National Taxpayer Advocate Nina E. Olson warned Congress on Wednesday that cuts in the IRS budget could hurt the federal government’s ability to collect revenue and may result in harm to taxpayers.
In her Fiscal Year 2012 Objectives Report to Congress, Olson asserts that recession-related legislation such as the economic stimulus payments and the first-time homebuyer credit dumped extra work on the IRS while making the tax system more complex for taxpayers. This has resulted in a higher number of taxpayer questions and problems, the Taxpayer Advocate Service said in a news release.
In the meantime, Olson’s report claims, funding for the IRS has not kept up with the demand for services. For the 2011 fiscal year, for example, appropriations were reduced by 0.2%, though the impact was magnified when higher costs are taken into account, the report says.
The result has been a lower level of service from the IRS, according to the report, which points to the IRS responding at a lower rate to phone calls and other correspondence. For example, the press release announcing the report says, “from 2004 until 2010, the percentage of phone calls the IRS answered from taxpayers seeking to reach a telephone assistor declined from 87 percent to 74 percent, and the percentage of unanswered correspondence classified as ‘overage’ at year’s end increased by 135 percent.”
The situation will become worse if Congress reduces the IRS’ budget for fiscal 2012, the report says.
“In recent years, the IRS has been given more and more tasks, but it is not receiving the resources it needs to fulfill these tasks without cutting corners,” the report says. “And when the IRS cuts corners, taxpayers can be harmed and revenue collection may suffer.”
Tracking Down Wayward Taxes
The National Taxpayer Advocate previously has recommended that the IRS be exempt, for the most part, from budget caps or reductions. Olson’s report cites statistics showing that in fiscal 2010, the IRS collected $2.35 trillion in taxes while operating on a budget of about $12.1 billion. That’s $194 in federal revenue for each dollar spent. Despite that, there remains a budget gap of about $345 billion per year in taxes that are due but not paid voluntarily and timely. Cuts to the IRS budget would hurt the agency’s ability to track down that money, the report says.
“Despite differing views about the appropriate level of taxation, there is widespread agreement that taxes that are due and owing under the law should be collected,” the report says. “Spending cuts mean the IRS will not have the resources to ensure that all taxpayers pay their fair share, thereby effectively forcing compliant taxpayers to pay more to subsidize noncompliance by others. Moreover, the IRS will not have the ability to meet the service needs of the taxpayers who are paying our nation’s bills.”
TAS Faces Cutbacks
The report also expresses concern about the Taxpayer Advocate Service’s ability to fulfill its role to meet taxpayer needs. “Congress created TAS largely to serve as the IRS’ ‘safety net’ for taxpayers who are experiencing significant hardships,” the report says. “In practice, TAS is often a taxpayer’s last resort for resolving a tax problem.” Its case receipts have risen from about 169,000 in fiscal 2004 to about 299,000 in fiscal 2010, an increase of 77%. The report warns that if TAS does not receive sufficient resources to handle its increasing workload, it might have to decline to accept certain categories of cases, leaving taxpayers to fend for themselves.
Leaning on the IRS on Liens
Olson’s report addressed more than just the impact of possible budget cuts. She also focused on the IRS’ lien practices, an area of concern in previous reports. While praising the agency for making changes such as making lien withdrawals available in a wider range of cases, the report criticized the IRS for continuing to automatically file tax liens based on dollar threshold. Olson recommends that an analysis of the taxpayer’s financial status should factor into any lien decisions. This “should balance the need to protect the government’s interests in the taxpayer’s assets with a corresponding concern for the financial harm the lien will create for that taxpayer.”
Other Issues
Olson’s report also touched on several other issues, including the taxpayer impact of a possible government shutdown, tax reform and complexity efforts, earned income tax credit improvements, tax-related identity theft and innocent spouse relief.
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