A pair of reports released Wednesday highlight the impact of yearly budget cuts on the Internal Revenue Service’s activities.

The Internal Revenue Service Advisory Council released its annual report for 2015 on Wednesday to the IRS Commissioner, containing recommendations on a wide range of tax administration issues.

One of the top recommendations from IRSAC is the IRS needs sufficient funding to operate efficiently and effectively, provide timely and useful guidance and assistance to taxpayers, and enforce current law, so the integrity of, and respect for, the U.S.’s voluntary tax system is maintained.

The IRSAC report noted that overall funding for the IRS has decreased approximately 17 percent on an inflation-adjusted basis since fiscal year 2010 and is now below fiscal year 2009 levels. The reductions do not include the effects of the unfunded mandates of significant new program costs, like administration of the Affordable Care Act and other laws, imposed on the IRS, the report noted.

“The IRS has managed these massive downward adjustments in its funding by scaling back activities, freezing hiring, limiting training, and using limited budget flexibility to reallocate resources among its four appropriations accounts and the programs they respectively control,” said the report.

IRSAC noted the budget cuts have already had a significant and negative impact on both taxpayer service and enforcement functions of the IRS, inhibiting its ability to carry out its mission.

"In our view and in the views of others, the adjustments forced by recent budget reductions have had substantial and widespread negative impacts on the agency, all of its 81,279 personnel, federal taxpayers, state taxpayers whose state tax-related obligations are affected by interaction between their state tax system and the IRS, and taxpayer representatives (the attorneys, certified public accountants, enrolled agents, software providers, and others who assist taxpayers in filing their tax returns and dealing with the resulting obligations that flow from them)," said the report. "Thus, the reductions affect all the issues with which IRSAC and taxpayers generally are concerned.”

IRSAC’s report also discussed a number of other issues, including identity authentication of the Form 1040 series, third-party payer arrangements for employment taxes, continuity of independence, strength and visibility of the Office of Professional Responsibility, international information return penalties, and the statutory authority of the IRS to regulate tax practice.

On the latter topic, the report stated, “The IRSAC believes all tax return preparers should be subject to the competency and ethical standards in Treasury Circular 230 and that all tax return preparers not subject to the standards of a bar license or accounting license should be required to demonstrate competency by successfully passing an appropriate test and taking annual continuing education. We therefore recommend that the IRS be granted the explicit statutory authority to regulate tax return preparers and, indeed, all stages of tax practice.”

Another report released Wednesday, from the Treasury Inspector General for Tax Administration, highlighted the impact of the budget cuts on IRS compliance activities. The TIGTA report noted the budget reductions resulted in decreases in the number of employees available to provide services to taxpayers and enforce the tax laws. Overall, IRS employment (all employees who are on permanent, temporary, and term appointments) has declined 15 percent from 107,622 in fiscal year 2010 to 91,018 in FY 2014. The number of enforcement personnel decreased by nearly 1,000 employees during FY 2014.

As resources decreased, the IRS’s responsibilities have expanded, TIGTA noted. For example, in FY 2014, the IRS continued implementing tax-related portions of the Affordable Care Act and the Foreign Account Tax Compliance Act, or FATCA. Despite these challenges, total dollars received and collected (gross collections) increased for the fourth straight year to $3.1 trillion (a 6.8 percent increase) in FY 2014. Enforcement revenue collected also increased from $53.3 billion in FY 2013 to $57.1 billion in FY 2014 due, in part, to a relatively small number of large dollar examination cases. Tax return filings remained steady while gross accounts receivable increased to $412 billion.

FY 2014 Collection function activities showed mixed results, according to the TIGTA report. The amount collected on delinquent accounts by both the Automated Collection System and the Compliance Services Collection Operations increased while the amount collected by Field Collection decreased. The Collection function continued to receive more delinquent accounts than it closed, although the number of delinquent accounts in the Collection queue decreased due, in part, to the removal of millions of accounts that were not resolved. While the use of levies increased, fewer Notices of Federal Tax Lien were filed and fewer seizures were made. Meanwhile, taxpayers’ use of the offer in compromise payment option decreased for the first time in the past five years.

The Examination function conducted 11 percent fewer examinations in FY 2014 than in FY 2013. The decline in examinations occurred across almost all tax return types, including individual, corporation, and S corporation.  Seventy-one percent of return examinations were conducted via correspondence. In addition to the decline in the number of tax return examinations, productivity indicators also declined. The dollar yield per hour for most return types decreased. Also, the no change rates increased for most types of examinations (individuals, corporations, and partnerships).

The National Society of Accountants sent a letter to lawmakers this week criticizing Congress’s plans for further budget cuts at the IRS next year (see NSA Blasts Congress on IRS Cuts).

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