$33 million was for information technology. none of that was provided so we are one of the constraints is we have to pay for the i t particularly out of other project we otherwise would have funded as we go forward. the $100 million in is preparing for in dealing with information issues, designing of the issues,

making sure they work, one reason is i am committed that we will lead this time next year have an effect of filing season which means we will be effectively implementing our responsibilities under the affordable care act. we did that at the front end the rollout difficulties were not irs difficulties and we are finding the funds as one of the things we have to find another areas. >> the amount requested was 440. how much does the irs spend annually on implementation of the affordable care act and how much does it expect to spend? >> what we are spending this year and what the estimate is, what will happen to us, and filing next year, a lot of inquiries as well as taxpayers

in the area of eligible for premium tax credit and even if they aren't making sure they are comfortable when we started that public information campaign, and to get taxpayers comfortable 70% or 80% don't have anything to do with it at all, i have insurance and will move on the way, a chunk of people will be affected. and how much we spend for i to your personnel on affordable care, what we spending this year and would we expect requirements will be in the next year or two? >> when you next appear before us, there will be a lot of discussion about the dollars that are necessary. >> i wanted to ask about bonuses. in making sure bonuses are given

to employees, improved performance or goals they have met, i don't know if you have seen, we put some report language together. have you taken guidance in the language for bonuses to be awarded? to those who actually show improved employee performance and productivity? >> the pool is 1% of compensation on performance judgments made by managers not by employees, obviously comment and history is those awards have gone to two thirds of the employees so referrals don't get any. the average size of those awards as well hundred dollars so no one is making a lot of money and if i could respond to the 1% in terms of how did i come to this decision, after the decision was made last year trying to reach

the sequester levels that performance awards would not be paid to irs employees, government-wide, 1% performance awards could be made, my predecessor decided while the contract provided with the bargaining unit performance award the pool of 1.75% that we fought negotiating ability to change that number and the number went to zero, the union understandably replied, filed a grievance, unfair labor practice and a loss is all of which were pending when i started. in the course of negotiating a new agreement which we are in the process of and i hope in the near future we will have that agreement settles we have been negotiating with the performance pull lot to be going forward. >> what does that mean? a number of people that are eligible? >> the bargaining unit is one ever thousands of employees it is and take the salary and the question is what is the

performance award pool? doesn't go to every employee. >> these aren't merit based? >> performance awards based on merit determine my manager but the size of the pool available for awards was set by the contract at 1.7%. >> that many will get a performance award? >> 1.75% whereas the pool, each individual was evaluated, a judgment was made and two thirds of them were eligible for awards, performance awards, the average was $1,200. 1-third of the more not eligible because they had not performed determined by their manager and the question is what is the size of the pool or whether there would be a pull at all? the decision was no pool. we negotiated a settlement with the union that would drop the grievance, the unfair labor practice and the lawsuit and we would pay not one 1.75 into a pool for performance awards but

1%. in terms of how we are able to do that we had in our budget post sequester funding for that because as a result of the sequester we lost another 1300 people and on an annualized basis that provides us part of the revenue we need. we made more assumptions about cuts in other overhead expenses of 4% and the arrangement with the union is we won't pay those awards in the fiscal year the way we always done it. we came managers two three month after the fiscal year in the next one so we are moving the bargaining unit awards to the next fiscal year's so this year we only pay one school board, there won't be two. that is how it fits in the budget. >> can i quickly reclaim my time? >> i was going to give you back two minutes. >> what i am interested in understanding is if someone is eligible for an award because they have shown based on their merit and hard work they deserve

it i am fine with that. my issue is understanding, you said the managers make the decision. i assume you have issued guidance whereby they can use some kind of criteria to make this? >> there is an agency wide performance plan by the human capital office. >> and a follow-up for a quality control to make sure it is not a manager, people have actually met these awards because people receive these performance awards will for crying out loud are the subject of investigations so i want to make sure moving forward that these awards are appropriate. >> to make sure, managers and bargaining, when you pay at a performance award you need to be sure it is awarding performance. if you are making awards that is not good for morale either.

we have a very sophisticated system and their point is well taken we need to and i said the same thing, need to evaluate because we are comfortable that this -- everybody is above average. we need to reward performance. that is my final reason for making this decision. we could do it in the budget and you haven't had a pay raise in four years, subject to a lot of difficulties over the last year and ultimately as i say 75% of our budget is people. without people the work isn't going to get done. one reason i am now wandering around a country in the wintertime is to remind those employees who are dedicated to the mission that we value their work, they are terrifically dedicated, around 20, 25, 30 years working in this area and their only concern is can we get them the resources to provide better taxpayer service. in settling with a union and saving a risk to pay more, time

is it in a different way, i can send a signal to the employees we value their work. it seemed to me that is appropriate. >> with that i yield back. >> anybody have other questions? we are ready to move into panel 2. let me say to you, thank you, i know how busy law, thank you for being here today, i know what it difficult job you have and sometimes we lose sight of the good things the irs does that you do every day under difficult circumstances. so collecting revenues, answering questions, chasing down the bad guys, all the things you do every day we very much appreciate. thank you for the time. this concludes the first panel and we will have the second panel come along. thanks so much. >> thank you, mr. chairman.

[inaudible conversations] [inaudible conversations] [inaudible conversations] >> let me welcome our second panel of the day. i thank you for your patience and for being with us today. we appreciate both your time and your expertise. i am pleased to welcome the

treasury inspector general for tax administration wrestled george to share his observations and the efficiency of the irs, since the irs is the largest treasury bureau and ticked up accordingly the largest of the three treasury inspector generals and on to much is given much is expected so we rely on your office and your counsel to help us assess the irs's management and use of taxpayer fundss so welcome back, inspected george. please to welcome back olson, national taxpayer advocate. this is your first appearance since 2007 so i am hoping we can hear from you about your services, which you provide to taxpayers, what you are doing to help the taxpayers who may have been victims of tax law and abuse and the irs can make the

use of its funding. welcome, mr. olson. i appreciate the service of both of you, the testimony, but when the yield to the ranking member for any opening statement he would like to make. >> i want to welcome you both here. an interesting conversation with the commissioner. and what the recommendations are and things are falling into place or not? and from you, miss olson and how we can better serve the public and bring down the fear everyone has of the irs and we thank you and look forward to your testimony. >> let me start by asking both of you a question. i am sorry. i will let my guess you to make the opening statement.

got carried away. please, take your time and tell us, mr. george, will you begin? >> ranking member, thank you for the opportunity to discuss significant challenges facing the internal revenue service. let me start with providing quality customer service which is the first step to achieving taxpayer compliance. we have seen a decline in the irs's ability to provide a significant level of customer service in each of the channels taxpayers use including telephone, walk in and correspondence, many taxpayers use the telephone to contact the irs, meeting demand with the distaff thing continues to be a struggle resulting in long wait times, abandoned calls and taxpayers reviling the irs

toll-free telephone lines of service. in milwaukee in office known as taxpayer assistance centers the irs has decided to eliminate services such as tax return preparation that can be obtained through other channels. the irs assisted 6.5 million taxpayers in fiscal year 2013 but plans to reduce that number by 14% this year. the irs's ability to process taxpayer correspondence in a timely manner has declined. the backlog of paper correspondence inventories have substantially increased. the overage inventory rose from 593,000 at the end of 2012 to 1.2 million at the end of 2013. and improper payments, to report

to congress on the causes and steps taken to reduce these payments. the irs limits its reporting to improper payments associated with earned income tax credit. in our view the irs assessments should also include payments due to refund forward such as identity theft. tax rated identity theft continues to be a great problem that results in billions of dollars in improper payment. payment is significantly greater than what the irs protect and prevents. using characteristics of tax returns involving identity theft we analyze tax year 2011 returns and identify 1.1 million undetected returns that have refunds, $3.6 billion. this is a decrease of

$1.6 billion indicating the irs is making progress significant improvements are still needed. expanded access to the directory of new hires could provide the irs with information needed to make substantial improvements in its fraud detection efforts. legislation is needed to expand the irs's authority to access the status. the tax gap is a continuing challenge. the assessment is the tax gap is $450 billion annually. most of this amount, $376 million, is attributable to taxpayers underreporting their tax liability. the law provides certain new reporting requirements including merchant card reporting and fraud account reporting to help the irs identified and reported income. evaluating implementation of

these requirements this year. implementation of tax law changes associated with the affordable care act will prevent many changes for the irs and the coming years. the affordable care act provides refundable tax credit known as the premium tax credit to offset an individual's health insurance expenses. as with other refundable credits there is the risk of improper payment. further, in september of 2013 we reported that a fraud mitigation strategy is not in place to guide affordable care systems, testing, initial deployment and long-term operations. the irs informed me new systems -- two new systems, but until these new systems are successfully developed and tested, there is concern that the irs existing fraud detection system may not be capable of identifying and preventing refund fraud. we are also concerned about the

protection of confidential taxpayer data that will be provided to the exchanges. our review of the irs's customer service strategy determined it provides efficient plants to assist individuals in understanding tax implications of the affordable care act. the irs's role in providing customer service in this area will become more permanent, we will continue to monitor and correct any problems early in the process. chairman crenshaw, members of the subcommittee, thank you for the opportunity to share my views. >> thank you, >> distinguished members of the subcommittee, thank you for holding this hearing and inviting me to testify today. as you know the irs has face significant management and funding challenges over the last year. in my written testimony i have outlined the irs's progress and by continuing concerns regarding exempt organization applications

and implementation of the affordable care act. today i will focus on four other areas of concern. i believe it is critical that we adopt a taxpayer bill of rights. from time to time the irs which is fundamentally an enforcement agency will do things that are administratively convenient but not fair to taxpayers. in fact in the preface of my june report to congress i analyze the irs's actions dealing with organizations seeking tax-exempt status under 501 c 4 in the context of the ten rights i have proposed and i concluded the irs's actions would have violated eight of those. the enactment of a taxpayer bill of rights constitutes one important step to prevent similar situations from arising in the future. i am please the house of representatives passed a bill of rights i have proposed on a voice vote last summer and i hope the senate acts too because i think the taxpayer bill of rights should have the force of law. but the irs itself has the

authority to adopt taxpayer bill of rights and in case the senate does not act i have been working with the irs leadership to get agreement to do so. second, i am deeply concerned about the decline in the irs's ability to meet the service needs of the taxpaying public. even with widespread use of tax preparers the irs received 109 million telephone calls on its customer service lines last year. among taxpayers seeking to talk to a live assistant the irs could not answer two out of every five calls and those taxpayers who got through had to wait an average of 17.6 minutes on hold. for the first four months of the current fiscal year the irs is running behind last year and to make matters worse the irs has announced it will only answer basic tax law questions on its phone lines and walk in sides until april 15th and then no, i repeat no tax law questions at

all after of april 15th including questions from millions of taxpayers' obtain filing extensions and prepare their returns later in the year. i understand calls for more irs funding may meet with skepticism but i must tell you i don't see any way the agency can begin to meet taxpayer needs without more funding. at the end of the day irs funding reductions don't punish the irs. they punish the nearly 150 million individual taxpayers and 10 million business entity taxpayers who are trying their best to comply with the monster is the complex tax code we have imposed on them and not receiving the help they need from the government. as you start to make funding decisions for fiscal year 2015 i implore you to keep in mind 20 million phone calls the irs didn't answer last year, tens of millions of taxpayers who had to wait on hold for an average of 18 minutes also after calling

several times and the irs's new policy of not answering any tax law questions. of we don't do a better job assisting taxpayers noncompliance will increase and taxpayers will be harmed. third, the irs is doing a better job detecting and stopping identity theft in other refund fraud returns i remain concerned victims of tax related identity theft are not being assisted as quickly and seamlessly as they could. i have recommended for many years that the irs provides victims with a single employee who would serve as stole contact and would coordinate cross functional work to resolve cases more quickly and painlessly. the irs should stop dithering and do this. in my written testimony i provide detailed analysis of the sources of brendon come tax credit errors and make practical concrete proposals for reducing the improper payment rate. even as we ensure eligible taxpayers are not deterred from

receiving it. these recommendations include emphasizing personal contact during audits, regulating tax preparers to improve return accuracy and protect taxpayers, imposing penalties on preparers who fail to comply with due diligence requirements, using a third party affidavit form to verify the residents of a child in the audit and accelerating the use of third-party information report so the irs can verify income data before paying out refunds. this last recommendation will help address identity theft, refund fraud and improper payments combined, namely that congress direct the irs to develop a plan to enable to match information return data against tax return data before paying out refunds. at the same time it could make the data available to taxpayers and thereby help them prepare their returns more accurately and easily. i appreciate this opportunity to share my thoughts with you and i would be happy to answer any questions you may have.

>> thank both of you. let's ask a few questions and it is interesting to me to hear both of you talk about the fact that one thing the irs doesn't do very well is answers the telephone. we had a commissioner before us, one of my main concerns as i talked to him and it is always easy to just say if we had more money we could hire more people, we could answer the phone more. i told him when you have $11.3 billion, you have to decide how to spend the money. it seems to me that one of the priorities ought to be customer service. when you look through the entire budget, somehow, someway you ought to be able to find the money to do the things that are

most important and if that -- kind of the face of the irs, answer the telephone. you only get half the calls and did and when you get and you wait 20 minutes. some where somehow in all of that $11 billion there ought to be money. i told the commissioner it bothered me to find $63 million paid out as a bonuses reversing a decision that his predecessor had made because there wasn't enough money. those are the priority decisions that are being made and that is what we talk about today so maybe as the taxpayer advocate, as you advocate for those people that are trying to get through to the irs may be there are some things you can do as you look through that $11 billion and say here's an idea how you can save some money here, whether it is in your computer contracts or your rentals and i know they will say they are saving money and i appreciate that because it

is tough. still, it seems like you got to do the most important things first of all and i hope both of you can assist us in finding places where there is of little more money to move to the customer service i'dside . we had recommendations made, mr. george, we had the scandal going on, the recommendations that we made, each of you may demand the president said he will implement those so tell us how the irs is doing in implementing each of those recommendations in general and tell us do you believe some of the groups that are applying for tax status are there people still being subjected to this kind of bullying and scrutiny, and finally, what work to you plan to do to make sure this

doesn't go on any further? each of you could touch on that. >> if i may start first. the irs has reported to us that they have adopted all nine recommendation that we issued in our report on the inappropriate treatment of certain groups, tax-exempt status. we are in the process now of engaging in a review to determine the adequacy of corrective actions the irs purports to have taken. we are in the middle of that. i don't have a deadline as to when we will complete that. one of the issues we did recommend was catching up on the backlog of these applications that were still outstanding. as my comments suggest there are still outstanding applications for people or groups rather to

gain and up or down from the irs. i don't know whether i was here for the entire portion of the commissioner's comments, but i know in private has acknowledged that was the case and that is a priority. our report will have a response as to the adequacy of the response to our recommendations. >> we have been closely focusing on the process of getting an exempt or application through which creates some of the backlog, the amount of review they were doing or the steps they retaking and we have been working closely with them and trained by employees to do better advocacy when they get cases and we have seen a significant number of cases, issued a significant number taxpayer assistance orders on these cases including several that involved c 4s when we don't think we getting the attention. most was timeliness, getting a decision.

something my organization refocused on was the key point in mr. george's report where people were asking for guidance, front-line employees were asking for guidance on these issues for over a year and no guidance was coming back and we found the exempt organization function had no process for tracking the age of these guidance request, tracking the request and saying this is 3 months old, this is 6 months old and when you leave employees to their own devices for year-end backlog is continuing they come up with a solution and we all know what that solution was, a below list. we have been focusing to be responsible with their guidance, to track the guidance, have the management controls in place and as well to look at their profits and say what do you really need to know. i would comment, if i could, on a prior discussion about regulations. i spent a fair amount of time looking at proposed regulations

and i think what i saw was the irs responding to recommendations of mine and mr. george, getting greater clarity, see if there are bright line tests you can do, when you go to the bright line tests there are winners and losers and you have that trade-off of doing facts and circumstances which is subjective in a waivers is bright line tests with this objective and you are going to get some results that you may not want to get. so i view these rags as an opportunity to begin a dialogue with people and to hear back what the country really wants in fees organizations. >> it is interesting to hear that perspective because i do think as you probably know they are expecting 100,000 comments, one of the most controversial, toxic proposals ever made. the good news from here, the

commissioners say in his opinion, wouldn't be put in place anytime soon but he didn't really say when but your point there ought to be a lot of dialogue about that because it certainly may have a chilling affect on these elections coming up now and it certainly is arguable that freedom of speech could be limited so it is very important as we do that down the road so thanks for that. >> thank you both for your testimony. mr george, your lead investigator reviewed 5,500 e-mails and concluded there was no indication of political motivation. yet you failed to mention this until months after it was published. you never mentioned progressive groups were targeted for scrutiny as well.

the report repeated the emphasized the tea party and other conservative groups while using the term other to refer to those that did not involve tea party groups. studies of similar information filed in terms like progressive and occupied were also used as part of the inappropriate criteria in suggesting groups for scrutiny. are you concerned about how your initial report has been used? do you think you should have been more forthcoming or comprehensive in your analysis? last year's hearing you planned to look at the groups had done, have you done so? let me preface my comments by saying i join my colleagues in announcing anything that went wrong in terms of scrutinizing people and groups but your report indicates basically said was tea party, there have been other groups and we want to know

why you omitted at and did not clarify later on when it was known not to be the case. >> there were a number of issues. i beg your indulgence, mr. serrano, i might ask you to repeat one or two of them. comment about your initial comment about the e-mail indicating 5,000 plus groups. during the course of the initial report when i was informed by staff when there existed a, quote, smoking gun memo which i haven't seen, perhaps purported to say, irs, do this as it relates to the group's that were

the subject of this for a lack of a better word treatment. by groups in cincinnati and subsequently learned the people in washington. my auditors indicated to me that they had such a number of e-mails that they did not have the wherewithal to go through those. my office of investigations did have software which would allow them to do a quick scan search to see if that memorandum existed and could be located and so i did not learn about the memo that you noted in your comment until i was literally sitting in a hearing, i believe before the house oversight and government reform committee so was not aware the assertion was

made by the deputy for investigations. and so i am not going to say it was invalid, his conclusions, but i was just as surprised to learn about that conclusion as many others were. it is not that i was hiding anything but i was unaware that the review of the documents had been completed and that was the opinion of that member of my staff. as it relates to progressive groups. >> this was a member of your staff who came to this conclusion but didn't tell you? >> did not tell me directly, correct. that is correct. as it relates to progressive groups, you have to keep in mind

this was an extraordinarily blue with period in which we found ourselves and it was literally 6:30 p.m. the night before my first testimony before the senate finance committee in which my former chief counsel indicated there was a hidden tab in the documents supplied to us that indicated there were others on the lookout list. these lists at that time we had no idea until then, at least i didn't that it existed but we did not have any indication as to how they were being used. from the outset of our review, we did know that groups with names tea party, 9/11 and

patriot were being identified and the irs had set those aside for special processing. when we learned about the existence of these other bolos with progressive and a few other names on it there are two factors -- one, and this is the key, title 26 section 6103 of the united states code, has criminal penalties if i or anyone else with access to that information release the names or tax return information with very limited exceptions, the house ways and means committee and the chairman of the senate finance committee can receive that information without restriction. no other committee including this one has access to that information and if i were to reveal that information, not

knowing whether they were protected by section 6103 could be subject to penalty. and so in the late hour of receiving that information, in the course of that period when we are trying to to determine what if anything the irs did with this information i felt it best we had our facts in place before opening the up what could have been a big issue and what could not have been a big issue. we did not know at that time. >> let me tell you what troubles me about your testimony. we are hearing it incorrectly, that is possible, that you knew early according to your report that certain groups were being targeted but you found out other things the night before you were ready to testify. i have to ask myself how come

you were not aware in your investigation in the ongoing investigation that other groups and other issues were in play. it seems from what i heard from you and two locations is before you were ready to testify you found out about this or found out about that or were told it was taking place yet my big question to you was are you now ready or have you done anything in the past few months to say more than the tea party was targeted if you will, and remember that i am one of those liberal democrats who denounces this practice if it did exist but also saying there were people who have misused these by not having to put forth to their donors are and that is at the bottom, the center of the

problems so you are not talking to one who is the sending everything that happened but it seems to me if that you are not telling me everything you know now or everything you have done to correct the misconception out there that only certain groups were targeted when in fact that is not what happened and that has not been the history of this country anyway. >> i understand what you are saying but there's something like that that i mentioned at the outset of my response and the very evening, must've been 7:00 p.m. the night before the first testimony, i instructed my auditors to open up -- to determine how these other groups were treated, we are in the process of engaging in that review. just to be clear, there is an

ongoing fbi investigation, so we are restricted in terms of the people to whom we can speak. >> about all groups or the other groups? >> about the initial group of people we identified, but we are doing an audit and we have spoken to a few people who have already gone through that process but i don't have a due date for that and are also need to stress too that the below list that we identified that some of which had these progressive groups listed on them, our mandate was to look at the political advocacy or the campaign activities of these groups, approximately 298 of them. and only three had the name progressive in them. i have to again, i made this

point before, i was not in a position to determine just because a group had the name progressives in it automatically meant that it had one political affiliation or persuasion or another. that was not the purpose of this. others interpreted it that way. it was not in our report or in any of my public comments. i noticed conservative groups were targeted. >> let me just say this to you. your department, made a grave error in going public, not going public but letting people believe only certain groups were targeted, even when you fix that and get to the bottom of the truth, the fact is there was a political issue in this country running amok about only certain groups being targeted.

we will hear from this in the november elections. there will be a thousand more hearings, most of them will focus not on the budget but what happened here. i hope you understand by going the way you did you might have helped to create a situation. >> one thing that is getting lost in all of this, we are not formally complete before lois lerner spoke before a group in which she planted a question to ask about this. someone in the irs that acknowledged when they gain this inappropriate treatment the irs had months before it was released and did not question,

were released. and releasing which is unprecedented. it is not as if we went out of our way to cast a pall on any particular group. >> i was really -- >> we will have time to appreciate that. mr. yoder. >> thank you for coming to testify. we have had an eventful morning, the last year or so, put the irs and rulemaking authority on the front page, and the trust deficit, lies between those who

enforce the law. and fairly and impartially, we know it hasn't been occurring and mr. serrano and mr. george had a dialogue you. your point was one that i was going to make, it was in may of 2013 when lois lerner came out and apologized and said it was inappropriate to make comments to that regard. i think regardless of the original motive that is what we're trying to determine, how this happens, the motivations, let's talk about what happened and we will litigate who did what and do that and in this moment i want to move forward a bit and say what we doing to ensure this doesn't happen again. we talked about nine recommendations and their implementation, in your testimony both written and to the chairman's question that

they're following the recommendations of the like to talk about the final 1 c 4 and rules that are proposed now, legislation before the house on this, this has become a bipartisan moment of condemnation. the aclu arguing that these are putting a muzzle on public speech and liberal and conservative groups, i would like to know, are the rules the irs is proposing are the result of your recommendations and if not, where are they coming from? >> one of the proposed recommendations came directly from the audit report on inappropriate treatment of groups and we propose the guidance on how one should

measure primary activity of the 501 c 4. all of the other provisions in the proposed rule we have had no end developing. >> as these rules are developed is a your opinion that the treasury department can finalize an odd hours without the approval of the commissioner? >> i am not privy to the procedures the irs follows or the treasury department follows except to say for 50 years there has been guidance or directive issued by the secretary of the treasury who has deemed it is the assistant secretary of treasury for tax policy that has the ability to determine the final position of the department of treasury as it relates to internal revenue or tax policy and so i would have to defer to

them. >> you are not aware of any instance where the treasury secretary would make a rule or regulation in this regard without the consent or participation of the irs commissioner? >> i have never been a part of that but one can assume he or she would speak. >> the proposed rules, the enforcement services in the irs. and signs the final rules, that is the proposed rules. >> your recommendations on how to fix this problem, do you believe the irs follows recommendations of the inspector general that congress could sleep at night, to the rest assured to sleep at night

knowing what possibility agents in the irs, to have ideology or some other prospective that goes against their mandate that would target individuals in any way as individuals for audits or groups for audits, how ironclad i these reforms or changes? not just on this issue but there is a fear of individuals that if they got involved, mr. chairman, who made a donation or on the list. maybe not today or some other administration might utilize this objective powers that exist and human individuals have that are dealing with fraud or error or malfeasance, and now they

have to get an audit. how do we fix that? >> allow me to answer the question by saying we are dealing with human beings, we still officially have not had a chance to go formal review of the implementation to what was adopted and we go one by one to determine to what extent they have complied, and recommended in any way as we may have diverted or not match up to the recommendation but this is something of an aside but it is an ironclad rule that ironclads -- officially have no responsibility in that case.

and some of them do. and the most ironclad rule in place that you're dealing with human beings who are in perfect. >> this is why lot of americans are concerned about the irs getting concerned about their health care decisions and determining whether they have the proper -- met federal mandate and that sort of relationship. or someone else, someone with an irs agents cares a lot of people, that this agency became too powerful and has too many opportunities, to commit these types of anti freedom, anti american type actions so we will hopefully consider in a bipartisan way, and it can happen easily to a conservative group or a liberal group or a group based on religion or race

or anything. we have to routes is out and make sure this doesn't ever happen again. people don't feel like it can happen. recommendations are an important part of that. we look forward to additional recommendations. the second topic, has come up today, what is the irs doing to ensure that it has better resources with taxpayer concerns to ensure the phone is being picked up and the chair made the comment, your data, the responses are pretty weak. and i would like to maybe turns this, not enough people to answer all the questions or concerns taxpayers have court is the problem that the code is so

cumbersome and riddled with exemptions and loopholes and problems that average everyday working americans could possibly attempts to figure out as they hire accountants and lawyers and we have 4 million words in this code and it grows by the second with the regulatory side as well. the problem we need more people to answer the problems americans have with the code or the problem is the code itself? >> it is all of the above. i will defer to ms. olson in a moment but it is a 0 sum game here. we have a finite amount of resources and the american people understand how to comply with the tax code. has been my belief and finding many audit reports that people

understand what the rules are, if people -- the irs, this is a key component, had access to third party information about the income have tax reporting obligations that increase dramatically the compliance rate. i use this figure and i believe i have in previous testimony is, it is important to repeat this, it is a high correlation between tax compliance and third-party information withholding, the irs itself estimates individuals whose wages are subject to withholding report 99% for tax purposes. self-employed individuals who operate nonfarm businesses are estimated to report 44% of their

income for tax purposes and the most striking figure, while it is dated it is the most up-to-date information we have, self-employed individuals operating businesses on a cash basis report just 19% of their income for tax purposes so if the irs had the ability to gain more information from third parties to attests to the income of the taxpayer, you would have a massive positive impact on reducing the tax gap and increasing the revenue that is due to the federal government. i want to leave enough time for miss olson to respond. you have to have enforcement. that is the second aspect of it so the irs has to be in a position where it is by

correspondence, most people don't realize they receive a letter from the irs questioning their income tax or tax return, that is an audit. an audit is not just some irs person coming to your office or your home and sit across from you and going line by line through receipts or what have you. also a telephone call from the irs making the same inquiries is an audit so if you don't have those individuals in a position to do that and most people who are contacted by the irs do respond. if they had more resources, more people to be able to do that i think it would have a very beneficial impact on revenue collection. >> i think there are a number of things operating here. one is the sheer volume of the work that the irs has

undertaken. its core work has increased dramatically in the last ten years. the number of phone calls we have received has increased by 53% between fiscal year 2004 and this last fiscal year. just the volume, taxpayer service budget hasn't increased that much, to be able to meet the demand that taxpayers have. in terms of what the irs could do to move things from savings in one place and move them to these taxpayers service needs i think you have to look at the appropriations format itself. we had two categories of service and enforcement and a number of others like i t and is hard to move dollars between those two and in that taxpayers service category, he essentially the filing season so all those 150

million individual returns and can million business returns have to be processed and that is the big chunk of the taxpayer service budget and whatever is left over is for the phone. in fact this last year because one of the reasons the irs was able to get its level of phone service up to the abysmal level of service that it was was by taking people off of answering the phones for the automated collection system where taxpayers were calling in to say we would like to pay you money. we took the law of that system and put them on the regular 1040 line just to answer the calls during the filing season. if we hadn't done that we would have been in much worse shape during the filing season. i think there are lots of things that the irs does. i write a 700 page report every year identifying things the irs could do better and one thing i

spent a lot of time with and i encourage this committee to urge the irs to look at is the work that they do upfront that creates downstream consequences. because they are not addressing issues correctly up front for resolving the whole issue up front you are having many more touches downstream and that wastes resources and often those downstream resources are higher graded employees than the person at the first line of contact. we have done a number of studies tracing things through the process to show what work is generated by not getting that right and corrupt front. so i think there is somewhat of work that can be done in that area and i think there's some work, what are we categorizing as enforcement versus service? do we have the right allocations between the budget categories and things like that? the bottom line is the amount of

work, leave aside affordable care act, leave aside anything that is new, just the volume of returns that are coming in. one last point, after this recession we are seeing more people becoming self-employed to. they are not being hired back as wage earners. they're putting themselves into a business. so that issue of self-employed people not reporting becomes a larger issue for our tax gap and our business going forward. there is a huge taxpayer service side on that point, educating people, talking about their responsibilities. it is not just enforcement that brings in compliance. >> i appreciate both of your comments on that topic and it requires a lot of study and certainly changes from congress. i would say the biggest upstream factor of all this is you mentioned dealing with problems upstream and not letting them continue to cause problems down

the road and have more individuals to touch it and more staff having to deal with it the biggest upstream issues the complexity of the tax code. .. >> one of the unintended consequens of the irs having to shift people from one function to answer telephone calls, one of the areas in which they do this is especially trouble aring because it's -- troubling