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[Senate Hearing 114-67]
[From the U.S. Government Publishing Office]

                                                      S. Hrg. 114-67
 
                  INTERNAL REVENUE SERVICE OPERATIONS
                       AND THE PRESIDENT'S BUDGET
                          FOR FISCAL YEAR 2016

=======================================================================

                                HEARING

                               BEFORE THE

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 3, 2015

                               __________

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            Printed for the use of the Committee on Finance
            
                                ___________
                                
                                
                       U.S. GOVERNMENT PUBLISHING OFFICE
96-252 PDF                       WASHINGTON : 2015
                     
________________________________________________________________________________________ 
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                          COMMITTEE ON FINANCE

                     ORRIN G. HATCH, Utah, Chairman

CHUCK GRASSLEY, Iowa                 RON WYDEN, Oregon
MIKE CRAPO, Idaho                    CHARLES E. SCHUMER, New York
PAT ROBERTS, Kansas                  DEBBIE STABENOW, Michigan
MICHAEL B. ENZI, Wyoming             MARIA CANTWELL, Washington
JOHN CORNYN, Texas                   BILL NELSON, Florida
JOHN THUNE, South Dakota             ROBERT MENENDEZ, New Jersey
RICHARD BURR, North Carolina         THOMAS R. CARPER, Delaware
JOHNNY ISAKSON, Georgia              BENJAMIN L. CARDIN, Maryland
ROB PORTMAN, Ohio                    SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania      MICHAEL F. BENNET, Colorado
DANIEL COATS, Indiana                ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina

                     Chris Campbell, Staff Director

              Joshua Sheinkman, Democratic Staff Director

                                  (ii)

                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman, 
  Committee on Finance...........................................     1
Wyden, Hon. Ron, a U.S. Senator from Oregon......................     3

                         ADMINISTRATION WITNESS

Koskinen, Hon. John A., Commissioner, U.S. Internal Revenue 
  Service, Washington, DC........................................     5

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Hatch, Hon. Orrin G.:
    Opening statement............................................     1
    Prepared statement...........................................    43
Koskinen, Hon. John A.:
    Testimony....................................................     5
    Prepared statement...........................................    44
    Responses to questions from committee members, with 
      attachments................................................    48
Wyden, Hon. Ron:
    Opening statement............................................     3
    Prepared statement...........................................    80

                             Communication

National Association of College and University Business Officers 
  (NACUBO).......................................................    83

                                 (iii)

                  INTERNAL REVENUE SERVICE OPERATIONS
                       AND THE PRESIDENT'S BUDGET.
                          FOR FISCAL YEAR 2016

                              ----------                              

                       TUESDAY, FEBRUARY 3, 2015

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:33 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. 
Orrin G. Hatch (chairman of the committee) presiding.
    Present: Senators Grassley, Crapo, Roberts, Cornyn, Thune, 
Burr, Portman, Coats, Heller, Scott, Wyden, Stabenow, Nelson, 
Menendez, Carper, Cardin, Brown, Bennet, and Casey.
    Also present: Republican Staff: Chris Armstrong, Deputy 
Chief Oversight Counsel; Kimberly Brandt, Chief Healthcare 
Investigative Counsel; Chris Campbell, Staff Director; Jim 
Lyons, Tax Counsel; and Harrison Moore, Professional Staff 
Member. Democratic Staff: David Berick, Chief Investigator; 
Adam Carasso, Senior Tax and Economic Advisor; Michael Evans, 
General Counsel; Christopher Law, Investigator; Todd Metcalf, 
Chief Tax Counsel; Joshua Sheinkman, Staff Director; and 
Tiffany Smith, Senior Tax Counsel.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
              UTAH, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will come to order.
    The committee welcomes Internal Revenue Service 
Commissioner John Koskinen, who comes before us today to 
discuss his agency's budget and operations. We also will be 
discussing President Obama's fiscal year 2016 budget proposal.
    Commissioner Koskinen, this morning's hearing continues a 
long tradition of the close relationship between the Senate 
Finance Committee and your agency. More than 152 years ago, the 
Finance Committee received a letter from George Boutwell, whom 
President Lincoln had appointed as the first Commissioner of 
Internal Revenue. The letter came in response to an inquiry 
from the committee seeking information about the Commissioner's 
organization, his budget, and the activities of his office.
    Does that sound familiar?
    In his letter dated January 21, 1863, Commissioner Boutwell 
tried to answer the committee's questions, but started by first 
asking Congress for more money. Specifically, he wrote, 
``Before proceeding to estimate the expenses of assessing and 
collecting the revenue, I desire to express the opinion that an 
increase in the pay of assessors is very important, if not 
absolutely necessary.''
    Now, that part does sound familiar to me. As you and I 
continue this historic and important relationship, I hope we 
can begin the 114th Congress on a new footing.
    The issues before us are too great for that relationship to 
be anything but open, honest, and productive. We will certainly 
disagree a lot on your agency's implementation of Obamacare, on 
the application of premium tax credits to Federal exchanges, 
and on IRS spending, just to name a few issues.
    Sometimes a relationship will be contentious. Sometimes it 
will be congenial. Hopefully, more the latter than the former, 
but that will depend a lot on you and maybe a little bit on us 
too.
    When we look at the IRS's operations, there are a handful 
of basic principles the agency must follow in order to maintain 
its good working relationship with this committee. Today I am 
going to talk about three of those principles.
    First, the IRS must spend taxpayer dollars wisely. As the 
agency that collects taxes from American workers and 
businesses, your agency will continue to be under especially 
tough scrutiny when it comes to how it spends the money 
Congress appropriates, and, unfortunately, the IRS's operations 
do not appear to be able to withstand such scrutiny at this 
time.
    When you reverse the positions of your predecessors and 
award bonuses to employees who have not paid their taxes, when 
your agency throws lavish conferences, and when you spend tens 
of millions of dollars on public sector union activity, the 
public loses faith in your ability to spend more money wisely. 
Now, some of that was not your fault.
    When your agency pays tens of billions of dollars in 
improper payments every year, when the IRS mails thousands of 
fraudulent refund checks to a single home address, and when a 
quarter of all Earned Income Tax Credit payments are improper, 
the public loses faith in the IRS's ability to protect tax 
dollars carefully.
    Secondly, the IRS must treat taxpayers fairly and respect 
their rights. Recent scandals have given Americans reason to 
doubt that the IRS will treat them fairly. While the targeting 
of applicants for tax-exempt status may have happened before 
your tenure, taxpayers must have confidence that those days are 
over.
    Now just before, Mr. Koskinen, you became Commissioner, the 
IRS and the Treasury Department released a proposed regulation 
that would limit the ability of social welfare organizations to 
engage in speech about matters of public importance. After an 
outcry from all sides of the political spectrum, the proposed 
regulation was withdrawn. But now I hear you have a plan to 
reissue it. I think this would be a mistake, and I hope you do 
not go down that path of trying to limit political speech. That 
would only further entangle your agency in needless political 
debate and controversy.
    Third and finally, the IRS must be open and honest with 
this committee. We must have a mutual trust between us. I 
believe you to be an honest man, and, when you tell me 
something, I take you at your word. But it is because of this 
trust that I am concerned about a recent development in the 
committee's investigation of political targeting at the IRS.
    Last July, your agency told the committee that it had 
completed its production of documents regarding Lois Lerner, 
the central figure in the investigation. Then late last month, 
as the committee worked to finalize its investigative report, 
your agency delivered 86,000 pages of new documents, including 
30,000 pages of new Lois Lerner documents, including new e-
mails--30,000 pages of new documents, e-mails that fill 8 
boxes, and I have here about a tenth of those just in this pile 
that I cannot even lift. I might be able to if I stand up. But 
I have about a tenth of those.
    These documents are central and relevant to the committee's 
investigation. They were given to us without notice or 
explanation roughly 20 months after we made our initial 
document request and really after Senator Wyden and I and other 
members of this committee thought we were going to be able to 
have a final report on this matter.
    Now, this is not the way to build trust with this 
committee. This prolongs the committee's investigation and 
raises more questions than it answers. We will be following up 
on this matter more after today's hearing.
    Now, Commissioner Koskinen, we are here today to discuss 
your agency's operations and the President's budget proposal. 
There is much to discuss on these two topics, and I look 
forward to hearing your testimony and answers.
    In your opening remarks, I would appreciate it if you took 
the time to address three specific concerns that I have. First, 
I would like to hear what the IRS plans to do to address the 
consistently high levels of fraud and overpayments for the 
Earned Income Tax Credit.
    Second, I would like to hear what specific changes you plan 
to make in the agency's spending habits to deal with the 
budgetary shortfalls you have publicly decried.
    Third, I would like to hear about any contingency plans you 
have in place in case the Supreme Court invalidates the current 
structure of the Affordable Care Act tax subsidies later this 
year.
    I hope that today can mark the beginning of a new chapter 
in the long, historic relationship between the IRS and Senate 
Finance Committee. I hope it is a good chapter, but, once 
again, that is ultimately up to you, it seems to me.
    Let me just say that this is one-tenth of what we are 
talking about. This is a huge number of documents, and you can 
see the reason why I am a little bit concerned and maybe a 
little bit upset as well.
    [The prepared statement of Chairman Hatch appears in the 
appendix.]
    The Chairman. Senator Wyden, we will turn to you for your 
opening statement.

             OPENING STATEMENT OF HON. RON WYDEN, 
                   A U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you very much.
    Mr. Koskinen, I share Chairman Hatch's concern about 
bringing our bipartisan inquiry to a halt, and to get that 
done, to complete it in a thoughtful and a bipartisan way, we 
are going to need these documents. And as the chairman noted, 
we thought we were going to get some, and we are going to need 
them and need them quickly.
    Whenever I talk with Oregonians in meetings or town halls, 
the conversation nearly always comes down to the same core 
issue: the struggling middle class. Years after economists 
first said that the recession officially ended, too many 
middle-class Americans feel like they are standing on quicksand 
because the recovery has yet to reach them. So the challenge 
facing policymakers is putting America's middle class on solid 
economic ground, growing their paychecks, and ensuring that our 
recovery reaches every one across America.
    That challenge is going to be top of mind at each of the 
three hearings, colleagues, that we hold this week. Tomorrow 
and Thursday, the committee will talk with HHS Secretary 
Burwell and Treasury Secretary Lew about the administration's 
plan to save Americans money on health care, create jobs, 
increase wages, and invest in the middle class. Today the 
committee has an opportunity to discuss the status of America's 
accounting department, the Internal Revenue Service, with the 
Commissioner, John Koskinen.
    With W-2 forms in the mail and the tax season beginning, 
our country's annual headache is now setting in. And I want to 
emphasize that, today, taxpayers reside in two separate worlds. 
In one world, a middle-class office employee pays taxes 
directly out of her wages, and she is subjected every spring to 
the painstaking process of filing returns.
    Colleagues, for that office worker, there are no 
complicated tax avoidance strategies at her disposal. She does 
not have any shelters. She does not have any vehicles for her 
to hide her income. Meanwhile, in the other tax world, teams of 
accountants go out to pry open loopholes that are hidden in the 
tax code, and the line between right and wrong is murky at 
best.
    The inherent unfairness of America's tax system is a blow 
that falls hardest on the middle class, and it takes a number 
of forms. The most obvious is that, every year, families spend 
more time and money filling out their taxes. People are worried 
about compiling all their records, completing all the forms, 
and then filing them correctly.
    Unfortunately, the tax code itself has not gotten any 
simpler, and the lack of resources at the IRS has slowed 
service in a number of instances to a crawl. Nina Olson, who is 
the independent IRS Taxpayer Advocate, says, and I quote here, 
``This is the most serious problem facing taxpayers.''
    When Americans call into IRS help lines, they often sit in 
long queues listening to hold music. Protections against 
identity theft are delayed. Taxpayers who worry they might be 
victims of scams cannot end up getting the timely assistance 
that they need. Families that depend on a refund to help cover 
the mortgage or tuition get left waiting.
    Now, there is a second issue to consider today. According 
to the Internal Revenue Service, nearly $400 billion in taxes 
go unpaid each year. That is the tax gap. One of its biggest 
causes is the dishonesty of tax cheats and scammers who avoid 
paying what they owe. And it is important to reflect on who 
gets the short shrift as a result. It is the middle-class wage 
earner once again whose taxes come straight out of their 
paycheck.
    Honest taxpayers have to make up the difference when the 
scofflaws dodge their responsibilities, and that is wrong. But 
until Congress simplifies and restores fairness to the broken 
tax code, multinationals and those with high-priced accountants 
can continue to find loopholes.
    There is no question that the IRS can make better use of 
the resources it has. That is true for every Federal agency, 
every private business, and the Congress itself, and it has 
been acknowledged by Commissioner Koskinen and his predecessor. 
Meanwhile, policymakers cannot lose sight of the biggest 
challenge today, which is putting our middle class on solid 
economic ground.
    There are going to be many more opportunities for this 
committee to work on a bipartisan basis with the Commissioner 
and the IRS to make the system work better for middle-class 
families, including through comprehensive tax reform. The 
ultimate goal ought to be fairness. And as I wrap up, I want to 
come back to the fact that taxpayers should not be divided into 
two worlds, one of which today carries a much heavier burden 
than the other.
    Commissioner, we look forward to working with you and our 
colleagues to make that a reality.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Wyden.
    [The prepared statement of Senator Wyden appears in the 
appendix.]
    The Chairman. Our witness today is IRS Commissioner John 
Koskinen. Commissioner Koskinen has been serving as the head of 
the Internal Revenue Service since December 2013.
    Mr. Koskinen has broad public-sector experience, including 
having served as Chairman of the Board of Freddie Mac, City 
Administrator for the District of Columbia, and Deputy Director 
for Management of the Office of Management and Budget, three 
really difficult and trying positions.
    Mr. Koskinen also has extensive private-sector experience, 
including working as the president of the United States Soccer 
Foundation and as the president and CEO of Palmieri Company.
    Mr. Koskinen graduated with a JD from Yale University 
School of Law and a BA in physics from Duke University.
    We want to thank you, Mr. Commissioner, for being here 
today. Please begin with your statement.

  STATEMENT OF HON. JOHN A. KOSKINEN, COMMISSIONER, INTERNAL 
                REVENUE SERVICE, WASHINGTON, DC

    Commissioner Koskinen. Chairman Hatch, Ranking Member 
Wyden, and members of the committee, thank you for the 
opportunity to discuss the IRS budget and current operations. 
As the chairman noted, we at the IRS value our working 
relationship with this committee, with the chairman and the 
ranking member, and we look forward to a productive dialogue 
and constructive working relationship over the next 2 years of 
this Congress.
    First of all, I am pleased to report that the 2015 tax 
filing season opened on schedule on January 20th and is going 
well so far. We have accepted more than 16 million tax returns, 
and we have started issuing refunds. And in fact, to show you 
how much people care about the refunds, we have accepted 16 
million returns and already had 8 million hits on our Where's 
My Refund? app on the website.
    Opening the current filing season on schedule was a major 
accomplishment given the challenges we faced. This achievement 
is a direct result of the dedication, commitment, and expertise 
of the IRS workforce.
    Along with normal filing season preparations, there were 
significant challenges and extra work to get ready for the tax 
changes related to the Affordable Care Act and the Foreign 
Account Tax Compliance Act. We also had to update our systems 
to reflect the tax extender legislation passed in December.
    Despite this success, I remain deeply concerned about the 
agency's ability to continue to deliver on its mission in light 
of significant reductions in our budget. Just a month ago, the 
agency's fiscal year 2015 budget was set at $10.9 billion, $346 
million less than 2014, and really $600 million less than last 
year when another $250 million in mandated costs and inflation 
that we must absorb are counted. Plus, that is on top of a 
$600-million cut the IRS had already taken as a result of 
government-wide sequestration in 2013. The IRS is the only 
major agency that was not subsequently restored to the pre-
sequester level.
    These funding cuts are so significant that efficiencies 
alone cannot make up the difference. We continue to find 
efficiencies wherever we can and are presently saving $200 
million a year as a result of significantly reduced office 
space, printing and mailing, and use of contractors. But we 
have reached the point of having to make very critical 
performance tradeoffs.
    In allocating our limited resources for 2015, we tried to 
keep in mind the needs of both taxpayer service and enforcement 
to avoid overly harming one part of our mission while 
attempting to do another.
    Rather than going into greater detail about this, let me 
respond quickly to the points the chairman raised. First, with 
regard to the Earned Income Tax Credit, we are concerned about 
the high level of improper payments and the volume. The agency 
has been working for over 10 years struggling with this 
challenge, and, as I have testified before this committee 
before, we are asking Congress to give us additional tools to 
deal with the problem. They would include legislation to 
provide us with W-2s earlier. We should be able to get them at 
the same time employees do so that we could match them and find 
fraud and improper payments earlier.
    If we had correctable error authority, we could correct 
errors in returns, particularly EITC returns, when we have data 
that show that the returns are erroneous; but the only way we 
can correct them now is by doing an audit.
    And finally, if we had the ability to require minimum 
standards of tax preparers--over half of the EITC returns are 
prepared by preparers, the vast majority of whom do a great 
job. A reasonable number are stymied by the complications of 
the Act, and a small number of preparers are actually crooks 
who take advantage of taxpayers and seize all or some portion 
of their refunds. This committee and Senator Wyden have a bill 
that would restore our ability to require minimum standards for 
tax preparers, just the way there are minimum standards for 
everybody from hairdressers to others who provide public 
services.
    With regard to spending, as I have noted, we have taken 
actions wherever we can. The famous convention that was held 
inadvisably 5 years ago no longer could be held. Every 
expenditure of $50,000 or more for training or conferences has 
to be signed off personally by me and reviewed and signed off 
by the Treasury Department. So I am confident that those 
situations are not going to arise again.
    With regard to the 501(c)(4) investigation, we represented 
to you last spring that we had completed the production of 
documents related to the determination process. Since then we 
have provided hundreds of thousands of pages of additional 
documents requested by any one of the six various 
investigations going on.
    The documents you have received are not more documents 
about the determination process. They are documents that have 
been requested by different committees, particularly in the 
House, or more information about other peripheral players in 
the program and other detailed documents with regard to e-mails 
from those participants.
    All of those are responsive to requests we have had. 
Virtually none of them have anything to do with the 
determination process, but we have been pleased to provide them 
in an attempt to answer any question that anybody has and 
requests for documents on any matter. Our cover letter I 
thought explained where these documents came from. They are 
not, in fact, inconsistent with the earlier representations we 
have made.
    My time is running out. I will be happy to answer questions 
about the President's budget for 2016, which would go a 
significant way toward restoring our ability--if I had a little 
additional time, that would be very helpful.
    The other point you raised was with regard to our payment 
of performance awards to those who are delinquent on their 
taxes. First of all, I would like the record to note that the 
IRS has the highest compliance rate of any agency in 
government, including the Congress. Over 99 percent of our 
employees are compliant with their taxes, and that is because 
they take it seriously. It is an important responsibility for 
anybody who works for the Internal Revenue Service to be 
current on their taxes.
    Those who are not compliant include those who are making 
installment payments, who are working toward compliance. But it 
is clear, and it is clear to our employees that if you 
willfully do not pay your taxes, not only are you not eligible 
anymore for an award, you are subject to disciplinary action, 
including, in some cases, severance from the Service, and we do 
that on a regular basis. So I am confident that performance 
awards are only going to go to those who are eligible for them.
    Let me talk just a minute about the President's fiscal year 
2016 budget. The request totals $12.9 billion and is consistent 
with recommendations the President has made over the last 
several years. The level of funding would provide substantial 
support for our mission and help the agency move ahead in a 
number of critical areas. For example, we would be able to 
raise our phone service level to nearly 80 percent and 
significantly reduce the inventory of taxpayer correspondence.
    With respect to information technology, we would be able to 
properly maintain our current IT infrastructure. The funds 
would also help us work toward our goal of providing taxpayers 
with the same experience dealing with the IRS online as they 
now have with their financial institutions.
    On the enforcement side, the President's budget proposal 
would allow us to reverse the decline in individual audit 
coverage and increase document matching programs, which are 
critical to ensuring high rates of voluntary tax compliance. We 
would also be able to expand programs to prevent refund fraud 
related to identity theft and to improve international tax 
compliance.
    Using the resources provided by the President, we estimate 
that our efforts to improve enforcement will generate $60 
billion in additional revenue over the next 10 years at a cost 
of $19 billion, thereby reducing the deficit by $41 billion.
    We would also use a portion of the funding request to 
continue implementing legislative mandates, including the 
Affordable Care Act, the Foreign Account Tax Compliance Act, 
and the newly passed ABLE Act. As I noted in my complete 
testimony, the irony did not escape me that we were assigned 
new responsibilities under the new ABLE Act, and the pay-for 
for it, which is a program for professional employer 
organizations, is the same bill that cut our budget by $350 
million.
    I want to stress, though, that we are required to implement 
these laws. So, if we do not receive necessary funding, we will 
have to continue to take funds from taxpayer service, 
enforcement, or IT. That is because we believe that we have an 
obligation to enforce and implement statutory mandates, and we 
will do that with the ABLE Act and with the Professional 
Employer Organizations provisions.
    Along with providing the IRS with adequate funding, 
Congress can also help improve tax administration by enacting 
several proposals in the administration's 2016 budget request, 
which include the proposals I mentioned earlier with regard to 
earlier provision to the IRS of third-party information 
returns, such as W-2s, which would allow us to match the 
documents, and also if we could correct errors without having 
to audit returns, we would become much more efficient in terms 
of stopping improper payments.
    That concludes my statement. I appreciate the additional 
time. I will be happy to take your questions.
    The Chairman. Thank you, Mr. Koskinen.
    [The prepared statement of Commissioner Koskinen appears in 
the appendix.]
    The Chairman. Your fiscal year 2015 budget is about 3 
percent lower than your fiscal year 2014 budget, which has been 
decreasing since the high water mark of 2010.
    Now, we may disagree about how best to spend taxpayer 
dollars, but we will stipulate the fact that your agency has 
been forced to absorb budget cuts, although, as you will see in 
the chart behind me, your budget fluctuations look a little 
less dramatic when we do not use 2010 as the baseline.
    I have another chart that I think reveals the true problem. 
It is not IRS's budget. It is an ever-growing set of tax laws 
and an ever-increasing number of Federal programs the IRS is 
charged with administering. A lot of that is our fault, as I 
view it.
    Instead of only focusing on spending more money, we should 
instead focus on what is driving that need for bigger budgets, 
and that is the growing complexity of the tax code. The length 
of the tax laws has more than tripled since 1975. American 
families and businesses spend an estimated 6.1 billion hours, 
that is with a ``b,'' and $163 billion each year simply 
complying with the tax laws.
    Now, we should not blame you for this. Congress is the one 
that keeps adding to your growing responsibilities, and 
Congress enacted the poorly designed and bureaucratically 
unmanageable behemoth known as Obamacare, or should we use the 
other term, quote, ``Affordable Care Act,'' unquote.
    Congress enacted the labyrinth of new rules known as the 
Foreign Account Tax Compliance Act. But I hope you can 
recognize that there are two sides to this coin: the amount of 
money that Congress gives you to do your work and the amount of 
work that Congress gives you to do.
    I would love to hear you talk about the latter and not just 
the former. I want to hear your thoughts about the growing 
number of programs and policies your agency is tasked with that 
you have to administer.
    Will you work with the committee on ways we can reduce the 
burdens of tax compliance and streamline the number of growing 
responsibilities placed on your agency?
    Commissioner Koskinen. Yes. I appreciate that. As I have 
told our employees as I have visited offices around the country 
(I have now talked with over 13,000 IRS employees), in many 
ways, even with the background noise and challenges the agency 
faces in some charges, it is instructive that, as you note, Mr. 
Chairman, the IRS continues to be asked to implement new 
programs.
    To some extent, that is because there is some confidence 
that if you give the program to the Internal Revenue Service, 
it will get done, and it is a can-do agency. And, as I have 
noted earlier, we are committed to implementing whatever 
statutory proposals the Congress provides.
    But you are correct that the tax code has gotten to be 
extremely unwieldy. And I always preface any remarks I make by 
saying that tax policy is the domain of the Treasury 
Department, the White House, and the Congress. We are in the 
tax administration business. You tell us what the tax laws are, 
and we will do our best to administer them.
    Having said that, as I have also, I think, made clear to 
you in our meetings and also publicly, I am a great believer in 
tax simplification for the very reasons you mentioned. If we 
could simplify the tax code, it would, on the most important 
basis, make life simpler for taxpayers. It would be easier for 
them to determine how much they owe and how to pay it.
    Our experience is, most taxpayers want to do the right 
thing, want to be compliant. They are spending those 6 billion 
hours simply trying to determine what the right amount of tax 
is to be paid. To the extent we could simplify the code, it 
would make their lives simpler, and it would clearly make our 
life much simpler.
    So the two things we look at, as you say, beyond where we 
are in terms of budget cuts are, first, if the tax code were 
simpler, it would allow us to function more efficiently with 
the resources we have without adding back.
    The other thing I would emphasize, which I mention in my 
testimony, is we feel strongly that we need to look to where we 
want to be in 3 to 5 years, what should the taxpayer experience 
be 3 to 5 years down the road. And, if we had the funding 
provided in the President's budget, we would continue to build 
our online capacity, ultimately hoping to provide taxpayers 
with the same online account with us that they have with their 
banks or their financial institutions.
    They should be able to come online, be properly 
authenticated, look at previous tax returns, and look at the 
status of their filings. We should be able to immediately 
communicate back to them when they file without having to write 
a letter or have them call us and say, ``Did you forget this? 
We have another schedule here that is not in your return.'' And 
they should simply be able to make that correction without even 
filing an amendment. It should be able to be done quickly and 
efficiently.
    If that happened, we could obviously run much more 
efficiently and effectively. The people who called us would be 
people who needed to get specific information, not people 
calling as a regular matter of course.
    So I think on both counts, if we could actually build 
toward a better taxpayer experience from our standpoint, if we 
had a simpler tax code, taxpayers would have a much easier time 
determining what they owe and filing, and we would have a much 
easier time and be more efficient running the tax 
administration.
    The Chairman. Thank you. We are going to try to do that. It 
is going to be difficult with this Congress, but we will do the 
best we can.
    Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    Commissioner, let us talk about the middle class in this 
filing season. Senator Cardin and I, we are going after these 
unscrupulous tax preparers. And the combination of that and 
Nina Olson's comment about the shrinking resources you have, 
particularly to go after tax cheats, the costs of those things 
get heaped onto the middle class.
    What should the middle-class taxpayer expect this filing 
season?
    Commissioner Koskinen. As I noted, we are delighted that 
the filing season thus far, 3 weeks into it, has gone smoothly. 
We encourage people to file electronically. Over 85 percent of 
people filed electronically last year. We have said, ``Collect 
all of your information; make sure, to the extent you can, your 
return is accurate.'' If you file an accurate return online, it 
will be processed quickly. Your refund will be processed within 
21 days. Your filing experience should be a positive one.
    The difficulties come where people often inadvertently file 
incorrect returns, which causes us to have to write them. They 
have to write us back, they have to call, and we end up with a 
significant amount of work for us and a certain amount of 
concern on the part of taxpayers.
    But I would stress, overall we expect to process 150 
million individual tax returns this year. We expect that the 
vast majority of those will go through without a problem. Over 
80 percent of people under the Affordable Care Act, for 
instance, will simply check a box and say they have coverage.
    But most importantly, the vast majority of those people, 
particularly the 85--we hope it will be higher--percent of 
people who will file electronically, will simply file and that 
will be it.
    Senator Wyden. Another concern of middle-class families is 
the growing problem of identity theft. And the Internal Revenue 
Service is supposed to issue these PINs, identity protection 
PINs, to taxpayers who have been the victims of identity theft.
    But I am hearing from taxpayers in Oregon that many of them 
have not received these PINs, and I am also hearing stories in 
my State that some victims of identity theft are already being 
re-victimized this filing season, as the fraudsters go out and 
file tax returns with their Social Security numbers while they 
wait day after day for the IRS to send them these 
identification PINs.
    I think it would be very helpful if you could tell the 
committee when Americans are going to receive these PINs and, 
particularly, what to do to help these people who otherwise 
could be victimized again.
    Commissioner Koskinen. I would say it is an important 
problem that is at the top of our list. We have been fighting 
refund fraud and identify theft for several years now.
    With regard to the identity protection PINs, we expect to 
issue about 1.5 million of those.
    Senator Wyden. And when will that happen?
    Commissioner Koskinen. The PINs will all be out at the end 
of this week in the mail. Our problem has been, we are running 
an antiquated IT system.
    Part of the question has been, why do we spend so much on 
IT? The real question is, how come we cannot spend more? We are 
running applications we were running when John F. Kennedy was 
President. That is how antiquated this system is.
    We had a problem over the last couple of weeks with the 
part of the system that issued IP PINs. Every year, if you have 
an IP PIN, you get a new one. It has to be authenticated, and 
we mail it to you. The system had difficulties. We have solved 
those difficulties. But they are difficulties that should not 
exist. It should be a straightforward issue.
    In any event, they will be in the mail before the week is 
out.
    Senator Wyden. One last question with respect to the 
Affordable Care Act. We are starting to get a lot of questions 
with respect to people filing their tax returns to comply.
    What are you all doing to inform and assist taxpayers with 
these requirements?
    Commissioner Koskinen. We have spent the last 9 months 
trying to spread the word about how the Affordable Care Act was 
going to operate. We were concerned starting in the spring that 
anyone who bought a policy through the marketplaces and was 
getting an advance payment paid to the insurance company for 
their premium, to help them with their premium, needed to make 
sure that, if there was a change in their circumstance--their 
spouse got a job, they got an increase in pay, their family 
situation changed--they went back immediately to the 
marketplace to correct that information so they would not be 
surprised during filing season.
    We have provided a special section on our website devoted 
totally to the Affordable Care Act. We have met with tax 
preparers around the country, tax attorneys. We had tax forums 
with 10,000 preparers last summer who were given--we had 40 
seminars at those gatherings about the Affordable Care Act. We 
have over 100 YouTube videos.
    We have already had about 800,000 hits on the Affordable 
Care Act part of the website. When you call us, while you are 
waiting to get through, one of the things we have put in is an 
information channel that you can dial into. It will give you 
all of the frequently asked questions and answers about the 
Affordable Care Act.
    We have been sharing information with all of your offices 
so, when your constituents call, you will be able to work 
through what are the basic questions, what are the answers.
    So we have flooded the zone with information.
    Senator Wyden. My time is up, Commissioner. I just hope 
that you all will recognize that taxpayers who received 
assistance last year, of course, are going to have some 
questions about the steps to take to comply this year, and I 
hope there will be a special effort to reach out to them. Thank 
you.
    Thank you, Mr. Chairman.
    The Chairman. Senator Cornyn?
    Senator Cornyn. Thank you. Mr. Commissioner, no doubt you 
have a daunting responsibility, but American consumers and 
middle-class families whom the ranking member alluded to 
several times have had to make do with less during the years 
following the Great Recession and when middle-class wages have 
been stagnant.
    So the question is, why can't the government do more with 
less, and, specifically, estimates are that about a quarter of 
Earned Income Tax Credit payments in fiscal year 2013 alone 
were paid in error. This means that about $15 billion--$15 
billion--was wrongly paid. But if you spread it over 10 years, 
from 2003 to 2013, obviously, that is a big number too. It is 
$150 billion of improper EITC payments.
    It appears that the improper payment rate has remained 
relatively unchanged and the amount of EITC claims paid in 
error has grown despite the efforts that your agency has made. 
On top of that, as you know, it appears that the improper 
payment rate for the Additional Child Tax Credit is similar to 
the Earned Income Tax Credit. According to the Inspector 
General, at least a quarter of all ACTC payments for fiscal 
year 2013 were improperly made, with potential improper 
payments totaling as high as $7.1 billion; so, just in 1 year, 
2013, more than $22 billion in improper payments by the 
Internal Revenue Service.
    And then there is the issue that I know you are familiar 
with about the tens of millions of dollars that the agency 
spends on union members who perform no work that benefits the 
taxpayer. It is estimated that in 2013, roughly 500,000 hours 
were spent at a value of roughly $23.5 million. Again, these 
are union members who represent their union in the workforce 
there at the IRS who perform zero work that benefits the 
American taxpayer, and yet their appears to be no real concern 
about how to cut down that cost and redirect more of that money 
to doing the IRS's job.
    So I would just ask you this question. Given the amount of 
money that the IRS pays out improperly, some $22 billion just 
in 2013 alone, and given the money spent on nonproductive 
activity, at least in terms of that benefitting the taxpayer, 
due to the union activity, not to mention employee bonuses and 
the like, how do you think that the American people will feel 
about your coming here and just asking for more money?
    It seems to be, as the chairman points out, a historically 
established activity where bureaucrats come in and ask for more 
money without cleaning up their own house and taking care of 
their business. It seems to me that if you are coming here 
asking for more money, we would be more likely motivated to 
provide more money if, in fact, the IRS was spending the money 
that it currently gets to deal with things like these improper 
payments.
    Commissioner Koskinen. It is a good point. I would note 
that we are not asking for more money over history. We are 
asking for money back that has been taken away. Our budget has 
been cut, in absolute terms, $1,200,000,000 since 2010.
    As the chairman notes, the tax code has gotten more 
complicated. We have 7 million more taxpayers. We are charged 
with implementation of the Affordable Care Act, the Foreign 
Account Tax Compliance Act, and tax extenders as they go 
forward. So we are actually doing significantly more with 
significantly less.
    There comes a point at which you have to do less with less, 
and we have reached that point. We have, as I said, saved $1 
billion over that 5 years in efficiencies, with less office 
space, fewer contractors, less printing.
    We have worked very hard, as we have talked about, on the 
Earned Income Tax Credit. Part of our problem is, we do not 
have the resources--we have declining resources to audit in 
that area. We have 5,000 fewer revenue agents, revenue 
officers, and criminal investigators than we had 5 years ago, 
and that is solely because of the decline in expenditures.
    Senator Cornyn. And you have asked for roughly 9,000 more, 
or the President's budgets asks for roughly 9,000 more 
employees for the IRS to implement the Affordable Care Act. 
Correct?
    Commissioner Koskinen. The 9,000 employees would not be to 
implement the Affordable Care Act. The 9,000 employees--if we 
got 9,000 back, we would replace some of the 5,000 revenue 
officers we lost. We would replace all of the 3,000 fewer 
people we have answering phone calls than we had 5 years ago. 
The number of phone calls has gone up significantly, as you can 
imagine.
    With regard to union time, first of all, it is part of the 
bargaining relationship with our union, the way it is in every 
government agency across the government. That work benefits 
taxpayers to the extent that it represents workers and works 
with them to ensure that their working conditions are 
appropriate.
    We have, in fact, cut those with the union, cut that time 
that is being spent by over 10 percent, and we continue to work 
with them to make sure that that time is spent effectively. But 
we are not the only agency that does that. That is a program 
that exists every place there is a union across the government. 
We find that the union is an effective partner with us in terms 
of trying to improve the operations of the agency.
    But I would conclude by saying we have done significantly 
more with significantly less. But my concern for the last year 
has been that we are beyond the point of being able to do more 
with less. We are at a point where we have no choice but to do 
less with less.
    Senator Cornyn. Mr. Chairman, I would just ask for your 
help perhaps. I know Representative Boustany over in the House 
had sent a letter to the Commissioner in September 2014 asking 
him specifically to respond to some questions about the union 
activity at the IRS, and its alleged benefit to taxpayers, and 
there has been no response. That has been since September 2014.
    So if we could get an answer to that letter and some of 
those questions, it would be very helpful to our understanding 
of what you are talking about.
    Commissioner Koskinen. I would be delighted. I am not aware 
of that letter. My operating assumption, as the chairman knows, 
my commitment was that I read every letter I get, and we try to 
respond as quickly as we can, and no later than a month.
    The Chairman. I appreciate that. Let us have Mr. Boustany 
resend him the letter, directly to him, and let us see if we 
can get that answered.
    Commissioner Koskinen. In fact, I have met with Congressman 
Boustany a couple of times. We have what I think is a good 
working relationship, and I am very surprised to find out there 
is a letter that has not been answered for that period of time, 
because that is not our present mode of operation.
    In fact, the chairman----
    The Chairman. We will get that letter resubmitted, and 
maybe you can get us an answer.
    Commissioner Koskinen. I would note that the chairman last 
week sent me two different letters, and I hope to have an 
answer to those letters to you in the next few days.
    The Chairman. That would be great.
    Senator Cardin?
    Senator Cardin. Thank you, Mr. Chairman.
    Mr. Commissioner, I want to thank you. This is a tough job, 
and you continue to serve your country in this capacity, and I 
thank you very much for your willingness. You are the right 
person. I wish you had more support.
    It seems to me there are two things that this committee--
the Senate and particularly this committee--should be doing. 
First, we should look at our tax code and make it simpler and 
more predictable, and I know the chairman and ranking member 
are working to see whether we cannot find common ground in that 
regard, and that would certainly help a great deal. If we gave 
Americans more confidence in the tax code, I think taxpayers 
would appreciate that, and that would make your job a lot 
easier.
    The second thing is that this committee particularly should 
be an advocate for you having the resources you need in order 
to carry out the mission. I remember--I guess it has now been a 
decade ago--working, when I was in the House of 
Representatives, with then-Congressman Portman following up on 
the study that was done at the IRS at the time, and it was the 
Ways and Means Committee and the Senate Finance Committee that 
said to the appropriators, you have to have resources to 
modernize. And it lasted about 1 year before the cuts came 
back.
    So this committee should be your advocate for adequate 
resources. Instead, as you pointed out, you have sustained real 
cuts while your missions have increased dramatically.
    And we want to have tax compliance in all sections. I 
listened to Senator Cornyn's concerns about the Earned Income 
Tax Credit. The Earned Income Tax Credit is an extremely 
important provision in our tax code that offers fairness to 
middle-income working families. And yes, we want to make sure 
it is complied with, and Senator Wyden and I are going after, 
and hope to give you the authority to go after, paid tax 
preparers who are not doing the right thing in that regard.
    We want to give you those tools. But it is interesting that 
I do not hear the same strength on behalf of compliance with 
the high-income provisions that Senator Wyden mentioned in his 
opening comments that are available to high-income people or on 
business income. I know there was an IRS study that showed 
that, in some cases, over 50 percent of business income is not 
being reported.
    So, how do you decide with these limited resources how you 
are going to be able to get tax compliance when it is 
complicated and you are going against, particularly in the 
business side or high-income side, individuals who have 
tremendous resources to try to minimize their tax liability?
    How do you make those judgments? I would just urge you to 
spend more effort dealing with those who have sophisticated 
services that are not paying their fair share of taxes.
    Commissioner Koskinen. It is the challenge we have. 
Ultimately, we are all concerned with the compliance rate, to 
make sure we collect $3 trillion a year. My concern is that 
when the compliance rate drops by 1 percent, it costs the 
government $30 billion a year.
    The two sides of the compliance coin are enforcement and 
taxpayer service. And our challenge, as our budget is cut, is 
to try to make sure that we maintain as much effort in all of 
those areas as we can.
    But even in the area of auditing, we cannot take one area 
of the tax-paying public and say, well, we are not going to 
bother with you because there are other people out here who 
have more revenues, because, if you look at where the revenues 
come from, they come from across the spectrum.
    So our challenge is to continue, in our exam plans and our 
audit plans, to try to maximize the enforcement activities of 
the agency. But as I noted, we have 5,000 fewer people doing 
that now. So inevitably, our audit rates are going down, and 
our concern about that is that at some point that is going to 
affect the overall compliance rate.
    Senator Cardin. I would just make the point that if you had 
the additional resources, we would not only get better 
compliance--which is our responsibility, to make sure we have 
compliance--we would get greater revenue, which would help 
those taxpayers who are paying their taxes get the relief, so 
they are not over-taxed while other people are not paying their 
fair share.
    So it seems to me what this Congress has done in cutting 
your budgets makes no sense, and I am disappointed that this 
committee has not been a stronger advocate on your behalf, on 
the agency's behalf.
    One last point I would make. You are now implementing the 
Affordable Care Act and the provisions under the Affordable 
Care Act in this tax season. Booz Allen, which has a large 
presence in my State, has given high marks to the program you 
are using in regard to the refundable tax credit. What 
reactions are you receiving as you have tried to implement this 
as to the tools available to IRS to try to make the tax season 
as friendly as possible?
    Commissioner Koskinen. Thus far, we have had no significant 
challenges, although I would stress that we are at the front 
end of the return process. We expect the month of February will 
see a significant increase in the volume of returns.
    One of the best things we have going for us is that 91 
percent of the tax-paying public uses software, either with a 
paid preparer or they buy the software, and we have worked with 
software providers. So the software will take people through 
the application of the Affordable Care Act in whatever way it 
applies to the taxpayer, whether it is simply showing coverage, 
applying for an exemption, or reconciling the advanced payment 
they have gotten.
    Again, as I have noted, we have calculators on our website 
that will allow people to make the determinations that need to 
be made, and thus far we have had positive responses. But I 
would stress we are at the front end of what is going to be a 
very interesting filing season.
    Senator Cardin. Thank you. Thank you, Mr. Chairman.
    The Chairman. Senator Coats?
    Senator Coats. Thank you, Mr. Chairman.
    Mr. Koskinen, first of all, I want to state that what the 
chairman and vice chairman have stated relative to our 
unbelievably complex tax code has to be addressed, and I know 
both the chairman and vice chairman are committed to that 
process, and I hope all of our colleagues here are committed to 
that process, because it is clearly having a negative economic 
impact on us.
    The complexity of just simply going through the process of 
paying your taxes every year and the money that is spent and 
the hours that are spent, we just simply cannot keep pushing 
this down the road.
    So your response to that is that you applaud that very act, 
and I appreciated that. And I know you are concerned about the 
amount of money you have to spend and the burdens that you 
have. I would like to just give you a little bit of what I 
think might be some quick relief. This is a small ball thing.
    But Senator Cardin, who just spoke, and I are going to be 
introducing, this week, legislation that I hope you will be 
able to support. It is legislation that addresses the 
notification--it is called the NOTICE Act--legislation that 
will give charities, 501(c)(3)s and so forth, notice if their 
status is going to expire.
    A few years ago, the law was changed so that if the 
applicant's information, information required by the IRS to 
keep the status, was not supplied over a period of time, they 
would be automatically dropped from the qualification of tax-
exempt status.
    Now, there are a bunch of little--I mean, there are tens of 
thousands of small charitable organizations out there that 
simply do not have the back room for this, do not have lawyers 
waiting and plowing through the regulations and advising them 
of what they need to do and when they need to do it. And so it 
seemed to us, Senator Cardin and I--this is a bipartisan effort 
here--it seemed to us that a simple fix on this would be simply 
to provide them sufficient time of notice that, hey, your 
status is going to expire because we have not received your 
paperwork relative to annual reporting.
    What has resulted is thousands of hours and tens of 
millions of dollars to reinstate tax-exempt status, which I 
think imposes a significant burden on the IRS. And so what we 
are really calling for here is--well, let me just give you an 
example.
    There is a small women's auxiliary in Indiana that had 
filed for and received tax-exempt status. They had some 
leadership changes during that time. They wanted to raise 
$15,000 to help with the volunteer fire department, and, 
because of the leadership changes and because they did not 
really have somebody in the back room to give them notice and 
they did not have the money to hire lawyers and accountants and 
so forth and so on, they hit the deadline, and they were 
automatically then denied their tax-exempt status. It cost them 
$10,000 to reinstate, a lot of paperwork, and months and months 
and months of waiting. I think the figure is something like 
80,000 to 85,000 of these that have had to reapply.
    Our act would just simply require IRS to provide notice. 
Now, I would think in today's digital age, you probably have 
all these 501(c)(3)s listed somewhere in the database and it 
would be simply a matter of adjusting that so that, say, within 
90 days out or 100 days out, you hit a button, notices go out, 
whether it is by mail or by e-mail or both, to these, saying 
``warning'' or ``take notice,'' you did not file your 
information report and your tax-exempt status is going to 
expire unless you respond and file that. That is just one piece 
of paper. But it would save, I think, thousands of hours and 
months and months of delay and significant cost to these small 
charities if we could do that.
    So I would like to just put that on your plate. It is a 
small ball thing. It is just one step toward finding efficiency 
and effectiveness, which I think we can use, and it is needed 
so much throughout government, which is still doing a lot of 
things the old-fashioned way--a lot of files, a lot of 
paperwork, rules that do not seem to make much sense.
    I do not know if you want to comment on that. My time is 
about to run out. But we are going to introduce that, and, if 
you could work with us on that, we would appreciate it.
    Commissioner Koskinen. We would be delighted to work with 
you on that. We have about 1,600,000 outstanding tax-exempt 
organizations. So it is a big ball number when you look at it 
that way.
    We were concerned--it was before I got here. We streamlined 
the reinstatement process for entities. They could simply send 
us their notice. They hopefully did not have to spend $10,000.
    For small organizations, we have also streamlined the 
application process. You can now apply with a 3-page 
application rather than the 26-page application, because our 
concern is, for a lot of small charities out to do very good 
things, for them to have to spend $5,000 or $10,000 simply to 
get certified, if they are a very small organization, does not 
make much sense.
    We are delighted to work with you on this. I think there 
are thousands of these organizations out there. And you are 
exactly right. For a lot of them, the secretary moved, the 
president changed, they lost track of it, and we need to make 
sure that we streamline the process for any reinstatement 
necessary.
    We are continually trying to streamline the process for the 
application so we can have people out there doing good work.
    Senator Coats. That is good for going forward. I am told 
that--a staffer just told me that the simplified application is 
not available to charities that need retroactive reinstatement. 
So this would address retroactive reinstatement.
    Commissioner Koskinen. And we would be delighted to work 
with you on it.
    Senator Coats. Terrific. Thank you.
    The Chairman. Senator Brown?
    Senator Brown. Thank you, Mr. Chairman, very much for doing 
this hearing to clarify a lot of issues that are out and about 
in the media all over this country.
    I want to talk for a moment--a number of people have 
brought up the Earned Income Tax Credit and the Child Tax 
Credit. The chairman did, Senator Cardin did, Senator Cornyn 
did.
    Let us not forget what this is about. The Earned Income Tax 
Credit began as a temporary program with President Ford and was 
made permanent by President Carter. It was expanded 
dramatically by President Reagan and has been supported by 
Presidents of both parties for--I believe this is the 40th 
anniversary this year.
    So we know that they collectively--EITC and CTC--have 
reduced poverty for 32 million people, including 13 million 
children. We should not forget that as we talk about this.
    Now, we hear of the 23-percent fraud rate. Many call it the 
fraud rate, others say it is an error rate. That factor assumes 
a bunch of things. That 23 percent assumes that all audited 
returns are fraudulent. It does not factor in underpayments.
    The Office of the Taxpayer Advocate, an independent office 
within the IRS, has found that findings of fraud were 
overturned in 40 percent of cases where a taxpayer was accused 
of alleged EITC fraud and then sought the advocate's 
assistance. We know that people who file for EITC are less 
likely to have a strong advocate whom they employ to fight for 
them. We know all of that.
    Now, when you take into account those factors, what is the 
incidence of genuine fraud for EITC? How would the actual loss 
of revenue to the Treasury look if EITC also counted 
underpayments, because underpayments are part of that 23 
percent is my understanding?
    Commissioner Koskinen. As you note, it is a complicated 
issue. That is why it is called the improper-payment question 
rather than fraud, because only a portion of the money that 
goes out is----
    Senator Brown. But many here call it fraud.
    Commissioner Koskinen. Right. But it is an improper-payment 
issue derived, to some extent, by the complexity of the statue 
determining where children are resident and who has authority 
over them. There are inadvertent errors made by taxpayers 
filing on their own without a lot of background.
    As I have noted, one of the reasons we support the 
provision of the act to require tax preparers to have some 
minimum level of competence and understanding of the law is 
that over 50 percent of those filing for the EITC rely upon 
preparers, and many of them, as you note, are lower-income or 
middle-income families who rely on somebody in the 
neighborhood. And our hope is that the somebody in the 
neighborhood ought to be able to file for them a correct return 
as we go forward.
    So as I have said, we have asked for additional statutory 
authority which would allow us, particularly if we got W-2s 
earlier, to check whether there is under- or overstatement of 
income before we actually make the payment, which would help 
significantly.
    Also, in some cases, we know that there has been an error. 
When somebody thinks they have three children and our database 
shows two, we ought to be able to correct that rather than 
making the payment or holding the payment and having to go 
audit, which is now the only way we can make that change.
    If we could make the change, the taxpayer could still come 
in and say, ``Wait a minute, I really do have three children,'' 
and they would not lose anything. We would simply be able to 
get much more at the heart of the range of improper payments.
    The overall issue is that, even within this, we have this 
duality. We just had EITC Awareness Day in which we tried to 
make sure that everybody eligible for the program actually 
participates. But our estimate is about 80 percent of the 
people eligible participate, but 20 percent do not.
    So we have this dual obligation, on the one hand, to make 
sure people participate, are aware of the program, and, on the 
other hand, to make sure that the payments are appropriate and 
that we are actually paying the right amount to the right 
people.
    And if we had the additional legislative authority that we 
are asking for, I think we could actually give a greater----
    Senator Brown. That 23 percent would markedly be reduced.
    Commissioner Koskinen. It would be reduced. We will 
probably never get it down to zero, but we have been 
concerned--I have been concerned since I started--that that 
level has been pretty constant over the last 10 years, 
notwithstanding all of the activities the agency has done.
    So I had the meeting early in my tenure, and I said, I want 
everybody who knows about this to sit down to figure out what 
would help. And it turns out the legislative proposals we have 
made were the consensus of things we need to do to be able to 
attack this problem going forward.
    Senator Brown. I echo the comments that Senator Cardin made 
in his comments and questions, that there is so much less 
attention paid in the halls of Congress to the fact that we are 
not auditing as many upper-income people as you were just 
because of budget issues and that we seem to pay a lot less 
attention to the fraud of upper-income taxpayers than we do to 
EITC.
    It is a peculiar kind--the worst kind, in my mind--the 
worst kind of class warfare by people who are paid good 
salaries and get good pensions and health care from the 
government. Members of Congress spend an awful lot of time 
attacking a program that has brought literally millions of 
people out of poverty and has had a long, long, long, good 
history of support from Presidents of both parties across the 
liberal to conservative spectrum.
    Mr. Chairman, thank you.
    The Chairman. Senator Thune?
    Senator Thune. Thank you, Mr. Chairman.
    Commissioner, welcome. I joined with other members of this 
committee last year on a letter to you after it was reported by 
the Inspector General for Tax Administration that more than 
1,100 IRS employees with Federal tax compliance issues have 
been awarded over $1 million in cash awards and more than 
$10,000 in hours of time-off awards. In your response last May, 
you stated that the IRS was working toward trying to address 
this problem across the entire IRS, but you made no commitments 
nor did you set any deadlines for making certain this does not 
happen again in the future.
    I know that you have talked a little bit about this already 
this morning, but I just wanted, for the record, to get you to 
speak clearly on this issue, because it seems to me it is 
awfully hard to go to the hardworking American taxpayers and 
ask them to comply with the tax laws when you have employees in 
your own organization who do not comply and, more than that, 
who are getting bonuses, hours off, additional benefits, 
payments, and cash bonuses when they have tax-compliance 
issues.
    So can you commit to me that you are going to fix this 
problem and ensure that it is not going to happen again in the 
future?
    Commissioner Koskinen. We have already adopted policies to 
address the problem. Anyone who willfully is not complying with 
their tax obligations is not only ineligible for awards, but is 
subject to disciplinary action.
    That number of employees there who are viewed as, quote, 
``not compliant'' includes employees who were engaged in 
installment agreements, who are becoming compliant, but we 
still count those as noncompliant. We say you will have to be--
if you are going to be counted as compliant, you have to 
actually be current today with your taxes. Even if you are 
current with an installment agreement, that does not count. But 
that is not a willful violation.
    There have been proposals and suggestions where, if you 
willfully do not file your taxes with the IRS, not only are you 
not eligible today for a bonus--and we have a program and we 
are making sure that that applies as we look at performance 
awards--but as I say, under section 1203 of the code, if you 
willfully are in violation of not being compliant, it is 
grounds for dismissal, and we take disciplinary action against 
employees.
    Over 99 percent of the employees are compliant and they 
understand. Anybody who signs onto the IRS understands part of 
their obligation, because we are the tax administrators for the 
country, part of their obligations individually is to be 
compliant.
    But I would remind everybody we have a lot of GS-4s, GS-5s 
who are not tax attorneys, tax accountants, or CPAs, and they 
are capable of making the same mistakes, not willfully, but 
inadvertently, as everybody else does. We count those people as 
not compliant, but they are not people who, in fact, are 
willfully trying to cut corners or not pay their taxes.
    So our policy is in place, and it includes issues about 
other disciplinary actions. We firmly and totally agree that 
for you to be eligible for a performance award, you should be 
performing well, and that includes being compliant with your 
taxes, not willfully avoiding them, and you should not have any 
major disciplinary action going on at the same time, and that 
is a new policy.
    Senator Thune. I would just say, whether it is willful or 
not, voluntary or involuntary, just with absolute clarity, 
without any ambiguity, make it clear, because, as you know, the 
agency has a huge trust issue, a huge credibility issue with 
the American people. It needs to be crystal clear that people 
within the agency, the IRS employees, are not in any way going 
to be rewarded either through cash bonuses or time off if they 
have tax-compliance issues. It just has to be that crystal 
clear. Otherwise, I do not know how the American people can 
expect anything less when it comes to that issue.
    In your testimony, you cited the recent decline in IRS 
funding as a cause for poor customer service and insufficient 
tax enforcement. But there is also in the budget a request, in 
your 2016 budget, a request for $490 million and over 2,500 
employees, full-time equivalents, to implement and administer 
Obamacare.
    Now, I think it is needless to say that none of these 
employees would be necessary had Congress not chosen to enact 
all the mandates and taxes in the law. But is it not time to 
admit that the increased burden on the IRS is from Obamacare 
and not simply lower funding?
    I mean, we have funding issues, I understand. That is what 
you are here to talk about. But it strikes me at least that the 
resource issue is the result of a shift away from customer 
service and other core IRS functions and toward Obamacare.
    Commissioner Koskinen. As I have stated from the start of 
my tenure, it is exactly clear that our responsibilities have 
grown. It is not only the implementation of the Affordable Care 
Act. It is the implementation of the Foreign Account Tax 
Compliance Act. It is about to be the implementation of the 
ABLE Act and the related Professional Employer Organization 
responsibilities, where we are being asked to start new 
programs. All of those are resource-intensive. So it is not--if 
we did not have any of the statutory mandates we have to 
implement, we would have more resources available for both 
enforcement and taxpayer services, obviously.
    But I have stated from the start, and I agree with you, 
that every time there is a new program that is given to the 
IRS, it does not get done out of whole cloth. It is a mandate 
that we will pay attention to, but it takes resources away from 
either enforcement, services, or information technology 
advancement.
    The Chairman. Senator Heller?
    Senator Heller. Mr. Chairman, thank you.
    Commissioner, thank you for being here today and spending 
time with us.
    I want to thank Senator Thune for his questioning. It was 
one of the issues I wanted to talk about, obviously, the 
bonuses to the employees.
    Mr. Chairman, if I could request that we get a copy of the 
agency policy on this issue so we can take a look at it, I 
would appreciate it.
    Commissioner Koskinen. That is fine. We will be happy to 
provide that.
    Senator Heller. Also, I would like to mention what National 
Taxpayer Advocate Nina Olson said in a recent report to 
Congress. She said, ``Taxpayers this year are likely to receive 
the worst level of taxpayer services since at least 2001 when 
the IRS implemented its current performance measures.''
    I guess I want to ask you if this is a fair assessment.
    Commissioner Koskinen. I am not an expert on what 2001 
looked like, but it clearly is going to be a difficult filing 
season, and the service is going to be if not miserable, 
abysmal. Whatever it is, it will be a level of service that 
none of us believes taxpayers deserve.
    Senator Heller. So ``miserable'' is a word that you guys 
use quite a bit. That would be a reasonable assessment of what 
taxpayers can expect.
    Commissioner Koskinen. Right.
    Senator Heller. You said multiple times during the hearing 
today that you are doing significantly more with significantly 
less.
    Could you quantify ``significantly less''? You have 
mentioned it several times, but quantify it. Is it 3 percent 
less, 5 percent less? What are we talking about?
    Commissioner Koskinen. In terms of our ability to perform?
    Senator Heller. What are you talking about when you say 
``necessary budget cuts,'' ``significantly less''? What is the 
dollar amount or percentage we are talking about?
    Commissioner Koskinen. Of the budget cuts?
    Senator Heller. Yes.
    Commissioner Koskinen. Since 2010 the budget has been cut 
by $1,200,000,000. At the same time, all of the----
    Senator Heller. What percentage is that?
    Commissioner Koskinen. Pardon?
    Senator Heller. What percentage is that?
    Commissioner Koskinen. That is--what?--10 percent or 12 
percent.
    Senator Heller. Ten or 12 percent. So we would argue that 
the average taxpayer family also has to do significantly more 
with significantly less, so perhaps the IRS should also.
    Commissioner Koskinen. We are doing significantly more with 
significantly less. As just discussed, we have significant 
statutory mandates we have been given that we have no choice 
but to implement. In fact, as I noted, it is ironic that, at 
the same time in the bill that cut our budget, we were given 
yet two new programs to set up, start, and initiate.
    So it is not a question of our doing the same amount of 
work with less money; we are doing significantly more work.
    Senator Heller. And I would argue that the average taxpayer 
is out there doing the same thing.
    Commissioner Koskinen. Right.
    Senator Heller. The chairman of Ways and Means recently 
introduced legislation--I believe it is called the Stop 
Targeting of Political Beliefs by the IRS Act--that would bar 
the IRS from changing the guidelines for tax-exempt 401(c)(4) 
groups until the end of 2017.
    I think the IRS, if I am not mistaken, is expected to 
reissue new rules. Could you be more specific as to when those 
new rules would come about?
    Commissioner Koskinen. We do not have a timeline for those. 
As I have noted, one of the Inspector General's 
recommendations--about a year and a half ago when he made the 
report about the use of what were, he termed, improper criteria 
for identifying organizations applying for tax-exempt status--
said that we should review and clarify what the facts and 
circumstances would be that would determine how much political 
activity was allowable.
    The first proposal put out by the IRS and Treasury before I 
started managed to sort of aggravate people across the entire 
spectrum and generated 160,000 comments. We have worked our way 
very carefully through those comments. I have read over 1,000, 
1,200 pages of the most thoughtful and detailed comments. Our 
goal is to make sure that we end up with a standard that is 
clear, much clearer than the present standard, fair to 
everybody--we are looking at which organizations it should 
apply to--and easy to administer.
    To the extent we can, we would like to get out of the 
determination of political activity one way or the other and 
have a standard that is clear not only for us, but a standard 
that is clear for organizations as they are operating. They 
ought to have a clear, much clearer than facts-and-circumstance 
standard so they are comfortable that what they are doing is 
appropriate and that nobody is going to second-guess them and 
suddenly say they are no longer tax-exempt because they have 
exceeded vague, hard-to-understand terminology.
    But at this point, I cannot give you a deadline.
    Senator Heller. Commissioner, thank you. I want to go back 
to Nina Olson's recent report. I was disturbed that that 
report, in assessing the IRS, said that it lacked a clear 
rationale of resource allocation. Specifically, Ms. Olson said 
the agency has said that it would not answer complex tax laws 
on the phone or at walk-in centers. Further, after tax season, 
employees are being told not to answer any tax law question 
despite the fact that 15 million taxpayers will have obtained 
filing exemptions.
    I guess the question is, how do you expect taxpayers to 
adequately comply with the complex tax laws under Obamacare or 
FATCA since they have no resources to help them implement it?
    Commissioner Koskinen. It is a significant challenge and 
one that we are concerned about. My only disagreement with Nina 
on that is that we have actually carefully looked at how we can 
provide the best service we can with the resources we have.
    And the decision was made last year that if we continued to 
answer, which we used to do, complicated calls, by definition, 
the queue would get longer. And so, therefore, we told 
employees that they needed to answer straightforward questions. 
For complicated questions, the taxpayer would have to go to our 
website or elsewhere.
    The people who care most about that are our employees. As I 
wandered around the country last year visiting offices, their 
question was, ``We know the answer, why can we not help?'' And 
the answer I gave them was, if you take longer to answer a 
complicated call, the number of people in line gets longer, the 
waiting time gets longer. Trying to minimize the inconvenience 
to taxpayers as much as we can, we had no choice.
    Senator Heller. Is that significantly more or significantly 
less from expectations of the taxpayers?
    Commissioner Koskinen. I think the taxpayers have a right 
to expect that they can call the IRS, get an answer, get on the 
phone with an assistor within 2 to 5 minutes, get their 
questions answered satisfactorily so they can file. That is not 
something that our resources allow, and all I am saying is, as 
has been said----
    Senator Heller. It sounds like significantly less.
    Commissioner Koskinen. It is significantly less.
    Senator Heller. Not significantly more.
    Commissioner Koskinen. What is happening now is we have 
significantly less resources, and our service is significantly 
less----
    Senator Heller. But you just told me you were doing more.
    Commissioner Koskinen. We are doing more. We are answering 
more calls than we have answered before with our people. But 
because of the fact that there are even more calls, the demand 
is up, the level of service is down, and that is simply because 
we do not have enough people.
    It is not because they are not dedicated. It is not because 
they do not care. They care substantially about it.
    Senator Heller. And I am not arguing that point.
    Commissioner Koskinen. Right.
    Senator Heller. Commissioner, thank you.
    Mr. Chairman, thank you.
    The Chairman. Thank you. Senator Scott?
    Senator Scott. Thank you, Mr. Chairman.
    Thank you, Commissioner, for being here with us today.
    Some of this, of course, started before your tenure. Much 
has been made about the 3-percent reduction in resources. But 
at the height of your agency's high staffing levels and robust 
budgets, your employees started targeting religious, pro-life, 
and conservative groups, groups in my State, including Tea 
Party groups, whose members are mostly hardworking, everyday 
Americans who decided to simply exercise their First Amendment 
rights.
    And in response, in what some have perceived as a 
coordinated effort between the IRS and liberal groups aimed at 
targeting these Americans and their groups in an election year, 
we saw an absolutely chilling effect on certain types of 
supposedly free speech.
    I want you to understand and know that the actions of the 
IRS hurt my constituents.
    My first question is, has the IRS stopped targeting 
churches and religious organizations with oppressive and 
intrusive interference with their operations?
    Commissioner Koskinen. I have said from the start, and I 
think it is a fair question, that those were mistakes that were 
made. They should never have been made, and they should not be 
made again.
    And I have said that we are committed to trying to ensure 
the best we can that taxpayers are confident when they deal 
with us, wherever they deal with us, that they are going to get 
treated fairly no matter who they are, no matter what 
organization they belong to, no matter who they voted for in 
any election in the past. And we need to be able to do that, 
because it is critical for the confidence of taxpayers in the 
fairness of the system.
    So I am as troubled as anybody else is by the events that 
took place in 2010--well, after 2010. The Inspector General, a 
year and a half ago, almost 2 years ago, revealed that. We have 
implemented every one of the Inspector General's 
recommendations to try to do our best to ensure that it never 
happens again.
    One of those recommendations was to try to clarify the 
standard that is in the regulations now so that people would 
have a better--externally and internally--would have a better 
idea of what is permissible, what counts, and what does not 
count.
    Senator Scott. I appreciate your answer. Certainly, I am 
hopeful that we are moving in the right direction, but I hope 
you understand and appreciate my concern about the issue. I 
have a letter dated December 22, 2014 from the ACLJ where they 
represented 41 different conservative groups, and they are 
still working their way through the process. I think all but 
five have received their tax-exempt status. Unfortunately, some 
of those groups were in South Carolina, and it took more than 
4\1/2\ years to get their tax-exempt status.
    One of the questions I have, as well, goes to the IT 
challenges that you all face at the agency, Commissioner. 
Congress gives you hundreds of millions of dollars to modernize 
your IT system: $290 million this year, $300 million in 2013 
and 2014, $330 million in 2012, $260 million in 2011, $260 
million again in 2010, $230 million in 2009. I can go on and 
on, but I will not. Your total IT spending is over $2 billion 
each and every year, and last year included, as I said, $300 
million in IT spending for the ACA alone.
    In your written testimony, you told the committee that the 
IRS is operating with antiquated systems and still has 
applications that were running when John F. Kennedy was 
President. You said your agency still uses the computer 
programming language COBOL, which was invented, of course, in 
1959.
    Commissioner, the IRS has been spending nearly $1 million a 
day in the last year or two to modernize its IT system, and 
that is a lot of money. Can you please help me understand how 
in the world you are still operating with antiquated systems 
that go back to the Kennedy administration after we have spent 
over $2 billion of resources to get it there?
    Commissioner Koskinen. Our system, all of it was customized 
and developed in the 1950s and 1960s when there was no off-the-
shelf software. As I have frequently referred to it, it is like 
driving a Model T that now has a great GPS system and a 
wonderful sound system, has a rebuilt engine. So we have 
replaced a significant amount of that antiquated system with 
those expenditures.
    But we still have over 50 applications that need to be 
replaced. But to show what we have been able to do, that refund 
app, Where's My Refund?, got 200 million hits last year. A 
hundred and fifty million returns are processed; 85 percent of 
them are now processed electronically. That was not only not 
possible, it was inconceivable 15 years ago.
    So we have made substantial strides, but the $300 million 
on the Affordable Care Act, the $100 million we are spending on 
the Foreign Account Tax Compliance Act, are all challenges for 
us. Fortunately, the filing season this year is going smoothly 
because all of that has been implemented.
    We have 145,000 foreign financial institutions about to 
provide us data under the Foreign Account Tax Compliance Act. 
All of those systems had to be built and rebuilt to absorb that 
data.
    If we could continue to get the resources we need, we would 
get rid of a lot of these systems. Taxpayers would be able to 
just go online, as they do with Bank of America, Wells Fargo, 
or Fidelity, and deal with us without paper, without calls. 
They would be able to do all their transactions easily and 
efficiently.
    We are not talking about, as I said, going to the moon. We 
are talking about, ``Can I catch up with where financial 
institutions are?'' And to do that, we have to keep spending 
the money.
    Senator Scott. I certainly would like to--I know my time is 
up, so I will make this my last question, 53 seconds late.
    How much did it cost for that last technological 
advancement in the ``get the refund,'' whatever the last thing 
you said was?
    Commissioner Koskinen. I do not have the answer to that, 
but I will get it for you.
    Senator Scott. My thought is that the new software is 
relatively cost-effective. I will not call it inexpensive, that 
might be an overstatement, but it simply does not cost that 
much to add in new software to create an expedited process. I 
might be wrong.
    Commissioner Koskinen. No, no, no. You are exactly right. 
But part of our problem is, we have data from 150 million 
returns plus the returns you have had historically. All of that 
is stored in antiquated systems that we are starting to process 
and go forward with in what is called CADE 2, for Customer 
Account Data Engine.
    We are trying to build a relational database so all the 
applications can reach the data rather than having to hunt for 
the return. Right now we have automated the return as if it was 
being processed as paper. We need to automate the process so we 
actually deal with data as it goes forward.
    But I would be delighted to chat with you, and our IT 
people would be more than delighted to explain the roadmap we 
have trying to get from here to there. But you are right. If we 
could ever get there----
    The Chairman. Senator, your time is up.
    Senator Scott. That would be helpful. Thank you, sir.
    Commissioner Koskinen. Sure.
    The Chairman. Let me just make a couple of comments here at 
this time which I think are appropriate.
    The committee takes the allegations of misconduct by the 
IRS with respect to applications for tax-exempt status very 
seriously. Maybe you did not hear that. I will just repeat 
that. The committee takes the allegations of misconduct by the 
IRS with respect to the applications for tax-exempt status very 
seriously.
    We have been investigating this matter since May of 2013. 
Our staff has interviewed over 30 IRS and Treasury officials 
and reviewed over 1 million pages. Last year, Senator Wyden and 
I were almost ready to ask the committee to release the final 
report, and, in fact, we had a draft at that time. However, 
right around that time, we learned that IRS could not produce 
all e-mails to and from Lois Lerner, a key figure in the 
investigation, because of what the IRS claimed was a crashed 
hard drive.
    As a result, Senator Wyden and I decided to give the 
Treasury Inspector General for Tax Administration, TIGTA, time 
to investigate that particular matter. And I was pleased to 
recently learn the TIGTA apparently has recovered some or all 
of the missing e-mails. TIGTA expects they will be able to 
start providing the recovered e-mails to our investigators as 
early as 2 weeks from now. As soon as we have reviewed the e-
mails, we are hoping to renew the effort to move forward with 
the report, and at that time members of this committee will 
have ample opportunity to explore the IRS matter in great 
detail.
    We will have to do this carefully because of the 
restrictions imposed by section 6103 of the tax code, which 
generally prohibits the release of taxpayer-specific 
information. In the interest of efficiency and caution, I urge 
all members to save their questions on the investigation of IRS 
tax-exempt organizations, on that matter, until they have had a 
chance to review the final report.
    Senator Wyden, do you have any comments about that?
    Senator Wyden. Just very briefly, Mr. Chairman and 
colleagues.
    This is the only bipartisan inquiry that has been conducted 
or is being conducted on this issue. So thank you, Chairman 
Hatch, for your statement. I want to emphasize that we are 
working very closely to finalize the IRS tax-exempt inquiry.
    I personally think it will be more productive and more 
efficient in terms of our time use to focus on this issue in 
the context of the upcoming release of our report. I just want 
to emphasize, as Chairman Hatch did in his statement, that we 
are working very closely together, and, colleagues, we are 
committed to making sure that this will be the one bipartisan 
inquiry on this important topic.
    Thank you, Senator Hatch.
    The Chairman. Senator Casey?
    Senator Casey. Mr. Chairman, thanks very much.
    Mr. Commissioner, I am grateful to have you here and 
grateful for your work. You have a very tough job, probably 
among the toughest in this town.
    I want to ask you a couple of questions regarding a letter 
I sent you about a week ago. But before getting to that, I want 
to focus a little bit on this budget question, because I am a 
great believer that if we point out problems in an agency or 
program and ask for reforms and change and better service, we 
have to be willing to support the resources to get the IRS 
there, to get any other agency where they need to go.
    I was struck by--and I know we have a long list of 
examples--but I was strike by what you said on page 3 of your 
testimony. You said, and I am quoting, under the enforcement 
cuts category, ``We estimate the agency will lose about 1,800 
enforcement personnel through attrition through fiscal year 
2015 that we are not able to replace.'' When you go down that 
list of cuts and consequences, one of the results of that is 
middle-class families and very vulnerable folks out there 
having to navigate a complex system with little help.
    So your challenges in the budget become problems down the 
road for the middle class and for vulnerable families. So I 
support your efforts to get the resources you need to be able 
to do your job. It is not good enough for us to just say, there 
is a problem and we are not going to help you solve it.
    But I want to ask you about the letter I sent a little more 
than a week ago, last Monday, on the 26th, regarding--and 
everything has an acronym, as we know, but this is the TFOP, 
the Tax Forms Outlet Program, where, as many folks know, free 
tax forms and instruction booklets are sent out.
    I know in Pennsylvania--and I do not know if this is true 
in every State--but in Pennsylvania, we are getting a high, 
high volume of calls and communication regarding the fact that, 
because of the budget cuts, the distribution of that material 
is limited.
    One of the most significant parts of this problem for our 
State is our rural communities. We have literally millions of 
people who live in rural areas in Pennsylvania. So it is a big 
issue.
    So I would ask you--and some of the questions, obviously, 
are outlined in the letter I sent--what additional resources or 
tools or support would allow you to maintain the past year's 
level of service regarding these forms and instruction 
booklets?
    Commissioner Koskinen. It is an important question, and we 
take it seriously, because people have relied on those forms.
    One of the things we are trying to make clear to people--
and I had hoped to have an answer to your letter before the 
hearing, but we will get you the answer before the week is 
out--is that forms are all downloadable from our website. So 
everybody has access to the forms through the website.
    Now, we recognize there are some people who do not have 
access to the Internet----
    Senator Casey. That is a problem.
    Commissioner Koskinen [continuing]. And the challenge for 
libraries--many of which provide a great service to people 
because they allow you to, in fact, use their computers--is 
that they can download those forms, but there is a cost to 
that. They have to run their printers, and they are running on 
tight budgets. So we do not underestimate the significance of 
that problem.
    Overall, our concern has been--we try to figure out where 
to minimize the impacts as much as we can. We have historically 
sent out large volumes of paper both to libraries and our walk-
in sites. As we track them, only about 10 percent or 15 percent 
of those papers are used.
    So we are producing a huge volume of paper that never gets 
used. We have tried to, therefore, figure out which forms get 
used so we can produce those. But it is directly a result of 
trying to avoid shutting the place down, where can we cut costs 
as much as we can.
    So it is only a matter of a few million dollars to be able 
to produce all that. We have cut back over time, as part of our 
$200 million we saved. We used to send every taxpayer a copy of 
the instructions and the return. Nobody gets those anymore, and 
we save about $60 million a year in printing and mailing costs 
because of those and other attempts to go forward.
    But we are anxious to work with libraries and others--we 
have no choice, being where we are this year--to try to figure 
out what the right mix is for them so that they can have copies 
for people who need them and not burden the libraries with this 
cost. But that is, in effect, what has happened, to some 
extent: that cost burden has been shifted to them, and we are 
concerned about that, but there is not a lot we can do about it 
at this time.
    Senator Casey. Well, as quickly as you can, get an answer 
for my letter, because we are getting a lot of calls on this. 
And one of the problems is--and I know I am out of time--but 
one of the problems is, the IRS gave an 800 number, and when 
they call the 800 number, they say we are going to have this 
problem solved in 4 weeks, 5 weeks, 6 weeks. That is not enough 
time.
    We have something on the order of 20 million people in the 
country, 14 percent of the total, who do not file 
electronically. So the faster you can get answers to this and 
get those forms to people, the better.
    Commissioner Koskinen. On that point, part of our problem 
with the production of printed forms, while you can download 
them today, is that the tax legislation that passed got passed 
late, so it throws our printing process off, and that is why, 
by the end of this month, we will, for people who call the 1-
800 number, be able to mail them their returns.
    But I understand when you call in the middle of January and 
are told it is the end of February, that seems like forever, 
and especially if people are trying to file for refunds. But we 
will have those forms available and printed, back from the 
printer, before the month is out. But I will get you the answer 
to that letter this week.
    Senator Casey. Thanks very much. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    There is a vote on the floor at noon, but we are going to 
continue to hold this hearing during the vote. So I would like 
to make sure all members are able to ask their questions.
    Senator Nelson, you are next.
    Senator Nelson. Thank you.
    Almost $5 billion a year is going out as a result of 
criminals using somebody else's Social Security number. You 
answered, in a previous question, that you hoped to introduce 
the personal identification number next week for those who 
request it.
    You have a pilot study going on in three jurisdictions: 
Florida, Georgia, and the District of Columbia. You are doing 
it in Florida, in large part, because I have raised a ruckus as 
a result of a lot of these criminals.
    Street crime is actually reduced, because they find using a 
laptop enables them to achieve their goal of stealing people's 
money by putting in a false tax return, much to the annoyance 
and heartache of the legitimate taxpayer. And unless the 
taxpayer can get that PIN, personal identification number, they 
cannot get the system to operate, because the IRS says, oh, you 
have already filed a tax return, and they cannot get their 
legitimate taxpayer return filed and their refund, if they have 
one due. So I thank you for getting out those PIN numbers next 
week.
    But in those three jurisdictions, you have a pilot study 
going for a permanent PIN number. And since one of those 
jurisdictions is my State, I am going to apply for a permanent 
personal identification number and see how the system is, and I 
am filing this week legislation to set up a personal, permanent 
PIN.
    Now, the next and most egregious part of this is that a lot 
of these false tax returns are being filed by inmates in the 
prisons, in the Federal prison system, as well as the States.
    We brought this to the attention of the IRS a couple of 
years ago. You all implemented and we passed a law that gave 
you temporary authority so you could then break your 
confidentiality and share with the prison systems the fact that 
someone had filed a false tax return and, indeed, it was an 
inmate. We then followed up that temporary authority with a 
permanent authority in law 2 years ago, but it has yet to be 
implemented.
    Can you help us, please?
    Commissioner Koskinen. It is now implemented with the 
Federal prison system, and so the number of prisoner returns 
fraudulently filed has dropped significantly. We were down to 
about 53,000 last year, which is still a lot, but not compared 
to where it was.
    You are exactly right. A lot of this began with prisoners. 
We have to work memorandums of understanding with State prison 
authorities, and we are trying get them all to sign up, because 
it is in their interest as well to find out whether prisoners 
are actually engaged in illegal action.
    And so the statutory support from the Congress was critical 
to us, and it has already made a big impact. But you are right, 
we need now to have all the State prison authorities enter into 
the MOUs with us to go forward.
    Senator Nelson. So you have the memorandum in place with 
regard to the Federal prison system.
    Commissioner Koskinen. Yes. The Federal prisons, we 
exchange data with them, and we know what the rolls are like, 
and we are there. It is really at the State level where we need 
State authority and State agreements.
    Senator Nelson. Then I want to utilize this hearing here 
today for the word to go out to the respective 51 prison 
systems that if you want your folks to get mad, just let them 
know that prisoners are filing false tax returns, cheating the 
system, getting lots of money back. The State prison systems 
ought to get on the ball and sign this memorandum of 
understanding.
    I also want to use this hearing to encourage your people to 
get those MOUs. When a State steps forth and wants an MOU, get 
it done.
    Commissioner Koskinen. I would like to correct one thing, 
just because, as you go online, you will discover that, while 
we are actively pushing the pilot program in the three States 
you note, when you get an IP PIN, identity protection PIN, we 
give it to you for 1 year. It is a permanent process--you are 
protected--but each year you will get a new PIN, because 
otherwise we are concerned that the PINs will be stolen.
    So what it is is a way of updating every year. So when you 
get yours--some people I know personally, me, have discovered 
that it is a very good program.
    The reason we have not launched it nationally is simply 
that we want to see what the burden is on taxpayers, what the 
cost is for us, and how efficiently it goes. So we hope this 
year as many people as possible in Florida, Georgia, and the 
District of Columbia will sign up for IP PINs. It does 
significantly increase the protection they have against having 
their refunds stolen or their identity used against them in the 
Internal Revenue Service.
    Senator Nelson. Well, you just had another person sign up--
me.
    Commissioner Koskinen. Good.
    The Chairman. Senator, your time has expired.
    Senator Roberts?
    Senator Roberts. Thank you, Mr. Chairman. For nearly 30 
years, the IRS did not apply the gift tax to contributions made 
to charitable organizations of any type. Beginning in 2011, at 
the same time the IRS began targeting (c)(4) applicants, the 
IRS began gift-tax audits of individuals who had made 
contributions to various tax-exempt organizations.
    These audits were contrary to congressional policy and 
legal precedent. When we got wind of this, several members of 
the Finance Committee, including myself, sent a letter to the 
agency questioning these audits. The IRS stopped auditing these 
contributions. But since this is a very complicated area of the 
law, the IRS said that it would issue administrative guidance 
to ensure that the IRS audits would not be ramped up again.
    It has been about 3 years. We have yet to see any guidance 
or information. It is important to provide certainty to our 
citizens that the IRS is not going to select for audit gift tax 
assessments based on politics.
    So my question is, when do you plan to provide guidance on 
these audits, or would you be in favor of Congress codifying 
existing IRS policy with respect to application of the gift tax 
to (c)(4) and other tax-exempt organizations?
    Commissioner Koskinen. It is in consideration. We are 
taking a look at it across the board, because it is related to 
the whole question of the tax-exempt status of organizations 
across the spectrum.
    But in response to your question, anytime Congress would 
like to legislate in this area would be fine with us. We would 
be happy to have the IRS making as few decisions as possible in 
the area of political activity and exemptions and gift taxes 
related to that.
    So if the Congress would like to, on this particular 
question, create a statute that created whatever policy the 
Congress thought was appropriate, that would be helpful. But in 
the meantime, we want to make sure that whatever we do is, as I 
say, fair to everybody, and is clear and easy for people to 
understand.
    And so it is tied up with the entire question of tax-exempt 
organizations across the board----
    Senator Roberts. Well, we will try to be of help to you.
    Commissioner Koskinen. Good.
    Senator Roberts. I am sort of fascinated by the amount of 
money that you feel would be appropriate so you could do a 
better job. I understand you want $67 million more. Is that the 
number?
    Commissioner Koskinen. Actually, the President's budget for 
this year would be--our present budget is $10.9 billion. The 
President's request is for, in effect, a total of $12.9 
billion; $12.3 billion through appropriations and about $600 
million through a program integrity cap adjustment.
    Senator Roberts. You said ``fair to everybody.'' According 
to Senator Brown and Senator Cardin, I wish they were here, 
they really want to use the money that you are not receiving 
now for 9,000--you indicated 9,000 enforcement employees.
    Commissioner Koskinen. No. Actually it would be--we have 
lost 5,000 enforcement employees. The actual increase in the 
budget would allow us to restore employees, not totally because 
we are down 13,000, headed to 16,000 down, but it would allow 
us to hire, for instance, 3,000 employees in the service 
centers answering phone calls, so our level of service would go 
back to----
    Senator Roberts. So this is answering phone calls. This is 
not enforcement employees knocking on doors with regard to 
audits, so on and so forth.
    Commissioner Koskinen. No. Some of the 9,000 would be 
enforcement employees as well. As you say, overall----
    Senator Roberts. Are you going to just really aim at 
sophisticated rich people?
    Commissioner Koskinen. No. We cannot afford to aim.
    Senator Roberts. I know some rich people who are not 
sophisticated.
    Commissioner Koskinen. We cannot afford to aim at any 
particular segment of the tax-paying population. Everybody 
paying taxes--most people want to be compliant. So we are 
anxious to----
    Senator Roberts. Exactly.
    Commissioner Koskinen. We divided the world into two kinds 
of taxpayers. If you are trying to become compliant, we are 
going to work very hard with you to----
    Senator Roberts. Well, what I am worried about is, 
everybody wants to talk middle class and class warfare. And the 
idea that was promoted by my colleagues was about 9,000 
enforcement people who would just really focus on the rich. I 
do not know who is rich. Who is rich? Is that $250,000? I mean, 
is there a number there?
    Commissioner Koskinen. We do not divide it that way.
    Senator Roberts. Good. Good. Good.
    Commissioner Koskinen. We look at the entire spectrum.
    Senator Roberts. Good. Good. Fine. But rich and 
sophisticated. In other words, they could hire somebody because 
they have a myriad of problems, they cannot figure it out, and 
so this is supposed to be a target.
    I just want to let you know there is one Senator who does 
not agree with that. I appreciate that. And thank you for 
coming and thank you for trying to get the trains to run on 
time. That is what you told me when you first came to my 
office.
    Commissioner Koskinen. We are still working on it.
    Senator Roberts. All right. Thank you so much.
    Senator Grassley [presiding]. Mr. Commissioner, you have 
said some good things about the IRS whistleblower program.
    Commissioner Koskinen. Yes.
    Senator Grassley. I am not worried about what you said. I 
am worried about whether or not your words at the top are 
getting down. Particularly, I am interested if they heard you 
at the Office of Chief Counsel.
    So what I am going to do on that issue is not ask you to 
answer questions for me right now, but I would like to raise 
with you questions and points about that program and submit 
them for answer in writing and give you an opportunity to give 
very complete answers.
    And I would just ask now for your commitment to provide a 
complete and thorough response for the record on that issue of 
whistleblowers.
    Commissioner Koskinen. I would be delighted to do that.
    Senator Grassley. My next issue is EITC and immigration. I 
would like to have you help me better understand the tax 
implications of the President's executive action on 
immigration.
    Congress established the EITC program to encourage and 
reward work. Obviously, since those in the United States who 
are undocumented are not legally allowed to work, it makes no 
sense to provide them a subsidy to work.
    Current policy reflects this by requiring those claiming 
the EITC to provide a Social Security number for themselves, 
their spouse, and any children. However, the IRS Chief Counsel 
advice issued March of 2000--not now, 2000--suggests that 
individuals granted deferred action will be able to amend 
returns for the previous years to claim the EITC for years they 
worked illegally in the United States once they obtain a Social 
Security number.
    So, Mr. Commissioner, can you confirm that those granted 
deferred action will be eligible to benefit from the EITC for 
years in which they were working without papers in the United 
States once they obtain a Social Security number?
    Commissioner Koskinen. The way the program works is, those 
without a Social Security number--and there are thousands who 
file with ITINs every year--people paying their taxes even 
though they are not legally here, they are not eligible for the 
Earned Income Tax Credit program.
    Once you get a Social Security number, however, whatever 
the programs are, then the program allows you to file for 
Earned Income Tax Credits.
    In terms of whether you can do that retroactively, the 
normal statute of limitations would apply as to when you can 
apply and file an amended return, in effect.
    Underneath all that is the requirement that you have to 
have filed returns in the past. As I say, there are thousands 
of people here illegally who have ITINs and regularly pay 
income taxes. If you did not pay the income taxes, obviously 
you cannot now file a return and say, I am eligible for 
something else because I did not file when I was required to 
file.
    Senator Grassley. Now, I am not going to argue with you 
about what you said, because I think you stated it the way it 
is. But this is a problem you get into. The IRS's 
interpretation of the EITC eligibility requirements undermines 
congressional policy of not awarding those to workers illegally 
in the United States.
    Does the IRS have any intention of revisiting the 2000 
Chief Counsel advice in light of the President's executive 
action on immigration?
    Commissioner Koskinen. At this point, I am not aware that 
we are going to do that, but I would be happy to look into that 
further and get back to you.
    Senator Grassley. I am suggesting to you that it should be 
done, because congressional policy is that you do not reward 
those who come here undocumented. But with the President taking 
his action to legalize some people, to get Social Security and 
the ability to retroactively claim something would undermine 
the congressional policy. So I would ask you to look at that 
and respond in writing.
    Commissioner Koskinen. I would be pleased to do that.
    Senator Grassley. My last question will have to be this. I 
have been investigating charitable hospitals that are suing 
their low-income patients when they cannot afford to pay for 
care. As part of the tax-exempt status, charitable hospitals 
are required to offer a community benefit. Also, the law 
requires hospitals to have financial assistance policies to 
help low-income patients afford care.
    What is the IRS doing to identify hospitals that are not 
meeting the requirements to create financial assistance 
policies, or hospitals that are not following their own 
policies when it comes to low-income care?
    Commissioner Koskinen. We take this issue seriously. As you 
know, we have had additional regulatory guidance for hospitals 
as to how to meet their requirements, which are required. At 
this point, we audit tax-exempt organizations on a regular 
basis. Without sounding the old refrain, obviously, we have 
fewer people able to do that.
    One of our hopes is, by streamlining the application 
process for small 501(c)(3) organizations, we both make it much 
easier for them to qualify and give us more efficient use of 
our resources to audit at the back end.
    So we think the points you have been raising are very 
important ones. These are, in many cases, significant financial 
institutions that are tax-exempt, to some extent, because they 
have a requirement to provide community services.
    And it is an important area for us to be aware of and for 
hospitals and those running them to understand what their 
responsibilities are. And it is our responsibility across the 
entire tax code to make sure that we undertake enough audits 
and enforcement activities to reinforce the need for 
compliance.
    Senator Grassley. Senator Portman, you are next.
    Senator Portman. Thank you, Mr. Chairman.
    Thank you, Commissioner, for being here. I was here for 
part of your testimony and responses to questions, but you have 
a tough job. And as you know, I co-chaired the IRS 
Restructuring and Reform Act process with Senator Kerry now 17 
years ago, and we made a lot of progress.
    If you look at the increases in the budget during that 
time, I think they are reflected in the fact that the IRS 
undertook some reforms that people on this side of the aisle 
and that side of the aisle thought were appropriate. And I 
think we are in a situation now where people are looking for a 
commitment by the IRS to do a better job on the probably dozen 
things that have been raised today. I have heard about four or 
five of them while I have been here. And maybe with that, there 
is a willingness to provide additional funding.
    After that process with the IRS Restructuring and Reform 
Act, I know that the image of the agency improved. It is a 
tough agency to love because it is taking away your hard-earned 
dollars, but the standing of the agency improved because 
taxpayer service improved.
    And I am very concerned with what I hear about this tax 
filing season. So I think we do have to figure out how to have 
the IRS run more efficiently. One thing that we always pushed 
with the IRS Restructuring and Reform Act, long before the 
Internet was used as extensively as it is now, was more 
technology.
    And one of my concerns has been a specific program that 
would help in terms of this budget issue that you have talked 
about today. There was a decision made by your managers that 
has significantly raised costs for the agency, but also for 
practitioners, and also for taxpayers. It has resulted, as I 
understand it, in an additional 370,000 calls being dropped 
into your practitioner phone queue--and I am referring to the 
Taxpayer Advocate's report on this recently--your decision to 
shut down the online e-services disclosure authorization 
electronic account resolution applications.
    This was a service that allowed practitioners to go online 
and to get the power of attorney, access client information 
online, and for them it took a matter of hours. Now it is 
taking 10 to 20 days, on average, which costs everybody more, 
again, not just the practitioner and the taxpayer, but the IRS.
    I would think, with your manpower being stretched and your 
resources being stretched, that you would not want to make a 
decision like that that would cost the agency so much and be 
harmful to taxpayers.
    So my question to you is, I guess, is this type of 
Internet-based solution that the e-services program provided 
something that you are intending to get back involved with, and 
are you going to implement it more effectively next time? Why 
did you shut it down? The IRS has received over $190 million 
for business systems modernization in the fiscal year 2014 
budget.
    Can you make assurances to us today that using available 
resources, you are going to reestablish those e-services 
applications, that that would be a priority during this fiscal 
year?
    Commissioner Koskinen. I am happy to take a look at it, 
because I agree with you, as you know. My goal is--and we are 
trying to get people to understand what the world would look 
like 3 to 5 years out if we could actually better use 
technology as we go.
    We do not have any flexibility left this year to do almost 
anything beyond the minimum that we are doing, but I do think 
this is an important area. We have heard those same concerns.
    Our concern is making sure that the program runs 
efficiently, that the authentication is satisfactory, so it is 
in fact not available to--we talked earlier about refund fraud 
and identity thefts.
    You have to understand, as you know, we are dealing with 
criminal syndicates here and around the world now. We have 
gotten almost 2,000 people put in jail. So a lot of the 
amateurs, the people who used to do it by themselves, are not 
there.
    What we are really dealing with is people who are very 
sophisticated, have systems more sophisticated than ours. But I 
can commit to you that we are concerned overall about the 
practitioners. Our practitioner priority line, as I said, is 
almost an oxymoron anymore, because it takes so long to get 
through. And practitioners are critical of us because they 
often represent more than one taxpayer, and if they have a 
question we could answer, it would make a whole series of 
returns more likely to be accurate, and with less work.
    So practitioners are really at the highest level of our 
concern, and whatever we can do to make the system work better 
for them, we will. But as I say, we are constrained as to what 
changes at all we can make this year. We talked earlier about 
how even the production of forms to libraries is a problem for 
us.
    Senator Portman. And the library problem is one we have had 
back in Ohio. Constituents have come to us and said, ``We 
cannot get the forms we normally could get by going to the 
public library.''
    I think there are certain things like the e-services 
program that are going to save you so much money and hassle 
over time, and not just for, again, the taxpayer and 
practitioner, but for your people and for downstream costs.
    In terms of identity theft, this is something that I have a 
strong concern about, and I think you talked about this earlier 
today with some folks.
    Let me give you an example. We get a call from a 
constituent. It is a woman. She is a mom. She has a child. She 
has applied for EITC, and she has claimed the child on her EITC 
filing. She finds out her child has already been claimed by 
somebody else. So the IRS is telling her, ``I am sorry, you are 
not going to get your EITC even though you are working, even 
though you meet all the other requirements, because your child 
has already been claimed.''
    So we are working through that with your agency. I am not 
asking you to get involved in that one, because I think we are 
going to work that out with some of your folks. But the Social 
Security number apparently got into the wrong hands.
    What is the agency doing to combat that kind of identity 
theft? And what options do we, as legislators, have to help you 
with that? Because it is a growing problem.
    Commissioner Koskinen. Well, as I said, if we could get W-
2s earlier, that would help deal with some identify theft and 
fraud, because we will be able to see the returns. Particularly 
children's Social Security numbers are attractive to criminals 
because, oftentimes, children are not filing a return, and, if 
you are not claiming them on the return, they are an easy 
target. That is why the death files used to be where this all 
started, because there was nobody filing a return for someone 
who had died.
    We have increasingly sophisticated filters designed to 
identify where those returns are coming from. We stopped about 
$15 billion worth of fraudulent returns from going out last 
year, but we are still dealing with several billion dollars 
that got through those filters.
    Part of our problem is that, with our famous antiquated 
system, we have upgraded to the extent we can, but the people 
filing these returns are not filing one or two. They are filing 
hundreds of them and then reverse-engineering the process to 
see what our filters are doing, and then they are end-running 
them.
    And so this year for the first time--it started last year--
we can actually update our filters on an ongoing basis rather 
than once a year, which was where we were 2 or 3 years ago.
    Senator Wyden [presiding]. This is a very important issue, 
but Senator Menendez has been very patient. And since I asked 
about it earlier today as well, I am interested in working with 
my colleague.
    Senator Portman. Thank you, Mr. Chairman. I appreciate it. 
Thank you, Commissioner.
    Senator Wyden. Senator Menendez?
    Senator Menendez. Thank you, Mr. Chairman.
    Thank you, Commissioner. Look, I know the IRS is not the 
most popular agency in government, and it is politically 
popular for some to take shots at you and your workers. But at 
the end of the day, the main purpose of the IRS is to enforce 
the law and serve the American people. And when we try to 
punish the IRS, as some do, by cutting their budget, it is the 
American taxpayer who suffers the collateral damage through 
reduced service and efficiency.
    According to the National Taxpayer Advocate's annual report 
to Congress, and I will quote from it, ``The budget environment 
in the last 5 years has brought about a devastating erosion of 
taxpayer service, harming taxpayers individually and 
collectively.'' The report goes on to estimate that taxpayers 
will have to wait at least an average of 30 minutes on hold 
before they will be able to speak with someone and less than 
half of those calling in will be able to reach a 
representative. Less than half.
    Like you, I think this is completely unacceptable, not to 
mention that, for all who work hard and pay their taxes to 
support our Nation collectively, it really allows those who 
cheat to get away with it, to some degree, when you do not have 
the ability to ultimately enforce the law.
    So let me ask you, is there any way to reduce wait times 
and increase customer service by reallocating resources to that 
critical purpose, and if so, what would be the consequences of 
reprogramming funding away from other functions?
    Commissioner Koskinen. We have looked, as I said, at trying 
to be as even and fairly balanced as we can, because 
enforcement is a big part of our responsibilities, as is 
taxpayer service. Part of the limitation of saying, well, let 
us give up on enforcement and turn everybody to answering the 
phones is that the people who are revenue agents and officers 
are not trained to deal with, in fact, call center operations, 
just as our call center operators are not trained to become 
revenue agents overnight. Clearly, we could train them over 
time.
    So our judgment has been to kind of lower everything. As I 
say, we have 5,000 fewer revenue agents, officers, and criminal 
investigators. At the same time, we have 3,000 fewer people 
answering the phones, and this year we have 2,000 fewer 
temporary people available for the phones.
    Seventy-five percent of our budget is people, and they are 
spread across enforcement, operations, taxpayer service, and 
information technology. So there is no magic hidden pool that 
we can access that would move some people into taxpayer service 
and would go unnoticed.
    Senator Menendez. So at the end of the day, people who are 
calling and trying to find out exactly how to abide by the law, 
get information so that they can be a responsible filer, get 
delayed, and those who cheat on their taxes, to the detriment 
of all those who pay, are made less likely to be found out 
because you have less agents. Is that a fair characterization 
of what happens?
    Commissioner Koskinen. That is a fair characterization.
    Senator Menendez. Let me turn to another subject that I am 
very seriously concerned about. That is the Child Tax Credit, 
its refundable portion, the Additional Child Tax Credit, which 
is being criticized based on allegations of fraud.
    While fraud in any tax program must be addressed, a focus 
solely on one anti-poverty tax program that is threatening to 
completely deny an economic lifeline to needy children, in my 
mind, is not a meaningful solution.
    So there is a lot of talk about combating fraud in the 
Child Tax Credit, particularly among low-income immigrant 
families, and so I have a couple of questions that hopefully 
you can answer in short order.
    Is fraud in the CTC and ACTC a significant contributor to 
the $450 billion tax gap?
    Commissioner Koskinen. It is not. It is a problem we take 
seriously, but it is not at the core of the tax gap.
    Senator Menendez. By what percent would the gap be narrowed 
if there was zero fraud in the CTC program?
    Commissioner Koskinen. It might be narrowed by a 
percentage.
    Senator Menendez. Are unscrupulous tax preparers a 
significant cause of this fraud?
    Commissioner Koskinen. We are very concerned about 
unscrupulous tax preparers. As I would stress, the vast 
majority do a good job, know what they are doing. A smaller 
percentage of them mean well, but do not know really a lot of 
what they are doing. And then there is a percentage who are 
crooks, and they are the ones who are a major part of the 
problem of fraud across the board.
    Senator Menendez. And do you believe that denying the 
credit to anyone without a Social Security number is merely 
fraud prevention or a significant policy change that will deny 
this important credit to families that are currently eligible 
today?
    Commissioner Koskinen. No. Obviously, we would love to move 
everybody off Social Security numbers and just do an identity 
protection PIN someday, but at this juncture, the issue of 
fraud is one that applies to ITINs, it applies to any 
identifier. People are forever stealing identification 
information from taxpayers to, in fact, generate fraud.
    Senator Menendez. Well, I will close, Mr. Chairman, and say 
I find it interesting that with $450 billion in tax avoidance 
and fraud occurring every year, some colleagues have focused 
solely on poor children and families, which make up a mere 
fraction of the overall problem. In fact, businesses underpaid 
taxes by approximately $122 billion in 2006 alone, yet we do 
not seem to hear the same level of outrage in that regard.
    So I am for rooting out the fraud everywhere, but at the 
end of the day, I am not for denying individuals who 
legitimately have the right to get the credit who, because of 
the way that it is being pursued here, would be denied that 
right, and I think that approach is fundamentally flawed and 
there has to be a better way.
    Thank you.
    The Chairman. Thank you, Senator.
    Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    Commissioner, I have one question, but I think you want to 
correct something for the record in a discussion that you had 
with Senator Nelson.
    Commissioner Koskinen. Senator Nelson focused on an 
important problem, which is our exchange of information with 
prisons, and I noted we are working on developing MOUs with 
States, and I stated we had an MOU with the Bureau of Prisons. 
Actually, we get automatically, as a result of support from the 
Hill, the information from the Bureau of Prisons about the 
prisoner rolls, and we are able to, in fact, cut down 
significantly on prisoner fraud. But we do not actually have an 
MOU, as such, with the Bureau of Prisons.
    Senator Wyden. I want to talk to you now about what I 
consider to be a decade's worth of foot-dragging at the agency, 
and I am using that word very deliberately, because it has just 
not been possible to get some answers and get this resolved.
    As you know, because we have talked about it, there are 
some hedge funds that masquerade as insurance companies, and 
then they go to places like Bermuda and the Cayman Islands 
where they are not taxed and where their earnings are sheltered 
from U.S. taxes.
    Now, the IRS has been onto this for over a decade, since 
2003, has issued guidance: we have to scrutinize this. There 
are many responsible hedge funds that have offered suggestions 
on how to correct this. Every time I bring it up, you all say 
it is the Treasury's doing, that they are not getting at it, 
and Treasury says it is IRS that is not getting at it.
    I am going to bulldog this until this is resolved. I think 
this is outrageous that this has gone on for more than a 
decade, Commissioner, more than a decade since that guidance. 
And just to go back and forth between you all and the Treasury 
as I have is just unacceptable. These are people who are taking 
advantage of the law-abiding taxpayers we have talked about.
    So what is it going to take to get this actually resolved?
    Commissioner Koskinen. We have actually prepared guidance 
and are working with Treasury on putting it into final form, to 
a significant extent as a result of conversations you and I 
have had over the last few months.
    Our people and Treasury's have met with the insurance 
associations to get their suggestions and ideas on what would 
work and not work. The concern everybody has is, there are 
legitimate reinsurance companies that have large reserves 
because their claims are episodic. But within that context, we 
ought to be able to move this forward, and we are committed to 
doing that.
    And as I say, we are working with Treasury to get those 
regulations out.
    Senator Wyden. So guidance was issued in 2003. When do you 
think this is actually going to get accomplished? Can you give 
me a date this morning? Because otherwise it just sounds like 
more of the same, more of what everybody has talked about since 
2003: we are talking to our colleagues, it is going back and 
forth. Yes, there are legitimate hedge fund companies, we all 
acknowledge that, and legitimate insurance.
    These are people who are ripping taxpayers off. So give me 
a date when I can expect that this is going to be completed.
    Commissioner Koskinen. Well, as you know, I do not control 
that because ultimately regulations come out of both agencies. 
All I can commit to you is that we are pushing very hard to get 
this done.
    Senator Wyden. Ninety days? Can I expect this will get done 
in 90 days?
    Commissioner Koskinen. Ninety days has a nice ring to it.
    Senator Wyden. Good.
    Commissioner Koskinen. Let us say we will do our best to 
get it done in 90 days. It will help to have a deadline out 
there.
    Senator Wyden. But let us get it done in 90 days, 
Commissioner. After 10 years, 10 years plus 90 days seems to be 
enough time.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Thank you for your patience here, Mr. Commissioner. We 
appreciate you, and we appreciate you coming to the committee 
and being open to all these questions that have been asked of 
you.
    Let me just say a couple of things and ask a couple of 
questions.
    The President has indicated that he would be for corporate 
or business tax reform. Has anybody in the administration 
contacted you about how you think that ought to occur? It is a 
Treasury issue, but have they contacted you or talked to you 
about it?
    Commissioner Koskinen. I am not personally aware of any 
contact about that, but we have, with inversions and all of the 
issues that are kicking around, an ongoing set of reviews with 
the Treasury Office of Tax Policy about regulatory advice and 
development of programs.
    So, within that ongoing exchange, we meet every 2 weeks. I 
am not aware of a specific focus on what the policies would be 
or the recommendations would be, although my understanding is 
that in the budget presentation, there were going to be basic 
principles provided to you as to where they were going.
    But as always, tax policy, as I have said, belongs in the 
domain of Treasury, the White House, and the Congress. We are 
tax administration. But as such, we are anxious to cooperate 
with anybody thinking about tax reform, because it has to be 
administrable.
    The Chairman. That is right. And have they consulted with 
you about these tax proposals that the President is making in 
his budget that he filed here yesterday?
    Commissioner Koskinen. As I say, we do not have 
communications with the White House on----
    The Chairman. Why not? I mean, it seems to me you would 
know more about it than they do.
    Commissioner Koskinen. We do, but ultimately, for all the 
reasons we have talked about over the last year and a half, we 
are involved in tax administration. And so in discussions about 
tax policy, certainly at the very higher level of policy, not 
the drafting of the statutes, we usually are not consulted and 
do not reach out to them.
    But as you move forward, as I say, whatever the policy is 
that people are considering, it has to be administered, and it 
has to be administrable. And so we are very anxious to 
cooperate with anybody looking at reform or simplification of 
the code.
    The Chairman. Well, we appreciate you being here today. I 
want to thank you for appearing here today. I also want to 
thank all the Senators who participated. It has been a good 
hearing, in my opinion, and any questions for the record should 
be submitted no later than Tuesday, February 10th.
    So with that, the committee will adjourn until further 
notice.
    Commissioner Koskinen. Thank you, Mr. Chairman.
    The Chairman. Thank you. I appreciate you being here.
    [Whereupon, at 12:40 p.m., the hearing was concluded.]
                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              

 Prepared Statement of Hon. Orrin G. Hatch, a U.S. Senator From Utah, 
                     Chairman, Committee on Finance
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah) 
today delivered the following opening statement at a committee hearing 
on the President's FY 2016 budget request for the IRS:

    The committee welcomes Internal Revenue Service Commissioner John 
Koskinen, who comes before us today to discuss his agency's budget and 
operations. We will also be discussing President Obama's fiscal year 
2016 budget proposal.

    Commissioner Koskinen, this morning's hearing continues a long 
tradition of the close relationship between the Senate Finance 
Committee and your agency.

    More than 152 years ago, the Finance Committee received a letter 
from George Boutwell, who President Lincoln had appointed as the first 
Commissioner of Internal Revenue. The letter came in response to an 
inquiry from the committee, seeking information about the 
commissioner's organization, his budget, and the activities of his 
office.

    Does that sound familiar?

    In his letter, dated January 21, 1863, Commissioner Boutwell tried 
to answer the committee's questions, but started by first asking 
Congress for more money.

    Specifically, he wrote, ``Before proceeding to estimate the 
expenses of assessing and collecting the revenue, I desire to express 
the opinion that an increase in the pay of assessors is very important, 
if not absolutely necessary.''

    That part sounds familiar to me.

    As you and I continue this historic and important relationship, I 
hope we can begin the 114th Congress on new footing. The issues before 
us are too great for that relationship to be anything but open, honest, 
and productive.

    We will certainly disagree a lot--on your agency's implementation 
of Obamacare, on the application of premium tax credits to federal 
exchanges, and on IRS spending, just to name a few issues. Sometimes, 
the relationship will be contentious. Sometimes, it will be congenial. 
I hope it will be more the latter than the former, but that will depend 
on you.

    When we look at the IRS's operations, there are handful of basic 
principles the agency must follow in order maintain its good working 
relationship with this committee. Today, I'm going to talk about three 
of those principles.

    First, the IRS must spend taxpayer dollars wisely.

    As the agency that collects taxes from American workers and 
businesses, your agency will continue to be under especially tough 
scrutiny when it comes to how it spends the money Congress 
appropriates. And, unfortunately, the IRS's operations do not appear to 
be able to withstand such scrutiny.

    When you reverse the positions of your predecessors and award 
bonuses to employees who have not paid their taxes; when your agency 
throws lavish conferences; and when you spend tens of millions of 
dollars on public sector union activity, the public loses faith in your 
ability to spend money wisely.

    When your agency pays tens of billions of dollars in improper 
payments every year; when the IRS mails thousands of fraudulent refund 
checks to a single home address; and when a quarter of all Earned 
Income Tax Credit payments are improper, the public loses faith in your 
ability to protect tax dollars carefully.

    Second, the IRS must treat taxpayers fairly and respect their 
rights.

    Recent scandals have given Americans reason to doubt that the IRS 
will treat them fairly. While the targeting of applicants for tax-
exempt status may have happened before your tenure, taxpayers must have 
confidence that those days are over.

    Just before you became Commissioner, the IRS and Treasury 
Department released a proposed regulation that would limit the ability 
of social welfare organizations to engage in speech about matters of 
public importance. After an outcry from all sides of the political 
spectrum, the proposed regulation was withdrawn.

    But, now I hear you plan to reissue it.

    This would be a mistake--and I hope you do not go down the path of 
trying to limit political speech. That would only further entangle your 
agency in needless political debate and controversy.

    Third and finally, the IRS must be open and honest with this 
committee. We must have mutual trust between us.

    I believe you to be an honest man and when you tell me something, I 
take you at your word. But it's because of this trust that I am 
concerned about a recent development in the committee's investigation 
of political targeting at the IRS.

    Last July, your agency told the committee that it had completed its 
production of documents regarding Lois Lerner, the central figure in 
the investigation. Then, late last month, as the committee worked to 
finalize its investigative report, your agency delivered 86,000 pages 
of new documents, including 30,000 pages of new Lois Lerner documents, 
including new emails. Thirty thousand pages of new documents.

    Emails that fill eight boxes, and I have here about a tenth of 
those. These documents are central and relevant to the committee's 
investigation, and were given to us without notice or explanation 
roughly twenty months after we made our initial document request.

    This is not the way to build trust with this committee. This 
prolongs the committee's investigation and raises more questions than 
it answers.

    We will be following up on this matter more after today's hearing.

    Commissioner Koskinen, we are here today to discuss your agency's 
operations and the President's budget proposal. There is much to 
discuss on these two topics, and I look forward to hearing your 
testimony and answers.

    In your opening remarks, I'd appreciate it if you took the time to 
address three specific concerns that I have.

    First, I'd like to hear what the IRS plans to do to address the 
consistently high levels of fraud and overpayments for the Earned 
Income Tax Credit.

    Second, I'd like to hear what specific changes you plan to make in 
the agency's spending habits to deal with the budgetary shortfalls 
you've publicly decried.

    Third, I'd like to hear about any contingency plans you have in 
place in case the Supreme Court invalidates the current structure of 
the Affordable Care Act tax subsidies later this year.

    I hope that today can mark the beginning of a new chapter in the 
long, historic relationship between the IRS and the Senate Finance 
Committee.

    I hope it is a good chapter, but, once again, that is ultimately up 
to you.
                                 ______
                                 
             Prepared Statement of Hon. John A. Koskinen, 
                 Commissioner, Internal Revenue Service
    Chairman Hatch, Ranking Member Wyden, and Members of the Committee, 
thank you for the opportunity to appear before you today to discuss the 
IRS's budget and current operations.

    After just over a year as IRS Commissioner, it remains an honor for 
me to lead this great institution. My respect for the agency's role and 
admiration for its workforce continue to grow. I'm pleased to report 
that the 2015 tax filing season opened on schedule on January 20, and 
is going well so far.

    Opening the current filing season on schedule was a major 
accomplishment, given the challenges we faced. I attribute this 
achievement to the dedication, commitment and expertise of the IRS 
workforce. Along with normal filing season preparations, there was a 
significant amount of extra work to get ready for tax changes relating 
to the Affordable Care Act (ACA) and the Foreign Account Tax Compliance 
Act (FATCA). We also had to update our systems to reflect the passage 
of the tax extender legislation in December.

    Even with the demonstrated capacity of our work force to 
successfully meet these challenges to open filing season on time, I 
remain deeply concerned that the significant reductions in the IRS 
budget will degrade the agency's ability to continue to deliver on its 
mission during filing season and beyond. In fact, one of my highest 
priorities since becoming Commissioner has been to advise Congress 
about the ramifications of continued substantial cuts to our funding, 
and that is what I will focus on in my testimony today.

    IRS funding has been reduced $1.2 billion over the last five years, 
from $12.1 billion in Fiscal Year (FY) 2010 to $10.9 billion in FY 
2015. Just over a month ago, the agency's FY 2015 budget was cut by 
$346 million from FY 2014, to $10.9 billion. But the total reduction 
from last year is actually closer to $600 million when the $250 million 
increase in mandated costs and inflation are counted.

    The IRS is now at its lowest level of funding since FY 2008. When 
inflation is taken into account, the current funding level is 
comparable to that of 1998. Since then, however, the number of 
individual and business tax filers has increased by more than 30 
million, or 23 percent, along with the number of legislative mandates 
that the IRS is required to implement.

    It is important to point out that prior to this year the IRS was 
already reducing costs in order to absorb the reductions to our funding 
that began in FY 2011. This has not been easy because labor costs are 
by far the largest portion of the IRS budget. In fact, approximately 75 
percent of our budget represents staffing, which is critical to 
providing adequate levels of taxpayer service and maintaining robust 
compliance programs. Moreover, it is not possible to shift enforcement 
personnel into service jobs, or vice versa, without providing them with 
substantial training, which of course is resource-intensive.

    Nonetheless, the IRS has for several years been working hard to 
reduce costs and find efficiencies in our operations. The IRS has 
implemented significant reductions in its non-labor spending. In an 
effort to promote more efficient use of the Federal government's real 
estate assets and to generate savings, the agency in 2012 began a 
sweeping office space and rent reduction initiative. We estimate that 
these measures have reduced rent costs by more than $47 million each 
year and reduced total IRS office space by more than 1.8 million square 
feet.

    During the last several years, the agency generated annual savings 
of $60 million in printing and postage savings by eliminating the 
printing and mailing of selected tax packages and publications, and by 
transitioning to paperless employee pay statements.

    We will continue our efforts to find savings and efficiencies 
wherever we can. But as I said in my testimony to the Appropriations 
Committees almost one year ago, the cuts to the IRS are so significant 
that efficiencies alone cannot make up the difference. Now, we are at 
the point of having to make very critical performance tradeoffs. There 
is simply no way around the severity of these budget cuts without 
taking some difficult steps. We have been attempting to cope by 
protecting the core operations of the agency, in the belief that we 
must not hollow out the organization. We must identify the things that 
absolutely need to get done, and do them well.

    Our determination to protect the core operations of the agency has 
led us to the decision that we need to continue to invest in our 
workforce. The ability of the IRS to fulfill its mission depends on the 
experience, skills and dedication of our employees. We need to do 
everything we can to ensure that every employee has the leadership, 
systems and training to help us retain good employees, to support them 
in their work and to allow them to perform at the highest levels, 
whether they are involved in customer service, compliance programs or 
information technology (IT) infrastructure and operational support.

    As part of this investment in our workforce, the IRS will continue 
to recognize qualifying employees who do exceptional work. Performance 
awards are anecessary incentive to motivate the workforce and retain 
highly qualified employees, and in that regard, I firmly believe they 
provide the agency and taxpayers with a good return on the dollar. This 
investment will ensure that highly qualified employees have an 
incentive to stay with the agency and improve performance. As a result 
of negotiations with the National Treasury Employees Union (NTEU), the 
overall pool for awards was reduced to about 1 percent of the 
bargaining unit (BU) employee salary base, which is significantly less 
than the 1.75 percent provided to these employees in previous years.

    I recently worked with IRS senior leadership to determine how to 
allocate our limited resources in FY 2015. We reviewed our operations 
to determine where we could make cuts that would have the smallest 
possible impact on taxpayers and tax administration. In making these 
decisions, we strove to maintain a balanced and fair approach, keeping 
in mind the needs of both service and enforcement, to avoid overly 
harming one part of our mission in the attempt to maintain another.

    Let me now describe for this Committee the difficult decisions we 
made to absorb the latest round of budget cuts, and the impacts of 
those decisions. They include:

   Delays to critical IT investments of more than $200 million. We 
        anticipate that these delays will reduce taxpayer service and 
        cost-efficiency efforts as well as reduce outside contractor 
        support for critical IT projects. For example, we will not be 
        replacing aging IT systems, increasing the risk of downtime and 
        negatively affecting taxpayer service. In addition, we will not 
        be able to invest up front money to gain future operational 
        savings, such as moving to a shared cloud infrastructure and 
        reducing data center space.

   Enforcement cuts of more than $160 million. We estimate the agency 
        will lose about 1,800 enforcement personnel through attrition 
        during FY 2015 that we are not able to replace. We anticipate 
        the result will be fewer audits and resources focused on 
        collection. We estimate that as a result of these enforcement 
        cuts the government will lose at least $2 billion. In addition 
        to the revenue loss, the curtailment of enforcement programs is 
        extremely troublesome because these programs help create a 
        deterrent effect that is the key to preserving high levels of 
        voluntary compliance.

   Reductions in staffing during filing season totaling more than $180 
        million. Normally, IRS uses employee overtime and temporary 
        staff to provide the extra resources needed during the busy 
        filing season. However, IRS will be reducing overtime and 
        seasonal staff hours during FY 2015. We anticipate that these 
        cuts will result in delays in refunds for some taxpayers. 
        People who file paper tax returns could wait an extra week--or 
        possibly longer--to see their refund. Taxpayers with errors or 
        questions on their returns that require additional manual 
        review will also face delays in getting their refunds. It is 
        also expected that the taxpayers will have to wait longer to 
        get an answer to their questions from the IRS. In addition to 
        responses to written correspondence taking longer, taxpayers 
        will have more difficulty getting through to the IRS on the 
        phone and in person. We anticipate that about 50 percent of 
        callers will be able to get through to an assistor and as we 
        get further into the filing season, the telephone level of 
        service will continue to deteriorate, dropping below 50 
        percent. This means that for every person who tries to reach 
        IRS by phone, only half will end up getting through. That is 
        significantly below the FY 2014 average of 64 percent, which 
        was itself below desired levels. The 50 percent who reach the 
        IRS will face extended wait times that are unacceptable to all 
        of us.

   Continuing the agency hiring freeze. The IRS is extending the 
        exception-only hiring freeze begun by the IRS in FY 2011 
        through FY 2015. As a result, and assuming normal attrition 
        rates, the IRS expects to lose approximately 3,000 additional 
        full-time employees in FY 2015. That would bring the total 
        reduction in full-time staffing since FY 2010 to over 16,000. 
        The resulting reduction in staffing will have negative impacts 
        on taxpayer service and enforcement as noted above.

    Even with all of these reductions, the IRS still faces a 
significant budget shortfall for FY 2015. So at this time, the agency 
is contingency planning for the possibility of a shutdown of IRS 
operations for two days later this fiscal year, which will involve 
furloughing employees on those days. If this does become necessary, our 
goal will be to minimize disruption to taxpayers, employees and our 
operations. We will continue to do the best we can to avoid taking this 
drastic action. In fact, these dates will be very late in the fiscal 
year to give the agency time to do everything possible to avoid a 
shutdown and, if one is necessary, to do it at a time that causes as 
little disruption as possible.

    The concerns I have about the IRS's funding level relate not only 
to the negative impact these cuts have on the present operations of the 
agency, but also the impact on our ability to advance the agency into 
the future and provide a more up-to-date and efficient tax filing 
process for the taxpaying public.

    To the extent possible within our budget constraints, the IRS has 
already made some significant improvements in its technology to better 
serve taxpayers. For example, one of the most popular features on 
IRS.gov is the Where's My Refund? electronic tracking tool, which 
reduces phone traffic IRS receives regarding questions about refunds. 
Another good example is IRS Direct Pay, which provides taxpayers with a 
secure, free, quick and easy online option for making tax payments, 
reducing the need for IRS to process payments by check. Still another 
example is Get Transcript, a secure online system that allows taxpayers 
to view and print a record of their IRS account in a matter of minutes, 
saving taxpayers time and reducing IRS resources needed to process 
paper requests for transcripts.

    In looking to the future, we believe that it is not an option to 
stay at our current level of funding, given the extent to which both 
taxpayer service and enforcement will suffer as a result. It is very 
troubling to me that these cuts prevent us from fully improving and 
modernizing our IT infrastructure and operations support. This hurts 
taxpayers and the entire tax community.

    Earlier in this testimony I described some examples of IT projects 
that must be deferred as a result of budget reductions in FY 2015. But 
the problem is much broader. We are operating with antiquated systems 
that are increasingly at risk, as we continue to fall behind in 
upgrading both hardware infrastructure and software. Despite more than 
a decade of upgrades to the agency's core business systems, we still 
have very old technology running alongside our more modern systems. 
This compromises the stability and reliability of our information 
systems, and leaves us open to more system failures and potential 
security breaches.

    In regard to software, we still have applications that were running 
when John F. Kennedy was President. And we continue to use COBOL 
programming language. COBOL was considered outdated back when I served 
as chairman of the President's Council on Year 2000 Conversion and it 
is extremely difficult to find IT experts who are versed in this 
language. I give our IT employees a tremendous amount of credit as 
keeping things going in the face of these challenges is really a major 
accomplishment.

    It is important to point out that the IRS is the world's largest 
financial accounting institution, and that is a tremendously risky 
operation to run with outdated equipment and applications. Our 
situation is analogous to driving a Model T automobile that has 
satellite radio and the latest GPS system. Even with all the bells and 
whistles, it is still a Model T. Our core IT systems are not 
sustainable without significant further investment over the next few 
years.

    The President's 2016 Budget provides $12.3 billion in base 
discretionary resources, an increase of $1.3 billion from FY 2015 to 
make strategic investments in the IRS to continue modernizing our 
systems, improve service to taxpayers, and reduce the deficit through 
more effective enforcement and administration of tax laws. The Budget 
also proposes a $667 million cap adjustment to support program 
integrity efforts aimed at restoring enforcement of current tax laws to 
acceptable levels and to help reduce the tax gap. This multi-year 
effort is expected to generate $60 billion in additional revenue over 
the next ten years at a cost of $19 billion, thereby reducing the 
deficit by $41 billion. In addition, there are several important 
legislative proposals in the President's FY 2016 Budget related to tax 
administration. Specifically, let me highlight the following proposals:

   Acceleration of information return filing due dates. Under current 
        law, most information returns, including Forms 1099 and 1098, 
        must be filed with the IRS by February 28 of the year following 
        the year for which the information is being reported, while 
        Form W-2 must be filed with the Social Security Administration 
        (SSA) by the last day of February. The due date for filing 
        information returns with the IRS or SSA is generally extended 
        until March 31 if the returns are filed electronically. The 
        Budget proposal would require these information returns to be 
        filed earlier, which would assist the IRS in identifying 
        fraudulent returns and reduce refund fraud, including refund 
        fraud related to identity theft.

   Provide correctable error authority. The IRS has authority in 
        limited circumstances to identify certain computation or other 
        irregularities on returns and automatically adjust the return 
        for a taxpayer, colloquially known as ``math error authority.'' 
        At various times, Congress has expanded this limited authority 
        on a case-by-case basis to cover specific, newly enacted tax 
        code amendments. The IRS would be able to significantly improve 
        tax administration--including reducing improper payments and 
        cutting down on the need for costly audits--if Congress were to 
        enact the Budget proposal to replace the existing specific 
        grants of this authority with more general authority covering 
        computation errors and incorrect use of IRS tables. Congress 
        could also help in this regard by creating a new category of 
        ``correctable errors,'' allowing the IRS to fix errors in 
        several specific situations, such as when a taxpayer's 
        information does not match the data in certain government 
        databases.

   Authority to regulate return preparers. In the wake of court 
        decisions striking down the IRS's authority to regulate 
        unenrolled and unlicensed paid tax return preparers, Congress 
        should enact the Budget proposal to provide the agency with 
        explicit authority to regulate all paid preparers. The 
        regulation of all paid preparers, in conjunction with diligent 
        enforcement, would help promote high quality services from tax 
        return preparers, improve voluntary compliance, and foster 
        taxpayer confidence in the fairness of the tax system.

   Streamlined critical pay. The IRS Restructuring and Reform Act of 
        1998 increased the IRS's ability to recruit and retain a 
        handful of key executive-level staff by providing the agency 
        with streamlined critical pay authority. This allowed the IRS, 
        with the approval of the Treasury Secretary, to hire well-
        qualified individuals to fill positions deemed critical to the 
        agency's success, and that required expertise of an extremely 
        high level in an administrative, technical or professional 
        field. This authority expired at the end of FY 2013. The 
        President's budget request proposes renewing this authority, 
        which is essential to ensuring that the IRS has needed 
        expertise in a number of important areas, including IT--in 
        particular, cyber security--as well as international tax 
        compliance and operational support.

   Simplify large partnership audits. Auditing of large partnerships 
        has become a very challenging area for the IRS, in part because 
        the number and complexity of partnerships has grown 
        significantly over the last several years, and also because of 
        inefficiencies in the partnership audit rules contained in the 
        Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). The 
        procedures set up under TEFRA were designed to improve tax 
        administration by making it possible for the IRS to conduct 
        audits at the partnership level, instead of auditing each 
        individual partner. But TEFRA was enacted when partnerships 
        generally were smaller than they are today, and before they had 
        complicated tiered structures. Therefore, having to follow the 
        TEFRA procedures is now more of a burden for the agency than a 
        help. Congress could ease this situation by enacting the Budget 
        proposal to streamlined audit procedures for large 
        partnerships.

    Chairman Hatch, Ranking Member Wyden, and Members of the Committee, 
thank you again for the opportunity to discuss the IRS budget and 
current operations. Given the impacts we are already seeing on our 
ability to deliver on our mission, I believe it is vital that we find a 
solution to our budget problem, so that the IRS can be put on a path to 
a more stable and predictable level of funding. I look forward to 
working with Congress to do just that. This concludes my statement, and 
I would be happy to take your questions.
                                 ______
                                 
      Questions Submitted for the Record to Hon. John A. Koskinen
               Questions Submitted by Hon. Orrin G. Hatch
                         discretionary funding
    Question. This year, your agency has almost $800 in resources 
outside of appropriations, including nearly $400 million in user fees 
alone. Can you give the Committee better insight into the decision-
making process at IRS, and how the agency prioritizes its discretionary 
funding between taxpayer services, enforcement, employee bonus awards, 
and other spending?

    Answer. The IRS senior leadership uses a deliberate decision making 
process to determine priorities based on the hierarchy of statutory, 
regulatory, and Department/Service-directed requirements. The Service 
then allocates available appropriated resources against those 
requirements. We then determine the unfunded mission critical 
requirements and identify what additional resources are available from 
other sources, such as user fees, and allocate those resources against 
the Servicewide requirement.
                   procurement and spending practices
    Question. Reviews by the Treasury Inspector General for Tax 
Administration (TIGTA) found the IRS is ineffectively managing its 
software licenses by failing to adhere to industry best practices and 
failing to maintain agency-wide policies or procedures.\1\ As a result, 
the IRS may have wasted between $81 and $114 million on unused software 
licenses and annual license maintenance. Further, the IRS may have 
over-deployed licenses valued between $24 and $29 million, and it has 
not been able to account for whether these licenses were ever used.
---------------------------------------------------------------------------
    \1\ Treasury Inspector Gen. for Tax Admin., Additional 
Consideration of Prior Conduct and Performance Issues is Needed When 
Hiring Former Employees (Dec. 30, 2014), 2015-10-006.

    How much is the IRS currently spending on software asset 
---------------------------------------------------------------------------
management?

    Answer. The IRS estimates expenditures of approximately $16.7 
million on software asset management, including contractor support, 
software operations and maintenance, infrastructure support, and IRS 
labor to support its software asset management capability. While there 
are various software asset management processes, capabilities, and 
tools in place to support asset management for desktops/laptops, 
servers, and mainframe computers, some of the tools and associated 
processes are not yet fully integrated and institutionalized. We would 
like to reach an industry standard level of asset management known as 
Information Technology Infrastructure Library (ITIL) Level III 
capability. The IRS has chartered an Enterprise Software Governance 
Board (ESGB) to provide guidance and oversight in the development of 
software asset management processes, specific support centers for 
development of internal audit processes for software licenses, 
development of software asset management tool(s) requirements for an 
integrated asset management capability, and overall governance 
processes.

    Question. In light of TIGTA's findings, why should spending levels 
be increased?

    Answer. The IRS's 2016 infrastructure initiative requires 
investment in three elements: people, processes, and technology. 
Although TIGTA's estimates of underutilized software spending and over-
deployed software are dramatically higher than the IRS's estimates, the 
IRS does agree with TIGTA that there are significant benefits to be 
realized with an enterprise-wide software asset management capability 
that meets more mature ITIL and industry best-practice standards. In 
the future and after a resource review, the IRS can build on existing 
processes, capabilities, and tools to deliver an enhanced software 
asset management structure, enterprise-wide inventory, and software 
license management tools that are in line with TIGTA's recommendations. 
While there are some capabilities and tools currently in place, funding 
for this enterprise-wide effort has been significantly reduced due to 
budget reductions in FY 2014 and FY 2015. Without additional resources, 
we continue to cobble together the existing discovery tools, harvested 
data from various repositories, spreadsheets, and direct contact calls 
to manage our software assets. While the IRS has realized some 
significant savings following our existing processes, there is room to 
improve to rise to the level of industry standards and obtain the 
associated results.

    Within the FY 2016 President's request the IRS could backfill key 
positions that have been vacated due to natural attrition and 
retirements and to bring in external industry experts to begin to 
implement the recommendations made by TIGTA and the ESGB. Those 
resources would be used as appropriate to optimize existing software 
agreements as well as to implement the processes and procedures 
necessary to manage an overall effort at an enterprise level. The IRS 
believes there is a large upside potential for savings if appropriate 
staffing and funding can be allocated to this effort.

    Question. What structural reforms has the IRS implemented to 
improve software asset management and avoid irresponsible and wasteful 
spending of taxpayer money in this area?

    Answer. The IRS has chartered the ESGB, which is a collaborative 
effort with key stakeholders from all functional areas of IT that are 
overseeing the implementation of new processes and procedures for 
Software Asset Management. The ESGB is bringing together all ongoing 
software asset management capabilities at the IRS, such as the 
Infrastructure Currency (N/N-1) effort. The IRS enterprise system 
software is on average 3 releases behind industry standards, and in 
some cases it is 4 or more releases behind. Our goal is to have 
software remain current (N) or one version from current (N-1). The N/N-
1 team recently used Lean Six Sigma methodologies to assess and develop 
a plan that leverages existing software asset management capabilities 
and tools to ensure all installed versions of commercial off-the-shelf 
software remain N or N-1. This effort identified many opportunities to 
improve software management processes to gain efficiencies and 
quantifiable results.

    The roles and responsibilities of the ESGB also include selection 
of an enterprise tool(s) for software asset management, implementation 
of internal audit procedures for software agreements, and 
implementation of software asset management policies and governance.

    There is good momentum on the ESGB with the right level of 
executive leadership at meetings to move forward on this effort. 
However, continued lack of funding to build out an enterprise 
management structure and implement the policies, processes, and tools 
will jeopardize the effort.

    Question. How much investment is needed to accomplish this goal?

    Answer. The investment requested in the President's FY2016 budget 
to sustain IRS's Critical IT infrastructure includes resources that 
will allow the IRS to restore mainframes, servers, laptops, network 
devices and communications equipment to keep the IT infrastructure 
(hardware and software) current for existing and newly developed IT 
systems. This includes updating and replacing infrastructure components 
that are no longer operating reliably or need additional capability 
that is not available through an upgrade; that are being retired 
because of non-support; and that are unable to support the latest 
release of software, growth of current application demand or meet the 
latest federal security configuration standards. This also includes 
movement toward the goal of having software at N or N-1. These funds 
will also enable IRS to hire 157 qualified FTE, and contract for 
external subject matter experts, to build out its planned integrated 
capability for software asset management and to operate and maintain 
infrastructure components.
                            hiring practices
    Question. A TIGTA review found that between January 1, 2010 and 
September 30, 2013, the IRS hired 824 employees who had ``substantial 
employment issues'' during previous employment with the IRS.\2\
---------------------------------------------------------------------------
    \2\ Treasury Inspector Gen. for Tax Admin., Additional 
Consideration of Prior Conduct and Performance Issues is Needed When 
Hiring Former Employees (Dec. 30, 2014), 2015-10-006.

    For fiscal year 2013 and 2014, how much did the IRS pay these 824 
---------------------------------------------------------------------------
employees in salary and benefits?

    Answer. The IRS is following up with TIGTA to identify the 
methodology used to enumerate 824 employees in the report, to ascertain 
the identities of the employees, and to coordinate the response to this 
question about how much the IRS paid these employees in salary and 
benefits for fiscal year 2013 and 2014.

    Question. According to TIGTA, ``The IRS stated that, during the 
process of evaluating qualifications of applicants, prior IRS conduct 
and performance issues do not play a significant role in deciding the 
candidates who are best qualified for hiring.'' Is this an accurate 
statement of IRS policy? If it is, why does the IRS believe that these 
factors are not relevant when rehiring former employees?

    Answer. The IRS considers prior conduct and performance issues 
before hiring or rehiring employees, and believes it has sufficient 
legal basis to consider past conduct and performance at any time during 
the hiring process.

    Question. Although the IRS revamped its hiring process in 2012, 
TIGTA believes that ``the IRS needs to reassess its current process to 
more fully consider prior conduct and performance issues before 
rehiring employees.'' Does the IRS have sufficient legal basis to 
implement this recommendation? If not, what changes to the law are 
necessary to allow the IRS to more fully consider prior employment and 
performance issues when rehiring employees?

    Answer. Yes. The IRS believes it has sufficient legal basis to 
consider prior conduct and performance issues at any time during the 
hiring process, and it currently does so.
                       exempt sector enforcement
    Question. The IRS's fiscal year 2015 budget request provides 
funding for expanded criminal investigation capabilities and addresses 
compliance issues in the tax-exempt sector, including exempt 
organizations. In 2014, TIGTA found that the IRS had improperly 
disclosed confidential taxpayer information, which is protected under 
the Internal Revenue Code, in 21% of surveyed Freedom of Information 
Act (FOIA) and Privacy Act requests. Unauthorized disclosure occurred 
in 16.4% of surveyed requests in the previous year's audit.

    Describe the extent to which IRS employees suspected of tax code 
violations, including the unauthorized disclosure of Section 6103 
information, were appropriately investigated. How will these sorts of 
investigations change based on the IRS's fiscal year 2015 budget 
request?

    Answer. The IRS takes violations of section 6103 very seriously. 
Any and all IRS employees suspected of tax code violations, including 
the unauthorized disclosure of section 6103 information, are 
investigated to determine if a violation of the tax code occurred, and 
if so, an appropriate level of discipline. Managers are responsible for 
ensuring employees understand their obligations and do not improperly 
disclose taxpayer information. When improper disclosures are 
identified, managers are required to report those incidents to TIGTA 
and follow IRS incident-management procedures. TIGTA makes a 
determination to investigate based on the egregiousness of the incident 
and will, as appropriate, take action to pursue criminal charges. Non-
criminal disclosures of taxpayer information, records, or taxpayer-
privacy violations are adjudicated in accordance with the IRS Guide for 
Penalty Determinations and result in discipline ranging from a written 
reprimand to removal.

    The improper disclosures of confidential information noted in the 
most recent TIGTA annual review of FOIA compliance were determined to 
be inadvertent disclosures, not negligent or reckless. The findings 
report included an acknowledgment by TIGTA that the 13 occurrences of 
unauthorized disclosure found in their review were inadvertent and all 
were properly reported as unauthorized disclosures as required. TIGTA 
did not make a separate finding in this area because training was 
previously done to educate the staff in the errors noted and TIGTA 
included an acknowledgement in its report that all employees received 
that training.

    In fiscal year 2014, 129 employees were found to be in violation of 
section 6103 disclosure and security rules. Despite the changes in the 
IRS fiscal year 2015 budget request, the IRS will continue to 
investigate any and all employees suspected of tax code violations.
                   records maintenance and processing
    Question. From fiscal year 2009 to 2012, the IRS consistently 
reduced its backlog of FOIA requests. Yet, in fiscal 2013, there was an 
84% increase in the number of backlogged FOIA requests at the IRS.\3\ 
Halfway through fiscal year 2014, the FOIA backlog increased an 
additional 16%. In over 11% of surveyed requests, the IRS over-withheld 
information to which requesters were legally entitled because of 
improper redactions or inadequate search methods.
---------------------------------------------------------------------------
    \3\ Treasury Inspector Gen. for Tax Admin., Fiscal Year 2014 
Statutory Review of Compliance with the Freedom ofInformation Act 
(Sept. 17, 2014).

    As a percentage of its budget, how much has the IRS spent annually 
on FOIA and Privacy Act request processing since fiscal year 2013? If 
the share of spending is decreasing, which programs received additional 
budget allocations that would have otherwise been allocated for the 
---------------------------------------------------------------------------
processing of records requests?

    Answer. The IRS does not separately track costs related to FOIA and 
Privacy Act request processing.

    Question. What is the IRS's spending plan to improve statistics 
concerning improper redactions or withholdings on FOIA and Privacy Act 
records? What does the IRS foresee as the cost for properly training 
FOIA and Privacy Act officers to avoid improper practices with respect 
to records processing? Why have prior training efforts or investments 
failed to remedy what appears to be an ongoing, if not worsening, 
problem?

    Answer. The IRS processes thousands of Freedom of Information Act 
(FOIA) requests each year that require labor intensive searches of 
paper and electronic files. Many requests involve hundreds, and some 
involve millions, of pages of responsive documents. Additionally, 
because of the advent of the electronic age combined with the 
increasing complexity of the tax law, the number, volume and complexity 
of FOIA requests have significantly increased. First quarter FY 2015, 
FOIA receipts are 25% higher than the same period in 2014, and our 
complex inventory has increased over the last fiscal year by 53%. 
Therefore, the IRS is pursuing a technology solution to improve our 
ability to process, search and, when needed, redact necessary 
information in responsive documents. An automated solution is necessary 
to address the increased volume of electronic records and improve our 
ability to provide all responsive documents and reduce errors. Any 
potential automated solution, however, will still require human 
intervention and oversight to ensure accuracy and avoid inadvertent and 
inappropriate disclosures.

    The IRS agrees that training is critical to ensure the 
effectiveness and efficiency of the FOIA program. The IRS allocated 
$74,000 for the training of FOIA and Privacy Act officers in fiscal 
year 2015. In addition, to improve records processing we are holding a 
series of low-cost, high-impact virtual technical updates to address 
emerging case processing issues and questions.

    The IRS has always offered intensive, face-to-face technical 
training specifically for Disclosure employees, as well as Disclosure 
Awareness sessions to all IRS employees. Challenges remain because of 
significant attrition in our FOIA professional ranks. The current level 
of funding does not address the needs resulting from increased FOIA 
volume and complexity and years of attrition. A hiring freeze prevents 
replacement of staff due to attrition throughout the IRS, in order to 
meet restrictive funding cuts over the last several years. Hiring 
authority alone is not an immediate solution, however, due to the time, 
attention and oversight necessary to bring replacement staff up to the 
expert level required to properly process complex FOIA and Privacy Act 
inquiries.
                                 ______
                                 
                Questions Submitted by Hon. Rob Portman
                         contractor performance
    Question. Mr. Commissioner, a lot of the discussion today has 
focused on how the IRS spends the money that it is allocated, so let me 
continue on that theme and ask about how your agency measures contract 
performance. As you know, last month the Department of Health and Human 
Services' inspector general found that CMS did not always meet 
contracting requirements when hiring outside contractors to help create 
the healthcare.gov website. This ended up with the government spending 
$800 million to build what we all found out was ultimately a very 
flawed product.

    Among other things, the report found that:

   CMS failed to appoint anyone to coordinate the efforts of the 33 
        contractors who helped develop the healthcare.gov website;
   Only two of the six key contracts underwent CMS Contract Review 
        Board Oversight prior to award;
   CMS did not conduct thorough reviews of past contractor 
        performance; and
   CMS chose a contract type that placed the risk of cost overruns 
        solely on the U.S. government.

    Looking at the IRS's current list of contracts, it appears that the 
agency has awarded over $150 million in contracts with outside groups 
to administer the Affordable Care Act alone, and over $800 million in 
overall IT contracts.

    Given these past problems in other areas of the government, 
particularly when implementing the ACA, what can you tell us about the 
IRS's contracting process?

    Answer. The IRS IT contracting process uses best practices in 
acquisition management and uses a six-phase strategic sourcing model. 
Each of the phases provides critical planning, execution, and control 
of the overall contracting process, and is integral to the success of 
the IT contract and contractor performance. The phases include the 
following.

    Requirements Planning involves the process of identifying which 
business needs can be best met by procuring products or services 
outside the organization. This process involves determining whether to 
procure, how to procure, what to procure, how much to procure, and when 
to procure. This phase includes defining the procurement requirement, 
conducting market research, and developing preliminary budgets and cost 
estimates.

    Solicitation Planning involves the process of preparing the 
documents needed to support the solicitation. This process involves 
documenting program requirements and identifying potential sources. 
This phase includes selecting appropriate contract type, determining 
procurement method, and determining proposal evaluation criteria, and 
contract award strategy.

    Solicitation is the process of obtaining information (bids and 
proposals) from the prospective sellers on how project needs can be 
met. This phase of the contracting process includes conducting a pre-
proposal conference (if required), conducting advertising of the 
procurement opportunity, or providing notice to interested suppliers, 
and developing and maintaining a qualified bidder's list.

    Source Selection is the process of receiving bids or proposals and 
applying the proposal evaluation criteria to select a supplier. The 
source selection process includes the contract negotiations between the 
buyer and the seller in attempting to come to agreement on all aspects 
of the contract, to include cost, schedule, performance, terms and 
conditions, and anything else related to the contracted effort. This 
source selection process includes applying evaluation criteria to 
management, cost, and technical proposals; negotiating with suppliers; 
and executing the contract award strategy. At this point, IRS obtains 
independent cost estimates to assist in evaluating supplier proposals 
and conducting a price realism analysis on each supplier proposal.

    Contract Administration is the process of ensuring that each 
party's performance meets the contractual requirements. The contract 
administration process includes conducting a pre-performance 
conference, monitoring and controlling risk, managing the contract 
change control process, measuring and reporting the contractor's 
performance (cost, schedule, performance), and conducting project 
milestone reviews.

    Contract Closeout is the process of verifying that all 
administrative matters are concluded on a contract that is otherwise 
physically complete. The contract closeout process includes processing 
property dispositions, conducting final acceptance of products or 
services, processing final contractor payments, documenting the 
contractor's performance, and conducting a post-project audit.

    Question. Does anyone coordinate actions between the contractors?

    Answer. Shortly after the Affordable Care Act (ACA) legislation was 
enacted, the IRS Information Technology (IT) organization established 
the ACA IT Program Management Office (PMO), which serves as the primary 
integration point for the multiple ACA releases of functionality and 
coordinates the work completed by contractors supporting IT in 
developing and testing software applications related to the ACA. All 
contractors supporting the IRS IT organization in software development, 
including those supporting the ACA software development efforts, must 
follow the established IT processes, procedures, and controls that 
govern how software applications are built, tested, integrated, and 
deployed. Program governance and controls are in place to guide and 
manage the IT ACA software delivery, including a program governance 
board with frequent program reporting using dashboards and status 
reports that report task status, progress, performance, risks, and 
issues. The IRS has an established Enterprise Life Cycle (ELC), which 
is a foundational and repeatable set of controls for software 
development, testing, and deployment. IRS IT contractors are required 
to adhere to these IT controls.

    Question. Does the IRS have a Contract Review Board?

    Answer. Within the IRS, Contract Review Boards are established in 
accordance with the Department of Treasury Acquisition Procedures 
(DTAP) 1004.7203, and governed by IRS policy.

    Question. What goes in to reviewing prior contractor performance?

    Answer. In accordance with the Federal Acquisition Regulation, the 
IRS reviews contractor performance both prior to awarding new contracts 
and before the IRS exercises options to continue performance. Reviewing 
contractor qualifications is governed by FAR Part 9, Contractor 
Qualifications, which prescribes, among other things, policies, 
standards, and procedures pertaining to prospective contractors' 
responsibility; debarment, suspension, and ineligibility; and 
organizational conflicts of interest. In making the determination of 
responsibility, the contracting officer is required to consider 
information in the Federal Awardee Performance and Integrity 
Information System (FAPIIS), including information that is linked to 
FAPIIS such as from the System for Award Management (SAM) Exclusions, 
the Past Performance Information Retrieval System (PPIRS), and any 
other relevant past performance information. The contracting officer is 
required to consider all information in PPIRS and other past 
performance information when making a responsibility determination, and 
is required to document the contract file to indicate how the 
information in PPIRS was considered in any responsibility 
determination, as well as the action that was taken as a result of the 
information.

    Additionally, past performance can be evaluated as part of a 
technical evaluation. The contractor is required to provide information 
on their past performance with their offer; this information is 
reviewed and evaluated as part of an acquisition, as appropriate. The 
information contained in PPIRS is governed by FAR Subpart 42.15, 
Contractor Performance Information, which requires past performance 
information regarding a contractor's actions under previously awarded 
contracts, including the contractor's record of--

  (1) Conforming to requirements and to standards of good workmanship;
  (2) Forecasting and controlling costs;
  (3) Adherence to schedules, including the administrative aspects of 
        performance;
  (4)  Reasonable and cooperative behavior and commitment to customer 
        satisfaction;
  (5) Reporting into databases, as necessary;
  (6) Integrity and business ethics; and
  (7) Business-like concern for the interest of the customer.
                      country-by-country reporting
    Question. Mr. Commissioner, we have heard concerns from the 
business community about the potential effects of country-by-country 
reporting requirements that may come from the OECD's Base Erosion and 
Profit Shifting (BEPS) project. Essentially, companies would be 
required to provide their complete financial information to tax 
authorities in each country where they do business. Do you have 
concerns about these reporting requirements from an administrative 
perspective?

    Answer. Country-by-country reporting will require multi-national 
enterprises (MNEs) to report annually and for each tax jurisdiction in 
which they do business the following: revenue, profit before income 
tax, income tax paid and accrued, total employment, capital, retained 
earnings, employees, tangible assets, and the business activity in 
which each entity within the group engages. The requirement only 
applies to MNEs with annual consolidated group revenue of at least 750 
million euros (equating to approximately 1 billion dollars at the time 
the threshold was established). This standard will exclude 
approximately 85 to 90 percent of MNE groups (and approximately 93 
percent of US companies) from the filing requirement, while still 
covering MNE groups that control approximately 90 percent of corporate 
revenues. We are working with the OECD and G20 to ensure that the 
concerns and burdens of businesses and tax administrations are kept in 
mind as guidelines are developed regarding these reporting 
requirements.

    This reporting will require the IRS to build systems to obtain, 
transmit, store and analyze the data; develop new forms and a legal 
framework to obtain and exchange the information; determine how to best 
use the information; and train and deploy appropriate personnel. In a 
time of significant budgetary constraints and diminished human capital 
and technology resources, these tasks, as well as meaningful evaluation 
and use of the information, will be difficult.
            irs voluntary return preparer regulatory program
    Question. Following the Internal Revenue Service's loss last year 
in the Loving case, the IRS announced a new ``voluntary'' certification 
program under which tax return preparers who take a comprehension 
examination and complete 18 hours of continuing education each year 
would receive a Record of Completion and be listed in a publicly 
available IRS database showing return preparer qualifications. There 
are several aspects of this ``voluntary'' program that concern me:

    a. Doesn't this new ``voluntary'' program of continuing education 
and knowledge assessment include the same components that the court in 
Loving ruled the IRS lacked statutory authority to implement?

    Answer. No. The court in Loving found the IRS to be without 
statutory authority to mandate competency testing and continuing 
education. The court did not preclude voluntary continuing education 
efforts. The IRS's Annual Filing Season Program established in Rev. 
Proc. 2014-42 is a voluntary program focused on preparer education. It 
does not provide for competency testing.

    b. Despite the ``voluntary'' label, won't many return preparers 
actually feel compelled to enter the new program? Do you acknowledge 
that return preparers who do not get the official IRS listing could be 
placed at a competitive disadvantage, particularly since after 2015 
they would lose the ability to represent their clients in 
administrative proceedings with the IRS regarding the returns they have 
prepared? Since the IRS lacks the authority to require return preparers 
to undergo continuing education and knowledge assessment, doesn't it 
also lack the authority to coerce them into doing so?

    Answer. Revenue Procedure 2014-42 establishes the Annual Filing 
Season Program as permitted under authority described in sections 7803 
and 7805 of the Internal Revenue Code. The Annual Filing Season Program 
will aid in the administration of the provisions of Title 26 of the 
United States Code by enhancing return preparer competency, which will 
assist in increasing the accuracy of tax returns prepared by those 
preparers.

    The goal of the Annual Filing Season Program is to encourage tax 
return preparers to improve their knowledge of federal tax law and 
return preparation. Approximately 12% of unenrolled tax return 
preparers have taken advantage of the opportunity to participate in the 
program and to obtain the Annual Filing Season Program Record of 
Completion. This participation rate does not suggest that unenrolled 
preparers have felt pressured into participating in the program. 
Moreover, as recognized by the district court in AICPA v. IRS, 2014 
U.S. Dist. LEXIS 157723 (D.C. 2014) competitive pressure or economic 
considerations do not transform an otherwise voluntary decision into a 
coerced one.

    With regard to whether Annual Filing Season Program participants 
who are listed in the Directory of Federal Tax Return Preparers with 
Credentials and Select Qualifications (the ``Directory'') will have a 
competitive advantage over unenrolled tax return preparers who do not 
participate, many factors may contribute to competitive advantage. 
Inclusion in the Directory may be a factor, as well as market forces, 
individual preferences, cost of tax preparation services, overall 
experience and training of the tax return preparer, proximity of the 
tax return preparer to the taxpayer, or reputation in the community. It 
is difficult, if not impossible to determine which factor is the most 
important influencer for any taxpayer.

    Question. Preparers who undergo the IRS program's continuing 
education and testing will receive a ``Record of Completion'' and be 
listed in a publicly available IRS database.

    a. Isn't there a risk that this IRS imprimatur could be used by 
unscrupulous return preparers to lure unsuspecting clients?

    Answer. The goal of the IRS in offering the Annual Filing Season 
Program Record of Completion is to encourage tax return preparers to 
remain current with federal tax law requirements. Obtaining a Record of 
Completion for the 2015 Annual Filing Season Program generally requires 
return preparers to have completed 11 hours of continuing education 
during 2014 (8 hours for those exempt from the refresher course), 
including 2 hours of ethics or professional responsibility. To obtain a 
Record of Completion for the 2016 Annual Filing Season Program 
generally requires return preparers to have completed 18 hours of 
continuing education during 2015 (15 hours for those exempt from the 
refresher course), including 2 hours of ethics of professional 
responsibility. The purpose of the Directory is to identify tax return 
preparers with active Preparer Tax Identification Numbers (PTINs) and a 
credential or some education that may qualify them to prepare a tax 
return and to assist taxpayers in choosing a preparer by listing 
credentials and qualifications. Making this information available will 
raise taxpayer awareness of the various kinds of tax professionals that 
offer tax preparation services.

    b. Won't the IRS designation of certain tax return preparers as 
having obtained a Record of Completion create significant consumer 
confusion? The official IRS listing of these preparers will suggest to 
consumers that unlisted PTIN holders lack the authority to prepare 
returns--which is flatly incorrect. The official listing will also 
create the false impression among consumers that returns from listed 
return preparers are more likely to go unchallenged by the IRS. Does 
the IRS have any plan to address the inevitable marketplace confusion?

    Answer. To address concerns about potential confusion, the IRS in 
partnership with tax professional organizations launched a major 
campaign this filing season to help taxpayers choose tax return 
preparers wisely and help taxpayers understand the different categories 
of tax return preparers.

    The education campaign was launched with a press release and a new 
web page, irs.gov/chooseataxpro. The web page includes the following 
information:

   Which tax preparer is right for me? Explaining enrolled agents, 
        CPAs, attorneys, and others.

   Do some tax return preparers belong to professional organizations?

   IRS tips for choosing a tax preparer.

    When the IRS launched the new online Directory of Federal Tax 
Return Preparers With Credentials and Select Qualifications (the 
``Directory'') on February 5, 2015, the message was reiterated to 
choose a tax return preparer wisely and understand the different types 
of return preparers.

    IRS communications state clearly that anyone with a Preparer Tax 
Identification Number may prepare returns for compensation.
              preparer tax identification numbers (ptins)
    Question. To date, how much has the IRS collected from the 
mandatory fee (now $64.25 for the first year and $63 for renewals) for 
issuance of preparer tax identification numbers (PTINs)? Can you 
provide this committee a detailed accounting of how the IRS has spent 
those funds?

    Answer. The IRS portion of the fee for new and renewed PTINs is 
$50. The vendor charges $14.25 for new applications and $13.00 for 
renewals and remits the $50 to a Treasury account designated for the 
Return Preparer Office (RPO) of the IRS.

    All funds collected by RPO are by law required to be spent by the 
RPO and cannot be spent elsewhere or for any other purpose. The 
attached spreadsheet entitled ``Return Preparer Office PTIN 
Collections, Expenses, and Available Cash'' provides a breakdown of RPO 
receipts (i.e., user fees of $50 for each new and renewed PTIN) and 
expenditures from fiscal year 2011 through January 31, 2015.

    Question. Last year, the U.S. Court of Appeals for the District of 
Columbia ruled (Loving v. IRS) that the IRS exceeded its statutory 
authority in seeking to regulate tax return preparers. As a result of 
the court's decision, the IRS may no longer impose testing or 
continuing education requirements on tax return preparers. The Loving 
case did not preclude the IRS from requiring return preparers to have 
and use preparer taxpayer identification numbers (``PTINs'') and to pay 
annual fees to renew their PTINs.

    It is my understanding that return preparers filed suit against the 
IRS in September alleging that the PTIN registration fees are not 
authorized by law and, in any case, are excessive because they exceed 
the costs of issuing PTINs (as distinct from costs of maintaining the 
education and testing programs struck down in Loving). Do the annual 
PTIN fees in fact exceed the costs of issuing PTINs? If yes, how has 
the IRS used the excess funds? What authority does the IRS rely on for 
collecting these excess funds?

    Answer. The IRS does not collect excess funds. The PTIN 
registration and renewal fees comply with the user fee requirements 
outlined in OMB Circular A-25. Under the OMB Circular, unless OMB 
provides an exception, the IRS like all government agencies must 
calculate a user fee to recover the full costs of services provided. 
Because the IRS cannot predict the exact number of PTIN registrations 
and renewals to be received in any given year the PTIN user fee was 
calculated recognizing that PTIN collections may exceed operating 
expenses in some years, while operating expenses may exceed PTIN 
collections in other years. As recognized by the district court in 
Buckley v. U.S., 2013 U.S. Dist. LEXIS 184758 (N.D. Ga 2013) ``. . . a 
government agency such as the IRS may permissibly spread its cost over 
multiple years.'' Additionally, the IRS is required and the PTIN 
registration fee complies with the rules for user fees in OMB Circular 
A-25. Because the IRS cannot predict the exact number of PTIN 
registrations we will receive, PTIN collections may exceed operating 
expenses, or operating expenses may exceed PTIN collections in any 
given year. The IRS is required to collect and maintain sufficient 
funds to:

   Fully fund fiscal years in which operating expenses exceed 
        collections.

   Fully fund 25% of operating expenses for the subsequent fiscal 
        year. At the end of each fiscal year sufficient amounts must be 
        maintained to fund 25% of the anticipated operating expenses 
        for the first quarter of the coming year.

    The spreadsheet attached shows the funds maintained to fulfill 
these requirements.

                                                                       Return Preparer Office PTIN Annual Changes to Cash
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                     FY 2015
                                                                   FY 2012         FY 2013         FY 2014       FY 2011-- FY   ------------------------------------------------   FY 2011-- FY
                                              FY 2011  Actual      Actual          Actual          Actual         2014  Total                                       Actual &       2015  TOTAL
                                                                                                                                    Actual *      Projected **      Projected
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Annual User Fee Collections
---------------------------------------------
 
PTIN Collections                                 $36,963,246     $37,030,952     $35,726,028     $35,666,618      $145,386,844     $33,910,806      $2,145,715     $36,056,521     $181,443,365
 
Annual User Fee Operating Expenses
---------------------------------------------
 
Salaries & Benefits                               $2,783,805     $11,985,267     $14,483,602     $13,000,832       $42,253,505      $3,542,008      $6,924,655     $10,466,663      $52,720,168
Contract Support                                 $14,216,601     $16,203,046     $30,832,950      $7,853,735       $69,106,332      $1,818,086     $14,784,790     $16,602,876      $85,709,208
Misc Expenses--e.g., Travel, Printing,              $690,142        $635,521        $241,507        $241,920        $1,809,090         $64,080        $330,920        $395,000       $2,204,090
 Supplies, etc
                                             ---------------------------------------------------------------------------------------------------------------------------------------------------
Salaries, Contracts, etc Expenses Total          $17,690,548     $28,823,834     $45,558,060     $21,096,487      $113,168,928      $5,424,174     $22,040,365     $27,464,538     $140,633,466
PTIN Collections Less Expenses (Annual           $19,272,698      $8,207,119    $(9,832,032)     $14,570,132       $32,217,916                                      $8,591,983      $40,809,899
 Increase  (Decrease) to Available Cash)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* As of 1/31/2015
** From 2/1/15 through 9/30/15

            irs efforts to address problem return preparers
    Question. Does the IRS have compliance or enforcement strategies in 
place to track returns by PTIN? If yes, what data has the IRS collected 
on PTIN holders since it first implemented the PTIN program at the end 
of 2010?

    Answer. The current PTIN requirement gives the IRS an important and 
better line of sight into the return preparer community than ever 
before. With only a few years of data available, compliance efforts are 
still in their infancy, but PTINs allow the IRS to collect more 
accurate data on who is preparing returns, the volume and types of 
returns being prepared and the qualifications of those doing return 
preparation. Thus, the information obtained through the PTIN process 
helps us do more to analyze trends and spot anomalies, so that we have 
a much better understanding of the return preparer community as a 
whole, and can design more appropriate compliance and educational 
activities in response to the data we collect.

    Question. In a September 2014 report, the Treasury Inspector 
General for Tax Administration found that almost half the complaints 
filed by taxpayers regarding return preparers hadn't been reviewed by 
the IRS. Of 8,534 complaints reported to the IRS between Oct. 2012 and 
Sept. 2013, 83 percent had no work done on them or were still being 
processed. 3,953 complaints, or 47 percent, had not had any work 
initiated whatsoever and no case processor reviewing the complaint. Of 
those, 1,920, or 49 percent, had been in the IRS's inventory for at 
least 60 days without any work being started.

    In light of these findings, what steps has the IRS taken to ensure 
that it will promptly and effectively review taxpayer complaints about 
return preparers?

    Answer. Having no baseline for the volume of complaints to be 
anticipated at the start of the Complaint Referral Program in December 
2011, complaint volume quickly outpaced available resources to manage 
the workload. Prior to the start of TIGTA's review, the IRS had 
identified that a significant number of complaints had not been 
reviewed. Subsequently, the IRS eliminated all backlogged complaints by 
December 31, 2014, by focusing efforts on improving processes, by 
securing additional resources to address the backlogged complaints, and 
by conducting a dedicated effort to prioritize, evaluate, and resolve 
these complaints.

    New investments proposed in the FY 2016 budget should help prevent 
future backlogs. In the Budget, the IRS requested an additional $14.3 
million to help ensure ethical standards of conduct of practitioners, 
including hiring more staff to handle complaints.
                                 ______
                                 
               Questions Submitted by Hon. Chuck Grassley
    Question. As I mentioned at your hearing, I appreciate kind words 
you have given concerning the IRS whistleblower program and look 
forward to hearing back from you related to the issues I lay out below.

    First, the payments to whistleblowers have slowed to a trickle at 
best. This is whistleblowers waiting for payment where dollars have 
been collected and the holdup is with the IRS processing and checking 
the boxes for a payment. Often it is the whistleblower office waiting 
for someone in the field, or in senior management to move paper. I ask 
that that your office review all whistleblower cases pending payment 
and bring the Drano to unclog the holdup.

    Second, I again find myself frustrated with an IRS Chief Counsel 
office that seems to wake up every day seeking ways to undermine the 
whistleblower program both in the courts and the awards. I am 
especially concerned that chief counsel is throwing every argument it 
can think of against whistleblowers in tax court. It appears at times 
that the Chief Counsel's office thinks its job is to come up with 
hyper-technical arguments and seek to deny awards to whistleblowers who 
have risked their lives to uncover big time tax cheats. I ask that your 
office and the director of the whistleblower office review the chief 
counsel's wasteful and harmful litigation positions that undermine the 
whistleblower program and go directly against your support for the 
whistleblower program.

    Third, with tight budgets at the IRS it is all the more imperative 
that the IRS works with whistleblowers and their counsels on cases. The 
IRS criminal investigators have had great success using whistleblowers 
to go after banks and terrorist organizations, but the IRS civil 
division still hasn't gotten the message of working with 
whistleblowers. I note that the IRS hasn't been shy about paying 
outside law firms big money to help it in big examinations, yet ignores 
the possibility of harnessing whistleblowers and their lawyers who 
won't cost the IRS a dime from its budget.

    Commissioner, I appreciate your willingness to provide detailed 
written response addressing these three points.

    Answer. I have discussed with the Director of the Whistleblower 
Office the pace of award payments under section 7623, and have verified 
that he has made timely processing of claims for which an award is 
payable a top priority. Awards cannot be paid until the relevant 
taxpayer audit or investigation is completed (including any appeals), 
proceeds are collected, and the statute of limitations for filing a 
refund claim has expired. When those preconditions are met, the 
Whistleblower Office moves as quickly as possible to notify the 
whistleblower of a proposed award, obtain comments on the proposal, and 
make an award decision. To date, the Whistleblower Office has paid 12 
awards under section 7623(b). The Director estimates that six to twelve 
additional 7623(b) awards will be paid in FY 15.

    With respect to your second point, the IRS Office of Chief Counsel 
is responsible for defending the determinations of the IRS in the U.S. 
Tax Court, including those of the Whistleblower Office. The Office of 
Chief Counsel coordinates with the Whistleblower Office in defending 
its determinations before the Tax Court to ensure that Chief Counsel's 
litigating positions are consistent with the program's goals as well as 
the statutory and regulatory framework. In most cases before the Tax 
Court, the record of the case is sealed to protect both whistleblower 
and taxpayer interests. As a result, I cannot comment on specific 
arguments made in defending particular Whistleblower Office 
determinations that are subject to an order of the Tax Court sealing 
the record. The positions taken by the Office of Chief Counsel support 
the IRS's administration of the law.

    The suggestion that the IRS can do more to work with whistleblowers 
and their counsel is one that the IRS takes seriously. In a memorandum 
dated August 20, 2014, the IRS's Deputy Commissioner of Services and 
Enforcement reinforced previous guidance on the importance of thorough 
debriefing of whistleblowers during the evaluation of their 
submissions. After the IRS begins an investigation based on 
whistleblower information, section 6103 provides limited authority to 
interact with a whistleblower since disclosure of taxpayer information 
would be necessary to gather additional information while pursuing the 
audit or investigation.

    Question. During the hearing, I asked you about the ability of 
individuals receiving deferred action to amend tax returns and claim 
the earned income tax credit (EITC) as a result of the President's 
executive action. Your answer essentially confirmed that this is the 
case, but in doing so you also suggested that those receiving deferred 
action would have had to of already filed tax return for the year in 
question. However, a page on IRS's website titled ``Claiming EITC for 
Prior Tax Years'' would appear to suggest even if one failed to file a 
tax return in a previous year, they may now file a return for that year 
and claim the EITC.\4\ Could you please clarify your remarks and 
address whether someone receiving deferred actually must have 
previously filed a tax return during the year in question to claim the 
EITC retroactively? Also, please verify, whether or if, the IRS intends 
to revisit the March 2000 IRS Chief Counsel Advice concerning the 
ability of individuals to amend their tax returns to claim the EITC 
once obtaining a Social Security Number.
---------------------------------------------------------------------------
    \4\ Internal Revenue Service, ``Claiming EITC for Previous Tax 
Years.'' Available at: 
http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-
Credit/Claiming-EITC-Prior-Years.

    Answer. To clarify my earlier comments on EITC, not only can an 
individual amend a prior year return to claim EITC, but an individual 
who did not file a prior year return may file a return and claim EITC 
(subject to refund limitations under section 6511 of the Internal 
Revenue Code). I would note that filing new returns for prior years 
would likely be difficult, since filers would have to reconstruct 
earnings and other records for years when they were not able to work on 
---------------------------------------------------------------------------
the books.

    Section 32 of the Internal Revenue Code requires an SSN on the 
return, but a taxpayer claiming the EITC is not required to have an SSN 
before the close of the year for which the EITC is claimed. At your 
request, the IRS has reviewed the relevant statutes and legislative 
history, and we believe that the 2000 Chief Counsel Advice (CCA) on 
this issue is correct.

    Question. The Affordable Care Act created tax credits that can go 
directly to your insurance company to pay for coverage. If the credits 
were more than a person was supposed to get, they were supposed to pay 
that back to the IRS at the end of the year. Last month the IRS decided 
that it would waive some of these overpayments.

    How much money do you estimate this decision will cost?

    Answer. Notice 2015-9 provides limited penalty relief for certain 
taxpayers who received excess advance payments of the premium tax 
credit through Affordable Insurance Exchanges (also known as 
Marketplaces). It provides relief only for the failure to pay penalty 
and the estimated tax payment penalty. Notice 2015-9 does not provide 
relief from the underlying tax liability or the associated interest 
related to excess advance payments. Because the Notice likely only 
affects a small number of taxpayers, and because it provides relief for 
modest penalty amounts, it is not estimated that the Notice will have 
significant fiscal impact.

    Question. Will you report back to me after tax season has ended, to 
give me the exact amount of money the IRS waived?

    Answer. As noted above, Notice 2015-9 does not provide relief from 
the underlying tax liability or the associated interest related to 
excess advance payments received through the Marketplaces. Rather, it 
provides relief only for the failure to pay penalty and the estimated 
tax payment penalty. Moreover the notice applies only for the 2014 tax 
year and is only available for taxpayers who are otherwise compliant 
with their filing and payment obligations.

    Because the penalties to be abated under Notice 2015-9 are expected 
to affect a small number of taxpayers, in small amounts per taxpayer, 
it was decided to provide taxpayers seeking relief under the notice 
with a simple method of seeking relief. Taxpayers seeking relief from 
the penalty under section 6651(a)(2) for failure to pay were instructed 
to send a letter stating they are eligible for relief because they 
received excess advance payment of the premium tax credit; taxpayers 
seeking relief from the penalty under section 6654(a) for failure to 
pay estimated tax were instructed to file Form 2210, Underpayment of 
Estimated Tax by Individuals, Estates and Trusts, with a statement that 
they are eligible for relief because they received excess advance 
payment of the premium tax credit. Because of the simplified method 
provided to obtain relief, it is not administratively feasible to 
obtain precise data on the penalty amounts waived.

    Question. How will the IRS determine whether people actually need a 
waiver, or just don't want to pay what they owe?

    Answer. As noted above, Notice 2015-9 does not provide relief from 
the underlying tax liability or the associated interest related to 
excess advance payments received through the Marketplaces. Rather, it 
provides relief only for the failure to pay penalty and the estimated 
tax payment penalty. The eligibility requirements and the specific 
procedures by which a taxpayer can request penalty relief are outlined 
in Notice 2015-9. Generally, eligible taxpayers must complete existing 
IRS Form 2210 to seek relief from the estimated tax payment penalty and 
must assert, in response to IRS correspondence, that they are eligible 
for relief from the failure to pay penalty.

    Question. I asked you about nonprofit hospitals and whether the IRS 
is doing enough to ensure they are complying with requirements, 
particularly financial assistance policy requirements in the ACA. 
Please describe the IRS's efforts to audit hospitals for financial 
assistance policy requirements in FY 2014 and FY 2015, and any planned 
activity the IRS intends to conduct in this area going forward.

    Answer. The IRS reviews, at least once every three years, the 
Community Benefit Activities (CBA) of tax-exempt hospital organizations 
(estimated at more than 3,100 hospital organizations, many with 
multiple facilities) to which Internal Revenue Code (IRC) section 
501(r) applies. Under IRC section 501(r), the IRS began conducting CBA 
reviews in March 2011 and has completed the first cycle of reviews of 
hospital organizations. In FY 2014, the IRS started the second cycle of 
reviews of hospital organizations and conducted 1,033 reviews during FY 
2014. By February 20, 2015, the IRS had conducted 406 reviews. A total 
of 32,201 IRS labor hours have been spent conducting these reviews 
since they began.

    The general requirements of the Financial Assistance Policy (FAP) 
have been effective for tax years beginning after March 23, 2010. On 
December 29, 2014, the IRS issued final regulations under section 
501(r) that are effective for taxable years beginning after December 
29, 2015. A comparative analysis of hospitals that have been reviewed 
twice since reviews began in 2011 shows the hospitals with an FAP have 
increased by 6.8% (1,362 to 1,466). In addition, the following 
observations have been noted from the hospital reviews:

  1.  97.13% (1,390) of tax-exempt hospitals are using the Federal 
        Poverty Guidelines (FPG) to determine the eligibility for free 
        care.
  2.  95.0% (1,312) are using the FPG to determine the eligibility for 
        discounted care.
  3.  A comparison between first and second review responses to 
        facility level questions (regarding eligibility criterion, FPG, 
        and the basis of calculating amounts charged to patients, etc.) 
        shows a significant increase, on average 25.4%, in positive 
        responses. This may imply hospitals are providing more details 
        in the FAP or a more complete FAP since the first reviews were 
        conducted.
  4.  To date, 17 hospital organizations (for 49 tax years) have been 
        referred for audit of non-ACA issues, including unrelated 
        business income (UBI) tax, lack of profit motive, net operating 
        losses (NOL), etc. None was referred for noncompliance with FAP 
        requirements. Twenty-four of these examinations have been 
        closed, with six resulting in change due to various issues 
        including compensation adjustment, UBI, NOL adjustment, and 
        FICA adjustment.

    As the regulatory requirements become effective, the Exempt 
Organizations Examination office will expand the audits of 
organizations that have failed to meet the statutory provisions 
outlined in section 501(r)(1) including the assertion of the section 
4959 excise tax associated with a failure under section 501(r)(3), 
Community Health Needs Assessment (CHNA). Training materials are being 
prepared for employees to enforce the final provisions of the section 
501(r) regulations.

    Question. Commissioner, in an email you sent to IRS employees you 
referenced the need to make tough choices given budget constraints and 
suggested employee furloughs may have to be implemented. Before you 
take such actions, I hope that you consider cutting back on the number 
of hours dedicated by IRS employees to union work while on the taxpayer 
dime, which reportedly topped 500,000 for fiscal year (FY) 2013. If the 
budget constraints are as dire as you contend, existing resources must 
be used efficiently and effectively as they can. IRS agents performing 
union work, when they could instead be assisting taxpayers, is 
certainly not the most efficient use of resources. What, if any, 
changes have you taken or do you plan to take to reduce hours spent on 
union time or ``official time'' given current budget constraints? 
Additionally, please provide me with the number of hours IRS employees 
dedicated to union work in FY 2014 and, as well the number of hours so 
far spent on union work in FY2015. Additionally, please include the 
number of IRS agents who have dedicated 50% or more of their working 
hours to union activities.

    Answer. Congress found collective bargaining to be in the public 
interest and through 5 U.S.C. Chapter 71 required a grant of official 
time in many circumstances and binding collective bargaining in others. 
Because official time is mandated by statute and by collective 
bargaining agreements, IRS management does not have unilateral 
authority to control the amount of official time used. In addition, 
employees performing representational duties on official time are often 
able to resolve issues at early stages. Therefore, official time is an 
efficient use of resources particularly given the strain of overwork 
under which the current workforce is operating. Even so, the IRS and 
National Treasury Employees Union (NTEU) recently completed a round of 
negotiations through which IRS secured a new collective bargaining unit 
agreement designed to further reduce official time use over the next 
three years. The new agreement is expected to go into effect on October 
1, 2015. These changes are expected to include:

   Establishing benchmarks for reducing per capita official time;
   Reducing the number of face-to-face formal meetings by combining 
        multiple meetings into one and disseminating more information 
        electronically;
   Reducing travel time and the number of full time stewards; and
   Creating an IRS-NTEU committee to implement official time 
        mitigation strategies.

    These newly agreed upon strategies supplement previously agreed 
measures, including: placing limits on the amount of official time that 
non-full time stewards may use in a year; incentivizing NTEU to better 
manage official time usage; and establishing official time 
coordinators, who can address any potential underreporting of official 
time with NTEU.

    There were 491,948 official time hours during Fiscal Year (FY) 2014 
and 113,294 hours in the first quarter of FY 2015. Since 2011, the 
amount of official time hours has been cut by 16.7 percent. In FY 2014, 
there were 36 revenue agents that dedicated 50% or more of their 
working hours to union activities; in the first quarter of FY 2015, 
there were 37.
                                 ______
                                 
                Questions Submitted by Hon. Pat Roberts
           tax delinquent irs personnel--bonuses and rehiring
    Question. Mr. Koskinen, following up on your statements concerning 
Internal Revenue Service policy on IRS personnel who are delinquent in 
their federal income taxes, you state in your testimony that

        Those who are not compliant include those who are making 
        installment payments who are working toward compliance, but it 
        is clear--and it's clear to our employees--that if you 
        willfully do not pay your taxes, not only are you not eligible 
        anymore for an award, you're subject to disciplinary action 
        including, in cases, severance from the service. And we do that 
        on a regular basis. So I am confident that performance awards 
        are only going to go to those who are eligible for them.

    Please provide the latest available information concerning the 
number of current IRS personnel who have been identified as delinquent 
in paying federal income tax and former IRS personnel who have been 
separated from employment with your agency, for the Fiscal Years 2010-
2014 based on your stated policy concerning willful failure to pay 
taxes.

    Answer.

           IRS Personnel Who Have Been Identified for Being Delinquent in Paying Federal Income Tax *
----------------------------------------------------------------------------------------------------------------
       FY 2010               FY 2011                FY 2012                FY 2013                FY 2014
----------------------------------------------------------------------------------------------------------------
881                                  1,151                  1,236                  1,135                  1,034
----------------------------------------------------------------------------------------------------------------
* Includes employees who have been admonished, suspended, counseled, received last chance agreements for
  employment, and whose cases were closed without action. The numbers include current and former personnel.

  Former IRS Employees Who Have Separated, Been Removed, Retired Pending Action, or Resigned Pending Action for
                                    Delinquency in Paying Federal Income Tax
----------------------------------------------------------------------------------------------------------------
       FY 2010               FY 2011                FY 2012                FY 2013                FY 2014
----------------------------------------------------------------------------------------------------------------
23                                      31                     38                     27                     36
----------------------------------------------------------------------------------------------------------------

    The IRS conducts tax checks on all employees twice a year to ensure 
continued tax compliance. For the purposes of IRS employee tax 
compliance, delinquencies refer to a failure by the employee to timely 
file or pay any required tax returns. An employee is considered 
delinquent regardless of whether a balance is due or the return was 
subsequently filed, and covers delinquencies that were the result of 
both willful and non-willful intent. Section 1203(b) of the IRS Reform 
and Restructuring Act of 1998 requires the removal of employees found 
to have willfully failed to file any tax return or understated their 
Federal tax liability.

    Question. Can you please also provide to me the full Internal 
Revenue Service policy on the provision of bonuses or other awards, 
including performance awards and promotions under I.R.C. Section 1203, 
for employees who are identified as delinquent in their federal income 
taxes, together with your current definition of ``delinquent'' for 
purposes of this policy?

    Answer. The IRS has implemented measures to ensure that any IRS 
employee who violates section 1203(b) of the IRS Restructuring and 
Reform Act of 1998 is ineligible for a performance award. Attached is 
the IRS Bonus and Awards Recognition Program Policy applicable to all 
employee misconduct and tax compliance issues, excluding executives and 
other high-level officials. Also attached are two memos explaining the 
impact of disciplinary actions on performance-based pay adjustments, 
bonuses and awards for members of the Senior Executive Service and 
other high-level officials at the IRS.

    No IRS employee will be eligible for a discretionary award or 
performance award (to include bilingual awards, and discretionary 
salary increases such as Quality Step Increases (QSIs) or manager 
performance-based increases) if a final agency decision is made that 
the employee violated section 1203(b), such as by the late filing of, 
or underreporting income on, a federal tax return. The ineligibility 
determination will apply to the fiscal year in which the final agency 
decision is made.

    The IRS definition of ``delinquent'' when addressing employee tax 
noncompliance is the failure to timely pay his or her tax liability or 
balance due by April 15 of the year the return is due without incurring 
interest or penalties. Failure to timely pay, while not a potential 
section 1203(b) violation, is serious misconduct and subject to 
discipline up to and including termination of employment.

    Question. Later in response to questions, you state

        There have been proposals and suggestions if you willfully do 
        not file your taxes--not--in the IRS not only are you not 
        eligible today for a bonus--and we have a program that we are 
        making sure that that applies as we look at performance 
        awards--but, as I say, under section 1203 of the code, it's 
        grounds--if you willfully are in violation of not being 
        compliant it's grounds for dismissal. And we take disciplinary 
        action against employees.

    This statement is very concerning given information we have 
recently received from the Treasury Inspector General for Tax 
Administration (Report 2015-10-06) on the rehiring of former IRS 
personnel with prior disciplinary issues. In this report, TIGTA says 
that between January 2010 and September 2013, IRS has rehired hundreds 
of former employees with disciplinary issues associated with their 
prior IRS service. This includes well over a hundred employees with 
prior tax issues, including willful failure to file federal tax 
returns. In an understatement, TIGTA says this presents increased risk 
to the IRS. I think that this entirely unacceptable practice.

    Can you assure the committee that if you are able to hire the 
additional 9,000 new personnel as you have requested in your Fiscal 
Year 2016 budget submission that none of these prospective personnel 
will be currently delinquent in paying their federal income tax 
liabilities?

    Answer. The IRS is committed to ensuring all new hires, including 
the new employees referenced in the FY 2016 budget submission, are tax 
compliant at the time of hiring.

    The IRS applies the Office of Personnel Management's Suitability 
Processing and Handbook, 5 C.F.R. 731.103(d), to its hiring process. In 
addition to meeting government wide suitability standards, all IRS 
candidates must have filed all required tax returns during the prior 
three years, and either have paid or be current on all taxes due as a 
condition for receiving a final offer of employment.

    The IRS maintains the most rigorous employee tax compliance program 
in the federal government. Though they may have had prior tax issues, 
all former employees included in the TIGTA study were determined to be 
tax compliant at the time of re-hire. This is verified during the 
suitability phase of the hiring process, prior to the employee being 
offered a position. Additionally, the IRS conducts tax checks on all 
employees twice a year to ensure continued tax compliance.

    Historically, IRS employees have had very high tax compliance rates 
as compared to federal employees generally, including the civilian and 
militaryworkforce. The IRS employee tax delinquency rate is less than 
one percent, compared with a rate of almost 9 percent among the general 
U.S. population.

                          Tax Delinquency Rates
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Federal civilian                                                    3.99
                                                                 percent
------------------------------------------------------------------------
Military active duty                                                1.41
                                                                 percent
------------------------------------------------------------------------
IRS employees, including full-time, part-time and seasonal          0.96
                                                                 percent
------------------------------------------------------------------------
Source: Federal Employee/Retiree Delinquency Initiative (FERDI) Annual
  Report, September 30, 2014.

                 fiscal year taxpayer services request
    Question. While the IRS has had its overall budget reduced in 
recent years, so has virtually every other department and agency of the 
federal government. Notwithstanding this, the budget authority for the 
taxpayer services account has remained largely static since Fiscal Year 
2009.

                                   Taxpayer Services (enacted except for FY16)
                                              (dollars in millions)
----------------------------------------------------------------------------------------------------------------
     FY09           FY10          FY11          FY12          FY13          FY14          FY15          FY16
----------------------------------------------------------------------------------------------------------------
2,293                 2,279         2,293         2,240         2,136         2,157         2,157         2,409
----------------------------------------------------------------------------------------------------------------

    Not including transfers and additional funding through ($13 million 
in FY13; $34 proposed FY14), the taxpayer services account has been 
reduced only about $136 million from its most recent peak, and 
certainly not to the point where threats of service reductions are 
appropriate. Given that taxpayer services funding is close to its 
historic level, can you tell me what the appropriate funding level is 
for those services? Do you anticipate any additional transfers to the 
taxpayer services account, either from other accounts or from special 
programs?

    Answer. The appropriate funding level for Taxpayer Services is 
$2.409 billion as requested in the FY 2016 Congressional Justification. 
This level of funding would allow us to deliver an 80% level of service 
to meet taxpayer demand and continue delivering high-quality services 
to the taxpaying public. The IRS further anticipates augmenting 
Taxpayer Services funding with $55 million in user fee collections in 
both FY 2015 and FY 2016.

    While Taxpayer Services funding has been reduced to a lesser extent 
than other accounts, it is important to note that costs have risen over 
the same time period. Since FY 2011, the IRS has had nearly $100 
million in unfunded requests to maintain current levels (MCLs) of 
effort due to inflation in the Taxpayer Services appropriation, 
exacerbating the impact of the nominal $136 million reduction since FY 
2011. In FY 2016 alone, for example, MCLs are expected to be over $53 
million. As a result, full-time equivalent staffing in Taxpayer 
Services will decline over 9% (almost 3,000 FTE) from FY 2011 to FY 
2015. At the same time, over 6 million new individual filers have 
entered the tax system, an increase of 4.6%.

    Additionally, Taxpayer Services functions require corresponding 
funds in the Operations Support account which funds information 
technology, security, rent payments, and other administrative support. 
Reductions to Operations Support, therefore, precipitate reductions in 
effectiveness in Taxpayer Services.
              earned income tax credit (eitc) error rates
    Question. In responses to written questions asked during your 
confirmation process, you indicated that you didn't have information 
about the sources of improper EITC payments but you understood that 70% 
of EITC tax returns were prepared by paid preparers. You also indicated 
that you thought all EITC taxpayers should consider the same questions 
regardless of how they prepare their tax returns and that you were open 
to working with the tax software industry to identify problems and 
propose solutions. Well, IRS's own data indicates that the paid 
preparers now prepare only 58% of EITC returns and that the improper 
payment rate on self-prepared returns has skyrocketed. I understand 
that your agency has developed proposed changes to the Schedule EIC 
that should help reduce improper payments. Could you explain why these 
changes have not been implemented yet?

    Answer. I would like to correct the record that the error rate on 
self-prepared returns has skyrocketed. Our updated compliance study for 
tax years 2006 to 2008, released in August 2014,\5\ includes a detailed 
analysis of errors on EITC returns. It is based on the IRS's National 
Research Program (NRP) information which includes the results from a 
statistically valid, random sample of EITC tax returns. The study found 
that there was no difference in either the frequency of error or the 
dollar error percentage on returns prepared by paid preparers as 
compared to those prepared by taxpayers themselves.
---------------------------------------------------------------------------
    \5\ Publication 5162 (8-2014) Catalog Number 66766H Department of 
the Treasury Internal Revenue Service.

    Much of the difficulty in administering the EITC derives from the 
complexity of its statutory eligibility requirements, many of which are 
known only to the taxpayer and cannot be independently confirmed 
because there is no third-party corroborating data. Based on the most 
recent compliance study which examined the causes for erroneous EITC 
claims, the vast majority of improper payments are from inability to 
authenticate eligibility. They include errors associated with the 
inability to authenticate qualifying child eligibility requirements, 
mainly relationship and residency requirements. They also include 
filing status errors, when married couples file as single or head of 
household; and income misreporting errors, when taxpayers misreport 
self-employment income that is not reported to IRS by third parties. 
Finally they include errors in rules for all taxpayers claiming EITC, 
when taxpayers claim the credit using an invalid SSN, or when the 
credit is claimed by a non-citizen who has not been in the US for the 
entire year, or when the taxpayer meets the rule to be a qualifying 
child for another taxpayer; none of which can be authenticated by IRS 
---------------------------------------------------------------------------
at time of filing.

    The Compliance Study also estimates the rest of the improper 
payments are due to program design errors. These errors relate to 
income misreporting, tiebreaker errors, and joint return errors of 
qualifying children. These errors occur because information needed to 
confirm payment accuracy is not available at the time the return is 
processed and the refund is issued. For income misreporting, payer 
information is typically not available until after the filing season, 
therefore wages and other income sources cannot be matched against the 
return at time of filing. For tiebreaker errors and joint return errors 
of qualifying children, because returns are processed as filed, the IRS 
is unaware of a duplication of a qualifying child occurs when the first 
return is filed. The IRS cannot wait until all returns are filed to 
determine whether a child is claimed more than once and which taxpayer 
is actually entitled to claim the child, or to determine whether 
children claimed for EITC have filed a joint return.

    Since the tax years in the study, the IRS has continued its 
outreach and compliance programs directed at taxpayers. The IRS has 
also conducted significant outreach to educate paid preparers on their 
EITC due diligence responsibilities as well as revising the 
Regulations, improving the preparer checklist, and delivering its EITC 
paid preparer strategy. The IRS also continues to believe that 
requiring minimum qualifications for paid preparers would improve the 
accuracy of all returns, including EITC returns, and we continue to 
support legislation that would allow the IRS to require minimum 
qualifications for paid return preparers.

    The IRS has been following the trend in the decrease in paid 
preparer returns and corresponding increase in self-prepared returns 
that started with tax year 2007, likely facilitated by the availability 
of software. IRS data shows that for tax year 2012, 57% of EITC returns 
were prepared by paid preparers. Over the last several years, the IRS 
and the Treasury Department have considered new ways to ensure 
taxpayers preparing their own returns carefully consider EITC 
eligibility requirements. The IRS worked with our IRS/EITC Software 
Developers Working Group on proposals. The Department of the Treasury 
is currently conducting a pilot with a Free-File Alliance partner to 
test new ideas. Based on Treasury's test results and continued 
discussions, the IRS and Treasury will address potential changes that 
could improve areas of EITC noncompliance while taking taxpayer burden 
into consideration.
                                 ______
                                 
              Questions Submitted by Hon. Debbie Stabenow
                          1. taxpayer services
    Question. The National Taxpayer Advocate's 2014 report to Congress 
describes the kinds of difficulties that families have faced and will 
continue to face as they file their taxes.

    Of particular concern are the large number of taxpayers who are 
unable to actually be connected with a person at the IRS to get their 
basic tax questions answered. More than a third of calls end with the 
caller hanging up before having their question answered, receiving a 
busy signal, or being disconnected.

    In recent years, the agency has lost more than ten thousand 
employees, including thousands of employees dedicated to helping 
taxpayers.

    What can we do to improve the service that taxpayers receive from 
the IRS? Would granting the President's request for more money and more 
staff help you deliver better service?

    Answer. The best thing that Congress can do to improve the service 
that taxpayers receive from the IRS is to approve the President's 
budget request in totality.

    Funding for the IRS has been reduced by $1.2 billion over the last 
five years, dropping to $10.9 billion in Fiscal Year (FY) 2015. The IRS 
is now at its lowest level of funding since 2008. If adjusted for 
inflation, the agency's budget is now comparable to where it was in 
1998.

    Since 75 percent of the IRS budget is personnel, the agency has 
been absorbing the budget cuts mainly by reducing our workforce. As a 
result, IRS ended FY 2014 with more than 13,000 fewer permanent full-
time employees compared with 2010. The IRS expects to lose another 
3,000 or more through attrition by the end of this fiscal year.

    This year, the IRS was forced to substantially reduce hiring of 
extra seasonal help we usually have during the filing season. As a 
result, IRS's phone level of service at the start of the filing season 
was 54 percent, and dipped below 40 percent toward the end of filing 
season. That means many callers were forced to call more than once to 
get through, and more than six out of every ten calls did not reach a 
live assistor. Further, IRS expects to end the fiscal year with an 
average phone level of service of 40 percent. That is truly an 
unacceptable level of taxpayer service, especially given that the goal 
for phone service in a given year, if the agency were adequately 
funded, would be 80 percent.

    To further illustrate how serious IRS's phone service difficulties 
have been, the number of taxpayers disconnected by IRS's phone system 
when it becomes overloaded with calls is substantially higher this 
year. The number of these disconnects has reached 8.1 million so far 
this year, as compared with 951,000by this time last year. 
Additionally, taxpayers who have gotten through to an assistor have 
faced extended wait times that are unacceptable.

    As for in-person assistance, during the filing season many 
taxpayers had to line up outside our Taxpayer Assistance Centers (TACs) 
hours before they opened in order to get service. This is not a new 
problem this year, but it has gotten worse over time. IRS encouraged 
taxpayers to utilize the resources and self-service options available 
online at www.irs.gov this filing season to help reduce the need for 
in-person assistance, but the problem persisted due to a lack of 
funding. Approving the President's budget request for the IRS in 
totality would allow the IRS to provide the staff, services, and 
infrastructure it needs to meet taxpayer demand, including restoring 
its toll-free level of service to 80 percent, providing adequate 
staffing to meet the demands of taxpayers at its TACs, and enhancing 
its web applications to provide a broad range of self-service options.

    Question. Which taxpayers are affected the most by these cuts to 
services? It seems to me as though lower-income and middle-class 
taxpayers, who can't afford to hire accountants and lawyers to follow 
up with the IRS, suffer the most from these cuts to the important 
services the IRS provides.

    Answer. As noted in your remarks, the IRS has lost several thousand 
employees dedicated to helping taxpayers. All areas are affected by the 
difficult choices budget cuts and increased responsibilities have 
forced us to make. In 2014, the IRS began prioritizing limited staffing 
and resources to help those taxpayers who must interact with us by 
phone or in person, while encouraging all those who can to use self-
service or other, more efficient options.

    As projected, many taxpayers and tax preparers would not be able to 
reach us by telephone or at our Taxpayer Assistance Centers (TACs) this 
filing season. Those who did experienced a considerable hold and wait 
time. While our service levels were lower than we would prefer, our 
employees worked hard again this filing season to help the nation's 
taxpayers.

    We urge all taxpayers to take advantage of the many resources 
available 24/7 on IRS.gov. These resources include online forms and 
publications, tax law interactive tools and references, Get Transcript, 
Where's my Refund? and help understanding an IRS notice or letter--
again, all available anytime on IRS.gov. Those without internet access 
can use their telephone to access automated response systems. We 
created the IRS Services Guide to help taxpayers locate the services 
they need (http://www.irs.gov/pub/irs-pdf/p5136.pdf). Additionally, 
taxpayers without internet access may be able to use a Facilitated 
Self-Assistance kiosk, available at a few of our TACs.

    During filing season we answer basic tax law questions on our phone 
lines and at the TACs. Alternatively and during the rest of the year we 
encourage taxpayers to try the Interactive Tax Assistant http://
www.irs.gov/uac/Interactive-Tax-
Assistant-(ITA)-1 that takes them through a series of questions just 
like one of our customer service representatives would to determine 
exactly what help or information they need. Taxpayers can also look to 
tax return preparation software packages since tax law help is included 
as part of software. We also offer more than 100 short instructional 
videos, tax tips, and other resources year-round through a variety of 
social media platforms. Taxpayers should find these automated services 
convenient and easy to use. Many are available any time, day or night.

    Seniors and low-to-moderate-income taxpayers also have the option 
to get free help with return preparation through our Volunteer Income 
Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) 
programs. These programs also serve persons with disabilities, those 
with limited English proficiency, and Native Americans. We leverage 
national and local partners to deliver free tax preparation and 
outreach programs to millions of taxpayers throughout the nation. As of 
April 13, 2015, over 90,000 volunteers prepared more than 3.37 million 
federal tax returns at 12,057 VITA/TCE sites, compared to 3.35 million 
returns as of the same time last year.

    To expand the availability of alternative preparation and filing 
options, some of our partners offer taxpayers self-service options such 
as Facilitated Self-Assistance (FSA) and Virtual VITA. The FSA service 
option empowers taxpayers to prepare their own return with the 
assistance of a certified VITA volunteer. Virtual VITA helps our 
partners to provide free tax preparation services ``virtually'' to 
disabled, elderly and those with transportation or other issues.
                      2. corporate tax enforcement
    Question. Corporations have tax departments and can hire firms and 
consultants to take ``aggressive'' tax positions.

    These aggressive strategies might involve claiming deductions or 
characterizing income in a way that the IRS may or may not agree with. 
It might also involve claiming deductions or characterizing income in a 
way that the IRS doesn't have the manpower to catch. This means that 
some companies can avoid paying what they owe, while so many taxpayers 
are just trying to play by the rules.

    In his budget request, the President has requested increasing the 
appropriation for enforcement by $540 million.

    What impact would this increased enforcement funding have on your 
ability to go over corporate tax returns?

    Answer. The additional enforcement funds requested in the FY 2016 
Budget support an array of examination, collection, investigation, and 
regulatory programs that focus on all taxpaying segments. Initiatives 
that will support improved compliance by businesses include 
implementing business document matching programs; improving the 
identification and audit coverage of large, tiered partnerships and 
strengthening the administrative procedures that apply to partnerships, 
S corporations and Real Estate Mortgage Investment Conduits with more 
than 10 members or partners under the Tax Equity and Fiscal 
Responsibility Act (TEFRA); expanding international compliance efforts, 
including offshore criminal investigations; enhancing large corporate 
compliance through improved issue identification; and acquiring network 
analysis tools to identify potentially abusive returns.
                                 ______
                                 
               Questions Submitted by Hon. Mark R. Warner
    Question. I have heard from Virginia institutions of higher 
education about penalties for filing Forms 1098-T with incorrect or 
missing TINs.

    The IRS started fining institutions for filing 1098-Ts with 
incorrect or missing PINs going back to the 2011 tax year. Although the 
IRS issued a blanket waiver for the 2011 tax year, they have declined 
to issue similar blanket waivers for subsequent years, even though 
institutions filed their Forms 1098-T for the 2012 tax year without 
knowledge of the penalties. Institutions must request a waiver each 
year, creating bureaucratic burden. In addition, institutions must rely 
on student-supplied information and they cannot use independent 
verifying programs to ensure that the Forms 1098-T contain the correct 
TINs.

    For one Virginia college, the 2012 proposed penalty is $800,000.

    What is the IRS doing to fix the unnecessary confusion caused by 
the proposed penalties and come to a long-term solution that does not 
unduly harm or burden colleges or universities?

    Answer. Accurate information reporting is critical to the IRS's 
ability to administer the tax laws. The IRS provides guidance and 
regularly works with taxpayers to help them comply with the information 
reporting requirements.

    IRC section 6050S requires colleges and universities to report to 
the IRS the amounts of qualified tuition and related expenses received 
or billed and provide a statement to the student containing the same 
information. This provision was enacted in 1997 for academic periods 
beginning after 1997. Under section 6050S(b)(2)(A), the educational 
institution is required to include the name, address, and TIN of the 
student on Form 1098-T and the student statement. Final regulations 
under section 6050S were published in 2002 after notice soliciting 
public comments; these regulations were effective for Forms 1098-T 
required to be filed after 2003.

    Sections 6721 and 6722, enacted in 1986, impose penalties for 
failure to file correct information returns and failure to furnish 
correct payee statements respectively. The 1997 legislation amended 
sections 6721 and 6722 to apply the section 6721 penalties to Form 
1098-T and the section 6722 penalties to the student statement. 
Regulation 1.6050S-1 details the information required to be reported on 
Form 1098-T, the penalties for failure to comply, and the grounds for 
obtaining relief from the penalties. The underlying law is not new, and 
colleges and universities filing these information returns should have 
been aware of their legal requirements under sections 6050S, 6721, and 
6722 for many years. However, the IRS granted blanket waivers to 
colleges and universities for tax year 2011 from penalties under 
sections 6721 and 6722 as this was the first year Form 1098-T was 
included in the systemic penalty notice program.

    The blanket waivers were designed to provide affected educational 
institutions with additional time to conduct the due diligence 
necessary to ensure the filing of correct information returns and 
compliance with the statutory provisions of the law. Although blanket 
waivers were not provided after tax year 2011, penalty relief is 
available under section 6724 if the educational institution acted in a 
responsible manner when soliciting tax identification numbers (TINs).

    The IRS has undertaken a review of its procedures and communication 
tools. As a result of this review, the actions listed below are being 
taken to ensure that the IRS provides correct and complete information 
in communications and to ensure employees apply the correct criteria 
when considering penalty waiver requests from these institutions.

   Revise Internal Revenue Manual guidance.
   Revise Publication 1586, Reasonable Cause Regulations and 
        Requirements for Missing and Incorrect Name/TINs.
   Revise Notice 972CG that is sent to the institutions proposing a 
        penalty.
   Revising CPE training materials to include additional guidance on 
        penalty relief for Forms 1098-T.

    In addition, and as discussed below, the Department of the Treasury 
has proposed legislation to provide an exception to the limitation on 
disclosing tax return information to expand TIN matching beyond forms 
where payments are subject to back-up withholding. This would allow 
educational institutions to validate the accuracy of TINs included on 
Form 1098-Ts prior to filing, and if used, could be factored into 
reasonable cause penalty waiver considerations.

    Question. Is the IRS willing to work with universities to help them 
verify TINs?

    Answer. The IRS has always worked and will continue to work with 
taxpayer entities to help them comply with the law. Under current law, 
TIN verification is allowed for filers of information returns that 
report payments made by the filer that are subject to back-up 
withholding, such as dividends or other income. In such cases, the tax 
law allows the payor, before filing the return, to verify with the IRS 
the TIN furnished by the payee. Otherwise, the law precludes the IRS 
from disclosing a taxpayer's name, TIN, or other return information 
without specific authorization from the taxpayer. See IRC sections 3406 
& 6103; Treas. Reg. section 31.3406(j)-1; Rev. Proc. 2003-9, 2003-8 
I.R.B. 516.

    Form 1098-T does not report a payment issued by the educational 
institution, like many information documents, but rather reports that 
the institution received or billed for tuition. The provisions of the 
law authorizing TIN verification do not, therefore, apply to Form 1098-
T. Consequently, permitting TIN verification for Form 1098-T would 
require legislation. Accordingly, the Department of the Treasury has 
proposed legislation to provide an exception to the limitation on 
disclosing tax return information to expand TIN matching beyond forms 
where payments are subject to back-up withholding. See Gen. 
Explanations of the Administration's FY 2016 Revenue Proposals at pg. 
217, http://www.treasury.gov/resource-center/tax-policy/Documents/
General-Explanations-FY2016.pdf.

    Without legislative action, the IRS remains bound to follow the law 
as currently prescribed.
                                 ______
                                 
             Questions Submitted by Hon. Benjamin L. Cardin
    Question. As you know, the IRS has released a Form 1023-EZ as part 
of its effort to handle a large application backlog. While you should 
be commended for the streamlining work you've done at the IRS with 
limited resources thus far, I am concerned that the IRS may be missing 
important pieces of information from Form 1023-EZ filers. Exempt 
organizations that file the regular Form 1023 application must submit 
their organizing/governance documents at that time. Form 990 and 990-EZ 
filers must submit changes to those documents with those annual 
returns.

    When a 1023-EZ filer ``grows'' to the level where they should be 
filing a Form 990-EZ or 990, will they be expected to file the basic 
organizing documents at that time?

    Answer. When an entity that files a Form 1023-EZ, Streamlined 
Application for Recognition of Exemption Under Section 501(c)(3) of the 
Internal Revenue Code, files a Form 990, Return of Organization Exempt 
from Income Tax, or 990-EZ, Short Form Return of Organization Exempt 
from Income Tax, for the first time, the entity is not required to 
provide its organizational documents with its return. As is the case 
for other exempt organizations, if the entity files a Form 990 or 990-
EZ and the entity's organizational documents have changed, it must 
describe any significant changes to documents on its Form 990 or 990-
EZ.

    Question. The Work Opportunity Tax Credit is an incredibly 
important incentive that is used by employers throughout Maryland. 
While WOTC is now expired, it was made available retroactively in 2014. 
For WOTC processing to begin, the IRS must issue guidance that 
recognizes that the program has been reauthorized and that provides 
some transition relief so that employers can submit WOTC paperwork for 
hires in 2014 to their state agencies. The need for guidance to come 
out quickly is especially great because the program has only been 
extended for one year.

    When do you expect IRS to release guidance, similar to Notice 2013-
14, that will enable the WOTC program to be efficiently implemented 
retroactively?

    Answer. On December 19, 2014, Congress retroactively extended the 
Work Opportunity Tax Credit (WOTC) for the 2014 tax year. To claim the 
credit, an employer who hires a member of a targeted group listed in 
section 51(d)(1)(A) through (I) ordinarily has 28 days from the date of 
hire to submit to the Designated Local Agency (DLA) a Form 8850, Pre-
Screening Notice and Certification Request for the Work Opportunity 
Credit. Recognizing the concern raised that because of the retroactive 
enactment of WOTC, employers who hired individuals during 2014 would 
need additional time to file the form, on February 19, 2015, the IRS 
issued Notice 2015-13 providing employers until April 30, 2015, to file 
the form with the DLA.
                                 ______
                                 
                Questions Submitted by Hon. Dean Heller
    Question. In my opinion, properly done tax reform would reduce the 
IRS to its core function of collecting tax revenues, not implementing 
new tax-related regulations and reporting requirements under Obamacare. 
How many full time equivalents (FTE) or what percentage of the agency 
are dedicated to implementing Obamacare this tax filing season?

    Answer. The IRS projects requirements of approximately 2,828 full-
time equivalents (FTE) related to the tax law changes included in the 
ACA for fiscal year 2015. This includes FTEs to implement both the 
Marketplace provisions (such as the premium tax credit provision) and 
non-Marketplace provisions (such as the fee on branded drug 
manufacturers). This level of FTE is approximately 2.5% of our FY 15 
operating plan.

    Question. Under the IRS's own estimates, Obamacare will cost 
individuals and businesses millions of hours. Do you have an estimate 
of how many hours (or percentage of the agency) are expected to be 
spent on implementing Obamacare this FY?

    Answer. See the answer above, which tracks full-time equivalents, 
i.e. hours spent by IRS employees.

    Question. On February 5, 2015, the IRS announced (IR-2015-22) its 
new online directory of Federal tax return preparers. The searchable 
directory includes attorneys, CPAs, enrolled agents and those who have 
completed the requirements for the IRS Annual Filing Season Program 
(AFSP). All of those listed in the directory have Preparer Tax 
Identification Numbers (PTINs). However, ``Tax return preparers with 
PTINs who are not attorneys, CPAs, enrolled agents or AFSP participants 
are not included in the directory.''

    a. Haven't return preparers who obtained PTINs complied with the 
only mandatory requirements applicable to return preparers?

    Answer. Individuals preparing federal tax returns for compensation 
are required to have a preparer identification number (PTIN). They are 
also required to provide that number on the returns they prepare, sign 
the returns they prepare, and furnish a copy of the prepared return to 
the taxpayer.

    b. What is the rationale for excluding from the directory those who 
have PTINs but who are not also attorneys, CPAs, enrolled agents or 
AFSP participants?

    Answer. The directory is a tool to assist taxpayers with finding a 
preparer or verifying credentials and/or select qualifications. As 
such, the preparers listed in the Directory have earned and maintained 
professional credentials (CPA, enrolled agent, or attorney) or have 
completed a certain number of hours of continuing education from IRS-
approved continuing education providers in the specific categories of 
federal tax law topics, tax law updates, and ethics.

    Question. The IRS website page for the directory search (http://
irs.treasury.gov/rpo/rpo.jsf) contains the following statement: 
``Additionally, the IRS does not endorse any preparer or credential 
over another.''

    a. How do you reconcile that statement with the fact that the 
official IRS return preparer directory excludes thousands of compliant 
preparers who are PTIN holders?

    Answer. The description of the Directory on the IRS website (and 
information on linked webpages that include Information on 
Understanding Tax Return Preparer Qualifications and Credentials, and 
information on Choosing a Preparer) notes that anyone can be a paid tax 
return preparer as long as they have an IRS Preparer Identification 
Number (PTIN), and they sign and enter it on all returns they prepare. 
This information provides that tax return preparers who have PTINs but 
are not listed in the Directory may provide quality return preparation 
services, but cautions taxpayers to choose any return preparer wisely 
and to always inquire about their education and training.

    Question. Please provide the following information about the return 
preparer directory (as of February 5, 2015):

    a. How many return preparers are listed in the directory?

    Answer. There are 312,298 return preparers listed in the directory, 
some holding more than one designation.

    b. How many return preparers are listed in each of the six 
searchable categories?

    Answer.

 
 
 
i. Attorney Credential.....................................       27,729
ii. Certified Public Accountant Credential.................      202,943
iii. Enrolled Agent Credential.............................       48,322
iv. Enrolled Actuary Credential............................          350
v. Enrolled Retirement Plan Agent Credential...............          641
vi. Annual Filing Season Participant.......................       41,863
 

    c. How many PTIN holders are not listed in the directory?

    Answer. As of February 6, 2015, 360,592 return preparers with PTINs 
only are not included in the directory.

    Question. Has Congress ever specifically authorized the creation of 
this directory of return preparers?

    Answer. The Directory is a tax administration tool and requires no 
Congressional authorization. More than 140 million individual tax 
returns were filed last year, and more than half of them were prepared 
with the help of a paid preparer. The Directory is a practical tool for 
the millions of Americans who rely on the services of a paid return 
preparer. The purpose of the Directory is to help taxpayers find a tax 
professional with credentials and select qualifications to help them 
prepare their tax returns. It is part of a broader effort to provide 
taxpayers with information to understand the different categories of 
return preparers and their representation rights so they can choose a 
qualified tax return preparer who best meets their needs.

    Question. How much did the IRS spend in developing this online 
directory? What is the estimated annual cost to maintain it?

    Answer. Total development costs for the directory were $244,000 
with an estimated annual maintenance cost of $24,000.

    Question. Last year, you acknowledged, in your April testimony that 
the vast majority of return preparers operate with the highest ethical 
standards. That said, the GAO and the IRS's own research have admitted 
that a large number of returner preparers continue to engage in fraud. 
If this is true, how does urging thousands of return preparers to 
complete costly and time-consuming continuing education combat return 
preparer fraud?

    Answer. The IRS and the National Taxpayer Advocate have long agreed 
that the professionalism of tax return preparers can be increased 
through a framework that provides for registration, testing, 
certification, continuing education, and consumer education. (See, the 
Return Preparer Review, IRS Publication 4832 (Rev. 12-2009) at pages 
22-23) (http://www.irs.gov/pub/irs-pdf/p4832.pdf). See also, the 
Taxpayer Advocates 2015 Objectives Report to Congress (June 2014 at 
page 71) (http://www.taxpayeradvocate.irs.gov/2015ObjectivesReport). 
Absent the authority to require tax return preparers to have minimum 
qualifications or to mandate testing and continuing education, 
encouraging tax return preparers to maintain currency with federal tax 
law through continuing education improves compliance with the tax laws 
and filing requirements. Encouraging taxpayers to choose preparers 
wisely and to familiarize themselves with their preparer's 
qualifications also reduces opportunities for fraud to be perpetrated.

    Given that more than half of all taxpayers rely on a paid preparer 
to complete their tax returns, accurate return preparation, improved 
compliance and effective tax administration necessitate that tax return 
preparers have a basic level of competency to complete federal tax 
returns. Sixty percent of all paid tax return preparers are 
uncredentialed. With the escalation of taxpayer fraud and identity 
theft, it is more important than ever that a taxpayer choose his/her 
tax return preparer wisely and that should mean a tax return preparer 
who is knowledgeable in the tax law and return preparation. Remaining 
current with the tax law and tax law changes through continuing 
education benefits the preparer, the taxpayer and tax administration.

    Question. Over the past decade, the IRS Tax Division has obtained 
numerous injunctions against fraudulent tax return preparers. Despite 
these injunctions, I have seen alarming reports that the IRS is 
continuing to send out questionable refunds long after the IRS should 
have realized there was a problem. Can you list the steps the IRS is 
taking over the next year to block improper refunds from going out and 
increase its vigilance against return preparer fraud?

    Answer. The IRS maintains an office whose primary responsibility is 
fraud detection/revenue protection activities, addressing millions of 
questionable returns each year. All refund returns flow through the 
Electronic Fraud Detection System (EFDS) and Dependent Database (DDb) 
which contain complex fraud models and filters developed from 
historical fraud characteristics used to identify questionable income, 
withholding, refundable credits and/or taxpayer identity. In addition 
to these systemic fraud checks, employees perform analysis and review 
groups of returns with similar characteristics that indicate refund 
schemes. These fraud prevention efforts occur all year long and the IRS 
has implemented the following improvements to further combat fraud:

   In January 2013, we rolled out a program allowing financial 
        institutions to reject questionable refunds using a special 
        code on current year direct deposit refunds when the name/TIN 
        listed on the Treasury ACH file for the tax refund does not 
        match the account holder information in the bank's records for 
        a specified set of banking filters. An internal transcript is 
        then generated in order to review the refund.
   In January 2015, we limited the number of direct deposit refunds 
        that can be made to a single account to three (3) and any 
        additional refunds are sent via paper checks. This change is 
        expected to deter fraud and identity theft.

    For the 2015 filing season, we also increased the number of 
identity theft filters over the previous filing season and utilize 
dynamic lists to update filters based upon current schemes, historical 
characteristics and/or patterns.

    A major IRS project under development that will assist with pre-
refund fraud detection, income verification and taxpayer authentication 
is the Return Review Program (RRP). This application will replace the 
EFDS, enhancing many aspects of IRS compliance activity. RRP will 
perform historical filing analysis and use improved complex programming 
to review all returns for fraud potential improving the IRS's ability 
to identify and treat fraud and Identity Theft filings.

    Return preparer fraud is also addressed by IRS Criminal 
Investigation (CI). CI continues to investigate tax return preparers 
who promote schemes designed to obtain fraudulent refunds or to 
fraudulently reduce their clients' tax liabilities. CI will continue to 
investigate paid preparers who use invalid identifiers or fail to sign 
returns. CI will also increase its focus on preparers who promote 
schemes to US citizens living abroad.

    Each year, CI uses information collected from various sources to 
identify return preparer schemes. CI uses investigative analysts in 
CI's Scheme Development Centers (SDCs), special agents in 25 Field 
Offices, and data base information on return preparers to identify and 
evaluate preparers for potentially fraudulent activity. Return 
preparers are evaluated on a set of characteristics representative of 
the set of returns submitted by individual preparers. CI uses a Return 
Preparer Analysis Tool to perform a collection of fraud tests on return 
preparer data in the returns that the IRS has determined may indicate a 
higher-than-normal probability of fraud. The research into the pattern 
of suspicious return preparer schemes provides insights into the 
following questions:

   Who is preparing the returns?
   Does the preparer only file during the filing season (January-
        April)?
   Do returns come in large batches?
   Does the preparer only send in returns in October?
   Where does the preparer conduct business?
   Where does the preparer live?
   What are the mailing locations of the returns?

    For the 2015 filing season, CI is using a six prong approach to 
create an enhanced enforcement presence among tax practitioners, tax 
preparers, and other third parties in the return preparer community:

   Undercover special agent shopping activities.
   Coordinated legal and enforcement actions during filing season.
   Enhanced compliance partnerships with internal stakeholders.
   Enhanced partnership with external stakeholders.
   Outreach with the return preparer community.
   Coordinated cross-functional publicity.

    CI continues to use undercover investigations as one of the most 
effective methods of uncovering and investigating questionable return 
preparer schemes.

    CI continues to recommend appropriate e-file sanctions at the 
conclusion of any criminal investigation that involves an authorized e-
file provider who has violated the requirements of the e-file program. 
Sanctions imposed may be a written warning, a written reprimand, 
suspension, or revocation of the Electronic Filing Identification 
Number (EFIN).

    CI continues to support civil operations in the return preparer 
area by its many partnerships throughout the IRS to:

   Conduct Knock and Talk Visits with potentially abusive EITC return 
        preparers;
   Conduct parallel investigations in order to deter preparer 
        noncompliance (because they result not only in criminal 
        convictions and publicity, but also civil injunctions and 
        preparer penalties);
   Identify and investigate return preparers who do not readily 
        identify themselves because they do not sign their clients' 
        returns;
   Determine electronic filing suitability of all e-file applicants 
        based on their criminal history; and
   Work CI cases that involve disreputable conduct before the IRS by 
        an attorney, certified public accountant or enrolled agent.
                                 ______
                                 

                       DEPARTMENT OF THE TREASURY

                        internal revenue service
                         washington, d.c. 20224

DEPUTY COMMISSIONER

                           November 18, 2014

MEMORANDUM FOR SENIOR EXECUTIVE TEAM

FROM:  John M. Dalrymple, Chairman, Executive Resources Board

SUBJECT:   Impact of Disciplinary/Adverse Action on Performance-based 
            Pay Adjustments, Bonuses, and Awards

Please be advised that pursuant to a September 24, 2014 Department of 
the Treasury policy transmittal number TN-14-003 , entitled 
Departmental Oversight for Executive Misconduct in Determining Pay 
Adjustments, Bonuses and Awards (Enclosure 1), the following is 
effective immediately:

                An Executive (including members of the Senior Executive 
                Service (ES), Senior Leaders (SL), Streamlined Critical 
                Pay employees (AD), or the equivalent, or IR-01 
                Executive Officers (i.e., ``SES-in-waiting'')), who is 
                reprimanded or suspended, as result of any form of 
                misconduct, is ineligible for the following:

                A monetary performance-based award for the rating 
                period in which the disciplinary action or adverse 
                action was administered (e.g., performance bonus, 
                Special Act Award, Quality Step Increase, Presidential 
                Rank Award, a performance-based salary adjustment 
                otherwise authorized under 5 CFR 534.404 , etc.)

The Treasury-wide policy is already incorporated in the corresponding 
IRS policy, promulgated on March 14, 2014, via my memorandum entitled 
Policy and Procedures for High-Level Personnel (Enclosure 2).

Additionally, the following policy is effective immediately for all 
Executives and Executive Officers:

                If there was a final Agency decision that an IRS 
                Executive (including members of the Senior Executive 
                Service (ES), Senior Leaders (SL), Streamlined Critical 
                Pay employees (AD), or the equivalent, including IR-01 
                Executive Officers (``SES-in-waiting'')) committed any 
                act or omission set forth in 26 USC Sec. 7804, note 
                Sec. Sec. 1203(b)(1)-(10) of the Internal Revenue 
                Service Restructuring and Reform Act of 1998, such an 
                employee shall not be eligible for a monetary 
                performance award. If any final agency decision on a 
                Sec. 1203(b) finding is overturned by an administrative 
                or judicial third-party, the third-party may order a 
                retroactive award so long as such award is consistent 
                with the Back Pay Act.

If you have any questions regarding this matter, please contact Dan 
Riordan, Human Capital Officer, at (202) 317-7600, or a member of your 
staff may contact Max Goodman, Manager, Executive Misconduct Unit, 
Workforce Relations Division, Human Capital Office, at (202) 302-7571.

Enclosures (2)

cc: All Executives
   Associate Chief Counsel (General Legal Services)
   TIGTA Deputy Inspector General for Investigations
                                 ______
                                 

                       DEPARTMENT OF THE TREASURY

                        internal revenue service
                         washington, d.c. 20224

HUMAN CAPITAL OFFICE

                            February 4, 2015

MEMORANDUM FOR SENIOR EXECUTIVE TEAM

FROM:  Daniel T. Riordan, IRS Human Capital Officer

SUBJECT:   Interim Guidance: Impact of Employee Misconduct on Awards, 
            Bonuses, Performance-Based Pay Increases, and Quality Step 
            Increases to be Paid in Fiscal Year (FY) 2015

This is to inform you that we will issue the attached interim guidance 
and procedures to the Embedded HR directors notifying them about the 
screening for Section 1203(b) violations that will be conducted in 
FY2015 before granting performance awards, bonuses, performance-based 
pay increases (PBI), and Quality Step Increases (QSls).

This guidance applies to recognition to be paid or made effective in 
Fiscal Year FY2015 and applies to all bargaining (BU) and non-
bargaining unit (NBU) IRS employees except executives and other high-
level officials who are covered by separate misconduct policy and 
procedures approved by the Chair of the Executive Resources Board.

An employee shall not be eligible for covered recognition (excluding 
QSls) to be paid or made effective in FY2015 if there has been a final 
Agency decision in FY2014 that a Section 1203(b) violation has 
occurred. Additionally, employees will not be eligible for QSls paid in 
FY2015 if there has been a final Agency decision in FY2015 that a 
Section 1203(b) violation has occurred or a decision to impose any 
discipline with a penalty of suspension of 15 days or longer.

Further guidance will be issued regarding misconduct screening for 
recognition to be paid or made effective in FY2016. This guidance will 
incorporate recently issued Treasury policy once an agreement is 
reached with NTEU. This interim guidance will be in effect until the 
final policy is issued.

If you have any questions, please contact me or have a member of your 
staff contact Terri DeAngelis, Associate Director, Pay, Leave and 
Performance Branch at 
[email protected], or (215) 861-0775, or Marilyn Cain, Chief, 
Payband, Performance and Awards Programs at [email protected] or 
(512) 499-5431.
Attachment

cc: Human Capital Advisory Council
   FMA/PMA

Attachment Interim Guidance: HCO-06-1214--02-04-2015

The following changes are effective immediately for IRM 6.451.1, Awards 
and Recognition.

New IRM Subsection: Screening for Employee Misconduct Before Granting 
Covered Recognition.

  1)  Covered Employees. These procedures apply to all bargaining (BU) 
        and non-bargaining unit (NBU) IRS employees except executive 
        and other high-level officials who are covered by separate 
        misconduct policy and procedures approved by the Chair of the 
        Executive Resources Board.

  2)  Covered Recognition. These procedures cover the following types 
        of recognition to be paid or made effective in Fiscal Year (FY) 
        2015.

    a.BU employees: monetary and time-off performance awards, bilingual 
            awards, and paybanded (IR) employees' performance bonuses 
            and performance-based (pay) increases.

    b.  BU employees: monetary and time-off performance awards, 
            bilingual awards, and monetary/time-off awards elected by 
            BU employees instead of Quality Step Increases (QSIs) under 
            negotiated provisions.

    c.  NBU and BU employees: QSIs.

  3)  Excluded Recognition. These procedures do not cover suggestion 
        awards, travel gain-sharing awards, referral bonuses, foreign 
        language awards,\6\ or any other award or bonus not listed 
        under paragraph 2, Covered Recognition.
---------------------------------------------------------------------------
    \6\ Foreign language awards are distinguished from IRS bilingual 
awards. Foreign language awards may be granted only to law enforcement 
officers as defined in statute (for example, GS-1811 Criminal 
Investigators (Special Agents) assigned to the Criminal Investigation 
Division). However, bilingual awards are covered recognition under 
these procedures.

    a.  NBU and BU employees: Manager's Awards and Special Act Awards 
            are not covered by this policy because they are not being 
---------------------------------------------------------------------------
            paid during the applicable period.

  4)  Disqualifying Misconduct will result in ineligibility for covered 
        recognition.

    a.  1203(b) Violations. A Covered Employee shall not be eligible 
            for recognition described in paragraphs 2a and 2b to be 
            paid or made effective in FY 2015 if there has been a final 
            Agency decision in FY 2014 that a Section 1203(b) violation 
            has occurred.

      NOTE 1: Section 1203(b) violations are described in Section 
            1203(b)(1)-(10) of the Internal Revenue Service 
            Restructuring and Reform Act of 1998 (``RRA '98'') which 
            provides that IRS employees must be terminated from Federal 
            employment if they violate any of the ten specific acts or 
            omissions described. Acts or omissions of IRS employees 
            will be subject to the discipline prescribed by section 
            1203(b) only if those acts are taken, or those omissions 
            are made, with some degree of intent. The statute also 
            allows the IRS Commissioner to mitigate the sanction of 
            termination.

      NOTE 2: With respect to Section 1203(b) violations, ``Final 
            Agency decision'' refers to when the IRS deciding official 
            makes the decision that an employee violated Section 
            1203(b) of RRA '98 after the employee's oral and/or written 
            reply occurs (if applicable).

    b.  1203(b) Violations. A Covered Employee shall not be eligible 
            for recognition for a QSI as described in paragraphs 2c to 
            be paid or made effective in FY 2015 if there has been a 
            final Agency decision in FY 2015 that a Section 1203(b) 
            violation has occurred. See Notes 1 and 2 above.

    c.  Non-1203(b) Violations. A Covered Employee shall not be 
            eligible for recognition for a QSI as described in 
            paragraph 2c if there has been a final Agency decision in 
            FY 2015 to impose any discipline with a penalty of 
            suspension of 15 days or longer, or removal.

      NOTE: With respect to discipline, ``Final Agency decision'' 
            refers to when the IRS deciding official makes the decision 
            that an employee will be disciplined as described in 
            paragraph 4c, after the employee's oral and/or written 
            reply occurs (if applicable).

      NOTE: See summary chart below:

------------------------------------------------------------------------
        Award/Recognition                  Ineligibility Standard
------------------------------------------------------------------------
Cash/TOA for FY 2014 performance   Final Agency decision in FY 2014 that
 paid in March 2015                 a Section 1203(b) violation has
                                    occurred
QSI for FY 2015 performance paid      Final Agency decision in FY 2015
 in FY 2015                         that a Section 1203(b) violation has
                                    occurred
                                      Final Agency decision in FY 2015
                                    to impose any discipline with a
                                    penalty of suspension of 15 days or
                                    longer
PBI based on FY 2014 performance   Final Agency decision in FY 2014 that
 rating paid in FY 2015             a Section 1203(b) violation has
                                    occurred
------------------------------------------------------------------------

  5)  Screening for Disqualifying Misconduct. The Human Capital Office 
        will use the HCO Automated Labor Employee Relations Tracking 
        System (ALERTS) to perform centralized screening for 
        disqualifying misconduct and will ensure that employees, who 
        have been the subject of final Agency decisions in FY 2014 or 
        FY 2015 as applicable, shall not be granted Covered Recognition 
        in FY 2015.
  6)  Employee Notification. Ineligible employees will receive a letter 
        mailed to their home address of record prior to the effective 
        date of the covered recognition. Upon receipt of the letter, a 
        BU employee may file a grievance under Article 41 of the 
        National Agreement to contest his/her ineligibility. For NBU 
        employees, a determination of ineligibility under these 
        procedures is not grievable under the Agency Grievance 
        Procedure, IRM 6.771.1.
  7)  Documentation. The Workforce Relations Division shall maintain 
        ALERTS screening documentation in accordance with records 
        retention standards.
                                 ______
                                 

                       DEPARTMENT OF THE TREASURY

                        internal revenue service
                         washington, d.c. 20224

DEPUTY COMMISSIONER

                             March 14, 2014

MEMORANDUM FOR SENIOR EXECUTIVE TEAM

FROM:   John M. Dalrymple, Chairman, Executive Resources Board

SUBJECT:  Misconduct Policy and Procedures for High-Level Employees

[Supersedes Deputy Commissioner for Services and Enforcement Memorandum 
of January 06, 2014]

This memorandum and its attachments promulgate Internal Revenue Service 
policy and procedures pertaining to the adjudication of misconduct 
allegations involving high-level employees (i.e., Executives [ES; SL; 
AD]; Executive Officers [IR-01]; Senior Managers [IR-01]; Front Line 
Managers [IR-03]; and non-bargaining unit employees at grade GS-15, 
with the exception of those serving at grade via temporary promotion), 
and is issued under my authority and responsibilities as Chairman, 
Executive Resources Board.

One of our responsibilities as stewards of our nation's tax system is 
to establish and maintain the highest standard of professionalism and 
personal integrity throughout the IRS. All high-level employees must 
set an example through impeccable conduct. An allegation that a high-
level employee has failed to meet this obligation must be promptly 
addressed and accurately and effectively resolved. The IRS has 
determined that high-level employees must be held to a higher standard 
of professionalism, integrity, and accountability than employees of 
lower grade and organizational rank. Accordingly, high-level employees 
who engage in misconduct generally will be subject to corrective action 
exceeding that which is suggested for comparable offenses committed by 
employees of lower grade and rank.

Attached are the Policies and Procedures for Adjudicating Conduct-
Related Matters Involving High-Level Employees; Standards for Conduct-
Based Inquiries; and Report of Inquiry template. The policies, 
procedures, and guidelines contained in the attachments will help to 
ensure consistency, objectivity, and accountability in resolving 
allegations of misconduct. Each allegation of misconduct will be 
evaluated thoroughly and accurately by either internal administrative 
review/inquiry, or by formal investigation conducted by the Treasury 
Inspector General for Tax Administration (TIGTA).

Every allegation of misconduct, involving a high-level employee, must 
be presented to the Executive Misconduct Unit (EMU), of the Workforce 
Relations Division, Human Capital Office, for guidance and processing. 
Additionally, all formal and informal agreements to resolve complaints 
of misconduct (including Equal Employment Opportunity-related 
misconduct), and all formal and informal appeals of a disciplinary or 
adverse action, must be coordinated with the EMU before settlement 
terms or commitments may be communicated to complainants, grievants, or 
appellants.

If you have any questions regarding the policies and procedures related 
hereto, please contact Lia Colbert, Acting Director, Workforce 
Relations Division, Human Capital Office, at (202) 317-4390, or Max 
Goodman, Manager, EMU, at (202) 302-7571.

Attachments (3)

cc: All Executives
   All Executive Officers
   All Senior Managers
   All Front-Line Managers
   All Human Resources Managers
   All EEO Managers
   Associate Chief Counsel (General Legal Services)
   TIGTA Deputy Inspector General for Investigations
                                 ______
                                 
                              attachment 1

Policies and Procedures for Adjudicating Conduct-Related Matters 
Involving High-Level Employees

1. Applicability. These policies and procedures apply only to conduct-
based issues. [The respective Operations Branches within the Labor/
Employee Relations Field Operations Office, Workforce Relations 
Division, Human Capital Office, provide services and support for all 
performance-based actions involving high-level employees at grades GS-
15, IR-03, and IR-01, and conduct-based actions involving employees 
serving at grades GS-15, IR-03, and IR-01 via temporary promotion. The 
Office of Executive Services, Human Capital Office, provides services 
and support for all performance-based actions involving Executives and 
Executive Officers.]

2. Referring Allegations of Misconduct. All allegations of misconduct 
involving high level employees must be promptly referred to the 
Executive Misconduct Unit (EMU) or to the Treasury Inspector General 
for Tax Administration (TIGTA). The EMU can be reached at (202) 302-
7571. Complaints may be filed with TIGTA at http://www.treas.gov/tigta/
contact_report.shtml#theform, or by phone at 1-800-366-4484. [Note: 
TIGTA Complaint Referral Memoranda (TIGTA Forms 2070 and 2070A) and 
Reports of Investigation (TIGTA Form 2076) involving a high-level 
employee, and received by the Business Unit from a source other than 
the EMU, must be forwarded immediately to the EMU.]

3. Role of the EMU. The EMU is the exclusive servicing Employee 
Relations (ER) office for all conduct-based issues involving high-level 
employees. On occasion, the EMU will request assistance and support 
from other ER components within the Human Capital Office or the 
Business Units. When a complaint referred to the EMU includes a co-
subject who is not a high-level employee, the case associated with that 
employee will be adjudicated by that individual's servicing ER office, 
after adjudication of the primary case.

4. Processing Misconduct Cases. The EMU will receive and evaluate all 
complaints of misconduct against high-level employees, regardless of 
the source of the complaint (e.g., TIGTA, Employee Tax Compliance 
Branch, Credit Card Services Branch, IRS management official, Member of 
Congress, taxpayer, etc.).

The EMU may close conduct referrals at its own discretion; typically 
this occurs when an allegation of misconduct lacks sufficient 
information to justify administrative inquiry or formal investigation.

The EMU will analyze all referrals of potential or confirmed 
misconduct, before forwarding the cases to the responsible Business 
Unit Commissioner or Chief. When it is determined by the EMU that a 
misconduct matter requires the attention of the impacted Business Unit, 
the EMU will refer the matter with instructions, guidance, and/or 
recommendation. A due date for the Business Unit's recommendation for 
disposition will also be identified.

When appropriate, the EMU will consult with TIGTA; the Office of the 
Associate Chief Counsel, General Legal Services (GLS); and/or the AWSS 
Office of Equity, Diversity, and Inclusion Field Services for the 
purpose of assisting the responsible Business Unit with its case 
analysis and subsequent deliberations.

When an allegation of misconduct has been subjected to formal 
investigation by TIGTA, the resulting Report of Investigation (ROI) 
will be referred by the EMU to the responsible Business Unit for review 
and recommendation. The Business Unit may conduct additional 
administrative inquiry if deemed necessary or request that the EMU seek 
supplemental investigation by TIGTA and/or legal opinion from GLS. If 
an allegation of misconduct was not subjected to formal investigation 
by TIGTA, the EMU will determine whether to request a formal 
investigation or forward the matter to the responsible Business Unit 
for administrative inquiry (see attachments 2 and 3). In all cases, the 
Business Unit Commissioner/Deputy Commissioner or Chief/Deputy Chief 
must submit a written recommendation for disposition to the EMU by the 
identified response date. The EMU will advise as to whether the 
recommended disposition is consistent with previously adjudicated 
cases, involving comparable facts, circumstances, infractions, and 
grade level.

Note: Before the matter is returned to the EMU, the recommendation for 
disposition must be discussed with the management official (typically 
the first or second-level supervisor) who will be responsible for 
issuing any recommended corrective action upon final approval. No 
discussion with the affected employee may occur until the Business Unit 
is notified by the EMU that the recommended disposition is approved.

When the adjudication process results in confirmation of misconduct by 
a high-level employee, and the Business Unit recommends either 
disciplinary action (i.e., Letter of Admonishment, Letter of Reprimand, 
or Suspension of 1 to 14 days) or adverse action (i.e., Suspension of 
15 days or more, involuntary Change-To-Lower-Grade, or Removal from the 
Federal service), the EMU will refer the case and recommendation for 
disposition to the Chairperson, Executive Resources Board (currently, 
the Deputy Commissioner for Services and Enforcement) for approval to 
proceed with the initiation of the recommended administrative action. 
Cases involving Operations Support employees will be routed through the 
Deputy Commissioner for Operations Support.

Note: Under no circumstances may corrective action be administered or 
may the matter be otherwise resolved without contacting the EMU in 
advance.

5. Penalty Selection. General penalty guidelines are set forth in the 
IRS Guide to Penalty Determinations, IRS Document 11500 (Rev. 08-2012).

6. Proposing and Deciding Officials. Notices of proposed disciplinary 
or adverse action will be prepared by the EMU and issued by the 
employee's immediate supervisor (or second-level supervisor, when 
deemed appropriate). Disciplinary or adverse action decision letters 
will be prepared by the EMU and issued by the employee's first-level 
supervisor, second-level supervisor, or third-level supervisor, as 
deemed appropriate by the affected Business Unit Commissioner or Chief. 
However, the deciding official for actions involving Executives or 
Executive Officers cannot be delegated below the Business Unit Deputy 
Commissioner or Deputy Chief.

7. Adjudication Actions. The following dispositions are available:

Non-disciplinary Actions (not appealable):

Clearance Notification
Closed-Without-Action Notification
Oral Counseling (confined to first offenses of minor consequence)
Letter of Caution

Disciplinary Actions (may be appealed internally only, via the Agency 
Grievance System):

Letter of Admonishment (this is the lowest level of formal disciplinary 
action)
Letter of Reprimand
Suspension (less than 15 calendar days) *

Adverse Actions (may be appealed externally only, pursuant to U.S. 
Merit Systems Protection Board regulations and procedures):

Suspension (greater than 14 calendar days)
Reduction in Grade and Pay *
Removal from the Federal service

*  Note: by Federal regulation, these dispositions are not available to 
members of the Senior Executive Service.

8. Disposition Letters.
a. Clearance Notification:
The subject of a misconduct complaint may receive a Clearance 
Notification if: (a) he or she was interviewed during the investigation 
or administrative inquiry; (b) the allegation was unequivocally 
disproved; and (c) the subject or Business Unit requests such 
notification. If all conditions are met, the responsible Business Unit 
will issue such notification, orally or in writing, following 
consultation with the EMU. Confirmation that such notification was 
issued must be provided to the EMU.
b. Closed-Without-Action Notification:
The subject of a misconduct complaint may receive a Closed-Without-
Action Notification if: (a) he or she was interviewed during the 
investigation or administrative inquiry; (b)the allegation was 
unresolved; and (c) the subject or Business Unit requests such 
notification. If all conditions are met, the responsible Business Unit 
will issue such notification, orally or in writing, following 
consultation with the EMU. Confirmation that such notification was 
issued must be provided to the EMU.
c. Letter of Caution:
A Letter of Caution may be issued to the subject of a misconduct 
complaint when the facts of the case suggest only a need for the 
subject to exercise maximum diligence in the future with respect to the 
identified issue (i.e., the offense is not attributed to carelessness, 
negligence or intentional disregard). The letter will be prepared by 
the EMU and issued by the employee's immediate supervisor (or second-
level supervisor, when deemed appropriate).
d. Letter of Admonishment:
A Letter of Admonishment will be retained in the Employee Drop File 
(EDF) for 2 calendar years from the date it was received by the 
employee. The letter will be prepared by the EMU and issued by the 
employee's immediate supervisor (or second-level supervisor, when 
deemed appropriate).
e. Letter of Reprimand:
A Letter of Reprimand will be retained in the employee's Official 
Personnel Folder (OPF) for 2 calendar years from the date it was 
received by the employee (for tax-related offenses, Letters of 
Reprimand will be retained in the OPF for 5 calendar years). The letter 
will be prepared by the EMU and issued by the employee's immediate 
supervisor (or second-level supervisor, when deemed appropriate).

9. Other Actions.

a. High-level employees are ineligible for ``Alternative Discipline.''

b. An Executive who is reprimanded, suspended, or reduced in grade as 
result of misconduct, is ineligible for the following:

   a monetary performance-based award for the rating period in which 
        the disciplinary action or adverse action was administered 
        (e.g., performance bonus, Special Act Award, Presidential Rank 
        Award, etc.);
   a performance-based salary adjustment, otherwise authorized under 5 
        CFR 534.404.

An Executive Officer who is reprimanded, suspended, or reduced in grade 
as result of misconduct, is ineligible for the following:

   a monetary performance-based award for the rating period in which 
        the disciplinary action or adverse action was administered 
        (e.g., performance bonus, Special Act Award, Quality Step 
        Increase, etc.);

* Note: Senior Managers (IR-01), Front Line Managers (IR-03), and GS-15 
(NBU) employees are unaffected by Section 9.b.

10. Settlement Agreements. All formal and informal agreements to 
resolve a complaint of misconduct (including EEO-related misconduct), 
and all formal and informal appeals of a disciplinary or adverse 
action, must be coordinated with the EMU before a settlement commitment 
or terms of settlement can be communicated to the complainant, 
grievant, or appellant.

11. Agency Grievance System. High-level employees may grieve a 
disciplinary action via the Agency Grievance System (IRM 6.771.1). Such 
grievances will be referred directly to an external grievance examiner 
(i.e., private contractor). The grievance examiner's findings and 
recommendation will be submitted directly to the management official 
one level above the management official who issued the disciplinary 
action decision.
                                 ______
                                 
                              attachment 2

STANDARDS FOR CONDUCT-BASED INQUIRIES

Independence:
When appropriate and feasible, it is preferred that the fact-finding 
responsibility be assigned to an Executive outside the subject's chain-
of-command. The inquiry should be conducted with thoroughness and 
impartiality.
Scope of Work:
Inquiries should provide an objective and thorough review of the 
issue(s). Facts should be sufficiently developed to ensure that an 
informed decision could subsequently be rendered. Guidance is available 
from the EMU, Workforce Relations Division, Human Capital Office, if 
desired.

Affirmative response to the following questions generally will ensure 
that the fact-finding was thorough:

Were all the issues in the referral addressed?

Were all key individuals (e.g., complainant, subject, witnesses) 
contacted? [With regard to interviews of IRS employees, the fact-finder 
has a right to full cooperation from the interviewee. Refusal to 
cooperate may result in disciplinary or adverse action. The fact-finder 
also has the right to expect truthful answers from the interviewee. The 
lack of candor, false statement, or misrepresentation may also result 
in disciplinary or adverse action.]

Were all relevant questions asked?

Were all relevant policies, regulations, and procedures researched?

Were legal opinions and technical advice solicited, when appropriate? 
[Requests for legal opinions unrelated to tax administration should be 
referred to the EMU.]
Documentation Acquired in the Course of the Inquiry:
A copy of all documentation acquired in the course of the inquiry must 
accompany the report of inquiry upon its release to the head of the 
Business Unit.
                                 ______
                                 
                              attachment 3
REPORT OF INQUIRY

NAME, TITLE, GRADE OF SUBJECT:

TIGTA Case No. or ALERTS No.:

Inquiry conducted by:

      Name of Management Official:
      Position and Grade:
      Organization:
      Telephone Number:

Date of Report:

Scope of Inquiry:

State the issue(s); name of complainant, if identified; name all 
individuals from whom information was obtained; identify the date on 
which each individual was interviewed; attach a copy of all documents 
acquired during the course of the administrative inquiry.
Summary:

State the facts as they relate to each issue. For each issue, provide 
an analysis of the facts and conclusions drawn from the analysis. 
Conclusions should state, with regard to each issue, whether the 
allegation was substantiated, disproved, or unresolved.

A recommendation for disposition should NOT to be inserted in the 
Report of Inquiry. Rather. it should be delivered orally to the 
Business Unit Commissioner or Chief, if desired or requested, but only 
if the fact-finder is in the subject's chain-of-command.
                                 ______
                                 
                 Prepared Statement of Hon. Ron Wyden, 
                       a U.S. Senator From Oregon
    Whenever I talk with Oregonians in meetings or town halls, the 
conversation nearly always comes down to the same core issue--the 
struggling middle class. Years after economists first said the 
recession officially ended, too many middle-class Americans feel like 
they're standing on quicksand because the recovery has yet to reach 
them. So the challenge facing policymakers is putting America's middle 
class on solid economic ground--growing their paychecks and ensuring 
that our recovery reaches everybody across the country.

    That challenge will be top of mind at each of the three hearings 
the Finance Committee is holding this week. Tomorrow and Thursday, the 
committee will talk with HHS Secretary Burwell and Treasury Secretary 
Lew about the administration's plans to save Americans' money on health 
care, create jobs, increase wages, and invest in the middle class. 
Today, the committee has an opportunity to discuss the status of 
America's accounting department--the Internal Revenue Service--with IRS 
Commissioner John Koskinen.

    With W-2 forms in the mail and tax season beginning, the nation's 
annual headache is setting in. Taxpayers today live in two separate 
worlds. In one world, a middle class office employee pays taxes 
directly out of her wages and is subjected every spring to the 
painstaking process of filing returns. There are no complicated tax 
avoidance strategies at her disposal--no shelters or vehicles for her 
to hide income. Meanwhile, in the other world, teams of accountants pry 
open loopholes hidden in the tax code, and the line between right and 
wrong is murky at best.

    The inherent unfairness of our tax system is a blow that falls 
hardest on the middle class. And it takes a number of forms. The most 
obvious is that every year, families spend more time and money filing 
their taxes. People are concerned about compiling all their records, 
completing all the forms and filing correctly. Unfortunately, the tax 
code itself hasn't gotten any simpler, and the lack of resources at the 
IRS slows service to a crawl. Nina Olson, the independent IRS Taxpayer 
Advocate, calls this the ``most serious problem'' facing taxpayers.

    When people call into IRS help lines, they sit in long queues 
listening to hold music. Protections against identity theft are 
delayed, and taxpayers who worry they might be victims of scams can't 
get the timely assistance they need. Families depending on their refund 
to help cover the mortgage or tuition are left waiting.

    There's a second issue to consider today. According to the IRS, 
nearly $400 billion in taxes go unpaid every year. It's called the tax 
gap. One of its biggest causes is the dishonesty of tax cheats and 
scammers who avoid paying what they owe.

    Who's getting short shrift as a result? The middle-class wage 
earners whose taxes come straight out of their paychecks. Honest 
taxpayers have to make up the difference when scofflaws dodge their 
responsibilities, and that's not right. But until Congress simplifies 
and restores fairness to our broken tax code, multinationals and people 
with high-priced accountants will continue to find loopholes.

    There's no question that the IRS could make better use of the 
resources it has. That's true for every federal agency, every private 
business, and even Congress itself. It has also been acknowledged by 
Commissioner Koskinen and his predecessor.

    Meanwhile, policymakers cannot lose sight of the biggest challenge 
facing Congress today, which is putting the middle class on solid 
economic ground. There will be many more opportunities ahead for this 
committee to work on a bipartisan basis with Commissioner Koskinen and 
the IRS to make the system work better for middle class families--
including through comprehensive tax reform.

    The goal should be fairness. Taxpayers should no longer be divided 
into separate worlds, one of which carries a much heavier burden than 
the other. I look forward to working with Commissioner Koskinen and the 
committee to making that our reality.
                                 ______
                                 
                             Communication

                              ----------                              

        Statement for the Record of the National Association of 
                College and University Business Officers
    This statement is submitted for the record on behalf of the more 
than 2,100 public and nonprofit colleges and universities belonging to 
the National Association of College and University Business Officers. 
NACUBO represents chief financial officers and their staff at member 
institutions and our mission is to advance sound financial management 
and business practices of higher education institutions in fulfillment 
of their academic missions. Our members take their responsibilities for 
filing IRS information returns seriously and strive to the best of 
their abilities to comply with agency rules and regulations.

    Today provides an opportunity, as the Senate Finance Committee 
addresses the current state of operations and the budget of the 
Internal Revenue Service, to address an issue that gets to the heart of 
the current allocation of IRS resources. We write this statement in 
order to draw attention to an example of government wheel-spinning that 
for the past few years has burdened already squeezed college compliance 
offices. IRS has unnecessarily created an endless annual cycle of 
proposed fines, waiver requests, notices of delayed response, and 
eventually confirmation of waivers. This is bureaucracy at its worst.

    On behalf of colleges and universities across the country, NACUBO 
requests that the Internal Revenue Service stop issuing penalty notices 
to colleges and universities related to missing or inaccurate taxpayer 
identification numbers (TINs) on 2012 Forms 1098-T and take steps to 
rescind the notices that have been issued. Under existing rules, 
institutions must solicit a TIN at least once a year from certain 
enrolled students, but are not responsible if students fail to respond 
or respond with incorrect information.

    In August 2013 the IRS began asserting penalties against a large 
number of colleges and universities for filing Forms 1098-T with 
incorrect or missing TINs. These proposed penalties for the 2011 tax 
year generated unnecessary confusion for both the IRS and the regulated 
community.

    Following an outcry, IRS decided to waive such penalties for the 
2011 tax year. However, many schools still have yet to receive official 
notice that their fines for 2011 have been waived, despite the fact 
that the IRS announced the blanket waiver for 2011 one year ago.

    Hundreds of campuses again received penalty notices addressing the 
2012 tax year. Given that Forms 1098-T for 2012 were all filed long 
before the proposed fine notices were issued for the 2011 tax year, and 
also given that nothing has changed that should cause the IRS to come 
to a different outcome for 2012, it is unclear why the IRS is committed 
to repeating the cycle. We strongly believe that penalties should be 
waived until a long-term solution has been identified.
                               background
    Section 6050S of the Internal Revenue Code requires colleges and 
universities to report to the IRS, and to students, certain information 
on enrollment, tuition and related expenses, and scholarships related 
to claims for education deductions or credits. Form 1098-T is used for 
this purpose. It requires the college or university to identify the 
student by name, address, and TIN. The regulations at 26 CFR 1.6050S-
1(e) allow for a waiver of penalties for filing Form 1098-T with a 
missing or incorrect TIN if the failure is due to reasonable cause 
(such as the student's failure to provide a correct TIN) and the 
institution acted in a responsible manner. Under the IRS regulations, 
an institution acts in a responsible manner if it solicits a TIN at 
least once a year from anyone with a missing or incorrect TIN.

    In the course of complying with the tuition reporting requirements, 
it is inevitable that colleges and universities will submit Forms 1098-
T with incorrect TINs because they must rely on student input to obtain 
TINs and have no way to verify TINs prior to filing. By statute, 
colleges and universities are not permitted to use IRS-approved TIN 
matching services to verify TINs reported on Form 1098-T. This is 
because the IRS generally may not disclose a taxpayer's name, TIN, or 
other return information under Section 6103. Although there is a 
limited exception under Section 3406 that enables payers of reportable 
payments subject to backup withholding to verify TINs with the IRS 
prior to filing, tuition reporting does not qualify for this exception. 
As a result, it would be a violation of taxpayer confidentiality under 
Section 6103 for the IRS to permit colleges and universities to use TIN 
matching for tuition reporting.

    Further, some students do not have, or choose not to provide, a 
TIN. With the popularity of dual enrollment programs increasing, 
particularly at community colleges, high school students may comprise a 
significant population of those with missing TINs. However, the rules 
require institutions to file Forms 1098-T for these students regardless 
of missing or inaccurate numbers. Foreign students may or may not have 
a TIN. In this context, it is inappropriate to assert penalties on 
colleges and universities for filing Forms 1098-T with incorrect TINs.

    Notably, we appreciate the step IRS made to include guidance under 
section 6050S of the Internal Revenue Code regarding information 
reporting on tuition and related expenses on the 2014-2015 Priority 
Guidance Plan.
                            recommendations
    It is manifestly unfair to penalize colleges and universities for 
erroneous information that is beyond their control and which they 
cannot independently verify. The IRS should promptly issue another 
blanket waiver for proposed fines associated with 2012 Forms 1098-T and 
not repeat this mistake in future years. There are no material 
differences between the 2011 and 2012 tax years that could justify 
disparate treatment. Other possible solutions going forward include:

  1.  The IRS should issue new guidance to reinstate its past practice 
        of forbearance until a long-term solution has been identified. 
        Until 2013, the IRS's longstanding policy had been not to 
        assert penalties against colleges and universities for 
        incorrect TINs on Form 1098-T.

  2.  The IRS should revise the process used to file Forms 1098-T with 
        the IRS to allow the filing organization to affirmatively 
        certify that it has ``acted in a responsible manner'' and met 
        the standards for soliciting TINs from its students.

  3.  The IRS should revise its regulations at Sec. 1.6050S-1 to allow 
        higher education institutions to not file a 1098-T for students 
        who fail to provide a TIN. Institutions could be required to 
        notify such students that they will not receive a form unless 
        they provide a TIN by a certain date.

    We are very willing to work with Congress and with the Service to 
find a solution, eliminate the morass of red tape and identify both 
short- and long-term alternatives to the current information-reporting 
enforcement program.

                                      [all]
```