Administration's FY 2010 Budget Request for the IRS

6/09/2009

Senate Appropriations Subcommittee on Financial Services & General Government

Chairman Durbin, Ranking Member Collins, and distinguished members of the Subcommittee, I would like to thank you for allowing me to provide comments on the Administration’s FY 2010 budget request for the Internal Revenue Service (IRS). As President of the National Treasury Employees Union (NTEU), I have the honor of representing over 150,000 federal workers in 31 agencies, including the men and women at the IRS.

IRS FY 2010 Budget Request

Mr. Chairman, NTEU strongly supports the Administration’s FY 2010 budget request of $12.1 billion for the IRS, a roughly $600 million increase over FY 2009 levels. We believe that the President’s request will allow the IRS to continue providing taxpayers with top quality service and will assist efforts to enhance taxpayer compliance and close the tax gap.

We are particularly pleased the Administration’s budget request would provide $5.5 billion for IRS tax enforcement, including additional resources made available through a program integrity allocation adjustment. According to the Administration, IRS enforcement efforts recoup $5 for every $1 dollar invested and the program integrity savings from increased investment for IRS enforcement efforts will be more than $13 billion between 2010-2014.

We are also pleased to see the recently passed budget resolution fully funds the President’s budget request for the IRS and includes the President’s request for additional resources for IRS tax-law enforcement.

I would also note that in previous years, NTEU has supported the budget recommendations proposed by the IRS Oversight Board which have generally called for additional resources above that requested by the Administration. For FY 2010, the Oversight Board has recommended $12.961 billion in funding for the IRS. While we have not seen the specific details of the Board’s updated proposal, we would be inclined to support providing additional funding for the IRS above the Administration’s request and look forward to reviewing the Board’s final recommendation.

Major Challenges

Mr. Chairman, NTEU believes the President’s request will allow the IRS to meet its customer service and enforcement challenges while also addressing some of the most immediate challenges it will face in the coming years, including the growing human capital crisis, increasing complexity of tax administration, and a burgeoning tax gap.

Human Capital Crisis

NTEU believes that IRS employees are the most valuable asset in effective tax administration. We are glad to see that the IRS Strategic Plan for 2009-2013 recognizes this fact and stresses the importance of investing in the workforce in order to achieve its service and enforcement goals. But as the IRS notes, they face several major challenges such as large numbers of retirements and competition with both the public and private sectors for critical talent. According to the IRS, more than half of IRS employees and managers are age 50 or older. The expected large scale retirements of thousands of Service personnel over the next several years will only further deplete the decimated IRS workforce that is down by more than 23,000 since 1995. According to a report by the IRS Oversight Board, an independent body charged with providing IRS with long-term guidance and direction, roughly 4,000 IRS employees a year for the next four years are expected to retire, taking with them years of experience and valuable skills. The dramatic decline in staffing levels coupled with the pending retirement wave has caused the Oversight Board to identify human capital issues as one the most important strategic challenges facing the IRS.

In the face of an aging workforce and looming wave of retirements, Commissioner Shulman created the Workforce of Tomorrow task force to ensure that in five years the IRS has the leadership and workforce ready for the next 15 years and to help make the IRS the best place to work in government.

NTEU was happy to see that the President’s budget request acknowledges the human capital crisis at the Service and provides for major increases in Service staffing, particularly in the area of enforcement. According to the Administration, the new enforcement personnel funded in the President’s budget will generate $2.0 billion in additional annual enforcement revenue once the new hires reach full potential in FY 2012.

Increasing Complexity of Tax Administration

Under the President’s budget request, the IRS will also be better equipped to handle the challenges associated with the increasingly complexity of tax administration. For example, one of the biggest challenges the IRS confronts each year is identifying new tax law and administrative changes as well as expiring tax provisions. According to the IRS, in 2007 alone, 41 tax provisions expired affecting a wide range of taxpayers.

During the 2009 Filing Season, the IRS was presented with additional challenges due to the enactment of two significant new tax laws, the “Housing and Economic Recovery Act of 2008,” which includes a refundable homebuyer credit as well as an additional standard deduction for real property taxes, as well as the “Emergency Economic Stabilization Act of 2008,” which included 116 different tax provisions.

In the future, the IRS will also be confronted with the challenges presented by the increasing globalization of individual taxpayers and businesses. As more and more U.S. taxpayers and businesses expand into global markets, it will be important that the IRS has the technical expertise to identify and understand the proliferation of complex international activities and the emerging global nature of tax administration.

Tax Gap

Recent and projected large federal budget deficits have generated congressional and executive branch interest in raising revenue by reducing the tax gap, that is, the difference between what taxpayers should have paid and what they actually paid on a timely basis. For tax year 2001, the IRS estimated a gross tax gap of $345 billion, equal to a noncompliance rate of 16.3%.

NTEU believes that efforts to close the tax gap must focus on improving compliance activities and enhancing taxpayer service. By improving document matching, examination, and collection activities, the IRS will be better able to prevent, detect, and remedy noncompliance. And providing taxpayers with assistance and clear and accurate information before they file their tax returns will help reduce unnecessary contacts afterwards, allowing IRS to focus enforcement resources on taxpayers who are intentionally evading their tax obligations.

In addition to generating additional revenue for the federal government, reducing the tax gap will help strengthen public trust in the fairness of the tax system which will positively impact voluntary compliance with tax laws.

That is why NTEU supports the President’s request for an additional $332 million to help close the tax gap by strengthening compliance and allowing the IRS to better address the main components of the tax gap including, underreporting, non-filing and underpayment.

Enforcement

Mr. Chairman, as you know enforcement of the tax laws is an integral component of IRS’ effort to enhance voluntary compliance and close the tax gap. IRS enforcement activities, such as examination and collection, target elements of the tax gap and are a high priority for the Service. In FY 2008, the IRS initiated additional information reporting requirements for large partnerships and foreign corporations, soft notices and self-correction to improve compliance.

These efforts helped the IRS bring in $56.4 billion in enforcement revenue in 2008, a 65% increase over FY 2002. The $56.4 billion in collections in 2008 represents a 5 to 1 return on investment for all IRS activities. In addition, the IRS showed consistent improvement in its enforcement results meeting or exceeding 78% (14 of 18) of its program targets.

Most impressively, the IRS continues to bring in record amounts of enforcement revenue despite severe cuts to enforcement staffing over the past 13 years. In particular, the number of revenue officers and revenue agents – two groups critical to closing the tax gap and thereby reducing the federal budget deficit – have shrunk by 33 and 20 percent respectively. Revenue officers went from 8,139 to 5,481 and revenue agents fell from 16,078 to 12,951. As noted previously, these drastic cuts have come at a time when the IRS workload has increased dramatically due to the increasing complexity of tax administration.

NTEU believes it is essential that the IRS continue to direct resources toward enforcement activities that have the greatest overall impact on compliance and can best aid the Service’s efforts to close the tax gap. One such activity is the IRS Automated Underreporter (AUR) program which has evolved as an important Service compliance initiative using third-party information returns to identify income and deductions that were not reported on tax returns. NTEU believes the program is an effective way to detect taxpayer underreporting which accounts for roughly 82 percent of the gross tax gap.

In FY ’08, increased AUR contact closures increased by almost 4 percent from the previous year and dollars collected through AUR and information return processing increased by 22 percent.

The Administration’s budget request acknowledges the import role the AUR program can have in closing the tax gap by reducing the number of taxpayers who underreport their income and proposes an increase of $26.2 million and 300 FTE to increase coverage of the AUR document matching program. According to the Administration, this request will generate $386.5 million in additional revenue once new hires reach full potential in FY 2012 resulting in a return on investment (ROI) of 17 to 1.

Taxpayer Service

Mr. Chairman, NTEU strongly believes that providing quality customer service to the taxpayer is an important part of IRS efforts to help the taxpaying public understand their tax obligations while making it easier to participate in the tax system. Through many sources, the IRS provides year-round assistance to millions of taxpayers, including outreach and education programs, issuance of tax forms and publications, rulings and regulations, toll-free call centers, the IRS.gov web site, Taxpayer Assistance Centers (TACs), Volunteer Income Tax Assistance (VITA) sites, and Tax Counseling for the Elderly (TCE) sites. These efforts have helped the IRS raise their standard of service to America’s taxpayers and assisted in efforts to improve voluntary compliance. The IRS has continued to make great strides in recent years in the quality of the service it provides despite relatively flat budgets, that when adjusted for inflation, have provided the IRS with fewer resources over the past several years compared to FY2002.

But despite receiving fewer resources and continued reductions in the number of customer service representatives at the Service, the IRS was able to deliver a successful 2008 filing season. As you know, the 2008 filing season was particularly challenging due to late enactment of the AMT legislation and implementation of the Economic Stimulus Payment program. Despite these challenges, the IRS carried out another successful filing season during which IRS employees processed more than 155 million individual returns including returns filed solely to claim an economic stimulus payment, an increase of 11% over last year and issued 107.6 million refunds, totaling $369 billion; answered over 40.4 million calls, an increase of 21% due to a large increase in taxpayer inquiries about the economic stimulus checks; completed 52 million automated calls, an increase of over 123%; maintained account and tax law accuracy rates of over 90% and expanded return preparation at IRS Taxpayer Assistance Centers (TACs) preparing over 575,000 returns, a 42% increase over last year.

Mr. Chairman, while IRS employees were able to continue providing quality service to taxpayers in FY 2008, we do have concerns about the potential negative effect on IRS’ ability to continue doing so should the “efficiency savings” assumed in the Administration’s budget request not materialize. For FY 2010, the budget request identifies “efficiency savings” of more than $118 million at the cost of 1,504 FTE’s. If, as sometimes been the case in previous years, IRS fails to realize all expected savings then the funds available for critical Service personnel, such as those working at the 401 TACs located nationwide, would be further reduced.

As stated previously, NTEU strongly believes providing quality service to taxpayers is critical to ensuring taxpayers understand their tax obligations while making it easier for them to participate in the tax system. And in the current economic climate, we believe it is more important than ever that taxpayers be able to deal with the IRS directly to work through any financial difficulties they may encounter. IRS employees have a wide range of tools and information at their disposal, which allow them to work with taxpayers to address their financial hardships and to become compliant.

Above all else, the IRS employee’s interest is in assisting struggling taxpayers to meet their tax obligations in a way that will not exacerbate their financial distress. When an IRS employee works with a taxpayer, the employee has access to all of the taxpayer’s information and can answer questions and offer advice. For example, they can see whether a taxpayer has not filed a return and explain that the sooner the taxpayer makes arrangements to address filing and balance due issues the less penalty and interest they will owe. They can look at the taxpayer’s records and answer questions about why they owe a balance and what they can do about it. They can also tell the taxpayer that they are not having enough taxes withheld by their employer and need to address that or that if an ex-spouse is claiming a child as a dependent they will not also be able to receive an exemption. If a simple mistake, like a math error, has occurred, they can fix it. They can provide an extension of the time period for payment. They can make a determination that the taxpayer meets the currently not collectible requirements or whether the taxpayer may be eligible for an Offer in Compromise, in which part of the balance due is foregone.

NTEU believes providing quality services to taxpayers is an important part of any overall strategy to improve compliance and that the President’s request for taxpayer services will enable the IRS to deliver another successful filing season, improve the responsiveness and accuracy of taxpayer service, and support Service efforts to enhance taxpayer compliance.

Section 1203

Mr. Chairman, while meaningful funding for the IRS is important to operations, NTEU also believes that in order to maximize efficiencies at the IRS, Congress must act to modify Section 1203 of the IRS Restructuring and Reform Act of 1988 (RRA 98). Commonly known as the “Ten Deadly Sins,” Section 1203 outlines ten infractions for which IRS employees must be fired, including the untimely filing of federal income taxes even when a refund is due. No other federal or congressional employee is subject to similar mandatory termination.

Without question, Section 1203 has had a negative impact on the morale of the IRS workforce and is impeding the ability of the IRS to perform its mission. According to numerous GAO reports, IRS employees greatly fear the threat of being fired under Section 1203. This in turn has had a chilling effect on the ability of IRS employees to do their jobs. In particular, employees specifically attribute the decrease in recommending a seizure of taxpayer’s assets to Section 1203. Clearly, Section 1203 impedes IRS’ enforcement mission and is unfair to the IRS employees who must work under the constant threat of losing their jobs.

NTEU believes mandatory termination for Section 1203 violations is unduly harsh and should not be the only disciplinary action available. We advocate amending RRA 98 to allow for appropriate penalties other than mandatory termination for Section 1203 violations and to allow for independent review of determinations.

To be clear, NTEU does not condone any violation of law or rules of conduct by its members at the IRS or in any other government agency. Violations of some rules clearly warrant termination of employment. However, one group of federal employees should not be singled out and required to be fired for offenses that do not subject other executive, judicial, or legislative branch employees to the same penalty.

Mr. Chairman, the large majority of IRS employees work hard, follow the rules and pay their taxes on time. It is patently unfair to hold those who are charged with enforcing the tax laws to a higher standard than those who write them. NTEU asks for your support for changes to section 1203 of the IRS Reform and Restructuring Act, so that tax fairness applies to all Americans, even those who work at the IRS.

Conclusion

Mr. Chairman, thank you for the opportunity to provide NTEU’s thoughts on the Administration’s FY 2010 budget request for the IRS. We believe that by investing in the IRS workforce and demonstrably effective enforcement and taxpayer service programs, the Administration’s request will ensure the IRS continues to meet its mission of providing America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.