Taxpayer Advocate's Annual Report to Congress

4/15/2015

House Oversight and Government Reform Subcommittee on Government Operations

Chairman Meadows, Ranking Member Connolly and distinguished members of the subcommittee, I would like to thank you for allowing me to provide comments on important issues raised in the National Taxpayer Advocate’s Annual Report to Congress. 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, at this moment, millions of taxpayers across the country are rushing to meet the April 15 deadline to file their income taxes. In order to navigate an ever increasingly complex tax code, understand and comply with their tax obligations, many taxpayers rely on the IRS for guidance and assistance. Unfortunately, despite the critical role that the IRS can and should play in assisting taxpayers both understand and meet their tax obligations, the IRS’ ability to continue doing so has been severely challenged due to funding reductions in recent years.

Since FY 2010, IRS funding has been cut by almost $1.2 billion, or 17 percent after adjusting for inflation. The funding reductions have forced the IRS to operate under an exception-only hiring freeze since December 2010, and has forced the Service to reduce the total number of employees by over 18,000. This includes a decrease of 155 employees or 18.2% of the IRS workforce in North Carolina, and a decrease of 170 employees or 14.1% of the IRS workforce in Virginia. The lack of sufficient staffing has strained IRS’ capacity to carry out its important stated mission of providing America's taxpayers top quality service by helping them understand and meet their tax responsibilities.

The drastic cuts to IRS’ budget come at a time when the IRS workforce is already facing a dramatically increasing workload with staffing levels down by more than 18,000 since 2010, and more than 26 percent below what they were just 18 years ago. In 1995, the IRS had a staff of 114,064 to administer tax laws and process 205 million tax returns. By the close of 2013, staffing had fallen to 83,613 to administer a more complicated tax code and process 242 million much more complex tax returns and other forms. The IRS predicts it will lose an additional 3,000 employees by the end of FY 2015.

TAXPAYER SERVICES

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. 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. In particular, the number of employees assigned to answer telephone calls from taxpayers fell from 9,400 in 2010 to 6,900 in 2014, a 26% drop. Without additional resources, further degradation in taxpayer services will occur, jeopardizing our voluntary compliance system.

Impact of Inadequate Funding on Taxpayer Services

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 January, the National Taxpayer Advocate, Nina Olson, released her 2014 Annual Report to Congress which identifies the decline in IRS taxpayer services due to reduced funding as the #1 most serious problem facing taxpayers. The report describes in detail the severe reduction to taxpayer services caused by repeated cuts to the IRS budget. Among the report findings are:

• In FY 2015, the IRS predicts that it will be able to answer less than 50 percent of calls from taxpayers seeking assistance,—down from 87 percent in FY 2004.

• Taxpayers who do manage to get through are expected to wait on hold for 30 minutes on average, up from 2.6 minutes in FY 2004.

• During the upcoming filing season, it will not answer any tax-law questions except “basic” ones. After the filing season, it will not answer any tax-law questions at all, leaving the roughly 15 million taxpayers who file later in the year unable to get answers to their questions by calling or visiting IRS offices.

• The IRS historically has prepared tax returns for taxpayers seeking its help, particularly for low income, elderly, and disabled taxpayers. Eleven years ago, it prepared some 476,000 returns. That number declined significantly over the past decade, and last year the IRS announced it will no longer prepare returns at all.

• The IRS has also said the funding reductions could result in delays in refunds for some taxpayers. Those taxpayers who file paper returns could wait an extra week or longer to see their refund. Taxpayers with errors or questions on their returns that require additional manual review will also face delays.

Mr. Chairman, it is evident that funding reductions in recent years have seriously eroded the IRS’ ability to provide taxpayers with the services they need. Without additional funding, taxpayers will continue experiencing a degradation of services, including longer wait times to receive assistance over the telephone, increasing correspondence inventories, including letters from taxpayers seeking to resolve issues with taxes due or looking to set up payment plans.

Enforcement

Mr. Chairman, the funding reductions to the IRS budget in recent years have also negatively impacted its ability to maximize taxpayer compliance, combat identity theft, prevent tax evasion and reduce the deficit.

Impact on Voluntary Compliance & Tax Gap

NTEU strongly believes our system of voluntary tax compliance is most effective when the IRS is able to assist 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.

Unfortunately, as noted previously, funding reductions have resulted in the inability of millions of taxpayers to get answers from IRS call centers and at 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, including small businesses, 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 in our population 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.

The adverse impact on IRS’ capacity to collect revenue critical to reducing the federal deficit is clear. In FY 2014, on a budget of $11.2 billion, the IRS collected $3.1 trillion, roughly 93 percent of federal government receipts. According to the IRS, every dollar invested in IRS enforcement programs generates roughly $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 2013, IRS enforcement activities brought in $53.3 billion, down almost $6 billion from the $59.2 billion in FY 2007.

The $345 million reduction to IRS’ budget for FY 2015 will further reduce IRS’ ability to collect revenue and would result in the loss of billions in revenue in FY 2015 alone. That lost revenue could otherwise be invested in critical government programs or be used to reduce the federal deficit.

The IRS has warned that enforcement staffing will continue to be a significant concern under the FY 2015 funding level and has cautioned that under this insufficient level of funding, the IRS will lose another 1,800 enforcement personnel in FY 2015. The impact of the reduced staffing in enforcement will result in in at least 46,000 fewer individual and business audit closures and more than 280,000 fewer Automated Collection System and Field Collection case closures.

CONCLUSION

Mr. Chairman, thank you for the opportunity to provide NTEU’s views on some of the most important issues raised in the Taxpayer Advocate’s Annual report. We believe that only by restoring critical funding for effective taxpayer service and enforcement programs can the IRS provide America's taxpayers with quality service while maximizing revenue collection that is critical to reducing the federal deficit.