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Commissioner’s testimony includes how IRS would use proposed additional funding

May 2, 2014

In testimony on April 30 before the Senate Appropriations Committee, Subcommittee on Financial Services and General Government, IRS Commissioner John Koskinen discussed the agency’s performance under its current fiscal year (FY) 2014 funding levels, while acknowledging the “loss of confidence among taxpayers and particularly within Congress in regard to the way we manage operations.” He also provided a breakdown of how IRS would use the additional funds in the President’s FY 2015 budget request for the agency (a $1.2 billion increase over the FY enacted level), including the estimated return on investment (ROI), as applicable, for each item of additional spending.

FY 2013 and current filing season. Koskinen commended IRS for opening the 2013 filing season on Jan. 30 of that year, less than one month after the enactment of the 2012 Taxpayer Relief Act. He noted that this legislation was particularly far-reaching and that IRS “took the necessary steps to minimize disruptions for taxpayers.” However, he noted that the late tax law changes and ongoing decline in agency funding contributed to a drop in telephone service, with only 60.5% of callers being able to reach an IRS employee.

The 2014 filing season, which began on Jan. 31, “started strongly and ran very smoothly.” As of Apr. 11, 2014, IRS had received more than 112 million individual income tax returns and issued more than 85 million refunds. In addition, the level of telephone service increased to around 70% of callers getting through thus far, which Koskinen attributed to the fact that there were no significant tax law changes enacted in 2013 and increased resources on IRS’s website, but he predicted that the level for the year would be closer to 60.5%.

Taxpayer service. Koskinen stated that, during FY 2013, IRS updated forms to help taxpayers comply with filing requirements, converted forms for visually impaired taxpayers, translated more tax products into multiple languages, continued its effort to redesign taxpayer correspondence in plain language, and continued to provide alternative service options by enhancing its website. However, he noted that, with IRS’s budget in its fourth year of relative decline, “significant effects on taxpayer services will become more apparent in FY 2014.”

Tax compliance. In FY 2013, because of the sequestration and furloughs, IRS’s key enforcement programs fell below historical levels, including a 5% decrease in total individual audits and a 13% decrease in business return audits. Collections related to all enforcement activities totaled $53.3 billion in 2013, reflecting a $3.1 billion increase over FY 2012, but Koskinen tempered this increase by stating that “the total is still down by more than $4.3 billion from four years ago.” He expressed concern over the continuing effect of the “challenging budget environment” on FY 2014 enforcement activities. However, he emphasized that IRS has made significant progress in a number of areas including international compliance and return preparer education and compliance visits.

Business systems modernization. During FY 2013, IRS had a number of modernization successes including the Customer Account Data Engine 2 (CADE 2); Modernized e-File (MeF); the Information Return Document Matching program; and a new web portal that improved taxpayer access to IRS’s website. Koskinen anticipated that the FY 2014 funding won’t be sufficient to address critical technology infrastructure needs such as improvements to its website, new identity theft prevention tools, and necessary upgrades to its employees’ basic computer software.

Implementing enacted legislation. Koskinen stressed that, within its budget constraints, IRS “nonetheless has an obligation to carry out the legislative responsibilities Congress has approved over the last several years,” particularly the Affordable Care Act (ACA) and the Foreign Account Tax Compliance Act (FATCA).

With regard to the ACA, Koskinen expressed pleasure that “the systems and processes that the IRS developed to support enrollment in the new Health Insurance Marketplace were launched on schedule and are working as planned.” He also stated that IRS will continue to focus on the premium tax credit and the individual mandate, both of which go into effect in 2014 and will have a “profound effect on IRS forms and procedures beginning with the 2015 filing season.” He also emphasized that IRS is “focusing on ensuring that returns that erroneously or fraudulently claim refundable premium tax credits… are efficiently identified and addressed.”

With regard to FATCA, Koskinen noted that withholding requirements go into effect shortly, on July 1, 2014, but that “legal restrictions in some countries prevent” foreign financial institutions from fulfilling the reporting, withholding, and account disclosure requirements. Thus, he said, Treasury, with assistance from IRS, “is focused on bilateral agreements that address these legal impediments, simplify practical implementation, and reduce the costs” to foreign financial institutions. Koskinen said that, as of last week, there were 28 signed Intergovernmental Agreements, and another 27 jurisdictions that have been publicly identified as having reached agreements in substance.

In addition, IRS’s FATCA registration website opened in August of last year, and in January, 2014, financial institutions were able to begin submitting their electronically signed FATCA agreements. Koskinen stated that one of IRS’s biggest challenges will be having sufficient resources to build and maintain systems that can process all the incoming data—which will require additional staff.

Exempt organizations. IRS is continuing its efforts to improve the determination process for tax-exempt status, focusing on applications under Code Sec. 501(c)(3) and Code Sec. 501(c)(4). Koskinen stated that the agency is continuing to address the issues and concerns regarding Code Sec. 501(c)(4) applications and that it has made “important progress” in responding to the recommendations made by the Treasury Inspector General for Tax Administration (TIGTA).

Koskinen also noted that IRS had released proposed regs in November of last year to clarify the extent to which an organization’s political activity is consistent with tax-exempt status. He stressed the importance of making these rules as clear as possible, stating that doing so will help both IRS in its enforcement efforts as well as applicants and those administering Code Sec. 501(c)(4) organizations. IRS received over 150,000 comments on the proposed regs—a new record for an IRS rulemaking comment period—and Koskinen stated that IRS intends to consider all of the comments before moving forward.

He also spoke of improvements that the agency is making to the Code Sec. 501(c)(3) application process, noting that there has been a marked increase in the number of applications since 2010 owing, in part, to automatic revocations that occurred under the 2006 Pension Protection Act and subsequent requests for reinstatement. With regard to this issue, he noted that IRS has made a number of improvements to make applications for reinstatement, and applications for exempt status in general, easier. He also said that IRS is “examining the feasibility of creating a streamlined application process” for, in particular, small organizations that pose a low risk of noncompliance.

Budget request. According to Koskinen, the budgetary constraints under which IRS has been operating since 2010 pose “very serious challenges” to the agency’s efforts to enforce tax laws and provide customer service. He said that the federal government is essentially losing billions in revenue collection to achieve budget savings of a few hundred million dollars, noting that IRS generally has a $4-to-$1 return on investment (ROI).

Koskinen said that the President’s budget request is designed to, among other things, “reverse the erosion in the IRS budget over the last several years,” improve customer service, strengthen compliance, implement enacted legislation, enforce return prepare compliance, expand criminal investigation capabilities, and address compliance issues in the tax-exempt sector.

Koskinen then provided a breakdown of how the $1.2 billion in additional funds (over the enacted FY 2014 level) would be spent, and the respective ROIs for each, as applicable. Where new hires are involved, the projections are based on when the new hires reach full potential in FY 2017. Highlights follow:

 

… Improve taxpayer service—$211 million. This would allow IRS to answer about 12 million additional calls from taxpayers, including from taxpayers seeking assistance in regard to the ACA, and improve its level of telephone service to exceed 80%. It also includes $19 million that would be invested in advanced technology to further expand and improve the services taxpayers receive when they call IRS.
… Prevent refund fraud and identity theft—$65 million. This would allow IRS to help more taxpayers who have been victims of identity theft resolve their cases and invest in technology to further its efforts in identifying potentially fraudulent returns and reduce improper payments. Koskinen projected that these activities would protect nearly $1.5 billion in revenue, reflecting an ROI of more than $22 to $1.
… Address offshore tax evasion—$57 million. IRS would expand its efforts to identify and pursue U.S. taxpayers with undisclosed offshore accounts, expand criminal investigations of international tax and financial crimes, and expand related information gathering. These activities would bring in a projected $293 million in direct enforcement revenue, with an ROI of $4.8 to $1.
… Expand audit coverage of individuals—$98 million. IRS would hire additional personnel and improve its examination efforts. This would bring in a projected $674 million more in direct enforcement revenue, with an ROI of $7.1 to $1.
… Expand audit coverage of high-wealth taxpayers—$21 million. IRS would hire additional enforcement personnel to continue its focus on high-wealth taxpayers. Koskinen noted that this can be a particularly complex area, and projected that this would bring in additional enforcement revenue of $243.9 million, with an ROI of $11.3 to $1.
… Improve audit coverage of partnerships and flow-through entities—$36 million. IRS would hire additional staff to “keep pace with this segment of taxpayers, the most rapidly growing portion.” This would bring in a projected $268 million in enforcement revenue, with an ROI of $6.8 to $1.
… Enhance collection coverage—$67 million. IRS would hire new staff to improve its efforts with taxpayers to collect back taxes owed. This would bring in a projected $617 million in direct enforcement revenue, with an ROI of $8.5 to $1.
… Improve efforts in the tax-exempt sector—$16 million. IRS would continue its focused oversight of the tax-exempt sector and improve services to make voluntary compliance easier.
… Pursue fraud referrals and tax schemes—$18 million. IRS would improve its efforts in the core enforcement areas of corporate fraud, employment tax, and abusive tax schemes.
… Enhance return preparer compliance—$17 million. IRS would increase service and compliance activities in regard to tax return preparers.
… Use technology to enhance criminal investigation—$4 million. IRS would automate the process of evidence gathered by its criminal investigators by implementing a “virtual digital evidence processing environment.”
… Use technology to improve audit case selection—$37 million. IRS would improve the way it gathers and uses electronic data to improve how it selects cases for audit.
… Implement the ACA—$452 million. This funding, the majority of which Koskinen stated is required for information technology upgrades, would allow IRS to increase efforts to ensure compliance with a number of tax-related ACA provisions and perform outreach and educational activities for taxpayers.