2014 IRSAC General Report
INTERNAL REVENUE SERVICE ADVISORY COUNCIL
The Internal Revenue Service Advisory Council (the “IRSAC”), the successor to the Commissioner’s Advisory Group established in 1953, serves as an advisory body to the Commissioner of Internal Revenue.
Chartered to convey the public’s perception of the Internal Revenue Service and its activities to the Commissioner, the IRSAC membership is balanced to include representation from the taxpaying public, the tax professional community, small and large businesses, state tax administration, and the payroll community. The IRSAC currently consists of 19 members, all volunteers, with substantial, disparate experience and diverse backgrounds. Many provide tax advice to clients, others guide their large employer’s tax affairs, and many are active in the volunteer income tax community. In addition to representing different-sized organizations, industries, and geographic regions of the United States, members also represent several occupations that interact with the IRS and the tax community. Each member has a unique perspective on tax administration and is committed to providing meaningful feedback to the IRS.
The purpose of the IRSAC is to provide an organized public forum for IRS officials and representatives of the public to discuss relevant tax administration issues. Working with IRS leadership, the IRSAC reviews existing practice and procedures and makes recommendations on both existing and emerging tax administration issues. In addition, the IRSAC suggests operational improvements, conveys the public’s perception of professional standards and best practices for tax professionals and IRS activities, offers constructive observations regarding current or proposed IRS policies, programs, and procedures, and advises the Commissioner and senior IRS executives on substantive tax administration issues.
The IRSAC is organized into four subgroups — the Wage and Investment (W&I) Subgroup, the Small Business/Self-Employed (SB/SE) Subgroup, the Large Business and International (LB&I) Subgroup, and the Office of Professional Responsibility (OPR) Subgroup. The members appreciate the invaluable assistance, dedication, and support provided by personnel from the IRS Office of National Public Liaison (NPL) and the operating divisions — Candice Cromling, Director, NPL; Carl Medley, Chief, Liaison Advisory Groups, NPL; Lorenza Wilds, IRSAC Program Manager, NPL; Rose J. Smith, NPL; Anna Millikan, NPL; Maria Jaramillo, NPL; Brian Ward, NPL; Johnnie Beale, W&I; Tonjua Menefee, SB/SE; and Kate Gregg, LB&I. They also appreciate the assistance provided by IRS executives and other personnel throughout the year. We thank them for their commitment to the IRS’s (and IRSAC’s) mission and for engaging in meaningful discussions on important tax policy and procedural issues. The IRSAC members were honored for the opportunity to work with these dedicated, qualified individuals. Their service to the IRSAC, the IRS, and the public should be recognized as truly exemplary.
Issues selected for inclusion in this annual report were identified, researched, and discussed with the subgroups during four working sessions and numerous conference calls throughout the year.
The 2014 W&I Subgroup, chaired by André L. Re, prepared the attached report which provides recommendations for changing taxpayer behavior in their filing of tax returns (where a taxpayer uses a computer to prepare their tax return and then files a paper return) along with customer service improvements in both collections and in the automated underreporting function.
The 2014 LB&I Subgroup, chaired by Mark S. Mesler, Sr., prepared the attached report which provides recommendations for risk assessing large employers to assist in the audit process, clarifying the rules of engagement between the IRS and an LB&I taxpayer under exam, and addressing an apparent disconnect between the goals of the Compliance Assurance Process program and the Advance Pricing Agreement process surrounding the timing of issue resolution.
The 2014 SB/SE Subgroup, chaired by Sherrill L. Trovato, prepared the attached report which provides recommendations surrounding the simplified home office deduction, the IRS Fresh Start initiative, and business identity theft awareness, a topic of emerging concern to tax administration.
The 2014 OPR Subgroup, chaired by John G. Ams, prepared the attached report which provides recommendations concerning the regulation of tax return preparers, tax professionals giving tax assistance to a (legal under state law) marijuana business, and general guidance to tax professionals regarding professional obligations.
In addition to the reports and recommendations of the four IRSAC subgroups, the Council as a whole identified a transcendent issue — securing adequate funding for the IRS — that merits attention because of its importance to enabling the United States to have a system of tax administration worthy of its people.
GENERAL REPORT ISSUE: THE IRS NEEDS SUFFICIENT FUNDING TO OPERATE EFFICIENTLY AND EFFECTIVELY, PROVIDE TIMELY AND USEFUL GUIDANCE TO TAXPAYERS, AND ENFORCE CURRENT LAW, SO THAT RESPECT FOR OUR VOLUNTARY TAX SYSTEM IS MAINTAINED
The IRSAC commends the IRS for seeking to improve taxpayer service, reduce taxpayer burden, and ensure compliance by both deploying new and improved technologies and implementing creative program initiatives. These unassailable goals cannot be achieved with inadequate funding. Without adequate funding, both taxpayers and the tax system will continue to suffer. IRS personnel must receive the tools, training, and technology required to perform effectively. Advances in private sector technology are outpacing a resource-challenged IRS at a time when it is called upon to do more and when improved technology and a larger workforce are essential to its efficient operation. Without adequate funding, the IRS will be unable to balance the competing demands of its compliance, enforcement, and taxpayer service functions — a balance that is absolutely necessary to the proper functioning of our voluntary tax system. IRSAC is concerned that the long-term degradation of the IRS’s service and enforcement capabilities that inevitably flows from persistent underfunding will undermine this core of our tax system.
In IRSAC’s view, the IRS is in the midst of an existential funding crisis. Recent funding levels at the IRS impair the ability of the agency to perform its critical mission of providing much needed services and support to taxpayers who strive to meet their tax obligations and to identify and address the non-compliance of those who are not so inclined. We say this as professionals who deal with the tax law, tax system, and tax agency on an almost daily basis. We say it because, candidly, it needs to be said: Our tax system, which is dependent on voluntary compliance, is increasingly at risk.
Since FY 2010, the IRS budget declined each year, even though the agency was required to assume greater responsibilities (such as those mandated by Congress’s enactment of the Foreign Account Tax Compliance Act and the Affordable Care Act), and absent congressional action, it will be further reduced. The Internal Revenue Service Oversight Board, an independent body chartered by Congress to provide advice on, among other things, the IRS’s budget, confirmed the problem; in an October 20, 2011, letter to the Senate Committee on Appropriations, the Oversight Board commented that the gap between the budget it recommended and the budget approved by the House and Senate Appropriations Committees was “disturbingly large.”
Senior IRS leadership reiterated this appraisal in many appearances before Congress along with the Government Accountability Office, which is often characterized as a congressional “watchdog.” Regrettably, the IRS’s fiscal situation has not recently improved, and has in fact deteriorated. Full Time Equivalents (“FTEs,” a measure of the number of full-time personnel) were reduced by about 8,000 FTEs since fiscal year 2009. The IRS absorbed prior budget cuts through savings and efficiencies, but was compelled to reduce, delay, or eliminate services.
The IRS requested a significant budget increase for 2015. Not including other budgetary resources such as user fees, the fiscal year 2015 budget request for IRS is $12.5 billion, which represents an increase of 10.5 percent ($1.2 billion) in funding and 8.3 percent in staffing (6,998 FTEs) over fiscal year 2014. Nevertheless, earlier this year, the U.S. House of Representatives passed H.R. 5016, The Financial Services and General Government Appropriations Act, which would fund the IRS at significantly reduced levels compared with fiscal year 2014.
Although IRSAC recognizes the challenges that Congress faces regarding the federal budget, we respectfully disagree with its treatment of the IRS’s budget, which we submit is both short-sighted and counterproductive. Providing the IRS with sufficient resources is essential to its providing adequate taxpayer service, collecting taxes properly due, and ensuring compliance. The proposed funding reduction in H.R. 5016 would reduce the IRS’s funding to its lowest level in ten years. While the IRS made great strides in reducing costs, such as increasingly automating its systems, IRSAC believes that continued reduced funding will negatively affect the IRS’s ability to serve taxpayers and enforce the tax laws that Congress enacts. In particular, we are concerned that by not adequately funding the IRS, the following consequences might occur.
Declining Federal Revenues
Every dollar devoted to tax enforcement yields a substantial increase in tax collections, and reducing funding in the IRS’s tax enforcement efforts results in significantly lower tax collections.
Lack of Necessary Service Personnel at Required Experience Levels
The IRS must recruit and properly train a sufficient staff to perform the critical functions that Congress has assigned it in the face of complex and constantly changing tax laws. With many senior IRS personnel opting for retirement, and funding limits preventing many vacancies from being filled, IRSAC is concerned that the IRS will not have sufficient personnel to address taxpayer needs. Since the IRS’s training budget has already been reduced by 85 percent since fiscal year 2009 we are concerned about the adverse effects this reduction may have on tax administration and taxpayer rights.
Although the IRS made major strides to automate its systems and operations in its taxpayer service and enforcement functions, many essential IRS programs remain people-intensive and highly dependent on qualified personnel, supported by appropriate levels of funding for compensation, training, travel, and other items. The IRS responded to current cuts through hiring freezes, reduced funding for grants and other expenditures, and cuts in travel, training, facilities, supplies and other costs. The IRS also scrutinized contract spending to ensure only the most critical and mandatory requirements are fully funded.
These adjustments are not “cost free” to the tax system. Taxpayers and practitioners are already experiencing adverse effects due to cutbacks attributable to recent and projected funding reductions. Although recently some training allowances were restored, the effects of the earlier cuts on program effectiveness, not to mention staff retention, cannot be overestimated.
A further comment about staffing is appropriate. Recent cutbacks and sequestration meant that most IRS personnel saw limited or no compensation raises in recent years, even without considering the effect of the furloughs in FY 2013. This fiscal environment likely hastened the departure of senior IRS personnel who were already eligible for retirement. Coupled with other personnel policy changes that constrained the IRS’s inability to fill vacancies, we are concerned there will be a significant erosion of experienced leadership at a critical time, which cannot help but adversely affect taxpayer service and tax law enforcement.
Negative Effects on the Service’s Ability to Administer the Law Fairly
The decline in budget resources unavoidably adversely impacted enforcement programs. Further, the IRS is required by law to implement congressionally enacted laws, such as FATCA and the ACA, and a number of other complex statutes. The IRSAC commends the IRS’s efforts to blunt the effects of a reduced budget, but reluctantly concluded that the agency’s ability to carry out these duties runs the risk of being significantly compromised because the necessary resources are simply not available.
Decreases in the Quality of Taxpayer Service
The effects of the reduced funding are being felt in negative ways, not only by agency personnel but also by taxpayers and their representatives. In FY 2012, the IRS received around 125 million telephone calls. The IRS answered only about two out of three calls from taxpayers trying to reach a live person, and those taxpayers had to wait, on average, about 17 minutes. Meanwhile, at fiscal year end, the IRS had a backlog of more than 1 million pieces of correspondence (up 188 percent from FY 2004), and almost half of that backlog was overage (up 316 percent from FY 2004). While the percentage of calls answered increased, wait times also increased.
These are not mere abstract statistics; they have real-world consequences for taxpayers and their representatives. The only good news in them is that the call volumes are actually down from the levels in the early to mid-1990s, and that is likely owing to the salutary effects of increased automated assistors and other technology, such as the IRS’s website, as well as fewer tax law changes. Many of the calls and correspondence are from taxpayers and their representatives trying to respond to IRS inquiries and notices, including levies, other collection matters and identity theft (in 2013 the IRS had approximately 690,000 open cases of identity theft). Resolution of these types of issues cannot be automated because they require engagement with IRS personnel. Similarly, the ability of taxpayers to meet with the Office of Appeals to resolve cases administratively has also been negatively affected by decreased funding.
Effects on a System Based on Voluntary Compliance
The IRS’s enforcement efforts — its work to close the “tax gap” (which has been estimated at nearly $400 billion a year) — are also affected by the funding question. In FY 2012, the IRS brought in federal revenue of about $2.52 trillion on a budget of $11.8 billion, a return-on-investment (ROI) of 214:1. As the IRS recently estimated in a letter to Congress, reductions in the enforcement budget will inevitably and negatively affect the level of tax collections by as much as seven times the amount of the budget cuts.
In addition, while much of the lower collections will be attributable to the relatively small percentage of taxpayers who have traditionally ignored their responsibilities, a growing amount may be attributable to the effects of increasing cynicism of taxpayers about the fairness and integrity of the tax system. Thus, previously honest and diligent taxpayers who would otherwise end up paying more to subsidize noncompliance by others could themselves be tempted into noncompliance.
More broadly, any reduction in voluntary compliance will increase the cost of enforcing the tax law. Whatever the costs of running the current system, those costs are orders of magnitude less than what would be necessary if taxes were, in fact, routinely forcibly exacted rather than paid by honest citizens trying to voluntarily comply with their obligations.
Funding levels are now significantly below levels that IRSAC members, in our other role as concerned citizens, believe necessary for the IRS to fully and successfully achieve its mission of assisting taxpayers in complying with their legal obligations and enforcing those legal obligations when necessary. Recent reductions in funding endanger the significant investments and substantial progress made in the last two decades in modernizing the IRS, and compromises the IRS’s ability to deal with the challenges now before us and those to come. We recommend that the IRS be funded at a level no lower than the level requested by the Administration.