The economic downturn and an increasing number of taxpayers with complex tax issues contributed to a decline in the amount of revenue collected by the Internal Revenue Service in fiscal year 2009, according to a new government report.

J. Russell George

An annual statistical analysis by the Treasury Inspector General for Tax Administration found that gross collections declined to $2.35 trillion in FY 2009, compared with $2.75 trillion in FY 2008. However, many other indicators showed mixed or positive results.

The IRS collected fewer dollars on delinquent taxpayer accounts in FY 2009, while gross accounts receivable rose and more taxpayers’ delinquent accounts were placed in a holding file for unassigned inventory. However, the IRS increased its use of collection enforcement tools and closed more investigations of delinquent taxpayers.

“It is understandable that the Internal Revenue Service is collecting less money, since the economic recovery is still a work in progress,” said TIGTA Inspector General J. Russell George in a statement. “Under these circumstances, continued efforts to improve compliance will be even more important to reducing the tax gap.”

The IRS is also facing an increasing number of taxpayers with complex financial holdings, the increasing complexity of examinations, the growing impact of international tax law issues, and the expanding array of technology skill sets needed by the agency.

The IRS Examination function hired approximately 2,000 revenue agents and tax compliance officers during the last fiscal year, which was the most hiring done in the past five years. However, the IRS will not receive an immediate benefit from this hiring, and IRS Examination function compliance activities showed mixed results in FY 2009.

Compared to a slight decrease in FY 2008, the percentage of tax returns examined increased slightly during FY 2009, returning to approximately FY 2007 levels. At the same time, the dollar yield per hour increased for individual tax return examinations performed by tax compliance officers as well as for individual, corporate and other types of tax return examinations performed by revenue agents. Compared to a slight decrease in FY 2008, the overall percentage of tax returns examined increased slightly during FY 2009, returning to approximately FY 2007 levels.

TIGTA did not make any recommendations in this report, and the IRS did not provide any comments on the draft report.

The IRS is continuing its efforts to improve its business processes and workload selection methods because the processes and methods appear to be making a positive impact on compliance efforts. In addition, the hiring and training of new enforcement personnel continues to be a top priority at the IRS because much of the benefit of the agency’s recent hiring has yet to be realized.