U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

76–370 PDF 2012

IRS: ENFORCING OBAMACARE’S NEW RULES AND 

TAXES 

HEARING 

BEFORE THE

COMMITTEE ON OVERSIGHT 

AND GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

AUGUST 2, 2012 

Serial No. 112–187 

Printed for the use of the Committee on Oversight and Government Reform 

( 

Available via the World Wide Web: http://www.fdsys.gov 

http://www.house.gov/reform 

(II) 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

DARRELL E. ISSA, California, Chairman 

DAN BURTON, Indiana 

JOHN L. MICA, Florida 

TODD RUSSELL PLATTS, Pennsylvania 

MICHAEL R. TURNER, Ohio 

PATRICK T. MCHENRY, North Carolina 

JIM JORDAN, Ohio 

JASON CHAFFETZ, Utah 

CONNIE MACK, Florida 

TIM WALBERG, Michigan 

JAMES LANKFORD, Oklahoma 

JUSTIN AMASH, Michigan 

ANN MARIE BUERKLE, New York 

PAUL A. GOSAR, Arizona 

RAU ́ L R. LABRADOR, Idaho 

PATRICK MEEHAN, Pennsylvania 

SCOTT DESJARLAIS, Tennessee 

JOE WALSH, Illinois 

TREY GOWDY, South Carolina 

DENNIS A. ROSS, Florida 

BLAKE FARENTHOLD, Texas 

MIKE KELLY, Pennsylvania 

VACANCY 

ELIJAH E. CUMMINGS, Maryland, Ranking 

Minority Member 

EDOLPHUS TOWNS, New York 

CAROLYN B. MALONEY, New York 

ELEANOR HOLMES NORTON, District of 

Columbia 

DENNIS J. KUCINICH, Ohio 

JOHN F. TIERNEY, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

JIM COOPER, Tennessee 

GERALD E. CONNOLLY, Virginia 

MIKE QUIGLEY, Illinois 

DANNY K. DAVIS, Illinois 

BRUCE L. BRALEY, Iowa 

PETER WELCH, Vermont 

JOHN A. YARMUTH, Kentucky 

CHRISTOPHER S. MURPHY, Connecticut 

JACKIE SPEIER, California 

LAWRENCE J. BRADY, Staff Director 

JOHN D. CUADERES, Deputy Staff Director 

ROBERT BORDEN, General Counsel 

LINDA A. GOOD, Chief Clerk 

DAVID RAPALLO, Minority Staff Director 

(III) 

C O N T E N T S 

Page 

Hearing held on August 2, 2012 ............................................................................. 1 

WITNESSES 

Mr. Mark Everson, Vice Chairman, Alliantgroup 

Oral Statement ................................................................................................. 8 

Written Statement ............................................................................................ 11 

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

Oral Statement ................................................................................................. 20 

Written Statement ............................................................................................ 22 

Mr. Timothy Jost, Washington and Lee University 

Oral Statement ................................................................................................. 35 

Written Statement ............................................................................................ 37 

Mr. Michael Cannon, Director of Health Policy Studies, Cato Institute 

Oral Statement ................................................................................................. 45 

Written Statement ............................................................................................ 47 

The Honorable Douglas Shulman, Commissioner of Internal Revenue 

Oral Statement ................................................................................................. 84 

Written Statement ............................................................................................ 87 

APPENDIX 

The Honorable Elijah E. Cummings, a Member of Congress from the State 

of Maryland, Opening Statement ....................................................................... 106 

Letter to the Honorable Douglas Shulman, Commissioner of Internal Revenue ....................................................................................................................... 108

Yes, the Federal Exchange Can Offer Premium Tax Credits by Timothy 

Stoltzfus Jost ........................................................................................................ 111 

Legal Analysis of Availability of Premium Tax Credits in State and Federally 

Created Exchanges Pursuant to the Affordable Care Act from Jennifer 

Staman and Todd Garvey, Legislative Attorneys .............................................. 113 

Questions for the Honorable Douglas Shulman .................................................... 123 

Mr. Mark J. Mazur, Assistant Secretary (Tax Policy), Response to a letter 

to Commissioner Shulman regarding section 36B of The Internal Revenue 

Code ....................................................................................................................... 134

(1) 

IRS: ENFORCING OBAMACARE’S NEW RULES 

AND TAXES 

Thursday, August 2, 2012, 

HOUSE OF REPRESENTATIVES, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, D.C. 

The committee met, pursuant to call, at 9:00 a.m. in room 2154, 

Rayburn House Office Building, Hon. Darrell E. Issa [chairman of 

the committee] presiding. 

Present: Representatives Issa, McHenry, Jordan, Chaffetz, 

Walberg, Buerkle, Gosar, Labrador, DesJarlais, Gowdy, Kelly, 

Cummings, Maloney, Norton, Tierney, Connolly, Davis, and Murphy. 

Also present: Representative Roe. 

Staff Present: Brian Blase, Majority Professional Staff Member; 

Molly Boyl, Majority Parliamentarian; Lawrence J. Brady, Majority 

Staff Director; Sharon Casey, Majority Senior Assistant Clerk; 

John Cuaderes, Majority Deputy Staff Director; Linda Good, Majority Chief Clerk; Christopher Hixon, Majority Deputy Chief Counsel, 

Oversight; Mark D. Marin, Majority Director of Oversight; Christine Martin, Majority Counsel; Mary Pritchau, Majority Professional Staff Member; Tegan Millspaw, Majority Professional Staff 

Member; Jeff Solsby, Majority Senior Communications Advisor; Rebecca Watkins, Majority Press Secretary; Kevin Corbin, Minority 

Deputy Clerk; Yvette Cravins, Minority Counsel; Ashley Atienne, 

Minority Director of Communications; Susanne Sachsman Grooms, 

Minority Chief Counsel; Jennifer Hoffman, Minority Press Secretary; Carla Hultberg, Minority Chief Clerk; Una Lee, Minority 

Counsel; and Suzanne Owen, Minority Health Policy Advisor. 

Chairman ISSA. The Committee will come to order. 

The Oversight Committee exists to secure two fundamental principles: first, Americans have a right to know that the money Washington takes from them is well spent; and, second, Americans deserve an efficient, effective Government that works for them. 

Our duty on the Oversight and Government Reform Committee 

is to protect these rights. Our solemn responsibility is to hold Government accountable to taxpayers because taxpayers have a right 

to know what they get from their Government. 

Our job is to work tirelessly, in partnership with citizen watchdogs, to deliver the facts to the American people and bring genuine 

reform to the Federal bureaucracy. 

Today we meet because President Obama’s health care law, 

which was hastily written here in the House, so much so that it 

was once said we have to pass it to find out what’s in it, now beVerDate Aug 31 2005 12:02 Nov 02, 2012 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\76370.TXT APRIL
2 

gins to be implemented. As we implement over 20 new tax laws, 

the IRS, always willing to say we can do it, it will be difficult, but 

we can do it, is going to be asked to invade American’s lives like 

never before. Who you are sleeping with, who is in your bedroom, 

who you are married to or not married to will, in fact, affect your 

status, and perhaps cause your taxes to be taken retroactively because of a change in income, marital status, persons living within 

the home during the year. 

President Obama said you could keep the health care you wanted, but, of course, that is not happening. It is not happening in 

such great numbers that States who decided to rely on subsidized, 

under the Obama health care plan, subsidized health care are 

being told that involuntarily the Federal Government is setting up 

exchanges that will, in fact, preempt State’s rights, preempt Federalism once again. 

Under the letter and the discussion on the House floor of 

ObamaCare, it was very clear that States could choose whether or 

not to set up exchanges, and if they did not, Federal exchanges 

would not be subsidized. It was considered to be an incentive, an 

incentive that only four States have chosen. 

Americans know today that, in fact, this was one of the largest 

and most complex tax increases in American history. We know 

that, whether you are a medical device manufacturer finding that 

you are being taxed so as to raise the cost of health care in order 

to pay for health care, or whether your dividends and interest are 

being taxed for the first time ever under Medicare, or whether or 

not getting married could cost you $3,400. The fact is, under ObamaCare if you are making $25,000, in other words, $10 an hour with a little bit of overtime, but living 

unmarried, you will receive about $1,700 in subsidy. If you live 

with somebody who also makes $25,000 and is unmarried, they will 

get about $1,700. But if the two of you are foolish enough to get 

married, you will lose that $3,400. 

The numbers are not debatable. What is debatable is, with rules 

not yet written on a law that was so vague that time and time 

again the Administration tells their political appointees to interpret the meaning, to find that which is not within the four squares 

of the law, and simply say it was Congressional intent. 

I am one who was here for that vote. The intent was clear. It was 

an intent to deceive. ObamaCare was, in fact, a series of promises 

by Nancy Pelosi to Democrats in order to get them to vote for 

things that they otherwise wouldn’t have. Those Democrats, some 

of them here, some of them no longer here, have, in greater and 

greater numbers, realized they were lied to. Whether it was interfering with the churches, interfering with people’s personal right to 

stay with their own insurance company, or, in fact, interfering with 

Federalism, itself, and States’ rights to choose or choose not to participate, time and time again this Administration has broken promises through interpretation. 

It has been a long time since this Committee has looked at an 

IRS Commissioner and had to say what we will say today, which 

is, Madam Commissioner, you do not have the authority. You simply have the political will to interpret that States must, over their 

objections, operate effectively State exchanges, because if you don’t 

3 

do it we will do it for you, and without coming back to the Congress 

for a change you will cost the American people billions of dollars, 

hundreds of billions of dollars over ten years, that were not scored 

in the bill. 

Ultimately, ObamaCare, and I am calling it ObamaCare from 

now on. I am tired of calling it an affordability bill. It is not. It is 

not about quality health care and it is not about affordability. It 

was the largest increase in Federal spending and it scored in a way 

that was not true. 

Our primary reason today is to flesh out some of these clear 

problems, problems where either the law is unclear, or when the 

law is clear it is chosen to be ignored, or, more importantly, the intrusion by the IRS in our lives. 

Under this legislation and its interpretation by political appointees at the IRS, we will see every aspect of the American life 

audited by the IRS in an increasing way, so much so that I doubt 

they can, in fact, go after the conventional tax cheat for the next 

several years. 

In closing, I do not blame the IRS. They are just following political orders. I blame the President of the United States for pushing, 

when he can’t get through legislation, implementation of things 

that were not within the four square. 

Treasury and all of its individuals need to recognize that we will 

hold them accountable for the mistakes and the intrusions into people’s lives. 

Lastly, for the American people that may be aware of today’s 

hearing, there are many things which people object to in the Census, which comes once every ten years, with follow-ons throughout. 

The Census will not be nearly as intrusive as the IRS will be under 

this. States will be receiving information and other individuals, the 

IRS will be receiving information related to many things that have 

never been within the four squares of the Internal Revenue Service. 

More importantly, portals will be wide open to those who need 

to know about whether or not you are married, you have a change 

in employment, and the like, so the opportunity for leaks out of the 

IRS outside of Federal IRS employees will inherently grow. I am 

extremely concerned that January 2014 will come and we will have 

one after another failures to maintain the confidentiality of this 

new and expanding information. 

Lastly, the American people need to understand insurance carriers and exchanges will receive credits based on what the IRS believes should be paid. You may not go to a doctor the entire time. 

You may, in fact, want no health care. You may be 30 and healthy. 

But if your income rises, you marry, or do anything else that 

might affect that standing, or if the IRS simply overpays, they will 

not go back to the insurance company who shouldn’t have gotten 

the subsidy; they will go to you and take the money. You will be 

dunned by the IRS, an organization which can pursue you through 

bankruptcy, which has no limit to its powers, to eventually collect 

back money that you may not have wanted to spend. 

And, by the way, that $3,400 on the board and others, your employer will also first be told that he participates under ObamaCare 

in that subsidy if he doesn’t offer health care and you chose an exVerDate Aug 31 2005 12:02 Nov 02, 2012 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\76370.TXT APRIL
4 

change, but oh, by the way, it is doubtful whether or not he will 

get it back as they choose to collect it from somebody who ultimately made more pay than what was possible for the subsidy. 

That and so many other questions, so many other dozens of questions, are with us today. 

I want to thank our panel, and recognize the Ranking Member 

for his opening statement. 

Mr. CUMMINGS. Good morning. 

I have said it to my constituents and I have said it to my family, 

the 30 years that I have been in public life there is nothing that 

I have done, no vote that I have cast, that I am more proud of than 

the Affordable Care Act, and the reason why I say that is because 

I see the people who it will help and I know that there are people 

who will die—will die—will die—without it. That is real. 

And, as I said to some constituents the other day, if they want 

me to leave my neighbors on the side of the road sick, unable to 

get preventive care, like the lady that I met the other day with 

colon cancer who said, Congressman, just save my life. I have no 

insurance. Fortunately, we were able to work with her to get her 

in NIH. Then those are the people who will benefit. 

And I will say that, as we address this IRS issue, this is the 

United States of America. We can do this. We can get this done. 

The Affordable Care Act is a landmark achievement that will 

save huge sums of money for our Nation, while extending health 

insurance coverage to millions of people. They are the ones that get 

up early, that get the early bus. They work hard. They give it everything they have got. They are our mothers, our fathers, our 

friends. They are like Tyrone, the gentleman who lived down the 

street from me who died, and the last word he said to his wife on 

his sick bed was, Marie, I have got to get up out of here. I ain’t 

got no insurance. 

We are talking about them, our fellow Americans, the ones who 

send us here. 

So last month the Congressional Budget Office issued a report 

finding that the Affordable Care Act will extend health insurance 

coverage to 30 million people who do not have it today. They are 

not collateral damage; they are our people. They are Americans. 

That is an amazing accomplishment that our Nation should be 

proud of. 

In addition, our constituents are already seeing how the Affordable Care Act is putting money back in their pockets. This week 

insurance companies are returning to their customers, our constituents, more than $1 billion in the form of rebates and lower premiums. That is a direct result of the Affordable Care Act. 

Just yesterday women in private health insurance plans became 

eligible for life-saving, preventive health screenings with no copays. 

This is part of the Affordable Care Act’s comprehensive effort to 

save money by focusing on prevention. These are the women in our 

lives, our wives, our nieces, our daughters. 

It also addresses the historic disparities women face when paying 

for health care. The Affordable Care Act also has begun to ensure 

that seniors like my mother, who is 86 years old, have access to 

preventive care. Young adults have access to insurance on their 

5 

parents’ plans. And individuals are no longer subject to lifetime 

limits on their care. 

While all of these reforms are being realized now, many significant changes are yet to come. The Internal Revenue Service is the 

key agency charged with implementing many of the Affordable 

Care Act’s provisions by 2014, including minimum coverage requirements and tax credits for individuals purchasing health insurance on exchanges. 

This is a considerable undertaking for the IRS, but we can do 

this. Experts from the Government Accountability Office, the Inspector General’s office, and the National Taxpayer Advocate have 

reviewed IRS’s efforts to date, and they have concluded that the 

IRS is on the right track to successfully implementing the new law. 

For example, GAO issued a report that says, ‘‘The IRS generally 

follows leading practices for implementing such a large program, 

particularly at the level of individual offices and projects, emphasizing that top leadership has been involved.’’ 

In addition, the Inspector General issued a report that says this: 

‘‘Appropriate plans have been developed to implement tax-related 

provisions of the ACA using well-established methods for implementing tax legislation.’’ 

And in her testimony today Nina Olson, the National Taxpayer 

Advocate, says this: ‘‘Since ACA enactment, the IRS has been 

working through the major challenges, making significant progress. 

The lead time provided by the ACA has been very helpful for the 

IRS, and at this point it appears the IRS has used the time well.’’ 

Certainly there are significant challenges in implementing this 

law, and as IRS moves forward it benefits greatly from the continued rigorous oversight and recommendations from GAO, the IG, 

and the National Taxpayer Advocate. At the same time, we recognize that the IRS has been actively planning to implement the Affordable Care Act for more than two years, and it has already implemented many of the provisions successfully. 

For the challenges that remain, the IRS is working closely with 

taxpayers, the business community, and the insurance industry to 

ensure that its policies are responsive to consumers and consistent 

with the intent of Congress in passing the law. I remind us that 

this is the law. 

Today the Committee is faced with a choice: do we act constructively or destructively? Do we build up or tear down? Do we help 

or do we hurt? 

On one hand, we could work with the IRS and its oversight entities to ensure that the Affordable Care Act is successfully implemented, particularly now that the Supreme Court has ruled that 

it is Constitutional. On the other hand, we could try to exploit any 

and all ways to bring down this law or starve the IRS out of resources it needs to do its job. 

I personally hope that we pursue the first approach; however, 

Republicans have introduced legislation to do the second. The Congressional Budget Office has examined the Republican bill to repeal 

the Affordable Care Act and concluded that it would increase the 

Federal budget deficit by $109 billion over the next ten years. 

6 

It is time to accept the Affordable Care Act, to accept the Supreme Court decision, and to accept the billions of dollars in savings this law will bring to our citizens. 

I look forward to today’s testimony and I want to thank all of our 

witnesses for being here today. 

Mr. Chairman, I yield back. 

Chairman ISSA. I thank the gentleman. 

We now recognize Dr. DesJarlais for an opening statement and 

a unanimous consent. 

Dr. DESJARLAIS. Thank you, Mr. Chairman. 

Chairman Issa and Ranking Member Cummings, I appreciate 

your holding today’s hearing to further examine how the Internal 

Revenue Service has been implementing provisions of the Affordable Care Act. One of our chief responsibilities on this Committee 

is to ensure that taxpayer dollars are being utilized both efficiently 

and in accordance with the law. Unfortunately, it has become undeniably evident that the Affordable Care Act falls short on both of 

these principles. 

Just last week this Committee held a hearing on a new Health 

and Human Services demonstration project that the Obama Administration is paying for by cutting $8 billion from Medicare Advantage. These are funds that would normally be used for patient 

care. Two members from the nonpartisan Government Accountability Office stated that this demonstration project was unprecedented, flawed from its inception, and will ultimately demonstrate 

nothing. 

Further, there is strong evidence to suggest that the sole purpose 

of this project was nothing more than an attempt by this Administration to hide new costs that ObamaCare imposes on seniors until 

after the election. I fail to see how this is an efficient use of taxpayer dollars. 

There are the sort of examples that we have come to expect from 

this haphazardly passed bill authored by individuals who told the 

American people that they would have to pass it in order to find 

out what was in it. Well, today I want to focus on what is not in 

it. 

We have now discovered that when the Democrats were drafting 

ObamaCare they left out important language relating to Federally 

run insurance exchanges. Democrats wrongly assumed that the 

States would rush to set up exchanges once the bill was signed into 

law, but a majority of them are still yet to do so. 

Section 1321 of the bill gives authority to the Federal Government to set up exchanges in States that fail to do so on their own; 

however, the law only gives State-run exchanges the ability to 

issue premium assistance or tax credits. Nowhere does the bill 

grant this authority to Federal-run exchanges. 

The Obama Administration and proponents of this rule have 

stated that this was a simple drafting error. I don’t see how they 

can possibly make this claim when Democrats had ample opportunity throughout the reconciliation process where they specifically 

extended tax credits to exchanges created by U.S. territories, yet 

left Federal exchanges alone. This leads me to believe that this 

was, in fact, a deliberate and premeditated action on the part of 

7 

the Democrats as a way to incentivize States to set up the exchanges. 

Either way, there is no doubt that the language is missing. In 

order to fix this glaring problem, the Internal Revenue Service circumvented Congress’ legislative authority by issuing a rule allowing premium assistance subsidies to be offered through Federal exchanges. Back in November of 2011, my colleague and fellow Tennessee physician, Phil Roe, and I sent a letter to the IRS Commissioner asking what authority his agency had to unilaterally alter 

the Affordable Care Act and what specifically within the bill gave 

them the authority to bypass Congress in promulgating this rule. 

The response we received from the IRS cited no specific section or 

language justifying their actions. 

Mr. Chairman, I ask unanimous consent that this letter and the 

IRS’s response be submitted into the record. 

Chairman ISSA. Without objection, so ordered. 

Dr. DESJARLAIS. On June 18th I introduced H.J. Res. 112 which 

would nullify this rule under the Congressional Review Act. I firmly believe the actions by the IRS set a dangerous precedent that 

flies in the face of our Constitutional separation of powers. I am 

pleased to announce that Senator Ron Johnson has recently introduced companion legislation in the Senate. Ultimately, my bill and 

this issue are not about the merits of the President’s health care 

law but on how the IRS has overstepped the authority it was given 

as a result of the Affordable Care Act. 

While my colleagues on the other side of the aisle may not share 

my views regarding the detrimental affects that ObamaCare will 

have on our Country, surely they will agree that the framers of our 

Constitution were clear in giving Congress sole legislative authority. Just because Democrats hastily drafted their health care law 

due to electoral politics, it doesn’t mean they can now throw the 

separation of powers out the window. 

I look forward to hearing the testimony presented before us 

today, as well as having the opportunity to question our witnesses 

on these very important issues. 

I yield back the balance of my time. 

Chairman ISSA. I thank the gentleman. 

Members may have seven days in which to submit opening statements for the record. 

We will now recognize our panel. We welcome our witnesses on 

the first panel. 

Mr. Mark Everson was Commissioner of the IRS from 2003 to 

2007 and is currently vice chairman of the AlliantGroup. I might 

note, also one of the architects of Governor Mitch Daniels’ changes 

in Indiana. Ms. Nina Olson is currently the National Taxpayer Advocate at the IRS. Mr. Timothy Jost is professor at Washington and 

Lee University School of Law. And Mr. Michael Cannon is Director 

of Health Policies at the Cato Institute. 

Lady and gentlemen, pursuant to the rules of the Committee, 

would you please rise to take the oath and raise your right hands. 

Do you solemnly swear or affirm that the testimony you are 

about to give will be the truth, the whole truth? 

[Witnesses respond in the affirmative.] 

8 

Chairman ISSA. Please be seated. Let the record indicate all witnesses answered in the affirmative. 

As is the tradition of my predecessor, I will note that you have 

a time and lights, so I would only ask that you deal with it just 

the way you would green light, drive through; yellow light, drive 

through faster so you don’t get caught on the red; red light, please 

do a final summary as you see your time has expired. 

Your entire opening statements will be placed in the record, so 

you need not go verbatim. It will all be there. 

Mr. Everson? 

WITNESS STATEMENTS 

STATEMENT OF MARK EVERSON 

Mr. EVERSON. Good morning, Mr. Chairman, Mr. Cummings, 

members of the Committee. I am pleased to be here. 

As you have indicated, I am the Vice Chairman of AlliantGroup. 

I want to stress that my remarks are my own, not those of that 

business. But I would say that we work with CPA firms around the 

Country, and some of the reflections I am going to make are really 

tied to things that I have been told. 

I would also say that I am not here to advocate for or against 

repeal of the act or of any specific components of the act. I am trying to help you grapple with this issue of the IRS and its implementation. 

As the GAO has noted, this is a massive undertaking. That is the 

wording they have used. Very significant for the service. Nina 

Olson, my colleague, former colleague and the National Taxpayer 

Advocate, has said with proper planning and funding the IRS is 

fully capable of implementing health care reform. I am not so sure. 

Now, clearly I know that the Service is going to do everything 

it can to implement it. They always do. But this is really quite a 

heavy lift, if you will. 

There are really two questions. One, can they do it, and even if 

they are able to do it will there be collateral damage to tax administration as they are working on this set of issues. They are both 

important questions. 

The Service grapples with three things when it is implementing 

laws. Are there adequate lead times? I think there are generally 

in this act. Is there adequate funding? That is essential if they are 

to do their job. I counsel you to make sure you provide the funding 

that they need. And then, finally, complexity. There is a lot of complexity and ambiguity in statutes, and that is certainly the case 

here. 

As Nina has said, complexity is the most serious problem confronting taxpayers, and clearly this is a step backward for tax administration because of what the IG has said is the introduction of 

the most complexity in over 20 years to the tax code. So that is a 

big problem. 

In my testimony which you have I have raised a number of 

issues. Let me just mention a few. 

The first is information technology. This is going to be a real 

challenge for the Service. And, as you have indicated, reliance on 

a lot of outside parties will be the case. You don’t have to go any 

9 

further than today’s news, reading about millions of trades on the 

stock exchange going forward because of rogue programs or bad 

programs to know that errors get made. Systems issues are tough. 

A lot of challenges for the Service here because of the need to constantly update information. This is going to be a challenge. 

The second piece you have already mentioned, Mr. Chairman, is 

the protection of taxpayer data. If there was anything I really worried about as Commissioner, that was it. And there is a risk here 

that there can be disgorged information, and it would be very damaging to the Service and the confidence of taxpayers in the IRS if 

that were to happen. 

The other point that I would make is the burden on CPAs. CPAs 

struggle as it is to keep up with all of the changes in the tax code. 

They are the true advisors to small-and mid-sized businesses. They 

don’t have the staffs of the Merc or a GE to work through all this, 

and this is going to be very challenging. We get a lot of feedback 

on this at AlliantGroup. 

Before I close, I have got three very general points that I think 

are very important to place this in the overall context. 

Health care reform comes at a very difficult time for the IRS. In 

part, it is Congress’ doing. We are heading towards the end of the 

year where there is a great deal of ambiguity about what the law 

is. I really do encourage you to resolve these issues, because American businesses need certainty to make investment planning. But 

beyond that, I think the IRS is looking at the most difficult filing 

season next year, 2013, that it has had in decades because of the 

convergence of these factors and the potential for tax reform. 

So the competition for resources at the Service and of management attention, they only have so many senior managers, of course, 

this all comes at a very difficult time. 

A second point I would make that I think is sort of over-arching 

is the independence of the Service. For important and well-understood reasons, the IRS operates with a great deal of independence 

from other agencies. I worry that such direct participation of the 

Service in a major non-tax Administration initiative has the potential to erode the historic independence of the Service. 

And let me be clear here. I have nothing but the highest regard 

for Commissioner Shulman and his team. I am not suggesting I 

have seen things, but I just think that when you bring the Service 

in closer to the White House and to other agencies you just run the 

risk of eroding that independence. 

Let me conclude by touching on the politics of this and how it 

does impact the Service. I would say that, with the Supreme Court 

decision and the clear transfer of looking at all this back into the 

political arms of Government, it is also clear the Service is coming 

under attack. It would appear that some opponents of the Reform 

Act will demonize the IRS in order to build a case for overturning 

the law. 

The most striking example is the disturbing comparison of the 

IRS to the Gestapo by the incendiary Governor of Maine, Paul 

LaPage. Reuters quotes LePage as having said, ‘‘What I am trying 

to say is the Holocaust was a horrific crime against humanity and, 

frankly, I would never want to see that repeated. Maybe the IRS 

is not quite as bad yet.’’ 

10 

Attacks upon the IRS of this kind are unconscionable and will ultimately take their toll on the Service, its people, and the ability 

of the IRS to collect the money that we need to fund the Government. 

I would close by saying that I would suggest that, even if the 

Service is successful in executing the long list of tasks assigned to 

the IRS under the Affordable Care Act, there is still an 

unquantifiable real risk that health care reform will falter or perhaps, and nobody can be sure of this, but perhaps even fail because 

of the sheer number of moving parts and complexity of the new 

system. 

Let’s hope health care reform is not a modern day version of the 

Vasa, the famous top-heavy Swedish war ship built in 1628 and 

when it sailed out of Stockholm harbor it sank 400 feet from shore. 

If something like that happens because of all the complexity and 

all the interactions and all these pieces, if that happens, as you 

say, just two short years from now, the damage to the IRS and the 

impact on our Country in that regard, not the health side, will be 

real and lasting. 

Thank you. 

[Prepared statement of Mr. Everson follows:] 

11 


Insert offset folio 1 here 76370.001
12 


Insert offset folio 2 here 76370.002
13 


Insert offset folio 3 here 76370.003
14 


Insert offset folio 4 here 76370.004
15 


Insert offset folio 5 here 76370.005
16 


Insert offset folio 6 here 76370.006
17 


Insert offset folio 7 here 76370.007
18 


Insert offset folio 8 here 76370.008
19 


Insert offset folio 9 here 76370.009
20 

Chairman ISSA. Thank you. 

This Committee did research a Coast Guard ship that will crack 

in two in less than its first 20 years, so we are not completely beyond that at this time. 

Ms. Olson? 

STATEMENT OF NINA OLSON 

Ms. OLSON. Chairman Issa, Ranking Member Cummings, and 

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

today about the IRS’s implementation about the Patient Protection 

and Affordable Care Act. 

As you know, my office is non-partisan, so I take no position pro 

or con regarding the wisdom of the ACA; rather, my focus has been 

and continues to be on trying to ensure that a taxpayer perspective 

is considered as the IRS prepares to implement the law as it stands 

today. 

In my 2010 annual report to Congress, I published a detailed assessment of the administrative challenges the IRS will face in implementing the four major tax provisions of the law. Since that 

time, my office has monitored the IRS’s preparations for the ACA 

closely. Overall, I believe the IRS has done a good job of moving 

quickly to identify its key challenges, and has taken significant 

steps to address them, although some concerns remain. 

On the positive side, the IRS has already issued considerable 

guidance to clarify gray areas of the law. I view the early publication of guidance as a very positive development, because it enables 

both taxpayers and employers to know where they stand and to 

make informed decision about their coverage options, and also to 

allow others to litigate against those State-taken positions. 

The IRS also has made progress in developing business requirements for computers and other information technology. IT infrastructure lies at the core of the IRS’s ability to administer the program, largely because the IRS will use computer systems to communicate with the exchanges. Early systems development will 

allow for repeated advanced testing and enable the IRS to identify 

and fix glitches before the systems go live. 

My own organization, the Taxpayer Advocate Service, or TAS, 

has also been making preparations, including initial training of our 

employees on key provisions of the ACA, reviewing and commenting on drafts of published guidance, designing an online tool 

to help small businesses estimate the amount of small business 

health care tax credit they may receive, and conducting a survey 

of individuals and businesses regarding health insurance coverage 

and needs that will provide useful demographic information for 

outreach purposes. 

Notwithstanding these important steps, some areas of concern 

remain. First, the IRS and other entities need to step up their public information campaign. The IRS should make it a top priority to 

work with other agencies to develop and deploy a targeted communications campaign designed to anticipate and answer questions 

from individuals and employers. As part of this campaign, the IRS 

should educate taxpayers who receive the advance premium tax 

credit about the importance of updating information if their income 

or other relevant circumstances change. If the taxpayer continues 

21 

to receive a subsidy but becomes ineligible, he or she will end up 

with an unexpected tax bill when eventually filing the related return. 

Most taxpayers otherwise are not required to provide periodic updates to the IRS, so this new procedure needs to be communicated 

clearly. 

Other remaining challenges include establishing smooth interagency communications, minimizing the impact of tax-related identify theft on eligibility determinations, and providing additional 

guidance for small businesses and employers. 

I also believe it is critical that the IRS begin to include representatives of my office on its implementation teams. Congress 

placed TAS within the IRS specifically to ensure that the IRS considers our taxpayer perspective as it develops and implements programs, and with any program the devil is in the details, and if TAS 

representatives are not included on the teams where the details are 

hashed out, I am concerned the taxpayers eventually will be 

harmed. 

On the whole I believe the IRS will be able to successfully implement its responsibilities under the ACA, but I believe it is critical 

that the IRS receive adequate funding to meet taxpayer needs. If 

the funding is restricted, the IRS simply cannot cut spending on 

ACA implementation, because unless Congress changes the law, 

administering the ACA is a statutory requirement. Rather, the IRS 

would have to make cuts in its taxpayer service and enforcement 

programs, and that would be a mistake. 

In my 2011 annual report to Congress I identified the combination of the IRS’s expanding workload and its shrinking resources 

as the number one most serious problem facing taxpayers. I am 

deeply concerned that taxpayer service suffers the most when IRS 

funding is inadequate, and I therefore urge you to ensure that U.S. 

individuals and businesses that are trying to pay their taxes and 

are seeking help from the IRS are not shortchanged. 

Thank you for letting me testify today, and I would be happy to 

answer your questions. 

[Prepared statement of Ms. Olson follows:] 

22 


Insert offset folio 10 here 76370.010
23 


Insert offset folio 11 here 76370.011
24 


Insert offset folio 12 here 76370.012
25 


Insert offset folio 13 here 76370.013
26 


Insert offset folio 14 here 76370.014
27 


Insert offset folio 15 here 76370.015
28 


Insert offset folio 16 here 76370.016
29 


Insert offset folio 17 here 76370.017
30 


Insert offset folio 18 here 76370.018
31 


Insert offset folio 19 here 76370.019
32 


Insert offset folio 20 here 76370.020
33 


Insert offset folio 21 here 76370.021
34 


Insert offset folio 22 here 76370.022
35 

Chairman ISSA. I thank the gentlelady. 

I now ask unanimous consent the 2010 annual report to Congress be placed in the record. 

Without objection, so ordered. 

Chairman ISSA. The gentlelady mentioned a 2011 report. Do you 

have a copy of that with you? 

Ms. OLSON. I do not, but I can certainly get it to you for the 

record. 

Chairman ISSA. Then I would ask unanimous consent that also 

be placed in the record. 

Without objection, so ordered. 

Professor Jost, thank you very much. You are recognized. 

STATEMENT OF TIMOTHY JOST 

Mr. JOST. Thank you. Thank you, Chairman Issa, Ranking Member Cummings, Committee members, for this opportunity to address you today on the role of the Internal Revenue Service in 

health care reform. My remarks today specifically address Mr. Cannon’s assertions which he will be making shortly that the IRS rule 

that permits Federal exchanges to issue tax credits is illegal. 

If Mr. Cannon is right, many constituents of Committee members 

will lose tax relief that could give them access to affordable health 

insurance. Just for 2014, 1.9 million Floridians would lose $7.7 billion in Federal tax relief, 593,000 Indianans would lose $2.2 billion, 

over 1 million Ohioans would lose $4 billion, 2.6 million Texans 

would lose over $10 billion in Federal tax relief to help make 

health insurance affordable. 

Fortunately, Mr. Cannon’s position is based on a misunderstanding of the law, its structure, and history. The exchange is fundamentally a market for health insurance, but exchanges will also 

ensure that health insurance consumers get value for money and 

access to premium tax credits. 

Section 1311 of the Affordable Care Act asks the States to establish exchanges, but Section 1321 authorizes HHS to establish a 

Federal exchange in States that choose not to, which is likely to include many States of members of this Committee. 

Mr. Cannon believed that Federal exchanges cannot issue premium tax credits. This assertion was made earlier in this hearing. 

Because two subsection of Section 36(b) of the Internal Revenue 

Code, which establishes eligibility for tax credits, refer to ‘‘persons 

enrolled through an exchange established by the State under Section 1311,’’ Mr. Cannon argues that this means only State and not 

Federal exchanges can offer tax credits. 

The Affordable Care Act as amended by the Health Care and 

Education Reconciliation Act, however, explicitly provides that Federal exchanges can issue tax credits. 

When I teach first-year law students how to read a statute, I tell 

them you start with the definition section. Section 1563.C of the Affordable Care Act defines exchanges to mean ‘‘an American health 

benefits exchange established under Section 1311.’’ Section 1311 

literally states that a State shall establish an exchange, and section 1311.D describes and exchange as an exchange established by 

a State. 

36 

Because Congress cannot, however, Constitutionally require a 

State to establish exchanges, Section 1321.C provides that the HHS 

Secretary shall establish and operate such exchange within a State, 

referring to the 1311 State, if a State fails to do so. 

Under the Affordable Care Act definition of exchange, a Section 

1321 exchange becomes a Section 1311 exchange established by the 

State. This is reinforced by Section 1321, itself, which, again, refers 

to such exchange, referring to the earlier required 1311 required 

State exchange. Under ACA, therefore, all exchanges, Federal and 

State, are 1311 exchanges established by the State by definition. 

Other sections of the ACA direct all exchanges, Federal and 

State, to manage Federal tax credit functions, including Section 

1413, which requires all exchanges to use streamlined applications 

and eligibility assessments to qualify persons for premium tax 

credits. 

Most importantly, a third subsection of Section 36(b), itself, clarifies premium tax credits are available through both State and Federal exchanges. 

This subsection was added to the ACA by the Reconciliation Act, 

which, as a later adopted statute, takes precedence over the original ACA if there were any contradiction. 

Mr. Cannon’s interpretation is also refuted by the legislative history of the ACA as demonstrated in my extended remarks, which 

refer to repeated references to all States having premium tax credits available. 

Mr. Cannon claims to have found a statement by Senator Baucus 

acknowledging that only State exchanges could issue premium tax 

credits. I would be happy to introduce that colloquy between Senator Baucus and Senator Ensign into the record. It cannot be read 

to say that. 

Perhaps most importantly, the CBO and JCT have consistently 

assumed the availability of premium tax credits through State and 

Federal exchanges since 2009, and, indeed, the CBO’s report from 

two weeks ago at footnote 14 explicitly recognizes that both Federal 

and State exchanges will issue premium tax credit. 

Finally, Section 36(b) of the IRC expressly grants the IRS authority to write regulations if there were any ambiguity in the statute. Under the Chevron Doctrine, the IRS’s interpretation of the 

statute would be accepted by the courts, as a recent Congressional 

Research Service legal analysis affirms. 

In sum, premium tax credits will be available to middle income 

uninsured citizens of all of your States, not just Chairman Issa’s 

and Mr. Cummings’ States, which are going to have State exchanges. 

Thank you. 

[Prepared statement of Mr. Jost follows:] 

37 


Insert offset folio 23 here 76370.023
38 


Insert offset folio 24 here 76370.024
39 


Insert offset folio 25 here 76370.025
40 


Insert offset folio 26 here 76370.026
41 


Insert offset folio 27 here 76370.027
42 


Insert offset folio 28 here 76370.028
43 


Insert offset folio 29 here 76370.029
44 


Insert offset folio 30 here 76370.030
45 

Chairman ISSA. Thank you. 

I would instruct the staff to get an official copy of the that colloquy and ask unanimous consent it be placed in the record in the 

appropriate place. 

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

Chairman ISSA. Without objection, so ordered. 

With that, we recognize Mr. Cannon. 

STATEMENT OF MICHAEL CANNON 

Mr. CANNON. Thank you, Mr. Chairman and Mr. Cummings and 

members of the Committee, for the opportunity to present my 

views on the Internal Revenue Service’s final rule concerning premium assistance tax credits in the Patient Protection and Affordable Care Act. 

I have submitted written testimony on behalf of my co-author, 

Professor Jonathan Adler of Case Western Reserve University 

School of Law and myself. It is our contention that this rule exceeds the IRS’s statutory authority under the PPACA and is an illegal tax increase. 

Two facts are key to understanding why this IRS regulation is 

illegal. First, both sides of this controversy acknowledge that the 

statutory language governing eligibility for tax credits is clear and 

unambiguous. The act provides that taxpayers are eligible for tax 

credits if they purchase a health plan through ‘‘an exchange established by the State under Section 1311.’’ That language clearly authorizes tax credits only in State-established exchanges, and the 

act employs or refers to that language no less than six times when 

authorizing tax credits. There is no parallel language anywhere in 

the statute authorizing the IRS to offer tax credits through Federal 

fall-back exchanges established under Section 1321. 

The act’s authors intentionally conditioned tax credits on States 

establishing exchanges as one of a number of large financial incentives designed to encourage States to implement the statute. Even 

Professor Jost acknowledges that the provisions authorizing tax 

credits ‘‘clearly say,’’ those are his words, clearly say, those credits 

are available solely through State-created exchanges. 

Second, the remainder of the statute and the legislative history 

support the clear meaning of those provisions. The only statement 

anyone has found in the legislative history on this point comes 

from the bill’s lead author and chief sponsor, Senate Finance Committee Chairman Max Baucus, who confirmed the bill conditions 

tax credits on States establishing an exchange. 

And yet, contrary to the clear language of the statute and Congressional intent, this IRS regulation purports to issue tax credits 

in States that do not establish an exchange. Under the law’s employer mandate, those illegal tax credits will trigger an illegal 

$2,000 per employee tax on employers and unlawfully appropriate 

hundreds of billions of dollars to private health insurance companies in States that do not establish an exchange. 

Since those illegal expenditures will exceed the revenues raised 

by this rule’s illegal tax on employers, this IRS regulation will also 

increase Federal deficits by hundreds of billions of dollars, all contrary to the clear language of the statute and Congressional intent. 

46 

This IRS regulation is a large tax increase. It imposes a $2,000- 

per-worker tax on employers and obligates taxpayers to pay for 

hundreds of billions of dollars of subsidies to private insurers. For 

every $2 of unauthorized tax reduction that will result from this 

IRS regulation, it imposes $1 of unauthorized taxes on employers, 

commits taxpayers to pay for $8 of unauthorized subsidies to private insurance companies, and increases Federal deficits by $9. 

Though this IRS regulation is nominally about tax credits, Government spending accounts for 80 percent of its budgetary impact. 

Worse than the tax increase, though, this IRS regulation is an 

illegal tax increase. It lacks any statutory authority, it is contrary 

to both the clear language of the act and Congressional intent, and 

it cannot be justified on other legal grounds. It is, quite literally, 

taxation without representation. 

As you listen to the IRS and its defenders say that this illegal 

tax increase is consistent with the statute or supported by the statute or recognized through the statute, notice what they are not saying. In the year since the IRS proposed this regulation, they have 

not cited a single statutory provision expressly authorizing the IRS 

to do these things in Federal exchanges, because there is no such 

provision. They have not cited a single statutory provision that conflicts with the language limiting tax credits to State-created exchanges because there aren’t any. 

Nor have they cited a single statement from the legislative history that supports either this regulation’s attempt to issue tax 

credits and Federal exchanges or their claims that it was Congress’ 

intent that the Patient Protection and Affordable Care Act would 

do so. There is simply no plausible way to argue this IRS rule is 

consistent with or supported by Congressional intent, much less 

the statute. 

The most important indicator of Congressional intent is the text 

of the statute, itself. That text is clear. It was there for all to see 

before Congress approved it. It is not possible that someone who 

read the bill could have mistakenly thought that that language authorized tax credits and Federal exchanges. 

The IRS should rescind this rule before it takes effect in 2014. 

Alternatively, Congress and the President could stop it with a resolution of disapproval under the Congressional Review Act. 

And, finally, since this rule imposes an illegal tax on employers 

in States that opt not to create a health insurance exchange, those 

employers and possibly those States could file suit to block this 

rule in Federal court. 

Thank you. 

[Prepared statement of Mr. Cannon follows:] 

47 


Insert offset folio 31 here 76370.031
48 


Insert offset folio 32 here 76370.032
49 


Insert offset folio 33 here 76370.033
50 


Insert offset folio 34 here 76370.034
51 


Insert offset folio 35 here 76370.035
52 


Insert offset folio 36 here 76370.036
53 


Insert offset folio 37 here 76370.037
54 


Insert offset folio 38 here 76370.038
55 

Chairman ISSA. I thank the gentleman. 

I now ask unanimous consent that our colleague, the gentleman 

from Tennessee, Dr. Roe, be allowed to participate in today’s hearing. 

Without objection, so ordered. 

I will now recognize myself for a round of questioning. 

Professor Jost, is it undeniable that there is a cost difference between all States participating, some States participating, and the 

Federal Government essentially preempting the States choosing 

not to participate? In other words, if only 14 States participate, our 

scoring shows over half a trillion dollars less in cost to the Federal 

Treasury. Would you disagree with that? 

Mr. JOST. I would agree that citizens of all the rest of the States 

would be denied a—— 

Chairman ISSA. Okay. So I will take that as yes, it is a half a 

trillion dollars to the taxpayers or, more specifically, half a trillion 

dollars we don’t borrow from the Chinese. 

Mr. JOST. Well, a half a trillion dollars that would not be granted 

in Federal tax credits to citizens of this Country. Yes. Thank you. 

Chairman ISSA. Mr. Cannon, when CBO scored this, my understanding is they made the assumption that all States would participate. Is that your understanding? 

Mr. CANNON. There is a widespread assumption when this law 

was passed all States would establish exchanges. 

Chairman ISSA. Okay. But States not participating has a ramification. Isn’t it true that a State not participating means that a 

company would not get a $2,000 penalty plus the cost of the subsidy in that case if there is no State exchange? 

Mr. CANNON. That is correct. What triggers the penalties against 

employers under this law’s employer mandate, is when one of their 

employees receives a tax credit through an exchange, if there are 

no State-created exchanges there would be no tax credits. If there 

are no tax credits—— 

Chairman ISSA. So let’s run through, because I now understand 

why Justice Roberts made the decision he made. Clearly this was 

a pot full of taxes. We may disagree with whether it was right, but 

I begin to see why this is all about taxing, that ObamaCare is all 

about taxing. So let me ask a question. Under a State that does 

not create an exchange, does the individual still have an individual 

mandate? 

Mr. CANNON. Yes. 

Chairman ISSA. Does the individual then have to seek either private insurance or the Federal exchange that is anticipated in the 

law? 

Mr. CANNON. Or pay a penalty tax. 

Chairman ISSA. okay. So the Supreme Court decision that my 

colleague, the Ranking Member, referenced doesn’t change. The 

States have the right to opt out under this law. They have chosen 

to do so in huge amounts, or at least not to participate, and it 

doesn’t change anything related to the Supreme Court question of 

the individual mandate; is that correct? 

Mr. CANNON. That is correct. 

Chairman ISSA. So the challenge at the Supreme Court, which 

will occur when the tax is implemented, essentially the first time 

56 

an employer gets his bill he can then make a challenge that will 

go all the way to the Supreme Court, what would be an all new 

challenge that won’t occur until 2015, correct? 

Mr. CANNON. That is actually not clear, sir. Employers could file 

suit today, and it is a defensible, I think, perhaps the correct reading of the Supreme Court’s ruling in NFIB v. Sebelius that the 

anti-injunction act might not bar an employer establishing standing immediately. 

Chairman ISSA. But certainly it didn’t bar on the other tax. But 

you would say, and I think since Professor Jost only wants to answer the questions he wants to answer, not the ones I ask, clearly 

this is a separate issue that will very possibly go all the way to the 

Supreme Court; is that correct? 

Mr. CANNON. I can’t say how far it would go, sir. 

Chairman ISSA. Let me rephrase that. This is a separate issue 

which would be eligible? 

Mr. CANNON. That is correct. 

Chairman ISSA. Okay. Ms. Olson, you mentioned in our earlier 

conversation, I hope you don’t mind my bringing it up, that your 

legal counsel, your general counsel, had made this decision from 

the rule. Correct? 

Ms. OLSON. It is the Internal Revenue Service chief counsel, not 

mine, yes. 

Chairman ISSA. Right, but yours being the IRS. 

Ms. OLSON. Yes. Correct. 

Chairman ISSA. That is a political appointee, isn’t it? 

Ms. OLSON. Well, yes it is. 

Chairman ISSA. Okay. So a political appointee made the decision 

that this rule should be made without, according to Mr. Cannon 

and my reading of the bill, without any legal standing. I’m going 

to ask you another question. This one concerns me more. In year 

2010 report you wrote, ‘‘The new W–2 reporting requirements has 

raised numerous concerns that reporting the value of health insurance on employees’ W–2 may cause the amount to be taxed.’’ You 

wrote that. 

You also, in your 2010 report, which is in the record, you said, 

‘‘To get to the underlying goal of the new law, health coverage for 

the vast majority of Americans,’’ and this was a question, ‘‘Will the 

IRS audit every taxpayer who does not report?’’ These are areas of 

concern you raised. 

Ms. OLSON. Yes. 

Chairman ISSA. Let me go through this. You raised it again. If 

you don’t audit every single person to make sure that they properly 

were taxed, then we have a vast hole in which there could be subsidies paid that shouldn’t, there should be individual fines, taxes, 

if you will, $2,000 for those who don’t. So essentially you almost 

have gotten into a situation in which every American needs to be 

audited every year. That is more or less what you are saying there. 

Ms. OLSON. Sir, the first quote we were saying there is confusion 

about taxpayers when they get information on their W–2 reporting 

what their premiums are, should that be taxed, and the answer is 

no, that is not being taxed. 

57 

Chairman ISSA. Sure, I understand you can explain part of it, 

but the other part is essentially, if you don’t audit every American 

every year, then this thing won’t be right? 

Ms. OLSON. The second issue was we were raising that as a concern, and if the IRS takes its normal approach, which is to select 

portions of the population to audit on any tax position, then you 

are not going to be able to effectively implement the mandate. 

Chairman ISSA. Okay. And I want to recognize the Ranking 

Member, but I just want to make it clear it appears that the Commissioner made a political decision, which was the new W–2 reporting requirement has been delayed until after this Presidential 

election, hasn’t it? 

Ms. OLSON. I can’t speak to that. I think the Commissioner is on 

the next panel. 

Chairman ISSA. Well, no. 

Ms. OLSON. There has been a delay. 

Chairman ISSA. There has been a delay, and the effect of that 

delay has been it won’t appear for people to see until after this 

election. 

Ms. OLSON. That is a matter of fact. Yes. 

Chairman ISSA. Okay. With that, I recognize the Ranking Member. 

Mr. CUMMINGS. To all of our witnesses, I really want to see this 

law implemented to its fullest degree, because I know that right 

now, right this second, there are people watching us. There is 

somebody leaning in a sick bed that can’t get up. There is somebody who cannot get insurance. And they are saying, you know, 

whatever you do, whatever arguments you have got, get them 

straight because I want to live. And I want to speak for them because they are out there. 

I have often said that we all are the walking wounded. All of us 

are the walking wounded, and we are walking yet and wounded we 

will be. So, Ms. Olson, in your testimony you are generally positive 

about what the IRS has accomplished to date, and you say that 

over the past two years the IRS has used its time well, and I am 

going to come back to you in a moment. 

Mr. Everson, I want to thank you for your balanced testimony, 

but I want to ask you this. You were IRS Commissioner. We can 

do this. We can get this done. I know you highlighted a lot of issues 

that we need to be aware of, and I really appreciate that, and you 

are talking about some things that are perhaps preventive, hopefully, that is, so the IRS won’t run into this, but we can get this 

done, can’t we? This is America. This is the United States. We are 

a can-do Nation. 

Mr. EVERSON. Let me say this, sir. It is quite possible we will get 

it done. The Service is going to do its level best. The Commissioner, 

when you ask the Commissioner this question, he is going to say 

yes, of course. He has to. His job is to implement the law, however 

strong or however flawed, so that he can’t be then before the Committee or before Ways and Means or Finance and have people say, 

well, you never liked this law. You said you couldn’t do it anyway. 

So the Service is always going to say yes. 

I think the Service in this instance is a little bit like that frog 

they always talk about in the frying pan that you keep turning up 

58 

the heat until sooner or later the frog is dead. It doesn’t jump out. 

And that is my worry here, that there are so many pieces, there 

are so many things to do, especially on the systems side, as has 

been indicated, on the reg side. There is so much confusion out 

there that I do worry about this. 

And then secondly, as you and I have discussed, I worry about 

the impact on tax administration from a failure here. 

Mr. CUMMINGS. Yes. 

Mr. EVERSON. So I don’t think this is going to be easy and I don’t 

think it is a certainty that it can be done, sir. 

Mr. CUMMINGS. You said what? What was the last statement? 

Mr. EVERSON. I don’t think it is easy and I don’t think it is, by 

any means, a certainty that it can be done, even with very strong 

efforts by the IRS. 

Mr. CUMMINGS. And with resources. I think that was one of the 

things that you talked about. 

Mr. EVERSON. Resources. As I have indicated, absolutely, give 

the Service the resources it needs to do then if you are going to 

hold them accountable for doing it. 

Mr. CUMMINGS. Thank you. 

Ms. Olson, you raised one specific challenge, and that was the 

need for a communications plan and taxpayer education efforts. 

Why is that so important? I agree with you, by the way. I think 

that is much needed. 

Ms. OLSON. We need to tell taxpayers, make sure taxpayers 

know where they should go for each step of this program, and that 

for the advanced premium credit they are dealing with the exchanges, for issues on the tax return they are dealing with the IRS. 

They need to update their information during the year so they 

don’t get socked with a tax at the end of the year. And so we were 

talking about changing behavior, and we really need to communicate that information out there. 

To something else that Former Commissioner Everson said, you 

know, about the burden on the CPAs and other return preparers, 

I think we need to start talking to them about what to expect as 

we get closer to this date. 

Mr. CUMMINGS. I don’t know if you have read the GAO reports 

on the implementation of the Affordable Care Act, but they are also 

generally positive, Ms. Olson, about the IRS efforts to date. GAO 

finds that top IRS leaders have been directly involved in this process, and that IRS has accomplished a number of those, and that 

the risk of being identified and analyzed at the individual project 

level. 

GAO also makes a number of specific recommendations to improve the implementation of the program. For example, GAO recommends that IRS develop an integrated plan with detailed cost 

estimates and develop procedures identifying and evaluating risk 

mitigation strategies. Ms. Olson, are you aware of GAO’s findings? 

Are they consistent with yours? 

Ms. OLSON. Yes. And the IRS I know has responded to GAO’s 

findings and is taking steps to address that. 

Mr. CUMMINGS. Now let me ask you about another report. This 

one is from the Treasury Inspector General for tax administration 

and it is also fairly positive. It says that the IRS is effectively using 

59 

tracking systems to monitor implementation, that it is working on 

forms and publications and other consumer outreach, and that is 

has completed plans for computer programming tasks. 

And overall the Inspector General says this: the appropriate 

plans have been developed to implement tax-related provisions of 

the ACA using well-established methods for implementing tax legislation. Do you agree or disagree with the IG’s conclusion? 

Ms. OLSON. From what I have seen, I would have to agree to 

date. 

Mr. CUMMINGS. Well, my goal on this Committee is to conduct 

a constructive oversight and to work with you and the IRS to flag 

potential issues before they become problems. We will be having 

the IRS Commissioner on the next panel and I am looking forward 

to his thoughts, and I am hoping that he has listened very carefully 

to what Mr. Everson has just said and don’t tell us what he thinks 

we want to hear but tell us what we need to hear. 

With that I yield back. 

Chairman ISSA. I thank the gentleman. 

We now recognize the distinguished gentleman from Tennessee, 

Dr. DesJarlais, for his questions. 

Dr. DESJARLAIS. Thank you, Mr. Chairman. 

What we need to decide today is whether the IRS bypassed Congress, in a sense wrote a new tax law that is a power given solely 

to Congress, so let’s go through first a series of yes/no questions. 

I know panels tend not to like those, but let’s try to do the best 

we can. 

First, Mr. Cannon, is there anything stopping the IRS from implementing Section 36(b) of the Internal Revenue Code exactly as 

written? 

Mr. CANNON. Section 36(b) is large and complicated, sir. If what 

you mean is the provision restricting tax credits and State-run exchanges, no. 

Dr. DESJARLAIS. Professor Jost? 

Mr. JOST. Section 36(b), as I explained, if you read the definitions, does authorize Federal exchanges to issue a tax credit, so no, 

there is no problem. 

Dr. DESJARLAIS. There is no problem. Thank you. 

In one part of the law it authorizes tax credits for people who 

purchase a qualified health plan through an exchange established 

by a State under Section 1311, and even people who defend the IRS 

on this issue, such as yourself, Professor Jost, say that this part 

of the law is clear. Is there any part of the statute that prevents 

you from doing just that, offering tax credits only in State-run exchanges? 

Mr. JOST. Again, the definitions. 

Dr. DESJARLAIS. Mr. Cannon, is there any part of the statute 

that prevents you from doing just that, offering tax credits? 

Mr. CANNON. No. 

Dr. DESJARLAIS. No. Okay. 

Mr. CANNON. No. In fact, the statute requires that. 

Dr. DESJARLAIS. Okay. Is there any part of the statute that conflicts with that, Mr. Cannon? 

Mr. CANNON. No. In fact, all other elements of the law support 

the clear meaning of that limitation of tax credits to health insurVerDate Aug 31 2005 12:02 Nov 02, 2012 Jkt 000000 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 C:\DOCS\76370.TXT APRIL
60 

ance exchanges established by the State under Section 1311, and 

established by the State. Those words are key. 

Dr. DESJARLAIS. What about the information reporting requirement? 

Mr. CANNON. That does not conflict. It does require exchanges established under Section 1321 by the Federal Government to report 

information related to eligibility for tax credits and the advanced 

payment of tax credits to the Treasury Secretary and to individuals 

enrolled through those exchanges. 

Dr. DESJARLAIS. Okay. 

Mr. CANNON. But that does not conflict in any way with the limitation of tax credits to State-run exchanges. 

Dr. DESJARLAIS. Okay. So what is stopping the IRS from implementing the tax credit provision exactly as written and exchanges 

from implementing the information reporting requirement exactly 

as written, or can they both be implemented exactly as written 

without conflicting with each other? 

Mr. CANNON. The latter. They can both be implemented exactly 

as written without any conflict. 

Dr. DESJARLAIS. Agreed, Professor Jost? 

Mr. JOST. I would agree because, again, Federal exchanges can 

issue premium tax credits and can report. 

Dr. DESJARLAIS. Okay. Do you agree that when authorizing these 

premium assistance tax credits Internal Revenue Code explicitly 

refers to only health insurance exchanges as established by the 

States under 1311, Professor Jost? 

Mr. JOST. I do, and, again—— 

Dr. DESJARLAIS. Mr. Cannon? 

Mr. JOST.—given the definition, that means Federal exchanges. 

Mr. CANNON. That is what the statute says, but I would disagree 

with Professor Jost that the Federal Government can establish a 

health insurance exchange established by the State, which is what 

Section 1311 requires. And that claim is completely inconsistent 

with the text of the law. 

Dr. DESJARLAIS. Simple question: do you agree that when authorizing those tax credits the IRC reportedly refers to exchanges 

established by the State under 1311? 

Mr. CANNON. That is correct. 

Dr. DESJARLAIS. Professor Jost, do you agree with that? 

Mr. JOST. Again, given the definition that includes Federal exchanges. 

Dr. DESJARLAIS. Okay. Do you agree that the ruling providing 

tax credits in Federal exchanges will trigger penalties against employers under the employer mandate in States with Federal exchanges, Professor Jost? 

Mr. JOST. If they do not offer health insurance or adequate or affordable insurance and their employees go into the exchange and 

get Federal premium tax credits, yes. 

Dr. DESJARLAIS. Mr. Cannon, yes or no. 

Mr. CANNON. Yes. 

Dr. DESJARLAIS. Thank you. Are you aware, Professor Jost, of 

how many time state reconciliation bill, the Health Care and Education Act, amends Section 1401 of the ObamaCare law which creVerDate Aug 31 2005 12:02 Nov 02, 2012 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 C:\DOCS\76370.TXT APRIL
61 

ated IRC Section 36(b) authorizing the tax credits in State-created 

exchanges? 

Mr. JOST. Well, at least once, but I don’t know off the top of my 

head. 

Dr. DESJARLAIS. Seven times. Are you aware of how many times 

that the same reconciliation bill amended Section 1402 of the Affordable Care Act which authorizes cost-sharing subsidies, credits 

in State-created exchanges? 

Mr. JOST. Not off the top of my head. 

Dr. DESJARLAIS. Okay. Five times. So a total of 12 times. So if 

Congress intended to offer tax credits and cost-sharing subsidies 

through Federal exchanges, then why didn’t Congress include any 

language to that effect among the 12 amendments within the reconciliation bill authorizing tax credits and cost-sharing subsidies 

through exchanges established by U.S. territories? Is that a coincidence? 

Mr. JOST. Again, it had already authorized Federal exhibits to 

issue tax credits, and therefore there was no need to amend it. 

Dr. DESJARLAIS. Mr. Cannon, do you agree? Is he going wrong 

here? 

Mr. CANNON. There is no language authorizing tax credits in 

Federal exchanges, and the claim that Professor Jost is making is 

not supported by the text. What he is saying is that the Federal 

Government can create a health insurance exchange for purposes 

of Section 1311, but Section 1311, itself, clearly says that, for purposes of that section, ‘‘an exchange shall be a Governmental agency 

or nonprofit entity that is established by a State.’’ It is simply implausible to argue that the Federal Government can establish an 

exchange that is established by a State. 

Dr. DESJARLAIS. In fact, we know it was their intent to entice or 

almost coerce States into signing up for these exchanges. They 

thought that when ObamaCare was released the States would just 

line up and sign up for these exchanges, but when they didn’t they 

realized they had a real problem. But the intent of the bill was 

clear. That is what they were trying to do. Do you agree? 

Mr. CANNON. And that intent was revealed by the Senate Finance Committee, the Chairman Max Baucus. When challenged by 

opponents of the bill in his Committee he said that it does condition tax credits on the State creating an exchange. 

Chairman ISSA. The gentleman may finish the answer if he 

wants. You did? 

Mr. CANNON. Yes. 

Chairman ISSA. The gentleman’s time is expired. Thank you. 

We now go to the gentleman from Illinois, Mr. Davis, for his 

questions. 

Mr. DAVIS. Thank you very much, Mr. Chairman. I want to 

thank the witnesses for appearing also. 

Ms. Olson, opponents of health reform legislation have unfairly 

characterized the Affordable Care Act as resulting in ‘‘an unprecedented expansion of the IRS powers.’’ To be honest, I am not exactly sure of what they are talking about, so let’s look at some of 

the possibilities. 

One claim they appear to be making is that the IRS has the new 

authority to distribute billions of dollars in tax credits to individVerDate Aug 31 2005 12:02 Nov 02, 2012 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 C:\DOCS\76370.TXT APRIL
62 

uals purchasing health insurance on the exchanges. I think that is 

a good thing, but it seems that some of my colleagues on the other 

side of the aisle do not. Ms. Olson, does this aspect of the Affordable Care Act represent an unprecedented expansion of the IRS 

powers? Or does the IRS have decades of experience with distributing funds as part of similar social programs, like when the IRS 

distributed the Bush Administration’s economic stimulus payment? 

Another claim that opponents of the law are making is that the 

IRS will have access to individuals’ personal health information 

when they are verifying insurance coverage. 

Are these accurate assertions? 

Ms. OLSON. I view ACA not as an unprecedented expansion of 

IRS powers, but rather an unprecedented expansion of IRS work. 

The powers that we have in the law are powers that reside in tax 

administration, period. We implement the earned income tax credit, which is billions of dollars; the first-time homebuyer credit; as 

you referenced, the economic stimulus payment. We are a disperser 

of payments, and that trend has been happening since the 1970s. 

In terms of health information that we would get, my understanding is that we would get the information from insurers whether or not the taxpayer was covered, and essentially nothing else. 

The amount of the premium paid. And that would be it. Nothing 

about their state of health or anything like that. That is new information that we will be getting; however, we have always been getting information from third parties. So it is not a new approach 

giving us information; it is new information. 

Mr. DAVIS. Well, let me proceed. A number of people appear to 

still believe that the IRS will be subjecting individuals to liens or 

levies or even jail time if they fail to purchase insurance. Is this 

from your analysis? 

Ms. OLSON. No. The law, at my urging, in fact, prevents the IRS 

with respect to the individual mandate, what people call the individual mandate, the IRS is prevented from issuing liens or levies 

or its other enforcement action. It can collect that mandate through 

what we call refund offset, where a taxpayer has a refund coming 

to them and we would offset that refund amount with the amount 

of the penalty. 

Mr. DAVIS. And if low-income taxpayers cannot afford health insurance, will they be subject to a penalty? 

Ms. OLSON. There are many provisions in the law allowing for 

exemptions, both for hardship, and the mandate only applies to 

taxpayers starting at a certain level of income. 

Mr. DAVIS. Some folks have claimed that the Affordable Care Act 

will require the IRS to hire 16,000 new enforcement agents. The 

Commissioner has said on a number of occasions that this is a 

made-up number with no basis in fact. Is this your understanding, 

perhaps, as well? 

Ms. OLSON. I think the Commissioner can certainly speak on the 

next panel about this. The internal conversations, my understanding is that we are maybe looking at, going forward, 800, 860 

full-time equivalents for doing this work once it is implemented. 

Mr. DAVIS. Thank you very much. My time has expired. Mr. 

Chairman, I yield back. 

Chairman ISSA. I thank the gentleman. 

63 

I now ask unanimous consent that Professor Jost’s September 11, 

2011, article, Yes, the Federal Exchange Can Offer Premium Tax 

Credits be placed in the record. 

Without objection, so ordered. 

Chairman ISSA. Professor Jost, my staff has asked me to give you 

an opportunity to clarify an answer you gave to Dr. DesJarlais. You 

said that it was in the act, in the September 11th you said it was 

a drafting error. Can you reconcile? Is it in the act in written language, or in your September 11, 2011, article were you correct that 

it was, in fact, clearly left out of the act? 

Mr. JOST. I have learned over the last year a bit more about the 

statute, and that is something that I think is worth doing. 

Chairman ISSA. I just want to—— 

Mr. JOST. I think the statute could have been better drafted, but 

I think if you read the statute as a whole, including the definitions, 

it does authorize Federal exchanges and I was wrong at that point. 

Chairman ISSA. Okay. So you are saying 2011 is incorrect, the 

article, and you now stand by your testimony? 

Mr. JOST. That part of the 2011 article was incorrect, and I now 

stand by my testimony. Thank you. 

Chairman ISSA. Thank you very much. 

We now recognize the gentleman from Michigan, Mr. Walberg. 

Mr. WALBERG. Thank you, Mr. Chairman. 

I think the insertion of the music at that proper time was probably coming from the Sovereign of the Ages saying that we are living in a fantasy world that this thing is going to work, and so 

maybe that music will come in again at some time. 

As I understand from what I hear and what I read, what I have 

heard today, that tax credit eligibility and size are determined by 

a formula that includes a number of things, details. The tax credits 

are sent directly from Treasury to health insurance companies. 

Ms. Olson, you have stated that ‘‘taxpayers who did not update 

their household information during the year may find that they 

owe a significant amount of money at the end of the year. Money 

they likely do not have.’’ I would concur with you on that statement. At least my concerns would concur with you. What type of 

information will households have to update? 

Ms. OLSON. If they are determined by the exchange in advance 

that they are eligible for these advance payments of their health 

care premium, they will need to let the exchanges know if they 

have gotten an increase in salary, because that may make them ineligible for the full amount of credits that they are getting. On the 

other hand, if they have a child may become ineligible in their 

household, someone may die in their household. On the other hand, 

they may be entitled to more credit if they get unemployed or 

something like that. 

But the point is it is the changing of their circumstances that 

they are going to have to update it during the year, and that they 

could end up owing money at the end of the year is a risk and I 

am very concerned about that. 

Mr. WALBERG. And even with different States, changing States, 

as many people have to do just to find a job now, changing States 

with different provisions in their exchanges could make it very difficult, as well? 

64 

Ms. OLSON. It could very well be. 

Mr. WALBERG. You know, I come from the aspect if you are a person who has to file a quarterly report, you understand the complexities of that. But if you have a bunch of new citizens who are going 

to be really required, if they are going to be intentional about it 

and not run amuck, are going to be filing reports that they have 

never done before and don’t have the abilities of external resources 

to help them. The challenge will be there. Do you believe that most 

Americans are going to update the IRS or State exchanges when 

they change jobs, get married, move States, whatever? 

Ms. OLSON. I think it is going to be a very great learning curve. 

Mr. WALBERG. With a lot of pitfalls. 

Ms. OLSON. With a lot of pitfalls. The only saving grace is about 

80 percent, 75 to 80 percent of taxpayers get a refund, so it is unlikely that they will owe money to the IRS. It is just that their refund, average refund is $3,000, at least the first year their refund 

might be, you know, decreased. I am not minimizing that. That is 

a significant thing for taxpayers. 

Mr. WALBERG. And the confusion, especially the first reconciliation in 2015, how would you describe it? 

Ms. OLSON. I think it will be a surprise to the taxpayers if they 

don’t update their information. 

Mr. WALBERG. And persons who are in a situation where they 

are now having to use a Government-run or Government takeover 

of health care are not only going to have the sickness and the problems that they have, but also the confusion, the frustration, the 

worry, in some cases the terror of trying to deal with all of this 

while they are trying to get well. 

Ms. OLSON. I think the agencies are trying to make it as easy 

as possible. 

Mr. WALBERG. Okay. Thank you for your responses. 

Mr. Everson, many experts point out that the tax credit most 

similar to ObamaCare’s premium tax credits is the earned income 

tax credit. Unfortunately, the ITC has an extremely high error rate 

and fraud rate, sadly. What lessons are there from the ITC experience and IRS that the IRS can take to reduce the error rate and 

fraud rate with premium credits? 

Mr. EVERSON. Well, the program, sir, is very complex, and it is 

distinguished from many other Federal programs where there is a 

real front-end application process where you sort of sort through 

information and then someone is deemed ineligible or eligible for 

a benefit, but there is no administrative cost to the ITC in the 

sense that most big food stamps or other Federal programs they 

have got a 6 or 7 percent monies that are appropriated go to administering on the front end. The ITC is, by and large, like other 

things on your return. You put it out there, and then if the Service 

has questions—and they hold a lot of the returns before they pay, 

because, as you indicate, there is a lot of fraud, there is a lot of 

just plain misunderstanding—even more of that—that gets in 

there, and that is a real problem. But I would say the biggest piece 

is the complexity and the—— 

Mr. WALBERG. So ObamaCare is more complex than the ITC and 

other—— 

65 

Mr. EVERSON. I agree with the advocate’s comments earlier that 

it is about a lot more work, but it is about also very great complexity within each of the many provisions that are in the statute. 

So I consider this comparable in many ways, yes, I do, to the EITC. 

The EITC, at least when I was Commissioner, had the highest 

error rate of any Federal program. I believe it still does. I don’t 

know. 

Mr. WALBERG. And this is more complex? 

Mr. EVERSON. Yes. I think it is. 

Chairman ISSA. Would the gentleman yield for just one second? 

Mr. EVERSON. I would yield. 

Chairman ISSA. I just want to verify, Ms. Olson. You were saying 

individual taxpayers would have to update their record if they had 

a change. What year will be used by the IRS initially to determine, 

in 2014, what the subsidy will be? I don’t want an open question. 

I just want to make sure it is clear. 

Ms. OLSON. The 2012 income is what is used to determine your 

eligibility for a premium, advanced premium payment, for 2014. 

Chairman ISSA. Thank you. I just wanted to make sure we got 

that in the record. I thank the gentleman. 

With that, I recognize the gentleman from Massachusetts for five 

minutes. 

Mr. TIERNEY. Thank you, Mr. Chairman. I thank all of our witnesses today for their testimony and for their knowledge on this 

thing. 

Professor Jost, I just wanted to ask a question about the fact 

that until recently a lot of the insurance companies were spending, 

I believed, a significant amount of their premium money on things 

other than health services, whether it be salaries or bonuses or lobbyists or other administrative costs. One study, in fact, indicated 

that ten of the largest insurance companies saw their profits jump 

some 250 percent between 2000 and 2009. In just 2009, alone, at 

the height of the economic recession, the five biggest insurance 

companies saw their profits increase by 56 percent. So I find that 

a startling figure, but I wonder if you have any idea how these 

health insurance companies were able to increase their profits so 

dramatically during that time. 

Mr. JOST. Yes, I do. The medical trend, the growth in health care 

costs, has been growing at historically low levels for the last two 

or three years; nevertheless, insurance companies were increasing 

premiums because they believed that, once the recession ended, 

people would start using more medical care and trend would go 

back up. So there has been a growing gap between premiums and 

actual health care costs. 

The medical loss ratio 80/20 rule that the Affordable Care Act 

imposes has resulted in 12.8 million Americans receiving $1.1 billion in rebates that were due as of yesterday, including $300 million in rebates for American small businesses. Yet, insurance companies are still doing very well. I was just reading this morning 

Carl McDonald says that Cigna beat expectations and that most insurance companies in their most recent quarterly reports that were 

just issued beat expectations. So we have a solution where premiums are coming down, Americans are getting rebates, insurers 

are still doing just fine. 

66 

Mr. TIERNEY. Thank you. You know, I am glad to hear that. I 

was responsible for putting that provision in the House bill when 

it went through the education hearings on that, and this is the expected, anticipated result that we thought, and so it is good to 

know that your remarks coincide with what the Secretary has told 

us, as well, and what I think a number of reports have done that. 

Professor Jost again, the IRS issued their final regulation allowing the premium tax credits to be available to all people, regardless 

of the origin of their exchange participation; is that right? 

Mr. JOST. That is correct. 

Mr. TIERNEY. Okay. So Mr. Cannon made his argument that the 

rule constitutes a net tax increase. I assume that you don’t agree 

with him on that? 

Mr. JOST. No. This is a tax cut. 

Mr. TIERNEY. And under the interpretation of the Affordable 

Care Act that Mr. Cannon puts forward, residents of States with 

Federally operated exchanges wouldn’t qualify for the premium assistance tax credits, so I want to give you another opportunity, just 

rather than passing your opening remarks on that, to explain what 

the cost of Mr. Cannon’s interpretation would be to taxpayers who 

do not get their tax credits. 

Mr. JOST. Well, it is hard to know exactly. I mean, there are 

going to be a trillion dollars in tax credits over ten years, and it 

looks like initially probably 30 or 40 States are going to have Federal exchanges, so all of the residents of those States would be denied premium tax credits. 

Mr. TIERNEY. So the National Health Interview Survey just released this past Tuesday says that more than one in five middleaged United States adults and nearly half of the adults over the 

age of 65 have more than one chronic health condition, whether hypertension, diabetes, things of that nature. There are more and 

more people every day that need assistance in managing and preventing those diseases, and yet 50 million people are without access to health insurance. 

So, Professor, can you explain what the impact will be on those 

individuals of the exchanges coming into effect in 2014? 

Mr. JOST. Well, a report done by the Harvard Medical School a 

couple of years ago projected that about 45,000 Americans die 

every year because they are uninsured. Making premium tax credits available to 20 million Americans so that they can afford health 

insurance is really a question of life and death. It is going to be 

Americans whose lives are saved because they can get premium tax 

credits, and in many States that means initially premium tax credits through the Federal exchange. 

Mr. TIERNEY. Thank you. 

I yield back, Mr. Chairman. 

Chairman ISSA. I thank the gentleman. 

We now go to the gentlelady from New York, Ms. Buerkle. 

Ms. BUERKLE. Thank you, Mr. Chairman, and thank you for this 

very important hearing. And thank you to our panelists for being 

here today. 

I graduated from nursing school a very long time ago. I was one 

of those diploma grads who spent time doing clinical nursing. And 

then when I was 40 I decided to go to law school, and for 13 years 

67 

before I came to Congress I represented a large teaching hospital 

in upstate New York. So pretty much my professional career has 

been spent in health care, and one of the reasons I ran for Congress was because I thought the direction of the Affordable Care 

Act was incorrect. 

Now I do want to make one point, and that is my colleague on 

the other side of the aisle mentioned we are opposed to health care 

reform. By no means are we opposed to health care reform. But I 

would have thought, in a health care reform and in a Nation that 

wants to make sure people have increased access to health care, 

decrease the cost of health care, that we would have seen tort reform, that we would have seen the increased use of health savings 

accounts, that we would have seen the ability to buy insurance 

across State lines. Portability. Increasing the number of physicians 

and encouraging them to go into the family practice and the internal medicine fields. 

But we don’t see any of that, and I sit here and I think, Have 

we lost our way so much in this city that when we talk about 

health care reform we have to bring in the IRS and talk about raising taxes on the American people by $500 billion? Who in their 

right mind thinks that what we are talking about here today is 

going to increase access to health care for the American people or 

decrease the cost? Who has gotten so far away from reality down 

here that they think this is the way we help the American people? 

When my colleague talks about that patient laying in his bed 

needing health care, if you think that going to the IRS and dealing 

with the IRS is going to increase your health care, your access to 

health care, or decrease the cost or improve the quality of health 

care in this Nation, we have a problem in the United States of 

America. 

I am sitting here stunned. I have paid such close attention to 

this. All of my colleagues have. And I sit here and I think, What 

in God’s name are they talking about and how is that going to help 

that senior citizen understand her benefits, make sure she is covered, make sure that person who is unemployed has access to 

health care. This is gibberish. We are talking about the most intensely personal issue for the American people, health care. Health 

care is so important to every person in this room. It affects how 

they live their lives. And we are talking about an agency, the IRS, 

and I know firsthand from the complaints that come in to my office 

how difficult it is to deal with the IRS, how unresponsive the IRS 

is, and now you take the IRS and it is not just going to be your 

income tax any longer, it is going to be, well, I have had a baby, 

I have lost my job, I have gotten a promotion. All that now has to 

be communicated to the IRS. 

The American people and this health care system that has been 

created in the Affordable Care Act, the largest tax on the American 

people in the history of this Nation, if one person can tell me in 

this room how that is going to improve our health care system, how 

it is going to improve access to those who need health care, and 

how it is going to decrease the cost, I welcome the explanation, but 

I fear for the American people that this Affordable Care Act is 

going to dramatically affect their access to health care. It is going 

to dramatically affect the cost of health care. It is going to put us 

68 

into a single payer system which I believe was the ultimate goal 

of the Affordable Care Act. 

This does nothing, nothing, to improve the free market. Let the 

free market decide what system works best, not the Federal Government. We are in trouble when we sit here and we have a discussion that this is the best way to go for the American people, this 

is the best we can do to make sure the American people have 

health care coverage. 

I see my time has run out. 

Mr. Everson, if you could comment just briefly, we have had unemployment at over 8 percent for the last 42 months. How is this 

going to impact our businesses in this Nation? 

Mr. EVERSON. Well, in terms of the health care piece is your 

question? I do think that the difficult economic circumstances make 

the challenges that the advocate has spoken to of the constant updating of the information an even more daunting task as we go forward. 

The interactions that you have spoken about that are necessary 

with the Service, and then the complexity, the confusion of the fact 

that the person is going to be going in and seeing people in the exchange or talking to the exchange and then being told, well, the 

IRS says you are not eligible. The IRS says you already have this 

or that. That is all going to converge in a situation where a lot of 

people, as you indicate, are already under stress because of difficult 

economic circumstances, or maybe they don’t have a job. So I think 

that the circumstances of the Country right now make it inherently 

more difficult. 

Ms. BUERKLE. Thank you, Mr. Chairman. I yield back. 

Chairman ISSA. I thank the gentlelady. The gentlelady’s time has 

expired. 

We now go to the gentlelady from New York, who has been patiently waiting. Ms. Maloney? 

Ms. MALONEY. Thank you, Mr. Chairman and Mr. Ranking Member, my colleagues, and all of the panelists. 

Mr. Cannon, I understand that your reading of the Affordable 

Care Act is that it does not permit the IRS to provide premium tax 

cuts or tax credits to individuals who participate in health insurance exchanges administered by the Federal Government. In fact, 

I believe you called this illegal. Is that correct? 

Mr. CANNON. That is correct. 

Ms. MALONEY. Well, the Congressional Research Service has 

come out with a report on this, their own legal analysis, and they 

have examined this issue, and it did not come to the same conclusion. And, according to the report, which I would like unanimous 

consent to place in the record, according to the report it says—— 

Chairman ISSA. Without objection, so ordered. 

Ms. MALONEY. Thank you so much. 

It says on page eight, ‘‘The IRS rule appears to be an exercise 

of the authority delegated to the agency to implement Section 

36(b), which includes the authority to provide refundable tax credits for taxpayers enrolled in a health insurance exchange.’’ Have 

you read this report or have you seen this report? 

Mr. CANNON. I am not familiar with that at all. On what date 

was that released, may I ask? 

69 

Ms. MALONEY. This says July 23rd. 

Mr. CANNON. I will have to review that. 

Ms. MALONEY. Okay. Great. Or we can get you a copy. 

Mr. CANNON. I can comment on that claim. 

Ms. MALONEY. But first I would like to read other portions of it, 

too. 

The CRS also reports. It says thus: If a reviewing court ‘‘determines that there is ambiguity surrounding the issue of whether 

premium credits are available in Federal exchanges, the regulations issued under Section 36(b), the regulations will very likely be 

considered a reasonable agency interpretation of the statute and 

accorded deference by the court.’’ 

Now I would like to turn to Professor Jost, if I could. Mr. Jost, 

you believe Congress provided the IRS authority to provide premium tax credits to individuals who participate in the Federal exchange? 

Mr. JOST. That is correct. 

Ms. MALONEY. And why did you come to this conclusion? 

Mr. JOST. Well, again, because of the definitional sections of the 

statute and the way those work together, because of the structure 

of the statute, and because of the legislative history of the statute 

in which Congress, Senators, repeatedly said that tax credits would 

be available in all States. 

Ms. MALONEY. Well, do you agree with the interpretation that I 

just ready from the Congressional Research Service? 

Mr. JOST. Yes, I do. 

Ms. MALONEY. And, Mr. Jost, do you also agree with CRS that 

it is very likely that a court would defer to the IRS’s interpretation 

of the statute? 

Mr. JOST. That is correct. 

Ms. MALONEY. And on the substance, why was it important for 

Congress to give the IRS this authority? 

Mr. JOST. Because Section 36(b) is, as has been said a number 

of times, a complicated provision that requires interpretation and 

requires application, and the IRS has done an admirable job of putting out regulations with lots of examples in them to help people 

understand how this section is going to work. 

Ms. MALONEY. Well thank you. I think you gave a clear indication why this is important and why it matters. 

I yield back the balance of my time. 

Chairman ISSA. I thank the gentlelady. 

We now go to the gentleman from South Carolina, Mr. Gowdy. 

And I would ask the gentleman would he yield me ten seconds for 

a question. 

Mr. GOWDY. I would yield whatever time the Chairman wants. 

Chairman ISSA. Thank you. 

Mr. Cannon, do you know of any Member of Congress, either side 

of the aisle, who said that Federal exchanges would have subsidies 

prior to the passage? 

Mr. CANNON. Mr. Chairman, my staff and I did a pretty extensive search of the Congressional Record, including markups and 

Committee action, on this statute. We found only two mentions in 

the Congressional Record of what would happen if States did not 

create a health insurance exchange on their own. The first was the 

70 

chairman of the Senate Finance Committee said that tax credits 

are conditioned upon States establishing their own exchanges, so 

that affirmed—— 

Chairman ISSA. Barney Frank? 

Mr. CANNON. No, I’m sorry, the chairman of the Senate Finance 

Committee, Max Baucus, who is the lead author of this law. So 

that confirms the clear meaning of the statute. 

The only other mention was in the House during House consideration of the Patient Protection and Affordable Care Act by Congressman Michael Burgess. He said, What happens if the States 

don’t create an exchange? Well, a Federal exchange will impose a 

public option. It made no mention of tax credits. Those are the only 

two we have found. 

And Professor Jost and the IRS have not cited anything from the 

Congressional Record or the legislative history other than the idea 

that all States would be establishing their own exchanges. There 

is nothing that anyone else has offered that suggests that if a State 

does not establish an exchange that tax credits would be available 

in Federal exchanges. 

Chairman ISSA. Thank you. Clearly, the GSA had a mind-reader 

at its convention. Perhaps the IRS does, too. 

I thank the gentleman for yielding. 

Mr. GOWDY. Yes, sir. Speaking of mind-readers, I was going to 

ask you, Mr. Cannon, a similar series of questions. It appears the 

professor is relying on the definitional section, and without putting 

everyone in the audience to sleep with rules of statutory construction, the last statute takes precedence over a previously passed 

one, all provisions must be read in harmony if they can, all the 

other stuff that made us very anxious to get out of law school. Why 

is he wrong? 

Mr. CANNON. The professor makes the claim that the statute 

treats State and Federal exchanges equivalently. It does not. It refers to exchanges under Section 1311 as, as I quoted before, an exchange shall be a governmental agency or a nonprofit entity that 

is established by a State. So that is clear that they are not talking 

about an exchange established by the Federal Government. 

The section authorizing tax credits likewise is clear. It says those 

tax credits are available only through ‘‘an exchange established by 

the State under Section 1311.’’ Senator Baucus’ original bill had 

language similar to what Professor Jost cites. It says if a State 

doesn’t establish an exchange the Secretary shall ‘‘establish and operate the exchanges within the State,’’ and Senator Baucus confirmed that tax credits, under that language, would be available 

only in States that establish their own exchange. 

Furthermore, the statute, itself, does not address, the information reporting requirement that Professor Jost cites in his other argument refers to Section 1311 and 1321 exchanges separately. If 

every time the Federal Government referred to a Section 1321, if 

they were equivalent, there would be no need to refer to them separately. 

And the Finance Committee bill, which is what became the final 

law, was different from the bill that was reported by the Senate 

Health Committee and the bill that was reported by the House in 

this very important way: both the Health Committee bill and the 

71 

House Committee bill had explicit language saying that State and 

Federal exchanges are equivalent. They drew explicit equivalents 

between exchanges created by States and exchanges created by the 

Federal Government. There is no such language in here. The definitional section that Professor Jost mentions does not establish 

that equivalent. 

Mr. GOWDY. Mr. Everson, what new citizen information will be 

available to the IRS that is not currently available to them? 

Mr. EVERSON. I think, sir, that the statute contemplates getting 

into any number of areas that are non-financial. It is true, as has 

been already pointed out, it is not medical information, and that 

is important, but you are going to be asking businesses to report 

on their plans and details of their plans so that the Service can determine or it can be determined whether they qualify as meeting 

needs under the statute. 

And then you are going to have individuals, who will, as was indicated earlier, they are going to have to constantly update information about the status of employment and whether they have coverage or not. I think it can’t be said enough that this need for updating and the timeliness is a very real change for taxpayers that 

is important, in addition to the new areas beyond purely financial 

information that you as a taxpayer are used to already providing. 

Mr. GOWDY. Well, back in the good old days we used to have to 

get a court order just to get a tax return from somebody we were 

about to indict. What level of independence disclosure confidentiality will exist with this new information? 

Mr. EVERSON. Well, I think that is something that the Service is 

best capable of answering. The Service historically provides great 

importance to the protection of taxpayer information. My concern 

is that there are already real protocols that exist, through working 

with the State taxing authority. I am from Indiana, and working 

with the revenue department there, or with major cities to share 

that information. Everybody is used to doing that. 

These exchanges are going to be in the process of being stood up 

over a period of time. They are going to have enough they are dealing with, and yet they are going to be charged with protecting this 

information, as well. 

You get a lot of problems with disgorging of taxpayer information 

or information generally. I think there is not a week that goes by 

where a credit card company or a business doesn’t talk about hundreds of thousands of records being just spat out, and you are introducing a lot of new players here. So while there may be protocols, getting that working is going to be very challenging, and I 

would say fraught with problems. 

The last thing I would say on this is I worry about the Wikileaks parallel where you get not an error of the system but an individual who has lots of records and says, I don’t like this law or I 

don’t like elements of this, or so-and-so companies didn’t provide 

what had to happen, and individuals do the wrong thing. 

There is a lot of risk here, sir. 

Mr. GOWDY. Thank you, Mr. Chairman. 

Chairman ISSA. I thank the gentleman. 

72 

I would ask unanimous consent pursuant to the gentlelady from 

New York’s entering into the record the Congressional Research 

study of just a few days ago. 

The Ways and Means has forwarded a specific line in answer. 

‘‘Applying the plain meaning rule to Section 36(b), it is possible 

that the court could read the phrase ’an exchange established by 

the State under 1311 of ACA’ as being clear to not include an exchange established by the Federal Government.’’ I just wanted to 

make sure we made it clear that was actually the verbatim of that 

report. 

With that I recognize the gentleman from Virginia, Mr. Connolly. 

Mr. CONNOLLY. Thank you, Mr. Chairman, and thanks to our 

panelists for being here. 

Mr. Everson, in your testimony did I understand you to say that 

your concern is that the involvement of IRS in a major non-tax administration initiative has the potential to erode the independence 

of the IRS; is that correct? 

Mr. EVERSON. That is absolutely true, sir. 

Mr. CONNOLLY. Ms. Olson, do you share that concern? 

Ms. OLSON. I think that the IRS needs to not be viewed as a political or politicized agency. 

Mr. CONNOLLY. Does the assignment, however, here from the 

ACA, in your opinion, compromise or potentially compromise the 

independence of the IRS as indicated by Mr. Everson? 

Ms. OLSON. I think the IRS will conduct itself in a way that it 

will not be compromised. 

Mr. CONNOLLY. The IRS currently or recently has had, for example, assignments like the economic stimulus payments, the earned 

income tax credit, the first-time homebuyers tax credit, and the 

making work pay credit; is that correct? 

Ms. OLSON. Yes. 

Mr. CONNOLLY. Did the administration of any of those compromise the independence of the IRS? 

Ms. OLSON. The IRS implemented the law as it understood it. 

Mr. CONNOLLY. Did it compromise the independence of the IRS? 

Ms. OLSON. In my opinion, no. 

Mr. CONNOLLY. Mr. Everson, in your opinion did they compromise the independence of the IRS? 

Mr. EVERSON. I believe that the items you are citing are pretty 

well within the bailiwick of traditional tax matters for the Service. 

What I think you have here is the potential that comes from a 

major Administration initiative. Again, I am making this context 

outside of politics and I am not making any substantive allegations. I am talking about potential systemic risk. 

Mr. CONNOLLY. I understand. 

Mr. EVERSON. So I have not seen it, but I think that this is quantifiably different than anything the Service has done. 

Mr. CONNOLLY. Mr. Everson, unfortunately I only have five minutes, so bear with me here. 

Mr. EVERSON. Okay. Go ahead. 

Mr. CONNOLLY. Okay. Thank you. But let me ask this: in light 

of the Supreme Court ruling, Chief Justice Roberts’ ruling and that 

horrible word tax, doesn’t that, in fact, add more weight to the role 

of the IRS, not less? 

73 

Mr. EVERSON. No doubt it does. That is right. 

Mr. CONNOLLY. If I can, Mr. Everson. 

Mr. EVERSON. Yes. 

Mr. CONNOLLY. But it seems to me to put to bed a little bit the 

concern you have, maybe not you personally, about independence 

of IRS when the Chief Justice of the Supreme Court and a majority 

ruling of the Supreme Court says otherwise, that it most certainly 

is within the purview; in fact the responsibility of the IRS, by virtue of his decision of what constituted the Constitutionality of the 

act. 

Mr. EVERSON. Well, clearly that has justified the operation of the 

individual mandate, yes. 

Mr. CONNOLLY. Thank you. I’m sorry. 

Mr. EVERSON. That is okay. Go ahead. 

Mr. CONNOLLY. I have a limited period of time here. 

Mr. EVERSON. We obviously disagree. 

Mr. CONNOLLY. I understand, but we have a Supreme Court ruling. 

Mr. EVERSON. Of course. 

Mr. CONNOLLY. And God knoweth why, but they didn’t invoke 

the Commerce Clause; they invoked something else. So there we 

are. 

Professor Jost, are you familiar with RomneyCare in Massachusetts? 

Mr. JOST. I am familiar with the Massachusetts reforms, yes. 

Mr. CONNOLLY. Well, it seems to me if we are going to call the 

ACA ObamaCare, we will call health care reform in Massachusetts—— 

Mr. JOST. I don’t, so I am trying to be even-handed. 

Mr. CONNOLLY. I understand. I am trying to be even-handed, too. 

What is the role of the Massachusetts Department of Taxation, 

which is the analog in Massachusetts? I happen to come from Massachusetts originally. What is the role of the Massachusetts Department of Taxation in the administration of this particular set of 

issues in RomneyCare? 

Mr. JOST. I believe there are premium tax credits in Massachusetts. 

Mr. CONNOLLY. Really? And when fines or penalties are imposed, 

as they are under the law signed into law by the Governor of Massachusetts at the time, Mitt Romney, how is that administered? 

Mr. JOST. Through the tax system. 

Mr. CONNOLLY. Through the tax system. Is it not virtually identical to the system Ms. Olson described that will pertain to the 

ACA? 

Mr. JOST. The ACA was modeled on the Massachusetts health 

care reforms. 

Mr. CONNOLLY. So, for example, as Ms. Olson was testifying a little bit earlier, most people have a refund and you would net out 

the refund if you owed that fee; is that correct? 

Mr. JOST. I believe so. 

Mr. CONNOLLY. And is that not exactly how Massachusetts 

works? 

Mr. JOST. I believe so. 

Mr. CONNOLLY. Ms. Olson, is that your understanding, as well? 

74 

Ms. OLSON. I am not an expert on Massachusetts. I can only 

speak about the Federal provision. 

Mr. CONNOLLY. I see. Final point, maybe Ms. Olson, to you, there 

is a return for every dollar we invest in the IRS; is that not correct? 

Ms. OLSON. Yes. 

Mr. CONNOLLY. And is it my understanding for every dollar IRS got it produced $200 in revenue? 

Mr. CONNOLLY. That is the ratio of what we collect to our appropriated—— 

Mr. CONNOLLY. So, given our obsessive concern about the fiscal 

situation and the National debt, Congress has, in fact, increased 

IRS’s budget, given that ratio, so we can collect that which is owed; 

is that not correct? 

Ms. OLSON. You are still working on our appropriation this year. 

Mr. CONNOLLY. What has happened in the last three or four 

years? 

Ms. OLSON. Actually, last year our budget was decreased. 

Mr. CONNOLLY. Decreased? 

Ms. OLSON. Yes. 

Mr. CONNOLLY. And what is the total amount of revenue owed 

the Government, not new taxes, that is left on the table every year 

because of lack of collection? 

Ms. OLSON. It is about $359 billion or something in that range. 

Mr. CONNOLLY. So $359 billion a year. Now, if I multiply that times ten, that would be over $3.5 trillion; is that correct? And 

your understanding of the value of the sequester we are so concerned about, we are not going to cancel our five-week recess to do 

anything about, is $1.2 trillion; is that not correct? 

Ms. OLSON. I’m sorry. I am not following your question. 

Mr. CONNOLLY. The value of the sequester we are worried about is $1.2 trillion; is that not correct? 

Ms. OLSON. That is my understanding. 

Mr. CONNOLLY. And the amount you are talking about over that 

same period of time would be three times that. 

I thank the Chair. 

Ms. BUERKLE. [Presiding]. Thank you. 

The Chair recognizes the gentleman from North Carolina, Mr. 

McHenry. 

Mr. MCHENRY. Thank you, Madam Chair. 

Look, Americans know that the tax code is complex. That is obvious to even those that don’t pay taxes. I think it is one of the selfevident truths the American people have. I have run into an issue 

in western North Carolina dealing with small fire departments. I 

have got about six to eight of them that, based on a provision of 

the law and how the IRS chose to implement it, means that these 

volunteer fire departments that are quasi-governmental non-profits, they receive taxpayer funds and they actually have tax collection areas. We have this whole thing. And so my office has had to 

be engaged in making sure these non-profits still get to maintain 

their non-profit status based on how the IRS has implemented it. 

And so there is a lot of grief the American people have with the 

IRS and we have got public safety at risk based on how the IRS 

has chosen to implement a law. 

75 

And so I want to say, Ms. Olson, your office, the National Taxpayer Advocate Office in Greensboro has been enormously helpful 

to us in going through this whole process and trying to be truly a 

taxpayer advocate for these volunteer fire departments in my District, and I want to thank you for that. This has been enormously 

frustrating and confusing, but I certainly appreciate the work that 

you do and the work that your staff does. Thank you. 

Ms. OLSON. Thank you, sir. I am personally very familiar with 

that issue, and it is on my radar screen and we are working on 

this. 

Mr. MCHENRY. Thank you. I certainly appreciate it, and I hope 

that the commissioner hears this, as well, and that you have some 

compliance on behalf of taxpayers, the IRS actually has some compliance. 

To that end, and the reason why I bring this up is because it is 

about the confusing and complex nature of the tax code. And that 

is frustrating as it now stands, as it now stands. That is before we 

even talk about ObamaCare, as my colleagues on the other side of 

the aisle like to call the affordable health care or whatever else, 

any way they want to call it, but the point is if you look at how 

the Internal Revenue Service is going to have to implement 

ObamaCare and portions of ObamaCare, Mr. Everson, you have 

testified well on this. 

So in your testimony you expressed doubt as to whether the statutory scheme as enacted into law is even workable mechanically. 

What do you mean by that? Explain. The IRS can, you know, has 

a complex enough code. Are you saying that this is even beyond? 

Mr. EVERSON. I am suggesting that there are so many parts and 

there are so many players that we cannot, by any means, be sure 

that this is going to work. That is not getting at the policy objections that some have raised, it is just simply as a matter of management. That is particularly the case because of the fact that 

there are different levels of government. You have got different 

agencies of Government in the Federal level, and then you have got 

States and you have got these quasi-State entities, these exchanges. 

All of these are players, plus private parties, companies and individuals. All of this interacting together across these multiple provisions I think really is an extraordinarily daunting task from a 

managerial point of view. That is what I am getting at, sir. 

Mr. MCHENRY. Okay. So thus, you know, if they have more folks 

collecting taxes and the tax code is more engaged in people’s daily 

lives and health care decisions? 

Mr. EVERSON. Well, what I am saying here is that the other 

piece, whether you get this done or not, the other facet of my testimony is that I am concerned that by doing this, by assigning these 

health care responsibilities to the Service, which are contentious. 

They are certainly, as we know from this hearing, contentious politically, but they are going to be contentious for individuals because, as was indicated by the Chair, these are the intensely personal issues. That is the word you used. And I agree with that. 

You are adding into the interaction of the citizenry with the IRS 

another highly-charged element of a conversation, if you will, and 

76 

that can’t help but impact how they feel about tax collection, as 

well. 

Mr. MCHENRY. Ms. Olson, to this point, with implementation and 

your preparations for implementation of ObamaCare, how daunting 

and how difficult is this task going to be for the average American 

to be in compliance with this? You say that with the mid-year they 

are going to have to update if they change jobs, as they receive 

more income rather than less, or less income rather than more? For 

your planning purposes, how complex is this going to be and how 

much of a challenge is this going to be? 

Ms. OLSON. Well, it is going to be a challenge for individuals and 

the IRS and for the exchanges, and commissioner Everson is correct about all the moving parts. The taxpayers’ ongoing responsibility to update is going to be not with the IRS but with the exchanges, where the taxpayer is going to interact with the IRS at 

the end of the year with the return filing, and that is where we 

do a reconciliation of what they got during the year and then what 

they actually were entitled to based on what really happened with 

their income and their family structure during the year, and there 

is a possibility of a gap between that, and that will come as a rude 

surprise to some taxpayers. 

That is why I have emphasized that we have to really educate 

taxpayers about their responsibility to talk to the exchanges. My 

concern is similar to Mr. Everson’s in that taxpayers are going to 

look to the IRS, partly because we are talking about the IRS all 

the time about this, and call the IRS and want to give updates of 

information to the IRS, and they will be confused. Where do they 

go? And will they get to the right place? And will the IRS be helpful in telling them, here is where you need to go? 

I have said IRS employees have to have a Rolodex of where to 

send these individuals so they can get to the right place. 

Mr. MCHENRY. Oh, Lord. With that I yield back. 

Ms. BUERKLE. Thank you. 

The Chair now recognizes the gentleman from Arizona, Dr. 

Gosar. 

Dr. GOSAR. Thank you, Madam Chair. 

Ms. Olson, you made an interesting finding. Oh, by the way, I 

am a health care provider. I am a dentist. Okay? So I know something about this. You talked about changing behavior. Is that pretty easy, changing behavior? 

Ms. OLSON. No. 

Dr. GOSAR. How would you feel about that, Mr. Everson? 

Mr. EVERSON. I’m almost 58. It is tougher every year. 

Dr. GOSAR. I understand that. Ms. Olson, are you familiar with 

the Advanced Federal Child Tax Credit? 

Ms. OLSON. Yes. 

Dr. GOSAR. What were their instructions to the American people. 

Please do not call the IRS, right? 

Ms. OLSON. Yes. That was in 2001. 

Dr. GOSAR. How many calls did you get? 

Ms. OLSON. In one day we got about, it was our first million call 

day, and they called asking do we really not need to call you. 

Dr. GOSAR. So, I mean, when you are talking about customer 

service associated with this, this is much more complex? 

77 

Ms. OLSON. Yes. 

Dr. GOSAR. Would you say exponentially? 

Ms. OLSON. Yes. It goes to my earlier point: it is not that we 

have new powers or new duties, it is the scope. 

Dr. GOSAR. I understand. 

Ms. OLSON. It is the amount of work. 

Dr. GOSAR. So how many customer service people are you planning on hiring? 

Ms. OLSON. Well, I am not planning on hiring people until I 

know what my budget is. I think that is a question for the Commissioner. I have heard that we will be focusing on about 800 FTE 

that will be partly IT and majority working on the customer service 

side. 

Dr. GOSAR. Mr. Everson, tell me, given the quantum leap that we 

are doing here for customer service, in your estimations what kind 

of customer service detail would we need to handle this? 

Mr. EVERSON. I haven’t studied it in such detail that I would be 

able to give you a number. I mean, the Service is more than capable of having that conversation. But you are really talking, just as 

the Advocate has said, as Nina has said, you have got a whole new 

area of responsibilities, you have got potential for whole new conversations. 

In the Act, frankly, it extends well beyond that. Small businesses, we work at AlliantGroup where I am now, we work with 

small and mid-sized businesses. They are flummoxed by the statute 

and all the different obligations that they have. So there are lots 

of different parties that are going to be impacted by these changing 

standards, including maybe your dentist shop. I don’t know. 

Dr. GOSAR. Absolutely. We have kind of kept the Federal Government away as best we can. But that is my whole point is this is 

an ongoing dialogue that should be going on the whole year, not 

just at reconciliation, because it is compensatory backlog. So it is 

customer service intensive, would you say? So 800 FTEs ain’t going 

to work. 

Ms. OLSON. Well, that is the spec’ing out, but I have not seen the 

details behind that. 

Dr. GOSAR. Going back to changing behaviors, when you are 

sharing all this information, you know, and exponentially enlarging 

the pool of people accessing your personal information, boy, I tell 

you what, you had better have customer service. And, if I am not 

mistaken, you are not really known for customer service, right? 

Ms. OLSON. We need to improve our taxpayer service. 

Dr. GOSAR. So let me ask you this: what is your average wait for 

a person for customer service? 

Ms. OLSON. I think this year it was about 12 minutes on the 

main phone line. 

Dr. GOSAR. For an expedited form, right? 

Ms. OLSON. Yes. 

Dr. GOSAR. How much longer when we have questions? 

Ms. OLSON. I don’t know the answer to that. On some lines these 

have been—— 

Dr. GOSAR. Hours? Days? 

Ms. OLSON.—hours. Yes. 

78 

Dr. GOSAR. Days. I’m just saying on the phone just trying to get 

somebody that is qualified to answer. 

Ms. OLSON. Yes. 

Dr. GOSAR. And this is much more, as we have heard the witnesses talk about, exponentially just growing in size. 

Mr. Everson, I am really perplexed by the safety. I know I 

couldn’t find at least a sizeable leak from the IRS in personal information. 

Mr. EVERSON. Right. It has got a very good record. 

Ms. OLSON. It does. 

Mr. EVERSON. It is a real strong point of the Service. 

Dr. GOSAR. But the one problem that we have got is we are going 

out beyond that because we are going to be sharing this information all over the place, and we are also subjugating individuals to 

insurance companies, are we not? 

Mr. EVERSON. There is a tie-in into the insurance companies. I 

am not sure how that will work on the exchange of what they will 

have in terms of the taxpayer information, but clearly you are exactly right. When you get to the exchanges or you get to the other 

States, you are going to have a whole new set of players that are 

dealing with not just the traditional information but even more information. 

Dr. GOSAR. So how do we guarantee that that is, and you alluded 

to it. It is sort of like my gentleman friend from South Carolina, 

you know, this is the potential to share very personalized, like the 

gentlelady up here said, for sharing personal information. 

Mr. EVERSON. There are no guarantees in this area, sir, and it 

just is a very significant area of continuing focus by the Service. 

I would tell you any business in America now that deals with this 

kind of information, it is something that everybody worries about, 

but this does increase risk. That is all I am saying. 

Dr. GOSAR. One last question. Do you think the health care is individualized and should be personalized, patient friendly? Personally, your point of view? 

Mr. EVERSON. I am not going to answer a policy question on 

health care. I have not got a dog in that fight today. How is that? 

Dr. GOSAR. You do, because your health is yours today and you 

own it, right? 

Mr. EVERSON. Yes. 

Dr. GOSAR. How about you, Ms. Olson? 

Ms. OLSON. I am not going to answer that question. 

Dr. GOSAR. You don’t own your health today? 

Ms. OLSON. I do own my health today. I just went to my dentist 

last week. 

Dr. GOSAR. God love you, and you are smiling. How about you, 

Mr. Jost? 

Mr. JOST. I believe that my health care is personal, and I believe 

that the Affordable Care Act protects it. 

Dr. GOSAR. Mr. Cannon, how do you feel about that? 

Mr. CANNON. Health care is, of course, an intensely personal 

issue. There is a difference of opinion among obviously supporters 

and opponents of this law because, just like other opponents of this 

law, I think it is going to make access to health care less secure, 

not more. 

79 

Dr. GOSAR. Thank you very much. 

Mr. CANNON. And cause more people to fall through the cracks. 

Mr. EVERSON. Maybe I misunderstood your question, sir. If you 

are saying do I think information about my health care is personal 

and shouldn’t be shared, yes, I agree with that. 

Dr. GOSAR. Thank you very much. 

Ms. BUERKLE. Thank you. The Chair now recognizes the gentleman from Idaho, Mr. Labrador. 

Mr. LABRADOR. Thank you, Madam Chair. 

Mr. Cannon, my State right now, Idaho, is going through a huge 

debate about whether we should accept the health insurance exchange, should we do a Federal exchange or do a State exchange, 

and interestingly I have made a recommendation to our governor 

and to our legislature that they shouldn’t at this time accept a 

health insurance exchange as a State exchange, that they should 

allow it to become Federalized. So I want to have a little discussion 

with you about this. Have these true State exchanges that we are 

talking about when you are talking about State exchanges under 

ObamaCare? 

Mr. CANNON. No. The statute requires that every State-created 

exchange, in order to be compliant with ObamaCare, that it has to 

get approval from the Secretary, and the statute gives the Secretary the authority to heap pretty much whatever sorts of regulations the Secretary wants onto these State-created exchanges. 

So it really is a myth, the idea that States would be able to retain some sovereignty, retain some control over their health insurance markets if they create their own exchanges, because whatever 

the Secretary would be able to impose on a State through an exchange that the Federal Government created, the Secretary could 

also impose on a State-created exchange through regulation. 

Mr. LABRADOR. Well, you and I probably have very similar philosophies about the 10th Amendment and States’ rights. It seems 

odd that somebody from the Cato Institute and a conservative Republican from Idaho are asking a State to forego the State exchange and actually allow for the Federal exchange. Could you explain? 

Mr. CANNON. Well, it is a little bit ironic, but what you want is 

a Federally-run health insurance exchange in your State, which is 

really just a Government agency controlling the private health insurance market. If what you want is the Federal Government to 

control your State, then the best thing you can do is establish an 

exchange because the Federal Government will control it. 

If a State does not establish an exchange there might not be an 

exchange at all, because, as we all know, there is no funding in the 

act for the Federal Government to create these exchanges, and it 

is not likely that Congress is going to approve that funding any 

time soon, so this is a real problem for the Administration. They 

are having to take money away from other things that Congress 

appropriated money for. I would like to see an investigation into 

that, frankly. 

But the choice is not between a State-controlled exchange and a 

Federally-controlled exchange; it is between a Federally-controlled 

and maybe none. 

80 

Mr. LABRADOR. Okay. If a State would have set up its own exchange independent of ObamaCare, would the IRS penalties apply? 

Mr. CANNON. The IRS penalties against individuals who do not 

comply with the individual mandate would apply? 

Mr. LABRADOR. Right. 

Mr. CANNON. Penalties under the statute, the penalties against employers, the $2,000 per worker tax that the Patient Protection 

and Affordable Care Act imposes on employers in States that create their own exchanges would not apply in a State that does not 

create its own exchanges. So Utah, for example, could avoid that 

very large tax on employers by not creating an exchange, and what 

this IRS rule does is, it first deprives Utah of that choice, and then 

imposes that tax illegally on those employers. 

Mr. LABRADOR. Okay. But if a State sets up an exchange under 

ObamaCare, it is subject to the IRS penalties, right? 

Mr. CANNON. It is subjecting its employers to the employer man- date, which is a $2,000 per employee tax. 

Mr. LABRADOR. Okay. So when you are making the decision 

about whether you are going to set up a state exchange, you have 

to think about those taxation issues for your employers in your 

State? 

Mr. CANNON. As well as what employers in neighboring States, 

I’m sorry, the government’s neighboring States are doing, because 

if you are in Utah and your neighbors all decide not to create a 

health insurance exchange but you create one, you will be imposing 

a tax on your employers that your neighbors are not, and they may 

want to leave your State for other States. 

Mr. LABRADOR. Okay. Isn’t it true that under the actual text of 

the law that if a State does not set up its own ObamaCare exchange and the Federal Government steps in and sets up its own 

exchange that the IRS penalty does not apply? 

Mr. CANNON. The employer mandate, that is correct, because 

what triggers that $2,000 tax on employers is when one of that employer’s workers receives a tax credit through an exchange. Again, 

under the statute if there are no State-created exchanges there can 

be no tax credits to trigger that penalty against employers. 

Mr. LABRADOR. And in the concept of federalism, the concept of 

having the State create something that it can manage, is it truly 

a State-managed exchange if you are doing it under the rules of 

ObamaCare? 

Mr. CANNON. Absolutely not, and for the reasons I just mentioned as well as the fact that there will be hundreds of billions of 

dollars flowing through these exchanges from the Federal Government, so the Federal Government is going to be controlling all of 

that money. The Golden Rule applies here. 

Mr. LABRADOR. And I just want to be clear. So when you say 

that, you mean that since they are controlling the money they are 

going to be telling the State what rules apply for that State exchange, and what compliance, correct? 

Mr. CANNON. That is correct. For example, Utah’s exchange 

would not qualify under—— 

Mr. LABRADOR. Under ObamaCare. Correct. Even though they 

did it before ObamaCare, correct? 

Mr. CANNON. Correct. 

81 

Mr. LABRADOR. So, in essence, all the State exchange is is another Federal agency? 

Mr. CANNON. For which the States will have to pay, because if 

a State opts to create its own exchange it is responsible for the operating costs of that exchange. The estimates have been $10 million 

to $100 million per year. 

Mr. LABRADOR. All right. Thank you very much. 

Mr. CANNON. Thank you. 

Ms. BUERKLE. I thank the gentleman. 

I now recognize the gentleman from Pennsylvania, Mr. Kelly. 

Mr. KELLY. I thank the Chairwoman, and I thank all of you for 

being here today. This is critical. 

I had a conversation yesterday, and then also today, with Stephanie McCafferty, an automobile dealer who still owns the business. 

My son runs it. We did build it by ourselves, by the way. We have 

had this continuing conversation trying to determine exactly what 

this new Patient Protection Affordable Care Act actually does to us, 

and I have got to tell you, even after sitting down with the CRS 

for an hour everybody still scratches their head and says, You 

know what? We don’t know. We just don’t know. 

So, Mr. Everson, let me ask you this: is it true that the IRS will 

have to collect ObamaCare’s employer mandate penalty? 

Mr. EVERSON. Yes, sir. There will be an obligation upon the Service, like in many other areas, to make that assessment based on 

the information that is provided. 

Mr. KELLY. And that mandate penalty amounts to a $2,000 or $3,000 penalty per worker? 

Mr. EVERSON. I believe that is the case. I am not an expert in 

the exact figures. 

Mr. KELLY. I haven’t found anybody that is an expert in any of 

this. You are not offending me by answering that way. 

Mr. EVERSON. Yes. 

Mr. KELLY. It is a very difficult thing. Also, since the ObamaCare 

mandate penalty is assessable in the same manner as other employment tax penalties, is it true that the IRS does not have to 

offer the employer an opportunity to review and contest the determination prior to assessing the penalty? 

Mr. EVERSON. Well, I would say, sir, that is a question for the 

Service to address. It is an interpretation of the law and they have 

got to write the appropriate regs. I would expect that the Service 

will be very careful in laying all this out and want to get, because 

of the problems we have been talking about all morning, the nature 

of small businesses, lack of sophistication and understanding of the 

tax code, they are going to want to get this right, whatever they 

do, so they are going to have to work very hard. They are going 

to have to work very hard to do it, and then that is one piece of 

it. 

My other concern is then whether the folks in the businesses will 

understand it, actually. 

Mr. KELLY. In our business we buy and sell cars and we service 

cars and trucks and that is what we do. 

Mr. EVERSON. Yes. 

Mr. KELLY. Now, in addition to that, the greatest amount of time 

we spend now in the back office is not dealing with the services we 

82 

offer our customers, it is trying to be in compliance with the Government that continues. 

I have got to tell you, when I am opening the mail if it says it 

is from the Federal Government or the State government or the 

local government I say, What are they going to take from me now, 

or, How are they going to regulate me and make it harder for me 

to get through this business? 

Is there any appeals that exist, that come into play—and it happens after the collection begins, right, so if IRS comes in, they sit 

down, they talk with me and say, By the way, it starts now, it 

starts today. 

Mr. EVERSON. The Service has very clear procedures on appeal 

rights, and even before things happen you can raise matters up 

with supervisors, but I do think that there are going to be, this is 

another area where there is going to be more confusion. Some of 

these, as the taxpayer advocate has indicated, the provisions are 

different in certain standards as to what actions on an enforcement 

side the Service can take. I have written in my testimony I am concerned about that. Any time you introduce variability into a huge 

operation it is harder to run. 

So I think that these are all issues that are going to be tough 

to deal with. 

Mr. KELLY. And really I am on board with you. It is truly the 

uncertainty of what this law is asking us to do that creates this. 

I am talking now about job traders. You have got to stay on the 

sidelines because you are not sure that your actions are going to 

cause a problem for you. And I have been through tax audits, and 

I have got to tell you the thing that strikes fear into the hearts of 

most Americans is that the IRS is coming in to do an audit. 

Again, you say, my gosh, I know we did everything we thought 

we were supposed to do, but I guarantee you that small business 

owners who do not have, as you say, a level of sophistication, I 

mean, who does have the level of sophistication? It is certainly, 

even this panel with its vast knowledge and its experience, it is 

like I know something about it but I don’t know everything about 

it. And then we go to the job creators, the small business people 

and say, You know what? The ball is in your court right now. How 

do you stand up and do that? 

So let me ask you, Ms. Olson, how long does a business have to 

pay penalties assessed by the IRS under the employee mandate? 

Ms. OLSON. There is a ten-year collection statute. And I do want 

to say about the penalty, the small business penalty, that it applies 

to employers with over 50 employees, so there already is carved out 

by the law the very small. 

I think Commissioner Everson is correct that we have got to really work on this with the regulation and the appeals procedures, 

and if there is an ability to get reasonable cause, abatement of penalties, the things that we normally do with penalties, those are 

very important issues. 

Mr. KELLY. And, again, if I understood, you said the penalties 

are very small? 

Ms. OLSON. No. The have exempted the very small businesses 

from the penalties. 

Mr. KELLY. Under 50? 

83 

Ms. OLSON. Under 50 employees. 

Mr. KELLY. Okay. Well, a lot of my friends have more than 50 

people, so it applies to an awful lot of them. 

Ms. OLSON. Right. 

Mr. KELLY. So if a business reports an IRS error, how long will 

it take the IRS to fully investigate? Any ideas at all? 

Ms. OLSON. The IRS has three years from the filing of a return, 

in general, to investigate. 

Mr. KELLY. All right. So I would just suggest, and I offer this 

only as a small businessperson who has lived in the private sector 

for his whole life, gosh, you are making it hard for us. You are 

making it so hard for us. I would ask each of you, who signs your 

paycheck? 

Mr. EVERSON. Sir, I would tell you, you have made it hard for 

taxpayers, not the IRS. Let’s get this right. You wrote this law, the 

Congress did. 

Mr. KELLY. You know what, Mr. Everson, I just got here. I have 

only been here for 19 months. No, I didn’t write it. In fact, nobody 

even read it before they passed it, so let’s make sure we are very 

clear in what happened, okay? 

Mr. EVERSON. Okay. 

Mr. KELLY. And even the people that are sitting here on this 

panel today cannot tell us specifically what the penalties are going 

to be and how much it is going to cost small job creators like myself. So we can tap dance around this and we can pretend that it 

didn’t happen. 

I am going to show you right now this Government is crushing 

job creators and turning away and saying, you know what? The 

problem with you folks, you just don’t have the level of sophistication to understand this entire law. As a matter of fact, neither do 

we, but we do have the ability to come in here and tax you. We 

have the ability to come in here and shut you down. We have the 

ability to hold you accountable for a law that not even we understand. So how do you like that, Mr. Car Dealer? How do you like 

that, Mr. Carpenter? How do you like that, Mr. Manufacturer? 

How do you like that, Mr. Miner and Steelworker? 

Come on. Let’s be honest with each other. This is absolutely astounding that we would have to have this conversation. You are 

paid by the same people that I am paid by, and that is the taxpayers of this great Country, and we have made it so hard for 

those folks to live the way that the Founders designed this place. 

I am going to yield back my time because I am way over time, 

but I will never stop fighting for the small job creators that are out 

there and the small business people who have nobody else to turn 

to. I have sat through it, and I mean that sincerely. There is nothing that strikes fear in the hearts of people that own businesses 

than the fact that the IRS is showing up. Boy, I tell you what, you 

try to circle the wagons and get all your information together. 

When it comes to the point that I have to worry more about not 

competition down the street but I have to worry about my own 

Government holding me back, there is something wrong. 

Chairman ISSA. [Presiding]. I thank the gentleman for yielding 

back. 

I thank our panel for the generosity of all of your counsel. 

84 

Mr. Everson, I appreciate your recognition and, to be honest, 

your seeing both sides. I agree with you on a personal basis that 

Congress deserves the blame, noting that you are no longer on the 

Federal payroll. 

Ms. Olson, I would like to thank you personally for the fact that 

your various reports and counsel of some of the areas of concern 

were areas that we took note of here. 

Professor, I thank you very much for putting out your position 

in a very accurate way. I appreciate your being here. 

Mr. Cannon, it is always a pleasure to have Cato represented 

here. I think you did a great job of expressing their concerns. Ultimately, much of what we said here today will ultimately be decided 

outside of Congress in all likelihood. 

This has been a great panel. We stand in recess. Yes, Mr. 

Everson? 

Mr. EVERSON. I just want to thank the Chair and the Members 

for keeping me out of this exchange fight. I didn’t get any of the 

questions. Thank you, sir. 

Chairman ISSA. Well, Mr. Everson, as you go back and talk to 

small businesses you consult with, I am sure they will have questions about that for you, so you are not going to be out of the fight 

in the other side of your life. 

Thank you again. We stand in recess until ten minutes after the 

second vote. 

[Recess.] 

Chairman ISSA. The Committee will come to order. 

It is now our honor to introduce our second panel witness, The 

Honorable Douglas Shulman, who is the Commissioner of the IRS, 

a post that he has held since he was appointed under President 

Bush nearly five years ago. 

Welcome. 

Pursuant to our Committee, I would ask you to rise and take the 

oath and raise your right hand. 

Do you solemnly swear or affirm that the testimony you are 

about to give will be the truth, whole truth, and nothing but the 

truth? 

[Witness responds in the affirmative.] 

Chairman ISSA. Let the record indicate the gentleman has answered in the affirmative. Please have a seat. 

As I noted during the first panel, you did a great job of staying 

focused on what was going here from the back. You have obviously 

done this many times before. Since you are the only witness, we 

won’t hold you strictly to the five minutes, but I would ask you to 

remember that your entire written statement is in the record. 

With that, the gentleman is recognized. 

STATEMENT OF DOUGLAS SHULMAN 

Mr. SHULMAN. Thank you, Mr. Chairman. And thank you for 

having me here. Thank you, Ranking Member Cummings and 

other members of the Committee. 

Immediately upon enactment of the Affordable Care Act, or ACA, 

we began our implementation efforts, which included both executing on the short-term provisions that were in the bill that were 

85 

our responsibilities, as well as putting a structure and process in 

place to plan for provisions with future effective dates. 

The IRS moved very quickly on some of the law that became effective immediately. For example, we conducted outreach and implementation for the small business health care tax credit. The 

ACA, as you know, also expanded the adoption credit immediately 

and provided favorable tax treatment for adult children up to age 

26 who are covered by their parents’ insurance. 

The IRS’s most substantial implementation effort relates to the 

delivery of hundreds of billions of dollars in premium assistance 

tax credits that will help millions of American families afford 

health insurance starting in 2014. 

Now, the Department of Health and Human Services is the lead 

agency in defining the structure and operations of health insurance 

exchanges, with the Treasury and the IRS defining the associated 

rules for how the tax credits can help subsidize coverage. 

It is important to note that the credit will be paid directly to the 

insurance company, which is a major design feature which should 

help mitigate the risk of fraudulent claims. 

Taxpayers will then reconcile the advance payments they receive 

on their tax return. If the credit is larger than the sum of the advance payments, the taxpayer will be entitled to a refund. IF the 

credit is smaller than the sum of the advance payments, the taxpayer will owe the difference. 

Now, starting in 2014 individuals who can afford health insurance coverage and are not eligible for an exemption must either 

purchase minimum essential coverage or make a payment with 

their tax return. The payment only applies to taxpayers who can 

afford insurance but do not purchase it. 

We are already working with tax return preparers and the tax 

software community to give taxpayers the tools that they will need 

to fill out their returns in 2015. The IRS process for verifying coverage will be very similar to the one we have used for years to 

verify wages and withholding. The IRS will match what is reported 

on the tax return with the information reported by the insurers. 

For the small number of taxpayers who may appear to have underpaid and were not eligible for an exemption, we will generally 

follow up with written correspondence. 

I think it is important that I clarify one misconception. Revenue 

agents who are trained on much more complex tax issues do not 

work on resolving these kinds of issues. The law also clearly specifies that the IRS will not use levies or file notices of Federal tax 

liens if the taxpayers have unpaid amounts related to the individual coverage provision. 

Because these and other ACA provisions are substantial and require long-term planning, we immediately established processes 

within our business operations and our IT operations to make sure 

we could implement the law smoothly. 

Before closing, let me just observe that the IRS is continuing its 

long tradition of being a nonpartisan agency that implements the 

laws that Congress passes. As the Chairman mentioned, I started 

my tenure in 2008, and right when I walked in the door we were 

asked to, outside of the tax systems, figure out a way to send 100 

million Americans stimulus checks which the previous AdministraVerDate Aug 31 2005 12:02 Nov 02, 2012 Jkt 000000 PO 00000 Frm 00089 Fmt 6633 Sfmt 6633 C:\DOCS\76370.TXT APRIL
86 

tion did as the recession started to hit. We also played a role in 

the Recovery Act. During the serious economic downturn we set up 

special programs we called Fresh Start to work with struggling 

taxpayers, and now we are working on the Affordable Care Act. 

I believe the effort is going smoothly. I believe we have the proper plans in place. And all of this is a tribute to the dedicated professional men and women at the IRS who have devoted long careers to fair and even-handed administration of the Nation’s tax 

laws. 

Thank you. That ends my opening statement. 

[Prepared statement of Mr. Shulman follows:] 

87 


Insert offset folio 39 here 76370.039
88 


Insert offset folio 40 here 76370.040
89 


Insert offset folio 41 here 76370.041
90 


Insert offset folio 42 here 76370.042
91 

Chairman ISSA. Thank you. 

I recognize myself now. 

I want to start off by thanking you and the men and women of 

the IRS. I note that your job is a strenuous one, one that has a 

five-year term. I understand you are the third to have that term. 

And it was intended to take away the partisan perception, and I 

think you have done a good job of that. But I do have some questions, perhaps not so-called partisan, but maybe Pollyannaish. 

You have done, the IRS has done a selective outreach based on 

ObamaCare or the ACA’s benefits. You said it in your testimony. 

You sent out millions of post cards doing an outreach to educate 

people as to the law’s benefit or tax credit to small business, correct? 

Mr. SHULMAN. We did send out tax credits. 

Chairman ISSA. Do you plan on sending post cards out to tell 

people about the tax increases? 

Mr. SHULMAN. No. 

Chairman ISSA. So you are only telling people, the IRS is only 

telling people about the good news and not telling them about tax 

increases. Aren’t tax increases more something you need to know 

about in advance for planning than windfalls of money? I grew up 

in a neighborhood where that windfall is [foreign word], it is found 

money. This isn’t what you need warning for. You don’t need warning about good news; you need warning about tax increases, don’t 

you? 

Mr. SHULMAN. We do extensive outreach on all tax provisions, 

and we have started—— 

Chairman ISSA. But you are not sending any indication to small 

businesses about the tax increases they are going to see under 

ObamaCare? 

Mr. SHULMAN. We have done extensive outreach and we do it 

based on looking at what’s the best way to get the word out for different pieces. I think right now we are working with the preparer 

community and business community to work through, a, getting 

our systems in place in a way that works well, getting the interaction—— 

Chairman ISSA. Well, speaking of the systems, under ObamaCare 

Section 9002 you were required to deal with the W–2 forms, and 

yet you unilaterally delayed reporting requirements. In other 

words, this piece of bad news is not going out that otherwise would 

have made it clear that, again, tax increases, right? 

Mr. SHULMAN. Are you referring to the requirement that employers—— 

Chairman ISSA. Put a value of health insurance benefits on the 

W–2. 

Mr. SHULMAN. How much they paid for their health insurance. 

Chairman ISSA. Right. 

Mr. SHULMAN. No, we actually delayed the reporting requirement 

at the request of our information reporting committee that works 

with us regularly because they couldn’t get their systems ready. 

Chairman ISSA. They couldn’t get their systems ready? 

Mr. SHULMAN. We had a lot of feedback from the business community that—— 

92 

Chairman ISSA. Well, let’s go through that. There is Paychecks 

and ADP. They both got it ready. They are both able to do it. 

Mr. SHULMAN. So I am—— 

Chairman ISSA. I am trying to understand. This was something 

that I think many people who want folks to understand, this is sort 

of the bad news again. This is letting people know how much is already being paid in. The question is: where did you get the authority to unilaterally delay? You are saying it is based on not being 

ready, and yet the vast majority of these things, either you could 

have allowed a waiver and yet still implemented for those who are 

ready, and if someone was using Paychecks or ADP they would 

have been ready and it would have happened, right? 

Mr. SHULMAN. That is not my understanding. So my understanding is that this reporting, which I guess I am confused about 

it being bad news, this is just saying how much your current employer pays for your health insurance. 

Chairman ISSA. Well, most Americans have no idea that health 

care costs as much as it does. This provision was one that I think 

Republicans wanted genuinely in there so people would understand 

just how expensive it is, how much is already being paid for. Having over the years had employees who left who were shocked when 

they had to pay their COBRA and they wanted to know what was 

wrong, and the answer was, Well, we were paying 90 percent of it, 

now you can see what you are not seeing from a tax standpoint. 

Let me go through just one or two more questions. You said that 

the IRS would not be essentially dunning people who owed under 

the mandate, but is there anything that would prohibit you from 

assuming that the first $1,000 owed under the mandate penalty 

which now is assessed to be a tax by our U.S. Supreme Court, and 

let’s just say they refuse to pay it, is there anything that keeps you 

from considering that dollar one of taxable requirements and thus 

having the last dollar be owed? In other words, if I pay in $10,000 and I owe $9,000 or $8,000, and you simply make the assumption the first $1,000 added is this 

tax that they didn’t pay, is there any reason you wouldn’t take it 

all and dun them for revenues owed? Is there anything that stops 

you from doing that? 

Mr. SHULMAN. Let me try to answer the question. I’m not sure 

I understand it. 

Chairman ISSA. If I don’t pay my taxes, isn’t it possible you could 

treat the $1,000 mandated penalty like any other tax and dun me 

for it with penalty and interest? 

Mr. SHULMAN. So if you don’t pay that, what we would do is send 

out a letter. As you know, most people pay the taxes they owe on 

time. We would send out—— 

Chairman ISSA. But this is a tax that is not collected through 

withholding. If you assessed it as the first part of withholding, took 

it out of withholding, and then just simply dun me for being in arrears on my overall taxes, you could treat it, as long as there was 

$1,000 of withholding, you would take it for this and then treat it 

as though I didn’t have sufficient withholding. Couldn’t you deal 

with that? 

Mr. SHULMAN. So we would treat it as, you know, a penalty on 

your return. The statute is clear, and it is the only place the statVerDate Aug 31 2005 12:02 Nov 02, 2012 Jkt 000000 PO 00000 Frm 00096 Fmt 6633 Sfmt 6633 C:\DOCS\76370.TXT APRIL
93 

ute is clear, we can’t do a lien or a levy, which is very rare, which 

we do way down the line. Beyond that, it would be part of your 

Federal tax obligation. 

Chairman ISSA. I want to get this very clear, and I apologize for 

running over, but I haven’t gotten the answer to the actual question, so let me be clear on the question. If I owe $10,000 in normal 

taxes on income and I have this $1,000 penalty, if you put the 

$1,000 penalty at the end then you don’t have the ability to levy 

or lien. 

However, if you simply collect it as the first $1,000 on my withholding, take it out, I now have a shortfall in my withholding, so 

now you are not levying against the penalty, you are levying 

against ordinary taxes you have already collected on the front end. 

There is nothing that stops you from taking that as the first dollar 

and then levying on the last dollar against income tax. 

Mr. SHULMAN. I apologize. I want to be responsive. It will be part of your overall liability. If there is $1,000 owed, there will be a 

$1,000 carve-out that there could never be a lien on. I am confused 

about the withholding. 

Chairman ISSA. And I am going to yield to the Ranking Member, 

but there clearly was a statement, no question at all, Federal exchanges were not covered in this law, in the letter of the law, and 

yet you have had a rule-making that covers it, covers it without 

legislative action but rather based on some loose intent. 

The fact that we said that there is no levy, all you would have to do is collect this money off of the first $1,000 of withholding and 

then the shortfall would actually be on other funds you could levy. 

Any creative accountant could come up with it. I am going to assume that the IRS will do so based on what your folks have chosen 

to do on something that was outside ObamaCare’s right, which was 

subsidizing the Federal exchanges. 

Mr. Ranking Member, I would ask unanimous consent you have 

an additional three minutes, so if you will tally eight minutes I will 

yield to the gentleman. 

Mr. CUMMINGS. Thank you very much. 

Commissioner Shulman, I hope that IRS employees are watching 

this, and I want to say to them publicly thank you, and I thank 

you. Let me tell you what I am thanking you for. As I listened to 

the last panel, I listened to Mr. Everson, and you heard most of 

his testimony, did you not? 

Mr. SHULMAN. I did hear some of it. 

Mr. CUMMINGS. Yes. And he talked a lot about his concerns and 

basically all but said it can’t be done. And I have got to tell you 

that, as one who rose up from poverty to the Congress of the 

United States of America, I know that this Country, we can do anything we try hard enough to do. I know that. My own life has told 

me that. 

When you started off your testimony today to talk about what 

you all have done already and what you did, I think you started 

back in 2008, you said you had to come in and do certain things. 

I just like the can-do attitude, because certainly if we stick with 

the naysayers I guess we won’t get anything done. The fact is that 

what the people at IRS are doing in trying to make sure the law 

works properly will go a long ways towards helping a lot of people. 

94 

And I say this over and over again because I mean it. I am talking about people at IRS will end up helping people save their lives 

and save a lot of pain. And so I want to thank you all publicly for 

that can-do attitude. I know IRS gets a lot of bad comments. As 

a matter of fact, Government employees get a lot of bad comments. 

But when I hear things like what you just said, it just, in my mother’s words, who is a former sharecropper, it just makes my heart 

glad. 

Commissioner Shulman, in the earlier panel the Committee 

heard from Nina Olson, the National Taxpayer Advocate. In her 

testimony she explained that the IRS has made significant progress 

on rule-making and other areas. Let me read from her testimony. 

She says, ‘‘Since the enactment of ACA, the IRS has been working 

through the major challenges, making significant progress. The 

lead time provided by the ACA has been very helpful for the IRS, 

and at this point it appears the IRS has used the time well.’’ Ms. 

Olson is very complimentary about your efforts over the past two 

years to ensure that the planning process is on track. 

I would like to know your perspective. How did you approach the 

planning process over the past two years, and how would you 

evaluate your own efforts today? 

Mr. SHULMAN. Well, the one thing, while the ACA is a substantial undertaking, the tax provisions for the IRS, you know, I come 

from a business background, and the one thing I would say generally is that what you need is proper planning, enough lead time, 

and proper resources to implement things. 

In the world of tax, we have gotten used to, unfortunately, late 

legislation, retroactive legislation, and the one thing this law affords us is plenty of time to do implementation right. 

We had to scramble to get some of the things done, some of the 

things that the Chairman referenced and we talked about, but the 

major pieces of the legislation where we have the most work to do, 

like setting up our infrastructure to make sure we distribute tax 

credits, the premium tax credits in conjunction with the exchanges, 

we had multiple years to do. 

And so there is always room for improvement, but I think our 

team, both our team who had to work to do the planning, do the 

immediate implementation, and then build the IT systems, you 

know, I think they are well on track in doing, you know a good job, 

so I would give them a pretty good grade. 

That said, we have got to keep our eye on the ball and with any 

piece of tax legislation we need to make sure we take it through 

and implement at the end. 

Mr. CUMMINGS. Well, I hope that they know that they have a lot 

of grateful people who appreciate what they are doing. 

On the first panel we heard a lot of concerns about data privacy, 

and that is a concern of mine. I know the IRS actually has a great 

record on protecting taxpayers’ information. You may have heard 

some of that testimony. 

Commissioner Shulman, what steps has the agency taken to ensure the security of taxpayer information going forward, and do you 

think that steps that you have taken will be sufficient? And what 

additional steps do you see being necessary? 

95 

Mr. SHULMAN. Let me say a couple things. First of all, this agency takes data security very, very seriously. And we have an excellent track record of protecting the American taxpayers’ basic income data. 

Second, I would just say there has been a lot of, both in the previous panel and also, you know, out there in the general dialogue, 

I think way overstatements of the risk of data security. I mean, 

this is not something wildly new to us. Right now we share data 

with States for child support information, with States for Medicaid, 

with States for tax information, and we have very strict safeguards 

around that data. 

In this case, any data we exchange with States they have to have 

written procedures in place that we will look at. They have to agree 

to separate the data. They have to agree to have limited use of the 

data just for the purposes of the law. They need to train their people. 

We have an Office of Data Privacy and Security that will go out 

and do audits to make sure it is right, and the Federal law takes 

tax data very seriously, and individual employees can be prosecuted for breaching tax data. That individual liability extends out 

to anyone we send data to. 

And so this is nothing new for us. Obviously, it is an effort and 

we are going to have to do it, but I think the concerns about data 

security around this are overstated. 

Mr. CUMMINGS. You sound like you take a lot of pride in IRS’s 

efforts to keep the privacy of Americans’ tax information private. 

You seem very proud of that. Are you? 

Mr. SHULMAN. Well, A, I am very proud of it; B, it is a cornerstone of the tax system; C, we have done it a lot exchanging with 

States, and we haven’t had major issues. 

I will tell you a little story. My first day I showed up at the job 

I went to the Treasury Department and was sworn in by the Treasury Secretary. I came back, and the person waiting for me was the 

lawyer to explain the data privacy rules and the people who did the 

training for me. That is how seriously the agency takes this. They 

didn’t brief me on our technology or our filing season, et cetera. 

The first thing I was briefed on was data security. 

Mr. CUMMINGS. My last question, Ms. Olson spent a lot of time 

talking about the challenge for IRS with regard to communication, 

or communication strategy, taxpayer education about these new 

rules. Do you agree that taxpayer education is essential to the success of the implementation? And can you please explain how the 

IRS plans to educate the public about these new rules? 

Mr. SHULMAN. Well, there are a few things. One is any time a 

tax law is passed we do a variety of things. We use social media 

to get information out. Sometimes we do direct communication, and 

80 percent of taxpayers, and it is growing. Last tax season it was 

up actually over 85 percent, use either a paid professional preparer 

or tax software. And so a lot of the details of these rules, just like 

the details of the rest of people’s tax forms, gets sorted out either 

when they are figuring out how to file or get sorted out, you know, 

with their preparer. So we do a lot of work with them, and we expect to expand our outreach. 

96 

I will also note that, because this issue has gotten, the Affordable 

Care Act has gotten so much attention by the media, you know, 

this is not something people are unaware of, and we are trying 

hard just to get the actual facts out, and we will keep that campaign up. 

Dr. DESJARLAIS. [Presiding]. I thank the Ranking Member. 

The Chair will now recognize himself for five minutes. 

Mr. Shulman, thank you so much for being here today, because 

certainly we have several things we would like to clear up in regards to the initial drafting of the Affordable Care Act and the subsequent ruling by the IRS. I think you were listening to the first 

panel, and clearly there are some disagreements between Professor 

Jost and Mr. Cannon on whether or not the IRS ruling was illegal. 

Why do you think, first of all, I think that the intent when the 

law was written it was clear that the Administration and the authors of the bill assumed that the States would set up exchanges. 

Certainly it was clearly mentioned numerous times throughout the 

language of the bill and there was not mention of the Federal exchanges. I think, one, that the health care law people were very 

leery of. I think 63 percent opposed this law when it was first presented or even passed. And I think Senator Baucus from Montana 

clearly wanted a national exchange, but I think the American people resoundingly rejected the thought of a national takeover of 

health care. 

So the language was carefully crafted in the bill to mention State 

exchanges because State exchanges sounded much more palatable 

to people than a Federal takeover of health care. 

So were you a little shocked, I guess, when I think there’s only 

14 States now that have decided to set up State exchanges? Was 

that kind of a surprise to you and something you hadn’t anticipated? 

Mr. SHULMAN. I guess I didn’t follow, you know, the before and 

after as closely as that, so I had no reaction. I am watching how 

this goes. I mean, our main job is to try to implement the law that 

was written. 

Dr. DESJARLAIS. Sure. Fair enough. Do you agree that when authorizing these premium assistance tax credits the Internal Revenue Code, Section 36(b), explicitly refers to health insurance exchanges established by the States under Section 1311? 

Mr. SHULMAN. I think 36(b) has some contradictory language in 

it. 

Dr. DESJARLAIS. Well, we can put up a slide. Is there anything 

unclear about that? Is there anything unclear? Does it mention 

Federal exchanges anywhere in that section? 

Mr. SHULMAN. I am looking at the slide, but I am also aware of 

the whole statute, so I guess I—— 

Dr. DESJARLAIS. Okay. Do you recall it mentioning Federal exchanges? 

Mr. SHULMAN. Excuse me? 

Dr. DESJARLAIS. Are you aware, does it mention Federal exchanges or just State exchanges? 

Mr. SHULMAN. Anywhere in 36(b), yes. 

Dr. DESJARLAIS. In 1311. That is the slide. That is not the slide. 

We have another slide. 

97 

Mr. SHULMAN. I guess I watched the first panel and would agree 

that there is a lot of disagreement, and we obviously looked at the 

total statute and think we came to the correct legal reading. 

Dr. DESJARLAIS. Okay. The plain meaning of the Rule 36(b), it 

is possible that the court could read the phrase an exchange established by the State under 1311 of ACA, this was the CRS ruling 

that the gentlelady from New York referred to in the first panel. 

It said that the exchange could be clear to not include an exchange 

establishment by the Federal Government. Indeed, the language 

seems to be straightforward on its face. 

Are you aware of that CRS ruling? 

Mr. SHULMAN. I am not aware of that. 

Dr. DESJARLAIS. Okay. Well, do you agree that when authorizing 

those tax credits the IRC repeatedly refers to exchanges established by the State under Section 1311? 

Mr. SHULMAN. I guess I am not aware of the—— 

Dr. DESJARLAIS. Okay. Well, it does repeatedly. Why did the IRS 

add the phrase, or in 1321 in the rule, do you believe this is a dramatic interpretation that in essence rewrites the law? 

Mr. SHULMAN. No. 

Dr. DESJARLAIS. Why do you say that? 

Mr. SHULMAN. Maybe it would be helpful for you to hear how our 

rule-writing process works. I mean, our legal experts, career civil 

servants who are some of the best tax lawyers in the world, if not 

the best, take a look at statutes, look at the entirety of the statute, 

and try to come up with their best legal analysis. 

Dr. DESJARLAIS. Okay. Well, basically we are set to scramble because this bill was set to be passed and go to conference, and it did 

not go to conference but rather reconciliation because the votes 

simply weren’t there to pass the law. Scott Brown was elected and 

he was on his way in, so they had to rush this law. They knew it 

was imperfect. They knew that they couldn’t force the States to set 

up exchanges. 

The Federal Government doesn’t have the power to force the 

States to do it, so they had to try, in essence, to coerce the States 

in a sense to set up these exchanges, and they didn’t mention Federal exchanges on purpose because they wanted the States to do 

this. They wanted to kind of strong-arm the States to set up these 

exchanges, and they knew that they had to put out a bill with this 

language that was imperfect because if they didn’t do it before the 

end of the year, and they did it on Christmas Eve, then they were 

going to have to deal with probably not passing the law at all. 

So now you are tasked with basically cleaning up their mess, 

cleaning up their language, because it clearly wasn’t in the bill. 

They referred to State-run exchanges repeatedly and left out the 

Federal exchanges, even in the reconciliation process. It simply 

wasn’t in there. 

So I think Mr. Cannon, his point is that the IRS way overstepped 

its bounds of separation of power, in essence wrote a huge tax increase, trillion dollar tax increase, that Congress did not intend, 

but this mess was created when the States didn’t fall in line and 

set up the exchanges; isn’t that true? 

Mr. SHULMAN. No. 

Dr. DESJARLAIS. Why do you say it is not true? It clearly is. 

98 

Mr. SHULMAN. I just disagree with Mr. Cannon. I think that this 

was the correct reading of the law. I have no idea what the reference is to a tax increase, but we are not concerned with that. 

Dr. DESJARLAIS. You understand the statute. Does the statute 

ever say that the credits are available in Federal exchanges? Does 

it ever say that? 

Mr. SHULMAN. There are sections of the statute that directly talk 

about a Federally-run exchange—— 

Dr. DESJARLAIS. Can you tell me where? 

Mr. SHULMAN.—and the information to the IRS. In Section 1401, 

which is the same as 36(b), there’s reference about information reporting of premium tax credits to the IRS from the Federal exchange. Look, I fully understand that you have a view on this and 

that we disagree. I think the law professors before on the panel before fleshed out the arguments on both sides. Our legal experts 

came down on the side that we came out with. 

Dr. DESJARLAIS. I clearly disagree with you, because we know 

what the intent was. We know why this all came about, and I don’t 

think the argument was clearly refuted. In fact, Professor Jost in 

several cases rescinded. First, he wanted to call it a drafting error, 

a scrivener’s error. He retracted all those statements because they 

are scrambling to find a reason to justify what the IRS did. 

Clearly, this issue is far from over. The companies in the States 

without State-run exchanges are going to challenge the IRS rule 

and this will probably end up in Federal court. I don’t think there 

is any question about if; it is just a matter of when. 

I see my time has expired. I will yield to the gentleman from Illinois, Mr. Davis. 

Mr. DAVIS. Thank you very much, Mr. Chairman. And thank you, 

Commissioner. 

There are a lot of assertions that people make and have made, 

and they have said that this is in the legislation, this is in the bill, 

it is going to cause people to do this and cause people to do that. 

And then when you look you can’t find what they are basing their 

assumptions on. 

I know that some opponents of the legislation have claimed that 

to implement this that the Internal Revenue Service has got to hire 

16,000 new agents, enforcement agents. And you have said on numerous occasions that this is a made-up number with no basis in 

fact. As a matter of fact, some people have even compared the Internal Revenue Service to the Gestapo, as Mr. Everson pointed out 

in his testimony on the first panel, which is not only inaccurate 

but, quite frankly, unconscionable way beyond the pale, I think. 

Do you agree that this type of non-information, of mis-information is damaging to the image of the agency? And is it true that 

you are going to have to hire all of these people to enforce provisions of the act? 

Mr. SHULMAN. Sir, we have been incredibly transparent in what 

we need to implement this law. We put forward budgets and then 

sent to Congress the last three years of information, and then we 

put forward a budget this year. The budget we put forward this 

year, 92 percent of it is for infrastructure and technology to make 

sure that the act is executed. And so referring to this number 

16,000 agents, I have no idea where anyone got that. That is not 

99 

going to happen. And, as I said, the major parts of this law are 

going to be handled, the compliance aspects, through correspondence. 

You know, regarding unfortunate remarks about the IRS, all I 

would say is we have a very good track record of interacting with 

the American people in incredibly respectful ways. Right now the 

American customer satisfaction index, which is run by the University of Michigan, which looks at major companies across the globe 

as well as Government agencies, we have our highest rating ever 

at 73. Most people who interact with us send in a refund return, 

and within five to ten days get $3,000 back from us, so I know that 

the words IRS sometimes conjure up things that people can make 

scary. The reality is, for most people we are a great service organization. So yes, it is unhelpful for people to use rhetoric, but I think 

our record stands for itself. 

When you ask American citizens one by one in things like the 

American Customer Satisfaction Index, we get very high ratings. 

Mr. DAVIS. There are also individuals who use this invasion of 

privacy. It is very interesting who some of them are. They are not 

people that I have known to be protecting the privacy of individual 

citizens in a lot of other instances and a lot of other ways, but they 

claim that the Internal Revenue Service is going to have access to 

individuals’ private health information. Is that a need in order to 

enforce the provisions of the act? 

Mr. SHULMAN. No. Absolutely not. What we will know and asked 

for, based on the law, is: do you have health insurance coverage? 

If so, for how many months? And what was the name of the insurance company? 

Right now we get information about what’s your income, who is 

your employer, how long were you employed? Do you own a house? 

Did you sell a house? Was there interest on this house? Do you 

have stocks or bonds? Did you buy them or sell them? And so we 

get lots of information, but we get the bare bones that we need to 

file a tax return. 

I think it has been way over-stated our role in health care. I 

mean, we are basically going to facilitate the financial transactions 

that make this whole law work, but we are not going to have access 

to private individual health care information except for the fact of 

coverage. 

Mr. DAVIS. Do you see individuals being locked up, incarcerated, 

liens placed on their homes or their properties or whatever it is 

that they might own in order to make sure that there is compliance? 

Mr. SHULMAN. I mean, the minimum coverage provisions which 

say that you either need to have insurance or you pay a penalty, 

those specifically prohibit liens, levies, criminal prosecution, and so 

they are treated very different from other liabilities owed to the 

Federal Government. 

Mr. DAVIS. So then many of these assertions are quite honestly 

inaccurate? 

Mr. SHULMAN. Well, some of the ones you brought up, yes. 

Mr. DAVIS. Well, thank you very much. My time is expired. 

Mr. Chairman, I yield back. 

Dr. DESJARLAIS. I thank the gentleman. 

100 

I think, being as we have a small dias today, I think we can go 

through a second round of questioning if you will indulge us. 

Can you describe the universe of people who will be subject to 

the new HHS reporting requirements? We understand that it is expected that 20 million people will fall under these requirements; is 

that correct? 

Mr. SHULMAN. I’m sorry? Which requirements? 

Dr. DESJARLAIS. The HHS reporting requirements. 

Mr. SHULMAN. I am not sure what the HHS reporting requirements are or what you are referring to. 

Dr. DESJARLAIS. Okay. Well, under the HHS rules, isn’t it true 

that for these Americans they will now be required to tell the State 

and the IRS when they change jobs within 30 days of the change? 

Mr. SHULMAN. I think you are referring to the people who receive 

a premium tax credit? 

Dr. DESJARLAIS. Okay. Isn’t it true? Yes, you are referring to 

that. 

Mr. SHULMAN. So the way the premium tax credit works is people go to an exchange. If they have not been offered affordable 

health care coverage by their employer, they may be eligible for a 

tax credit to help subsidize the purchase of insurance. And that is 

based on a number of factors, including their income. 

If their income changes, they have an obligation to come back 

and say that the income changes so that the amount of the credit 

can be adjusted. 

Dr. DESJARLAIS. Okay. And that is within 30 days? 

Mr. SHULMAN. I am really not aware of the details of when that 

reporting back to the exchanges are, because that is not a piece of 

the act that we will be administering. That falls with, as you said, 

HHS and the exchanges. 

Dr. DESJARLAIS. Okay. If they don’t report the changes, assuming it is 30 days in the window, what are the consequences and 

how do you plan to enforce the rule? 

Mr. SHULMAN. So the way the premium tax credit works, which 

I referred to in my opening comments, is people go to the exchange, 

they determine the eligibility for a credit and the amount of the 

credit. They receive the credit, an advance payment, and that payment is made directly to the insurance company, and then there is 

a true-up procedure when they file a tax return, much like a trueup of estimated taxes or a true-up of your withholding, and the 

way that it works is if they got too much of a credit up front they 

will owe some money back; if they got not enough, the Federal Government will owe them the true-up, so there is a true-up procedure 

that will be administered on the back end. 

Dr. DESJARLAIS. According to your July 2010 report, IRS has fallen short of providing adequate taxpayer service in important areas. 

Given the massive scope of ObamaCare, is it likely the IRS customer service is going to get worse rather than better? 

Mr. SHULMAN. I am not sure what the July 10 report is. 

Dr. DESJARLAIS. The Taxpayer Advocate report. 

Mr. SHULMAN. That is from the Taxpayer Advocate, who independently reports to Congress. 

Dr. DESJARLAIS. Okay. Well, the question still stands about customer service. How do you anticipate that is going to be handled? 

101 

Mr. SHULMAN. We have had what I think is a very good track 

record of customer service with the resources we have been given, 

and I expect us to continue to deliver good customer service. 

Dr. DESJARLAIS. So an hour-plus wait in your opinion is good 

customer service when people actually need to talk to somebody 

who knows something about an issue? 

Mr. SHULMAN. We don’t have an hour-plus wait on average. 

Dr. DESJARLAIS. What would you say the wait is? 

Mr. SHULMAN. It depends when you call. The wait can be as 

short as someone picks up the phone immediately and there is no 

wait, and it can be a lot longer. If people call at peak times, we 

tell them how long their wait is and they call back. 

Dr. DESJARLAIS. Okay. From the National Taxpayer Association, 

for calls that require issues of expertise, the IRS track record is 

even worse. In March 2012 taxpayers calling IRS tax protection 

unit only reached IRS 11 percent of the time after an average wait 

time of an hour and six minutes. 

Mr. SHULMAN. This was a very specialized line that had just 

been set up. It was under-staffed at the very beginning. Once we 

became aware of the problems we put new people on, and the year 

we have averaged 90 percent, and so that is a very short point in 

time, and when we see issues we correct them. 

Dr. DESJARLAIS. I mean, I understand having pride in the agency 

that you oversee, but you can look in the camera and tell all the 

Americans watching that you feel the customer service within the 

IRS agency is good? 

Mr. SHULMAN. I can do it the other way around, which is, as I 

mentioned, the American Customer Satisfaction Index, which goes 

out and asks Americans how are their interactions with the IRS, 

is at its highest level ever at 73 percent. 

Dr. DESJARLAIS. That is not what the data says, and I think for 

the people watching they can probably make up their own minds. 

They don’t have to take my opinion or yours. 

My time has expired and I would be happy to yield or recognize 

now the Ranking Member for five minutes. 

Mr. CUMMINGS. Thank you very much. 

During one of our Subcommittee’s hearings some business entities told us, Commissioner, that they were not sure which rules 

will apply to them and how they will comply with new requirements. I understand that some of these rules are still in progress, 

such as the rule on how to calculate full-time equivalent employees. 

Has the IRS engaged with businesses to ensure that programs and 

regulations are responsive to their concerns? And, number two, are 

there still misperceptions about IRS’s role in implementing the 

health care reform bill? 

Mr. SHULMAN. To the second one, any time there is, you know, 

a major tax bill we need to educate people. Frankly, until you start 

actually implementing, that is when people really focus their mind 

and understand. 

With that said, we have been having extensive dialogue with the 

business community about the employer responsibility provisions of 

the law that we need to administer. As you mentioned, there’s a 

couple things. One is there is a misperception that every business 

is subject to this. Ninety-six percent Of Americans’ businesses have 

102 

less than 50 employees, and those people are totally exempt from 

the coverage requirements under the Affordable Care Act. 

Second is we have really focused our time trying to put guidance 

out to the business community, so there is this notion of you need 

to have 50 full-time equivalent employees in order for the provisions to kick in, and so there’s obvious questions about, okay, what 

is a full-time equivalent? What if I have 49 and then it goes to 50? 

What if somebody went from full time to part time? We have tried 

just to be very responsive, and so we have a look-back that says 

you can look back a year and say what did it look like the last 

year, and then you get a safe harbor for the next year so that people aren’t going to continually be having to wrestle with this. 

And so in the Affordable Care Act, but also really any time there 

is a major tax provision that is going to affect businesses, we have 

extensive dialogue with the business community, and what we try 

to do is make sure we put clear rules in place that will allow us 

to implement the law in the least burdensome manner possible to 

the business community. 

Mr. CUMMINGS. Commissioner, as you mentioned earlier, the IRS 

will be involved in distributing billions of dollars in premium tax 

credits for people buying insurance in the exchange and administering the minimum essential coverage provisions of the Affordable Care Act. Therefore, the IRS will be in the position of 

verifying information provided by third parties such as insurers. 

Can you tell us a little bit about your real time tax initiative and 

what is it and when does it begin? 

Mr. SHULMAN. So I guess two separate things. Yes, we are going 

to get information from insurance companies, information reporting 

very similar to what we get from brokerage companies today, 

banks, about interest information and home ownership and interest 

information from there. 

The real time initiative is really something apart and separate 

from this. That is basically a concept that I have laid out that says 

a lot of the tax system runs after the fact, meaning people file, we 

then later match returns and we send them letters; that we actually think we could have a much less burdensome system for the 

American people and one that actually led to better compliance, as 

well, if we could get information returns at the same time as the 

tax returns and any time there was any confusion clear it up. 

But the real time initiative that we have is something that is on 

a very different track. It is something that is just in the discussion 

phases, and we are getting lots of input, and it is really very separate from Affordable Care Act implementation. 

Mr. CUMMINGS. Well, I am going to, just as my last question, the 

Chairman just asked you to look into the camera and talk about 

something. I am going to ask you to look into the camera, too, and 

that is: can you tell the American people why you feel comfortable 

that you are going to be able to do what is required of you, your 

agency, that is, under the Affordable Care Act? Do you feel comfortable, assuming that you get the resources, I’m sure. 

Mr. SHULMAN. Yes. No, we feel very comfortable that the part of 

the Affordable Care Act which is in the Internal Revenue Code 

which we are responsible for, that it will be implemented well, it 

will be implemented on time, and people have my personal commitVerDate Aug 31 2005 12:02 Nov 02, 2012 Jkt 000000 PO 00000 Frm 00106 Fmt 6633 Sfmt 6633 C:\DOCS\76370.TXT APRIL
103 

ment and the agency’s broad commitment that we will do it in a 

way that minimizes burden on business and individuals and respects taxpayer rights and tries to facilitate, you know, a very good 

flow of information. 

Mr. CUMMINGS. Thank you very much. 

Dr. DESJARLAIS. [Presiding]. Thank you. 

For the third round, we would like to go back to the exchange 

rule a little bit. I can understand your confidence when essentially 

the IRS was given unprecedented power in this case to basically rewrite a rule and bypass Congress as it has in this case, so I guess 

maybe it would be easier to be confident if I knew that I didn’t 

have to go through Congress any more, I can just kind of make it 

up as I go. 

But can you specify the exact language that says the subsidies 

go to exchanges created by the Federal Government? 

Mr. SHULMAN. So a couple things. First, on your comment, we exercised the rule-writing authority that is delegated to the Secretary 

of the Treasury in every tax bill, and that is what we did. And 

there is actually a process in this Country that allows Congress to 

write the laws, we interpret them through rule, and implement 

them, and if there is a disagreement there is always the courts. So 

I don’t think we have any special power under the Affordable Care 

Act that we don’t have any time that we do rule-writing. 

Section 1321 talks about the Federal Government will stand in 

for the State at times. Section 1401 talks about—— 

Dr. DESJARLAIS. Okay. Stop there. It says it may stand in, but 

it doesn’t say it can issue tax credit, premium tax credits and it 

can’t imply the tax against the employers. It doesn’t say that, does 

it? 

Mr. SHULMAN. Section 1401, the second cite you are asking for, 

is saying that each exchange, and explicitly references the Federal 

exchange, shall report information to the IRS regarding the premium credits that it pays. And so I very much agree with you that 

there is some contradictory language. Our lawyers’ job is to say, 

taken in totality—— 

Dr. DESJARLAIS. You are not agreeing with me. I don’t think it 

is ambiguous, sir. I don’t think it is ambiguous. I think it is very 

clear. I think you are trying to twist it because you have to cover 

a gross misinterpretation that the States would set up exchanges, 

so that right now, to save this law, they couldn’t save it the proper 

way by going to conference. They couldn’t do that because Scott 

Brown was coming in and it was all going to fall apart, so they had 

to pass an imperfect bill, as Nancy Pelosi shared with all of us 

those famous words, we have to pass the bill to see what is in it. 

They had to pass an imperfect bill, so now when the States didn’t 

set up the exchanges we are having to go back around and try to 

find reasons for you to make this rule to include the Federal exchanges, which they did not intend to include. They wanted to force 

the States to do this. When the States didn’t do it, now we have 

this problem that we are here talking about today. 

Who initiated the rule for the exchange rule? Did the rule initiate at IRS or at the Treasury? 

Mr. SHULMAN. The way our rule-writing works is that lawyers at 

the IRS look at statutes, come up with their best interpretation. I 

104 

have to sign off on rules, as does the Assistant Secretary of Tax 

Policy. 

Dr. DESJARLAIS. How many times did you meet with the Treasury to discuss this rule? 

Mr. SHULMAN. Excuse me? 

Dr. DESJARLAIS. How many times did you meet with the Treasury to discuss this rule? 

Mr. SHULMAN. I meet with the Treasury Department of Tax Policy and their leadership on a regular basis. I have no idea how 

many times we actually talked about this rule. We talk about a lot 

of things. The tax code is very big and very complex. 

Dr. DESJARLAIS. It is, and it needs to be reformed. 

Was there any pressure from the Treasury Department to issue 

a rule that went beyond the statutory authorization? 

Mr. SHULMAN. I never felt any pressure on this rule. You know, 

my judgment on the rule was based on speaking with our lawyers 

and coming up with what we thought was the correct legal reading. 

Dr. DESJARLAIS. Have you ever done anything like this before? 

Mr. SHULMAN. Excuse me? 

Dr. DESJARLAIS. Have you ever done something like this before? 

Mr. SHULMAN. The Commissioner of Internal Revenue Service is 

continually consulting with the lawyers of the Internal Revenue 

Service and putting out regulations to interpret statutes. It is a 

major part of the job. 

Dr. DESJARLAIS. Okay, Mr. Shulman, and I know you are just 

trying to do your job. I will just close with one last question. The 

IRS will be responsible for collecting thousands of dollars from employers under the employer mandate. If the IRS makes mistakes, 

how can employers protect themselves from having to pay hundreds of thousands of dollars in error? 

Mr. SHULMAN. We have very laid-out, traditional administrative 

processes, and so, if we think somebody owes more taxes the first 

thing we do is try to work with them. If they disagree, they have, 

you know, very established appeals rights to supervisors. Then 

there is actually an administrative appeals process, our Office of 

Appeals, and then there is always the courts. And so there is a lot 

of avenues for people to disagree with us, and that is, you know, 

part of this Country. 

Dr. DESJARLAIS. Okay. So you are saying that your plans for an 

appeal process for employers is already in place? 

Mr. SHULMAN. It will be, you know, plans that we have, you 

know. It is not plans; it is procedures that we have in place, longestablished procedures to make sure the tax code is administered 

in a fair and even-handed manner. 

Dr. DESJARLAIS. So we don’t really know how employers will be 

able to appeal their penalties at this point? 

Mr. SHULMAN. If a penalty is assessed, most people voluntarily 

pay. If they disagree, whoever made the determination for the assessment they can always talk with their supervisor, and those 

processes are well enunciated in the Internal Revenue Manual. 

They can then go to our appeals function, which is an independent 

function much like an administrative court inside the IRS. And if 

they still disagree after those two steps, they can go to the courts. 

105 

Dr. DESJARLAIS. Okay. Identity theft is a big problem, and information sharing in ObamaCare makes it worse. That is a report 

that just came out from the IRS today. 

Mr. SHULMAN. That is incorrect. Identity theft is a problem in 

this Country, but there has never been an allegation that there is 

a problem with information for identity theft coming from the IRS. 

Dr. DESJARLAIS. This is the text from the ruling issued today. In 

a new report to be issued Thursday, the Inspector General for the 

IRS says the tax thieves are stealing the identity of taxpayers and 

filing bogus returns on their behalf and collecting fraudulent refunds as a result. That is about $21 billion in fraudulent tax refunds over the next five years. Are you not aware of that? 

Mr. SHULMAN. I am aware of that report, but I want to be very 

clear: people get their purse stolen in a mall, someone has personal 

information, and then they file a return with us. Or someone has 

access to an employer database and they steal information and file 

a return with us. There are no allegations in that report or other 

places that information is being taken out of the IRS for identity 

theft purposes. 

Further, I have read that report. That report is very clear that 

the problems with identity theft mostly are systemic, and there is 

a variety of things that we have asked Congress to do to give us 

powers that haven’t passed. 

Dr. DESJARLAIS. So you don’t think it is possible that with all the 

new information you have got to collect regarding ObamaCare, that 

this problem could get worse? 

Mr. SHULMAN. I think connecting identity theft as a problem in 

this Country and the Affordable Care Act would be totally irresponsible to connect those two. 

Dr. DESJARLAIS. Interesting. All right. Well, I tell you what, I 

thank you very much for your testimony and your patience in going 

through three rounds of questioning. 

I would like to thank all of our witnesses today for taking time 

from their busy schedules to appear before us today. 

The Committee stands adjourned. 

[Whereupon, at 12:43 p.m., the committee was adjourned.] 

106 


Insert offset folio 43 here 76370.043
107 


Insert offset folio 44 here 76370.044
108 


Insert offset folio 45 here 76370.045
109 


Insert offset folio 46 here 76370.046
110 


Insert offset folio 47 here 76370.047
111 


Insert offset folio 48 here 76370.048
112 


Insert offset folio 49 here 76370.049
113 


Insert offset folio 50 here 76370.050
114 


Insert offset folio 51 here 76370.051
115 


Insert offset folio 52 here 76370.052
116 


Insert offset folio 53 here 76370.053
117 


Insert offset folio 54 here 76370.054
118 


Insert offset folio 55 here 76370.055
119 


Insert offset folio 56 here 76370.056
120 


Insert offset folio 57 here 76370.057
121 


Insert offset folio 58 here 76370.058
122 


Insert offset folio 59 here 76370.059
123 


Insert offset folio 60 here 76370.060
124 


Insert offset folio 61 here 76370.061
125 


Insert offset folio 62 here 76370.062
126 


Insert offset folio 63 here 76370.063
127 


Insert offset folio 64 here 76370.064
128 


Insert offset folio 65 here 76370.065
129 


Insert offset folio 66 here 76370.066
130 


Insert offset folio 67 here 76370.067
131 


Insert offset folio 68 here 76370.068
132 


Insert offset folio 69 here 76370.069
133 


Insert offset folio 70 here 76370.070
134 


Insert offset folio 71 here 76370.071
135 


Insert offset folio 72 here 76370.072
136 

Æ 


Insert offset folio 73 here 76370.073