Nov. 3, 2015 Washington Thank you for that warm welcome. I’m delighted to join you again at your National Tax Conference, and I appreciate the opportunity for a return engagement. It’s hard to believe it’s been a year since I spoke to this group for the first time as IRS Commissioner. Much has happened over the past year, and much has changed. One thing that hasn’t changed is my admiration for everything tax professionals do to help maintain our tax system. The critical role played by tax professionals was never more apparent than during this past filing season. Despite many challenges, the processing of tax returns went very smoothly for the vast majority of taxpayers. This was due in no small part to the important work done by everyone in this room to help people file their taxes accurately and on time. I’ll have more to say on the filing season, and the problems we had with taxpayer service, in a moment. For now I want to thank you for all you do, year in and year out, in support of the taxpaying public. A year ago when I spoke to this group, I said the biggest challenge facing the IRS was its budget situation. I warned that if our budget was reduced below the Fiscal Year 2014 level of $11.3 billion, we would find it harder to fulfill our goals for both taxpayer service and enforcement. Since then, our situation has gotten worse. The IRS’s budget was cut another $350 million for Fiscal 2015, so we operated on just $10.9 billion last year. That brings the total for budget reductions over the last five years to $1.2 billion. The IRS is now at its lowest level of funding since 2008. But if you adjust for inflation, our budget is now comparable to where we were in 1998. The IRS had already spent several years working to reduce costs and find efficiencies in our operations, which included cutting our workforce through attrition by about 15,000 full-time employees. But there is a limit to how much we can do to find efficiencies. In 2015, we reached the point of having to make very critical performance tradeoffs. There was simply no way around the severity of these budget cuts without taking difficult steps, which have had negative impacts on service, enforcement and information technology. Take taxpayer service. A moment ago I said the 2015 filing season went very smoothly in terms of processing returns. True enough, but for taxpayers or preparers who needed our help during the filing season, it was a completely different story. The level of service we were able to provide, both on the phone and in person, was far worse than anyone would want. Taxpayers who called the IRS had long wait times on the phones. On bad days, fewer than 40 percent of calls were able to reach a live assistor, and that was after a 30-minute wait or longer. And taxpayers who needed in–person help at IRS Taxpayer Assistance Centers often waited in very long lines just to get in the door. These problems did not end with the filing season. Callers have continued to experience long wait times on the phones, and we are still getting reports of long lines at TACs in some locations. This unacceptable level of service is a problem for practitioners as well, especially as it relates to the Practitioner Priority Line. The waits for practitioners on this line have rivaled those for the regular taxpayer help lines. Of course, this is unacceptable to all of us. Tax practitioners interact with the IRS every day, and you need our assistance and expertise to properly represent your clients and help them fulfill their tax obligations. Along with taxpayer service, our compliance programs have suffered as well. Consider that the 15,000 full-time employees we have lost since 2010 include 5,000 key enforcement personnel. These are the people who audit returns, perform collection activities and investigate tax fraud and other crimes. We are especially concerned about the effect that the reduction in our workforce has had on audits. The IRS completed about 1.2 million individual audits in Fiscal 2015. That’s 13,700 fewer than the previous year. Even more disturbing, the decline in audits in 2015 was not a one-year aberration. The number for 2015 was 350,000 below five years ago. That’s a drop of 22 percent, and corresponds exactly to the number of revenue agents, which is also down 22 percent since 2010. During that same period, the number of income tax returns filed by individuals topped 146 million, an increase of almost 3 percent from 2010. Not surprisingly, we’re seeing clear evidence of a longstanding decline in revenue coming from audits. Between 2005 and 2010, the revenue generated from audits averaged $14.7 billion annually. But since 2010, it has averaged only $10.5 billion a year, which is a drop of nearly 30 percent, and translates to more than $20 billion in uncollected revenue over the past five years. These numbers show that when you have fewer employees doing compliance work, you end up leaving tax revenue on the table. In cutting the IRS budget, the government is forgoing billions just to achieve budget savings of a few hundred million dollars, since we estimate that every $1 invested in the IRS produces $4 in revenue. Some estimates are even higher. No one in all my hearings and private meetings on Capitol Hill has ever disagreed with our assertion that if you give us $1, you will get at least $4 back. Nonetheless, the IRS’s budget continues to be cut. The risk here is not just about dollars and cents. Taxpayer service and enforcement need to be viewed as two sides of the same compliance coin, because our system is built on the notion of voluntary compliance. If people think they’re not going to get caught if they cheat, or they’re just fed up because they can’t get the help they need from us to file their taxes, the system will be put at risk, and voluntary compliance is likely to suffer. Consider that a one-percent decline in the compliance rate translates into $30 billion in lost revenue for the government. A third area of concern in regard to our funding relates to information technology. Thanks to financial support from Congress years ago, the IRS made great strides in modernizing its systems. But because of the recent restrictions on our funding, the IRS has been forced to delay critical projects in the IT area. Despite more than a decade of upgrades to the agency’s core business systems, we still have very old technology operating alongside our more modern systems. Plus, we still have software applications that were running 50 years ago. Limited resources for both taxpayer services and IT investments have also hurt our ability to do more to combat stolen identity refund fraud and assist victims, and the same is true for cybersecurity. While we continue to invest in these areas, our investments have not been up to the level needed to ensure we’re doing everything possible to thwart cybercrime and protect taxpayer data. This is especially important in light of the plans I described in my speech to this group last year for a more comprehensive online filing experience for taxpayers. I remain hopeful that Congress will realize our need for increased funding. I believe the problem we had earlier this year with our Get Transcript online application has helped make that case. In my opinion, it was an important reminder to Congress that the IRS needs adequate resources in order to properly protect taxpayer information and combat cybercrime. I also hope Congress will understand the only way for taxpayer service to improve in the short run is for us to have the additional funding needed to hire the people necessary to answer the phones in a timely way. In the long run, this funding will also allow us to progress toward the improved online filing experienced I mentioned a moment ago. That in turn would move more taxpayers away from calls and in-person visits and help save agency resources. The ultimate irony of our funding situation is that, while Congress keeps cutting our budget, we continue to be given new legislative responsibilities. As this group well knows, we have spent significant time and resources over the last several years implementing the tax-related provisions of the Affordable Care Act. This mandate came without a dime of additional funding. It meant that we had to take anywhere from $300 million to $450 million each year from other critical needs to meet this statutory mandate. Another good example is the Foreign Account Tax Compliance Act, or FATCA. Although we received a small amount of funding for FATCA, we have still spent significant time and resources on implementation for a number of years. As part of that work, we are now in the process of beginning the exchange of significant volumes of information with countries around the world. Yet another good example of a legislative mandate came last December. At the same time Congress was cutting our budget by $350 million, it also enacted the Achieving a Better Life Experience, or ABLE, Act, along with a new certification requirement for Professional Employer Organizations. Both had to be accomplished without any additional funding, and on a very tight timeframe. In addition, earlier this year Congress reauthorized the Health Coverage Tax Credit, which had expired at the end of 2013. After winding down that program, we now have to implement it all over again. As I have said many times, we have no choice but to do statutory mandates. But when those mandates are unfunded, implementation comes at the expense of taxpayer service and enforcement. Given the situation I just described, any decision by Congress to cut funding levels further would make matters even worse. For 2016, the House originally proposed reducing our budget by another $838 million, and the Senate proposed a $470 million cut. Either funding level, coming on top of five consecutive years of cuts to the IRS budget, would have devastating effects on taxpayers and our tax system. The IRS would be forced to reduce its workforce by several thousand more full-time employees. That means still fewer workers to answer taxpayer calls and letters, help identity-theft victims, conduct audits, collect revenue, and maintain and improve our IT systems. At this point, more than a month into the fiscal year, we’re still operating under a temporary funding bill for 2016. The budget deal that was recently announced allows for an overall increase for the government for 2016 but doesn’t set individual agency levels. We hope that when these levels are set, the IRS will be one of the agencies that receives an increase. It’s clear that even holding us constant at last year’s level would further harm our ability to function effectively, since we have to absorb the government-wide pay raise and inflationary costs. We will certainly continue to play the hand we’re dealt as we’ve always done, but the number of cards in that hand is getting smaller and smaller. While the budget is certainly our number-one challenge, another major challenge facing the IRS and the entire tax community is the need to improve our efforts to protect taxpayer information and combat stolen identity refund fraud. We formed the Security Summit group in March, with an unprecedented sit-down meeting with the states and leaders in the tax industry. That meeting led to a remarkable, ongoing collaborative effort that holds short-term and long-term promise to better protect the nation’s taxpayers. I’m delighted to see how united this group has been. We’ve even added a few additional members recently, so we now have 20 major players in the tax and financial industries working with us on this effort. This is significant, because the Security Summit group now covers virtually the entire population of taxpayers who e-file their tax returns. Just two weeks ago, the group announced it is on track to fulfill the goal of having new protections in place by the time taxpayers have to file tax returns in 2016. Although we’re still a few months away from W-2s going out to taxpayers, we want everyone to know they can expect more protections than ever when they file their taxes next year. For the upcoming filing season, we have been focusing on a two-pronged approach. This involves both improving taxpayer authentication on the front end, and obtaining more matching data so we can make our fraud filters more effective at identifying and stopping false returns. Working together – the states, industry and the IRS – we came up with more than 20 data components that we can collect and share with each other when a return is filed. This data – which is largely invisible to the taxpayer as their return is filed – will shine new light on potentially fraudulent returns. Along with this data sharing, we’ll also continue to use one of our most powerful weapons against fraud, and that is our Return Review Program. This is a relatively new and sophisticated fraud detection system designed specifically to help protect taxpayers. The bottom line here is that we are breaking new ground in the battle against refund fraud caused by identity theft. And that’s good news for taxpayers, tax professionals and the entire tax system. But we need to do more, and we will. So you will continue hearing more from the Security Summit group as we make further progress going forward. Before leaving this subject, I just want to remind everyone how critical it is for all of us to work together to combat stolen identity refund fraud. This is not just a problem for the IRS. It touches every segment of the tax community. Given the almost unimaginable amount of personal data that organized crime syndicates have been able to collect, it’s safe to say this is a problem for everyone. And the only hope we have of stopping these criminals is through our collaborative efforts. One more critical challenge, for the IRS and for the tax community, is the upcoming filing season. It promises to be another complicated filing season, and not just because of our budget situation. Along with protecting against stolen identity refund fraud, our efforts to prepare for the upcoming filing season once again involve the Affordable Care Act. We are preparing our systems for additional ACA changes that took effect this year. One is a reporting requirement that applies to health coverage providers and certain large employers. Also taking effect for 2015 is the employer shared responsibility provision. Certain large employers will owe a shared responsibility payment if they do not offer adequate, affordable coverage to their full-time employees and at least one of those employees receives the premium tax credit. Another concern we have about the upcoming filing season involves the possibility of late tax legislation. As you all remember, we had this same concern last year. Once again, Congress has been working on legislation to extend a group of expired tax provisions, but it has not completed action yet. The uncertainty we face over the extenders legislation raises operational and compliance risks for the IRS in its administration of the tax law and delivery of the filing season. This uncertainty imposes stress, not only on the IRS, but also on the entire tax community, including everyone in this room. If this uncertainty persists into December, we could be forced to postpone the opening of the 2016 filing season. This would delay the start of processing of tax refunds for millions of taxpayers. It’s also important for lawmakers to understand what the effect would be if they made any substantive changes to tax provisions that are extended, or decided to approve any new tax provisions. We would need to reprogram our systems and make processing changes that would result in delays. So I will continue to urge members of Congress not to let this uncertainty drag on. We believe it is critical for Congress to make a decision one way or another on the extenders legislation no later than the end of November in order to ensure there are no disruptions to the upcoming filing season. As you can see, there is no end to interesting challenges for the IRS. Amid these challenges, I continue to be impressed by the energy and enthusiasm of our workforce. I’m amazed at their continued commitment to serving taxpayers, despite everything that has gone on at the agency, and everything that has happened to federal employees, over the last few years. I’m almost at the midway point of my four years as IRS Commissioner. I continue to be excited and proud to lead this great institution, and I’m looking forward to the second half of my term. I took this job nearly two years ago because I understand the critical role the IRS plays in the lives of taxpayers and in the collection of the revenues that fund the government. I know I speak for the thousands of dedicated employees of the IRS when I say that we are committed to continuing to do all we can to build for the future, in the interest of serving the American taxpayer. Thank you for letting me spend this time with you today. I would be happy to take questions in the time we have left.