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Congressional Testimony
Internal Revenue Service Budget Request for FY 2015
Internal Revenue Service Budget Request for FY 2015
4/30/2013
Senate Appropriations Subcommittee on Financial Services and General Government
Chairman Udall, Ranking Member Johanns and distinguished members of the Subcommittee, I would like to thank you for allowing me to provide comments on the IRS budget request for FY 2015. 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.
Mr. Chairman, despite the critical role that the IRS plays in helping taxpayers meet their tax obligations and generating revenue to fund the federal government, the IRS’ ability to continue doing so has been severely challenged due to funding reductions in recent years.
Since FY 2011, funding for the IRS has been cut by nearly $1 billion, a reduction of almost 8 percent. The funding cuts have forced the IRS to operate under an exception-only hiring freeze since December 2010, and forced the Service to reduce the total number of full-time, permanent employees by about 10,000, many of whom are responsible for providing critical services that taxpayers require in order to meet their tax obligations.
IRS FY 2015 BUDGET REQUEST
NTEU was pleased to see that the Administration’s budget request for the IRS would provide the agency with a total of $12.4 billion in FY 2015, an increase of more than
$1.1 billion over the current FY 2014 level which would help restore funding for important taxpayer service and enforcement activities that have been slashed in recent years. These funding reductions have adversely impacted IRS’ ability to meet its mission, and without action by Congress, IRS’ ability to serve taxpayers and enforce our nation’s tax laws will continue to erode.
Taxpayer Services
Providing quality taxpayer service is a critical component of the IRS’ efforts to help the taxpaying public understand their tax obligations while making it easier to participate in the tax system. Through a variety of in-person, telephone and web-based methods, the IRS seeks to help taxpayers navigate an increasingly complex tax code and prevent inadvertent noncompliance. Unfortunately, the IRS’ ability to provide excellent taxpayer service has been severely challenged due to reduced funding in recent years and the cuts mandated by sequestration. Without additional resources, further degradation in taxpayer services will occur, jeopardizing our voluntary compliance system.
Impact of Inadequate Funding on Taxpayer Services
In the past few years, many experts in the tax community, including the National Taxpayer Advocate, IRS Oversight Board and the IRS Advisory Council have all warned of the dangers of underfunding the IRS and the adverse impact it has had on taxpayer service.
In her Annual Report to Congress released earlier this year, National Taxpayer Advocate Nina Olson identified insufficient funding of the IRS as one of the most serious problems facing taxpayers. According to Olson, the lack of adequate funding, coupled with a rising workload has had a devastating impact on IRS taxpayer service. Among the report’s findings are:
• Last year, only 61 percent of calls from
taxpayers seeking assistance reached a customer
service representative, leaving 20 million
taxpayers unable to get through—that is a
decline from 87 percent a decade earlier, with
half the decline occurring since 2010.
• Taxpayers who did get through had to wait on
hold approximately 17.6 minutes before speaking
with a CSR. That’s up from 2.6 minutes ten
years earlier, a nearly six-fold increase, with
nearly half the increase occurring since FY
2010.
• An 86 percent drop in tax law questions
answered from 795,000 10 years ago to only
110,000 in the 2013 tax-filing season.
• A cut of 87 percent, from $172 million in 2010
to just $22 million last year in employee
training.
• The IRS historically has prepared tax returns
for taxpayers seeking its help, particularly
for low income, elderly, and disabled
taxpayers. Ten years ago, it prepared some
476,000 returns. That number declined
significantly over the decade, and the IRS
recently announced it will no longer prepare
returns at all.
• Last year, the IRS received about 8.4 million
letters from taxpayers responding to proposed
adjustments to their tax liabilities. As of the
end of the fiscal year, 53 percent of taxpayer
letters in the IRS’s “adjustments” inventory
were considered “over age” (generally, more
than 45 days old). That compares with “over
age” percentages of 12 percent ten years
earlier and 28 percent in FY 2010.
• At the same time, the number of individual tax
returns grew from 131.4 million in fiscal 2004
to about 146 million in fiscal 2013, an
increase of about 11 percent, with about one-
third of it having occurred just since fiscal
2010.
Delayed Start to Filing Season
In late December, the IRS announced it would have to delay the start of the 2014 tax filing season by 10 days to allow the IRS sufficient time to program and test its tax processing system which must be updated annually to reflect tax law updates, business process changes and programming updates in time for the start of the filing season. The annual process for updating IRS systems was significantly delayed by the 16-day federal government shutdown which came at the height of IRS’ preparations to update its systems. According to the IRS, programming, testing and deployment of more than 50 IRS systems is needed to handle processing of nearly 150 million tax returns. Updating these core systems is a complex, year-round process with the majority of the work beginning in the fall of each year.
However, with roughly 90 percent of IRS operations closed due to the government shutdown, IRS preparations were delayed nearly three weeks, causing the need to postpone the start of the filing season.
The delayed start to the filing season will have a direct impact on taxpayers who will be forced to wait longer to start the filing process and who are already facing longer wait times to speak to an IRS representative due to the lack of sufficient staffing. According to the IRS, they expect more than 18 million calls to go unanswered this filing season and wait times to rise to around 25 minutes per call, compared with 10 minutes in 2010. Once taxpayers do get through, they may not be able to get the answers they need to resolve their tax issues. The IRS recently announced that due to its budget situation, it would only be able to answer “basic” tax law questions on its telephone lines and in its walk-in sites during the upcoming filing season.
Taxpayers’ inability to get the answers they need to understand complex tax issues will almost certainly impact the accuracy of their returns, which could delay refunds to the many taxpayers that depend on their refunds to pay their bills and meet other financial obligations. While returns without any issues may be processed in a timely manner, those returns that are kicked out of the automated process will have to be worked by an understaffed IRS workforce which is down more than 8 percent. A lack of adequate staff to handle these returns will almost inevitably lead to substantial delays in processing refunds for those taxpayers, delaying the financial relief they may require.
With taxpayers unable to receive the assistance they need to resolve their tax questions and accurately prepare their returns, many may be forced to turn to paid preparers for help, resulting in additional expenses for them to simply comply with their tax obligations.
Adverse Impact of New Filing Season Initiative
on Taxpayers
Last September, the IRS announced a new FY 2014 filing season initiative that included various procedural changes that the agency plans to implement in FY 2014 at call sites, Taxpayer Assistance Centers (TACs) and campus locations across the country. The changes limit the live assistance that taxpayers receive and direct them to utilize more online services. The changes will primarily impact taxpayers seeking assistance in the following areas: tax law inquiries, tax return preparation, requests for employer identification numbers, requests for transcripts, and updates on the status of their refunds. Below is a summary of changes and the adverse impact they will have on taxpayers this filing season.
• Tax Law Assistance – will provide live assistance with basic tax law only, and only through April 15, 2014. All advanced tax law questions, including common complex issues such as estate and trust distributions, the alternative minimum tax (AMT), casualty and theft losses and the qualified state tuition program will be referred to other IRS resources. In addition, all topics related to corporations and partnerships will also be considered “out of scope,” thus live assistance will not be available to taxpayers with questions about these difficult topics.
• Tax Return Preparation – will direct taxpayers
who request return preparation at IRS TACs to
other options instead of preparing tax returns
for them on site.
• Employer Identification Number (EIN) – will
refer all new taxpayer EIN requests to the EIN
Online Assistant for EIN issuance.
• Requests for Transcripts – will redirect all
individual taxpayers needing a transcript to
the Get Transcript application.
• Tax Refund Inquiries – will redirect all
taxpayer requests for refund information to
Where’s My Refund? and automated phone channels
for the first 21 days after they file.
• Practitioner Priority Service (PPS) –will
deflect transcript requests made for non-tax
account issues to other IRS options.
NTEU believes that limiting the amount of live assistance to taxpayers that are actively seeking help with their tax related issues will be detrimental to efforts to increase compliance with our nations’ tax laws, and only serve to harm those taxpayers that rely on the assistance of qualified and experienced IRS employees to understand and meet their tax obligations.
Mr. Chairman, it is clear funding reductions in recent years have seriously impaired the IRS’ ability to provide taxpayers with the services they need. And without the additional funding proposed in the Administration’s budget request, taxpayers will continue experiencing a degradation of services including difficulty seeking telephone assistance, delays in responses to letters, including those seeking to resolve issues with taxes due, delayed responses to small business owners or individual taxpayers looking to set up payment plans.
That is why we strongly support the President’s request of $2.3 billion in funding for taxpayer services in FY 2015, a $195 million increase over the current level. We believe this increase will allow the IRS to further improve customer service to meet rising taxpayer demand and help taxpayers understand their obligations, correctly file their returns, and pay taxes due in a timely manner.
We were also pleased to see the President’s request would provide an additional $165 million for IRS taxpayer service as part of the new Opportunity, Growth, and Security Initiative. This funding will support additional IRS customer service improvements, including increasing toll-free telephone level of service by 11 percentage points to over 80 percent, driving responsiveness to taxpayers through correspondence inventory reduction, and bolstering resources to help tackle more labor intensive identity theft and refund fraud cases.
NTEU believes providing quality services to taxpayers is a critical component to our system of tax administration, and that the President’s request for additional funding for taxpayer services will help prevent further degradation of services and enable the IRS to provide taxpayers with the services they need to meet their tax obligations.
Enforcement
Mr. Chairman, the funding reductions to the IRS budget in recent years have also negatively impacted its ability to maximize taxpayer compliance, reduce the tax gap and generate critical revenue for the federal government.
Impact on Voluntary Compliance & Tax Gap
NTEU believes our system of voluntary tax compliance is most effective when the IRS is able to assist those trying to meet their obligations under the law. In particular, by assisting taxpayers with their tax questions before they file their returns, the IRS can help prevent inadvertent noncompliance and reduce burdensome post-filing actions, such as audits and penalties.
However, funding reductions and the cuts to operating expenses mandated by sequestration have resulted in the inability of millions of taxpayers to get answers from IRS call centers and taxpayer assistance centers (TACs), which lessens their ability to meet their tax obligations.
The National Taxpayer Advocate has previously warned that limited resources were impeding IRS’ ability to conduct education and outreach to taxpayers, particularly small business, which is critical to ensuring they are able to understand and comply with their tax obligations. For example, she has repeatedly warned staffing levels at TACs across the country are woefully inadequate, with taxpayers lining up to enter IRS offices well before those offices were even open and with some people being turned away.
Inadequate staffing and the lack of availability of services at TACs has long been a problem at the IRS and disproportionately impacts the most vulnerable populations who use TACs most often, including non-English speaking taxpayers, the elderly and low income individuals and families, who often need additional assistance in understanding and meeting their tax responsibilities. If these taxpayers are not provided the assistance they need to understand their tax obligations, they may inadvertently file an incorrect return which could necessitate the need for IRS to undertake post-filing actions that are costly and burdensome to both the taxpayer and the IRS.
Incorrect filings could also result in taxpayers paying less than they owe, further hampering efforts to close 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 adverse impact of insufficient staffing on IRS’ capacity to collect revenue critical to reducing the federal deficit is clear. According to the IRS, every dollar invested in IRS enforcement programs generates between $4-7 in return, but reduced funding for enforcement programs in recent years has led to a steady decline in enforcement revenue since FY 2007. In FY 2012, IRS enforcement activities brought in roughly $50.2 billion, down $9 billion from the $59.2 billion high in FY 2007. The IRS has noted that the decline in enforcement revenue has come amid a continuing decline in key enforcement personnel staffing. There were 7,400 fewer permanent enforcement personnel in FY 2013 than in FY 2010, including roughly 3,000 fewer revenue agents and revenue officers who are central to Service enforcement efforts.
The IRS has warned that enforcement staffing will continue to be a significant concern under the FY 2014 funding level and has warned that under this insufficient level of funding, audits will decline by an estimated 100,000 and the number of collection activities will decline by an estimated 190,000.
While we know 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.
That is why NTEU was happy to see the Administration’s budget request would provide a $349 million increase in funding for IRS tax enforcement above the current level. The increased funding is designed to protect revenue by identifying fraud and preventing issuance of questionable refunds, including tax-related identity theft, addressing offshore noncompliance, and improving examination audit and collection coverage rates.
We also support the Administration’s program integrity cap adjustment of $474 million to help the IRS continue to target international tax compliance and restore previously reduced enforcement levels. A large portion of this increase will be invested in strengthening current Service compliance programs designed to close the tax gap by combating offshore tax evasion, expanding enforcement efforts on noncompliance among corporate and high-income taxpayers. These investments are expected to generate $2.1 billion in additional annual enforcement revenue, resulting in a return on investment (ROI) of nearly 6 to 1, once new hires reach full potential in FY 2017. 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.
CONCLUSION
Mr. Chairman, thank you for the opportunity to provide NTEU’s views on the Administration’s FY 2015 budget request for the IRS. NTEU believes that only by restoring critical funding for effective enforcement and taxpayer service programs can the IRS provide America's taxpayers with quality service while maximizing revenue collection that is critical to reducing the federal deficit.