The IRS should spend more of its $80 billion appropriation over 10 years on taxpayer services and business systems modernization and less on enforcement and operations, National Taxpayer Advocate Erin Collins said Thursday in a blog post.
The Inflation Reduction Act of 2022, P.L. 117-169, which Congress approved in August, "allocated the funds in a manner that does not address the needs of U.S. taxpayers, including individuals, families, and businesses," Collins wrote.
Chronic underfunding over the past several decades means the IRS is in dire need of the $80 billion, which is in addition to the agency's annual appropriation, she said. But Congress should reallocate the funds so that more goes toward services that encourage compliance from the start of the tax filing process, she said.
"The most efficient way to improve compliance is by encouraging and helping taxpayers to do the right thing on the front end," she wrote. "That is much cheaper and more effective than trying to audit our way out of the tax gap one taxpayer at a time on the back end."
A massive paper backlog and a failure to answer calls from taxpayers and tax professionals hounded the IRS in recent years as a drop in funding and tax changes due to COVID-19 caused a public outcry, although the IRS says additional staffing has alleviated both issues. In addition, between 2010 and 2020, funding for the IRS was reduced by nearly 20% when adjusted for inflation, Collins said.
She cited several examples of poor IRS service, including that during the last two years, tens of millions of taxpayers "have experienced delays that at times exceeded 10 months to get their returns processed and receive refunds, including refundable credits." On the technology side, she noted that "individual taxpayers' online accounts do not provide robust functionality competitive with financial institutions. And the IRS doesn't offer businesses any online account option or provide practitioners with online access to their clients' account data."
Collins' remarks come as a new commissioner, Danny Werfel, began work at the IRS this week. The IRS is supposed to release its proposed budget for the $80 billion soon. When the agency missed Treasury Secretary Janet Yellen's deadline of Feb. 17 to turn in the proposal, a spokesman said it would deliver the plan "in the coming weeks."
Congress now funds enforcement and taxpayer service at a ratio of about 2:1; the Inflation Reduction Act allocation changes that ratio to more than 14:1, Collins said. And while enforcement is an important part of tax compliance, it's just one part of the strategy needed to lessen the tax gap, which, according to an IRS estimate, averaged $470 billion a year during the 2017–2019 period.
The AICPA has consistently told Congress that, in light of the recent service deficits at the IRS, the allocations between enforcement and service lacked balance.
"The AICPA has always publicly advocated for funding that supports an effective and efficient tax administrative system, and we are pleased to see that Congress has made a significant investment in critical IRS divisions," Barry Melancon, CPA, CGMA, the CEO of AICPA & CIMA, together as the Association of International Certified Professional Accountants, said in a statement in August. "However, we believe there is a gross imbalance between the Inflation Reduction Act funding allocated to enforcement and the funding allocated to service in light of the ongoing processing delays, outstanding backlog of returns, and basic customer service issues plaguing the IRS."
Collins recommended four paths that Congress could take to reallocate the IRS funds:
- Pass stand-alone legislation that reallocates money to adequately fund taxpayer services and business systems modernization (BSM);
- Adjust the funding allocations among the four budget accounts in annual appropriations bills;
- Allow the IRS to transfer additional money from the enforcement account to taxpayer services and BSM; and
- Expand the scope of IRS activities from the enforcement account.
"Our nation's taxpayers deserve a responsive and respectful tax administration that serves all taxpayers fairly; is not overly burdensome for individuals, families, and businesses; and instills trust in our tax system," Collins said. "In short, both individual taxpayers and business taxpayers deserve a well-functioning IRS."
— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.