I started this current series to discuss what is wrong with our country and what we need to do to fix it. While I have discussed some of the topics that I will be including in this series, they have been included in other articles. In this series I will concentrate on a single topic. This will also mean that some of the articles may be slightly shorter than my readers have grown accustomed to, however they will still be written with the same attention to detail. This series will have no set number of articles and will continue to grow as I come across additional subjects.
I thought this was going to be a difficult article to do. However, I came across this seminal article on the IRS, which pretty much sums up everything I wanted to say. None the less I will delve a little more deeply and see if I can find some more material. In the meanwhile I have copy and pasted the entire article I just mentioned below. I hope you find it as interesting as I have.
The IRS: A Broken Home in Need of Repair
Decades of underfunding and misdirected oversight have hampered the IRS’s ability to achieve its core tax collection mission, much less its growing role in social welfare policy. Providing the IRS with greater and more stable funding, combined with organizational reforms to better delineate revenue collection from benefit administration, represents an untapped opportunity to improve taxpayer services and tax enforcement simultaneously
Despite its lackluster reputation, the Internal Revenue Service (IRS) is one of the United States’ most important organizations, processing approximately $4 trillion in revenue and tax expenditures annually. Because of this, the agency was historically spared from partisan fighting, with public officials largely supporting the agency’s apolitical mission throughout most of the 20th century. “Taxes are the lifeblood of government,” as the Supreme Court put it in Bull v. United States.
Nevertheless, over the past three decades the IRS has had its own lifeblood drained by budget cuts and mounting bureaucratic hurdles. As the need for IRS reform has increased, so too has political polarization, with the service becoming the target of scorn by many elected officials on Capitol Hill. The IRS’s resources have become stretched thin by an increasingly complex tax code, including growing responsibilities that the agency wasn’t designed for, from administering social benefit programs (such as the recently expanded Child Tax Credit), to implementing intricate federal regulations. As lawmakers delegate more and more to the IRS, the time is right for policymakers to approach the agency with fresh eyes, and consider how it can be revamped to better achieve its missions, past, present and future.
The IRS Nears Its Breaking Point
Despite a growing reliance on the IRS to administer policies tangential to revenue collection, public officials have too-often preferred to scorn the IRS rather than nurture it. This isn’t to say that the IRS hasn’t made any internal mistakes over their nearly 160-year history — in fact, the IRS has a chronic history of cost over-runs and project mismanagement. It is nonetheless important to understand the watershed period that transformed how the IRS operates in its current form.
Congress has frequently ignored the IRS’s request to fund modernization while it attempts to update their information systems infrastructure dating from the 1960s. This has led to technological failures that contribute to a vicious cycle of visible dysfunction and angry constituents, thus souring lawmakers against the IRS all the more. The mismanagement of past funding influxes have only added to Congress’s skepticism. When the IRS finally began receiving the money for the Tax Systems Modernization (TSM) program in 1986, for example, they experienced a “famine-to-feast infusion of resources” that they were unprepared for. As a General Accounting Office report noted in the early 1990s, the IRS lacked a clear explanation of their plan for TSM while also failing to clarify the mission and scope of the program.
The IRS was unprepared for the TSM because their organizational culture and management structure was ill-suited for technology mega-projects. They acted as a more insular organization that was averse to working with outside contractors and newer employees, despite their lack of in-house technical skills to implement the modernization program. As Barry Bozeman notes, given the political scapegoating of those at the IRS and negative portrayal of the service by news media, “It is not difficult to understand how such an environment can foment distrust and insularity.” The plans the organization developed before funding was allocated thus gave “more attention to the wish list than to the specifications and functionality.”
The TSM program included many projects, from developing electronic tax filing to digitizing paper returns. However, IRS management failed to recognize that even the latest technology at the time was incapable of meeting those promises, so many of the initiatives simply failed. TSM turned from a modernization effort into an organizational learning experience. Following various reports from the General Accounting Office and National Research criticizing the program, Congress increasingly scrutinized the TSM. By 1996, the IRS received $300 million less than requested for continued funding of the TSM. “It’s never too late to stop a hemorrhage” said a GAO chief scientist before the Senate Governmental Affairs Committee in May of 1996. A month later, Congress created the National Commission on Restructuring the Internal Revenue Service to scrutinize the IRS and evaluate its future.
In 1997, the Commission released their final report, calling to “overhaul the IRS and transform it into an efficient, modern, and responsive agency.” As Joseph T. Thorndike noted, the commission noted three issues for the agency: dealing with accountability among management, chronic short-sightedness of agency goals, and missing expertise around technical systems modernization. To address these problems, some key recommendations from the Committee included:
- Establishing an executive Board of Directors to fill the leadership vacuum at the agency by guiding the IRS on the specific implementation of policy initiatives;
- Setting the IRS Commissioner’s term length to five years and with more managerial flexibility to promote consistent project management to see programs to completion;
- And creating a congressional committee to coordinate oversight of the IRS so they could assess overall performance of the agency, rather than have Congress confront them sporadically over narrow flaws that miss the bigger picture.
Notably, the congressional commission also blamed Congress’s tax legislation for some of the IRS’s overall issues, stating that the complexity of the tax code put a significant burden on the administration, and that “Reducing taxpayer burden by simplifying the tax laws and administration must start with the Congress and the President.” While several of their recommendations went ignored, the general desire for increased oversight and a tighter leash on IRS behavior were prioritized and acted on. This was in part due to multiple scandals that arose during this period, which drastically derailed the focus of IRS reform efforts.
There is an additional political context that shaped how the IRS would be reformed: the 1994 Republican Revolution. While the Congressional Commission was bipartisan, that didn’t stop politicians from using IRS reform efforts as a political cudgel. Although the problems with the TSM program made the need to address the agency’s broader issues practically inevitable, Democrats losing their House majority for the first time since 1952 left Congress with fewer taxation supporters and a new group of anti-tax antagonists. Some members of Congress used the 1994 elections as a justification for roasting the IRS, with Senator Chuck Grassley stating that restructuring the IRS was “keeping with what many saw as the mandate given to the Congress in 1994—moving power from government to the people.” As congressional investigations continued in 1997, Republican pollster Frank Luntz reminded candidates that “nothing guarantees more applause and more support than the call to abolish the Internal Revenue Service.”
As legislation based off congressional hearings went through the House smoothly in the fall of 1997, concurrent political activities altered the tone around the reform’s purpose. In both chambers of Congress, committees held hearings on “horror stories” from taxpayers on alleged IRS abuses. Then Chair of the House Republican Conference, John Boehner, declared “This Halloween, the Republican Congress is unmasking the IRS for what it really is: a bureaucratic monster stalking the American taxpayer,” in tandem with the launch of a GOP website to solicit such claims. Another scandal erupted with claims that the IRS was targeting conservative non-profit organizations, leading to further Congressional hearings and scorn towards the agency. While both scandals greatly affected the 1998 IRS Restructuring and Reform Act, over the two years following its passage, government investigations found that both sets of allegations were generally unfounded and that the IRS had been operating within the law. As the Restructuring Commission noted in their initial report, there were “very few examples of IRS personnel abusing power.” The report recommended that taxpayers should have greater protection from undue IRS enforcement regardless.
An effort that originally sought to improve the IRS’s ability to implement modernization projects quickly transformed into legislation that, as political scientist David C. Johnston puts it, “handcuffed the tax police.” As tax law professor Leandra Lederman notes in her article, “IRS: Politics as Usual?,” shaping the reform bill around alleged crises was not conducive to deliberation and led to overreaction. Instead of legislating reforms to help the agency adequately administer the tax code, the backlash to various scandals led to the IRS Reform Act placing the service under even more bureaucratic burdens, further hindering the agency’s ability to collect revenue much less address systems modernization. With the IRS’s organizational incompetence left unimproved, the agency’s core IT systems remain trapped in the 1960s to this day.
The reforms in late 1990s would go on to have drastic effects on the IRS’s ability to do its most basic function: collect taxes. Following its passage, the agency faced dramatic pressure to defer action on tax collection activities. Individual income tax audit rates declined by almost 66 percent from 1996–2002, while the audits that did occur defaulted to inaction in a third of the cases. In Fiscal Year 1997, the IRS performed 10,090 seizures in response to unpaid taxes. By 2000, total annual seizures dropped to just 74. As of 2017, that number was 323, down 58 percent from 2011. Lederman identifies three key reasons for these downturns:
- First, the restructuring of the IRS consumed many organizational resources that had to be directed away from regular activities;
- Second, the IRS Reform Act forced the agency to reallocate individual employees from enforcement to service responsibilities, such as helping taxpayers navigating filings;
- Third, statutes in the legislation established agency rules with strict penalties for what was deemed wrongful activity by IRS personnel. The “Ten Deadly Sins,” for example, included “Providing a false statement under oath with respect to a material matter involving a taxpayer or taxpayer representative.” This led employees to avoid acting on valid collection cases over fears of being fired.
In the wake of the aforementioned scandals, Charles Rossotti was appointed as a commissioner to reform the IRS. Sharing some of the mindset around the Reform Act, he sought to make the service more efficient and “think about its job from the taxpayers’ point of view.” Drawing from the Restructuring Commission’s original report, Rossotti initiated a fundamental overhaul of the IRS’s structure from regionally-based operations to four centralized divisions that each served different segments of taxpayers; the basic structure that remains to this day. The Commissioner also understood the modernization challenges the IRS had been facing, describing the agency’s information systems capabilities as “like being a bank and not knowing how much money is in your customer’s account.” While he did partner with the private sector to bring more expertise into the modernization project, by 2004 Congressional testimony suggested that the efforts still faced “significant delays and cost over-runs.”
The 1998 law created two bodies to increase oversight of the IRS: the IRS Oversight Board and the office of the Treasury Inspector General for Tax Administration (TIGTA). It was a later report from TIGTA that triggered the 2013 scandal involving alleged targeting of conservative 501(c)(4) nonprofit organizations. Investigations from multiple institutions later concluded that this was in all likelihood a result of bureaucratic mismanagement of a markedly complex tax code. Indeed, far from engaging in overzealous enforcement, the IRS developed an organizational culture of risk aversion, with employees afraid to carry out normal enforcement activities in fear of violating regulations on their behavior. As Rossotti put it in 2002, “We live in a fishbowl. It is difficult to make even a small mistake because it immediately gets magnified. A small mistake is quickly interpreted as “now the whole thing is falling apart.” The attacks levied against the IRS have also worn-down employee morale over time. As Commissioner John Koskinen testified to Congress in June 2014 about the targeting controversy, “When they then are subject to depositions and recorded interviews, it sends… a deleterious effect on morale because they thought they were actually doing what they were asked to do…” In response to this one scandal, Koskinen stated that 250 IRS employees were forced to dedicate approximately 120,000 hours of work in order to meet congressional demands.
At the time, the perception of a moral crisis within the IRS was enough to trigger passage of the Protecting Americans From Tax Hikes (PATH) Act in 2015. One component of the legislation sought to deepen IRS personnel’s fear of punishment by indicating that “performing, delaying, or failing to perform… any official action (including any audit) with respect to a taxpayer for purpose of extracting personal gain or benefit or for a political purpose” will result in an employee’s termination. The same year this legislation passed, IRS funding levels fell to levels comparable to their 1998 budget adjusted for inflation. Since then, funding for the IRS was only marginally increased for one year following the PATH Act reforms.
These developments proved important not just for the IRS’s functioning as a revenue agency, but for its ability to properly fulfill its growing non-revenue responsibilities. Over the past few decades, Congress has delegated more regulatory and social welfare tasks to the service. However, instead of ensuring that the IRS has the proper organizational structure and resources to smoothly meet these expanding roles, Congress has instead passed legislation to micromanage the agency’s resources towards processing tax returns and servicing customers. The strains from these agency design choices have made themselves apparent over the last 18 months, with the IRS struggling to quickly implement a host of COVID-19 relief programs, from tax credits for paid sick leave to economic impact payments.
A Service Underserved
While enforcement rates were able to recover somewhat during the 2000s, the last decade of scorn for the IRS has only exacerbated their struggles. Passage of the Affordable Care Act gave the IRS various responsibilities for administering provisions of the extensive legislation, such as premium tax credits. As a consequence, the Republican House majority that emerged from the 2010 midterms repeatedly pushed to slash the IRS’s budget, with a member of the House Appropriations Committee saying in a 2013 hearing that any significant funding increase “was going to be a challenge for some very basic reasons. There are a lot of objections to the Affordable Health Care Act, a lot of objections to ObamaCare.” The IRS Advisory Council nonetheless stated in 2014 that the agency was “in the midst of an existential funding crisis.”
Despite the starve-the-beast treatment it has received, a 2015 OECD report found that the IRS has become one of the most efficient tax administrations in the developed world, yielding one of the lowest costs of tax collection ratios even with its byzantine tax code to administer. But as tax professor Steve Johnson notes, no organization is ever going to achieve perfect efficiency. Changes to the tax system have occurred almost every year, and placed an increasing burden on the IRS’s workforce, requiring repeated training among IRS employees.
Following budget cuts throughout the early 2010s, IRS Commissioner John Korskinen said, “We continue to find efficiencies wherever we can and are presently saving $200 million a year… But we have reached the point of having to make very critical performance tradeoffs.” With a shrinking scope for bona fide efficiencies, 75 percent of cuts instead went to go to personnel and staff training. As seven former IRS commissioners acknowledged in 2015, these cuts to appropriations created a crisis for the IRS workforce, with only 4 percent of employees under the age of 30 and an estimated 38 percent of employees eligible to retire in 2018. While the political argument was to punish the IRS for scandals by withholding funding, budget cuts for staff and training did nothing to help improve the agency’s “vast bureaucratic bumbling,” as one Senator described it. On the contrary, they made matter worse.
There are numerous metrics that capture the IRS’s dire resource struggles. The wear-down of the IRS has been well documented, from the delays it faced distributing economic relief payments, to its backlog in processing last year’s tax returns. The IRS receives funding comparable to its constant-dollar appropriations from 30 years ago while needing to process 56 million more tax returns and twice the number of business tax returns.
From 2010 to 2020, the number of individual income tax returns the IRS has to process rose from 142 million to 170 million. Over that same period, the IRS has cut over 33,000 positions, while the part of their budget that “funds the infrastructure necessary for processing returns and refunds” has declined by 9 percent in inflation adjusted dollars. In FY2020, the IRS was only able to answer 24 percent of the 100 million calls that were made by taxpayers, many of whom were merely seeking help complying with their tax obligations. Between 2010 and 2018, funding for the IRS fell by 20 percent in inflation-adjusted dollars and 22 percent of their staff has been removed. To call this an unsustainable trend for such a critical government agency is an understatement.
Nor were these funding cuts evenly spread out, with tax enforcement facing the largest decline. The current IRS commissioner now says the IRS is “outgunned” to address the $1 trillion gap in taxes that go uncollected. The IRS enforcement budget declined by 23 percent from 2010 to 2018 while the customer service budget only decreased by 4 percent. Further hindering their capabilities, IRS expenditures on training per-employee declined by over 80 percent from 2010 to 2014. Over half of employment cuts have been in enforcement positions, and its number of revenue agents has now dipped below 10,000 for the first time since 1953. From 2011-2013, it is estimated that over $100 billion in business income and $60 billion in nonbusiness income was underreported. From 2010–2019, the audit rate for individuals declined by almost two-thirds and the rate for businesses fell by half. As the IRS’s resources have thinned, the “core tax-collection mission” that Senator Grassley cited for the agency in the 1990s is ironically the area subsequent reforms gutted the most.
The IRS’s decades-long pleas for appropriations to remedy their technological backwater have largely gone unaddressed. Former head of the IRS’s Office of the Taxpayer Advocate, Nina Olson, described the situation like so: “The IRS has erected a 50-story office building on top of a creaky, 60-year-old foundation, and it is adding a few more floors every year.” Indeed, 231 of the IT systems used by the IRS are classified as “legacy systems,” i.e. ones that are at least 25 years old, including many core systems that run on arcane programming languages that are too old to be maintained.
Following the full display of the IRS’s technology deficit with their systems-wide failure on Tax Day in 2018, the Taxpayer Relief Act mandated changes to the IRS’s electronic abilities. The organization’s 2019 Modernization Business Plan outlined numerous goals for overhauling their systems. These include, but are not limited to:
- Modernizing the IRS Individual Master File (while neglecting the Business Master File);
- Developing web applications for assisting taxpayer issues;
- Replacing batch processing with a Real-Time Tax Processing program;
- Improving automation of business tax returns;
- Transferring workloads to cloud-based platforms and digitizing data;
- Protecting taxpayer data through cyber analytics and threat management.
This 2018 legislation was followed the year after by the Taxpayer First Act, which called for reorganizing the IRS’s leadership structure toward addressing the agency’s repeated failure to effectively implement program modernization. However, as of August 2020, TIGTA found that “specific or long-term plans have not been developed to address updating, replacing, or retiring most legacy systems.” The report points to the fact that IRS continues to receive less funding than it estimates is needed.
Due to the workforce deficit, the IRS has increasingly relied on automated processes for detecting audit targets. This comes with its own drawbacks, however, because using automated methods for auditing wealthy individuals’ taxes is more difficult given their length and complexity. Forced by their limited resources, they have instead had to focus on simpler examinations, such as low- and medium-income people who claim the Earned Income Tax Credit (EITC). Indeed, the agency’s Automated Correspondence Exam application is specifically tailored to assess EITC cases. As a result, in 2018 over a third of individual tax returns selected for examination were related to EITC refunds. This has adversely affected EITC up-take, as a 2019 NBER working paper found that taxpayers were less likely to claim the EITC in subsequent years if they were audited, despite the small share of audited individuals who are ultimately determined to be ineligible.
Workforce cuts and lack of staff training have, somewhat paradoxically, harmed automation efforts more broadly. The share of cases involving software-detected underreporting declined between 2010–2018 as the IRS’s Automated Underreporting program experienced a 40 percent cut to its workforce. As such, the IRS has steered away from enforcement activities focused on higher-income taxpayers towards simpler cases, including those involving low-income recipients of refundable tax credits. Like the drunkard who looks for their keys under the lamp post, the IRS thus increasingly subjects vulnerable populations to unnecessary and unprofitable scrutiny merely because they file the types of returns the IRS can quickly and automatically screen for audit.
The IRS Is Broken, Now What?
Decades of budget cuts and over a year of pandemic confusion have made dealing with the Internal Revenue Service harder than ever. Consider:
- Only about 9% of people who call the IRS can get through to a live agent. Wait times of 2 to 4 or more hours are not uncommon.
- Even tax pros have trouble getting through, and it’s gotten so bad that a new company, EnQ, has started spamming the IRS phone lines and charging tax pros $100 a month for “preferred access.”
- IRS phone centers are now being used to help FEMA and other agencies with national emergencies.
- Millions of 2020 returns have been delayed in processing because not enough IRS personnel are available to review them.
- Congress keeps passing more laws that tie up the IRS with new regulations and implementation- things like the advanced child tax credit, economic stimulus payments, or employee retention credits, while not providing the resources to support these new programs.
How are tax professionals supposed to deal with this dysfunction? For starters, don’t take it out on the people at the IRS who are stuck in this bad predicament. Surviving the next tax season will take smarts, patience, and perseverance.
Smarts means knowing the best ways to get the vital information from IRS. Tax notices, though sometimes wrong or confusing, are a good start in getting to the heart of the issue. Online tax pro accounts and/or transcript requests using form 2848 or 8821 are ways to get around the long phone lines. And knowing when the best times are to call the practitioner priority line for the hardest cases is a must.
Patience is important in dialing down the stress levels for clients and tax pros alike. IRS letters and notices produce unnecessary panic and worry. Reassure your clients while you calmly deal with the issues at hand and explain the process ahead, with realistic expectations of what could happen next.
Perseverance is the key, as the most difficult and complex problems will require repeated contacts and continuous monitoring, sometimes over multiple years. Keep good records and have a system in place to monitor client and IRS communications, so that an action and response timeline can be established.
The IRS Is Long Overdue for Substantial and Systemic Changes
The IRS is in trouble, and everyone—taxpayers, tax practitioners, Congress, and even Treasury and the IRS themselves—is keenly aware.
In his opening statement at a House Ways and Means Subcommittee on Oversight hearing, Chairman Bill Pascrell Jr. (D-N.J.) remarked: “The Commissioner must also update us on the status of the gigantic backlog. This includes 2019 returns filed last year. These returns must be processed now so taxpayers can get the money they are owed. Many of these taxpayers have been receiving erroneous notices saying they haven’t timely filed. We have demanded that these notices must stop but we keep hearing horror stories of the IRS sending confusing, incorrect notices to struggling taxpayers.”
This was not a statement made at one of the recent, and many, Congressional hearings on the 2022 tax filing season; rather, those words were uttered more than a year ago on March 18, 2021. As Yogi Berra famously said, “It’s deja vu all over again!”
So, what’s happened in the last year? According to National Taxpayer Advocate Erin Collins in a recent Taxpayer Advocate Directive 2022-1, “Over the past year, the IRS has not made progress in reducing its backlog. As of March 19, 2021, the number of unprocessed original Forms 1040 stood at 4.6 million. As of March 18, 2022, the number had ticked up slightly to 4.7 million.”
And that’s just individual income tax returns. The number jumps to a staggering 14.7 million unprocessed paper returns when you add 4.9 million original business tax returns, 1.3 million returns that the IRS has not yet been able to classify, 2.6 million amended individual income tax returns, and 1.2 million amended business tax returns. And 14.7 million doesn’t even include the unopened mail or the unprocessed Master File adjustments sitting on IRS campus desks.
A survey of AICPA members shows that satisfaction with the IRS among tax professionals has hit an all-time low – dropping from an already low 21 percent in 2016 to a dismal 10 percent in 2020.
The last two years have been like none of us could have imagined. Frankly, we expected a little more flexibility and empathy from IRS leadership. We’ve heard stories from many CPAs that encapsulate the current challenges. In one instance, a CPA’s firm was hit by COVID in 2020 and was unable to timely file all their clients’ returns.
One particular client was assessed a late filing penalty and the IRS would not accept Covid as reasonable cause to abate the penalty. In addition, again, in this instance, the corporate return was paper filed; the penalty assessment was communicated by paper; and the abatement requests—numerous ones—were all by paper. This 2019 corporate tax return penalty situation has still not been resolved after three years.
The pandemic shined a spotlight on various obstacles in our tax system, the antiquated nature of our tax administration system and the need for modernization at the IRS which has reached a critical level. And while the IRS announced a series of measures intended to blunt the impact on taxpayers of the current backlog, these measures are little more than patchwork in a system that, without extensive modernization measures, will find itself addressing these same challenges again very soon.
The AICPA recognizes that, while there is a greater need for modernization at the IRS, there is also a more immediate need for relief. As the work piled up beyond historic proportions, the AICPA has given suggestions to reduce some of that work. Let me be clear: our suggestions won’t fundamentally fix the problems but will provide meaningful relief when it is most needed.
At a hearing just this past March, Commissioner Charles Rettig publicly stated that the IRS has had a backlog plan “since the pandemic began.” In response to the backlog and pressure from the AICPA and other stakeholder organizations, the IRS announced the creation of two “surge” teams to deal with returns. They also announced that they would pause numerous automated notices to taxpayers and delayed a planned closure of an IRS processing facility. Finally, the IRS secured direct hiring authority to more quickly hire and onboard additional IRS employees.
In addition to our request to pause automatic penalty notices, the AICPA identified additional actions the IRS could take now to help alleviate some of the burden and put them on a path towards offering functional services to taxpayers.
Among these recommendations are aligning requests for account holds with the time it takes the IRS to process any penalty abatement requests and postponing the use of the new Schedules K-2 and K-3 until the 2023 tax filing season. The IRS also could announce today that it will offer taxpayers a special penalty waiver from Covid impacts or IRS backlog issues. Offering a special “backlog” or Covid penalty waiver would preserve the use of “first-time abate.” Additionally, this special waiver should be implemented in a way that would avoid sending mail which would further burden the processing backlog.
The simple elegance of these measures is that they can be implemented today and would reduce taxpayer contact with the beleaguered IRS. Voluntary compliance, even with the best of intentions, becomes difficult when the IRS is broken.
A priority of Erin Collins’ Taxpayer Advocate Directive 2022-1 was to help IRS more efficiently process paper. We also believe that eliminating paper, as our suggestions would do in the short run, would help us avoid having the same conversation about backlogs a year from now.
We encourage the IRS to strive to be a modern-functioning agency for the 21st century where it prioritizes customer satisfaction, including from enforcement actions, a modernized technological infrastructure, and provides IRS employees with the experience and training to understand and address taxpayer needs.
Yogi Berra once said, “When you come to a fork in the road, take it.” We hope the IRS is listening to Berra.
Rebuilding the IRS
The administrative capacity of the IRS has now been crumbling for decades. It needs to be extensively retrofitted and renovated to carry out even its core responsibilities, much less its growing role in social and regulatory policy. At at some level, the U.S. still needs to administer the tax system it has. The general needs for increased funding, staffing, training, and technology remain clear and any reforms should include them. However, there are numerous proposals and ideas for improving the IRS’s deeper functionality. While detailing all such proposals would fill a book, some themes emerge that we’ve encapsulated in the seven following recommendations:
1. Adapt to the IRS’s dual role as a revenue and benefit administration.
The IRS has started to be more considerate about the administration of its tax expenditures, such as performing outreach to neglected communities to increase the take-up rate of tax benefits. Nonetheless, the IRS needs broader reforms to incorporate its growing role in benefit administration, including greater appropriations from Congress specifically for the benefit programs the IRS already houses, and for its efforts to increase participation rates. Beyond greater funding, the IRS should be restructured to better reflect the dual but distinct roles of tax collection / enforcement and benefit administration. For example, the Wage and Investment Division, which administers tax laws governing individual wage earners, could be reorganized to better distinguish between the division’s compliance and enforcement activities and their role in benefit outreach and customer service.
2. Return the IRS to a single mission by delegating its non-revenue responsibilities elsewhere.
While this may be a more idealistic solution, segmenting an agency by mission has precedent with other agencies. Congress has previously spun-out new organizations to take on responsibilities that a given agency was unable to administer properly, with examples ranging communications regulation to immigration policy. For instance, the Immigration and Naturalization Service struggled to build a culture around immigration enforcement while having the dual role of accepting immigrants into the United States, leading to the reorganization the separated U.S. Citizenship and Immigration Services (USCIS) from the investigatory activities of U.S. Immigration and Customs Enforcement (ICE). The immigration example may be particularly relevant given the analogous tensions between the IRS’s missions as a collections agency and benefit administrator.
3. Change the appropriations structure for the IRS to mandatory funding.
As IRS Commissioner Charles Retting testified in an April 2021, “mandatory, consistent, adequate multi-year funding allows us to plan appropriately.” While this is no doubt true of every government agency, stable funding is particularly vital for an administration that serves as the lifeblood for everything else the government does. Retting cites the IRS’s unstable annual appropriations as a major reason for the IRS’s hiring struggles. Establishing mandatory appropriations for the service would also make its ability to function resilient to the potential scandals, real or perceived, that anti-tax populists and pundits have incentives to latch on to. Moreover, if Congress is going to respond to agency scandals by “punishing” the IRS, mandatory funding would at least push lawmakers towards reforms that address structural bureaucratic issues rather than funding cuts.
4. Create a joint congressional committee to oversee the IRS’s broader missions.
While the original Restructuring Commission recommended this in the 1990s, there is still no congressional body to comprehensively oversee the IRS. Because of this, the agency still struggles with addressing duplicate information demands from different congressional committees. Congress has also generally failed to realize the broader problems facing the IRS and its challenges with administering the complex tax code and ancillary responsibilities they have legislated, instead favoring ad hoc scandals as they pop up. Establishing a specific committee for oversight would enable Congress to better understand the full extent of the problems facing the IRS, allowing reformers to see the forest for the trees.
5. Expand the IRS’s project management capabilities while requiring implementation frameworks for project goals.
As TIGTA found, the IRS still doesn’t seem to have sufficient plans at the ready to implement mega-technology projects if/when they receive the resources to do so. As the Biden administration aims to fund a large portion of their American Families Plan through shrinking the tax gap, the IRS needs to have detailed frameworks in place for how to follow through on expansions in the service’s capabilities. While the IRS plans on establishing a specific division in its leadership structure for organization-wide modernization, they need to focus their work on blueprinting how it would manage the projects it has outlined within their modernization wish lists. This will help avert the famine-to-feast and cost overrun problems that could lead the agency to stumble on another modernization effort, triggering another wave of backlash from Congress.
6. Separate the EITC’s child and worker benefits, while automating delivery of EITC and CTC refunds to eligible taxpayers.
This reform has two components. First, simplifying the EITC by shifting its per-child portion into the Child Tax Credit, as Senator Romney recently proposed in the Family Security Act, would clarify the EITC’s function as a work-support and reduce the complexity of its administration. Second, since employers are required to submit W-2 forms to the IRS early in the tax season, the IRS now matches W-2 wage data with tax returns before administering refunds. Because of this, the IRS now has the capability to automatically identify most eligible EITC and CTC recipients whether or not they file a claim. Allowing such refunds to be issued automatically would reduce the filing burden on low income households and thus reduce improper payments.
7. Replace the tax preparation Free File program with direct filing software on the IRS website.
Currently, the IRS contracts with private tax preparation software providers and has established an electronic filing portal for them within the IRS. The IRS subsidizes this alliance of tax software companies to give taxpayers an option for free electronic filing; applications that users have generally found unsatisfactory. The IRS also expends resources toward oversight of the program; resources that could be used for internal IRS projects. The reliance on third-party tax preparers hurts EITC recipients, in particular. As the Progressive Policy Institute notes, tax prep companies trim more than 10% off of low-income workers’ EITC refunds on average. A free, in-house filing system would also complement the online portal the IRS is developing to help deliver the new monthly Child Tax Credit, particularly if combined with pre-populated returns.
In summary, modernizing the IRS represents an untapped opportunity to improve taxpayer services and the tax enforcement simultaneously. Outside periods of vilification, the IRS is broadly well-regarded by the public. Survey data from Pew Research found it held a +25-net approval rating, with even 50 percent of Republicans having a favorable view of the agency. As the cumulative damage from years underfunding come to a head, the need for new funding and deeper reforms to the IRS’s organizational structure have become mission-critical. If such reforms aren’t forthcoming, we should not expect the IRS to live up to its growing number of responsibilities, but instead prepare for its already-broken foundation to continue to crumble.
Fixing the IRS: Troubled Agency’s Needs Run Deeper Than Funding
The Biden administration touts a sustained funding increase as a silver bullet to the agency’s problems.
“Frankly, the IRS just does not have the resources that it needs today to serve the American people the way they should be served,” said Natasha Sarin, deputy assistant secretary for economic policy at the Treasury Department.
More resources would help, but with or without a budget boost, the agency needs to confront the technology, workforce, and public perception problems at the root of its customer service struggles.
Tax reform: How to fix a broken system
For as long as this country has had an Internal Revenue Service, Americans have complained about — and often sought ways to fix — what is by most accounts a broken system. But from a “flat tax” to getting rid of the income tax altogether, no proposed remedy to our annual tax-filing woes has quite held the answer. Until now.
Below are several steps aimed at bringing sanity to our taxpaying process. Individually, each of these steps may not seem to mean much, but, taken as a whole, I’m confident they mean even less.
— Five cents will be deducted from the tax bill of anyone who delivers his or her return to the IRS in a reusable bag.
— The so-called “death tax” is expanded to also apply to assets of people who are just feeling achy.
— Children over the age of 6 must declare all quarters and other change pulled out of ears by slightly drunk uncles.
— One lucky fan gets to file a joint tax return with Justin Bieber.
— Tax refunds can only be spent in an IRS-owned revolving prize shop like the one they used to have for winners on “Wheel of Fortune.”
— Members of local tea party groups are no longer required to pay taxes but must instead return to the government their neighborhood’s sewage system.
— In addition to cigarette taxes already in place across the country, the IRS can add an additional fee if it deems that your tax forms smell like you were smoking when you filled them out.
— Bad haircuts are now deductible. (Photo and affidavit from stylist required.)
— Parents can, of course, still claim children as dependents but now must affix monetary value to each of them.
— Each American can lie about one item of his or her choosing on tax return.
— Heidi Montag must pay “F-cup tax.” (She should calculate this tax by removing her new F-cups, filling them with solid gold and mailing to the IRS; IRS will take the gold and return her F-cups within 60 days.)
— Purple-tinted resume paper is no longer deductible as a legitimate job-seeking expense.
— Receipts and gifts from romantic dates, past and present, with John Tesh must be filed.
— People in the highest tax bracket are given a rare opportunity to put all of their money in an incinerator so they can pay a lower tax rate and stop complaining about paying too much in taxes.
— TurboTax must pay the IRS $100,000 for every e-mail it sends me.
— A new “Check here if you — or your spouse, if a joint return — want $3 to go to the Bret Michaels emergency-appendectomy medical-costs fund” box has been added for late filers this year.
— People must include documentation of every penny they saw on the sidewalk regardless of whether they picked it up. (Please include location and date each penny was spotted to ensure that no penny is counted more than once.)
— People who purchase the iPad or the iPhone in the tax-filing year must file Form 1276G explaining in no less than 10,000 words how they can’t believe they ever lived without it, blah, blah, blah, and then promise to never speak about the iPad/iPhone again.
— All Americans must provide IRS with proof of subscription to this newspaper.
— Anybody, regardless of whether employed by the IRS or not, can audit anybody else.
Will the government fix the IRS? Who knows, the simple fix would be to have a basic tax rate with no deductions, same for people and corporations alike, with no tax loop holes either. Why should our government incentivize people to have families that they can’t afford? With our earned income credits and our welfare system, we are doing just this. I will talk more about our welfare system in another article in this series. It used to be you did not buy something unless you afford it, then easy credit changed that. Now the government has made it possible to raise a family without be able to afford it and paying for it. If we eliminated all loop holes in the tax system, we would save billions of dollars wasted in tax collections, we would also increase the revenues coming in without breaking the backs of small businesses and the middle class. Ask yourself why are the poor, poor? We have certainly spent trillions of tax payer dollars to fix the problem, so why are they still poor? The IRS is certainly not the solution.
niskanencenter.org, “The IRS: A Broken Home in Need of Repair.” By SAMUEL HAMMOND, DAVID KOGGAN; noticeninja.com, “The IRS Is Broken, Now What?” By Dan Connors; newsbloombergtax.com, “The IRS Is Long Overdue for Substantial and Systemic Changes.” By Edward Karl. chicagotribune.com, “Tax reform: How to fix a broken system.” By Mark Bazer; investopedia.com, “Should the U.S. Switch to a Flat Tax?” By Gregory Gethard; en.wkipedia.org, “Internal Revenue Service.” By Wikipedia editors;
Internal Revenue Service
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting taxes and administering the Internal Revenue Code, the main body of the federal statutory tax law. It is part of the Department of the Treasury and led by the Commissioner of Internal Revenue, who is appointed to a five-year term by the President of the United States. The duties of the IRS include providing tax assistance to taxpayers; pursuing and resolving instances of erroneous or fraudulent tax filings; and overseeing various benefits programs, including the Affordable Care Act.
The IRS originates from the Commissioner of Internal Revenue, a federal office created in 1862 to assess the nation’s first income tax to fund the American Civil War. The temporary measure provided over a fifth of the Union’s war expenses before being allowed to expire a decade later. In 1913, the Sixteenth Amendment to the U.S. Constitution was ratified authorizing Congress to impose a tax on income, and the Bureau of Internal Revenue was established. In 1953, the agency was renamed the Internal Revenue Service, and in subsequent decades underwent numerous reforms and reorganizations, most significantly in the 1990s.
Since its establishment, the IRS has been responsible for collecting most of the revenue needed to fund the federal government, albeit while facing periodic controversy and opposition over its methods, constitutionality, and the principle of taxation generally. In recent years the agency has struggled with budget cuts and reduced morale. As of 2018, it saw a 15 percent reduction in its workforce, including a decline of more than 25 percent of its enforcement staff. Nevertheless, during the 2017 fiscal year, the agency processed more than 245 million tax returns.
American Civil War (1861–65)
In July 1862, during the American Civil War, President Abraham Lincoln and Congress passed the Revenue Act of 1862, creating the office of Commissioner of Internal Revenue and enacting a temporary income tax to pay war expenses.
The Revenue Act of 1862 was passed as an emergency and temporary war-time tax. It copied a relatively new British system of income taxation, instead of trade and property taxation. The first income tax was passed in 1862:
- The initial rate was 3% on income over $800, which exempted most wage-earners.
- In 1862 the rate was 3% on income between $600 and $10,000, and 5% on income over $10,000.
By the end of the war, 10% of Union households had paid some form of income tax, and the Union raised 21% of its war revenue through income taxes.
Post Civil War, Reconstruction, and popular tax reform (1866–1913)
After the Civil War, Reconstruction, railroads, and transforming the North and South war machines towards peacetime required public funding. However, in 1872, seven years after the war, lawmakers allowed the temporary Civil War income tax to expire.
Income taxes evolved, but in 1894 the Supreme Court declared the Income Tax of 1894 unconstitutional in Pollock v. Farmers’ Loan & Trust Co., a decision that contradicted Hylton v. United States. The federal government scrambled to raise money.
In 1906, with the election of President Theodore Roosevelt, and later his successor William Howard Taft, the United States saw a populist movement for tax reform. This movement culminated during then-candidate Woodrow Wilson‘s election of 1912 and in February 1913, the ratification of the Sixteenth Amendment to the United States Constitution:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
This granted Congress the specific power to impose an income tax without regard to apportionment among the states by population. By February 1913, 36 states had ratified the change to the Constitution. It was further ratified by six more states by March. Of the 48 states at the time, 42 ratified it. Connecticut, Rhode Island, and Utah rejected the amendment; Pennsylvania, Virginia, and Florida did not take up the issue.
Post 16th Amendment (1913–present)
Though the constitutional amendment to allow the federal government to collect income taxes was proposed by President Taft in 1909, the 16th Amendment was not ratified until 1913, just before the start of the First World War. In 1913 the first edition of the 1040 form was introduced. A copy of the very first IRS 1040 form, can be found at the IRS website showing that only those with annual incomes of at least $3,000 (equivalent to $82,300 in 2021) were instructed to file the income tax return.
In the first year after the ratification of the 16th Amendment, no taxes were collected. Instead, taxpayers simply completed the form and the IRS checked the form for accuracy. The IRS’s workload jumped by ten-fold, triggering a massive restructuring. Professional tax collectors began to replace a system of “patronage” appointments. The IRS doubled its staff but was still processing 1917 returns in 1919.
Income tax raised much of the money required to finance the war effort; in 1918 a new Revenue Act established a top tax rate of 77%.
In 1919 the IRS was tasked with enforcement of laws relating to prohibition of alcohol sales and manufacture; this was transferred to the jurisdiction of the Department of Justice in 1930. After repeal in 1933, the IRS resumed collection of taxes on beverage alcohol. The alcohol, tobacco and firearms activities of the bureau were segregated into the Bureau of Alcohol, Tobacco, Firearms and Explosives in 1972.
A new tax act was passed in 1942 as the United States entered the Second World War. This act included a special wartime surcharge. The number of American citizens who paid income tax increased from about four million in 1939 to more than forty-two million by 1945.
In 1952, after a series of politically damaging incidents of tax evasion and bribery among its own employees, the Bureau of Internal Revenue was reorganized under a plan put forward by President Truman, with the approval of Congress. The reorganization decentralized many functions to new district offices which replaced the collector’s offices. Civil service directors were appointed to replace the politically-appointed collectors of the Bureau of Internal Revenue. Not long after, the bureau was renamed the Internal Revenue Service.
In 1954 the filing deadline was moved from March 15 to April 15.
The Tax Reform Act of 1969 created the Alternative Minimum Tax.
By 1986, limited electronic filing of tax returns was possible.
The Internal Revenue Service Restructuring and Reform Act of 1998 (“RRA 98”) changed the organization from geographically oriented to an organization based on four operating divisions. It added “10 deadly sins” that require immediate termination of IRS employees found to have committed certain misconduct.
Enforcement activities declined. The IRS Oversight Board noted that the decline in enforcement activities has “rais[ed] questions about tax compliance and fairness to the vast majority of citizens who pay all their taxes”. In June 2012, the IRS Oversight Board recommended to Treasury a fiscal year 2014 budget of $13.074 billion for the Internal Revenue Service.
On December 20, 2017, Congress passed the Tax Cuts and Jobs Act of 2017. It was signed into law by President Trump on December 22, 2017.
In the 2017 fiscal year, the IRS had 76,832 employees conducting its work, a decrease of 14.9 percent from 2012.
Presidential tax returns (1973)
From the 1950s through the 1970s, the IRS began using technology such as microfilm to keep and organize records. Access to this information proved controversial, when President Richard Nixon‘s tax returns were leaked to the public. His tax advisor, Edward L. Morgan, became the fourth law-enforcement official to be charged with a crime during Watergate.
John Requard, Jr., accused of leaking the Nixon tax returns, collected delinquent taxes in the slums of Washington. In his words: “We went after people for nickels and dimes, many of them poor and in many cases illiterate people who didn’t know how to deal with a government agency.” Requard admitted that he saw the returns, but denied that he leaked them.
Reporter Jack White of The Providence Journal won the Pulitzer Prize for reporting about Nixon’s tax returns. Nixon, with a salary of $200,000, paid $792.81 in federal income tax in 1970 and $878.03 in 1971, with deductions of $571,000 for donating “vice-presidential papers”. This was one of the reasons for his famous statement: “Well, I’m not a crook. I’ve earned everything I’ve got.”
So controversial was this leak, that most later US presidents released their tax returns (though sometimes only partially). These returns can be found online at the Tax History Project.
By the end of the Second World War, the IRS was handling sixty million tax returns each year, using a combination of mechanical desk calculators, accounting machines, and pencil and paper forms. In 1948 punch card equipment was used. The first trial of a computer system for income tax processing was in 1955, when an IBM 650 installed at Kansas City processed 1.1 million returns. The IRS was authorized to proceed with computerization in 1959, and purchased IBM 1401 and IBM 7070 systems for local and regional data processing centers. The Social Security number was used for taxpayer identification starting in 1965. By 1967, all returns were processed by computer and punched card data entry was phased out.
Information processing in the IRS systems of the late 1960s was in batch mode; microfilm records were updated weekly and distributed to regional centers for handling tax inquiries. A project to implement an interactive, real time system, the “Tax Administration System”, was launched, that would provide thousands of local interactive terminals at IRS offices. However, the General Accounting Office prepared a report critical of the lack of protection of privacy in TAS, and the project was abandoned in 1978.
In 1995, the IRS began to use the public Internet for electronic filing. Since the introduction of e-filing, self-paced online tax services have flourished, augmenting the work of tax accountants, who were sometimes replaced.
In 2003, the IRS struck a deal with tax software vendors: The IRS would not develop online filing software and, in return, software vendors would provide free e-filing to most Americans. In 2009, 70% of filers qualified for free electronic filing of federal returns.
According to an inspector general’s report, released in November 2013, identity theft in the United States is blamed for $4 billion worth of fraudulent 2012 tax refunds by the IRS. Fraudulent claims were made with the use of stolen taxpayer identification and Social Security numbers, with returns sent to addresses both in the US and internationally. Following the release of the findings, the IRS stated that it resolved most of the identity theft cases of 2013 within 120 days, while the average time to resolve cases from the 2011/2012 tax period was 312 days.
In September 2014, IRS Commissioner John Koskinen expressed concern over the organization’s ability to handle Obamacare and administer premium tax credits that help people pay for health plans from the health law’s insurance exchanges. It will also enforce the law’s individual mandate, which requires most Americans to hold health insurance. In January 2015, Fox News obtained an email which predicted a messy tax season on several fronts. The email was sent by IRS Commissioner Koskinen to workers. Koskinen predicted the IRS would shut down operations for two days later this year which would result in unpaid furloughs for employees and service cuts for taxpayers. Koskinen also said delays to IT investments of more than $200 million may delay new taxpayer protections against identity theft. Also in January 2015, the editorial board of The New York Times called the IRS budget cuts penny-wise-and-pound-foolish, where for every dollar of cuts in the budget, six were lost in tax revenue.
History of the IRS name
As early as the year 1918, the Bureau of Internal Revenue began using the name “Internal Revenue Service” on at least one tax form. In 1953, the name change to the “Internal Revenue Service” was formalized in Treasury Decision 6038.
The 1980s saw a reorganization of the IRS. A bipartisan commission was created with several mandates, among them to increase customer service and improve collections. Congress later enacted the Internal Revenue Service Restructuring and Reform Act of 1998.
Because of that Act, the IRS now functions under four major operating divisions: Large Business and International (LB&I), Small Business/Self-Employed (SB/SE), Wage and Investment (W&I), and Tax Exempt & Government Entities (TE/GE). Effective October 1, 2010, the name of the Large and Mid-Size Business division was changed to the Large Business & International (LB&I) division. While there is some evidence that customer service has improved, lost tax revenues in 2001 were over $323 billion.
The IRS is headquartered in Washington, D.C., and does most of its computer programming in Maryland. It currently operates three submission processing centers which process returns sent by mail and returns filed electronically via E-file. Different types of returns are processed at the various centers with some centers processing individual returns and others processing business returns.
Originally, there were ten submission processing centers across the country. In the early 2000s, the IRS closed five centers: Andover, Massachusetts; Holtsville, New York; Philadelphia, Pennsylvania; Atlanta, Georgia; and Memphis, Tennessee. This left five centers processing returns: Austin, Texas; Covington, Kentucky; Fresno, California; Kansas City, Missouri; and Ogden, Utah. In October 2016 the IRS announced that three more centers will close over a six-year period: Covington in 2019, Fresno in 2021, and Austin in 2024. Currently Kansas City, Missouri; Ogden, Utah; and Austin, Texas, remain open. This will leave Kansas City and Ogden as the final two submission processing centers after 2024.
The IRS also operates three computer centers around the country (in Detroit, Michigan; Martinsburg, West Virginia; and Memphis, Tennessee).
The current IRS commissioner is Charles P. Rettig of California. There have been 48 previous commissioners of Internal Revenue and 28 acting commissioners since the agency’s creation in 1862.
From May 22, 2013, to December 23, 2013, senior official at the Office of Management and Budget Daniel Werfel was acting Commissioner of Internal Revenue. Werfel, who attended law school at the University of North Carolina and attained a master’s degree from Duke University, prepared the government for a potential shutdown in 2011 by determining which services that would remain in existence.
No IRS commissioner has served more than five years and one month since Guy Helvering, who served 10 years until 1943. The most recent commissioner to serve the longest term was Doug Shulman, who was appointed by President George W. Bush and served for five years.
The Commissioner of Internal Revenue is assisted by two deputy commissioners.
The Deputy Commissioner for Operations Support reports directly to the Commissioner and oversees the IRS’s integrated support functions, facilitating economy of scale efficiencies and better business practices. The Deputy Commissioner for Operations Support provides executive leadership for customer service, processing, tax law enforcement and financial management operations and is responsible for overseeing IRS operations and providing executive leadership on policies, programs and activities. The Deputy assists and acts on behalf of the IRS Commissioner in directing, coordinating and controlling the policies, programs and activities of the IRS; in establishing tax administration policy, and developing strategic issues and objectives for IRS strategic management.
The Deputy Commissioner for Services and Enforcement reports directly to the Commissioner and oversees the four primary operating divisions responsible for the major customer segments and other taxpayer-facing functions. The Deputy Commissioner for Services and Enforcement serves as the IRS Commissioner’s essential assistant acting on behalf of the commissioner in establishing and enforcing tax administration policy and upholding IRS’s mission to provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities.
Office of the Taxpayer Advocate
The Office of the Taxpayer Advocate, also called the Taxpayer Advocate Service, is an independent office within the IRS responsible for assisting taxpayers in resolving their problems with the IRS and identifying systemic problems that exist within the IRS. The current head of the organization, known as the United States Taxpayer Advocate, is Erin M. Collins.
Independent Office of Appeals
The Independent Office of Appeals is an independent organization within the IRS that helps taxpayers resolve their tax disputes through an informal, administrative process. Its mission is to resolve tax controversies fairly and impartially, without litigation. Resolution of a case in Appeals “could take anywhere from 90 days to a year”. The current chief is Donna C. Hansber.
Office of Professional Responsibility (OPR)
OPR investigates suspected misconduct by attorneys, CPAs and enrolled agents (“tax practitioners”) involving practice before the IRS and has the power to impose various penalties. OPR can also take action against tax practitioners for conviction of a crime or failure to file their own tax returns. According to former OPR director Karen Hawkins, “The focus has been on roadkill – the easy cases of tax practitioners who are non-filers.” The current acting director is Elizabeth Kastenberg.
Criminal Investigation (CI)
Internal Revenue Service, Criminal Investigation (IRS-CI) is responsible for investigating potential criminal violations of the U.S. Internal Revenue Code and related financial crimes, such as money laundering, currency violations, tax-related identity theft fraud, and terrorist financing that adversely affect tax administration. This division is headed by the Chief, Criminal Investigation appointed by the IRS Commissioner.
Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) are volunteer programs that the IRS runs to train volunteers and provide tax assistance and counseling to taxpayers. Volunteers can study e-course material, take tests, and practice using tax-preparation software. Link & Learn Taxes (searchable by keyword on the IRS website), is the free e-learning portion of VITA/TCE program for training volunteers.
- Commissioner of Internal Revenue
- Deputy Commissioner for Services and Enforcement
- Assistant Deputy Commissioner for Services and Enforcement
- Large Business and International Division – administers tax laws governing businesses with assets greater than $10 million
- Small Business/Self-Employed Division – administers tax laws governing small businesses and self-employed taxpayers
- Collection – collects delinquent taxes and secures filing of delinquent tax return
- Examination – reviews returns to ensure taxpayers have complied with their tax responsibilities
- Operations Support – centralized support services
- Wage and Investment Division – administers tax laws governing individual wage earners
- Customer Assistance, Relationships and Education – assist taxpayers in satisfying their tax responsibilities
- Return Integrity and Compliance Services – detecting and preventing improper refunds
- Customer Account Services – processing taxpayer returns
- Operations Support – internal management and support services
- Tax Exempt and Government Entities Division – administers tax laws governing governmental and tax exempt entities
- Government Entities/Shares Services – manages, directs, and executes nationwide activities for government entities as well as provides divisional operational support
- Employee Plans. – administers pension plan tax laws
- Exempt Organizations – determining tax exempt status for organizations and regulating the same through examination and compliance checks
- Criminal Investigation Division – investigates criminal violations of tax laws and other related financial crimes
- International Operations – conducts international investigations of financial crimes and provides special agent attaches in strategic International locations
- Operations, Policy, and Support – plans, develops, directs, and implements criminal investigations through regional field offices
- Refund and Cyber Crimes – identifying criminal tax schemes and conducting cybercrime investigations
- Strategy – internal support services
- Technology Operations and Investigative Services – management of information technology
- Office of Online Services
- Return Preparer Office
- Office of Professional Responsibility
- Whistleblower Office
- Deputy Commissioner for Operations Support
- Assistant Deputy Commissioner for Operations Support
- Chief, Facilities Management and Security Services
- Chief Information Officer
- Chief Privacy Officer
- Chief Procurement Officer
- Chief Financial Officer
- IRS Human Capital Officer
- Chief Risk Officer
- Chief Diversity Officer
- Chief Research and Analytics Officer
- Chief of Staff
- Chief, Communications and Liaison
- National Taxpayer Advocate
- Chief Counsel
- Chief, IRS Independent Office of Appeals
- Deputy Commissioner for Services and Enforcement
For fiscal year 2009, the U.S. Congress appropriated spending of approximately $12.624 billion of “discretionary budget authority” to operate the Department of the Treasury, of which $11.522 billion was allocated to the IRS. The projected estimate of the budget for the IRS for fiscal year 2011 was $12.633 billion. By contrast, during Fiscal Year (FY) 2006, the IRS collected more than $2.2 trillion in tax (net of refunds), about 44 percent of which was attributable to the individual income tax. This is partially due to the nature of the individual income tax category, containing taxes collected from working class, small business, self-employed, and capital gains. The top 5% of income earners pay 38.284% of the federal tax collected.
As of 2007, the agency estimates that the United States Treasury is owed $354 billion more than the amount the IRS collects. This is known as the tax gap.
The gross tax gap is the amount of true tax liability that is not paid voluntarily and timely. For years 2008–2010, the estimated gross tax gap was $458 billion. The net tax gap is the gross tax gap less tax that will be subsequently collected, either paid voluntarily or as the result of IRS administrative and enforcement activities; it is the portion of the gross tax gap that will not be paid. It is estimated that $52 billion of the gross tax gap was eventually collected resulting in a net tax gap of $406 billion.
In 2011, 234 million tax returns were filed allowing the IRS to collect $2.4 trillion out of which $384 billion were attributed to mistake or fraud.
Outsourcing collection and tax-assistance
In September 2006, the IRS started to outsource the collection of taxpayers debts to private debt collection agencies. Opponents to this change note that the IRS will be handing over personal information to these debt collection agencies, who are being paid between 29% and 39% of the amount collected. Opponents are also worried about the agencies’ being paid on percent collected, because it will encourage the collectors to use pressure tactics to collect the maximum amount. IRS spokesman Terry Lemons responds to these critics saying the new system “is a sound, balanced program that respects taxpayers’ rights and taxpayer privacy”. Other state and local agencies also use private collection agencies.
In March 2009, the IRS announced that it would no longer outsource the collection of taxpayers debts to private debt collection agencies. The IRS decided not to renew contracts to private debt collection agencies, and began a hiring program at its call sites and processing centers across the country to bring on more personnel to process collections internally from taxpayers. As of October 2009, the IRS has ceased using private debt collection agencies.
In September 2009, after undercover exposé videos of questionable activities by staff of one of the IRS’s volunteer tax-assistance organizations were made public, the IRS removed ACORN from its volunteer tax-assistance program.[
The IRS publishes tax forms which taxpayers are required to choose from and use for calculating and reporting their federal tax obligations. The IRS also publishes a number of forms for its own internal operations, such as Forms 3471 and 4228 (which are used during the initial processing of income tax returns).
In addition to collection of revenue and pursuing tax cheaters, the IRS issues administrative rulings such as revenue rulings and private letter rulings. In addition, the Service publishes the Internal Revenue Bulletin containing the various IRS pronouncements. The controlling authority of regulations and revenue rulings allows taxpayers to rely on them. A letter ruling is good for the taxpayer to whom it is issued, and gives some explanation of the Service’s position on a particular tax issue. Additionally, a letter ruling reasonably relied upon by a taxpayer allows for the waiver of penalties for underpayment of tax.
As is the case with all administrative pronouncements, taxpayers sometimes litigate the validity of the pronouncements, and courts sometimes determine a particular rule to be invalid where the agency has exceeded its grant of authority. The IRS also issues formal pronouncements called Revenue Procedures, that among other things tell taxpayers how to correct prior tax errors. The IRS’s own internal operations manual is the Internal Revenue Manual, which describes the clerical procedures for processing and auditing tax returns in excruciating detail. For example, the Internal Revenue Manual contains a special procedure for processing the tax returns of the President and Vice President of the United States.
More formal rulemaking to give the Service’s interpretation of a statute, or when the statute itself directs that the Secretary of the Treasury shall provide, IRS undergoes the formal regulation process with a Notice of proposed rulemaking (NPRM) published in the Federal Register announcing the proposed regulation, the date of the in-person hearing, and the process for interested parties to have their views heard either in person at the hearing in Washington, D.C., or by mail. Following the statutory period provided in the Administrative Procedure Act the Service decides on the final regulations “as is”, or as reflecting changes, or sometimes withdraws the proposed regulations. Generally, taxpayers may rely on proposed regulations until final regulations become effective. For example, human resource professionals are relying on the October 4, 2005 Proposed Regulations (citation 70 F.R. 57930-57984) for the Section 409A on deferred compensation (the so-called Enron rules on deferred compensation to add teeth to the old rules) because regulations have not been finalized.
The IRS oversaw the Homebuyer Credit and First Time Homebuyer Credit programs instituted by the federal government from 2008–2010. Those programs provided United States citizens with money toward the purchase of homes, regardless of income tax filings.
Most non-supervisory employees at the IRS are represented by a labor union. The exclusive labor union at the IRS is the National Treasury Employees Union (NTEU). Employees are not required to join the union or pay dues. The IRS and NTEU have a national collective bargaining agreement.
In pursuing administrative remedies against the IRS for certain unfair or illegal personnel actions, under federal law an IRS employee may choose only one of the three forums below:
- NTEU, or
- United States Merit Systems Protection Board (MSPB), or
- United States Office of Special Counsel (OSC).
Employees are also required to report certain misconduct to TIGTA. Federal law prohibits reprisal or retaliation against an employee who reports wrongdoing.
See also: List of allegations of misuse of the Internal Revenue Service
The IRS has been accused of abusive behavior on multiple occasions. Testimony was given before a Senate subcommittee that focused on cases of overly aggressive IRS collection tactics in considering a need for legislation to give taxpayers greater protection in disputes with the agency.
Congress passed the Taxpayer Bill of Rights III on July 22, 1998, which shifted the burden of proof from the taxpayer to the IRS in certain limited situations. The IRS retains the legal authority to enforce liens and seize assets without obtaining judgment in court.
In 2002, the IRS accused James and Pamela Moran, as well as several others, of conspiracy, filing false tax returns and mail fraud as part of the Anderson Ark investment scheme. The Morans were eventually acquitted, and their attorney stated that the government should have realized that the couple was merely duped by those running the scheme.
In 2004, the law licenses of two former IRS lawyers were suspended after a federal court ruled that they defrauded the courts so the IRS could win a sum in tax shelter cases.
In 2013, the Internal Revenue Service became embroiled in a political scandal in which it was discovered that the agency subjected conservative or conservative-sounding groups filing for tax-exempt status to extra scrutiny.
On September 5, 2014, 16 months after the scandal first erupted, a Senate Subcommittee released a report that confirmed that Internal Revenue Service used inappropriate criteria to target Tea Party groups, but found no evidence of political bias. The chairman of the Senate Permanent Subcommittee on Investigations confirmed that while the actions were “inappropriate, intrusive, and burdensome”, the Democrats have often experienced similar treatment. Republicans noted that 83% of the groups being held up by the IRS were right-leaning; and the Subcommittee Minority staff, which did not join the Majority staff report, filed a dissenting report entitled, “IRS Targeting Tea Party Groups”.
On May 25, 2015, the agency announced that over several months criminals had accessed the private tax information of more than 100,000 taxpayers and stolen about $50 million in fraudulent returns. By providing Social Security numbers and other information obtained from prior computer crimes, the criminals were able to use the IRS’s online “Get Transcript” function to have the IRS provide them with the tax returns and other private information of American tax filers. On August 17, 2015, IRS disclosed that the breach had compromised an additional 220,000 taxpayer records. On February 27, 2016, the IRS disclosed that more than 700,000 Social Security numbers and other sensitive information had been stolen.
The Internal Revenue Service has been the subject of frequent criticism by many elected officials and candidates for political office, including some who have called to abolish the IRS. Among them were Ted Cruz, Rand Paul, Ben Carson, Mike Huckabee, and Richard Lugar. In 1998, a Republican congressman introduced a bill to repeal the Internal Revenue Code by 2002. In 2016, The Republican Study Committee, which counts over two-thirds of House of Representatives Republicans as its members, called for “the complete elimination of the IRS”, and Republican Representative Rob Woodall of Georgia has introduced a bill every year since he entered Congress in 2011 to eliminate income taxes and abolish the IRS.
The IRS has been criticized for its reliance on legacy software. Systems such as the Individual Master File are more than 50 years old and have been identified by the Government Accountability Office as “facing significant risks due to their reliance on legacy programming languages, outdated hardware, and a shortage of human resources with critical skills”.
Should the U.S. Switch to a Flat Tax?
The only guarantees in life are death and taxes. But out of those two, one is infinitely more complex than the other.
In America, that becomes clear every April, a month associated with the cold sweats that routinely come when individuals and families rush to file their taxes on time. It’s a stressful process that can involve long hours, finger blisters from calculator mashing, angry phone calls to human resource offices, and expensive checks written to accountants.
Residents in many other countries around the world face similar circumstances. This is because, like in America, most of the world’s major economies have a gradual tax system that charges different rates for various income levels. In most cases, those who make the most money pay a higher percentage in taxes compared to lower-income brackets.
But some countries use a completely different tax system, and it’s one that some pundits would like to see advance around the world.
What Is a Flat Tax?
In many nations, governments have chosen to charge residents and businesses a flat tax. In other words, everyone pays the same exact rate. Proponents of flat taxes say that several benefits exist from using this system.
Many of the countries that have shifted to a flat tax were at one time in the Soviet Union. And these countries, for most of the past decade, have seen their economies grow rapidly. In 2004, 10 Eastern European nations used a flat tax: Ukraine taxed its residents 13%, Georgia implemented a 12% tax, and Romania taxed its citizens 16%. and Lithuania taxed its residents 33%.1 And many of these countries that instituted a flat tax saw their economies grow dramatically.
For example, Estonia, Lithuania, and Latvia were suffering from inefficiency and economic stagnation prior to implementing flat taxes of 26%, 33%, and 26%, respectively—and experienced unprecedented growth following the tax reform, over double what was seen in the world’s mature, industrialized economies. Estonia experienced an average growth of 9% each year (adjusted for inflation); Lithuania emerged as the fastest growing economy in the Baltics; and Latvia experienced an average growth rate of about 4% a year since the flat tax, and its inflation, which was 25% in 1995, dropped to less than 4 %.2 a by approximately 8% in a single year.2
The reason why the flat tax works, according to proponents, is that the system is incredibly simple. In many cases, it’s not just individuals who enjoy the benefits of an easy-to-understand tax code; some nations grant flat taxes to businesses as an incentive to lure corporations and other employers. In addition, there’s an inherent sense of fairness to the flat tax, as all people pay the same percentage of their income. This also de-politicizes tax codes as they are written since legislators cannot give preferences or penalties to firms and industries they look upon either favorably or negatively.
Flat tax supporters often cite the nation of Estonia as proof of the system’s benefits. Pinned between Russia and the Baltic Sea, Estonia is a tiny country with under two million residents, roughly the size of Dallas, Texas. In 1994, just three years after separating itself from the Soviet Union, Estonian policymakers made the choice to go to a 26% flat tax, the first in the world to move away from the gradual system.3 That number since then has been reduced to 20%.4
Since instituting the flat tax, Estonia has emerged from obscurity to become a member of the European Union. And it has also earned the nickname “The Baltic Tiger” due to its incredible economic growth rate. From 2000 to 2008, Estonia’s economy grew by an average of 7% per year.5 Though hurt by the global Great Recession, it had rebounded to 4.9% by 2017.6 In 2011, its unemployment rate was in excess of 13.5%; in 2020, only 6.9% of its population was without jobs. Estonia has also gained a reputation for being surprisingly high-tech; over 89% of its population uses the internet, well above the world average.7
Other nations followed Estonia’s lead and also adopted flat tax policies. First on board were Estonia’s two Baltic neighbors, Lithuania and Latvia. Next came Russia, the biggest economy to have adopted this measure. Also following suit were Serbia, Ukraine, Slovakia, Georgia, Romania, Kyrgyzstan, North Macedonia, Mauritius, and Mongolia.3
So, Why Not Move to a Flat Tax?
First, while there is no doubt that many countries that have adopted the flat tax have had booming economies, there is no actual proof that the flat tax is the reason why these nations have grown. After all, many of these places were Communist nations behind the Iron Curtain. Once the Soviet Union collapsed they were able to open up their economies to investment and had an easier time trading with the developed countries in the west.
In addition, a flat tax may not be as fair as one would think. A gradual tax system does allow for things like wealth redistribution, which many have argued is a major benefit to society. And a flat tax could also give middle-class families an extra burden. If someone making one million per year has to pay 18% of his income in taxes, he still has netted $820,000 for the year, a figure which still has great purchasing power. But a person making $50,000 per year is left with $41,000 per year; that difference can influence fiscal decisions, like purchasing a new car versus a used car, whether to place a down payment on a house or affording either a state school or private college, extremely tough for people who make closer to the national median income level.
In addition, when a group of countries near each other enact a flat tax, it creates a race towards the bottom; in order to compete, nations must keep on lowering their tax rates, a problem that could lead to fiscal instability.
Lastly, in the wake of the 2008 recession, many countries that adopted a flat tax have suffered greatly. Take, for instance, Latvia, one of the earliest countries to adopt the flat tax. Its overheated economy suffered a near-complete liquidity squeeze, which caused its GDP to decline approximately 25% between 2008 and 2010, and unemployment to climb to nearly 21% of the population.8 It had to take a bailout from the International Monetary Fund in order to pay public sector workers.
The country recovered but decided to ditch the flat tax on personal income in 2017.9 It now has a progressive system with rates rising from 20% to 31% as a taxpayer’s income increases.10
Latvia’s Baltic neighbors, Lithuania and Estonia, also faced similar pitfalls during the global Great Recession. All of this, some say, is a sign that these nations failed to raise enough tax dollars due to their tax policies. Others, however, say that these nations rely on exports, which suffered greatly due to the downturn facing major economies.
The Bottom Line
So, will the entire world one day have a flat tax? It’s unlikely, especially in the world’s biggest economies which have a long-established tax code that many might not want to change. But it is likely that, despite recent pitfalls, many smaller and growing nations may see the benefits of charging everyone the same tax.
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