Future Challenges at the IRS
Senate Committee on Finance
Chairman Hatch, Ranking Member Wyden and distinguished members of the committee, I would like to thank you for allowing me to provide comments on future challenges facing the IRS. As President of the National Treasury Employees Union (NTEU), I have the honor of representing over 150,000 federal workers in 32 agencies, including the men and women at the IRS.
Mr. Chairman, without question, the biggest challenge confronting the IRS and its ability to effectively administer the tax code, assist taxpayers and enforce our nation’s tax laws is a lack of adequate resources. Since FY 2010, IRS funding has been cut by more than $715 million which has forced the IRS to operate under an exception-only hiring freeze since December 2010, and reduce the total number of full-time employees by approximately 22,000 across every state in the country. The lack of sufficient staffing has strained IRS’ capacity to meet its stated mission of providing America's taxpayers top quality service by helping them understand and meet their tax responsibilities, and to enforce the law with integrity and fairness to all.
The drastic cuts to IRS’ budget come at a time when the IRS workforce is already facing a dramatically increasing workload with full-time staffing levels down almost 24 percent below what they were just 7 years ago. In 2010, the IRS had 92,148 full-time employees to administer tax laws and process 230 million tax returns. By the close of 2017, that number had fallen to 70,573 to administer a more complicated tax code and process 245 million much more complex tax returns and other forms.
In addition, in recent years the IRS has had to implement a number of significant legislative mandates, nearly all of which came with no additional funding. These include the Affordable Care Act (ACA), the Foreign Account Tax Compliance Act (FATCA), the Achieving a Better Life Experience (ABLE) Act, reauthorization of the Health Coverage Tax Credit (HCTC), the seriously delinquent debt certification program and the 2015 Protecting Americans from Tax Hikes (PATH) Act.
Most recently, the IRS was tasked with carrying out H.R. 1, the “Tax Cuts and Jobs Act,” the most extensive changes to the U.S. tax code since 1986. Implementation of this drastic overhaul of the tax code falls almost entirely on the IRS who must, among other things, reprogram approximately 140 interrelated return processing systems in conjunction with creating or revising approximately 450 tax forms, publications and instructions; publish guidance, notices, and FAQs; and prepare the IRS workforce to help taxpayers understand how the new law applies to them.
In order to carry out this monumental task, the IRS has requested $397 million in Fiscal Years 2018 and 2019 which would fund roughly 1,600 new FTEs. Approximately 92 percent of this request would fund upgrades to IRS IT systems and taxpayer assistance, education and outreach. In particular, this funding would allow the IRS to hire an additional 1,000 FTEs to respond to the 4 million more phone calls and additional written taxpayer correspondence anticipated as a result of the new tax law and provide outreach to help prepare small businesses and tax preparers for the changes to the tax code.
NTEU was pleased the FY 2018 Omnibus Appropriations Act contained $320 million in dedicated funding to carry out the new tax law that may be allocated to the taxpayer service, enforcement or operations support accounts. And while NTEU believes the overall increase of $195 million in FY 2018 funding to the IRS above the FY 2017 level is a step in the right direction, it must be followed by additional, incremental funding increases that will allow the IRS to begin to thoughtfully rebuild its decimated workforce, and meet the myriad of challenges it faces, including implementation of the new tax law. Administration’s FY 2019
That is why NTEU was disappointed that the Administration’s FY 2019 budget calls for just $11.1 billion in base funding for the IRS, a cut of more than $295 million from the current level, and reducing the number of full-time equivalents (FTEs) by 5,800 from the FY 2017 level, including front-line taxpayer service and enforcement personnel. While the Administration has requested an additional $362 million via a program integrity cap adjustment, we believe this additional funding should have been included as part of the base request. The administration notes this $362 million cap adjustment would generate $44 billion in additional revenue over 10 years providing a positive return on investment (ROI). While we support providing the IRS with additional funding to improve enforcement activities and particularly those with such a positive ROI, Congress has not always provided requested cap adjustments for the IRS and prefers that funding for activities be proposed with the base request.
Tax Community Concerns with Funding Cuts
NTEU knows any further reductions in funding and staffing will further exacerbate the adverse impact previous cuts have had on IRS’ ability to provide taxpayers with the service they need and enforcement of our nation’s tax laws. We believe that in order to continue to make improvements in taxpayer services while handling a growing workload and increasing collections, it is imperative to reverse the severe cuts in IRS staffing levels and begin providing adequate resources to meet these challenges. With the future workload only expected to continue to rise, the IRS will be under a great deal of pressure to improve customer service standards while simultaneously enforcing the nation’s tax laws.
NTEU is not alone in its concern about the impact funding reductions are having on the IRS and its ability to carry out its core taxpayer service and enforcement missions. In recent years, many experts in the tax community, including the National Taxpayer Advocate, the IRS Advisory Council, former IRS Commissioners and the tax preparer community have all warned of the dangers of continued reductions to the IRS budget and the adverse impact it has had on its ability to administer the tax code and carryout the recently enacted tax reform law.
In January, the National Taxpayer Advocate, Nina Olson, released her 2017 Annual Report to Congress. In her introductory remarks, Olson describes the adverse impact on taxpayer services and enforcement caused by repeated cuts to the IRS budget, “as the National Taxpayer Advocate, I see daily the consequences of reduced funding of the IRS and the choices made by the agency in the face of these funding constraints. These impacts are real and affect everything the IRS does. Funding cuts have rendered the IRS unable to provide acceptable levels of taxpayer service, unable to upgrade its technology to improve its efficiency and effectiveness, and unable to maintain compliance programs that both promote compliance and protect taxpayer rights. “Shortcuts” have become the norm, and “shortcuts” are incompatible with high-quality tax administration. There is no doubt that the IRS needs more funding.”
The call for additional resources has also been voiced in recent years by the IRS Advisory Council (IRSAC) which is comprised of representatives from the taxpaying public, the tax professional community, small and large businesses, academia, and the payroll community. In their most recent report, the Council highlighted the importance of providing stable and adequate funding for the IRS because of its fundamental importance to the effective functioning of the government. The report noted the consequences of recent funding reductions have affected every facet of the agency’s work and resulted in hiring freezes, training reductions, and the scaling back of both taxpayer assistance and enforcement activities.
The report when on to say “the inability to invest in modernizing the IRS’ IT infrastructure, employee recruitment and essential training has compromised the quality and timeliness of phone assistance and other taxpayer services, slowed the processing of refunds and the issuance of necessary forms and guidance, impaired the IRS’s ability to meaningfully address tax noncompliance through audits and other enforcement and collection mechanisms, and made more difficult the task of safeguarding taxpayer information.”
Impact of Funding Cuts on Taxpayer Services
Mr. Chairman, providing quality taxpayer service is a critical component of the IRS’ efforts to help the taxpaying public understand its federal tax obligations while making it easier to comply with the tax system. Unfortunately, the IRS’ ability to provide excellent taxpayer service has been severely challenged due to reduced funding in recent years. As noted previously, since FY 2010, overall funding for the IRS has declined by more than $700 million, while the number of individual taxpayers has increased by 10 million, or more than 6 percent. These cuts have resulted in drastic reduction in the number of Customer Service Representatives (CSRs) from 21,057 in 2010 to 9,209 in 2017, a 56% drop. The reduction in employees assigned to answer taxpayer inquiries in recent years led to a rapid decline in the phone level of service (LOS), resulting in just 38 percent of taxpayer calls being answered during the 2015 filing season, down from 74 percent in FY 2010. In addition, wait times to speak to IRS representatives increased to 23 minutes on average.
Recognizing the adverse impact that funding reductions were having on IRS taxpayer service activities, Congress provided the IRS with $290 million in targeted funding in FY 2016 and FY 2017 to improve the phone level of service rate, among other things. With this funding, the IRS was able to hire additional temporary telephone assistors which drastically reduced taxpayer wait times and helped the IRS raise the phone level of service from 38 percent during the 2015 filing season to 72 percent during the 2016 filing season, and to 79 percent during the 2017 filing season.
Despite the clear evidence that providing the IRS with additional funding enabled them to drastically reduce taxpayer wait times and improve the phone level of service during the 2016 and 2017 filing seasons, the Administration’s FY 2019 budget request calls for reducing funding for taxpayer services by more than $265 million below the current FY 2018 level. Furthermore, because the Administration’s request does not contain any of the additional funding that Congress provided in 2016 and 2017 to improve the phone level of service, overall staffing for taxpayer services under the Administration’s request would actually be reduced by over 4,000 FTEs from the FY 2017 level.
In addition, as part of its Actions to Achieve Workforce Management, the President’s request proposes reducing staffing by 2,307 FTEs. While touting the savings that this reduction in staffing would have, the Administration acknowledges this workforce reduction would lower the phone level of service from 75% in FY ’18 to 47% in FY’19. Such proposals are short-sighted and will simply reverse the gains made in recent years and leave the IRS unable to provide taxpayers with the assistance they need.
NTEU believes it is critical that the IRS is able to provide taxpayers with timely assistance, particularly those with questions about the newly passed tax law. The IRS conservatively estimates an increase of at least 4 million calls related to the new law. A drastic increase in calls from taxpayer seeking guidance on changes to the tax code is not new. Following passage of the 1986 tax reform law, the IRS experienced a 14% increase in call volume. With additional funding the IRS was able to hire 1,300 additional staff, increase phone line capacity by 30 percent and expand hours and phone service to Saturdays. More recently, following passage of the Affordable Care Act (ACA), calls and correspondence from taxpayers increased by 8% from FY 2010 to FY 2011, and by another 18% in FY 2012.
Mr. Chairman, it is clear that drastic funding reductions in recent years have seriously eroded the IRS’ ability to provide taxpayers with the services they need. Without additional funding to meet the expected rising demand, taxpayers will continue experiencing a degradation of services, including longer wait times to receive assistance over the telephone and increasing correspondence inventories.
Impact on Budget Reductions on Enforcement
NTEU believes a strong enforcement program that respects taxpayer rights, and minimizes taxpayer burden, plays a critical role in IRS’ efforts to enhance voluntary compliance, combat the rising incidence of identity theft, and reduce the tax gap.
Unfortunately, funding reductions in recent years are undermining the Service’s ability to maximize taxpayer compliance, prevent tax evasion and reduce the deficit. The adverse impact of insufficient funding on IRS’ capacity to collect revenue critical to reducing the federal deficit is clear. In 2017, operating on a budget of $11.2 billion, the IRS collected $3.4 trillion, roughly 93 percent of federal government receipts. According to the IRS, every dollar invested in IRS enforcement programs generates roughly $6 in increased revenues, but reduced funding for enforcement programs in recent years has led to a decline in enforcement revenue since FY 2007. In FY 2017, IRS enforcement activities brought in $56.9 billion, down more than $2 billion from the $59.2 billion of FY 2007.
The reduction in revenue can be partly attributed to a reduction in the total number of IRS enforcement personnel, including revenue officers and revenue agents – two groups critical to efforts to reduce the federal budget deficit. Since FY 2010, the total number of revenue officers and revenue agents fell more than 32 percent from 20,510 to 12,840, a reduction of almost 7,700 positions.
Reduced staffing for enforcement also resulted in a substantial decline in the number of enforcement actions taken during FY 2017. The IRS audited almost 934,000 individual income tax returns during the fiscal year, the lowest number of audits since 2003. According to the IRS, the chance of being audited fell to 0.6 percent, the lowest coverage rate since 2002. Additionally, several collection actions fell during FY 2017, including IRS levies which were down 32 percent compared to FY 2016, and liens which were down almost 5 percent from the previous year.
Without sufficient staffing to effectively enforce the law to ensure compliance with tax responsibilities and combat fraud, our voluntary tax compliance system is at risk. And as the former IRS Commissioner repeatedly noted, a simple one-percent decline in the compliance rate translates into $30 billion in lost revenue for the government.
Sufficient enforcement staffing is also critical if the IRS is to make further progress on closing the tax gap, which is the amount of tax owed by taxpayers that is not paid on time. According to the IRS, the amount of tax not timely paid is $450 billion, translating to a noncompliance rate of almost 17 percent. The Government Accountability Office included enforcement of our nation’s tax laws and addressing the tax gap in its February 2017 High-Risk Series (GAO-17-317) and stated, “IRS’s capacity to implement new initiatives, carry out ongoing enforcement and taxpayer service programs, and combat identity theft (IDT) refund fraud under an uncertain budgetary environment remains a challenge.”
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. At a time when Congress is debating painful choices of program cuts and tax increases to address the federal budget deficit, NTEU believes it makes sense to invest in one of the most effective deficit reduction tools: collecting revenue that is owed, but hasn’t yet been paid.
Despite the clear evidence that reductions to enforcement funding and staffing have had on the Service’s efforts to generate revenue and to enforce our nation’s tax laws, NTEU was disappointed to see the Administration’s FY 2019 budget request would reduce funding for enforcement by almost $232 million below the current level, and result in the loss of almost 1,900 FTEs from the FY 2017 level. With enforcement staffing already down by more than 30 percent since FY 2010, the reduced proposed level of funding would severely undermine the IRS’ ability to maximize taxpayer compliance, prevent tax evasion and reduce the deficit.
Mr. Chairman, the adverse impact of recent and continued funding cuts on the IRS’ ability to provide taxpayers with the service they need and to enforce our nation’s tax laws is clear. NTEU strongly believes that only by providing the IRS with additional resources will the IRS be able to meet the rising workload level, stabilize and strengthen tax compliance and customer service programs, and allow the Service to address the federal deficit in a serious and meaningful way.
Mr. Chairman, as noted above, NTEU was pleased to see the FY 2018 Omnibus provided the IRS with $320 million of the $397 million the IRS requested over FY 2018 and FY 2019 to implement the new tax law. This funding will allow the IRS to begin implementation activities on time, many of which must be completed during the first quarter of FY 2019. However, we are concerned that other than mentioning the IRS would need additional resources to implement the new tax law, the Administration’s FY 2019 request barely addresses the IRS role in implementing the new law or urge Congress to fully fund the IRS’ request.
The importance of fully funding the IRS’ request to implement the new tax law cannot be overstated. As with all statutory mandates, the IRS will be forced to implement the new tax law regardless of whether or not Congress provides it with the remaining $77 million it has requested for FY 2019. But should they not be provided with this additional funding in FY 2019, roughly 84 percent of which would fund taxpayer assistance, education and outreach activities, they could be forced to divert resources from other critical enforcement and taxpayer service programs and defer investing in or upgrading existing aged IT infrastructure. After already absorbing more than $700 million in funding cuts since 2010 which has severely impaired its ability to carry out its core taxpayer service and enforcement missions, forcing the IRS to reallocate already limited resources from core taxpayer service and enforcement activities to implement the new tax law would further diminish its ability to carry out those activities.
NTEU appreciates that as part of the tax reform proposal approved out of the Finance Committee, language offered by Sens. Carper and Brown was included expressing the need to improve IRS customer service and protections for taxpayers by reinstating appropriate IRS funding levels. In particular, the language “expressed the sense of the Senate that politically motivated budget cuts are counterproductive to deficit reduction, diminish the IRS's ability to adequately serve taxpayers and protect taxpayer information, and reduce the IRS's ability to enforce the law.” While we were disappointed the final tax legislation did not include this important language, we appreciate the Committee recognizing the adverse impact that previous funding cuts have had on core IRS activities and expressing support for providing the IRS with additional funding in the future to implement the new tax law and carry out its taxpayer service and enforcement mission.
Mr. Chairman, thank you for the opportunity to provide NTEU’s views on the biggest challenges facing the IRS. We believe to ensure the IRS is able to continue making improvements in taxpayer services while handling a growing workload including the biggest change to the tax code in 30 years, it is imperative that the agency be provided with the resources and staffing necessary to meet these challenges. With the complexity of tax administration and future workloads only expected to rise, the IRS will be under a great deal of pressure to improve customer service standards while simultaneously enforcing the nation’s tax laws.