reporting, the levels of compliance would go up astronomically i would argue. >> right. mr. chairman, i just need a minute to give mr. miller an opportunity to respond to some of that. >> thank you, mr. towns. >> also mr. white very quickly. >> thank you. thank you. >> there's a whole batch that was wrapped noof general george's comments. a few things i'd like to clarify. one, our national research program that comes up with the tax gap is also used on an annual basis to improve our filters. so it has a benefit to us to do these things, to improve our selection process. because we have a living process that filters back in the results so that we can target better our are noncompliance. there's no doubt that we can improve and we are improving on an annual basis. other things i'll mention, the queue in the collection area

exists. no question about that. cases go to the queue when they are lower priority than other cases. other cases can be a higher priority, one, because we think they're better dollar kaz or two, because we don't have the resources to reach them at this point. we are doing a better job of selecting cases for collection. it's not first in, first out. i want to make that will very clear. it is based on the attributes of the given case. thanks. >> of let me ask you this very quickly. i'm really -- i appreciate your generosity. you know, anybody ever estimated or looked at the fact that you indicate you have 35,000 employees who detect identity theft. what would happen if you had 55,000 or 45,000? i mean, would the resources increase? you know, i'm not sure that are not having more staff is an economical way to go.

>> so mr. towns, i would agree with you. i think that nina has said and others at this table have said that we believe the irs is a pretty good investment and that we are in essence, the people who bringing in $2.4 trillion and in the 90%, upper 90 percentile of every dollar that comes into the government on an annual basis. so i think that as we pull people, and we have pulled many people to work on identity theft, as we had to and as we should, that does impact other programs. >> right. >> sir, if i might comment on some of the earlier points from the inspector general. the irs does have a project right now that is looking into the impact of service on compliance. my office is working very closely with the office of research and with the wage and investment division and we're doing a lot of surveys of taxpayers. and it will be very interesting what we find out.

and this is a constantly developing area. i have been very critical of the irs's collection strategy and their use of automation and their failure to just pick up the phone and talk to taxpayers because i think you can really get resolution. but the notice stream where we send out notices to taxpayers early in the system are in the process is very effective, but what that leaves us with are those taxpayers who aren't going to willingly come forward and they need maybe a little nudging and it's how you do the nudging. i main point i want to talk about is the comment about our incomplete of reporting. you all just repealed a provision that would have given the irs more information about the purchases that businesses made, but the upshot and we really criticize the provision because it imposed so much burden on the businesses who are going to have to do the

reporting. i think that's a trade off. and in the self-employed area, the way to get information reporting on the self-employed is to get the householder to report on the person who's cutting their grass every week. and you're not going to get that done. you know, that's just not something we can impose on those taxpayers. so that's where you have to do vigorous audits and look at areas of risk and think of some alternative strategies. i'm not convinced that information reporting is the end all, be all for this tough area that we've got. >> right. ip mr. white, before you respond, getting back to the third party reporting, do you think that the irs has taken full advantage of third party reporting and whatever else you have to add, i appreciate it. >> let me start way quick example that highlights the importance of research. i want to the follow up on almost miller's point there. the recently enacted basis

reporting requirements for financial transactions, financial securities, that policy proposal was based nmpl significant part on research that was done using the compliance data that irs develops to estimate the tax gap. and so that's an example of how you can use that is data to make changes to reduce the tax gap. it's estimated that the first seven years of that basis reporting proposal bring in $7 billion. that's a reduction in the tax gap. in terms of information reporting, third party information reporting, one of the advantages there as i think has been discussed somewhat is that irs can match that will information to tax returns rather than having to do an audit. audits are labor intensive, very costly for irs. more importantly, they're very burdensome on taxpayers. so this is an alternative to audits for enforcement

processes. the difficulty is in identifying new information reporting sources. there are some thampl we have raised in recent reports, some additional resources. >> mr. white, if i can ask you, mr. towns, if you don't mind, plrn conley needs to run for a floor statement. if we can kind of come back, let mr. conley get in and then we'll come back to those examples of additional resources. >> i thank my colleagues and fib me. mr. chairman, i would ask unanimous consent that my opening statement be entered into the record in full. >> without objection so ordered. >> i would further request that colin kelly's statement prepared for this hearing also be entered into the record in full. >> without objection, so ordered. >> i thank the chair. plaintiff george you talked about i think you said a $450

billion tax gap. >> gross, yes. >> that's this year? >> as of 2006. >> 2006. and it's growing? >> yes, it is. and i believe it's a low balled figure and again, part of the earlier discussion indicated that it's an ongoing review. so and it doesn't include aspects such as the international tax gap. >> understood. do you think there could be some relationship between that growing gap and the fact that we've had a 20% reduction since 1995 in revenue offices and revenue agents? >> there's no question if the irs had additional resources they would be able to collect additional tax receipts. >> i'd point out to my colleagues just for the sake of argument, $450 billion in money owed the government we're not collecting. that's what the tax gap is? correct? >> roughly i mean. >> times ten is $4.5 trillion. now, here we are sweat can we go big at 4 trillion -- sweating a

sequestration that would be $1.28 trillion. this would be a big debt in the debt if we simply put the resourceses into irs to collect the money that's owed. now, over and above that, this committee, this subcommittee led by my colleagues, mr. bush platts and plaintiff touns, has done a lot of work on the issue of improper payments. mr. miller, i think you were covering that in your testimony. that's the estimate of annual improper payments, you know, mistakes get made, refunds get sent to people who really didn't qualify for them or the amounts are wrong or whatever it may be. what's the estimated annual improper payment for irs? >> just to give two examples, under the. >> is there a global figure? we've got $450 billion as a tax gap. what's the comparable figure for annual improper payments? >> let me respond by saying that i can tell you definitively

under the additional child tax credit, it's estimated at $4.28 billion a year although the irs under an interpretation from treasury disputes whether or not that's an actual improper payment. we don't believe we, the ig's office don't believe that congress authorizes the payment of the additional child tax credit to people who reply not u.s. citizens and who don't have -- >> but we're trying to deal with global numbers here. it would be useful to have a number. the total amount estimated for the entire federal government is $125 billion a year. >> right and then of course, the earned income tax credit it's estimated about $13 billion a year. but no, i do not have a global number. >> our tax gap numbers say that tax credits as part of the underreporting gap are about $2 billion of that the 450 or 6% of the gross tax gap. >> okay. >> and so that includes a number of refundable tax credits.

>> all right. mr. miller? >> so the only thing i would caution is there's a difference between the improper payment which is what went out that shouldn't have gone out and the tax gap which includes all sorts of different people. >> i agree with you. i'm making that distinction and trying to get what is the number for the former. >> i don't have the that number. >> be helpful. because again, if you set a goal of making it zero, understanding that that's probably an impossible task. >> it is. >> but backing into that, what would be required, what would be required to close that is $4800 billion gap and to better get our handle on the improper payments? because you know, we're making incredible and in my opinion sometimes egregrious policy decisions that are going to do real daniel to the united states of america. we're cutting back on investments that are very important if we're going to stay competitive and here right in front of us is a source of revenue we're owed except this

body is not willing to make the investments in irs that we need to make. and what is very clear from your testimony is that for every dollar we investment in irs, especially in terms of compliance, we have a big return. without pain and suffering. and it puzzles one why congress wouldn't seize on that opportunity as one measure to put a real dent in the debt without having to create, you know, weeping and gnashing of teeth. let me ask a question mr. miller. if i may mr. chairman, and i promise you. talked about offshore tax havens. is that correct? >> yes, sir. >> so that's kind of something every ordinary average american taxpayer has, right? >> i hope not actually. >> well, what% and of tax filers

v. offshore accounts? >> so we know the ones, and i don't have the% and with me but we know the ones who are declaring them either under the f bar rules or under our new rules that call for a checked box on the 140. we'll find that out when the 2011 returns fully come in. >> and that's a legal loophole in the law that somebody can take advantage of. >> it's a permissible act. obviously, we've made -- we've made inroads on offshore and we also have the be rules now that are going to require banks to report to the united states those who have foreign bank accounts. >> can't think of anybody who has those kinds of accounts -- oh, yes, i can think of one. >> sir. >> according to one study, the percentage of income paid in taxes for the top .1 of 1% of taxpayers in that top bracket has declined.

>> 70 -- from 70 to 40%. if you look at the middle income it's increased. that suggests a rather dramatic regression in taxes paid and the defact tote tax code we're living with. would you comment? >> i really wouldn't be able to comment on that. >> are those numbers accurate. >> i don't know. i'd have to check on that. >> would you not agree if the top of .18 of 1% which used to pay 70% of the% and of income paid in taxes is now 40% that's certainly not progress. that's called regression? >> so that's outside of what the deputy at the internal revenue serious would be speaking about, sir. >> miss olson? >> sir, i don't have those numbers. i'd be glad to look into them and get back to you.

>> would you agree if those numbers are accurate, that would suggest that the-debacho income tax in this country is becoming more regressive not more progressive if the top ten of 1% is paying half of what it used to pay and the middle quartile is paying more? >> the reason it's difficult to answer that is i've just been looking at historical data and it's not clear to me that the highest income taxpayers are paying less than what they might have done historically. so that's why i'm saying i'd need to look at what you're asking me and look at the charts that i've got and be able to answer for the record. >> boy, i have to tell you, miss olson, numbers available to me are quite clear. they're not ambiguous. the decline significantly in terms of the total% and of income tax collected by the irs. mr. chairman, i thank you and i thank you, mr. towns, for your

indulgence. >> i thank the gentleman. before coming back, mr. towns just would the associate myself with the gentleman's comments about the need for us to do a better job of making that investment with him revenue officers to get the return on that investment for american taxpayers and similar to how we the three of us work together on the funding levels for government accountability office and advocating to the appropriations committee members and staff on the return. if i remember, there was like $86 for every dollar spent at gao. glad to work with you and mr. towns and others on something similar that makes the case and the advocates' numbers really present it the pretty well what that return on investment is. so, with that, back to mr. towns. if it's okay, mr. white, if you wanted to include your reference to some examples of additional data collection that would be

helpful. >> yeah, this would be additional information reporting. two things we've recommended in recent reports. one is payments for services to corporations, this is not payments for goods but this would be purchases of services frompl contract kers, outside contractor oz who may be incorporated. if you're incorporated, that does not have to be reported to irs. if you're not incorporated, it does have to be reported to irs. so one suggestion for additional information reporting there is to extend that to contractors who are incorporated. payments for services by owners of rental real estate is another area where we've recommended increased reporting and then there are also cases where reporting is done now, but where additional information could be provided. one example is on reporting on mortgages. currently the 1098 forms that report mortgage information do not include the address of the mortgaged property. that creates can problems for ir subpoena in sorting out

suspicious returns from correct returns because it's not easy toe tell even how many properties of somebody owns. so there are both sorts of opportunities there. one other point i'd mention is there's been quite a bit of discussion about return on investment. this is something in our recent work we've highlighted with irs the importance of doing more estimates of return on investment both for proposed initiatives which the service is now doing and then after the fact help trying to calculate, trying to measure it the actual return from investment on compliance initiatives so that the service learns what's been effective, what's been more effective than they thought it would be, what's been less effective than they thought it would be. that raises then the possibility of redirecting resources to areas to get the biggest bang for the buck.

>> yeah, thank you. okay, mr. george. >> mr. towns, beg your indulgence to touch on what mr. white discussed and throughout this session, we've talked about the need for the irs to receive additional information, third party information and how that would enhance revenue collection. but what is just as important is once the irs receives this information, what it does with it. and that is a problem that we've reported on before. whether it's a 1099 or what have you. the irs will receive this information from an employer and yet, and then will receive a tax return, a return seeking a refund and won't match the two in time to ensure that the information is accurate. so if someone was to commit tax fraud, you know, they are able to claim more in a refund than they're entitled to because the irs didn't on a timely basis compare the information. and that is a major problem.

yes, it's resource you know derived in terms of there having fewer computer systems or revenue officers or i would defer rather to mr. miller to address how they handle that internally, but it is a significant rob. >> right. mr. miller? >> mr. towns, so i agree with general george that it is a significant problem and it stems from a number of reasons, the key of which is timing. we don't have the 1099 or the w-2 often when the return comes in for refund. we do what we can. but under the current systems, we don't have the information to match. we have recently started talking to the community about being more realtime which would -- has in mind exactly what will general george is talking about. the most information we can have at the time of that refund the better off we will all be. we should have the w-2. we should have the 10999s with

respect to that person so that we can validate one, that it is the person that should be getting the refund and two, that the amount is correct. >> why can't we get that? >> so we receive many 10999s dual march 30th and we already are mpb 70 million into the refund stream by that time. >> what changes would -- you know, this is why we're having this hearing, you know, to see in terms of what we can correct. i mean, that's the purpose, you know. so what needs to be done? >> you know, this it is something that my office has proposed several years ago, and we did a study, looked at many different countries around the world. many countries, and i alluded to this in my testimony a little bit, they don't start the filing -- they don't issue refunds until they have the -- the filing season is closed. and they have received all the

returns and they've had a chance, including information returns and they've had a chance to run everything against you know and do matching and then they issue the refunds. in the united states, people are slowing up the first week of january to file their returns to get a refund. and it would mean a major shock to the system. i do understand, i understand that some of the payroll processing companies have said that if all we needed was gross wages and withholding, that they on the w-2s, they could basically provide us that information within the first couple of weeks of january. it's all of the information classifying you know nontaxable health insurance and retirement plans, that's what takes a little bit longer for them to process. so i think that the irs is looking and anas commissioner miller said, we're engaging in conversations now with the information reporting sector to see what we can get early.

i could also tell you that as a trailal took a very interesting approach sort of what the united states is doing. they sat down with many of their partners like the major banks and some of the major employers and they said what information can you get us very quickly. and people voluntarily came in and said we can get up the this very quickly. then they told the taxpayers if you wait until this date, filing season starts here but if you wait until this date you can go online and you can see the information that we have. you know, so you can be sure about what you get. so they voluntarily asked taxpayers to sort of wait in the filing season. and because they had a prefilled return so ta taxpayers could just sort of download that information and fill in the rest of the stuff, it was viewed as a very positive thing. now, they're really getting about 408% of their taxpayers are actually waiting and using the information that the agency is getting voluntarily.

and they're getting to the point where they might be able to say, okay, now we're changing deadlines because we're seeing people move to later in the filing season. and that's the approach that we've recommended. use it voluntarily. make it as a desirable thing, taxpayers will wait because they want the certainty. negotiate with your partners like the irs is beginning to do and rather than bringing a huge shock to the system where taxpayers are desperately waiting for their refunds up early. >> mr. white? >> just to add a little bit to this, a few other considerations in addition to the burden on the third parties changing the filing date for the information returns, there does feed to be enough time allowed for them to ensure that those information returns already accurate. if they're not accurate, if they have errors in them, they're they're much less useful for irs because it means they're finding false positives and at that point, contacting taxpayers

about a mismatch when there may not be a true mismatch. one other point about the value of this kind of information return matching early on before refunds are issued is that it would to some extent be a long-term solution or at least a partial solution to the i.d. theft problem. irs would be able to be do more verification before issuing refunds to detect illegitimate claims. >> you know, you mentioned, and this is it for me mr. chairman. you mentioned in terms of statute of limitations, there is no statute of limitation on fraud. >> that is correct. >>. >> okay. but broving the fraud, which comes first? i mean so it's in the queue. if it's there for five years and i believe that's the statute of limitations for it, for you

know, someone having to pay their tax obligation. if the irs vent gotten to it, it's out of the queue. that's my understanding and you can correct me if i'm wrong, commissioner. but and so if they haven't proven it by then, how do they know it was fraud, fraudulent. >> and much of the tax gap stock exchange not in that the queue. it's there are significant parts of the tax gap that irs doesn't detect in the sense of identifying the particular taxpayers that owe that amount. one of the issues here is that a significant portion of the tax gap is envelope very small amounts of money spread over millions of taxpayers. there are a lot of small businesses that have reporting problems both intentional and unintentional. they're small. by definition the tax liabilities there are small and it raises a question of whether it's worth going after them because to find the unpaid taxes in many cases you'd have to

audit them. and then another question is how intrusive you want the tax system to be to find those relatively small amounts spread over, again, millions of taxpayers. >> so if i could, just one correction to general george. there's a ten-year statute for us to collect the money. and actually, i think i would agree that the older and colder the debt, the less likely it is we're going to collect it just like any other debt. but we do have offsets that occur constantly and we have other liens and other tools that do make use of that data and those accounts are collected on. >> something that mr. white said, there are two things other than direct enforcement that are very valuable tools. commissioner miller mentioned the refund offsets. a large percentage of collection occurs because a taxpayer has a debt with us, but they're also getting a refund in a future year. that's just the computer seeing

the refund and grabbing it and it goes into the public treasury. but another thing that the irs is doing this year is some behavior modification, if you will. we had recommended several years ago on the so prioritiership return that you brik out the lines for reporting income where you say here's income from 1099s that's reported on 1099s filed, you know, and here's other income. and i just know as a former return preparer that my clients would come in and just show me their 1099 income. i'd say clearly i'm not going to audit your books, but clearly have you more money than in that you brought in. they'd go, oh, yeah, $100 or something. well, if you force taxpayers to have to articulate, they're going to look they've put all their money under the 1099 and think the irs is going to audit me if i don't report some other

money on the non1099 income. suddenly you disappear. even if people were reporting 100 td and now reporting $1,000, he that's a lot of money. we've used that in the past, little behavior modifications that drive people to a little bit more compliant behavior because they think we're looking at them. and that's a very important tool. that's really the policy behind information reporting but you don't just need it for third party. you could do it through what they have to report on their returns. >> thank you, mr. chairman, for your generosity. >> gentleman is more than welcome. i want to turn the discussion a little more toward specifically identity theft and the issue that the ranking member and i have focused a lot of time on with our staff and both sides with the subcommittee staff. certainly want it on the commend the irs for increased focus on this issue.

and it's certainly a necessity as we see the numbers going up each year of those seeking to defraud the american people through identity theft related to tax refunds. i know one of the issues is the taxpayer protection units that have been established as somebody who's been you know, a victim of identity theft or believes they have to have' designated unit. i think that's an important step. one of the things that jumped out to me and it was in the tax for advocates testimony that is just unacceptable is how i'd say it is the level of service numbers. and understand that in general, the goal in year was about 60 plus percent level of service, and yet, when the taxpayer protection level of service in mid-march was under 12% and even in this past week in kind of the heaviest time was only at