Oversight Hearing on the IRS

2/26/2014

House Appropriations Subcommittee on Financial Services and General Government

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.

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 ever 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. And without additional resources, further degradation in taxpayer services will occur that adds risk to our voluntary compliance system.

Impact of Inadequate Funding on Taxpayer Services

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.

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 their 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, necessitating 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, request for transcript, and updates on the status of their refunds. Below is a summary of changes and the adverse impact it 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 strongly 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.

IRS Employees Surveyed on Impact of Reduced Funding on Taxpayer Services

NTEU recently surveyed IRS chapter leaders from around the country on the impact of current funding cutbacks on taxpayer services. The responses represent data collected from more than 90 NTEU Chapters from every region of the country.

According to our chapters that represent front-line IRS employees who work with taxpayers every day, taxpayer frustration over the reduced level and number of services is running very high this filing season. 85% of chapters reported that taxpayers had expressed anger over the reduction in services offered, including the inability to get documents in a timely manner and receive live assistance, while 83% have had taxpayers direct their anger over longer telephone wait times directly at them.

IRS leaders also weighed in on the impact that insufficient funding was having directly on front-line employees with 80% reporting customer service representatives could not effectively do their job due to lack of adequate staffing, and 89% reporting a decline in overall employee morale at the Service.

Impact on Voluntary Compliance & Tax Gap

NTEU believes our system of voluntary tax compliance is most effective when the IRS is able to provide excellent service for 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.

Impact on Taxpayer Identity Theft Assistance

As stated previously, the importance of quality taxpayer assistance is critical to ensuring taxpayers are able to navigate the complex tax code and understand and meet their tax obligations in a timely manner. But, it is also vital that the IRS has the resources to provide assistance to those who have been victimized by fraud, and in particular, identity theft. The need to provide timely assistance to victims of identity theft is clear. According to the IRS, between 2011 and 2012, new cases of identity theft grew from nearly 250,000 to 816,000.

Identity theft cases are extremely complex and resolving these cases in a timely manner can be difficult as they often comprise multiple issues over multiple tax years. Recognizing the need to address the rising incidence of identity theft and provide victims with the assistance they need, the IRS had more than 3,000 employees dedicated to working identity theft cases by the end of FY 2013. The IRS also provided updated training to telephone representatives who deal with identity theft victims on a daily basis so that they better understand the serious financial problems of identity theft victims and maintain the proper level of sensitivity when working with them.

And while the IRS is doing what it can to prevent identity theft, resolve cases in a timely manner, and provide its victims with the assistance they need, its ability to do so will diminish unless additional resources are provided.

Thank you again for the opportunity to provide NTEU’s views on IRS operations. NTEU believes that only by restoring funding for effective taxpayer service programs can the IRS provide taxpayers with the assistance they need to understand and meet their tax obligations, combat identity theft through fraud prevention and victim assistance and maximize revenue collection that is critical to reducing the national deficit.