by Roger Russell
The Internal Revenue Service Oversight Board’s 2004 fourth annual report paints a mixed picture of the agency’s successes and shortcomings in meeting its goals over the past year.
While the service has improved its assistance programs, the report depicts a weakened and vulnerable IRS enforcement program that is being exploited daily by those wishing to evade the tax law.
For example, in Fiscal Year 2003, the IRS was able to pursue only 18 percent of known cases of abusive devices designed to hide income, leaving an estimated $447 million uncollected. There is also only one chance in four that the IRS will go after an individual who does not file a return, according to the report.
“Obviously, taxpayers are not well-served with a shaky enforcement program, and we must put it on a firm footing,” said board member Chuck Kolbe. “The board’s research shows that taxpayer attitudes towards cheating are eroding. We must re-instill confidence in the fairness and effectiveness of our tax system.”
The report said that the nation’s annual tax gap is $311 billion, and noted that the figure is based on 1988 data. When the IRS completes its new study, the gap is likely to be even higher. That amount is unacceptable to honest taxpayers, according to the board, which noted that its own research shows that one out of five taxpayers now believes that it is acceptable to cheat “at least a little” on their taxes.
A number of recent reports show that the compliance gap is not closing, according to the board. It cited a Government Accountability Office finding that 63 percent of U.S. corporations did not pay any federal taxes from 1996 to 2000, as well as a Treasury Inspector General for Tax Administration study that showed a growing number of delinquent accounts and uncollected liabilities.
The business audit rate has also decreased, according to a Transactional Records Access Clearinghouse study that was cited. Five years ago, three out of every 1,000 business returns were audited, but that rate dropped to two out of every 1,000 returns in Fiscal Year 2003. The decline in face-to-face audits for all corporations was steeper: 15 audits per 1,000 returns in FY 1999, but only seven per 1,000 in FY 2003.
The IRS simply doesn’t have the resources to close the budget gap, according to the report. Earlier this year, the oversight board warned of a trend where projected hiring of new enforcement personnel is evaporating in the face of resources being redirected to pay for unfunded mandates, such as pay raises. The board argued that investments in enforcement pay for themselves many times over.
“It makes perfect sense from a business perspective to provide the IRS with a modest budget increase so the agency can begin to collect the $300 billion that is left on the table each year,” it said.
Marty Davidoff, tax liaison chair for the American Association of Attorney-CPAs, agreed.
“Congress just doesn’t get it,” he said. “They keep getting requests from the IRS, the Oversight Board, the Office of Management and Budget, and practitioner groups that the IRS needs more money. Not only will more money bring in greater revenue — it will save our tax system from collapsing altogether.”
“Without additional funding, the IRS would more and more be forced to allocate its limited resources from customer service to compliance in an effort to shore up a leaky ship,” he continued. “With limited funds, it’s a no-win situation. You plug one hole on one side of the boat, then two more open on the other side. You need to give the IRS enough money to fix the whole ship.”
Last March, Davidoff noted, the Oversight Board called for a 10 percent increase in the 2004/2005 IRS budget. “That would be a great start,” he said, “but even more is needed.”
“Unfortunately, history repeated itself yet again, and we can no longer afford to hide from the hard truth,” said board chair Nancy Killefer.
“Last month, the House Appropriations Committee approved legislation providing for pay raise parity for civilian and military personnel. And as the board predicted, the IRS will once again have to make up out of its own pockets what could easily amount to a $100 million difference,” she said.
“In an all-too-familiar scenario, the IRS will begin its fiscal year deep in a budgetary hole,” continued Killefer. “It’s no wonder that tax cheats have declared open season on the IRS. We need a realistic budget for the IRS that reflects these political realities,” she said.
“They can’t even collect the money that’s easy to collect,” said Davidoff. “Up to a third of the money that they think they can collect they can’t get to, because they don’t have the resources. It’s simply a matter of getting enough bodies to the cases where people owe money.”
“It’s absurd that they can’t even get the small amount extra the Bush Administration requested,” he continued. “It’s only fair to the rest of us. It would lessen the tax burden of the honest taxpayers.”
The board also outlined the problems facing the IRS Business Systems Modernization program, which will eventually replace the current, antiquated computer system. In spite of the many problems that surfaced last year, the board still strongly believes that the long-term health and viability of the nation’s tax administration system rest upon the modernization program’s success.
“The IRS BSM program and its prime contractor did not acquit themselves well last year. Slippages in program delivery and cost overruns continued to plague the program,” said the chairman of the board’s Business Transformation Committee, Larry R. Levitan.
“However, new controls and management processes have been implemented which we hope will remedy what ails modernization,” he said. “And we’re seeing some progress. Recently, the critical Customer Account Data Engine project successfully processed a small number of 1040EZ returns. It’s a good start, but no one is breaking out the champagne. There’s much hard work ahead that holds great rewards but also great risk.”
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