The IRS Oversight Board said in its annual report to Congress on Thursday that despite a successful 2010 tax filing season the agency has been challenged in the past few years to implement and administer many new tax provisions intended to bring relief to taxpayers feeling the effects of troubled economic conditions.

“The IRS has responded well to these challenges, but the result has been to stretch the IRS’ resources thin,” said the report. “Every new tax provision added to the Internal Revenue Code requires both service and enforcement resources for successful implementation.”

The report includes a comprehensive appendix that describes the effect that recent legislative changes have had on tax administration during the 2007 through 2010 filing seasons based on reports released by the Government Accountability Office and the Treasury Inspector General for Tax Administration.

In evaluating the IRS strategic progress, the oversight board cites two systemic weaknesses that require attention: the tax gap and the IRS’s archaic information technology systems. The report warns, “Failure to mitigate these weaknesses will cause long-term performance issues for the tax administration system.” These two weaknesses are exacerbated by another concern: an under-appreciation of the importance of tax administration to the nation’s economic well-being as evidenced by a willingness to expand the complexity of the Tax Code with little regard for the impact on taxpayers or the resources needed by the IRS to administer the code.

The board said it believes more attention should be placed on how the tax gap is measured. The current tax gap estimate is based on data from 2001 returns. While the IRS has a number of efforts underway that promise to have a positive influence on non-compliance, without updated estimates it is impossible to evaluate the overall effect of those programs on voluntary compliance.

Moreover, it is difficult to link changes in voluntary compliance levels with specific IRS enforcement and service programs, and better insight into how specific programs affect compliance is needed.

The oversight board plans to work with the IRS to develop performance measures to evaluate the effectiveness of IRS programs such as preparer regulation, use of information reports for merchant payment cards and stock basis, and the Compliance Assurance Process program. Such measures would provide the board, the IRS, and other decision-makers the data necessary to make informed management and funding decisions.

The report also emphasizes that a modern information technology system and a highly effective workforce are two strategic foundations that must be in place to ensure future IRS success.
Other challenges that need attention include the need for the IRS to become more effective with less resources, implementing the tax provisions of the Patient Protection and Affordable Care Act, and simplifying an expanding Tax Code.

In addition to releasing its annual report, the IRS Oversight Board met in Washington, D.C. on May 5. The board discussed IRS budget issues and reviewed the progress of the Customer Account Data Engine 2 program. The IRS reported that achievement of Transition State 1, which will implement a modern database and provide the capability for daily updating of tax accounts for individual taxpayers, is on schedule and on budget for January 2012.

The board reviewed the Streamlined Critical Pay program and approved target values for the IRS’s Human Capital strategic measures.

In addition, the board was briefed on the implementation plan for the new information reports that will begin in 2012 for securities basis reporting and payment card and third party network transactions. These information reports are intended to improve voluntary tax compliance by taxpayers and enhance the IRS’ enforcement efforts.

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