Internal Revenue Service Budget Request for FY 2016

2/03/2015

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 the IRS budget request for

FY 2016. 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 2010, IRS funding has been cut by almost $1.2 billion, or 17 percent after adjusting for inflation. The funding reductions have forced the IRS to operate under an exception-only hiring freeze since December 2010, and will have forced the Service to reduce the total number of full-time, permanent employees by 17,000 by the end of FY 2015. The lack of sufficient staffing has strained IRS’ capacity to carry out its important taxpayer service and enforcement missions.

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 by 13,000 since 2010, and more than 26 percent below what they were just 18 years ago. In 1995, the IRS had a staff of 114,064 to administer tax laws and process 205 million tax returns. By the close of 2013, staffing had fallen to 83,613 to administer a more complicated tax code and process 242 million much more complex tax returns and other forms. The IRS predicts it will lose another 4,000 full-time employees by the end of FY 2015.

IRS FY 2016 BUDGET REQUEST

NTEU was pleased to see that the Administration’s budget request for the IRS would provide the agency with a total of $12.9 billion in funding for FY 2016, including $12.3 billion in base funding and $667 million via a program integrity cap adjustment. The $12.9 billion in funding would represent an increase of more than $1.9 billion over the current FY 2015 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. 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 January, the National Taxpayer Advocate, Nina Olson, released her 2014 Annual Report to Congress which identifies the decline in IRS taxpayer services due to reduced funding as the #1 most serious problem facing taxpayers. The report describes in detail the severe reduction to taxpayer services caused by repeated cuts to the IRS budget. Among the report findings are:

• In FY 2015, the IRS predicts that it will be able to answer less than 50 percent of calls from taxpayers seeking assistance,—down from 87 percent in FY 2004.

• Taxpayers who do manage to get through are expected to wait on hold for 30 minutes on average, up from 2.6 minutes in FY 2004.

• During the upcoming filing season, it will not answer any tax-law questions except “basic” ones. After the filing season, 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 last year the IRS announced it will no longer prepare returns at all.

• The IRS has also said the funding reductions could result in delays in refunds for some taxpayers. Those taxpayers who file paper returns could wait an extra week or longer to see their refund. Taxpayers with errors or questions on their returns that require additional manual review will also face delays.

Mr. Chairman, it is evident that funding reductions in recent years have seriously eroded the IRS’ ability to provide taxpayers with the services they need. Without the additional funding proposed in the Administration’s budget request, taxpayers will continue experiencing a degradation of services, including longer wait times to receive assistance over the telephone, increasing correspondence inventories, including letters from taxpayers seeking to resolve issues with taxes due or looking to set up payment plans.

That is why we strongly support the President’s request of $2.4 billion in funding for taxpayer services in FY 2016, a $252 million increase over the current level. We believe this increase will allow the IRS to restore customer service levels to meet rising taxpayer demand and help taxpayers understand their obligations, correctly file their returns, and pay taxes due in a timely manner.

Enforcement

Mr. Chairman, the funding reductions to the IRS budget in recent years have also negatively impacted its ability to maximize taxpayer compliance, prevent tax evasion and reduce deficit.

Impact on Voluntary Compliance & Tax Gap

NTEU strongly 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.

Unfortunately, as noted previously, funding reductions have resulted in the inability of millions of taxpayers to get answers from IRS call centers and at 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, including small businesses, 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 in our population 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.

The adverse impact on IRS’ capacity to collect revenue critical to reducing the federal deficit is clear. In FY 2014, on a budget of $11.2 billion, the IRS collected $3.1 trillion, roughly 93 percent of federal government receipts. According to the IRS, every dollar invested in IRS enforcement programs generates roughly $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 2013, IRS enforcement activities brought in $53.3 billion, down almost $6 billion from the $59.2 billion in FY 2007.

The $345 million reduction to IRS’ budget for FY 2015 will further reduce IRS’ ability to collect revenue and would result in the loss of billions in revenue in FY 2015 alone. That lost revenue could otherwise be invested in critical government programs or be used to reduce the federal deficit.

The IRS has warned that enforcement staffing will continue to be a significant concern under the FY 2015 funding level and has cautioned that under this insufficient level of funding, the IRS will lose another 1,800 enforcement personnel in FY 2015. The impact of the reduced staffing in enforcement will result in in at least 46,000 fewer individual and business audit closures and more than 280,000 fewer Automated Collection System and Field Collection case closures.

That is why NTEU was happy to see the Administration’s budget request would provide a $539 million increase in funding for IRS tax enforcement above the current level. This increase includes a program integrity cap adjustment which provides critical funding designed to protect revenue by identifying fraud and preventing issuance of questionable refunds, including tax-related identity theft, addressing offshore noncompliance, and improving collection coverage rates. According to the Administration, the additional funding provided via the cap adjustment is expected to generate $2.8 billion in additional annual enforcement revenue, resulting in a return on investment (ROI) of more than 6 to 1, once new hires reach full potential in FY 2018. 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 2016 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