screeria -- nigeria. - anthony

foxx. and a discussion about u.s.-cuban relations at the heritage foundation. the irs has asked congress to provide $12.9 billion for funding in 2016. 18% more than the current fiscal year. irs commissioner john kostka testified.

the senate finance committee is chaired by utah republican orrin hatch. this is just over two hours. >> welcome to the irs john cost koskinen koskinen. also fiscal year 2016 budget proposal. commissioner costkoskinen. more than 152 years ago the finance committee received a letter from george butwell who president lincoln had apointed as the first commissioner of the international revenue. the letter came in response to an inquiry from the committee seeking information about the commissioner's organization, his budget and the activities of his office. does that sound familiar? in his letter, dated january 21st 1863 commissioner bodwell tried to answer the committee's

questions by starting by first asking congress for more money. specifically he wroelt, quote before proceeding to estimate the expenses of assessing and collecting the revenue i desire to express the opinion that an increase in the pay of assessors is very important if not absolute necessary unquote. now, that part does sound familiar to me. as you and i continue this historic and important relationship, i hope we can begin the 114th congress on new footing. the issues before us are too great for that relationship to be anything but open, honest and productive. we will certainly disagree a lot on your agency's implementation of obamacare, on the application of premium tax credits the federal exchanges and on irs spending, just to name a few issues. sometimes the relationship will be contentious. sometimes it will be congenial. i hope more of the latter than the former but that will depend a lot on you. and maybe a little bit on us, too. when we look at the irs's

operations, there are a handful of basic principles the agency must follow in order to maintain its working relationship with this committee. today i'm going to talk about three of those principles. first, the irs must spend taxpayer dollars wisely. because the agency that collects taxes from american workers and businesses, your agency will continue to be under a special scrutiny when it comes to how it spends the money congress appropriates. and unfortunately, the irs's operations do not appear to be able to withstand such scrutiny at this time. when you reverse the positions of your predecessors to employees who have not paid their taxes, when your agency throws lavish conferences and when you spend tens of millions of dollars on public sector union activity, the public loses faith in your ability to spend your money wisely. now, some of that wasn't your fault. when your agency faced tens of billions of dollars in improper payments every year, when the

irs owes refund checks to a single address and when a quarter of all tax credit payments are improper the public loses faith in the irs's ability to protect tax dollars carefully. secondly, the irs must treat taxpayers fairly and respect their rights. recent scandals have given americans reason to doubt that the irs will treat them fairly. while the targeting of applicants for tax-exempt status may have happened before your tenure taxpayers must have confidence that those days are over. now, just before mr. koskinen you became commissioner, limit the ability of welfare organizations to engage in speech about matters of public importance. after an outcry from all sides of the political spectrum the proposed regulation was withdrawn. but now i hear you have a plan to reissue it.

i think this would be a mistake, and i hope you don't go down that path of trying to limit political speech. that would only further put your agency in needless critical debate and controversy. third, and finally the irs must be open and honest with this committee. we must have a mutual trust between us. i believe you to be an honest man. and when you tell me something i take you at your word. but it's because of this trust that i am concerned about a recent development in the committee's investigation of political targeting at the irs. last july, your agency told the committee that had completed its production of documents regarding lois lerner. the central figure in the investigation. and late last month this committee worked to finalize its investigative report, your agency delivered 86000 pages of new documents including 30,000 pages of new lois lerner documents including new e-mails.

30,000 pages of new documents e-mails, boxes that i have here about one-tenth of those. just in this pile that i can't even lift. i might be able to if i stand up. but i have about one-tenth of those. these documents are central and relevant to the committee's investigation, they were given to us without notice or explanation roughly 20 months after we made our initial document request and really after we thought we were going to be able to, senator wyden and i were going to be able to have a final report. this prolongs the committee's investigation and raises more questions that it answers. we will be following up on this matter more after today's hearing. now, commissioner koskinen, we are here today to discuss your agency's operations and the president's budget proposal. there is much to discuss on these two topics, and i look forward to hearing your

testimony and answers. in your opening remarks i'd appreciate it if you took the time to address three specific concerns that i have. first i'd like to hear what the irs planned to do -- plans to do to address the consistency consistently high levels of fraud and overpayments to the unearned income tax credit. second i'd like to hear what specific changes you plan to make in the agency's spending habits to deal with the budgetary shortfalls you publicly decried. third, i'd like to hear about any contingency plans you have in place in case the supreme court invalidated the current structure of the affordable care act tax subsidyies later this year. i hope that today can mark the beginning of a new chapter in the long historic relationship between the irs and senate finance committee. i hope there's a good chapter, but once again that is audibly up to you, it seems to me. let me just say that, you know, this is one-tenth of what we're talking about. this is a huge number of

documents. and you can see one reason why i'm a little bit concerned and maybe a little bit upset as well. senator wyden, i turn to you for your opening statement. >> thank you very much. and mr. koskinen, i share chairman hatch's concern about bringing our bipartisan inquiry to a halt. and to get that done to complete it in a thoughtful and a bipartisan way we're going to need these documents. as the chairman noted, we thaurt thought they were going to get some and we're going to need them quickly. whenever i talk with oregonians in meetings or town halls, the conversation always comes down to the same core issue, the struggling middle class. years after economists first said that the recession officially ended, too many middle-class americans feel like they're standing on quicksand because the recovery has yet to reach them. so the challenge facing policymakers is putting

america's middle class on solid economic ground. growing their paychecks and ensuring that our recovery reaches everyone across america. that challenge is going to be top of mind at each of the three hearings colleagues that we hold this week. tomorrow and thursday, the committee will talk with hhs secretary burrwell about the administration's plans to save americans' money on health care, create jobs increase wages and invest in the middle class. today the committee has an opportunity to discuss the status of america's accounting department. the internal revenue service with the commissioner, john koskinen. with w-2 forms in the mail and the tax season beginning, our country's annual headache is now setting in. and i want to emphasize that today taxpayers reside in two separate worlds. in one world a middle-class

office employee pays taxes directly out of her wages and she is subjected every spring to the painstaking process of filing returns. colleagues for that office worker there are no complicated tax avoidance strategies at her disposal. she doesn't have any shelters. she doesn't have any vehicles for her to hide her income. meanwhile, in the other tax world, teams of accountants go out to pry open loopholes that are hidden in the tax code, and the line between right and wrong is murky at best. the inherent unfairness of america's tax system is a blow that falls hardest on the middle class. and it takes a number of forms. the most obvious is that every year families spend more time and money filling out their taxes. people are worried about compiling all their records completing all the forms, and

then filing them correctly. unfortunately, the tax code itself hasn't gotten any simpler, and the lack of resources that the irs has slowed service in a number of instances to a crawl. nina olsen who is the independent irs taxpayer advocate calls -- and i quote here -- that this is the most serious problem facing taxpayers. when americans call into irs help lines they often sit in long queues listening to hold music. protections against identity theft are delayed. taxpayers are worried they might be victims of scams can't end up getting the timely assistance that they need. families that depend on a refund help cover the mortgage or tuition get left waiting. now, there's a second issue to consider today. according to the internal revenue service, nearly $400 billion in taxes go unpaid each year. that's the tax gap.

one of its biggest causes is the dishonesty of tax cheats and scammers who avoid paying what they owe. and it's important to reflect on who gets the short stick as a result. it's the middle-class age earner once again whose taxes come straight out of their paycheck. honest taxpayers have to make up the difference when the laws dodge their responsibilities, and that's wrong. but until congress simplifies and restores fairness to the broken tax code, multinationals and those with high-priced accountants can continue to find loophole loopholes. there is no question that the irs can make better use of the resources it has. that is true for every federal agency, every private business, and the congress itself. and it has been acknowledged by commissioner koskinen and his predecessor. meanwhile, policymakers can't lose sight of the biggest challenge today, which is putting our middle class on solid economic ground. they're going to be many more

opportunities for this committee to work on a bipartisan basis with the commissioner and the irs to make the system work better for middle-class families including through comprehensive tax reform. ultimate goal ought to be fairness. and as i wrap up i want to come back to the fact that taxpayers shouldn't be divided into two worlds. and one of those today carries a much heavier burden than the other. commissioner, we look forward to working with you and our colleagues to make that a reality, and i thank you mr. chairman. >> well thank you senator. commissioner koskinen has been serving as the head of the irs since december 2013. he has broad public sector experience including having chaired chaired freddie mac and deputy director for management of the office of management of budget. three really difficult and trying positions.

mr. koskinen also has extensive private sector experience including working as the president of the united states soccer foundation, and is the president and ceo of palmeri company. he graduated with a j.d. from the university of law and a b.a. in physics from duke university. we want to thank you, mr. commissioner, for being here today and please begin with your statement. >> senator hatch, ranking member wyden and members of the committee, thank you for the opportunity to discuss operations. we at the irs value our working relationship with this committee, with the chairman and the ranking members and look forward to a productive dialogue and constructive working relationship over the next two years of this congress. first of all, i'm pleased to report that the 2015 tax filing season opened on schedule on january 20th and is going well

so far. we've accepted more than 16 million tax returns and we've started issuing refunds. and in fact to show you how much people care about the refunds, we've accepted 16 million returns and already had 80 hits on where's my refund app on the website. opening the current filing season on schedule was a major accomplishment, given the challenges we faced. this achievement is a direct result of the dedication commitment and expertise of the irs work force. along with normal filing season preparations, there were significant challenges and extra work to get ready for the tax changes related to the affordable care act and the foreign account tax compliance act. we also had to update our systems to reflect the tax extender legislation passed in december. despite this success, i remain deeply concerned about the agency's ability to continue to deliver on its mission in light of significant reductions in our budget. just a month ago the agency's fiscal 2015 budget was set at

$10.9 billion. $346 million less than 2014 and really an amount $600 million less than last year when another $250 million in mandated costs and inflation that we must absorb are counted. plus, that's on top of a $600 million cut the irs had already taken as a result of governmentwide sequestration in 2013. the irs is the only major agency that was not subsequently restored to the pre-sequester level. these funding cuts are so significant that efficiency alone cannot make up the difference. we continue to find efficiencies where we can and are presently saving $200 million a year as a result of significantly reduced office space, printing and mailing and use of contractors. but we've reached the point of having to make very critical performance tradeoffs. in allocating our limited resources for 2015, we tried to

attempt to do another. rather than going into greater detail about this, let me respond quickly to the points the chairman raised. first with regard to the earned income tax credit, we are concerned about the high level of improper payments and the volume. the agency has been working for over ten years struggling with this challenge. and as i've testified before this committee before we are asking congress to give us additional tools to deal with the problem. they would include legislation to provide us with w-2s earlier. we should be able to get them at the same time employees do so that we could match and find fraud and improper payments earlier. if we had correctible error authority, we could correct errors and returns, particularly eitc returns. but the only way we can correct them now is by doing an audit. and finally if we had the ability to require minimum standards of tax preparers, over half of the eitc returns are prepared by preparers, the vast majority of whom do a great job.

a reasonable number are stymied by the complications of the act and a small number of preparers are actually crooks. who take advantage of taxpayers and seize all or portions of their refunds. this committee and senator wyden have a bill that would restore our ability to require minimum standards for tax preparers just the way there are minimum standards for everybody from hairdressers to others who provide public services. we've taken actions wherever we can. the famous convention that was held inadvisedly five years ago no longer could be held for training or conferences has to be signed off personally by me and reviewed and signed off by the treasury department. so i am confident that those situations are not going to arise again. with regard to the foreign investigation, we represented to you last spring that we had completed the production of documents related to the determination process.

since then we have provided hundreds of thousands of pages of additional documents requested by anyone of the six various investigations going on. the documents you have received are not more documents about the determination process. they are documents that have been requested by different committees particularly in the house, or more information about other peripheral players in the program, other detailed documents with regard to e-mails from those participants. all of those are responsive to requests we've had which none of them have anything to do with the determination process, but we've been pleased to provide them in an attempt to answer any question that anybody has in request for documents on any matter. our cover letter i thought explained where these documents came from. they are not, in fact, inconsistent with the earlier representations we've made. my time is running out. i will be happy to answer questions about the president's budget for 2016 which would go a significant way toward restoring

our ability. if i had a little additional time, that would be very helpful. i would then -- other point you raised with regard to our payment of performance awards to those who are delinquent in their taxes first of all, i would like the record to note the irs has the highest compliance rate of any agency in government including the congress. over 99% of our employees are compliant with their taxes. and that's because they take it seriously. it's an important responsibility for anybody who works for the internal revenue service to be current on their taxes. those who are not compliant include those who are making installment payments, who are working toward compliance, but it is clear and it's clear to our employees that if you willfully do not pay your taxes not only are you ineligible anymore for an award, you're subject to disciplinary action including in cases, severance from the service, and we do that on a regular basis.

so i am confident that performance awards are only going to go to those who are eligible for them. let me talk just a minute about the president's fiscal year 2016 budget, which total -- the request totals $12.9 billion, and it's consistent with recommendations the president has made over the last several years. the level of funding would provide substantial support for our mission and help the agency move ahead in a number of critical areas. for example, we'd be able to raise our phone service level to nearly 80% and significantly reduce the inventory of taxpayer correspondence. with respect to information technology, we'd be able to properly maintain our current i.t. infrastructure, the funds would also help us work toward our goal of providing taxpayers with the same experience dealing with the irs online as they now have with their financial institutions. on the enforcement side, the president's budget proposal would allow us to reverse the

decline in individual audit coverage and increase document matching programs which are critical to ensuring high rates of voluntary tax compliance. we'd also be able to expand programs to prevent refund fraud related to identity theft and to improve international tax compliance. using the resources provided by the president, we estimate -- our efforts to improve enforcement will generate $60 billion in additional revenue over the next ten years at a cost of $19 billion, thereby reducing the deficit by $41 billion. we'll also use a portion of the funding request to continue implementing legislative mandates including the affordable care act, the foreign account tax compliance act, and the newly passed abel act. as i noted in my complete testimony, i didn't -- the irony did not escape me that we were assigned new responsibilities under the new abel act and to pay for it which is a program for professional employee organizations in the same bill that cut our budget by $350

million. i want to stress though, that we are required to implement these laws. so if we don't receive necessary funding, we will have to finance to take funds from taxpayer service enforcement or i.t. that's because we believe that we have an obligation to enforce and implement statutory mandates, and we will do that with the abel act and with the professional employees act. along with providing the irs with adequate funding, congress can also help improve tax administration by enacting several proposals in the administration's 2016 budget request which includes proposals i mentioned earlier with regard to earlier provision to the irs of third-party information returns such as w-2s which would allow us to match the documents and also if we could make correctible errors without having to audit returns, we would become much more efficient in terms of stopping improper payments. that concludes my statement.

i appreciate the additional time and i'd be happy to take your questions. >> thank you, mr. koskinen. your fiscal year 2015 budget is about 3% lower than your fiscal year 2014 budget, which has been decreasing since the high watermark of 2010. now, we may disagree about how best to spend taxpayer dollars, but we will stipulate the fact that your agency has been forced to observe budget cuts. now, you will see on the chart behind me -- where is that chart -- right there your budget fluctuations look a little less dramatic when we don't use 2010 as the baseline. i have another chart that i think reveals the true problem. it isn't irs's budget. it's an ever-growing set of tax laws, an ever-increasing number of federal programs the irs is charged with administrateing. well, that's our fault as i view it. instead of only focusing on spending more money we should instead focus on what is driving

that need for bigger budgets and that's the growing complexity of the tax code. the length of the tax laws have more than tripled since 1975. american families and businesses spend an edd 6.1 billion hours with a "b" simply complying with the tax laws. we should not blame you for this. congress is the one that keeps adding to your growing responsibilities. and congress enacted the design and bureaucratically unmanageable known as obamacare, or should we use the other term, quote, affordable care act enquote. congress enacted a labyrinth of new rules. i hope you can recognize that there are two sides to this coin, the amount of money that congress gives you to do your

work, and the amount of work that congress gives you to do. i would love to hear you talk about the latter and not just the former. i want to hear your thoughts about the growing number of programs and policies your agency is tasked with, that you have to administer. we work with the committee on ways we can reduce the burdens of task compliance and streamline the number of growing responsibilities placed on your agency. >> i appreciate that. as i've told our employees, as i visited offices around the country, i've now talked with over 13,000 irs employees. in many ways even with the background noise and challenges the agency faces in some charges, it's instructive that as you note, mr. chairman, the irs continues to be asked to implement new programs. and to some extent that's because there's some confidence that if you give the program to the internal revenue service it

will get done. and it is a can-do agency. and as i noted, we're committed to implementing whatever congress provides. but you are correct, that the tax code has gotten to be extremely unwieldy. and i always preface any remarks i make by saying the tax policy is the domain of the treasury department, the white house and the congress. we are in the tax administration business. you tell us what the tax laws are, and we'll do our best to administer them. having said that as i've also i think, made clear to you in our meetings and also publicly i am a great believer in tax simplification for the very reasons you mentioned. if we could simplify the tax code, it would -- the most important basis make life simpler for taxpayers. it would be easier to determine how much they owe and how to pay it. our experience is most taxpayers want to do the right thing, want to be compliant. they are spending 6 billion hours simply trying to determine what the right amount of tax is to be paid. to the extent we could simplify the code, it would make their lives simpler and it would

clearly make our lives simpler. so the two things we look at as you say, beyond where we are in terms of budget cuts, the tax code were simpler it would allow us to function more efficiently with the resources we have without adding back. the other thing i would emphasize that i mentioned in my testimony is we feel strongly that we need to look to where do we want to be in three to five years? what should the taxpayer experience be three to five years down the road? and if we had the funding provided in the president's budget, we would continue to build our online capacity ultimately hoping to provide taxpayers with the same online account with us that they have with their banks or their financial institutions. they should be able to come online properly authenticate it, look at previous tax returns, look at the status of their filings. we should be able to immediately communicate back to them when they file without having to write a letter or having them call us and say did you forget this? we have another schedule here that isn't in your return. and they should simply be able

to make that correction without filing an amendment. if that happened, we could obviously run much more efficiently and effectively. the people who called us would be people who needed to get specific information, not people calling as a regular matter of course. so i think on both counts, if we could actually build toward a better taxpayer experience from our standpoint if we had a simpler tax code taxpayers would have a much easier time determining what they owe in filing, and we would have a much easier time and a more efficient time running the tax administration. >> well, thank you. we're going to try and do that. it's going to be difficult with this congress but we'll do the best we can. senator wyden. >> thank you, chairman. let's talk about the middle class. senator cardin and i, we are going after these unscrupulous tax preparers, and the combination of that and nina olsen's comment about the shrinking resources you have to go after tax cheats and those

costs often get heaped onto the middle class, what should the middle-class taxpayer expect this filing season? >> as i noted, we're delighted that the filing season three weeks into it has gone smoothly. we encourage people to file electronically. over 85% of people filed electric electronically last year. make sure your return is accurate. if you file an accurate return online, it will be processed quickly. your refund will be processed within 21 days. your filing experience should be a positive one. the difficulties come where people often inadvertently file incorrect returns which cause us to have to write them. he have to write us back. they have to call. and we end up with a significant amount of work for us. and a certain amount of concern on the part of taxpayers. but i would stress overall we expect to process 150 million individual tax returns this year.

we expect that the vast majority of those will go without a problem. over 80% of people on the affordable care act, for instance, will simply check a box and say they have coverage. but most importantly, the vast majority of those people, particularly the 85 a higher percentage of people who file electronically will simply file and that will be it. >> another concern of middle-class families is the growing problem of identity theft. and the internal revenue service is supposed to issue these p.i.n.s, identity protection p.i.n.s to taxpayers who have been the victims of identity theft. but i'm hearing from taxpayers in oregon that many of them have not received these p.i.n.s. and i'm also hearing stories in my state that some victims of identity theft are already being revictimized this filing season as the fraudsters go out and file tax returns with their social security numbers while they wait day after day for the irs to send them these identification p.i.n.s.

i think it would be very helpful if you could tell the committee when americans are going to receive these p.i.n.s and particularly what to do to help these people who otherwise could be victimized again. >> it's important and at the top of our list. we've been fighting refund fraud and identity theft for several years now. with regard to the identity p.i.n.s, we expect to issue about 1.5 million of those. >> when will that happen? >> the p.i.n.s will all be out the end of this week in the mail. our problem has been we're running an antiquated i.t. system. part of the question is why do we spend so much on i.t. the real question is how come we can't spend more. we're running applications we're running when john f. kennedy was president. that's how antiquated it is. we had a problem over the last couple weeks with that part of the system. every year if you have p.i.n., it has to be a new one. it has to be authenticated.

we solved those difficulties, but they're difficulties that shouldn't exist. it should be a straightforward issue. they'll be in the mail before the week is out. >> one last question with respect to the affordable care act. we're starting to get a lot of questions with respect to people filing their tax returns to comply. what are you all doing to inform and assist taxpayers with these requirements? >> we've spent the last nine months trying to spread the word about how the affordable care act was going to operate. we were concerned starting in the spring that anyone who bought a policy through the marketplace was getting an advanced payment paid to the insurance company for their premium to help them with their premium needed to make sure if there was a change in their circumstance, their spouse got a job, they got an increase in pay, their family situation changed, they should go back immediately to the marketplace to correct that information so they wouldn't be surprised during filing season. we have provided a special section on our website devoted totally to the affordable care

act. we have met with tax preparers around the country tax attorneys. we had tax forms with 10,000 preparers last summer who were given -- we had 40 seminars at those gatherings about the affordable care act. we have over 100 youtube videos. we've already had about 800,000 hits on the affordable care act part of the website. if you go -- when you call us while you're waiting to get through, one of the things we put in is an information channel that you can dial into. we'll give you all of the frequently asked questions and answers about the affordable care act. we've been sharing information with all of your offices so when your constituents call, you'll be able to work through, what are the basic question, what are the answers. we have flooded the zone with information. >> my time is up commissioner. i just hope that you all will recognize that taxpayers who received assistance last year, of course, are going to have some questions about the steps to take to comply this year, and i hope there will be a special

effort to reach out to them. thank you. thank you, mr. chairman. >> senator cornyn. >> thank you, mr. commissioner. no doubt you have a daunting responsibility, but american consumers and middle-class families that the ranking member alluded to several times have had to make do with less during the years following the great recession and when middle-class wages have been stagnant. and so the question is why can't the government do more with less? and specifically estimates are that about a quarter of earned income tax credit payments in fiscal year 2013 alone were paid in error. this means that about $15 billion -- $15 billion -- was wrongly paid. but if you spread it over ten years from 2003 to 2013, obviously that is a big number.

it's $150 billion of improper eitc payments. and it appears that the improper payment rate has remained relatively unchanged and the amount of eitc claims has grown despite the efforts that your agency has made. on top of that, as you know, it appears that the improper payment rate for the additional child tax credit is similar to the earned income tax credit, according to the inspector general, at least a quarter of all actc payments for fiscal year 2013 were improperly made with potential improper payments totalling as high as $7.1 billion. so just in one year, 2013, more than $22 billion in improper payments by the internal revenue service. and then there's the issue of -- that i know you're familiar with about the tens of millions of dollars that the agency spends

on union members who perform no work that benefits the taxpayer. it's estimated that 2013 roughly 500,000 hours were spent at a value of roughly $23.5 million. again, these are union members who represent their union in the work force there at the irs that perform zero work that benefits the american taxpayer. and yet there appears to be no real concern about how do you cut down that cost and redirect more of that money to doing the irs's job. so i would just ask you this question. given the amount of money that the irs pays out improperly some $22 billion just in 2013 alone, and given the money spent on nonproductive activity at least in terms of that

benefiting the taxpayer due to the union activity not to mention employee bonuses and the like, how do you think that the american people will feel about just your coming here and asking for more money? it seems to be as the chairman points out an historic -- historically established activity where bureaucrats come in and ask for more money without cleaning up their own house and taking care of their business. it seems to me that if you're coming here asking for more money, we would be more likely motivated to provide more money if in fact, the irs was spending the money that it currently gets to deal with things like these improper payments. >> it's a good point. i would note that we're not asking for more money over history. we're asking for money back that's been taken away. our budget's been cut in

absolute terms a billion $200 million since 2010. as the chairman notes the tax code has gotten more complicated. we have 7 million more taxpayers. we have been charged with implementation of the affordable care act. tax extenders as they go forward. so we are actually doing significantly more with significantly less. there comes a point at which you have to do less with less because you've reached that point. we have, as i said, saved a billion dollars over that five years in efficiencies with less office space fewer contractors, less printing. we have worked very hard, as we've talked on earned income tax credit. part of our problem is we don't have the resource -- we have declining resources to audit in that area. we have 5,000 fewer revenue agents, revenue officers and criminal investigators than we had five years ago. and that's solely because of the decline in expenditures. >> you've asked for roughly 9,000 more -- the president's budget asks for roughly 9,000 more employees for the irs to implement the affordable care

act, correct? >> 9,000 employees would not be able to implement the act. if we got 9,000 back we'd replace some of the 5,000, and we'd replace all of the 3,000 fewer people we have answering phone calls than we had five years ago, the number of phone calls has gone up significantly as can you imagine. with regard to union time, first of all it's part of the bargaining relationship with our union, the way every government agency across the government does. that work benefits taxpayers to the extent that it represents workers, allows them and works with them to ensure that their working conditions are appropriate. we have, in fact, cut those with the union, cut that time that's being spent by over 10% and we continue to work with them to make sure that that time is spent effectively. but we're not the only agency that does that. that's a program that exists every place there's a union across the government. we find that the union is an effective partner with us in terms of trying to improve the operations of the agency.

but i would conclude by saying we have done significantly more with significantly less. but my concern for the last year has been that we're beyond the point of being able to do more with less. we are at a point where we have no choice but to do less with less. >> mr. chairman i would just ask for your help, perhaps. i know representative over in the house that sent a letter to the commissioner in september of 2014 asking him specifically to respond to some questions about the union activity at the irs and its alleged benefit to taxpayers. and there has been no response. that's been since 20 -- september 2014. so if we could get an answer to that letter and some of those questions, it would be very helpful to our understanding of what you're talking about. >> i would be delighted. i'm not aware of that letter. my operating assumption is the chairman knows my commitment was that i read every letter i get and we try to respond as quickly as we can and no later than a

month later. >> let's have him re-send the letter directly to him. >> in fact i met with congressman a couple times. we have what i think is a good working relationship. i am very surprised to find out there's a letter that hasn't been answered for that period of time because that's not our present mode of operation. >> let's have it resubmitted. >> and i would note the chairman sent me two different letters and i hope to have an answer to those letters in the next few days. >> that would be great. senator cardin. >> thank you mr. chairman. mr. commissioner, i want to thank you. this is a tough job. and you continue to serve your country in this capacity and i thank you very much for your willingness. you're the right person. i wish you had more support. it seems to me there's two things that this committee the senate and particularly this committee should be doing. first, we should look at our tax code and make it simpler and

more predictable. and i know the chairman and ranking member are working to see that we can't find common ground in that regard. and that would certainly help a great deal. if we gave more confidence to the tax code, i think taxpayers would be -- would appreciate that and make your job a lot easier. the second thing is that this committee particularly should be an advocate for you having the resources you need in order to carry out the mission. i remember -- i guess it's now been a decade ago working when i was in the house of representatives with then congressman portman following up on the study that was done at the irs at the time. and it was the ways and means committee and senate finance committee that said to the appropriators, you had to have the resources to modernize. and it lasted about one year before the cuts came back. so this committee should be your advocate for adequate resources. instead, as you pointed out you have sustained real cuts while

your commissions have increased dramatically. and we want to have tax compliance in all sections. this and senator cornyn's concerns about the earned income tax credit. the earned income tax credit is an extremely important provision in our tax code that offers fairness for middle-income working families. yes, we want to make sure it's complied with. and senator wyden and i are going after and hope to give you the authority to go after paid tax preparers who are not doing the right thing in that regard. we want to give you those tools. but it's interesting. i don't hear the same strength on behalf of compliance with the high-income provisions that senator wyden mentioned in his opening comment that are available to high-income people. in some cases over 50% of business income is not being reported.

so how do you decide with these limited resources how you're going to be able to get tax compliance when it's complicated and you're going against particularly on the business side or high income side individuals who have tremendous resources to try to minimize their tax liability. how do you make those judgments? i would just urge you to spend more effort dealing with those who have sophisticated services that are not paying their fair share of taxes. >> it is the challenge we have. ultimately, we're all concerned in the compliance rate to make sure we collect $3 trillion a year. my concern is if the compliance rate drops by 1%, it costs the government $30 billion a year. the two sides of the compliance code are enforcement and taxpayer service. and our challenge is our budget is cut is try to make sure that we maintain as much effort in all of those areas as we can. but even in the area of

auditing, you know, we cannot take one area of the tax-paying public and say we're not going to bother with you because there are other people who have more revenues. because if you look at where the revenues come from, they come from across the spectrum. so our challenge is to continue in our exam plans, in our audit plans to try to maximize the enforcement activities of the agency. but as i noted, we have 5,000 people -- fewer people doing that now. so inevitably, our audit rates are going down. and our concern about that is that at some point that's going to affect the overall compliance rate. >> i would just make the point that if you had the additional resources, we would not only get better compliance which is our responsibility to make sure we have compliance, we'd get greater revenue which would help those taxpayers who are paying their taxes, would get the relief so they're not overtaxed while people are not paying their fair share. so it seems to me what this congress has done in cutting

their budgets makes no sense and i'm disappointed this committee hasn't been a stronger advocate on your behalf and the agency's behalf. one last point i would make on implementing at fordable care act and the provisions and this tax season booz allen which has a large presence in my state has given high marks to the program you're using in regards to the refundable tax credit. what reactions are you receiving as you have tried to implement this as to the tools available to irs to try to make the tax season as friendly as possible? >> thus far we've had no significant challenges although i would stress that we are at the front end of the return process. we expect the month of february we'll see a significant increase in the volume of returns. one of the best things we have going for us is that 91% of the tax-paying public uses software either with a paid preparer or they buy the software. and we work with software providers so the software will

take people through the application of the affordable care act in whatever way it applies to the taxpayer whether it's simply showing coverage applying for an exemption, or reconciling the advanced payment they've gotten. again, as i've noted, we have calculators our website that will allow people to make determinations that need to be made. and thus far we've had positive responses. but i would stress we're at the beginning of what's going to be a very interesting filing season. >> thank you mr. chairman. senator coates? >> thank you mr. chairman. mr. koskinen, first of all, i want to state what the chairman and vice chairman have stated relative to our unbelievably complex tax code. it has to be addressed. and i know both the chairman and the vice chairman are committed to that process. and i hope all of our colleagues here are committed to that process because it's clearly

having a negative economic impact on us and the complexity of just simply going through the process of paying your taxes every year and the money that is spent and the hours that are spent, we just simply cannot keep pushing this down the road. your response to that is that you would applaud that very act. and i appreciated that. but let me -- and i know you're concerned about the amount of money you have to spend and the burdens that you have. i'd like to just do a -- give you a little bit of what i think might be some quick relief. this is a small ball thing. but senator cardin who just spoke and i are going to be introducing this week legislation that i hope will -- you'll be able to support. it's legislation that addresses

the notification -- it's called the notice act -- legislation that will give charities, the 5c3s and so forth notice if their status is going to expire. a few years ago the law was changed so that applications was not supplied over a period of time that they would be automatically dropped from the qualification of tax exempt status. now, there's a bunch of little -- i mean, there's tens of thousands of small charitable organizations out there that simpley don't have the

back room and lawyers advising them of what they need to do and when they needed to do it. so it sealed to us, you know, a simple fix on this would be simply to provide them sufficient time to notice, hey, your status is going to expire because we have not received your paperwork relative to reporting. what that has resulted in is thousands of hours and tens of millions of dollars to reinstate which poses a significant burden on the irs. so what we're calling for here, let me just give you an example. there's a small women's automobile accident auxiliary in indiana. they wanted to raise $15,000 to

help with the volunteer fire department. and because the leadership changes and because they didn't really have somebody in the back room to give them notice and they didn't have money to hire lawyers and accountants and so forth and so on, they hit the deadline. and they were automatically then denied their tax exempt status. it cost them $10,000 to reinstate a lot of paperwork, months and months of waiting. i think the figures were like 85,000 who have reapplied.

say a h say 90 days out notices go out, whether it's by e-mail or both, warning, take notice of your exempt -- if you didn't file your information report and your tax exempt status is going to expire unless you respond to it, file that. that's just one piece of paper. but it would save, i think thousands of hours and months and months of delay and significant cost to these small charities, if we could do that. we're going to swro deuce that. if you could work with us on

that, we'd appreciate it. >> we had about a million six hundred thousand outstanding tax exempt organizations. it is a big ball to work with when you look at it that way. we were concerned with, before i got here. we streamlined the process for entities they could sitly send us their notice. they hopefully didn't have to spend $10,000. for small organizations, you can streamline the application process. if they're a very small organization, it doesn't make much sense. we're delighted to work with you on this. there are thousands of these organizations out there. the secretary moved, the president changed. and we need to make sure that we streamline the process for any reinstatement necessary.

we're continually trying to streamline the process. >> that's good for going forward. i'm told that the application are retroactive reinstatements. >> we'd be delighted to work together. >> senator? >> thank you, mr. chairman. senators did. let's not forget what this is about. for an income tax credit began as a temporary program with president ford and was made permanent by president carter and expanded dramatically by president reagan has been supported by presidents of both

parties for i believe there is the 40th anniversary this year. we know that they collectively have reduced poverty for 32 million people including 13 million children. we shouldn't forget that as we talk about this. now, we hear of the 23% broad rate -- many call it the fraud rate, others say it's an error rate. findings of fraud were overturned in 40% of cases where a taxpayer was alleged of eitc fraud and then sought the advocate's assistance. we know that people that file for the eitc are less likely to have a strong advocate whom they employ to add to fight for them. we know all of that.

when you take into account those factors, what's the incident of genuine fraud for eitc? how would actual loss of revenue look if underpayments were also counted? they're part of that 23 ppt, is my understanding. >> it's a complicated issue. that's why it's called the improper payment. it's derived to some extent where children are resident who have authority over them so that they are inadvertent errors made by taxpayers filing on their own without a lot of background. as i've noeted, one other reason we support the provision to have tax prepares to have some minimal understanding of the law because over 50% of those filing for eitc rely upon preparers.

as you know, they are lower income or middle income families who rely on somebody in the neighborhood. and our hope is that somebody in the neighborhood ought to be able to file a correct return for them as we go forward. it would help significantly. also, in some cases we know that there's been an error. we ought to be able to correct that rather than making payment or holding the payment and having to go audit which is now the only way to make that change. the taxpayer can still come in and say wait a minute, i really do have three children. we'd simply be able to get at the heart of the range of the improper payments. the overall issue is that even within this, we have this duality.

we'll probably never get it down to zero. notwithstanding all the activity that is the agency has done. i said i want everybody who knows about this, we're going to sit down and figure out what would be done with things we need to do to be able to attack this problem going forward. >> i think the comments made with the comments and questions

made that there is so much less attention paid in the halls of congress. it's a peculiar kind of class the worst kind in my mind, the worst kind of class warfare where people who are paying good salaries who get good pensions and health care from the government members of congress spend an awful lot of time attacking a program that has brought literally millions of people out of pocket that has had a long, long, good history of support from presidents across both parties of liberals to conservative spectrum.

>> thank you, mr. chairman. commissioner, welcome. i joined with other members of this committee last year on a letter to you after it was reported by the inspector general for tax administration that more than 1100 employees had been awarded over a million dollars in cash rewards and more than $10,000 in timeoff awards. you made no commitments nor did you set any deadlines. and i know that you've talked a little bit about this already this morning. i just wanted, for the record to get you to speak clearly on this issue. it seems to me that it's awfully

hard to go to the hardworking american taxpayers and ask them to come ply with the tax laws when you have employee ins your own organization that don't comply. can you commit to me that you are going to fix this problem and ensure that that's not going to happen again in the future? >> we have already adopted policies to address the problem. not engaged in installment agreements, who are becoming compliant. but we still count those as compliant. we say if you're going to be counted as compliant, you have to be kumpbt today with your taxes, even if you're kushlt

with an installment greemtagreement, that doesn't count. there are proposals and suggestions. if you willfully d not file your taxes and the irs, not only are you not eligible today for a bonus because we look at performance awards, but as they say under section 12 of 3 of the code, it's grounds if you willfully are not in compliance it's grounds for dismissal. over 99% of the employees are kpliebt. they understand, anybody who signs on to the irs, they understand part of their obligation is to be compliant. we have gs5s. and they're capable of making the same mistakes. not willfully, but inadvertently inadvertently. we count those people as compliant. but they're not people who are willfully trying to cut corners

or not pay their taxes. so our policy is in place. and it includes issues of about other disciplinary actions. we've firmly and totally agree that for you to be eligible for a performance award you should be performing. and that includes kplient with your taxes, not willfully avoiding them. and that's a new policy. >> i would just say whether it's willful or not, voluntary or involuntary, just with absolute clarity, without any ambiguity, make it clear. as you know, the agency has a huge trust issue. they are not going to be rewarded in any way if they've got tax compliance issues. it's got to be that crystal kwleer.

in your testimony, you cited the irs decline for insufficient tax enforcement. but there's also in the budget, a request, in your 2016 budget, a request for $490 million and other 2500 employees, ftes, to implement and administer obamacare. now, it's needless to say none of these employees would be necessary if congress chose to mandate in the law. but isn't it time to admit that the increased burden on the irs is from obamacare, not simply lower if you believeding. that's what you're here to talk about. but it strikes me at least, that the resource issue is the result of a shift away from customer service and other core irs functions in for obamacare. >> as i've stated from the start of my tenure it's exactly clear that our responsibleties have

grown. it's not only the implementation of the affordablecare act. it's the implementation of the compliance act, is about to be the imp leaptation of the able act and the related organization responsibleties where we're being asked to start new programs. all of those are resource-intensive. so it is not -- if we did not have any of the statutory mandates we have to itch leapt we would have more resources available for enforcement and taxpayer services, obviously. but i have stated from the start and i agree with you, every time there's a new program that's given to the irs, it is a mandate that we will pay attention to. >> mr. chairman, thank you. and, commissioner, thank you for being here today and spending time with us.

mr. chairman, if i would e could request that we get a copy of the agency policy on this issue so we can take a look at it, i would appreciate it. taxpayers this year are likely to receive the worst level of taxpayer services since at least 23001 when the irs imp leapted its current performance measures. i guess i want to ask you if this is a fair assessment. >> all right. i'm not an expert of what 2001 looked like. but it clearly is going to be a difficult filing season. and the service is going to be, if not miserable, abysmal. whatever it is, it will be a level of service that none of us believe taxpayers deserve chlts.

>> so miserable is a word that you guys use quite a bit. now, you said mult parking light times during your hearings, that you're doing significantly more with significantly less. can you quantify significantliless? what are you talking about necessary budget cuts? what's the dollar amount of percentage that we're talking about. >> of the budget cut? >> it's been cut at $200 million. at the same time -- >> what percentage is that? >> that's 10 or 12%. >> so we would argue to the american taxpayer family that also has to deal significantly more with significantly less, that perhaps if they should, perhaps the irs should, also? >> we are doing significantly more with significantly less.

it's just discussed we've got no choice but to itch leapt. as i noted it's ironic in the bill that cuts our budget we were given to new initiatives. it's not a question of doing the same amount of work with less money. we were doing significantly more work. >> and i would argue that the average taxpayer is out there doing the same thing. the chairman of ways and means introduced legislation that would bar the irs, i believe it's called stop tar getting political belief of the irs act that would bar the irs from changing the guidelines for tax exempt 401 c-4 groups until the end of 2017. i think the irs is expected to reissue new rules. could you be more specific as to when those new rules would come about? >> we don't have a time line for

those. >> one of the inspector general's recommendations when he termed the proper criteria for organizations applying for tax exempt status said that we should review and clarify what the facts and circumstances would be that would determine how much political activity was allowable. the first proposal before i started managed to sort of aggravate people across the entire spectrum and general rated 1 6 0,rate ed 160,000 comments. our goal is to make sure that we end up with a standard that's clear, much clearer than the present standard, fair to everybody. we're looking at which organization it should apply to and easy to administer.

>> they ought to have a much clearer of facts and circumstances standard. nobody's going to second guess them and suddenly say they're no longer tax exempt because they've exceeded some vague hard-to-understand terminology. >> i want to go back to nina nina olson's report. i was disturbed in that report that in assessing the irs, it lacked resource allocation. 13e6kly, the agency has said it would not answer complex tax laws. on the phone or at walk-in centers further, after tax season, emt ploy years are being told not to answer any tax law

question despite the fact that 15 taxpayer will receive filing status. >> it's a significant challenge and one that we're concerned about. the decision was made last year that if we continue to answer, by definition if queue would get longer. the people who care most about that are the employees. the answer i gave them was if you take longer to answer a complicated call, the number of people in line gets longer. the waiting time gets longer.

trying to minimize the inconvenience to taxpayers as much as we can. >> is that significantly more or significantly less from expectations to the taxpayers. >> i think the taxpayers have a right to expect that they can call the irs get on the phone within 2-to-5 minutes and get their questions answered satisfactory so that they can file. >> and this sounds significantly less. >> it's not significantly less. what's happening now is we have significantly less resource and our service is significantly less. >> we're doing more. we're answering more calls than we've answered before with our people. but, because of the fact that there are even more calls, the demand is up. the level of service is down. and that's zimply because we don't have enough people. it's not because they're not dedicated. it's not because they don't care. they care substantially about it. >> and i'm not arguing that point. commissioner, thank you. mr. chairman, thank you.

much has been made about the three percent reduction in resources. your employees started targeting pro-life groups. members are mostly hard-working every day americans who decided to sitly exercise their first amendment rights. and in response, what some have perceived as a coordinated effort between the irs and liberal groups aimed at targeting these americans and their groups in an election year, we saw an absolute chilling effect on certain types of, supposedly, free speech. i want you to understand and know that the actions of the irs hurt my constituents.

and my first question is has the irs stopped targeting churches and religious organizations with oppressive and intrusive interference with their operations. >> i've said from the start tonight, those were mistakes that have been made and should be never made again. i said we're committed to ensuring that taxpayers are confident where ever they deal with us, that they're going to get treated fairly no matter who they are, no matter who they voted for in any election in the past. we need to be able to do that because it's critical for the fairness of the system. i am as troubled as anybody else is by the events that took place in 2010.

>> people externally and internally would have a better idea of what's permissible, what counts and what doesn't count. >> i appreciate your answer. certainly, i am hopeful that we're moving in the right direction. i certainly have a letter rep zebted with 41 different conservative groups. all but five have seched their tax exempt status. one of the questions that you all face at the agency

commissioner, congress gives you hundreds of millions of dollars to modernize your i.t. system. you told the committee that the irs is operating with antiquated systems and still has applications that were running.