Impact of Recent Budget Cuts and Sequestration on the Internal Revenue Service Efforts to Combat Identity Theft

4/10/2013

Senate Special Committee on Aging

Chairman Nelson, Ranking Member Collins and distinguished members of the Committee, I would like to thank you for allowing me to provide comments on the impact that recent budget cuts and sequestration have had on IRS efforts to combat identity theft. 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, NTEU believes that the best way to combat the rising incidence of tax-related identity theft is to ensure that the IRS is provided with sufficient resources. Unfortunately, despite the critical role it plays in combating identity theft, as well as assisting taxpayers and generating revenue to fund the federal government, the IRS’ ability to continue doing so has been severely challenged due to reduced funding in recent years and the cuts mandated by sequestration.

Since FY 2011, the IRS budget has been reduced by almost $1 billion due to a cut of $305 million for FY 2012 and over $600 million under sequestration. These cuts have led to an ongoing hiring freeze at the IRS for the past several years and have strained its capacity to carry out its important taxpayer service and enforcement missions. In addition, the cuts mandated by sequestration will force the IRS to furlough all of its employees for between 5 and 7 days.

Impact on Taxpayer Identity Theft Assistance

According to the IRS, the sequester cuts to operating expenses and furloughs of IRS employees will result in the inability of millions of taxpayers, including those impacted by identity theft, to get answers from IRS call centers and taxpayer assistance centers and will significantly delay IRS responses to taxpayer letters. The IRS previously announced the cuts would force it to complete fewer tax return reviews and would reduce its capacity to detect and prevent fraud, resulting in an inability to collect and protect billions of dollars in revenue annually.

These devastating cuts come at a time when the IRS workforce is already facing a dramatically increasing workload with staffing levels down by 10,000 from two years ago, and more than 20 percent below what they were just 15 years ago. In 1995, the IRS had a staff of 114,064 to administer the tax law, while today they have just 90,500 to administer a much more complicated tax code and growing number of taxpayers.

In the past few years, many experts in the tax community, including the IRS Oversight Board, IRS Advisory Council and the National Taxpayer Advocate have all warned of the dangers of underfunding the IRS. In her 2012 annual report to Congress, Taxpayer Advocate Nina Olson identified chronic underfunding of the IRS as one of the top problems facing the agency, noting the reductions to the IRS budget over the past two years and additional cuts under sequestration. The report noted that a lack of sufficient resources, coupled with a rising workload and increasingly complex tax code, was negatively impacting IRS’ ability to carry out its numerous critical taxpayer assistance responsibilities, including assisting those impacted by identity theft, and assist efforts to reduce the federal deficit.

In particular, her report noted that limited resources impede the agency’s ability to

conduct education and outreach to taxpayers, particularly small business, and to enforce tax laws, all contributing to a growing gap between taxes owed and taxes paid. For example, she said, staffing levels at Taxpayer Assistance Centers (TACs) across the country were 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 availability of service at TACs has long been a problem at the IRS and has previously been highlighted by the National Taxpayer Advocate as a serious problem disproportionately impacting the most vulnerable populations who use TACs most often, including the elderly that are often the target of identity theft scams.

Olson noted the problems were not confined to the 398 TACs. The agency’s ability to answer phone calls on a timely basis and to answer letters has also been sharply impeded. Olson noted that in FY 2012, the IRS was able to answer only 68 percent of the calls it received, with callers having to wait an average of 17 minutes on hold. In 2004, by contrast, the agency was able to answer 87 percent of all calls and the average wait time was 2 ½ minutes. The longer wait times directly impact the IRS’ ability to provide victims of tax-related identity theft with the timely assistance that they need.

Despite the adverse impact that recent budget cuts that have had on the IRS, it has continued to make progress in combating identity theft. With the prevalence of identity theft increasing across the U.S. and the world, the IRS made investigating identify theft a top priority in FY 2012 via a four pronged strategy, which included providing guidance and support in assisting victims, including providing Identity Protection Personal Identification Numbers (IPPIN) to over 250,000 taxpayers; initiating civil and criminal recourse against perpetrators resulting in 939 criminal charges related to identity theft, and creation of an Identity Theft Clearinghouse to refer identity theft refund fraud schemes for investigation; stopping or recovering refunds obtained through identity theft; and preventing fraudulent activity, including $1.85 billion in fraudulent refunds due to identity theft protection filters and indicators. While IRS has made progress on this issue, they can do more, but only if they are provided the necessary resources.

Impact on Efforts to Reduce the Federal Deficit

In addition to the adverse impact on taxpayer services and to assisting those that are the target of identity theft, the Taxpayer Advocate also noted that the lack of adequate resources was undermining IRS’ ability to effectively implement its enforcement and compliance initiatives, hampering its ability to maximize revenue collection and close the tax gap. Because of the IRS’ unique role in generating some 93 percent of federal revenue, Olson urged Congress to view providing sufficient resources for the IRS as an investment rather than an expense.

IRS’ ability to generate critical revenue necessary to reduce the federal deficit is clear. In FY 2012, on a budget of $11.8 billion, the IRS collected $2.52 trillion, roughly 93 percent of federal government receipts. This means that, for every $1 that Congress appropriated for the IRS, the IRS collected about $214 in return.

However, reductions in enforcement funding in FY ’11 and FY ’12 have undermined IRS’ ability to maximize taxpayer compliance and bring in much needed federal revenue. In FY ’12, the IRS generated $52 billion in enforcement revenue, down from $57.6 billion in FY ’10. The reduction in revenue can be partly attributed to a reduction in the total number of revenue officers (ROs) and revenue agents (RAs). Despite the critical role they play in maximizing taxpayer compliance and generating revenue, the total number of ROs and RAs was reduced by more than 1,500 between 2011 and the end of 2012 and are down more than 20 percent since 1995.

The need for sufficient enforcement staffing is more important than ever. Last January the IRS released a new set of tax gap estimates for tax year 2006. The tax gap is defined as the amount of tax owed by taxpayers that is not paid on time and is the most comprehensive and up to date data that IRS has on noncompliance. According to the IRS, the amount of tax not timely paid is $450 billion, translating to a noncompliance rate of almost 17 percent.

While 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.

Mr. Chairman, thank you again for the opportunity to provide NTEU’s views on the impact of recent budget cuts and sequestration on IRS’ efforts to prevent identity theft. NTEU believes that only restoring critical funding for effective enforcement and taxpayer service programs, can the IRS combat identity theft through fraud prevention and victim assistance and maximize revenue collection that is critical to reducing the federal deficit.