted to, those who misuse their positions (e.g., hospital, medical institution and office 

personnel, financial and credit card organizations personnel, prison corrections offioer, college 

or university registrar etc.) 

For the reasons stated above: 

• genealogists are NOT the cause of identity theft; 

genealogists have legitimate, professional and life-saving reasons to have Immediate access to 

the SSCI; and 

proactive measures are needed to prevent identity theft and vigorously pursue and punish the 

TRUE identity thieves, 
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87414.099

IAJGS respectfully encourages the Committee to continue the commercial version of the Death Master 

File, known as the Social Security Death Index, to be available to the public including the genealogical 

oommunity. 

On behalf of the International Association of Jewish Genealogical Societies we appreciate the 

opportunity to submit our comments, and for the occasion to bring to the Committee's attention the 

many services the genealogy community performs for local. state and federal government offices, 

We look forward to working with the Committee and staff to find an accommodation that provides 

forensic genealogists, heir researchers and those researching genetically inherited diseases With 

immediate access to the DMF/SSDI and others to have access within 2-3 years to the DMF/SSDI. 

Respectfully submitted, 

Jan Meisels Allen 

IAJGS Vice President 

Chairperson, IAJGS Public Records Access Monitoring Committee 

http://www.identiMheft.infOlbreaches09.aspx 

http://www.nctimes.comlnewsllocal/article3b9Sce3B-f048-597e-9a76-47321d11432S.html 

http://www.washingtonpost.comlpolitics/tricare-military-beneficiaries-being-inforrned-of-stolenpersonal-datal2011f11f23/glqAcRNHtN story.html 

Copes, H., and Vieraitis, L.M. (2009). Understanding identity theft: Offenders' accounts of their lives 

and crimes. Criminal Justice Review, 34(3), 329-349 

3 http://consumerisl.com/2010/03fid-theft-ring-used-hospital-records-for-300k-shopping-spree,html 

4 For complete survey methodologies, inCluding weighting variables please contact 

mediarelations@ancestrv.com and for the 2011 survey go to: 

http://corporate.ancestry.com/press/press-releasesf2012f01/ancestry ccm-partners-wilhhistorical-society-of-cennsylvania-to-bring·the-states·rich-historv-onlinel 

This survey was conducted online within the United States by Harris Interactive 

on beha/fof Ancestry. com from March 13-15, 2012 among 2,211 adults ages 18 and 

older and from August 5-9, 2011 among 2,950 adults ages 18 and older. 

s http://wryw.aarp.org/relationships/genealogy/info-06-2011/genealogv-tips.html 

http://www.familiesforforgottenheroes.org/Genealogist.hlm 

6 Mayo Clinic staff: "Medical History: Compiling your medical family tree," 

http://WNW.mayoclinic.comlhealthlmedical-history/HQ01707; 

7 https:llfamilyhistory.hhs.govlfhh-weblhome.action 

8 httQ:llwww,cancer.gov/cancertopicslfactsheetiRisklBRCA 

9 Abraham'S Children: Race, Identity, and the DNA of the Chosen People. Jon Entine, Grand 

Central Publishing, New York, N.Y. 2007 

hltp:flwww.smithsgnianmag.com/science-nature/san-Iuis-valley.hlml 

The Wandering Gene and the Indian Princess: Race, Religion, and DNA. Jeff Wheelwright. 

WW Norton & Co. New York, NY. 2012. 

10 http://www.youtube.com/watch?v::gpgTF07nMBk 

11 http://www,irs.gov/pub/irs-pdf/p2104 pdf 
129 


87414.100

o LifeLock' 'ld:anaILltICS." 

Relentlessly Protecting Your Identity 

STATEMENT FOR THE RECORD 

Of' 

TODD DAVIS, CHIEF EXECUTIVE OFFICER OF 

LIFELOCK INC. 

BEFORE THE UNITED STATES SENATE COMMITTEE ON FINANCE 

Hearing on Tax Fraud and Tax TD Theft: Moving Forward with Solutions 

April 16,2013 

Chahman Baueus, Ranking Member Hatch, I thank you for this hearing and appreciate the 

opportunity to submit this statement for the record. As the leader in consumer risk management 

with patented analytics, proven expertise and real-time insight into consumer behavior, I am 

pleased to share with you LifeLock's perspectives on solutions to combat identity theft-related 

tax fraud. In short, LifeLock advocates the use of patented, predictive fraud analytics to reduce 

fraud upfront, incorporation of alerting and multi-factor authentication teclmology for victims of 

taxpayer identity theft combined with high levels of customer service to help stop fraud and 

provide taxpayers greater control over the use of their identity in future tax filings. 

Abollt LifeLock alld ID Allalyties 

LifeLock and TD Analytics, a wholly-owned subsidiary of Life Lock, are recognized expelts at 

the detection, analysis, and identity fraud protection in both the private and public sectors. 

LifeLock is the industry leader in protecting individuals from identity theft and related fraud. In 

the sixth annual identity protection service scorecard by Javelin Strategy & Researchi

, for 

example, LifeLock UltimateTM was scored as first place overall by demonstrating across-theboard excellence in service quality and capabilities. Also recognized was the proactive nature of 

LifeLock UltimateTM, naming it Best in Detection. This proactive protection, which helps stop 

identity fraud before the damage is done, is a critical differentiator for LifeLock versus many 

alternative solutions that only notify consumers after an identity fraud has occurred. 

ID Analytics, a LifeLock company, SUppOlts the identity risk management needs of over 250 

leading companies to help stop fraud, authenticate individuals, minimize credit risk, and reduce 

financial losses. TD Analytics provides identity risk management services to eight of the top ten 

credit card issuers, six of the top ten financial services companies, three of the top four wireless 

carriers, nearly five million consumer subscribers and several government agencies. 

LifeLock's and lD Analytics' integrated capabilities offer industry leading identity fraud 

detection and customer service for those who are victims of identity theft. These capabilities, 

combining predictive analytics and real-time aielts, pioneered in the financial services industry, 
130 


87414.101

are also applicable to the problem of tax identity fraud that plagues the Internal Revenue Service 

as well as revenue agencies across the U.S. 

Tax-Related Idefltity Theft 

Identity thieves will fraudulently claim $21 billion in fraudulent tax refunds over the next five 

years, according to a 2012 reporti

; issued by the Inspector General for the U.S. Department of 

Treasury and the Internal Revenue Service Acting Commissioner Miller has testified that over 

two million suspicious returns have been suspended or rejected so far in the 2013 filing season. 

We know this problem is not unique to the IRS. We see private industries, especially those in 

the financial services and banking sectors, wrestle with the same problem. When aggregated, the 

private sector's exposure is greater than the IRS' challenges. For example, 12.6 million adults in 

the US, representing 5.26% of the adult population, were victims of identity fraud which 

generated $21 billion in total cost of identity fraud to consumers and enterprises in the U.S.iii 

Apply Commercial Best Practices to Solve Tax F/'Ul/d (lIId idelltity Theft 

In the 1990's, financial services companies pioneered the use of predictive analytics in their realtime operations in response to ever evolving types of fraud. More recently, customer service 

organizations, suppOiting millions of clients, implemented real-time messaging and alerts in 

order to provide customers greater control over the use of their identity, enhance customer 

service, and detect unauthorized transactions. 

LifeLock and ID Analytics provide these very capabilities and solutions that can help stop fraud 

on the front end, provide a high level of customer service to victims of taxpayer identity theft, 

and engage taxpayers to help stop ti'aud in future tax filings. 

We believe the same identity and fraud-related services provided to the world's largest 

companies can identify, detect, and reduce the same fraud that the Treasury Department must 

control and minimize. This process can include the use of alelting technology, similar to alerts 

sent by large institutions when a customer's profile or address has changed, to give the customer 

greater control over the use of their identity. 

A flexible, multi-step risk-based approach, similar to what is common-place in private banking 

enterprises, will detect and reduce identity theft for revenue agencies, enabling delivery of 

legitimate tax-return refunds with more fraud detected at less expense and with less effort. 

RetmTIs that are scored as low-risk can be automatically approved for refunds while high-risk 

identities should be recommended for additional automated fraud screening or referred to answer 

a series of personalized, network-based authentication questions. This approach can be applied 

to millions of returns by operating as a funnel, leaving only a small subset of individuals who 

require additional verification, thus minimizing customer friction and costs to adjudicate or 

review a tax filing. 

The rank ordering of risk is designed to handle high volumes of transactions and minimize the 
131 


87414.102

amount of friction incun'ed by a customer while maximizing the enterprise's security and fraud 

detection. For revenue agencies, this translates into low false positive rates and the application 

of additional resources and money on the riskiest individuals. Using this approach, the majority 

of low-risk individuals are not subject to additional automated or manual reviews thereby 

improving their overall customer experience and minimizing a revenue agency's down-stream 

manual review costs. 

As an optional next step, for those identities exceeding a revenue agency's risk threshold, 

automated review capabilities should be applied. These capabilities are transparent to the 

taxpayer and provide the agency a chanee to review high-risk filings and learn of other attributes 

to help clarify potential risk. For example, ID Analytics offers the ability to identify how 

identity manipulators create and use improper aliases to commit fi"aud or avoid matching a 

"negative" or "do not pay" list. 

In the third step, the IRS could apply review tools to test high-risk identities that cannot be 

resolved using automated tools. While there are a variety of manual review tools techniques 

available, the risk based approach sb'ives to minimize their use as they tend to increase costs and 

typically require additional action by the customer. 

Finally, for those individuals already victimized by taxpayer identity fraud, we recommend the 

use of a real-time ale11ing technology to connect registered victims with new taxpayer filings. ID 

Analytics built a real-time alerting platform to help stop identity misuse and has integrated it into 

LifeLock's proactive service offerings. Similar "monitoring and alerts" capabilities, managed by 

government officials, could help victims better manage their future tax filings and protect their 

identity in tax filing transactions that they did not initiate. 

Conclllsion 

The IRS has worked diligently in recent years to curb identity theft and screen returns before 

processing. It is our hope that the Committee will provide the IRS with clear guidance, using the 

lessons learned and best practices available from leading financial enterprises and companies like 

LifeLock and ID Analytics, to help them incorporate existing, proven models of fraud detection 

into their processes. We stand ready to help both the IRS and the Committee better understand 

this dynamic marketplace and the solutions that have been most effective in identifying and 

stopping fraudulent transactions. 

i (Source: Javelin Strategy & Research's 2012 Identity Theft Protection Services Scorecard, October 2012) 

iI (http://www.treasury.gov/tigta/auditreporls/2012reports/201242080fr.html) 

m (Javelin Strategy & Research (2013)) 
132 


87414.103

NCO I L National Conference of Insurance Legislators 

VIAE·MAIL 

April 15, 2013 

The Honorable Max Baucus 

Chair, U,S, Senate Committee on Finance 

219 Dirksen Senate Office Building 

Washington, D.C. 200510 

Dear Chairman Baucus: 

PRESIDENT: R8tl, CMrles Curtiss, TN 

PRESJOENT~eLECT: Rep. Greg Wt8n. AL 

VICE PRESIDENT: s.m. Noh _", NY 

SECRETARY: Sen. Tt8lll$ Hoil:trrum, IN 

TREASURER: Rep, Steve RigQ$, KY 

As leaders of the National Conference of Insurance legislators (NCOll), we would like to commend you on 

your exploration of tax fraud in the 113'h Congressional Session, evidenced by your upcoming hearing, "Tax 

Fraud and Tax ID Theft: Moving Forward with Solutions." We also would like to reaffirm for the record the 

very important state-mandated use of the Social Security Administration's Death Master File (DMF) as a 

consumer protection under the NCOll Model Unclaimed Life Insurance Benefits Act. Since its adoption, the 

model has been enacted in six states, is now pending in five, and is being considered in numerous others, 

AS NCOll related to Congress last year (letter attached), the NCOll model relies on the DMF to help ensure 

that life insurance beneficiaries receive their promised benefits. The model act was developed in 2011 in 

response to growing concern that life insurance companies would not always use the DMF to find deceased 

life insurance policyholders for which life insurance death benefits were owed-but would commonly use 

tools like the DMF to identify deceased owners of annuity contracts to cease payments. 

The NCOll Model Unclaimed Life Insurance Benefits Act (1) compels routine identification of deceased 

policyholders by use of the DMF or no less comprehensive database, (2) establishes steps for beneficiary 

notification, (3) promotes timely payment of claims to beneficiaries, and (4) in the event that benefits go 

unclaimed, provides clear procedures for life insurers to escheat the funds, per unclaimed property laws, 

Since adoption, this model in some form has been passed in Kentucky, Maryland, Montana, New Mexico, 

New York, and Alabama. Five states, including Massachusetts, Nevada, North Dakota, Rhode Island, and 

Vermont have legislation pending in 2013 legislative sessions, while yet others are considering the model. 

We again appreciate the opportunity to bring our Model Unclaimed Life Insurance Benefits Act to your 

attention as Congress reviews DMF-related issues. NCOll takes seriously concerns regarding release of 

personal information through the DMF and the need to protect against fraudulent activity. Also vitally 

important is making sure that companies follow through on their promises of payment-particularly to 

individuals who may have recently lost a loved one. We hope any federal legislation will acknowledge this. 

NCOll is an organization of state lawmakers whose main area of public policy concern is insurance 

legislation and regulation, Many legislators active in NCOll either chair or are members of the committees 

responsible for insurance legislation in their respective state houses across the country, 

For more information, please feel free to contact the NCOll National Office at 518-687-0178, 

Sincerely, 

Rep, Charles Curtiss, TN 

NCOll President 

0..c.~'Zr':"- ~ ~/ ;J!/~<tMJ 

Rep. George Keiser, ND 

NCOll President (2010-2011) 

Rep. Robert Damron, KY 

NCOll President (2009-2010) 

Enclosures I(j:NCOIU2013 DOCUl"I'lentsj2007939C.doc 

1t.lI~eVT!V1:: Q!It"CTOR, SUSAN f t.1J1.."'N I'fA1'lO"lAI. O,.,.lee, 365 JOR!.MN HOAO. lRO¥, NY l:<!~O; n.L. ~llH"'Jl-Ul1a, FA~. 51!l-\';lli7 040' WI:8:!JIT1I:; WWW,NCOH •. OHU 

e:_MA1L' i .... ,,-O<""I(';OIL PI'" WASIoI1SQ,TON OI"F!CI:, »Ol PIINN$Yl.YAN' ... AY>'.:"!UE.. NW. ,,1,;11"£ ~OO. soun; I:IlIllO'NG, WASHINGTCJN. oc aOOM. 1'£':! •. 102-210-:1014; I'"A)- 202/)30-£\004 
133 


87414.104

NeOIL 

National Conference of Insurance Legislators 

VIA E·MAIL 

February 1, 2012 

Representative Sam Johnson, Chair 

U.S. House Committee on Ways & Means 

Subcommittee on Social Security 

1211 Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Johnson: 

f')(I!SWmt! $liN. CAhQu,1.I!.AV11t..4 W» 

.PJI:~ll1rcn S8N,\'lSlMP&OH.JN 

\'10):l'lWI)'tNt\ up'ot..U.t.I!$~U1t'rul.1N 

SECIlI!'1A1n'i 1t£P.. tnt:aC MlIH, At. 

1ltttAS1.IJ:~ IiDt.Mll1hl!SUN, NY 

As leaders of the National Conference of Insurance legislators (NCOll), we would like to update you 

regarding state insurance legislators' activity related to the Social Security Administration's Death Master File 

(DMF). We recently became aware of your February 2 hearing on the accuracy and uses of the DMF and 

thought that the Subcommittee should be cognizant of the NCOll Model Unclaimed Life Insurance Benefits 

Act that relies on the DMF to help ensure that life insurance beneficiaries receive their promised benefits. 

NCOll Past President Rep. Robert Damron (KY) developed the model act in 2011 in response to insurance 

regulator, state treasurer, and media accounts that life insurance companies would commonly use tools such 

as the DMF to identify deceased owners of annuity contracts and cease annuity payments, but would not 

always use those same tools to find deceased life insurance policyholders, for which life insurance death 

benefits were owed. Rep. Damron believed that stronger company standards were needed to: 

compel routine identification of deceased policyholders 

establish steps for beneficiary notification 

promote timely payment of claims to beneficiaries 

NCOll believes that the model act-which is attached for your convenience-represents an important 

consumer protection as it serves to ensure the proper payment of policy benefits due to our constituents. 

NCOll overwhelmingly adopted the model act following hours of research and debate from legislators across 

the country and with input from key interested parties. 

The NCOll model, as adopted, requires insurers to quarterly compare the DMF with holders of in-force life 

insurance policies and retained asset accounts. It calls for timely insurer efforts to confirm an insured or 

account holder's death, locate any beneficiaries, and provide them with claims forms and instructions. In the 

event that benefits go unclaimed, the model provides clear procedures for life insurers to notify state treasury 

departments and to escheat the funds, per unclaimed property laws. Several of the model's provisions, in 

fact, reflect the terms and business practices of a John Hancock Financial agreement with state treasurers 

regarding unclaimed life insurance benefits. 

NCOll takes seriously the statements in your hearing announcement regarding incorrect DMF death reports 

and a potential for identity theft. We agree that correcting false reports and protecting against ID fraud are 

critical policy goals. Also vitally important is making sure that companies follow through on their promises of 

payment-particularly to individuals who may have recently lost a loved one. 

We appreciate the opportunity to bring our Model Unclaimed Life Insurance Benefits Actto your attention as 

you review DMF-related issues. NCOll would welcome an opportunity to work with you to ensure that 

insurance companies continue to have access to important data in the DMF-while protecting against fraud 

and identity theft, the goal of H.R. 3475, the Keeping IDs Safe Act of 2011. 

I\:xt:eUTwe I)lltl!"eTOIt: &USAN F. NO""N NATlONAI.QP"ICt:; 3~JOAO""N ROAO, TROY. NY '~ISO, ru.: SHH's?-()I7('I, F,o,)(, Sl£H'ia-'·04{)' Wl!:i!I$ITe., WWW.NCOII-,ORIl 

!!_MAlL: "'H"OojoNCOII.. ORe; WASHINGTON OFFlee: (',0\ Pli:NNSYl-VANIA AVENUE, NW. SUITE ~OO> SOUTH aUH.J)ING. WASHINGTON. DC 0l.0004. TEL: .202·2Z()'~014, FAX, 20t·330-5004 
134 


87414.105

NCOIL is an organization of state legislators whose main area of public policy concern is insurance 

legislation and regulation. Many legislators active in NCOIL either chair or are members of the committees 

responsible for insurance legislation in their respective state houses across the country. 

For more information, please feel free to contact the NCOIL National Office at 518-687-0178 or our 

Washington, DC Office at 202-220-3014. 

Sincerely, 

Sen. Carroll Leavell, NM 

NCOIL President 

Enclosures 

Rep. George Keiser, ND 

NCOIL President (2010-2011) 

Rep. Robert Damron, KY 

NCOIL President (2009-2010) 

KlNCQIU2012/2007631 
135 


87414.106

NeOIL 

National Conference of Insurance Legislators 

Model Unclaimed life Insurance Benefits Act 

PItl!.Wl'.Wtl SIlN.CAbOtLUtA.V1ItJ.,WM 

PIlI!.Sl:Ot.tv-r·a.tX:n $1lN. YJ5IWl'SON,.tN 

v.ldl~~al!P-<.:::KAaU!SCJJft'ttKt'N 

ROtlITIl.1t"C :au (lUC WReN. AL 

'rti:~ fmNtIl.IdUN,N)' 

Adopted by the NCOIL Executive Committee on November 20,2011, and by the Ufe Insurance & 

Financial Planning Committee on November 17, 2011. Amended and adopted by the Executive 

Committee on July 15,2012, and by the Ufe Insurance & Financial Planning Committee on July 13, 

2012. Sponsored by Rep. Robert Damron (KY) 

Section 1. Short Title 

This Act shall be known as the Unclaimed Ufe Insurance Benefits Act. 

Section 2. Purpose 

This Act shall require recognition of the escheat or unclaimed property statutes of the adopting state 

and require the complete and proper disclosure, transparency, and accountability relating to any 

method of payment for life insurance death benefits regulated by the state's insurance department. 

Section 3. Definitions 

A. "Death Master File" means the United States Social Security Administration's Death Master File or 

any other database or service that is at least as comprehensive as the United States Social Security 

Administration's Death Master File for determining that a person has reportedly died. 

B. "Death Master File Match" means a search of the Death Master File that results in a match of the 

social security number or the name and date of birth of an insured, annuity owner, or retained asset 

account holder. 

C. "Policy" means any policy or certificate of life insurance that provides a death benefit. The term 

"Policy" shall not include any policy or certificate of life insurance that provides a death benefit 

under an employee benefit plan (i) subject to The Employee Retirement Income Security Act of 

1974 [29 USC 1002J, as periodically amended, or (ii) under any Federal employee benefit program, 

or (iii) any policy or certificate of life insurance that is used to fund a preneed funeral contract or 

prearrangement, or (iv) any policy or certificate of credit life or accidental death insurance. 

D. "Contract" means an annuity contract. The term "Contract" shall not include an annuity used to fund 

an employment-based retirement plan or program where the insurer is not committed by terms of 

the annuity contract to pay death benefits to the beneficiaries of specific plan participants. 

Drafting note: All other terms used in this Act shall be interpreted in a manner consistent with the 

definitions used in [Insert State Insurance Code]. 

Section 4. Insurer Conduct 

A. An insurer shall perform a comparison of its insureds' in-force life insurance policies and retained 

asset accounts against a Death Master File, on at least a semi-annual basis, to identify potential 

matches of its insureds. For those potential matches identified as a result of a Death Master File 

Match, the insurer shall: 

1. within ninety (90) days of a Death Master File Match: 

a. complete a good faith effort, which shall be documented by the insurer, to confirm the 

death of the insured or retained asset account holder against other available records 

and information; and 

1:::M!!eVTlVI!; OIRI!;C'rOR: SUSAN F, t>OLAN NATIONAL ,,""ICE: 3ai> JOROAN ROAO. TROY. NY 121\1-0; lEI.. ~:lJa·6e·'·017a, FAX, $!8·S61·(!40! WkIJ;SITI:: WWW NCOIL.ORG 

E·MAIL, l"lF<WNCOtL OAW Wo\l'JIlUNGTON OI'''IC£: ,,;}I PF,NNSVI...VANIA "''''''NUl(. NW. SUITE fj\'lO. S()\!T~ aUILOING. WASHINGTON. rx: 2-00(>4. T"I..., ;!():t·;!~Q-~DI4, FAX 20;1;-:330·:>004 
136 


87414.107

b. determine whether benefits are due in accordance with the applicable policy or contract; 

and if benefits are due in accordance with the applicable policy or contract: 

use good faith efforts, which shall be documented by the insurer, to locate the 

beneficiary or beneficiaries; and 

ii. provide the appropriate claims forms or instructions to the beneficiary or 

beneficiaries to make a claim including the need to provide an official death 

certificate, if applicable under the policy or contract 

2. With respect to group life insurance, insurers are required to confirm the possible death of an 

insured when the insurers maintain at least the following information of those covered under a 

policy or certificate: (1) Social Security number or name and date of birth, and (2) beneficiary 

deSignation information, (3) coverage eligibility, (4) benefit amount, and (5) premium payment 

status. 

3. To the extent permitted by law, the insurer may disclose minimum necessary personal 

information about the insured or beneficiary to a person who the insurer reasonably believes 

may be able to assist the insurer locate the beneficiary or a person otherwise entitled to 

payment of the claims proceeds. 

8. An insurer or its service provider shall not charge insureds, account holders, or beneficiaries for any 

fees or costs associated with a search or verification conducted pursuant to this section. 

C. The benefits from a life insurance policy or a retained asset account, plus any applicable accrued 

interest shall first be payable to the designated beneficiaries or owners and in the event said 

beneficiaries or owners can not be found, shall escheat to the state as unclaimed property pursuant 

to [Cite state statute for escheat or unclaimed life insurance benefits). 

Drafting note: Some states' insurance commissioners may want to develop an informational notice that 

apprises beneficiaries of their rights to the payment of interest on the benefits or proceeds of a life 

insurance policy or retained asset account. The written notice should be provided by a life insurer to a beneficiary prior to or concurrent with the payment of any life insurance proceeds or the settlement of 

any life insurance claim, where applicable. 

D. An insurer shall notify the [Insert the state agency for unclaimed property] upon the expiration of the 

statutory time period for escheat that: 

1. a life insurance policy beneficiary or retained asset account holder has not submitted a claim 

with the insurer; and 

2. the insurer has complied with subsection A of this Section and has been unable, after good faith 

efforts documented by the insurer, to contact the retained asset account holder, beneficiary or 

beneficiaries. 

E. Upon such notice, an insurer shall immediately submit the unclaimed life insurance benefits or 

unclaimed retained asset accounts, plus any applicable accrued interest, to the [Insert the state 

agency for unclaimed property]. 

Section 5. Unfair Trade Practices 

Failure to meet any requirement of this Act is a violation of [Insert State Unfair Trade Practices Statute). 

Drafting note: Some states' Unfair Trade Practices statutes specify that an act must be shown to be a 

''pattern'' or "general business practice" in order to constitute a violation of that statute. In those 

instances, care should be taken in the adoption of this model to ensure consistency across those two 

statutes. 
137 


87414.108

Section 6. Effective Date 

This Act shall take effect on or after [insert appropriate date]. 

Drafting note: Due to the fact that the provisions of this Act may necessitate significant changes to 

insurer compliance programs, states should consider up to a one-year delayed effective date. 

Drafting note: To address other concerns with transparency and accountability in life insurer procedures 

relating to treatment of retained asset accounts, please refer to the NeOIL Beneficiaries' Bill of Rights, 

which requires extensive written disclosures to consumers and insurer reporting. 

© National Conference of Insurance Legislators (NCO!L) 

K:!NCQIU201212007625g,doc 
138 


87414.109

The U.S Senate 

Committee on Finance 

P.O. Sox 200040 

AlIlilin TX 7872C·0940 

Statement for the Record 

Tax Fraud and Tax ID Theft: Moving Forward with Solutions 

Submitted by 

Frederick E. Moss, JD, LL.M. 

access@,fgs.org 

972·679-5377 

April 16, 2013 
139 


87414.110

Chairman Baucus, Ranking Member Hatch, and distinguished Members of the Subcommittee: 

Thank you for the invitation to submit this Statement for the Record on behalf of the 

genealogical community through its Records Preservation and Access Committee to supplement 

the record of the hearing held by the Committee on the 16th of April 2013. 

I serve as the legal advisor to the Federation of Genealogical Societies and as a member of the 

Records Preservation and Access Committee more fully described below. 

Be assured that the genealogical community shares the objective of protecting Americans against 

fraud and of addressing detlcienciesln the current operation of the Social Security 

Administration's Death Master File. This hearing marks a valuable opportunity to express our 

views to Congress on this important subject and we commend the committee for continuing to 

monitor progress in addressing challenges faced by the Intemal Revenue Service in confronting 

tax fraud by identity thieves. 

Much Has Changed Since lOU 

In the spring of2011 we were all.outraged by reports that identity thieves were filing ftaudulent 

tax refund claims USing the social security numbers (SSNs) of recently deceased children and 

adults. The comprehensive hearing held by the Subcommittee on Fiscal Responsibility and 

Economic Growth of this Senate Finance Committee on May 25, 2011 suggested that thieves 

had discovered vulnerabilities in our system for processing the online filing of tax retums and 

that we were seeing the leading edge of a flood of fraudulent refund claims for which we were 

ill-prepared. htto:/lwww.finance.scnate.gov/hearings/hcaringl?id-32a4f2cc-S056-a032·5258-

S967bf140b37~2S20 

It was clear that refund checks were being mailed with a minimum of scrutiny and before the 

IRS would have received informational returns (W2s, 1 0995, etc) that could verify the legitimacy 

of the refund claims. 

Changes on Genealogical Websites 

During the fall of2011 some suggested that identity thieves coyld have gotten the SSNs of 

recently deceased children by online access to the Social Security Death Index (the commercial 

version of the Social Security Administration's Death Master File (DMF». If thieves were using 

the SSDI, the IRS clearly was not. The ssm, originally created as a fraud prevention resource, 

listed the SSNs of deceased persons and essentially "burned" the SSNs of those appearing 

thereon. It has been made widely available since the early 1980s and has been found to be a rich 

resource for a wide variety of legitimate users including medical researchers and genealogists. 
140 


87414.111

As the tax filing season opened in early 2011, the ssm was freely accessible by the general 

public from a number of web sites, to include most of the major sites serving the genealogical 

community without requiring a subscription or login. Several Senators, including members of 

this committee, voiced their concerns in a December 1, 2011 letter addressed to the CEO of 

Ancestry.com Inc and asked that they and other genealogical sites remove SSNs from their 

posting of the ssm. l!ttp:/lwww.brown.scnate.gov!l1cwsroom!press/relcaseJafter-call-from-se11-

brown-ancestrycom-removcs-sogial-security-nunlbers-from-webs!te-to-prevent-fraud 

Ancestry.com and other genealogical web sites immediately took measures designed to prevent 

the abuse of their resources by thieves. In addition to putting this data behind their subscription 

pay wall, Ancestry chose to conceal the SSN ofthe deceased for a period oftime, even for their 

subscribers. Other genealogical sites took similar measures. 

httll:llwww.abc2news.com/dpp/news/local llews/investigationslwebsite-stops-displaymg-socinlsecurity-nUnlbers-for-recently-dead 

Efforts By the Internal Revenue Service 

The information provided by the witnesses in this hearing give multiple reasons to be encouraged 

by the actions being taken to combat refund fraud and help victims of identity theft. Their 

written statements are available at: 

http://www.finance.senate.govlh\;!U'ings/hearing!?id~62739085-5056-a032-5281-4500bf4d4fb3 

The testimony of Steven T. Miller, Acting Commissioner of the Internal Revenue Service 

described a nUnlber of significant steps they have taken. 

IRS Improved Filtering 

We implemented new identity theft screeningjilters to improve our ability to .spot false returns 

before we process them and issue refunds. For example, we deSigned and launched new filters 

that /lag returns if certain characteristics are detected. While the developmenJ 0/ eJJective filters 

is complex given the dynamic lives of legitimaTe taxpayers, these filters enable us to idenJif; 

fraudulent returns even where a taxpayer's information has not been previously used for filing 

by an identity thief These new filters specific to identity theft built on our overall re/undfraud 

detection program, which already identified a significant number of identity theft cases besides 

those identified by the new filters. We have added even more identity theftjilters /01' the 2013 

filing season, inc[udingfilters that target mUltiple refunds into a single bank account or to a 

single address. Page 3, 

Expanded Criminal Investigations 

Investigations of tax fraud related to identity theft have increased significantly over the past 

three fiscal years. In FY 2012, CI initiated 900 investigations involving identity theft, which is 
141 


87414112.eps

more than triple the number of investigations In FY 2011. Indic/ments in identity-theft related 

cases also increased significantly, fotaling nearly 500 in FY 2012, with 223 individuals 

sentenced and an average time to be served of 48 months. This compares with 165 indictments, 

80 individuals sentenced. and a 44-month average sentence in FY 1011. Additionally, the direct 

investigative time spent by Clan identity theji cases has increased by 129 per cent in FY 2012 

over FY 2011. 

This trend Is co1ltinuing in FY 2013. Already through April 9, 2013, more than 800 criminal 

identity theft investigations have been opened. Indictments in identity theft-related cases total 

607, with 197 individuals sentenced and an average time to be served of 44 months. 

In collaboration with the Department of Justice's Tax Division (DOJ-Ta;v;) and local u.s. 

Attorneys' offices, fhe IRS conducted a highly successful coordinated identity theft enforcement 

sweep in January 2013. This nationwide effort against 389 identity theft suspects led (0 734 

enforcement actions, including 189 indictments, informations and complaints, and 109 arrests. 

Around the time of the sweep, IRS auditors and investigators conducted compliance visits to 197 

money service businesses in a variety of locations across the country to help ensure that these 

businesses were not facilitating refundfraudclnd identity theft. Page 7. 

Appropriate prosecution and sentencing of those perpetrating tax fraud related to identity theft 

has the potential of not only thwarting their predations but should serve as a deterrent to others 

tempted to follow their example. This begins to look like progress. 

Tbieves Have Moved On 

As genealogical sites have protected SSNs of recently deceased people and the IRS 

has improved their filters used before refunds are paid, the possibility that thieves are 

elCploiting information from the SSDI has dramatically diminished. It is likely that 

the ssm was never the primary source ofSSNs exploited by thieves. To the extent 

that it may ever have been used, the thieves have moved on. The list ofthose 

recently sentenced as reported on page 9 of Acting Commissioner Miller's Statement 

in this hearing indicates that the SSNs were (1) stolen from a community college's 

financial aid office, (2) stolen or tricks used to secure tax.pa~r's personal 

infonnation, (3) involved residents of Puerto Rico, (4) stolen from a medical center 

records office, or (5) by breaking into a tax preparation office. Although an 

additional case involving the misuse of an online database was cited, that misconduct 

turned out to be by a "trusted user" of a commercially avallable non-genealogical 

database. It is significant that all three recent cases of tax fraud identity theft 

mentioned during the April 16 hearing involved living victims, not any who's SSNs 

might ever have been available on the SSDJ. 

National Taxpayer Advocate - "The Larger Question" 

The written statement of National Taxpayer Advocate Nina E. Olson suggests a 

number of steps that would improve the IRS's ability to combat fraud and provide 
142 


87414.113

better service to taxpayers. Page 16 of her statement includes the following major 

recommendation: 

IV. To Reduce Ta~pay.r Burden and CUI Down on TlIx Fraud, \he IfI& &hould Be Empowered to Proc .... lnform.Uon 

R,porlln" Documents Uk. Fonna W·2 Saki ... Processing Tax Rowrna and ..... ulnG Refunds. 

She further observed that: " ... [a]pproximately 97 percent of taxpayers receive at least one 

information return. Traditionally, the IRS has not matched this data with the items reported on 

the taxpayers' tax returns until long after the filing season. In 2010, the IRS closed 4.3 million 

cases in which it identified a discrepancy between the taxpayer's return and third.party 

information, leading to $7.2'billion in additional assessments." 

In her testimony before this Senate Finance Committee hearing, she posed "the larger question" 

in suggesting that we need to begin considering whether the IRS should wait to begin paying 

refunds until after the close ofthe filing season. Found at 1:51 :20 of thc committee video at; 

ilttp:/lwww.finance:senate.gov/heariMslhearlng/?id-62739085-S056-a032-5281-4S00bf4d4fb3 

Previous Statements Submitted in Related Hearing Last Session 

Organizations representing tbe genealogical community have been actively monitoring these 

issues for the last year and, where the opportunity was provided, have sought to provide 

appropriate input. The Subcommittee on Fiscal Responsibility and Economic Growth of this 

Senate Finance Committee held the second in a series of hearings on Tax Fraud by Identity Theft 

on March 20, 2012. http://www.finance.senate.govlhearings/hearing/?id=8c908260.S056.a032· 

525c-4f663b8d35f8%2520 

Although we had not been asked to testify, the organizations sponsoring the Records 

Preservation and Access Committee did respond to the invitation to submit Statements for the 

Record of the March 20, 2012 Hearing on behalf of RP AC, FOS, NOS and lAJGS. 

bttp:llwww.fgs.orglrpacl2012/04/02/ssdi-statement.for-the-record.senate-financesubcommittee-hearing-20-mllfcb-2017J 

Addressing legislative proposals pending last spring, their recommendations to the Congress and 

to the genealogical community reflected the following coordinated position; 

While we advocate all genealogist'! should have immediate access tQ the ssm, we would 

support the two year delay in access as proposed in S 1534-and if necessary the third year 

that National Taxpayer Advocate Nina Olson advocated during her oral testimony during 

the March 20th hearing. This support is with the caveat that certain genealogists are to be 

eligible for certifioation for immediate access. These genealogists include; forensic 

genealogists, heir researchcrs, and those researching individual genetically inherited 

diseases. 
143 


87414.114

Although the legislative proposals pending before the Congress may have changed, 

the interests we then sought to protect have not. 

This is not the statement I anticipated preparing for this hearing. I fully expected to be focused 

upon defining the categories of genealogists needing immediate access having conceded the 

appropriateness of a statute mandating a two or three year delay in access to SSDI data for the 

general public. A review of the steps already taken by the IRS and genealogical entities hosting 

ssm data on their websites lead me to conclude tllat these measures have likely already 

achieved the benefits sought by such legislation. 

I certainly know of no principled rationale that would support an embargo of SSDI data 

(including the "burned" SSNs) in excess of the three years cited as possibly required by the IRS 

to resolve estate issues. I understand this position to be consistent with that taken by the 

National Taxpayer Advocate. 

Interests of the Genealogical Community 

The interests of the genealogical community are not hard to understand. Access to records or the 

lack thereof, is the pivotal issue for genealogists, Without documentation, ourfamily histories 

are more legend than history. Recent genetic advances have given additional significance to 

well-documented medical family histories. You can expect to hear expressions of concern from 

across the genealogical community whenever they may have reason to believe their access to 

these records is being threatened. 

About the Recortb Preservation and Access Committee 

The genealogical community works together through The Records Preservation and Access 

Committee (RP AC), a joint committee which today includes The National Genealogical Society 

(NGS), the Federation of Genealogical Societies (FOS) and the International Association of 

Jewish Genealogical Societies (IAJGS) as sponsoring members. The Association of Professional 

Genealogists (APG), the Board tbr Certification of Genealogists (BCG), the American Society of 

Genealogists (ASG), and the International Commission for the Accreditation of Professional 

Genealogists (ICAPGen) and industry representatives also serve as participating members. 

RP AC meets monthly, and more often if needed, to advise the genealogical and historical 

comm.unities, as well as other interested parties, on ensuring proper access to vital records, and 

on supporting strong records preservation policies and practices. 

Conclusion 

Of the multiple congressional hearings addressing the threat oftax fraud by identity 

theft, this is the first to suggest that real progress is being made, By targeting the 
144 


87414.115

criminal through the use ofappropriate filters, investigation and aggressive 

enforcement, the efforts of identity thieves are being thwarted. Hopefully, by 

publicizing the results of successful prosecutions and the award ofsubstantial 

penalties to the offenders, others may be deterred. 

To the extent that the ssm on genealogical websites was ever the source of 

compromised SSNs then used to file fraudulent tax refund claims, the responsible 

actions taken by those websites should have denied access to that information. In 

fact, while it is only informed speculation on my part that we shouJd have seen few, if 

any, fraudulent returns attributable to SSNs accessed from the SSDI during the filing 

SClISOll just ended, the IRS should eventually be able to statistically confirm that that 

vulnerability targeting the ~ has been closed. 

We should continue to bc concerned that the SSNs of living persons will continue to 

be vulnerable so long as the IRS is mandated to expedite the payment of refund 

claims before they have even received information retums necessary to determine 

their validity. 

The genealogical community has noticed that the only users ofthe ssm for 

legitimate purposes called to testify in any of the congressional hearings addressing 

this issue have been from the financial/fraud prevention communities. Genealogists, 

medical researchers, those working with coroners and the Departnlent of Defense to 

connect families with remalns, have not been invited to appear. Pending legislative 

proposals (and the Administration's budget proposals) seem to lend credence to the 

relatively modem cliche that "if you aren't at the table, you are on the menu! " 

Summary 

We offer three maln points: 

(1) Our strongest message is that steps already taken by the IRS and genealogical entities to 

protect SSNs listed in the ssm may have already intercepted this particular form of 

identity theft without waiting for any additional legislation. 

(2) The SSNs of living people will remain vulnerabJe as long as the IRS mandate is to rush 

payments of tax refundS before information returns can be compared with the submitted 

return to assure its validity. 

(3) As existing policy regarding public access to the Death Master File is 

reviewed, we urge that input from actual genealogists be sought. 111e 

members ofthe Records Preservation and Access Committee stand ready to 

assist in arranging for that input to both the Executive and Legislative 

branches. We can best be reached at access@fgs.org . 
145 


87414.116

Links & Resources 

(I) RPAC SFC 20 March 2012 

http://www.fgs.org/rpacl2012l04/02/ssdi-statemcnt-for-thc-record-senate-financesubcommittee-hearing-20-march-20 121 

(2) SFC 25 May 2011 

http://w,,{w.finance.senate.gov/hearings/hearing/?ld'''32a4f2cc-5056-a032-5258-

8967bfl40b37%2520 

(3) Nelson Letter 

btt12://www.abc2new$.comldpp/news/local news/invcstigationslwebslte-stops-disnlayingsocial-securitv-numbers.for-recently-dead 

http://genealogy.about.com/bI2011/12/16/genealogy-sites-pressured-into-removingssdLhtm 

http://www.abc2news.com/dpp/newsllocal news/investigations/website-stops-displayingsocial-security-nUffibers-for-recently-dead 

(4) SFC 16 April 

httll:/Iwww,finance.senate.gov!hearings!hearingl?id;ti2739085-5OS6-a032-S281-

4S00bf4d4fb3 

(5) SFC 20 Mar 2012 

httn:llwww.finance.senate,govlhealillgs/hearing/7id=8c908260-5056-a032-525£-

4f663b8d35f8%2520 
146 


87414.117

KENNETH H. RYESKY, ESQ., STATEMENT FOR THE RECORD, SENATE 

HEARINGS: 

COMMITTEE ON FINANCE: "TAX FRAUD AND TAX ID 

THEFT: MOVING FORWARD WITH SOLUTIONS," 16 APRIL 

2013. 

SPECIAL COMMITTEE ON AGING: TAX-RELATED 

IDENTITY THEFT: AN EPIDEMIC FACING SENIORS AND 

TAXPAYERS," 10 APRIL 2013 

I. INTRODUCTION: 

The foregoing Committee hearings, covering similar issues, were held. This Commentary is 

accordingly submitted to the respective Committees. 

II. COMMENTATOR'S BACKGROUND & CONTACT INFORMATION: 

Background: The Commentator, Kenneth H. Ryesky, Esq., is a member of the Bars of 

New York, New Jersey and Pennsylvania, and is an Adjunct Assistant Professor, Department of 

Accounting and Information Systems, Queens College of the City University of New York, 

where he teaches Business Law courses and Taxation courses. Prior to entering into the private 

practice oflaw, Mr. Ryesky served as an Attorney with the Internal Revenue Service ("IRS"), 

Manhattan District. In addition to his law degree, Mr. Ryesky holds BBA and MBA degrees in 

Management, and a MLS degree. He has authored several scholarly articles and commentaries 

on taxation, including some submissions to various Congressional Committees. 

Mr. Ryesky also engages in genealogical research on a personal and sometime 

professional basis. He is a member of the Jewish Genealogical Society of New York, and slated 

as a session panelist at the IAJGS Conference on Jewish Genealogy in Boston this coming 

August. 

Contact Information: Kenneth H. Ryesky, Esq., Department of Accounting & 

Information Systems, 215 Powdermaker Hall, Queens College CUNY, 65-30 Kissena Boulevard, 

Flushing, NY 11367. Telephone 718/997-5070; E-mail: khresq@sprintmail.com. 

Disclaimer: Notwithstanding various consultations between the Commentator and other 

interested individuals and organizations, this Commentary reflects the Commentator's personal 

views, is not written or submitted on behalf of any other person or entity, and does not 

necessarily represent the official position of any person, entity, organization or institution with 

which the Commentator is or has been associated, employed or retained. 
147 


87414.118

III. COMMENTARY ON THE ISSUES: 

A. Prior Commentaries Submitted: 

The Commentator's previous relevant submissions to Congressional hearings include the 

following: 

I. Hearing on Identity Theft and Tax Fraud, House Oversight & Government Reform 

Committee, Subcommittee on Govemment Organization, Efficiency, 

and Financial Management, I 12th Congress, 2nd Session, November 29, 

2012,<http://www.gpo.gov/fdsys/pkg/CHRG-112hhrg77479/pdf/CHRG-112hhrg77479.pdf> . 

2. Joint Hearing on Social Security Numbers on Medicare Card~, House Ways and 

Means Committee, Subcommittees on Social Security and on Health, I 12th Congress, 2nd 

Session, August 1,2012, 

<https:lldocs.google.comlfile/d/OBOerD-E9YYOrS3BFZEtpSXhoWIU/edit>. 

3. Hearing on Tax Fraud involving Identity Theft, House Ways and Means Committee, 

Subcommittees on Oversight and Social Security, U.S. House of Representatives, I 12th 

Congress, 2nd Session, May 8, 2012 

<http://wavsruldmeans.house.govlUploadedFiles/SFR KennethRyesky OS SS 5 8 12.pdf>, 

also available at 2012 TNT 95-49. 

4. Hearing on Social Security Administration's Death Master File, House Ways and 

Means Committee, Subcommittee on Social Security, U.S. House of Representatives, I 12th 

Congress, 2nd Session, February 2, 2012, 

<http://waysandmeans.house.govlUploadedFiles/SFR KennethRyesky SS 2 2 12.pdf>, also 

available at 2012 TNT 25-32. 

5. Hearing on Tax Fraud by Identity Theft, Part 2: Status, Progress, and Potential 

Solutions, Senate Committee on Finance Subcommittee on Fiscal Responsibility & Economic 

Growth, I 12th Congress, 2nd Session, March 20,2012, <http://v.'WW.gpo.gov/fdsys/pkglCHRGI 12shrg78502/pdf/CHRG-112shrg78502.pdf>, also available at 2012 TNT 56-30. 

The foregoing commentaries are incorporated by reference, and now reasserted. 

B. Points to be Emphasized: 

Having reasserted his prior commentaries, the Commentator now stresses and emphasizes 

the following matters for the Committees: 

I. The tax refund identity theft fraud victims showcased at the respective 

hearings were Ms. Hossli (witness), Mr. Saile (Mr. Baucus's constituent), and Mr. Hatch's two 
148 


87414.119

Finance Committee staff members. It is noted that each of these is a living person, whose Social 

Security Number (SSN) and other personal data was not and could not have been obtained by the 

identity thieves from the Death Master File (DMF). 

2. Ms. Olson's written statement, on page 16, confirms that "Approximately 97 percent 

of taxpayers receive at least one information return. Traditionally, the IRS has not matched this 

data with the items reported on the taxpayers' tax returns until long after the filing season." This 

spotlights a major flaw in the system, which the identity thieves have exploited. 

3. The Form SS-5 Application for a Social Security Number specifically requires, for 

applications with respect to a child under 18 years of age, that the parents' names and SSNs be 

entered. The information necessary to screen tax returns to prevent an identity thief from 

fraudulently claiming someone else's deceased child as a dependent has accordingly long been 

available, but has not been used. 

4. The Committees' attention is directed to the case of United States v. Alan N. Scott, 

270 F.3d 30 (1st Cir. 2001). The first two sentences ofthe third paragraph of the judicial 

opinion read, 

" In a 1998 case, a jury convicted Scott of conspiring to make and of 

making false claims to an agency of the United States, 18 U.S.C. §§ 286, 287 

(1994). Scott filed twenty false income tax returns with the IRS for the tax year 

1996 seeking tax refunds in the names of at least twelve people. " 

Once Scott's conviction was obtained in 1998, the IRS could no longer deny knowing that 

stolen identity tax fraud was a problem. And by the time Tonya Ferguson pled guilty to stolen 

identity tax fraud in November of2001 [United States v. Ferguson, No. 2:01-cr-20213-BBD, 

Western District of Tennessee], the day had long passed when the IRS could in good faith claim 

that Mr. Scott's stolen identity tax fraud scheme was an isolated aberrational fluke. 

5. IRS Memorandum SBSE-04-1212-055 "Interim Guidance on Processing Identity 

Theft Cases" (20 December 2012) [www.irs.gov/pub/foialiglspderISBSE-04-1212-055.pdf] has 

a control number reflecting origin in the IRS's Small Business I Self-Employed Division and not 

the Wage & Investment Division. This suggests that identity thieves may already be using 

business tax identification numbers (TINs) and committing tax return identity theft against 

businesses in addition to stealing the identities of individuals. 

IV. CONCLUSION: 

In prior Congressional hearings, the blame assigrunent agendas of many seem to have 

targeted the availability of the DMF, and, perhaps, the genealogy community. It has become 

increasingly clear that the totallockdown of the DMF would not and carmot stop stolen identity 

tax fraud, inasmuch as there numerous other sources for SSNs of individuals, living and dead. 
149 


87414.120

The genealogy community as a whole understands the need to control identity theft, 

whether in connection with tax returns or otherwise, and could support a 2-year embargo on the 

release of entries in the DMF, provided that (A) genealogists be eligible for certification for early 

disclosure for purposes such as tracking lost heirs, investigating family medical histories, 

repatriating the remains of deceased individuals to surviving relatives, and other compelling 

purposes; and (8) the IRS takes a more positive and proactive role in screening and filtering the 

tax returns it processes before issuing refunds, including screening for multiple refunds to the 

same address and/or bank account. 
150 


87414.121

VISA 

STATEMENT FOR THE RECORD 

THE UNITED STATES SENATE COMMITTEE ON FINANCE 

Hearing on Tax Fraud and Tax ID Theft: Moving Forward with Solutions 

April 16, 2013 

VISA Inc. 

P.O. Box 8999 

San Francisco, CA 94128-8999 

ABOlJT VISA: Visa Inc. is the world's largest retail electronic payments network. Visa has partnered with 

Federal and State Governments for over 20 years in developing and delivering innovative payment 

solutions that increase efficiencies, significantly reduce costs, and improve recipient payment/purchase 

experiences. The Visa Prepaid Debit card is currently offered through 80 government disbursement 

programs across 39 states in partnership with major financial institutions. 
151 


87414.122

ELECTRONIC DISBURSEMENTS: STATES LEAD THE WAY FOR 

BENEFIT PAYMENTS AND TAX REFUNDS USING PREPAID CARDS 

BACKGROUND: Effective March 2013, the U.S. Government requires all federal benefit 

payments to be made electronically. This switch has enormous benefits: immediate 

administrative savings; financial inclusion for the unbanked and underserved; accountability; and 

increased security. While this is good news, two facts remain: federal tax refunds are excluded 

from the electronic payment requirement and the federal government is not consistent in the 

application of electronic payments, resulting in the Internal Revenue Service printing and 

mailing 45 million paper tax refund checks annually. Not only does this approach eliminate 

opportunities to include the unbanked in the financial mainstream, it ignores industry and 

consumer trends. Government agencies across the US and around the world have long 

recognized that prepaid cards represent a cost effective way to make electronic payments to 

unbanked and underserved constituents who can benefit from their use every day. 

THE DISBURSEMENTS. At the federal level, beginning in 2010, the US Treasury mandated the 

electronic disbursement of all benefit payments (Social Security, SSI, VA benefits, Federal 

Retirement, for instance). As the attached graphics show, states continue to lead the way on the 

use of prepaid cards. Today, 49 of 50 states have implemented card-based electronic payment 

programs for their constituents across a wide range of government disbursement programs: 

Child Support (48 states); Unemployment Insurance (44 states); Temporary Assistance for 

Needy Families (TANF); Emergency Disaster Relief; Workers' Compensation; Adoption 

Assistance; Foster Care; and Housing Subsidies for Beneficiaries and Property Owners. 

Additionally, 10 states are now issuing state income and property tax refunds via electronic 

means: 

- Alabama - Connecticut 

- Georgia - Illinois 

- Louisiana - Missouri 

- New York - Oklahoma 

- South Carolina - Virginia 

SAVINGS To TAXPAYERS AND INDIVIDUALS. The federal government estimates that switching 

social security benefits to electronic delivery will save U.S taxpayers $1 billion over ten years. 

This is because the cost of disbursing funds by paper checks is substantial: $1.03 per paper 

check compared to $.10 for an electronic payment. At the state level, the savings are equally 

significant. In one Midwestern state, the state saved more than $32 million over a 3 year period 

by switching to electronic disbursement. In Nebraska, the state reported it cost $.59 to issue a 

child support payment via paper check; switching to prepaid cards, the state reduced its costs to 

$.01 per payment, saving more than $368,000 per year. 

ACCESS FOR THE UNBANKED AND UNDERSERVED. For the approximately 80 million US 

households who are unbanked and/or underserved, electronic payments increase access, reduce 

out of pocket costs, and provide additional security. Consider this: benefit check cashing fees 

can range from a flat fee of $3.00 to 2%- 6% of the face value of the check-hardly a fee the 

unbanked or underserved can afford. Using prepaid cards, this population gains access to the 

financial mainstream. Additional benefits include having faster access to their payments and 
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better security when comparing prepaid cards to paper checks. In one year alone, more than 

540,000 Social Security and Supplemental Security Income paper checks were reported lost or 

stolen and had to be replaced, creating a financial hardship for the recipient and additional costs 

to the government. 

THE BENEFITS. In addition to immediate savings, prepaid cards offer other significant benefits: 

,/' Money Management and Control. Prepaid cards offer individuals greater access to, and 

control over their money. Cardholders spend only the funds loaded on the card. Government 

programs have visibility into potential unauthorized expenditures (T ANFP, for instance). 

,/' Convenience. Individuals have immediate access to their funds, faster transactions, and the 

ability to make purchases and pay bills in stores and on line while eliminating check cashing 

fees. 

,/' Acceptance. Individuals can use their prepaid cards to make purchases at the millions of 

merchants who accepts cards-in stores, on-line or by phone. Additionally, there are more 

than a million ATMs worldwide that provide easy access to funds. 

,/' Additional Security. According to the Government Accountability Office (GAO), there were 

641,690 incidents of identity theft involving tax fraud in 2011. This number is on the rise 

and remains a top priority for IRS Criminal Investigators. Once a check is issued, there is no 

pulling it back if fraud is subsequently detected. With electronic payments, funds can be 

recalled. 

,/' Multiple Products and Solutions. There is not a one size fits all approach with prepaid cards. 

Products are easily designed and delivered based on customer and consumer requirements: 

reloadable prepaid cards allow funds to be added at any time; partial authorization lets 

account holders split payments; and "zero" liability protections ensure consumers are not 

responsible for unauthorized charges. This is just a small sample of how products can be 

tailored to meet the specific requirements of federal programs. 

THE FUTURE THROUGH ENHANCEMENTS AND INNOVATIONS. Industry continues to pave the way 

with significant innovations in technology. There are multiple products available, supported by 

technology enhancements and sophisticated risk and fraud prevention. Efforts are underway to 

test new technologies that allow multiple payments to be disbursed on the same card. Significant 

work is also being done on the fraud prevention front -not just in detecting fraud once the benefit 

has been issued, but in stopping fraud before it happens. Innovation will not stop here. Industry 

recognizes that consumers want choice, security and convenience. 

THE VALUE OF PREPAID CARDS Is Too BIG To IGNORE. As Congress and the Administration 

look for ways to achieve cost savings, simplify the delivery of benefits and payments to 

individuals, and eliminate fraud, the value of prepaid cards is too big to ignore. The federal 

government should be consistent in its approach to electronic payments and take lessons learned 

from states, including the adoption of card-based income tax refund programs. 
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ISSUE: DELIVERING FEDERAL TAX REFUNDS ON PREPAID CARDS 

BACKGROUND: Of the one billion benefit payments totaling $1.7 trillion made by the Treasury 

in 2010, an estimated $287 billion was disbursed by paper check rather than electronically 

deposited to a bank account. Although the U.S. Government now requires that all federal benefit 

payments be made electronically, the IRS continues to issue tax refunds either through paper 

check or electronic deposit. The IRS encourages but does not require tax refunds to be issued 

electronically and in tax year 2011, the IRS distributed more than 45 million refund checks. The 

IRS is the last remaining federal program not to fully embrace electronic payments. 

THE BENEFITS. The switch to the electronic delivery of social security benefits alone is projected 

to save U.S taxpayers $1 billion over ten years. This is because the cost of disbursing funds by 

paper checks is substantial: $1.03 per paper check compared to $.1 0 for an electronic payment. 

The benefits to recipients and the federal government are also substantial: increased security, 

transparency, accountability and financial inclusion. For the approximately 80 million 

households who are unbanked andlor underserved, cashing a check is costly and less secure. 

Benefit check cashing fees can range from $3.00 to 2%- 6% of the face value of the check. In 

addition, in one year alone, more than 540,000 Social Security and Supplemental Security 

Income paper checks were reported lost or stolen and had to be replaced, at a significant cost to 

the government and inconvenience to the recipient. 

THE TAX PILOT. In 2010, IRS conducted a pilot program intended to test multiple scenarios of 

card-based refunds. With only limited participation, some described it as a "failure". At the 

same time, the pilot provided valuable lessons learned, including that such a product could be 

both valuable to tax filers and produce savings to the Department of Treasury. A report by the 

Urban Institute in January of2012 concluded that that receiving refunds directly onto a low cost 

account-linked card was a concept with promise, including access to mainstream financial 

services for the unbanked. The National Taxpayer Advocate has also repeatedly endorsed the 

goal of issuing refunds electronically. 

THE QUESTION OF FRAUD. According to the Government Accountability Office (GAO), there 

were 641,690 incidents of identity theft involving tax fraud in 2011. This number is on the rise 

and remains a top priority for IRS Criminal Investigators. Once a check is issued, there is no 

pulling it back if fraud is subsequently detected. With electronic payments, funds can be recalled. 

THE STATES. Today, 49 of 50 states have implemented card-based electronic payment programs 

for their constituents across a wide range of government disbursement programs: Child Support, 

Unemployment Insurance; Temporary Assistance for Needy Families (TANF); Emergency 

Disaster Relief; Workers' Compensation; Adoption Assistance; Foster Care; and Housing 

Subsidies for Beneficiaries and Property Owners. Additionally, 10 states are now issuing state 

tax refunds via electronic means: 

I - Alabama - Connecticut 

- Georgia - Illinois 

- Louisiana - Missouri 

- New York - Ohio 

- South Carolina - Virginia 
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QUESTIONS: 

1. The federal government requires that all benefit payments be made via electronic means. 

This has proven to be very successful: there are immediate cost savings to the 

government, benefits for the unbanked and underserved, and additional security and 

safety in the delivery of benefits . 

./ Why hasn't the IRS followed the lead of the rest of the federal government in 

mandating electronic disbursement of tax refunds? 

./ What would it take to make this happen? Executive Order? Statutory authorization? 

2. The benefits of electronic payments to agencies, taxpayers, and constituents are 

widespread and proven across a range of state and federal programs. The 2010 pilot 

provided valuable lessons leamed for a national rollout but IRS has not taken steps to 

initiate a fully electronic tax refund model. 

./ What plans does IRS have to move forward with a folly electronic refund model for 

tax refunds? 

./ What specific lessons learned from the 2010 pilot would be applied to a national 

rollout? 

3. The IRS continues to aggressively tackle identity theft. Multiple efforts are underway to 

both prevent and resolve cases of identity theft. There is also significant work being done 

in the private sector to prevent identity theft. For instance, financial institutions and 

electronic payment networks are working diligently to ensure their disbursement 

programs are not used fraudulently . 

./ What is the IRS doing to leverage the work being done in the private sector to 

combat taxfraud in general and identity theft specifically? 

4. A number of states have taken the lead in implementing electronic tax refunds. These 

efforts will provide additional "lessons leamed" at both the state and federal levels. 

They also potentially offer an opportunity for the IRS to work with these states to issue 

federal tax refunds . 

./ Can the IRS leverage the work being done at the State level 10 issue tax refunds 

electronically? 

./ Has the IRS been working with these states to determine lessons learned? 

87414.126

Child Support Prepaid Programs 

49 States have prepaid Child Support payment programs 

,<0 

'" 

HI -:.,. 

Saure€: Data reflects public information available through individual state agency website-s and other pub!kaHy available information. 

The District of Columbia has a Visa-branded prepaid card program for child support payments, 

As of 4/2013 

II Prepaid Programs::: 4

No Programs:::: 1 

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Unemployment Insurance Prepaid Programs 

44 States have prepaid Unemployment Insurance disbursement prog

Source: Data reflects public inform.ation 

The District of Columbia has a Visa-branded prepald 

Asof 4/2013 

HI 

payments. 

III Prepaid Programs"" 

No Programs:: 6 

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State Tax Refund Prepaid Programs 

10 states have prepaid Personal Income Tax disbursement programs 

HI 

Source: Data reflects pubHc information available through individual state agency websites and other publicaUy available information, 

As of 4/2013 

IiII Prepaid Program

No Programs 3No State Tax = 9* 

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Housing Authority Prepaid Programs 

31 counties have Housing Authority assistance disbursement program

HI 

Source: Data reflects public informatroo available through individual state agency websjtes and other publically available information. 

As of 4/2013 

IlIIl Prepaid Programs:

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TANF Prepaid Programs 

7 states have prepaid TANF disbursement programs 

Source: Data reflects public information available through individual 

As of 4/2013 

information. 

Si Prepaid Programs:;; 

No Programs = 43 

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Workers Compensation Prepaid Programs 

, 

5 states have prepaid Workers Compensation disbursement program

HI 

Source: Data reflects public information available through individual state agency websites and other publically available information. 

As of 4/2013 

II Prepaid Programs '= 5 

No Programs:::: 45 
161 

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