and haven't compiled, completed and compiled the information from audits from '06. '07 or '08. that we still have that. because i think that's one of the issues, i think the inspector general raises in the ability to use the data we have. and whether it deals with identity theft, deals with tax gap, i understand that it cost money but if we do it well and act on what you learn it will save money in the long run by helping us to close that tax gap in this case. so that's a concern that jumps out is we're relying on 6-year-old data and the need to make that more current so we can be more effective how we respond to what that data tells us. >> if i may jump in, i do think that the irs is doing what is a rolling research study, so they are going to do three years rolled up at a time, so you would be able, even though you

may be a bit behind, when 2006 is done you would do 2007, 2008, 2009 rolled together and then you move one year on as you go along. to the point about how long it really does take, if you have even 2006, some people are filing in october 15th and you may want those people in your random sample because they may be some complex returns so you're waiting for those to go through the processing. then taxpayers have rights so even the 14,000 audits that we have, they may want to go to appeals before they go to tax court. if they go to tax court it may take a year and a half before they are out of tax court. we have to wait until we're final on the whole issue. we don't know what's going to be in the 14,000 sample where there are tax court ones or not. i do think that the irs's proposal about the rolling sample really will work that will give us even though we'll have some years of lag, it will

give us good data going forward. >> i certainly appreciate that some of these cases are going to be very complex, especially those that go into tax court. but again, we don't need the data from all 14,000 to be able to assess what's working or not. if we lost 4,000 and had 10,000 to look at, but it's 3-year-old data instead of 6-year-old data that would be more beneficial. >> i was going to add there are segments of the tax gap that the irs hasn't adequately addressed, too. for example, the international tax gap. our office, hundreds of billions per year, that is due to the american taxpayer, treasury isn't being paid on time if at all. so again, it is an enormous task as was pointed out. they need additional resources but something that needs to be

addressed. >> commissioner, you want to comment on that? i know that's an area where we have in my understanding, the most limited information regarding what efforts are. again i realize this is an issue of resource, i'm not an appropriator though i want to look at how we can make the case and the taxpayer advocate well documents the internal investment, in services what a return of investment that is compared to enforcement and how we can promote what your needs are. when we hear hundreds of billions of dollars that maybe we're not getting in that one category, how can we do better? >> so on the international tax gap i'm not familiar with the inspector general's numbers to be honest with you. so i'm not going to speak directly on that. on international, two things. you're not looking at a single number, you're looking at different components. you're looking at okay, what's

cross border activity of large corporations. that's one set of documentation that we would look at. and we are doing operational audits there and look at that and that's our window into that world. the other world is off-shore accounts which as you may be aware we've done a good job. we had 33,000 people that have come in to us in the last 2, 3 year years. do we know the total number t full pie? probably not. but we're on our way doing good distinguish things in both areas. >> i don't want to suggest that we're not moving in the right direction, but i think to the american people that are paying their taxes and doing their best to pay whether it's 5,000 or 3,000 or 10,000, and then when

they see numbers that are -- if it was even tens of billions but it's hundreds of billions not being paid, we need to do a better job. out of fairness to those who are complying with the law and paying their fair share. let me -- one other question before yielding to the ranking member. one of the issues miss olson, you talked about, is in the current system we use electronic collection, especially for the withholding of taxes and we have a mandatory 94% requirement for irs in using electronic collection. can you expound, the way i understood is your suggestion or recommendation is if we use that same approach to estimated tax payments it would not just help the taxpayer but ultimately

generate more collection if we took that approach. >> we were very successful once the irs was given the nudge saying achieve this goal in employment taxes in getting electronic payments which saves the cold front money because you're not processing checks. but it makes it easier for the taxpayer after they get used to it that we should apply that to estimated taxes. i think that in some areas it's hard for taxpayers to save up money to pay estimated taxes quarterly f. they can pay it month lick like other bills and they pay lots of bills through their bank accounts setting up payments. we don't have a good interface. if we could get a nudge from congress that set as goal, the irs has responded well with that and developed a praj, then we would get the different parts to make at good user interface for the taxpayer. >> is it kind of the same

argument on making it clear that volunteer reporting agreements would achieve the same goal. >> yes, they do have an employee like the receptionist so they are in the payroll tax system. the people who are cutting hair are renting booths. they move on and they don't pay their estimated taxes. the salon said if we could enter into an agreement, we're already in the system we'll with hold a percentage and keep them in compliance, we'll have these people stay with us, and we won't have so much upheaval. when we worked with counsel they said we don't have the legal authority to enter into those agreements the way that code section written. >> the irs general counsel. >> yes. >> they need additional -- >> additional statutory authority. so and so this really was a user

friendly taxpayer friendly proposal. >> something that we're glad to look at as a committee in trying to see if we can work to allow that. because i think it sounds like a win-win >> right. >> for the person who has contractors working in their facility, they don't get the turnover, the independent contractors are more -- >> it's not mandatory. it's voluntary. ultimately the taxes are owed are better collected. yield to the ranking member mr. towns for the purpose of questions. >> thank you very much, mr. chairman. let me begin with you, general george. your testimony indicates that the irs has institutional impediments that prevents them from effectively addressing the tax gap. of course you mentioned specifically even when the irs

examines a return often there is no change made to the return and this increases the burden on com client taxpayers. could you elaborate on the irs has incomplete compliance research. and specifically the irs does not know all of the sources of non-compliance so the irs's resources cannot be targeted appropriately. the research which is needed is on the relationship between the taxpayer's burden and compliance. on the impact on customer service, on voluntary compliance. these are various studies, they may have engaged in the past but we don't believe they have done so adequately. additional research is also needed to measure how establishing bench marks and other measures to assess the

effectiveness, whether something is working or isn't working. we know for a fact that when they reach out to a taxpayer by letter, the initial contact normally results in a relatively high response from the taxpayer. that is the taxpayer will either acknowledge that he or she owes the tax and pay it. yet f the irs delays reaching out to the taxpayer and don't have the exact numbers yet, number of weeks or days, we know the response rate declines. so, in a recent report we encouraged the irs to increase the frequency in which they communicate with taxpayers. and the irs to my understanding has declined to do so. again, citing resources.

but that's just one example. in complete compliance strategies, the irs systems that identify returns for examination need improvement to identify potentially noncompliant returns. the collection activity that extends for years has a lower rate of collection for delinquent liabilities. the irs has something called the cue which is a data base in which tax returns for people who owe taxes which aren't handled by revenue officers or any other method in the irs, literally are put in line. that line contains millions of tax returns and keep in mind there is a statute of limitations. on when someone has to comply with their tax obligation. so millions of dollars or potentially and in being lost,

the irs has not addressed these returns, had someone assigned to look at them. but one of the most disconcerting aspects of all of this is that the irs has an incomplete document matching program. so, the irs does not have reliable third party data for taxpayers, for all taxpayer sectors at least, and for all types of tax returns. and most notably income earned by the self employed. i carry this card with me and i cite this at every opportunity i can because this is information that comes from the irs theirs is compelling. actually you heard earlier today there is a very high orallation between tax compliant and reporting. individuals whose wages are subject to withholding report 99% of their wages. self employed individual who is operate non-form businesses are

estimated to report only 68% of their income for tax purposes. but the most striking number is self employed individual who is operate businesses on a cash basis are estimated to report only 19% of their income. so there is no question that if the irs, again it would have to have authority from congress in some of these instances, were able to mandate third party reporting the levels of compliance would go up. astronomically i would argue. >> mr. chairman i need a minute to give mr. miller an opportunity to respond to some of that. >> thank you. >> also mr. white very quickly. >> thank you. there's a whole batch that was wrapped into general george's comments. a few things i'd like to clarify. one, our national research program that comes wake-up the

tax gap is also used on an annual basis to improve our filters. so it has a benefit to us to do these, to improve our selection process. because we have a living process that filters back in the results so we can target better. there is no doubt we can improve. other things i'll mention, the cue in the collection area exists, no question about that. cases go to the cue when they are lower priority than other cases. other cases can be a higher priority, one, because we think they are better dollar cases or two, we don't have the resources to reach them at this point. we're doing a better job of selecting cases for collection. it's not first in, first out. it is based on the attributes of the given case. >> thanks. >> let me ask you quickly.

i appreciate your generosity. anybody ever estimated or looked at the fact that you indicate you have 35,000 employees who detect identity theft. what would happen if the you had 55 or 45, i mean, would your resources increase? i'm not sure that not having more stf is an economical way to go. >> i would agree with you. i think that nina said and other at this table said we believe the irs is a pretty good investment and that we are in essence the people who bring in $2.4 trillion and in the upper 90 percentile that comes into the government on an annual basis. as we pull people and we have pulled many to work on identity theft, as we had to and should,

that does impact other programs. >> 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 doing a lot of surveys of taxpayers. it will be interesting what we find out. this is a constantly developing area. i have been critical of the irs collection strategy and use of automation and failure to pick up the phone and talk to taxpayers. i think you can really get resolution but the notice stream where we send out notices early in the process is very effective. but what that leaves us with are those taxpayers who are not going to willingly come forward and need a little nudging. it's how you do the nudging.

the main point i want to talk about is the comment about our incomplete document matching. we have been given significant tools. you repealed a provision that would have given more information about the purchases that businesses made but the upshot and we really criticized the provision because it imposed so much burden on the businesses who were going to have to do the reporting. i think that's the grade-off. in a self employed area the information on the self employed is to get the householder to report on the person who is cutting their grass every week. and you're not going to get that done. that's not something we can impose on those taxpayers. so that's why we have to look at areas of risk and think of alternative strategies. i'm not convinced that information reporting is the end up a be all for this tough area

that we've got. >> just before you answer, also include in whatever your response is getting back to the 30 party reporting. do you think that we're taking advantage of third party reporting and everything else you have to add. >> let me start with a quick example that highlighting the importance of research. i want to follow up on mr. miller's point there. the recently enacted basis reporting requirements for financial transactions, that was based in significant part on research that was done using the compliance data that irs develops to timt the tax gap. that's an example of how you can use that. it's estimated that the first 7 years of that basis reporting proposal will bring in $7 billion.

that's a reduction in the tach. in terms of information reporting, one of the advantages there as i think has been discussed somewhat is that irs can match that information to tax returns rather than having to do an audit. audits are labor intensive, very costly for irs. they are burdensome on taxpayers. this is an alternative to audit processes. the difficulty is in identifying new information reporting sources. there are some that we have raised in recent reports, some additional sources. one is -- >> if i can ask you, if you don't mind, mr. conolly needs to run for a floor statement. if we can kind of come back, let mr. conolly get in and then come back to those examples of additional sources.

okay. >> i thank my colleagues. mr. chairman, i would ask unanimous ask unanimous consent that my overwhelming statement be entered into the record in full. >> without objection, so order. >> i would further request that the president of the national treasury employees union statement prepared for this hearing also be entered into the record. >> without objection. >> i thank the chair. mr. george, you talked about a $hao billion tax cap. >> gross, yes. >> that's this year. >> that's as of 2006. >> 2006 and it's growing. >> i believe it's a lowball figure. it's ab ongoing review. it doesn't include aspects such as the international tax gap. >> do you think there could be some growing relation between the gap and a reduction since 1995 in revenue offices from revenue agencies.

>> there's no question if the i had additional resources they would be able to collect additional tax receipts. >> just for the sake of argument, $450 billion in money owed the government we're not collecting, that's what the tax cap is, correct? >> roughly, i mean -- >> times ten is $4.5 trillion? here we are sweating can we go big at $4 trillion. sweating a sequestration that would be $1.2 trillion. this would be a big dent in the debt if we simply put the resources into irs to collect the money that's owed. over and above that. this could be this subcommittee led by my colleagues has done a lot of work on the issue of improper payments. mr. miller i think you were covering that in your testimony. what's the estimated of annual

improper payments? mistakes get made. refunds get set to people who really didn't qualify for them or the amounts are wrong. what's the estimated annual improper payment for the irs? >> just to give two examples -- >> is there a global figure? what's the comparable figure for annual improper payments? >> let me respond by saying i can tell you definitively under the child tax credit it's estimated at $2 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 that it authorizes the payment of the additional child tax credit to people who are not u.s. citizens and who don't have -- >> we're trying to deal with global numbers here. it would be useful to have a number.

the total amount estimated is $125 billion a year. >> then of course, the earned income tax credit it's estimated about $13 billion a year. no, i do not have a global number for it. >> our tax cap numbers say that tax credits as part of the under reporting gap are about $28 billion of that $450 or 6% of the gross tax gap. >> okay. >> 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 cap which includes all sorts of different people. >> i'm making that distinction and trying to get the number for the former. >> i don't have that number. we can come back with that. >> if you set a goal of zero, understanding that's probably an impossible task, backing into that, what would be required? what would be required to close

that $450 billion gap and to better get a handle on the improper payments. we're making incredible and sometimes egregious policy decisions that are going to do real damage to the united states of america. we're cutting back on investments that are very important if we're going to stay competitive. here 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. what's clear from your testimony is for every dollar we invest in irs especially in terms of compliance, we have a big return. without pain and suffering. 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 you a question, mr. miller. oops. if i may mr. chairman, i promise -- you talked about offshore tax havens, is that correct? >> yes, sir. >> that's kind of something every ordinary every american taxpayer has, right? >> i hope not, actually. well, what percentage of tax filers have shauf joer accounts? >> so we know the ones, i don't have the percentage with me. we know the ones who are declaring them either under the fbar rules or under our new rules that call for a check box on the 1040. we'll found that out when the 2011 forms come in. >> that's a legal loophole in the law that somebody can take advantage of. >> it's a permissible act.

we've made inroads on offshore and we have rules that require banks to the 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. according to one study, the percentage of income paid in taxes the top 10% of tax payers has declined from 70 to 40%. if you look at the middle income quinn tile it's increased. that suggests a rather dramatic regression. would you comment? >> i wouldn't be able to comment on that. >> are those numbers accurate? >> i don't know.

i would have to check on those. if you agree the top 1/10 of 1% which used to pay 70% of the percentage 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 service 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 defacto income tax in this country is becoming more regressive not more progressive. the top 1/10 of 1% is paying half of what it used to pay and the middle is paying more? >> the reason why it's difficult to answer that question is that i've just been looking at historical data. it's not clear to me that the

highest income taxpayers are paying less than what they might have done historically. 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 it for the record. >> i'd have toss miss olson, the numbers available to me are quite clear. they're not ambiguous. they declined significantly in terms of the total percentage of total income tax collected by the irs. mr. chairman, i thank you for your indulgence. >> i thank the gentleman and before coming back, i would associate myself with the gentlemen's comments about the need for us to do a better job of making that investment with the revenue officers to get the return on that investment for american tax payers and similar to how 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. i remember there was 86 hours for every dollar spent. glad to work with you on something that makes the case and the advocates numbers presented well what that return on investment is. all right. with that, back to mr. towns, and mr. white, if you wanted to include your references to some examples of additional data collection that would be helpful. >> this would be additional information reporting. two things we recommended in recent reports one is payments for services to cooperations. this is not payments for goods. but this would be purchases of services from contractors, outside contractors who may be incorporated. if you're incorporated, that does not have to be recorded to irs. if you're not incorporated, does have to be recorded to irs. one suggestion per additional information reporting there