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Friday, February 25, 2011

The Cost of Tax Administration - IRS FY2012 Budget Request

The IRS budget request was released last week (full text of 166 pages, IRS summary). This is a reminder of the significant costs to collect roughly $2.3 trillion of tax revenues and process over 140 million individual tax returns in addition to millions of other types of returns! The FY2012 budget request is "$13,283.9 million, $1,137.8 million, 9.37 percent, more than the FY 2010 enacted level."

Is 9% budget increase request due to more complicated tax rules to enforce? Will the increase bring in more revenue? How much is due to the IRS being responsible for some part of health care law enforcement?

The $1.1 billion increase includes the following items (per page 3 of the full report):

  • +$401.7 million adjustment to reach the FY 2011 President’s policy level
  • +$85.7 million to fund the non-pay inflation adjustment and retirement contribution
  • -$189.9 million for efficiency savings and non-recur activities
  • +$114.3 million to improve taxpayer service and the website
  • +$605.7 million to implement legislative mandates, handle new information reporting requirements; increase compliance efforts to address offshore tax evasion, focus on corporate and high-wealth returns, increase examination and collection coverage, enforce tax return preparer compliance, and address workload growth in Appeals and Counsel
  • +$118.8 million to enhance employee security, develop disaster recovery systems capability, and develop the information technology, infrastructure, and systems to implement the various Affordable Care Act (ACA) provisions.

Per the IRS, "The FY 2012 budget includes $339 million in new IRS enforcement initiatives, which raise $1.3 billion in revenue annually at full performance. This is a return on investment (ROI) of 4.5 to 1 when new hires reach full potential in FY 2014." A table at page 6 of the full report shows the following expected ROI on various programs when fully implemented in 2014.

  • Increased collection coverage 8.8
  • Increased international services and enforcement (including 377 new employees) 8.2
  • Administering new statutory reporting requirements 7.0
  • Implementing merchant and basis reporting (including 415 new employees) 6.0
  • Ensure accurate delivery of tax credits 4.1
  • Administer new statutory reporting requirements 0.0 (it is puzzling why this items is listed twice. When listed with a zero ROI, the costs are three times higher than the one listed as producing a 7.0 ROI.)
  • $96 million of the new enforcement initiatives (less than 1/3 of the total) show zero ROI

A few interesting budget items:

  • +$11.5 million / +81 FTE - to implement and enforce the indoor tanning excise tax added by health care legislation
  • +$29.3 million / +76FTE to administer new fees on drug manufacturers and health insurers
  • +$9.9 million / +84 FTE to strengthen oversight of exempt hospitals
  • + $260.3 million / + 834 FTE to ensure accurate delivery of tax credits with a significant amount focused on Affordable Care Act credits
  • +$58.5 million / + 187 FTE to administer new statutory reporting requirements including 82 FTE related to new 1099 reporting requirements

A few observations:

  • The costs of tax administration are going up. Which makes sense given the increase in the number of tax provisions and activities Congress expects the IRS to be involved with including enforcement of health care provisions.
  • Is the expertise of the IRS being used effectively? Why not more on reducing the tax gap and less on enforcing the health care legislation (let a different government agency handle that)?
  • It seems that it would be more transparent if Congress allocated enforcement funds whenever it adds new initiatives, such as the expanded 1099 filing requirement rather than requiring the IRS to ask for them separately.

Anything you find surprising?


Anonymous said...

I'm surprised that the IRS is claiming they need so few FTEs to deal with the new 1099 requirements. Maybe they're trying to make a case to leave them in?

Anonymous said...

nctaxpro agree with your 1099 comment. It seems odd that with cost basis reporting they are only budgeting 1.3m and 20 FTE. I would love to understand how they are going to handle the massive increase in data they will recieve as well as how they plan on monitoring and determing conflicting 1099 data with schedule D.