reform precisely what we think the future of those should be. we're going to begin a process of consulting with the congress and a broad session of housing experts on what we think the recommendations are. we'll defer recommendations on those things for a bit longer. >> okay. can you give me a time frame that you're looking at? >> i can't yet but we probably will next week when we lay it out. it's just a little early. given the scale of the stuff we're trying to take on. we want to do this carefully. >> no problem. thank you. >> mr. secretary, thank you for your time here today. we're going to allow you to leave, of course and go about your business of saving the american economy or lunch, whatever is on your schedule. but we thank you very much for being here. we'll send you some questions that you might'?'?'?'?'?'?g?g?gc

pleased to welcome douglas shulman, well ee mersed as the 47th commissioner of the internal revenue service. thank you for your service and pledge to lead the irs from good to great. each year irs employees make hundreds of millions of contacts with american taxpayers and businesses and represent the face of our government. approximately 93,000 employees and the accounts receivable department of the u.s. and fiscal year 2008, the irs collected 2.7 trillion dollars, 96% total federal receipts. the more revenue the irs collects, the more they have to deal with the challenges to face our nation and ease the tax burden on the citizens we

believe to be deserving of that. conversely, the less revenue, the less revenue they have for tax cuts or for worthy expenditures. proposed a budget of 12.1.26 billion for the irs. with support 95,081 ftes, above the current fiscal year 2009 base. mr. commissioner, thank you for your patience and thank you for joining us. the floor is yours. >> thank you, chairman, we appreciate the opportunity to testify about the irs's fiscal year 2010 budget. over the past year i think the agency has shown that it can improve performance and be agile

and respond to changing situations. i often say we need to excel at both service and enforcement, not an either/or proposition. i believe this budget will allow us to make continuous improvement in our service and enforcement, as well as technology and workforce. as the secretary mentioned, the president's budget request 332 million in additional enforcement initiative, includes a robust set of international enforcement initiatives that the president, the secretary and i unveiled on may 4th. increased resources for irs compliance initiative have direct measurable results through a return on an investment. in this 332 million will yield 2 billion a year once it becomes fully operational in 2012. in addition, we've asked for money so we can continue to improve our service, including

face to face telephones, web base and self-service service models. i believe it's incredibly important and fundamental to keeping honest taxpayers in the system that we have world class service. it's a key parts of bringing in the $2.5 trillion it takes to run government every year. as you mentioned, we are the face of the american government to more people than any other agency. in this regard, i also want to point out to the committee that i plan to deliver recommendations to the president and the treasury secretary by the end of this year on how we, the irs can better leverage the tax return preparer community to increase compliance and ensure high ethical standards of conduct for preparers. over 80% of the american people use either tax software or pay a

preparer to prepare their return. this has been a transformational shifts in the way taxes are prepared. because paying taxes is one of the largest financial transactions that americans have each year, we need to make sure the professionals who serve them are ethical and they ensure the right amount of tax is paid. i'm also pleased to report, we've moved now to enact stimulus legislation this year we implemented major provisions of american recovery and reinvestment act getting money into the hands of individuals as well as small businesses. let me turn briefly to our ongoing effort to modernize our core taxpayer accounts data base. we consistently delivered on commitments over the last several years. this year i have adopted a much more focused strategy, which will allow the irs to complete the taxpayer data base

conversion on an accelerated time frame. we're doing this by gradually shifting course, from simultaneously developing the data base and the associated applications to a more stream lined focus on completing the modernized database. this is going to be key to our future success, to future online services and new compliance and enforcement systems. this budget also reflects our long-term commitment to efficiency savings and productivity with e-filing going up, we developed processing centers in five sites instead of 10. we project five-year savings to be over $100 million. and finally, let me point out three important legislative changes in the president's budgets. there's many which we worked on. i support them all. three very important ones, the robust set of international legislative proposals which will

be essential to us curbing offshore tax abuse. second aa proposal to require tax preparers who have a certain volume of tax filings to file electronically. and the third is a proposal that we eliminate the 20% down payment for a taxpayer who comes in trying to get an offering compromise for us. right now they have to put 20% down. there's been decrease in the program, we want to get the program back up. we're recommending getting rid of that 20% down payment. mr. chairman, thank you again for the opportunity to testify. i'm happy to answer any questions. >> thank you, mr. shulman. three states that i know of here, oregon, california and alabama already regulate tax preparers. can you find in their state regulation evidence that their tax preparers in those states are doing a better job? >> some of this regulation is pretty recent and relatively

small subset. gao has done studies of state regulation and what is effective. and it is kind of across the board. everything from registration to registration and licensing to actual continuing education. what i announced last week is that i'm going to have a wide open discussion about this. we'll invite the industry in and invite taxpayers in and consumer advocates in. i would love to work with the committee on this and look and say, what's the most effective way for us to work with that community to make sure there's good compliance. that could include service and education and clearly will include ramped up enforcement of the bad preparers then regulation is on the table. and we'll closely look at the state -- >> some parts of the 1040s and schedules and such were most often mistakes being made.

>> there's complicated mistakes, refundable credible, the most common are math error mistakes, not putting your social security right. one of the reasons we encourage electronic filing it often catches math errors. >> years ago my bookkeeper in springfield illinois passed away. listen i'm, a lawyer i'll do my own tax return. i think every member of congress should be required to do their own tax return. we would have tax simplification in a hurry in this country. as you might guess, the irs sent back my tax return and said you did a math error here mr. durbin, which is a humbling experience and disqualified me from service in the president's cabinet. having said that, it was an eye opener. may i ask you about refund anticipation loans. i don't know if you're familiar with these. i've co-sponsor the legislation,

nationalal consumer law center found the interest rate for a refund anticipation loan can range from 50% to 500%. is the irs doing anything at this point to address concerns about refund anticipation loans? >> a couple of things, one of the most important things we do is continue to get our technology in order so we can get refunds out quick to so they can get money in their pockets. we now, if you electronically file and get a direct deposit you'll get your refund back in under ten days and usually it comes back in three to four days. if we can finish our modernized taxpayer account database, every taxpayer will have opportunity to get a quicker return back. that's one way, get rid of the need. i think it's incredibly

unfortunate that people's financials that they need to take a high interest loan and can't wait ten days to get in. as we look at the whole preparer issue, refund anticipation loans are clearly an associated service that some preparers provide. we'll take a look at this, the folk as you say on a preparer conduct. but clearly all of the related industries will be part of preparer review. >> what about answering the phone at the irs? you reduced your performance goal from 82% last year to 77% this year. i wonder why you did that. what steps are you taking to improve irs's telephone performance for next year? >> phones have been stressed after last year sending checks out to all of the american people, this year doing the recovery act and trueing up the checks sent out last year. 2007 we had 48 million calls

between january and may. 2008 we actually had 64 million, 2009 we had 74 million. and so one thing we are -- have done as a result of that is we've redone our call routing to make it quicker that people get in the right cue and the most important questions get answered quickest. second, is we're trying to push more to the web. one of reasons in the decline, about 5 million people called and said what's my adjusted gross income. next year we'll have a web service to let you get your adjusted gross income. and we added an estimated wait time. if we say it's going to be 15 minutes to get to you, you can hang up and call when it's not so busy. the realty is, lots of government services are competing for money. we're trying to figure out the right number. i think 77% doesn't mean 23% are

unhappy, only 7% got a busy signal or disconnected. it's a much smaller number. we're trying to get better at the web and figure out the right level of service. >> two weeks ago i got the best e-mail that i can possibly imagine, it was from the irs. and they told me that i had a refund coming. i was elated. $600. it was terrific, i think of something to do with that. of course, you know as i know right off the bat there's something wrong with this. can you tell me what it is? >> we don't send e-mails to people soliciting things. >> so there are lots of scams like that. this person wanted me to send back information so they could send my refund check in the name of the irs. do you go after these folks? do you try to initiate progression prosecution. >> we like to figure out, he wont get an unsolicited phone call or e-mail from the irs

telling you you have to deal with someone from the irs. people should delete that. we work with law enforcement authorities, when we see these, we have hot lines and lots of people reported into us. 2,000 internet sites have been shut down this filing season. we're very aggressive about it. people are -- some of these are originating from overseas. it's hard -- >> friends of nigeria have an ongoing correspondence with me. >> thank you, mr. chairman. i just want to associate myself with the chairman's last question to express concern and the need for more enforcement and education to deal with these scams. they are pervasive, but the irs can certainly play an important role as well in alerting consumers.

consumers are h$ @ durbin's concern in that area. we need to do more both to educate consumers and go after the people who are perpetrating these scams, which is difficult to do in an internet world. let me switch to some other issues. the irs oversight board in its statement to this committee identified two serious weaknesses of our tax administration system. the first is the $290 billion tax gab and the seconds is what the board referred to as the ar

kayic nature of the system. i'm well aware of that because the g.a.o. year after year puts the irs's information system on its high risk list. i would like to start with the tax gap issue. and ask what you think should be done. >> one is a would say the tax numbers are imperfect. a lot of them are extrapolated numbers. the only way is to do randomized audits. it would be a burden on people, et cetera. with that said, we take it very seriously. i think there's three important things that can be done with the tax gap. one is simplification. as long as the tax code is this complex, people will make

mistakes and have opportunities to use the complexity of the system for evasion. second is information reporting. all of the statistics show if we get a w-2 from an employer and it's withhold at the source, we have 99% compliance where people operate cash businesses and there's no information propertied to us, it's all voluntary, the compliance rate is much lower. congress passed a couple of very important information reporting provisions last year. credit card reporting for small businesses as well as basis reporting. they'll be helpful. the president's budget this year has very important information reporting, especially in the international context where we get more information about cross border wire transfer. that's going to be important. so first the simplification, second is to information reporting. we also are taking a look, this

whole issue of how do we leverage preparers to be part of the system. if you think about the image of someone sitting down with a 1040 and pencil, the chairman notwithstanding a couple years ago, not that many people do that any more. people are using a third party, those people need to be part of the solution of getting people to pay the right amount of taxes. when they don't, it's a huge disservice to an american person. if you end up paying penalties and interest and having trouble with the irs, your preparer hasn't done you any favors. the whole issue of leveraging preparers is going to be part of a tax gap strategy. >> let me follow up on the issue of bad preparers. do you make referrals to state licensing boards when you identify a quote, bad preparer who is a cpa? because they are the ones that have the ability to impose sanctions. >> we actually under circular

230 have the ability for anyone who represents a person before the irs to impose sanctions. we can also give preparer penalties and coordinate with states. we do all of the above. i would say it is such a transformational shift, so many people using a third party, that we need to have this overall strategy which includes the punitive aspect of enforcements and also ensures we're getting the right education and right services to preparers so they can serve the american people well. >> does the irs have an estimate of the tax gap attributable to international activities? the reason i ask, as you mentioned in your opening statement, offshore tax abuses and it seems that this is the focus of your fiscal year 10 enforcement initiative.

>> the short answer is no. we don't have a good international tax gap estimate. the reason for that is to get good estimates that we're realing to put out, we actually have to do randomized audits and coordinate with other law enforcement agencies. by nature the reason they evade paying is because it's hard for the u.s. government to get to them. there's wildly high estimates based on total deposits and how many they think are overseas. so there's some numbers that get bantied about as part of the debate. when i think about tax gap and enforcement, i think about the dollars we'll bring in directly. but i also think about the deterrent effect and how we project fairness to all american people. the international issues for me are very important, a, to go get the money that's being hidden

offshore, but also, i think ordinary americans need to know, if you're we wialthy enough to e assets, you're not getting a free pass while firemen and teachers are paying their fair share of taxes. it's a long way of saying, it's actually part of collecting the 2 .5 trillion you need to run the government. and it is a matter of fundamental fairness and people need to know the u.s. government is on the job. >> i would like to ask only one follow up question here on consumer account data engine. i've been noticing, i worked with senator colins on this issue after 9/11 on technology in the federal government. having followed it over the years, it's been a source of frustration over how many bad starts we've had in different agencies trying to bring modern technology, maybe the private sector has the same problem.

it seems to be at the federal level. your cade system, a core component of the business systems modernization was intended to replace the individual master file, now cost over $400 million since work began almost five years ago, only delivered 15% of the full capability intended. the budget proposes a 10% increase for bsm or 24 million above the 229.9 million enacted last year. has the irs taken actions to address g.a.o.'s recommendations to visit the business system modernization, including developing long term plans for completing the program? >> yeah, i'm aware of the g.a.o. report came out yesterday. a couple of things, the first thing i did when i came in. i talked about the stake holders and gao and our auditor.

tell me about cade. $1.5 billion technology portfolio. it's important, because it is our core data base, not everything we do in technology. what i was told by overseers, we've made great progress and proven we can do system development, but they don't see a path to finishing c.a.d.e. internal projections were 2015, 2020. i believe technology projects, the way you get them done, you have leaders, people who run agencies focus on them and drive towards result. what we've done is refocus the effort. and we've split apart trying to do all of the application work at the same time we do the data base work. the core is getting the data base done. we'll get refunds out quicker and address material weaknesses and we will be able to use data

for enforcement programs. it's the real business comes out of the data base. we're focused on getting that done now and we're slowing down application development and focusing on conversion of the database. the other thing that's important from the report that came out, the vast majority of $400 million is being put to good use. it is the key is getting a data model with consistent definitions that all systems use. that was under that umbrella. we put out refunds in five days to millions of taxpayers using the money that's been spent, he is especially in this difficult economic time. we're using a huge amount of the software and hardware. so this is a shifting of focus, gradual. it's what you do with any big technology project as you learn as you go along. i certainly would hope it's not put in a category of i don't believe it's failed at all.

what i did, stepped in and said what can i get done during my five-year ten-year. >> thank you. just one final question and the rest for the record. i appreciate the chairman bringing up the cade strategy, that has been of concern to me. the other issue that concerns me has to do with i.t. security weaknesses. how many improvement in data protection do you believe the irs will be able to make with the $90 million that you're requesting for i.t. security? give us your assessment of the vulnerability and whether that is in fact a sufficient amount to address the problem? >> yeah, so when i came in, everyone all they talked about was modernization, i believe if you're going to run a big

technology portfolio you need to worry about current systems, updating those, making sure there's the right security and infrastructu infrastructure, you need to worry about data security then you have to worry about your new systems. so one of things this budget reflects is me rebalancing the portfolio so we're not focused on modernization, that we care a lot about security and data. there's 90 million in there, in the budget request to upgrade security posture and infrastructure, it's incredibly important. i think knock on wood, we haven't had a major data breach. there's always going to be a spectrum of weaknesses that overseers will point out and you have to do risk reward evaluations. you'll never get to every potential piece of weakness, but you have to figure out what's important. all development is now new

development, we're having audit logs which are incredibly important for internal threat. we're consolidating our, the access points into our network so we have perimeter security. a lot of data security is cultural. you want people who have access to data to wake up every day and feel it's their responsibility to lockdown the data. so we have something we called operation red. we stood every employee down to talk about what data is under their sphere and what they do to protect it. from filing cabinets to save to technology. i would say we're in a better security posture when i got in. the people who are interested in breaching data security are always going to be innovating. we'll need to stay ahead of the curve. the money request in this budget will allow us to keep improving our game. >> thank you, mr. chairman. >> i would like to say the irs oversight board submitted for

ininclusion in the record, the preliminary recommendations on the fy 2010 budget proposal. submitted its analysis and recommendations and kelly, president of the national employees union has submitted a written statement and without objection these will be made part of the record. the record will remain open mr. commissioner until wednesday, june 17th for subcommittee members to submit statements or

>> now from london, prime minister's question time. every wednesday while parliament is in session prime minister gordon brown takes questions from the members of the house of commons. prior to question time, the house is wrapping u