American taxpayers face inadequate service, erosion of rights and reduced tax compliance because of the Internal Revenue Service’s expanding workload and declining resources, according to a report by the IRS’ internal monitor.
National Taxpayer Advocate Nina Olson noted in her annual report to Congress, released last week, that use of automated processes to adjust tax liabilities is harming taxpayers, and recommended that Congress enact a comprehensive Taxpayer Bill of Rights.
“The overriding challenge facing the IRS is that its workload has grown significantly in recent years, while its funding is being cut,” Olson said in a statement. “This is causing the IRS to resort to shortcuts that undermine fundamental taxpayer rights and harm taxpayers–and at the same time reduces the IRS’ ability to deliver on its core mission of raising revenue.”
The report said the IRS’ workload has grown sharply because of the increasing complexity of the tax code and the code’s frequent changes, the need to provide service to a more diverse taxpayer population, the IRS’ increasing responsibility for administering economic and social policies, a surge in refund fraud and tax-related identity theft and the implementation of new third-party information reporting requirements.
To keep up with its rising workload, the IRS is relying more and more on automated data-matching procedures to identify potentially inaccurate claims and adjust tax liabilities. In many cases, however, the taxpayer’s return position turns out to be correct.
Moreover, although taxpayers who are subject to audits are entitled to established taxpayer rights protections, an increasing number of IRS adjustments are not classified as audits, so these protections often do not apply. In 2010 alone, the IRS made about 15 million contacts with individual taxpayers to adjust their tax liabilities, but treated only 1.6 million as audits.
Even then, it conducted more than three-quarters of those by correspondence with no single IRS employee responsible for the audit, making it more difficult for the taxpayer to communicate with the IRS about his or her case.
Another problem Olson’s report identified was that the IRS determines that some taxpayers have committed fraud without notifying them and giving them an opportunity to respond. In 2011, the IRS declined to process some 900,000 returns, and simply “auto-voided” the returns without providing the individuals who had submitted them with notice of the action. Later, it marked tens of thousands of these accounts with a code indicated it had erred and the return had been submitted by a legitimate taxpayer.
Among taxpayers who sought assistance from Olson’s office after their refunds had been withheld on a suspicion of fraud, 75% received relief, but only after waiting an average of nearly six months to receive their refunds. The average refund amount was $5,600, a significant sum for most households.
The report said that because of inadequate funding, the IRS, which collects more than 90% of all federal revenue, cannot adequately pursue unpaid tax liabilities. On a budget of $12.1 billion, the IRS collected $2.4 trillion in FY 2011–for every $1 that Congress appropriated for the IRS, the IRS collected about $200 in return.
The report also pointed out important equity concerns: Compliant taxpayers carry a disproportionate share of the tax burden. For 2001, the most recent year for which a complete tax gap estimate existed when the report was written, the IRS estimated that it was unable to collect $290 billion in taxes. With 108 million households in the U.S. at the time, the average household paid a “noncompliance surtax” of almost $2,700 to enable the federal government to raise the same revenue it would have collected if all taxpayers had reported their income and paid their taxes in full.
Recently, the IRS released updated tax gap estimates. For 2006, it estimated that it was unable to collect $385 billion in taxes when there were 114 million households, producing an updated “noncompliance surtax” of nearly $3,400 per household.
The report recommended that Congress develop new budget procedures designed to fund the IRS at a level that will enable it to meet taxpayer needs and maximize tax compliance, with due regard for protecting taxpayer rights and minimizing taxpayer burden.
It also urged Congress to codify a Taxpayer Bill of Rights that would clearly list the major rights and responsibilities of taxpayers.