Closing the Tax Gap and Preventing Identity Theft

4/19/2012

House Oversight and Government Reform Subcommittee on Government Organization

Chairman Platts, Ranking Member Towns and distinguished members of the Subcommittee, I would like to thank you for allowing me to provide comments on closing the tax gap and preventing identity theft. As President of the National Treasury Employees Union (NTEU), I have the honor of representing the men and women at the IRS who serve on the front lines of our nation’s efforts to address these critical issues.

Mr. Chairman, NTEU believes that the best way to address the growing tax gap and combat the rising incidence of tax-related identity theft is to ensure that the IRS is provided with sufficient resources. That is why we strongly support the Administration’s FY 2013 budget request for the IRS. We believe that by investing in effective Service enforcement and taxpayer service activities, the President’s request will allow the IRS to help close the tax gap and crack down on taxpayer identity theft.

IRS BUDGET

Mr. Chairman, NTEU believes that in the current budgetary environment, it is critical that the IRS has the resources it needs to maximize taxpayer compliance, reduce the tax gap, generate critical revenue for the federal government, and combat identity theft.

IRS’ ability to generate critical revenue necessary to reduce the federal deficit is clear. In FY ‘11, on a budget of $12.1 billion, the IRS collected $2.42 trillion, 92 percent of federal government receipts. This means that, for every $1 that Congress appropriated for the IRS, the IRS collected about $200 in return.

However, reductions in enforcement funding in FY ’11 and FY ’12 have undermined IRS’ ability to maximize taxpayer compliance and bring in much needed federal revenue. In FY ’11, the IRS generated $55 billion in enforcement revenue, down from $57.6 billion in FY ’10. The reduction in revenue can be partly attributed to a reduction in the total number of revenue officers (ROs) and revenue agents (RAs). Despite the critical role they play in maximizing taxpayer compliance and generating revenue, the total number of ROs and RAs was reduced by almost 450 between FY ’10 and FY ’11, and is down almost 20 percent since 1995.

Combating the Tax Gap

The need for sufficient enforcement staffing is more important than ever. In January the IRS released a new set of tax gap estimates for tax year 2006. The tax gap is defined as the amount of tax owes by taxpayers that is not paid on time and is the most comprehensive and up to date data that IRS has on noncompliance. According to the IRS, the amount of tax not timely paid is $450 billion, translating to a noncompliance rate of almost 17 percent.

While the tax gap can never be completely eliminated, even an incremental reduction in the amount of unpaid taxes would provide critical resources for the federal government.

That is why NTEU was happy to see the Administration’s budget request would provide a $402 million increase in funding for IRS tax enforcement above the FY 2012 level, including additional resources made available through a program integrity cap adjustment.

The increased funding would be invested in Service enforcement programs designed to increase compliance by addressing offshore tax evasion, reduce the underreporting tax gap, and restore revenue lost from FY ’12 reductions to examination audit and collection programs. According to the IRS, these investments are expected to generate $1.48 billion in additional annual enforcement revenue, resulting in a return on investment (ROI) of more than 4 to 1, once new hires reach full potential in FY 2015. This estimate does not account for the deterrent effect of IRS enforcement programs, estimated to be at least three times larger than the direct revenue impact.

Combating Identity Theft

In addition to providing the resources necessary to generate revenue for the federal government and close the tax gap, the President’s request also calls for critical resources to combat the rapid growth of tax-related identity theft that has resulted in a backlog of more than 228,000 cases. As part of its Revenue Protection Strategy, the Administration’s budget would provide IRS with $38 million to address this backlog and future cases. This funding, which would support 400 new FTEs, would allow IRS to increase the specialized staff dedicated to handling identity theft cases associated with pre-refund, post-refund and on-going resolution support and would ensure that taxpayers affected by identity theft have their issues resolved timely and not be burdened with the same issues from year to year.

In particular, the additional staff would allow IRS to address identity theft by researching thousands of taxpayer social security numbers received through enforcement actions, and resolving situations such as false tax returns and information reporting documents where a taxpayer has been compromised by identity theft; resolving incidents identified through the normal process of filing tax returns; improving the tracking of case resolution by streamlining the process; and supporting the Identity Protection PIN program to help past identity theft victims avoid subsequent filing issues.

With the prevalence of identity theft increasing across the U.S. and the world, the IRS has already begun employing a number of identity theft indicators that allow taxpayer accounts to be flagged for potential identity theft and fraud. According to the IRS, in 2011, the IRS advocated the protection and proper use of identity information by: ensuring identity theft indicators and business rules isolated returns for additional screening to validate whether the true taxpayer filed the return; removing more than 324,725 returns from processing and preventing more than $1.3 billion in fraudulent refunds through October 13, 2011; issuing Identity Protection Personal Identification Numbers (PIN) to approximately 56,000 taxpayers who self-reported they were victims of identity theft, allowing them to avoid delays in processing their returns; and establishing the Identity Theft Assessment and Action Group (ITAAG) to implement, promote, and refine identity theft procedures to ensure that the IRS resolves taxpayer account issues timely and completely.

Mr. Chairman, NTEU strongly supports the Administration’s ongoing efforts to combat tax-related identity theft and believes the President’s funding request is necessary to allow the IRS to improve the identification and resolution of tax-related identity theft and assist victims with the assistance they need in a timely manner.

IMPACT OF UNDER FUNDING THE IRS

Mr. Chairman, as you know, despite the critical role that the IRS plays in helping taxpayers meet their tax obligations and generating revenue to fund the federal government and close the tax gap, the IRS’ ability to continue doing so has been severely challenged due to the lack of adequate funding in FY ‘11 and FY ‘12.

For FY ‘11, the full year CR provided IRS with $12.121 billion in funding, roughly its’ FY ‘10 level of $12.146 billion, less a 0.2% rescission, which strained IRS’ capacity to carry out its important enforcement and taxpayer service missions and led to a general freeze on hiring.

In FY ’12, funding for the IRS was again reduced by almost $330 million below its

FY ’10 level. In addition to hampering IRS’ ability to collect revenue and assist taxpayers in a timely manner, the FY ‘12 funding reductions have resulted in 5,000 fewer staff on the payroll this filing season compared to last year at a time when the workload is dramatically increasing, and staffing levels are more than 20% below what they were 15 years ago. In 1995, the IRS had a staff of 114,064 to administer the tax law and process 205 million returns. Today, they have just 90,711, yet must administer a much more complicated tax code and process approximately 236 million, much more complicated, tax returns.

The dangers associated with underfunding the IRS cannot be overstated and have been highlighted in recent reports by the IRS Oversight Board, IRS Advisory Council, and most recently, by the National Taxpayer Advocate. In her most recent Annual Report to Congress, the National Taxpayer Advocate identified inadequate funding for the IRS as the most serious problem facing taxpayers. The report noted that a lack of sufficient resources, coupled with a rising workload and increasingly complex tax code, was negatively impacting IRS’ ability to carry out its taxpayer service mission and assist efforts to reduce the federal deficit.

In particular, Olson noted that IRS’ capacity to respond to taxpayer inquiries has been severely diminished, to the extent that now the IRS is unable to answer three out of every ten calls it receives, and nearly half of all taxpayers who write to the IRS must wait more than 6 1/2 weeks for a reply. In addition, recent funding cuts resulted in a drop in the telephone level of service from 74 to 70 percent between FY ’10 to FY ’11. Because of expected higher call demand and new legislation requiring more training for telephone assistors, the Administration’s FY’13 target level of service is 63 percent.

In addition to delays in correspondence and reduced telephone levels of service, NTEU has also received reports from our members about abnormally long wait times for taxpayers seeking assistance at many of the walk-in Taxpayer Assistance Centers (TACs) around the country due to insufficient staffing. According to the IRS, 107 out of the 398 TACs located around the country are currently being staffed by just one or two employees, while overall staffing at many TACs is half of what it was just 8 years ago. The lack of sufficient staffing has greatly increased wait times at the TACs and has hampered the ability of TAC employees to provide taxpayers with the personal one-on-one assistance that they need. Inadequate staffing and availability of service at TACs has long been a problem at the IRS and has previously been highlighted by the National Taxpayer Advocate as a serious problem disproportionately impacting the most vulnerable populations who use TACs most often, including low income taxpayers, those with language barriers, the elderly and the less educated.

In addition to the adverse impact on taxpayer services, the Taxpayer Advocate’s Report also noted that the lack of adequate resources was undermining IRS’ ability to effectively implement its enforcement and compliance initiatives, hampering its ability to maximize revenue collection and close the tax gap. Because of the IRS’ unique role in generating revenue that funds the federal government, Olson urged Congress to view providing sufficient resources for the IRS as an investment rather than an expense.

We are pleased the President’s budget proposal acknowledges the importance of providing IRS with the necessary resources to generate critical revenue for the federal government and devotes a significant portion of the increase from FY ’12 to restoring lost revenue resulting from reductions in funding over the past two years. We urge Congress to support that proposal.

CONCLUSION

Mr. Chairman, thank you for the opportunity to provide NTEU’s views on IRS’ efforts to close the tax gap and prevent identity theft. NTEU believes that only by restoring critical funding for demonstrably effective enforcement and taxpayer service programs, will the IRS be able to maximize revenue collection that is critical to reducing the tax gap, and combat identity theft through fraud prevention and victim assistance.