HEARING ON INTERNAL REVENUE SERVICE
OPERATIONS AND THE 2011 TAX RETURN
HEARING BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
March 31, 2011
Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
DIANE BLACK, Tennessee
JOHN LEWIS, Georgia
XAVIER BECERRA, California
RON KIND, Wisconsin
JIM MCDERMOTT, Washington
JON TRAUB, Staff Director
C O N T E N T S
The Honorable Douglas Shulman, Commissioner, Internal Revenue Service
HEARING ON INTERNAL REVENUE SERVICE
OPERATIONS AND THE 2011 TAX RETURN
U.S. House of Representatives,
Committee on Ways and Means,
The subcommittee met, pursuant to notice, at 10:02 a.m., in Room 1100, Longworth House Office Building, Hon. Charles Boustany [chairman of the subcommittee] presiding.
[The advisory of the hearing follows:]
*Chairman Boustany. The subcommittee will come to order. Good morning. I would like to welcome everyone to today’s hearing on the Internal Revenue Service and the 2011 tax return filing season.
Today’s conversation about the IRS should begin with a topic too often ignored, and that is the taxpayer. The National Taxpayer Advocate’s recent report to Congress provided some alarming facts on what the federal tax code has become, and how it affects the average taxpayer.
Every year taxpayers face a tax code of growing complexity. For instance, there have been nearly 5,000 changes to the tax code in the past 10 years. Between the period of 1975 and 2005, the code tripled in size. As a result of the growing length and complexity of the tax code, individual taxpayers and businesses spend an estimated 6.1 billion hours and $163 billion every single year complying with the tax filing requirements. The cost of compliance for your average individual taxpayer was over $250 in 2007.
So, as we meet today, we are in the middle of the 2011 tax return filing season. And millions of individuals and businesses are working to meet their annual tax return filing obligations. As of March 18th, IRS had processed over 73 million individual tax returns, and issued nearly 65 million refunds, totaling $193 billion. With 2.5 weeks to go until the April 18th filing deadline, the subcommittee looks forward to hearing more about the ongoing tax return season and any problems the Agency and tax return filers might be encountering.
The subcommittee would also like to learn more about the efforts the IRS has undertaken to improve the efficient processing of returns and refunds, including its eFiling modernization program.
Charged with administering this growing tax code, the IRS must simultaneously respect the rights of taxpayers, provide assistance to the millions of taxpayers who have questions about their taxes, and go after those who cheat the system. And the Agency has to do this against the backdrop of ever‑increasing responsibilities to administer social policy programs. The IRS’s dual mission to both revenue collector and social policy program administrator diverts IRS resources from its core mission, and can diminish taxpayer service.
Among the biggest contributors to this problem is the new health care law, which gives the IRS a host of new responsibilities, including the indoor tanning tax, new taxes and fees on employers and individuals, and a complex small business tax credit.
For 2011 fiscal year, the IRS has requested nearly $6 billion, an increase of more than 8 percent from the fiscal year 2011 appropriation. Included in this $6 billion is a request for nearly a half‑a‑billion dollars and over 1,200 new employees to implement the health care law’s new provisions.
And the cost of the health care law do not end there. IRS’s implementation of the health care law is estimated to cost somewhere between $5 billion and $10 billion over the next 10 years. So, in addition to the current tax return filing season and the IRS budget request, I hope we can take this opportunity to discuss this dual mission, and whether it is hampering the IRS’s ability and core revenue collection responsibilities.
So, with that, I want to welcome Commissioner Shulman today, who is here to testify, and look forward to a fruitful discussion of his agency, its mission, and the ongoing tax return filing season.
Commissioner, I know you were working under very time‑constrained circumstances with the passage of the law in December. I know you have scrambled to get things done. And it seems to me at this stage things are going fairly well with the filing season, so we look forward to your comments.
Before I yield to Ranking Member Lewis, I ask unanimous consent that all Members’ written statements be included in the record.
*Chairman Boustany. Without objection, so ordered. I also ask unanimous consent that the GAO’s interim report on the 2011 tax filing season, which is being released today, also be included in the record.
*Chairman Boustany. Without objection, so ordered.
*Chairman Boustany. Now I want to welcome Commissioner Shulman, and I will yield to the ranking member for his opening statement.
*Mr. Lewis. Well, thank you very much, Mr. Chairman. Mr. Chairman, I want to thank you for holding this hearing on the Internal Revenue Service. I am pleased to have the Commissioner before us today. This hearing is timely. I have serious concerns about the Republican plans to cut funding for the agency, and effect that those cuts will have on our taxpayers. The majority’s plan to cut $600 million from the agency budget this year will result in $4 billion in lost revenue. I do not understand how this helps the deficit.
The plan also harms taxpayers. An estimated three million people will not have their telephone calls answered, and one million people will not receive face‑to‑face service at an agency center. This makes no sense.
I look forward to discussing the agency’s proposed budget for next year. Most of the funds requested for the Affordable Care Act are to assist taxpayers and improve operations, not for enforcement agents, as charged by some.
Finally, I would like to ensure that the Agency has the resources it needs to balance taxpayer services and enforcement. It is important for the agencies to provide services that help elderly, low income, and working class Americans fulfill their tax obligations. It is particularly important that the tax laws are applied fairly to all taxpayers. I look forward to the Commissioner’s testimony on how to achieve this balance.
And I welcome you also, Mr. Commissioner. Thank you, Mr. Chairman.
*Chairman Boustany. I thank the ranking member. And now I want to welcome IRS commissioner Douglas Shulman.
Commissioner Shulman has served in this position since his appointment in 2008. And, sir, we want to thank you for being here today to testify.
As is customary, you will have the five minutes for your oral statement, to present your testimony, and your full written testimony will be submitted for the record. And I now will yield time to Commissioner Shulman to present your testimony.
Thank you, sir.
STATEMENT OF DOUGLAS SHULMAN, COMMISSIONER, INTERNAL REVENUE SERVICE
*Mr. Shulman. Chairman Boustany, Ranking Member Lewis, members of the subcommittee, thank you for this opportunity to testify on the filing season, and to provide you with an overview of our proposed 2012 budget.
Despite some of the challenges that the chairman mentioned earlier this year, particularly the late passage of tax law, the 2011 filing season has proceeded smoothly. As of March 19th of this year, we have received more than 75 million individual returns, have issued 65 million refunds, with an average value of refunds of about $3,000.
Our eFile program continues to grow. This year, so far, our eFile rate is 6.3 percent higher than last year, and last year was 5 percent higher than the year before. We also continue to see people using their home computers and filing continuing to grow. We have received almost 25 million returns from home computers, a 9 percent increase over last year. The reason this is so significant is it is much cheaper for the Federal Government to process an electronically‑filed return. It costs about $.17, as opposed to $3.66 for a paper return. And people get their refunds much quicker.
We have also seen an increase in self service options. Our web traffic has grown eight percent. Our “Where’s My Refund” tool has grown 19 percent. And automated calls answered have increased by about 21 percent.
Regarding our answering phone calls, I am pleased to tell you our level of service, despite a flat budget, remains at 74 percent. And our accuracy remains at 95 percent. And so the phone operation is going well this year.
Let me also note during this filing season we continue to try to adjust core programs to meet evolving needs of taxpayers. And a good example of this is what I call our fresh start program, which is focused on our collection area. We announced that we were expanding our offer in compromise program, making the ability for lien withdrawal easier, making it easier for small businesses to enter an installment plan with us this year, and changing our criteria for filing liens. And you are going to see us continue to evolve our programs as taxpayer needs warrant it.
Let me now turn to the 2012 budget. This budget was crafted during a time of fiscal austerity. For me, that means aggressively pursuing savings where we can find savings, but also investing in strategic priorities that enhance the nation’s tax system.
I think the President made clear in the budget that the IRS is vital to the functioning of the government, to keeping our nation strong and our economy strong. Last year, we collected $2.3 trillion. This translates to every dollar spent on the IRS, about $200 comes into the Federal Government. I think it is in recognition of the critical role that we play that this 2012 budget makes judicious investments. It also tries to keep the balance between taxpayer service, serving honest Americans, and our enforcement programs, making sure we find people who aren’t paying their fair share of taxes.
It also continues our investment in our core account database, which is the cornerstone of our modernization effort. When this is complete in 2012, assuming we get the funding, it is going to mean faster processing of all returns, faster refunds to all Americans, and enhanced data security of our technology systems.
Because of our unique revenue‑raising functions, our budget more than pays for itself, and directly contributes to deficit reduction. And I will also note this year’s budget, as well as the last several years that I have been here, has significant savings. We have $190 million of program cuts and savings in the 2012 budget.
Now, I would be remiss in my responsibilities if I didn’t make a few comments about H.R. 1. Under the House version of the continuing resolution, the total 2011 funding for the IRS would be $603 million below the 2010‑enacted levels, with potentially devastating effects to the nation’s tax system.
If H.R. 1 were to be enacted, the IRS would have to make substantial and immediate cuts to all of its programs, including its enforcement programs. We estimate that this would reduce enforcement revenue this year by $4 billion. This would increase the deficit by about seven times the magnitude of the proposed reduction in the budget.
In addition, such a conspicuous drop in IRS enforcement activities could have an impact on longer‑term voluntary compliance. We would also be forced to dramatically reduce resources to taxpayer services, leading to millions of unanswered phone calls, delayed processing of correspondence, and potentially delayed refunds.
In conclusion, we are in a very challenging environment with difficult choices to make. Despite this year’s challenges, the filing season is progressing smoothly. So I look forward to a constructive dialogue today and over the coming weeks and months.
And Mr. Chairman and Ranking Member Lewis, I also just want to very much thank you for the support and constructive dialogue that this committee has had with our agency over the last several years, and continuing this year. That concludes my testimony.
[The statement of Mr. Shulman follows:]
*Chairman Boustany. Thank you, Commissioner. I mentioned to you before the hearing I appreciated your written testimony and some of the breakdowns that you gave us. And the information was very, very helpful.
As I mentioned in my opening statement, too often we all forget the enormous price in both time and dollars that the individual taxpayer has to pay to comply with the tax filing requirement. And, of course, Americans spend a vast amount of time and resources every year to file their tax returns. The tax code clearly is growing in complexity, and this shifts enormous cost to the taxpayer, but also makes honest compliance more difficult. The complexities have added significant burdens to the IRS.
And just a simple question. Is it your opinion that the tax code is too complex?
*Mr. Shulman. Yes.
*Chairman Boustany. We are going to be going through tax reform, and this is certainly going to take time. It is going to be a deliberative process. And so, I think as we go through that process, clearly with a mind on how to simplify things for the taxpayer, we also need to keep in mind the burdens that it places on your agency as well. And I would just like to hear you expound a little more on that aspect of the complexity.
*Mr. Shulman. Sure. So my short answer, yes, is what I believe. The tax code is incredibly complex, and unfortunately has been going in the wrong direction over the last decade.
As I mentioned in my remarks, the vast majority of my employees’ time and resources is spent trying to serve the American people and help them wade through tax complexity, and get their refunds quickly. We have a pretty unique view into what it feels like to be a taxpayer, wrestling with the tax code. We would be happy to engage in whatever dialogue people would like, just about simplicity.
We also can see where there is either honest mistakes made, and ‑‑ because of the complexity, a lot of non‑compliance is honest mistakes by taxpayers, just getting tripped up with the code. We also see where we have issues in areas of controversy. A lot of places where we have controversy is where there is complexity, because there is vagaries in the law we then need to, with the Treasury Department, promulgate guidance.
And so, anything you can do to simplify the code certainly helps our agency, because we spend a lot of time answering questions, providing service, correcting mistakes, and then having enforcement actions around the complex areas of the law. My belief is it would certainly help taxpayers.
*Chairman Boustany. And I think you bring an important perspective to this, because I know in our conversations in the past, you have started businesses, you came from the business world and had to deal with the tax code from the perspective of a business owner. And now, your position heading the agency, the Internal Revenue Service.
And I think you told me in the past that you get assistance when you file. Is that true?
*Mr. Shulman. I traditionally have, yes.
*Chairman Boustany. Yes. And so, when the IRS commissioner himself is requiring, you know, professional assistance to deal with the tax code, I think that is a statement in and of itself, as many of us who serve in Congress probably also ‑‑ I know I get professional help with mine. So, again, it is just an indicator of the complexity of the code.
The new health care law, of course, it is no news that it has added enormous new duties and responsibilities. I mentioned an indoor tanning tax, new Medicare part D rebates, new taxes on drug makers, insurance subsidies, employer penalties, and of course, the individual mandate.
The 2012 budget proposal request, nearly half‑a‑billion dollars in new funding, and I think we’ve seen the figure of 1,200 new employees to implement the law for next year. And much of this in the law isn’t implemented until later in the decade. So I think CBO estimates that the 10‑year cost for the IRS is going to be somewhere in the $5 billion to $10 billion range. And do you agree with that, as a result of the Affordable Care Act? Is that ‑
*Mr. Shulman. Yes.
*Chairman Boustany. Do you agree with ‑
*Mr. Shulman. I think the CBO estimates are ‑
*Chairman Boustany. Okay.
*Mr. Shulman. ‑‑ in the general direction.
*Chairman Boustany. Yes. And for 2012 do you have any indication ‑‑ I think we have seen mention of tens of millions of dollars for infrastructure related to the Affordable Care Act, and I guess, related staff. Do you have a sense of what kind of staffing request or build‑out you will need for the 2012 budget?
*Mr. Shulman. Yes, the 2012 budget submitted is the 1,200 people. Just a few comments about that. I want to make very clear that the IRS’s role in the Affordable Care Act is to implement the tax code provisions in the act, the movement of money. It is really HHS’s responsibility to be involved in the health policy issues.
The vast majority of our request ‑‑ 82 percent ‑‑ is really around technology and infrastructure to build systems to match household incomes ‑‑ because right now we have AGI by individuals and couples ‑‑ and build the interfaces with insurance companies and the state exchanges to administer the refundable credit portion of that. That is the vast majority of the request.
*Chairman Boustany. That is the big part. Have you ‑‑ do you have an estimate of how many full‑time employees you’re going to need to bring in for the implementation in 2012?
*Mr. Shulman. So 2012 is the 1,200.
*Chairman Boustany. That is the 1,200.
*Mr. Shulman. Yes.
*Chairman Boustany. Okay. For clarification. Okay, thank you.
I now yield time to the ranking member.
*Mr. Lewis. Thank you, Mr. Chairman. Mr. Commissioner, again I want to thank you for being here, and I want to thank you for your years of service.
I noticed that you have a number of open houses this filing season. I would like to know who attended these open houses, and what problems are they facing?
*Mr. Shulman. About two years ago, as we continued to innovate around service ‑‑ and two years ago we were still deep in the nation’s worst recession ‑‑ I really sat down with my senior team and said, what can we do to help taxpayers? How can we go the extra mile to help resolve issues?
Last year we actually held 1,000 open houses around the country. And they were Saturdays, trying to create another service option so working people who had the weekend off could do this. It was mainly targeted at individual taxpayers, as well as small businesses, who had an outstanding issue with the IRS and wanted to resolve it.
A lot of people, if they get behind on their tax, don’t understand they can come in, and get on an installment plan. If they really can’t pay and their circumstances have changed, we can put them in currently not collectible status and leave them alone for a year. And we can also compromise their debt, if there is no prospect of paying.
So, we ‑‑ and what we did is we made these available, and we had everyone from revenue agents, customer service reps, appeals officers who could settle, so everyone was there that they could settle their issues.
This year we are repeating it, based on lessons of last year. I think the main issues ‑‑ and I can get back to you with a specific breakdown ‑‑ is we’re trying to target people who have an outstanding debt, or are wrapped up with us in some way, either need to get on an installment plan, need to pay, want to get a lien released, or have simple tax law questions.
We will service anyone from across the board, but we are really trying to focus on people who got caught up in the economic downturn, whose circumstances have changed. We can answer questions and really resolve any situations, once and for all.
*Mr. Lewis. Has the agency been a little more liberal during these difficult economic times with taxpayers?
*Mr. Shulman. The way I would describe it is we always have the ability to be reasonable with folks, and compromise the debt, et cetera. I encourage anyone on the subcommittee to come visit IRS facilities. If you walk around, despite the popular image of the IRS in people’s head, if you walk around and meet any of our employees, they say “I am serving the American people.”
Again, a year‑and‑a‑half ago we did the open houses. I also announced expedited lien release for people who are refinancing houses. As I mentioned, this year we increased from $25,000 of tax debt, where a small business could automatically get on an installment plan without any questions asked to $50,000 this year. We basically said we won’t file a lien with someone if they create direct deposits with us this year. People who felt that their credit scores were being hurt because a lien wasn’t withdrawn after they paid their debt, but rather was released, we made it so they can automatically get it withdrawn.
And so, absolutely I think my answer is in these tough economic times I have pushed the agency hard, and the agency has responded very well, to get creative, to try to make sure we help out taxpayers where we can, while also trying to make sure those who can afford to pay, pay their tax bill.
*Mr. Lewis. Mr. Commissioner, are those that claim the earned income tax credit more likely to be audited than the general population?
*Mr. Shulman. Yes, they are. With any large refundable tax credit there is always the temptation for fraud. It is also a very complex credit, as I was discussing with the chairman. And so I think there is a whole set of honest mistakes that happen in claiming that.
We basically have a two percent audit rate of earned income tax credit. We have a one percent audit rate for the rest of the individual taxpayer population. And about 36 percent of our audits last year were targeted at the earned income tax credit.
What we try to do with that program, like any of our programs, is have balance. We do a lot of outreach and education ‑‑ we’ve done it with a lot of Members of Congress ‑‑ to make sure people who are eligible take advantage of the credit. And then we have very rigorous enforcement programs to make sure people who aren’t eligible ‑‑ we try to stop them from getting the credit.
*Mr. Lewis. Thank you, Mr. Commissioner. Thank you, Mr. Chairman.
*Chairman Boustany. I thank the ranking member. The chair now recognizes Mr. Gerlach for five minutes.
*Mr. Gerlach. Thank you, Mr. Chairman. Thank you, Commissioner, for being here.
Can I follow up on just some of that last commentary you made on auditing? Does ‑‑ the auditing work that the IRS does, does that fall under the enforcement part of your budget request, for this year, $5.9 billion that you’re requesting for “enforcement?” Would auditing of individuals and businesses fall under that category?
*Mr. Shulman. Yes, it would.
*Mr. Gerlach. Okay. And did I hear you correctly just a moment ago that, on average, you audit individuals ‑‑ about one percent of the individuals that file with the IRS per year?
*Mr. Shulman. That has been a traditional rate, spread out across all individuals. It varies by income category, it varies by, as I said, earned income tax credits, a particular interest of ours.
*Mr. Gerlach. And what percent of business filers do you audit per year?
*Mr. Shulman. It depends on the level of income, and also, the volume of filers that come in. Some quick statistics, businesses that have assets below 10 million last year, it was about .94 percent. So just under one ‑
*Mr. Gerlach. Just under one?
*Mr. Shulman. Just under one percent. And then it goes up. Businesses that have over $250 million of assets have about a 23 percent audit coverage rate. And then the largest corporations in the country generally have auditors on site and have lots of ongoing interactions with us.
*Mr. Gerlach. So are the audits ‑‑ for the business audit, are they kicked off based upon random selection, or based upon red flags that come up from the prior filings, or the periodic filings? What kicks in an audit for particularly a small business owner?
*Mr. Shulman. Yes. Our audit criteria is based on a number of factors. We have been, as an agency ‑‑ and I have been very focused on ‑‑ risk‑based audits as the most important to us. So it can be ‑‑ we have certain geographic coverage. We have certain risk factors and parameters around data that comes in on returns.
And we also have certain areas ‑‑ certain businesses which are more risky, from a compliance standpoint. Cash businesses, obviously, have different compliance issues than other ‑
*Mr. Gerlach. And what is the average length of an audit? How much time does your auditor spend in that business?
And how do you juxtapose that against the amount of time, therefore, the business has to participate and cooperate with those auditors, in terms of the time they are then taking their employees away from their business duties to them comply with the audit requests that the auditors are making?
What is the ratio of time you are spending in the businesses auditing them, and what is the amount of time they are putting in to cooperate and participate and try to satisfy the auditor’s request?
*Mr. Shulman. I can get back to you with that. I don’t have the ratio off the top of my head.
*Mr. Gerlach. Okay. But I guess what I am getting at is what is the loss of productivity and profitability of these businesses that are taking time to comply with your request, and have you ever calculated what the impact of the auditing process is on profitability and productivity of the businesses that you are involved in?
*Mr. Shulman. Yes, we look at burden and calculate burden quite a bit. And let me just share with you my approach, and my philosophy ‑
*Mr. Gerlach. Yes, yes.
*Mr. Shulman. ‑‑ about this. We try to do is do our job of making sure there is compliance with the law, do a lot of outreach and education ‑‑ we’ve got extensive programs around small businesses, and making sure we help them comply with the law ‑‑ and try to do our job in the least burdensome manner possible. Obviously, nobody likes to have an audit.
*Mr. Gerlach. Yes.
*Mr. Shulman. And it’s going to take some time when someone does an audit.
We have tried to move more and more, as I mentioned, to targeting our audits to places where there is potential non‑compliance, and leaving taxpayers who have traditionally been compliant alone. We have also tried to get better and better at using data, so that when data comes in, we analyze the data, and when we go in we spend less time.
*Mr. Gerlach. What ‑‑ of those that are audited on the business side ‑‑ and I would be interested on the individual side, as well ‑‑ but on the business side, staying with that, how many are found to be in non‑compliance, or to have violated the code, based upon that audit?
What percentage of those in the total auditing ‑‑ audited group there, how many do you find have violated the law and need to either pay penalties or interest or a combination?
*Mr. Shulman. We measure something called the no‑change rate, which is what percentage of people do we audit, and there has been no adjustment made. I will get you the numbers. One of the measures is ‑‑ are we doing risk‑based audits appropriately? If we are auditing and there is not much of a no‑change rate, then it means we might be picking the wrong folks.
If ‑‑ the no‑change rates have been moving up, that means our analytical group has gotten better at risk‑based audits. But we’ve got to be real careful.
*Mr. Gerlach. Is it 50 percent of those businesses audited?
*Mr. Shulman. Yes ‑‑ it is more than 50 percent.
*Mr. Gerlach. Are in violation in some way, shape, or form ‑
*Mr. Shulman. Yes, have a change in the audit.
*Mr. Gerlach. Okay.
*Mr. Shulman. But just one comment I want to make is I am always very cognizant ‑‑ and there is a whole bunch of things in the law about how we measure our performance. While we want to go in places that have higher non‑compliance in the enforcement arena, I also don’t want to set perverse incentives for my people to make changes where they won’t happen. We are always trying to get that balance right and have that dialogue.
*Mr. Gerlach. Thank you. Appreciate it.
*Mr. Shulman. Thank you.
*Chairman Boustany. I thank the gentleman. Mr. Becerra, you are recognized for five minutes.
*Mr. Becerra. Thank you, Mr. Chairman, and thank you for holding this hearing. Commissioner, great to see you again. Thank you for the work you are doing.
By the way, thank you for the work that you have done in trying to get agents who try to put out their services as preparers of tax returns for the American public, having them become registered agents, so that we have a way to track their record of service.
Because too often I know I have had people come to my office saying, “I got swindled by a guy who said he’s going to prepare my taxes, did a terrible job, now I’m being audited, I had to pay a big amount of money, causing big headaches,” so thank you very much for helping us go down the road of making the realm of tax preparers a professional service.
And I know my own tax preparer has said to me, “Great work that the IRS did in trying to help the rest of the guys out there do what many of us have done for years, and that is provide a professional service that we are willing to have audited at any time.”
So thank you for that. I know you are saving the American public a great deal of money, and probably increasing their tax refunds, because they are calculating them correctly.
You mentioned something very troubling. The budget bill that was passed by this House, H.R. 1, by the Republican majority a few weeks back, would cut $600 million out of your budget, which you said would cost us in revenues, because of lower tax collections ‑‑ proper and legitimate tax collections ‑‑ some $4 billion. So, by almost a factor of seven, we would be increasing the size of the deficit by instituting a cut that would not allow you to go out and do your collection services appropriately. And it might also undermine the voluntary system that we have for tax payment by American taxpayers.
Does that mean that you would actually have to reduce the number of personnel that are actually working to help process forms? What actually goes into this $600 million cut that makes it difficult for the U.S. Treasury to collect the money that is owed to it, and therefore, makes other taxpayers have to pay more, because they will have to make up for the $4 billion lost by those who owe the money?
*Mr. Shulman. First of all, I am hopeful ‑‑ at least from my proprietary perspective, as the IRS Commissioner ‑‑ that we don’t have those cuts. And I know that all Members of Congress and the administration are now working to try to get a budget deal done.
The cuts would be just big, big cuts that would have to be jammed into a six‑month window. We would have to have across‑the‑board cuts. We would either have to have long furloughs or RIFs, and we would be taking people basically away from every function. So we would be taking people away from collection, we would take them away from exam, we would take them away from automatic screening. We would be taking them from customer service, we would be taking them from outreach. We would be taking them out of our technology operation.
My responsibility ‑‑ as, obviously, Congress’s responsibility to give us whatever budget, my responsibility is to tell you what would happen. This would be our estimate, $4 billion less revenue, phone calls not answered, returns backed up and not processed.
*Mr. Becerra. Yes. And so there was no direction in the budget bill that cuts the $600 million as to how you could do it in a way that would not undermine services. And I don’t hear you saying that you could find a way to institute those cuts that wouldn’t undermine services.
*Mr. Shulman. Well, if you look at the allocations, across our enforcement, our service, our operations budget, all the things I laid out would happen. The biggest cut is to enforcement.
*Mr. Becerra. I also want to make sure I emphasize again something else you said, because there is a need to dispel this rumor, this myth floating out there, that the money that IRS needs to try to implement this new patient’s bill of rights is somehow all focused on getting IRS agents to bang on people’s doors, when my understanding is the bulk of the money, the vast majority of the money, is really used to provide assistance, taxpayer assistance services, or to beef up mostly our IT, our intellectual ‑‑ our Internet technology, so that we can help process a lot of these claims.
I was looking at the budget that you outlined for the use of the money. Am I correct that 60 percent of the $470 million that you requested to implement the new patients bill of rights would go towards computer system upgrades, and those things that you need to just implement the bill, getting 30 million Americans now with good health insurance, and that of the 40 percent that remains, that would be used for personnel, two‑thirds of that would be used for taxpayer services in other ways to provide a service, not necessarily to go out there and do enforcement?
So, I guess that totals to about 85 percent of the money being used for services, and for better systems operations.
*Mr. Shulman. Let me make sure I give you accurate numbers. So let me give you the way I ‑
*Mr. Becerra. Thank you.
*Mr. Shulman. ‑‑ look at it, which is about 82 percent, or $390 million of the request, is to support the refundable credit operation. Clearly, the biggest lift for us is the infrastructure around having technology that gets income data smoothly into and out of, in real time, the 50 exchanges that will be built around the country in the 50 different states.
When people get a refundable credit, we actually send money on a monthly basis to the insurance company that people send that money ‑‑ so we need to have reconciliation systems with them, feeding it back into the states in a real‑time basis.
Only about 11 percent, or $50 million of the budget, is for enforcement. And so, everybody likes to talk about IRS agents. We have lots of people who are phone operators, technology folks. We’re much more boring than the popular image of the agent, in lots of our operations. I think of us as a large financial service operation. We are more – but we are very akin to that. We do a lot of money flows, $2.3 trillion. And so that is where most of it goes.
The enforcement money in the 2012 budget is largely for traditional tax enforcement, compliance programs around the taxes that are going into effect ‑‑ that are in effect now, and are going into effect over the next year or two.
*Mr. Becerra. Thank you. Thank you, Mr. Chairman. I appreciate it.
*Chairman Boustany. I thank the gentleman. The chair now recognizes Ms. Jenkins for five minutes.
*Ms. Jenkins. Thank you, Mr. Chairman. Thank you, Commissioner, for being here.
As the House and Senate continue budget talks in an effort to prevent a government shutdown, it is important that we understand whether the IRS is prepared to handle a government shutdown. So I am just curious. In the event of a shutdown, what is the IRS’s plan to process tax returns and issue tax refunds?
*Mr. Shulman. First of all, I will tell you everybody is hopeful that there will not be a shutdown. We run a $13 billion financial services operation, and the idea of stopping it for a few days or a few weeks is strange to someone like me who has run big operations. I think the President has been very clear that it is not in anybody’s interest to have a government shutdown. My understanding is there is very productive talks going on at this point.
What I will tell you is we had an old plan that looked at government shutdowns based on October 1, when the fiscal year begins. We have never had a government shutdown in the middle of the filing season before. The closer we get to April 15th, the more consideration and factors are at play.
As these dates, I think we are on our sixth CR, have pushed out, we have had to adjust plans going forward. I will tell you right now we are in discussions with OMB and the Administration of exactly what would happen. And so I cannot tell you. Our old plan was we deposited checks, we didn’t process returns. That was a plan that was built in 1995, when there was not so much electronic filing. And now we are closely looking at it, and are having discussions.
*Ms. Jenkins. Okay, thank you. In your testimony here you mentioned that the average refund is nearly $3,000. And you say this money can help taxpayers pay their bills, make needed purchases, and to save.
But we all know that this refund money isn’t just plucked off the money tree in the back of the Capitol. This is money ‑‑ this is the taxpayer’s money, and it could have been used the whole year for them to invest, or to make purchases. And I think, instead, they are giving the government, basically, an interest‑free loan.
So, I am just, again, curious. Do you see this high level of refund as a deliberate action of taxpayers, or as a result of maybe a tax code that is overly complex?
*Mr. Shulman. I think each taxpayer is different ‑‑ I think a lot of taxpayers actually use the withholding system to have automated savings so that they can then get a refund. People like to do it.
In my ideal world as a taxpayer, I actually withhold the exact right amount, and I neither pay nor get a refund. That is my own personal goal. It is very hard to hit, because of the complexity of the code and estimating exactly, you know, all the factors that will come in.
And so, it is a fact that we usually put out, you know, $250 billion to $300 billion of refunds. Retail sales ‑‑ the Commerce Department, over time, has looked at this ‑‑ retail sales usually increase in February through May, as a direct result of refunds. I always encourage people to withhold correctly.
And so, we see it as just a fact of the tax system, neither good nor bad, just a fact, that we give you and you can make your own judgements about.
*Ms. Jenkins. But if it was a more simplified calculation, do you think people would deliberately be lending the government interest‑free money during the year?
*Mr. Shulman. I won’t speculate on it. I mean I think a lot of it is not ‑‑ there is the complexity of the code, but there is also the issue of people don’t know always exactly what they will make, what their spouse will make, what interest income they might get, how their jobs will change, if they are going to get a second job. So I think there is a bunch of factors.
*Ms. Jenkins. Okay. Thank you. I yield back.
*Chairman Boustany. The chair now recognizes Mr. Buchanan for five minutes.
*Mr. Buchanan. Thank you, Mr. Chairman, and I appreciate the Commissioner being here. You met with us a couple of weeks ago, and so I don’t know how you get much work done ‑‑ you are here. But we are excited to see you back.
Let me just touch on a couple of things. And it is along the line of tax simplification. I look at ‑‑ in our area I was chairman of a Chamber. We had about 2,500 businesses. Most of them are ‑‑ a lot of these businesses are 3 to 10 employees. There are some that are larger, larger companies, banks, and some other things. But I would say out of the 2,600 probably 2,200 are 20 employees or less. What are you doing to help simplify their ability to file and, you know, quarterly things that they have got to file?
Because I do hear it just takes so much time and effort from these small businesses. You know, a lot of them do not have a controller or a CPA, or they are a CPA but they have got an accountant that is outside. What is the IRS doing to make it simpler for them?
*Mr. Shulman. As you know, we implement the tax laws that are written. And as you know, I had the conversation with the chairman earlier about simpler laws would clearly be helpful. But it is not our role.
What we try to do is, given the laws that are on the books, do as much outreach education service as we can. I would be surprised if one of our people wasn’t at the Chamber of Commerce on a regular basis in your district, holding education events, explaining tax law changes, being available to businesses.
We spend a lot of time with the practitioner community. For individuals, 66 percent of people use a tax professional. For businesses, including small businesses, it is 80 percent. So if we can get good information and tools to the practitioner community, they can make sure that people file it well.
And we answer millions of calls from small businesses every year. Our phone operators spend a lot of time doing that. We have a dedicated website. We have a dedicated outreach and education unit for small businesses. We have an e‑newsletter on tax issues for small businesses that has a distribution of about 200,000. And so we do everything we can, given our resources, given the code ‑
*Mr. Buchanan. And secondly, because we have just got five minutes, what about independent contractors? We have a lot of Realtors, everybody else, you know, maybe it is themself, their husband, but basically there is a lot of people out there ‑‑ they might be with Amway or whatever they are with, as independent contractors. Is there anything we are doing to ‑‑ and their situation is probably even more difficult, because they are just themselves, and ‑‑ is there anything that we are doing to help them and simplify things for them, as well?
*Mr. Shulman. Again, we have all of the avenues of service. They usually afford themselves of the individual services. We answered 35 million calls last year. We keep having more self‑service options on our website, and we will continue to do that. And we are trying just to get the right balance of ‑‑ you know, with the service resources we have.
My personal view is the vast majority of our service resources should be going to individuals and small businesses who cannot afford themselves of the professional tax community help and are struggling to make ends meet.
*Mr. Buchanan. And, Commissioner, my colleague mentioned about dispute, when you have a dispute with the IRS. Let us say medium‑sized companies or a little larger companies, what is the process ‑‑ are the negotiators on the IRS side, are they empowered ‑‑ because you hear these things a lot of time just drag on and on and on. Very expensive, and not only in terms of outside professionals, but very expensive in terms of the internal time it takes an organization ‑‑ I am not talking about the person that has got 5 employees, someone that has got, in our area, for example, 400, 400 or 500. They have a dispute, it just seems like it drags on forever.
And I guess the question is, you know, what is the process on your side to resolve these things, or have someone in that is bright enough, sharp enough ‑‑ not that they are all not ‑‑ but is ‑‑ are they empowered to get something done and get these things wrapped up and get a compromise or ‑‑ what is your attitude, or how does it work on your side?
*Mr. Shulman. I have been very public. I mean if you look at things I have been talking about for the last three years, my real goal with the business taxpayer is to resolve issues and get certainty sooner for the IRS and for taxpayers. We have a whole slew of programs, and I have been pushing them very hard.
Part of it is getting clearer guidance, creating safe harbor, where we can simplify the rules. We have an appeals function. So if you disagree with us, we close out an audit, you can go to our appeals function ‑
*Mr. Buchanan. Well, before the appeals, is the auditor itself, the person, can they ‑‑ do they have a boss that they can go through and try to negotiate it out before it goes to the appeal?
*Mr. Shulman. Oh, absolutely. But what I was going to tell you is we have expanded what we call fast‑track appeals, where we can just go in and audit, invite an appeals officer in to negotiate a settlement.
Our folks have the ability to work through issues. We do have time lines where you have got to get in, you have got to get out with folks.
*Mr. Buchanan. Yes.
*Mr. Shulman. Now, some taxpayers complain about the time lines.
*Mr. Buchanan. Yes.
*Mr. Shulman. Because they say someone is in, and they are just trying to get issues and get out ‑
*Mr. Buchanan. The big thing I hear is just getting it done fast‑track. I am glad to hear you have got something like that, because they just don’t want things to drag on for a year, they would rather just get the people in the room and try to work something out and move forward, because it costs a lot of money, time, and aggravation over, you know, a period of time.
*Mr. Shulman. Yes, absolutely.
*Mr. Buchanan. Okay. Thank you. I yield back.
*Chairman Boustany. I thank the gentleman. The chair now recognizes Dr. McDermott for questioning.
*Mr. McDermott. Thank you, Commissioner. I have been listening to this testimony today, and I am not real sure why we are having this hearing. But I heard the chairman mention the Affordable Care Act and the additional responsibilities you will have in auditing people’s behavior with respect to purchase of health insurance.
And I understand that this afternoon, later today, we are going to mark up a bill that would prevent any money from being spent in an insurance policy on abortions. And I suspect that the audit responsibility will fall to you to determine whether or not any money has been spent on abortions, or is planned by the insurance companies ‑‑ it sounds like an insurance function that is going to wind up in your hands.
And I would be surprised if you have already started to think about this, because you don’t start to think until we do something, but it is coming down the road. And I have some questions I would like you to think about, and give me a response if you can, in terms of how many additional people you are going to have to hire to look at all the insurance plans, to be sure that no money is being spent on abortions.
One of the issues that I think ought to be considered in that is also the HSA. If I put my money in an HSA, can I take it out and spend it any way I want on health care costs? And how do you audit that to be sure that I am not taking advantage of the tax code to put money in there and then wind up paying for an abortion for whomever?
It seems to me we are adding things. We continually look at the IRS as kind of our unofficial enforcer, and that you wind up with the responsibility for doing that. And I would appreciate if you could give me an answer in writing as to what you think the effect will be, if the bill passes today preventing the use of any health care money for abortion, I would like to see from you an estimate of what it means to the bureaucracy to have to go around and look and be sure that nobody is taking advantage of the tax code.
You have any information about that at all at the moment? I mean how many people you are going to have to have in this system to do this?
*Mr. Shulman. I don’t.
*Mr. McDermott. And do you have an estimate of what you are spending already, or you will spend to audit the system, under the Affordable Care Act?
*Mr. Shulman. On the bill you referred to regarding our involvement, lots of bills are around until bills are passed.
*Mr. McDermott. Right.
*Mr. Shulman. ‑‑ We will look at that, and any question you send me I will be happy to respond to.
Regarding the Affordable Care Act, we laid out in excruciating detail in our 2012 budget what we will need in 2012. And as I mentioned before, the vast majority of that money is technology infrastructure service money to interface with the exchanges, interface with insurance companies to move the money with the refundable credits.
*Mr. McDermott. And do you have ‑‑ how are you going to enforce the fact that people have or have not complied with the law, the individual mandate?
*Mr. Shulman. Oh, the individual responsibility payment? We requested some money for that in 2012. All of that money is technology and infrastructure money just around systems. It will basically be document‑matching, just like a W‑2.
So, the insurance company will either send us fact or coverage, saying “This person is covered,” or not. If they say they are not, generally people will voluntarily comply, our systems will match that, and they will say, “I wasn’t covered, and here is the payment.” If they don’t say that, and we see it, we will send them a bill. And the Affordable Care Act was very clear about having some of our enforcement tools, such as a lien or a levy not being available for that.
So, think of it like a credit card bill that you either choose to pay or not pay. If you don’t pay, you will get a bill.
*Mr. McDermott. And ‑‑ but you have no enforcement capacity.
*Mr. Shulman. Some will call that enforcement capacity, getting a letter from the IRS. It’s like a credit card bill, but it will have our letterhead on it.
I believe what you were talking about before in here is that first of all, we are just going to have fact of coverage information. We are not going to know about your coverage, we are not going to know about your personal health issues.
And second of all, this is not the kind of thing that agents spend time on, these dollar amounts. And so you don’t have agents rooting around asking these things. You have document‑matching, and bills that get sent out.
*Mr. McDermott. So people could get around the bill?
*Mr. Shulman. What is that?
*Mr. McDermott. People could get around the bill, since no agent is going to ever look into their health care records. You are not going to put agents at work looking into people’s health care.
*Mr. Shulman. Most of our enforcement activity is not based on face‑to‑face agents. And most people comply voluntarily with the tax laws. Lots of people, when they get in correspondence with us, pay up and feel that is enforcement.
So, I would not characterize it that we anticipate large numbers of people getting around it. But there is always non‑compliance, and there is some non‑compliance we don’t find.
*Mr. McDermott. Thank you.
*Chairman Boustany. I thank the gentleman. The chair now recognizes Ms. Black for questioning.
*Ms. Black. Thank you, Mr. Chairman. And as I talked to you the other day, Commissioner, you asked me if I had some concerns, and I talked a little bit about people making phone calls, and maybe getting different answers as they called in, one time to the other.
But I want to turn to a piece that I have read in the information that was provided us about telephone assistance for taxpayers, and that it continues to be a problem.
The percentage of callers that successfully obtain the live assistance over the phone is down from 74.2 percent down to 72.6 percent this year. And the average wait times have also increased from 9.9 to 10.3 minutes. And so far, this year, 10.3 percent of the calls were abandoned, and .8 percent reached a busy signal or ended in a disconnection, probably out of frustration. But both numbers are increases from prior years.
And the IRS’s goal, as we understand it, is to answer only 71 percent of the calls in this current year, and then 80 percent in 2012, which is down from the goal that was set back in 2007, of answering 82 percent. So the goal has been decreased. And I know that you have requested an additional $30 million. So my question is, what do you intend on doing with those $30 million and, with the goal being decreased, just how does that fit? Why a decreased goal?
*Mr. Shulman. Thanks for the question. Answering the nation’s taxpayers’ telephone calls is a big deal to us, and something we take seriously.
Let me be very clear about what the level of service is. The level of service, which I checked this morning and is running at about 74 percent this year, is a formula that takes into account people who hang up, as well as the people that get through to a live assister. It does not translate into 26 percent of people unhappy.
We added last year, a call waiting feature. It used to be you just waited. And now it says, “Your wait will be 10 minutes,” if it is going to be 10 minutes. If people who hang up after they hear that, because they do not want to wait, and decide to call back later, if you add that, it adds about 10 percentage points. So you are actually up closer to 84 percent.
The reality is, from where I sit and my folks who are stretching and trying to hit 74 percent, it is a pretty straightforward formula. How many people do you have sitting on the phones, answering the phones, being accurate with your questions?
Most of this will be extra seasonal people during filing season. And I am actually pretty proud the agency is maintaining the level of last year, given that we are under a CR and do not know what kind of cuts are coming forward. And so we are trying to balance the money we have against the level of service.
*Ms. Black. And my time is running out here, so ‑‑ I do have a second part of the question.
*Mr. Shulman. Sure.
*Ms. Black. But to that I would say that I hope maybe we use some technology as well, maybe as you say, to give them more information about it will be a 10‑minute wait time or whatever, not just personnel, but also looking at other technology that can be used.
But I want to turn the attention to a program called the Historic Preservation Facade Easement Program. And I know that Chairman Jo Ann Emerson was concerned about this, and brought this situation up in Appropriations. And it has come to my attention by someone else back at home, in particular.
And then, also the IRS advisory council in the 2009 general report took issue with what is going on with the audits. And I wondered if you might, in my one‑minute time that I have left, speak a little bit about the program and the fact that even the advisory committee recommends that there may be a safe harbor on the audit policy, because of it appearing to be so onerous. And if you could speak to that, I would appreciate it.
*Mr. Shulman. Sure. I would love you to come to our call centers and see. We have spent a lot of time on technology and productivity. Part of the reason we can still hit 74 percent is because we have squeezed a lot of productivity out of not adding workers this year.
On easements, historic easements is an issue. You get a big tax credit. We need to have some coverage, make sure people don’t abuse it, but also make sure that there is historic preservation, and people use those easements.
We take very seriously the IRSAC recommendations. Those people spent a lot of time. And we are looking right now at those recommendations. I cannot speak specifically to the program here, but would be happy to follow up with you on it.
*Ms. Black. Well, I appreciate that, because there was a recommendation, and I would like to know what you think about the recommendation, if you all will follow through on that. Thank you.
*Mr. Shulman. Thank you.
*Chairman Boustany. The chair now recognizes Mr. Kind for questioning.
*Mr. Kind. Thank you, Mr. Chairman, for holding this hearing. Mr. Commissioner, thank you for being here, and for the service that you provide.
I missed your opening testimony, so I apologize for asking, but do you have an update in regards to the paid preparer regs that you are coming forward with?
*Mr. Shulman. Yes. We have started registering. We have over 700,000 paid preparers registered this year, which just means they get their name in and they have a number. We are now in the process of working through the testing and continuing education component, which will be next.
I have been very clear that I think this is important for the tax system, to have a minimum level of competence with paid preparers. But we also want to do it in a staged way, so there is no disruption of service to taxpayers.
And so, we registered this year, we are working on the programs for testing, and then we are going to give people several years to pass the test to get in. So it is going to take several years to get up and running.
*Mr. Kind. Okay. And what is the response rate, as far as eFiling right now? What percentage are filing?
*Mr. Shulman. Last year, we were about 70 percent. We are running about five percent higher than that this year. And so it looks to be going in a positive direction.
*Mr. Kind. Okay. You know, and any update on the debit card refund program and how well that is working?
*Mr. Shulman. No updates at this point of the program that the Treasury Department is running.
*Mr. Kind. Okay. Let me ask you, we have the, under the Affordable Care Act, tax credits going to small businesses, 35 percent last year, this year we will continue to 2014, when it goes up to 50 percent. Are you encountering any difficulty with small businesses applying for those tax credits under the Affordable Care Act?
*Mr. Shulman. Most business returns come in in the fall. So we will see what is coming. It is a very targeted group that is eligible. As you know, 10 employees going to 25 employees with a phase‑out. And so I think, you would not yet encounter people who are eligible having issues. We have heard from people who wish they were eligible but who fall outside those ranges.
*Mr. Kind. Yes, but you are not encountering any degree of difficulty, as far as people determining their eligibility, or being able to figure out whether to apply for the tax credit or not?
*Mr. Shulman. We have tried to, do outreach, make sure we are available. We know the practitioner community is very, very focused on that, as well.
*Mr. Kind. Yes. I checked the website, IRS website, as far as how you are explaining this to the small business community out there, and you also offer some small examples of small businesses, but not a calculator, itself. Is that purposeful, that you are avoiding kind of a plug‑in calculator from the IRS website to see if small businesses would be eligible or not?
*Mr. Shulman. I don’t think we were avoiding it. Calculators are good for some things and not for others. Our folks who work on it probably decided it wasn’t going to be that helpful for this.
*Mr. Kind. Okay. Notification of small businesses. The IRS sent out postcards to small ‑
*Mr. Shulman. Yes.
*Mr. Kind. ‑‑ about possible notification. What about e‑notices to small businesses?
*Mr. Shulman. Yes. We have an e‑business newsletter for small businesses, and there has been information about it there. I mean we ‑
*Mr. Kind. Are most small businesses filing electronically these days?
*Mr. Shulman. Most are.
*Mr. Kind. Okay. So ‑‑ I’m just thinking of the efficiency, and maybe cost savings. Does it make more sense just to notify them through e‑notices, as opposed to formal postcards being mailed out?
*Mr. Shulman. We have tried different methods of communication. We always do that. Most of our methods are electronic, but sometimes we send out postcards to folks, sometimes we don’t. It is all based on the population, how we can reach them, what information we have in the database. With our e‑business newsletter ‑‑ not every small business signs up with the IRS, but we actually had a database of potential eligible taxpayers that had addresses. So that is why we sent them.
*Mr. Kind. Now I share Representative Becerra’s concern that many people have already raised in regards to what the $600 million in cuts to the IRS would mean, as far as the collection of revenue and the lost revenue that we would miss out on.
But could you today give the committee kind of an update on what type of cost savings measures that you are going through in the IRS ‑‑ in light of the budget deficits that we are facing, some of the efficiencies that you are trying to encourage?
*Mr. Shulman. Yes. Absolutely. I am a big believer ‑‑ and folks know this even before everybody was talking about the deficit. The day I showed up I told our team that I view a job of any big business or big operation is stop programs that no longer make sense, make cuts where you can make cuts, and then invest in the future. And that is ‑‑ the set of budgets that I put forward to try to do that.
Our 2011 budget ‑‑ not the 2012 ‑‑ had about $180 million of cuts. As electronic filing has grown, we have actually reduced service centers and people processing returns. We have taken our technology up to a standardization level that we are extracting $75 million each year out of our core technology budget. We have standardized on certain technology platforms, made it easier. We have consolidated data centers. And then we have actually just made some cuts in programs. We have cut some outreach programs. We have actually cut some mailing of materials, and we are going to keep doing that, going forward.
I will tell you, given the current fiscal environment, I have also put a hiring freeze in place. Exceptions to come to me to approve, and we are still investing in strategic priorities. We have dramatically cut our travel budget, except for case‑related travel this year. And we have been in the process of putting in contingency plans, so that if there are dramatic cuts, that we could implement them.
I think our employees actually understand. The way I have explained it to them ‑‑ when I go out in town halls around the country ‑‑ is we need to find cuts now. We are going to have to make hard decisions. If our budget is cut severely, I would rather have us find the cuts, rather than RIF people. Because in the Federal Government when you RIF everyone thinks you are just finding efficiencies. It is a pretty blunt tool, and it is based on seniority, and who got added last, and people kick down. What I would rather do is find programs that, at least in the hierarchy of priorities, we feel we should make cuts.
*Mr. Kind. Great. Thank you. Thank you, Mr. Chairman.
*Chairman Boustany. I thank the gentleman. Thank you, Commissioner Shulman, for appearing before the subcommittee. And we appreciate your testimony and your frank answers to all these questions.
Please be advised that Members may have some additional questions that they will submit in writing. And those questions and answers would be part of this hearing record.
Also, Commissioner, no doubt you have heard the news reports about the report that Chairman Herger, Congressman Reichert, and I released yesterday regarding the AARP’s structure and function. And early next week we will be sending that report to you to request further examination of the tax‑exempt status of the AARP. But I wanted to officially let you know that we will be sending that report to you.
*Mr. Becerra. Mr. Chairman, in regards to that, could I ask is the committee going to inquire of other of these not‑for‑profit 501(c)(3) or 501(c)(4)’s?
Because as we have served on this subcommittee in the past, that has been one issue I have raised quite often, with regard to the non‑profit, charitable world, is are they, in fact, providing a service, a public good, that pays for the loss of revenue that we give to those non‑profits through tax‑deductible contributions, through the non‑tax status that they carry.
And so, I would be interested to know, does the chairman expect that this subcommittee will do further examination of other organizations, not just senior organizations, I know there are a number of new senior organizations that have been out there doing quite a bit of political work, and I would be interested in making sure that we examine the non‑profit world all together. But certainly if we are going to look at, in this case, the AARP, other senior groups, as well.
*Chairman Boustany. I share the gentleman’s concerns. I think they are very legitimate. And as we look at tax reform in that context, we will be having those discussions. And the specific report referenced as a result of questions that were asked by Congressman Reichert and Ginny Brown‑Waite, and the report released was a culmination of 18 months of work done to seek answers to those questions.
So, at this time we are focused on that particular issue. But I think, in the context of tax reform, those ‑‑ your question is certainly an important one, and will be discussed.
*Mr. Becerra. I thank the chairman for that response. If I could just indulge and ask one last question, the issue, as I see it, is not about a particular organization, or about the activities of an organization. To me it is we have a code that says that you can apply to be treated differently from a for‑profit entity, which has to pay taxes. And if you are going to get to forgo having to pay those taxes that an otherwise established enterprise has to pay, we should make sure that the public is getting some benefit for it.
Because there are a lot of businesses that want to do the same type of thing and get the same type of break. You know, essentially these not‑for‑profits get to operate for a far‑less cost, because they don’t have to pay taxes. And there are a lot of folks who are out there engaging in an enterprise and paying taxes because they have registered as a corporation or some type of business.
And I think it is important for us to make sure that if you are going to try to tell the public that they should not have to pay the same level of taxes that a for‑profit enterprise pays, that it should be for a good reason.
And I think the Commissioner would be a great witness to have, along with the folks from his operations, to try to help guide us in making sure that these operations that otherwise would be taxable as for‑profit entities are operating as they should, as organizations that legitimately deserve that non‑profit status.
*Chairman Boustany. Very important questions, and certainly know we have a current body of law that needs to be followed with regard to whether an organization qualifies as tax‑exempt or not.
And clearly, the IRS is the agency, the entity that is best positioned to make that determination, to enforce the law.
And so, that is why we are returning this ‑‑ we are going to send this specific report over. And then we will have further discussions in the context of tax reform. I thank the gentleman. His concerns are legitimate.
With that, the committee stands adjourned. Thank you, Commissioner.
[Whereupon, at 11:13 a.m., the subcommittee was adjourned.]
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