Washington, DC, November 4, 2014
Good morning. I’m delighted to be here at the AICPA’s 2014 National Tax Conference. Before I start, let me just say I realize that I’m the only thing standing between everyone and their lunch, so I promise to do my best to keep this informative. With all the challenges we have to talk about, I’m sure that won’t be difficult.
I’m approaching the end of my first year as IRS Commissioner, and I feel exactly the way as I did on Day One – excited and proud to lead a great institution, and an experienced and dedicated workforce. These past few months have been a learning experience for me. One of the most important things I’ve come to understand is the critical role that tax professionals play in supporting the work being done by the IRS to operate our tax system. The IRS wants to make it as easy as possible for people to understand and meet their tax responsibilities, and we couldn’t do that without the help you provide to taxpayers, year in and year out.
In moving this agency forward, we face a number of challenges in the short term, including the upcoming filing season and our resource situation. Before discussing those, I first want to talk about the work we have been doing to develop and implement a longer-term vision for the future of tax administration. We have begun to ask ourselves what the tax filing experience ought to look like for a taxpayer three to five years down the road, and what it would take to make that vision a reality.
We have already started down this path by working to provide more online tax information that taxpayers want and need. As a result of these efforts, taxpayers can do a lot more online with the IRS these days. For example, one of the most popular features on IRS.gov is the “Where’s My Refund?” electronic tracking tool, which taxpayers used more than 200 million times last year. Now, of course that doesn’t mean there are 200 million taxpayers, just that some of them can’t resist checking on their refund over and over.
Another good example is IRS Direct Pay, which provides taxpayer with a secure, free, quick and easy online option for making tax payments.
More than one million tax payments totaling more than $2.7 billion have been made through Direct Pay since we launched it earlier this year.
But even with these and other recent innovations in online taxpayer services, which have been very helpful, the IRS is still far from providing the type of access that people need for a more robust online experience. While taxpayers and practitioners are using the online channel more and more, we never lose sight of the fact that millions of people still call us on the phone, go to our walk-in sites and correspond with us through the mails, all in order to do the right thing and voluntarily comply with their tax obligations.
I say this because while we always strive to provide quality service, we realize that the experience for you and the taxpayer isn’t always the most efficient. Millions of taxpayers and practitioners continue to wait on the phones, wait in lines outside IRS offices around the country, or wait for correspondence from us – simply because there’s no good option online.
So in this context, one of the things we’ve begun to do is try to define what a more complete online filing experience should be.
In this future vision, most things that taxpayers do to fulfill their tax obligations could be done virtually, and there would be much less need for in-person help or for calling the IRS.
The online experience should give taxpayers confidence in knowing they can take care of their tax obligations in a fast, secure, transparent and consistent manner. People ought to have the same experience dealing with the IRS as they have now with their financial institution, whether it’s a bank, brokerage or mortgage company. The idea is that taxpayers would have an account at the IRS where they can log in securely, get all the information about their account, and interact with the IRS as needed.
Improving service to taxpayers in this way can also help us on the compliance side of the equation. Under this future vision, the IRS could identify anomalies in tax returns shortly after a return is filed, and interact with taxpayers as soon as possible so that those anomalies could be corrected without costly follow-up contact or labor-intensive audits.
Imagine, for example, if we could simply send a message to a taxpayer saying, “We just received your return and notice that you forgot this schedule,” and they could respond, or their preparer or power of attorney could respond, by promptly uploading that schedule to their account. There would be no need for phone calls or correspondence to iron out such a minor problem.
This vision I’m describing is not an approach that we will be ready to implement this year or even next, but we want to make it a reality in the future, some years from now. Of course, how quickly we can deliver on this vision will depend on future levels of agency funding. That’s a big issue.
Before leaving this subject, I want to point out that this online experience as we envision it needs to be expanded at some point to include business taxpayers. Everyone ought to be able to interact with the IRS in this way. It would make everyone’s tax experience easier, with taxpayers saving time and the IRS saving resources.
So that gives you an idea of where we want to go in modernizing taxpayer service and compliance. Implementing this vision will be a major challenge for the agency, and we are excited to be on this journey.
At the same time, we are also squarely focused on a number of near-term challenges. None is more critical for the agency than the upcoming filing season. We believe it may be one of the most complicated filing seasons we’ve ever had, for a number of reasons.
Going into 2015, one of the challenges will be implementing our voluntary education program, known as the Annual Filing Season Program, or AFSP, for return preparers who are not CPAs, attorneys or enrolled agents.
We realize that there are concerns out there, and we agree that a voluntary program is not the ideal solution. It’s not what we set out to accomplish, and we would prefer to see Congress enact legislation allowing the IRS to impose mandatory oversight of tax return preparers.
But until that happens, we have a responsibility to taxpayers and our tax system to ensure that we keep the momentum going toward the standards of competence and professionalism we have been working to set for preparers who lack credentials.
Although we have had differences with the AICPA leadership on this program, I firmly believe that encouraging those preparers to improve their knowledge of tax law will be extremely beneficial to taxpayers, and will improve tax compliance.
We intend to have a robust public campaign that will educate people about the need to select preparers who can demonstrate competency. This campaign will also explain the different types of return preparers and the qualifications each one has.
We believe it’s important for taxpayers to understand, for example, the importance of the educational and ethical requirements that CPAs must meet on an ongoing basis to maintain their designation. Taxpayers need to know that the qualifications of CPAs, attorneys and Enrolled Agents are on a much higher level than the preparers who only complete the minimum level of continuing education offered under our voluntary program.
One way we’re helping taxpayers is by developing a database of qualified tax return preparers that will be available on IRS.gov early next year. This database will include the unregulated preparers who choose to participate in our voluntary education program. It will also have practitioners who already have higher levels of qualification and practice rights, and who don’t need our program, including CPAs, attorneys, and Enrolled Agents.
Another thing making the 2015 filing season more interesting than usual, as I’m sure everyone here knows, is the Affordable Care Act. This will be the first filing season with a Form 1040 that reflects two major ACA provisions, the premium tax credit and the individual shared responsibility provision. The IRS has spent years in planning and preparation for these provisions, with hundreds of employees from all across the agency involved in this effort.
The IRS has also been working to make sure taxpayers know how these major ACA provisions may affect them next year at tax time. We have done a number of things to get the word out. For one, we created a new web page devoted to the ACA. We have also issued plain-language Health Care Tax Tips and flyers, all with information publicized widely to over 500,000 subscribing organizations that serve individual taxpayers.
We are also using social media and, of course, YouTube videos to help people learn about these important provisions. We will be doing even more communications and outreach in the months ahead.
The 2015 filing season may also be complicated by the passage of late tax legislation. Congress has been working on legislation to extend a group of major tax provisions that expired at the end of 2013, but it has not completed action yet.
This continuing uncertainty about the extender legislation imposes stress, not only on the IRS, but on the entire tax community, including everyone in this room. I’m extremely grateful for the support we have received from the AICPA on this issue. Specifically, I’m referring to the letter sent to the Congressional tax committees recently, in which the AICPA detailed its concerns about the consequences of late tax legislation, for the tax system and for our economy.
I would note that if the uncertainty over extenders continues into December, the IRS could be forced to postpone the opening of the 2015 filing season.
This would delay the start of processing of tax refunds for millions of taxpayers. That’s not our only worry. There’s also the possibility that Congress could enact policy changes to the existing extenders or even add new tax provisions. Either scenario would mean the IRS would need to reprogram systems and make processing changes, which would result in longer delays.
One more thing keeping me up at night is the possibility that Congress might not pass extender legislation until early 2015. We certainly hope that doesn’t happen, and there have been some recent encouraging signs. But we can’t discount that possibility, since it has happened before, and not long ago. I’m sure everyone remembers when Congress acted retroactively to pass an extender bill in January 2013. Retroactive tax law changes create even bigger challenges, including significant service disruptions and the need for millions of taxpayers to file amended returns.
I will continue to urge members of Congress not to let this uncertainty drag on. Our hope is that lawmakers will provide a clear policy direction on the extender legislation before the end of November.
Moving beyond the filing season, no challenge facing the IRS is more critical than our budget situation. Over the last several years, the agency has experienced reductions in funding that are creating serious obstacles to our ability to fulfill our mission. Our ability to move forward on the long-term vision I outlined a moment ago needs to be seen in the context of these limitations on our resources. The ongoing funding shortfall requires us to make some extremely difficult choices. Right now the problem is trying to figure out how to survive with the constraints we are under and the obligations we have. We will continue to implement statutory mandates like the ACA and FATCA, but budget constraints will pose serious challenges to our customer service, enforcement efforts, and information technology projects.
To give you an idea of where we stand, the IRS budget for Fiscal Year 2014 was set at just under $11.3 billion, which is about $850 million below 2010. Going into Fiscal Year 2015 we’re essentially at the same level, since we are under a continuing resolution at the moment. So we’re still operating with a budget that is approximately 7 percent below 2010, while the taxpaying public grew by about 4 percent, or seven million taxpayers, over the same time period.
Plus, the agency now has 13,000 fewer permanent full-time employees than it did in 2010, even as our responsibilities have continued to expand.
We are very concerned that continued funding reductions are resulting in missed opportunities for the agency. Our enforcement programs are one example. Between 2010 and 2014, we’re down 5,000 key enforcement personnel: that includes revenue officers, revenue agents and criminal investigators. This has forced the agency to reduce the number of audits and collection activities. As a result, billions of dollars in enforcement revenue are not being taken in. Essentially, the government is losing billions to achieve budget savings of a few hundred million dollars, since the IRS estimates that, for every $1 invested in the IRS budget, it produces $4 in revenue.
Because of the restrictions on our funding, the IRS has also been forced to delay critical information technology and infrastructure projects. To cite one example, we’re falling behind in upgrading hardware infrastructure and software
In addition, we have not been able to implement an enterprise-wide unified case management platform. As a result, we continue to operate separate legacy systems, which duplicate effort and are costly and inefficient to maintain.
We are also concerned about how the budget affects taxpayer service. In this regard, these cuts have a direct and noticeable impact on both taxpayers and their representatives. Tax practitioners interact with the IRS every day, and they need our assistance and expertise to properly represent their clients and help them fulfill their tax obligations.
The demand for taxpayer services is expected to increase as the IRS continues to implement and administer tax-related provisions of major legislation, including the ACA and FATCA. This increased demand will further erode the IRS’ ability to provide the level of taxpayer services that the public has a right to expect.
During the upcoming filing season, if the IRS lacks adequate resources, millions of taxpayers and their representatives will continue to see longer wait times on the phone to get basic questions answered and to resolve tax issues.
To put this into context, take a look at the agency’s performance during the 2014 filing season. The IRS was able to maintain a level of phone service of about 71 percent, despite our funding limitations. Along with the diligent efforts of our employees, we attributed this to our increased ability to provide information on IRS.gov and the lack of major tax legislation in 2013. That 71 percent service level was higher than the 2013 average of 60.5 percent. But it’s still an unacceptable level of service, since it means that almost 30 percent of calls did not get to a live assistor.
Congress is now considering what our funding level should be for Fiscal Year 2015. If we do not receive adequate resources and we can’t do the hiring needed to handle this call volume, we estimate our level of phone service in 2015 would plunge to 53 percent. At 53 percent, that would mean close to half of those trying to get our help over the phone would not get through.
In making the case for additional funding for the IRS, I want to emphasize that we take very seriously the need to be careful stewards of the resources we receive. Our cost-cutting measures have saved nearly $1 billion since 2010.
But these efforts do not compensate for the massive deficit left by reduced appropriations in recent years, and we will continue to find it difficult to fulfill our goals for both service and enforcement as long as we do not receive adequate funding. I know this creates significant issues for your group as well as the entire tax community.
There is also a deeper issue to consider. Any marked deterioration in taxpayer services and enforcement creates long-term risk for the U.S. tax system, which is based on voluntary compliance.
If people think that their chances of ever hearing from us are diminishing significantly, or if they just can’t find the information they need and get discouraged, the impact is actually going to be on the compliance rate. And if the compliance rate goes down by one percent, it costs the government $30 billion a year. That’s almost three times the entire budget for the IRS. And so I look forward to working with Congress to solve this budget problem. I hope that one of the legacies of my time as IRS Commissioner will be that we put the agency’s funding on a more solid and sustainable footing.
Before I conclude, I just want to let everyone know that today in the exhibit hall, the IRS is demonstrating a very helpful online tool that we’ve designed for practitioners with clients who receive Form 1099-K. This tool will help practitioners identify how the reported gross receipts of a client may vary from other businesses in similar circumstances. AICPA members have access to this tool on their website. So I encourage you to stop by the IRS booth in the exhibit hall and let our folks show you what this tool can do.
It’s now time for me to listen to what you have to say. Thank you for allowing me to spend this time with you, and I’ll be happy to take your questions in the time we have left.