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Saturday, December 19, 2015

Top Ten Items of Tax Policy Interest for 2015 - #2

Continuing with my list of ten news items and activities from 2015 that I think have particular tax policy relevance. 

#2 - IRS Funding Challenges - Despite an aging workforce resulting in many retirements, a tax statute that is made increasingly more complicated each year, and the need to modernize operational and technology practices, the IRS budget has been cut by over $1.2 billion from FY2010 to FY2015. [See 5/18/15 TIGTA report, Center for Budget and Policy Priorities article on the cuts of 9/30/15 and USA Today article of 6/17/15.]

The May 2015 TIGTA report includes the following graphs showing the decrease in the number of collection officers and a 95% increase in computer downtime due to use of old technology (hardware and software).

Soruce: TIGTA, 5/8/15 Reduced IRS Budget report, page 9
Source: TIGTA report of 5/8/15, page 14

Commissioner Koskinen made statements in two speeches in 2015 that I want to highlight.
  1. 11/3/15 at the AICPA National Tax Conference - Government revenues will decline due to reduced workforce and reduced audits. Per Koskinen: "We are especially concerned about the effect that the reduction in our workforce has had on audits. The IRS completed about 1.2 million individual audits in Fiscal 2015. That’s 13,700 fewer than the previous year.
      Even more disturbing, the decline in audits in 2015 was not a one-year aberration. The number for 2015 was 350,000 below five years ago. That’s a drop of 22 percent, and corresponds exactly to the number of revenue agents, which is also down 22 percent since 2010. During that same period, the number of income tax returns filed by individuals topped 146 million, an increase of almost 3 percent from 2010.
      Not surprisingly, we’re seeing clear evidence of a longstanding decline in revenue coming from audits. Between 2005 and 2010, the revenue generated from audits averaged $14.7 billion annually. But since 2010, it has averaged only $10.5 billion a year, which is a drop of nearly 30 percent, and translates to more than $20 billion in uncollected revenue over the past five years.

      These numbers show that when you have fewer employees doing compliance work, you end up leaving tax revenue on the table. In cutting the IRS budget, the government is forgoing billions just to achieve budget savings of a few hundred million dollars, since we estimate that every $1 invested in the IRS produces $4 in revenue. Some estimates are even higher. No one in all my hearings and private meetings on Capitol Hill has ever disagreed with our assertion that if you give us $1, you will get at least $4 back. Nonetheless, the IRS’s budget continues to be cut."
  2. 3/31/15 before the National Press Club - Problems of an aging workforce and inadequate hiring in recent years. Per Koskinen: "the portion of our workforce over 50 years of age has been growing steadily during the last several years. Today more than half of our employees are in that age group. And we estimate that by next year, more than 25 percent of the IRS workforce will be eligible to retire. By 2019, that number will be over 40 percent. Meanwhile, the number of IRS employees under 30 has been steadily declining, and is now less than 3 percent of our workforce. We only have about 1,900 employees under age 30 – and about half of those are only part-time. And we have only 650 employees who are 25 or younger. Essentially, the IRS is facing its own version of the Baby Bust.
      This situation makes it extremely difficult, if not impossible, for the IRS to properly develop its next generation of leaders. We estimate that by next year 41 percent of our front-line managers and 61 percent of our executives will be eligible to retire.
I am shocked that less than 3% of today's IRS workforce is under age 30.  Obviously, budget cuts and new budget needs (technology needs and dealing with new laws such as the Affordable Care Act) have prevented hiring.  I know it has been a long time since I've had a student tell me they got a job at the IRS, yet many would like to work there. (I worked at the IRS for five years when I was in my twenties!)

Tax Policy Implications of IRS Funding Problems:
  • Complexity - Our already complex tax rules that affect all income levels of taxpayers will be even more complex in practice when the IRS does not have the resources to provide the levels of assistance needed to help individuals and businesses comply. I think the IRS has done a good job with the complications of the Affordable Care Act, but more is needed for individuals and both small and large businesses. The level of complexity in this one law alone is staggering.
  • Compliance / Minimum Tax Gap - Unfortunately, as more of the public realizes that their chance of audit is even more unlikely than before, some will reduce the level of care regarding the accuracy of their tax return.
  • Reduced Revenues - When IRS examination rates go down, revenue collections go down.
  • Fairness - If revenues go down due to reduced audit and collection activity, and lawmakers make it up with tax increases on compliant taxpayers, the system loses a lot of its fairness, and taxpayers lose respect for the system.    
  • Effect on State and Local Governments - State and local governments that impose an income tax rely heavily upon IRS income tax exams to find errors on the state and local returns. With reduced IRS examination activity, states will need to either accept their reduced revenues or increase their audit activity levels (and to increase the budget of their tax agencies). 
What do you think? 

My list so far of news and activities of 2015 with tax policy relevance (no ranking involved):
  1. Congress can alter out tax system via a lot of non-tax bills - here

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