By Robert McKenzie
The IRS employs an extensive set of performance measures. However, a National Taxpayer Advocate analysis found that the IRS measures place disproportionate emphasis on cycle time. An overemphasis on cycle time creates incentives for IRS employees to take actions quickly, even where doing so produces inaccurate results or delays the final resolution of problems. As a consequence, taxpayers may face inaccurate audit determinations or unwarranted collection actions.
As a separate matter, the IRS measures the return on investment (ROI) of its enforcement activities, but not its taxpayer service activities. Under congressional budget scoring rules, funding for new IRS initiatives is exempt from otherwise applicable spending caps if an initiative is projected to produce an ROI of greater than 1:1. Therefore, because the IRS measures the ROI for enforcement activities but not services, the IRS receives disproportionate funding for enforcement activities.
The IRS evaluation policies can have a devastating impact on individual taxpayers who must deal with IRS enforcement personnel. Many times during an audit IRS examination personnel will set unrealistic deadlines for supplying supporting documents for a deduction or expense. Short deadlines consistently result in premature proposed deficiencies from the IRS correspondence units. Taxpayers are forced to file appeals on issues that could have been resolved had the IRS set reasonable deadlines. Taxpayers who miss deadlines find themselves facing IRS collection actions and must enter a lengthy audit reconsideration process of the erroneous determinations.
Short deadlines can be even more harmful to taxpayers who owe taxes and seek to resolve them with an installment agreement or offer in compromise. Practitoners have found that short deadlines can result in more enforced collection actions against taxpayer assets. Between 2008 and 2010 there was a 37% increase in IRS levies on bank accounts, wages and accounts receivable. In that same time frame there was a 42% increase in the recording of federal tax liens against taxpayers with an attendant adverse impact on their credit rating. Part of the increase came as a result of IRS collection employees setting arbitrary deadlines and refusing to grant reasonable extensions for responses. Many small businesses and individuals have been forced out of business and into bankruptcy by harsh collection policies.
The IRS evaluation system rewards aggressive actions and fails to reward IRS employees who exercise discretion and compassion in setting deadlines or allowing taxpayers to resolve their tax problems without enforcement measures.
The National Taxpayer Advocate has recommended the IRS develop ROIs for its taxpayer service initiatives and measures that create better incentives for IRS leaders to adopt procedures that prevent delinquencies and promote voluntary compliance. The IRS must move to an evaluation system that rewards employees who apply judgment and discretion while performing exams and collection actions. The current system places too much emphasis on cycle time and results in substantial hardships for taxpayers who try to deal with the IRS in good faith.