american story on american history tv. get our schedules, and see past programs at our websites. you can join in the conversation on social media sites. >> coming up live in about an hour on our companion network c-span, an interview with former vice president dick cheney. that's live from the washington center for internships at 1:00 p.m. eastern on c-span. and a little later today, the social security and medicare trustees release their annual report on the financial health of those entitlement programs for the elderly. the trustees include treasury secretary tim geithner, health and human services secretary kathleen is a beale yas and hilda solis. they release the report at 1:45 eastern with live coverage here on c-span3. the irs says that more than $300 billion in federal taxes go

unpaid each year. and there is a growing problem of identity thieves filing fraudulent returns and collecting other people's refunds. several top irs officials testified before a house subcommittee last week for an hour and 45 minutes. >> that the tax code is extremely complex. this complexity makes it hard for taxpayers who honestly want to pay their taxes, to figure out what they actually owe. and as a result they can accidentally overpay or underpay. we must do more to understand the sources of the tax gap and compliance burdens so we can make progress and new solutions. we cannot close the tax gap by enforcement against the average american who is doing their best to comply with the tax laws.

we all have to share the burden and do more and let us work to reform our tax code in a way that will help us collect more of the taxes that are owed but not paid. and let us continue our work to make the tax code more fair and simple in order to do that we must work together. i thank our witnesses today, inspector general miller, mr. white, miss olson, for your appearance here today. george, i thank all of you for being here and i look forward to the testimony with great anticipation. we need to make certain that people are protected and that is our obligation and responsibility to do it. and i think that working together we can do a lot better than what we're doing. this is not a committee here to blame you and you blame us. this is a committee to come up

with solutions. thank you so much, mr. chairman. >> thank you, gentlemen. and would echo your final comment there as well that we're about working with you and all to solve problems, not to play gotcha and all the more we appreciate our witnesses being with us today. we'll keep the record open for seven days for additional statements or extraneous materials to be submitted for the record, we're now glad to move to our witnesses and we are honored to have four very dedicated public servants who day in and day out seek to serve the american people with great distinction and honor and who bring great expertise to the benefit of the subcommittee today. so we thank each of you. we're honoreded to have mr. steven miller of service and enforcement at the internal revenue service, miss nina olson, national taxpayer advocate, j. russell george, treasury inspector general and mr. james white, director of

strategic issues at the u.s. government accountability office. we thank you for being here. we've had a chance to review your written testimony and appreciate you submitting that ahead of time. it allows me to go through, i'm famous for my blue marker and making notes of things to get to. we appreciate that in advance and welcome your testimony today. if we can try to stay to about the 5-minute window and that will hopefully allow us to get through your opening statements before running to the floor for votes and coming back for questions. commissioner miller if you would like to begin. i apologize. if i could ask all four of you to stand pursuant to committee rules i need to swear you in. if you could stand and raise your right hand. do you solemnly swear or affirm the testimony you are about to give this committee will be the truth, the whole truth and nothing but the truth. thank you. you may be seated. let the record reflect that all four witnesses affirmed the oath. we'll now begin with commissioner miller.

>> chairman platts, ranking member towns, my name is steve miller, deputy commissioner of the internal revenue service. i appreciate the opportunity to testify on the tax gap. i'm also to update the subcommittee on our identity theft work this filing season. the tax gap is the difference between the amount of tax owed by taxpayers for a given year and the amount that is paid voluntarily and on time. the amount includes the complete spectrum of behavior from confusion to fraud. the tax gap analysis itself is best seen as a directional tool to provide insights into areas where noncompliance exists, and the means by which we can impact compliance. as better explained in my written testimony, our work shows that compliance is most prevalent where there is withholding and/or third party reporting. the irs received a tax gap study governoring 2006 which shows that the nation's compliance rate that year is a little over 83%. this is essentially unchanged from the last review covering

tax year 2001. the report showed that the net tax gap in dollars for 2006 was $385 billion. the tax gap is comprised of three components. underreporting, nonfiling and underpayment. of which underreporting is by far the largest. as indicated, the largest parts of the underreporting category are where there is little withholding or third party reporting. in our view, any discussion on how to reduce the tax gap must consider three guiding principles. first, both unintentional taxpayer error and intentional taxpayer evasion must be addressed. thus, both enforcement and service are necessary. second, different sources of noncompliance require different approaches. and third, major attempt to address the tax gap by regulation or through increased enforcement must be considered within a context that fully

recognizes taxpayer burden and taxpayer rights. in keeping with these principles our strategy involves not only increasing enforcement activi activities but educating taxpayers about their tax obligations, improving customer service to make it easier for individuals in businesses to get help they need to meet their filing requirements, reducing opportunities for tax evasion, expanding compliance research, and improving information technology. with respect to enforceme menme irs is making head way. over the last decade tax collections have gone oup significantly and audit rates have risen. some of these gains are deteriorating as our budget astro fees. thus we would ask for support for our 2013 budget. we believe the best way to impact the tax gap is through a combination of responsible discussions on legislative change and responsible investments in the irs. turning to identity theft. in november i testified before this subcommittee and described

our ongoing work and my written testimony today i provided an update on irs actions. what you'll see is we've implemented the many initiatives we outlined in november. as before our approach the two-pronged. first we need to stop false refunds before they get out. second, we need to help those who have been victimized. we're in fact stopping much more refund fraud and identity theft specifically. we put various new identity theft screening filters in place to spot false returns before they are processed and before a refund is issued. the numbers are in my testimony and i'm more than willing to discuss any questions you have in a particular area. on our work with victims, we have trained 35,000 of our employees to recognize and be sensitive to identity theft. we've also expanded a program for identity protection, personal identification numbers or pins. we issued pins to over 250,000

i.d. theft victims by allows unfettered filing for 2012 for those individuals. we increase staffing to assist victims and we're advising and streamlining our process to determine who the real taxpayer is when duplicate filings occur. i will say we're not done but we've made real progress. mr. chairman, this concludes my oral testimony. i'd be happy to answer any questions. >> thank you, commissioner miller. miss olson. >> chairman platts, ranking member towns and members of the subcommittee, thank you for inviting me to testify today about the subjects of the tax gap and tax-related identity theft. both of these issues present challenges to tax administration. regarding the tax gap the irs recently released an updated tax gap estimate of 3 -- net of 385 billion in 2006, and the size of

this estimate has understandably attracted considerable attention. there are many causes of noncompliance including difficulty understanding and complying with the law, inability to pay due to financial hardships, and deliberate understatements of tax. i believe the complexity of the tax code is responsible for a considerable portion of noncompliance and i have repeatedly recommended in my reports to congress that you all simplify the code. while you're working on that and i am ever the optimist in that regard, that there are other steps that can be taken. first, the irs should be give at any resources to substantially improve its taxpayer services. the percentage of calls the irs answers known as the level of service has been declining in recent years, for the year to date about one out of every three calls seeking to reach an irs representative hasn't gotten through. when taxpayers have managed to get through taxpayers have waited an average of 14 minutes on hold.

the irs is also behind in timely processing taxpayer correspondence, with the percentage of letters classified as over age at nearly half of all correspondence by the end of fiscal year 2011. there is no doubt in my mind but that some taxpayers give up in frustration or anger when they find nobody is home and simply don't file or pay. this state of affairs may cause the tax gap to increase by transforming formerly compliant taxpayers into noncompliant because the irs doesn't pick up the phone or look at its mail. second, while the irs will never be the the government's most popular agency, i believe its funding level should be substantially increased. overall the irs is an extraordinary investment. on a budget of $12.1 billion, it collected $2.4 trillion in tax revenue last year bringing in $200 for every dollar invested. yet the congressional budget

rules generally require that the irs be funded like all other spending programs with no direct credit given for the funds the irs brings in. that makes little sense. simplifying the tax code, improving service and giving the irs sufficient funds to expand in the proper way would go a long way toward maximizing the tax compliance. regarding tax-related identity theft, the irs made significant progress in this area in recent years including adopting many of my office's recommendations. notwithstanding these efforts it's clear that combatting identity theft continues to pose significant challenges for the irs. three points deserve emphasis. first, the irs should continue to work with the social security administration to restrict public access to the master file. second, i'm aware some state and local law enforcement agencies would like access to taxpayer return information to help

combat identity theft. i have significant concerns about loosening taxpayer privacy protections and believe this is an area where we need to tread carefully. but as i describe in my written statement, the irs is developing a proper that would enable taxpayers to consent to the release of their returns in appropriate circumstances. in my view, giving taxpayers a choice strikes the appropriate balance. lastly, i note that even as the irs is being urged to do much more to combat identity theft, taxpayers are clamoring for the irs tires process returns and issue refunds more quickly. while there is still room for improvements, the two goals are at odds f. our overriding goal is to process tax returns and deliver tax refunds as quickly as possible for the vast majority of person who is file. some identity thieves will get away with refund fraud and some honest taxpayers will be harmed.

on the other hand if we decide to place a greater value on protecting against identity theft and refund claims the irs will need more time to review returns and the roughly 110 million taxpayer who is receive refunds will have to wait long tear get them, perhaps considerably longer. alternatively the irs will require a considerably larger staff to enable it to review questionable returns more quickly. there is no way around these trade-offs. i appreciate the opportunity to testify and would be happy to answer your questions. >> thank you, miss olson. inspector general george. >> thank you. chairman platts, thank you for the opportunity to testify on the tax gaps and the efforts by the internal revenue service to enforce compliance with the tax code. my comments will also address the growing risk of identity theft and tax fraud. in january 2012, the irs released updated estimates of the tax gap for 2006 which

indicated that the nation's 83% voluntary compliance rate was essentially unchanged from prior estimates. the irs estimated that the gross tax gap increased from $345 billion to $450 billion as was indicated by mr. miller. my written statement includes a table that shows the comparison between the prior and current tax gap estimates. as also stated earlier the irs reports that the gross tax gap is comprised of three components. again $376 billion in underreporting of tax liabilities, $28 billion due to non-filing of tax return, and $46 billion in underpayment of tax liabilities. the irs reported that the growth in the tax gap from 2001 to 2006 was in the underreporting and underpayment forms of non-compliance which jointly account for more than 9 out of

10 tax gap dollars. the irs also reported that the tax gap is caused by both unintentional taxpayer errors, whether due to tax law complexity, confusion or carelessness. and willful tax evasion or cheating. the irs needs to overcome institutional impediments to address the tax gap. these refer to the established policies, practices, technologies or business requirements that add unintended costs or are no longer opt tim given today's soxt we tend to believe the current institutional impediments can point the way to improved opportunities, namely, address incomplete compliance research, reassess insufficient compliance strategies, determine how best to fix and complete document matching programs, and find a way to handle the insufficient

enforcement resources. every year more than one half of all taxpayers pay someone else to prepare their federal tax returns. third party reporting and transparency is crucial to high compliance among individual taxpayers. bases reporting associated with the buying and selling of securities was an area that needed third party reporting based on previous studies that showed low levels of compliance. the new merchant card reporting requirements were established in 2011. they provide third party reporting on business receipts for the first time. making it much easier for the irs to identify businesses that are either underreporting receipts or not reporting at all. globalization of the u.s. economy has been a major trend for many years. the scope and complexity of the international financial system creates significant enforcement challenges for the irs. the irs continues to be challenged by a lack of information reporting on many

cross border transactions. the misclassification of millions of employees as independent contractors is a nationwide problem that continues to grow and contribute to the $72 billion underreporting employment tax gap. identified more than 74,000 taxpayers who may have avoided paying approximately $26 million in social security and medicare taxes in 2008. it has continued to assess the irs efforts to prevent identity theft. individuals are stealing identities at an alarming rate for use in submitting tax returns with false income and with holding documents. for 2011 the irs reported it detected 940,000 tax returns involving identity theft and prevented the issuance of fraudulent refunds. the amount of fraudulent tax refunds irs detects and prevents

is substantial. the the irs does not know how many identity thieves are filing fictitious returns and how much revenue is being lost resulting from the issue yens of fraudulent refunds. we found that the issuance of fraudulent tax refunds on false documents goes beyond the amount detected and prevented by the irs and upcoming report will provide further data. access to third party income and with holding information at the time tax returns are processed is a single most important tool the irs could have to identify and prevent tax fraud. chairman platts, ranking member towns, thank you for the opportunity to share my views. >> thank you, inspector general george. mr. white. >> chairman platts, ranking member towns and the subcommittee i'm pleased to be here to discuss the tax gap, i.d. based fraud and how to reduce them.

the gross tax on pages 4 and 5 of my statement as you heard, was recently estimated by irs to be $450 billion for tax year 2006. this is the amount the taxpayers should have paid but did not pay on time. note that this is the amount unpaid for just one year. of this irs estimates as you heard, that it will ultimately collect $65 billion from its enforcement actions and late payments by taxpayers leaving a net gap of $385 billion. one piece of context is that the tax gap has persisted at about the same level as a percent of total tax. this despied efforts to reduce it. thinking about how to reduce the tax gap is understanding its nature. the tax gap is spread across various types of taxes, and taxpayer and taxpayer behavior. most of the gap is for the individual income tax but the

corporate income tax and employment tax are also significant contributors, much of the tax gap is due to misreporting of business income, even for the individual income tax. non-business income contributes. even for a certain category of taxpayer there is a variety of misreporting behavior. for example, in a recent report we found sole proprietors misreport their receipts and expenses and some of each is unintentional while some is intentional. at one level as you heard, the cause of the tax gap is easy to understand. income subject to reporting by two irs by third parties such as employers or banks, has low misreporting. only about 1% of wage income with holding is misreported. on the other hand, 56% of rent, royalty and sole proprietor income with little or no information reporting is misreported. there are opportunities to reduce the tax gap.

but because of the variety of noncompliance, multiple approaches will be needed. no single approach is likely to fully and cost effectively address the tax gap. opportunities include more third party information reporting, third party reports to irs birs a taxpayer's income allow irs to easily verify through computer matching that the return is accurate. as i noted compliance is high when income is reported by third parties such as employers or banks. the challenge with increasing third party reporting is identifying new third parties. they must have knowledge of taxpayers interest and expenses and have reporting costs. irs must be able to enforce the reporting requirements so for example a small number of reporting entities like banks can be an advantage. the problem is that most third parties that meet these requirements are already required to report. another opportunity is improving

service to taxpayers. wait time to get through has been around 16 minutes this year. the model of human assisters responding to taxpayers may not be sustainable given its high cost. different strategies for answering questions such as on the irs website or through paid tax preparerers or tax preparation software will be needed. another opportunity is additional resources f. irs's efforts don't keep up with work load growth then the risk is enforcement and with it voluntary compliance will go down. if taxpayers lose faith in the fairness of the system they could become less willing to comply themselves. another opportunity is increasing prerefund compliance checks, could reduce improper payments and might limit refund

fraud based on i.d. theft. leveraging external resources. such resources include paid preparers, tax software companies and whistle-blowers. we made recommendations to help irs leverage all three to reduce the tax gap. modernized information systems that can route phone calls to help taxpayers get the answers they need and support irs's enforcement staff with timely access to data. simplifying the tax code which has been discussed. simplification can make it easier for taxpayer who is want to comply, do so and make it harder for those trying to evade their obligations. in closing i want to highlight the value of research on the nature and causes of the tax gap. it's costly but without it congress and irs left to reduce the tax gap without a understanding of its causes. mr. chairman, this concludes my

statement. i'd be happy to answer any questions. >> thank you mr. white. thank all four of you. perfect timing, clock is at zero on the floor. so i'm going to run over and mr. towns, mr. conolly and i, will return very quickly as soon as the votes are concluded. appreciate your testimony. this hearing stands in recess to recall the chair.

>> the hearing will come to order. appreciate everyone's patience while we concluded the floor votes. we'll move into questions. i'll yield myself five minutes to begin.

certainly the numbers are pretty staggering when you think of a tax cap of almost $400 billion even after netting some recovery of taxes that were not properly paid when we talk about taxpayer identity theft, fraud, the fact that we have hundreds of thousands of americans victimized and again, billions ever dollars at risk. so the issues that we're trying to address today are real issues that are about real money, the american people, and about with trying to protect the american people as well, either they are not paying $3400, somebody else's tax bill or not being victimized by criminals. starting with the area of the tax gap and commissioner miller, i guess just kind of a structural question or framework. is the data we're looking at, is '06 data, we're in '012, so --

and i think prior to that it was '01, five years back before we had similar data. one, is there a plan that this year you're going to update it again, five years, now six years, to update the data about the tax gap, and what is the difficulty in having it be more current? because having 6-year-old data certainly is helpful but not if it one or 2-year-old data. >> i think that's right, mr. chairman. the process has been to do examinations, so for example, if we were to do 2011 year, those returns are now coming in. it would be a while before we would do our statistical sample and using 1040s as an example. we're doing 14,000 research audits per year to try to update this so it's a continuing path

we're on. it will be a while, a few years before we complete those audits, before we are able to roll up the information with respect to those audits. 2006 is a long time ago. but i'm not sure how much better we would be able to get. i think we'll be -- we'll have an easier time going forward than in 2001, we did a better job in 2006, with better data, better estimating models. and we'll get more current but i don't think we're ever going to be -- will never be the 2011 gap is as we sit in 2012. >> i certainly don't expect that the year 2012 we could look and say in 2011 this is what the tax gap was. but it is the fact that it's 6-year-old data especially with technology, and i guess your answer concerns me a little bit, that we're still doing