Despite performing admirably in a difficult environment, the Internal Revenue Service still needs to improve on strategies to narrow the tax gap and hone its information technology systems, according to the IRS Oversight Board
The report evaluates the IRS's performance in 2009, describes the challenges facing tax administration, and provides scorecards on IRS effectiveness during the past year.
"Overall, the IRS had a challenging year in 2009, but performed fairly well," said Oversight Board chairman Paul Cherecwich Jr.
Although the number of audits for both individuals and businesses increased, total enforcement revenues dropped from $56.4 billion in fiscal year 2008 to $48.9 billion in FY2009. However, this is due to the fact that revenues were abnormally high in the last few years as a result of large tax shelter settlements, according to Cherecwich.
"These artificially boosted collections," he explained. "The audit results from last year are more in line with historic audit results."
The tax gap and information technology continue to be weaknesses that need to be addressed, said the Oversight Board's report. The annual tax gap is the difference between the amount of tax that taxpayers should pay and the amount that is paid voluntarily and on time.
"The IRS collects 96 percent of federal revenue. Taxpayers who do not meet their tax obligations cost the U.S. government $290 billion every year, or an average of over $2,600 per household," the report stated. "To the extent that the IRS can reduce this uncollected tax revenue - or tax gap, as it is known - economic benefit is provided to the vast majority of taxpayers who pay what they legally owe."
In fact, the $290 billion estimate of the tax gap is several years old, and may not reflect current conditions, Cherecwich indicated.
"The board has requested that the IRS plan to update the gap on an annual basis, beginning next year," he said. "They do a statistical analysis on audit results, and they have a multi-year history as part of the National Research Program."
PTINS VS. THE TAX GAP
The IRS has taken actions in the past year that have the potential to reduce the tax gap, he pointed out. "The preparer regulation program will be beneficial. The preparer regulations will help improve the integrity of our tax system," he said.
Beginning in 2011, paid tax return preparers must use a preparer tax identification number, or PTIN, for returns filed or claims submitted, and preparers who are not CPAs, attorneys or enrolled agents will eventually be subject to testing and continuing education requirements.
"It's important to stay on top of the tax gap number, given everything that's happened to the economy," said Paul Cinquemani, director of government relations for the National Association of Tax Professionals. "And we're pleased the IRS is moving on the tax preparer end of the equation. To the extent that there are unscrupulous and incompetent preparers, it will aid in reducing the gap."
However, the optimal tax gap may not be zero, observed Robert Kerr, senior director of government relations for the National Association of Enrolled Agents. "We wouldn't want to live in a world in which there was a zero tax gap, since it would require far too stringent enforcement measures. There is room for improvement, however, and the agency is moving forward in measuring it."
Kerr noted that the tax service is conducting employment tax audits for the first time in decades. "By having better measurements of the tax gap, you find out where your problems are," he explained. "Then you can create a strategy to address where the weaknesses lie."
HIDDEN ASSETS OVERSEAS
"The second major activity toward reducing the tax gap has been in connection with efforts to identify assets and wealth hidden overseas," Cherecwich said.
The IRS's effort to identify taxpayers who were hiding money in offshore jurisdictions was successful in reaching agreement with the Swiss government to receive information on U.S. holders of accounts. In parallel with that action, the IRS established an offshore voluntary disclosure program. "Over 14,700 taxpayers took advantage of the opportunity, providing the IRS with a wealth of information to mine for future enforcement efforts," the report stated.
In a related effort, the IRS established a Global High Wealth Industry Group to focus enforcement efforts on high-wealth individuals and related entities that they control. The intent is to take an integrated look at the full range of entities controlled by high-wealth individuals, such as trusts, real estate investments, companies, and flow-through entities.
One of the problems with fixing the tax gap is the complexity of tax laws, noted Cherecwich: "I would hope that Congress recognizes that when they create more work for the IRS, they need to give more funding to provide additional services and enforcement. For example, there have been three different sets of rules just for the First-Time Homebuyer's Credit. They have to educate taxpayers about the rules, and then they have to monitor them."
"Whenever you give someone a new job to do without the resources to do it, one of two things is going to happen," he said. "Either they are not going to do it, or they will do the new job but not do something else they were doing before. The reality is that the IRS has to be appropriately funded for the tasks that Congress has given it to do."
Both the Government Accountability Office and the Treasury Inspector General for Tax Administration have made note of the IRS's need for better information technology, the report said.
"Information technology is one of the biggest challenges for the IRS," said Cherecwich. "It has been slow going due to lack of adequate funding."
The report cited the restructuring of the Customer Account Data Engine, or CADE, program as an intermediate milestone for the CADE 2 development program, with key components slated to be in place for the 2012 filing season. Over 140 million individual account records will be stored in a modern database that has the capability to update taxpayer account information on a daily basis.
"The implementation of this capability will mark a new era for management of the IRS's central taxpayer records for individuals, with resultant gains in IRS efficiency and taxpayer service," the report stated. "Although the IRS appears to be meeting its intermediate milestones for the CADE 2 development program, true success will only be achieved upon implementation and operation."
Improvements in the tax gap and information technology will require both adequate funding and a sustained long-term effort, Cherecwich remarked.
The Oversight Board was created by the IRS Restructuring and Reform Act of 1998. Similar to a corporate board of directors, it consists of nine members charged with overseeing the IRS.
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