go to bat for the kind of people that we are seeing getting sleep around the country. i am particularly struck and would like you to amplify a bit on. you said that there are actually new incentives and new opportunities for the unscrupulous tax preparer to in effect ripped people off. could you describe it in a little more detail? ..

when the irs is contacting them and saying, you owe us taxes. and that drives the taxpayer to be engaged in a long extended conversation with the irs. by that point the preparer is long gone, you can't find that preparer. >> i appreciate your clarifying that because i didn't think the standards were adequate even before we saw taxpayers bumping up against the kind of problems that you're talking about and i appreciate your demonstrating and that is usually the case that the unscrupulous are always one or two steps ahead of efforts, particularly voluntary efforts, to deal with the problem. now i gather so we're clear on this point the loving decision in your view has created new problems in effect in terms of

protecting taxpayers, is that right? >> well, absolutely. the loving decision, first of all, my reading of it did not could to the fact whether regulation is desirable or not. it addressed whether the irs has the authority to regulate the taxpayer under current law. there is injunction against the irs being able to implement the exam and the continuing education requirements and that is a significant obstacle. we can register tax preparers but we can not test them, require them to be tested or require them to take an exam in order to do returns. >> how limited are the tools that are left given the loving decision? because my sense is that there are some tools that are left but they're pretty narrow and they really don't go to the heart of what you've been talking about which is protection against the unscrupulous preparer? i share the view that there are many, if not the majority of

preparers who are very honest and reputable but it sure looks like some new opportunities, some new trap doors have been created for those who are unscrupulous and tell us how given the decision in the loving case how restricted the tools are for the irs to deal with the unscrupulous preparer. >> right now the irs has penalty it is can applies expense preparers it identifies. it requires earned income tax credit arena for preparers to complete due diligence certification for the questions they have to ask the taxpayer and certify it. we have the ability to seek injunctive relief against some unscrupulous preparers working with the department of justice but this is a situation where the irs can't audit itself out of this situation. it can't audit itself or apply penalties or even do injunctions, you know, with 1.2 million preparers. it can not get the kind of

competence that we need to engender by doing one-on-one audits. you need a much broader approach and more importantly, taxpayers need the designation so that they have a bright line so that they can say, yes, this is someone who has demonstrated competency and this is someone i should go to. you go to someone other than that all bets are off whether that person is competent. that's a very important distinction that audits will not get you. >> i appreciate that and i have especially appreciate that last point because in effect what you're saying is, we need a system that up front makes it clear to those who need these services where the, as you call it, the bright lines are and where you ought to go to get the kind of consumer protection you need and the alternative we're that what we're stuck with in effect post the loving decision is reactive kind of tools where

you're playing catch-up ball. is that a fair appraisal? >> taxpayers already experience the harm rather than being able to prevent the harm. >> helpful to have your view today. senator hatch. >> thank you, mr. chairman. let me ask both of you what is the irs doing about how to educate the public how to collect a competent and prepared preparer and ethical standards of a particular prepareer? now you alluded to answers to this but i would like to have a little bit more. >> as part of our outreach to taxpayers we provide on a regular basis throughout the year a wide range of information and advice to taxpayers to assist them in attempts how much they owe and how to pay it. so we advise people they should be careful who their tax preparer is. they should check them out. but as noted, there is no way we can provide any minimum standard guaranty for tax preparers.

so all we can do for taxpayers, which we do do, you should be careful. be sure you know who the tax preparer is and what their background and experience is. but are to the average taxpayer that is very difficult thing to do. there is no listings. there is no way for them to figure out who are those who studied and have a minimal level of confidence and whose don't. in our view if you have a way of giving the information to the taxpayer than the free market would be more fell gently applied. would see say, all right, if i'm going to taxpayer who hasn't received a minimum standards i'm taking a bigger chance than if i go to a tax preparer that actually passed the irs examinations. but at this point we can't give them that additional information, but we simply have to tell them be prepared, be careful with your preparer but that is not particularly helpful with the average taxpayer. >> i think, sir, one thing my office did, we create ad poster last year in this environment to warn taxpayers to do two things

to protect themselves. that is, preparers are required to give you a copy of your return that is signed by the preparer and has their ptim number on it. if there is one piece of information in this environment without setting standards for taxpayers at least get that. if the preparer alters the return afterwards and you have you have the name and identifying number with the preparer and that there was really fraud committed and that is important piece of information for us to have whether that happens. >> that is good. mr. commissioner, when you confirmed by this committee one of my charges to you was that you needed to restore public confidence in the irs and you affirmed it was your intent to make that a top priority. however there have been several recent incidents which underscore the degree to which the public still may have reason to not trust the irs. between the furor over the irs's

proposed rule making for 501(c)(4)s which received over 148,000, actually i think over 150,000 comments, most of which were negative and, recent concerns raised by my colleagues on the house side whether or not your agency is fully cooperating with producing documents relating, related to the ongoing irs political targeting investigation, i am concerned that it is no longer such a priority. the american people deserve to have an irs which is free from political bias and of course we have to hold you accountable as members of congress. and i personally am holding you accountable for insuring under your watch no such bias is or will be present. and i believe you believe that and intend to do that. to that end, can you tell me what steps you've taken to begin restoring that trust and how my colleagues and i can be assured you're continuing to make this a

top priority? >> thank you, senator. it is and always have been and will continue to be a priority of mine an the agency's. with regard to the production of documents for the tax writing committees, the house ways and means committee and this committee, we have had no complaints about the volume of material we have now provided well over 700,000 pages of information. we don't have to redact it. as we work through it, we're simply giving you everything we can find. we worked closely with your staff, with the ways and means committee staff, to identify additional information you may need and we're providing that material in volume. we hopefully are nearing con -- closure on that. we have provided you all the information about the determinations process that we have. the discussion has been and concern has been by those committees that don't have the authority to see taxpayer information where we have to review every single page, redact any information related to individual taxpayers before we can provide that information.

but we are continually providing since the hearing i had before the house oversight committee, we provided them by indof this week another 50,000 pages of redacted information. no one has a greater interest than me personally or within the irs to have these investigations come to a close. as i have said from the start ever we get a final report we'll look at facts as they have been found. we'll consider what additional actions need to be taken if any. we accepted all the inspector general's recommendation and then we'll move forward. i think it is important that never taxpayer to be confident no matter who they are, what their political organization, their political beliefs, who they voted for in the last election and treated by irs in even-handed way and treated same way everyone else is treated goinger to ward. >> that's good. thank you, mr. chairman. >> i thank my colleague. i would only say senator casey's turn. i would just say that i don't see any evidence that protecting

taxpayers from unscrupulous preparers is a partisan issue and that's what we're focused on here today and got a lot of heavy lifting to do and we'll go to senator casey next. >> mr. chair, thank you very much. before i pose some questions for our witnesses, i wanted to address an issue that has been raised a number of types including this morning. this is the 501(c)(4) issue, the processing of those. we did our committee -- subcommittee assignments recently and i'm appointed new chair of the subcommittee of taxation and irs oversight. so i like folks in both parties in this committee are committed to making sure that any kind of abusive practice sis that is -- practices enpaged in are not repeated and rooted out and exposed. the committee, mr. chairman, i

guess undertook a investigation which has been an bipartisan investigation into the issue. the investigation included interviews with individuals who were impacted as well as irs employees and mr. chairman, it is my understanding that the committee's staff has essentially completed the investigation is prepared to release findings and conclusions. so, mr. chairman, i welcome the prompt release of the conclusions of that bipartisan investigation. look forward to working with you on the issue. as well as other members. >> thank you, senator casey and certainly that investigation was well underway when chairman baucus chaired the committee. senator hatch has been very constructive in terms of working with me. this is the only bipartisan investigation that is taking place into these issues and i'm very hopeful that we'll have that report ready for members quickly. >> thanks very much.

commissioner i wanted to start with you. i know your time identified some tax scams on so-called dirty dozen list and there were two issues i've worked on that are related to this, the kind of abuse of data or information. one is that the, the death master file, preventing that from being used for fraudulent purposes as well as working with the social security administration to prevent criminals from stealing social security checks. i guess, more broadly on this, on this issue of scams and preventing them, what would you hope that we could do here in the congress starting here in the senate and senate finance committee, to better help the irs protect taxpayers? i'm assuming that the, some, form of the items that you

outlined on pages 6 and 7 of your testimony. >> right. i appreciate the question. obviously the taxpayer advocate and i are here supporting congressional efforts to give us the authority to set minimum standard for tax preparers. a reasonable amount. most tax preparers are competent, they're educated, they do a good job. what we're worried about those on the periphery who either don't have enough information to adequately prepare a return, or worse are figuring out various way to defraud taxpayers, high fees, taking all or portion of their refund or channeling them as the taxpayer advocate sate said which may or may not be in their interest. we also are proposing with regard to identity theft and refund fraud generally that the congress give us authority to get w2 information by the end of january. what now, what's happened is, we

are sort of victims of our on progress. in the old days you used to get your irs refund months later. meantime we would have gotten all the third party information. with the electronic filing and tremendous progress the irs and its employees have made, with you file the return we say we'll get awe re refund within 21 days, so we leapfrogged receipt by irs of third party information. critical part of that information would be to have third party information and w2 identifiers earlier so we could check refund applications to insure there is some comparison before that. the action congress already took to close the death master file has been very helpful although there are people who still have access to it. we are concerned across the board and with the ease of theft of social security numbers in the public sector, no one has ever stolen social security numbers from the irs database but they use the social security number to file a false return. >> i appreciate that.

miss olson? >> i think one thing that is an emerging trend that i've just been briefed on is the theft of social security numbers from preparers themselves. hacking into preparer databases and that's very difficult because you do get the wage information so even if we have the wage information, we can't necessarily tell that that's a bad return. the irs right now is doing a pilot to see if you can match the name and account, the name on the return where the deposit is supposed to be made into an account with the name on the account itself. the bank account itself. and that is having some mixed results but there may be things on that end where you can work with the financial institution to do greater security. are these dollars supposed to go into there? i know the irs is considering limiting how many refund can be made into a particular account.

so that, that would be a very easy thing. then, again, these criminals are, you're truly talking about scams. these are opportunistic criminals. they're going to do whatever is easiest. the more you can create barriers for them committing fraud they will look somewhere else. they won't necessarily go away permanently but go somewhere else. >> thank you very much. >> thank you, senator casey. senator grassley. >> [inaudible] go ahead. >> senator roberts. >> senator roberts thanking senator grassley. mr. koskinen when you visited with me last year prior to your confirmation, sir, you thought it was your role to clean up the irs and get agency back on track with regard to the processings of applications and implementation of the affordable care act both monumental tasks indeed. you said that your longer term goal however was to restore the

irs reputation and integrity on these and other functions. i have some confidence since you're going to be able to do that. however, prior to your confirmation you said that the irs was targeting certain groups during the exemption application process, thereby trampling on their first amendment rights. seems to mae that there is a common sense step that you need to take. and you should take it today. stop all action on the proposed 501(c)(4) regular layings until the house ways and means committee, this committee, everyone, knows what went on, who was involved, what the implication of the all of this is and how we can address the issues raised and hold people accountable. that is why i have joined with senator flake from arizona, 40 of my colleagues, to offer legislation to stop you from proceeding with the new rules until we have answers. here's the deal. we have code of regulation title 26.

i'm sure you're familiar with it. internal revenue rules take various forms. the most important issues are issued as regulations and the treasury decisions are prescribed by the commissioner and secretary or his delegate. other rules may be implemented of the commissioner or signature of any other official to whom authority has been delegated. regulation and treasury decisions are prepared in the office of the chief counsel after approval by the commissioner. here's the deal. our constituents informed us with some degree of outrage, there is irs fox in the first amendment chicken house. response by the irs. yes, when we know that. we are writing regulations that will tell the fox to behave himself. but that makes no sense. we are investigating why the fox was even in the first amendment chicken house in the first place. so i have some discussion suggestion. first, why don't we get the damn

fox out of the first amendment chicken house. second, wave the regulations until we get our investigations done, at least until we can find out who and how the who put the fox in the chicken house in the first place and hold them accountable. why can't we stop on these regulations until we are done with our investigation? >> having worked on my uncle's farm in minnesota i have a little bit of familiarity with foxes in henhouses but let me respond to the point. as i said for some time, actually in my earlier testimony in february, especially since the volume of comments since then have gone up and increased, the chances of our finishing any regulation before the end of the year are very slim if not nonexistent. our hope has been that in fact one or more of the six investigations that have been going on now since last year will be completed well in advance of that. so i think in terms of the goal of not having a regulation until we have some investigation done,

i think that unless the investigations are going to go on for into next year, somebody will issue at least one and hopefully this committee, perhaps others, will issue their report sometime in the next three or four months which will be well in advance of anytime we would have a chance of completing this regulation. with regard to the regulation, as i have said in the past, not having been around when it was originally formulated, my commitment and dedication is that any regulation that is ultimately issued should be fair to everybody, should be clear, and it should be easy to administer. and we are going to carefully review the 150,000 plus comments that have been made. i don't know, we have just started the review so i'm not quite sure how everybody knows whether they're positive or negative. but clearly the regulation attracted a lot of interest. by the time we hold a public hearing in all likelihood, repropose any regulation we would be considering and get more public comments, it will be well into the end, toward the

end of this year. my hope would be, someone would have at least, one of the six investigations will have been done by then, if not more. we're committed to reviewing the findings of that investigative report and taking any additional action necessary to put this hyped news my time is about up. i want to thank you for that word, committed. so you are unequivocally committed to this committee and you are committing to this committee the 501(c)(4) proposed regulations will not be finalized this year? >> i think what i have said is that the chances of being finalized before the end of the year, not before the election, before the end of the year are slim. we are not rushing to get them done -- >> an expression if, the chances of something happening in dodge city kansas are slim and none and slim left town. why don't we say none this year. more especially until the investigations are done? why can't we do that. >> we do that and probably in light of the chances it's a slim

chance, fairly likely -- what i can easily commit to, we won't be anywhere near completing these regulations before somebody has completed an investigation because i am confident -- >> i hope you share these regs with us as we go through this. >> the senator's time has expired. >> that are outraged by this thank you, mr. chairman for your -- >> senator grassley. >> mr. k, i wrote you and secretary lou on february 20th. i asked about the administration's decision to delay the employer mandate until 2017 for businesses with 50 to 99 employees. that category of businesses is not specified in the health care law at all. in order to qualify for the delay you require employers to certify that they didn't lay off employees to get below 100 employee thresholds. this certification seems like unnecessary information unless you think the employer mandate will cause businesses to lay

people off. a, do you think that businesses will lay off their employees in order to avoid paying penalties under the health care law? and if not, why are you requiring the certification? and b, what is the legal justification for a new category of businesses with 50 to 99 employees and certification process? >> senator, as you know, tax policy issues like this are all the domain of the treasury department. those decisions were made by the treasury department. i did not participate in those. as a general matter i do not think that companies, with regard to health care issues are going to willy-nilly lay off their employees. i think most companies are dedicated to their workforce and to developing them but the question in terms of what basis would those decisions were made is really a question that has to be addressed to the treasury department. >> don't you, you have to sign off on them? >> all treasury regulations are issued by treasury and the irs

but the policy issues behind questions like this are decided by the treasury department. the chief counsel's office, actually reports directly to the treasury department. >> well i requested a response from you and secretary lou by march the 7th. so when can i expect such a response? and i assume you can be aer rand for make you are sure this gets done. >> i will real clearly commit that i don't know why any response gets cleared by complicated process by commitment to you and this committee we'll reply promptly to any letter we get from you. i will assure you i get a proper response pro our side. i can't tell you when the treasury department will respond. >> you talked to secretary lew and he made the same promise that you came. when he cops best committee will answers our responses. i don't know why people will say they will answer our responses

if they won't. anyway, go on to the second question. mr. k, just last week, i wrote to you concerning the non-profit hospital reforms that author and were enacted in twin. these reforms impose new requirements on non-profit hospitals and hold them to account for tax status. what has been the delay in finalizing regulations in this area and when can we expect final regulations? >> i have a series of regulations and proposals have been drafted pursuant to that statute and december, january of this year we provided treasury provided with the irs jointly guidance to hospitals that they could rely on the existing proposed regulations that are out there. we expect that the final regulations will be issued before the summer is out. but the hospitals have already been advised they can rely upon the earlier regulations or

proposals that are out there. >> the 2010 non-profit hospital reforms also required the irs and the department of departmend human services to collect information on non-profit hospitals and report to congress every year. an annual report should have been issued to congress for fiscal year 2012 but congress never received any report. congress has yet to receive a final report fiscal year 2013. a 2012 report by the inspector general of treasury recommended that the irs enter into a memorandum of understanding with hhs in order to better coordinate the collection and sharing of the information for the report. the irs agreed with the inspector general's recommendations. and as i understand it, the memoranda of understanding has not been finalized. what is the status of the memorandum between irs, hhs? when would you expect it to be

finalized? why hasn't there been an annual report as required by law? and when can congress expect the 2013 report? >> we have been working cooperatively with hhs. we expect not a memorandum of understanding but written final confirmation from them about the process we're going to use going forward. the problem with timing is it takes two to three years for all of the data to be filed. so the 2011 data has now been made public by hhs. we expect to provide jointly as we, because our data is going to measure with theirs. the hospitals all ask for us to use apples to apples data. so we will earlier this summer, this summer we will be issuing to the congress a report for 2011 because that is the timing which we actually get the final data and then every year thereafter we will provide that report on an annual basis jointly with hhs. so the data for 2011 is already public from hhs's side. we're collecting then for the same time period, calendar 2011,

putting the data together. and you will get every year, it will be, delayed because of the time the hospitals have to file all of that data but as a regular matter start this summer you will get annually the data required. >> thank you, senator grassley. senator thune is next. >> thank you, mr. chairman. i want to thank you you and senator hatch for holding this hearing. i think all americans expect the irs to laws in impartial manner and expect tax preparers to operate in a ethical and competent manner. the concerns by the gao in the recent study is troubling and i'm pleased the committee is many can inning this issue to determine if lodge shun action is necessary to protect americans from unscrupulous and incompetent tax preparers. i want to go, mr. koskinen, give you an opportunity, turn to something been mentioned here by my colleagues and has been discussed of late and give you the opportunity to correct the

record. last week the washington post max kessler awarded you three pinnochios, the inspector general for tax administration, russell george had not used term targeting referring to how irs treated conservative social welfare groups. the post article noted mr. george specifically stated in his testimony to congress that the irs targeted specific groups. i'm quoting now, applying for tax-exempt status. it delayed processing of thieves groups applications and requested unnecessary information as well as subjected these groups to special scrutiny. and that end quote. and, given that the post article and the confusion around recent statements that you have made on this top i can i want to give you an opportunity to correct the record. and the question i guess specifically, do you agree that the treasury inspector general for tax administration has found that certain conservative groups are targeted for extra scrutiny by the irs? >> i appreciate the opportunity to cented record. it has been intriguing to me it

has become this big issue, tempest in the teapot. what i said in my testimony which seeps to have triggered this, was that the inspector general's report last may in his findings said that he found inappropriate criteria were used to select applications for further review. it was in response to a question about the findings of the ig and my point was the ig's finding in the report said it was improper criteria. thereafter and couple times since then made it clear the ig clearly, in his testimony to congress used the word targeting. he talked about targeting beforehand. my only point in response to question that the inspector general findings was targeted. the actual finding said improper criteria. one man's improper criteria is another man's targeting. how it got to be this big of an issue i don't know. however you described it shouldn't have happened, shouldn't happen going forward in the future. we are committed. we've taken all the ig's

recommendation and accepted them. we are committed, that is to say not only c-4 applications but in any relationship with the irs we'll continue to audit people. some will be democrats. some will be republicans. some will go to church. some won't. when you hear from us it is only something in your tax return. people need to be confident that is our commitment, that is our general approach to these issues and that's how we're going to behave going forward. >> just as follow-up to that, the post article also referenced in, to your use of the term, targeting, asked, poses that question. the basic question, was the phrase so toxic that it was wiped from the lexicon once you arrived at irs? and i guess i would just ask since your confirmation as commissioner has anyone in the administration, within the irs, the treasury, white house, any place like, that pressured or counsel you against using the terms, target or targeting in reference to the matter we'll talking about? >> no one in the administration. the only concern i've heard, i've been to 20 offices of the

irs now. i listened to and met with over 8,000 employees. several employees objected to the term targeting but nobody in the white house. nobody in the treasury. nobody in the administration has asked me not to use the word. >> thank you. mr. chairman, i want to just, about a minute left here, focus on what i believe is a major driver of more and more americans seeking tax preparation assistance. that is the incredible complexity of the tax code. as you know, much of the affordable care act is administered through the tags code which means when uninsured americans file their taxes they will need to figure out whether they qualify for the subsidies, how much they can receive whether it makes more financial and medical sense to get coverage or pay the penalty for violating the law. does the question, the question is, doesn't the affordable care act create a lot of new complexity issues on top of those that we already have making it even more difficult for, driving even more americans to tax preparers when it comes to getting their returns in on

time? and, do you believe that most tax preparers are adequately prepared to handle the complexities arising from the affordable care act. >> i think we'll have a lot of questions by preparers and taxpayers about the affordable care act. the vast majority of americans are going to be unaffected by it. they will check off a box that they have insurance, they have to the medicare and they won't be affected. but for people in the area who are applying for insurance, getting advance premium credits there will be questions asked. one of our concerns is to make sure we're prepared to answer those questions. >> miss olson, quickly on that. do you have a comment. >> there is certainly a great deal of complexity in the affordable care act. i would note, and i'm watching very carefully and closely how the irs is approaching that. also on the compliance side, what they do if somebody owes money as a result of it. there is one thing about the affordable care act that is very important. we are going to get a lot of information from third parties which will allow us to identify

inaccurate claims. during the filing season. that is very different as the commissioner earlier alluded. it is very important for us to get w2 and 1099 information early to avoid all this fraud and errors in the regular tax system. there is actual added benefit in the affordable care act that we don't have with the rest of the filing system that would really be good to have in the rest of the filing system. >> thank you, mr. chairman. >> thank you, senator thune. i very much appreciate. you're also highlighting the complexity of the code because the congress is not blameless here. virtually every session some other group comes up, usually with a good cause and what happens here on the finance committee we just add it to the code. there have been something like 15,000 changes comes to maybe one or two for every working day in recent years. that is right at the heart of tax reform and look forward to working with my colleagues. senator isakson is next. >> thank you, mr. chairman. i concure with your opening

statement talking about tax simplification is the key to this and i think it is key. the another key what georgians is how long i stay in church and answer questions what that subject is about. given proximity to april 15th everything was about the irs. listening to senator casey's statement which i think i heard we are close to having conclusions from our bipartisan investigation, is that correct? >> i'll let senator hatch chime in here but i before so. certainly the staffs have been talking. senator hatch has been very constructive, given the fact that this is the only bipartisan investigation into this. obviously there were errors made. there is no question about that. it is fornash we wrap that up and hopefully we do it quickly. senator hatch. >> we're trying to wrap this up as quickly as it can. it has been slow of the we haven't gotten a number of documents we still have to get. i agree with the distinguished

chairman that we're working in bipartisan manner. hopefully we can conclude this within relatively near future. at least i hope so. >> commissioner can we have clarity on that point? i understand you sent as you letter indicating that that you made available all the documents for purposes of this investigation. is that right? i don't have the letter with me. >> couple weeks, three weeks ago said we provided you all the documents we had about the determinations process which was the subject of the inspector general's report. since then we've had requests for additional information, not about the determinations process but about any involvement in the, by lois lerner the exam process and appeals process and regulatory process and we are providing you, completing the provision of all of that additional information as well. but for the base issue of determinations issue that the ig raised you have all the documents we could find. >> we are intruding on senator isakson's time. i will have senator hatch have the last word here. >> well we did get, they said

they had given us most of the documents and then we found out that they hadn't. so we just got a new set of documents last week. we're appreciative of the cooperation. we still haven't gotten into the treasury documents as much as we would like to. although we're starting. all i can say we're trying to do the very best we can to conclude this investigation. and hopefully we will in the near future. >> we are committed to getting this done, commissioner. we're going to get it done in a bistart sawn way. i -- bipartisan way. i assure we'll follow up quickly on any remaining questions. i knew as of a couple of weeks ago you had give us everything we asked for. that strikes me as indicative of your cooperation. this is not going to be imputed to senator isakson's time. so let us make sure -- >> in that case, let me just say i appreciate that. we've had good working relationships with the staffs of the majority and minority and we are committed to continuing to work with whatever you need. we're anxious to get it to you.

>> very good. senator isakson we'll roll the clock back so you can have your full five minutes. >> well i asked the question and i'm glad y'all went to the detail in answering question. in a voluntary compliance dependent system which ours sis the can confidence the people have in the internal revenue service is the key to voluntary compliance. quicker we get to the answers whatever the answers are the best better all of us are. i want to thank commissioner koskinen in his visit to atlanta and including me in that visit. run a business and watch department manager or business hoed motivate your employees, if your performance in atlanta typical what you do when you grow to other offices around the country i think confidence of the irs and employees will go up because i was very impressed. >> thank you. >> ms. olson made statements about financial incentives to inflate numbers and tax returns for preparer to take advantage

and pocket the difference. how do they pocket the difference? >> some of the ways you can see if you get larger tax refund for your customer and you're actually preparing returns in a car dealership or furniture rental place or any number of, you know, other kinds of entities that are selling products unrelated to tax, then you can get a loan advancing funds so the taxpayer can inapply inflated refunds to purchasing a product and what we're seeing in some instance, and i used to see this in the low income taxpayer clinic i ran when i represented taxpayers, we saw this in the vehicle purchase where a taxpayer would use the loan on a, an inflated refund to purchase an automobile. irs would then disallow that refund. the taxpayer would be unable to make the payments on going on this higher dollar vehicle than they really could afford. they owed the refund back to the

irs and the car was ultimately repossessed. then the taxpayer would end up with cancellation of debt income next year which was taxable. >> other, more direct ways of fraud is the preparer can put his bank account down as the bank account to which the refund should go and it is all done electronically. then the preparer can take out a big fee before he provides refund to the taxpayer, keep some of the refund or may keep it all. there is no way for us to tell electronically when he puts down his bank account to keep the refund from going to his bank account. a lot of those taxpayer don't have bank accounts. >> in either case that is fraud against the taxpayer. >> fraud against the taxpayer. >> which brings to the question i want to ask about irs refund program. you said low income taxpayers are most often abused? as prefiled helped? it would avoid people padding deductions or padding income? >> the issue many of the

taxpayers who are most vulnerable do not have computer literacy, the level of computer literacy would enable them to do that. in some of the walk-in sights irs has and vita sites think get taxpayers to sit down and walk them through. they have computer terminals. you can go prepare your own return. if you can learn it once, maybe next year you can do it yourself. but there is very high learning curve. i think one thing that can help, if we can get this w2, 1099 information in advance, then maybe the irs can pour into whether it is commercial software or free file or into the free syllable forms we have as part of the consortium you could pour some of the data in that might make it easier for taxpayers to say, okay, i have these dependents, et cetera and prepare their own returns. it is a big list for this population. >> my last question, i appreciate the time, mr. chairman, when you catch an

unenrolled preparer, in a fraud, under the loving decision you don't have any standing to do anything to that person but can you refer them to the justice department for prosecution or investigation? >> and we do that. whenever we find either systemic fraud or fraud a violation. law we can refer for prosecution. as taxpayer advocate noted that is at fact after the taxpayer has been abused. we can't prosecute, we don't have resources to catch everybody who fraudulently defrauded their clients or prosecute them all. but they are at risk. if they commit fraud in filing of their returns for their clients, they violate the law, they're at risk for prosecution, the question is, whether we can catch enough of them to make a difference. >> well cms does a good job of trying to enforce against fraud in medicare and medicaid by making highly visible profiles of anybody they catch defrauding the government, might be the same thing, might be beneficial for the irs as well.

>> we give as much ability for the prosecution we get and for the sentences we get but there is still a lot of people figuring out there playing rule let. and -- roulette and levels they're operating. the question is whether there will be enough resources to prosecute them. >> thank you, mr. chairman. >> thank you, senator isakson. among the good points you ask just made i think there ought to be more inquiry to the free file and actually see what its strengths and limits are. i heard for example, questions whether they can do state returns and these kinds of matters. i want to work closely with you on this. senator burr? >> commissioner, welcome. senator coburn and i have shared some correspondence with you in the last two weeks. you've responded. you thank you for that very timely response. let me refresh your memory. this was in relation to the chicago district of the nlrb's decision as it related to the

northwestern football players and their potential unionization and we said to you, that our interpretation of section 117 of the internal revenue code was in fact exactly what your tax experts said, there was an exclusion specifically stated in there for scholarships, educational scholarships, that made those exempt from ordinary income. the statute goes on to say, one exception. and i'll quote it. it says, and i quote, shall not apply to that portion of any amounts received which represents payment for services by the student required as a condition for receiving the qualified scholarship. meaning if the individual received a scholarship portioning, or the portion that represented a payment for a service, was no longer tax-exempt. i got a very detailed letter back from you, basically stating

the first part which is section 117 and the exclusion of for scholarships and you made a very specific statement in here that the nlrb definition of an employee for labor law does not control whether the individual is an employee for the purposes of federal tax. in other words scholarships are governed by irs code and this is going to raise a big question because in nowhere did your letter note the disqualifying thing found in the tax code which is providing a service. now, let me just state for my colleagues, the nlrb decision said these students are employees. the suit was brought by northwestern football players because they said, we're under the control of the university. they tell us when to go to

practice, when to go to a game. they control, therefore, we should have the opportunity to bargain with them because we are employees. the irs, excuse me, the nlrb made a determination that they were employees and they referred to section 23 of the nlrb act. let me just quote from that. the act provides in relevant part that the term employee shall include any employee. the supreme court held by applying this broad definition of an employee it is necessary to consider common law definition of an employee. under the common law definition of an employee a person who performs services for another under a contract of hire subject to others control or right of control and in return for payment. now let me just suggest to you, if that doesn't meet the exclusionary part of section 117 i really don't understand it.

and i understand your point here that labor law doesn't dictate tax law. so, let me point then to tax law. in revenue ruling 77-263 which discussions, discusses section 117, and the tax law treatment of athletic scholarships the irs states this clearly. any amount paid for allowed to or on behalf of an individual to enable an individual to pursue studies or research is not considered to be an amount received as a scholarship or fellowship grant for the purposes of section 117. if such amount represents compensation for past, present, or future employment services or for services that are subject to, and i underlined, direction or supervision of a grantor. or if such student or research are primarily for the benefit of

the grantor. any of these conditions will negate the existence of a scholarship for fellowship grant as defined in the regulation. so the body of tax law is pretty clear on this question, commissioner. bargaining for payments can not be excluded from income as athletic scholarships. again, the players seeking to unionize in the northwestern case and they make the argument they're employees and that the scholarships they receive from the university are compensation for services rendered. the nlrb has agreed with the players that they're employees and that their scholarships are compensation for services rendered. let me just ask you. how can the irs ignore tax law and the facts the answer that they prepared for you to send me? >> well, first of all it would be interesting to see what the

nlrb final decision is as that issue from the regional office goes forward as it goes. >> if goes as currently written, are those scholarships taxable? >> well the revenue ruling you're talking about talks about and tries to distinguish obviously graduate students who teach, who do research or get paid in that issue. obviously interesting discussions are going on in the ncaa about whether in fact student athletes should get stipends. whether they should in fact be paid in addition to their scholarships. the principle thus far that all of these students are student athletes. that the scholarship allows them to attend college and participate in athletics and that historically has been the rule applied. to the extent the circumstances change significantly, that's why i say it will be interesting to see where this goes, then obviously we will take another look at what the definition of compensation is, what the definition of scholarships and

and what the situation is but thus far the people who have looked at it, the experts in the irs have ruled that nothing has changed thus far that would cause to us make a -- >> commissioner, let me ask just from the explanation and what i read of tax law, where have i missed it that it is clearly stated there that if they are supervised, if they perform a service required by that entity that controls them, this is no longer considered a scholarship? i think that you're reinterpreting what tax law says. >> no, what i'm saying is historically what football players do today is no different than what they did five, 10 or 20 years ago and they have always been treated as those were scholarships. to the extent that the nature of the compensation changes, then we would take a look at it but nothing in terms of what a student athlete does has changed even as a result of that nlrb

decision. >> senator burr, we've got to move on. we've got a lot of additional witnesses. is that acceptable or anything else you need to do? way over. >> let me just say, mr. chairman, it concerns me that we might look at it in the future because we either followed the statute that is in the law which i think is very clear, or we don't and i'm not sure that irs statute is open for interpretation when it is as clear as it is. that you would have to change a lot of words there, that to suggest that this does not fit the determination that -- >> senator brown? >> senator brown. >> thank you, mr. chairman. thank you, mr. chairman. i appreciate senator burr bringing up such an interesting issue what happens at north western with these players who i add, i've met with a couple of them, they're not asking, they're definitely not asking for compensation. i know senator burr didn't say that but it is about concussions and about a kid that gets hurt

and loses his scholarship because he is no use to the university then and may not have health care provided for. i remember suspension of some player of a major player at my state, did not get suspension until after bowl games because of revenue he represented to the ncaa and espn. even though he deserved suspension, he didn't deserve it until he played that game -- >> if i could say -- if i could say -- >> colleagues we have number of witnesses on second panel. >> i will go on to my question. questions about tax preparers. senator brown. >> it will be that, there has not been much to sigh say, nobody talked about earned income tax credit. i can't stay for the second panel. one of the witnesses on the second panel will have much to say on the earned income tax

credit. my view if which look at itc which president reagan called the best poverty program in america and miss olson has been outspoken about that and if we look at eitc as too much fraud and we need to be vigilant we might be focused on carried interest and blocker corporations an accounts in the cayman islands. but let me ask to miss olson, there was a titta report that found higher rates for eitc. they estimate enbetween 20 and 22% of eligible workers are not claiming eitc. many of our states we put real personal time and real staff time to getting people to sign up to know about it and to be aware of it. first two questions, miss olson what do we do to maintain enhance the i eit r&d tc and reduce error rate and reducing enrollment? second in and professor barrick's testimony that the

eitc lifts millions of people out of poverty that the risk of fraud is so great should be addressed by eliminating both credits. comment on both of those if you would, miss olson. >> i think the irs has some research, some very good research from its random audits of eitc taxpayers that really demonstrates the sources of error are very great. you've got, it's a complicated statute so you've got those kinds of errors and then you do have fraud for all the reasons we talked about here, vulnerability of the population. the population also changes 1/3 every year. so it is very hard to have a learning curve where you're teaching people, they're leaving the eitc and coming into the eitc in great numbers. i have proposed in other testimony multiple ways of addressing the errors including both education, designing the statute a little bit, to combine the family-related credits and

dependency exemptions and child credit into a larger family credit that would be refundable and then a worker credit because that makes the dollar overall dollar amount a little less for each provision and a little less attractive for fraud. but the main point i really want to make about this is that the eitc has very low administration costs for such a large social benefit program. where its costs are in the compliance and error and fraud rate. we don't know what's fraud and we don't know what's error. other benefit programs have very high administration costs and not as high, you know, error costs. that is because they have a lot of front end application processes. we don't. you file an income tax return. that is very inexpensive. we have the costs at the back end. but what the eitc has no other benefit program has, is a high

participation rate. that we have 75 to 80% of the eligible taxpayers getting that money, is higher than any other benefit program that the united states administers to that population to my knowledge. if you want to look at effectiveness and efficacy of eitc yes, we have high error rate and low costs as opposed to programs that have low error rates but very high administration costs and low participation rates. i think if you look at it holistically yes, we have to get down our error rates and i've made really substantive proposals how to do that but, as an effective program, it's very good in my personal opinion. and my professional opinion too. >> yes. we, i agree with the taxpayer advocate. we've had two big meetings i've had with everybody whoever thought about this program. we have tried a lot of different things. i think the error rate, 20 to

22% and amount of payment made in error, it is not all fraud as taxpayer advocate said are untenable. it's a great program. we have to make it clear to the public, we understand it's a problem, it is a serious problem that we care about and in fact we are going to do something about it. one of the things we need and we asked congress this time around authority for what is called correctable error authority. if we find and know there's a problem in a return can not change that return notice it is just simple math errors without an audit. and contacting the taxpayer of the correctable error authority would allows we know there's an error in the return to make the change, advise the taxpayers. the taxpayer could appeal and come back at us but would allow us to eliminate some improper payments at the front end rather than requiring us to have an audit each time. >> my colleague's time has expired. senator carper. >> thank you, senator. thanks, mr. chairman. mr. koskinen, miss olson, very nice to see you both.

thank you very much for your service and being with us today. i want to say, mr. chairman, i'm delighted we're having this hearing and i commend you and senator hatch for holding it. my colleagues hear me say from time to time there are three things we need to do for deficit reduction if we're serious about it. we've seen the deficit come down $1.4 trillion in 2009. last year was only $680 billion. this year expected to come in about $550 billion. and then drop a little more and start going back up again. if we're serious about deficit reduction. we need to do three things. entitlement reform, save programs for our kids. doesn't savage old people or poor people. we need tax reform to bring down corporate rates more competitive with rest of the world and generate revenues for deficit reduction. third thing to look at everything we do in government around how to get better investment for our money. gao spent a lot of time in recent years looking at this. how do we get, make sure in terms of the revenue coming into the treasury that that taxpayers

are paying a fair and reasonable amount but others are not being unduly burdened because some of our neighbors are not doing their fair share. and this hearing put as real spotlight on one of the ways we can better insure everybody is paying their fair share. so i'm delighted we're having this hearing. years of investigation by gao and by treasury inspector general have revealed serious problems. . .

will offer enough opportunity for return prepares to establish themselves so that many preparers will participate? >> go ahead. >> i think that if we coupled a voluntary certification with some conditions, for example, right now i'm enrolled return prepares can represent taxpayers in august before the irs of returns that they prepare. and that's a rule that we of culminate. we should change the rule to only grant that ability to people have taken the test and demonstrate competency, in continuing education. they can also write their name on the return and say, you can

call us if there are questions about the return and we should restrict that to certified preparers. so that, that kids a leg up to those people who are taking the time out to do that voluntary testing and continuing education. they can say we can do these things where other people cannot. it won't work if we don't have comprehensive education campaign. we have to make the good housekeeping seal of approval, that you have a clear choice. you go to someone, an attorney, and the cpa or a certified repair, or all bets are off. >> how could we help disregard other than passing legislation? how can we help? there may be nothing. there may be something spent this hearing is very valuable to give come to try as we do to get taxpayers to be careful when you select a preparer, to try to determine what their background is and the competency.

again, the government and the irs have a great interest in competent preparers because the errors that are provided as a font that is great when it's not done what creates a tremendous burden on the system as well as a question of whether we getting adequate compliance. i think a voluntary program which we are considering would be a step forward it's still going to leave people on the periphery for whatever reason they decide they're not going to register and take the exams and 10 straight competence to produce erroneous returns that we didn't have to deal with, have to contact taxpayers about and others. so it is, ultimately it's not as if it's a six of one half a dozen of another. it's critical taxpayers get proper advice and we get as many accurate tax returns as we can so that we don't trigger a way resources chasing people who have no business sellin tellinge return in the first place. >> mr. chairman, my time has expired. i'm going to return, just by sending a question for the

record but ask a question that is -- a substantial or sure of the formal drafting implement it to the tax system but you'll get a question from me on the. they do so much spent i appreciate my colleague bring up the compliance bulletin issue. my concern is that it really doesn't deal with the scofflaws. we know that the majority of preparers our scruples and honest. the problem is what to do about the outliers and those of the people who are going to be exactly tripping over themselves to comply with a voluntary compliance point, but we will discuss that and discuss all of the options you're dealing with this problem. senator cantwell. >> thank you, mr. chairman. following on that note, one of the options i believe is continuing to make things simpler from a technology perspective. some of my colleagues have brought up free file program which is a public-private partnership between the irs and commercial tax software companies that offer free federal tax preparation.

since this inception, it has saved over 30 million taxpayers in helping them with their filings and is also saved the federal government something like $91 million by making it easier on the processing cost. so one of the things, i kind of disagree with you a little bit, ms. olson, in the context i'm sure there are a lot of people to make less than $50,000 who know how to use word or excel, you know, software programs. this is about continuing to make the complexity of the tax code simple so that the administration of it is simpler, too. so i wanted to talk to you about what else we can do to continue to advance the use of technology and helping taxpayers file efficiently. i've heard stories in my own office of young people, you know, using an online version but then going and things a a

little bit for the and and going the next you're thinking they're going to get some great advice from somebody in all they're doing is sitting across from somebody who knows barely more than they do, but charging them, you know, two times or three times the rate. so to me, make the tax code simpler, make it easy for people to file, make the code easier to understand so that people know exactly what they're doing. isn't that the direction we should be going? >> absolutely. i mean, i've made the complexity of the tax code and a moisture problem for taxpayers many time in my annual reports to congress i do think, i wasn't under enrolled -- prepared returns for many clients, and i was baffled why people would not do some of the returns that they were bringing to me. but is this nervousness factor that they're going to make mistake, that they missed something. and i think that's driving people of all income levels to return preparers.

the free file usage has not been robust in terms of the numbers of taxpayers, even though it covers a large population. and i think some of that is that some group of that taxpayers like to buy the products to get all the other bills -- bells and whistles, incorporate with her accounting programs, et cetera. others want to go to return preparers like i said before because they don't want to make a mistake and they just don't trust themselves even with the software. i think the irs publicizes the free forbear a comebac comeback- back to some as an early. i think it's important for the irs to be able to get w-2 and 1099 data early in the filing season, as soon as possible so we can make it able to taxpayers so they can download it into their software programs that they may purchase. so prepares can download into their program, as a people can download into free file or free fillable forms and get a little further along, and that's

accurate information, the mister w-2 that got sent to the wrong address. i would be the big technology push, and congress can do something about this by setting some goals for the irs to move forward in this. congress cycles for the irs to get into electronic filing, and even though it didn't hit the goal -- it became a rationale for it became a goal and the irs organize itself around achieving the. i think to get to the next electronic, with getting the third part information reporting timely, being able to help taxpayers but also protect against fraud. >> wanted to ask, software has to focus all hi its attention on making it intuitive and i think some intuitive news we could probably put into the ta tax coe explanations and so we'll survey take you up on that offer. i also want to ask quickly because we've covered this

devastating loss in a mudslide areas are states we been looking at all this as it relates to disaster relief. you have servicing a lot of these incidents with sandy. do you think when you look at this issue of what's available -- seems like we are so almost rifle shot and here's a committee where you've lost your house, in a lot of instances. you still have to pay on your mortgage even though your house has been totally wiped out. how do we help these communities? >> we have made recommendations in the past about disasters but didn't quite qualify for presidentially declared disasters. i commit to working with your office about some of that. i also think your idea about some of the mortgage relief and debt relief and things so you don't trigger taxable events because you can't pay these things, that's very important. i would be more than happy to look into the. >> thank you. thank you, mr. chairman. >> both of you, this was very helpful in terms of technology

issues. there is no one in the senate has more tech savvy than senator cantwell so we will follow up on these two issues. and on the mortgage point, on terms of trying to protect people from tax increases when they get debt relief, that is part of the extenders as result largely of the senator stabenow. so at this point i think we've completed our first round. i'd like to reduce our second panel, with senator hatch introduced dr. john barrick, associate professor at brigham young university. thank you both very much. you spent of our time at the witness table, and we thank you for expertise and your patients. now, for second i would like to introduce the first witness, mr. james mctigue, director tax issues from the government accountability office. mr. wayne mcelrath, director of investigative services, will answer questions numbers have after mr. mctigue -- i know this topic generates a lot of passion, but --

[laughter] i think we're all right. we will have mr. wayne mcelrath, director of investigative services answer questions that members may have after mr. mctigue provides test when. our next witness is mr. william cobb, the president and ceo of f h&r block. authored what is is this janis salisbury. chair of the oregon board of tax practitioners. and ms. salisbury, we know that you have asked clients waiting for you at home in oregon so we thank you for coming. senator hatch, was introduced dr. john barrick momentarily. our first witness will be ms. chi chi wu, stab in at the national customer -- national consumer law center. then dan album, attorney for the institute of justice. let us now have senator hatch introduced dr. john barrick, associate professor of brigham young. >> i would like to welcome professor john barrick from the school of accountancy at the brigham young university. which is a very highly rated business school.

professor barrick is a leading academic expert in taxation. in addition he has a wealth of practical experience. is highlights include two years as, tax experience with a bipartisan joint committee on taxation and four years as a tax consultant with price waterhouse. his family as he within today. happy to have you here helping us to understand these issues. >> thank you very much, senator hatch. we thank all of our witnesses for coming. in order to get -- to give members time to ask questions, we ask you to limit your questions -- statements to five minutes. >> why did you start, mr. mctigue? [inaudible] >> i don't think a microphone is on. >> can you hear me speak was yes. >> okay, thank you, mr. chairman and members of the committee. i'm pleased to be a today to

discuss the quality of services provided by paid tax prepares to millions of taxpayers will on prepares to provide them with accurate and fully compliant tax returns. the irs has long recognized that hate prepares actions have an enormous impact on its ability to administer tax laws effectively and collect the revenue that funds the government. despite the importance of paid prepares and our tax system, irs is offered to regular paid prepares is limited to certain prepares as you've heard such as attorneys and certified public accountants. the majority, 55%, are known as an enrolled prepares and are not regulated by irs. in 2010, irs initiated steps to regulate unenrolled prepares but the court ruled the irs lacked the authority. in order to gain some insight into how unenrolled prepares actually perform, we develop to senators based on common tax issues. we call these sinners our

waitress singer and our mechanic scenario. in our waitress center, our undercoveundercove r investigator posed as a single mother who received wage income and reported cash income from tips. should one shell to live with her during the year and qualify for the earned income tax credit, and one who did not. in our second scenario, a mechanic and his wife the right the majority of their income from his wages, and also had some slight in, from prepare work and shelter for death ritual to live live at home, once attended college. as you can see from the board on my right, in figure three in this state, 19 visits randomly selected commercial paid preparers, refund errors range from $52 lower to $3700 higher than they should have been, and annoyed to insist that the page prepare tightly the correct refund amount. in the waitress center, preparers may tiki errors. first, not reporting all the

cash to income, and second, claiming both children as being eligible to receive earned income tax credit. the clustering illustrates different prepares me the same errors. for example, for prepares did not claim the cash tip income which hosted the waitress' refund by $654. one prepared to our investigators that issue reported the tip income it would be a red flag and her employer would be audited. three prepares me both pairs which resulted in refunds that were stated by more than $3700. again one prepared told our investigators that she could claim her second child if no one else did even though the child did not live with her for more than half of the year. any mechanics center, not reporting cash income resulted in refunds that were overstated by $3000. one prepared told our investigators that if the site income was reported, this tax preparation fee would go up in this refund would go down. to prepares, wanted to show

investigators how this refund would change if the site income was reported. clearly taxpayers were not well served by the prepares that we visited. but as the next board illustrates, they paid a lot of money for the services and fees vary widely. for example, with the mechanics sunnier fees range from about $300, to $600. alarmingly, the average fee for the waitress center was nearly $300, more than 80% of her weekly pay. often, paid preparers it did not provide enough fees up front or the actual fees charged were higher. higher fees did not translate into more accurate returns. in fact, if you charge for the cracked mechanic return was one of the lowest at $311. when our investigators inquired about the high fees we heard a range of responses like we charge more in the morning and the afternoon, we charge more

early in the taxis and then later, in the air and income tax credit form is one of the most expensive. although our findings are anecdotal, gao's analysis of irs's research program national research program data reveals that prepared and filed return showed an estimated 60% error rate compared to an estimated 50% for self prepared returns prepares were similar to those encountered during our visits. for example, prepared to file returns on it income tax credit as an estimated a rate of 51%. undoubtedly many paid preparers to the dust to provide clients with returns that are accurate and fully comply. however, poor performs can result in taxpayers being audited having to pay back taxes and interest and possibly even penalties. in 2008 and gao look at states that regulate paid preparers can we found returns filed by state prepares in oregon which has those stringent requirements of

any state were more likely to be accurate than comparable returns filed by prepares from the rest of the country. given the importance of paid preparers come we are recommending if congress -- it should consider granting irs the authority to regulate unenrolled tax preparers. this concludes my statement and i would be happy to answer any questions. thank you. >> thank you very much. mr. cobb, i think you will be next. >> chairman wyden -- >> mr. nawaz, would you like to add to that -- mr. mcelrath. spent i have nothing to add. >> thank you for inviting h&r block. we are pleased to participate in this important discussion about protecting consumers from incompetent and unethical prepares to as the world's largest consumer tax services provider, competence and ethical tax return preparation is something we take very seriously. faster we found more than

22 million u.s. individual income tax returns, about 15 million returns and the more than 10,000 offices and another 7 million to our software offers. we know a lot about consumer views on taxes and know what it takes to maintain expertise in is always changing tax landscape. in order to protect taxpayers from incompetent and unethical tax returns prepares, the rtp items that must be addressed. first, minimum standard for tax return preparers, and second, consistent fraud prevention others across all tax preparation methods. first and we support legislation that sets standards for professional tax return preparers. the most obvious way to address and comforted and unethical tax return preparers is to establish a set of minimum standards. standards provide an objective measure for both consumers and tax preparers to measure and monitor the overall competency, expertise and performance of tax return preparers. this is critical because the ultimate goal is to taxpayers file for complete and accurate

returns. equally important is the reduction of both fraudulent tax returns and the improper payment rate of the earned income tax credit. more than 80 million people file an individual income tax return with the help of a tax return prepared ever you. consumers need an objective way to know the person they could give one of the biggest financial transaction of their year is competence and meets standard visited to accurately prepare a tax return. taxpayers themselves agree. a recent national survey that we commission found that nine out of 10 consumers support requiring professional tax prepares to meet minimum training standards. as this initiative moves forward, the u.s. treasury department and irs must leverage lessons learned from the prior much to tax preparer program and partner with private industry to great an effective and cost-efficient program. the components of the program must include tax preparer registration, demonstrated competenccompetenc y, continuing education and background

screening. at the end of the day requiring return to prepares to meet men and standards and stay current with the tax code is not about granting the iran' irs additionl authority they shouldn't have worked to advance anti-competitive pursuits. it is about protecting the 60% of consumers who get help with your taxes every year. this is why we require our h&r block taxpayers to meet stringent education and competency standards. 75 hours of axle and return preparation education plus 35 hours of skilled training in their first year, then annual and a 15 hours of continuing education, and 20 hours of skills training. the second key item is implementing consistent fraud prevention measures across all tax preparation methods. the steps designed to prevent eitc fraud and the paid preparers you are notably absent in the do-it-youdo-it-you rself channel. specifically for the 40% of tax payers together on taxes using

do-it-yourself software, like such as h&r block, they are not required to provide the same information and documentation to substantiate their eligibility for this refundable credit. congress must close this obvious gap not only for eitc but for all refundable credits. eitc proper payment rate persisting a 20% or higher, this is an obvious opportunity they can and should be ceased immediately. consumers are not concerned about answering more questions. in the same survey i mentioned before, a significant majority of taxpayers expressed a willingness to do more to help combat tax fraud such as answering more questions on the returns were even waiting a little longer for the refund. government, the tax preparers, software developers and taxpayers each play a significasignifica nt role in the tax filing process. taxpayers are willing to do their part as long as it's administered consistently for all. additionally, this difference in

standards creates a loophole for ghost prepares the don't want to comply with the paid prepare requirements but they simply use a do-it-yourself product. irs should set standards for tax software to ferret out ghost preparers. let me take a moment to acknowledge your interest in streamlining the tax code and the tax filing process. we would be pleased to share our consumer tax expertise on these issues with you and your staff. tax institute at h&r block comprised enrolled agents, tax it turns, cpas and former irs officials analyzes proposed legislation and regulations weapon on how they will affect consumers. and a doing this analysis attacks institute has access to the real world expertise of our 70,000 tax professionals who are on the front line with consumers. in conclusion, we urge congress to listen to consumers and move to enact a minimum standards for return preparers an intimate consistent anti-fraud measures for taxpayers. the standards are essential for protecting consumers, combating fraud and reducing improper

payment. thank you. >> ms. salisbury, welcome. you made a long trek at a busy time of the year, and i know you've got some late nights energy and really appreciate your coming. >> thank you. chairman wyden speed i'm not sure mic is on of the. let's make sure. we always want oregonians heard. >> that's right. >> perfect. >> all right. chairman wyden, ranking member hatch, indistinguishable is of the committee, my name is janice elsberry to it and irs enrolled agent and a licensed tax consultant in oregon. for the past six years i have surfaced in oregon as a number of the board of tax petitioners and then served on the board for the last two years as chair. i am pleased to be here to discuss with the committee the actions that oregon has taken to protect taxpayers from

incompetent and unethical tax return preparers, and to recommend that congress provide the irs with the authority to require individuals to demonstrate minimum competency and tax return preparation. either by passing the state board examination or for the individual to pass and irs examination, and then to impose continuing education requirements after passage of such examination. the primary reason oregon felt it necessary to develop its own paid program 40 years ago is the same today as it was then. initial training and registration in the century before anyone can even begin preparing tax returns. oregon's track record proves this. in 1972, oregon determined that people engaging in tax return preparation should be licensed and be required to obtain continued education relating to

tax return preparer occupation. the board of tax practitioners currently regulates tax return preparers in oregon. oregon requires paid preparers to are not already licensed by the state as cpas or attorneys to obtain a state license to prepare tax returns. to become a licensed tax preparer come a person must have a high school diploma or the equivalent, complete 80 hours of approved qualified education, pass a state administered examination, and then pay a registration fee and application. annual renewals by licensees requires proof of at least 30 hours of continuing education. according to a report this committee prepared by the gao office in august 2008, federal tax returns for the year 2001 filed in oregon were more likely to be accurate than returns from anywhere in the rest of the country. specifically the gao found that

the odds that return prepare signed by an oregon paid prepare was accurate, or about 72% higher than a comparable return filed by paid preparers in the rest of the country. oregon has been a leader in requiring the licensing of tax return preparers for over 40 years, and the results noted by the gao show the excellent results of oregon's regulations. accordingly, the oregon state board of tax practitioners are just the congress to enact legislation similar to oregon's legislation, which would require individuals to demonstrate competency in the preparation of tax returns, and satisfy continuing education requirements. we suggest that such competency be demonstrated by a written examination, approved by state board of accountancy, or a board of law examiners, or a state

entity such as the oregon board of tax practitioners, or by the irs. the passage of an examination of recognized by a state such as oregon to show competency in tax return competency -- tax return preparation must be considered to demonstrate tax competency for federal tax return preparers in order to recognize efforts that have been undertaken at the state level, and to avoid duplicate and unnecessary testing. we commend the senate finance committee for holding this hearing, and considering this important legislation. thank you for the opportunity to be with you, please let me know if you have any questions. i'm very willing to enter. >> thank you. that's very helpful and we will have some questions in a moment. professor. >> chairman wyden, ranking member hatch, and members of the committee, thank you for inviting me to purchase the indistinct. protecting taxpayers from incompetent and unethical tax

return preparers is an important topic. to illustrate the problem of like to share a former colleague and classmates recent expense of the taxpayer briefly the received return progress services from a ghost preparers. a new client comes to visit a cpa and indicates he has a tax problem. the client never attended college, is a single father and to his two young children ages four and six and is facing uncertain economic times. during the previous year he engaged a tax return preparer who claimed he could get him at $8000 refund. at the cost of $800 or 10% of the refund due. to return prepare did not sign the return nor did he provide reliable prepare contact information as promise. the client did receive an $8000 refund and begin spending it. however, a short time later the client received and irs notice denying the three american opportunity credits that were claimed, one for himself and each of his two young children.

the money had to be returned. who was to blame? both the client and the tax preparer knowingly submit or have opportunity to know about the return, that the return claimed -- claimed false information to the client is now worse off than before. he owes the full amount of the refund policies out the $800 filing fee. the return preparation fee to the prepare is a ghost not to be found, $800 richer than before. all of us at this hearing would like to prevent this type of behavior from happening again. but how can we best do that? first, our taxes is both message to raise revenue and complex as the noted today. 6.1 billion hours complying with the law and decode having over 4 million words and containing 4600 changes since 2001, this complexity has led to the need for tax return preparers.

there are three main problems associated with regulation, inability to regular the most unscrewed with and unethical, the inability to impose ethics on return preparers, integration of winners and losers within the industry. i firmly believe the current regulatory framework is insufficient to address these limitations and i'll make several recommendations that the congress and the irs follow to better protect these taxpayers. first, voluntarily -- voluntary disclosure but we live in a free society. let the markets decide to create incentives for return preparers to voluntarily register. attorneys, cpas and enrolled agents already do this. is the irs choose to endorse or certify a new class of return preparers with only 15 hours of education, the irs will provide a field of april and a false sense

financial incentives to do matter, the current law encourages and creates incentives for fraud to the unscrupulous and unethical, this is easy money. third, enforce existing return prepare laws. in 2005 the irs criminal investigation division stated that the irs girlie has numerous tools available to address return preparer fraud to get the iran's already has ample statutory authorized tools, why do they need regulations to

address this issue? and charge the irs and force existing tools. forth, educate tax preparers. taxpayers. taxpayer's ultimately responsible for their return. they have an observation to put forth a good effort. if something promise you but anyone sounds too good to be true, it probably is. buyers beware. taxpayer education can be an effective tool that the irs has historically used successfully. in conclusion, the tax law is large and complex. for these reasons the majority of taxpayers speak out return prayer to help them -- seek out. but there are those that attempt to defraud the income tax system. rather than regulate companies take the following steps that i've mentioned. the most important protection for taxpayers wil would be a sir income tax system as suggested by chairman wyden today. i would encourage the committee to continue to pursue meaningful reform. thank you for giving me the time

and opportunity. >> thank you, mr. barrett. ms. wu. >> chairman wyden, ranking member hatch and members of the committee, thank you for inviting me here today. my name is chi chi wu. i'm a staff attorney at the nashp to austin to. thank you for investing on the need for taxpayers from incompetent and unethical taxpayers. this is a consumer protection issues will of the revenue protection issue. issue. separate but then it's the licensing and competency standards for paid tax preparers. either congress need to give irs the authority of the states into active such laws. indeed, mindful of the difficulty in getting federal legislation passed we have issued a model act to encourage states to adopt such laws. i've worked on the intersection of text and consumers for over a decade. when i began i assume that taxpayers were licensed professionals with certain educational credentials. after all, the dextran is most important financial transaction during the year for many americans and they would only make sense the prepares and americans place their trust and

the sensitive financial information would be required to take some courses and pass a test. to my surprise, the exact opposite was true. they are essentially unregulated and 46 states. contrast this with other professions that require licensing of all or most states such as hairdressers or landscape architects. it has result in an environment that leads to incompetence and fraud. one indication is existence of french prepares. payday lenders, pont jobs, check cashes. used car discount jewelry shops, bigger stores. this, of course, raises questions. how accurate our tax returns prepared by used car dealers? one can imagine it may take a backseat to the desired -- using tax refund as a down payment. and four to the problems go beyond the. in 2000 we conducted industry shopper testing. the original purpose was to investigate disclosures could refund but a special is. our surprise we found fraud and

for other the 17th as we conducted or nearly 25%. one example involves a preparer who didn't how to handle a form 1099 d. to prepare said there was a problem she didn't know how to handle. the problem was there was a $5000 -- official number, giving we must pay taxes on. with a on. with the dividend our return would only return 100 does but if she was to ignore it then we would receive $3000 in returns. she then called her tax people who told the we do not need to report the dividends and just ignore it. in 2010 we conducted another round of testing and found incompetence or fraud in six out of 19 this, 30%. one example are called a preparer -- begin making of deductions. the tester do not attend church but to prepare into a 2000 the church commissioners they deducted the cost of her clothes and laundry, showed our federal refund would increase $3000 from

about 1000. are prepared try to convince the tester to make a pitch in as she does not have any computer refund would go up to $5000 issued. they tried to qualifier for the a i t. c. even though she is not eligible. attacks prepare deducted $400 in 2008 tax preparer should cause even after the tester told the prepares that she did not pay for tax-preparation lest you. these test results are not isolated or unique. similar testing including the testing announced by the gao have an equal or greater levels of fraud or incompetence. look at the totality we can see these are not limited to a handful of bad apples. recent lawsuit by the department of justice against instant tax service shut down the chain to a costly cost the government hundreds of thousands of dollars in staff time by irs personnel and doj lawyers. there's something not enough reasons to go after all the bad

actors. furthermore, we did with the notion prepared revelation would harm taxpayers because they raise the fee to cover the cost of education and testing. and a bonus return can put the taxpayer at risk of an irs audit or even criminal sanctions. second we believe prepare regulation will not create significant greater cost. compliance costs are minimal. prior to the court decision, there is plan to charge less than $100 for its exhibit these costs are doors by the hundreds of dollars in fees that some charge for a single return. as are testing legal, for the $500 in some cases. in the doj's lawsuit against instant tax service, that chain typically charge about five and $50 for as little as 15 minutes of work. -- $550. thank you for the opportunity to

testify and i look forward to your questions. >> thank you very much, ms. wu. mr. alban, welcome. >> thank you, chairman wyden. and ranking member hatch, the other members of the committee. congress should not give the irs additional power over tax preparers by forcing them to get an irs license before they can assist taxpayers with her tax returns. tax preparers are already regulated by numerous federal statutory requirements imposing both civil and criminal penalties for everything from failing to keep a list of the returns they are prepared for the past three years to actual tax fraud. tax preparers are also required to register with the irs to obtain an individualized number known as a ptin so they must include on every return they're prepared so that the irs can track and analyze their return. these tools already provide the irs with what it needs to identify, track, and penalize the few bad apples without unnecessarily burdening the vast

majority of law-abiding prepares. i have three main critiques a preparer licensed as bad public policy followed by a few recommended solutions that are superior to licensing. first, prepare licensing is protectionist and anti-competitive. rather than protecting consumers, licensing regulations to protect large incumbents in industry insiders from competition i ever can costly barriers to entry. indeed, several financial analysts have concluded that the largest firms such as h&r block stand to benefit the most from licensing prepares. unsurprising the irs licensing regulations were a product of lobbying by powerful special interests to h&r block, jackson hewitt and into it, the makers of turbotax, all actively supported licensing while other industry insiders such as the american institute of cpas obtained special exemptions for their members to former h&r block ceo mark ernst even oversaw the drafting of the

regulations that irs. of course, mom and pop prepares julie don't have the resources to send lobbyists to washington, d.c. to represent their interest. at the same time, licensing burdens usually fall hardest on the little guys who don't have the same financial resources and can't benefit from economies of scale. licensing was expected to push out tens of thousands of independent prepares possibly as much as 10-20% of all prepares to most of those who would beenn put a business were seasonal mom and pop prepares like my client, 81 year-old of be the wisconsin the existing site is a every tax season and has been been preparing tax returns are over 30 years from his dining room table. second, consumers would be harmed by prepare licensing which raises prices and reduces choices. licensing reduces competition which is bad for consumers. between reduced competition and increased regulatory compliance costs, licensing is expected to artificially drive up the prices

consumers pay for tax progression to licensing reduces consumer choices and interferes with consumer autonomy over personal finance. many tax persona on the left with fewer options, but will be forced to pick a new prepare if licensing drives the current prepare out of business. indeed, instead taxpayers not the irs should be the ones who get to decide who prepares their taxes. licensing may result in other unintended consequences that are consumers to higher prices and fewer choices may push unqualified tax tears to prepare the own returns, it will also likely boost the number of unregistered ghost preparers who did not sign the returns they bigger and a very difficult for the irs to monitor. 30, prepare licensing offers a false promise and fails to deliver. as an initial matter licensing regulations cannot do much about fraud prevention that is already achieved by the ptin registration combined with existing criminal penalty. this on as prepares can take exams and sit through

conditioning education courses just as well as on the prepares. licensing and irs mandated training are largely ineffective. for example, irs trained and certified prepares in the volunteer program were found by tigta to have a siege will present a rate in 2011. similarly high a rates have been done over the years indeed the studies of irs employees answering questions but likewise and irs study found a licensed california prepares had the third highest rates in the country for over two years, for two years in a row despite the state's long-standing licensing program. that's because the real problem is not competency, attacks could complexity. as the advocate extend last night tax code complexity almost guarantees that every return has an air into. some inadvertent them some intentional. licensing will not prevent tax preparers from making errors but it will simply limit who is licensed to make those errors. licensing should be rejected because better solutions for

these problems already exist. first, voluntary certification is far superior to mandatory licensing. it allows both consumers and prepares to decide if they by certification that permits them to opt in or opt out to the best, the second way to reduce errors it to reduce complexity. semper fi the tax code to reduce air raid. and third, the irs already has the legal and technical tools it needs to identify, track, and penalize a few bad apples. enforcement of these existing laws is far preferable because, unlike licensing, it does not impose substantial costs on the vast majority of law-abiding tax preparers. thank you. >> thank you. all of you have been very helpful. i want to see what i can do to kind of draw out some of the kind of key kinds of questions. mr. alban, as i understand it, is particularly concerned about the small practitioner. i sorely understand why small businesses can be frustrated

with the needless government red tape and bureaucracy. my understanding, however, here, ms. salisbury, you are a small practitioner are there like two practitioners at your firm? >> that are a total of four, to our cpas and to our lpc's. >> i think that would certainly qualify as a small practitioner. do you all feel apropos of mr. alban's point that somehow this disadvantage passionate disadvantagdisadvantages you, m? it looks like both of you passed cover to get. that doesn't look like to me it is a disadvantage to a small practitioner. >> the numbers prove it is not in oregon and california. oregon without licensing, as recently as 20 living in the most recent facts i have, is that nearly 84% of the practitioners in oregon are not

employed by h&r block, jackson hewitt or liberty, the three big companies in oregon. and in california is nearly 89%. so it disproves that, and both of those states have some form of registration for practitioners. >> if i may add quickly, 40% of our system, small business, 1670 franchisees, man many of them ae like missiles but, i wan wantedo offices and believe it or small businesses. >> so now that we have at least addressed some, whether small practitioners are disadvantaged by having some minimum standards, i want to ask you, ms. salisbury, we've had our system for decades. and we oregonians are pretty outspoken souls. and i can tell, i've been on the finance committee now since 2005 and i have not had anybody who is a practitioner come and say, oh, my goodness, some of these

bureaucratic water torture if we have the kind of thing that we have in oregon, we have passed the coveted test, have taken 30 hours per year of continuing education, audit preparation and sanctions for those who are not competent to we've done this for decades. nobody is marching in the streets. nobody is picketing. there is no sign of unhappiness. is that a fair appraisal of what we had? and then, of course, the result has been document by the general accounting office and you refer to as well, we've had superior results with this kind of system that at least i would characterize anything oregonians would is appropriate oversight, appropriate oversight that really gets at, what's really missing today which is the minimum competency standard. is that a fair assessment? >> very much so. very fair spent what lessons can

irs learn from oregon's experience over these decades? i mean, i heard discussions from mr. alban about the cost. i've not heard complaints about oregon's costs or things of this nature. are the other lessons here from the standpoint of oregon's experience for the irs of? >> the cost in oregon are very affordable, probably the most expensive cost is education. but because we require education we have a lot of resources in the state that provide cost effective education rather than spending two or three or $400 for a days of education you can get education through other resources, not as expensive. so education is not an issue. the registration fees are very affordable for even a small business. i had a larger business in years past and paid for those and still managed to keep my head above water, with the business. so it's not a concern.

we've wondered why it's taken a nation so long to be speeded we are always too logical for the rest of the country. one of the question if i might for you, mr. mctigue. one of the things that concerns me about some of these questions with respect to having minimum competence and the like hi is te who are opposed say we already have the tough standards, and it seems to me what you all have found is that that's not the case. what we basically have is reactive after the fact when the harm is done to people who just want to get every single dollar back that they're owed. is that a fair characterization of? >> yes, mr. chairman, that is a fair characterization. as you stated, the majority of the actions that the irs has tools and actions that can take are after the fact, after the refunds have gone out, after the

paper there has disappeared in some cases it and it's the taxpayer who's left explaining, dealing with the back taxes, penalty, get back in penalties. whereas up front regulation has potential to prevent some of these refunds going out. >> my time has expired. i just appreciate the fact that you have done this second independent inquiry. people can question the value of one independent inquiry. i wouldn't because i watched the professionalism of your office over the years, but you've now found it twice. i also note because you're quite scrupulous and document the facts and you said look, we looked at 19 sites. as you know there been other analyses which are pretty much in line with yours. we've got a lot to do to fix this, and we are going to be working with all of you.

senator hatch. >> well, thank you, mr. chairman. i want to thank all of you for being here. each of you has presented us with various perspectives that i think will benefit the committee and hopefully they irs as well. mr. baird, let me ask you a question. attorneys, cpas and enrolled agents have long been regular and subject to professional standards and confidence and ethical conduct. is there clear evidence that returns prepared by these credentialed preparers are less prone to error than those returns that are prepared by now unregulated preparers, or even ghost preparers? >> i'm unaware of specific evidence that shows that credentialed preparers and the specifically mentioned groups are fundamentally different. however, i don't have full access to the data that gao or

tigta or others have used. as an academic though i'm always willing to help them design more specifically reliable and more educated studies, examine these important questions. >> okay, thank you. mr. mctigue, let me ask you, software development, increasing computer lives he has made easier for many people to prepare and, of course, filed on tax returns the in fact the percentage of self preparers returns been increasing in recent years. is this trend one that is improving or degrading the overall quality of tax compliance the? mr. hatch, senator hatch, that's an issue that we didn't look at in this study. but we did look at data from irs's national research program database and look at error rates for prepared filed returns versus south prepared returns, we did see a significant

difference, that returns prepared by paid preparers that in a rate of 60% versus 50% for self prepared returns. >> let me throw this one out. winning tax filer stops using the services of a paid preparers, and instead uses software to solve prepare the on returns, do we not have any statistic or any evidence, do you know what happens to the quality of their tax filings? >> again, the data that irs collects through random audits, the most recent national research program audit covered the tax season 2006-2000 you looked at various error rates -- 2009. both in the aggregate and also specific tax issues or line

items. one, for example, was the earned income tax credit, and in that case the data, estimates from the data showed that returns prepared by paid preparers had a rate of 51% versus 44% for self prepared returns. >> some have expressed concern that regulation will drive unethical preparer's underground, turned it into would've been referred to here as ghosts prepares. at a very difficult to discover and shut down. how big is the problem of the ghost preparers, and is a problem getting worse? what's bee being done to address that particular problem? >> i'm not aware of any data that exists, either irs data or otherwise, that goes to the scope of the problem. again, gao feels about a baseline level of regulation can

help consumers with some assurance that the people that they are going to have their tax returns prepared by meet certain qualifications and they have a certain level of assurance that their tax returns will be compliant, as they expect. >> i want to thank all of you. h&r block's ruling does a great job, as do others and i would like, mr. chairman, to put this -- >> without objection, so ordered. >> thank you. thank you all for being here. >> senator casey. >> come on back i'll have time for one question, and i know the panel won't miss a show to be upset about that. but mr. conn i wanted to ask a question that relates to your testimony. on page 12, you summarize what the so-called vita folks have to go through, the volunteer income tax assistance folks in their minimum standards.

we all would agree i think that's especially important in those kinds of standards are especially important evolvable populations, folks were easily misled or often isolated and have to depend upon someone who they come into contact with and might, might mislead them. and i would assume that when we talk about kind of basic minimum standards year, that you would hope that everyone gets, or everyone would have an opportunity to be served by an individual that goes through the minimum standards. that would be comparable to your appendix d., which the requirement would be so-called

volunteer tax preparers go through. is that generally act of? >> yes, that is generally accurate. we, for our people, we have continuing education every year for people who start out wanting to be a tax prepare for us but it's over 100 hours of training, 75 pounds of income tax training, including ethical training. we also do skills training. for continuing education we average around 35 years for anyone with even a tax preparer or for 30 years yet to come in and get that. so certainly we would want, and we can adjust the hours beginning of what the statute is, but generally we agree with your point. >> and would what is set forth in this appendix, these requirements that you just outlined, you would think that would be the best direction the federal government should move in?

in other words, have something -- in other words, how do you effectuate this is a matter of national policy for all tax payers to benefit from? >> i think against the salisbury has a great model, but your miserably pointed out with pride what organ does. i think that is a model that can be built off. i think the research we've done shows that you've heard all day about fraud and various cases that people have cited. i think that we have a standard which has been implemented for a number of years and would have to test market if you will. we do a lot of training. so i think the outline is there to put a national policy in place plus, you have clients, consumers who come in our research are saying, of course i want to know the person sitting across from me has certain standards. if you people in my position on not in front of the committee like this asking for more regulation. i don't imagine you find that very often. we want a level playing field. we want to be able to do, this

is about anti-competitive behavior. this is about going up against people who are just, you've heard this, the horror stories that are in the fringes or something else saying how big is your refund ask we don't do refund anticipation loans the we just want to clean up the industry. >> thank you very much. >> thank you, senator casey. i want to thank all of our witnesses for their participation. members of the committee are going to have into the close of business on friday april 11 to submit questions for the record. i just want to make a short statement and give the last word to senator hatch on this topic. last week in this room on a bipartisan basis, our committee committed to getting with what our -- >> we will leave this hearing at this point are you can see it in its entirety on our website. go to c-span.org. the u.s. senate is about to gavel in to begin today's session. at 11, senators will have their

first vote on whether to advance the pay equity bill. 60 votes are needed and republican senators are indicating they will not support the legislation unless the allowed to offer amendments. the senate is scheduled to vote on a nomination to the federal trade commission. now live coverage of the u.s. senate here on c-span2. senate will come to order. the chaplain, dr. barry black, will lead the senate in prayer. the chaplain: let us pray. eternal god, who transforms common days into transfiguring and redemptive moments, hallowed be your name. make our lawmakers great enough for these momentous times, as they seek to live worthy of your great name.