Internal Revenue Service commissioner John Koskinen told a group of tax practitioners that budget cuts at the agency are harming not only taxpayers, but tax practitioners as well, and warned that unless Congress acts on tax extenders legislation, tax season might need to be delayed next year. At the same conference, National Taxpayer Advocate Nina Olson complained of declining taxpayer service levels by the IRS and obstructions to the work of her office on behalf of taxpayers.
[IMGCAP(1)]“The IRS is now at its lowest level of funding since 2008,” Koskinen said during a speech Tuesday at the American Institute of CPAs’ National Tax Conference in Washington, D.C. “But if you adjust for inflation, our budget is now comparable to where we were in 1998.”
He admitted that the level of service the IRS was able to provide, both on the phone and in person, was far worse than anyone would want. “Taxpayers who called the IRS had long wait times on the phones,” said Koskinen. “On bad days, fewer than 40 percent of calls were able to reach a live assistor, and that was after a 30-minute wait or longer. And taxpayers who needed in–person help at IRS Taxpayer Assistance Centers often waited in very long lines just to get in the door.”
Koskinen acknowledged the problems did not end with the tax-filing season. Callers have continued to experience long wait times on the phones, and the IRS is still getting reports of long lines at Taxpayer Assistance Centers in some locations. The problems have also been experienced by tax practitioners trying to help their clients comply with their tax obligations.
“This unacceptable level of service is a problem for practitioners as well, especially as it relates to the Practitioner Priority Line,” said Koskinen. “The waits for practitioners on this line have rivaled those for the regular taxpayer help lines. Of course, this is unacceptable to all of us. Tax practitioners interact with the IRS every day, and you need our assistance and expertise to properly represent your clients and help them fulfill their tax obligations.”
Decline in Audits and Compliance
The IRS has also seen reductions in taxpayer compliance. “Consider that the 15,000 full-time employees we have lost since 2010 include 5,000 key enforcement personnel,” said Koskinen. “These are the people who audit returns, perform collection activities and investigate tax fraud and other crimes. We are especially concerned about the effect that the reduction in our workforce has had on audits. The IRS completed about 1.2 million individual audits in fiscal 2015. That’s 13,700 fewer than the previous year. Even more disturbing, the decline in audits in 2015 was not a one-year aberration. The number for 2015 was 350,000 below five years ago. That’s a drop of 22 percent, and corresponds exactly to the number of revenue agents, which is also down 22 percent since 2010. During that same period, the number of income tax returns filed by individuals topped 146 million, an increase of almost 3 percent from 2010.”
Koskinen noted that the decline in audits was leading to a decline in tax revenue. “Not surprisingly, we’re seeing clear evidence of a longstanding decline in revenue coming from audits,” he said. “Between 2005 and 2010, the revenue generated from audits averaged $14.7 billion annually. But since 2010, it has averaged only $10.5 billion a year, which is a drop of nearly 30 percent, and translates to more than $20 billion in uncollected revenue over the past five years. These numbers show that when you have fewer employees doing compliance work, you end up leaving tax revenue on the table. In cutting the IRS budget, the government is forgoing billions just to achieve budget savings of a few hundred million dollars, since we estimate that every $1 invested in the IRS produces $4 in revenue. Some estimates are even higher. No one in all my hearings and private meetings on Capitol Hill has ever disagreed with our assertion that if you give us $1, you will get at least $4 back. Nonetheless, the IRS’s budget continues to be cut.”
Koskinen pointed out that the risk is not just in terms of dollars and cents. “Taxpayer service and enforcement need to be viewed as two sides of the same compliance coin, because our system is built on the notion of voluntary compliance,” he said. “If people think they’re not going to get caught if they cheat, or they’re just fed up because they can’t get the help they need from us to file their taxes, the system will be put at risk, and voluntary compliance is likely to suffer. Consider that a one-percent decline in the compliance rate translates into $30 billion in lost revenue for the government.”
Koskinen also described the IRS’s efforts to combat identity theft. He noted the IRS has been working with state tax authorities and the private sector, including tax software vendors and major tax prep chains, to beef up security (see IRS, States and Tax Industry Adding New Safeguards to Curb Identity Theft).
“Just two weeks ago, the group announced it is on track to fulfill the goal of having new protections in place by the time taxpayers have to file tax returns in 2016,” he said. “Although we’re still a few months away from W-2s going out to taxpayers, we want everyone to know they can expect more protections than ever when they file their taxes next year.”
For the upcoming filing season, the IRS and its partners have been taking a two-pronged approach. “This involves both improving taxpayer authentication on the front end, and obtaining more matching data so we can make our fraud filters more effective at identifying and stopping false returns,” said Koskinen. “Working together—the states, industry and the IRS—we came up with more than 20 data components that we can collect and share with each other when a return is filed. This data—which is largely invisible to the taxpayer as their return is filed—will shine new light on potentially fraudulent returns. Along with this data sharing, we’ll also continue to use one of our most powerful weapons against fraud, and that is our Return Review Program. This is a relatively new and sophisticated fraud detection system designed specifically to help protect taxpayers.”
Taxpayer Advocate Service Problems
National Taxpayer Advocate Nina Olson spoke at the conference earlier in the morning Tuesday and highlighted some of the same trends, including the IRS’s struggle to help taxpayers facing identity theft. She described one case in which her office had tried to help a taxpayer get a refund released by the IRS.
[IMGCAP(2)]“We sent it over because the taxpayer was experiencing significant hardship, which was an economic hardship,” said Olson. “The response that she got back from an official receiving that order was ‘We have thousands of these cases. Get in line.’ Now, I have never heard that response and I have been there for 15 years.”
Olson’s office had to take the additional step of issuing a Taxpayer Assistance Order. “The IRS is going to have to do this work,” she said. “It’s just a question of whether they’re going to make us do more work to make them do the work. This is what we are seeing in the environment right now, this feeling that because Congress hasn’t funded you, it works its way down to the employees so that they feel, ‘Well, I’m going to do just this, and I’ve got so much work, I’m only going to be able to get this done.' What’s seeping down into the front-line employees is a demoralization that it doesn’t matter if they get their work done spectacularly well or not, or that they go the extra mile.”
Olson is also seeing resistance from the IRS to the Taxpayer Advocate Service’s intervention on cases.
“The cases that come up to my level are often very complex,” she said. “People have staked out positions through the various levels of appeals, and I understand that. However, when it gets up to my level, we’re trying to figure out what’s gone on in the case before, and I am trying to take an independent look at the case and understand all perspectives so that I can formulate my position that I will then advocate to the deputy commissioner and the commissioner. We are finding instances where the IRS is refusing to let me or my staff have access to the administrative files of the taxpayers unless I sign a document agreeing in writing not to share any information that I find or see in that file with the taxpayer him or herself. I find that deeply offensive. I am subject to the same laws as any other IRS employee about disclosure of tax information. I am also by law entitled to any tax return or any tax return information that I need to conduct my tax administration duties. My tax administration duties are in the code and number one is help taxpayers resolve their problems with the IRS, and I need to be able to see the administrative files in order to determine how they go about doing that. My position is that the IRS in those instances has violated the law by not providing me access to those files, and I do not say that lightly.”
Olson said there are other instances where the taxpayer has asked her or a member of her staff to attend a conference between the taxpayer’s representative and the IRS, and she has encountered resistance there as well. “The IRS has refused to let us meet, and there is no legal basis for that,” she said. “However, it may take a statute directing the IRS to allow that to happen, or to order the IRS that it can’t stop it. It’s that kind of action, and that kind of activity that actually leads Congress to micromanage the IRS. It’s completely unnecessary and it’s completely avoidable.”
Challenges for Next Tax Season
Congress will need to act on tax extenders legislation if it wants to avoid further problems for taxpayers and tax professionals next tax season, according to Koskinen. He is also worried about the mounting challenges of implementing the Affordable Care Act.
“One more critical challenge, for the IRS and for the tax community, is the upcoming filing season,” he said. “It promises to be another complicated filing season, and not just because of our budget situation. Along with protecting against stolen identity refund fraud, our efforts to prepare for the upcoming filing season once again involve the Affordable Care Act. We are preparing our systems for additional ACA changes that took effect this year. One is a reporting requirement that applies to health coverage providers and certain large employers.”
Another ACA provision taking effect for 2015 is the employer shared responsibility provision, he noted. “Certain large employers will owe a shared responsibility payment if they do not offer adequate, affordable coverage to their full-time employees and at least one of those employees receives the premium tax credit,” said Koskinen.
Another concern the IRS has about the upcoming filing season involves the possibility of late tax legislation. “We had this same concern last year,” said Koskinen. “Once again, Congress has been working on legislation to extend a group of expired tax provisions, but it has not completed action yet. The uncertainty we face over the extenders legislation raises operational and compliance risks for the IRS in its administration of the tax law and delivery of the filing season. This uncertainty imposes stress, not only on the IRS, but also on the entire tax community, including everyone in this room.”
Koskinen warned that tax season might have to be delayed unless Congress acts by next month.
“If this uncertainty persists into December, we could be forced to postpone the opening of the 2016 filing season,” he said. “This would delay the start of processing of tax refunds for millions of taxpayers. It’s also important for lawmakers to understand what the effect would be if they made any substantive changes to tax provisions that are extended, or decided to approve any new tax provisions. We would need to reprogram our systems and make processing changes that would result in delays. So I will continue to urge members of Congress not to let this uncertainty drag on. We believe it is critical for Congress to make a decision one way or another on the extenders legislation no later than the end of November in order to ensure there are no disruptions to the upcoming filing season.”
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