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46–363—PDF 2007

S. HRG. 110–689

EXAMINING THE ADMINISTRATION’S PLAN FOR

REDUCING THE TAX GAP: WHAT ARE THE

GOALS, BENCHMARKS, AND TIMETABLES?

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

APRIL 18, 2007

(

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

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENT

Page

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

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

ADMINISTRATION WITNESSES

Paulson, Hon. Henry M., Jr., Secretary, Department of the Treasury, Washington, DC; accompanied by Hon. Eric Solomon, Assistant Secretary for

Tax Policy, Department of the Treasury, Washington, DC and Hon. Mark

W. Everson, Commissioner, Internal Revenue Service, Washington, DC ....... 3

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

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

Everson, Hon. Mark W.:

Prepared statement with attachments ........................................................... 39

Grassley, Hon. Chuck:

Prepared statement .......................................................................................... 61

Paulson, Hon. Henry M., Jr.:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 63

Responses to questions from committee members ......................................... 66

Salazar, Hon. Ken:

Prepared statement .......................................................................................... 136

Solomon, Hon. Eric:

Prepared statement .......................................................................................... 137

COMMUNICATIONS

Kebschull, William David ....................................................................................... 145

National Association for the Self-Employed .......................................................... 155

Peralta, Leslie .......................................................................................................... 162

(III)

(1)

EXAMINING THE ADMINISTRATION’S

PLAN FOR REDUCING THE TAX GAP:

WHAT ARE THE GOALS,

BENCHMARKS, AND TIMETABLES?

WEDNESDAY, APRIL 18, 2007

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:27 a.m., in

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

(chairman of the committee) presiding.

Present: Senators Conrad, Lincoln, Wyden, Schumer, Stabenow,

Salazar, Grassley, Thomas, Bunning, and Crapo.

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

Forty-five years ago, President Kennedy challenged the Nation.

He said, ‘‘I believe that this Nation should commit itself to achieving the goal, before this decade is out, of landing a man on the

moon and returning him safely to the earth.’’

President Kennedy acknowledged the difficulty of the task, but

he also saw the risks of failing to act. He said, ‘‘While we cannot

guarantee that we will one day be first, we can guarantee that any

failure to make this effort will make us last.’’

Today we discuss goals for improving compliance with the tax

law. Improving tax compliance might also be a difficult task, but

it is not rocket science. In 2005, the rate of voluntary tax compliance was 85 percent. In 2006, it dropped to 83.7 percent. That is

a drop of more than a full percentage point in 1 year. Each percentage point drop in the rate amounts to a $25-billion increase in the

annual tax gap.

Since 2001, the government has failed to collect more than $2 trillion in legally owed taxes. The American people have a right

to expect that their government will have a goal and that a credible

plan to reduce this tax gap exists. It is the Treasury’s job to fix it,

yet the administration does not appear to take this job seriously.

In February of 2006, I asked Secretary Snow for a tax gap plan

within 30 days. When he left office 5 months later, we still had not

received one. He left behind a few proposals that would raise

$3.5 billion over 10 years, barely a dent in the tax gap, that would

lose $3.5 trillion—trillion—over 10 years.

2

On June 13, 2006, I asked IRS Commissioner Everson for a ‘‘reasonable, but aggressive’’ plan to reduce the tax gap. He agreed to

provide a plan, but he has not delivered one.

On June 27, 2006, I asked Mr. Paulson for a plan. He did not

commit to provide one. On July 13, 2006, I asked Mr. Solomon for

a plan. He, too, did not commit to provide a plan. Only after I held

up Mr. Solomon’s nomination did Treasury agree to come up with

something. Good faith. That was the agreement.

What we received, however, was an outline for a strategy. That

outline was utterly inadequate. It merely rehashed ideas that were

already floating around Washington. It contained no specific goals.

The Treasury promised to provide a more detailed outline following the release of the administration’s fiscal year 2008 budget

plan. In February, however, the administration’s budget included

16 tax-compliant proposals that would raise just $29 billion over 10

years.

The Finance Committee staff is working closely with Treasury officials to develop these proposals. But a few worthy ideas do not

rise to the level of a plan, and a penny on every dollar of the tax

gap is simply not enough. That is what those 16 amounted to, one

penny on the dollar of the tax gap.

The budget says that the Treasury and the IRS ‘‘continue to consider additional approaches to reducing the tax gap.’’ But for 21⁄2

months, this committee has been waiting to hear what they are.

Some complain that improving the tax compliance will burden

taxpayers and decrease their rights. But what about the rights of

honest, hardworking taxpayers who do pay taxes that they owe?

What about the additional tax burden on honest taxpayers when

the dishonest are allowed to skate by?

I know there is no magic solution to the tax gap, but that does

not mean that there is no solution to the tax gap. Increasing our

Nation’s rate of voluntary tax compliance is going to take some ingenuity. It will take some elbow grease. It is going to require a

multi-faceted approach and require addressing services, enforcement, and technology. But the administration still needs a plan. It

needs a concrete plan, a plan with goals, with benchmarks, with

time tables.

Secretary Paulson was a successful investment banker. Any

banker would ask for a comprehensive business plan before approving a loan. Every time the Secretary of Treasury travels overseas,

the Department has a destination, an itinerary, and a precise time

table. It has a plan, a very detailed plan.

That is why it astounds me that the Treasury does not have a

comprehensive, credible plan for the tax gap. I will not wait any

longer. I am going to set the goal for you today. I am setting the

goal of 90 percent voluntary compliance by the year 2017. Ninety

percent over the next 10 years. That is 6 percentage points higher

than today’s rate.

I think this is realistic. It is achievable within 10 years, and

when it is reached, collections of taxes legally owed will increase

by at least $150 billion annually. It is up to the Treasury Department to develop and present to this committee a plan that will

achieve this 90-percent compliance goal. I would invite you back,

Mr. Secretary, to appear before this committee in 90 days, July 18,

3

2007, to deliver a more credible plan, complete with benchmarks

and time tables.

The dropping voluntary compliance rate threatens the integrity

of our tax system. It undermines fairness, it weakens confidence in

government, and it breeds disrespect for the law.

This Nation should commit itself to achieving the goal before a

decade is out of having at least 9 out of 10 taxpayers comply with

the tax law. While we cannot guarantee that we will achieve this

goal, we can guarantee the consequences of failure to make the effort.

Let us challenge more taxpayers to comply with the law. Let us

challenge the Treasury Department to find ways to make it so. Let

us, together, work to restore the integrity of our tax system.

I see Senator Grassley is not here, so I will begin with you, Mr.

Secretary. Why don’t you begin with your opening statement?

Secretary PAULSON. Thank you, Mr. Chairman.

The CHAIRMAN. But when he returns, at the appropriate time I

will ask Senator Grassley if he wishes to make a statement. I

apologize for the late delay in this hearing; we had two votes. I do

not think there are any more votes to interfere with the hearing

the rest of the day.

STATEMENT OF HON. HENRY M. PAULSON, JR., SECRETARY,

DEPARTMENT OF THE TREASURY, WASHINGTON, DC; ACCOMPANIED BY HON. ERIC SOLOMON, ASSISTANT SECRETARY FOR TAX POLICY, DEPARTMENT OF THE TREASURY,

WASHINGTON, DC AND HON. MARK W. EVERSON, COMMISSIONER, INTERNAL REVENUE SERVICE, WASHINGTON, DC

Secretary PAULSON. I will begin with an opening statement, and

then hopefully we will have a chance to talk about some of the

points you made, including the man on the moon and the business

trip analogy, because I would like a chance to talk about them.

Chairman Baucus, members of the committee, thank you for considering this important topic and for inviting me to speak about it.

It is very appropriate that we have this conversation the day after

tax day.

Over the last few months, millions of Americans have collected

their W–2s, their 1090s, their home mortgage interest statements,

and countless other pieces of paper to fill out their tax returns.

This is an annual ritual for Americans, completed without great

enthusiasm, but with remarkable honesty and effort.

The vast majority of Americans pay their taxes, without additional prodding by the IRS, out of a sense of fairness and civic

duty. They understand the importance of paying what they owe,

and they know that when they fail to pay their taxes, when other

people fail to pay their taxes, it serves as a de facto increase on

everyone else.

While the current compliance rate is high, it can, and should, be

improved. Our objective must be to increase tax compliance without

over-burdening the tens of millions of taxpayers who already pay

their taxes honestly and on time.

The amount of taxes that are owed but not paid is commonly referred to as the tax gap. An important part of addressing the tax

gap is to understand not only the types of taxpayers—individuals,

4

small businesses, corporations—that do not comply, but also why

these taxpayers fail to comply. Answering these questions will help

us improve taxpayer service and better target our enforcement efforts.

In September of last year, we released a comprehensive 7-point

strategy to address the tax gap. The budget we put forward for

2008 is critical to implementing that strategy. It requests new

funding for taxpayer services, research, improved technology, and

targeted enforcement. We ask for your help in working with the

Appropriations Committee to make sure the IRS has the resources

it needs to improve compliance, while maintaining its commitment

to taxpayer service.

The budget also includes 16 legislative proposals that, if enacted,

will help to narrow the tax gap without imposing excessive burdens

on compliant taxpayers. Since I appeared before this committee,

my staff has been meeting with your staff on a regular basis to review the 16 legislative proposals.

Treasury’s Assistant Secretary for Tax Policy Eric Solomon and

IRS Commissioner Mark Everson are here with me today to provide more detail about these proposals and the IRS’s budget request.

Our legislative proposals attempt to balance the burden they impose on taxpayers against the impact they will have on improving

compliance. Even so, some of the proposals have generated concern

from those who could be affected by them.

We must consider the impact of any new rules on the vast majority of Americans who already pay what they owe and better target

our enforcement efforts to minimize additional burdens.

Since I last testified before you, Treasury has explored ways to

improve compliance. We held a public discussion a few weeks ago

and heard from a broad cross section of stakeholders, including a

former IRS Commissioner, tax preparers, and business representatives.

Several insights emerged: first, we need to know more about specific sources and causes of the tax gap so we can focus our efforts

more precisely; second, great care must be given to ensure that

those efforts do not impose unreasonable burdens on already compliant taxpayers; third, simplification of the tax code, as well as

taxpayer education and services, would help improve compliance;

fourth, we need to manage expectations, recognizing that every potential solution carries consequences.

I know you spent a great deal of time exploring this issue, and

since I came to Washington I have taken a hard look as well. The

most recent data we have on the tax gap comes from 2001. It indicates that the vast majority of the tax gap was attributable to

under-reporting of income.

Most of the under-reporting is attributable to individuals with

business income and corresponding self-employment tax liabilities.

This includes small businesses, farms, and ranches. It is unclear

whether this under-reporting is a result of deliberate deception or

simple misunderstanding of what needs to be reported and how to

do it.

To substantially improve compliance in this regard, Congress

would have to mandate additional requirements that would affect

5

not only those who do not report all other income, but also those

who already do. I have come to the conclusion that there is a big

part of the tax gap we simply will not be able to reach without adding draconian and painful requirements on all taxpayers. I do not

believe any of us really want to do that.

We must remember that the tax gap is simply not a pot of gold

that we can dip into every time we want to pay for a new or expanded program, nor should it be viewed as an easy solution to existing challenges, such as the Alternative Minimum Tax.

As you know, narrowing the tax gap is about improving compliance. It is not about changing the baseline to raise more revenue.

The budget resolution passed by the Senate assumes revenue collections are raised by hundreds of billions of dollars.

Some believe this level can be achieved largely through measures

to reduce the tax gap. I believe it is unrealistic to assume that reducing the tax gap will yield that level of additional revenue.

In developing our 16 proposals, we focused on changes that

would narrow the tax gap with minimal additional burdens. Some

have suggested that far more expansive proposals should be put

forward. Many of these proposals would require steps that I would

not recommend because they are bad tax policy and would be unnecessarily painful, expensive, and time-consuming for taxpayers.

For example, requiring individuals to file 1099s reporting their

transactions with service providers such as their doctor, auto mechanic, dry cleaner; eliminating cash transactions in favor of electronic transactions with card issuers and banks providing statements to the IRS so that payments can be matched with the

business’s reported income; or doubling or tripling the number of

IRS agents and audits.

In theory, each of these measures could bring in some additional

revenue, but the cost of compliance for individuals and businesses,

most of whom already pay what they owe, would far outweigh the

gains. In many cases, such measures would also raise privacy concerns due to the government’s heavier focus on the daily transactions in each of our lives.

I hope we can all agree that such extreme measures are not the

approach we should take. Instead, as a strong first step toward

narrowing the tax gap, I hope you will work with us to approve the

additional IRS funding and enact the legislative proposals the

President has requested.

I am pleased that Congress has recently taken up a number of

these proposals by capitalizing on the direct and indirect effects of

IRS enforcement, and, by making focused legislative changes, I am

confident we can make measurable progress toward reducing the

tax gap without adversely affecting compliant taxpayers.

We should also look for ways to reduce the complexity of the U.S.

tax code. Making the tax code simpler and fairer for the average

American could help to improve compliance by reducing the number of honest mistakes, removing incentives for cheating, and providing fewer places for tax cheats to hide.

It is critical that we manage expectations and view efforts to reduce the tax gap over the long term, with a clear understanding

of both the costs and the benefits of taking any action. Making significant progress will require a sustained, focused effort by the adVerDate 11-MAY-2000 15:57 Feb 27, 2009 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 46363.000 SFIN1 PsN: SFIN1
6

ministration, Congress, and the American people. Honest American

taxpayers are allies in this effort, and we must always put their

interests first.

Thank you very much.

The CHAIRMAN. Thank you, Mr. Secretary.

[The prepared statement of Secretary Paulson appears in the appendix.]

The CHAIRMAN. As I listened to you, basically I heard you say not

much could be done. You are basically accepting it. That is basically what I heard.

Secretary PAULSON. Well, let us address that a minute. I believe

that we can make, and are making, progress. I believe that if you

have an 85-percent compliance rate, that is a level that people all

over the world look at with great admiration. So to go beyond that,

we know it is a matter of balance, weighing the burden you are

putting on the compliant taxpayers. Now, what I would like to do,

if I could just take a minute and address——

The CHAIRMAN. Very briefly, because I do not want to take up

the time on one question.

Secretary PAULSON. What I want to do is address your goal.

The CHAIRMAN. Sure. Sure.

Secretary PAULSON. Because this is a very, very important topic,

and we all agree we need to make progress. We all agree that no

one likes people who are free-riding on our system. We need to figure out how to deal with this.

Now, your question of the goal. I would love to get to 90 percent.

I would like to get there as much as you would. So, as I have

thought about the goal, there are two problems I have with it.

Now, I will use your man-on-the-moon analogy. When we got the

man on the moon, it was clear to everybody. The man was on the

moon, and it was very, very measurable.

The first question I have about this—which I think is not the

overriding question but I just really need to point it out—is that,

with your goal, in 10 years of 90-percent voluntary compliance,

what we would need to do to ascertain whether we reached the

goal would be to do a study in 2017, and we would get the results

several years later. And, it would only be an estimate. Because it

is very hard, no matter what kind of study you do, to figure out

or prove how much money was not paid in taxes. Most of the tax

gap, 80 percent of it, is from under-reporting.

But again, I do believe that is not a reason, in and of itself, not

to set a goal. I believe the part that troubles me the most is, if we

set a goal for 90 percent, then you are rightfully going to say—and

what we did at Goldman Sachs and what we do at Treasury when

we have business plans is—how are we going to get there? I am

sure, when we said, how are we going to get a man on the moon,

there was a series of steps that needed to be taken, and there were

clear steps to get there.

When I look at it, if I say 80 percent of this tax gap is about

under-reporting of income and the vast majority of that is individual income, the steps that need to be taken are very, very onerous steps if people were going to get there.

The CHAIRMAN. So basically you are agreeing that not much can

be done because the steps, in your judgment, are too onerous.

7

Secretary PAULSON. No. I think we can talk a lot about what has

been done and what is being done. The administration put forward

a goal before I was here to get up to 85 percent. I think Commissioner Everson is quite optimistic that if we pass the legislative

proposals, pass the funding request in the budget, and keep working on the things we are doing, we will make progress.

I want to make progress, but what I do not want to do is put

forward a plan that is an aspiration when we cannot measure the

success and I cannot tell you what we are going to do to get there.

The CHAIRMAN. Right. I hear you. I do not have a lot of time

here, but two points I want to make. One, I would just like your

very brief comment. I have before me a release by the Republican

party, the Senate Republican Policy Committee. It is talking about

the tax gap.

The executive summary says there is no pot of gold here. That

is because any attempts to reduce the tax gap on a large scale necessarily must increase the burden on taxpayers and decrease taxpayer rights.

The policy paper goes on to say—this is the main point—that the

practical impact of implementing it could be devastating to the individual taxpayer. That is the Republican Senate Campaign Committee.

What is your response to that?

Secretary PAULSON. On this, we have a very credible plan, and

we want to keep working on it to make progress on reducing the

tax gap. So I would like to talk about what we can do to reduce

the tax gap.

The CHAIRMAN. Here are five potential areas that I think are not

draconian. One, is improved service.

Secretary PAULSON. Yes.

The CHAIRMAN. That is, do not shut down face-to-face taxpayer

assistance centers for the elderly and poor.

Secretary PAULSON. We would agree with that.

The CHAIRMAN. That is one way. Second, more electronic filing.

Free, direct IRS portals so everyone can file.

Secretary PAULSON. I missed your second. What was your second?

The CHAIRMAN. More electronic filing.

Secretary PAULSON. Yes.

The CHAIRMAN. A free, direct IRS portal so everyone can file for

free and get faster refunds, less errors, and so forth. More electronic filing.

Third, improve regulation of preparers. We all know the gross

disservice that a lot of preparers are performing and how many

mistakes preparers are making. The GAO did a study on that, and

it was just devastating, how badly the preparers are trained. That

is not a big burden on taxpayers. That is not draconian, I would

not think.

Better technology. You know, work smarter. Better filters. Catch

identity thieves, like Mr. Soukas the other day, who had false identification, for example. I was stunned at that hearing to learn, I

might say, and I do not mean to step on the toes of Mark Everson,

basically saying not much could be done about that.

8

Here is this guy who defrauded honest taxpayers with refund loans of $43,000. The answer I got was, nothing can be done about

that, which I find just totally stunning, outrageous, and unacceptable. We have to find ways to find those persons who file false

identifications.

Another is, use the tools you have. What about tax shelters? So

far there have been no disclosure penalties for 21⁄2 years after

stronger penalties were enacted in the JOBS bill. There are a lot

of things that can be done, and I am just surprised and disappointed that I am not hearing suggestions from you, Mr. Secretary. You can tell us what needs to be done to reach that 90 percent.

You can put a caveat next to it, when we meet 3 months from

now, as to whether you would recommend them or do not recommend them, but your best judgment of what it takes to reach

90 percent compliance over 10 years.

Secretary PAULSON. I would say this, Mr. Chairman. First of all,

I think every statement you made, I agree with. We are working

on better service and more electronic filing, and the Commissioner

will tell you everything he is doing with regard to the individual

and corporate side concerning tax shelters and better technology.

So this is something we are working on very, very hard. We have

seven principles, and the ones you named are included in those. So,

these are the things we are working on. All I am saying to you is

that I do not see a clear path, pursuing all of these, where I would

be able to say we are going to get to 90 percent. Again, as I said,

the elephant in the room right here is under-reporting and what

it takes to get at non-reported income.

The CHAIRMAN. Well, my time has expired. I appreciate that. We

will have further opportunity to talk about this.

Senator Conrad?

Senator CONRAD. Thank you, Mr. Chairman. Thank you, first of

all, for holding this hearing. Thank you for being aggressive on this

effort, because I think this is one of the significant challenges facing us from a fiscal standpoint, and in terms of equity to all taxpayers.

They are now telling us the tax gap, the difference between what is owed and what is paid, back in 2001, was $345 billion for that

1 year alone. The difference between what is owed and what is

paid, $345 billion for back in 2001.

I have studied the numbers from what has been done in terms

of assessing taxpayers for money not paid over, and it looks to me

like we have gone through a very deep valley where compliance

was dramatically reduced. It has been recovering now under the

leadership of Mr. Everson. But we went through a very deep valley

there. I believe this number—I have spent some time studying this

number—is a conservative number.

Let us go to the next slide, if we could. What this means, according to the National Taxpayer Advocate—this is a person who is

given responsibility to stand up for all the honest taxpayers.

She said this in a report this year: ‘‘Compliant taxpayers pay a

great deal of money each year to subsidize non-compliance by others. Each household was effectively assessed an average surtax of

about $2,680 to subsidize non-compliance in 2001. That is not a

9

burden we should expect our Nation’s taxpayers to bear lightly.’’ So

if it was $2,680 for all of us who are honest taxpayers to subsidize

those who are not, that really is utterly unacceptable.

Let us go to the next. I must say, Mr. Secretary, I am an admirer

of yours. You know that. I have said so publicly, I have said it to

you privately. On this issue, I do not think you are meeting the

test. I do not think, in your previous position—you had a sterling

reputation—that if you saw a hole in the budget of this significance, that you would accept a lack of a plan. And what I hear you

saying today is, we are supposed to accept a lack of a plan.

Secretary PAULSON. We have a plan.

Senator CONRAD. Please. Not a serious plan. Look, we have a

hole here of $2 trillion, I believe, over the next 5 years. Two trillion. And this administration is telling us, about the best they can

do is $20 billion a year. Now, come on. You can do better than that.

Now, we have not discussed tax havens. That is a whole other

element, but one that also deserves attention. I have shown this

building on the floor of the Senate. This is a building in the Cayman Islands. It is a 5-story building that claims to be the home to

12,700 companies. They all say they are doing business out of this

building. Now, they are not doing business out of this building.

They are engaged in an enormous tax dodge.

Let us go to the next. We have another committee of Congress,

the Senate Homeland Security and Governmental Affairs Committee on Investigations, and here is what they have told us: ‘‘Experts have estimated the total loss to the Treasury from offshore

tax evasion alone approaches $100 billion a year, including $40 to

$70 billion from individuals, another $30 billion from corporations

engaging in offshore tax evasion.’’

Now, if anybody doubts that there is a massive movement on tax

evasion, I would just urge you to go to the website. Go punch in

‘‘tax haven’’ and see what you find. Here is what we found. Put in

‘‘offshore tax planning.’’ We got 1,260,000 hits. One million, two

hundred and sixty thousand.

Read what they are saying. It is appalling, what they are saying.

Go on the Web. Here is my favorite: ‘‘Live tax-free and worldwide

on a luxury yacht. Moving offshore and living tax-free just got easier.’’

Now, Mr. Secretary, I could go on and on with this stuff. This

is the Subcommittee on Investigations of Homeland Security that

says we are losing $100 billion a year to this.

We are losing, over the next 5 years, I believe, $400 billion a year

to the tax gap. That is a combined effect of $500 billion a year, and

all I hear from this administration is, the best they can do is to

recover maybe $20 billion of that. Is that really the best you can

do?

Secretary PAULSON. Senator, let me say that I believe the 16 legislative proposals we have put forward are the most comprehensive

set of proposals that have been put forward in 20 years. I really

do believe a first step of this plan, a very, very important first step,

is enacting those proposals, enacting our budget request, and we

are working very hard.

Senator CONRAD. Mr. Secretary, I am out of time. Let me just

say this to you sir, and I say this with absolute sincerity.

10

Secretary PAULSON. Right.

Senator CONRAD. I calculate, between the tax gap and this tax haven abuse, over the next 5 years, $2.5 trillion of lost revenue to

the U.S. Treasury. In the testimony before the Budget Committee

by this administration, the best they could say was that they would

capture maybe $20 billion of that, and not until the end of the

year. We are talking about capturing 2 or 3 percent. Is that really

the best you can do?

Secretary PAULSON. Well, first of all, in terms of those numbers

and in terms of estimates, there is no doubt there is a lot of abuse,

and there is a big focus on that. There is also a fair amount, in

this global world, of very legitimate activity offshore.

Senator CONRAD. But I am not talking about legitimate activity.

I am talking about illegitimate activity.

The CHAIRMAN. Senator, you are going to have to——

Secretary PAULSON. And I would say a lot of what you were talking about there was, again, individual unreported income. That is

what we are talking about.

But Mark, would you comment a little bit about what you are

doing in this area?

The CHAIRMAN. Very briefly, Mark. The time is way over. Maybe

a few seconds.

Commissioner EVERSON. Senator Conrad, as you know——

The CHAIRMAN. About 15, 30 seconds. No more, please.

Commissioner EVERSON. Particularly when you get into the offshore area, that is the hardest area for us, one, because those are

seeking to obscure information that is more readily available, and

also because, as the Secretary is indicating, there are many legitimate business activities that take place and this gets beyond what

is in the tax gap to what may not be really policy that the Congress

intended, but is legal in some instances.

The CHAIRMAN. Thank you, Senator.

Senator Thomas?

Senator THOMAS. Thank you. This is enthusiastic conversation

here today.

How many of the 16 proposals that you had were included in the

budget resolution?

Secretary PAULSON. How many of them? We put forward all of

them.

Senator THOMAS. But are they in the budget resolution?

Secretary PAULSON. No.

Senator THOMAS. Well, then where are we on them?

Secretary PAULSON. We need to get them done.

Senator THOMAS. I know. But that is why we are here. They are

not getting done that way then, is that it?

Secretary PAULSON. Yes.

The CHAIRMAN. I might say, nine are in the supplemental. Nine.

We are working on seven. There is no problem with working

through the other seven. We are working on it.

Secretary PAULSON. Senator, I have spent a lot of time with people at Treasury, people at IRS, the man on my right, the man on

my left, asking how do we go after this and thinking it through.

I will tell you, the 16 proposals we put up there we thought were

the best. There are issues with a number of them. It is a matter

11

of balancing. Overall, we thought these were the right steps to

take, and we think they are aggressive. I think the fact that they

are difficult to get passed quickly and that there is a fair amount

of comment on them just shows you how challenging this is.

Senator THOMAS. Yes.

One of the kind of puzzling things, just looking at this from the

standpoint of not being an expert in it, you seem to be able to know

what the gap is but you do not know what to do about it. How do

you determine what the gap is? If you know what is not there, why

can’t you go after it?

Secretary PAULSON. First of all, that is a very good question. The

gap, which I tried to get to earlier, is an estimate that in some

cases is bordering on an educated guess, because we did the study

in 2001 and we got the results 4 years later.

Now, Senator, think about this a minute. If 80 percent of it is

as a result of unreported income, if you have individuals, small

businesses, and others not reporting cash income or not reporting

income in other ways, it is hard when you send an IRS agent in

to audit them to know whether you have found all the unreported

income.

So this is, at best, an educated guess. It is a number of years out

of date. But we are learning about this. Just because it is difficult

does not mean we should not be working on it. We are working

very, very hard on it.

I was just trying to make the point that there is some level,

when you have a tax system like ours, that is less than 100-percent

compliance, which is as far as you can reasonably go without overburdening everyone else.

When I first came here, I was given some memos to read on the

tax gap, and people said, well, the solution to the tax gap is to simplify the tax system. I think that will be useful in dealing with

honest taxpayers who want to do the right things. But it will not

be helpful with compliance issues.

Frankly, the more I looked at it, the more I said, if you really

were going to seriously make a very big dent in closing that tax

gap, you would have to go in the opposite way. You would have to

impose more burdens. You would be going toward complexity,

which I think would be a big burden on all the honest taxpayers.

Senator THOMAS. Closing the tax gap is a kind of an interesting

term. But is it not true that the activities that Mr. Conrad referred

to there on the website are already illegal, right? We do not need

to pass any more laws. They are already illegal. We are just simply

not enforcing the law.

Secretary PAULSON. Well, I would say he was, I am sure, referring to the point that there are plenty of illegal activities. So there

it is a matter of compliance and being able to hunt them down,

having enough trained auditors and investigators. Mark can talk

about that. So, that is part of it.

But again, when you get to the corporate side, that is the smallest part of the issue. When you are looking at individuals, a lot of

these activities are illegal. It is illegal to not report income, but

plenty of people do not.

Senator THOMAS. All right. I guess that is the challenge. I have

used up my time. Thank you.

12

The CHAIRMAN. Thank you very much, Senator.

Senator Grassley?

Senator GRASSLEY. Yes. Thank you.

Mr. Chairman, I am going to put my statement in the record. I

would love to hear myself say it, but I think we had better go on

to other things.

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

Senator GRASSLEY. So I am going to go to the Secretary and ask

some questions, and it is going to be about enforcement. I think my

staff hopefully gave you an idea of what I was going to ask, because I am not playing a ‘‘gotcha’’ game with you.

First of all, for everybody to understand, enforcement activities

by the IRS are, of course, just one method of attacking the tax gap.

We cannot use enforcement proposals for the benefit of this committee as bringing in revenue, because CBO is not going to score

them. It is going to bring in more revenue, yes, and that is going

to help us with the budget deficit. That is a very important consideration.

It seems to me that the largest portion of the tax gap is underreporting by small business. When it comes to small business, I

guess I am a little concerned about our being too intrusive, yet we

have to do everything we can to collect every dollar.

Last year we had Commissioner Everson testifying before the Budget Committee that the tax gap could be reduced $50 to $100

billion without changing the way the government interacts with

taxpayers, and then earlier this year Commissioner Everson clarified for the Budget Committee that the IRS is already picking up

the lower end of that range, and that it could get to the middle of

that range or another $20 to $30 billion in 5 years if Congress

would meet the President’s funding request for the IRS. Mr. Secretary, five questions. The IRS’s $345 billion tax gap estimate represents a voluntary compliance rate of about 84 percent.

That is pre-enforcement. After collecting $55 billion through late

payments and enforcement, the compliance rate would be about 86

percent. How do IRS enforcement practices affect that voluntary

compliance rate?

Secretary PAULSON. They obviously increase it. Obviously, it has

a significant impact.

Senator GRASSLEY. All right.

How would IRS have to change its enforcement practices to reach

a voluntary compliance rate of, let us say, 90 percent? There is

nothing magic about the 90 percent; 89, 90, 91. If it were 90 percent, it would bring in about $130 billion.

Secretary PAULSON. I will make a general comment, and then I

will let the expert speak. But I believe that this is a very, very important balance, to have the IRS be vigilant and proactive and not

be abusive.

I can remember, back when I was in the private sector in the

late 1990s, reading press reports about hearings about abusive tactics that were too aggressive by the IRS. I think the Commissioner

has been very aggressive without crossing the line.

I think part of the reason is that he has invested heavily in getting new IRS agents, but recognizing that you can only assimilate

13

them, train them, control them, and bring them on at a measured

level.

I commend this committee for helping to fund that build-up, because I think we have made, and I think he can make, the case

in terms of the improvements that have been put in place and the

progress we have made in this area. But again, it is a balance.

I think it would be a mistake for me to say, although it would

make us all feel good if I said, well, let us keep investing in the

IRS and we will get to 90 percent in 2017. Then maybe in 2020,

3 years later, someone could call me, wherever I am, and say, did

we get there? Although we have to keep working on it and we want

to invest very heavily in compliance and enforcement, I do not

think that will be the path that will get us to 90 percent.

I think we would have to do some very burdensome things. It is

a mirage to say that that 90 percent is out there without some

pain. I think that is something we should just work on together.

Senator GRASSLEY. How would the IRS need to change its enforcement practices to reach the post-enforcement compliance rate

of 90 percent, which would mean collecting about an additional $80

billion a year through enforcement? Specifically, how many more

revenue agents, how many more audits, how much more money

would Congress have to give the IRS? Then that will have to be

my last question.

Secretary PAULSON. I will let Mark answer specifically. He is the

expert.

Senator GRASSLEY. All right.

Secretary PAULSON. But I would just say to you, as someone who

has spent a lot of time talking with him about this, if he thought

you could appropriate more money and that would solve it, he

would be asking for it. He is asking for what he needs. He is picking a number and saying, these are the number of IRS agents we

can hire, we can train, we can assimilate.

So, if you keep funding us the way we are, and he can keep hiring and training people the way he is, he is going to get to that

85-percent goal that is laid out there and maybe do a little better.

But that is, I think, the simple answer.

The CHAIRMAN. I am sorry. We can come up later and follow up

in the second round, but I want to keep things moving here.

Senator Schumer, you are next.

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

the Chairman and Ranking Member for scheduling the hearing.

This, to me, is the second most important tax issue we face after

dealing with the Alternative Minimum Tax, the tax gap is.

But before I begin on the tax gap, I have one question, not related, but time is of the essence. This is to you, Mr. Secretary, or

to Mr. Everson. We have had big floods in New York State. They

occurred Sunday and Monday. Heavily populated areas had 7

inches of rain; the previous record was less than 2.

Now, I know the IRS gave a 2-day extension for those families

severely affected by the flooding to file their taxes. I would like to

ask, I have heard from some of the families. Can that be extended

for maybe an additional week?

Commissioner EVERSON. We will certainly take a look at it. That

sounds like a reasonable request to me, Senator. We did want to

14

act promptly, because some people do wait till the end. I had not

heard that additional request, but we will certainly take it under

consideration and act one way or another today.

Senator SCHUMER. All right. If you could get me an answer this

afternoon, I would appreciate it.

Commissioner EVERSON. Yes. I can certainly do that.

Senator SCHUMER. It does not have to be too long, but they are

just getting settled.

Commissioner EVERSON. Yes. I understand entirely. I talked to

a friend about this whose basement had flooded. He had already

filed, though.

Senator SCHUMER. All right. Great. Well, your friends are the

early birds, but people who call me are not, shall we say. [Laughter.]

All right. Let us get to the tax gap. The net tax gap, as Senator

Baucus said, is estimated at about $300 billion a year. It is inexcusable that we have let tax avoidance and evasion reach this

point.

I found it almost immoral that, until the last couple of years, we

were auditing working families earning $25,000 a year at a higher

rate than families making more than $1 million a year. This idea,

before your term began, and yours, that somehow it was the EITC

where all the money was, I have to believe was ideologically, and

almost nastily, driven. But that is not my question.

I also, though, was surprised to read in the New York Times that

things are being cut back in certain areas, that IRS auditors are

being forced to close corporate examination cases prematurely, that

of corporations, only 1.2 percent faced real audits in 2006, and that

was stunning to me.

We need to do more audits on corporations and high-income

Americans, simply because, as Willie Sutton said, that is where the

money is. So, I have known both of you. I have great respect. I do

not mean this with disrespect. The Chairman sort of alluded to it.

I will say it in a little more New York way. The idea that we cannot do better is a little bit insulting, with no disrespect intended

to either of you. To close the tax gap only by 1 percent without

your ‘‘draconian and painful requirements on all taxpayers’’ defies

belief.

Are you telling us there is no middle ground between 1 percent

and 100 percent? Could we not close the gap by 10 percent, maybe

20 percent without the kind of draconian measures that you are

talking about? It is a huge amount of money.

Secretary PAULSON. Yes. I would say, of course there is. We have,

Senator, quite an aggressive program. In terms of compliance and

enforcement, we have a 7-point plan we have gone through. We

have the legislative proposals. We are making real progress. But

all I was saying is that I just do not want to mislead the American

people here with the idea that we could set out a goal and say 90

percent.

Senator SCHUMER. I do not want you to mislead or overstate. But

isn’t 1 percent minimal, low? You scratch your head and believe

that that should not be the goal of the IRS or of Treasury in tax

collection.

15

Secretary PAULSON. It is one thing to have a goal. I have a goal.

All of us have a goal. We have an aspirational goal to get to 90 percent or higher. But I believe it is incumbent upon me to make sure

we have an aggressive plan, an aggressive plan that is balanced

and is based upon tangible steps we are taking.

Senator SCHUMER. Right.

Secretary PAULSON. And my point is, it would be, I think, irresponsible of me, sitting in this seat. It would be quite easy for me

to put forward some plan and, years after I have left—hopefully I

will still be alive and can read about it in the newspaper sometime—someone will comment on that plan.

Senator SCHUMER. I understand. But you do not think 1 percent

is too low?

Secretary PAULSON. What I have said is that I would like to fund

our budget, pass the 16 legislative proposals, and I know we will

get to 1 percent or better. We are hiring as many IRS agents as

we can reasonably hire and train. This man can tell you all the

things he is doing. So we are clearly going to push forward.

The other thing is that we are pleased to work on this jointly.

I appreciate what Chairman Baucus has said, but we have had

people up every week, talking with his staff. We are looking for

more steps to take, and we are pleased to work with you on it.

The CHAIRMAN. Thank you. I might just remind everybody here

that those proposals total about one cent on the dollar. They total

about one cent on the dollar. Some are already in the supplemental. We are working through the others, but the total is only

one cent on the dollar.

Secretary PAULSON. I understand. But even those——

The CHAIRMAN. Senator Bunning?

Senator BUNNING. Thank you.

Mr. Secretary, I have before me—I believe these are your charts.

Commissioner EVERSON. Yes.

Senator BUNNING. Are they your charts?

Commissioner EVERSON. Yes, sir.

Senator BUNNING. All right.

Commissioner EVERSON. We have that chart here. This is the

point I wanted to make, just to respond.

Senator BUNNING. Well, I am going to make the point, if you do

not mind.

Commissioner EVERSON. All right.

Senator BUNNING. Thank you.

According to the chart that you have set forth, since 2001—and

I am sorry Senator Schumer is leaving—the EITC increases since

2001 are minimal, the audits. Those who make under $100,000 are

accelerated. For those making over $100,000, they are very accelerated, to the point of almost 3 times the amount of audits that you

did in 2001. Is that correct?

Commissioner EVERSON. That is absolutely correct, sir. At that

point, 2001 was the Clinton-Bush transition year. EITC audits

were something like half of all of our audits each year. I took a conscious decision to flat-line them in 2005, after they had grown up

some more.

We have been clearly emphasizing the high income, because you

are right, Senator. That is also a sense of fairness that resonates

16

in our system in that red line. That has gone up much more sharply. That is the area of emphasis.

Senator Bunning. All right.

Mr. Commissioner, it looks like, with that type of auditing, if we

are going where the money is, we are going to the right people. In

the next chart, the growth in corporate tax receipts since 2003 has

been kind of dramatic. Can you give me the numbers on that, the

actual numbers, or is this just a trend line?

Commissioner EVERSON. There are two lines here. There is the

actual increase in corporate tax receipts between 2003 and 2006.

The total receipts to the government increased by over $600 billion.

The big contributors to that were high-income individuals and corporations.

These two lines show that that increase, and also as a percentage

of GDP—Senator, when I got in this job I was getting a lot of questions about why our corporate tax receipts were so down as a percentage of GDP. They have come up because income is up. Corporations have done well. But the tax has gone up, too. I would be very

concerned——

Senator BUNNING. That is collection of taxes.

Commissioner EVERSON. Correct, sir. Correct.

Senator BUNNING. All right. That is what I wanted to make sure

of.

So the actual facts do not bear out what my good friend from

New York was trying to point out since 2001. Is that accurate?

Commissioner EVERSON. I never contradict a Senator.

Senator BUNNING. Well, your charts are contradicting him. Are

your charts accurate?

Commissioner EVERSON. I would say to you, Senator, that we

have emphasized, in my tenure, high-income individuals and corporations, and I think those efforts have paid off.

Senator BUNNING. All right.

In the President’s fiscal budget request, the President outlined

16 different ways to close the tax gap that would raise about $30

billion in 10 years. That seems minute to the amount of uncollected

taxes.

We have been arguing back and forth here—at least the questions have been arguing—your ability as Secretary of Treasury to

do more in respect to collecting without draconian, as you call it,

means to do it. If there is a ball out there full of money, give me

how we can get more of it it without burdening.

Secretary PAULSON. Well, I would make this point. The 16 proposals were legislative proposals, largely to deal with under-reporting. I think they are one part of a plan. One is ramping up enforcement properly, as we have laid out.

Senator BUNNING. That is the money you have requested in your

budget. All right.

Secretary PAULSON. If you are going to do this in a responsible

way, it has to——

Senator BUNNING. There is a diminishing return here somewhere

along the way.

Secretary PAULSON. Well, it is not only a diminishing return, but

there are only so many agents you can hire and train in a given

17

period of time if you are going to control this process. So that is

important.

But Chairman Baucus mentioned other things: more electronic

filing, more education, taxpayer service. We have to do a better job

of modernizing our technology at the IRS. There is a fair number

of more research. This is quite a comprehensive program, so this

is something we have to work on and work on over time, and we

can make progress.

Senator BUNNING. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator Stabenow?

Senator STABENOW. Thank you, Mr. Chairman. Thank you very

much for this meeting. Thank you to all of you for coming.

I have had an opportunity, in a number of committee settings

and watching debate on the floor, to see Senator Conrad’s charts.

I have a simple question to start with. We know or were told that

this building has 12,748 companies in it. Has anybody checked out

that building? Do you believe, Mr. Secretary or Commissioner

Everson, that there really are 12,748 companies? It is a very efficient building if there are that many companies in that building.

Secretary PAULSON. Let me turn it over to the man who has responsibility for that.

Senator STABENOW. We have seen this picture numerous times.

Has anybody checked it out?

Commissioner EVERSON. I think that one of the problems is,

when you are dealing with a tax haven country, depending on

whether there are exchange of information provisions and what is

public or not, getting behind some of the information is very difficult. This is not a situation of dealing with Great Britain or a

country like that.

Senator STABENOW. I appreciate that. But have you tried? This

building. Not just in general. Here is a building. We have a picture

of it.

Commissioner EVERSON. We would not try——

Senator STABENOW. We have an address.

Commissioner EVERSON. No, we would not try a building. What

we would do is, we would work based on what we would see for

an individual or a corporation that would lead us to make an inquiry or do an audit of that individual or that corporation.

Senator STABENOW. So on the face of it, just knowing there are

12,000-plus corporations that say they do business out of a building

that is 5 stories high, obviously common sense would dictate they

are not there. So that, on the face of it, would not be——

Commissioner EVERSON. I think it might be a factor, but you are

asking a question that I would want to ask our people about. But

typically the way it works, again, is you look at the returns of the

individual, what you know about the individual. Does it seem out

of line? Is there anything that leads you to it? That could be a factor. I am not saying it is not a factor, but we do not start, typically,

with something like that, is my understanding.

Senator STABENOW. So even though, right now, we know—I

mean, I really sincerely mean this as a question.

Commissioner EVERSON. Yes.

18

Senator STABENOW. I do not understand.

Commissioner EVERSON. Yes.

Senator STABENOW. I would have thought, after the first time we

had this building shown, that somebody would have started checking it out. So just on the face of it——

Commissioner EVERSON. Well, I guess, then, the problem here is

you are dealing with—some of the nations just will not give you all

the details that you want to get. That is the nature of tax havens.

Senator STABENOW. So Cayman Islands are not cooperating,

then? Is that it?

Commissioner EVERSON. I would say to you that it is more difficult to get information from the Cayman Islands and certain

other tax haven nations than in other places, traditional partners,

treaty partners.

Senator STABENOW. I would very much appreciate, as a member

of this committee—and I am sure all the members would appreciate—knowing specifically the difficulties in finding out information about what appears to be, on its face, something that is not

accurate.

Commissioner EVERSON. Sure. Absolutely.

Senator STABENOW. And I guess the next question I would have

is, on the websites that Senator Conrad talked about, do any of

your investigators look at the website, in the age of the Internet,

and attempt to pursue anything through these broad advertisements now about ways for folks to skip——

Commissioner EVERSON. We do. We do, Senator. We have active

programs and we try to stay on top of this, particularly on the

phishing schemes. You may have seen, we put out a notice on Friday or Saturday where we saw a new scheme that was trying to

rip off the Free File Alliance. An organization was posing as a Free

File member.

We got on that quite promptly. It actually goes back—it is interesting—it goes back to the conversation we were having last week,

where a taxpayer called in to check what was going on. That is

what led us to unraveling this. So, we absolutely do do what you

are saying there.

Senator STABENOW. I would appreciate very much knowing—earlier, Commissioner Everson, you mentioned that there are things

that Congress would need to do. There are some things that may

be causing something like this that are, in fact, legal.

Commissioner EVERSON. Yes.

Senator STABENOW. We talked about tax incentives, tax policies

that actually encourage businesses to go offshore, jobs to go offshore rather than being here in America. We need to know from

you what your recommendations are to stop things like this from

happening.

Commissioner EVERSON. Yes

Senator STABENOW. Not the broad question.

Commissioner EVERSON. Yes.

Senator STABENOW. I am not talking about the broad issue of

out-sourcing and so on. But these kinds of things that we are talking about that, on the face of it, I think, make us as the Federal

Government look pretty foolish.

Commissioner EVERSON. Yes. Thank you.

19

Senator STABENOW. Thank you.

The CHAIRMAN. Senator Lincoln? Thank you, Senator Stabenow.

Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman.

I am so pleased that we are here today with this discussion, and

you brought us so enthusiastically into looking for the solutions to

this. You and Senator Grassley have really both put forth some

phenomenal effort to address this in the Finance Committee, and

I am very grateful to you.

I, along with most Americans, continue to be astounded, I think,

with the amount of taxes that are owed and not paid. We are not

talking about a small amount here, and I think it is overwhelming,

particularly to most of the constituency I serve, who try hard every

day to live by the rules and do what they are supposed to do.

So I think we are looking at the progress that we can make in

closing this gap. It should be significant. It should be more than

one cent on the dollar. Our hope is that we can all come to the

table and look for the solutions that will make that happen.

We know, here in the Finance Committee, that our hands are

tied to some degree. We cannot do it by ourselves. With 16 legislative proposals, that only gets us one cent on the dollar. We need

to work with you. We need your help and your dedication to solve

this issue and certainly hope that we can do that. We can put our

heads together and our ideas together to really make that happen.

And I would just say to the three of you all, the reason why we

want to make that happen. I have a constituent, an 80-year-old

constituent in northwest Arkansas, who has dedicated the rest of

his life to ensuring that a 4-story building that houses his senior

colleagues in that community stays open, because we are not seeing

the resources put into housing for seniors in this country.

I spoke with the Humanities Council yesterday—which has been

under-funded for the last 4 years—which provides tremendous resources in very small amounts to some of the poorest children in

our country to experience field trips and exposures to things like

the Civil Rights Movement and other things that really make the

fabric of our country stronger.

I look at a group of 25 junior and senior high school students I

spoke with yesterday who were concerned about the number of

children in this country who are going hungry. Out of 2.6 million

people in Arkansas, approximately 500,000 people live in food insecurity. I mean, we need those revenues, and it is worth working

for, to make this a reality in terms of the things that we can do.

So we are looking for your help and we are looking for your passion in doing what is right in making our country whole and reinvigorating the fabric of this country.

Just two quick questions I have. Commissioner Everson, the decline in corporate audits was touched a little bit by Senator Schumer. There was an article also in the Washington Post—I do not

know if anybody else brought it up—that caught my attention last

week. It outlines policy changes that you made in 2003 and those

shifts in auditing.

Commissioner EVERSON. Yes.

Senator LINCOLN. We are seeing now, and I guess I would argue

as a direct result, decreased revenues from audits of our largest

20

companies; money raised from audits of the biggest companies fell

15 percent—that was indicated.

But perhaps maybe the directives that agents are getting would

be a concern that I have, that the Washington Post article indicated

that they were walking away from unassessed taxes in the audits

because the policy does not allow them to pursue it.

In other words, when they start that audit, they are targeted towards a specific problem. If they come across another issue, they

are basically instructed to go over the issue they found, to focus on

the issue in the audit that they started with. It just seems like a

big problem to me in terms of what we are leaving on the table.

Commissioner EVERSON. Sure.

Senator LINCOLN. Maybe you might comment on the article and

why we do not allow more flexibility in allowing agents to follow

that audit where it takes them, so to speak.

Commissioner EVERSON. Of course. Well, Senator, the first point

I would make is, I was distraught about the decreasing coverages

in the corporate. Maybe I will just show you this chart here, and

speak loudly.

These are the total corporate audits for over $10 million in assets. They were going down just like individual audits went down.

You could see, we brought them back up from $7,000 to almost

$11,000. We had very low coverage, 5 or 6 percent, in the category

between $10 and $250 million. I was very concerned about that, because these companies are growing. The bigger companies were

doing 1 in 3, or 44 percent, each year, the ones that are bigger

here.

As we brought this back, the total dollars that we have assessed,

you can see dollars recommended, an increase from $13 billion and

it went up to $32 billion. It came back down a little bit last year.

We are not concerned about that. But it is way up.

What we have done is, we have pressed to get things done sooner. And I would be concerned about that if we did not see the numbers coming up. But what we have done is, we have gotten more

coverage and we have gotten more money being set up.

Senator LINCOLN. But would your numbers not be even better if

you gave them more flexibility to focus on everything they are auditing?

Commissioner EVERSON. Senator, my understanding is pretty

clear on this. If an agent feels there is more to do, they have to

take that upline to their supervisor and that will be dealt with. If

the supervisor agrees, then they will proceed. I do not think people

are being stopped.

But there is an issue here where sometimes it takes longer to do

some of these corporate audits, if you will, than it takes to get a

death penalty decision all the way through the system in America.

That is not a good thing.

Senator LINCOLN. But all the more reason they should have flexibility as they go because, if it is going to take them that long, you

do not want to get to the end and have to go back.

Commissioner EVERSON. I agree with you. I think they have a

fair amount of flexibility. But I think what we are doing is working

here. We are doing more, but we are pressing to go faster.

The CHAIRMAN. All right. Thank you. Thank you, Senator.

21

Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman. Welcome to all of

you.

My question to start with is for you, Secretary Paulson. My view

is that real tax reform is a very good way to close the tax gap because, with real reform, you simplify the system and it makes it

tougher for people to cheat and to rip the system off.

We have had one witness after another come before the Senate

Finance Committee. In fact, Mr. Everson—I asked him this question, and he said he agreed. Do you believe that real tax reform

that simplifies the tax code would be a good way to close the tax

gap?

Secretary PAULSON. Yes. First of all, I think it would be great to

have tax simplification and real tax reform that simplifies. So,

number one, I think that is good. I think, second, ‘‘close’’ is one

thing, but to make progress on the tax gap is another.

I think closing the tax gap is something that may be unrealistic,

but making progress on it is possible. I think the best kind of

progress will come from your suggestion. But I do believe that the

most progress will be made in dealing with those who are making

honest errors as a result of complexity. I do not think simplification

deals with the under-reporting of income and people who intentionally do not report income or do not report cash income.

So I think, frankly, if we set our sights too high, the only way

you can get at a part of the problem is by putting a burden on all

the honest taxpayers that Senator Lincoln talked about who are already paying their taxes, and then to have them be more burdened

with more reporting.

So I think what you are suggesting is the most effective way of

dealing with this in a balanced, non-burdensome way. But I do believe, again, that to get at a big part of the problem, the only way

you could get it, would be through steps I would not want to recommend, which would be more onerous reporting.

Senator WYDEN. I am not suggesting that tax simplification will

close the entire tax gap. But we have had one witness after another, including Mr. Everson, say that it would make a real difference.

Secretary PAULSON. Absolutely, Senator.

Senator WYDEN. I appreciate that.

Secretary PAULSON. Absolutely.

Senator WYDEN. So why is it that tax reform has been buried by

the administration? Now, I am very troubled about the fact that it

has now been something like 18 months since the President’s commission came in with their reform proposal. I was one of the Democrats who said I think there are some darned good things in it.

I think it is too bad that, at a time when the country thinks the

tax code is broken and we have had people just in the last few

weeks go through bureaucratic water torture trying to fill out

schedule this and form that, I still do not understand why the administration is stalling on tax reform. It has been 18 months. Now,

you have not been there for 18 months, and we have had a number

of good conversations on it.

But when can we expect the administration to come forward with

a concrete proposal where we can go at this in a bipartisan way,

22

the way the Congress did in 1986? We have had 15,000 changes

in the tax code. It comes to three for every working day.

Practitioners are telling me that the system is so broken and so

complicated, that it does give the green light to people to try to rip

it off, to take advantage, to exploit it. You all have an opportunity,

in a bipartisan way, with people like myself working with you, to

change this. When can we expect that the administration will come

forward with a tax reform proposal?

Secretary PAULSON. Senator Wyden, let me say, first of all, I appreciate your enthusiasm for this area, as I said, and your creative

thought and the amount of effort and passion you put into that. I

would say, frankly, I think a lot of people find it inspiring.

But to get to your specific question, the judgment was made that

we have now had significant tax relief and that there are priorities,

very, very major priorities in terms of entitlement reform, that we

have deemed to be very pressing.

So with regard to simplification, we have emphasized this in

more incremental ways. Eric Solomon, who is sitting on my right,

can give you some of the things that we are doing incrementally.

But in answer to your question, there is not a major tax reform

proposal being put forward now, and I do not see that on the dockets in the near future.

Senator WYDEN. My time is up. I would only ask, Mr. Secretary,

that you all reconsider it. I think that is a bad judgment. Certainly

all of the things that you have cited, the administration’s assertion

about the value of their tax program, that was true before the commission was named.

What was the point of having this commission? That commission,

now, is basically being labeled a sham, that there really was not

any point in having it, and we are not going to do anything with

it because we think everything else is working.

I think the tax code is broken. I think simplifying it will make

a real dent, if not deal with the entire problem, with the tax gap.

I hope, Mr. Secretary, you will reconsider this. This is an area

where you can have bipartisanship, and I hope you will look at it

again.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

Mr. Secretary, I think there is a little confusion over the propriety of a U.S. business having, say, a shell subsidiary in a tax

haven, so my real question is, is there a legitimate purpose for a

U.S. business to have a shell subsidiary located in a tax haven

country like the Cayman Islands? Is there a legitimate purpose?

Secretary PAULSON. There may be no legitimate purpose in that

particular instance. I think the comment that was made by the

Commissioner and was made by me was that there is a lot of very

legitimate business in today’s global marketplace that is done offshore, so we need to distinguish. I think what the Commissioner

said is to distinguish between tax policy and law on the one hand,

and compliance on the other.

The CHAIRMAN. That is correct. But I am asking, still, whether

there is a legitimate business purpose. I think it was Senator

Stabenow who held up the photograph of that building in the CayVerDate 11-MAY-2000 15:57 Feb 27, 2009 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 46363.000 SFIN1 PsN: SFIN1
23

man Islands. I am asking, again, is there a legitimate business

purpose for U.S. companies?

Secretary PAULSON. In terms of that particular thing, I’m not familiar with the legitimacy. I do not know the details.

The CHAIRMAN. What is the Treasury doing to attack noncompliance involving offshore activities?

Secretary PAULSON. Mark, would you like to go through what you

are doing? It is really quite a comprehensive effort.

Commissioner EVERSON. I would say, Mr. Chairman, that this is

one of the most difficult areas. That is the first point I would make.

It is in part because, when you get into the more sophisticated

products and schemes that are developed by tax intermediaries, investment banks, law firms, accounting firms, they can start as

something that is totally legitimate and then morph into something

that pushes the lines ever outward. If you will recall the testimony

I gave last June, you get into troubling areas like the foreign tax

credit generators. You have issues on sales of intangibles. Transfer

pricing is always tough.

Now, what we do is, we are doing more on our corporate side.

But I would say the principal change we are making is the way we

are interacting with other countries. We have formed the Joint

International Tax Shelter Information Center—you may be familiar

with that—here in Washington, with partners from the U.K., Australia, and Canada.

We are about to expand that to London, with other partners.

That is an area where we exchange information, again, within the

context of treaties, and then follow up on that. I chair a group at

the OECD, the Forum on Tax Administration, which is tax administrators from all over the world who met in Seoul last September

and commissioned a study which is being led by the United Kingdom on tax intermediaries, and it gets to this issue. I do not want

to promise any easy solutions here. This is the toughest area, I

think, the international.

The CHAIRMAN. Right. It is a very tough question.

Commissioner EVERSON. Very tough.

The CHAIRMAN. I urge you to keep this committee very informed

of your joint international efforts, because I am quite certain other

countries are facing some of the same problems.

Commissioner EVERSON. Sir, they have the same concerns. That

is why they endorsed what was a pretty tough statement, the Seoul

Declaration, last September that expressed concern about just

these issues.

The CHAIRMAN. I appreciate that.

Mr. SOLOMON. Mr. Chairman, could I just add?

The CHAIRMAN. Keep this committee informed. Frankly, there is

a lot of angst in the Congress about what is going on here.

Commissioner EVERSON. I understand.

Mr. SOLOMON. Mr. Chairman, could I add a point with regard to

these international issues? On the regulatory side, we have many

important projects. For example, in the transfer pricing area, which

is section 482, we have very important projects there about services

and cost sharing. Also, three recent projects on foreign tax credit.

The Commissioner referenced recent regulations with regard to

structured transactions.

24

Also, in the treaty and the tax information exchange area, information exchange is very important. In fact, recently a tax information exchange was entered into with the Cayman Islands.

The CHAIRMAN. All right. I appreciate that.

I want to get back a little bit to sort of the overall theme of this

hearing, and that is the degree to which a lot of this tax gap can

be addressed without causing undue pain.

I am quite concerned, frankly, because I still hear from the administration that the sundry honest taxpayers are being singled

out and they are going to have to share a greater burden for the

sake of trying to find those who are not the honest taxpayers.

Let me get at this a little bit differently. You, Mr. Secretary, earlier said that there comes a point where additional efforts here

tend to over-burden taxpayers. Can you agree with me that achieving 90 percent compliance does not over-burden taxpayers?

Secretary PAULSON. Here is the way I would approach it.

The CHAIRMAN. What is the level?

Secretary PAULSON. You see, I think speaking in terms of broad

goals are helpful, but I think the only way we can really make

meaningful progress is to approach these things from the bottom

up.

I cannot speculate in terms of what level we can achieve without

over-burdening. The only way I know how to do it is to work with

you—we are not going to be able to do anything important together

here without doing it jointly—from the bottom up on a plan and

say what is doable.

The CHAIRMAN. I am sorry, Mr. Secretary. We have been down

that road, and it did not work. I am changing gears here, as I mentioned in my opening statement.

Secretary PAULSON. Right.

The CHAIRMAN. I am asking you to come up with a plan. You are

the Treasury. You are the IRS. You have the facts. You are the

agency, the departments in charge here. We are asking you to come

up with a plan to reach 90-percent compliance over 10 years. I

think that is a fair statement.

You come back to us in 3 months and tell us what you can or

cannot do, any changes in the law that you think may or may not

be necessary, and we will deal with those. We are just asking you

for the plan so we can get to 90-percent compliance.

Secretary PAULSON. Right. We have come up with a plan. We

think our plan is a serious, credible plan. I am happy to come back

and talk with you about it.

The CHAIRMAN. Mr. Secretary, if it is what you have given us,

it is not credible. It is only 1 percent.

Secretary PAULSON. I would just say to you, and just say it with

great respect, because I know how much you care about this, that

I care about it also. I would like to be able to say with some credibility, without fooling people or misleading people, that there is a

clear path to 90 percent. But to show a plan, to have a goal, we

would have to say what steps we are going to take to get there.

The CHAIRMAN. Exactly. Exactly.

Secretary PAULSON. And I would say to you that I do not see the

steps that we can take. I cannot see a clear path.

The CHAIRMAN. You are saying we cannot get there.

25

Secretary PAULSON. I am not saying we cannot get there, but I

am saying I do not have, and I have not heard from you or anyone

else, a set of steps that could be taken to get at this under-reporting and to close that gap all the way to 90 percent. We will keep

working. We will keep working with you.

I have worked on a lot of business plans. I have worked with

multiple clients. I have done it at Goldman Sachs; I have done it

in the not-for-profit area. There are some plans where you can set

a very specific goal because you see the steps to get there. We need

to build this from the bottom up.

The CHAIRMAN. I am asking you to do that. When we meet 3

months from now, I would like to see it.

Secretary PAULSON. We have a plan that says, here are our enforcement legislative proposals, and other areas on which we are

focusing. I will be pleased to come back and talk to you about it

again and keep working on it.

The CHAIRMAN. But, Mr. Secretary, I am not going to leave this

issue. I am going to be focused on this until we reach our goal.

Secretary PAULSON. I am not either. I am not either.

The CHAIRMAN. Like a lot of things in life, if we are going to do

something, we might as well do it now. We are not just going to

be dragging our heels and so on and so forth. Let us get the job

done.

Secretary PAULSON. I would leave it this way. You and I are in

total agreement on one thing. The tax gap is a serious issue. We

should be very vigilant about addressing it. I am not going to rest

until we keep making progress.

I think this administration is doing as much as anyone has done

about it. I want to do more and want to work on it. But what I

do not want to do is put forward something that is going to mislead

the American people. I really do not want to do that.

We are going to have to work together, and this is going to have

to be a joint effort. If you have ideas, you have been working on

this for a long time yourself, you have a big staff, if there are

things you think we are not considering——

The CHAIRMAN. You have got a heck of a lot bigger staff than we

do. [Laughter.]

Secretary PAULSON. I know.

The CHAIRMAN. By far.

Secretary PAULSON. Anything you want us to evaluate, we will

evaluate. We will work together on this.

The CHAIRMAN. I appreciate that. Three months from now I want

a plan.

Secretary PAULSON. You have a plan now.

The CHAIRMAN. No. I want a plan that is a real plan, that gets

us to 90 percent. This is not a plan that gets us to 90 percent.

Secretary PAULSON. The other thing that would be great is if 3

months from now—and I really say this with great respect—we

had the 16 legislative proposals enacted, if our budget——

The CHAIRMAN. Nine of them are in the supplemental. They

amount to about $2.3 billion over 10 years. There are five or six

others that total about $27 billion over 10 years. If you add them

all up, it’s the 1 percent in your plan. That is not a plan.

26

Secretary PAULSON. I tell you, where I come from, every $30 billion is real money, and we want to go after it a billion dollars at

a time.

The CHAIRMAN. That is what we are asking. You come up with

a plan.

Secretary PAULSON. And we are doing a lot of other things.

The CHAIRMAN. You come up with a plan. Every year we have another $30 billion. Then we get to the 90 percent.

Secretary PAULSON. Thank you.

The CHAIRMAN. All right.

Senator Salazar?

Senator SALAZAR. Thank you. Thank you very much, Chairman

Baucus.

I do have a statement for the record, and I will just submit that

for the record.

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

Senator SALAZAR. But I have a question for you, Secretary

Paulson.

The CHAIRMAN. I might say, I am sorry, Senator. I am going to

have to leave here. But, Mr. Secretary, again, you have not heard

the last from me on this.

Secretary PAULSON. I rest assured. We are going to keep working

on it. You have not heard the last from me. We will get back to

you.

The CHAIRMAN. And we are also going to solve it.

Secretary PAULSON. Well, we have to determine what the ‘‘it’’ is

we are going to solve, and what is the realistic objective. I will tell

you, we are going to be working very hard. We owe it to the American taxpayer and we owe it to you, so we are going to keep working hard on this. But I value my credibility too much to promise

something where I do not see a clear path to get there.

The CHAIRMAN. But we have very high regard for your talents,

Mr. Secretary.

Secretary PAULSON. Thank you.

The CHAIRMAN. See you in 3 months, Mr. Secretary.

Senator SALAZAR. Thank you, Mr. Chairman.

Secretary Paulson, I looked at the same figures that my Chairman and others have looked at. The plan that has been set forth

by the administration, at least the figures I have here, would

produce $19.5 billion over 10 years as we try to close the tax gap.

I hear you, in the dialogue with the Chairman, essentially saying

this is what we think we can do in a realistic way, so we are not

just aiming at something that is pie in the sky.

Secretary PAULSON. Senator, you missed the first part. Those are

the legislative proposals, which are really as comprehensive as anything that has been suggested in 20 years. That is part of an overall plan that has to do with enforcement, research, investment and

technology, and taxpayer service.

So, we have a comprehensive plan. We are not doing it all

through the legislative proposals. But we believe, if you are going

to get at some of the unreported income, you are going to need to

do it through legislative proposals, some of which are not easy, I

know, for Congress to pass, but they are an important part.

27

Senator SALAZAR. Then the additional statutory enactments that

you requested us to enact, plus additional executive authority that

you will exercise, which you already have, that gets you to that

$19.2 billion figure?

Secretary PAULSON. Well, I think what you are talking about—

is that with the Joint Committee score?

Mr. SOLOMON. Yes. That may be the Joint Committee score. The

$19.2 billion is the Joint Committee score. Our score was $29 billion.

Senator SALAZAR. Your score was $29 billion?

Secretary PAULSON. Right.

Senator SALAZAR. All right. I think that is where Chairman Baucus or others came up with this. That would be a 10 percent, 1 percent solution, whatever. But it is not dealing with the whole tax

gap.

Now, I hear you saying that what you want to do, and what you

have done here, is you have set forth what you consider to be a

plan that is comprehensive and realistic on how you get there. The

dialogue with the Chairman is that you do not know how to get

where we want you to go.

So my question to you is, and I am sure you have done this already within Treasury. We know what the tax gap is, and you

probably have identified the different sectors that are out there in

terms of what contributes to the tax gap.

I am not an expert like you are, but I can imagine that, when

I go to the Mile High Flea Market in Denver, CO, several hundred

thousand people congregate there every weekend, and there are

probably not a lot of taxes being collected there. There are probably

lots of places that you have identified as gaps.

For me, I will support the Chairman in terms of the request here

that you come up with a plan that we can examine again in 3

months. But it would be useful information to know what you think

the major opportunities are for us to close the tax gap.

Secretary PAULSON. Right. I think that is really the key question.

Just to be very brief, the last comprehensive research was based

on tax year 2001. We did research on tax year 2001, and we got

the results in 2004. We are doing new research right now.

What you see, Senator, is that about 80 percent of the tax gap

is a result of under-reporting. Some people just do not file. But the

biggest part is under-reporting, and a lot of that is going to be individuals. A lot of that is going to be small businesses, farms, and

so on.

Senator SALAZAR. Let me ask you this, just to push you a little

bit on that. So, if it is under-reporting then from individuals and

small businesses, I know a lot of restaurants—my wife was an

owner of a Dairy Queen restaurant for some time.

Secretary PAULSON. Yes.

Senator SALAZAR. At least, when you are part of a franchise, everything gets calculated because it has to go to your franchisor, so

you know exactly what your sales are. I know a lot of other owners

of restaurants who probably do not have that same kind of accountability. So if you just take that one sector, just the restaurant sector, what is it that you would do to try to get accurate reporting?

28

Commissioner EVERSON. Let me throw in one of the 16 proposals

we have made that I personally believe is the most important, and

it is being roundly criticized in the small business community.

That is to get, once a year, the gross receipts from credit card

processors so that we would know—if it is the Everson dry cleaning

business—every year, from 8 or 10 credit card processors, the IRS

would get a number that would say, here are the total receipts that

that business generated via credit cards.

If you follow the example for a second, if Everson—I probably would not do this, given my day job—had only reported $500,000

of cash income and $500,000 of credit card income, but then the

banks reported to the IRS that there was actually $1 million of

credit card income, well, obviously that could trigger an audit, but

it would actually trigger more compliance, because word gets

around and they would do that. They would file correctly.

But they would not only file correctly on credit card receipts,

they would file correctly about the cash receipts, because they

know that we know—and this is a hypothetical—that dry cleaners

are half cash and half credit cards.

That is the most important way that we think we can get at this

without having a lot of extra burden for those small businesses, because the banks who process this already have all that information

in their databases.

Senator SALAZAR. Now, are you supportive of that proposal then?

Commissioner EVERSON. We have made that proposal. We made

it last year and the Congress has not acted. We want them to act.

We ask you to act.

Senator SALAZAR. My time is up, and I see my wonderful colleague from Arkansas. She has, obviously, questions. She is the

chairperson of the committee, so I will turn it back to her.

Thank you, Blanche. Thank you, Secretary Paulson and the rest

of you.

Secretary PAULSON. Thank you.

Commissioner EVERSON. Thank you.

Senator LINCOLN. Well, thanks, Senator Salazar.

Commissioner, just going back to that last question I had where

the agents in the Washington Post article were quoted as saying

that they were walking away from unassessed taxes in those audits

because the policy does not allow them, I think you take that one

step further, your answer was simply that you are giving them the

ability to appeal to their superiors. I would certainly like to know

how many, and how often, are those superiors allowing them to

continue?

Commissioner EVERSON. Sure.

Senator LINCOLN. So if you could get that back to me.

Commissioner EVERSON. We can do that. Can I make one point?

Senator LINCOLN. Apparently they are not, it sounds like. I

mean, when you go further into the quotes from those agents, they

are being told, no, stay focused on what we have given you and do

not deviate.

Secretary PAULSON. Let me say one thing. I know nothing about

the particulars here, but as someone who has managed a business

with multiple people, sometimes the people in the field do not have

the best judgment, and sometimes they are spending time and reVerDate 11-MAY-2000 15:57 Feb 27, 2009 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 46363.000 SFIN1 PsN: SFIN1
29

sources where someone actually above them may know a bit more

than they do about where their time could be better spent.

Senator LINCOLN. I am sure they do. But I would just simply like

to know how many times they are being allowed to go ahead.

Commissioner EVERSON. Certainly. Certainly, Senator.

Senator LINCOLN. Thank you.

Mr. Commissioner, the difference between the tax gap and what

you all refer to at the IRS—I do not think you use the words ‘‘accounts receivable.’’ Maybe you use ‘‘accounts financial.’’ Do you use

‘‘accounts receivable?’’

Commissioner EVERSON. Yes. Yes.

Senator LINCOLN. Are accounts receivable considered as a part of

the tax gap?

Commissioner EVERSON. No, ma’am. That is the difference between, say, an income statement and a balance sheet. The accounts

receivable, which runs around $260 to $280 billion, that is the

amount that is actually owed. The government carries on its books

debt for 10 years. In a business, you would write off a lot of that

amount.

Senator LINCOLN. But you cannot write that off.

Commissioner EVERSON. We cannot write it off, so we carry that

until 10 years have elapsed.

Senator LINCOLN. Right. So how much of it is considered collectible?

Commissioner EVERSON. We look at that, and I think our poten- tially collectible inventory that we look at is somewhere around $70

or $80 billion. Is that a fair number? My colleagues are——

Senator LINCOLN. Of that $200 billion?

Commissioner EVERSON. The $280 billion.

Senator LINCOLN. Two hundred and eighty.

Commissioner EVERSON. That is what we count.

Senator LINCOLN. Seventy is collectible?

Commissioner EVERSON. Seventy or so. Seventy or eighty, we

would categorize. As you know, Senator, the longer the debt stays

out there, the harder it is to get.

Senator LINCOLN. So your idea on the dollar amounts of the re- ceivables not currently in the queue to be collected is $210 billion?

Commissioner EVERSON. Well, we would not be actively working

that.

Senator LINCOLN. And that is just over a 10-year period, right?

Commissioner EVERSON. It is not a 10-year period. That is the

amount on the balance sheet today.

Senator LINCOLN. Right. But it is going to sunset. I mean, it has

a statute of limitations of 10 years. Correct?

Commissioner EVERSON. It stays on the balance sheet. That is

correct. Yes.

Senator LINCOLN. So how much revenue owed in accounts receivable is lost every year through the 10-year statute of limitations?

How much do you lose there?

Commissioner EVERSON. I do not think the 10 years really

prompts any additional loss.

Senator LINCOLN. It goes off your books.

Commissioner EVERSON. Well, it goes off the books, but the older

it gets the harder it would be to get, frankly.

30

Senator LINCOLN. It is still there and it still goes off your books.

Commissioner EVERSON. No, I agree. I understand. But the way

to get after this is to get after it promptly. That is why part of our

enforcement build is to do more in the collections area. It also gets

into this controversial area of private debt collectors that Senator

Grassley is so strongly supportive of. We use that tool to get after

the money sooner.

Senator LINCOLN. So you are saying you only collect, of those re- ceivables, about $70 billion out of the $280 billion?

Commissioner EVERSON. That is not what I suggested.

Senator LINCOLN. All right. I am sorry.

Commissioner EVERSON. What I am saying is, when we look at

that amount now at a point in time that is on the government’s

balance sheet——

Senator LINCOLN. Receivables.

Commissioner EVERSON [continuing]. We say we can potentially

get only around a quarter of that. A lot of it is already old or, for

a variety of reasons, you are not going to get to.

Senator LINCOLN. Well, maybe you could expand on that some

more to me in terms of an answer of why it is so difficult to get.

Commissioner EVERSON. Absolutely. Happy to.

Senator LINCOLN. And why you give up on it, I guess.

Commissioner EVERSON. I have learned that collections is a complex area, and we are happy to take you through it.

Senator LINCOLN. The other thing that I would just like to briefly

mention, because Senator Grassley is back and I will hand it over

to him, some of you all commented on the impact on small businesses. I certainly want to be cognizant of that. There is much

there to be concerned about, I think.

But the other was an issue that Senator Grassley himself

brought up. Just repeating today, for what it is worth, I do not believe we are going to see the kind of significant progress on this

issue if we do not recognize that voluntary compliance is certainly

a huge key.

We are never going to be able to police all of the non-compliant

taxpayers, but we catch more flies with honey. We say that in the

South. I guess they say it everywhere. Taxpayer service, through

outreach and education on the front end, I think, has to be an essential tool.

It was amazing to me. I did a tax Free File seminar in my State

and an outreach of trying to encourage more people to use the Free

File opportunities that exist, and more importantly to file online

and hopefully do a better job, particularly in terms of bringing

down error rates. I was amazed at the number of people, one, who

came, two, who did not know about it, and three, who were interested in being able to take that message back to other people in

their communities.

Education is going to be a critical part of what we do in terms

of both minimizing error rates and making sure that we are doing

everything we can. I hope that that will be a huge part of what we

do.

Commissioner EVERSON. Senator, just two quick comments. One,

I agree with you. The volunteer sites, that program, year over year,

is up 15 percent through last Friday in terms of how many returns

31

we processed. It is a key area of emphasis, as we discussed last

week. I absolutely think it is essential.

Senator LINCOLN. Well, as Senator Grassley will remember, I

voted for the prescription drug component to Medicare and am glad

I did. It was not perfect, but it was a good thing. But a huge part

of what I think helped make it successful for us in Arkansas was,

we went back home and I spent weeks working with seniors across

our State, educating them on how to engage with the program.

If we do not do that here, we are never going to reach the goals

that Senator Baucus has set for us. I think those are laudable

goals, and I think they are achievable. Thank you.

Senator GRASSLEY. I am cognizant of the fact that you have to

go very soon, Mr. Secretary. I have to as well, so we are not going

to be here a long time.

Mr. Secretary, I asked about the number of agents, additional

audits, and how much more money it would take to provide the

IRS the additional resources they need to get $80 billion a year.

You provided a general answer. I would only ask you now if you

would follow up with an answer more in detail in writing.

Then I want to go on to an issue that I brought up a couple

times. This is kind of a general question, but it deals with the tax

gap and the efficient use of employees within the Treasury Department.

Several hundred thousand hours of IRS employee time are spent

on union activities. That is taxpayer time that could be used for the

tax gap work. Would that time be better spent on enforcement and

taxpayer service, at least part of it? Go ahead.

Secretary PAULSON. Mr. Chairman, that is an important question. Let me turn it over to the guy who is closest to it.

Commissioner EVERSON. Senator, we do have an overall agreement with the union which has now lapsed. We are in the process

of trying to renegotiate that master agreement. It would get at

issues like this.

I believe you are correct, that if you look at the agency relative

to other departments and agencies within government, that the

amount of time devoted to union activities is proportionately higher

at the IRS than it is elsewhere. Obviously we would like to get

every incremental productive resource that we can, as management.

Senator GRASSLEY. All right. Well, I am glad you are negotiating

that. You will have an opportunity to get more of that put into collecting taxes than union activity.

Commissioner EVERSON. Well, I am sure your interest in it is not

unseen.

Senator GRASSLEY. Mr. Secretary, I think that there is a lot

going on in the hedge fund industry that might help us with the

tax gap as well. You recently had the opportunity to study the

hedge fund industry in relation to the President’s Working Group

on Financial Markets.

I would like to know if you studied any tax policy issues related

to the financial markets, and specifically hedge funds or alternative

investments, in that context. If not, I would like to know why that

was not a part of the issue.

32

Secretary PAULSON. Yes, Senator. Two things. First of all, we did

not study tax policy. I would just give you a simple answer there.

When we think about tax policy, it is not by business activity, it

is by taxpayer type. So we have individuals, corporations, partnerships, and so on.

But Eric, do you have anything else?

Mr. SOLOMON. Yes. Independently, we are looking at issues regarding hedge funds.

Senator GRASSLEY. All right. So you are dealing with this problem as a possible tax problem, just not as part of the President’s

Working Group on Financial Markets.

Mr. SOLOMON. That is correct. Yes, we are looking at these

issues, and I know the IRS is also looking at these issues.

Senator GRASSLEY. All right.

Mr. Secretary, Chairman Baucus correctly zeroed in on a relationship between the tax gap and international issues. I would like

to follow up. Mr. Solomon noted in his written testimony that the

Treasury Department and the IRS have done, and continue to do,

considerable work to go after the international tax gap, particularly

in the areas of transfer pricing and information exchange.

Mr. Solomon, please briefly describe Treasury’s work in these

areas and the role of our tax information exchange network in combatting offshore tax evasion.

Mr. SOLOMON. We are doing a lot in the international area. For

example, in transfer pricing we have very important projects in regard to services among related parties, and also cost sharing. In

the foreign tax credit area, we have issued three sets of guidance

dealing with cross-border transactions and most recently proposed

regulations about certain highly structured transactions.

Information exchange is a very important issue. We have a very

vigorous treaty program, trying to enter into new treaties. Also, tax

information exchange agreements are very important. In just the

very recent past, we have entered into a number of tax information

exchange agreements, as I mentioned, including one with the Cayman Islands, but also with other countries such as the Netherlands

Antilles, and the British Virgin Islands.

Senator GRASSLEY. All right.

Mr. Secretary, the administration proposed, and I strongly supported, an effort to provide for private debt collection contracts at

the IRS. This was a way for the IRS to collect tax due and owing

that otherwise would not be collected because of a low priority.

The Commissioner stated at an earlier hearing that the private

debt collection effort was an important part of fighting the tax gap.

Actually, it has not gotten the support from members of Congress

the way it should. It seems like fighting the tax gap is stopping at

the union boss’s door.

However, despite the naysayers, the Treasury Inspector General

for Tax Administration recently came out with a report that gave

the private debt collection program and IRS management a gold

star.

I would like your comments on the importance of the private

debt collection effort as it relates to the tax gap, and more importantly, to understand and get your commitment to already established plans to expand this successful program.

33

Secretary PAULSON. Senator, first of all, clearly we understand

the direction from Congress. I think this program is being run, as

the Inspector General said, in a very positive and balanced way.

The second point I would make, which the Commissioner could

point out to you, is that a lot of the activity being conducted by the

private debt collectors, if they were not doing it, would not be done.

As he is hiring new IRS agents and training them, there is a

higher value-added use for them. So the cases assigned to the private collection agencies are the simplest cases, and he has more

productive uses for new IRS agents. So, again, we understand the

importance of that program.

Senator GRASSLEY. I have one more question I will submit for the

record.

Senator Schumer?

Senator SCHUMER. Thank you, Mr. Chairman.

First, I saw that the chart that the Commissioner put up showed

that enforcement dollars are on the rise. I have a question related

to it.

Commissioner EVERSON. Certainly.

Senator SCHUMER. The private debt collection program is controversial, but maybe there is one aspect that could be expanded.

My understanding is that a certain percentage of the money collected by debt collectors has to be used to boost IRS enforcement.

That sounds good to me.

Commissioner EVERSON. Can be used. Yes. That is correct.

Senator SCHUMER. Yes. All right.

Well, why do we not set up an enforcement trust fund within the

IRS, where the IRS gets to dedicate, say, 1 percent of the money

that it raises through new enforcement to the following year’s enforcement budget without Congress’s interference?

Commissioner EVERSON. I am a former OMB official, and I think

Mitch Daniels would reach across several States and wring my

neck if I agreed to a proposal like that.

Senator SCHUMER. He is Governor of Indiana now.

Commissioner EVERSON. I know. I know.

Secretary PAULSON. Senator, I can say this. We have been very

fortunate because, over the last several years, Congress has improved our enforcement budget.

Commissioner EVERSON. That is not correct. We did not get everything we wanted in enforcement. That is the starting point.

Secretary PAULSON. All right.

Senator SCHUMER. I saw on the Commissioner’s——

Commissioner EVERSON. But I want to say this, since I have contradicted my boss. This Secretary fought for, and got, the biggest

budget increase that we have had in years. What we have now is

a very good budget before the Congress that does address enforcement.

Secretary PAULSON. And I am assuming, and no one on this committee has here indicated that that would not be approved. I would

find it ironic beyond belief if, after this hearing on the tax gap, it

were not approved.

Senator SCHUMER. Right. But this trust fund would be an incentive. It would be automatic. You could count on it from year to

year. When I asked the Commissioner the question, I saw the smile

34

on his face. It sort of reminded me when Sid Caesar, the old comedian, would get all the applause in the audience. He would say,

‘‘No, no more applause.’’

Commissioner EVERSON. Let me say one thing. One of the biggest

problems we have, Senator, is this scoring question, because we

can demonstrate for you that, if you invest in the IRS—and it runs

to services, enforcement, our infrastructure, everything else too—

you get a very good return. But that does not count. You score a

legislative proposal, but you do not score the baseline IRS activity.

Senator SCHUMER. Right. Right.

Commissioner EVERSON. That is a real problem.

Senator SCHUMER. Yes. Well, this would help that, I think. It

would sort of give you some money automatically.

Commissioner EVERSON. You might throw money at us.

Senator SCHUMER. Yes. All right. Well, I do not want to do that.

Commissioner EVERSON. Can I come back to your earlier question? This will surprise you that you get an answer this promptly.

Senator SCHUMER. Yes.

Commissioner EVERSON. But we are going to grant that extra

week.

Senator SCHUMER. Oh. Thank you. That is great. I very much appreciate it, and so do the people in Westchester and the Hudson

Valley who had all that flooding, and I am sure the people in New

Jersey, and other States as well, although they have not contacted

me. Great. All right.

The next question relates to something that has been a pet peeve

of mine that relates to the corporate side of things. It is book

versus tax income. Since I am last here, I think I can take a little

more time, so I will elaborate a bit.

Obviously one of the issues that is intriguing to me is the difference between the profits businesses report to their shareholders

versus the profits they report to the IRS. Some of this is due to deductions, like depreciation, but a good part of it is also gamesmanship. They want to report as high a profit to the shareholder and

as low a profit to the IRS as possible, so I think the numbers

should bear some relationship. I think, as Justice Brandeis once

said—I think it was Brandeis—‘‘sunlight is the greatest disinfectant.’’

Now, the IRS—correctly, in my opinion—has made an effort to

get companies to explain these differences on what is called Schedule M–3. It is supposed to explain the discrepancies between book

and tax income.

From what I am told, many companies do not take it seriously,

that the M–3 is not seriously filled out. Sunlight would be a great

disinfectant. Why could we not make either the M–3 form public,

or if not public, because there might be certain things that companies do not want to make public, an abbreviated M–3 that would

show the main bottom lines and compare them? I think it would

be an incentive on corporations to narrow the difference between

what they say publicly and what they report to you.

Secretary PAULSON. Senator, I am going to make a point. Most

of the points you bring up, I agree with. On this one, I would have

a significant question. The reason is the accounting rules. I spent

a lot of time in accounting.

35

Senator SCHUMER. Right.

Secretary PAULSON. Accounting rules are very different from tax

rules.

Senator SCHUMER. Right.

Secretary PAULSON. The accounting rules are changing all the

time. Most companies, very, very honest, honorable companies who

are not trying to explain anything, have book income that is driven

by accounting rules, which is very different for their tax income,

which is based on tax rules.

So, I have always believed that we are doing this right. That is

one thing the IRS should look at, and it is one thing the IRS does

look at. I think putting it in sunlight and publicizing it could be

misleading and could be misused by people who just simply say, because there is a difference, there is something wrong there.

Senator SCHUMER. Right. Now, everyone will admit there is a difference.

Secretary PAULSON. That would be my concern.

Senator SCHUMER. All right. Well, I am not going to ask the

Commissioner to overrule you here. [Laughter.]

Commissioner EVERSON. Thank you. Thank you very much.

Senator SCHUMER. Do you have time for one more?

Secretary PAULSON. Yes.

Senator SCHUMER. All right. Great. I will be as quick as I can.

This one relates to the Free File program. It is really to the Commissioner.

Commissioner EVERSON. Yes.

Senator SCHUMER. I wrote a letter last week to you. I do not

know if you have gotten to look at it yet. In my view, it is simply

wrong to ask taxpayers to pay an additional fee for the privilege

of filing their returns electronically when it saves the government

money and we are trying to reach a goal of 80 percent e-filing.

So I do not think it would infringe on tax preparers and software

companies for the IRS to offer free filing to everybody, as long as

the IRS forms did not provide tax advice or actually do the math.

I would like you to explain to the committee why taxpayers who

mail in their forms get to do so for free, while those who file electronically have to pay an additional $15 fee, we will call it, not a

tax.

It seems backwards to me that millions of Americans who are actually doing their own taxes at home—with a software program

maybe; these days, a lot of people do that—printing the forms out,

should avoid the fee. Taxpayer Advocate Olson, Nina Olson, does

the same thing. She recently testified that navigating the Free File

portal on the IRS website was like being in the wild west.

So should the IRS not act within its rights and end the Free File

agreement by next year so everyone can file electronically for free?

So if you are over $50,000 you do not have to pay a tax preparer

if you do not want to because it is not just $15, but the tax preparer fee. It would help you reach your goal of 80 percent. It seems

to me like a no-lose.

Commissioner EVERSON. The Free File agreement is in there to

help taxpayers, largely middle- or lower-income taxpayers. Really,

it helps them avoid going to a practitioner or buying the software.

If you are in the Free File, you do not get charged to file with the

36

government. But what you are getting at is, if you have used Turbo

Tax at home or something else, then you might be getting a fee depending on the product that you bought.

Senator SCHUMER. You are.

Commissioner EVERSON. Yes. So what you are raising, Senator,

is a question of increasing concern, I think, in the industry. There

are sort of two levels. One is this ability to get whatever return it

is you have—and 80 percent of the returns now are done by the

software—into the system without an additional charge. We do not

make the charge, they make the charge, the practitioner or the

software company.

Senator SCHUMER. Right. We want to let them go right to you

without the practitioner.

Commissioner EVERSON. That is right. But to do this would take

quite a bit of investment on the part of this service. It would be

some years out. I think that this is a question that the industry

needs to look at. We need to look at it, and we need to size how

big a deliverable this would be.

Senator SCHUMER. Well, could it not be just, finally, your interests and the industry’s interests are somewhat different here?

Commissioner EVERSON. I am not sure, in that instance, they are

if that fee reflects the true incremental costs. But I do not know

the——

Senator SCHUMER. All right. Well, I would ask you to give that

a serious look.

Commissioner EVERSON. Certainly, sir.

Senator SCHUMER. I think we should be able to do that.

I did have one more. I will be quick. Withholding. What about

withholding on capital gains and dividends of large amounts? Not

of somebody who pays a small amount, but above a certain amount

of dividend, or a certain amount? We get 99-percent compliance

when there is withholding of wages. We might be able to increase

compliance if you think it is a problem. I am not sure it is the right

thing to do. I want to ask you.

Secretary PAULSON. Well, that is one thing. We have a list of

things we look at and think about.

Senator SCHUMER. Yes.

Secretary PAULSON. It is one thing we look at. Actually, we look

at income, dividends, pensions, and withholding on a lot of things.

I remember back, and I think it was in the days of Dan Rostenkowski, when Congress took a step to do that, and there was just

such an outpouring of sentiment that it was quickly withdrawn.

We have looked at that. To date, we have felt that it would be a

mistake to propose that, but that is something that——

Senator SCHUMER. As I recall, Rostenkowski proposed it on all.

I mean, a small little person who gets $100 in dividends should not

be withheld, but a big one—where the money is—again, might

work. And Rostenkowski, dearly I love him, was in the pre-computer days.

Mr. SOLOMON. In this area, 1099s are issued. There is a very

high reporting rate for 1099s. So the question is how much extra

benefit you would get from that. My understanding is that the compliance rate with respect to 1099s is somewhere in the 95 percent

37

area. So you would have to take that into account, whether or not

this particular idea, how much it would get for you.

Commissioner EVERSON. Could I add one thing? I agree with everything that has just been said. We have a proposal—one of the

16—to get basis reporting for stock transactions. That, so far, has

not been picked up even though it is a very bipartisan proposal. I

have heard from Senators and Congressmen on both sides of the

aisle. This would further get at it. We put that forward and strongly advocate it.

Senator SCHUMER. Yes. I am a co-sponsor of that. I would support that.

Secretary PAULSON. Good.

Senator SCHUMER. Thank you all for staying an extra 7 minutes.

Secretary PAULSON. Thank you.

Senator SCHUMER. And for the rest of the time as well.

Can I do this? The hearing is adjourned. [Laughter.]

[Whereupon, at 12:22 p.m., the hearing was concluded.]

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