Strategy highlights service, enforcement, voluntary compliance
The Internal Revenue Service's new five-year plan, which runs through 2013, seeks to balance service and enforcement while maintaining what it called "the fairest and most effective system of voluntary tax compliance in the world."
However, it isn't an either/or proposition, according to IRS Commissioner Douglas Shulman. "Our first goal is to improve service to taxpayers to make voluntary compliance easier," he said. "Our second and equally important goal is to enforce the law to ensure everyone meets their obligation to pay taxes."
Shulman said that the IRS needs to invest in both people and technology to excel at both.
"The pendulum swings between service and enforcement, and every commissioner would like to be the one that gets it to stop right in the middle," said Roger Harris, president of Padgett Business Services and former chair of the IRS Advisory Council. "But there are clearly some commissioners identified as service commissioners and others as enforcement commissioners. And commissioners know that they're always one Senate hearing away from being one or the other."
The plan noted that the IRS faces a critical challenge in replacing experienced personnel as they grow older: "More than half of IRS employees and managers are age 50 or older - and 39 percent of IRS executives and 20 percent of IRS managers are already eligible for retirement."
"The IRS must grow employees' and managers' skills and sophistication, even while more senior people retire," it said. "To succeed in the long term, the IRS must focus on attracting and developing skilled employees, even as the existing workforce ages and the agency continues to face stiff competition for new talent."
Harris said that the problem of turnover of IRS veteran personnel is getting more critical. "Senior people with years of experience are leaving - they're facing a real brain drain," he said. "You can replace bodies, but it's difficult to replace the experience that you only get by working in an organization and learning the ropes for awhile."
Beanna J. Whitlock, a San Antonio-based tax practitioner and former IRS National Public Liaison, agreed: "There's a fine line they have to tread between getting people on the workforce, but not placing them there prematurely without enough knowledge or experience."
THE COMPLEXITY ISSUE
Two major trends addressed by the plan are the increasing complexity of tax administration and the expanding role of tax practitioners and other third parties in the tax system. Between 1993 and 2007, the percentage of taxpayers who prepared their own returns without outside assistance fell by more than two thirds, from 41 percent to 13 percent. At the same time, the use of paid preparers rose from 51 percent to 60 percent, and use of software expanded from 8 percent to 27 percent.
"Each year, the IRS must respond to new tax provisions from Congress and adjust to expiring ones," the plan stated. "In 2007 alone, 41 provisions expired, affecting a wide spectrum of taxpayers. The legislative mandates we face often have short implementation periods; these strain management capacity and demand substantial resources."
The IRS estimated that there are between 400,000 and 500,000 tax professionals who operate under the professional guidelines of Circular 230 (CPAs, enrolled agents and attorneys), and most observers estimate at least an equal number outside the system.
"The IRS must acknowledge the important role of these third-party practitioners in the tax system, and continue to serve them effectively, while helping ensure that they meet professional standards and abide by the law," the plan stated.
Although not explicitly calling for the regulation of tax preparers, the plan stated its objective of strengthening partnerships with practitioners, preparers and other third parties to ensure effective tax administration. Tax professionals not only play an increasingly important role within the system, they outnumber IRS employees by 10-to-1, according to the IRS.
A recent survey of tax professionals serving small businesses and self-employed taxpayers revealed that the top service priorities were resolving IRS notices and acquiring pre-filing client account information. "To increase the quality of our service to tax partners, we will create dedicated issue-resolution teams, establish centralized points of contact for practitioners, and expand e-service options," the plan stated. "In addition, we will enhance our systems so that we can quickly identify and disseminate the most frequent errors to the practitioner community."
"We should all have to meet certain standards and play by the same rules and be subject to the same penalties," said Harris. "We put more and more responsibility on those who prepare taxes, yet there are those who pop up in January and vanish on April 15. In many cases, they don't understand all the rules and they don't follow them."
Whitlock agreed: "There's been 'pending legislation' on this in previous Congresses, and [National Taxpayer Advocate Nina Olson] has listed this as one of her goals for years."
"In the meantime, a number of states are taking the lead on implementing mandatory licensing for preparers," she explained. "It's the same with e-filing. As important as e-filing is to the IRS, they have taken a back seat and allowed the states to mandate it. They're getting the benefits of mandated e-filing without having to mandate it themselves."
However, there is a danger in regulating tax preparers, according to David Lifson, a partner with Hayes & Co./Crowe Horvath LLP, chair of the New York State Society of CPAs Committee on Tax Reform and a member of the IRS Advisory Council. "If the IRS regulated, tested, certified or otherwise blessed every tax preparer, the public would regard any error as the responsibility of the IRS," he said. "What they should do is enforce good behavior on all tax preparers. To do that, you need to register them so you can identify them, and monitor them so you can punish the bad ones."
"Every preparer of returns for money should be required to register and identify themselves," he said, "so if they make the same error over and over the IRS can have them in and have a chat with them."
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