Taxpayer Advocate Says IRS Needs to Shift Focus Away from Collections

National Taxpayer Advocate, Nina Olson, recently submitted her mid-year report to Congress.  It is nothing incredibly new, I suppose, except that IRS’ 2015 tax season numbers are completely off the charts (and not in a good way).  Here are some key points:

  • 8.8 million dropped calls due to switchboard overload
  • only 37% of customer service calls were actually answered
  • average hold time was 23 minutes
  • less than 10% of customer service calls answered during peak of tax season

Olson’s preface is a pleasure to read.  Its brilliant, and yet so simple.  She acknowledges the lack of funding that the IRS has had to deal with over the past few years, and she astutely points out that, while difficult, periods of famine (so to speak) can be healthy if they cause you (or an organization such as the IRS) to rethink its priorities and to rethink the way funds are allocated.  The operative phrase here is that it can be healthy.  In her own words:

But from a taxpayer perspective, I am concerned its long-term approach is headed in the wrong direction. First, the IRS continues to view itself as an enforcement agency first and a service agency second. Enforcement is important, of course, but it is a question of emphasis and self-definition. Second, the IRS’s vision of the future rests on a mistaken assumption that it can save dollars and maintain voluntary compliance by automating taxpayer service and issue resolution and getting out of the business of dealing with taxpayers directly in person or by phone.

What the IRS should do during this period of congressional distrust and resulting inadequate funding is examine every one of its underlying principles. In my view, it should transform itself as a tax agency from one that is designed around nabbing the small percentage of the population that actively evades tax to one that aims first and foremost to meet the needs of the overwhelming majority of taxpayers who are trying to comply with the tax laws.

The truth is, most people pay their taxes voluntarily, but the IRS has always been laser focused on collection and enforcement.  Olson is right.  As the IRS continues to put taxpayer service on the back burner, the whole idea of voluntary compliance becomes more tenuous.  And I don’t think Olson is saying that enforcement has no place in our tax system.  There will always be a need for enforcement.  But the focus needs to shift so that it is not the top priority.

One of my mentors taught me how to operate a well-balanced law practice.  He taught me to see it as both a service and a business, and to never lose sight of both.  If you focus too much on the business, then you do your clients a disservice.  And if you fail to give attention to the business aspects, then you won’t earn a decent living.

The IRS is really no different.  As Nina Olson said, they are too focused on the “business” of enforcement and the service side is suffering.  But the great thing about both a law practice and the IRS is, when you give enough attention to the service aspect so that the clients/taxpayers are satisfied, the revenue will come.

IRS Voluntary Classification Settlement Program is Broken

Sometimes employers misclassify their workers as independent contractors (self-employed) when, in fact, they are employees.  And when I say “sometimes” I mean millions of times.  It is very common.  I’m sure some of them do it unknowingly, but I am also certain that some employers do it because they don’t want the responsibility and costs associated with having actual employees.  The difference is that employers must withhold and/or pay a number of taxes when a worker is also an employee, including income taxes, Social Security, Medicare, and unemployment.

The IRS would love it if taxpayers (including employers) would fall in line with the IRS’ dreams of “voluntary compliance,” but one of the things they do when this doesn’t happen is they set up programs to entice them to come clean on their own.  The IRS doesn’t call it an amnesty program; I don’t think they particularly like that word.  In fact, I put the word “amnesty” in the search box of the IRS website and exactly two results came up, and both of them were in the context of a state amnesty program.  The word tends to have the connotation of getting out of paying taxes or making use of a legal loophole, and the IRS really doesn’t want to suggest that.

But I can use it.  I like the word.  The IRS has an amnesty program for reporting offshore accounts called the Offshore Voluntary Disclosure Program.  And the IRS has an amnesty program for coming clean on worker classification issues called the Voluntary Classification Settlement Program.  But the VCSP has been very poorly administered over the years.  It appears that just about every aspect of the program has some kind of flaw.  Even the most basic things are not working, like correctly determining eligibility for the program, monitoring compliance with the program, and analyzing program performance.  If you want to read about how screwed up VCSP is, be my guest.  Full report here.

Nominee for IRS Commissioner Vows to Restore Public Trust

President Obama’s choice for IRS Commissioner is John Koskinen, a man known for his talent in turning around large corporations on the brink of collapse.  He is known for his skills in “restoring public trust” after major disasters.  Isn’t it a little funny that Koskinen is coming highly recommended for the post without any significant tax knowledge?  I don’t know if it is funny or just a sign of the times.

The nomination of John Koskinen shows where our priorities are with the IRS.  The IRS is in survival mode and they need a strong leader who will right the ship.  Sure, they are fine-tuning and making needed adjustments to their processes along the way (according to the near weekly TIGTA audit reports), and this makes it seem like they are focused on the important details of tax administration.  But don’t be fooled.  The nomination of Koskinen speaks volumes about how the president views this agency in crisis.  And the Senate too, since it looks like Mr. Koskinen has received bipartisan support at his confirmation hearing earlier today.

50 years ago it may have seemed odd to put somebody like Koskinen at the head of the IRS, but it was a different agency back then.  I do think they have the right guy for the job.  The IRS needs a proven leader and game-changer, not just another bean counter.  Koskinen went on the record saying, “public trust is the IRS’ most important and valuable asset,” and I think this is spot on.  If taxpayers can’t be certain the IRS will safeguard their private information and administer the tax laws fairly, then the concept of “voluntary compliance” will not work because people literally won’t pay.

TIGTA Questions Tax Gap Stats

The most current “tax gap” figure is $450 billion — a little too nicely rounded, isn’t it? Seems like a wild guess, right?

Every year Americans collectively owe hundreds of billions of dollars in taxes.  But the IRS is successful in collecting only part of that.  The “tax gap” is the difference between these two figures.  It is the difference between taxes owed and taxes paid without resorting to enforced collections.  Of course it is much more than a “gap” these days; it is more like a chasm.  Tax gap data is some of the most important data there is for an agency whose primary duty is to figure out who isn’t paying and get them to pay.

As important as this information is, the IRS calculates and reports the tax gap only once every 5 years.  The most recent tax gap analysis was completed in January 2012, which provided tax gap data for tax year 2006 ($450 billion).  If you see a problem with this delay in information, you’re not the only one.  Recently the Treasury Inspector General for Tax Administration (TIGTA) issued an audit report criticizing the IRS’ tax gap analysis procedures.

One of the criticisms was related to the turnaround time on these reports.   Granted, tax gap figures are not easy to come by.  We’re talking about some very difficult calculations that are based on pretty convoluted data.  Indeed, part of the reason why the IRS only does this report every 5 years is because it takes nearly that long to gather and report on the data.  However, TIGTA would like to see tax gap reports churned out more regularly.  The more current the data, the more likely it is to assist with tax policy and administration.

As you can imagine, there are probably a thousand different versions of the tax gap (a thousand different ways to calculate it).  That’s what I mean by “convoluted data.”  But, as if it weren’t complicated enough already, TIGTA also recommended that the IRS include separate estimates for revenues lost in the “informal economy” (i.e., drug deals and small cash transactions) and offshore tax evasion.  Also, the IRS has been asked to change the way it calculates the corporate tax gap.

So, really it’s the same old story with the IRS: they’re being asked to do more, do it more quickly, and do it with less money.  Poor guys.

IRS Tax Cheat Poll

A recent IRS poll shows that 87% of American taxpayers believe it is NEVER ok to cheat on their income taxes.

In my experience as a tax attorney, I can’t help but think this little statistic is overly-optimistic.  It is obvious that the IRS is trying to spread optimism about the integrity of the tax system at a time when many Americans are making decisions about what (and what not) to report.  I just don’t think this statistic paints an accurate picture.  Here’s why:

  • The poll consisted of 1,500 randomly chosen adults; that’s a pretty small sample size.
  • The participants were questioned over the phone.  I’m gonna go out on a limb and say that tax cheats are more the type to screen their calls and not participate in polls.
  • There appear to have been some follow-up questions such as “What is your reason for honest and accurate reporting?” (to which 95 percent cited “personal integrity”), but what about asking “Do you (or have you) cheated on your taxes?”  I think this is an important question because, while many people believe it is wrong to fudge numbers, I think fewer people tend to strictly follow their own advice/beliefs.
  • It is unclear to me whether or not the IRS actually defined “cheating.”  For example, if the IRS had included in its definition of cheating “providing an estimate when an exact amount is readily available,” then I think we would be looking at something less than 87 percent.  Just keeping it real.

I would be interested in seeing more details about this poll.  If anybody finds anything, let me know!

Newest Tax Gap Figures are Astounding

On Friday the IRS released its “tax gap” figures for tax year 2006. The previous measurement was five years earlier in 2001.

The tax gap is the difference between what taxpayers should be paying and what is actually paid.  And while the newest figures may make you choke, they are not too much worse than 2001.

The gross tax gap in 2006: $450 billion.

The gross tax gap in 2001: $345 billion.

What contributes to the tax gap is failing to file, failing to report all income, and simply failing to pay. The biggest contributing factor is the underreporting of income.

A comprehensive explanation of the 2006 tax gap can be found on the IRS website.