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IRS Needs $495 Million for Tax Reform Implementation, TAS Says

Posted on January 11, 2018 by William Hoffman

The IRS estimates it will need nearly half a billion dollars over two years to implement tax reform, according to a new report, but some congressional taxwriters are being noncommittal.

The National Taxpayer Advocate’s 2017 annual report, released January 10, lists the IRS’s estimated cost of implementing the Tax Cuts and Jobs Act, (P.L. 115-97): roughly $495 billion for fiscal 2018 and 2019. The new law will affect 131 IRS filing season systems, requiring programming and systems updates, new and revised forms and instructions, employee training, and new systems covering compliance, eligibility, and documentation, National Taxpayer Advocate Nina Olson reported.

Senate Finance Committee Chair Orrin G. Hatch, R-Utah, said January 10 that he wants the agency “to have enough money to operate efficiently and well, especially if we’ve given them a lot of good assignments to do.” Hatch added that he will carefully consider the TAS funding recommendation. 

House Ways and Means Committee Chair Kevin Brady, R-Texas, told Tax Analysts that he is discussing implementation with Treasury Secretary Steven Mnuchin and acting IRS Commissioner David Kautter. “These conversations include how to improve the agency’s efficiency and customer service with existing resources, as well as evaluating what new resources they may need to best serve taxpayers,” according to Brady’s spokesperson.

Ways and Means Committee ranking minority member Richard E. Neal, D-Mass., welcomed TAS’s call for more help for the IRS, saying January 10, “We’re asking [the IRS] to do more with less all of the time.” Fellow Ways and Means member Kenny Marchant, R-Texas, countered, “They’re going to have to justify that” money, he said, adding that he would be “more comfortable if [President] Trump would put a permanent guy in [the IRS] before we allot these funds.”

Speaking with Tax Analysts on January 10, Olson expressed optimism that Congress would take up some of the 50 legislative proposals in TAS’s first-ever Purple Book.

“The [congressional] committees have been very positive about the Purple Book in particular,” Olson said. “They took it the way we’d hoped they would take it, which is, ‘Oh, this is really helpful to see everything organized, and to see the references to the prior legislation.’ Anytime you can come up with [legislative] language, that’s very helpful. It’s a good starting point.”

Audit And Appeals

This year’s annual report comprises one volume reviewing the 21 “most serious problems” identified by the TAS, a second volume of tax administration research and literature review, an executive summary, and the first-ever Purple Book of legislative proposals for tax administration reform.

The report criticizes IRS audit behavior, saying the agency conducts “significant types and amounts” of what it considers nontraditional audits. Math error corrections, the Automated Underreporter, the automated substitute for returns, and other compliance activities requiring taxpayer contacts and disclosure are not considered “real” audits by the agency, though these “unreal” audits outnumber proper “real” audits, and they can feel like a real examination to the taxpayer, TAS said. This IRS policy underreports actual IRS compliance activity and returns on investment while circumventing taxpayer protections, the report said.

TAS also predicted that the IRS’s 2016 guidance expanding the participation of Counsel and Compliance officials in Appeals conferences will change the relationship between taxpayers and hearing officers and make negotiations tougher. “Adding IRS employees to the Appeals conference turns the Appeals conference into more of a trial setting, as opposed to the historic conduct of most Appeals conferences,” TAS quoted from a November 2016 story in Tax Notes. Expanding those conferences will compromise Appeals’ independence, the report said, and will result in fewer case resolutions, reduced compliance, and additional litigation.

TAS also mentioned a perennial taxpayer compliant: the IRS’s live telephone assistance. The taxpayer advocate called for the agency to train phone staff to answer both “basic” and “complex” tax questions year-round; since 2014, the IRS has instructed its phone staff to answer only basic questions, and only during filing season. The IRS should also invest in callback technology to reduce taxpayer idle time on the phone, and use routing and information retention systems to identify taxpayer questions and direct them to the appropriate staff for service, TAS said.

Private Collection, EITC

Olson placed the IRS’s congressionally mandated private tax debt collection program at the top of her report’s “most serious problems” list.

Private collections so far are generating little revenue: $6.7 million for the IRS from taxpayers whose debt was assigned to private collector agencies (PCAs), compared with $18.9 million invested in the program by the IRS so far, Olson said. The collection agencies have been paid about $1 million in commissions, though about 44 percent of taxpayers collected from were at or below 250 percent of the federal poverty level, and would not have been levied if the IRS had paid closer attention to their incomes, she said. Olson said that “the PCAs are doing what the IRS tells them to. . . . It’s all in the contract. The PCAs aren’t doing any screening of financial information now.”

The TAS report did find several areas of notable IRS improvement. While the agency has made “commendable strides” toward electronic services, TAS said the moves appear to be made primarily in response to cost concerns, and without the benefit of in-depth research on taxpayer needs and preference.

The report also lauded the IRS for holding its second annual earned income tax credit (EITC) summit with state and federal tax authorities, tax professionals, and consumer advocates in September 2017. But the report faulted the agency for not “adequately” studying the effects of taxpayer education on EITC compliance, and called on it to implement a dedicated, toll-free phone line for EITC questions.

Finally, TAS noted improvements in the IRS’s fraud detection efforts: The agency’s Return Review Program selected 25 percent fewer returns for review in the first nine months of 2017, compared with the same period in 2016, TAS said. Yet the false positive rate rose 54 percent in the first nine months of 2016, and 66 percent in the same time frame in 2017, the report noted. Taxpayers with false positive holds suffer indefinite refund delays while the IRS resolves their cases, TAS said. 

 IRS Stats

IRS Stats

Dylan Moroses, Stephen K. Cooper and Zoe Sagalow contributed to this story.