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March 14, 2016
The Future of Tax Administration
by Nina Olson

Full Text Published by Tax Analysts®


Taxpayer Advocate Nina Olson warns of administrative "death spiral." (Tax Analysts/Derek Squires)Nina Olson is the national taxpayer advocate.

Olson provides an overview of eight articles in the March 14 edition of Tax Notes that discuss the current state of the IRS, and she concludes that the IRS is understaffed and lacks the focus needed to serve taxpayers.

The articles are scheduled to be published in Tax Notes Today from March 14 to March 17.


Copyright 2016 Nina Olson.
All rights reserved.

* * * * *

The articles in this special issue of Tax Notes paint a portrait of the IRS in great flux -- dealing with an ever-increasing and expanding workload in a climate of funding constraints, a world where the global economy and global tax compliance present new challenges, the taxpayer base is extraordinarily diverse, and the threat of cybercrime is constantly present. Leandra Lederman's article succinctly chronicles how we got to this state, and Larry Gibbs describes the impact of expanding IRS duties to include delivering social programs, especially for the low income. In response to where it finds itself today, the IRS is attempting to put forward a vision of its "future state." Meanwhile, taxpayers are just trying to figure out what they need to do to comply with the laws.

Professors Les Book and Keith Fogg discuss, I believe correctly, the justification for tax administration processes that focus on the needs of specific taxpayer populations. Book notes that this focus is especially important given the major role the IRS plays in delivering benefits to low-income and other taxpayer populations that have particular challenges navigating the tax system. In fact, not so long ago, the IRS embraced this approach. The first guiding principle for the 1998 IRS reorganization was "Understand the customer's point of view and use this understanding to prevent and solve problems and provide quality service." An IRS report from that time noted, "This principle . . . represents a significant shift in emphasis . . . from an internal focus to a customer focus."1

The role of the IRS as a provider of service and assistance as opposed to an enforcer runs throughout these articles and has been with the IRS since its inception. This dual-personality dilemma is reflected in the IRS's current mission statement. In its original form, adopted immediately after enactment of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA '98), it read: "Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all." This formulation acknowledged the primary role of taxpayer service in promoting voluntary compliance. Somewhere along the line, the last clause in the mission statement was changed, without any fanfare, to "by enforcing the tax law with integrity and fairness to all" (emphasis added). The insertion of "enforcing the tax law" thus not-so-subtly overturned all the work done to reform the culture of the IRS in the late '90s and early 2000s. This change in emphasis is reflected throughout the goals of subsequent IRS strategic plans and even the future state. For example, in none of the future state themes are the words "outreach," "education," "assistance," or "taxpayer rights" present. Words matter. What you say is what you get.

There is only one true enforcement arm of the IRS, and that is Criminal Investigation. I fully agree with Mark Matthews that CI's mix of work needs to be rebalanced to focus primarily on criminal violations of the tax law. But I also think that the definition of what constitutes a tax crime is no longer as pure as we might like it to be -- the Internet age has truly blurred the lines between categories of criminal activity. In fact, I think the argument should be made (and Matthews has done so, well) for more funding for CI precisely because it needs to do both traditional tax work and the nontax cases.

If CI is the only enforcement arm of the IRS, what is the role of exam and collection? To my mind, exam and collection derive from the requirement that the IRS assist taxpayers in complying with the law. Its job is to educate, not just deter. The rights to privacy and to a fair and just tax system underpin those functions: that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and the tax agency will consider facts and circumstances that might affect taxpayers' underlying liabilities, ability to pay, or ability to timely provide information. Yet, as many of the authors included herein note, the IRS is using measures that drive production and counting rather than future voluntary compliance, or as Heather Maloy puts it, "change in long-term compliance behavior." If you think about the IRS as a processing agency, you will end up with performance measures that value output (number of audits closed, and dollars assessed or collected) rather than outcome (future voluntary compliance).

Maloy suggests that the IRS adopt an auditing approach similar to that used in financial statement assurance audits. She says that instead of looking for "large, unusual or questionable items (LUQs) or mistakes that taxpayers with complex business structures inevitably make," the IRS should ensure that multinationals have strong compliance practices and controls, and should focus only on anomalies. This approach applies as much to individuals and small businesses as it does to large corporations -- if the taxpayer is willing to comply and is attempting to do so, why are we penalizing mistakes instead of educating taxpayers, given the complexity of our lives and the law?

The Large Business and International Division's current reorganization effort attempts to adopt aspects of this approach. But as the erosion of the post-RRA '98 focus on taxpayer service has demonstrated, cultural change takes a long time and will fail if not sustained and supported by focused, technically adept leadership that is willing to push up its sleeves and get involved in the day-to-day work of its employees. Samuel Maruca correctly observes that the cultural resistance to this involvement and the lack of technically skilled managers may be the shoals on which the LB&I reorganization founders.

As Book notes, the trend of large bureaucracies is to move toward procedures that allow them to process the volume of their work efficiently, at least superficially. However, an effective tax system is not a monologue by the government; it is a conversation between the government and its taxpayers. This dialogue is all but absent in the IRS of today, with the possible exception of those "lucky" large entities, high-income individuals, and the serially noncompliant who get the benefit of "concierge level," one-to-one attention in field exam and collection. Fogg laments the IRS's failure to talk with taxpayers who have tax debts about their financial situations and about what they are actually able to pay in light of that situation. It is ironic that one of the primary worries about the use of private debt collectors is that taxpayers will think they are scammers because the IRS has been promoting an anti-scam message that it doesn't make outgoing calls to taxpayers in collection matters. Say what now? What kind of world do we live in where the fact that the tax agency doesn't pick up the phone and talk with a taxpayer about a collection matter is considered a good thing?

Calling in to the IRS these days is not much fun for taxpayers or their representatives, especially if one's return has been compromised by identity theft or flagged as a questionable refund. Beth Tucker clearly lays out both the challenges and the risks of identity theft and other cybercrimes for the IRS. No one understands the risk of identity theft to the tax system, and its role in eroding taxpayer confidence in that system, better than I do. (I first raised the issue of identity theft in my 2005 annual report to Congress and was pretty much ignored by the IRS.) To my mind, the IRS's response to victim assistance and minimizing taxpayer burden has been woefully inadequate. For example, a few weeks ago, the level of service on the phone line that taxpayers are directed to call in order to authenticate their identity was at 6 percent. In other words, only six out of 100 calls were put through. I have never seen anything like that number in my entire career. Moreover, although for the 2015 calendar year the IRS stopped 4.8 million suspicious returns and 1.4 million identity theft returns, thus preventing $8 billion in fraudulent refunds, its false positive rate for its fraud detection filters ran from 31 to 36 percent. It is simply unacceptable to ask taxpayers who have filed legitimate returns to have to work through abysmal telephone service to have their legitimacy verified. This is not just a matter of throwing more bodies at the problem: There is something wrong with the IRS filters and processes, and until they are improved, the IRS is creating victims, not assisting them.

Michael Dolan and Fogg both reference how the IRS was organized in pre-RRA '98 days. Dolan notes that "as the IRS shifted its structure for district-based operations to centralized national operating divisions, it became more difficult for frontline taxpayers to access informal voluntary resolution routes." Fogg points out that revenue officers in the field knew about the economic and other conditions that taxpayers in a particular locale faced and how that affected their ability to pay taxes, and he contrasts that with the approach of the Automated Collection System in which employees in remote, centralized sites receive calls from taxpayers throughout the nation in response to IRS automated notices, levies, and liens.

In planning for its future, the IRS should reconsider its drive toward centralization and make the case to Congress for more funding for local posts of duty. It should also think deeply about how to integrate geographic focus and structure into functions organized around taxpayer segments. In fact, today, the only two populations that have functions focused on them are LB&I and the Tax-Exempt and Government Entities Division. The names "Wage and Investment" and "Small-Business/Self-Employed" do not accurately describe the work done by these divisions. SB/SE conducts almost all audits except for the earned income tax credit, and all collection. Wage and Investment is pretty much overtaken by return processing and refund fraud/identity theft. The focus on the specific needs of individual and small-business taxpayers is largely gone.

I believe the IRS can overcome its challenges, but it must first acknowledge that the causes of some of them have nothing to do with funding or too much work. Through its centralization over the last decade and its virtual absence in the community, the IRS has isolated itself from the very taxpayers it serves. This isolation has made it easy for U.S. taxpayers to believe the worst about the IRS and its employees. If we are not careful, the only time taxpayers will have personal contact with an IRS employee is when the IRS is going to do something bad to them -- assess more tax or collect their money or property. This is not a good state of affairs for any of us.

Each of the articles in this special issue, in its own way, calls for the IRS to make its primary focus the vast majority of taxpayers -- those who are willingly trying to comply with the tax laws -- regardless whether they make mistakes. These articles contain important insights and suggestions. I'm hoping the IRS will listen.


FOOTNOTE

1 Publication 3329, Modernizing America's Tax Agency (1999).

END OF FOOTNOTE
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