The Internal Revenue Service earns about $198 million a year in fees from installment agreements and $40 million in fees from tax return transcripts, but the reason for some of the user fees is vague, according to a new report.
The report, from the Government Accountability Office, noted that user fees are a growing part of the IRS’s budget. While they currently fund less than 2 percent of the IRS's budget, fee collections are expected to reach $309 million in fiscal year 2012 and recently involved nearly 20 million transactions with taxpayers.
The IRS charges user fees for various activities, including helping taxpayers comply with their tax liabilities, clarifying the application of the Tax Code to particular circumstances, and ensuring the quality of paid preparers of tax returns, among others.
However, last fiscal year, two fees accounted for more than 80 percent of the total. The largest by far was the user fee for installment agreements. The agreements allow taxpayers who cannot pay their full tax liability the option to pay it off with smaller monthly payments over a period of up to 60 months. The installment agreement service is offered to most taxpayers for $105, with lower rates available for low-income taxpayers and those who opt for a direct debit agreement. This service generated $198 million, or 68 percent of the IRS's total retained user fee collections.
The second most lucrative user fee was for income verification express services, also known as IVES, in which the IRS provides two-business-day processing and electronic delivery of tax return transcripts for users, such as mortgage lenders and other financial market entities, in order to confirm the income of a borrower during the processing of a loan application. The IRS charged a fee of $2.25 for each IVES transcript request, generating $40 million, or 14 percent of total retained fee collections.
The report noted that all paid tax return preparers, including attorneys, CPAs, and enrolled agents, are required to apply for a PTIN before preparing any federal tax returns in 2011 and thereafter. Individuals who apply for a PTIN must pay an annual fee of $64.25. Of that amount, IRS collects $50 for associated PTIN activities and the remaining $14.25 is transferred to a third-party vendor responsible for maintaining the registration system.
The user fee program for the preparer tax identification number does not receive congressional appropriations and must recover all costs for providing the service through its fee collections. Fee receipts are transferred back to the user fee program to fund all the activities related to that fee program.
In addition to the PTIN fee, the IRS plans to implement two new user fees for preparer competency testing and fingerprinting requirements in fiscal year 2012 (see IRS Begins Scheduling Tax Preparer Competency Tests). According to IRS officials, the return preparer user fee program will be funded exclusively through collections from these three fees.
The IRS conducts a review of its user fees every two years and has taken steps to improve its estimates of the cost of providing its user fee services, with particular attention to its largest fee, the report noted. For example, the IRS hired a contractor to evaluate, update, and simplify the cost estimate for the installment agreement user fee.
However, for a few of the IRS’s smaller fee programs, the GAO found that the IRS omitted fees from its biennial review, did not clearly document assumptions to be used in some cost estimates, and lacked documentation of factors considered in setting some fees.
For example, one user fee has not been reviewed or updated since fiscal year 1996, while program managers for another user fee were uncertain about the salary assumptions behind it.
“IRS faces unique challenges in establishing user fees,” said the report. “For example, the National Taxpayer Advocate has noted that user fees may prevent the public from accessing IRS’s services because they cannot afford to pay the fee or may discourage people from seeking services that help IRS fulfill its core mission. User fees may also be costly for IRS to administer and divert resources from activities that bring in more tax revenue. On the other hand, user fees can promote an efficient and fair allocation of government resources and ensure that those who are receiving special benefits pay for them.”
The GAO also found that while IRS officials said they consider factors other than cost (such as the potential effects on taxpayer compliance and administrative burden) in setting the fee rates, they did not thoroughly document these factors or corroborate their anecdotal support with an analysis. Finally, the GAO found that the IRS did not fully document the final decisions made on fee rates as a result of its biennial review.
The IRS has implemented several new user fees in recent years, but it may not be taking full advantage of its process for identifying new user fees, the GAO noted. In accordance with a directive from the Office of Management and Budget, the IRS’s CFO requests that each division review its programs and provide proposals for new user fees on a biennial basis. However, officials in some divisions or offices said they had no formal solicitation process for employees to suggest new user fee proposals.
In addition, the IRS does not clearly refer its staff to consider established guidelines identified in the Internal Revenue Manual or other resources when identifying potential new user fees during its biennial review. The GAO was unable to determine the extent to which IRS staff considered these guidelines.
The GAO recommended that the Internal Revenue Commissioner take steps to include certain additional fees in the IRS’s biennial review, improve guidance on estimating the costs of user fees, and improve the documentation of the assumptions used, factors considered, and decisions made during the setting and reviewing of existing fees. In addition, steps should be taken to provide clear, specific, and direct guidelines for IRS employees and managers to follow in identifying potential new fee opportunities, said the GAO. In written comments, the IRS agreed with the GAO’s recommendations.
“We are pleased that the Government Accountability Office (GAO) recognized our efforts in conducting a biennial review of user fees and striving to improve our cost estimation in order to make sound decisions regarding user fee rates,” wrote Beth Tucker, the deputy commissioner for operations support at the IRS. “Additionally, the GAO recognized that the IRS set the Return Preparer user fee in accordance with established cost estimation guidelines.”
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