Hearing of the House Ways and Means Committee - Internal Revenue Service Operations and the 2014 Tax Return Filing Season

Hearing

Good morning and welcome to the Subcommittee on Oversight's hearing on the Internal Revenue Service's operation and budget.

This filing season, million of taxpayers across America have struggled to meet their tax filing obligations. Doing so has become harder over time, as the tax code grows in complexity, forcing taxpayers to spend over 6 billion hours and $160 billion every single year to comply with its filing requirements. At the IRS, hardworking public servants also bear the weight of America's outdated tax code.

Despite these challenges, and another late start to the filing season, the IRS appears to have carried out the 2014 tax-filing season with success. Initial reports suggest the 2014 filing season was free of the problems that have marred previous filing seasons. As of early April, the Service processed over 98 million returns, issued 80 million refunds, and responded to nearly 40 million calls with lower wait times. All of these are improvements over last year.

The Members of the Subcommittee and I congratulate Commissioner Koskinen and the thousands of dedicated career IRS employees on a successful filing season. We thank them for their hard work under difficult circumstances. In IRS offices across the country, public servants work hard to administer the nation's tax laws fairly and accurately. This is not an easy task, and we thank them for their service.

However, these successes have occurred against the backdrop of the ongoing investigation into the agency's targeting of conservative groups applying for tax-exempt status. As the agency works to recover from the scandal, these kinds of successes will help the agency regain the trust of the American people. It will be a long road, and how the IRS responds to the ongoing investigation will affect the pace of the recovery for better or worse.

We still have serious concerns about the integrity of the agency based on three findings:

First: Lerner Defied Internal IRS Controls to Target Certain Taxpayers.

On April 9, the Committee sent a letter referring former Executive Organization Division Director Lois Lerner to Attorney General Holder for potentially engaging in criminal wrong doing in her capacity as EO Director. One of these actions, in particular, has serious implications for the IRS as it rebuilds from the scandal.

The Committee uncovered evidence that shows Ms. Lerner acted in defiance of internal controls developed to ensure that no single IRS employee could target an organization for an adverse determination or exam. Ms. Lerner was not only familiar with these internal controls, but they were policies she created and touted publicly as a way of commending her agency's impartiality. The evidence shows that Ms. Lerner knowingly bypassed these controls, reached into her division, and directed that specific organizations be subjected to audit.

And yet, an official IRS report declared that, "we have not found evidence of intentional wrongdoing by IRS personnel." Given the evidence the Committee has uncovered to the contrary, I call on the IRS to review the agency's internal controls to ensure that targeting cannot happen again.

Second: Donors Whose Names Were Inappropriately Requested by the IRS Were Audited.

Equally troubling is new evidence uncovered by the Committee that shows the IRS's exam function may have been used for political purposes. It is well known that the IRS improperly requested donor information from scores of conservative groups. For months, this Committee has asked the IRS what it did with these improperly obtained lists and whether those lists were used to target individual donors to right-leaning groups. Recently, the Committee uncovered new information indicating that, after groups provided the information to the IRS, nearly one in ten donors were subject to audit. Any abuse of discretion in audit selection must be identified and stopped.

Because of failures in IRS policy exploited by Lois Lerner and the possible targeting of conservative donors, I have requested that the Government Accountability Office undertake a thorough review of the policies and procedures for audit selection by the IRS's Small Business/Self Employed Division. Last year, I made a similar request that the GAO audit the Exempt Organizations Division. I understand that audit is already underway. Commissioner Koskinen, I call on you to give the GAO your unqualified cooperation to these audits. Only sunshine can begin to restore public confidence in the IRS.

Third: The IRS Has Denied Some Applicants for Exempt Status Their Right to an Independent Appeal.

Through the Committee's investigation, we have also found that the IRS was, until very recently, denying certain applicants for tax exempt status their right to an independent appeal process as guaranteed by the IRS Restructuring and Reform Act of 1998. Ordinarily, if an applicant for exempt status is denied, the applicant can appeal to an independent appeals division that was mandated by the 1998 IRS Restructuring Act. However, if Washington, D.C. selected an applicant for additional review, an adverse determination was not appealable. The most a disappointed applicant could do was "protest" to the very same officials that denied the group in the first place. Noteworthy is that all of the applicants that were subject to extra scrutiny based on the name "Tea Party" or the policy objective to "make America a better place to live" also had their appeal rights taken away.

This practice would never have come to light but for this Committee's thorough oversight of the agency, and as a consequence, the IRS has now pledged to change this practice. We are gratified by this change, but Mr. Koskinen, I call on the IRS today to ensure that all applicants who were denied their right to a fair, independent appeal receive one and receive it soon.

The IRS cannot be an agency in which one senior executive can easily circumvent policies designed to safeguard taxpayers' due process rights. It cannot be an agency in which taxpayers are denied their right to an appeal based on the location of their file. And it cannot be an agency that audits taxpayers based on improperly obtained information.

Commissioner Koskinen, I appreciate your hard work under difficult circumstances, but this Subcommittee cannot simply take the IRS's assurances at face value. The IRS's problems must be addressed with through frank, serious conversations, so I look forward to discussing these matters and more during today's hearing. Again, I applaud the Commissioner and the IRS for its good work during the 2014 filing season and I hope the agency will continue with this success as it begins to regain the trust of the American people.

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