FY 2018 Budget Request for the IRS
Senate Appropriations Subcommittee on Financial Services and General Government
Chairwoman Capito, Ranking Member Coons and distinguished members of the subcommittee, I would like to thank you for allowing me to provide comments on the Administration’s Fiscal Year 2018 budget request for the 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.
Madam Chairwoman, since FY 2010, IRS funding has been cut by almost $1 billion. The funding reductions have forced the IRS to operate under an exception-only hiring freeze since December 2010, and has forced the Service to reduce the total number of full-time employees by approximately 18,000 across every state in the country. The lack of sufficient staffing has strained IRS’ capacity to meet its 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 staffing levels down almost 20 percent below what they were just 6 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 2016, that number had fallen to 74,151 to administer a more complicated tax code and process 244 million much more complex tax returns and other forms.
In addition, over the last several 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 (FACTA), 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.
NTEU was disappointed that the Administration’s FY 2018 budget calls for reducing IRS funding by an additional $260 million below the FY 2017 enacted level and reducing overall staffing by more than 4,200. 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.
Impact of Inadequate Funding on Taxpayer Services
Madam Chairwoman, 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. Since FY 2010, overall funding for the IRS has declined by more than $900 million (7 percent), while the number of individual taxpayers has increased by 10 million, or more than 6 percent. These reductions have resulted in a reduction in the number of employees assigned to answer telephone calls from 9,400 in 2010 to 6,200 in 2015, a 34% drop.
In a letter to Congress following the close of the 2015 filing season, the IRS highlighted some of the adverse impacts these reductions had on its’ ability to deliver taxpayer services during the filing season. These include:
• A reduction in the percentage of callers seeking live assistance who received it (telephone level of service) to 38 percent—down from 74 percent in FY 2010.
• Taxpayers waited about 23 minutes on average for an IRS representative to get on the line, and more than 60 percent of calls were never answered. This represents a sharp decline from 2010, when the IRS answered three-quarters of calls and had an average wait time of just under 11 minutes.
• The IRS was not able to answer any tax-law questions except “basic” ones during the filing season, and now that the filing season is over, it will not answer any tax-law questions at all, leaving the roughly 15 million taxpayers who file later in the year unable to get answers to their questions by calling or visiting IRS offices.
• The IRS historically has prepared tax returns for taxpayers seeking its help, particularly for low income, elderly, and disabled taxpayers. Eleven years ago, it prepared some 476,000 returns. That number declined significantly over the past decade, and in 2014 the IRS announced it would no longer prepare returns at all.
Additionally, because funding reductions forced the IRS to shorten the period of employment for their seasonal employees who help answer taxpayer correspondence, the IRS’ inventory of correspondence from taxpayers in 2014 and 2015 grew significantly above what it normally would have been to more than 900,000.
For FY 2016 and FY 2017, the IRS was provided with $290 million to improve the customer service representative level of service (LOS) 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. The additional funding also freed up more resources to help the IRS reduce the correspondence inventory to 690,000 by the end of FY 2016, a drastic reduction from just two years prior.
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 2018 budget request actually calls for reducing taxpayer services seasonal staffing costs by $239 million and overall taxpayer services staffing by almost 2,200 FTEs. The Administration’s request seems to acknowledge the adverse impact that these reductions will have on IRS’ ability to provide quality service by noting the target level of service for all of FY 2018 is just 39%, a drop of 25 percent from the FY 2017 level. It is clear that the Administration’s proposed reductions in funding and staffing for taxpayer services will simply reverse the gains made in recent years and leave the IRS unable to provide taxpayers with the assistance they need.
The importance of providing taxpayers with timely assistance over the phone or in person is also of particular importance for victims of identity theft and other types of tax refund fraud. These cases are extremely complex cases to resolve, frequently touching on multiple issues and multiple tax years, and the process of resolving these cases can be very frustrating for victims.
While the IRS has made considerable progress in this area, additional work remains. Fighting identity theft is an ongoing battle as identity thieves continue to create new ways of stealing personal information and using it for their gain. Therefore, it is critical that the IRS has the resources and staffing necessary to prevent refund fraud from occurring in the first place, to investigate identity theft-related crimes when they do occur, and to help taxpayers who have been victimized by identity thieves as quickly as possible.
Madam Chairwoman, 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, taxpayers will continue experiencing a degradation of services, including longer wait times to receive assistance over the telephone, increasing correspondence inventories, including letters from victims of identity theft and taxpayers seeking to resolve issues with taxes due or looking to set up payment plans.
Impact on Enforcement & Efforts to Reduce the Federal Deficit
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 FY 2016, operating on a budget of $11.2 billion, the IRS collected $3.3 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 2016, IRS enforcement activities brought in $54.3 billion, down almost $5 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 13,791, a reduction of almost 6,800 positions.
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 IRS Commissioner has 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.
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 2018 budget request would slash funding for enforcement by $50 million from the current level, and result in the loss of more than 2,100 enforcement FTEs. With enforcement staffing already down by more than 30 percent since
FY 2010, these additional proposed reductions will simply further reduce IRS’ ability to enforce our nation’s tax laws, maximize taxpayer compliance, combat identity theft and other types of fraud, and generate revenue collection that is critical to reducing the federal deficit.
Madam Chairwoman, the adverse impact of recent funding cuts on the IRS’ ability to provide taxpayers with the service they need and 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.
PRIVATE TAX COLLECTION
Madam Chairwoman, I would also like to note NTEU’s strong opposition to the resumption earlier this year of the use of private collection agencies (PCAs) to collect taxes on a commission basis. NTEU believes this twice failed program is a waste of taxpayer’s dollars, invites overly aggressive collection techniques, jeopardizes the financial privacy of American taxpayers, and may ultimately serve to undermine efforts to reduce the deficit.
As you know, in late 2015, Congress approved a long-term highway funding bill which offset part of the costs of the bill by requiring the Treasury Department to contract with PCAs to collect federal tax debt on a commission basis despite the objections of the Administration, the National Taxpayer Advocate and a coalition of civil and consumer rights groups.
The use of PCAs to collect tax debts has repeatedly been shown to be a waste of taxpayer dollars. The first attempt to use PCAs to collect Federal taxes came in 1996 and 1997, when Congress authorized IRS to conduct a two year pilot project testing the use of PCAs to collect tax debts. The 1996 pilot was so unsuccessful it was cancelled after 12 months. Contractors participating in the pilot programs were found to have regularly violated the Fair Debt Collection Practices Act (FDCPA), and the program resulted in a $17 million net loss.
Under legislation enacted in 2004, the IRS again attempted the use of PCAs to collect Federal taxes in 2006. In September of that year, the IRS began turning over delinquent taxpayer accounts to three PCAs who were permitted to keep between 21-24 percent of the money they collected. While the program was projected to bring in $2.2 billion in new revenue, data from the IRS showed that the program resulted in a net loss of almost $4.5 million to the federal government, after subtracting $86.2 million in program administration costs and more than $16 million in commissions to the PCAs.
Before terminating the program in March 2009, an independently-reviewed study by the IRS found that IRS employees are three times more efficient at collecting taxes than private tax collectors.
In addition to being fiscally unsound, allowing PCAs to collect tax debt on a commission basis led to taxpayer abuse. According to the IRS, between September 2006 and March 2009, the IRS received dozens of taxpayer complaints against the PCAs, five of which were confirmed by an IRS Complaint Panel to be serious violations of law. In addition, one of the three original private contractors was dropped by the IRS for dubious practices despite the Service’s previous assurance that its oversight would prevent abuse, and penalties totaling at least $10,000 were imposed by the IRS on the PCAs for violations against taxpayers. In one instance, private collectors made 150 calls to the elderly parents of a taxpayer after the collection agency was notified he was no longer at that address. I would note that one of the four companies currently under contract with the IRS to collect taxes lost its contract with the U.S. Department of Education in 2015 for providing inaccurate information to student loan recipients.
Concerns that this latest attempt to turn over tax collection to private contractors could lead to taxpayer abuse were reinforced recently after a review of the call scripts used by the PCAs to contact taxpayers exposed potential violations of taxpayer privacy protections. The review, undertaken by a group of four Senators concerned the PCA program could lead to taxpayer abuse, showed the scripts may include implied threats to taxpayers, violations of taxpayer privacy protections due to information shared with third parties, and inadequate responses to taxpayer cease and desist requests. Concerns over their findings led the group of Senators to recently request the Federal Trade Commission to investigate whether the collection agencies are violating the Fair Debt Collections Practices Act.
In addition to concerns that the PCAs could be violating the FDCPA, NTEU is concerned that given the proliferation of tax schemes in recent years, allowing private companies to contact taxpayers on behalf of the IRS will lead to confusion among taxpayers and invite aggressive tax schemes.
In February the IRS released its annual “Dirty Dozen” list of tax scams for 2017 which highlights various illegal schemes that taxpayers may encounter throughout the year. Among the top scams the IRS warned taxpayers to guard against were aggressive and threatening phone calls from criminals impersonating IRS agents. The IRS has seen a surge of these phone scams in recent years as con artists threaten taxpayers with police arrest, deportation and license revocation, among other things. While the IRS has historically preferred to contact taxpayers by letter and not by phone, often saying that “if you are surprised to be hearing from us, then you’re not hearing from us,” under the private debt collection program, private collection firms are now calling taxpayers directly and identifying themselves as contractors of the IRS. This will simply confuse taxpayers that have been told repeatedly they will not receive calls from the IRS.
I would note that in April the Treasury Inspector General for Tax Administration (TIGTA) announced 11 people had been charged with crimes involving schemes to impersonate IRS agents and steal money from innocent taxpayers by claiming they owed back taxes. Furthermore, in recent testimony before Congress, both TIGTA and the National Taxpayer Advocate warned that the use of private debt collectors could exacerbate or widen the impersonation scam and noted their offices would be closely watching this issue as the outsourcing of taxpayer cases to PCAs continues to ramp up.
We also believe this latest attempt to turn over tax collection to private contractors will unfairly target low-income taxpayers. The IRS has estimated that almost 80 percent of the cases that would be referred to the PCAs would involve taxpayers with incomes below 250 percent of the federal poverty level. Furthermore, a review by the National Taxpayer Advocate of returns of those taxpayer cases to be assigned to the PCAs showed the median reported income was about $32,000 and more than one-third of the returns reported incomes of less than $20,000.
Subjecting taxpayers that are struggling to make ends meet and can’t afford legal representation to private contractors whose sole motivation is to maximize their own profits at the taxpayers’ expense is simply unfair. In the words of the National Taxpayer Advocate, this would “place a bulls-eye on the back of low income taxpayers.”
IRS employees, unlike the PCAs, have a variety of tools at their disposal with which they can help delinquent taxpayers meet their tax obligations, in particular, those facing financial difficulties. These include the ability to postpone, extend or suspend collection activities for limited periods of time; making available flexible payment schedules that provide for skipped or reduced monthly payments; the possibility of waiving late penalties or postponing asset seizures and Offers In Compromise (OIC), an agreement between a struggling taxpayer and the agency that settles a tax debt for less than the full amount owed.
In contrast, the PCA’s sole interest is to collect from a taxpayer the balance due amount they have been provided. They have no interest in whether the taxpayer owes other taxes or may not have filed required returns, nor do they have access to any other taxpayer records, so they are unable to answer any questions, provide any advice or use any of the tools IRS employees have, such as extensions or offers in compromise. In the current economic climate, it is more important than ever that taxpayers be able to deal with the IRS directly to work through any financial hardships they may be experiencing.
Upon ending the latest attempt to use PCAs in 2009, the IRS committed to working the tax cases recalled from the PCAs. As part of its 2013 Annual Report to Congress, the National Taxpayer Advocate undertook a study that analyzed the results the IRS obtained while working the inventory recalled from the PCAs and analyzed whether the IRS or the PCA performed better when working the PCA inventory. The study found the IRS collected about 62 percent more than the PCAs ($139.4 million compared to $86.2 million), and was significantly more effective in collecting taxes. The study noted that the results likely understated the difference in effectiveness, since the PCAs worked the cases first and collected the easy dollars while the IRS only got cases the PCAs had already handled.
NTEU is not alone in our opposition to private tax collection program. Opposition to allowing private companies to collect taxes on a commission basis has been voiced by a number of public advocacy groups, tax experts, former IRS Commissioners as well as the National Taxpayer Advocacy Panel. In addition, the National Taxpayer Advocate, an independent official within the IRS, previously identified the IRS private tax collection initiative as one of the most serious problems facing taxpayers and repeatedly called on Congress to repeal the IRS’ authority to outsource tax collection work to private debt collectors.
Outsourcing the collection of taxes to private companies has also been opposed by a number of public advocacy groups including, Consumer Federation of America; NAACP; National Active and Retired Federal Employees Association; National Consumer Law Center; National Consumers League; Citizens for Tax Justice; OMB Watch, AFSCME, National Council of La Raza; and the U.S. Public Interest Research Group.
Madam Chairwoman, NTEU understands and commends efforts to ensure that all taxpayers pay their fair share of taxes. Without a doubt, rank and file IRS employees are committed to achieving this goal in the most cost-effective manner while providing a high level of customer service to American taxpayers. But the facts make clear that the use of private tax collection companies is not in the best interest of American taxpayers, could potentially undermine future efforts to close the tax gap, and should be terminated immediately.
Madam Chairwoman, thank you for the opportunity to provide NTEU’s views on the Administration’s FY 2018 budget request for the IRS. We believe that to ensure the IRS is able to continue making improvements in taxpayer services while handling a growing workload and increasing collections, it is imperative that the agency is provided with the resources 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.