by Roger Russell
The American tax system is severely overtaxed despite the recent restructuring of the Internal Revenue Service, reports the IRS Oversight Board.
“A steadily increasing demand on tax administrative service, and a steady real decline in IRS resources” is making the IRS more prone to make errors in processing returns and less likely to detect “manipulation” by fraudulent preparers, the board stated in its annual report.
The board urged the IRS to enlist both the Bush administration and Congress to beef up its resources and to seek changes in the tax system to make its job easier.
The report painted a vivid verbal picture of how the IRS is overburdened. In the last 10 years, its workload has risen by 16 percent while its staff has dropped by 16 percent - from 115,205 in fiscal year 1992 to 96,714 in fiscal year 2002.
It also said that resources are falling while there has been a steady rise in “opportunities for manipulation and for error” in tax return processing. It noted, for example, a steady rise in more complicated types of returns - those filed by individuals earning over $100,000 per year, and by small corporations.
The IRS Oversight Board was created by the Restructuring and Reform Act of 1998 to oversee the IRS, much like a corporate board of directors. Its specific responsibilities include the review and approval of strategic and performance plans; review of operational functions; and review of the selection, evaluation and compensation of IRS senior executives.
The board recommends that the following be done:
© Close the compliance gap. The IRS modernization program and a 3 percent annual productivity gain are not enough, by themselves, to do this. The board said that an increase in staff is necessary, and it endorsed former Commissioner Charles Rossotti’s recommendation of an annual 2 percent-per-year staff growth through 2010.
● Boost customer service. With the growth in the complexity of the tax code, the demand for customer service grows every year. The IRS needs the resources to improve customer service to a long-term level agreed on by Congress and the administration.
● Commit to modernization. Both IRS processes and supporting information systems must be modernized at the same time that existing systems are maintained.
● Focus on people resources. The retirement of “waves of federal employees” over the next five years will result in a severe loss of institutional knowledge, according the report. The report urges that the IRS develop an agency-wide human resources initiative to recruit, retain and develop employees.
● Measure long-term goals. A consensus is needed to determine “the appropriate level of performance in the long term, for both customer service and compliance.”
● Simplify the tax code. While the board declined to endorse a particular simplification proposal, it noted that complexity adds to taxpayers’ burdens and hinders IRS enforcement. It urged Congress to consider complexity issues as part of every tax bill and make tax code simplification a theme for future legislation.
The conflicting trends of increased workload with a decreased staff has produced a “resource triage” - since compliance activities were considered more discretionary than essential services, such as return processing and answering correspondence, resources were shifted from compliance activities to customer service.
The board cited former Commissioner Rossotti’s end-of-term-report that 60 percent of identified tax debts are not pursued, 75 percent of taxpayers who don’t file are not pursued, and 79 percent of taxpayers who use abusive devices (e.g. abusive tax shelters and offshore accounts) are not pursued.
To combat the compliance gap, the IRS increased collection activities, shut down abusive tax shelters and launched Limited Issue Focused Exams for large business audits - all effective, but not enough to close the compliance gap, said the board. Since its resources are limited, the IRS must continue to focus on key areas of non-compliance.
The majority of taxpayers have a stake in seeing these efforts succeed, according to the board, which cited a survey of taxpayer attitudes that it conducted last July. According to the survey, a great majority of taxpayers “want the IRS to ensure that all taxpayers are reporting and paying their taxes honestly.”
Seventy-four percent said that their “personal integrity is the most important factor that influences them to report and pay taxes honestly,” more than twice as much as any other factor - including fear of audits and third-party reporting.
The payoff for increasing IRS resources is the additional revenue in the nation’s coffers, which would more than make up for increases in budget. The IRS itself estimates that if it had all the resources it needs, it could bring in an additional $30 billion annually.
