«Testimony of The Honorable J. Russell George Treasury Inspector General for Tax Administration February 25, 2015 Washington, D.C. TESTIMONY OF THE ...»
HEARING BEFORE THE
COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEE ON FINANCIAL SERVICES
AND GENERAL GOVERNMENT
U.S. HOUSE OF REPRESENTATIVES
“Oversight Hearing - Internal Revenue Service”
The Honorable J. Russell George
Treasury Inspector General for Tax Administration February 25, 2015 Washington, D.C.
THE HONORABLE J. RUSSELL GEORGE
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATIONbefore the
COMMITTEE ON APPROPRIATIONS, SUBCOMMITTEE ON
FINANCIAL SERVICES AND GENERAL GOVERNMENT
U.S. HOUSE OF REPRESENTATIVES“Oversight Hearing - Internal Revenue Service” February 25, 2015 Chairman Crenshaw, Ranking Member Serrano, and Members of the Subcommittee, thank you for the opportunity to testify on opportunities for the Internal Revenue Service (IRS) to perform its mission efficiently and effectively.
The Treasury Inspector General for Tax Administration, also known as “TIGTA,” is statutorily mandated to provide independent audit and investigative services necessary to improve the economy, efficiency, and effectiveness of the IRS, including the IRS Chief Counsel and the IRS Oversight Board. TIGTA’s oversight activities are designed to identify high-risk systemic inefficiencies in IRS operations and to investigate exploited weaknesses in tax administration. TIGTA’s role is critical in that we provide the American taxpayer with assurance that the approximately 91,0001 IRS employees, who collected over $3.1 trillion in tax revenue, processed over 242 million tax returns and other forms, and issued $374 billion in tax refunds2 during Fiscal Year (FY)3 2014, perform their duties in an effective and efficient manner while minimizing the risks of waste, fraud, or abuse.
Achieving program efficiencies and cost savings is imperative, as the IRS must continue to carry out its mission with a significantly reduced budget. In FY 2014, the IRS budget was approximately $11.3 billion in appropriated resources, $850 million less than its FY 2010 level. During the same period, the IRS lost over 11,000 full-time permanent employees. The IRS’s approved budget for FY 2015 was further reduced to $10.9 billion, resulting in a cut of approximately $346 million in appropriated resources from FY 2014.
Total IRS staffing as of January 24, 2015. Included in the total are approximately 19,000 seasonal and part-time employees.
IRS, Management’s Discussion & Analysis, Fiscal Year 2014, page 2.
The Federal Government’s fiscal year begins on October 1 and ends on September 30.
TIGTA reported that implementation of the mandated sequestration,4 coupled with a trend of lower budgets, reduced staffing, and the loss of supplementary funding for the implementation of the Patient Protection and Affordable Care Act (Affordable Care Act),5 affected the IRS’s ability to deliver its priority program areas, including customer service and enforcement activities.6 The IRS’s toll-free Level of Service7 decreased from 68 percent in FY 2012 to 61 percent in FY 2013. Key examination and collection statistics also declined. Examinations of individual tax returns declined approximately five percent from FY 2012 to FY 2013; and collection activities initiated by the IRS, such as liens, levies, and property seizures, declined approximately 33 percent during the same period. Our analysis of select customer service and enforcement statistics indicates that the downward trend in these areas may continue.
For example, budget cuts have resulted in significant declines in the performance of the IRS collection program.8 From FY 2010 to FY 2014, the budgets for the Automated Collection System (ACS) 9 operations and Field Collection were reduced by over $269 million. ACS staffing has been reduced by 24 percent since FY 2011, and the number of revenue officers has decreased 24 percent since FY 2011.
As a result, in FY 2014 revenue officers closed 34 percent fewer cases than in FY 2011 and collected $222 million less than in FY 2011. In the ACS, contact representatives answered 25 percent fewer calls in FY 2014 than in FY 2011 and collected $224 million less in FY 2014 than in FY 2011.
At the same time IRS is operating with a reduced budget, it continues to shoulder increased responsibilities as it implements and administers provisions of the Affordable Care Act. This filing season represents the first time taxpayers must report on their tax return whether they and their dependents maintained minimum essential health care insurance coverage or face a tax penalty for not maintaining this coverage.
Sequestration involves automatic spending cuts of approximately $1 trillion across the Federal Government that took effect on March 1, 2013.
Pub. L. No. 111-148, 124 Stat. 119 (2010) (codified as amended in scattered sections of the U.S. code), as amended by the Heath Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat.
TIGTA, Ref. No. 2014-10-025, Implementation of Fiscal Year 2013 Sequestration Budget Reductions (June 2014).
The primary measure of service to taxpayers. It is the relative success rate of taxpayers who call for live assistance on the IRS’s toll-free telephone lines.
TIGTA, Audit No. 201330013, Budget Cuts Resulted in Significant Declines in Key Resources and Unfavorable Trends in Collection Program Performance, report planned for April 2015.
The Automated Collection System consists of 15 call sites with contact representatives to engage taxpayers and their representatives on resolving unpaid tax debts. Field Collection consists of over 400 offices across the country through which revenue officers contact taxpayers in person to resolve tax debts and secure unfiled returns.
The IRS must also ensure that the more than 6 million individuals who purchased insurance from a Health Care Exchange10 accurately reconcile advance payments of the Premium Tax Credit (PTC)11 they may have received on their tax return. Since enactment of the Affordable Care Act, these responsibilities have required the IRS to develop new information technology, modify existing computer systems, and establish new or revised filing, reporting, and compliance processes and procedures.
Another significant IRS undertaking is the implementation of systems, policies and procedures to implement enforcement of the Foreign Account Tax Compliance Act (FATCA).12 FATCA requires individuals owning foreign-held assets to self-report them on the new Form 8938, Statement of Specified Foreign Financial Assets, if funds in the aggregate exceed $50,000. Participating foreign financial institutions (FFIs) must also register with the IRS and identify U.S. account holders, disclosing the account information to the IRS; and 30 percent withholding is imposed on payments to recalcitrant account holders and non-participating FFIs. TIGTA has begun a review of the IRS’s role in implementing FATCA, which will include an analysis of how the IRS is using the information it receives to improve compliance as well as the procedures in place to account for information errors and other problems that may increase taxpayer burden.
In addition, the IRS continues to dedicate significant resources to detect and review potential identity theft tax returns as well as to assist victims. Resources have not been sufficient for the IRS to work identity theft cases dealing with refund fraud, which continues to be a concern. IRS employees who work the majority of identity theft cases are telephone assistors who also respond to taxpayers’ calls to the IRS’s toll-free telephone lines. 13 This has contributed to the IRS’s inability to timely resolve victims’ cases as well as the continued decline in its ability to timely respond to taxpayers’ written correspondence. The allocation of limited resources requires difficult decisions, with a focus on balancing taxpayer assistance on the toll-free telephone lines during the filing season with other various priority programs, such as identity theft and aged work.
For example, the IRS previously reallocated ACS staff, who attempt to collect taxes through telephone contact with taxpayers, to work the growing inventory of Exchanges are intended to allow eligible individuals to obtain health insurance, and all Exchanges, whether State-based or established and operated by the Federal government, are required to perform certain functions.
A refundable tax credit to assist individuals and families in purchasing health insurance coverage through an Affordable Insurance Exchange.
Pub. L. No. 111-147, 124 Stat 71 (2010).
The IRS refers to the suite of 29 telephone lines to which taxpayers can make calls as “Customer Account Services Toll-Free.” identity theft cases. The combination of fewer resources and the need to continue answering telephone calls has contributed to trends that have been unfavorable to several ACS business results over the past four years. Specifically, we determined that inventory is growing because new inventory is outpacing case closures, cases in inventory are aging because inventory is taking longer to close, revenue declined while more cases were closed as uncollectible, and fewer enforcement actions (liens and levies) were taken.14 During the past several years, the IRS has continued to take steps to more effectively detect and prevent the issuance of fraudulent refunds resulting from identity theft tax return filings. The IRS reported that in Filing Season 2013, its efforts prevented between $22 billion and $24 billion in identity theft tax refunds from being issued.15 This is a result of the IRS’s continued enhancement of filters used to detect tax returns that have a high likelihood that they involve identity theft at the time the returns are processed. For example, the IRS used 11 filters in Processing Year 2012 to identify tax returns with a high likelihood of involving identity theft, compared to 114 filters used in Processing Year 2014. The use of these filters assists the IRS in more effectively allocating its resources to address identity-theft tax refund fraud.
The IRS has also taken steps to more effectively prevent the filing of identity theft tax returns by locking the tax accounts of deceased individuals to prevent others from filing a tax return using their name and Social Security Number. The IRS has locked approximately 26.3 million taxpayer accounts between January 2011 and December 31, 2014. In addition, the IRS issues an Identity Protection Personal Identification Number (IP PIN) to any taxpayer who is a confirmed victim of identity theft or who has reported to the IRS that he or she could be at risk of identity theft. Once the IRS confirms the identity of a victim or “at-risk” taxpayer, the IRS will issue the taxpayer an IP PIN for use by the taxpayer when filing his or her tax return. The presence of a valid IP PIN on the tax return tells the IRS that the rightful taxpayer filed the tax return, thus reducing the need for the IRS to screen the tax return for potential identity theft.
The IRS has issued more than 1.5 million IP PINs for Processing Year 2015.
Despite these improvements, the IRS recognizes that new identity theft patterns are constantly evolving and, as such, it needs to adapt its detection and prevention processes. The IRS’s own analysis estimates that identity thieves were successful in receiving over $5 billion in fraudulent tax refunds in Filing Season 2013. This will TIGTA, Ref. No. 2014-30-080, Declining Resources Have Contributed to Unfavorable Trends in Several Key Automated Collection System Business Results (Sep. 2014).
IRS ID Theft Taxonomy, dated September 15, 2014, page 1.
require the continued expenditure of resources that could otherwise be used to respond to taxpayer telephone calls, answer correspondence, and resolve discrepancies on tax returns. In addition, we reported that the IRS did not provide an IP PIN to 557,265 eligible taxpayers for Processing Year 201316 and continues to make errors on the tax accounts of victims of identity theft.17 These errors further delayed refunds issued to taxpayers and required the IRS to reopen cases and expend limited resources to resolve the errors.
Another challenging area is the ongoing IRS impersonation scam. Between October 2013 and January 31, 2015, TIGTA has logged approximately 300,000 contacts from taxpayers who reported that they received telephone calls from individuals claiming to be IRS employees. The impersonators told the victims that they owed additional tax and, if not immediately paid, they would be arrested, lose their driver’s licenses, or face other consequences. More than 2,700 victims have reported an aggregate loss of more than $14.5 million dollars. While TIGTA investigates these complaints, we have worked closely with the IRS, the Federal Trade Commission and local media outlets to publish press releases, warnings, and other public awareness announcements in order to warn taxpayers of the scam. The sheer volume of contacts from concerned taxpayers is an additional strain on IRS resources.
IRS efforts to improve the identification of questionable refund claims is a significant step in protecting and maintaining the integrity of the Federal system of tax administration. However, the IRS must continue to identify and implement innovative and cost-saving strategies to accomplish its mission of providing America’s taxpayers with top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness.
While the IRS faces many challenges, TIGTA has recently reported on several other areas where the IRS can achieve cost savings, more efficiently use its limited resources, and make more informed business decisions. In addition, timelier reporting of third-party data and additional authority would assist the IRS in improving tax administration.
Opportunities Exist for Additional Cost Savings In August 2012, TIGTA reported that the IRS can achieve additional cost TIGTA, Ref. No. 2014-40-086, Identity Protection Personal Identification Numbers Are Not Provided to All Eligible Taxpayers (Sep. 2014).
TIGTA, Audit No. 201340036, Identity Theft Victim Assistance – Follow-Up, report planned for March 2015.
savings from better managing its real property costs. TIGTA reported that the IRS completed 17 space consolidation and relocation projects from October 2010 through December 2011, which the IRS estimated would result in $2.8 million of realized rent savings in FY 2012. However, we reported that the IRS continues to incur rental costs for more workstations than required. TIGTA estimated that if the employees the IRS allows to routinely telework on a full- or part-time basis shared their workstations on days they were not in the office, 10,244 workstations could potentially be eliminated.