Congressional Hearings
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL YEAR 2019
Congressional Hearings
SuDoc ClassNumber: Y 4.AP 6/2
Congress: Senate
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| AUTHORITYID | CHAMBER | TYPE | COMMITTEENAME |
|---|---|---|---|
| ssap00 | S | S | Committee on Appropriations |
[Senate Hearing 115-]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
YEAR 2019
----------
TUESDAY, MAY 22, 2018
U.S. Senate,
Subcommittee of the Committee on Appropriations,
Washington, DC.
The subcommittee met at 10:04 a.m., in room SD-138, Dirksen
Senate Office Building, Hon. James Lankford (Chairman)
presiding.
Present: Senators Lankford, Moran, Boozman, Daines, Coons,
Leahy, Manchin, and Van Hollen.
DEPARTMENT OF THE TREASURY
STATEMENT OF HON. STEVEN T. MNUCHIN, SECRETARY
OPENING STATEMENT OF SENATOR JAMES LANKFORD
Senator Lankford. Good morning. The subcommittee will come
to order.
This is our second of our fiscal year 2019 budget hearings
for agencies under the jurisdiction of the Financial Services
and General Government Subcommittee.
Today we have with us the Secretary of the Treasury, Steve
Mnuchin, and the Acting Commissioner of the Internal Revenue
Service, David Kautter. Thank you for being here today.
We will do these in back-to-back panels.
The Treasury Department's budget request proposes a total
funding of $12.3 billion in 2019 for its operations and its
bureaus. These offices execute important functions that promote
our economic growth, combat illicit finance, safeguard our
financial system, administer the Internal Revenue Code, and
manage the Federal Government's fiscal operations.
One of the largest proposed increases is an additional
$17.2 million to the Office of Terrorism and Financial
Intelligence. The Office of Terrorism and Financial
Intelligence plays a critical role in our national security by
developing and implementing our Government's strategies to
combat terrorist financing.
I look forward to hearing how you will utilitize the
increase to target additional sanctions against terrorists,
international narcotics traffickers, and those involved in the
proliferation of weapons of mass destruction.
I also look forward to hearing how the memorandum of
agreement between Treasury and OMB to create a new framework
for reviewing tax regulations is being implemented.
I have long believed that IRS regulations should be held to
the same rigorous standards as other agencies. While it is
important that the IRS implements the Tax Cuts and Jobs Act
expeditiously, it is also important that proposed tax
regulations are thoroughly analyzed and impose the least
possible burden of some costs.
The IRS requests a total of $11.135 billion for its base
operations and an additional $362 million that would be
provided through a program integrity cap adjustment. While the
agency's previous request for a program integrity cap
adjustment were not enacted, I look forward to discussing the
agency's resource needs.
This funding is intended to administer the Nation's tax
system, generate more than $3 trillion in revenue to fund
Government programs, protect billions of taxpayer records, and
strengthen tax compliance.
Tax compliance in particular is critical. The Government
Accountability Office has identified the enforcement of tax
laws as a high risk area. In 2016, the IRS estimated that the
average annual gross tax gap, the difference between taxes owed
and taxes paid on time, was $458 billion for tax years 2008 to
2010.
I look forward to hearing your strategy for closing the tax
gap, and I stand ready to work with you on the solutions.
Thank you again for testifying today.
I now turn to my colleague, the Ranking Member, Senator
Coons, for his opening statement.
STATEMENT OF SENATOR CHRISTOPHER A. COONS
Senator Coons. Thank you, Chairman Lankford, for convening
this hearing. I appreciate the opportunity we have to work
together on the diverse and important set of issues that come
before the subcommittee and hope we can continue to find common
ground and work well together.
I would like to welcome our witnesses, Treasury Secretary
Mnuchin and IRS Acting Commissioner Kautter. Thank you for
joining us this morning and for your service.
Today we are considering the budget for the Treasury
Department, including the IRS. Treasury is central to our
Government's stability and ongoing operations, helps sustain
our country's fiscal health and protect our national security.
You have a vital and wide-ranging job from collecting taxes and
processing over $3 trillion in Federal payments annually to
prosecuting financial crimes here in the United States and
identifying and stopping individuals that finance and promote
terror abroad.
I am pleased you requested an increase in the Office of
Terrorism and Financial Intelligence, which has the critical
responsibility of enforcing sanctions. I do want to discuss the
adequacy of resources for that office later in this hearing. I
am concerned the very real and important work you are doing
regarding North Korea and Iran do not limit your ability to
enforce other sanctions around the world.
I am, however, disappointed your budget proposes to
eliminate altogether grants to Community Development Financial
Institutions (CDFI) which support development and create jobs
in underserved neighborhoods around our Nation. In fiscal year
2016 alone, CDFI program awardees originated more than $5
billion in loans and investment, financed more than 12,000
businesses, the development of nearly 28,000 affordable housing
units, and served nearly half a million individuals with
financial literacy training.
I am also concerned about the overall adequacy of the IRS
budget. No Government agency is more visible or has a greater
personal impact on the American people than the Internal
Revenue Service. The IRS collects the revenues that fund more
than 95 percent of our Federal Government's operations, public
services, and programs. And each year, more than 80,000 public
servants at the IRS makes hundreds of millions of contacts with
taxpayers and businesses. The IRS has endured years of freezes
and budget cuts, and the proposal we are reviewing today would
continue that trend by further cutting funds for both
enforcement activities and taxpayer services.
My office frequently hears from Delawareans frustrated when
their calls to the IRS go unanswered or it takes a long time to
connect with an official at the IRS, especially those who are
seeking information so that they can comply with their tax
obligations voluntarily. I would imagine many other Senate
offices hear from constituents with similar concerns. The
solution to these concerns is to give the agency the resources
it needs, not to slash the budget further in an effort to score
points.
Like the Chairman, I am concerned about your strategy to
close the tax gap and will be interested in hearing more about
that today and to hearing more about why the Department and the
IRS thinks it is a good idea to reduce its service delivery
rates for taxpayers.
We have a great deal to discuss today and important ground
to cover. I hope we will hear our witnesses' perspectives on
what resources are essential to deliver the high quality
services American taxpayers and companies deserve. I know
Delawareans expect no less.
I welcome the opportunity to work with you on these
important issues, Chairman Lankford, as the fiscal year 2019
process moves forward here in Appropriations. Thank you.
Senator Lankford. I want to recognize the Vice Chairman of
the full committee for an opening statement as well.
STATEMENT OF SENATOR PATRICK J. LEAHY
Senator Leahy. Thank you, Mr. Chairman. I note that both
Senator Shelby and I are very anxious--and I know, Chairman
Lankford and Senator Coons, you are too--to get all the
appropriations bills through in regular order.
I am worried, Mr. Secretary--so I am going to have to leave
to work on another one of the bills. But we have this tax bill,
which some would praise, others would consider, as I do, a
corporate tax giveaway. Corporate CEOs are happy with the
result. Stock buy-backs are booming, the most in the entirety
of my life. JPMorgan Chase has estimated it could reach an all-
time high this year.
But Vermonters feel that Washington has put the
corporations ahead of their own interests, whether it is a
relative pittance working families receive in relief. The
amounts are low, and some polls show that more than half of
Americans report not noticing the increase in their paychecks,
or the rising health care premiums they face they feel is a bad
deal. And on top of that, the tax cuts were put on the Nation's
credit card. It is sort of like buying a war on a credit card.
It means the deficits explode.
But also what they are finding is the IRS has been starved
for resources. Senator Coons mentioned this, but in a rural
State like Vermont, taxpayers that have questions or need
assistance--they are left out in the cold. They do not have
assistance. They do not have a place to get their questions
answered. Now with the new law, many Vermonters are confused
about how to navigate the tax system in light of the changes. I
know the President promised we would do taxes on a postcard-
sized tax return. Well, that is not the situation. That is not
a promise that was kept. A typical Vermonter cannot afford
armies of tax lawyers to help them. Millionaires, billionaires,
corporations that benefit from the new tax law can. Now, they
should have the right to call the IRS or visit a location in
person to receive the assistance they need in a timely manner.
That is not available.
And further troubling them is that millions of American
taxpayers wonder whether their personal, sensitive information
has been compromised in any one of the many data breaches,
which never should have occurred. The loss of this data puts
taxpayers at risk for fraud. And ironically, you are proposing
cutting support for the IRS at a time when these data banks are
even more vulnerable.
I am sorry we are in this. We are trying--Senator Shelby
and I are--to have a bipartisan way of getting our
appropriations bills through. I wish the same had been done on
the tax bill. But the least we can do, now that it has been
passed, is to make sure the average American taxpayer actually
has the resources so they know how to navigate it. But your
budget strains the IRS's already limited resources. It does not
make it look like you are on the side of hardworking middle
class Vermonters and Americans.
And then one last word on trade. Trade policy, Mr.
Secretary, as you know, like tax policy is complicated. There
are many stakeholders. There are many interests. There are many
nuances. It cannot be negotiated on Twitter accounts. You
cannot one day threaten billions of dollars in tariffs on
Chinese products and then pull back on it the next day. You
cannot accept promises to address intellectual property theft
without meaningful commitments to back them up. We have a
national security problem with the theft of our intellectual
property by the Chinese and others. It is the envy of the
world--our intellectual property. But it also means that they
want to steal it, and you do not address that with 280
characters on Twitter.
So I will submit some questions for the record.
But, Mr. Chairman, I appreciate your moving forward, as
others are in this subcommittee, to get our bills done.
Senator Lankford. Thank you, Senator Leahy.
Secretary Mnuchin, you are recognized. Obviously we have
your written statement as well, and glad to be able to have
that and pleased to be able receive your oral testimony now as
well.
SUMMARY STATEMENT OF HON. STEVEN T. MNUCHIN
Secretary Mnuchin. Thank you very much.
Chairman Lankford, Ranking Member Coons, and Members of the
subcommittee, it is good to be here with you today to discuss
the President's budget and the priorities for the Treasury
Department.
I would like to begin by thanking you for your support in
the fiscal year 2018 omnibus for tax reform implementation and
the Treasury's Office of Terrorism and Financial Intelligence
(TFI). The Tax Cuts and Jobs Act is the most significant tax
reform legislation since 1986. The resources appropriated will
allow the IRS to update its systems to implement the new tax
law and provide much needed guidance to taxpayers and
businesses. The continued support for TFI's initiatives is
critical as we as we continue our maximum pressure campaign on
North Korea and support efforts to denuclearize the Korean
Peninsula.
Additionally, funds for TFI are helping to advance the work
of the Terrorist Financing Targeting Center (TFTC). The TFTC is
a collaborative, multilateral effort with Saudi Arabia and the
Gulf Cooperation Council to fight terrorism, counter Iran's
malign influence, and isolate the Assad regime.
Turning to the President's 2019 budget, the
administration's request reflects the priorities of protecting
and strengthening America's financial system and national
security. We have requested increased resources for TFI and the
Financial Crimes Enforcement Network. Treasury is working
aggressively to combat terrorist groups, transnational criminal
enterprises, proliferators of weapons of mass destruction,
human rights abusers, and other malign actors. Treasury will
continue efforts to achieve a change in behavior by the North
Korean regime and fully fund the TFTC in Saudi Arabia. These
funds will also be used to implement the Countering America's
Adversaries Through Sanctions Act, including funding for our
Russia and Iran programs, to target illicit financial networks.
This budget also provides for Treasury-wide cybersecurity
protections. As I have previously noted, protecting both
Treasury and the global financial system from cyber attacks is
critical to our Nation's financial stability. These attacks not
only have the potential to affect financial markets and the
broader economy. They also implicate our national security. In
particular, I want to highlight the Cybersecurity Enhancement
Account. This initiative makes proactive and strategic
investments in enterprise-wide cybersecurity capabilities.
These capabilities will ensure that Treasury is better prepared
to defend against cyber attacks and respond appropriately when
they occur.
Finally, as Chair of the Committee on Foreign Investment in
the United States (CFIUS), I would like to highlight the
ongoing collaborations between the administration and Members
of this body to modernize the CFIUS review process. We are
working together to protect technological advantages that are
critical to our national security, while continuing to promote
investment and economic growth.
The policies articulated in the President's budget will
foster economic growth, set our country on a sound fiscal path
in the long term, and carry out the administration's commitment
to protect the national security of the United States.
Thank you very much.
[The statement follows:]
Prepared Statement of Hon. Steven T. Mnuchin
Chairman Lankford, Ranking Member Coons, and Members of the
subcommittee, it is good to be here with you today to discuss the
President's budget and the priorities of the Treasury Department.
I would like to begin by thanking you for your support in the
fiscal year 2018 omnibus for tax reform implementation and Treasury's
Office of Terrorism and Financial Intelligence (TFI). The Tax Cuts &
Jobs Act is the most significant tax reform legislation since 1986. The
resources appropriated will allow the IRS to update its systems to
implement the new law and provide much needed guidance to taxpayers and
businesses. The continued support for TFI's initiatives is critical as
we continue our maximum pressure campaign on North Korea and support
efforts to denuclearize the Korean peninsula. Additionally, funds for
TFI are helping to advance the work of the Terrorist Financing
Targeting Center (TFTC). The TFTC is a collaborative, multilateral
effort with Saudi Arabia and the Gulf Cooperation Council to fight
terrorism, counter Iran's malign influence, and isolate the Assad
regime.
Turning to the President's fiscal year 2019 budget, the
administration's request reflects the priorities of protecting and
strengthening America's financial system and national security. We have
requested increased resources for TFI and the Financial Crimes
Enforcement Network. Treasury is working aggressively to combat
terrorist groups, transnational criminal enterprises, proliferators of
weapons of mass destruction, human rights abusers, and other malign
actors. Treasury will continue efforts to achieve a change in behavior
by the North Korean regime and fully fund the TFTC in Saudi Arabia.
These funds will also be used to implement the Countering America's
Adversaries Through Sanctions Act, including funding for our Russia and
Iran programs, and to target illicit financial networks.
This budget also provides for Treasury-wide cybersecurity
protections. As I have previously noted, protecting both Treasury and
the global financial system from cyber attacks is critical to our
Nation's financial stability. These attacks not only have the potential
to affect financial markets and the broader economy, they also
implicate our national security. In particular, I want to highlight the
Cybersecurity Enhancement Account. This initiative makes proactive and
strategic investments in enterprise-wide cybersecurity capabilities.
These capabilities will ensure that Treasury is better prepared to
defend against cyber attacks and respond appropriately when they occur.
Finally, as Chair of the Committee on Foreign Investment in the
United States (CFIUS), I would like to highlight the ongoing
collaboration between the administration and members of this body to
modernize the CFIUS review process. We are working together to protect
technological advantages that are critical to our national security,
while continuing to promote investment and economic growth.
The policies articulated in the President's budget will foster
economic growth, set our country on a sound fiscal path in the long
term, and carry out the administration's commitment to protect the
national security of the United States.
Thank you very much.
Senator Lankford. Mr. Secretary, thank you.
I recognize myself for some brief opening questions. Then
we will move to other Members quickly.
TERRORIST FINANCING TARGETING CENTER OPERATIONS
Tell me a little bit more about the Terrorist Financing
Targeting Center in Saudi Arabia that you are standing up. What
are the key goals that you want to have within the next 12
months as you target this financing, and when do you think it
will be fully ready and operational?
Secretary Mnuchin. Well, the key goals are to be able to
share information that leads to combating terrorist financing
activities and, in particular, make sure that we have
coordinated sanctions, not only here but also throughout the
Middle East. I think we have already seen this working. We have
some people on the ground. We want to continue to staff that up
on the ground. But I see this as a very significant achievement
for us to be able to counter terrorist financing in the region.
Senator Lankford. Fast forward 12 months. How many people
do you think are committed to this in the effort there in the
region? And do you think it is fully operational by the end of
12 months?
Secretary Mnuchin. I do think it will be fully operational.
I think that we will have a significant number of people, I
think something like 20 people on the ground from our
standpoint and 10 to 20 from each of the additional countries.
So something like 50 from them and 20 from us.
Senator Lankford. Do you see this as a model for dealing
with counternarcotics and obviously the movement of money and
illicit trafficking here in our hemisphere as well to be an
effective model for what we are doing there on terrorist
financing in Saudi Arabia and the region? Would that work in
our region as well? And what would be different in how we
handle counternarcotics work versus how we are handling
counterterrorism work there?
Secretary Mnuchin. Well, I think as you know, we
fundamentally believe that sanctions are a critical tool in
combating all different types of terrorist activities and can
also be used to counter narcotics trafficking and other illicit
activities.
We do see this as a model. I think in the region, it makes
sense for us to have people on the ground working together. I
think that we can use that same model here but do not
necessarily need a physical presence.
Senator Lankford. I want to recognize the Ranking Member,
Senator Coons.
Senator Coons. Thank you, Chairman Lankford.
Thank you, Secretary Mnuchin.
The President's fiscal year 2019 request for the Community
Development Financial Institutes Fund eliminates all funding
for grant programs, a cut of about $236 million from the fiscal
year 2018 enacted level. I just cannot understand why the
administration is advancing these cuts. These are programs that
have enjoyed strong bipartisan support the entire time I have
served on this subcommittee. Applications for CDFIs are nearly
four times what current resources can provide. CDFI investments
generate $12 in private capital in communities that badly need
investment for every dollar in grants.
How do you justify or explain these proposed significant
cuts to this important program?
Secretary Mnuchin. Senator, first of all, I fully
appreciate this does have bipartisan support, and to the extent
you decide to fund it, I can assure you and commit that
Treasury will continue to provide that function.
As it relates to the administration's decision to cut this,
this was merely making difficult decisions and prioritizing
spending.
Senator Coons. Well, if I could suggest a different
difficult decision in prioritizing spending. Both taxpayer
services and enforcement funding are significantly cut in this
budget proposal. Taxpayer enforcement returns $5 to the
Treasury for every dollar spent on enforcement. I might suggest
that is an area for greater investment rather than cutting a
long-established bipartisan program that helps low-income
communities.
TREASURY SANCTIONS
Let me move on to sanctions. I think also on a bipartisan
basis, we have steadily increased our investment, but we also
have a steadily growing range of sanctions around the world.
And I think this is very important work that you are doing, and
I look forward to supporting your work and hearing more about
it that Senator Lankford was just asking about.
I am concerned, though, that Treasury's capacity to
actually implement and enforce all the different sanctions
around the world, including on the continent of Africa where
there are sanctions against Burundi, South Sudan, Zimbabwe, the
Central African Republic (CAR), and the Democratic Republic of
the Congo (DRC) may be exceeded--may not be fully funded. Let
me put it that way. We have heard Treasury may not be able to
complete new congressionally mandated reports on Iran's
sanctions because the limited staff are too busy monitoring and
implementing existing sanctions. Is that correct, and do you
think the 12 percent increase requested for the Office of
Terrorism and Financial Assistance is sufficient?
Secretary Mnuchin. Well, Senator, first of all, thank you
very much. I am glad, as you appreciate, we are busier on
sanctions throughout the world than we have ever been, and
these are very important tools and I believe they are working
very well in that process with our foreign policy and our
national security issues.
As it relates to the Iran report, I can assure you that we
will have those reports.
I think the increase is significant, but again, as you have
outlined, these are areas that will have more and more demands
and we will come back to you if we need additional resources
once we staff up to these levels.
Senator Coons. I was concerned by the President's decision
to withdraw from the Joint Comprehensive Plan of Action
(JCPOA). Although I saw it as having real limitations and
agreed with much of the initiatives proposed by Secretary
Pompeo and the President to work with our European allies to
strengthen our actions against Iran's unacceptable, aggressive
behavior in the region, I did think we would be better off
staying in the deal with our European allies.
Now that we are not just departed from the JCPOA, but
Secretary Pompeo has announced intention to be far more
aggressive, I am concerned. Do you think intend to sanction
economic activity by some of our closest allies, Germany, the
UK, France, or Korea, Japan, and others, in this context in
order to try and re-escalate pressure on Iran?
Secretary Mnuchin. Senator, as you are aware, the President
has been saying for the last year he had very serious concerns
about the Iran JCPOA. I can tell you I just got back from the
region and there are significant concerns there as well about
Iran's bad behavior. The President is determined that Iran
never has nuclear weapons, and I think that is an important
issue for the region.
As it relates to the sanctions, as you are aware, the
President--because he did not sign the certification, the Iran
sanctions will go back in place, both the primary sanctions and
the secondary sanctions. We have already communicated with our
European partners both through Secretary Pompeo and myself that
we will be enforcing the secondary sanctions.
Senator Coons. I will just say I am very concerned about
how that will affect our relations. I agree with the broader
objective of restraining, hopefully ending, Iran's aggressive
and bad behavior, but the division with our allies at a
critical moment concerns me.
Let me ask the last question. ZTE Corporation, a Chinese
telecommunications giant, was subject to sanctions for
violating our U.S. national sanctions on Iran and North Korea.
FBI Director Wray just testified the FBI is deeply concerned
about the threats foreign telecom companies pose to the
security of U.S. networks. Sanctions are a critical tool. If we
do not hold companies accountable for violating them, they
become ineffective. Yet, the President tweeted I think last
week that he and Xi Jinping are working hard together to make
sure that ZTE is able to function and be vibrant.
Given the clear findings ZTE is guilty of violating U.S.
sanctions against Iran and North Korea, why is the
administration back-peddling to make it easier for a Chinese
company to operate and compete with U.S. companies?
Secretary Mnuchin. Senator, I would comment, as I have said
recently. First of all, I do not think it is a function of
back-peddling.
First, let me just comment on President Xi did ask
President Trump look into this. This is not a surprise.
President Trump often calls foreign leaders on business issues.
This is a Commerce Department enforcement issue, working
with the Justice Department. The President has been very clear
that this is up to the Commerce Department. Although I have
participated in certain discussions, I can assure you that
whatever the Commerce Department decides--the intel community
has been part of the briefings, and we will make sure that we
enforce national security issues. If there are any proposed
changes on ZTE--the objective was not to put ZTE out of
business. The objective was to make sure that they abide by our
sanctions programs.
One proposal that the Commerce Department did was,
obviously, limiting exports that create certain issues for our
companies and our jobs. I cannot comment on what the Commerce
Department is considering. But again, I can assure you anything
that they consider will take into account the very important
national security issues, and those will be addressed.
Senator Coons. Thank you. I certainly hope we will continue
to rigorously enforce our sanctions against North Korea and
Iran.
Senator Lankford. Senator Manchin.
Senator Manchin. Thank you, Mr. Chairman.
Secretary, thank you for being here.
In March, the administration announced the U.S. will place
a 25 percent tariff on imported steel and a 10 percent tariff
on imported aluminum, which I have greatly supported.
Historically trade deals have not been good for our State of
West Virginia, and I appreciate the President taking a look at
all these trade deals. And I support that very vigorously.
As a way of looking at these tariffs, I think I would want
to know where you all stand on this as far as the tariffs on
steel and aluminum with China, if that is still in place, if
that tariff is going to go into force. And it seems like when
it was first brought out, it was on like a blanket across all
trade agreements and then brought back from those such as
Canada, which we had surpluses with. Why would we have not just
targeted China to begin with since we knew they are the bad
actor?
Secretary Mnuchin. Again, Senator, thank you very much.
First of all, as it relates to China, the steel and
aluminum tariffs will remain in force. Those were not part of
our discussions. We were merely focused on the proposed----
Senator Manchin. Those are not going to be touched at all.
Secretary Mnuchin. Those are not being touched.
As it relates to other countries, I think, as you know,
this was done under section 232 and addressing national
security issues. And the President has instructed the Commerce
Department and USTR to have discussions with other countries.
As you know, in certain places, they have already gone into
effect. In certain places, they are on hold pending discussions
with those other countries and getting various assurances. But
the President is very determined to make sure we protect the
steel and aluminum industry here.
Senator Manchin. Senator Coons just mentioned about ZTE. We
are very much concerned about ZTE. Last year, the U.S. imposed
a $1.19 billion penalty against ZTE, one of their big tech
companies, and it was found to have violated U.S. sanctions by
selling equipment to Iran and North Korea, which alerted us at
a high level.
Last month, the Commerce Department decided to ban American
companies from buying or selling the phone-maker's products for
the next 7 years. And now we understand that might be undone,
and I think that was the concern. I think you answered that by
saying it would have to be a Commerce Department decision on
that.
What is your own personal feelings on ZTE?
Secretary Mnuchin. Again, just to comment on--because I
have participated in listening in some of these discussions. I
can assure you that the administration is absolutely determined
to enforce sanctions and make sure there are very significant
penalties for companies that violate sanctions, number one.
Number two, the administration is very well aware of the
national security issues, and anything now or in the future
will address national security issues. I have had the
opportunity to be part of discussions with the intelligence
community.
Number three, you know, kind of to the extent that the
Commerce Department looks at alternative means, those will be
subject to the enforcement and something that they are
comfortable with.
Senator Manchin. Well, I would hope that you all would
understand the security. If the U.S. were ever to go to war
with China, which I hope never, ever occurs and never even
comes into the realm of talking about this, it is not far-
fetched to believe that China could potentially disable
American cell phones or take control of American networks.
I cannot understand in our trade deals how we allow them to
come into our markets in ways we cannot get into their markets.
That should be the simple adjustments to be made. If you are
allowed to come into the markets, whether it be resources or
our networks or our grid system, then we should be allowed to
go into their markets. And for some reason, China gets a bye on
this every time.
I would like to go to the CFIUS, if we could. As you are
aware, I think it is important to keep an eye on foreign
involvement in the U.S. economy. That is why I was an early
supporter and cosponsor of the Foreign Investment Risk Review
Modernization Act (FIRRMA). It really comes down to failure to
address efforts by China to acquire U.S. technology. It has
far-reaching costs over the long term. The Commission on the
Theft of American Intellectual Property estimates that privacy
theft and counterfeiting by China cost the U.S. economy between
$225 billion to around $600 billion a year, and we are not even
talking about the effects that it could have on our military's
leadership around the globe.
So do you believe China is the U.S.'s greatest national
economic threat?
Secretary Mnuchin. Senator, first of all, I take my role at
CFIUS very seriously. As you know, we have been quite
aggressive in the use of these powers. I am also very much
looking forward to the Senate. I believe they have a vote this
morning on the FIRRMA legislation. It is something that the
administration very much supports. We need to bring CFIUS into
the modern age, and I think that is very important.
Senator Manchin. Well, do you believe that China is the
United States' greatest economic threat? Do you see anybody
else as a threat to our economy other than China?
Secretary Mnuchin. Again, we carefully analyze all the
different economic threats. I think, as you know, the President
has been extremely focused on every discussion with every
foreign leader on trade, and I believe he has a very strong
position on trade and a very strong position on national
security, which we have been enforcing.
Senator Manchin. Do you believe CFIUS reform legislation in
the Senate now can protect the ownership of U.S. technology and
infrastructure from transfers to countries like China?
Secretary Mnuchin. I do indeed. On top of that, whatever we
need to do, we will work to ensure that.
Senator Manchin. Thank you.
Senator Lankford. Senator Moran.
Senator Moran. Mr. Chairman, thank you.
This is my first subcommittee meeting of this Financial
Services and General Government Subcommittee (FSGG) with you as
its Chairman, and I look forward to working with you.
Senator Lankford. A fairly familiar spot for you to be just
over to the right here, though.
Senator Moran. We will continue our close working
relationship based upon geography and other features.
Mr. Secretary, thank you for joining us this morning.
I heard what Senator Coons asked you in regard to ZTE. I
had a similar question. Reports from ``The Wall Street
Journal'' is generally what I know about what the
administration has announced in regard to ZTE. I also know from
hearings, press reports, and conversations that our
intelligence entities have testified and have indicated their
concern from a national security point of view in regard to the
company ZTE.
My question I think is perhaps similar to Senator Coons'. I
was going to ask you to justify what appears to be a clear and
present intelligence issue being resolved with at least what
``The Wall Street Journal'' reports as changes in our policies
in regard to those sanctions.
My understanding is your answer would generally be this is
a question for Secretary Ross. And decisions were made. You
were in the room, as I understand it, but the details or the
justification would be better coming from the Department of
Commerce.
Secretary Mnuchin. Well, again that is case. But I want to
say very specifically--and there seems to be more interest in
this issue than any enforcement issue I have seen in recent
times. I can assure you that the administration is very focused
on making sure that our sanctions regimes are enforced. That is
number one.
Number two, any national security issues--I can assure you
this administration is as much, if not more, focused on
national security than anywhere else. That is why the President
has taken very aggressive positions in all areas around the
world in us using sanctions. So I can assure you that whatever
changes or decisions that are made in Commerce will deal with
the national security issues. The intelligence areas we have
discussed and have reviewed. I would encourage anybody in a
classified setting, if they are interested in understanding the
security issues. But I can assure you the national security
issues are being addressed, and that is of paramount importance
to the President. This was not a quid pro quo or anything else.
This was merely that President Xi asked President Trump to look
into this, which he has done. Any changes to this will fully
support the mandate of making sure that our sanctions and our
technology are protected.
Senator Moran. Mr. Secretary, thank you. I would assure you
that in previous hearings and previous administrations, our
interest, for example, in sanctions against Iran were visible
and continuing. No different today. I want the United States to
be protected, and one of the ways that we can do so is with our
use of enforcement of our laws and the sanctions that come with
them.
I want to turn to a more pedestrian issue. Mr. Secretary,
there are, as I understand it, as of June 2017, more than 60
million U.S. savings bonds more than $23 billion at the U.S.
Treasury. They are matured and unredeemed debt. I have asked
this question of your predecessor, Secretary Lew, without
satisfaction.
But my question is related to the efforts by the Treasury
Department to find the owners of those bonds and to remit them
the money that they are due. The law indicates that and the
past practice was that they would escheat to States and then
States, in our case the State treasurer's office, would begin
the process of trying to pursue lost owners.
Seventeen States, in fact, have those laws in place, and
they try to find the original owners. It was Treasury's
longstanding policy that States would have to take title to the
bonds through a valid State escheat process. However, in 2015,
the Obama administration published a final rule that attempts
to block States from taking title and to reunite and return
those redeemed bonds to their owners. That was a complete
reversal of Treasury Department policy of 60 years.
I wonder if your Treasury Department has a different policy
and if you are taking any efforts to find the owners or to
allow the process to take place in which the bonds escheat to
the States?
Secretary Mnuchin. Well, Senator, although I take great
pride in knowing an awful lot of the details and the many
aspects that the Treasury does, this is not one. But I promise
you that I will look into this and make sure my staff addresses
it. What you are suggesting is that our procedures do not make
sense, and if that is the case, I can assure you we will look
into it and address that.
Senator Moran. I am suggesting that, and I think I had the
same answer from Secretary Lew. So he did not know either. But
I trust that you will follow up with an answer when I did not
get----
Secretary Mnuchin. You have my personal assurance that we
will follow up with you.
Senator Moran. Thank you very much, Secretary.
Senator Lankford. Senator Daines.
PROTECTING U.S. INTELLECTUAL PROPERTY AND TECHNOLOGY
Senator Daines. Thank you, Mr. Chairman.
Secretary Mnuchin, thanks for coming up the hill.
I just recently returned from two trips to China over the
last 6 weeks. I have crisscrossed the country. I have been in
Shenzhen, Hangzhou, Beijing, Shanghai, and Shenyang. The
threats regarding China are very real, as well as the
significant opportunities. I spent 5 and a half years working
in Guangzhou with Procter & Gamble, so I very much understand
and see the balance and the understanding of the tremendous
opportunities for American companies, for American farmers and
ranchers, as well as the threats.
I think it is very important that we engage in these
negotiations. We cannot just see this as a standard trade
dispute with China. We must keep in mind China's long-term
strategic approach and their long-term goal of becoming the
world's superpower militarily and economically.
My question is, how will you seek to balance the importance
of increasing U.S. exports in agriculture and energy in the
immediate future, which I applaud, versus the longer-term
threat of China's forced technology transfers, their military
investments, their outright theft, and their incredibly fast
developing innovation ecosystem?
Secretary Mnuchin. Thank you.
Mr. Senator, I think as you are aware of, President Trump
has been more aggressive than any previous President ever on
dealing with the China trade issue. That is why we ended up
with--proposed $150 billion of tariffs in a 301 report. It is
because of those issues we have had a series of intense
negotiations that are a framework. I can assure you that we are
not looking at short-term gains. What we are looking at is
creating opportunities for U.S. workers and U.S. companies to
compete fairly there on a level playing field and to make sure
that U.S. intellectual property and technology is protected. So
that is absolutely the President's desire.
Senator Daines. So I have been actively engaged for a long
time and very specifically on the ground in China in areas of
biotechnology, quantum computing, artificial intelligence,
avionics.
A very specific question, Secretary Mnuchin. Will you
reject any trade proposals with China that would loosen or
weaken existing restrictions on the export or transfer of U.S.
military technologies and the advanced dual-use technologies
because of the military-civilian fusion there as they think
about things over there, jet engines, semiconductors, or
helicopter technologies?
Secretary Mnuchin. I would say that export control items
are absolutely not on the table for discussions. We would in no
way look to loosen that, and quite the contrary, I think we are
aggressively looking at whether it is through CFIUS, with
FIRRMA, or other means--the President has instructed me to
review protecting those technologies. I could assure you this
President is very focused on, as I have said, protecting
American technology.
Senator Daines. You brought up CFIUS, Mr. Secretary. I am
glad you did. I think it is clear that the time has past where
the U.S. can be complacent when it comes to China. The very
real threats they pose to our national security need to be
addressed directly and in a strategic and very thoughtful
manner.
As you chair the Committee on Foreign Investment in the
United States, CFIUS, how can we best protect U.S. interests
and our innovation while not unduly impeding foreign direct
investment from our friends, as well as our allies?
Secretary Mnuchin. Well, as I like to say, the United
States is the most open environment for investment, and we want
to keep it that way other than for national security issues.
And the single most important thing is to pass the legislation
that modernizes CFIUS, gives us the tools that we need. That is
the first step and in my opinion the most important step for
giving us tools. But I can assure you this administration is
very focused, as I have said, on using CFIUS to the maximum
amount available.
Senator Daines. You have previously expressed some concerns
that CFIUS does not currently cover joint ventures. I worked as
part of a joint venture for 5 and a half years of a Fortune 25
company in China. I was engaged just recently on the ground
there in China with some very high profile American joint
ventures there in Shanghai.
Do you support legislation that would expand CFIUS
jurisdiction to include joint ventures?
Secretary Mnuchin. Yes. That may be one of the most
important aspects of the new legislation.
Senator Daines. Thank you, Mr. Secretary.
Senator Lankford. Senator Boozman.
Senator Boozman. Thank you, Mr. Secretary. Thank you for
being here.
CYBERSECURITY
Secretary Mnuchin, as you mentioned in your testimony,
cybersecurity is a huge concern as we continue to move into the
world where everything is digital. Could you expand on the role
of the Cybersecurity Enhancement Account and how it helps to
prepare us in combating cybersecurity threats?
Secretary Mnuchin. Yes, Senator. I think it is a very
important source of funds. But I would also just comment that
cybersecurity is extremely important between the IRS, which is
constantly under attack and, as you know, needs to protect very
important taxpayer information, as well as our role in making
sure that the financial system is protected. I do believe--and
the Acting Commissioner and I have discussed this--although we
spent a lot of money on technology at the IRS, we have not
spent enough. He and I are looking at a 5-year plan to address
these issues. But one of my most important priorities is to
make sure that we protect our financial system and the IRS
against cyber intrusions.
Senator Boozman. I know being on the subcommittee for a
while, having gone through the challenges that IRS and OPM have
faced, how do you change the culture. We can increase
technology, but a lot of it is just the culture of thinking in
a different way, in a secure way.
Secretary Mnuchin. I think we have many, many important
people at the IRS that understand this culture and that every
day make sure that they protect it. The Commissioner and I are
very focused on using technology at the IRS, as Senator
Lankford talked about in the tax gap. In my mind, one of the
biggest ways of shrinking the tax gap is through additional use
of technology as opposed to just throwing money at enforcement.
But I think the acting Commissioner and myself have spent a lot
of time. We meet monthly with the IT people there, and that,
for both of us, is a major priority across the Department.
Senator Boozman. Very good.
Agriculture is one of the few areas where the U.S. actually
runs a trade surplus, and it accounts for almost a third of
Arkansas' overall economy. In many of Arkansas' small rural
communities, in fact, much of Arkansas, it accounts for more
like 90 percent of what is going on in the area's economy.
I have heard from many of my constituents that simply the
uncertainty that we are going on through right now is causing
significant problems as far as their plans and costing them
market share. For Arkansas' largest row crop, soybeans, every
third row is exported to China. However, just last week it was
reported that almost 1 million tons of soybean exports have
been canceled. With 95 percent of the world's consumers living
outside of the United States, our farmers need markets to sell
their products. There are other countries who are chomping at
the bit to take our market share.
The University of Arkansas produced a report that noted if
25 percent retaliatory tariffs are placed on rice, corn,
soybeans, and sorghum, Arkansas will see job losses over 4,400,
and our State's value-added economy would be reduced by $383
million.
And I know that you know all these things. You have been
very good about visiting with Congress in small and big groups.
You have been very, very available.
Can you talk just a little bit--and I know you are hearing
this over and over again, but it truly is an important thing
that is going on with our economy, with our farm community, not
just our farm community but everything. And one of the great
enemies that we have seen in the past, over regulation, we are
getting somewhat better at now. But now we are creating this.
Can you talk just a little bit about trade and what you see in
the foreseeable future?
Secretary Mnuchin. Yes. Thank you very much.
Let me just first comment on an overview that the
President's economic plans are really beginning to kick in as a
result of the tax cuts, regulatory relief, and trade.
I think for the first time we are now seeing many
projections of 3 percent and higher GDP. I think that we could
have a GDP number that surprises us on the up side this year
very significantly. The number one issue is creating economic
growth.
As part of that, our farmers are some of the most efficient
in the world. This is a tremendous export for the United
States. Whether it is the North American Free Trade Agreement
(NAFTA) or whether it is China, our farmers have terrific
opportunities not only to sell existing amounts, but they
should be selling a lot more, and that was one of our specific
discussions in China. But I can assure you the President is
very focused on opportunities. Farmer income has gone down
significantly, and we are looking to create better
opportunities because as you said, these are great exports, and
we need to make sure that there is certainty in long-term
commitments for our farmers.
Senator Boozman. Thank you very much.
Thank you, Mr. Chairman.
Senator Lankford. Mr. Secretary, let me do a quick second
round with us as well to be able to clarify some additional
questions that we may have.
The Office of Foreign Assets Control in March took on some
of the Mexican heroin trafficking and then just earlier this
month, there were countries and individuals in Venezuela and in
Panama, that there were additional basically asset seizures and
focus on trying to be able to deal with them and that
trafficking coming in the United States.
Are there additional authorities that Treasury needs to be
able to deal with the counternarcotics work in our hemisphere?
There are about $100 billion that is estimated to be moving
from the United States just into Mexico in illicit trade and
traffic. What other authorities do you need to be able to take
that on that you do not have currently?
Secretary Mnuchin. Thank you, Mr. Chairman. As you and I
have discussed, this is a very big opportunity to stop the drug
trafficking by following the money. I think we do have the
authorities. We are working on putting together interagency
groups to focus on this. We have used these sanctions
successfully this year, and we will continue to do so. And we
will work with our counterparts in Mexico and other countries
to do that.
Senator Lankford. You have asked for some additional
funding in that area. We think it is very reasonable to be able
to have some additional emphasis based on what we are facing
with the opioid crisis in the United States and such. We will
want to be able to follow up in the year ahead to see how that
is spent and what is done and the benefit of that to the United
States in that additional investment.
Can I switch over to IRS? The IT investment. You and I have
spoken as well. It seems like every year IRS comes back to us,
asks for additional dollars and says we have a legacy system,
so we need additional dollars for our IT to be able to improve
that. That request has been out there about every 10 years in a
row, and every year for 10 years or so, this Congress has given
additional funds and targeted that area.
At what point do we get on top of that, and how does that
actually happen that we finally catch the IRS up into the
technology that is needed?
Secretary Mnuchin. Thank you, Mr. Chairman.
Let me make just two comments.
The first is I would just highlight we do have a request to
transfer money between Taxpayer Services and Enforcement into
Operations Support. While the headline sounds like it does not
make sense, as I have explained to you, the reason why we have
that request is we run the entire technology budget through
Operations Support. What will probably make more sense over
time is to allocate the technology budget to Taxpayer Services
and Enforcement and Operations. The money that we are
requesting to transfer is to spend technology dollars on
Taxpayer Services and Enforcement. I believe that is a much
better long-term way of delivering taxpayer support and
enforcement. That is issue number one.
Issue number two. I think you know we did have a technology
problem this year on tax day. That is something that as far as
I am concerned is completely unacceptable to have the IRS
systems go down. As a result of that, as I have said, we are
doing a complete review. I think that we have come back and
always focused on the most pressing issues. But I am determined
that we have a plan to bring the IRS into the modern age of
technology. Right now, as I have said to you, we are looking at
that seriously.
Senator Lankford. It is my understanding that there is in
development a 5-year plan basically to be able to lay out how
to be able to catch IRS up and what to be able to do with
technology. Is that the current plan?
Secretary Mnuchin. I have asked the Commissioner and the
team to work on that. We meet every day with the Commissioner
because he is busy on tax implementation. But this is a major
focus that I have asked the Commissioner to work on and for us
to make sure we come back and brief you on.
Senator Lankford. When do you think we would get that plan,
at least the draft of it, to be able to see how----
Secretary Mnuchin. I hope to, within the next 90 days, be
able to come back and give you a preliminary update.
Senator Lankford. That would be helpful because, obviously,
we need to be able to look at how we are going to allocate the
funding for that to be able to support that and to be able to
have the completion.
The Committee on Foreign Investment that you are so
incredibly engaged in, that has been such a conversation at
this point of how we are going to handle that--do you have the
funding that you need to be able to deal with that particular
area? Because that is a growing threat for us. What do you need
that you do not have that is additional to what you have
requested?
Secretary Mnuchin. We have asked for some additional
funding under the current resources. But if FIRRMA does pass,
which we hope it does, we will need additional funding.
Senator Lankford. Do you have a good idea of what that will
be for that additional funding?
Secretary Mnuchin. I would rather privately come and brief
you and the subcommittee Members on that since it is pending.
Senator Lankford. Senator Coons and I will look forward to
that conversation then to be able to talk about where we are
going long-term on those issues.
Obviously, there is a difference in funding needs because
Treasury is now working with the Office of Information and
Regulatory Affairs (OIRA) and to be able to work through the
IRS. Do you have the funding that you need for the additional
regulatory responsibilities and the answers to be able to get
back to OIRA and that coordination back and forth. Is there an
additional responsibility--that because of the additional
responsibility, do you need additional funding in that area?
Secretary Mnuchin. I believe we put in some additional
requests for next year for that.
Senator Lankford. Okay. We will go through that as well.
You may be surprised that some community banks are coming
and knocking on our door asking questions about interaction
with Treasury and such. The Customer Due Diligence Rule is one
of those issues that there has been some questions about. This
is a long-term issue and has been discussed again for years.
What steps are being taken to allow community banks to be
able to have their issues heard and to make sure that they are
being heard and we are not running over the top of them,
obviously. Large banks, community banks--very different
staffing issues, and when you deal with the customer due
diligence issue, that is very different for them.
Secretary Mnuchin. Yes, I can appreciate that. On the one
hand, we are trying to balance the important Bank Secrecy Act
(BSA) requirements, as well as making sure that community banks
can enforce these issues without being burdened by undue amount
of costs. We have had the opportunity to meet with many of the
community bank representatives, and we are working through
those issues.
Senator Lankford. What do you think the timing is to try to
resolve that to make sure that is fully resolved?
Secretary Mnuchin. We will try to come back to you and give
you an update within the next month on that.
Senator Lankford. That would be helpful.
One last question for me and I am going to recognize the
Ranking Member as well for an additional set of questions.
The Judgment Fund has been an issue for awhile, just in
basic transparency. That is an area that Congress has delegated
out that responsibility years ago to make sure that there is
not a continual vote every time that there needs to be a
decision on it. But the Judgment Fund in recent days has been
used--not in the last year, but in the last decade has been
used for some rather creative ways.
How do we get greater transparency into how the Judgment
Fund is actually used to make sure that Congress sees that it
is actually being used in ways that it is intended?
Secretary Mnuchin. Well, let me say I fully appreciate this
issue. At Treasury, we are merely the fiscal agent on that
fund. So like many other areas of the Government, we are
responsible for the disbursement of the funds. But to the
extent that the requests come in with the necessary
authorization, we merely process it.
I would suggest that this is, again, an issue that perhaps
we can come back to you on. Right now, the information that we
collect is rather limited around the processing of those
payments, and when we get the requests, we make sure that they
are properly authorized. But we are not focused on the issue
within our area of the reasons for the payments.
Senator Lankford. Senator Coons.
Senator Coons. Thank you for your clarification, Mr.
Secretary, about a reallocation to Operations that in your view
may end up supporting Taxpayer Services and Enforcement. I
would welcome a little more detail on that.
Let me move to one of the consequences of the tax law that
I am concerned about. According to the nonpartisan Tax Policy
Center, charitable giving may fall by as much as $13 billion
per year because of changes in the tax law. Charities, as you
well know, provide vital community services, education, health,
and others. And given downward pressure on the State and local
government spending in these areas as well, I am very concerned
about what this might mean for our communities.
Are you concerned about a potential decrease in charitable
giving? And would you support legislation that would allow
individuals to claim the charitable deduction without having to
itemize, the so-called universal charitable deduction?
Secretary Mnuchin. Well, first, let me just say I think
charitable contributions are an important part of communities
and our society and are actually a very good and important
alternative to government spending.
I think that the tax bill will encourage more charitable
donations. One of the things we were very focused on is not
putting a cap on charitable donations. There were people who
proposed that. We did not support that.
I think what you are suggesting is that perhaps because of
the simplification, that somehow or another it does not create
the incentives. I am not sure I agree that will be the outcome.
But this is something I would suggest if, over time, that
indeed has the outcome, that we look at it and potentially
address it. But I do not expect that in the short term.
Senator Coons. Well, I would welcome a chance to work with
you if we, indeed, see an emerging significant drop in
charitable giving.
As you may well know, buried in the tax code is a provision
called the Master Limited Partnership (MLP) that has long been
taken advantage of by the energy sector to build out
infrastructure such as pipelines and create energy and
infrastructure jobs. MLPs are taxed as a partnership, but
ownership interests are trade like a corporate equity. But by
statute, oddly, they can only be used by a narrow segment of
energy, nonrenewable energy.
I have worked with a number of Republicans and Democrats--
Senator Moran on this subcommittee is an early cosponsor--to
broaden the number of uses to which MLPs can be put in the
energy sector so we are not picking winners and losers. It has
both bipartisan and bicameral support.
Are you familiar with MLPs and the benefits they provided
to infrastructure in our energy sector? And do you think
expanding MLPs to all forms of energy might be a wise way to
expand infrastructure investment opportunities?
Secretary Mnuchin. I am very familiar with MLPs and the
role that they serve. I am less familiar with the issue, as you
have suggested, about expanding them. But I will consult with
our Office of Tax Policy and look at that and would be happy to
review that with you.
Senator Coons. It is a conversation I have had with both of
your predecessors who tended to oppose pass-through entities. I
think we are in a different environment now, and I am hopeful
that we might have a constructive conversation about it.
I share your hope that charitable giving does not go down,
but I also wanted to raise a concern about deficits more
broadly.
As a potential consequence of the tax bill, the chief
economist of Goldman Sachs said yesterday that his projection
is that the current deficit is $825 billion. By 2021, it will
go to $1.25 trillion; by 2028, to $2.05 trillion. All of this
creating upward pressure on interest rates and I think
potentially harming growth, which is the principal goal that
you have identified.
Do you think at some point, if deficits and the national
debt continue to grow, that we should reconsider some of the
provisions of the tax bill?
Secretary Mnuchin. I do not necessarily think we should
reconsider certain provisions of the tax bill. I continue to
think that if we hit our targets on GDP, that the tax bill will
pay for itself.
But I do share your concerns about deficits overall. I
think as it relates to the spending issue, the President was
very focused on increases in military spending, and increases
of non-military spending went along with that. I do think that
deficits are something we do need to look at and address. But
our primary goal right now is economic growth.
Senator Coons. Let me ask you a last question, if I might.
I was deeply concerned by recent reports that important
financial information about Michael Cohen, President Trump's
personal attorney, could not be located by law enforcement. A
whistleblower from U.S. law enforcement said two suspicious
activity reports on money paid to Mr. Cohen's account were
missing.
Can you say that the Treasury Department did not remove,
distort, or destroy any suspicious activity reports (SARS)
related to Michael Cohen?
Secretary Mnuchin. Mr. Senator, first of all, I very much
appreciate you asking me this question because I think there
has been misinformation on the press about this.
As we have recently said, let me first comment that I
personally have not been involved in any of the procedures or
anything associated with this. But I will also comment--we do
have procedures where at the request of law enforcement
agencies, we do have the ability to suppress important
information, and for different law enforcement reasons, as you
can appreciate, this is often done.
Now, let me also just be clear. I am not making any
comments whether this was or was not done, as it relates to
these specific SARs, but I do want to comment that the
Financial Crimes Enforcement Network (FinCEN) does have a
longstanding policy of accommodating the enforcement agencies
on that.
I would also comment that our Inspector General is
reviewing the issue of leaks. At least there is the appearance
that some information may have gone out. I have seen articles
that actually reference employees who claim they released
information because they thought things that were suppressed.
There is no excuse whatsoever for anybody who has access to
these important systems to release information on an
unauthorized basis, and I can assure you our Inspector General
is reviewing these issues very carefully.
Senator Coons. If I might, Mr. Secretary, I appreciate that
your IG has been directed to investigate leaks. Is the IG also
investigating whether or not there has been any inappropriate
interference with the SARs that are alleged to be inaccessible
or missing?
Secretary Mnuchin. Again, they are reviewing everything
associated with the information of the SARs, both the
technology issues, the issues around logging. Again, I can
assure you that they are doing a thorough review because this
system of SARs is absolutely critical to our entire FinCEN
effort, and we need to make sure that it is in no way at risk.
Senator Coons. I am glad you are committed to the integrity
of the Financial Crimes Enforcement Network and to hear that
the Inspector General is looking at this broadly. And I would
look forward to any follow-up from you on this. Thank you, Mr.
Secretary.
Senator Lankford. Mr. Secretary, one quick question, as
well as a follow-up on what Senator Coons was talking about
also. It is a big concern for me, and that is the charitable
giving side.
One of the challenges that we have had is getting up-to-
date information. Often when we go back to IRS and say tell us
the tracking on this, they will give us the information that
may be 4 years old. With the charitable giving and that change,
that is something we are going to have track pretty carefully
to be able to see if that was a wise choice. There are, at this
point, guesses on how that will happen, but it is all educated
guesses as we go through the process of what that will mean for
charitable giving in the days ahead.
How quickly do you think we can get accurate tax
information at the end of this next year to be able to see what
actually happened in charitable giving and the changes?
Secretary Mnuchin. I think we will have some pretty good
data so that we could begin to see the impacts of that.
Senator Lankford. Do you think that will take 18 months? Do
you think that will take 6 months? How long do you think it
will be before we get some good guesstimates?
Secretary Mnuchin. I am going to have to confer with the
Commissioner on that, but you are free to ask him that
question.
Senator Lankford. We will follow up as well. It is just one
of the things we will want to be able to look at. I would say
from my perspective, I do not want to have to wait 3 years to
be able to get the last year's information. If possible, to be
able to get a rolling year-to-year comparison would help us.
Secretary Mnuchin. I can assure you I do not want to wait
for 3 years either, and we will get that to you.
Senator Lankford. It would be very helpful.
Secretary, thank you for being here. You have always been
very open to answering questions. You have been available when
we have asked you to be able to come in the office, even
available by phone. So thank you from both of us and from our
subcommittee to be able to walk through this. I appreciate you
testifying before the subcommittee today.
At this point, we are going to have a brief pause here as
we transition to our second panel with the Acting Commissioner
David Kautter.
Thank you again, Mr. Secretary, for being here.
[Pause.]
Senator Lankford. Mr. Kautter, being the Commissioner of
the IRS is an incredibly difficult task. Being the Acting
Commissioner is even more difficult because you are always in
flux and in transition. We appreciate you stepping up and being
able to take the leadership and to be able to walk us through
this. I look forward to receiving your testimony.
----------
INTERNAL REVENUE SERVICE
STATEMENT OF DAVID J. KAUTTER, ACTING COMMISSIONER
Mr. Kautter. Thank you, Mr. Chairman and Ranking Member
Coons, and Members of the subcommittee. Thanks for the
opportunity to discuss the IRS budget and current operations.
I want to begin by thanking Congress and especially this
subcommittee for providing the IRS with an increase in funding
for fiscal year 2018 in the omnibus budget bill. This funding
will allow the IRS to continue delivering on critical
priorities, including improving taxpayer service, updating our
information technology infrastructure, increasing
cybersecurity, and safeguarding taxpayer data.
I also want to express my appreciation for the additional
$320 million in funding to implement the Tax Cuts and Jobs Act
and for the flexibility we were given to shift resources
between accounts. Implementing the new tax law is a critical
priority for the IRS this year and next. Our goal is to ensure
taxpayers and tax professionals can understand and navigate the
changes made by the new law.
Implementing tax reform is a huge undertaking. We estimate
that the IRS will need to create or revise more than 400 tax
forms, publications, and instructions. We will need to publish
extensive guidance, including regulations, notices, and
frequently asked questions. And we will need to reprogram about
140 interrelated tax return processing systems to be ready for
the 2019 filing season. So I am extremely grateful that we
received this additional funding in the early stages of our
work on the new tax law. It ensures we can start critical
implementation activities on time, and knowing funding is
available through next year allows us to let contracts
appropriately and have the resources needed to test our
processing systems in the first quarter of fiscal year 2019.
The broad scope of our efforts required us to begin
implementation work almost as soon as the law was enacted last
December. We worked on implementing the new tax law while we
were administering the 2018 tax filing season. So far, we have
issued over 70 pieces of public guidance and have drafted most
of the revised tax forms we will need for 2018. We are
finishing up the instructions for those forms and plan to
release the forms and instructions for public comment over the
summer.
Even with this challenge, I am pleased to report the filing
season went well overall despite a system outage on April 17
that prevented the IRS from accepting electronically filed
returns and some payments for about 11 hours. Later that day,
we are able to bring our systems back up, and we subsequently
received and processed 14 million electronic submissions.
Within 24 hours of the onset of the outage, the IRS had fully
recovered and was current in its processing.
For the filing season as a whole, IRS received a total of
more than 139 million individual returns. We have issued more
than 99 million refunds for more than $275 billion. About 80
percent of returns filed so far have claimed a refund, with the
average refund totaling approximately $2,800, which is about
the same as last year.
Looking ahead, the President's fiscal year 2019 budget
requests an appropriation of $11.497 billion for the IRS, which
is $11.135 billion in base resources, plus $365 million
provided through a program integrity cap adjustment. The
President's budget submission seeks less costly ways of
delivering taxpayer service and maintaining enforcement using
technology, training, and internal efficiencies. The budget
balances competing priorities and increases funding to
operations support by 6.2 percent.
Dedicated funding is needed now to modernize IRS hardware
and software so that we have the technology needed to run the
day-to-day operations, transform the taxpayer experience,
improve cybersecurity, and ensure we can continue to safeguard
taxpayer data.
The IRS is subject to 2.5 million cyber attacks on average
each day, 1 million of which are sophisticated attacks. Some of
the attacks are referenced to acquire taxpayer data, and some
are efforts to disrupt the functioning of the U.S. Government.
Against this backdrop, it is important to realize that 59
percent of IRS hardware and 32 percent of its software is
obsolete.
In regard to taxpayer service, we understand Congress'
concern and are taking steps to improve service through a
multi-channel approach.
It is important to underscore the fact that taxpayer
service is funded not only by the Taxpayer Service
Appropriations Account but also from the Operations Support
Account. For example, funds from the Operations Support Account
pay for the phones, computers, and office space for our
Taxpayer Assistance Centers.
I would also note that the investments needed to improve
IRS information technology that I mentioned a moment ago are
critical to our efforts to improve taxpayer service. IT is the
backbone for how we serve taxpayers today.
In addition to ensuring adequate funding for the agency,
Congress can also help IRS by enacting three pieces of
legislation that will improve tax administration, renewing
streamlined critical pay authority, allowing correction
procedure for specific areas, and giving IRS authority to
require minimum qualifications for tax return preparers. These
provisions, along with the other items highlighted in the
budget, will help the IRS continue building on its work to
serve the Nation's taxpayers.
That concludes my statement. I would be happy to take your
questions.
[The statement follows:]
Prepared Statement of Hon. David J. Kautter
introduction
Chairman Lankford, Ranking Member Coons and Members of the
subcommittee, thank you for the opportunity to discuss the IRS's budget
and current operations, including efforts to improve taxpayer service.
In allocating resources, the IRS strives to balance three competing
and overarching priorities: basic tax administration, sustaining our
information technology (IT) systems and modernizing our operations. The
President's fiscal year 2019 budget request attempts to balance these
priorities by investing in key mission-critical requirements and build
on the work the IRS has already begun in fiscal year 2018 to implement
the Tax Cuts and Jobs Act.
This piece of legislation was the first major tax reform
legislation in more than 30 years. With hundreds of provisions intended
to provide relief to American families and make America's businesses
more competitive, the new law will require extensive work by the IRS in
calendar years 2018 and 2019 to serve the needs of both taxpayers and
tax professionals. We appreciate the additional $320 million approved
by Congress as part of the omnibus budget bill for fiscal year 2018.
This funding enables the IRS to start critical implementation
activities on time, and we transmitted updated implementation plans and
cost estimates to Congress recently.
In addition, the IRS has been focused on implementing the tax-
related provisions in the Bipartisan Budget Act enacted in early
February. Retroactive extension of tax provisions requires the IRS to
reprogram its tax return operating systems during the filing season,
and by late February the IRS had completed system reprogramming for the
three benefits most likely to be claimed on tax returns early in the
tax filing season. Since then, the IRS has completed reprogramming its
systems, and has updated the necessary forms and instructions, to
accommodate the other extender provisions in the Budget Act.
The IRS remains mindful of the need to do everything possible to
provide taxpayers and their representatives with secure, high-quality
assistance and services, through every available channel. The agency
spends a significant amount of time and resources each year working to
fulfill this critical part of our mission, and our workforce remains
dedicated to helping taxpayers understand and meet their filing
obligations. Taxpayer needs have been evolving, with more taxpayers
conducting their business using digital tools at the time and place of
their choosing. The fiscal year 2019 budget invests resources to meet
these needs by reducing dependency on a single point of entry and
ensuring the IRS meets the needs of all taxpayers.
The most visible service the IRS provides each year is delivery of
a smooth tax filing season. I'm pleased to report that the 2018 filing
season began on schedule on January 29 and went well overall, despite a
system outage on April 17 that prevented the IRS from accepting
electronically filed returns and some payments for about 11 hours.
Later that day we were able to bring our systems back up, and we
subsequently received 14 million electronic submissions. Within 24
hours of the onset of the outage, the IRS had fully recovered and was
current in its return processing. For the filing season as a whole, the
IRS received more than 139.9 million individual returns through April
27. We have issued more than 99.5 million refunds for more than $275.7
billion, with the average refund totaling approximately $2,800. The
average phone level of service (LOS) on our toll-free lines for the
filing season was about 80 percent. During calendar year 2017, the IRS
received more than 150 million individual income tax returns, 87
percent of which were filed electronically.
the president's fiscal year 2019 budget
The President's fiscal year 2019 budget request of $11.135 billion
includes savings and reductions of $24.5 million and more than 2,200
full-time equivalent equivalents (FTE) compared to the fiscal year 2018
enacted level (excluding the one-time funding of $320 million provided
for tax reform in the final bill).
The budget invests in high-priority programs to allow the IRS to
assist more taxpayers by becoming more efficient and effective. The
budget also invests in technology and data analytics, to focus
compliance and enforcement contacts on closing the tax gap, and to
protect taxpayer refunds from fraud. Importantly, the budget increases
funding for security and replacing obsolete hardware to protect
taxpayers' sensitive data from growing cyber threats. In addition, the
budget requests modest changes to the IRS transfer and reprogramming
authority to provide the IRS with the flexibility necessary to manage
its resources more effectively.
Taxpayer Services
The President's budget request includes $2.24 billion for taxpayer
services. We will continue our investments in improving the use of
online tools and offerings and modernizing the taxpayer experience. The
IRS is mindful of the need to continually improve our efforts to ensure
taxpayers can file their taxes as quickly and easily as possible. We
will continue expanding opportunities for taxpayers and their
representatives to complete service and compliance interactions through
their preferred channel, be it online, over the phone, or in-person at
one of the IRS's many Taxpayer Assistance Centers (TACs).
Over the last several years the IRS has launched a number of
digital applications that allow taxpayers to conduct various
transactions online, such as paying their tax bill, having access to
certain return information, and requesting an online payment agreement.
Our work in this area also includes continuing the development, over
time, of online accounts at the IRS where taxpayers can log in
securely, obtain the information they need about their account and
interact with the IRS as needed.
Effectively serving taxpayers who prefer to be served through
electronic channels allows the IRS to reduce costs, increases taxpayer
satisfaction and frees up funds to serve those taxpayers who prefer to
be served differently. Not only that, efforts to continue improving our
online offerings will allow the IRS to simplify return filing for the
vast majority of taxpayers. Enhancing taxpayer service in this way will
in turn increase voluntary compliance, improve tax administration and
increase taxpayer satisfaction.
Operations Support
The President's budget request includes $4.16 billion for
operations support programs including rent, cyber and physical
security, IT services for all IRS employees, and core tax processing
and compliance systems. Within that total, $2.29 billion is allocated
for information services.
The management, maintenance, and ongoing enhancement of the IRS's
information technology systems are central to the reliability of its
operations, and to the successful accomplishment of its mission. The
2019 budget includes dedicated funding to refresh IRS hardware and
software to provide a stable foundation for delivering technology
services required for day-to-day operations, transforming the taxpayer
experience, and modernizing IRS operations.
At the end of fiscal year 2017, more than 59 percent of IRS
hardware was past its useful life compared to 64 percent at the end of
fiscal year 2016, and 32 percent of software was two or more releases
behind the most current commercially-available version. The fiscal year
2019 budget provides $187.8 million to enable the IRS to implement
critical hardware and software upgrades and reduce system outages and
failures.
Sustained investments in IT are also required to improve
cybersecurity and ensure the IRS can continue to safeguard taxpayer
data. The IRS combats more than 1 million cyberattacks daily, and
operates strong network perimeter defenses to mitigate threats, detect
vulnerabilities and monitor network security. The 2019 budget includes
$303.7 million for these critical activities.
Enforcement
The President's fiscal year 2019 budget includes $4.63 billion for
enforcement programs. In addition, the budget also includes a program
integrity cap adjustment for improving the effectiveness and efficiency
of the IRS's overall tax enforcement program.
The IRS remains committed to increasing compliance by assisting
taxpayers in fulfilling their tax obligations and enforcing the tax
laws. As a result of these efforts, the agency remains one of the most
cost-effective investments within the Federal Government. In fiscal
year 2017, the IRS collected $3.4 trillion in revenue to fund the
Federal Government, which represents more than 90 percent of all
Federal receipts, and resources invested in the agency lead to
significant revenue increases for the Nation.
One of the IRS's highest priorities remains the effort to combat
tax-related identity theft and refund fraud. Protecting taxpayers and
their personal data from identity theft is a critical aspect of
taxpayer service, and the IRS has worked to improve its efforts in this
critical area. During fiscal year 2017, the IRS continued increasing
taxpayer protections to make filing a tax return as safe and secure as
possible. As a result, the number of fraudulent refunds declined and
the number of taxpayers reporting to the IRS that they were victims of
identity theft has also declined. The number of victim reports declined
from 401,000 in calendar year 2016 to 242,000 in 2017, a drop of 40
percent.
Business Systems Modernization
The President's budget includes $110 million for business systems
modernization. To gain efficiencies, secure and protect data, and
reduce the resources necessary to maintain existing systems, the IRS
will continue efforts to modernize its systems. Our main initiatives in
this area are: expanding the digital conversion of paper case files,
automating repetitive manual processes, leveraging existing data to
detect tax noncompliance earlier, and enabling a strong and secure
systems platform for taxpayer-facing applications.
implementing the new tax law
Implementing the Tax Cuts and Jobs Act is one of the IRS's highest
priorities. The IRS has established a Tax Reform Implementation Office,
led by senior leadership, to ensure its successful administration. Our
efforts to implement this new law began shortly after its enactment.
For example, the IRS issued two important pieces of guidance related to
the new law on December 29, 2017: notices that address amended section
965 of the Internal Revenue Code and the new section 1446(f).
Subsequently, the IRS has issued additional guidance relating to
section 965, including a set of Frequently Asked Questions that deal
primarily with how to report the transition tax.
Additionally, the IRS and the Treasury Department have been working
to update the income tax withholding process to take into account
changes made by the new statute that affect virtually every taxpayer
who receives a paycheck. In early January, we released updated
withholding tables for 2018. In late February we released an updated
version of our online Withholding Calculator on IRS.gov, which
taxpayers can use to help them ensure the correct amount of tax is
being withheld from their paychecks. At the same time, we released a
revised Form W-4, Employee's Withholding Allowance Certificate, that
more fully reflects the new law.
Additional published guidance on the new tax law will be provided
as the Treasury Department and the IRS continue to analyze the law and
its impact on tax administration. The 2017-2018 Priority Guidance Plan
issued by the Treasury Department and the IRS includes projects related
to the law, and updates to the plan are published periodically.
Activities to implement tax reform include: re-programming
approximately 140 interrelated return processing systems in conjunction
with creating or revising approximately 450 tax forms, publications and
instructions; publishing guidance, notices, and Frequently Asked
Questions (FAQ); preparing the IRS workforce to help taxpayers
understand how the new law applies to them; and importantly, providing
taxpayer assistance and outreach.
The estimates for these activities reflect one-time costs
associated with updating major systems and enabling the IRS to quickly
respond to the new tax law changes and anticipated higher taxpayer
demand for assistance in 2018 and 2019. As with other major
investments, the IRS expects some recurring operations and maintenance
costs which will be funded within base appropriations.
legislative proposals in the president's fiscal year 2019 budget
Along with the funding requested in the President's fiscal year
2019 budget, we are also asking for Congress's help legislatively,
particularly in four important areas that would improve tax
administration and support the IRS in fulfilling its mission:
Program Integrity Cap
In addition to the base appropriations request of $11.135 billion,
the fiscal year 2019 budget proposes a $362 million program integrity
cap adjustment to fund new and continuing investments in expanding and
improving the effectiveness and efficiency of the IRS's overall tax
enforcement program.
The budget also proposes a program integrity cap in the outyears to
fund new initiatives and inflation. The investments will generate about
$44 billion in additional revenue over 10 years and will cost about $15
billion for net savings of $29 billion. Notably, the return on
investment (ROI) likely is understated because it does not reflect the
effect that enhanced enforcement has on deterring noncompliance.
Streamlined Critical Pay Authority
The IRS Restructuring and Reform Act of 1998 increased the IRS'
ability to recruit and retain a small number of key executive-level
staff by providing the agency with streamlined critical pay authority.
This allowed the IRS, with approval from Treasury, to move quickly to
hire well-qualified individuals to fill positions deemed critical to
the agency's success, and that required expertise of an extremely high
level in an administrative, technical or professional field. Executives
hired under this authority included our former Chief Information
Officer, a senior cybersecurity expert, our system architect, the
director of our online systems development team and other senior IT
executives. This authority expired at the end of fiscal year 2013. The
last appointment made under Streamlined Critical Pay authority expired
on September 29, 2017. Without this authority, the IRS continues to
face challenges recruiting and retaining top-level talent, especially
IT professionals who can help modernize our IT systems and protect
taxpayer data from cyberattacks. The President's fiscal year 2019
budget request proposes reinstating this authority through fiscal year
2022.
Correction Procedures for Specific Errors
Under current law, the IRS has authority in limited circumstances
to identify certain computation mistakes or other irregularities on
returns and automatically adjust the return for a taxpayer. At various
times, Congress has expanded this limited authority on a case-by-case
basis to cover specific, newly enacted tax code amendments. The IRS
would be able to significantly improve tax administration--including
reducing improper payments and cutting down on the need for costly
audits--if Congress were to enact a proposal in the President's fiscal
year 2019 budget to provide the IRS with greater flexibility to correct
specific errors on taxpayer returns. This proposal would allow the IRS
to correct errors in cases when the information provided by the
taxpayer does not match the information contained in government
databases, or when the taxpayer has exceeded the lifetime limit for
claiming a deduction or credit.
Authority to Require Minimum Qualifications for Return Preparers
The President's budget request proposes providing the Secretary
with explicit authority to require that all paid tax return preparers
have a minimum knowledge of the Code. This is especially important to
ensure that the estimated 400,000 tax preparers without credentials can
meet minimum standards for competency. Incompetent and dishonest tax
return preparers harm taxpayers by subjecting them to potential audits
and by potentially subjecting them to penalties and interest as a
result of incorrect returns. Requiring all paid tax preparers to keep
up with changes in the Code would help promote high-quality service
from preparers, improve voluntary compliance and foster taxpayer
confidence in the fairness of the tax system.
Chairman Lankford, Ranking Member Coons and Members of the
subcommittee, that concludes my statement. I would be happy to take
your questions.
Senator Lankford. Thank you very much for your statement
and your preparation and the ongoing work there in that role.
Let me get right to a couple issues and we will try to
clear this up and have an ongoing dialogue.
IRS TECHNOLOGY
The first of which, let us talk about tax day and about
filing, the 11-hour time period that there was the shutdown of
the system. It is my understanding--though you had mentioned
about 59 percent of the hardware is obsolete that is within our
current system. My understanding is the particular piece of
hardware that failed there was only a year and a half old at
that point. Help us walk through the mechanics of what happened
and how we are avoiding that for next year.
Mr. Kautter. Certainly. So you are correct, Senator. The
equipment that failed is a year and a half old. It was what is
called firmware, which is the software that actually runs the
mainframe computer. These mainframes are in operation around
the globe. This particular problem has only ever occurred once
before. So it so happens that it happens on the last day of
filing season. But we were able to quickly diagnose the
problem. Within 12 hours of the problem having occurred, we had
the systems back up and running. We did it on a planned basis
where we started out small and then opened it up wider. Within
24 hours of the system problem, we had processed all the
returns that were in the system and we were back up and
running.
I think one of the lessons that we have learned, frankly,
from this last episode is that probably during the peak of
filing season, we need to keep our backup system up and running
simultaneously with our mainframe systems.
Senator Lankford. This 5-year plan that is being discussed
that the Secretary just mentioned--in the next 90 days, we will
get some kind of update on that. How engaged are you in that
process?
Mr. Kautter. I am very involved in it. In fact, it is hard
for me to meet with the Secretary without him mentioning it. We
are well along the road for developing that plan. We have got a
pretty good outline of all the systems and the detail behind
it. And right now, we are working on the cost of updating the
systems in various stages.
But the IRS I think has done a fairly good job of
strategically investing the technology dollars that it has. The
hardware that runs the core filing system is up-to-date and
current. The language that runs on those mainframes is not up-
to-date and current. It is, frankly, a language from the 1960s.
It is a solid language. It is stable. We can use it. But having
the ability to use more modern language so the systems can be
better integrated would be very beneficial to the IRS and
efficient operating of the filing systems.
The other aspect. By using that old language, Mr. Chairman,
the system is built block upon block. It is not an integrated
system. So although we have got modern hardware, the software
is really our Achilles heel. And I frankly personally, having
been in the job 6 months and coming from the private sector, my
sense is the best way to deal with this is is going to be in a
major, comprehensive way. I think dealing with it in an
incremental approach is going to be highly inefficient and is
not going to get the sort of efficiencies that you are looking
for.
Senator Lankford. I would say when we hear ``major,
comprehensive way,'' we typically hear outside contractor
coming in, charging us a fortune for their consulting services
and doing a few things. We will want to be able to have an
ongoing dialogue to be able to make sure that at the end of it,
3 years later, IRS is not coming back and saying we still have
legacy systems. Millions were invested and most of it went to
contractors rather than to actually solving the problem.
Mr. Kautter. I think that is fair. And I also think it is
fair to say the IRS in the past has not done a particularly
good job with respect to its technology dollars. The leadership
team that is now in place in the IRS on the operations support
side has been in place less than 2 years. The Deputy
Commissioner has been in his job just a little over 2 years,
and the eight primary deputies have all been in their jobs
under 2 years. So I think it is a new team that is energetic,
knowledgeable, and I hope and I believe will get a different
result.
Senator Lankford. Let me ask you about the new tax regime
and trying to be able to shift over to a new system. At this
point, are you on schedule with the transition for the 2018
filing?
Mr. Kautter. Yes, sir. We have all the forms drafted. We
are working on the instructions. They will be done within the
next 2 weeks. The plan is for the forms and the instructions to
be released over the summer for public comment. The
publications that need to be amended are well in process of
being amended and are on track.
The most time-consuming and expensive part of tax reform
implementation is technology. For the $397 million request we
originally made, 73 percent of that is for technology. We have
already started to develop the software to implement tax
reform. The major piece that is left is guidance. We expect to
have proposed regulations on most of the major pieces of the
tax reform out by the fall. So we are on track. You could
always do better. We could always move a little faster, but I
think we are in pretty good shape.
Senator Lankford. It is my understanding there is a $77
million request that is the second tranche. Is that a correct
number?
Mr. Kautter. Yes, sir. That is correct.
Senator Lankford. Let me recognize the Ranking Member,
Senator Coons.
Senator Coons. Thank you, Chairman Lankford.
Mr. Kautter, providing access to quality customer service
helps American taxpayers understand their obligations so they
can pay the right amount in a timely way. It is important to me
that Delawareans, Americans are able to get the assistance they
are seeking from the IRS so that they can, in good faith, pay
the taxes they owe. For several years, for much of my time on
this subcommittee, the IRS service level has, frankly, been
awful and unacceptable. In 2015, only 38 percent of calls to
the IRS were answered, and callers, American taxpayers,
experienced an average waiting time of more than 30 minutes.
Those service numbers have come back up significantly this
year. Yet, as I understand your budget proposal, it is to make
headcount cuts that will bring it back down. In fact, I think
your goal for this coming year is, again, that 39 percent of
calls to the IRS are answered. And that means if you reach that
goal, the majority of American taxpayers calling with questions
will never reach anyone to get an answer.
Why is that an acceptable goal for the IRS? And how do we
return to a level of service experienced back in 2004 when the
IRS answered 87 percent of phone calls and wait times averaged
just 2 and a half minutes?
Mr. Kautter. Well, Senator, let me respond in two ways.
First of all, in putting together the budget, we had to
make some choices between funding. And given the increasing
number of cyber attacks, the sophistication of those attacks,
and the age of some of the software and hardware that we have
at the IRS, the decision was made to invest in operations
support. Now, that is short term. It is not forever. And we
talked about funding for technology to get the IRS up to speed.
But it is just a hard choice that we had to make.
Second, with respect to level of service, if you look at
the IRS response to telephone calls, you find a wide array of
response between various phone lines that the IRS operates. The
phone line for taxpayers calling to ask questions of the IRS,
individual taxpayers--the level of service for that over the
last filing season was 80 percent. And I do not mean to
minimize the fact that other lines are not answered nearly as
quickly. But with respect to that line, it is 80 percent.
Senator Coons. And given the hard choices you are
referencing, do you expect it to continue to be 80 percent this
coming filing season?
Mr. Kautter. Under the budget that has been submitted, it
would be less than 80 percent.
Senator Coons. How much less than 80 percent?
Mr. Kautter. It would probably be in the 60-65 percent
range.
Senator Coons. So about 40 percent of Americans who call
looking for assistance, given a sweeping tax code reform, the
biggest in 30 years, about 40 percent would not get an answer.
Mr. Kautter. I think that is a terrific question. So it is
important to realize----
Senator Coons. It is. So let me just interrupt you there,
if I might, because I asked the same question of the Secretary
and I am expecting a better answer from you. I hear that you
have got competing demands. You have got cyber attacks. You got
aging IT equipment. One path is to cut service to American
taxpayers. A better path would seem to me to to be invest in
program integrity activities. If I understood your testimony
right the tax gap, taxes that are owed but not paid, is about
$400 billion. If the IRS invested, I think you said, $15
billion in program integrity over 10 years, it would recoup $44
billion in additional revenue.
Mr. Kautter. Yes, sir.
Senator Coons. Well, so that is a roughly 3 and a half, 4
to 1 return on investment. You have got two options: lay people
off and cut services so more Americans trying to seek taxpayer
assistance are frustrated and confused, or invest in making
sure the tax cheats actually pay their taxes. It seems to me
there is an obvious alternative and much better choice.
The request from the IRS also requested a program integrity
cap adjustment, which is sensible but something that the IRS
has requested year after year after year. The Budget Committee
has never provided appropriators with that adjustment. In fact,
I do not believe there is a Budget Committee vehicle that would
even allow that this year.
So let me just suggest that perhaps a better approach is to
request funding for program integrity activities--in other
words, finding people who are cheating on their taxes--within
your base budget request.
Could you please just share with me what you think the IRS
should be spending on enforcement activities to maximize return
on investment, and what are you doing in the current budget to
reduce the tax gap?
Mr. Kautter. If you look at enforcement activity, it is
down, over the last 10 years, 37 percent across the board, the
number of audits. Part of the challenge is that, again given
budget priorities, we are trying to decide between operations
support and hardware and software.
But I would also say with respect to enforcement, the IRS
is much more sophisticated today than it was 5 or 10 years ago
in its use of technology and data analytics to identify
taxpayers to audit. For example, an individual taxpayer making
more than a million dollars a year is seven times more likely
to be audited than a taxpayer under $200,000 a year. With
respect to taxpayer data that is submitted on information
forms, the level of compliance is in the upper 90 percent
range. Where we have our problems with the tax gap tends to be
in the cash economy and with respect to activity that is not
reported anywhere on a form that the IRS can find.
So I think enforcement is at a point where we need to start
looking seriously about enhancing what we do. But I am not as
concerned as some. I am concerned. I am not as concerned as
some because I have seen what data analytics and technology can
do in terms of identifying areas of noncompliance.
Senator Coons. Let me just make sure I have understood your
testimony. Do I understand your testimony correctly that there
is a significant tax gap, that auditing rates have been
steadily declining over the past decade, and that significant
improvements, increases in investment in tax enforcement, would
bring a multiple rate of return for every additional dollar
spent?
Mr. Kautter. It is true that----
Senator Coons. Then why on earth would we not do that?
Mr. Kautter. In a finite world, we have to make decisions
between technology and----
Senator Coons. Door number one, generate more revenue. Door
number two, frustrate American taxpayers by cutting services.
It seems to me like an easy choice.
Mr. Kautter. Well, I think we will go back and take a look
at what else we can in the enforcement area. Thank you.
Senator Coons. Let me ask one last question, if I might.
The National Taxpayer Advocate has endorsed an approach for
years that would assign a single IRS account representative for
tax-related identity theft and refund fraud victims. I noted
that in your testimony the number of tax refund fraud victims
dropped significantly over the past year from 400,000 in the
previous year to 240,000 in calendar 2017. I just want to
commend you and the folks at IRS on that improvement. That is
still a quarter of a million Americans facing the deeply
frustrating experience of refund fraud.
What changes have you made to take into account this input
from the Taxpayer Advocate, and how might we work together to
make sure that the handling of tax refund fraud and identity
theft is as streamlined and efficient as possible? These are
some of the toughest constituent calls I get, people who are
really upset.
Mr. Kautter. We are in the process of putting together a
report on what we can do with respect to enhancing the identity
theft area. We had great success. We are down 65 percent on the
number of reported tax-related identity thefts over the last 2
years. I think the challenge is to get the number down to that
point.
We have had to introduce a number of filters within the
processing system. Some of those filters produce false
positives. We end up holding up refunds longer than taxpayers
would like. We are in the process of revisiting those filters
and seeing what we can do to reduce the number of false
positives.
I would also say, Senator Coons, prevention is part of the
problem. With respect to helping taxpayers, once they are
victims of identity theft, we have set up a separate identity
theft victims assistance group, and they have had great
success. About 75 percent of the victims have their problems
resolved within 4 months. And again, we would like to get that
down to a lower level. Our inventory is 5 percent of what it
was 2 years ago.
Senator Coons. And is part of the actions that group is
taking having a single point of contact for identity theft
victims?
Mr. Kautter. It is. So what we have moved to is a small
group concept, a team concept, for an individual taxpayer. We
looked at providing sort of the one-on-one relationship, and
our concern with that was that sometimes that one individual
who is your point of contact within the IRS could have a large
caseload. They could be on vacation. They could be out. So what
we have moved to are small teams where the information can be
exchanged easily and the taxpayer's account is sitting right
there in front of that team. So I think that is a wonderful
approach, and we are in favor of that.
Senator Coons. Well, thank you. I would appreciate the
chance to have a longer dialogue with you about that, and I
look forward to hearing about your reconsideration on
enforcement investments. Thank you.
Mr. Kautter. Yes, sir.
Senator Lankford. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman.
Welcome.
POTENTIAL IMPACT OF THE TAX BILL
Let me just first apologize for being late. I was just in a
Banking Committee where we had a markup on a Committee on
Foreign Investment in the United States (CFIUS) bill. And I am
pleased that the committee adopted an amendment I offered on a
bipartisan basis dealing with ZTE and Chinese
telecommunications companies that have violated U.S. sanctions.
I understand there was a lot of conversation about that here
today. But in the Banking Committee on that bill--and the bill
passed--there is now a provision that essentially says that the
President may not unilaterally change sanctions in place
against a Chinese telecommunications company unless he
certifies that the company has been in compliance with U.S. law
for more than a year and that they are fully cooperating with
the United States. So I was pleased to see bipartisan support
for that.
So I have a couple of questions with respect to the tax law
that passed. I understand you are double-hatted. Right? You are
the Acting Commissioner of the IRS but also the Assistant
Secretary that oversees tax policy at the Department. Right?
Mr. Kautter. Yes, sir.
Senator Van Hollen. And I understand that the Secretary,
Secretary Mnuchin, again claimed today that the tax bill that
we just passed would pay for itself, meaning that it would not
add to the debt. Is that a correct statement of what he said?
Mr. Kautter. Yes, sir.
Senator Van Hollen. A simple question. At the time that the
tax proposal was being put forward, Secretary Mnuchin said
there were 100 analysts at the Secretary of the Treasury
working on all the implications of this and that they were
going to give us the analysis showing the impact on the debt.
They were going to give us distribution analyses. All we ended
up was getting a one-pager. In fact, I have got the one-pager
here with me.
So my question is did the Department of the Treasury do an
analysis showing what the impact of the tax bill would be on
the debt?
Mr. Kautter. We had extensive analysis run as the bill was
being considered, and I think it culminated in that one-page
document that you are seeing.
Senator Van Hollen. So that is it. So all that work
culminated in a one-page analysis.
Mr. Kautter. There is a lot behind it and that is the
summary.
Senator Van Hollen. With all respect, Secretary, I mean the
reality is that when the Joint Committee on Taxation does an
analysis, they provide a document that shows how they got to
their answer. So that is it. The one-pager is all that came out
of that. Is that correct?
Mr. Kautter. To my knowledge, that is all that is being
publicly released. Yes, sir.
Senator Van Hollen. Is there analysis that has been done
that is not publicly released that would show the impact on the
debt?
Mr. Kautter. I do not know about the impact on the debt. I
mean, we vigorously analyzed each provision, its impact, on
various segments of the economy.
Senator Van Hollen. But the Secretary is making claims
about its impact on the debt, and so that is why I am focused
on this issue because we have a full analysis that was recently
presented to the Congress from the Congressional Budget Office
that indicates that the debt would increase by close to $2
trillion over the next 10 years. Have you had a chance to see
that?
Mr. Kautter. Yes, sir.
Senator Van Hollen. And do you have any reason to dispute
their analysis?
Mr. Kautter. I think it is a reasonable analysis.
Senator Van Hollen. I do too. And what is interesting is
that when the Inspector General of the Department of the
Treasury looked at some of these issues and asked one of the
key people in the tax policy department, Mr. Mackey--are you
familiar with Mr. Mackey?
Mr. Kautter. Yes, sir.
Senator Van Hollen. I mean, he is a professional. Right?
Mr. Kautter. Yes, sir.
Senator Van Hollen. They asked him about the previous JCT,
Joint Committee on Taxation, analysis which showed that if you
take into account the economic impact, you still have a
trillion dollar addition to the debt. And that does not
include, by the way, any additional interest on the debt.
And Mr. Mackey--when he was asked by the Inspector General
about this, he said that the JCT estimates were, quote, widely
considered to be reasonable. Unquote. Do you dispute that?
Mr. Kautter. I think they are reasonable. Yes, sir.
Senator Van Hollen. Thank you.
Mr. Kautter. But I would say, Senator, once you move into
predicting the future, there is a wide range of reasonable
estimates that can be made. The Secretary, who I talk to daily,
feels very strongly that the economic activity will create
enough revenue for the tax bill to pay for itself. And I also
believe that is within the range of reasonable estimates.
Senator Van Hollen. Here is the issue. Feeling is one
thing; analysis is another. Would you agree?
Mr. Kautter. Yes, sir.
Senator Van Hollen. I mean, we would all love to say that
whatever we are going to do is generate--why stop at 3 percent
growth? Why not 4 or 5? But the reason you do analysis is to
get your best estimate. Right?
Mr. Kautter. Yes.
Senator Van Hollen. And as I understand what you are
saying, the Treasury has not done that detailed estimate with
respect to the debt, and yet the Secretary of the Treasury is
making public comments very confidently predicting this thing
is going to pay for itself when the CBO says it is going to add
$2 trillion to the debt and you-- and I give you full credit--
just said the CBO analysis is a good, reasonable analysis. So
what are we supposed to believe?
Mr. Kautter. The analysis on the debt may have been made,
Senator. I am just not aware of it at the Treasury Department.
Senator Van Hollen. Well, if it has been made, I am going
to ask you to make that available to the Congress because I
think the American people are due whatever work product came
out of an analysis of a tax bill. And so I would ask, Mr.
Chairman, that if there is such an analysis, that the
subcommittee request it from the administration.
Senator Lankford. I have no issue with that. Obviously,
typically internal documents are internal to the executive
branch and always have been. But if there is a document that we
can get, we should.
Senator Van Hollen. Well, this is just an analysis of the
impact of the tax bill on the debt. I am not looking for any
kind of work product information. And given that the Secretary
continues to make these statements, it would be interesting to
discover what the basis of it is because most people believe
that the CBO analysis was a reasonable one. So I appreciate
that, Mr. Chairman, and thank you.
The last question I have. Did you do a distributional
analysis at the Department of the Treasury?
Mr. Kautter. We have looked at distributions. Yes, sir.
Senator Van Hollen. Because I did ask the Secretary about
that in a Banking Committee hearing a little while ago. And I
would also respectfully, Mr. Chairman, request the distribution
analysis that was done by the Department of the Treasury.
Senator Lankford. I have no issue with that as well.
Actually long-term on this--I appreciate your questions. Long-
term is going to be over the next 2-3 years, as the actual
numbers come in. The estimates at the beginning are one thing.
Actually what occurs in the economy will be the real evidence
as we roll out in the next couple of years.
Senator Van Hollen. That is true. We all try to do analyses
so that we can make the best decisions possible, given the
information at hand. And I have seen the JCT estimate. I have
seen the CBO estimate. I have seen the backup material for
that. So it would be useful to have the backup material that
the Secretary of Treasury is using. Thank you.
Senator Lankford. Thank you.
Senator Daines.
Senator Daines. Thank you, Mr. Chairman.
It is good to have you here, Mr. Kautter. Thank you for
being here.
Obamacare violates the principles of Tribal sovereignty--
it is a big issue for me back home in Montana for our Tribes--
because it requires Indian Tribes to either provide health care
coverage for their employees or face fines of $2,000 per
employee. These penalties would prove disastrous for our
Tribes. The fines outstanding are seven-figure in nature. Their
economies are already struggling. In many cases, Tribal
governments would be forced to cut essential services to their
people or lay off employees in a climate where jobs are already
very scarce.
Last Congress, I offered some legislation that would exempt
Tribal governments and tribally owned businesses and
organizations from this severe standard. I am announcing right
here and right now that I will be reintroducing that
legislation again very soon.
Mr. Kautter, could you provide an update on where the IRS
is in levying fines for noncompliance with the employer
mandate?
Mr. Kautter. Yes, sir. At this point, the IRS has
identified about 32,000 employers who may be subject to the
penalty. We have issued 11,000 letters, just a little over
11,000 letters at this point. We have closed a little over
3,000 of those cases or letters. Of those 3,000, almost 82
percent have resulted in no change. It is basically the
taxpayer filled out the form wrong. So we have had a high no-
change rate. The amount of penalties assessed at this point is
about $83 million.
Senator Daines. So thank you. I am impressed you have those
numbers right there off the top of your head. I can tell you
watch this very carefully.
But to confirm, the IRS is still working to exact those
fines against Tribal governments, tribally owned businesses,
and Tribal organizations in the same way that the IRS is going
after other large employers. Is that correct?
Mr. Kautter. Yes, sir.
Senator Daines. Do you know how many Native American
governments, businesses, or Tribal organizations will be held
liable for penalties under the employer mandate for tax years
2015 and 2016?
Mr. Kautter. No, Senator, I do not.
Senator Daines. Would you be able to get that information
to me after today's hearing?
Mr. Kautter. So you are looking for the number of--I will
get the question from you.
Senator Daines. Yes, the number of Native American
governments, businesses, Tribal organizations that are held
liable for penalties for 2015 and 2016.
Mr. Kautter. Yes, sir.
Senator Daines. Thank you. And we will give the specifics
as well on that just to be clear on it. Thank you for that.
I think it is important. And the purpose of that question
and to get that data is so that we can better understand the
scope of the employer mandate's negative impacts to Indian
Tribes. And I look forward to leading the charge once again to
prevent these negative impacts on our Tribes, and remedy would
be the legislation I am proposing.
I want to shift gears and talk about freedom of speech. Mr.
Kautter, as you may know, the previous Commissioner back in
2015 made statements questioning whether Schedule B forms for
tax exempt organizations were necessary and also expressed
concern about whether the confidentiality of the information
can be kept. Recently we have seen tax-exempt organizations
call for the Treasury and the IRS to suspend Schedule B forms
for tax-exempt organizations in order to protect anonymous free
speech.
Do you support this effort and will you act?
Mr. Kautter. Senator, I am actively involved with the
Secretary looking at Schedule B, and I think for many
organizations, there frankly is not a requirement. We do not
need that information to administer the tax laws in a fair and
equitable way. So let me work with the Secretary and get back
to you. I know it is an issue of interest of his and it is an
interest of mine, and I think we could do something with
respect to Schedule B going forward.
Senator Daines. Thank you. It was, I think, chilling for
many of us who watched that unfold in the last administration,
a fundamental First Amendment issue on freedom of speech and of
expression. So I would appreciate your help in this effort.
Mr. Kautter. Yes, sir.
Senator Daines. Thank you, Mr. Chairman.
Senator Lankford. Let me follow up on Senator Daines'
question. It was one of the questions that I had as well.
Tell me what has changed in the exempt organization's
portion of the IRS. There has been, obviously, a tremendous
amount of attention focused on them over the last 8 years. What
have you seen as a change in operation of what forms are
required, the process, the time period to be able to get
answers back for all organizations regardless of the
background? Tell me what has changed in the exempt
organization's portion of the IRS.
Mr. Kautter. Sure. From my perspective, Mr. Chairman, the
leadership of that division within the IRS has changed. The
leadership has set a completely different tone than I think the
tone that existed in that organization in the past. They are
interested in fair and equitable administration of the law. I
think your question earlier about how do you change the culture
in the IRS, I think it is the same as any organization. It has
to start at the top and it has to be driven through management
and accountability.
I think that is what has happened to tax-exempt
organizations. We continue to look at, as Senator Daines
suggested changes in the forms and the filing that could be
made that would allow us to continue to administer the tax law,
reduce the regulatory burden on taxpayers, and assure that the
laws are being complied with by tax-exempt organizations. So it
is an area of great interest to me and, as I said, I think
significant changes have been made and continue to be
considered.
MINIMUM QUALIFICATIONS FOR RETURN PREPARERS
Senator Lankford. We will continue to be able to follow up
on that in the days ahead as well.
You, in your written and then briefly in your oral
testimony, had mentioned three requests that you have for
additional legislation, one of them being authority to require
minimum qualifications for return preparers. Let me ask the why
on that, and I think I know the why, but I would like you to be
able to clarify the why, and then let us talk about this
business. It has been an ongoing conversation with IRS and
Congress.
Mr. Kautter. Sure. I think two reasons. Accurate reporting
by taxpayers is critical to the functioning of the tax system.
Fifty-six percent of all returns prepared are prepared by a
paid return preparer. There are about 650,000 paid tax return
preparers. Sixty percent of those folks, about 400,000, have no
professional credentials whatsoever. They are not CPAs,
attorneys, or enrolled agents. The accuracy of those returns is
not as high as it should be. That creates problems for the
taxpayers who have used those individuals. It creates problems
for the IRS. And requiring minimum competency and some annual
education for someone who wants to be a paid tax return
preparer seems to me to be a reasonable approach to help
facilitate operation of the system.
Senator Lankford. So in previous dialogues that I have had
with IRS leadership before, there is always the carrot and the
stick conversation. Obviously, this was attempted before
several years ago and then was ruled and was kicked out by the
courts on those mandates, saying that there is not legislative
support for that requirement. The question is, would the carrot
work better on it? For instance, if you are a paid tax
preparer, your returns come faster if you have already been
through training. If you have not been through training, then
your returns may take 2 months to come back, and you would have
to be able to tell people as a tax preparer am I one that can
get your return fast or am I one of those guys that can get
your return, but it may be 2 months down the road for it. Is
there a way to be able to do that kind of prioritization saying
those that are certified can do faster returns, those that are
not certified do slower?
Mr. Kautter. An interesting approach, Mr. Chairman. I have
not looked into that. In theory it is possible. We would have
to gather some additional information to implement something
like that. It does disadvantage those individuals who use
return preparers who are not certified. And I guess different
people would have different opinions on whether that is a good
approach or not.
Senator Lankford. Well, typically if you are an individual
doing a return, they are going to advertise, hey, we can get
your return fast. You cannot say that if you cannot actually
get the return fast. You are not actually certified to be able
to do it. So the encouragement is, get the training, get the
certification. Then you can help people actually get a faster
return. If you do not get certified, then you are not.
Mr. Kautter. An interesting approach. And I would say in
order to implement that approach, we would probably need some
legislative authority to require the education of the return
preparers and to implement that policy. But not having
considered it, I would have to look into that.
Senator Lankford. Let us keep that ongoing conversation
between us and our teams and see what may be needed because
there may be some other ways to be able to deal with this.
IMPROPER PAYMENTS
This issue about improper payments. Obviously, this has
come up over and over again on the issue about tax preparers
that are, again, not qualified, that are putting out
inconsistent information about improper payments. GAO has
listed it as a high risk issue for years. The Inspector General
has listed that as a major issue to be able to address.
Where are we right now on dealing with the issue of
improper payments?
Mr. Kautter. This is an issue that has been looked at for
years. It is very frustrating. If you look at the improper
payments with respect to the earned income credit, the
education credits, and the additional child tax credit, there
are probably three broad sources of noncompliance. Let me
divide it into two categories.
The legislation with respect to refundable credits is very
complicated. It is some of the most complicated legislation in
the Internal Revenue Code. And I say that as somebody who has
been a tax practitioner for 40 years. The definition of who is
a qualifying child, trying to identify the family income--many
taxpayers misinterpret filing status, get head of household
versus married, believe it or not. Our analysis is about 6
percent of the overpayments are attributable to the fact that
the IRS does not have on hand the financial data to verify
income of those individuals claiming the refundable credit.
Senator Lankford. Did you say 6 percent or 60 percent?
Mr. Kautter. Six.
Ninety-four percent of the problem, as we have analyzed it,
comes from the complexity of the legislation, the definition of
a qualifying child. Is someone a relative? How long do they
live in that household? And then second, the marital status.
That is, in our analysis, 94 percent of the problem. And it is
frustrating because I will sit here and tell you without
changes in that legislation or invading people's lives, the IRS
will continue to pay out $20 billion to $25 billion a year,
year in and year out, in improper payments. I take no pride in
saying that. It is in fact the way the system is structured.
Senator Lankford. Is that something that your team could
make specific recommendations and say this is the area where,
if we can clean this up, this will make an enormous difference?
Mr. Kautter. We have looked at it. We will make some
recommendations. I do not know that we have got anything that
will make an enormous difference unless we change some of the
fundamentals of the statute.
Senator Lankford. Well, clearly that is something that
Senator Coons and I do not handle here from our appropriations,
but obviously, the Finance Committee does. And that type of
language would need to be addressed in the authorizing statute.
But that specific recommendation to be able to deal with a
long-term issue is important, GAO has mentioned that year after
year as a high risk. IRS continues to be able to say we need
greater training typically for tax preparers because it is
where they miss it. But if there are ways to be able to clean
up the language and you have recommendations, we would be
pleased to be able to pass those on.
Mr. Kautter. Yes, sir.
TAX LAW CHANGES
Senator Lankford. Let me ask about next year's tax filing.
As you are going through and preparing forms, is there an
estimate at this point of how many individuals--now, this is
not just the business side but for the individual tax side--
will have a simplified process of filing their taxes and what
those forms might look like for Americans?
Mr. Kautter. We are right in the middle of trying to design
the Form 1040 for next year, and I would hope within 2 weeks to
3 weeks we have got a pretty good idea of what that new design
looks like. One thing for sure under the tax reform bill, the
number of individuals itemizing on their returns will drop from
about 35 percent of all taxpayers to 10 to 12 percent of all
taxpayers. So that in and of itself will be a substantial
simplification.
Senator Lankford. So as far as the 10 to 12 percent, those
are still in the 1040 area. Are you anticipating the other 88
to 90 percent are on the 1040-EZ at that point?
Mr. Kautter. We are looking at the entire family of 1040
forms, including 1040-A and the 1040-EZ. And we are working on
some concepts that might dramatically change the way that
family of forms is structured.
Senator Lankford. Well, we will look forward to getting a
chance to get a follow-up on that.
Senator Coons, do you have additional questions?
Senator Coons. Let me just ask one last question. Given
that significant drop in the number of filers who will itemize,
what is your expectation about the potential impact on
charitable giving? I know you heard me ask the same question of
Secretary Mnuchin.
Mr. Kautter. So I think it is a tough question. It is
trying to predict the future. My sense is that most taxpayers--
this is just personal, Senator--do not give because of the
deduction. I think many give out of a sense of charity. I do
think what you will see for a well-advised taxpayer, frankly,
is bunching of charitable contributions. In other words,
someone who gives a substantial amount and could bunch, say, 2
or 3 years of contributions in 1 year to get over the limit for
being in the standard deduction--you will see more of that. I
personally do not believe there will be a dramatic decline in
charitable contributions. Can I prove it? I cannot.
Senator Coons. We have got lots of hopes and expectations
about charitable giving, about deficits. I will say that across
a number of subjects we have discussed today, what will be the
impact of greater investment in enforcement? What will be the
impact on the ability of taxpayers to get good customer
service? How might we improve program integrity in terms of
taxpayers using paid preparers, and what might we change? And
then how might we reduce improper payments through some
revisions to the relevant statute? All of these are things I
look forward to working with the Chairman on. These are
longstanding, vexing challenges. But as I emphasized before, I
think the better path is investing in enforcement rather than
cutting services at the highest level.
I appreciate the chance to have you before us today, and I
look forward to continuing to work together.
Senator Lankford. Let me do one last comment. This is
purely personal. I think it is a good learning technique for
IRS just in general. I have an individual that we are doing
casework for right now that is active deployed military. He has
been frequently deployed, and his filing from 2015 was tagged
as a possible identity theft. And he is told he has to go in
person to a taxpayer assistance center to be able to go ahead
and check in. He has been deployed over and over and over and
over again. His power of attorney is not being accepted to be
able to go in for him on his behalf.
If there are issues like that, then I would assume if we
are working that case, that is probably true in other cases.
That is something that we need to be able to evaluate for our
folks that are forward deployed in the military and how they
are going to interact with IRS and what that is going to look
like to try to make it as simple as possible for them. They
have fairly stressful days already, and to be able to deal with
that would be one of the areas I would just flag for you to say
we are dealing with that case currently. We are going to work
it out. Our folks that have been the taxpayer advocates in
Oklahoma that we work with have really been terrific folks and
have been very, very responsive and have done a very good job
of working with us on that. But this may be something that we
are just not dealing with but a lot of other folks are as well.
Mr. Kautter. Well, thanks, Senator. I will take that back
and make sure we do not have a systemic issue there.
Senator Lankford. That would be great.
Thank you again for your testimony today and for your
participation and for the engagement on this issue and wearing
two hats. Your job is tough enough. Wearing two hats
simultaneously makes it a little tougher on that.
ADDITIONAL COMMITTEE QUESTIONS
If there are no further questions on this, the hearing
record will remain open until Thursday, May 31, for
subcommittee Members to submit any statements or questions for
the witness for the record.
[The following questions were not asked at the hearing, but
were submitted to the Departments for response subsequent to
the hearing:]
Questions Submitted to Hon. Steven T. Mnuchin
Questions Submitted by Senator Chris Van Hollen
Question 1. During the hearing, Mr. Kautter confirmed that the
Treasury Department has performed its own distributional analysis of
the recently enacted tax law (Public Law 115-97). When I asked whether
the Treasury Department had done this distributional analysis, Mr.
Kautter testified, ``We have looked at distributions. Yes, sir.''
Renewing my request following your earlier testimony before the
Senate Banking Committee on January 30, please provide the
distributional analysis performed by the Treasury Department's Office
of Tax Analysis regarding the size of the average tax change for
different income groups. At a minimum, this should include
distributional tables showing the average tax change for each income
group, expressed in dollar terms and as a percentage of after-tax
income. And I would also appreciate any additional distributional
analysis that the Office of Tax Analysis conducted regarding the new
tax law.
If there is any reason that the Treasury Department is unable to
disclose its distributional analysis of the new tax law, please
describe the issue that is preventing the release of this information.
Answer. The Treasury Department regularly publishes analysis
conducted by our Office of Tax Analysis (OTA). See attachment on the
next page. Also available at: https://www.treasury.gov/resource-center/
tax-policy/tax-analysis/Documents/
Distribution-of-Income-by-Source-2019.pdf.
ATTACHMENT
(Available at: https://www.treasury.gov/resource-center/tax-policy/tax-
analysis/Documents/Distribution-of-Income-by-Source-2019.pdf)
Question 2. Mr. Mnuchin, ZTE reached a historic combined $1.19
billion settlement with the U.S. Government and pled guilty to criminal
charges, including obstruction of justice, and reached settlements with
the U.S. Department of the Treasury's Office of Foreign Assets Control
(OFAC), the U.S. Department of Commerce's Bureau of Industry and
Security (BIS), and the U.S. Department of Justice (DOJ), ending a
long-running investigation into ZTE by the U.S. Government.
Part of ZTE's settlement with the U.S. Government was that ZTE also
agreed to a 7-year suspended denial of export privileges, which could
be activated if any aspect of the agreement was not met and/or if the
company committed additional violations of the Export Administration
Regulations (EAR). In fact, the Commerce Department released documents
that featured flow charts on the best ways to circumvent American
sanctions and provided step-by-step guidelines for setting up shell
companies to circumvent U.S. export controls. It also released
documents signed by ZTE executives, stating that the firm was exporting
to ``all five major embargoed countries--Iran, Sudan, North Korea,
Syria and Cuba.''
Last month, the Commerce Department activated its denial order of
export privileges, denying ZTE's export privileges for 7 years. Then
the President tweeted that he was going to put this enforcement action
on the table as part of your trade negotiations with China. On May 25,
the Commerce Department communicated to certain offices on Capitol Hill
that the administration had reached a deal with ZTE that would allow
the company to resume business with U.S. companies, subject to
management changes and the payment of a fine.
Question 2a. Do you recall when OFAC assessed penalties on ZTE?
Please state OFAC's charges against ZTE.
Answer. On March 7, 2017, ZTE executed a settlement agreement with
OFAC whereby ZTE settled its potential civil liability for 251 apparent
violations of the Iranian Transactions and Sanctions Regulations, 31
C.F.R. part 560 (ITSR) for $100,871,266.
From on or about January 2010 to on or about March 2016, ZTE
engaged in: (i) the exportation, sale, or supply, directly or
indirectly, from the United States of goods to Iran or the Government
of Iran; (ii) the re-exportation of controlled U.S.-origin goods
subject to the Export Administration Regulations from a third-country
with knowledge that the goods were intended specifically for Iran or
the Government of Iran; and (iii) activity that evaded or avoided,
attempted and/or conspired to violate, and/or caused violations of the
prohibitions set forth in the ITSR. Specifically, ZTE appears to have
engaged in 251 transactions in apparent violation of Sec. Sec. 560.203,
560.204, and/or 560.205 of the ITSR. The total value of the
transactions constituting the apparent violations was $39,622,972.
Question 2b. Did ZTE fully comply with OFAC and Treasury officials
during the investigation?
Answer. No, ZTE did not fully comply during the course of the
investigation which ultimately led to the settlement concluded on March
7, 2017. In 2013, ZTE's highest-level leadership decided to
surreptitiously resume its Iran-related business in 2013 while under
investigation by the U.S. Government. ZTE continued its Iran-related
business until March 2016, when the Department of Commerce added ZTE to
the Entity List. Additionally, under the direction of its leadership,
ZTE deleted evidence and provided the U.S. Government with altered
information to hide the fact that it had resumed its unlawful business
with Iran.
Question 2c. Did ZTE comply with OFAC's order after it reached its
settlement? Please elaborate.
Answer. OFAC did not issue an order to ZTE but rather resolved its
case via settlement agreement. The Department of Commerce issued two
suspended denial orders against ZTE as part of its settlement
agreements with the company. Questions regarding the suspended denial
orders should be directed to the Department of Commerce, the agency
that issued the orders.
Question 2d. Do you have evidence demonstrating a change in ZTE's
behavior? If so, please provide that information. Do you have national
security concerns about ZTE's access to the U.S. market?
Answer. Under the terms of the settlement agreement with OFAC, ZTE
is required to maintain policies and procedures to minimize the risk of
any recurrence of U.S. economic sanctions violations in the future. ZTE
also confirmed in its agreement with OFAC that it had terminated the
violative conduct described in the agreement.
Treasury does not speculate on possible sanctions violations or
comment on possible or pending investigations. We constantly monitor
for global activity that might undermine the integrity of our sanctions
and trigger our authorities, and do not hesitate to pursue violative or
sanctionable conduct when appropriate.
Question 2e. Did you ever recommend to the President to offer to
China that you would reduce or lift penalties on ZTE as part of your
ongoing trade negotiations with China for reasons unrelated to U.S.
national security?
Answer. Any changes to Commerce Department penalties on ZTE will
ensure the protection of the national security of the United States and
the enforcement of U.S. sanctions programs. This is an enforcement
issue, not a trade issue. We are committed to protecting American
technology, American jobs, and our national security. Our goal is to
protect America's interests without putting an entire company out of
business and hurting innocent employees.
Question 2f. Did you ever recommend to the Secretary of Commerce
that he reduce or lift the export controls on ZTE for reasons unrelated
to U.S. national security?
Answer. Please see response to 2e.
Question 2g. Did the President consult with you about reducing or
lifting these enforcement actions as part of your ongoing trade
negotiations with China?
Answer. Please see response to 2e.
Question 2h. Did the President ask you or Secretary Ross to reduce
or lift penalties on ZTE for reasons unrelated to U.S. national
security?
Answer. Please see response to 2e.
Question 2i. Do you think it is appropriate to include large
enforcement matters like the one we have with ZTE as part of trade
negotiations with a foreign power?
Answer. Please see response to 2e.
Question 2j. Do you support lifting penalties on ZTE? Please
explain your rationale.
Answer. ZTE settled its potential civil liability for 251 apparent
violations of the ITSR for $100,871,266. OFAC expects all apparent
violators who enter into settlement agreements to fully comply with the
terms of their agreements, including the payment of any agreed-to
settlement amount. Treasury defers to other agencies with respect to
any regulatory and law enforcement actions taken against ZTE.
Question 2k. What are the implications for other actors being
investigated by Treasury for violations of sanctions or Bank Secrecy
Act and Anti Money Laundering laws?
Answer. The ZTE settlement is OFAC's largest ever against a non-
financial entity and sends a powerful message that Treasury will
aggressively pursue any company that willfully violates U.S. economic
sanctions laws and obstructs Federal investigations of such violations.
This settlement is the result of close collaboration and coordination
between multiple U.S. Government agencies and highlights the
effectiveness of a whole-of-government approach to pursuing egregious
violations of U.S. economic sanctions or export control laws. Other
actors being investigated by Treasury are on notice that OFAC will
continue to coordinate its efforts with other Federal agencies--
including the U.S. Department of Justice and the U.S. Department of
Commerce--in order to prevent sensitive or controlled U.S.-origin goods
from being illegally shipped or exported to sanctioned countries or
parties. Given the specific authorities under which the ZTE case was
brought, this case is unlikely the implicate BSA/AML laws.
______
Questions Submitted to Hon. David Kautter
Questions Submitted by Senator Patrick J. Leahy
Question. I have been very concerned about the budget cuts directed
at the IRS over the last several years. The Trump administration's
budget proposal for fiscal year 2019 would continue cuts to the IRS
that will impact key taxpayer services at a time when many Americans
are confused about their new obligations under the Republican tax cut
legislation. The IRS also experienced an embarrassing technical failure
on the last day taxpayers had to file their taxes, requiring an
extension in the filing date. At the same time, IRS enforcement efforts
have dropped and the sensitive information of American taxpayers is
under constant attack.
How will further budget cuts, including reductions in taxpayer
services (particularly in rural areas), improve the IRS experience for
taxpayers in Vermont?
Answer. The IRS provides service through a variety of channels,
which are funded through two different accounts. The Taxpayer Services
account funds taxpayer services provided through toll-free phone lines,
walk-in assistance at Taxpayer Assistance Centers, and correspondence.
The Operations Support account funds the systems that support taxpayer
services, a growing range of online taxpayer services, and web-based
self-assistance tools. The 2019 budget includes funding for taxpayer
services as well as the underlying systems and new tools and technology
which enable taxpayers to conveniently and securely engage with us
anytime and anyplace--similar to any other financial institution.
Question. Rural areas like Vermont have unique challenges when it
comes to providing taxpayer services, which is why closing Taxpayer
Assistance Centers (TACs) is so problematic. Attempting to replace in-
person visits with online services doesn't help Vermonters who lack
broadband service. Replacing these visits with phone calls only helps
if the IRS sets a target response rate that aims to serve everyone who
makes a call.
What consideration has the IRS given to the impact of TAC closures
in rural areas that lack access to broadband?
Answer. We recognize that our obligation to serve all taxpayers
requires the IRS to provide multiple ways to get assistance. The IRS is
committed to finding ways to ensure all taxpayers have convenient and
efficient service options. We will always provide service options that
are alternatives to the Internet, including face-to-face and telephone
service options. The IRS makes decisions about location and staffing of
TACs after evaluating population covered, distance between the TACs,
services most frequently requested in the area, cost, and availability
of alternative services, including services through our trusted
partners. Toll-free phone lines continue to be the number one choice
for getting assistance with account and tax law questions. The IRS
answered more than 21.4 million calls this fiscal year through July.
To continue providing face-to-face services outside of the
traditional TAC model, the IRS has been exploring various options. For
example, as of August 21, 2018, we have 38 partner cities that host the
IRS Virtual Service Delivery technology. This technology enables
taxpayers to receive assistance from TAC employees in another
geographic area of the country via an IRS computer and high-resolution
video. Thus, the IRS is able to maintain virtual face-to-face services
without placing any technology demands on taxpayers. Additionally, the
IRS partnered with the Social Security Administration (SSA) to pilot a
program that co-locates IRS TAC employees within SSA office space.
These collaborations provide additional service channels in geographic
locations without a TAC.
Additionally, the IRS continues to look for innovative ways of
providing taxpayer services for taxpayers without broadband. For
example, the IRS redesigned IRS.gov, making it mobile friendly. This
means the site will resize and adapt based on the screen size or the
type of device used, including a smartphone or tablet. Taxpayers can
now use IRS.gov on their mobile devices, without needing access to
broadband. Another example is the IRS2Go App, which is the official IRS
smartphone application compatible with Apple and Android mobile
devices. Taxpayers don't need a computer or broadband to check their
refund status, make a payment, find free tax preparation assistance,
sign up for helpful tax tips, and more. IRS2Go is available in both
English and Spanish. In addition, we offer 100 commonly used
Instructions and Publications in eBook format. IRS eBooks for mobile
devices are free and are provided in the ePub format.
Question. According to the Identity Theft Resource Center, there
were a record-high 1,579 data breaches in 2017, compromising nearly 158
million Social Security numbers. The massive Equifax data breach
impacted as many as 147.9 million Americans and exposed personally
identifiable information that scammers can use to file fraudulent tax
returns. It is clear that the number of data breaches is growing rather
than shrinking.
What steps has the IRS taken to protect taxpayers in the wake of
the Equifax data breach?
Answer. We have taken significant steps in recent years to
strengthen our information technology systems to protect taxpayers
against identity theft and refund fraud. As part of our Security Summit
partnership with State tax administrators and the private sector tax
community, we have added new protections for electronically engaging
with the IRS, including greater authentication measures and fraud
detection filters for verifying legitimate tax filers and detecting
identity theft tax returns. These additional fraud detection filters
and cross-checks make it harder for fraudsters to obtain fraudulent tax
refunds, protecting taxpayers and revenue loss. We specifically
designed these safety measures to work in the environment of large-
scale data breaches, such as Equifax, where criminals obtained basic
information such as names and Social Security numbers.
As it relates to the Equifax data breach specifically, we took
immediate action to understand and evaluate the impact of the breach.
Immediately upon notification, we conducted a comprehensive internal
review and performed an on-site inspection at the Equifax facility. The
on-site inspection confirmed that no IRS data was compromised.
Additionally, in our continued efforts to combat cyber fraud and
protect taxpayer data, we have seen no indications of tax fraud from
information exposed in the Equifax data breach. We will continue to
actively and closely monitor the situation.
Question. Does the IRS budget request take into account the
potential for future spikes in data breaches?
Answer. Yes. The 2019 budget includes a $181 million initiative
that would strengthen cyber security, provide higher levels of security
for taxpayer data (improved identity assurance and authorization) and
help maintain the currency of the agency's hardware and software, our
most significant operating risk. Adequate funding for information
technology operations is one of IRS's most critical needs.
Question. During the Obama administration, Republicans attacked the
IRS for what they perceived as politicized behavior by its leadership.
While I believe these attacks were overblown, there is no question that
it is important to ensure that the IRS is independent from political
concerns. You currently serve two roles in the Trump administration,
including a policy role at the Treasury Department that may require you
to take political considerations into account.
What assurances can you give this Committee that you are serving as
Acting IRS Commissioner in a manner that is independent from political
considerations?
Answer. I can assure you that as Acting IRS Commissioner, I am
deeply committed to being independent in working to accomplish the
mission of my organization, which is to provide America's taxpayers top
quality service by helping them understand and meet their tax
responsibilities and by applying the tax law with integrity and
fairness to all.
Question. Do you believe you can adequately shield IRS employees
from political pressure given your dual role in the administration?
Answer. Yes. The IRS career employees provide high quality service
to all American taxpayers on a fair and impartial basis, in an
environment free of fear of retribution, retaliation or political
pressure.
Question. Since becoming Acting IRS Commissioner, have you ever
personally briefed or met with President Trump? If so, how many times?
Answer. I have not personally briefed President Trump in my role as
Acting IRS Commissioner.
______
Question Submitted by Senator Chris Van Hollen
Question. During the hearing, you testified that you were unaware
of any detailed estimate performed by the Treasury Department for the
impact of the new tax law on the debt, despite the Treasury Secretary's
frequent claims that the tax law would pay for itself with economic
growth. You further testified that, to your knowledge, the only
analysis regarding this issue that has been ``publicly released'' was a
one-page document that simply assumed higher economic growth without
any analysis showing that the tax law would actually produce such
growth. You later stated, however, that detailed analysis showing that
the tax law would pay for itself may exist, but that you are, ``just
not aware of it at the Treasury Department.''
If any detailed analysis exists to show how the new tax law will
pay for itself with economic growth, at the Treasury Department or
elsewhere, please provide that analysis.
Answer. For additional analysis on this topic from the
administration, we would refer you to the detailed report published by
the Council of Economic Advisors in October 2017 attached, and also
available at: https://www.whitehouse.gov/sites/whitehouse.gov/files/
documents/Tax%20Reform%20and%20Wages.pdf).
ATTACHMENT
(Available at: https://www.whitehouse.gov/sites/whitehouse.gov/files/
documents/Tax%20Reform%20and%20Wages.pdf)
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
SUBCOMMITTEE RECESS
The subcommittee hearing is hereby adjourned.
[Whereupon, at 11:54 a.m., Tuesday, May 22, the
subcommittee was recessed, to reconvene subject to the call of
the Chair.]
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