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63–953—PDF 2009

S. HRG. 111–840 

TAX ISSUES RELATED TO PONZI SCHEMES 

AND AN UPDATE ON OFFSHORE 

TAX EVASION LEGISLATION 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MARCH 17, 2009 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

BLANCHE L. LINCOLN, Arkansas 

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 

CHUCK GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

RUSSELL SULLIVAN, Staff Director 

KOLAN DAVIS, Republican Staff Director and Chief Counsel 

(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 

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 3 

Schumer, Hon. Charles E., a U.S. Senator from New York ................................. 15 

WITNESSES 

Shulman, Hon. Douglas H., Commissioner, Internal Revenue Service, Washington, DC ............................................................................................................. 4 

Brostek, Michael, Director, Tax Issues, Government Accountability Office, 

Washington, DC ................................................................................................... 6 

Josephson, William, Fried, Frank, Harris, Shriver, and Jacobson, LLP, New 

York, NY ............................................................................................................... 7 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

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

Brostek, Michael: 

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

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

Responses to questions from committee members ......................................... 55 

Grassley, Hon. Chuck: 

Opening statement ........................................................................................... 3 

Prepared statement .......................................................................................... 58 

Josephson, William: 

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

Prepared statement with attachment ............................................................. 60 

Schumer, Hon. Charles E.: 

Opening statement ........................................................................................... 15 

Prepared statements of Madoff victims Adriane Biondo, Ronnie Sue 

Ambrosino, and Richard Friedman ............................................................. 75 

Shulman, Hon. Douglas H.: 

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

Prepared statement with attachment ............................................................. 90 

COMMUNICATION

Coughlin, Edward T. and Kathleen M. .................................................................. 111 

(III) 

(1) 

TAX ISSUES RELATED TO PONZI SCHEMES 

AND AN UPDATE ON OFFSHORE 

TAX EVASION LEGISLATION 

TUESDAY, MARCH 17, 2009 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:02 a.m., in 

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

(chairman of the committee) presiding. 

Present: Senators Kerry, Schumer, Stabenow, Cantwell, Nelson, 

Menendez, Carper, Grassley, Snowe, and Enzi. 

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; John Angell, Senior Advisor; Cathy Koch, 

Chief Tax Counsel; Mary Baker, Detailee; Dan Gutschenritter, Intern; Vincent Mascia, Fellow; and Miki Hanada, Fellow. Republican 

Staff: Kolan Davis, Staff Director and Chief Counsel; Mark Prater, 

Deputy Chief of Staff and Chief Tax Counsel; and Theresa Pattara, 

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. 

Sophocles wrote, ‘‘Things gained through unjust fraud are never 

secure.’’ 

Today we consider two kinds of unjust fraud. Today we look for 

ways to help honest taxpayers become just a little more secure. 

Today we examine the tax consequences of Bernard L. Madoff ’s 

scheme to defraud investors. And we consider ways to crack down 

on the efforts of offshore tax entities to defraud the U.S. Government of the taxes that they owe. 

Last December, during one of our Nation’s most severe financial 

crises, authorities uncovered perhaps the Nation’s largest case of financial fraud. On December 11, Bernard L. Madoff was arrested 

after revealing that for 2 decades he had been running a Ponzi 

scheme that involved more than $60 billion. A court-appointed 

trustee found that, incredibly, Madoff ’s firm had conducted absolutely no trading for at least 13 years. Thirteen years of false earnings reportings, and 13 years of no trades. 

Last week, Madoff pleaded guilty to 11 counts of fraud, money 

laundering, perjury, and theft. Those charges carry with them maximum sentences that add up to 150 years. 

2 

Senators Schumer, Cantwell, and Menendez requested that we 

hold a hearing on the tax consequences for these victims, and today 

IRS Commissioner Doug Shulman will explain how these victims 

can process their losses on their tax returns. We expect the Commissioner to discuss issues like theft loss, phantom income, and 

fraudulent conveyance. 

Today we will also discuss the effort to combat another type of 

fraud. We will discuss outlines of potential legislation designed to 

stem overseas tax evasion. In the last Congress, the Finance Committee held two hearings on overseas tax evasion. In a May 2007 

Finance Committee hearing, GAO testified about the Qualified 

Intermediary program and offshore tax evasion. 

Qualified intermediaries are a key element of the government’s 

overseas tax enforcement system. Qualified intermediaries are financial institutions that serve as our Nation’s eyes and ears on the 

movement of U.S. funds overseas, but they do not work very well. 

GAO determined that foreign corporations set up by an American 

individual, perhaps in the Cayman Islands, may enable that individual to hide income tax behind the corporate veil. A July 2008 

Finance Committee hearing focused on the Cayman Islands, by the 

way, and offshore tax evasion. I asked the GAO to travel to the 

Caymans and look at the Ugland House. This is that famous 5- 

story building that the GAO testified has 18,587 tenants. Half of 

those tenants, about 9,000 of them, are reportedly Americans. 

The GAO reported the following findings related to the Cayman 

Islands, just the Caymans: U.S. taxpayers have reported 1,400 controlled foreign corporations in the Cayman Islands; $2 trillion of 

bank assets are based there and 9,000 mutual funds, including 

hedge funds—a hedge fund for every 7 people on the island. 

After the second hearing, I decided it was time to do something 

about this, to do what we could to close that overseas tax gap. 

Some have estimated the overseas tax gap to total $50 billion to 

$70 billion a year. I would remind all of us that the tax gap, again, 

is taxes legally owed but not timely paid. 

Today we will discuss legislative proposals intended to enhance 

the transparency of offshore activity. We will consider how we can 

give the IRS better tools to deter, detect, and stop offshore noncompliance. 

Among other proposals, here are three. The first would require 

entities transferring funds offshore, other than on behalf of publicly 

traded companies, to report to the IRS the amount and destination 

or account information of the funds transferred. This will give the 

IRS a trail of funds going offshore, and it will help the IRS to deter 

and detect offshore noncompliance. 

The second proposal would extend the statute of limitations for 

tax returns with certain international transactions from 3 years to 

6 years. This change would give the IRS more time to detect and 

examine often complicated offshore activity. 

The third proposal would facilitate the IRS’s ability to enforce 

compliance with the law’s requirement for reports of foreign bank 

and financial accounts. The proposal would require entities to file 

these reports along with their tax returns. 

As we look out at the deficits that we will be facing over the next 

few years, the importance of moving forward on the offshore tax 

3 

evasion problem becomes all the more clear. We need to reclaim 

every dollar of tax revenue that we can from these offshore tax 

evaders. 

President Obama’s fiscal year 2010 budget proposes a robust effort aimed at curbing offshore tax evasion. While we are waiting 

for the details of his plan, it makes sense for us to move forward 

nevertheless on proposals that we think could do the job. 

While we are on the topic of scams, I am looking very closely at 

tax options that will reclaim these outrageous bonuses paid by 

AIG. The country is angry. Individual Americans are angry. I am 

angry. Four and a half million Americans have lost their jobs. At 

least 4.5 million Americans, in this recession, have lost their jobs. 

That these people are getting bonuses, getting multi-million dollar 

bonuses, while others are losing their jobs is just totally unfair. So 

we are looking at those ideas, and I will discuss them with committee members shortly. 

So let us look for ways to address unjust fraud. Let us do what 

we can to help fraud’s victims. And let us try to help honest taxpayers to become just a little more secure. 

Senator Grassley? 

OPENING STATEMENT OF HON. CHUCK GRASSLEY, 

A U.S. SENATOR FROM IOWA 

Senator GRASSLEY. Mr. Chairman, I am going to just refer to one 

paragraph of my opening statement and put the rest in the record. 

Some of the charities that invested in Bernie Madoff, including 

universities and those funded by Hollywood, would presumably 

have sophisticated advisors. This raises questions for me about 

whether the board members of these organizations were more interested in helping their friend than furthering charitable work. 

Mr. Josephson, who is here to testify, will probably appreciate 

that as well, with his willingness to be here, again today—he has 

been before this committee before to discuss due diligence requirements for charities, trustees and boards of directors, as well as 

other tax implications for board misconduct under the Internal 

Revenue Service. 

Then I would spend just a little bit of time thanking you for 

bringing up the AIG issue. We are here to talk about Ponzi 

schemes. I suppose every Ponzi scheme is different, and AIG may 

not fall into that category, but it surely brings into question a lot 

of tax issues that we have in TARP, and the fact that in some cases 

income limitations apply and in some cases they do not, and the 

extent to which bonuses are affected or not affected. 

So I want to back you up on looking into that and doing what 

we can to make sure that these things do not happen in the future, 

because from the standpoint of not understanding Ponzi schemes, 

after about 7 or 8 months of reading about AIG and trying to determine what happens, I am not even sure we have a handle on exactly what happened. In the case of this economic recession caused 

by a lot of people taking chances and doing things that were not 

very transparent, we have to bring some transparency to this. So, 

I appreciate that very much. 

The CHAIRMAN. Thank you, Senator, very, very much. 

4 

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

The CHAIRMAN. Now I welcome our witnesses. Our first is IRS 

Commissioner Doug Shulman. Thank you, Commissioner, for being 

here. Next, we have the Director of Tax Issues for the GAO, Michael Brostek. Finally, we have the former Assistant Attorney General for the New York State Law Department’s Charities Bureau, 

William Josephson. 

As is our normal practice, all of your statements will be included 

in the record, and I would ask each of you to speak for about 5 

minutes. 

We will start with you, Commissioner. 

STATEMENT OF HON. DOUGLAS H. SHULMAN, COMMISSIONER, 

INTERNAL REVENUE SERVICE, WASHINGTON, DC 

Commissioner SHULMAN. Thank you, Mr. Chairman, Ranking 

Member Grassley, members of the committee. I appreciate the opportunity to testify today about Ponzi schemes in general, which 

also will provide some guidance around the Madoff situation, as 

well as talk to you about IRS’s efforts to detect and stop unlawful 

offshore tax avoidance. 

Beyond the toll of human suffering, the Madoff case raises numerous issues for the victims of losses from Ponzi-type investment 

schemes. To help provide clarity in this very complicated matter, 

today the IRS is issuing two guidance items that will assist victims 

of all Ponzi schemes. 

Let me refer you to my written testimony, which has more details about our actions, and I will make a few points about the 

guidance. The first guidance is a revenue ruling, which is the 

Treasury Department and the IRS’s best legal interpretation regarding the tax treatments of losses in Ponzi schemes. 

Determining the amount and timing of tax deductions arising 

from Ponzi-type investment schemes is factually very difficult and 

depends on the taxpayer’s prospect for recovering the lost money. 

Sometimes that can take years to determine. 

The guidance we are issuing today clarifies that Ponzi losses are 

investment theft losses under the code, and that the taxpayer may 

deduct all of the purported earnings on which the investor paid 

taxes, as well as the cash invested in the Ponzi scheme. It also 

clarifies that the investment theft loss is not a normal casualty 

loss, and therefore is not subject to limitations that apply to noninvestment type losses. This ruling should provide clarity and 

straightforward guidance to taxpayers. 

In addition, we have issued a revenue procedure, with the goal 

of making it as easy as possible for taxpayers affected by these 

schemes to avail themselves of the proper tax deductions. Key to 

the revenue procedure is providing a safe-harbor method of computing and reporting losses. The procedure’s goal, again, is to be 

helpful to taxpayers who are confronted with a very complex area 

of the law and difficult facts. 

Mr. Chairman, I am also pleased to briefly describe the unprecedented focus that the IRS has brought to detecting and bringing to 

justice those who unlawfully hide assets overseas to avoid paying 

tax. In today’s economic environment, where the Federal GovernVerDate Nov 24 2008 17:32 Feb 09, 2011 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 R:\DOCS\63953.000 TIMD
5 

ment is necessarily running large deficits to restore economic 

growth, it is more important than ever that American citizens feel 

confident that individuals and corporations are playing by the rules 

and paying the taxes that they owe. 

When the American public is confronted with stories of financial 

institutions helping U.S. citizens to maintain secret overseas accounts involving sham trusts to improperly avoid U.S. tax, they 

should be outraged, as am I, and as I know you are. But they 

should also know that the U.S. Government is taking unprecedented measures, and there is much more to come. 

I can assure you that the President and the Treasury Secretary 

are committed to taking aggressive action on offshore tax abuse. 

Over the next several months, the administration intends to propose a series of legislative and enforcement measures to reduce 

U.S. tax evasion and avoidance. 

While I am proud of the progress we have made since I became 

Commissioner, we are only at the beginning. You should expect to 

see a multi-year effort of beefing up our resources and tools needed 

to address international tax abuse. 

Since becoming Commissioner, I have made international issues 

a top priority. We actually discussed it at my confirmation hearing 

here a year ago at the Senate Finance Committee. I have increased 

the number of audits in this area and stepped up hiring of international investigators and experts. We have been steadily increasing pressure on offshore financial institutions that facilitate concealment of taxable income by U.S. citizens, and that pressure, I 

can assure you, will only increase. 

The IRS’s investigations are getting results. The Justice Department recently signed a deferred prosecution agreement with a 

major Swiss bank, which involved a payment of $780 million. They 

are also continuing to pursue a lawsuit for a civil summons to get 

more bank accounts from that institution. 

Several so-called ‘‘tax haven countries’’ have pledged to reform 

bank secrecy laws, and just last week have agreed to comply with 

international standards for tax and data sharing. The IRS is also 

looking to improve information reporting and sharing. 

Mr. Chairman, you referred to the Qualified Intermediary program, which gives us a line of sight to foreign financial institutions. 

We are looking to improve that program by increasing the type of 

information that those institutions must report about U.S. citizens, 

and also creating rules that insist on better due diligence on accounts opened or maintained by qualified intermediaries. 

We are also exploring the increased use of, and potentially more, 

information reporting requirements around money being transferred in and out of the United States. 

Mr. Chairman, I know that you are considering legislation designed to improve tax compliance with respect to offshore transactions. I appreciate all the support you have given to the IRS. I 

believe that the general direction of your legislation will help us 

combat offshore tax abuse. My staff and I are looking forward to 

working with you and other members of this committee on that legislation. 

I want to thank you for the opportunity to testify, and I look forward to answering your questions. 

6 

The CHAIRMAN. Thank you very much, Commissioner. 

[The prepared statement of Commissioner Shulman appears in 

the appendix.] 

The CHAIRMAN. Mr. Brostek, you are next. 

STATEMENT OF MICHAEL BROSTEK, DIRECTOR, TAX ISSUES, 

GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC 

Mr. BROSTEK. Mr. Chairman, Senator Grassley, and members of 

the committee, thank you for inviting me to discuss our work related to individuals’ use of offshore locations to evade taxes. 

My statement describes the characteristics of individuals found 

to have evaded tax and how they did so, describes factors that enable offshore noncompliance, and discusses challenges that offshore 

financial activities pose for the IRS. 

Taxpayers whose noncompliance involved offshore locations are a 

diverse group. Some have owed relatively small amounts of taxes, 

interest and penalties, but some have evaded millions in taxes on 

hundreds of millions of dollars in assets. Some taxpayers appear to 

have been inadvertently failing to pay their taxes, such as when 

they inherited money overseas but failed to report income earned 

on that money. Others have used very elaborate structures that 

serve to hide their activities, and thus appear to have been quite 

deliberate in their evasion. 

Regardless, taxpayers’ offshore noncompliance can be enabled by 

the limited transparency that is the hallmark of many offshore jurisdictions. Some offshore jurisdictions share very limited information about U.S. taxpayers with IRS, and those wishing to evade 

taxes can devise elaborate, sometimes multinational, schemes to 

hide their activity. 

Due to the limited transparency of offshore investments and 

transactions, compliance for those with offshore activity relies on 

self-reporting. Years of IRS research have shown that when compliance is so heavily voluntary, taxpayers tend to be non-compliant. 

Financial advisors may also facilitate many offshore schemes. 

Advisors may cater to a retail market through conferences open to 

a very wide variety of individuals; alternatively, advisors may target just those with very substantial income or assets. Either way, 

advisors can use the relative ease and low cost of creating offshore 

accounts, companies, trusts, et cetera to help taxpayers hide their 

income. 

These characteristics of offshore locations or activity make IRS 

enforcement challenging. The complexity of offshore cases results 

in examinations with an offshore component taking much longer 

than normal examinations—that is, audits. For the period we studied, the median time between a return being filed and the completion of an offshore examination was almost 500 days longer than 

for all other examinations. 

Due to the 3-year civil statute of limitations, IRS sometimes prematurely ends offshore examinations even though declined cases 

may have more assessment potential than cases that are not near 

the statutory deadline. Congress has granted exceptions to the 3- 

year statute in some situations, for instance, when a taxpayer fails 

to report listed transactions. GAO suggests that Congress consider 

a statute extension for cases that do involve offshore activity. 

7 

To promote offshore compliance, IRS established the Qualified 

Intermediary program, QI program, in the year 2000. The program 

does help ensure that U.S.-source income paid to foreign persons 

is properly taxed. U.S.-source income includes, for example, interest on U.S. and corporate bonds, stock dividends, and rents. QIs 

are foreign financial institutions that contract with IRS to withhold 

U.S.-source income that they pay to their customers and to report 

certain information to IRS. 

These QI program features should result in QIs being a better 

source of withholding decisions than U.S. withholding agents. That 

is, because QIs are overseas, they are more likely to have direct 

contact with the foreign customers than U.S. withholding agents 

would, and should be better able to judge whether customers are 

qualified for lower tax rates, such as under our treaties. 

Second, QIs accept enhanced responsibilities for ensuring customers qualify for lower taxes, such as using IRS-approved documents to identify their customers. Finally, and importantly, QIs 

agree to have external parties review their accounts and procedures and report those results to IRS. However, the recent deferred 

prosecution agreement for UBS AG starkly shows that the program 

is an imperfect tool to thwart offshore compliance problems. 

Earlier we made several recommendations to improve the QI program. Perhaps most pertinent to today’s hearing is our recommendation that IRS require QIs’ external auditors to report any indications of fraud or illegal acts that could significantly affect the results of their reviews of QI compliance. We cannot say that having 

this reporting requirement in place would have forestalled UBS’s 

efforts to defraud the U.S. or led to earlier detection. However, the 

type of fraudulent activity engaged in by UBS is what our recommendation would cover. 

That concludes my statement. I would be happy to answer questions. 

The CHAIRMAN. Thank you very much, Mr. Brostek. 

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

The CHAIRMAN. Mr. Josephson? 

STATEMENT OF WILLIAM JOSEPHSON, FRIED, FRANK, 

HARRIS, SHRIVER, AND JACOBSON, LLP, NEW YORK, NY 

Mr. JOSEPHSON. Thank you, Chairman Baucus, Senator Grassley, other Senators. I am very happy and honored to be able to appear before the committee again. 

As the committee knows, I have prepared a very detailed statement that actually harks back to the committee staff recommendations in June of 2004 for charity reform; many of those recommendations have been enacted, too many have not. 

I would like to submit my statement for the record. It contains 

a detailed list of proposed changes in the code, affecting both publicly supported charities and private foundations that I hope the 

committee will seriously consider. 

The CHAIRMAN. Without objection, it will be included. 

Mr. JOSEPHSON. Thank you. 

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

8 

Mr. JOSEPHSON. I would like to make a few general remarks 

about what I think the implications for charity the Madoff scandal 

has, and what I think the committee and the Congress need to do 

to try to ensure that charities do not get so involved again. 

The Madoff scandal dramatizes the need for Congress to make a 

public policy decision that has needed to be made for a long time, 

but which it has deferred. We can go on as we have been, paying 

lip service to the Federal and State laws that affect fiduciary investment responsibilities. 

In fact, the State laws are extremely difficult to enforce and have 

very little teeth. The jeopardy investment rules which are most 

pertinent to the Madoff scandal have, also, very little teeth, and 

the enforcement resources available to the IRS to do something 

about them are meager and inadequate to the task. 

These facts send to charitable fiduciaries the wrong but unmistakable message that their fiduciary responsibilities somehow are 

less onerous and less important than those that they owe, for example, to trusts some of them may have for their children. 

Alternatively, Congress can, and should, rewrite not just the private foundation jeopardy investment rules, though they certainly 

need to be rewritten, and apply them not just to private foundations but to all exempt organizations, including public charities, 

but Treasury also can rewrite the jeopardy investment regulations 

to make them as detailed and comprehensive as the excess compensation and benefit regulations are with respect to public charities that pay too much to their managers. 

While Congress is doing this, hopefully it can clean up various 

anomalies in the code between the treatment of public charities 

and private foundations and the treatment within those categories 

that I discuss in detail in my statement. 

Most important, Congress can at least give the Internal Revenue 

Service the resources that it should have had since 1969 to do the 

necessary public charity and private foundation enforcement that 

40 of the 50 States do not do at all, and the other 10 do inadequately; otherwise the parade of charity scandals will continue 

endlessly. 

Of course, the charities’ trade associations will object. They will 

argue that ‘‘we will not be able to get people to serve as directors 

or trustees.’’ But I know of no systematic, empirical evidence that 

that is true. From my own experience, I know that, if one truly 

cares about doing good, one serves, one takes one’s service seriously, and one accepts those responsibilities and those liabilities. 

The charities’ arguments in this area remind me of those that 

were made when I was the head of the Charities Bureau, and Attorney General Elliott Spitzer reversed the longstanding precedent 

of his predecessors in order to give donors standing to enforce their 

restricted gifts. The charities argued that there will be a plethora 

of lawsuits the charities will have to spend charity money defending. 

Well, unfortunately perhaps, that has not happened because, unlike for but one example, the Robertson family in the Princeton 

case where I was an expert witness for plaintiffs, too few donors 

have the motivation, the resources, and what Mayor LaGuardia 

used to call the intestinal fortitude to enforce their restricted gifts. 

9 

The committee staff recommended, in June of 2004, that the size 

of charity boards should be limited. Most of them are far too big, 

as compared, for example, to the for-profit boards of public companies. This is bad because responsibility of those fiduciaries is diffused and diluted, and those fiduciaries do not feel, and cannot be 

held, accountable for what they do. 

Thank you, Mr. Chairman. I would be glad to answer any questions. 

The CHAIRMAN. Thank you very much, Mr. Josephson. That was 

very persuasive. 

I will start with you, Commissioner. Let us just do the math. Say an investor who lost $500,000 with Bernie Madoff, under these new 

guidelines—maybe not so new—what would the tax treatment be? 

What could the investor recoup? 

Commissioner SHULMAN. Well, a couple of things. One, any investment made with—and I want to clarify, the ruling and procedure we put out today are trying to be applicable to all Ponzi 

schemes, not just the Madoff situation. 

The CHAIRMAN. Right. Right. 

Commissioner SHULMAN. I will use the example under Madoff. It 

is an investment theft loss. The $500,000—it can include both 

money put in, as well as earnings over time that were left in their 

account with Madoff. 

The CHAIRMAN. Right. 

Commissioner SHULMAN. And this is assuming they paid taxes 

on those earnings. 

The CHAIRMAN. Correct. 

Commissioner SHULMAN. It will be deductible in the year discovered, and we give some guidance in the revenue procedure about 

how to determine the year that it is discovered. 

The CHAIRMAN. The full $500,000? I am sorry. What is deducted, 

what amount? 

Commissioner SHULMAN. An amount. And then we have the procedure of safe harbor that says you can deduct up to 95 percent 

without us looking further. I mean, we will obviously make sure 

the documentation is correct, but there is a safe harbor of 95 percent immediately. Subtract from the 95 percent private insurance, 

including SIPC that you might get back, and you can deduct that 

95 percent immediately. Then the remaining 5 percent, if you recover more in later years, is taxable if you have already taken a 

deduction. If you do not recover the 5 percent, you can then take 

that deduction later. So there is basically a safe harbor for 95 percent. 

The CHAIRMAN. So about 95 percent is deductible then, basically? 

Commissioner SHULMAN. More or less. 

The CHAIRMAN. More or less. All right. 

And these regulations. When are they in effect? When can taxpayers expect to be able to utilize them? 

Commissioner SHULMAN. They can utilize them immediately. We 

plan to put them out on our website later today. 

The CHAIRMAN. All right. 

With respect to offshore problems, Mr. Brostek, last week the Finance Committee released a bipartisan draft of legislation intended 

to give IRS more tools, about eight proposals. One is information 

10 

reporting to the Service when funds are transferred to offshore accounts, and another requires the Foreign Bank Account Report, 

FBAR, to be attached to the tax return. 

Just give me a sense of how effectively this will help us begin 

to solve this problem of evaded taxes. 

Mr. BROSTEK. As I noted in my statement, when compliance is 

really dependent on the self-reporting of individuals, data indicates 

that taxpayers tend to take advantage of that lack of transparency. 

The CHAIRMAN. Right. 

Mr. BROSTEK. In general, the provisions in the bill appear to be 

trying to get more transparency over the transactions of individuals. 

The CHAIRMAN. Right. 

Mr. BROSTEK. Therefore, they ought to have something of a deterrent effect on the non-compliant behavior, reduce it just because 

the reporting is there. The provision should also give IRS some additional information to use in making more efficient use of its own 

resources to identify who is likely being non-compliant and, when 

they are doing audits, to be more efficient about conducting those 

audits and determining how much noncompliance there is. 

The CHAIRMAN. How effective do you think it will be? I mean, is 

this enough? Do we need to do more? What is your sense? If we 

want to close this down, this overseas tax evasion, this tax gap, 

what do we have to do? 

Mr. BROSTEK. Well, I hate to be pessimistic, but I do not 

think—— 

The CHAIRMAN. I want you to be realistic. But you are a good 

public servant. 

Mr. BROSTEK. To be realistic, I do not think we are ever going 

to completely shut down tax evasion. Those who would like to 

evade tax are very inventive. They have people who are very inventive working for them, particularly those who have a lot of resources who can hire very good talent. So, I cannot say how much 

precisely your proposed legislation would reduce the gap. I do think 

it would be helpful. I do think it would reduce the amount of noncompliance. 

The CHAIRMAN. So what more could we do? 

Mr. BROSTEK. I do not have a set of proposals for you today. 

The CHAIRMAN. Just some thoughts, some ideas. 

Mr. BROSTEK. All right. Well, as I noted in the statement, I do 

think that one of the things you have in your legislation is to expand the period of time that IRS has to conduct audits, to extend 

the statute of limitations. 

The CHAIRMAN. We do that, from 3 to 6. 

Mr. BROSTEK. Yes. And I think that is desirable for a number of 

reasons, but in part because IRS agents are very careful not to extend over the statute of limitations. When we did our review of this 

situation, we found a number of individuals—I believe there were 

about 35 agents—who had been disciplined for taking more than 

the statutory amount of time in the 2-year period we studied. So 

extending the statute will make the IRS agents more able and willing to investigate complex cases that run beyond a 3-year period. 

The CHAIRMAN. All right. 

11 

Americans are quite angry about these—I am going to ask this 

of you, Commissioner Shulman—AIG bonuses paid, and other bonuses paid. So my basic question to you, and it really outrages me, 

as it does, I think, most Americans. We want to do what we can 

to stop this nonsense. President Obama has made lots of statements about, he is trying to stop it. I think at one point the Treasury was in a position to stop the bonuses, but for some reason did 

not, I think in part they listened to the argument, we need those 

folks, they are experts, and all that. If they do not get their bonuses, they might leave. We do not know how to unwind all this 

stuff. 

That has no effect on me. There are enough bright people in this 

country whom I think would go to work to try to unwind this. People there do not have to receive bonuses to stay. As I am told, they 

are really retention bonuses designed to encourage the folks in this 

product section to stay. But I do not think those bonuses should be 

paid. I do not know to what degree we can go back and get them. 

I do not know. But another option is to tax them. So the basic 

question is, what is the highest tax that we could impose on those 

bonuses that would be sustainable in court? 

Commissioner SHULMAN. Let me say a couple of things, Mr. 

Chairman. As a citizen, I share your outrage. I cannot add a lot 

to what the President said yesterday, that he was outraged by 

these bonuses. I think we, obviously, operate within the contours 

of the tax law, and I have not looked at and do not know the specifics of this situation. But I will tell you, I heard you say earlier 

that this committee is going to look at this, and we stand ready, 

as you explore these issues, for the IRS to do what it can to assist 

in that exploration with both the committee, and obviously with 

the Department of Treasury. But I cannot answer the tax number. 

The CHAIRMAN. I would like you to work with us, and we will 

work with others, too. But we have to find the answer to that question: what is the highest excise tax we can impose that is sustainable in court? 

Senator Nelson, you are next. 

Senator NELSON. Perhaps 90 percent, Mr. Chairman. 

The CHAIRMAN. Let us find out what it is. 

Senator NELSON. I want to congratulate the IRS and the Justice 

Department. When you exposed the massive fraud on the Swiss 

Bank, UBS, do you have any reason to believe that UBS is a onetime aberration, or are there other banks out there engaging in 

this fraudulent activity? 

Commissioner SHULMAN. Yes. Thank you for your commendation. 

We have been trying to be very aggressive around offshore tax evasion. 

I guess I cannot speak to other financial institutions. I think, as 

Mr. Brostek said, this is an issue that people are pushing the envelope on. What I will tell you is, we have a robust voluntary compliance initiative. We have a whistle-blower program. We know that 

taxpayers who were hiding assets overseas—we have their attention and they are very nervous because the IRS is applying more 

pressure and committees like this are talking about legislation. 

I will also tell you that financial intermediaries that are facilitating this through a lot of formal and informal conversations have 

12 

paid attention and are making sure they have their ducks in a row 

and are abiding by the Qualified Intermediary program. 

We are going to intensify and add to the tools in the Qualified 

Intermediary program and then hopefully work through some legislation. So I cannot talk to you about numbers and cannot talk to 

you about specific investigations, but I can tell you that we are 

heartened by the successes we have seen in this case. We plan to 

continue pursuing our summons around this case, and we are going 

to pursue anyone we find is facilitating offshore tax evasion. 

Senator NELSON. All right. So the answer is, you do not know of 

any others? 

Commissioner SHULMAN. I think the answer is, we have a whole 

bunch of things we are looking at. We have taxpayers coming in 

under the whistle-blower program. I am not in a position to speak 

publicly and authoritatively about others, but I can tell you this is 

an area we are looking at very closely. 

Senator NELSON. All right. Well, thanks to the chairman, we are 

going to get into some legislation on this; the chairman has filed 

one version; I filed another version with Senator Levin. 

There is a unique little wrinkle here, that an American citizen 

can go to a very exclusive tax shelter, the Virgin Islands’ Economic 

Development Program. How many taxpayers participate in this 

Virgin Islands tax shelter, and what kind of oversight is the IRS 

exercising on them? 

Commissioner SHULMAN. The first question, I do not have the 

number. As you know, the law allows the U.S. Virgin Islands to set 

up its own Economic Development Zone and have special tax rates. 

Any time we see special, significantly lower tax rates, it obviously 

presents potential opportunities for people to play games. We have 

some public lawsuits going on around this. We have a number of 

open cases where we are pursuing these issues. 

The real issue hinges on the residency: is someone really a resident of the U.S. Virgin Islands, and what is their source of income? 

Is it a U.S. Virgin Islands source or a U.S. source? It is very factintensive. We have a number of open cases, some of which are 

docketed and you can see in the courts. But we are pretty focused 

on this, just like we are focused on a lot of places that have much 

lower tax rates where people are taking advantage of the system. 

Senator NELSON. Will you share with the committee how many 

taxpayers participate in this Virgin Islands shelter? 

Commissioner SHULMAN. Yes. I do not know. I will share with 

you what we have. I am not sure we have a clear definition of the 

Virgin Islands shelters, but I will get you as much information as 

we can. 

Senator NELSON. All right. Thanks to the good work of the GAO, 

you found out that a number of financial institutions that have 

been receiving considerable Federal assistance from the TARP program have utilized the subsidiaries in countries or territories as 

tax havens. For example, AIG has five subsidiaries in Bermuda; 

Citigroup has 90 subsidiaries in the Caymans; Bank of America 

has 59 subsidiaries in the Caymans and even others in the Bahamas, Bermuda, and the Virgin Islands. 

Now naturally, part of this outrage that the chairman has talked 

about is that the taxpayers want to know why, if they are receiving 

13 

all of these bailouts, are they also getting the shelter in these tax 

havens. Is it a valid business reason that they are creating these 

entities? Do you believe that tax avoidance underlies the decision 

or is it a legitimate decision by banks to create these subsidiaries 

in low- or no-tax jurisdictions? 

Mr. BROSTEK. I think it is a mixture, sir. The work that we did 

for the chairman and ranking member on the Cayman Islands suggested that there are subsidiaries created in some of these low-tax 

jurisdictions for what I think we would all agree are fairly legitimate business purposes. For instance, we saw that the sale of U.S. 

manufactured aircraft was facilitated through the Export-Import 

Bank, a U.S. Government-affiliated entity that had worked with 

Boeing and other manufacturers, to sell airplanes through the Cayman Islands. 

But I also think that a number of these facilities are set up for 

legal tax avoidance, trying to minimize the tax that the corporate 

structure pays as a whole. There are undoubtedly some situations 

where these are used to step over the line and illegally evade tax. 

Senator NELSON. Mr. Chairman, we have to put a stop to this 

nonsense. 

The CHAIRMAN. We do. It is an outrage. It is an absolute outrage. 

Senator NELSON. It is part of the way that we can solve the 

budgetary deficit problem, get the tax that is owed instead of allowing all of this tax avoidance. 

The CHAIRMAN. I think that is true. As Mr. Brostek said, first 

we have to distinguish between individual tax evasion, and then 

corporate, with respect to tax havens. There is a difference. But 

nevertheless, the tax gap in each case is very, very large, and it 

is about time. This country has given lip service to that for a while. 

We have made several attempts at it, but we have never really 

done enough significantly about it. Now is the time to do it. 

Senator Enzi, you are next. 

Senator ENZI. Thank you, Mr. Chairman. I appreciate you holding this hearing today. It has already been educational, and I appreciate Commissioner Shulman’s explanation and clarity on the 

announcement on the tax treatment. 

But it is clear that there is massive undersight of this fraud by 

both the Securities and Exchange Commission, charged with investor protection, and the Financial Industry Regulatory Authority, 

charged with oversight of the broker / dealer members. 

Can you give me a little idea of your authority as IRS Commissioner in investigating false income statements in this regard? Can 

you give us suggestions for ways the IRS can keep this from happening? 

Commissioner SHULMAN. Well, at the end of the day, most of our 

enforcement resources are focused on making sure we collect the 

proper amount of tax. That is what we had been focused on. It is 

not our primary responsibility to oversee investment schemes. 

With that said, we have, for instance, in our Criminal Investigation Division, some of the best forensic accountants who can follow 

the trail of money in criminal cases. We make those people available to the FBI, to other agencies who are investigating fraud, and 

we will continue to do so. I believe that information-sharing among 

Federal Government agencies, so we all view ourselves as the U.S. 

14 

Government trying to do right by the American citizens, is the way 

we should approach things. 

So, to the extent we can either synthesize information or we can 

compare information on tax returns, albeit within a responsible 

way, not sharing taxpayer data and not breaking that trust, is important to do. So we have had conversations with a variety of our 

agencies about which of our resources we can offer to help them as 

they try to go after a whole number of frauds that have come to 

light around this current financial crisis that we are in. 

Senator ENZI. It is estimated that we stand to lose about $17 billion on this tax scam in taxes that we will not be able to collect. 

Commissioner SHULMAN. On—I am sorry? 

Senator ENZI. On the Madoff scheme. 

Commissioner SHULMAN. I had not seen that estimate. I am 

sorry. 

Senator ENZI. All right. I would be interested in an estimate of 

what was probably lost by the time we do the tax adjustments that 

will be coming up. 

Chairman Baucus’s proposal for treatment of offshore funds 

transfers requires financial institutions to report to the IRS any 

amount of funds transferred out of the country. Based on my reading of the text, this includes transfers such as remittances to families living abroad and U.S. citizens making purchases overseas. 

Could you comment on that interpretation? 

Commissioner SHULMAN. I cannot comment on the interpretation, because I think the legislation will still be hashed out. I would 

defer to committee staff. 

The CHAIRMAN. Right. 

Commissioner SHULMAN. What I would say is, I have had a lot 

of conversations with this committee, with the chairman. One of 

the keys to really getting after the tax gap, if not the key, is information reporting. So as a general concept, I am a big fan of information reporting. On this specific proposal, we look forward to 

working with the committee. Any time we get information reported 

to us, there is a responsibility for us to take that information and 

make sure we sort through it and pursue people who are involved 

in abusive transactions, and not pursue innocent people who are 

just in the business of doing financial transactions. 

So, if that is in there, I think the onus will be on us to make 

sure we are not pursuing somebody who is wiring money to his 

daughter who happens to be studying abroad, but that we are actually following a money trail to people who are hiding assets overseas and trying to avoid paying taxes. 

Senator ENZI. And what particular groups would those be? 

Commissioner SHULMAN. Excuse me? 

Senator ENZI. What particular groups would those be, that this 

would now target, that we are not already requiring reports for income transfers under the current law? 

Commissioner SHULMAN. Well, as I understand it, the proposal 

is actually putting responsibility on the financial institution to 

send information to the IRS. Right now, every citizen has to voluntarily report what is happening overseas with their account, the 

taxes that are due. The problem with that system is, honest taxpayers are reporting and paying taxes; we often do not have a line 

15 

of sight to dishonest ones. So I think all these legislative proposals 

are trying to get us a line of sight so that honest taxpayers will 

not be footing the bill for the dishonest taxpayers. 

Senator ENZI. Thank you. My time has expired. I look forward 

to working with the chairman on the proposal. 

The CHAIRMAN. Thank you, Senator. I might say that clearly we 

are going to work this out so that some of the concerns you are implying are addressed. I think the main point being, this is thirdparty reporting, third-party information reporting. It kind of gets 

to the point that Mr. Brostek was making, that sometimes people 

do not voluntarily report everything. The average American taxpayer, I think, does. But I think to a large degree we are not talking about average American taxpayers. We need third-party information reporting. Thank you. 

Senator Schumer? 

Senator SCHUMER. Thank you, Mr. Chairman. I want to thank 

you for holding this hearing, in part, at least, at the request of Senator Cantwell, Senator Menendez, and me, and I appreciate that. 

The CHAIRMAN. Right. You are welcome. You bet. 

Senator SCHUMER. I have a brief opening statement to make, and 

then I will ask some questions of the Commissioner. 

OPENING STATEMENT OF HON. CHARLES E. SCHUMER, 

A U.S. SENATOR FROM NEW YORK 

Senator SCHUMER. The perfidy of Bernie Madoff is now well 

known. His Ponzi scheme victimized not only well-known names 

such as Steven Spielberg and Fred Wilpon, the owner of the Mets, 

but hardworking middle-class people who thought they were making prudent investments for their retirement. Madoff ’s fraud has 

jeopardized dozens of union pension funds in upstate New York, as 

well as 150,000 philanthropical foundations. The fraud affected 

hardworking middle-class individuals who thought they were investing wisely and safely for their retirement years, and, just like 

that, they are wiped out. 

I would like to ask the committee’s permission to enter into the 

record personal stories of three Madoff victims: Adriane Biondo, 

Ronnie Sue Ambrosino, and Richard Friedman. 

The CHAIRMAN. No objection. 

[The information appears in the appendix on p. 75.] 

Senator SCHUMER. The pain this man inflicted is as widespread 

as it is piercing. Two weeks ago today, I wrote you, along with Senators Menendez and Cantwell, asking for the Finance Committee 

to hold a hearing on the various tax issues related to the Madoff 

fraud. I asked for the hearing because I was worried that, not only 

had people lost their life’s savings, but they also would have paid 

taxes on money they never received, and they should be able to get 

that money back. I want to thank you, Mr. Chairman, for agreeing 

to the request and scheduling the hearing so quickly. 

After Madoff ’s arrest, several questions arose about provisions of 

the tax code related to the theft-loss deduction and when taxes 

paid in past years on phantom income might be eligible for a refund, among other issues. People were confused about what to do 

on their 2008 tax returns and needed guidance from the IRS. I am 

very pleased that in each area in which there was a major dispute, 

16 

the IRS sided with the victim. The IRS ruling says that people can 

take a theft-loss deduction in 2008 for any money directly invested 

with Madoff, including any reinvested gains, and that such losses 

can be carried back for 5 years and forward for 20 years. 

By treating the theft losses this way, victims will not have to 

worry about filing amended returns for prior years. This means the 

victims will not owe taxes on income they never received. Victims 

will receive the most lenient tax treatment in a simple and 

straightforward way. The guidance the IRS is issuing today is 

clear, it is comprehensive, and it comes at a crucial time. I want 

to thank the Commissioner and your entire team for their good 

work, with my office and those of others. 

There are some issues left unresolved, and I will explore those 

in questions. But for the most part, I believe the prominent issues 

have been addressed, and we are hearing from victims and their 

lawyers that they are very pleased with what the IRS has done. 

So I want to thank you, Mr. Chairman. Now I would like to just, 

with my remaining time, ask a question or two. 

First, to the Commissioner. Again, thank you, Commissioner. 

You did a very good job here. Your testimony states that the safeharbor procedure outlined by the IRS says that taxpayers should 

deduct from their losses their expected SIPC recovery of $500,000 

per investor. I can see how part of this guidance might raise questions, since it might be many years until the SIPC claims are paid 

or until it is clear what the SIPC recovery will be. 

Does the IRS guidance allow taxpayers to simply decline to make 

an SIPC claim and assert the position by some form of affidavit 

and increase their eligible theft loss? Why would it not be preferable to allow people to defer the SIPC reimbursements and take 

the full tax loss now, but, if they receive an SIPC claim in the future, then the tax implications can be taken into account at that 

time? Because people are worried, they are desperate, and they do 

not know what the SIPC is going to do for them yet. 

Commissioner SHULMAN. Yes. A couple of issues. One is, we have 

actually met with SIPC. I have met with the chairman. Unfortunately, in this tragic situation, probably the best chance of people 

getting some money back is through SIPC and then recovering 

some of the taxes that they have paid. So, it is important. 

What I would say is, each taxpayer is a little different. SIPC is 

treating people directly invested differently than they are people 

not directly invested. So the way that our guidance reads—and 

again, it is not just Madoff; we are trying to cover Ponzi schemes 

in general because, in down economies, that is where you usually 

see more Ponzi schemes come to light—is that the loss is deductible 

except for reasonable prospect of recovery. 

So what I guess I would say is, whether or not people expect to 

get SIPC, the facts and circumstances dictate actions, depending on 

where they were situated in this Madoff scheme. People are going 

to have to use their best judgment coming under the safe harbor. 

Again, there is a true-up at the end so, if they get money and they 

took a deduction, they are going to have to pay taxes on it. If they 

did not, if they thought they were going to get money and they 

never get it, they can take that as a deduction later. 

17 

Senator SCHUMER. I would just ask you, in this guidance, to be, 

again, as much on the victim’s side as you can be, given the awful 

situation they are in. 

The CHAIRMAN. Thank you. Thank you. 

Senator Menendez? 

Senator SCHUMER. Mr. Chairman, I have other questions. Are we 

going to have a second round? 

The CHAIRMAN. Yes. 

Senator SCHUMER. Great. Thank you. 

The CHAIRMAN. Senator Menendez? 

Senator MENENDEZ. Thank you, Mr. Chairman. I want to join my 

other colleagues who asked you for this hearing. I appreciate you 

doing it so quickly as well. 

The CHAIRMAN. You bet. 

Senator MENENDEZ. Bernie Madoff is probably the most visible 

and incredible example of a calamitous failure of the Federal Government’s responsibility of its regulatory agencies to oversee the 

market. We have had some of those hearings in the Banking Committee. The failures of regulators to detect his crimes are pretty 

outstanding, and we are left with the aftermath of personal tragedies for people who have had their entire life and their nest eggs 

become empty shells, and face some real, real difficult choices in 

their lives. So I appreciate, Commissioner, the guidance that you 

are issuing today. 

I want to follow up with one or two questions, and hopefully you 

will have the answers. If not, we will hear it subsequently. Just to 

follow up on Senator Schumer’s question, according to your guidance, victims of the Madoff scandal who invested through feeder 

funds have to wait for those funds to file their tax returns and distribute the proceeds from the Securities Investor Protection Corporation payments and the deductions, proportionately. 

Now, this leaves a lot of these victims, many of whom had no 

idea that they were even invested with Madoff, at the mercy of the 

prompt action of their funds. I know you said you had a meeting 

with the head of the SIPC. Is the IRS going to appropriately monitor the distribution of these proceeds through the feeder funds to 

ensure individual victims receive a timely and accurate payment 

from the funds? 

Commissioner SHULMAN. Senator, we are pretty focused on this 

issue of direct investors, indirect investors, feeder funds. What I 

would say is, we did not make up any new law in putting out this 

guidance. We did our best interpretation of existing law. The way 

that any investor, in any kind of loss through a fund, gets that is 

usually through their K–1. 

So it is really going to be up to the direct investor to claim this 

deduction and then flow through to their partners—or whomever 

else, however it is structured, LLC, partnership—the losses. So, if 

you invested in a partnership that then invested in Madoff, the 

only way you are going to know what the gains were in that partnership for other investments, what the other losses were, and 

what the Madoff issues were, is to get that partnership return 

through your K–1. What we will be doing is making sure that the 

loss is appropriate for the actual partnership when they file it with 

18 

us. So I am not sure if I answered your question, but the bottom 

line is, that is how they will do it. 

Senator MENENDEZ. I am just concerned that, while they have to 

wait for the feeder funds to do their work and their reporting, that 

they are left out there waiting. So it is going to depend upon the 

diligence of the feeder funds at the end of the day? 

Commissioner SHULMAN. At the end of the day. I mean, I think 

there is no other way, in any sort of partnership, that you can file 

a tax return. You have to know what the partnership has. 

Senator MENENDEZ. We will have to look at it. 

Commissioner SHULMAN. Yes. We will be happy to look at it and 

talk with you. 

Senator MENENDEZ. Let me ask you, in terms of documentation 

of losses, what is going to be considered proper documentation to 

establish losses, in particular? I know that you are looking at Ponzi 

schemes in general, but due to the Madoff fraud—for example, is 

the IRS going to permit those who were feeder group victims to establish that they incurred losses by the use of statements and other 

documentations that they received from the feeder group? 

Commissioner SHULMAN. Yes. I mean, in general, yes. This is 

general guidance. But in the Madoff case, we anticipate statements 

are good enough because people actually got this phantom income 

that they paid taxes on. The idea is, you can now get a deduction 

for it. 

Senator MENENDEZ. Let me ask you, in our letter to you we 

asked whether or not you were going to establish a special unit to 

process claims related to the Madoff fraud and similar fraud, simply because of the efficiency and the size of this particular Ponzi 

scheme. Is that something that you are contemplating at the Agency? 

Commissioner SHULMAN. What we have done across the board is, 

we have taken a look at this very significant economic downturn 

that we are in. Everything from NOL carry-backs for small businesses to individuals in hardship situations to those who have 

Ponzi schemes—we made sure that we have streamlined processes 

to take care of it. 

So what we have done is, we already have units that can take 

care of this. You will notice that there is going to be a special form 

if you are looking to operate under the safe harbor, so you will selfidentify that you are a victim of a Ponzi scheme, and those returns 

will be handled appropriately and expeditiously. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Grassley? 

Senator GRASSLEY. Yes. Mr. Chairman, if I could, before I ask 

questions, reinforce the dialogue that we had at the opening of this 

hearing. You alluded to some ways in which we could make sure 

that the intent of a portion of the TARP legislation be carried out. 

In that legislation, the Finance Committee insisted that executive 

compensation be limited by way of: (1) the loss of tax deduction for 

the institution, and (2) a penalty tax for executives in the cases of 

excess golden parachutes. 

Under the legislation as enacted, these tax limitations only applied in the case of an asset sale. But last year we were told that 

19 

Treasury would no longer purchase troubled assets in an auction 

sale. Instead, Treasury has and will continue to infuse taxpayers’ 

funds into a financial institution largely through direct purchases. 

It is now high time that we apply the tax-related limitations to direct purchases. 

I know that Treasury made an attempt to do this in Treasury 

guidance. In my opinion, that guidance falls short of enforcement. 

Enforcement would be stronger if the limitations were written in 

the code. While we are at it, we should write other limitations into 

the tax code, like claw-back policies and other penalty taxes on bonuses. So, I wish you would consider that, at least. 

The CHAIRMAN. You bet. 

Senator GRASSLEY. Mr. Commissioner, as I mentioned in my 

opening statement, I appreciate that the IRS is moving quickly to 

assist taxpayers during these difficult times, including victims of 

Ponzi schemes. However, I am concerned that the guidance issued 

today will cause tax cheats to consider taking abusive deductions. 

Could you tell me how the IRS intends to monitor theft loss deductions to ensure that only victims of actual Ponzi schemes can take 

advantage of the guidance that you are issuing today? 

Commissioner SHULMAN. Yes. Sure, Senator. That is a great 

question. Anyone who takes advantage of the safe harbor and the 

streamlined implementation procedure we are putting out today 

has to attach a form, so they self-identify. That is the key. When 

people self-identify coming in that they are claiming a special deduction, we can identify that group. We can take samplings out of 

that group. We can look behind the returns there. 

So we will balance expediting these so that people who are victims of devastating loss actually have the opportunity to get some 

relief, but we will also have enforcement and audit coverage to 

make sure we look behind these so that we do not have a lot of 

fraud. 

Senator GRASSLEY. All right. 

Next, let us take a look at the disheartening situation of billions 

being lost by charitable victims of Ponzi schemes. In Congress, in 

1969, we provided the IRS with some tools to curb bad investment 

decisions by private foundations, including the section 4944 excise 

tax on jeopardy investments. 

Can you tell me if the IRS is considering assessing this tax on 

individuals who ran some of these organizations, particularly the 

ones which have been shut down? I would also appreciate if you 

could tell me how often the IRS has assessed this tax in recent 

years. 

Commissioner SHULMAN. Yes. I think you are referring to the 

private foundation jeopardy investment rules where we have the 

ability to assess a 10-percent excise tax on people who do not exercise due diligence and proper monitoring of investments. 

Senator GRASSLEY. Yes. 

Commissioner SHULMAN. I cannot tell you, because we have not 

gotten returns in yet around Ponzi schemes, how many investigations are open. What I will tell you is that it is a tool that is available to us that we certainly will consider. I do not have the answer. 

I will have to come back to you, if it is all right, on the number 

of times we have imposed the tax in recent years. 

20 

Senator GRASSLEY. That is very good. Thank you. 

Mr. Josephson, your testimony troubles me, as you seem to indicate that many States are not minding the store when it comes to 

protecting charitable assets. Yet the panel on the nonprofit sector 

and others recommended that the IRS not be given authority to enforce State fiduciary duty rules. Can you briefly discuss the fiduciary duties that States are supposed to use to police? I would also 

appreciate hearing your thoughts on whether Congress should provide the IRS with authority to enforce State laws when the State 

is unable or unwilling to act. 

Mr. JOSEPHSON. As you know, Senator Grassley, the State laws 

for charities are widely unenforced. Forty States have no charity 

enforcement capability at all, and very little interest in enforcing 

the State laws with respect to charities. 

Of the 10 or so States that do, resources are very limited. State 

law does not provide effective means for enforcers because many 

State laws contain rules like the misjudgment rule and the exculpatory provisions in the Uniform Management of Institutional 

Funds Act, that make it extremely difficult—extremely difficult— 

for State charity officers to get results in these prudent investment 

and other abusive situations. That is why your committee staff, in 

2004, and myself in my own testimony before the committee over 

many years, have advocated additional resources to the Internal 

Revenue Service for this purpose, and also a revenue sharing that 

might encourage States that do not enforce the charity laws to do 

so. 

The vehicle for this, as you know, could well be the excise taxes 

and penalties that were provided in the 1969 Tax Reform Act, 

which were intended at that time to be used for charity oversight 

by the Internal Revenue Service. Unfortunately, that has never 

happened. So as my testimony indicates, for example, the exempt 

organizations’ people have very few examiners, fewer than 500, and 

yet there are 1.8 million exempt organizations, and 70,000 exempt 

organization applications are filed each year. This is an enforcement burden that cannot be discharged. 

Senator GRASSLEY. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Stabenow, you are next. 

Senator STABENOW. Well, thank you, Mr. Chairman, for holding 

this hearing. Let me start by saying I appreciate President 

Obama’s comments and leadership on these issues, and the chairman’s leadership, and Senator Levin’s, and others who are working 

very hard to address what has become an outrage. 

I think the majority of Americans feels that we somehow now 

have created this culture of greed in this country, whether it is 

Bernie Madoff, or AIG bonuses, or the growth of offshore tax havens. The majority of people who are working hard every day and 

playing by the rules and just trying to have a good life for their 

family look around and go, what in the world is going on? 

So, Commissioner Shulman, I want to thank you. It is kind of 

nice to hear positive things about the IRS and what you have been 

doing on behalf of victims, on behalf of people who find themselves 

in difficult times not of their making. I would encourage you to conVerDate Nov 24 2008 17:32 Feb 09, 2011 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 R:\DOCS\63953.000 TIMD
21 

tinue to keep them foremost in your actions as you think about 

what needs to be done, in particular right now, for people. 

I would like to speak a little bit about what is happening globally, because this did not happen in a vacuum. We are in a global 

financial system. We have a global regulatory system, a global 

credit crisis. In the last quarter of 2008, the world economy shrank 

for the first time since 1945. The IMF expects global growth to be 

negative this year and the first annual global contraction for over 

60 years. 

So it is going to be very important next month, when we see the 

G–20 summit, to be doing everything possible to effectively work 

with other countries on this issue. It needs to be a coordinated effort. Every country has a vested stake in what is happening right 

now. I would expect that cracking down on abusive tax shelters 

and other issues would be a top priority at the G–20 summit. 

So my first question would be, what suggestions do you have for 

international cooperation as we look at all these issues? 

Commissioner SHULMAN. I have been very clear that we cannot 

have a go-it-alone strategy; that we certainly have interests that 

we need to pursue on behalf of the United States. But when you 

get to international tax evasion, the same institutions that are facilitating this behavior, the same people who are trying to hide assets, are either cheating our government of money and our citizens 

of money, or cheating other law-abiding citizens of money in other 

jurisdictions. 

I think President Obama has been very clear that international 

tax enforcement, robust international tax enforcement, is high on 

his agenda. He has also talked about some tax policy around deferral and other things that will be forthcoming, as I said, in the next 

several months. 

We have had a coordinated effort, through the OECD, on trying 

to bring bank secrecy jurisdictions and so-called tax havens into 

line with international standards. I am quite proud of the work we 

have done around the UBS case and others, to bring them to light 

and bring international attention. 

Just last week, Liechtenstein, Switzerland, Austria, Hong Kong, 

and Singapore all agreed to comply with OECD standards. So I 

think it is that kind of combination of individual enforcement actions bringing to light these abuses, as well as international pressure. I know it was on the agenda last weekend when the finance 

ministers met at the G–20. I am assuming these agendas morph 

over time; clearly, the global financial crisis is a big issue. But I 

think everybody is very focused on making sure that everybody is 

playing by the rules, while every government is trying to take care 

of their citizens and be a global player in the financial crisis. 

Senator STABENOW. Well, there is no question that we are seeing 

some increased transparency and more willingness to share information. I am wondering, specifically with tax haven countries, 

what we should be doing additionally to encourage or require some 

way for them to be sharing information, specific information, with 

us. 

Commissioner SHULMAN. Yes. What I would say is, if there are 

tax haven countries that have been facilitating this—Liechtenstein, 

for instance, had some problems with enforcement a year ago—— 

22 

Senator STABENOW. Right. 

Commissioner SHULMAN [continuing]. They have now agreed to 

an information exchange agreement with us. The only way we 

would agree is that, within a year, they had to change their bank 

secrecy laws, so our information sharing agreement trumped their 

bank secrecy laws. We are monitoring that and assuming they do 

that. If not, we pull back our information exchange agreement. So 

those are the kinds of things we can do. 

I will also tell you that I meet regularly with a group of 10 tax 

administrators globally, and we have started talking about things 

like more automatic information sharing, strengthening cooperation. A great example is, we have a thing called JITSIC, which is 

a Joint Information Tax Shelter Information Center, where we actually co-locate our people with people from other countries. 

This year, by people comparing notes, we brought to light a corporate transaction issue that we are aggressively pursuing called 

foreign tax credit generators, where basically a corporation does 

one transaction in a foreign jurisdiction, claims a credit, both in the 

U.S. and somewhere else, which really perverts the foreign tax 

credit legislation that has been passed. I mean, foreign tax credits 

are designed so you do not pay taxes here and somewhere else, not 

so you can generate a tax somewhere else and get a deduction multiple places around the world. 

That would not have happened if we were not co-locating people 

and in deeper dialogue with people. So I think it is going to be a 

combination of bilateral treaties, multilateral pressure, aggressive 

enforcement action, potential for policy changes, as well as real dialogue and cooperation amongst countries that have like interests. 

Senator STABENOW. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Snowe? 

Senator SNOWE. Thank you, Mr. Chairman. Like everyone else, 

I share in the outrage over the payment by AIG and their announcement of bonuses. It certainly is a staggering insult to the 

American people. It is in total disregard of the reality of the magnitude of their unconscionable behavior in the first place that has 

wreaked havoc on the average American, upended and disrupted 

their lives, people who struggle every day to make ends meet, live 

by the rules, work by the rules, and now they are losing their jobs, 

they are losing the value of their pensions. So I think that this is 

something that we clearly have to focus on. 

In fact, in talking about the bonuses, we had the opportunity 

during the stimulus debate—in fact, Senator Wyden really had legislation that was passed by a voice vote on the Senate floor that 

would have retroactively given choices to companies, and that 

would have applied to AIG in this circumstance, where they either 

would pay a 35-percent excise tax on those bonuses or they would 

have to return the TARP money, the money the taxpayers had 

given to AIG and all the other troubled institutions. We fought, 

during the conference, to maintain that provision. Regrettably, it 

was dropped. We could have been in a very different situation 

today had that provision become law. 

So I would hope, Mr. Chairman, we would reconsider it. I would 

hope we could take action. Perhaps we could change even the taxVerDate Nov 24 2008 17:32 Feb 09, 2011 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 R:\DOCS\63953.000 TIMD
23 

ation. We use the top tax rate of 35 percent, but it would have applied in this instance, for AIG, for any contracts, any commitments 

that were made during the course of 2008, for any bonuses that 

were paid or were going to be paid. So we would have been in a 

different situation entirely today had that provision been enacted 

and accepted by the conference. Mr. Shulman, UBS has paid $782 million in taxes and penalties 

for criminal offenses. As we know with AIG, disclosures transferred 

billions of dollars to financial institutions, one of which, of course, 

is UBS. I know that they have received $800 million, plus $1.7 billion, for a total of $2.5 billion. It is extraordinary to me that we 

would have had this kind of transfer to an institution that has secret bank accounts. 

We know that they agreed, with our government, to disclose the 

250 accounts and their identities, but at one point during the mid2000s they had more than 5,200 accounts. I think this looks like 

we are simply laundering this money through AIG so that UBS can 

pay back their $782 million that they paid for criminal offenses to 

the U.S. Government. Would you respond, briefly? 

Commissioner SHULMAN. Yes. Well, a few things. One, as I said 

before, I cannot really add much to what the President said yesterday about AIG, but as a citizen, I share your outrage about the 

bonus situation. 

Regarding UBS, we are actually still in active litigation with 

them. We are pursuing, or the Justice Department is pursuing on 

our behalf, a John Doe summons to get all of the outstanding bank 

accounts. I have been very clear that we plan to continue to pursue 

that and to continue following this trail. I cannot really speak 

much more about the UBS case. 

The Justice Department has asked me not to, so that I, as the 

leader of an agency, do not jeopardize that case, except to say, for 

the tax evasion case with UBS, we plan to pursue all the means 

we can. There has been a case against the institution, and now we 

are making sure we go after the U.S. citizens that were using that 

institution to facilitate tax evasion. 

Senator SNOWE. It is inconceivable to me, though, that the Treasury Department did look at these cash flows. So on one hand, UBS 

is paying $782 million in criminal offenses and penalties to the 

U.S. Government. On the other hand, they have benefitted through 

the TARP funds of $2.5 billion as a result of the disclosures that 

were made by AIG. So, yes. I mean, that is something that should 

have been regarded at the outset. I do not know how it even happened in the first place. It does not make sense. 

Commissioner SHULMAN. Yes. 

Senator SNOWE. And frankly, it is preposterous. So I do not 

blame the American people about their anger. But this is something that, frankly, the Treasury Department should have considered in the first place rather than allowing this to happen. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Kerry? 

Senator KERRY. Thank you, Mr. Chairman. Thanks a lot for 

doing this hearing and, again, bringing this subject up as you did 

earlier last year. We appreciate it enormously. This is a subject 

24 

that I have been interested in and following since the 1980s when 

I stumbled across these issues with the BCCI case. I have brought 

a number of pieces of legislation which were passed which have 

helped to increase the level of scrutiny that we have with respect 

to transfers, the $10,000 piece, the amendments with a number of 

countries on their cooperative efforts with us. But clearly—clearly—we have only scratched the surface, and I want to talk about 

that for a minute. 

The UBS effort—well, we know there was sort of an initiative 

taken to reach out to some 20,000 wealthy Americans and actually 

flout the tax laws through the offshore banking services and evade 

over $300 million in taxes. 

Now, you have mentioned the case is ongoing, but help us, from 

a legislative point of view and an oversight point of view. Last July 

when we had the hearing, Jack Blum testified here—and you were 

here, Mr. Shulman, you were here, Mr. Brostek—the problem of 

offshore tax evasion is exacerbated by the so-called revenue rule, 

the understanding that basically no government will help enforce 

the tax laws of another government. Do you, in fact, find that to 

be true? 

Commissioner SHULMAN. I find it to be varying among governments. I do not necessarily find that blanket statement to be true, 

because I think there are a lot of like-minded governments that understand that, if one of our citizens is evading taxes and they do 

not help us, they are disadvantaged when one of theirs is evading 

taxes; they need to help us. We have treaties around that help us 

with information exchange. 

Senator KERRY. Let me say, as the chair of the Foreign Relations 

Committee, we are going to look at those treaties, and we are going 

to start examining the degree to which they have been enforced, 

not enforced, or are impediments, in some cases. 

Commissioner SHULMAN. Yes. No, I think that is a worthwhile effort. What I was going to say is, the model U.S. treaty for taxes 

has 30 provisions, everything from pensions to annuities to exchange of art, those kinds of things, around tax treatment. It only 

has one enforcement provision, article 26. That enforcement provision is generally designed. You need to know the name of the taxpayer, for example: Senator Kerry. You have a name. You have to 

name the account and go after them. 

So, while treaties are useful, they do not necessarily spontaneously produce the kind of information that we would like to get. 

That is why we use a variety of other tools, like a John Doe summons, like other international cooperation, like the QI program, 

where we have other levers, and clearly the kind of legislation that 

this committee is considering are levers that we could use. 

Senator KERRY. Well, it seems to me that we even have to go beyond that. I mean, I have found that a lot of these governments 

have just fundamental indifference. I remember going to visit with 

the Governor of the Bank of England with respect to offshore entities. This was about 10 years ago. I found a remarkable level of 

disinterest, and even hostility, towards the idea of getting involved. 

Gordon Brown came here, now as Prime Minister, a couple of 

weeks ago and announced from the podium of the House that we 

have to end offshore accounts that are basically havens. How do we 

25 

do that? What is the cooperative effort necessary for you to be able 

to guarantee that those accounts the chairman referred to in the 

Cayman Islands are, in fact, legitimate business interests rather 

than just pass-throughs and cut-outs and shell corporations and so 

forth? Is there an international standard? This is at the G–20, 

even, that ought to be discussed in a week or so, that they ought 

to be talking about international, legitimate business standards, 

sham transaction standard, and level of scrutiny. 

Commissioner SHULMAN. I guess I would say a couple of things. 

One is, I would say there is no silver bullet. There are going to be 

multiple pieces of a strategy that includes enforcement regulations, 

legislation, as well as international cooperation. Two is, I would 

separate individuals hiding income offshore through sham trusts 

and accounts, and corporations, because you have two different sets 

of issues. I think you are asking the question about the corporation 

set of issues. 

As Mr. Brostek said, there are some corporations just doing some 

business transactions that make sense internationally. There are 

some that are doing aggressive, but legal, tax planning, and that 

gets to tax policy. Then there are some who are clearly being abusive and avoiding taxes, and those are the ones that we go after. 

I think one of the issues that is on the table, that the President 

has put on the table in his 2010 budget, is the issue around deferral, because I think your conversation in the U.K.—countries compete on tax rates. Countries compete to have businesses and less 

regulation / more regulation. 

I think what we have seen in recent days is that all countries 

are connected and that there need to be some standards globally. 

But probably the simplest things, and they are being discussed as 

the President signaled in his blueprint, are some of the deferral 

issues. Because, once a U.S. corporation has to pay taxes everywhere, my job as IRS Commissioner becomes much easier because 

there is not as much incentive to play games. 

The CHAIRMAN. Senator Cantwell? Excuse me. Senator Carper. I 

am sorry. Senator Carper is next. Sorry. 

Senator CARPER. Thanks very much. 

Mr. Shulman, you were good to come by my office and meet with 

me almost a year ago. I think it was before you had been confirmed. You have been on your post for, I think, about a year now. 

Is that correct? 

Commissioner SHULMAN. A dog year. It feels like 7. [Laughter.] 

Yes. Yes. 

Senator CARPER. I was going to say, welcome to the pound. 

[Laughter.] 

You serve a term of 5 years, as I recall. Is that correct? 

Commissioner SHULMAN. That is correct. 

Senator CARPER. Any idea how long that has been the case? 

Commissioner SHULMAN. A 5-year term for the Commissioner? 

Senator CARPER. Yes. 

Commissioner SHULMAN. It was part of the IRS Restructuring 

and Reform Act. 1998 was the first 5-year term. So, I will be the 

third Commissioner who was confirmed for approximately 5 years. 

Senator CARPER. I hesitate in asking this question, but do you 

think it is a good idea? 

26 

Commissioner SHULMAN. What is that? 

Senator CARPER. Do you think it is a good idea to have a 5-year 

term that stretches across different terms of a President? 

Commissioner SHULMAN. My belief is that the IRS needs to be 

a nonpartisan, by-the-books agency that enforces the law, that is 

removed from politics. It is also a large organization with very complex people and technology issues that take many years to actually 

get a strategy and stick with it. 

Senator CARPER. The reason why I ask, I chair a subcommittee 

that has jurisdiction over, among other things, the Census Bureau. 

We are wrestling with whether or not the Director of the Bureau 

of Census should also serve an extended term, as you do, and other 

Commissioners well in the future. So, thank you very much. The 

parameters that you just described with your Agency are very similar to those that exist in the Census Bureau. So, thank you. 

Commissioner SHULMAN. I will not comment on the Census Bureau. 

Senator CARPER. All right. Just fill out your census form, and 

you will be fine, all right? [Laughter.] As you may recall when you 

visited with us, we talked a bit about the tax gap. 

Commissioner SHULMAN. Yes. 

Senator CARPER. We talked about how information is reported. 

We actually do a pretty good job of collecting taxes from those people. In the stimulus package that we passed, we recently went in 

a lot of different directions, a lot of it to put people to work. As far 

as I know, none of that money was directed to the Internal Revenue Service. 

I am wondering, though, with respect to the omnibus appropriations bill which was just enacted, and I think just signed by the 

President, were there any resources provided in that legislation for 

the balance of this fiscal year that can help you and your colleagues at the IRS do your job better? 

Commissioner SHULMAN. The answer is yes. Chairman Baucus 

and a number of other members of Congress have been incredibly 

supportive of the IRS and the IRS budget, to go after the tax gap. 

As we talked about with the tax gap, we have a proven return on 

investment as an agency: 5:1; for specific programs, it is 13:1, 14:1. 

So increasing our resources is going to be key. 

There was an increase in enforcement resources in the current 

omnibus bill. President Obama’s budget outlines a couple of things. 

One is robust IRS enforcement programs, but also, very clearly, a 

long-term commitment, because one of the things about Federal 

agencies is, if you give a bunch of money one year and then do not 

in the next, it takes a while to plan, to recruit. When we bring on 

an agent, we have to pull other agents off of cases to train them. 

We have to put them on simpler cases and pull different inventory 

off. So that is a piece of it. 

The other thing that is quite helpful that is in the Emergency 

Economic Stabilization Act of 2008, and that this committee took 

leadership on, is credit card reporting and basis reporting. The real 

way to leap-frog and get a real grip on the tax gap is to leverage 

our resources and also, clearly, information reporting, because the 

more information we get from third parties, the better we are going 

to do at our job. 

27 

The last thing I would say is there was $51 million in the appropriations—or in the omnibus bill—that just passed for research for 

the IRS. The only real credible way to do tax gap research is to do 

audits of returns you would not otherwise do an audit for, because 

you do not know what is there unless you go and look in places you 

would not look. Usually we are auditing returns that have higher 

yields, where we see indicators that there will be collection. We actually do random audits. So this investment in research so we can 

continue to hone in and target our resources better is key. So, I 

think we have gotten a lot of support, and we are going to keep 

at it. 

Senator CARPER. Good. I share the passion of our chairman, and 

that of a number of people on our committee, to go after as much 

of this tax money that is owed and not being collected. We want 

to make sure you have the resources, the personnel, the technology 

to do that work. 

Mr. Brostek, you have been, I think, good enough to participate, 

as I recall, maybe in a round table that we had on this subject several months ago. 

Mr. BROSTEK. Correct. 

Senator CARPER. The same as the tax gap. Are there some points 

that you would like to share with us that you would have us focus 

on this year, particularly within this committee, to go after not just 

the low-hanging fruit, but the fruit that is a little higher on the 

tree? 

Mr. BROSTEK. Well, there are a number of things that could be 

done. Looking for additional information reporting is clearly one of 

the best strategies. 

Senator CARPER. When the information is reported, the IRS collects about 90 percent of what is owed. 

Mr. BROSTEK. Or more. Yes. I think it is up to 96 percent on 

complete information reporting. IRS knows exactly the same income items that the taxpayer knows. 

One area that I think is maybe a little under-appreciated is the 

role of the paid preparer community. Well over half of taxpayers 

use a paid preparer to prepare their returns. There is a pretty good 

body of evidence that the performance of that community is not 

stellar. 

Senator CARPER. Yes. 

Mr. BROSTEK. Sometimes that may be because a taxpayer is not 

providing good information, but there is also an emerging body of 

evidence that the preparers themselves are not always diligent and 

competent. I think that is one of the areas that might be worth 

paying some attention to. 

The CHAIRMAN. Thank you very much. 

Senator CARPER. Thank you very much. 

The CHAIRMAN. Thank you, Senator. 

Senator Cantwell? 

Senator CANTWELL. Thank you, Mr. Chairman. I want to add my 

thanks for you holding this important hearing. Madoff fraud and 

schemes defrauded about 8,000 people and over $50 billion, so, on 

top of everything else we have been through, to have this incident 

happen is just unbelievable. Part of, I think, the importance of the 

28 

hearing today is to also look at the regulatory reforms that we need 

to put in place. 

But first, I want to thank Commissioner Shulman for being here, 

and for the IRS Statement of Guidance that was issued today. I am 

very pleased that the IRS ruled and with the procedures that we 

are putting in place so that direct investors can have more predictability on how to handle these theft losses. So I very much appreciate the fact that the IRS has moved forward on that. 

My question is in regards to the regulatory side of this equation. 

Stephen Harbeck, from the SIPC, told the House Financial Services 

Committee in January, ‘‘It became apparent very early in the 

Madoff case that the customer statements Mr. Madoff had been 

sending to investors bore little or no relation to reality. The records 

sent to customers were inaccurate when compared with the inventory of securities actually held by the brokerage firms.’’ 

So sometimes tax regulators themselves can help be the canary 

in the coal mine in showing signs of danger because they can get 

access to information that others cannot get access to. So while 

Madoff was sending bogus statements to his clients, they were also 

making real payments to the IRS. So my question is, could the IRS 

have connected some of these dots sooner and perhaps focused 

some of the attention on the right areas? How much interaction 

does the IRS, Treasury, and SEC have when it comes to coordinating these very complex investment firms? 

Commissioner SHULMAN. Yes. A couple of issues. One is, the majority of our enforcement resources are focused on collecting taxes. 

As you said, one of the issues, the reason we are putting out guidance, is people actually were paying taxes on these. Frankly, we 

have a big enough job to do, and the complexity of the code is going 

up, that we need all the resources we can to make sure we collect 

the proper amount of tax. That is where we are very focused. Our 

first line of sight is not to look at investment schemes and those 

kinds of things. 

With that said, I am a big believer that I am a public servant. 

I am here to serve the American people, and I need to coordinate 

with other leaders in the government to try to make sure it works 

as efficiently as possible. We have made our forensic investigators, 

especially our criminal investigators who are very good at following 

the money trail, available to other Federal agencies to coordinate 

on enforcement and fraud cases. We have a long tradition of that, 

but we are doing that especially in some Ponzi-related schemes. 

You might have seen, we filed some tax issues around another 

prominent Ponzi scheme just this week. 

Senator CANTWELL. Do you think if you would have had the resources and we had better coordination, that we could have connected some of the dots? 

Commissioner SHULMAN. I think it is always easy to look in the 

rear-view mirror. A lot of people were duped by Bernie Madoff, 

from Federal regulators to very sophisticated investors. We are 

going to continue to coordinate and assist where we can. We are 

certainly going to try to make our resources available. 

I have actually had conversations with the chairman of the SEC 

about how we take tips in, and I know she is moving aggressively 

on getting better at synthesizing tips. So I am a believer that we 

29 

can all learn from each other and we should share as much information, expertise, and personnel as we can. 

Senator CANTWELL. But do you think there are any legal obstacles for more coordination? Because, again, it seems to me that you 

have access to records and information that help piece the puzzle 

together. 

Commissioner SHULMAN. Yes. Well, section 6103, which is a pretty locked-down provision around us not sharing taxpayer information, is quite important to the integrity of the whole tax system, 

that people feel like they are filing taxes, they are bringing information in, and it is not going to be shared. 

With that said, that is sharing it with the public. There are some 

impediments sometimes to sharing with other agencies, and we are 

certainly open to exploring if the information we have can be helpful in fraud cases and, if so, how to get that into the hands of other 

authorities. 

Senator CANTWELL. Well, I certainly want to explore that with 

you, because I think the inter-agency coordination and cooperation 

is critical on many fronts. I would assume with DOJ investigations 

you probably do that now to some degree but, if you did it across 

several agencies, that it would also help in identifying these sooner. 

Commissioner SHULMAN. I will tell you, the other topic we are 

talking about with offshore, we are actually now very aggressively 

having conversations with other agencies around how to triage all 

the information that the Federal Government has in order to do a 

better job. So I very much agree with the direction you are headed. 

Senator CANTWELL. Thank you. 

And, Mr. Chairman, I know that we have had all of this economic crisis on individuals and the impact, but the amount of capital losses that taxpayers can write off against their income is limited to $3,000. I know my colleague, Senator Bunning, has brought 

this up before. But I think it is something really the committee 

should look at, maybe spend a little more time looking at this particular area and how we can help consumers. 

The CHAIRMAN. Yes. Thank you, Senator. 

I would just like to ask you a question, Commissioner Shulman, 

about UBS. As I understand it, at the urging of the Justice Department, the Justice Department won an agreement with UBS in 

which UBS agreed to turn over the names of about 250 customers 

suspected of tax evasion. We are not talking about avoidance here, 

we are talking about evasion. UBS also agreed to pay a fine of $780 

million. 

But Bradley Birkenfeld, a former UBS employee, said that U.S. persons had hidden more than $15 billion in assets with the assistance of the UBS Private Wealth Management Group. I think the 

IRS alleges that approximately 52,000 U.S. persons used UBS to 

hide assets in that Swiss bank alone, UBS. 

What is going on here? They have only given us the names of 

250. You think there are 52,000 more. What is happening here? 

How do we get the information we want? 

Commissioner SHULMAN. Well, let me say a couple of things, Mr. 

Chairman. First of all, I would love to go into this case with you 

and brag about it, because I think the IRS actually found this, 

brought this to light. It created international attention. 

30 

The CHAIRMAN. And I compliment you for that. 

Commissioner SHULMAN. And, as you know, I cannot really talk 

about specific taxpayer cases, et cetera. 

The CHAIRMAN. Right. 

Commissioner SHULMAN. What I will tell you is there were two 

things that happened. There was a deferred prosecution agreement 

that was around UBS being indicted criminally, that the Justice 

Department deferred that with a set of conditions that are all part 

of the public record. 

The CHAIRMAN. Right. 

Commissioner SHULMAN. There is also the IRS’s John Doe summons to force UBS to produce all of the accounts, and that is being 

litigated through the courts now. So what is going on is, prosecution was deferred on the criminal matter, but we are pursuing the 

civil matter and continuing to try to get as many of the accounts 

as we can. My view is, we should get all the accounts. 

The CHAIRMAN. Right. 

Commissioner SHULMAN. But I cannot prejudge. 

The CHAIRMAN. Right. 

Commissioner SHULMAN. There is going to be a hearing in July 

with the judge. 

The CHAIRMAN. Right. But how do we get at the Swiss problem? 

As I understand it, Switzerland makes its own decision whether or 

not the requested name, John Doe, is violating the law, U.S. law. 

Commissioner SHULMAN. Yes. 

The CHAIRMAN. They are making their own determination themselves. If they determine, well, gee, maybe this person John Doe is 

not violating the law, we are not going to send the name to the 

IRS. 

Commissioner SHULMAN. Yes. 

The CHAIRMAN. That is a problem. That is not their judgment as 

to whether U.S. law is being violated, that is the judgment of the 

United States, it would seem to me. 

Commissioner SHULMAN. Yes. One of the problems—and we 

talked about treaties a little bit before—is sovereign law often 

trumps treaties. These indications we have gotten from some of the 

bank secrecy jurisdictions, including Switzerland, to comply with 

the OECD standards would actually have our information exchange 

potentially trump sovereign law. So that is one of the ways to get 

at it. Bank secrecy is a big issue for us at the IRS. 

In the Swiss case, as I understand it, for us, you send in a tax 

return, you sign your tax return. If you do not, if you basically lied 

on the tax return, it is tax evasion. The Swiss interpretation is not 

the same. You actually have to actively—it is not just about signing 

a tax return and sending it in—you have to actively conceal assets, 

set up phony trusts, and have acts of commission rather than omission. 

The CHAIRMAN. Right. So to what degree would the information 

reporting actually trump sovereign Swiss law? 

Commissioner SHULMAN. What information? 

The CHAIRMAN. To what degree would information—if we require—if this legislation we are contemplating here were to be enacted, to what degree would that help? 

31 

Commissioner SHULMAN. Well, I think what it would do is, I am 

not sure it trumps Swiss law, but we would actually see the flows 

going out of the U.S. and be able to connect that to U.S. citizens. 

What we are doing with the John Doe summons is trying to get the 

names of the U.S. citizens. So what it would actually do is potentially give us a line of sight when the money left, not years later 

when we are trying to grab back the money that is already gone. 

So I think this kind of information reporting is definitely worth exploring and could be a great tool for us. 

The CHAIRMAN. So how many other havens are there? Liechtenstein is stepping forward, as I understand it. Monaco has not, 

as I understand it. 

Commissioner SHULMAN. I read in the papers that they say they 

are, but that is all I know. 

The CHAIRMAN. All right. I hear the current position of Monaco 

is ‘‘to make no comment at all,’’ said a state official. Now, I do not 

know what ‘‘no comment’’ means. It is just what he said. Then 

there is Singapore. We have a problem with Singapore. What are 

some of the countries we have problems with here? 

Commissioner SHULMAN. Well, I guess I would rather—— 

The CHAIRMAN. I know you would rather not name them. 

Commissioner SHULMAN. Yes. Listing the names of countries is 

the purview of Treasury, the State Department. Obviously we have 

our eyes on it. I mean, I guess what I would say is—— 

The CHAIRMAN. If we name names, that puts sunshine on those 

countries, put a little glow on them. If it embarrasses them, they 

might do something. 

Commissioner SHULMAN. Well, let me just say I am probably not 

going to be doing a lot of ski vacations in the Swiss Alps. [Laughter.] I think bank secrecy is an issue, so places that have bank secrecy laws, places that do not have information exchange agreements with us, are a problem. And then by definition, places that 

hold themselves out as low- or no-tax jurisdictions. So I am more 

focused on a set of criteria. The ones you listed are all ones that 

are on our radar that, when we see transactions going on there, we 

go there. 

The CHAIRMAN. My time is expiring. I would just urge you to go 

for it. You have such support in this country. Be very, very vigorous. Very vigorous. Almost embarrassingly vigorous. I think that 

American taxpayers would be very proud. I know I will, personally, 

if you do. 

Senator Schumer is next. 

Senator SCHUMER. Thank you, Mr. Chairman. I really appreciate 

your having the hearing. I think it is on two very important subjects, and I appreciate the second round and all the witnesses. 

I am going to return to the issue that I care about. Well, I care 

about both, but I am questioning about, because I agree it is—what 

did you say, Mr. Chairman? It is embarrassingly—— 

The CHAIRMAN. Well, I know I would like him to be embarrassingly vigorous. 

Senator SCHUMER. Embarrassingly vigorous on offshore stuff. I 

agree. All right. 

The CHAIRMAN. I mean, back off a little, but just be very vigorous. [Laughter.] 

32 

Commissioner SHULMAN. For this year. 

Senator SCHUMER. The man from Montana has spoken. 

Next question. This is back on helping the victims of Madoff. 

This one sounds innocuous, but it is very important, technically, to 

a lot of people. How will the IRS handle theft losses for individual 

taxpayers who invested with Madoff directly, but did so inside a retirement vehicle like an IRA or Roth IRA? This is sort of uncharted 

waters. But a lot of victims were affected inside these accounts, average, middle-class people. 

Commissioner SHULMAN. Yes. 401(k)s, IRAs, retirement vehicles. 

If an investment was deductible going in, you cannot take a loss 

going out because there were not taxes paid on it. 

Senator SCHUMER. Right. 

Commissioner SHULMAN. There are some exceptions, as you mentioned, like a Roth IRA. The rules get very complicated. But, if it 

is after-tax money, there may be the ability to take losses, but 

mostly you take losses at the time of distribution. So I would just 

encourage people to look at the guidance and to have conversations 

with our counsel’s office. 

Senator SCHUMER. Right. Again, I would just urge you to be as 

helpful as you can to the victims in this regard, particularly with 

the Roth IRA situation. 

Commissioner SHULMAN. Can I make just one clarifying comment about your earlier comment, Senator? 

Senator SCHUMER. Please. Yes. 

Commissioner SHULMAN. You talked about a 5-year carry-back 

and indefinite carry-forward of the loss. 

Senator SCHUMER. Twenty-year, I think. 

Commissioner SHULMAN. Under general rules it is a 3-year carryback, because you have investment theft loss. It is defined as a 

business loss under the code, and you can carry it back for 3 years. 

A unique twist of the American Recovery and Reinvestment Act 

says, for 2008, if you have gross receipts of less than $15 million, 

you get a 5-year carry-back. So I did not want people listening to 

this to be confused. 

Senator SCHUMER. Right. 

Commissioner SHULMAN. So they are going to need to look at 

their circumstances, look when they discover it, and—— 

Senator SCHUMER. But, if you are below $15 million, you are all 

right with the 5 years? 

Commissioner SHULMAN. In 2008. 

Senator SCHUMER. Yes. All right. Good. 

The one point about the IRA. The money in the IRA was still stolen. It was in an IRA, but it is still gone, so anything you can do 

to be helpful—all right. 

Third, does the guidance say anything about potential claw-back 

payments that the victims who had previously withdrawn funds 

may have had to make? What is the tax treatment of such clawbacks under current law? Would taxpayers receive a deduction for 

such payments? 

Commissioner SHULMAN. Sir, the ruling tries to clarify existing 

law, not make up law. It is deductible in the year discovered, except for reasonable prospects of recovery. I think people need to determine in all Ponzi schemes—and I think the Madoff people will 

33 

understand the situation better than I will because they are in contact with the trustee—how much there is a reasonable prospect of 

recovery. 

What I will tell you, though, is there is a true-up at the end. So, 

if people take a deduction and get that loss, they are going to be 

able—if they then get some sort of payment, they will just be taxed 

on it. If they do not take the deduction because they think they are 

going to get it and they never get any sort of recovery, then they 

can take that loss. 

Senator SCHUMER. All right. Again, I have to repeat that all of 

the rulings and guidance that you have given are really helpful to 

the victims. I do not know if I have mentioned this. We have heard 

from victims themselves already since yesterday—because we 

shared what you had shared with us ahead of time—we have heard 

from some of their lawyers that they are really happy with what 

the IRS is trying to do here. It is a rare day when someone can 

be very happy with the IRS, and this is it. 

Commissioner SHULMAN. It is a good day. 

Senator SCHUMER. In a difficult situation. So, thank you. 

The CHAIRMAN. All right. 

Senator Snowe? 

Senator SNOWE. Thank you again, Commissioner Shulman. I 

want to follow up again on UBS, because I think it is extremely 

disturbing, frankly. I realize it is a matter of the Justice Department and the IRS at this point regarding UBS and its unwillingness to disclose all of these accounts. But regardless, we have a situation where we have given the bank $2.5 billion in Federal taxpayers’ money and they are paying $782 million in criminal penalties and taxes to the U.S. Government for tax evasion. 

So the bottom line is, we are giving money to an institution that 

has been involved in tax evasion. There is nobody in America who 

can understand that. So we had better make it abundantly clear 

to the Swiss government. Even so, whether we have a treaty or 

not, we should make it abundantly clear. We, frankly, should rescind that money. I just think it is absolutely preposterous that we 

are in this situation today. 

We are dealing, on the one hand, with the bonuses, and then on 

the other hand we are dealing with a situation that we are giving 

money to an institution that has been engaged in tax evasion. I 

know that Secretary Geithner will be making this a priority for the 

G–20 meeting in April, absolutely, in terms of bank secrecy laws 

and tax evasion. 

But nevertheless, in this situation, we need to address it. I do 

not think it is something that we can defer, and go forward in the 

future. We are dealing with a bank that refuses to disclose all of 

its accounts. They say it is a matter for diplomatic chains between 

the U.S. Government and the Swiss government. But it is also a 

matter for the U.S. Congress, and I do not think it is something 

that we can ever justify or accept. So I know that, going forward 

we need to address this now and retroactively, in my estimation, 

because I just do not think it is at all tolerable under these circumstances. 

To that point, this has been something that UBS has been engaged in for the better part of a decade, since 2000. At any point 

34 

do you know, to your knowledge, if anybody ever approached the 

IRS, similar to Harry Markopolos who approached the SEC regarding Bernie Madoff ? Was there anybody who ever approached IRS 

about UBS and these secret bank accounts at any point between 

2000 and 2007, before the IRS identified this problem? 

Commissioner SHULMAN. Not to my knowledge. 

Senator SNOWE. It is hard to imagine, actually, because this in- stitution not only failed to pay $220 million in taxes, obviously paying penalties and interest up to $782 million. So at no point during 

that decade did anybody ever approach the IRS or was there any 

indication that there was anything wrong? 

Commissioner SHULMAN. Well, I will tell you, it is in the public 

record, and I can only talk about the public record. But we actually, through informants, through going after, aggressively, other 

cases, got onto this issue. So, again, this is something that I think 

that the Agency has, with our stepped-up focus on international tax 

evasion, gotten laser-like focus in this, started pursuing the John 

Doe summons, started to bring international pressure. 

So this is one where there are plenty of things that we do not 

do perfectly, and we are always looking to improve. This is one 

where we got on top of it and are continuing to pursue it, as I said. 

I want to tell you that you have my personnel commitment to continue to pursue these matters. 

Senator SNOWE. I appreciate that, too. I appreciate the work. 

Mr. Josephson, on the Pension Benefit Guaranty Corporation, 

which is responsible for pension plans when a company becomes insolvent, there is the case of the East River Management Company, 

which is no longer in operation and defunct, and PBGC had to take 

it over in December. Is it routine for the PBGC to assume fiduciary 

responsibility for a company that did not even diversify? I mean, 

should there be any standards with respect to that? Because it is 

clear in this case, they turned over all of their money to Bernie 

Madoff and there was no diversification within its plan. Now PBGC 

is obviously having to assume responsibility for this now-defunct 

plan. 

Mr. JOSEPHSON. It depends where you think, Senator, the risk of 

loss should fall. Obviously, diversification is required by the applicable State law. For the failure to diversify, there would be State 

penalties against the insolvent corporation that did not diversify. 

But where is the Pension Benefit Guaranty Corporation going to be 

able to collect that? 

Senator SNOWE. Right. 

Mr. JOSEPHSON. There is a conundrum here. I do not know that 

there is, under State law or Federal law, any effective remedy in 

that situation. But particularly in response to the dialogue between 

Senator Carper, Mr. Brostek, and Ms. Cantwell’s questions, I think 

we also need to focus on whether or not the accounting profession, 

in auditing exempt organizations—publicly supported charities, private foundations, pension plans—is actually doing its job. 

In my 5 years as head of the Charities Bureau in New York, I 

found that the resources that accounting firms—even the Big Four 

accounting firms—devoted to this kind of work were meager compared to what they purported to devote to the major publicly held 

companies. But even in that case, Senator, you will certainly reVerDate Nov 24 2008 17:32 Feb 09, 2011 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 R:\DOCS\63953.000 TIMD
35 

member that the failures of the auditing function for publicly held 

companies, in effect, required the Federal Government to federalize 

those accounting standards in the Public Companies Accounting 

Oversight Board. 

There is another analogy here that I think is relevant, because 

of Mr. Brostek’s remark about the incidence of tax evasion in returns prepared by paid preparers. There are, in fact, no Federal 

standards for auditors that account for exempt organizations. That 

is an aspect that the committee ought to take into account. 

For example, there is a recent precedent. The Treasury, in response to the committee’s initiative with respect to donated property, has issued regulations that really require appraisers of donated property to meet set qualifications and to express their opinions in a set form. No such requirement exists with respect to the 

paid preparers that prepare returns for exempt organizations. 

As I said before, my experience in the Charities Bureau is, they 

do not devote the same kind of resources and the same kind of acumen. There is no evidence, for example, that any of the accountants 

who audited any of the Madoff funds ever did a walk-through to 

try to determine whether or not the statements he was providing 

were actually backed by transaction slips. Madoff ’s trustee, Mr. 

Picard, has said publicly that there are no transaction slips for 

Madoff transactions over the whole 13 years of the scandal. I cannot understand why the auditing function did not at some point 

uncover that. This is an important subject, it seems to me, for IRS 

and committee oversight. 

Senator SNOWE. You are absolutely correct, and I thank you very 

much for those very constructive suggestions. Thank you. 

Senator CARPER. Gentlemen, I have just a couple of questions to 

wrap up, at least for me. Again, thank you very much for being 

here today and for your responses, and for your service, too. 

When I was Governor of Delaware, every year we had an award 

that was provided, sort of like a State version of a national award, 

that was offered to either businesses—a quality award for best 

quality, and the business operation could be nonprofit, it could be 

actually a public entity that won. 

I think in my last year as Governor, the winner was the Delaware Division of Revenue because they did a very good job of collecting taxes that were owed. They also did a pretty good job of providing customer service. I think you demonstrated again here today 

that we can do both. We applaud you and the folks who are a part 

of your team. 

Mr. Shulman, I believe you mentioned that, in the omnibus appropriations bill to fund the IRS for the balance of this fiscal year, 

there was maybe $50 million that was appropriated, I think you 

said, that could be used for research. 

Commissioner SHULMAN. Yes. 

Senator CARPER. And you welcomed that. I think the last time 

we actually had an extensive study of the tax gap may have been 

in tax year 2001. I would just ask if the IRS might have any plans 

to use some portion of that $50 million to update the tax gap. Are 

you aware of any other initiatives under way to do so? 

Commissioner SHULMAN. Yes. The tax gap number, as I have gotten under it, is very difficult to estimate. The current numbers that 

36 

are public are 2001 numbers. Very few of those are actual 2001 

numbers. A lot of them are extrapolated numbers from 1986, when 

we used to do very extensive, kind of random audits to really, really get under it. 

We have a commitment to update the tax gap more regularly, 

focus on some areas where research had not been done, and also 

to do things like I mentioned before—do some random audits, rather than just targeting the areas where we normally try to do audits 

and have low- or no-change rates—so we target it correctly. So the 

answer is yes. It is all focused in what we call our National Research Program, which gets under reasons for noncompliance, 

where there is noncompliance, and eventually it leads us to datadriven resource-allocation decisions about how to go after noncompliance, which, as you said, is a combination of good service for 

people who are confused by a very complicated tax code and aggressive enforcement for those who are trying to evade the law. 

Senator CARPER. Good. Thank you. 

A question to Mr. Brostek, and also for you, Commissioner. Sticking with the tax gap again, we all know we need additional thirdparty reporting in areas that go beyond the measures that are already enacted. We talked about some others today: basis reporting 

is one, and we have talked, I think, today, about credit card reporting. I also believe that it is important to make sure that we are 

talking about what I would describe as the right people. 

With respect to the statutory authority the IRS has already been 

given, and may be given in the future, how does the IRS, if you 

will, thread the needle between increasing enforcement targeted on 

unscrupulous taxpayers, while not accidentally imposing undue 

hardships on taxpayers who are trying to comply with the law? 

Mr. BROSTEK. Maybe I will start and pass it over. The research 

that the Commissioner has referred to is fundamental to their 

being able to determine which taxpayers are most likely to be noncompliant. GAO has long supported the type of research that IRS 

is undertaking; it improves their selection process to ensure that 

they are bothering the fewest number of taxpayers who are completely compliant. 

In addition to that, the IRS personnel do have informants and 

receive tips. They receive tips through the enhanced whistle-blower 

protections that this committee was responsible for. All those 

things help IRS in identifying the most likely non-compliant taxpayers. 

If I could, I would like to mention one other thing in relation to 

the research that I think is sometimes under-appreciated, and that 

is that it helps in constructing systemic solutions. The basis reporting provision that is being implemented now, that IRS has proposed regulations out on and is being commented on, grew out of 

research that we did using the National Research Program database from the 2001 tax year. 

We were able to go into the files from that research to develop 

the case that basis reporting was practical and would have an effect on the tax gap related to that particular problem. So it is not 

just that that research helps with the selection of routine audits, 

it also helps us revise regulations and create statutory solutions to 

the problem. 

37 

Senator CARPER. Thank you. 

Mr. Commissioner, if you would just respond briefly, please. 

Commissioner SHULMAN. Yes. I mean, I do not think it is necessarily a choice, is the way I think about it. Basis reporting, for 

example. Anyone who is compliant has nothing to fear. There are 

a lot of compliant taxpayers who spend a lot of time, when they sell 

a stock, digging around and trying to figure out, what was their 

basis when they bought it, and if they reinvested dividends. 

So I think a lot of people who are trying to be compliant are actually going to welcome reporting. The third party sends it to us, 

the third party sends it to you, you attach it, and you are done, 

versus the rigmarole you go through now trying to figure out what 

your basis was. So, if done right, information reporting—rather 

than us suspecting you and going and doing an extensive audit, 

which is more burdensome, actually—if done right, is less burdensome, gives us the information, allows us to do our compliance job 

without a full-blown audit, and so should be quite helpful. But like 

I said before, our job is, as we get information, to make sure that 

we use it appropriately and only with people who are not—or as 

much as possible with people who are not—compliant. 

The other thing I would just say is there is something about information reporting that has a direct enforcement effect. People’s 

behavior changes when they think you can see. So with the W–2, 

people are very compliant, not because we are running so many 

W–2 versus income checks. We do it automatically, so we see all 

your W–2s. No one, I think, would think about lying about their 

wages because they know it is sent right to the IRS. So it has a 

real effect on voluntary compliance, as well as on our direct compliance program. 

Senator CARPER. That is a very good point. 

Again, thank you for your testimony today. Mr. Chairman, I have 

another question I would like to submit for the record. But you 

have been very helpful. We appreciate your participation and your 

testimony. 

[The question appears in the appendix on p. 56.] 

The CHAIRMAN. Thank you, Senator. 

Mr. Commissioner, I just have a question about your budget. You 

are getting a big increase in your budget, which is great. I think, 

instead of $11 billion, is that correct, you will have $13 billion, if 

the President’s proposal is agreed to? 

Commissioner SHULMAN. It is a significant increase. The details 

have not come out. They will come out—— 

The CHAIRMAN. All right. I understand it is very significant. The 

question is, how do you intend to put this extra funding to work? 

What are you going to do with it? What about offshore enforcement? What component is offshore enforcement? The third question 

is, what goals and milestones, what measures, what benchmarks 

will you put in place to determine whether or not you are successful? 

Commissioner SHULMAN. Sure. I am happy to go through that 

with you. We are going to put the budget to work by making sure 

we get the right personnel to do what we need to do. We are going 

to hire examiners, agents, special agents, some of whom we will 

put offshore in other localities. We are going to hire economists, fiVerDate Nov 24 2008 17:32 Feb 09, 2011 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 R:\DOCS\63953.000 TIMD
38 

nancial product specialists, appraisers, lawyers, all the people we 

need to go after the complex trail of money that is involved, both 

in the U.S. and overseas. 

We are also going to use it to perfect the data we have in house, 

so that we are doing data modeling correctly, innovate around data 

modeling so we are going after the evasion that happens both here 

at home and overseas, and get third-party information in and combine it with our data so we can, again, be better at targeting and 

using data from other agencies and other countries to make sure 

we are triangulating in on enforcement issues. 

We are also, just in a gross sense, going to open more cases, look 

at more issues. Large business, for instance. Every major corporation has an audit every year. We are now going to be able to look 

at more issues and go deeper into issues, and some of the things 

in your legislation should allow us some more time to go deeper. 

And then on partnerships, right now we audit a partnership. A 

partnership is usually a web of multiple, sometimes hundreds, of 

partners. We are going to use those resources and the new people 

we have to be able to look further to actually trace the money so 

that we are looking at the whole economic picture, not just the entity on which we are doing a tax return. So it is really: people, 

technology, do our job better. 

There are measures that we will use. We have our traditional 

measures: coverage, case closures, audit by type, enforcement dollars. Clearly, the President has set out a 5:1 return, or depending 

on where the money is going for enforcement, a 7:1 return, a 13:1 

return. We are going to need to monitor that. 

I think we also need to work on measures around earlier identification of issues. Before, I talked about foreign tax credit generators. We got on top of that. So, having better trained people, more 

of them, pursuing more issues, getting to issues earlier so we stop 

problems before they start, those are somewhat intangibles and 

they are not going to show up in our traditional metrics, but they 

are things that we are going to need to look at. 

Then I guess the last thing I would say is, as we develop measures, I am very anxious to work with you and others on legislation 

because, depending on what kind of new tools we get, we will be 

able to have a much higher bar for ourselves to go after. 

I just want to emphasize, a significant portion will be international. As you know, the President has set out $210 billion, a 

combination of policy and enforcement. Frankly, we are going to 

take, year after year, pretty much as many resources as we can absorb into the international arena, get trained, and get up to speed 

in that year and continue focusing there. 

I actually, last October 1st when we were under a budget freeze 

and we were basically under a hiring freeze, took some attrition 

money from other areas and put it into international because I 

thought it was so important that we continue to invest in that area 

and not fall behind. 

The CHAIRMAN. All right. 

I guess there are a lot of pretty bright people out there trying 

to evade taxes, a lot of preparers, tax lawyers, others. Do you feel 

when you hire, that you will be able to hire people with sufficient 

39 

competence, talent, expertise, and know-how and all this on how 

taxes are being evaded? 

Commissioner SHULMAN. Yes. I mean, we have talked before, Mr. 

Chairman. One of my highest priorities is our workforce, getting 

the right people, training them, making sure they are motivated, 

making sure they have the right tools. I actually have a centralized 

unit that is reporting directly to me to revamp a variety of workforce efforts. 

For our hiring, we have now pulled it out of the business units 

and are centralizing our hiring infrastructure. I think one of the, 

I would not call it silver linings, but one of the realities in this economic downturn is we have time right now. We are getting more 

applicants for every opening than we have ever gotten in our history of incredibly qualified people, so I plan to take advantage of 

this. 

The CHAIRMAN. Now, that may be true, and there may be a 

major opportunity there. I run across this in several different circumstances. In fact, I was talking to one of the top lawyers in the 

Obama administration, and he said they thought that, after the 

President was elected, they would get a lot of applicants for jobs 

in his shop, and very talented people. He was wrong: they were 

flooded with applicants, people who were just more talented, and 

just the brightest people one could possibly hope for. 

Second, I was talking to the President of Harvard University not 

too long ago and she said, it is amazing. Not too many years ago— 

I do not know what school it was, whether it was Harvard College, 

or maybe it was some other unit—that a large majority of their 

students wanted to go to Wall Street because that is where the 

money was. But, she said, frankly, a lot of people are going because 

there is peer pressure to go. 

But now that Wall Street is sort of on the down side, a lot of students say, gee, that is great, because I really did not want to do 

that anyway. I want to go into public service, I want to go to Africa, I want to go help people, help do these things. I run into it 

anecdotally, people in Wall Street and elsewhere saying, hey, now 

I do not have to chase the dollar as much. There is so much pressure to chase the dollar, but now I can do some things I kind of 

want to do. 

So I think there is a real opportunity here. A lot of people want 

to serve. They care about our country. They want to help serve our 

country. I just urge you to take advantage of that, get the best and 

the brightest, and make sure they have their heads screwed on 

straight, too, as they are doing the work. 

But thank you, Commissioner, very much. I think you are doing 

a really good job. We will just keep working together to address 

some of these problems. 

Commissioner SHULMAN. I appreciate all the support. 

The CHAIRMAN. The hearing is adjourned. 

[Whereupon, at 12:14 p.m., the hearing was concluded.] 

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