2015 IRSAC General Report

Notice: Historical Content
This is an archival or historical document and may not reflect current law, policies or procedures.

GENERAL REPORT

OF THE

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.  As an advisory body designed to focus on broad policy matters, the IRSAC's primary purpose is to provide an organized public forum for senior Internal Revenue Service (the IRS) executives and representatives of the public to discuss relevant tax administration issues.

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, and the payroll community. The IRSAC is currently comprised of 20 members with substantial, disparate experience and diverse backgrounds. Many provide tax advice to clients, others manage 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 occupations that interact with the IRS and the tax community in a variety of ways. Each member has a unique perspective on tax administration and is committed to providing meaningful input and feedback to the IRS. The members are volunteers, and receive no compensation for their service.

Working with IRS leadership, the IRSAC reviews existing practices 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 currently organized into three subgroups — the Small Business/Self-Employed and Wage and Investment (SBSE/W&I) 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; Anna Millikan, NPL; Maria Jaramillo, NPL; Brian Ward, NPL; Johnnie Beale, W&I; Tonjua Menefee, SB/SE; and Kate Gregg, LB&I. They are also grateful for the invaluable assistance provided by IRS executives and other personnel throughout the year. We thank them for their commitment to the IRS’ and IRSAC’s mission and for engaging in the meaningful discussions and dialogue that each subgroup held on numerous important issues. The IRSAC members were honored and privileged to have the opportunity to work with these dedicated, qualified individuals. Their dedicated service to the IRSAC, IRS, and the public should be recognized as truly exemplary.

Issues selected for inclusion in this annual report represent those to which IRSAC members have devoted particular attention during four working sessions and numerous conference calls throughout the year. The issues included in the IRSAC annual report are issues that members consider especially important but also include issues that IRS personnel brought to our attention and for which input was requested. Nearly all issues involved extensive research efforts.

We acknowledge the many challenges that the IRS has recently experienced and, knowing the demands on IRS executives and operating division representatives, we also sincerely appreciate and want to recognize the time and effort devoted by them to IRSAC activities during the year.

The 2015 SBSE/W&I Subgroup, co-chaired by Andre’ L. Re and Sherrill L. Trovato, prepared recommendations regarding cost-effective ways to improve individual taxpayer authentication to ensure a high level of confidence while minimizing taxpayer burden, to mitigate fraud by payroll service providers, to improve the taxpayer experience by increasing the IRS’ communication with taxpayers, and other suggestions to improve the Offer in Compromise process and the automated online self-service applications.

The 2015 LB&I Subgroup, chaired by Mark S. Mesler, Sr., prepared recommendations regarding recommendations regarding penalty administration in light of impending LB&I examination process changes and the IRS’ emphasis on international information reporting. In addition, the Subgroup made recommendations on risk assessment and examinations in relation to recently modified Tangible Property Regulations.

The 2015 OPR Subgroup, chaired by Ronald D. Aucutt, prepared recommendations to maintain the independence, strength, and visibility of the IRS Office of Professional Responsibility and provide it with the legislative authority it needs to do its job of protecting taxpayers and our voluntary compliance system.  It also prepared a recommendation to reaffirm and strengthen a 2011 IRSAC proposal that OPR consistently use the Uniform Standards of Professional Appraisal Practice in judging appraiser conduct.

In addition to the reports and recommendations of the three IRSAC subgroups, the Council as a whole identified two transcendent issues — securing adequate funding for the IRS and preserving a strong, balanced, and independent Office of Professional Responsibility — that merit special attention because of their fundamental importance to enabling the United States to have a system of tax administration that can and will meet the objectives of the stated mission of the Internal Revenue Service:

The IRS Mission
Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

This mission statement describes our role and the public’s expectation about how we should perform that role.

  • In the United States, the Congress passes tax laws and requires taxpayers to comply.
  • The taxpayer’s role is to understand and meet his or her tax obligations.
  • The IRS role is to help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share.

 

ISSUE ONE: THE IRS NEEDS SUFFICIENT FUNDING TO OPERATE EFFICIENTLY AND EFFECTIVELY, PROVIDE TIMELY AND USEFUL GUIDANCE AND ASSISTANCE TO TAXPAYERS, AND ENFORCE CURRENT LAW, SO THAT THE INTEGRITY OF, AND RESPECT FOR, OUR VOLUNTARY TAX SYSTEM IS MAINTAINED

Executive Summary

The Internal Revenue Service is a bureau of the Department of the Treasury, one of the world's most efficient tax administrators,[1] and by some measures the largest financial services organization in the world. The financing of the federal government depends largely upon the Internal Revenue Service, which collected 93 percent of federal receipts in FY 2014.[2] In FY 2012, the IRS collected more than $2.5 trillion in revenue[3] and processed more than 237 million tax returns, and more than 2 billion information returns.[4]

Including the effects of across-the-board rescissions and reductions required by sequestration and other adjustments, overall funding for the IRS has decreased about 17 percent on an inflation-adjusted basis since FY 2010,[5] and is now below FY 2009 levels.[6]  These reductions do not include the effects of the unfunded mandates of significant new program costs, like administration of the Patient Protection and Affordable Care Act (the ACA) and other laws, imposed on the IRS.

The IRS has managed these massive downward adjustments in its funding by scaling back activities, freezing hiring, limiting training, and using limited budget flexibility[7] to reallocate resources among its four appropriations accounts and the programs they respectively control. 

As discussed below, these cuts have already had a significant and negative impact on both the taxpayer service and enforcement functions of the IRS, inhibiting its ability to carry on the IRS mission.  In our view and in the views of others, the adjustments forced by recent budget reductions have had substantial and widespread negative impacts on the agency, all of its 81,279 personnel,[8]  federal taxpayers, state taxpayers whose state tax-related obligations are affected by interaction between their state tax system and the IRS, and taxpayer representatives (the attorneys, certified public accountants, enrolled agents, software providers, and others who assist taxpayers in filing their tax returns and dealing with the resulting obligations that flow from them).  Thus, the reductions affect all the issues with which IRSAC and taxpayers generally are concerned.

Recent deficiencies in funding are eroding the significant investments and substantial progress made in the last two decades in modernizing and streamlining the IRS, and making it more efficient. These investments were made at the behest and with the support of House and Senate Congressional leaders in both parties, the Treasury Department and IRS, and private individuals, all of whom care deeply about both particular issues and the core integrity and effectiveness of our tax system.  The funding deficiencies compromise the IRS’ ability to deal with the challenges now before us and those yet to come, and may have even more dramatic and costly future impacts on our system of voluntary compliance and self-assessment.  An efficient, well-functioning IRS is absolutely critical to every aspect and program of our federal government.  State governments are also adversely affected, as most state tax systems “piggyback” off aspects of the federal tax system.

IRSAC does not believe that current levels of funding are adequate to achieve these goals so necessary to each and every one of us as American citizens. We say this as professionals who deal with the tax law, tax system, and tax agency on a daily basis. We say this because, candidly, it needs to be said.  We believe our tax system, which is dependent on voluntary compliance, is increasingly at risk.

Description of the Problem

The financing of the federal government depends largely upon the IRS, which collected 93 percent of federal receipts in FY 2014.[9] In FY 2012, the IRS collected more than $2.5 trillion in revenue[10] and processed more than 237 million tax returns, and more than 2 billion information returns.[11]  Because of the accumulated expertise of its large workforce, its massive systems and the huge data depository they hold, the IRS has been mandated additional duties outside its traditional mission and responsibilities, such as administration of significant portions of the ACA passed by the Congress.

Between FYs 2010 and 2015, the IRS’s budget has been reduced by more than $1.2 billion.[12]  

The IRS’s Recommended, Requested, and Appropriated Budgets From FY 2009 to FY 2015

Source: IRS Oversight Board’s FY 2015 IRS Budget Recommendation Special Report.

Including the effects of across-the-board rescissions and reductions required by sequestration and other adjustments, overall funding for the IRS has decreased about 17 percent on an inflation-adjusted basis since FY 2010,[13] and is now below FY 2009 levels.[14]

This startling statistic does not include the substantial burdens of unfunded mandates such as the ACA.  In February 2015, the IRS released version three of its ACA cost estimate as part of its ongoing practice to refine the cost estimate and to address GAO recommendations with respect to the estimation process.[15]  The cost estimate totals $2.72 billion (adjusted for inflation) from mid-FY 2014 through FY 2026; when prior years are included, the estimate increases to $3.43 billion from FY 2010 through 2026 (adjusted for inflation).  Likewise, new Treasury Department initiatives on taxpayer information exchanges or participation in those of other government organizations, such as the Foreign Account Tax Compliance Act (FATCA) passed by the Congress, and the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) initiative, have also magnified the need for resources without corresponding increases in funding.

Notes to figure: The taxpayer population has grown about 6 percent since FY 2010 while the IRS budget, in real terms, has decreased 17 percent.  In addition to ACA and FATCA, which IRS expects to cost over $600 million to implement in FY 2016, IRS now has responsibilities for the ABLE Act and the Health Coverage Tax Credit.  Implementing these two new programs is expected to cost over $50 million next year.  Inflationary costs such as increased contributions to employee health plans and pay raises also costs IRS about $200 million a year.  Source: IRS Budget Division.

The IRS has responded by scaling back activities, freezing hiring, limiting training, and using limited budget flexibility to reallocate resources among its four appropriations accounts.[16]

These impacts affect all the issues with which IRSAC and taxpayers generally are concerned.

Increased Automation Brings Both Pros and Cons

The IRSAC commends the IRS for nevertheless continuing to seek ways to improve taxpayer service and ensure compliance, while reducing taxpayer burden by, among other measures, deploying new and improved technology.  But there are significant implications to these changes, both in the short and longer term.  Even those changes that may at first seem to be improvements may have long-term negative consequences — for example, the shift to more and more automation and less and less contact with live persons may disadvantage and disappoint taxpayers who often have complex problems that are not easily addressed by those automated systems. 

Importance of Voluntary Compliance

These problems and others stemming from a degraded enforcement presence may adversely affect the voluntary compliance of many more taxpayers.  Our tax system is one of self-assessment.  The Voluntary Compliance Rate (VCR) is the amount of tax for a given tax year that is paid voluntarily and timely, expressed as a percentage of the corresponding amount of tax that the IRS estimates should have been paid. It reflects taxpayers’ compliance with their filing, reporting, and payment obligations. For example, a 2007 report issued in conjunction with Congressional reviews of the then approximately $345 billion Tax Gap (the aggregate amount of taxes of each type that should be paid each year and are not) provided an estimate of the VCR of 83.7 percent for all taxes and all taxpayers for FY 2001.[17] Similarly, the amount was estimated at $450 billion for FY 2006, the latest IRS data available, and the overall VCR, or the gross Tax Gap as a percentage of total true tax liability, at 83.1 percent.[18]

Source:  IRS.

The most cost-effective systems of imposing and collecting taxes are those that encourage and permit the vast majority of taxpayers to meet their tax obligations voluntarily, allowing for tax administrations to concentrate their efforts and limited resources on those taxpayers who do not comply.  The VCR has remained remarkably constant over the several decades since statistics began to be kept in 1974, but may change if and when major changes are made in the system. Even a small percentage of degradation of the VCR would necessitate considerable additional resources to be committed to maintain the new lower level of compliance and would likely result in significant revenue losses as well.

Impacts of Insufficient Funding

Recent funding levels at the IRS impair the ability of the agency to adequately 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.  

IRSAC recognizes the immense challenges that the Congress faces in trying to address federal spending on government programs in order to balance the federal budget.  We also recognize the desire of the Congress to exercise its oversight function in relation to how certain personnel at the IRS have administered the tax laws affecting tax-exempt organizations.  These challenges and issues, however, make it more, not less, important for the IRS to have the necessary resources and support it needs to appropriately manage and perform its central function of administering the tax laws fairly and collecting the taxes properly due under those laws.  

Direct Program Impacts

IRS initially absorbed the recent budget cuts through savings and efficiencies, but was compelled to reduce, delay, or eliminate services.  The IRS also scrutinized contract spending to ensure only the most critical and mandatory requirements are fully funded.[19]

A recent GAO investigative report looked at IRS responses to the funding decreases since FY 2010, and concluded that the examined business units (several larger and key units) scaled back activities, potentially reducing program effectiveness or increasing risk to IRS and the federal government.[20]  Each business unit examined —Human Capital Office, Office of Chief Counsel, and SB/SE Division — took actions to absorb budget reductions:

One common element among each of the business units examined is that they spend 80 percent or more of their funds on labor. When IRS receives its budget, the Corporate Budget Office coordinates with business units to ensure that each business unit has sufficient funding to support Full Time Equivalents (FTEs) already onboard. The review of FTEs aligns anticipated salary and benefit costs to available appropriated funding for each business unit…. From fiscal year 2010 to fiscal year 2014, FTEs declined through attrition in each of the business units examined [from 20 to as much as 29.6 percent of unit FTEs]. Because labor comprises the majority of these business units’ expenses, unit managers are limited in how they implement budget cuts. According to business unit officials, budget reductions were often implemented by decreasing the amount or type of activity performed. One key factor that influenced business units’ decisions about how to prioritize activities was whether the activity was statutorily mandated. According to IRS officials, statutorily mandated activities—such as tax litigation in the Office of Chief Counsel—remained a priority. [tabular data summarized][21]

Some examples of reduced or eliminated activities that were cited include the following:  non-filer investigations, private letter rulings, bankruptcy program, acquisition of e-discovery and document management software for tax litigation, and background reinvestigations of employees.  All of these are important activities.

Lack of Necessary IRS Personnel at Required Experience Levels

In addition to the reductions just mentioned, significant reductions were also made in internal staff costs, such as hiring, training[22] and travel.[23]  GAO estimated in the referenced reports that the savings were $56.2 million for the training and travel reductions for the period surveyed.

Another example of how the IRS has had to respond to the budget realities are the severe constraints that have been placed on hiring, either new hires or the filling of vacated positions.  The report explains that:

IRS plans to replace few employees who leave the agency. In an agency with over 80,000 FTEs, all requests for external hiring in fiscal year 2015 must be approved by a direct report to the Commissioner. Specifically, requests for new hires are reviewed by the Deputy Commissioner for Operations Support, Deputy Commissioner for Services and Enforcement, and in certain cases, the Chief of Staff.[24]

This has led to many critical positions being left unfilled.

These adjustments are not “cost free” to the tax system. Taxpayers and practitioners are experiencing adverse effects due to required cutbacks attributable to recent and projected funding reductions.  Although some training allowances were recently restored, the effects of the earlier cuts on program effectiveness, not to mention staff retention, cannot be overstated.

A further comment about staff retention 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 environment likely hastened the departure of senior IRS personnel who were already eligible for retirement. IRSAC is concerned that, coupled with other personnel policy changes that constrain the IRS’ inability to fill vacancies, the budget reductions contribute to a significant erosion of experienced leadership at a critical time, that cannot help but adversely affect taxpayer service and tax law enforcement.

But the longer-term effects of those adjustments may be much more dramatic than the cuts themselves.  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. Since its most recent major reorganization in the late 1990s, IRS personnel and their activities have been centered on two major functions:  taxpayer services and enforcement of the tax laws.  The IRS has made major strides to further automate its systems and operations in both areas and to reduce costs of operations through such means.  IRSAC believes that there have been many positive accomplishments in this process in essential IRS programs throughout the IRS.  Nevertheless, as the cited GAO study indicates, many necessary IRS programs are still people-intensive and therefore highly dependent on qualified personnel, supported by appropriate levels of funding for compensation, training, travel, and other items.

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 experienced and trained personnel to adequately address taxpayer needs and protect taxpayer rights. This concern is already seen in the decline in taxpayer service.

Decreases in Quality of Taxpayer Service

The effects of the reduced funding are being felt in various negative ways, not only by agency personnel but also by taxpayers and their representatives.  There are many areas in which the metrics of taxpayer service at the IRS have been measured and scrutinized over the years.  A recent report by the Taxpayer Advocate Service looks at a number of them.[25] Of particular note are the observations with respect to telephone calls and taxpayer correspondence, affecting the ability of taxpayers to interact with IRS with respect to matters of great importance to them:

During the filing season, the IRS was only able to answer about 37 percent of the calls routed to telephone assistors, and those callers who managed to get through had to wait on hold an average about 23 minutes. (Except where otherwise noted, the telephone and correspondence data cited herein is for the filing season covering the January 1 through April 18 period or the comparable period for prior years.)

The percentage of calls answered by telephone assistors (known as the “Customer Service Representative Level of Service” or “LOS”) and the average hold times this filing season constituted by far their worst levels since the IRS adopted its current performance measures in 2001. For comparison, the IRS reached its high-water mark in providing taxpayer service in 2004 when it answered 85 percent of taxpayer calls directed to telephone assistors and hold times averaged three minutes during the filing season.  Even during last year’s filing season, the IRS answered 71 percent of its calls and hold times averaged about 14 minutes.

Between January 1 and April 18, the IRS Accounts Management (AM) telephone lines received about 50 million taxpayer telephone calls.  Of those, about 30 million were routed to automated processes, and about 20 million were routed to telephone assistors.  One might assume that calls routed to automation would be answered at a much higher rate than calls routed to telephone assistors, but that is not the case. Of the 49.9 million calls the IRS received on its AM lines, including calls routed to automation, 24.1 million were deemed to be answered. That is less than 50 percent.

One basic system limitation results in what in IRS parlance is known as a “courtesy disconnect.” When the IRS switchboard is overloaded and cannot handle additional calls, the IRS essentially hangs up on callers. The number of courtesy disconnects skyrocketed this filing season as compared with prior years, rising by more than 1,500 percent from about 544,000 in 2014 to about 8.8 million this year.

The Practitioner Priority Service (PPS) phone line is used by tax professionals who are trying to reach the IRS to assist their clients. Over the course of the filing season, the IRS answered only 45 percent of practitioner calls on this line, and the hold time averaged 45 minutes. Thus, the use of the term “priority” has understandably evoked a combination of frustration and amusement from tax attorneys, CPAs, and Enrolled Agents, who must decide whether and how much to charge their clients for the time they spend waiting on hold. Of course, the 45-minute hold time represents merely an average. One practitioner told the National Taxpayer Advocate of waiting six hours to reach a telephone assistor. Another practitioner whom the National Taxpayer Advocate knows well forwarded an email from an associate at his law firm reporting on a four-hour and 24-minute telephone call, of which the first four hours and three minutes were spent waiting on hold.

Tradeoff Between Telephone Service and Correspondence

Since 2008, the IRS has received more than 100 million telephone calls from taxpayers in every year, and it has received an average of more than ten million letters from taxpayers responding to proposed adjustments and other notices (e.g., requesting penalty abatements, responding to math error notices, and making payment arrangements).

There is a large pool of AM employees that the IRS shifts back and forth between answering the phones and responding to taxpayer correspondence. However, the IRS faces a difficult choice in deciding which service to prioritize, and with relatively poor levels of service on both and limited resources, it is not an easy choice. If it assigns more employees to answer taxpayer telephone calls, it will fall further behind in processing taxpayer responses to proposed adjustment notices. If it assigns more employees to process taxpayer responses to proposed adjustment notices, it will answer fewer telephone calls.

At the end of the 2014 filing season, 22.7 percent of taxpayer correspondence had not been processed within normal timeframes and was considered “overage.”  At the end of the 2015 filing season, the overage percentage was 25.1 percent.

While the decline in processing taxpayer correspondence was much more modest than the decline in telephone performance, the consequences of a failure to process taxpayer responses to proposed increases in tax liability can be more significant. Therefore, the IRS made a decision to minimize increasing correspondence delays. [Portions of text, graphics, and internal footnotes were omitted.][26]

Recent GAO and IRS Oversight Board reports indicate percentages of overage taxpayer correspondence at even higher levels, as high as fifty percent as measured in those studies.[27]

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 down from the levels in the early to mid-1990s, and that is likely owing to the positive effects of increased automated assistors and other technology, such as the IRS’ website, as well as fewer tax law changes.  

Much has been done to make necessary information and services available on the IRS website, and the progress there is truly remarkable and positive. However, many of the unanswered calls and correspondence are from taxpayers seeking additional information to prepare and file their tax returns and reports, and these taxpayers are being frustrated in their efforts.  Many of the calls and correspondence are taxpayers and/or their representatives trying to respond to IRS inquiries and notices, including impending levies and other collection matters.  Because some of these processes are automated, the inability to engage with IRS can mean serious problems for the affected taxpayers and significantly higher costs for their representatives.  Additionally, many taxpayers are trying to deal with problems related to identity theft.[28]  Resolution of these types of issues cannot and should not be fully automated because they require engagement with IRS personnel to resolve complex matters.

Similarly, the ability of taxpayers and their representatives to meet with the Office of Appeals to resolve tax controversy cases administratively has also been negatively affected by decreased funding.

IRSAC is concerned that because most of the IRS’ budget is devoted to personnel costs, the funding reductions necessarily reduce the staff available to deal with these issues.

Negative Effects on the IRS’ Ability to Administer and Enforce the Law Fairly

The decline in budget resources has adversely affected enforcement programs as well. At the same time that the IRS is struggling to meet taxpayer needs in its service functions, it is also struggling in its enforcement efforts — its work to close the “Tax Gap.” 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 and the VCR 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 forcibly exacted rather than paid by honest citizens striving to voluntarily comply with their obligations, and who would want to live in such a system.

Report GAO-15-420R, Internal Revenue Service: Observations on IRS’ Operations, Planning, and Resources, April 10, 2014 (Updated March 3, 2015), at 12.

Report GAO-14-534R, “Internal Revenue Service: Absorbing Budget Cuts Has Resulted in Significant Staffing Declines and Uneven Performance,” April 10, 2014 (Updated April 18, 2014) at 27.

Recommendation

Funding levels are now significantly below levels that IRSAC members, in our role as concerned citizens, believe necessary for the IRS to successfully achieve its traditional mission, and new ones like the critical role it is currently required by law to play in the implementation of the ACA.  These roles include both assisting taxpayers in complying with their legal obligations and enforcing those legal obligations when necessary. The impacts of recent reductions in IRS programs are already being felt by all American taxpayers. These issues must be addressed now.

Recent deficiencies in funding are eroding the significant investments and substantial progress made in the last two decades in modernizing and streamlining the IRS, and making it more efficient.  Insufficient funding may have even more dramatic and costly future impacts on our system of voluntary compliance and self-assessment. 

We have experienced the fact that taxpayers often blame the IRS for their unhappiness with our system of tax laws, or in some cases its enforcement.  The IRS does not make the tax laws, and unless and until the laws are changed, the IRS must enforce those laws enacted by the Congress and signed by the President.  Lawmakers in both political parties often criticize the IRS, usually because of genuine concerns with specific aspects of tax administration and enforcement. When criticism is due to poorly executed enforcement, those problems should be specifically and surgically addressed either by realignment of programs and resources, by additional funding if appropriate, or by personnel actions specific to the individuals involved.  But an efficient, well-functioning IRS is necessary to the functioning of our federal government.  The same is true for our state governments, as most state tax systems “piggyback” off aspects of the federal tax system. We do not believe that current levels of funding are adequate and regret that, if they continue, they may lead to serious consequences to all of us.   We recommend that the IRS be funded at a level no lower than the FY 2016 budget request proposed by the Administration.  
 

ISSUE TWO: LOOKING FORWARD IN THIS VOLATILE ENVIRONMENT, THE IRS MUST MAINTAIN THE TAXPAYER AND PRACTITIONER PROTECTIONS AFFORDED BY A STRONG, BALANCED, AND INDEPENDENT OFFICE OF PROFESSIONAL RESPONSIBILITY

Description of the Problem

With the current budget constraints on the IRS creating a need to consolidate and prioritize expenditures, and with the resulting pressures on taxpayer voluntary compliance and enforcement of the tax laws, the IRSAC believes it is critical that IRS maintain the systemic protections afforded both taxpayers and practitioners by a strong, balanced, and independent Office of Professional Responsibility (OPR).  

The quality and accuracy of tax returns and other submissions to the IRS is especially vital in a time of reduced IRS monitoring capacity due to budget constraints and personnel reductions.  IRSAC believes that OPR’s function is increasingly vital at this time, that legislation is needed to restore OPR’s ability to regulate return preparers and all aspects of professional assistance to and representation of taxpayers.  Further, within the IRS it is important that funding priorities not jeopardize OPR’s independence and vitality.

These concerns are heightened by the results of recent court cases that have limited in significant ways the authority of OPR.  If not addressed, these developments could leave taxpayers, practitioners, IRS, and the Congress to face some of the destructive behaviors that have undermined the tax system in the past.  Further, OPR should not just be “another enforcement office” in the IRS organization.  Practitioners should be able to expect a fair and impartial evaluation of allegations made against them by others, including personnel in the examination functions of IRS, given that the possible effects of such actions include limitations on their ability to practice and earn a living.

Recommendation

Because of its significance and importance, the IRSAC has included these matters in its General Report.  As much more fully discussed in the OPR Subgroup report, IRSAC urges the IRS to maintain the independence, strength, and visibility of OPR. 

 
[1] The IRS spent just 48 cents for each $100 it collected in FY 2012.  (Table 29, IRS 2012 Data Book.)  The US spends roughly half what the average OECD country spends to collect $1,000.  See Organization for Economic Cooperation and Development, “Tax Administration 2015:  Comparative Information on OECD and Other Advanced and Emerging Economies,” at http://www.oecd.org/ctp/administration/tax-administration-23077727.htm.  According to IRS Budget Division, in 2013 IRS spent less than $5 to collect every $1,000 in net revenue. Today that amount is even lower, below $4, and it is likely that only Switzerland now spends less.  IRS also spends under one tenth of one percent — currently about 0.06%—  of U.S. GDP on tax administration, far lower than most developed countries, again with only Switzerland lower.  Note that most OECD countries generate a substantial portion of their revenue from indirect/consumption taxes with self-enforcing features that require less service/compliance work, making the comparison even more significant.
[2] GAO-15-624, “IRS 2016 BUDGET: IRS Is Scaling Back Activities and Using Budget Flexibilities to Absorb Funding Cuts,” June 2015 (“GAO-15-624”), at 1.
[3] Id.
[4]There were 2,109,781,400 information returns of various types filed in 2014.  See Publication 6961 (Rev. 7-2014).
[5] National Taxpayer Advocate 2014 Annual Report to Congress 13 (Most Serious Problem:  TAXPAYER SERVICE: Taxpayer Service Has Reached Unacceptably Low Levels and Is Getting Worse, Creating Compliance Barriers and Significant Inconvenience for Millions of Taxpayers).
[6] GAO-15-624, at 1. 
[7] See note 16 below for additional discussion of these constraints.
[8] Full Time Equivalents (“FTE”) reported for FY 2015. GAO-15-624, at 1. Since FY 2010, IRS’s overall staffing has declined by about 13,000 FTEs (14.1 percent). FTEs units are the computed number of equivalent employees working full-time, or the ratio of the total number of paid hours during a period (part time, full time, contracted) by the number of working hours in that period Mondays through Fridays.
[9] GAO-15-624, at 1.
[10] Id.
[11]There were 2,109,781,400 information returns of various types filed in 2014.  See Publication 6961 (Rev. 7-2014).
[12] Treasury Inspector General for Tax Administration, “Reduced Budgets and Collection Resources Have Resulted in Declines in Taxpayer Service, Case Closures, and Dollars Collected,” Report 2015-30-035, May 8, 2015, at 1:  “Due to delays in enacting Federal budgets for the past several years, Continuing Resolutions have been passed to keep the Government operating. As such, the full-year operating budget has not been known until well into the fiscal year. Additionally, the impact of the sequestration provisions in the Balanced Budget and Emergency Deficit Control Act, as amended by the Budget Control Act of 2011, Pub. L. No. 112-25, 125 Stat. 240 (2011), significantly affected the IRS. During Fiscal Year (FY) 2013, the IRS operated under a Continuing Resolution, in addition to sequestration rules, that funded the agency at just less than $11.2 billion. That amount was significantly lower than both the President’s and the IRS Oversight Board’s FY 2013 recommendations, approximately $948 million less than the FY 2010 budget. The IRS’s FY 2015 enacted budget of $10.9 billion was more than $1.2 billion (10 percent) less than the FY 2010 enacted budget.”
[13] National Taxpayer Advocate 2014 Annual Report to Congress 13 (Most Serious Problem:  TAXPAYER SERVICE: Taxpayer Service Has Reached Unacceptably Low Levels and Is Getting Worse, Creating Compliance Barriers and Significant Inconvenience for Millions of Taxpayers).
[14] GAO-15-624, at 1. 
[15] GAO-15-624, at 22.

[16] Appropriations laws contain constraints and limitations on the ability of an agency to cross-fund or reallocate resources between the bucketed appropriations.  This is important to note because of recent criticism that the IRS should be more nimble and adjust by moving money to higher priority needs and defunding others.

The appropriations provided by Congress currently fall into four bucketed amounts: Enforcement, Operations Support, Taxpayer Services, and Business Systems Modernization. 

Congressionally approved appropriations are intended to provide a mandated framework that supports the activities of an agency.  While the IRS cannot transfer resources from one appropriation account to another without specific statutory authority to do so, the agency still has some flexibility because fund centers may receive funds from more than one appropriation account. The IRS may reprogram funds among budget activities within certain limits. Reprogramming shifts funds within an appropriation account and agencies may reprogram without additional statutory authority. The IRS is restricted from reprogramming funds within appropriation accounts without Congressional committee approval if the reprogramming will, among other things, augment existing programs, projects, or activities (which IRS refers to as budget activities) in excess of $5 million or 10 percent, whichever is less.

Enforcement funds activities such as determining and collecting owed taxes, providing legal and litigation support, and conducting criminal investigations. Operations Support funds activities including rent and facilities expenses, IRS-wide administration activities, and IT maintenance and security.  Taxpayer Services funds taxpayer service activities and programs, including pre-filing assistance and education, filing and account services, and taxpayer advocacy services. Business Systems Modernization funds the planning and capital asset acquisition of IT to modernize IRS business systems. In addition to the amount appropriated to these four accounts, the IRS supplements its budgetary resources through specific collections, such as user fees and certain reimbursables, which are not appropriated annually.

Budget activities divide appropriation accounts into additional functions. For example, the Enforcement appropriation is broken into three budget activities: Investigations, Exam and Collections, and Regulatory. Each budget activity, in turn, has multiple program activities. For example, Exam and Collections has 20 program activities, such as Tax Reporting Compliance – Field Exam; Earned Income Tax Credit Management and Administration; and Whistleblower Office. In addition to program activities, the lower levels of the budget formulation and budget execution structures include business units and other areas of interest, which are not discrete categories. For example, Wage and Investment is one division within the IRS and can be referred to as a business unit, while identity theft would be considered an area of interest that crosses divisions within the IRS. 

A GAO investigation reported that IRS is utilizing its limited budgeting flexibility and taking steps to improve agency-wide coordination of budgeting decisions. GAO-15-624, at 4-5.

[17] Internal Revenue Service, U.S. Department of the Treasury, “Reducing the Federal Tax Gap: A Report on Improving Voluntary Compliance,” August 2, 2007.
[18] Theodore Black, Kim Bloomquist, Edward Emblom, Andrew Johns, Alan Plumley, and Esmeralda Stuk, “Federal Tax Compliance Research: Tax Year 2006 Tax Gap Estimation,” IRS Research, Analysis, and Statistics Working Paper, March 2012.
[19]GAO-13-541R, “IRS’s 2013 Filing Season and 2014 Budget Request,” April 15, 2013, at 20.
[20] GAO-15-624.
[21] Id., at 10.
[22] Reductions in training budgets, some of which continue, in particular functions ranged from 74 to 96 percent in the four operating divisions.  GAO-14-534R, “Internal Revenue Service: Absorbing Budget Cuts Has Resulted in Significant Staffing Declines and Uneven Performance,” April 10, 2014 (Updated April 18, 2014), at 22.  See also, Written Statement of Nina E. Olson, National Taxpayer Advocate, Hearing on Internal Revenue Service FY 2015 Budget Request Before the Comm. on Appropriations, Subcomm. on Financial Services and General Government, U.S. Senate, 113th Cong., 2d Sess. (Apr. 30, 2014), at 11.
[23] Reductions in travel costs were cut by 87 percent.  GAO-14-534R, at 22.
[24] Id. at 14.
[25] Taxpayer Advocate Service, Fiscal Year 2016 Objectives Report to Congress, June 30, 2015. To understand the IRS’s telephone statistics, a few concepts are important to review. First, the IRS tracks the total number of calls it receives, which is known as the “Enterprise Total.” The Enterprise Total includes calls to the “Accounts Management” (AM) telephone lines (which typically account for around 85-90 percent of all “Enterprise Total” calls), calls to the compliance telephone lines, and calls to a few additional low-volume telephone lines. Second, answered calls are split between “Assistor Answered Calls” and calls handled by the IRS’ automated processes. Whether a call is routed to automation or to a customer service representative (CSR) depends on the telephone number the taxpayer calls and how the caller responds to the prompts he or she encounters. Third, the official “Level of Service” statistics reflect only calls routed to CSRs on the AM telephone lines.
[26] Id. at 9-19.
[27] Report GAO-15-420R, “Internal Revenue Service: Observations on IRS's Operations, Planning, and Resources,” April 10, 2014 (Updated March 3, 2015), at 18. GAO-15-163, “Tax Filing Season,” at 18-19.  IRS Oversight Board FY 2015 Budget Recommendation Special Report, at 13.

[28] In 2013, the Service had approximately 690,000 open cases of identity theft. Written Statement of Nina E. Olson, National Taxpayer Advocate, at 4, Hearing on Identity Theft-Related Tax Fraud Before the Comm. on Oversight and Government Reform Subcomm. On Government Operations, U.S. House of Representatives, 113th Cong., 1st Sess. (Aug. 2, 2013).