Nov. 5, 2013 Good morning. It is a pleasure to be here at the AICPA’s 2013 National Tax Conference. Thank you to AICPA’s Tax Executive Committee for inviting me, and a special thank you to Committee Chair Jeff Porter. I would like to start my remarks by saying that the IRS owes a debt of thanks to the AICPA for the partnership we have with you. We need partners like the AICPA to be successful in fulfilling our dual mission of tax compliance and taxpayer service. By working together with you, we are better able to interact with hundreds of millions of taxpayers, help them adjust to new tax laws, speed the average time for getting refunds to them, and above all retain their trust and cooperation. To cite one instance, the AICPA provided critical input at the beginning of the 2013 filing season to help the IRS mitigate the impacts of the filing season delay on various segments of the taxpayer community. In addition, the AICPA has supported the Return Preparer Program in a number of important ways, including keeping members informed of their responsibilities under the preparer registration system. The AICPA also consistently gives us the feedback we need to develop guidance for taxpayers and practitioners. One recent example is the feedback you provided on the implementation of the cost basis reporting requirement for securities transactions. Moreover, every AICPA member is a vital link between the IRS and taxpayers, in particular for those people seeking help in doing their taxes. Each one of you makes our job easier by helping your clients properly report their taxes and pay what they owe. Let me now transition and provide you a broader update from the IRS. First, let me start by sharing with you what a tremendous honor it has been to serve as the Acting Commissioner of the IRS for these past five months. Back in May, when I was asked if I would take on the job, I ran through a gamut of thoughts and emotions about the challenges that lay ahead. But above all, my bottom line perspective on it was that the IRS carries out a critical mission, that it is an organization with dedicated and talented civil servants who were going through an extraordinarily challenging moment in its history, and that if I could help in any way, then I would. After all, to help the government work better is the very thing I had hoped to accomplish when I entered into a career in public service more than 16 years ago. And as you would expect, the journey over the past five months has been anything but easy. In fact, it has been the most challenging assignment of my career. But it has also been the most rewarding. And that is in large measure because of the people of the IRS. As I have met more and more members of the IRS workforce over the last several months, I have gained a better understanding of their sense of duty in delivering on our mission, whatever obstacles may exist. So many of them have been at the Service for 20, 30, and even 40-plus years. My commitment to them and to the broader public has been to do what is necessary to help the IRS restore any trust that has been lost and move the agency forward, because the citizens’ trust in our organization is central to carrying out our mission. We have been working toward this goal by staying focused on the task at hand and communicating with external stakeholders. With help from public sector management experts that I have brought into the Service and other seasoned IRS leaders, we are engaged in a methodical, thorough, and persistent effort to identify, design, and implement management reforms that will benefit IRS programs and operations. We have initiated a robust action plan to resolve the problems with the 501(c)(4) application process that were described by the Treasury Inspector General for Tax Administration in a report in May. Through this action plan we are making improvements throughout the exempt organizations area, and have undertaken a major effort to examine other aspects of IRS operations to reduce future risks to the tax system. The last few months have been extraordinarily active ones. In late June, at the direction of the President and the Secretary of the Treasury, I issued a 30-day report that outlined our efforts to chart a path forward for the IRS. The report contained more than 60 action items that encompass the nine recommendations included in the May TIGTA report, as well as other actions we are taking. Highlights of what we have accomplished to date include the following: First, we have improved the screening criteria for applications for tax-exempt status. Since I and my leadership team suspended the “Be on the Lookout” or BOLO lists in June, we have issued guidelines and instructions requiring screening assessments to be based on activity, not names or labels. Second, we have strengthened checks and balances in cases where additional detailed information is needed to process an application for tax-exempt status. Managers are now reviewing these requests before they are sent out, and we are working to standardize information requests to ensure consistency. Third, we have enhanced training for EO personnel in the proper ways to review applications to determine the extent of political campaign activities. Instructions have been issued to managers and screeners, and we are working to incorporate this information into the Internal Revenue Manual. Fourth, we have reduced the inventory of 501(c)(4) applications, including the group of 132 cases pending for 120 days or more as of late May. As of the end of October, 80 percent of those cases have been closed. This includes 40 organizations that took advantage of a self-certification option we recently offered. Fifth, we have broadened our scope beyond the 501(c)(4) case inventory to also explore ways to reduce the inventory of applications for 501(c)(3) status. Sixth, we have launched an Enterprise Risk Management program, which will enhance our ability to identify and manage future risks wherever they may exist within the IRS. Seventh, we are using a Lean Six Sigma management methodology within EO to further improve the determinations process and more efficiently process applications. Eighth, we are implementing a comprehensive plan for reviewing audit selection criteria throughout the IRS to ensure fairness and impartiality. And ninth, we are working with the National Taxpayer Advocate to increase taxpayers’ awareness of mechanisms at their disposal for resolving issues with the IRS. As you can see, a lot has been going on, and all of our activities have a common theme of strengthening management controls and ensuring that the most efficient and effective management practices are in place throughout the IRS. Now, amid the problems we have faced and worked to correct, we need to acknowledge that many things are going right with the IRS, and we have achieved a degree of management excellence in many areas. The IRS has had a number of major accomplishments over the last few years. For example, year-in and year-out, the IRS delivers smooth and successful filing seasons. In Fiscal Year 2013, the IRS collected approximately $2.9 trillion in revenue to fund the federal government, which represents about 91 percent of all federal receipts. For the 2013 filing season, through September 27 the IRS processed more than 145 million individual tax returns and issued more than 107 million refunds to taxpayers totaling $286 billion. Even in years when tax changes are enacted just before filing season begins, the IRS has an impressive track record of being ready. One case in point is the 2013 filing season, which I mentioned a minute ago. That filing season started with difficult challenges for the IRS, as substantial tax law changes were enacted on January 2, just before the IRS would normally begin accepting e-filed returns. IRS staff worked around the clock, to make changes to the systems and forms necessary to open the tax filing season. As a result of exceptional planning and hard work by our employees, all but a small minority of taxpayers were able to begin filing in late January, and all were able to file by early March. The IRS has had other accomplishments as well. We have modernized our technology in order to improve the filing experience for you and your clients. The IRS reached a major milestone in its modernization efforts last year with the launch of our Customer Account Data Engine, or CADE2 as it is known. Up to this point, the IRS had been performing core account processing on a weekly basis. Launching CADE2 meant the IRS successfully migrated to daily processing and posting of individual taxpayer accounts, enabling faster refunds for more taxpayers, more timely account updates and faster issuance of taxpayer notices. Also in the technology area, the IRS made important progress on another front when Modernized e-File Release 7 became operational in 2012. Modernized e-File is a major improvement over the previous system, which processed returns in several batches per day, rather than in real time. Modernized e-File reduces turnaround time, improves processing and allows acknowledgments to be sent much more quickly. The enhancements of Release 7 expanded the reach of Modernized e-File to cover 100 percent of those filing 1040s electronically. Our technology modernization effort is one accomplishment that has not gone unnoticed. Last February, the Government Accountability Office, or GAO, removed the IRS Business Systems Modernization program from its High-Risk list, where it had been since 1995. GAO cited CADE2 as the reason for this change. In addition, in March, the Excellence.gov Awards Program sponsored by the American Council for Technology and the Industry Advisory Council recognized CADE2 for Excellence in Enterprise Efficiencies. On the enforcement front, the IRS has worked to improve international tax compliance, and has been tackling offshore tax evasion through robust compliance programs designed to encourage taxpayers to disclose unreported offshore income. The IRS has worked to obtain information on owners of offshore accounts and conduct investigations and examinations to bring evaders into the system and to justice. The IRS also made available a special voluntary disclosure program in 2009 and again in 2011, and reopened the program in 2012. The IRS has received billions of dollars in back taxes and penalties from individuals who have made voluntary disclosures under this program. Another example of recent accomplishments involves our work on identity theft and refund fraud. This work continues to grow, touching nearly every part of the organization. More than 3,000 IRS employees are currently working full-time on identity theft – more than double the number at the start of the previous filing season. We have also trained 37,000 employees who work with taxpayers to recognize identity theft and help victims. So far this calendar year, the IRS has worked with victims to resolve more than 794,000 cases. This is more than three times the number of identity theft victim cases that we had resolved at the same time last year. We realize, though, that case resolution often takes too long, and we continue to strive to reduce the time that it takes to close cases. We have also expanded our fraud detection efforts. We have increased the number and quality of our identity theft screening filters, and we have suspended or rejected more than 6 million suspicious returns so far this calendar year. The number of identity theft investigations by our Criminal Investigation division continues to rise, with nearly 1,500 investigations opened in Fiscal 2013. That is a 66-percent increase over Fiscal 2012, and more than five times higher than the Fiscal 2011 level. We are also delivering on our responsibilities under the Affordable Care Act, particularly in support of the Health Insurance Marketplaces. As of late October, the IRS has received and responded to more than 1.3 million requests from the Marketplaces for historical household income and family size data, which are critical pieces of data the Marketplaces need to determine an applicant’s eligibility for income-based financial assistance, including a premium assistance tax credit. We have also acted on more than 330,000 requests for a computation service that we provide to the Marketplaces to help determine eligibility for the premium tax credit. These IRS systems that support the Marketplaces are driven by technology tools overseen by the same IT professionals who delivered our modernization improvements, including CADE2 and Modernized e-File, and, like CADE2 and Modernized e-File, our ACA tools are working as planned. In addition to our support of the Health Insurance Marketplaces, the IRS has effectively implemented dozens of new tax credits and revenue raising tax changes under the ACA. Our ACA activities are the latest examples of a long tradition of the IRS supporting wider government efforts on priority projects. Another critical aspect of our mission is the service we provide to taxpayers and you, their representatives. Taxpayer demand for self-service and electronic service options has been increasing dramatically in recent years, and we have been working to meet this demand. We continue to improve and expand the amount of tax information and web services available to taxpayers through our website, IRS.gov. In Fiscal 2012, taxpayers viewed IRS.gov more than 370 million times. These taxpayers used IRS.gov to get forms and publications, find answers to their tax questions, and check the status of their refunds. Taxpayers used the “Where’s My Refund?” electronic tracking tool more than 130 million times. The IRS has been increasing communications with taxpayers who do not get their information from traditional sources, such as newspapers and broadcast news. By employing social media such as YouTube and Twitter, the IRS reaches these taxpayers and provides important service and compliance messages to them. Along these lines, the IRS also developed a Smartphone application, IRS2Go, which allows taxpayers to check the status of their refund and get tax news updates on their mobile devices. Taken together, these efforts reflect a vision for a more digitally-driven IRS that we are working to realize as we go forward. The IRS’ commitment to customer service also means assisting taxpayers who are facing difficult economic times and other hardships. The IRS began the Fresh Start initiative several years ago to help struggling taxpayers meet their tax obligations, by adding flexibilities to our collection programs. Since then, we have improved and expanded the program a number of times. Our efforts to assist taxpayers also have involved helping victims of natural disasters. We have, for example, moved quickly to provide tax relief to victims of the recent severe storms in Colorado and the tornadoes in Oklahoma earlier this year, as well as last year’s Hurricane Sandy. Yet another aspect of taxpayer service involves modifying regulations, to the extent that the underlying law allows, to make them more workable for individuals and businesses who must comply with them. One recent example is the decision by the IRS and Treasury to change the longstanding “use it or lose it” rule governing health flexible spending accounts. Under this change, which became effective October 31, employers can allow plan participants to carry over up to $500 of their unused health account balances remaining at the end of a plan year. The modification was in direct response to an overwhelming amount of feedback from individuals, employers and others, who told us how hard it is for employees to predict future medical needs. Allowing for a carryover amount makes it less likely that employees will underfund their flexible spending accounts, and also reduces the incentive to make unnecessary purchases to completely spend down an account by the end of the year. The activities I have just outlined are reflective of an IRS that remains resilient in the face of emerging challenges and constant change. As the tax code grows in complexity, as the population of taxpayers grows in size, as the economy becomes more global, as corporate structures grow more complex, and as the information age dramatically changes the risks associated with maintaining data security and protecting against fraud, the IRS consistently goes toe-to-toe with these changes. While we recognize that there are improvements needed within the IRS, we must also acknowledge that the IRS has a strong track record of deploying an evolving set of business solutions and innovations that meet the challenges we face. But as we go forward, we must assess how we will continue to meet these challenges. The IRS, like other Federal agencies, has been in a difficult budget environment for several years, and we face continuing budget uncertainty and likely additional resource cuts. Between Fiscal 2010 and 2013, IRS appropriations have been cut by nearly $1 billion, including more than $600 million in reductions from sequestration and rescissions this year. This represents nearly an 8 percent cut in our annual budget while the total population of individual and business filers grew by more than 4 percent over the same time period. Labor is our largest operating expense and we have been very focused on managing personnel costs. We have operated under an exception-only hiring freeze since December 2010. In Fiscal 2012 the IRS secured buyout authority that resulted in the elimination of more than 1,200 positions that did not involve direct service or enforcement interactions with taxpayers. By closely managing hiring, the IRS reduced the total number of full-time, permanent employees by almost 8,000, or about 9 percent, since 2010. The IRS has also implemented significant reductions in its non-labor spending. During the last three years, the IRS has limited employee travel and training to mission-critical projects. By our estimates, training costs have been reduced by 83 percent and training-related travel costs have been reduced by 87 percent since 2010. We have expanded the use of alternative delivery methods for in-person meetings, training, conferences, and operational travel. Over the same timeframe, the IRS also reduced spending on professional and technical service contracts by $200 million. Additionally, the IRS generated $60 million in printing and postage savings by eliminating the printing and mailing of selected tax packages and publications, and by transitioning to paperless employee pay statements. Finally, in an effort to promote more efficient use of the Federal government’s real estate assets and to generate savings, the IRS in 2012 announced a sweeping office space and rent reduction initiative that over two years is projected to close 43 smaller IRS offices and consolidate space in many larger facilities. These measures will reduce rent costs by more than $40 million and reduce total IRS office space by more than 1.3 million square feet by the end of Fiscal 2014. We will continue our efforts to find savings and efficiencies wherever we can. However, the budget cuts to the IRS are so significant that efficiencies alone cannot make up the difference. It is vital for the IRS to receive adequate resources going forward in order for us to deliver on our dual mission of enforcing the tax laws and providing excellent customer service, and so it is fair to ask whether the IRS can meet its objectives for sustained excellence in enforcement and taxpayer service in the budget environment we are in. Given the very real potential of a further decline in resources for our agency, we face the prospect of having to make very critical performance tradeoffs. One example of this involves our efforts to combat identity theft. The progress that the IRS has made against identity theft-related refund fraud would not have been possible without directing resources away from other enforcement activities and our service programs. In order to continue the progress we have made, as identity theft continues to increase, we will need to invest in additional solutions. The President’s Fiscal 2014 budget proposed a funding level that would let us continue to make progress against identity theft, while also allowing us to continue our other enforcement activities and maintain reasonable levels of customer service. Without this additional funding we will be left with a poor set of resource allocation choices, and the situation would become even more serious if we were to incur significant additional budget cuts. We would no longer be able to sustain our current level of effort on identity theft without weakening other programs. It is also important to point out how the cuts to our budget have a very real impact on the upcoming filing season, and in particular on the service we are able to provide to taxpayers to help them fulfill their tax obligations. Our resource limitations will translate into longer waits for help at Taxpayer Assistance Centers as well as longer waits for phone assistance. In addition, to cite another example, we announced earlier this year the elimination of two e-service offerings for professional tax preparers: Disclosure Authorization and Electronic Account Resolution. Although we worked to eliminate offerings with the lowest historical usage rates, we realize this change still generated a great deal of concern among preparers who used the services. But unfortunately, given how tight our budget situation is, and will continue to be, we were not able to reconsider the decision. These are not easy choices, but it is important to recognize that our resource limitations have a very real impact on our ability to deliver taxpayer services. We continue to drive efficiencies, and in some places we are investing in new solutions, but in other areas we are forced to curtail service, and taxpayers and tax professionals will feel the effects of these changes. The tradeoffs I just described would be only the tip of the iceberg if we received further significant cuts to our budget. We would be forced to downsize operations, and would have to prioritize, devoting resources to only the most mission-critical activities. If the IRS is forced to operate without adequate resources in the years to come, it would make more sense for us to perform a few key activities well, rather than do a mediocre job of performing a wider range of activities. Given how critical this question of resources is, I want to take a minute to delve deeper, and further examine the tradeoffs and impacts of significant cuts to the IRS budget. I believe we need to engage in a robust dialogue on the future of the agency, our challenges and our opportunities. The issues surrounding the IRS, like many public sector organizations, are complex and we believe warrant rolling up sleeves and moving beyond talking points. I see a vision for a better IRS, one that not only is more digital and in line with the information age, but also one with better internal controls and management disciplines. To get us there we need to retain talented, skilled workers and we need IT tools. One concern I have in regard to this dialogue is that it can be too simplistic on both sides of the debate. For those who have an ongoing concern about our ability to meet taxpayer service goals, it is not as simple as asking for more money, and for critics of the IRS, it should not be as simple as slashing our budget. On all sides of this discussion, we should engage in a more comprehensive analysis where we develop a common vision and determine what the right solutions will be for our agency and what those solutions will cost. Such analysis would be detailed and include a determination of both where we can contract and where we need to expand and excel. The analysis should also involve how we can establish better accountability measures and how transparency can be a better tool within the context of tax administration. So I am committed to approaching a discussion of the IRS budget in a manner in which I don’t simply ask for more money. I want to delve into a substantive and multi-dimensional discussion of how we right-size our budget and how we drive efficiencies in our operations to reduce budgetary pressure. But also, the discussion must entail what it means to scale back or defund IRS activities. As one part of this discussion, we need to ask: Who is harmed by further significant cuts to our budget versus the benefits that will be achieved by them? As part of answering this question, it is important to point out that for every dollar the IRS spends, the return on investment is more than 4-to-1. So there is a certain level of risk to the IRS’ ability to generate the same amount of revenue for the government as in the past. In addition, such cuts would further impact taxpayer services, which could mean delays of several additional months for written IRS correspondence. For phone or walk-in customer service, millions of taxpaying individuals and small business owners could not reach the IRS. The number of taxpayer calls answered could fall to record low levels. A potential significant reduction in taxpayer service levels must be analyzed in terms of its potential impact on our system of voluntary tax compliance, which is supported by our dual mission of service and enforcement. Thus, there are several complex factors to consider. We must sustain the public trust by demonstrating an ability to wisely spend taxpayer dollars. However, we cannot expect to have a high level of voluntary compliance if we cannot enforce the tax laws or if we are unable to provide the service that taxpayers need in order to help them meet their tax obligations. Over the summer I met with community leaders and practitioners in Washington, DC, Atlanta, Dallas and Chicago. Their message to me was an important one: They pointed out that, no matter what level of funding the IRS receives, their duties as taxpayers and preparers don’t change. They still have to file returns and comply with the tax laws. So they need a high-performing IRS to assist them. Ultimately, I believe a high-performing IRS is in the best interest of the nation. To be high performing, we must be able to invest for the future in areas such as strategic hiring, critical training and further technology modernization. At the same time, we must be careful stewards of the resources we are given, so that taxpayers have confidence that the IRS is driving efficiencies and doing the best we can to manage those resources. Let me pause for a moment to emphasize the training aspect of our efforts. I mentioned earlier that we have significantly reduced our training budget. Going forward, we need to figure out a way to reinvest in training, in a way that is cost-effective and uses taxpayer dollars wisely. The same holds true for future hiring efforts, because we will lose critical institutional knowledge and compromise overall productivity if we fail to replace departing staff. These two examples show that, before additional significant cuts are implemented, we must carefully consider the state of IRS spending today, and the impact such cuts would have on the core mission of taxpayer service and enforcement. This brings me to the most recent challenge we have faced at the IRS, the government shutdown that occurred last month. If you examine the repercussions from this hiatus on our operations, it is possible to view the shutdown as a microcosm of the broader budget difficulties that confront the IRS. I know that the impacts to our operations from this shutdown are important to you and your clients, so I want to spend a few minutes discussing what we are doing to mitigate those impacts going forward. The 16-day government shutdown that began October 1 was the longest one the IRS has ever experienced. About 90 percent of our operations were closed during this period. What continued to operate were those activities that were excepted due to an imminent threat to government property and those funded out of accounts that were not affected by the shutdown, such as our work on the ACA. As you know, we have unique responsibilities as an agency, and the incoming work did not stop even though we were closed. As an example, a large amount of correspondence came in during this period, more than 400,000 pieces of mail that will take considerable time to work through. And there is a large amount of pent-up demand for our services on the phone and other areas. This additional build-up of work comes during a challenging time. When the shutdown began, we were in the middle of one of our busiest periods for filing season preparation. The average taxpayer may not realize it, but our work on filing season is a year-round process for our IT operations, the Wage and Investment Division and other parts of the IRS. Programming, testing and deployment of more than 50 IRS systems must be accomplished to handle processing of nearly 150 million tax returns. Updating these core systems is a complex process, with the majority of the work beginning in the fall of each year. Typically during September and October, the IRS IT staff ramps up development and testing of all the separate processing systems, which also impacts hundreds of subsystems. The closure of the IRS for sixteen days in October meant a work stoppage for 3,000 to 4,000 IT staffers alone, many of whom would have been working to ensure the readiness of our technology tools in advance of the 2014 filing season. Layer on top of our normal filing season preparations the fact that IRS systems are subject to tens of thousands of changes each year to reflect changes in tax law, inflation adjustments and other needs, such as heightened fraud and identity theft prevention to protect taxpayers against ever-more sophisticated schemes. This year, to prepare for the 2014 filing season, additional fraud detections are being added, which requires additional time and work. So you can see how a shutdown of this duration has a significant impact on filing season preparations. Going forward, we are focused on resuming our regular operations and catching up on the work that came in during the shutdown. Of course, a major impact of the shutdown was the postponement of the beginning of filing season. We made the decision that we needed to open the 2014 filing season one to two weeks later than we originally planned after a careful review of our complex programming and system needs. The original start of the 2014 filing season was January 21, and with a one-to-two week delay, we would start accepting and processing 2013 individual tax returns no earlier than January 28 and no later than February 4. We are currently exploring options to shorten the delay, and we will announce a final decision in December. We want taxpayers and the tax community to know the new start date as far in advance as possible, because we know you need to prepare for a later start of the filing season. Our decision to postpone the start of the 2014 filing season has raised the question of how we were able to launch the 2013 filing season with less of a delay, even though Congress enacted major tax changes, including a permanent extension of the AMT patch, just days before that filing season began. The answer is that the two situations are very different. Regarding the AMT patch and other late tax law changes, the vast majority of core programming and systems work had been completed in the months leading up to the late legislation. By contrast, the shutdown in October coincided with a crucial period for building our new systems for 2014. To give you an analogy, the AMT change is a bit like a tune-up on a car: something needed to ensure proper performance of a car that has already been built. The October shutdown occurred at an earlier, more complex stage when the car itself was still in production. The point is that we must take the time to get the filing season right, and we cannot risk bigger problems that could arise if we do not make sure we are fully prepared beforehand. If mistakes and problems were to be discovered in this complex process after the IRS began accepting tax returns, we could be facing significant return processing and refund delays for millions of taxpayers. We know the government shutdown and resulting closure of the IRS was a difficult time for many in the tax professional community, and we appreciate your patience during this period. We are continuing to assess impacts of the shutdown to our business operations, policies, systems, procedures, and legal work. We are committed to addressing any backlogs or increased work volumes in a timely manner. To cite one example, I realize that for the AICPA, a major ramification of the temporary halt to IRS operations during the shutdown was a delay in the start date for Preparer Tax Identification Number registration and renewals for 2014. As a result of this delay, we have been experiencing historically high signup volume since the PTIN renewal season was opened at the end of October. The heavy volume led to some system overload issues, but we are working through those issues and will continue to monitor the system and make any needed adjustments. As we move forward, we are wholly focused on continuing to provide top-quality products and services to taxpayers and the tax professional community while delivering a smooth and efficient filing season. Before I wrap up, I want to thank the AICPA again for its partnership over the years. The help you provide has never been more critical than today as we continue to face resource challenges going forward. In order to meet those and other challenges, we must and we will maintain our partnerships with key stakeholders, including everyone in this room. Thank you again for the opportunity to talk to you today. I would be happy to take a few questions.
