Let’s start with the impact of the American Taxpayer Relief Act, passed into law at the start of the year. Because of the time required to update and test systems, the late passage of ATRA forced the IRS to delay the start of the filing season. While the service estimated that over 120 million filers would be good to go at the end of January, others have had to wait additional weeks to file. Such a delay sends a shudder through the IRS, disrupting work flows and increasing taxpayer anxiety.
The problem of stolen identity refund fraud further complicates the filing season. This criminal activity has exploded in the last several years. In 2012 the service stopped several million fraudulent returns. False positives may run well below 10 percent, but this is another area where the IRS just can’t win. If computer programs are tightened in order to minimize fraud -- including all too often by incarcerated felons -- legitimate refunds are delayed and taxpayers howl. On the other hand, if standards are too loose, billions more go out the door at a time when we need the money. Of course, cleaning up stolen identities is a further drag on service resources, taking months, and adding to the frustration of honest taxpayers.
All this is unfolding when the service is striving to meet its looming responsibilities under the Affordable Care Act. Many of the act’s provisions require extensive systems work with unforgiving delivery deadlines. The new law demands the continuing attention of senior IRS managers at a time when the service is struggling to do its day job.
The IRS is also in the midst of making significant changes in its Large Business & International operating unit, moving to increase examinations in the mid-market. The shifts at LB&I are noteworthy because examiners are transitioning from a world of sophisticated, large businesses with state-of-the-art accounting and documentation systems, to one of smaller and midsized businesses. Smaller financial staffs at the taxpayer and a lack of advanced accounting software and documentation systems may prolong exams. In a period of resource constraints, examiners will have reduced access to subject matter experts who are needed to address unique issues arising over the course of an audit.
In-year budget adjustments are nothing new at the IRS, but the sequestration is more daunting than the norm. While not immediate, the impact will be significant, and it will take a long time for the service to dig out. Like other non-defense, discretionary arms of government, the IRS is taking a 5 percent haircut for fiscal year 2013. With just seven months to absorb the cuts, this really means a reduction of 9 percent for the rest of the fiscal year, assuming steady spending on a month-to-month basis. With a budget of just under $12 billion, the IRS needs to cut almost $600 million. The sequester mechanics reduce each of the service’s four funding accounts by the same 5 percent. Because personnel services constitute over 90 percent of total costs in the taxpayer services and enforcement operating accounts, the IRS will not avoid furloughs. Acting Commissioner Steve Miller has indicated that he expects to limit furloughs to no more than seven days through the end of the year. Holding furloughs to less than 3 percent of yearly days worked confirms that the IRS has planned intelligently for the sequester cuts and already significantly reduced spending.
As the service has recently stated, furloughs won’t kick in until this summer, protecting the filing season underway. My own guess is that the IRS will do everything it can to maintain its efforts to combat and clean up identity theft, and to successfully meet its obligations under health care reform. This means most taxpayer services and enforcement programs will feel the squeeze before long. It is worth noting that taxpayer service has already deteriorated over the last four to five years, with average wait times on the phones going from 4.6 minutes in 2007 to 17 minutes last year, and overage correspondence increasing from 17 percent to 40 percent during the same period. Don’t expect things to get better with these further reductions. The cuts in enforcement will reduce examinations, collections and appeals activities, thus reducing enforcement revenues that would otherwise contribute to deficit reduction. Criminal investigations will also take a hit at a time when there is no shortage of tax and financial crimes.
Finally, there is the question of who will be in charge. I gave Steve Miller his first agency leadership position in 2004 when I asked him to run the Tax Exempt and Government Entities unit. He is a strong executive, highly regarded in Congress, and well-suited for the job of commissioner. The IRS needs a confirmed commissioner and Steve would be an excellent choice. Whatever he does in this regard, the president should move expeditiously to lock in leadership at the IRS. There is too much happening and a lot at stake.
Mark W. Everson is vice chairman of alliantgroup, a leading provider of specialty tax services for small and midsized businesses. He served as commissioner of internal revenue from 2003 through 2007.
3 Comments
Another area where the IRS has really fallen behind is in responding to the Reports to Congress issued by the National Tax Advocate, Nina Olsen. In accordance with the law the IRS commissioner is obligated to respond to these within a specific time limit. But that time limit has come and gone with the prior IRS Commissioner having, in effect, ignored both Ms. Olsen's recommendations as well as the legal requirement to respond. Her recommendations are very well founded and a thoughtful response would be very much in order, even though late.
Several of them relate to the compliance problems faced by US citizen taxpayers resident overseas who have been victims of what she clearly identifies as "bait and swtich" tactics of the IRS in collecting penalties for minor inaccuracies in submitting FBAR reports where these inaccuracies had no effect in increasing the tax liability of the individuals. As JackieB mentions in her posting, the loyal American coommunity overseas, which acts as "free" ambassadors in spreading American culture and interests throughout the world, has been seriously weakened through the implementation of FATCA to the point that for more than a few it has become impossible to survive living abroad as a US citizen. It is not in the best interests of the US, for example, that persons with US citizens be forced to renounce their American citizenship in the face of US laws which obligate them to violate either the civil or criminal laws of their host countries in order to comply with some of the really outlandish and destructive requrements of FATCA. One specific case I know of a Treasury Department official recommended that a US citizen, a dual national of the country where he lives, consider renouncing his US citizenship in view of the difficulties imposed by US tax laws he is facing. There is no other nation on earth where its citizens must renounce their citizenship in order to survive if they live and work in another country. That is pretty serious.
Posted by: RogerC | March 21, 2013 4:46 AM
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Amen to jackieb! Right on point.
Amazing that he did not mention it, given the IRS resource drain this global disaster is, and for so very very little return.
FATCA, as the 'shock and awe" of the War On Offshore Tax Evasion, (WOOTE) is just like the Iraqi war, the returns are not worth the financial cost of the fight.
There are other DOJ means (which have been shown to be very successful) to deal with homeland evasion beside such extreme preemptive global action with all the collateral damage and unintended consequences of a mission gone mad in pursuit of "one good intention".
Posted by: Just Me | March 21, 2013 4:23 AM
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I congratulate Mr. Everson for his thouoghtful review of the challenges facing the IRS. The heavy workload of the IRS is due to the fault of Congress which passes laws without consideration of the cost of carrying them out. Having the IRS involved in administration of the nation's health program is a prime example. The Ways and Means Committee is currently preparing comprehensive tax reform, and one of the measures which it should consider is to require Congress to estimate the cost of administering any law passed. The current budgeting system where revenue bills are isolated from cost of carrying them out is ludicrous. Any business which operated under such principles would be bankrupt in a short time.
I regret tht Mr. Everson did not mention the excessive amount of time consumed by top legal and fiancial talent at the IRS and Treasury by FATCA legislation. This is blatant case of Congress passing a law with no cost/benefit anaylsis and no consideration of the administratie weight it imposes on Treaury. FATCA was not even debated in Congress; it was just slipped into the HIRE legislation as a so-called fund raiser ($800 million a year estimated by the Joint Committee of Taxation). Yet this legislation is so badly written that Treasury, after taking three years to produce 544 pages of regulations, is now informally rewriting the law (one can ask if it has in fact a legal base to do so) through negotiations of Intergovernmental Agreements with all countries around the world. It does not take a genius to appreciate how much human effort and cost Treasury and IRS have had to put into this law. And to top it off, FATCA is so revolutionary that it is going to disrupt international financial transactions since the United States is unilaterally imposing its law on the rest of the world, it is destroying the community of Americans overseas, it is costing literally billions of dollars to foreign financial institutions and US financial institutiions to implement and it is discouraging foreign investment in the United States.
Let's hope that Chairman Camp and Ranking Member Levin rise to the challenge to simplify the tax code,repeal FATCA, adopt residence-based taxation and ensure that any future tax legislation must be evalued by its impact on IRS administrative costs.
Posted by: jackieb | March 21, 2013 2:37 AM
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