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Hearing Of The Oversight Subcommittee Of The House Ways And Means Committee - Internal Revenue Service Operations And Fiscal Year 2010 Budget Proposals

Chaired by: Rep. John Lewis

Witness: Douglas Shulman, Commissioner, Internal Revenue Service

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REP. LEWIS: (Sounds gavel.) Good morning. The hearing of the Subcommittee on Oversight and Investigation will come to order.

Again this year, the subcommittee is holding an oversight review of the Internal Revenue Service. We intend to examine the operations of the agency, its budget, and its service to taxpayers.

This is the first time the commissioner has been before this subcommittee, this Congress. We welcome you, Mr. Commissioner. This is also the first time many of the members of this subcommittee will have the opportunity to review the agency. I look forward to their participation.

Today's hearing is a chance for the IRS to assure this subcommittee and the public that it is acting fairly, fair in how it treats taxpayers, and fair in how it treats its employees. Overall, I think the agency has done a good job. However, there is always room for improvement.

I do not think it is fair that 5 million taxpayers received busy signals when they called this year for help, and almost 18 million taxpayers hung up before getting through. If the agency needs additional resources to meet its customer service mission, we need to know that.

I'm also concerned that low-income taxpayers are having their social security payments levied by the agency. And it is a shame that victims of identity theft do not have their cases resolved with more urgency.

Where this subcommittee can help the agency improve, we will. Taxpayers wanting to settle their tax debts should not be required to make a down payment with their offer. Small businesses should not be run out of business by tax shelter penalties aimed at big corporations. These issues require tax law changes that the ranking member and I support.

Finally, I want to be sure that the agency is being fair to its employees. Each year, the agency's employees collect about $2.7 trillion and process 250 million returns. As fewer paper returns are filed, the agency has started to consolidate. In these difficult times, I ask the agency to take every reasonable step to ensure that employees at these locations, such as Atlanta and Andover, are not without jobs.

I want to again thank the commissioner for being so helpful and so responsive and thank you for being here today, Mr. Commissioner.

And I am pleased to recognize the distinguished ranking member, Dr. Boustany for his opening statement.

REP. CHARLES W. BOUSTANY (R-LA): Thank you Mr. Chairman, thank you for yielding time to me.

And welcome, Commissioner. Good to see you again.

Mr. Chairman, I want to thank you for holding this hearing and for your leadership on a number of legislative initiatives on which we are both cooperating, including our offers in compromised legislation as well as some other projects that we have discussed.

As the new ranking member for the subcommittee, I look forward to continuing to work with you to improve IRS tax administration to make the system work better for the American people.

We are conducting this important annual hearing to review the proposed budget for the IRS and the latest filing season. These last two filing seasons have clearly been different from previous years as the IRS has faced the enactment of economic stimulus legislation that provides for many new tax benefits to the American taxpayers.

These provisions have created an unanticipated workload on top of the expected workload for the 2009 filing season, and I look forward to hearing about how the IRS has handled it, and what long-term lessons the agency has learned from the experience.

The president's budget for Fiscal Year 2010 requests additional resources for IRS enforcement efforts. And while additional enforcement tools may be necessary, it's important to remember that the most effective way to close the tax gap would be to simplify the tax code, especially for small businesses and the self-employed.

Most of the tax gap results from honest mistakes by taxpayers trying to make sense of complex tax laws rather than intentional wrongdoing. And in this time of economic hardship and restricted access to credit, small businesses across the country are hanging on by a thread.

Overly aggressive tax enforcement activities that single out small business that have been trapped by the complexity of the tax code could be the difference between those businesses surviving and disappearing.

Also, as the IRS steps up enforcement efforts in the area of international tax evasion, I hope the Obama administration, members of Congress, the media, and the American people will remember that there really is a bright-line distinction between tax evasion on one hand, which is illegal. And legitimate international tax policies that improve the competitiveness of American businesses on the other hand.

Tax evasion is a federal crime. And individuals who break the law by hiding their income and offshore accounts should be aggressively pursued and punished to the fullest extent of the law. But these efforts should not be confused with policies such as the ability of U.S. businesses doing business overseas to defer tax on foreign profits, a longstanding principle of sound tax policy that puts our businesses on a more even playing field with foreign competitors.

My previous conversations, Commissioner, with you, give me great confidence that you appreciate that distinction and I'm heartened by that. Although as I read your testimony, there were a couple of areas that gave me some concern that I would like to pursue as we get into questioning. So I certainly look forward to your testimony today and to discussing these issues further.

Again, Mr. Chairman, thank you, and I yield back my time.

REP. LEWIS: Well, thank you very much, sir.

Now, we will hear from our witness, IRS Commissioner, Doug Shulman. I ask Mr. Commissioner that you limit your testimony to five minutes. Without objection, your entire statement will be included in the record. Welcome.

MR. SHULMAN: Chairman Lewis, Ranking Member Boustany, and members of the subcommittee, I want to thank you for the opportunity to testify here today and I want to thank this subcommittee for all the support that it has given the agency.

I'm very proud to be here today to talk to you about the dedicated work of IRS employees around the country as they delivered a successful, yet difficult filing season. I also want to talk to you about the president's 2010 budget request.

Among the highlights of this year's filing season was record e- filing as well as an increase in the average value of a refund by 14 percent, which was good news for taxpayers in this difficult economic time.

Mr. Chairman, I also want to take this opportunity to announce today that by the end of the year, I plan to deliver, to the president and the Treasury secretary, a comprehensive set of recommendations on how to better leverage the tax return, prepare a community to increase taxpayer compliance, and ensure high ethical standards of conduct for paid tax return preparers.

Today, over 80 percent of taxpayers use either a tax-return preparer or third-party software to complete their returns. This is a transformational shift in tax administration. The first part of the review that I plan to undertake will involve fact finding and receiving input from a large and diverse constituent community.

I know that this has been an issue of great interest to the subcommittee. I look forward to hearing your thoughts on the matter and keeping you appraised as we have this dialogue.

Paying taxes is one of the largest financial transactions that individual Americans have each year. And we need to make sure that the professionals who serve them are ethical and ensure that the right amount of tax is paid.

Let me turn to the economy. The IRS is acutely aware of the many financial problems facing individual Americans, businesses, and non- profit organizations. And I'm very committed to striking the right balance between collecting the revenue to fund the government and using all of the tools at our disposal to work with taxpayers who are in difficult financial circumstances.

The IRS, this year, continued to help boost the economy by executing the provisions, the tax provisions, of the American Recovery and Reinvestment Act. We acted in record time after Congress passed and the president signed legislation to boost working Americans' paychecks. And we're continued to focus on outreach efforts, to make sure that taxpayers get every credit, every deduction, and every exclusion that they qualify for.

Mr. Chairman, in the past year, the IRS has demonstrated its ability to be agile and respond to quickly changing situations. The 2010 budget that was submitted by the president will help build the strategic foundation for us to continue moving forward.

My belief is that the IRS needs to excel at both service and enforcement to meet its mission. It is not an either-or proposition. And the budget helps us focus on both. It includes a robust portfolio of enforcement initiatives including a focus on international enforcement that the president, Treasury secretary, and I unveiled on May 4, 2009.

I've made international issues a top priority for my tenure, and we are going to have an unprecedented focus and investment in international issues. The budget also allows us to continue to evolve and improve with service delivery, which is fundamental to collecting the right amount of taxes and funding the government.

Let me turn to the modernization of our core account payer database. We've consistently delivered on our commitments over the last several years. This year we have adopted a much more focused strategy, that's going to allow us to complete the taxpayer database conversion on an accelerated timeframe which is an essential element for our service and enforcement activities.

And finally, Mr. Chairman, let me just encourage the committee's support for the legislative proposals in the president's budget. And let me highlight three of them. First, there is a suite of proposals to curb international tax evasion, which are very important to the IRS.

Second, a proposal to require tax return preparers who have a certain volume of tax return filings to file electronically. And third is the proposal that you and the ranking member have put forth in legislation, which is to eliminate the 20 percent down payment to receive an offer-in-compromise. An offer-in-compromise is a very important tool for us to work with taxpayers who can't meet their tax obligation.

These three provisions, the entire budget will be very helpful as we pursue our strategy of having a modern agency that continuously improves and excels at both service and enforcement.

Again, thank you for the opportunity to testify. And I'm happy to answer any questions.

REP. LEWIS: Mr. Commissioner, thank you so much for your testimony. We appreciate your testimony and willing to come here this morning and testify.

At this time I will open the hearing for questions. I ask that each member follow the five-minute rule. If the witness will respond with short answer, all members will have an opportunity to ask question hopefully, before the first vote. We shall move this hearing with all deliberate speed. And some of you understand what I mean with -- using the phrase, all deliberate speed.

Mr. Commissioner, I am troubled by the fact that almost 23 million taxpayers were not able to reach the agency by phone -- by telephone this year. Some received busy signal, others hung up after waiting. Could you tell us why has the level of service dropped? What steps are you taking to allow more taxpayers to speak to the agency during the next filing season?

MR. SHULMAN: Yes, it's a great question. It is one -- (audio break) -- we are focused on. Any time a taxpayer calls the IRS and doesn't get right through, I'm not happy. Let me give you a couple of statistics. In 2000, between January and May we received 48 million calls. I'm sorry, in 2007.

In 2008, we received 64 million calls during that time period. In 2009, we received 74 million calls during that time period. That was the result of economic stimulus payments going out last year. Cleaning those up this year and reconciling accounts this year, and then the American Recovery and Reinvestment Act coming in this year.

And so the IRS has been called on to have unprecedented amount of activities. The level of service dropped. It especially dropped during a couple of peak weeks, which is normal. Like any big enterprise, we need to balance all of our resources. And one of the things we are quite focused on, while our phones get a lot of attention, we triage between phones and paper.

So we don't want people waiting a long time if they have written us. We don't want people waiting a long time on the phones. Our level of service was lower than we'd like. We have done a couple of things. One is we are pushing more people to the web. Five million of those calls were people trying to find out their adjusted gross income.

By next year, you will be able to find that out on the web. We've changed our telephone scripts to try to move and process people more quickly. We also have added an estimated wait time to your call. So if you call, you'll know how long it takes and you can hang up and call back at a less busy time.

So some of those hang-ups, while they show up in our level of service going down aren't necessarily a bad thing, because they move people to non-peak hours and people don't waste their time for 10 minutes before they figure out that they actually can't wait any longer.

And so those are some of the things we are doing. We are going to keep closely monitoring those and we are going to try to improve every year albeit within resource constraints and try to make smart resource decisions.

REP. LEWIS: Thank you. Mr. Commissioner, I understand that the agency has assessed millions of dollars of punitives in taxpayers for failing to disclose tax shelter. Ninety-four percent of these taxpayers are small businesses, is this true?

MR. SHULMAN: We have four listed transaction and reportable transactions. Congress passed the law that made a strict liability penalty if you don't report one of those transactions. The idea was to have some of the most egregious tax behavior have high penalties. We are quite well aware that there have been people caught up in this who the law wasn't intended for and we are focused on this.

Right now we don't have discretion to waive those penalties, but I would like to work with Congress to try to make this reasonable, so we have a little more discretion in these areas. So if people like small business as you mentioned, get caught up unexpectedly, we have some leeway.

REP. LEWIS: We understand that the agency has imposed over $1 million of penalties on some tax payers. I would like to submit for the record, real life examples, provided by the small business council. How can this be -- can you load a punitive? Do you have the capacity? Or you need us to change -- will our piece of legislation have changed that?

MR. SHULMAN: Yeah, now this is strict liability. So generally, the agency has quite a bit of discretion. We don't have much discretion here, and as you said, there is people caught up in this that the law probably wasn't intended. So getting some more discretion would be something that I'd be very interested in working with the committee on.

REP. LEWIS: Well, thank you very much, Mr. Commissioner. And now I yield to the ranking member for his questions.

REP. BOUSTANY: Thank you, Mr. Chairman.

Commissioner, everyone agrees that those who criminally evade U.S. tax obligations should be brought to justice and that greater enforcement resources for the IRS certainly could make this happen. I do have some strong concerns however, that the administration and the press tend to lump together the need to combat offshore tax evasion on one hand with raising taxes on foreign profits of fully compliant U.S. businesses on the other.

I mean, what we want really are U.S. corporations doing business overseas to be able to compete on a level playing field with their foreign competitors. So for the sake of clarity, do you agree that the international tax enforcement, funding we are discussing here today, in the proposed budget should be kept distinct from proposed tax policy changes, such as, restrictions on deferral and foreign tax credits about which reasonable people can disagree.

You know, as I read your testimony on page 9, I think it was the very top paragraph; you referenced the May 4th statement by President Obama. And you referenced closing certain ambiguities in the tax code, which is a -- really a policy issue that Congress will have to take up.

And then I go down to page 14, and the first three paragraphs under international legislative proposals. And you reference a balanced approach that'll allow U.S. companies to continue to compete in the international marketplace. But yet, I get to the second paragraph and this is an assault on deferral.

And in the third paragraph, you talk about clamping down on overseas tax havens, and then get into the check-the-box provision. And so again, do you agree that we ought to have a clear line of distinction between -- in dealing with evasion and legitimate tax policy.

MR. SHULMAN: Yeah, and let me tell you how I think about this. I think there are two distinct sets of issues that the IRS spends time on and worries about. One is very clear. U.S. taxpayers hiding assets overseas illegally, not paying taxes, for those people we have an aggressive agenda. We are going to find them and we are going to prosecute them and pursue them and -- there is a lot of very public cases out there.

The second issue is with multinational businesses, a very different and distinct issue. There is plenty of legitimate tax planning and there is a lot of people trying to be competitive, trying to construct business transactions that also have a tax benefit. And people who stay within the lines of the law, we have no issue with.

I also think there is large corporations that use the complexities of global capital markets and the complexities of the tax code to push the envelope beyond what we think is legal. And we have disagreements sometimes about the law.

REP. BOUSTANY: But it --

MR. SHULMAN: And so for -- that's where I end up focusing as the IRS commissioner.

REP. BOUSTANY: Okay, but --

MR. SHULMAN: It's also a set of -- I'm sorry.

REP. BOUSTANY: Yeah, let me just say, isn't it true that most large U.S. businesses with worldwide operations are under continual audit by the IRS, and have agents trained to detect illegal activity year-round, you know, working year-round, doing auditing.

MR. SHULMAN: Most of the largest corporations are under continual audit. One of the pieces in the current legislation -- here in the president's budget, is to give us money for offshore tax evasion, but it's also to give us economists, lawyers, agents, who are well-trained to make sure we can continue to match off against corporations who are doing tax planning, but occasionally pushing the balance.

REP. BOUSTANY: Thank you. I have another question on a different subject, and back in, I think it was 2007, then assistant secretary for tax policy, Eric Solomon sent a letter to then ranking member Jim McCrery, ranking member of the full committee, explaining his concerns with the ability of the IRS to administer tax credit bonds.

And according to Mr. Solomon, at that time, a lack of uniform rules and the proliferation of special purpose tax credit bonds imposed tremendous administrative burdens on the IRS and Treasury. Now, clearly, the economic -- the Emergency Economic Stabilization Act of 2008, and the Recovery Act of 2009, both contain significant expansions of these tax credit bonds. Do you share assistant -- then Assistant Secretary Solomon's concerns about the difficulty in administering these bonds?

MR. SHULMAN: I'm not familiar with that specific letter. So I don't want to speak to his concerns. I'd be happy to follow-up with you. What I will tell you is there is some bond provisions in the recovery act the Congress passed. We are staffed up and ready to execute those.

And so I'm not aware of, you know, us having specific issues. Now, I will tell you, you know, any time there is complexity in the code, it puts burden on the IRS. And when you get into lots of capital market flows and special deductions for special areas and incentives, it often causes administrative burden writ large. But I am not familiar with that specific issue.

REP. BOUSTANY: Perhaps we can meet on that later. And have someone with -- from Treasury as well, just to get clarification on where we were in '07, and where we are today, given the expansion of these various tax credit vehicles.

MR. SHULMAN: Yeah, I'd be happy to.

REP. BOUSTANY: Thank you. I yield back.

REP. LEWIS: Now, I turn to Mr. Becerra for his questions.

REP. XAVIER BECERRA (D-CA): Thank you, Mr. Chairman, and thank you for holding this hearing.

And Mr. Shulman, great to have you here, thank you, for taking the time. I'm very encouraged by your comments today and your announcement that you will be doing more to examine the whole issue of paid tax preparers. This is something I have been concerned about for quite sometime. I will be reintroducing legislation soon that deals with the issue of paid tax preparers.

And I'd like to see if I can ask a few questions, understanding that you are now in the process of talking, collecting information, and perhaps not having final answers, I would like to see if I can get from you some -- some of your opinions on some of these issues. But more importantly, some of the facts that drove you to this decision in this announcement to move forward in examining the whole tax preparer community.

First, you mentioned that 80 percent of Americans use either a paid tax preparer or some third-party software to try to file their tax returns. My understanding is that on top of that statistic, some 60 percent of Americans rely on paid tax preparers exclusively to do this. And so well over half of American taxpayers go to someone else and pay that individual or company to get their tax filings into the IRS, and get them in accurately.

The concern I have and the reason I've taken this issue on for quite some time is that we find that in too many cases there are errors even in these filings by people who have paid tax preparers to prepare the returns for them. And what we are finding is that we have all sorts of people who are being paid to do tax preparation.

Many are certified public accountants, many are attorneys with experience in tax law, many are individuals who've worked in the field of tax policy and law for quite some time, whether through the IRS or otherwise. But there is no clear standard nationally that says what you have to do and -- do to prepare to become a tax preparer.

You could open a shop tomorrow without little trouble. In fact, you and I don't know how many how many tax preparers there are right now in America, is that correct?

MR. SHULMAN: That's correct.

REP. BECERRA: And so I know that there's been talk of requiring all tax preparers who are paid to register. So, at least, you can tell us the number of tax preparers that are out there, and begin to track their work. But that seems to only deal with the problem once it's already occurred.

If you are only going to register them, then you find out that some aren't doing good work, and Americans are now paying penalties to the IRS because they filed the income tax returns improperly, based on a paid tax preparer having prepared these returns for these American taxpayers.

And some of us believe -- I am in this camp that believes that we have to do something to make sure there is a level of competency in these tax preparers, so that when you pay good money to do your civic duty of paying your taxes, you don't have to find out the IRS is going to come after you because you did it wrong. And it's very tough, I suspect, to go after that tax preparer afterwards to take care of your penalty, your fines, your late fees, and all the rest.

And so I'm wondering if you can comment on this notion of going farther than just asking tax preparers, paid tax preparers, to register with the government through the IRS, but also to ask for some level of competency of anyone who wishes to hold himself out as being a professional tax preparer.

MR. SHULMAN: Yeah, I think a couple of things; clearly with preparers and software providers being engaged with 80 percent of Americans plus, there's very few people who sit down, like, the older image that people have filling out the 1040 anymore.

They need to be part of the overall tax administration system for two reasons. One is their part of making sure we have compliance and collect the right amount of taxes. And two is, as I mentioned, paying your taxes is one of the largest financial transactions that American citizens and American taxpayers have each year.

And we need to make sure that people are ethical, they are well trained, they're giving good service. But to make sure we collect the right amount of money and that people are being treated fairly.

REP. BECERRA: And so Commissioner, how do you make sure that they are well trained?

MR. SHULMAN: Well, so what I've just announced is, I will tell you exactly my thoughts on that by the end of this year. And I will submit it in writing to the Treasury secretary and the president. I want to enter this with an open mind.

I'm a big believer in transparent and open dialogue when the government gets involved in a big question like this that is going to affect a lot of people. And so we are going to hold some open meetings with preparers, with consumer advocates, with taxpayers, with any affected constituency.

We are going to be looking forward to having discussions with the Congress. And for me everything is on the table with this, everything from education to services we provide, to strict enforcement we have, to all the regulatory issues that you've discussed.

REP. BECERRA: Thank you, Mr. Commissioner, thank you very much.

REP. LEWIS: Now, I turn to Mr. Pascrell for his questions.

REP. BILL PASCRELL (D-NJ): Thank you, Mr. Chairman. Commissioner Shulman, welcome to the committee. You did a fantastic job, the IRS, in responding to the American Recovery and Reinvestment Act, and all of the different programs to -- that are here to stimulate the economy. And -- (audio break) -- while the extension was good news I think we want to resolve this once and for all.

Typical public safety pension plans are designed around, I repeat, the years of service and not in arbitrary age, due to the physical and mental strain of the job. The IRS regulation does not take into account the reasons for why this retirement system is established as it is.

I would like to see governmental plans completely excluded from the normal retirement age regulation. Here's my question, would you be willing or able to provide a formal opinion stating that government pension plans are exempt from the normal retirement age?

MR. SHULMAN: You know, I'm going to have to have conversations with obviously our attorneys on this and the Treasury Department. But the sentiments you have around, (a) pensions being important for public employees, firemen, policemen, people who have special stress on the job, I'm very sympathetic to.

I would ask you, I'm not going to be able to make any commitments here, but I certainly will work with your office on it, look at it, and give you anything I can as far as commitments.

REP. PASCRELL: We are talking about a very different classification of workers, particularly when we talk about police and fire. You are talking about not only the stress of the job, but you are talking about losing a lot of people that we need particularly at this time.

And I would ask us to move this, to move as quickly as possible to get a final opinion on this. It affects every career firefighter and every -- just about every police officer in the United States of America. I would ask for your indulgence on that.

The second question is, I'm glad to see in your testimony that you highlight the new car purchase deduction. You know, we've sent so much money to the big three; we did not ask ourselves the question, some of us did on both sides of the aisle, what good is it if we provide dollars to keep them afloat, and we don't sell any cars.

Well, that is exactly what happened. And this is the result of a lot of the dealers having to shut down. It could have been avoidable. We had legislation to do that.

As well as the Earned Income Tax Credit, which we've all been -- many of us have been strong advocates of, for a number of years.

You've stated that, and I'm quoting you, "Through a series of massive outreach efforts, the IRS wants to make sure that taxpayers are aware of every credit, deduction, and exclusion for which they qualify, including several new benefits this year."

You even used the word publicized, and I don't know how you're publicizing what's happening in the automobile industry to get cars, help the process of selling cars, I wish you would tell us that. What more can be done, do you think, to increase the awareness of both the EITC for instance and -- as well as the new car purchase deduction, which is going to save people a lot of money?

MR. SHULMAN: Yeah, you mentioned we are very focused on the education and outreach component of our mission. We've got -- I won't bore you with all the programs, but we run special events, we do events with members of Congress, we do a lot of media both in English and Spanish.

(Audio break) -- we have a variety of mailings, we have a very large web presence, we have one of the most trafficked business, non- individual websites in the world. And with the Recovery Act, the president tasked every agency to be very aggressive about outreach.

If my memory serves me correctly, the president actually announced the new car credit, and he does well when it comes to media and getting attention and publicizing. So, it -- you know, we go all out to do that. It also, though, takes, you know, lots of partnerships.

So we try to work through community groups, tax preparation groups, you know, both low-income taxpayer clinics, a variety of folks to do publications. You know, media and outreach in publication is a science and also an art and we try to hone both of it, both of them.

We spend a lot of time and resources trying to execute that part of our mission, because as I think the chairman and ranking member said, if we can get people to do it right in the first place, that's the best way to do tax administration.

REP. PASCRELL: Mr. Chairman, Mr. Commissioner, in these thousands of dealers that are being forced to close, on the average, there are 47-48 employees at every one of these dealers that the level of income is between $48,000 to $55,000. You are talking about a lot of people. You are talking about a lot of people being put out to pasture.

And I think whatever we can do to accelerate this -- it's fine that the president made the statement that's stepping -- at the bully pulpit, but the fact is that the IRS must be a partner and the publicity must be something that gets down to the average person, so that they know that this is real.

And we should be working with the dealers to help them. We did such a great job, didn't we, of working with the big three. Let's deal with the dealers and help those folks on Main Street. Thank you.

REP. LEWIS: Now, we turn to Mr. Linder for his questions.

REP. JOHN LINDER (R-GA): Thank you, Mr. Chairman.

Mr. Commissioner, welcome; nice to have you here.

MR. SHULMAN: Thank you.

REP. LINDER: Well, increasing numbers, as you put it out in the early part of your remarks, are going to professionals to prepare their tax returns and setting them online. Do you have any idea what percentage of all taxpayers use itemized deductions and what percent do not take itemized deductions?

MR. SHULMAN: I don't have that number off the top of my head, but I would be happy to get them to you.

REP. LINDER: A ballpark?

MR. SHULMAN: Roughly a third, I'm --

REP. LINDER: A third used itemized deductions?

MR. SHULMAN: Yeah.

REP. LINDER: Yeah. Those third that used itemized deductions pay about $350 billion a year to fill out their tax -- to respond in writing to the IRS. Businesses spend -- and individuals -- spend another $100 billion a year calculating the tax implications of a business decision. If we are spending $450 billion a year just to deal with the IRS, is that productive time and money?

MR. SHULMAN: If you are getting at, is the tax credit incredibly complex and difficult to deal with, I think it's incredibly complex and difficult to deal with, and my job would be a lot easier with a much more simple tax code.

REP. LINDER: Have you got -- do you have any tax task force in your agency looking at ways to fix it?

MR. SHULMAN: You know, the president has assigned the Economic Recovery Panel led by Paul Volcker to look at a variety of issues including burden and simplification and we're engaged with that panel.

REP. LINDER: Do you have any idea how large the underground economy is?

MR. SHULMAN: I do not.

REP. LINDER: Do you take any guesses?

MR. SHULMAN: No.

REP. LINDER: Would you believe 2-3 trillion?

MR. SHULMAN: I won't hazard to guess, but --

REP. LINDER: Okay. In the past, we gave unpaid claims, small amounts, to private companies to collect, and they raised some money. That has now been taken off the books. It's not legal for them to do that or for you to give them their claims. Who is filling in that role? Are we just forfeiting the money?

MR. SHULMAN: Yeah, we have had a, what I think, has been a successful honing and refining of our collection program. The way that we measure tax debt that's collectible; we have to keep debt on the books for 10 years, unlike private sector companies who write off a lot of debt. But if you look at our inventory of potentially collectible debt was in 2003, about $7.3 billion; that's decreased in half over the last -- in 2008.

REP. LINDER: How can you say that $7.3 billion when you tell us that the tax gap is $345 billion?

MR. SHULMAN: Two different measures; potentially collectible inventory is agreed upon tax that we are out collecting. The tax gap is a measure of what's owed that's not paid, which includes people who aren't on the books, et cetera. So that's the amount of taxes owed minus the amount of taxes paid every year.

REP. LINDER: The question was, is somebody now in your department, pursuing those smaller claims that used to be pursued by private companies?

MR. SHULMAN: Yes, yes.

REP. LINDER: Thank you.

Thank you, Mr. Chairman.

REP. LEWIS: Now, we recognize Mr. Etheridge for his questions.

REP. BOB ETHERIDGE (D-NC): Thank you, Mr. Chairman.

And Mr. Commissioner, thank you for joining us today.

Let me follow through the line this argument (ph) followed to an extent.

If you would speak to the IRS' ability, you touched on a little bit earlier, how to deal with the growing complexity, number one, in the tax code.

And secondly, we have expanded tax credits for education, to provide benefits for homeowners, to give new credits for energy efficiency, among others. And they are meant to help people make the decision, number one, to go to college, or buy a home, or as you just talked about, buy a car, or improve the home to save energy, et cetera.

I guess, the broader question -- you've touched about the outreach, but are you reaching out through various groups out there, and I'd be interested in comments, because I think it's -- you know, the time is running out on some of these.

MR. SHULMAN: Yeah.

REP. ETHERIDGE: It's now June and December will be here real quick. And I believe, if I remember anything about IRS, you got to have that completed and paid for before you file your taxes. You can't have it on the contract, it didn't work. And so I would be interested in your comment as we are reaching out. Because that time line really isn't seven months now, it's probably more like four or five, depending on what you would do?

MR. SHULMAN: Yeah. We've been, for each of the different tax credits, we have a set of groups. I mean there is a wide network of tax professionals, both preparers -- the groups, umbrella groups for accountants, a variety of community groups who are our partners that in general that we reach out to, for people who go to tax, but then also, you know for housing credit, for instance. We have been working with specifically different groups that we usually don't work with to advertise those kinds of things.

REP. ETHERIDGE: Information out.

MR. SHULMAN: We've partnered with HUD, for instance, who has their networks and their outreach program, with all the different housing groups. They are working side by side with us to penetrate that market.

We have partnered with education to do outreach there. And so we have tried to go through our traditional channels, but also specific channels just to make sure people get all the information they need for the recovery act.

REP. ETHERIDGE: To your knowledge, are all of the rules and regulations in place or will they be in place shortly before these new bonds are out there, because I know there are a variety of zero-rated bonds we put in the recovery act.

MR. SHULMAN: Yeah.

REP. ETHERIDGE: And talking with some of the local governments, I'm not really sure they have them in place where they can start issuing bonds.

MR. SHULMAN: We have issued most of the guidance. We also have now gotten questions and are working on some very specific technical issues, but we've been very focused. I will tell you as an agency head, you know, the vice president was tasked with overseeing this.

Everyone has deadlines around it. It's all very transparent, when we are putting out guidance for what. Most of all our guidance is out, anything that's not out is incredibly technical, more difficult guidance, and we are putting, checking on it daily, and putting pressure on our agency as is the Treasury secretary for the things that have to come out of the Treasury.

REP. ETHERIDGE: Would it be possible that someone from your department be in touch with our office, because we've got some specific ones. I know the guidance is not there yet. And they are in the process of trying to do some bonds that will help expand some stuff, and this is a specific -- these local bonds that deals with municipalities and counties and states for economic development?

MR. SHULMAN: Absolutely. We'd be happy to work with your office immediately.

REP. ETHERIDGE: Okay. Let me ask one other question in the time I have left, because today our economy is increasingly global. And a lot of small businesses, who never thought they would be selling stuff offshore, are now selling stuff internationally. And many of them are doing quite well.

When once they only worried about selling in-state that wasn't a problem for the tax system, because they, you know, they collected the tax as they sold, et cetera. And as more businesses expand and become global, does the IRS have the manpower, I assume you have the expertise, to deal with these emerging businesses, and giving the assistance they need in some of these complex areas? Because I think this is a great opportunity as the economy starts to recover -- (audio break) -- in finding a level of ability to deal with that?

MR. SHULMAN: You know, I think -- I come from, you know, capital markets regulation field before this, and now looking at the tax system. And one of the issues we have in this country that everyone is wrestling with is how do you deal with sovereign laws and sovereign authorities in a global world? And how do you deal when you cross borders?

I would say, this agency has done a good job trying to get ahead of the curve. We have got a long way to go and it's going to be a multi-year effort. You asked about if we have the resources and the competency. The people who are there are quite competent; they are going to need training, because all these techniques are emerging.

And we are getting more resources in this year's budget, hopefully in next year's budget, the 2010 budget that was sent to the Hill. And so it's going to be an area that we are going to keep focused on and try to get in front of.

REP. ETHERIDGE: Mr. Commissioner, if there is any way we can be of help, I am sure the chairman would say to you, let us know. Because I think this is an area where we're going to get growth, and if we're really going to get out of this thing, we are going to need to help small business. Thank you.

And I yield back, Mr. Chairman.

MR. SHULMAN: Thank you.

REP. LEWIS: Thank you very much.

We now turn to Mr. Kind for his question.

REP. RON KIND (D-WI): Great, thank you, Mr. Chairman for holding the hearing.

Mr. Commissioner, welcome back, always nice to hear from you. Let me just follow up quickly on what Mr. Linder had asked you previously about the Volcker Commission.

Now, that obviously has been tasked to meet this summer-fall, and report back later. IRS role -- is there any role that the IRS is going to be playing with the Volcker Commission or what?

MR. SHULMAN: For the specific tax part that involves simplification, tax gap enforcement, those kinds of pieces yes, you know, I'd been invited to participate, we have staff engaged in that.

REP. KIND: And on what stage are we in with that commission? Have we had a formal meeting yet?

MR. SHULMAN: You know, I would rather not speak for the White House and the Volcker Commission. Yeah, I mean, there was a formal public meeting in May of the whole group. I know the tax group has met, but I -- like I said, I probably shouldn't, you know, speak for the White House?

REP. KIND: The IRS -- pardon me, has the IRS been involved in any meetings so far?

MR. SHULMAN: Yes, I've attended the first meeting.

REP. KIND: Okay.

MR. SHULMAN: And so and I'm deeply involved, you know, as is the Treasury.

REP. KIND: Let me ask you a question then. My staff person in charge of IRS, she is back home, indicates to me this anecdotally that offers in compromise have diminished quite a bit recently in light of the current economic situation. Is there a reason or is this is an anomaly or what?

MR. SHULMAN: I -- they have been going down over the last several years. It's something I'm quite concerned about. Two things that I think are important; one is in the president's budget and in coming from the chairman and the ranking member and other members of the committee, there's a recommendation that we eliminate the 20 percent down payment requirement, which I think will help boost that.

We are also reviewing internally how we make sure we get the word out, because I'm very focused and everyone in our agency is very focused and understands we are a big service organization, but we are also an enforcement organization.

REP. KIND: Right.

MR. SHULMAN: Not everyone in America understands the service component, even though they file the return, we want to make sure people know that if they reach out to us, and they are having a hard time paying, we can work with them. And so we are doing an internal review and this legislative change, I think, would be important.

REP. KIND: What was the reason why there has been kind of a drop-off in offers in compromise?

MR. SHULMAN: We don't know but I suspect one of the reasons is the law that went into place several years ago that required you to put a 20 percent down payment for your offer-in-compromise. And so, you know, this is usually people who don't have the money to pay their full tax debt. They may not have the full money to put 20 percent down when they don't even know that the debt's going to be compromised.

REP. KIND: Right. I think later this year, new tax gap estimates were supposed to be released. I think the last year we have available is the $345 billion in 2001, does that sound right? In 2009, we are supposed to get an update, is that right?

MR. SHULMAN: Sir the tax gap -- a couple of things. One is they are very imprecise measure.

REP. KIND: Right.

MR. SHULMAN: You -- the number is targeted to 2001, but a lot of that is extrapolated data from '83, '86, and so it's not based on real updated data. We have been given some more money to actually update that research. We were given in the past, we are given it now. Our goal is to get to multi-year -- get to regular updates recognizing that it's always going to be imperfect.

We are shooting and right now working hard on S-corp and C-corp numbers which are especially old, and we are hoping to get those out, you know, in the not too distant future.

REP. KIND: And I assume that your review of this is going to be able to identify what might be more achievable as far as going after some of the tax gap revenue that we're losing right now?

MR. SHULMAN: Yeah, I mean, I think a lot of focus on the tax gap, I'm concerned about the tax gap. Some of these tax gap numbers though are, we know that, you know, where there is no information reporting, is where there is lower compliance; down in the 50 percent range where there is lots of information reporting like in W2 and withholding you are up in the 99 percent range.

So it's somewhat imprecise, because I mean, by definition, the tax gap is the money that's not coming in. So you don't know exactly where it is and what the motivation. There is a whole bunch of proposals, you know, this committee was supportive of having credit card reporting and basis reporting.

There are some proposals in the president's budget around having international focus, some reporting on businesses. And so I think we already have a whole bunch of strategies that are good to go after.

REP. KIND: Let me ask you this.

MR. SHULMAN: And yes, the research will help us target that.

REP. KIND: Let me ask a quick question on withholding tables on Making Work Pay. It's my understanding that for married couples the credit solicited $600, but isn't the maximum amount for a married couple $800? So am I missing something here in the withholding tables?

MR. SHULMAN: Yeah, I mean, the withholding tables are estimates and guides. If you are married, you might have one person working or two people working, you might be able to get ($)400 or ($)800 depending, you know, who is working in the household.

And so, by definition, these things don't -- withholding table isn't going to take into account every single taxpayer situation. My understanding is that the Treasury Department economists who put together the tables tried to come up with an average which would work for the most people, recognizing it's not going to work for everybody.

REP. KIND: Is it creating confusion?

MR. SHULMAN: Withholding tables every year are imprecise. And so, you know, the important thing is for people to look at their own situation, decide what their withholding should be. Some people like to under-withhold and owe something at the end.

Some people like to over-withhold and get a big refund. And so the one piece that was creating a lot of confusion, this committee was good and brought to our attention early, was the withholding tables for people on pensions who weren't working, were taking two-grade deductions, and therefore were going to owe more at the end, and we corrected that. And so where there's more confusion than normal, we will be agile and try to update those as we see problems.

REP. KIND: Thank you, Mr. Commissioner.

Thank you, Mr. Chairman.

REP. LEWIS: Thank you.

Now we turn to Roskam for his questions.

REP. PETER J. ROSKAM (R-IL): Thank you, Mr. Chairman.

Thank you, Commissioner. Just quick areas, one is could you give me a general sense based on your conversation earlier with some of the other members about your view on the Free File Alliance, and how that sort of -- how that interplays with other plans?

You know, the president, during his campaign, talked -- I think it was pretty explicitly about getting official help on the side of taxpayers if you had a tax -- had income under a $100,000. I guess, my question is, do you view that Free File Alliance as a helpful tool right now?

And if you -- I guess, the question is, if you are having a hard time answering the phones and answering the mail, then you've got a complicated job admittedly. Is that any time to be bringing in tax preparation in-house, so to speak? Could you just give me your general sense of that?

MR. SHULMAN: Yeah. I mean, my general sense is this, is you know, I'd like the tax code to be simpler first, so people had to rely less on software, and people, et cetera, and it was easier.

Second is, American people have to pay taxes. And so as cheap and easy as it can be, that would be great philosophically is where I lean. I also think the Free File Alliance has been a very good partnership we've had, over the years, that has allowed lower income people to file their tax returns for free online.

It was developed at a time where the Internet hadn't been as developed, and expectations of consumers broadly were probably not that they could get online and do something quick and for free. Lot of members of the Free File Alliance actually this year, for the first time, are allowing free electronic filing even when you purchase their software.

And so I think this is a rapidly evolving area. I think any time you are talking about electronic filing, software preparation, the Internet, it changes every year, both the expectations of the American people change every year, as well as the abilities of both government and the private sector to deliver. And so it's been a good program.

I think all of our programs around electronic filing are going to evolve. This year you might have seen -- last year we had about 58 percent of individuals filed electronically. This year, to-date, about 68 percent have, although people who have extensions, usually come in paper, because they are more complex returns, but it's still clearly going to be above the 58 percent. So that keeps growing.

So I think this is just going to be an ongoing conversation that we are going to have. And we, as the government, need to keep up with the times. That means, we are going to be doing certain things. We're going to be doing certain things with the private sector and keep moving.

REP. ROSKAM: I would just encourage a lot of private sector development. It seems like there has been a good history there. So that's, I'm sure in the stew as you are making your decisions.

MR. SHULMAN: Absolutely.

REP. ROSKAM: Just switching gears quickly, and this has to go with the administration's request for additional enforcement funding really targeted towards small business entrepreneurs. Can you speak to that?

You know, folks in my area, you know, if there is a legitimate -- here we had the secretary of the Treasury that came in and admitted that it was so complicated that he had a difficult time discerning a tax liability.

Is this really where the emphasis should be going right now at a time when we are in real turmoil from an economic point of view? Should we really be focusing in from a targeting point of view at small business and entrepreneurs? Could you give me your sense in terms of emphasis?

MR. SHULMAN: Yeah, I mean, my priority areas are coverage and compliance, which isn't always the same as enforcement, because sometimes you find issues. When we find issues, we try to work through with people hopefully, a lot of people make inadvertent mistakes.

My priority areas are high net worth individuals, large corporations, international, and then some of the flow-through entities which are much more difficult for us. Those are areas where there has been -- you know, where we find bigger issues with tax sometimes.

I don't think we have a specific coverage, you know, targets and increase around small business. You know, we recognize -- I recognize, I tell you I've been in conversation with the administration that small businesses are engines of growth in this country. That entrepreneurship is very important in this country.

What I would say is where there is not a lot of information reporting is one area where we're focused on. There is -- sometimes we get a 1099 from a bank. And sometimes it's attached to a Schedule C, which is part of a return.

And we are going to be able to increase our ability to do pure document matching, send out letters if there is a mismatch to make sure people have the -- you know, get information from us and pay the right amount of taxes. But I don't think we have a special target on small businesses.

REP. ROSKAM: Thank you. I yield back.

REP. LEWIS: Thank you.

We now turn to Mr. Larson for his questions.

REP. JOHN LARSON (D-CT): Thank you, Mr. Chairman, and thank you, as always, for holding this very fine hearing.

Thank you, Mr. Shulman, for being here and your service to the country. How many employees do they -- do we have in the IRS?

MR. SHULMAN: We have about 93,000 FTEs, you know, fulltime equivalents. We have a lot of seasonal people who come on during filing season, and process returns and go off, but you know, the working number is about 93,000.

REP. LARSON: Has the IRS ever been specifically charged by the Congress to -- if the IRS was rewriting the tax code, how would it rewrite it? Have you all received the -- and this is just a curious question that always comes into my mind. My guess is probably not, but --

MR. SHULMAN: No, I think of it is the prerogative of the Ways and Means Committee and Finance Committee. So no.

REP. LARSON: Wasn't that an intelligent answer.

(Laughter.)

Well, let me ask you this as a follow-up. As -- if you were charged by the Congress, who after all, you know, with the number of employees that you have and the vast experience of looking at a tax code that at best -- certainly some could, you know, describe as a Gordian knot, would not a number of people who have been in that very noble public service have ideas about where they think changes could be made?

MR. SHULMAN: Sure.

REP. LARSON: And if you were charged, how long do you think a study like that would take?

MR. SHULMAN: You know, I can't say. What I will tell you is we have a very good relationship and we are a bureau of the Department of Treasury. I have a very good relationship with the Treasury secretary.

You know, the White House and the Treasury take the lead on tax issues. The -- we were talking before, the Volcker panel is actually engaged in that as is the Treasury Department. And we certainly have a strong voice in this effort.

REP. LARSON: We kind of consider ourselves representatives of the people as well, and so we're interested in the sinew and the nuts and bolts. And it'd be interesting to see what our frontline people have to say about our tax system as well.

But let me move rapidly on to -- do you have an opinion or has the IRS expressed the opinion on the issue that was discussed in this committee, et cetera, one point is that we're looking at revenues on carried interest.

MR. SHULMAN: I -- you know, the administration has sent its opinion via the president's budget, and I'm supportive of that.

REP. LARSON: All right. Let me try another area here for you.

MR. SHULMAN: It's hard to drum into too much tax policy.

REP. LARSON: What is the IRS' feeling, "60 Minutes" ran a special about what's been going on in terms of the dark market or the over-the-counter market with credit default swaps and derivatives, et cetera. Should there be a separate tax treatment for those?

MR. SHULMAN: Well, as you know, internationally, there is actually a lot of different treatments of securities lending, equity- linked notes, swaps, derivatives. What I would say is there is inconsistent treatment in the code today. All -- this has been put together for different reasons and around competitiveness, capital close (ph), a variety of things.

Clearly with what's happened in the financial markets, there's, you know, interest in this, but I won't opine on whether or not this should be different or not.

REP. LARSON: Well, it is interesting, because usually the feedback we get, oh, no, God, government has got to stay away from this, because you know, certainly if there was an effort in this area, they would move offshore. Well, it seems to me like this is a global economic crisis.

And when reports account for anywhere from ($)40 trillion to $60 trillion in trades that happened in an over-the-counter unregulated area, that this might at least peak the interest of the IRS or the administration or anyone concerned about revenues and loss thereof. And then appropriate regulatory steps that should be taken in this area. Do you have any opinion on that, or --

MR. SHULMAN: I mean, you know, my only opinion is I know that Treasury has put forward proposals around derivatives regulation. It's being debated in Congress and the Senate. Clearly, you know, this is an area that has the attention of leaders in the country.

REP. LARSON: With regard to the American Recovery and Reinvestment Act, you know, the taxpayers who are eligible for Making Work Pay; some have become aware of the fact that they potentially are going to have to repay a portion of their credit. Others have not.

I understand you are going to be undertaking an outreach campaign to make sure on this issue. Could you elaborate what efforts are being made to make sure that people won't get sticker shock, so to speak at, when they find out that they - -they've been the benefactor of Make Work Pay, but now they may end up paying portions of that back.

MR. SHULMAN: Yeah, I mean, the biggest confusion this year was around pensioners who were using the tables, but not working. So they weren't eligible for the Make Work Pay credit. But their pension was being drawn down. We changed that on the tables. We've worked directly with pension organizations.

We've been working with organizations such as the AARP to do outreach to individuals to make sure they make any changes to the withholding as appropriate. And so we've got a pretty deep network through our tax exempt group into the pension community. So all the groups that can reach the actual pensions --

REP. LARSON: Including social security, yeah

MR. SHULMAN: Yeah, exactly.

REP. LARSON: Yes. Thank you very much.

Thank you, Mr. Chairman.

REP. LEWIS: Well, thank you.

Mr. Commissioner, I want to yield to Mr. Boustany for an additional question.

REP. BOUSTANY: Thank you, Mr. Chairman.

Commissioner, I looked over the June 2009 GAO report on your budget estimates and request, and there was one conclusion that came out, and I'm going to read briefly a paragraph here from the report.

It says, "By presenting ROI projections for the proposed enforcement initiatives in its budget request, IRS is providing important information about estimated costs and potential revenues. Such information should be useful to Congress for budgeting and oversight.

"However, without actual ROI information, Congress, IRS management, and the public will not know whether the approximately $900 million investment from fiscal year 2010 through fiscal year 2012 for enforcement initiatives actually realized the projected results."

And so GAO goes on to recommend that the commissioner take steps to develop return on investments for IRS's enforcement programs using actual revenue and full cost data and compare that to the projection. So could you comment on the steps that you are going to take in that regard?

MR. SHULMAN: Let me comment on in general. One is, we do track ROI on an aggregate basis. I think there is a -- when I came into the job, one observation I had is there is a very well-defined and agreed upon between OMB and CBO what our ROI is for our collection versus our exempt, et cetera.

I think one place all of the ROI discussions missed the mark is investments in technology and service also help yield voluntary compliance. It's often been said that a dollar put into enforcement has a three to one deterrent in fact. And education brings in the right amount, the preparer work that we are doing.

And so I'm actually quite focused on making sure that service, technology, and enforcement are all seen as part of funding, helping make sure we fund the government and get it right. And so I would -- you know, those are the kinds of things that I'm quite focused on making sure that we have the proper dialogue about it, and obviously, the measurements on the back end.

REP. BOUSTANY: Thank you. I yield back.

REP. LEWIS: Mr. Commissioner, I want to just ask one last question. In my statement, I mentioned the fact that the agency is closing the Atlanta and Andover unit of paper returns. Could you tell us how many employees will be affected there?

MR. SHULMAN: You know, I can talk to you some about the Atlanta. And these are all estimates because it wouldn't happen until 2011. In Andover, we actually are in the process of it. And we try to give employees advance notice. We try to give them reassignment preferences.

We try to allow people who want to retire early, to swap with people who want to stay longer. Our experience doing this in Brookhaven, Philadelphia, and Memphis, is very few people at the end of the day actually have to be rift that we go the extra mile and try to work with employees.

Because I personally believe we have an obligation to people who've been with us a long time that if we're trying to -- you know, we have an obligation to the American people to try to run efficient operations. And as more electronic filing comes in, not waste money, but at the same time, we have personal obligations to people who've been dedicated to the government to help find them another job.

And so in Atlanta, the number of permanent employees that could be affected, not ones -- we have some people we brought on just for contracts and they knew exactly, you know, that this was a one-year deal or a temporary deal. But the number of permanent could be up to a 1,000. For those people, we are going to make sure we stretch, and bend, and find other work.

When we have opportunities to make new investment, we are going to try, you know, as long as it makes business sense to put it in the place where there's potential layoff. So in Andover, for instance, we've opened -- committed to opening another AUR site, which is where we match information returns against actual tax returns.

And so, you know, I want to just tell you, I believe we have an obligation to people to do everything we can to work with them. I've instructed my staff, who runs the division that it is going to have to work on the ramp down. That if there is any place to be flexible and creative, that's here, and we are going to have an eye towards if there's more work to be done, trying to have it there, so we can pick up other employees.

REP. LEWIS: I appreciate your concern and your feeling along these lines.

Have you had an opportunity or someone at the agency to talk with other federal agencies, such as the Social Security Administration about the possibility looking at some of these individuals?

MR. SHULMAN: We have not to date, but we certainly will.

REP. LEWIS: Well, thank you very much.

I believe, Mr. Becerra has a last question or two?

REP. BECERRA: Yes, Mr. Chairman, if I may.

REP. LEWIS: I'll turn to you, sir.

REP. BECERRA: Thank you, Mr. Chairman.

Commissioner, let me -- before I leave the whole issue of tax preparers, can I get a sense, are you -- the door is completely open to try to examine this issue of tax preparers. You're not limiting your scope of inquiry to one aspect of tax preparation? It's wide open.

MR. SHULMAN: Yeah, there is going to be a very open, transparent, and I've no preconceived notions, and we are going to just try to open the door.

REP. BECERRA: Great, good to hear. The tax gap -- if the estimate for the 2001 tax gap is anywhere near accurate, we have no way of knowing, but if it were -- if it is, in fact, or was, in fact, something in the order $345 billion of uncollected owed taxes, over the last eight years, we could have collected enough money to not only cover this massive deficit that we see for 2009, but probably enough to cover most of the deficit from the last several years.

So it adds up to quite a bit of money. And I know that your agency is going to come up with a new estimate for the tax gap to update the numbers, since it's -- the 2001 number is obviously very old.

We thought we were going to receive something soon, if not already, on this tax gap number. And I'm wondering if you can tell me when can this committee expect to hear from you and your agency on the work you've done to estimate the size of the tax gap between what we should collect and what we actually collect?

MR. SHULMAN: Yeah. So a couple of things. One is, as I mentioned before to one of your colleagues, these are real estimates. There's not -- I mean, 2001 happens to be the year that we looked at, but a lot of these are extrapolated from 1980s numbers. It's very hard to get your hand around it.

Two is, I think it's important that you know, members of Congress know. You know, this isn't just free money they can go and get grabbed to close the deficit. You know, this is money that's going to take multi-year work. The best way to go after the tax gap is going to be information reporting.

We don't have a big tax gap with wage earners in this country where we get their information. They file their return. If there's any problem, we just send them a letter and we get it closed off, and there is actually withholding it at the source. And so there is a whole bunch of proposals that are in here.

Our goal is to have annual tax gap updates. We are trying to roll through the different segments. The ones that we are most focused on right now are S-corporations and C-corporations. And those I, you know, hope to get out in the not too distant future.

REP. BECERRA: And Mr. Chairman, I'll end with this last question, it makes more a comment. I want to pick up on something the commissioner just said. The issue of the tax gap, really doesn't relate to salaried workers who get a paycheck week-in, week-out, because that income is reported in a fairly aggressive and accurate way on a constant basis?

You get your paycheck. Taxes are deducted based on how many exemptions you claim, and so forth. And so most wage earners don't do the type of tax evasion or innocent filing mistakes that would lead to this massive tax gap of several hundred billions of dollars.

As you said, it's the fact that we don't have information from others that should be paying taxes, that causes us not to be able to collect enough from those who have earned an income and haven't paid it. The point that I'm trying to make here is that most Americans who work for a living making a salary or a wage aren't the folks who are trying to evade paying taxes or making mistakes paying their taxes.

It's folks who don't have the constant documentation required to pay their taxes that are leading to this problem. I won't say they are causing it, because a lot of folks are innocently not filing correct information or inadequate information on what they should be paying.

But it's clearly the case that we need to have a better way of tracking those who don't have a regular paycheck within their scope of income generation. So we can figure out how it is that we can get every American to pay his or her fair share of taxes so that we can have every American who is dutifully paying their taxes, not paying more than necessary to make up for the gap created by those who are shirking their responsibility to pay their fair share.

So I think it's important. My dad worked all his life in road construction and in agriculture picking crops. He always got paid through a check. He never got to take a deduction for his lunch, or anything like that. But he always got tax.

And I think it's important that those who work day-in and day-out and get a paycheck know that they are not going to be paid to make higher taxes. Because there is somebody who is able to write-off that two-martini lunch who isn't documenting as well as he or she could, and paying his or her fair share of taxes.

So I thank you, Commissioner, for your presence today and your testimony.

Thank you, Mr. Chairman.

REP. LEWIS: I will like to submit a question for the record from Congressman Levin and Congressman Thompson.

Mr. Commissioner, I would like to thank you for being here today for your testimony. We appreciate your views. You have been more than helpful.

Is there any other business to come before to subcommittee? There being no further business. This hearing is adjourned. (Sounds gavel.) Thank you very much.


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