the issue of the federal of it. the hub is the place where data from five different agencies come together in order they tell the states whether someone in that state applying should get the federal subsidy. it is a complex information technology restaurant. the issues arising have to do the privacy issues. not know, thiso is a place where irs data has to come together. data from the department of homeland security on your immigration status is together. the department of justice under .riminal history incarcerated people for instance can i get a subsidy. hhs and social security for enrollment and other entitlement programs. -- in car city people, for

instance, cannot get a subsidy. people, forted instance, cannot get a subsidy. hhs and social security for enrollment and other entitlement programs. want to determine whether you are eligible or not for the subsidy. this is a fairly complex issue. , oh my god,earing this is a terrible danger to americans by the seat because the amount of information. maybe bruce, we can start with you? how valid you think that critique is? the perspective i would this debate illustrates, there are a lot of unanswered questions.

the policies around how this info will be handled is now being formulated. take for example, will the consumer able to view their furl -- their full information? our understanding is no, that is not the case. the business process began with presenting the consumer with information that is available from that source and allowing the information to drive how they apply for eligibility. there is plan b or plan c to redesign the business process. probably has an impact on the website, workflow. i applaud the simplified application. really came at the

11th hour. andoperational impact technology impacts and the lack of clarity on these rules keeps integrator and the vendors -- -- all this be a summer real potential for violation of american privacy? will this be subject to all sorts of funny business? can we build it securely and now? >> the answer is a straightforward yes. we can. the government has in its possession large volumes of data about individuals. the problem that has come up with the irs is not one of violation of secrecy or privacy. that is not the issue involved. it is the alleged misjudgment by a number of middle level irs

officials in administering a law. the idea that because the irs onehave improperly handled particular piece of legislation does not mean that it is it attentional malefactor and administration of healthcare policy. all of our checks for social security. .t is an administrative agency it is involved in the implementation of a particular piece of legislation. attention has to be paid to safeguards. mistake sick.us -- mistakes. i think sheila really put her finger on the critical question.

you have an all-out effort. unified government working on behalf of the legislation. in the state of massachusetts, you had bipartisan cooperation in implementing something like the federal legislation. as i mentioned, i am on the district exchange. i can assure you that this effort is in that same spirit. i'm sure this'll happen a number of other states. -- one couldon mention michigan, florida, texas. in those so much places. what i think will end up octoberg is not summit as thejanuary 1, march 1 legislation begins to bite. we will have a royal screw up

another part of the nation. the question will be whether our lyrical system is able to focus on the fact that this program can and will work in some places and use that, euros -- use those success stories as a template for where this process good eve all. the information system that has taken over certain elements of indication in the united states are able to emphasize the problems that will emerge, the message that will occur. in turn this into a debacle. i think mitch mcconnell was absolutely right. i do not see that there are often, but he is right that healthcare will be the major issue in 2014 campaign. -- i often agree

with henry and i agree with him here as well. i think we will see a variation across the country in terms of the ease of which this is implemented. of thes about medicare time the passage of the medicare part d benefits, one of the the known population. they were in the medicare program. you had a relatively straightforward definition of who was eligible. i think one of the great complexities here for purchases -- purposes at the exchange and your description of the source of information into the exchange transit complexity of you do not know who these people are. we know in the general sense who is uninsured. if you remember trouble nation

-- tribal nation, but fundamentally, we do not know who these people are. we're also dealing dealing with the enormous complexity of language. one of the points that was raised of the form certainly helped. if you're in the state of california and you have got 27 languages that you're dealing largely acrosso the country as well, the ability of individuals to access information, whether they have a steps, all of the challenges and trying to reach out to the population may not have had access to information are double the government. dick success varies enormously across the country. you should this access varies enormously across the country. the success varies enormously across the country.

>> how you deal with the question of who is eligible? >> we take this very seriously. there's a lot of attention being paid to that issue. we take it very souci. -- it very seriously. i was at a meeting with a foundation that wants to help us with our outrage. one of the foundation representatives -- with our outreach. one of the foundation representatives was worried because of some the issues that we talked about. the next person said that he was up all night. he was extremely worried. i said, you know, the good news

is that you both cannot be right. i do think either of them appreciated that. it is not a winning answer. [laughter] there are a lot of things. it is complex. there are a lot of different directions it could wind up owing. -- going. we have to be prepared and roll with the punches a little bit. at the same time, a lot of potential benefits. we are trying to keep our eye on that. even where there are risk, we are trying to mitigate them where we can. i can give you an example. we need a decision to change the essential healthcare benefit plan. we realized we had some flexibility and wound up taking a small group when. -- plan.

without that would be the most easiest to transition. -- we thought that would be the most easiest to transition. with luck, we got it right the first time. get past that. in terms of our high risk in the state, we made some decisions to keep it functioning for a while longer to help with easing going into the exchange. [indiscernible] we are trying to make those decisions. we're going to have to see what happens. we will keep a close eye on the enrollment. if our system works as we are hoping it will, we will integrate the exchange enrollment. legal people to answer question -- we will be answer -- able to answer questions well.

that brings me to a question i wanted to ask if the panel. already the hhs has delayed implementation on a couple of levels. the limitation of the shop exchanges for small businesses is delayed by a year. the existing insurance plan stopped taking applicant in february because they ran out of money. for have been criticized giving out waivers to states and companies. what is next? is it possible that hhs will pull back on other requirements? healthcare plans be certified. is it possible that they pull back on that for a year or two? are there other things out there that there could be a

pullback in order to get this rolling and without too much confusion? >> i think most of that has probably happened. i do not think there'll be any major -- the federal government is not launching the employee part of it. i think we made some strategic decisions like that in maryland. . have learned the lingo the must haves, nice to have , that isi had a dollar just a nice to have. the other phrase that comes up a lot is contingency. the contingency of this. i have never really used that word.

if this does not work, what is our contingency? you have maxed out all contingencies. a dependency, in other words. -- i would not anticipate major changes from here. >> bruce? sheila? >> i would agree completely. i would not expect major changes. if anything, i think we are seeing pragmatic thought as to what the implementation challenges will be and how through administrative relief and within the confines of the capabilities as an agency they can offer relief. an example being as soon as friday. a letter was saying to directors outlining five equinix -- techniques that they are encouraging states to take. they call it targeted enrollment strategies to facilitate

medicaid in 2014. one of those techniques is to allow states to implement the use of modified adjusted gross income sooner when systems are ideally ready. that itself introduces complexity. some of the other techniques are quite interesting. for example, using income evidence as eligibility for medicaid. thatng medicaid cards -- people can activate. the emphasis is on the consumer experience. i would not disagree that i do not expect any major changes. on some issues, the question has been asked.

the department has said they do not have the authority on some delays. some interesting questions occur around medicaid. the number of a state is a good it ine of one to approach a different way. are there other approaches? i think there are interesting conversations occurring around eight rich plan. if you're dealing with people who go in and out of the medicaid -- i think there are interesting conversations occurring around the medicaid plan. if you're dealing with people who go in and out of medicaid -- that did manage those individuals and families that are essentially in those kinds of transition periods. i think there's a lot of conversation going on. at the end of the day, a lot of this will be what we find out. how many insurers choose to

participate? what are their rates like? what is the plan the choice? it to the state is going through a similar kind of process. i worked with the state of tennessee as a look at that question to understand what people's interest were in terms of coverage. there's a great desire to have required elements and benefits. have yet to learn from some of those conversations. that may modify decisions going forward. simpleink there's a answer to summarize what people have been saying. all of the deadlines will be met. exchanges will open october 1. enrollment will start then. the plans will begin. people will begin to go in january 1. the other key element of the proposal the plan is going to be

met. the administration has shown very great flexibility. i think the reason is quite simple. , i hope and expect it will, it will be with us for a very long time. for themen be possible to fix things that are not right right now. the thing is to stay alive and get this thing up and running. try to deal with the problems that emerge in the way that you would describe. we still have legislation that are meeting.

i think that is the unknown. that is the unknown. it really will inform us on how this will go forward. >> i want to take some questions from the audience. i would like a quick answer from everyone. , where do youum fall? .> oh my i would fall somewhere between pickups and seizures -- hiccups and seizures. [laughter] >> josh. , but answer for maryland cod

the country at large. i think it will look very different for different parts of the country. >> i agree. audible hiccups. raising eyebrows at a dinner party. [laughter] ok. we have someone with microphones. we're on c-span. have aot talk unless we microphone in front of us. do not talk is till -- until there's a microphone. a woman right here. >> hi. i'm a primary care physician. of --e husband was head in the clinton administration.

my question is something no one has mentioned. the way the small group and individual health insurance sixet has worked is by -- people were excluded. sick people were excluded. it is possible that the company with the best plan will end up with the same people. that could terminate that plan very quickly. i wonder if any preparation of the mean to do the risk adjustment. >> anybody who would like to take that? >> there are several mechanisms to mitigate risk. a couple of them the federal government overseas.

states have some options. we will be running that part of the program. there's flexibility in state law. i think it will be an important issue. whether there is out right gaming of the system, selection is a huge part of the costs. insurers had to pay each other under some of the rules that are being set up. hopefully we will get to the point where it is blow the point where insurers can compete by doing a good job in helping to manage costs. you want tolike your their reward to where get every word for doing the

right thing. hopefully there will be plans. i think we have some very good plans. keeping in -- keeping it relatively stable i think it's is so much better off in the future than where we are now for that kind of gaming to happen. i can't say that nothing will happen, but there are a lot that hangs that make me think it will be less of an incentive to do that. >> bruce? >> we need to go back to the future outlook of the initial implementation of medicare. going back to the balance a budget act of 1987. some of the processes that followed from that, that help create the role of an independent broker and for good reason. that was needed given what was

going on in the early days. how you really look at exchange operations are set up, we think it is critical that the information is presented to consumers and done in a fair and unbiased manner. there is a city that was published in health affairs. was closely parallel to what we expected in the exchange. or to percent those individuals found information -- 40% of those interviewed -- individuals found information hard to understand. inyou look left to right the travel industry to the banking industry and to the commercial insurance industry, the percentage of individuals that new -- needed some form of assistance to make a plan is much greater. theideal is to look at travelocity or expedia

experience. there's a large portion of individuals who have never applied for insurance before. they need partial and unbiased information. decisions, your ability to make be altered by too much information. we want it positive consumer experience. .> the gentleman over here >> thank you. -- howquestion successful have the efforts by republicans in congress to defund it been in terms of impact on the implementation? >> good question. in the press, there is a lot of talk about the affect at the

hub that it was not funded. the secretary sebelius as had to do that out of discretionary funds. what else do know about that? , a senator was quite concerned about moving money out of a prevention fund to fund the resources necessary. what was required by other agencies was quite substantial. no question its has an impact on their ability, the treasury for example, to participate in the required information sharing. they could well have an impact. >> anyone else? --not so much in maryland nine nin

i do not think we know the numbers. more money is needed. a peculiar strategy of governments to try to make byislation fail appropriating a little money it cannot be properly administered. that is the kind of mud eyed approach that is deplorable. >> it is one of the things that i thought was most struck does about your opening comments. that this was-- done in a genetically different way. >> i think it also highlights the remarkable challenge here because of the state federal partnership. the really dependent upon a

federal infrastructure. in this case, you are dependent upon both. they are to be fully funded by their own operations. wouldpectation was it not be federal funds over the long term. the whole question of federal and state responsibility and how that plays out by state will have a tremendous impact. >> state exchanges are supposed to be self funding as well so they are not a burden in the long run. as the federal agencies that are at risk. >> you also have this problem for the state commissioners all have different levels of power. there are some states where they can turn down requests for premium increases. in other states -- they cannot do that. that is why we hear a wide variety of speculation on what

this will do to premiums. in some states, they might actually go as high as 24% and 30%. in other states, they won't increase it or it will be minimum. >> the main story i'm premiums is not the level. it is the diversity of impacts across different classes of insurance purchases. there will be some people who'll see big reductions. there'll be some who will see the increases. the average effect i do not think captures the amount of churning that will occur. >> well put. >> we have seen increases in the number of insurers in maryland in implementation. there's freeing up are getting interested in medicaid. it has a very interesting dynamic. is a lot of discussion about one

group is doing versus another group. part of the theory here is that having a level playing field the company it would create some kind of competition. you can see that happening. not just in maryland, but other places. they are saying but people are doing. seeing what people are doing. >> i think we do not yet no state by state how many insurers will participate. i think that will be a question of what you're looking at in terms of the market. >> this is why it is possible for their to be such productions. the gentleman in the blue. write up here. right up your. here's the microphone. >> hi. quick question.

some people wait until they get sick and then jump on a plan. how can the government convinced these individuals to enroll in plans? i do not think we have a clue. there was an accommodation made in the legislation that allows those under 32 purchase a catastrophic land. it would be less costly. but it will be the calculation that any individual with a costs a penalty and risk and the cost of coverage, age demand will increase costs for young people. essentially there is a compression. again, i think it will be state- by-state in terms of what is available in the exchange and whether or not the young and

invincible find a better use of their money oral -- or whether they would rather wait until they get sick. >> as other marketing materials directly aimed at -- >> massachusetts got the red sox. they did a good job. ruth -- with respect to getting small employers, they do not do a good job. a very important decision early on. we got by some people who had worked on that. maybe they would've done it differently. to interest at that. we realize that small employers have roots to getting insurance

now. asian grocers of broker community. -- it usually goes to the broker community. it was getting a little bit. before i talk about what the positions want to know, what i heard from the broker was -- that is helpful. something like 90% of people. buyingcompanies are health insurance. there didn't payroll an entire they are doing payroll and retirement. there managing that. -- they are managing that. we offer them the opportunity to have their system to work so people can continue with the coveted the make sense to them

to get into the exchange. there's a lot on our website that walks through those things. there are different models. a lot of work with small groups. we will see. in maryland, we have a guaranteed issue. a tax credit's is a value. a small employer might find it valuable. choice have your instead of just one. how it plays out, we do not know. we expect lower enrollment. , we want people were covered to stay covered. maybe it is a sprint on that side instead of a marathon.

along.s i think that is fine. >> let's go there. hi. there's a lot of talk of the village he -- variability. how does it break down? will there be less congressional resistance and be able to continue with it as opposed to everything is failure and it is easy to kill? >> that is a question i was going to ask henry. he said recently that the 2012 election cap affordable care act alive. 2016 election will determine whether it survives.

>> i might have been two years late. as long as president obama is in office, and this will remain the law of the land. onequestion you raise is that we do not know. it is tied to enormous variability around the country. you can count on the fact that various reporters and bloggers and grab at the mistakes hold them close to their hearts. [laughter] what i hope and pray is that those who like myself and expect all of us appear on the platform think affordable care act is a

step forward that should be built upon and improved animal work hard to talk about the success stories that will and will improved work hard to talk about the success stories that will unfold. i hope there'll be a slowdown in the rate of health care costs. i think that if we do our job well enough, it will be an extended and very rough or you do, but one that can get where we want to go. voyage, but one that can get us where we want to go. >> right here up front. ok. >> thank you. i'm not talking on behalf of the asian american, it pacific

islanders. i wanted to bring to focus that no one has raised a voice for that population. it appears that population has been increasing. many of us are not in the habit of having health insurance. many of us rely on family support. many stay at home and die at home. is a mandate coming. i feel the costs of healthcare can be reduced significantly .ith prevention and treatment also in the exchange, education, the public can play significant role. is anything that is planned out to address that population?

we are, in a way, in a similar boat. >> i'm happy to jump in and explain. .here is a program we have the ability in maryland have a structure that. we could have done it with one company with one approach in the whole state. we are a very diverse state in maryland. we could have come up with a thousand different little grants with tiny amounts of money. we did this through public comment. we have a whole advisory committee,. we divided the state into six areas. comeked and groups to together under lead agency. multiple groups, including grassroots organizations that work with different parts of the population, to come in and

put him proposals. we have a competition in each of the areas. we had six agencies and more than 50 groups that are all part of one of those organizations, including groups that have tremendous -- part of it is you can say i will give it in a language that you can read, but if you do not know that hurson were talking to -- --son you're talking to they're in the process of getting trained. our goals have been rather than a specifying what it is, we asked people to come together. healthtgomery county department if the meter. they brought in their best partner to serve the counties. it is not a one-size-fits-all message. we have to reach very diversified groups. >> i agree completely.

the children's health care insurance program has grown to cover 86% of individuals that qualified. one of the reasons for that access is that states became very focused on the appropriate means of communicating that last mile, if you will come in a trusted manner. when you consider that nearly 50 or send of americans ainsured have basic or below sick literacy that is a critical point. c, that is a critical point. literacy, that is a critical point. we enroll individuals in medicaid.

we make that connection. it has to be very thoughtful, engaging, and pragmatic. they cannot be something you think about in the 11th hour. about theas a forum affordable care act. >> last question. >> thank you. the expansion of medicaid was andcourse to be part of aca moving toward universal coverage and support. it put a bit of a crank into those plans. could you have us your assessment of where that stands now with the states and what we can expect over time? -- morebecome more give attractive? what are some states that reject

the expansion? we do not know. it is a state-by-state discussion. some legislatures have made a decision and others have not. considering a governor 's request or a legislator who wants to overcome what the governor has decided. what happens to those one of the odd isrks of the legislation that there is an element of the population that would be eligible under the expansion and not eligible for subsidies. very low income. others will be eligible for subsidies and can go through the exchange or partnership exchange. there is a small group of

individuals who will not qualify for subsidies. they will be very low income. they will essentially remain uninsured. it will depend on the state and in the size of that group. the history of medicaid suggests that it came in over time. whether that will be the case this time remains unclear. will expire.unding it is available during that time. there will be states that will look at what the economic implications are for the state for the long term and whether or not they'll be taking on a greater burden or not. other changes were included in the medicaid program. . variety of other things theion in terms of reduction in safety net payments in states that may not

be expanding bear covered populations. a lot of complexity. still quite uncertain. it will play through the legislative sessions in the states. >> did you want to add anything? anything else? >> i would say this -- obviously in washington there are a lot of politics. that is cured into a lot of state legislature. -- that is carried into a lie the state legislature? -- that is cured into a lot of state legislature. there are a lot of people who benefit from medicaid. some of thehave got .osturing or narrow politics

i think there's something to be thatfor having policies could over time change politics. who arenk among those the most active in the states are the provider groups. andhospitals and physicians others were actively engaged in talking with her legislators and trying to make the point that josh was making. the value of the coverage essentially will accrue to the benefit of the state. it will be a state-by-state conversation. go ahead. >> is pretty straightforward. every taxpayer in maryland or any other state is paying taxes to support the expansion of medicaid and all the states that have adopted it.

if they do not come into the system, turning down 100% payment and 90% payment for coverage within their state, ofs is about as close making an offer you cannot refuse as you can get. [laughter] a senior official in the national government association will ask the very question that you have post -- how many states will not be in medicaid? he said governor perry is still one.nor of texas, [laughter] >> on that note, i have to cut this off. for beingto our panel with us today. [applause]

[captions copyright national cable satellite corp. 2013] [captioning performed by national captioning institute] up on c-span, the senate finance committee investigates the irs targeting of conservative groups. that is followed by treasury secretary jack lew. and an oversight committee hearing on the irs. and jpmorgan ceo jamie dimon. >> on the next "washington journal" the latest in the investigation of the irs targeting conservative groups. our guest is representative mark meadows from north carolina. the keystone pipeline. the house will vote on wednesday on a bill that would approve the

project. later spotlight on bloomberg businessweek and the story on jamie dimon. "washington journal" is like every morning at 7 a.m. eastern on c-span. former irs commissioner doug shulman expressed regret that there was targeting under his watch. irs from 2008 the 2 2012. -- to 2012. this panel is two hours and 15 minutes. >> come to order. before we begin, i am confident i can speak for every member to

send our thoughts and prayers to the people of oklahoma. we'll stand with courageous town of moore and the people of oklahoma as they come together to face this tragedy. we are all together. we all share their grief. stevenson once said, i am quoting now "it depends for its success and liability of the good judgment of so many of us." these words are etched in granite at the irs headquarters just outside of washington d.c.

they speak to the need of government at all levels. that confidence was broken recently by the news that the irs targeting conservative groups seeking tax exempt status. in doing so, the irs abandoned good judgment and lost the public's trust. the american people have every right to be outraged. targeting groups based on their political views is not only inappropriate, it is intolerable. we need to understand how and why this targeting occurred. we need to know who was involved and who was responsible. we need to install new safeguards to ensure it never happens again. the irs is one of the most direct relations with the people of any agency. the irs employees know where we

live, where we work, how many children we have, and what investments we make. irs employees are placed in a position of great trust. they must exercise this trust in a fair and evenhanded manner. employees in cincinnati abused this trust. the treasury and inspector general's report found employees target groups with names containing "tea party," and "patriot." inspector general's report found that the tax-exempt unit was a bureaucratic mess. employees were ignorant about tax laws and defiant with supervisors and blind to impropriety. this is unacceptable.

but inspector general's report raises many unanswered questions. the report examined 298 applications. the cincinnati office identified some of those applications using screening terms. what was the nature of the other 202 applications? are they filed by liberal groups or moderate groups? we cannot measure the full impact without knowing the nature of these additional applications. who is responsible? we know officials tried to stop this behavior. who in cincinnati perpetuated his behavior? one person, two persons? we do not know. we have launched an investigation.

we've requested additional documents as part of our inquiry. we'll follow the facts and see where they take us. this inspector general's report shows the need for congress and this commission to overhaul tax code. we have come a long way of the tariff act of 1894. when congress first created exemptions for educational organizations. today, there are countless political organizations on both end of the spectrum masquerading as social welfare groups. these 501(c)(4) groups seek status. it allows them to keep the identity of their donors secret. data collected by opensecrets.org showed groups

spent billions of dollars in the 2012 election. none of the donors behind these campaigns were disclosed. this was all secret money. in 2010, i wrote a letter to the irs asking for them to look at all major tax-exempt organizations. 501(c)(4), i asked this question. is the tax code being used to limit transparency of our elections that are the bedrock of our democracy? this letter was part of the long line of investigation that the committee has conducted into tax-exempt organizations. in 2006, we investigated the office of jack abramoff to use

tax-exempt to lobby. we investigated religious organizations. once the controversy clears, we investigate the root of this. neither the tax code or the complex regulations that govern provide clear standards for how much political organization a group can undertake. the code does not provide a clear definition of what qualifies for political activity. the statute provides one definition of 501(c)(4). the statute says earnings must be devoted to charitable, educational or recreational

activities. on the other hand, it can be defined as primarily, as closely engaged in the common good of the people of the community. how does the irs justify a regulation that would weaken the standard from exclusively to primarily? these ambiguities may have contributed to be unacceptable steps we are examining here today. america expects irs to do its job. the irs cannot pick one group for closer examination and give others a free pass. it is what they did. as adlai stevenson said mama the success of our government -- said, the success of our government depends on so many. it is clear, the irs used poor judgment. today, they will have to answer for it. >> thank you, mr. chairman.

before i begin, i would like to take a moment that my thoughts and prayers are with the good people of oklahoma who have been impacted by the devastating tornadoes. in particular, my prayers go to those who lost loved ones. it was a really catastrophic storm. i hope they will be up to deal with this in every good way. thank you for convening this important hearing. we agree. despite some claims to the contrary, the irs targeting is a scandal. it undermines the americans trust that the government will enforce the law without regard to political beliefs or party affiliation. make no mistake, this hearing and investigation that will follow are critical to this country. over the weekend, a senior white

house official said republicans are on a "partisan fishing expedition." i hope they are not referring to what this committee is doing. this would be very disconcerting particularly after last week when the president said he was committed with working with congress to find out the truth. these hearings are not a sideshow to detract from the current agenda. i hope the president and his administration are not attempting to distract us from getting to the bottom of this. we will pursue this matter where ever it leads. internal revenue service is one the most powerful. everyone knows that. it has a broader reach than almost any other government agency or entity. many law-abiding citizens are already afraid of the irs. that being the case, the

american people have the right to expect that the irs will exercise its authority in a neutral, nonbiased way. we need to work together to make sure that's precisely what it does. any hint of political bias or partisanship that the irs needs to be taken seriously. there appears to have been more we have report from the inspector general indicating that the use of inappropriate criteria was all too common in the evaluation of applications. so far, here is what we know. we know that between 2010 and 2012, concerned groups applying were targeted by the irs and subjected to increased levels of scrutiny.

we know these groups were targeted because they had the words "tea party" or "patriot" in their names. they said they wanted to do things like "make america a better place to live." we know these groups were asked invasive questions about their donors. their positions on various issues and the political affiliation of their officers and directors. some of these group's applications were delayed for three years. some friendly to the president were promptly approved. despite -- extended beyond the processing center in cincinnati. officials and washed in dc were aware at an early stage -- in washington were aware at an early stage. offices besides cincinnati scrutinized conservative groups.

this problem was not limited to a few employees in cincinnati. we know that by june 2012 at the latest, the number two official was aware there was an ongoing inquiry into these issues. here is what we do not know. we do not know why the target began. we are concerned about the extent to which senior officials at the irs and department of treasury became aware of these practices and when they found out what they did or did not do we want totop to them. know why the irs misled congress when they said no groups were being targeted when we raised this issue with the agency last year? this is one of the most disturbing elements of the

story. in 2012, i spearheaded letters from republican senators to commit -- to shulman. it had become politicized. i received two different responses. miller was serving as the deputy commissioner. neither of these responses hinted at the possibility that the targeting was going on even though these officials were certainly aware that a number of conservative groups had in fact been targeted. despite efforts in 2012 to find out the ask -- facts, the irs did not come clean until their hand was forced. even then, one of the top officials within the department of treasury chose to disclose it had targeted innocent organizations by responding at a press conference.

the american people deserve to know the truth about what went on here. they deserve to know why the truth was kept from them for so long. were top irs officials blind? or were they holding out until after the election quick mark -- election? it is not the only problem that needs to be addressed. i am referring to the fact that in 2012, 1 of the offices that was targeting conservative group applications also disclosed confidential information about some of the same groups to a left-leaning organization. this revelation comes on the heels of other allegations. confidential information including donor information

submitted by conservative nonprofits. we need to look closely at all of these allegations as well. you can see there are a lot of problems at the irs. i am glad that members of both parties have recognized the need to address these issues. mr. chairman, i am pleased to be working with you on this investigation. i hope will continue to work to get to the bottom of this. i wanted to ensure our colleagues and the american people we will find out exactly what happened. we'll do everything we can to make sure it does not happen again. the only way to address these issues and to restore the credibility of the irs is to have a full accounting of the tax. -- facts. we are going to learn the facts of what went on here. today's hearing is the first step in this process. thank you, mr. chairman.

>> i would like to welcome our panel of witnesses. mr. steven miller, acting commissioner of the internal revenue service. former commissioner of the irs, doug shulman. thank you for coming. i would like for you to stand so i can swear you in. raise your right hand, please. do you swear that the testimony you are about to give is the truth, the whole truth, and nothing but the truth so help you god? thank you. as with our regular practice, i will ask each of you to summarize your statements in about five minutes. we'll start with you mr. george. the committee will have a lot of questions. >> thank you, chairman baucus.

thank you for the opportunity to discuss a report concerning the internal revenue service treatment of groups who applied for tax exempt status. our audit was based that certain groups were treated unfairly. there are three allegations one that irs targeted specific groups applying for tax-exempt status. they delayed the processing of these group's applications. the irs requested unnecessary information. our review confirmed all of the allegations. inappropriate criteria used by the irs to target tea party and other organizations based on their names and policy positions. the practice started in 2010 and continued until june 2011. the criteria which we obtained

from a briefing in june of 2011 of the organizations names including the tea party or patriots. whether the organization had policy positions of government spending. did the organization intend to provide education to make america a better place to live? where their statements criticizing how the country is being run? these criteria were inappropriate that they do not okasan on text -- they did not focus on tax exempt laws. 501(c)(3) may not engage in political intervention which is an action taken against a particular candidate running for office. 501(c)(4) organizations may engage in such activities as long as it's not their primary activity.

employees began selecting tea party organizations for review -- in early12. 2010. a team of irs specialists in cincinnati, ohio were furred to a determination unit to select 298 cases for additional scrutiny. the first time executives from washington became aware in june of 2011 and some executives not aware until april or may. these inappropriate criteria remained in effect for 18 months. after learning of the criteria, the director changed them in july of 2011 to remove references from organization names and policy positions only to have stabbed in cincinnati to cincinnatistaff in

tochange the criteria back again only to have staff in cincinnati to change the criteria back again. they did not include tea party or other named organizations. it took until 2012 that the criteria was changed to be consistent. the organizations selected for review for significant political campaign intervention experienced significant delays in the processing of their application. as of 2012, the status for the 296 cases we were able to review where 100 cases had been approved, what a cases were withdrawn -- 100 cases were withdrawn. 0 had been denied. some have been in process for over three years without resolution. of the 108 cases approved, 30 were tea party or patriots.

another troubling aspect we uncovered was the fact that brs request -- irs requested unnecessary information. some had unnecessary questions. we found that staff at the determination unit sent questions with little or no supervised review. they later determined the questions were not needed until unneeded until media accounts and questions arose. an example of unnecessary information requested with the names of past and future donors. the irs said they destroyed the information received from applicants. irs demonstrated gross negligence.

it was substantiated and raises troubling questions about whether irs had effective management. members of the committee, thank you for the opportunity. >> thank you, mr. george. mr. miller, you are next. >> given time consideration will consideration, we were unable to prepare. as acting commissioner, i want to apologize on behalf of the internal revenue service for the mistakes we made and the poor service we provided. the affected organizations and the american public deserve better. partisanship or the perception of partisanship has no place at the irs. you cannot appear to determine the tax-exempt status of an organization. i do not believe it motivated the people in the report. i have reviewed the report and i

believe his conclusions are consistent with that. i think what happened here where was foolish mistakes were made by people trying to be more efficient. the listing described while intolerable was a mistake and not an act of partisanship. the agency is move forward. -- is moving forward. we are working to correct. and to make sure it never happens again. management will take appropriate action with respect to those responsible. i would be happy to answer any questions you may have. >> you might pull the microphone a little closer to you. that helps. chairman baucus, ranking member hatch, thank you for the opportunity to appear before the committee to talk about the

inspector general's report. i was commissioner of the internal revenue service from 2008 to 2012. during that time, that agency was called upon to tackle a number of challenges. that agency played a key role in stimulus and recovery efforts during the economic downturn. aggressively addressed offshore tax evasion and completed a major modernization of its core technology database. it continued to deliver on its core mission of collecting the revenue to fund the government. the irs is a major operation with more than 90,000 employees who work on issues ranging from individual tax returns to building complex technology to ensuring compliance with businesses to educating the public about tax law changes to

administering a very complex set of rules governing tax-exempt organizations. i have recently read the inspector general's report. i was dismayed and saddened to read that inspector general conclusion that action had been taken to give the appearance that the surface was not acting service was not acting as it should be as a nonpolitical, nonpartisan agency. the irs serves a critical function for our nation. it collects the taxes necessary to run the government. because of this important responsibility, brs must administer -- the irs must administer and be perceived to

administer our tax laws fairly and impartially. given the challenges that the agency faces, it does its job in an admirable way. the great majority of the time. men and women of the irs are hard-working, honest public servants. while the inspector general's report did not indicate t if there were any political motivation involved, the actions outlined in the report have justifiably led to questions about the fairness of the approach taken here. the effect has been bad for the agency and bad for the american taxpayer. i am happy to answer any questions. >> thank you. i have a couple of questions. essentially, the headquarters shut down the use of political

terms such as "tea party" and other terms we learned about in june of 2011. why were people not fired or transferred? more significant action taken than do not do this? given how outrageous, how come more definitive action was not taken? >> sorry. i was not aware at the time that it happened. i became aware of this in may of 2012. >> mr. shulman, you were around during this time but mark -- time? >> in 2011, i was not aware of this. >> who was aware of this? somebody was aware obviously.

>> the report indicates that organizations knew. you would have to ask the inspector general. >> you are acting -- you were the head of the irs. who did know? you read the report. you were acting commissioner. come on. if you do not know it, somebody is not doing his job. why wasn't there direct action taken? when these terms were determined right away and the arts a second chance. -- irs had a second chance.

after it started up again, they stopped and went back again to old habits. i cannot believe it frankly. why was more firm action not taken by people at the top? it is outrageous. it is unacceptable conduct. mr. miller? >> again, sir bouma out -- sir, i was unaware. when i was aware, i took action. >> what action did you take? >> i was briefed after sending a group to take a look. it reported to me in may of 2012. much of what had transpired and was shown in the ig report that thatcases were languishing.

a list had been utilized. letters have gone out that were much more broad than they should be. at that point, we had taken care of the letters because that is how we knew something was going on i asked for a review. we trained our folks who held workshops to ensure they were going to do the work well. we took a look at the cases. i asked for the cases to be looked at in the group in a fashion so those that looked like they should be approved should be approved. those that needed further development got that development. we took action on that. at that time, i was aware that another group was working on this. i took intermediate action. we transferred and reassigned a person involved with the letters. the person i believed to be responsible for the listing will at that time -- listing, at that

time -- >> i appreciate that. we'll try to get the answers to some of the questions. we are not getting to definitive answers at this time. how did this culture -- who created this culture of indifference to the american people and such a grace -- aggressive behavior to target certain groups? what did you do to correct that culture? i will start with you mr. shulman. >> during my time at the arts -- irs, i believe i articulated that the irs needed to be nonpartisan -- >> how did it happen? >> there are a set of rules

built into the system. education of people that the vast majority of the are as employees understand -- irs employees understand -- >> my time has expired. bottom line, how did this happen? >> i cannot say that i know the answer. >> you have some sense because you were the commissioner for a number of years. >> i am six months out of office. when i left, the ig was looking to gather all of the facts. i've had the benefit of reading the report. that is a full accounting of facts. i cannot answer that question. >> you have time to think about this. >> thank you, mr. chairman.

on two different occasions, my colleagues and i wrote letters to you mr. shulman. in the first letter of 2012, we asked about selective enforcement by irs. we wrote to request more information about the mispractice of requesting confidential donor information. as i wrote in my letter, "it is critical that the public has confidence without regard to politics of any kind." the responses i received from the irs were anything but transparent. the irs responded and said in both responses were signed by you. these responses did not disclose that the irs had probably

targeted tea party or other conservative organizations or improperly asked for confidential donor lists. i asked to put all 4 letters in. the irs was aware that they had targeted tea party and other organizations. we know by june 2011 at the latest, others were aware there was a be on the lookout listing regarding tea party and other organizations. we know that in may 2012, you were briefed about these actions. you said "there was absolutely no targeting."

to this day you have not corrected your testimony, even though the irs was targeting tea party organizations. why did you not come forward before today to correct the record and acknowledge errors occurring in the irs, the organization you headed? >> let me answer a few things. the full set of facts around the circumstances came out last week in the report which i read. until that point, i did not have a full set of facts. >> you knew what was going on. how come you did not let us know when we submitted letters? >> what i knew was not the full set of facts. what i knew sometime in the spring of 2012 was that there was a list that was being used.

i knew that the word tea party was on the list. i did not know what other words were on the list. i did not know the scope and severity of this. i did not know the groups that were pulled would have been pulled in any way. i thought it was proper step. to make sure that the matter is being looked at by the inspector general. >> we sent you letters. we inquired about this with a number of senators on this letter. you should have corrected the record. you should have done it long before today. that is the point i am making. mr. miller, your signature is on both the responses i received from the irs. nowhere did you indicate that you knew the irs was improperly selecting tea party organizations for extra scrutiny. nowhere in your responses did

you indicate that the irs was asking improper questions about donor contributions. you just sat on that knowledge. mr. george stated that he briefed you in 2012 by an audit. we knew you were aware of it. at the time, you responded. you did not mention any of this in my responses. that is a lie by omission. there is no question in my mind. it is a lie by omission. you kept it from people who have the obligation to oversee this matter. on friday, you swore under oath you had told the truth in your prior responses. you said irs had been guilty of horrible customer service. what we have learned about irs goes beyond horrible customer service.

why did you mislead me and my colleagues? my fellow senators and the american people by failing to tell us what you knew about the subject we were asking about? why didn't you tell us? >> mr. hatch, i did not like. >> what? >> i did not lie. >> you should have told us. >> i answered the questions. i answered them truthfully. did i know about the list? yes. we answered those questions. frankly, the content of political motivation here, i did not agree with that in may or now. we were not politically motivated or targeting that isative groups.

george'st by mr. report. >> what else can you call it? today's statement was more definitive than the one you gave to the house. let me say this. you knew this was going on. you knew we were concerned. you knew we had written to you. how come you did not correct the record? we could have solved this problem a long time ago. what was your responsibility? >> i am sorry. >> how come you did not answer our letters? >> i believe that i did answer them and truthfully. >> thank you. we are going down the list. senator? >> thank you. this is an important hearing. let me just say, mr. miller, you are saying this is a mistake.

we would suggest a serious mistake. what i do not understand is how again, something can start in 2010 and not until 2011 that the director of the exempt organization learned of the practice. it was not until january of 2012 that they set up new criteria which was still inappropriate. and it was not until four months after that the cincinnati office finally started doing the right criteria. mr. shulman and mr. miller, it took almost two years. almost two years for the irs to fix the problem including 11 months after it came to the attention of the division head. how in the world could it have taken so long for senior people to find the problem, fix the

problem, and was there no ongoing oversight of employees in cincinnati and what they were doing? mr. shulman, we'll start with you. >> again, i am not there to ask questions of people when, where, and how. >> we expect you were there. >> i was there. since it came to light, i have not been able to be there and ask questions. let me answer your question. >> why didn't you know when you were there? >> i agree that this is an issue that if someone spotted, they should've ran up the chain -- and why they not. didn't, i don't kow.

>> mr. miller? >> i will agree. i will not disagree with the activation of bad management. that did happen. i do not want to understate concerns with the list. we should not have done that. we should not have done that. we should be looking at the file and not names and the position taken on a given topic in terms of how we will people into full development of these cases. it was not elevated. we did not know. >> mr. george lima could you speak -- george, you speak about what your review have revealed about irs management and how that breakdown was possible? and have they done anything to make the unacceptable actions less likely in the future? >> we have not yet completed our analysis of their response to our recommendations, we do i will be ableo.

to respond once we complete that review. they didn't seek clarification from headquarters in washington cincinnati did seek clarification from headquarters in washington. and the bottom line is it was a breakdown in communication and mismanagement. >> it does sound like the first clarification that received, they took it back and they change again and get something inappropriately. >> there were two aspects. they had not received an answer and eventually did get direction to change the way they were acting. and then, on their own decided to revert to a slightly different, yet still

inappropriate way to handle these matters. >> thank you. senator grassley? >> i'm going to direct my question to mr. shulman. this comes directly from iowa. one of my constituents attempted to establish 501(c)(3) charity. she told my staff that an irs agent told her your application is ready to go. however, it will not be approved until you send a letter signed by your entire board under penalty of perjury saying you will not protest at planned parenthood. that is outrageous that that statement would even be made by anybody in the government that somehow you have to compromise your first amendment right.

she also received a letter from the irs asking several invasive questions. the government getting involved as to somebody having a prayer meeting. it appears the irs offered this group a quid pro quo. you can become a charity if you do not protest in front of a planned parenthood. so you do not have to worry, it is it appropriate to offer a quid pro quo in an example like this? mr. miller or mr. shulman, either one of you. >> the answer is, no. >> let's move on. that is the answer you should give. how could you let this happen under your leadership and do either of you feel any responsibility or remorse for treating american citizens this way?

>> i started my statement with an apology. i will continue that. i do not know what happened in your given case. i cannot speak to it. i do apologize for the treatment of folks. there are two things that happened with these cases. first, the selection criteria and it was bad. second, the treatment when they were in the group. that was bad. it was. i do not know if it was this organization, the service that folks got was not the service we should be providing anyone. there is no question about that. >> mr. miller, i wrote a letter raising questions about the spontaneous apology made at the american bar association. lerner said it was spontaneous.

wasdenied that the question planted. you admitted during your testimony last week that the irs had planted the question to be asked. you said "it was a prepared q&a." whose idea was it?and why? >> i will take responsibility. now that we had the report and we had our response, we got we should be -- thought we should be talking about this. we wanted to reach out to the staff. it did not work out. >> was an incredibly bad idea.

how was it appropriate for government own toys to request -- government employees to request information of the ig report. >> i think that what we try to do was get the apology out, and start the story. the report was coming. we knew that. the report was done. >> on may 8, ways and means represented melissa lerner, if she could comment briefly on the status of the irs investigation into these nonprofits. ms. lerner pointed to a questionnaire on a website. she said nothing about pending reports, or the disclosure she made two days later about targeting. as result, representative crowley has said that he feels

misled and has called for ms. lerner's resignation. you agree that ms. lerner gave misleading testimony to congress? >> i do not have any knowledge on that. >> has the irs proposed to discipline ms. lerner et al. -- for any part she played response tolying congress? >> at this point, now that all of this is coming to light, those discussions are ongoing. i will not be part of those discussions, obviously. >> thank you. >> thank you, mr. chairman. i want to take a differenttack. i like to go back to how we got into this mess in the first place. the statute of course says that these organizations, c4, the net earnings of which are devoted

exclusively to charitable educational or recreational purposes, and then the rule that came along fleshing out the statute talks about promotion of social where fair -- welfare organization operated exclusively for the promotion of social welfare. then a further defines that term, the promotion of social welfare does not include the direct or indirect participation or intervention in political campaigns. so, i want to get back to the original purpose of the statute as being implemented by the irs.

how could you all, in the irs, allow the tax breaks funded basically by the taxpayer on these political campaign expenditures? can you shed some light please? >> i can start. let me try to restate some pieces of the questions you may be asking. please correct me if i'm not getting it right. there is a question out there that the statute, the chair references the statute talks about exclusively, social welfare, regulation which was promulgated 50 years ago talks about -- >> it uses primarily. then it goes on to say what is promotion of social welfare. this is the rule. it does not include direct or -- orect per dissipation or

indirect participation orintervention in political campaigns on behalf of or in opposition to any candidate for public office. you will we have seen in the course of the last two campaign cycles is an enormous money running through both through the which thezations. avowed purposes on behalf of or in in opposition to any candidate for public office, and the intervention in political campaigns. where is the irs in the regulatory process in forcing its rule to stop this in the first place, which if it had, would have gotten to the mess that we are in right now? >> there are a couple places where we have to act. if i can set the context, as a 501(c) four organization, you

are permitted to engage in a amount of political campaign activity. you are. as long as it is not social welfare, your primary activity. we have an obligation to look at cases both in the audit stream out there doing this sort of work. or in the determination of a process, which is why we began to centralize these cases. you asked for the genesis of this. centralization was warranted. we have to look. we are obligated under the law to look at what an organization does to grant exemption. the way we centralize was wrong. that goes to the listing that we use. but, we are to look at the amount of political campaign activity that was planned and how authorization operates, and that is what we did in the

termination of the process here. >> i would simply say, since we're doing the oversight here, that they rule, i understand the king's english, and it says the promotion of social welfare does not include direct or indirect participation or invention and political intervention and political campaigns. how you interpret that to say that does allow some intervention in political campaigns is beyond me. if that had been cut off at the pass, we would not be even weinning to these.-- wouldn't be getting to these. >> i would like to know that he'll be taking review of the

irs oversight of the level of campaign intervention by 501(c) four. >> who will be doing that? >> my organization. >> i would say that if we could get the irs to final -- follow the law and the regulation that implemented it, we wouldn't have this problem in the future. >> i think i agree with you. it is complicated. it is unfortunate this issue has not been addressed in the last without anyears. precision or focus or straight thinking. we are going to have to enact some changes in the statute. the irs has to do a better job of following the statue. i personal view is this confusion, this ambiguity has led to part of the problem here. >> i agree. we have to straighten it out. >> next i have roberts. >> thank you.

listening to the responses that you have provided, i am reminded ageone of my granddaughter's, 4, when she knows she has done something wrong. she says you can't see me. we can all see what happened. the problem is no one is taking responsibility other than horrible consumer service and apologies. there is a kansas setting -- saying, never lie and less you have to, and if you do not have -- ife, stick to the truth. you don't have a damn good

lie, stick to the truth. we need some real truth tellers here. facts are stubborn things bring what we have is targeted harassment and abuse of conservative groups. that is what has happened. as we hear daily from others, many who simply have -- i think that is very significant. nobody likes to be audited. nobody likes to say they have been audited. especially with what has been going on. what we have on our hands is suppression of the first amendment rights and nobody owning up to it. the back of the matter is the irs has been acting in a politicized manner for at least three years. a top economic adviser doubles in order to make a political point. i askedaig for tax-- the ig for tax administration to response. we never heard back at all. last year, members of this committee hearing a growing number of complaints to ask of

individuals were being singled out or targeted in the application process. here is the letter. it is the same letter. you will see this. it is 10 pages long. completely silent targeting, but analysis of the law. you knew that targeting was going on. i do not think you do that. that befuddles me as to why anybody in possession like you, like you,sition or basically, what ever do that. just not respond. you also said that the determinations office was trying to find a new way to process exemption applications. here we have irs officials milling about, doing them best,, need more lawyers, this may have

been fully this -- fullest, i find hard to believe that the irs were given free range to set up a list to be on the lookout. there must've been a directive from washington. we need full disclosure of how this happened. there was a news report quoting theynonymous irs employee. have been taking a lot of grief here. accordingly, this quote was attributed to this anonymous irs employee. we have had all the problems with this, we know that it was wrong for a we knew there would be hell to pay. we knew that when it hits the fan, nobody at the top will take the blame. it will slide right to us. i would like to at least have somebody, lois lerner, sarah halling, who'll be working for the affordable care office, --

joseph grants, a deputy tax commissioner. we are not going to hear from him. he retired. mr. miller, you have apologize. the you are leaving. you are six months out, so you can remember. esther wilkins, the chief counselor of the irs. he is not here pretty probably should he here. jacob lew, it went right up there. finally, the white house general counsel. do any of these folks ever say what was going on and take responsibility? i have not seen that. my follow-up question will be in regard of how on our can the --is have a limitation of the

irs beearth can the then implementation of affordable care act given the current situation. >> thank you. >> there is been a lot of discussion about who knew what and when they knew it. one of the questions i have, for you mr. george, it seems that there is an argument being made that there was no political motivation in these actions. is that a conclusion that you have reached? >> in the review that we conducted thus far, that is the conclusion that we have reached. >> how do you reach that conclusion? >> in this instance, it was as a result of the interviews that were conducted of the people who were most likely involved in the overall master. you take it one step

or another and we directly inquired as to whether or not there was direction from people in washington beyond those who were dry dry clay related to the determinations. there indications to us, this was not done under oath, this was an audit and nine they did not receive direction from people be on the irs. >> that could be anyone up the chain of the irs? >> it in theory could be. we have no evidence thus far. >> in other words, you have simply the statements of those who were engaging in the conduct saying that they were not politically motivated. based on that, you reached the

conclusion there was no motivation. that you haven't found it? >> it is the latter. that we have not found any. >> it seems to me that it is unbelievable to look at what has happened and say there is no political motivation here. how could an agency with the power that the internal revenue service has engage in this kind of conduct, and it not be politically motivated? i think that most people in the united states have a very quick and intuitive understanding of the reason that these revelations are so concerning to the country. if you look at the irs, more than perhaps any other agency of government, it has the capacity to be the prosecutor, the judge, the jury, and executioner in ways that can devastate individuals, families, and businesses. americans understand that.

to have the investigation reach the conclusion that these kinds of actions were just a statistical anomaly, or they just assisted clay came together at the same time, but there was no finding of any kind of political motivation, i think it is almost beyond belief. is there any way that you can conduct further investigations, and perhaps by putting people under oath, identify where the -- wherens name from? the direction came from. we have continuous denial of responsibility for the policies. those of omitting the policies it wasn't us. we are asked as american people to believe that just out of the ecosphere, the notion to target

these entities just coalesced and came together? >> as a result, standard practice, of audits that we conducted, there are subsequent investigations. suffice it to say, this matter is not over as far as we're in terms of our next investigation. >> you believe there will be further investigation on this issue? >> there will be continued review by us to read it at least nine investigation, that may be the case. >> thank you. >> thank you. bill called my office and said that the ministry there was -- said that the

administrator that was fired was just the fall guy. from the testimony that we heard earlier, there was disciplinary action taken by the administrator did not know about it. doesn't disciplinary action filter up in these organizations? i got a call from charles of pinedale who had concerns that the charges were being targeted as well. noting the irs had requested membership lists of his church. that seems a bit above and beyond what had ought to be done. doesn't the irs have a policy of not commenting on issues subject to an audit prior to the release of the audit? why does the irs feel it is unnecessary to make make such-- feel it was so necessary to make such statements days before the

report was public to release? why did the irs not shed light on the issue years ago when it became aware of the inappropriate targeting? mr. miller? >> let me correct part of your question. i actually took that disciplinary action in maine of 2012 -- may of 2012. we do have a practice of not talking about investigations or audits. the audit was done at this time mistakenly that we should get in front and apologize, and that was -- and reach out to the hill. that was wrong. we made a mistake. >> i thought that you were not aware of disciplinary action. david posted on facebook -- does anybody have an answer? >> i would recommend, there were in the media discussions of the

release of some data to probe a referal was made out of our offices. at this point, i think he can speak to that better than i. >> to follow-up on what senator robert says, mr. george, when you commented to the house ways and means committee last week, you believe the actions were inappropriate if not illegal. do you still believe that is the case, or any of the actions were taken by the irs employees e legal question mark -- illegal? your group conducted an audit, and i investigation. could it in fact have been illegal activity? >> two things. to address mr. miller's point that the matter that you

mentioned, the release of taxpayer information could be a violation, which does of criminal associations with it. that is something my organization investigates and takes quite seriously. if we have evidence of such activity, we would refer to prosecutors. i'm otherwise restricted by law from revealing any additional information beyond that. as relates to this matter, the restructuring of 19 any eight -- 1998 provides for the action to be taken if irs employees are guilty of abusing, misusing, among another things, tax information. we are charged with reviewing that. we're doing so. if we determine that something has occurred, we will certainly pass it on in an administrative

environment, or a criminal environment pursuant to the act itself. it has very few criminal aspects to it. there are certainly quite a few administrative aspects that can be taken. based on that, we thus far have not uncovered any actions that we would deem illegal in this instant matter sir.

.

>> i learned that the activities -- >> they were planning an investigation? >> i am sorry, and audit. they were aware, they had been to cincinnati, if my memory serves me right, and were in the process of opening up an audit. >> you never asked mr. miller what the purpose of the investigation was? i think it was>> obvious to me when i heard it that something did not sound right about having a list. >> you testified you had no idea this had anything to do inh the practices going on

cincinnati, didn't you? >> i testified, i said earlier that what i learned about, i knew there was a list, i knew " was on thea party list. >> so what did you do? >> i did not know at that time what else was on the list. >> what did you do with the information? of irs.e the head what did you do? >> this was wrought to the had a virus. three facts. there is a list. >> you took no action. and mr. miller, to the best of my memory, told me at that time that it had been stopped and they were looking into it. so -- >> did you have knowledge of

the existence of the list at this time? >> it was brought to me at this time. >> that was the first time you knew about it, when mr. miller brought it to you? my memory. i have been out for a long time, but i believe it is and i certainly do not remember ever hearing about it before. >> mr. miller, was that the first time you discussed with the then-commissioner? >> i believe so. you have any additional follow-up conversations about the scope of the audit? >> the scope of the audit would have been the inspector general coming to us and discussing that. >> what action did you take as the deputy once you learned of the list and potential practices? you earlierd for

in my testimony. >> you will have to summarize it again. >> we made sure our folks were trained. we had workshops to ensure that they knew how to do the work they needed to do. we took a look at the cases carefully to see which of those -- >> i get the gestures. i remember you went through it. the last question. i appreciate the chair's patients. i asked you earlier if you briefed the deputy secretary on june of 2012. i think you said yes, i did. brief or regularly update the chief counsel william legals within the irs office? >> i did not, sir. someone on his staff was briefed, but not the chief counsel himself. >> who was the person on his staff who was briefed? >> we do not have a name, sir.

but we can supply you. >> would you supply that for the record? your i ask you to give us best information about how many times that individual was briefed? >> we will endeavor to do so, senator. memr. shulman, you told earlier but i will give you one more chance. you told me you had no conversations with chief andsel about what went on their practices? remember having conversations with the chief counsel about general policy matters. not the kinds of matters we are talking about, inappropriate criteria, a list. about the broader conversation. >> the inspector general's audit? >> no. around the broader 4, shouldions of c-

there be guidance. the chief counsel and assistant secretary and commissioner get involved in the guidance plan. i do not have memory of talking about the chief senator. >> thanks. >> about the audit. >> i appreciate the second round and a chance to follow up on earlier questions. to go back to where we were when were to move on, we talking about the fact that we sent a letter, senator hatch and myself, other members joined us on march 14. the letter was in response to a lot of information we were getting from groups back home saying they were being inappropriately asked questions that were irrelevant to whether they thought should be relevant questions about their status. and there were delays and there timefrying frames -- frames for producing information. we wrote the letter laying out

these issues. and as i was asking you guys, whether you were targeting groups politically, that was march 14. 26, march 23, based on your testimony, mr. miller, you say that having received our letter and knowing additional information from the media, you asked your senior advisor for tax exempt organizations to go down and see what is going on and report back to you. you testified earlier that for six weeks you do not recall having asked her what she learned. therefore, you responded to our letter by saying everything is fine. you responded to our letter on april 26. march 14, we ask you these questions. again, this is not about members of this committee. i was not on the committee at the time.

this is about the american people getting the information needed to correct the situation. younow tell us today that received a briefing one week after you sent us a letter. your letter says everything is fine. no targeting. and we can believe or not believe the fact that during that five-week period you did not bother to find out what they were doing in cincinnati. a week after, you do get a briefing. this is the may 3 briefing. you have testified that you were outraged when you got that may.ing on the third of a week after you responded to us. is that correct, that you were outraged? >> i was troubled. >> you used the word outraged last week. if you were so outraged, it seems to me very odd you did not .ry to correct the ne record

you had told us in the letter that everything was fine. on april 26, when you responded to us with that letter, what you had learned on may 3, political criteria like tea party, patriot, we the people was used, would you have told us that? >> i do not or member the letter clearly enough, sir. >> this is the letter you sent back to us based on our march 14 letter. >> yes, sir. >> you do not know about the letter? >> i did not know the list on the 26th. i will tell you, my recollection of the letter is that it was about the letters going on, a separate and distinct aspect. >> the letter asked for the assurance that the specific inquiries were unrelated to "politics, were consistent with the treatment of tax exempt organizations across the spectrum." it asked specifically what criteria and what "bases there were for applying greater

scrutiny for applicants." you responded with a 10-page letter. >> i do not believe there were political motivations. >> ok. my question, you responded with a 10-page letter saying it was neutral, only individualized criteria were used, and there was no question your letter was an accurate. you learned on may 3 it was false. yet you did nothing to correct the public record even though you were outraged based on your own testimony. these are think serious questions for us to ask. i think we deserve answers. not for us, but for the american people and those who were subject to this inappropriate targeting. about ask you a question the audit. first, you have said there is a difference between an audit and an investigation. can you briefly tell us what

the differences in terms of how deep you go? did you use your full investigative powers to uncover wrongdoing? did you use broader subpoena powers? >> we did not thus far in the production of this audit we are discussing, senator. there is no question that as a result of some of the findings that we have uncovered, subsequent action will be taken by us. >> so on page 70 the report, you state -- seven of the report, you state that the inappropriate criteria was not influenced by any organization outside of the irs. been used by the administration to say that there was no influence. let me be clear -- is that a finding of your report, or simply a restatement of what irs employees told you? >> it is a restatement of the information we received from irs employees, senator. >> and that would be consistent

with an audit as compared to an investigation? >> correct. >> so i take it you did not ask anyone in the administration outside of the irs if they ever weighed in with the irs on the issue of monitoring approval of organizations? >> that is correct. >> see you have not even asked the question of anyone outside. >> not at this stage. >> i take it you did not subpoena any relevant e-mails, call logs, schedules, notes from meetings to verify the statements from the iris employees were accurate and complete because that is beyond the scope of an audit? >> actually, we did review quite a few e-mails in the course of this. >> to you feel it was all the e- mails involved with this? schedules, notes, and so on that would verify statements? >> of the people we interviewed and the people at the level that we thought would be directly involved, at that stage. >> is it beyond the scope of an audit to ask people outside of the irs whether they influence

the irs on monitoring approval? >> on a case-by-case basis, senator, in this instance, again, we did not have indications to the interviews we conducted that there was any reason to go beyond that. at the time this audit was being produced, over the course of a year. again, events subsequent to to this have now cost us to reassess how and what we will look at. >> thank you. i think the bottom line is that there is a need for a fuller investigation, as you and senator hatch are undertaking. >> thank you. thank you, all of you, for your testimony here today. there are obviously many more questions not yet answered. the committee will continue to look into this matter. but thank you very much. adjourned. [captioning performed bynational captioning institute] [captions copyright nationalcable satellite corp. 2013] >> hearings on the irs targeting of conservative groups continue wednesday, when

the house oversight and government reform committee questions deputy to real -- treasury secretary. she is expected to invoke her fifth amendment rights. -- 9:30erage at 9:00 30 a.m. eastern on c-span 3. >> this morning, treasury secretary jack lew testified about the limitation of a dodd frank financial regulations. live at 7:00 a.m. eastern, "washington journal" previews the oversight committee hearing on the irs, looks at the future of the keystone oil pipeline, and hears from a reporter on jamie dimon. the u.s.0:00 eastern, house starts with morning hours speeches. >> this is the way it looked during garfield's 1880 campaign. the formal parlor.

she spent a lot of time with her children. they adored their children very much. they had lost two children in infancy. those children died. her children all had the benefit of having two very intelligent parents who strongly believed in education. books were very important for james and lucretia. their children learned to read as well. the family would sit by the fireplace and read to one another, often times out loud. that was one of their favorite activities. we are here in the dining room. in the center of the table is this very interesting art piece. -- it won any award at the philadelphia centennial. mrs. garfield absolutely adored her time at the exposition. she would write pages and pages of what she saw at the sites. a lot of people think of mrs.

garfield as a very artistic way. she was also very, very intelligent, love the sciences. >> a conversation on lucretia garfield is now available on our website. tune in monday for our next program on first lady frances cleveland. >> treasury secretary jack lew says he has directed the new acting irs commissioner to conduct a thorough review of the tiger -- irs targeting of conservative groups. these comments came during a senate banking committee hearing on implementing dodd frank financial regulations and the findings of the financial civility oversight council's annual report. this is an hour and 40 minutes. >> good morning. i will call this hearing to order. i'd like to start by sending my

thoughts and prayers are with the families of moore, oklahoma. it is a difficult time as families mourn the loss of loved ones and begin rebuilding their community. today we welcome secretary jack lew to the committee for the first time since he was confirmed. while this committee lacks jurisdiction over the irs, i am more personally expressing my sincere disappointment and anger regarding the recent revelation that some irs employees returning little -- were targeting political organizations. politics has no faith at the irs. i commend secretary lew and president obama for taking such

action last week. they are looking into whether any laws have been broken and the appropriate senate committees are holding hearings so we can get to the bottom of this. this committee has a duty to oversee efforts to strengthen u.s. financial ability, especially in might of the crisis our economy continues to recover from. today, secretary lew will focus on the financial stability oversight annual report to congress as required by the wall street reform acts. i'm pleased this year's fsoc report shows progress in key areas this committee have devoted attention to, including money market funds, the housing market, libor and economic situation in europe. financial services preparedness

for national disasters. the stock -- the fsoc has made --portant recommendations to new technologies, and financial services compared nice. oc has made, the fss he important recommendations to further safeguard our economy that should be considered. indicators point to well- fsoc.nated the senate has confirmed the first director of the office of financial research, a key position with critical research and analysis. what more needs to be done to improve our nation's financial

stability and priority rules with potential regulators. standardslude enhanced for large and systemic firms. agreements and the volcker rule. fsoc itself continues to work on wee non bank designation. expect additional action on the market funds and the tri party repo market and other proposals and ensured no firm is too big to fail. the three-year anniversary of washing before becoming law and a five-year anniversary of the financial crisis are fast

approaching. they must be finalized soon so congress can assess whether it is necessary to do more. i look forward to hearing your testimony and learning what steps you are taking as fsoc's chair to strengthen the financial stability. with that, i will turn to ranking member crepo for his opening statement. >> thank you. i also want to extend my condolences to the families of those who were killed yesterday as a result of the devastating

tornadoes in oklahoma. all of us keep the people of oklahoma and our hearts and prayers. today secretary lew comes before the committee to testify. the secretary of the treasury wears many hats. he is responsible for formulating and recommending a number of domestic tax policies for the ministration. he is required to trigger for this committee annually to testify on the activities of the council. and to answer questions concerning the most recent annual report. the council 2013 annual report covers many areas of the activities and with a number of potential emerging threats to the financial stability of the united states. i want to focus my opening statement on one particular area that needs your personal

attention. the u.s. capital markets must remain the preferred destination for investors around the world. capital is the life blood of u.s. businesses which in turn are the engines of job creation and economic growth. unfortunately, it is causing investors to look elsewhere for productive investment opportunities. the list of problematic cross- border issues that need to be addressed is growing. and the restoration from four regulators over the lack of international coordination on financial reform measures has reached an unprecedented level. after the so-called volcker rule. recently, a number of foreign regulators have weighed in on federal reserve's will to --opose -- gentlemen enhanced

proposed rule to implement enhanced standards for foreign banking operations. , the european commissioner in charge of financial regulation warned in a letter to the federal reserve chairman ben bernanke that the feds propose rules affecting affecting european banks doing business in the united states will duplicate work already done in europe and create additional cost. the commissioner also warned that the fed proposal could risk a protectionist backlash and threaten the global economic recovery. the frustration reached a new level when nine finance ministers wrote to secretary their concerns about the lack of progress developing workable cross-border rules as part of reforms of the otc derivatives market. they warned that without clear direction from regulators working together, derivatives markets will reseed into localized, less efficient structures.

riveted's end-users will find it more difficult to manage risk and suffer from burdensome regulatory conditions. i look forward to hearing from you about the specific steps you intended take to avoid these cross-border conflicts and the unnecessary costs imposed by them. finally, although this hearing is focused on secretary lew's fsoc, ichairman of the would be remiss if i did not take this opportunity to question about the irs scandal. we are literally conducting an investigation into the irs circumstances about three floors below us at this moment as we meet. i may need to step out to get down to that hearing. the largest bureau within the treasury department is the irs. lastly, the treasury inspector general admission to -- issued a report regarding disturbing regarding the targeting of conservative groups by the

irs. these actions should never be tolerated. president obama has directed secretary lew to make sure all of the inspector general's recommendations are implemented quickly. i look forward to hearing how the secretary will carry out this directive. i also look for to hearing the additional steps he is taking to ensure no future income tax audits will be conducted in such a discriminatory manner. >> thank you, senator. in order to get to secretary lew's testimony and questions, opening statements will be limited to chair and ranking members. the record will be open for the next seven days for opening statements and other materials you would like to submit. today's witness is the 76th secretary of the u.s. department of treasury. secretary bill, welcome. before you begin your statement,

there is concern regarding previous actions at the irs. if you would like to say a few words on that matter, please do that before you begin your testimony. you may begin. >> thank you, mr. chairman. i will like to begin by expressing my own condolences to the people of oklahoma who are suffering so much today. the families are in our thoughts and prayers as they go through the recovery from the devastating tornado in oklahoma city. chairman johnson, ranking member, members of this committee, thank you for the opportunity to testify on the financial stability oversight councils 2013 annual report. before i addressed the report, i would like to say a few words about the treasury inspector general for tax administration's report last week.

it showed some employees at the irs used outrageous methods to --termine if certain groups of qualified for tax exempt status. as the report indicates, while the conduct is not politically motivated, it was unacceptable and inexcusable. administering the tax code without any hint of bias is a solemn obligation that must be carried out with the highest of standards. that's why i moved quickly to make steps to restore confidence in the irs. within 24 hours, i asked for and received the resignation of the acting commissioner. within 24 hours later, the president appointed a new acting commissioner, a person of high integrity who is on the confidence of democrats and republicans for his professionalism. i've directed incoming acting commissioner daniel werfel to carry out a thorough review of the conduct in to take action on three specific things -- making sure those who acted inappropriately are held accountable for their actions, examining and correcting

failures of the system that allow this behavior to happen and taking a forward-looking view in determining whether the irs has systemic problems that need to be addressed. it acting commissioner will take actions as needed and report back to me on his progress within 30 days so we can report back to the president. we are going to make sure nothing like this ever happens again. i'd like to turn to the council's annual report, the subject of this hearing. this report represents extensive collaboration among councilmembers, agencies and staff. to give this a chance to provide the congress and the public -- potential emerging threats to financial stability and recommendations to strengthen the financial system. i want to point out that the strength of our financial system depend greatly on the strength

of our economy. there is no doubt be a made significant progress recovering from the worst economic crisis since the great depression. the economy has been for 15 consecutive quarters. the private sector has been creating jobs for 30 aged eight months. the -- 38 straight months but there is more work to do. we need to keep her foot on the excelerator and economic growth and job creation need to be more rapid. the president has the four-day -- has put forward a jobs and growth plan that strengthens the recovery in manufacturing and worker training well taking a balanced approach to restoring our fiscal health. this strategy will not only help grow or economy now and well and the future, but will the sequester with sensible death said reduction measures. since the council's and report, our financial system has grown stronger in a number of ways. m the levels of the largest--

capital letters -- levels for the largest financial institution have increased. the implementation of. frank and international that -- the dodd frank act and international reform priorities have brought significant progress toward establishing a resilient program globally. the council and member agencies continue to put reforms in place. well additional work remains, we are much closer to the end of the process than the beginning. we have seen a good deal accomplished recently, including progress on the evaluation of a initial set of non-bank financial companies for designation. progress on the consolidated ,upervision of institutions progress on implement in provisions related to living wills, reducing risk and increasing transparency in the derivatives market, and

progress on enhancing protections for bar words and other participants in the mortgage market. despite the positive developments, there are still risks to u.s. financial stability. the report identifies those risks and makes recommendations to mitigate them. it is our judgment that the market participants need to take steps to reduce vulnerabilities. government agencies, regulators and businesses need to address operational risks posed by technology failures, natural disasters and cyber attacks. reforms are needed to address the reliance on self-reported interest rates like libor. i want to thank the staff for their hard work and dedication. this is an ongoing effort. we look forward to continuing to work with you, this committee and congress to make sure we have a more resilient and stable financial system. i thank you and look forward to answering your questions. >> thank you for your testimony. i will ask the clerk to put five minutes on :00 for each member.

-- on the clock for each member. mr. secretary, the wall street reform act provides regulators a number of tools to enhance financial stability. do you think wall street reform not onlytools to strengthen our financial system, but also to end too big to fail? >> i think the reforms provide powerful tools for regulators by creating fsoc. the policy of dodd-frank was very clear. too big to fail is in a mix of old policy and it had to end -- is an unacceptable policy and it had to end. there is still more progress to be made.

a number of issues -- agencies are determining how to set the levels so that in the end, we will be able to say too big to fail has ended. one of the principles but is important is we must implement dodd-frank and we need to do it quickly. we are also going to take an ongoing look at the system. one of the problems between the great depression and the financial crisis of 2008 was too long a period went by and we lost our ability to see what was going on and to regulate it effectively. we need to make the resolve and determination to keep asking the question as we finished implementing and going forward, whether we still have the tools we need or whether we need more. >> what are you doing to ensure key roles that strengthen

financial stability and end too big to fail are completed as soon as possible? when should we expect to see designations made? >> i have been secretary for just under three months. i have had three meetings. in between, i have had numerous conversations and meetings on various matters that are still us sending to implement the dodd frank legislation. i have made clear to all the fsoc that it is a matter of enormous priority so that all the participants of the market know what the policies are and that we take the taps -- steps to protect the public from another financial crisis.

i think there will be progress this year. we have indicated that the last public meeting that we are making progress on the non-bank designation. i'm hoping we will soon be in a position to make a final determination in that area. i think there is ongoing work in all the areas i mentioned in my opening statement. one of the things i see as my role as chairman is to make sure that we do not measure our progress in months and years, but start to measure our progress in weeks and months. >> how soon do you see ?esignations made, specifically >> i do not want to jump ahead of a decision that requires the we havethe council, but stand show staff work going on between meetings. another meeting is the week after next. we are trying to get this matter up for decisions as quickly as possible. secretary, international

coordination and corporation is important for a successful financial reform. are there specific areas regarding cross-border resolution and enhanced credential standards where more can be done to strengthen coordination with our global counterparts? >> mr. chairman, i think we have seen a substantial improvement in international cooperation as we have gone through this process. the g-20 is working hard on trying to coordinate this area. there are informal groups of regulators and central bankers and finance is coordinating on this. these are tough issues for each of us within our borders. they are tough issues between countries. and one of the principles that we are making paramount is that our mandate is to protect the u.s. taxpayer and the u.s. economy by setting standards of

the level we think is appropriate. we are trying very hard in the international community to make it a race to the top, not a race to the bottom. if we can agree on high standards, a lot of the issues are resolved by having compatible highest and words. i think we are making a lot of progress in that regard. i know these are going to be challenging times for competition in the financial markets. it's important that the u.s. remain a competitive financial market.it is equally important it remain a candidate financial market where we have the safeguards to protect having taxpayers in the position they were in after the economic crisis in 2008. >> thank you, mr. chairman. secretary, i would like to start with a few questions about the irs situation. when did you first become aware of the allegations that the irs was targeting conservative groups? >> senator, i first came aware that there was an audit

underway on march 15 when i had a meeting with the inspector general. it was in my early weeks of the treasury department. it was the process of having initial getting to know you meetings. the inspector general flag a number of items without going into great detail. an audit and they told me there might be troubling findings, but did not describe them in detail. i did not learn any more about it until it became public. >> that was my next question. when did you first received confirmation the allegations were in fact true? >> when it was publicly reported a week ago, friday, i was at the g-seven meetings in the united kingdom, and i was outraged. i did not yet have the report and did not get the report until tuesday. when i got the report, my immediate reaction was to take the steps i noted in my opening statement, to ask for and receive the resignation of the acting commissioner, to help

the president make the decision to appoint a new acting commissioner, and to charge the new acting commissioner with the responsibilities i described. >> i am sure you are aware in congressional testimony last agencyit was admitted the planted a question at the american bar association conference to reveal its actions before notifying congress. were you personally involved in that decision? >> no. >> do you believe it was an appropriate way to make the information public? >> there were some conversations that staff level between treasury and irs. it was the discretion of the irs to decide how to manage this matter. the guiding principle for the treasury department and -- in irs investigation is to not interfere in any way, to not interfere with the ig's ability

to find facts, to interview people, the fine record, and in no way to color the outcome. i am not aware of any action that was taken with the treasury department that is inconsistent with that well established practice. i went and asked about this -- if i would have been asked, i would have advised against it. but it was a decision for the iris to make. >> my time is quickly running out and i probably will and get to the questions in this round but with regard to the internal revenue service, does the revelation about the actions of different agencies in the administration, there is a real unjustified discussion among the -- a real and i think justified

discussion among the people of the united states that the internal revenue service is in many ways, the prosecutor, the judge, the jury, and the executioner. i understand there are legal points in the process of the irs exercising its activities where people can get review. but there is a very real concern in my opinion that the irs has such incredible power that abuses of the irs are viewed by the american public with great concern. given then to you, fact that the president has directed you to quickly implement the inspector general's nine request or nine recommendations, what additional steps that you taken to restore public trust in the integrity of the irs and the treasury department, and frankly to ensure that no future income tax audits will ever again be conducted in this kind of manner? >> first, i cannot say strongly enough how unacceptable this behavior was and how outraged i was when i learned about it.

i think the irs system has to be beyond politics. the irs has an independent character because there is the concern that in past decades there was political interference in the irs. i will take every step that i can to make sure that the management structure and the way the irs conducts its business is set up in a way to prevent this from happening in the future. i have already had that conversation with the new acting commissioner who takes over tomorrow. he has a very short time to identify who should be accountable, how to get to the bottom of how the management and communication systems broke down, and to look systemically and what other steps need to be taken. i will not cross that line into the administration of the tax system because the cure could be worse than the disease.

we need to make sure there's no political involvement of the administration and the management of the irs is the responsibility of the treasury secretary. it has to be within the irs and apart from politics. >> thank you very much, mr. chairman. one of the issues raised by the report is the systemic risk potentially caused by the default of relying on -- what specific policy or regulatory tools to the council suggest to deal with this systemic risk? >> it is part of a broader set of systemic concerns that have to do with wholesale funding. the short-term funding for longer-term obligations.

there's a very real risk that if the short-term funding ceases to be available and is not well collateralized, there begins an unraveling process that could become systemically very damaging. the regulation -- it is three different parties. the federal reserve board is looking at the rules that govern the banks that do the short-term lending to the broker-dealers and is looking at the adequacy of collateral and other issues to try to make sure they are taking provincial steps in this area. the report identified this along with money-market funds as a source of real concern. i must say it is something i have put a fair amount of attention into as treasury secretary. >> falling on the chairman's discussion, in dodd-frank there

was an enhanced capital requirements for bank holding companies. senator collins was essential in getting this essential piece of as youation included. look, you go beyond the traditional notion of a bank holding company that may have the deposit activities, commercial lending, even investment banking, and get into the realm of insurance companies. have you given thought to the applicability of this section in terms of insurance companies in particular? >> i think the per se step is to -- the first step is to make the determination as to whether or not the banks should be designated because they are so significant. the standard is whether the material distress institutions is a threat to the u.s. financial stability. we have been going through the

process and a very orderly way of reviewing the potential designation against that standard. if the designation is made, the authority to regulate would go to one or another institution. the federal reserve board would have substantial responsibility in this area. questions have been raised as to whether or not the tools are perfectly fitting for non-banks, and that is an issue that we will look at. >> you have indicated that because of the self reporting and highly subjective measures have to be replaced. is there any thoughts about in the short run and the long run how we should replace it and how quickly we would have to move to replace it? >> the report notes the need for there to be a replacement. frankly, there is not a ready

replacement. libor is something the market self designated and it is contractually something that parties have signed onto. there is not an immediate substitute that would be available. there's an international process that involves regulators from multiple nations and market participants from multiple nations. the report properly noted the urgency of developing an alternative so if there is a transition, there can be an orderly transition. libor is the reference rate that is included in millions of contractual agreements. it would have to be pursuant to those contractual terms. there is a great deal of importance that the process move speedily and that allowed her to -- that is a reference rate as

an alternative be available. >> a quick follow-up question. it is ubiquitous in every contract, almost every contract. this is being regulated very loosely by the british authorities, and they being very aggressive in ensuring that it -- even though it is subjective, that it is less subjective than before? cases ofwere manipulation that were totally unacceptable. the british authorities have recognized that was in on acceptable set of events, and they are determined to not let that be repeated. i think the challenge is that the rate is inherently uncertain toause it is referenced overnight lending between banks at a time when there is much less overnight lending between banks. which is one of the reasons

there needs to be a reference rate less susceptible to manipulation. >> senator shelby. >> welcome, mr. secretary. it is my understanding that the treasury secretary, the set up at the treasury, the irs commissioner reports to the treasury secretary through the deputy secretary of the treasury. is that correct? >> that is correct. who was deputy secretary of the treasury in 2012? >> the current deputy secretary. >> have you talked to him about the irs situation? >> yes, i have. >> did he relate to you any knowledge that he may have had about what was going on in cincinnati when the irs was targeting these conservative

groups? >> he and i both received the ig's report at the same time last tuesday. we have had numerous conversations about it since then. >> you testified you met with the inspector general in march, several months back, shortly after taking office and the inspector general presented a list of ongoing investigations, including the irs targeting >>ese conservative groups. what he indicated to me was there was an audit taking place of the 501(c) four determination unit. he did indicate there were potentially -- >> did you pursue that -- did you ask why they would do such a thing or anything? what did you do? >> the fact it is the practice that treasury is quite properly when you are notified of an ig investigation, you allow the ig to do their work. you don't get in the way. you make sure that have access

to whatever they need to complete their audit. that is what treasury was doing. i don't think the executive would have taken any action at-- he expected me to take any action at that time, because i was wil awaiting his report. >> before you were confirmed in your present job, your the chief of staff at the white house, correct? >> yes. >> when did you become chief of staff of the white house? >> in january 2012. so when this was going on in cincinnati, you were chief of staff at the white house, correct? you had no knowledge whatsoever of anything amiss dealing with the irs, approval, disapproval, delay or anything specific? >> oh was not aware the audit until i met with the inspector general. >> have you heard anything at the white house? >> i was not aware of any specific facts. i know that questions had been raised. the fact is this audit was

publicly posted in october 2012. the fact that an audit was going on was a matter of public record. i had no specific knowledge. >> did you believe that someone at the cincinnati office was just on their own, targeting the conservative groups, slowing them down? is that part of the culture at the obama white house? >> i have read the ig report quite carefully and i think it is very important to note that there is no suggestion of any political interference with the process of making the determination. there is unacceptable behavior that happened at the irs that has to stop and cannot happen again, but there's no suggestion of any political intervention. frankly, the way we manage ig reports is meant to keep politics out of any review and to make sure i g has the complete freedom to find whatever facts that fine. i said what i've said to every

ig -- auditor i've worked with, you have my support. if there are problems i want to know about them and fix them. >> is the ig report complete now?>> the audit is complete. ,> could the ig, if you saw fit thed he recommended to justice department possible prosecution of people who were abusing the public trust and abusing the irs regulations? to makehave the power recommendations. i am not aware of any recommendation in this case. i am aware the attorney general has indicated they will investigate whether there has been criminal activity. >> as secretary of treasury, do you have the power to recommend things to the justice department on possible prosecution of people who abuse the irs for political reasons?

>> i believe in this and all matters that nobody is above the law. i think the first question we have is, who is responsible, and holding people accountable for their actions. we started a day after the report was made public by asking for and receiving the resignation of the acting commissioner. we will continue to hold people accountable for their actions. we have to restore confidence in the irs has to be free of any bias. >> are you concerned at all in your position as secretary of the treasury that some of this criteria that was used in cincinnati to target conservative political groups could have been explicitly or implicitly endorsed by individuals higher up in this administration? >> i've seen no suggestion of any political involvement at all. what i have said and what i

believe is that it was unacceptable, and whoever is responsible should be held accountable. >> but you don't think it does happen out of thin air. there's something triggering all this, either cultural or somebody pushing it inside. don't you think that happened? >> i think the cincinnati office exercised very poor judgment and used criteria that are unacceptable. we made it clear that the irs has to be beyond any suspicion of bias. >> the irs should be above suspicion period. >> yes. >> appreciate your answers with reference to the irs. i want to call your attention as an element of that something i am concerned about, broader structure and how the agency pursues the terminations.

that petition was fought with the treasury department and the irs looking for revision of that theyulations. would believe would clean up the mess we are dealing with today. forstatute congress passed eligibility says civil leagues or organizations not organized for profit but operating exclusively for the promotion of social welfare are eligible. the irs regulation, an organization as operate exclusively for the promotion of social welfare it is primarily engaged in promoting the common good and general welfare. i don't think congress meant primarily when they passed the action that says exclusively. as an example of how an agency gets away from the congressional intent is something i hope when we are looking at the totality of this problem we are pursuing as well.

>> one of the recommendations that the ig pause a report made is that we should take a look at this very issue. that will be going on immediately with the new acting commissioner coming in. let me follow up on something senator reed talked about which i raised in previous hearings, which is the libor interest rate. i want to get a sense of how much effort are we putting into finding alternatives here, because even you noted that in referencing the libor, you said it diminishes market integrity and will be unsustainable in the long run. how much effort or putting into seeking alternatives to the libor, because it is not sustainable in the long run. we should be starting to deal with that challenge now. >> i totally agree. there is an enormous amount

effort being put into it. the chair of our commodities futures trading commission has been working with international regulators on this for some time. i have been at several international meetings where finance ministers and central- bank heads have discussed it. there is a common sense, an urgency to develop an alternative because any transition has to be orderly. the fact that there is a problem is one part of the analysis. there has to be a solution. at the moment there is not an easy alternative, which is why it is so critical and as the report noted, a matter of high priority to develop a reference rate that could be used as an -- tonative to live more. libor. >> i am looking forward to that because i am seriously concerned about libor trust rate manipulation.and the consequences it has on ensuring

the integrity of interest rates, that affects everybody. consumers, businesses, and communities. more broadly, i am also interested in whether any of the federal reserve or financial stability oversight council projections are based in whole or in part on surveys are estimates made by institutions with a financial stake in the outcome. in other words, are the projections about inflation that --e fed uses to take monastery monetary policy decisions about risk the overall economy susceptible to the same risk of manipulation? >> i would have to take that question. i read the federal reserve board projections. they have a very talented team of economists who work there and i know they consult all the major forecast as we do. what specific forecast the use

-- they use i would have to check. >> i would like to hear back from the department on that because it makes me concerned that those who have an interest at the end of the day are given the information to make a determination, it raises the question of the fox guarding the chicken coop. if we are going to have transparency and greater confidence in our financial institutions, we want to have that across the spectrum. >> we do our own economic assumption and compare them to the blue chips, the cbo economic assumption. the general practice is we do our own economic projections and see where they hit on the spectrum of others. if there is an outlier estimates >> our dislike to call your attention to two things.