National Taxpayer Advocate Nina Olson has presented her annual report to Congress. This year’s report identifies 22 serious problems she believes are hampering the IRS’s ability to effectively collect tax and help taxpayers. Her number one issue is that the IRS is not adequately funded. As Ms. Olson states in her report:
The IRS has been a very effective agency, but as we discuss in this report, the imbalance between its workload and its resources is becoming unmanageable.
Between 2001 and 2010, the IRS has been given 4430 tax law changes. 479 of those were in 2010 alone. For each change, the IRS must explain to taxpayers what the change is and how to work with it, write computer code to process returns, and train auditors to find the improper uses of the changes. They have also been saddled with a number of new refundable credits which has greatly increased the number of fraudulent return filed. In 2011, The Electronic Fraud Detection System (EFDS) marked 1,054,704 returns as possibly fraudulent. This was a 72% increase over 2010.
At the same time, the IRS budget has been reduced (2.5% in FY2012 alone). This results in a cut in taxpayer services. The chance of getting a live IRS employee on the phone dropped from 87% in FY 2004 to 70% in FY 2011. It now takes the IRS longer to respond to taxpayer letters. The Taxpayer Advocate Service (TAS) estimates that half of all taxpayer will wait almost 7 weeks to get a response from the IRS. TAS has also found the IRS taking “shortcuts” in working with taxpayers. More returns are being selected automatically and many times incorrectly chosen. Many of these are not being classified as “audits” and therefore the taxpayer is not receiving the taxpayer rights they are entitled to by law.
By increasing the IRS’s budget, Ms. Olson believes we would not only see an improvement in customer service but increase the amount of tax revenues. The IRS could allocate more funds to work on tax compliance and fraud. Besides helping the IRS to do its job better, increased funding could also decrease the tax for honest taxpayers. The current tax gap is costing each household $2,680 a year in extra taxes.