The 2016 tax filing season promises to be challenging for the IRS, Commissioner John Koskinen told attendees at the AICPA National Tax Conference in Washington on Tuesday.
Koskinen made a similar prediction a year ago in his first address to CPAs in the same forum. That prediction was borne out, and for some of the same reasons he cited again this time: Congress’s tardiness in acting on a raft of currently expired temporary Code provisions and last year’s cuts in the IRS’s budget, coming on top of several previous years of cuts. Despite those problems, filing of returns went relatively smoothly for most taxpayers last year, he said, although the IRS’s level of service to taxpayers and practitioners sank to “totally unacceptable” levels.
In addition, this year significant provisions of the Patient Protection and Affordable Care Act, P.L. 111-148, and reporting requirements under the Foreign Account Tax Compliance Act (FATCA), P.L. 111-147, take full effect, as well. Add to that certification requirements under the new Achieving a Better Life Experience (ABLE) accounts and Congress’s recent reauthorization of the Sec. 35 health coverage tax credit for displaced workers, and the IRS has more than its share of largely unfunded new legislative mandates to carry out—with the specter of further budget cuts, he said.
Although President Barack Obama’s fiscal 2016 budget calls for a $2 billion increase for the IRS, the House of Representatives has proposed reducing its budget by $838 million and the Senate proposes $470 million in cuts, Koskinen said.
“Either funding level, coming on top of five years of cuts to the IRS budget, would have devastating effects on taxpayers and on our tax system,” he said.
Since 2010, the IRS’s budget has been cut by $1.2 billion, which leaves it at its lowest level since 2008 or, adjusted for inflation, comparable to its level in 1998, when there were 30 million fewer taxpayers, he said. The Service has cut 15,000 full-time employees and would have to cut “several thousand more” if its funding is reduced further, he said.
One result of last year’s cuts was that taxpayers trying to call the IRS during last filing season for help got through to a live person less than 40% of the time “on bad days,” often after waiting on hold for 30 minutes or longer. Service was no better on the IRS’s Practitioner Priority Line, making that name “an oxymoron,” Koskinen said.
Budget cuts have also degraded the IRS’s compliance function, Koskinen added, reducing the number of audits performed and the amount of revenue brought in as a result. From 2005 to 2010, such revenue averaged $14.7 billion annually, but over the next five years averaged only $10.5 billion a year, leaving an estimated $20 billion uncollected.
“In cutting the IRS budget, the government is forgoing billions of dollars in revenue to receive savings of a few hundred million dollars,” he said, since, by some estimates, every dollar of funding for the IRS produces at least $4 in revenue.
Refund fraud using stolen taxpayer identification remains an ongoing challenge, he said, but as in the other areas, reduced funding lessens the IRS’s ability to continue modernizing its data systems and strengthening their security. He touted the Security Summit’s work that has promised to make e-filing more secure in the upcoming filing season (see previous coverage).
“We have the world’s most attractive database” to thieves, Koskinen said.
The main reason thieves gained entry to the IRS’s Get Transcript online service earlier this year was not so much to use taxpayers’ personal data elsewhere—the thieves already knew answers to many of their targets’ security questions—but to use their prior returns to file more realistic fraudulent ones in hopes of countering the IRS’s filters for detecting them, he said. While Get Transcript has been suspended (the IRS hopes to reinstate it next spring), taxpayers can still order transcripts online, but they must receive them by mail, for which they should allow seven days, he said.
Consequently, upgrading its systems for detecting such fraud and continuing to invest in better cybersecurity are two of the IRS’s main funding priorities going forward, along with improving service, he said.
Earlier Tuesday, National Taxpayer Advocate Nina Olson told the conference that, besides gaining the resources it needs, the IRS in its compliance and enforcement functions needs to see taxpayers as human beings through such means as face-to-face Appeals hearings. Besides efficiency in collections, it should promote practices that respect taxpayers’ rights and enhance voluntary compliance broadly and for the long term, she said.
However, the Service’s trend, she said, has been rather to reduce taxpayer direct contacts. The phone number taxpayers with a balance-due notice are given to call suffers from a low level of service as well. If taxpayers try but are unable to contact the IRS to make payment arrangements, the IRS through its automated collection system may next send out a levy notice or file a lien.
“Now, how does that make you feel as a taxpayer?” she asked. “The environment today will, no question about it, will erode trust in the IRS, if it hasn’t been eroded, and will erode voluntary compliance.”
—Paul Bonner (email@example.com) is a Tax Adviser senior editor.