Transcripts For CSPAN Capitol Hill Hearings 20130522

>> after multiple long markup setups, they pass the 13-5 ohion bill by votes. it goes to the senate floor. republican leader said he would not try to block immigration reform from reaching the floor despite the opposition of some conservative leaders. i had the final vote is the final discussion was on the amendment by patrick leahy which would allow gay americans to sponsor their spouses for green cards. lakey with the drawing that at the very end after the debate. withdrawing that at the very end after the debate. marco rubio said they will not support the gang of eight compromise if the amendment would include that. .he final vote was 13-five lots of free on twitter. if equality threatens your coalition, maybe you are not a real coalition. matt murphy tweeted that the gang of eight posted will rights for all. christopher edwards saying having my rights up for a vote like this actually has me in tears. i feel invisible. more.tter for we will bring you the senate finance committee on the targeting of tea party groups. the house oversight and government reform committee will cause officials about that. they will hear from former commissioner. she is scheduled to appear. she is planning to invoke her fifth amendment rights. live coverage at 9:30 p.m. eastern. ,ednesday on washington journal will start off with the latest into the irs targeting groups. it will be mark meadows of south carolina. the national resources defense council talks about a bill coming up on the floor tomorrow which would expedite the process for the excel pipeline. -- xl pipeline. "bloombergs of ," and his cover story. that is tomorrow on "washington journal." thehe capitol today lima flag came to half-staff in memory of those killed in the oklahoma tornado. it will remain at half staff through wednesday. president obama address the issue and gave his condolences at the white house. >> good morning, everybody. as we all know by now lula a series of storms swept through the plains yesterday and one of the most destructive for nato's in history. it sliced -- one of the most destructive storms in town. neighborhoods were destroyed. dozens of people lost their lives. many more were injured. among the victims were young children. theng to take shelter in safest place they knew -- their school. our prayers are with the people of oklahoma today. our gratitude is with the teachers who gave their all to shield their children with the ,eighbors, first responders and personnel who raised to help as soon as the tornado passed. who searchedhose for survivors through the night. focusation, our full right now is on the urgent work of rescue and the hard work of recovery and rebuilding the lives ahead. yesterday, i spoke with governor fallin to make it clear to oklahoma that they would have all the resources that they need at their disposal. ast night,, i issued declaration to expedite those resources to support the governor's team and the immediate response and to offer direct assistance to folks would've suffered a loss. i just spoke with mayor lewis , oklahoma to ensure he is getting everything he needs. i met with secretary napolitano this morning and my homeland security adviser to underscore that. oklahoma needs to get everything it needs right away. the fema administrator craig few fugate on his way as -- as we speak. the state already was facing the first wave of deadly tornadoes. fema activated urban search and rescue teams from texas, nebraska, and tennessee to assist and the ongoing search and rescue efforts and a mobile response unit to boost communication and logistical support. the people of moore should know that there country will remain on the ground for them, beside them as long as it takes. their homes and schools to rebuild and businesses to reopen. their parents to console and first responders to respond. and frightened children who will need our continued love and attention. there are empty spaces where there used to be living rooms and bedrooms and classrooms. and time, we are going to need -- in time, we are going to need to fill it with laughter and community. we do not know the full extent of the damage from this week's storm. we do not know the human and economic losses that may have occurred. we know that severe rumbling of whether -- bad weather continues and we are preparing for a hurricane season to begin next week. but, if there is hope to hold oklahoma butt in around the country is the knowledge that the good people aree and in oklahoma better prepared for this type of storm than most. and what they can be certain of is americans from every corner of this country will be right there with them opening our homes, our hearts to those in need. we are a country that stand with our fellow citizens as long as it takes. we have seen that in joplin. we saw that in boston. oft is what the people oklahoma or going to need from us right now. for those of you who want to help, you can go online right now to the american red cross which is already on the ground in moore. we have seen the university of oklahoma who said they will provide housing. we have seen local churches opened their doors and wallets. the people of joplin dispatched a team to help the people of moore. for all of those who have been affected, we recognize that you face a long road ahead. in some cases, there will be a normals grief -- enormous grief that will be absorbed. but you will not travel that path along. and oury our faith faith in one another. our prayers are with the people of oklahoma today. will back up the prayers wicked deeds as long as it takes -- with deeds as long as it takes. thank you. >> president obama from 10:00 eastern on monday night, he signed a disaster declaration for oklahoma clearing the way for federal aid. today he just paged craig fugate to the region to court and eight. administrator fugate and governor fallin divided a situation around moore, oklahoma. homeland security secretary janet napolitano also scheduled to be in oklahoma tomorrow to inspect the damage. ,oming up tonight on c-span senate finance committee on the irs targeting of conservative groups. treasury secretary jack lew testifies about to be frank regulation law. on thegs institute implementation of the affordable care act. former irs commissioner shulman express regret that the agency singled out conserving groups. mr. shuman led the irs from 2008-two thousand 12. he testified in a sent finance hearing. treasury inspector general j. russell george. this panel is two hours and 15 minutes. >> come to order. before we began, i am confident i can speak for every member to thoughts and prayers to the people of oklahoma. we'll stand with courageous town obamare and the people of as they come together to face this tragedy. -- people of oklahoma as they come together to face this tragedy. we are all together. we all shared their grief. adlai stevenson once said, i am "oted amount "-- quoting now it depends for its success and liability of the good judgment of so many of us." these words are etched in granite at the irs headquarters just outside of washington dc. a speed to the need of government at all levels -- they speak to the need of government at all levels. that confidence was broken recently by the news that the irs targeting conservative groups seeking tax exempt status. in doing so, the irs abandoned good judgment and lost the public's trust. the american people have every right to be outraged. targeting groups based on their political views is not only inappropriate, it is intolerable. we need to understand how and why this targeting occurred. we need to know who was involved and who was responsible. we need to install new safeguards to ensure it never happens again. the irs is one of the most direct relations with the people of any agency. the a irs employees know where we live, where we work, how many children we have lima and what investments -- we have, and what investments we make. irs employees and place in a position of great trust. they must exercise this trust and a fair and evenhanded manner. abusedes in cincinnati this trust. the treasury and inspector general report found employees target groups with names ," andning "tea party "patriot." inspector general's report found that the tax-exempt unit was a bureaucratic mess. employees were a direct about tax laws and defiant other supervisors and blind to impropriety. this is unacceptable. but inspector general report raises many an answer questions. 298report examined applications. the cincinnati office of thosed some applications using screening terms. what was the nature of the other 202 applications? are they filed by liberal groups or moderate groups? we cannot measure the full impact without knowing the nature of these additional applications. who is responsible? we know of officials tried to stop this behavior. who in cincinnati perpetuated his behavior? twoperson, to person? -- person? we do not know. we have launched an investigation. we've requested additional documents as part of our inquiry. will follow the fax and see where they take us. this specter general's report shows the need for congress and this commission to overhaul tax code. of the come a long way tariff act of 1894. when congress first created exemptions for educational organizations. countlessare political organizations that both end of the spectrum masquerading as social welfare groups. these groups 501(c)(4) seek status. it allows them to keep the identity of their donors secret. data collected by opensecrets.org spend billions of dollars in the 2012 election. none of the donors behind these campaigns were disclosed. this was all secret money. in 2010, i wrote a letter to the irs asking for them to look at all major tax-exempt organizations. , i asked this question. if the tax code being used to limit transparency of our elections that are the bedrock of our democracy? this letter was part of the long line of investigation that the committee has conducted into tax-exempt organizations. in 2006, we investigated the office of jack abramoff to use to-texas -- tax-exempt lobby. we investigated religious organizations. what's the controversy clears, we to investigate the root of this. or the the tax code complex regulations that govern provide clear standards for how much political organization a group can undertake. the code does not provide a clear definition of what qualifies for political activity. the statute provides one definition of 501(c)(4). the statute says earnings must be devoted to charitable, educational " a recreational -- educational or recreational activities. on the other hand, it can be defined as primarily, is closely engaged in the common good of the people of the community. how does the irs justify a regulation that would weaken the standard from exclusively to primarily? these ambiguities may have contributed to be unacceptable steps we are examining here today. america expects irs to do its job. the irs cannot pick one group for closer examination and give others a free pass. it is what they did. as adlai stevenson said mama the success of our government -- said, the success of our government depends on so many. it is clear, the irs used poor judgment. today, they will have to answer for it. >> thank you, mr. chairman. before i begin, i would like to take a moment that might out and prayers are with the good people of oklahoma who have been impacted by the devastating tornadoes. in particular, my prayers go to those who lost loved ones. it was a really catastrophic storm. i hope they will be up to deal with this in every good way. thank you for convening this important come maybe -- committee. we agree. despite some claims to the contrary, the irs targeting is a scandal. it undermines-- the americans trust that the government will enforce the law without regard to political beliefs or party affiliation. make no mistake, this hearing and investigation that will follow are critical to this country. over the weekend, a senior white house official said republicans are on a "partisan fishing expedition." we are conducting "trunk -- trumped up hearings." i hope they are not referring to what this committee is doing. this would be very disconcerting particularly after last week with the president said he was committed with working with congress to find out the truth. these hearings are not a sideshow to detract from the current agenda. i hope the president and his administration are not attempted to distract us from getting to the bottom of this. we will pursue this matter where ever it leads. internal revenue service is one the most powerful. everyone knows that. it has a broader reach than almost any other government agency or entity. many law-abiding citizens are already afraid of the irs. , thebeing the case american people have the right to expect that the irs will exercise its authority in a neutral, nonbiased way. we need to work together to make sure it precisely what it does. any hint of political bias or partisanship that brs needs to beat -- of the irs needs to be taken seriously. there appears to have been more than a hit a by -- a hint of bias. we have report from the inspector general indicating that the use of inappropriate criteria was all too common in the evaluation of applications. so far lima here is what we know. we know that between 2010 and 2012 month concerned groups applying were targeted by the artist and subjected to increased levels of scrutiny. we know these groups were targeted because they had the " or "patriot"ty in their names. they said they wanted to do things like "make america a better place to live." we know these groups were asked invasive questions about their donors. their positions on various issues and the political affiliation of their officers and directors. some of these group's applications were delayed for three years. friendly to the president were promptly approved. beyond theextended processing center in cincinnati. officials and washed in dc were inre at an early stage -- washington were aware at an early stage. offices besides cincinnati scrutinized conservative groups. this problem was not limited to a few employees in cincinnati. june 2012 atby the latest, the number two official was aware there was an ongoing inquiry into these issues. here is what we do not know. we do not know why the target began. we are concerned about the extent to which a senior officials at the irs and department of treasury became aware of these practices and when they found out what they did or did not do to put a stop to them. misled brs -- irs congress when they said no groups were being targeted when we raised this issue with the onecy last year? this is of the most disturbing elements of the story. , i spearheaded letters from republican senators to commit -- to shulman. it had become politicized. i received two different responses. miller was serving as the deputy commissioner. neither of these responses hinted at the possibility that the targeting was going on even though these officials were certainly aware that a number of conservative groups had in fact been targeted. despite efforts in 2012 to find out the ask -- facts, the irs did not come clean until their hand was forced. even then, one of the top officials within the department treasury chose to disclose it had targeted innocent organizations by responding at a press conference. the american people deserve to know the truth about what went on here. they deserve to know why the truth was kept from them for so long. ?ere top irs officials a blind or were they holding out until after the election quick mark -- election? it is not the only problem that needs to be addressed. i am referring to the act that in 2012, 1 of the offices that was targeting concerted group applications also disclosed confidential information about some of the same groups to a left-leaning organization. this revelation comes on the heels of other allegations. confidential information including donor information submitted by conservative nonprofits. we need to look closely at all of these allegations as well. you can see there are a lot of problems at the irs. i am glad that members of both parties have recognized the need to address these issues. to beairman, i am pleased working with you on this investigation. i hope will continue to work to get to the bottom of this. i wanted to ensure our colleagues and the american people we will find out exactly what happened. we'll do everything we can to make sure it does not happen again. the only way to address these issues and to restore the credibility of the irs is to have a full accounting of the tax. -- facts. facts going to learn the of what went on here. today's hearing is the first step in this process. thank you, mr. chairman. >> i would like to welcome our panel witnesses. mr. steven miller, acting commissioner of the internal revenue service. former commissioner of the irs will doug shulman. thank you for coming. i would like for you to stand so i can swear you in. raise your right hand, please. that the testimony you are about to give is the truth, the whole truth, and nothing but the truth so help you god. thank you. , iwith our regular practice will ask each of you to summarize your statements in about five minutes. we'll start with you mr. george. the committee will have a lot of questions. >> thank you, chairman baucus. thank you for the opportunity to discuss a report concerning the internal revenue service treatment of groups applied for tax exempt status. our audit was based that certain groups were treated unfairly. there are three allegation. one that brs targeted specific groups applying for tax-exempt status. they delay the processing of these group applications. brs request -- the irs requested unnecessary information. our review confirmed all of the allegations. inappropriate criteria used by the irs to target tea party and other organizations based on their names and policy positions. the practice started in 2010 and continued until june 2011. the criteria which we obtained from a briefing in june of 2011 weren't the organizations names including the tea party or patriots. whether the organization had policy positions of government spending. did the organization and tend to makede education america a better place to live? where their statements criticizing how the country is being run? these criteria were inappropriate that they do not okasan on text -- they did not focus on tax exempt laws. they may not engage in political intervention which is an action taken against a particular candidate running for office. 501(c)(4) organizations may engage in such activities as long as not their primary activity. employees began selecting tea party organizations for review in early 2012. of irs specialist in cincinnati, ohio were furred to a determination unit to select 298 cases for additional scrutiny. the first time executives from washington became aware in june of 2011 at some executives not aware until april or may. these inappropriate criteria remained in effect for 18 months. after learning of the criteria, the director change them in july of 2011 to remove references from organization names and policy positions only to have stabbed in cincinnati to change the criteria back again -- only to have staff in cincinnati to change the criteria back again. they did not include tea party or other named organizations. it took until 2012 that the criteria was changed to be consistent. the organization selected for review for significant political campaign intervention experience significant delays in the processing of their application. as of 2012, the status for the 296 cases we were able to review were 100 cases had been approved, what a cases were 100 cases were withdrawn. 0 had been denied. some have been in process for over three years without resolution. 30the 108 cases approved, were tea party or patriots is. another troubling aspect we uncovered was the fact that brs request -- irs requested unnecessary information. some had unnecessary questions. we found that staff at the determination unit sent questions with little or no supervise review. they later determined the questions were not needed until media up quark -- media accounts and questions arose. an example of unnecessary information requested with the names of past and future donors. they destroyed the information received from applicants. irslosing, brs -- demonstrated gross negligence. it was substantiated and raises troubling questions about whether irs had effective management. members of the committee, thank you for the opportunity. >> thank you, to george. mr. miller, you are next. >> given time consideration will -- consumers, we were unable to prepare. , i wantg commissioner to apologize on behalf of the internal revenue service for the mistakes we made and the poor service we provided. the affected organizations and the american public deserves better. partisanship or the perception of partisanship has no place at the irs. to determinepear the tax-exempt status of an organization. i do not believe it motivated the people in the report. i have reviewed the report and i believe his conclusions are consistent with that. i think what happened here where -- was foolish mistakes were made by people trying to be more efficient. the listing described while intolerable was a mistake and not an act of partisanship. the agency is move forward. -- is moving forward. correct.rking to and to make sure it never happens again. management will take appropriate action with respect to those responsible. i would be happy to answer any questions you may have. >> you might pull the microphone a little closer to you. that helps. chairman baucus, ranking member hatch, thank you for the opportunity to appear before the committee to talk about the inspector general's report. i was commissioner of the internal revenue service from 2008 two 2012. during that time, that agency was called upon to tackle a number of challenges. that agency played a key role in stimulus and recovery efforts during the economic downturn. aggressively addressed offshore tax evasion and completed a major modernization of its core technology database. it continued to deliver on its core mission of collecting the revenue to fund the government. the irs is a major operation with more than 90,000 employees who work on issues ranging from individual tax returns to building complex technology to ensuring compliance with businesses to educating the public about tax law changes to administering a very complex set of rules governing tax-exempt organizations. i have recently read the treasury and spectral -- inspector general's report. i was dismayed and saddened to read that inspector general conclusion that action had been taken to give the appearance that the surface was not acting -- service was not acting as it should be as a nonpolitical, nonpartisan agency. the irs serves a critical function for our nation. it collects the taxes necessary to run the government. because of this important responsibility, brs must administer -- the irs must administer and be perceived to administer our tax laws fairly and impartially. given the challenges that the agency faces, it does its job in an admirable way. the great majority of the time. men and women of the irs are hard-working, honest public servants. while at the inspector general's report did not indicate that if there were any political the actionsnvolved, outlined in the report have justifiably led to questions about the fairness of the approach taken here. the effect has been bad for the agency and bad for the american taxpayer. am happy to answer any questions. but -- >> thank you. i have a couple of questions. that headquarters shut down the use of political terms such as "tea party" and other terms we learned about in june of 2011. why were people not fired or transferred? more significant action taken then do not do this? , how comeoutrageous more definitive action was not taken? >> sorry. i was not aware at the time that it happened. i became aware of this in may of 2012. >> mr. shulman, you were around during this time but mark -- time? >> and 2011, i was not aware of this. >> who was aware of this? somebody was aware obviously. thate report indicates organizations new. -- knew. you would have to ask the inspector general. -- you werecting the head of the irs. who did know? you read the report. you were acting commissioner. come on. if you do not know it, somebody is not doing his job. actionn't were direct taken? when these terms were determined right away and the arts a second chance. -- irs had a second chance. if it started up again, they stopped and went back again to old habits. i cannot believe it frankly. more firm action not taken by people at the top? it is outrageous. it is unacceptable conduct. mr. miller? -- sir,, sir bouma out i was unaware. when i was aware, i took action. >> what action did you take? after sending a group to take a look. it reported to make in may of 2012. and of what had transpired will shown in the ig report that the cases were languishing. that wereve gone out much more broad than they should be. at that point, we had taken care of the letters because of that is how we do something was going on i asked for a review. we trained our folks who held workshops to ensure they were going to do the work well. we took a look at the cases. i asked for the cases to be looked at in the group in a fashion so those that look like they should be approved should be approved. those that needed further development got that development. we took action on that. thatat time, i was aware another group is working on this. i took intermedia action. he transferred and reassigned -- we transferred and reassigned a person involved with the letters. the present i believed to be responsible for the listing will at that time -- listing, at that time -- >> i appreciate that. we'll try to get the answers to some of the questions. we are not getting to definitive answers at this time. how did this culture -- who created this culture of indifference to the american people and such a grace -- aggressive behavior to target groups but mark -- groups? what did you do to correct that culture? i will start with you mr. shulman. >> during my time at the arts -- irs, i believe an irs needed that the to be nonpartisan -- >> how did it happen? >> there are a set of rules built into the system. that the of people vast majority of the are as employees understand -- irs employees understand -- >> my time has expired. bottom line, how did this happen? >> i cannot say that i know the answer. becauseave some sense you are the commissioner for number of years. out of six months office. when i left, the ig was looking to gather all of the tax. i've had the benefit of for reading the report. that is a full accounting of facts. i cannot answer that question. >> you have time to think about this. >> thank you, mr. chairman. , mywo different occasions colleagues and i wrote letters to you mr. shulman. and the first letter of 2012, we asked about selective enforcement by brs -- irs. we wrote to request more information about the miss practice of requesting confidential donor information. " it iste in my letter, critical that the public has confidence without regard to politics of any kind." the responses i received from the irs were anything but transparent. and said inonded both responses were signed by you. these responses did not irs had andt the probably targeted tea party or other conservative organizations or improperly asked for coffee digital donor lists. i asked to put all 4 letters and. the irs was aware that they had targeted tea party and other organizations. we know by june 2011 at the others were where there was a be on the lookout listing regarding tea party and other organizations. we note that in may of 2012 lumumba you were briefed -- 2012, you were briefed about these actions. there was absolutely no targeting." to this day you have not corrected your testimony, even though the irs was targeted tea party organizations. why did you not come forward before today to correct the record and knowledge errors in a screaming occurring in the irs, the organization you headed? >> let me answer a few things. the full set of facts around the circumstances came out last week in the report which i read. until that point, i do not have a full set of facts. .> you knew what was going on how come you did not let us know when we submitted letters? >> what i knew was not the full set of facts. what i knew sometime in the spring of 2012 was that there was a list that was being used. word tea party was on the list. i did not know what other words were on the list. i did not know the scope and severity of this. that not know the groups were pulled it would have been pulled in any way. i thought it was proper step. that the matter is being looked at by the inspector general. >> we sent you letters. with aired about this number of senators on this letter. you should have corrected the record. you should have done it long before today. that is the point i am making. is onller, your signature both the responses i i received from the irs. nowhere did you indicate that you knew the irs was improperly selecting tea party organizations for extra scrutiny. nowhere in your responses did you indicate that the irs was asking improper questions about donor contributions. you just sat on that knowledge. mr. george stated that he briefed you and 2012 by an audit. we knew you were aware of it. at the time, you responded. you did not mention any of this in my responses. that is a lie by omission. there is no question in my mind. it is a lie by omission. you kept it from people who have the obligation to oversee this matter. on friday, you swore under oath you had told the truth in your prior responses. you said brs had been guilty of horrible customer service. irs we have learned about goes beyond horrible customer service. why did you mislead me and my colleagues? my fellow senators and the american people by failing to tell us what you knew about the subject we were asking about? why didn't you tell us? >> mr. hatch, i did not like. >> what? >> i did not like. >> you should have told us. >> i answered the questions. i answered them truthfully. did i know about the list? yes. we answered those questions. the content of political motivation here, i did not agree with that it may or now. we were not politically motivated or targeting conservative groups. >> what else can you call it? statement was more definitive than the one you gave to the house. let me say this. you knew this was going on. you knew we were concerned. you knew we had written to you. correct thedid not record? we could have solved this problem a long time ago. >>t are your responsibility? i am sorry. >> how come you did not answer our letters? >> i believe that i did answer them and truthfully. >> thank you. we are going down the list. senator? >> thank you. this is an important hearing. , mr. miller,ay you are saying this is a mistake. we would suggest a serious mistake. what i do not understand is how again, something can start in thatand a not until 2011 the director of the exempt organization learned of the practice. it was not until january of 2012 that they set up new criteria which was still inappropriate. and it was not until four months after that the cincinnati office finally started doing the right criteria. it shulman and mr. miller, took almost two years. almost two years for the irs to fix the problem including 11 months after it came to the attention of the division head. how in the world could it have taken so long for senior people to find the problem, fix the problem, and was there no ongoing oversight of employees in cincinnati and what they were doing? mr. shulman, will start with you. >> again, i am not there to ask questions of people when, where, and how. >> we expect you were there. >> i was there. since it came to light, i have not been able to be there and ask questions. let me answer your question. >> why didn't you know when you were there? >> i agree that this is an issue that if someone spotted, they should've ran up the chain -- and they did not. >> mr. miller? >> i will agree. i will not disagree with the activation of bad management. that did happen. i do not want to understate concerns with the list. we should not have done that. we should not have done that. we should be looking at the file and not names and the position taken on a given topic in terms of how we will people into full development of these cases. it was not elevated. we did not know. >> mr. george lima could you speak -- george, you speak about what your review have revealed about irs management and how that breakdown was possible? and have they done anything to make the unacceptable actions less likely in the future? >> we have not yet completed our analysis of their response to our recommendations lemont we do intend -- replications, we do intend to do so. recommendations, we do intend to do so. they didn't seek clarification from headquarters in washington -- cincinnati did seek clarification from headquarters in washington. is it was aom line breakdown in communication and mismanagement. >> it does sound like the first clarification that received, they took it back and they change again and get something inappropriately. >> there were two aspects. they had not received an answer and eventually did get direction to change the way they were acting. and then lama on their own decided to revert to a slightly different, yet still in the purview way to handle these matters. >> thank you. senator grassley? >> i'm going to direct my question to mr. shulman. directly from iowa. one of my constituents attempted .o establish 501(c)(3) charity irstold my staff that an agent told her your application is ready to go. however, it will not be approved unto you send a letter signed by your entire board under penalty of perjury saying you will not protest at planned parenthood. that is outrageous that that statement would even be made by anybody in the government that somehow you have to compromise your first amendment right. she also received a letter from the irs asking several invasive questions. the government getting involved as somebody having a prayer meeting. it appears the irs offered this group a quid pro quo. you can become a charity if you do not protest in front of a planned parenthood. so you do not have to worry, it -- is an appropriate to offer a quid pro quo in example like this? mr. miller or mr. shulman, either one of you. , no.e answer is >> let's move on. that is the answer you should give. how could you let this happen under your leadership and do either you feel any responsibility or remorse for for treating american citizens this way? >> i started my statement with an apology. i will continue that. i do not know what happened in your given case. i cannot speak to it. i do apologize for the treatment of folks. there are two things that happened with these case. rest, the selection -- first, the selection criteria and it was bad. second, the treatment when they were in the group. that was bad. it was. i do not know if it was this organization, the service that folks got was not the service we should be providing anyone. there is no question about that. >> mr. miller, i wrote a letter raising questions about the spontaneous apology made at the american bar association. lerner said it was spontaneous. you admitted during your irsimony last week that the had planted the question to be asked. you said "it was a prepared q&a." whose idea was it? >> i will take responsibility. now that we had report and we had our response, we got we thought we should be talking about this. we wanted to reach out to the staff. it did not work out. and as you goals you -- >> give us some examples. >> i think that what we try to do was get the apology out, and start the story. the report was coming. we knew that. the report was done. ways and means , ifesented melissa lerner she could comment briefly on the status of the irs investigation into these nonprofits. mr. -- ms. lerner pointed to a questionnaire on a website. she said nothing about pending reports, or the disclosure she made two days later about targeting. as result, representative crowley has said that he feels misled and has called for ms. lerner's resignation. you agree that ms. lerner gave misleading testimony to congress? >> i do not have any knowledge on that. >> has the irs proposed to discipline ms. lerner et al. -- at all? now that allint, of this is coming to light, those discussions are ongoing. i will not be part of those discussions, obviously. >> thank you. >> thank you, mr. chairman. i want to take a different attack. i like to go back to how we got into this mess in the first place. thattatute of course says , c4, theanizations net earnings of which are devoted exclusively to charitable educational or recreational purposes, and then the rule that came along fleshing out the statute talks about promotion of social where fair -- welfare organization operated exclusively for the promotion of social welfare. then a further defines that term, the promotion of social welfare does not include the directory direct participation or intervention in political campaigns. so, i want to get back to the original purpose of the statute as being implemented by the irs. , in the irs, all allow the tax breaks funded basically by the taxpayer on these political campaign expenditures? ?an you shed some light please >> i can start. let me try to restate some pieces of the questions you may be asking. please correct me if i'm not getting it right. there is a question out there that the statute, the chair references the statute talks about exclusively, social welfare, regulation which was promulgated 50 years ago talks about -- >> it uses primarily. then it goes on to say what is promotion of social welfare. this is the rule. it does not include direct or indirect per dissipation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. you will we have seen in the course of the last two campaign cycles is an enormous money running through both through c4 seif organizations -- organizations. wikia valid purposes on behalf of or in in opposition to any candidate for public office, and the intervention in political campaigns. where is the irs in the regulatory process in forcing its rule to stop this in the ,irst place, which if it had would have gotten to the mess that we are in right now? >> there are a couple places where we have to act. , as aan set the context 501(c) four organization, you are permitted to engage in a amount of political campaign activity. you are. as long as it is not social welfare, your primary activity. we have an obligation to look at cases both in the audit stream out there doing this sort of work. or in the determination of a process, which is why we began to centralize these cases. you asked for the genesis of this. .entralization was warranted we have to look. we are obligated under the law to look at what an organization does to grant exemption. the way we centralize was wrong. that goes to the listing that we use. but, we are to look at the amount of political campaign activity that was planned and how authorization operates, and that is what we did in the termination of the process here. >> i would simply say, since we're doing the oversight here, that they rule, i understand the king's english, and it says the promotion of social welfare does not include direct or indirect participation or invention and political intervention and political campaigns. to say interpret that that does allow some intervention in political campaigns is beyond me. if that had been cut off at the pass, we would not be even beginning to these. >> i would like to know that he'll be taking review of the irs oversight of the level of campaign intervention by 501(c) four. >> who will be doing that? what's my organization. -- >> my organization. >> i would say that if we could get the irs to final -- follow the law and the regulation that implemented it, we wouldn't have this problem in the future. >> i think i agree with you. it is complicated. it is unfortunate this issue has not been addressed in the last couple of years. we are going to have to enact some changes in the statute. the irs has to do a better job of following the statue. i personal view is this confusion, this ambiguity has led to part of the problem here. >> i agree. we have to straighten it out. >> next i have roberts. >> thank you. thatening to the responses you have provided, i am reminded ,f one of my granddaughter's when she knows she has done something wrong. she says you can't see me. we can all see what happened. the problem is no one is taking responsibility other than andible consumer service apologies. there is a kansas setting -- saying, never lie and less you have to, and if you do not have a like, stick to the truth. we need some real truth tellers here. facts are stubborn things bring what we have is targeted harassment and abuse of conservative groups. that is what has happened. as we hear daily from others, -- i thinkmply have that is very significant. nothing -- nobody likes to be audited. nobody likes to say they have been audited. especially with what has been going on. what we have on our hands is suppression of the first amendment rights and nobody owning up to it. the back of the matter is the irs has been acting in a politicized manner for at least three years. a top economic adviser doubles -- in order to make a political point. i asked aig for tax administration to response. we never heard back at all. last year, members of this growinge hearing a number of complaints to ask of individuals were being singled out or targeted in the application process. here is the letter. .t is the same letter you will see this. it is 10 pages long. completely silent targeting, but analysis of the law. you knew that targeting was going on. i do not think you do that. that befuddles me as to why anybody in possession like you, or basically, what ever do that. just not respond. you also said that the determinations office was trying to find a new way to process exemption applications. here we have irs officials milling about, doing them best,, need more lawyers, this may have been fully this -- fullest, i find hard to believe that the irs were given free range to set up a list to be on the lookout. there must've been a directive from washington. we need full disclosure of how this happened. there was a news report quoting an anonymous irs employee. have been taking a lot of grief here. accordingly, this quote was attributed to this anonymous irs employee. we have had all the problems with this, we know that it was wrong for a we knew there would be hell to pay. we knew that when it hits the pain, nobody at the top will take the blame. it will slide right to us. i would like to at least have sarahdy, lois lerner, who'll be working for -- affordable care office, joseph grants, a deputy tax commissioner. we are not going to hear from him. he retired. esther miller, you have apologize. the you are leaving. you are six months out, so you can remember. esther wilkins, the chief counselor of the irs. he is not here pretty probably should he here. jacob lew, it went right up there. finally, the white house general counsel. do any of these folks ever say what was going on and take responsibility? i have not seen that. my follow-up question will be in regard of how on our can the iris have a limitation of the affordable care act given the current situation. >> thank you. there is been a lot of discussion about who knew what and when they knew it. , forf the questions i have you mr. george, it seems that there is an argument being made that there was no political motivation in these actions. is that a conclusion that you have reached? >> in the review that we conducted thus far, that is the conclusion that we have reached. >> how do you reach that conclusion? instance, it was as a result of the interviews that were conducted of the people who were most likely involved in the overall master. -- matter. he we directly inquired as to whether or not there was direction from people in washington beyond those who were dry dry clay related to the determinations. there indications to us, this was not done under oath, this was an audit and nine investigation, that they did indicate that a did not -- they did not receive direction from people be on the irs. >> that could be anyone up the chain of the irs? >> it in theory could be. we have no evidence thus far. >> in other words, you have simply the statements of those who were engaging in the conduct saying that they were not politically notated -- motivated. a son that -- based on that, you reached the conclusion there was no motivation. that you haven't found it? >> it is the latter. that we have not found any. it >> it seems to me that it is unbelievable to look at what has happened and say there is no political motivation here. with the an agency power that the internal revenue service has engage in this kind of conduct, and it not be politically motivated? i think that most people in the united states have a very quick and intuitive understanding of the reason that these revelations are so concerning to the country. if you look at the irs, more than perhaps any other agency of government, it has the capacity to be the prosecutor, the judge, the jury, and executioner in ways that can devastate individuals, families, and businesses. americans understand that. to have the investigation reached the conclusion that these kinds of actions were , or a statistical anomaly they just assisted clay came together at the same time, but there was no finding of any kind of political motivation, i think it is almost belong belief -- beyond belief. is there any way that you can conduct further investigations, and perhaps by putting people under oath, identify where the directions name from? ofhave continuous denial responsibility for the policies. those of omitting the policies it wasn't us. we are asked as american people to believe that just out of the ecosphere, the notion to target entities just coalesced and came together? , standardsult practice, of audits that we conducted, there are subsequent investigations. suffice it to say, this matter is not over as far as we're concerned. believe there will be further investigation on this issue? >> there will be continued review by us to read it at least nine investigation, that may be the case. >> thank you. >> thank you. bill called my office and said that the ministry there was fired. he was just a fall guy. from the testimony that we heard earlier, there was disciplinary action taken by the administrator did not know about it. doesn't disciplinary action filter up in these organizations? i got a call from charles of pinedale who had concerns that the charges were being targeted as well. noting the irs had requested membership lists of his church. that seems a bit above and beyond what had ought to be done. doesn't the irs have a policy of subjectenting on issues to an audit prior to the release of the audit? why does the irs feel it is unnecessary to make make such statements days before the report was public to release? why did the irs not shed light on the issue years ago when it became aware of the inappropriate targeting? mr. miller? >> let me correct part of your question. i actually took that disciplinary action in maine of 2012 -- may of 2012. we do have a practice of not talking about investigations or audits. the audit was done at this time mistakenly that we should get in front and apologize, and that was -- and reach out to the hill. that was wrong. we made a mistake. >> i thought that you were not aware of disciplinary action. post on facebook -- does anybody have an answer? therei would recommend, discussions ofia the release of some data to probe public. he can point, i think speak to that better than i. on what senator robert says, mr. george, when you commented to the house ways and means committee last week, you believe the actions were inappropriate if not illegal. do you still believe that is the case, or any of the actions were taken by the irs employees e legal question mark -- illegal? your group conducted an audit, and i investigation. could it in fact have been illegal activity? >> two things. to address mr. miller's point that the matter that you mentioned, the release of taxpayer information could be a which does of criminal associations with it. that is something my organization investigates and takes quite seriously. if we have evidence of such activity, we would refer to prosecutors. i'm otherwise restricted by law from revealing any additional information beyond that. as relates to this matter, the restructuring of 19 any eight -- 1998 provides for the action to be taken if irs employees are guilty of abusing, misusing, among another things, tax information. we are charged with reviewing that. we're doing so. if we determine that something has occurred, we will certainly pass it on in an administrative environment, or a criminal environment pursuant to the act itself. criminal aspects to it. there are certainly quite a few administrative aspects that can be taken. based on that, we thus far have not uncovered any actions that we would deem illegal in this instant matter sir. guess the american people will kind of judge that. it seems again is borderline if it is not illegal. my time is expired. >> thank you. i have several questions for you him mr. shulman. the basic proposition is simple. notwithstanding the troubling and unacceptable conduct of the irs, political organizations do not want to be scrutinized by the government. they shouldn't seek religious like and on the editing -- privileges like anonymity. that is why my hope is that out of this debate will come clear and enforceable rules to treat all political groups equally. with respect to questions, mr. miller and mr. shulman, the s have blurred between political active groups that disclose their donors, those with the 527's, and those who do not. those are the 501(c) fours. it has become apparent that organizations that ought to be 527's are applying for c4 disclosurevoid obligations. that means there is an incentive for people to choose their tax status based on whether they want to hide their donors. my view is that is a legal that congress ought to close. given that to be exempt from federal income tax, action 501(c) four of the code requires nonprofits to operate exclusively for the promotion of social welfare. i question to the two of you, why was this problem not corrected? clarifyor, could you the problem? >> the line is blurred. the as war between the the 527's and the 501(c) fours. the year -- there is an incentive to choose a tax status based on whether they want to hide their donors. you all do not seem to have done anything about it. i want to know why not. melamy state that -- let state that i think the law in the tax exempt area is very complex. >> we understand all that. why didn't you do anything on your watch to correct it? >> let me continue. that theury regulation irs staff in cincinnati was wrestling with our long-standing regulations. 40 years old. i did see that the inspector general in his report recommended that the treasury ought to look at regulations. the chairman said he was going to look at this great all i can hards that this is a very task given to the irs. , which easyirs process tax returns and get billions of dollars refunded, to also have them have this piece of the operation that by the law has to be asking questions about political activities is very difficult. -- ifere i sit, yes congress can help clarify the law, that would be helpful. >> same question. what did you do to correct this problem on your watch? not enough.ut out we get 70,000 applications for exemption a year. the number of those that are c4 's is much less. even those have doubled over the last few years. there is no doubt and that in 2010, when citizens united release this wave of cash am a some of that cash headed for c4 organizations. that is ruben by data -- that is proven by data. that puts pressure on us to take a look. can do allations the politics they want to do. i the one c4 organizations have a limited organization to do politics. it is our obligation to go and look hard and whether they meet those requirements. we would have to talk, and staff will work through the issues in the law. we cannot import batch convert and her position into a 527 organization at this point. >> what troubles me is that on your watch, when the lines are blurring on this disclosure issue, as far as i can tell, you all did not do anything to correct the problem in a meaningful way. i think that is regrettable. let me ask you about another issue going forward. the irs and the inspector general agree on a member of reform proposals. the irs does not support one of the most important -- developing and making public clear guidance for processing potentially political cases. even in the best train doesn't -- in the absence of clear guidelines, the country is in effect less -- let to the winds of the bureaucracy. wouldn't it make sense to have those knowledgeable about political campaigns work with the irs to develop clear and forcible guidelines that are really at the intersection of these two areas? campaign-finance and tax law? would it make sense to get to working together under congressional and public oversight? it sounds reasonable to me. i do not direct with the irs does not. -- doesn't now. -- does now. that was whether there was some sort of guide that we could do to move these cases forward. ,ery concerning those involved these cases are very fact specific. that may not be possible. given all this, -- >> my time is up. the is but a general is right. you can get more expertise of we start bringing in people who are knowledgeable about election law. this is another failure in terms of what the problems are that we are dealing with now. >> in response to the question, frankly i am sure the senator is not comfortable with your answer. i surely am not. i wrote a letter to mr. shulman september 28, 2010 asking you to look into this. a mack truck is being driven through the 501(c) four loophole. the answer we got back from you many months later basically said , and kind ofned looking at it. that is all it says. you are on notice. you did not acknowledge you are on notice. nobody did anything about it. i am disappointed. the next is senator mendez. >> thank you. in your opening statement at the idea that any government agency would use politically charged terms for selective review is truly offensive to our concept of democracy. it is not only unacceptable, but it is appalling. it undermines the very nature of the government and its people that consent by virtue of s institutions it will work anyway that is fair and transparent. i also also broke concerns and i want to follow-up on the two scandals here. one is the management, the failures and the whole process of singling out specific groups. the other is how we take , and thenauthority extrapolate it differently than what the congressman. withd the statute reference to 501(c) four and it says organizations not organized for profit, but operated exclusively for the promotion of social welfare. to stateook that exclusively and turned it if it is from ireland engaged -- primarily engaged in social where far. i sighed over exclusively. we wanted to to limit the scope of who could avail themselves of the benefit of the 501(c) four under the tax code. do you believe that a more literal reading of the statutory language could've taken some of the authority of the subject of scrutiny out of the hands of the irs officials, thus avoiding our mitigating some of the problems that we are talking about here today? >> i will respond record to your question. i just had to acknowledge that the secretary of the treasury has delegated all tax policy questions exclusively to the assistant secretary for tax policy. with that said, the direct issue you raise with me was beyond the scope of this board, but it would seem as if what you are saying would be accurate. that they should have not necessarily taken the interpretation that they did. lex how do you jump from exclusively to primarily? -- >> how do you jump him exclusively to primarily? say a couple of things. one is that as i mentioned, this was a regulation, a treasure regulation that has been in effect for many years. i nohalf of myself, longer -- this was a place only got there. i do not necessarily disagree with you. this is a place that congress should look. from where i sit, the irs is given a very difficult task of trying to go when and figure out. there is enough political -- you can do some political activity, but you cannot do too much. the confusion and breakdown that you saw happen in cincinnati is inexcusable, but i would also suggest that it is our of the very difficult task given to these people. >> it is a task that we should clearly correct if we can't do it. i envision exclusive to mean exclusive not primarily. i have a copy of a august 2012 op-ed by karl rove, which has to be included in the record. 111 million ofly ads were paid by his campaign. with $107.4 million more in ads, or boosting mr. romney humming from outside groups, with crossroads gps, a group he helped found providing over half. i do not mean to single out them as the only bad actor. but this is the nature. there is a reason that you seek a 501(c) four status. , andan hide your donors you also have a tax advantage. otherwise you do not need to seek it. the reason that people come forth, i would like to see what does a cost the american taxpayer in the ranking of all of these 501(c) fours and they are not being produced for social welfare, but they are being used for political adversaries. send a letteran in 2012 to all the inspector general's reminding them that under the inspector general's, it worked -- requires flagrant problems report to congress to the agency heads within seven days. did you receive that letter? did you respond to inform german issa? >> we did receive the letter. wasrman issa's committee the first to actually contact us regarding this matter. through the course of engaging in the review, on occasion we had medications with his staff. >> thank you. >> thank you, mr. chairman. i think we all will agree that we can not allow, tolerate, targeting by clinical views and that we need to make sure that the process is clear to hold those accountable who violated that, and to make sure this is not happen again. having said that, i just want to concur with many of my colleagues on the interpretation of the law. relying onyou are was issued in 1958. he said not there primarily activity interpreting what is exclusively engaged in promotion of social welfare activities. it seems to be hard to understand. then to the va, the political in 1958 the- political arm workers or what -- differ from what they are today. this is an area denny's be dealt with. i want to get further clarification. will docases that were for additional scrutiny. with the name2 tea party in it. , and 13 with patriots. 200 and two others. can you give us further clarification as what makes up those 202? >> we are not in a position to do so. in many instances, we would only be able to review the names of the organizations. certain names were so generic that we were unable to determine whether or not they had a particular point of view, or .hether they are not the irs in other instances, when the name tea party was used, it was quite obvious. >> was the standard for the selection of those? all the 202 were reviewed to determine whether or not significant campaign intervention was engaged in. >> i am and understand correctly, the 90 some were because of the name of the organization. the other 202, were they selected? >> according to our review, it was determine whether significant campaign intervention had occurred by those organizations. >> what basis was used to single out those question mark >> i'm going to do for mr. miller. >> what basis was used? >> what i believe is what is in the report, more case of being pulled in where folks saw evidence of political activity. they put those cases in. those would include any case they came across their screening desk read. you do not know what standard they used to make a judgment that they were involved in political activities? i am trying to figure out how these were selected there had to be some rationale, or stated reason. there was evidence of political activity of the screen are believed was there, and therefore was put into -- i will say this. it is my hope that when you all do your review, some of these things will become more clear than they are in the report. wi-fi appreciate that. i would be very interested to aboutw the irs went selecting all of the groups for review. >> that is part of the problem. there was indication at all why the split -- particular cases were selected. that is something we identified .s a problem >> you do not know the standards that were used? what has been in the report. i believe that was in the airport was indicated that the screeners were looking for evidence of political activity. >> we need to have more information as to how these were selected. i was an arbitrary selection, think we need to know how that was determined. one less question that deals with how your training dollars. one of the findings is that the staff was not adequately trained in order to meet the challenges. this is a complicated area. it involves tough judgment. it has to be done and some uniform way. can you just share with us whether you have adequate resources in order to pursue the training? senator portman and i worked on irs reform. both of us hope we would never be at a hearing like this. one of our objectives was to make sure that it was handle a professional, nonpartisan way. you have the resources you need? well enough. train there is no question about that. .e believe that is the case more generally, we are down $1 billion over the last couple of years. that has caused us to cut training fairly drastically. , we haven this area maybe 140 of our folks that do this sort of work. those in cincinnati and reporting to cincinnati. we have 70,000 applications that come through. do we have the resources to get the job done? i do not believe we do. >> thank you, mr. chairman. i agree with everyone here that has made the statement with some tone of anger in many cases that iran should never go after anyone because of their political philosophy. that is the most important thing. publicowever, worthy of trust to maintain the current troubles or the resolve of the entire fall of freelancing low level employees. it is clear that it comes from leadership. it is a vacuum that has existed for far too long in this. you know the statue. it is clear. are operated exclusively for the promotion of self/social well for. -- social welfare. we have not seen change to that. it is a gray area that exists today greeted by the treasury. how -- explain it to me. i know you have talked about it already. what is the term primarily for social welfare mean? that is at the root of so many of these problems. you havek that mentioned this. we have talked about this. we have had 50 years of this regulation in place. organizations are operating with the framework. it is only recently with the flow political dollars that it is been called into question whether this is the appropriate way to regulate the organizations. ofhave not done a good job putting out guidelines on how to figure out what primarily means. yes you look of the activities organization for you at the dollars of the organizations, and the expenses of the organizations. we've not been crisp on that either. >> how long do we wait? is yourthat predecessors. we have had three years of citizens united. we have had to federal elections. tens of millions of dollars, state after state, spent by 501(c) four. how long do we wait for washington? >> is a question you will have to ask my successor. whatt me ask you, what steps are taken to define a test primarily promoting social welfare? are steps taken to establish clear definition of political activity? >> the inspector general stated this. has authority to make tax policy. i actually don't think it is fair to blame the irs for not fixing that. the irs can -- this is actually if congressat decides it needs to be change, they should clarify our age to be done in regulation. -- or it should be done in regulation. >> thank you. >> i think it is clear that there are liberal groups and conservative groups that both follow the law and the regulations. there is only one group that was targeted. you all can get here and say that there was a political targeting, but it does not go with the facts. maybe it wasn't you, but somebody was. i think one of the purposes of this hearing is to find out who was targeting conservative groups. otherwise you cannot swing the fact that you had all these conservative groups selected for extra scrutiny. you've evidence there was groups with progressives, or names like that. to rest. this issue there was political targeting here. i do not know how you can deny that. thatther of you were aware ms. lerner was going to plant that question and tried to get ahead of the new cycle by disclosing this report? >> i did know, yes. --whether any discussions ofe there any discussions this information's? any discussions with the white house about ms. lerner's intention to drop this bomb at the aba conference? lex i had no conversations with the white house. there is also been reporting that the deputy secretary were made aware of the irs -- the report last june. did you have any discussions with treasury around that time? >> is that to me? no, i do not have any conversations or the time. >> and do not rim are having any conversation with the treasury department. >> there are no discussions you had any information with the treasury department. -- there wereas no discussions? >> let me clarify. ithink everybody knew that was very difficult to administer the c4 laws. i do not have any memory of it. they're very well could have been conversations about policy. the policy matters the members have talked about. should the primary purpose have beprimary purpose task change? there are no conversations that i had with the treasury department about this matter in the report relating to inappropriate criteria. all the things that were in this. >> that is the answer i was giving. >> ok. you testified in front of the house in march of last year that there was no targeting. he you became aware of that in may. don't you think that you should have had an obligation to clarify or to correct that statement? >> in the spring when i found beingout a list that was used to a place of these applications into the determinations unit, what i a list. there was i did know the tea party was on agree i didn't know what else. i had a partial set of facts. i knew that the inspector general was going to be looking into it. i knew that it was being stopped. i think i'm in the right decision, which was to let the inspector general get to the bottom of it, chase down all the facts, and then make is findings public. youet me ask if i could mentioned earlier that disclosure of confidential information to be a violation of law. >> it is, but whether it is administrative or criminal is the issue. it could be a violation of the law. theifically -- restructuring reform act. gettingeporting about this information to probable to propublica, could be a violation of the law. >> it could be. >> let me ask all of you, the release animated -- there was a statement made at the well would be relevant. d believe the law is irrelevant? >> i believe the law is always relevant. >> i'm not sure i understand the question. wexler was a statement whether the laws were broken were relevant. you believe the laws are relevant this case? >> i guess i would agree with the us but to general that people should not break the law. >> i just think there are a couple things here. one of the targeting issue. clearly that has political overtones. whether there was information disclosed that would be a violation of law. it is a serious match up rethink the american people believe that it's a very serious matter. -- it is a serious matter. the american people believe it is a very serious matter. those are all things that are missing in the equation. i hope we continue to get more facts out about this, that the corrective actions are taken. thank you. >> senator burr. ?> who briefed you >> on what? >> on the investigation. >> on the investigation. to the best ofrd my recollection of the investigation was mr. miller telling me that there was the existence of the list, and it was on the the inspector general was going to look into. >> did you brief mr. miller, or do any of your investigative team ruth esther miller -- brief mr. miller? , whicha may 30 of 2012 regularly hold with the commissioner and is cheap jeff these -- chief deputies, that we first raised this issue. >> mr. miller says he is not aware of the practice that was going on. did you read, on the scope of the investigation? >> i do not believe we went to the details which have made -- may have played out the scope. i may have misused the word investigation. it was an audit we were investigation. -- it was an auditing we were conducting. >> i just heard two people at the table say they didn't briefly. did you brief or did did part of your investigative team brief the decorative -- deputy secretary? -- broughtally made to his attention this audit. >> did that have the details of the scope of your investigation? >> it did not. that was the extent of it. there were other matters we were discussing. >> your investigation states that the council was briefed .nd august 2011 of the practice was that the irs counsel, our -- was -- or was it the >> in terms of a regular setting that i have with the meeting with the general counsel of the department of the treasury -- a were talking about reference in your report that council was briefed by somebody. somebody within the eeo, that the council the irs was knowledgeable in 2011. am i correct? >> it was just pointed out to me that attorneys within the office of chief counsel were briefed. >> they understood what the practice was that was going on within the applications? >> i was not at that briefing. i do not know the extent to which they received information. >> this was a four-year investigation. r investigation included the general counsel of the irs nuven practices, they had been discussed with the attorneys of the internal revenue service. >is it normal for the chief counselor's office of an agency not to have any conversations with the commissioner? >> i have no idea of the practices. >> limiter to both of you. he you said -- are you testifying that he never talked about this? >> i have been asked that question. i don't know this right that, but i think think the time under your referring to is talking about the office of cheese council. not necessarily the chief counsel. they could've been anyone in that chain. >> give attorneys are involved in the discussion about the practice that the eeo is conducting on how they process applications, and that would not have been something that was raised to the level of commissioner? >> i didn't know that until i read the report. i do not know anything about that meeting. are you testifying today that the council never discussed this matter with you? >> if you are asking the question did anyone from the chief counsel's office tell me about meetings they were having with the exact organizations, i had no memory of anybody doing that. >> 20 suggest that we need to get the chief counsel into testify. i think that is absolutely crucial. mr. miller, let me just ask you, is this stop? the practice of how they process the consideration of these applications? conservative,it's patriot. >> i believe that did happen. loisames stopped when lerner first learned of it. in theond listing report is still problematic. it talks about will sleep -- policy positions. it is not particularly partisan. >> it was partisan before. >> and absolutely was. >> for the record, the target for approval within the irs of these applications is 120 days. there are currently applications that are over 1200 days, without action. , has this you practice stopped? if it has, what is the date it stop? it seems like these applications would have been process by now. >> let's break this up in little bit. let me see i can answer your question. the process i was talking about was the selection process. that hasn't not a five. we have also worked -- -- that has been modified. some of these cases are difficult cases. they should not have taken as long as they have, but any development. -- but they need development. that they could, but there are cases that go into appeals. there are cases that going to court. these are difficult cases. there are no doubts that some of that 1200 would be when they are languishing before may of 2012. >> thank you, mr. chairman. , mr. chairman. last night i did a monthly telephone town hall meeting which i do every month in my state. during the hour, we had up to 2500 people on the call. i handled onto one questions and i always make notes when answering so the next day i can review things i did not know the answer to or whatever. the 10th call last night was from a person named syd. given what has happened apparently at the irs, i have lost confidence in the united states of america. that was a constituent. he went on to say if the agency that collects taxes from he is able to target as they did in the qualification for tax-free status, what is to keep them from targeting from other things? the reason this is an important reason, audit and the we need an important investigation is to restore the belief in the irs. that's my concern. >> mr. george, i want to make sure i understand what you said. i believe that ms. lerner was in charge of the approval of the department during 2011. is that correct? >> yes. >> i thought you said the cincinnati office was ordered to change their criteria by the director and that following that order, they changed it back. >> that is correct. >> do you know who changed it back? is there any person or trail? >> we have not found any evidence as to the identification of the person. >> that's my point. audit, you did not do an investigation. >> that's correct. audits are developed to find a possibility of wrongdoing. >> it also looks at the systemic problems that may exist within a program. >> to date, there have been no internal investigation at the irs, is that correct question mark >> that i am not aware of. >> we looked in the march timeframe . that was reported to me in may that there were issues. this sort of thing would be done by tigda. we worked with them on this. pastu are now commissioners of the irs. there's going to be a new commissioner, correct? let's assume that commissioner will make a phone call before he or she accepts the appointment and asks for your advice as to what to do. regarding this issue, what would your advice be to the next commissioner of the irs? mr. miller? >> i would agree with your opening statement. it breaks my heart because i spent 25 years trying to protect this service. the perception right now is there is in issue and the new commissioner need to attack it. he or she needs to take a hard look, make some changes, put in place some safeguards that very obvious in terms of their transparency, what the process is, how we are going to do things. and regained the believe of the american people that the irs is and remains in o nonpartisan. >> the commissioner of the irs has multiple things to deal with -- filings, technology. last year, it was the fiscal cliff. offshore issues. i think the challenge for the next commissioner is what you talked about. this whole episode is clearly -- has clearly put a blemish on the agency and kept a shadow over the good work the men and women do every day. but the next commissioner needs faithis rebuild the people have in the impartiality and fairness of the agency without losing sight. this is a small sliver of but the agency does, and not have it overwhelmed him so problems emerge elsewhere. >> my hope was that the answer would have been that whomever the next commissioner is, he or she should immediately request investigation of the findings of the audit to determine if there were violations, who authorized them, and who carry them out. to me, the one thing we have never gotten to is what the chairman referred to at the beginning of the hearing -- who, what, where, when. takewhen those answers place can you begin the process of restoring the confidence of the american people in the irs. centocor and -- senator cornyn is next. >> thank you for convening this hearing. this is a very important issue, as we all know. without regard to party affiliation or ideology, if we cannot trust the irs to perform its functions and partially -- confidence ofhe the american people will be shaken to its very core. so this is very portent in tank you for that. -- and thank you for that. mr. miller and mr. shulman, in began to2012, i receive complaints from my constituents in houston, texas, waco and san antonio for organizations like the king san antonioots, the tea party and the waco tea party asking me to assist them to inquire why the irs was taking an aggressive posture with regards to their applications for tax-exempt status. i share senator hatch's comments and concerns about the denial that have occurred over the course of time any targeting was taking place when we now know that that targeting was in fact taking place. mr. miller, you started your testimony by apologizing and mr. shulman, i wonder if you have any words of apology for my constituents and others who feel like the public trust has been violated by the irs. >> i am deeply saddened by this whole set of events. i have read the ig's reports and i regret that it happened and happens on my watch. >> is that an apology. >> to your constituents, i don't know the details. i don't know what happened to them. i did not begin to look at particular constituents and taxpayer matters. as a general principle, as the irs commissioner, i did not touch individual cases and i certainly do not touch cases that involved political activity. so if i knew the details of it, i could give you an answer. >> so it's not your responsibility? the buck does not stop with you. >> i certainly am not ly responsible for creating a list. that had an appropriate criteria on it. and what i know with the full facts that are out is from the inspector general's report which does not say that i am responsible for that. with that said, this happened on my watch. and i very much regret that it happened on my watch. i don't think that qualifies as an apology. it qualifies as an expression of regret which i think is well deserved. i have beyond just a question about the particular activities here that the inspector general has discovered in which we are all becoming acquainted with. about what youn talked about earlier in your testimony. the core function of the irs. but i think about the core function of the irs, it is to collect the revenue that the federal government needs in order to function. ,t seems like over the years the congress has given the irs additional responsibilities, for example, to release little activity and speech. .nd now to implement obamacare there are some 90,000 employees in the irs. would you share my concerns has deviated from its core function and should be reformed to focus on the core function and perhaps not be these other additional responsibilities until it can get its house in order? is taxed but the responsibility of it ministering the nation's tax laws. over the years, the nation's tax laws have been used for more and more things. i defer to congress to decide what it wants to use the tax code for and whether it wants to i arrested do all the functions in the tax code. irs is givene that responsibility, the obligation of the agency is to do it to the best of its ability. >> i know my chairman -- i know my time is up, missed chairman. i agree with the comments you started out saying that if we that weall to congress have asked the irs to do much more than its core function and not to get involved in things like policing political activity and speech and now implementing obamacare, but it's not all that surprising these kinds of problems have arisen in addition to the discretion that mid-and low-level individuals have and the lack of proper management practices. i think this is a great opportunity not only to get to the bottom of what happened but to address tax reforms in a way that returns the irs to the core function. senator portman, you are next. >> thank you, mr. chairman. i also had a town hall meeting last night. we had about 25,000 people on at any one time. the questions were coming in from republicans, democrats, independents all saying the same thing -- outrage. the outbreak being expressed was the irs had an evenhanded affair of our tax laws given the power of the agency. mr. miller, in response to concerns expressed by grassroots organizations around ohio, senator hatch and i sent a letter to the iris on march 14, 2012. you responded to that letter. i just want to tell you why i joined senator hatch on this letter. that cheap party of ohio was asked -- the tea party was asked print of a list of everyone who had spoken at a meeting. i thought that was odd. follow-re 94 exhaustive up questions and demands in response to the january application to include resumes of past and present employees. one question asked about any connection with an individual .ho does not live in a county they were trying to find out about an individual that had no connection with that tea party. kind of scary. the coalition was hit with similar questions. its application was delayed by over two years. the shelby county, liberty group, sent me this letter they got in the irs. it is inappropriate, a relevant question. they are also given three weeks to respond. who were individuals asked to come up with tons of information in a short time, much of which was difficult for them to compile survey contacted me. they wanted to know the names of in theerson organization, the time they spent at particular events. they want to know detailed content of beaches, forms, names of speakers and so forth. to know detailed names off speacheseches, speakers and so forth. the letter was very specific. there was no question what we were asking. the letter asked when i the what basis of the iris require a 501(c) four applicant to make disclosures beyond standard information and what objective criteria are used to identify for greater scrutiny. these questions go to the heart of political allegations that we were hearing about. let me ask you, mr. miller, did you receive him read that letter on march 14? point, yes, sir. >> did you think the allegations described in the letter were alarming question mark -- were alarming? >> i was aware -- in the same timeframe. march you knew before the 14 letter that these serious allegations were out there. nine days after receiving the letter that you asked nancy marks, a senior technical advisor, to lead a team and look at what was going on based on allegations. is that correct? >> i did. >> and the revelation that political criteria had been used to target the 41 applicants -- to target applicants. so for 6 weeks when you sent your team to cincinnati to may 3, you do not bother to ask for any interim updates from the team you cast with investigating these allegations -- team you tasked with investigating these allegations. you never heard from them? >> i do not recollect that i did that one way or another. the implication -- this was a short timeframe. about you're finding out the serious allegation, sending the team out for six weeks to maneuver have the curiosity the allegations be handled -- >> so you're finding out about the serious allegations, sending them team out for six weeks -- >> there are two pieces. the letters be acted on immediately. we try to give people more time onthe letters we acted immediately. we tried to give them more time. >> he responded to the letter on april 26. you did not bother to ask if anything was wrong before you chose to respond to our obligations. on march 26 with assurances nothing was wrong, you did not even wait to hear back on the team investigating the allegations. you chose to respond without the information. >> no, i responded to the questions asked. they were responded to correctly and truthfully. >> this is a letter i talked about earlier we asked specifically about whether there was political targeting. .ou send a team to investigate the team takes six weeks. respondent april 26, a week before you heard back from them. he did not bother to get the report from the mentored responded. is that accurate? >> i answered the questions asked. i answered them truthfully. but he did not bother to check -- >> you ddid not bother to check. based on only individualized consideration. no political criteria whatsoever. we have learned the ig report says that -- says they were aware. did you report to the chief counsel? i do not know that. >> thank you, senator. next is centered to me -- is senator toomey. senator hatch is going to vote and come right back. >> thank you. quick point. another of my colleagues are said about the fact that some americans choose to exercise their first amendment rights anonymously. i would remind us all that perhaps one of the most important works of political advocacy ever done with the federalist papers, written anonymously under pseudonyms. theever one thinks of how treasury role in limiting the c4 standards has been developed has nothing to do with the irs decision to use ideologies as a basis for imposing unnecessary and extra screening on people seeking 501(c) four status. we areask mr. miller -- sitting here in may of 2013. at this point, do you know who it is that initiated the policy of establishing these ideological criteria for creating this additional level of screening for applicants for c4 that is? status? >> it happened twice. this -- the first time, there is more clarity. >> who was it? >> i can give you the name. >> i think that is important that we understand who did that. >> according to the ig report, lois lerner. i believe that is the way it happened. >> who ordered to be resumed ,lthough using different words but same idea was resumed in may 2012 -- the same idea was resumed at may 2012? fax that is left unclear. >> life that left unclear even now. -- >> that is left unclear. >> why is that left unclear, even now. the acting commissioner for tax- exempt and government entities division, the director of exempt organizations reported to her. isn't there somebody in this chain -- who ought to know who was initiating this an appropriate activity and re- initiating it? >> somebody should have none. there is no question about that. there are processes in place to have made it clear exactly who has the ability to either start or modify the listing. at the time, those controls were not in place. >> you said somebody should've is a but clearly there chain of command, and organizational structure. there are people responsible. should it have been lois lerner? sarah hall ingram? yourself? who should be responsible for making sure this important function is being carried out properly? what under the current management chain, it's been determined that director of ruling has control of that listing. let me clarify one thing. sarah ingram has been used severaal times here already. into thisen thrown and i do not know that is a fair thing. we should check the timeline. i do not think she was working at the time being discussed here. >> i have not accused her of anything although i was under the impression she was the acting commissioner during this time. if we believe we still don't even know he was responsible for the decision to resume a completely inappropriate activity that had been seizeceai do not know how we can come to the conclusion that this was not politically motivated. on the face of it, it appears completely politically motivated. in the best of my knowledge, there was no criteria identifying left of center organizations as deserving special scrutiny like using the "progressive" orv "occupy." mr. chairman, i was just a booking need to do is bring before the committee some people who might actually know the answers about who decided this was a good idea, that wwe should resume this afternoon initial malfeasance was ended. it's frustrating to have no answers for a hearing like this. >> thank you. i apologize. can you come back, senator? >> i can't. can i just take two minutes? >> go ahead. ig has said he does not know who made the decision to resume. irs commissioner does not know who made the decision to resume. did you ask these questions? people in cincinnati or washington say? it seems impossible we don't know that answer. >> i did ask in may. i was told a name. dave. that was not the correct -- they thought that was not the correct name. it was the name of a group manager and ohio. >> it does not seem like it is asking too much. i think we should ask again. it's irs won't do it -- if the --mr. shulmant said the iris has been given a difficult job. no doubt that is true. in this case, the regulation simply is not consistent with the laws that have been written. i would argue the agency -- since you are all lawyers, i would ask whether you think the regulation is written reflects the language of the statute as it is written. does anybody want to defend the way the language is written? >> i will not defend or attack it. .t is what the regulation is as the administrator, that is what we would do. if we were to modify, and we should be open to the conversation and policy folks would be key in this. if we were to modify, we might still be in the same face. to determine how much political activity needs to be done. it might not be 100% you cannot do it. it might be x percent.' even there, we would have a hard time deciding what politics, what's not. these are very difficult tasks. >> anybody else want to defend it? with good reason. thank you, mr. chairman. in recessmittee is for 10 or 15 minutes. >> hearings on the irs targeting of conservative groups continue wednesday in the house oversight and government reform committee questions lois lerner who oversaw the irs tax exempt division. she is expected to invoke her fifth amendment rights. live coverage at 9:30 eastern on c-span3. >> on c-span tonight, treasury secretary jack lew testifies about the implementation of the dodd-frank financial regulations. then a brookings institution for him on the. later, the senate finance committee investigates the irs targeting of conservative groups. >> on the next washington journal, the latest on the investigation into the irs targeting of conservative groups. our guest is representative mark meadows of north carolina. resourcesational defense council talks about the keystone xl pipeline. the house will vote wednesday on a bill that would approve the project. later our spotlight on magazine features nick summers a bloomberg businessweek with his story on jpmorgan's chairman jamie dimon. live every morning at 7:00 a.m. eastern on c-span. the former -- the formal parlor and family room. lucretia but a lot of time with their children. toy had lost two children infancy. they died before the family moved here. their five children all have the benefit of having two very intelligent parents who strongly believed in education. books were very important to them and their children left readers well. the family would sit by the fireplace and read to one another, often times out loud in the evenings. that was was one of their favorite activities. we are here in the family dining room. in the center of the table is this interesting art piece. an award at the philadelphia centennial. mrs. garfield adored her time at the exhibition. pages and pages of what she saw. a lot of people think of this very artistically. ,he's also very intelligent loved the sciences. now available on our website, c- span.org/firstladies. tune in next monday for our program on frances cleveland. >> a senate homeland security subcommittee released a report showing how apple subsidiary companies in ireland about the company to avoid paying u.s. taxes on some of its profits. senator rand paul said he believes apple is being unfairly targeted. you can see his remarks at c- span.org. here is some of what he said. by our forended chilean dollar government bullying, and badgering one of america's greatest success stories. tell me one of these politicians up here who does not minimize their taxes. some a chief financial officer you would hire if you did not try to minimize your taxes legally. done iswhat apple has illegal. i am offended by a government that uses the irs to bully parties and by a government that convenes a hearing to bully one of america's greatest success. . i'm offended by this -- by the spectacle. it may want to be on trial, it should be congress. i think the committee should apologize to apple. i think the congress should be on trial for creating a bizarre tax code that runs into the tens of thousands of pages for creating a tax code that does not compete with the rest of the world. this committee will admit apple has not broken any laws yet. we are forced to sit through a show trial at the whims of politicians when congress should be on trial for chasing the profits of great american companies overseas. you want applause? i say instead of apple executives, we should have brought in here today a giant mirror. so we to look at the reflection of congress. this problem is created by the awful tax code. if you want to assign blame, the committee needs to look in the mirror and see who created this mess. see who greeted the tax code chasing american companies overseas. doublearate tax code is that of canada. i never thought i would become limiting canada for the types code that further tax code. instead of complaining theirs setoo low, why don't we about that ours is too high. i find it abominable. we have 700 million dollars in sales. they make the guerrilla class. they were virtually out of business. in the 1990's, apple struggled. 1990's, people were worried they might go out of business. if one computer was not doing well, all of a sudden the innovation i can about -- we want to bring them forward and chastise them for their success? we did repatriation of foreign capital. don't double tax it. we tax it at 35%. let's tax it at five percent. i have a bill that would be patriot rockets from our companies at five percent and put into infrastructure. it at not going to get 35%. you're getting zero. let's create an infrastructure fund. there are probably 70 votes for that bill in congress but nobody will bring it up. they say it is a sweetener for overall tax reform which is elusive and they failed to talk to climb. why not tomorrow pass it? why do you think people are frustrated with congress question mark because we do not do the right. that our taxits code as part of the problem. if we have repatriation at five percent, they would bring money home. juston't we just pass it? pass it if it is the right thing to do. i would say what we really need to do is apologize to apple, koppelman and for job creation they are doing and do our jobs. look in the mirror, let's make the tax code better and more competitive worldwide. money goes where it is welcome. currently our tax code makes money not welcome. >> thank you. you are free to apologize if you wish. that is not what this subcommittee is about. it is about investigating the tax code that is not working for the american people. it is not working for businesses. some businesses decide how money taxes they are are going to pay, how many they won't. but they will leave offshore in terms of profits, cooking up arrangements to avoid paying taxes. apple is a great company but no company should be able to determine how much it's going to pay in taxes,, it profits they will keep offshore. how much they will bring back home, using gimmicks to avoid paying taxes that should be paid to his country. they make use of this country, they use our law system. they have the right to lobby for whatever they want. but they do not have the right to decide, a taxes they are going to pay and to they are going to pay them. avoiding paying taxes is not right. the american people know it is not right. if you want to hold at the mirror, you can do to anybody you want. this subcommittee will not apologize to apple. we did not drag them in front of us that committee. they have come here willingly to explain their system. we intend to hear from them. we will also hear from some experts. hearts treasury jack lew says he has directed the new irs acting commissioner to conduct a thorough review of the irs targeting of conservative groups. his comments came during the senate banking committee hearing on an summit the dodd- frank regulations law and the findings of the financial ability oversight council's annual report. this is an hour and 40 minutes. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2013] good morning. i will call this hearing to order. i'd like to start by sending my thoughts and prayers are with .he families of moore, oklahoma it is a difficult time as families mourn the loss of loved ones and begin rebuilding their community. today we welcome secretary jack lew to the committee for the first time since he was confirmed. while this committee lacks jurisdiction over the irs, i am expressing myy sincere disappointment and anger regarding the recent revelation that some irs --loyees returning little were targeting political organizations. politics has no faith at the irs. andmmend secretary lew president obama for taking such action last week. they are looking into whether any laws have been broken and the appropriate senate committees are holding hearings so we can get to the bottom of this. this committee has a duty to oversee efforts to strengthen ,.s. financial ability especially in might of the crisis our economy continues to recover from. will focusetary lew on the financial stability oversight annual report to by the wallrequired street reform acts. i'm pleased this year's fsoc report shows progress in key areas this committee have devoted attention to, including money market funds, the housing libor andber -- economic summit -- economic situation in europe. financial services preparedness for national disasters. fsoc has madehe important recommendations to further safeguard our economy that should be considered. all indicators point to well courtney did -- to well coordinated fsoc. the senate has confirmed the first director of the office of financial research, a key with critical research and analysis. what more needs to be done to improve our nation's financial stability and priority rules with potential regulators. these include enhanced [indiscernible] for large systemic firms. fsoc itself continues to work bank designation. repo marketty and other proposals and ensured no firm is too big to fail. the three-year anniversary of washing before becoming law and a five-year anniversary of the financial crisis are fast approaching. they must be finalized soon so whether itn assess is necessary to do more. i look forward to hearing your testimony and learning what fsoc'sou are taking as to strengthen the financial stabilitychair -- fsoc's chair to strengthen the financial stability. with that, i will turn to ranking member crypto -- ranking member crepo for his opening statement. >> thank you. i also want to extend my condolences to the families of those who were killed yesterday as a result of the devastating tornadoes in oklahoma. us keep the people of oklahoma and our hearts and prayers. today secretary lew comes before the committee to testify. the secretary of the treasury wears many hats. he is responsible for formulating and recommending a number of domestic tax policies for the ministration. fors required to trigger this committee annually to testify on the activities of the council. and to answer questions concerning the most recent annual report. the council 2013 annual report covers many areas of the activities and with a number of potential emerging threats to the financial stability of the united states. i want to focus my opening statement on one particular area that needs your personal attention. the u.s. capital markets must remain the preferred destination for investors around the world. capital is the life blood of u.s. businesses which in turn are the engines of job creation and economic growth. it is causing investors to look elsewhere for productive investment opportunities. the list of problematic cross- border issues that need to be addressed is growing. from fourstoration regulators over the lack of international coordination on financial reform measures has reached an unprecedented level. after the so-called vocal role rule.cker recently, a number of foreign regulators have weighed in on federal reserve's will to -- gentlemen enhanced standards for foreign banking operations. the european commissioner in charge of financial regulation warned in a letter to the federal reserve chairman ben bernanke that the fed's proposed rules affecting european banks doing business in the united states will to locate work already done in europe and create additional cost. the commissioner also warned the proposal could risk a backlash and threaten the global economic recovery. 9 finannce ministers expressed their concerns about the lack of progress in developing workable rules as part of reforms of the otc derivatives market. they warned that without clear direction from regulators, derivatives markets will become less localized. derivatives end-users will find it more difficult to manage risk and suffer from burdensome regulatory conditions. i look forward to hearing about the specific steps you intend to take to avoid these cross-border conflicts and the and necessary cost imposed by them. costs the unecessary imposed by them. we are literally conducting an investigation into the irs circumstances about three floors below us at this moment as we meet. i may need to step out to get down to that hearing. largest bureau within the treasury department is the irs. lastly, the treasury inspector general admission to -- issued a report regarding disturbing actions. these actions should never be tolerated. president obama has directed secretary lew to make sure all of the inspector general i's recommendations are implemented quickly. i look forward to hearing how the secretary will carry out this directive. i also look for to hearing the additional steps he is taking to ensure no future income tax audits will be conducted in such a discriminatory manner. >> thank you, senator. in order to get to secretary lew's testimony and questions, opening statements will be limited to chair and ranking members. record will be open for the next seven days for opening statements and other materials you would like to submit. 76th's witness is the secretary of the u.s. department of secretary -- department of treasury. secretary bill, welcome. before you begin your statement, there is concern regarding previous actions at the irs. if you would like to say a few words on that matter, please do that before you begin your testimony. you may begin. >> thank you, mr. chairman. i will like to begin by expressing my own condolences to the people of oklahoma who are suffering so much today. the families are in our thoughts and prayers as they go through the recovery from the devastating tornado in oklahoma city. chairman johnson, ranking member, members of this committee, thank you for the opportunity to testify on the financial stability oversight councils 2013 annual report. before i addressed the report, i would like to say a few words the treasury inspector general for tax administration's report last week. at theed some employees irs used outrageous methods to determine if certain groups of five for tax exempt status. indicates, while the conduct is not politically motivated, it was unacceptable and inexcusable. administering the tax code without any hint of bias is a solemn obligation that must be carried out with the highest of standards. that's why i moved quickly to make steps to restore confidence in the irs. within 24 hours, i asked for and received the resignation of the acting commissioner. within 24 hours later, the president appointed a new acting commissioner, a person of high integrity who is on the confidence of democrats and republicans for his professionalism. i've directed incoming acting commissioner daniel werfel to carry out a thorough review of the conduct in to take action on three specific things -- making sure those who acted inappropriately are held accountable for their actions, examining and correcting failures of the system that allow this behavior to happen and taking a forward-looking view in determining whether the irs has systemic problems that need to be addressed. it acting commissioner will take actions as needed and report back to me on his progress within 30 days so we can report back to the president. we are going to make sure nothing like this ever happens again. turn to the council 's annual report, the subject of this hearing. this report represents extensive collaboration among councilmembers, agencies and staff. to give this a chance to provide the congress and the public -- potential emerging threats to financial stability and recommendations to strengthen the financial system. out that thent strength of our financial system depend greatly on the strength of our economy. there is no doubt be a made significant progress recovering from the worst economic crisis since the great depression. the economy has been for 15 consecutive quarters. the private sector has been creating jobs for 30 aged eight months. months38 straight but there is more work to do. we need to keep her foot on the excelerator and economic growth and job creation need to be more rapid. the president has the four-day copperheads of of the jobs and growth plan that strengthens the recovery by making needed investments in manufacturing and worker training and taking a balanced approach to restoring our long-term physical health grade this strategy will not only help grow our economy now and well into the future, it will replace the sequester with sensible deficit reduction measures. since the council's and report, our financial system has grown stronger in a number of ways. the largest of financial institutions have increased. regulators are taking steps towards improving transparency and risk mitigation in derivatives and other markets. the delimitation of the dodd- frank act has brought significant progress towards establishing a more resilient and stable financial system, domestically and globally. on the dodd-frank and limitation, the council and its member agencies continued reforms in place. while additional work remains, we're much closer to the end of the process them we are to the beginning. be in a good deal good deal of congress recently, including progress on the councils of valuation -- we have seen a good deal of progress recently, including progress on the councils of valuation. progress on implementing provisions related to living wills and reducing risk and increasing transparency in derivatives market and protections for borrowers and participants in the mortgage markets. despite the positive developments, there are still risks to u.s. financial stability. identifies those risks and makes recommendations to mitigate them. it is our judgment that the market participants need to take steps to reduce vulnerabilities. government agencies, regulators and businesses need to address operational risks posed by technology failures, natural disasters and cyber attacks. reforms are needed to address the reliance on self-reported interest rates mike leiber -- rates like libor. want to thank the staff for their hard work and dedication. this is an ongoing effort. we look forward to continuing to work with you, this committee and congress to make sure we have a more resilient and stable financial system. i thank you and look forward to answering your questions. >> thank you for your testimony. i will ask the clerk to put five minutes on :00 for each member. mr. secretary, the washing i will ask the clerk to put five minutes on the clock, . mr. secretary, the wall street reform act [indiscernible] >> i think the reforms provide powerful tools for regulators by creating fsoc. the policy of dodd-frank was very clear. too big to fail is in a mix of old policy and it had to end -- is an unacceptable policy and it had to end. there is still more progres to be made. --umber of issues agencies are determining how to set the levels so that in the end, we will be able to say too big to fail has ended. one of the principles but is important is we must implement dodd-frank and we need to do it quickly. we are also going to take an ongoing look at the system. one of the problems between the great depression and the financial crisis of 2008 was too long aperiod -- a period went by and we lost our ability to see what was going on and to regulate it effectively. andeed to make the resolve determination to keep asking the question as we finished implementing and going forward, whether we still have the tools we need or whether we need more. >> what are you doing to ensure key roles that strengthen financial stability and end too big to fail are completed as soon as possible? see should we expect to [indiscernible] have been secretary for just under three months. i have had three meetings with fsoc. in between, i have had numerous conversations and meetings on various matters that are still outstanding to implement the dodd-frank legislation. have made clear to all the members at fsco that -- at fsoc that it is a tremendous parity debbie complete the rules and people know what the policy is and we take the steps and use the tool to protect the public from another financial crisis. there will be progress this year. we have indicated at the last public meeting that we're making progress progress on the non-bank designation. i'm hoping we will soon be in a position to make a final determination in that area. there is ongoing work and all the areas i mentioned in my opening statement. one of the things i see as my role as chairman of the s lock is make sure we don't measure our progress in months and years but weeks and months -- one of the things is e see as my fsocas chairman of the is making sure we don't measure our progress in months and years but weeks and months. we are trying to get this matter up for decision as quickly as possible. ofinternational ordination cooperation is important for successful financial reform. are there specific areas regarding cross-border were more can be done to strengthen coordination with their global counterparts? a i think we have seen substantial improvement in international cooperation as we have gone to this process. on g 20 is working hard trying to coordinate in this area. there are informal groups of regulators and central bankers and finance ministers coordinating on this. these are tough issues for each of us within our borders. they are tough issues between countries. the principles we are making paramount is that our mandate is to protect the u.s. taxpayer and he was economy by setting standards at the level we think is appropriate. we are trying very hard and the international community to make it a race to the top, not to the bottom. if we could agree on high standards, a lot of these issues are resolved by having compatible high standards. i think we are making a lot of progress in that regard. i know these are going to be forlenging times competition in the financial markets. it's important that the u.s. remain a competitive financial market. where we have the safeguards to protect against having tax payers left in the position they were in after the economic crisis of 2008. >> thank you, mr. chairman. secretary, i would like to start with a few questions about the irs situation. when did you first become aware of allegations that the irs was targeting conservative groups westmark like -- >> i first became aware that was an audit underway on march 15 when i had a meeting with the inspector general. it was my early weeks of the treasury department. in the process of having initial getting to know you meetings. the inspector general flagged a number of items without going into great detail. he mentioned it was an audit of 501(c) four activity, told me there might be troubling findings, did not describe them in detail. i do not learn any more about it until it became public. if that was my next question. when did you first receive confirmation those allegations were in fact true? >> the first i heard one of the public reported a week ago friday. i was at the g-7 meetings in the uk and was outraged at the time. i do not yet have the ig report. i do not actually get the report until tuesday. when i got the report, my immediate reaction was to take the steps that i noted in my opening statement. to ask for and received the resignation of the acting commissioner, >> i am sure you are wearing congressional testimony last the, it was admitted question was planted in order to reveal its actions before notifying congress. were you personally involved in that decision? >> no. >> do you believe it was an appropriate way to make the information public? >> there were some conversations that staff level between treasury and irs. discretion of the irs to decide how to manage this matter. the guiding principle for the treasury department and -- in irs investigation is to not interfere in any way, to not interfere with the ig's ability to find facts, to interview people, the fine record, and in no way to color the outcome. i am not aware of any action that was taken with the treasury department that is inconsistent with that well established practice. --ent and asked about this if i would have been asked, i would have advised against it. runningme is quickly out and i probably will and get to the questions in this round but with regard to the internal revenue service, does the revelation about the actions of different agencies coming afford it in the it met project in the administration, -- in the realistration, there is a unjustified discussion among the people of the united states that the internal revenue service is in many real ways the prosecutor, the judge, the jury, and the executioner. i understand there are legal. of the ira'ss exercising its activities where people can get some review, but there is a very real concern in my opinion that the irs has such incredible power that abuses that the irs argued by the american public with great concern -- are viewed by the american public with great concern. what additional steps have you taken to restore public trust in the integrity of the irs and the treasury department and to ensure that no future income tax audits will ever again be conducted in this kind of manner? >> first, i cannot say strongly enough how unacceptable this behavior was and how outraged i was when i learned about it. administration -- system has to be beyond politics. the irs has an independent character because there is the concern that in past decades there was political interference in the irs. i will take every step that i can to make sure that the management structure and the way the irs conducts its business is set up in a way to prevent this from happening in the future. i have already had that conversation with the new acting commissioner who takes over tomorrow. he has a very short time to identify who should be accountable, how to get to the bottom of how the management and communication systems broke down, and to look systemically and what other steps need to be taken. i will not cross that line into the administration of the tax system because the cure could be worse than the disease. we need to make sure there's no political involvement of the administration and the management of the irs is the responsibility of the treasury secretary. irs ando be within the apart from politics. >> thank you very much, mr. chairman. raised by theues report is the systemic risk potentially caused by the whatlt of relying on -- specific policy or regulatory tools to the council suggest to deal with this systemic risk? >> it is part of a broader set of systemic concerns that have to do with wholesale funding. the short-term funding for longer-term obligations. there's a very real risk that if the short-term funding ceases to be available and is not well collateralized, there begins an unraveling -- unraveling process that could become systemically very damaging. regulation -- it is three different parties. the federal reserve board is looking at the rules that govern the banks that do the short-term lending to the broker-dealers and is looking at the adequacy of collateral and other issues to try to make sure they are taking provincial steps in this area. the report identified this along with money-market funds as a source of real concern. i must say it is something i have put a fair amount of attention into as treasury secretary. falling on the chairman's in dodd-frank there was an enhanced capital requirements for bank holding companies. senator collins was essential in getting this essential piece of legislation included. you go beyond the traditional notion [indiscernible] of get into the realm insurance companies. have you given thought to the applicability of this section in terms of insurance companies in particular? >> i think the per se step is to make the determination as to whether or not the banks should be designated because they are so significant. thestandard is whether material distress institutions is a threat to the u.s. financial stability. we have been going through the process and a very orderly way of reviewing the potential designation against that standard. if the designation is made, the authority to regulate would go to one or another institution. the federal reserve board would have substantial responsibility in this area. questions have been raised as to tools are not the perfectly fitting for non-banks, and that is an issue that we t.ll look oua >> you have indicated that because of the self reporting and highly subjective measures have to be replaced. is there any thoughts about in the short run and the long run how we should replace it and how quickly we would have to move to replace it? >> the report notes the need for there to be a replacement. frankly, there is not a ready replacement. the marketmething self designated and it is contractually something that parties have signed onto. there is not an immediate substitute that would be available. there's an international process that involves regulators from multiple nations and market participants from multiple nations. the report properly noted the urgency of developing an alternative so if there is a transition, there can be an orderly transition. libor is the reference rate that is included in millions of contractual agreements. it would have to be pursuant to those contractual terms. there is a great deal of importance that the process move speedily and that allowed her to be available,. >> a quick follow-up question. in everyquitous contract, almost every contract. this is being regulated very loosely by the british authorities, and they being very aggressive in ensuring that it is less objective than before. >> the ring cases of manipulation never totally unacceptable. the british authorities have recognized that was an unacceptable set of events and thatetermined to not let be repeated. is challenges that the rate inherently uncertain because its reference to overnight lending between banks at a time when there is much less overnight lending between banks. that is one reason there needs to be a reference rate that is less susceptible to manipulation. .> senator shelby >> welcome, mr. secretary. is my understanding that the treasury secretary, the set up at the treasury, the irs commissioner reports to the treasury secretary through the deputy secretary of the treasury. is that correct? >> that is correct. who was deputy secretary of the treasury in 2012? >> the current deputy secretary. >> have you talked to him about the irs situation? >> yes, i have. he relate to you any knowledge that he may have had about what was going on in cincinnati when the irs was targeting these conservative groups echo >> he and i both at thed the ig's report same time last tuesday. we have had numerous conversations about it since then. >> you testified you met with the inspector general in march, several months back, shortly after taking office and the inspector general presented a list of ongoing investigations, including the irs targeting these conservative groups. is that correct back a >> woody indicated to me was that there .as an audit taking place he did indicate there were potentially -- >> did you pursue that -- did you ask why they would do such a thing or anything? what did you do? >> the fact it is the practice that treasury is quite properly when you are notified of an ig investigation, you allow the ig to do their work. you don't get in the way. you make sure that have access to whatever they need to complete their audit. that is what treasury was doing. i don't think the executive would have taken any action at that time because i was awaiting his report. >> before you were confirmed in your present job, your the chief of staff at the white house, correct? >> yes. >> when did you become chief of staff of the white house? >> in january 2012. so when this was going on in cincinnati, you were chief of staff at the white house, correct? you had no knowledge whatsoever of anything amiss dealing with the irs, approval, disapproval, delay or anything specific? >> oh was not aware the audit until i met with the inspector general. >> have you heard anything at the white house? >> i was not aware of any specific facts. i know that questions had been raised. the fact is this audit was publicly posted in october 2012. the fact that an audit was going on was a matter of public record. i had no specific knowledge. someoneou believe that at the cincinnati office was just on their own, targeting the conservative groups, slowing them down? is that part of the culture at the obama white house? >> i have read the ig report quite carefully and i think it is very important to note that there is no suggestion of any political interference with the process of making the determination. there is unacceptable behavior that happened at the irs that has to stop and cannot happen again, but there's no suggestion of any political intervention. frankly, the way we manage ig reports is meant to keep politics out of any review and to make sure i g has the complete freedom to find whatever facts that fine. to everyat i've said archer i've worked with, you have my support. if there are problems i want to know about them and fix them. >> is the ig report complete now? ig, if he saw fit, could you recommend to the justice department possible prosecution of people that were abusing the public trust and abusing the irs regulations? >> i.t.'s do have the power to make recommendations. i am aware that the attorney general indicated that they will investigate whether or not there's been any criminal activity. >> do you have the power to recommend things to the justice department's on prosecution of forle who abuse the irs political reasons? >> i believe in this and all matters that nobody is above the law. i think the first question we have is, who is responsible, and holding people accountable for their actions. we started a day after the report was made public by asking for and receiving the resignation of the acting commissioner. we will continue to hold people accountable for their actions. we have to restore confidence in the irs. all inyou concerned at your position as secretary of the treasury that some of this that was used in cincinnati to target conservative political groups could have been explicitly or implicitly endorsed by individuals higher up in this administration? >> i've seen no suggestion of any political involvement at all. what i have said and what i believe is that it was unacceptable, and whoever is responsible should be held accountable. >> but you don't think it does happen out of thin air. there's something triggering all this, either cultural or somebody pushing it inside. don't you think that happeneddax >> i think the cincinnati office exercise very poor judgment and use criteria that are unacceptable. we made it clear that the irs has to be beyond any suspicion of bias. the irs should be above suspicion period. >> yes. >> appreciate your answers with reference to the irs. i want to call your attention as an element of that something i am concerned about, broader structure and how the agency pursues the terminations. that petition was fought with the treasury department and the irs looking for revision of their regulations. the statutes for eligibility not civil organizations organized for profit but operated exclusively for the promotion and social welfare are eligible. the irs regulation, an organization as operate exclusively for the promotion of social welfare it is primarily engaged in promoting the common good and general welfare. i don't think congress meant primarily when they passed the action that says exclusively. as an example of how an agency gets away from the congressional intent is something i hope when we are looking at the totality of this problem we are pursuing as well. >> one of the recommendations that the ig pause a report made is that we should take a look at this very issue. that will be going on immediately with the new acting commissioner coming in. let me follow up on something senator reed talked about which i raised in previous hearings, which is the libor interest rate. i want to get a sense of how intoeffort are we putting finding alternatives here, because even you noted that in referencing the libor, you said it diminishes market integrity and will be unsustainable in the long run. how much effort or putting into seeking alternatives to the libor, because it is not sustainable in the long run. we should be starting to deal with that challenge now. >> i totally agree. there is an enormous amount effort being put into it. the chair of our commodities futures trading commission has been working with international regulators on this for some time. i have been at several international meetings where finance ministers and central- bank heads have discussed it. there is a common sense, an urgency to develop an alternative because any transition has to be orderly. the fact that there is a problem is one part of the analysis. there has to be a solution. at the moment there is not an easy alternative, which is why it is so critical and as the report noted, a matter of high priority to develop a reference rate that could be used as an alternative to live more. >> i am looking forward to that because i am seriously concerned about libor trust rate manipulation. it affects everybody, consumers, businesses, and communities. more broadly, i am also interested in whether any of the federal reserve or financial stability oversight council projections are based in whole or in part on surveys are estimates made by institutions with a financial stake in the outcome. in other words, are the projections about inflation that the fed uses to take monastery policy decisions about risk the overall economy susceptible to the same risk of manipulation? >> i would have to take that question. i read the federal reserve board projections. they have a very talented team of economists who work there and i know they consult all the major forecast as we do. what specific forecast the use of have to check. >> i would like to hear back from the department on that because it makes me concerned that those who have an interest at the end of the day are given the information to make a determination, it raises the the fox guarding the chicken coop. if we are going to have transparency and greater confidence in our financial institutions, we want to have that across the spectrum. economicour own assumption and compare them to cbo economics, the assumption. the general practice is we do our own economic projections and see where they hit on the spectrum of others. if there is an out liar estimates -- >> our dislike to call your attention to two things. senator boxer and my responsible homeowner refinancing act, we think it will help millions of families and we hope this will be an advocacy point because the bill is only open for so long as interest rates remain historically low. as well, the whole question of our efforts, which i have mentioned to you before, on making sure that we unlock the that the administration has also acknowledged. those are things that will not cost the federal government money at the end of the day, and have a good -- the potential to help boost the economy. >> i have to strongly agree that opening opportunity refinancing to more homeowners who are creditworthy is an urgent matter. the window will not remain open forever. we don't know exactly when interest rates will go up but you know that over time, interest rates will go up. if middle-class working americans are either under water or have lost some of the value in their home because of the financial crisis, while they are still creditworthy, they are not able to refinance at lower interest rates. it would be hugely important to the economy in terms of promoting economic growth. it is something we believe legislation like yours would help fix and we would very much like to work with you to get that done. >> thank you for being here today. i may surprise you but i will mostly stick to the subject at hand. i want to say on the irish issue, my understanding when the fbi comes to a company accused of corrupt practices, a lot of times they will go to the top, even though they may not have known specifically the activities. in essence, engaged them because of the culture they have created hold himd therefore culpable for some of the levels of lower it is some of the activities at lower levels. i want to say the indignation that you showed on the front end, to a degree, is kind of laughable, in that when you have the president of the united states and the vice-president and other leading folks in our administration using the type of language to describe the folks that were targeted -- thinkzing, vulcanizing, i you would expect that bureaucrats at lower levels are going to act in the way that they acted. it is reprehensible what happened, but it will be interesting to see as this goes about where this culture really came from. i know you have not been there long, but i do think that that demonizing and the type of language that was used probably causes these bureaucrats to feel empowered to go and do the things they did, which offends all our sensibility, including yours, as you stated on the front end. >> i have to say the president's reaction to this was exactly the same as mine. he was outraged. he had taken no steps ever to condone this kind of thing. the issue we are dealing with is whether or not the irs engaged in an unacceptable behavior in screening applications. we are not discussing the merits of the organization. that is a separate issue. it is irrelevant. >> i could not agree more, but i think when people, just like in a corporation, when they hear the ceo saying things that affect people on down lower levels, that is typically what happens in the case against the company. i am not trying to implicate. i am just saying people should not be surprised that bureaucrats at lower levels took it upon themselves to do what they did when at the highest being people were demonized and novelized in the way they work. march 12 andter on ask about section 121. i have not received a response. the question is, do you believe it has the ability to break a company that is help the but one that they believe could pause systemic risk because of the kind of activities or the size that they are? have not received a response and i am wondering if you might do so. letter, inot seen the apologize. are tohorities coordinate the activities of the different agencies that make up the membership of the council. there are some limited areas where they are starting to take action. i am happy to look at your letter. is title 2he thing and dodd-frank talked about was -- i think most of us thought that when a company fails they were going to be liquidated. i have had a lot of conversations about this. they realize these organizations are so complex they really cannot orderly liquidation. you cannotecided orderly liquidate them. they have come up with a single point of entry. basically you attack that shareholders and creditors rightfully. one of the things we have been pursuing is making sure that there's enough long-term credit held at a holding company. we have not received a response, but i think it is gorgeous love to hear your thoughts on that. obviously with people going to not at the holding company level. i just wonder if you address that issue. >> the owner of the liquidation authority that the single point of entry proves our ability to manage any future crises are problems that develop. i totally agree that there has to be adequate capital available in order for that to work. in general, raising capital standards has been a big part of the activity in a last couple of years. is a combination of things, if you combine looking at capital, what the content of investment activities are, how much leverage there is. .ut the creation of a single entry will only work if there is the ability to attack the assets that are in the equity and credit. >> i know that right now this is not your most export area, if you will, but you would agree, generally speaking, that we need to have a certain amount of capital at the holding company level. otherwise the single point of entry will not be useful. >> there needs to be sufficient capital at the point when there is a liquidation in order for the process to work. how it gets there and how it is maintained is something they are working through right now. but just one more question. i know that some other people have gone over slightly. i was a little disappointed by the meeting about trying to make our financial regulations work a little better. the community banks around our country are dealing with basel 3. is very complex. there has been some discussion about a minimum capital ratio for our community banks. i know it is a big issue to them and could make them far more secure if we just had a simpler capital ratio. i think many of us would like to see them raised even at other levels. is that something you would ?onsider doing allowing them to have a simplified capital ratio that would be better for them to operate under and generally better for our country. but i have met with representatives of the small and medium-sized banks. i have looked into their concerns as many members of the committee have, and i share the concerns of the regulators to have the direct responsibility to take action in that area. they are looking for ways to make appropriate distinctions and i have small institutions that are not averse to risk be treated as we did the same as large institutions? history did not be -- did not begin in 2008. we had a financial crisis in the 1980's which was the savings and loans. all the regulators have to make sure they are looking ahead and taking provincial steps to address all the potential sources of systemic risk. there is not a one-size-fits-all approach. there are many provisions that reflect the differences between large and small institutions. i have shared my concern with the regulators. i have heard that they share those concerns and i think we have to leave them alone of time to complete the process. want to make a couple of comments on the remarks just a second ago from center court. legislation addresses a lot of that. it's set capital standards that 15%. it told us out of basel 3, so it deals with a lot of those issues. the report cites what we recall the too big to fail banks. sykes -- sites risk-taking as a threat to the economy. receivetitutions special treatment by virtue of their size. you acknowledge after confirmation hearing that this perception gives the medivacs of funding in dance at the capital markets. that is pretty clear. and reinforce that that our legislation will in fact eliminate the to be to fail funding advantage they get. fsok tonk requires make recommendations to promote market discipline. my question is, why has fsok failed to meet this requirement? >> i think that a number of the issues that are raised in your legislation are issues that the regulators are working on right now. notcapital standards have been finally set. basel 3 is a floor, not a ceiling. there are number of regulatory approaches that would considerably raise the cost of being a large bank. i think we have to see where that process ens in order to be able to answer the question whether we have fully solve the problem. it is certainly the objective to be able to say at the end that we have ended to be to fail and --t we have eliminated any the fact that the market applies a subsidy, we have said that to be to fail is not our policy is a bit of a challenge. we demonstrated with the rules would put in place that make it possible to be a large bank in terms of the requirements that are put in place. the one issue out like to take 3.ue with is replacing basel for a lot of the world, it becomes an aspirational goal. we are trying to encourage the world to race to the top, not the bottom. working in a lot of other countries. when we look at the sources of financial risk, one of the things we worry about is the rest that is presented to the united states from undercapitalized institutions around the world. we have to get a balance in the approach, and we look forward to working together. sophisticated guy to make that statement that if 15% four large bags, when britain is doing what it is doing. you said something else, that the market implies that to be to fail may still be around. is what the markets think that matters. the markets continue to say that too big to fail is alive and well. a recent report said the u.s. treasury has avoided publicly weighing in on this debate. this is more of a summary statement than a question. the perception is still there. you are a sophisticated guy. you've seen what happens when one of the leading bank lobbyists, after the legislation was signed, said this is halftime, and then put an even larger, more powerful legion of lobbyists on ways that we could use standards and at the same may be better than now but what is it done with risk assessment of all, you know it is not going to be very strong capital standards. it is minimal compared to what the market that we should do. he takes his legal responsibility to promote market discipline. the want to emphasize things people are agreeing on. if you look at the statements made by many of the regulators, what i am saying is consistent with statements made by the fed governor, for example. as the final rules are put in place, we need to set adequate capital standards and put other requirements in place that meet our standards, so that we can fulfill the obligation of ending too big to fail. i totally agree with that. partly at is assuming political judgment that the government would jump in again that there's a problem. our job is to make sure there is that the enough layer of capital and there is no need to even get to that point. we are committed to making that happen. >> but the market b market basel 3 is about. the market assumes it will go into effect, likely. possess --still bloomberg says $83 billion. lots of other analysts have said 70, 80, 90 basis points advantage. an incredible concentration, $2 trillion among the largest banks. it does not matter what we think, it matters what the market see. their worst nightmares may be realized if we do not act on this. >> the only thing i would respond by saying is that we are not yet completed in the process. we should make more progress this year. we need to make substantially more progress is your. when all the rules are completed, can i sit here and say we have made progress? >> the market has seen how long has taken to implement these rules. >> thank you for being here. could you repeat the time line that he explained to mr. shelby about when you had knowledge of the irs issues? >> i have one conversation with the inspector general on march 15. it was a session that was one of many meetings i had to brief but senior officials at the department soon after becoming secretary. i then saw the results of the report when they became public. banks were you curious enough to ask when you talk to the inspector general about what the impact may have been? >> what i said to the inspector general was to have my full support. i am going to take action to fix any problems you may find. >> what was it specifically that caught your attention? >> it was a very brief conversation in this matter. knowing there was an audit underway, suggesting there might be trouble in funny, and that was it. the i.t. process is one where the head of an agency ought not to be getting in between inspector generals and their work. >> i have been through a number of audits in my political career with government agencies. you always have preliminary findings. you sit down and talk to them before they issue that final report. had just a price that you no additional questions that they were troubled by. >> i think there is a well established practice at the treasury department of not bringing audit findings to the secretary until they are final. audit findings change frequently and direction and degree. they are not act. actionable.not i have said to every auditor i have ever worked with, you need to complete your work. if there is a problem, you have my commitment of support, and we will fix anything you find. the individual you are describing is not working in the issue.at is at chronology matters, and at the time she was assigned to work on the implementation of the affordable care act. she was actually not working on this, to the best of my knowledge. any individual who is responsible will be held accountable when she testified in 2011 that she was the commissioner of the tax-exempt all this was going on. she has testified over the last couple of years that she was the commissioner of this. name some employees. will she be held accountable? >> what i have said is our policy, anyone whose actions are such they should be held accountable will be held accountable. there will be a new acting commissioner as of tomorrow. his first order of business is to make factual determination of who should be held accountable. >> this is all about financial security. they have probably spent more time around a kitchen table discussing their finances than any single issue. the kitchenine table talks going on. agency in then united states that has more control our input on your ability to win or lose. i just did a town hall meeting recently, last week. about hiringtion 16,000 new irs agents. the adjectives in this town hall meeting or that the irs is biased, corrupt, politicized and eager to attack white house after terris. -- white house adversaries. when you ask them question, should we hire 16,000 new irs agents, 61% said absolutely not. if you cannot trust them with your own data, if every business ban comes up to me that is audited and wonders if the irs is doing it for political that is a difficult question for me to answer. said and the president had said -- has said that the actions here were unacceptable. there's nothing in the inspector general's report that suggested anyway there's any political pressure brought to bear. and actions were unacceptable and have to be corrected. they cannot be allowed to happen. we have to restore confidence in the irs. there are a lot of investigations going on right now. committees, the justice department is looking at it and we have a new acting commissioner who will come in and do a top to bottom review, beginning tomorrow. thank you, mr. chairman. >> with the question was asked about the irs, you replied more or less. i believe in this and all matters that no one is above the law. as you said that, i was thinking about the situation with hsbc where 14 years they laundered money repeatedly, they were devised to stop doing it. it was related to countries where we have basically embargoes because of their policies to acquire nuclear weapons. these were terrorist organizations which put at risk are men and women around the world and companies around world. were drug organizations in northern mexico and thousands have died from most drug operations. this money laundering took place continuously after multiple efforts to stop it. youryou think about statement that no one should be above the law and you look at what age as b.c. did, are you deeply disturbed that this prosecution free zone has been created? >> there were civil penalties that the treasury department was responsible for. these were criminal activities. >> it is not our responsibility as treasury secretary to make decisions on criminal matters. i can tell you my view is that no one is above the law. where there is criminal wrongdoing, investigations are appropriate and prosecutions are corporate. i cannot speak to the prosecutorial decisions that were made. i was not in the treasury at the time. is not in my area of responsibility. >> is it your sense that when a major organization is engaged in money laundering, which they have admitted to, and they are given a free pass on criminal persecution, that draws into question whether or not there are organizations that are above the law. what does that convey to ordinary americans? >> i have testified on a number .f occasions my point of view is, no one is above the law. >> i would encourage you to weigh end, because your world is a world involving large financial institutions, so there is an overlap between your role in this regard. i want to turn to the ig report. senator menendez noted that we have this unusual situation for the statute of the law says that donations will be used for charitable activities. but the irs regulation says, and this is the most bizarre thing i have in canada in public life, that the word exclusively means primarily. how is it acceptable that an irs regulation completely ignores and overturns the 100% standard set in the law? >> as i responded to senator menendez, this is one of the issues coming out of this matter that is going to have to be reviewed. something we would look forward to working with congress on as we look at it. this is a very controversial area. >> let me be clear, congress has already written law and essays exclusively it is the irs regulation. >> i understand. i am saying that the process of reviewing the policy will begin immediately, and we will consult as week ago. has been noted by many that we have a political organization under the law called 527. we have another charitable organization, but in that case the irs regulation has created enormous confusion about what can be done. noner activity can be charitable activity, contrary to the clear language of the law. that confusion has become an enormous problem. is it not important to end the confusion and make the regulation consistent with the law, for the benefit of all concerned? >> there is no doubt there is confusion in this area, and something we are now beginning to look at. position to a respond after there is a review. >> senator kyl. .- senator cook >> i staff has put together a chart showing the effect of the kirk-menendez a minute. i don't think i have ever seen action by the u.s. senate that has been so effective against a rogue nation. this shows the value of the iranian currency, which is called the rial, against the dollar. since december 1, 2011. what does like to add on that we toe a next step review fallaway the initiative to restrict access to iranian euro denominated accounts, which would cost the iranians about $30 billion. you could help the senate move on to it that next step which is to adopt the legislation. we already have 21 senators and several members of this committee on this legislation. if you look at what has happened thate rial, you will see iran has lost 50% of their oil .urchasing power we have significantly impacted the purchasing power parity in iran. >> we have discussed this on a number of occasions and i agree with you that our sanctions policy and the implementation on a unilateral and multilateral basis has had an enormous impact on the economy of iran and is making life very hard in iran. i was going to say that i haven't raised the issue of access to bureau denominated accounts with me of my counterparts and finance ministers in europe. after you and i talked about this and i brought that to their attention, it actually heightened level of awareness of the issue. the law is a strong law, and i think we have asked them to get that into place where it is working better. back of dutchh allies on this eu initiative. >> i am not familiar with the dutch initiative you are describing but i will look into it. it is a pleasure to have you here. i want to ask a question on the housing finance system. in your testimony, you made reference to the housing finance system. much attention has been paid in recent months to the question of how to return to private capital to lead the market. i hear that all the time. and how to resolve the conservatorship of fannie mae and freddie mac. senators week, two held a hearing on this topic. can you talk about the recommendation for how to phase in to return to private capital to the housing market? >> this is obviously an area where there is considerable need for action. as an areantified it that requires attention. it is obviously not a place where they can put a specific plan out there. in administration has laid out the broad principles in this area and we look forward to working on a bipartisan basis as we go forward with that. i think the issue of winding down the conservatorship is going to take a while. we are making progress and are determined that we will get taxpayers much of their money back as we possibly can for having bailed out fannie and freddie. it will take a while but we are making considerable progress there. a housingking at finance sector which is dominated by government issued or guaranteed mortgages. we need to give private capital back into the market. inneed to finalize the rules the qualified mortgage area. i have heard from a number of bankers that we want to be in the space. we are willing to do our part, but we have to know how much is going to cost us, what the risk and capital requirements will be. going forward we do need to move ahead on the next debt. there are some big policy issues we will have to grapple with and we will continue to work on that going forward. have ahe bailout, do you figure as to how much the public has spent? >> i can get back to you with the exact number. >> and then on the rulemaking, it still needs to be completed. -- whatt of rule making else needs to be done to start the process, and do you have any sort timeframe? this has been going on for quite awhile. >> obviously i have been secretary for just under three months. i've made it a matter of enormous priority for me personally, driving this process. we also have to look to what was going on the first two years of dodd-frank. there was an enormous effort to repeal dodd-frank. there was an effort to put every delay in the way of implementing the rules that you could imagine. since november, that has changed. what i am hearing now is the desire to settle down. there is acceptancy that dodd- frank is a lot of land and is not going anywhere. i have gone to all the regulators and said this is more than just a question of implementing dodd-frank. it is a question of respect in the government's ability to implement the policy it said it was going to implement. i want to keep this at the top of all the agencies. i don't have the ability to direct specific actions in every case. i will use every tool that i have to get decisions made in these areas. >> thank you, mr. chairman. >> thank you for coming in to the job have been put into at a most appropriate time. have beenhe questions asked but i want to talk about the whole premise of what is going on with the american people. the government should be your ally, your partner. the government has become the adversary relationship and is basically not your friend anymore. the irs has always been the elephant in the room, if you will. i have individuals who believe they have been targeted. that thought it was just a pervasive attitude that the installation of -- institution has gotten so large. that, and i amng not talking about just the irs, but government in general. anybody in any agency that would use for their own personal agenda or a political agenda against a class of people or an --ividual, should not be they should be losing their jobs, losing the benefits they accrue, and may be facing jail time. >> i have tried to stake in the clearest terms of possibly can tell unacceptable is for this behavior to have happened. i have spent most of my career in public service. i hold myself and everyone i work with to a very high standard. there's no place for bias in the implementation of our tax laws or our other laws. we have to be implemented fairly and equally. i would be reluctant to go beyond the facts in front of us now and assume any broader issue. i think it is a bad enough set of facts that we are looking at that we need to understand them, take the actions to fix them. look at the irs and make sure that if there are problems, we fix them. i would be reluctant to accept the notion that this is a pervasive problem, unless presented with fax to that effect. we have to be vigilant and make we are a government of laws, observing standards of neutrality in the way we implement a loss in fairness. that is what i believe and have always tried to do. i know your leadership, virginiaens of west would be very appreciative of that. in the late the savings-and-loan crisis may not have been as big as the one in 2008, but across the federal government millions of dollars. we investigated u.s. senators. they'ree back now looking at why it has gotten so big. are they getting so large that they are a protected class or species? >> i have indicated today and on a previous occasion that i do not believe anyone is above the law. there should not be an acceptance of that principle. bank gets that bigot, should not be the ultimate recommendation that we should not let them to decide peer in that position? >> i think there's a question of how we make sure we have ended too big to fail. one is to say there's a certain or divide up what can take place. you use the tools we have in dodd-frank to make it more expensive to be big and it .ecomes a market determination >> and working with a the capital requirements would be something -- >> i think we ought to see where the rules and up when it is fully implemented to see if it solves the problem. >> you can understand the to gets' concerns capital back on the street. they're the people who benefited the most from the turn of the economy. >> in the aftermath of the crisis, they took a bold action in passing powerful tools and we are now determined -- >> i appreciate your explanation, but i'm wondering why it's taking so long to get this implemented. atmosphere we live in every day as part of that reason and i hope it stops. >> senator. mr. chairman and ranking member crapo, thank you. add that i will hold them all in my prayers in oklahoma. it is a terrible catastrophe. thank you for mentioning it publicly. thank you for being here, secretary lew. i want to talk about a different brown amendment. you may remember senator brown joined with senator kaufman during the dodd-frank debate to introduce an amendment that would have broken up the country's largest banks. the amendment had bipartisan support behind it, but it did not pass and we all know what has happened since then. the four biggest banks considered too big to fail before the crisis are now 30% larger than they were just five years ago. scandal, the infamous london whale, the fourth quarter -- foreclosure fraud. -- said-general holder they could not do this without factoring in potential systemic fallout. there are parts of dodd-frank there to address the problem, even federal reserve chairman bernanke says it is not yet over. i know you're elsewhere during the dodd-frank debate, but i like to read you something from a "new yorker" article on what a senior treasury official said about the brown-kaufman and too big to fail amendment. department,treasury would have been for it it would have happened. but we were not, so it didn't." the opposition of the treasury is an important reason that my colleague, senator brown's amendment did not pass. are you still opposed to capping the size? >> i have tried to indicate that ending too big to fail is in our policy and lancers already today. >> at the question is specifically about capping the size of the largest financial institutions. it was the treasury opposition that killed off breaking up the bid banks and i want to note the treasury has changed its position. >> as you noted, i was not in the treasury at the time. we are in a path now which of the right path, to implement dodd-frank and take stock when we're done implementing. there are a lot of calls of legislation in this area and i have said things to people who won various kinds of changes. this is not the time to be enacting big changes to dodd- frank or to the regulatory system. >> the question is, secretary , we all set back in 2008- 2009, the problems that caused this was concentration in the and morendustry concentration. we are seeing some roles in dodd-frank of was trying to ended. let me phrase this a different way. how big to the biggest banks have to get before reconsider breaking them up? they are 30% bigger than they were five years ago. do they need to double in size from a triple in size, quadruple in size? senator, many changes that have taken effect since the passage of of dodd-frank, we have better capitalized banks, better visibility, derivatives traded in a way where we can see what is going on, there were many things that contributed to the financial crisis and we're making good progress. have we taken the measures and to account for systemic risk to not be the issue that it was? is not the only factor. >> yes, but it's one that is growing. >> of the look what happened from 2008 until now, there were other institutions who failed that needed to be reorganized and it wasn't unusual time when we were ironically seeing a shrinking in the number of players because of the failures of the institutions. i'm not trying to avoid addressing too big to fail. and trying to address that it is an unacceptable policy. we need to take a look at all the policies that lead up to systemic risk. >> secretary, i really think the evidence suggests that the concentration as one of those factors. when we see the largest financial institutions getting bigger and bigger, it tells us clearly on the past. >> in fairness, we have not seen the charges that will be fully in effect. we have seen one scandal after another in these larger financial institutions. it is clear that have not changed their risk practices nor have they decided they will suddenly start changing the law. at best, we have evidence going both ways. forologize, mr. chairman, running over in this exchange. secretary, the ranking member and i have a brief follow-up question. the report highlights the growing securities threat to the financial sector including the recent attacks. fsot do to make sure that they remain vigilant telling guarding against threats? can fsoc do? >> cybersecurity is a major threat and it will be with us going forward. out therebad forces always tried to get a step ahead of any protections that are put into place. the first thing we have to do is to make sure we have the kind of coordination where the threats are well understood and communicated, where there is collaboration with the industry and with the regulators and the industry. , ifirst weeks l.a. office wanted to make it clear that we needed them to step forward to be a part of that process. executiveg that the orders that the president issued last year, he got about as far as we could go with administrative authority to put forward the tools to deal with this. it would be very helpful to get legislation to make it even more likely that firms would do the kind of cooperative work that is needed to be as vigilant as we can possibly be. one thing i'm particularly concerned about as large institutions have the capacity to do more on their own than smaller institutions do. i think we have to be very concerned that the risks are not just to the big money-center banks. they are much broader than that and they're faced by institutions in the kind of collaboration and cooperation we're talking about how the full capacity to respond should there be a threat. we're going have to remain committed and vigilant using all the tools that we have both to detectives and to look at these issues and it will take real cooperation between financial- services and government officials. >> centre crapo. >> thank you, mr. chairman. mr. secretary, two questions to follow up on. one on the irs and one on fsoc. you indicated that the inspector general's finding indicated that there was not a political motivation to irs activity. >> no political pressure was brought to bear. few had to step out for a moments to go down to the finance committee and i had an opportunity to ask some questions of the inspector general and a few very important things came out. he made it clear that the report does not make a finding that there was no political pressure or political motivation. it was that they were not able to find it. i asked what they looked into. they said they asked irs interrogated,they were interviewed, whether they had a political motivation. none of them admitted to having such. i asked them if they were under growth. no informational testimony under oath and it was his opinion that he thought further investigation was necessary. it seems to me at this point, is a coalition of targeting certain politically group to individuals or organizations. as i said earlier, we have an agency perceived by many in america to be the prosecutor, judge, jury, and executioner in major parts of their lives were setting up the criteria to look at those who are set up in the tea party, who use the words, tea party, make america better, or criticize how the country runs and later expanding the list forith a bolo those who want to educate our unconstitutional and the bill of rights, those focused on addressing social economic reform in the united states. is question i have to you are you, or is the irs, taking the position that somehow this coalition of audits that focus on people from these political perspectives just happened accidentally or statistically came about in a way that was not driven by a decision that was aimed at this particular fo political philosophy? >> pharma wareham no evidence that suggests any political interference in any way. there is a sharp fall between the treasury department and the irs it is a welcome a well- respected line and no evidence has been brought to bear. i read the report. it said there was no evidence of any political pressure. people can ask questions and i'm not discouraging asking those questions, but there is no evidence and we should be clear. >> the extent of the evidence is interviewing those who were implementing the lists and asking them if they were politically motivated? >> anyone accountable should be held accountable, but there has to be evidence to hold them accountable. >> you believe the lack of nodence means there is political -- what senator, i will not speculate on fact i cannot see. >> one quick question, secretary, on fsoc. you said you thought there was a lot a progress being made on resolving cross border issues. in april, he received a letter .rom nine foreign ministers >> i have spoken with many of them about it. i think the letter was ill informed and there were conversations going on between the sec and cftc making progress and i will might speculate whether reasons that other political officials write letters and i did say to them quite directly that it was not a helpful way to promote conversations to the independent regulatory agencies to write a letter like that that did not even reflect a state of affairs. i would not read too much into that letter. they are not finished yet, but have been working quite effectively to try to deal with this and i think the letter was something that did not reflect where the situation was out the time. >> thank you, mr. chairman, for the extra time. >> secretary, thank you for your testimony today and your continued focus on matters important to the financial system. this hearing is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2013] brookingsup, a institution for mommy affordable care act. then, the senate finance committee investigating the irs targeting of conservative groups. lewr, secretary jack testifies about the implementation dodd-frank regulations. >> wednesday, more about the investigation into the irs targeting of conservative groups with the house. secretary and a special administrator for tax evasion, a former irs director schulman. live at 9:30 am eastern on c-span3. monday, the brookings institution examined implementation of the affordable care act, the health care bill signed into law in 2010. it includes state exchanges, expanding medicaid, and the role of the irs in enforcing the individual mandate. this is about 90 minutes. >> good afternoon everyone. welcome to brookings and welcome to our forum on implementing the affordable care act. my name as elaine and i am a senior fellow here and director of the brand new center on effective public management. i would like to welcome everyone here today for a very important discussion of a very timely topic. it's been a long time since the federal government has had to implement a great big a new program. 10 years ago, we saw the implementation of the medicare part d and implementation of the brand new department of homeland security. in each instance, there were substantial growing pains and there were predictions of disaster. as there have been with the affordable care act. ,n the case of medicare implementation exceeded expectations and costs have not been nearly as high as was originally feared. in the case of the department of homeland security, the implementation was bumpier, nonetheless, both systems operate more or less smoothly and, in retrospect, the crisis looks over baloney. obamaear, the administration needs to finalize implementation of the affordable health care act, historic legislation and the most significant domestic policy achievement of the administration to date. the question of how it goes is front and center. even the president has admitted that there will be hiccups along the way. compared to earlier health care legislation, this one is incredibly complex involving activity in 50 states, 50 state insurance commissioners, and large changes in the private health-care industry. republicanxity is a party that still does not like it and thursday voted for the 37th time to repeal it. question that i will be proposing in the course of this conversation to my distinguished panelists is -- how will it go? be sinking, would do not answer it yet, think of a continuum. at one and is the pickup scenario. that means, more or less normal. if the implementation as successful, the exchanges will be up and running and there will be some glitches and some people who qualify for subsidies will not get theirs and they will have to appeal. some people who do not qualify will get them and someone will run after them to try to get the money. it will be those kinds of problems but within a normal startup. , andiddle of the continuum i still this from david brooks, which explains why he writes for "the new york times" shambolic messiness where there will be inerally years of confusion serious problems with the federal of of being able to interface with the exchanges. there may be waivers to these roles while they are worked out. there may be premium increases and a whole lot of stuff. in the end, the act will prevail. finally, at the complete other end of the continuum is what i call the repeal scenario. large numbers of people in this town and around the country, called republicans, are rooting for this one. they seem to like this idea so much that they voted 37 times for it. this go?ion is will at the other end of the 1989nuing, the way of the medicare catastrophic care act was signed into law by president reagan and then repealed 16 months after it was enacted making it the shortest lived of -- piece of social policy in the united states. .hat is the continuing i will ask all of you to place ourselves on that, but do not do it yet. i want eacht there, of our panelists to discuss some of the implementation this year's -- issues. i will introduce everyone and then i will call on them. thegoing to the start with senior fellow of economic studies here at brookings. ofhas also been a director economic studies program. he came to brookings in 1968. he has taught at the university of maryland. in the 1970's, the assistant secretary of planning at the department of health and education and welfare. he chaired the advisory council on social security and he is a member of the institute of resident -- medicine and he is a founding member, vice-president, and chairman of the board of the national academy of social insurance. is the author of many publications dealing with medicare, medicaid, and social security. i cannot imagine a better person to have on this panel and to start us off. sheila burke, going alphabetically, the only other woman on the panel is an adjunct lecturer at the harvard kennedy school of government. i met her when she was executive dean of the school from 1996- 2000. as chief of staff to bob dole and a professional staff member for the committee on finance. she is a member of the institute of medicine and the national academy of sciences and the american academy of nursing a. she was also my nurse, just in case anyone feels a little fehlau as we discussed this problem. >> or scared. >> she has been a distinguished visitor and she serves on the board for the kaiser commission and the future of medicaid and the uninsured. the middle, bruce, president and general manager of maxxam as health services bringing more than 20 years of public-sector health and human services programs, policy, and operations experience. global health operations which provided administrative, program management, and operational support for programs including, and you will see why he is here, health insurance exchanges, medicare, medicaid, and children's health insurance program, also known as chip. this is the largest book of business creating huge annual revenues and they have a witholio contracts medicaid administrative services in 18 states and the district. they are really at the heart of the implementation game. at another very important meeting but he will join us. the secretary of the maryland department of health and mental hygiene. he previously served as commissioner of health in baltimore and as the principal deputy commissioner of the fda. has a long interest in health and permission technology and serves on the policy committee for the u.s. department of health and human services. as you will see, maryland is one of the state's that has actually made some real progress on this will be good to hear from the state's perspective. like tot, what i would do is ask our panelists a series of questions and then we will open it up to wallet. , as we always do. i want to start with henry. i would like you to start of this panel with a little bit of a historic perspective on the health-care system. nearly half a century ago, 48 years this summer, to be precise, congress passed legislation creating medicare and 10 years later, they passed medicare part d, a prescription drug benefits. recently, you said nothing approaching the complexity of this rollout has ever happened in u.s. peacetime history. can you spend some time telling us about this and about the problems, similarities, and differences you see in implementing this as opposed to the earlier bills? >> i would be glad to do so. i want to add one item to what seemed like a roster of my complete life history and that is that they currently sit on the d.c. health exchange and i am vice chair, getting to see the implementation from the inside as well as the outside. to me that there is one similarity between previous experience with major health reform legislation and the current one, and i have to say that they all concern health care. beyond that -- [laughter] the differences are more salient and important than the similarities. the first major difference, and it's critical, is that both the expansion of medicare part d and the original enactment were bipartisan efforts. the original medicare program was a blend of republican and democratic proposals. wilbur mills made it clear that he was not going ahead unless it was and it ended up being that way. similarly, with the extension of there wasefits, substantial support on both sides of the aisle, although not all democrats signed up with the president's proposal at the time. difference which i think is critical in understanding this bill, in contrast to medicare, the original enactment, medicare was designed with the administrators in the room allah legislation was being written. that meant that the problems of implementation were considered as the legislation was being drafted. that was not out all the case this time. the administration backed off to and thisrable degree was largely drafted within congress. this and that being a struggle between various democratic andslative policy groups the design was to put the matter generally. a third difference that in a way is paradoxical that the enactment of medicare and medicare part d were more radical programs than the affordable care act. i mean radical in the following sense. thatcreated new programs supplanted or replaced but had gone before. the affordable care act then to itself in a pretzel in order to accommodate existing institutions and disturbed current arrangements as little as possible. given the fact that the u.s. health-care system is exclusively complicated, that meant the legislation itself had to be exclusively complicated and it fully delivered on that characteristic. the final difference, and i think does go directly to the question, alain, that opposed to all of us, concerning prospects down the road. in my opinion, we have developed a very intense, fast reacting, adversarial political environment in which analysis is done quickly, frequently a manner of,d in as alice rivlin once said, forensic social science, some mobilized to make a legal or therefore,ase and, the elbowroom that administrators have a for working through problems before they are brought come almost hysterically, to the attention of the public, that elbow room has been decidedly narrowed. i will stop it there with the differences and we will come back to the continuum. >> we will come back to that. i will give the doctor to question to -- a minute to catch his breath and we will go to bruce. a company such as maximalist does not typically get involved in the creation of policy, but then we look at the policy and figure out what the process these are that need to be implemented and what it needs to do to support the implementation. i have given some thought to the fact that there is a little confusion as to what day one might look like. >> what does it look like? >> it's important to understand that on day one, we will bill aeing -- we will see exchanger version 1.0 which will represent additional process improvements and there's no doubt that this is an incredibly tremendous undertaking and represents the orchestration of many stakeholders bring together technology, consumer engagement, all that it entails, revisions to the regulatory process these and the process these in the insurance market under a new policy environment that has to be interwoven with existing program structures. it's a very complex undertaking. the states we're working with than those in a similar market, the state and the government will make the october 1st deadline and we will have operational changes, but the road will be bumpy for the initial time before things smooth out. we will talk about where we will see some bumps in the road and what's being done to address them. above all, states and the government are focusing on the consumer experience and ensuring that it is high quality from day one and individuals can seamlessly traversed the problematic boundaries between various insurance affordability problems and medicaid, and, as a consequence, when giving consideration to prioritize and functionality between being available on day one, the privatization is on back office manual work around and things that will not disrupt the consumer experience. many states are also in the process of implementing new eligibility systems for medicaid or what is sometimes called multi-program eligibility systems and states are availing themselves of 9010 federal money to do that and they are in various stages of progress in that implementation. just as we are the kinetics a change readiness, similarly depending on where they are in the implementation of the technology of, a can signal the maturity of a system to system interfaces. from our experience, it is clear they are thinking about the work around they might need to implement and testing them behind the scenes to be perfected. another important element, while we're talking about the individual exchanges largely, we're talking about families more than individuals who will be applying for this insurance. can beily situation complex. you can have a father who qualifies, a mother who is a newly pregnant qualifying, a child on schip, and other child about to emancipate. understanding those complexities has to implement it -- implication on the handoff that has to occur with the entities. as we have thought about it, we have thought about four things that states should be thinking about for day want to minimize the bumps in the road. the first i would offer is the importance of the navigator programs out there. they are the front lines of health reform to consumers. they need to be well trained, certified, and coordinated to provide the policy, the procedures that they articulate and will coordinate with the health insurance exchanges. there are four different categories. person the navigator, in the sisters, agents and brokers who, as many may know, they cannot serve as a navigators' -- in person but the sisters. and then there are accountants. -- then there are in person assisters, ipa's. it numbers that you can call for information and these new customer service centers, the navigators, those assisting, as well as the no "wrong door" provision, communicating is critical. not every application is going to follow "the happy path of transaction," as we call in the industry. that is what we envision in click to cart. everett. as dawn not seamlessly through the website and that is something we strive for as we move forward with two. know and beyond. as well as a mobile platform years. forward with 2.0 and beyond. they want to ensure that the income being used for the eligibility is more current than what might be available t hrough the data services held. to handle those types of transactions is critical and this is something we can learn from medicare and schip. "more knowledgeable and fully trained individuals to handle those complex cases can be an effective they want strategy. whether agardless of state is state-based, federally facilitated, or a partnership, we can talk about the definition shortly -- >> there is a handout on which states have which. >> perfect. >they create ongoing requirements for those states. insuring that there is a choreography between the local public health department offices and counted based offices, existing call center operations, federal call center operations and so forth is critical. they have to still make decisions as to whether they will be a screen and refer state, will be given permission from the federal exchange and make a final determination that the state level? they have them make the determination? they still own the responsibility for that case going forward. marketare looking at readiness making sure qualified health plans are available for selection by consumers to effectively run their course and the information can be uploaded >> i want to put in the a little personal antidote. my father worked with the social security administration and his job was to write the training materials for medicare. he wanted to be very clear about how he was writing those materials. every night he brought them home and he had me brought the materials and answer the questions. i do believe i was the only 15 year-old in america who knew how to determine medicare eligibility. [laughter] i don't know that i could have figured this one out. maryland is one of the all star state. press accounts as a maryland is way ahead of everyone else in planning, implementation, etc. can you tell us when you started, what you have accomplished and, then, if you were to talk to a state's, let's just say idaho who just in the last month decided to start working on this, where would you have them began? set up?d you have them in aapologize for coming few minutes late. >> that's okay. >> it was not a health reform related program. i think that we are very excited for october 1st next year in maryland. everything we can. i do not know whether we are an all-star or not, but our goal is to deliver. from my perspective, maryland has had some unique advantages. i'm particularly lucky because of the level of engagement that existed in the state. before i started, there were some pretty important decisions made. the governor and the lt. gov had a series of 20 or so public hearings around the state, hundreds of comments from the public and really had established a broad consensus that made sense for maryland to do a state-based exchange. the logic was that maryland could control their own destiny and that there are some unique aspects to maryland system that the exchange could be sensitive to and it would be more likely to be sensitive to if it were state-based. it was interesting to me when i was on a few national panel sitting next to people with some degree of understatement were not huge fans of the affordable care act from other states and they would say how much they hated it and i would say, we support the affordable care act but there is an irony here, i'm the only one on the panel who supports it and we're the only one going our own way. every one else will be stuck with the federal government exchange in their area when that was a term that they used with some amount of -- yes. [laughter] we went off on our own way. vis-à-vis affordable care act in maryland and the analysis i used most commonly as a set of tools that the state can use to customize in different ways to accomplish improved access and control costs. it provides tools that are safe to use and that is how we have gone about it. we have three different pieces of legislation so far. the first one was to set up governance and that proved to be really large to identify the topic that should be studied in the state. there were six studies we did in the first year. governance was critical. >> what year? >> 2011. we wanted to take it one step at a time. that has been armada. we did not rush out and say we're going to do it all this way and we had it all figured out. governance as nine people on board, three of them state officials, the health secretary and chair of the board, six public members, terrific people, the head of one of the retail associations is on there, former director of the american health association, and a ringer who follows exchange developments. some health economists, consumer advocates, just a great group of people. then we have said about studying these key issues and we set up four revisory committees and there was just a stack of this high of reports, comments, and people really felt like they were engaged and we've brought it down to about 28 recommendations for the legislature and then it passed a policy framework. when we started, i thought there would be 12 issues that would cause all sorts of ugliness in terms of debate, but we actually really resolve them and it sailed through. i give a lot of credit to the lieutenant governor who brought everyone together in the legislative process. chance toeryone a submit amendments. we had like 300 and we yet responded to each one individually. if you're in maryland and submitted an amendment coming of got an answer on a if it was included, wire why not. then he made some critical decisions that were unique to maryland. we decided to integrate the small group exchange with existing third-party administrators who sell most of the insurance to small businesses and we wanted to allow for groups to sell on the exchange without having to become navigators. there were a lot of things are related to what we wanted to do in maryland. then it was fixing little things and getting the funding structure in place. it would be unfair to say that we have not had our share of disagreements, but we have had such an aggressive and publicly engaged process that everyone has been willing to say, let's get this finished up as good as possible. it said the people on all sides of the issue that one of the challenges that hits me a lot of is that people project on to the exchange either their fears or helps and both of them can really. -- can derail you. the exchange is going to fix this long standing issue with this not being reimbursed. i agree that is a longstanding problem, but maybe not october 1st. we have to get this right. if we do not have an exchange functioning, it will be hard to fix the problem. willingave really been to understand our issues. and then you decide how you're going to use it in different ways. there are a number of different providers, community how contractors will go, the brokerage commission. we're not going to try to micromanage that. we will study that and see how it goes. we will encourage robust contract. . we will maybe have some mixers to meet with the different people. but we're not going to try to dictate when we really need to focus on the fundamental jobs. to a question about other states, but i really do think that the governance structure is really important and the ability to really engage the public and have people talk about what they're really want to get out of health reform and not think about it as a uniform thing but a set of rules that can be applied. second, i think that you want to create a can do spirit. i was incredibly lucky that the board was really coming together. we have had two years anton the contested issues in terms of -- contested in the terms of, i did not know what the answer was going to be. we have to talk about. had one episode in two years. to a point where people are really confident. maybe i would rather have it this way, but this is a good interim stepped. the one contested vote was not what i would call on a fundamental issue. i just said, ok. we will be moving on. everyone laughed and voted. it's been really important. spirit, focusing on governance, public engagement, and then be strategic. decide what you can and cannot do in order to get going. it is obviously for people just getting started that it will be more of an acute task, but you can do that by being really transparent about why. likeid no, but it is more "no, but --." and that needs to be more the kind of approach. >> that's great. sheila, i wanted to rescue something a little bit more about design and implementation. but it relates. the mandate to purchase health insurance is at the heart of the plan. it is also the least popular plan in the law. -- the least popular item. how do think this will work? will it get people who do not have insurance out to buy? is there a chance that the combination of the mandate and requirements in the law for more will cause premiums to rise for those a qualify for subsidies and for those who do not? how do see this all working together? all, thank you for inviting me. when i first heard the redressing josh, i thought i called -- you called him "the all spark" which is a transformer thing. [laughter] >> i guess he could be. >> i think you have asked a series of questions, frankly, to which we do not know the answer. you are absolutely right that one of the most controversial aspects from the debate that occurred around the mandate wonder about what its effect will be, how many people it will effect, these are the questions we do not yet know the answer to. many of the issues that henry raised our issue that in fact play out here. in the tensions that exist in rowling the program forward and the tension between defense and the state and the absence of a bipartisan agreement and the red-blue dynamic that we will have to confront that will be critical in terms of what people know about the program and how that essentially plays out. if you actually think about the size and nature of the question, there are 300 million people we anticipate having coverage in the near term. merilee medicare coverage, the many thatf exist. there will be a large pool who will be exempt. it could be on their income, a member of tribal organizations, it could be on a host of qualifications that essentially exempt them from this mandate. the latest estimates by the kaiser family foundation and suggest there are about 30 million people that they believe will be subject to the mandate to essentially neither have been in come that is it to lower premiums that exceed the capacity to finance. you're looking at a universe of about 30 million. critical questions in terms of the mandate is the importance to the success of the program going forward in the risk, essentially, of the exchanges and the other programs formed in not having adequate number of people who are both health the house allows unhealthy. one of the desires in the creation of the mandate was to basically get people into the system to spread the risk and avoid some of the issues that have existed historic claim with individual and small group coverage, which has been very costly, because it tended to draw people most at risk. one issue going forward with the exchange's is, whether in fact, if those people most at risk who requireerage decide to themselves to essentially purchase that coverage. that is really the target of a mandate to get the broadest possible ability to enroll? if faced with a penalty of $95 that,remium in excess of what would the choice be? we know that there are essential health benefits that must be covered. we are only now beginning to see what participation there will be .n the part of insurers the cost know yet what will be. some of the costs are beginning to occur. , theates like oregon premium costs are not going to be as great as what we expected but in other states, there is a that the size of the benefit now required will be more costly than people have experienced in the past even with essentially the protections in the law with respect to race. the of the requirements of ofranteed issue and things that nature that some believe will increase the price of those products. the question as to whether or not the people who participate will be based on the knowledge and there are very few people who fundamentally really understand what is required under the law and what the expectations will be for them. the poll suggests there is a larger pool of people who do not yet know what is in the aca so it might be a surprise to some. there will be people who make the judgment that the cost of the penalty, which many believe to be in too low, less than what is required in massachusetts, and not sufficient to encourage people to essentially get coverage that could be quite costly for them, particularly those who may not qualify for the subsidy. you have knowledge, cost, the product you are not yet certain of in terms of what's insurers will be participating in every state, so that is yet to be discovered. there are a great many things that we do not yet know. the blue-uestions in red environment as to which states will actively, aggressively seek out and try to make people aware of what's available. we have heard a lot of discussion over the efforts to essentially publicize the benefits of the aca and what the requirements might be. that will play out differently in every state. there'll be some states like maryland and others will make an aggressive attempt to make people available. websites, navigators, the variety of sources of information that will be quite important but that will vary enormously by state. there'll be some states were quite well-equipped to put the systems in place and other states who will be slow to pick up that mantle. in those states, you may have a little resistance to pick up that occurs. i think we really do not yet know. it will essentially play out over the next few months of those efforts take place over the summer. it will depend largely on the states and the information they make available. it will depend on what the product looks like, what the price looks like, and whether people feel compelled to do so. whether it, again, becomes a source of coverage for people at risk. >> great. i want to ask the panel questioned that is actually prompted by news reports lately. the irs scandal has now been bleeding into health care over the issue of the federal of it. the hub is the place where data from five different agencies come together in order they tell the states whether someone in that state applying should get the federal subsidy. it is a complex information technology restaurant. the issues arising have to do the privacy issues. not know, thiso is a place where irs data has to come together. data from the department of homeland security on your immigration status is together. the department of justice under .riminal history incarcerated people for instance can i get a subsidy. hhs and social security for enrollment d

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