Cutbacks, reorganization free up resources for enforcement
by Roger Russell
Recently announced cutbacks by the Internal Revenue Service — a strategy that the agency said lends greater focus to compliance issues — may be a boon to the tax preparation industry.
“It could have quite a positive impact on tax professionals, because the typical taxpayer wants to have peace of mind in the event he gets a letter from the IRS,” said Chuck McCabe, president of Richmond, Va.-based Peoples Income Tax and chairman of the National Association of Tax Business Owners. “It should drive more taxpayers to seek professional help.”
IRS Commissioner Mark W. Everson recently announced a series of steps, including the involuntary layoffs of approximately 2,400 employees, to create operational efficiencies and make room for more enforcement positions to be added in 2005. No employee will be laid off before January of 2005, according to the IRS.
“These changes reflect our ongoing effort to manage the agency efficiently and effectively for the nation’s taxpayers,” Everson said. “By tightening operations, we can devote more people to front-line positions and strengthen tax enforcement activities. At the same time, service to taxpayers will not be reduced.”
“I wish Congress didn’t have to make them eliminate jobs to get more enforcement,” said Martin Davidoff, the chairman of the IRS Tax Liaison Committee of the American Association of Attorney-CPAs. “The tax system needs a decent amount of enforcement. There has been a perception that people are getting away with too many things.”
The changes announced involve closing the Memphis, Tenn., tax-return processing operations in October 2005; consolidation of back-office processing for exam, collection and insolvency cases from 92 locations to four starting in 2005; and the reduction of agency overhead in internal support functions, particularly through new technology gains in the human resources area.
The savings from the three initiatives would allow the IRS to fill 2,200 new positions. Between 1996 and 2002, IRS enforcement resources, including criminal investigators, revenue agents and revenue officers, went down by more than a quarter, according to Everson.
“Savings from these initiatives will allow the IRS to hire more people to pursue cheating by high-income individuals and corporations, continue our attack on abusive tax shelters, bolster our criminal investigation efforts and assist with other enforcement priorities,” Everson said.
The changes are possible because of the increased efficiencies delivered by e-filing and an improved personnel system, according to Everson.
“The new commissioner has made it clear that compliance is his No. 1 priority,” said McCabe. “The reason they haven’t been able to focus on compliance to the extent they would like is that they haven’t been given the resources they need from Congress. This realignment is a way to shift their resources to the compliance side.”
“The root of the problem with taxpayer noncompliance has been lack of IRS resources,” he continued. “This is a good way to correct it, by taking advantage of the efficiencies created by e-filing and other technologies. The only way to increase compliance is to increase the level of enforcement — whether it’s just one individual or a professional preparing 100 fraudulent returns, they should be audited.”
Davidoff agreed. “Not only do I like what they’re doing, I’d like Congress to back them up by saying, ‘We’ll give you the means to do it.’ An example is the proposal to use private collection agencies to help collect debt owed to the IRS,” he said.
“If Congress had the foresight to give them a direct budget to hire more people, we wouldn’t have to risk the integrity of our tax system by using outside private collection agencies. With the outside agencies, we won’t be getting as good a product, and the IRS still will have to monitor the collection agency rather than just do it in-house.”
Meanwhile, the Bush administration’s new budget proposal contains a number of measures designed to close loopholes and halt several abusive tax avoidance transactions. It would increase the total IRS budget by 4.8 percent, with $300 million earmarked for compliance.
Among the IRS-specific legislative proposals included in the fiscal year 2005 budget are penalties for nondisclosure by taxpayers and promoters for failure to disclose potentially abusive transactions, uniform disclosure rules, and an increase in penalties for false or fraudulent statements made to promote abusive tax avoidance transactions.
The proposals also would limit the statutory tax practitioner privilege in cases where it is used to avoid the disclosure of the identity of taxpayers who have entered into potentially abusive transactions. The proposal would extend the “corporate tax shelter” exception to all “tax shelters,” and would confirm that the identity of any person that a promoter is required to identify is not privileged.
“The direction the IRS has taken is positive so long as it’s done properly and not unfairly,” said McCabe. “It’s also a positive thing for honest taxpayers, as long as it’s not a throwback to past years where there was an abuse of power by the IRS.”
Former IRS employee Michael Grace, currently a tax lawyer and director with the Washington, D.C.-based law firm Jackson & Campbell PC, noted a cyclical nature to the enforcement issue. “Every organization, especially large ones, struggles to define their identity and purpose,” he said. “The IRS faces the same problem. In recent years, the pendulum seems to have swung back and forth between customer service and enforcement as the service’s priority.”
“The IRS should adapt to technological changes and the changing landscape of tax ‘products,’” Grace continued. “However, the system might function better if we could keep the pendulum in one place for awhile.”
